DEMURRER TO FIRST AMENDED CROSS-COMPLAINT; MOTION TO STRIKE PORTIONS OF FIRST AMENDED CROSS-COMPLAINT

Moving Party: Cross-Defendant Quality Egg, LLC

Respondent: Cross-Complainant California Egg Distributors, Inc.

POS: Moving OK; Opposing OK

In this action for common counts, Plaintiff alleges that Defendant failed to pay for eggs ordered by Defendant and provided by Plaintiff. Plaintiff commenced this action on 10/9/12, asserting causes of action for:

1. Open Book Account
2. Account Stated

On 2/15/13, Defendant filed a cross-complaint against Plaintiff, alleging that Plaintiff sold eggs that were contaminated with salmonella. The First Amended Cross-Complaint, filed on 7/19/13, asserts causes of action for:

1. Fraud and Concealment
2. Negligence
3. Intentional Interference with Prospective Economic Advantage
4. Negligent Interference with Prospective Economic Advantage
5. Unfair Competition
6. Breach of Contract
7. Breach of Covenant of Good Faith and Fair Dealing
8. Unfair Business Practices – Common Law
9. Unjust Enrichment
10. Declaratory Relief
11. Equitable Indemnification

The Case Management Conference is now set for 3/6/14.

(1) DEMURRER TO FIRST AMENDED CROSS-COMPLAINT:

Cross-Defendant Quality Egg, LLC (“Cross-Defendant” or “Quality Egg”) demurs to the First Amended Cross-Complaint (“FACC”) of Cross-Complainant California Egg Distributors, Inc. (“Cross-Complainant” or “California Egg”) on the grounds that it fails to allege facts sufficient to state a cause of action against Quality Egg.

FIRST CAUSE OF ACTION FOR FRAUD AND CONCEALMENT:

The elements of fraud are: (1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud or induce reliance; (4) justifiable reliance; and (5) damages. (See CC § 1709.) Fraud actions are subject to strict requirements of particularity in pleading. (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) However, an exception to the strict pleading standard is recognized when it appears that the facts lie more within defendant’s knowledge than plaintiff’s: i.e., less specificity is required where “defendant must necessarily possess full information concerning the facts of the controversy.” (Id. at 216.)

The FACC alleges that starting no later than February 2010, Cross-Defendant learned that salmonella was likely contaminating their farms (FACC ¶ 23); Cross-Defendants received scores of reports showing that every one of their farms was contaminated by salmonella, and many of their pullet farms were also contaminated with salmonella (Ibid.); during this time Cross-Defendant also learned that salmonella was in the internal organs of hens recovered from some eggs farms (Ibid.); rather than initiate immediate clean-up operations, test eggs for salmonella, and divert tainted eggs out of the food supply, Cross-Defendant chose to continue selling eggs without any warnings or disclosure to customers, regulators, or the public (Ibid.); Cross-Defendant sold eggs to Cross-Complainant that they knew were intended for wholesale, distribution, and retail sale, and ultimately human consumption (Id. ¶ 24); as such, Cross-Defendants had a duty to disclose to Cross-Complainant that their eggs were from contaminated farms and laying hens (Ibid.); Cross-Defendants did not disclose the information because they knew that Cross-Complainant would have stopped purchasing from them (Id. ¶¶ 25-26); Cross-Complainant relied on the failure to disclose (Id. ¶ 27); for sales after July 9, 2010, Cross-Defendants had also warranted by both words and/or actions that they would comply with the FDA egg safety rule (Id. ¶ 28); and that as a proximate cause of its reliance, Cross-Complainant was induced to enter into a series of written agreement and suffered damages that include lost sales, lost profits, recall-related administrate costs, and the loss of goodwill and reputation (Id. ¶ 30).

The FACC adequately alleges facts to support a cause of action for fraudulent concealment. Thus, the demurrer to the first cause of action is overruled.

SECOND CAUSE OF ACTION FOR NEGLIGENCE AND FOURTH CAUSE OF ACTION FOR NEGLIGENT INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE:

The elements of a negligence cause of action are duty, breach, causation, and damages. (County of Santa Clara v. Atlantic Richfield Co. (2006) 137 Cal.App.4th 292, 318.)

The elements for negligent interference with prospective economic advantage are: (1) an economic relationship between the plaintiff and a third party; (2) that contained a reasonably probable future economic benefit or advantage to plaintiff; (3) defendant knew of the existence of the relationship and was aware, or should have been, that if it did not act with due care, its actions would interfere with the relationship and cause plaintiff to lose in whole or in part the probable future economic benefit or advantage; (4) the defendant was negligent; (5) the negligence caused damage to plaintiff because of actual interference or disruption; and (6) plaintiff lost in whole or in part the economic benefits or advantage reasonably expected from the relationship. (North Amer. Chem. Co. v. Sup. Ct. (1997) 59 Cal. App. 4th 764, 786.)

Under the “economic loss rule,” a manufacturer or distributor may be liable in strict liability or negligence for physical injury to property caused by a defective product, but not for purely “economic losses.” (See e.g., KB Home v. Superior Court (2003) 112 Cal. App. 4th 1076.) “The economic loss rule requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he or she can demonstrate harm above and beyond a broken contractual promise.” (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 988.)

The FACC alleges that Cross-Defendants owed a duty of care in that they operated an egg farming enterprise that produced goods that they knew were intended for resale and human consumption (FACC ¶ 35); there exists a special relationship between the parties wherein Cross-Defendants owed a duty of care to Cross-Complainant and its clients to sell eggs that were appropriate for consumption (Id. ¶ 36); Cross-Defendants breached their duties by selling eggs to Cross-Complainant from farms and chickens with confirmed salmonella contamination, and by failing to inform Cross-Complainant of this contamination (Id. ¶ 37); and as a result, Cross-Complainant suffered damages (Id. ¶¶ 38-40). The FACC adequately alleges facts to support a cause of action for negligence. The FACC also adequately alleges facts to support a cause of action for negligent interference with prospective economic advantage. (See FACC ¶¶ 50-54.)

Cross-Defendant, in its demurrer, contends that these causes of action are barred by the economic loss rule. Specifically, Cross-Defendant contends that for Cross-Complainant to allege a tort claim after a breach of contract, one of the following must be demonstrated: (1) a product defect causes damages to other property, (2) breach of a legal duty independent of the contract and the claim alleged is for an intentional tortious conduct, or (3) there is a special relationship that existed between the parties. However, the FACC adequately alleges a “special relationship” between the parties. (See FACC ¶¶ 36-39.) Thus, the demurrers to the second and fourth causes of action are overruled on this basis.

THIRD AND FOURTH CAUSES OF ACTION FOR INTENTIONAL AND NEGLIGENT INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE – STATUTE OF LIMITATIONS:

An action for tortious interference with economic relations is governed by the CCP § 339(1) 2–year statute of limitations for an “obligation or liability not founded upon an instrument of writing.” (See Knoell v. Petrovich (1999) 76 Cal.App.4th 164, 168 — causes of action for interference with contractual relations and interference with prospective business advantage.)

A demurrer can be utilized where the complaint itself is incomplete or discloses some defense that would bar recovery (e.g., dates pleaded in complaint show statute of limitations has run). (Estate of Moss (2012) 204 Cal.App.4th 521, 535.) If the complaint alleges facts establishing a defense to the claim (e.g., dates indicating the statute of limitations has run), plaintiff must “plead around” that defense (e.g., allege facts showing defendant is estopped from raising a statute of limitations defense). (See Czajkowski v. Haskell & White, LLP (2012) 208 Cal.App.4th 166, 174–175.)

The FACC alleges that Cross-Complainant purchased eggs from Cross-Defendants from approximately July 2007 to approximately August 2010 (FACC ¶ 19); and that the interference with prospective economic advantage occurred when Cross-Defendants sold the “tainted eggs” (FACC ¶¶42-45, 53).

Plaintiff commenced this action on October 9, 2012, and the Cross-Complainant filed its cross-complaint on February 15, 2013, both after the 2-year statute of limitations had expired. While Cross-Complainant contends that the claims were equitably tolled because the last update as to the salmonella outbreak was in November of 2010 (FACC ¶ 20), it is unclear how such fact would trigger an equitable tolling. The FACC fails to adequately allege facts demonstrating that the statute of limitations was tolled as a result of the update. Thus, the demurrers to the third and fourth causes of action based upon the statute of limitations are sustained.

THIRD CAUSE OF ACTION FOR INTENTIONAL INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE:

The elements are: (1) an economic relationship existing between the plaintiff and third party; (2) the probability of future economic benefit to the plaintiff; (3) defendant’s knowledge of the relationship; (4) defendant’s intentional acts designed to disrupt the relationship; (5) defendant engaged in an independently wrongful act in disrupting the relationship beyond just inducing disruption of economic advantage; (6) an actual disruption of the relationship; and (7) economic harm to the plaintiff caused by the acts. (Salma v. Capon (2008) 161 Cal.App.4th 1275, 1290.)

The FACC adequately alleges facts to support a cause of action for intentional interference with prospective advantage. (FACC ¶¶ 42-47.) Cross-Defendant contends that the FACC fails because it fails to allege any intent on the part of Cross-Defendant to cause a disruption to Cross-Complainant’s relationship with its customers. However, it is not necessary for the tort of intentional interference with prospective economic advantage to prove that the defendant acted with the specific intent, or purpose, of disrupting the plaintiff’s prospective economic advantage; instead, it is sufficient for the plaintiff to plead that the defendant knew that the interference was certain or substantially certain to occur as a result of his action. (San Jose Constr. v. S.B.C.C. (2007) 155 Cal.App.4th 1528, 1544.) Thus, the demurrer to the third cause of action is overruled on this basis.

FIFTH CAUSE OF ACTION FOR UNFAIR COMPETITION AND EIGHTH CAUSE OF ACTION FOR UNFAIR BUSINESS PRACTICES:

In order to properly assert a claim for Unfair Business Practices, Bus & Prof C. § 17200, the complaint must allege a business practice that is unfair, unlawful or fraudulent, and an authorized remedy. (Bus & Prof C § 17200.)

The FACC adequately alleges fraud to support the claim for unfair competition and/or unfair business practices. Thus, the demurrers to the fifth and eighth causes of action are overruled.

SIXTH CAUSE OF ACTION FOR BREACH OF CONTRACT:

The elements of a breach of contract cause of action are (1) the existence of a contract; (2) plaintiff’s performance or excuse for nonperformance; (3) defendant’s breach (or anticipatory breach); and (4) resulting damage. (Wall Street Network, Ltd. v. N. Y. Times Co. (2008) 164 Cal.App.4th 1171, 1178.)

The FACC alleges several purchase orders (written agreements) (FACC ¶ 62); Cross-Complainant’s performance (Id. ¶ 63); Cross-Defendant’s breach (Id. ¶ 64); and damages (Id. ¶ 65). The FACC adequately asserts a cause of action for breach of a written contract. Uncertainties, if any, may be resolved through discovery. Thus, the demurrer to the sixth cause of action is overruled.

SEVENTH CAUSE OF ACTION FOR BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING:

“[E]very contract imposes upon each party a duty of good faith and fair dealing in the performance of the contract such that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” (Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44, 55.) To properly assert a cause of action for breach of the implied covenant of good faith and fair dealing, plaintiff must allege (1) the existence of a contractual relationship; (2) the implied duty; (3) breach of the duty; and (4) causation of damages. (Smith v. San Francisco (1990) 225 Cal.App.3d 38, 49.)

The FACC adequately alleges a cause of action for breach of covenant of good faith and fair dealing. (FACC ¶¶67-69.) The demurer to the seventh cause of action is overruled.

NINTH CAUSE OF ACTION FOR UNJUST ENRICHMENT:

Unjust enrichment requires the following elements: (1) receipt of a benefit; (2) unjust or wrongful retention of the benefit; and (3) at the expense of another. (Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1593.)

The FACC alleges that as a result of the acts, conduct and/or omission committed by Cross-Defendant, Cross-Defendant has become jointly and severally indebted to Cross-Complainant. (FACC ¶ 75.) The FACC fails to adequately allege facts to support a cause of action for unjust enrichment. Further, “unjust enrichment does not lie where … express binding agreements exist and define the parties’ rights.” (Cal. Medical Ass’n v. Aetna U. S. Healthcare of Cal. (2001) 94 Cal. App. 4th 151, 172.) Moreover, “unjust enrichment is not a cause of action.” (Jogani v. Sup. Ct. (2008) 165 Cal.App.4th 901, 911; See also Melchior v. New Line Prods., Inc. (2003) 106 Cal.App.4th 779, 794 – defining it as a remedy.) The demurrer to the ninth cause of action is sustained.

ELEVENTH CAUSE OF ACTION FOR EQUITABLE INDEMNITY:

“To state a claim for equitable indemnity, a defendant must allege the same harm for which he may be held liable is properly attributable — at least in part — to the cross-defendant.” (Platt v. Coldwell Banker Residential Real Estate Services (1990) 217 Cal. App. 3d 1439, 1445 n.7.)

The FACC alleges that Cross-Complainant is entitled to equitable indemnity from Cross-Defendants for third party losses and costs as a result of Cross-Defendant’s wrongful acts. (FACC ¶¶ 80-84.) The FACC adequately alleges a cause of action for equitable indemnity. While Cross-Defendant contends that the FACC has not plead any facts sufficient to determine when any injury, loss or damages occurred, or when payment of the underlying claim to Cross-Complainant was made, it appears that such determination can be made through discovery. Thus, the demurrer to the eleventh cause of action is overruled.

(2) MOTION TO STRIKE PORTIONS OF THE FIRST AMENDED CROSS-COMPLAINT:

Cross-Defendant also moves to strike portions of the FACC alleging malice, fraud or oppression and seeking punitive damages. As discussed above, the FACC adequately alleges fraud to support its allegations and requests for punitive damages. Thus, the motion to strike is denied.

The court will hear from counsel for Cross-Complainant as to whether leave to amend is requested, and will require an offer of proof if so.