Finisar Corporation v. Cosemi Technologies, Inc.

Case Name: Finisar Corporation v. Cosemi Technologies, Inc.
Case No.: 18CV322150

I. Background

This case brought by Finisar Corporation (“Plaintiff”) against Cosemi Technologies, Inc. (“Defendant”) arises from Defendant supplying faulty products to Plaintiff.

According to the First Amended Complaint, Defendant entered into written agreements with Plaintiff whereby Plaintiff agreed to supply a particular part (“Device”) in exchange for payment. The agreements were the terms and conditions that accompanied Plaintiff’s purchase orders (“the Purchase Orders”). The Purchase Orders included a warranty provision which stated, among other things the Device would be “in strict conformance with Buyer’s specifications, blueprints, drawings, and data, if any, and [all] Services shall be performed in a workmanlike and professional manner.” (FAC, ¶ 7.) The Purchase Orders also required Defendant to indemnify Plaintiff for losses related to the actions or omissions of the Defendant, including non-compliance with specifications or nonconforming goods.

A breakdown in one of the key manufacturing processes used to produce the Device resulted Devices with reduced or damaged performance. Defendant’s quality control measures at the time did not detect the problem. Thus, Defendant unknowingly sent many defective Devices to Plaintiff from late 2013 through June 2014. Plaintiff incorporated these devices into its products, and sold them to consumers. In 2014 Plaintiff began receiving complaints from consumers regarding some of its products that included the Device. Plaintiff and Defendant engaged in extensive discussions regarding the means to repair the problem and develop a remedy. In mid-2014, Plaintiff determined the problem was the Device. Plaintiff then stopped further shipment of products including the Device. As a result of the faulty Devices, some of Plaintiff’s customers demanded replacement products, its reputation for quality was damaged, and it has experienced dramatic business loss. In total Defendant has incurred over $20 million in damages.

The FAC alleges causes of action for (1) breach of contract; (2) breach of express warranty; and (3) breach of implied warranty.

Currently before the Court is a demurrer to the FAC and a motion to strike certain allegations regarding damages.

II. Request for Judicial Notice

Defendant requests judicial notice of the following matters: (1) Plaintiff’s VMI Agreement with Defendant (“VMI Agreement”); and (2) Plaintiff’s Terms and Conditions (“Terms and Conditions”) as stated on its website. Defendant seeks to use these two documents to establish that the Purchase Orders do not supply the relevant terms or control the parties relationship.

In the first instance, the Court notes that purpose of the RJN is inconsistently presented. The caption on the RJN states it is brought in support of the demurrer. In the body of the RJN Defendant requests judicial notice in support of both the Demurrer and Motion to Strike. (RJN, p. 2:1-3.) In fact, Defendant only cites to the RJN in support of the motion to strike. Defendant’s memorandum in support of the demurrer does not cite the RJN. Thus, the Court interprets the RJN as brought in support of the motion to strike.

Defendant asserts judicial notice is appropriate under Evidence Code section 452, subdivision (h), which permits judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Evid. Code, § 452, subd. (h).) Defendant argues that the VMI Agreement is a proper subject for judicial notice because it is a contract signed by Plaintiff and attached to the original complaint as an exhibit.

A private contract is not subject to judicial notice under Evidence Code section 452, subdivision (h).) (Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145 (Gould), In Gould, the court held that “the existence of a contract between private parties cannot be established by judicial notice under Evidence Code section 452, subdivision (h).” (Ibid.)

However, judicial notice of a private contract is possible where that contract is referenced in pleadings. (Gould, supra, 31 Cal.App.4th at p. 1145, fn. 1.) Although not clearly stated, this is Plaintiff’s argument; that the VMI Agreement is a matter subject to judicial notice because it was attached to a prior pleading. Plaintiff, in essence, makes a request for judicial notice of the VMI Agreement as a court record. This argument could have been more succinctly and clearly brought under section 452, subdivision (d) [authorizing judicial notice of court records].) Nevertheless, it is meritorious. (See Gould, supra, 31 Cal.App.4th at p. 1145, fn. 1.)

When the Court takes judicial notice of a document, its truth or proper interpretation ordinarily remain disputable. (StorMedia Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.) However, Defendant asserts, correctly, that where the Court takes judicial notice of a legally operative document like a contract, it may take judicial notice of its legal effect and facts that derive therefrom. (E.g., Fontenot v. Wells Fargo Bank, N.A., (2011) 198 Cal.App.4th 256, 264–266, disapproved on other grounds in Yvanova v. New Century Mortg. Corp., (2016) 62 Cal.4th 919, 939.) Thus, the Court can take judicial notice of the legal effect of the VMI Agreement.

Turning to terms and conditions on Plaintiff’s website, Defendant argues that they are not reasonably subject to dispute because they are on the Plaintiff’s website, and were referenced in the VMI Agreement.

Defendant cites Scott v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743 for the proposition that “because relevant documents in certain types of cases are found only online, websites and their contents may be proper subjects for judicial notice” (RJN, p. 2:21-23; see Scott v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 743, 753 (Scott).)

In Scott, the court listed several cases taking judicial notice of an agreement between the Federal Deposit Insurance Corporation (FDIC) and a financial institution (“P&A Agreements”) were subject to judicial notice. (Ibid.) Defendant takes an overly expansive view of Scott; it does not stand for the proposition that any website or websites in general may be subject to judicial notice. The several cases listed in support of the Scott court’s decision all dealt with similar P&A Agreements between the government and a creditor. (Id. at p. 753, fn. 2.) None of the cases listed in Scott apply to contracts generally or websites generally. Thus, this argument is not well-taken.

Plaintiff also argues “[t]he Court also should take judicial notice of [Finisar Terms and Conditions] because ‘Finisar’s standard terms and conditions available [sic] online at www.finisar.com’ is referenced in the VMI Agreement that is referenced and attached to the original complaint.” (RJN, p. 3:18-21.) Plaintiff’s only authority in support of this argument is Ingram v. Flippo (1999) 74 Cal.App. 4th 1280. There, a District Attorney was sued for declaratory and injunctive relief by a local school board member after issuing a press release charging the school board with minor violations of California’s Brown Act. (Ingram v. Flippo (1999) 74 Cal.App. 4th 1280, 1283 (Ingram).) The court took judicial notice of the press release pursuant to Evidence Code section 452, subdivision (h), stating, “[s]ince the contents of the letter and media release form the basis of the allegations in the complaint, it is essential that we evaluate the complaint by reference to these documents.” (Id. at p. 1285.) Plaintiff cites Ingram for the proposition “A court may take judicial notice of a document explicitly mentioned in a complaint or even a document not explicitly referred to in a complaint but which the complaint necessarily relies upon.” (RJN, p. 2:17-19.)

Ingram provides no authority for the proposition that if a pleading refers to or attaches a document, and that document refers to a third document, then under Evidence Code section 452, subdivision (h) judicial notice is proper as to the third document. (See Ingram, supra, 74 Cal.App. 4th at p. 1285.) Even if it did, the Terms and Conditions attached to the RJN is clearly not meant to fill in terms in the VMI Agreement. For instance, where the VMI Agreement identifies Plaintiff as the “buyer” the Terms and Conditions identifies Plaintiff as the “seller.” (See RJN, Exs. 1 & 2.) Thus, it does not appear that the Terms and Conditions could be referred to in the FAC or VMI Agreement.

Accordingly, the request for judicial notice is GRANTED as to the VMI Agreement, and DENIED as to the Terms and Conditions.

III. Merits of the Demurrer

Defendant demurs to each cause of action on the ground of failure to plead sufficient facts. (Code Civ. Proc., § 430.10, subd. (e).) Defendant’s argument is that as to products delivered prior to January 22, 2014 all three causes of action are barred by the statute of limitations.

“ ‘The defense of statute of limitations may be asserted by general demurrer if the complaint shows on its face that the statute bars the action.’ [Citations.] There is an important qualification, however: ‘In order for the bar of the statute of limitations to be raised by demurrer, the defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows merely that the action may be barred.’ [Citations.]” (E-Fab., Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315-1316.) In assessing whether a claim is time-barred, two fundamental questions drive the analysis: (a) What statute of limitations governs the plaintiff’s cause of action? (b) When did the cause of action accrue? (Id. at p. 1316.) A general demurrer—including one based on the statute of limitations—will not lie to part of a cause of action. (Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 274 [“Further, to prevail on a demurrer based on the statute of limitations, a defendant must establish the entire cause of action is untimely”]; Kong v. City of Hawaiian Gardens Redevelopment Agency (2002)108 Cal.App.4th 1028, 1037 [“demurrer cannot rightfully be sustained to part of a cause of action or to a particular type of damage or remedy”]; Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 452 (Fire Ins. Exchange); PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682 (PH II, Inc.).)

As to accrual, Defendant’s position is that the four year statute of limitations accrued in late 2013 with the tender of the defective Devices. This case was filed in January 2018. Thus, Defendant contends all three causes of action are barred because the claim “is untimely for any goods delivered after [sic] January 22, 2014.” (Dem., p. 6:10-11.) The Court presumes Defendant meant goods delivered before 2014.

The instant demurrer applies to only a portion of each cause of action. Plaintiff alleges Defendant shipped defective products from “late 2013 through June 2014.” (FAC, ¶ 11.) The demurrer applies only to shipments in 2013 and part of the first month of 2014. As Plaintiff correctly notes “even if [Defendant] were to prevail on the statute of limitations, it would only serve to limit [Plaintiff’s] damages to those arising out of defective photodiodes shipped after January 22, 2014.” (Opp., p. 6:15-18.) In sum, even if the demurrer was meritorious Plaintiff could still support each cause of action based on several months of defective Devices.

Defendant’s only attempt to address this issue in the demurrer is an assertion that “[a] demurrer is also proper for claims that are ‘not entirely time-barred’ where a recurring obligation triggers a separate statute of limitations for each obligation.” (Dem., p. 4:27 to 5:1.) Defendant cites Aryeh v. Canon Bus. Sols., Inc. (2013) 55 Cal. 4th 1185.

There, a business owner entered into a lease to rent copy machines from a manufacturer of copiers. (Aryeh v. Canon Bus. Sols., Inc. (2013) 55 Cal. 4th 1185 (Aryeh).) The business made monthly payments in exchange for the right to make a certain number of copies, but was charged fees if it went over that limit. (Id. at p. 1190.) The business determined that the manufacturer was improperly charging it for copies. (Ibid.) This took place over the course of more than two years, resulting in additional fees spread throughout that time. (Ibid.) When the business owner filed suit—in a single cause of action—the earliest fees were well past the statute of limitations, but the most recent fees were not. (Ibid.) The copier manufacturer demurred on the basis of the statute of limitations. (Ibid.) The demurrer was sustained at the trial court and appellate level. (Ibid.)

The Supreme Court agreed with the plaintiff’s argument that the cause of action was not barred pursuant to the continuous accrual doctrine. The Supreme Court stated the doctrine “applies whenever there is a continuing or recurring obligation: ‘When an obligation or liability arises on a recurring basis, a cause of action accrues each time a wrongful act occurs, triggering a new limitations period.’ [Citation.] Because each new breach of such an obligation provides all the elements of a claim—wrongdoing, harm, and causation [citation]—each may be treated as an independently actionable wrong with its own time limit for recovery.” (Aryeh, supra, 55 Cal. 4th at p. 1199.) The Court held that at the demurrer stage the case was not barred in its entirety because the plaintiff alleged some misconduct within the statute of limitations period. (Id. at p. 1202.)

Defendant does not analyze the case other than a parenthetical citation stating “at the demurrer stage, the continuous accrual theory will bar claims for recurring obligations ‘with each monthly payment triggering its own statute of limitations’.” (Dem., p. 5:2-3.) Defendant cites Aryeh as if it permits a demurrer to be made as to part of a cause of action. It does not. There, the court considered the continuous accrual doctrine as a counter argument brought by the plaintiff to avoid the statute of limitations. (Aryeh, supra, 55 Cal. 4th p. 1109.) Here, Defendant attempts to use it to demur to part of a cause of action. Defendant does not adequately support the proposition that the continuous accrual doctrine permits a party to demurrer to only part of a cause of action. (See Fire Ins. Exchange, supra, 116 Cal.App.4th at p. 452; PH II, Inc. supra, 33 Cal.App.4th at p. 1682.)

Defendant’s entire demurrer is predicated on the false premise it can demurrer to only part of a cause of action. Thus, it is sufficient to overrule the demurrer without addressing the merits of Defendant’s arguments.

Accordingly, the demurrer is OVERRULED.

IV. Merits of the Motion to Strike

Defendant moves to strike a variety of allegations from the FAC primarily related to damages. Defendant also moves to strike generally all Plaintiff’s “references for damages for claims that accrued prior to January 22, 2014” for the reasons stated in the demurrer. (Notice of Mtn. to Strike, p. 3:10-11.) A motion to strike lies to remove “any irrelevant, false, or improper matter inserted in any pleading.” (Code Civ. Proc. § 436, subd.(a).)

The majority of the challenged allegations deal with the extent and type of Plaintiff’s damages. As to the others, they concern whether the Purchase Order govern the parties relationship. These Defendant moves to strike because they constitute irrelevant and improper matters under Code of Civil Procedure sections 436, subdivision (a) and 431.10, subdivision (b).

Specifically, Defendant moves to strike the following: (1) “These sales were governed by the Terms and Conditions that accompanied Finisar’s Purchase Orders” (FAC, ¶ 6); (2) “The Purchase Orders also require Cosemi to indemnify Finisar for any loss, costs, damage, expense, or liability arising from, relating to or resulting from property damage, personal injury or death arising out of or in connection with the actions or omissions of Seller . . . including the improper manufacture or design or non-compliance with specifications or with respect to nonconforming Goods (FAC, ¶ 17); (3) paragraph 14 in its entirety; (4) paragraph 15 in its entirety; (5) the prayer for general consequential, and compensatory damages according to proof (FAC, p. 6: 3-4); (6) the prayer for indemnity (FAC, p. 6: 3-4); (7) the prayer for liquidated damages for delay (FAC, p. 6:6); and (8) the prayer for all reasonable costs of investigation, court costs, and all other costs of suit (FAC, p. 6:8-9).

Defendant’s motion to strike is based on the sham pleading doctrine. The sham pleading doctrine holds, as a general rule, that an amended pleading that contradicts an admission in an earlier complaint will not be allowed. (Henry v. Losse (1991) 54 Cal.3d 723, 742-743.) The rationale behind this rule is clear: “[a] pleader may not attempt to breathe life into a complaint by omitting relevant facts which made his previous complaint defective.” (Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 946.) To the extent that there are inconsistencies with prior pleadings, they “must be explained; if the pleader fails to do so, the court may disregard the inconsistent allegations.” (Vallejo Development Co., supra, 24 Cal.App.4th at 946.) The rule “is intended to prevent sham pleadings omitting an incurable defect in the case.” (Berman v. Bromberg (1997) 56 Cal.App.4th 936, 946.)

Defendant argues that in the original complaint Plaintiff attached the VMI Agreement and included an allegation that “A 2013 ‘VMl Agreement’ relating to the sale of the DEVICES contains similar warranties.” (Compl., ¶ 6.) Both the attachment and the allegation were omitted from the FAC. Defendant’s theory is that this was done in order to increase damages because under the VMI Agreement—and Terms and Conditions referenced therein—Defendant was not liable for the variety of damages now sought. Particularly Defendant argues that Terms and Conditions, as attached to the RJN, expressly limited the seller’s liability.

In the first instance, the Court declined the request for judicial notice of the Terms and Conditions. Thus, argument based thereon must fail. Even if this were not so, it would not change the result.

Turning to the merits of the sham pleading argument, Plaintiff’s argument is predicated on the Complaint stating the VMI Agreement controls the parties relationship—particularly with regard to the types of damages available—and the new allegations in the FAC contradict or undermine that point. This premise is not supported by the Complaint. Thus, the sham pleading doctrine argument is not apt.

Specifically, the Complaint did not state that the VMI Agreement controlled the parties relationship, that they were superior to the Purchase Agreements, or even that they overlapped. The Complaint states the “sales were governed by the Terms and Conditions that accompanied FINISAR’s Purchase Orders.” (Compl., ¶ 6.) Plaintiff alleges in both the Complaint and the FAC that it has attached a true and representative purchase order to the FAC as Exhibit 1. Exhibit 1 is a nine page document. The first three pages are labelled as a purchase order. The last six are a different document titled “Finisar Purchase Order Terms and Conditions.” (Compl., Ex. 1; FAC, Ex. 1.) This document permits the recovery of “all consequential and incidental damages and expenses (including reasonable attorneys’ fees) actually or proximately arising from any breach of Seller’s warranties and representations.” (Compl., Ex. 1; FAC, Ex. 1.) Moreover, Exhibit 1 also states that document is the entire agreement between the parties. Therefore, the Complaint simply does not allege that the VMI Agreement—or any other agreement—limited damages in the manner Defendant asserts.

Accordingly, Defendant’s sham pleading argument is not well-taken.

Defendant further argues that consequential and incidental damages should be stricken pursuant to the VMI Agreement. This argument fails for the same reasons its sham pleading argument did. As alleged, the controlling language was the terms attached to the purchase orders, and not the VMI Agreement.

Defendant also argues that because the VMI Agreement is signed it is the best indication of the parties’ intent. In support Defendant cites Adams v. Williams Resorts, Inc. (1962) 210 Cal. App. 2d 456 for the proposition that in interpreting contracts courts should give effect to the intent of the parties. (Adams v. Williams Resorts, Inc. (1962) 210 Cal.App.2d 456, 460.) That principle is true, but inapplicable here. The present issue is not interpreting part of a contract or a whole contract. The dispute is which document is the relevant contract. When assessing a motion to strike the Court assumes the truth of the challenged allegations. (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.) Plaintiff has alleged the Purchase Orders and attached terms were what governed the sales. At the pleading stage the Court is not in a position to assess whether the VMI Agreement or the Purchase Orders truly represented the intent of the parties based on factual considerations.

Defendant next argues that the Terms and Conditions—which the Court declined to take judicial notice of—contradicts the terms in the Purchase Orders. Again, the Court did not take judicial notice of that document. Thus, this argument fails.

Subsequently, Defendant argues that the VMI Agreement and the Terms and Conditions prohibit subsequent modification unless it is in writing. Defendant argues that such terms have been enforced previously. (See Lonely Maiden Productions, LLC v. GoldenTree Asset Management, LP (2011) 201 Cal.App.4th 368, 378 [“[a] signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded”].)

As discussed above, according to the pleadings the VMI Agreement is not the relevant document. It is separate from the Purchase Orders which allegedly controlled the sales. Thus, the Purchase Orders did not modify or alter it.

Also, Defendant argues that the Uniform Commercial Code section 2207, subdivision (2)(b) prevents additional terms from becoming part of the contract if they “materially alter” the contract. That statute states:

“(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. [¶] (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: [¶] (a) The offer expressly limits acceptance to the terms of the offer; [¶] (b) They materially alter it; or [¶]
(c) Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.”

(Cal. U. Com. Code, § 2207.)

Defendant’s argument is predicated on there being a prior contract which was modified by the Purchase Orders. According to the FAC, and indeed the Complaint, the agreement was the Purchase Orders. There is no allegation of a prior agreement that the purchase orders modified. Thus, Defendant’s argument is without merit.

In addition, Defendant argues that relief should be limited to direct damages as stated in the VMI Agreement and the Terms and Conditions. As described above—with respect to the sham pleading doctrine—the sales were not governed by these agreements.

Finally, Defendant makes an ambiguous motion to strike based on its demurrer; “[f]or the reasons stated in [Defendant’s] concurrently-filed Demurrer, [it] also seeks to strike [Plaintiff’s] references for damages for claims that occurred prior to January 22, 2014.” (Mtn. to Strike, p. 3.:10-11.) Defendant does not identify which allegations this argument is directed towards. “A notice of motion to strike a portion of a pleading must quote in full the portions sought to be stricken except where the motion is to strike an entire paragraph, cause of action, count or defense.” (Cal. Rules of Court, rule 3.1322.) Defendant neither quotes verbatim or otherwise identifies what allegations this refers to. Thus, this portion of the motion to strike is not procedurally proper. Therefore, the Court does not consider this point.

Accordingly, the motion to strike is DENIED in its entirety.

Print Friendly, PDF & Email
Copy the code below to your web site.
x 

Leave a Reply

Your email address will not be published. Required fields are marked *