Petition for Writ of Certiorari — Geophysical Systems Corp. v. Raytheon Co.

No. 93- tide

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1993

GEOPHYSICAL SYSTEMS CORPORATION,

Petitioner,

V.

RAYTHEON COMPANY and

SEISMOGRAPH SERVICE CORPORATION

Petition For A Writ Of Certiorari To The United States

Court Of Appeals For The Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

Jerrold J. Ganzfried

Counsel of Record

HOWREY & SIMON

1299 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

(202) 783-0800

Counsel for Petitioner

Geophysical Systems Corporation

QUESTIONS PRESENTED

In cases from Erie Railroad v. Tompkins through Salve

Regina College v. Russell, this Court has recognized that the

constitutional and statutory imperatives of federalism

require federal courts to adhere to state substantive law in

diversity of citizenship cases. In the present case, the Ninth

Circuit interpreted authoritative state court precedents in

ways that conflict with decisions of the California courts and

other federal courts of appeals. The questions presented are:

1. Whether the Ninth Circuit employed an

incorrect standard for discerning “trends” in state law, in

conflict with decisions of the Third and Seventh Circuits?

2. Whether federal courts have a degree of

latitude to depart from state law precedents by expanding,

contracting or diverging from such precedents in ways the

state courts have not adopted?

PARTIES TO THE PROCEEDING

All parties to the proceeding in the court of appeals

are identified in the caption. Pursuant to Supreme Court

Rule 29.1, petitioner states that there are no parent or

subsidiary companies to be listed.

li

TABLE OF CONTENTS

Questions Presentec ................cscrsssssoscsscsecensncessscsesssnssnenssssecssees i

Parties to the Proceeding ............:ssscsesesessseeeeeesnseseeeeenenseeeseneeees ii

Opinions Below ..........:csscscceeseeeeeseeseeesnesneeeenesnesnsensaneneeneeneeneeneenes 2

PaaP bOI ioscan ics isivs snvinnsusscdacasnstensessesesenoaussnenaccesenepsnesinessenann 2

Statutes Envolved..........scssccessarneenevesssessvnssessnensvesensnvecessnsnconnssanases 2

Introduction and Statement of the Case ........:ssseeseseeeeeeeeseees 3

Reasons for Granting the Petition. ..........:cssesseseeeeseesrseenseseeees 7

1. Federalism Requires Uniformity of Decisions............ 9

2. Review Is Warranted to Preclude

the Courts of Appeals from Predicting

Non-Existent Trends in State Law..............::s:ssseseseeees 11

3. Review Is Warranted to Define When,

If Ever, a Federal Court May Depart

From Settled Principles of State Law .............ss:s:ss+ 13

COMTI sic sensnins cnn veenvovsernsancnsersmuinesnsstnntasmnimasnenaamamnlaseianiensats 17

Appendix A.......csccscececsssesesesesesesesssnsnsassnsesesenssnsnsnanenenenennensanans Al

Appendix B .......ssssecsssesseseeteseseseeneensensseneneenssnssnssncanenseneensenennes Al18

Appendix C .....essecseeseseeseceesneneeeeneesneneenesneenesnesasenssanennennennenneenees A20

Appendix D........ccccescseseeeeenenseseneseensecsesssenensensnsneanenensenensenensens A22

Appendix E .......cessesesecsssesesneseesnesnensensensnnsnseesnssnsnenennensensnnensenes A24

Appendix F .......sesseesssesseseseesesesnsneenesnssnssssnsnssanensenseanensenennsenennes A29

Appendix G....sessecsesscseseeseseetesesestsnsenesnscssesnssnsssssnencnseneensenennes A33

Appendix H .......ccsecessesssesneneseneseenseessesnsssensnesessnennensenensenennensenes A35

Appendix | seseesessessececennennsennnnnnnnnssnsusnuuunnnnnsnnnasnansnnsnnnananananen A36

iii

TABLE OF AUTHORITIES

CASES

Allied Grape Growers v. Bronco Wine Co., 249

ple IE SF 8 PRIN WIE shes nsicsshnncliassnsisusnnibnnbantbitbasbaaneahs 14

April Enterprises, Inc. v. KTTV, 195 Cal. Rptr. 421

SO RN BR sch ecsshbcihioien sbeonc tastcnnwcs eee ua tanneneiaeiiad 6,11, 12

Barquis v. Merchants Collection Association, 101

ERP os bsscacscsennacsipensciomnmoseicennaseinniaanieauabonines 7,14

Borse v. Piece Goods Shop, Inc., 963 F.2d 611,

aN MIND icsissi toancsicsinscsncoinses ecealonliiousaadsoeneaasnpes esaeiadaniauaian 8,12

Clay v. Sun Insurance Office Ltd., 363 U.S. 207 (1960)..... 8, 9, 16

Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3 (1975) .......... 14

Dixon Mobile Homes, Inc. v. Walters, 122 Cal. Rptr.

EE SHUI ROP ED incr sunk rssesciacnanteadeonmone lgamanaendinananmaaate 15

Employers Insurance of Wausau v. Albert D. Seeno

Constr. Co., P65 F.2d SBE (Fis Cie, BOT) nono nnescessisnsensnnsnrensscrsscees 8

Erie Railroad v. Tompkins, 304 U.S. 64 (1938) ............seseee 37,8

Foley v. Interactive Data Corp., 254 Cal. Rptr. 211

IT sisi senandiinsnseeisnnssnsisioeipeisiniaiaitnleicsuaiddaioadmtin 6, 11, 12

Garnac Grain Co., Inc. v. Blackley, 932 F.2d 1563,

STE Satis WIRWP SB oyestnncccnssanncacinsinsneniiieuicionebescdetialausmudlnmiaisianssaronait 8

Hanna v. Plumer, 380 U.S. 460 (1965) .............sscccccsssssesssssees 3,9

In re Air Crash Disaster Near Chicago, Illinois,

Fe Fe A MIN OE SD i ericchuscinse se eceenintiphsashdnsviebabasheanicanie 9,13

].C. Wyckoff & Associates, Inc. v. Standard Fire Ins.

Co., 936 F.2d 1474 (6th Cir. 1991) o..ccceccsssscocccescsescessecssucssessssccesee 8

iv

Kasel v. Remington Arms Co., 101 Cal. Rptr. 314

(Ct. App. 1972) .....ssssscsessccrsssssnsessnssensseneconsennscansecnnscanscansnecencensen 15

Klaxon Co. v. Stentor Electric Manufacturing Co.,

313 U.S. 487(1941) .....essessessessesssseesenencnsencessssssssnsasenensecensnnsensnney 15

Lehman Brothers v. Schein, 416 U.S. 386 (1974) .....-+--+-0++ 3, 8, 16

Los Angeles Memorial Coliseum Commission . NFL,

791 F.2d 1356 (9th Cir. 1986), cert. denied, 484 U.S.

B26 (1987) ...ssscccesccvsesssssseeecsnnsennssscesssssvsnnssssssennccnsocssnsconsssnascsansnueset® 9

McMahon v. Pennsylvania Life Insurance Co., 891

F.2d 1251 (7th Cir. 1989) .......cecccseesssssseeneesensessnsnsensessssene 11,12

Nedlloyd Lines B.V. v. Superior Court, 11 Cal. Rptr.

2d 330 (1992) nessesceecsscssesssecsnsesneenecnnsessaneanecasenecnneensssnsnesnscsnssasenns 11

Newman v. Emerson Radio Corp., 258 Cal. Rptr. 592

(1989) coocssssssssscsscssscccceesnssensnseesnnnneeceqnsnnnnscenesnaneeesanannegennanansts 11

Offshore Rental Co. v. Continental Oil Co., 148 Cal.

Retr. 867 (1978)....-----s--sssssssssessssescnnensnsesssssssnnsennnnecnnanecsnnessnnsce 15

People v. Casa Blanca Convalescent Homes, Inc.,

206 Cal. Rptr. 164 (Ct. App. 1984) ....ss.-sssessssssseeessnnneeeees 13, 14

People v. Dollar Rent-A-Car-Sys., 259 Cal. Rptr.

191 (Ct. App. 1989) ..--sssssscecsssesssssssssnssesennecsnsessnsnssssnnsssnneenansnenes 13

Prudential-LMI Commercial Insurance v. Superior

Court, 274 Cal. Rptr. 387 (1990) ....--.:-ssssssserssssssnesessnsensensensens 6, 12

Prudential-LMI Commercial Insurance v. Superior

Court, 260 Cal. Rptr. 85 (Ct. App. 1989) ....----ssssssesssssessensensee 12

Reich v. Purcell, 63 Cal. Rptr. 31 (1967) .....-:-sssecsesecreesesetenees 15

Salve Regina College v. Russell, 111 S. Ct. 1217

(1991) .oessoscscsssconssssssssecensscscensessnsnssencsnssenssccnscessnsnsscsessenaecs 3,8 ,9, 16

Tolan v. Levi Strauss & Co., 867 F.2d 467

SOON ic ts: WI iaiavibietsess'cnhi-onesaciin decdascicaitmacnnsuaidadesapeaacnabetninisaleaiconiad 12

WO ORE kD Whee Oe CD arctanecerencansivccniahccstninnindsiaim 8

Wisconsin v. Mitchell, 113 S. Ct. 2194 (1993) eee eeeeeeeeees 14

STATUTES

pT OR | en ee aa nee ee ee 2

Oe eas Be Be CE ii isc sonlsnlssiebseniehsesartacsh aucedbiesedsobitiaiibal 5

ee reise A Oe ee I vrai nceh disco ctersiorntmunispunenicaaceipasiaianesbai ues 5

cee PE ees cithininetiecciimnnertdenasionpiigaemenianna y Fis. i 4

Cal. Bus. & Prof. Code § 17200 (1987) ...........sssssssssssssesseneesees 13

Be Ns I Be Ca stare etcisseincconenesiasiesiamadaeaasnls 15

MISCELLANEOUS

Analysis and Reports Branch, Administrative

Office of the U.S. Courts, Federal

Judicial Workload Statistics Report (1991) .........cceeeeseeeeeees 9

Comment, A Snake in the Path of the Law:

The Seventh Circuit's Non-Publication Rule,

SE UD. PURE, 6: Be; a ree cessnenssweskncicabnapeseiteccccsesdonenecranenes 10

Daniel N. Hoffman, Nonpublication of Federal

Appellate Court Opinions, 6 Just. Sys. J. 405 (1981) «0... 10

William L. Reynolds and William M. Richman,

The Non-Precedential Precedent - Limited

Publication and No-Citation Rules in the United

States Courts of Appeals, 78 Colum. L. Rev. 1167 (1978).......... 10

Donald R. Songer, Danna Smith and Reginald

Sheehan, Nonpublication in the Eleventh Circuit:

An Empirical Analysis, 16 Fl. St. U. L. Rev. 963 (1989)............ 10

vi

OOOO,

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

GEOPHYSICAL SYSTEMS CORPORATION,

Petitioner,

WV

RAYTHEON COMPANY and

SEISMOGRAPH SERVICE CORPORATION

Petition For A Writ Of Certiorari To The United

States Court Of Appeals For The Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioner Geophysical Systems Corporation (GSC)

etitions for a writ of certiorari to review the judgment of

the United States Court of Appeals for the Ninth Circuit in

this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, Al-

Al17) is not reported. The opinions of the district court

(App., infra, A22-A34) are not reported.

JURISDICTION

The judgment of the court of appeals was entered on

February 11, 1993. App., infra, A18. A timely petition for

rehearing was served and filed on February 24, 1993 and

was denied on May 3, 1993. App., infra, A20. The

jurisdiction of this Court is invoked under 28 U.S.C. § 1254

(1988).

STATUTES INVOLVED

The Rules of Decision Act, 28 U.S.C. § 1652, provides:

The laws of the several states, except

where the Constitution or treaties of the

United States or Acts of Congress otherwise

require or provide, shall be regarded as rules

of decision in civil actions in the courts of the

United States, in cases where they apply.

Additional relevant statutes are set out at App., infra,

A35-36.

INTRODUCTION AND

STATEMENT OF THE CASE

On one level, this case is a routine breach of contract

claim litigated in the district court under diversity of

citizenship jurisdiction. Yet it is that very typicality which

reveals the peril to federalism that arises when, as here, the

lower federal courts fail to adhere to binding sources of state

law. A bedrock premise of the dual federal-state judiciary

system is the assurance that substantive issues of state law

will be decided the same way regardless of the forum. That

premise is rooted in the Constitution’s allocation of power

between the national and state governments; it is reflected in

statutes dating back to the founding of the Republic (Federal

Judiciary Act of September 24, 1789, § 34 c.20, 28 U.S.C. §

1652); and it informs this Court’s decisions in Erie Railroad v.

Tompkins, 304 U.S. 64 (1938); Lehman Brothers v. Schein, 416

U.S. 386 (1974); and Salve Regina College v. Russell, 111 S. Ct.

1217 (1991). In short, it is “one of the modern cornerstones

of our federalism.” Hanna v. Plumer, 380 U.S. 460, 474 (1965)

(Harlan, J., concurring).

The decision below reaches results contrary to

governing state precedent. As this petition explains, the

decision below is an ideal candidate for this Court’s review

because it contains several common examples of the ways

lower federal courts depart from settled principles of state

law: rejecting or modifying relevant precedents in favor of

an amorphous “trend” in the law even where the state

courts have perceived no such trend; ignoring authoritative

state court constructions of state statutes; and making policy

determinations at odds with holdings of the state courts.

Moreover, the decision below employed a standard for

discerning a governing trend in state law that conflicts with

and is more lax than the standard employed by the Third

and Seventh Circuits. Accordingly, this Court should grant

review to continue the effort commenced in Erie, and

revisited in Lehman Brothers and Salve Regina College, of

defining the contours of federal court fidelity to state

decisions on questions of state substantive law.

sts

1. GSC, a California corporation, developed a

patented technology for seismic research which represented

a significant advance in the collection of seismic data and

was an initial success in the market. The data amassed by

GSC required computer processing capability in order to

generate usable reports. Seismograph Service Corporation

(SSC), a Delaware corporation with its principal place of

business in Oklahoma, competed with GSC in the sale of

seismic exploration devices and recognized the technological

significance of GSC’s breakthrough technology.

Anticipating that GSC would become the industry standard

for data acquisition, SSC deemed it essential to beat out its

competitors by playing a role in that technology. (Tr.

11/9/88 at 166; 11/10/88 at 91-96; 11/14/88 at 6-7; Ex.

2364). !

SSC approached GSC (Tr. 11/16/88 at 130-31) and

offered to supply data processing capability. Throughout

their discussions, SSC knowingly made false representations

and promises about its equipment and eventually won out

over other potential suppliers to obtain a series of contracts

with GSC. As SSC officials admitted in this litigation, they

knew from the start that their computer equipment could

not perform as promised and that they could not reasonably

make any representation as to the speed capability of their

computers. (ER 38-39; Tr. 11/3/88 am at 78-79, pm at 15-18;

11/4/88 at 114-118; 11/17/88 am at 37; Ex. 2021). Once

installed, the SSC computers failed to work properly. In

response to complaints, SSC provided false assurances that

the problems would soon be solved and induced GSC to

continue to contract for additional equipment. (Tr. 11/3/88

pm at 18-55.) Even when performance deadlines were

extended, SSC never met many software capabilities

promised in the contracts. (Id.) Eventually, as GSC’s

systems failed to provide the usable reports customers

expected, customers canceled orders and terminated

business dealings with GSC. (Exs. 2042, 31AA, 2232, 2846,

81, 2053, 755, 2709, 2056, 38, 2894, 2895, 2892, 2976, 2959, 36;

1 “Tr.” refers to the trial transcript; “ER” refers to the Excerpts of

Record filed in the Ninth Circuit; “Ex.” refers to exhibits in the record.

as

-5-

Tr. 11/17/88 am at 29-38, 46-48; 11/3/88 pm at 90-97).

GSC’s once-thriving business withered, leading to the

company’s bankruptcy. App., infra, A2. Evidence in this

case also showed that SSC sought to exploit GSC’s situation

to its own competitive advantage and that SSC similarly

victimized other customers; indeed, SSC’s vice president

testified that SSC regularly made false promises to

customers. (Tr. 11/9/88 at 139-42; 11/16/88 at 37-42; Ex.

2008).

2. Following its discovery of SSC’s fraud, GSC

filed suit in the United States District Court for the Central

District of California on December 23, 1985, based on

diversity jurisdiction under 28 U.S.C. § 1332 and federal

question jurisdiction under § 1331. The complaint alleged

state law claims for fraud and negligent misrepresentation,

unfair competition, breach of contract, warranty and the

implied covenant of good faith, and federal claims for

violation of the RICO statute. After a two-month trial in

1988, the jury awarded GSC $48,302,515 in damages.

Subsequent to the trial, the district court, reversing

rulings it made earlier in the case regarding statute of

limitations issues, granted JNOV on several claims. In

particular, the court held that the statute of limitations for

breach of the implied covenant of good faith did not run

from the date of discovery. The court reached this

conclusion in reliance on a recent California Supreme Court

decision having nothing to do with the statute of limitations,

but which the district court nonetheless regarded as a

harbinger of a trend in state law. App., infra, Al3. The

district court also granted a new trial on certain contract-

related claims. Thus limited, the second trial resulted in a

verdict in favor of SSC. Thereafter, the district court entered

a final judgment dismissing all claims except the state law

claim for unfair competition, on which the court entered

judgment for GSC in the amount of $2,550,452.65. App.,

infra, A33.

> The United States Court of Appeals for the

Ninth Circuit reversed the judgment in favor of GSC on the

state law unfair competition claim, remanded for entry of

xe

JNOV on that claim, and affirmed the dismissal of all other

claims by GSC. App.., infra, Al-A17.

The Ninth Circuit’s opinion is characterized by

holdings on state law issues that conflict with binding

California precedent. Accordingly, the outcome differs from

the result that would have obtained in state court or in other

circuits that follow stricter standards for adhering to state

court precedent.

Several examples illustrate the point.

a. On the claim for breach of the implied

covenant of good faith, the court of appeals held that GSC’s

claim is barred by the statute of limitations because the

“discovery” rule does not apply to such claims. The court

reached this conclusion despite the express holding in April

Enterprises, Inc. v. KTTV, 195 Cal. Rptr. 421 (Ct. App. 1983),

that the discovery rule is applicable to implied covenant of

good faith claims. Relying on a decision by the California

Supreme Court (Foley v. Interactive Data Corp., 254 Cal.

Rptr. 211 (1988)) that does not even address the relevant

statute of limitations issue, the Ninth Circuit concluded that

April Enterprises “was no longer good law.” App., infra, A12.

Although it acknowledged that “April Enterprises was not

effectively overruled by Foley,” the Ninth Circuit

nonetheless accepted the view that Foley evidenced a

“trend.”* App., infra, A13. In so holding, the opinion below

ignored a more recent decision of the California Supreme

Court that does involve the statute of limitations and that

cites April Enterprises with approval (Prudential-LMI

Commercial Insurance v. Superior Court, 274 Cal. Rptr. 387

(1990)).

b. On the unfair competition claim, the Ninth

Circuit held that GSC was not injured “beyond the risk of

loss any party entering into a contract to buy goods

assumes.” App., infra, Al6. Despite GSC’s recitation of

2 _Unless indicated otherwise, emphasis within quotations has been

added.

-7J-

numerous cases in which California courts routinely uphold

claims for unfair competition in these circumstances, the

court addressed only Barquis v. Merchants Collection

Association, 101 Cal. Rptr. 745 (1972). The court stated that

“Barguis does not hold that injury to a competitor satisfies

the statutory definition of competitive injury. Rather,

Barguis refers specifically to the statutory requirement of

proving an ‘unfair . . . injury toa competitor.’” App., infra,

A16 (emphasis supplied by court). Based on a standard of

its own creation, the Ninth Circuit rejected as a matter of law

the verdict of a correctly-instructed jury and dismissed a

claim that the state courts uniformly vindicate.

- With respect to the fraud and

misrepresentation claim, the court of appeals affirmed the

district court’s holding that Oklahoma’s two-year statute of

limitations applied instead of California’s three-year statute.

Id. at A8. In the Ninth Circuit’s view, no weight can be

accorded to an Oklahoma borrowing statute which requires

Oklahoma courts to defer to California’s longer statute of

limitations in the circumstances of this case. Id. But, under

California’s “impairment of governmental interests” test, the

state courts routinely hold that California residents are

entitled to apply California’s statute of limitations in

situations where the sister state exhibits the flexibility and

deference that Oklahoma does here.

REASONS FOR GRANTING THE PETITION

Fundamental concepts of federalism require that

United States courts exercising diversity jurisdiction apply

state law as it exists without expanding in directions in

which the state has not chosen to embark. Erie, 304 U.S. at

78; 28 U.S.C. § 1652 (in diversity of citizenship cases, state

law “shall be regarded as rules of decision in civil actions in

the courts of the United States”). This directive applies

whether the law of the state is embodied in statutes or in

decisions of state courts. West v. AT&T, 311 U.S. 223, 236-37

(1940); Erie, 304 U.S. at 78. In the 55 years since Erie, this

Court has been called upon to uphold this imperative of

LL

_

federalism by defining the latitude available to federal

courts in interpreting state law. E.g., Clay v. Sun Ins. Office

Ltd., 363 U.S. 207, 212 (1960); Lehman Bros. v. Schein, 416 U.S.

386, 389-90 (1974); Salve Regina College v. Russell, 111 S.Ct

1217, 1218 (1991). These decisions were all designed to

avoid the risks of the “divergent development of state law”

between federal and state courts and to prevent the creation

of “a dual system of enforcement of state-created rights, in

which the substantive rule applied to a dispute may depend

on the choice of forum.” Salve Regina College, 111 S.Ct. at

1221.

Beyond the need to forestall federal intrusion upon

the state’s prerogative to determine state law, this Court has

also interceded to discourage the forum-shopping and

unfairness that inevitably result if federal courts may depart

from the substantive principles of state law. This case

presents a particularly apt opportunity for this Court to

prescribe standards for the lower federal courts to follow:

(1) in discerning whether state courts have authoritatively

resolved an issue and (2) in predicting or announcing

“trends” in state law that permit precedents ta be discarded.

Review is also warranted because the courts of

appeals have employed conflicting standards for guiding the

discretion of a federal court sitting in diversity to interpret

state law in the absence of a controlling ruling by the state

supreme court. In contrast to the decision below, the Third

and Seventh Circuits have refused to accept generalized

trends as a basis for disregarding state law cases on point.

Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 617 (3d Cir. 1992);

In re Air Crash Disaster Near Chicago, Illinois, 771 F.2d 338, 340

(7th Cir. 1985). The practical effect of these conflicting

standards is exemplified by this case since other circuits

3 See, eg. sg os Ins. of Wausau v. Albert D. Seeno Constr. Co., 945

F.2d 284 (9th Cir. 1991) (decisions of intermediate courts “represent data

that a federal court must consider”); ].C. Wyckoff & Assoc., Inc. v. Standard

Fire Ins. Co., 936 F.2d 1474 (6th Cir. 1991) (such decisions are “not to be

disregarded” unless federal court “is convinced” otherwise); Garnac

Grain Co, Inc. v. Blackley, 932 F.2d 1563, 1570 (8th Cir. 1991) (federal court

“must follow” decisions of intermediate state appellate courts “when they

are the best evidence” of state law).

=< =

have analyzed the very California cases at issue here in ways

that differ from the opinion below.

1. Federalism Requires Uniformity Of

Decisions

Aside from the constitutional and statutory

underpinnings of Erie, this Court also has perceived the

“twin aims”-- of “discouragement of forum-shopping and

avoidance of inequitable administration of the law.” Salve

Regina College, 111 S. Ct. at 1221 (quoting Hanna v. Plumer,

380 U.S. at 468). In recent years the Court has recognized

that additional steps are necessary in order to promote these

twin aims. For example, in Clay and Lehman Brothers the

Court reaffirmed the ability of the federal courts to utilize a

state’s certification procedures on unsettled issues of state

law, in order to assure that the outcome of a case will not be

altered by the forum.4

More recently, in Salve Regina College the Court held

that a “court of appeals should review de novo a district

court's determination of state law." Salve Regina College, 111

S. Ct. at 1221. This holding, which limited district courts’

discretion in interpreting state law, was designed to avoid

the potential "divergent development of state law among the

federal trial courts even within a single State" and to

preclude "a dual system of enforcement of state-created

rights, in which the substantive rule applied to a dispute

may depend on the choice of forum.” Id. at 1222.

Clear guidance on how the federal courts are to treat

decisions by intermediate state appellate courts on issues of

state law in the absence of a flatly controlling state supreme

court decision is all the more necessary in the current

environment where 70% of federal appellate decisions are

4 Not all states have enacted procedures for certification of state law

questions to the state supreme court. California has no certification

rovision. See Los Angeles Memorial Coliseum Commission v. NFL, 791 F.2d

356, 1362 (9th Cir. 1986), cert. denied, 484 U.S. 826 (1987).

tll

<.

unpublished.> The prevalence of unpublished opinions

hinders the ability of state supreme courts to detect and

correct errors in the application of state law. Since

unpublished opinions, such as the opinion below, are

deemed not to have precedential value and are not officially

reported, they may mask a divergence from state court

decisions and affect the state supreme court’s exercise of its

discretionary jurisdiction. For example, where state

appellate courts are in accord on an issue the state supreme

court may see no need to grant review. But review might

well be warranted, even where the state courts are in accord,

in order to correct the differing view of a federal court.

Accordingly, the issuance of unpublished opinions that

expand upon, contract, or predict state court decisions may

have a doubly negative impact on federalism concerns: first,

by intruding on the state court’s authority to interpret state

law; second, by forestalling corrective decisions of the state

supreme court.®

The effect on litigants is also resounding. Not only

are certainty and fairness diminished if forum selection is

outcome determinative, but parties litigating state law issues

in federal court lack the opportunity to seek review in the

state supreme court on incorrect legal rulings.

The court of appeals’ unpublished opinion in the

present case illustrates the pitfalls of conferring broad

discretion on federal courts to predict, expand upon, or

depart from authoritative state court decisions. The Ninth

Circuit diverged from settled state law on three significant

issues in this case.

5 Analysis and Reports Branch, Administrative Office of the U.S.

Courts, Federal Judicial Workload Statistics Report app. at 29 (1991)

(Table S-5).

6 See William L. Reynolds and William M. Richman, The Non-

Precedential Precedent -- Limited Publication and No-Citation Rules in the

United States Courts of Appeals, 78 Colum. L. Rev. 1167 (1978); Donald R.

Songer, Danna Smith and Reginald Sheehan, Nonpublication in the Eleventh

Circuit: An Empirical Analysis, 16 Fl. St. U. L. Rev. 963 (1989); Daniel N.

Hoffman, Nonpublication g Federal Appellate Court Opinions, 6 Just. Sys. J.

405 (1981); Comment, A Snake in the Path of the Law: The Seventh Circuit's

Non-Publication Rule, 39 U. Pitt. L. Rev. 309 (1977).

so

2 Review Is Warranted To Preclude The

Courts Of Appeals From Predicting

Non-Existent Trends In State Law

First, the Ninth Circuit disregarded decisions of the

California state courts on the application of the discovery

rule to the statute of limitations for breach of the implied

covenant of good faith. The court held that April Enterprises

must be reinterpreted in light of Foley v. Interactive Data

Corp., a decision by the California Supreme Court involving

no statute of limitations issue at all. Foley simply held that

“contractual remedies should remain the sole available relief

for breaches of the implied covenant . . . in the employment

context.” 254 Cal. Rptr. at 237.

California courts meticulously note that Foley arose

in an employment context and dealt only with remedial

issues. Indeed, in Newman v. Emerson Radio Corp., 258 Cal.

Rptr. 592, 593 (1989),7 the California Supreme Court

explained that “[iJn Foley... we held that in the context of an

alleged wrongful discharge from employment . . . an employee

may not obtain tort relief for breach of the implied

covenant.” See also Nedlloyd Lines B.V. v. Superior Court,

11 Cal. Rptr. 2d 330, 346-47 (1992) (Kennard, J., concurring

and dissenting) (the California Supreme Court has “declined

to extend tort remedies for breach of the implied covenant to

breaches of employment contracts”); Shoemaker v. Myers,

276 Cal. Rptr. 303, 317 (1990) (citing Foley for proposition

that cause of action for tortious breach of the implied

covenant, “in the employment context, cannot support an

award of tort damages”).

In accord with the California courts, other federal

appellate courts also apply Foley only to labor cases. See, €.g.,

McMahon v. Pennsylvania Life Ins. Co., 891 F.2d 1251, 1256

(7th Cir. 1989) (“The leading California Supreme Court case

involving the implied covenant of good faith and fair

dealing in an employment termination case is Foley”); Tolan v.

7 Chief Justice Lucas, the author of the court’s opinion in Newman, was

also the author of the court’s opinion in Foley.

-1]2-

Levi Strauss & Co., 867 F.2d 467, 472 (8th Cir. 1989) (citing

Foley as holding that “in the employment context, cause of

action seeking tort remedies for breach of implied covenant

is not permitted”). Thus, the decision below conflicts not

only with interpretations of Foley by the state courts but by

the federal courts as well. The novel extension of Foley in the

opinion below to a situation outside the labor context and to

an issue not even addressed in Foley encourages forum-

shopping not only between federal and state court, but also

among the federal courts themselves.

Contrary to the decision below, the California

Supreme Court and the intermediate state appellate courts

continue to cite the statute of limitations holding of April

Enterprises with approval. See Prudential-LMI, 274 Cal. Rptr.

at 391.8 Indeed, the underlying court of appeal opinion in

Prudential-LMI contains an extended discussion of April

Enterprises. See 260 Cal. Rptr. 85, 96-99 (Ct. App. 1989). If, as

the Ninth Circuit held, the statute of limitations holding of

April Enterprises must be revisited in light of Foley, that

conclusion has escaped the state courts, including the

supreme court, which still cites April Enterprises approvingly

with no mention of Foley.

In contrast to the opinion below, other circuits are

more circumspect in predicting “trends” in state law. The

Third Circuit in Borse v. Piece Goods Shop, Inc., 963 F.2d 611,

617 (3d Cir. 1992), in interpreting the state’s public policy

exception to the at-will employment doctrine, refused to

recognize a trend based on recent state supreme court

decisions which had cast serious doubt on the viability of

the exception, concluding that it was “aware of no

‘persuasive evidence of a change in Pennsylvania law.’”

Instead, the Third Circuit applied state law as it had been

interpreted by the state’s intermediate appellate courts

which continued to recognize the exception.

8 Chief Justice Lucas was also the author of the supreme court’s

opinion in Prudential-LMI1.

- 18.

The Seventh Circuit followed a similarly deferential

approach in In re Air Crash Disaster Near Chicago, Illinois, 771

F.2d 338, 340 (7th Cir. 1985), involving Illinois’ wrongful

death statute. Although the Illinois Supreme Court recently

had expanded the scope of the statute to permit

compensation for loss of society to those in parent-child

relationships, the state supreme court had not ruled on the

narrow issue before the Seventh Circuit: whether adult

siblings of victims could recover for loss of society. A state

appellate court had ruled on that very issue, denying

coverage to adult siblings. The district court in Air Crash,

however, held to the contrary, and the Seventh Circuit

reversed: “The Illinois Supreme Court may someday hold

that an adult sibling can recover for loss of society under the

Illinois Wrongful Death Act, but we decline to take that

expansive step for the Court.” Id. at 340.

The divergence between the opinion below and the

more measured standard employed by the Third and

Seventh Circuits in divining “trends” in state law

demonstrates the need for clear guidance from this Court on

the discretion a federal court has to depart from established

state law (as determined by intermediate appellate courts)

and to predict trends in state law.

3. Review Is Warranted To Define When, If

Ever, A Federal Court May Depart From

Settled Principles Of State Law.

The Ninth Circuit disregarded twenty years of

established state law on GSC's claim for unfair competition

under Cal. Bus. & Prof. Code § 17200. App., infra, A35. The

statute broadly defines unfair competition to include any

“unlawful, unfair or fraudulent business practice." 1d.

Consistent with that expansive mandate, the state courts

recognize the statute must be "broadly interpreted to bar all

ongoing wrongful business activity in any context in which

it appears." People v. Dollar Rent-A-Car-Sys., 259 Cal. Rptr.

191, 197 (Ct. App. 1989). Accord, People v. Casa Blanca

Convalescent Homes, Inc., 206 Cal. Rptr. 164, 177 (Ct. App.

1984). The Ninth Circuit's confining interpretation pays no

heed to such recent authoritative state court decisions and is

-14-

contrary to this Court's admonition that "[a] federal court in

a diversity case is not free to engraft onto those state rules

exceptions or modifications which may commend

themselves to the federal court, but which have not

commended themselves to the state in which the federal

court sits." Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4

(1975). See also Wisconsin v. Mitchell, 113 S. Ct. 2194, 2198

(1993) ("[t]here is no doubt that we are bound by a state

court's construction of a state statute").

Although the one case upon which the Ninth Circuit

relied, Barguis v. Merchants Collection Association 101 Cal.

Rptr. 745 (1972), was an important milestone in expanding

the scope of §17200, state court interpretation of the statute

did not cease when that case was decided more than twenty

years ago. In particular, the decision in Allied Grape Growers

v. Bronco Wine Co., 249 Cal. Rptr. 872 (Ct. App. 1988) reveals

the inconsistency between the Ninth Circuit's decision and

the current state court interpretation of the statute. The

court in Bronco Wine upheld a statutory unfair competition

claim arising from a contractual dispute between two

parties. In so holding, the state court rejected the stated

rationale of the Ninth Circuit in this case. For example, the

court rejected the contention that § 17200 did not apply

because the plaintiff was "a single entity operating under a

single contract." 249 Cal. Rptr. at 884. Moreover, the court

noted that although there was evidence that defendant

victimized others with the same practice, "[t]here is nothing

in the word ‘practice’ that necessarily limits Section 17200

cases to those actions involving multiple victims." Id.

Had GSC’s claim been litigated in state court, the

jury verdict in its favor would have been upheld. The

gravamen of GSC's unfair competition claim is that it was

defrauded; fraud is sufficiently "unfair" to satisfy any

reasonable interpretation of the statute. But, because the

Ninth Circuit failed to adhere to the statutory interpretation

of the state courts, the forum altered the outcome.

A further example of the Ninth Circuit’s failure to

follcw settled principles of state law is its holding on the

statute of limitations governing GSC’s claim of fraud.

«45.

Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487,

496 (1941), requires that the conflicts of laws rules to be

applied by a federal court must conform to those prevailing

in the state in which the federal court sits. But the court

below disregarded California state law on the choice of law

issue. Although the Ninth Circuit held (App., infra, A8) that

the district court "carefully analyzed the choice of law

problem presented here and correctly identified and applied

the relevant legal principles,” the district court merely noted

that Oklahoma has a two-year statute, California has a three-

year statute, and then simply applied Oklahoma's. ER 83-84.

The district court reached this conclusion only by denying

any significance to Oklahoma’s "borrowing statute” (12

Okla. Stat. § 105 (App., infra, A34)) that requires Oklahoma

courts to apply the longer statute of limitations to claims that

accrue outside of Oklahoma. The court of appeals agreed

that the borrowing statute is “inapplicable because

Oklahoma is not the forum state." App., infra, A8.

What the Ninth Circuit failed to perceive is that

while the Oklahoma borrowing statute is a conflicts

provision, it is highly probative in the comparative

impairment of interests analysis required by California law.

See Offshore Rental Co. v. Continental Oil Co., 148 Cal. Rptr.

867, 873 (1978); Reich v. Purcell, 63 Cal. Rptr. 31, 34 (1967);

State courts place great importance on "the relative

commitment of the respective states to the laws involved."

Offshore Rental, 148 Cal. Rptr. at 873. The borrowing statute

evidences Oklahoma's flexibility and its willingness to have

longer statutes of limitation apply, compelling the

conclusion that no Oklahoma interest would be impaired by

allowing a California resident the benefit of California’s

three-year period. The court also disregarded California's

general preference for applying its own law. Dixon Mobile

Homes, Inc. v. Walters, 122 Cal. Rptr. 202, 208 (Ct. App. 1975);

Kasel v. Remington Arms Co., 101 Cal. Rptr. 314, 327

(Ct. App. 1972).

These examples illustrate the uncertainty and

unfairness that result when a federal court has latitude to

impose a policy gloss on state law issues. Forum shopping

is plainly encouraged; and the power to remove a Case to

areca

- 16 -

federal court has substantive ramifications that are often

dispositive. The same factors that warranted certiorari in

Clay, Lehman Brothers and Salve Regina College are present

here. Accordingly, this case provides a fitting opportunity

for this Court to take the much-needed next step in assuring

the uniformity of decisions that is essential to our system of

federalism.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Jerrold J. Ganzfried

Counsel of Record

HOWREY & SIMON

1299 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2402

(202) 783-0800

Counsel for Geophysical

Systems Corporation

July 30, 1993

APPENDICES

Al

APPENDIX A

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GEOPHYSICAL SYSTEMS

Defendants - Appellees/

Cross-Appellant

)

)

CORPORATION, )

)

Plaintiff-Appellant/ )

Cross-Appellee ) Nos. 90-56373,

) 90-56374

v. )

) D.C. No. CV-85-

RAYTHEON COMPANY, ) 8359-AWT

INC; SEISMOGRAPHIC )

SERVICE CORPORATION, ) MEMORANDUM’

)

)

)

)

Appeal from the United States District Court

for the Central District of California

A. Wallace Tashima, District Judge, Presiding

Argued and Submitted October 5, 1992

San Francisco, California

This disposition is not appropriate for publication and

may not be cited to or by the courts of this circuit except

as provided by 9th Cir. R. 36-3.

Before: TANG, PREGERSON, and ALARCON,

Circuit Judges.

Geophysical Systems Corporation ("Geophysical")

is a now-bankrupt business that conducted seismic

research and manufactured equipment to conduct this

research. Before it also went bankrupt, Seismograph

Service Corporation ("Seismograph") manufactured

computer equipment for measuring seismic activity.

Seismograph is a subsidiary of Raytheon Company

("Raytheon"). Geophysical is a California corporation;

Seismograph is a Delaware corporation with its principal

place of business in Oklahoma.

Geophysical and Seismograph had two contracts

under which Seismograph would sell to Geophysical

computer equipment for seismic research. The two

contracts were signed in February and August 1981,

respectively.

On December 21, 1987, approximately three years

after Geophysical went bankrupt, Geophysical filed suit

against Seismograph on various contract and warranty

theories, for negligent and/or _ intentional

misrepresentation, for violating California’s unfair

competition law, and for violating civil RICO.

Geophysical also named Raytheon as defendant, and

argued that Raytheon should be held liable as

Seismograph’s alter ego.

We have diversity jurisdiction under 28 U.S.C.

§ 1332 and federal question jurisdiction under 28 U.S.C.

§ 1331. We affirm in part, reverse in part, and remand for

proceedings consistent with this disposition.

A3

Background

The district court held two trials in this case, both

of them jury trials.

The district court disposed of Geophysical’s RICO

claim in favor of Seismograph and Raytheon on summary

judgment and denied Geophysical’s motion for

reconsideration on this issue.

Before the first case went to the jury, Raytheon and

Seismograph filed several motions for directed verdict.

The district court granted some of the motions.

First, the district court dismissed all of

Geophysical’s claims against Raytheon on the ground that

Raytheon was not liable as an alter ego for Seismograph’s

actions.

Second, the district court dismissed all of

Geophysical’s fraud and misrepresentation claims as

barred by Oklahoma’s two-year statute of limitations.

Third, the court held that all of Geophysical’s

breach of warranty and breach of contract claims under

the August 1981 contract were barred by the two-year

limitations period provided in the contract. The district

court rejected Geophysical’s challenges to the validity of

that provision.

Finally, in a later order, the district court held that

Geophysical’s breach of contract claims under the

February 1981 contract were barred by California’s four-

year statute of limitations. The district court rejected

%

i

ee

A4

Geophysical’s contentions that the statute was tolled by

Seismograph’s promises to perform under the contract.

With these issues resolved, the jury only had to

decide:

1. contract-released disputes arising out of the

February 1981 contract, namely:

(a) breach of express and/or implied

warranty under the February 1981 contract,

and;

(b) breach of the implied covenant of

good faith and fair dealing under the

February 1981 contract, and;

a violation of California laws against unfair

competition.

The jury returned a $48 million verdict against

Seismograph. The parties dispute whether the jury

rendered a special or general verdict.

After the jury’s verdict, the district court granted in

part and denied in part Seismograph’s motion for

judgment notwithstanding the verdict or for a new trial.

in addition, the district court withheld consideration of

Seismograph’s motion for judgment notwithstanding the

verdict or for a new trial on Geophysical’s unfair

competition claim. After the second trial on Geophysical’s

contract-related claims, the district court ruled on

Seismograph’s motion on the unfair competition claim.

The district court denied Seismograph’s motion based on

Geophysical’s acceptance of a remittitur of all damages on

AS

the unfair competition claim in excess of $1.9 million.

The district court then entered judgment on the remaining

verdicts from the first and second trial and resolved

motions for attorney’s fees, costs, and pre- and post-

judgment interest.

The parties raise numerous issues on appeal. We

deal with each in turn.

Analysis

I. Issues Arising From the First Trial

A.

On November 25, 1986, the district court granted

summary judgment in favor of both defendants on the

RICO claim. Exhibit B, ER 28-9. Geophysical argues on

appeal that the district court erred. We review a district

court’s decision on summary judgment de novo. Kruso v.

International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th

Cir. 1989), cert denied, 496 U.S. 937 (1990). We agree

with the district court that summary judgment in favor of

Seismograph and Raytheon on the civil RICO claim was

proper.

The district court dismissed the RICO claim on the

ground that Geophysical had not met its burden of

producing evidence to prove the essential elements of a

RICO claim against either Raytheon or Seismograph.

Specifically, the district court found that Geophysical had

not adduced sufficient evidence to show enterprise and

pattern. ER 29.

A6é

On October 28, 1987, the district court denied

plaintiffs motion for reconsideration on the RICO claim.

Exhibit C, ER 30-32. The district court also denied

plaintiffs request for leave to amend its pleadings on this

issue, noting that it would be futile and cause delay. ER

31-2.

The district court’s interpretation of the RICO

enterprise and pattern requirements are questions of law

that we review de novo. ‘Ticor Title Ins. Co. v. Florida,

937 F.2d 477, 450 (9th Cir. 1991). We agree with the

district court that the evidence presented could not

plausibly support Geophysical’s allegation that

Seismograph’s conduct violated RICO. The pattern of

conduct described by Geophysical as a RICO violation was

merely negotiation between two contracting parties.

Geophysical provides little indication that Seismograph’s

acts as alleged in the RICO claims were directed at

anything more than the singular purpose of inducing

Geophysical to acquire Seismograph’s computers. This is

not sufficient to show the necessary pattern of

racketeering activity. See Sever v. Alaska Pulp Corp.,

Nos. 91-36067, 91-36074, slip op. 12799, 12809-11, 1992

WL 301752 (9th Cir. Oct. 26, 1992) (multiple acts

amounting to no more than a single episode having a

singular purpose insufficient to show pattern).

As the Supreme Court held in Celotex Corp. v.

Catrett, 477 U.S. 317, 323-24 (1986), "[o]ne of the

principal purposes of the summary judgment rule is to

isolate and dispose of factually unsupported claims." The

facts as alleged before the district court and on this appeal

could not reasonably be resolved in favor of Geophysical

on its RICO claim. Summary judgment was therefore

EEE

A7

appropriate. See also Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 250 (1986).

B.

Before the case went to the jury, the district court

issued a series of orders granting some of defendants’

motions for directed verdict. See Exhibits E-G, December

7, 1988; Exhibit H, December 14, 1988.’

1.

The district court granted Seismograph’s motion for

a directed verdict on Geophysical’s fraud and

misrepresentation claims. Exhibit F, ER 74; Exhibit I, ER

83-4. The district court held that these claims were

governed by Oklahoma’s two-year statute of limitations.

ER 74. Further, the district court found that Geophysical

1 First, the district court granted Raytheon’s motion for

a directed verdict and dismissed all claims against

Raytheon. Exhibit E, ER 71-2. The district court rejected

Geophysical’s argument that Raytheon and Seismograph

were alter egos. On appeal, Geophysical argues that the

district court erred by granting the directed verdict in

favor of Raytheon. In addition, Geophysical filed a

motion asking us to invoke judicial estoppel against

Seismograph on the question whether it was Raytheon’s

alter ego.

Because we conclude that Seismograph was not

liable to Geophysical for any of the causes of action

brought in this lawsuit, we need not reach the question

whether Raytheon would be liable on Seismograph’s

behalf.

|

|

|

A8

should have and actually did discover the fraud more than

two years before filing its lawsuit. ER 74, 87-89.

Geophysical contends on appeal that the district

court erred by applying Oklahoma’s two-year statute of

limitations to the fraud and misrepresentation claims. We

review a district court’s decision on choice of law de novo,

Sparling v. Hoffman Constr. Co., 864 F.2d 635, 641 (9th

Cir. 1988), and conclude that Geophysical’s contention is

unavailing.

The district court carefully analyzed the choice of

law problem presented here and correctly identified and

applied the relevant legal principles. ER 83-84. The

court properly rejected Geophysical’s argument that the

Oklahoma borrowing statute should apply. The Oklahoma

borrowing statute is a choice of law provision which is

inapplicable because Oklahoma is not the forum state. A

federal court should apply the forum state’s choice of law

rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487

(1941). California, not Oklahoma, is the forum state.

Consequently, California’s governmental interests test

determines choice of law. We agree with the district court

that under this rule, Oklahoma’s shorter statute of

limitations should apply.

The district court also dismissed all of

Geophysical’s breach of warranty and breach of contract

claims under the August 1981 contract. The court held

that these claims were barred by the two-year limitations

period provision in the contract. ER 76. On appeal,

Geophysical reasserts the argument it made to the district

court that the Oklahoma UCC provision allowing parties

to agree to a shorter limitations period than would

otherwise apply is a violation of Oklahoma’s state

— |

A9

constitution. The district court rejected the argument and

so do we. See ER 80-83.

Contrary to Geophysical’s contention on appeal, the

Oklahoma UCC provision is not special legislation that

would violate the Oklahoma constitution. Oklahoma’s

UCC provision allows contracting parties to agree to a

shorter limitations period than would otherwise apply.

See Okla. Stat. tit. 12A, § 2-725. That section applies to

the entire class of claims that UCC Article 2 creates for

contracts involving the sale of goods. Unlike the special

legislation in Reynolds v. Porter, 760 P.2d 816 (Okla.

1988), section 2-725 does not subdivide the class of

potential plaintiffs that Article 2 creates. Cf. id. at 823

(statute of limitations applicable to actionable medical

malpractice claims invalid for having carved that subclass

of claims out of broader claims).

3.

On December 14, 1988, the district court ruled that

California’s four-year statute of limitation barred

Geophysical’s claims for breach of contract under the

February 1981 contract. On appeal, Geophysical contends

that the district court’s decision was erroneous. We

review the district court’s interpretation of state law de

novo. Salve Regina College v. Russell, 111 S. Ct. 1217,

1221 (1991).

The district court rejected Geophysical’s argument

that Seismograph’s promises to perform had the effect of

tolling the statute. Specifically, the district court rejected

the analogy to promises to repair in a breach of warranty

action and held that Geophysical’s tolling argument does

not apply to Seismograph’s promises to perform. ER 93-

a a ee

Al0

98. We agree. The district court properly concluded that

California’s four-year statute of limitation barred

Geophysical’s claims for breach of contract under the

February 1981 contract.’

i.

On March 16, 1989 the district court ruled on

Seismograph’s motion for judgment NOV or for a new

trial. Exhibit H, ER 77. The motion was granted in part

and denied in part. On appeal, Geophysical contends that

the disirict court erred by granting the motion in part.

A district court’s decision to grant a motion for a

new trial is reviewed for abuse of discretion. Hard v.

Burlington N. R.R., 870 F.2d 1454, 1461-62 (9th Cir.

1989).

> During the second trial, Geophysical attempted to

revive its claim for breach of contract by arguing that

some provisions of the February 1981 contract were

warranties. The district court rejected the argument and

ruled in limine on a motion brought by Seismograph that

evidence of those provisions was inadmissible except as it

would relate to claims that Seismograph breached implied

and/or express warranty provisions that were genuinely at

issue in the second trial. Further, the district court

concluded that Geophysical failed to raise these issues in

a timely fashion, and therefore waived any warranty claims

based on these provisions of the February contract.

On appeal, Geophysical argues that the district court’s

ruling on Seismograph’s motion was error. The argument

is without merit.

All

The district court initially denied Seismograph’s

motion for a new trial with respect to all issues of liability

on the contract and contract-related claims. ER 78.

Several months later, the district court reconsidered its

decision and granted Seismograph’s motion for a new trial

on some of the contract-related liability issues. Exhibit K,

ER 100-104.

On appeal, Geophysical contends that the district

court erred by granting Seismograph’s motion. For the

reasons set forth below, we reject this contention.

Based on an analysis of recent California case law,

the district court concluded that it had erred by instructing

the jury to apply a discovery rule to Geophysical’s claim

that Seismograph had breached the implied covenant of

good faith and fair dealing. ER 102. The court noted

that a recent California Supreme Court case made clear

that an action for breach of the implied covenant is strictly

a contract action under California law. See Foley v.

Interactive Data Corp., 765 P.2d 373, 389 (Cal. 1988).

As such, a discovery rule would not apply to Geophysical’s

implied covenant claim because such a rule normally

applies only to tort claims. April Enters., Inc. v. KTTV,

* The court’s reasoning is provided in the memorandum

and in the transcript of proceedings from the previous day.

See Exhibit L, ER 105-112.

* The only exception to this rule is that tort damages

may be assessed for breach of the implied covenant where

a special relationship has been established. Foley, 765

P.2d at 394,

Al2

195 Cal. Rptr. 421, 435 (Cal. Ct. App. 1983). The district

court granted Seismograph’s motion for judgment NOV

and a new trial based on its conclusion that the instruction

to the jury applying the discovery rule to Geophysical’s

implied covenant claim was error.°

Geophysical argues on appeal as it did before the

district court that Seismograph’s motion should not have

been granted. According to Geophysical, the discovery

rule does apply to its claims that Seismograph breached

the implied covenant of good faith and fair dealing.

Geophysical concedes that its implied covenant claim is

Strictly a contract action, but argues that the discovery rule

applies nonetheless under the April Enterprises exception.

In April Enterprises, the California Court of Appeal held

that the discovery rule can apply in a contract action

where the nonbreaching party shows that the breaching

..--party-concealed its improper conduct. April Enterprises,

195 Cal. Rptr. at 437.

The district court rejected this argument and

concluded that April Enterprises was no longer good law

in light of the California Supreme Court’s decision in

— Foley.

* The district court further ordered that the new trial

would be limited to implied covenant claims arising from

Seismograph’s conduct after December 23, 1981. The

rationale for this limitation was that without a discovery

rule, California’s four-year statute of limitations would bar

Geophysical’s implied covenant claim for any conduct by

Seismograph that occurred more than four years before

Geophysical filed its lawsuit on December 23, 1985.

EEE

Al3

We agree with the district court that April

Enterprises must be reinterpreted in light of the California

Supreme Court’s decision in Foley. The clear trend in

California law is to limit availability of tort damages in

contract actions to only those cases where a special

relationship is shown. In accordance with that trend, the

April Enterprises exception would apply only to those

contract actions where a special relationship is shown. No

such relationship is shown or even alleged by Geophysical.

The district court properly granted Seismograph’s

motion. Although April Enterprises was not effectively

overruled by Foley, its scope was limited. The district

court correctly concluded that the discovery rule should

not apply to Geophysical’s contract claim for breach of the

implied covenant of good faith and fair dealing.

y

On the issue of damages for Geophysical’s contract-

related claims, the district court granted Seismograph’s

motion and ordered a new trial. Geophysical argues on

appeal that this was an abuse of discretion.

The district court held that "[t]he amount of the

verdict is grossly excessive, contrary to the great weight of

the evidence, and probably infected by prejudice." ER 78.

The court noted that prejudice likely arose from

presentation of extensive evidence on claims which later

were not presented to the jury because they were

dismissed in the series of rulings granting directed verdict.

The district court did not err by ordering a new

trial. By the time the case was finally presented to the

jury, volumes of evidence had been introduced, much of

Al4

it irrelevant to the relatively small number of issues

ultimately left for the jury to decide. We agree with the

district court that this evidence would have a prejudicial

effect on the jury.

Geophysical also contends on appeal that the

district court erred by ordering a new trial on damages

because the jury rendered a special verdict. We disagree.

The district court properly determined that the jury’s

verdict could not be sufficiently disaggregated and that a

new trial on damages was therefore required. The district

court did not abuse its discretion by awarding Seismograph

a new trial on damages.

I. Issues Arising from the Second Trial

The second trial began on April 17, 1990 and lasted

two months. Pursuant to the district court’s orders before

and after the first trial, the second trial would resolve only

the following issues of liability and damages:

1. whether Seismograph breached an express

warranty in the February 1981 contract;

y whether Seismograph breached an implied

warranty of fitness for a particular purpose under

the February 1981 contract; and

a whether Seismograph breached the implied

covenant of good faith and fair dealing after

December 23, 1981.

ER 103.

Al5

The jury returned a verdict for Seismograph. On

August 13, 1990, the district court ruled on various post-

trial motions. Exhibit M, ER 113-16.

The district court denied Seismograph’s motion,

filed after the first trial, for judgment NOV or a new trial

on Geophysical’s unfair competition claim.° On cross-

appeal, Seismograph argues that the district court erred by

denying its motion for judgment NOV or new trial.

Seismograph maintains that Geophysical failed to prove

the elements of a violation of California’s unfair

competition statute and therefore judgment NOV was

proper. We agree.’

Denial of a motion for judgment NOV is

inappropriate when it is clear that the evidence and its

inferences cannot reasonably support a judgment in favor

of the opposing party. Transgo, Inc. v. Ajac Transmission

Parts Corp., 768 F.2d 1001, 1014 (9th Cir. 1985), cert.

denied, 474 U.S. 1059 (1986). We conclude that the

6 Initially, the district court had granted Seismograph’s

motion for jnov on Geophysical’s claim that Seismograph

violated California’s unfair competition law. ER 77-78.

On May 24, 1989, the district court vacated its ruling on

Seismograph’s motion for judgment NOV or new trial on

Geophysical’s unfair competition claim. Exhibit E, SER

at 17-18. The court decided that it would withhold ruling

on Seismograph’s motion until the second trial concluded.

7 Because we conclude that judgment NOV should have

been granted in Seismograph’s favor, we need not reach

other issues raised by the parties regarding the unfair

competition claim, remittitur on that claim, or post-

judgment interest.

Al6

evidence as alleged by Geophysical could not reasonably

support a verdict in its favor under California’s unfair

competition law. Specifically, Geophysical has not met its

burden of proving either that it suffered a competitive

injury or that there was injury to the consuming public

within the meaning of the statute.

Geophysical alleges that it was in competition with

Seismograph and that the deal it struck with Seismograph

inflicted losses on Geophysical. The evidence presented

by Geophysical is insufficient to support a verdict in its

favor under section 17200 of California’s Business and

Professions Code. Nothing in the evidence shows that

Geophysical was injured beyond the risk of loss that any

party entering into a contract to buy goods assumes.

In response to Seismograph’s contentions on cross-

appeal, Geophysical argues that the statutory requirement

of competitive injury is satisfied merely by proving that

Geophysical was a competitor and that it was injured. To

support its argument, Geophysical relies on the California

Supreme Court’s opinion in Barquis_v. Merchants

Collection Ass’n, 496 P.2d 817, 828 (Cal. 1972).

The argument fails. Barquis merely stands for the

proposition that California’s unfair competition statute

protects consumers as well as competitors from unfair

business _ practices. Contrary to Geophysical’s

characterization of the case, Barquis does not hold that

injury to a competitor satisfies the statutory definition of

competitive injury. Rather, Barquis refers specifically to

the statutory requirement of proving an "unfair injury to a

competitor." Id. (emphasis added). The evidence

presented by Geophysical to show competitive injury fails

to meet this requirement.

Al7

As a final argument, Geophysical attempts to

portray itself as an injured consumer. This argument also

fails. Geophysical was a commercial purchaser of

equipment from Seismograph. This was not what the

California legislature had in mind when it extended

protection against unfair competition "to the entire

consuming public." See id.

CONCLUSION

For the reasons set forth above, the district court’s

decision is affirmed in part and reversed in part.

Accordingly, we remand to the district court for entry of

judgment NOV on the unfair competition claim.

AFFIRMED IN PART, REVERSED IN PART,

REMANDED FOR PROCEEDINGS CONSISTENT

WITH THIS DISPOSITION.

FILED: February 11, 1993

13)

Al8

APPENDIX B

JUDGMENT

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 90-56373

CT/AG#: CV-85-8359-AWT

GEOPHYSICAL SYSTEMS CORPORATION

Plaintiff-Appellant

v.

RAYTHEON COMPANY INC.; SEISMOGRAPH

SERVICE CORPORATION

Defendants-Appellees.

No. 90-56374

CT/AG#: CV-85-8359-AWT

GEOPHYSICAL SYSTEMS CORPORATION

Plaintiff-Appellee)

V.

SEISMOGRAPH SERVICE CORPORATION

Defendant-Appellant

Al9

APPEAL FROM the United States District Court

for the Central District of California, Los Angeles.

THIS CAUSE came on to be heard from the

Transcript of the Record from the United States District

Court for the Central District of California, Los Angeles

and was duly submitted.

ON CONSIDERATION WHEREOF, It is now

here ordered and adjudged by this Court, that the

judgment of the same District Court in this cause be and

hereby is AFFIRMED IN PART, REMANDED.

Filed and entered February 11, 1993.

A20

APPENDIX C

NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GEOPHYSICAL SYSTEMS Nos. 90-56373,

90-56374

Plaintiff-Appellant

D.C. No.

v. CV-85-8359-AWT

RAYTHEON COMPANY INC.; ORDER

SEISMOGRAPHIC SERVICE

CORP.,

Defendants-Appellees.

i a i ee he he he ee

Before: TANG, PREGERSON, and ALARCON, Circuit

Judges.

The panel as constituted above has voted to deny

the petition for rehearing and to reject the suggestion for

rehearing en banc.

The full court has been advised of the suggestion

for rehearing en banc and no judge has requested an en

banc hearing. Federal Rule 35(b).

A21

The petition for rehearing is DENIED and the

suggestion for rehearing en banc is REJECTED.

Filed: May 3, 1993

A22

APPENDIX D

STEPHEN J. HOLTMAN

JAMES A. GERK

DAVID A. HACKER

SIMMONS, PERRINE, ALBRIGHT & ELLWOOD

1200 Merchants National Bank Building

Cedar Rapids, Iowa 52401

Telephone: (319) 366-7641

JENNIE L. LA PRADE

LILLICK McHOSE & CHARLES

725 S. Figueroa Street

Suite 1200

Los Angeles, California 90017-2513

Telephone: (213) 488-7100

Attorneys for Defendants

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

VERDICT II

)

GEOPHYSICAL ) Case No. CV

SYSTEMS CORP., a ) 85-8359 AWT

California Corporation, ) (Kx)

)

Plaintiff, ) ORDER RE

) DIRECTED

)

)

A23

RAYTHEON COMPANY, ) Date: Dec. 6, 1988

INC., a Delaware ) Time: 9:00 a.m.

Corporation, and ) Courtroom: 6

SEISMOGRAPH SERVICE ) __ Before the

CORP., a Delaware ) | Honorable

Corporation, ) A. Wallace Tashima

) Trial Date: Nov. 1,

Defendant. ) 1988

)

Defendants have filed a Motion for Directed

Verdict Re GSC’s Fraud and Negligent Misrepresentation

Claims. Having considered the motion and the arguments

of counsel, Defendants’ motion is granted.

The motion is granted on the basis that these

claims are governed by the two-year limitation period

under Oklahoma law and that plaintiff should have, and

actually did, discover[ed] the fraud well before more than

two years before commencement of this action.

IT IS ORDERED that all of plaintiffs Fraud and

Negligent Misrepresentation Claims are dismissed on the

merits.

Dated: December 6, 1988

/s/

A. WALLACE TASHIMA

United States District Judge

_—E——————_——_—_—_— eee

A24

APPENDIX E

STEPHEN J. HOLTMAN

JAMES A. GERK

DAVID A. HACKER

SIMMONS, PERRINE, ALBRIGHT & ELLWOOD

1200 Merchants National Bank Building

Cedar Rapids, Iowa 52401

Telephone: (319) 366-7641

JENNIE L. LA PRADE

LILLICK McHOSE & CHARLES

725 S. Figueroa Street

Suite 1200

Los Angeles, California 90017-2513

Telepione: (213) 488-7100

Attorneys for Defendants

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

RULING ON

)

GEOPHYSICAL ) Case No. CV

SYSTEMS CORP., a ) 85-8359 AWT

California Corporation, ) (Kx)

)

Plaintiff, ) ORDER RE

) MOTION TO

v. ) RECONSIDER

)

A25

MOTION FOR

JNOV OR FOR A

NEW TRIAL

SEISMOGRAPH SERVICE

CORPORATION

a Delaware Corporation,

)

)

)

)

Defendant. ) DATE: November 6,

) 1989

) TIME: 10:00 a.m.

) Before the

) Honorable

)

)

A. Wallace Tashima

Defendant Seismograph Service Corporation

("SSC") has filed a Motion asking the Court to reconsider

its previous ruling on SSC’s Motion for jnov or for a new

trial. GSC opposes SSC’s Motion.

After reviewing the entire record, including the

Court’s rulings and jury instructions at the first trial, the

written arguments of counsel in support of and in

opposition to SSC’s Motion, and the oral arguments

presented at the hearing held on SSC’s Motion, the Court

finds that SSC’s Motion should be granted, in part.

SSC bases its motion on the change in California

law which began with Foley v. Interactive Data Corp., 47

Cal. 3d 654, 254 Cal. Rptr. 211, 765 P.2d 373 (1988).

Foley and the cases following Foley have reversed the

previous direction of California law and established that

a claim for breach of the implied covenant of good faith

and fair dealing is a purely contractual claim absent

special factors not present in the pending dispute. See

Newman v. Emerson Radio Corp., 48 Cal. 3d 973, 258

Cal. Rptr. 592, 772 P.2d 1059 (1980); Mundy v. Household

—————_—_ |

A26

Finance Co., F.2d __, 1989 U.S. App. LEXIS 13485

(9th Cir. 1989); S.O.S., Inc. v. Payday, Inc., F.2d ___,

1989 U.S. App. LEXIS 13763 (9th Cir. 1989); Oki

America, Inc. v. Microtech International, Inc., 872 F.2d

312 (9th Cir. 1989) (concurring opinion); Miller v.

Fairchild Industries, Inc., 876 F.2d 718 (9th Cir. 1989);

DeHorney_v. Bank of American National Trust and

Savings Association, 879 F.2d 459 (9th Cir. 1989); Mitsui

Manufacturer Bank v. Superior Court, 212 Cal. App. 3d

726, 260 Cal. Rptr. 793 (1989); Price v. Wells Fargo Bank,

___ Cal. App. __, 1989 Cal.App.LEXIS 869 (1980).

Because of the recent changes in California law, SSC’s

Motion to Reconsider is granted.

In light of Foley and the cases following Foley, the

Court concludes that GSC’s claim for breach of the

implied covenant of good faith and fair dealing is a purely

contractual claim. Because GSC’s claim for breach of the

implied covenant of good faith and fair dealing is a purely

contractual claim, (A) it is governed by the four year

statute of limitation of Cal.Com.Code § 2725 and (B) it is

not subject to a discovery rule. GSC’s claims for breach

of the implied covenant of good faith and fair dealing

accrued when the conduct giving rise to any breaches

occurred.

Further, in light of Foley and the recent

developments and clarifications of California law, the

Court concludes that its jury instructions applying the

discovery rule to GSC’s claim of breach of the implied

covenant of good faith and fair dealing were incorrect.

GSC filed its present action on December 23, 1985.

SSC is entitled to judgment as a matter of law on all

portions of GSC’s claim of breach of the implied covenant

ee

A27

of good faith and fair dealing which accrued prior to

December 23, 1981. The Court, accordingly, grants jnov

against GSC and for SSC on all claims of breach of the

implied covenant of good faith and fair dealing which

accrued prior to December 23, 1981. The Court,

accordingly, grants jnov against GSC and for SSC on all

claims of breach of the implied covenant of good faith and

fair dealing related to conduct on the part of SSC that

occurred before December 23, 1981.

Because it is necessary to grant jnov with regard to

GSC’s claim that SSC breached the implied covenant of

good faith and fair dealing before 12/13/81, a new trial is

necessary on GSC’s remaining claims. Sunkist Growers

Inc. v. Winckler & Smith Citrus Products Co., 370 U.S. 19,

29-30, 82 S.Ct. 1130, 1135-1136, 8 L.Ed.2d 305 (1962);

Brocklesby v. United States, 767 F.2d 1288, 1294 (9th Cir.

1985); Syufy Enterprises v. American Multicinema, Inc.,

793 F.2d 990, 1001 (9th Cir. 1986); Brett v. Hotel, Motel

Restaurant, Construction Camp and Bartenders Local 879,

828 F.2d 1409, 1426 (9th Cir. 1987).

SUMMARY:

1. The Court grants SSC’s Motion to

Reconsider, in part.

y The Court grants SSC’s Motion for JNOV

against GSC and for SSC on all claims of

breach of the implied covenant of good

faith and fair dealing related to conduct on

the part of SSC that occurred before

December 23, 1981.

A28

3. The Court denies SSC’s Motion for JNOV

against GSC and for SSC on all ciaims of

breach of the implied covenant of good

faith and fair dealing after December 23,

1981.

4. The Court grants SSC’s Motion for a New

Trial on GSC’s breach of warranty claims,

and the remaining breach of the implied

covenant claim.

a The new trial shall concern all and only

issues relating to liability and damages on

GSC’s claims (A) that SSC breached the

express warranty in the February 1981

contract, (B) that SSC breached an implied

warranty of fitness for a particular purposes

associated with the February 1981 contract,

and (C) that SSC breached the implied

covenant of good faith and fair dealing after

December 23, 1981.

IT IS SO ORDERED.

FURTHER ORDERED that discovery on

"causation" is reopened for a 60-day period to Jan. 24,

1990.

DATED: November 21, 1989

/s/

UNTTED STATES DISTRICT JUDGE

A29

APPENDIX F

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

GEOPHYSICAL SYSTEMS

CORP., etc.,

No. CV

Plaintiff, 85-8359 AWT

V. ORDER RE

CERTAIN

RAYTHEON COMPANY, POST-TRIAL

INC., etc., MOTIONS

Defendant.

Nm ee eee eee ee”

This action has now been tried twice to a jury. Still

pending from the first triai is defendant’s motion for

judgment notwithstanding the verdict or, in the alternative,

for a new trial on plaintifffs unfair competition claim.

Ruling on that motion was held in abeyance by the Court,

pending retrial of the warranty and contract-based claims.

The Court was able to do this because of its determination

that if a new trial were to be held, it would be a court

trial. This ruling, in turn, was based on the Court’s

conclusion that because California’s unfair competition

statute authorizes only equitable relief, there was no right

to trial by jury on such claim.

A30

After the second trial, plaintiff moved for the entry

of judgment on its unfair competition claim in the sum of

$1,924,515. These motions have now been argued and

submitted. Further, at the hearing on these motions, the

Court asked plaintiff to indicate whether it would be

willing to accept a remittitur of all damages in excess of

$1,924,515 on its unfair competition claim in lieu of

granting defendant’s motion for new trial, at least as to

damages, on that claim. Plaintiff, or August 10, 1990, filed

its acceptance of the remittitur.

The Court denies the motion for JNOV and for a

new trial on liability. The Court is satisfied that the

instructions given to the jury on this claim correctly stated

the law and that the evidence is sufficient to support the

verdict of liability on this claim. Further, error and

prejudice on the other claims did not infect this claim.

Since defendant’s objection as to a jury trial on this claim

was not made until after the first trial, it was waived as to

the first trial.

On the amount of "restitution," the court has

several comments. First, at the first trial, the parties

agreed as to the proper amount of restitution as

$1,924,515. On that basis, that amount was included in

the instructions. Second, the Court agrees with plaintiff

that the only logical basis of the amount of the verdict was

for the jury to have added the restitution amount to the

amount of damages determined by plaintiffs damage

expoert, George Strong. Third, plaintiff has intimated that

if there is a new trial, it will seek substantially greater

restitution -- in the $12 million range. Based on the

A31

testimony thus far however, the Court does not find that

"restitution" in this case exceeds the "stipulated" amount of

$1,924,515.

The Court further concludes that plaintiff is

entitled to prejudgment interest on the amount of

restitution under Cal. Civ. Code §3287(a). It cannot be

disputed that the amount involved is a sum certain. Since

this claim for restitution arises under plaintiffs unfair

competition theory, the Court finds that the first demand

for restitution was the initial complaint in this action.

Thus, prejudgment interest will be awarded from

December 23, 1985, the date the action was commenced.

The applicable rate under state law is seven percent (7%)

per annum. Cal. Civ. Code §1916-1; see also Cal. Civ.

§3289. Computed in accordance with these requirements,

plaintiff shall be awarded prejudgment interest in the

amount of $625,937.65. Moreover, regardless of plaintiff's

right to prejudgment interest under statute, the Court

finds as an equitable matter, that plaintiff should receive

prejudgment interest, as calculated above, to make it

whole. Otherwise, given the delays in this case, restitution

would not be an adequate remedy.

IT IS ORDERED:

1. Defendant’s motion for JNOV or, in the

alternative, for a new trial on the unfair competition

claims is DENIED.

2. Based on plaintiffs acceptance of a

remittance, remitting all amounts on the unfair

competition claim in excess of said sum, judgment shall be

A32

entered in plaintiffs favor in said claim in the sum of

$1,924,515, together with prejudgment interest in the sum

of $625,937.65.

Dated: August 13, 1990

/s/

A. WALLACE TASHIMA

United States District Judge

A33

APPENDIX G

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

GEOPHYSICAL SYSTEMS

CORP., etc.,

No. CV

Plaintiff, 85-8359 AWT

JUDGMENT ON

VERDICTS

¥.

RAYTHEON COMPANY,

INC., etc.,

Defendant.

Nee Nee ee ee Nee ee Ne ee ae ee ee ee SN

This action having been tried twice to a jury,

IT IS ADJUDGED:

: In accordance with the verdict in the first

trial, after remittitur of excess amounts by plaintiff,

Geophysical Systems Corporation shall recover from

defendant Seismograph Service Corporation, on its unfair

competition claim, the sum of $1,924,515, together with

prejudgment interest of $625,937.65, for a total award of

$2,550,452.65.

A34

2. In accordance with the verdict in the second

trial, plaintiff shall recover nothing on all of its remaining

claims and said claims are dismissed on the merits.

S Pursuant to 28 U.S.C. §1961(a), this

judgment shall bear interest at the rate of 7.88 percent per

annum.

4. Each party shall bear its own costs. Local

Rule 16.2.3.

Dated: August 13, 1990

/s/

A. WALLACE TASHIMA

United States District Judge

A35

APPENDIX H

CALIFORNIA BUSINESS AND

PROFESSIONS CODE

§ 17200. Unfair competition; law governing. As used in

this chapter, unfair competition shall mean and include

unlawful, unfair or fraudulent business practice and unfair,

deceptive, untrue or misleading advertising and any act

prohibited by Chapter 1 (commencing with Section 17500)

of Part 3 of Division 7 of the Business and Professions

Code.

A36

APPENDIX I

OKLAHOMA STATUTES TITLE 12

UNIFORM STATUTE OF LIMITATION

ON FOREIGN CLAIMS ACT

§ 105. Law governing. The period of limitation

applicable to a claim accruing outside of this state shall be

that prescribed either by the law of the place where the

claim accrued or by the law of this State, whichever last

bars the claim.