Court Opinion

ID: 4587193
Source: CourtListenerOpinion
Date Created: 2020-11-17 21:00:45.858306+00
Date Added: 2024-06-11T08:48:33.759361
License: Public Domain

NOT FOR PUBLICATION                          FILED
                    UNITED STATES COURT OF APPEALS                       NOV 17 2020
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                            FOR THE NINTH CIRCUIT

KST DATA, INC., a California Corporation, No.          19-55422

      Plaintiff-counter-                        D.C. No.
      defendant-Appellee,                       2:17-cv-07927-SJO-SK

 v.
                                                MEMORANDUM*
DXC TECHNOLOGY COMPANY, a
Virginia corporation,

                Defendant,

and

ENTERPRISE SERVICES LLC,

      Defendant-counter-claimant-
      Appellant,

 v.

ARMANDO TAN,

      Counter-defendant-Appellee,

and

MITCHELL EVANS,

                Counter-defendant.

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
                   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

Before: PAEZ and BADE, Circuit Judges, and MELGREN,** District Judge.

      Plaintiff KST Data, Inc. (“KST”) contracted with Defendant Enterprise

Services, LLC (“ES”) 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. ES answered and asserted counterclaims against KST

and one of its principals, Armando Tan. The district court granted KST’s and

Tan’s motions to dismiss ES’s tort-based counterclaims, granted KST’s motion for

summary judgment on ES’s contract-based counterclaims, denied ES’s motion for

summary judgment on the parties’ breach of contract claims, and granted summary

judgment sua sponte to KST on KST’s breach of contract claim. Pursuant to these

orders, the district court entered judgment in favor of KST, ordering ES to pay

damages and prejudgment interest. ES appealed each of these orders. In a

concurrently filed opinion, we reverse the district court’s ruling granting KST

summary judgment sua sponte on its breach of contract claim and the district

      **
             The Honorable Eric F. Melgren, United States District Judge for the
District of Kansas, sitting by designation.

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court’s entry of judgment against ES. As to the remaining rulings, we affirm in

part, reverse in part, and remand.

      We have jurisdiction under 28 U.S.C. § 1291. We review de novo a district

court’s choice-of-law determination, Shannon-Vail Five Inc. v. Bunch, 270 F.3d
1207, 1210 (9th Cir. 2001), as well as its dismissal based on the running of a

statute of limitations, Sea Hawk Seafoods, Inc. v. Locke, 568 F.3d 757, 764 (9th

Cir. 2009). We also 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. 2000).

      1.     The district court properly concluded that California law, rather than

New York law, governed the parties’ claims. In diversity jurisdiction cases, such

as this one, we apply the forum state’s choice-of-law rules. First Intercontinental

Bank v. Ahn, 798 F.3d 1149, 1153 (9th Cir. 2015). California courts apply the

principles set forth in the Restatement (Second) of Conflict of Laws § 187 to

determine the law governing a contract with a choice-of-law provision. Nedlloyd

Lines B.V. v. Superior Court, 3 Cal. 4th 459, 464-65 (1992). Under § 187, the law

of the state chosen by the parties applies unless either (1) “the chosen state has no

substantial relationship to the parties or the transaction and there is no other

reasonable basis for the parties [sic] choice,” or (2) the “application of the law of

the chosen state would be contrary to a fundamental policy of a state which has a

materially greater interest than the chosen state in the determination of the

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particular issue.” Id. at 465 (quoting Restatement (Second) Conflict of Laws

§ 187(2) (1971)). We must consider the first prong of § 187 first. Id. at 466. If

there is no substantial relationship between the parties and the chosen state or no

reasonable basis for the parties’ choice of law, “that is the end of the inquiry, and

the court need not enforce the parties’ choice of law.” Id.

      ES concedes that there is no substantial relationship between the parties or

transaction and New York. Furthermore, ES has not shown a reasonable basis for

the parties’ choice of New York law. Contrary to ES’s argument, neither the

sophistication of the parties nor the inclusion of a choice-of-law provision in a

contract is sufficient to establish a reasonable basis.1 If a reasonable basis were

created simply through the inclusion of a choice-of-law provision in a contract, this

would nullify the entire choice-of-law analysis that the California Supreme Court

has delineated. We affirm the district court’s conclusion that California law

governs the parties’ claims.

      2.     ES does not dispute that if California law applies, the district court did

1
 We are not persuaded by ES’s citation to JMP Securities LLP v. Altair
Nanotechnologies Inc., No. 11-4498 SC, 2012 WL 892157 (N.D. Cal. Mar. 14,
2012). In that case, the district court found a reasonable basis for applying the
parties’ choice of law because, in addition to the choice-of-law provision, the
contract contained a forum selection clause under which both parties consented to
personal jurisdiction and venue in the same state. Id. at *5. Here, the KST-ES
Contract did not contain a forum selection clause designating New York as the
forum for personal jurisdiction and venue.

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not err in dismissing its tortious interference counterclaims under the applicable

California statute of limitations. Therefore, we affirm the district court’s dismissal

of these claims.

      3.     The district court erroneously dismissed ES’s fraudulent and negligent

misrepresentation claims as time-barred. Section 338(d) of the California Code of

Civil Procedure provides that the statute of limitations for a claim of fraud or

mistake is three years. “[T]he statute begins to run when the ‘cause of action

accrues.’” Thomas v. Canyon, 198 Cal. App. 4th 594, 604 (2011) (quoting Fox v.

Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 806 (2005)). Fraudulent and

negligent misrepresentation claims accrue when the aggrieved party (1) discovers

the conduct causing the loss and (2) sustains actual damage. Lederer v. Gursey

Schneider LLP, 22 Cal. App. 5th 508, 521 (2018); Jolly v. Eli Lilly & Co., 44 Cal.
3d 1103, 1111 (1988).

      KST filed suit in September 2017, and ES asserted its counterclaims in

November 2017. In its counterclaims, ES alleged that it discovered KST’s secret

arrangement with DME Products and Systems, Inc. (“DME”)2 in mid-2014. 3 But

because ES did not sustain injury until NASA denied payment, the statute of

limitations began to run, at the earliest, in December 2014—when NASA first

2
  ES contracted with DME to perform some of the services ES was obligated to
provide under its contract with NASA.
3
  For further explanation of ES’s allegations see the discussion at paragraph 7.

                                          5                                    19-55422
notified ES that it was going to impose a retainage penalty. See, e.g., City of Vista

v. Robert Thomas Sec., Inc., 84 Cal. App. 4th 882, 887 (2000) (stating that when

damages are an element of the offense, the cause of action does not accrue until the

aggrieved party suffers pecuniary loss).4 The December 2014 date is less than

three years before KST filed suit and ES filed its counterclaims. Therefore, ES’s

fraudulent and negligent misrepresentation claims are not time-barred under

California’s statute of limitations. We reverse the district court’s dismissal of these

claims and remand.

      4.     The district court dismissed ES’s civil conspiracy claim against KST

because it found that KST failed to allege a colorable tort claim. Because we have

reinstated ES’s fraudulent and negligent misrepresentation claims, we vacate the

district court’s dismissal of the conspiracy claim and remand.

      5.     The district court dismissed ES’s counterclaims against Tan for the

same reasons it dismissed ES’s tort-based counterclaims against KST. The district

court correctly determined that California law governs ES’s counterclaims against

Tan because he was not a party to the KST-ES Contract and not bound by its

choice-of-law provision. See E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 293

4
 The district court’s motion to dismiss order states that NASA informed ES in
December 2014 that it would not be receiving its payments. The parties do not
dispute this date on appeal, although it’s not clear from ES’s Answer, Affirmative
Defenses, and Counterclaims when NASA informed ES it was denying payment.

                                          6                                    19-55422
(2002) (“It goes without saying that a contract cannot bind a nonparty.”). But for

the same reasons discussed above, the district court erred in concluding that the

fraudulent and negligent misrepresentation claims against Tan were time-barred

and that there was no underlying tort claim to support the conspiracy claim against

Tan. Accordingly, we reverse the district court’s dismissal of these claims.

      6.     ES contends that KST breached section 4.2 of the Resale Master

Agreement (“RMA”)5 by performing work that DME contracted to perform for ES.

RMA section 4.2 prohibited KST from performing any “Services” for ES or

incurring any expenses or costs until ES issued a purchase order. The term

“Services” is a defined term in the RMA, limited to certain services KST was to

provide to ES under the agreement. Section 4.2 does not apply to services KST

performed under a separate arrangement with DME regardless of whether those

services benefited ES. Because we hold that KST did not breach section 4.2 of the

RMA, we affirm (1) the district court’s grant of summary judgment in favor of

KST on ES’s breach of contract claim and (2) the district court’s denial of

summary judgment to ES on ES’s breach of contract claim.

      7.     The district court erred in granting summary judgment to KST on

ES’s indemnification claim. Section 10.1 of the RMA required KST to indemnify

5
 The RMA set forth the terms and conditions under which ES purchased products
and services from KST.

                                         7                                     19-55422
ES for claims, losses, or damages resulting from:

      a) any act or omission, whether active or passive and whether actual
      or alleged, or willful misconduct of [KST] or its Personnel;

      b) the breach of this Agreement by Supplier or its Personnel of any of
      its contractual obligations, covenants, undertakings or promises under
      this Agreement; or

      c) property loss, damage, personal injury or death, sustained by
      Supplier or by any of Supplier’s Personnel.

The district court concluded that ES was not entitled to indemnification because

KST did not breach its contractual obligations to ES. While this conclusion

addresses subsection (b) of section 10.1, it ignores subsection (a), which required

KST to indemnify ES for KST’s acts or omissions or willful misconduct resulting

in loss to ES. The language of subsection (a) is so broad and inclusive that there is

a genuine issue of material fact whether KST’s alleged misconduct triggered this

clause. Viewing the facts in the light most favorable to ES, KST represented that

DME performed work for the ACES Contract 6 when in fact KST performed the

work. KST knew that ES needed DME’s small business certifications to comply

with the ACES Contract. As a result, ES fell out of compliance and NASA

imposed a retainage penalty. Whether such conduct constitutes “any act or

6
  The “ACES Contract” is the contract ES entered into with NASA to provide
information technology-related hardware, services, and labor. 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.

                                          8                                    19-55422
omission” or “willful misconduct” resulting in loss to ES is an issue for the jury to

decide. The district court therefore erred in granting summary judgment to KST

on ES’s indemnification claim.

      8.     The district court properly granted summary judgment to KST on

ES’s claim of breach of the implied covenant of good faith and fair dealing.

“Every contract imposes upon each party a duty of good faith and fair dealing in its

performance and its enforcement.” Carma Dev. v. Marathon Dev. Cal., Inc., 2
Cal. 4th 342, 371 (1992) (citation and internal quotation marks omitted). “[T]he

scope of conduct prohibited by the covenant of good faith is circumscribed by the

purposes and express terms of the contract.” Id. at 373 (citation omitted). In this

case, ES relied on KST’s alleged “pass-through” relationship with DME as

evidence of KST’s breach of the implied covenant of good faith. Section 1.1 of the

RMA, however, limited the scope of the KST-ES Contract to KST’s provision of

products and services to ES under that agreement. The contract does not extend to

KST performing work for DME, and thus KST’s allegedly improper relationship

with DME does not violate the covenant of good faith and fair dealing arising from

the KST-ES Contract. We affirm the district court’s grant of summary judgment to

KST on this counterclaim.

      AFFIRMED IN PART, REVERSED IN PART, and REMANDED.

Each party shall bear its own costs on appeal.

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