Opinion
B198648
8-8-2008
ECC SYSTEMS, INC., Plaintiff and Appellant, v. TYCO INTERNATIONAL LTD. et al., Defendants and Respondents.
Law Offices of Ronald S. Barak and Ronald S. Barak for Plaintiff and Appellant. Morris Polich & Purdy, Anthony G. Brazil, Lee I. Petersil and Richard H. Nakamura, Jr., for Defendants and Respondents.
Not to be Published
This dispute arises out of a 1998 license agreement between plaintiff ECC Systems, Inc. (ECC) and defendant Mallinckrodt Inc., through its subsidiary, defendant Nellcor Puritan Bennett, Inc. (Mallinckrodt). ECC patented medical technology for storing and delivering compressed gas, known as the "OxyPac." ECC alleged that Mallinckrodt failed to complete the development and marketing of the OxyPac and instead developed, patented, and marketed its own competing device, the "Helios," which used liquid oxygen instead of gaseous oxygen. ECC appeals from an order of dismissal entered after the trial court sustained defendants demurrer without leave to amend to ECCs third amended complaint, granted defendants motion to strike, and denied ECCs motion for leave to file a fourth amended complaint.
We affirm the order of dismissal because the causes of action for slander of title and negligent interference with contract fail to state viable claims and the remaining causes of action are barred by the doctrine of collateral estoppel. A bankruptcy courts finding in prior litigation that the OxyPac technology was not commercially viable at the time the parties license agreement was terminated collaterally estops ECC from establishing the required element of damages in this action. We also conclude that the denial of ECCs motion for leave to file a fourth amended complaint was not prejudicial error because the proposed causes of action were not viable, suffering from the same defects as the causes of action in the third amended complaint.
BACKGROUND
Because this matter was resolved at the pleading stage by way of demurrer and motion to strike, the background is derived from the allegations of the third amended complaint as well as the matters judicially noticed by the trial court. (Groves v. Peterson (2002) 100 Cal.App.4th 659, 667.) In connection with the motion to strike and the demurrer to the third amended complaint, the trial court took judicial notice of pleadings and rulings in prior state court and federal court actions. We also granted respondents request for judicial notice of federal court orders in the related litigation.
A. Prior Litigation
In November 1998, ECC and Mallinckrodt entered into a "Patent License Option and Consulting Agreement" (License Agreement) by which ECC granted to Mallinckrodt a six-month option to acquire from ECC a license of the OxyPac technology (sometimes referred to as the Technology). In April 1999, Mallinckrodt exercised the option, created a binding bilateral license agreement between ECC and Mallinckrodt, and paid ECC $100,000. The License Agreement provided that upon the exercise of the option, "the parties will begin negotiations to establish the terms of the license for the Technology." Although Mallinckrodt did not enter into negotiations of the "`open" terms of the License Agreement, Mallinckrodt for a time continued development of the OxyPac as contemplated and provided for in the License Agreement.
In June 2000, Mallinckrodt merged with either or both Tyco International, Ltd., and Tyco International (U.S.), Inc. (hereinafter Tyco). In March 2001, ECC was informed that "the commercialization and marketing of the Technology [(OxyPac)] was not part of the business plan of Tyco and that, as a result, [Mallinckrodt was] ceasing to pursue, develop or to commercialize the Technology."
In September 2000, ECC filed suit against Mallinckrodt in the Los Angeles Superior Court for breach of contract, fraud in the inducement, breach of the implied covenant of good faith and fair dealing, and declaratory relief. (ECC Systems, Inc. v. Mallinckrodt, Inc. et al. (Super. Ct. L.A. County, 2001, No. BC237430), the first state court action.) In September 2001, the trial court granted summary adjudication in favor of Mallinckrodt on the causes of action for fraud and breach of the implied covenant, but denied summary adjudication on the issue of whether Mallinckrodt had a duty under the License Agreement to commercialize the OxyPac.
ECC filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, and the first state court action was removed to the bankruptcy court on November 1, 2001, where it was prosecuted by ECC as an adversary proceeding. (In re ECC Systems, Inc. (Bankr. C.D.Cal., 2005, No. LA 01-42514-BR).) The bankruptcy court bifurcated the adversary proceeding, ruling on the liability issues in phase 1 in October 2003 and on the damages issues in phase 2 in October 2005.
In a phase 1 joint pretrial order, ECC listed numerous issues for trial, including (1) whether Mallinckrodt was required to pay development costs and up-front license fees (in addition to the $100,000 fee, which ECC claimed was not an up-front license fee); (2) whether Mallinckrodt failed to negotiate the remaining open terms of the License Agreement; (3) whether Mallinckrodt, upon the merger with Tyco, sold off relevant medical gas assets and thus disabled its efforts to commercialize and market the OxyPac; (4) whether Mallinckrodt wrongfully failed to develop, commercialize, and market the OxyPac; and (5) whether ECC was harmed by the acts and omissions of Mallinckrodt. Mallinckrodt listed as issues for trial whether it promised or guaranteed it would commercialize or sell any OxyPac units, whether there was a working prototype of the OxyPac, and whether it diligently pursued the research and development of the OxyPac for two years at a cost of about $2 million.
At the phase 1 trial, ECC argued that the viability and value of the OxyPac was demonstrated by numerous exhibits and by the testimony. In its ruling, the bankruptcy court found that Mallinckrodt "met any covenant of good faith. They spent a lot of time and a lot of money . . . . [¶] . . . [¶] I think almost a couple of years and $2 million is a lot. . . . They worked hard, and they just felt economically at that point it wasnt viable. [¶] And in fact, even Mr. Sanders [of ECC] admitted it. No one could say exactly how long this thing would take to get it down. . . . [¶] . . . [¶] But the bottom line is, it is clear to me that the technology — and Mr. Sanders admitted — was still, after, what, two years or so and a couple of million out, still was not to the point where it would be commercially viable, and no one could say exactly when that would be. [¶] . . . [¶] [S]o Im satisfied that there was no bad faith. Im also satisfied . . . that [the License Agreement] was properly terminated."
In phase 1, the bankruptcy court also found that Mallinckrodt had not agreed to pay any further fees other than the initial $100,000, and that Mallinckrodt properly terminated the License Agreement in March 2001, although the termination was without written notice. The court found that Mallinckrodt breached the duty to negotiate further licensing terms, but that ECC waived the breach. After the bankruptcy court announced its findings and conclusions, ECC requested that any order contain a provision stating that the License Agreement was terminated and that Mallinckrodt has no continuing interest in ECCs patents. The bankruptcy court responded, "[T]hats not what this lawsuit is about. . . . [¶] [T]hat was not an issue in this case. They [(Mallinckrodt)] have admitted . . . that as far as [ECCs two patents], that they have no interest." The court then told the parties that they could stipulate to provisions in the judgment concerning ECCs patents. Thereafter, a judgment was entered in Mallinckrodts favor on all issues and also with the provision to which the parties had stipulated, namely that Mallinckrodt had no ownership interest in ECCs patents.
ECC appealed to the United States District Court for the Central District of California (District Court), challenging, among other things, the bankruptcy courts findings that Mallinckrodt properly terminated the License Agreement in March 2001 and did not breach the License Agreement or the implied covenant of good faith and fair dealing by stopping development of the OxyPac. (In re ECC Systems, Inc. (C.D.Cal., 2004, No. CV 03-08427 LGB).) In December 2004, the District Court reversed the bankruptcy courts findings that ECC waived the breach of the agreement to negotiate the open license terms and Mallinckrodt properly terminated the License Agreement without written notice, but the District Court affirmed the bankruptcy courts findings that Mallinckrodt did not breach the License Agreement or the covenant of good faith and fair dealing when it terminated the agreement and discontinued work on the OxyPac.
After remand for phase 2 of the trial in October 2005, the bankruptcy court found that ECC had not proven that it sustained recoverable damages as a result of the breach of the duty to negotiate and a judgment was entered in favor of Mallinckrodt. At the phase 2 trial, the bankruptcy court remarked that in phase 1 the issue of the commercial viability of the OxyPac "was heavily litigated and that was a good portion of what this . . . was about[,] and I found that at least as of the time of the termination it was just simply not commercially viable. Now your expert . . . apparently ignores that. You [(ECC)] apparently ignore that[,] saying I either didnt find and should have found it. That is the record in this case."
In July 2007, the District Court affirmed the bankruptcy courts judgment, and in September 2007, the District Court denied ECCs motion for reconsideration. (In re ECC Systems, Inc. (C.D.Cal., 2007, No. CV 06-02091 DDP).) ECC appealed to the Ninth Circuit of the United States Court of Appeals in October 2007, which appeal is still pending.
B. Second State Court Action (This Lawsuit)
While the adversary proceeding was pending in the bankruptcy court, ECC filed the instant action against Tyco in December 2002 for intentional and negligent interference with contract and business relations. In October 2003, the superior court stayed the action because of the pending bankruptcy court proceeding. In June 2005, the superior court granted ECCs motions to lift the stay and for leave to file a first amended complaint. Among other amendments, the first amended complaint added Mallinckrodt as defendants.
In February 2006, the court sustained defendants demurrer to one of the causes of action of the first amended complaint and granted leave to amend. ECC filed a second amended complaint, to which defendants demurred. The court sustained the demurrer but with leave to amend some of the causes of action, and in July 2006, ECC filed the third amended complaint.
The third amended complaint asserted causes of action against Mallinckrodt for breach of the License Agreement and for slander of title. The breach of contract claim alleged that Mallinckrodt breached the License Agreement in the following respects: failing to negotiate the "open" terms of the license, failing to keep ECC informed of their efforts in connection with the OxyPac, failing to pay the up-front advance fee upon Mallinckrodts exercise of the option, failing to develop and market the OxyPac, impairing its ability to perform its obligations by selling off assets as a result of the Tyco merger, refusing to relinquish claims of interest in and to the OxyPac patents, and failing to maintain the ECC patents.
The claim for slander of title was based on allegations that between June and November 2000, Mallinckrodt filed 15 patent applications in connection with its Helios device and the United States Patent Office subsequently issued patents to Mallinckrodt. Mallinckrodts patent applications were "false and also inconsistent with and disparaging to the ECC Patents and the ECC Technology," and were intended by Mallinckrodt "to cast doubt and a cloud upon the existence or extent of ECCs rights in said intellectual property." Mallinckrodts patents were also alleged to constitute the "publication of injurious falsehood under applicable California law that disparaged, damaged and harmed the ECC Patents and the ECC Technology."
The third amended complaint contained four causes of action against Tyco: intentional and negligent interference with contract and intentional and negligent interference with prospective business advantage. The gravamen of all of the claims against Tyco was that Tyco caused and encouraged Mallinckrodt to abandon development of the OxyPac and to file its own patent applications, which ECC characterized as "slanderous publications."
Concurrently with the filing of the third amended complaint, ECC filed a motion for leave to file a fourth amended complaint. According to ECC, the proposed fourth amended complaint added "complementary legal theories of recovery based on those same facts" previously pleaded. In addition to the assertion of the new legal theories of breach of fiduciary duty, theft of joint venture opportunity, unjust enrichment, unlawful competition, and conspiracy, Tyco was added as a defendant to the previously pleaded cause of action for slander of title.
Mallinckrodt and Tyco opposed ECCs motion for leave to file a fourth amended complaint, demurred to the third amended complaint, and moved to strike portions of the third amended complaint. In the motion to strike, defendants asserted that the bankruptcy courts judgment collaterally estopped or barred the breach of contract claims (first cause of action). In the demurrer, defendants asserted that the third, fifth and sixth causes of action (intentional interference with contract, and intentional and negligent interference with prospective business advantage) were also barred by the collateral estoppel doctrine. Defendants demurred to the claims for slander of title (second cause of action) and negligent interference with contract (fourth cause of action) on the ground that they failed to state viable claims. Defendants maintained that the claims for breach of contract and slander of title were also barred by the respective statutes of limitations. ECC opposed the demurrer and the motion to strike. In connection with ECCs motion for leave to amend and the defendants demurrer and motion to strike, the trial court took judicial notice of transcripts, pleadings and documents filed in the first state court action and in the prior bankruptcy proceeding.
In October 2006, the court denied ECCs motion for leave to file the proposed fourth amended complaint. In February 2007, the court issued a written ruling granting the motion to strike and sustaining the demurrer without leave to amend. The court concluded that ECC had not alleged the element of publication required for slander of title (second cause of action) because it was "mere speculation" that anyone saw Mallinckrodts patents posted on the United States Patent Office Web site and that anyone viewing Mallinckrodts patents would construe them as disparaging ECCs patents. The court determined that there was no viable claim for negligent interference with contract (fourth cause of action).
The court determined that the first, third, fifth, and sixth causes of action were barred by the collateral estoppel doctrine because the bankruptcy courts finding that the OxyPac was not commercially viable at the time Mallinckrodt terminated the License Agreement in March 2001 showed that ECC cannot establish the necessary element of damages.
ECC appealed from the order of dismissal, challenging the orders granting the motion to strike and sustaining the demurrer without leave to amend, as well as the order denying the motion for leave to file a fourth amended complaint.
DISCUSSION
A. Collateral Estoppel Bars First, Third, Fifth, and Sixth Causes of Action
"If judicially noticed records of prior litigation show the complaint is barred by collateral estoppel, the demurrer may be sustained. [Citations.] On appeal from the judgment of dismissal following the sustaining of the demurrer without leave to amend, we review the order de novo to determine whether as a matter of law the complaint is barred by collateral estoppel. [Citation.]" (Groves v. Peterson, supra, 100 Cal.App.4th at p. 667.)
Under the principle of collateral estoppel, an aspect of the doctrine of res judicata, an issue necessarily decided in prior litigation may be conclusively determined against the parties thereto or their privies in a subsequent lawsuit on a different cause of action. (Vandenberg v. Superior Court (1999) 21 Cal.4th 815, 828.) Thus, collateral estoppel "may also preclude a party to prior litigation from redisputing issues therein decided against him, even when those issues bear on different claims raised in a later case. Moreover, because the estoppel need not be mutual, it is not necessary that the earlier and later proceedings involve the identical parties or their privies. Only the party against whom the doctrine is invoked must be bound by the prior proceeding." (Ibid.) "This means that the loss of a particular dispute against a particular opponent in a particular forum may impose adverse and unforeseeable litigation consequences far beyond the parameters of the original case." (Id. at p. 829.)
"The `identical issue requirement [of collateral estoppel] addresses whether `identical factual allegations are at stake in the two proceedings, not whether the ultimate issues or dispositions are the same." (Bostick v. Flex Equipment Co., Inc. (2007) 147 Cal.App.4th 80, 96.) "The `necessarily decided requirement means only that the resolution of the issue cannot have been `"entirely unnecessary" to the judgment in the [prior] proceeding." (Id. at p. 97.)
"California gives full faith and credit to a final order or judgment of a federal court . . . ." (Nathanson v. Hecker (2002) 99 Cal.App.4th 1158, 1163.) Under federal law, the pendency of an appeal does not preclude finality for purposes of res judicata, so the federal rule "applicable to matters decided in bankruptcy [citation], `is that a judgment or order, once rendered, is final for purposes of res judicata until reversed on appeal or modified or set aside in the court of rendition. [Citations.]" (Ibid.)
ECC contends that the trial court erred in "reconsidering" the defendants renewed collateral estoppel arguments because the trial court had previously overruled a demurrer to the first amended complaint on the same ground. ECC cites no legal authority to support its proposition, and the law is to the contrary. Parties are "entirely within their rights to demur to [an] amended complaint notwithstanding their prior unsuccessful efforts to demur to the . . . original complaint." (Pacific States Enterprises, Inc. v. City of Coachella (1993) 13 Cal.App.4th 1414, 1420, fn. 3; see also Coshow v. City of Escondido (2005) 132 Cal.App.4th 687, 702 [court has inherent power to reconsider its rulings and change its decision until entry of judgment].)
We also reject ECCs argument that the only issue before the bankruptcy court was whether Mallinckrodt breached the agreement to negotiate the open terms of the license and that the trial court "wrongfully seized upon the Bankruptcy Courts unnecessary and unsupported dictum and surplusage as a preclusive determination that the ECC Technology was not viable . . . and, therefore, that ECC could not have any damages in any of its causes of action in This Action." The bankruptcy proceeding documents judicially noticed by the trial court show that the bankruptcy court made findings — which formed the basis of the bankruptcy courts judgment and were not mere surplusage — that Mallinckrodt did not agree to pay any fees in addition to the $100,000 which was paid to ECC, that Mallinckrodt did not breach the obligation in the License Agreement or its duty of good faith and fair dealing with respect to development and marketing of the OxyPac, that the OxyPac was not commercially viable at the time the License Agreement was terminated in March 2001, and that ECC sustained no damages as a result of the breach of the duty to negotiate the open license terms because the OxyPac was not commercially viable in March 2001. We thus find no support in the record for ECCs assertion that the only questions before the bankruptcy court were whether Mallinckrodt breached the agreement to negotiate the open terms and whether ECC was damaged thereby.
ECC seizes upon the bankruptcy courts statement that it did not know if the OxyPac would ever be viable and that the court had no opinion on that issue. But all that the court was stating was that it was not addressing the issue of future commercial viability of the OxyPac after the March 2001 termination of the parties agreement. The courts statement about future viability does nothing to undermine the findings and determinations adverse to ECC that were made by the bankruptcy court.
Because the finding of lack of commercial viability of the OxyPac in March 2001 is fatal to ECCs ability to establish damages, the demurrer to the third, fifth and sixth causes of action was properly sustained without leave to amend and the motion to strike the first cause of action was properly granted.
B. Second and Fourth Causes of Action
The trial court correctly ruled that the fourth cause of action against Tyco, labeled "negligent interference with contract," does not constitute a viable claim. As stated in LiMandri v. Judkins (1997) 52 Cal.App.4th 326 at page 349: "In [Fifield] Manor v. Finston (1960) 54 Cal.2d 632, the California Supreme Court noted: `[W]ith the exception of an action by the master for tortious injuries to his servant, thus depriving the master of his servants services, which traces back to medieval English law [citations], the courts have [quite] consistently refused to recognize a cause of action based on negligent, as opposed to intentional, conduct which interferes with the performance of a contract between third parties or renders its performance more expensive or burdensome. [Citations.] (Id. at p. 636.) Although the continuing validity of the so-called `[Fifield] rule is questionable in light of the California Supreme Courts recognition in JAire [Corp. v. Gregory (1979)] 24 Cal.3d 799 of a cause of action for negligent interference with prospective economic advantage, the Supreme Court has yet to disapprove [Fifield]."
Even if the sustaining of the demurrer to the fourth cause of action on the above ground was error, ECC has not established that it was prejudicial error. The fourth cause of action, like the fifth and sixth causes of action, would have been barred by the collateral estoppel doctrine because of the bankruptcy courts finding that ECCs patents were not commercially viable at the time the License Agreement was terminated.
The demurrer to the second cause of action for slander of title was properly sustained because there are no facts establishing the element of disparagement of ECCs title to its patents. In this cause of action, ECC alleged that Mallinckrodts filing of its own patent applications and the issuance of the Mallinckrodt patents damaged, impaired, hindered, and devalued ECCs OxyPac patents.
"Disparagement of title occurs when a person, without a privilege to do so, publishes a false statement that disparages title to property and causes pecuniary loss. [Citation.] `The elements of the tort are (1) publication, (2) absence of justification, (3) falsity and (4) direct pecuniary loss." (Truck Ins. Exchange v. Bennett (1997) 53 Cal.App.4th 75, 84.) "The tort of slander of title is meant to protect against frivolous title disputes that interfere with the salability of property." (Westfield Ins. Co. v. TWT, Inc. (N.D.Cal. 1989) 723 F.Supp. 492, 496.)
We do not construe ECCs claim for slander of title as alleging the invalidity or unenforceability of Mallinckrodts patents because such issues arise under federal patent law and we would lack subject matter jurisdiction over such claims. (Holiday Matinee, Inc. v. Rambus, Inc. (2004) 118 Cal.App.4th 1413, 1427.) Rather, ECC appears to be arguing that Mallinckrodt had no ownership rights in its own 15 patents because Mallinckrodts patents were based on ECCs technology. As ECCs reply brief explains, "Having no right to ownership of such patents, Mallinckrodts filing of such patent applications, acceptance and recordation of rights under such patents, and the actual issuance of such patents, all constitute publications and notice to the world of Mallinckrodts (wrongful) claim to ownership of such rights." In other words, ECC alleges that Mallinckrodts assertion of rights to the 15 patents constitutes disparagement of ECCs title to its own separate patents and intellectual property. But, assuming that the United States Patent Office properly issued patents for the respective technologies (and ECC does not allege otherwise), the pleading does not allege how Mallinckrodts assertion of an ownership interest in the patents issued to it amounts to disparagement of ECCs title to its patents. Thus, there are no facts showing that Mallinckrodts alleged wrongful conduct in claiming ownership of the patents issued in its name caused title to ECCs patents to be impaired.
ECC misplaces reliance on Glass v. Gulf Oil Corp. (1970) 12 Cal.App.3d 412 (Glass) and Appel v. Burman (1984) 159 Cal.App.3d 1209 (Appel). In Glass, the Court of Appeal held the evidence sufficient to support a jury finding that developers planning a vast housing development published false and unprivileged statements that affected the title to a neighbors adjacent property when the developers falsely represented that a private road on the neighbors property, which roadway was not dedicated to the public, would be available to provide an access road to the housing development. (Glass, supra, 12 Cal.App.3d at pp. 420-422.)
In Appel, the Court of Appeal held evidence sufficient to support a judgment in a case involving a boundary dispute between two neighbors. In connection with a home addition, the Appels planned to move a privacy fence and a power pole located on their property a distance of six feet, to the actual boundary line. The Burmans attorney wrote a letter to the Appels and the department of water and power that the Burmans considered the fence to be the actual agreed upon boundary between the two properties and the power company refused to move the power pole until the dispute between the neighbors was resolved. The trial court found that, to protect their privacy, the Burmans used a claim of agreed upon boundary of the fence as an excuse to prevent the Appels from constructing their improvements for as long as possible without any sincere belief that the Burmans had any right, title, or interest in the portion of the Appel property between the fence and the boundary line. (Appel, supra, 159 Cal.App.3d at p. 1214.)
There was disparagement in both Appel and Glass because the false publications were about and concerning anothers title to property. Here, ECC fails to allege facts showing that Mallinckrodt made any publication about and concerning ECCs patents. ECC also fails to cite any legal authority supporting a slander of title claim under the instant circumstances. The demurrer was properly sustained without leave to amend as to the second cause of action.
Because the motion to strike was properly granted as to the first cause of action and the demurrer to the remaining causes of action was properly sustained without leave to amend on the foregoing grounds, we need not discuss ECCs contentions regarding punitive damages and whether the respective statute of limitations barred the first and second causes of action.
C. Motion for Leave to File Fourth Amended Complaint
ECC fails to establish any prejudicial error or that that the trial court abused its discretion in denying its motion for leave to file a fourth amended complaint because the proposed pleading was deficient as a matter of law. If a proposed complaint fails to state a cause of action, it is proper to deny a motion for leave to amend. (Foxborough v. Van Atta (1994) 26 Cal.App.4th 217, 230.)
ECCs proposed fourth amended complaint contained the causes of action in the third amended complaint as well as additional causes of action asserting new legal theories of recovery. The causes of action previously asserted fail to state causes of action for the reasons discussed above. As to the new theories of recovery, ECCs motion below and brief on appeal admit that these new theories were based "solely on facts previously alleged" in the third amended complaint. To the extent that the new legal theories are based on the same facts, the bankruptcy courts judgment would operate as a bar to the establishment of the element of damages. The new legal theories thus would not state viable causes of action because they would be subject to demurrer on the ground of the collateral estoppel doctrine, based on the bankruptcy courts finding that the OxyPac was not commercially viable. Accordingly, ECC fails to show that the trial court abused its discretion. Assuming for purposes of argument that the ruling was erroneous, ECC fails to show any prejudicial error — that is, that one or more of the new legal theories would have withstood a demurrer or other challenge to the sufficiency of the pleading. (Code Civ. Proc., § 475 ["No judgment . . . shall be reversed . . . unless it shall appear from the record that such error . . . was prejudicial . . . . There shall be no presumption that error is prejudicial, or that injury was done if error is shown"].)
DISPOSITION
The order of dismissal is affirmed. Defendants are entitled to their costs on appeal.
We concur:
ROTHSCHILD, J.
NEIDORF, J.