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QBEX Computadoras S.A. v. Intel Corp.

United States District Court, N.D. California, San Jose Division

November 17, 2017




         Plaintiff Qbex Computadoras S.A. (“Qbex”) sues Defendant Intel Corporation (“Intel”) for claims arising from Intel's provision of allegedly faulty smartphone microprocessors, which Qbex alleges overheated and sometimes caused the smartphones to catch fire or explode. Before the Court is Intel's motion to dismiss six of Qbex's eight claims for relief and certain of Qbex's prayers for relief. ECF No. 18 (“Mot.”). Having considered the submissions of the parties, the relevant law, the parties' arguments at the November 16, 2017 hearing, and the record in this case, the Court GRANTS IN PART and DENIES IN PART Intel's motion to dismiss six of the eight claims for relief and certain prayers for relief.

         I. BACKGROUND

         A. Factual Background

         Intel is a Delaware corporation based in California that “designs, trademarks, manufactures, markets, and sells microprocessors.” Complaint (“Compl.”), ECF No. 1, ¶ 12.

         Qbex is a Brazilian company that sells consumer electronics. Id. ¶¶ 11, 17-18. Qbex began selling electronics in Brazil in 2003. Id. ¶ 18. In 2005, Qbex began selling desktop computers. Id. ¶ 20. In 2008, Qbex desktops were recognized among the “most reliable” computers in Brazil. Id. ¶ 21. In 2012 and 2013, Qbex was listed among the top ten desktop vendors in Brazil. Id. Qbex began selling laptop computers in 2010. Id. ¶ 20. In 2013, Qbex began selling tablets. Id. By September 2015, Qbex's TX300 tablet was the second most sold tablet in Brazil. Id. ¶ 24. Between 2005 and 2012, Qbex's revenues increased from roughly $1, 300, 000 to $85, 000, 000 per year. Id. ¶ 22.

         1. Development of the Intel-Qbex Smartphone Deal

         In January 2015, Alessandra Souza, an Intel executive representative in Brazil who was in charge of the Qbex account, approached Joabe Fonseca, the president of Qbex, about the possibility of launching Intel's line of smartphones in Brazil under the Qbex brand. Id. ¶ 25. The smartphones would feature Intel's SoFIA microprocessor and mobile platform. Id. ¶ 26.

         On February 27, 2015, Souza sent Fonseca catalogs of Intel's original design manufacturers (“ODMs”) that would provide the Intel smartphone hardware to Qbex. Id. ¶ 29. Qbex explains that U.S. technology companies design products and then outsource the manufacturing of those products to ODMs. Id. ¶ 30. Water World Technology Co. Ltd. (“Water World”) in China would be the ODM for the motherboard and internal systems of the smartphones. Id. ¶ 31. Fuzhou Rockchip Electronics Co. Ltd. (“Rockchip”) was the ODM for the SoFIA microprocessors. Id. ¶ 32. Fortune Ship Technology (HK) Limited (“Fortune Ship”), I-Swim Technology Company Limited (“I-Swim”), and HK Tianruixiang Communication Equipment Limited (“HK Tianruixiang”), all based in China or Hong Kong, were the system integrators for the smartphone parts. Id. ¶ 31. Souza told Fonseca that Intel was responsible for the design and quality of the products and that Intel had supervising technicians working at its ODM and system integrator partners' factories to ensure compliance with Intel's standards and designs. Id. ¶ 33.

         Fonseca attended Intel's Solutions Summit for Latin America (the “ISS Conference”) on April 22, 2013. Id. ¶ 34. At the ISS Conference, Fonseca met with Intel's vice president and sales and marketing group general manager for Latin America, Steve Long. Id. ¶ 35. During the meeting with Long, Fonseca agreed on behalf of Qbex to launch the Intel smartphones under the Qbex brand. Id.

         On June 5, 2015, Marcelo Pinheiro of Intel sent Fonseca a presentation about the SoFIA microprocessor and Intel's mobile platform. In this presentation, Intel represented that its SoFIA microprocessor performed better than the microprocessors produced by Intel's competitors MediaTek and Qualcomm. Id. ¶ 37. Based on this presentation, Fonseca confirmed Qbex's decision to launch Intel's smartphones rather than Qualcomm's smartphones. Id. ¶¶ 37-38.

         Qbex contends that the contractual relationship between Intel and Qbex was governed by a range of written agreements that Qbex refers to as the “umbrella agreements.” Id. ¶¶ 39, 48. The umbrella agreements included a Technology Provider Program Agreement (“Provider Agreement”), a Channel Trademark License Agreement, and separate Price Matching Agreements. Id. ¶¶ 40, 47. Qbex contends that the umbrella agreements “were supplemented or expanded by oral and written communications regarding the number of units that Qbex agreed to purchase and that Intel agreed to provide to Qbex from its ODMs.” Id. ¶ 48.

         In preparation for the launch of the smartphones, Qbex invested more than $130, 000 and eventually shifted more than 90% of its capacity to the assembly, marketing, and sale of the Intel smartphones. Id. ¶ 53. Qbex also hired more than 200 new employees for the Intel smartphone business. Id. Qbex began to sell the Intel smartphones in October 2015. Id. ¶ 55. Between October 2015 and December 2016, Qbex sold (or distributed) 235, 074 units. Id. ¶ 57.

         2. The Overheating Problems

         Qbex contends that the Intel microprocessor “and/or mobile system had a design defect that caused the [smartphone] to overheat and even explode.” Id. ¶ 58. As a result of the defect, there were 2 reported incidents of malfunction in December 2015, 43 smartphone returns or complaints in January 2016, 79 returns or complaints in February 2016, and 219 returns or complaints in March 2016. Id. ¶ 70. In April 2016, there were 401 complaints or returns; in May 2016, there were 915 complaints or returns; and in June 2016 there were 1, 446 complaints or returns. Id. ¶ 75. There were 9, 090 complaints or returns in July 2016 and 5, 962 complaints or returns in August 2016. Id. ¶ 86. In total, Qbex alleges it received more than 35, 000 customer complaints related to the alleged design defect in the SoFIA microprocessor. Id. ¶ 91.

         Qbex explains that as part of its quality control procedures, Qbex tested the performance of smartphone samples it received from the ODMs before beginning its own mass production of the phones. Id. ¶ 64. “While performing these tests, Qbex's engineering team noted that the temperature of the Intel [s]martphones was higher than the temperature of other comparable electronics.” Id. ¶ 65.

         In an email dated December 12, 2015, Raul Miranda of Qbex's engineering team reported the overheating problem to Fortune Ship officials and attached a copy of a Qbex engineering report showing a performance temperature of 44 degrees Celsius. Id. ¶¶ 66-67; Exh. E. On December 14, 2015, Raymond Zou of Fortune Ship responded that “the maximum temperature 44 degree[s] Celsius should be accepted. For Intel SoFia 3G platform, the power consumption is a little higher than other platform.” Compl. ¶ 68; Exh. E. Qbex raised the overheating issue with Souza, who represented to Qbex that Intel would review the issue with Fortune Ship. Compl. ¶ 69. Qbex contends that Souza's response was misleading because Intel and Fortune Ship had already determined by October 2015 that the smartphones tended to overheat. Id. ¶¶ 59, 69.

         Qbex alleges that between February and April 2016, Intel officials conveyed satisfaction with the sales of the Intel phones in the Brazilian market and optimism about the future of the SoFIA platform. Id. ¶¶ 72-76. On April 29, 2016, however, Intel announced that it was canceling the production of the SoFIA microprocessor. Id. ¶ 77. Intel represented to Qbex that this decision was a result of business restructuring, not because of any problem with the microprocessor. Id.

         At the May 2016 ISS Conference, Fonseca met with Souza, Long, and Vice President and General Manager of Global Accounts CJ Bruno. Id. ¶ 79. During that meeting, Bruno “agreed on behalf of Intel to sell to Qbex through Intel's ODMs 970, 000 smartphone units to cover the market demand through the second quarter of 2017.” Id. ¶ 81. Qbex contends that Intel “further agreed to provide technical support to Qbex and its customers through, at least, the second quarter of 2017.” Id. ¶ 83. This agreement was memorialized in an email dated May 19, 2016. Id. ¶ 84; Exh. G.

         At some point, Qbex heard rumors that Intel fired all the engineers in charge of the SoFIA microprocessors and that the ODMs could not solve the overheating problems without Intel's engineers. Compl. ¶ 87. Qbex eventually “confirmed through an independent study that a design defect in Intel's SoFIA microprocessor” was indeed the cause of the smartphones' overheating problems. Id. ¶ 88. In December 2016, Qbex terminated its relationship with Intel and stopped selling the Intel smartphones. Id. ¶ 89.

         3. Qbex's Damages Contentions

         Qbex contends that it has suffered damages as a result of the defective SoFIA microprocessors including but not limited to the loss of its investment in the smartphone expansion, the loss of goodwill and reputation, and the loss of expected profits on the sale of the smartphones that Intel agreed to supply through the second quarter of 2017. Id. ¶ 90. In addition, Qbex alleges that it hired 216 additional employees to manage customer complaints and related lawsuits. Id. ¶ 91. Moreover, Qbex has agreed to exchange more than 18, 000 defective smartphones and has resolved or settled numerous administrative and judicial complaints. Id. Finally, Qbex is currently storing 13, 518 smartphones that it cannot sell, in addition to 20, 000 units held in customs in Brazil and 10, 000 units in storage at the ODM factories in Hong Kong. Id. ¶ 92.

         B. Procedural History

         Qbex filed the instant complaint on June 12, 2017. Compl. The complaint alleges eight causes of action under Delaware law: (1) common law fraud; (2) violation of the Delaware Consumer Fraud Act, 6 Del. Code § 2513; (3) common law negligent misrepresentation; (4) breach of the implied warranty of merchantability, 6 Del. Code § 2-314; (5) common law breach of the covenant of good faith and fair dealing; (6) common law unjust enrichment; (7) common law civil conspiracy; and (8) breach of contract. Compl. ¶¶ 95-142.

         On August 3, 2017, Intel filed an administrative motion stating its intention to move to dismiss six of Qbex's eight causes of action and seeking an order that the deadline for Intel to respond to the other two causes of action would be fourteen days after the Court's ruling on its motion to dismiss. ECF No. 17. On August 4, 2017, Intel filed the instant motion to dismiss Qbex's first, second, third, fifth, sixth, and seventh causes of action, as well as Qbex's prayers for treble damages, punitive damages, and attorneys' fees. ECF No. 18.

         On August 7, 2017, Qbex opposed Intel's administrative motion to set the deadline for Intel's response to the other two causes of action not subject to the motion to dismiss. ECF No. 19. On August 15, 2017, the Court granted Intel's administrative motion. ECF No. 20. The Court ruled that if the Court denies Intel's motion to dismiss, Intel must answer the complaint within fourteen days of the Court's resolution of the motion to dismiss. If the Court grants Intel's motion to dismiss, Intel must file a responsive pleading within twenty-one days after service of the amended complaint. Id. at 2.

         On August 18, 2017, Qbex filed an opposition to the motion to dismiss. ECF No. 21 (“Opp.”). On August 25, Intel filed a reply. ECF No. 31 (“Reply”). The Court held a hearing on the motion to dismiss on November 16, 2017.


         A. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6)

         Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an action for failure to allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “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. 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.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations omitted). For purposes of ruling on a Rule 12(b)(6) motion, the Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).

         However, a court need not accept as true allegations contradicted by judicially noticeable facts, Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000), and the “[C]ourt may look beyond the plaintiff's complaint to matters of public record” without converting the Rule 12(b)(6) motion into one for summary judgment, Shaw v. Hahn, 56 F.3d 1128, 1129 n.1 (9th Cir. 1995). Nor is the Court required to assume the truth of legal conclusions merely because they are cast in the form of factual allegations.” Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (per curiam) (quoting W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981)). Mere “conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss.” Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004); accord Iqbal, 556 U.S. at 678. Furthermore, “‘a plaintiff may plead [him]self out of court'” if he “plead[s] facts which establish that he cannot prevail on his . . . claim.” Weisbuch v. County of Los Angeles, 119 F.3d 778, 783 n.1 (9th Cir. 1997) (quoting Warzon v. Drew, 60 F.3d 1234, 1239 (7th Cir. 1995)).

         B. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 9(b)

         Federal Rule of Civil Procedure 9(b) requires that allegations of fraud be stated with particularity. Specifically, the Ninth Circuit has held that averments of fraud “be accompanied by ‘the who, what, when, where, and how' of the misconduct charged.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). When an “entire claim within a complaint[] is grounded in fraud and its allegations fail to satisfy the heightened pleading requirements of Rule 9(b), a district court may dismiss the . . . claim.” Id. at 1107. The Ninth Circuit has recognized that “it is established law in this and other circuits that such dismissals are appropriate, ” even though “there is no explicit basis in the text of the federal rules for the dismissal of a complaint for failure to satisfy 9(b).” Id. A motion to dismiss a complaint “under Rule 9(b) for failure to plead with particularity is the functional equivalent of a motion to dismiss under Rule 12(b)(6) for failure to state a claim.” Id.

         C. Leave to Amend

         Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend “shall be freely granted when justice so requires, ” bearing in mind “the underlying purpose of Rule 15 to facilitate decision on the merits, rather than on the pleadings or technicalities.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (ellipses omitted). However, a court “may exercise its discretion to deny leave to amend due to ‘undue delay, bad faith or dilatory motive on part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party . . ., [and] futility of amendment.'” Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 892-93 (9th Cir. 2010) (alterations in original) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).


         Intel argues that six of Qbex's causes of action should be dismissed either for failure to comply with Federal Rule of Civil Procedure 9(b) or because they fail as a matter of Delaware law. The Court addresses Intel's arguments in turn below.

         A. Qbex's First Cause of Action for Common Law Fraud Fails to Satisfy Rule 9(b)

         1. The Parties' Arguments

         Qbex's first cause of action is for common law fraud under Delaware law. Qbex alleges that Intel represented that its SoFIA microprocessors were high quality microprocessors that would function not only for their intended purpose, but better than Intel's competitors' microprocessors. Compl. ¶ 96. Qbex contends that it relied on these representations in agreeing to sell the Intel smartphones under the Qbex brand. Id. ¶¶ 99-100. Qbex alleges that these representations were false because Intel knew or should have known that the SoFIA microprocessors were defective. Id. ¶ 98. Qbex alleges that it suffered more than $100 million in damages as a result of Intel's fraudulent misrepresentations. Id. ¶ 101.

         Intel argues that Qbex's common law fraud cause of action fails because it does not plead with sufficient particularity what damages are attributable to the alleged fraud. Mot. at 8. Specifically, Intel argues that Qbex fails to distinguish between damages attributable to fraud and damages attributable to breach of contract. Id. at 8-9. Qbex counters that its fraud claims arise from Intel's fraudulent inducement of Qbex at the outset of their smartphone partnership, whereas its contract claims arise from the May 2016 agreement for Intel to provide additional smartphones and technical support. Opp. at 4-5. As such, Qbex argues that the fraud-related damages it seeks are out-of-pocket expenses preparing for the launch of the smartphone business, lost goodwill, lost profits, and lost customers. Id. at 5. Qbex states that its contract-related damages are expectation damages resulting from Intel's ...

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