Crestwood Capital Corporation v. Andes Industries Incorporated

Filing 101

ORDER directing the Clerk to file the proposed First Amended Complaint (lodged as Doc. 72 ). FURTHER ORDERED that Polar Star Management Ltd.'s Motion to Dismiss (Doc. 114, CV-15-02549) is granted. The First Amended Complaint is dismissed with p rejudice as to Polar Star Management Ltd. FURTHER ORDERED that Defendant Cheng-Sun Lans Motion to Dismiss (Doc. 133, CV-15-02549) is granted. The First Amended Complaint is dismissed with prejudice as to Cheng Sun Lan. FURTHER ORDERED that Defendant EZconn Corporation's Motion to Dismiss Counts I, II, III, VI, VII, VIII, IX, X, XI, and XII (Doc. 26, CV-15-01810) is granted in part and denied in part. The First Amended Complaint is dismissed with prejudice as to EZconn except for Count IV fo r breach of contract and ount IX for breach of the implied duty of good faith and fair dealing. FURTHER ORDERED that Defendant eGtran Corporation's Motion to Dismiss Counts I, II, III, V, VI, VII, VIII, IX, X, XI, and XII (Doc. 28, CV-15-01810) is granted. The First Amended Complaint is dismissed with prejudice as to eGtran. IT IS FURTHER ORDERED that the Renewed Motion for Jurisdictional Discovery by Andes Industries, Inc., and PCT International, Inc. (Doc. 84 , CV-15-00600) and Cheng-Sun Lan's Motion to Strike Portions of Reply in Support of Renewed Motion for Jurisdictional Discovery or, Alternatively, for Leave to File Sur-Reply (Doc. 92 , CV-15-00600) are denied as moot. Signed by Judge Neil V Wake on 6/24/2016.(KMG)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Crestwood Capital Corporation,
Plaintiff,

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v.
Andes Industries, Inc.,
Defendant.

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Devon Investment Inc.,

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No. CV-15-00600-PHX-NVW
(Consolidated)
ORDER
[Not for Publication]
[Re: No. CV-15-01810-PHX-NVW
and No. CV-15-02549-PHX-NVW]
No. CV-15-00604-PHX-NVW

Plaintiff,

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v.

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Andes Industries, Inc.,

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Defendant.
Preston Collection Inc.,

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No. CV-15-00607-PHX-NVW

Plaintiff,

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v.

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Steven Youtsey,

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Defendant.
Andes Industries, Inc.; and PCT International,
Inc.,

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Plaintiffs,
v.
EZconn Corporation; and eGtran Corporation,
Defendants.

No. CV-15-01810-PHX-NVW

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Andes Industries, Inc.; and PCT International,
Inc.,

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No. CV-15-02549-PHX-NVW

Plaintiffs,
v.
Cheng-Sun Lan; Kun-Te Yang; Chi-Jen
Dennis) Lan; Polar Star Management Ltd.,

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Defendants.

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EZconn Corporation,

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No. CV-16-00508-PHX-NVW

Plaintiff,
v.
PCT International, Inc.,

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Defendant.

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Before the Court are the following motions:

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Polar Star Management Ltd.’s

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Motion to Dismiss (Doc. 114, CV-15-02549); Defendant Cheng-Sun Lan’s Motion to

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Dismiss (Doc. 133, CV-15-02549); Defendant EZconn Corporation’s Motion to Dismiss

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Counts I, II, III, VI, VII, VIII, IX, X, XI, and XII (Doc. 26, CV-15-01810); Defendant

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eGtran Corporation’s Motion to Dismiss Counts I, II, III, V, VI, VII, VIII, IX, X, XI, and

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XII (Doc. 28, CV-15-01810); the Renewed Motion for Jurisdictional Discovery by Andes

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Industries, Inc., and PCT International, Inc. (Doc. 84, CV-15-00600); and Cheng-Sun

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Lan’s Motion to Strike Portions of Reply in Support of Renewed Motion for

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Jurisdictional Discovery or, Alternatively, for Leave to File Sur-Reply (Doc. 92, CV-15-

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00600). Oral argument was held on June 8, 2016.

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I.

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OVERVIEW
This case consolidates six actions involving twelve parties, who form essentially

two sides to this litigation. Four actions were brought to collect amounts owed on loans
of nearly $9 million made in 2009-2010 and for unpaid invoices totaling more than $6.6
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million during 2012-2013, plus interest. Two actions were brought by the borrower and

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purchaser for breach of contract and other claims to obtain, at least, an offset against any

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liability in the four collection actions. The borrower’s and purchaser’s allegations of

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wrongdoing rely substantially on a related case in which the purchaser obtained a

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monetary judgment and permanent injunction for patent infringement.

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International, Inc. v. Holland Electronics, LLC, CV-12-001797-PHX-JAT. In the present

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case, the borrower, Andes Industries, Inc. (“Andes”), and the purchaser, Andes’ wholly

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owned subsidiary, PCT International, Inc. (“PCT International”),1 allege that during the

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patent litigation the infringer disclosed emails showing receipt of confidential proprietary

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information about PCT International from a Taiwanese company that manufactured

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products for both PCT International and the infringer. The Taiwanese manufacturer

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seeks to collect $6.6 million from PCT International for unpaid invoices.

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manufacturer’s allegedly wrongful disclosures of technical development information,

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order information, and corporate financial information to the infringer form the primary

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basis for Andes and PCT International’s twelve claims for breach of contract, fraud, etc.,

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and their claims for offset against the collection actions.

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A.

See PCT

The

The Parties

As alleged, Andes is a closely held Nevada corporation with its principal place of
business in Mesa, Arizona.

Andes owns PCT International, a closely held Nevada

corporation with its principal place of business in Mesa, Arizona. PCT International
develops, manufactures, and sells products for broadband telecommunications networks.
Andes shareholders include Kun-Te Yang, Dennis Lan, and Polar Star Management Ltd.,
a British Virgin Islands corporation. No shareholder owns a majority interest in Andes.

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This Order does not adopt the parties’ confusing and misleading use of “PII” for
PCT International, Inc. and “PCT” for Andes and PCT International, Inc. collectively.
The First Amended Complaint implies there is no distinction between the two
corporations.
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Steven Youtsey is the founder, President, and CEO of Andes. Kun-Te Yang

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allegedly loaned Youtsey amounts totaling $1,142,500.00, memorialized by a spreadsheet

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signed by Youtsey and dated March 8, 2010. On March 19, 2015, Kun-Te Yang assigned

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his rights and interest in the Youtsey loan to Preston Collection Inc., a British Virgin

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Islands corporation.

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As CEO of Andes, Youtsey executed a promissory note payable to Dennis Lan in

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the amount of $4,700,507.00, plus interest, dated March 11, 2009. It identifies Andes as

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the borrower. On March 19, 2015, Dennis Lan assigned his rights and interest in the note

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to Devon Investment Inc., a British Virgin Islands corporation.

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As CEO/President of Andes, Youtsey executed a promissory note payable to

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Cheng-Sun Lan (“Mr. Lan”) in the amount of $3,000,000.00, plus normal interest and

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$45,000 bonus interest, dated December 20, 2009. It identifies Andes as the borrower.

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On April 1, 2015, Mr. Lan assigned the note to Crestwood Capital Corporation, a British

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Virgin Island corporation wholly owned by Mr. Lan.

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EZconn Corporation is a Taiwanese corporation with places of business located in

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Taiwan and the People’s Republic of China. EZconn is owned by eGtran Corporation, a

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British Virgin Islands corporation with its principal place of business in Taiwan. EZconn

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manufactured broadband telecommunications for Andes and PCT International and also

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for their competitor Holland Electronics, LLC. Andes and PCT International shared

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confidential proprietary information with EZconn, which allegedly was disclosed to

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Holland. EZconn alleges that during 2012 and 2013, PCT International ordered and

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received more than $6,600,000.00 worth of product from EZconn that PCT International

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has not paid for.

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B.

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The Collection Actions

On June 26, 2015, EZconn filed a lawsuit against PCT International in Taiwan
alleging breach of contract. On February 24, 2016, EZconn filed a lawsuit against PCT
International in this Court, alleging breach of contract, involving the same claims as those
in the Taiwanese action. In order to avoid duplication, the parties agreed that EZconn
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would withdraw the Taiwanese action and PCT International would file an answer in the

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Arizona action. EZconn alleges that PCT International materially breached its contracts

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with EZconn by failing to pay for all products ordered, received, and accepted by

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EZconn, including but not limited to specific invoices identified in the Complaint.

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EZconn seeks an award of damages currently calculated as $6,630,091.57, plus interest

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and costs. In its Answer, PCT International alleges that “[a]ny claim by EZconn is

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limited and/or barred, in whole or in part, because those damages are subject to set off”

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based on Andes and PCT International’s claims for breach of contract, fraud, etc.

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In actions filed in this Court, Crestwood Capital Corporation sued Andes, Devon

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Investment Inc. sued Andes, and Preston Collection Inc. sued Youtsey to recover the

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amounts owed under the promissory notes and acknowledged debt assigned to them by

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Mr. Lan, Dennis Lan, and Kun-Te Yang respectively. In each of those actions, Andes or

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Youtsey filed an Answer alleging that any claim for damages “is limited and/or barred, in

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whole or in part, because those damages are subject to set off” based on Andes and PCT

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International’s claims for breach of contract, fraud, etc.

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Under Arizona law, with some exceptions, unless an account debtor has made an

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enforceable agreement not to assert defenses or claims, the rights of an assignee are

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subject to:

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All terms of the agreement between the account debtor and assignor
and any defense or claim in recoupment arising from the transaction that
gave rise to the contract; and
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Any other defense or claim of the account debtor against the
assignor that accrues before the account debtor receives a notification of the
assignment authenticated by the assignor or assignee.
A.R.S. § 47-9404(A). However, the claim of an account debtor against an assignor may
be asserted against an assignee under this provision only to reduce the amount the
account debtor owes. A.R.S. § 47-9404(A).
In summary, EZconn, Crestwood Capital, Devon Investment, and Preston
Collection seek to recover from Andes and its CEO, Youtsey, amounts due for loans and
unpaid invoices, plus interest and costs. Andes and Youtsey’s primary defense is that
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EZconn and the parties who assigned the rights to collect on the loans and invoices—Mr.

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Lan, Dennis Lan, and Kun-Te Yang—are liable for breach of contract, fraud, etc., for

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wrongful disclosures, for which Andes and Youtsey are entitled to offset.

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C.

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The Actions for Breach of Contract, Fraud, Etc.

On March 18, 2014, Andes and PCT International sued EZconn, eGtran, Mr. Lan,
Kun-Te Yang, Dennis Lan, and Polar Star in the U.S. District Court for the District of
Nevada. When claims against EZconn and eGtran were dismissed for lack of personal
jurisdiction, Andes and PCT International brought those claims in a new action in this
Court.

Subsequently, the Nevada action against the remaining Defendants was

transferred to this Court.
Andes and PCT International allege that they2 engaged EZconn as a contract
manufacturer based on assurances that Mr. Lan and EZconn would protect Andes and
PCT International’s confidential proprietary information disclosed pursuant to their
contractual agreement. Andes and PCT International also allege that each purchase order
they sent to EZconn contained detailed Terms and Conditions regarding protection of
their confidential proprietary information. Andes and PCT International further allege
that they provided EZconn and eGtran confidential proprietary information, and this
information was disclosed to Holland. The information allegedly disclosed includes
technical design information, the prices at which EZconn offered to manufacture products
for Andes and PCT International, quantities of products Andes and PCT International
purchased from EZconn, confidential financial information, and information regarding
customer orders. As a result, Holland allegedly was enabled to market and sell infringing
products and unfairly compete with Andes and PCT International. In addition, EZconn

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The First Amended Complaint alleges that “PCT” engaged EZconn as its
contract manufacturer and provided EZconn with confidential proprietary information,
and it defines “PCT” as including both Andes and PCT International. However, the
contractual relationship appears to have been formed through purchase orders PCT
International issued to EZconn.
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allegedly used some of the confidential technical information to develop its own patent

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applications.

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demonstrate breach of contract by EZconn, but numerous torts by EZconn and other

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Defendants, such as breach of fiduciary duty, fraud, unfair competition, etc.

Andes and PCT International allege that these disclosures not only

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Mr. Lan, eGtran, and Polar Star moved to dismiss all of Andes and PCT

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International’s claims. EZconn moved to dismiss all of Andes and PCT International’s

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claims except the breach of contract claim. EZconn’s position is that this is a contract

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action and only a contract action.

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On February 26, 2016, the Court ordered that if Andes and PCT International

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contend that amendment of their complaint filed in CV-15-02549 can cure any alleged

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deficiency, they were required to lodge a proposed amended complaint containing all

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further allegations they could make against Mr. Lan and Polar Star. (Doc. 55.) The

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Court further ordered that in the event that Polar Star’s or Mr. Lan’s motion to dismiss is

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granted in any part, no leave would be granted to amend the complaint beyond what was

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offered in the proposed amended complaint. (Id.)

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On March 10, 2016, the Court ordered that if Andes and PCT International

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contend that amendment of their complaint filed in CV-15-01810 and/or their complaint

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filed in CV-15-02549 can cure any alleged deficiency, they were required to lodge a

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proposed amended complaint containing all further allegations they could make against

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EZconn and eGtran. (Doc. 71). They did so (Doc. 72), and the Court will grant leave to

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file the proposed amended complaint. Because the First Amended Complaint does not

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add new claims or parties and the parties moving to dismiss Andes and PCT

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International’s initial complaint responded to the proposed First Amended Complaint in

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their replies, the motions to dismiss will be deemed motions to dismiss the First

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Amended Complaint.

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SERVICE OF PROCESS ON MR. LAN AND POLAR STAR IS
SUFFICIENT.

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Mr. Lan and Polar Star seek dismissal under Rule 12(b)(4) and (5) for insufficient

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II.

process and insufficient service of process.

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A federal court lacks personal jurisdiction over a defendant unless the defendant

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has been served in substantial compliance with Rule 4 of the Federal Rules of Civil

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Procedure. Crowley v. Bannister, 734 F.3d 967, 974–75 (9th Cir. 2013). Although Rule

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4 should be liberally construed if the defendant receives sufficient notice of the

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complaint, “substantial compliance” requires more than actual notice or simply naming

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the defendant in the caption of the complaint. Id. at 975.
“[S]ervice of summons is the procedure by which a court having venue and
jurisdiction of the subject matter of the suit asserts jurisdiction over the
person of the party served.” Mississippi Publ’g Corp. v. Murphree, 326
U.S. 438, 444–445 (1946). Thus, before a court may exercise personal
jurisdiction over a defendant, there must be more than notice to the
defendant and a constitutionally sufficient relationship between the
defendant and the forum. There also must be a basis for the defendant’s
amenability to service of summons. Absent consent, this means there must
be authorization for service of summons on the defendant.
Omni Capital Int’l, Ltd. v. Rudolf Wolff & Co., 484 U.S. 97, 104 (1987).

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Polar Star was served in care of its registered agent in the British Virgin Islands on

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July 24, 2014. (Doc. 67, CV-15-02549.) The summons and complaint identified Polar

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Star by the correct name, but the complaint described Polar Star as a Taiwanese

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corporation instead of a British Virgin Islands corporation. Polar Star contends that

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correctly identifying the location of incorporation is essential to the sufficiency of

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process. But there was no confusion about whether Polar Star was the entity named as a

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defendant in the complaint. And Polar Star does not dispute that service was made upon

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its agent who was authorized to accept service. Thus, Polar Star was served in substantial

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compliance with Rule 4.

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Mr. Lan and Polar Star also contend that service upon them was ineffective

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because their summonses were issued by the U.S. District Court for the District of
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Nevada before the case was transferred. They contend they must be served again with

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summonses issued by this Court. However, they rely on cases requiring that defendants

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be re-served after transfer under 28 U.S.C. § 1406(a) where the transferor court lacked

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personal jurisdiction over the defendants. See McCurdy v. Am. Bd. of Plastic Surgery,

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157 F.3d 191, 195 (3d Cir. 1998); Cornelius v. DeLuca, 709 F. Supp. 2d 1003, 1009 (D.

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Idaho 2010); Wilson v. St. Mary’s Hosp., 822 F. Supp. 1450, 1451 (D. Minn. 1993). If a

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civil action is filed in the wrong district or division, § 1406(a) requires the district court

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to either dismiss the action or transfer it to any district or division in which it could have

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been brought. In the cases cited by Mr. Lan and Polar Star, venue was improper, the

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transferor court lacked personal jurisdiction over the defendant served, the service issued

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by the transferor court was deemed ineffective, and re-service was required. Here,

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however, the transferor court expressly found venue to be proper both in Nevada and in

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Arizona and granted a motion to transfer pursuant to 28 U.S.C. § 1404(a). (Doc. 99 at 4.)

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Under § 1404(a), a civil action may be transferred for the convenience of parties

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and witnesses, in the interest of justice, to any other district or division where it might

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have been brought or to any district or division to which all parties have consented. Polar

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Star was served with process on July 24, 2014, and Mr. Lan was served on November 23,

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2015. On December 14, 2015, Judge Andrew P. Gordon, District Judge for the U.S.

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District Court for the District of Nevada, granted Andes and PCT International’s motion

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to transfer under § 1404(a) despite opposition by EZconn and eGtran. Judge Gordon

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found that the factors identified in Jones v. GNC Franchising, Inc., favored transfer of

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this case to Arizona. 211 F.3d 495, 498-99 (9th Cir. 2000) (identifying factors guiding a

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court’s discretion to transfer a case under § 1404(a)). He also found that venue was

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proper in Nevada because venue is proper in “any judicial district in which any defendant

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is subject to the court’s personal jurisdiction with respect to such action” where all

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defendants are not residents of Nevada and a substantial part of the events giving rise to

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the claim did not occur in Nevada. (Doc. 99 at 3-4, quoting 28 U.S.C. § 1391(b)(3).)

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Judge Gordon expressly found that Defendants Kun-Te Yang, Dennis Lan, and Polar Star
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had consented to jurisdiction in Nevada and Arizona as shareholders of Andes.

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Therefore, venue in Nevada was proper. Subject matter jurisdiction is not disputed.

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“[S]ervice of summons is the procedure by which a court having venue and

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jurisdiction of the subject matter of the suit asserts jurisdiction over the person of the

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party served.” Mississippi Publ’g Corp., 326 U.S. at 444–445. Service of process issued

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by the U.S. District Court for the District of Nevada, having venue and subject matter

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jurisdiction, was therefore effective. Neither Mr. Lan nor Polar Star must be re-served.

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III.

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THE COURT HAS SPECIFIC PERSONAL JURISDICTION OVER THE
CLAIMS ALLEGED AGAINST MR. LAN AND POLAR STAR.

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Mr. Lan and Polar Star seek dismissal under Rule 12(b)(2) for lack of personal

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jurisdiction.
A.

Legal Standard

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The burden to establish personal jurisdiction rests on the plaintiff, but if the
motion attacking jurisdiction is based on written materials rather than an evidentiary
hearing, the plaintiff need only make a prima facie showing of jurisdictional facts.
Mavrix Photo, Inc. v. Brand Techs., Inc., 647 F.3d 1218, 1223 (9th Cir. 2011). Although
bare allegations are not sufficient, uncontroverted allegations in the complaint must be
taken as true. Id. Conflicts between statements contained in affidavits must be resolved
in the plaintiff’s favor. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 800
(9th Cir. 2004).
Where there is no applicable federal statute governing personal jurisdiction, the
district court applies the law of the state in which the court sits. Id. Arizona permits its
courts to exercise personal jurisdiction “to the maximum extent permitted by . . . the
Constitution of the United States.” Ariz. R. Civ. P. 4.2(a); see A. Uberti & C. v.
Leonardo, 181 Ariz. 565, 569, 892 P.2d 1354, 1358 (1995). The Constitution permits a
court to exercise personal jurisdiction over a nonresident defendant if the defendant has at
least “minimum contacts” with the forum State such that the exercise of jurisdiction

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“does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v.

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Washington, 326 U.S. 310, 316 (1945); accord Mavrix, 647 F.3d at 1223.

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Personal jurisdiction can be either specific or general. Picot v. Weston, 780 F.3d

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1206, 1211 (9th Cir. 2015). A court may exercise general jurisdiction over a nonresident

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defendant when the defendant’s affiliations with the State are so continuous and

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systematic that the defendant is “essentially at home” in the forum State. Mavrix, 647

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F.3d at 1223. “This is an exacting standard, as it should be, because a finding of general

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jurisdiction permits a defendant to be haled into court in the forum state to answer for any

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of its activities anywhere in the world.” Schwarzenegger, 374 F.3d at 801.

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When a plaintiff relies on specific personal jurisdiction, the plaintiff must establish

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that jurisdiction is proper for each claim asserted against the defendant. Picot, 780 F.3d

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at 1211. If personal jurisdiction exists over one claim, the court may exercise pendent

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personal jurisdiction over other claims that arise out of the same core facts. Id. To

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decide whether a defendant is subject to specific personal jurisdiction, the Ninth Circuit

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applies a three-part test:

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(1) The non-resident defendant must purposefully direct his activities or
consummate some transaction with the forum or resident thereof; or
perform some act by which he purposefully avails himself of the privilege
of conducting activities in the forum, thereby invoking the benefits and
protections of its laws;
(2) the claim must be one which arises out of or relates to the defendant’s
forum-related activities; and
(3) the exercise of jurisdiction must comport with fair play and substantial
justice, i.e., it must be reasonable.
Id. (quoting Schwarzenegger, 374 F.3d at 802). The plaintiff must prove the first two
parts. Id. If he does so, the burden shifts to the defendant to show why the exercise of
jurisdiction is not reasonable. Id. at 1212.
For a defendant to be subject to specific jurisdiction, “the defendant’s suit-related
conduct must create a substantial connection with the forum State.” Walden v. Fiore, __
U.S. __, 134 S. Ct. 1115, 1121 (2014). A “substantial connection” between the defendant

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and the State must arise out of contacts that the defendant himself creates with the forum

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State. Id. at 1122. And the contacts to be considered are those with the forum State

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itself, not merely with persons who reside there. Id. “[A] defendant’s relationship with a

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plaintiff or third party, standing alone, is an insufficient basis for jurisdiction.” Id. at

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1123.

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To determine specific jurisdiction over contract claims, the inquiry is whether the

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defendant purposely availed himself of the privilege of conducting activities within the

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forum State, thereby invoking the benefit and protection of its laws. Picot, 780 F.3d at

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1212.

“Purposeful availment” consists of more than merely random or attenuated

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contacts with the State. Id. It requires affirmative conduct by the defendant that allows

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or promotes the transaction of business within the forum State. Id. Thus, a defendant’s

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contract with an out-of-state party does not, by itself, automatically confer jurisdiction in

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that party’s State. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478 (1985); see also

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Walden, 134 S. Ct. at 1122-23. On the other hand, jurisdiction is proper over defendants

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who “purposefully ‘reached out beyond’ their State into another by, for example, entering

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a contractual relationship that ‘envisioned continuing and wide-reaching contacts’ in the

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forum State.” Walden, 134 S. Ct. at 1122 (quoting Burger King, 471 U.S. at 479-80).

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For tort claims, the inquiry is whether the defendant purposely directed his actions

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at the forum State, regardless of where the actions took place. Picot, 780 F.3d at 1212.

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“Purposeful direction” occurs where the defendant “(1) committed an intentional act, (2)

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expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to

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be suffered in the forum state.”

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manifestation of the actor’s intent to perform an actual, physical act in the real world, not

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including any of its actual or intended results.” Washington Shoe Co. v. A-Z Sporting

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Goods Inc., 704 F.3d 668, 674 (9th Cir. 2012). “Express aiming” exists “when the

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defendant is alleged to have engaged in wrongful conduct targeted at a plaintiff whom the

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defendant knows to be a resident of the forum state.” Id. at 675. But “mere injury to a

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forum resident is not a sufficient connection to the forum.” Picot, 780 F.3d at 1214

Id. at 1214.

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“[A]n intentional act is an external

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(quoting Walden, 134 S. Ct. at 1125)). “[A]n injury is jurisdictionally relevant only

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insofar as it shows that the defendant has formed a contact with the forum State.” Id.

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B.

Mr. Lan

On December 18, 2009, Steven Youtsey as CEO/President of Andes Industries,
Inc., executed a “12% Promissory Note plus bonus interest” on behalf of Andes. The
note is dated December 20, 2009, and identifies Andes as the borrower and Mr. Lan as
the payee. The December 20, 2009 Note requires a total payment of $3,135,000.00 due
in full on March 20, 2010. It states that it “shall be governed, construed and interpreted
by, through and under the Laws of the State of Arizona.” (Doc. 1-1 at 4; Doc. 30 at 2-3.)
Mr. Lan is the 100 percent equity owner of Crestwood Capital Corporation. (Doc. 29 at
53.) On April 1, 2015, Mr. Lan assigned all of his rights, title, and interest in the
December 20, 2009 Promissory Note to Crestwood to recover and collect all amounts due
under or arising from enforcement of the December 20, 2009 Promissory Note. (Doc. 1
at 3.) Two days later, on April 3, 2015, Crestwood filed an action in this Court to recover
the money that Andes borrowed from Mr. Lan, plus interest, costs, and attorneys’ fees.
(Doc. 1.)
Mr. Lan is subject to personal jurisdiction in this Court on the claims asserted.
First, under A.R.S. § 47-9404(A), all the claims asserted against Mr. Lan could be
litigated up to full recoupment in Crestwood’s collection action whether or not he is
subject to personal jurisdiction in Arizona. Second, Mr. Lan would be subject to any
counterclaim to the full extent of the claim by bringing an action on his note in this state.
Fed. R. Civ. P. 13(b). He cannot escape that jurisdiction by endorsing his note to himself
in the form of his wholly owned corporation two days before filing the action. Rule
13(b) is not so easily evaded to the prejudice of the party Mr. Lan has sued in this Court
through his wholly owned corporation.
Third, apart from Rule 13(b), Mr. Lan’s suit-related conduct created a substantial
connection with the State of Arizona to the extent of claims against him arising out of the
same transaction or occurrence or series of transactions or occurrences as his collection
- 13 -

1

action. By filing an action in this Court to collect on a promissory note through a

2

nominee without economic interest apart from his own, Mr. Lan purposely availed

3

himself of the privilege of conducting activities within the forum State, thereby invoking

4

the benefit and protection of its laws. Further, Mr. Lan allegedly “negotiate[d] loan

5

agreements with PCT by which he obtained, directly or indirectly, promissory notes and

6

security interests in Andes stock and PCT’s valuable intellectual property,” obtained

7

confidential proprietary information, and disclosed PCT’s intellectual property and

8

confidential proprietary information to competitors. These are intentional acts expressly

9

aimed at a plaintiff whom the defendant knows to be a forum resident. Therefore, the

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23
24
25
26
27
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Court has personal jurisdiction over Mr. Lan.
C.

Polar Star

On August 1, 2000, New Elite Technologies, Inc., a Taiwanese company, received
1,250,000 shares of Andes stock through a Stock Exchange Agreement. The Agreement
states that Steven Youtsey and New Elite Technologies, Inc., were all of the shareholders
of OptiSolutions, Inc., an Arizona corporation, and that Youtsey, Kun-Te Yang, Goldman
Financial, LLC, Ronald Clark, Wade Ferguson, and Roger and Sybil Ferguson were all of
the shareholders of PCT International, a Nevada corporation. It further states that the
PCT International shareholders and the OptiSolutions shareholders wish to transfer all of
their respective PCT International and OptiSolutions stock to Andes in exchange for
common stock in Andes, resulting in PCT International and OptiSolutions becoming
wholly owned subsidiaries of Andes. It acknowledges that Andes is intended to be a
holding company of PCT International and OptiSolutions, Inc.
The Agreement further states, “All parties consent and agree to the jurisdiction of
the state and federal courts in Maricopa County, Arizona, but an action hereunder may be
brought in any forum having jurisdiction.” (Doc. 125-5 at 8.) It also states: “This
Agreement shall be binding on and inure to the benefit of the parties and their respective
successors. No party may assign any right or obligation hereunder without the prior
express written approval of Andes.” (Id.)
- 14 -

1

On June 29, 2004, New Elite Technologies, Inc., merged with Infomax Optical

2

Technology Corp., another Taiwanese company, and the new company was named

3

Infomax Optical Technology Corp. (Doc. 125-4.) On May 4, 2009, Infomax Optical

4

Technology Corp. sold its shares in Andes to Polar Star Management Limited. (Doc.

5

125-3.) On May 31, 2010, Andes issued a certificate showing Polar Star Management

6

Limited as the owner of 1,250,000 shares of Andes common stock, apparently all of the

7

stock originally issued under the Stock Exchange Agreement to New Elite Technologies,

8

Inc. (Doc. 125-2.)

9

Polar Star contends that its “arms-length” purchase of stock from Infomax does

10

not make it a successor to Infomax, and therefore it is not bound by the August 1, 2000

11

Stock Exchange Agreement. But the terms of the Agreement suggest otherwise. The

12

Agreement creates Andes as a holding company of PCT International and OptiSolutions,

13

Inc.

14

OptiSolutions, Inc. The Andes stock issued under the Agreement represented 100% of

15

Andes’ outstanding stock as of the Agreement’s effective date. It states that Andes stock

16

is not registered, will be restricted stock, and will be subject to the transfer restrictions

17

and purchase options and obligations set forth in the Bylaws for Andes. It also states,

18

“The shares to be received by each Shareholder are being acquired for investment and

19

not, directly or indirectly, with a view to, or in connection with, the distribution or resale

20

of such shares.” (Doc. 125-5 at 5.) Further, it prohibits assignment of any right or

21

obligation without the prior express written approval of Andes. Polar Star could not have

22

acquired Andes stock without permission from Andes and compliance with its Bylaws.

23

The rights and obligations of New Elite Technologies, Inc., as an owner and investor in

24

Andes were assumed by Polar Star when it acquired the stock. Polar Star is therefore

25

bound by New Elite Technologies, Inc.’s consent to “the jurisdiction of the state and

26

federal courts in Maricopa County, Arizona.”3

It issued Andes stock to only the shareholders of PCT International and

27
28

3

Polar Star’s contention that the present lawsuit is not “an action hereunder” the
Stock Exchange Agreement confuses jurisdiction with forum selection. Under the
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21
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Therefore, the Court has personal jurisdiction over Polar Star based on consent.
IV.

THE FIRST AMENDED COMPLAINT STATES TWO CLAIMS FOR
WHICH RELIEF CAN BE GRANTED—BREACH OF CONTRACT AND
BREACH OF THE IMPLIED DUTY OF GOOD FAITH AND FAIR
DEALING.
EZconn moves for dismissal under Rule 12(b)(6) of the Federal Rules of Civil

Procedure of all claims pled against it except Count IV, which alleges breach of contract
solely against EZconn. Polar Star, Mr. Lan, and eGtran move under Rule 12(b)(6) for
dismissal of all claims pled against them.
Count V alleges intentional interference by Mr. Lan and eGtran with the
contractual relationship between PCT International and EZconn. Count VII alleges fraud
against Mr. Lan, EZconn, and eGtran. Count IX alleges breach of the implied duty of
good faith and fair dealing against EZconn and eGtran. The remaining counts, I, II, III,
VI, VIII, X, XI, and XII, allege claims against all Defendants.
Counts I, II, III, VI, VIII, X, XI, and XII could be dismissed for failing to give
each Defendant fair notice of what the claim is and the grounds upon which it rests. See
Fed. R. Civ. P. 8(a); Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th
Cir. 2008).

A claim must be stated clearly enough to provide each defendant fair

opportunity to frame a responsive pleading. McHenry v. Renne, 84 F.3d 1172, 1176 (9th
Cir. 1996). “Something labeled a complaint . . ., yet without simplicity, conciseness and
clarity as to whom plaintiffs are suing for what wrongs, fails to perform the essential
functions of a complaint.” Id. at 1180. However, these claims also fail to state a claim
upon which relief can be granted and will be dismissed under Rule 12(b)(6).

23
24
25
26
27
28

Agreement, the parties consented to “the jurisdiction of the state and federal courts in
Maricopa County, Arizona,” and also agreed that any action arising under the Agreement
could be litigated in any forum having jurisdiction.
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13
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23
24

A.

Legal Standard

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the
plaintiff’s pleadings. All allegations of material fact are assumed to be true and are
construed in the light most favorable to the nonmoving party. Cousins v. Lockyer, 568
F.3d 1063, 1067 (9th Cir. 2009). Dismissal under Rule 12(b)(6) can be based on “the
lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a
cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.
1990). To avoid dismissal, a complaint need contain only “enough facts to state a claim
for relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007). The principle that a court accepts as true all of the allegations in a complaint
does not apply to legal conclusions or conclusory factual allegations. Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009). “A claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.” Id. “The plausibility standard is not akin to a
‘probability requirement,’ but it asks for more than a sheer possibility that a defendant
has acted unlawfully.” Id.
In deciding a motion to dismiss under Rule 12(b)(6), “[a] court may consider
evidence on which the complaint ‘necessarily relies’ if: (1) the complaint refers to the
document; (2) the document is central to the plaintiff’s claim; and (3) no party questions
the authenticity of the copy attached to the 12(b)(6) motion.” Marder v. Lopez, 450 F.3d
445, 448 (9th Cir. 2006). Here, the parties submitted declarations and other evidence to
be considered regarding personal jurisdiction, but the Court has not considered materials
outside the pleadings to decide whether the First Amended Complaint states a claim upon
which relief can be granted.

25
26
27
28

B.

The First Amended Complaint Fails to State Any Claim Against Polar
Star.

The First Amended Complaint affirmatively alleges that Polar Star did nothing. It
alleges that no representative of Polar Star ever visited Andes and PCT International’s
- 17 -

1

facilities or directly interacted with Andes and PCT International. It alleges that all of

2

Polar Star’s communications with Andes and PCT International have come through Mr.

3

Lan and representatives of EZconn and/or eGtran, but it does not allege that Polar Star

4

actually had any communications with Andes and PCT International. It alleges that Polar

5

Star is a shareholder of Andes, but only as a proxy for Mr. Lan. It alleges that all actions

6

with respect to Polar Star’s shareholder interest have been directed and controlled by Mr.

7

Lan. It alleges that Andes has not held formal shareholder meetings or elections, and

8

most substantial business decisions for Andes and PCT International were addressed

9

through communications between Mr. Lan and Youtsey. It alleges that Mr. Lan directed

10

and controlled the actions of Polar Star, but it does not allege any wrongful actions that

11

Mr. Lan caused Polar Star to take.

12

characterization of Polar Star as a “corporate insider,” privy to confidential financial and

13

other information through its shareholder status, is contradicted by their allegations that

14

Polar Star had no interaction with Andes and PCT International.

Moreover, Andes and PCT International’s

15

Counts I, II, III, VI, VIII, X, XI, and XII are the only claims that apply to Polar

16

Star, they do not allege any actions taken specifically by Polar Star, and they make only

17

conclusory factual allegations inconsistent with facts pled regarding Polar Star. Count I

18

for breach of fiduciary duty alleges that Defendants “entered into special, confidential

19

relationships with [Andes and PCT International] as integrally involved corporate

20

insiders of [Andes and PCT International].” Polar Star could not have been “integrally

21

involved” without any communication or interaction with Andes and PCT International,

22

without any shareholder meetings, and without participation in substantial business

23

decisions.

24

knowingly participated in breaches of fiduciary duty committed by the other

25

Defendants,” but as pled, Polar Star did not do anything, much less provide substantial

26

assistance to anyone. Count III alleges Polar Star and the other Defendants owed a duty

27

to maintain confidentiality of certain information, but there was no alleged

28

communication between Polar Star and PCT International, or anyone else, from which

Count II alleges “Defendants each provided substantial assistance and

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1

Polar Star could have obtained confidential proprietary information, and no alleged action

2

taken by Polar Star that could be construed as usurpation of corporate opportunities.

3

Counts VI, VIII, X, XI, and XII fare no better. The First Amended Complaint alleges, in

4

essence, that Polar Star is a repository for Mr. Lan’s ownership interest, and nothing

5

more.

6

Therefore, all claims against Polar Star will be dismissed. 4

7

C.

8

The First Amended Complaint Does Not Allege Facts Supporting Any
Alter Ego Liability for Any Defendant.

9

It is undisputed that EZconn manufactured products for PCT International, PCT

10

International did not pay for all of the products it received, and Andes did not repay

11

certain loans it received from Mr. Lan, Kun-Te Yang, Dennis Lan.5 Andes and PCT

12

International contend they are not legally liable for the unpaid invoices and loans because

13

EZconn wrongful disclosed and misused Andes and PCT International’s confidential

14

proprietary information. They seek to offset damages they may obtain for EZconn’s

15

actions against the amount PCT International owes to EZconn and also against Andes’

16

debt to Mr. Lan, Dennis Lan, and Kun-Te Yang. Andes and PCT International seek to

17

impose liability for EZconn’s actions on Mr. Lan, Dennis Lan, and Kun-Te Yang by

18

characterizing Mr. Lan as “the mastermind” and all of the Defendants as

19

indistinguishable alter egos of each other:

20
21

As PCT has alleged, Mr. Lan directed and controlled the operations of each
of the other Defendants who also committed the identified wrongful

22
4

23
24
25
26
27
28

The First Amended Complaint pleads the same allegations regarding Kun-Te
Yang and Dennis Lan as it pleads regarding Polar Star, i.e., they hold Mr. Lan’s
shareholder interest in Andes as his proxies and have had no direct interaction or
communication with Andes and PCT International. Andes and PCT International
initiated service on Kun-Te Yang and Dennis Lan through the letters rogatory process
and had not received proof of service as of March 4, 2016. Kun-Te Yang and Dennis
Lan have not appeared in this Court and have not joined in the present motions to
dismiss.
5
Whether the loan from Kun-Te Yang was made to Youtsey personally or on
behalf of Andes and PCT International is disputed.
- 19 -

1
2
3
4

conduct. Thus, each Defendant’s wrongdoing is attributable to Mr. Lan.
Indeed, PCT alleges that each defendant functioned as Mr. Lan’s alter ego.
Accordingly, the Complaint details an interwoven scheme to harm PCT,
with Mr. Lan as the mastermind.
(Doc. 73 at 8.)

5

The First Amended Complaint alleges that Mr. Lan was “the mastermind of the

6

harm” to Andes and PCT International, directing and controlling all of the other

7

Defendants and acting through the other Defendants. (Doc. 72 at 7.) It alleges that Kun-

8

Te Yang, Dennis Lan, Polar Star, EZconn, and eGtran each functioned as “Mr. Lan’s

9

proxy and alter ego,” and eGtran also functioned as an alter ego of EZconn.

10

The First Amended Complaint alleges that Mr. Lan acted through the other

11

Defendants to wrongfully seize control over the intellectual property, confidential

12

information, and business of Andes and PCT International, in which the Defendants own

13

a minority interest, and divert profits to EZconn, a company in which, at relevant times,

14

Defendants have owned a controlling majority interest. It alleges the other Defendants

15

acted under Mr. Lan’s direction and control, abusing their positions as suppliers,

16

fiduciaries, and shareholders of Andes and PCT International. It also alleges that Mr.

17

Lan was a de facto shareholder of Andes, but directed that his shareholder interest be held

18

by Kun-Te Yang, Dennis Lan, and Polar Star, each of whom functioned as Mr. Lan’s

19

proxy and alter ego.

20

participated in meetings of Andes’ Board of Directors and was involved in substantial

21

business decisions for Andes and PCT International through persons he identified to act

22

on his behalf, including Kun-Te Yang, Dennis Lan, Polar Star, and employees and

23

executives of EZconn and eGtran.

The First Amended Complaint further alleges that Mr. Lan

24

Thus, the First Amended Complaint alleges that Mr. Lan is liable for the

25

wrongdoing of each of the other Defendants because each Defendant functioned as Mr.

26

Lan’s alter ego. It also alleges that each of the other Defendants is liable for Mr. Lan’s

27

actions because each Defendant functioned as Mr. Lan’s alter ego.

28
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1.

Mr. Lan’s Alter Ego Liability for EZconn and eGtran

The term “alter ego” is used in the context of “piercing the corporate veil” to
impose liability on an individual for the actions of a corporation:
As a general rule, a corporation will be treated as a legal entity until
sufficient reason appears to disregard the corporate form. The corporate
fiction will be disregarded when the corporation is the alter ego or business
conduit of a person, and when to observe the corporation would work an
injustice. The alter-ego status is said to exist when there is such unity of
interest and ownership that the separate personalities of the corporation and
owners cease to exist.

15

Where a corporation is operated and maintained for the purpose for which it
was incorporated and not as a mere shield of the stockholders, the corporate
form should not be disregarded. If a corporation was formed or is
employed for fraudulent purposes then clearly the corporate fiction should
be disregarded. . . . But it must be noted that a legitimate purpose of
incorporation is to avoid personal liability and if the corporate fiction is too
easily ignored and personal liability imposed, then incorporation is
discouraged. If there is no unification of interests and intermingling of
funds, so that the corporation loses its separate identity, then the owners
should not be personally liable.

16

Dietel v. Day, 16 Ariz. App. 206, 208, 492 P.2d 455, 457 (1972) (citations omitted).

17

Corporate directors and officers are not personally liable for torts committed by the

18

corporation unless they have participated in the tort or were negligent in the management

19

or supervision of the corporate affairs causing or contributing to the injury.

20

Bischofshausen, Vasbinder, & Luckie v. D.W. Jaquays Min. & Equip. Contractors Co.,

21

145 Ariz. 204, 210-11, 700 P.2d 902, 908-09 (Ct. App. 1985).

10
11
12
13
14

22

The First Amended Complaint alleges that, at times relevant to this action, Mr.

23

Lan owned or controlled, directly or indirectly, EZconn and eGtran. It alleges that

24

EZconn functioned as an alter ego of Mr. Lan and of eGtran, and eGtran owned and

25

controlled EZconn.

26

management and served as a Senior Vice President of the company, and eGtran

27

functioned as an alter ego of Mr. Lan and EZconn. It vaguely alleges that Mr. Lan

It further alleges that Mr. Lan was part of eGtran’s executive

28
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“intermingled his business dealings with those of eGtran and EZconn,” but it does not

2

allege that Mr. Lan intermingled his personal funds with those of eGtran and EZconn.

3

The First Amended Complaint does not allege facts showing such unity of interest

4

and ownership between Mr. Lan and EZconn or Mr. Lan and eGtran that the separate

5

personalities of the corporation and owners ceased to exist. It does not allege facts

6

showing that EZconn or eGtran operated as a shield for Mr. Lan rather than for the

7

purpose for which either was incorporated. It does not allege facts showing that Mr.

8

Lan’s personal funds were intermingled with those of either EZconn or eGtran. It does

9

not allege that either EZconn or eGtran failed to observe corporate formalities. The First

10

Amended Complaint does not allege facts necessary to impose alter ego liability on Mr.

11

Lan for the actions of EZconn or eGtran.

12

2.

13

Mr. Lan’s Alter Ego Liability for Kun-Te Yang, Dennis Lan,
and Polar Star

14

The First Amended Complaint seeks to stretch application of alter ego liability

15

from personal liability for corporate actions to personal liability for actions of another

16

individual and to avoid reliance on a theory of vicarious, respondeat superior, or agency

17

liability. Andes and PCT International offer no authority to support such an expansion of

18

alter ego liability. In fact, they acknowledge that they have pled alternative claims

19

because their allegations of alter ego liability may fail. But even if alter ego liability

20

could be imposed on Mr. Lan for the actions of other individuals, the First Amended

21

Complaint does not allege facts suggesting such unity of interest and ownership that the

22

separate personalities ceased to exist. See Dietel, 16 Ariz. App. at 208, 492 P.2d at 457.

23

The First Amended Complaint alleges that Andes shareholders Kun-Te Yang,

24

Dennis Lan, and Polar Star acted as Mr. Lan’s proxies and under his control. It alleges

25

they were “corporate insiders” and caused Andes and PCT International harm. But the

26

First Amended Complaint also alleges that Kun-Te Yang, Dennis Lan, and Polar Star

27

never visited PCT International’s facilities and never directly interacted with Andes and

28

PCT International. It alleges that Andes did not hold shareholder meetings. It alleges
- 22 -

1

that most substantial business decisions for PCT were addressed through communications

2

between Mr. Lan and Mr. Youtsey. It does not allege that Kun-Te Yang, Dennis Lan,

3

and Polar Star actually did anything. Therefore, the First Amended Complaint does not

4

plausibly allege that any of the shareholders committed any wrongdoing for which Mr.

5

Lan could be liable, and even if it did, Mr. Lan would not be liable for them as his alter

6

egos.

7
8
9
10
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23
24
25
26
27
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3.

eGtran’s Alter Ego Liability for EZconn

A parent corporation may be held liable for the acts of its subsidiary when the
individuality or separateness of the subsidiary corporation has ceased. Gatecliff v. Great
Republic Life Ins. Co., 170 Ariz. 34, 37, 821 P.2d 725, 728 (1991). To establish such
liability, “plaintiffs must prove both (1) unity of control and (2) that observance of the
corporate form would sanction a fraud or promote injustice.” Id. “Substantially total
control may be proved by showing, among other things: stock ownership by the parent;
common officers or directors; financing of subsidiary by the parent; payment of salaries
and other expenses of subsidiary by the parent; failure of subsidiary to maintain
formalities of separate corporate existence; similarity of logo; and plaintiff’s lack of
knowledge of subsidiary’s separate corporate existence.” Id. “To be held responsible for
actions of its subsidiary, a parent must actually exercise control such that the subsidiary is
‘a mere instrumentality.’” Keg Rests. Ariz., Inc. v. Jones, No. 1 CA-CV 15-0054, 2016
WL 3101794, at *8 (Ariz. Ct. App. June 2, 2016). The key is failure to maintain the
formalities or the financial distinctness of separate corporations.
The First Amended Complaint alleges that “eGtran owned and controlled EZconn,
and directed and controlled the actions of EZconn herein.” (Doc. 72 at 9.) It further
alleges that eGtran and EZconn share or shared multiple common officers and directors.
It does not allege facts showing that EZconn failed to maintain formalities of separate
corporate existence, only that after eGtran acquired EZconn, the Chairman of the Board
of eGtran approved invoices for PCT International’s purchases from EZconn and
requested those payments be directed to him and that EZconn personnel began using
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1

email addresses with an “@egtran.com” suffix. Such limited and vague allegations do

2

not show that the individuality or separateness of the subsidiary corporation had ceased.

3

They are insufficient to impose liability on eGtran for the actions of EZconn.

4
5

Thus, the First Amended Complaint fails to allege facts showing that any
Defendant should be held liable for the actions of another Defendant as an alter ego.

6

D.

7
8
9
10
11
12
13
14
15
16
17

Count IV: Breach of Contract (Against EZconn)

The First Amended Complaint alleges that the contractual manufacturing
relationship between PCT International and EZconn required PCT International to
disclose certain information to EZconn, such as quantities of items PCT International
ordered from EZconn, the prices PCT International paid EZconn for those items, and
other information about customer orders. It further alleges that EZconn disclosed this
information to one of PCT International’s competitors for which EZconn also
manufactured similar products. As alleged, the Terms and Conditions included in PCT
International’s purchase orders prohibit EZconn from discussing orders with any third
party.
Count IV alleges EZconn breached its obligations under contracts between PCT
International and EZconn by, among other things:

18
19

a.

Wrongfully using [Andes and PCT International] “items, materials, data,
technical information, [] intellectual property,” and other property for their
own benefit;

b.

Using [Andes and PCT International]’s property for purposes other than
production or delivery of products manufactured for [Andes and PCT
International];

c.

Using [Andes and PCT International]’s materials and intangibles for the
benefit of parties other than [Andes and PCT International];

d.

Reproducing [Andes and PCT International]’s property, including
materials, data, technical information, and intellectual property without
[Andes and PCT International]’s prior written authorization; and

e.

Claiming right, title, and interest to inventions utilizing [Andes and PCT
International]’s intellectual property.

20
21
22
23
24
25
26
27
28

(Doc. 72 at 27-28.)
- 24 -

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Count IV alleges a breach of contract claim only against EZconn, and EZconn

2

does not move to dismiss Count IV. Therefore, Count IV remains, but it applies only to

3

EZconn.

4

E.

5

Count IX: Breach of Implied Duty of Good Faith and Fair Dealing
(Against EZconn and eGtran)

6

Arizona law implies a covenant of good faith and fair dealing in every contract.

7

Rawlings v. Apodaca, 151 Ariz. 149, 153, 726 P.2d 565, 569 (1986). The essence of the

8

implied covenant is “neither party will act to impair the right of the other to receive the

9

benefits which flow from their agreement or contractual relationship.” Id. “[A]n implied

10

covenant of good faith and fair dealing cannot directly contradict an express contract

11

term.” Bike Fashion Corp. v. Kramer, 202 Ariz. 420, 424, 46 P.3d 431, 435 (Ct. App.

12

2002). But a party can exercise discretion retained or unforeclosed under a contract in

13

such a way as to deny the other a reasonably expected benefit of the bargain. Id.

14

Therefore, “Arizona law recognizes that a party can breach the implied covenant of good

15

faith and fair dealing both by exercising express discretion in a way inconsistent with a

16

party’s reasonable expectations and by acting in ways not expressly excluded by the

17

contract’s terms but which nevertheless bear adversely on the party’s reasonably

18

expected benefits of the bargain.” Id. Further, “a party may breach the implied covenant

19

of good faith and fair dealing even if the express terms of the contract speak to a related

20

subject.” Id.

21

An action for breach of the implied covenant of good faith and fair dealing may be

22

brought in contract or in tort. An action in tort may be brought only where there is a

23

“special relationship between the parties arising from elements of public interest,

24

adhesion, and fiduciary responsibility.” Wells Fargo Bank v. Ariz. Laborers, Teamsters

25

& Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 491, 38 P.3d 12, 29

26

(2002). But when the remedy sought sounds in contract, the plaintiff is not required to

27

prove the existence of a special relationship. Id.

28
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1

Count IX alleges that EZconn and eGtran owed PCT International a duty of good

2

faith and fair dealing because EZconn was a party to contracts with PCT International

3

and eGtran was the alter ego of EZconn. It further alleges that EZconn and eGtran

4

breached their duties of good faith and fair dealing owed to PCT International by “the

5

wrongful and illegal conduct alleged herein.” (Doc. 72 at 35.) In addition, Count IX

6

alleges that EZconn and eGtran had a special, confidential relationship with Andes and

7

PCT International. In response to the motions to dismiss, Andes and PCT International

8

state that they plead this claim for breach of the implied duty of good faith and fair

9

dealing in the alternative to their claim against EZconn for breach of contract.

10

The First Amended Complaint does not allege any facts showing that either

11

EZconn or eGtran had a special relationship with Andes and PCT International.

12

However, the First Amended Complaint does not seek tort damages, and Andes and PCT

13

International do not need to establish a special relationship to state a claim for breach of

14

the implied covenant of good faith and fair dealing.

15

The First Amended Complaint does not allege that eGtran was a party to any

16

contract from which an implied duty of good faith and fair dealing could arise. Other

17

than alter ego liability, Andes and PCT International allege no basis for imposing liability

18

on eGtran for EZconn’s alleged breach of the implied covenant of good faith and fair

19

dealing. As already found, the First Amended Complaint does not adequately plead alter

20

ego status between EZconn and eGtran.

21

The First Amended Complaint alleges that EZconn breached its contract with PCT

22

by wrongfully disclosing PCT’s confidential proprietary information in violation of

23

express Terms and Conditions incorporated in their purchase orders and by other actions.

24

It also alleges that PCT shared information with EZconn that EZconn secretly used to

25

apply for patents. If the alleged disclosures were not related to specific purchase orders,

26

the Terms and Conditions may not expressly prohibit EZconn’s actions. To the extent

27

that EZconn’s allegedly wrongful actions are not expressly excluded by the contract’s

28

terms but “nevertheless bear adversely on [EZconn’s] reasonably expected benefits of the
- 26 -

1

bargain,” the First Amended Complaint sufficiently alleges a claim for breach of the

2

implied duty of good faith and fair dealing against EZconn.

3

Therefore, Count IX will be dismissed as to eGtran, but not with respect to

4

EZconn.

5

F.

6

Count V: Intentional Interference with Contract (Against Mr. Lan
and eGtran)

7

To prove intentional inference with contract, a plaintiff must prove:

8

(1) existence of a valid contractual relationship, (2) knowledge of the
relationship on the part of the interferor, (3) intentional interference
inducing or causing a breach, (4) resultant damage to the party whose
relationship has been disrupted, and (5) that the defendant acted
improperly.

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Safeway Ins. Co. v. Guerrero, 210 Ariz. 5, 10, 106 P.3d 1020, 1025 (2005). The “valid
contractual relationship” must be between the plaintiff and a third party; a party cannot
tortiously interfere with its own contract. Payne v. Pennzoil Corp., 138 Ariz. 52, 57, 672
P.2d 1322, 1327 (1983); Restatement (Second) of Torts § 766 (1979) (defining cause of
action for interfering with the performance of a contract “between another and a third
person”).
Count V alleges that Mr. Lan and eGtran interfered with the contract between PCT
International and EZconn by exercising control over EZconn to breach its contractual
obligation for Mr. Lan’s and eGtran’s gain. Andes and PCT International acknowledge
that if EZconn is determined to be the alter ego of Mr. Lan and eGtran, they are not third
parties to the contract and cannot interfere with their own contract. But Count V fails
even after alter ego status has been rejected. It alleges nothing more than that a corporate
officer and a parent corporation are liable for the breaches of contract in which they had a
role. Therefore, Count V will be dismissed as to Mr. Lan and eGtran.

26
27
28
- 27 -

1
2

G.

Count I: Breach of Fiduciary Duty (Against All Defendants)
Count II: Aiding and Abetting a Breach of Fiduciary Duty (Against
All Defendants)

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

“A fiduciary relation exists between two persons when one of them is under a
duty to act for or to give advice for the benefit of another upon matters within the scope
of the relation.” Restatement (Second) of Torts § 874 cmt. a (1979). A fiduciary
relationship is a confidential relationship in which the fiduciary holds superiority of
position over the beneficiary, which may be demonstrated by a substitution of the
fiduciary’s will for that of the beneficiary.

Standard Chartered PLC v. Price

Waterhouse, 190 Ariz. 6, 24, 945 P.2d 317, 335 (Ct. App. 1997). It requires “peculiar
reliance in the trustworthiness of another,” which is more than mere trust in another’s
competence or integrity. Id.
“Purely commercial transactions do not give rise to a fiduciary relationship.”
Urias v. PCS Health Sys., Inc., 211 Ariz. 81, 87, 118 P.3d 29, 35 (Ct. App. 2005)
(citation omitted). “A commercial contract creates a fiduciary relationship only when
one party agrees to serve in a fiduciary capacity.” Id.
A corporation’s director owes a fiduciary duty to the corporation and its
stockholders. Atkinson v. Marquart, 112 Ariz. 304, 306, 541 P.2d 556, 558 (1975). A
fiduciary duty may exist among shareholders with equal ownership in a closely held
corporation. E.g., Hollis v. Hill, 232 F.3d 460, 466 (5th Cir. 2000) (shareholders were
directors, participated personally in the corporation’s management, made money
principally through salaries as officers, and did not receive large dividends); Clark v.
Lubritz, 113 Nev. 1089, 944 P.2d 861 (1997) (closely held corporation functioned as
partnership). In a closely held corporation, majority shareholders, particularly those with
management responsibilities, have a fiduciary duty to protect the interests of minority
shareholders. E.g., Mims v. Valley Nat. Bank, 14 Ariz. App. 190, 192, 481 P.2d 876, 878
(1971); Donahue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 328 N.E.2d
505 (1975). But Andes and PCT International have cited no authority holding that

- 28 -

1

shareholder status alone imposes a fiduciary duty, even within a closely held

2

corporation.6

3

Count I of the First Amended Complaint alleges that “Defendants, either directly

4

or as alter egos, entered into special, confidential relationships with [Andes and PCT

5

International] as integrally involved corporate insiders,” and each owed Andes and PCT

6

International fiduciary duties. (Doc. 72 at 24.) Count II alleges, “The Defendants each

7

provided substantial assistance and knowingly participated in the breaches of fiduciary

8

duty committed by the other Defendants.” (Id. at 25.)

9

The First Amended Complaint alleges that all of the Defendants owed fiduciary

10

duties to Andes and PCT International through (1) Mr. Lan’s special, confidential

11

relationship with Andes and (2) as direct or indirect shareholders of Andes. It alleges that

12

Youtsey, as president and founder of PCT International, developed a special and

13

confidential relationship of trust with Mr. Lan, on behalf of EZconn, beyond that of a

14

mere contract manufacturer. The First Amended Complaint also alleges that, because

15

Mr. Lan was a trusted business partner, Andes and PCT International allowed Mr. Lan to

16

invest in Andes and hold his ownership interest through Kun-Te Yang, Dennis Lan, and

17

Polar Star. The First Amended Complaint alleges that Andes operated like a partnership,

18

most substantial business decisions were addressed through communications between Mr.

19

Lan and Mr. Youtsey, and “these communications were usually facilitated by English

20

speaking representatives of EZconn and/or eGtran” because Mr. Lan does not speak

21
22
23
24
25
26
27
28

6

Whether Arizona or Nevada law governs makes no difference in this case.
However, Andes and PCT International contend that Nevada, the place of Andes’
incorporation, applies to the determination of fiduciary duties, relying on AMERCO v.
Shoen, 184 Ariz. 150, 152 n.1, 907 P.2d 536, 538 n.1 (Ct. App. 1995). The AMERCO
footnote states that no choice-of-law issues were raised, but Nevada law would have
applied because it was the place of incorporation. It cites §§ 302 and 309 of the
Restatement (Second) of Conflict of Laws (1971), which provide direction for deciding
choice-of-law issues when determining a corporation’s obligations to shareholders and
creditors and a director’s or officer’s liability to the corporation, its creditors, and its
shareholders. Neither section addresses choice of law when deciding a shareholder’s
liability.
- 29 -

1

English. (Doc. 72 at 18.) It does not allege any facts supporting Andes and PCT

2

International’s claim that Mr. Lan, EZconn, eGtran, or any other Defendant developed a

3

special, confidential relationship with Andes and PCT International.

4

The First Amended Complaint also does not allege facts showing that any of the

5

Defendants had a fiduciary duty to Andes and PCT International because of direct or

6

indirect shareholder status. It alleges that no Andes shareholder held a majority position,

7

and it does not allege that all shareholders held equal ownership. It does not allege that

8

any of the Defendants served as a director, had management responsibilities, or held a

9

position of superiority over other shareholders. Even if Mr. Lan could be liable for

10

conduct of shareholders Kun-Te Yang, Dennis Lan, and Polar Star, the First Amended

11

Complaint does not allege facts imposing fiduciary duties on those shareholders.

12

The First Amended Complaint does not allege facts showing that any of the

13

Defendants owed a fiduciary duty to Andes and PCT International. Therefore, none of

14

the Defendants can be liable for aiding and abetting a breach of fiduciary duty by any

15

other Defendant. Therefore, Counts I and II will be dismissed as to Mr. Lan, EZconn,

16

and eGtran.

17

H.

18

Count III: Usurpation of Corporate Opportunities (Against All
Defendants)

19

“The ‘corporate opportunity doctrine’ prohibits fiduciary usurpation of a corporate

20

opportunity. It requires a fiduciary who learns of a corporate opportunity to disclose it to

21

the corporation before seeking to appropriate the opportunity for himself.” AMERCO v.

22

Shoen, 184 Ariz. 150, 158, 907 P.2d 536, 544 (Ct. App. 1995).

23

The First Amended Complaint does not allege facts from which it can be inferred

24

that Mr. Lan, EZconn, or eGtran had a fiduciary relationship with Andes and PCT

25

International. Therefore Mr. Lan, EZconn, and eGtran cannot be liable for usurpation of

26

corporate opportunities. Therefore, Count III will be dismissed as to Mr. Lan, EZconn,

27

and eGtran.

28
- 30 -

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

I.

Count VIII: Constructive Fraud (Against All Defendants)

Constructive fraud is “a breach of a legal or equitable duty which, without regard
to moral guilt or intent of the person charged, the law declares fraudulent because the
breach tends to deceive others, violates public or private confidences, or injures public
interests.” Lasley v. Helms, 179 Ariz. 589, 591, 880 P.2d 1135, 1137 (Ct. App. 1994).
“While it does not require a showing of intent to deceive or dishonesty of purpose, it does
require a fiduciary or confidential relationship.” Dawson v. Withycombe, 216 Ariz. 84,
107, 163 P.3d 1034, 1057 (Ct. App. 2007).
Count VIII alleges that because of the “special, confidential relationship” between
Andes/PCT International and Defendants and “Defendants’ status as corporate insiders,”
Andes and PCT International entrusted Defendants with their confidential proprietary
information, and Defendants breached their duties to Andes and PCT International by
disclosing Andes and PCT International’s confidential proprietary information to Andes
and PCT International’s competitors and by other actions. (Doc. 72 at 34.)
The First Amended Complaint does not allege facts from which it can be inferred
that Mr. Lan, EZconn, or eGtran had a fiduciary or confidential relationship with Andes
and PCT International. Moreover, the First Amended Complaint fails to identify the role
of each defendant in the alleged fraudulent scheme. See Swartz v. KPMG LLP, 476 F.3d
756, 764-765 (9th Cir. 2007).
Therefore, Count VIII will be dismissed as to Mr. Lan, EZconn, and eGtran.

21
22
23
24
25
26
27
28

J.

Count VII: Fraud (Against Mr. Lan, EZconn, and eGtran)

To state a claim for common law fraud under Arizona law, a plaintiff must plead
nine elements:
(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker’s
knowledge of its falsity or ignorance of its truth; (5) the speaker’s intent
that it be acted upon by the recipient in the manner reasonably
contemplated; (6) the hearer’s ignorance of its falsity; (7) the hearer’s
reliance on its truth; (8) the hearer’s right to rely on it; (9) the hearer’s
consequent and proximate injury.
- 31 -

1

Comerica Bank v. Mahmoodi, 224 Ariz. 289, 291-92, 229 P.3d 1031, 1033-34 (Ct. App.

2

2010). In alleging fraud, the circumstances must be alleged with particularity. Fed. R.

3

Civ. P. 9(b). Rule 9(b) requires allegations of fraud to be “specific enough to give

4

defendants notice of the particular misconduct which is alleged to constitute the fraud

5

charged so that they can defend against the charge and not just deny that they have done

6

anything wrong.”

7

Plaintiffs alleging fraud “must state the time, place, and specific content of the false

8

representations as well as the identities of the parties to the misrepresentations.”

9

Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986);

10

Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001).

accord Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007).

15

Rule 9(b) does not allow a complaint to merely lump multiple defendants
together but requires plaintiffs to differentiate their allegations when suing
more than one defendant and inform each defendant separately of the
allegations surrounding his alleged participation in the fraud. In the context
of a fraud suit involving multiple defendants, a plaintiff must, at a
minimum, identify the role of each defendant in the alleged fraudulent
scheme.

16

Swartz v. KPMG LLP, 476 F.3d 756, 764-765 (9th Cir. 2007) (internal quotation marks,

17

alteration marks, and citations omitted). The representation must relate to either a past or

18

existing fact, not “unfilled promises, expressions of intention or statements concerning

19

future events unless such were made with the present intention not to perform.” Staheli

20

v. Kauffman, 122 Ariz. 380, 383, 595 P.2d 172, 175 (1979).

11
12
13
14

21

Count VII alleges two types of representations made by Mr. Lan and EZconn: (1)

22

promises made in 1997 before PCT International began a contractual relationship with

23

EZconn and (2) contract terms incorporated into PCT International’s purchase orders.

24

All of these alleged representations concern EZconn’s obligation to protect Andes and

25

PCT International’s confidential proprietary information. The First Amended Complaint

26

does not specifically allege “the time, place, and specific content of the false

27

representations as well as the identities of the parties to the misrepresentations.”

28
- 32 -

1

Count VII summarily alleges that these representations were false and misleading

2

when made and that Mr. Lan, EZconn, and eGTran knew these representations were false

3

and misleading when they were made. But the representations did not relate to past or

4

existing facts, so they could not have been false when made. They are expressions of

5

intention or statements about future events, and Andes and PCT International do not

6

allege they were made with the present intention not to perform. Instead, Andes and PCT

7

International assert that the representations “became palpably false” by “at least 2012,”

8

which is when PCT International sued Holland Electronics, LLC, for patent infringement.

9

(Doc. 73 at 15, Doc. 74 at 12, Doc. 75 at 13.)

10

Count VII alleges that Andes and PCT International reasonably relied on these

11

representations and “would not have disclosed [their] confidential proprietary

12

information or conducted business with EZconn absent such representations.” (Doc. 72

13

at 33.) But the First Amended Complaint alleges that Andes and PCT International

14

provided EZconn with confidential proprietary information pursuant to the contractual

15

agreement between PCT International and EZconn. Andes and PCT International do not

16

allege any reliance beyond performing contractual obligations to EZconn.

17

Further, Count VII alleges that “before, during and after these representations,

18

EZconn and Mr. Lan were actively disclosing [Andes and PCT International]’s

19

confidential proprietary information to [Andes and PCT International]’s competitors,

20

while also seeking to convert [Andes and PCT International]’s intellectual property by

21

secretly filing patent applications claiming as EZconn’s own intellectual property

22

belonging to [Andes and PCT International].” (Id. at 33.) Alleging that Defendants

23

disclosed Andes and PCT International’s confidential information before they made the

24

representations contradicts the allegation that Andes and PCT International provided

25

EZconn the information in reliance on the representations.

26

The First Amended Complaint does not plead a fraud claim with Rule 9(b)

27

particularity. Even if it were held to a lesser standard, it fails to state a fraud claim upon

28

which relief can be granted. Mr. Lan and representatives of EZconn allegedly gave PCT
- 33 -

1

International assurances about protecting PCT International’s confidential information

2

before EZconn and PCT International formed a contractual relationship. As alleged, it

3

was necessary for PCT International to provide EZconn with certain information in order

4

for EZconn to perform under the contract. When PCT International sent to EZconn

5

purchase orders, certain Terms and Conditions allegedly were incorporated. EZconn

6

manufactured and delivered to Andes and PCT International the products it ordered,

7

which could be considered as accepting the Terms and Conditions. As alleged, EZconn

8

breached the terms regarding protecting Andes and PCT International’s confidential

9

proprietary information, and Andes and PCT International suffered pecuniary loss.

10

Viewing Count VII generously, it alleges no more than a breach of contract claim against

11

EZconn.

12

In addition, Andes and PCT International contend that any false representation by

13

EZconn is attributable to eGtran because EZconn is eGtran’s alter ego. As previously

14

concluded, Andes and PCT International have not pled sufficient facts to show alter ego

15

status among Mr. Lan, EZconn, and eGtran.

16

Therefore, Count VII will be dismissed as to Mr. Lan, EZconn, and eGtran.

17

K.

18

Count VI:
Tortious Interference with Prospective Economic
Advantage (Against All Defendants)

19

To establish a claim for tortious interference with prospective economic

20

advantage, a plaintiff must prove (1) it had a valid contractual relationship or business

21

expectancy; (2) the defendant knew of the relationship or expectancy; (3) the defendant

22

intentionally interfered, which induced or caused a breach or termination of the

23

relationship or expectancy; and (4) the plaintiff incurred damages as a result of the

24

disrupted relationship or expectancy. Telesaurus VPC, LLC v. Power, 623 F.3d 998,

25

1009 (9th Cir. 2010); Dube v. Likins, 216 Ariz. 406, 412, 167 P.3d 93, 99 (Ct. App.

26

2007). “As a general rule, an action for tortious interference with a business relationship

27

requires a business relationship evidenced by an actual and identifiable understanding or

28

agreement which in all probability would have been completed if the defendant had not
- 34 -

1

interfered.” Dube, 216 Ariz. at 414, 167 P.3d at 101 (citation omitted). The plaintiff

2

must identify the specific relationship with which the defendant interfered. Id. “A claim

3

for tortious interference with a business expectancy is insufficient unless the plaintiff

4

alleges facts showing the expectancy constitutes more than a mere ‘hope.’” Id. at 412,

5

167 P.3d at 99.

6

The defendant’s conduct must be “improper” before liability will attach. Id. at

7

413, 167 P.3d at 100; Miller v. Hehlen, 209 Ariz. 462, 471, 104 P.3d 193, 202 (Ct. App.

8

2005). And a competitor’s conduct is not improper if “his purpose at least in part is to

9

advance his own economic interests.” Miller, 209 Ariz. at 471, 104 P.3d at 202. A court

10

should be cautious in finding liability where the effect of a defendant’s interference is

11

only to cause the cancellation of a terminable contract. Id. at 471-72, 104 P.3d at 202-03.

12

Count VI alleges that “Defendants wrongfully interfered with [Andes and PCT

13

International]’s prospective contractual relationships and economic advantages by, for

14

example, wrongfully using [Andes and PCT International]’s valuable intellectual

15

property and confidential information to manufacture infringing products sold by Holland

16

that embodied [Andes and PCT International]’s patented technology, and assisting

17

Holland in the sales of those infringing products.” (Doc. 72 at 30.) Count VI further

18

alleges that “[Andes and PCT International] had prospective contractual relationships and

19

economic advantages, for example, with existing and customers interested in purchasing

20

products embodying [Andes and PCT International]’s proprietary and patented

21

technology.” (Doc. 72 at 30.) It provides two examples of business expectancies: (1) an

22

opportunity to supply products embodying PCT International’s patented technology to

23

Holland Electronics, LLC; and (2) a then-existing relationship with Teléfonos de México,

24

S.A.B. de C.V., known as Telmex, through which PCT International was the exclusive

25

supplier of products embodying PCT International’s patented technology.

26

The first example is contradicted by Andes and PCT International’s allegations

27

that Holland is a direct competitor of Andes and PCT International. The First Amended

28

Complaint does not allege facts showing that Holland likely would have purchased
- 35 -

1

products from PCT International instead of manufacturing its own using a technology

2

different from PCT International’s patented technology. In its responses to the motions

3

to dismiss, Andes and PCT International do not defend their allegation that they had an

4

opportunity to supply products to Holland.

5

Regarding the second example, the First Amended Complaint alleges that before

6

Defendants’ wrongful disclosures to Holland, PCT International sold large volumes of

7

their products to Telmex, but after the disclosures, Telmex began purchasing those

8

products from Holland instead of from PCT International. It does not allege any factual

9

basis showing a business expectancy constituting more than mere hope for a continued

10

relationship with Telmex and a constant volume of sales. It does not allege which, if any,

11

of the Defendants knew about Andes and PCT International’s business expectancy or

12

interfered with Andes and PCT International’s relationship with Telmex.

13

Moreover, it is not plausible that Mr. Lan, EZconn, and eGtran would act against

14

their own self-interest. If Mr. Lan was an indirect shareholder in Andes, reducing PCT

15

International’s sales revenues would reduce the value of Mr. Lan’s ownership interest in

16

Andes.

17

likelihood that Andes could pay its debt to Mr. Lan. If EZconn earned the same profit for

18

supplying products to Holland as it did for supplying products to PCT International, there

19

would be no incentive for EZconn to facilitate diversion of sales to Telmex from PCT

20

International to Holland.

In addition, damaging PCT International’s earnings would decrease the

21

Count VI does not plead facts showing that Mr. Lan, EZconn, and/or eGtran

22

intentionally interfered with a prospective relationship or expectancy, which induced or

23

caused a breach or termination of the relationship or expectancy. Therefore, Count VI

24

will be dismissed as to Mr. Lan, EZconn, and eGtran.

25
26

L.

Count X:
Defendants)

Unfair Competition (Common Law) (Against All

27

To maintain an action for unfair competition under Arizona law, a plaintiff must

28

show either (1) it was engaged in competitive business with the defendant or (2) the
- 36 -

1

defendant’s actions were likely to produce public confusion. Sutter Home Winery, Inc. v.

2

Vintage Selections, Ltd., 971 F.2d 401, 407 (9th Cir. 1992). To be in competition with

3

each other, parties must solicit the same trade or solicit the same customers. Id. at 408.

4

Count X alleges:

5

172. Defendants entered into a secret partnership with at least one
of [Andes and PCT International]’s competitors, Holland, by which they
disclosed [Andes and PCT International]’s valuable intellectual property
and confidential, proprietary information to Holland; and then wrongfully
used [Andes and PCT International]’s valuable intellectual property and
confidential, proprietary information to manufacture infringing products for
Holland that utilized [Andes and PCT International]’s patented technology.
The Defendants[] then provided additional [Andes and PCT International]
confidential, proprietary information to Holland for the purpose of unfairly
competing with [Andes and PCT International].

6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

....
175. Additionally, EZconn, acting at the direction and control of
Mr. Lan, also converted [Andes and PCT International]’s intellectual
property by secretly filing patent applications claiming as its own
intellectual property belonging to [Andes and PCT International], without
[Andes and PCT International]’s permission or license.
176. By this wrongful conduct, the Defendants wrongfully created
confusion as to the true inventorship of products embodying [Andes and
PCT International]’s patented technology, and wrongfully deprived [Andes
and PCT International] of [their] reputation as the exclusive inventor of
such products.
(Doc. 72 at 36–37.)
The First Amended Complaint does not allege facts showing that Mr. Lan,
EZconn, or eGtran engaged in competitive business with Andes and PCT International.
It alleges only that Holland is a competitor of PCT International, EZconn assisted
Holland by disclosing Andes and PCT International’s confidential proprietary
information, and the assistance somehow converted EZconn into a de facto competitor of
Andes and PCT International. Applying the flawed alter ego theory, Andes and PCT
International contend that by entering into this secret partnership with Holland, all of the
Defendants became de facto competitors of Andes and PCT International. However,

- 37 -

1

assisting one of Andes and PCT International’s competitors does not show that Mr. Lan,

2

EZconn, or eGtran actually engaged in competitive business with Andes and PCT

3

International. The First Amended Complaint does not allege that Mr. Lan, EZconn, or

4

eGtran sold or attempted to sell products to Telmex or other alleged customers of Andes

5

and PCT International. It does not allege that Mr. Lan, EZconn, or eGtran solicited the

6

same trade or customers as Andes and PCT International. It does not allege that Mr. Lan,

7

EZconn, or eGtran had any ownership interest in Holland or acted as Holland’s agent.

8

The First Amended Complaint also does not allege facts showing that the actions

9

of Mr. Lan, EZconn, or eGtran were likely to produce public confusion. The First

10

Amended Complaint alleges only that by secretly filing patent applications EZconn

11

created confusion, and these actions are attributable to Mr. Lan and eGtran under the

12

flawed alter ego theory. It is implausible that an application for a U.S. patent can be filed

13

secretly. But if the applications were filed secretly, they could not have created public

14

confusion.

15

confusion if products were sold embodying the technology covered by EZconn’s patent.

16

And if EZconn’s patent applications were denied, the applications could not create

17

confusion regarding the true inventorship of products embodying Andes and PCT

18

International’s patented technology.

Moreover, if patents were granted to EZconn, then there would be no

19

Viewing Andes and PCT International’s factual allegations in the light most

20

favorable to Andes and PCT International, they do not state a claim for unfair

21

competition that is plausible on its face. Therefore, Count X will be dismissed as to Mr.

22

Lan, EZconn, and eGtran.

23
24
25
26
27
28

M.

Count XI: Unjust Enrichment (Against All Defendants)

“Unjust enrichment occurs when one party has and retains money or benefits that
in justice and equity belong to another.” Trustmark Ins. Co. v. Bank One, 202 Ariz. 535,
541, 48 P.3d 485, 491 (Ct. App. 2002). To establish a claim for unjust enrichment, a
party must show: “(1) an enrichment; (2) an impoverishment; (3) a connection between
the enrichment and the impoverishment; (4) the absence of justification for the
- 38 -

1

enrichment and the impoverishment; and (5) the absence of a legal remedy.” Id. The

2

doctrine of unjust enrichment does not apply if a specific contract governs the

3

relationship of the parties. Id. at 542, 48 P.3d at 492. If enrichment results from failure

4

to comply with contractual obligations, breach of contract is the permitted remedy. If

5

enrichment results from conduct permitted by the contract, it is not unjust. Id. “If there

6

is ‘a specific contract which governs the relationship of the parties, the doctrine of unjust

7

enrichment has no application.’” Id. (quoting Brooks v. Valley Nat. Bank, 113 Ariz. 169,

8

174, 548 P.2d 1166, 1171 (1976)); accord Summers v. Gloor, 239 Ariz. 222, 368 P.3d

9

930, 934 (Ct. App. 2016).

10

Count XI alleges that all Defendants usurped Andes and PCT International’s

11

intellectual property and confidential, proprietary information, which harmed Andes and

12

PCT International and unjustly benefited all Defendants financially and furthered their

13

business interests.

14

“Defendants have acted to wrongfully utilize [Andes and PCT International]’s valuable

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intellectual property and confidential information for their own economic benefit, and to

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the detriment of [Andes and PCT International].” (Id. at 5.) The alleged wrongful

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conduct includes falsely claiming ownership over Andes and PCT International’s

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intellectual property and wrongfully using Andes and PCT International’s intellectual

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property and confidential information to boost sales to Holland. (Id.) The First Amended

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Complaint further alleges that “Defendants, under the direction and control of Mr. Lan

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and his affiliates, and for their own economic benefit,” furthered their own business

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interests at the expense of Andes and PCT International and Andes and PCT

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International’s other shareholders by disclosing Andes and PCT International’s

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intellectual property and confidential proprietary information to competitors, including

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Holland, despite expressly agreeing to keep the information confidential. (Id. at 20.) It

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provides examples of wrongful disclosures to Holland, but it does not name any other

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competitors or give examples of any wrongful disclosures to other competitors. (Id. at

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21.) It alleges that “Defendants and Holland” sold large volumes of infringing products,

(Doc. 72 at 38.)

The First Amended Complaint alleges that

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unfairly competed with Andes and PCT International, forced Andes and PCT

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International to change their pricing for patented products, and caused Andes and PCT

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International to lose sales. (Id. at 21-22.)

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Count XI does not include factual allegations regarding which Defendants “acted

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wrongfully,” relying instead on a faulty theory of alter ego liability. The First Amended

6

Complaint alleges that Andes and PCT International provided confidential proprietary

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information to EZconn as required by Andes and PCT International’s contractual

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relationship with EZconn. It alleges that the Terms and Conditions of PCT’s written

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purchase orders dictated what EZconn was required to do with the confidential

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proprietary information. With regard to EZconn, because there is “a specific contract

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which governs the relationship of the parties, the doctrine of unjust enrichment has no

12

application.” See Trustmark, 202 Ariz. at 542, 48 P.3d at 492. And there are no factual

13

allegations that support imposing liability on any Defendant other than EZconn.

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Moreover, the First Amended Complaint does not plausibly allege that any of the

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Defendants received economic benefit from increasing Holland’s sales.

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Viewing PCT’s factual allegations in the light most favorable to Andes and PCT

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International, they do not state a claim for unjust enrichment that is plausible on its face.

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Therefore, Count XI will be dismissed as to Mr. Lan, EZconn, and eGtran.

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N.

Count XII: Civil Conspiracy (Against All Defendants)

Under Arizona law, “there is no such thing as a civil action for conspiracy.”
Tovrea Land & Cattle Co. v. Linsenmeyer, 100 Ariz. 107, 131, 412 P.2d 47, 63 (1966).
“The action is one for damages arising out of the acts committed pursuant to the
conspiracy. The damage for which recovery may be had in such a civil action is not the
conspiracy itself but the injury to the plaintiff produced by the specific overt acts.” Id.
Count XII alleges, “Acting under the direction and control of Mr. Lan, with Mr. Lan as
the mastermind of the conspiracy, the Defendants came to a mutual understanding that
they would work in concert to harm [Andes and PCT International] as alleged in Counts
I-XI above.” (Doc. 72 at 39.) Thus, Count XII alleges that all Defendants conspired to
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commit the breach of contract, fraud, etc., alleged in the other Counts, and Count XII

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would obtain no relief beyond that obtained in Counts I-XI.

3

Even if Count XII served a purpose, it fails to state a claim. Liability for civil

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conspiracy requires that two or more individuals agree and accomplish an underlying tort

5

that they agreed to commit. Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement

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Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, 498, 38 P.3d 12, 36 (2002). A

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corporation cannot conspire with itself or with its directors if they are acting in the

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corporation’s behalf. Rowland v. Union Hills Country Club, 157 Ariz. 301, 306, 757

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P.2d 105, 110 (Ct. App. 1988). But when officers of a corporation act for their own

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purposes, they become independent actors, who can conspire with the corporation. Id.

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The First Amended Complaint alleges that Mr. Lan served as an officer of eGtran,

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the parent corporation of EZconn. Mr. Lan cannot conspire with eGtran or EZconn

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unless he is acting independently from the companies, for his own purposes. The First

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Amended Complaint alleges exactly the opposite, i.e., Mr. Lan directed and controlled

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EZconn and eGtran.

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Therefore, Count XII will be dismissed as to Mr. Lan, EZconn, and eGtran.
V.

ANDES AND PCT INTERNATIONAL’S RENEWED MOTION FOR
JURISDICTIONAL DISCOVERY (DOC. 84) AND CHENG-SUN LAN’S
MOTION TO STRIKE PORTIONS OF REPLY IN SUPPORT OF
RENEWED MOTION FOR JURISDICTIONAL DISCOVERY OR,
ALTERNATIVELY, FOR LEAVE TO FILE SUR-REPLY (DOC. 92) ARE
MOOT.
Andes and PCT International sought leave to conduct jurisdictional discovery

because Mr. Lan contested personal jurisdiction. Because the Court has determined that
it has personal jurisdiction over Mr. Lan, jurisdictional discovery is unnecessary.
Therefore, the Renewed Motion for Jurisdictional Discovery by Andes Industries, Inc.,
and PCT International, Inc. (Doc. 84) and Cheng-Sun Lan’s Motion to Strike Portions of
Reply in Support of Renewed Motion for Jurisdictional Discovery or, Alternatively, for
Leave to File Sur-Reply (Doc. 92) are moot.

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VI.

NO FURTHER LEAVE TO AMEND WILL BE GRANTED.
Leave to amend should be freely given “when justice so requires.” Fed. R. Civ. P.

15(a)(2). In deciding whether justice so requires, courts consider five factors: bad faith,
undue delay, prejudice to the opposing party, futility of amendment, and whether the
plaintiff has previously amended the complaint. Johnson v. Buckley, 356 F.3d 1067,
1077 (9th Cir. 2004). “Futility alone can justify the denial of a motion to amend.” Id.
Leave to amend should be granted if the complaint’s deficiencies can be cured with
additional factual allegations that are consistent with and do not contradict allegations in
the challenged pleading. United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th
Cir. 2011). Dismissal without leave to amend is proper if the complaint cannot be cured
by any amendment. Id.
Courts have “especially broad” discretion to deny leave to amend where the
plaintiff already has had one or more opportunities to amend a complaint. Ascon Props.,
Inc. v. Mobil Oil Co., 866 F.2d 1149, 1161 (9th Cir. 1989). “Leave to amend need not be
given if a complaint, as amended, is subject to dismissal.” Moore v. Kayport Package
Exp., Inc., 885 F.2d 531, 538 (9th Cir. 1989).
Here, Andes and PCT International were ordered to lodge a proposed amended
complaint containing all further allegations they could make against Mr. Lan, Polar Star,
EZconn, and eGtran. They were warned that leave for further amendment beyond that
would not be granted. The proposed First Amended Complaint presumably contains all
further allegations Andes and PCT International could make, and the Court considered it
in deciding these motions to dismiss.
During oral argument, there was discussion regarding emails between EZconn and
Holland Electronics produced during discovery in PCT International, Inc. v. Holland
Electronics, LLC, CV-12-001797-PHX-JAT, and whether they might provide a basis for
further amendment of the First Amended Complaint.

Counsel for Andes and PCT

International stated that he was in the process of finalizing a stipulated protective order to
permit Andes and PCT International to file the emails in this consolidated case. If
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necessary, Andes and PCT International would like to amend their complaint to include

2

more specific allegations based on the emails. Counsel for EZconn, eGtran, Mr. Lan, and

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Polar Star stated they opposed granting Andes and PCT International leave to amend

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their complaint again because there was no reason for Andes and PCT International’s

5

failure to plead in the First Amended Complaint all of the allegations they could have

6

made and further amendment would impose unnecessary expenses on EZconn, eGtran,

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Mr. Lan, and Polar Star. To date, neither a stipulated protective order nor the emails have

8

been filed in this case. However, because the emails were filed under seal in PCT

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International, Inc. v. Holland Electronics, LLC, CV-12-001797-PHX-JAT, the Court was

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able to review them. Upon review of the emails discussed during oral argument, the

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Court concludes that the emails do not indicate that Andes and PCT International could

12

cure pleading deficiencies by further amendment. Thus, it would be futile for Andes and

13

PCT International to further amend their pleading if additional factual allegations are

14

limited to those consistent with factual allegations in the First Amended Complaint.

15

Therefore, no further leave to amend will be granted.

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IT IS THEREFORE ORDERED directing the Clerk to file the proposed First

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Amended Complaint (lodged as Doc. 72).
IT IS FURTHER ORDERED that Polar Star Management Ltd.’s Motion to

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Dismiss (Doc. 114, CV-15-02549) is granted.

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dismissed with prejudice as to Polar Star Management Ltd.

The First Amended Complaint is

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IT IS FURTHER ORDERED that Defendant Cheng-Sun Lan’s Motion to Dismiss

22

(Doc. 133, CV-15-02549) is granted. The First Amended Complaint is dismissed with

23

prejudice as to Cheng-Sun Lan.

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IT IS FURTHER ORDERED that Defendant EZconn Corporation’s Motion to

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Dismiss Counts I, II, III, VI, VII, VIII, IX, X, XI, and XII (Doc. 26, CV-15-01810) is

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granted in part and denied in part. The First Amended Complaint is dismissed with

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prejudice as to EZconn except for Count IV for breach of contract and Count IX for

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breach of the implied duty of good faith and fair dealing.
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IT IS FURTHER ORDERED that Defendant eGtran Corporation’s Motion to

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Dismiss Counts I, II, III, V, VI, VII, VIII, IX, X, XI, and XII (Doc. 28, CV-15-01810) is

3

granted. The First Amended Complaint is dismissed with prejudice as to eGtran.

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IT IS FURTHER ORDERED that the Renewed Motion for Jurisdictional

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Discovery by Andes Industries, Inc., and PCT International, Inc. (Doc. 84, CV-15-00600)

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and Cheng-Sun Lan’s Motion to Strike Portions of Reply in Support of Renewed Motion

7

for Jurisdictional Discovery or, Alternatively, for Leave to File Sur-Reply (Doc. 92,

8

CV-15-00600) are denied as moot.

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Dated this 24th day of June, 2016.

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