Opinion
Case No. 19-CV-01279-LHK
02-20-2020
MICROSOFT CORPORATION, et al., Plaintiffs, v. HON HAI PRECISION INDUSTRY CO., LTD., Defendant.
ORDER GRANTING MOTION TO DISMISS COUNTERCLAIMS WITH PREJUDICE IN PART AND WITH LEAVE TO AMEND IN PART; GRANTING IN PART AND DENYING IN PART MOTION TO STRIKE AFFIRMATIVE DEFENSES; AND GRANTING MOTION FOR LEAVE TO AMEND THE ANSWER AND COUNTERCLAIMS
Re: Dkt. Nos. 52, 72
PUBLIC REDACTED VERSION
Plaintiffs Microsoft Corporation and Microsoft Licensing GP ("Microsoft") filed this action for breach of contract against Defendant Hon Hai Precision Industry Co., Ltd. ("Hon Hai"). ECF No. 1 ("Compl."). After the Court denied Hon Hai's motion to dismiss or strike Microsoft's complaint, ECF No. 46, Hon Hai filed an answer and counterclaims, ECF No. 51 ("Answer"). Microsoft now moves to dismiss or strike Hon Hai's counterclaims and affirmative defenses. ECF No. 52. Additionally, Hon Hai moves for leave to amend the answer and counterclaims. ECF No. 72. Having considered the parties' briefing, the relevant law, and the record in this case, the Court GRANTS Microsoft's motion to dismiss Hon Hai's counterclaims with prejudice in part and with leave to amend in part; GRANTS in part and DENIES in part Microsoft's motion to strike Hon Hai's affirmative defenses; and GRANTS Hon Hai's motion for leave to amend the answer and counterclaims.
Microsoft's motion to dismiss or strike contains a notice of motion that is separately paginated from the memorandum of points and authorities in support of the motion. See ECF No. 52 at i. Civil Local Rule 7-2(b) provides that the notice of motion and points and authorities should be contained in one document with a combined limit of 25 pages. See Civ. Loc. R. 7-2(b).
I. BACKGROUND
A. Factual Background
Microsoft is a Washington corporation. Answer ¶ 10; Compl. ¶ 10. Hon Hai is a Taiwanese corporation, and Hon Hai and its subsidiaries manufacture certain consumer electronic devices for companies to sell under their own brand names. Answer ¶¶ 12, 15. These consumer electronic devices include devices whose patents belong to Microsoft. Id. ¶¶ 15, 81, 88.
On or before April 1, 2013, Microsoft and Hon Hai entered into a "Confidential Patent License Agreement" ("PLA"), in which Microsoft granted Hon Hai a worldwide license to Microsoft's portfolio of patents for certain "Covered Products" in exchange for specified royalties. Id. ¶¶ 5, 6, 16. Microsoft and Hon Hai entered into the PLA following three years of negotiations where "Microsoft and Hon Hai were represented by counsel in connection with the contract negotiations." Id. ¶¶ 16, 73. Hon Hai alleges that it "obtained assurances from Microsoft that it would work to create a level playing field in the Android market by (1) signing Hon Hai's competitors and/or brand name customers up to Android licenses and (2) granting Hon Hai substantially the same royalty rates that Microsoft was charging prior licensees." Id. ¶ 73. Hon Hai explained that such assurances were important because "unlike Microsoft, Hon Hai and its subsidiaries lacked the leverage to get most of their brand name customers—especially in China—to bear the cost of the royalties demanded by Microsoft, particularly if Hon Hai's competitors were not subject to comparable royalty obligations." Id. ¶ 88.
Hon Hai does not allege that any specific contractual provision in the PLA explicitly requires Microsoft to either grant Hon Hai substantially the same royalty rates that Microsoft was charging prior licensees or to sign up Hon Hai's competitors or brand name customers to Android licenses. Id. ¶¶ 89-91. Indeed, Hon Hai concedes that Hon Hai included a most-favored-nation provision in a draft of the PLA, but Microsoft rejected it. Id. ¶¶ 56, 65; ECF No. 53-3 at 9 § 4.2.2 ("Traino Decl. Ex A"). The rejected most-favored-nation provision would have read as follows:
Microsoft requests that the Court consider a draft of the PLA dated May 14, 2012. Traino Decl. Ex A. The May 14, 2012 draft of the PLA was referenced in Hon Hai's Answer. Answer ¶¶ 56-57. Hon Hai does not oppose Microsoft's request and even relies on the May 14, 2012 draft in its opposition to Microsoft's motion to dismiss. See Opp. at 18 n.14, 20 n.15. Accordingly, the Court will consider the May 14, 2012 draft of the PLA. United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003) ("A court may, however, consider certain materials—documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice—without converting the motion to dismiss into a motion for summary judgment."); Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1160 (9th Cir. 2012) ("Under the 'incorporation by reference' doctrine in this Circuit, a court may look beyond the pleadings without converting the Rule 12(b)(6) motion into one for summary judgment." (quotation marks omitted)).
MICROSOFT and its Affiliates shall treat Hon Hai as its most favored EMS Company licensee. MICROSOFT represents, warrants and covenants to Hon Hai that the net price for each category of Covered Product shall be as low or lower , after taking into account all credits, discounts and other offsets, than the net price MICROSOFT offers or provides at any time during the Term to any EMS Company for licensing of substantially similar types of covered products. If MICROSOFT offers or provides to any other EMS Company licensing net prices or terms that cause the representation, warranty or covenant in this section to be untrue, then MICROSOFT shall notify Hon Hai of, and offer to Hon Hai, the same aggregate better net pricing and terms. MICROSOFT shall, upon Hon Hai's acceptance of the better net pricing and terms, promptly credit or reimburse Hon Hai, at Hon Hai's option, any amounts Hon Hai paid in excess of the better net pricing and terms after they were offered or provided to any other EMS Company. An officer of MICROSOFT shall annually certify to Hon Hai in writing that MICROSOFT is in compliance with this section.Traino Decl. Ex A at 9 (deleted Section 4.2.2.) Such a provision would have guaranteed that Hon Hai would get the lowest net price offered or provided by Microsoft to another company during the term of the license. Id.
Rather, Hon Hai's allegations that Microsoft agreed to grant Hon Hai substantially the same royalty rates that Microsoft was charging prior licensees or to sign up Hon Hai's competitors or brand name customers to Android licenses are based on two alleged oral misrepresentations made during PLA negotiations. First, on March 26, 2012, Hon Hai alleges that one of Microsoft's representatives allegedly told Hon Hai's "outside counsel" from "Haynes & Boone, LLP" that "Microsoft's Android royalty rates were well set with other ODMs, that Microsoft did not have flexibility on those rates, and that Microsoft would provide its current pricing schedule to Hon Hai in its next draft of the PLA." Answer ¶ 55. Second, Hon Hai claims that on August 9, 2012, one of Microsoft's representatives "represented to Hon Hai, in response to Hon Hai's argument that Microsoft's proposed Android royalty rates were too high, that Microsoft's prior licensees had set the pricing and that Microsoft would not play favorites." Id. ¶ 58.
Hon Hai alleges that "it did not know Microsoft's representations were false and relied on them in deciding not to make further attempts to negotiate the royalty rates downward and to enter into the PLA containing those rates." Id. ¶¶ 106, 112. "[B]ased on conversations with Hon Hai before and after the PLA was signed, the PLA's purposes could be achieved and Hon Hai could enjoy the benefits of the [PLA] only if Microsoft continued its efforts, in good faith, to sign up new Android licensees" and to make new licensees pay the same royalty rates that Hon Hai paid. Id. ¶ 45. "Nevertheless, once the PLA was signed, Microsoft sat on its hands and reneged on its assurances." Id. ¶ 73. As a result, Hon Hai allegedly "suffered injury resulting in money damage," including "claims by Microsoft for payment of excessive royalties, legal fees associated with defending against Microsoft's royalty claims, and reputational harm." Id. ¶ 66.
B. Procedural History
On March 8, 2019, Microsoft filed the instant lawsuit against Hon Hai, which asserts a single cause of action for breach of contract. ECF No. 1. Microsoft seeks (1) specific performance of the provisions requiring Hon Hai to submit complete and accurate Royalty Reports; (2) specific performance of the provision requiring Hon Hai to cooperate with an audit; (3) "Court-supervised discovery of Hon Hai's books and records"; (4) "damages in the form of royalty payments and interest"; and (5) costs, including attorneys' fees. Id.
On May 3, 2019, Hon Hai moved to dismiss or, in the alternative, to strike several portions of the complaint. ECF No. 26. The Court denied Hon Hai's motion on August 16, 2019. ECF No. 46. In response, on August 30, 2019, Hon Hai filed an answer to Microsoft's complaint. ECF No. 51 ("Answer"). Hon Hai's Answer includes 11 affirmative defenses and four counterclaims. Hon Hai pleads the following affirmative defenses: (1) failure to state a claim; (2) "Plaintiff's conduct;" (3) failure to mitigate; (4) breach of the implied covenant of good faith and fair dealing; (5) failure of consideration; (6) frustration of performance; (7) fraudulent inducement; (8) mistake of fact; (9) statute of limitations; (10) mootness; and (11) "setoff." Id. at 5-13. Hon Hai's four counterclaims are (1) breach of the implied covenant of good faith and fair dealing; (2) fraudulent inducement; (3) negligent misrepresentation; and (4) rescission. Id. at 18-22.
On September 20, 2019, Microsoft filed a motion to dismiss Hon Hai's counterclaims and to strike Hon Hai's affirmative defenses. ECF No. 52 ("Mot."). Specifically, Microsoft seeks to dismiss Hon Hai's four counterclaims and to strike Hon Hai's fourth, sixth, seventh, and eighth affirmative defenses. On October 4, 2019, Hon Hai filed its opposition. ECF No. 60 ("Opp."). On October 14, 2019, Microsoft filed its reply. ECF No. 66 ("Reply").
On October 31, 2019, the last day for the parties to amend the pleadings, Hon Hai filed a motion for leave to file a first amended answer and counterclaims. ECF No. 72 ("Mot. to Amend"). Hon Hai seeks to add two new affirmative defenses of "unenforceability" and "patent misuse" and to add additional material to its third, fifth, and eighth affirmative defenses. Id. at 3. Microsoft opposed Hon Hai's motion for leave to file a first amended answer and counterclaims on November 14, 2019, ECF No. 84 ("Opp. to Amend"), and on November 21, 2019, Hon Hai filed a reply, ECF No. 88 ("Reply ISO Amend").
II. LEGAL STANDARD
A. Motion to Dismiss
"A motion to dismiss a counterclaim brought pursuant to Federal Rule of Civil Procedure 12(b)(6) is evaluated under the same standard as a motion to dismiss a plaintiff's complaint." AirWair Int'l Ltd. v. Schultz, 84 F. Supp. 3d 943, 949 (N.D. Cal. 2015); see also Boon Rawd Trading Inter'l v. Paleewong Trading Co., 688 F. Supp. 2d 940, 947 (N.D. Cal. 2010). Pursuant to Federal Rule of Civil Procedure 12(b)(6), a defendant may move to dismiss an action for failure to allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (internal quotation marks omitted). For purposes of ruling on a Rule 12(b)(6) motion, a court "accept[s] factual allegations in the complaint as true and construe[s] the pleadings in the light most favorable to the nonmoving party." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).
The Court, however, need not accept as true allegations contradicted by judicially noticeable facts, see Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000), and it "may look beyond the plaintiff's complaint to matters of public record" without converting the Rule 12(b)(6) motion into a motion for summary judgment, Shaw v. Hahn, 56 F.3d 1128, 1129 n.1 (9th Cir. 1995). Nor must the Court "assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (per curiam) (internal quotation marks omitted). Mere "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004).
B. Rule 9(b)
Claims sounding in fraud are subject to the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure, which requires that a plaintiff alleging fraud "must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b); see Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009). To satisfy the heightened standard under Rule 9(b), the allegations must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). Thus, claims sounding in fraud must allege "an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (per curiam) (internal quotation marks omitted); see also Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) ("Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged." (internal quotation marks omitted)). The plaintiff must also set forth "what is false or misleading about a statement, and why it is false." Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010) (internal quotation marks omitted).
C. Motion to Strike
Federal Rule of Civil Procedure 12(f) permits a court to "strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." A Rule 12(f) motion to strike serves "to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial." SidneyVinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983); see also Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev'd on other grounds, 510 U.S. 517 (1994). A defense may be stricken as insufficient if it fails to give plaintiff "fair notice" of the defense. Wyshak v. City Nat'l Bank, 607 F.2d 824, 827 (9th Cir. 1979); see generally Fed. R. Civ. P. 8. A court may also strike from an answer matter that is immaterial, i.e., "that which has no essential or important relationship to the claim for relief or the defenses being plead," or matter that is impertinent, i.e., that which does not pertain, and is not necessary, to the issues in question. Fantasy, 984 F.2d at 1527. Motions to strike are generally disfavored and "should not be granted unless the matter to be stricken clearly could have no possible bearing on the subject of the litigation" or "unless prejudice would result to the moving party from denial of the motion." Platte Anchor Bolt, Inc. v. IHI, Inc., 352 F. Supp. 2d 1048, 1057 (N.D. Cal. 2004) (citations omitted). "If there is any doubt whether the portion to be stricken might bear on an issue in the litigation, the court should deny the motion." Id. (citations omitted).
"As with motions to dismiss, when ruling on a motion to strike, the Court takes the plaintiff's allegations as true and must liberally construe the complaint in the light most favorable to the plaintiff." Stearns v. Select Comfort Retail Corp., 763 F.Supp.2d 1128, 1140 (N.D. Cal. July 21, 2010).Whether to grant a motion to strike is within the sound discretion of the district court. See Davidson v. Kimberly-Clark Corp., 889 F.3d 956, 963 (9th Cir. 2018).
D. Leave to Amend
Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend "should be freely granted when justice so requires," bearing in mind that "the underlying purpose of Rule 15 . . . [is] to facilitate decision on the merits, rather than on the pleadings or technicalities." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc). Accordingly, leave to amend generally shall be denied only if allowing amendment would unduly prejudice the opposing party, cause undue delay, or be futile, or if the moving party has acted in bad faith. Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir. 2008). At the same time, a court is justified in denying leave to amend when a plaintiff "repeated[ly] fail[s] to cure deficiencies by amendments previously allowed." See Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 892 (9th Cir. 2010). Indeed, a "district court's discretion to deny leave to amend is particularly broad where plaintiff has previously amended the complaint." Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1058 (9th Cir. 2011) (quotation marks omitted).
III. DISCUSSION
Hon Hai's answer includes 11 affirmative defenses and four counterclaims. Answer at 5-13. Microsoft seeks to dismiss all four of Hon Hai's counterclaims and to strike Hon Hai's fourth affirmative defense of breach of the implied covenant of good faith and fair dealing, sixth affirmative defense of frustration of performance, seventh affirmative defense of fraudulent inducement, and eighth affirmative defense of mistake of fact. Mot. at 8-22.
Additionally, Hon Hai filed a motion for leave to file a first amended answer and counterclaims. Mot. to Amend. Hon Hai seeks to add two new affirmative defenses of "unenforceability" and "patent misuse" and to add additional material to its third, fifth, and eighth affirmative defenses. Id. at 3. Microsoft opposes Hon Hai's motion for leave to file a first amended answer and counterclaims. Opp. to Amend.
The Court begins by analyzing whether Hon Hai's counterclaims survive Microsoft's motion to dismiss. The Court then addresses whether to strike Hon Hai's affirmative defenses. Finally, the Court considers whether Hon Hai should be granted leave to file an amended answer and counterclaims.
A. Counterclaims
Hon Hai pleads four counterclaims in its Answer: (1) breach of the implied covenant of good faith and fair dealing; (2) fraudulent inducement; (3) negligent misrepresentation; and (4) rescission. Answer at 18-22. Microsoft contends that all four counterclaims must be dismissed for failure to state a claim. Mot. at 8-18. The Court agrees. The Court begins with Hon Hai's rescission counterclaim and then turns to Hon Hai's counterclaim for breach of the implied covenant of good faith and fair dealing. The Court concludes with Hon Hai's fraudulent inducement and negligent misrepresentation counterclaims.
1. Rescission
In the Answer, Hon Hai pleads that Microsoft induced Hon Hai to enter into the PLA by giving two purportedly false statements on March 26, 2012 and August 9, 2012. Answer ¶ 116. First, on March 26, 2012, one of Microsoft's representatives allegedly told Hon Hai's counsel that "Microsoft's Android royalty rates were well set with other ODMs, that Microsoft did not have flexibility on those rates, and that Microsoft would provide its current pricing schedule to Hon Hai in its next draft of the PLA." Id. Next, Hon Hai claims that on August 9, 2012, one of Microsoft's representatives "represented to Hon Hai, in response to Hon Hai's argument that Microsoft's proposed Android royalty rates were too high, that Microsoft's prior licensees had set the pricing and that Microsoft would not play favorites." Id.
Hon Hai asserts that these statements were false, and that as a result of these alleged misrepresentations, "Hon Hai has suffered and will continue to suffer injury." Id. ¶ 120. On this basis, Hon Hai asserts a cause of action for "rescission" and claims to "hereby give[] notice of its intent to rescind the PLA based on Microsoft's false representations." Id. ¶ 121. In the alternative, Hon Hai asserts that it gave "constructive notice" of its intent to rescind the PLA based on "correspondence between the parties in 2017-2019 and the fact that Hon Hai did not submit royalty reports to Microsoft pursuant to the PLA for the period 2015 to the present." Id.
Microsoft contends that Hon Hai's cause of action for "rescission" should be dismissed with prejudice. The Court agrees. "Rescission is not a cause of action, but a common-law remedy on the contract." Direct Techs., LLC v. Elec Arts, Inc., 525 Fed. App'x 560, 562 (9th Cir. 2013). "California courts no longer 'grant' rescission, but merely recognize that the underlying facts have been established and grant consistent relief." Id. As the Ninth Circuit has recognized, "[t]he equitable action to have a rescission adjudged was abolished in 1961, and the statutes now deal solely with unilateral rescission by notice and offer to restore the consideration." Tzu Chien Chen v. Thomas & Betts Corp., 268 Fed. App'x 508, 510 (9th Cir. 2008) (emphasis in original) (quotation marks omitted); see also Wong v. Stoler, 237 Cal. App. 4th 1375, 1385 (2015) ("Before 1961, California recognized two methods by which a party to a contract could obtain rescissionary relief: (1) unilateral rescission, followed by an action to enforce the out-of-court rescission; or (2) an action for judicial rescission in which specific judicial relief is granted. In 1961, however, the Legislature abolished the action to obtain judicial rescission and left only an action to obtain relief based on a party effecting rescission." (citation omitted)); Invisible Dot, Inc. v. DeDecker, 2019 WL 6520522, at *4 (C.D. Cal. July 29, 2019) ("However, California has abolished the cause of action for a court-ordered rescission. The current statutory scheme allows only for an action to enforce rescission and obtain relief accordingly." (citing Runyan v. Pac. Air Indus., Inc., 2 Cal. 3d 304, 313-15 (1970))).
Put simply, "[r]escission is not a cause of action; it is a remedy." Nakash v. Superior Court, 196 Cal. App. 3d 59, 70 (1987); Shetty v. Am.'s Wholesale Lender, 2019 WL 1330317, at *4 (N.D. Cal. Mar. 25, 2019) ("Under California law, rescission is not a cause of action; it is a remedy." (quotation marks omitted)); Moreno v. Citibank, N.A., 2010 WL 1038222, at *4 (N.D. Cal. Mar. 19, 2010) ("However, rescission is not a freestanding cause of action, but rather relief that may be granted as a result of unlawful conduct.").
Accordingly, the Court GRANTS Microsoft's motion to dismiss Hon Hai's fourth cause of action for rescission with prejudice. Moreno, 2010 WL 1038222, at *4 ("Because rescission is not a cause of action, the Court dismisses this claim with prejudice."); see also Shetty, 2019 WL 1330317, at *4 (dismissing rescission cause of action with prejudice). Hon Hai, however, is not precluded from seeking rescission as a remedy in a future pleading. See Moreno, 2010 WL 1038222, at *4 ("If Plaintiff intends to seek rescission of the [contract], [it] must state a claim for which rescission could be granted and plead for such relief as a remedy for that claim.").
2. Breach of the Implied Covenant of Good Faith and Fair Dealing
The Court now turns to Hon Hai's counterclaim for breach of the implied covenant of good faith and fair dealing. Under California law, the elements of a cause of action for breach of the covenant of good faith and fair dealing are: "(1) the parties entered into a contract; (2) the plaintiff fulfilled his obligations under the contract [or was excused from nonperformance]; (3) any conditions precedent to the defendant's performance occurred; (4) the defendant unfairly interfered with the plaintiff's rights to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant's conduct." Rosenfeld v. JPMorgan Chase Bank, N.A., 732 F.Supp.2d 952, 968 (N.D. Cal. 2010) (citations omitted); see also Berkeley v. Wells Fargo Bank, 2015 WL 6126815, at *4 (N.D. Cal. Oct. 19, 2015) ("To state a claim for breach of the implied covenant [of good faith and fair dealing], a plaintiff must allege performance or excuse for nonperformance under the contract." (internal alterations omitted)); Enuke v. Am.'s Wholesale Lender, 2011 WL 11651341, at *9 (C.D. Cal. Dec. 18, 2011) ("Thus, to state a claim for a breach of the implied covenant of good faith and fair dealing, a plaintiff must allege performance or excuse for nonperformance under the contract.").
Hon Hai alleges that Microsoft breached the implied covenant of good faith and fair dealing by "failing to take reasonable and expected steps to get other manufacturers and brand name sellers of Android products to enter into comparable patent license agreements with Microsoft with respect to such products." Answer ¶ 100; id. ¶ 43 ("During the PLA negotiations, to address Hon Hai's concerns . . ., Microsoft assured Hon Hai that after the PLA was signed it would continue its efforts to get other Android manufacturers and brand name companies (including in China) to sign Android license agreements."). Hon Hai claims that its "willingness to enter into the PLA[] was premised on obtaining these assurances" because "Hon Hai and its subsidiaries lacked the leverage to get most of their brand name customers . . . to bear the cost of the royalties demanded by Microsoft, particularly if Hon Hai's competitors were not subject to comparable royalty obligations." Id. ¶¶ 39, 73. However, "once the PLA [was] signed, Microsoft sat on its hands and reneged on its assurances despite Hon Ha's pleas." Id. ¶ 73. In effect, Hon Hai alleges that an implied covenant of good faith and fair dealing required Microsoft to impose royalty fees on Hon Hai's competitors in order to lessen Hon Hai's own royalty payments to Microsoft.
Microsoft responds that Hon Hai failed to sufficiently allege a counterclaim for breach of the implied covenant of good faith and fair dealing. Specifically, Microsoft argues that Hon Hai did not adequately plead that Hon Hai performed or was excused from nonperformance (the second element), that Microsoft unfairly interfered with Hon Hai's rights to receive the benefits of the PLA (the fourth element), or that Hon Hai was harmed by Microsoft's conduct and suffered damages (the fifth element). The Court agrees that Hon Hai failed to adequately plead that Microsoft unfairly interfered with Hon Hai's rights to receive the benefits of the PLA and does not reach Microsoft's other arguments.
Under California law, "[t]he covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made." Guz v. Bechtel Nat. Inc., 24 Cal. 4th 317, 349 (2000) (emphasis in original). The implied covenant of good faith and fair dealing requires each party to "do everything the contract presupposes [the party] will do to accomplish [the agreement's] purpose." Pasadena Live v. City of Pasadena, 114 Cal. App. 4th 1089, 1093 (2004) (quotation marks omitted). At the same time, the implied covenant of good faith and fair dealing "cannot substantively alter [the] terms [of the contract]" or "impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement. Guz, 24 Cal. 4th at 327. "The covenant thus cannot be endowed with an existence independent of its contractual underpinnings," id., "is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract," Pasadena Live, 114 Cal. App. 4th at 1094 (quotation marks omitted).
Openshaw v. FedEx Ground Package System, Inc., 576 Fed. App'x 685 (9th Cir. 2014), is particularly instructive to the instant case. In Openshaw, the plaintiff sued FedEx for terminating an operating agreement and alleged claims for breach of contract and breach of the implied covenant of good faith and fair dealing. A jury found in favor of Openshaw only on his claim for breach of the implied covenant of good faith and fair dealing and awarded damages. The district court denied FedEx's Rule 50(b) motion for judgment notwithstanding the verdict, but on appeal, the Ninth Circuit reversed and remanded with instructions to enter judgment for FedEx. Id. at 686-87.
Among other things, Openshaw argued on appeal that FedEx breached the implied covenant of good faith and fair dealing by "not offering Openshaw a spare truck when he needed it, not telling Openshaw about a spare driver when he needed one, and not telling Openshaw in advance how many packages he would have to deliver." Id. at 688. The Ninth Circuit ruled against Openshaw because "[t]he covenant of good faith and fair dealing protects against one party interfering with another party's contract rights; it does not obligate a party to help another party perform that other's contract obligations." Id. Because "the Agreement explicitly obligated Openshaw to provide trucks and drivers and to operate at a national standard," "[a] good faith and fair dealing obligation [could not] be read into the Agreement to impose a substantive duty on FedEx to help Openshaw provide trucks and drivers or to meet delivery standards." Id. "[T]hat obligation was placed solely on Openshaw by the specific terms of the Agreement." Id.
The logic of Openshaw applies here with equal force. At bottom, Hon Hai's argument is that an implied covenant of good faith and fair dealing required Microsoft to license Hon Hai's competitors in order to help Hon Hai perform on its contractually obligated royalty payments to Microsoft. But the PLA specifically obligated Hon Hai to make royalty payments for products containing Microsoft's patents (subject to limited exceptions) and nowhere required Microsoft to license any of Hon Hai's competitors. In other words, Hon Hai's counterclaim for breach of the implied covenant of good faith and fair dealing would effectively write in a requirement that Microsoft help Hon Hai perform its contract obligations. Pasadena Live, 114 Cal. App. 4th at 1094 ("The implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract." (quotation marks omitted)). Like the Ninth Circuit, the Court will not read into the PLA an obligation "to impose a substantive duty on [Microsoft] to help [Hon Hai]" meet its payment obligations when "[t]hat obligation was placed solely on [Hon Hai] by the specific terms of the Agreement." Openshaw, 576 Fed. App'x at 688. Doing so would contravene the California Supreme Court's express admonition that the implied covenant of good faith and fair dealing "cannot substantively alter [the] terms [of the contract]" or "impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement. Guz, 24 Cal. 4th at 327.
Accordingly, the Court GRANTS Microsoft's motion to dismiss Hon Hai's counterclaim for breach of the implied covenant of good faith and fair dealing. Nonetheless, because granting Hon Hai an additional opportunity to amend its counterclaim for breach of the implied covenant of good faith and fair dealing would not be futile, cause undue delay, or unduly prejudice Microsoft, and Hon Hai has not acted in bad faith, the Court GRANTS Hon Hai leave to amend. See Leadsinger, Inc., 512 F.3d at 532.
3. Fraudulent Inducement and Negligent Misrepresentation
The Court concludes its analysis of Hon Hai's counterclaims by addressing Hon Hai's fraudulent inducement and negligent misrepresentation causes of actions. The Court notes that Rule 9(b)'s heightened pleading standard applies to both Hon Hai's fraudulent inducement and negligent misrepresentation causes of actions. See MegaFon PJSC v. Hewlett Packard Enter. Co., 2019 WL 1130481, at *5 (N.D. Cal. Mar. 12, 2019) (applying Rule 9(b) to fraudulent inducement and negligent misrepresentation causes of action); Gilmore v. Wells Fargo Bank N.A., 75 F. Supp. 3d 1255, 1269-70 (N.D. Cal. 2014) ("[N]egligent misrepresentation is a species of fraud, and, hence, must be [pled] in accordance with Rule 9(b)." (collecting cases)). Rule 9(b)'s heightened pleading standard also applies to allegations involving justifiable reliance. Tabler v. Panera LLC, 2019 WL 5579529, at *10 n.6 (N.D. Cal. Oct. 29, 2019) ("Rule 9(b), not Rule 8(a), sets forth the pleading standard that a plaintiff's allegations of reliance must satisfy in fraud cases." (citing In re Volkswagen "Clean Diesel" Mktg., Sales Practices, and Prods. Liab. Litig., 349 F. Supp. 3d 881, 917 (N.D. Cal. 2018))).
"[F]raudulent inducement . . . has the same elements as fraud under California law." Romero v. San Pedro Forklift, Inc., 266 Fed. App'x 552, 556 n.2 (9th Cir. 2008) (citing Lazar v. Superior Court, 12 Cal. 4th 631 (1996)). Those elements are (1) a misrepresentation; (2) knowledge of falsity; (3) intent to induce reliance; (4) actual and justifiable reliance; and (5) resulting damage." Lazar, 12 Cal. 4th at 638; Chapman v. Skype Inc., 220 Cal. App. 4th 217, 230-231 (2013). Similarly, "[t]he essential elements of a count for negligent misrepresentation are the same except that it does not require knowledge of falsity but instead requires a misrepresentation of fact by a person who has no reasonable grounds for believing it to be true." Chapman, 220 Cal. App. 4th at 231; GemCap Lending I, LLC v. Quarles & Brady, LLP, 787 Fed. App'x 369, 372 (9th Cir. 2019) ("The elements of negligent misrepresentation are the same as those for intentional misrepresentation, except that a lower standard than knowledge of falsity applies.").
Hon Hai alleges that Microsoft made a pair of false representations of fact that induced Hon Hai to "accept Microsoft's proposed royalty rates and enter into the PLA containing those rates." Answer ¶¶ 105, 111. Those alleged misrepresentations are the same ones that Hon Hai alleged in its rescission cause of action.
Specifically, Hon Hai asserts that on March 26, 2012, during contractual negotiations, one of Microsoft's representatives allegedly told Hon Hai's counsel that "Microsoft's Android royalty rates were well set with other ODMs, that Microsoft did not have flexibility on those rates, and that Microsoft would provide its current pricing schedule to Hon Hai in its next draft of the PLA." Id. ¶¶ 103(a), 109(a). Second, Hon Hai claims that on August 9, 2012—again, during contractual negotiations—one of Microsoft's representatives "represented to Hon Hai, in response to Hon Hai's argument that Microsoft's proposed Android royalty rates were too high, that Microsoft's prior licensees had set the pricing and that Microsoft would not play favorites." Id. ¶¶ 103(b), 109(b). Hon Hai alleges that "it did not know Microsoft's representations were false and relied on them in deciding not to make further attempts to negotiate the royalty rates downward and to enter into the PLA containing those rates." Id. ¶¶ 106, 112. Accordingly, Hon Hai claims that Microsoft is liable for fraudulent inducement and negligent misrepresentation.
Microsoft challenges Hon Hai's allegations on two grounds. First, Microsoft contends that Hon Hai has not adequately pled any misstatements by Microsoft because the alleged statements are non-actionable "puffery." Mot. at 14-16. Second, Microsoft argues that Hon Hai failed to adequately allege justifiable reliance on any supposed misrepresentation. Mot. at 16-18. The Court agrees that Hon Hai failed to adequately allege justifiable reliance. As a result, the Court does not reach Hon Hai's puffery argument.
To properly plead either a fraudulent inducement or negligent misrepresentation cause of action, a plaintiff must establish "'justifiable' reliance, i.e., circumstances were such to make it reasonable for the plaintiff to accept the defendant's statements without an independent inquiry or investigation." West v. JPMorgan Chase Bank, N.A., 214 Cal. App. 4th 780, 794 (2013) (quotation marks and internal alterations omitted) (emphasis in original). Put another way, justifiable reliance extends "beyond the plaintiff's subjective reliance to an objective requirement that a reasonable person in the plaintiff's shoes would have been justified in relying on the misrepresentation." Dix v. Nova Benefit Plans, LLC, 2015 WL 12859221, at *5 (C.D. Cal. Apr. 28, 2015) (citing Beckwith v. Dahl, 205 Cal. App. 4th 1039, 1066-67 (2012)). "The reasonableness of the plaintiff's reliance is judged by reference to the plaintiff's knowledge and experience." West, 214 Cal. App. 4th at 794 (quotation marks omitted).
First, Hon Hai's allegations that it justifiably relied on Microsoft's statements that royalty rates were non-negotiable fail because Hon Hai concedes that Hon Hai obtained lower prices in subsequent negotiations. Hon Hai alleges that on March 26, 2012, one of Microsoft's representatives told Hon Hai's counsel that "Microsoft's Android royalty rates were well set with other ODMs, that Microsoft did not have flexibility on those rates." Answer ¶¶ 103(a), 109(a). Hon Hai claims that Hon Hai "relied on" Microsoft's representation that royalty rates were non-negotiable "in deciding not to make further attempts to negotiate the royalty rates downward and to enter into the PLA containing those rates." Id. ¶ 106, 112.
The problem with this argument is that Hon Hai acknowledges that [Redacted] Opp. at 20. Hon Hai's only response is that "[w]ithout a full understanding of the circumstances, it cannot be assumed that this small reduction in rates reflects Hon Hai's ability or Microsoft's willingness to negotiate the rates downward." Id. This contention fails because Hon Hai explicitly grounds its fraudulent inducement and negligent misrepresentation claims on the allegation that Microsoft falsely represented that it "did not have flexibility on [the royalty] rates." Answer ¶ 103(a), 109(a). Hon Hai's Answer does not provide allegations that provide the Court a "full understanding of the circumstances." Opp. at 20. Indeed, perhaps it may be true that "the evidence will show that Microsoft implemented the small rate change as a token gesture when it imposed a much more onerous PLA provision on Hon Hai in early 2013." See id. n.17. But as pled, the Answer contains no such allegations, and a party "cannot amend the complaint through briefing." Diamond S.J. Enter., Inc. v. City of San Jose, 2018 WL 5619746 (N.D. Cal. Oct. 29, 2018). "Allegations raised for the first time in the briefing are not considered in determining the sufficiency of the complaint." Id. (quotation marks omitted). As a result, the Court considers only the substance of Hon Hai's Answer, and the Answer provides no allegations that explain why Hon Hai could have justifiably relied on Microsoft's statements that the royalty rates were non- negotiable when Hon Hai itself acknowledges that the final version of the PLA contained lower royalty rates for some products. The absence of such allegations militates against concluding that Hon Hai's reliance was reasonable and justified.
Second, Hon Hai's allegations of justifiable reliance fail because Hon Hai concedes that it asked for a most-favored-nation provision in previous drafts of the PLA. Traino Decl. Ex. A at 9 (deleted Section 4.2.2); Opp. at 21. The requested most-favored-nation provision would have read as follows:
MICROSOFT and its Affiliates shall treat Hon Hai as its most favored EMS Company licensee. MICROSOFT represents, warrants and covenants to Hon Hai that the net price for each category of Covered Product shall be as low or lower , after taking into account all credits, discounts and other offsets, than the net price MICROSOFT offers or provides at any time during the Term to any EMS Company for licensing of substantially similar types of covered products. If MICROSOFT offers or provides to any other EMS Company licensing net prices or terms that cause the representation, warranty or covenant in this section to be untrue, then MICROSOFT shall notify Hon Hai of, and offer to Hon Hai, the same aggregate better net pricing and terms. MICROSOFT shall, upon Hon Hai's acceptance of the better net pricing and terms, promptly credit or reimburse Hon Hai, at Hon Hai's option, any amounts Hon Hai paid in excess of the better net pricing and terms after they were offered or provided to any other EMS Company. An officer of MICROSOFT shall annually certify to Hon Hai in writing that MICROSOFT is in compliance with this section.Traino Decl. Ex A at 9 (deleted Section 4.2.2. (emphasis added)). Such a provision would have guaranteed that Hon Hai would get the lowest net price offered or provided by Microsoft to another company during the entire term of the license. Id. Nonetheless, Hon Hai expressly admits that Microsoft did not agree to a most-favored-nation provision, and no such provision appears in the final draft of the PLA. Answer ¶ 65. This fact is important because Hon Hai alleges that the August 9, 2012 misrepresentation that induced Hon Hai to enter into the PLA involved a statement that "Microsoft would not play favorites" in pricing royalty fees. Id. ¶¶ 103(b), 109(b). That Microsoft expressly denied Hon Hai's request to include a most-favored-nation provision into the PLA—which would have guaranteed that "Microsoft would not play favorites" in royalty pricing—is another factor that weighs against concluding that Hon Hai's justifiably relied on Microsoft's alleged misrepresentations involving non-differential royalty fees.
Third, that the PLA contains an integration clause also weighs against finding reasonable reliance. The integration clause in the PLA states that the PLA as written "constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior and contemporaneous agreements, whether written or oral." ECF No. 19-4 § 7.3.
Hon Hai responds that the Court should not consider the integration clause because "it is well-established that [an integration clause does] not defeat a fraud claim." Opp. at 21 n.18. Hon Hai is correct that under California law, a general integration clause does not make reliance on oral statements automatically unreasonable. Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 32 Cal. App. 4th 985, 987 (1995) ("The primary issue is whether a contract clause which states that the parties relied only on representations contained in the contract establishes, as a matter of law, that a party claiming fraud did not reasonably rely on representations not contained in the contract. We hold that such a per se rule is inconsistent with California law and reverse the summary judgment.").
Nonetheless, even if an integration clause does not make reliance on oral statements automatically unreasonable, "certainly [courts] can take such a clause's existence into account in determining whether an allegation of justifiable reliance" is adequately pled. Stretch Lab Franchise, LLC v. Stretch Lab, LLC, 2019 WL 2279388, at *4 (C.D. Cal. Mar. 4, 2019); United Guar. Mortg. Indem. Co. v. Countrywide Fin. Corp., 660 F.Supp.2d 1163, 1176 n.15 (C.D. Cal. Oct. 5, 2009) ("[A]n integration clause may be relevant to reasonable reliance . . . ."). The Court notes that the inclusion of an integration clause in the PLA is not determinative or conclusive in any regard. However, the fact of the matter is that the instant case involves sophisticated corporate entities who were represented by counsel and negotiated the PLA over the course of many months. These entities agreed to the PLA with an integration clause that stated that the PLA as written "constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior and contemporaneous agreements, whether written or oral." ECF No. 19-4 § 7.3. Though not determinative, the presence of that integration clause is certainly relevant to the Court's justifiable reliance analysis and militates in favor of finding that Hon Hai did not justifiably rely on Microsoft's alleged misrepresentations.
Finally, Hon Hai's reliance on Microsoft's alleged misrepresentations was unjustified because courts have consistently held that "[w]here a party is represented by counsel, or where the alleged misrepresentation was made by an adversary during the course of negotiations, . . . reliance is unjustifiable." Borg v. Principal Life Ins. Co., 2008 WL 11453724 (N.D. Cal. July 24, 2008). Courts may find reliance unjustified as a matter of law even though the reasonableness of a party's reliance is ordinarily a question of fact. Hadland v. NN Inv'rs Life Ins. Co., 24 Cal. App. 4th 1578, 1586 (1994) ("[A]lthough the issue of justifiable reliance ordinarily presents a question of fact, there are cases in which it may be decided as a matter of law." (citations omitted)). This is especially true where sophisticated parties represented by counsel allegedly rely on misrepresentations made by an adversary during the negotiation of a contract. Scognamillo v. Credit Suisse First Bos. LLC, 2005 WL 2045807, at *7 (N.D. Cal. Aug. 25, 2005), aff'd sub nom. Scognamillo v. Credit Suisse First Bos., 254 Fed. App'x 669 (9th Cir. 2007) (granting motion to dismiss fraud and negligent misrepresentation claims because as a matter of law, Plaintiffs did not allege facts demonstrating that reliance was justified); N. California Collection Servs. Inc. of Sacramento v. Cent. Sierra Const., Inc., 2008 WL 3876266, at *5 (E.D. Cal. Aug. 20, 2008), aff'd sub nom. N. Cal. Collection Servs. Inc. of Sacramento v. Cent. Sierra Const., Inc., 370 Fed. App'x 774 (9th Cir. 2010) (holding that "[a]lthough reasonableness of a party's reliance is usually a question of fact," reliance on the representations in that case "was unreasonable as a matter of law").
Here, Microsoft's alleged misrepresentations took place on March 26, 2012 and August 9, 2012, in the middle of negotiations for the PLA. According to Hon Hai, these representations "induc[ed] Hon Hai to accept Microsoft's proposed royalty rates and enter into the PLA containing those rates." Answer ¶¶ 105, 111. Hon Hai entered into the PLA with Microsoft on April 1, 2013, many months after both alleged misstatements were made. Id. ¶ 16.
Furthermore, Hon Hai acknowledges that during at least one of the two negotiation sessions, Hon Hai was represented by "outside counsel" from "Haynes & Boone, LLP" and that Microsoft's representative made the alleged misrepresentation directly to Hon Hai's outside counsel. Id. ¶¶ 103(a), 109(a). In any event, throughout the PLA contract negotiations, Hon Hai was "represented by counsel." Id. ¶ 16. Additionally, Hon Hai also acknowledges that it is a sophisticated Taiwanese corporation engaged in electronics manufacturing with direct and indirect subsidiaries involved in the manufacture, assembly, and sale of electronic equipment and products such as computers and communication devices. Id. ¶¶ 3, 15.
These facts—i.e., Hon Hai's knowledge and experience as a sophisticated corporation in the electronics industry, the fact that Hon Hai was represented by experienced outside counsel during negotiations, and the fact that any alleged misrepresentations were made during negotiations—indicate that Hon Hai's reliance was unjustified and unreasonable. Borg, 2008 WL 11453724 ("Where a party is represented by counsel, or where the alleged misrepresentation was made by an adversary during the course of negotiations, . . . reliance is unjustifiable."); Wilhelm v. Pray, Price, Williams & Russell, 186 Cal. App. 3d 1324, 1332 (1986) ("[I]t would not be 'reasonable' for [plaintiff] to accept [defense counsel's] representations as an adversary without an independent inquiry." (emphasis in original)); Barkett v. Sentosa Properties LLC, 2015 WL 3756348, at *7 (E.D. Cal. June 16, 2015), aff'd, 692 Fed. App'x 411 (9th Cir. 2017) ("This Court agrees with Defendants and those courts that have held that sophisticated parties represented by counsel are unjustified relying on misrepresentations made during the negotiations process."); Signal Hill Serv., Inc. v. Macquarie Bank Ltd., 2011 WL 13220305, at *13 (C.D. Cal. June 29, 2011) ("While the transactions at issue were complicated, certain of the purported misrepresentations and/or omissions should not have misled [plaintiff] given the background of the officers and the hedge transactions in which it had previously engaged."); Facebook, Inc. v. ConnectU, Inc., 2008 WL 8820476, at *5 (N.D. Cal. June 25, 2008), aff'd sub nom. Facebook, Inc. v. Pac. Nw. Software, Inc., 640 F.3d 1034 (9th Cir. 2011) ("Where a party is represented by counsel, or where the alleged misrepresentation was made by an adversary during the course of negotiations, courts have held that reliance is unjustifiable."); Scognamillo, 2005 WL 2045807, at *7 ("Plaintiffs cannot demonstrate that, in the absence of a fiduciary relationship, reliance on statements made by individuals on the other side of a business transaction would have been justified in light of Plaintiffs' knowledge and experience."). Therefore, these facts also weigh in favor of holding that Hon Hai was not justified in relying on Microsoft's alleged misrepresentations made on March 26, 2012 and August 9, 2012.
Accordingly, the Court concludes that Hon Hai did not adequately allege that Hon Hai justifiably relied on Microsoft's alleged March 26, 2012 and August 9, 2012 misrepresentations. The Court therefore GRANTS Microsoft's motion to dismiss Hon Hai's fraudulent inducement and negligent misrepresentation claims. Nonetheless, because granting Hon Hai an additional opportunity to amend its claims for fraudulent inducement and negligent misrepresentation would not be futile, cause undue delay, or unduly prejudice Microsoft, and Hon Hai has not acted in bad faith, the Court GRANTS Hon Hai leave to amend. See Leadsinger, Inc., 512 F.3d at 532.
B. Affirmative Defenses
Federal Rule of Civil Procedure 8(b)(1) requires a party to "state in short and plain terms its defenses to each claim asserted against it." Rule 8(c) similarly requires that a party "affirmatively state any avoidance or affirmative defense." The United States Supreme Court in Twombly, 550 U.S. 544, and Iqbal, 556 U.S. 662, set a heightened "plausibility" pleading standard for complaints. This Court, as well as the vast majority of district courts, has held that the heightened pleading standard for complaints articulated in Twombly and Iqbal applies to affirmative defenses. See Perez v. Gordon & Wong Law Group, P.C., 2012 WL 1029425, at *8 (N.D. Cal. March 26, 2012) (collecting cases).
"This standard 'serve[s] to weed out the boilerplate listing of affirmative defenses which is commonplace in most defendants' pleadings where many of the defenses alleged are irrelevant to the claims asserted.'" Id. (quoting Barnes v. AT&T Pension Benefit Plan-Nonbargained Program, 718 F. Supp. 2d 1167, 1172 (N.D. Cal. 2010)). "This standard is also consistent with Iqbal's admonition that fair notice pleading under Rule 8 is not intended to give parties free license to engage in unfounded fishing expeditions on matters for which they bear the burden of proof at trial." Id. (citing Iqbal, 556 U.S. at 678-79).
Therefore, "[w]hile a defense need not include extensive factual allegations in order to give fair notice, bare statements reciting mere legal conclusions may not be sufficient." Id. (internal quotation marks omitted). Additionally, courts may strike affirmative defenses that are redundant of insufficiently pleaded counterclaims on the basis that those affirmative defenses are insufficient as a matter of law. Int'l Test Sols., Inc. v. Mipox Int'l Corp., 2017 WL 2118314, at *1, 8 (N.D. Cal. May 16, 2017) (dismissing counterclaim for unenforceability and striking affirmative defense of unenforceability as insufficient as a matter of law); Fed. R. Civ. P. 12(f) (permitting courts to "strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.").
The Court granted Microsoft's motion to dismiss Hon Hai's counterclaims for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, negligent misrepresentation, and rescission. Hon Hai's affirmative defenses include breach of the implied covenant of good faith and fair dealing (fourth affirmative defense), frustration of performance (sixth affirmative defense), fraudulent inducement (seventh affirmative defense), and mistake of fact (eighth affirmative defense). Microsoft moves to strike these four affirmative defenses on the basis that they rely upon the same legal and factual bases as Hon Hai's insufficiently alleged counterclaims.
The Court GRANTS Microsoft's motion to strike as to the fourth affirmative defense of breach of the implied covenant of good faith and fair dealing and the seventh affirmative defense of fraudulent inducement. These two affirmative defenses are duplicative of Hon Hai's counterclaims for breach of the implied covenant of good faith and fair dealing and fraudulent inducement and are insufficiently alleged for the reasons discussed. Int'l Test Sols., Inc., 2017 WL 2118314, at *1, 8 (dismissing counterclaim for unenforceability and striking affirmative defense of unenforceability as insufficient as a matter of law). Nonetheless, because granting Hon Hai an additional opportunity to amend these affirmative defenses would not be futile, cause undue delay, or unduly prejudice Microsoft, and Hon Hai has not acted in bad faith, the Court GRANTS Hon Hai leave to amend these affirmative defenses. See Leadsinger, Inc., 512 F.3d at 532.
As to the sixth affirmative defense of frustration of performance and the eighth affirmative defense of mistake of fact, the Court DENIES Microsoft's motion to strike. Microsoft has not explained whether these two affirmative defenses have the same elements or how they suffer from the same legal deficiencies as Hon Hai's counterclaims. Mot. at 21. Microsoft does argue that Hon Hai's eighth affirmative defense of mistake of fact fails because Hon Hai's fraudulent inducement and negligent misrepresentation claims allege that Hon Hai "well understood what Microsoft was saying and relied upon it." Id. However, this is not enough to strike Hon Hai's affirmative defense of mistake of fact, as "[a] party may state as many separate claims or defenses as it has, regardless of consistency." Fed. R. Civ. P. 8(b)(3); see also Fed. R. Civ. P. 8(b)(2) ("A party may set out 2 or more statements of a claim or defense alternatively or hypothetically, either in a single count or defense or in separate ones."). As a result, the Court DENIES Microsoft's motion to strike Hon Hai's sixth affirmative defense of frustration of performance and the eighth affirmative defense of mistake of fact.
C. Motion to Amend the Answer and Counterclaims
Finally, the Court addresses Hon Hai's motion to amend the answer and counterclaims. Hon Hai seeks leave to plead additional allegations in support of its third affirmative defense of failure to mitigate, its fifth affirmative defense of failure of consideration, and its eighth affirmative defense of mistake of fact. Hon Hai also requests leave to add two additional affirmative defenses of unenforceability by reason of ambiguity and patent misuse.
Pursuant to Federal Rule of Civil Procedure 15(a), a party may amend its pleading once as a matter of course within 21 days of serving it. Fed. R. Civ. P. 15(a)(1). After that initial period has passed, amendment is permitted only with the opposing party's written consent or leave of Court. Fed. R. Civ. P 15(a)(2). Rule 15 instructs that "[t]he court should freely give leave when justice so requires." Id. Although this rule "should be interpreted with extreme liberality, leave to amend is not to be granted automatically." Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990) (internal citation and quotation marks omitted). The Court considers five factors in assessing a motion for leave to amend: "bad faith, undue delay, prejudice to the opposing party, futility of amendment, and whether the plaintiff has previously amended the complaint." Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004). Not all of the factors merit equal weight; it is the consideration of prejudice to the opposing party that carries the greatest weight. Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). "Absent prejudice or a strong showing of any of the remaining [] factors, there exists a presumption under Rule 15(a) in favor of granting leave to amend." Id. The party opposing amendment bears the burden of showing why leave to amend should not be granted. Genentech, Inc. v. Abbott Labs., 127 F.R.D. 529, 530-31 (N.D. Cal. 1989); DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987) (same).
Microsoft does not argue that bad faith, undue delay, prejudice, or previous amendment weigh against granting leave to amend. Opp. to Amend at 4-9. Indeed, there are no allegations that Hon Hai is acting in bad faith. Nor did Hon Hai's motion for leave to amend cause undue delay, as Hon Hai filed its motion for leave to amend on October 31, 2019, the last day to amend the pleadings. ECF No. 36 (Case Management Order). Additionally, Hon Hai has not previously amended its Answer, which also weighs in favor of granting the motion for leave to amend.
Rather, Microsoft contends that Hon Hai's proposed amendments are futile. Id. In exceptional circumstances, "futility of amendment can, by itself, justify the denial of a motion for leave to amend." Green v. Bimbo Bakeries USA, 2014 WL 12641598, at *1 (N.D. Cal. July 7, 2014) (quoting Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995)). "Ordinarily, however, 'courts will defer consideration of challenges to the merits of a proposed amended pleading until after leave to amend is granted and the amended pleading is filed.'" Snap! Mobile, Inc. v. Croghan, 2019 WL 3503071, at *4 (N.D. Cal. Aug. 1, 2019) (quoting Netbula, LLC v. Distinct Corp., 212 F.R.D. 534, 539 (N.D. Cal. 2003)). This is because a proposed amendment is futile for the purposes of a motion for leave to amend "only if no set of facts can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense," Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988), and "[s]uch arguments are better left for full briefing on a motion to dismiss," CSPC Dophen Corp. v. Zhixiang Hu, 2019 WL 5960137, at *6 (E.D. Cal. Nov. 13, 2019) (quotation marks omitted). In other words, in order to deny a motion for leave to amend on the basis of futility alone, a court must find that amendment is "necessarily futile." Bimbo Bakeries USA, 2014 WL 12641598, at *3; Defazio v. Hollister, Inc., 2008 WL 2825045, at *3 (E.D. Cal. July 21, 2008) ("Absent a clear indication that plaintiffs have no viable theory of recovery, the court is not prepared to deem plaintiffs' proposed Fifth Amended Complaint futile. In so finding, the court does not mean to suggest that plaintiffs' new allegations are, as stated in their proposed Fifth Amended Complaint, necessarily pled in a manner sufficient to withstand a motion to dismiss.").
The Court first analyzes whether Microsoft has met its heavy burden of proving futility as to Hon Hai's new affirmative defenses of unenforceability by reason of ambiguity and patent misuse. The Court will then assess whether Microsoft has established that Hon Hai's additional allegations in support of its third affirmative defense of failure to mitigate, its fifth affirmative defense of failure of consideration, and its eighth affirmative defense of mistake of fact are futile.
1. Hon Hai's New Affirmative Defense of Unenforceability By Reason of Ambiguity
First, Hon Hai seeks to amend the answer to include a new affirmative defense of unenforceability by reason of ambiguity. Mot. to Amend at 2. Under California law, "[a] proposal cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain. The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy." Bowers v. Raymond J. Lucia Co., Inc., 206 Cal. App. 4th 724, 734 (2012) (quotation marks omitted); see also Ladas v. Cal. State Auto. Ass'n, 19 Cal. App. 4th 761, 770 (1993) ("Where a contract is so uncertain and indefinite that the intention of the parties in material particulars cannot be ascertained, the contract is void and unenforceable."). "If, by contract, a supposed 'contract' does not provide a basis for determining what obligations the parties have agreed to, and hence does not make possible a determination of whether those agreed obligations have been breached, there is no contract." Bowers, 206 Cal. App. 4th at 734 (quotation marks omitted). "Whether a contract is certain enough to be enforced is a question of law for the court." Patel v. Liebermensch, 45 Cal. 4th 344, 348 n.1 (2008).
Microsoft argues that it is "plainly" "feasible to interpret the License Agreement." Opp. to Amend at 4. The Court is sympathetic to Microsoft's argument. California "law does not favor but leans against the destruction of contracts because of uncertainty; and it will, if feasible, so construe agreements as to carry into effect the reasonable intentions of the parties if they can be ascertained." Patel, 45 Cal. 4th at 348 (quotation marks omitted). Unfortunately, in order to deny a motion for leave to amend on the basis of futility alone, there must be "no set of facts [that] can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense." Miller, 845 F.2d at 214. At this stage, the Court cannot say that Microsoft carried its heavy burden to establish that leave to amend should be denied on the basis of futility alone, especially when Microsoft concedes that bad faith, undue delay, prejudice, or previous amendment do not weigh against granting leave to amend. "In so finding, the [C]ourt does not mean to suggest that [Hon Hai's] new allegations are, as stated in [the proposed amended answer], necessarily pled in a manner sufficient to withstand a motion to dismiss." See Defazio, 2008 WL 2825045, at *3. Rather, Microsoft has simply failed to establish at this interim stage that adding an affirmative defense of unenforceability by reason of ambiguity would be "necessarily futile." Bimbo Bakeries USA, 2014 WL 12641598, at *3. Microsoft is of course free to move to dismiss or strike this affirmative defense at a later stage. The Court therefore GRANTS Hon Hai's motion for leave to add an affirmative defense of unenforceability by reason of ambiguity.
2. Hon Hai's New Affirmative Defense of Patent Misuse
Second, Hon Hai seeks to amend the answer to include a new affirmative defense of patent misuse. Mot. to Amend at 2. Patent misuse is a "patentee's act of impermissibly broadening the physical or temporal scope of the patent grant with anticompetitive effect." Princo Corp. v. Int'l Trade Com'n, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (en banc). The doctrine of patent misuse is "grounded in the policy-based desire to prevent a patentee from using the patent to obtain market benefit beyond that which inheres in the statutory patent right." Id. Microsoft contends that "to sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market." Opp. to Amend at 5 (quoting Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1001-02 (Fed. Cir. 1986)). "Two common examples of such impermissible broadening are using a patent which enjoys market power in the relevant market . . . to restrain competition in an unpatented product or employing the patent beyond its 17-year term." B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997). Microsoft argues that Hon Hai did not adequately allege (1) that Microsoft impermissibly broadened its patent rights, (2) that any alleged misuse had an anticompetitive effect, or (3) that Microsoft enjoys market power in a relevant market. Id. at 5-6.
The Court disagrees with Microsoft at this interim stage of the proceedings. In the proposed answer, Hon Hai alleges that "Microsoft misuses its patent to expand the geographic scope of its patents beyond the United States." ECF No. 72-1 ¶ 80. Hon Hai alleges that "for example," Microsoft "has far fewer and far less valuable patents in Singapore than it has in the United States," yet Microsoft "conditioned the license it provided to Hon Hai in the United States upon Hon Hai being willing to pay for a license it does not need . . . in Singapore." Id. Hon Hai also alleges that Microsoft enjoys market power in the relevant market "for Android operating system intellectual property" because "Microsoft is by far the biggest player." Id. ¶¶ 78, 80. As a result, Hon Hai alleges that "Microsoft was able to leverage its U.S. patents to force Hon Hai to pay royalties in geographies where Microsoft held no patents or very limited patents." Id.¶ 81.
With these allegations, the Court cannot say that an affirmative defense of patent misuse would be "necessarily futile." Bimbo Bakeries USA, 2014 WL 12641598, at *3. Microsoft must establish that there are "no set of facts [that] can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense." Miller, 845 F.2d at 214. In short, Microsoft has not carried its heavy burden to prove that an affirmative defense of patent misuse should not be permitted, especially when Microsoft concedes that bad faith, undue delay, prejudice, or previous amendment do not weigh against granting leave to amend. The Court again reiterates that these new allegations are not necessarily pled in a manner sufficient to withstand a motion to dismiss or strike and that Microsoft is not precluded from later moving to dismiss or strike the affirmative defense of patent misuse. Croghan, 2019 WL 3503071, at *4 ("Ordinarily, however, courts will defer consideration of challenges to the merits of a proposed amended pleading until after leave to amend is granted and the amended pleading is filed." (quotation marks omitted)); Defazio, 2008 WL 2825045, at *3 ("[T]he court is not prepared to deem plaintiffs' proposed [amended complaint] futile . . . . [but] the court does not mean to suggest that plaintiffs' new allegations are . . . necessarily pled in a manner sufficient to withstand a motion to dismiss."). With these qualifications in mind, the Court GRANTS Hon Hai's motion for leave to add an affirmative defense of patent misuse.
3. Additional Allegations in Support of Existing Affirmative Defenses of Failure to Mitigate, Failure of Consideration, and Mistake of Fact
Finally, Hon Hai seeks leave to amend the answer to add allegations in support of its existing affirmative defenses of failure to mitigate, failure of consideration, and mistake of fact. Microsoft opposes Hon Hai's request to allege additional allegations in support of these affirmative defenses on the basis that any amendments are futile. Microsoft, however, did not move to strike the affirmative defenses of failure to mitigate or failure of consideration. Microsoft did move to strike the affirmative defense of mistake of fact, but as discussed above, the Court denied Microsoft's motion to strike mistake of fact as an affirmative defense.
At this stage, it would be anomalous to prohibit Hon Hai from adding allegations to existing affirmative defenses when those affirmative defenses will not be stricken. In any event, Microsoft has not met its heavy burden of establishing that any new allegations would be "necessarily futile." Bimbo Bakeries USA, 2014 WL 12641598, at *3. Especially because Microsoft concedes that bad faith, undue delay, prejudice, or previous amendment do not weigh against granting leave to amend, the Court "will defer consideration of challenges to the merits of a proposed amended pleading until after leave to amend is granted and the amended pleading is filed." Croghan, 2019 WL 3503071, at *4 (quotation marks omitted). Accordingly, the Court GRANTS Hon Hai's motion for leave to amend its affirmative defenses of failure to mitigate, failure of consideration, and mistake of fact.
IV. CONCLUSION
For the foregoing reasons, the Court GRANTS with prejudice Microsoft's motion to dismiss Hon Hai's rescission counterclaim. The Court GRANTS with leave to amend Microsoft's motion to dismiss Hon Hai's counterclaims for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and negligent misrepresentation. The Court GRANTS with leave to amend Microsoft's motion to strike Hon Hai's fourth affirmative defense of breach of the implied covenant of good faith and fair dealing and seventh affirmative defense of fraudulent inducement. The Court DENIES Microsoft's motion to strike Hon Hai's sixth affirmative defense of frustration of performance and the eighth affirmative defense of mistake of fact. Finally, the Court GRANTS Hon Hai's motion for leave to amend the answer.
Hon Hai shall file any amended answer and counterclaims within 30 days of this Order. Failure to file an amended answer and counterclaims within 30 days of this Order or failure to cure deficiencies identified herein or in Microsoft's motions to dismiss or strike will result in dismissal of the deficient counterclaims and affirmative defenses with prejudice. Hon Hai may not add new counterclaims, parties, or affirmative defenses without a stipulation or leave of the Court.
IT IS SO ORDERED.
Dated: February 20, 2020
/s/_________
LUCY H. KOH
United States District Judge