K. SEBELIUS, Magistrate Judge
This matter comes before the Court upon Plaintiff's First Motion for Partial Summary Judgment (Doc. 87). The motion is fully briefed, and the Court is prepared to rule. For reasons explained below, Plaintiff's Motion for Partial Summary Judgment is denied.
Summary judgment is appropriate only if "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." For the purpose of reviewing a summary judgment motion, a factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." A "genuine" issue of fact exists where "there is sufficient evidence on each side so that a rational trier of fact could resolve the issue either way."
The movant bears the initial burden of making a prima facie demonstration of the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. To meet this standard, the moving party does not need to negate the claims of the opposing party; instead, the moving party can simply point out the absence of evidence for the opposing party on an essential element of that party's claim.
If a moving party satisfies this initial burden, the burden shifts to the opposing party to "set forth specific facts" that would be admissible in evidence showing there is a genuine issue for trial and from which a rational trier of fact could find for the non-movant. In considering a motion for summary judgment, the Court must "examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment."
Plaintiff Digital Ally, Inc. ("Digital" or "Plaintiff") designs, manufactures, and distributes digital video systems. Defendant Z3 Technology, LLC ("Z3" or "Defendant") is a computer engineering firm that designs and manufactures hardware modules for use in videographic products. The modules, including related software and design information, are then licensed to Z3's customers.
On or about January 2, 2009, Digital, through its Vice President of Engineering (Robert Haler), purportedly entered into a "Software/Hardware Design and Production License Agreement" denominated PLA-2009.01.02 ("PLA-2009") with Z3. According to Z3, under PLA-2009, it agreed to design, manufacture, and deliver to Digital certain hardware modules using the Texas Instruments DM365 computer chip and related software components for use in Digital's products. Z3 contends that PLA-2009 required Digital to place "guaranteed minimum orders" for 39,050 DM365 modules from Z3, gave Z3 a right of first manufacture with regard to DM365 modules, and also required Digital to pay certain royalties if it did not submit the guaranteed minimum orders.
A substantial portion of Z3's work under the contract was to design DM365 modules pursuant to design details provided by Digital. Until Digital "provide[d] all necessary design details, Z3 could not design, manufacture and deliver the modules. PLA-2009 sets forth a design schedule, commencing in "Week 0" when Digital was to provide "all necessary design details" to Z3, and ending once Digital ordered, received, and tested sample units. Under the contract, this design period would take 28 weeks. The design schedule did not require Z3 to deliver an initial sample until "Week 10" of the contract, which could not have occurred until mid-March at the earliest. Z3 contends "Week 10" of the contract occurred much later because Digital did not provide all the necessary design details in "Week 0."
During the "design period," Digital was obligated to pay $300,000 in fees according to the schedule set forth in PLA-2009, with the last payment being made in Week 28, when pre-production samples were available. Digital paid the first two fee installments under the contract: $75,000 in January 2009 and $50,000 in February 2009.
Although Digital was substantially behind and delayed in providing Z3 with all necessary design details for the DM365 modules, the parties began working on the design of the DM365 module promptly after the contract was signed on January 2, 2009. From January 13, 2009 through April 8, 2009, both parties devoted engineering time and effort to designing the DM365 module.
On April 10, 2009, Thomas Heckman, Digital's CFO, sent Aaron Caldwell, Z3's President, a letter purporting to terminate PLA-2009 pursuant to paragraph 3 thereof, "effectively immediately." Digital also directed Z3 to "cease all activity" with respect to PLA-2009. Mr. Caldwell had follow up conversations with Stan Ross, Digital's Chief Executive Officer, Mr. Heckman, and Steve Phillips, Digital's new Vice President of Engineering, regarding the April 10 letter by phone, by e-mail, and in person. During these communications, Digital made it clear it would stand by its "termination" letter and its direction that Z3 cease all work on the DM365 module. In light of these developments, Z3 stopped working on the DM365 module. No hardware or software were ever produced for Digital pursuant to PLA-2009.
Z3 contends Digital's wrongful termination and its direction to Z3 to "cease all activity" under PLA-2009 were the only reasons Z3 stopped working on the DM365 modules. Z3 believes it would have been able to complete the design of the module and exercise its right of first manufacture under PLA-2009.
In Count I of its Amended Counterclaim, Z3 alleges Digital breached PLA-2009 by failing to place a "guaranteed minimum" order of 39,050 DM365 modules or pay an equivalent royalty. Z3 seeks "loss of profits" on the sale of 39,050 modules. Digital moves for summary judgment on Count I because it contends there were unfulfilled conditions precedent and because Z3 has insufficient evidence of lost profits.
A. Choice of Law
In diversity actions, a federal court applies "the choice of law principles of the state in which it sits." Kansas case law recognizes the principle of freedom to contract and, under most circumstances, permits parties to choose the law applicable to their contract. Accordingly, where the parties to a contract have entered into an agreement that incorporates a choice of law provision, Kansas courts generally effectuate the law chosen by the parties to control the agreement. However, where the application of the contracting parties' choice of law provision engenders a result contrary to public policy, Kansas courts will not apply another state's law.
PLA-2009 states: "This Agreement will be governed by and interpreted in accordance with the laws of the State of Nebraska, without reference to conflict of laws principles." Both parties appear to agree that Nebraska law applies. Further, neither party has argued there are public policy concerns that dictate a different result. The Court will apply Nebraska law.
B. Waiver of Conditions Precedent
In its motion for summary judgment, Digital argues PLA-2009 contains three conditions precedent that were never satisfied. Z3 argues Digital waived any argument there were unsatisfied conditions precedent because, in its answer, Digital did not deny with particularity that any conditions precedent had occurred or been performed. Digital contends it may raise this issue for the first time in a motion for summary judgment without having specifically identified those unfulfilled conditions in its answer.
Fed.R.Civ.P. 9(c) states, "[i]n pleading conditions precedent, it suffices to allege generally that all conditions precedent have occurred or been performed. But when denying that a condition precedent has occurred or been performed, a party must do so with particularity." "A party who intends to controvert the claimant's general allegation of performance or occurrence thus is given the burden of identifying those conditions that the denying party believes are unfulfilled and wishes to put into issue." The denying party cannot raise an issue of nonperformance or nonoccurrence of conditions precedent by a general denial.
Paragraph 36 of Defendant's Amended Counterclaim alleges that Z3 "performed all conditions precedent in PLA-2009." Paragraph 36 of Plaintiff's Reply to Amended Counterclaim merely states, "Digital denies the allegations contained in ¶ 36 of the Amended Counterclaim." Thus, Plaintiff pleaded only a general denial and did not deny with "particularity" that any specific condition precedent had been fulfilled.
The Court has found only one Tenth Circuit case discussing Rule 9(c)'s requirement that a party specifically deny fulfillment of a condition precedent with particularity. In Lumbermens Mutual Insurance Co. v. Bowman, the appellees, Robert Bowman and Walter Lewis, sued appellant, Lumbermens Mutual Insurance Company, to recover amounts due under a fire insurance policy. Under New Mexico law, the filing of a proof of loss with the insurer by the insured was a condition precedent to the insurer's liability on the policy. Appellant argued it was entitled to a directed verdict on the complaint because no proof of loss was ever filed by appellees.
The Tenth Circuit rejected appellant's argument. It held that appellees complied with Fed.R.Civ.P. 9(c) by averring generally in their complaint that they had fully complied with all of the terms and conditions of the policy. The Tenth Circuit then determined that appellant did not comply with Fed.R.Civ.P. 9(c) because, in its answer, appellant only generally denied that the terms and conditions of the policy had been complied with and did not specifically and with particularity deny the filing of a proof of loss. Based upon appellant's failure to deny the fulfillment of a condition precedent with particularity, the Tenth Circuit held that whether the condition had been complied with was not an issue in the case and no evidence in connection therewith should have been received. This case, however, is not entirely on point because appellant in Lumbermens did not attempt to raise the issue in a summary judgment motion before trial.
Various courts from other jurisdictions have held that when a party does not deny with particularity, in its answer, that a condition precedent has been fulfilled, it is precluded from subsequently raising that issue. For example, in Myers v. Central Florida Investments, the plaintiff alleged in her complaint that she had fulfilled a condition precedent to her claim by filing a timely charge with the EEOC before filing suit. In its answer, the defendant generally denied the allegations in this paragraph. The court held that the defendant's general denial did not meet the particularity requirements of Fed.R.Civ.P. 9 and stated, "Should a defendant `not deny the satisfaction of the conditions precedent specifically and with particularity, however, the allegations are assumed admitted and cannot later be attacked.'" Other courts have followed a similar approach. Plaintiff, however, cites authority from other jurisdictions indicating a party may deny the performance of a condition precedent by summary judgment motion as well as by answer.
See Jackson v. Seaboard Coast Line R.R. Co., 678 F.2d 992, 1009 (11th Cir. 1982) ("If the party does not deny the satisfaction of the conditions precedent specifically and with particularity, however, the allegations are assumed admitted and cannot later be attacked); EEOC v. Serv. Temps, Inc., No. 08-CV-1552-D, 2010 WL 1644909, at *4 (N.D. Tex. Apr. 22, 2010) (holding that defendant was precluded from arguing failure of a condition precedent as a basis for summary judgment because "[w]hen a party fails to specify in its operative pleading (typically an answer to a complaint) the particular condition precedent that has not been fulfilled, it can be precluded from taking that position during the litigation."); Wilshin v. Allstate Ins. Co.,
The Hawaii Supreme Court answered the question of whether the Plaintiffs in this case have standing to bring an unfair method of competition claim under Hawaii law:
1. Plaintiffs Are "Any Person" Within The Meaning of §§ 480-1 and 480-2(e)
H.R.S. § 480-2(e) states that "any person" can sue for unfair methods of competition. H.R.S. 480-1 defines "person" to include "individuals, corporations, firms, trusts, partnerships," etc. The Hawaii Supreme Court held that under the plain language of 480-1 and 480-2(e), the plaintiff employees are "any person" because they are "individuals." Id. at 309. The legislative history of H.R.S. 480-2(e) further supported the Court's conclusion that the Plaintiffs qualified as "any person" under the statute.
H.R.S. § 480-2 was enacted in 2002 in response to a decision by the Hawaii Supreme in which the Court held that there was no private claim under H.R.S. § 480-13 for unfair methods of competition that violated H.R.S. § 480-2. See Robert's Hawaii Sch. Bus, Inc. v. Laupahoehoe Transp. Co., Inc., 982 P.2d 853, 878 (1999).
2. Plaintiff Employees May Bring a Private Action Under H.R.S. § 480-2(e) for a Violation of H.R.S. § 481B-14 If They Satisfy the Requirements of H.R.S. § 480-13.
The Hawaii Supreme Court next determined whether the Plaintiffs have standing to bring a claim under H.R.S. 480-2(e) for a violation of § 481B-14. The Court examined the language of § 481B-4, which states that "any person who violates chapter [481B] shall be deemed to have engaged in an unfair method of competition and unfair or deceptive act or practice . . ." The Court held that nothing in this provision, or in the language of H.R.S. § 481B-14, precludes employees from enforcing § 481B-4 and § 481B-14 through § 480-2(e). Id. at 312.
The Court also examined the legislative history of § 481B-14. After reviewing this history, the Court concluded that: (1) the legislature was concerned that "both employees and consumers can be negatively impacted" when a restaurant or hotel withholds a services charge; (2) there was no clear indication in the legislative history that the legislature intended to limit enforcement to consumers, businesses, or competitors and to preclude enforcement by employees; and (3) the Plaintiff employees are "persons" under H.R.S. § 480-2(e). The Court, therefore, held that the Plaintiffs have standing to sue as "persons" under § 480-2(e) for a violation of § 481B-14 " if they meet the additional requirements discussed below." Id. at 314 (emphasis added).
The provision was originally intended to "strengthen Hawaii's wage and hour law" and would have amended Hawaii's Wage and Hour statute, H.R.S. § 388-6, instead of Hawaii's Antitrust statute.Id. at 313. Due to concerns expressed by the Department of Labor and Industrial Relations that the definition of "tips" included in the original version would conflict with federal wage law, the legislature "amended the bill by deleting its contents and inserting a new section regarding unfair and deceptive business practices." Id. According to the legislative history, the purpose of the new bill was "to prevent unfair and deceptive business practices," and "enhance consumer protection." Id. The legislative history also expressed concern that employees were not receiving "money intended as a gratuity by the customer." Id. at 314.
3. Plaintiffs Must Sufficiently Allege the "Nature of the Competition" to Bring a Private Unfair Method of Competition Claim Under H.R.S. §§ 480-2(e) and 480-13(a)
To bring a private unfair method of competition claim under H.R.S. § 480-2(e) and recover monetary damages, the Hawaii Supreme Court stated that the Plaintiff employees in this case "must first satisfy the requirements of H.R.S. § 480-13." Davis, 228 P.3d 303, 314 (citing Flores v. Rawlings Co., LLC, 177 P.3d 341, 350 (2008) ("In order for [the defendant's actions] . . . to be actionable by private litigants [pursuant to H.R.S. § 480-2], the threshold requirements of H.R.S. § 480-13 must be satisfied.") H.R.S. § 480-13 states that "any person who is injured in the person's business or property" by an act declared unlawful by Chapter 480 may sue for damages and bring proceedings to enjoin the act or practice. Id. a. Hawaii Medical Association v. Hawaii Medical Services Association
In deciding whether the Plaintiffs' Complaint satisfied the requirements of H.R.S. § 480-13, the Hawaii Supreme Court discussed its holding in Hawaii Med. Ass'n. v. Hawaii Med Serv. Ass'n., 148 P.3d 1179 (Haw. 2006) (hereinafter "HMA"). In HMA, the Hawaii Supreme Court held that "the three essential elements to recovery under H.R.S. § 480-13 are: (1) a violation of H.R.S. chapter 480; (2) which causes an injury to the plaintiff's business or property; and (3) proof of the amount of damages."Id. at 1216.
In HMA, the plaintiff, Hawaii Medical Association (HMA), brought suit on its own behalf and on behalf of participating physicians in Hawaii Medical Service Association's (HMSA) network for violations of H.R.S. § 480-2 and tortious interference with a prospective economic advantage. Id. at 1183. HMA alleged that HMSA engaged in a scheme to avoid making timely and complete payments owed to physician members, after HMA physicians provided medical care to HMSA members pursuant to agreements entered into by the physicians and HMA. Id. at 1186. HMSA filed a motion for judgment on the pleadings arguing, in part, that HMA's unfair competition claim failed because HMA had not pled any direct injury to its "business or property." Id. at 1188. The lower court agreed and HMA appealed.
The Court then decided whether Hawaii Medical Association's (HMA) complaint satisfied element two and properly pled an "injury" to HMA under § 480-13(a). Id. at 1209-17. The Court first determined that HMA need not be a "competitor of or in competition with" HMSA in order to have standing under H.R.S. § 480-13(a). Id. at 1212. The Court stated that a plaintiff "may bring claims of unfair methods of competition based on conduct that would also support claims of unfair or deceptive acts or practice" if the nature of the competition is sufficiently alleged in the complaint. Id. at 1215. The court reasoned that if it did not require a plaintiff to plead the nature of the competition, "the distinction between claims of unfair or deceptive acts or practices and claims of unfair methods of competition that are based on such acts or practices would be lost," because "the existence of competition is what distinguishes a claim of unfair or deceptive acts or practices from a claim of unfair methods of competition." Id. at 1213-1214 (emphasis in original).
HMA sufficiently alleged the "nature of the competition," according to the Court, because it described the competition at issue in great detail. Specifically, HMA alleged that:
11. [HMSA's] conduct has adversely impacted, and continues to adversely impact, members of [HMSA's] plans by, among other things, (a) imposing financial hardships on, and in some cases threatening the continued
viability of, the medical practices run by [the plaintiffs]; (b) threatening the continuity of care provided to patients by [the plaintiffs], as required by sound medical judgment; (c) requiring [the plaintiffs] to expend considerable resources seeking reimbursement that could otherwise be available to provide enhanced healthcare services to [HMSA's] plan members; (d) making it more costly and difficult for [the plaintiffs] to maintain and enhance the availability and quality of care that all patients receive; and (e) increasing the costs of rendering healthcare services in Hawaii as a result of the additional costs incurred and considerable effort expended by HMA members in seeking reimbursement from HMSA for services rendered . . .
25.
Through its market dominance and oppressive conduct, HMSA has improperly and unfairly attempted to impose unconscionably low reimbursements upon physicians. Thus physicians are forced to either accept the unconscionably low reimbursement rates or to simply not contract with HMSA.
26.
HMSA dominates the enrollee market in Hawaii with over 65% of Hawaii's population enrolled in one of HMSA's plans. In this regard, HMSA is the largest provider of fee-for-service insurance in the State with more than 90% of the market and is the second largest HMO provider in the State . . .
27.
It is through such market dominance that HMSA is able to dictate the terms and amount of reimbursement HMA physicians will receive.
Id. at 1214 (emphasis in original).
The Court also held that HMA sufficiently alleged injury in fact to itself because HMA established that it was injured in its "business or property" by alleging a diminishment of financial resources as a result of HMSA's actions. Id. at 1216.
4. Plaintiff Employees Have Sufficiently Alleged Injury In Fact
In this case, the Hawaii Supreme Court held that the Plaintiff employees alleged an injury in fact to their business or property "because [Plaintiffs] have alleged that their tip income has been reduced due to Four Seasons' allegedly unlawful conduct . . ."Davis, 228 P.3d at 317.
5. Plaintiff Employees Have Failed to Sufficiently Allege the Nature of the Competition
The Hawaii Supreme Court in Davis then analyzed whether Plaintiffs sufficiently alleged the "nature of the competition." The Plaintiffs argued that where there is a per se violation of Hawaii's antitrust or consumer protection laws, as is alleged in this case, a plaintiff need not allege the nature of the competition. Id. at 438, 441.
The Court responded to this argument by analyzing what effect the "deeming" language of H.R.S. § 481B-4 has on the elements of a claim brought under § 480-2(e) for a violation of § 481B-14. Specifically, § 481B-4 states that "any person" who violates chapter 481B, which includes § 481B-14, "shall be deemed to have engaged in an unfair method of competition and unfair or deceptive act or practice in the conduct of any trade or commerce within the meaning of section 480-2."
The Court held that, despite the language of § 481B-4, a plaintiff must still comply with the requirements of § 480-13 and allege the nature of the competition. This is because the requirement that the plaintiff allege the nature of the competition is different from the requirement that a defendant's conduct constitute an unfair method of competition. The latter requirement comes from H.R.S. § 480-2(a), which generally states that methods of unfair competition are unlawful. Id. at 319. The requirement that a plaintiff allege the nature of the competition comes from H.R.S. § 480-13, which requires a plaintiff to show that they were harmed "as a result of actions of the defendantthat negatively affect competition." Id. (emphasis added). The Court stated that by "deeming" a violation of § 481B-14 to be an unfair method of competition, the legislature predetermined that violations of § 481B would constitute per se unfair methods of competition for purposes of § 480-2. In other words the statute provides that conduct which violates HRS § 481B constitutes an unfair method of competition. However, by doing so, the Legislature
did
not determine that an injury suffered by `any person' as a result of a violation of chapter 481B
necessarily stems from the negative effect on competition caused by the violation. In other words, the legislature was not making a determination that any person injured as a result of a violation of Chapter 481B automatically has standing to sue pursuant to H.R.S. § 480-2 and 480-13. Instead, a private person must separately allege the nature of the competition in accordance with this court's holding in HMA (emphasis added).
Id. at 320. 6. The Injury Must Stem From Behavior That Reduces or Has a Negative Effect on Competition
The Hawaii Supreme Court in Davis then discussed federal cases involving "per se" anti-trust violations. The Supreme Court has held that even where a plaintiff alleges a per se violation of the antitrust laws, the plaintiff must still allege and prove antitrust injury by alleging the nature of the competition "in order to ensure that the injury results from a competition-reducing aspect of the defendant's behavior." Id. at 325 (citing Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 341 (1990). On this issue, the Court stated that it makes no difference whether the courts or the legislature have "deemed" certain actions to be anticompetitive, "because the purpose of the antitrust injury requirement is to ensure that the plaintiff's alleged injury stems from this anticompetitive aspect, rather than some pro-competitive or neutral effect of the defendant's antitrust violation." Id. at 325 n. 35 (emphasis added); (see also, Glen Holly Entm't, Inc. v. Tektronix, Inc., 343 F.3d 1000, 1008 (9th Cir. 2003) ("If the injury flows from aspects of the defendant's conduct that are beneficial or neutral to competition, there is no antitrust injury, even if the defendant's conduct is illegal per se.")
The Court concluded by stating that "embodied in Hawaii's virtually word-for-word adoption" of the prohibitions set forth in the Sherman, Clayton, and FTC Act "is the federal antitrust laws' focus on commerce, the economy, and preserving competition." Id. at 326. Hawaii's requirement that a plaintiff allege the "nature of the competition" is, therefore: (1) "consistent with the federal requirement that a plaintiff allege that his or her injury `reflects the anticompetitive effect either of the violation or of the anticompetitive acts made possible by the violation;'" and (2) "reflects the underlying purpose of both the federal and Hawaii antitrust laws, which is to preserve unrestrained competition." Id.
In summary, the Davis opinion clarifies that:
(1) Plaintiffs qualify as "persons" who may bring a claim under H.R.S. § 480-2(e);
(2) Plaintiffs have standing to bring a private claim for unfair competition under H.R.S. §§ 481B-14 and 480-2 only if they satisfy the requirements of § 480-13.
(3) The essential elements of a claim under § 480-13 are: (1) a violation of Chapter 480; (2) that causes an "injury" to plaintiffs' business or property; and (3) damages. To satisfy the second element, plaintiffs must allege an injury in fact and the "nature of the competition."
(4) Plaintiffs sufficiently alleged an injury in fact.
(5) Plaintiffs failed to sufficiently allege the nature of the competition.
(6) Plaintiffs must ultimately show that their injury "necessarily stems from the negative effect on competition caused by the violation," as opposed to "some pro-competitive or neutral effect of the defendant's antitrust violation." Id. at 325.
D. Pleading Standards For Antitrust Claims After Bell Atlantic Corp. v. Twombly
In addition to the parameters outlined above, the Court must also be cognizant of the pleading standards announced by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly. As stated above, the Court in Twombly held that on motion to dismiss in an antitrust case, a court must determine whether an antitrust claim is "plausible" in light of basic economic principles. 550 U.S. 544, 556 (2007).
The plaintiff in Twombly filed a putative antitrust class action against incumbent local exchange carriers ("ILECs"), alleging that the ILECs conspired to: (1) avoid competing with one another; and (2) prevent competitors from entering the local telephone and internet service markets. The Court evaluated "what a plaintiff must plead in order to state a claim under § 1 of the Sherman Act." Id. at 555. The Court stated that Rule 8 of the Federal Rules of Civil Procedure "requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action," and that "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. at 555.
Section 1 of the Sherman Act states that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1.
The allegations in the plaintiffs' complaint were insufficient, according to the Court, because: (1) plaintiffs' Section 1 claim rested on descriptions of parallel conduct and not an any independent allegation of an actual agreement among the defendants; (2) although "a few stray statements" in the complaint directly alleged an agreement "on fair reading these [were] merely legal conclusions resting on prior allegations;" and (3) these facts were insufficient to "nudge[] the[] claims across the line from conceivable to plausible" without speculation. Id. at 565, 569.
In Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), the United States Supreme Court stated that "[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 1949. The Court also confirmed that the standards announced in Twombly apply in all civil cases.Id. at 1949.
The Ninth Circuit Court of Appeals applied the standards announced in Twombly in Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008). In that case, the Plaintiff merchants brought an antitrust action against credit card companies and banks, alleging that the defendants had conspired to fix the amount of card transaction fees charged in retail transactions in violation of the Sherman Act. Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008). The U.S. District Court for the Northern District of California granted the Defendants' motion to dismiss and the merchants appealed. The Ninth Circuit Court of Appeals affirmed, because the plaintiffs failed to specify in the complaint "who, did what, to whom (or with whom), where, and when," and instead relied on general allegations that the defendants "conspired" to fix prices "without any evidentiary facts to support such [a] conclusion."Id. at 1048, 1050 (citing Twombly, 127 S. Ct. At 1964-66). In so holding, the Court reasoned that because the plaintiff failed to plead specific facts that supported the existence of a scheme or conspiracy, the claim was not "plausible" under Twombly.
E. Plaintiffs' Second Amended Complaint
Plaintiffs have added three paragraphs, paragraphs 1012, to their Second Amended Complaint. Paragraph 10 alleges that: (1) the Defendants' failure to disclose the service charge or remit it to its employees "has an unlawful competitionreducing effect upon the hotel and restaurant industry;" (2) nondisclosure to the customers allows the Defendants to "gain a competitive advantage over hotels and restaurants" that either make the required disclosure or remit the service charge to their servers; and (3) the defendants "have gained" an unfair competitive advantage over competitor hotels that comply because by retaining a portion of the service charge, "the defendants are able to reduce the published cost of their food and beverages by improperly profiting from the imposition of a service charge that their customers would believe is used in full to pay [the] gratuity." (Second Amended Compl. at ¶ 10.)
Paragraph 11 alleges that: (1) the Defendants "are competing with plaintiffs for the amount of money customers are willing to pay for food and beverage service;" and (2) "[b]y not disclosing to customers that service charges are not paid in full to the wait staff employees, the defendants are gaining an improper competitive advantage over plaintiffs" with respect to the amount of the gratuity that customers are willing to pay. (Second Amended Compl. at ¶ 11.)
Paragraph 12 alleges that the Defendants' failure to remit the entire service charge to its employees as tip income has resulted in a loss of tip income for the Plaintiffs and is "inextricably intertwined" with the Plaintiffs' injury because: (1) Plaintiffs have not received the total proceeds of the service charge, which they claim is legally their tip income; and (2) Plaintiffs have not received tips that customers would otherwise have left if the customers were told that the Plaintiffs did not get to keep the entire service charge. (Second Amended Compl. at ¶ 12.)
1. Paragraph 11 of Plaintiffs' Second Amended Complaint Fails to Adequately Plead the Nature of the Competition
In determining whether paragraphs 10 through 12 of Plaintiffs' Second Amended Complaint contain sufficient allegations regarding the "nature of the competition," the question is whether the Plaintiffs have shown that their injuries "stem from the negative effect on competition caused by the violation," as opposed to "some pro-competitive or neutral effect of the defendant's antitrust violation." Davis, 228 P.3d at 325. The allegations in paragraphs 10 through 12 must be measured pursuant to these standards as set forth in the Davis Opinion.
Paragraph 10 of the Second Amended Complaint, unlike the allegations made by the plaintiffs in HMA, which contained adetailed explanation as to why HMSA's conduct negatively affected competition in the medical insurance and medical services markets, does not contain a detailed explanation as to how the Defendants' actions have an effect on the relevant market or reduce competition. There are minimal allegations that will require fleshing out by the Plaintiffs as the case progresses. Although the Court will allow Plaintiffs to proceed based upon the allegations in paragraph 10, Plaintiffs will be required to prove at trial that their injuries "stem from the negative effect on competition caused by the violation," as opposed to "some pro-competitive or neutral effect of the defendant's antitrust violation."Davis, 228 P.3d at 325.
The allegations in paragraph 11 do not meet the standard applied to paragraph 10. Plaintiffs allege that they are competing with the Defendants for the money customers are willing to leave for tips, and the violation of § 481B-14 provides the Defendants with an unfair competitive advantage over the Plaintiffs. (Second Amended Compl. at ¶ 11.) According to theDavis opinion, as stated above, a plaintiff's injury must "stem[] from the negative effect on competition caused by the violation."Id. at 320. In other words, the plaintiff's injury cannot be directly caused by the violation itself. The injury must be caused by the negative effect on competition that the alleged violation causes, so as to ensure that the injury is not instead caused by some pro-competitive or neutral effect of the defendant's conduct. This is true even where the alleged conduct is illegal per se. Id. at 325 (citing Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 341 (1990) ("Although a vertical, maximum price fixing agreement is unlawful under § 1 of the Sherman Act . . . [a]ntitrust injury does not arise for purposes of § 4 of the Clayton Act until a private party is adversely affected by an anticompetitive aspect of the defendant's conduct." Id. (emphasis in original)); Glen Holly Entm't, Inc. v. Tektronix, Inc., 343 F.3d 1000, 1008 (9th Cir. 2003) ("If the injury flows from aspects of the defendant's conduct that are beneficial or neutral to competition, there is no antitrust injury, even if the defendant's conduct is illegal per se.")
In Glen Holly Entm't, Inc. v. Tektronix, Inc., 343 F.3d 1000, 1008, the plaintiff filed suit under Section 4 of the Clayton Act for violations of the Sherman Act against two manufacturers of film editing equipment. The plaintiff alleged that the defendants entered into an agreement to jointly market certain products and to prohibit one of the manufacturers from selling the products to certain customers, including the plaintiff. Id. at 1005-1006. The plaintiff alleged that this caused the plaintiff to lose its customers and violated sections 1 and 2 of the Sherman Act because it was a "contract or conspiracy" that created a monopoly and destroyed competition, thereby constituting a per se violation of the Sherman Act. The Ninth Circuit Court of Appeals held that the plaintiff's allegations of injury were sufficient because they "stem[med] from a competition-reducing aspect or effect of [the defendants'] behavior." Id. at 1014.
Here, the Plaintiffs allege that they were injured by the violation of H.R.S. § 481B-14 itself, not by a negative effect on competition that the violation of H.R.S. § 481B-14 caused. No case law or other authority has been produced to support Plaintiffs' allegation that they were "competing" with their own employer for tips, that there is a competitive "market" for tips, or that the Defendants are a part of this market, such that the Defendants' conduct could have had a negative effect on competition in such a market.
In paragraph 12 of the Second Amended Complaint, the Plaintiffs allege that their injuries "flow directly from the Defendants' anticompetitive acts and are inextricably intertwined" with those acts. Plaintiffs argue that they can establish an antitrust injury under Blue Shield of Virginia v. McCreedy, 457 U.S. 465 (1982) by showing that their injury is "inextricably intertwined" with the injury the Defendants seek to inflict on the relevant market. (Pls. Mot. to Amend, p. 11.)
As discussed in Section B, supra, in Blue Shield, the U.S. Supreme Court held that the plaintiff had standing because her injury reflected "the anticompetitive effect" of the alleged violation and was "inextricably intertwined with the injury the conspirators sought to inflict on the psychologists and the psychotherapy market." Id. at 484. The Hawaii Supreme Court has not expressly adopted the "inextricably intertwined" standard for purposes of § 480-13 and 481B-14. In the Davis opinion, the court acknowledged and even discussed Blue Shield. Although it could have, given the similarities in language between § 4 of the Clayton Act and H.R.S. § 480-13, the Hawaii Supreme Court did not hold that an injury that is "inextricably intertwined" with an allegedly unfair method of competition satisfies the standards of H.R.S. § 480-13. Given the similarities between § 4 of the Clayton Act and H.R.S. § 480-13 and the fact that the Hawaii Supreme Court discussed Blue Shield favorably, the Court will allow Plaintiffs to proceed on the inextricably intertwined allegations contained in paragraph 12.
2. The Allegations in Paragraphs 10 and 12 of Plaintiffs' Second Amended Complaint Are on the Borderline of Plausibility
There is no explanation in Plaintiffs' Second Amended Complaint as to how using money from service charges to lower published food and beverage prices has any effect on the market that is economically plausible under Twombly. Numerous factors go into a patron's decision as to where he or she will host an event; price is only one of those factors. Even assuming that price is the only factor, if the Four Seasons uses the service charge to lower its food and beverage prices, this would potentially have a positive effect on competition because it would encourage other hotels and restaurants to be more competitive by doing the same. As the U.S. Supreme Court stated in Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990), "[l]ow prices benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition."
Assuming the "injury" Plaintiffs complain of is that the Four Seasons gains an unfair competitive advantage over rival hotels and restaurant establishments, there will need to be proof that there is a competitive advantage that affects and/or injures competition in the overall marketplace, for Plaintiffs to prevail under H.R.S. § 480-13.
Under the inextricably intertwined theory of recovery, Plaintiffs must first prove that an injury exists that the Defendant "sought to inflict" on competitors, before Plaintiffs can establish that their injury is inextricably intertwined with this injury. See Blue Shield, 457 U.S. at 484 (holding that plaintiff had standing because her injury was "inextricably intertwined with the injury the conspirators sought to inflict on the psychologists and the psychotherapy market.") If the evidence establishes Defendants practice did, in fact, lead to lower food and beverage prices, but the lowering of food and beverage prices did not cause injury to competition, then Plaintiffs cannot recover under this theory. (Glen Holly Entm't, Inc. v. Tektronix, Inc., 343 F.3d 1000, 1008 (9th Cir. 2003) ("If the injury flows from aspects of the defendant's conduct that are beneficial or neutral to competition, there is no antitrust injury, even if the defendant's conduct is illegal per se.")
The Motion to Dismiss is DENIED as to Count I.
II. DEFENDANTS' RENEWED MOTION TO DISMISS REMAINING CLAIMS The Defendants also move the Court to dismiss the remaining Counts in Plaintiffs' Second Amended Complaint, arguing that the Plaintiffs have failed to make the allegations necessary to state a claim for: (1) Intentional Interference With a Contractual or Advantageous Relationship (Count II); (2) Breach of Implied Contract (Count III); (3) Unjust Enrichment (Count IV); and (4) Unpaid Wages under H.R.S. § 388-6 (Count V).
A. Intentional Interference With a Contractual or Advantageous Relationship
To state a claim for tortious interference with a prospective business advantage, a plaintiff must allege: (1) the existence of a valid business relationship or a prospective advantage or expectancy that is reasonably probable of maturing into a future economic benefit to the plaintiff; (2) knowledge of the relationship, advantage, or expectancy by the defendant; (3) purposeful intent to interfere with the relationship, advantage, or expectancy; (4) legal causation between the act of interference and the impairment of the relationship, advantage, or expectancy; and (5) actual damages. Meridian Mortgage., Inc. v. First Hawaiian Bank, 122 P.3d 1133, 1145-46 (Haw. App. 2005).
Plaintiffs allege in their Second Amended Complaint that "[t]he defendants' conduct as set forth above in failing to remit the total proceeds of service charges to [Plaintiffs] constitutes unlawful intentional interference with contractual and/or advantageous relationships . . . between the[] employees and the defendants' customers under state common law. There are sufficient facts in the body of the Complaint to support elements 1, 2, 4, and 5. There is no allegation, however, that the Defendants purposely intended to interfere with the allegedly advantageous expectancy or relationship between the Plaintiffs and the Defendants' customers. The Defendants' Motion to Dismiss Count II is GRANTED.
B. Breach of Implied Contract
To state a claim for breach of an implied contract, a plaintiff must allege the breach of "an agreement in fact," which is not expressed but "is implied or presumed" based upon the actions of the parties. Kemp v. State of Hawaii Child Support Enforcement Agency, 111 Hawaii 367, 391 (2006). The Supreme Court of Hawaii has held that an implied contract can be found "where the intentions of the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts." Durette v. Aloha Plastic Recycling, Inc., 100 P.3d, 74 (Haw. 2004).
In this case, the Plaintiffs allege that the Defendants "breached an implied contract with the plaintiffs that [they] would comply with the law and distribute the total proceeds of service charges to food and beverage servers." (See Second Amended Compl. at p. 10.) Assuming the allegations in the Second Amended Complaint are true, it is plausible that a jury could find that the employment relationship between Plaintiffs and the Defendants created an implied obligation on the part of the Defendants to comply with H.R.S. § 481B-14. The Defendants' Motion to Dismiss Count III is DENIED. C. Unjust Enrichment
To state a claim for unjust enrichment, a plaintiff must allege that: (1) the defendant received a benefit from the plaintiff; and (2) allowing the defendant to retain the benefit would be unjust. Durette v. Aloha Plastic Recycling, Inc., 100 P.3d 60, 74 (Haw. 2004).
Here, the Plaintiffs allege that the Defendants' conduct in accepting the benefit of Plaintiffs' work while collecting and retaining a service charge that customers expected and intended to be distributed to the Plaintiffs constituted unjust enrichment. (See Second Amended Compl. at p. 10, ¶¶ 6-9, Count IV.) It is plausible that these facts, if proven true, constitute unjust enrichment. The Defendants' Motion to Dismiss Count IV is DENIED.
D. Unpaid Wages
H.R.S. § 388-6, entitled "Withholding of Wages," states: "[n]o employer may deduct, retain, or otherwise require to be paid, any part or portion of any compensation earned by any employee except where required by federal or state statute or by court process . . ." For purposes of § 388-6, "wages" includes tips and gratuities. H.R.S. § 388-1.
Plaintiffs argue that: (1) H.R.S. § 481B-14 requires an employer to distribute service charges to employees as "tip income" unless the employer discloses its retention of the service charge to customers; (2) this "tip income" falls under the definition of "wages" according to H.R.S. § 388-1; and (3) since the Defendants have failed to make the required disclosure to customers, they have retained "tip income" in violation of H.R.S. § 388-6.
Count V of the Complaint states that as a result of the Defendants' failure to remit the entire proceeds of the service charge to the Plaintiffs, "the Plaintiffs have been deprived of income which constitutes wages, which is actionable under [H.R.S.] § 388-6, 10, and 11." (See Second Amended Compl. at p. 10.) The Complaint further states that the Plaintiffs "bring a claim for unpaid wages, including liquidated damages, interest, and attorneys' fees." Id. Based on the language of the relevant statutes, Plaintiffs allegations are sufficient to state a plausible claim for unpaid wages under H.R.S. § 388-6. The Defendants' Motion to Dismiss Count V is DENIED.
CONCLUSION Paragraphs 10 and 12 of Plaintiffs' Second Amended Complaint establish that Plaintiffs have standing to bring a claim for unfair methods of competition under H.R.S. § 481B-14, 480-2, and 480-13 (Count I). Paragraph 11 of the Complaint does not sufficiently allege the nature of the competition, such that Plaintiffs have shown that their alleged injury was caused by conduct that has a negative effect on or reduces competition. Plaintiffs will be permitted to proceed on Count I of the Complaint but only based upon the allegations set forth in paragraphs 10 and 12.
Plaintiffs' Second Amended Complaint fails to state a claim for Intentional Interference With a Contractual or Advantageous Relationship (Count II). The remaining claims for Breach of Implied Contract (Count III), Unjust Enrichment (Count IV), and Unpaid Wages (Count V) are sufficiently pled. Defendants' Renewed Motion to Dismiss (Doc. 94) is GRANTED in part and DENIED in part.
IT IS SO ORDERED.
DATED: September 30, 2010, Honolulu, Hawaii.