Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02590/USCOURTS-cand-4_06-cv-02590-1/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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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

REJECTS SKATE MAGAZINE, INC., a

Tennessee corporation; WESLEY M.

DRIVER; RADIUS MEDIA, LLC, an Alabama

limited liability company; and SHAWN

ENGLER,

Plaintiffs,

v.

ACUTRACK, INC.,

Defendant.

 /

No. C 06-2590 CW

ORDER GRANTING IN

PART AND DENYING

IN PART

DEFENDANT'S

MOTION TO DISMISS

Defendant Acutrack, Inc., moves pursuant to Federal Rules of

Civil Procedure 9(b), 12(b)(1) and 12(b)(6) to dismiss the

complaint filed against it by Plaintiffs Rejects Skate Magazine,

Inc. (Rejects), Wesley Driver, Radius Media, LLC and Shawn Engler,

and, in the alternative, to strike Plaintiffs' claim for punitive

damages. Plaintiffs oppose the motion. The matter was taken under

submission on the papers. Having considered all of the papers

filed by the parties, the Court grants the motion to dismiss the

claim for negligent and intentional infliction of emotional

distress, but otherwise denies Defendant's motion to dismiss. 

BACKGROUND

Unless otherwise noted, the following facts are taken from the

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Complaint and are assumed to be true for purposes of this motion. 

Mr. Driver organized and operated Rejects out of his home in

Tennessee and founded its eponymous magazine. The magazine

targeted minors who were interested in skating and, up until

February, 2003, it enjoyed substantial growth, including being

placed for sale in Barnes & Noble Bookstores, and had a bright

future. As part of its marketing plan, many issues of the magazine

included DVDs, with similar skate content. 

Radius is a company founded by Mr. Engler, organized and

operating in Alabama. Radius produced Rejects' DVDs, and the two

companies worked closely with each other to ensure that the content

of the DVDs was similar to that of the magazine. Mr. Engler acted

as an agent for Mr. Driver, Radius and Rejects. 

Plaintiffs entered into an agreement with Defendant (described

as a "foreign" corporation doing business in Tennessee) to

reproduce Rejects' DVD No. 4. In making the agreement, Plaintiffs

relied on the following false statements of material fact made by

Defendant:

A. That defendant Acutrack had performed numerous duplication

and/or replication jobs in the past without making

mistakes; 

B. That defendant Acutrack would reproduce Rejects DVD #4 in

substantially the same form in which it was received; 

C. That the defendant Acutrack used advanced processes to

insure that Rejects DVD No. 4 would be replicated and/or

duplicated in substantially the same form in which it was

received;

D. That defendant Acutrack took proper measures to ensure

that its reproduction process yielded replicates and/or

duplicates that were substantially similar to the

original; 

E. That DVDs reproduced and/or replicated by the defendant

Acutrack exceeded industry standards.

Complaint ¶ 44. The Complaint does not specify which portions of

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these statements were false, or if they were all false in their

entirety.

Defendant failed to perform its obligations under the

agreement by failing to reproduce the DVD supplied by Plaintiffs. 

Instead, "on a substantial number of DVDs, Acutrack produced and/or

reproduced gay pornography, including a hardcore gay pornographic

movie named "Hard Hat Pigs." Complaint ¶ 15. The pornographic

DVDs were then distributed with Rejects' magazine to retail outlets

for sale, and viewed by children across the country. 

 As a result, Plaintiffs suffered damage, including the demise

of Rejects' magazine and serious economic harm to Radius. Mr.

Engler and Mr. Driver suffered severe damage to their reputations,

severe mental anguish and emotional distress, substantial debt and

loss of substantial income. 

Plaintiffs bring claims for (1) breach of contract;

(2) negligence, gross negligence and/or wantonness based on

Defendant's alleged "duty to reproduce the content on Rejects DVD

No. 4 in a professional manner" and to reproduce substantially

identical content to that sent to it by Plaintiffs; (3) negligent

and/or intentional misrepresentation; and (4) intentional and/or

negligent infliction of emotional distress. Plaintiffs seek

compensatory and punitive damages. 

Plaintiffs originally filed a complaint in Alabama State court

on April 7, 2004. Defendant moved to dismiss on various grounds. 

The Alabama court granted Defendant's motion to dismiss under the

doctrine of forum non conveniens. Plaintiffs then filed the

current Complaint in Tennessee State court on April 18, 2005. 

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Defendant removed the case to the United States District Court for

the Middle District of Tennessee. According to Defendant's Notice

of Removal, the district court had jurisdiction "because complete

diversity exists and the amount in controversy exceeds $75,000.00." 

Pls.' Ex. A, Def.'s Not. of Removal ¶ 3. Defendant's allegations

regarding the citizenship of the parties were the same as those in

the Complaint, except that Defendant specified that it is a

California corporation with its principal place of business in

Livermore, California, and that Mr. Engler is and was a resident of

Alabama. Id. ¶¶ 6, 8. Defendant also noted that Mr. Driver is now

a resident of New York. Id. ¶ 5. Plaintiffs moved to remand on

that grounds that Defendant had waived its right to removal by

consenting to the dismissal of the Alabama action and to the

jurisdiction of the State of Tennessee. The Tennessee district

court denied the motion. Pls.' Ex. B, August 22, 2005 Order at 2. 

That court later granted Defendant's motion for transfer of venue

to the Northern District of California. 

LEGAL STANDARDS

I. Rule 12(b)(1)

Dismissal is appropriate under Rule 12(b)(1) when the district

court lacks subject matter jurisdiction over the claim. Fed. R.

Civ. P. 12(b)(1). Federal subject matter jurisdiction must exist

at the time the action is commenced. Morongo Band of Mission

Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376, 1380 (9th

Cir. 1988), cert. denied, 488 U.S. 1006 (1989). A Rule 12(b)(1)

motion may either attack the sufficiency of the pleadings to

establish federal jurisdiction, or allege an actual lack of

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1

Therefore, the parties' focus on whether Defendant "waived"

its challenge to the Court's subject matter jurisdiction by

removing this case to Tennessee district court is inapposite. 

5

jurisdiction which exists despite the formal sufficiency of the

complaint. Thornhill Publ’g Co. v. Gen. Tel. & Elecs. Corp., 594

F.2d 730, 733 (9th Cir. 1979); Roberts v. Corrothers, 812 F.2d

1173, 1177 (9th Cir. 1987).

Subject matter jurisdiction is a threshold issue which goes to

the power of the court to hear the case.1

 Therefore, a Rule

12(b)(1) challenge should be decided before other grounds for

dismissal, because they will become moot if dismissal is granted. 

Alvares v. Erickson, 514 F.2d 156, 160 (9th Cir.), cert. denied,

423 U.S. 874 (1975).

A federal court is presumed to lack subject matter

jurisdiction until the contrary affirmatively appears. Stock West,

Inc. v. Confederated Tribes, 873 F.2d 1221, 1225 (9th Cir. 1989). 

An action should not be dismissed for lack of subject matter

jurisdiction without giving the plaintiff an opportunity to amend

unless it is clear that the jurisdictional deficiency cannot be

cured by amendment. May Dep’t Store v. Graphic Process Co., 637

F.2d 1211, 1216 (9th Cir. 1980). Absent an independent basis, the

agreement of the parties does not confer subject matter

jurisdiction. Brockman v. Merabank, 40 F.3d 1013, 1017 (9th Cir.

1994).

II. Rule 12(b)(6)

A motion to dismiss for failure to state a claim will be

denied unless it is “clear that no relief could be granted under

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any set of facts that could be proved consistent with the

allegations.” Falkowski v. Imation Corp., 309 F.3d 1123, 1132 (9th

Cir. 2002), citing Swierkiewicz v. Sorema N.A., 534 U.S. 506

(2002). All material allegations in the complaint will be taken as

true and construed in the light most favorable to the plaintiff. 

NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). 

When granting a motion to dismiss, a court is generally required to

grant a plaintiff leave to amend, even if no request to amend the

pleading was made, unless amendment would be futile. Cook, Perkiss

& Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-

47 (9th Cir. 1990). In determining whether amendment would be

futile, a court examines whether the complaint could be amended to

cure the defect requiring dismissal “without contradicting any of

the allegations of [the] original complaint.” Reddy v. Litton

Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990). Leave to amend

should be liberally granted, but an amended complaint cannot allege

facts inconsistent with the challenged pleading. Id. at 296-97. 

III. Rule 9(b)

“In all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with particularity.” 

Fed. R. Civ. P. 9(b). The allegations must be “specific enough to

give defendants notice of the particular misconduct which is

alleged to constitute the fraud charged so that they can defend

against the charge and not just deny that they have done anything

wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). 

Statements of the time, place and nature of the alleged fraudulent

activities are sufficient, Wool v. Tandem Computers, Inc., 818 F.2d

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Defendant mistakenly relies on Desaigoudar v. Meyercord, 223

F.3d 1020, 1022 (9th Cir. 2000) for the proposition that averments

of fraud must be plead with a "high degree of meticulousness"; this

standard refers to the requirements of the Private Securities

Litigation Reform Act. 

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1433, 1439 (9th Cir. 1987), provided the plaintiff sets forth “what

is false or misleading about a statement, and why it is false.”2

In re GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1548 (9th Cir.

1994). Scienter may be averred generally, simply by saying that it

existed. See id. at 1547; see Fed. R. Civ. P. 9(b) (“Malice,

intent, knowledge, and other condition of mind of a person may be

averred generally”). As to matters peculiarly within the opposing

party’s knowledge, pleadings based on information and belief may

satisfy Rule 9(b) if they also state the facts on which the belief

is founded. Wool, 818 F.2d at 1439.

DISCUSSION

I. Subject Matter Jurisdiction

Defendant moves to dismiss the Complaint for lack of subject

matter jurisdiction, on the grounds that Plaintiffs' original

pleading in Tennessee State court failed to specify the citizenship

of each Plaintiff and failed to state that the amount in

controversy was more than $75,000. 

 District courts have original jurisdiction over all civil

actions "where the matter in controversy exceeds the sum or value

of $75,000, exclusive of interest and costs, and is between . . . 

citizens of different States." 28 U.S.C. § 1332(a). 

Here, most of the necessary elements of diversity jurisdiction

which Defendant now claims are missing have in fact been

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affirmatively established by Defendant's own pleading in its Notice

of Removal, which is attached to Plaintiffs' opposition and is also

part of the docket transferred to this Court from Tennessee. For

instance, the Notice of Removal indicates that the amount in

controversy is more than $75,000 and that Defendant is a citizen

and resident of California. Moreover, Defendant affirmatively

represented that "complete diversity exists." Notice of Removal

¶ 3. The Tennessee district court presumably relied on this

statement in exercising jurisdiction and denying Plaintiffs' motion

to remand, although it appears from the judge's order that

Plaintiffs argued only that Defendant had waived its right of

removal, not Defendant lacked the right to remove. Defendant does

not now claim that the statements it alleged in the Notice of

Removal are mistaken or present any other reason why the Court

should not rely on the representations therein. However, in light

of Defendant's current position, if Plaintiffs would like the Court

to remand this case to Tennessee State court, the Court will do so

on their request. The Court denies Defendant's motion to dismiss

for lack of subject matter jurisdiction.

II. Economic Loss Doctrine

Defendant moves to dismiss Plaintiffs' claims for negligence,

misrepresentation and emotional distress on the grounds that they

are precluded by the economic loss doctrine. 

Under California's economic loss rule, to recover in tort for

damages caused by a defective product, a plaintiff must demonstrate

personal injury or damage to property other than the product

itself. Jimenez v. Super. Ct., 29 Cal. 4th 473, 483 (2002); Aas v.

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3

Kalitta Air, LLC v. Cent. Tex. Airborne Systems, Inc., No. C

96-2494 CW (N.D. Cal. judgment as a matter of law granted in part,

July 22, 2005), petitions for permission to appeal granted, Nos.

05-16841 and 05-16842 (9th Cir. Sept. 20, 2005). 

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Super. Ct., 24 Cal. 4th 627, 635-36 (2000). Generally, a tortious

breach of contract may be found when 

(1) the breach is accompanied by a traditional common law

tort, such as fraud or conversion; (2) the means used to

breach the contract are tortious, involving deceit or undue

coercion; or (3) one party intentionally breaches the contract

intending or knowing that such a breach will cause severe,

unmitigable harm in the form of mental anguish, personal

hardship, or substantial consequential damages.

Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979, 990 (2004)

(quoting Ehrlich v. Menezes, 21 Cal. 4th 543, 553-54 (1999)). 

Claims of fraud and intentional misrepresentation that are

independent of a breach of contract are not subject to the economic

loss rule. Id. at 991. 

Plaintiffs argue that the economic loss rule is inapposite

because the contract here was for services, not a product. 

However, as this Court has held in another case involving the

economic loss doctrine,3 the limitation on tort recovery applies to

the negligent performance of services as well as to the negligent

manufacture of goods. As the Court has reasoned,

The Aas Court briefly addressed the plaintiffs' contention

that the economic loss rule does not apply to the negligent

performance of service. In a footnote, the Aas Court noted,

"Plaintiffs also argue that Seely [v. White Motor Co., 63 Cal.

2d 9, 18 (1965)] does not apply to the negligent performance

of services, as distinguished from the negligent manufacture

of products." [Aas, 24 Cal. 4th at] 645, n. 11 (internal

citation omitted) (emphasis in original). The Aas Court

responded that "the basis for that argument appears, once

again, to be that J'Aire takes precedence over Seely." Id.

(internal citation omitted). Read in the context of the

opinion as a whole, this passage suggests that the Aas Court

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rejected the plaintiffs' contention that negligent performance

of services is to be treated differently than the negligent

manufacture of goods. This interpretation of this passage is

supported by other passages of the Aas opinion that draw no

distinction between these situations. See id. at 636 ("For

defective products and negligent services that have caused

neither property damage nor personal injury, however, tort

remedies have been uncertain."). In addition, the Aas Court

specifically rejected the plaintiffs' argument, based on North

American Chemical Co. v. Superior Court, 59 Cal. App. 4th 764,

774 (1997), that those plaintiffs in contractual privity with

the defendant are entitled to recover for negligent

performance of a service contract. Id. at 642-43. The Aas

Court explained that a "person may not ordinarily recover in

tort for the breach of duties that merely restate contractual

obligations." Id. at 643. For these reasons, the Court

concludes that economic loss rule applies to the negligent

performance of services as well as to the negligent

manufacture of goods. 

Order Granting Pl.'s Req. for Clarification and Denying Def.'s

Req., Kalitta, slip op. at 8-9 (Aug. 19, 2004) (full citation for

Seely added). Therefore, the Court will apply the economic loss

rule here regardless of whether the parties' contract is defined as

one for a product (i.e., duplicated DVDs) or services (duplication

of DVDs). 

Plaintiffs' negligence claim merely restates its breach of

contract claim, thereby subjecting Plaintiffs' claim to application

of the economic loss doctrine. However, because Plaintiffs could

arguably prove, consistent with the allegations in the Complaint,

personal injury or damage to other property, the Court denies

Defendant's motion to dismiss the negligence claim. 

Plaintiffs' claims for negligent or intentional

misrepresentation and negligent or intentional infliction of

emotional distress are traditional common law tort claims. By

alleging these torts, Plaintiffs have alleged violations of duties

independent of the contract; therefore, the economic loss doctrine

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4

Defendant also relies upon Decker for the proposition that

Plaintiffs must plead with particularity "an explanation as to why

the disputed statement[s were] untrue or misleading when made." 42

F.3d at 1549. However, this portion of Decker refers to the

heightened pleading standard applicable in securities fraud cases. 

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does not apply to those claims. 

Therefore, the Court denies Defendant's motion to dismiss, on

the basis of the economic loss rule, Plaintiffs' claims for

negligence, negligent or intentional misrepresentation and

negligent or intentional infliction of emotional distress. 

III. Failure to Plead with Particularity

Defendant moves to dismiss Plaintiffs' claim for negligent or

intentional misrepresentation on the ground that Plaintiffs have

failed to plead this claim with the particularity required by Rule

9(b). 

Plaintiffs specify in their Complaint the particular

statements, made over the telephone by Defendant in late December,

2002, which are alleged to be false. However, a plaintiff 

must set forth more than the neutral facts necessary to

identify the transaction. The plaintiff must set forth what

is false or misleading about a statement, and why it is false.

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003)

(quoting Decker v. GlenFed, Inc., 42 F.3d 1541, 1548 (9th Cir.

1994)).4 Here, the Complaint makes clear that the DVDs were not

correctly duplicated, a fact which presumably forms the basis of

Plaintiffs' belief that certain of Defendant's alleged statements

(e.g., that Defendant "took proper measures to ensure that its

reproduction process yielded replicates that were substantially

similar to the original") were false or misleading. See Complaint

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¶ 44(D) and (E). Although Plaintiffs have not explained why

statements such as that in ¶ 44(A), alleging that Defendant said it

would use advance processes to duplicate the DVDs, were false or

misleading, the Complaint is sufficient without them. 

Therefore, the Court denies Defendant's motion to dismiss

Plaintiffs' claim for negligent or intentional misrepresentation. 

IV. Emotional Distress

Defendant moves to dismiss Plaintiffs' claim for negligent or

intentional infliction of emotional distress on the grounds that

Plaintiffs have failed to allege any outrageous conduct, severe

emotional distress or causation. Plaintiffs do not oppose this

portion of Defendant's motion. A claim for infliction of emotional

distress damages requires "extreme and outrageous" conduct by a

defendant that is "so extreme as to exceed all bounds of that

usually tolerated in a civilized community." Potter v. Firestone

Tire & Rubber Co., 6 Cal. 4th 965, 1001 (1993) (quoting Christensen

v. Sup. Court, 54 Cal. 3d 868, 903 (1991)). The Court agrees that

none of Defendant's alleged acts or omissions can be described as

extreme and outrageous, despite Plaintiffs' conclusory

descriptions. Accordingly, the Court grants Defendant's motion to

dismiss Plaintiffs' claim for negligent or intentional infliction

of emotional distress. Plaintiffs do not request leave to amend;

however, the Court will allow them to file a FAC including a claim

for intentional or negligent infliction of emotional distress if

they can, truthfully and consistently with the original complaint,

allege facts showing that Defendant engaged in extreme and

outrageous conduct. 

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V. Punitive Damages

Finally, Defendant moves to strike Plaintiffs' demand for

punitive damages on the grounds that they have failed to state a

claim that would support punitive damages. 

[P]unitive or exemplary damages, which are designed to punish

and deter statutorily defined types of wrongful conduct, are

available only in actions for breach of an obligation not

arising from contract. In the absence of an independent tort,

punitive damages may not be awarded for breach of contract

even where the defendant's conduct in breaching the contract

was wilful, fraudulent, or malicious.

Cates Constr., Inc. v. Talbot Partners, 21 Cal. 4th 28, 61 (quoting

Cal. Civ. Code § 3294(a) and Applied Equipment Corp. v. Litton

Saudi Arabia Ltd., 7 Cal. 4th 503, 516 (1994)) (internal quotation

marks, internal citations and emphasis omitted). 

In Section II above, the Court denied Defendant's motion to

dismiss Plaintiffs' claim for negligence, on the grounds that they

could, consistently with the Complaint, prove a type of damage that

would avoid application of the economic loss rule. In addition,

Plaintiffs' fraud claim survives. These claims would support

punitive damages. Therefore, Defendant's motion to strike is

denied. 

CONCLUSION

For the foregoing reasons, the Court GRANTS Defendant's motion

to dismiss Plaintiffs' claim for negligent or intentional emotional

distress but otherwise DENIES the motion (Docket No. 11). 

Plaintiffs may file a FAC within twenty days of the date of this

order, if they can, truthfully and without contradicting the

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original complaint, allege facts showing that Defendant engaged in

extreme and outrageous conduct. 

IT IS SO ORDERED.

Dated: 8/22/06 

CLAUDIA WILKEN

United States District Judge

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