Case Name: Open-Silicon, Inc. v. PeerNova, Inc.
Case No.: 2015-1-CV-276628

I. Background

This action arises out of a dispute over a contract for the sale of application specific integrated circuit chips (“ASIC chips”) between plaintiff Open-Silicon, Inc. (“Open-Silicon”) and defendant PeerNova, Inc. (“PeerNova”). PeerNova engaged Open-Silicon to design and manufacture ASIC chips for its Bitcoin mining machines. The parties executed five agreements governing the transaction, which included performance specifications for the ASIC chips. PeerNova alleges that it relied upon Open-Silicon’s representations as to the quality and performance of chips it designed for other purchasers in contracting for the purchase of the ASIC chips. Open-Silicon designed the chips and PeerNova thereafter ordered twelve wafer lots. PeerNova subsequently claimed that the chips did not conform to the specifications as promised. Based on its claim that the ASIC chips were non-conforming, PeerNova refused to accept delivery of the chips, refused to pay, and ordered Open-Silicon to stop production.

Open-Silicon initiated this action, filing a complaint against PeerNova to collect sums owed for the design and manufacture of its ASIC chips. PeerNova then filed a verified first amended cross-complaint (“FACC”) against Open-Silicon asserting causes of action for: (1) fraud in the inducement (as to the Design and Production Agreement and Statement of Work); (2) fraud in the inducement (as to the Engineering Change Order, Risk Waiver Agreement, and Purchase Order); (3) fraudulent concealment; (4) fraud – intentional misrepresentation; (5) fraud – negligent misrepresentation; (6) breach of contract; and (7) breach of the duty of good faith and fair dealing.

Open-Silicon asserts the ASIC chips it designed and manufactured were indeed conforming, even though their power usage and performance differed slightly from the standards initially discussed by the parties, because the specifications in the Statement of Work were preliminary and subject to change. Open-Silicon states that PeerNova had ulterior motives for refusing to accept delivery and refusing to pay. Specifically, PeerNova’s customers had cancelled orders and demanded refunds for its Bitcoin mining machines due to a downturn in the Bitcoin market and PeerNova had neither a use for nor funds to pay for the ASIC chips.

In January 2016, Open-Silicon propounded its requests for the production of documents, set two (“RPD”) in an effort to obtain evidence to support these allegations. PeerNova timely served responses. The parties met and conferred in an effort to informally resolve their dispute as to PeerNova’s objection-only responses to some of the requests. The parties resolved many issues, but reached an impasse as to RPD Nos. 1, 48-52, 55-60, and 64-66. Consequently, Open-Silicon filed the instant motion to compel further responses to these requests on the ground that PeerNova’s objections lack merit. Neither party requests sanctions.

II. Discussion

A party may move for an order compelling further responses to an RPD if the party deems that an objection raised in response is without merit or too general. (Code Civ. Proc., § 2031.310, subd. (a).) The party moving to compel further responses “shall set forth specific facts showing good cause justifying the discovery sought by the demand.” (Code Civ. Proc., § 2030.310, subd. (b)(1).) To satisfy this burden, the moving party must make “a fact-specific showing of relevance.” (Glenfeld Development Corp. v. Superior Court (1997) 53 Cal.App.4th 1113, 1117.) “In the context of discovery, evidence is ‘relevant’ if it might reasonably assist a party in evaluating its case, preparing for trial, or facilitating a settlement. Admissibility is not the test, and it is sufficient if the information sought might reasonably lead to other, admissible evidence.” (Ibid.) Once the propounding party establishes good cause for the discovery, the burden shifts to the responding party to justify any objections. (Kirkland v. Superior Court (2002) 95 Cal.App.4th 92, 98.)
A. RPD No. 1

RPD No. 1 requests “all documents describing the business conducted or intended to be conducted by PeerNova at any time [from May 1, 2013 to February 4, 2015], including without limitation any description of any products or services offered or to be offered.” PeerNova objected on the grounds that the request is overbroad, vague and ambiguous, and seeks confidential information. PeerNova attempts to justify all of its objections except for its objection on the ground of confidentiality.

Open-Silicon does not address whether good cause exists for the discovery sought by RPD No. 1 in its motion or separate statement. In its reply, Open-Silicon states in a conclusory manner that documents responsive to RPD No. 1 would tend to show PeerNova’s true motives for ending their business relationship.

On its face, RPD No. 1 is so broad and generic that its relevance to this case is not self-evident. During meet and confer discussions and in its moving papers, Open-Silicon attempted to clarify that it seeks “marketing materials, investor materials, and press releases” describing the nature of PeerNova’s current and contemplated businesses. Even taking this statement into account, the Court is left to make too many inferential leaps to determine the relevance of the requested documents as framed in the request itself. Open-Silicon has failed to establish the relevance of the discovery and thus has not carried its burden of establishing good cause for RPD No. 1. Therefore, a further response to RPD No. 1 is not warranted.

B. RPD Nos. 48-52 and 55

RPD Nos. 48-52 and 55 each seek documents with information about PeerNova’s financial condition from May 1, 2013 to February 4, 2015. PeerNova objected to these requests on the grounds of relevance, overbreadth, vagueness, and ambiguity. PeerNova attempts to justify its objections on the ground of relevance as to all of these requests. PeerNova also attempts to justify its objections on the ground of overbreadth as to RPD Nos. 48-51 and 55, but not RPD No. 52. PeerNova does not justify its objections on the ground of vagueness and ambiguity as to any of these requests. PeerNova also objected to RPD Nos. 52 and 55 on the ground of confidentiality, but does not attempt to justify its objections on that ground.

1. Good Cause and Relevance Objection

Open-Silicon argues that these RPD will result in the discovery of evidence showing PeerNova’s true motives for refusing to accept and pay for the ASIC chips, which it will use in its defense at trial and in its evaluation of PeerNova’s theory of damages. PeerNova argues that evidence of its true motive is not relevant to the claims in the FACC and that it has produced sufficient documents for Open-Silicon to evaluate its theory of damages.

As stated above, the moving party must first establish good cause for the discovery requested. Discovery may relate to the claim or defense of the party seeking discovery. . . .” (Code Civ. Proc., § 2017.010, italics added.) Documents containing information about a party’s financial condition are discoverable to the extent that they are relevant to claims or damages. (See Columbia Broadcasting Systems, Inc. v. Superior Court (1968) 263 Cal.App.2d 12, 22; see also Rawnsley v. Superior Court (1986) 183 Cal.App.3d 86, 91-92.)

In the FACC, PeerNova alleges several fraud claims arising out of Open-Silicon’s alleged misrepresentations about the performance and quality of ASIC chips they designed and produced for other customers and could have designed and produced for PeerNova. Documents tending to show PeerNova’s financial hardship and inability to sell the Bitcoin mining machines for which the ASIC chips were designed and manufactured are relevant to possibly demonstrate weaknesses in PeerNova’s theory and narrative of its case, the context in which the parties’ agreements were formed, and the credibility of PeerNova’s claim that it relied upon Open-Silicon’s misrepresentations in purchasing the ASIC chips. The Court thus agrees that documents responsive to these RPD may assist or lead to information that will aid Open-Silicon in evaluating the claims in the FACC and in preparing for trial.

In its opposition, PeerNova relies on JRS Products, Inc. v. Matsushita Electric Corp. of America (“JRS Products”) (2004) 115 Cal.App.4th 168 for the proposition that “motive is irrelevant to a breach of contract claim.” (Opp. at 6.) In JRS Products, the court actually stated that “motive, regardless of how malevolent, remains irrelevant to a breach of contract claim and does not convert a contract action into a tort claim exposing the breaching party to liability for punitive damages.” (JRS Products, supra, 115 Cal.App.4th at p. 182.) This statement of law does not stand for the proposition cited by PeerNova. Rather, it was made in the context of the court’s holding that a plaintiff must allege a statutory duty in order to properly establish a claim for prospective interference with an economic relationship. (Ibid.) Where a plaintiff has alleged conduct that constitutes a breach of contract, he or she cannot change that claim into a tort claim and seek an award of punitive damages by alleging that the breaching party acted with a malevolent motive. (Ibid.) These principles are not implicated in the case at bench, and JRS Products is thus inapposite. Furthermore, the Court notes that even if this case stood for the proposition advanced by PeerNova, it would only establish that motive is not relevant to one out of its seven claims.

PeerNova further argues that, as to RPD Nos. 48-51 and 55 (but not RPD No. 52), its financial condition is not “at issue.” In support, PeerNova relies on a case cited in Open-Silicon’s moving papers concerning discovery of a party’s financial condition relative to an alter ego theory of liability. Because the FACC does not contain an alter ego theory of liability that puts its financial condition directly at issue, PeerNova concludes that discovery of its financial condition is not relevant. Open-Silicon cited that case as a mere example, not as the exclusive basis for discovery of a party’s financial condition. As articulated above, the standard of relevance for purposes of discovery is not whether a matter is directly at issue, but rather, whether the discovery requests will provide the propounding party with documents or information to assist it in evaluating its case, preparing for trial, or facilitating settlement. (See Glenfeld Development Corp. v. Superior Court, supra, 53 Cal.App.4th at p. 1117.) The Court rejects this argument as well.

In conclusion, Open-Silicon has established good cause for RPD Nos. 48-52 and 55 and PeerNova’s objections on the ground of relevance are overruled.

2. Overbreadth Objection

PeerNova argues that RPD Nos. 48-51 and 55 call “for much more than is needed to ‘fully and fairly’ test” its theory of damages. (Opp. at 7.) PeerNova elaborates that it has and will continue to produce documents that are sufficient for Open-Silicon to evaluate damages. (Ibid.) To the extent it advances these assertions in support of its overbreadth objections, which is not entirely clear, PeerNova has not satisfied its burden of justifying its objections as PeerNova does not explain how the scope or language of the discovery requests are problematic. Accordingly, PeerNova’s objections to RPD Nos. 48-51 and 55 on the grounds they are overbroad are overruled.

C. RPD Nos. 56 and 64-65

RPD Nos. 56 and 64-65 seek documents pertaining to the hiring of Dr. Naveed Sherwani (“Dr. Sherwani”) and Dr. Shafy Eltoukhy (“Dr. Eltoukhy”).

As germane to these requests, Open-Silicon and PeerNova had a series of face-to-face meetings beginning in November 2013 in which they began discussions of the design and manufacture of the ASIC chips. At those times, Dr. Sherwani was the Chief Executive Officer of Open-Silicon. Dr. Sherwani left Open-Silicon in December 2013, and began serving as the President and Chief Executive Officer of PeerNova in January 2014, the month the parties contracted for the sale of the ASIC chips. PeerNova also hired Dr. Eltoukhy, who previously served as the Vice President of Operations and Technology Development at Open-Silicon, around that time.

Open-Silicon propounded the subject requests to obtain evidence showing that Dr. Sherwani and Dr. Eltoukhy, and thus PeerNova as their principal, could not have justifiably relied upon the alleged misrepresentations as to the performance of the ASIC chips due to their knowledge of the technology and of Open-Silicon’s business practices.

PeerNova objected to RPD Nos. 56 and 64-65 on the grounds of relevance and confidentiality. Additionally, PeerNova objected to RPD No. 56 on the ground it seeks documents outside of the parties’ agreed upon timeframe. PeerNova only attempts to justify its objections on the ground of relevance.

Open-Silicon argues that these requests seek documents that will show PeerNova could not have reasonably relied on its alleged misrepresentations because PeerNova’s agents, Dr. Sherwani and Dr. Eltoukhy, had knowledge of the relevant technology and its business practices. Open-Silicon further intends to show they were hired specifically because of their knowledge as its former employees.

The FACC alleges fraud in the inducement as to each of the parties’ agreements as well as fraudulent and negligent misrepresentation. Each of these claims requires PeerNova to establish that it justifiably relied on Open Silicon’s misrepresentations. (See, e.g., West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 793-94; see also Philipson & Simon v. Gulsvig (2007) 154 Cal.App.4th 347, 363.) The knowledge and experience of PeerNova and its agents bear directly on whether its reliance was reasonable. (West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 794.)

RPD Nos. 56 and 64-65 request documents that may show, directly or indirectly, the knowledge Dr. Sherwani and Dr. Eltoukhy brought with them from Open-Silicon to PeerNova. Moreover, these requests may lead to the discovery of admissible evidence about relevant technical knowledge and proprietary information. Such information may be probative of whether reliance by PeerNova or its agents, if any, was justified. These requests are therefore directly relevant to PeerNova’s claims and Open-Silicon’s defenses.

PeerNova misleadingly states that it “does not object to producing documents reflecting these individuals’ actual knowledge of Open-Silicon’s representations or their involvement, if any, in this project.” (Opp., at 5, original underscoring.) According to PeerNova, the only knowledge that is relevant is Dr. Sherwani’s and Dr. Eltoukhy’s actual knowledge of representations made by Open-Silicon, presumably while they were still in Open-Silicon’s employ. However, Open-Silicon does not argue that it needs documents to prove the representations it made or what its former employees knew about those statements when made. Rather, Open-Silicon hopes to discover through these requests its former employees’ knowledge of the technology in general, business practices, and ASIC chips because such knowledge may disprove PeerNova’s claimed reliance, or that any reliance was not justified. The Court rejects PeerNova’s arguments and objections to these requests.

Open-Silicon has established good cause for RPD Nos. 56 and 64-65 and PeerNova’s objections on the ground of relevance are overruled.

D. RPD Nos. 57-60 and 66

PeerNova objected to RPD Nos. 57-60 and 66 on the grounds of relevance and confidentiality, but does not attempt to justify any of its objections to these requests. In its opposition, PeerNova states it does not oppose RPD Nos. 57-60 and 66 and “will produce all non-privileged documents responsive to [these requests] to the extent that they exist.” (Opp. at 1, fn. 1.) PeerNova has thus abandoned its objections to these requests.

III. Conclusion

For the reasons set forth herein, Open-Silicon’s motion to compel further responses is DENIED as to RPD No. 1 and GRANTED as to RPD Nos. 48-52, 55-60, and 64-66.

PeerNova shall provide verified further responses to RPD Nos. 48-52, 55-60, and 64-66, without objections, within 10 calendar days of this order and produce responsive documents in accordance with those responses.

The Court will prepare the order.