California Physicians Service, Inc. v. HealthPlan Services, Inc.

[3] 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA [6] 7 CALIFORNIA PHYSICIANS SERVICE, Case No. 3:18-cv-03730-JD INC., [8] Plaintiff, ORDER RE PRELIMINARY 9 INJUNCTION v. 10 Re: Dkt. No. 151 HEALTHPLAN SERVICES, INC., et al., [11] Defendants. [12] 13 In 2013, plaintiff California Physicians Service, which does business as Blue Shield of 14 California (Blue Shield), outsourced patient enrollment, account management, billing, and other 15 services to defendant Healthplan Services (HPS) under a Business Process Outsourcing 16 Agreement (BPOA). Blue Shield found HPS’s performance of the services to be unsatisfactory in 17 virtually every respect, and filed this action in June 2018 for breach of the BPOA. See Dkt. No. 1. 18 After a few rounds of pleadings motions, and the Court’s dismissal of several claims, see Dkt. No. 19 73, the third amended complaint (TAC) is the operative complaint. Dkt. No. 111. 20 One of the contract claims in the TAC relates to a “Parental Guaranty” that Blue Shield 21 signed in 2013 with HPH-TH Holdings, Inc. (HPH-TH), HPH Holdings Corp., and Healthplan 22 Holdings, Inc., as guarantors of HPS. Dkt. No. 111, Exh. 1 at 239. Section 7(e) of the Parental 23 Guaranty states that “at all times” up to termination, “the fair saleable value of the property of the 24 Guarantor is and will be at least one hundred twenty percent (120%) in excess of the total 25 liabilities of the Guarantor (including the maximum amount reasonably expected to become due in 26 respect of this Parental Guaranty and all other contingent liabilities of the Guarantor).” Id. at 242. 27 HPH Holdings Corp. and Healthplan Holdings, Inc. subsequently merged into HPS sometime in 1 Blue Shield seeks an injunction requiring HPS to satisfy the terms of Section 7(e) on the 2 ground that the obligations “now reside in HPS” after the mergers. Id. at 1. HPS does not dispute 3 this proposition, and the Court accepts it for purposes of this order, without reaching any findings 4 of fact or binding conclusions about it at this time. 5 The request is denied. The objections to evidence, Dkt. Nos. 163, 171, are terminated. 6 The Court did not rely on disputed evidence, and in any event, the rules of evidence are relaxed in 7 preliminary injunction proceedings. See Upshaw v. Alameda County, 377 F. Supp. 3d 1027 , 1032 8 (N.D. Cal. 2019). 9 DISCUSSION 10 I. PROCEDURAL POSTURE OF BLUE SHIELD’S MOTION 11 Blue Shield’s motion is peculiar in several respects. To start, Blue Shield did not seek an 12 injunction under Federal Rule of Civil Procedure 65, which is the rule expressly dedicated to 13 preliminary injunction motions. It moved instead under Rule 64, see Dkt. No. 151 at 1, which 14 incorporates state law “to determine the availability of prejudgment remedies for the seizure of 15 person or property to secure satisfaction of the judgment ultimately entered.” Granny Goose 16 Foods, Inc. v. Bhd. of Teamsters & Auto Truck Drivers Local No. 70 of Alameda Cty., 415 U.S. 17 423, 436 n.10 (1974). These remedies include writs of attachment and similar state law 18 procedures for the seizing of property in advance of trial and a judgment. Fed. R. Civ. P. 64(b); 19 see also Reebok Int’l Ltd. v. Marnatech Enters. Inc., 970 F.2d 552 , 558 (9th Cir. 1992) (Rule 64 20 “permits state seizure provisions to be used in federal courts.”). California law governs the 21 Parental Guaranty, see Dkt. No. 111, Exh. 1 at 242-43, and the procedures for obtaining 22 prejudgment seizures are stated in California Code of Civil Procedure Sections 481.010 - 493.060, 23 which impose a number of specific requirements that must be satisfied. California deems 24 prejudgment seizures such as a writ of attachment to be “a harsh remedy because it causes the 25 defendant to lose control of his property before the plaintiff’s claim is adjudicated.” Martin v. 26 Aboyan, 148 Cal. App. 3d 826, 831 (1983). 27 Blue Shield never says why Rule 64 might apply here. After citing it as the only grounds 1 California’s general injunction statute, California Code of Civil Procedure Section 526. See Dkt. 2 No. 151 at 6 et seq. In effect, Blue Shield took Rule 64 to the dance and left it at the door. 3 A good argument can be made that this is enough to deny the motion. Blue Shield made 4 no meaningful arguments for an injunction under Rule 64 or the state prejudgment seizure 5 provisions it imports, and yet Rule 64 is the sole grounds on which it moved. This unduly 6 burdened HPS and the Court with burning resources on a phantom argument. The Court is also 7 concerned that Blue Shield’s reference to Rule 64 was a calculated effort to sidestep the hurdles it 8 faced under the traditional injunction standards. Even so, the Court will decide the injunction 9 request in the interest of putting it to rest. 10 II. INJUNCTION ANALYSIS 11 A. Choice of Law and Legal Standards 12 The problems with Blue Shield’s motion extend beyond the Rule 64 misfire. By focusing 13 on the California injunction statute, and barely acknowledging Rule 65, Blue Shield slights an 14 important choice of law issue under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). This Court is 15 sitting in diversity in a case that presents California state law contract claims. In this 16 circumstance, Erie advises that the Court should apply federal procedural law and state substantive 17 law to the contract claims. See Hanna v. Plumer, 380 U.S. 460, 471 (1965); Sonner v. Premier 18 Nutrition Corp., 971 F.3d 834, 839 (9th Cir. 2020). The application of this rule is not always easy 19 because the “[c]lassification of a law as ‘substantive’ or ‘procedural’ for Erie purposes is 20 sometimes a challenging endeavor.” Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415 , 427 21 (1996). This has proven especially true when determining the law that should apply to decide the 22 availability of a preliminary injunction in a diversity action. See, e.g., Sims Snowboards, Inc. v. 23 Kelly, 863 F.2d 643, 647 (9th Cir. 1988) (noting different case outcomes). 24 The question is acute here because CCP Section 526 delineates a variety of specific 25 instances when an injunction may or may not be granted by a California court. For example, 26 Section 526 expressly states that an injunction “cannot be granted” to “prevent the breach of a 27 contract the performance of which would not be specifically enforced.” Cal. Code Civ. Proc. 1 expressly allows an injunction to be granted when a party may do something in derogation of 2 another’s rights and “tending to render the judgment ineffectual.” Id. § 526(a)(3). The interplay 3 of Section 526 with our federal injunction practice under Rule 65 is the Erie issue raised by Blue 4 Shield’s motion. 5 Neither Blue Shield nor HPS did justice to this question. Blue Shield largely assumed, 6 without meaningful analysis, that Section 526 governs its motion. See Dkt. No. 151 at 6. HPS 7 took a closer look at the Erie question, but jumped to the conclusion that Rule 65 controls on the 8 basis of a smattering of district court cases going that way. Dkt. No. 159 at 5-6. Neither side 9 really tackled the issue, and in the absence of adequate briefing, the Court is not inclined to make 10 extensive conclusions about the allocation of procedural and substantive issues under California 11 law and federal practice. 12 Nor is that necessary to resolve Blue Shield’s motion. Whether analyzed under CCP 13 Section 526 or FRCP Rule 65, the result is the same: Blue Shield is not entitled to an injunction 14 on the record before the Court. In both jurisdictions, an injunction is not available unless the 15 plaintiff has demonstrated a likelihood of success on the merits, and the possibility of imminent 16 and irreparable harm if relief is not granted. The federal formulation of these requirements is 17 well-established. See generally Michigan v. DeVos, 481 F. Supp. 3d 984 , 990-91 (N.D. Cal. 18 2020). Preliminary injunctions are “an extraordinary remedy never awarded as of right.” Winter 19 v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). “A plaintiff seeking a preliminary 20 injunction must establish that he [or she] is likely to succeed on the merits, that he [or she] is 21 likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities 22 tips in his [or her] favor, and that an injunction is in the public interest.” Winter, 555 U.S. at 20 ; 23 see also Garcia v. Google, Inc., 786 F.3d 733, 740 (9th Cir. 2015) (en banc) (same). In our 24 circuit, a plaintiff may also obtain a preliminary injunction under a “sliding scale” approach by 25 raising “serious questions” going to the merits of the plaintiff’s claims and showing that the 26 balance of hardships tips “sharply” in his or her favor. A Woman’s Friend Pregnancy Res. Clinic 27 v. Becerra, 901 F.3d 1166, 1167 (9th Cir. 2018); see also Vanguard Outdoor, LLC v. City of L.A., 1 While a plaintiff must establish all four of the Winter factors to obtain a preliminary 2 injunction, see A Woman’s Friend, 901 F.3d at 1167 , a demonstration of “a fair chance of success 3 on the merits, or questions serious enough to require litigation” is “an irreducible minimum” for 4 injunctive relief. Airbnb, Inc. v. City and Cnty. of San Francisco, 217 F. Supp. 3d 1066 , 1072 5 (N.D. Cal. 2016) (citation omitted). 6 A showing of imminent irreparable harm is also essential. See Winter, 555 U.S. at 22 ; 7 Caribbean Marine Servs. Co., Inc. v. Baldridge, 844 F.2d 668, 674 (9th Cir. 1988) (“At a 8 minimum, a plaintiff seeking preliminary injunctive relief must demonstrate that it will be exposed 9 to irreparable harm.”) (citation omitted). That is because “the basis of injunctive relief in the 10 federal courts has always been irreparable harm and inadequacy of legal remedies.” Sampson v. 11 Murray, 415 U.S. 61, 88 (1974) (internal quotations and citations omitted). 12 So too under California state law. “Trial courts ‘evaluate two interrelated factors when 13 deciding whether or not to issue a preliminary injunction. The first is the likelihood that the 14 plaintiff will prevail on the merits at trial. The second is the interim harm that the plaintiff is 15 likely to sustain if the injunction were denied as compared to the harm the defendant is likely to 16 suffer if the preliminary injunction were issued.” Amgen Inc. v. Health Care Servs., 47 Cal. App. 17 5th 716, 731 (2020) (quoting ITV Gurney Holding Inc. v. Gurney, 18 Cal. App. 5th 22 , 28-29 18 (2017)); see also West Coast Constr. Co., Inc. v. Oceano Sanitary Dist., 17 Cal. App. 3d 693 , 702 19 (1971) (injunction will be denied “unless there is a reasonable probability” of success on merits). 20 While the harm assessment in California is typically presented as a balancing test, the California 21 Supreme Court has emphasized that a showing of irreparable harm to the plaintiff is required. To 22 “obtain a preliminary injunction, a plaintiff ordinarily is required to present evidence of the 23 irreparable injury or interim harm that it will suffer if an injunction is not issued pending an 24 adjudication of the merits.” White v. Davis, 30 Cal. 4th 528, 554 (2003). “Indeed, in order to 25 obtain injunctive relief the plaintiff must ordinarily show that the defendant’s wrongful acts 26 threaten to cause irreparable injuries, ones that cannot be adequately compensated in damages.” 27 Intel Corp. v. Hamidi, 30 Cal. 4th 1342, 1352 (2003) (emphasis in original). 1 California and federal law both measure irreparable harm in terms of the traditional 2 equitable concept of the inadequacy of damages and other legal remedies. In the federal 3 formulation, “[m]ere injuries, however substantial, in terms of money, time and energy” are not 4 enough to warrant injunctive relief. Sampson, 415 U.S. at 90 ; see also Los Angeles Mem’l 5 Coliseum Comm’n v. NFL, 634 F.2d 1197 , 1202 (9th Cir. 1980) (monetary injury is not irreparable 6 harm). “The possibility that adequate compensatory or other corrective relief will be available at a 7 later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm.” 8 Sampson, 415 U.S. at 90 (internal citations omitted); see also Stanley v. Univ. of Southern Cal., 13 9 F.3d 1313, 1320-21 (9th Cir. 1994) (plaintiff seeking injunction must show that legal remedy of 10 damages is inadequate). 11 The same holds in California. An injunction may be issued “[w]hen pecuniary 12 compensation would not afford adequate relief.” Cal. Code Civ. Proc. § 526(a)(4). “[T]o obtain 13 an injunction a plaintiff ordinarily must show that the defendant’s wrongful acts threaten to cause 14 irreparable injury, meaning injury that cannot adequately be compensated in damages.” Syngenta 15 Crop Prot., Inc. v. Helliker, 138 Cal. App. 4th 1135, 1167 (2006) (citing Intel Corp., 30 Cal. 4th at 16 1352). 17 B. CCP Section 526 18 The prohibition of injunctions to prevent a breach of contract in Section 526 is a specific 19 substantive embodiment of the injunction standards. It bars an injunction for contracts that cannot 20 be specifically enforced. Cal. Code Civ. Proc. § 526(b)(5). “Specific performance of a contract 21 may be decreed whenever: (1) its terms are sufficiently definite; (2) consideration is adequate; (3) 22 there is substantial similarity of the requested performance to the contractual terms; (4) there is 23 mutuality of remedies; and (5) plaintiff’s legal remedy is inadequate.” Union Oil Co. of Cal. v. 24 Greka Energy Corp., 165 Cal. App. 4th 129, 134 (2008) (quotation omitted). As is true for 25 injunctions generally, the fifth element about the inadequacy of a legal remedy requires proof that 26 money damages would not be sufficient to address the injury. Wilkison v. Wiederkehr, 101 Cal. 27 App. 4th 822, 832 (2002). “No principle of equitable jurisprudence is more firmly stablished than 1 Overall, California and federal law are in perfect alignment on the fundamental 2 prerequisites for injunctive relief, with the substantive qualification that California presumptively 3 prohibits an injunction to prevent a breach of contract that cannot be specifically performed. This 4 makes short work of denying Blue Shield’s motion. In an apparent effort to improve its odds, 5 Blue Shield tries to sidestep the specific contract-related bar in Section 526(b)(5) by pointing to 6 more general grounds permitting an injunction such as Section 526(a)(3), which covers situations 7 involving actions “tending to render the judgment ineffectual.” See Dkt. No. 151 at 7-8. That will 8 not do. Section 526(b)(5) is specifically on point here, and it is this provision that will determine 9 whether an injunction is available to Blue Shield, not the more general propositions that Blue 10 Shield urges. 11 As the record currently stands, an injunction is not authorized by California law. Blue 12 Shield asks to enjoin HPS from breaching the guarantor obligations in Section 7(e) of the Parental 13 Guaranty. Under Section 526(b)(5), such an injunction is available only if Section 7(e) is subject 14 to a specific performance decree. 15 It is not. Blue Shield has not demonstrated that the core term in Section 7(e) -- “fair 16 saleable value” -- is sufficiently definite to permit specific performance. Union Oil Co., 165 Cal. 17 App. 4th at 134. The Parental Guaranty did not define fair saleable value, which Blue Shield 18 acknowledged at the injunction hearing, see Dkt. No. 178 at 5:19-20; and Blue Shield has not 19 proffered any extrinsic evidence that provides a clear and undisputed definition of it. Blue Shield 20 has not shown that it is a term in common professional usage such that persons skilled in 21 contractual guaranties and similar financial practices would understand it the same way. To the 22 contrary, the parties sharply disagree about the meaning of the term, and proffer competing 23 interpretations of it. See, e.g., Dkt. No. 151 at 11-13; Dkt. No. 159 at 8-9. Consequently, the 24 Court cannot say that fair saleable value is sufficiently definite to “make the precise act which is to 25 be done clearly ascertainable,” as specific performance demands. See Lewis v. YouTube, LLC, 244 26 Cal. App. 4th 118, 126 (2015) (quoting Cal. Civil Code § 3390 (5)). This conclusion has an 27 adverse consequence for Blue Shield’s likelihood of success on the merits of its claim, as will be 1 Blue Shield also has not demonstrated that an award of damages would be inadequate to 2 remedy a breach of Section 7(e), which is another element required for specific performance. 3 Union Oil Co., 165 Cal. App. 4th at 134 . It suggests that the guaranty was intended to give it 4 “peace of mind,” see Dkt. No. 168 at 3, but that in itself says nothing about the sufficiency of a 5 damages award to restore its spirits and make it whole if it proves that Section 7(e) was breached. 6 So too for Blue Shield’s fretting about HPS’s ability to pay a judgment, should that day come to 7 pass. Such an unspecific concern is too speculative and inchoate to constitute irreparable harm. 8 See Caribbean Marine, 844 F.2d at 674 . 9 Had Blue Shield adduced evidence that HPS were in imminent danger of insolvency or 10 failing as an ongoing concern, there might have been grounds for establishing irreparable harm. It 11 did not tender such evidence, and the undisputed facts in the record do not indicate that HPS faces 12 any type of imminent financial failure that would seriously call into doubt its ability to cover any 13 guarantee obligations under Section 7(e). Blue Shield estimates its damages from the breach of 14 the BPOA to be “at least” $20 million, Dkt. No. 151 at 2, which is a convenient reference point for 15 evaluating HPS vis-à-vis a potential damages award. HPS states, without disagreement by Blue 16 Shield, that it was acquired by Wipro Limited in 2016 for $460 million. Dkt. No. 159 at 2; Dkt. 17 No. 160 ¶ 7. Wipro is said to be a publicly traded company with more than 185,000 employees 18 worldwide, and with “revenues in excess of $9 billion.” Id. Even assuming Blue Shield hits a 19 home run and wins a $20 million judgment, which is an entirely speculative outcome at this 20 juncture, Wipro is a substantial entity for Blue Shield to pursue should HPS itself not be able to 21 pay, and Blue Shield has not established otherwise. Blue Shield also glosses over a general 22 liability cap of $15 million on damages for a breach of the BPOA. Dkt. No. 111, Exh. 1 at 66 23 (Section 30.1.2). HPS states that it has maintained a credit line with a $15 million borrowing 24 capacity since 2017, Dkt. No. 159 at 5, and offered Blue Shield a letter of credit backed by “a 25 bank account with a cash balance of at least $15 million,” id. at 3. Blue Shield again does not 26 dispute any of this, or account for it in claiming a threat of irreparable harm. Overall, Blue Shield 27 has failed to proffer facts demonstrating why a damages award would be inadequate for a breach 1 A final nail for Blue Shield is the existence of a third guarantor, HPH-TH. Blue Shield did 2 not account for this guarantor in a meaningful way, and makes only the rather cryptic statement 3 that it “does not move against HPH-TH at this time, but reserves its right to do so.” Dkt. No. 151 4 at 3 n.5. The availability of this guarantor alone, without any of the other evidence in the record, 5 is probably enough to forestall the possibility of irreparable harm. 6 Blue Shield suggests that it is free to ignore all of this because imminent irreparable harm 7 may simply be assumed when a security pledge is in dispute. See Dkt. No. 151 at 13. That goes 8 too far. Blue Shield relies on Marine Midland Tr. Co. of New York v. Alleghany Corp., 28 F. 9 Supp. 680 (S.D.N.Y. 1939), but this older trial court decision is readily distinguishable. Marine 10 Midland was decided primarily under New York law on indentures. See id. at 683. Needless to 11 say, the court was not called upon to account for the substantive prohibition of an injunction to 12 prevent a breach of contract in Section 526, and California law on specific performance, which 13 govern here. Even so, the court did considerably more than just presume irreparable harm, as Blue 14 Shield urges. The court found that the plaintiff was likely to prevail because the terms of the 15 contract were clear and undisputed, and that the defendant had only one source of cash to meet its 16 obligations, which if spent on other purposes would leave nothing available to the plaintiff. See 17 id. at 683-84. As discussed, Blue Shield has not made any similar showings here. It also bears 18 mention that Blue Shield did not identify any California state court decisions that have followed 19 Marine Midland, and certainly none in the context of an injunction. 20 Blue Shield’s reference to Safeco Ins. Co. of America v. Schwab, 739 F.2d 431 (9th Cir. 21 1984) is equally misplaced. Safeco mentions Marine Midland only in the context of a motion to 22 dismiss a claim against a surety for a tax bond. Id. at 433 . Safeco shines no light on injunctive 23 relief or the application of Section 526 in the circumstances presented here. It surely did not 24 conclude that Blue Shield is relieved from showing irreparable harm to get an injunction. 25 It is also true that Marine Midland and Safeco involved surety obligations that were 26 definite and well-defined. In Safeco, the surety agreement authorized payment of a precise sum 27 “upon demand.” Safeco, 739 F.2d at 432 . In Marine Midland, the agreement required a security 1 The clarity in those agreements contrasts sharply with the indefiniteness of “fair saleable value” in 2 the Parental Guaranty. 3 C. FRCP Rule 65 4 Consequently, Section 526(b)(5) bars the injunction Blue Shield seeks. This outcome 5 effectively eliminates the need for any analysis under Rule 65. This is so because the main 6 teaching of Erie is that “in all cases where a federal court is exercising jurisdiction solely because 7 of the diversity of citizenship of the parties, the outcome of the litigation in the federal court 8 should be substantially the same, so far as legal rules determine the outcome of a litigation, as it 9 would be if tried in a State court.” Guaranty Tr. Co. of New York v. York, 326 U.S. 99 , 109 10 (1945). In the injunction context, this means that “a party suing in diversity to obtain an 11 injunction” should not get one in federal court “if state law clearly rejects the availability of that 12 remedy.” Sims, 863 F.2d at 647 (reversing injunction issued under Rule 65 in breach of contract 13 case because California state law barred this type of relief). The bedrock rule set by Sims is that 14 Section 526 constrains the Court’s equitable powers in this diversity action. 15 Even so, an independent analysis of the traditional federal injunction factors would show 16 that an injunction could not have been granted under those factors. Blue Shield has not shown a 17 likelihood of success on the merits of the Section 7(e) claim. It is not at all clear that its 18 interpretation of the meaning of fair saleable value captures the parties’ intentions in the Parental 19 Guaranty, or even reflects common usage. This uncertainty is further compounded by the fact that 20 the evidence adduced so far about HPS’s assets and liabilities for purposes of Section 7(e) is 21 complicated and conflicting. The parties hotly debate the details and ultimate meaning of HPS’s 22 balance sheets, financial statements, and other accounting documents. See, e.g., Dkt. No. 151 at 23 11-12; Dkt. No. 159 at 3-5. In light of this disputed evidence, Blue Shield has not demonstrated 24 that it is likely to prevail on the claim that HPS breached Section 7(e). At best the question 25 warrants further litigation, and in all probability will require a jury trial to resolve. 26 The absence of irreparable harm for specific performance applies with full force to the 27 parallel federal injunction inquiry. The Court notes that Blue Shield also has not demonstrated 1 notified Blue Shield by March 2017 that two of the original guarantors had merged into HPS. 2 || Dkt. No. 159 at 3. Blue Shield did not file this motion for injunctive relief until August 2020. 3 Dkt. No. 151. It did not present a good explanation for this long delay, which cuts against a 4 || finding of irreparable harm. See Garcia, 786 F.3d at 746 . 5 CONCLUSION 6 Blue Shield has not demonstrated grounds for an injunction under California law or Rule 7 65. Consequently, an injunction is denied. 8 IT IS SO ORDERED. 9 Dated: March 9, 2021 [11] JAMES DMNATO 12 United States District Judge © [16] = 17 Z 18