Opinion
Faced with accusations it was breaching a services agreement by failing to pay what it allegedly owed for services rendered, Osseous Technologies of America, Inc. (Osseous), sued for declaratory relief (Code Civ. Proc., § 1060)
FACTS
“On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend . . . [w]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law.” (City of Dinuba v. County of Tulare (2007)
Dispute Between Osseous and DiscoveryOrtho
Osseous “develops and markets innovative, high quality products for surgeons and restorative clinicians in dental and sinus surgery sectors.” Osseous believed one such technology to be particularly promising, with
Osseous entered into a written marketing agreement (which Osseous attached to the complaint) with DiscoveryOrtho on December 3, 2008. The marketing agreement pertained to the promising Osseous technology noted above. Osseous disclosed it had begun discussions with Medtronic (a prominent medical technology company) regarding the Osseous technology. Osseous indicated it would like DiscoveryOrtho to “[p]rovide outreach/introductions/ interface to [potential] licensing partners i.e. Stryker, Globus, Synthes, and Zimmer etc.”
Pursuant to the marketing agreement, DiscoveryOrtho agreed to “1. Identify Potential Strategic Partners, [f] 2. Provide Market Outreach to those strategic partners in presenting the licensing opportunity. [][] 3. Facilitate further discussions with Medtronic management and assist in negotiating a licensing/acquisition agreement if possible. [][] 4. Evaluate/Negotiate term sheet in conjunction with Osseous with a potential non-Medtronic strategic partner. [][] DiscoveryOrtho will present Osseous a summary target list of potential strategic licensing partners within 2 weeks of beginning the project and will update Osseous on its outreach efforts weekly.”
Osseous’s obligations under the marketing agreement pertained to exclusivity and fees. The exclusivity provision stated: “Osseous agrees to work with DiscoveryOrtho exclusively for a six month period, renewable for an additional three months if mutually agreed by DiscoveryOrtho . . . and Osseous. However, if during the conclusion of the six month term, a term sheet is actively under consideration or an introduction made by [DiscoveryOrtho] reemerges as an interested party at a later date, [DiscoveryOrtho]/Osseous will continue to abide by the terms of the agreement in good faith.” The fee provision allocated “a percentage of the total value of the final license or asset sale transaction” to DiscoveryOrtho. The parties agreed to one fee formula for a Medtronic transaction, then provided: “The percentage paid to DiscoveryOrtho on a non-Medtronic license or acquisition would be 5% of the transaction/gross consideration of up to $25 million plus 9% on any incremental gross amount from $25 million and above.”
“On or about December 5, 2008, two days after entering the [marketing] agreement, [Osseous’s] President, William Knox, on his own initiative and unassisted by [DiscoveryOrtho], made contact and began discussions with
“On or about February 1, 2009, [DiscoveryOrtho] and [Osseous] entered into a [contract addendum], [f] Pursuant to the Addendum, [Osseous] recognized that [DiscoveryOrtho’s] ‘creаtion of new product designs/applications for the [technology] created additional value to [Osseous]’ and agreed to pay [DiscoveryOrtho] 8.5% of the total transaction/gross consideration for any license, IP acquisition, distribution or co-development agreement on such new product designs or applications.”
“In or about June 2009, [Osseous] reached a Distribution Agreement with Zimmer . . . regarding [Osseous’s] existing . . . technology and products . . . .” Citing a confidentiality agreement, Osseous did not attach the Zimmer distribution agreement to the complaint or quote its key provisions. Instead, Osseous characterized it as not “involv[ing] an asset sale or upfront license, or [DiscoveryOrtho’s] creation of any new product designs or applications.”
“[DiscoveryOrtho] sent [Osseous] an invoice on or about June 23, 2009, demanding that [Osseous] pay [DiscoveryOrtho] exorbitant sums for upfront payments, milestones, royalties, yearly mínimums, product transfer prices and call options all based at the 8.5% rate sрecified in the Addendum and extending over the entire life of the Zimmer Distribution Agreement . . . .” Osseous “disputed, and hereby again disputes, the Invoice and the amounts stated thereon and/or that any account has been stated between [Osseous] and [DiscoveryOrtho] for any of those amounts.” The invoice, attached to the complaint, indicates a $2.25 million upfront payment was due, and set forth a schedule (stretching over at least five years) for additional payments.
Procedural History
The July 2, 2009 complaint avers an actual controversy exists as to “whether [DiscoveryOrtho] is entitled to any payment from [Osseous] pursuant to the Agreement or Addendum for any consulting services provided by [DiscoveryOrtho] to [Osseous] in connection with or in assistance to the Zimmer Distribution Agreement.” The prayer for relief requests a declaration on multiple questions pertaining to the interpretation of the DiscoveryOrtho agreement (with addendum) and its applicability to the Zimmеr distribution agreement. The complaint contends neither the agreement nor the addendum applies to the Zimmer distribution agreement. The complaint further contends DiscoveryOrtho’s “recovery of any amount for its services should be limited
The filing of the complaint occurred more than six months after the execution of the marketing agreement (which by its terms lasted for six months unless extended). There was no allegation in the complaint that, other than alleged current and prospective payment obligations, the marketing agreement (or a successor agreement) was still in effect at the time of filing.
DiscoveryOrtho demurred to the complaint. On September 25, 2009, the court held a hearing and ultimately sustained the demurrer without leave to amend. The court reasoned: “The case as alleged in the complaint is nothing more than a ‘breach of contract’ action. Plaintiff signed a contract; and invoices were sent for services rendered by defendant. Plaintiff disputes the services provided and does not want to honor the bills. There are no allegations in the complaint that suggest that declaratory relief will regulate future conduct by the parties . ... HO The determination sought ... is not necessary or proper under the circumstances.” The court indicated there was no possible amendment of the complaint that could change the result, rejecting counsel’s suggestion that further explanation “of the Zimmer distribution agreement and further flushing out the issues with [the] invoice” could change the court’s calculus. Judgment was entered on November 6, 2009.
In March 2010, DiscoveryOrtho sued Osseous for breach of contract in the United States District Court for the Southern District of New York.
DISCUSSION
Standard of Review
Ordinarily, “[w]hen a demurrer is sustained, we determine [de novo] whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by
The normal standard of review in this case is altered by discretion built into the statutory provisions authorizing courts to hear cases brought solely for declaratory relief. “Any person interested . . . under a contract. . . may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action ... in the superior court for a declaration of his or her rights and duties . . . inсluding a determination of any question of construction or validity arising under the . . . contract. He or she may ask for a declaration of rights or duties, either alone or with other relief; and the court may make a binding declaration of these rights or duties, whether or not further relief is or could be claimed at the time. The declaration may be either affirmative or negative in form and effect, and the declaration shall have the force of a final judgment. The declaration may be had before there has been any breach of the obligation in respect to which said declaration is sought.” (§ 1060.) “The court may refuse to exercise the power granted by this chapter in any case where its declaration or determination is not necessary or proper at the time under all the circumstances.” (§ 1061.)
Sections 1060 and 1061 “must be read together . . . .” (Meyer v. Sprint Spectrum L.P. (2009)
The general purposes of declaratory relief inform the interpretation of sections 1060 and 1061. “ ‘ “The purpose of a declaratory judgment is to ‘serve some practical end in quieting or stabilizing an uncertain or disputed jural relation.’ ” [Citation.] “Another purpose is to liquidate doubts with respect to uncertainties or controversies which might otherwise result in subsequent litigation [citation].” [Citation.]’ [Citation.] ‘ “One test of the right to institute proceedings for declaratory judgment is the necessity of present
Conceptual Framework
Logically (given the statutory scheme and the standard of review), there are three possible classifications of actions brought solely under the authority of section 1060: (1) actions that must be dismissed by the trial court; (2) actions in which a declaratory adjudication is entirely appropriate, and a trial court would therefore abuse its discretion under section 1061 by dismissing the case; and (3) actions wherein a trial court has discretion to provide declaratory relief under section 1060, but also has discretion to dismiss the action under section 1061. For convenience, we will call these classifications: “Type 1”—the court must dismiss; “Type 2”—the court must not dismiss; and “Type 3”—the court has discretion to dismiss or not. Our task is to classify this dispute based on the allegations in Osseous’s complaint. If this is a “Type 1” or “Type 3” case, we must affirm. If this is a “Type 2” case, we must reverse.
This is not an easy “Type 1.” All of the statutory prerequisites to filing an action for declaratory relief have been met. (See § 1060.) One of the parties to a contract (Osseous) is seeking guidance with regard to its legal rights and duties under such contract. There is an actual controversy—is DiscoveryOrtho entitled to payment for services rendered under the marketing contract, or does the Zimmer distribution agreement fall outside the marketing contract? The controversy has ripened sufficiently for judicial determination. (BKHN, Inc. v. Department of Health Services (1992)
We endorse this summary as far as it goes. But precisely when, if ever, is a trial court required to dismiss an action as not “necessary or proper” even if there is an actual, present controversy pertaining to a contract? Is it within the discretion of a trial court to allow or disallow a potential breach of contract defendant to choose the time and venue for a legal confrontation by filing a preemptive declaratory relief action? Does the case before us deal solely with past wrongs providing the basis for a breach of contract action, or are there issues of contract interpretation that will affect the parties’ conduсt prospectively?
We thus turn to an analysis of the specific facts and circumstances of the most pertinent cases. Before doing so, we flag an incongruity between the facts of this case and many of the cases discussed below. Here, Osseous, a potential defendant to a breach of contract action, sued DiscoveryOrtho for declaratory relief. This preemptive action could be based on a desire to resolve its dispute without delay and/or to select the litigation forum. Osseous does not have a readily apparent claim for breach of contract; a declaratory action is the only way Osseous could initiate litigation between the parties. Less understandable is why a potential breach of contract plaintiff would sue a defendant for declaratory relief when such a plaintiff had the ability to bring a plain vanilla breach of contract action. Yet several of the mоst germane cases in this area of law were decided on this peculiar fact pattern—a plaintiff seeking declaratory relief instead of damages. Stranger still, no published California case has dealt head on with the precise facts we have here—a potential defendant to a commercial breach of contract action beating the potential plaintiff to the punch by filing an action for declaratory relief, only to have the trial court dismiss the action under section 1061.
Type 1: Trial Court Abuses Its Discretion by Not Dismissing the Action
The leading case for the proposition that a court abuses its discretion by failing to dismiss a declaratory relief action when a breach of contract action
Travers featured a plaintiff who failed miserably in framing the pleadings. The Travers plaintiff sued two other individuals for deсlaratory relief in connection with a botched attempt by the plaintiff to purchase real estate from one of the defendants (the other defendant purchased the real estate). (Travers, supra, 254 Cal.App.2d at pp. 927-928.) The complaint did “not allege uncertainty as to the meaning of the contract or pray for its interpretation. It merely allege[d] a breach of the contract as a foundation for some unspecified claim of a right to redress. No facts are alleged which would render necessary or proper a declaration with respect to the future conduct of the parties.” (Id. at p. 929.)
Affirming the trial court’s grant of summary judgment (which was granted on other grounds), the Travers court observed: “[W]e have found no authority for the proposition that declaratory relief is proper procedure when the rights of the complaining party have crystallized into a cause of action for past wrongs, all relatiоnship between the parties has ceased to exist and there is no conduct of the parties subject to regulation by the court.” (Travers, supra,
Some subsequent cases applied similar analyses in comparable fact patterns, but did not starkly assert (as Travers did) that a trial court would abuse its discretion by providing declaratory relief. (See Cardellini v. Casey (1986)
In sum, authority for the proposition that a trial court abuses its discretion by refusing to dismiss a declaratory relief claim because the claim amounts to a backward-looking breach of contract claim is underwhelming.
Two other cases involving mandatory dismissals of declaratory relief actions are worth discussing, though such cases do not involve breach of contract disputes.
In Filarsky, supra,
The facts in Filarsky are far afield from the case before us. Obviously, Filarsky cannot be read to state it is always an abuse of discretion to provide declaratory relief to a party that is a potential defendant to a future lawsuit on the issue raised in the declaratory relief action. But the important “takеaway” from Filarsky for the instant case is that our Supreme Court found it was sometimes appropriate to dismiss declaratory relief actions because the defendant in the declaratory action had the more appropriate, straightforward remedy. In Filarsky, the remedy was a lawsuit by the petitioner seeking public records; in this case, the alternative remedy would be a breach of contract action brought by DiscoveryOrtho. Filarsky lends some strength to the notion that straightforward breach of contract claims should be allowed to develop (or not) in due course, rather than being preemptively litigated via declaratory relief.
Like Filarsky, supra,
Type 2: Trial Court Abuses Its Discretion by Dismissing Action
In Columbia Pictures Corp. v. DeToth (1945)
DeToth explained the complaint alleged an actual, ongoing controversy, in that Columbia alleged it was owed continuing performance from the director. (DeToth, supra,
In Warren v. Kaiser Foundation Health Plan, Inc. (1975)
Thus, in both DeToth and Warren, the pleadings alleged both continuing contractual relationships and future consequences for the conduct of the relationship that depended on the court’s interpretation of the contracts at issue.
In California Union Ins. Co. v. Trinity River Land Co. (1980)
Although California Union mentioned an “abuse of discretion” standard, the appellate court did not analyze section 1061 оr explicitly consider whether the court could have dismissed the action as not necessary or proper. (California Union, supra,
Type 3: Trial Court Has Discretion to Dismiss Action or Allow Action to Proceed
A recent case offers important insights to our inquiry, despite lacking a comparable fact pattern. In Meyer, supra,
Meyer is important for its recent confirmation that trial cоurts have discretion at the demurrer stage of a dispute to weed out disputes in which a declaration would not be necessary or proper at the time. And even though Meyer involved a question of whether any dispute had sufficiently ripened to have practical consequences, its focus on future, practical consequences is applicable to a case in which the parties’ contractual relationship has already ended.
A series of older cases are more closely aligned with the facts presented in the instant case.
Our Supreme Court held that in a dispute involving an alleged breach of contract, courts may provide declaratory relief under section 1060 if the relief sought would also govern the future conduct of the parties. (Ermolieff v. R.K.O. Radio Pictures (1942)
In Watson v. Sansone (1971)
A concurring and dissenting opinion in Watson offered a nonjurisdictional rationale for affirming: “it was no abuse of discretion [under section 1061] to refuse to entertain a suit for declaratory relief under the circumstances alleged in the complaint.” (Watson, supra,
Several other cases are worth noting for their analysis of trial court discretion in dismissing declaratory relief actions. Though dismissal of
Finally, we acknowledge two cases which disallowed attempts by defendants to sever issues from the pending action by filing a declaratory relief action in a different court. In Sunset Scavenger Corp. v. Oddou (1936)
The Court Had Discretion to Dismiss the Osseous Complaint
The court dismissed this action, citing two major reasons for its decision: (1) an adequate remedy exists for the parties to resolve their dispute (DiscoveryOrtho could bring a breach of contract action); and (2) there are no allegations suggesting declaratory relief will regulate future conduct by the parties (rather than simply arriving at a determination of whether the contract was breached and, if so, the amount of damages). As noted above, we accept all factual allegations in the complaint as true and consider whether there was a reasonable possibility Osseous could have amended any shortcomings in the complaint.
Given the facts alleged and the stage of the proceedings, we conclude this is a “Type 3” case. Osseous pleaded a current controversy pertaining to the parties’ rights and duties. And other than Travers, supra,
The allegations of the complaint and the attachments thereto suggest this case principally concerns the interpretation of contracts to assess alleged “past wrongs.” Osseous has already entered into a distribution agreement with Zimmer, which Osseous claims is outside the scope of the DiscoveryOrtho marketing agreement. DiscoveryOrtho contends the Zimmer distribution agreement entitles DiscoveryOrtho to payment under the marketing agreement. Osseous refused to pay the amount currently due (according to DiscoveryOrtho), thereby setting the stage for DiscoveryOrtho to bring a breach of contract action. The fact that DiscoveryOrtho had not yet filed a breach of contract action mere weeks after the dispute arose between the parties did not suggest the dispute would not be resolved in a timely fashion or that such remedy will be otherwise insufficient.
The available information suggests declaratory relief might conceivably guide the future conduct of Osseous. Accepting the allegations of the complaint, there is no fixed total amount due. The total amount allegedly due to DiscoveryOrtho under the marketing agreement may depend upon the revenues generated by Osseous under the Zimmer distribution agreement (the marketing agreement and addendum refer to set percentages of the “transaction/gross consideration”). Allegedly, the Zimmer distribution agreement is not an “asset sale or upfront license”; instead, it apparently contemplates ongoing payments for the right to distribute Osseous’s technology. Thus, declaratory relief could plausibly affect Osseous’s future conduct and in turn affect DiscoveryOrtho ’ s entitlements under the marketing agreement.
But the trial court was not required to speculate in favor of Osseous or accept its bare contentions. Even in its appellate brief, Osseous manages only a vague proposed amendment to the complaint: “The performance [of] the Zimmer Dental Agreement has not been completed and, thus, certain acts will transpire between Zimmer Dental and Osseous into the future that will generate additional disputes over the Osseous-[DiscoveryOrtho] written agreement.” This is not sufficient to call the court’s exercise of discretion into question.
California trial courts may consider in their section 1061 analysis whether the timing of the declaratory relief action suggests litigation strategy motivated the filing rather than a concern that judicial guidance was needed and would not be forthcoming absent the filing of a declaratory relief action. Our review of the record, including the parties’ requests for judicial notice, suggests this factor also supports affirming the court’s order.
We conclude dismissal was well within the discretion provided by section 1061. It is likely the ultimate outcome of the current litigation between the parties will be a single judgment fully and finally resolving the parties’
DISPOSITION
The judgment is affirmed. DiscoveryOrtho shall recover its costs on appeal.
Moore, Acting P. J., and Fybel, J., concurred.
Notes
All statutory references are to the Code of Civil Procedure unless otherwise stated.
We grant Osseous’s request that this court take judicial notice of pleadings and a motion to dismiss from the federal case, Discovery Ortho Partners, LLC v. Osseous Technologies of America, Inc. (S.D.N.Y., No. 10-CV-1729). We previously granted DiscoveryOrtho’s request that we take judicial notice of its opposition to Osseous’s motion to dismiss in the same case.
Obviously, the issue is not moot; there is a live issue whether DiscoveryOrtho is entitled to damages.
Cardellini v. Casey, supra,
Two justices dissented in DeToth: “The question presented here is not whether the trial court would have been justified, under the facts alleged, in overruling the demurrer and in granting declaratory relief, but whether the trial court was compelled, under the facts alleged, to overrule the demurrer and to grant such relief.” “The majority opinion fails to give effect to [section 1061] and fails to consider numerous authorities dealing with the discretionary power thereby vested in the trial court . . . .” “In my opinion, the trial court was not compelled to overrule the demurrer and grant declarаtory relief under the allegations of the complaint before it. It affirmatively appeared from said allegations that plaintiff’s cause of action, if any, had fully accrued by reasons of defendant’s alleged breach of the contract. Assuming the validity of the alleged contract, plaintiff had the alternative remedies of an action for damages or of an action for injunctive relief. [Citations.] These alternative remedies were clearly available; were both speedy and adequate; and were equally, if not better, suited to plaintiff’s needs than the remedy by way of mere declaratory relief.... To entertain an action for mere declaratory relief under the circumstances would encourage a multiplicity of actions where but one action would suffice.” (DeToth, supra,
We are not impressed with the other proposed facts Osseous claims it would have alleged had the court given leave to amend the complaint (even though Osseous did not raise these
On the other hand, concerns raised by DiscoveryOrtho with regard to its right to a jury trial had the court overruled the demurrer are overblown. DiscoveryOrtho could have pleaded its breach of contract action as a cross-complaint. (See §§ 428.10, 426.60, subd. (c); see also § 1062 [“The remedies provided by this chapter are cumulative, and shall not be construed as restricting any remedy, provisional or otherwise, provided by law for the benefit of any party to such action, and no judgment under this chapter shall preclude any party from obtaining additional relief based upon the same facts.”].) Moreover, “[w]here an action for declaratory relief is in effect used as a substitute for an action at law for breach of contract, a party is entitled to a jury trial as a matter of right.” (Patterson v. Insurance Co. of North America (1970)