Case Number: BC642540 Hearing Date: May 31, 2018 Dept: 73

5/31/18 (cont. from 5/7/18)
Dept. 73
Rafael Ongkeko, Judge presiding

PERFORMANCE DESIGNED PRODUCTS, LLC v. HARMONIX MUSIC SYSTEMS, INC. (BC642540)

Counsel for plaintiff Performance Designed Products, LLC: Joseph Busch; Christopher Pitet; Robert Peck (Grobaty, etc.)
Counsel for defendant Harmonix Music Systems, Inc.: Christopher Casamassima; Laura Donaldson (Wilmer, etc.)

DEFENDANT’S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, SUMMARY ADJUDICATION (filed 2/15/18)

TENTATIVE RULING

The parties’ unopposed motions to seal documents submitted are GRANTED based on the same reasons indicated in the court’s prior sealing order. The court will require the parties to meet and confer to reach a stipulation regarding releasing the sealed documents to the parties at the conclusion of this case.

Defendant’s motion for summary adjudication of Plaintiff’s first, second, third, and fifth causes of action is DENIED.
Defendant’s motion for summary adjudication of Plaintiff’s sixth cause of action for rescission based on failure of consideration is GRANTED.
Defendant’s motion for summary judgment is DENIED.

DISCUSSION (Please note: Unfortunately, the court’s tentative ruling website, which is the source of this version, is not able to show certain formatting that may be contained in the original, such as the court’s use of footnotes (here, 5 footnotes), boldface, italics, or the underscoring of case citations. A hard copy will be available for the parties in court before the hearing.)

Factual and procedural background

Plaintiff sues Defendant for fraudulently inducing Plaintiff to enter a license agreement that required Plaintiff to pay Defendant $5.7 million in royalties in exchange for the ability to manufacture and sell to retailers Rock Band 4 video game and related hardware. Plaintiff Performance Designed Products LLC designs, develops, and sells video game accessories (e.g., gaming headsets, video game controllers, chargers, keyboards, and computer mice). Defendant Harmonix Music Systems, Inc. is the developer of the “Rock Band” video game franchise. Defendant’s business model is to license the software to third parties (like Plaintiff) that are then responsible for manufacturing the controllers, packaging the controllers with the software, and selling the software and controllers as “bundles” to retailers. (FAC ¶ 16.)

In March 2015, Plaintiff’s competitor, Mad Catz, entered into a binding term sheet agreement to be Defendant’s initial manufacturer and distributor of Rock Band 4 for the video game’s October 2015 launch. In October 2015, the term sheet agreement was replaced with a formal manufacturing and distribution agreement. Per this formal agreement, Defendant granted Mad Catz a non-exclusive license to publish and distribute the software for Rock Band 4 (“stand-alone software”), as well as an exclusive license to manufacture and sell the related instrument controller, including “bundles” (software and controllers). In exchange, Mad Catz agreed to pay Defendant royalties and provided Defendant monthly reports regarding sales and inventory. (FAC ¶ 20.)

In October 2015, during the same month that Defendant and Mad Catz entered their formal agreement, Defendant orally told Plaintiff that it was not pleased with Mad Catz’s distribution strategy for the October 2015 launch. Defendant told Plaintiff that it was forecasting sales of Rock Band 4 in the range of 1 million to 1.5 million units of Rock Band 4 in the next 12 months and hoped to have a new partnership with Plaintiff in place as quickly as possible. (FAC ¶ 19.) Over the next few months Plaintiff and Defendant negotiated over an agreement to re-launch Rock Band 4 in October 2016.

On February 22, 2016, Plaintiff and Defendant entered an agreement for Plaintiff to launch Rock Band 4 in October 2016. The agreement provided: (1) Defendant to grant Plaintiff a non-exclusive license to publish and distribute the Rock Band 4 software and an exclusive license to manufacture and sell the related instrument controllers (i.e., bundles); (2) Plaintiff would manufacture and have available for sale Minimum Quantities of Rock Back (400,000 units); and (3) Plaintiff would pay Defendant a Minimum Guarantee on the Minimum Quantities ($5.7 million). (FAC ¶¶ 20, 26.) Plaintiff alleges Defendant’s chief executive officer made the following representations to Plaintiff’s chief executive officer: (1) Mad Catz had approximately 73,000 units of Rock Band 4 in its inventory; (2) there was “very little” Rock Band 4 in the sales channel; and (3) the sales channel would be clear of Rock Band 4 when Plaintiff launched its version of Rock Band, Rock Band: Rivals. (FAC ¶¶ 24, 25.)

On October 2016, Plaintiff launched its version of Rock Band Four. Plaintiff quickly learned that, contrary to Defendant’s representations, Mad Catz had more than double the number of units in its inventory (over 150,000); (2) the sales channel had more inventory than the market could absorb; and (3) Plaintiff’s forecast to sell a minimum of 400,000 units was grossly inaccurate. Plaintiff suffered substantial damages because, despite not being able to sell the Minimum Quantities (400,000), Plaintiff was obligated to pay substantial royalties ($5.7 million). (FAC ¶¶ 28, 30, 31.)

On December 2, 2016, filed its original complaint against Defendant. On March 27, 2017, Plaintiff filed its operative First Amended Complaint for:

C/A 1: Fraud – Intentional Misrepresentation
C/A 2: Fraud – Concealment
C/A 3: Negligent Misrepresentation
C/A 4: Declaratory Relief
C/A 5: Rescission Based on Fraud
C/A 6: Rescission Based on Failure of Consideration
C/A 7: Rescission Based on Mutual Mistake

On May 1, 2017, Defendant filed a Cross-Complaint against Plaintiff for:

C/A 1: Breach of Contract
C/A 2: Unjust Enrichment
C/A 3: Violation of the Implied Covenant of Good Faith and Fair Dealing

Defendant’s MSJ/MSA:
On February 15, 2018, Defendant filed this motion.
On April 23, 2018, Plaintiff filed an opposition.
On May 2, 2018, Defendant filed a reply.

Defendant moves for summary judgment or, alternatively, summary adjudication on all causes of action. Defendant argues Plaintiff’s causes of action for intentional misrepresentation (C/A 1), negligent misrepresentation (C/A 3), and rescission based on fraud (C/A 5) all fail because Plaintiff’s purported reliance on Defendant’s statements concerning total global inventory of Rock Band Four was not reasonable. Similarly, Defendant argues that Plaintiff cannot establish the required elements for fraudulent concealment (C/A 2). Defendant also argues that Plaintiff’s rescission based on failure of consideration claim (C/A 6) fails because both parties gave “good and valuable” consideration as part of the agreement. [Defendant’s motion regarding the fourth (declaratory relief) and seventh causes of action (mutual mistake rescission) is moot in light of Plaintiff’s dismissal of these two causes of action entered on 5/1/18.]

Defendant’s motion is based largely on the argument that Plaintiff undeniably knew that the global inventory of Rock Band Four was significantly greater than 135,000 units (the combination of Mad Catz’s 73,000 plus 62,470 units that Defendant claims amounts to the 10-week supply in the sales channel). Defendant argues that the combination of Mad Catz’s public disclosure and the sell-in and sell-through data that Defendant provided Plaintiff precludes Plaintiff from justifiably relying on Defendant’s purported representations regarding the quantity of RB4 in Mad Catz’s inventory and in the retail channel. Specifically, Defendant claims Plaintiff knew that retailers had at least 325,000 units in inventory because the sales data shows that 600,000 units were sold to retailers, who sold 369,000 units. (DSS 26.) Defendant argues Plaintiff was aware of Mad Catz’s public report valuing its RB4 inventory as $12.3 million. (DSS 28.) Defendant argues that any purported reliance on Mad Catz’s inventory levels is especially unreasonable in light of the agreement’s integration provision. Defendant argues it is undisputed that Plaintiff bargained for and received a right to manufacture and distribute hardware and software for Rock Band Four. (DSS 32.) Defendant argues that Plaintiff has sold over 180,000 units of Rock Band Four. Defendant asserts that Plaintiff’s disappointment from not selling as much as hoped does not establish the lack of consideration.

In opposition, Plaintiff argues the integrated agreement does not preclude Plaintiff from bringing its fraud-based causes of action. Plaintiff contends Defendant’s calculations include stand-alone-software, which makes the data misleading and inaccurate. Plaintiff further explains that Defendant’s representations that Mad Catz had 73,000 bundles in inventory and that there was “very little” bundles in the sales channel must be analyzed separately. Plaintiff also contends that Defendant fails to differentiate between lack of consideration and failure of consideration. Plaintiff argues that the consideration Defendant promised Plaintiff in exchange for Plaintiff’s payment of the royalties was the ability to sell RB4 “in a sales channel relatively free of Mad Catz RB4. That consideration failed spectacularly because of the flood of Mad Catz RB4 in the sales channel.” (See Opp., p. 19.)

In reply, Defendant argues that Plaintiff is attempting to rewrite its claims about what information it supposedly lacked and pretends to know less than it did. Defendant argues Plaintiff’s opposition contradicts its judicial admissions that the parties negotiated over “units.” Defendant maintains its argument that the agreement with Plaintiff expressly provides that Plaintiff has a license to develop, manufacture, and sell RB4, and that Plaintiff has sold over 180,000 units.

Request for Judicial Notice
Defendant requests judicial notice of: (1) February 22, 2016 Rock Band 4 Manufacturing, Publishing and Distribution Agreement; and (2) screenshots of Plaintiff’s website.
Defendant’s request for judicial notice of the February 22, 2016 agreement is GRANTED. (Evid. Code, § 452, subd. (h).) Defendant’s request for judicial notice of screenshots of Plaintiff’s website is DENIED. The court GRANTS judicial notice as to the existence of the agreement. (People v. McKinzie (2012) 54 Cal.4th 1302, 1326 [court may decline taking judicial notice of irrelevant matters].)

Preliminary Matters

Dispute as to Title of Video Game

Defendant refers to the video game Mad Catz’s Rock Band Four as “Rock Band 2015” and refers to Plaintiff’s Rock Band Four as either “Rock Band 2016” or “Rock Band Rivals.” Plaintiff disputes these references, arguing that both parties contracted to manufacture and develop Rock Band Four (and did not use other titles). Notwithstanding this dispute, the agreement demonstrates that Plaintiff and Defendant agreed to relaunch Rock Band Four and that the relaunched video game would not be the same version of Rock Band Four released by Mad Catz in 2015.

Judicial Admission Argument

“[I]n seeking summary judgment, ‘a defendant may rely on the complaint’s factual allegations, which constitute judicial admissions. [Citations.] Such admissions are conclusive concessions of the truth of a matter and effectively remove it from the issues.’ ” (Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1126-1127.)

Here, Defendant accuses Plaintiff of trying to rewrite the complaint by substituting “bundles” for “units.” Defendant argues that this substitution contradicts Plaintiff’s FAC and discovery responses that refer to Defendant’s misrepresentations of “units.” Regardless of this argument, it is undisputed that the contract provides that Plaintiff is only licensed to manufacture and develop “bundles”—not stand-alone software. Based on this circumstance, it is reasonable to infer that Plaintiff uses “bundles” and “units” interchangeably. Moreover, the evidence demonstrates that both Plaintiff and Defendant used the term “bundles” during negotiations. As such, Plaintiff’s opposition does not contradict its judicial admissions.

Merits

A defendant moving for summary judgment must show “that one or more elements of the cause of action . . . cannot be established, or that there is a complete defense to the cause of action.” (CCP § 437c, subd. (p)(2).) “Summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. In determining if the papers show that there is no triable issue as to any material fact, the court shall consider all of the evidence set forth in the papers, except the evidence to which objections have been made and sustained by the court, and all inferences reasonably deducible from the evidence, except summary judgment shall not be granted by the court based on inferences reasonably deducible from the evidence if contradicted by other inferences or evidence that raise a triable issue as to any material fact.” (CCP § 437c, subd. (c).)

“The defendant may, but need not, present evidence that conclusively negates an element of the plaintiff’s cause of action. The defendant may also present evidence that the plaintiff does not possess, and cannot reasonably obtain, needed evidence–as through admissions by the plaintiff following extensive discovery to the effect that he has discovered nothing. But… the defendant must indeed present evidence.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 855 [italics in original].) The court in Aguilar distilled summary judgment to “a single proposition: If a party moving for summary judgment in any action . . . would prevail at trial without submission of any issue of material fact to a trier of fact for determination, then he should prevail on summary judgment. In such a case . . . the ‘court should grant’ the motion ‘and “avoid a . . . trial’ rendered ‘useless’ by nonsuit or directed verdict or similar device. (Id. at 855.)

As noted in Aguilar, “the party moving for summary judgment bears an initial burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact; if he carries his burden of production, he causes a shift, and the opposing party is then subjected to a burden of production of his own to make a prima facie showing of the existence of a triable issue of material fact.” (Aguilar, supra, 25 Cal.4th at 850.) Thus, courts usually follow a three-step analysis: “First, we identify the issues framed by the pleadings . . . . [¶] Secondly, we determine whether the moving party’s showing has established facts which negate the opponent’s claim and justify a judgment in movant’s favor. . . . [¶] When a . . . motion prima facie justifies a judgment, the third and final step is to determine whether the opposition demonstrates the existence of a triable, material factual issue.” (Ojavan Investors, Inc. v. Cal. Coastal Comm. (1997) 54 Cal.App.4th 373, 385 [citation and footnote omitted].)

The Supreme Court has once again recently confirmed that the purpose of the 1992 and 1993 amendments to the summary judgment statute was “‘to liberalize the granting of [summary judgment] motions.’ ” (Perry v. Bakewell Hawthorne, LLC (2017) 2 Cal.5th 536, 542.) It is no longer called a “disfavored” remedy. “Summary judgment is now seen as a ‘particularly suitable means to test the sufficiency’ of the plaintiff’s or defendant’s case.” (Ibid.) However, in determining the existence of a triable issue of material fact, an opposing party’s declarations and other evidence are liberally construed, while those of the moving party strictly construed. (D’Amico v. Bd. of Medical Examiners (1974) 11 Cal.3d 1, 21.)

Defendant argues that Plaintiff cannot prevail on any of its fraud-based causes of action because: (1) the specific enumeration of representations and warranties, plus the integration clause, conveyed to Plaintiff that Defendant was making no guarantee as to Mad Catz or any retailer’s inventory of RB4; and (2) Plaintiff could not have reasonably relied upon the purported representation that Mad Catz only had 73,000 units and that there were “very little” units in the sales channel because Plaintiff knew the global inventory of RB4 units was substantial. Defendant also argues that Plaintiff cannot prove rescission based on failure of consideration because the license agreement allows Plaintiff to manufacture and develop Rock Band Four, which it has done.

First Cause of Action for Intentional Misrepresentation and Third Cause of Action for Negligent Misrepresentation

“To establish a claim for fraudulent misrepresentation, the plaintiff must prove: ‘(1) the defendant represented to the plaintiff that an important fact was true; (2) that representation was false; (3) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (4) the defendant intended that the plaintiff rely on the representation; (5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and (7) the plaintiff’s reliance on the defendant’s representation was a substantial factor in causing that harm to the plaintiff.’ ” (Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 606; emphasis added.)

1. Whether the Agreement’s Integration Clause Bar Plaintiff from Reasonably Relying on Defendant’s Purported Representations?

An integration clause is an express statement that all prior discussions are superseded by [or “merged” into] the written agreement. The presence of such an integration clause is given great weight on the issue of integration. It is “very persuasive, if not controlling, on the issue.” (Masterson v. Sine (1968) 68 Cal.2d 222, 225.) “The parol evidence rule protects the integrity of written contracts by making their terms the exclusive evidence of the parties’ agreement. However, an established exception to the rule allows a party to present extrinsic evidence to show that the agreement was tainted by fraud.” (Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Ass’n (2013) 55 Cal.4th 1169, 1171-1172.) “[P]arol evidence is admissible to prove fraud in the inducement ‘even though the contract recites that all conditions and representations are embodied therein.’ ” (Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Development Corp. (1995) 32 Cal. App. 4th 985, 995.) “A party may claim fraud in the inducement of a contract containing a provision disclaiming any fraudulent misrepresentations and introduce parol evidence to show such fraud.” (Hinesley v. Oakshade Town Center (2005) 135 Cal. App. 4th 289, 301.)

Defendant relies largely on Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289. In that case, the court affirmed summary judgment for a commercial landlord against a claim of fraud based upon a contract containing a non-reliance/non-representation clause: “Lessee does not rely on the fact nor does Lessor represent that any specific Lessee of [sic] type or number of Lessees shall during the term of this Lease occupy any space in the Shopping Center.” Although the landlord made false representations to the commercial tenant that other commercial tenants would be renting property from him in the same lot, the court upheld summary judgment because the “express language” of the non-reliance/non-representation clause “should have conveyed the implication [citation] that the lease did not come with a guarantee that any particular businesses would be or stay cotenants with Hinesley [Plaintiff].” The court considered other factors, such as the facts that Hinesley, the commercial tenant, was a sophisticated party and represented by counsel that suggested edits to other portions of the contract not related to the non-reliance clause. Combined, the court found the “clause should have put Hinesley on notice to ask further questions.” (Id. at p. 301.)

Hinesley is distinguishable. Although Plaintiff is a sophisticated party and was represented by counsel when it entered into the three-year contract agreeing to pay $5.7 million as a minimum royalty (see PSS 15, 25, 33), the integration clause is broad:

Entire Agreement. This Agreement, together with the Exhibits and Schedules hereto which are incorporated herein by this reference, constitutes the entire agreement between the Parties and supersedes any prior or inconsistent agreements, negotiations, representations and promises, written or oral with respect to the subject matter thereof.

(Donaldson Decl., Ex. A, § 12.10.) Unlike the more focused clause in Hinesley, the express language in the integration clause does not convey the implication that Defendant’s representations about Mad Catz’s inventory of RB4 bundles and the quantity of bundles in the sales channel were false. And the clause did not put Plaintiff on notice to conduct further research on the matter. The evidence also demonstrates that Plaintiff did conduct research.

The integration clause does not preclude parol evidence showing purported representations on which Plaintiff relied.

2. Whether Plaintiff Reasonably Relied on Defendant’s Representations?

Plaintiff’s FAC alleges that (1) Mad Catz had approximately 73,000 units of RB4 in its inventory; (2) there was “very little” Rock Band 4 in the sales channel; and (3) the sales channel would be clear of Rock Band 4 when Plaintiff launched its version of Rock Band, Rock Band: Rivals. (FAC ¶¶ 24, 25.)

Defendant argues it is unreasonable for Plaintiff to rely on those purported representations because, before executing the agreement: (1) Mad Catz publicly disclosed a $12.3 million increase in its inventory of Rock Band Four (DSS 21); (2) Mad Catz’s agreement allows it to continue manufacturing additional units of Rock Band Four; (3) Plaintiff knew that Mad Catz sold 600,000 units to retailers (“sell-in”), and those retailers sold 275,000 units to consumers (“sell-through”), which shows that retailers alone had approximately 325,000 units in inventory (DSS 25); and (4) Defendant provided Plaintiff with its own sales data, which showed retail sales of approximately 469,000 units, which leaves more than 230,000 units in retailers’ inventories (DSS 26). Defendant argues that this information shows that there was a substantial amount of bundles in the market.

Even if these facts are sufficient for Defendant to meet its burden on summary judgment, Plaintiff’s opposing evidence demonstrates a triable issue of material fact exists as to whether Plaintiff’s reliance was reasonable. Specifically, Plaintiff contends that its reliance on Defendant’s representation regarding Mad Catz’s inventory was reasonable because Mad Catz’s disclosure did not distinguish the number of bundles versus the inventory of stand-alone-software or the value it placed on each. (PSSAF 67.) While Plaintiff concedes that it acknowledged and agreed Mad Catz could continue to sell its version of Rock Band Four, Plaintiff disputes that agreement acknowledged or permitted Mad Catz to continue to manufacture its version of Rock Band Four. (PSS 7, 11.) Plaintiff also disputes this issue by arguing that Defendant maintained, even after the disclosure, that Mad Catz only had 73,000 bundles even after the disclosure. (Richards Decl. ¶ 21; PSSAF 67, 79.) Plaintiff also presents evidence that demonstrates that it was reasonable for it to rely on Defendant’s representations regarding the sales channel because Defendant’s calculation in support of its argument is based on data that includes stand-alone software and only the quantity in North America (not globally). (PSS 17, 18, 24-28; see also Response to PSSAF 70-79, 80.)

Defendant’s motion for summary adjudication as to the first and third causes of action are DENIED.

Second Cause of Action for Fraudulent Concealment

The required elements for fraudulent concealment are: (1) concealment or suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the plaintiff; (3) the defendant intended to defraud the plaintiff by intentionally concealing or suppressing the fact; (4) the plaintiff was unaware of the fact and would not have acted as he or she did if he or she had known of the concealed or suppressed fact; and (5) plaintiff sustained damage as a result of the concealment or suppression of the fact. [Citation.]” (Hambrick v. Healthcare Partners Medical Group, Inc. (2015) 238 Cal.App.4th 124, 162, quoting Graham, supra, 226 Cal.App.4th at 606.)

Defendant argues that Plaintiff’s second cause of action for fraudulent concealment fails because Plaintiff cannot prove that it was unaware of the substantial amount of RB4 games in Mad Catz’s inventory and in the chain of sales or that it would not have entered the agreement if it had known of the concealed fact. For the same reasons discussed above, a dispute exists as to whether Plaintiff was aware of the “substantial” amount and/or whether Plaintiff reasonably relied that there was only 73,000 in Mad Catz’s inventory and “very little” in the stream of sales.

Defendant’s motion for summary adjudication as to the second cause of action for fraudulent concealment is DENIED.

Fifth Cause of Action for Rescission Based on Fraud

California Civil Code section 1689, subdivision (b)(1), provides that a party to a contract may rescind the contract: “[i]f the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such part.”

The fifth cause of action for rescission based on fraud is predicated on the first three causes of action. Based on the reasons discussed above, Defendant’s motion for summary adjudication as to the fifth cause of action is DENIED.

Sixth Cause of Action for Rescission Based on Failure of Consideration

Defendant argues that Plaintiff’s sixth cause of action for rescission based on failure of consideration fails because Plaintiff bargained for and received a right to manufacture and distribute hardware/software for RB4.

California Civil Code section 1689, subdivision (b)(1), provides that a party to a contract may rescind the contract “[i]f the consideration for the obligation of the rescinding party, before it is rendered [], fails in a material respect from any cause.” “Failure of consideration is the failure to execute a promise, the performance of which has been exchanged for performance by the other party.” (Taliaferro v. Davis (1963) 216 Cal.App.2d 398, 410.) “Where the consideration fails in whole or in part through the fault of a party whose duty it is to render it, the other party may invoke such failure as a basis for rescinding or terminating the contract, provided the failure or refusal to perform constitutes a breach in such an essential particular as to justify rescission or termination.” (Id. at 412.)

Here, the agreement was not conditioned on Defendant providing “a sales channel relatively free of Mad Catz RB4.” And the evidence does not show that the saturated market and retailers’ disinterest in Plaintiff’s version of RB4 constitute a “breach in such an essential particular as to justify rescission or termination.”

Defendant’s motion for summary adjudication of Plaintiff’s sixth cause of action for rescission based on failure of consideration is GRANTED.

Unless waived, notice of ruling by Plaintiff.