Filed 3/26/14 RunflatAmerica v. Michelin No. America CA2/2

                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.



              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                                     SECOND APPELLATE DISTRICT
                                                  DIVISION TWO

RUNFLATAMERICA, LLC,                                                    B246418 c/w B249242

                   Plaintiff and Appellant,                             (Los Angeles County
                                                                        Super. Ct. No. BC477901)
         v.

MICHELIN NORTH AMERICA, INC.,
et al.,

                   Defendants and Respondents.




         APPEAL from a judgment and order of the Superior Court of Los Angeles
County. Richard E. Rico, Judge. Affirmed.
         Egan Avenatti, Michael J. Avenatti and Scott H. Sims for Plaintiff and Appellant.
         Horvitz & Levy, Lisa Perrochet and Jason R. Litt; Yukevich/Cavenaugh, James J.
Yukevich and Todd A. Cavanaugh for Defendant and Respondent Michelin North
America, Inc.
         Yoka & Smith, Walter M. Yoka, David T. McCann, and Jennifer Weinhold for
Defendant and Respondent The Goodyear Tire & Rubber Company.
         Clyde Snow & Sessions and Mark L. Smith for Defendants and Respondents
Bridgestone Americas Tire Operations, LLC and Bridgestone Americas, Inc.
       In this shareholder derivative action, plaintiff RunflatAmerica LLC (Runflat)
appeals from the judgment dismissing its claims, brought on behalf of nominal defendant
Runflat America Corporation (RAC), against defendants Michelin North America, Inc.
(Michelin), Bridgestone Americas Tire Operations, LLC and Bridgestone Americas, Inc.
(collectively, Bridgestone), and The Goodyear Tire and Rubber Company (Goodyear)1
after the trial court sustained, without leave to amend, defendants’ demurrers to Runflat’s
first amended complaint. Runflat also appeals from the order dismissing the action
against RAC as the nominal defendant. We affirm both the judgment, and the order
dismissing the action against RAC.
                                     BACKGROUND
The parties
       RAC, the nominal defendant in this action, is a California corporation founded in
2000 that manufactures tire inserts for military use. Rick Cole (Cole) served as chief
executive officer and president of RAC from 2000 to 2010. Runflat is a Nevada limited
liability company that is wholly owned by Cole. Runflat owns in excess of 10 percent of
the outstanding stock of RAC.
       Michelin, Bridgestone, and Goodyear supply tires for military vehicles.
Factual background
       In 2007, RAC developed an injected composite runflat tire insert for military use.
A “runflat” insert is a product that enables a tire to continue functioning after it has been
punctured. At the time RAC’s product was developed, a company named Hutchinson
Industries had been supplying the majority of runflat tire inserts for military use.
Hutchinson’s products were used with tires made by defendants.
       RAC secured a contract to supply 12,000 runflat inserts for military vehicles
manufactured by BAE Systems. The contract term was from June 2007 through January
2009. At the time the parties entered into the contract, BAE Systems advised RAC to




1      Michelin, Bridgestone, and Goodyear are referred to collectively as defendants.

                                              2
“remain able to supply spare parts through at least February 2009, if not for years to
come, equaling or exceeding the 12,000 initial production amounts.”
       In July 2007, Michelin asked to inspect the RAC inserts that would be used with
Michelin’s tires because of concerns that the composite inserts would cause undue wear
and tear on its tires. Michelin and RAC could not agree on nondisclosure terms,
however, and the inspection never occurred.
       RAC delivered the 12,000 composite runflat inserts to BAE Systems through
January of 2009. RAC did not receive any reports of undue wear and tear on Michelin
tires, nor did it receive any negative feedback from any manufacturer or military source
regarding its composite inserts. When RAC’s contract expired in January 2009, BAE
Systems declined to renew the contract and instead contracted with RAC’s competitor,
Hutchinson, to supply runflat tire inserts for its vehicles. By November 2009,
Hutchinson was supplying its own composite insert that plaintiff alleges was “strikingly
similar” to its own product. After RAC’s contract with BAE Systems expired, Cole was
removed as president and CEO of RAC and was removed from RAC’s board of directors.
       In January 2010, Michelin disseminated a technical bulletin advising of “potential
damage” from the use of “noncompliant devices” in wheel assemblies. The bulletin that
warned that some types of “runflat and beadlock devices” that contain “[m]etal, hard
plastic or other non-compliant materials” will create damage to the interior surfaces of
tires and would void Michelin’s warranty on its tires. The bulletin did not mention
composite inserts, RAC, Hutchinson, or their respective runflat inserts. In the following
months, Goodyear and Bridgestone disseminated similar bulletins. The Goodyear
bulletin warned that runflat devices made of hard plastic, composite, metal, and other
noncompliant materials “can” damage a tire’s inner liner, and the Bridgestone bulletin
warned that such devices “may” damage areas of the tire.
The instant lawsuit
       On January 30, 2012, Runflat filed this shareholder derivative action nominally
against RAC, to pursue claims against Michelin, Goodyear, and Bridgestone. The
original complaint alleged that two RAC board members “conspired to terminate Cole as


                                              3
RAC’s President and Chief Executive Officer.” The complaint further alleged that
because the board members “remov[ed] Cole from his positions,” any presuit demand
asking the board to take action against defendants “would [have been] a useless and futile
action, and [was] therefore excused.” The complaint asserted causes of action for trade
libel, intentional interference with contractual relations, and violations of the unfair
competition law.
       Defendants filed separate demurrers to the complaint, on the grounds that Runflat
failed to allege that it had made a formal demand on RAC before filing a derivative
action, as required by Corporations Code section 800, subdivision (b)(2), failed to allege
facts sufficient to show that making such a demand would have been futile, and failed to
allege that it had provided written notice of the proposed complaint to RAC’s board
before filing suit. In its opposition, Runflat argued that defendants lacked standing to
assert defenses that only RAC could raise. Runflat further argued that a presuit demand
would have been futile because RAC’s board had conspired to oust Cole from the
company.
       The trial court sustained the demurrers with leave to amend, noting that Runflat
had failed to assert specific facts as to each RAC director’s inability to exercise his or her
own business judgment and that defendants had standing to assert a defense based on
Runflat’s failure to allege a timely presuit demand or demand futility. The trial court
rejected Runflat’s general allegation that a demand on RAC’s board was futile because
the board had ousted Cole from the company, noting that “[a]ny animosity by two of the
board members against Cole appear[ed] unrelated to the board of directors’ interest in
suing Defendants for wrongdoing against RAC.”
       Following the trial court’s ruling, Runflat requested additional time to file an
amended complaint. During that time, Runflat sent a letter and a proposed first amended
complaint to RAC’s board, demanding that RAC “immediately pursue claims” against
defendants. The demand letter gave RAC’s board ten days to respond. RAC’S board did
not respond, and Runflat filed a first amended complaint alleging that it had served a



                                              4
demand and copy of the proposed amended complaint on RAC. The first amended
complaint did not allege that a demand on RAC’s board would have been futile.
       Defendants each filed demurrers to the first amended complaint, arguing that
Runflat’s demand letter to RAC’s board was invalid because Corporations Code section
800 requires that the demand and copy of the proposed complaint be provided before the
lawsuit is “instituted” and that a demand made after the initiation of the lawsuit but
before the filing of an amended complaint did not satisfy the statutory requirement. The
trial court sustained the demurrers on this ground. The trial court alternatively found that
the first amended complaint failed to state claims for trade libel, interference with
contractual relations, or unfair business practices and dismissed the action as to each of
the defendants. The trial court subsequently dismissed the action as to nominal defendant
RAC. This consolidated appeal followed.2
                                       DISCUSSION
I. Standard of review
       “On appeal from a judgment dismissing an action after sustaining a demurrer
without leave to amend, the standard of review is well settled. The reviewing court gives
the complaint a reasonable interpretation, and treats the demurrer as admitting all
material facts properly pleaded. [Citations.] The court does not, however, assume the
truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be
affirmed ‘if any one of the several grounds of demurrer is well taken. [Citations.]’
[Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff
has stated a cause of action under any possible legal theory. [Citation.] And it is an
abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows
there is a reasonable possibility any defect identified by the defendant can be cured by
amendment. [Citation.]” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-
967.) The legal sufficiency of the complaint is reviewed de novo. (Montclair
Parkowners Assn. v. City of Montclair (1999) 76 Cal.App.4th 784, 790.)

2     Runflat filed a separate appeal of the postjudgment order dismissing the action as
to nominal defendant RAC. On our own motion, we consolidated the two appeals.

                                              5
       The trial court concluded that Runflat failed to state claims for trade libel,
interference with contractual relations, and unfair trade practices. We agree and affirm
the dismissal of Runflat’s action on that basis. (Orange Unified School Dist. v. Rancho
Santiago Community College Dist. (1997) 54 Cal.App.4th 750, 757 (Orange Unified)
[appellate court will affirm a trial court’s ruling sustaining a demurrer if it is correct on
any theory].)
II. Trade libel
       Runflat contends the trial court erred by sustaining defendants’ demurrers to its
cause of action for trade libel. Trade libel is defined under California law as the
publication of a false statement disparaging the quality of another’s property, which the
publisher should recognize is likely to cause pecuniary loss to the owner.
(ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1010.) “To constitute
trade libel, a statement must be false.” (Ibid.) When “a statement is ambiguous or
susceptible of an innocent meaning, it is incumbent upon the plaintiff to plead the facts
showing its defamatory meaning. [Citation.]” (Id. at p. 1011.)
       Runflat’s first amended complaint fails to allege facts demonstrating that
defendants’ technical bulletins are defamatory. The bulletins warned military contractors
and the military that runflat devices made of composite, hard plastic, metal, or other non-
compliant materials could cause damage to the interior surface of tires in which those
devices were installed. The bulletins also advised recipients that damage caused by such
devices would not be covered by defendants’ respective tire warranties. Defendants’
bulletins contain no reference to RAC or its product.
       Runflat concedes that the bulletins do not refer to RAC or its products, but alleges
that defendants’ bulletins were “clearly an assault on RAC’s business and its composite
product” because “RAC was the only manufacturer of composite inserts at that time
competing for [Department of Defense] business” and “there were no composite runflat
inserts for use within the United States other than RAC’s in existence at the time each of
the bulletins was disseminated.” This statement is plainly contradicted, however, by
allegations elsewhere in the first amended complaint, which states that before any of


                                               6
defendants’ technical bulletins were disseminated, “Hutchinson supplied their own
version of a composite runflat, strikingly similar to Runflat’s” to other military
contractors. The first amended complaint alleges no facts showing that defendants’
technical bulletins were directed at RAC’s products.
       Runflat argues that there is no requirement under California law that a publication
identify the product being disparaged in order to constitute trade libel but cites no
authority to support this argument. Davis v . Hearst (1911) 160 Cal. 143, on which
Runflat relies, is inapposite. The court in that case held that extrinsic evidence can be
presented to show that an ambiguously worded defamatory statement was in fact directed
at the plaintiff, and that a jury’s finding that any person to whom the defamatory
statement was published would understand that it applied to the plaintiff is sufficient to
support a libel verdict. The amended complaint alleges no facts establishing that
defendants’ technical bulletins were directed at RAC or that recipients of the bulletins
would construe it in such a manner. Plaintiff’s argument that Michelin and Hutchinson
shared “a close relationship” sufficient to support an inference that they conspired to
disparage RAC’s product is unsupported by any facts whatsoever.
       The trial court did not err by concluding that Runflat failed to state a claim for
trade libel.
III. Intentional interference with contract
       Runflat contends the trial court erred by sustaining the demurrers to its cause of
action for interference with contractual relations. To state a claim for intentional
interference with contractual relations, a plaintiff must allege a valid contract between the
plaintiff and a third party, the defendant’s knowledge of this contract, intentional acts
designed to induce the disruption of the contractual relationship, and actual disruption of
the contractual relationship resulting in damage. (Quelimane Co. v. Stewart Title
Guaranty Co. (1998) 19 Cal.4th 26, 55.) The existence of a valid enforceable contract is
a necessary element of such a claim. (PMC, Inc. v. Saban Entertainment, Inc. (1996) 45
Cal.App.4th 579, 601, disapproved on another ground by Korea Supply Co. v. Lockheed
Martin Corp. (2003) 29 Cal.4th 1134, 1159, fn. 11.)


                                              7
       Runflat’s claim for intentional interference with contractual relationship fails as a
matter of law because RAC had no enforceable contract at the time the alleged
interference occurred. Runflat’s first amended complaint alleges that the contract
between RAC and BAE Systems expired in January 2009, more than a year before any of
defendants’ technical bulletins was disseminated. The trial court did not err by sustaining
defendants’ demurrers to this cause of action.
IV. Violation of Unfair Competition Law
       The unfair competition law (Bus. & Prof. Code, § 17200 et seq.) (UCL) makes
actionable any “unlawful, unfair or fraudulent” business practice. Runflat’s UCL claim is
based on alleged “unfair” and “fraudulent” business practices by defendants.
       A. Unfair business practice
       “[T]he test to determine whether a business practice is unfair differs depending on
whether the plaintiff in a UCL case is a competitor of the defendant or a consumer.
[Citations.]” (Drum v. San Fernando Valley Bar Assn. (2010) 182 Cal.App.4th 247, 253
(Drum).) In competitor cases, a business practice is “unfair” only if it “threatens an
incipient violation of an antitrust law, or violates the policy or spirit of one of those laws
because its effects are comparable to or the same as a violation of the law, or otherwise
significantly threatens or harms competition.” (Cel-Tech Communications, Inc. v.
Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 187, fn. omitted.)
       In consumer cases, some appellate courts have required that unfair business
practice claims “be tethered to specific constitutional, statutory, or regulatory provisions.
[Citations.]” (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1260-
1261 (Bardin).) Other appellate courts have applied two different versions of a balancing
test that requires the reviewing court to weigh the utility of the alleged unfair business
practice against the injury it causes. Under the first version of this test, the court
determines whether the alleged business practice “is immoral, unethical, oppressive,
unscrupulous or substantially injurious to consumers and requires the court to weigh the
utility of the defendant’s conduct against the gravity of the harm to the alleged victim.
[Citations.]” (Id. at p. 1260.) The second version of the balancing test draws on the


                                               8
definition of “unfair” in section 5 of the Federal Trade Commission Act (15 U.S.C.
§ 45(n)), and requires that “‘“(1) The consumer injury must be substantial; (2) the injury
must not be outweighed by any countervailing benefits to consumers or competition; and
(3) it must be an injury that consumers themselves could not reasonably have avoided.”’
[Citations.]” (Drum, supra, 182 Cal.App.4th at pp. 254-257.)
       Runflat’s first amended complaint fails to state an unfair business practice claim
under any of these tests. The first amended complaint fails to state a competitor claim for
unfair business practices. It alleges in conclusory fashion that defendants “threatened an
incipient violation of antitrust law” by precluding RAC “from maintaining a foothold in
the composite runflat insert marketplace” against Hutchinson, its only competitor. It
fails, however, to provide any factual support for this allegation or to explain how
bulletins advising recipients that damage caused by noncompliant runflat devices were
not covered by defendants’ respective tire warranties violated any antitrust laws.
(Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 619 [facts supporting a
UCL claim must be pled with reasonable particularity].) The first amended complaint
does not allege facts showing how defendants’ bulletins precluded RAC from competing
with Hutchinson, as both companies manufactured composite runflat inserts that were the
subject of the technical bulletins.
       The first amended complaint fails to state a consumer claim for unfair business
practices under the UCL. It is tethered to no specific statutory or regulatory provision. It
contains no allegation that defendants engaged in any conduct that was “immoral,
unethical, oppressive, unscrupulous or substantially injurious to consumers” nor does it
allege that any consumer was substantially injured by defendants’ conduct.
       B. Fraudulent business practice
       The first amended complaint also fails to set forth facts sufficient to state a cause
of action for a fraudulent business practice under the UCL. To state a claim under this
theory, Runflat was required to state “with reasonable particularity” that members of the
public were “likely to be deceived” by defendants’ conduct. (Bardin, supra, 163
Cal.App.4th at p. 1274.) The first amended complaint fails to allege how members of the


                                              9
public were likely to be deceived, as none of defendants’ technical bulletins refer to RAC
or its products specifically. As the trial court noted in its written ruling, Michelin’s
bulletin does not even refer to “composite runflats” and the Goodyear and Bridgestone
bulletins merely advise consumers that certain noncompliant inserts “may” cause damage
to their tires. These allegations are insufficient to state a claim for a fraudulent business
practice. (Ibid.)
       The trial court did not err by sustaining defendants’ demurrers to the cause of
action for violation of the UCL.
V. Leave to amend
       Runflat fails to suggest with any specificity how it would further amend the first
amended complaint to correct the defects noted above. The burden of proving a
reasonable possibility of amending the complaint to state a cause of action “is squarely on
the plaintiff.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The trial court therefore did
not abuse its discretion by sustaining the demurrers without leave to amend.
VI. Corporations Code section 800
       The parties argue at some length in their respective appellate briefs as to whether
Runflat lacked standing to pursue a shareholder derivative action on behalf of RAC
because it failed to make a timely demand on RAC’s board before commencing this
action, as required by Corporations Code section 800, subdivision (b),3 and whether the
demand letter Runflat delivered to RAC’s board 10 days before filing the operative first
amended complaint satisfied the statutory demand requirement. Neither side has
presented any persuasive authority in support of their respective positions.



3       Corporations Code section 800, subdivision (b) provides in relevant part: “No
action may be instituted or maintained in right of any domestic or foreign corporation by
any holder of shares . . . of the corporation unless . . . [t]he plaintiff alleges in the
complaint with particularity plaintiff’s efforts to secure from the board such action as
plaintiff desires, or the reasons for not making such effort, and alleges further that
plaintiff has either informed the corporation or the board in writing of the ultimate facts
of each cause of action against each defendant or delivered to the corporation or the
board a true copy of the complaint which plaintiff proposes to file.”

                                              10
       Defendants’ argument that a demand is timely under Corporations Code section
800, subdivision (b) only if made before the filing of the initial complaint appears to
conflict with the plain language of the statute, which states that “[n]o action may be
instituted or maintained” unless such a demand has been made on the corporation or its
board. (Corp. Code, § 800, subd. (b), italics added.) The cases cited by defendants,
Vaughn v. LJ Internat., Inc. (2009) 174 Cal.App.4th 213 and Bader v. Anderson (2009)
179 Cal.App.4th 775, are inapposite. Vaughn concerned a shareholder presuit demand
requirement not under California law, but under the British Virgin Island Business
Companies Act of 2004, and the shareholder plaintiff in Bader made no presuit demand
on the board and failed to allege that making such a demand would have been futile.
Neither of those cases involved the circumstance presented here -- a demand presented to
the nominal corporate defendant’s board after the action was commenced but before the
filing of the operative first amended complaint.
       Runflat’s reliance on Braddock v. Zimmerman (Del. 2006) 906 A.2d 776 as
authority for its position is similarly misplaced. In Braddock, the Delaware Supreme
Court did not hold that a demand is timely if made after the initial complaint has been
filed so long as it is made before the filing of the operative amended complaint. Rather,
the court in Braddock addressed a much narrower issue -- the circumstances under which
a plaintiff is required to reestablish the basis for demand futility when filing an amended
complaint in a derivative action. The Delaware Supreme Court in Braddock concluded
that the plaintiff does not have to reestablish the basis for demand futility at the time of
filing an amended complaint except when there has been a change in the composition of
the board of directors, and then only “as to derivative claims in the amended complaint
that are not already validly in litigation.” (Id. at p. 786, fn. omitted.)
       We need not address the parties’ arguments, in any event, because Runflat has
failed to state a cause of action under any of the theories alleged in the first amended
complaint, and we affirm the trial court’s ruling sustaining defendants’ demurrers and
dismissing the action on that basis. (Orange Unified, supra, 54 Cal.App.4th at p. 757.)



                                               11
                                   DISPOSITION
      The judgment is affirmed as is the order dismissing the action against nominal
defendant RAC. Defendants are awarded their costs on appeal.
      NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.



                                               ____________________________, J.
                                               CHAVEZ
We concur:



__________________________, Acting P. J.
ASHMANN-GERST



__________________________, J.*
FERNS




________________________________________________________________________
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.


                                          12
