Herbalife International of America, Inc. v. Eastern Computer Exchange, Inc.

• Court: District Court, C.D. California
• Decided: June 8, 2022
• Docket: 2:22-cv-00347
• Status: Unknown

Opinion

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8 United States District Court 9 Central District of California

11 HERBALIFE INTERNATIONAL OF Case № 2:22-cv-00347-ODW (AGRx) AMERICA, INC., 12 Plaintiff, ORDER GRANTING IN PART AND 13 v. DENYING IN PART PLAINTIFF’S 14 MOTION TO DISMISS 15 E INA CS .T aE nR d N G EC RO RM YP BU ET RE GR ,E XCHANGE COUNTERCLAIMS [19]

16 Defendants. 17 18 I. INTRODUCTION 19 Plaintiff Herbalife International of America brought suit against Defendants 20 Eastern Computer Exchange, Inc. and Gerry Berg, alleging that Defendants conspired 21 to provide Eastern an unfair business advantage to the detriment of Herbalife. 22 (Compl. ¶ 7, ECF No. 1.) Defendants answered and asserted six counterclaims 23 against Herbalife sounding in contract. (Answer & Countercl. (“Countercl.”), ECF 24 No. 16.) Herbalife now moves to dismiss Defendants’ counterclaims. (Mot. Dismiss 25 (“Motion” or “Mot.”), ECF No. 19-1.) For the reasons set forth below, the Court 26 GRANTS in PART and DENIES in PART Herbalife’s Motion.1 27

28 1 Having carefully considered the papers filed in connection with the Motion, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; C.D. Cal. L.R. 7-15. Case 2:22-cv-00347-ODW-AGR Document 37 Filed 06/08/22 Page 2 of 11 Page ID #:326

1 II. BACKGROUND 2 Herbalife is a global nutrition company that provides consumers with nutrition 3 solutions in the area of weight management, sports nutrition, and health and wellness. 4 (Pl.’s Compl. ¶ 8, ECF No. 1.) Gerry Berg is Herbalife’s former Vice President of 5 Infrastructure & Operations. (Id. ¶ 15.) Eastern is a technology company that 6 partners with computer equipment manufacturers to resell such equipment to users 7 such as Herbalife. (Id. ¶ 19.) 8 In 2019, Eastern became a vendor for Herbalife and under the applicable Master 9 Services Agreement (“MSA”), Eastern “was to provide professional services, 10 including but not limited to, engineering services, and program/project management 11 services.” (Countercl. ¶ 5.) Eastern and Herbalife also signed a Non-Disclosure 12 Agreement (“NDA”), prohibiting the parties from using any confidential information 13 of the other. (Id.) In January 2020, Eastern began working with Herbalife’s storage 14 and network teams in an effort to review Herbalife’s current systems and create and 15 design the proper solutions for Herbalife’s business continuity and disaster recovery 16 needs (“BCDR”). (Id. ¶ 6.) 17 In February 2020, Herbalife asked Eastern to provide a BCDR solution and for 18 the next three months, Eastern worked toward that objective. (Id. ¶ 7.) Eventually, 19 Eastern proposed a BCDR solution that would cost approximately $11.5 million 20 dollars and involve multiple phases (the “BCDR Project”). (Id.) In April 2020, an 21 Herbalife senior manager verbally awarded Eastern Phase 1 of the BCDR Project. (Id. 22 ¶ 8.) In May 2020, senior officers at Herbalife, including Berg, requested that Eastern 23 work on Phase 2 of the BCDR Project. (Id.) Herbalife informed Eastern that 24 Herbalife would require approval of Phase 1 and Phase 2 from the Board of Directors. 25 (Id. ¶ 9.) 26 On June 29, 2020, Eastern and Herbalife entered into a separate Enterprise 27 License Agreement (“ELA”), whereby Eastern would procure certain software, 28 services, and tokens or credits from manufacturers, which Herbalife would then

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1 purchase from Eastern. (Id. ¶ 11.) Pursuant to the terms of the ELA, Eastern 2 purchased manufacturer tokens and licenses on behalf of Herbalife. (Id.) Herbalife 3 never paid Eastern for, or purchased from Eastern, the tokens and licenses. (Id.) 4 On October 27, 2020, an Herbalife officer presented Phase 1 and Phase 2 to the 5 Board of Directors, and Herbalife confirmed to Eastern that the Board of Directors 6 approved, and awarded to Eastern, the BCDR Project. (Id. ¶ 13.) On October 28, 7 2020, an Herbalife officer ordered Eastern to “order [equipment for] Phase 1 and 8 Phase 2 tomorrow.” (Id. ¶ 14.) On October 29, 2020, relying upon Herbalife’s 9 communications from the previous day, including express instructions to order the 10 equipment the next day, Eastern began discussions with equipment managers. (Id. 11 ¶ 16.) The following day, Eastern placed an order on Herbalife’s behalf for the 12 equipment required for the BCDR project. (Id. ¶ 16.) After awarding Eastern Phases 13 1 and 2, Herbalife refused to pay Eastern for the services Eastern rendered and the 14 equipment Eastern ordered on Herbalife’s behalf for the BCDR project.2 (Id. ¶ 28.) 15 Accordingly, Herbalife brought this action alleging five causes of action against 16 Defendants: (1) fraudulent concealment; (2) breach of fiduciary duty; (3) breach of 17 contract; (4) conversion; and (5) declaratory relief. (See Pl.’s Compl.) Defendants 18 then filed an answer and asserted six counterclaims: (1) breach of oral contract; 19 (2) breach of written contract; (3) promissory estoppel; (4) negligent 20 misrepresentation; (5) conversion; and (6) declaratory relief. (Countercl. ¶¶ 29–59.) 21 Herbalife now moves to dismiss all six of Defendants’ counterclaims pursuant to 22 Federal Rule of Civil Procedure (“Rule”) 12(b)(6). 23 III. LEGAL STANDARD 24 A court may dismiss a complaint under Rule 12(b)(6) for lack of a cognizable 25 legal theory or insufficient facts pleaded to support an otherwise cognizable legal 26

2 According to Herbalife, however, Defendants never received approval for the BCDR Project and 27 Herbalife never authorized Eastern’s purchase of the equipment. (Pl.’s Compl. ¶¶ 29–34, 42.) 28 Instead, Herbalife alleges, Defendants created a fraudulent purchase order from Herbalife in order to be compensated for unapproved purchases and services. (Id. ¶¶ 45–49.)

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1 theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). “To 2 survive a motion to dismiss . . . under Rule 12(b)(6), a complaint generally must 3 satisfy only the minimal notice pleading requirements of Rule 8(a)(2)” by including a 4 short and plain statement of the claim. Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 5 2003); see also Fed. R. Civ. P. 8(a)(2). The “complaint must contain sufficient factual 6 matter, accepted as true, to state a claim to relief that is plausible on its face.” 7 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted); see 8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (The “[f]actual allegations must 9 be enough to raise a right to relief above the speculative level.”). “A pleading that 10 offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of 11 action will not do.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). 12 Whether a complaint satisfies the plausibility standard is a “context-specific 13 task that requires the reviewing court to draw on its judicial experience and common 14 sense.” Iqbal, 556 U.S. at 679. A court is generally limited to the pleadings and must 15 construe all “factual allegations set forth in the complaint . . . as true and . . . in the 16 light most favorable” to the plaintiff. Lee v. City of Los Angeles, 250 F.3d 668, 679 17 (2001). But a court need not blindly accept conclusory allegations, unwarranted 18 deductions of fact, and unreasonable inferences. Sprewell v. Golden State Warriors, 19 266 F.3d 979, 988 (9th Cir. 2001). When a district court grants a motion to dismiss, it 20 should generally provide leave to amend unless it is clear the complaint could not be 21 saved by any amendment. See Fed. R. Civ. P. 15(a); Manzarek v. St. Paul Fire & 22 Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). 23 IV. DISCUSSION 24 Defendants fail to state a claim as to five of their six counterclaims. The Court 25 thus dismisses the five counterclaims and provides leave to amend for four of them. 26 A. First Counterclaim: Breach of Oral Contract 27 In their first counterclaim, Defendants allege Herbalife breached a contract that 28 awarded Defendants the BCDR Project. (Countercl. ¶¶ 29–33.)

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1 Under California law, the elements for breach of oral contract are identical to 2 those for breach of written contract. Francois & Co., LLC v. Nadeau, 334 F.R.D. 588, 3 597–98 (C.D. Cal. 2020). To state a claim for breach of contract, “a plaintiff must 4 plead: (1) the existence of a contract; (2) the plaintiff’s performance or excuse for 5 non-performance; (3) the defendant’s breach; and (4) damages to the plaintiff as a 6 result of the breach.” Lyons v. Bank of Am., N.A., No. 11-01232 CW, 2011 WL 7 3607608, at *2 (N.D. Cal. Aug. 15, 2011) (citing Armstrong Petrol. Corp. v. Tri–Valley 8 Oil & Gas Co., 116 Cal. App. 4th 1375, 1391 n.6 (2004)). 9 The Court finds that Defendants do not state a claim for breach of oral contract. 10 First, Defendants do not adequately plead the existence of a contract, as Defendants 11 do not allege exactly what contract Herbalife breached. Defendants state that they 12 entered into a contract with Herbalife in which Defendants would be awarded the 13 BCDR Project, and that Herbalife breached the terms of the agreement. (Countercl. 14 ¶¶ 29–31.) Although the counterclaim includes the basic terms of the contract (i.e., 15 each party’s general obligations thereunder), it does not provide any other specificities 16 of the contract, such as the effective date of the contract, who orally communicated to 17 whom sufficient information to form this contract, the duration of the contract, or 18 what specific provisions Herbalife breached. See, e.g., Alpha GRP, Inc. v. Subaru of 19 Am., Inc., No. CV 18-2133 MWF (MRWx), 2018 WL 5986989, at *10 (C.D. Cal. 20 June 8, 2018) (dismissing breach of contract claim because it lacked details as to what, 21 precisely, defendants promised to pay, the effective date of the contract, the duration 22 of the contract, and other terms). 23 Moreover, the formation of a contract requires mutual assent consisting of offer 24 and acceptance. See Guadagno v. E*Trade Bank, 592 F. Supp. 2d 1263, 1271 (C.D. 25 Cal. 2008). Defendants do allege sufficient facts to establish that Herbalife offered 26 Defendants the BCDR Project, and that Defendants accepted the offer. Netbula, LLC 27 v. BindView Dev. Corp., 516 F. Supp. 2d 1137, 1155 (N.D. Cal. 2007) (“Mutual assent 28 is accomplished when a specific offer is communicated to the offeree, and an

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1 acceptance is subsequently communicated to the offeror.”) Defendants thus do not 2 sufficiently allege mutual assent. Therefore, this counterclaim lacks the details to 3 properly allege a valid contract and to identify the parties’ contractual obligations 4 relating to the BCDR Project. Thus, the Court GRANTS the Motion as to 5 Defendants’ first counterclaim for breach of oral contract, with leave to amend these 6 deficiencies. 7 B. Second Counterclaim: Breach of Written Contract 8 Turning to the second counterclaim, Defendants contend they and Herbalife 9 entered into three agreements––the NDA, the MSA, and an Enterprise License 10 Agreement. (Countercl. ¶ 35.) Defendants argue Herbalife breached these contracts 11 by disclosing confidential information and refusing to pay for services and equipment 12 associated with the BCDR Project. (Id. ¶ 37.) Although Defendants list the contracts 13 they entered into with Herbalife, (id. ¶ 35), Defendants fail to properly plead that 14 Herbalife breached the terms of those contracts. Defendants do not explain which 15 terms of each contract Herbalife allegedly breached nor do Defendants explain how 16 those terms were breached. For example, Defendants do not describe the type of 17 confidential information Herbalife supplied to Defendants’ competitor in violation of 18 the NDA or any other context for this alleged disclosure. Defendants therefore do not 19 adequately plead their breach of contract counterclaim. Thus, the Court GRANTS the 20 Motion as to Defendants’ second counterclaim for breach of written contract, with 21 leave to amend these deficiencies. 22 C. Third Counterclaim: Promissory Estoppel 23 Herbalife contends Defendants fail to state a promissory estoppel claim because 24 this counterclaim is duplicative of the breach of contract claim and, alternatively, 25 Defendants fail to assert a clear and unambiguous promise. (Mot. 9–10.) The Court 26 finds that although the promissory estoppel claim is not duplicative, it nevertheless 27 must be dismissed because Defendants fail to sufficiently plead the claim. 28

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1 To state a promissory estoppel claim under California law, a plaintiff must 2 allege “(1) a promise clear and unambiguous in its terms; (2) reliance by the party to 3 whom the promise is made; (3) [that is] both reasonable and foreseeable; and (4) the 4 party asserting the estoppel must be injured by his reliance.” B & O Mfg., Inc. v. 5 Home Depot U.S.A., Inc., No. C 07–02864-JSW, 2007 WL 3232276, *6 (N.D. Cal. 6 Nov. 1, 2007) (citing Laks v. Coast Fed. Sav. & Loan Ass’n, 60 Cal. App. 3d 885, 890 7 (1976)). An action for promissory estoppel, however, cannot lie where a “valid 8 contract, supported by consideration, governs the same subject matter as the alleged 9 promise.” Horne v. Harley-Davidson, Inc., 660 F. Supp. 2d 1152, 1163 (C.D. Cal. 10 2009) (applying California law); see also Walker v. KFC Corp., 728 F.2d 1215, 1220 11 (9th Cir. 1984) (“Promissory estoppel is not a doctrine designed to give a party to a 12 negotiated commercial bargain a second bite at the apple in the event it fails to prove a 13 breach of contract.”). Courts, however, have permitted plaintiffs to proceed 14 simultaneously with claims for promissory estoppel and breach of contract at the 15 pleading stage when there are disputes as to whether a valid contract has been formed, 16 as is the case here. See, e.g., Fleet v. Bank of America N.A., 229 Cal. App. 4th 1403, 17 1413 (2014) (permitting promissory estoppel and breach of contract claims to survive 18 defendant’s demurrer, despite factual inconsistency, because it was not clear that the 19 letter at issue constituted a contract); see also TreeFrog Devs., Inc. v. Seidio, Inc., 20 No. CV 13-0158, 2013 WL 4028096, at *8 (S.D. Cal. Aug. 6, 2013) (permitting 21 promissory estoppel and breach of contract claims to survive past the dismissal stage 22 “[n]otwithstanding [the] foreseeable inconsistency in proof” when parties disputed the 23 existence of a contract). 24 Here, Herbalife incorrectly asserts Defendants’ counterclaim is barred because 25 it is duplicative of the breach of contract claim. (Mot. 9–10.) Although Defendants’ 26 promissory estoppel claim arises under the same allegations that give rise to 27 Defendants’ breach of contract claim—that Defendants were entitled to the BCDR 28 Project, (Countercl. ¶ 40)—at the pleading state, “[a] party may state as many separate

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1 claims or defenses as it has, regardless of consistency.” Fed. R. Civ. P. 8(d)(3). Thus, 2 the Court declines to dismiss the claim on this basis. 3 Herbalife also argues the promissory estoppel counterclaim is barred because 4 Defendants do not allege a clear and unambiguous promise. (Mot. 10.) However, in 5 their counterclaim, Defendants allege Herbalife promised to award them the BCDR 6 Project. (Countercl. ¶ 40.) Defendants asserted several allegations in the 7 counterclaim suggesting a clear and unambiguous promise. (See id. ¶ 13 (“Vetere 8 presented Phase 1 and Phase 2 to the Board of Directors, and Herbalife confirmed to 9 Eastern that the project was approved by the Board of Directors and awarded to 10 Eastern.”); ¶ 21 (similar); see also ¶ 19.) Thus, Defendants have alleged a “promise of 11 sufficient definitiveness and clarity, to justify applying promissory estoppel.” Lange 12 v. TIG Ins. Co., 68 Cal. App. 4th 1179, 1186 (1998). The Court therefore DENIES the 13 Motion as to Defendants’ third counterclaim for promissory estoppel. 14 D. Fourth Counterclaim: Negligent Misrepresentation 15 Herbalife argues Defendants’ negligent misrepresentation counterclaim is 16 barred under the economic loss doctrine and Defendants have not satisfied the 17 heightened pleading standard of Rule 9(b). (Mot. 7–9.) 18 Under California law, the economic loss rule applies to claims for negligent 19 misrepresentation. See Fisher v. Honda N. Am., Inc., No. LA CV 13–09285 JAK, 20 2014 WL 2808188, at *7 (C.D. Cal. June 12, 2014). “Generally, under the ‘economic 21 loss’ rule, a plaintiff who suffers only pecuniary injury as a result of the conduct of 22 another cannot recover those losses in tort. Instead, the claimant is limited to recovery 23 under the law of contract.” Apollo Grp., Inc. v. Avnet, Inc., 58 F.3d 477, 479 (9th Cir. 24 1995). Under the economic loss doctrine, “purely economic losses are not recoverable 25 in tort.” NuCal Foods, Inc. v. Quality Egg LLC, 918 F. Supp. 2d 1023, 1028 (E.D. 26 Cal. 2013). Moreover, the rule “generally bars tort claims based on contract breaches, 27 thereby limiting contracting parties to contracting damages.” UMG Recordings, Inc v. 28 Glob. Eagle Entm't, Inc., 117 F. Supp. 3d 1092, 1103 (C.D. Cal. 2015) (internal

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1 quotation marks omitted). “Courts have also applied the economic loss rule to bar 2 negligent misrepresentation claims where the purported negligent conduct is 3 conceptually indistinct from a contract breach.” UMG Recordings, 117 F. Supp. 3d at 4 1105. 5 Here, Defendants’ negligent misrepresentation and breach of contract 6 counterclaims are both based on Herbalife awarding Defendants the BCDR Project. 7 (Countercl. ¶ 47.) The economic loss rules bars Defendants from bringing a breach of 8 contract theory and then arguing the same facts on a tort theory as well. See UMG 9 Recordings, 117 F. Supp. 3d at 1105 (finding a breach of contract claim subsumes the 10 negligent misrepresentation claim). To recover for negligent misrepresentation, 11 Defendants must identify a violated independent non-contractual duty, or the claims 12 are barred by the economic loss doctrine. Defendants do not identify any such duty. 13 Moreover, Defendants do not allege harm above and beyond the broken 14 contractual agreement, as Defendants only point to monetary damages for lost profits, 15 restocking fees, financing fees, and other amounts required to pay the equipment 16 manufacturer. (Id. ¶ 51.) Defendants aver purely economic losses, which are not 17 recoverable under the tort of negligent misrepresentation. Therefore, the economic 18 loss rule bars Defendants’ negligent misrepresentation claim. 19 Because the Court finds Defendants fail to adequately plead this counterclaim 20 based on the economic loss doctrine, the Court need not analyze whether Defendants’ 21 negligent misrepresentation claim meets the Rule 9(b) pleading standards. Thus, the 22 Court GRANTS the Motion as to Defendants’ fourth counterclaim for negligent 23 misrepresentation with leave to amend these deficiencies. 24 E. Fifth Counterclaim: Conversion 25 Herbalife further contends Defendants fail to state a claim for conversion. 26 (Mot. 11.) To state a claim for conversion, a plaintiff must plead facts demonstrating 27 that a defendant wrongfully took or disposed of property belonging to the plaintiff. 28 Fortaleza v. PNC Fin. Servs. Grp., Inc., 642 F. Supp. 2d 1012, 1022 (N.D. Cal. 2008).

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1 The elements of a conversion claim are: “(1) the plaintiff’s ownership or right to 2 possession of the property at the time of the conversion; (2) the defendant's conversion 3 by a wrongful act or disposition of property rights; and (3) damages.” Mindys 4 Cosmetics, Inc. v. Dakar, 611 F.3d 590, 601 (9th Cir. 2010) (applying California law). 5 A party alleging conversion must also show that the alleged converter has assumed 6 control over the property “or that the alleged converter has applied the property to his 7 own use.” Id. 8 Here, Defendants again argue Herbalife was entrusted with proprietary 9 confidential information that Herbalife improperly divulged to Defendants’ 10 competitors. (Countercl. ¶ 57.) This allegation is insufficient as Defendants fail to 11 allege specific facts indicating how Herbalife affirmatively took Defendants’ property 12 from them. Moreover, Defendants state that Herbalife conspired to convert 13 confidential information, but do not specify the type of confidential information that 14 Herbalife wrongfully divulged to Defendants’ competitors or identify any specific 15 competitor. (Id.) Without more information as to the type and disposition of the 16 confidential information, Defendants fail to sufficiently plead a counterclaim for 17 conversion. Thus, the Court GRANTS the Motion as to Defendants’ fifth 18 counterclaim for conversion with leave to amend these deficiencies 19 F. Sixth Counterclaim: Declaratory Relief 20 By way of their sixth and final counterclaim, Defendants seek declaratory relief 21 for Herbalife to pay Defendants for all equipment and software Defendants ordered 22 for the BCDR Project. (Countercl. ¶ 54.) Declaratory relief is a remedy and not an 23 independent cause of action. See Lane v. Vitek Real Estate Indus. Grp., 713 F. Supp. 24 2d 1092, 1104 (E.D. Cal. 2010) (“Declaratory and injunctive relief are not 25 independent claims, rather they are forms of relief.”); Taheny v. Wells Fargo Bank, 26 N.A., No. CIV. S-10-2123 LKK, 2010 WL 5394315, at *11 (E.D. Cal. Dec. 22, 2010) 27 (“Plaintiffs’ purported claim for ‘declaratory relief’ is a remedy, not a cause of 28 action.”). Because declaratory relief is not its own cause of action—and such relief is

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1 || already sought by way of Defendants’ contract claims—the Court DISMISSES 2 || Defendants’ counterclaim for declaratory relief. 3 Vv. CONCLUSION 4 For the reasons discussed above, the Court GRANTS in PART and DENIES 5 || in PART Herbalife’s Motion to Dismiss Defendants’ Counterclaim and provides 6 || leave to amend as described above. (ECF No. 19.) If Defendants choose to file an 7 || Amended Counterclaim, they shall do so within twenty-one (21) days of the date of 8 | this Order, in which case Herbalife shall answer or otherwise respond within fourteen 9 || (14) days of the filing. If Defendants choose not to amend, then as of the lapse of this 10 || deadline to amend, their claims shall be deemed dismissed with prejudice. 1] 12 IT IS SO ORDERED. 13 ay a; a” y 14 June 8, 2022 beh igit 15 ie 16 7 OTIS D. WRIGHT, I ig UNITED STATES DISTRICT JUDGE

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