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Stroke Rehabilitation v. Nautilus


March 24, 2011


The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge


Presently before the Court are the parties' cross motions for summary judgment. (Doc. Nos. 94, 100.) Also before the Court are Defendant's request for judicial notice (Doc. No. 94-7 (RJN), and the parties' respective oppositions and replies (Doc. Nos. 99 (Pl.'s Opp'n), 104 (Def.'s Opp'n), 103 (Def.'s Reply), 105 (Pl.'s Reply)). Having considered the parties' arguments and the law, the Court GRANTS Defendant's request for judicial notice, DENIES Defendant's motion for summary judgment, and GRANTS IN PART and DENIES IN PART Plaintiff's cross motion.


This lawsuit is the second action arising out of a more than ten-year-old dispute over a contract for the purchase of medical grade exercise equipment. Four district judges, a host of neutral mediators, a special master, and two Ninth Circuit panels have had the pleasure of making the parties' acquaintances. Although this matter's tortuous litigation history could fill volumes-as the parties' briefing demonstrates-the following represents the Court's best effort to briefly set forth the relevant factual and procedural background.

In 1998 and 1999, Ponani Sukumar ordered "custom designed, medical grade [exercise] equipment designed for stroke rehabilitation purposes" from Defendant Nautilus, Inc. (Nautilus or Defendant).*fn1 (Doc. No. 99-10 (Sukumar Decl.) ¶¶ 4--5; Doc. No. 99-4 (Smith Decl.) ¶ 5.) Jeff Turner and Frank Smith negotiated the terms of the sale on behalf of Nautilus. (Sukumar Decl. ¶ 5; Smith Decl. ¶ 5.) Mr. Sukumar paid extra for "high end powder coating" on the machines in lieu of an ordinary paint job. (Sukumar Decl. ¶ 7; Smith Decl. ¶ 6.) Mr. Sukumar believed that the powder coating would protect the underlying metal frame against degradation, including rust and corrosion. (Sukumar Decl. ¶ 7.) Mr. Sukumar told Mr. Smith and Mr. Turner that the availability of powder coating and a warranty covering defects in powder coating influenced his decision to purchase the equipment from Nautilus. (Sukumar Decl. ¶¶ 6--7, 9--10; Smith Decl. ¶¶ 6--7.)

In approximately March of 1999, Nautilus advised Mr. Sukumar that the equipment he had ordered was ready. (Sukumar Decl. ¶ 11; Smith Decl. ¶ 13.) Mr. Sukumar reviewed photographs and videos of the machines and determined that there were "significant problems" with the machines. (Sukumar Decl. ¶ 11; Smith Decl. ¶ 13.) Mr. Sukumar asked Nautilus to remedy the problems before delivery. (Sukumar Decl. ¶ 11; Smith Decl. ¶ 13.) Nautilus attempted to do so, but it could not conform the machines to the contract specifications. (Sukumar Decl. ¶ 11; Smith Decl. ¶ 13.)

On February 11, 2000, Mr. Sukumar filed in the United States District Court for the Southern District of California a verified complaint against Nautilus for breach of contract, specific performance, and injunctive relief (the Direct Focus action).*fn2 (Sukumar Decl. ¶ 11; Doc. Nos. 99-9 to 99-14 (Def.'s Notice of Lodgment (NOL)) Ex. 1.) Magistrate Judge Anthony J. Battaglia brokered a settlement between the parties, pursuant to which Nautilus would deliver the equipment to Mr. Sukumar for inspection by retired Magistrate Judge Harry R. McCue. (Sukumar Decl. ¶ 13; Def.'s NOL Ex. 2.)*fn3

In approximately October 2001, Nautilus delivered the equipment for inspection by Judge McCue and Mr. Sukumar. (Sukumar Decl. ¶ 13.) Nautilus repaired some of the defects Mr. Sukumar identified on site -including cosmetic defects in the powder coating on the machines-and returned some of the machines to its factory for further repairs. (Id.; Def.'s NOL Ex. 2, at 1; Def.'s NOL Ex. 3, at 2.)*fn4 However, Judge McCue concluded that "Nautilus [had] complied with the contract with respect to the machines on site" and recommended that Mr. Sukumar be directed to pay the balance owing to Nautilus for the equipment. (Def.'s NOL Ex. 2, at 2; Def.'s NOL Ex. 3, at 3.) Judge McCue noted that Mr. Sukumar could address any remaining discrepancies "pursuant to any warranty which may be applicable." (Id.)

Thereafter, Nautilus delivered additional equipment to Mr. Sukumar and re-delivered the machines it had returned to its factory. (Sukumar Decl. ¶ 14; Def.'s NOL Ex. 3, at 3.) Mr. Sukumar rejected the machines. (Sukumar Decl. ¶ 14.) After meeting with the parties and reviewing Mr. Sukumar's list of complaints (Def.'s NOL Ex. 3, at 4), Judge McCue concluded that "[t]he only satisfactory solution to [the] dispute [was] to rescind the contract and restore the parties to the status quo ante" (id. at 7).

On August 7, 2002, in light of Judge McCue's findings, Judge Battaglia concluded that the settlement process had reached an impasse and that further litigation was necessary to adjudicate the parties' positions. (Def.'s NOL Ex. 5, at 2.) Judge Battaglia ordered that the equipment temporarily remain in Mr. Sukumar's possession to allow Mr. Sukumar "time to complete an expert inspection or analysis needed for trial." (Id.) On January 7, 2003, Judge Battaglia ordered Mr. Sukumar to return the equipment to Nautilus. (Sukumar Decl. ¶ 15.)

On April 1, 2003, Mr. Sukumar amended his complaint in the Direct Focus action. (Def.'s NOL Ex. 6.) The amended complaint alleged the same causes of action as the original complaint and added claims for fraud and violation of California Business and Professions Code section 17200. (Id.; see also Def.'s NOL Ex. 1.) With the exception of the claims for breach of contract, fraud, and specific performance, all of the claims were disposed of before trial. (Def.'s NOL Ex. 7, at Ex. A, at 1--2.) After a four-day bench trial, District Judge Larry Alan Burns granted judgment in Mr. Sukumar's favor on his breach of contract and specific performance claims. (Id. at 1; see also Def.'s NOL Ex. 7 (showing judgment entered December 8, 2004).) Judge Burns concluded that Nautilus breached its contract with Mr. Sukumar by, among other things, failing to provide Mr. Sukumar with certain labeling and features he had bargained for. (Def.'s NOL Ex. 7, at Ex. A, at 5--6.) Regarding Mr. Sukumar's complaints about cosmetic defects, however, Judge Burns concluded:

Nautilus is not in breach for having initially supplied machines with some pinholes in weld seams, weld spatter, variable size decals, one machine with a rusty bar, and one machine with latent rust requiring disassembly, sand blasting, and re-painting, and the like. Minor imperfections do not render the equipment unfit for its intended purposes. Nautilus cured or committed to cure most of the minor quality control items, and shall do so. (Id. at 6.) Judge Burns ordered Nautilus to conform the equipment to the contract specifications and deliver it to Mr. Sukumar by November 29, 2004, later extended to December 31, 2004. (Id.; Def.'s NOL Ex. 8, at 1.) The judgment gave Mr. Sukumar fourteen days after delivery to inspect and accept the machines. (Def.'s NOL Ex. 7, at Ex. A, at 6.)

Nautilus re-delivered equipment on December 30, 2004.*fn5 (Def.'s NOL Ex. 8, at 2.) On January 18, 2005, Mr. Sukumar filed a lengthy notice of conditions constituting material breach. (Def.'s NOL Ex. 8.) Mr. Sukumar's notice contained numerous complaints regarding the condition of the equipment's powder coating. (See id. at 4--6, 8--9, 11, 14, 17, 20.) Judge Burns ultimately rejected Mr. Sukumar's notice as untimely and denied him post-judgment relief. (See Def.'s NOL Ex.9.) Mr. Sukumar timely appealed.*fn6

The Ninth Circuit reversed Judge Burns's ruling that Mr. Sukumar's failure to timely file his notice deprived the court of jurisdiction to consider it and remanded for consideration of Mr. Sukumar's motion to enforce the judgment under Federal Rule of Civil Procedure 70. Sukumar v. Direct Focus Inc., 224 F. App'x 556, 560 (9th Cir. 2007). The court suggested that, on remand, Judge Burns appoint a special master "to work out a recommended final order." Id.

As the Ninth Circuit suggested, Judge Burns appointed retired Justice Howard B. Wiener to serve as a special master on remand. (Def.'s NOL Ex. 13.) Justice Wiener received written materials from both parties and established a website that allowed Mr. Sukumar to itemize the defects on each machine and Nautilus to respond. (Def.'s NOL Ex. 14, at 1.) Among other issues, Mr. Sukumar complained of "defective fit and finish including seriously compromised powder coating protection provided on all delivered equipment." (Id. at 2.) After reviewing the written materials and the parties' submissions to the website, Justice Wiener conducted an on-site inspection of the equipment with the parties, their counsel, and Mr. Sukumar's experts. (Id. at 3.)

On March 8, 2008, Justice Wiener submitted his findings. (See Def.'s NOL Ex. 14.) Relevant here, Mr. Sukumar's expert witness, Michael Cravens, opined that "the barrier protective value of the applied powder coated finish to the Nautilus fitness equipment [was] degrading rapidly" for a variety of reasons. (Id. at 8.) However, Justice Wiener generally "found each machine to be in good working condition with no defects that could reasonably and objectively be considered material." (Id. at 9.) Justice Wiener rejected Mr. Cravens's claim that the alleged powder coating defects would reduce the useful life of the equipment. (Id. ("I am satisfied that the useful life of each machine will not be reduced by any of the alleged defects identified by Cravens.").) Accordingly, with two exceptions not relevant here, Justice Wiener recommended that Judge Burns reject Mr. Sukumar's "broad assertion that there [was] a defective fit and finish with seriously compromised powder coating on all the delivered equipment." (Id. at 14.)

On April 23, 2008, Judge Burns adopted Justice Wiener's recommendations with minor modifications, including Justice Wiener's recommendation regarding Mr. Sukumar's fit and finish complaints. See Sukumar v. Direct Focus, Inc., 2008 WL 1860677, at *6--7 (S.D. Cal. Apr. 24, 2008) ("The court finds much of the deterioration cannot be attributed solely to defects arising from the machine conditions at the time of delivery, and is mindful of the inspections of that equipment memorialized in the record that occurred years ago by neutral observers who also described as minor, frivolous, or unrealistic many of Sukumar's complaints."). On October 16, 2009, the Ninth Circuit affirmed Judge Burns's order adopting Justice Wiener's report and recommendation, thus ending the more than nine-year Direct Focus saga. See Sukumar v. Direct Focus, Inc., 349 F. App'x 163 (9th Cir. 2009).

On December 22, 2008, Plaintiff filed in Los Angeles Superior Court a complaint against Nautilus for breach of express warranty, breach of implied warranty for fitness of purpose, and breach of implied warranty of merchantability. (See Compl.) Defendant removed the case to the United States District Court for the Central District of California on January 20, 2009 (Doc. No. 1.), and on April 10, 2009, District Judge Dale S. Fischer transferred the case to this District (Doc. No. 18). On May 28, 2009, the Court denied Plaintiff's motion to retransfer to the Central District of California. (Doc. No. 29.) On April 30, 2009, Judge Burns denied Defendant's request that he take the case pursuant to Civil Local Rule 40.1(d). (Doc. No.27.)

On August 12, 2010, Defendant filed its motion for summary judgment. (Doc. No. 94.) On September 3, 2010, Plaintiff responded to Defendant's motion and cross-moved for summary judgment. (Doc. Nos. 99, 100.) The Court heard oral argument on November 12, 2010. (Doc. No. 109.)


Federal Rule of Civil Procedure 56 permits a court to grant summary judgment where (1) the moving party demonstrates the absence of a genuine issue of material fact and (2) entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "Material," for purposes of Rule 56, means that the fact, under governing substantive law, could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). For a dispute to be "genuine," a reasonable jury must be able to return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.

The initial burden of establishing the absence of a genuine issue of material fact falls on the moving party. Celotex, 477 U.S. at 323. The movant can carry his burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party "failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof." Id. at 322--23. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987).

Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 324. The nonmoving party cannot oppose a properly supported summary judgment motion by "rest[ing] on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co.v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).


1. Defendant's Requests for Judicial Notice

Defendant moves the Court to take judicial notice of certain documents filed in the Direct Focus action in ruling on the instant motions. (See Def.'s RJN; Doc. Nos. 103-1 to 103-4 (Def.'s Supplemental RJN).) The Court finds that the documents are properly judicially noticed. See United States ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) ("We may take judicial notice of proceedings in other courts, both within and without the federal judicial system, if those procedings have a direct relation to the matters at issue." (internal quotation marks omitted)); see also Fed. R. Evid. 201. They are matters of public record, and Plaintiff does not dispute the authenticity of any document. Accordingly, the Court GRANTS Defendant's request for judicial notice.

2. Motions for Summary Judgment

Defendant moves for summary judgment on four grounds. First, Defendant contends that the judgment in the Direct Focus action precludes Plaintiff's claims in this action. (Mem. ISO Def.'s MSJ 12--18.) Second, Defendant contends that issue preclusion bars Plaintiff's claims. (Id. 18--21.) Third, Defendant contends that Plaintiff's breach of warranty claims lack merit as a matter of law. (Id. at 21--24.) And fourth, Defendant contends that the applicable statute of limitations bars Plaintiff's complaint. (Id. at 24--25.) Plaintiff moves for cross summary judgment on all of Defendant's contentions.*fn7 (See Pl.'s Mem. ISO MSJ.) The Court addresses each argument in turn.

A. Claim Preclusion

(1) Applicable Law

At the threshold, the parties disagree whether California or federal claim preclusion law applies to Plaintiff's breach of warranty claims. (Compare Mem. ISO Def.'s MSJ 12--13 (arguing that California law applies), with Pl.'s Opp'n 10 (noting conflicting authority).) In light of varied and contradictory case law on this issue, the Court commiserates with the parties. Nevertheless, the Court has reviewed the jurisprudence and concludes that California claim preclusion law applies.

In a diversity of citizenship action, a federal court applies the preclusion rules of the state in which it sits. Taylor v. Sturgell, 553 U.S. 880, 891 n.4 (2008); Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508--09 (2001). Confusion exists, however, regarding the content of California's claim preclusion doctrine as it applies to federal court judgments. In Costantini v. Trans World Airlines, 681 F.2d 1199, 1201 (9th Cir. 1982), the Ninth Circuit recognized that a California federal court must apply California's claim preclusion law in a diversity action. But the court concluded that "California law . . . determines the res judicata effect of a prior federal court judgment by applying federal standards." Id. Thus, California federal courts following Costantini have consistently applied federal standards to determine the preclusive effects of federal court judgments. See In re DirecTV Early Cancellation Litig., 783 F. Supp. 2d 1062, 2010 WL 3633079, at *12 (C.D. Cal. Sep. 7, 2010); Murray v. Sears, Roebuck and Co., 2010 WL 3490214, at *2 (N.D. Cal. Sep. 3, 2010); Gardner v. Shell Oil Co., 2010 WL 157647, at *3 (N.D. Cal. Apr. 19, 2010); Greenwich Ins. Co. v. Media Breakaway, LLC, 2009 WL 2231678, at *5 (C.D. Cal. July 22, 2009); MRW, Inc. v. Big-O Tires, LLC, 2008 WL 5113782, at *6 (E.D. Cal. Nov. 26, 2008); Genchev v. Detroit Diesel Corp., 2008 WL 4492648, at *3 (S.D. Cal. Oct. 2, 2008); Simmons v. Am. Airlines, 2002 WL 102604, at *3 (N.D. Cal. Jan. 23, 2002).

Contrary to the Ninth Circuit's holding in Costantini, however, California courts do not apply federal standards to determine the preclusive effect of federal court judgments in diversity actions. See Johnson v. GlaxoSmithKline, Inc., 83 Cal. Rptr. 3d 607, 615, 623--24 (Cal. Ct. App. 2008) (applying California's primary rights doctrine to determine preclusive effect of federal court decisions); City of Simi Valley v. Superior Court, 4 Cal. Rptr. 3d 468, 472 (Cal. Ct. App. 2003) ("California will determine the res judicata effect of the prior federal court judgment on the basis of whether the federal and state actions involve the same primary right." (quoting Gamble v. Gen. Foods Corp., 280 Cal. Rptr. 457, 460 (Cal. Ct. App. 1991)) (internal quotation marks omitted)); Lucas v. Cnty. of Los Angeles, 54 Cal. Rptr. 2d 655, 662 (Cal. Ct. App. 1996) ("Under California law, res judicata effect is determined on the basis of whether the prior federal judgment is based on the same primary right as the state action."). But see Louie v. BFS Retail and Commercial Operations, LLC, 101 Cal. Rptr. 3d 441, 448--49 (Cal. Ct. App. 2009) (applying federal standards to determine preclusive effect of federal court judgment in federal question action). In fact, at least one California court has concluded that the Ninth Circuit misconstrued California law when it decided Costantini. Gamble, 280 Cal. Rptr. at 460 ("The California cases cited by defendant do not hold that California courts must employ the transactional approach for the purposes of a res judicata analysis when a prior judgment has been rendered in federal court. Although Costantini . . . reaches a different conclusion, we believe that court misconstrued the holdings in Younger v. Jensen[, 605 P.2d 813 (Cal. 1980)] and Levy v. Cohen[, 561 P.2d 252 (Cal. 1977)]."). Taylor and Semtek require the Court to look to these California authorities in conducting its claim preclusion analysis. Accordingly, the Court declines to follow the interpretation of California law urged by Contstantini and its progeny.

(2) The Primary Rights Doctrine "Under California's claim preclusion doctrine, 'a valid, final judgment on the merits precludes parties or their privies from relitigating the same "cause of action" in a subsequent suit.'" San Diego Police Officers' Ass'n v. San Diego City Emps.' Ret. Sys., 568 F.3d 725, 734 (9th Cir. 2009). Three elements must be satisfied to support a claim preclusion defense: "(1) the second lawsuit must involve the same 'cause of action' as the first one, (2) there must have been a final judgment on the merits in the first lawsuit[,] and (3) the party to be precluded must itself have been a party, or in privity with a party, to that first lawsuit." Id.

California defines a "cause of action" for claim preclusion purposes by reference to the primary right at stake. Brodheim v. Cry, 584 F.3d 1262, 1268 (9th Cir. 2009) (citing Maldonado v. Harris, 370 F.3d 945, 952 (9th Cir. 2004)). Under the primary rights doctrine:

A "cause of action" is comprised of a "primary right" of the plaintiff, a corresponding "primary duty" of the defendant, and a wrongful act by the defendant constituting a breach of that duty. The most salient characteristic of a primary right is that it is indivisible: the violation of a single primary right gives rise to but a single cause of action.

Mycogen Corp. v. Monsanto Co., 51 P.3d 297, 306 (Cal. 2002) (quoting Crowley v. Katleman, 881 P.2d 1083, 1090 (Cal. 1994)); see also Boeken v. Philip Morris USA, Inc., 230 P.3d 342, 348 (Cal. 2010 ("[U]nder the primary rights theory, the determinative factor is the harm suffered. When two actions involving the same parties seek compensation for the same harm, they generally involve the same primary right."). A party must bring all claims arising out of the same cause of action in a single suit; "if not brought initially, they may not be raised at a later date." Mycogen, 51 P.3d at 302; see also Palomar Mobilehome Park Ass'n, 989 F.2d 362, 364 (9th Cir. 1993) ("California, as most states, recognizes that the doctrine of res judicata will bar not only those claims actually litigated in a prior proceeding, but also claims that could have been litigated.").

However, a prior judgment does not bar a subsequent action "when 'there are changed conditions and new facts which were not in existence at the time the action was filed upon which the prior judgment is based.'" Planning & Conservation League v. Castaic Lake Water Agency, 103 Cal. Rptr. 3d 124, 140 (Cal. Ct. App. 2009) (quoting McGaffey v. Sudowitz, 10 Cal. Rptr. 862, 864 (Cal. Ct. App. 1961)). Nor does the doctrine of claim preclusion bar claims that arise after the initial complaint is filed. Allied Fire Protection v. Diede Constr., Inc., 25 Cal. Rptr. 3d 195, 199 (Cal. Ct. App. 2005). "These rights may be asserted in a supplemental pleading, but if such a pleading is not filed a plaintiff is not foreclosed from asserting the rights in a subsequent action." Id.

(3) Discussion

Because Plaintiff succeeded to Mr. Sukumar's right, title, and interest in the equipment, the privity requirement is met here. See Basore v. Metro. Trust Co. of Cal., 234 P.2d 296, 298--99 (Cal. Ct. App. 1951); Compl. ¶ 9 & Ex. D. Plaintiff does not dispute that the December 2004 judgment after trial in the Direct Focus action is a final judgment on the merits. Thus, the only disputed issue is whether Plaintiff's breach of warranty action arises from the same cause of action-seeks to vindicate the same primary right-as Mr. Sukumar's earlier action against Nautilus. Resolution of this issue requires the Court to answer but one deceptively simple question: Could Mr. Sukumar have raised the instant breach of warranty claims in the Direct Focus action?

Defendant asks the Court to answer this question in the affirmative because Mr. Sukumar fully litigated his powder coating complaints in the Direct Focus action. (Mem. ISO MSJ 14--17; Reply 6.) Plaintiff, however, contends that the warranty claims in this action involve different defects than those at issue in the Direct Focus action. (Pl.'s Opp'n 12--15.)

The Court finds that a genuine issue of material fact exists regarding whether the warranty claims in this action are based on "changed conditions and new facts that were not in existence" at the time of the Direct Focus action. Planning & Conservation League, 103 Cal. Rptr. 3d at 140. Plaintiff's expert, Mr. Cravens, opines that "there are new . . . defects that have manifested subsequent to" the Direct Focus action. (Doc. No. 99-8 (Cravens Decl.) ¶ 8.) Mr. Cravens further opines "that other powder-coating defects that originally manifested prior to the conclusion of the [Direct Focus action] have now degraded" significantly. (Id. ¶ 9 (internal quotation marks omitted).) Mr. Cravens noted "numerous instances of osmotic blistering, rust[,] and corrosion that had increased in size" since his last inspection.*fn8 (Id.)

Defendant vigorously objects to Mr. Cravens's declaration on the ground that it contradicts Mr. Cravens's earlier declaration in the Direct Focus action. (Def.'s Reply 3--6.) In that declaration, Mr. Cravens opined that the machines' powder coating exhibited "strong physical evidence of pinholes in the coatings [sic] protective layer, poor coverage in recessed areas, thin coating over weld spatter, thin coating on sharp edges, coating over contamination, breaches in the coating do [sic] to material handling damage, and areas of under cured coating." (Def.'s Supplemental RJN Ex. A, at 45.) These defects were "widespread among the entire population" of machines. (Id.) According to Defendant, "[a]ny areas of 'corrosion' or rust spots therefore, including those recently found are necessarily the result of the larger defect already litigated, not new defects themselves." (Def.'s Reply 4.) In support of this proposition, Defendant cites Mr. Cravens's earlier declaration, in which Mr. Cravens opined:

Areas where the coating is compromised or signs of earlier failure of the coatings [sic] protective value if left untouched will cause corrosion and deterioration to start at these points, eventually undermining the coating and then spreading to adjacent areas. Furthermore, as corrosion increases, it does so at an accelerated rate until large areas of the surface are left totally unprotected. (Def.'s Supplemental RJN Ex. A, at 45.)

The Court does not read Mr. Cravens's declaration in this case as necessarily irreconcilable with his earlier deposition. Indulging every inference in Plaintiff's favor, as the Court must on summary judgment, the Court can fairly read Mr. Cravens's earlier declaration as referring to a discrete set of powder coating defects. (See id. at 44--45.) The declaration in this action specifically refers to "new . . . defects that have manifested subsequent to the Direct Focus litigation." (Cravens Decl. ¶ 8.) Without determining Mr. Cravens's credibility, the Court cannot conclude that the allegedly new defects asserted in this action "necessarily result[ed]" from the defects litigated in the Direct Focus action, as Defendant requests. (Def.'s Reply 4.) Rather, a genuine issue of fact exists regarding whether the defects asserted in this action arose after the Direct Focus judgment. This conclusion prohibits the Court from granting summary judgment on Defendant's claim preclusion defense.*fn9 See Allied Fire, 25 Cal. Rptr. 3d at 199; City of Downey v. Johnson, 145 Cal. Rptr. 298, 300 (Cal. Ct. App. 1978) (declining to apply claim preclusion because new rights accrued since rendition of prior judgment). Accordingly, the Court DENIES both motions as to this defense.*fn10

B. Issue Preclusion

(1) Legal Standard

As above, the Court applies California law in conducting its issue preclusion analysis. See Taylor, 553 U.S. at 891 n.4; Semtek, 531 U.S. at 508--09. Issue preclusion bars "a party to prior litigation from redisputing issues therein decided against him, even when those issues bear on different claims raised in a later case." Vandenberg v. Superior Court, 982 P.2d 229, 237 (Cal. 1999). Five requirements must be fulfilled to support an issue preclusion defense:

First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding. The party asserting collateral estoppel bears the burden of establishing these requirements.

Pac. Lumber Co. v. State Water Res.Control Bd., 126 P.3d 1040, 1054 (Cal. 2006) (quoting Lucido v. Superior Court, 795 P.2d 1223, 1225 (Cal. 1990)) (citations omitted). However, issue preclusion "does not apply where there are changed conditions or new facts which did not exist at the time of the prior judgment . . . ." U.S. Golf Ass'n v. Arroyo Software Corp., 81 Cal. Rptr. 2d 708, 713 (Cal. Ct. App. 1999).

(2) Discussion

Plaintiff's opposition to Defendant's motion for summary judgment only addresses whether the issue sought to be precluded from litigation here is identical to an issue decided in the Direct Focus action. (Pl.'s Opp'n 17--20.) Accordingly, the Court assumes for the purpose of ruling on these motions that Plaintiff does not dispute that the other four issue preclusion requirements are satisfied here.*fn11

Defendant defines the issue that it seeks to preclude Plaintiff from relitigating as follows: "Whether deficiencies exist in the powder coat applied to the Nautilus machines Plaintiff purchased in 1998--1999." (Mem. ISO Def.'s MSJ 19.) Plaintiff premises all of his breach of warranty claims on powder coating defects. (See Compl. ¶ 34 ("Nautilus breached its express warranties by delivering to SCSRA equipment whose powder coating suffered from defects in materials and/or workmanship."); id. ¶ 44 ("Nautilus breached its implied warranty [of fitness for purpose] . . . inasmuch as the Nautilus equipment was not free from defects and/or fit for its intended use and/or purpose because it suffered from defective workmanship and/or materials with respect to its powder coating."); id. ¶ 55 ("Nautilus breached its implied warranties of merchantability . . . inasmuch as the Nautilus equipment was not free from defects and/or fit for its purpose because it exhibited signs of defective workmanship and/or materials with respect to its powder coating.").) The question, then, is whether this issue is identical to an issue decided in the Direct Focus action.

Again, the Court finds that a factual dispute exists regarding whether the issue Defendant seeks to preclude is identical to an issue decided in the Direct Focus action. Defendant argues that the powder coating defects at issue in this case were adjudicated in the Direct Focus action as part of the "overarching issue" of "systemic powder coat deficiency on all Nautilus machines." (Def.'s Reply 7.) However, as the Court discussed supra, the Court can fairly read the record in the Direct Focus action as addressing a discrete set of defects. In his order adopting Justice Wiener's report and recommendation, Judge Burns observed that his orders in the Direct Focus action "appl[ied] only to the actual subject matter of [that] litigation, meaning the particular contracts, equipment, and issues adjudicated in [the Direct Focus action], as circumscribed by the complaint allegations, the operative pleadings, the trial[,] and the Judgment."*fn12 Direct Focus, 2008 WL 1860677, at *10. Further, Plaintiff has proffered evidence that the breach of warranty claims here are based on "new . . . defects that have manifested subsequent to the Direct Focus litigation." (Cravens Decl. ¶ 8.) If the Court credits Mr. Cravens's declaration, then the issue sought to be precluded necessarily could not have been litigated in the Direct Focus action because the subject of this action-the allegedly new defects-did not yet exist. This genuine issue of material fact prohibits the Court from granting summary judgment on Defendant's issue preclusion defense. See U.S. Golf Ass'n, 81 Cal. Rptr. 2d at 714--15 ("The new Formulas at issue in this case are totally different than the old formula at issue in St. Andrews. Because the facts and conditions at issue have changed, the issue is not 'identical,' and collateral estoppel does not apply."). Accordingly, the Court DENIES both motions as to this defense.

C. Breach of Warranty

(1) Express Warranty

Plaintiff premises its express warranty claim on the written product warranty that accompanied the equipment. (Compl. ¶ 15; see Compl. Ex. A.) In material part, the written warranty states: "Nautilus warrants to the original purchaser that their exercise equipment is free from defects in material and workmanship under normal use and service." (Compl. Ex. A.) Defendant provides a "Lifetime" warranty on the "Static Frame" of Nautilus strength machines and a five-year warranty on the "Structural Frame & Welds" of Nautilus bikes, climbers, and skates. (Id.) The parties dispute whether the Static Frame and Structural Frame & Welds warranties encompass the powder coating on the equipment.

California courts interpret written warranties according to general contract principles. McNeely v. Claremont Mgmt. Co., 27 Cal. Rptr. 87, 89 (Cal. Ct. App. 1962). Under California law, contract interpretation is a question of law. SDR Capital Mgmt., Inc. v. Am. Int'l Specialty Ins. Co., 320 F. Supp. 2d 1043, 1046 (S.D. Cal. 2004); see also Parsons v. Bristol Develop. Co., 402 P.2d 839 (Cal. 1965). "The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties." Byrne v. Laura, 60 Cal. Rptr. 2d 908, 916 (Cal. Ct. App. 1997). "When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible." Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 135 Cal. Rptr. 2d 505, 513 (Cal. Ct. App. 1992).

In interpreting the contract, a court must first determine whether the contract is ambiguous. See Han v. Mobil Oil Corp., 73 F.3d 872, 877 (9th Cir. 1995). "A contract provision is considered ambiguous when the provision is susceptible to more than one reasonable interpretation." SDR Capital Mgmt., 320 F. Supp. 2d at 1046 (citing MacKinnon v. Truck Ins. Exchange, 73 P.3d 1205, 1213 (Cal. 2003)). However, the "mere fact that a word or phrase in a policy may have multiple meanings does not create an ambiguity." Palmer v. Truck Ins. Exchange, 988 P.2d 568, 574 (Cal. 1999). "Ambiguity cannot be based on a strained instead of reasonable interpretation" of the contract's terms. McKee v. State Farm Fire & Cas. Co., 193 Cal. Rptr. 745, 746 (1983). The contract must be interpreted as a whole. MacKinnon, 73 P.3d at 1213. Further, the Court can determine whether the contract is ambiguous on its face or by using extrinsic evidence of the parties' intent. Oceanside 84, Ltd. v. Fidelity Fed. Bank, 66 Cal. Rptr. 2d 487, 492 (Cal. Ct. App. 1997); see also Founding Members, 109 Cal. App. 4th at 955. If no parol evidence is introduced to interpret the contract, or if the evidence is not contradictory, the trial court's resolution of the ambiguity is a question of law. See Winet v. Price, 6 Cal. Rptr. 2d 554, 557 (Cal. Ct. App. 1992). However, "when two equally plausible interpretations of the language of a contract may be made . . . parol evidence is admissible to aid in interpreting the agreement, thereby presenting a question of fact which precludes summary judgment if the evidence is contradictory." WYDA Assocs. v. Merner, 50 Cal. Rptr. 2d 323, 327 (Cal. Ct. App. 1996) (quoting Walter E. Heller Western Inc. v. Tecrim Corp., 241 Cal. Rptr. 677, 681 (Cal. Ct. App. 1987)).

The key provision at issue in this case is Defendant's guarantee that the "Static Frame" and "Structural Frame & Welds" are "free from defects in material and workmanship." (Compl. Ex. A.) Plaintiff contends that "[t]he plain language of the warranty unambiguously encompasses powder coating" because powder coating is a "'material' used in connection with the frames." (Pl.'s Opp'n 20.) Defendant, on the other hand, contends that "'Static Frame' refers to the metal structure, and does not include the paint or powder coating." (Def.'s Mem. ISO MSJ 23.) The language of the warranty itself is not a picture of clarity. Accordingly, the Court turns to the parties' extrinsic evidence to determine whether the disputed provisions are ambiguous.

In support of its proposed interpretation, Defendant submits the declarations of (1) Gregory Webb, Director of Engineering for Med-Fit Systems, Inc., the recent successor to Nautilus's Strength Division, and former Nautilus Vice President of Engineering for Commercial Strength (Doc. No. 94-5 (Webb Decl.) ¶ 1); (2) Tracy Maloney, Defendant's Vice President of Customer service (Doc. No. 94-6 (Maloney Decl.) ¶ 1); and (3) Dean Sbargia, President and CEO of Med-Fit Systems and former distributor of Nautilus strength equipment (Doc. No. 94-4 (Sbargia Decl.) ¶¶ 1, 2, 5).*fn13 Each declarant states that, to the best of his knowledge, Defendant has never provided any express warranty for the powder coating on machines it sells domestically. (Maloney Decl. ¶ 3; Sbargia Decl. ¶ 5; Webb Decl. ¶¶ 4--5.) Mr. Maloney explains that the warranty for the "metal frame" on its machines "is limited exclusively to the structural integrity of the machine and does not include the powder coat. Powder coat, paint, or rust issues are not covered by a Nautilus warranty."*fn14 (Maloney Decl. ¶ 6.) Mr. Webb, who is "aware of the specific machines that were at issue" in the Direct Focus action, specifically asserts that "no express warranty [was] provided for the powder coat on the Nautilus brand machines . . . [Plaintiff] possesses." (Webb Decl. ¶¶ 3, 6.)

Plaintiff, of course, submits three declarations supporting its proposed interpretation of the warranty.*fn15 Mr. Sukumar states that, while he was negotiating the sales contracts with Nautilus, it was his understanding "that [the] warranties for the structures and frames of the machines clearly covered the powder coating on the machines." (Sukumar Decl. ¶ 9.) Mr. Sukumar "mentioned on multiple occasions to [a Nautilus salesperson] that the comprehensive warranty provided by Nautilus was one of the primary reasons [he] was buying the equipment from Nautilus." (Id. ¶ 6; accord Smith Decl.¶ 6; Doc. No. 99-6 (Turner Decl.) ¶ 6.) Mr. Smith and Mr. Turner, the Nautilus salesmen who negotiated the sales contracts on Nautilus's behalf, understood that the warranties for the structues and the frames covered the powder coating on the machines. (Smith Decl. ¶ 8; Turner Decl. ¶ 9.) Mr. Smith also "assured Mr. Sukumar that his warranty coverage for the frames, structures[,] and welds of the equipment he was purchasing applied to the powder coating as well because the powder coating played an integral role in protecting the structures." (Smith Decl. ¶ 12.)

The Court, after receiving all of the extrinsic evidence, determines that the relevant warranty provision are "reasonably susceptible" to either proposed interpretation. Winet, 6 Cal. Rptr. 2d at 557. Declarants on both sides who are familiar with the specific transaction at issue-Webb for Defendant and Smith, Sukumar, and Turner for Plaintiff-interpret the warranty differently. (Smith Decl. ¶ 8; Sukumar Decl. ¶ 9; Turner Decl. ¶ 9; Webb Decl. ¶¶ 3, 6.) Accordingly, the meaning of the coverage provision for the machines' frames presents a question of fact. WYDA Assocs., 50 Cal. Rptr. 2d at 327. For that reason, the Court DENIES both motions as to Plaintiff's express warranty claim.*fn16

(2) Implied Warranty

Plaintiff's complaint alleges two implied warranty causes of action-one for breach of the implied warranty of fitness of purpose and one for breach of the implied warranty of merchantability. (Compl. 39--60.) To prevail on an implied warranty of fitness claim under California law, a plaintiff must establish the following elements:

(1) [T]he buyer intended to use the product for a particular purpose; (2) the seller had reason to know this; (3) the buyer relied on the seller's judgment to select suitable goods for that purpose; (4) the seller had reason to know that the buyer was relying on seller in this way; and (5) the product failed to suit buyer's purpose and subsequently damaged the buyer.

Birdsong v. Apple, Inc., 2008 WL 7359917, at *5 (N.D. Cal. June 13, 2008) (citing Keith v. Buchanan, 220 Cal. Rptr. 392, 399 (Cal. Ct. App. 1985)). To prevail on an implied warranty of merchantability claim, a plaintiff must demonstrate that the subject goods are unfit for the ordinary purpose for which such goods are used. Cal. Com. Code § 2314(2)(c).

Thus, in order to prevail on his implied warranty causes of action, Plaintiff must show that the machines are unfit for their intended purposes. Defendant, citing the findings of Judge McCue, Justice Wiener, and Judge Burns, argues Plaintiff should be estopped from re-arguing that the machines are unfit for their intended purposes. (Def.'s Mem. ISO MSJ 23--24 ("Retired Justice McCue, retired Justice Wiener, and sitting District Judge Burns, among many others, have all found, after years of inspections, expert reports, and litigation, that these Nautilus machines are compliant, fit for their intended purposes, and merchantable.").) The Court disposes of this issue as it disposed of Defendant's issue preclusion defense. Plaintiff has proffered evidence that it bases its breach of warranty claims on defects that arose after the conclusion of the Direct Focus litigation. (See Cravens Decl. ¶ 8.) Defendant has proffered conflicting evidence in the form of Mr. Cravens's purportedly contradictory declaration. (See Def.'s Supplemental RJN Ex. A, at 44--45.) Accordingly, the issue Defendant apparently seeks to preclude-whether the machines are fit for their intended purposes-conceivably could not have been litigated in the Direct Focus action because the allegedly new defects did not yet exist. In light of the factual dispute regarding when the relevant defects arose, the Court DENIES both motions as to Plaintiff's implied warranty claims.

(3) Notice

Defendant argues for the first time in its reply that Plaintiff has not provided the requisite notice of the allegedly new defects under California Commercial Code section 2607(3)(A) ("The buyer must, within a reasonable time after he or she discovers or should have discovered any breach, notify the seller of breach or bee barred from any remedy . . . ."). (Def.'s Reply 9.) Because Defendant raised this argument for the first time in its reply, it is improper, and the Court declines to consider it. See Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1093 n.3 (9th Cir. 2007).

D. Statute of Limitations

California Commercial Code section 2725 imposes a four-year statute of limitations for breach of warranty claims. See Fundin v. Chicago Pneumatic Tool Co., 199 Cal. Rptr. 789, 795 (Cal. Ct. App. 1984). A cause of action for breach of warranty accrues for statute of limitations purposes when the breach occurs, and the breach occurs when tender of delivery is made. Cal. Com. Code § 2725(2). Tender of delivery requires the seller to make available to the buyer goods that conform to the contract specifications. Cal. Com. Code §§ 2503(1), 2106(2). Here, Defendant did not deliver conforming goods to Plaintiff until December 30, 2004. (See Def.'s NOL Ex. 8, at 2; Direct Focus, 2008 WL 1860677, at *5--12.) Plaintiff commenced this action on December 22, 2008. (See Compl.) Accordingly, Plaintiff filed his complaint before the statute of limitations expired.*fn17

Defendant's argues that "Plaintiff's assertion that only conforming goods will trigger the statue is unsupported and would allow an indefinite tolling to any buyer in a sales of goods case." (Def.'s Reply 10.) This argument is without merit. Under California Commercial Code section 2725, a cause of action for breach of warranty does not accrue until tender of delivery is made. California Commercial Code section 2503 defines "tender of delivery" as delivery of conforming goods. Accordingly, the relevant statutes, by their plain terms require delivery of conforming goods to start the proverbial clock running on the statute of limitations.

Moreover, this interpretation of California Commercial Code section 2725 does not, as Defendant suggests, allow indefinite tolling. The statute of limitations is only tolled so long as the goods do not conform to the contract for sale. Once the seller delivers conforming goods, the statute of limitations begins to run. This interpretation is sensible where, as here, the seller does not deliver conforming goods for several years after the contract for sale is made.

Accordingly, the Court GRANTS Plaintiff's motion for summary judgment on Defendant's statute of limitations defense and DENIES Defendant's motion for summary judgment.


For the reasons stated above, the Court DENIES both motions for summary judgment as they pertain to Defendant's issue preclusion and claim preclusion defenses, and to the merits of Plaintiff's breach of warranty claims. As to Defendant's statute of limitations defense, the Court DENIES Defendant's motion and GRANTS Plaintiff's cross-motion.


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