Fiteq Inc v. Venture Corporation et al

Filing 289

ORDER by Judge Beth Labson Freeman granting 199 Motion for Partial Summary Judgment. (blflc3S, COURT STAFF) (Filed on 6/30/2015)

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1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 FITEQ INC, Case No. 13-cv-01946-BLF Plaintiff, 8 v. 9 10 VENTURE CORPORATION, et al., Defendants. ORDER GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION [Re: ECF 199] United States District Court Northern District of California 11 12 13 Plaintiff FiTeq is a research and development company that has designed a novel “smart” 14 credit card, containing an on-board computer that FiTeq contends could prevent data breaches and 15 the theft of the card user’s personal identifying information. In 2009, FiTeq entered into a contract 16 (the “2009 Agreement”) with Defendant Venture, an electronic design and manufacturing 17 company, seeking to engineer a mass producible design for this “smart” credit card. Whether that 18 contract binds Venture to obligations to manufacture the credit card is the issue presented by this 19 motion. 20 FiTeq’s card has never been manufactured. Although the parties agree that they entered 21 into a contract, the proper interpretation of the 2009 Agreement forms the linchpin of the parties’ 22 present dispute. Plaintiff moves for partial summary adjudication on two issues of contract 23 interpretation: (1) that “under the Operating Agreement and Common Stock Purchase Agreement, 24 and subject to the terms and conditions stated therein, Venture had the obligation to manufacture 25 all cards required by FiTeq’s agreements with card issuers,” and (2) “those conditions did not 26 require FiTeq to provide any consideration, funding, or financing for Venture’s card 27 manufacturing capacity or card production other than as expressly stated in the two contracts.” 28 Mot., ECF 199 at 1. Having reviewed the submissions of the parties, the underlying contract, and the arguments 1 2 3 made by counsel, the Court GRANTS Plaintiff’s motion, for the reasons set forth herein. I. BACKGROUND 4 A. Undisputed Facts 5 A review of the parties’ papers shows that the following facts are undisputed. 6 On July 15, 2009, following lengthy negotiations over a six-month period, the parties 7 entered into an Operating Agreement – the 2009 Agreement. See id. Exh. Y. The 2009 Agreement 8 states that it is to be interpreted pursuant to California law. See Exh. Y at § 17.2. FiTeq terminated 9 the 2009 Agreement sometime in late 2012 or early 2013. See SAC ¶ 117. 10 The 2009 Agreement’s Recitals state that Venture “desires to invest in and be engaged by United States District Court Northern District of California 11 FiTeq in the engineering and manufacturing of FiTeq Cards,” while FiTeq “desires to engage 12 Venture to enhance its card technology.” Id. at 7. In Section 3, entitled “Services and Right of 13 Exclusivity,” the contract states that Venture would “provide [] engineering and manufacturing 14 services to FiTeq,” id. at 8 (Section 3.1), and that “Venture will serve as FiTeq’s sole source for 15 the engineering services pursuant to the Statement of Work and manufacturing of FiTeq Cards,” 16 id. (Section 3.2). The 2009 Agreement further provides that Venture was obligated to conform its 17 manufacturing process to the certification requirements of major credit card companies, including 18 American Express, Discover, JCB, MasterCard, and Visa, and that FiTeq was required to “use its 19 best efforts to assist Venture” in obtaining these certifications. See id. at 10 (Section 4.1.4). 20 Once the FiTeq Card was certified and available for sale, additional obligations arose. 21 Under the 2009 Agreement, when FiTeq was to have received a purchase order from a third-party 22 buyer, it was obligated to “forward the Purchase Order to Venture for its acceptance, rejection, or 23 modification.” See id. at 14 (Section 5.3.1). The 2009 Agreement permitted Venture to “reject a 24 Purchase Order by modification only if” certain conditions were met, including if “the Unit Price 25 on the Purchase Order is less than the Standard Unit Price,” id. at 15 (Section 5.3.3), and was 26 required, upon such a rejection, to provide to FiTeq with information, including an acceptable 27 price, quantity, and delivery date, that FiTeq could then communicate to the buyer for further 28 negotiation. See id. (Section 5.4). Upon written acceptance of the Purchase Order, FiTeq would 2 1 “assign the Purchase Order to Venture” and Venture would “receive payment directly from the 2 Buyer.” Id. at 16 (Section 5.6). Section 5.1 states that this assignment was so “Venture can finance 3 turnkey manufacturing and be the recipient of a portion of the payment owed . . . as it becomes 4 due.” See id. at 15. If FiTeq nonetheless received payment directly from the buyer, FiTeq would 5 promptly transmit the payment to Venture. See id. at 16 (Section 5.6). 6 Section 5.7 of the Agreement sets forth Venture’s obligations regarding shipment and 7 delivery of the cards and the liabilities of both parties following the departure of a shipment from 8 Venture’s dock. See id. (“All FiTeq Cards delivered pursuant to the terms of this Agreement shall 9 be suitably packed for shipment in accordance with the Specifications and marked for shipment by Venture.”). Under Section 5.8, FiTeq had certain rights to inspect incoming shipments and reject 11 United States District Court Northern District of California 10 the cards that were shipped, after which time Venture would “verify the non-compliance of the 12 affected FiTeq cards,” and, if it deemed the cards non-complaint, “at its own costs [] replace the 13 defective FiTeq Cards.” Id. 14 Section 7 of the Agreement outlined a number of warranties, including that each card 15 “shall comply with all applicable specifications,” “shall be new and unused,” and that each card is 16 warranted from defects for a time period of “24 months after personalization, or 26 months ex 17 factory, or 2100 swipes, whichever is earlier.” Id. at 17. Section 13.3 described the manner in 18 which Venture would indemnify FiTeq against any claims by a third-party that arose “out of or in 19 connection with any breach of the warranty as set out in Section 7.1.” See id. at 26. 20 Section 10 of the 2009 Agreement sets forth a “notice and cure” procedure that would be 21 invoked if either party failed to meet any of its obligations set forth in the Agreement. See id. at 22 21-22. If either party breached the Agreement and the breach could not be resolved pursuant to the 23 notice and cure procedures, Section 12.2 authorized the non-breaching party to “issue a written 24 notice to the other Party to cure the breach within 30 days of the receipt of the written notice. If 25 the non-compliance is not remedied within the said 30 days, the non-defaulting Party may 26 terminate the agreement.” Id. at 24. 27 28 The parties also, in Section 11.2, formed a Management Arbitration Subcommittee to serve as the “body for final resolutions of issues related to this Agreement, including but not limited to 3 1 this Agreement, the manufacturing services, the engineering services as set out in the SOW,” and 2 other matters. See id. at 23. This subcommittee would “define Notice and Cure Procedures,” and 3 would meet quarterly to resolve any issues between the parties. Were the parties unable to reach 4 an agreement within 60 days, the parties were permitted to terminate the agreement according to 5 Section 12.2 or bring a claim consistent with Section 17.2, which permits a party to bring suit in 6 “state or federal courts located in Santa Clara, California.” Id. at 28. 7 Finally, the Agreement contained an integration clause at Section 17.13. See id. at 30 8 (“This Agreement . . . supersedes any and all prior proposals, understandings and agreements 9 between the Parties with respect to the subject matter hereof.”). The parties also entered into a Common Stock Purchase Agreement (hereinafter the 10 United States District Court Northern District of California 11 “Stock Agreement”), in which Venture purchased $500,000 in FiTeq in exchange for 1 million 12 shares of FiTeq common stock. See id. Exh. V at 2 (Section 1.1). This Stock Agreement also 13 contained an integration clause. See id. at 13 (Section 5.11). Plaintiff’s Legal Claims Relevant to this Motion 14 B. 15 Plaintiff brings suit for, among other claims, breach of contract, alleging that after the 16 parties executed the 2009 Agreement, Venture began work “finish[ing] the card design and 17 creat[ing] a scalable manufacturing process.” Mot. at 15. It argues that “within months” Venture 18 began missing deadlines despite “falsely [telling] FiTeq that it had hit every engineering 19 benchmark in the Operating Agreement.” Id. at 16. Thereafter, in 2012, FiTeq alleges that Venture 20 attempted to renegotiate the 2009 Agreement, demanding “FiTeq pay it millions of dollar up-front 21 to obtain Venture’s performance of its contractual manufacturing obligations, including paying to 22 build Venture’s card manufacturing factory in Singapore.” Id. FiTeq then terminated the 2009 23 Agreement, and this action followed. See id. 24 25 II. LEGAL STANDARD Federal Rule of Civil Procedure 56 governs motions for summary judgment. Summary 26 judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions 27 on file, together with the affidavits, if any, show that there is no genuine issue as to any material 28 fact and that the moving party is entitled to a judgment as a matter of law.” Celotex Corp. v. 4 1 Catrett, 477 U.S. 317, 322 (1986). “Partial summary judgment that falls short of a final 2 determination, even of a single claim, is authorized by Rule 56 in order to limit the issues to be 3 tried.” State Farm Fire & Cas. Co. v. Geary, 699 F. Supp. 756, 759 (N.D. Cal. 1987). The moving party “bears the burden of showing there is no material factual dispute,” Hill 4 5 v. R+L Carriers, Inc., 690 F.Supp.2d 1001, 1004 (N.D.Cal.2010), by “identifying for the court the 6 portions of the materials on file that it believes demonstrate the absence of any genuine issue of 7 material fact.” T.W. Elec. Serv. Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 8 1987). In judging evidence at the summary judgment stage, “the Court does not make credibility 9 determinations or weigh conflicting evidence, and is required to draw all inferences in a light most favorable to the nonmoving party.” First Pac. Networks, Inc. v. Atl. Mut. Ins. Co., 891 F. Supp. 11 United States District Court Northern District of California 10 510, 513–14 (N.D. Cal. 1995). For a court to find that a genuine dispute of material fact exists, 12 “there must be enough doubt for a reasonable trier of fact to find for the [non-moving party].” 13 Corales v. Bennett, 567 F.3d 554, 562 (9th Cir. 2009). 14 III. DISCUSSION 15 The limited question before the Court is how to interpret the 2009 Agreement. 16 Contract interpretation is a question of law to be determined by the Court. See, e.g., TRB 17 Investments, Inc. v. Fireman’s Fund Ins. Co., 40 Cal. 4th 19, 27 (2006). California law makes 18 clear that the “fundamental rules of contract interpretation are based on the premise that the 19 interpretation of a contract must give effect to the ‘mutual intention’ of the parties.” Id. The intent 20 of the parties “at the time the contract is formed” governs the Court’s interpretation, see Cal. Civ. 21 Code §1636, and this intent “is to be inferred, if possible, solely from the written provisions of the 22 contract.” Cal. Civ. Code § 1639. “If the contractual language is clear and explicit, it governs.” 23 County of San Diego v. Ace Prop & Cas. Ins. Co., 37 Cal. 4th 406, 415 (2005) (citing Bank of the 24 West v. Superior Court, 2 Cal. 4th 1254, 1264 (1992)). 25 To that end, “language in a contract must be construed in the context of [the] instrument as 26 a whole . . . and cannot be found to be ambiguous in the abstract.” Bay Cities Paving & Grading, 27 Inc. v. Lawyers’ Mut. Ins. Co., 5 Cal. 4th 854, 867 (1993). “Courts will not adopt a strained or 28 absurd interpretation in order to create an ambiguity where none exists.” Reserve Ins. Co. v. 5 1 Pisciotta, 30 Cal. 3d 800, 807 (1982). 2 A. The 2009 Agreement is Both a Development and Manufacturing Agreement 3 Plaintiff seeks partial summary adjudication as to the following issue: “[U]nder the 4 Operating Agreement and Common Stock Purchase Agreement, and subject to the terms and 5 conditions stated therein, Venture had the obligation to manufacture all cards required by FiTeq’s 6 agreements with card issuers.” See Mot. at 1. Plaintiff argues that the 2009 Agreement, though one integrated contract, includes two 7 8 “phases”: a development phase and a production/manufacturing phase. See Hearing Tr. at 5:19-22 9 (The Court: “Is it fair for me to look at this like the TK Power case as a development phase and a production phase contract?” Mr. Hosie: It does, indeed.”). Venture contends that the 2009 11 United States District Court Northern District of California 10 Agreement is only a development contract, because the agreement lacked a significant number of 12 essential commercial manufacturing terms. See, e.g., Opp. at 5-8; see also Hearing Tr. at 12:10- 13 13:16. FiTeq argues that the production portion of the 2009 Agreement is a manufacturing 14 requirements contract which is enforceable despite any open terms it may contain. See Reply at 1. 15 Though the parties present the Court with ample parol evidence, both parties agree that the 16 contract is unambiguous and should be interpreted on its face, without a review of parol evidence. 17 See Mot. at 19 (“[T]he Operating Agreement and Purchase Agreement are unambiguous.”); see 18 Opp. at 1 (“Defendants agree with FiTeq, Inc. that the Operating Agreement was carefully 19 negotiated over months, is unambiguous and should be interpreted without resorting to parol 20 evidence.”); see also Reply at 10.1 The Court agrees with the parties, and interprets the contract 21 according to its four corners, without regard to parol evidence. Cf. Bay Cities at 874. In support of its motion, FiTeq argues that the 2009 Agreement “is rife with explicit terms 22 23 discussing Venture’s mass production of FiTeq cards,” including referring to Venture as the “sole” 24 1 25 26 27 28 The parties, however, express substantial disagreement about the parol evidence that was produced. Both parties argue that the parol evidence supports their respective interpretations of the contract, and Defendant further argues that the parol evidence produced by Plaintiff creates a dispute of material fact that precludes summary adjudication. See Opp. at 9. To that end, Venture objects to exhibits A-Q, S-U, W-X, and AA-EE to the Hosie Declaration, ECF 199-1, under Federal Rule of Evidence 402. Because the Court construes the contract on its face, Venture’s objection is SUSTAINED to the extent the evidence is offered for the purpose of adding to or modifying the terms of the 2009 Agreement. See Masterson v. Sine, 68 Cal. 2d 222, 225 (1968). 6 1 supplier of the cards to FiTeq and stating that Venture would be compensated for production 2 through the assignment of purchase orders by FiTeq to Venture in order to “finance turnkey 3 manufacturing.” See Mot. at 18-19. 4 Thus, FiTeq contends, the manufacturing and production portions of the 2009 Agreement 5 constitute a requirements contract governed by the California Commercial Code (“CCC”). Under 6 Section 2204 of the CCC, a “contract for sale of goods may be made in any manner sufficient to 7 show agreement,” and “[e]ven though one of more terms are left open a contract for sale does not 8 fail for indefiniteness if the parties have intended to make a contract and there is a reasonably 9 certain basis for giving an appropriate remedy.” Cal. Comm. Code §§ 2204(1), 2204(3). The CCC expressly recognizes that such contracts may leave open price terms. See Cal. Comm. Code. § 11 United States District Court Northern District of California 10 2305(1) (“The parties if they so intend can conclude a contract for sale even though the price is not 12 settled. In such a case the price is a reasonable price at the time for delivery if . . . [t]he price is left 13 to be agreed by the parties and they fail to agree.”). When parties leave open a price term, the 14 party charged with fixing the price has an obligation to fix said price in good faith. See id. § 15 2305(2). If, however, the parties “intend not to be bound unless the price be fixed or agreed and it 16 is not fixed or agreed there is no contract.” See id. § 2305(4). 17 A contract is “void and unenforceable if it is so uncertain and indefinite that the intention 18 of the parties in material particulars cannot be ascertained.” Netbula, LLC v. BindView Dev. Corp., 19 516 F. Supp. 2d 1137, 1155 (N.D. Cal. 2007). This means that the “scope of the duty and limits of 20 acceptable performance must be.” Id. But even where a contract vests the power to vary price 21 terms with one party, the contract is not rendered illusory so long as “the party’s actual exercise of 22 that power is reasonable.” See Perdue v. Crocker Nat’l Bank, 38 Cal. 3d 345, 352 (1985). 23 When a buyer “expressly or implicitly promises he will obtain his goods or services from 24 the [seller] exclusively,” a requirements contract is formed. See, e.g., Harvey v. Fearless Farris 25 Wholesale, Inc., 589 F.2d 451, 461 (9th Cir. 1979); see also Cal. Comm. Code § 2306(2) (“A 26 lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods 27 concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply 28 the goods and by the buyer to use best efforts to promote their sale.”). A requirements contract 7 1 exists “where the seller agrees to supply all of the buyer’s requirements.” See Mozaffarian v. 2 Breitling, 1998 WL 827596, at *8-9 (N.D. Cal. 1998). “Requirements contracts have been 3 enforced by the courts with little difficulty, where the surrounding circumstances indicate the 4 approximate scope of the promise.” Amber Chemical, Inc. v. Reilley Indus., Inc., 2007 WL 5 512410, at *3 (E.D. Cal. Feb. 14, 2007). 6 Venture responds that the 2009 Agreement was only a development contract, and that any 7 agreement between the parties for Venture to actually manufacture FiTeq cards is illusory because 8 the 2009 Agreement, including the Statement of Work (“SOW”), lacks myriad essential terms, 9 including price, quantities, supplier lists, a quality assurance plan, a bill of materials, a standard delivery date, an engineering and test plan, product specifications, and manufacturing milestones. 11 United States District Court Northern District of California 10 See Opp. at 5-8. Consistent with this argument, Venture contends that the contract is governed by 12 California common law, and not the CCC, because the 2009 Agreement was not a contract for the 13 purchase or sale of goods, since “[o]n its face, the [2009 Agreement] does not obligate FiTeq (or 14 anyone) to ever purchase a single card from Venture.” See Opp. at 3. It further argues that any 15 manufacturing exclusivity was “contingent” and terminated by FiTeq. See Opp. at 8. 16 17 18 Following a review of the governing law and the language of the 2009 Agreement, the Court agrees with FiTeq, for a number of reasons. First, the 2009 Agreement expressly includes obligations beyond the mere development of 19 a card. It contains a number of terms describing the parties’ obligations with regard to 20 manufacturing cards. For example, Section 3.2 of the contract outlines Venture’s exclusive right to 21 serve as “FiTeq’s sole source for the engineering services pursuant to the Statement of Work and 22 manufacturing of FiTeq Cards,” subject to three conditions: (1) the other terms of the 2009 23 Agreement, (2) Venture’s $500,000 investment in FiTeq consistent with the parties’ Stock 24 Agreement, and (3) “Venture making satisfactory progress on achieving all the tasks set out in the 25 SOW within the agreed timelines.” Exh. Y at 9. The SOW includes within it a requirement that 26 Venture create a “scalable, repeatable manufacturing process on line that scales to >1 million 27 cards per month.” See Exh. Y. at 39-40 (SOW Milestone 5). The explicit inclusion of this scalable 28 manufacturing process as part of the Statement of Work – which outlined milestones that Venture 8 1 was required to meet under its obligations of the contract – shows that the contract did not merely 2 cover Venture developing a card, but also obligated Venture to create a manufacturing process to 3 bring that card to market. This provision thus runs counter to Venture’s argument that the parties “contemplated but 4 5 did not execute a manufacturing agreement,” see Opp. at 10, because the manufacturing 6 component of the 2009 Agreement was expressly included in the parties’ agreed-upon SOW. 7 Venture argues that Milestone 5, the “production pilot” phase, demanded only that it would make 8 5,000 cards in order to prove that the process was “scalable.” See Opp. at 7. But this argument is 9 unpersuasive: even if Venture were required only to make 5,000 cards, Milestone 5 demanded that Venture prove a scalable manufacturing process that could produce over a million cards per 11 United States District Court Northern District of California 10 month. Though Venture would need to test that process in smaller batches of cards to ensure that 12 the process worked, such a test is the necessary first stage of a manufacturing process which was 13 supposed to, according to the plain language of the contract, produce millions of FiTeq cards.2 14 Additionally, the mechanism under which Venture’s manufacturing would be financed – 15 the assignment of FiTeq’s contracts with third-party card issuers to Venture to “finance turnkey 16 manufacturing” – is set forth in Section 5.1 of the 2009 Agreement. Had the parties only 17 “contemplated” manufacturing, without agreeing that Venture would actually manufacture 18 anything, the parties would not have included such an explicit funding mechanism for this 19 manufacturing in the 2009 Agreement.3 California law, which demands that the “whole of a contract is to be taken together,” 20 21 22 23 24 2 Venture further argues that a manufacturing process was “impossible” until cards were certified by the major credit card companies. This argument is unpersuasive because the SOW separated the card certification process from the development of a scalable manufacturing process. See Exh. Y at 39-40. 3 25 26 27 28 Venture’s actions following the signing of the 2009 Agreement are also telling. After the contract was signed, Venture worked to secure financing for its Singapore facility through an incentive grant provided by Singapore’s Economic Development Board (“EDB”). See, e.g., Hosie Decl. Exhs S, T, EE. Such an attempt to secure substantial financing for the facility which was to manufacture the FiTeq cards shows conduct consistent with the intent to actually manufacture the cards, not just develop them. Under California law, it has long been the case that such postcontract conduct can be reviewed by the Court in determining the contracting parties’ intent. See, e.g., Purdy v. Buffums, 95 Cal. App. 299, 303 (1928). 9 1 “disfavor[s] constructions of contractual provisions that would render other provisions 2 surplasage.” Boghos v. Certain Underwriters at Lloyd’s of London, 30 Cal. 4th 495, 503 (2005); 3 see also Farmers Ins. Exchange v. Knopp, 50 Cal. App. 4th 1415, 1421 (1996) (“[C]ontracts . . . 4 are to be construed to avoid rendering terms surplasage.”). Were the 2009 Agreement merely for 5 development and not manufacturing, myriad terms in the contract would be rendered surplus, 6 including (1) the purchase order provisions of Section 5.3, (2) the payment provisions of Section 7 5.6, (3) the shipment and delivery provisions of Section 5.7, (4) the customer inspection 8 provisions of Section 5.8, (5) the warranty provisions of Section 7.1, and (6) the product liability 9 indemnification provision of Section 13.3. Such a construction would run counter to California’s clear rule disfavoring interpretations that render any provision – let alone so many provisions – 11 United States District Court Northern District of California 10 surplus, because these sections would be meaningless and have no bearing on the parties’ 12 agreement to merely develop a card. See, e.g., London Market Ins. v. Superior Court, 146 Cal. 13 App. 4th 648, 669-70 (2007). 14 Nonetheless, Venture argues that any manufacturing portion of the 2009 Agreement is 15 illusory because the parties failed to come to agreement on certain essential commercial 16 manufacturing terms. See Opp. at 5. FiTeq argues in response that the manufacturing portion of 17 the contract is a requirements contract for the sale of goods under the CCC, which can be enforced 18 even though the parties left open certain terms. See Mot. at 22. Venture thus contends that if 19 California common law applies, there is no manufacturing contract between the parties. Plaintiff 20 argues instead that, because the CCC applies, at least the manufacturing portion of the 2009 21 Agreement is a valid and enforceable requirements contract. To resolve this dispute, the Court 22 must first determine to what extent, if any, the CCC applies to the 2009 Agreement. 23 The CCC applies to “transactions in goods,” see Cal. Comm. Code § 2102, which includes 24 “all things (including specially manufactured goods) which are movable at the time of 25 identification to the contract for sale.” Id. § 2105. The CCC does not, however, apply to 26 transactions involving services. “Complications arise when the transaction involves both goods 27 and services.” TK Power, Inc. v. Textron, Inc., 433 F. Supp. 2d 1058, 1061 (N.D. Cal. 2006). In 28 such an instance, application of the CCC turns on the essence of the agreement. The Court must 10 1 determine the predominant character of the agreement – whether the contract is for the provision 2 of a service with goods incidentally involved, or for the provision of goods with services 3 incidentally involved, and must apply the law that governs that predominant factor. See, e.g., 4 United States ex. Rel. Bartec Indus., Inc. v. United Pacific Co., 976 F.2d 1274, 1277 (9th Cir. 5 1992). “A number of courts have held that where a transaction involves a mix of ‘goods’ covered 6 by the UCC and non-goods such as service or real estate, the court may apply non-UCC law to 7 that portion of the contract that does not involve goods.” TK Power at 1063 (compiling cases). 8 Here, the Court is faced with interpreting a contract that includes a services portion (the development phase) and a goods portion (the manufacturing and production phase). As such, 10 consistent with the framework outlined in TK Power, the 2009 Agreement’s “services phase” 11 United States District Court Northern District of California 9 should be interpreted pursuant to the common law, and its “goods phase” should be interpreted 12 pursuant to the CCC. 13 Venture argues, however, that because FiTeq “never agreed to buy ‘goods’ from Venture,” 14 the CCC nonetheless does not apply. See Opp. at 4. This argument is unpersuasive. Under the 15 2009 Agreement, FiTeq was to obtain purchase orders for cards and submit them to Venture for 16 approval. If Venture accepted the purchase order, FiTeq would assign the order to Venture so that 17 the third-party’s payment could directly finance manufacturing. See Section 5.1. But FiTeq was 18 still purchasing goods – the cards – from Venture. The third-party was in turn purchasing the cards 19 from FiTeq. The assignment agreement, as FiTeq argues, “took a step out of this process, but it did 20 nothing to change the fundamental reality: FiTeq would sell the cards that Venture built for 21 FiTeq.” Reply at 4 (emphasis added). Defendant’s reliance on Borrachia v. Biomet, Inc. in support 22 of its position is unpersuasive. In that case, the Ninth Circuit determined that the language of “an 23 agency contract for services” between the parties “ma[de] it plain that Biomet’s ‘devices’ were to 24 be sold by Biomet to the hospitals, and that none of the devices were sold to Borrachia.” 348 Fed. 25 App’x 269, 271 (9th Cir. 2009). Here, in contrast, Venture was to sell the cards to FiTeq, and 26 FiTeq would then sell the cards to third-party buyers. Though FiTeq would assign the purchase 27 orders to Venture to streamline funding for card production, the fact remains that under the 2009 28 Agreement FiTeq would purchase the cards from Venture. Thus, the Court applies the CCC to the 11 1 manufacturing and production portion of the 2009 Agreement. Additionally, though Venture argues otherwise, the 2009 Agreement is an exclusive 2 3 requirements contract. Section 3.2 makes this clear, stating that “Venture will serve as FiTeq’s 4 sole source for the engineering services . . . and manufacturing of FiTeq Cards.” Hosie Decl. Exh. 5 Y at 9 (emphasis added). The parties even called this a “Right of Exclusivity.” See id. Venture 6 argues that this exclusivity was “contingent . . . on achieving all the tasks set forth in the SOW,” 7 Opp. at 8, and thus that the 2009 Agreement was not actually an exclusive contract. But this 8 argument does not follow because a party cannot obviate its responsibilities under an exclusive 9 contract by failing to make progress consistent with the other terms of the contract. When parties enter into an exclusive requirements contract, Section 2306(2) of the CCC obligates them to 11 United States District Court Northern District of California 10 undertake best efforts. Venture therefore cannot argue that a failure to complete terms of the SOW 12 renders the contract non-exclusive – instead, such a failure would go to the question of best 13 efforts. Further, though the parties left terms open in the 2009 Agreement, including price and 14 15 quantity, such open terms do not render the contract illusory because the parties otherwise 16 evidenced an intent to bind themselves into an exclusive manufacturing relationship. See Cal. 17 Comm. Code § 2204(1). This is shown in Section 5.3 of the 2009 Agreement, which outlined the 18 parties’ respective obligations with regard to purchase orders. Section 5.3.2, “Acceptance of 19 Purchase Orders,” stated that the parties, every quarter, would agree to sheet pricing “acceptable to 20 customers of FiTeq.” Exh. Y at 14. Then, when a purchase order was forwarded from FiTeq to 21 Venture, Venture had two options: it could accept the purchase order in writing pursuant to 22 Section 5.3.2(b), “thereby consenting to the Unit Price and the Shipment Date of FiTeq Cards 23 pursuant to the Purchase Order,” id. at 15,4 or it could reject the purchase order pursuant to Section 24 5.3.3. Under Sections 5.3.3 and 5.3.4, however, Venture was required to “modify” any purchase 25 order it rejected by proposing a new acceptable price, a new acceptable quantity, or a new 26 4 27 28 If a purchase order was accepted, Section 5.3.2(c) obligated Venture then to “manufacture, assemble, inspect, test, package, sell, and deliver FiTeq Cards in accordance with the Purchase Order,” which provides further support for FiTeq’s argument that the parties intended to enter into a manufacturing relationship in addition to their development relationship. See Exh. Y at 15. 12 acceptable delivery date. See id. FiTeq would then take these new terms to the third party buyer 2 for further negotiation. Under a plain reading of Section 5.3, therefore, Venture had no right to 3 unilaterally reject a purchase order without providing such information. This shows a clear intent 4 by Venture to bind itself to fulfill the orders placed by third parties with FiTeq, and is therefore a 5 manifestation of the parties’ respective intent to enter into a binding requirements contract because 6 Venture bound itself to provide FiTeq with all of the cards it required to fulfill orders with third 7 parties. See Mozaffarian v. Breitling, 1998 WL 827596, at *8-9 (N.D. Cal. 1998). The parties 8 additionally created a management arbitration subcommittee under Section 11.2 – to resolve 9 disputes between the parties on issues such as manufacturing and engineering the cards – which 10 was expressly designed to “resolve any issues arising from the implementation and operation of 11 United States District Court Northern District of California 1 this Agreement.” Id. at 23 (Section 11.2(b)(ii)). 12 Even though the parties left open their price terms when they signed the 2009 Agreement, 13 they set forth a procedure by which prices would be determined. This agreement is wholly 14 consistent with Section 2305 of the CCC, which permits parties to “conclude a contract for sale 15 even though the price is not settled.” Cal. Comm. Code § 2305(1). The CCC does not even 16 require that the contract explicitly recognize that the price term remains open, as Section 2305 17 continues: “In such a case the price is a reasonable price at the time for delivery,” even if 18 “[n]othing is said as to price.” Id. § 2305(1)(a). 19 In this case, Venture expressly agreed to be the exclusive manufacturer of FiTeq’s cards 20 despite this open price term, and was unable under the terms of the contract to simply refuse to fill 21 an order. If the parties disagreed on price, or quantity, or delivery, Venture was required to 22 propose a modified alternative for FiTeq to take back to the buyer. Even then if the parties were 23 unable to agree a management subcommittee was formed to resolve such disputes. All of these 24 decisions were occurring under the backdrop of the CCC, which implies into a requirements 25 contract where the price remains open the duty to fix prices in good faith. See Cal. Comm. Code § 26 2305(2). The manufacturing portion of the 2009 Agreement is therefore not, contrary to 27 Defendants’ argument, void for indefiniteness, but instead is “at least sufficiently defined to 28 provide a rational basis for the assessment of damages in the case of breach.” Netbula at 1155. 13 1 As described above, a contract is “void and unenforceable if it is so uncertain and 2 indefinite that the intention of the parties in material particulars cannot be ascertained.” Id. The 3 2009 Agreement, particularly the purchase order parameters set forth in Section 5.3 and the 4 exclusivity provisions set forth in Section 3.2, provides sufficient definiteness. See also Robinson 5 & Wilson, Inc. v. Stone, 35 Cal. App. 3d 396, 407 (1973) (“[T]he terms of a contract need not be 6 stated in the minutest detail, [but] it is requisite to enforceability that it must evidence a meeting of 7 the minds upon the essential features of the agreement.”). At bottom, the 2009 Agreement carried 8 risks for both parties – FiTeq and Venture were attempting to bring a new, untested product to 9 market. But the 2009 Agreement shows a clear intent by the parties to enter into a contract which included both a development and manufacturing component. The Court, in construing the 2009 11 United States District Court Northern District of California 10 Agreement, considers the contract as a whole so as to give effect to the mutual intent of the 12 parties. See, e.g., Bay Cities at 874. Under the California Commercial Code, the manufacturing 13 portion of the 2009 Agreement is a valid requirements contract, and the Court therefore GRANTS 14 Plaintiff’s motion for partial summary judgment as to its first issue, “under the Operating 15 Agreement and Common Stock Purchase Agreement, and subject to the terms and conditions 16 stated therein, Venture had the obligation to manufacture all cards required by FiTeq’s agreements 17 with card issuers.” 18 B. 19 20 The 2009 Agreement Does Not Demand FiTeq Pay Venture Additional Consideration to Finance Venture’s Card Manufacturing Capacity Plaintiff also seeks partial summary adjudication as to a second issue: FiTeq was not 21 required to, “subject to the terms and conditions stated [in the 2009 Agreement and Stock 22 Agreement,] . . . provide any consideration, funding, or financing for Venture’s card 23 manufacturing capacity or card production other than as expressly stated in the two contracts.” 24 Mot. at 1. FiTeq contends that Venture demanded millions of dollars in additional investment to 25 finance manufacturing facilities, including a production facility in Singapore, which was not 26 required by the terms of the 2009 Agreement. See Mot. at 18. Venture does not substantively 27 oppose this argument, except inasmuch as it disputes FiTeq’s interpretation of the 2009 28 Agreement. See generally Opp. at 4-10. 14 1 The Court agrees with FiTeq. Neither the 2009 Agreement nor the Stock Agreement 2 address FiTeq further funding Venture’s card manufacturing capacity, apart from the terms 3 explicitly stated in the contracts, such as Section 3.2’s requirement that FiTeq assign its third-party 4 purchase orders to Venture in order to finance manufacturing. As the Court has held above, the 5 2009 Agreement includes a manufacturing portion which obligated Venture to manufacture cards 6 consistent with the terms of the contract – it was not merely a development contract. Venture 7 points to no language in the contract that would obligate FiTeq to provide any further 8 consideration for manufacturing and production of the cards, and the Court finds that the 2009 9 Agreement is silent as to any other funding or financing obligations on the part of FiTeq with 10 regard to the Venture’s manufacturing of cards pursuant to valid purchase orders. As such, the Court GRANTS Plaintiff’s motion for partial summary adjudication as to its United States District Court Northern District of California 11 12 second issue: FiTeq was not required to, “subject to the terms and conditions stated [in the 2009 13 Agreement and Stock Agreement,] . . . provide any consideration, funding, or financing for 14 Venture’s card manufacturing capacity or card production other than as expressly stated in the two 15 contracts.” 16 IV. 17 18 19 20 21 22 ORDER For the foregoing reasons, Plaintiff’s motion for partial summary adjudication is GRANTED. IT IS SO ORDERED. Dated: June 30, 2015 ______________________________________ BETH LABSON FREEMAN United States District Judge 23 24 25 26 27 28 15

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