Case Name: Wellex Corporation v. NVIDIA Corporation, et al.
Case No.: 16-CV-299320

Currently before the Court are the following matters: (1) the demurrer by defendant NVIDIA Corporation (“NVIDIA”) to the fourth amended complaint (“4AC”) of plaintiff Wellex Corporation (“Plaintiff”); and (2) the demurrer by defendants Fabrinet USA, Inc. and Fabrinet West, Inc. (collectively, “Fabrinet”) to the 4AC of Plaintiff.

Factual and Procedural Background

This is an action for breach of contract and intentional interference, among other things, arising out of a failed business relationship. According to the allegations of the 4AC, Plaintiff is in the business of electronic manufacturing services. (4AC, ¶ 8.) Part of its business includes new product introduction (“NPI”), whereby Plaintiff is provided with designs of printed circuit boards from its customers and manufactures prototype boards for the customers’ further analysis and testing. (Ibid.) To place electronic components onto printed circuit boards, Plaintiff uses surface mount technology (“SMT”)—a process utilizing robotic machines. (Ibid.) Several SMT machines with different functions are used to form a single production line. (Ibid.)

Plaintiff has been one of NVIDIA’s NPI vendors since 2008. (4AC, ¶ 9.) NVIDIA is Plaintiff’s primary customer, generating approximately $3,000,000 of gross revenue and $600,000 of profit yearly. (Ibid.) Plaintiff was primarily working on consignment of NPI production, whereby NVIDIA would supply all electronic components for its prototype builds. (Ibid.) For its other customers, Plaintiff performs “turnkey” production, meaning that Plaintiff supplies the necessary components. (Ibid.)

As a condition of performing NPI services, NVIDIA required Plaintiff to reserve two SMT production lines (“NVIDIA Lines”) at all times for their needs, which NVIDIA’s engineering team must certify. (4AC, ¶ 10.) NVIDIA also required Plaintiff to disclose the identities and expertise of all employees working on the NVIDIA Lines. (Ibid.) Plaintiff agreed to NVIDIA’s conditions in order to secure NVIDIA’s business. (Ibid.)

From 2011 to 2014, NVIDIA demanded that Plaintiff upgrade the NVIDIA Lines by purchasing new SMT machines with “parts on part” capabilities (“PoP”) and increased precision. (4AC, ¶ 11.) NVIDIA expressly promised to Wellex that if it upgraded the NVIDIA Lines per its request, Wellex would receive continuing NPI business from NVIDIA to make this substantial investment worthwhile. (Ibid.) More specifically, in June 2011, NVIDIA represented that if the upgrade took place, it would continue providing the same level of business to Wellex for a period of five years after the equipment was purchased, i.e., $300,000 per year of purchase orders (“Initial Upgrade Contract”). (Id., at ¶ 12.) Wellex accepted the contract and performed by purchasing the new SMT machine in July 2011, for approximately $230,000. (Ibid.) NVIDIA and Plaintiff’s engineering teams worked closely together to set up the machine to NVIDIA’s specifications. (Ibid.)

In January 2013, Plaintiff completed its performance under the Initial Upgrade Contract by purchasing another SMT machine for approximately $690,000 to complete the NVIDIA Line with PoP capability. (4AC, ¶ 14.) However, later in 2013, Plaintiff’s representatives were informed by Talbert Aquilar (“Aquilar”) from NVIDIA that the NVIDIA Line with PoP capability was insufficient for NVIDIA’s needs. (Id., at ¶ 15.) Aquilar pressured Plaintiff to make additional machine upgrades. (Ibid.)

On February 2, 2014, Brant Carter (“Carter”)—a representative of NVIDIA—stated that if Plaintiff made a subsequent upgrade of the NVIDIA Lines to the requested SMT machines, NVIDIA would provide $3,000,000 per year of purchase orders to Plaintiff for five years commencing from the date of equipment delivery (“Subsequent Upgrade Contract”). (4AC, ¶ 16.) Carter represented to Wellex that he had the authority to enter into the Subsequent Upgrade Contract on behalf of NVIDIA. (Ibid.) “[D]uring said meeting and subsequent discussions following this meeting, it was agreed that the promised business would be based on a price matrix established by the parties attached [to the 4AC] as Exhibit A.” (Ibid.) The Subsequent Upgrade Contract modified and superseded the Initial Upgrade Contract in that the promised business of $3,000,000 per year would end five years after Plaintiff purchased the new SMT machines. (Ibid.) The new agreement was accepted by Plaintiff who, between February and June 2014, fully performed by purchasing the required SMT machine and accessories for over $700,000. (Id., at ¶ 17.) Plaintiff alleges that NVIDIA was therefore obligated to provide $3,000,000 per year of purchase orders to it from June 2014 to June 2019. (Ibid.)

During the upgrade period, NVIDIA knew that: (1) the NVIDIA Lines were reserved for NVIDIA’s NPI production; (2) Plaintiff had no other customers requiring PoP capability and the upgrades were performed at the request of and for the sole benefit of NVIDIA; and (3) Plaintiff incurred substantial time and expense in upgrading the NVIDIA Lines. (4AC, ¶ 19.) Plaintiff accepted NVIDIA’s offers and fully performed to the terms agreed between the parties with the expectation that after Plaintiff purchased the requested SMT machines, NVIDIA would provide Plaintiff with the work to fulfill the NVIDIA Lines until June 2019. (Id., at ¶ 20.) NVIDIA, however, did not perform as agreed and instead subsequently refused to send its engineers to finalize the upgraded NVIDIA Line and failed to provide the work promised. (Ibid.) NVIDIA terminated Plaintiff’s NPI services to Plaintiff’s detriment and Plaintiff would not have invested over $1,600,000 plus additional labors costs if the parties’ relationship was merely “at will” and terminable at any time by NVIDIA as it claimed. (Ibid.)

In August 2015, NVIDIA orally informed Plaintiff that it was terminating its business with Plaintiff “due to cost concerns.” (4AC, ¶ 21.) NVIDIA then moved all of its NPI services to Fabrinet. (Id., at ¶ 23.) Fabrinet USA, Inc. set up a new company—Fabrinet West, Inc.—on January 16, 2015, for the primary purpose of diverting NVIDIA’s NPI business away from Plaintiff. (Ibid.) Plaintiff alleges that the long term friendship between Debra Shoquist (“Shoquist”), Vice President of Manufacturing for NVIDIA, and Tom Mitchel (“Mitchel”), a senior member of the Fabrinet organization, led to the establishment of Fabrinet West as well as the sharing of the scope of manufacturing by Plaintiff and the disclosure of the names and operational positions of Plaintiff’s employees. (Id., at ¶¶ 22-23.) This sharing of inside information “ultimately led to the loss of the NPI lines, and the solicitation of employees from Plaintiff [] by Fabrinet West, thus directly interfering with the contract” between Plaintiff and NVIDIA. (Id., at ¶ 23.) To date, Fabrinet has recruited 12 former employees of Plaintiff to work at its Santa Clara facility. (Id., at ¶ 24.) As a result of NVIDIA’s conduct, Plaintiff incurred over $1,600,000 in costs as well as additional consequential damages. (Id., at ¶¶ 21-22.) Plaintiff alleges on information and belief that its damages far exceed the revenue generated from NVIDIA’s business between 2011 and 2015. (Id., at ¶ 22.)

Based on the foregoing, Plaintiff filed the operative 4AC against NVIDIA and Fabrinet, alleging the following causes of action: (1) breach of express contract (against NVIDIA); (2) promissory fraud (against NVIDIA); and (3) intentional interference with contractual relations/inducing breach of contract (against Fabrinet).

On February 1, 2018, NVIDIA and Fabrinet filed their demurrers to the 4AC. Plaintiff filed papers in opposition to the demurrers on February 13, 2018. On February 20, 2018, Fabrinet filed a reply.

Discussion

I. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732, internal citations and quotations omitted; see Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) However, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)

II. NVIDIA’s Demurrer

NVIDIA demurs to the first and second causes of action of the 4AC on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

A. First Cause of Action

NVIDIA argues that the first cause of action for breach of contract fails to allege facts sufficient to state a claim because the cause of action, as pleaded, is barred by the statute of frauds and equal dignities rule.

1. Statute of Frauds

“The statute of frauds is a collective term describing the various statutory provisions that deny enforcement to certain enumerated classes of contracts unless they are reduced to writing and signed by the party to be charged.” (1 Witkin, Summary of California Law (11th ed. 2017) Contracts, § 343.) As relevant here, one type of contract subject to the statute of frauds is “[a]n agreement that by its terms is not to be performed within a year from the making thereof.” (Civ. Code, § 1624, subd. (a)(1); see Munoz v. Kaiser Steel Corp. (1984) 156 Cal.App.3d 965, 971.)

As NVIDIA persuasively argues, the contract that is the subject of the breach of contract claim—the Subsequent Upgrade Contract—is alleged to have been five years in duration and thus, by its terms, was not to be performed within a year of its making. (4AC, ¶ 16.) Accordingly, on its face the agreement falls within the statute of frauds. Moreover, Plaintiff alleges that the agreement was oral. (Ibid.) Consequently, the Subsequent Upgrade Contract is barred by the statute of frauds unless an exception to the statute of frauds applies.

In its opposition, Plaintiff insists that numerous exceptions to the statute of frauds apply to the circumstances at bar. First, Plaintiff asserts that the doctrines of estoppel and part performance apply in this case. Under both doctrines, the suffering of an unconscionable injury by the plaintiff must be pleaded in order to estop the defendant from relying on the statute of frauds. (See Ruinello v. Murray (1951) 36 Cal.2d 687, 689 [stating that “there can be no estoppel [of the defendant relying on the statute of frauds] unless plaintiff will suffer unconscionable injury or defendant will be unjustly enriched if the oral contract is not enforced”]; see also Secrest v. Security Nat. Mortg. Loan Trust 2002-2 (2008) 167 Cal.App.4th 544, 555–556 (Secrest) [“Before a party can be estopped to assert the statute [of frauds] due to the other’s part performance, it must appear that a sufficient change of position has occurred so that the application of the statutory bar would result in an unjust and unconscionable loss, amounting in effect to a fraud. [Citations.]”]; Anderson v. Stansbury (1952) 38 Cal.2d 707, 715-16.)

As NVIDIA persuasively argues, Plaintiff has not sufficiently pleaded that it will suffer such an injury if the contract is not enforced. As NVIDIA notes, Plaintiff alleges that it received approximately $3,000,000 per year in revenue from NVIDIA during the period of 2011 to 2015, and realized a 20 percent profit margin. (4AC, ¶ 9.) Thus, Plaintiff seemingly recouped the amounts it expended on new equipment in reliance on the purported agreements and while it claims to have lost profits due to NVIDIA’s alleged breach, the loss of the benefit of the bargain, i.e., anticipated profits, does not constitute an unconscionably injury. (See, e.g., C.R. Fedrick, Inc. v. Borg-Warner Corp. (9th Cir. 1977) 552 F.2d 852, 857-858.) Although Plaintiff alleges on information and belief that its damages far exceed the revenue generated from NVIDIA’s business between 2011 and 2015 (4AC, ¶ 22), NVIDIA is correct that Plaintiff may not allege such facts on information and belief because facts regarding its damages are presumably within its knowledge (Hall v. James (1926) 79 Cal.App. 433, 435-36; see Seamen’s Bank v. Super. Ct. (1987) 190 Cal.App.3d 1485, 1495 [one may not allege on information and belief facts presumably within his or her knowledge]).

Second, Plaintiff insists that it fully performed under the agreement, thereby taking NVIDIA’s alleged contractual obligations outside of the statute of frauds. As a general matter, “[w]here the contract is unilateral, or, though originally bilateral, has been fully performed by one party, the remaining promise is taken out of the statute [of frauds], and the party who performed may enforce it against the other.” (Secrest, supra, 167 Cal.App.4th at p. 556; Roberts v. Wachter (1951) 104 Cal.App.2d 271, 280-81 (Roberts) [“ ‘When a contract has been so far performed that nothing remains to be done but the payment of the consideration for the performance, the fact that the contract does not require the payment within a year furnishes no defense to an action for the price.’ ”]; Dutton v. Interstate Inv. Corp. (1941) 19 Cal.2d 65, 70 (Dutton) [a party’s full performance of his or her obligations under a contract removes the bar of the statute of frauds]; Dean v. Davis (1946) 73 Cal.App.2d 166, 168 [same]; Winchester Drive-In Theatre, Inc. v. Warner Bros. Pictures Distributing Corp. (9th Cir. 1966) 358 F.2d 432, 435 [same]; Nicolds v. Storch (1944) 67 Cal.App.2d 8, 17; Marr v. Postal Union Life Ins. Co. (1940) 40 Cal.App.2d 673, 679 (Marr).) Plaintiff asserts that it has properly triggered this exception by alleging in the 4AC that it fully performed by purchasing the required SMT machinery and setting up the NVIDIA Lines. (4AC, ¶¶ 12-16.)

Anticipating Plaintiff’s argument regarding full performance, NVIDIA contends that Plaintiff does not—and cannot—allege any facts to support the application of this exception to its breach of contract claim. In particular, NVIDIA asserts that the full performance doctrine only applies when nothing remains to be done except the payment of money. NVIDIA contends that Plaintiff needed to take additional steps before it was entitled to “payment of $3 million per year …”; specifically, NVIDIA states that “the only scenario in which [Plaintiff] could have fully performed under the alleged Subsequent Upgrade Contract is if it had upgraded and fully setup its production lines with the purportedly ‘required’ Fuji SMT machines and fulfilled all the purchase orders that NVIDIA was allegedly required to issue.” (Mem. Ps. & As., p. 9:16-20.)

This argument is not well-taken. NVIDIA’s characterization of the full performance exception to the statute of frauds is too narrow. It is not true that the full performance doctrine only applies when nothing remains to be done except the payment of money. Rather, the doctrine applies when the contract has been fully performed by one party such that “nothing remains to be done but the payment of the consideration for the performance ….” (Roberts, supra, 104 Cal.App.2d at p. 280-81; Secrest, supra, 167 Cal.App.4th at p. 556 [“[w]here the contract is unilateral, or, though originally bilateral, has been fully performed by one party, the remaining promise is taken out of the statute [of frauds], and the party who performed may enforce it against the other.”], italics added.) According to the allegations of the 4AC, the consideration for Plaintiff’s performance—i.e., Plaintiff’s purchase of upgraded Fuji SMT machines—was NVIDIA’s promise that it would “provide $3,000,000 per year of purchase orders to [Plaintiff] for five (5) years commencing from the date of equipment delivery.” (4AC, ¶¶ 15-16, italics.) As Plaintiff alleges that it fully performed under the Subsequent Upgrade Contract by purchasing the upgraded Fuji SMT machines, the consideration for Plaintiff’s performance—NVIDIA’s promise that it would provide Plaintiff with $3,000,000 worth of purchase orders per year for five years—is taken out of the statute of frauds.

NVIDIA also argues that Plaintiff must plead facts demonstrating that it suffered an unconscionable injury in order for the full performance exception apply. However, none of the authorities cited by NVIDIA require the allegation of an unconscionable injury by the plaintiff in order to trigger the exception based on full performance by one party. Rather, the authorities cited by NVIDIA indicate that the full performance exception is sometimes placed on the ground of estoppel; mere part performance of a contract is insufficient to remove a promise from the statute of frauds and requires a showing of an unconscionable injury; and the principle that full performance takes a contract out of the statute of frauds has been limited to the situation where performance consisted of conveying property, rendering personal services, or doing something other than the payment of money. The cases relied up by NVIDIA are distinguishable from this case as Plaintiff’s performance consisted of doing something other than the payment of money—Plaintiff purchased the upgraded Fuji SMT machines. Furthermore, when courts have applied the full performance exception, they have not indicated that a showing of unconscionable loss is required for the exception to apply. (See e.g., Marr, supra, 40 Cal.App.2d at p. 679 [making no mention of a requirement of unconscionable injury]; Dutton, supra, 19 Cal.2d at p. 70 [same]; Roberts, supra, 104 Cal.App.2d at pp. 280-81 [same].)

As NVIDIA fails to establish the insufficiency of the full performance allegations, it has not shown that its performance under the subject agreement has not been removed from the statute of frauds. Thus, NVIDIA’s contention that Plaintiff’s claim is barred by the statute of frauds is unavailing.

2. Equal Dignities Rule

Civil Code section 2309 provides: “An oral authorization is sufficient for any purpose, except that an authority to enter into a contract required by law to be in writing can only be given by an instrument in writing.” This statute is known as the “equal dignities rule,” and it requires that the agent have written authority to bind his principal upon any agreement within the class of contracts covered by the statute of frauds or other sections that make a writing necessary. (O’Banion v. Paradiso (1964) 61 Cal.2d 559, 563.) “The equal dignities rule is essentially a corollary to the statute of frauds. Where a contract would be void unless reduced to writing (e.g., those contracts subject to the statute of fraud), authority to enter into such a contract must also be in writing.” (Shoals v. Home Depot, Inc. (E.D. Cal. 2006) 422 F.Supp.2d 1183, 1189-90.)

As NVIDIA persuasively argues, because the Subsequent Upgrade Contract was required by law to be in writing, authority to enter into the agreement also needed to be provided in writing. There are no allegations in the 4AC that Carter had written authorization from NVIDIA to entered into the Subsequent Upgrade Contract. Consequently, the Subsequent Upgrade Contract is barred by the equal dignities rule unless an exception to the rule applies.

In opposition, Plaintiff contends that the doctrine of estoppel bars NVIDIA from raising the equal dignities rule. Specifically, Plaintiff contends that “[NVIDIA] acted through its employees for years”; “[i]t continued to do so following the formation of the agreements at issue”; [NVIDIA] employees coordinated with [its] employees on the required upgrades, and subsequently issued purchase orders as agreed up until the time of breach”; NVIDIA accepted the benefits of the agreement; and NVIDIA “held its corporate representatives, e.g., Carter, out to [it] as authorized agents of the company.” (Opp’n., pp. 12:17-24 and 13:2-13.)

“[A]uthorities recognize that under certain circumstances a principal may estop himself from claiming the benefit of section 2309, but such estoppel must be based on the principal’s own acts or representations.” (McGirr v. Gulf Oil Corp. (1974) 41 Cal.App.3d 246, 254.) “First, there are the cases where the principal has done something which has caused the third person to believe that written authority exists or is unnecessary.” (Id., at p. 257.) Second, there are cases where principals have been estopped to rely on section 2309 of the Civil Code when principals receive the benefits resulting from the agreement “with complete knowledge of the circumstances.” (Id., at pp. 257-58.)

Here, there are no factual allegations in the 4AC showing that NVIDIA, itself, created an impression that Carter had authority to enter into the Subsequent Upgrade Contract for more than one year or that whatever authority he had was in writing. Additionally, there are no factual allegations in the 4AC demonstrating that NVIDIA accepted any benefits which may have resulted to it from the Subsequent Upgrade Contract with knowledge that Plaintiff intended them as part and parcel of a contract that required the provision of $3,000,000 worth of purchase orders over the course of five years. Consequently, as currently pleaded, the first cause of action is barred by the equal dignities rule.

Accordingly, NVIDIA’s demurrer to the first cause of action is SUSTAINED, with 10 days’ leave to amend.

B. Second Cause of Action

NVIDIA argues that the second cause of action for promissory fraud fails to allege facts sufficient to state a claim because “[Plaintiff’s] own allegations affirmatively negate the element of an existence of an intent not to perform at the time the alleged promise was made.” (Mem. Ps. & As., p. 12:22-23.) In particular, NVIDIA points to the allegations that it provided Plaintiff with $3,000,000 of business per year during the period of 2011 to 2014. NVIDIA contends that such allegations demonstrate that it carried out its alleged promise for a period of time such that there can be no inference of an intent to defraud.

Where a defendant has made efforts to carry out a promise made to the plaintiff, there can be no fraud. (See, e.g., Church of Merciful Savior v. Volunteers of America, Inc. (1960) 184 Cal.App.2d 851, 859.) The 4AC contains factual allegations showing that NVIDIA made efforts to carry out its alleged promise to Plaintiff, i.e., NVIDIA continued to provide Plaintiff with its business until August 2015. Furthermore, with respect to the issue of intent, Plaintiffs simply allege that NVIDIA did not intend to perform its alleged promise because in February 2014, NVIDIA “did not intend to provide continuing business of $3,000,000 per year until June[ ] 2019[;] [r]ather, [NVIDIA] intended to induce [Plaintiff] to upgrade its Fuji [NVIDIA] Line to benefit [NVIDIA’s] NPI production.” (4AC, ¶ 31) This general averment of lack of intent is insufficient given the specific allegations regarding NVIDIA’s performance. (See Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1390 [where a plaintiff alleges a permissible conclusion of law … but also avers specific additional facts which either do not support such conclusion, or are inconsistent therewith, such specific allegations will control ….”].)

As Plaintiff previously had an opportunity to correct this pleading defect and does not show how it might be able to state facts sufficient to constitute a valid cause of action,
NVIDIA’s demurrer to the second cause of action is SUSTAINED without leave to amend. (See Goodman v. Kennedy (1976) 18 Cal. 3d 335, 349 [“Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading”].)

III. Fabrinet’s Demurrer

Fabrinet demurs to the third cause of action of the 4AC for intentional interference with contractual relations/inducing breach of contract on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).) Amongst other things, Fabrinet argues that the Subsequent Upgrade Contract is barred by the equal dignities rule.

The existence of such a contract is a necessary element of a claim for intentional interference with contractual relations. (See Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55 [stating that elements of such a claim are (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage]; see also Tuchscher Development Enterprises, Inc. v. San Diego Unified Port Dist. (2003) 106 Cal.App.4th 1219, 1239.)

As explained in greater detail above, as currently pleaded, the Subsequent Upgrade Contract is barred by the equal dignities rule and Plaintiff has not alleged sufficient facts giving rise to the doctrine of estoppel.

Accordingly, Fabrinet’s demurrer to the third cause of action is SUSTAINED, with 10 days’ leave to amend.