Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-06637/USCOURTS-cand-5_06-cv-06637-3/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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United States District Court

For the Northern District of California

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

MOTION TO STRIKE—No. C-06-06637 RMW

SPT / TSF

United States District Court

For the Northern District of California

E-FILED on 11/5/2007

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

CARDONET, INC.,

Plaintiff,

v.

IBM CORPORATION, et al.,

Defendants.

No. C-06-06637 RMW

ORDER DENYING DEFENDANT'S

MOTION TO DISMISS FIRST AMENDED

COMPLAINT AND GRANTING

DEFENDANT'S MOTION TO STRIKE

[Re Docket No. 27]

Plaintiff Cardonet, Inc. ("Cardonet") pleads the following seven claims in its first amended

complaint ("FAC"): 1) breach of contract; 2) promissory estoppel; 3) unjust enrichment; 4) fraud; 5)

negligent misrepresentation; and 6) conversion. Defendant IBM Corporation ("IBM") moves to

dismiss plaintiff's second through sixth claims. IBM further moves to strike plaintiff's request for

punitive damages, claim for attorney's fees, and demand for jury trial. Cardonet opposes both

motions, but agrees to withdraw its claim for attorney's fees. For the reasons set forth below, the

court denies IBM's motion to dismiss and grants IBM's motion to strike.

I. BACKGROUND

This action was removed to federal court on the basis of diversity of citizenship. Previously,

this court concluded that the choice-of-law provision in the contract between the parties is

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1

 These documents are attached as exhibits to Cardonet's FAC. 

2

 The FAC uses the term "SKUs" as the unit measure for Cardonet's software product. 

Cardonet prices its software based on usage and measures that usage in "SKUs." See compl. ¶ 8. 

ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

MOTION TO STRIKE—No. C-06-06637 RMW

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enforceable as to all of Cardonet's claims; therefore, New York law applies. Order dated February

14, 2007 Granting Defendant's Motion to Dismiss and to Strike ("Feb. 14, 2007 Order") at 8:10-11,

11:2-10. Thus, the court dismissed plaintiff's claims with leave to amend to replead under New

York law, and to replead with particularity under Fed. R. Civ. P. 9 where necessary. Id. at 11:4-6. 

Cardonet develops and licenses product information management software. FAC ¶ 3. It also

provides maintenance and support services for the software. Id. IBM develops, manufactures, and

sells advanced electronic systems, hardware, and software directly and through third party retailers. 

Id. ¶ 4. On December 23, 2003 Cardonet and IBM entered into a software licensing and

maintenance agreement (the "Agreement"), which included two separate documents, a base

agreement (the "Base Agreement") and an addendum (the "Addendum").1

 Id. ¶ 5. Both referenced

IBM contract number 490S3033. Pursuant to the Agreement, Cardonet agreed to grant IBM a

license to use 1,385,724 SKUs2

 of Cardonet's software and to provide maintenance and support for

such software. Id. In exchange, IBM was to pay license fees and software and maintenance fees as

set forth in the Agreement. Id. Cardonet alleges that it provided considerably discounted prices to

IBM for the 1,385,724 SKUs of software based on its belief that IBM and Cardonet would have a

long-lasting business relationship. Id. ¶ 8. According to Cardonet, this belief was formed based on

discussions between the management of both companies and a prior working relationship during

which Cardonet provided IBM unlimited use of its software for a 90 day trial period without charge. 

Id. 

Cardonet also alleges that when the parties entered into the Agreement, they mutually agreed

on a definition of "SKUs" that was consistent with industry practice and the parties' past operating 

practice. Id. ¶ 9. Cardonet provided the 1,385,724 SKUs called for in the Agreement. Id. ¶ 6. 

However, Cardonet avers, between January 1, 2004 and September 2004, IBM repeatedly demanded

that Cardonet relinquish additional SKUs to IBM. Id. 

Sometime before January 1, 2004 IBM encountered technical problems using Cardonet's

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

MOTION TO STRIKE—No. C-06-06637 RMW

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software. Id. ¶ 10. While assisting IBM with the problems, Cardonet allegedly discovered that the

problems were caused by IBM having acquired more than the contractually-agreed upon SKUs of

Cardonet's software; IBM had acquired a total of 1,403,149 SKUs at the time. Id. Cardonet then

informed IBM that IBM had exceeded the contractual limits for SKUs under the Agreement. Id.

¶ 11. Cardonet alleges that on January 5, 2004 IBM management informed Cardonet, via email and

telephone, that IBM was interested in having at least an additional 3,000,000 SKUs immediately. 

Id. Specifically, Paul Gomes, IBM's Director of Offering Information Management, and William

Murphy, IBM's software contracts administrator (and the individual who had previously executed

the Agreement on IBM's behalf), promised to meet with Cardonet management on or before October

1, 2004 to discuss and to pay Cardonet for the SKUs acquired in excess of the contractual limit if

Cardonet immediately released an additional 3,000,000 SKUs to Cardonet. Id. Cardonet then

immediately released an additional 3,000,000 SKUs to IBM. Id. ¶ 12. 

Cardonet alleges that sometime before April 2004 Gomes, Murphy, and another IBM

employee, Steve Finely, requested Cardonet to permit IBM to have unlimited access to Cardonet's

software, again promising in exchange that IBM would meet with Cardonet on or before October 1,

2004 to discuss and pay for all SKUs acquired by IBM. Id. ¶ 13. Cardonet complied with the

request purportedly in reliance on IBM's promises. Id. 

Thereafter, through September 14, 2004, Cardonet repeatedly attempted to set up meetings

with Gomes to schedule the promised meeting. Id. ¶ 14. IBM allegedly either made no response or

promised to discuss the matter at a later date. Id. On September 17, 2004 Cardonet wrote to

Murphy:

We need to have resolved this issue prior to October 1. Paul [Gomes] has not gotten

back to me and IBM is currently outside of it's [sic] capacity per the contract we signed.

I have been trying to get it settled for quite some time now with no luck. W[e] agreed

in good faith that Cardonet would allow this to happen (over capacity) as long as we

adjusted this by October 1 (and IBM paid any difference that it might owe if they went

over their current SKU count–see below for details)[.] Can you provide some assistance.

Id. Cardonet also provided its standard list prices for the SKUs in excess of the contracted limit. Id.

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3

 It is unclear whether Cardonet provided maintenance and support for the SKUs above the

total contracted for SKUs. 

ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

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Cardonet alleges that the October 2004 meeting promised by IBM never occurred and IBM

never paid Cardonet for the SKUs acquired beyond the amount stated in the Agreement, or for the

related maintenance and support fees.3

 Id. ¶¶ 15, 18. IBM purportedly has continued to deny it

owes Cardonet any additional sums, although it supposedly has not denied it made promises to pay

at the time it requested additional SKUs. Id. On November 9, 2004 Murphy informed Cardonet that

based on IBM's definition of "SKUs" IBM had not exceeded the contractual limit in the Agreement. 

Id. At the time IBM indicated that it was using at least 3,995,781 units of Cardonet's software. Id. 

II. ANALYSIS

Dismissal under Fed. R. Civ. P. 12(b)(6) is proper only when a complaint exhibits either a

"lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal

theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). The court must

accept the facts alleged in the complaint as true. Id. "A complaint should not be dismissed 'unless it

appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would

entitle him to relief.'" Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 248 (9th Cir. 1997) (quoting

Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

Fed. R. Civ. P. 12(f) provides that the court may upon motion by a party "order stricken from

any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous

matter." 

IBM moves to dismiss Cardonet's second (promissory estoppel), third (unjust enrichment),

fourth (fraud), fifth (negligent misrepresentation), and sixth (conversion) claims for relief. IBM

further moves to strike Cardonet's claim for punitive damages, request for attorney's fees, and

demand for a jury trial. 

A. Promissory Estoppel and Unjust Enrichment Claims

IBM argues that Cardonet's promissory estoppel and unjust enrichment claims must be

dismissed because they are barred by the existence of a valid, enforceable contract governing the

matter in dispute. Under New York law, "[i]t is impermissible . . . to seek damages in an action

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

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sounding in quasi contract where the suing party has fully performed on a valid written agreement,

the existence of which is undisputed, and the scope of which clearly covers the dispute between the

parties." Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, 389 (1987). IBM contends

that the matter in dispute here—the alleged promises to pay for additional SKUs and the transfer of

SKUs without additional charge by Cardonet to IBM—is clearly within the scope of the section 3.0

of the Addendum, which states:

The parties shall meet on or before October 1, 2004 to review [IBM's] capacity usage of

the Licensed Work for purposes of determining if additional Fees are due for additional

Units used in [IBM] in excess of the Units specified in Exhibit D attached hereto. [IBM]

shall not utilize additional Run Time Instances of the Licensed Work without the prior

written consent of [Cardonet]. 

FAC, Ex. A (Addendum) § 3.0. 

The court is unpersuaded by IBM's argument. In Clark-Fitzpatrick, the plaintiff sued the

defendant for having planned flawed engineering designs which required substantial design changes

during construction and for failing to complete certain of its responsibilities under the contract, such

as obtaining rights to certain bordering properties and locating and moving utility lines. 70 N.Y.2d

at 385. The plaintiff nevertheless proceeded and finished construction and then sued the defendant

to recover damages. Id. The court concluded that plaintiff could not state a quasi contract claim

against the defendant because the disputes of defendant's failure to perform or to adequately perform

were clearly within the scope of the contract. Id. The court so concluded because the contract

"contained detailed engineering specifications," id. at 385, "fully detail[ed] all applicable terms and

conditions, and specifically provid[ed] for project design changes with adjustments in compensation

contemplated in light of those changes." Id. at 389. 

By contrast, here, the provision of the Addendum upon which IBM relies binds the parties

only to an agreement to meet on or before October 1, 2004 to review IBM's capacity usage for

purposes of determining if additional fees are required. Although IBM argues that the Agreement

contemplates adjustments in fees for SKU usage changes, nothing in the Addendum (or Agreement)

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4

 IBM argues that the absence of pricing is irrelevant because such a missing term does not

render a contract indefinite. However, the issue in this motion to dismiss is not definiteness or

validity of the Agreement, but whether the dispute, as alleged, is clearly within the scope of the

contract. IBM also argues that § 3.0 of the Agreement encompasses the dispute of whether or not

IBM's actual usage exceeds the contractual limit and requires additional fees. However, this

argument requires the court to interpret the provision broadly and in IBM's favor, which the court

declines to do on a motion to dismiss. 

5

 Cardonet attached the Addendum as Exhibit B to its FAC. The Addendum also contains its

own Exhibit B which sets forth "Pricing and Fees." 

6

 IBM does not argue that Cardonet has not pled its fraud claim with particularity as required

by Fed. R. Civ. P. 9 or that the claims fail because Cardonet has not alleged facts supporting the

elements of these claims under New York law. 

ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

MOTION TO STRIKE—No. C-06-06637 RMW

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provides for the payment terms or fees that must be paid if IBM exceeded the contracted usage.4

Rather, the contract sets forth pricing and fees only for the 1,385,724 SKUs, 40 source catalogs, 40

output channels, and 2 run time instances. FAC, Ex. B (Addendum) at Ex. B5

. Although Cardonet

alleges that IBM also ignored its request to meet by or before October 1, 2004, Cardonet also alleges

that IBM, by making promises to pay for more SKUs, induced Cardonet to permit up to unlimited

access to its product. Therefore, the court finds that the dispute is not clearly within the scope of the

Agreement. Accordingly, the court concludes that Cardonet's quasi contract claims are not barred

by the existence of a valid, enforceable agreement. 

B. Tort Claims

IBM moves to dismiss Cardonet's tort claims on two grounds. First, IBM argues that these

claims are barred because they do not arise from a duty independent of the obligations imposed by

the Agreement.6

 IBM argues that Cardonet's tort claims basically allege that IBM falsely promised

to or negligently misrepresented its intent to perform under the contract. Therefore, IBM contends,

any alleged wrongdoing relates only to non-performance of duties under the Agreement. Second,

IBM argues that the tort claims are barred by the economic loss rule. 

1. Contractual Duty

Under New York law, a "plaintiff's tort claim must allege a breach of a duty that 'spring[s]

from circumstances extraneous to, and not constituting elements of, the contract, although it may be

connected with and dependent upon the contract.'" Carmania Corp., N.V. v. Hambrecht Terrell

Int'l., 705 F. Supp. 936, 938 (S.D.N.Y. 1989) (quoting Clark-Fitzpatrick, 70 N.Y.2d at 389)). 

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

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However, New York law allows "concurrent recovery in tort and contract so long as a defendant

violates distinct legal duties: one that arises from the contract at issue, and one that arises

independently." Id. Here, Cardonet alleges that after the total SKUs permitted by the Agreement

had been used by IBM and Cardonet had so informed IBM, the parties had separate discussions

during which IBM requested more SKUs while promising to meet with Cardonet by October 1, 2004

and to pay additional fees for SKUs in excess of capacity. Cardonet alleges that, relying upon those

statements, it permitted IBM to have access to an additional 3,000,000 SKUs and, eventually, to

have access to unlimited SKUs. Thereafter, Cardonet alleges, IBM ignored requests to meet and

unilaterally informed Cardonet that there has been no excess usage of SKUs and no additional fees

were due. Taking inferences of these factual allegations in the light most favorable to Cardonet,

IBM's alleged statements extend beyond a mere promise to perform under the contract. 

As discussed in section A, supra, the contract provides for payment for the contracted

number of SKUs and for a meeting by October 1, 2004 for further discussions, but made no

provisions for the fees and payment terms for SKUs above the contractual limit. The basis for

Cardonet's claims is not limited to contract performance as IBM suggests, but stems from IBM's

promises to meet and pay additional fees after being informed by Cardonet (and not disputing) that

the contractual limit had been reached. That these allegations are related to or factually similar to

Cardonet's breach of contract claim does not bar the claims. See Carmania Corp., 705 F. Supp. at

938 n.1 ("If a defendant owes a plaintiff a legal duty independent of contract, he is liable in tort for

breaching that duty no matter how similar the factual allegations underlying the contract claim."). 

Here, IBM's statements extend beyond a promise to perform under the Agreement and give rise to a

separate legal duty based on false statements or misrepresentation which allegedly induced Cardonet

to grant access to more SKUs. Accordingly, the court concludes that Cardonet's claims for fraud

and misrepresentation arise from a duty independent of the obligations imposed by the contract. The

court also notes, however, that although Cardonet may go forward with its tort claims, there does not

appear to be any allegation of a measure of damages separate from what Cardonet seeks under its

quasi contract claims. 

2. Economic Loss Rule

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

MOTION TO STRIKE—No. C-06-06637 RMW

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New York's economic loss doctrine restricts plaintiffs "who have suffered 'economic loss,'

but not personal or property injury, to an action for the benefit of their bargain. If the damages are

the type remedial in contract, a plaintiff may not recover in tort." Carmania Corp., N.V. v.

Hambrecht Terrell Int'l, 705 F. Supp. 936, 938 (S.D.N.Y. 1989); see Long Island Lighting Co. v.

Transamerica Delaval, 646 F. Supp. 1442, 1457 (S.D.N.Y. 1986) (noting that a tort action for

economic loss is inappropriate). 

However, "the 'economic loss rule' does not extend to prohibiting a suit by a party in privity

for pecuniary losses suffered as a result of breach of a duty independent of the contract." The

Limited, Inc. v. McCrory Corp., 169 A.D.2d 605, 607-08 (N.Y. App. Div. 1991). In The Limited,

the plaintiff alleged it was in privity with the defendant pursuant to a stock purchase agreement. Id.

Nevertheless, the court concluded that because the plaintiff had also asserted a duty independent of

the contract, the plaintiff stated a viable negligence claim for pecuniary losses. Id. As discussed in

section B.1, supra, the court concludes that plaintiff has alleged tort duties independent of the

parties' contractual obligations. Because such duties are independent of the contract between the

parties, plaintiff's alleged damages, although pecuniary, are not limited to the benefit of the bargain

under the Agreement. See Stell Mfg. Corp. v. Century Indus., Inc., 15 A.D.2d 87, 89-90 (N.Y. App.

Div. 1961) (rejecting respondents' argument that "where a contract is the source of a relationship

between the parties, torts committed in the course of and made possible by such relationship should

be protected from independent attack, and the limit of recovery be restricted to damages for breach

of such contract"). 

C. Motion to Strike

IBM moves to strike plaintiff's request for attorney's fees. In its opposing brief Cardonet

withdrew its claim for attorney's fees. Accordingly, IBM's motion to strike the claim for attorney's

fees is granted as unopposed. 

IBM also seeks to strike plaintiff's demand for punitive damages. Under New York law,

punitive damages may be granted in private fraud claims if the claims involve "wrongdoing directed

at the general public or egregious culpable conduct." The Limited, 169 A.D.2d at 608. A plaintiff

must allege fraud "evincing a 'high degree of moral turpitude' and demonstrating 'such wanton

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

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dishonesty as to imply a criminal indifference to civil obligations'" and must allege that the "conduct

was 'aimed at the public generally.'" Rocanova v. Equitable Life Assur. Soc. of U.S., 634 N.E.2d

940, 943-44 (N.Y. 1994) (quoting Walker v. Sheldon, 179 N.E.2d 497, 498-99 (N.Y. 1961)). 

Cardonet seeks punitive damages for its fraud and conversion claims. Because Cardonet's

allegations of IBM's purported conduct for these claims do not involve the requisite high degree of

moral turpitude or wanton dishonesty and conduct aimed at the public, the court strikes its demand

for punitive damages.

IBM argues that the demand for jury trial must be stricken because the Agreement expressly

waives "any right to a jury regarding disputes related to this Agreement." FAC, Ex. A (Base

Agreement) § 14.3. IBM contends that all of Cardonet's claims are disputes related to the

Agreement. Cardonet does not dispute the provision is set forth in the Agreement, but argues that

only its breach of contract claim is "related to" the Agreement. Although the court concluded that

the quasi contract and tort claims are separate from Cardonet's breach of contract claim, these claims

are nevertheless sufficiently related to the Agreement to fall within the scope of § 14.3. 

Accordingly, the court grants IBM's motion to strike the demand for jury trial. 

III. ORDER

For the foregoing reasons, the court denies IBM's motion to dismiss and grants IBM's motion

to strike.

DATED: 11/5/2007

RONALD M. WHYTE

United States District Judge

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ORDER DENYING DEFENDANT'S MOTION TO DISMISS FIRST AMENDED COMPLAINT AND GRANTING DEFENDANT'S

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Notice of this document has been electronically sent to:

Counsel for Plaintiff:

Kenneth N. Frucht Kfrucht@aol.com 

Frederick J. Geonetta landglawyers@msn.com 

Thomas Marc Litton tmlitton@compuserve.com 

Counsel for Defendants:

Shon Morgan shonmorgan@quinnemanuel.com, amykuzio@quinnemanuel.com

Joseph Mel Paunovich joepaunovich@quinnemanuel.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 11/5/2007 TSF

Chambers of Judge Whyte

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