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 First Amended 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 merchants with credit and debit card processing capabilities. (First Amended Complaint (“FAC”), ¶¶ 1, 20.) On July 31, 2006, Plaintiff entered into a written purchase and sale agreement (“Purchase 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, Ex. B.) Pursuant to the terms of the Purchase 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. B.) The T4100 units allow customers to swipe their credit and debit cards to pay for goods and services. (Id., at ¶¶ 3, 19.) Hypercom “advertised the T4100 as a ‘reliable’ terminal that would provide customers with 100,000 hours of use,” which “exceeds 10 years of operation.” (Ibid.) Hypercom’s published advertising material included official product specifications for the T4100 units, which expressly stated that “the ‘Reliability’ of the T4100 terminals was ‘100,000 hours (MTBF calculated), excluding printer.’ ” (Ibid., Ex. A.) 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. (FAC, ¶¶ 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, fraudulently concealed the installation from Plaintiff, 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”). (FAC, ¶¶ 26, 31, 33.) Equinox “assumed the Purchase Agreement and became bound by its terms,” “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 Purchase Agreement, “[Plaintiff] and Hypercom never entered into a novation with regard to the Purchase Agreement and [Plaintiff] never released Hypercom from any liabilities or obligations associated with the Purchase Agreement.” (Id., at ¶ 32.)

Shortly thereafter, on August 4, 2011, VeriFone Systems, Inc. (“VeriFone”) acquired Hypercom Corporation. (FAC, ¶¶ 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. (Id., at ¶ 2.)

In February 2014, Equinox sold “substantially all” of its assets to defendant Brookfield Equinox, LLC (“Brookfield”) pursuant to an Asset Purchase Agreement. (FAC, ¶¶ 9, 35-37.) Equinox subsequently “ceased all ordinary business operations, liquidated, and filed for Chapter 7 bankruptcy, such that only one corporation continued to exist and to service [Plaintiff’s] account after the transfer.”[1] (Id., at ¶ 37.) Brookfield is allegedly a mere continuation of Equinox and “assumed [Equinox’s] rights and obligations under the Purchase Agreement” by misleading it “into believing that [Brookfield] was a continuation of [Equinox’s] business.” (Id., at ¶¶ 39-45.)

On December 7, 2014, the T4100 units “stopped functioning en masse.” (FAC, ¶¶ 5, 17, 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. (FAC, ¶¶ 51-52.) After the T4100 units became inoperable, Brookfield notified Plaintiff that software installed on the T4220 units would cause those units to fail in 2015 and 2019. (Id., at ¶¶ 52-53.) 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 the operative FAC 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); and (9) intentional interference with contractual relations (against Defendants).[2]

Currently before the Court are the demurrer by Hypercom Corporation and the demurrer by Brookfield to the first amended complaint. Plaintiff filed papers in opposition to the demurrers on August 25, 2016.[3] Hypercom and Brookfield filed reply papers in support of their respective demurrers on August 31, 2016.

Discussion

  1. Legal Standard

In reviewing the sufficiency of a complaint against a general demurrer, courts are guided by long settled rules. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “ ‘The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.]’ ” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850 (“Gregory”).) If facts appearing in an attached exhibit contradict those expressly pleaded in the complaint, those in the exhibit are given precedence. (Mead v. Sanwa Bank Cal. (1998) 61 Cal.App.4th 561, 567-568.) The question of the plaintiff’s ability to prove the factual allegations of the complaint, 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 (“Committee”).)

  1. Demurrer by Hypercom Corporation

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

  1. Request for Judicial Notice

Hypercom Corporation asks the Court to take judicial notice of the following definitions pursuant to Evidence Code section 452, subdivision (h): (1) the Newton’s Telecom Dictionary definition of “Mean Time Between Failure” and “MTBF”; and (2) the Dictionary of Computing definition of “Mean Time Between Failures” and “MTBF.”

Plaintiff objects to Hypercom Corporation’s request for judicial notice. Plaintiff points out that Evidence Code section 452, subdivision (h) allows judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” Plaintiff asserts that “[t]he MTBF definition as understood in the industry and its impact on warranty periods in the parties’ contract is in dispute” and “[t]he subject of a technical MTBF definition, and how it is applied and understood in the industry of credit card processing terminals, should be properly determined through expert testimony, not judicial notice.” (P’s Obj. to RJN, p. 1.)

However, in its opposition papers, Plaintiff repeatedly cites to the definitions submitted by Hypercom Corporation and relies upon those definitions to support its arguments and interpretation of the Purchase Agreement. Furthermore, Plaintiff does not provide any alternative understanding or definition of the terms “Mean Time Between Failure” and “MTBF.” In light of the foregoing, it appears that there is, in actuality, no dispute between the parties as to the definitions of the subject terms.

Accordingly, Plaintiff’s objection to the request for judicial notice is overruled and the request for judicial notice is GRANTED.

  1. Seventh and Eighth Causes of Action

The seventh and eighth causes of action set forth claims, respectively, for fraudulent concealment and negligent misrepresentation/concealment. As the parties acknowledge in their papers, the Court previously sustained Hypercom Corporation’s demurrer to these causes of action, as alleged in the original complaint, with leave to amend. Plaintiff has now re-alleged the claims, without any alteration or change, in the FAC. Plaintiff indicates that it has done so because it believes that it must re-allege those claims in order to preserve its right to appeal. (FAC, p. 21, fn. 1; Opp’n., p. 13:3-11 [“The allegations against Hypercom in the Seventh and Eighth Causes of Action are being re-pleaded by [Plaintiff] solely for purposes of preserving any right to appeal.”].)

As Hypercom Corporation persuasively argues, re-assertion of the seventh and eighth causes of action is wholly unnecessary to preserve Plaintiff’s right to appeal. The case of National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35 (“National”) is directly on point. In National, the Court of Appeal answered the question of “whether a plaintiff who elects to stand on a cause of action to which a demurrer has been sustained with leave to amend must continue to re-allege the ‘dead’ cause of action in future amended complaints in order to preserve the right of appeal regarding its validity.” (National, supra, 171 Cal.App.4th at p. 45.) The court concluded that “such pointless re-allegation is unnecessary to avoid waiver.” (Ibid.) “When a demurrer to a cause of action is sustained with leave to amend, the plaintiff may elect not to amend the cause of action. The order sustaining the demurrer is treated as an intermediate order with respect to that cause of action, appealable at the time of a final judgment, and the plaintiff is deemed to have elected to stand on the validity of the cause of action as originally pleaded. [Citations.] ‘The rule that a choice to amend waives any error can reasonably be applied only on a cause-of-action-by-cause-of-action basis. If a plaintiff chooses not to amend one cause of action but files an amended complaint containing the remaining causes of action or amended versions of the remaining causes of action, no waiver occurs and the plaintiff may challenge the intermediate ruling on the demurrer on an appeal from a subsequent judgment. It is only where the plaintiff amends the cause of action to which the demurrer was sustained that any error is waived.’ [Citation.]” (Id., at p. 44.)

 

Based on the foregoing, the demurrer to the seventh and eighth causes of action is SUSTAINED, without leave to amend.

  1. First and Second Causes 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 Purchase Agreement expressly provide for the same. (See FAC, Ex. B, ¶ 18.4 [setting forth a Governing Law provision].)

 

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 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 sufficient facts showing that it breached the express terms of the Purchase Agreement or the implied covenant of good faith and fair dealing. In the first cause of action, Plaintiff alleges that Hypercom Corporation breached the Purchase Agreement by: selling it the T4100 units, which “ceased operating as little as five years after they were purchased,” and selling it the T4220 units that contained defective software. (FAC, ¶¶ 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 ¶ 64.) However, the fact that the T4100 units stopped working after 5 years, as a result of the installation of the software, does not appear to be a breach of the Purchase Agreement. There is no provision in the Purchase Agreement stating that the T4100 and/or T4220 units will operate or perform in a particular manner five or more years after the date of purchase.

 

Moreover, the Purchase Agreement warrants only that the T4100 units, and the software therein, “will perform substantially as described in Hypercom’s official published specifications for the periods set forth below for the relevant item,” i.e., 90 days for product software and one year for the units themselves. (FAC, Ex. B, ¶ 9.) The Purchase Agreement expressly states 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, and Hypercom Corporation does not warrant or represent that the product or product software will perform uninterrupted or error-free. (Ibid.) Here, Plaintiff alleges that the T4100 units first failed to operate and/or perform on December 7, 2014, as a result of the software installed by Hypercom Corporation. 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. With respect to the T4220 units, Plaintiff alleges that it preemptively remedied the alleged defect and, consequently, those units never failed to perform. Since the T4220 units did not fail during the warranty period, the inclusion of the software in the T4220 units did not constitute a breach of the warranty provision.

 

Despite the foregoing, Plaintiff contends that inclusion of the software in the T4100 and T4220 units constitutes a breach of the warranty provision because Hypercom Corporation’s “official published specifications” for the T4100 units contain a chart providing that the T4100 units’ “Reliability” is “100,000 hours (MTBF calculated), excluding printer.”[4] (FAC, Ex. A.) Plaintiff argues that it reasonably assumed that a substantial portion of the terminals would continue to function well after the expiration of the one year warranty period, even if the units were not actually covered by the warranty, because the terms “Mean Time Between Failure” and “MTBF” are estimates of averages, meaning that statistically half of the terminals would function reliably for 100,000 hours. (Opp’n., pp. 4-5.) In effect, Plaintiff is asserting that the chart contained in the official published specifications created a warranty that “a substantial portion of the terminals would surpass 100,000 hours of reliable operation even after the expiration of the 12-month warranty period.” (Opp’n., p. 5.)

 

Plaintiff’s argument is not well-taken. As an initial matter, the official published specifications attached to the FAC pertain only to the T4100 units. Plaintiff does not provide the Court with the official published specifications for the T4220 units. Additionally, there is no indication that the official published specifications for the T4220 units contain any language regarding reliability or the units’ “Mean Time Between Failure” or “MTBF.” Thus, Plaintiff’s argument—that the official published specifications attached to the FAC create some additional and/or further warranty regarding the performance of the units—fails as it pertains to the T4220 units.

 

Next, Plaintiff’s argument also fails as to the T4100 units. As indicated above, the warranty provision set forth in the Purchase Agreement is expressly limited in time, stating that the terminals “will perform substantially as described in Hypercom’s official published specifications for the periods set forth below,” which is one year for the units and 90 days for product software. (FAC, Ex. B, ¶ 9.) This warranty is “IN LIEU OF ALL OTHER WARRANTIES AND REPRESENTATIONS OF ANY KIND.” (Ibid.) Consequently, even if the language set forth in the official published specifications could be interpreted as Plaintiff suggests—creating a warranty that “a substantial portion of the [T4100] terminals would surpass 100,000 hours of reliable operation even after the expiration of the 12-month warranty period”—said warranty is supplanted by the limited warranty set forth by the express terms of the Purchase Agreement.

 

Plaintiff also argues that the inclusion of the defective software in the units violated paragraph six of the Purchase Agreement, which provides that Hypercom grants Plaintiff “a perpetual, non-exclusive, non-transferable, license to use any software which is an integral part of the Products (‘Product Software’) in object code form only for the sole purpose of enabling the Products to function according to its specifications.” (FAC, Ex. B, ¶ 6.) Plaintiff contends that the defective software effectively “revoked [its] and its customers’ license to use the software integral to the terminals by unilaterally turning the machines off.” (Opp’n., p. 6.) Plaintiff cites no legal authority whatsoever supporting its argument or otherwise suggesting that inclusion of software in a device, which renders the device inoperable, constitutes a revocation of a license to use certain software in connection with the device. The Court agrees with Hypercom Corporation that it appears Plaintiff is attempting to transform the licensing provision into an additional warranty regarding the performance and/or reliability of the units. As previously indicated, any such warranty would be supplanted by the express warranty set forth in paragraph nine of the Purchase Agreement as the express warranty is made in lieu of all other warranties and representations.

 

Lastly, Plaintiff argues that the warranty provision fails its essential purpose. Plaintiff’s argument is not well-taken. The cases cited by Plaintiff are inapposite as they involve limitation of liability and/or remedy clauses, as opposed to warranties regarding performance.[5] Moreover, the warranty provision at issue in this case does not fail its essential purpose. The essential purpose of a warranty is to ensure that the product will comply with the terms of the warranty during the warranty period. (See Wisconsin Power and Light Co. v. Westinghouse Elec. Corp. (7th Cir. 1987) 830 F.2d 1405, 1412 (“Wisconsin”) [interpreting a provision of Wisconsin’s version of UCC § 2-719, which is identical to A.R.S. § 47-2719(B)]; see also Chaurasia v. General Motors Corp. (Ariz. Ct. App. 2006) 212 Ariz. 18, 23.) Here, there is no allegation the units failed to perform substantially as described in Hypercom’s official published specifications during the warranty period (i.e., one year for the units and 90 days for product software). Similarly, there is no allegation that there was any failure or refusal to make repairs and/or provide an adequate remedy during the warranty period. Consequently, the express warranty did not fail in its essential purpose as Hypercom Corporation complied with the provisions of the warranty. Notably, the terms of the Purchase Agreement indicate 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. (FAC, Ex. B, ¶¶ 9-10.) If Plaintiff wanted to reserve its right to sue Hypercom Corporation for equipment failure beyond the stated term of the warranty, it should have negotiated for such a right. (Wisconsin, supra, 830 F.2d at p. 1412.) But Plaintiff cannot accept the presumably more favorable purchase price and then disclaim the conditions underlying that price. (Ibid.)

 

In closing, the Court notes that Plaintiff has the burden to show in what manner it can amend the FAC and how that amendment will change the legal effect of the pleading. (Goodman v. Kennedy (1976) 18 Cal.3d 335, 349 (“Goodman”).) Plaintiff has not met this burden as it has not articulated how any amendment will correct the deficiencies identified above.

 

For these reasons, the demurrer to the first and second causes of action is SUSTAINED, without leave to amend.

  1. Ninth Cause of Action

As a preliminary matter, both Hypercom Corporation and Plaintiff agree that Arizona law governs the ninth cause of action for intentional interference with contractual relations.

Hypercom Corporation argues that the ninth cause of action is barred by the economic loss rule. Hypercom Corporation also argues that Plaintiff fails to set forth sufficient facts to state a claim for intentional interference with contractual relations because Plaintiff fails to allege any facts showing that it acted improperly or that it had specific knowledge of Plaintiff’s contractual relationships.

 

In opposition, Plaintiff contends that the claim is not barred by the economic loss rule, it pleads sufficient facts showing that Hypercom Corporation acted improperly, and Hypercom Corporation knew of the existence of its end-user contracts and customer relationships.

 

 

 

  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.)

 

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. Hypercom Corporation relies on older (published and unpublished) federal decisions to support its position. However, as Plaintiff points out, there is more recent federal authority holding that the economic loss rule does not apply to claims for intentional interference with contractual relations. (See Firetrace USA, LLC v. Jesclard (D. Ariz. 2010) 800 F.Supp.2d 1042, 1052.) Absent binding 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. Improper Acts and Knowledge of Contractual Relationships

“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.” (Arizona Laborers, supra, 201 Ariz. at p. 493.)

 

In the ninth cause of action, Plaintiff alleges that immediately prior to December 7, 2014, it had valid contracts with thousands of its customers to whom it had distributed T4100 and T220 terminals. (FAC, ¶ 110.) 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 ¶ 111.) As 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.

 

As Plaintiff persuasively argues, the allegations of the FAC and the terms of the Purchase Agreement permit the reasonable inference that Hypercom Corporation had specific 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 Purchase Agreement expressly provides that 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. (FAC, Ex. B, ¶ 1.) Thus, Hypercom Corporation’s argument regarding its lack of knowledge lacks merit.

 

Next, the Court is not prepared to hold, at this time, that Hypercom Corporation’s alleged conduct cannot constitute improper conduct as a matter of law. As Hypercom Corporation points out, to determine whether the alleged conduct constitutes improper conduct for purposes of this tort, Arizona courts consider seven factors: “(a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interest sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relations between the parties.” (Safeway Ins. Co., Inc. v. Guerrero (2005) 210 Ariz. 5, 12 (“Safeway”).) The propriety of action is generally an issue of fact, which is more properly resolved on summary judgment. (Neonatology Associates, Ltd. v. Phoenix Perinatal Associates Inc. (Ariz. Ct. App. 2007) 216 Ariz. 185, 188.) Thus, it would be premature at this time to find that Hypercom Corporation’s alleged conduct was not improper as a matter of law.

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

III. Demurrer by Brookfield

Brookfield demurs to the fifth through ninth causes of action of the FAC on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10 (e).)

 

  1. Fifth and Sixth Causes of Action

As an initial matter, 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 Purchase Agreement expressly provide that the contract is governed by Arizona law. (See FAC, Ex. B, ¶ 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.)

 

Brookfield argues that Plaintiff fails to allege facts showing that: it is a mere continuation of Equinox; it expressly assumed Hypercom and Equinox’s obligations and liabilities under the Purchase Agreement; or it breached the Purchase Agreement.

In opposition, Plaintiff contends that it properly states its claims because: Brookfield assumed Hypercom and Equinox’s obligations and liabilities under the Purchase Agreement; Brookfield is a mere continuation of Equinox; the inclusion of the defective software in the T4100 and T4220 units constitutes a breach of paragraphs six and nine of the Purchase Agreement; and the warranty and limited liability provisions fail their essential purpose.

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. Even assuming arguendo that Plaintiff pled sufficient facts showing that it is a mere continuation of Equinox and/or it expressly assumed Hypercom Corporation or Equinox’s obligations under the Purchase Agreement, Plaintiff fails to allege facts showing that the inclusion of the allegedly defective software in the T4100 and T4220 units constituted a breach of the Purchase Agreement. As indicated above, the only warranty provision in the Purchase Agreement states that the units will operate or perform in a particular manner for one year for the units and the product software is warrantied for 90 days. (FAC, at Ex. B, ¶ 9.) The Purchase 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 units failed to perform substantially as described in the official published specifications within the warranty period. Thus, Plaintiff fails to allege facts demonstrating a breach of the Purchase Agreement.

 

Plaintiff’s other arguments—that the warranty and liability of liability provisions fail their essential purpose—lack merit for the same reasons articulated above in connection with Hypercom Corporation’s demurrer.

 

Accordingly, the demurrer to the fifth and sixth causes of action is SUSTAINED, without leave to amend. (See Goodman, supra, 18 Cal.3d at p. 349.)

 

  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 are barred by the economic loss rule.

 

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, supra, i.e., that if Hypercom Corporation had not misrepresented the capabilities and quality of the T4100 units, it would not have entered into the Purchase Agreement. (See FAC, ¶¶ 92-106.) Plaintiff does not seek to rescind or reform the Purchase Agreement, but essentially affirms the contract by seeking contract damages under a tort theory. (See FAC, Prayer, ¶¶ 1-7.) There is no allegation that parties were of unequal bargaining power. Moreover, based on the terms of the Purchase Agreement, it appears that the parties anticipated the possibility that the Defendants would breach the contract by providing units not in substantial compliance with the official published specifications, allocated the risks accordingly, and provided remedies for any such breach. (See FAC, Ex. B, ¶¶ 9-10.) Most importantly, absent from the FAC is any claim of physical injury to persons or property other that the units themselves that would exempt these claims from the economic loss rule. Consequently, Plaintiff’s seventh and eighth causes of action are barred by the economic loss rule.

 

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

  1. Ninth Cause of Action

Brookfield argues that the ninth cause of action fails because the Defendants’ alleged conduct is not improper and the claim is barred by the economic loss rule. The Court finds that Brookfield’s arguments lack merit for the same reasons previously set forth above with respect to Hypercom Corporation’s demurrer.

 

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

[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] The FAC filed with the Court is missing page 24 and, consequently, only contains the first through eighth causes of action. Nonetheless, it is readily apparent from the parties’ papers that the FAC, as it should appear, also contains a ninth cause of action for intentional interference with contractual relations. Since the allegations of the ninth cause of action are substantially set forth in the parties’ papers and do not appear to be in dispute, the Court is still able to address the demurrers with respect to the ninth cause of action. The Court requests that Plaintiff’s counsel provide it with a copy of page 24 of the FAC for its file and provide Defendants with a copy of the material provided to the Court.

 

[3] Plaintiff failed to include a table of contents and table of authorities in its opposition to Hypercom Corporation’s demurrer even though its opposition exceeds 10 pages. (See Cal. Rules of Ct., rule 3.113(f) [stating that “[a] memorandum that exceeds 10 pages must include a table of contents and a table of authorities”].) Plaintiff is admonished that all future filings must comply with the California Rules of Court.

 

[4] The Court accepts as true, as it must, the allegation that the documents attached to the FAC as Exhibit A are Hypercom Corporation’s official published specifications. (Gregory, supra, 104 Cal.App.4th at p. 850.) Hypercom Corporation’s arguments regarding the truth of this allegation and Plaintiff’s ability to prove the same does not concern the Court on demurrer. (Committee, supra, 35 Cal.3d at pp. 213–214.)

 

[5] To the extent Plaintiff argues that the limitation of liability and/or remedy provision (which is set forth in paragraph ten of the Purchase Agreement) is invalid, its argument is immaterial and does not affect the analysis set forth above. The analysis is based on the terms set forth in paragraph nine of the Purchase Agreement and Plaintiff fails to establish any breach of the Purchase Agreement in the first instance.