GONZALO P. CURIEL, District Judge.
Before the Court is Defendants' motion for leave to file an amended answer and counterclaims. (Dkt. No. 41.) Plaintiff filed an opposition on July 28, 2017 and Defendants filed a reply on August 4, 2017. (Dkt. Nos. 45, 52.) Based on the reasoning below, the Court GRANTS Defendants' motion for leave to file first amended answer and counterclaim.
On April 20, 2016, the case was removed from state court. (Dkt. No. 1.) Plaintiff Duncan Lindsey, Ph.D. ("Plaintiff" or "Dr. Lindsey") filed a complaint alleging state law causes of action for breach of contract, fraud, breach of fiduciary duty, constructive fraud, breach of the implied covenant of good faith and fair dealing, rescission, accounting and declaratory relief against Defendants Elsevier Inc., Elsevier B.V, and Elsevier, Ltd.'s ("Defendants" or "Elsevier") failure to pay him royalties allegedly owed under a written contract for a scholarly research journal. (Dkt. No. 1-2, Compl.) On July 28, 1978, Plaintiff, a distinguished scholar in the field of social work, entered into a contract with Defendants' predecessor, Pergamon Press, to develop and publish a journal called "Children and Youth Services Review" ("CYSR") which became the premier research journal in the field of child welfare social work. (
In 1989, Pergamon Press agreed to increase the editorial subsidy to $2000 per issue. (
Despite the success of CYSR, Plaintiff alleges Elsevier has never paid him any subscription royalties as Elsevier and its predecessor repeatedly informed Plaintiff that the threshold of 750 subscriptions was never met. (
Discovery in this case was conducted in two phases. Phase 1 was to consist only of discovery served by Plaintiff so that he could evaluate the amount of Elsevier's subscription income that is attributable to CYSR and then the parties could engage in settlement discussions. (Dkt. No. 41-1, Jonak Decl. ¶ 4.) Phase 1 ended on December 16, 2016. (
Documents by Dr. Lindsey were not produced until March 31, 2017 and consisted of over 78,000 pages and did not include any metadata. (
From 2008 until 2015, Plaintiff had asked Elsevier to pay part of the editorial subsidy to Renji Mathew ("Renji") in India who Dr. Lindsey claimed was assisting with work on CYSR. (Dkt. No. 41-1, Jonak Decl. ¶ 7.) However, in the initial production of documents, no documents or emails were produced concerning Renji. (
When Defendants conducted their own independent research of Renji, it was discovered his background is in software development and not editorial or child welfare work. (Dkt. No. 41-1, Jonak Decl. ¶ 12.) During the time when Dr. Lindsey was using Mathew's services, Plaintiff "was involved in software ventures utilizing personnel from India that were developing applications matching the identical services provided by Renji and his company, Sykronit. Our investigation has also revealed that Synkronit provided application development services to Webport, one of Lindsey's companies, and helped produce some of its apps, including Airport Pro. Renji and/or Synkronit may also have provided services to other of Lindsey's business ventures." (
Defendants also discovered evidence in Plaintiff's document production that he claimed $1.3 million in expenses for CYSR but the expenses appear to be related to his other business ventures. (
Based on the newly discovered evidence, Defendants seek leave of Court to file a counterclaim against Plaintiff for breach of contract, fraud, and conversion. (Dkt. No. 41-4, Proposed Am. Ans. and Counterclaim.) Plaintiff opposes.
Once a district court has established a deadline for amended pleadings, and that deadline has passed, Federal Rule of Civil Procedure ("Rule") 16 applies to modify a scheduling order.
A scheduling order was filed on September 14, 2016 which set the deadline to amend the pleadings by November 14, 2016. (Dkt. No. 20.) An amended scheduling order, which did not extend the deadlines for amending pleadings, was then filed on January 27, 2017. (Dkt. No. 38.) Because the pleading amendment deadline has long passed, Defendants bear the burden of showing "good cause" to amend the answer and add counterclaims under Rule 16(b).
Under Rule 15(a), leave to amend a complaint after a responsive pleading has been filed may be allowed by leave of the court and "shall freely be given when justice so requires."
Because Rule 15(a) favors a liberal policy, the nonmoving party bears the burden of demonstrating why leave to amend should not be granted.
Plaintiff primarily disputes the motion arguing that the proposed counterclaims are defective by failing to meet the Rule 8 pleading standard, and are consequently futile. Defendants argue they have sufficiently alleged causes of action in their counterclaim.
"A motion for leave to amend may be denied if it appears to be futile or legally insufficient."
Rule 8 requires "a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a)(2). Under Rule 8, detailed factual allegations are not required, but "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."
Moreover, Rule 8's pleading standard does not prevent a plaintiff from "pleading facts alleged `upon information and belief' where the facts are peculiarly within the possession and control of the defendant or where the belief is based on factual information that makes the inference of culpability plausible."
District courts in the Ninth Circuit have also concluded that allegations in a complaint based on "information and belief" are sufficient to survive a motion to dismiss as long as there is some plausible basis to support a cause of action.
Here, Plaintiff argues that all the claims fail to meet the pleading standard of Rule 8 as they are conclusory and are devoid of any factual support. He also argues that the allegations are misleading and intended to imply allegations that are not truthful. Furthermore, he maintains that there are no specific facts to toll the statute of limitations. In reply, Defendants argue that Plaintiff seeks to impose a heightened pleading standard to the breach of contract claim and also improperly disputes the facts alleged in the proposed counterclaim which is not proper on a motion to amend.
Plaintiff argues that no facts are alleged and the allegations are only based on "information and belief" and are conclusory. Defendants dispute Plaintiff's argument asserting that they have sufficiently alleged a breach of contract claim.
Neither party definitively argues whether California or New York law applies. However, at this time, such a determination is not necessary because the elements for a breach of contract claim in California and New York are the same. A breach of contract cause of action in California and New York requires a 1) contract, 2) plaintiff's performance or excuse for performance, 3) defendant's breach and 4) damages.
Of the elements of a breach of contract claim, it appears that Plaintiff is challenging the allegations to support a breach by Plaintiff. The breach of contract claim alleges that Dr. Lindsey breached Defendants' right of first refusal to consider Dr. Lindsey's publication ideas or projects by failing to present other publication ideas and projects to Elsevier and instead pursued them with another publisher, (Dkt. No. 41-1, Proposed Counterclaim ¶ 104), breached his obligation to "endeavor" to obtain sponsorship agreements by not obtaining any sponsorships, (
Next, much of Plaintiff's arguments challenge Defendants' interpretation of the contract and dispute the facts alleged; however, such arguments are not proper on a motion for leave to amend. For example, as to Dr. Lindsey's agreement to endeavor to seek sponsorships, he claims he was not contractually obligated to obtain sponsoring subscriptions, that Elsevier and its predecessor knew that he was not able to obtain sponsorship subscriptions for the past 39 years and yet 39 years later they claim that he breached the contract. These arguments on the merits of the claim are not proper on a motion to amend and the Court is not in a position to resolve any factual disputes. The Court is only obligated to determine whether the alleged facts, taken as true, "may be a proper subject of relief."
Based on the allegations presented in the proposed counterclaim, Defendants have sufficiently placed Plaintiff on notice as to the nature of the claims and present facts that plausibly state a breach of contract claim.
Next, Plaintiff argues that the claims are futile because they are barred by the statute of limitations. Arguing that New York law presumably governs the contract, without legal authority explaining why, Plaintiff asserts that the statute of limitation is six years for a breach of contract claim. In response, Defendants argue that California's statute of limitations apply based on California's "governmental interest" analysis.
This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332(a)(2). (Dkt. No. 1, Notice of Removal ¶ 5.) Under diversity jurisdiction, the court applies the choice-of-law rules of the state in which it sits, and in this case, it is California.
California Civil Code section 1646 provides that "[a] contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made." Cal. Civ. Code § 1646. Section 1646's purpose "is to determine the choice of law with respect to the interpretation of a contract in accordance with the parties' presumed intention at the time they entered the contract."
While a choice of law analysis on the interpretation of the contract is governed by section 1646, the choice of law analysis on which state's statute of limitations should apply is governed by the governmental interest test.
To determine "whether the relevant California statute of limitations . . . or, instead, another jurisdiction's statute of limitations . . . should be applied in a particular case must be determined through application of the governmental interest analysis that governs choice-of-law issues generally."
The parties disagree on whether New York or California law applies to the statute of limitations. A motion for leave to amend is not the proper motion for addressing the applicable statute of limitations that requires full briefing and thoughtful consideration of each state's interest in the case. Plaintiff initially raises the statute of limitations issue in his opposition presuming that New York law applies without any legal analysis on the governmental interest test. Defendants then respond to the argument in its reply applying the governmental interest test. Plaintiff has not had an opportunity to address the governmental interest standard. While the Court has concerns as to whether Defendants' counterclaims may be barred by the statute of limitations, the issue has not been properly briefed and cannot be resolved on this motion.
Plaintiff has not demonstrated that the breach of contract counterclaim is futile.
Plaintiff argues that the fraud and conversion claims are also futile based on the same reasons as the breach of contract claim. He again argues the merits of the two claims arguing it is not possible to allege fraud and conversion claims based on the terms of the contract. Defendants assert that Plaintiff improperly disputes the facts alleged in the counterclaim.
"To establish fraud, a plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance, and injury."
The counterclaim for fraud alleges that Lindsey defrauded Elsevier because he induced it to make, and to continue to make, payments to him as a partial reimbursement of what he claimed to be his editorial costs. (Dkt. No. 41-1, Proposed Counterclaim ¶¶ 112, 117-120, 127-128.) Dr. Lindsey misrepresented and omitted disclosure to Elsevier the "credentials, work, amount, and/or scope of what Renji was doing in India, inducing Elsevier to pay significant editorial subsidies for CYSR, and inducing Elsevier to send monies to Renji, part or all of which was unrelated to CYSR and instead benefitted Lindsey personally and/or his software companies." (
These allegations, taken as true, state a claim for relief for fraud under Rule 8. See
Plaintiff contends that Defendants' failure to raise these claims during the past 39 years that the contract has been in effect constitutes undue delay. In their motion, Defendants claim they sought leave to amend after discovery of the relevant facts.
To determine undue delay, the court considers whether the movant "knew or should have known the facts and theories raised by the amendment in the original pleading."
Here, Defendants assert that they did not learn the editorial subsidy sent to Mathew's in India did not relate to work on CYSR and that he was defrauding Elsevier by having it pay for software development for Lindsey's own private companies until the production of documents recently on March 27, 2017, April 27, 2017, June 23, 2017 and July 29, 2017. Defendants also claim that the facts to support the other causes of action were also recently discovered. Accordingly, the Court concludes that there was no undue delay in filing the motion.
Plaintiff argues that the motion is brought in bad faith and is in response to Dr. Lindsey's lawsuit against Defendants for unpaid royalties in order to pressure him to drop his lawsuit. Specifically, he claims that Defendants concealed their plan to assert counterclaims until after the parties designated their experts on June 26, 2017. Plaintiff was confused as to why Defendants' designation of experts included topics that was outside the scope of the complaint. It was not until a few days later, on June 30, 2017, that Defendants delivered the proposed counterclaim to him. (Dkt. No. 45-1, Valle Decl. ¶ 9.) He further claims the meritless claims alleged are examples of bad faith tactics. Lastly, he contends that Defendants never complained about his efforts to obtain sponsoring subscriptions, and his editorial work or practices concerning CYSR. Therefore, based on these assertions, Defendants' counterclaims are designed to harass and scare Plaintiff into abandoning his claims or having him settle at a lower amount.
In response, Defendants assert that their experts were already going to be designated as they were relevant to Plaintiff's claim for "reasonable compensation" sought in the complaint and to their affirmative defenses. Moreover, Plaintiff knew two weeks before rebuttal expert designation about the proposed counterclaims and while defense counsel offered Plaintiff an additional two weeks to designate any other expert witnesses, he did not. (Dkt. No. 52-1, Jonak Decl. ¶¶ 3, 4, 5, 6, 7.)
The Court concluded above that the counterclaims are not baseless. Defendants assert they timely filed this motion shortly after learning of newly discovered facts from Plaintiff's recent document production. There is no evidence, other than Plaintiff's conclusory allegations, that Defendants brought the instant motion in order to scare Plaintiff to drop the lawsuit. The Court concludes that Plaintiff has not demonstrated that Defendants brought the motion in bad faith.
Plaintiff argues he will be prejudiced as the counterclaim will expand the nature of the case and he will need to take discovery from Elsevier and Pergamon Press and retake the deposition of Robert Miranda, who signed the contract in 1978 and is 83 years old.
Prejudice is the critical factor in considering motions for leave to amend.
Here, discovery is still ongoing with a deadline of October 23, 2017. (Dkt. No. 40 at 2.) Although Plaintiff may have to retake the deposition of Mr. Miranda and some additional discovery from Elsevier, the counter claim will not alter the litigation to take an entirely new course so as to prejudice Dr. Lindsey.
In light of "the strong federal policy favoring the disposition of cases on the merits and permitting amendments with `extreme liberality,'"
Based on the above, the Court GRANTS Defendants' motion for leave to file an amended answer and counterclaim. The amended answer and counterclaim shall be filed within three (3) days of the filed date of the Court's order. The hearing set for August 18, 2017 shall be
IT IS SO ORDERED.