Hebei Hengbo New Materials Tech. Co. v. Apple, Inc.

Decision Date26 September 2018
Docket NumberCase No. 18-CV-00468-LHK
CourtU.S. District Court — Northern District of California

Daniel R. Fong, Neil A. Friedman Popovic, Sheppard Mullin Richter & Hampton LLP a Limited Liability Partnership, Including Professional Corp., San Francisco, CA, Kent Randall Raygor, Valerie Elizabeth Alter, Sheppard Mullin Richter & Hampton LLP a Limited Liability Partnership Including Professional Corp., Los Angeles, CA, for Plaintiff.

Matthew Rawlinson, Hilary Hellmuth Mattis, Latham & Watkins LLP, Menlo Park, CA, Miles Norman Ruthberg, Latham & Watkins LLP, New York, NY, for Defendant.


Re: Dkt. Nos. 34, 45, 53

LUCY H. KOH, United States District Judge

Plaintiff Hebei Hengbo New Materials Technology Co., Ltd. f/n/a Hengbo Fine Ceramics Materials Co., Ltd. ("Hengbo") filed this suit against Apple, Inc. ("Apple") and 10 Doe Defendants claiming that its contract with Apple to produce high purity alumina melt stock to make glass should be rescinded and that Apple breached the implied covenant of good faith and fair dealing. Before the Court is Plaintiff's Motion to Compel Arbitration and Defendants' Motion to Dismiss. Having considered the parties' briefs, the relevant law, and the record in this case, the Court DENIES Plaintiff's Motion to Compel Arbitration. The Court GRANTS IN PART and DENIES IN PART Defendant's Motion to Dismiss.

A. Factual Background

Plaintiff Hengbo is a limited liability company organized under the laws of China. ECF No. 23 ("Compl.") ¶ 3. Hengbo manufactures, among other things, "high purity alumina melt stock," which is used "to make sapphire glass, a scratch resistant and durable form of glass used in consumer electronics." Id. Defendant Apple is a California corporation that develops and sells products such as the Apple iPhone. Id. ¶ 4. Hengbo alleges that the names and capacities of the Doe defendants have not yet been ascertained. Id. ¶ 5.

On January 23, 2014, Hengbo and Apple signed a Master Development and Supply Agreement ("MDSA") and a Statement of Work ("SOW") for Hengbo's production of high purity alumina melt stock for use in Apple's products. See Compl. ¶ 6 (citing Compl. Exhs. A & B). Hengbo argues that "[t]he terms of the MDSA are onerous and unfair to Hengbo, and result directly from Apple's superior bargaining power and abuse thereof." Id.

Hengbo pleads that the MDSA imposed obligations upon Hengbo, including:

• Apple [will] "periodically provide written forecasts indicating Apple's projected demand for each Good (each such forecast, a ‘Forecast ’). Supplier [Hengbo] will accept each such Forecast upon receipt. Supplier [Hengbo] will timely commence the manufacture of Goods in order to deliver the Goods by the dates indicated in each Forecast.
• Hengbo [is obligated] to "accept and timely fulfill all Purchase Orders that Apple, or any Apple-authorized entity issues to procure Goods under this Agreement for use in Apple products (Apple and each of the foregoing entities, an ‘Authorized Purchaser ’) by the delivery date requested in such Purchase Order so long as the number of Goods indicated does not exceed the quantity specified in the applicable Forecast."
"Regardless of initial manufacturing yields or any other circumstance, Supplier [Hengbo] will always timely start the manufacture of the Goods in order to fully and timely meet Apple's Forecasts."

Id. ¶¶ 7–9 (citing Compl. Exh. A ¶¶ 2, 4.1, 16).

By contrast, Hengbo pleads that "the MDSA did not obligate Apple to do anything." Id. ¶ 10. The MDSA stated: "Authorized purchasers may, without charge, (i) cancel any Purchase Order, or any portion thereof; or (ii) reschedule the shipment dates of undelivered Goods and/or redirect shipments of Goods to alternate locations. Id. ¶ 10 (citing Compl. Exh. A ¶ 4.2). Hengbo asserts the MDSA "did not obligate Apple to purchase anything from Hengbo." Id. ¶ 11. The MDSA stated: "Authorized Purchasers are not obligated to purchase any Goods except pursuant to a Purchase Order it issues. Except for amounts due pursuant to a Purchase Order or SOW, Authorized Purchasers will not be responsible for any costs in connection with the supply or purchase of any Goods."Id. (citing Compl. Exh. A ¶ 4.5). "In other words," Hengbo asserts, "Hengbo was obligated to produce thousands of metric tons of high purity alumina stock to meet Apple's forecasts, but Apple was not obligated to do anything in return." Id.

Beginning in the year 2014 until November 3, 2014, "Apple's forecasts required Hengbo to produce hundreds of metric tons" of high grade alumina stock each month (from June 1, 2014, the forecasts required 454 tons per month). Id. ¶ 13. Because of these forecasts, Hengbo produced thousands of metric tons of high purity alumina stock that ultimately amounted to approximately 2,000 metric tons. Id. ¶¶ 15, 16. To make this level of production possible, Hengbo enlarged its production capacity by building a new factory and hiring additional workers. Id. ¶ 15. Apple purchased none of the alumina stock. Id. ¶ 14. Instead, Apple changed its forecast on November 3, 2014 when it "abruptly reduced its forecasts from 454 metric tons per month to zero." Id. ¶ 17. The result for Hengbo is that approximately 2,000 metric tons of alumina stock remain unused and unbought by Apple or "any entity acting on its behalf" in a warehouse in China, a situation Hengbo pleads resulted in $25,000,000 in damages. Id. ¶¶ 16, 18.

Consequently, Hengbo's Complaint asserts two claims for relief. First Hengbo seeks enforcement of rescission of contract pursuant to California Civil Code § 1689(b)(2)-(4). Id. ¶¶ 19–22. Second, Hengbo alternatively claims a breach of contract and the implied covenant of good faith and fair dealing. Id. ¶¶ 23–28.

B. Procedural History

Hengbo filed this case on January 22, 2018, more than three-and-a-half years after the issues that gave rise to the Complaint. See ECF No. 1. The original version of the Complaint contained certain redactions, so it was accompanied by a Motion to file Under Seal. See ECF No. 4. After Magistrate Judge Cousins denied the Motion to File Documents Under Seal, see ECF No. 19, Hengbo refiled its original Complaint without any redactions. ECF No. 23. Apple was served on January 23, 2018. See ECF No. 11.

On April 2, 2018, the Court granted the parties' stipulation to extend Apple's deadline to answer or otherwise respond to the Complaint to April 20, 2018. ECF No. 28.

On April 20, 2018, Apple filed its Motion to Dismiss Plaintiff's Complaint. ECF No. 34 ("MTD"). On April 24, 2018, the parties filed a Joint Case Management Statement ("JCMS"). ECF No. 37. In the JCMS, the parties discussed their respective stance on the facts, the legal issues, the scope of discovery, and the filing of motions. See id. In particular, the JCMS stated that "[t]he parties are additionally contemplating, but have not yet decided, whether to move to compel arbitration," and that "Plaintiff reserves its right to move to compel contractual arbitration at a later date." Id. at 4, 6.

At the case management conference ("CMC") on May 2, 2018—101 days after Hengbo filed its Complaint—counsel for Hengbo again represented that it had not yet decided whether to seek arbitration and that "it's just a matter of the client making up their mind." See ECF No. 43 at 3–4. After the CMC, the Court issued its Case Management Order and gave Hengbo until May 11, 2018 to file a statement regarding whether it intends to move to compel arbitration, and June 1, 2018 to file any motion to compel arbitration. ECF No. 42.

On May 11, 2018, Hengbo filed its Notice of Intent to File a Motion to Compel Arbitration. ECF No. 44. On June 1, 2018, 43 days after Apple filed its Motion to Dismiss and 131 days after Hengo initiated the lawsuit, Plaintiff Hengbo filed a Motion to Compel Arbitration. ECF No. 45 ("MTC"). On June 4, 2018, Hengbo filed an Opposition to Apple's Motion to Dismiss. ECF No. 47 ("MTD Opp'n"). On June 15, 2018, Apple filed an Opposition to Hengbo's Motion to Compel Arbitration. ECF No. 48 ("MTC Opp'n"). On June 19, 2018, Apple filed its Reply to the Motion to Dismiss. ECF No. 50 ("MTD Reply"). On June 22, 2018, Hengbo filed its Reply to the Motion to Compel Arbitration. ECF No. 52 ("MTC Reply").

On June 22, 2018, Hengbo filed an Administrative Motion to Advance the Hearing Date so that this Court would hear Plaintiff's June 1, 2018 Motion to Compel before or at the same time as Apple's March 20, 2018 Motion to Dismiss. ECF No. 53. Apple opposed on June 26, 2018. ECF No. 54. Because the Court rules on the Motion to Dismiss and the Motion to Compel Arbitration simultaneously, the Court DENIES AS MOOT Plaintiff's administrative motion. See ECF No. 53; see also Fed. R. Civ. P. 78(b).

A. Motion to Compel Arbitration

The Federal Arbitration Act ("FAA") applies to arbitration agreements in any contract affecting interstate commerce. See Circuit City Stores, Inc. v. Adams , 532 U.S. 105, 119, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001) ; 9 U.S.C. § 2. Under Section 3 of the FAA, "a party may apply to a federal court for a stay of the trial of an action ‘upon any issue referable to arbitration under an agreement in writing for such arbitration.’ "

Rent–A–Center, West, Inc. v. Jackson , 561 U.S. 63, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) (quoting 9 U.S.C. § 3 ). If all claims in litigation are subject to a valid arbitration agreement, the court may dismiss or stay the case. See Hopkins & Carley, ALC v. Thomson Elite , 2011 WL 1327359, at *7–8 (N.D. Cal. Apr. 6, 2011).

The FAA states that written arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In deciding whether a dispute is...

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