United States District Court, S.D. California
FREDERICK STOCCO, an individual, KATHLEEN STOCCO, an individual, and GIA FLORENCE SRL, an Italy company, Plaintiffs,
GEMOLOGICAL INSTITUTE OF AMERICA, INC., a California Corporation; and Does 1 through 100, Defendant.
WILLIAM Q. HAYES, District Judge.
The matter before the Court is the Motion for Summary Judgment (ECF No. 46) filed by Defendant Gemological Institute of America, Inc.
On April 19, 2012, Plaintiffs Frederick Stocco and Kathleen Stocco filed a complaint in San Diego Superior Court against Defendant Gemological Institute of America ("GIA"). (ECF No. 1). On May 29, 2012, Defendant removed the action to this Court on the basis of federal question jurisdiction. (ECF No. 1-3). On July 10, 2012, Plaintiffs filed the First Amended Complaint ("FAC"). (ECF No. 7). The FAC asserted the following claims for relief: (1) fraud - misrepresentation; (2) negligence, (3) breach of written contract; (4) fraud in the inducement; (5) failure to provide franchise offering circular; and (6) unfair business practices. On July 20, 2012, Defendant filed a motion to dismiss the FAC. (ECF No. 10). On January 3, 2013, the Court granted the motion to dismiss, dismissing Plaintiffs' third, fourth, fifth, and sixth claims for breach of written contract, fraud in the inducement, failure to provide franchise offering circular, and unfair business practices, respectively. (ECF No. 14).
On May 28, 2013, Plaintiffs filed the Second Amended Complaint ("SAC"), which is the operative pleading, adding GIA Florence SRL (hereinafter "GIA Italy") as a Plaintiff. (ECF No. 29). The SAC asserts the following claims for relief against Defendant GIA: (1) fraud - misrepresentation by Frederick and Kathleen Stocco; (2) negligence by Frederick and Kathleen Stocco; (3) breach of written contract by GIA Italy; and (4) failure to provide franchise offering circular by all Plaintiffs. On June 7, 2013, Defendant filed a motion to dismiss the SAC. (ECF No. 33). On September 24, 2013, the Court issued an order granting in part Defendant's motion to dismiss, dismissing Plaintiffs' fourth claim for failure to provide franchise offering circular. (ECF No. 37). On October 8, 2013, Defendant filed an Answer and Counterclaims to the SAC. (ECF No. 38).
On July 30, 2014, Defendant filed the Motion for Summary Judgment. (ECF No. 46). On August 20, 2014, Plaintiffs filed an opposition. (ECF No. 47). On August 25, 2014, Plaintiffs filed an amended opposition. (ECF No. 48). On August 29, 2014, Defendant filed a reply and objections to Plaintiffs' evidence in opposition. (ECF Nos. 51-52). On October 29, 2014, the Court held oral argument on the Motion for Summary Judgment.
On November 7, 2014, the Court issued an Order requesting supplemental briefing on three issues. (ECF No. 62). On November 20, 2014, Plaintiffs filed a supplemental brief. (ECF No. 63). On December 1, 2014, Defendant filed a response to Plaintiffs' supplemental brief. (ECF No. 64). On December 8, 2014, Plaintiffs filed a reply in support of their supplemental brief. (ECF No. 67).
II. Factual Background
A. The Stoccos' Social Security Benefits
In 1991, GIA-GEM, a subsidiary of GIA, hired Plaintiffs Frederick and Kathleen Stocco (together, the "Stoccos") to work in Italy. (Plaintiffs' Response to Defendant's Separate Statement of Undisputed Material Facts ("Pls.' RSSUF") ¶ 3, ECF No. 48-2 at 2). The Stoccos were hired pursuant to two separate employment agreements. Id. ¶ 5. The employment agreements, entered into between the Stoccos and GIA, covered a period from December 10, 1991, to December 15, 1993, and "assign [the Stoccos] for services in Vicenza, Italy." (SAC Ex. 1, at 3-4, ECF No. 29-2 at 3-4). The employment agreements list Frederick Stocco's base salary at $50, 000 and Kathleen Stocco's base salary at $30, 000. Id. The employment agreements do not cover or refer to U.S. Social Security benefits or promise to file a "certificate of coverage." (Pls.' RSSUF ¶ 9, ECF No. 48-2 at 3-4).
According to Frederick Stocco, Dennis Foltz,  a GIA representative (now deceased), hired him and told him at the time of his hiring in 1991 that GIA would file a "certificate of coverage" that would enable the Stoccos to participate in the U.S. Social Security System, even though they would be working abroad in Italy. Id. ¶ 6; (F. Stocco Dep. at 25:25-28:11, 54:2-23, ECF No. 46-4 at 5-8, 30). Frederick Stocco testified that Dennis Foltz told him that he "wouldn't have to pay into [Italy's] Social Security" and that he "was remaining in the U.S. Social Security system" by virtue of the filing of the "certificate of coverage." Id. at 54:15-23. Kathleen Stocco testified that she never had a conversation with anybody at GIA about a "certificate of coverage, " but testified that Chris Kennan, a "colleague" and head of GIA Bangkok, told her that "[y]ou get paid like [you have] always been paid." (K. Stocco Dep. at 86:6-15, 87:1-4, ECF No. 46-5 at 39-40).
"In December 1991, pursuant to their employment agreements, the Stoccos relocated from the U.S. to Vicenza, Italy." (Pls.' RSSUF ¶ 10, ECF No. 48-2 at 4). "Up until April 1992... the Stoccos were paid directly by GIA, and were provided paystubs, which showed deductions for U.S. Social Security taxes." Id. ¶ 17.
In 1992, GIA established GIA Italy, a wholly-owned subsidiary, for the purpose of opening a school for gemological studies in Vicenza, Italy. Id. ¶¶ 1, 11. Frederick and Kathleen Stocco became Managing Directors of the school. Id. ¶ 12. Kathleen Stocco "ran GIA Italy's day-to-day operations." Id. Frederick Stocco assisted Kathleen Stocco, acted as an interface for the school with local trade, and interviewed potential students. Id. ¶ 13. "After April 1992, [when the school became operational, ] the Stoccos received wages from only one entity - GIA Italy. The Stoccos did not receive any compensation from any source other than GIA Italy." Id. ¶ 20.
Kathleen Stocco testified that she was responsible for paying GIA Italy's bills and issuing employee paychecks and pay stubs, and that she was ultimately responsible for GIA Italy's payroll. (K. Stocco Dep. at 29:4-8, 60:10-61:6, ECF No. 46-5 at 13, 28-29). At one point, Kathleen Stocco testified that GIA did not request copies of wage statements or invoices paid by GIA Italy. Id. at 27:19-28:4. At another point, Kathleen Stocco testified that "all of the financials were reported to the U.S. So the U.S. would receive all of this information, and then make the payments in the U.S. But Italy would have nothing to do with that." (K. Stocco Dep. at 77:16-20; ECF No. 48-6 at 16). Frederick Stocco testified that Italian CPAs prepared GIA Italy's employee paychecks and wage statements, including the Stoccos' paychecks. (F. Stocco Dep. at 35:2-13, ECF No. 46-4 at 13). Frederick Stocco testified that either he or Kathleen Stocco would sign the paychecks and view the wage statements. Id. at 35:13-37:23. Frederick Stocco also testified that Italian CPAs prepared these documents because this process is "very complicated" in Italy. Id. at 36:23-37:9.
Kathleen Stocco testified that she was responsible for making payments on behalf of GIA Italy into the Italian social insurance system and that GIA Italy wage statements would show deductions for Italian social insurance taxes. (K. Stocco Dep. at 61:21-62:8, ECF No. 46-5 at 29-30). It is undisputed that from 1996-2011, "GIA Italy (and later GIA Florence) contributed to the Italian social insurance system on behalf of the Stoccos. The statements indicate that the Stoccos also contributed to their respective [Istituto Nazionale della Previdenza Social ("INPS")] Accounts." (Pls.' RSSUF ¶ 25, ECF No. 48-2 at 8; see also Exhibit 6 to the Declaration of Nancy Dix ("Dix Decl."), ECF No. 46-9; Exhibits 1-3 to the Declaration of Emiliana Dal Bon ("Dal Bon Decl."), ECF Nos. 46-24, 46-25, 46-26). Emiliana Maria Dal Bon, an Italian labor consultant, stated that, based on the Stoccos' INPS Statements, the Stoccos were contributing to the Italian social insurance system. (Dal Bon Decl. ¶¶ 10-12, ECF No. 46-23 at 3). Dal Bon stated that, "[l]ike the U.S. Social Security System, workers and employers in the Italian Social insurance system both contribute into the system on the worker's behalf." Id. ¶ 8.
Once the worker has contributed to the system for a certain number of years, which is determined in part by the category of the worker, the worker becomes vested in the system. The worker is then able to collect the benefits upon reaching a certain age, which is also determined in part on the category of the worker. Benefits are determined based on the number of years social contributions were paid into the system on the worker's behalf.
Id. Dal Bon concluded: "Having reviewed the Stoccos' INPS Statements of Account Contributions, I can confirm, based on my expertise, that both of the Stoccos are entitled to receive retirement benefits through the Italian Social Insurance System." Id. ¶ 12.
Kathleen Stocco testified that GIA Italy never issued a payment to the U.S. Social Security system. (K. Stocco Dep. at 81:4-14, ECF No. 46-5 at 38). Kathleen Stocco testified that she never saw U.S. Social Security tax deductions on her own paychecks or wage statements from 1993 until 2007. (K. Stocco Dep. at 79:7-13, ECF No. 48-6 at 18). Kathleen Stocco testified that U.S. Social Security tax deductions "would not be recorded in Italy" because "all of the financials were reported to the U.S. So the U.S. would receive all of this information, and then make the payments in the U.S. But Italy would have nothing to do with that." (K. Stocco Dep. at 76:8-9, ECF No. 46-5 at 35; K. Stocco Dep. at 77:16-20, ECF No. 48-6 at 16). Frederick Stocco testified that he did not see any indication on his wage statements after April of 1992 that U.S. Social Security taxes were being deducted from his wages. (F. Stocco Dep. at 39:24-40:5, ECF No. 46-4 at 16-17).
In 2007, GIA transferred ownership of GIA Italy to the Stoccos through a stock transfer agreement and licensing agreement ("2007 Licensing Agreement"). (Pls.' RSSUF ¶ 35, ECF No. 48-2 at 10). The 2007 Licensing Agreement permitted the Stoccos to use GIA's intellectual property and continue operating the gemology school. Id.
Frederick Stocco testified that he first discovered, in 2011, that GIA had not made Social Security contributions on his behalf any time after 1992. (F. Stocco Dep. at 50:4-7, ECF No. 46-4 at 27). Frederick Stocco testified that, in 2011, a Social Security Administration employee informed him that GIA had not made Social Security contributions for him after 1992, the same year GIA Italy was established. Id. at 50:9-20.
In 2012, Frederick Stocco began collecting 597 Euros per month from the Italian social insurance system. (Pls.' RSSUF ¶ 28, ECF No. 48-2 at 9). Kathleen Stocco will be eligible for Italian social insurance benefits when she turns 71. Id. ¶ 30. Frederick Stocco has received some U.S. Social Security benefits, and Kathleen Stocco is eligible to receive U.S. Social Security benefits. Id. ¶¶ 27, 29.
B. The Firgem Foundation and Drop-Off Window
In 2005, GIA relocated GIA Italy from Vicenza to Florence. Id. ¶ 31. At this same time, GIA, the Florence Chamber of Commerce, and the University of Florence incorporated the Firenze Scienze Gemmologiche ("Firgem Foundation"). Id. ¶ 32. The Firgem Foundation was formed by Articles of Incorporation ("Firgem Agreement"), which state that its purpose is to "exclusively pursue goals that encourage and support the creation of a multi-purpose center to promote study and research in the field of gemology" and "to promote training, study and research in the field of gold jewelry design and production." Id. ¶ 33. The Firgem Articles state that the Firgem Foundation is founded "[b]y the initiative of" GIA, the University of Florence, and the Florence Chamber of Commerce. (SAC Ex. 4 at 103, ECF No. 29-2 at 103). The Firgem Agreement provides that the Foundation is "delegating to [GIA Italy] the operational part of the activities and providing the premises of the Foundation to the above as a free of charge loan for use.'" Id. at 105. The Firgem Agreement provides that GIA Italy "will carry out independently" certain activities, including "[p]erforming the analysis of precious stones and metals, [and] issuing globally recognized GIA Carlsbad certificates...." (ECF No. 29-2 at 105). GIA President William Boyajian appointed Frederick Stocco as his proxy to sign the Firgem Agreement on behalf of GIA. (Exhibit 13 to the Declaration of DennisHickman ("Hickman Decl."), ECF No. 48-17).
In 2007, GIA transferred ownership of GIA Italy to the Stoccos through the 2007 Licensing Agreement. (Pls.' RSSUF ¶ 35, ECF No. 48-2 at 10). The 2007 Licensing Agreement permitted the Stoccos to use GIA's intellectual property and continue operating the gemology school. Id. In 2009, GIA and GIA Italy entered into an new licensing agreement that replaced the 2007 licencing agreement ("2009 Licensing Agreement"). Id . ¶ 36. Both licensing agreements provided that GIA Italy "will not operate any trade-service laboratory for the purpose of diamond grading, colored stone grading, or gem identification, without the prior written consent of GIA in each instance." (SAC Ex. 6 at 159, ECF No. 29-3 at 7; SAC Ex. 7 at 211, ECF No. 29-4 at 6).
In a letter dated May 10, 2007, Donna M. Baker, as GIA's president, appointed the Stoccos as Council Members of the Firgem Foundation. (Hickman Decl. Ex. 7, ECF No. 48-11). In 2008, Baker, as GIA's CEO, wrote a letter on behalf of GIA, resigning from the Firgem Foundation and delegating to GIA Italy "all powers [of GIA] to make any decisions and conclude any agreements relative to the Foundation." (Pls.' RSSUF ¶ 38, ECF No. 48-2 at 11; SAC Ex. 8 at 269, ECF No. 29-4 at 64).
On March 7, 2011, the Firgem Foundation issued a press release, stating:
The Florence Chamber of Commerce & Firgem (Fondazione Firenze Scienze Gemmologiche) formally opened their new gem laboratory, Gem Lab Services (GLS), based in the history center of Florence on the prestigious Via Tornabuoni.
GLS, a state-of-the-art lab, will offer services for diamond and colored stone grading reports backed by FIRGEM, as well as an impressive drop-off service for internationally recognized GIA (Gemological Institute of America) reports and certificates; the only Italian gem lab to offer this service, and, one of only 3 labs in Europe that offer a GIA drop-off service.
(Dix Decl. Ex. 9, ECF No. 46-12). In a letter dated March 22, 2011, Donna Baker wrote to Gregory Winegar of the Florence Chamber of Commerce and Firgem, stating:
It was brought to our notice... that the press release contained an error by stating GLS will offer a GIA drop-off service, one of three labs in Europe to do so. Actually, the only such locations in Europe are London and Antwerp. To prevent consumers from experiencing confusion or making incorrect assumptions, we respectfully request that future press releases do not mention GIA as regards grading services. We appreciate your understanding in this manner.
(SAC Ex. 9 at 271, ECF No. 29-4 at 66).
Brook Ellis testified that there was some discussion at some point between Defendant GIA and the Firgem Foundation about opening a "take-in window" but not a gem lab. (Ellis Dep. at 24:7-25:14, ECF No. 48-16 at 3-4). Frederick Stocco testified that, some time after they acquired ownership of GIA Italy in 2007, the Florence Chamber of Commerce agreed to provide eighty-percent of the revenues from a gem grading lab to fund the school, which formed their expectation of receiving revenue from a gem grading lab. (F. Stocco Dep. at 128:4-131:4, 140:18-141:1, ECF No. 46-6 at 35-38, 46-47). Kathleen Stocco testified that Defendant GIA never authorized GIA Italy to open a "gem lab, " "take-in window, " or "drop-off window." (K. Stocco Dep. at 111:13-21, ECF No. 48-6 at 30). Kathleen Stocco testified that her understanding of the Firgem Foundation's purpose was to support GIA education and open up a lab that issued GIA reports. Id. at 111:22-112:6. Kathleen Stocco testified that GIA Italy expected the Firgem Foundation's gem lab or take-in window to be a source of significant revenue for GIA Italy because "[w]hen you have the access to a GIA report, it draws the trade into that city for business. And when you draw the trade into the city for business, we have an increase in enrollments and thus revenue." Id. at 129:6-14.
III. Motion for Summary Judgment
Defendant moves for summary judgment on Plaintiffs' three remaining claims: (1) negligence; (2) fraud - misrepresentation; and (3) breach of written contract.
A. Summary Judgment Standard
"A party may move for summary judgment, identifying each claim or defense-or the part of each claim or defense-on which summary judgment is sought. The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A material fact is one that is relevant to an element of a claim or defense, determined by the substantive law governing the claim or defense. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
The moving party has the initial burden of demonstrating that summary judgment is proper. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 153 (1970). Where the party moving for summary judgment does not bear the burden of proof at trial, "the burden on the moving party may be discharged by showing'-that is, pointing out to the district court-that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Cartrett, 477 U.S. 317, 325 (1986); see also United Steelworkers v. Phelps Dodge Corp., 865 F.2d 1539, 1542-43 (9th Cir. 1989) ("[O]n an issue where the plaintiff has the burden of proof, the defendant may move for summary judgment by pointing to the absence of facts to support the plaintiff's claim. The defendant is not required to produce evidence showing the absence of a genuine issue of material fact with respect to an issue where the plaintiff has the burden of proof. Nor does Rule 56(c) require that the moving party support its motion with affidavits or other similar materials negating the nonmoving party's claim.") (quotation omitted).
If the moving party meets the initial burden, the nonmoving party cannot defeat summary judgment merely by demonstrating "that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586; see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986) ("The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient."). The nonmoving party must "go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial." Celotex, 477 U.S. at 324 (quotations omitted). The nonmoving party's evidence is to be believed, and all justifiable inferences are to be drawn in its favor. See Anderson, 477 U.S. at 256.
B. Second Claim for Negligence (by the Stoccos)
The Stoccos assert that Defendant GIA was negligent in failing to contribute to their U.S. Social Security accounts from April of 1992 until 2007. The Stoccos assert that Defendant GIA had a legal duty to do so because Dennis Foltz, a GIA vice president (now deceased), represented to the Stoccos at the time of their hiring that GIA would file certificates of coverage on the Stoccos' behalf. According to the Stoccos, Defendant GIA's filing of certificates of coverage would enable them to participate in the U.S. Social Security system while working abroad for GIA from 1992 until 2007, when ownership of GIA Italy was transferred to the Stoccos pursuant to the 2007 Licensing Agreement. Defendant moves for summary judgment on the Stoccos' negligence claim on three grounds: (1) statute of limitations; (2) lack of a legal duty; and (3) lack of damages.
i. Statute of Limitations
Defendant contends that any negligence claim is time-barred because the claim accrued in 1992, and the Stoccos should not get the benefit of the discovery rule. Specifically, Defendant contends that the Stoccos should have known that GIA was not making payments to the U.S. Social Security system because GIA Italy's audit reports and statements from Italy's social insurance system both showed that payments were being made to the Italian social insurance system. Defendant contends that the Stoccos themselves made payments to the Italian social insurance agency on GIA Italy's behalf, and that Frederick Stocco knew that the filing of certificates of coverage would exempt the Stoccos from paying into the Italian social insurance system. Defendant further contends that the wage statements the Stoccos received (and helped prepare) did not show any withholdings for U.S. Social Security taxes. Defendant contends that the Stoccos were aware that GIA Italy "never issued a check to the U.S. Social Security Administration for Social Security taxes." (ECF No. 46-1 at 12).
The Stoccos contend that they had no reason to inquire into their U.S. Social Security status until Frederick Stocco turned sixty-five in 2011. The Stoccos contend that a Social Security Administration agent informed Frederick Stocco in 2011 that his account "reflected a drastically reduced amount from that which he expected, " and Frederick Stocco began to inquire about payments made by GIA. (ECF No. 48-1 at 15).
In California, actions for personal injury and the breach of an oral contract have two-year statutes of limitations. Cal. Code Civ. Proc. § 335.1; Cal. Code Civ. Proc. § 339. "The general rule for defining the accrual of a cause of action sets the date as the time when, under the substantive law, the wrongful act is done, ' or the wrongful result occurs, and the consequent liability arises....'" Norgart v. Upjohn Co., 21 Cal.4th 383, 397 (1999) (citation omitted). "An exception to the general rule for defining the accrual of a cause of action-indeed, the most important' one-is the discovery rule." Id. (citation omitted). "It postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action." Id.
"California law recognizes a general, rebuttable presumption, that plaintiffs have knowledge of the wrongful cause of an injury.'" Grisham v. Philip Morris U.S.A., Inc., 40 Cal.4th 623, 638 (2007) (quoting Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797, 808 (2005)). "In order to rebut the presumption, a plaintiff must plead facts sufficient to convince the trial judge that delayed discovery was justified. And when the case is tried on the merits the plaintiff bears the burden of proof on the discovery issue." William L. Lyon & Assocs., Inc. v. Superior Court, 204 Cal.App.4th 1294, 1310 (2012) (quoting April Enters, Inc. v. KTTV, 147 Cal.App.3d 805, 832 (1983)). A plaintiff seeking the benefit of the discovery rule "must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence...." McKelvey v. Boeing N. Am., Inc., 74 Cal.App.4th 151, 160 (1999) (emphasis in original). "When there has been a belated discovery of the cause of action, the issue whether the plaintiff exercised reasonable diligence is a question of fact for the court or jury to decide. The drastic remedy of summary judgment may not be granted unless reasonable minds can draw only one conclusion from the evidence." Enfield v. Hunt, 91 Cal.App.3d 417, 419-20 (1979).
Because the Stoccos filed this action on April 19, 2012 (ECF No. 1 at 1), the Stoccos have the burden of proof at trial that they had no reason to discover that GIA was not contributing to their Social Security accounts before April 19, 2010.
It is undisputed that U.S. Social Security taxes were deducted from both Frederick and Kathleen Stoccos' paychecks issued by GIA until April of 1992. It is undisputed that wages and other employment benefits were only paid by GIA Italy after April of 1992. Both Frederick and Kathleen Stocco testified that they were paid by GIA Italy after April of 1992 and that they never saw U.S. Social Security tax deductions on their own wage statements after April of 1992. (F. Stocco Dep. at 39:16-19, 39:24-40:5, ECF No. 46-4 at 16-17; K. Stocco Dep. at 77:5-79:16, ECF No. 48-6 at 16-18). Kathleen Stocco testified that GIA Italy never issued a payment to the U.S. Social Security system. (K. Stocco Dep. at 81:4-14, ECF No. 46-5 at 38). Frederick Stocco testified that an ...