Central Coast Pipe Lining Inc v. Pipe Shield USA Inc et al, No. 2:2013cv00639 - Document 51 (C.D. Cal. 2013)

Court Description: ORDER DENYING MOTION FOR SUMMARY JUDGMENT 35 by Judge Otis D. Wright, II (lc)
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Central Coast Pipe Lining Inc v. Pipe Shield USA Inc et al Doc. 51 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 CENTRAL COAST PIPE LINING, INC., 12 13 14 15 16 17 18 19 v. Plaintiff, Case No. 2:13-cv-00639-ODW(Ex) ORDER DENYING MOTION FOR SUMMARY JUDGMENT [35] PIPE SHIELD USA, INC.; PIPE SHIELD SERVICES, LTD.; B.G. ARNOLD SERVICES T/A BRADLEY MECHANICAL SERVICES; ELASTOCHEM COMPANY SPECIALTY, INC.; DOES 1–100, inclusive, Defendants. I. INTRODUCTION 20 After a falling out between Plaintiff Central Coast Pipe Lining, Inc. and 21 Defendant B.G. Arnold Services T/A Bradley Mechanical Services (“BMS”), the 22 parties executed a Settlement Agreement. Paragraph 4 of that agreement states that 23 the “Parties agree that each will for itself and/or directly or indirectly through any 24 other party, refrain from interfering with, hindering or by any means impeding the 25 business operations and/or expansion of any other party.” Central Coast attempted to 26 purchase pipelining epoxy directly from former defendant Elastochem Company 27 Specialty, Inc.—manufacturer of the epoxy BMS formerly sold to Central Coast. But 28 BMS blocked the sale, Elastochem was unwilling to sell to Central Coast, or both. Dockets.Justia.com 1 Central Coast then sued for breach of the Settlement Agreement. Since both parties 2 offer conflicting evidence bearing upon the Settlement Agreement’s ultimate 3 interpretation, the Court finds that there are genuine issues of material fact and 4 accordingly DENIES BMS’s Motion for Summary Judgment.1 (ECF No. 35.) II. 5 FACTUAL BACKGROUND 6 Central Coast is a California corporation that is engaged in the business of 7 rehabilitating potable water pipes via blow-through epoxy lining. BMS is a Canadian 8 corporation that sells pipelining epoxies. Elastochem2 manufactures and supplies 9 BMS with the epoxies at issue in this case. 10 On December 31, 2010, Central Coast and BMS entered into a License 11 Agreement under which Central Coast received the exclusive right to use and 12 sublicense BMS’s pipelining epoxy in California. (Statement of Undisputed Facts 13 (“SUF”) 11.) Central Coast paid BMS $100,000 for the license. (SUF 12.) 14 BMS and Elastochem are co-owners of Elastochem’s pipelining epoxy products 15 with BMS acting as Elastochem’s exclusive distributor. (SUF 10.) As a result of this 16 agreement, BMS argues that Elastochem cannot sell pipelining epoxy directly to an 17 end user. (SUF 16, 25–26.) 18 One of Elastochem’s products is AN500 pipelining epoxy—the epoxy Central 19 Coast formerly used in its business. (SUF 19.) After BMS and Elastochem entered 20 into their Co-Ownership Agreement, BMS and Elastochem developed another epoxy: 21 AG310. (SUF 18.) Elastochem has never sold AG310. (SUF 28.) Central Coast 22 asserts that Elastochem is free to sell AG310 to whomever it wants because the Co- 23 Ownership Agreement does not mention AG310. (SUF 16, 25–26.) 24 While Elastochem developed AN500 for lining pipes, BMS contends that 25 AG310 is not suitable for pipelining, because it is less viscous than AN500. (SUF 19– 26 1 27 28 After carefully considering the papers filed with respect to this Motion, the Court deems the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15. 2 On April 19, 2013, the Court granted in part Defendants’ Motion to Dismiss, thereby eliminating all claims against Elastochem. (ECF No. 22.) 2 1 22, 24.) BMS argues that AG310’s intended use is for lining municipal water cisterns, 2 water reservoirs, and metal and concrete tanks—not pipes. (SUF 23.) Central Coast 3 disagrees, asserting that AG310 is not chemically or physically different than AN500. 4 (SUF 19–24.) At the time the parties entered into the Settlement Agreement, Stan 5 Rutiz, Central Coast’s President, believed that AN500 and AG310 were identical 6 products. (SUF 31.) 7 In September 2011, Rutiz submitted two pseudononymous price requests 8 directly to Elastochem regarding AG310. (Arnold Dep. Ex. 10.) Rutiz did not 9 disclose that he wished to use AG310 for pipelining. (SUF 54.) Brenda DiLoreto, the 10 wife of Elastochem’s Technical Director, Sam DiLoreto, quoted $135 a gallon and 11 provided AG310’s material safety data sheet. (Arnold Dep. Ex. 10.) 12 Central Coast and BMS had a falling out and began negotiating a settlement 13 agreement in December 2011. Rutiz proposed that after the parties finalized the 14 settlement, Central Coast would be free to purchase epoxy from any source, including 15 Elastochem, and that BMS would not interfere with Central Coast’s purchases. 16 (SUF 38.) Brad Arnold, BMS’s President, replied that this was “not an option [BMS 17 was] willing to entertain.” (Id.) 18 On December 7, 2011, Rutiz emailed Arnold, telling him, “You know I have no 19 other means to purchase NSF-61 potable epoxy, which I need to go forward. You will 20 advise Elastochemical [sic] in writing, you have no objection to them selling me their 21 epoxy, as they would to you or any other purchaser.” (Rutiz Dep. Ex. 9.) Arnold 22 responded, informing Rutiz that after the settlement, “any epoxy sales will be through 23 Pipe Shield[3] not directly with my supplier [Elastochem].” (Id.) 24 That same day, Rutiz expressed his understanding, stating that he was “free to 25 conduct [his] business in any manner, in any area, however and where [he] 26 please[d]”—besides purchasing AN500 only from BMS/Pipe Shield. (Id.) But 27 28 3 It appears that Pipe Shield USA was wound up, and BMS succeeded to Pipe Shield’s contract interests with Central Coast. (See Mot. 2.) 3 1 Arnold cautioned that the “only issue is that once [Central Coast’s] territory is sold, 2 the epoxy [Central Coast] will purchase will be for [its] own use only, not for resale.” 3 (Id.) 4 5 Central Coast’s first proposed version of the Settlement Agreement included a noninterference provision, which read, 6 The Pipe Shield Parties hereby agree for each of them that they will use 7 best efforts to facilitate the sale of any epoxy from any source to CCPL 8 and or its designees and shall each whether for itself and/or directly or 9 indirectly through any other party, refrain from interfering with, 10 11 hindering or by any means impeding such sale. (Arnold Dep. Ex. 10.) 12 On January 18, 2012, the parties finalized their Settlement Agreement. 13 (SUF 13.) BMS agreed to return $70,000 to Central Coast and to sell Central Coast 14 pipelining epoxy at $175 a gallon until the $70,000 was fully repaid. (SUF 14.) In 15 return, Central Coast gave up its exclusive California rights to BMS’s epoxy under the 16 Master License. (SUF 15.) 17 18 The final version of the noninterference provision, or paragraph 4 of the Settlement Agreement, states, 19 The Parties agree that each will for itself and/or directly or indirectly 20 through any other party, refrain from interfering with, hindering or by 21 any means impeding the business operations and/or expansion of any 22 other party. For greater clarity, the Parties will be permitted to compete 23 with any other Party in a commercially reasonable manner. 24 (SUF 9.) 25 In discussing the noninterference provision, Arnold contends that he made it 26 clear to Rutiz that Rutiz could not buy any epoxy directly through Elastochem. 27 (Arnold Dep. 200:12–201:1.) But Central Coast’s understanding of the provision was 28 that Central Coast and BMS were each free to do whatever they wanted with their 4 1 own businesses. (Rutiz Dep. 146:2–4.) Rutiz avers that he and Arnold discussed that 2 Central Coast “could buy epoxy from any source, any time, anywhere,” including 3 from Elastochem. (Id. 146:19–22.) On February 13, 2012, Rutiz contacted Ms. Loreto, inquiring about purchasing 4 5 AG310, which he believed was identical to AN500. (Arnold Dep. Ex. 10.) 6 Mr. DiLoreto forwarded the email to Arnold, asking how Arnold wanted Elastochem 7 to handle Rutiz’s request. (Id.) On Februrary 15, 2012, Arnold replied, “He [Rutiz] is 8 a snake. . . . I would appreciate it if you would tell him that he will have to order 9 through me [BMS]. Is the AG 310 the same as AN 500?” (Id. (ellipsis in original).) 10 Mr. DiLoreto responded that he “had no intention of selling [Rutiz] anything! . . . The 11 AG310 is not the same.” (Id.) 12 BMS asserts that it will sell Central Coast AN500 for its own use but not for 13 resale. (Arnold Dep. 131:6–15.) Central Coast admits that there are four other 14 companies from which it could obtain its pipelining epoxy. (SUF 72.) But Central 15 Coast would have to become a licensee or franchisee of one of these companies, 16 which it does not want to do. (SUF 82.) 17 On December 17, 2012, Central Coast filed suit in San Luis Obispo County 18 Superior Court against Defendants Pipe Shield USA, Inc., Pipe Shield Services, Ltd., 19 BMS, and Elastochem. (Not. of Removal Ex. A.) Central Coast alleged claims for 20 breach of contract; fraud; intentional interference with contract; Cartwright Act 21 violations; violation of California’s Unfair Competition Law; conspiracy and aiding 22 and abetting; and negligence. 23 After two rounds of motions to dismiss, the Court narrowed the issues down to 24 just the breach-of-contract claim. The Court’s previous Orders also eliminated any 25 claims against Elastochem. 26 judgment. (ECF No. 35.) Central Coast timely opposed. (ECF No. 36.) That Motion 27 is now before the Court for decision. 28 /// On November 15, 2013, BMS moved for summary 5 III. 1 LEGAL STANDARD 2 Summary judgment should be granted if there are no genuine issues of material 3 fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. 4 P. 56(c). The moving party bears the initial burden of establishing the absence of a 5 genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986). 6 Once the moving party has met its burden, the nonmoving party must go beyond the 7 pleadings and identify specific facts through admissible evidence that show a genuine 8 issue for trial. Id.; Fed. R. Civ. P. 56(c). Conclusory or speculative testimony in 9 affidavits and moving papers is insufficient to raise genuine issues of fact and defeat 10 summary judgment. Thornhill’s Publ’g Co. v. GTE Corp., 594 F.2d 730, 738 (9th 11 Cir. 1979). 12 A genuine issue of material fact must be more than a scintilla of evidence or 13 evidence that is merely colorable or not significantly probative. Addisu v. Fred 14 Meyer, 198 F.3d 1130, 1134 (9th Cir. 2000). A disputed fact is “material” where the 15 resolution of that fact might affect the outcome of the suit under the governing law. 16 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1968). An issue is “genuine” if 17 the evidence is sufficient for a reasonable jury to return a verdict for the nonmoving 18 party. Id. Where the moving and nonmoving parties’ versions of events differ, courts 19 are required to view the facts and draw reasonable inferences in the light most 20 favorable to the nonmoving party. Scott v. Harris, 550 U.S. 372, 378 (2007). IV. 21 DISCUSSION 22 BMS moves for summary judgment on Central Coast’s sole remaining claim for 23 breach of contract. BMS contends that the undisputed evidence demonstrates that 24 paragraph 4 of the Settlement Agreement means that Central Coast could purchase 25 pipelining epoxy directly from any source other than Elastochem. But Central Coast 26 denies that it ever discussed Elastochem and ardently asserts that the noninterference 27 provision means that it can purchase epoxy from any company—including 28 Elastochem. Given the disagreement over whether the parties ever discussed 6 1 Elastochem and to what extent, the Court finds that there is a genuine dispute of 2 material fact sufficient to preclude summary judgment. 3 A. Interpretation of the Settlement Agreement 4 BMS argues that the agreed interpretation of paragraph 4 is that Central Coast 5 could purchase pipelining epoxy from any source other than its supplier, Elastochem. 6 Central Coast disagrees, asserting that the parties agreed that it could purchase epoxy 7 from Elastochem or any other source. 8 1. Parol-evidence rule 9 California law provides that a court should interpret a contract solely by its 10 language if the language is “clear and explicit.” Cal. Civ. Code § 1638. In 11 interpreting a contract, “the objective intent of the contracting parties is a legal 12 question determined solely by reference to the contract’s terms.” Wolf v. Walt Disney 13 Pictures & Television, 162 Cal. App. 4th 1107, 1126 (Ct. App. 2008); see also Civ. 14 Code § 1639 (noting that the parties’ intention should be ascertained by the writing 15 alone, where possible). 16 When, as here, the parties resort to prior discussions to interpret a contract’s 17 terms, the parol-evidence rule governs the admissibility of the pre-incorporation 18 evidence. The parol-evidence rule provides that terms “set forth in a writing intended 19 by the parties as a final expression of their agreement with respect to such terms as are 20 included therein may not be contradicted by evidence of any prior agreement or of a 21 contemporaneous oral agreement.” Cal. Civ. Proc. Code § 1856(a); Wolf, 162 Cal. 22 App. 4th at 1126 (holding that extrinsic evidence is generally inadmissible). 23 But a court may employ extrinsic evidence to explain a contract, unless the 24 writing is fully integrated. Civ. Proc. Code § 1856(b). The court therefore must 25 preliminarily determine whether the parties intended the contract to be a final 26 expression of their agreement. Id. § 1856(d). An integration or merger clause is 27 persuasive evidence of full integration. Founding Members of the Newport Beach 28 /// 7 1 Country Club v. Newport Beach Country Club, Inc., 109 Cal. App. 4th 944, 953–54 2 (Ct. App. 2003). 3 Here, the Settlement Agreement does include a merger clause, which states that 4 the “Agreement constitutes the entire agreement between the parties pertaining to the 5 subject matter contained herein.” 6 supersedes all prior and contemporaneous representations and understandings of the 7 Parties.” But since the parties only wish to explain the noninterference provision’s 8 terms, the Court finds that the integration clause does not bar the party’s prior 9 negotiations solely for interpretative purposes. See Civ. Code § 1856(g). The clause also states that the “Agreement 10 2. Explaining paragraph 4’s meaning 11 In ruling on Defendants’ second Motion to Dismiss, the Court framed the heart 12 of the breach-of-contract issue: “Essentially the case comes down to the 13 noninterference provision’s interpretation, that is, what the parties meant when they 14 agreed that each party would ‘refrain from interfering with, hindering or by any means 15 impeding the business operations and/or expansion of any other Party.’” 16 No. 22, at 6.) 17 reference whether Central Coast could purchase from Elastochem, BMS’s supplier, or 18 whether BMS had any duty to not interfere with Central Coast’s attempt to purchase 19 directly from Elastochem. 20 settlement provision. (ECF Paragraph 4 of the Settlement Agreement does not specifically Both parties offer conflicting interpretations of the 21 When interpreting a contract’s terms, California courts employ a three-step 22 process. First, the court must determine whether the terms are reasonably susceptible 23 to the interpretation advanced by the proffered extrinsic evidence. Wolf, 162 Cal. 24 App. 4th at 1126–27. If the language is reasonably susceptible to the proposed 25 meaning, the court admits the extrinsic evidence. Id. If there is no material conflict 26 between the extrinsic evidence adduced, the court interprets the contract solely as a 27 matter of law. Id. But when “there is a conflict in the extrinsic evidence, the factual 28 conflict is to be resolved by the jury.” Id. 8 1 BMS argues that both parties understood the noninterference provision to mean 2 that Central Coast was free to purchase pipelining epoxy from any source other than 3 Elastochem. Arnold contends that he made it clear to Rutiz that Central Coast could 4 only purchase epoxy through BMS and not directly from Elastochem due to BMS 5 owning the exclusive distribution rights to Elastochem’s pipelining products. BMS 6 also points out that Rutiz agreed via email that he would not purchase AN500 from 7 any source other than Pipe Shield/BMS. 8 Central Coast disagrees, arguing that the parties agreed through paragraph 4 9 that Central Coast is free to purchase pipelining epoxy from any source—including 10 directly from Elastochem. Central Coast indicates that it incorporated this 11 understanding in its first version of paragraph 4, and the final version—though 12 worded differently—only includes “insignificant changes.” Rutiz also asserts that the 13 parties specifically discussed Central Coast being able to purchase pipelining epoxy 14 from Elastochem. 15 While the parties offer divergent interpretations of the noninterference 16 provision, that disagreement will not alone preclude summary judgment. Med. 17 Operations Mgmt., Inc. v. Nat’l Health Labs., Inc., 176 Cal. App. 3d 886, 892 (Ct. 18 App. 1986) (noting the difference between disputed inferences as opposed to 19 conflicting evidence). 20 But the parties here also offer conflicting evidence. BMS contends that the 21 parties agreed that Central Coast could not purchase pipelining epoxy directly from 22 Elastochem. (Arnold Dep. 198:22–201:1.) In stark contrast, Central Coast—through 23 Rutiz—asserts that the parties specifically discussed and established that Central 24 Coast could purchase epoxy from anyone—including Elastochem. 25 Dep. 145:25–146:22.) What the parties discussed with respect to Central Coast’s 26 ability to purchase directly from Elastochem bears upon the ultimate interpretation of 27 the ambiguously worded noninterference provision. That is, one cannot determine the 28 parties’ objective intent in agreeing to “refrain from interfering with, hindering or by 9 (Rutiz 1 any means impeding the business operations and/or expansion of any other party” 2 until a trier of fact resolves what the parties actually discussed regarding Elastochem. 3 See Morey v. Vannucci, 64 Cal. App. 4th 904, 914 (Ct. App. 1998) (holding that the 4 jury had to determine which conflicting evidence to believe before the court could 5 interpret a disputed contract provision). 6 BMS argues that the parties’ undisputed December 7–8, 2011 email exchange 7 demonstrates that Central Coast agreed that it could only purchase epoxy from Pipe 8 Shield/BMS. But Central Coast merely stated that it would only purchase “AN500” 9 from BMS. There is no reference to AG 310—and thus that discussion does not 10 resolve the evidentiary dispute. 11 The parties also hotly dispute much about AG310, including whether 12 Elastochem could legally sell it to Central Coast without violating the BMS- 13 Elastochem Co-Ownership Agreement, whether Elastochem was willing to sell 14 AG310 to Central Coast, and whether AG310 and AN500 are chemically and 15 physically similar enough that one could use AG310 for pipelining. But neither party 16 submitted any expert testimony determining whether both products are similar enough 17 that one could use AG310 in lieu of AN500. And even if Arnold, the DiLorettos,4 or 18 Rutiz could be considered experts for this limited purpose, both parties still offer 19 contradictory evidence regarding the similarity of the products. 20 consequently finds that there is a genuine issue of material fact on the chemical and 21 physical similarity between AN500 and AG310—i.e., whether Central Coast could 22 even have used AG310 for pipelining. The Court With these genuine disputes of material fact, the Court cannot at this stage 23 24 interpret the parties’ noninterference provision. 25 BMS’s Motion on this ground. 26 /// 27 4 28 The Court accordingly DENIES BMS objects to the admission of Brenda DiLoretto’s deposition testimony regarding the identity of the epoxies on the basis of lack of foundation and relevance. Since Central Coast’s cited testimony does not support its proposition, the Court SUSTAINS BMS’s objection. 10 1 B. Breach 2 Under California law, the essential elements of a breach-of-contract claim are 3 (1) the contract, (2) plaintiff’s performance or excuse for nonperformance, 4 (3) defendant’s breach, and (4) the resulting damages to plaintiff. Reichert v. Gen. 5 Ins. Co. of Am., 68 Cal. 2d 822, 830 (1968) (in bank). 6 Central Coast argues that BMS breached the Settlement Agreement by 7 requesting that Elastochem not sell AG310 to Central Coast. Perplexingly, one way 8 Central Coast contends that BMS breached the agreement was by instructing 9 Elastochem not to sell epoxy to Central Coast on December 7, 2011. Considering that 10 the parties executed the Settlement Agreement on January 18, 2012, BMS could not 11 have prospectively breached an agreement a month before it ever existed. 12 In any event, one cannot determine whether BMS breached the agreement 13 before one determines the full scope of BMS’s contractual duties. Since there are 14 genuine issues of material fact bearing upon interpretation, the Court cannot assess at 15 this point whether Central Coast proved the breach element of its claim. 16 C. Causation 17 BMS next argues that Central Coast cannot prove causation, because 18 Elastochem was contractually bound to refrain from selling pipelining epoxy to end 19 users like Central Coast. 20 previously offered to sell Central Coast AG310—all without BMS’s prior approval. 21 Central Coast also asserts that BMS did not have the legal right to exclusively sell 22 AG310, because BMS did not pay for the development of the product and it was not 23 listed in the BMS-Elastochem exclusivity agreement. Central Coast disagrees, contending that Elastochem 24 In breach-of-contract cases, the test for causation is “whether the breach was a 25 substantial factor in causing the damages.” US Ecology, Inc. v. State, 129 Cal. App. 26 4th 887, 909 (Ct. App. 2005). 27 As discussed above, the Court cannot resolve what role AG310 plays in BMS’s 28 alleged breach of contract without a trier of fact first determining whether AG310 is a 11 1 viable substitute for AN500. The parties fervidly dispute the identity of the products 2 and provide contradictory opinions on the issue. It is therefore premature to opine 3 whether Central Coast can prove causation due to BMS and Elastochem’s exclusivity 4 agreement or whether the Co-Ownership Agreement covered AG310. 5 D. Failure to mitigate damages 6 BMS’s final argument centers on Central Coast allegedly failing to mitigate 7 damages. California law is clear that a “plaintiff who suffers damage as a result of 8 either a breach of contract or a tort has a duty to take reasonable steps to mitigate 9 those damages and will not be able to recover for any losses which could have been 10 thus avoided.” Shaffer v. Debbas, 17 Cal. App. 4th 33, 41 (Ct. App. 1993). 11 BMS argues that Central Coast can obtain pipelining epoxy from other 12 companies, such as Duraflow, Nuflow, and American Pipe Lining. BMS further 13 points out that Central Coast has not sought epoxy from these other sources. Lastly, 14 BMS contends that nothing precludes Central Coast from purchasing AN500 from 15 BMS for Central Coast’s business use—just not for resale. But Central Coast asserts 16 that these other companies do not sell directly to end users, and Central Coast is not 17 willing to become a franchisee or licensee of one of these companies. 18 BMS seems to argue that the Court should preclude Central Coast from 19 recovering any damages for failing to mitigate. But this is “an incorrect interpretation 20 of the law. A party’s failure to take reasonable steps to mitigate damages bars 21 recovery of only the avoidable portion of the damages”—not all damages. Carnation 22 Co. v. Olivet Egg Ranch, 189 Cal. App. 3d 809, 819 n.12 (Ct. App. 1986). Even if the 23 Court were to determine that Central Coast could have obtained pipelining epoxy 24 elsewhere, there is no evidence before the Court of the exact dollar amount Central 25 Coast could have saved. Rather, the factual disputes regarding the availability of 26 replacement epoxy and the failure-to-mitigate calculation remain for the trier of fact to 27 resolve. 28 /// 12 V. 1 2 CONCLUSION For the reasons discussed above, the Court DENIES Defendants’ Motion for 3 Summary Judgment. (ECF No. 35.) 4 IT IS SO ORDERED. 5 6 December 9, 2013 7 8 9 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13