Case Name:    Total Merchant Services, Inc. v. Hypercom Corporation, et al.

Case No.:        16-CV-291071

Demurrers by Defendants Hypercom Corporation and Brookfield Equinox, LLC to the Complaint of Plaintiff Total Merchant Services, Inc.

Factual and Procedural Background

            This action arises out of the purchase and sale of defective credit card processing terminal units. Plaintiff Total Merchant Services, Inc. (“Plaintiff”) provides small and medium-sized businesses with credit and debit card processing capabilities. (Complaint, ¶¶ 2, 20.) On July 31, 2006, Plaintiff entered into a purchase and sale agreement (the “Agreement”) with Hypercom U.SA., Inc. (“Hypercom U.S.A.”), a wholly owned subsidiary of defendant Hypercom Corporation (“Hypercom Corporation”) (collectively, “Hypercom”). (Id., at ¶¶ 2, 21.) Pursuant to the terms of the Agreement, Plaintiff agreed to purchase no less than 17,000 T4100 credit card processing terminal units (“T4100 units”) from Hypercom U.S.A. (Id., at ¶¶ 2, 21-22, Ex. A.) The T4100 units allow customers to swipe their credit and debit cards to pay for goods and services. (Id., at ¶ 3.) Hypercom allegedly “advertised the T4100 as a ‘reliable’ terminal that would provide customers with 100,000 hours of use,” which “exceeds 10 years of operation.” (Ibid.) Plaintiff “understood and believed that the T4100 units … would remain operable well beyond a decade.” (Ibid.)

From 2006 to 2010, in accordance with the Agreement, Plaintiff purchased 52,000 T4100 units from Hypercom U.S.A. and sold and/or distributed the units to its customers. (Complaint, ¶¶ 2-3, 23.) Plaintiff alleges that the T4100 units were defective because each unit “contained instructions embedded in its operating system software that prevented the terminal from ‘re-booting’ after December 7, 2014,” “the ten-year anniversary of the installation of the operating system code.” (Id., at ¶¶ 4, 22.) Hypercom secretly installed these instructions on the T4100 units and never informed Plaintiff that the “machines … would, by design, stop working in 2014, during the busy holiday season.” (Id., at ¶ 4.)

In 2011, pursuant to a Stock and Asset Purchase Agreement, Hypercom Corporation sold all of its assets associated with its business in the United States to Equinox Payments, LLC (“Equinox”). (Complaint, ¶¶ 26, 31, 33.) Equinox “assumed the [Agreement],” “sold terminals pursuant to its terms,” and “provided support to [Plaintiff] for the products previously sold” by Hypercom U.S.A. (Id., at ¶¶ 31-32.) Even though Equinox “assumed the [Agreement] and became bound by its terms, [Plaintiff] and Hypercom never entered into a novation with regard to the [Agreement] and [Plaintiff] never released Hypercom from any liabilities or obligations associated with the [Agreement].” (Id., at ¶ 32.)

Shortly thereafter, VeriFone Systems, Inc. (“VeriFone”) acquired Hypercom Corporation. (Complaint, ¶¶ 8, 27.) At the time of the acquisition, Hypercom U.S.A. remained a wholly-owned subsidiary of Hypercom Corporation. (Id., at ¶ 28.)

Approximately one year later, Hypercom U.S.A. merged with Hypercom Corporation. (Complaint, ¶ 2.)

In February 2014, Equinox sold most of its assets to defendant Brookfield Equinox, LLC (“Brookfield”) pursuant to an Asset Purchase Agreement. (Complaint, ¶¶ 9, 35-37.) Equinox subsequently filed for bankruptcy and changed its name to defendant EP Liquidation, LLC.[1] (Ibid.) Plaintiff alleges that Brookfield is a mere continuation of Equinox and “assumed [Equinox’s] rights and obligations under the [Agreement]” by misleading it “into believing that [Brookfield] was a continuation of [Equinox’s] business.” (Id., at ¶¶ 39-41, 45.) Plaintiff “purchased products from [Brookfield]” and “did so pursuant to the same form of purchase order that it used with Hypercom and [Equinox], and pursuant to the [Agreement].” (Id., at ¶ 44.)

On December 7, 2014, the T4100 units “stopped functioning en masse.” (Complaint, ¶ 46, emphasis omitted.) The T4100 units that were turned off or re-booted after that date ceased to function and became completely unusable. (Id., at ¶¶ 5, 46.) Those units remained inoperable until a new operating system was installed, which “typically required physical retrieval of the [unit] from the end user.” (Id., at ¶¶ 5, 48.) “Despite the significant amount of money and effort [Plaintiff] spent attempting to manage and correct the situation, thousands of merchants who were unable to process credit or debit card transactions during the holiday season terminated their contracts with [Plaintiff] and obtained [credit card processing terminals] from [Plaintiff’s] competitors.” (Id., at ¶¶ 5, 50.)

In addition to the T4100 units, Plaintiff purchased T4220 credit card processing terminal units (“T4220 units”) from Hypercom in 2010 and 2011, Equinox in 2011 to 2013, and Brookfield in 2014. (Complaint, ¶¶ 51-52.) After the T4100 units became inoperable, Brookfield notified Plaintiff that the operating system installed on the T4220 units would cause those units to fail in 2015 and 2019. (Id., at ¶ 53.) To prevent that from happening, Plaintiff spent hundreds of thousands of dollars correcting the software in the T4220 units and/or replacing the terminals. (Id., at ¶¶ 53-54.)

Based on the foregoing, Plaintiff filed a complaint against Hypercom Corporation, Equinox, and Brookfield (collectively, “Defendants”), alleging causes of action for: (1) breach of contract (against Hypercom Corporation); (2) breach of implied covenant of good faith and fair dealing (against Hypercom Corporation); (3) breach of contract (against Equinox); (4) breach of implied covenant of good faith and fair dealing (against Equinox); (5) breach of contract (against Brookfield); (6) breach of implied covenant of good faith and fair dealing (against Brookfield); (7) fraudulent concealment (against Defendants); (8) negligent misrepresentation/concealment (against Defendants); (9) intentional interference with contractual relations (against Defendants); (10) negligent interference with prospective economic advantage (against Defendants); and (11) unfair competition in violation of Business and Professions Code section 17200, et seq. (“UCL”) (against Defendants).

Currently before the Court are the demurrer by Hypercom Corporation and the demurrer by Brookfield to the complaint. Plaintiff filed papers in opposition to the demurrers on May 11 and 17, 2016. Hypercom and Brookfield reply papers in support of their respective demurrers on May 23, 2016.

Discussion

  1. Legal Standard

“In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.’ ” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

  1. Demurrer by Hypercom Corporation

            Hypercom Corporation demurs to the first, second, and seventh through eleventh causes of action of the complaint on the ground of failure to allege facts sufficient to constitute a cause of action.[2] (See Code Civ. Proc., § 430.10 (e).)

  1. First and Second Cause of Action

            As an initial matter, both Hypercom Corporation and Plaintiff agree that Arizona law governs the first and second causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing because the terms of the Agreement expressly provide that the Agreement is governed by Arizona law. (See Complaint, Ex. A, ¶ 18.4.)

Under Arizona law, to state a claim for breach of contract, a plaintiff must allege facts demonstrating the existence of the contract, its breach, and the resulting damage. (Steinberger v. McVey ex rel. County of Maricopa (Ariz. Ct. App. 2014) 234 Ariz. 125, 140 (“Steinberger”).) Furthermore, “Arizona law implies a covenant of good faith and fair dealing in every contract. [Citations.] Such implied terms are as much a part of a contract as are the express terms. [Citation.] The implied covenant of good faith and fair dealing prohibits a party from doing anything to prevent other parties to the contract from receiving the benefits and entitlements of the agreement.” (Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund (2002) 201 Ariz. 474, 490 (“Arizona Laborers”).)

As Hypercom Corporation persuasively argues, Plaintiff fails to allege facts showing that Hypercom Corporation breached the express terms of the Agreement or the implied covenant of good faith and fair dealing. In the first cause of action, Plaintiff alleges that Hypercom Corporation breached the Agreement by: selling it the T4100 units, which “ceased operating as little as five years after they were purchased”; failing to deliver T4100 units that complied with product specifications; failing to provide T4100 units that contained new operating system software; and selling it the T4220 units that contained defective software. (Complaint, ¶¶ 58-59.) In the second cause of action, Plaintiff alleges that Hypercom Corporation breached the implied covenant of good faith and fair dealing by installing instructions in the T4100 units’ operating system software that prevented the units from re-booting after a date certain. (Id., at ¶ 63.) However, there is no provision in the Agreement that states that the T4100 and/or T4220 units will operate or perform in a particular manner five or more years after the date of purchase. Additionally, there is no provision stating that the T4100 and/or T4220 units will contain new software. Therefore, the fact that the T4100 units stopped working after 5 years and did not contain new software does not appear to be a breach of the Agreement. Similarly, based on the terms of the Agreement, the inclusion of the allegedly defective software in the T4220 units, which never actually failed, does not appear to be a breach of the Agreement.

Moreover, the Agreement warrants only that the T4100 units and the software therein “will perform substantially as described in Hypercom’s official published specifications” for up to 90 days for “Product Software” and one year for the units themselves. (Id., at Ex. A, ¶ 9.) The Agreement further provides that the foregoing warranty is in lieu of all other warranties and representations of any kind with respect to the T4100 units and the product software. (Ibid.) Here, Plaintiff alleges that the T4100 units first failed to operate and/or perform on December 7, 2014. That date is well-beyond the warranty period given that the last T4100 unit was allegedly purchased from Hypercom sometime in 2011. Thus, Plaintiff does not establish that the failure of the T4100 units in 2014 constitutes a breach of the Agreement or the implied covenant of good faith and fair dealing. Additionally, Plaintiff does not allege any facts regarding the “official published specifications.” Thus, there is no way for the Court to determine whether the T4100’s alleged inability to reboot after December 7, 2014, constitute substantial noncompliance with the “official published specifications.” With respect the to the T4220 units, Plaintiff alleges that the units never failed to perform as it remedied the alleged defect. Consequently, it is unclear to the Court how those units possibly could have failed to “perform substantially as described in Hypercom’s official published specifications.”

While Plaintiff contends in its opposition papers that that the “official published specifications” are the same as the alleged advertised product information (i.e., that the T4100 units were reliable and would provide 100,000 hours of use to its customers) (see P’s Mem. Ps. & As., pp. 5-6), there is no such allegation in the complaint. Since Plaintiff’s argument is based on facts that do not appear on the face of the complaint or from any judicially noticeable matter, it is not well-taken. (See Code Civ. Proc., § 437, subd. (a) [on a motion to strike, the trial court considers matters that appear on the face of the challenged pleading or from any matter of which it is required to take judicial notice].)

Plaintiff’s remaining arguments regarding the purported invalidity of the limitation of liability and/or remedy provision in the Agreement (see Complaint, Ex A., ¶ 10) are immaterial and do not affect the analysis set forth above because the analysis is based on the terms set forth in paragraph 9 of the Agreement and Plaintiff fails to establish any breach of the Agreement in the first instance.

For these reasons, the demurrer to the first and second causes of action is SUSTAINED, with 10 days’ leave to amend.

  1. Seventh through Eleventh Causes of Action

            Hypercom Corporation argues that the remaining claims—the seventh through eleventh causes of action—are governed by Arizona law and, regardless of whether California or Arizona law is applied, they are barred by the economic loss rule. Hypercom Corporation also argues that the seventh through ninth causes of action do not set forth sufficient facts supporting the requisite element of each claim under Arizona law. Next, Hypercom Corporation asserts that there is no claim for negligent interference with prospective economic advantage—the tenth cause of action of the complaint—under Arizona law and, even if California law applies, Plaintiff fails to allege facts supporting the elements of such a claim. Lastly, Hypercom Corporation contends that the eleventh cause of action is inappropriate because the Agreement states that claims related to its terms are governed by Arizona law; the UCL claim based on California statutory law; and, even if California law applies, Plaintiff has not alleged any unfair or fraudulent conduct.

In opposition, Plaintiff contends that the remaining claims are not barred by the economic loss rule because, under Arizona law, fraud claims are independent from contractual claims. Plaintiff also argues that it pleads sufficient facts supporting its fraud claims because, under Arizona law, the wrongful acts are pled with specificity and claims for fraudulent misrepresentation and concealment to not require a showing of duty. Next, with respect to the ninth and tenth causes of action, Plaintiff asserts that it adequately pleads facts showing that Hypercom knew of the existence of its end-user contracts and customer relationships. Plaintiff does not address Hypercom Corporation’s argument that the tenth cause of action fails because there is no claim for negligent interference with prospective economic advantage under Arizona law. Finally, regarding the eleventh cause of action, Plaintiff states that to the extent that the parties’ contractual election of Arizona law bars the claim, it should be permitted to “allege unfair business practice remedies under Arizona common and statutory law.” (P’s Mem. Ps. & As., p. 15:12-15.) Plaintiff does not address Hypercom Corporations argument that the claim is improper given the choice-of-law provision in the Agreement.

  1. Governing Law

            As an initial matter, the Court addresses whether Arizona or California law applies to Plaintiff’s remaining claims.

It is undisputed that the parties’ Agreement contains an express choice-of-law provision that the “Agreement shall be governed by the laws of the state of Arizona without regards to its conflict of law principles.” (Complaint, Ex. A, ¶ 18.4.)

Under California law, a choice of law made by sophisticated commercial parties through arm’s length negotiation will be enforced unless the chosen law conflicts with a fundamental public policy of California. (See Nedlloyd Lines, B.V. v. Super. Ct. (1992) 3 Cal.4th 459, 465–466.) “[A] choice-of-law clause, which provides that a specified body of law ‘governs’ the ‘agreement’ between the parties, encompasses all causes of action arising from or related to that agreement, regardless of how they are characterized, including tortious breaches of duties emanating from the agreement or the legal relationships it creates.” (Id., at p. 470, emphasis added.) The mere fact that the chosen law provides greater or lesser protection than California law, or that in a particular application the chosen law would not provide protection while California law would, are not reasons for applying California law. (See Wong v. Tenneco (1985) 39 Cal.3d 126, 135–136.)

Here, Plaintiff’s remaining claims for fraudulent inducement, intentional interference with contractual relations, negligent interference with prospective economic advantage, and violation of the UCL are related to the Agreement. Additionally, Plaintiff does not argue that Arizona law, if applied, would violate any California public policy. Moreover, in its opposition papers, Plaintiff repeatedly cites to and relies upon Arizona law, such that it appears to concede the applicability of Arizona law to the remaining claims. Because the law is so clearly in favor of enforcing choice-of-law provisions and Plaintiff does not make any argument to otherwise, the Court finds that Arizona law applies to the remaining claims.

  1. Economic Loss Rule

The Arizona economic loss rule was first expressly acknowledged under Arizona law in Salt River Project Agricultural Improvement & Power District v. Westinghouse Electric Corp. (1984) 143 Ariz. 368 (“Salt River”). (Shaw v. CTVT Motors, Inc. (Ariz. Ct. App. 2013) 232 Ariz. 30, 32 (“Shaw”).) The doctrine refers to a “common law rule limiting a contracting party to contractual remedies for the recovery of economic losses unaccompanied by physical injury to persons or other property.” (Flagstaff Affordable Housing Ltd. v. Design Alliance, Inc. (2010) 223 Ariz. 320, 323 (“Flagstaff”).) Salt River addressed the economic loss rule in the context of a strict-liability product defect claim. (Shaw, supra, 232 Ariz. at p. 32.) In that case, the Arizona Supreme Court held that “[w]here economic loss, in the form of repair costs, diminished value, or lost profits, is the plaintiff’s only loss, the policies of the law generally will be best served by leaving the parties to their commercial remedies.” (Salt River, supra, 143 Ariz. at p. 379.)

The Arizona Supreme Court next expressly considered the economic loss rule in Flagstaff. (Shaw, supra, 232 Ariz. at p. 32.) In that case, the court applied the rule to claims based on construction defects resulting from professional negligence. (Flagstaff, supra, 223 Ariz. at 321.) The court limited tort recovery involving “contracts for construction” to those situations in which the plaintiff’s economic loss was “accompanied by physical injury to persons or other property.” (Id., at pp. 326–327.) In that context, absent this physical injury to persons or other property, a plaintiff can only obtain contract remedies. (Shaw, supra, 232 Ariz. at p. 32.)

Relying on Flagstaff, the Arizona Court of Appeal applied the economic loss rule to claims for negligence, negligent and intentional misrepresentation, and fraud in Cook v. Orkin Exterminating Co. (2011) 227 Ariz. 331 (“Cook”). (Shaw, supra, 232 Ariz. at p. 32.) In Cook, the plaintiff homeowners claimed that the defendant pest control company misrepresented its ability to rid their home of termites “thereby inducing them to enter the Agreement, which they otherwise would not have done.” (Cook, supra, 227 Ariz. at p. 334.) The Court of Appeal found that the economic loss rule barred the plaintiffs’ tort claims because they were seeking remedies for purely economic loss from the pest control company’s alleged failure to adequately perform its promises under the Agreement. (Id., at p. 335.) Furthermore, it explicitly rejected the plaintiffs’ argument that the economic loss rule did not apply to their fraud claims: “We reject the Cooks’ argument that the ELR does not apply to their fraud and misrepresentation claims. The Arizona Supreme Court held in Flagstaff II that a contracting party is limited wholly to its contractual remedies for purely economic loss related to the subject of the parties’ contract.” (Id., at 335, fn. 6, emphasis in original.)

Here, Plaintiff’s seventh and eighth causes of action for fraudulent concealment and negligent misrepresentation/concealment advance essentially the same claim for fraudulent inducement as the plaintiffs in Cook, i.e., that if Hypercom Corporation had not misrepresented the capabilities and quality of the T4100 units, it would not have entered into the Agreement and purchased the units. (See Complaint, ¶¶ 94-95, 102.) Plaintiff does not seek to rescind or reform the Agreement allegedly induced by fraud, but essentially affirms the Agreement by seeking contract damages under a tort theory. (See Complaint, Prayer, ¶¶ 1-7.) There is no allegation that parties were of unequal bargaining power. Moreover, based on the terms of the Agreement, it appears that the parties anticipated the possibility that Hypercom Corporation would breach the contract by providing credit card processing units not in substantial compliance with the official product specifications, allocated the risks accordingly, and provided remedies for any such breach. (See Complaint, Ex. A, ¶¶ 9-10.) Most importantly, absent from Plaintiff’s complaint is any claim of physical injury to persons or property other that the units themselves that would except this claim from the economic loss rule. Consequently, under the foregoing cases, Plaintiff’s seventh and eighth causes of action are barred by the economic loss rule.

The vast majority of the cases cited by Plaintiff in its opposition for the proposition that the economic loss rule does not apply to its fraud claims are federal cases that were decided prior to Cook. Consequently, those cases are no longer persuasive.

Moreover, the single federal case cited by Plaintiff that was decided after CookHomeland Ins. Co. of New York v. Southwest Real Estate Purchasing Group Inc. (D. Ariz., Dec. 5, 2012, No. CV 12-00856-PHX-FJM) 2012 WL 6050616 (“Homeland”)—fails to address Cook’s holding and appears to be based solely on speculation that the Arizona Supreme Court would not be willing to extend the economic loss rule to claims of negligent misrepresentation. (Id., at p. *4.) Not only is Cook the better reasoned decision, but it is binding authority as to Arizona law. Consequently, the Court will not follow Homeland.

            In light of the foregoing, the demurrer as to the seventh and eighth causes of action is SUSTAINED, with 10 days’ leave to amend.

Turning to the ninth through eleventh causes of action, Hypercom Corporation cites no Arizona legal authority, and the Court is aware of none, applying the economic loss rule to claims for intentional interference with contractual relations, negligent interference with prospective economic advantage, and violation of the UCL. Absent legal authority demonstrating that the economic loss rule is a bar to such claims, the Court declines to extend the doctrine to such causes of action.

  1. Intentional Interference with Contractual Relations Claim

            Hypercom Corporation argues that the ninth cause of action fails to state a claim for intentional interference with contractual relations because Plaintiff does not plead sufficient facts showing that it had valid contractual relationship at the time of the alleged interference or that Hypercom knew of the existence of that relationship.

In opposition, Plaintiff argues that Hypercom had knowledge of its contractual relationships with its customers because the Agreement contemplated multiple purchases of a number of years, it made ongoing purchases, and the Agreement itself states that Plaintiff “will purchase the Products for the primary purpose of entering into or continuing a merchant processing arrangement with its end user customers.” (Complaint, Ex. A, ¶ 1.)

“Arizona has long recognized the tort of intentional interference with contractual relations. [Citation.] A prima facie case of intentional interference requires: (1) existence of a valid contractual relationship, (2) knowledge of the relationship on the part of the interferor, (3) intentional interference inducing or causing a breach, (4) resultant damage to the party whose relationship has been disrupted, and (5) that the defendant acted improperly.” (Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund (2002) 201 Ariz. 474, 493.)

Here, Plaintiff alleges that “[i]mmediately prior to December 7, 2014, [it] had valid contracts with … thousands of its customers to whom it had distributed T4100 and T220 terminals.” (Complaint, ¶ 106.) Plaintiff further alleges that “Defendants[’] actions were designed to, and did, interfere with and disrupt use of the T4100 and T4220 terminals and [its] contracts with customers utilizing the terminals.” (Id., at ¶ 107.) As currently pleaded, “Defendants[’] actions” appear to include not only the installation of the defective software in the units sometime around 2004, but the subsequent concealment of the fact that the units would cease to function approximately 10 years later. Based on the face of the pleading, it cannot be said that the alleged fraudulent concealment did not occur immediately prior to December 7, 2014, at the time Plaintiff allegedly had valid contracts with its customers. Consequently, Hypercom Corporation does not establish that Plaintiff fails to plead the existence of a valid contractual relationship at the time of the alleged interference.

Moreover, as Plaintiff persuasively argues, the allegations of the complaint and the terms of the Agreement permit the reasonable inference that Hypercom Corporation had knowledge of Plaintiff’s contractual relationships with its customers. Plaintiff alleges that it made continuous purchases from Hypercom Corporation from 2006 to 2010 and the Agreement expressly provides that “[a]s a Hypercom customer, [Plaintiff] will purchase the Products for the primary purpose of entering into or continuing a merchant processing arrangement with its end user customers,” “[Plaintiff] cannot resell the Product to anyone other than its End User,” and “[Plaintiff] will provide Products only pursuant to an executed End User merchant processing agreement ….” (Complaint, Complaint, ¶¶ 2-3, 23, Ex. A, ¶ 1.) Thus, Hypercom Corporation’s argument regarding this element lacks merit.

Based on the foregoing, the demurrer to the ninth cause of action is OVERRULED.

  1. Negligent Interference with Prospective Economic Advantage                                        Claim

            Plaintiff’s tenth cause of action is for negligent interference with prospective economic advantage. However, “[t]he tort of negligent interference with prospective economic advantage is not recognized under Arizona law.” (Loomis v. U.S. Bank Home Mortg. (D. Ariz. 2012) 912 F.Supp.2d 848, 860 (“Loomis”).) In its opposition, Plaintiff fails to address Hypercom Corporation’s argument that this claim is not permitted under Arizona law. As such, Plaintiff implicitly acknowledges that the argument has merit.

Accordingly, the demurrer to the tenth cause of action is SUSTAINED, with 10 days’ leave to amend.

  1. UCL Claim

Plaintiff’s eleventh cause of action is a claim for violation of the UCL, which is a creature of California statute. However, as indicated above, the Court has found that Arizona law is applicable in this action and Plaintiff has not suggested that Arizona has an analogous UCL claim. Consequently, Plaintiff cannot assert a claim under the UCL. (See Medimatch, Inc. v. Lucent Techs., Inc. (N.D. Cal. 2000) 120 F.Supp.2d 842, 861–862 (“Medimatch”) [dismissing a California UCL claim on basis that claim fell within scope of New Jersey choice-of-law provision]; see also Century 21 Real Estate LLC v. All Professional Realty, Inc. (E.D. Cal. 2012) 889 F.Supp.2d 1198, 1235 [same] (“Century”).)

Thus, the demurrer to the eleventh cause of action is SUSTAINED, with 10 days’ leave to amend.

III.       Demurrer by Brookfield

            Brookfield demurs to the fifth through eleventh causes of action of the complaint on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10 (e).) Brookfield also demurs to the sixth, seventh, eighth, and eleventh causes of action on the ground of uncertainty. (See Code Civ. Proc., § 430.10 (f).)

  1. Request for Judicial Notice

            Brookfield requests judicial notice of: (1) a reply brief filed in the case of In re: EP Liquidation, LLC (United States Bankruptcy Court, Case No. 14-10359); and (2) and an Asset Purchase Agreement attached as an exhibit to the subject reply brief.

“Judicial notice is the recognition and acceptance by the court, for use by the trier of fact or by the court, of the existence of a matter of law or fact that is relevant to an issue in the action without requiring formal proof of the matter.” (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.) Courts may generally take judicial notice of court records. (See Evid. Code § 452, subd. (d).) While courts are free to take judicial notice of the existence of each document in a court file, including the truth of results reached in documents such as judgments, they may not take judicial notice of the truth of hearsay statements in decisions and court files. (People v. Woodell (1998) 17 Cal. 4th 448, 455 (“Woodell”); see Lockley v. Law Office of Cantrell, Green, Pekich, Cruz & McCort (2001) 91 Cal.App.4th 875, 882; see also Day v. Sharp (1975) 50 Cal.App.3d 904, 914 [stating that “[t]here exists a mistaken notion that this means taking judicial notice of the existence of facts asserted in every document of a court file, including pleadings and affidavits … a court cannot take judicial notice of hearsay allegations as being true, just because they are part of a court record or file”].)

Here, the documents at issue are court records and generally relevant to the pending matters. Thus, the Court may properly take judicial notice of the existence of the documents. (See Evid. Code § 452, subd. (d).) However, the Court may not take judicial notice of the truth of hearsay statements therein. (See Woodell, supra, 17 Cal. 4th at p. 455.)

Accordingly, Brookfield’s request for judicial notice is GRANTED only as to the existence of the documents.

  1. Fifth and Sixth Causes of Action

As an initial matter, both Brookfield and Plaintiff agree that Arizona law governs the fifth and sixth causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing because the terms of the Agreement expressly provide that the Agreement is governed by Arizona law. (See Complaint, Ex. A, ¶ 18.4.)

Under Arizona law, to state a claim for breach of contract, a plaintiff must allege facts demonstrating the existence of the contract, its breach, and the resulting damage. (Steinberger, supra, 234 Ariz. at p. 140.) Furthermore, “Arizona law implies a covenant of good faith and fair dealing in every contract. [Citations.] Such implied terms are as much a part of a contract as are the express terms. [Citation.] The implied covenant of good faith and fair dealing prohibits a party from doing anything to prevent other parties to the contract from receiving the benefits and entitlements of the agreement.” (Arizona Laborers, supra, 201 Ariz. at p. 490.)

            Plaintiff contends that it properly states claims for breach of contract and breach of implied covenant of good faith and fair dealing against Brookfield because: Brookfield assumed Hypercom and Equinox’s obligations and liabilities under the Agreement and, therefore, may be held liable for their breaches of the Agreement; Brookfield is a mere continuation of Equinox and, therefore, may be held liable for Equinox’s breaches of the Agreement under a theory of successor liability; and Brookfield directly sold T4200 units to Plaintiff that contained the defective software.           

            The Court finds that Plaintiff fails to state a claim for breach of contract or breach of implied covenant of good faith and fair dealing based on each of the above-noted theories.

First, under Arizona law, assignment and/or delegation of contract liabilities must be expressly made. (See Grant v. Harner (1925) 29 Ariz. 41; see also PDG Los Arcos, LLC v. Adams (9th Cir. 2011) 436 Fed.Appx. 739, 739-743.) Furthermore, there is no Arizona case law holding that an assumption of contractual duties and/or liabilities of another may be implied from the surrounding circumstances. (See In re Mortgages Ltd. (Bankr. D. Ariz. 2009) 405 B.R. 669, 671-672; see also In re Mortgages Ltd. (D. Ariz. 2010) 427 B.R. 780, 783-785.) Absent legal authority providing that a non-party to the contract—such as Brookfield—can, by virtue of its conduct, enter into an implied agreement to assume the contractual liabilities of a party to the Agreement, the Court declines to recognize such a theory.

Second, Plaintiff fails to plead sufficient facts showing successor liability. Under Arizona law, when a corporation sells or transfers its principal assets to a successor corporation, the latter can be liable for the debts and liabilities of the former if the purchasing corporation is a mere continuation of the seller. (See A.R. Teeters & Associates, Inc. v. Eastman Kodak Co. (Ariz. Ct. App. 1992) 172 Ariz. 324, 329-330.) However, the traditional “mere continuation” exception applies “only when there is a common identity of officers, directors and stock between the selling and purchasing corporations, and only one corporation after the transfer.” (Winsor v. Glasswerks PHX, L.L.C. (Ariz. Ct. App. 2003) 204 Ariz. 303, 307-310, emphasis added.) Even under the broader continuity of enterprise exception, successor liability is only imposed when the seller corporation has ceased ordinary business operations, liquidated, and dissolved soon after distribution of a consideration received from the buying corporation. (Ibid.) Here, it is readily apparent from the allegations of the complaint that more than one corporation continued to exist after the alleged transfer of assets from Equinox to Brookfield. (See Complaint, ¶¶ 9, 35-37.) Moreover, even though Equinox subsequently filed for bankruptcy, Plaintiff does not allege that Equinox ceased ordinary business operations, liquidated, and dissolved soon after it sold its assets to Brookfield. Consequently, Plaintiff does not demonstrate that Brookfield may be held liable for Equinox’s conduct on a theory of successor liability.

Third, even though Plaintiff alleges that Brookfield itself sold it T4220 units pursuant to the terms of the Agreement, Plaintiff fails to allege facts showing that the sale of those units constituted a breach of the Agreement. As indicated above, there is no provision in the Agreement stating that the T4220 units will operate or perform in a particular manner five or more years after the date of purchase. Moreover, the Agreement warrants only that the units and the software therein “will perform substantially as described in Hypercom’s official published specifications” for up to 90 days for “Product Software” and one year for the units themselves. (Id., at Ex. A, ¶ 9.) The Agreement further provides that the foregoing warranty is in lieu of all other warranties and representations of any kind with respect to the units and the product software. (Ibid.) Plaintiff does not allege that the T4220 units failed to perform substantially as described in the official published specifications within the warranty period. Furthermore, the complaint does not contain any allegations regarding the nature or contents of the “official published specifications” and, thus, the Court cannot determine whether the inclusion of the allegedly defective software constituted a breach of the Agreement.

Accordingly, the demurrer to the fifth and sixth causes of action is SUSTAINED, with 10 days’ leave to amend.

  1. Seventh and Eight Causes of Action 

Brookfield argues that the seventh and eighth causes of action for fraudulent concealment and negligent misrepresentation/concealment fail because the claims are not alleged with specificity and it cannot be held liable for representations made by Hypercom Corporation or Equinox.

While the Court agrees with Brookfield that Plaintiff has not pled facts showing that it can be held liable for Hypercom Corporation and Equinox’s conduct, Plaintiff’s claims are based in part on Brookfield’s alleged failure to disclose the fact that the T4220 units contained the defect software. Moreover, the Court finds that the allegations of nondisclosure are reasonably particularized. (Spudnuts, Inc. v. Lane (Ariz. Ct. App. 1982) 131 Ariz. 424, 425 [“all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity”].)

Thus, the demurrer to the seventh and eight causes of action is OVERRULED.

  1. Ninth Cause of Action

            Brookfiled argues that the ninth cause of action fails to state a claim for intentional interference with contractual relations because it is not liable for any interference caused by the sale of the T4100 units and Plaintiff does not plead sufficient facts showing that the sale of T4220 units interfered in any way with its relationships with its customers. Brookfield also contends that the claim is barred by the economic loss rule.

The Court finds that Brookfield’s arguments lack merit. Even though the T4220 units never failed to operate, as Plaintiff persuasively argues, interference may occur when a defendant causes performance to be more expensive or burdensome. (See Plattner v. State Farm Mut. Auto. Ins. Co. (1991) 168 Ariz. 311, 316.) Here, Plaintiff alleges that Brookfield’s conduct, i.e., failing to disclose the defective software, caused it to incur additional costs to repair the T4220 units. Thus, Plaintiff alleges facts indicating that Brookfield’s alleged interference made its performance under its contracts with its clients more expensive or burdensome. Lastly, Brookfield cites no Arizona legal authority, and the Court is aware of none, applying the economic loss rule to a claim for intentional interference with contractual relations. Absent legal authority demonstrating that the economic loss rule is a bar to such a claim, the Court declines to extend the doctrine to this cause of action.

Based on the foregoing, the demurrer to the ninth cause of action is OVERRULED.

  1. Tenth Cause of Action

            Plaintiff’s tenth cause of action is for negligent interference with prospective economic advantage. However, “[t]he tort of negligent interference with prospective economic advantage is not recognized under Arizona law.” (Loomis, supra, 912 F.Supp.2d at p. 860.) In its opposition, Plaintiff fails to address Brookfield’s argument that this claim is not permitted under Arizona, implicitly acknowledging that the argument has merit.

Accordingly, the demurrer to the tenth cause of action is SUSTAINED, with 10 days’ leave to amend.

 

  1. Eleventh Cause of Action

Plaintiff’s eleventh cause of action is a claim for violation of the UCL, which is a creature of California statutory law. However, as indicated above, the Court has found that Arizona law is applicable in this action and Plaintiff has not suggested that Arizona has an analogous UCL claim. Consequently, Plaintiff cannot assert a claim under the UCL. (See Medimatch, supra, 120 F.Supp.2d at pp. 861–862 [dismissing a California UCL claim on basis that claim fell within scope of New Jersey choice-of-law provision]; see also Century, supra, 889 F.Supp.2d at p. 1235 [same].)

Thus, the demurrer to the eleventh cause of action is SUSTAINED, with 10 days’ leave to amend.

[1] Despite the name change, in their papers, the parties continue to refer to defendant EP Liquidation, LLC by its former name, Equinox. For simplicity’s sake, the Court will do the same.

[2] While Hypercom Corporation briefly asserts at the outset of its moving papers that it is not a proper defendant to this action, it makes clear that this argument is not a basis for its demurrer. (See Mem. Ps. & As., p. 1:3-18; see also Reply, p. 1, fn. 1.)