United States District Court, S.D. California
THE SHERWIN-WILLIAMS COMPANY, f/k/a SHERWIN-WILLIAMS AUTOMOTIVE FINISHES CORP., Plaintiff/Counter-Defendant,
JB COLLISION SERVICES, INC., d/b/a J & M AUTOBODY, and d/b/a/EL DORADO COLLISION; and DOES 1through 10, inclusive, Defendant/Counter-Claimants. THE SHERWIN-WILLIAMS COMPANY, f/k/a SHERWIN-WILLIAMS AUTOMOTIVE FINISHES CORP., Plaintiff/Counter-Defendant,
JJT, INC., d/b/a JOHN'S COLLISION CENTER, and JOHN TYCZKI, an individual, and DOES 1 through 10, inclusive Defendant/Counter-Claimants.
ORDER DENYING MOTION TO DISMISS DEFENDANTS' COUNTERCLAIMS
LARRY ALAN BURNS, District Judge.
Plaintiff Sherwin-Williams makes paints and coatings for cars. Defendants are two automotive body shops, JB Collision and JJT Inc., as well as their owner, John Tyczki. This action concerns two supply contracts between the parties: a September 2008 agreement between Sherwin-Williams and JB, and a May 2011 agreement between Sherwin-Williams and JJT personally guaranteed by Defendant Tyczki. In the first contract, JB agreed to buy all of its paints, coatings, and related products from Sherwin-Williams until JB spent $1, 300, 000. In the second, JJT agreed to largely the same terms, except the supply term was $250, 000. In return, Sherwin-Williams agreed sell its products to each Defendant at a discount and to provide each with a monetary advance ($275, 000 and $40, 000, respectively).
At a disputed time in early 2013, Defendants stopped buying all of their paints and coatings from Sherwin-Williams, and on February 28, 2013, Sherwin-Williams sent letters to both JB and JJT saying it believed each was in breach of its respective contract. Later, in April of 2013, JJT returned the $40, 000 advance on its contract.
That led to this consolidated action. Sherwin-Williams filed a complaint asserting breach of contract claims against JB, JJT, and Tyczki, who counterclaimed contract and tort causes of action that in essence alleged Sherwin-Williams's products were no good. After Defendants amended their counterclaims once, the Court granted Sherwin-Williams's motion to dismiss them and gave Defendants partial leave to amend. (13-cv-01946, Docket no. 31.) On June 24, 2014, Defendants jointly filed second amended counterclaims ("SACC") asserting six causes of action: 1) breach of the JB contract; 2) breach of the JJT contract; 3) concealment/fraud; 4) intentional misrepresentation; 5) negligent misrepresentation; and 6) unjust enrichment. (Docket no. 36.)
Now before the Court is Sherwin-Williams's motion to dismiss all of Defendants' counterclaims save the two for breach of contract. According to Sherwin-Williams, the 27-page counterclaim complaint is time-barred, inadequately plead, contradictory, and non-cognizable under California law. Defendants oppose on all fronts.
I. Legal Standard
A Rule 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The Court must accept all factual allegations as true and construe them in the light most favorable to Defendants. See Cedars-Sinai Med. Ctr. v. Nat'l League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007). To defeat Sherwin-Williams's motion to dismiss, the factual allegations of the SACC needn't be detailed, but they must be sufficient to "raise a right to relief above the speculative level...." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). That is, "some threshold of plausibility must be crossed at the outset" before a case can go forward. Id. at 558 (internal quotations omitted). A claim has "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.
While the Court must draw all reasonable inferences in a way that is favorable to Defendants, it need not "necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003) (internal quotations omitted). In fact, the Court does not need to accept any legal conclusions as true. Iqbal, 556 U.S. at 678. A complaint does not suffice "if it tenders naked assertions devoid of further factual enhancement." Id. (internal quotations omitted). Nor does it suffice if it contains a merely formulaic recitation of the elements of a cause of action. Twombly, 550 U.S. at 555.
A pleading that sounds in fraud must satisfy the particularity requirement of Federal Rule of Civil Procedure 9(b). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003). The complaint "must state with particularity the circumstances constituting fraud...." Fed.R.Civ.P. 9(b). "To ascertain whether a complaint sounds in fraud, ' we must normally determine, after a close examination of the language and structure of the complaint, whether the complaint allege[s] a unified course of fraudulent conduct' and rel[ies] entirely on that course of conduct as the basis of a claim.'" In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 885 (9th Cir. 2012) (quoting Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1161 (9th Cir. 2009)). "Rule 9(b) demands that the circumstances constituting the alleged fraud be specific enough to give defendants notice of the particular misconduct so that they can defend against the charge and not just deny that they have done anything wrong." Vess, 317 F.3d at 1106. Thus, to survive a motion to dismiss, any claim sounding in fraud "must be accompanied by the who, what, when, where, and how' of the misconduct charged." Id. (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)).
When the Court granted Sherwin-Williams's previous motion to dismiss, it identified several pleading problems with Defendants' concealment/fraud and misrepresentation claims. The Court held that Defendants failed to connect allegations of concealment and fraud to any particular statements by Sherwin-Williams; that their factual allegations were based on the hard-to-accept premise that Defendants were defrauded into continuing the supply agreement despite being a dissatisfied customer of Sherwin-Williams for over two years; that the allegations were not careful to always specify who from Sherwin-Williams said what, and when and where it was said, with adequate particularity; that some of Defendants' general allegations constituted non-actionable puffery; that Defendants did not plausibly support the allegation that Sherwin-Williams knew it was misleading Defendants all along (as opposed to just having a good faith dispute over product quality); and finally that Defendants could overcome California's economic-loss rule (that no tort cause of action will lie where the breach of duty is nothing more than a violation of a contractual promise) only if it clarified that Sherwin-Williams's alleged misrepresentations about the quality of its products induced Defendants to enter into and, later on, to not terminate the supply agreements. (Docket no. 31.)
A. Factual Allegations
Defendants' SACC goes a long way in directly addressing the Court's previous ruling. Defendants clarified that their asserted fraud claims were independent of their breach claim, premised instead on a theory that the contracts were fraudulently induced. ( E.g., SACC ¶¶ 17, 18, 20, 43-47, 54-55, and 62.) Defendants also alleged further factual detail, specifying that, in August and September of 2008, Sherwin-Williams's agents Jose Garcia and Kurt Hammond told Tyczki that its water-based paint products provided "perfect color match, " that they did not cause well-known paint problems such as "dye back, " "sanding scratches, " "color fading, " "color match problems, " "solvent popping, " "paint shrinkage, " and "orange peel." (SACC ¶18.) Garcia is also alleged to have warranted that the products would allow Defendants to paint a vehicle "prime to shine in 50 minutes." ( Id. ¶ 20(a).) Defendants further detailed that Garcia made the representations over the phone in August and September of 2008 knowing them to be false. ( Id. ¶20(a)-(b).) According to the SACC, Sherwin-Williams represented that its water-based paint products were of the same quality as its solvent-based products to induce Defendants to switch, and whereas the solvent-based products had none of the above defects, Sherwin-Williams's water-based paints exhibited all of them. ( Id. ¶19.)
Defendants allege that in September 2008, one week after being induced to switch to water-based paints, Tyczki noticed their color-match problems and complained to Garcia. ( Id. ¶ 20(c).) According to the SACC, Garcia and Hammond then met with Tyczki at the Brigantine Restaurant in Poway, California to acknowledge that there were problems with the product and assure him that the problems would be corrected; the SACC goes on to allege that Garcia and Hammond knew such representations to be false when making them, trying to induce Tyczki not to terminate the agreement. ( Id. ¶20(d).) Sherwin-Williams represented that it would fix the water-based paints' color fading, sanding scratches, solvent popping, shrinkage, and dye back problems if the parties agreed to revert to solvent-based paints for six months, ( id. ¶20(e)-(f)), and then represented that the problems were fixed approximately six months later, in March 2009, ( id. ¶20(f)). Defendants allege that they acquiesced to using ...