Flextronics Int'l USA, Inc. v. Sparkling Drink Sys. Innovation Ctr. Ltd.

• Decision Date: 04 May 2016
• Docket Number: 15 C 4904
• Parties: Flextronics International USA, Inc., Plaintiff, v. Sparkling Drink Systems Innovation Center Ltd, Sparkling Drink Systems Innovation Center HK, and Aaron Serge Bueno, Defendants.
• Court: U.S. District Court — Northern District of Illinois

186 F.Supp.3d 852

Flextronics International USA, Inc., Plaintiff,

v.Sparkling Drink Systems Innovation Center Ltd, Sparkling Drink Systems Innovation Center HK, and Aaron Serge Bueno, Defendants.

15 C 4904

United States District Court, N.D. Illinois, Eastern Division.

Signed May 4, 2016

Andrew J. Jarzyna, Benesch Friedlander Coplan & Aronoff, LLP, Chicago, IL, Andrew Gregory Fiorella, Warren Thomas McClurg, II, Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, OH, for Plaintiff.

F. John McGinnis, Brandon M. Thompson, Maurice Wutscher LLP, Chicago, IL, Eric Tsai, Maurice Wutscher LLP, San Francisco, CA, Patrick Robert Tira, Maurice Wutscher LLP, San Diego, CA, for Defendants.

MEMORANDUM OPINION AND ORDER

Gary Feinerman, UNITED STATES DISTRICT JUDGE

Flextronics International USA, Inc. ("Flextronics") brought this suit against Aaron Serge Bueno and two companies he founded, Sparkling Drink Systems Innovation Center Ltd ("SDS-IC") and Sparkling Drink Systems Innovation Center HK ("SDS-HK") (together, "SDS"), alleging breach of contract, fraud, and other state law claims in connection with a manufacturing agreement. Doc. 19 at ¶¶ 92-134. Defendants have moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, 12(b)(6) for failure to state a claim, and 12(b)(7) for failure to join an indispensable party. Doc. 29. The motion is granted in part and denied in part; the court has subject matter jurisdiction under 28 U.S.C. § 1332(a)(2), and no indispensable party has been left out, but Flextronics's unjust enrichment claim is dismissed without prejudice and parts of its fraud and negligent misrepresentation claims are dismissed with prejudice.

Background

On a facial challenge to subject matter jurisdiction under Rule 12(b)(1) or a motion to dismiss under Rule 12(b)(6) or Rule 12(b)(7), the court assumes the truth of the operative complaint's factual allegations, though not its legal conclusions. See Vesely v. Armslist LLC , 762 F.3d 661, 664–65 (7th Cir.2014) (Rule 12(b)(6) ); Apex Digital Inc. v. Sears, Roebuck & Co. , 572 F.3d 440, 443–44 (7th Cir.2009) (Rule 12(b)(1) ); Davis Cos. v. Emerald Casino, Inc. , 268 F.3d 477, 479 n. 2 (7th Cir.2001) (Rule 12(b)(7) ). The court must also consider "documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice," along with additional facts set forth in Flextronics's brief opposing dismissal, so long as those facts "are consistent with the pleadings." Geinosky v. City of Chicago , 675 F.3d 743, 745 n. 1 (7th Cir.2012) ; see also Runnion ex rel. Runnion v. Girl Scouts of Greater Chi. & Nw. Ind. , 786 F.3d 510, 528 n. 8 (7th Cir.2015). The following facts are set forth as favorably to Flextronics as those materials allow. See Meade v. Moraine Valley Cmty. Coll. , 770 F.3d 680, 682 (7th Cir.2014).

Flextronics is a corporation organized under California law with its headquarters in San Jose, California. Doc. 19 at ¶ 20. It is affiliated with Flextronics Medical Sales and Marketing, Ltd. ("Medical"), a company organized under the laws of Mauritius. Ibid. ; Doc. 29-2 at 11. SDS-IC and SDS-HK are "limited companies" organized under the laws of Hong Kong with headquarters in Hong Kong. Doc. 19 at ¶¶ 21-22. Bueno, a citizen of Hong Kong and Israel, is the founder, executive chairman, "controlling ultimate owner," and a director of SDS-IC and SDS-HK. Doc. 19 at ¶ 23.

SDS reached out to Flextronics in 2014 in order to engage it to manufacture disposable plastic pods for use in SDS's at-home beverage systems—machines that mix water with powder contained in the pods to make flavored drinks such as soda and coffee. Id. at ¶¶ 4-5. Bueno, SDS CEO Thomas Schwab, and three other SDS representatives traveled to Flextronics's facility in San Jose on June 26, 2014, to discuss the proposal with Flextronics President Paul Humphries and several other senior Flextronics officers. Id. at ¶ 27. After providing the Flextronics delegation with sample pods and drinks, SDS gave a slide show to sell Flextronics on the beverage system's business prospects. One slide said that "SDS intends to sell 22 million appliances in the next 5 years." Id. at ¶ 31. Another, in a section titled "Consequences for Flextronics," stated that "SDS will have to purchase a cumulated 8,6 billion capsules representing almost 700 million US$ of purchase over the next 5 years." Id. at ¶¶ 33-34. Bueno also represented that "SDS had contracts with and huge orders from Walmart, Target, and Bed Bath & Beyond, among other major companies." Id. at ¶ 35.

Bueno and Schwab followed up the June 26 meeting with mixed messages about the status of SDS's relationships with retailers like Walmart and Target. On June 28, Bueno sent an email to various Flextronics executives suggesting that contracts with those retailers were in place; the email stated that "WalMart would not want to wait to receive pods until the first week of November" and that Bueno was "quite sure that Target will react the same way (During the meeting last Wednesday they even wanted us to be ready in... August!!!)". Id. at ¶ 37 (ellipses in original). But on July 8, Bueno sent another email suggesting that the deals with the retailers had not yet closed; it read, "will be meeting (for final closing): Walmart coming Friday (11th), BB&B the 18th and Target (with all Senior buyers!!, proving it is strategic for them) the 29th. In addition we are moving with HSN and As Seen on TV!—Great business around!" Id. at ¶ 38. A month later, Bueno sent yet another email to "various executives at Flextronics entities" stating that SDS had "signed the final contract last Friday" with Haan, a Korean company, and that the "total pods minimum settle in the contract are 376,568,757 ...." Id. at ¶ 40. And on October 16, 2014, Schwab emailed Humphries to urge Flextronics to begin producing pods quickly, writing that SDS "can't afford not delivering in time to BB&B etc." Id. at ¶ 41.

In November 2014, SDS entered into an interim agreement ("the Agreement") with Medical, Flextronics's Mauritius affiliate. Id. at ¶ 42; Doc. 19-1 at 2. SDS agreed to buy pods from Medical and to pay Medical's "non-recurring expense ... charges." Doc. 19-1 at 2, 6. Either party could terminate the Agreement at will, but if SDS terminated it was required to pay Medical the price of the pods that Medical had produced as well as the costs that Medical had incurred for labor and equipment resulting from orders placed or demand forecasts made by SDS. Doc. 19 at ¶ 46; Doc. 19-1 at 3. The Agreement also stated that it

will not be assigned by either party without the other party's prior written consent; provided, however, that Customer understands that Flextronics will engage related legal entities ("Affiliates") to perform all or part of the services contemplated in this Interim Agreement and that Flextronics may assign, convey or otherwise transfer its rights and obligations under this Interim Agreement, in whole or in part, to any of its Affiliates or to a third party financial institution for the purpose of receivables financing (e.g., factoring).

Doc. 19-1 at 4. The complaint alleges that Medical subsequently "assigned all [of its] rights and obligations" in the Agreement to Flextronics. Doc. 19 at ¶ 20. On December 4, 2014, Bueno emailed various Flextronics executives and operations personnel with a "forecast" that SDS would need Flextronics to manufacture 100 million capsules in 2015. Id. at ¶ 48.

SDS shared the powder capsule's design with Flextronics while it was negotiating the Agreement with Medical. Id. at ¶ 57. Flextronics's engineers were skeptical that the design would work. When vapor permeates the kind of powder in SDS's pods, the powder clumps up and becomes useless. Id. at ¶¶ 60-61. Flextronics repeatedly warned SDS that the capsules would need to be protected by a vapor barrier to prevent clumping, but SDS repeatedly responded that adding a vapor barrier would not be necessary. Id. at ¶ 60. As it turned out, Flextronics was right; the clumping issue made SDS's design essentially unworkable. Id. at ¶¶ 61-67. Flextronics developed three potential fixes to the design that would prevent clumping, but they all would have increased the manufacturing cost significantly, making SDS's drink systems uneconomical. Id. at ¶ 70.

SDS tried to back out of the Agreement when it realized that the pods would not work. It never picked up or paid for the million or so pods that Flextronics produced, id. at ¶ 68, and it never paid Flextronics's bills for non-recurring expenses, labor and equipment, and unused materials, id. at ¶¶ 113-14. Altogether, Flextronics alleges that SDS owes $7,031,357 under the Agreement. Id. at ¶¶ 113, 120.

Discussion

I. Subject Matter Jurisdiction

The court must address Defendants' challenge to subject matter jurisdiction before reaching the merits. See Clean Water Action Council of Ne. Wis., Inc. v. E.P.A. , 765 F.3d 749, 751 (7th Cir.2014) ("Jurisdiction comes first."); Belleville Catering Co. v. Champaign Mkt. Place, L.L.C. , 350 F.3d 691, 693 (7th Cir.2003) ("[I]nquiring whether the court has jurisdiction is a federal judge's first duty in every case."). Flextronics asserts that the court has diversity jurisdiction under 28 U.S.C. § 1332(a)(2) because Flextronics is a citizen of California and Defendants are all "citizens or subjects of ... foreign state[s]"—Hong Kong and Israel. Doc. 19 at ¶ 25; see 28 U.S.C. § 1332(a)(2) (providing that the diversity jurisdiction covers "all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between ... citizens of a State and citizens or subjects of a foreign state"). Defendants disagree; they point out that while Flextronics is diverse from them, Medical is not. Doc. 29-2 at 11-14. Medical is a citizen of Mauritius, a tiny island nation in the Indian...