3H Corporation v. Open-Silicon Corporation CASE NO. 112CV235151
DATE: 6 June 2014 TIME: 9:00 LINE NUMBER: 10
This matter will be heard by the Honorable Judge Socrates Peter Manoukian in Department 19 in the Old Courthouse, 2nd Floor, 161 North First Street, San Jose. Any party opposing the tentative ruling must call Department 19 at 408.808.6856 and the opposing party no later than 4:00 PM Thursday 5 June 2014. Please specify the issue to be contested when calling the Court and counsel.

On 6 June 2014, the motion of defendant Open-Silicon Corporation (“Open-Silicon”) to compel further responses to requests for production of documents and for monetary sanctions was argued and submitted. Plaintiff 3H Corporation (“3H”) filed a formal opposition to the motion.

All parties are reminded that all papers must comply with California Rules of Court, rule 3.1110(f).

Statement of Facts

This action arises from a contract dispute between 3H and Open-Silicon. 3H is a sales representative company. On 19 May 2009, 3H entered into a written agreement to promote the business of Open-Silicon in the Southern California marketplace. Pursuant to the terms of the parties’ agreement, Open-Silicon was required to pay 3H commissions for certain sales according to a rate schedule based upon volume of sales. 3H began providing services under the agreement shortly after its execution and the parties executed a second sales representative agreement on 25 June 2009, with a commencement date of 1 January 2010.

According to 3H, the parties’ agreement contained a “Post-Termination Commission Schedule,” which provided for the payment of commissions for a certain period following termination. The longer 3H worked as a sales representative of Open-Silicon, the longer the period of payment for commissions would be following termination. Pursuant to the parties’ agreement, if 3H represented Open-Silicon for more than 2 years, the commission period would be extended by 180 days following the termination date.

3H continued to act as a sales representative for Open-Silicon into the summer of 2011. On 20 June 2011, 3H received a letter from Open-Silicon indicating that the 2010 agreement was not being renewed. 3H takes the position that the letter of 20 June 2011 did not constitute proper notice of termination and that 3H did not receive proper notification of termination until 6 July 2011, giving rise to an official termination date of 5 August 2011 (30 days from the first date of proper notice of termination). According to 3H, since the contract was not officially terminated until August of 2011, 3H worked as a sales representative for more than 2 years and, under the terms of the parties’ agreement, 3H was entitled to 6 months of commissions post termination.

3H claims that, following the termination of the parties’ agreement, Open-Silicon failed to correctly report commissionable sales and ultimately failed to pay 3H for all of the commissions owed. More specifically, 3H claims that Open-Silicon coded thousands of units sold as “Engineering Change Orders,” which do not qualify as commissionable sales pursuant to the parties’ agreement.

In October of 2012, based upon the above allegations, 3H instituted the present action against Open-Silicon. The operative Second Amended Complaint asserts causes of action for (1) breach of contract, (2) accounting, (3) breach of implied covenant of good faith and fair dealing, (4) quantum meruit, (5) intentional misrepresentation, and (6) negligent misrepresentation.

Discovery Dispute

On 18 November 2013, Open-Silicon took the deposition of the President of 3H, Sam Hamade (“Mr. Hamade”). During his deposition, Mr. Hamade testified as to the definition of the term “Engineering Change Order” (“ECO”) and the industry standard for identifying a transaction as an ECO. Mr. Hamade further testified that, per industry standards, most, if not all, of the orders that were designated by Open-Silicon as ECOs should have been designated as commissionable purchase orders for which 3H was entitled to receive commissions. In support of this testimony, Mr. Hamade indicated that 3H had acted as the sales representative for numerous other companies within the industry, including eSilicon, On Semi, LSI, National Semiconductor, Flextronics, “and many, many others,” and they all follow the industry standard espoused by Mr. Hamade—suggesting that all of those companies would have classified the orders as commissionable purchase orders rather than ECOs. (Depo. of Sam Hamade, attached to Decl. of Marcus Yang (“Decl. of Yang”), Ex. A, pp. 174:21-175:5.)

On 10 February 2014, Open-Silicon served 3H with its second set of requests for production of documents (“RPD”). Based upon Mr. Hamade’s deposition testimony, the requests generally seek documents related to 3H’s prior business dealings (including copies of contracts) with all of the nonparty companies with which 3H has previously acted as a sales representative.

On 12 March 2014, 3H served Open-Silicon with responses to the RPD, objecting to every request on various grounds, including relevance, and producing no documents responsive to the requests.

On 10 April 2014, counsel for Open-Silicon sent a meet and confer letter to counsel for 3H, raising several perceived deficiencies with 3H’s responses. In the letter, counsel for Open-Silicon stated that “the documents sought are highly relevant since the issue of what constitutes a ‘commissionable sale’ is one of the main, key issues in this action.” (Decl. of Yang, Ex. H.) Addressing the issue of relevance, counsel for Open-Silicon elaborated as follows:

With regard to the individual document requests, [RPD Nos.] 11-19 all relate to 3H’s previous experience in the industry with regard to agreements between it, as a sales representative, and companies that 3H worked with prior to Open-Silicon; to commissions received from previous companies; what entitled a “Commissionable Sale”; what a ECO was; and 3H’s performance as a sales representative for companies prior to Open-Silicon. 3H’s previous experience in each of these areas is relevant. In the deposition of Sam Hamade, 3H’s President, Mr. Hamade testified extensively on the definition of an ECO and the industry standard for identifying a transaction as an ECO. Mr. Hamade testified during his deposition that most, if not all, of the order that were designated as ECOs would have been designated as Purchase Orders and that 3H therefore was entitled to commissions. (Id.)

On 18 April 2014, counsel for 3H responded to counsel for Open-Silicon’s letter. In her response, counsel for 3H reasserted that the documents sought are irrelevant, and stated the following:

All of the Requests seek documents specifically pertaining to [3H’s] business dealings with third parties who are competitors of [Open-Silicon]. The relevancy of such documents, is marginal at best, certainly not sufficient enough to overcome the harassing, overbroad, and unduly burdensome nature of the Requests. [¶] Furthermore, I have no doubt in my mind that [Open-Silicon] is well aware that the information it is seeking is confidential in nature, is likely protected by nondisclosure provisions . . . , and is pertaining to its direct competitors in the industry.

Mr. Hamade has considerable experience working in the industry and can, based on that experience, offer testimony as to what he believes consists of a “Commissionable Sale” or what an ECO is. That does not entitle Defendant to pry into every business dealing that [3H] may have had to lead Mr. Hamade to the opinions and understanding of how the industry operates. If you disagree with his interpretation, then you should have an expert opine as to how the industry classifies “Commissionable Sales” and ECOs. (Id., Ex. I.)

On 1 May 2014, having reached an impasse as to the relevance of the documents, Open-Silicon filed the motion presently before the Court, seeking further responses to its second set of RPD served on 3H.

On 27 May 2014, 3H filed an opposition to the motion and, on 30 May 2014, Open-Silicon filed its reply brief.

Discussion

I. Motion to Compel Further Responses to RPD

Open-Silicon seeks further responses to RPD Nos. 11-21. The requests fall into two categories. The requests in the first category (RPD Nos. 11-19) seek documents relating to 3H’s business dealings, including contracts and communications, with companies that 3H had previously acted as a sales representative. The second category (RPD Nos. 20 and 21) consists of the remainder of the requests, which share the characteristic of not seeking the information sought by the first category of requests.

Open-Silicon asserts that 3H’s objections lack merit and that it should be compelled to provide further responses to each of the requests. 3H stands on its objections, primarily asserting that the requests seek irrelevant and commercially sensitive information.

A. Legal Standard

Upon receipt of a response to a demand for inspection, including requests for the production of documents, the demanding party may move for an order compelling further response to the demand if the demanding party deems that any of the following apply:

(1) A statement of compliance with the demand is incomplete.
(2)
(3) A representation of inability to comply is inadequate, incomplete, or evasive.
(4)
(5) An objection in the response is without merit or too general.
(6)
(Code Civ. Proc. [“CCP”], § 2031.310, subd. (a)(1) – (3).) The motion for order compelling further responses “shall set forth specific facts showing good cause justifying the discovery sought by the inspection demand.” (CCP, § 2031.310, subd. (b)(1); Kirkland v. Sup. Ct. (2002) 95 Cal.App.4th 92, 98.) To establish “good cause,” the burden is on the moving party to show both relevance to the subject matter (e.g., how the information in the documents would tend to prove or disprove some issue in the case) and specific facts justifying discovery (e.g., why such information is necessary for trial preparation or to prevent surprise at trial). (Glenfed Develop. Corp. v. Sup. Ct. (1997) 53 Cal.4th 1113, 1117.) Where the moving party establishes “good cause,” the burden shifts to the responding party to justify its objections. (Kirkland, supra, 95 Cal.App.4th at p. 98.)

B. RPD Nos. 11-19

RPD Nos. 11-19 seek documents relating to 3H’s prior business dealings, including contracts and communications, with companies for which 3H had previously acted as a sales representative. RPD Nos. 11, 12, 14, and 15 are illustrative of the nature of this category of requests.

RPD No. 11 seeks:

ALL DOCUMENTS reflecting or comprising any AGREEMENTS from January 1, 2007 to the present, including but not limited to AGREEMENTS between YOU and eSILICON, between YOU and ON Semiconductor, between YOU and National Semiconductor, or between YOU and any manufacturer, provider or supplier of products or services which directly or indirectly compete with OPEN-SILICON’s products or services. (Open-Silicon’s Separate Statement, p. 2.)

RPD No. 12 seeks “ALL DOCUMENTS RELATING TO the negotiation, renewal, and termination of any AGREEMENTS from January 1, 2007 to the present.” (Id., p. 4.)

RPD No. 14 seeks “ALL DOCUMENTS that RELATE TO what constitutes a COMMISSIONABLE SALE under any AGREEMENT from January 1, 2007 to the present.” (Id., p. 9.)

And RPD No. 15 seeks “ALL DOCUMENTS that RELATE TO the definition of an ECO under any AGREEMENT from January 1, 2007 to the present.” (Id., p. 12.)

3H objected to each of these requests as follows:

Objections: Plaintiff objects on the grounds that this request seeks documents protected from disclosure by the attorney-client privilege, the attorney work-product doctrine, and/or any other applicable privilege. Plaintiff further objects to this request to the extent it calls for disclosure of confidential, proprietary, trade-secret, and/or competitively sensitive information. . . . Plaintiff also objects on the ground that this request seeks information prematurely in violation of Civil Code of Procedure Section 2034.210 et seq. Plaintiff objects to this request on the ground that it is overbroad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence. (Id., pp. 2, 5, 9, 10, and 12.)

The first question the Court must address is whether Open-Silicon has established good cause justifying the discovery. (CCP, § 2031.310, subd. (b)(1); Kirkland v. Sup. Ct. (2002) 95 Cal.App.4th 92, 98.) As indicated above, to establish good cause, the burden is on Open-Silicon to show both relevance to the subject matter (e.g., how the information in the documents would tend to prove or disprove some issue in the case) and specific facts justifying discovery (e.g., why such information is necessary for trial preparation or to prevent surprise at trial). (Glenfed Develop. Corp. v. Sup. Ct. (1997) 53 Cal.4th 1113, 1117.)

Concerning the relevance of the documents, Open-Silicon first notes that one of the key issues in this case revolves around the definitions of “ECO” and “Commissionable Purchase Order,” and whether Open-Silicon improperly classified certain transactions as ECOs to deprive 3H of commissions. Open-Silicon also directs the Court to Mr. Hamade’s deposition, during which he testified that most, if not all, of Open-Silicon’s direct competitors that 3H has acted as a sales representative would have classified the transactions as commissionable purchase orders rather than ECOs. In light of Mr. Hamade’s deposition testimony, Open-Silicon asserts that, “to the extent that any of [documents] were not already at issue, Mr. Hamade’s deposition has ‘opened the door’ to these issues.” (Mem. of Ps & As in Support of Mot. to Compel Further Responses, p. 6.) Based upon these assertions, Open-Silicon contends that “[i]t is indeed difficult, if not impossible, to see how the requested documents, which include documents related to 3H’s sales dealings with eSilicon and other clients, to commissionable sales, and to ECOs, ‘are not reasonably calculated to lead to the discovery of [relevant] evidence.’” (Def.’s Reply, p. 2.)

3H challenges the relevance of these documents, arguing that “[s]imply because Mr. Hamade testified as to what his understanding of ECO is based on his many years of experience in the industry does not give Defendant carte blanche to pr[y] into every business dealing Plaintiff may have had in the past with other companies in order to establish if Mr. Hamade’s understanding through his many years of industry experience is reasonable.” (Opp., p. 4.)

For the reasons set forth below, the Court finds that Open-Silicon has not established good cause.

Although relevance in the discovery context is to be construed liberally in favor of disclosure, the scope of civil discovery is not limitless. (See Calcor Space Facility v. Super. Ct. (1997) 53 Cal.App.4th 216, 223.) Section 2017.010 of the Code of Civil Procedure provides that information concerning any matter is subject to discovery “if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence.” (CCP, § 2017.010, subd. (a).) Thus, although admissibility is not a prerequisite to discovery, the test is whether the information sought might reasonably lead to other evidence that would be admissible. (See Calcor, supra, 53 Cal.App.4th at p. 223.)

It is Open-Silicon’s contention that, since 3H has asserted—through Mr. Hamade’s deposition—that Open-Silicon did not follow the industry standard when categorizing purchase orders as ECOs, Open-Silicon may now seek every contract and communication between 3H and any company it has worked with in the past to see whether Mr. Hamade’s assertions are accurate. This argument is not well-taken and the documents Open-Silicon seeks go well beyond the permissible scope of discovery.

In order to demonstrate good cause, the moving party must first show how the information in the documents would tend to prove or disprove some issue in the case. (Glenfed Develop. Corp. v. Sup. Ct. (1997) 53 Cal.4th 1113, 1117.) Open-Silicon asserts that the documents are relevant to the issue of whether it complied with the industry standard. This assertion, however, is not supported by the applicable law.

It is well-settled that, where a technical term in a contract is in dispute, extrinsic evidence of trade usage may be used to demonstrate that the term has a particular meaning within the industry. (See Wolf v. Super. Ct. (2004) 114 Cal.App.4th 1343, 1358 [stating that, “while words in a contract are ordinarily to be construed according to their plain, ordinary, popular or legal meaning, . . . [if] particular expressions have by trade usage acquired a different meaning, and both parties are engaged in that trade, the parties to the contract are deemed to have used them according to their different and peculiar sense as shown by such trade usage [and] [p]arol evidence is admissible to establish the trade usage.”].) This principle has been codified both in the Civil Code as well as the Code of Civil Procedure. (Civ. Code, § 1645 [“Technical words are to be interpreted as usually understood by persons in the profession or business to which they relate”]; see also CCP, § 1861 [“The terms of a writing are presumed to have been used in their primary and general acceptation, but evidence is nevertheless admissible that they have a local, technical, or otherwise peculiar signification. . . .”].)

Such evidence may include the factual circumstances under which the parties negotiated or entered into the contract, the subsequent actions of the parties in the course of performance, or usage of trade. (Id., at p. 1356.) Trade usage denotes a uniform course of conduct in a particular industry. (See Binder v. Aetna Life Ins. Co. (1999) 75 Cal.App.4th 832, 853.) Similarly, the Uniform Commercial Code defines usage of trade as any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. (Unif. Com. Code, §1-303, subd. (c).)

As to proving trade usage, the court of appeal has stated that “[e]xpert testimony is admissible to prove custom and usage in an industry.” (Howard Entertainment, Inc. v. Kudrow (2012) 208 Cal.App.4th 1102, 1114.) Notably absent from the types of extrinsic evidence that may be used to demonstrate the meaning of a technical term in a contract is a party’s unrelated previous business dealings.

In addition to the rules set forth above, the Court is guided by the principle that the scope of permissible discovery is one of “reason, logic and common sense.” (Lipton v. Super. Ct. (1996) 48 Cal.App.4th 1599, 1611.) If the Court was to accept Open-Silicon’s position, the company would not only be able to serve business records subpoenas on the companies that had contracts with 3H—which Open-Silicon has already attempted in this case with nonparty eSilicon—but also on every other company in the industry to determine how they interpret the term “ECO.” It seems obvious to the Court that such a practice is not contemplated or permitted by the Civil Discovery Act.

The Court does not take issue with Open-Silicon’s assertion that the industry standard concerning the categorization of ECOs is at issue in this case. However, as 3H points out, where a party offers trade usage or custom to supply meaning to technical contractual terms, it is ordinarily done so through the use of expert testimony. The Court could find no cases in which a party was permitted to obtain discovery concerning an opposing party’s prior business dealings (including contracts subject to nondisclosure agreements that are wholly unrelated to the contract in dispute) to establish trade usage. Open-Silicon has cited none and the relief requested appears to be quite literally unprecedented.

For the reasons set forth above, Open-Silicon has not made a showing of how the information in the documents would tend to prove or disprove some issue in the case. Open-Silicon has therefore failed to establish the first factor of the two-prong good cause requirement. (See Glenfed Develop. Corp., supra, 53 Cal.4th 1113, 1117.) Because Open-Silicon has not demonstrated good cause for the discovery, its motion to compel further responses to RPD Nos. 11-19 is DENIED.

C. Remaining Requests

1. RPD No. 20

RPD No. 20 seeks “ALL COMMUNICATIONS between 3H CORPORATION and CUSTOMERS or POTENTIAL CUSTOMERS regarding OPEN-SILICON that OPEN-SILICON did not receive at the time the COMMUNICAITON was made.” (Open-Silicon’s Separate Statement, p. 25.)

Concerning good cause, Open-Silicon does not address this particular request in its memorandum in support of its motion. Similarly, the argument presented in the separate statement with regard to RPD No. 20 appears to be copy and pasted from earlier arguments and reasserts the arguments concerning the interpretation of ECOs and Mr. Hamade’s deposition testimony. In other words, Open-Silicon makes no attempt to show how the particular request is relevant to the subject matter of this case and the relevance is not facially apparent from the request. For instance, while the Court can see how communications between 3H and customers of Open-Silicon during the relevant time period may be relevant, the relevance of communication between 3H and potential customers seems more tenuous. In any event, Open-Silicon has failed to explain the relevance of the requested documents, thereby failing to demonstrate good cause justifying the discovery.

Because Open-Silicon has failed to demonstrate good cause justifying RPD No. 20, its motion to compel a further response to that request is DENIED.

2. RPD No. 21

RPD No. 21 seeks “ALL DOCUMENTS that RELATE TO the renewal of any written agreement between 3H and OPEN-SILICON.” (Open-Silicon’s Separate Statement, p. 27.)

Unlike the previous request, the relevance of this request is facially apparent. 3H’s complaint expressly alleges that the parties’ contract was subject to a “Post-Termination Commission Schedule,” which provided for payment of commissions for a certain period following the termination of the contract. Moreover, the parties dispute the exact date on which the contract was terminated which, in turn, will affect the parties’ rights and duties under the above-referenced post-termination clause. Documents related to the renewal of the agreement between 3H and Open-Silicon are therefore relevant to the subject matter of this action and the Court finds good cause for the discovery.

3H objected to RPD No. 21 on the following grounds: attorney-client privilege, work product, vagueness and ambiguity, the request calls for a legal conclusion, the request is premature in light of the expert disclosure rules, the information is already in Open-Silicon’s possession, and the request is overly broad and unduly burdensome.

3H does not attempt to justify any of its objections specifically with regard to RPD No. 21. The objections are therefore overruled with the exception of the attorney-client privilege and work product doctrine, which are preserved. (Best Products, Inc. v. Sup. Ct. (2004) 119 Cal.App.4th 1181, 1188-1189 [holding that where a defendant asserted the attorney-client and work product privileges in a timely manner, albeit in a boilerplate fashion, the trial court erred in finding a waiver of the privileges].) Accordingly, Open-Silicon’s motion to compel a further response to RPD No. 21 is GRANTED.

II. Request for Sanctions

Open-Silicon seeks monetary sanctions against 3H and/or its attorneys of record in the amount of $6,120 under Code of Civil Procedure section 2031.310, subdivision (h). That section provides that “the court shall impose a monetary sanction . . . against any party, person, or attorney who unsuccessfully makes or opposes a motion to compel further responses to a demand, unless it finds that the one subject to the sanction acted with substantial justification or that other circumstances make the imposition of the sanction unjust.”

Here, Open-Silicon’s motion to compel further responses is denied with regard to 10 of the 11 requests at issue. 3H therefore acted with substantial justification in opposing the motion. Consequently, Open-Silicon’s request for monetary sanctions is DENIED.

Conclusion and Order

Open-Silicon’s motion to compel further responses to its second set of RPD is GRANTED IN PART and DENIED IN PART. The motion is DENIED with respect to RPD Nos. 11-20. The motion is GRANTED with respect to RPD No. 21. Accordingly, 3H shall serve a verified, code-compliant further response, without objections (except for attorney-client privilege and attorney work product doctrine, which have been preserved) to RPD No. 21, and documents in conformity with the response, within 20 calendar days of the filing of this Order. To the extent any additional documents are withheld based upon attorney-client privilege and/or attorney work product, 3H shall also provide a privilege log identifying all documents withheld and providing a factual basis for the privilege claimed.

Open-Silicon’s request for monetary sanctions is DENIED.