Opinion ID: 419203
Heading Depth: 2
Heading Rank: 4

Heading: Tort Liability Issues.

Text: 38 In addition to its conclusion that ADDS breached its warranties covering the Regent 100 terminals, the district court ruled that ADDS was guilty of fraudulent misrepresentation respecting those terminals. Also, it ultimately ruled that ADDS tortiously interfered with CDT's contract with Intel. We conclude that ADDS was denied a fair trial as to these issues because each issue was introduced by an extremely late change in the pleadings and neither was tried by consent. ADDS sought a continuance which was taken under advisement by the court until after the trial was completed. This in effect constituted a denial of the motion for continuance and prevented ADDS from having an adequate opportunity to respond to the changed pleadings. For this reason, we must remand these issues for a new trial. 39
40 CDT's original complaint presented six causes of action. Among these claims was only one that alleged fraud. The gravamen of this claim was that ADDS, by falsely promising to supply CDT with sales leads and marketing assistance, fraudulently induced CDT to enter the distributorship agreement. Concerning the substandard quality of the Regent 100 computer terminals, CDT alleged only a breach of contract cause of action. CDT's pretrial statement did not mention fraud at all. On the third day of the four-day bench trial, CDT introduced a pleading amendment that for the first time alleged that ADDS had fraudulently misrepresented the capabilities of the Regent 100 line of terminals. The court allowed CDT to so amend its pleadings. ADDS now challenges the amendment, contending that it was introduced and allowed so late that ADDS did not have a fair opportunity to contest CDT's fraud allegation. CDT argues that because some evidence relevant to its new fraud claim was introduced at trial without objection from ADDS, the fraud issue was tried by consent, and the district court's allowance of the pleading amendment and subsequent judgment of liability on the issue were proper. 41 Federal Rule of Civil Procedure 15(b) embodies a liberal policy in favor of allowing pleading amendments at any time during and even after trial. Also, even if the pleadings are never amended, the rule allows a judgment on an issue to stand if the issue has been tried by express or implied consent. However, late pleading amendments are improper under the rule if they cause substantial prejudice to the opposing party. (1971); (3d Cir.1963). (9th Cir.1981) (party may be permitted to alter legal theory through late pleading amendments only if other party is not prejudiced in its defense upon the merits). 42 Under the circumstances of the present case, where the pleading amendment was allowed after the purportedly relevant evidence had already been admitted, the question whether the defendant was prejudiced by the amendment is no different from the question whether the issue introduced by the amendment was tried by consent. As we have observed in (9th Cir.1971), the purpose of pleading amendments under the second sentence of Federal Rule 15(b) is to align the pleadings to conform to issues actually tried. The rule does not permit amendments to include issues which may be inferentially suggested by incidental evidence in the record. See also Gonzalez v. United States, (9th Cir.1979); (6th Cir.1974); (5th Cir.1973); (8th Cir.1965). An adverse party cannot be expected to object to the introduction of evidence that is only tangentially related to the issues actually pleaded prior to trial unless the party has notice that the evidence is being introduced as proof on some other unpleaded issue. See 6 C. Wright & A. Miller, Federal Practice & Procedure Sec. 1493, at 466-67 (1971). 43 Our review of the record convinces us that ADDS suffered substantial prejudice as a result of the pleading amendment that introduced the fraud cause of action. Under California law, fraud in the sale of substandard equipment is established when a seller knowingly makes a misrepresentation with an intent to induce reliance, and justifiable reliance results, causing damage to the plaintiff. (9th Cir.1982). Thus, the significant factual issue for purposes of CDT's fraud claim was whether ADDS knew that its statements concerning the Regent 100 terminals were false at the time they were made. ADDS had no notice of CDT's intent to pursue this issue, and thus no reason to object to evidence bearing on the issue. ADDS's knowledge of the defect had but marginal relevancy to the question whether the terminals failed to perform as warranted. Under the original pleadings and pretrial statement, the evidence was of no importance. While trial by consent might properly be found in other situations where evidence irrelevant to the pleadings is introduced, in this case the trial transcript demonstrates that ADDS did not know CDT would seek to assert its fraud claim until the time of the motion to amend. Had ADDS been aware that its knowledge of the Regent defects would be an important issue in the case, it would have elicited testimony concerning that topic from its witnesses, and might have called additional witnesses. The one remaining day of trial following the amendment did not afford the defendant an adequate opportunity to defend against the new fraud claim. Had the district court granted ADDS's request for a continuance, the prejudice to ADDS from the surprise pleading amendment might have been cured. See Robbins v. Jordan, 181 F.2d 793, 795 (D.C.Cir.1950). But the district court in effect denied the motion by reserving its ruling on both the amendment and the continuance request until the end of trial, when it allowed the amendment. The lateness of CDT's pleading amendment, coupled with the denial of ADDS's motion for a continuance, thus caused substantial prejudice to ADDS's defense. (9th Cir.1981); (2d Cir.1977); 3 J. Moore, Moore's Federal Practice p 15.13(2), at 15-173 (1978 supp. to 2d ed. 1966). 44 The Sixth Circuit dealt with a situation similar to the one presented here in (6th Cir.1974). In that case, the defendant was a nationwide distributor of Lotus automobiles, and the plaintiff was a local Lotus dealer. Four Lotuses sold by the defendant to the plaintiff developed substantial mechanical defects that required repeated servicing by the plaintiff. . The plaintiff's complaint represented the converse of CDT's in the present case; it alleged misrepresentation by the defendant but not a breach of warranty. Id. The pretrial order likewise did not mention a breach of warranty theory. At the close of the bench trial, the district judge ruled that the defendant had not misrepresented the nature and vintage of the automobiles. However, he concluded that the issue of warranty liability had been tried by implied consent, and allowed the plaintiff to recover for breach of warranty pursuant to Federal Rule 15(b). . 45 The Sixth Circuit Court of Appeals reversed. The court acknowledged that Rule 15(b) allows recovery on a theory tried fully by the parties, even though not set forth in the pleadings or in the pretrial order. (citing (9th Cir.1967)). But it held that a trial court may not base its decision upon an issue that was tried inadvertently. Id. It concluded that the evidence on which the district court based its warranty decision, while relevant to that issue, had been introduced for the purpose of proving misrepresentation. Finding that the defendant never consented to trial of the unpleaded warranty issue, the court ruled that the defendant had lacked an opportunity to counter the new theory, and reversed the judgment. . A similar result is required here. As the court observed in [i]mplied consent to the trial of an unpleaded issue is not established merely because evidence relevant to that issue was introduced without objection. At least it must appear that the parties understood the evidence to be aimed at the unpleaded issue. . 46 We conclude that we must vacate the district court's judgment on the fraud issue and remand for retrial on that issue. . 47
48 Turning to the district court's award of $28,702 for tortious interference with contract, we find that a similar analysis applies. CDT's complaint did not allege that ADDS had interfered with a CDT-Intel contract; rather, it alleged that ADDS had interfered with CDT's prospective business advantage in connection with the Intel transaction. Nor did CDT's pretrial statement mention inducement to breach a contract. Instead, it stated CDT's theory to be that ADDS interfered with CDT's prospective economic relationship with Intel Corporation by depriving CDT of a sale to that corporation by using means which were inconsistent with the distributorship relationship between CDT and ADDS. The district court rendered its initial judgment in favor of CDT on this basis. On a Rule 59 motion to alter or amend judgment, ADDS argued that the liability imposed for interference with prospective business advantage could not stand, because ADDS, like any competitor, was privileged to submit a sales offer to Intel at any time prior to the formation of a binding contract between Intel and CDT. The district court, in its supplemental findings and conclusions entered in response to CDT's motion, agreed with this reasoning. However, for the first time it found that a contract between CDT and Intel had been formed prior to the submission of ADDS's second bid, and that the submission of that bid constituted a tortious interference with contract. . 49 Because the interference with contract theory was not pleaded and was not tried by consent as required by Federal Rule 15(b), we conclude that the district court's judgment on this issue cannot stand. The evidence at trial focused primarily upon ADDS's pricing policies and the question whether ADDS's second bid breached some express or implied obligation not to engage in price cutting running from ADDS to CDT. By contrast, the parties never appear to have focused upon the question whether a binding contract between CDT and Intel ever existed. For example, CDT called as a witness Steve Abreu, Intel's purchasing agent, who would presumably have been in the best position of any non-party to testify concerning the existence of such a contract. Yet Abreu was not asked anything about the existence of a contract; instead the questioning focused upon whether or not Intel could properly be classified as an original equipment manufacturer of computers. The only testimony cited by CDT to support its contention that the interference with contract issue was tried by consent was that of Douglas Cole, CDT's own salesman. This testimony is not sufficient to show that the question whether a CDT-Intel contract existed was fully tried by consent. We conclude that ADDS never received a proper opportunity to contest the existence of the contract, and therefore suffered substantial prejudice as a result of the district court's post-trial ruling premised upon Rule 15(b). We conclude that we must reverse the district court's judgment on the interference with contract issue, and must remand for retrial to determine whether a valid contract between CDT and Intel was ever formed, and if so, whether ADDS tortiously interfered with that contract. 50