Simon Marketing v. Price Waterhouse

Filed 5/19/08 Simon Marketing v. Price Waterhouse CA2/7

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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 SEVEN

APPEAL from a judgment of the Superior Court of Los Angeles County, Jane L. Johnson, Judge. Reversed.

Girardi | Keese, John A. Girardi, John K. Courtney and Jennifer A. Lenze, for Plaintiff and Appellant.

Fulbright & Jaworski, Robert S. Schulman, Robert E. Darby and Spencer Persson, for Defendant and Respondent.

____________________________

Simon Marketing, Inc. was retained by McDonalds Corporation to assist it in developing and administering promotional games for McDonalds customers. Simons director of security Jerry Jacobson was responsible for maintaining the integrity of the promotional games and personally distributed (or seeded) the high-value game pieces to various McDonalds restaurants throughout the country. Simon engaged the accounting firm PricewaterhouseCoopers, L.L.P. (PwC) to monitor the printing of the high-value game pieces, transportation of the pieces to various packaging plants and insertion of the pieces into McDonalds packaging materials. According to Simon, these duties included supervision of Jacobsons handling of the high-value game pieces between the printing site and the designated seeding location. Nonetheless, Jacobson successfully embezzled high-value game pieces over a period of several years before he was exposed, indicted and convicted of various felonies.

Simon sued PwC for breach of contract, alleging its failure to properly supervise Jacobsons work permitted the embezzlement to occur and caused Simon to lose its business relationship with McDonalds. In an earlier appeal we reversed the trial courts order sustaining PwCs demurrer to Simons third amended complaint without leave to amend. (Simon Marketing, Inc. v. Pricewaterhouse Coopers LLP (Sept. 21, 2005, B175221) [nonpub. opn.] (Simon I).) The case has now returned after the trial court granted summary judgment in favor of PwC. We again reverse.

FACTUAL AND PROCEDURAL BACKGROUND

1.      Simons Third Amended Complaint

Simons third amended complaint, filed December 5, 2003, contained a single claim for breach of contract against PwC[1]alleging PwC was contractually obligated to accompany and oversee Jacobson to various seeding locations in the United States thereby ensuring the integrity of the game processes. Further, Simon contracted with [PwC] to, among other things, have a representative of the accounting firm perform an ongoing internal control audit of all aspects of the various promotional games. The representative was . . . to audit Jacobsons activities and oversee the ultimate distribution of the high-value game pieces to various locations throughout the United States. This auditing included [PwCs] having, at all times, joint responsibility for the winning prize pieces until their true insertion into the promotional games at various locations . . . . Simon also alleged PwC was to provide a professional auditing service in accordance with the standards of due care and diligence customary in the industry between auditor and client. The terms of this agreement were never memorialized in writing.

2.      PwCs Demurrer and Our Decision in Simon I

On February 27, 2004 the trial court sustained PwCs demurrer to Simons third amended complaint without leave to amend. On September 21, 2005 this court reversed the judgment entered on that order, ruling Simon had adequately stated a claim for breach of contract against PwC, but cautioning it may be difficult for [Simon] to prove its allegations. (Simon I, supra, B175221, at p. 7.)

3.      Trial Setting and Discovery Issues

At a status conference on March 23, 2006, the trial court set a trial date of January 16, 2007. On July 7, 2006, at PwCs request and over Simons objection, the trial court continued the trial date to April 16, 2007. Neither party requested the court continue the previously determined discovery cut-off date of December 18, 2006.

Simon served notice of its first deposition (Bennett) on November 22, 2006. It noticed two more depositions on December 22, 2006 and served a third set of special interrogatories and a second set of document requests. PwC objected to the discovery as untimely, and Simon moved to compel PwC to respond to the discovery. On January 30, 2007 the trial court denied the motion to compel, ruling Simon had failed to articulate why the discovery was necessary and had not been diligent in conducting its discovery. The court indicated its ruling was without prejudice to Simon filing a motion to reopen discovery, but directed Simon to explain why the discovery was necessary and why it had not been completed before the discovery cut-off.

As suggested, Simon filed a motion to reopen discovery, which was heard on February 20, 2007. The court denied the motion, ruling the issues Simon wished to explore in its late discovery should have been inquired into before the discovery cutoff-date. The court reaffirmed its prior ruling Simon had not been diligent in conducting discovery.

4.      PwCs Motion for Summary Judgment

On December 28, 2006, following the close of discovery, PwC moved for summary judgment or, in the alternative, for summary adjudication with respect to the issue of duty, on the ground PwC was not responsible under the implied-in-fact contract alleged by Simon for preventing or detecting Jacobsons embezzlement. Specifically, PwC asserted the evidence established it did not assume either by agreement or conduct a duty to maintain joint physical custody with Jacobson of the high-value winning game pieces, responsibility for seeding the winning pieces into the games or any duty to report security vulnerabilities or breaches to Simon.

With its statement of undisputed material facts PwC submitted evidence establishing most of PwCs services were rendered at a printing plant in Oakwood, Georgia operated by Dittler Brothers, Inc. (Dittler). These services included observation of Dittlers production of winning game pieces and creation of seed packs for higher-value winners. Seed packs were envelopes containing a winning game piece and several commons, or non-winning pieces. In what became a routine operation conducted multiple times a year, the seed packs were prepared in a secure conference room at Dittler, with representatives of Dittler, PwC (usually a woman named Hilda Bennett) and Simon (usually Jacobson) working together to place a winning ticket and non-winning commons into the envelopes. Bennett and Jacobson sealed the envelopes and initialed the flaps. Jacobson then placed a security seal with the label SMI over the flaps. After the seed packs were created, they were locked in a vault at the Dittler plant. The seed packs remained in the vault until they were removed by Jacobson and Bennett. Jacobson then signed a written release prepared by Dittler and witnessed by Bennett, stating that Simon accepted full responsibility for the game pieces during the seeding process.

To seed the high-value game pieces, Jacobson, usually accompanied by Bennett, traveled to manufacturing plants throughout the United States and affixed the winning tickets to McDonalds product containers (for example, beverage cups or french fry boxes). Bennetts role was limited to being an observer, and the seeding process was governed by security procedures developed by Simon and implemented by Jacobson. According to evidence proffered by PwC, Bennett was instructed by Jacobson and his supervisors to follow Jacobsons direction concerning those security procedures.

Simons security procedures required physical custody of the seed packs to remain with a Simon management representative (usually Jacobson) from the time they left the Dittler plant until they were opened at the designated seeding location. The procedures specified a PwC representative (usually Bennett) travel with the Simon representative to the designated seeding location and monitor the opening of the seed packs and insertion of the high-value pieces into the packaging materials.

Simons security procedures did not specify how Jacobson was to carry the seed packs. Initially, Jacobson carried the seed packs in a briefcase with two locks, the combination of one known to him and the combination of the other known to Bennett (dual control). At some point in 1996 Jacobson altered this procedure to allow him to transport the seed packs in a modified bulletproof vest. Bennett did not question or report this alteration in procedure. She explained in her declaration she did not object to this change in procedure or notify Simon it had occurred because she had been told by two of Jacobsons supervisors she was to accept direction from Jacobson.

Many of the seeding trips required overnight travel. Invariably, there would be times during these trips when Jacobson was alone with the seed packs. On many occasions Jacobson opened the seed pack envelopes and removed the winning tickets, replacing them with commons only. He then re-sealed the seed pack envelopes with a duplicate SMI security seal. As a result, when Jacobson delivered the seed packs to Simons plant representative at the designated seeding location, neither the plant representative nor Bennett could tell Jacobson had tampered with the envelopes.

Jacobson took the winning tickets he had removed from the seed packs and distributed them to confederates throughout the country who then claimed to be winners of the games. According to Jacobson, the value of the tickets he embezzled was in the millions of dollars. Jacobson also testified, PwC had no knowledge of my misconduct, nor could it have discovered it given the role PwC actually played in the seeding process.

In January 2001 Simon hired the accounting firm of KPMG to replace PwC. Simon admitted KPMG assumed the same responsibilities as PwC with respect to the McDonalds games, and their agreement was memorialized in a written engagement letter. KPMG hired Bennett to perform the same job functions she had performed previously for PwC. During Bennetts tenure at KPMG, Simons security procedures were identical to the procedures in place during her employment with PwC. The KPMG agreement expressly stated its services were not intended to constitute an audit in accordance with the standards established by the American Institute of Certified Public Accountants (AICPA) and were not intended to reveal errors or fraud.

In August 2001 Jacobson was arrested and indicted. He pleaded guilty to numerous counts of fraud and served time in prison. Immediately after Jacobsons arrest, McDonalds fired Simon.

In opposition to PwCs motion Simon submitted several declarations from Simon executives who averred physical dual control of the high-value winning game pieces by Simon and PwC, through the use of dual combinations on safes and dual locks on briefcases, had been required to ensure the pieces got into the game and into consumers hands. This was a shared responsibility between Simon and PwC. PwC objected to this evidence on the ground it contradicted the executives earlier deposition testimony, lacked foundation or personal knowledge and was inconsistent with the deposition testimony of the witness designed by Simon as the person most knowledgeable of the security procedures actually used.

On March 14, 2007 the court granted PwCs motion for summary judgment, ruling Simons implied-in-fact contract with PwC was in all material respects identical to its written contract with KPMG, which did not impose an obligation to conduct an audit, examination or review in accordance with standards established by the [AICPA]. The court also ruled, after sustaining PwCs objections to Simons evidence in opposition to the motion, PwC had carried its burden of establishing, by undisputed evidence, it had no duty to prevent or discover fraud by Jacobson. The court explained any implied duty to discover fraud had been extinguished because PwC simply followed the security procedures implemented by Jacobson, who, Bennett was told, was authorized to unilaterally change the security protocol. As the court emphasized, PwC repeatedly disclaimed responsibility for the adequacy of [Simons] security measures in its procedure letters following each game, and Simon never objected to those statements. On April 4, 2007 the court entered judgment in favor of PwC and against Simon.

CONTENTIONS

Simon contends the trial court erred as a matter of law in granting summary judgment and abused its discretion in sustaining objections to substantial portions of its evidentiary declarations, while denying its own motion to strike the Jacobson declaration submitted by PwC. Simon also contends the trial court abused its discretion in denying its motion to reopen discovery.

DISCUSSION

1.      Standard of Review on Summary Judgment

We review the trial courts grant of summary judgment de novo and decide independently whether the parties have met their respective burdens and whether facts not subject to triable dispute warrant judgment for the moving party as a matter of law. (Intel Corp. v. Hamidi (2003) 30 Cal.4th 1342, 1348; Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 334; Code Civ. Proc., 437c, subd. (c).)[2]

When a defendant moves for summary judgment in a situation in which the plaintiff would have the burden of proof at trial by a preponderance of the evidence, the defendant may, but need not, present evidence that conclusively negates an element of the plaintiffs cause of action. Alternatively, the defendant may present evidence to show[] that one or more elements of the cause of action . . . cannot be established by the plaintiff. ( 437c, subd. (p)(2); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 853 (Aguilar).) [T]he defendant must present evidence that would preclude a reasonable trier of fact from finding that it was more likely than not that the material fact was true [citation], or the defendant must establish that an element of the claim cannot be established, by presenting evidence that the plaintiff does not possess and cannot reasonably obtain, needed evidence. (Kahn v. East SideUnionHigh School Dist. (2003) 31 Cal.4th 990, 1003.) Once the defendants initial burden has been met, the burden shifts to the plaintiff to demonstrate, by reference to specific facts not just allegations in the pleadings, there is a triable issue of material fact as to the cause of action or defense. ( 437c, subd. (p)(2); Aguilar, at p. 849.)

In contrast to the de novo standard of review applicable to the trial courts order granting summary judgment (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476-477), evidentiary rulings made on summary judgment are reviewed for an abuse of discretion. (Walker v. Countrywide Home Loans, Inc. (2002) 98 Cal.App.4th 1158, 1169.)

2.      PwCs Evidence Is Insufficient To Shift the Burden to Simon in Light of Bennetts Admission She Failed To Alert Simon to Jacobsons Unilateral Alteration of Basic Security Procedures

PwC premised its motion on two related theories: (1) Simons implied-in-fact contract with PwC did not materially differ from its contract with KPMG, which expressly disavowed any obligation to discover fraud; and (2) Simon failed to establish a triable issue of material fact with respect to the existence of any duty by PwC to discover Jacobsons fraud or to exercise dual control over the game pieces on seeding trips. As discussed, the trial court agreed with PwC on both grounds.

The keystone for Simons lawsuit for breach of an implied contract, as we discussed in our opinion in Simon I reversing the trial courts order sustaining PwCs demurrer to the third amended complaint, is the allegation PwC necessarily assumed certain contractual duties to Simon when it was retained to validate the legitimacy of the games marketed by Simon on behalf of McDonalds. Unlike KPMG, which insisted on an express written agreement defining the terms of the contractual relationship, neither PwC nor its predecessor Coopers & Lybrand reduced the terms of the engagement to writing. Consequently, we are left with an implied-in-fact contract, which renders the existence of a particular duty a factual question.[3] Describing such an inquiry in the context of an employment relationship, the Supreme Court observed, Where there is no express agreement, the issue is whether other evidence of the parties conduct has a tendency in reason [citation] to demonstrate the existence of an actual mutual understanding on particular terms and conditions of employment. If such evidence logically permits conflicting inferences, a question of fact is presented. [Citation.] But where the undisputed facts negate the existence or the breach of the contract claimed, summary judgment is proper. (Guz v. Bechtel National, Inc., supra, 24 Cal.4th at p. 337; accord, Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 681 [nature of [an implied-in-fact] contract must be determined from totality of the circumstances]; cf. Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150 [although limited partner did not normally participate in management of partnership, existence of fiduciary duty was a triable issue of fact where certain factual scenarios, such as access to confidential information, may have created a fiduciary duty].)

Given Simons theory of the case, to satisfy its initial burden under Aguilar in moving for summary judgment, PwC was obligated either to present sufficient evidence to preclude the trier of fact from finding it had a duty under the totality of the circumstances to detect and report Jacobsons dishonesty or to establish Simon does not possess and cannot reasonably obtain evidence to prove the existence of such a duty. (Aguilar, supra,25 Cal.4th at pp. 853-854.) Absent such proof, the burden on summary judgment does not shift to Simon to demonstrate a triable issue of material fact on the question of duty.

In the context of the agreement alleged here, this initial burden may be an impossible one to meet. Certainly, PwC has not met it here.

Simon did not allege it retained PwC to audit its financial statements, an engagement commonly circumscribed by AICPA standards; to the contrary, it retained PwC to assure the integrity of its production and distribution of highly valuable game pieces. Whatever procedures PwC believed it was hired to perform included, at the initiation of the engagement, the obligation to maintain the security of the game pieces during transport to the seeding location through the use of a double-locked briefcase, for which one of the lock combinations was kept secret from Simon personnel. Indeed, Bennett concedes she routinely hid the combination from Jacobson as part of this initial security procedure. Further, at the request of Simon Bennett accompanied Jacobson to the designated seeding location, where she observed the insertion of the winner pieces into the game. Those facts, standing alone, create an inference of duty PwC has not successfully defeated.

Neither Jacobsons assertion he alone was responsible for security of the game pieces nor Bennetts explanation she was told to take direction from Jacobson defeats this inference. The purpose of the double-locked briefcase is inescapable; no one was above suspicion. Bennetts recollection she was told to accept direction from Jacobson does not establish his authority to alter procedures clearly designed to prevent unilateral control by anyone of the winning game pieces. Although it may be difficult for Simon to prove so at trial, we cannot say a fact finder could never conclude Bennetts unquestioning acceptance of Jacobsons unilateral, unconfirmed alteration of this procedure breached the implicit duty to ensure no one had unilateral access to the game pieces. Her passivity in accepting Jacobsons explanation, without confirmation from another Simon representative, underscores a troubling absence of the vigilant attitude Simon asserts it expected from the independent monitor.[4]

Nonetheless, the trial court found compelling the language included in the standard letter PwC sent to Simon at the conclusion of each seeding trip stating, The sufficiency of these procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purposes for which this report has been requested or for any other purposes. As PwC established, Simon executives not only received a version of this letter after each trip but also were provided with a draft for their comment before final versions were issued; no objection was ever made to this language.

Under the rigorous standard set forth in Aguilar, however, PwC failed to present sufficient evidence to shift the burden to Simon; that is, it did not establish a trier of fact could never find it had no duty to ensure delivery of the winning game tickets to the seeding location. Although the bulk of procedures verified by PwC involved the controlled printing of the high-value winning game pieces, PwC also routinely represented it had observed the insertion of the winner pieces into the game at various locations throughout the USA and Canada, and [b]ased on the . . . foregoing procedures, it is our belief that: 1. The high-level winners prepared for seeding conformed to the attached high-level prize structure . . . as per customer instructions. Even were a trier of fact to agree with PwC Jacobson was authorized to unilaterally alter the mode of transport for high-value game pieces from a dual control procedure partially controlled by PwC to a unilateral system controlled solely by Jacobson, the trier of fact could reasonably infer from these statements PwC examined the game pieces on their arrival at the seeding location and verified the inclusion of the original high-value pieces.

In sum, the burden to establish the existence of a triable issue of material fact never shifted to Simon. PwCs motion should have been denied.[5]

3.      The Trial Court Did Not Abuse Its Discretion in Denying Simons Motions To Continue the Discovery Cutoff Date and To Reopen Discovery

Notwithstanding the express language of section 2024.020, subdivision (b),[6]Simon delayed in conducting certain written discovery and depositions and then moved to compel that discovery when PwC declined to respond, arguing it had understood the discovery cutoff date had been continued along with the trial date, following PwCs request for additional time in which to serve its motion for summary judgment. In denying that motion, the trial court invited Simon to file a motion to reopen discovery (see 2024.050)[7]but cautioned the motion would not be granted if Simon failed to establish both necessity for the information sought and diligence in pursuing that information before the close of discovery. The trial court denied both motions on the ground Simon had failed to meet this standard.

Discovery rulings, including rulings on the propriety of reopening discovery in anticipation of summary judgment, are reviewed for abuse of discretion. (E.g., Cheviot Vista Homeowners Assn. v. State Farm Fire & Casualty Co. (2006) 143 Cal.App.4th 1486, 1501; People ex rel. Dept. of Transportation v. Outdoor Media Group (1993) 13 Cal.App.4th 1067, 1077.) The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason. (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478.)

The trial courts denial of Simons discovery motions was not an abuse of discretion. (See Frazee v. Seely (2002) 95 Cal.App.4th 627, 633 [party seeking further discovery must show facts to be obtained are essential and could not have been presented with opposition papers]; Lloyd Design Corp. v. Mercedes-Benz of North America, Inc. (1998) 66 Cal.App.4th 716, 726 [[b]y indicating that the court had more than enough evidence before it to sustain a ruling in Lloyds favor, Lloyd gave the trial court sufficient reason not to continue the motion for purposes of allowing further discovery]; see also Roth v. Rhodes (1994) 25 Cal.App.4th 530, 547 [delay in requesting continuance and proximity of trial date may provide adequate basis for denying request].) Simon failed to identify any valid reason for having failed to commence in a timely manner the discovery it claimed to need. Accordingly, we see no basis to require the trial court to reopen discovery upon remand.

DISPOSITION

The judgment is reversed. Simon Marketing, Inc. is to recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

PERLUSS, P.J.

We concur:

WOODS, J. ZELON, J.

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[1] It also included a breach of contract claim against KPMG, L.L.P., which replaced PwC in January 2001. That claim is not part of the current appeal.

[2] Statutory references are to the Code of Civil Procedure.

[3] Unlike tort law, where the existence of a legal duty is a question of law (see Rowland v. Christian (1968) 69 Cal.2d 108, 112-113), the existence of a contractual legal duty is determined by the terms of the parties contract. (City of Hope Natl Medical Center v. Genentech, Inc. (April 24, 2008, S129463) __ Cal.4th __, at p. 23, fn. 5.)

[4] There can be no doubt PwC was not engaged to perform traditional auditory functions. Nonetheless, the invoices PwC submitted to Simon identified [p]rofessional services performed related to the game audits . . . . As we noted in our previous opinion, the very term audit implies an obligation to root out fraud in the clients business. (Simon I, at pp. 10-11, fn. 7, citing Merriam-Websters Dictionary of Law (1996 Merriam-Webster, Inc.) at p. 38 [defining audit as a formal examination of an organizations or an individuals financial records often for the purpose of uncovering fraud or inaccurate tax returns].)

[5] In light of our conclusion the burden to produce evidence sufficient to create a triable issue of material fact did not shift to Simon, we need not review the trial courts rulings on PwCs evidentiary objections.

[6] Section 2024.020 provides: (a) Except as otherwise provided in this chapter, any party shall be entitled as a matter of right to complete discovery proceedings on or before the 30th day, and to have motions concerning discovery heard on or before the 15th day, before the date initially set for the trial of the action. [] (b) Except as provided in Section 2024.050, a continuance or postponement of the trial date does not operate to reopen discovery proceedings.

[7] Section 2024.050 provides in part: (a) On motion of any party, the court may grant leave to complete discovery proceedings, or to have a motion concerning discovery heard, closer to the initial trial date, or to reopen discovery after a new trial date has been set. This motion shall be accompanied by a meet and confer declaration under Section 2016.040. [] (b) In exercising its discretion to grant or deny this motion, the court shall take into consideration any matter relevant to the leave requested, including, but not limited to, the following: [] (1) The necessity and the reasons for the discovery; [] (2) The diligence or lack of diligence of the party seeking the discovery or the hearing of a discovery motion, and the reasons that the discovery was not completed or that the discovery motion was not heard earlier.