1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 DAVID W. CAIN, an individual, Case No. 1:23-cv-01249-JLT-CDB 12 Plaintiff, ORDER DENYING MOTION FOR SUR-REPLY AND GRANTING IN PART 13 v. AND DENYING IN PART IFG’S MOTION TO DISMISS 14 INTERNATIONAL FRUIT GENETICS, LLC, a California Limited Liability (Doc. 36) 15 Company, 16 Defendant. 17 18 I. INTRODUCTION 19 Before the Court is Defendant Close Demeter LLC, formerly known as International Fruit 20 Genetics, LLC’s (“IFG”) motion to dismiss Plaintiff David Cain’s first amended complaint. 21 (Doc. 36.) For the reasons set forth below, the Court grants in part and denies in part IFG’s 22 motion. 23 II. BACKGROUND 24 Dr. Cain spent approximately twenty years as a plant geneticist at IFG developing fruit 25 varietals. (Doc. 34, ¶ 2.) Dr. Cain had no ownership interest in IFG but received yearly royalty 26 payments for the table grape varieties he developed for IFG. (Docs. 34, ¶ 3; 36-1 at 6.) In March 27 2022, IFG entered into a purchase agreement with SNFL Investment LLC (the “Buyer”) to sell 28 IFG. (Doc. 34, ¶ 4.) As part of its purchase of IFG, Buyer required that IFG buy out Dr. Cain’s 1 future stream of royalty payments. (Doc. 36 at 6.) Dr. Cain and IFG entered into a Buyout and 2 Waiver Agreement (the “Buyout Agreement”), which provided for Dr. Cain to receive $245 3 million dollars lump sum payment as satisfaction of Dr. Cain’s future stream of royalties. (Doc. 4 34, ¶ 4.) In May 2022, after the purchase agreement and Buyout Agreement were executed, a 5 minority member of IFG sought to invalidate the sale. (Doc. 34, ¶ 5.) Following resolution of the 6 minority member’s challenge, the pending sale closed on August 11, 2023. (Doc. 34, ¶ 8.) Dr. 7 Cain brought this suit seeking payment of the royalties allegedly accrued during the pendency of 8 the closing through: (1) a breach of contract claim; (2) a breach of the covenant of good faith and 9 fair dealing claim; (3) an unjust enrichment claim; and (4) a fraud in the inducement claim. (Doc. 10 34, ¶¶ 8–9, 41–78.) 11 III. LEGAL STANDARD 12 Under Federal Rule of Civil Procedure 12(b)(6), a party may file a motion to dismiss on 13 the grounds that a complaint “fail[s] to state a claim upon which relief can be granted.” Fed. R. 14 Civ. P. 12(b)(6). A motion to dismiss pursuant to Rule 12(b)(6) tests the legal sufficiency of the 15 complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In deciding a motion to dismiss, 16 “all allegations of material fact are taken as true and construed in the light most favorable to the 17 non-moving party.” In re Facebook, Inc. Internet Tracking Litig., 956 F.3d 589, 601 (9th Cir. 18 2020). In assessing the sufficiency of a complaint, all well-pleaded factual allegations must be 19 accepted as true. Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009). 20 A claim is facially plausible “when the plaintiff pleads factual content that allows the 21 court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” 22 Iqbal, 556 U.S. at 678. A complaint that offers mere “labels and conclusions” or “a formulaic 23 recitation of the elements of a cause of action will not do.” Id.; see also Moss v. U.S. Secret Serv., 24 572 F.3d 962, 969 (9th Cir. 2009). “Dismissal is proper only where there is no cognizable legal 25 theory or an absence of sufficient facts alleged to support a cognizable legal theory.” Navarro, 26 250 F.3d at 732. 27 If the court dismisses the complaint, it “should grant leave to amend even if no request to 28 amend the pleading was made, unless it determines that the pleading could not possibly be cured 1 by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). In making 2 this determination, the court should consider factors such as “the presence or absence of undue 3 delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, 4 undue prejudice to the opposing party and futility of the proposed amendment.” Moore v. 5 Kayport Package Express, 885 F.2d 531, 538 (9th Cir. 1989). 6 IV. DISCUSSION 7 A. Motion for Sur-Reply 8 As a threshold matter, Dr. Cain requested the Court consider a sur-reply filed “for the sole 9 purpose of addressing the applicability of the economic loss doctrine” raised in IFG’s reply to the 10 opposition to the motion to dismiss. (Doc. 45 at 2.) Courts generally view motions to file a sur- 11 reply with disfavor. See Hill v. England, No. CVF05869RECTAG, 2005 WL 3031136, at *1 12 (E.D. Cal. Nov. 8, 2005). However, permitting a sur-reply is within the discretion of the district 13 court. See id. “Although the court in its discretion [may] allow the filing of a sur-reply, this 14 discretion should be exercised in favor of allowing a sur-reply only where a valid reason for such 15 additional briefing exists.” Johnson v. Wennes, No. 08-cv-1798, 2009 WL 1161620, at *2 (S.D. 16 Cal. Apr. 28, 2009). Good cause to permit a party to file a sur-reply may exist “where the movant 17 raises new arguments in its reply brief.” Hill, 2005 WL 3031136, at *1. Neither the federal rules 18 nor the local rules permit a sur-reply as a matter of course. 19 Dr. Cain argues that IFG’s reply “argues for the first time that the economic loss doctrine 20 bars Dr. Cain’s fraud in the inducement claim.” (Doc. 45 at 2.) Arguably, IFG’s reply brief does 21 not raise new arguments—it merely extrapolates on the potentially duplicative nature of a 22 contract claim and a fraud claim under the header of the economic loss doctrine, (Doc. 43 at 11), 23 an argument that was raised in a general sense in the opening motion to dismiss (see Doc. 36-1 at 24 24 (arguing that “[u]nder Delaware law, a plaintiff’s fraud claim ‘may not simply “rehash” the 25 damages allegedly caused by the breach of contract’; it must allege damages ‘caused by the fraud 26 separate and apart from the alleged breach damages’”).) Even if the mention of the economic loss 27 doctrine could be interpreted as raising a distinct argument, the Court does not rely on the 28 economic loss doctrine in its analysis of the fraud claim and therefore declines to consider the 1 sur-reply for that additional reason. Thus, Dr. Cain’s motion to consider the sur-reply is 2 DENIED and the Court hereby strikes the accompanying briefing. 3 B. Breach of Contract Claim 4 Dr. Cain alleges that “[u]nder the Buyout Agreement, IFG had a contractual obligation to 5 pay Dr. Cain the royalty payments that continued to accrue between the time the Purchase 6 Agreement was executed and when the transaction closed.” (Doc. 34, ¶ 42.) Dr. Cain alleges that 7 by withholding the approximately $12 million allegedly owed in royalties that accrued between 8 the execution of the Buyout Agreement and closing, IFG breached the Buyout Agreement. (Doc. 9 34, ¶¶ 41–51.) Under Delaware law, “[i]n order to survive a motion to dismiss for failure to state 10 a breach of contract claim, the plaintiff must demonstrate: first, the existence of the contract, 11 whether express or implied; second, the breach of an obligation imposed by that contract; and 12 third, the resultant damage to the plaintiff.” VLIW Technology, LLC v. Hewlett-Packard Co., 840 13 A.2d 606, 612 (Del. 2003).1 The parties do not dispute the existence of the contract—the Buyout 14 Agreement—but rather, if there was a breach of an obligation imposed by that contract. (See 15 Docs. 36-1 at 13–18; 42 at 11–20.) 16 The Buyout Agreement provides that: 17 At, and conditioned upon, the occurrence of the Closing (as defined in the Purchase Agreement),2 Buyer shall pay or cause to be paid to Cain or his designee the 18 non-refundable amount of Two Hundred Forty-Five Million Dollars ($245,000,000) (the “Cain Payments Buyout Fee”). Upon Cain’s, or his designee’s, receipt of 19 payment in full of the Cain Payments Buyout Fee: (a) the Cain Agreements shall terminate and be of no further force or effect (other than the intellectual property 20 and patent assignments which shall remain in effect and are unconditional and irrevocable), (b) any right of Cain and any related persons or entities of Cain that 21 may have rights or obligations under the Cain Agreements or the Operating Agreement (as defined below) to receive the Cain Payments, any other 22 compensation or any other payments or any rights pursuant to the Cain Agreements or the Operating Agreement shall terminate and be of no further force or effect and 23 (c) neither the Company nor Buyer shall have any further liability or obligations whatsoever under the Cain Agreements to Cain or any related persons or entities of 24 Cain. Until Cain’s, or his designee’s, receipt of payment in full of the Cain Payments Buyout Fee, Cain Payments (which shall include any and all Cain Payments that 25 have accrued though not yet been paid under the Cain Agreements prior to Closing) shall continue to accrue and be paid by the Company in accordance with the terms 26
27 1 The parties do not dispute that the Delaware choice of law clause in the Buyout Agreement governs the breach of contract claim. (See generally Docs. 36; 42; 43.) 28 2 The Purchase Agreement is not before the Court. However, the parties do not dispute that closing occurred on 1 and conditions of the Cain Agreements and all Cain Agreements shall remain valid and in effect. 2 3 (Doc. 44 at 2–3.) The “Cain Agreements” repeatedly referenced within the Buyout Agreement 4 are the Employment and Patent Acknowledgement agreements entered into by the parties on 5 January 1, 2001. (Doc. 44 at 2.) On the point of royalties, the Cain Agreements provide that 6 “[t]he Company will pay on a calendar year basis to the Employee, in addition to the Base Salary, 7 a royalty based on income generated from licensing or technology fees and royalty fees from 8 marketed fruit which result from the newly developed varieties.” (Doc. 34-1 at 3.) 9 “When interpreting a contract, the role of a court is to effectuate the parties’ intent.” 10 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). However, “[i]n 11 deciding a motion to dismiss, the trial court cannot choose between two differing reasonable 12 interpretations of ambiguous provisions.” VLIW Tech., LLC, 840 A.2d at 615. Dismissal under 13 Rule 12(b)(6) “is proper only if the defendants’ interpretation is the only reasonable construction 14 as a matter of law.” Id. “Ambiguity exists ‘when the provisions in controversy are reasonably or 15 fairly susceptible of different interpretations.’” Id. (quoting Vanderbilt Income & Growth Assocs. 16 v. Arvida, 691 A.2d 609, 613 (Del. 1996)). If the provisions at issue are susceptible to more than 17 one reasonable interpretation, then for the purposes of deciding a motion to dismiss, “their 18 meaning must be construed in the light most favorable to the non-moving party.” Id. 19 Dr. Cain alleges that “IFG had a contractual obligation to pay Dr. Cain those royalty 20 payments because in the Buyout Agreement, the parties agreed that the Cain Agreements would 21 remain valid and in effect to effectuate IFG’s continuing duty to pay Dr. Cain the royalties that 22 accrued prior to the closing.” (Doc. 34, ¶ 42.)3 IFG contends that, because the terms of the Cain 23 Agreements specify that “Dr. Cain’s royalty compensation has always been paid ‘on a calendar 24 year basis’ ‘within sixty (60) days of each calendar year-end,’” there could be no interim, 25 mid-year payment for royalties accrued between January 1, 2023, and closing on August 11, 26 2023. (Doc. 36-1 at 14.) IFG argues that according to the language of the agreement, “Company 27 3 It is undisputed that IFG provided payment of the royalties accrued for the year 2022. Thus, the focus of the 28 breach of contract royalties issue is on the alleged accrual of royalties from January 1 to closing on August 11, 2023. 1 will pay on a calendar year basis” such that the royalty payment can only be made on an annual 2 basis, not prorated to accommodate a partial year payment for the August 2023 closing. (Doc. 3 36-1 at 14.) 4 The Buyout Agreement provides that until “receipt of payment in full of the Cain 5 Payments Buyout Fee, Cain Payments (which shall include any and all Cain Payments that have 6 accrued though not yet been paid under the Cain Agreements prior to Closing) shall continue to 7 accrue and be paid by the Company . . .” (Doc. 44 at 2–3.) IFG contends that this Buyout 8 Agreement language, paired with the “Company will pay on a calendar year basis” language, 9 unambiguously establishes the accrual timeline and payment schedule such that accrual occurs on 10 a yearly basis and accordingly can only be paid on a yearly basis. (Doc. 36-1 at 14–16.) Dr. Cain 11 argues that the payment on a calendar year basis is a mere function of convenience because it 12 would be impractical for IFG to calculate royalties on a daily or weekly basis, but the payment 13 schedule does not modify the accrual of royalties on income received day to day. (Doc. 42 at 13– 14 14.) Dr. Cain contends that the Buyout Agreement language indicates that accrual is not on a 15 year-to-year basis, and as such, IFG owes Dr. Cain a prorated royalty payment for the partial year 16 up until the August 2023 closing. (Doc. 42 at 13–14.) 17 The record reflects that the contractual provisions regarding royalty accrual and payment 18 are ambiguous. Because the provisions at issue in the Buyout Agreement and Cain Agreements 19 are susceptible to more than one reasonable interpretation, for the purposes of deciding the 20 motion to dismiss, their meaning must be construed in the light most favorable to Dr. Cain, the 21 non-moving party. See VLIW Tech., LLC, 840 A.2d at 615. The Court “must not dismiss any 22 claim pursuant to Rule 12(b)(6) unless it appears with reasonable certainty that the plaintiff 23 cannot prevail on any set of facts which might be proven to support the allegations in the 24 complaint.” Id. Applying that standard here, the Court holds that Dr. Cain’s complaint 25 adequately states an alleged breach of contractual obligation, and thus, a set of facts upon which 26 relief may be granted.4 Therefore, IFG’s motion to dismiss the breach of contract claim is 27 4 The parties dispute the applicability of extrinsic evidence—particularly email negotiations preceding the 28 conclusion of the Buyout Agreement—to resolve any ambiguity present in the interpretation of the contractual 1 DENIED. 2 C. Breach of the Covenant of Good Faith and Fair Dealing Claim 3 As an alternative to the breach of contract claim, Dr. Cain alleges that “IFG made an 4 implied covenant to act reasonably to fulfill the intent of the parties to the Buyout 5 Agreement . . . [and] because the Buyout Agreement contemplates that Dr. Cain would continue 6 to accrue royalties up until the closing, there is an implied covenant that Dr. Cain would also be 7 paid the royalties that had accrued up until the closing.” (Doc. 34, ¶ 54 (emphasis in original).) 8 Thus, Dr. Cain alleges that “IFG breached the implied covenant by taking the position . . . that it 9 will not pay Dr. Cain the accrued but unpaid 2023 royalty payments.” (Doc. 34, ¶ 57.) 10 “The implied covenant is inherent in all contracts and is used to infer contract terms to 11 handle developments or contractual gaps that . . . neither party anticipated.” Dieckman v. 12 Regency GP LP, 155 A.3d 358, 366 (Del. 2017) (cleaned up).5 The implied covenant applies 13 “when the party asserting the implied covenant proves that the other party has acted arbitrarily or 14 unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably 15 expected. The reasonable expectations of the contracting parties are assessed at the time of 16 contracting.” Id. To sufficiently allege an implied covenant claim, a plaintiff must allege “a 17 specific implied contractual obligation, a breach of that obligation by the defendant, and resulting 18 damage to the plaintiff.” Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, 302 19 A.3d 430, 458 (Del. Ch. Aug. 9, 2023). 20 To determine if an implicit obligation exists, a court “first must engage in the process of 21 contract construction to determine whether there is a gap that needs to be filled.” Allen v. El Paso 22 Pipeline GP Co., LLC, 113 A.3d 167, 183 (Del. Ch. June 20, 2024). “Through this process, a 23 court determines whether the language of the contract expressly covers a particular issue, in 24 which case the implied covenant will not apply, or whether the contract is silent on the subject, 25 differing—but reasonable—interpretations of a contract term, the Court turns to extrinsic evidence to understand the 26 parties’ agreement.” Markow v. Synageva Biopharma Corp., 2016 WL 1613419, at *5 (Del. 2016). However, “[s]uch an inquiry cannot proceed on a motion to dismiss.” Id. Therefore, the Court will not delve into any 27 considerations of extrinsic evidence, because “[a]t the motion to dismiss stage, the Court ‘cannot choose between two differing reasonable interpretations of ambiguous provisions.’” Id. (quoting VLIW Tech., LLC, 840 A.2d at 615). 28 5 The parties do not dispute that the Delaware choice of law clause in the Buyout Agreement governs the implied 1 revealing a gap that the implied covenant might fill.” NAMA Hldgs., LLC v. Related WMC LLC, 2 2014 WL 6436647, at *16 (Del. Ch. Nov. 17, 2014). The court must first find a gap in the 3 contract because “[t]he implied covenant will not infer language that contradicts a clear exercise 4 of an express contractual right.” Nemec v. Shrader, 991 A.2d 1120, 1127 (Del. 2010). “If a 5 contractual gap exists, then the court must determine whether the implied covenant should be 6 used to supply a term to fill the gap. Not all gaps should be filled.” Allen, 113 A.3d at 183. “The 7 implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms 8 that the parties would have agreed to during their original negotiations if they had thought to 9 address them.” Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013). “Existing 10 contract terms control, however, such that implied good faith cannot be used to circumvent the 11 parties’ bargain, or to create a free-floating duty unattached to the underlying legal document.” 12 Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (cleaned up). 13 The application of the implied covenant is a “cautious enterprise.” Nemec v. Shrader, 991 14 A.2d 1120, 1125 (Del. 2010). Implied covenants are “not an equitable remedy for rebalancing 15 economic interests after events that could have been anticipated, but were not, that later adversely 16 affected one party to a contract.” Id. at 1128. “Even where the contract is silent, an interpreting 17 court cannot use an implied covenant to re-write the agreement between the parties, and should be 18 most chary about implying a contractual protection when the contract could easily have been 19 drafted to expressly provide for it.” Oxbow Carbon & Mins. Hldgs., Inc. v. Crestview-Oxbow 20 Acq., LLC, 202 A.3d 482, 507 (Del. 2019). 21 IFG argues that Dr. Cain fails to plead “any specific implied contractual obligation” about 22 the accrual and payment of royalties because the Buyout Agreement “already contains express 23 terms controlling royalty payments.” (Doc. 36-1 at 18.) IFG contends that Dr. Cain improperly 24 relied on “allegations about conduct around the closing of the asset sale,” and that any reliance on 25 these conversations would turn the cause of action into a “sort of free-floating duty, unattached to 26 the underlying legal document.” (Doc. 36-1 at 19.) Dr. Cain avers that this cause of action is 27 intentionally pled in the alternative to the breach of contract claim to maintain potential recovery 28 of the royalties “to the extent the Court does not read the Buyout Agreement to expressly provide 1 that Dr. Cain was entitled to be paid royalties that accrued but were not yet ‘due’ at the closing.” 2 (Doc. 42 at 21 (emphasis in original).) Dr. Cain contends that IFG “had knowledge and control 3 over when the closing would occur, and it was required to refrain from manipulating the closing 4 in a way that would deprive Dr. Cain from being paid royalties that accrued.” (Docs. 42 at 21; 5 34, ¶ 54.) 6 Dr. Cain’s First Amended Complaint sufficiently pleads a breach of an implied covenant 7 of good faith and fair dealing. Though IFG argues that the Buyout Agreement does not provide 8 for a specific implied contractual obligation, Dr. Cain alleges that the implied covenant only 9 exists to the extent that the Buyout Agreement is found not to have specified that royalties 10 accrued prior to closing are to be paid. (Doc. 34, ¶ 54.) As the Court explained earlier, it is 11 premature to determine at the motion to dismiss stage the appropriate contractual interpretation. 12 See also VLIW Tech., LLC, 840 A.2d at 615. Dr. Cain permissibly pled an alternative cause of 13 action predicated on an alternative contractual construction. Following the alternative 14 construction that there was an implied duty to pay the royalties that accrued prior to closing, Dr. 15 Cain sufficiently alleged that IFG breached that obligation and damages resulted from IFG not 16 transmitting the royalties. (Doc. 34, ¶¶ 57–58.) Therefore, IFG’s motion to dismiss the breach of 17 an implied covenant of good faith and fair dealing claim is DENIED. 18 D. Unjust Enrichment Claim 19 Dr. Cain also alleges that “IFG retained all the income that was generated between 20 January 2023 and August 2023, but IFG did not pay Dr. Cain the royalties from the income 21 generated within that period. IFG’s actions represent the receipt and unjust retention of a benefit 22 at the expense of Dr. Cain.” (Doc. 34, ¶ 65.) Dr. Cain argues that California law governs the 23 unjust enrichment claim because such a cause of action is asserted when a contract is found 24 unenforceable or ineffective. (Doc. 42 at 22.) IFG asserts that Delaware law governs the unjust 25 enrichment claim because it is closely related to the Buyout Agreement which contains a 26 Delaware choice of law provision. (Doc. 36-1 at 20.) 27 Delaware law applies to the unjust enrichment claim here. “In determining the 28 enforceability of a choice of law provision in a diversity action, a federal court applies the choice 1 of law rules of the forum state, in this case California.” Hatfield v. Halifax PLC, 564 F.3d 1177, 2 1182 (9th Cir. 2009). “If the parties state their intention in an express choice-of-law clause, 3 California courts ordinarily will enforce the parties’ stated intention.” Id. (quoting Frontier Oil 4 Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1450 n.7 (2007)). California courts will enforce 5 this express intention if: “(1) the chosen jurisdiction has a substantial relationship to the parties or 6 their transaction; or (2) any other reasonable basis for the choice of law provision exists.” Id. If 7 either of these tests is met, the court will enforce the choice of law provision unless the chosen 8 jurisdiction’s law is contrary to California public policy. Id. “[A] valid choice-of-law clause, 9 which provides that a specified body of law ‘governs’ the ‘agreement’ between the parties, 10 encompasses all causes of action arising from or related to that agreement, regardless of how they 11 are characterized, including tortious breaches of duty emanating from the agreement or the legal 12 relationships it creates.” Nedlloyd Lines B.V. v. Super. Ct., 3 Cal. 4th 459, 470 (1992). 13 As the Ninth Circuit held, when an unjust enrichment is alleged to have arisen in the 14 course of performing the contract, “issues arising in the restitution action are to be resolved in 15 accordance with the law adopted in the choice of law provision.” Alaska Airlines, Inc. v. United 16 Airlines, Inc., 902 F.2d 1400, 1403 (9th Cir. 1990). In Alaska Airlines, the Ninth Circuit 17 contemplated if the choice of law provision governs even if the underlying contract is found 18 unenforceable. See id. The court held that it is “appropriate to apply the choice of law clause to 19 the unjust enrichment claim” because “the claim was closely related to the parties’ contractual 20 relationship.” Id. (cleaned up). Thus, even if the underlying Buyout Agreement is deemed 21 unenforceable or ineffective as Dr. Cain argues, it is appropriate “to apply the choice of law 22 clause to all claims arising out of it, including restitution.” See id. (See Doc. 42 at 22.) 23 Therefore, the choice of law clause in the Buyout Agreement applies, and Delaware law governs 24 the unjust enrichment cause of action. 25 Under Delaware law, unjust enrichment is “the unjust retention of a benefit to the loss of 26 another, or the retention of money or property of another against the fundamental principles of 27 justice or equity and good conscience.” Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) 28 (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)). To 1 adequately plead an unjust enrichment claim, plaintiff must plead: “(1) an enrichment, (2) an 2 impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of 3 justification, and (5) the absence of a remedy provided by law.” Id. 4 Dr. Cain has adequately pled the first three elements by alleging that IFG received 5 additional revenue through the royalties accrued but not paid to Dr. Cain. See Garfield v. Allen, 6 277 A.3d 296, 341 (Del. Ch. May 24, 2022) (holding that a plaintiff sufficiently pleads the first 7 three elements by alleging that the defendant possesses the value that plaintiff alleges rightfully 8 belongs to them). (Doc. 34, ¶ 65.) Dr. Cain sufficiently pled the fourth element (absence of 9 justification) by alleging that IFG failed to explain or represent why IFG could retain the royalty 10 payments accrued up until closing. See id. (holding that plaintiff sufficiently pleads the absence 11 of justification by asserting that defendant should not have received the contested value). (Doc. 12 34, ¶ 64.) 13 IFG focuses its argument on the fifth argument. (See Docs. 36-1 at 20–22; 43 at 8–9.) 14 IFG contends that because Dr. Cain has alleged a breach of contract claim in which Dr. Cain 15 affirmatively pled the express language of the Buyout Agreement governs the royalties, Dr. Cain 16 cannot now allege an alternative unjust enrichment claim. (Doc. 36-1 at 20–22.) As Dr. Cain 17 argues, (Doc. 42 at 22), bringing a breach of contract claim alone is not a concession of the fifth 18 element. See Garfield, 277 A.3d at 346 (holding that the presence of a breach of contract claim 19 does not mean that the fifth element automatically fails because “under that reasoning, any 20 plaintiff who pleads a cause of action in addition to unjust enrichment has hoisted itself on its 21 own petard. Only an unadorned complaint asserting a single claim for unjust enrichment would 22 have any chance of success”). However, Delaware law has clarified that “‘unjust enrichment 23 claims that are premised on an express, enforceable contract’ fail to state a claim.” Intermec IP 24 Corp. v. TransCore, LP, 2021 WL 3620435, *16 (Del. Super. Aug. 16, 2021). Only when the 25 unjust enrichment claim “consider[s] facts that were not covered, expressly or impliedly, by the 26 subject agreement” can a breach of contract and unjust enrichment claim survive a motion to 27 dismiss. See id. at *17. Dr. Cain’s unjust enrichment claim relies upon the existence of the 28 Buyout Agreement to allege that IFG’s retention of the royalty payments would rise to the level 1 of an unjust enrichment. (Doc. 34, ¶¶ 61–65.) Because Dr. Cain’s unjust enrichment claim does 2 not dispute the scope or validity of the Buyout Agreement to the royalty payments, the unjust 3 enrichment claim cannot proceed. On the other hand, the Court cannot find that Dr. Cain is 4 unable to state a claim for unjust enrichment. Intermec IP Corp. at 17, n. 160 [quoting Avantix 5 Labs., Inc. v. Pharmion, LLC, 2012 WL 2309981, at *9 (Del. Super. Ct. June 18, 2012) for the 6 proposition that an unjust enrichment claim can proceed at the pleading stage “where the breach 7 is based on a ‘claim not governed exclusively by the contract at issue’ and holding an unjust 8 enrichment claim could proceed alongside breach-of-contract claims because some alleged 9 services on which unjust enrichment was based were not ‘addresse[d]’ by the subject contract's 10 scope”).] Therefore, IFG’s motion to dismiss this cause of action is GRANTED with leave to 11 amend. 12 E. Fraud in the Inducement Claim 13 As yet another alternative to the breach of contract claim, Dr. Cain alleges that “IFG never 14 intended to pay Dr. Cain royalties that accrued but were not yet due prior to the closing, but it 15 knew that Dr. Cain would not have made or agreed to all of the terms in the Buyout Agreement if 16 Dr. Cain was aware that IFG did not intend to pay all accrued royalty payments up until the 17 closing.” (Doc. 34, ¶ 73 (emphasis in original).) Dr. Cain avers that he justifiably relied upon 18 IFG’s false representations, and that IFG committed fraud with the intent to deprive Dr. Cain of 19 his right to the allegedly accrued royalty payments. (Doc. 34, ¶¶ 67–78.) Dr. Cain argues that 20 California law must govern the fraud claim “because California has a materially greater interest in 21 the determination of the fraud claim, and it would be contrary to a fundamental policy of 22 California for Delaware law to apply to this claim.” (Doc. 42 at 23–24.) IFG contends that the 23 parties have “stated their intention in an express choice-of-law clause” which must be applied to 24 the fraud claim here. (Doc. 43 at 9–10.) IFG argues that under Delaware law, the fraud claim 25 must be dismissed because the anti-reliance clause in the Buyout Agreement bars the fraud claim, 26 and even if the court disagrees, Dr. Cain failed to plead his fraud claim with particularity. (Doc. 27 36-1 at 22–23.) 28 As discussed previously, the Court will extend the choice of law provision to tort claims, 1 such as fraudulent inducement, that arise from and relate to the contract. See Nedlloyd Lines B.V., 2 3 Cal. 4th at 470. Dr. Cain argues that the disparate treatment of a fraud in the inducement claim 3 between California and Delaware necessitates the applicability of California law. (Doc. 42 at 24.) 4 The Court is not persuaded. In California, “where two sophisticated, commercial entities agree to 5 a choice of law clause . . . the most reasonable interpretation of their actions is that they intended 6 for the clause to apply to all causes of action arising from or related to their contract.” See id. at 7 469 (emphasis in original). Dr. Cain’s realization and concession that Delaware law would 8 foreclose the fraud claim does not equate to a violation of public policy in California. (See Doc. 9 42 at 24.) In fact, California district courts have held that fraudulent inducement claims need not 10 be governed solely by California law. See Gardensensor, Inc. v. Stanley Black & Decker, Inc., 11 2012 WL 12925714, at *3 (N.D. Cal. Oct. 25, 2012) (holding that a Delaware choice of law 12 provision governs a fraud in the inducement claim); see also Think20 Labs LLC v. Perkinelmer 13 Health Sciences, Inc., 2023 WL 9005633, at *4 (C.D. Cal. Nov. 30, 2023) (holding that a 14 Massachusetts choice of law provision governs a fraud in the inducement claim). Thus, the 15 parties’ choice of law clause controls and Delaware law applies to the fraud in the inducement 16 claim. 17 In Delaware, to state a claim for fraudulent inducement, “plaintiff must plead with 18 particularity the following elements: (1) a false representation of material fact; (2) the defendant’s 19 knowledge of or belief as to the falsity of the representation or the defendant’s reckless 20 indifference to the truth of the representation; (3) the defendant’s intent to induce the plaintiff to 21 act or refrain from acting; (4) the plaintiff’s action or inaction taken in justifiable reliance upon 22 the representation; and (5) damage to the plaintiff as a result of such reliance.” Chapter 7 Tr. 23 Constantino Flores v. Strauss Water Ltd., 2016 WL 5243950, at *7 n.34 (Del. Ch. Sep. 22, 2016) 24 (quoting Duffield Assocs., Inc. v. Meridian Architects & Eng’rs, LLC, 2010 WL 2802409, at *4 25 (Del. Super. July 12, 2010)). However, if the contract underlying the fraud in the inducement 26 claim “contain[s] language that, when read together, can be said to add up to a clear anti-reliance 27 clause by which the plaintiff has contractually promised that it did not rely upon statements 28 outside the contract’s four corners in deciding to sign the contract,” the contract bars a plaintiff 1 from bringing a fraudulent inducement claim. Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2 2004). 3 Here, the integration clause in the Buyout Agreement provides that: 4 The Parties declare and represent that no promise, inducement or agreement not herein expressed has been made to them and that this Agreement contains the full 5 and entire agreement between and among the Parties with respect to the subject matter hereof, and that the terms of this Agreement are contractual and not a mere 6 recital. 7 (Doc. 44 at 7.) Further, the Buyout Agreement states that:
8 Except for the express representations and warranties contained in this Agreement . . . each Party acknowledges that it has not relied upon any 9 representation or warranty made by any other Party, or any other person on such party’s behalf, except as specifically provided in this Agreement. 10 11 (Doc. 44 at 6.) Taken together, these clauses amount to a disclaimer of the type discussed in 12 Kronenberg by disclaiming any reliance on extracontractual representations. See Kronenberg, 13 872 A.2d at 593.6 Because Dr. Cain disclaimed any justifiable reliance upon representations 14 beyond the four corners of the contract, his fraudulent inducement claim fails as a matter of law. 15 Thus, IFG’s motion to dismiss the fraudulent inducement claim is GRANTED. Because 16 amendment is futile, this cause of action is dismissed with prejudice. 17 CONCLUSION 18 For the reasons set forth above: 19 1. Dr. Cain’s motion for sur-reply is DENIED. 20 2. IFG’s motion to dismiss the breach of contract claim is DENIED. 21 3. IFG’s motion to dismiss the breach of an implied covenant of good faith claim is 22 DENIED. 23 4. IFG’s motion to dismiss the unjust enrichment claim is GRANTED with leave to 24 amend. 25 5. IFG’s motion to dismiss the fraudulent inducement claim is GRANTED without leave 26 to amend. 27
28 6 As Dr. Cain acknowledges, under Delaware law, the presence of a valid integration and anti-reliance clause may 1 The plaintiff SHALL file an amended complaint, if at all, within 21 days. Failure to do so 2 | will result in the action moving forward without the unjust enrichment claim. The defense 3 | SHALL file a responsive pleading within 21 days of the filing of the amended complaint. 4 5 IT IS SO ORDERED. 6 | Dated: _ October 24, 2024 Cerin | Tower TED STATES DISTRICT JUDGE 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15