MegaFon PJSC v.Hewlett Packard Enterprise Company, No. 5:2018cv06463 - Document 60 (N.D. Cal. 2019)
Court Description: ORDER DENYING DEFENDANT'S MOTION TO DISMISS THE AMENDED COMPLAINT. Re: Dkt. No. 53 . HPE must answer the amended complaint within 14 days. Signed by Judge Nathanael Cousins. (lmh, COURT STAFF) (Filed on 6/10/2019)
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MegaFon PJSC v.Hewlett Packard Enterprise Company Doc. 60 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 10 MEGAFON PJSC, Plaintiff, United States District Court Northern District of California 11 v. 12 13 14 HEWLETT PACKARD ENTERPRISE COMPANY, Case No. 18-cv-06463-NC ORDER DENYING DEFENDANT’S MOTION TO DISMISS THE AMENDED COMPLAINT Re: Dkt. No. 53 Defendant. 15 16 In a case arising from a telecom project in Russia, defendant Hewlett Packard 17 Enterprise moves to dismiss plaintiff MegaFon’s amended complaint as time-barred. Dkt. 18 Nos. 52, 53. HPE also moves to dismiss under Rule 12(b)(7) for failure to join HPE’s 19 Russian subsidiary, HP Russia, and requests certification of this issue for interlocutory 20 appeal under 28 U.S.C. § 1292(b). Because MegaFon has plausibly alleged that it could 21 not have discovered the basis of its fraud claims until well within the statutory period, the 22 motion to dismiss is DENIED. The Court previously denied HPE’s motion to dismiss for 23 failure to join HPE Russia, and HPE’s motion for reconsideration of that issue is DENIED. 24 Finally, finding that HPE has not shown exceptional circumstances warranting 25 interlocutory review, that request is also DENIED. 26 I. Background 27 A. Procedural Background 28 MegaFon filed its complaint against HPE on October 23, 2018, for fraudulent Dockets.Justia.com United States District Court Northern District of California 1 inducement, negligent misrepresentation, and unfair competition. Dkt. No. 1. MegaFon 2 moved to dismiss for failure to state a claim under Rules 12(b)(6) and 9(b), including 3 failure to state actionable claims due to time bars under relevant statutes of limitation, and 4 for failure to join a necessary and indispensable party under Rules 12(b)(7) and 19(a)–(b). 5 The Court held a hearing on the motion. Dkt. No. 43. The Court granted the motion in 6 part and denied it in part, finding that MegaFon had sufficiently stated its claims and that 7 HP Russia was not a necessary party, but holding that the claims as pled were time-barred. 8 Dkt. No. 50. The Court granted MegaFon leave to amend to plead that its claims were 9 timely. Id. MegaFon filed an amended complaint with the same factual allegations as its 10 first, plus an additional six pages of facts going toward the question of timeliness. Dkt. 11 No. 52. HPE again moved to dismiss, both under applicable statutes of limitation and 12 again for failure to add a necessary and indispensable party under Rule 12(b)(7). Dkt. No. 13 53. In the event that the Court does not rule in its favor on the 12(b)(7) question, HPE 14 requested certification of the issue for interlocutory appeal. Id. 15 16 Both parties consented to the jurisdiction of a magistrate judge under 28 U.S.C. § 636(c). Dkt. Nos. 12, 16. 17 B. Facts Alleged in the Amended Complaint 18 The following facts are alleged in MegaFon’s amended complaint and were also 19 already alleged in its original complaint. Dkt. Nos. 1, 52. In deciding this motion, the 20 Court accepts these allegations as true and construes them in the light most favorable to 21 MegaFon. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir. 1996). 22 MegaFon is one of the largest telecom operators in Russia. Dkt. No. 52 at ¶ 7. 23 MegaFon decided in 2011 that it needed to upgrade its mobile phone network to 24 accommodate LTE communications. Id. at ¶ 2. It circulated a Request For Information 25 containing its express goals for this upgrade. Id. HPE responded to the RFI. Id. at ¶¶ 8, 26 16. After extensive negotiations throughout 2012 including representations by HPE that it 27 could provide for all of MegaFon’s needs, the companies entered a contract in 2013. Id. at 28 ¶ 18–53. This contract was between MegaFon and HPE Russia (at the time called “ZAO 2 1 HP”), HPE’s Russian subsidiary. Dkt. No. 24 at 1. The upgraded system performed poorly, contained defects, and was fundamentally 2 3 incapable of meeting MegaFon’s requirements. Dkt. No. 52 at ¶ 58–67. MegaFon paid 4 $28 million for the failed upgrade, will have to spend up to another $28 million for a new 5 upgrade, and suffered costs in diagnosing and mitigating the dysfunctional system while its 6 reputation was harmed. Id. at ¶¶ 113, 114. MegaFon added the following facts to its amended complaint. Dkt. No. 52. While United States District Court Northern District of California 7 8 implementation issues arose as early as 2013, the system built by HPE was not fully 9 deployed until 2016. Id. at ¶¶ 87, 90. Though MegaFon flagged multiple problems with 10 the system in 2013, HPE assured MegaFon that these issues were transitory and were 11 related to the migration of MegaFon’s existing system to the new one. Id. at ¶ 87, 94. The 12 transition involved serial replacement of hardware and software over two years. Id. at ¶ 13 89. HPE repeatedly represented that it had fixed or was close to fixing every problem that 14 arose during that time. Id. at ¶¶ 93, 95. HPE proposed a so-called “interim solution,” 15 indicating that once the migration was completed the issues would resolve. Id. at ¶ 95. A 16 formal plan to that effect, delivered by HPE in late 2015, identified an August or 17 September 2016 date by which a final release would be a permanent fix. Id. at ¶ 99. By 18 late 2016, the migration was complete but technical deficiencies remained. Id. at ¶¶ 102, 19 105. In April and May 2017, “catastrophic failures” that caused widespread system 20 outages occurred. Id. at ¶ 108. In June 2017, HPE concluded that the only permanent fix 21 would be a “do-over.” Id. at ¶ 110. 22 23 II. Legal Standard A motion to dismiss for failure to state a claim under Rule 12(b)(6) tests the legal 24 sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). On a 25 motion to dismiss, all allegations of material fact are taken as true and construed in the 26 light most favorable to the non-movant. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337– 27 38 (9th Cir. 1996). The Court, however, need not accept as true “allegations that are 28 merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re 3 United States District Court Northern District of California 1 Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). Although a complaint need 2 not allege detailed factual allegations, it must contain sufficient factual matter, accepted as 3 true, to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 4 550 U.S. 544, 570 (2007). A claim is facially plausible when it “allows the court to draw 5 the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft 6 v. Iqbal, 556 U.S. 662, 678 (2009). If a claim is not sufficiently pled, the Court should 7 grant leave to amend unless it “determines that the pleading could not possibly be cured by 8 allegations of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). 9 III. Discussion 10 A. MegaFon has Sufficiently Alleged that Its Claims Are Not Time Barred 11 Fraud and negligent misrepresentation claims are subject to three-year statutes of 12 limitations and unfair competition claims to a four-year statute of limitations. Cal. Code 13 Civ. Proc. §338(d); Cal. Bus. & Prof. Code § 17208; Villegas v. Wells Fargo Bank, N.A., 14 2012 WL 4097747, No. 12-cv-2004-LB, at *4 (N.D. Cal. Sept. 17, 2012) (granting a 15 motion to dismiss under Cal. Code Civ. Proc. §338(d) and Cal. Bus. & Prof. Code § 17208 16 where plaintiff filed a complaint more than four years after the events giving rise to the 17 suit). This timing accrues from the date that the plaintiff discovers, or should have 18 discovered, the fraud. Aiello v. BAC Home Loans Servicing, LP, 2011 WL 13266352, No. 19 11-cv-3655-RS, at *4 (N.D. Cal. Sept. 30, 2011). When the statute of limitations is at 20 issue, the plaintiff must allege “(1) the time and manner of discovery and (2) the inability 21 to have made earlier discovery despite reasonable diligence.” Rosal v. First Fed. Bank of 22 Cal., 671 F. Supp. 2d 1111, 1131–32 (N.D. Cal. 2009). The burden is on the plaintiff to 23 show that it exercised this diligence. Rhynes v. Stryker Corp., 2011 WL 2149095, No. 10- 24 cv-5619-SC, at *2 (N.D. Cal. May 31, 2011). The plaintiff must “affirmatively excuse his 25 failure to discover the fraud within [the statutory period] by showing that he was not 26 negligent in failing to make the discovery sooner and that he had no actual or presumptive 27 knowledge of facts sufficient to put him on inquiry.” Clemens v. DaimerChrysler Corp., 28 534 F.3d 1017, 1024 (9th Cir. 2008). 4 To plead fraudulent concealment, a plaintiff must allege: (1) that the defendant took United States District Court Northern District of California 1 2 affirmative acts to mislead it; (2) that it did not have actual or constructive knowledge of 3 the facts giving rise to these claims; and (3) that it acted diligently in trying to uncover 4 those facts. Beneficial Standard Life Ins. Co. v. Madariaga, 851 F.2d 271, 276 (9th Cir. 5 1988). 6 In its order dismissing MegaFon’s first complaint, this Court found that the 7 fraudulent misrepresentations alleged occurred more than five years before this case was 8 filed. Dkt. No. 50 at 10. Because many events giving rise to MegaFon’s claims occurred 9 outside the statutes of limitation for both fraud and unfair competition, this Court held that 10 under the discovery rule “MegaFon must plead that it did not and could not have 11 discovered the claims within the limitations period.” Id.; see Eidson v. Medtronic, Inc., 12 981 F. Supp. 2d 868, 894 (N.D. Cal. 2013). In particular, this Court instructed MegaFon 13 that it had not been “clear enough about (1) how and when the alleged fraud was 14 discovered, or (2) why it could not have been discovered earlier despite reasonable 15 diligence.” Dkt. No. 50 at 11. Further, the Court struggled to determine whether MegaFon 16 intended to plead fraudulent concealment and found that, if so, MegaFon had insufficiently 17 alleged its elements. Id. 18 19 1. The Discovery Rule Delayed the Accrual of Time Until 2017 HPE argues that MegaFon failed again to plead sufficient facts as to the who, when, 20 and how behind its discovery of the alleged fraud. Dkt. No. 53 at 8. The Court finds that 21 MegaFon’s amended complaint is now sufficient on these facts. MegaFon alleges 22 additional facts about its communications with HPE throughout 2013–2017 about the 23 technical issues with the system, including details of particular conversations with named 24 HPE representatives on specific dates about the ultimate system failure. Dkt. No. 52 at ¶¶ 25 108–110 (alleging that HPE’s CEO Antonio Neri diagnosed the failures as caused by “an 26 overload of a subset of solid state driver supporting the subscriber records” on May 19, 27 2017; that HPE’s Oleg Neyolov “insisted that HPE ‘had already provided a plan’” on May 28 18, 2017; and that a meeting took place where HPE proposed a “do-over” on June 20, 5 United States District Court Northern District of California 1 2017). MegaFon also adds that it hired two consulting firms to assess the causes of the 2 crashes, and those firms’ reports were completed in July and August 2017. Id. at ¶ 111. 3 This is enough detail to explain how MegaFon’s discovery of the alleged fraud happened 4 in the first place in order to “give defendants notice of the particular misconduct” alleged 5 under Rule 9(b). Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir. 1993). 6 HPE’s next, and best, argument that the discovery rule did not delay the accrual of 7 MegaFon’s claims is that MegaFon was on notice of the alleged fraud from very early in 8 the companies’ relationship. Dkt. No. 53 at 9. HPE points out that it disclosed early on 9 that its previous experience creating similar systems only included smaller versions of 10 what MegaFon required. See Dkt. No. 25, Ex. 8 at §§ 3.3.; Dkt. No. 25, Ex. 10 at 1. Most 11 significantly, MegaFon recounts repeated incidents starting as early as 2013 where it 12 complained to HPE about performance problems. See, e.g., Dkt. No. 52 at ¶¶ 62, 90, 91, 13 91. The issues even rose to the level of MegaFon making financial claims for payment of 14 contractual penalties in February 2014. Id. at ¶ 63. 15 MegaFon’s early awareness of technical issues with the system would be enough to 16 put it on notice of the possible existence of its alleged fraud claims if the technical issues 17 formed the basis of its complaint. But MegaFon’s complaint identifies HPE’s fraud as 18 misrepresenting its ability “to deliver the UDR system it had represented it could deliver.” 19 Dkt. No. 52 at ¶ 112. And MegaFon could not know that HPE was “unable to deliver” the 20 system until the system itself failed. Id. According to the complaint, that failure—the 21 widespread system outages that could only be resolved by a complete “do-over”—did not 22 occur until 2017. Id. at ¶¶ 108, 110. By forming its claims around the “catastrophic 23 failures” of early 2017, MegaFon has adequately pled that it could not have known about 24 those failures before they happened. Id. at ¶ 108. 25 26 2. MegaFon Sufficiently Pleads Fraudulent Concealment A claim for fraudulent concealment must allege that the defendant took affirmative 27 acts to mislead the plaintiff, that the plaintiff did not have actual or constructive knowledge 28 of the facts giving rise to its claims, and that the plaintiff acted diligently in trying to 6 1 uncover those facts. Beneficial Standard Life Ins. Co. v. Madariaga, 851 F.2d 271, 276 2 (9th Cir. 1988). The Court was previously unsure whether MegaFon intended to allege 3 that HPE had fraudulently concealed its inability to deliver the agreed-upon system. Dkt. 4 No. 50 at 11. MegaFon now affirmatively argues a fraudulent concealment theory. Dkt. 5 No. 56 at 7. United States District Court Northern District of California 6 The complaint alleges that HPE affirmatively misled MegaFon by misrepresenting 7 both its own ability to deliver the system and by misrepresenting the severity of the 8 technical issues as they arose. Specifically, MegaFon alleges that HPE touted its 9 “extensive experience in successful implementation of similar project[s] globally” and 10 repeatedly told MegaFon that the system’s problems were temporary. Dkt. No. 52 at ¶¶ 11 56, 88, 62, 90–92. MegaFon alleges that HPE representatives communicated that the 12 problems were only related to the migration stage, and that the underlying systems 13 “work[ed] normally,” that the failures were “caused by external factors,” and that there 14 were “no performance problems.” Id. at ¶¶ 93, 95, 97. HPE also provided monthly reports 15 which MegaFon alleges “announced that the HPE system was working fine.” Id. at ¶¶ 16 103, 105. This exaggeration of its own expertise and concealing of the true source of the 17 failures constitute affirmative misleading on the part of HPE. 18 Next, the complaint alleges that MegaFon did not have actual or constructive 19 knowledge of this fraud. As discussed in Section 1 above, the Court finds that MegaFon 20 has sufficiently pled that it could not have discovered the fraud until the widespread 21 system outages occurred in 2017. 22 Finally, MegaFon has plausibly alleged that it diligently investigated its claims. It 23 did so by repeatedly questioning HPE about the technical failures, demanding an action 24 plan, signing an additional agreement with a protocol of solutions, and hiring outside 25 consultants to assess the root cause of the outages. Id. at ¶¶ 98–101, 111. These facts 26 allege diligent efforts to uncover the facts underlying MegaFon’s claims. 27 28 The Court finds that MegaFon has pled facts to allege that the time under the statutes of limitation were tolled until the 2017 outages, and therefore its claims did not 7 1 begin to accrue until that time. MegaFon has also alleged that HPE fraudulently concealed 2 its misrepresentations through that time. Therefore, the claims in the amended complaint 3 are not time-barred. 4 B. 5 Rule 19(a) provides that a party is “necessary” to an action if: 6 (A) in that person’s absence, the court cannot accord complete relief among existing parties; or (B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person’s absence may (i) as a practical matter impair or impede the person’s ability to protect the interest; or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest. 7 8 9 United States District Court Northern District of California 10 Reconsideration of Failure to Join Under Rules 19(a) and 12(b)(7) 11 Fed. R. Civ. P. 19(a)(1). Rule 12(b)(7) authorizes dismissal of an action that fails to join a 12 party whose presence is necessary for adjudication under Rule 19. 13 HPE already moved to dismiss MegaFon’s original complaint for failure to join 14 HPE Russia, which it argued was a necessary and indispensable party. The Court found 15 that HPE Russia’s interest would not be impaired or impeded by these parties disposing of 16 this action in its absence because its interests would be adequately represented by HPE. 17 Dkt. No. 50 at 5–6. This Court held that “HPE Russia is not necessary under Rule 19(a),” 18 and, as such, it did not “analyze the feasibility of joinder or the indispensability of HPE 19 Russia under Rule 19(b).” Id. at 6. 20 HPE moves to dismiss on this basis again, arguing that “the new allegations in the 21 amended complaint confirm that HPE Russia is a necessary and indispensable party.” Dkt. 22 No. 53 at 16. But HPE points to no new facts in the amended complaint to show this; the 23 alleged facts it cites are all from the original complaint. Id. at 8–13. HPE repeats, in its 24 motion to dismiss, previous arguments already rejected by this Court rather than filing a 25 motion for reconsideration under Civil Local Rule 7-9. That rule prohibits repetition of 26 argument. Civ. L-R. 7-9(c). HPE’s argument is largely repetitive here. Because HPE 27 should have properly filed a motion for reconsideration of this issue, the Court treats its 28 motion to dismiss under Rule 12(b)(7) as such a motion, and the motion for 8 United States District Court Northern District of California 1 reconsideration is DENIED. 2 C. HPE Has Not Shown the Circumstances Warrant Interlocutory Appeal 3 Finally, HPE requests that this Court certify the 12(b)(7) issue for interlocutory 4 appeal. Dkt. No. 53 at 16–22. This Court should only do so if HPE shows that its order 5 “(1) involves a controlling question of law,” (2) “as to which there is substantial ground for 6 difference of opinion,” and (3) where “an immediate appeal from the order may materially 7 advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b). If a party 8 establishes all three of those elements, the Court has discretion over whether to grant 9 certification. Kaltwasser v. AT&T Mobility, LLC, 2011 WL 5417085, No. 07-cv-0422-JW 10 at *1 (N.D. Cal. Nov. 8, 2011). The Ninth Circuit “has long recognized the congressional 11 directive that section 1292(b) is to be applied sparingly and only in exceptional cases.” In 12 re Cement Antitrust Litig., 673 F.2d 1020, 1027 (9th Cir. 1981). 13 HPE has not shown any “exceptional circumstances” to justify interlocutory review. 14 Nanavati v. Adecoo USA, 2015 WL 4035072, No. 14-cv-4145-BLF, at *1 (N.D. Cal. June 15 30, 2015) (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 475 (1978). This Court’s 16 previous order is particularly inappropriate for interlocutory appeal because it only ruled 17 on whether HPE Russia was a necessary party and did not address whether it was 18 indispensable. Dkt. No. 50 at 6. Without a ruling to review on the question of 19 indispensability, a reversal of this Court’s order on appeal would not actually hold that the 20 case could not proceed without HPE Russia. Fed. R. Civ. P. 19; United States v. Bowen, 21 172 F.3d 682, 688 (9th Cir. 1999). The Court is not persuaded that an immediate appeal 22 will materially advance the ultimate termination of this litigation. 23 IV. Conclusion 24 Because MegaFon has adequately alleged in the amended complaint that its claims 25 are timely, the motion to dismiss is DENIED. The motion for reconsideration of the 26 Court’s previous denial of HPE’s motion to dismiss for failure to join a necessary and 27 indispensable party is also DENIED. The request for certification for interlocutory appeal 28 is also DENIED. HPE must answer the amended complaint within 14 days. 9 1 2 IT IS SO ORDERED. 3 4 5 Dated: June 10, 2019 _____________________________________ NATHANAEL M. COUSINS United States Magistrate Judge 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10
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