Case Name:    TreasureLife LLC v. Armor Scientific Holdings, Inc.

Case No.:        19-CV-358778

Currently before the Court is the demurrer by plaintiff and cross-defendant TreasureLife LLC (“TreasureLife”) to the first amended cross-complaint (“FACC”) of defendant and cross-complainant Armor Scientific Holdings, Inc. (“Armor Scientific”).

Factual and Procedural Background

TreasureLife brought this action against Armor Scientific, which arises out of a Master Services Agreement (“MSA”) for software consulting and development services.

On April 3, 2020, Armor Scientific filed the operative FACC against TreasureLife.  According to the allegations of the FACC, Armor Scientific is a start-up company which develops and integrates cybersecurity technology for use in businesses.  (FACC, ¶ 6.)  On January 1, 2019, Armor Scientific entered into the written MSA with TreasureLife, under which TreasureLife would provide Armor Scientific with software development and implementation, and technical support services.  (Id. at ¶ 7 & Ex. A.)  The MSA allegedly created a mechanism under which Armor Scientific could ask TreasureLife to create software programs, coding, documentation, and any other materials or work product—defined as “deliverables” in the MSA—in exchange for payment.  (Id. at ¶ 8.)  Armor Scientific could request deliverables through a statement of work (“SOW”), which would describe the deliverables and identify any additional terms applicable to the SOW.  (Id. at ¶ 9.)  Each SOW would be independently negotiated, could contain unique terms and obligations, and would require acceptance by both parties.  (Ibid.)  Under the MSA, each SOW would require “continual work with daily deliverables” due from TreasureLife.  (Ibid.)

Shortly after the MSA was executed, Armor Scientific issued the first SOW to TreasureLife, under which TreasureLife was authorized to create the following deliverable: source code that related to lock and unlock features of Armor Scientific’s software, specifically as it relates to the functionality of the software on Android-Windows systems.  (FACC, ¶ 10.)  To perform this work, TreasureLife selected and hired Innominds, a software developer that would help create the source code deliverables.  (Id. at ¶ 11.)  Innominds and its point of contact Manju Rao (“Rao”) were, and acted at all relevant times as, the agents and/or representatives of TreasureLife.  (Id. at ¶ 12.)

In or about January 2019, Armor Scientific asked TreasureLife to provide a status update on the progress of the deliverables.  (FACC, ¶ 13.)  In response, TreasureLife sent Armor Scientific screenshots of the supposed source code to prove it and Innominds had been actively working on, and making progress toward completing, the deliverables.  (Id. at ¶ 14.)  Rao and Robert Phillips (“Phillips”), TreasureLife’s principal, sent the screenshots to Armor Scientific’s chief technology officer and chief executive officer, Nicholas Buchanan (“Buchanan”) and Barry Nester, respectively.  (Ibid.)  Based on, and in reliance on, the screenshots, Armor Scientific remitted at least $132,484 in payments to TreasureLife.  (Id. at ¶ 15.)

When Armor Scientific requested the actual deliverable itself, TreasureLife refused to provide it.  (FACC, ¶ 16.)  To date, Armor Scientific has not received that, or any other, deliverable from TreasureLife despite having paid TreasureLife at least $132,484.  (Ibid.)

Armor Scientific alleges the screenshots of the supposed progress being made on the deliverable were not actually screenshots of work performed on the deliverables.  (FACC, ¶ 17.)  Rather, the screenshots were of another project TreasureLife had been working on at Phillips’ direction.  (Id. at ¶ 18.)  Armor Scientific alleges TreasureLife intentionally misled it into believing TreasureLife was working on the deliverables in order to gain at least $132,484 in payment, even though TreasureLife did not perform the work as claimed and never planned to actually perform the work.  (Id. at ¶ 19.)

“Ignorant of these facts at the time, in or about March 2019, Armor Scientific issued a second SOW for [d]eliverables to be developed by TreasureLife in the form of additional source code related to the functionality of [its] software to Android-Windows systems.”  (FACC, ¶ 20.)  “In the months that followed, Armor Scientific never received a single [d]eliverable.”  (Id. at ¶ 21.)

On or about May 31, 2019, Buchanan sent an email to Phillips about the status of the deliverables.  (FACC, ¶ 22.)  In the email, Buchanan complained to Phillips that “Innominds is holding our work hostage, holding our environment hostage, and failing to meet a minimum standard to document their work.”  (Id. at ¶ 23.)  Buchanan stated he was “asking [Innominds] to show [him] what [he] bought which is perfectly reasonable [especially] when Innominds is deliberately withholding code and servers.”  (Id. at ¶ 24.)  Armor Scientific’s chief financial officer, Gary Thorholm, then issued a stop work order on both SOWs as well as any and all work being performed by TreasureLife and/or Innominds.  (Id. at ¶ 25.)  At that time, Armor Scientific had yet to receive any of the deliverables it had paid for.  (Id. at ¶ 26.)

On or about June 4, 2019, Buchanan reached out again to Rao, requesting that Innominds and TreasureLife produce the source code Armor Scientific had paid for.  (FACC, ¶ 28.)  “Rao deflected, requested additional time, and reminded … Buchanan how pleased Armor Scientific was with the screenshot demonstrations.”  (Ibid.)  However, Armor Scientific never received the deliverables.  (Ibid.)  Eventually, Phillips and Innominds stopped all communication with Armor Scientific.  (Id. at ¶ 29.)

Based on the foregoing allegations, the FACC alleges causes of action for: (1) breach of contract; and (2) fraud.

On June 3, 2020, TreasureLife filed the instant demurrer to the FACC.  Armor Scientific filed an opposition to the demurrer on August 18, 2020.  On August 25, 2020, TreasureLife filed a reply.

Discussion

            TreasureLife demurs to the FACC on the ground of failure to allege sufficient facts to constitute a cause of action.  (See Code Civ. Proc., § 430.10, subd. (e).)

  1. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading.  (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.)  Consequently, “ ‘[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice’ [citation].” (Hilltop Properties, Inc. v. State (1965) 233 Cal.App.2d 349, 353; Code Civ. Proc., § 430.30, subd. (a).)  “ ‘It is not the ordinary function of a demurrer to test the truth of the … allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. … .’  [Citation.]  Thus, … ‘the facts alleged in the pleading are deemed to be true, however improbable they may be. [Citation.]’ [Citations.]”  (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958.)

  1. First Cause of Action

TreasureLife argues the first cause of action for breach of contract fails because Armor Scientific does not plead facts showing that it breached the MSA.[1]  (Dem, pp. 2:11-12 [“The First Cause of Action for Breach of Contract fails to state facts sufficient to constitute cause of action, because it fails to plead breach of the alleged contract.”], 10:1-2 [“Armor’s allegations and the MSA together show Armor can allege no breach of contract.”].)  TreasureLife contends that it was only required to provide certain services under the terms of the MSA and it, therefore, was not obligated to deliver any deliverables to Armor Scientific.  For these reasons, TreasureLife concludes that it did not breach the MSA by failing to provide any deliverables to Armor Scientific.

“A cause of action for breach of contract requires pleading of a contract, plaintiff’s performance or excuse for failure to perform, defendant’s breach and damage to plaintiff resulting therefrom. [Citation.]”  (McKell v. Washington Mut., Inc. (2006) 142 Cal.App.4th 1457, 1489.)

Here, the MSA states that it “includes provisions for technical management, software design, development and documentation, Software support and maintenance, testing, quality assurance, training and on-going warranty support services to be provided by [TreasureLife] along with any and all partners.”  (FACC, Ex. A, p. 1, “Recitals.”)  The MSA further states that “[Armor Scientific] desires to engage [TreasureLife] on a non-exclusive basis, as an independent contractor, to provide [Armor Scientific] with software development and implementation and technical support services (the ‘Services’), on the terms provided herein.”  (Ibid.)

With respect to the parties’ obligations, the MSA provides “[TreasureLife] shall provide the Services and develop and deliver the Deliverables in accordance with the specification, the development schedule and the other terms and conditions of the SOW as set forth in Exhibit A, as amended from time to time.”  (FACC, Ex. A, p. 2, ¶ 2.1.1.)  A statement of work becomes binding when executed by the parties, and TreasureLife is then obligated to “provide the Services described therein and deliver the Deliverables as specified in such Statement of Work.”  (Id. at Ex. A, pp. 2-2, ¶ 2.1.2.)  “Deliverables” are defined as “the software programs (in object code and source code forms), including Technology …, and the documentation, (including but not limited to all notes, schemas, drafts, etc.), and any other materials or work product developed for [Armor Scientific] under this Agreement or a Statement of Work.”  (Id. at Ex. A, p. 2, ¶ 1.3.)  The fully executed statement of work attached to the MSA as Exhibit A states that it “is for continual work with daily deliverables.”  (Id. at Ex. A, p. 21.)  The statement of work further provides that “[t]his project is ongoing until termination of contract and deliverables will be submitted and completed as the project continues, deliverables will be defined by the CTO and/or Product Manager of Armor Scientific.”  (Ibid.)  Notably, the FACC also alleges that TreasureLife was to create and deliver a specific deliverable, source code.  (FACC, ¶¶ 10 & 20.)

Lastly, the MSA further provides that “[u]pon any termination of a Statement of Work for any reason, [TreasureLife] shall deliver to [Armor Scientific] all Work Product completed to date ….”  (Id. at Ex. A, p. 10, ¶ 3.3.1.)  “Work Product” is defined as “any Deliverables and any other work product or Technology prepared by [TreasureLife], its employees or agents in the course of performing Services pursuant to a Statement of Work or this Agreement. ”  (Id. at Ex. A, p. 2, ¶ 1.7.)

The foregoing demonstrates that, under the terms of the MSA and the statements of work, TreasureLife was obligated to provide not only services, but to develop and deliver deliverables, specifically source code, to Armor Scientific.  Armor Scientific alleges sufficient facts showing that TreasureLife breached this contractual obligation because it alleges that TreasureLife never provided it with any deliverables, such as source code.  (FACC, ¶¶ 16, 21, 26, & 42.)  Thus, TreasureLife’s argument on demurrer lacks merit.

            Accordingly, TreasureLife’s demurrer to the first cause of action is OVERRULED.

III.       Second Cause of Action

            TreasureLife argues the second cause of action for fraud fails because, among other things, Armor Scientific does not plead the element of knowledge with the requisite specificity.

The essential elements of a fraud claim based on an intentional misrepresentation are: “(1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792, citing Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638 (Lazar).)  These elements must be pleaded with particularity.  (Lazarsupra, 12 Cal.4th at pp. 644-645.)  “[G]eneral and conclusory allegations do not suffice.”  (Id. at pp. 644-645.)

Here, Armor Scientific does not allege that TreasureLife knew its alleged representation was false at the time it was made.  Instead, Armor Scientific simply alleges that TreasureLife purported to send it screenshots of the work performed on its project, TreasureLife actually sent it screenshots of work on a different project, and TreasureLife intended to mislead and defraud it.  (FACC, 47 & 50-52.)  These allegations do not show that TreasureLife knew the alleged misrepresentation was false at the time it was made.

            Accordingly, TreasureLife’s demurrer to the second cause of action is SUSTAINED, with leave to amend within 10 days of the filing of this order.

[1]           For the first time in reply, TreasureLife argues Armor Scientific fails to establish its performance under the MSA or its excuse for failure to perform.  (Reply, p. 2:13-15 & 3:7-9.)  TreasureLife did not address these specific elements in its moving papers and its attempt to raise new points regarding those elements for the first time in reply is improper.  (See Tellez v. Rich Voss Trucking Inc. (2015) 240 Cal.App.4th 1052, 1066 [courts do not consider points raised for the first time in a reply brief]; see also Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764 [points raised for first time in a reply brief will ordinarily be disregarded because other party is deprived of the opportunity to counter the argument]; In re Tiffany Y. (1990) 223 Cal.App.3d 298, 302-303; REO Broadcasting Consultants v. Martin (1999) 69 Cal.App.4th 489, 500.)  Consequently, the Court declines to consider TreasureLife’s new arguments.