Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Cal.: Products distributor fails to specify sufficient terms to avoid Statute of Frauds dismissal, (Jan 31, 2025)

By Justin Marcus Smith, J.D.

In an oral breach of contract case, the court said it needed to see the actual contents of purported letters to determine whether terms specified, if any, might overcome the Statute of Frauds.

A personal products distributor claiming breach of an oral contract failed to plead that the alleged contract satisfied the Statute of Frauds writing requirement, held the federal district court in San Diego, California, in granting the defendant’s motion to dismiss that claim. The distributor alleged there were certain written documents making the Statute of Frauds inapplicable, but the court said it needed to see the actual contents of such documents, not a summary. The court declined to go beyond clear stated exceptions to the Statute of Frauds to recognize “mutual part performance” as an exception. The distributor’s tortious interference with contract claim failed for the same reason: the plaintiff did not have a contract under the Statute of Frauds. However, the court held the distributor could plead promissory estoppel in the alternative to breach of contract based on the same facts. The court relied on unsettled case law about whether unjust enrichment is a separate cause of action to deny dismissal of the unjust enrichment claim. The court dismissed the claim for quantum meruit because the plaintiff did not “furnish services” to the defendants, but the court appeared to leave the door open to amendment. Last, the court denied the defendants’ motion to dismiss the distributor’s prayer for consequential damages, but it granted dismissal of the prayer for attorney’s fees in connection with unjust enrichment or promissory estoppel claims (Cosmonova, LLC, v. Biofilm, Inc., No. 3:24-cv-01453-MMA-JLB (S.D. Cal. Jan. 28, 2025)).

Background. Cosmonova, LLC, a health and beauty products distributor in Latin America, complained that BioFilm, Inc., and Combe, Inc., the acquirer of BioFilm, breached oral contracts for the distribution of personal lubrication products in countries that included Mexico, Brazil, and Argentina. Cosmonova said it took steps to secure the relevant regulatory permissions. It also said Biofilm agreed that California law would govern their distribution agreements.

Cosmonova initially sued in August 2024. It filed a first amended complaint in November 2024 asserting five causes of action: (1) breach of oral contract; (2) tortious interference with contract only against Combe; (3) promissory estoppel; (4) unjust enrichment; and (5) quantum meruit.

Breach of oral contract. The court determined that Cosmonova failed to plead that the parties eventually placed enough terms, like quantity, in writing to satisfy the Statute of Frauds. The court also found that Cosmonova failed to plead the existence of purported letters of authorization for each Latin American country implicated in this distribution dispute.

The defendants argued that the Statute of Frauds barred the breach of oral contract cause of action. They also said that Cosmonova failed to allege a mutual manifestation to definite material terms, what would qualify as breach, or damages. The court said the elements of breach were the same whether an agreement is oral or in writing. The court found, for the purposes of the motion to dismiss, that the alleged master distribution agreement for Latin America fell under the California Commercial Code provisions for sales of goods, i.e., California’s version of the Uniform Commercial Code. Neither party addressed whether the California Commercial Code would apply, albeit the defendants mentioned the Statute of frauds.

Cosmonova maintained it had enforceable contracts, that there were writings that documented the terms of the various agreements, and that the parties both partially performed. Inasmuch as Cosmonova pleaded it had damages of $10 million in profits, the court found it could reasonably infer that the relevant goods were valued at $500 or more. That meant the Statute of Frauds would indeed apply and require a writing. The court also noted that Cosmonova pleaded that performance of the agreements was to take place over five-year terms. This aspect, too, placed the matter within the Statute of Frauds under either Cal. Com. Code § 2201(1) or Cal. Civ. Code § 1624(a)(1).

The court noted that the required writing did not need to contain every term. A letter might be sufficient if it stated the salient terms of the bargain under either statute. Here, the court acknowledged that Cosmonova pointed to alleged BioFilm letters of authorization for exclusive distribution in Colombia, Mexico, and Venezuela. However, the court said it needed more than a legally conclusory summary of the letters. Cosmonova needed to allege the actual contents for the court to identify terms that might overcome the Statute of Frauds where the initial agreements were merely oral. Likewise, allegations that BioFilm sent pricing lists were insufficient because the plaintiff did not allege what country agreement pertained or quantities involved. As to Cosmonova’s other allegations that BioFilm confirmed terms in writing, Cosmonova did not specify crucial terms.

Cosmonova cited only one case for the proposition that mutual part performance would take the alleged agreements out of the Statute of Frauds, but the court said that case only applied to marital property. The California Commercial Code stated clear exceptions to the Statute of Frauds, for example, “[w]ith respect to goods for which payment has been made and accepted or which have been received and accepted[,]” but the court said it was reluctant to go beyond that to recognize “mutual part performance” as an exception. In any event, Cosmonova could not claim legal damages for partial performance. It could only seek equitable relief. It might be able to recover restitution for unjust enrichment, but legal and equitable relief were mutually exclusive.

In any event, Cosmonova did not not sufficiently plead that both parties partially performed in several of the countries implicated. All considered, the court agreed with the defendants that Cosmonova failed to plead that the alleged contracts satisfied the Statute of Frauds writing requirement. The court accordingly granted the defendants’ motion to dismiss Cosmonova’s breach of oral contracts claim.

Tortious interference. The court held Cosmonova could not satisfy the first element of its tortious interference claim because it failed to plead a contract that satisfied the Statute of Frauds. The court granted the defendants’ motion to dismiss Cosmonova’s tortious interference with contract claim on that basis.

Promissory estoppel. The court disagreed with the defendants’ contention that the promissory estoppel claim must fail because it duplicated the breach of contract claim. Cosmonova could plead promissory estoppel in the alternative to breach of contract based on the same facts.

Continuing its analysis, the court found that Cosmonova pleaded it spent over $700,000 to obtain national regulatory approvals and to build sales channels, representing a loss on the alleged breach of promise that it would be the defendants’ exclusive distributor. The court held this was enough, at the pleading stage, to determine sufficient injury if the putative agreement were not enforced. The court accordingly denied the defendants’ motion to dismiss the promissory estoppel claim.

Unjust enrichment. Turning to unjust enrichment, the court noted that California courts of appeal are split on whether unjust enrichment is an independent cause of action. Without resolving the split, the Ninth Circuit has allowed them as independent or for restitution in quasi-contract. The court relied on the unsettled state of the case law to deny the defendants’ motion to dismiss Cosmonova’s unjust enrichment claim. The defendants could raise this argument again later.

Quantum meruit. The court held Cosmonova’s claim for quantum meruit must fail, because, as the defendants argued, the plaintiff did not “furnish services” to the defendants. The court concluded the pleaded energy, time, and money Cosmonova allegedly spent seeking regulatory certifications was not merely a “service” to the defendants under a traditional quantum meruit claim. Rather, it was “an action equally as beneficial to Plaintiff.” In opposition to dismissal, the plaintiff even appeared to acknowledge this. Therefore, the court declined to find that plaintiff pleaded a “service.”

The court dismissed the quantum meruit claim while apparently acknowledging that Cosmonova might amend to plead services and that it already pleaded the defendants received an unfair benefit. The court also acknowledged the allegation that Cosmonova’s sales efforts greatly enhanced brand awareness of the BioFilm product.

Damages. Where the defendants challenged prayers for consequential damages and attorney fees as not recoverable by law, the court reserved decision for summary judgment or trial. However, the court said California law was clear that a party cannot seek contract-based attorney fees under an unjust enrichment or promissory estoppel cause of action. The court accordingly denied the defendants’ motion to dismiss Cosmonova’s prayer for consequential damages, but it granted dismissal of the prayer for attorney fees in connection with unjust enrichment or promissory estoppel claims.

The Case is No. 3:24-cv-01453-MMA-JLB.

Judge: Anello, M.

Attorneys: Flora Vigo (Gaw | Poe LLP) for Cosmonova, LLC. Erik C. Swanholt (Foley & Lardner, LLP) for BioFilm, Inc.

Companies: Cosmonova, LLC; BioFilm, Inc.

Cases: FranchisingDistribution CaliforniaNews