Clayton v. Automated Gaming Technologies, Inc.

Filing 102

ORDER granting in part and denying in part Defendants' 68 Motion to Dismiss signed by Judge John A. Mendez on 4/2/14. The Court GRANTS WITH PREJUDICE Defendants' Motion to Dismiss the Sixth Cause of Action for fraud. The Court DENIES Defendants' Motion to Dismiss the Seventh Cause of Action for copyright infringement. (Mena-Sanchez, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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KEITH R. CLAYTON,

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No.

2:13-cv-00907-JAM-EFB

Plaintiff,
v.

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS

AUTOMATED GAMING TECHNOLOGIES,
INC., a Nevada corporation, JOHN
R. PRATHER, and ROBERT MAGNANTI,

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Defendants.

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AUTOMATED GAMING TECHNOLOGIES,
INC., a Nevada corporation,
Counter-Claimant,

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v.
KEITH R. CLAYTON, and DOES 1
through 10, inclusive,
Counter-Defendants.

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This matter is before the Court on Defendants Automated
Gaming Technologies, Inc. (“AGT”), John R. Prather, and Robert

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Magnanti’s (collectively “Defendants”) Motion to Dismiss (Doc.

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#68) the sixth and seventh causes of action in Plaintiff Keith R.

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Clayton’s (“Plaintiff”) Third Amended Complaint (“TAC”) (Doc.

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#60). 1

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replied (Doc. #94).

Plaintiff filed an opposition (Doc. #90) and Defendants

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I.

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FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

The Third Amended Complaint states seven causes of action
against Defendants: (1) restitution after rescission of the

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software contract, (2) breach of the software contract,

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(3) common count for goods delivered, (4) breach of employment

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contract, (5) common count for labor and services, (6) fraud, and

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(7) copyright infringement.

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AGT is a Nevada corporation that develops and sells software

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and hardware for the cash processing industries.

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Prather is the executive vice-president and secretary at AGT, and

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Magnanti is the president of AGT.

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computer programmer and a designer and author of computer

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software.

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Id. ¶¶ 5-6.

TAC ¶¶ 4, 10.

Plaintiff is a

Id. ¶ 10.

In September 2009, AGT hired Plaintiff as the Executive Vice

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President of its Systems Department.

TAC ¶ 32.

AGT and

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Plaintiff executed a written employment agreement (“First

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Employment Agreement”).

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into a subsequent employment agreement (“Second Employment

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Agreement”), amending and superseding the First Employment

In April 2010, Plaintiff and AGT entered

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This motion was determined to be suitable for decision without
oral argument. E.D. Cal. L.R. 230(g). The hearing was
scheduled for March 5, 2014.
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Agreement.

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oral contract with AGT (“Software Sale Agreement”) to sell it

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certain software that he had created, called an Administrative

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Application (“Admin App”).

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Id. ¶ 33, Exh. A.

In 2010, Plaintiff entered into an

TAC ¶¶ 11-13.

Plaintiff alleges that in the period from August to mid-

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September 2009, and in the First Employment Agreement, Prather

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and Magnanti, on behalf of AGT, promised they would pay 1.5% of

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gross profits from the Systems division and give Plaintiff 1% of

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AGT’s stock after each year of employment.

TAC ¶ 49.

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Subsequently, Prather and Magnanti renegotiated the terms of

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Plaintiff’s employment in March 2010, representing and promising

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to Plaintiff additional compensation from AGT.

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The substance of these representations was included in the Second

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Employment Agreement.

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in August 2009, through early 2010, Defendants made repeated

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representations that they would buy and pay for the Admin App.

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Id. ¶¶ 55-56.

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of the deal were included in the Software Sale Agreement.

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Plaintiff is the owner of the copyright for the Admin App.

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¶ 67.

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certain software for AGT, including “Currency Banking Management

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System” software (“CBMS software”) and Biometric software.

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¶ 16, 68.

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Id. ¶¶ 50-53.

Plaintiff further alleges that starting

Eventually, these promises and the specific terms

Id.

The Admin App was used as the foundation for developing

Id.

Plaintiff filed the First Amended Complaint (Doc. #1-A) on

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March 29, 2013, alleging five causes of action against AGT

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arising from the Employment Agreements and the Software Sale

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Agreement.

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Motion to Dismiss for Lack of Personal Jurisdiction and/or

AGT removed the case to this Court and brought a

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Improper Venue or in the alternative to Transfer Venue (Doc. #7)

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to the District of Nevada.

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motion for leave to file the Second Amended Complaint (Doc. #18).

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AGT’s motion was dismissed in its entirety (Doc. #29), and

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Plaintiff was given leave to file the Second Amended Complaint

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(Doc. #30).

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this Court as of July 10, 2013 (Doc. #30); it added, in relevant

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part, allegations of a subsequent version of the Employment

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agreement.

Plaintiff filed an unopposed counter-

The Second Amended Complaint was deemed filed by

On September 21, 2013, Plaintiff filed a motion for

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leave to file the Third Amended Complaint (Doc. #41), which added

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claims for copyright infringement and promissory fraud against

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then-existing defendant, AGT, as well as against newly named

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defendants Prather and Magnanti.

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to dismiss (Doc. #37) AGT’s Counterclaim (Doc. #34).

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granted both motions (Doc. #59).

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was filed on January 6, 2014 and seeks dismissal of the sixth and

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seventh causes of action in the Third Amended Complaint.

Plaintiff also filed a motion
The Court

The current motion to dismiss

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II.

OPINION

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A.

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Plaintiff requests the Court judicially notice (Doc. #91)

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Request for Judicial Notice

two copies of the First Employment Agreement.
Generally, the Court may not consider material beyond the

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pleadings in ruling on a motion to dismiss for failure to state

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a claim.

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by, the complaint so long as authenticity is not disputed, or

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matters of public record, provided that they are not subject to

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reasonable dispute.

The exceptions are material attached to, or relied on

E.g., Sherman v. Stryker Corp., 2009 WL
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2241664, at *2 (C.D. Cal. 2009) (citing Lee v. City of Los

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Angeles, 250 F.3d 668, 688 (9th Cir. 2001) and Fed. R. Evid.

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201).

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The First Employment Agreement is clearly relied on in the

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complaint and its authenticity is not disputed.

Accordingly,

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the Court grants Plaintiff’s request for judicial notice.

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B.

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Defendants’ Motion to Dismiss targets the sixth and seventh

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Discussion

causes of action in the Third Amended Complaint.

Defendants

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contend the claims for fraud and copyright infringement do not

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meet even the most liberal pleading requirement, and thus cannot

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withstand this motion filed pursuant to Rule 12(b)(6) of the

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Federal Rules of Civil Procedure.

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1.

MTD at p. 2.

Fraud

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Defendants contend Plaintiff’s claim for fraud must fail

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because the allegations of the Third Amended Complaint do not

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meet the heightened pleading requirements imposed by Rule 9(b).

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MTD at p. 6.

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Under either Nevada or California law, the elements of a

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claim for fraud are: (1) a false representation, (2) defendant’s

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knowledge of its falsity, (3) intent to induce reliance,

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(4) justifiable reliance, and (5) resulting damages.

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v. Fritz Companies, Inc., 30 Cal. 4th 167, 173 (2003); Nelson v.

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Heer, 123 Nev. 217, 225 (2007).

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accompanied by the who, what, when, where, and how of the

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misconduct charged.

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2003); Fed. R. Civ. Proc. 9(b).

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///

See Small

Averments of fraud must be

Vess v. Ciba, 317 F.3d 1097, 1106 (9th Cir.

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Defendants contend that the Third Amended Complaint is

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completely devoid of any specific facts and details and thus

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fails to meet the heightened standard.

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argue the allegations are vague, referring to “representations”

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made by Defendants without details as to their content or timing.

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Defendants also argue the claim should fail because Plaintiff has

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failed to adequately allege that Defendants knew their

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representations were false or that they had no intent to perform

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at the time the representations were made.

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MTD at pp. 6-8.

They

Plaintiff responded in the Opposition that the details of

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the false representations underlying his fraud claim are

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explicitly contained in the agreements themselves.

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states that the allegations regarding the negotiations prior to

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the contracts being formed “supply but a background” to the

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agreements entered into by the parties; the agreements themselves

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supply the “specific content of the false representations.”

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at pp. 11-12.

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Plaintiff

Opp.

In their Reply, Defendants admit that they misunderstood the

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claim as arising from the negotiations prior to the agreements,

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rather than being based on the promises and representations

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specifically contained in the agreements.

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argue that Plaintiff has now clearly articulated that the false

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representations underlying the fraud claim are those promises

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made in the agreements themselves.

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claim is therefore barred by the economic loss doctrine.

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Court agrees and because it does not believe that additional

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briefing on the issue is necessary, grants Defendants’ motion on

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this ground.
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Reply at p. 2.

They

Defendants contend that the
The

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“[T]he economic loss doctrine is designed to maintain a

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distinction between damage remedies for breach of contract and

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for tort. The term “economic loss” refers to damages that are

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solely monetary . . . .

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certain economic losses are properly remediable only in

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contract.”

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873 (9th Cir. 2007).

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to bar fraud claims where “the damages plaintiffs seek are the

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same economic losses arising from the alleged breach of

The economic loss doctrine provides that

Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865,
The economic loss doctrine has been applied

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contract.”

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Managers, Inc., 629 F.Supp.2d 1135, 1146 (E.D. Cal. 2009); see

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also Foster Poultry Farms v. Alkar-Rapidpak-MP Equip., Inc., 868

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F. Supp. 2d 983, 991-92 (E.D. Cal. 2012); Alvarado Orthopedic

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Research, L.P.

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WL 3703192, at *3 (S.D. Cal. 2011).

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loss rule ‘prevent[s] the law of contract and the law of tort

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from dissolving one into the other.’”

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Inc. v. Dana Corp., 34 Cal. 4th 979, 988 (2004) (quoting Rich

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Products Corp. v. Kemutec, Inc., 66 F.Supp.2d 937, 969 (E.D. Wis.

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1999)).

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Multifamily Captive Group, LLC v. Assurance Risk

v. Linvatec Corp., No. 11–CV–246–IEG (RBB), 2011
“Quite simply, the economic

Robinson Helicopter Co.,

The sixth cause of action in the Third Amended Complaint

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contains a series of paragraphs describing the alleged false

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representations underlying the claim.

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alleges that the false representations were made during the

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negotiations of the two employment agreements and the Software

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Sale Agreement and eventually formed the basis of those

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agreements.

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specific content of the false representations made during the

TAC ¶¶ 49-56.

Plaintiff

Plaintiff makes clear in his Opposition that the

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contract negotiations is in fact contained in the three

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agreements.

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content of the negotiations outside of and prior to the

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agreements as simply a way to tie Prather and Magnanti to the

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formation of the agreements containing these representations and

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to show their knowledge and participation in the formation of the

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agreements. Id.

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Opp. at pp. 11-12.

He downplays any emphasis on the

“To allow a fraud claim [where the false representations

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underlying it are those made in the contract itself] would ‘open

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the door to tort claims in virtually every case in which a party

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promised to make payments under a contract but failed to do so.’”

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Multifamily Captive Group, 629 F. Supp. 2d at 1146 (quoting

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Intelligraphics, Inc. v. Marvell Semiconductor, Inc., No. C07–

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02499 JCS, 2009 WL 330259, at *17 (N.D. Cal. 2009)).

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finds Plaintiff’s fraud claim is merely a restatement of his

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contract claims in the form of a tort claim.

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doctrine must be applied to bar such a claim.

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494 F.3d at 880; Foster Poultry Farms, 868 F. Supp. 2d at 991-92.

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The Court

The economic loss
See id.; Giles,

Accordingly, Defendants’ Motion to Dismiss the sixth cause

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of action for fraud is GRANTED.

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indicated that the specific content of the false representations

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was included in the agreements themselves, the claim cannot be

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amended to state a viable cause of action for fraud.

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the claim is dismissed with prejudice.

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2.

Because Plaintiff has clearly

Therefore

Copyright Infringement

Defendants contend Plaintiff’s copyright infringement claim

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should be dismissed because it fails to adequately allege a

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required element, copying, and even if it did, the allegations as
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a whole do not meet even the most liberal pleading standard.

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at pp. 9-11.

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To demonstrate copyright infringement, a plaintiff must

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prove two elements: (1) “ownership of a valid copyright” and

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(2) “copying of constituent elements of the work that are

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original.”

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MTD

429 F.3d 869, 876 (9th Cir. 2005).

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Twentieth Century Fox Film Corp. v. Entm't Distrib.,

It appears that, for purposes of their Motion to Dismiss,
Defendants have conceded the first element.

MTD at p. 9.

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However, they argue Plaintiff has failed to plead the requisite

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copying to establish a copyright infringement claim.

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contend the CBMS and Biometric software, which Plaintiff

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identifies as sources of infringing material, are “works made for

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hire” and thus cannot serve as the basis for Plaintiff’s

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copyright infringement claim because AGT is the owner of the

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software.

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infringement claim fails as a matter of law.

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Defendants

MTD at p. 10. Therefore, they argue, the copyright

A “work made for hire” is “a work prepared by an employee

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within the scope of his or her employment.”

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Defendants argue the CBMS and Biometric software were made while

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Plaintiff was an employee of AGT in the scope of that employment.

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Plaintiff argues the CBMS and Biometric software are derivative

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works and that AGT has no rights to them because AGT unlawfully

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used Plaintiff’s copyrighted Admin App in developing it.

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p. 18-19.

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17 U.S.C. § 101.

Opp. at

A “derivative work” is a “work based upon one or more

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preexisting works.”

17 U.S.C. § 101.

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work employing preexisting material in which copyright subsists
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However, “protection for a

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does not extend to any part of the work in which such material

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has been used unlawfully.”

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of whether AGT may be considered the “author” or owner of the

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CBMS and Biometric software, it does not own or have rights in

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the Admin App (“the preexisting material in which copyright

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subsists”) if that material was used unlawfully.

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Auto Parts Network, Inc. v. Parts Geek, LLC, 692 F.3d 1009, 1015-

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16 (9th Cir. 2012).

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Complaint as true, the CBMS and Biometric software are derivative

Id. § 103(a).

Therefore, regardless

Id.; see U.S.

Taking the allegations in the Third Amended

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works using the Admin App as their foundation (TAC ¶ 68); AGT’s

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use of the Admin App was unlawful and thus AGT is liable for any

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improper use of it (TAC ¶¶ 69-70).

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Defendants further argue that even if improper copying has

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been alleged, the Third Amended Complaint fails to allege

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sufficient facts relating to what acts and during what time

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Defendants infringed upon the copyright.

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Defendants claim the allegations include nothing more than bare

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assertions and legal conclusions.

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MTD at p. 11.

Copyright claims need not be pled with particularity.

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Perfect 10, Inc. v. Cybernet Ventures, Inc., 167 F. Supp. 2d

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1114, 1120 (C.D. Cal. 2001).

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present ownership by plaintiff, registration in compliance with

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the applicable statute and infringement by defendant have been

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held sufficient under the rules.”

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v. Power Ventures, Inc., C 08-5780 JF (RS), 2009 WL 1299698, at

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*4 (N.D. Cal. 2009); Marvel Enterprises, Inc. v. NCSoft Corp., CV

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04-9253RGKPLAX, 2005 WL 878090, at *2 (C.D. Cal. 2005).

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///

“[C]omplaints simply alleging

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Id.; see also Facebook, Inc.

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The Third Amended Complaint specifically alleges Defendants

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have infringed on Plaintiff’s copyright in the Admin App through

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its unauthorized direct reproduction and copying of the Admin App

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as well as through the reproducing, distributing, displaying, and

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offering for sale of derivate works unlawfully incorporating the

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Admin App.

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alleged a copyright infringement claim.

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TAC ¶¶ 67-70.

Therefore, Plaintiff has sufficiently

Defendants cite several cases supporting their contention
that these allegations are not enough.

However, their reliance

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is misplaced as many of these cases involve more speculative or

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vague allegations.

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Surface Tech., Inc. v. Sae-A Trading Am. Corp., CV 10-6972

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CASPJWX, 2011 WL 281020, at *6 (C.D. Cal. 2011) where the court

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dismissed the plaintiff’s copyright claim.

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made its ruling on standing grounds and even when it considered

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the allegations in the complaint the court found it alleged “no

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facts indicating what acts constitute the alleged infringement,

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and which copyrights have allegedly been infringed.”

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Plaintiff has clearly indicated what copyright has been allegedly

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infringed and the acts that constitute the infringement.

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For instance, Defendants cite to Universal

However, the court

Id.

Here,

Accordingly, Defendants Motion to Dismiss the copyright
infringement claim as a whole is denied.

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Defendants argue that even if the claim is sufficiently

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alleged against AGT, the complaint lacks factual allegations

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establishing Prather and Magnanti’s individual liability.

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p. 12.

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CIV. S-11-1541 KJM, 2011 WL 5307834 (E.D. Cal. 2011) as support

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for their contention.

MTD at

Defendants cite Berster Technologies, LLC v. Christmas,

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In Berster, the court did dismiss plaintiff’s copyright

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infringement claim against one defendant, EinsteinModz, reasoning

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plaintiff made nothing more than conclusory references to its

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involvement in any infringement.

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the same paragraph the Berster court found the claims against

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another defendant, Coy Christmas, an officer of the defendant

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companies, sufficient.

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plaintiff’s allegations were sufficient to state a copyright

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violation because they identified the copyright and the allegedly

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infringing activities, citing a section of the complaint in which

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the defendant officer is alleged to have improperly sold

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copyrighted material.

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Id.

Berster, at *9-10.

However, in

The court stated that the

Id.

Again, Plaintiff has identified the copyright and the

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allegedly infringing activities, specifically alleging that

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Prather and Magnanti personally directed the improper

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reproducing, distributing, public displaying and selling of

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Plaintiff’s copyrighted Admin App and its derivate works.

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70-71.

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of copyright law, liability may extend “to cases in which a

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defendant ‘has the right and ability to supervise the infringing

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activity and also has a direct financial interest in such

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activities.’”

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1022 (9th Cir. 2001) (internal citation omitted).

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officers may be held personally liable for copyright infringement

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if they authorize or direct or participate in the unlawful

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activity, even when acting as agents of the corporation.

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Broad. & T.V. Co., Ltd. v. IPTV Corp., 742 F. Supp. 2d 1101,

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1114-15 (C.D. Cal. 2010).

TAC ¶¶

The Ninth Circuit has clearly stated that in the context

A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004,
Corporate

Bangkok

Plaintiff’s allegation that Prather
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and Magnanti personally directed the infringing activities is

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enough to allow the claim to proceed.

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Accordingly, Defendants motion to dismiss the copyright
infringement claim as against Prather and Magnanti is DENIED.

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III.

ORDER

For the reasons set forth above, the Court GRANTS WITH

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PREJUDICE Defendants’ Motion to Dismiss the Sixth Cause of Action

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for fraud.

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The Court DENIES Defendants’ Motion to Dismiss the Seventh
Cause of Action for copyright infringement.
IT IS SO ORDERED.
Dated:

April 2, 2014

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