finding failure to cure 13 pleading deficiencies is “strong indication that the plaintiffs have no additional facts to 14 plead”
How later courts described this case
- finding failure to cure 13 pleading deficiencies is “strong indication that the plaintiffs have no additional facts to 14 plead”
- finding breach of contract claim subsumed 10 negligent misrepresentation claim
- finding plaintiff could not pursue breach of contract and quasi-contract 5 claims where plaintiff did not deny the existence or enforceability of the alleged 6 agreement
Written by the judges who cited it.
The opinion
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 1 of 14 Page ID #:446
O
1
2
3
4
5
6
7
8 United States District Court
9 Central District of California
10
11 HERBALIFE INTERNATIONAL OF Case № 2:22-cv-00347-ODW (AGRx)
AMERICA, INC.,
12
Plaintiff, ORDER GRANTING IN PART AND
13
v. DENYING IN PART PLAINTIFF’S
14 MOTION TO DISMISS FIRST
15 E INA CS .T eE t R alN ., COMPUTER EXCHANGE AMENDED COUNTERCLAIM [39]
16
Defendants.
17
18 I. INTRODUCTION
19 Plaintiff Herbalife International of America, Inc. brings suit against Defendant
20 Eastern Computer Exchange, Inc., alleging that Eastern fraudulently ordered millions
21 of dollars of computer equipment on behalf of Herbalife. (First Am. Compl. (“FAC”)
22 ¶ 5, ECF No. 35.) In its First Amended Counterclaim, Eastern asserts six
23 counterclaims against Herbalife. (First Am. Countercl. (“Am. Countercl.”) ¶¶ 34–71,
24 ECF No. 38.) Herbalife now moves to dismiss four of Eastern’s counterclaims
25 pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Mot. Dismiss Am.
26 Countercl. (“Motion” or “Mot.”), ECF No. 39-1.) The Motion is fully briefed.
27
28
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 2 of 14 Page ID #:447
1 (Opp’n, ECF No. 40; Reply, ECF No. 41.) For the reasons set forth below, the Court
2 GRANTS IN PART and DENIES IN PART Herbalife’s Motion.1
3 II. BACKGROUND
4 Herbalife is a global nutrition company that provides consumers with nutrition
5 solutions in the areas of weight management, sports nutrition, and health and wellness.
6 (FAC ¶ 6.) Eastern is a technology company that partners with computer equipment
7 manufacturers to resell such equipment to end users such as Herbalife. (Id. ¶ 13.)
8 On December 19, 2019, Herbalife and Eastern entered into a Master Services
9 Agreement (“MSA”). (Am. Countercl. ¶ 9.) Under the MSA, Herbalife agreed to pay
10 Eastern for professional services, including, but not limited to, “consulting services,
11 design, and implementation, expansion/upgrades, health & performance assessments
12 of Herbalife’s networks, servers, cloud systems, storage, and data protection.” (Id.
13 ¶¶ 9–10.) Eastern and Herbalife also signed a Non-Disclosure Agreement (“NDA”),
14 prohibiting the parties from using the confidential information of the other party. (Id.
15 ¶¶ 6–8.) In January 2020, Eastern began working with Herbalife’s storage and
16 network teams to review Herbalife’s current systems and to create solutions for
17 Herbalife’s business continuity and disaster recovery needs (“BCDR”). (Id. ¶ 11.)
18 In February 2020, Herbalife asked Eastern to provide a BCDR solution and, for
19 the next three months, Eastern worked toward that objective. (Id. ¶ 12.) In
20 March 2020, Eastern proposed “Phase 1,” an initial BCDR solution for Herbalife’s
21 Winston Salem location that would cost no more than $11.5 million dollars. (Id.)
22 Eastern submitted a written proposal, and Herbalife verbally awarded Phase 1 to
23 Eastern. (Id.) However, after Herbalife awarded Phase 1 to Eastern, Herbalife
24 informed Eastern that Herbalife would require approval from the Board of Directors
25 of the Phase 1 and subsequent Phase 2 proposals. (Id. ¶ 13.)
26
27
28 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the
matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15.
2
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1 In May 2020, senior officers at Herbalife requested that Eastern begin to work
2 on “Phase 2” of the BCDR project. (Id.) In June 2020, Eastern submitted its proposal
3 for Phase 2. (Id.) Between May and October 2020, approximately eighteen Eastern
4 employees spent over 8,000 hours to prepare the proposals for Phases 1 and 2 for
5 presentation to the Board of Directors. (Id. ¶ 15.)
6 On June 29, 2020, Eastern and Herbalife entered into a separate Enterprise
7 License Agreement (“ELA”), whereby Herbalife agreed to purchase certain software,
8 services, licenses, and purchasing tokens or credits from Eastern. (Id. ¶ 32.) Pursuant
9 to the terms of the ELA, Eastern purchased manufacturer tokens and licenses on
10 behalf of Herbalife. (Id.) Herbalife never paid Eastern for the tokens and licenses.
11 (Id.)
12 On October 27, 2020, Rhonda Vetere, Herbalife’s Executive Vice President and
13 Chief Information Officer, presented the proposals for Phases 1 and 2 of the BCDR
14 project to the Board of Directors. (Id. ¶¶ 5, 17.) Vetere confirmed to Eastern that the
15 Board of Directors approved, and awarded to Eastern, the BCDR project. (Id. ¶ 17.)
16 On October 28, 2020, another Herbalife representative, Peter Bray, “confirmed that
17 Herbalife awarded Phase 1 and Phase 2 to Eastern, and instructed Eastern’s team to
18 ‘order [the equipment for] Phase 1 and Phase 2 tomorrow.’” (Id. ¶ 18.) On
19 October 29, 2020, relying upon Herbalife’s communications, including express
20 instructions to order the equipment the next day, Eastern began communicating with
21 equipment managers. (Id. ¶ 20.) The following day, Eastern placed an order on
22 Herbalife’s behalf for the equipment for the BCDR project. (Id.) Herbalife later
23 refused to pay Eastern for the services Eastern rendered and the equipment Eastern
24 ordered on Herbalife’s behalf for the BCDR project. (Id. ¶ 31.)
25 As a result of the ensuing dispute between the parties, Herbalife sued Eastern.
26 (Compl., ECF No. 1.) Eastern asserted six counterclaims against Herbalife, which
27 Herbalife moved to dismiss. (Answer & Countercl., ECF No. 16; Mot. Dismiss
28 Countercl., ECF No. 19.) After the Court granted in part and denied in part
3
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 4 of 14 Page ID #:449
1 Herbalife’s motion with leave to amend, (Order, ECF No. 37), Eastern filed its
2 operative First Amended Counterclaim, again asserting six counterclaims against
3 Herbalife: (1) breach of oral contract; (2) breach of written contract; (3) promissory
4 estoppel; (4) negligent misrepresentation; (5) quantum meruit; and (6) conversion,
5 (Am. Countercl. ¶¶ 34–71). Herbalife now moves to dismiss four of Eastern’s
6 amended counterclaims: (1) breach of oral contract (first counterclaim); (2) negligent
7 misrepresentation (fourth counterclaim); (3) quantum meruit (fifth counterclaim); and
8 (4) conversion (sixth counterclaim).
9 III. LEGAL STANDARD
10 A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable
11 legal theory or insufficient facts pleaded to support an otherwise cognizable legal
12 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). To
13 survive a dismissal motion, a complaint need only satisfy “the minimal notice
14 pleading requirements of Rule 8(a)(2)”—“a short and plain statement of the claim.”
15 Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003). The “[f]actual allegations must be
16 enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v.
17 Twombly, 550 U.S. 544, 555 (2007). Pursuant to this standard, the complaint must
18 “contain sufficient factual matter, accepted as true, to state a claim to relief that is
19 plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation
20 marks omitted).
21 The determination of whether a complaint satisfies the plausibility standard is a
22 “context-specific task that requires the reviewing court to draw on its judicial
23 experience and common sense.” Id. at 679. A court is generally limited to the
24 pleadings and must construe “[a]ll factual allegations set forth in the complaint . . . as
25 true and . . . in the light most favorable” to the plaintiff. Lee v. City of Los Angeles,
26 250 F.3d 668, 688 (9th Cir. 2001) (internal quotation marks omitted). However, a
27 court need not blindly accept “allegations that are merely conclusory, unwarranted
28 deductions of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors,
4
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 5 of 14 Page ID #:450
1 266 F.3d 979, 988 (9th Cir. 2001). Ultimately, there must be sufficient factual
2 allegations “to give fair notice and to enable the opposing party to defend itself
3 effectively,” and “the factual allegations that are taken as true must plausibly suggest
4 an entitlement to relief, such that it is not unfair to require the opposing party to be
5 subjected to the expense of discovery and continued litigation.” Starr v. Baca,
6 652 F.3d 1202, 1216 (9th Cir. 2011).
7 Where a district court grants a motion to dismiss, it should generally provide
8 leave to amend unless it is clear the complaint could not be saved by any amendment.
9 See Fed. R. Civ. P. 15(a); Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d
10 1025, 1031 (9th Cir. 2008).
11 IV. DISCUSSION
12 Herbalife moves to dismiss Eastern’s first, fourth, fifth, and sixth
13 counterclaims.
14 A. Breach of Oral Contract (First Counterclaim)
15 On Herbalife’s first motion to dismiss Eastern’s breach of oral contract
16 counterclaim, the Court dismissed this counterclaim for lack of sufficient facts
17 concerning the details of the oral contract and its formation. (Order 5–6.) The Court
18 granted Eastern leave to amend these deficiencies. (Id.) Eastern amended its
19 counterclaim, and Herbalife now moves to dismiss on the basis that Eastern fails to
20 sufficiently plead the terms of the alleged contracts, which terms Herbalife breached,
21 and facts supporting any breaches. (Mot. 4–6.)
22 Under California law, the elements for breach of oral contract are identical to
23 those for breach of written contract. Francois & Co., LLC v. Nadeau, 334 F.R.D. 588,
24 597–98 (C.D. Cal. 2020). “A cause of action for damages for breach of contract is
25 comprised of the following elements: (1) the contract, (2) plaintiff’s performance or
26 excuse for nonperformance, (3) defendant’s breach, and (4) the resulting damages to
27 plaintiff.” Careau & Co. v. Sec. Pac. Bus. Credit, Inc., 222 Cal. App. 3d 1371, 1388
28 (1990). Moreover, the formation of a contract requires mutual assent consisting of an
5
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 6 of 14 Page ID #:451
1 offer and acceptance. See Netbula, LLC v. BindView Dev. Corp., 516 F. Supp. 2d
2 1137, 1155 (N.D. Cal. 2007). “Mutual assent is accomplished when a specific offer is
3 communicated to the offeree, and an acceptance is subsequently communicated to the
4 offeror.” Id.
5 In its amended breach of oral contract counterclaim, Eastern alleges additional
6 facts concerning the formation and terms of its alleged contracts with Herbalife. (See
7 Am. Countercl. ¶¶ 34–39.) First, Eastern alleges that it submitted to Herbalife a
8 written proposal for Phase 1 of the BCDR project. (Id. ¶¶ 12, 34.) In that proposal,
9 Eastern offered to develop and complete an initial BCDR solution for Herbalife’s
10 Winston Salem location, including all necessary software, equipment, and services,
11 for a cost of no more than $11.5 million dollars. (Id.) Eastern further alleges that, in
12 April 2020, Mike Familetti, a Senior Manager at Herbalife, orally accepted Eastern’s
13 proposal for Phase 1. (Id.) This is sufficient to allege that Eastern and Herbalife
14 entered into a contract for Phase 1 of the BCDR project.
15 Second, Eastern alleges that it submitted to Herbalife a proposal for Phase 2 of
16 the BCDR project, as well as a subsequent bid. (Id. ¶ 35.) Pursuant to Eastern’s
17 Phase 2 bid, Eastern offered to provide all software, equipment, and services
18 necessary to implement and complete Phase 2 of the BCDR project for a cost of
19 $42,413,678.30. (Id.) Eastern alleges that, on December 28, 2020, Rhonda Vetere,
20 Herbalife’s Executive Vice President and Chief Information Officer, accepted
21 Eastern’s Phase 2 bid. (Id. ¶¶ 5, 35.) This is sufficient to allege that Eastern and
22 Herbalife entered into a contract for Phase 2 of the BCDR project.
23 Third, Eastern alleges that, at an October 28, 2020 meeting, Marty O’Brien, an
24 Eastern employee, “asked whether Herbalife would like to order the equipment
25 necessary for the BCDR project.” (Id. ¶¶ 18, 36.) In response, Peter Bray, on behalf
26 of Herbalife, instructed O’Brien to purchase the equipment the following day, to be
27 delivered before the end of the year. (Id. ¶ 36.) Eastern understood Herbalife would
28
6
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1 pay for the cost of the equipment. (Id.) This is sufficient to allege that Eastern and
2 Herbalife entered into a contract for the purchase of this equipment.
3 Eastern alleges that it performed in accordance with these contracts, except to
4 the extent it was excused. (Id. ¶ 37.) Eastern further alleges that Herbalife breached
5 these contracts by failing to move forward with Phases 1 and 2 of the BCDR project
6 and failing to pay Eastern. (Id. ¶ 38.) Although Eastern’s allegation that Herbalife
7 “fail[ed] and refus[ed] to move forward with Phase 1 and Phase 2 of the approved
8 BCDR project” lacks specificity, Eastern does, at a minimum, sufficiently allege that
9 Herbalife breached these contracts by failing to pay Eastern pursuant to the contracts.
10 (Id. ¶¶ 31, 38.) The Court finds that, at this stage, these allegations are sufficient for
11 Eastern to proceed on its breach of oral contract counterclaim.
12 Accordingly, the Court DENIES Herbalife’s Motion as to Eastern’s
13 counterclaim for breach of oral contract.
14 B. Negligent Misrepresentation (Fourth Counterclaim)
15 In its prior order granting Herbalife’s motion to dismiss Eastern’s negligent
16 misrepresentation counterclaim, the Court found that the economic loss rule barred
17 Eastern’s counterclaim as alleged. (Order 9.) The Court granted Eastern leave to
18 amend. (Id.) Herbalife again moves to dismiss Eastern’s amended negligent
19 misrepresentation counterclaim on the basis that it is barred under the economic loss
20 doctrine and also that Eastern has not satisfied the heightened pleading standard of
21 Rule 9(b). (Mot. 6–9.)
22 Under the economic loss doctrine, “purely economic losses are not recoverable
23 in tort.” NuCal Foods, Inc. v. Quality Egg LLC, 918 F. Supp. 2d 1023, 1028
24 (E.D. Cal. 2013). Moreover, the economic loss doctrine “generally bars tort claims
25 based on contract breaches, thereby limiting contracting parties to contracting
26 damages.” UMG Recordings, Inc v. Glob. Eagle Ent., Inc., 117 F. Supp. 3d 1092,
27 1103 (C.D. Cal. 2015) (internal quotation marks omitted). “Courts have also applied
28 the economic loss rule to bar negligent misrepresentation claims where the
7
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 8 of 14 Page ID #:453
1 purportedly negligent conduct is conceptually indistinct from a contract breach.” Id.
2 at 1105.
3 Here, Eastern’s negligent misrepresentation and breach of contract
4 counterclaims are both premised on Eastern and Herbalife’s alleged contract
5 concerning the purchase of equipment for Phases 1 and 2 of the BCDR project. (Am.
6 Countercl. ¶¶ 36, 52.) As the Court explained in its prior order, the economic loss rule
7 accordingly bars Eastern from bringing a breach of contract theory and then arguing
8 the same facts pursuant to a tort theory as well. (See Order 9 (citing UMG
9 Recordings, 117 F. Supp. 3d at 1105 (finding breach of contract claim subsumed
10 negligent misrepresentation claim)).)
11 Eastern argues that California courts recognize exceptions to the economic loss
12 rule, including where the conduct alleged: (1) “breaches a duty imposed by some type
13 of ‘special’ or ‘confidential’ relationship,” or (2) “was committed ‘intending or
14 knowing that such a breach will cause severe, unmitigable harm in the form of [. . .]
15 substantial consequential damages.’” (Opp’n 11 (alterations in original)); see also
16 F.D.I.C. v. CoreLogic Valuation Servs., LLC, No. SA CV 11-0704 DOC (ANx),
17 2011 WL 5554324, at *4 (C.D. Cal. Nov. 14, 2011). However, the Court finds that
18 Eastern has not alleged sufficient facts indicating that its negligent misrepresentation
19 counterclaim falls within one of these exceptions. First, Eastern does not allege that it
20 had a special or confidential relationship with Herbalife that would impose any
21 non-contractual duties and, rather, refers only to “the working relationship that
22 Eastern and Herbalife had developed over the course of the [BCDR] project.”2
23 (Opp’n 11; Am. Countercl. ¶ 55.) Second, Eastern’s allegations of harm—“loss of its
24 business reputation with its vendors, and the restocking fee that it had to pay to its
25
26 2 Eastern also alleges that it relied upon “Mr. Bray’s representations due to Mr. Bray’s role at
Eastern.” (Am. Countercl. ¶ 55.) However, Eastern inconsistently alleges that Bray is a
27
representative of Eastern, (id.), and Herbalife, (id. ¶¶ 18, 36). Further, Eastern does not explain how
28 “Mr. Bray’s role at Eastern,” or at Herbalife for that matter, conferred a special or confidential
relationship that would impose a non-contractual duty. (Id. ¶¶ 18, 20, 36, 52.)
8
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 9 of 14 Page ID #:454
1 third-party vendor,” (Am. Countercl. ¶ 56)—are “purely economic losses [that] are
2 not recoverable in tort,” NuCal Foods, 918 F. Supp. 2d at 1028; Worldwide Media,
3 Inc. v. Twitter, Inc., No. 17-cv-07335-VKD, 2018 WL 5304852, at *10 (N.D. Cal.
4 Oct. 24, 2018) (“[D]amages to a business’s goodwill and reputation are commercial
5 losses encompassed by the economic loss doctrine.”).
6 Because the Court finds that Eastern’s negligent misrepresentation counterclaim
7 is barred by the economic loss doctrine, the Court need not reach the question of
8 whether Eastern’s allegations satisfy Rule 9(b) pleading standards. The Court
9 GRANTS Herbalife’s Motion as to Eastern’s negligent misrepresentation
10 counterclaim and, given that Eastern already had an opportunity to cure these
11 deficiencies, DISMISSES this claim without leave to amend. See Zucco Partners,
12 LLC v. Digimarc Corp., 552 F.3d 981, 1007 (9th Cir. 2009) (finding failure to cure
13 pleading deficiencies is “strong indication that the plaintiffs have no additional facts to
14 plead”).
15 C. Quantum Meruit (Fifth Counterclaim)
16 In its Amended Counterclaim, Eastern alleges for the first time3 that Herbalife
17 is liable to Eastern in quantum meruit for the services and goods that Eastern provided
18 in relation to Phases 1 and 2 of the BCDR project. (Am. Countercl. ¶¶ 58–66.)
19 Herbalife moves to dismiss Eastern’s quantum meruit counterclaim on the basis that
20 Eastern cannot allege both an express contract and an implied-in-law contract based
21 on the same transaction without also alleging facts to reconcile its contradictory
22 claims. (Mot. 10.)
23
24
25 3 The Court granted Eastern limited leave to amend to correct the deficiencies identified in the
Court’s prior order. (Order 11.) The Court did not grant Eastern leave to add additional claims.
26 (Id.) This alone is sufficient to dismiss Eastern’s quantum meruit counterclaim. See DeLeon v.
Wells Fargo Bank, N.A., 10-cv-01390-LHK, 2010 WL 4285006, at *3 (N.D. Cal. Oct. 22, 2010) (“In
27
this case, the prior order granting leave to amend was limited in scope, and Plaintiffs were therefore
28 required to seek leave of the Court before adding new claims.”). Regardless, the Court finds that
Eastern fails to allege sufficient facts in support of its quantum meruit counterclaim.
9
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 10 of 14 Page ID #:455
1 Under California law, “an action in quasi-contract . . . does not lie when an
2 enforceable, binding agreement exists defining the rights of the parties.” Paracor
3 Fin., Inc. v. Gen. Elec. Cap. Corp., 96 F.3d 1151, 1167 (9th Cir. 1996). However, at
4 the pleading stage, a plaintiff may assert alternative, and even inconsistent, claims.
5 Fed. R. Civ. P. 8(d). Applying this rule, “[s]ubstantial authority supports pleading
6 legal and equitable contract claims in the alternative to one another, even when the
7 factual predicate to the legal claims would defeat the equitable claims.” 1 Energy
8 Sols., Inc. v. Nicholas Holiday, Inc., No. CV-13-5000-MWF (Ex), 2013 WL
9 12133654, at *3 (C.D. Cal. Nov. 5, 2013). Nonetheless, a plaintiff must allege
10 sufficient facts to state each claim for relief such that it is plausible on its face. See
11 Iqbal, 556 U.S. at 678. Thus, “even though a plaintiff can allege multiple theories of
12 recovery, to pursue a quantum meruit claim, a plaintiff may not plead the existence of
13 an enforceable contract and maintain a quasi-contract claim at the same time, unless
14 the plaintiff has pled facts suggesting that the contract may be unenforceable or
15 invalid.” Jacobs v. Sustainability Partners LLC, No. 20-cv-01981-PJH, 2020 WL
16 5593200, at *17 (N.D. Cal. Sept. 18, 2020) (internal quotation marks omitted)
17 (collecting cases).
18 Here, Eastern seeks to enforce its alleged contracts with Herbalife related to the
19 BCDR project and, at the same time, brings a quantum meruit counterclaim to recover
20 for the same goods and services that it provided to Herbalife under those contracts, in
21 relation to the BCDR project. (Am. Countercl. ¶¶ 34–43, 58–66.) However, Eastern
22 fails to allege any facts suggesting that its alleged contracts with Herbalife are
23 unenforceable or invalid. Moreover, in its opposition brief, Eastern does not
24 substantively respond to Herbalife’s argument that such facts are required to state a
25 quasi-contract claim when Eastern seeks to simultaneously maintain a breach of
26 contract claim. (See Opp’n 8.) Rather, Eastern argues that, because Herbalife has
27 taken the position that there is no enforceable contract between the parties, Eastern
28 should be permitted to allege alternative theories. (Id.) “Although [Eastern] may
10
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 11 of 14 Page ID #:456
1 plead inconsistent claims that allege both the existence of an enforceable agreement
2 and the absence of an enforceable agreement,” it must plead sufficient facts to support
3 each of its claims. See Klein v. Chevron U.S.A., Inc., 202 Cal. App. 4th 1342, 1389–
4 90 (2012) (finding plaintiff could not pursue breach of contract and quasi-contract
5 claims where plaintiff did not deny the existence or enforceability of the alleged
6 agreement).
7 Because Eastern fails to allege any facts, even in the alternative, suggesting that
8 its alleged contracts with Herbalife are unenforceable or invalid, the Court GRANTS
9 Herbalife’s Motion as to Eastern’s quantum meruit counterclaim and DISMISSES
10 this claim with leave to amend.
11 D. Conversion (Sixth Counterclaim)
12 Finally, in its sixth counterclaim, Eastern alleges that Herbalife converted
13 Eastern’s confidential information by disclosing it to one of Eastern’s competitors.
14 (Am. Countercl. ¶¶ 67–71.) The Court previously dismissed Eastern’s conversion
15 counterclaim with leave to amend because Eastern failed to allege specific facts in
16 support of its claim, including how Herbalife took Eastern’s confidential information
17 and the type of confidential information that Herbalife disclosed. (Order 10.) Eastern
18 amended its conversion counterclaim to allege that Reed Haley, a Sourcing Analyst at
19 Herbalife, improperly disclosed and distributed Eastern’s confidential and proprietary
20 property—including confidential pricing terms, profit margins, business plans,
21 summaries, reports, pricing policies and methods, purchasing methods, vendor and
22 business partner identities, and bids—to an account executive at Eastern’s competitor,
23 CDW. (Am. Countercl. ¶¶ 25, 68–69.) Herbalife moves to dismiss this claim on the
24 basis that it is superseded by California’s Uniform Trade Secret Act (“CUTSA”) or,
25 alternatively, because Eastern fails to allege that it has been deprived of its property.
26 (Mot. 11–13.)
27 In California, conversion has three elements: “(1) the plaintiff’s ownership or
28 right to possession of the property at the time of the conversion; (2) the defendant’s
11
Case 2:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 12 of 14 Page ID #:457
1 conversion by a wrongful act or disposition of property rights; and (3) damages.”
2 Mindys Cosmetics, Inc. v. Dakar, 611 F.3d 590, 601 (9th Cir. 2010). “[C]onversion
3 traditionally required a taking of tangible property.” Silvaco Data Sys. v. Intel Corp.,
4 184 Cal. App. 4th 210, 239 n.21 (2010), disapproved of on other grounds by Kwikset
5 Corp. v. Superior Court, 51 Cal. 4th 310 (2011) (emphasis in original). Although
6 “[t]his restriction has been greatly eroded,” id., “‘information’ cannot be ‘stolen’
7 unless it constitutes property,” and “information is not property unless some law
8 makes it so,” id. at 239 (emphasis in original). Moreover, “the expansion of
9 conversion law to reach intangible property should not be permitted to ‘displace other,
10 more suitable law.’” Id. at 239 n.21.
11 CUTSA “provides for the civil recovery of ‘actual loss’ or other injury caused
12 by the misappropriation of trade secrets.” SunPower Corp. v. SolarCity Corp.,
13 No. 12-cv-00694-LHK, 2012 WL 6160472, at *3 (N.D. Cal. Dec. 11, 2012). CUTSA
14 defines “trade secret” as information that “[d]erives independent economic value . . .
15 from not being generally known,” and “[i]s the subject of efforts that are reasonable
16 under the circumstances to maintain its secrecy.” Cal. Civ. Code § 3426.1(d).
17 Applying CUTSA, the California Court of Appeal reasoned that “[i]nformation that
18 does not fit this definition, and is not otherwise made property by some provision of
19 positive law, belongs to no one, and cannot be converted or stolen.” Silvaco, 184 Cal.
20 App. 4th at 239 n.22. Moreover, “the majority of district courts that have considered
21 Silvaco have held that CUTSA supersedes claims based on the misappropriation of
22 information that does not satisfy the definition of trade secret under CUTSA.”
23 SunPower, 2012 WL 6160472, at *6.
24 Here, Eastern’s conversion counterclaim is based on the alleged taking of
25 Eastern’s confidential information. (Am. Countercl. ¶¶ 67–71.) Eastern does not
26 allege that the relevant information constitutes a trade secret. (Id.) Moreover,
27 although Eastern asserts in a conclusory fashion that the confidential information is of
28 a “proprietary nature,” (id. ¶ 68), it does not allege any facts or positive law to support
12
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1 that assertion. Thus, absent allegations indicating a property right in the confidential
2 information conferred by positive law, Eastern’s conversion counterclaim is
3 superseded by CUTSA. See SunPower, 2012 WL 6160472, at *6.
4 In addition, even if Eastern’s conversion claim was not superseded by CUTSA,
5 Eastern fails to allege sufficient facts indicating that it was wrongfully dispossessed of
6 its confidential information or, alternatively, of its value. See Hiossen, Inc. v. Kim,
7 No. CV 16-01579 SJO (MRWx), 2016 WL 10987365, at *6 (C.D. Cal. Aug. 17, 2016)
8 (finding plaintiff failed to state a claim for conversion where plaintiff failed to allege
9 dispossession of value of converted information). Although Eastern alleges that
10 “Haley, acting on behalf of Herbalife, improperly disclosed and distributed” the
11 confidential information, (Am. Countercl. ¶ 69), Eastern does not allege that it was
12 dispossessed of that information or its value. This is insufficient to state a claim for
13 conversion.
14 In light of these deficiencies, the Court GRANTS Herbalife’s Motion as to
15 Eastern’s conversion counterclaim and DISMISSES this claim with leave to amend.
16 In its opposition brief, Eastern requests leave to proceed with a misappropriation of
17 trade secret counterclaim in lieu of its conversion counterclaim. (Opp’n 9–10.) The
18 Court DENIES Eastern’s request because Eastern previously amended its conversion
19 counterclaim and the request is now untimely, coming after the deadline to hear a
20 motion to amend the pleadings in this matter. (See id.; see also Scheduling Order 24,
21 ECF No. 28.)
22 ///
23 ///
24 ///
25 ///
26 ///
27 ///
28 ///
13
Case|P:22-cv-00347-ODW-AGR Document 52 Filed 12/28/22 Page 14o0f14 Page ID #:459
1 Vv. CONCLUSION
2 For the reasons discussed above, the Court GRANTS in PART and DENIES
3 || in PART Herbalife’s Motion to Dismiss, and provides leave to amend as described
4|| above. (ECF No. 39.) Amendment beyond the scope of that expressly granted herein
5 || will not be permitted. Acri v. Int'l Ass’n. of Machinists & Aerospace Workers,
6 || 781 F.2d 1393, 1398 (9th Cir. 1986). If Eastern chooses to file a Second Amended
7 || Counterclaim, it shall do so within twenty-one (21) days of the date of this Order, in
8 | which case Herbalife shall answer or otherwise respond within fourteen (14) days of
9 | the filing. If Eastern fails to timely amend, then, as of the lapse of this deadline to
10 | amend, Eastern’s counterclaims dismissed herein shall be deemed dismissed with
11 || prejudice.
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13 IT IS SO ORDERED.
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15 December 28, 2022 ss
16 wx
Gédiod
18 OTIS D. WRIGHT, II
9 UNITED STATES DISTRICT JUDGE
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