TRC & Associates Inc v. Nuscience Corporation et al

Filing 94

ORDER that the Court DISMISSES NuSciences Third-Party Complaint WITHOUT LEAVE TO AMEND 71 . The Court also DISCHARGES the Order Show Cause against NuScience as it relates to the Counterclaims against TRC 81 by Judge Otis D. Wright, II .(lc). Modified on 1/13/2014 .(lc).

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UNITED STATES DISTRICT COURT

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CENTRAL DISTRICT OF CALIFORNIA

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TRC & ASSOCIATES,

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ORDER DISMISSING
NUSCIENCE’S THIRD-PARTY
COMPLAINT [71] AND
v.
DISCHARGING ORDER TO SHOW
NUSCIENCE CORPORATION; LUMINA CAUSE RE NUSCIENCE’S
HEALTH PRODUCTS, INC., and DOES
COUNTERCLAIMS [81]
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Case No. 2:13-cv-6903-ODW(CWx)

Plaintiff/Counterdefendant,

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Defendants/Counterclaimants.
NUSCIENCE CORPORATION,
Third-Party Plaintiff,
v.
JOHN CLARK; DAVID MCKINNEY; and
STEPHEN E. ABRAHAM
Third-Party Defendants.

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I.

INTRODUCTION

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On December 19, 2013, the Court ordered Defendants NuScience Corporation

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(“NuScience”) and Lumina Health Products, Inc. (“Lumina”) to show cause why the

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Counterclaims and Third-Party Complaints filed in this action should not be dismissed

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for lack of jurisdiction. (ECF No. 81.) While Lumina agreed to voluntarily dismiss

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its Third-Party Complaint in response to the Order (ECF Nos. 82, 85.), NuScience did

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not. Instead, NuScience contends that its Third-Party Complaint is proper under

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Federal Rule of Civil Procedure 14, warranting the exercise of supplemental

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jurisdiction.

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Complaint contains claims against three Third-Party Defendants, including counsel for

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Plaintiff TRC & Associates (“TRC”). For the reasons discussed below, the Court

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DISMISSES the Third-Party Complaint WITHOUT LEAVE TO AMEND. (ECF

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No. 71.) As to NuScience’s Counterclaims, the Court hereby DISCHARGES the

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Order to Show Cause. (ECF No. 81.) The Counterclaims are now subject to regular

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(ECF No. 83.)

The Court disagrees.

NuScience’s Third-Party

motion practice.
II.

FACTUAL BACKGROUND

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The original Complaint in this action was filed by TRC on September 18, 2013.

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(ECF No. 1.) The Complaint asserts the following four claims against NuScience and

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Lumina: (1) fraud; (2) violation of California’s Unfair Competition Law (UCL), Cal.

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Bus. & Prof. Code §§ 17200; (3) violation of California’s False Advertising Law

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(FAL), Cal. Bus. & Prof. Code §§ 17500; and (4) violation of the Racketeer

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Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961. TRC is a

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retailer of nutritional supplements.

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manufactures a supplement known as CELLFOOD, and Lumina is the domestic

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distributor of the product. (Id. ¶¶ 26, 63.) TRC’s claims are based on alleged

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misrepresentations by NuScience and Lumina regarding CELLFOOD’s ingredients,

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safety, and effects. Specifically, the Complaint alleges that NuScience and Lumina

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actively concealed a key ingredient in CELLFOOD that poses a “severe health

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hazard” and misrepresented compliance with federal regulations. (Id. ¶¶ 49–62.)

(Compl. ¶ 17.)

NuScience develops and

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While this case is still at the pleadings stage, the Court has already had the

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opportunity to rule on several matters. The Court has denied multiple applications to

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place filings under seal, including an attempt by NuScience to have the entire

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Complaint sealed. (ECF Nos. 18, 21, 33, 60.) The Court has also denied two Motions

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to Disqualify Plaintiff’s Counsel Stephen Abraham filed by NuScience and Lumina.

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(ECF No. 63.) Two Motions to Dismiss were denied as well. (ECF No. 64.)

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On December 2, 2013, NuScience answered TRC’s Complaint. (ECF No. 66.)

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An Amended Answer was filed on December 18, 2013, adding counterclaims against

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TRC that include misappropriation of trade secrets and unfair business practices.

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(ECF No. 80.) Along with the Amended Answer and Counterclaims, NuScience also

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filed a Third-Party Complaint against David McKinney, Stephen Abraham, and John

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Clark. (ECF No. 71.) McKinney is a former employee of NuScience. Abraham is

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TRC’s counsel in this action. Clark is allegedly the controlling shareholder of TRC.

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The Third-Party Complaint asserts eight claims including breach of contract, fraud,

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misappropriation of trade secrets, aiding and abetting, interference with contractual

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relations, and unfair business practices. All of the claims do not necessarily apply to

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every Third-Party Defendant. Lumina also filed counterclaims against TRC and a

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Third-Party Complaint against Clark. (ECF Nos. 73, 74.)

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On December 19, 2013, the Court issued an Order to Show Cause regarding the

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Counterclaims and Third-Party Complaints filed by NuScience and Lumina. (ECF

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No. 81.) Of particular concern to the Court was whether Federal Rule of Civil

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Procedure 14 permitted the impleader of the parties named in the Third-Party

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Complaints. The Court also expressed concern over the exercise of supplemental

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jurisdiction, since none of the new claims are based on federal law. Lumina filed a

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response to the Order on December 23, 2013, stating that it would voluntarily dismiss

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its Third-Party Complaint. 1 (ECF No. 82, Ex. A.) Based on this representation, the

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Court discharged the Order to Show Cause as to Lumina, leaving Lumina’s

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Counterclaims subject to regular motion practice. (ECF No. 84.) On December 27,

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2013, NuScience filed a response to the Order. (ECF No. 83.) Unlike Lumina,

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Lumina filed a Notice of Dismissal on January 6, 2014, generating the dismissal of Lumina’s
Third-Party Complaint against Clark. (ECF No. 85.)

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NuScience maintains that its Third-Party Complaint is proper under the Federal Rules

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of Civil Procedure.
III.

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LEGAL STANDARD

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Third-party practice is governed by Federal Rule of Civil Procedure 14. “A

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defending party may, as a third-party plaintiff, serve a summons and complaint on a

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nonparty who is or may be liable to it for all or part of the claim against it.” Fed. R.

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Civ. P. 14(a)(1). It is not sufficient that a third-party claim is related or arises out of

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the same set of facts. United States v. One 1977 Mercedes Benz, 708 F.2d 444, 452

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(9th Cir. 1983), cert. denied, 464 U.S. 1071 (1984). “[A] third-party claim may be

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asserted only when the third party’s liability is in some way dependent on the outcome

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of the main claim and the third party’s liability is secondary or derivative.” Id.

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(emphasis added); see also Stewart v. American Intern. Oil & Gas Co., 845 F.2d 196,

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199–200 (9th Cir. 1988); Krainski v. Mill, 356 Fed. Appx. 951, 952 (9th Cir. 2009).

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The decision to permit the impleader of a third-party defendant rests within the sound

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discretion of the trial court. Sw. Adm’rs, Inc. v. Rozay’s Transfer, 791 F.2d 769, 777

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(9th Cir. 1986); see also Fed. R. Civ. P. 14 advisory committee notes.
IV.

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DISCUSSION

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NuScience’s Third-Party Complaint contains claims against three Third-Party

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Defendants—David McKinney, Stephen Abraham, and John Clark. NuScience raises

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distinct arguments in support of impleader for each of these Third-Party Defendants.

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Accordingly, the Court addresses each in turn.

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A.

David McKinney

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NuScience’s claims against David McKinney are premised on his former

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employment at NuScience as head of its sales department. (NuScience Compl. ¶ 47.)

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According to NuScience, McKinney has a contractual duty not to disclose certain

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information that he obtained during his employment. (Id. ¶¶ 48–54.) But NuScience

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alleges that McKinney breached that duty by aiding in TRC’s current litigation against

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NuScience. (E.g., id. ¶¶ 102–103.) McKinney is allegedly the source of certain

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information contained in TRC’s Complaint and has also submitted declarations in

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support of TRC’s responses to motions in this action. (Id.) NuScience alleges that

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McKinney’s contract provides for indemnification in the event that a breach results in

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any claims, costs, or attorneys’ fees for NuScience. (Id. ¶ 54.) Since indemnification

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is available, NuScience argues that impleader is proper against McKinney under

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Federal Rule of Civil Procedure 14. NuScience also contends that any additional

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claims, 2 not arising under the alleged breach of contract, are properly joined under

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Federal Rule of Civil Procedure 18(a).

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The problem with NuScience’s arguments in support of the third-party claims

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against McKinney is that the connection between McKinney’s alleged breach of

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contract and TRC’s claims is ancillary at best. McKinney’s alleged role is essentially

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that of a whistleblower. McKinney may be supplying information to TRC, and that

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information may be in breach of an employment agreement with NuScience; however,

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McKinney’s employment agreement is in no way central to the disposition of TRC’s

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claims against NuScience.

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employment agreement with NuScience does not make NuScience any less liable for

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the alleged fraudulent conduct against TRC. NuScience’s claims against McKinney

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are not dependent on the outcome of the main claims asserted by TRC. McKinney

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could be found liable for breach of contract, or any of the other claims in the Third-

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Party Complaint, regardless of the outcome of TRC’s claims. See One 1977 Mercedes

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Benz, 708 F.2d at 452 (requiring that third-party claims be in some way dependent on

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the outcome of the main claims).

The fact that McKinney may have breached an

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Moreover, the policy behind impleader—judicial efficiency—actually works

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against NuScience here. See Sw. Adm’rs, 791 F.2d at 777 (citing judicial efficiency as

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the purpose for Federal Rule of Civil Procedure 14). Delving into the terms of

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McKinney’s employment agreement in this case would send the Court and this

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The Third-Party Complaint asserts the following claims for relief against McKinney: breach of
contract, fraud, misappropriation of trade secrets (two counts), aiding and abetting, and indemnity.

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litigation down a rabbit hole and result in undue delay and prejudice to the ongoing

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proceedings. Cf. Lehman v. Revolution Portfolio LLC, 166 F.3d 389, 393 (1st Cir.

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1999) (allowing impleader of joint tortfeasors because it would not cause undue delay

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or prejudice the ongoing proceedings).

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NuScience’s third-party claims against McKinney.

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B.

Therefore, the Court DISMISSES

Stephen Abraham

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NuScience asserts one claim against Stephen Abraham for intentional

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interference with contractual relations. Abraham is counsel for TRC in this action and

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has also represented McKinney in the past. NuScience’s claim against Abraham is

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closely related to its claims against McKinney. According to NuScience, Abraham

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has encouraged McKinney to breach his employment agreement with NuScience in

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order to further TRC’s lawsuit. (E.g., NuScience Compl. ¶¶ 102–03.) NuScience

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argues that impleader is proper with respect to Abraham because his alleged conduct

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is “intimately connected with TRC’s allegations” and “his liability is dependent on the

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outcome of TRC’s Complaint.” (ECF No. 83 at 12:5–7.) NuScience then boldly

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asserts—without any legal support—that Abraham is derivatively liable for any

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damages NuScience may incur as a result of TRC’s claims. (Id. at 12:7–15.)

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The Court has déjà vu with respect to NuScience’s arguments in support of the

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third-party claims against Abraham.

The Court denied NuScience’s Motion to

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Disqualify Abraham less than two months ago. (ECF No. 63.) Now, it appears that

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NuScience is trying to circumvent the Court’s Order by bringing Abraham into the

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suit as a party. The Court is unwilling to play NuScience’s game. The allegations

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against Abraham in the Third-Party Complaint are almost identical to the arguments

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that this Court rejected in denying the Motion to Disqualify. The Court will not

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revisit those issues in a Third-Party Complaint after finding them irrelevant to TRC’s

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claims in the Motion to Disqualify. (See id. at 6–7.) Notwithstanding the Motion to

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Disqualify, the Court also finds that the claim against Abraham turns on the

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disposition of claims against McKinney, not TRC. The claim against Abraham is

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premised on the alleged employment agreement with McKinney. Since the Court has

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already rejected the claims against McKinney as being outside the purview of

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impleader in this case, so too follows the claim against Abraham. Thus, the Court

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DISMISSES NuScience’s third-party claim against Abraham.

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C.

John Clark

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NuScience’s third-party claims against John Clark are for misappropriation of

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trade secrets, aiding and abetting, and unfair business practices. Clark is allegedly an

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officer and controlling shareholder of TRC and, in NuScience’s own words, “his

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actions are indistinguishable from that of the company.” (ECF No. 83 at 13:17–19.)

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According to NuScience, the third-party claims against Clark are proper under Federal

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Rule of Civil Procedure 14 because his allegedly fraudulent conduct is behind TRC’s

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lawsuit. (See id. at 2:26–3:3.) NuScience argues that this conduct makes Clark

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“liable to NuScience for any damages it sustains in this suit.” (Id. at 3:3–4.)

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The Court cannot comprehend NuScience’s logic with respect to the claims

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against Clark. NuScience appears to be arguing that Clark is derivatively liable to

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NuScience for TRC’s claims, yet NuScience admits that Clark’s actions are

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“indistinguishable” from TRC’s actions. If TRC’s lawsuit is found to be premised on

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fraudulent conduct, then TRC’s claims would fail, and NuScience would not be liable.

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If TRC’s claims succeed, then they were not premised on fraudulent conduct by Clark,

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whose actions are “indistinguishable” from TRC’s actions. There is no scenario that

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the Court can dream up under which NuScience could be found liable for TRC’s

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claims and Clark derivatively liable to NuScience for the damages that result. It

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makes no sense. Under NuScience’s theory, TRC would be paying its own damages

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if NuScience was found liable.

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Since a third-party defendant’s liability must be secondary or derivative, the

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Court DISMISSES the third-party claims against Clark. One 1977 Mercedes Benz,

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708 F.2d at 452. The Court notes that there is nothing to stop NuScience from suing

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Clark, or anyone else associated with TRC, at a later time to recover damages incurred

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in the event TRC’s claims fail as a result of fraudulent conduct. Moreover, if Clark’s

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conduct really is “indistinguishable” from that of TRC, then the counterclaims that

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have been filed against TRC are the proper means of seeking relief.
V.

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CONCLUSION

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For the reasons discussed above, the Court DISMISSES NuScience’s Third-

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Party Complaint WITHOUT LEAVE TO AMEND. (ECF No. 71.) The Court also

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DISCHARGES the Order Show Cause against NuScience as it relates to the

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Counterclaims against TRC. (ECF No. 81.)

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IT IS SO ORDERED.

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January 13, 2013

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____________________________________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE

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