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Leading Manufacturing Solutions, LP v. Hitco, Ltd.

United States District Court, S.D. California

March 24, 2017

LEADING MANUFACTURING SOLUTIONS, LP, Plaintiff,
v.
HITCO, LTD., et al., Defendants.

          ORDER DENYING MOTION TO STRIKE OR DISMISS; AND ORDER GRANTING MOTION FOR LEAVE TO AMEND [DOCKET NUMBERS 40, 60]

          HONORABLE LARRY ALAN BURNS United States District Judge

         After Plaintiff Leading Manufacturing Solutions, LP (“LMS”) filed a second amended complaint (“SAC”) that added Theodore B. Smith, Jr. as a Defendant, Smith filed a motion to strike certain allegations and to dismiss. Smith contends that he was added as a Defendant solely on the basis of what LMS learned during settlement negotiations. He argues that this violates Fed.R.Evid. and that the allegations should therefore be stricken. After those allegations are stricken, he argues, the SAC fails to state a claim against him. He also seeks dismissal of the SAC's two claims against him. Defendants, HITCO, LTD. and HITCO, INC. (the “HITCO Defendants”) did not move to dismiss, but instead filed an answer.

         After that, LMS sought leave to file a third amended complaint (“TAC”), which Defendants all opposed.

         I. Motion to Strike and to Dismiss

         A. Legal Standards

         A Rule12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Under Fed.R.Civ.P. 8(a)(2), only "a short and plain statement of the claim showing that the pleader is entitled to relief, " is required, in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-55 (2007). The well-pleaded facts must do more than permit the Court to infer "the mere possibility of conduct"; they must show that the pleader is entitled to relief. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

         When determining whether a complaint states a claim, the Court accepts all allegations of material fact in the complaint as true and construes them in the light most favorable to the non-moving party. Cedars-Sinai Medical Center v. National League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007) (citation omitted). But the Court is "not required to accept as true conclusory allegations which are contradicted by documents referred to in the complaint, " and does "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) (citations and quotation marks omitted).

         At the pleading stage, the Court may consider not only the complaint itself, but also documents it refers to, whose authenticity is not questioned, and matters judicially noticed. Zucco Partners LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009). The Court also need not accept as true allegations that contradict properly subject to judicial notice, or incorporated into the complaint. Gonzalez v. Planned Parenthood of Los Angeles, 759 F.3d 1112, 1115 (9th Cir. 2014).

         Under Fed.R.Civ.P. 12(f), the Court can strike from a pleading any "redundant, immaterial, impertinent, or scandalous matter, " either sua sponte or in response to a motion.

         B. Discussion: Motion to Strike

         Shortly after LMS filed its amended complaint, Smith says, the parties engaged in settlement negotiations, during which financial information was exchanged. This, he says, led to LMS's discovering that the two Defendants, HITCO, LTD. and HITCO, INC., were insolvent. As a result, LMS soon requested leave to amend. Among other things, the SAC added Smith as a Defendant. Smith argues that information LMS obtained during the settlement discussions led to LMS pointing the finger at Smith. This, he argues, violates Fed.R.Evid. 408, and he asks the Court to strike all allegations that Smith is the alter ego of the two HITCO entities. Smith's motion identifies particular allegations he says were made only after LMS learned of the HITCO entities' insolvency. (Mot. (Docket no. 40-1) at 4:1-10.)

         Under Fed.R.Evid. 408(a), statements made during settlement negotiations cannot be admitted for certain purposes. These include proof of the validity or amount of a disputed claim, or impeachment by prior inconsistent statement. But under Rule 408(b), the evidence may be admitted for other purposes. Smith relies on McCrary v. Elations Company, LLC, 2013 WL 6403073 (C.D. Cal., July 12, 2013); Vaxiion Therapeutics, Inc. v. Foley & Lardner LLP, 2009 WL 1292913 (S.D. Cal., May 6, 2009); and the unpublished Ford v. United States, 917 F.2d 566 (9th Cir. 1990).[1]

         Neither McCrary nor Vaxiion helps Smith's position. In part, both stand for the unremarkable proposition that statements made in connection with settlement discussions are not admissible as evidence. Here, LMS is not seeking to admit any documents or statements from settlement discussions as evidence.

         In Vaxiion, the plaintiff asked the court to allow an expert witness to rely on a confidential document that was disclosed in connection with settlement discussions and subject to a protective order. The court refused, noting first that the witness was not an expert, and also that allowing the witness to rely on the document would violate the protective order. The court also opined that even though expert witnesses can rely on inadmissible evidence, allowing the expert to rely on evidence excluded under Rule 408 and ...


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