R Power Biofuels, LLC v. Chemex LLC

R POWER BIOFUELS, LLC, Plaintiff, v. CHEMEX LLC, Defendant.

Case No. 16-CV-00716-LHK

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

November 11, 2016

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS

Re: Dkt. No. 38, 39, 42, 52

R Power Biofuels, LLC ("Plaintiff") sued Chemex LLC ("Defendant") for breach of contract, breach of express and implied warranties, and for torts involving negligence and intentional conduct. ECF No. 37, First Amended Complaint ("Compl."). Before the Court is Defendant's motion to dismiss Plaintiff's claims for negligent and intentional misrepresentation, negligent and tortious interference with prospective economic advantage, tortious interference with contract, breach of the implied covenant of good faith and fair dealing, breach of the implied warranty of fitness for a particular purpose, and Plaintiff's prayer for consequential damages, punitive damages, and attorney's fees.¹ ECF No. 39 ("Mot."). Having considered the parties' briefing, the relevant law, and the record in this case, the Court GRANTS in part and DENIES in part Defendant's motion to dismiss.

I. BACKGROUND

A. Factual Background

The Court takes the facts alleged in the complaint as true for the purposes of deciding the instant motion to dismiss. Plaintiff is a former owner of AGRON Bioenergy LLC, formerly known as North Star Biofuels LLC (hereinafter "North Star"), and brings the instant suit as assignee of North Star's claims. Compl. ¶ 3.

In 2012, North Star entered into a written agreement with Defendant, in which Defendant agreed to design, engineer, and build a biodiesel production plant using North Star's proprietary biodiesel production technology. Id. ¶¶ 10-13. The biodiesel plant was to be built at North Star's facility in Watsonville, California. Id. ¶ 11. The written agreement was composed of two written "Services Orders," one entered on February 14, 2012 for the design of the biodiesel plant, and one entered on May 22, 2012 for the construction of the biodiesel plant.² Id. ¶¶ 13-14; ECF No. 40-1 ("February 14, 2012 Services Order"); ECF No. 40-2 ("May 22, 2012 Services Order"). Defendant refused to build the biodiesel plant unless it was also hired to design the plant. Id. ¶ 16. North Star paid Defendant $3.5 million in total to design and build the plant. Id. ¶ 18.

The biodiesel plant was based on a "modular" design, that is, the plant was composed of multiple independent "skid-mounted" structures connected to one another to form a fully-functioning biodiesel production plant. Id. ¶ 21. Defendant built each skid one at a time and delivered them on a rolling basis, albeit behind schedule and over-budget. Id. ¶ 26-27.

Between May 2012 and December 2012, Defendant asked North Star for permission to utilize used equipment from Defendant's storage yard, rather than new equipment, to build the plant. Id. ¶ 23. Defendant promised North Star that the used equipment would be suitable and ready to use for the biodiesel plant after Defendant refurbished and retrofitted the equipment to meet the design specifications of North Star's plant. Id. ¶¶ 23-25. Defendant sold this used equipment to North Star at a sizeable profit and charged significant additional fees for the work Defendant did to refurbish and retrofit the equipment. Id. ¶ 24.

The plant could not be started until all of the skids were delivered, installed, and properly connected. Id. ¶ 27. In June 2013, North Star attempted to start the biodiesel plant. Id. ¶ 28. While the structure housing North Star's proprietary biodiesel process functioned adequately, the other units performing conventional chemical engineering processes failed to perform. Id. After investigating the system, North Star detected performance problems and identified numerous engineering and fabrication errors caused by Defendant, many of which were caused by Defendant's failure to follow its own engineering and manufacturing designs. Id. ¶ 29-30. Specifically, Defendant failed to sufficiently refurbish and retrofit the used equipment it supplied, some of which were filled with dirt and debris and were the incorrect size for the design. Id. ¶ 29(b)-(c).

North Star repeatedly informed Defendant that the plant was not operational. Id. ¶ 32. Defendant promised to repair the plant at first, accepting responsibility for some errors, but denied responsibility for the majority of the problems. Id.¶ 32-33. Defendant provided some minor repairs and advice, but Defendant's actions and advice did not help or exacerbated the issues. Id. ¶ 34.

North Star was forced to make repairs itself and incurred $1.5 million in third-party costs. Id. ¶ 35. The plant eventually was able to run, but was never able to produce 1,000 barrels of biodiesel per day, the amount originally contemplated and for which the parties contracted. Id. ¶ 36.

North Star entered a number of contracts with major oil companies for the sale of biodiesel, locked in at high prices, in reliance on Defendant's assurances that the plant would be operational. Id. ¶ 45. North Star also anticipated that it would expand its business based on its relationships with several oil companies. Id. ¶ 46. On May 21, 2015, North Star assigned Plaintiff all claims for monetary losses caused by Defendant's conduct. Id. ¶ 49.

B. Procedural History

On February 11, 2016, Plaintiff filed the instant suit against Defendant. ECF No. 1. On June 24, 2016, after discussions with Defendant, Plaintiff filed the operative First Amended Complaint. Plaintiff claims (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) breach of the implied warranty of fitness for a particular purpose under California Commerce Code § 2315, (4) breach of express warranty, (5) tortious interference with contract, (6) negligent and tortious interference with prospective economic advantage, and (7) negligent and intentional misrepresentation. Compl. ¶¶ 50-149.

On July 25, 2016, Defendant filed the instant motion to dismiss, and a motion to seal the Services Orders at issue in the instant suit, including the portions of its motion that quote the Services Orders, ECF No. 38. On August 8, 2016, Plaintiff filed an opposition, ECF No. 43 ("Resp."), and moved to seal the portions of its opposition that quote the Services Order, ECF No. 42. On August 18, 2016, Defendant replied, ECF No. 53 ("Reply"), and moved to seal the portions of its reply that quote the Services Order, ECF No. 52.

II. LEGAL STANDARD

A. Motion to Dismiss Under Rule 12(b)(6)

A motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal under Rule 12(b)(6) may be based on either (1) the "lack of a cognizable legal theory," or (2) "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). While "'detailed factual allegations'" are not required, a complaint must include sufficient facts to "'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting 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." Id.

For purposes of ruling on a Rule 12(b)(6) motion to dismiss, the Court accepts all allegations of material fact as true and construes the pleadings in the light most favorable to the plaintiffs. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). The Court need not, however, accept as true pleadings that are no more than legal conclusions or the "'formulaic recitation of the elements' of a cause of action." Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 555). Mere "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996); accord Iqbal, 129 S. Ct. at 1949-50.

B. Leave to Amend

Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend "shall be freely given 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, 1140 (9th Cir. 2000) (en banc) (internal quotation marks and alterations omitted). When dismissing a complaint for failure to state a claim, "'a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.'" Id. at 1127 (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995)). Generally, leave to amend shall be denied only if allowing amendment would unduly prejudice the opposing party, cause undue delay, or be futile, or if the moving party has acted in bad faith. Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir. 2008).

C. State Law in Diversity Cases

"In determining the law of the state for purposes of diversity, a federal court is bound by the decisions of the highest state court." Albano v. Shea Homes Ltd. P'ship, 634 F.3d 524, 530 (9th Cir. 2011). If the state's highest court has not decided an issue, it is the responsibility of the federal courts sitting in diversity to predict "how the state high court would resolve it." Id.; Air-Sea Forwarders, Inc. v. Air Asia Co., Ltd., 880 F.2d 176, 186 (9th Cir. 1989) (internal quotation marks omitted). In the absence of clear authority, the Court looks for guidance from decisions of the state appellate courts and other persuasive authorities, such as decisions from courts in other jurisdictions and treatises. Strother v. S....