Court Opinion

ID: 4586866
Source: CourtListenerOpinion
Date Created: 2020-11-17 18:00:23.874882+00
Date Added: 2024-06-11T08:48:29.831413
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

KST DATA, INC., a California           No. 19-55422
Corporation,
       Plaintiff-Counter-Defendant-       D.C. No.
                           Appellee,   2:17-cv-07927-
                                          SJO-SK
                 v.

DXC TECHNOLOGY COMPANY, a                OPINION
Virginia corporation,
                      Defendant,

                and

ENTERPRISE SERVICES LLC,
     Defendant-Counter-Claimant-
                       Appellant,

                 v.

ARMANDO TAN,
     Counter-Defendant-Appellee,

                and

MITCHELL EVANS,
              Counter-Defendant.
2            KST DATA V. ENTERPRISE SERVICES

        Appeal from the United States District Court
            for the Central District of California
         S. James Otero, District Judge, Presiding

              Argued and Submitted July 6, 2020
                    Pasadena, California

                    Filed November 17, 2020

    Before: Richard A. Paez and Bridget S. Bade, Circuit
        Judges, and Eric F. Melgren, * District Judge.

                   Opinion by Judge Melgren

                          SUMMARY **

                      Affirmative Defenses

    The panel affirmed in part, and reversed in part, the
district court’s judgment in an action concerning a
contractual dispute between Enterprise Services, LLC and
KST Data, Inc. to provide services to the National
Aeronautics and Space Administration.

    The district court granted summary judgment sua sponte
to KST on its breach of contract claim. Enterprise contended
this was error because the district court did not give

    *
      The Honorable Eric F. Melgren, United States District Judge for
the District of Kansas, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
            KST DATA V. ENTERPRISE SERVICES                 3

Enterprise the opportunity to assert its affirmative defenses.
Enterprise raised the defenses in its answers to KST’s
complaint and first amended complaint, but it did not file an
answer to KST’s second (and final) amended complaint.

    The panel held that the standard of review was de novo
review because the issue presented was a legal issue that
involved the interpretation of the Federal Rules of Civil
Procedure.

    The panel held that a defendant is not required to file a
new answer reasserting its affirmative defenses when the
claim in the amended complaint related to those affirmative
defenses remains the same. Specifically, the panel held that
by not giving Enterprise notice and the opportunity to assert
its affirmative defenses, the district court erred in granting
summary judgment sua sponte. The panel further held that
Enterprise did not waive its affirmative defenses to the
breach of contract claim by not filing an answer to the
Second Amended Complaint, where Enterprise had raised
the same affirmative defense in the First Amended
Complaint.

    The panel remanded with instructions for the district
court to allow Enterprise to show why KST was not entitled
to judgment as a matter of law on KST’s breach of contract
claim.

   The panel addressed remaining issues on appeal in a
concurrently filed memorandum disposition.
4           KST DATA V. ENTERPRISE SERVICES

                        COUNSEL

Stephen G. Larson (argued) Hilary Potashner, and Paul A.
Rigali, Larson O’Brien LLP, Los Angeles, California;
Attison L. Barnes III, Wiley Rein LLP, Washington, D.C.;
for Defendant-Counter-Claimant-Appellant.

Nicole R. Van Dyk (argued), Gary S. Lincenberg,
Thomas R. Freeman, and Ashley D. Bowman, Bird Marella
Boxer Wolpert Nessim Drooks Lincenberg & Rhow P.C.,
Los Angeles, California, for Plaintiff-Counter-Defendant-
Appellee and Counter-Defendant-Appellee.

                         OPINION

MELGREN, District Judge:

    Is a defendant required to file a new answer reasserting
its affirmative defenses when the claim in the amended
complaint related to those affirmative defenses remains the
same? We hold that the defendant is not.

     Defendant Enterprise Services, LLC (“ES”) entered into
a contract with KST Data, Inc. (“KST”) to provide services
to the National Aeronautics and Space Administration
(“NASA”). KST sued ES following ES’s nonpayment of
invoices totaling over $5.4 million. In ruling on the parties’
summary judgment motions, the district court granted
summary judgment sua sponte to KST on its breach of
contract claim. ES contends that this ruling was improper
because the district court did not give ES the opportunity to
assert its affirmative defenses. ES raised these defenses in
its answers to KST’s complaint and first amended complaint,
but it did not file an answer to KST’s second (and final)
            KST DATA V. ENTERPRISE SERVICES                 5

amended complaint. In a subsequent order entering
judgment against ES on KST’s claim, the district court
concluded that ES’s failure to file an answer to the second
amended complaint resulted in a waiver of its affirmative
defenses. ES appeals the district court’s rulings. We reverse
and remand for further proceedings.

                              I

                              A

    This dispute stems from a contract ES entered into with
NASA to provide information technology-related hardware,
services, and labor (the “ACES Contract”). As part of the
ACES Contract, ES agreed to subcontract a certain
percentage of the work to various types of small businesses
in exchange for financial incentives. If ES did not meet these
requirements, NASA could apply yearly retainage penalties.

    ES began working with KST in 2009 while preparing its
bid proposal for the ACES Contract. ES alleges that KST
was intimately involved in the bidding process for the ACES
Contract and helped develop the plan for ES to satisfy the
small business requirements. To that end, KST allegedly
identified and recommended DME Products and Systems,
Inc. (“DME”) as a company with whom ES should
subcontract to meet multiple small business requirements.
KST, however, denies any involvement in the bidding
process for the ACES Contract.

    After NASA awarded ES the ACES Contract, ES
selected KST and DME as first-tier subcontractors. ES
entered into a Statement of Work and Resale Master
Agreement (“RMA”) with KST (the “KST-ES Contract”),
the terms of which are not relevant here.
6             KST DATA V. ENTERPRISE SERVICES

    In mid-2014, ES received a subpoena from the NASA
Inspector General requesting information regarding KST
and DME. ES alleges that it learned only at this time that
KST was secretly performing work ES had contracted DME
to perform as part of its small business requirements.
According to ES, KST treated DME as a “pass-through”
entity whereby KST performed the work ES contracted to
DME despite knowing that DME must perform the work to
meet the small business subcontracting requirements of the
ACES Contract.

    KST, on the other hand, describes its relationship with
DME as an oral, second-tier subcontract. KST alleges that
it entered into this subcontract when ES engaged DME to
perform print management services—services it believed ES
had previously intended to subcontract to KST and that KST
had already prepared to perform. As payment for providing
the print management services, KST received a percentage
of the amount DME earned under its purchase orders from
ES each month.

    In December 2014, NASA determined that KST’s and
ES’s alleged arrangement violated the small business
subcontracting plan in the ACES Contract. NASA imposed
a $5.4 million retainage penalty against ES. As a result, ES
withheld payment to KST of amounts invoiced under the
KST-ES Contract equal to the amount NASA withheld from
ES. ES took this action in reliance upon the indemnification
provision of the RMA. 1

     1
       The RMA’s indemnification provision is set forth and discussed in
the concurrently filed memorandum disposition.
            KST DATA V. ENTERPRISE SERVICES                   7

                               B

    KST filed its Complaint in September 2017 in the
Superior Court of California for the County of Los Angeles.
The case was ultimately removed to the Central District of
California. KST subsequently filed a First Amended
Complaint asserting claims for (1) breach of contract,
(2) breach of the covenant of good faith and fair dealing,
(3) unjust enrichment, and (4) quantum meruit. ES filed an
Answer and affirmative defenses and asserted counterclaims
against KST for breach of contract and other claims.

     Upon ES’s motion, the district court dismissed KST’s
claims for breach of the covenant of good faith and fair
dealing, unjust enrichment, and quantum meruit and granted
KST ten days to file and serve a second amended complaint.
It also invited ES to file an answer within ten days thereafter.

    KST filed a Second Amended Complaint, again
asserting claims for breach of contract, breach of the
covenant of good faith and fair dealing, unjust enrichment,
and quantum meruit. ES again moved to dismiss all but the
breach of contract claim. The district court granted ES’s
motion without leave to amend. Thus, KST’s only
remaining claim in the Second Amended Complaint was for
breach of contract. ES did not file an answer to the Second
Amended Complaint.

    The parties subsequently moved for summary judgment
on their remaining claims. The district court granted KST’s
motion for summary judgment against ES on its
counterclaims for breach of contract, and denied ES’s
motion for summary judgment on the same claim. The
district court also denied ES’s motion for summary judgment
against KST on KST’s breach of contract claim, and granted
summary judgment sua sponte for KST against ES on KST’s
8           KST DATA V. ENTERPRISE SERVICES

breach of contract claim. The district court reasoned that
because KST did not breach the KST-ES Contract, “ES
necessarily breached its contractual obligations to KST
when it withheld payments to KST.”

     Shortly thereafter, KST moved for entry of judgment on
its breach of contract claim. ES argued in response that KST
could not recover damages for breach of contract because of
its affirmative defenses of unclean hands, fraud, and
misrepresentation. This was ES’s first opportunity to raise
its affirmative defenses. The district court, however,
rejected ES’s argument. It found that ES had not filed an
answer to the Second Amended Complaint that pled these
affirmative defenses. Although ES raised these defenses in
its Answer to the First Amended Complaint, the district court
determined that the First Amended Complaint was no longer
the operative complaint and that “[a]s soon as KST filed a
Second Amended Complaint, ES needed to file a new
answer that specified its affirmative defenses.” Because ES
did not file a new answer, the district court held that it
waived its affirmative defenses. The district court therefore
concluded that KST was entitled to damages and
prejudgment interest to remedy ES’s breach of contract.

    ES timely appealed the district court’s summary
judgment and entry of judgment orders. At issue in this
opinion are the district court’s rulings that KST was entitled
to summary judgment sua sponte on its breach of contract
claim and that ES waived its affirmative defenses by failing
to reassert them in a new answer in response to KST’s
Second Amended Complaint. We address the remaining
issues on appeal in a concurrently filed memorandum
disposition.
            KST DATA V. ENTERPRISE SERVICES                 9

                             II

    We have jurisdiction under 28 U.S.C. § 1291. We
review de novo a district court’s decision to grant summary
judgment. Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915,
918–19 (9th Cir. 2009). As to the district court’s
determination that ES waived its affirmative defenses, the
parties dispute the appropriate standard of review. ES
contends that we should apply de novo review, relying on
Harbeson v. Parke Davis, Inc., 746 F.2d 517 (9th Cir. 1984).
In that case, we stated, “A question concerning the waiver of
an affirmative defense involves the interpretation of Rule
8(c) of the Federal Rules of Civil Procedure and, as such, is
a question of law reviewed de novo.” Id. at 520. KST
contends that we should review the district court’s decision
for an abuse of discretion. It relies on a more recent line of
our cases holding that the district court has discretionary
authority to allow a defendant to plead an affirmative
defense in a subsequent motion absent prejudice to the
opposing party. See Alcarmen v. J.P. Morgan Chase Bank,
No. 13-CV-1575 YGR, 2014 WL 3368647, at *5 (N.D. Cal.
July 8, 2014) (citing cases, including Simmons v. Navajo
Cnty., 609 F.3d 1011, 1023 (9th Cir. 2010), overruled on
other grounds by Castro v. Cnty. of Los Angeles, 833 F.3d
1060 (9th Cir. 2016) (en banc); Ledo Fin. Corp. v. Summers,
122 F.3d 825, 827 (9th Cir. 1997); Camarillo v. McCarthy,
998 F.2d 638, 639 (9th Cir. 1993)). None of the cases cited
by the parties involve the unique question presented here:
Does the filing of an amended complaint require the
defendant to file a new answer specifying its affirmative
defenses when the claims in the amended complaint remain
unchanged? Because this is a legal issue that involves the
interpretation of the Federal Rules of Civil Procedure, we
apply de novo review. See Oja v. U.S. Army Corps of
Eng’rs, 440 F.3d 1122, 1127 (9th Cir. 2006) (“We . . .
10          KST DATA V. ENTERPRISE SERVICES

review de novo the district court’s application of the Federal
Rules of Civil Procedure . . . .”); United States v. Clifford
Matley Family Tr., 354 F.3d 1154, 1159 n.4 (9th Cir. 2004)
(“We review de novo interpretations of the Federal Rules of
Civil Procedure.”) (citing DP Aviation v. Smiths Indus.
Aerospace & Def. Sys., Ltd., 268 F.3d 829, 846 (9th Cir.
2001)).

                             III

                              A

    Under Federal Rule of Civil Procedure 56(f), a district
court may sua sponte grant summary judgment if the
nonmovant has “notice and a reasonable time to respond.”
But, “the propriety of granting summary judgment in favor
of a party who did not so move is often a ‘close question.’”
Kassbaum v. Steppenwolf Prod., Inc., 236 F.3d 487, 494 (9th
Cir. 2000) (quoting Sohappy v. Hodel, 911 F.2d 1312, 1320
(9th Cir. 1990)). Before granting the nonmovant judgment,
“great care must be exercised to assure that the original
movant has had an adequate opportunity to show that there
is a genuine issue and that his [or her] opponent is not
entitled to judgment as a matter of law.” Id. (quoting Ramsey
v. Coughlin, 94 F.3d 71, 74 (2d Cir. 1996)).

    ES moved for summary judgment on KST’s breach of
contract claim, and thus, in its summary judgment motion,
ES argued that KST could not satisfy the elements of that
claim. ES was not required to, and in fact did not, assert its
affirmative defenses at that time. See Zivkovic v. S. Cal.
Edison Co., 302 F.3d 1080, 1088 (9th Cir. 2002) (“A defense
which demonstrates that [the] plaintiff has not met its burden
of proof is not an affirmative defense.”); Moore v.
Millennium Acquisitions, LLC, No. 14-CV-01402-LJO,
2015 WL 769740, at *3 (E.D. Cal. Feb. 23, 2015) (holding
            KST DATA V. ENTERPRISE SERVICES                 11

that a defendant may attack the plaintiff’s case-in-chief by
arguing the plaintiff cannot meet his burden of proof on
claims, and it is unnecessary to raise an affirmative defense
based on such theory). The district court did not address
ES’s affirmative defenses in its order granting KST
summary judgment, and instead, summarily concluded that
KST was entitled to judgment as a matter of law. By not
giving ES notice and the opportunity to assert its affirmative
defenses, the district court erred in granting summary
judgment sua sponte.

                              B

    The district court did not commit reversible error,
however, if ES waived its affirmative defenses by failing to
assert them in response to the Second Amended Complaint.
KST argues that by filing a Second Amended Complaint,
ES’s Answer and affirmative defenses filed in response to
KST’s First Amended Complaint were rendered moot, and
thus ES was required to file a new answer and affirmative
defenses in response to the Second Amended Complaint.
KST argues that by failing to do so, ES waived its right to
assert any of its affirmative defenses in response to KST’s
breach of contract claim.

    We have not addressed when a defendant is required to
reassert its affirmative defenses in response to an amended
pleading. Federal Rule of Civil Procedure 8(c) requires a
party to “affirmatively state any avoidance or affirmative
defense” in response to a pleading. Generally, an affirmative
defense that is not asserted in an answer to the complaint is
waived or forfeited by the defendant. John R. Sand & Gravel
Co. v. United States, 552 U.S. 130, 133 (2008) (citing Fed.
R. Civ. P. 8(c)(1), 12(b), 15(a)). But the circumstances of
this case do not allow for the simple application of this rule.
Here, ES asserted its affirmative defenses—in response to
12          KST DATA V. ENTERPRISE SERVICES

the Complaint and First Amended Complaint. ES claims
that it was not required to restate these defenses in response
to the same breach of contract claim in the Second Amended
Complaint.

    ES asks us to adopt the rulings of several federal district
courts in California that have held it is the defendant’s option
to file an answer to an amended complaint. Stanley Works
v. Snydergeneral Corp., 781 F. Supp. 659, 664–65 (E.D. Cal.
1990) (citing Wright, Miller & Kane, 6 Federal Practice and
Procedure § 1476, pp. 558–59 (1990)); Hazeltine v. Hicks,
No. 14-cv-00056-DAD-GSA-PC, 2016 WL 6716469, at *1
(E.D. Cal. Nov. 14, 2016); Upek, Inc. v. Authentec, Inc., No.
10-424-JF-PVT, 2010 WL 2681734, at *3 (N.D. Cal. July 6,
2010). These district courts concluded that the defendant
may file a new answer if “the . . . [a]mended [c]omplaint
makes allegations that change the theory or scope of the
case.” Stanley Works, 781 F. Supp. at 665 (citation omitted).
But when an amended complaint “does not add new parties,
new claims, or significant new factual allegations, . . . the
previously filed response to the original pleading [will]
suffice.” Upek, 2010 WL 2681734, at *3 (quoting Kraft v.
Arden, No. CV 07-487-PK, 2009 WL 73869, at *7 (D. Or.
Jan. 8, 2009)).

    KST does not present any definitive authority stating that
a defendant must file an answer to an amended complaint
regardless of whether the amended complaint contains new
claims or factual allegations. Instead, it simply argues that
ES failed to comply with Federal Rule of Civil Procedure
15(a)(3). That Rule provides, “Unless the court orders
otherwise, any required response to an amended pleading
must be made within the time remaining to respond to the
original pleading or within 14 days after service of the
amended pleading, whichever is later.” According to KST,
            KST DATA V. ENTERPRISE SERVICES                  13

the district court ordered ES to file an answer within ten days
of KST filing its Second Amended Complaint. But the
district court’s order only invited ES to file an answer. It did
not require it. Furthermore, by its plain terms, Rule 15(a)(3)
does not render a prior response to a prior pleading moot and
require the filing of a new answer.

    KST also cites several cases in support of its argument,
but they are distinguishable. Two of these cases involve
defendants who responded to amended complaints and later
sought to assert affirmative defenses or factual allegations
not included in their responses. See Moore v. Chase, Inc.,
No. 14-cv-01178, 2016 WL 866121, at *6 (E.D. Cal. Mar. 7,
2016) (concluding that the defendant waived the affirmative
defense because it was not pleaded in the defendant’s answer
to the plaintiff’s amended complaint); Stanley v. Broward
Cnty. Sheriff, 773 F. App’x 1065, 1070 n.3 (11th Cir. 2019)
(finding that the defendant, who filed an answer in response
to the amended complaint, could not rely on statements in
the earlier answer to a previous complaint). And the third
case only recites Rule 15(a)(3) and extends the defendant’s
time to respond to the amended complaint. See In re
DirecTV Early Cancellation Litig., 738 F. Supp. 2d 1062,
1092 (C.D. Cal. 2010) (quoting Rule 15(a)(3) and predicting
that the defendant would seek an extension of time to file an
answer to the amended complaint and preemptively
extending the time for the defendant to respond). These
cases do not involve the unique situation here—where the
defendant did not respond to an amended complaint because
it had filed an answer to the previous complaint that
contained the same claim.

    We are persuaded that the analysis in Stanley Works,
Hazeltine, and Upek is correct. A defendant is not required
to file a new answer to an amended complaint when the
14            KST DATA V. ENTERPRISE SERVICES

allegations in the amended complaint do not “change the
theory or scope of the case.” Stanley Works, 781 F. Supp.
at 665. Here, the Second Amended Complaint contained the
same material allegations with respect to the breach of
contract claim as the First Amended Complaint. Therefore,
ES did not waive its affirmative defenses to that claim by not
filing an answer to the Second Amended Complaint. 2

                                    IV

    ES was not required to respond and reassert its
affirmative defenses to KST’s Second Amended Complaint
because ES had already asserted those affirmative defenses
in response to the same breach of contract claim in the First
Amended Complaint. Before granting summary judgment
sua sponte in favor of KST, the district court should have
given ES notice and an opportunity to assert its affirmative
defenses in response to KST’s breach of contract claim. We
therefore reverse the grant of summary judgment and entry
of judgment in favor of KST and remand with instructions

     2
       KST also argues that ES should have sought leave to amend its
pleading. A district court has discretion to allow a party to raise an
affirmative defense after the pleading stage absent prejudice to the
opposing party. Simmons v. Navajo Cnty., 609 F.3d 1011, 1023 (9th Cir.
2010), overruled on other grounds by Castro v. Cnty. of Los Angeles,
833 F.3d 1060 (9th Cir. 2016) (en banc). KST contends that because ES
never sought the district court’s discretion to amend its pleading, it
cannot argue now that the district court abused its discretion in failing to
allow it to litigate its affirmative defenses. But, as discussed above, the
district court’s discretion is not at issue here because it did not rely on
Simmons in concluding that ES waived its affirmative defenses. Instead,
the district court held that the First Amended Complaint was not the
operative complaint in the litigation, and as soon as KST filed the Second
Amended Complaint, ES was required to file a new answer and
affirmative defenses. Thus, KST’s argument is inapplicable to the issue
before the court.
           KST DATA V. ENTERPRISE SERVICES             15

for the district court to allow ES to show why KST is not
entitled to judgment as a matter of law on KST’s breach of
contract claim. The parties shall bear their own costs.

   REVERSED and REMANDED.