Demurrer to Complaint
Requests for Judicial Notice
Tentative: Overrule – 21 days to answer.
Defendant Planet DDS developed a web-based dental practice management software that it markets under the name Denticon. Quality Systems, Inc. (QSI) alleges it has a 7-year contract with Planet DDS for the exclusive marketing rights of the same software (which it sells under the name QSI Dental Web) to certain types of “high end” customers.
QSI has now sued, claiming Planet DDS breached the exclusivity provision of the parties’ agreement. Seven causes of action re alleged: (1) Breach of Contract, (2) Breach of the Implied Covenant of Good Faith and Fair Dealing, (3) Declaratory Relief, (4) Intentional Interference with Prospective Economic Advantage, (5) Negligent Interference with Prospective Economic Advantage, (6) Unfair business practices (Bus. & Prof. Code § 17200), and (7) Unfair competition (Bus. & Prof. Code § 17200). The allegations in each preceding paragraph are incorporated into each succeeding cause of action.
While the parties’ agreement is not attached as an exhibit to the complaint, the parties have stipulated the court may take judicial notice of it and consider it in ruling on the demurrer.
Plaintiff also seeks judicial notice of an order by the California supreme Court in the matter of Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937. The court denies the request as the scope of the decision is described in the decision itself.
There are 14 pages of allegations before the first cause of action first cause of action appears on page 15 of the 29-page complaint. The demurrer to the first and third causes of action (breach of contract and declaratory relief) are based on Defendant’s argument that Business & Professions Code section 16600 voids Section 10(b) of the parties’ Exclusive Software License Agreement (the “License Agreement”). Even if true, such a finding by this court would not dispose of the entirety of either cause of action. Paragraph 34 of the Complaint contains allegations that Planet DDS intentionally delayed releasing material enhancements and updates for the software until after the initial four-year term when such information was to be provided at no additional charge, an alleged breach entirely unrelated to the Business Restrictions provision. The Agreement, in Section 3(a), expressly requires Planet DDS during the initial royalty period to promptly notify QSI of material updates or enhancements to the software and deliver them at no additional charge. This Defendant allegedly did not do.
In ruling on the Demurrer, the Court must accept all properly pleaded factual allegation as true. this allegation is properly pleaded and not dependent on the section 16600 analysis.
The second cause of action is for breach of the covenant of good faith and fair dealing. QSI’s allegation of a breach of paragraph 3(a)’s requirements for software enhancements is properly pleaded and must be accepted as true in ruling on the demurrer. those allegations are sufficient to overrule the demurrer to this cause of action. Planet DDS focused its arguments on the allegations concerning customer leads only, arguing the obligation to provide customer leads was not an express term of the parties’ agreement. Again, that may or may not be so, but the argument, even if legally correct, does not dispose of the entire cause of action.
In the fourth and fifth causes of action for intentional and negligent interference with prospective economic advantage, QSI sufficiently alleges Planet DDS intentionally interfered with QSI’s relationship with existing and prospective customers by, among other things, falsely telling prospective customers that “Planet Defendant’s source code was better than QSI’s source code and that QSI’s product would not scale in the manner the customer wanted” and that Planet DDS “is part of QSI.” (Compl. ¶ 48.) These allegations are incorporated by reference into the fourth and fifth causes of action. (¶¶ 71.) Planet DDS’s arguments that (1) the statement regarding the source code is non-actionable opinion and (2) QSI is attempting to “tortify” the breach a contract claim by alleging torts arising from the alleged breach of the Business Restrictions provision would not dispose of the entire cause of action. Further, the alleged defamatory statements are factual allegations independent from the contractual obligations that are part of the parties’ License Agreement, so QSI is not barred from bringing a tort claim.
Demurrers based on uncertainty are disfavored, and Planet DDS is sufficiently on notice of the claims and allegations against it to frame the issues for discovery.
With respect to the cause of action for negligent interference, Planet DDS does not cite any authority for its argument that “[t]he mere existence of a contract between QSI and Planet DDS does not establish the requisite duty of care” (Motion 12:17-18), so the Court makes no finding on that issue at this time. “Every brief should contain a legal argument with citation to authorities on the points made. If none is furnished on a particular point, the court may treat it as waived, and pass it without consideration.” (People v. Stanley (1995) 10 Cal.4th 764, 793).
The sixth cause of action for violation of the Unfair Practices Act (Bus. & Prof. Code § 17000) and the seventh for violation of the Unfair Competition Law (Bus. & Prof. Code § 17200) allege Planet DDS sold its product below cost or as a loss leader in order to divert business from QSI, including selling at least one product to a customer free of charge even though the cost was greater than zero. (Compl. ¶¶ 48, 103-105.). Pursuant to Business and Professions Code Section 17043, “[i]t is unlawful for any person engaged in business within this State to sell any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition.” It also is unlawful for any person engaged in business within this State “to sell or use any article or product as a ‘loss leader.’” (Bus. & Prof. Code § 17044.) “Loss leader” means any article or product sold at less than cost: (a) Where the purpose is to induce, promote or encourage the purchase of other merchandise; or (b) Where the effect is a tendency or capacity to mislead or deceive purchasers or prospective purchasers; or (c) Where the effect is to divert trade from or otherwise injure competitors. (Bus. & Prof. Code § 17030.) QSI’s allegations are sufficient for pleading purposes.
Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal. 4th 163, 170, cited by Planet DDS, involved evidence at trial, not a challenge to the pleadings. Here, QSI has sufficiently alleged facts that, if true, could give rise to an inference that Planet DDS offered the product below cost for the specific purpose of injuring Plaintiff.
With respect to the costs to produce the product, QSI did not specify Planet DDS’s costs, but rather alleged the cost is greater than zero, and specified the types of costs that would be incurred. (Compl. ¶ 103.) Citing Indep. Journal Newspapers v. United W. Newspapers, Inc. (1971) 15 Cal. App. 3d 583, 587, Planet DDS argues this is insufficient and QSI is in the same business as Planet DDS and could have given an estimate. In light of QSI’s allegation that Planet DDS gave the software to a customer free of charge, and QSI’s allegation of the types of costs that are incurred, the complaint sufficiently puts Planet DDS on notice of the allegations to frame the issues for discovery.
Planet DDS also seeks to introduce facts outside the complaint by arguing the customer receiving the free produce was a charitable organization. That cannot be considered on demurrer.