Joseph Ross v. Scott M. Keller, et al.

JOSEPH ROSS AND ROSS INTERNATIONAL’S DEMURRER TO MIRTECH’S FIRST AMENDED CROSS-COMPLAINT

 

MOVING PARTY:  Cross-Defendants Joseph Ross; Ross International

RESPONDING PARTY(S): Cross-Complainant Mirtech, Inc.

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

This is a corporate dispute over the management of Freshtech, a food packaging distributor.  Joseph Ross, a director and former officer of Freshtech, alleges that he was forced out by Nazir Mir and Scott Keller, Freshtech’s other officers and directors, because they were engaging in improper conduct.  

Mirtech, Inc., a named Defendant that is owned by Defendant Mir, has filed a Cross-Complaint against Ross and his entity, Ross International. Mirtech has a license agreement with Freshtech to collaborate in the food packaging marketplace.  Mirtech alleges that Ross, in his role as Freshtech’s CEO, abdicated his duties to Freshtech.  Instead, Ross allegedly steered business toward a Freshtech competitor, rPlanet Earth Los Angeles, LLC.  This meant a loss in business for Freshtech and a loss of royalties for Mirtech.  Mirtech brings causes of action against Ross and Ross International for (1) breach of contract, (2) fraudulent concealment, and (3) intentional interference with contractual relations.

Cross-Defendants Ross and Ross International again demur to the First Cause of Action in Mirtech’s First Amended Cross-Complaint.  Mirtech Opposed. 

TENTATIVE RULING:

Cross-Defendants’ Demurrer is OVERRULED.  They are to file an Answer (if they haven’t already done so) to the FACC within 21 days.

Cross-Complainant Mirtech to give notice, unless waived.

DISCUSSION:

Demurrer

I. Judicial Notice

The court takes judicial notice of Cross-Defendants’ Exhibit E.

II. Meet and Confer

The Declaration of Attorney Vandad Khosravirad, Counsel for Cross-Defendants, reflects that the meet and confer requirement was satisfied. (CCP § 430.41.) 

III. Legal Standard

A demurrer for sufficiency tests whether the complaint states a cause of action.  (Hahn v. Mirda (2007) 147 Cal. App. 4th 740, 747.)  When considering demurrers, courts read the allegations liberally and in context.  (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228.)  In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice.  (CCP § 430.30(a).)  A demurrer tests the pleadings alone and not the evidence or other extrinsic matters.  (SKF Farms v. Superior Court (1984) 153 Cal. App. 3d 902, 905.)  Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.  (Id.)  The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.  (Hahn, 147 Cal.App.4th at 747.)

IV. Analysis

This court previously sustained the Ross Cross-Defendants’ demurrer to the breach of contract cause of action in the Cross-Complaint. (See 10/25/2022 Ruling.)  Following a satisfactory “offer of proof,” this court granted Mirtech leave to amend the cause of action. Cross-Defendants again demur to the first cause of action on the grounds that Mirtech is not a party to, nor third-party beneficiary of, the Freshtech Shareholders’ Agreement.

A. Elements of a Third-Party Beneficiary

“[U]nder California's third party beneficiary doctrine, a third party — that is, an individual or entity that is not a party to a contract — may bring a breach of contract action against a party to a contract only if the third party establishes not only (1) that it is likely to benefit from the contract, but also (2) that a motivating purpose of the contracting parties is to provide a benefit to the third party, and further (3) that permitting the third party to bring its own breach of contract action against a contracting party is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.”  (Goonewardene v. ADP, LLC (2019) 6 Cal. 5th 817, 821.)

Here, it is clear here that Mirtech would likely benefit from the Shareholders Agreement, as it preserved Mirtech’s right to contract with Freshtech vis-a-vis the Mirtech License Agreement. The Cross-Defendants concede as much.  But Cross-Defendants contend that Mirtech cannot demonstrate that it was a “motivating purpose” of the contracting parties to provide a benefit to Mirtech, nor that permitting Mirtech to bring its own breach of contract action against the Ross Cross-Defendants is consistent with the objectives of the Freshtech Shareholders Agreement and the reasonable expectations of the contracting parties.  (Goonewardene, 6 Cal. 5th at 821.)

The controlling authorities addressing third party beneficiaries demonstrate that in some contexts, whether a party is a third-party beneficiary is a question of fact left to the jury.  For example, the CACI Civil Jury Instructions provide:

[Name of plaintiff] is not a party to the contract. However, [name of plaintiff] may be entitled to damages for breach of contract if [he/she/ nonbinary pronoun/it] proves that a motivating purpose of [names of the contracting parties] was for [name of plaintiff] to benefit from their contract.

You should consider all of the circumstances under which the contract was made. It is not necessary for [name of plaintiff] to have been named in the contract.

(See CACI 301, “Third-Party Beneficiary”)

Thus, the analysis begins, but does not end with, the language of the contract itself. Consideration of the “circumstances under which the contract was made” are also necessary. (Id.) 

As previously discussed when considering whether leave to amend was appropriate, the FACC supplements the former pleading to allege that it was a “motivating purpose” of the Freshtech Shareholders to benefit Mirtech when they entered into the Shareholders’ Agreement.  The Proposed FACC alleges, in relevant part, that from 2006 to 2012, Freshtech operated without the subject Shareholder’s Agreement in place.  (FACC ¶ 23.) During this time, Freshtech did not have a license to any Mirtech Technology and neither Mirtech nor Mir were obligated to provide any technologies to Freshtech. (Id.) But, “[i]n and around late 2011 through early 2012, Freshtech saw a business opportunity to potentially exploit the Mirtech Technology.” (Id. at ¶ 24.) The Shareholders recognized that to incorporate Mirtech technology would “require a significant capital infusion,” and at this time, “did not wish to invest the necessary capital resources.” (Id.)  Seeking alternate means to capitalize on the Mirtech technology, “[t]he Shareholders, upon extensive discussion, came to the conclusion that they could potentially realize significant profits by Mirtech granting a license to Freshtech.”  (Id. at ¶ 24.)

Mir, however, “told Ross and Keller that he was unwilling to simply grant Freshtech an exclusive license to this patented technology” without proper assurances from Freshtech. (Id. at ¶ 26.) Instead, Mir “insisted that the Shareholders enter into a formal shareholders’ agreement (with restrictive covenants), which eventually became the Shareholders’ Agreement, before he would agree to allow Mirtech to grant an exclusive license to Freshtech.” (Id.) “The Shareholders Agreement was an assurance that all three shareholders would work together to comprehensively grow Freshtech and to do so, in this one instance, by realizing the mutual benefit(s) of this Mirtech Technology.”  (Id.) The Proposed FACC alleges that Ross was so interested in making the deal happen “that he authorized Freshtech to pay for Mirtech’s legal fees to negotiate the Shareholders’ Agreement and License Agreement.”  (Id. at ¶ 28.)  

Ultimately, “[t]he Shareholders’ Agreement and License Agreement were executed in May 2012. The Shareholders agreed to the Shareholders’ Agreement in exchange, at least in part, for Mirtech granting an exclusive license to Freshtech for the use of Mirtech Technology.” (Id. at ¶ 29.) “The Shareholders’ Agreement and License Agreement were negotiated and executed in tandem, and “[t]here would be no Shareholders’ Agreement without the License Agreement and vice versa.”  (Id. at ¶ 31.)

Considering these allegations—which this court must accept as true now—Mirtech has sufficiently alleged that it was a “motivating purpose” of the Freshtech Shareholders to benefit Mirtech when they entered into the Shareholders’ Agreement.  (See Fox v. JAMDAT Mobile, Inc. (2010) 185 Cal. App. 4th 1068, 1078 [court “must accept[] as true all well pleaded facts” in the complaint when ruling on a demurrer].)

Whether permitting Mirtech to bring its own breach of contract action against the Ross Cross-Defendants is consistent with the objectives of the Shareholders Agreement and the reasonable expectations of the contracting parties is a closer call.  As this court has previously explained, the royalty payments for which Mirtech seeks compensation from Ross arise from the License Agreement with Freshtech – not the Freshtech Shareholders Agreement. Under these circumstances, Mirtech’s remedies would appear to lie against Freshtech for breach of the Mirtech License agreement, not against the Ross entities for breach of the Freshtech Shareholder’s Agreement.  Moreover, Freshtech and its other two shareholders Mir and Keller have already asserted a breach of Section 1.3(d) against Ross in their Second Amended Cross-Complaint.

Be that as it may, this court cannot determine as a matter of law at the demurrer stage that allowing the cause of action to go forward would be inconsistent with the reasonable expectations of the parties.   “[T]he requirement in the third element that third party enforcement be consistent with ‘the objectives of the contract’ is comparable to the inquiry…regarding whether third party enforcement will effectuate ‘the contracting parties’ performance objectives,’ namely ‘those objectives of the enterprise embodied in the contract, read in the light of surrounding circumstances’ ....”  (Goonewardene v. ADP, LLC (2019) 6 Cal. 5th 817, 831 [emphasis added]; Kalmanovitz v. Bitting (1996) 43 Cal.App.4th 311, 315 [Third-party beneficiary status may be determined as a question of law only if there is no conflicting extrinsic evidence].) 

Thus, for pleading purposes, Mirtech has sufficiently alleged this third element. Resolving this issue further will require factual consideration of the circumstances existing at the time the parties entered into the contract. At this time, this court must accept the allegations in the FACC as true.  

B. Breach Causing Damages to Mirtech

Finally, Cross-Defendants argue the breach of contract claim fails because a breach of the Shareholder’s Agreement caused no damage to Mirtech.  

However, the contractual obligation that Mirtech seeks to enforce against Ross are the restrictive covenants provided for under the Shareholders’ Agreement. These alleged breaches caused damages in the form of lost royalties that Mirtech otherwise would have received. 

Accordingly, Cross-Defendants’ Demurrer is OVERRULED.

IT IS SO ORDERED.

Dated:   March 29, 2023 ___________________________________

Randolph M. Hammock

Judge of the Superior Court