Whittlestone, Inc. v. Handi-Craft Co.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

WHITTLESTONE, INC., a California 

corporation,

No. 09-16353

Plaintiff-Appellant,

v.  D.C. No.

4:08-cv-04193-SBA

HANDI-CRAFT COMPANY, a Missouri

OPINION

corporation,

Defendant-Appellee.



Appeal from the United States District Court

for the Northern District of California

Saundra B. Armstrong, District Judge, Presiding

Argued and Submitted

May 13, 2010—San Francisco, California

Filed August 17, 2010

Before: Stephen Reinhardt, William A. Fletcher and

N. Randy Smith, Circuit Judges.

Opinion by Judge N. R. Smith

12059

WHITTLESTONE v. HANDI-CRAFT CO. 12061

COUNSEL

Russell J. Hanlon (argued), San Jose, California, for plaintiff-

appellant WHITTLESTONE, INC.

Peter W. Herzog (argued) & Michael A. Vitale of Herzog

Crebs, LLP, St. Louis, Missouri; Dean Pollack & Rohit A.

Sabnis of Burnham Brown, PLC, Oakland, California for

defendant-appellee HANDI-CRAFT COMPANY.

OPINION

N.R. SMITH, Circuit Judge:

In this case of first impression, we hold that Rule 12(f) of

the Federal Rules of Civil Procedure does not authorize a dis-

12062 WHITTLESTONE v. HANDI-CRAFT CO.

trict court to strike a claim for damages on the ground that

such damages are precluded as a matter of law. We reverse

and remand.

I. Background

In March 2006, Whittlestone (a California corporation with

its principal place of business in California) and Handi-Craft

(a Missouri corporation with its principal place of business in

Missouri) entered into a written, twenty-year contract. In the

contract, Handi-Craft was obligated to make minimum annual

unit or dollar amount purchases of Whittlestone products for

resale to third parties.

Relevant paragraphs of the contract stated:

5. Term. The “Term” of this Agreement shall

begin on the date of this Agreement and end after the

initial term described below, unless sooner termi-

nated pursuant to the Agreement.

....

20. Termination.

a. This Agreement may be terminated as to any or

all of the Whittlestone Products at any time by the

mutual written consent of both parties.

b. This Agreement may be terminated as to any or

all of the Whittlestone Products by Handi-Craft upon

at least forty-five (45) days prior written notice to

Whittlestone in the event of the occurrence of any of

the following events and Whittlestone’s failure to

cure said default within said time:

1. The insolvency of Whittlestone; . . . .

WHITTLESTONE v. HANDI-CRAFT CO. 12063

2. If Whittlestone shall at any time commit

a breach of its obligations or fails or omits

to perform any of its material obligations

contained herein.

c. This Agreement may be terminated as to any or

all of the Whittlestone Products by Whittlestone

upon at least forty-five (45) days prior written notice

to Handi-Craft in the event of the occurrence of any

of the following events and Handi-Craft’s failure to

cure said default within said time:

1. The insolvency of Handi-Craft; . . . .

2. If Handi-Craft shall at any time commit

a breach of its obligations or fails or omits

to perform any of its material obligations

contained herein.

d. Neither party, by reason of the termination or

nonrenewal of this Agreement for any or all of the

Whittlestone Products, shall be liable to the other for

compensation, reimbursement or damages because

of the loss of anticipated sales or prospective profits

or because of expenditures, investments, leases,

property improvements or other matters related to

the business or good will of either party.

....

f. Upon termination of this Agreement as to any

or all of the Whittlestone Products as a result of a

material breach by Whittlestone, Handi-Craft, at its

option, shall be relieved from any obligation to dis-

tribute any further shipment of any Whittlestone

Products and may cancel all of its unshipped orders

for such Whittlestone Products. . . . Upon termina-

tion of this Agreement as to any or all of the Whittle-

12064 WHITTLESTONE v. HANDI-CRAFT CO.

stone Products as a result of a material breach by

Handi-Craft, Whittlestone at its option, shall be

relieved from any obligation to ship any further ship-

ment of any Whittlestone Products, and Handi-Craft

must accept delivery of any remaining shipped or

unshipped orders for such Whittlestone Products and

Handi-Craft will be held liable for any and all such

orders.

....

i. This Agreement may be terminated by Whittle-

stone, at any time after the date that is eighteen (18)

months following a Change in Control in the owner-

ship of Handi-Craft upon ten (10) days prior written

notice to Handi-Craft.

j. This Agreement may be terminated by Handi-

Craft, at any time after the date that is eighteen (18)

months following a Change in Control in the owner-

ship of Whittlestone upon ten (10) days prior written

notice to Whittlestone.

Handi-Craft unilaterally withdrew from the contract in June

2008—only two years into the twenty-year term. Shortly

thereafter, Whittlestone filed suit against Handi-Craft for

breach of contract, and requested damages, “including loss of

the value of the twenty year contract for Whittlestone prod-

ucts including minimum annual unit or dollar purchases by

Handi-Craft, lost profits, consequential damages [and] other-

wise unearned credits and discounts granted to Handi-Craft is

[sic] excess of $250,000.” (hereinafter, these various damages

are referred to generally as “lost profits and consequential

damages”). Whittlestone also requested restitutionary relief.

A. The Rule 12(f) Motion

On October 9, 2008, Handi-Craft filed a Rule 12(f) motion

to strike those portions of Whittlestone’s complaint that

WHITTLESTONE v. HANDI-CRAFT CO. 12065

sought the recovery of lost profits and consequential damages.

Handi-Craft claimed that such damages were barred by Para-

graph 20(d) of the contract.

In an order dated November 18, 2008, the district court

granted Handi-Craft’s motion to strike. Without deciding

which state’s law governed the contract, the district court

found that the provision limiting lost profits and consequential

damages was enforceable under either Missouri or California

law. It then found that the contract between the two parties

clearly excluded the damages sought by Whittlestone.

Accordingly, it struck Whittlestone’s claim for “lost profits,”

“consequential damages,” the “loss of value of the twenty

year contract for Whittlestone products including minimum

annual unit or dollar purchases by Handi-Craft,” and other

“unearned credits and discounts” from the complaint. Whittle-

stone then filed a motion for reconsideration, which was

denied. Whittlestone now appeals.

II. Standard of Review

“We review the district court’s decision to strike matter

pursuant to Federal Rule of Civil Procedure 12(f) for abuse of

discretion.” Nurse v. United States, 226 F.3d 996, 1000 (9th

Cir. 2000). However, the issue presented here is not whether

the district court properly struck the matter under Rule 12(f),

but whether Rule 12(f) authorizes the district court to strike

such matter at all. The panel reviews this purely legal issue de

novo. California Scents v. Surco Prods., Inc., 406 F.3d 1102,

1105 (9th Cir. 2005) (“This court reviews de novo a district

court’s interpretation of the Federal Rules of Civil Proce-

dure.”).

III. Discussion

Whittlestone argues that the district court erred by striking

its claim for lost profits and consequential damages from the

complaint, because courts may not resolve “disputed and sub-

12066 WHITTLESTONE v. HANDI-CRAFT CO.

stantial factual or legal issue[s] in deciding . . . a motion to

strike.” We agree and remand this case back to the district

court with instructions that the relevant portions of Whittle-

stone’s complaint not be stricken under Rule 12(f).

A. Whether the District Court Erred by Striking a

Claim for Damages in a Rule 12(f) Motion

[1] Rule 12(f) of the Federal Rules of Civil Procedure

states that a district court “may strike from a pleading an

insufficient defense or any redundant, immaterial, imperti-

nent, or scandalous matter.” “The function of a 12(f) motion

to strike is to avoid the expenditure of time and money that

must arise from litigating spurious issues by dispensing with

those issues prior to trial . . . .” Fantasy, Inc. v. Fogerty, 984

F.2d 1524, 1527 (9th Cir. 1993) (quotation marks, citation,

and first alteration omitted), rev’d on other grounds by

Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994). Our interpreta-

tion of the Federal Rules of Civil Procedure begins with the

relevant rule’s “plain meaning.” Kootenai Tribe of Idaho v.

Veneman, 313 F.3d 1094, 1111 (9th Cir. 2002). Thus, we

begin our analysis by determining whether Whittlestone’s

claim for lost profits and consequential damages was: (1) an

insufficient defense; (2) redundant; (3) immaterial; (4) imper-

tinent; or (5) scandalous.

[2] It is quite clear that none of the five categories covers

the allegations in the pleading sought to be stricken by Handi-

Craft. First, the claim for damages is clearly not an insuffi-

cient defense; nobody has suggested otherwise. Second, the

claim for damages could not be redundant, as it does not

appear anywhere else in the complaint. Third, the claim for

damages is not immaterial, because whether these damages

are recoverable relates directly to the plaintiff’s underlying

claim for relief. See Fogerty, 984 F.2d at 1527 (“Immaterial

matter is that which has no essential or important relationship

to the claim for relief or the defenses being plead.”) (quoting

5A Charles A. Wright & Arthur R. Miller, Federal Practice

WHITTLESTONE v. HANDI-CRAFT CO. 12067

and Procedure § 1382, at 706-07 (1990) (quotation marks

omitted)). Fourth, the claim for damages is not impertinent,

because whether these damages are recoverable pertains

directly to the harm being alleged. Id. (“Impertinent matter

consists of statements that do not pertain, and are not neces-

sary, to the issues in question.”) (quotation marks and citation

omitted). Finally, a claim for damages is not scandalous, and

Handi-Craft has not alleged as much.

[3] Notwithstanding this, Handi-Craft argues that Whittle-

stone’s claim for lost profits and consequential damages

should be stricken from the complaint, because such damages

are precluded as a matter of law. Thus, Handi-Craft’s 12(f)

motion was really an attempt to have certain portions of Whit-

tlestone’s complaint dismissed or to obtain summary judg-

ment against Whittlestone as to those portions of the suit—

actions better suited for a Rule 12(b)(6) motion or a Rule 56

motion, not a Rule 12(f) motion.1 Compare Yamamoto v.

Omiya, 564 F.2d 1319, 1327 (9th Cir. 1977) (“Rule 12(f) is

‘neither an authorized nor a proper way to procure the dis-

missal of all or a part of a complaint.’ ”) (citing 5A Charles

A. Wright & Arthur R. Miller, Federal Practice and Proce-

dure § 1380, at 782 (1969)), with Rutman Wine Co. v. E.&J.

Gallo Winery, 829 F.2d 729, 738 (9th Cir. 1987) (“The pur-

pose of [Rule] 12(b)(6) is to enable defendants to challenge

the legal sufficiency of complaints . . . .”).

[4] Were we to read Rule 12(f) in a manner that allowed

litigants to use it as a means to dismiss some or all of a plead-

ing (as Handi-Craft would have us do here), we would be cre-

ating redundancies within the Federal Rules of Civil

Procedure, because a Rule 12(b)(6) motion (or a motion for

1

When, on a motion under Rule 12(b)(6), “matters outside the pleadings

are presented to and not excluded by the court, the motion must be treated

as one for summary judgment under Rule 56. All parties must be given a

reasonable opportunity to present all the material that is pertinent to the

motion.” Fed. R. Civ. P. 12(d).

12068 WHITTLESTONE v. HANDI-CRAFT CO.

summary judgment at a later stage in the proceedings) already

serves such a purpose.

Moreover, Rule 12(f) motions are reviewed for “abuse of

discretion,” Nurse, 226 F.3d at 1000, whereas 12(b)(6)

motions are reviewed de novo, San Pedro Hotel Co., Inc. v

City of Los Angeles, 159 F.3d 470, 477 (9th Cir. 1998). Thus,

if a party may seek dismissal of a pleading under Rule 12(f),

the district court’s action would be subject to a different stan-

dard of review than if the district court had adjudicated the

same substantive action under Rule 12(b)(6). Applying differ-

ent standards of review, when the district court’s underlying

action is the same, does not make sense.

[5] We therefore hold that Rule 12(f) does not authorize

district courts to strike claims for damages on the ground that

such claims are precluded as a matter of law.2

(Text continued on page 12070)

2

Even were we to examine the district court’s actions under Rule

12(b)(6), we would be required to hold that the district court erred in dis-

missing Whittlestone’s claim for lost profits and consequential damages.

Under both California law and Missouri law, “[t]he whole of a contract

is to be taken together, so as to give effect to every part, if reasonably

practicable, each clause helping to interpret the other.” Cal. Civ. Code

§ 1641; Myers v. Union Elec. Light & Power Co., 66 S.W.2d 565, 568

(Mo. 1933). Reviewing the entirety of the contract to determine the mean-

ing of “termination” as used in Paragraph 20(d) and “constru[ing] the

pleadings in the light most favorable to the nonmoving party,” Knievel v.

ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005), it appears the district court

erred by ruling that Paragraph 20(d) necessarily precluded recovery of the

damages sought by Whittlestone.

The contract states that the agreement is for a twenty-year term, “unless

sooner terminated pursuant to the Agreement,” suggesting that a termina-

tion must be done exclusively according to the terms of the contract. In

a subsequent paragraph, Paragraph 20 entitled “Termination,” the contract

prescribes four methods for terminating the contract. First, it notes that the

contract may be terminated “by the mutual written consent of both par-

ties.” Paragraph 20(a). Second, either party may terminate the contract,

upon giving forty-five days prior written notice and a chance to cure, if

the other party becomes insolvent. Paragrah 20(b)(1) & (c)(1). Third,

WHITTLESTONE v. HANDI-CRAFT CO. 12069

either party may terminate the contract, upon giving forty-five days prior

written notice and a chance to cure, if the other party breaches a material

obligation under the contract. Paragraph 20(b)(2) & (c)(2). And finally,

either party may terminate the contract if there is a change in control in

the ownership of the other party. Paragraph 20(i) & (j). These are the only

four methods for terminating the contract “spelled out” in Paragraph 20;

unilateral withdrawal of a party from the contact is not one of them. Thus,

as Whittlestone plausibly argues, “interpreting paragraph 20(d) in light of

the other provisions in the agreement, . . . a ‘termination’ [triggering] the

damages limitation provision [of Paragraph 20(d)] must be a termination

under one of the four grounds and procedures specified elsewhere in para-

graph 20 (or the expiration of the 20-year term of the agreement).” There-

fore, construing the pleadings in the light most favorable to Whittlestone,

Whittlestone’s claim for damages survives because the contract arguably

was not terminated pursuant to Paragraph 20(d).

Pointing to language in paragraph 20(f) of the contract that described

“termination . . . as a result of a material breach by [the parties],” the dis-

trict court found that the “the term ‘termination’ and the ensuing damage

limitation set forth in Paragraph 20(d) apply to terminations derived from

breaches of the Agreement.” The district court reasoned that, “[t]his lan-

guage demonstrates that the parties intended ‘termination,’ as used in the

Agreement, to encompass termination resulting from a material breach of

the Agreement.” Construing the pleadings in the light most favorable to

Whittlestone, however, this reasoning fails. Whittlestone does not dispute

that the contract can be terminated by one party’s material breach of the

contract. Rather, Whittlestone argues that, under Paragraph 20(b)(2) &

(c)(2) of the agreement, in the event of a breach of contract the contract

may be terminated only by the non-breaching party. Thus, because Handi-

Craft was the breaching party, it could not terminate the contract pursuant

to Paragraph 20 (b)(2). Paragraph 20(f) is not inconsistent with this propo-

sition, as it speaks in terms of the non-breaching party being able to termi-

nate upon breach by the other party. Therefore, Whittlestone’s

interpretation of the contract was at least as plausible as Handi-Craft’s,

and the district court erred by ruling that Whittlestone’s proffered interpre-

tation necessarily failed as a matter of law.

Construing the pleadings in the light most favorable to Whittlestone, it

appears Whittlestone’s claim for lost profits and consequential damages is

not per se barred by the contract. The parties may well argue at a later

stage of litigation that the intent of the parties or properly admitted extrin-

sic evidence supports their respective interpretations of the contract. ASP

12070 WHITTLESTONE v. HANDI-CRAFT CO.

IV. Conclusion

[6] We hold that Rule 12(f) of the Federal Rules of Civil

Procedure does not authorize a district court to dismiss a

claim for damages on the basis it is precluded as a matter of

law. Therefore, we remand this case back to the district court

with specific instructions to not dismiss Whittlestone’s claim

for lost profits and consequential damages under a Rule 12(f)

motion.

REVERSED AND REMANDED.

Props. Group v. Fard, Inc., 35 Cal. Rptr. 3d 343, 349 (Ct. App. 2005);

Good Hope Missionary Baptist Church v, St. Louis Alarm Monitoring Co.,

Inc., 306 S.W.3d 185, 192 (Mo. Ct. App. 2010). Such factually based

arguments are appropriate on remand at a later stage of litigation, not on

the pleadings.