2010-00090603-CU-BC

Kristine Burke MD vs. Meditab Software Inc

Nature of Proceeding: Hearing on Demurrer to Third Amended Complaint

Filed By: Gortinsky, Alex

*** If oral argument is requested, the parties shall at the time of the request
notify both the clerk and opposing counsel of the specific causes of action that
will be addressed at the hearing. ***

Defendant Meditab Software, Inc.’s demurrer to the Third Amended Complaint (“3AC”)
is SUSTAINED in part and OVERRULED in part, with leave to amend, as follows.
This action arises out of plaintiff’s purchase of a software program which she expected
would assist in the management of her medical practice but which allegedly caused it
to lose nearly $200,000. The 3AC asserts four (4) causes of action (“COA”) in the
following order: Breach of contract, breach of warranty, “deceit” and negligent
misrepresentation.

All COA. Defendant first asserts that in violation of the ruling sustaining the demurrer
to the prior complaint, the 3AC still appears to allege COA and damages on behalf of
both Dr. Burke individually and her corporate medical practice. This demurrer is
overruled because, as correctly pointed out by the opposition, the Court upheld
defendant’s prior challenge to the complaint because it added damages allegedly
suffered by Dr. Burke personally which were not previously claimed (or recoverable) by
her corporate practice. However, the Court has reviewed the 3AC and finds it does
not allege on Dr. Burke’s behalf any damages which are not also alleged on behalf of
the practice itself. Since the 3AC effectively seeks the same damages on behalf of
both plaintiffs, the 3AC is consistent with the Court’s prior ruling and the statute of
limitations is no bar to the claims or damages now alleged on behalf of Dr. Burke
personally.

3rd and 4th COA. Defendant next contends that these two COA lack specific facts from
which a jury could infer that defendant’s promises about its software were “false or
negligent” when made. Specifically, defendant points to the allegations in the 3AC
which effectively admit defendant made numerous attempts to fix the software and
contends this shows defendant merely had an overly optimistic view of the software’s
performance, rather than some intent at the time the contract was made not to
perform. The Court overrules the demurrer to these two COA as well. While plaintiffs’
ability to recover on either or both of these COA will require the fact finder to conclude
defendant had no intent to perform at the time the contract was entered, this element
of the prima facie case is sufficiently pled. First, Paragraphs 6-7 of the 3AC
specifically allege facts from which a trier of fact could infer that defendant and/or its
agents either knew or should have known plaintiff would not ultimately be provided
with a program which performed according to the representations and/or promises
made. This would be tantamount to an intent not to perform. Second, evidence of a
defendant’s conduct subsequent to the alleged false promise is admissible and may be
sufficient to show there was at the time of the promise no intent to perform. (See, e.g.,
Green Trees Enterprises v. Palm Springs Alpine Estates (1967) 66 Cal.2d 782; Miller
v. National Amer. Life Ins. Co. (1976) 54 Cal.App.3d 331, 338; Diamond Woodworks v.
Argonaut Ins. Co. (2003) 109 Cal.App.4th 1020, 1046; 135 C.R.2d 736; see also BAJI,
No. 12.41.) Thus, although defendant’s numerous attempts to cure the software’s
defects after the contract was signed may lead the trier of fact to reject plaintiff’s claim
that defendant had no intent to perform, it is equally possible the opposition conclusion
could be reached. Because this question cannot be resolved here as a matter of law,
the demurrer on this ground must be and hereby is overruled.

All COA. Defendant’s final argument is apparently that all of plaintiffs’ COA are barred
by the “economic loss rule” to the extent the 3AC merely alleges the product in
question, the software, did not meet plaintiffs’ expectations and that the 3AC alleges
no deceit or misrepresentation independent of the conduct which constituted
defendant’s breach of contract.

This demurrer on this ground must be overruled as it relates to the first two COA for
breach of contract and breach of warranty. Defendant’s moving papers correctly
assert that in the context of product liability, the “economic loss rule” does effectively
preclude a plaintiff from holding a product manufacturer strictly liable for a design or
manufacturing defect which caused no personal injury or damage to other property but
rather which caused only economic loss (e.g., diminution is value, cost of repair or
replacement, etc.). (Mov. Memo. P&A, p.5:19-p.6:9.) However, the moving papers
admit that in such cases where the sole result of a defective product is mere economic
loss, the plaintiff is permitted to proceed against the manufacturer on a contract theory.
(Id., at p.5:24-p.6:1; p.6:5-7.) In Robinson Helicopter Co. v. Dana Corp., one of the
authorities cited by defendant, the Supreme Court explained that the “economic loss
rule” typically “bars a tort action in the absence of personal injury or physical damage
to other property,” but there was no suggestion that this rule precluded any contract-
based claim for purely economic losses. (Robinson Helicopter Co. (2004) 34 Cal.4th
979, 984.) Consequently, the “economic loss rule” on which defendant relies here
poses no barrier to either of the first two COA in the 3AC for breach of contract and
breach of warranty since both of these contract-based theories are permissible means
by which plaintiff may recover her any economic losses. Accordingly, defendant’s
demurrer to the first two COA based on the “economic loss rule” must be and hereby is
overruled.

rd th
On the other hand, the demurrer to the 3 and 4 fraud-based COA on the ground
they are barred by the “economic loss rule” is sustained. In Erlich v. Menezes (1999)
21 Cal.4th 543, the Supreme Court held that conduct amounting to a breach of
contract becomes tortious only when it also violates a duty independent of the contract
and arising from the principles of tort law and then identified “several instances where
tort damages were permitted in contract cases.” (Robinson Helicopter Co., at 989.)
The High Court explained:

“[I]n each of these 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 harm. [Citation.]” (Robinson Helicopter Co., at 990
(citing Erlich, at 552).)

A few years later in Robinson Helicopter Co., the Supreme Court applied this standard
to the facts presented there and concluded not only that the misrepresentations by
defendant Dana Corp. “were independent of Dana [Corp.’s] breach of contract” but
also that the “economic loss rule” did not bar Robinson Helicopter’s fraud claims. (
Robinson Helicopter Co., at 990-991.) More specifically, the Court held that Dana
Corp.’s provision of false certificates of conformance induced Robinson Helicopter to
accept delivery and use the nonconforming clutches as well as causing the latter to
incur significant costs in investigating the cause of the faulty clutches constituted
tortious conduct separate from Dana Corp.’s breach of its contractual obligation to
provide conforming clutches. (Robinson Helicopter Co., at 991.) The Supreme Court
also pointed out that Dana Corp.’s provision of faulty clutches exposed Robinson
Helicopter not only to liability for personal damages if a helicopter crashed but also to
disciplinary action by the FAA and thus, Dana Corp.’s fraud was a tort separate and
distinct from the latter’s breach of contract. (Robinson Helicopter Co., at 991.)

In contrast, this Court can find in the present case no substantive difference between
the facts alleged in the 3AC to constitute defendant’s breach of contract and the facts
alleged to constitute defendant’s fraud. The heart of plaintiffs’ breach of contract and
breach of warranty COA is that defendant failed to provide the software modules which were purchased, failed to provide software as warranted, failed to provide software
which integrated into plaintiffs’ medical practice and failed to provide technical and
professional support as promised. (3AC, ¶¶26, 30-32.) The essence of the both the
“deceit” and the negligent misrepresentation COA is that defendant and/or its product
fell short in that (a) “the transcription documents contained many grammar, flow, and
wording errors;” (b) “the prescription module…failed to include necessary medication
information for patients’ prescriptions;” (c) defendant failed to “provide an operational
software program” and failed to address plaintiffs’ concerns with it; and (d) defendant
failed to deliver and install a Healthcare Portal and an IVR module. (3AC, ¶¶37, 43.)
The 3AC, as currently pled, fails to establish any tort liability against defendant which
is completely independent of defendant’s obligations under the contract or is based on
facts separate and distinct from those which constitute defendant’s alleged breach of
contract. Consequently, the Court sustains the demurrer to the two fraud-based COA
as being violative of the “economic loss rule” as discussed in Robinson Helicopter Co.

Since this is the first time defendant has raised the “economic loss rule,” leave to
amend is granted.

Plaintiffs may file and serve an amended complaint no later than 10/18/2013.
Although not required by court rule or statute, plaintiffs are directed to present a
copy of this order when the amended complaint is presented for filing.

Defendant to respond within 10 days if the amended complaint is personally served,
15 days if served by mail. If the response is either a demurrer or motion to strike, a
copy of the new amended complaint must be included with the moving papers .

This minute order is effective immediately. No formal order or other notice is required.
(Code Civ. Proc. §1019.5; CRC Rule 3.1312.)

Item 4 2010-00090603-CU-BC

Kristine Burke MD vs. Meditab Software Inc

Nature of Proceeding: Motion to Strike Portions of Third Amended Complaint

Filed By: Gortinsky, Alex

Defendant Meditab Software, Inc.’s motion to strike portions of the Third Amended
Complaint (“3AC”) is GRANTED in part and DENIED in part, with leave to amend, as
follows.

This action arises out of plaintiff’s purchase of a software program which she expected
would assist in the management of her medical practice but which allegedly caused it
to lose nearly $200,000. The 3AC asserts four (4) causes of action (“COA”) in the
following order: Breach of contract, breach of warranty, “deceit” and negligent
misrepresentation.

The Court denies defendant’s request to strike all allegations which purport to allege
that Dr. Burke, as an individual and as distinguished from her corporate medical
practice, is a plaintiff. As explained in the tentative ruling on defendant’s demurrer, the
3AC does not allege on Dr. Burke’s behalf any damages which are different from those
alleged on behalf of the practice itself and this is consistent with the Court’s ruling on
the demurrer to the prior complaint. The Court also denies defendant’s request to strike all allegations relating to its CEO,
Mike Patel. Although Patel’s demurrer was previously sustained and he has
apparently been voluntarily dismissed by plaintiff as an individual defendant, this does
not mean that the 3AC cannot permissibly refer to him. In fact, given what the Court
currently understands, reference to Patel may be essential to a clear, concise pleading
of the COA. This is especially true if plaintiffs attempt to state a valid fraud claim which
requires factual specificity but it is also true even if they rely solely on contract-based
theories.

The motion is granted as to the punitive damages allegations in that the Court has
sustained defendant’s demurrer to the two fraud-based COA on the grounds they are
both barred by “economic loss rule,” as discussed in Robinson Helicopter Co.

Consistent with the tentative ruling on defendant’s demurrer to the 3AC, leave to
amend is granted.

Plaintiffs may file and serve an amended complaint no later than 10/18/2013.
Although not required by court rule or statute, plaintiffs are directed to present a
copy of this order when the amended complaint is presented for filing.

Defendant to respond within 10 days if the amended complaint is personally served,
15 days if served by mail. If the response is either a demurrer or motion to strike, a
copy of the new amended complaint must be included with the moving papers .

This minute order is effective immediately. No formal order or other notice is required.
(Code Civ. Proc. §1019.5; CRC Rule 3.1312.)