“A court 12 may consider evidence on which the complaint ‘necessarily relies’ if: (1) the complaint 13 refers to the document; (2) the document is central to the plaintiff’s claim; and (3) no party 14 questions the authenticity of the copy attached to the 12(b)(6) motion.”
How later courts described this case
- “A court 12 may consider evidence on which the complaint ‘necessarily relies’ if: (1) the complaint 13 refers to the document; (2) the document is central to the plaintiff’s claim; and (3) no party 14 questions the authenticity of the copy attached to the 12(b)(6) motion.”
- discussing Armendariz, 24 Cal. 17 4th at 113–14
- affirming a district court holding that the 23 defendants’ refusal to return plaintiff’s deposit following defendants’ anticipatory breach 24 of contract to convey title to real and personal property constituted conversion
- taking judicial notice of an uncontested 28 screenshot of an email
Written by the judges who cited it.
The opinion
1
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8 UNITED STATES DISTRICT COURT
9 SOUTHERN DISTRICT OF CALIFORNIA
10
11 SAHEL ONCOLOGY, LLC Case No. 23-cv-1458-BAS-DDL
12 Plaintiff,
ORDER
13 v. 1. GRANTING
DEFENDANT’S REQUEST
14 STA PHARMACEUTICAL HONG
FOR JUDICIAL NOTICE
KONG LIMITED,
15 (ECF NO. 28-2), and
Defendant. 2. GRANTING IN PART AND
16
DENYING IN PART
17 DEFENDANT’S MOTION
TO DISMISS THE FIRST
18
AMENDED COMPLAINT
19 (ECF No. 28-1)
20
21
22 Presently before the Court is Defendant STA Pharmaceutical Hong King Limited’s
23 (“STA” or “Defendant”) Motion to Dismiss the First Amended Complaint of Plaintiff
24 Sahel Oncology (“Sahel” or “Plaintiff”). (ECF No. 28-1 (“MTD”).) Defendant moves to
25 dismiss on the grounds that Plaintiff fails to plead a claim upon which relief may be
26 granted. (Id.) Sahel opposes. (ECF No. 29 (“Resp.”).) Defendant replies. (ECF No. 30
27 (“Reply”).) Defendant additionally requests judicial notice of eleven exhibits attached to
28 its motion to dismiss. (ECF No. 28-2.) Plaintiff does not oppose.
1 The Court finds the motions suitable for determination on the papers submitted and
2 without oral argument. Fed. R. Civ. P. 78(b); Civ. L.R. 7.1(d)(1). For the reasons set forth
3 below, the Court GRANTS Defendant’s Request for Judicial Notice (ECF No. 28-2), and
4 GRANTS IN PART and DENIES IN PART Defendant’s motion to dismiss the First
5 Amended Complaint (“FAC”) (ECF No. 28-1).
6 I. BACKGROUND
7 This case concerns a written contract between two companies to develop and
8 manufacture a new cancer drug. Sahel brings claims under multiple theories of liability:
9 alleging the contract as written is invalid, or one of its provisions is invalid, or the contract
10 is valid but STA breached it. For these claims, Sahel seeks damages. Sahel also seeks
11 reformation of the contract via declaratory relief on the grounds of equitable estoppel or
12 unconscionability.
13 Plaintiff Sahel Oncology (“Sahel” or “Plaintiff”) develops drugs for cancer patients
14 and has its principal place of business in California. (ECF No. 27 (“FAC”) ¶¶ 1, 5.) It has
15 over eight years of experience in “experimental therapeutics” in this field, which includes
16 the design of “several clinical trials, including trials to treat patients with brain cancer.”
17 (Id. ¶ 6.) STA is a pharmaceutical contract development and manufacturing company with
18 its principal place of business in China. (Id. ¶¶ 2, 7.)
19 Contract negotiations. The parties entered into the relevant written contract on or
20 around June 6, 2023. (FAC ¶ 9.) In the contract, STA agreed to manufacture and produce
21 a cancer-fighting compound developed by Sahel. (Id.)
22 Sahel entered into this contract because it was attempting to manufacture its drug for
23 a terminally ill cancer patient who “urgently needed” it. (Id. ¶ 11.) STA was aware of this
24 during contract negotiations. (Id.) Ultimately, after the parties entered into the written
25 contract, STA did not deliver the drug according to the approximate timetable in the
26 contract and, to this Court’s knowledge, still has not delivered it. (Id. ¶ 28.)
27 The parties dispute STA’s representations and their meanings during the contract
28 negotiation period. Sahel alleges two main misrepresentations by STA. First, Sahel alleges
1 that “STA represented to Sahel it would source the required API (Active Pharmaceutical
2 Ingredient) for the manufacture of the new drug in 8 weeks or less.” (Id. ¶ 12.) Second,
3 Sahel alleges STA represented that it would produce enough of the drug and of a sufficient
4 quality that it could be used on the cancer patient within a two- to three-month period after
5 the parties signed the contract. (Id. ¶¶ 11, 13–14.) The contract contradicts this, though,
6 and Sahel admits that the contract itself states that the first batch would be produced under
7 GLP1 conditions, which are not suitable for use on humans. (Id. ¶ 15.)
8 Although the contract’s language contradicts Sahel’s allegations regarding STA’s
9 second misrepresentation, Sahel alleges that language does not reflect the understanding of
10 the parties when they agreed to the contract. When Sahel attempted to change the
11 contractual language to require the first phase of drug manufacturing to be of a sufficient
12 quality for emergency compassionate use, STA told it that the agreement “was its standard
13 form contract, that Sahel could not change it, and Sahel needed to sign it in the form
14 presented (i.e. with the first batch[] produced under GLP conditions).” (Id. ¶ 19.) While
15 Sahel tried to change the language away from manufacturing the first batch of the drug
16 under GLP conditions, Sahel also argues that STA misled Sahel to believe that the GLP
17 conditions would suffice for Sahel’s planned emergency compassionate use. (Id. ¶¶ 16–
18 18.) Sahel further alleges that, were it not for these misrepresentations, Sahel would not
19 have entered into the contract in the first place. (Id. ¶ 10.) It only entered into the contract
20 in reliance on STA’s promises and misrepresentations. (Id.) According to the FAC, STA
21 used Sahel’s urgency in procuring the drug to “lure[] Sahel into signing a contract which
22 contained form, boiler-plate terms that differed from what STA had promised.” (Id. ¶ 21.)
23 Contract terms. As already noted, the FAC alleges the terms as written in the
24 contract do not reflect the agreement reached by the parties. The twenty-one-page contract
25 is filled with timelines, assumptions, and industry terms.
26
27
28
1 First, according to the contract, STA was responsible for “sourc[ing] and
2 purchas[ing] the required quantity” of the active pharmaceutical ingredient with the
3 necessary safety and quality certifications. (ECF No. 28-4 at 7.) In the contract, the parties
4 estimated sourcing the active pharmaceutical ingredient would take two months, and Sahel
5 agreed to pay for the substance at “actual cost.” (Id. at 4.) The contract makes clear,
6 however, that if a material like the active pharmaceutical ingredient “is not commercially
7 available,” then Sahel could either supply the material at its expense or amend the
8 agreement “to permit the use of a commercially available substitute.” (Id. at 15.)
9 Second, STA agreed to manufacture Sahel’s drug in two phases. Initially, STA was
10 to produce a toxicology and engineering batch of the drug, which would be “non-GMP”2
11 and used for “microbiological test methods verification and defective rate information.”
12 (Id. at 5.) There was no suggestion in the contract that this first batch would be used in
13 humans. STA further agreed to later produce a “GMP”3 drug batch after using a “Class C
14 clean room for solution preparation” and taking other precautions. (Id. at 6, 10.) In contrast
15 to the first batch, this second batch was to be used for “clinical supplies.” (Id. at 6.)
16 Third, the contract required STA to provide periodic progress updates to Sahel via
17 team meetings. (Id. at 7.) The frequency of the updates was to be determined at the project
18 kickoff meeting, and STA was to provide a written update to Sahel prior to each project
19 update meeting. (Id. at 14.)
20 The contract includes a confidentiality clause that states the parties will “maintain
21 the Confidential Information in confidence.” (Id. at 18.) This section of the contract has
22
23
2 “Non-GMP” production here means GLP production. (FAC ¶ 16.)
24 3 The Court briefly touches upon the contract’s use of “GMP” and “GLP” when describing the
25 manufacturing services. The contract incorporates the Food, Drug, and Cosmetic Act’s good
manufacturing practices (“GMP”) for producing drugs. (See ECF No. 28-4 at 7 (defining GMP to include
26 “current good manufacturing practices and regulations . . . that are promulgated by any competent
government authority”).) These GMP requirements assure that a drug meets safety criteria “and has the
27 identity and strength, and meets the quality and purity characteristics, which it purports or is represented
to possess.” 21 U.S.C. § 351(a)(2)(B). If a drug is not made under GMP conditions, then the law deems
28
1 been modified and the duration of the confidentiality provision, per the redline, was
2 extended from five to seven years. (Id.)
3 Performance. As part of the contract, Sahel agreed to share its proprietary
4 technology for the new drug with STA soon after the contract was signed, and it did so just
5 six days after signing, on June 12, 2023. (FAC ¶ 9.) In sharing this technology, Sahel
6 hoped to spur STA “to quickly produce the new drug for Sahel.” (Id.) The contract also
7 required an initial payment of $134,550, which Sahel paid to STA. (Id. ¶ 23.)
8 Soon after the parties entered into the contract, Sahel alleges the parties met on one
9 or two occasions. In the first meeting, Sahel claims that, on June 19, 2023, just seven days
10 after it allegedly shared its technology with STA, “STA presented a proposal to Sahel
11 where it demanded that Sahel pay an additional $178,000 before it would proceed with the
12 work” eliminating the Toxic/Engineered batch phase. (Id. ¶ 26.) This additional payment
13 was outside of the contract’s written terms and Sahel considered it to be a type of extortion.
14 In the second meeting, perhaps taking place several weeks later, Sahel alleges STA
15 suggested that the first batch (the GLP batch) could be eliminated altogether and STA could
16 proceed directly to the GMP phase. (Id. ¶ 25.) It is unclear from the FAC whether these
17 two meetings were in fact one and the same, and, if they were two distinct meetings,
18 whether STA requested additional payment at each of them.
19 Sahel also alleges breach of contract by STA’s failure to perform on the parties’
20 contract. Sahel alleges STA breached by failing to source and purchase the active
21 pharmaceutical ingredient within eight weeks as required by the contract. (Id. ¶ 29.) Sahel
22 alleges that STA told Sahel it could not source the active pharmaceutical ingredient because
23 it cost far too much, but when Sahel investigated this claim it found that it could acquire
24 the active pharmaceutical ingredient for 1.25% of the cost quoted by STA. (Id. ¶ 30.)
25 Sahel also alleges STA breached the contract by refusing to share information related to
26 the sourcing and acquisition of the active pharmaceutical ingredient, and by STA’s failure
27 to provide progress reports to Sahel on the project. (Id. ¶ 31.) Sahel further alleges STA
28
1 breached the contract by violating the contract’s confidentiality clause regarding Sahel’s
2 technology because STA has begun “advertising Sahel’s technology on its website.” (Id.)
3 II. REQUEST FOR JUDICIAL NOTICE
4 [W]here a defendant attaches extrinsic evidence to a Rule
12(b)(6) motion, the court ordinarily must convert that motion
5
into one for summary judgment under Rule 56 to give the
6 plaintiff an opportunity to respond. Where, however, an attached
document is integral to the plaintiff’s claims and its authenticity
7
is not disputed, the plaintiff obviously is on notice of the contents
8 of the document and the need for a chance to refute evidence is
greatly diminished.
9
10 Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998), as amended (July 28, 1998)
11 (citations omitted) accord Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006) (“A court
12 may consider evidence on which the complaint ‘necessarily relies’ if: (1) the complaint
13 refers to the document; (2) the document is central to the plaintiff’s claim; and (3) no party
14 questions the authenticity of the copy attached to the 12(b)(6) motion.”).
15 Here, Defendant requests the Court take judicial notice of several documents. (ECF
16 No. 28-2.) First, STA requests the Court take judicial notice of the contract at issue in this
17 case—the same contract Sahel claims STA breached. (ECF No. 28-4, Ex. 1). As STA
18 notes, this contract was previously submitted and authenticated in relation to the parties’
19 briefing on a prior motion, and courts may take judicial notice of their own files and
20 records. See Gerritsen v. Warner Bros. Ent. Inc., 112 F. Supp. 3d 1011, 1034 (C.D. Cal.
21 2015) (collecting authorities). Accordingly, the Court takes judicial notice of STA’s
22 Exhibit 1. (ECF No. 28-4, Ex. 1).
23 The emails found in Exhibits 2 through 10 are central to Plaintiff’s claims as they
24 show what was communicated between the two parties during and after contract
25 negotiations. Furthermore, their authenticity is uncontested. Therefore, the Court takes
26 judicial notice of Exhibits 2 through 10, (ECF Nos. 28-5 to 28-13). See Perkins v. Linkedin
27 Corp., 53 F. Supp. 3d 1222, 1242 (N.D. Cal. 2014) (taking judicial notice of an uncontested
28 screenshot of an email).
1 Because courts may consider documents that are public records, the Court shall also
2 take judicial notice of Defendant’s Exhibit 11, a complaint filed by Plaintiff against
3 Latitude Pharmaceuticals, Inc. in state court in March of last year. (ECF No. 28-14.)
4 Accordingly, Defendant’s request for judicial notice as to all of its proposed exhibits
5 is GRANTED. (ECF No. 28-2.)
6 III. LEGAL STANDARD
7 STA brings this motion pursuant to Federal Rule of Civil Procedure 12(b)(6), which
8 allows a party to seek to dismiss a complaint for “failure to state a claim upon which relief
9 can be granted.” Fed. R. Civ. P. 12(b)(6). “To survive a motion to dismiss, a complaint
10 must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
11 plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp.
12 v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff
13 pleads factual content that allows the court to draw the reasonable inference that the
14 defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678.
15 A court “need not assume the truth of legal conclusions cast in the form of factual
16 allegations.” United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir.
17 1986). While Rule 8(a) does not require detailed factual allegations, “it demands more
18 than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at
19 678. A pleading is insufficient if it offers mere “labels and conclusions” or “a formulaic
20 recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555; see also Iqbal,
21 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of action, supported by
22 mere conclusory statements, do not suffice.”).
23 Ultimately, a court may not dismiss a complaint in which the plaintiff has alleged
24 enough facts to “state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at
25 697 (quoting Twombly, 550 U.S. at 570). Only where a plaintiff fails to “nudge[ ] [his or
26 her] claims . . . across the line from conceivable to plausible[,]” is the complaint properly
27 dismissed. Iqbal, 556 U.S. at 680. While the plausibility requirement is not akin to a
28 probability requirement, it demands more than “a sheer possibility that a defendant has
1 acted unlawfully.” Id. at 678. The determination of whether a complaint satisfies the
2 plausibility standard is a “context-specific task that requires the reviewing court to draw
3 on its judicial experience and common sense.” Id. at 679.
4 When a court dismisses a complaint, it must then decide whether to grant leave to
5 amend. Under Rule 15(a)(2), granting leave to amend rests within the trial court’s sound
6 discretion. Swanson v. U.S. Forest Serv., 87 F.3d 339, 343 (9th Cir. 1996). The Ninth
7 Circuit has held that leave to amend should be freely granted. See Morongo Band of
8 Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990).
9 IV. ANALYSIS
10 A. Economic Loss Rule
11 STA first argues that Sahel’s claims of both fraud and negligent misrepresentation
12 are barred by the economic loss rule. (MTD at 16–22.)4 The Court, however, may swiftly
13 dispose of Defendant’s argument. “Notwithstanding, the economic loss rule, courts in
14 California have allowed misrepresentation claims to proceed.” Augustine v. Talking Rain
15 Beverage Co., Inc., 386 F. Supp. 3d 1317, 1331 (S.D. Cal. 2019) (citations omitted)
16 (permitting a negligent misrepresentation claim pertaining to defendant’s alleged
17 misrepresentations in connection with defendant’s product to proceed past the motion to
18 dismiss stage). Courts have similarly allowed fraud claims to proceed. See Young v.
19 Neurobrands, LLC, No. C 18-05907 JSW, 2019 WL 13247942, at *16 (N.D. Cal. Feb. 19,
20 2019) (finding the economic loss rule did not bar claims where the plaintiffs alleged they
21 were fraudulently induced into a contract). In line with these decisions, this Court finds
22 that dismissal of neither Plaintiff’s fraud nor negligent misrepresentation claim is
23 warranted under this principle.
24
25
26
4 STA states in its Reply that Sahel failed to defend against this argument in its Response and thus the
27 Court may deem the argument conceded. However, a court generally has discretion to consider even a
waived argument. See In re Hanford Nuclear Reservation Litig., 534 F.3d 986, 1007 (9th Cir. 2008)
28
1 Defendant also argues that the economic loss rule bars Plaintiff’s claim for
2 conversion, citing to several unreported district court cases in support. (MTD at 8:11–21.)
3 Whether the economic loss rule bars a conversion claim turns on “whether the ownership
4 interest that formed the basis for the conversion claim preexisted the contract or arises from
5 the contract. Where the interest preexisted the contract, a conversion claim will lie.” Fine
6 v. Kansas City Life Ins. Co., 627 F. Supp. 3d 1153, 1161 (C.D. Cal. 2022) (citing Expedited
7 Packages, LLC v. Beavex Inc., No. 15-00721, 2015 WL 13357436, at *4 (C.D. Cal. Sept.
8 10, 2015)).
9 In Fine, the court upheld a conversion claim where the plaintiff paid premiums on a
10 life insurance policy sold by the defendant. See Fine v. Kansas City Life Ins. Co., 627 F.
11 Supp. 3d 1153, 1156–57 (C.D. Cal. 2022). In that case, the court determined that the
12 plaintiff had a preexisting ownership interest in the premiums paid to the defendant. See
13 id. at 1162. Similarly, here, Plaintiff had a preexisting ownership interest in the funds it
14 paid to Defendant pursuant to the contract—the funds were its own—and thus Plaintiff’s
15 claim for conversion is not barred by the economic loss rule.
16 Accordingly, the economic loss rule bars none of Plaintiff’s claims.
17 B. Fraud, Negligent Misrepresentation, the Parol Evidence Rule
18 1. The Parol Evidence Rule
19 Defendant avers the parol evidence rule bars Plaintiff from employing facts from
20 outside the contract itself to demonstrate Defendant’s fraud or negligent misrepresentation.
21 (MTD at 15:3–17:5.) Unless Sahel seeks to invalidate the agreement altogether, STA
22 claims the parol evidence rule bars Sahel from referencing pre-contract statements and
23 representations as evidence of fraud or negligent misrepresentation. (Id. at 16:11–24.)
24 Broadly, the parol evidence rule “prevents the introduction of extrinsic evidence to
25 vary, alter, or contradict the terms of a written agreement.” IIG Wireless, Inc. v. Yi, 231
26 Cal. Rptr. 3d 771, 783 (Cal. Ct. App. 2018). Where it comes to questions of fraud or
27 negligent misrepresentation attacking the terms and validity of a contract as written, the
28 parol evidence rule does not bar extrinsic evidence. See id. at 785 (stating that the parol
1 evidence rule exception for fraud or negligent misrepresentation cannot by limited to cases
2 “only where the validity of the agreement is at issue, which would limit it to breach of
3 contract cases seeking to rescind the agreement.” (discussing Riverisland Cold Storage,
4 Inc. v. Fresno-Madera Prod. Credit Assn., 291 P.3d 316 (Cal. 2013))).
5 Because Sahel alleges STA committed fraud or negligent misrepresentation when it
6 made statements concerning the parties’ contract, the parol evidence rule thus does not bar
7 the Court from considering statements and actions by the parties that are extrinsic to the
8 explicit terms of the contract itself.
9 2. STA’s Statements
10 In analyzing the sufficiency of the FAC, then, federal courts apply Rule 9(b)’s
11 heightened pleading standard when it comes to fraud. Kearns v. Ford Motor Co., 567 F.3d
12 1120, 1125 (9th Cir. 2009). “Rule 9(b) demands that the circumstances constituting the
13 alleged fraud be ‘specific enough to give defendants notice of the particular misconduct
14 . . . so that they can defend against the charge and not just deny that they have done
15 anything wrong.’” Id. at 1124 (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th
16 Cir. 2001). “This means that allegations of fraud must be stated with ‘specificity including
17 an account of the time, place, and specific content of the false representations as well as
18 the identities of the parties to the misrepresentations.’” SVGRP LLC v. Sowell Fin. Servs.,
19 LLC, No. 5:16-cv-7302-HRL, 2017 WL 1383735, at *4 (N.D. Cal. Apr. 18, 2017) (quoting
20 Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007)).5 Defendant avers that the FAC
21
22 5 Defendant argues that there are additional pleading requirements for a “corporate defendant” and cites
to authority from the Northern District of California as support. (ECF No. 28 at 10:4–8 (citing Flowers
23 v. Wells Fargo Bank, N.A., No. C 11–1315 PJH, 2011 WL 2748650, at *6 (N.D. Cal. July 13, 2011)).)
The Court notes that Flowers cited to a California Court of Appeal case. See Tarmann v. State Farm Mut.
24
Auto. Ins. Co., 2 Cal. App. 4th 153, 157 (1991). The relevant state court decision specifies additional
25 requirements for pleading fraud against a corporation under California law. Id. (collecting cases).
However, the Ninth Circuit has held “that Rule 9(b)’s particularity requirement applies to state-law causes
26 of action,” and that “the Rule 9(b) requirement that the circumstances of the fraud must be stated with
particularity is a federally imposed rule.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir.
27 2003) (quoting Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir. 1985)). As a result, the Court does not
consider California’s specificity requirements in determining the sufficiency of Plaintiffs’ Complaint
28
1 does not plead allegations regarding Defendant’s fraud with the level of specificity required
2 by Rule 9(b). The Court thus analyzes whether Plaintiff pleads fraud with sufficient
3 specificity as to each statement alleged in the FAC.
4 “A cause of action for fraud requires proof of five elements: (1) misrepresentation;
5 (2) knowledge of the statement’s falsity; (3) intent to induce reliance; (4) justifiable
6 reliance; and (5) resulting damage.” Body Jewelz, Inc. v. Valley Forge Ins. Co., 241 F.
7 Supp. 3d 1084, 1091 (C.D. Cal. 2017) (quoting Hunter v. Up-Right, Inc., 6 Cal. 4th 1174,
8 1184 (Cal. 1993)); Lazar v. Superior Court, 12 Cal. 4th 631, 638 (Cal. 1996).
9 “[T]o qualify as a misrepresentation, the complaint must allege facts sufficient to
10 plausibly establish that the statement was false when made.” Muse Brands, LLC v. Gentil,
11 No. 15-cv-01744-JSC, 2015 WL 4572975, *4 (N.D. Cal. July 29, 2015) (citing In re
12 GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994)). A plaintiff cannot rest a
13 claim of fraud on a statement that later turned out not to be true, but rather must plead and
14 show that an alleged statement was false or misleading when made. See In re Clearly
15 Canadian Sec. Litig., 875 F. Supp. 1410, 1421 (N.D. Cal. 1995). The two sets of
16 misrepresentations at issue in this case concern the (1) timing of the drug manufacturing
17 process; and (2) the quality of the first batch of the drug, and whether that first batch would
18 be available for compassionate use to a human patient.
19 The timing. The FAC alleges that STA intentionally misrepresented it would be
20 able to begin work on production of the new drug immediately and that it would be ready
21 for compassionate use on Sahel’s human patient within two to three months. (FAC ¶ 11.)
22 Sahel claims one of STA’s project managers, Grace Yin, confirmed this in an email stating:
23 “We can target to produce the tox batch within 2-3M assuming we start our work
24 immediately in early of June.” (Id. ¶ 13.) STA’s head project manager, Lynne Faust,
25 allegedly also wrote in a May 17, 2023, email that STA would be “able to immediately
26 start this program.” (Id. ¶ 17.) Sahel points to STA’s later inaction to show that these
27 statements were knowingly false when made by Faust and Yin (id. ¶ 16), but Sahel cannot
28 rest its claim of fraud on a statement that later turned out not to be true, but rather must
1 plead and show that an alleged statement was false or misleading when made, see In re
2 Clearly Canadian Sec. Litig., 875 F. Supp. 1410, 1421 (N.D. Cal. 1995). Further, that a
3 company can target a certain deadline is not a statement that a company may meet that
4 deadline—Yin’s statement about how long manufacture would take cannot therefore be a
5 misrepresentation. Ultimately, Plaintiff has made no such allegations here and as such has
6 insufficiently alleged fraud as to STA’s representations about the timing of drug
7 manufacture.
8 Quality of the first drug batch. Second, Sahel alleges STA misrepresented the
9 potential use of the first batch of the drug by stating it would be eligible for compassionate
10 use on the human patient Sahel was treating. First, Sahel’s FAC expresses some confusion
11 about whether the misrepresentations were in relation to which line the first batch would
12 be produced on or whether the GLP line, the one named in the contract, would produce an
13 initial batch of sufficient quality for use on Sahel’s patient.
14 While Sahel admits that the contract states the first batch “would be produced under
15 GLP conditions,” Sahel alleges that STA misled it to believe that was not the case, that the
16 contract did not reflect the actual agreement between the parties, and it was therefore
17 reasonable for Sahel to rely on STA’s representations that the first batch would be produced
18 under GMP conditions. (FAC ¶ 15.) Sahel’s argument stems from several statements
19 made by STA staff before Sahel signed the contract with STA. Sahel alleges that during
20 this time STA misrepresented that “the first batch would be made on STA’s GMP line so
21 that the samples would be sterile and therefore suitable for human Compassionate Use.”
22 (Id. ¶ 14.) Sahel further alleges STA confirmed this misrepresentation via an email from
23 Yin on May 22, 2023, stating that the first batch would be “produced on our GMP line for
24 sure.” (Id.)
25 At the same time that Sahel alleges it was misled to believe the initial batch would
26 be produced on the GMP line, it also alleges STA misled Sahel to believe that the initial
27 batch would be produced on the GLP line, but it was irrelevant because the GLP line’s
28 production would be of sufficient quality to serve Sahel’s human patient. Specifically, the
1 FAC states that in response to an April 2023 email from Sahel expressing concern about
2 which line would produce a batch sufficient for compassionate use on a human patient,
3 STA project manager Ming Zhang responded more than a month later, stating:
4 Based on my previous experience, GMP is not required for
investigator-initiated study. I worked on an investigator-initiated
5
study when I was with my previous company. We just had a
6 compound pharmacy to make some drug product for human use.
It was not under GMP and the drug products were in R&D lab.
7
We just ensured it is sterile.
8 (Id. ¶ 16.) Sahel’s FAC further alleges that STA’s head project manager, Faust, also
9 responded more than a month later to say, “[w]e are able to immediately start this program
10 and I can confirm this contract replaces the earlier one we shared with you for the GLP
11 only. This contract will allow us to move forward with the feasibility and the engineering
12 batch will also be the GLP lot for your most immediate needs and then we will start the
13 clinical manufacturing.” (Id. ¶ 17.)
14 From these allegations, it is clear that Sahel received contradictory missives from
15 various STA employees: some stating that the first batch of the drug would be produced
16 on the GLP line, other on the GMP line. The contract clearly states, however, that the first
17 batch would be made on the GLP line. Therefore, Sahel’s misunderstanding could not
18 stem from whether the first batch would come from the GLP or the GMP line—the
19 misunderstanding would be whether an initial GLP-produced batch could be eligible for
20 compassionate use on Sahel’s human patient. While STA’s staff’s statements on the
21 subject may constitute misrepresentations, Sahel was not justified in relying upon them, as
22 is further explained below.
23 STA’s ability to source the active pharmaceutical ingredient. Somewhat coupled
24 with the first alleged misrepresentation regarding STA’s capacity to complete the project,
25 the FAC claims Defendant committed fraud with regard to its promises about the sourcing
26 of the required active pharmaceutical ingredient. The FAC alleges that “STA represented
27 to Sahel it would source the required [active pharmaceutical ingredient] for the
28 manufacture of the new drug in 8 weeks or less.” (FAC ¶ 12.) The FAC specifies that
1 STA made these statements “in meetings and conferences occurring on April 12, 2023, and
2 others in April and May of 2023 that there would be no problem in sourcing the [active
3 pharmaceutical ingredient].” (Id.) The FAC further states that “Dr. Nezami, Sahel’s
4 principal, and Sadia Shauka, a Sahel consultant, with the STA’s project team” attended
5 these meetings. (Id.) These allegations meet the requirements of the who, when, where,
6 and how, for the purposes of satisfying Rule 9(b). See United States v. United Healthcare
7 Ins. Co., 848 F.3d 1161, 1181 (9th Cir. 2016) (finding the complaint sufficient where it
8 contained allegations that companies were committing specific acts that constituted fraud,
9 without stating which company employees did or said what). Thus, Plaintiffs have alleged
10 that STA stated it would be able to source the active pharmaceutical ingredient and begin
11 production within eight weeks of signing the contract.
12 Plaintiff alleges this representation was false when STA made it because STA’s later
13 reasons for why it could not source the necessary ingredient were false—something Sahel
14 seems to allege indicates a cover-up. The FAC states that because STA quoted a wildly
15 inaccurate and exorbitant price for the cost of this active pharmaceutical ingredient, it
16 demonstrates STA was covering its tracks—that it never could make the drug but it tried
17 to make the excuse that the ingredient was too expensive as a way to avoid performance
18 on the contract. (See id. ¶ 30 (alleging STA “made promises that it knew it could not
19 keep”).) Plaintiff further states that STA at the time “did not have access to the [active
20 pharmaceutical ingredient] or did not know where to find it.” (Id. ¶ 35.) Plaintiff further
21 points to how STA had not sourced or purchased the active pharmaceutical ingredient as
22 of the writing of the FAC. (Id.) Therefore, Plaintiff successfully alleges a plausible claim
23 that Defendant made misrepresentations it knew to be false when it made claims about its
24 ability to source the active pharmaceutical ingredient.
25 3. Justifiability of Plaintiff’s Reliance
26 Reliance is justifiable where “circumstances were such to make it reasonable for the
27 plaintiff to accept the defendant’s statements without an independent inquiry or
28 investigation.” OCM Principal Opportunities Fund, LP v. CIBC World Markets Corp., 68
1 Cal. Rptr. 3d 828, 856 (Cal. Ct. App. 2007), as modified (Dec. 26, 2007) (citation omitted).
2 “The reasonableness of the plaintiff’s reliance is judged by reference to the plaintiff’s
3 knowledge and experience.” Id. (citing 5 Witkin, Summary of Cal. Law (10th ed. 2005)
4 Torts § 808, at p. 1164).
5 As noted in this Court’s prior order, “the [contract] does not require STA to
6 immediately manufacture a drug batch for human injection. The contract includes many
7 prerequisite steps, including a toxicology and engineering batch that must be completed
8 before the GMP batch. Plus, although the parties offer competing interpretations of the
9 agreement’s timeline, it makes no difference. The contract notes the timeline is
10 ‘tentative.’” (ECF No. 11 at 6:14–19 (citation omitted).)
11 STA argues that Sahel’s reliance on the misrepresentations above as to the timing of
12 the process and the acquisition of the active pharmaceutical ingredient was “per se
13 unjustifiable” given that the FDA regulations for compassionate use trials were publicly
14 available and Sahel itself alleged that it had eight years’ experience in clinical trials and
15 experimental therapeutics. (MTD at 11:17–12:14 (quoting FAC ¶¶ 5–6).)
16 Moreover, this Court takes judicial notice of Sahel’s prior complaint, filed against a
17 separate company months before Sahel entered into its contract with STA, stating that
18 Sahel alleged plans to seek FDA approval of a drug before its use in humans, indicating
19 Sahel understood FDA approval to be required before human use. (ECF No. 28-14, Ex. 11
20 ¶ 27.) In this prior complaint, Sahel states that it “seeks clinical trials with the goal of
21 developing effective drugs that can be submitted to the Food and Drug Administration
22 (“FDA”) for approval.” (ECF No. 28-14 ¶ 8.) In that same complaint, Sahel shares its
23 understanding of the drug development process as follows:
24 Before a drug can be tested in people, the drug company or
sponsor perform laboratory and animal tests to discover how the
25
drug works and whether it is likely to be safe and work well in
26 humans. Next, a series of tests on humans begins to determine
whether the drug is safe when used to treat a disease and whether
27
it provides a real health benefit.
28 (Id. ¶ 9.)
1
2 Ultimately, this Court finds Sahel’s reliance unjustifiable. It would be unjustifiable
3 for Sahel to rely on STA’s statements as above when, as Sahel itself has stated, so much
4 was on the line and it already had experience with the novel drug production process,
5 including an understanding that the FDA requires laboratory and animal tests prior to
6 administering novel drugs on humans. Because justifiable reliance is also an element of a
7 claim of negligent misrepresentation, and the statements for which Plaintiff alleges
8 Defendant committed negligent misrepresentation are the same as those for Plaintiff’s
9 fraud claim, Body Jewelz, 241 F. Supp. 3d at 1091 (citing Fox v. Pollack, 181 Cal. App. 3d
10 954, 962 (Cal. Ct. App. 1986)), Plaintiff fails to successfully allege both fraud and
11 negligent misrepresentation on the part of STA.
12 Having thus determined Sahel’s claims for fraud and negligent misrepresentation
13 cannot survive, the Court shall not consider Defendant’s arguments related to the non-
14 reliance clause of the contract. (See ECF No. 28 at 14:15–17:5.)
15 C. Breach of Written Contract
16 Sahel in its FAC alleges that STA breached the terms of the contract in five separate
17 ways: (1) by failing to source the active pharmaceutical ingredient within eight weeks,
18 (2) by failing to “share any information regarding the [active pharmaceutical ingredient]
19 and excipients, and failing to obtain any approval regarding such compounds and/or
20 ingredients;” (3) by failing to update Sahel on the progress of the project; (4) by failing to
21 provide written updates ahead of meetings; and (5) by advertising Sahel’s technology to
22 obtain other clients. (FAC ¶ 48.a–e.) In challenge, STA attaches the contract itself to its
23 Motion to Dismiss.
24 To state a claim for breach of contract under California law, plaintiffs must plead
25 four elements: (1) the existence of a contract, (2) plaintiffs’ performance or excuse for
26 nonperformance, (3) defendant’s breach, and (4) damage to the plaintiffs as a result of that
27 breach. Misha Consulting Grp., Inc. v. Core Ed. & Consulting Solutions, Inc., No. C-13-
28 04262-RMW, 2013 WL 6073362, at *1 (N.D. Cal. Nov. 15, 2013) (citing CDF Firefighters
1 v. Maldonado, 70 Cal. Rptr. 3d 667, 679 (Cal. Ct. App. 2008), as modified on denial of
2 reh’g (Feb. 5, 2008)). There is no dispute that a contract existed and that Sahel completed
3 at least partial performance. The core of STA’s challenge to Sahel’s breach of contract
4 claim rests on whether STA breached the contract.
5 Breach 1: Failing to source the active pharmaceutical ingredient within eight weeks.
6 Sahel claims STA breached the contract by “[f]ailing to source or make the [active
7 pharmaceutical ingredient] available within 8 weeks.” (FAC ¶ 48.a.) STA moves to
8 dismiss on the grounds that “[t]he unambiguous terms of the Contract demonstrate that
9 STA was not required to source or make the [active pharmaceutical ingredient] available
10 within eight weeks as Plaintiff alleges.” (MTD at 17:20–22.) Plaintiff attempts to survive
11 the motion to dismiss by alleging the contract was ambiguous as to who was to source the
12 active pharmaceutical ingredient and what the contract intended by the term “raw
13 materials.” (Resp. at 13:28–14:2, 14:17–20.)
14 Interpretation of contracts is a matter of law and appropriate to address at the motion
15 to dismiss stage, but where there is ambiguity in the meaning of a contract’s provision(s),
16 the court must deny the motion to dismiss. Gerlinger v. Amazon.com, Inc., 311 F. Supp.
17 2d 838, 843 (N.D. Cal. 2004) (citing Atel Fin. Corp. v. Quaker Coal Co., 321 F.3d 924,
18 925–26 (9th Cir. 2003)); Monaco v. Bear Stearns Residential Mortg. Corp., 554 F. Supp.
19 2d 1034, 1040 (C.D. Cal. 2008); see also Trs. of Screen Actors Guild-Producers Pension
20 & Health Plans v. NYCA, Inc., 572 F.3d 771, 777 (9th Cir. 2009). In interpreting a contract,
21 unless the contract uses words in a technical manner or defines certain terms, the words of
22 a contract are understood in their ordinary and popular sense. See Britz Fertilizers, Inc.,
23 665 F. Supp. 2d 1142, 1159–60 (citing Founding Members of the Newport Beach Country
24 Club v. Newport Beach Country Club, Inc., 135 Cal. Rptr. 2d 505, 513 (Cal. Ct. App.
25 2003)). Although a contract is ambiguous if it is capable of two different reasonable
26 interpretations, a court will not strain to create an ambiguity where none exists. See
27 Kashmiri v. Regents of the Univ. of Cal., 67 Cal. Rptr. 3d 635, 660 (Cal. Ct. App. 2007), as
28 modified (Nov. 15, 2007), as modified (Nov. 28, 2007) (“[L]anguage in a contract must be
1 interpreted as a whole, and in the circumstances of the case, and cannot be found to be
2 ambiguous in the abstract.”) (quoting Waller v. Truck Ins. Exchange, Inc., 900 P.2d 619,
3 627 (Cal. 1995), as modified on denial of reh’g (Oct. 26, 1995)).
4 Plaintiff argues that “the contract, at best, is ambiguous as to who was to source the
5 [active pharmaceutical ingredient].” (Resp. at 14:17–20.) However, the language of the
6 contract is quite clear and not self-contradictory. STA is intended to source the raw
7 materials for the project, subject to Sahel’s approval. Specifically, Sections 4.1.2(1) and
8 4.1.1(1), which govern various assumptions of the contract, supplement one another
9 without contradiction. Section 4.1.1 titled “General Assumptions” provides that STA will
10 source and purchase the required materials. Section 4.1.2, titled “Raw Material & Tooling
11 Assumptions,” states that STA “will be responsible for sourcing all raw materials from
12 suppliers approved (suggested by) Sahel.” While Section 4.1.2 adds a requirement that
13 Sahel have approval authority, there is no ambiguity that STA is in charge of sourcing all
14 materials. The Court would be straining if it were to conjecture that the provisions, read
15 together, could mean Sahel was in charge of sourcing the materials to produce the drug.
16 Therefore, the Court finds the contract unambiguous as to the requirement that STA source
17 the raw material.
18 Second, it is unambiguous as to what “raw materials” refers. Plaintiff aims to
19 survive the motion to dismiss by alleging the contract was ambiguous as to what the
20 contract intended by the term “raw materials.” (Resp. at 13:28–14:2.) Plaintiff claims it
21 is unclear that “raw materials really meant [active pharmaceutical ingredient] and
22 excipients.” (Resp. at 14:1–2.) However, Plaintiff does not offer an alternative reasonable
23 interpretation of the term, and the ordinary sense of “raw materials” in the context of the
24 contract as a whole, clearly means the raw materials to manufacture the drug the parties
25 contracted for. Therefore, the Court finds the contract unambiguous as to what the term
26 “raw material” refers.
27 Having concluded the contract is unambiguous as to the provisions at issue in
28 breach 1, the Court proceeds with the analysis of whether Sahel plausibly pleads STA
1 breached the contract by failing to source the active pharmaceutical ingredient within the
2 eight weeks. The Court reiterates its finding in its order on the TRO that the unambiguous
3 terms of the written contract do not require STA to immediately source the active
4 pharmaceutical ingredient at all costs and the timeline provided in the contract is explicitly
5 “tentative.” (See ECF No. 11 at 6:4–7:4.) Therefore, that STA did not source the active
6 pharmaceutical ingredient within eight weeks was not a breach of the contract and Plaintiff
7 fails to plausibly allege a claim for breach of contract under breach 1.
8 Breach 2: STA failed to share information regarding the active pharmaceutical
9 ingredient or excipients. Sahel claims STA breached the contract by failing to “share any
10 information regarding the active pharmaceutical ingredient and excipients, and failing to
11 obtain any approval regarding such compounds and/or ingredients.” (FAC ¶ 48.b.) STA
12 responds that its conduct did not constitute breach because “Sahel admits that STA held a
13 project meeting and presented a proposal to Sahel for its approval. Sahel refused to agree
14 to the proposal but clearly admits STA shared the information regarding the active
15 pharmaceutical ingredient in an attempt to obtain Sahel’s approval as required by the
16 Contract.” (MTD at 18:5–9.) Indeed, upon the facts as pled, taken as true, the Court finds
17 Plaintiff fails to state a plausible claim for breach of contract on these grounds. While it
18 does not appear that the FAC contradicts itself, it does fail to state sufficient facts to allege
19 such a breach. For instance, it fails to allege any facts such as unanswered emails,
20 communications in meetings, or anything else to suggest that STA has failed to provide
21 any information or that it has failed to obtain any approval. Rather, Sahel simply states
22 that it has failed to do so and thus has breached, but Sahel fails to indicate how it knows
23 this to be the case or any actions taken on its part to confirm compliance. This amounts to
24 exactly the kind of “the-defendant-unlawfully-harmed-me accusation” that cannot survive
25 the motion to dismiss stage, see Iqbal, 556 U.S. at 678, because it offers mere “labels and
26 conclusions” rather than facts, Twombly, 550 U.S. at 555. Accordingly, Sahel fails to
27 plausibly allege a claim for breach of contract under breach 2.
28
1 Breach 3: Failing to provide Sahel with updates on project progress. The Court finds
2 Sahel sufficiently pleads facts in support of breach 3, STA’s failure to update Sahel on the
3 progress of the project. (FAC ¶ 48.c.) The contract at 5.2 states: “Progress on this project
4 is reported to Sahel Oncology LLC as part of regularly-scheduled project team meetings
5 (frequency to be determined at project initiation).” While Plaintiff does not plead any facts
6 indicating the decided-upon frequency of the project team meetings, Sahel does plead that
7 STA has “refused to provide such progress” updates. At this stage of the proceedings,
8 Sahel’s claim as to breach 3 thus survives.
9 Breach 4: Failing to provide written updates prior to team meetings. Also, the Court
10 disagrees with STA that Sahel has failed to allege facts in support of its claim that STA did
11 not “provide written updates prior to each team meeting” as the contract requires. (FAC
12 ¶ 48.d.) The contract requires that STA provide written updates prior to team meetings and
13 Sahel alleges STA has not done that. Such assertions are sufficient at this stage in
14 proceedings for Sahel’s claim as to breach 4 to survive.
15 Breach 5: Advertising Sahel’s technology on STA’s website. Defendant makes the
16 same argument as to breach 4 but it necessarily fails where Plaintiff alleged that Defendant
17 was advertising Plaintiff’s technology on its website, in contravention of the contract, and
18 therefore that constituted breach. (FAC ¶ 31.) This constitutes sufficient factual
19 allegations to state a plausible claim at this stage of the case and therefore the motion to
20 dismiss will be denied as to the claim for breach 5 of the contract.
21 D. Conversion
22 Plaintiff alleges a claim for conversion by stating STA “wrongfully obtained and
23 maintains the [initial deposit] paid by Sahel,” causing Sahel damage as a “proximate result
24 of such conversion.” (FAC ¶¶ 52–53.) Sahel further requests “punitive and exemplary
25 damages” for this claim because “[t]he conduct of STA is despicable, fraudulent, and
26 shows a conscious disregard for the rights of Sahel and its patients.” (Id. ¶ 54.)
27 The elements of a claim for conversion are (1) the plaintiff’s ownership or right to
28 possession of the property at the time of the conversion, (2) the defendant’s conversion by
1 a wrongful act or disposition of property rights, and (3) damages.” Prakashpalan v.
2 Engstrom, Lipscomb & Lack, 167 Cal. Rptr. 3d 832, 857 (Cal. Ct. App. 2014), as modified
3 on denial of reh’g (Feb. 27, 2014) (citing Farmers Ins. Exchange v. Zerin, 53 Cal. App.
4 4th 445, 451 (Cal. Ct. App. 1997).) “A mere contractual right of payment, without more,
5 will not suffice.” Cakebread v. Berkeley Millwork & Furniture Co., No. 16-CV-00083-
6 RS, 2017 WL 579913, at *8 (N.D. Cal. Feb. 13, 2017) (citing Rutherford Holdings, LLC
7 v. Plaza Del Rey, 223 Cal. App. 4th 221, 233 (Cal. Ct. App. 2014)). “[T]he simple failure
8 to pay money owed does not constitute conversion . . . . Were it otherwise, the tort of
9 conversion would swallow the significant category of contract claims that are based on the
10 failure to satisfy mere contractual right[s] of payment.” Beluca Ventures LLC v.
11 Aktiebolag, 622 F. Supp. 3d 806, 814 (N.D. Cal. 2022) (citing Voris v. Lampert, 446 P.3d
12 284, 291 (Cal. 2019)).
13 STA argues Sahel fails to state a claim for conversion because Sahel fails to
14 plausibly allege the first element of conversion—that Sahel has an ownership right to the
15 money Sahel deposited with STA. (MTD at 22:5–23:3.) Indeed, whether Sahel
16 sufficiently pleads this claim turns on whether it was “entitled to immediate possession” of
17 the property at the time of conversion. Bastanchury v. Times-Mirror Co., 68 Cal. App. 2d
18 217, 236 (Cal. Ct. App. 1945).
19 Here, Sahel does not plead sufficient facts as to the time of conversion, but it is
20 irrelevant because once Sahel deposited funds in STA’s account, Sahel was no longer
21 entitled to immediate possession of the property at any point. See In re James E. O’Connell
22 Co., 799 F.2d 1258, 1261 (9th Cir. 1986) (affirming a district court holding that the
23 defendants’ refusal to return plaintiff’s deposit following defendants’ anticipatory breach
24 of contract to convey title to real and personal property constituted conversion); Schneider
25 v. Bank of Am. N.A., 2014 WL 2118327, at *13 (E.D. Cal. May 21, 2014) (holding that an
26 allegation that the defendants refused to return to the plaintiffs any portion of funds the
27 plaintiff entrusted to the defendant for the purpose of crediting the plaintiff’s mortgage
28 account, even after fees the defendant claimed to be owed were deducted, constituted a
1 viable claim for conversion). The contract makes clear that the funds in the instant case
2 were not to be transferred to an escrow account and were not otherwise entrusted to
3 Defendant on some temporary basis. (See generally ECF No. 28-4.) Rather, the contract
4 specifically requires the initial deposit was to be transferred directly to an account in STA’s
5 name. (ECF No. 28-4, Ex. 1, at 0006 (requiring the initial payment to be paid into an
6 account where the beneficiary is explicitly “STA Pharmaceutical Hong Kong Limited.”)
7 Further, Plaintiff fails to plead facts that do more than “merely restate contractual
8 obligations,” and thus fails to state a claim to recover for the tort of conversion. Nguyen v.
9 Stephens Inst., 529 F. Supp. 3d 1047, 1058 (N.D. Cal. 2021) (citation omitted). Plaintiff
10 has done no more than claim that STA failed to pay money the contract states STA owes
11 Sahel. The California Supreme Court has held such claims cannot constitute conversion
12 because otherwise “the tort of conversion would swallow the significant category of
13 contract claims that are based on the failure to satisfy mere contractual right[s] of
14 payment.” Voris, 446 P.3d at 291 (citations omitted). Sahel claims that because Sahel was
15 “lured into the contract” via “fraudulent representations and promises,” it has stated a claim
16 for conversion. (Resp. at 16:2–11.) However, Sahel cites to no cases in support of this
17 proposition and this Court has found none—further, as described above, Sahel has failed
18 to state such a claim for fraud or even negligent misrepresentation. As such, this argument
19 must necessarily fall.
20 Therefore, Plaintiff fails to state a claim for conversion.
21 E. Equitable Estoppel
22 The FAC includes a claim for declaratory relief under the California principle of
23 equitable estoppel, California Evidence Code Section 623. (FAC ¶ 56.) Plaintiff seeks to
24 estop STA “from relying on the terms of the contract as they contradict STA’s express
25 promises and representations and Sahel relied on those promises and representations to
26 sign the contract.” (Id. ¶ 57.) Sahel alleges that because STA wishes to apply the express
27 language of the contract and Sahel wishes to apply the terms as indicated by STA’s
28 promises and conduct, “an actual controversy has arisen between the Sahel and STA such
1 that Sahel seeks a declaration from the Court as to the parties’ rights on this matter.” (Id.
2 ¶¶ 58–59.)
3 Defendant attempts to dismiss this claim, arguing it is duplicative of Plaintiff’s
4 breach of written contract and fraud claims. (MTD at 23:6–18.) Defendant’s argument
5 must fail, though, in the face of the Federal Rules of Civil Procedure. A plaintiff “may
6 state as many separate claims or defenses as it has, regardless of consistency.” Fed. R. Civ.
7 P. 8(d)(3); see also Stockton E. Water Dist. v. United States, 583 F.3d 1344, 1368 (Fed.
8 Cir. 2009), on reh’g in part, 638 F.3d 781 (Fed. Cir. 2011) (“It cannot be understood as
9 precluding a party from alleging in the same complaint two alternative theories for recovery
10 against the [defendant], for example, one for breach of contract and one for a taking under
11 the Fifth Amendment to the Constitution. That is expressly permitted by the Federal Rules,
12 and the fact that the theories may be inconsistent is of no moment.”). The reported cases
13 STA cites in support of its argument are inapposite because the opinions stem not from
14 motions to dismiss, but from final judgments. See, e.g., Tyler v. Travelers Com. Ins. Co.,
15 499 F. Supp. 3d 693, 702 (N.D. Cal. 2020) (granting a motion for judgment on the
16 pleadings); United States v. Washington, 759 F.2d 1353, 1356–57 (9th Cir. 1985)
17 (reviewing a district court’s grant of declaratory judgment).
18 Because a plaintiff may plead duplicative claims at this stage in the case, Sahel’s
19 claim for equitable estoppel necessarily survives as it relates to Plaintiff’s surviving breach
20 of contract claims.
21 F. Unconscionability of the Limitations on Liability Provision
22 Further, Sahel petitions the Court to declare one provision of the contract
23 unconscionable. The provision is in an attachment to the contract and is labeled
24 “Limitations on Liability.” (ECF No. 28-4 at 0018.) Sahel seeks a determination and
25 declaration by the Court that this Limitations on Liability provision within the contract is
26 unconscionable and unenforceable. (Id. ¶¶ 60–66.) The provision reads as follows:
27 9.4 Limitations on Liability (a) Except for Losses arising from
a Party’s breach of confidentiality obligations or from a Party ‘s
28
1 gross negligence or willful misconduct, neither Party nor any of
their respective Affiliates or any of their respective directors,
2
officers, employees or agents, shall have any liability to the other
3 Party for any punitive, multiple, special, incidental, indirect or
consequential damages, or for damages for the loss of business,
4
anticipated savings, opportunity, use, revenue or profit,
5 reputation or financing, in connection with or arising out of this
Agreement or any activities carried out under this Agreement
6
regardless of whether an action is brought in tort, contract or any
7 other theory, (b) Except for Losses arising from Provider’s
breach of confidentiality obligations or from Provider’s gross
8
negligence or willful misconduct, Provider’s maximum
9 aggregate total liability in connection with the Agreement will
not exceed the total payments of Service Fees received for the
10
affected Services under the Agreement from which the liability
11 arises. (c) Subject to the limitations set forth in this Section 9.4,
in the event that the Provider commits a breach of the obligation
12
set forth in Section 4.1 above, Provider’s sole liability, and
13 Client’s sole remedy shall be for Provider to conform, at
Provider’s cost and expense , the affected work or portion of the
14
Services affected by the breach to the relevant specification.
15 Notwithstanding the foregoing, (i) unless the breach is solely
caused by gross negligence or willful misconduct of Provider,
16
the cost covered by Provider under this Section 9.4(c) shall not
17 include the cost of any Materials; and (ii) with regards to any
Services that involve using a Client Material, the cost covered by
18
Provider under this Section 9.4(c) shall not include the cost of
19 such Client Material under any circumstances. (d) Nothing in
this Agreement shall limit or exclude a Party’s liability for any
20
liability which cannot be limited or excluded by Applicable Law.
21 (ECF No. 28-4 at 18.)
22 As Sahel notes, the provision is “single spaced and in small type,” like the other
23 provisions in the attachment. (FAC ¶ 61.) Sahel alleges the Limitations on Liability
24 provision, like each of the provisions in the Standard Terms and Conditions attachment,
25 was “presented on a take it or leave it basis,” and that the Limitations on Liability provision
26 was “buried” in this attachment. (Id. ¶¶ 62–63.) Plaintiff alleges in the FAC that Sahel
27 sought to include various requirements in the contract but was denied by STA saying, “that
28
1 this was its standard form contract, and that STA could not change it, and Sahel needed to
2 sign it in the form presented.” (Id. ¶ 19.)
3 Under California law, a contract must be both procedurally and substantively
4 unconscionable to be rendered invalid. Armendariz v. Found. Health Psychcare Servs.,
5 Inc., 6 P.3d 669, 690 (Cal. 2000). The measure of unconscionability is taken on a “sliding
6 scale”—the less procedurally unconscionable a contract is, the more substantively
7 unconscionable it must be and vice versa. Chavarria v. Ralphs Grocery Co., 733 F.3d 916,
8 922 (9th Cir. 2013). “The ultimate issue in every case is whether the terms of the contract
9 are sufficiently unfair, in view of all relevant circumstances, that a court should withhold
10 enforcement.” OTO, L.L.C. v. Kho, 447 P.3d 680, 690 (Cal. 2019) (citation omitted).
11 Procedural unconscionability refers to “the manner in which the contract was
12 negotiated and the respective circumstances of the parties at that time, focusing on the level
13 of oppression and surprise involved in the agreement.” Chavarria, 733 F.3d at 922 (citing
14 Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 783 (9th Cir. 2002)). Absence
15 of choice and unequal bargaining power go to the level of oppression, while “the extent to
16 which the contract clearly discloses its terms as well as the reasonable expectations of the
17 weaker party” go to the level of surprise. Id. For instance, the court found in Chavarria
18 that it was procedurally unconscionable due to oppression where the plaintiff “could only
19 agree to be bound by the policy or seek work elsewhere.” Id. at 923.
20 Here, Plaintiff pleads several facts in favor of a finding of procedural
21 unconscionability. First, Sahel claims the contract was presented as a take it or leave it
22 contract. Second, that STA leveraged the intense time pressure Sahel felt to assist its
23 patient to push Sahel into entering into the contract. And, third, that Defendant
24 misrepresented its capacity to manufacture that drug all point to procedural
25 unconscionability. (Resp. at 18:2–5.)
26 As discussed above, Plaintiff has not alleged sufficient facts to demonstrate STA’s
27 misrepresentations about its capacity to manufacture the drug in the desired time period
28 were ones that Plaintiff could reasonably rely upon. Further, the plain text of the contract
1 itself contradicts Plaintiff’s assertion that the contract was take it or leave it. The contract
2 has been redlined and modified in its substantive terms, such as an increase in the duration
3 of the confidentiality provision from five to seven years. (ECF No. 28-4 at 0018.)
4 Moreover, Plaintiff does not allege certain other hallmarks of procedural unconscionability
5 such as the lack of representation in its contract negotiations with STA. While Plaintiff
6 notes the Limitations on Liability provision was in small type, its heading was in bold and
7 the provision was formatted in the same way as others that Sahel redlined and modified in
8 the contract. Therefore, Sahel fails to allege procedural unconscionability in connection
9 with the limitations on liability provision.
10 A contract is substantively unconscionable when it is unjustifiably one-sided to such
11 an extent that it “shocks the conscience.” Chavarria, 733 F.3d at 923 (quoting Parada v.
12 Super. Ct., 98 Cal. Rptr. 3d 743, 759 (Cal. Ct. App. 2009). It is not enough for the terms
13 of the contract to simply be an “old-fashioned bad bargain.” OTO, 447 P.3d at 693. The
14 California Supreme Court has held that not all damages limitations in contracts of adhesion
15 are per se substantively unconscionable. Chin v. Advanced Fresh Concepts Franchise
16 Corp., 194 Cal. App. 4th 704, 712 (Cal. Ct. App. 2011) (discussing Armendariz, 24 Cal.
17 4th at 113–14). While the Limitations on Liability provision limits damages available to
18 Plaintiff, Plaintiff has not offered facts to show that it is so one-sided as to shock the
19 conscience. That Defendant acted as some sort of fox in the henhouse when it entered into
20 the contract with Plaintiff is implausible based on these facts. Without further facts alleged,
21 Plaintiff fails to allege substantive unconscionability.
22 In sum, Plaintiff has failed to allege sufficient facts to show procedural or substantive
23 unconscionability to indicate Sahel has stated a plausible claim for relief declaring the
24 Limitations on Liability provision unconscionable.
25 V. CONCLUSION
26 Accordingly, the Court GRANTS Defendant’s Request for Judicial Notice. (ECF
27 No. 28-2.) The Court further rules as follows on Defendant’s Motion to Dismiss Plaintiff’s
28 FAC (ECF No. 28-1):
1 1. GRANTED as to Plaintiffs fraud and negligent misrepresentation claims;
2 2. Breach of contract
3 a. GRANTED as to Plaintiffs alleged breach 1;
4 b. GRANTED as to Plaintiff's alleged breach 2;
5 c. DENIED as to Plaintiff's alleged breach 3;
6 d. DENIED as to Plaintiffs alleged breach 4;
7 e. DENIED as to Plaintiffs alleged breach 5;
8 3. GRANTED as to Plaintiff's conversion claim;
9 4. Equitable estoppel
10 a. DENIED as to Plaintiffs equitable estoppel claim as it relates to □□□□□□□□□□□
11 surviving breach of contract claims;
12 b. GRANTED as to Plaintiffs equitable estoppel claim as it relates to
13 Plaintiffs dismissed breach of contract claims;
14 5. GRANTED as to Plaintiff's unconscionability claim.
15 To the extent the Court dismisses Plaintiff's claims, it does so without prejudice. If
16 || Plaintiff wishes to amend the claims herein dismissed, it must do so on or before July 9,
17 ||2024. If Plaintiff fails to amend, Defendant is ordered to file its response on or before July
18 || 16, 2024.
19 IT IS SO ORDERED.
20 A
21 || DATED: June 18, 2024 ( itl A (Liphan 6
22 United States District Judge
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