Case Name: Ultrra v. AboveGEM, Inc., Oliver Wang, et al.
Case No.: 18CV325990

This is an action primarily alleging fraudulent inducement of contract and breach of contract, specifically a software licensing agreement (“SLA”). Plaintiff Ultrra LLC (“Plaintiff”) describes itself as a “multi-level marketing or ‘direct sales’ organization. . . . Ultrra recruits and supports a network of preferred customers, distributors, sales persons and small business owners (‘Distributors’) with a first class support system, including their own personalized web-site, business tools & training 24/7, social media resources, mobile business access and a branded product-line, expert training resources and pro marketing materials to build their business.” (Complaint at para. 3.) Defendants are alleged to be providers of software for companies like Plaintiff. The Complaint alleges that Defendants had been pursuing Plaintiff’s business for some time but that it “was unwilling to contract with AboveGEM in 2014-2016 because it had understood that the software was new, unstable and unfinished. . . . [I]n November of 2016, Defendants gave Plaintiff marketing materials of their new and enhanced software system, which they stated was finished [ ] stable and robust. . . . Defendants represented that this new version’s significantly higher cost was because it had substantially more ‘robust’ features and functions, which they said was ‘scalable.’ They also promised to include 30 hours of development time for enhancement of the system per month, which they not only later failed to do, they never intended to provide.” (Complaint at para. 12.)

The Complaint alleges that based on Defendants’ allegedly false express and implied representations about the software, Plaintiff entered into the written SLA with Defendants “on or about November 21, 2016.” (Complaint at para. 11.) The Complaint further alleges that in December 2016 Plaintiff provided Defendants with its requirements in a written document and that Defendants “represented that they would meet these requirements. In the first weekend of January 2017, Defendants represented to Plaintiff that the software with the customizations and enhancements requested were ready, and requested that Plaintiff begin paying them the $2,500 monthly hosting fee. Defendants had already represented that the Software would be fully functioning and ready by January 1, 2017. The software was not fully functioning on that date nor ever completely nor in a commercially reasonable fashion.” (Complaint at para. 15-16.) The Complaint goes to allege that the software failed to perform in a variety of ways, including (para. 19) that “sales commissions were consistently calculated incorrectly, and this was reported initially on January 17, 2017.” Throughout 2017 the software allegedly failed to perform as promised and Plaintiff eventually stopped paying the $2,500 monthly fee for use of the software in protest. (See Complaint at para. 23.)

The parties’ dispute continued into early 2018. Plaintiff’s original and still operative Complaint was filed on April 4, 2018 and states five causes of action: 1) Intentional Interference with Contractual Relations and Prospective Economic Advantage; 2) “Damages and/or Rescission for Intentional Fraud”; 3) Trespass/Conversion; 4) Negligence, and; 5) Breach of Contract and Warranty (against AboveGEM only). Defendant AboveGEM filed a Cross-Complaint on May 31, 2018.

Currently before the Court are two matters: 1) Defendants’ special motion to strike the Complaint, and; 2) Defendants’ demurrer to the Complaint’s first, second and fourth causes of action.

1. Defendants’ special motion to strike

As an initial matter the Court notes the following: Defendants’ papers in support of the motion to strike do not comply with Rule of Court 3.1113(f) as their memorandum of points and authorities exceeds ten pages but lacks the required table of contents and table of authorities. Plaintiff’s opposition was filed one day late and Plaintiff’s counsel has altered the line spacing in a manner that does not comply with Rule of Court 2.108. The Court has exercised its discretion to consider both side’s papers in their entirety despite these defects. Any purported requests for judicial notice that do not comply with Rule of Court 3.1113(l) are denied.

When a special motion to strike is filed, the initial burden rests with the moving party to demonstrate that the challenged pleading arises from protected activity. (Code of Civ. Proc. “CCP” §425.16(e); Zamos v. Stroud (2004) 32 Cal.4th 958, 965.) “A defendant meets his or her burden on the first step of the anti-SLAPP analysis by demonstrating the acts underlying the plaintiff’s cause of action fall within one of the four categories spelled out in [CCP] section 425.16, subdivision (e).” (Collier v. Harris (2015) 240 Cal.App.4th 41, 50-51.) That section provides that an “‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue’ includes: (1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law, (2) any written or oral statement made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law, (3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest, or (4) any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.” (CCP §425.16(e).) “These categories define the scope of the anti-SLAPP statute by listing acts which constitute an ‘act in furtherance of a person’s right of petition or free speech under the United States or California Constitution in connection with a public issue.’” (Collier, supra, at 51, citing CCP §425.16(e).)

As the California Supreme Court has stressed, “the critical point is whether the plaintiff’s cause of action itself was based on an act in furtherance of the defendant’s right of petition or free speech.” (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 78.) “In other words, the defendant’s act underlying the plaintiff’s cause of action must itself have been in furtherance of the right of petition or free speech.” (Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658, 670 (Peregrine Funding). Emphasis added.) “In deciding whether the ‘arising from’ requirement is met, a court considers ‘the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based.’” (Peregrine Funding, supra, 133 Cal.App.4th at p. 670.) “[H]owever, it is not enough to establish that the action was filed in response to or in retaliation for a party’s exercise of the right to petition. [Citations.] Rather, the claim must be based on the protected petitioning activity.” (Bergstein v. Stroock & Stroock & Lavan LLP (2015) 236 Cal.App.4th 793, 804, (Bergstein), citing Navellier v. Sletten (2003) 29 Cal.4th 82, 89.) “[I]f the defendant does not demonstrate this initial prong, the court should deny the anti-SLAPP motion and need not address the second step.” (Baharian-Mehr v. Smith (2010) 189 Cal.App.4th 265, 271 (Baharian-Mehr).)

Defendants’ special motion to strike is DENIED for failure to meet the initial burden to establish that the targeted claims, in this case every cause of action alleged in the Complaint, are based on their protected activity, specifically a March 13, 2018 email sent by Defendant Wang in his capacity as “AboveGEM’s Co-Founder.” (See Wang Decl. at para. 4.) Last year in a unanimous opinion the Supreme Court reiterated that “a claim is not subject to a motion to strike simply because it contests an action or decision that was arrived at following speech or petitioning activity, or that was thereafter communicated by means of speech or petitioning activity. Rather, a claim may be struck only if the speech or petitioning activity itself is the wrong complained of, and not just evidence of liability or a step leading to some different act for which liability is asserted.” (Park v. Board of Trustees of California State University (2017) 2 Cal.5th 1057, 1060 [emphasis in original].) “A claim arises from protected activity when that activity underlies or forms the basis for the claim. Critically, ‘the defendant’s act underlying the plaintiff’s cause of action must itself have been an act in furtherance of the right of petition or free speech.’ ‘[T]he mere fact that an action was filed after protected activity took place does not mean the action arose from that activity for the purposes of the Anti-SLAPP statute.’ . . . In short, in ruling on an anti-SLAPP motion, courts should consider the elements of the challenged claim and what actions by defendants supply those elements and consequently form the basis for liability.” (Id. at 1062-1063, internal citations omitted but citing among others City of Cotati, supra at p. 78.)

Here, while the Complaint (at para. 24) quotes a portion of the March 13, 2018 email and that paragraph, like many of the general allegations, is incorporated by reference into each cause of action, it is not apparent from the Complaint or any of the evidence submitted by Defendants that the March 13, 2018 email (even if it is assumed for purposes of argument to be protected activity) is itself the “wrong complained of” and is the basis of any of the Complaint’s causes of action. It is instead clear from the Complaint that Plaintiff’s claims are based on an alleged series of actions (and the parties’ dispute over them) that began in late 2016 and early 2017 and continued through the filing of the Complaint on April 4, 2018. These include, among other things, Defendants allegedly misrepresenting their software in order to induce Plaintiff to contract with them, breaching the resulting contract by failing to provide what was promised and damaging Plaintiff’s ability to do business with third parties. The fact that the alleged wrongdoing was, in the words of the Park Court, “thereafter communicated by means of speech or petitioning activity,” such as the March 13, 2018 email (again assuming for purposes of argument that the email was protected activity) does not make the Complaint the proper subject of a special motion to strike.

Because the Court finds that Defendants have not met their burden on the first step of the analysis, it is not necessary for the Court to address the second step. (See Baharian-Mehr, supra.)

2. Defendants’ Demurrer to the Complaint

As noted above Defendants also demurrer to the Complaint’s first cause of action (intentional interference with contractual relations), second cause of action (fraud) and fourth cause of action (negligence) on the ground that they fail to state sufficient facts. (See Notice of Demurrer and Demurrer at 1:24-2:3.) As also stated above, the Court will exercise its discretion to consider Plaintiff’s opposition which was filed one day late. The Court further notes that Defendants appear to have failed to comply with CCP § §430.41 as the demurrer is not accompanied by the now required declaration regarding the parties’ efforts to meet and confer on the issues raised. As a failure to meet and confer is not, by itself, a basis for overruling the demurrer the Court will overlook this failure. The parties are directed to comply with applicable law in the future.

The Court in ruling on a demurrer treats it “as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Piccinini v. Cal. Emergency Management Agency (2014) 226 Cal.App.4th 685, 688, citing Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213-214.)

a) First Cause of Action (Intentional Interference with Contract)

The elements of claim for intentional interference with contractual relations are: 1) a contract between plaintiff and an identified third party; 2) defendant’s knowledge of the contract; 3) defendant’s intentional acts designed to induce a breach or disruption of the contract; 4) the actual breach or disruption of the contractual relationship; and 5) resulting damage. (Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126; Quelimane Company, Inc. v. Stewart Title Guaranty Company (1998) 19 Cal.4th 26, 55.) A plaintiff need not allege that the defendant acted with a specific intent to interfere. (Quelimane at p. 56.) Instead, it is sufficient for the plaintiff to plead that the defendant knew that the interference is certain or substantially certain to occur as a result of his or her action. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1156-1157.) It should be noted that a claim for international interference with prospective economic advantage, which it appears Plaintiff may have also intended to allege (but has not), is a distinct cause of action with different elements which would have to be pled separately.

Defendants’ demurrer to the first cause of action on the ground that it fails to state sufficient facts is SUSTAINED with 10 days’ leave to amend. As presently pled, the first cause of action alleges in pertinent part at paragraphs 45-46 that “[t]he conduct of the Defendants was intended to and had the effect of unreasonably interfering with Plaintiff’s business and capital raising operations and contracts, economic relationships and prospects for future business and capital raising operations. The conduct alleged herein was unjustified and unreasonably interfered with Plaintiff’s business and capital raising operations and contracts, economic relationships and prospects for future business and capital raising operations.”

This fails to sufficiently identify any specific contracts with identified third parties, or adequately allege that such specific contracts were intentionally disrupted by Defendants with damages to Plaintiff attributable to that interference. Incorporating all prior allegations by reference is not a substitute for stating sufficient facts within the cause of action itself. As Plaintiff’s opposition indicates that the claim can be alleged with more detail, leave to amend is appropriately granted.

b) Second Cause of Action (“Damages and/or Rescission for Intentional Fraud”)
“The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792 [citation omitted].) “Fraud must be pleaded with specificity rather than with general and conclusory allegations. The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.” (Id. at p. 793 [citation and quotation marks omitted].) Courts enforce the specificity requirement in consideration of its two purposes. (Id. at p. 793.) The first purpose is to give notice to the defendant with sufficiently definite charges that the defendant can meet them. (Ibid.) The second is to permit a court to weed out meritless fraud claims on the basis of the pleadings; thus, the pleading should be sufficient to enable the court to determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud. (Ibid.)

“An action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract. [Citation.] The action is one of deceit, which requires proof that the defendant made a misrepresentation of fact or a promise without any intention of performing it. [Citation.] A complaint for fraud must allege the following elements: (1) a knowingly false representation by the defendant; (2) an intent to deceive or induce reliance; (3) justifiable reliance by the plaintiff; and (4) resulting damages. [Citation.] Every element must be specifically pleaded. [Citation].” (Service by Medallion, Inc. v. Clorox Co. (1996) 44 Cal.App.4th 1807, 1816.)

Defendants’ demurrer to the second cause of action on the ground that it fails to state sufficient facts is SUSTAINED with 10 days’ leave to amend. As presently pled the second cause of action alleges in pertinent part (Complaint at paras. 49-50) that “Defendants made several fraudulent misrepresentations of fact, as alleged herein, which were relied on reasonably by Plaintiff and which induced Plaintiff to enter into the SLA and to abandon its prior vendor. Defendants made several fraudulent promises without any intention of performing them, as alleged herein, which were relied on reasonably by Plaintiff and which induced Plaintiff to enter into the SLA and to abandon its prior vendor.” This fails to allege fraud with sufficient particularity, particularly as against a corporate entity defendant such as AboveGEM. Incorporating all prior allegations by reference does not satisfy the heightened pleading standard for fraud claims.

b) Fourth Cause of Action (Negligence)

“In order to establish negligence, a plaintiff must demonstrate a duty on the part of defendant, breach of that duty, causation and damages.” (Strong v. State of Cal. (2011) 201 Cal.App.4th 1439, 1449.) Whether a duty of care exists is a question of law for the Court. (Id.)

Defendants’ demurrer to the fourth cause of action on the ground that it fails to state sufficient facts is SUSTAINED with 10 days’ leave to amend. As an initial matter the fourth cause of action, despite being alleged against all defendants, contains no allegations against Defendant Wang. More importantly, as currently pled the fourth cause of action attempts to frame Defendants’ alleged breach of the SLA (dealt with more directly in the Complaint’s fifth cause of action for breach of contract) as an act of negligence. “Defendant AboveGEM owed a duty of care to Plaintiff to carry out the terms of the SLA and provide the Software and services to a reasonable standard of care . . .” (Complaint at para. 57.)

Negligence sounds in tort, not contract, and strictly speaking there is no cause of action for “negligent” breach of contact. In Erlich v. Menezes (1999) 21 Cal.4th 543, the California Supreme Court noted that a contractual obligation may create a legal duty and the breach of that duty may support an action in tort in certain circumstances. (Id. at p. 551.) However, it explained that conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. (Id.) An omission to perform a contract obligation (such as Defendants’ alleged failure to provide a working software system) is never a tort, unless that omission is also an omission of a legal duty. (Id.) The Erlich Court noted that tort damages have been permitted in contract cases where a breach of duty directly causes physical injury, for breach of the covenant of good faith and fair dealing in insurance contracts, for wrongful discharge in violation of fundamental public policy, or where the contract was fraudulently induced. (Id. at 551-552.) In each of those cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to do harm. (Id. at 552.) The mere negligent breach of a contract is not enough to allow tort damages. Courts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.

As the fourth cause of action at present only alleges a breach of contract (the SLA) and does not allege any duty of care independent of the contact or any breach of such a duty, it fails to state sufficient facts.