Kwan Software Engineering, Inc. v. Foray Technologies, LLC
Filing
38
ORDER DENYING DEFENDANT'S MOTION TO DISMISS OR STAY 7 (Illston, Susan) (Filed on 11/1/2012)
1
2
3
4
5
6
7
8
IN THE UNITED STATES DISTRICT COURT
9
FOR THE NORTHERN DISTRICT OF CALIFORNIA
United States District Court
For the Northern District of California
10
11
KWAN SOFTWARE ENGINEERING, INC.,
12
13
14
15
No. C 12-03762 SI
ORDER DENYING DEFENDANT’S
MOTION TO DISMISS OR STAY
Plaintiff,
v.
FORAY TECHNOLOGIES, LLC,
Defendant.
/
16
17
On September 4, 2012, defendant Foray Technologies, LLC (“Foray”) filed a motion to dismiss
18
or stay the fifth, sixth, and seventh causes of action in plaintiff’s first amended complaint (“FAC”)
19
because of an action pending between the parties in the Superior Court of California, Santa Clara
20
County. Plaintiff, Kwan Software Engineering, Inc., d/b/a Veripic, Inc., (“Veripic”) has filed an
21
opposition and defendant has filed a reply. Pursuant to Civil Local Rule 7-1(b), the Court finds these
22
matters appropriate for resolution without oral argument and hereby VACATES the hearing currently
23
scheduled for November 2, 2012. Having considered the parties’ arguments, the Court hereby DENIES
24
defendant’s motion for the reasons discussed below.
25
26
BACKGROUND
27
Plaintiff Veripic is a California corporation that provides digital asset management services to
28
police and fire departments, as well as to other entities throughout the United States that need to store
and retrieve photos, video, and audio files. Pl.’s First Amended Complaint (“FAC”) ¶ 1, 7. Defendant
1
Foray is and has been a direct competitor of Veripic’s and also sells digital evidence-related software
2
to law enforcement agencies. Id. ¶ 9.
On August 14, 2009, Veripic filed a complaint against Foray in the Superior Court of the State
4
of California, Santa Clara County. Kwan Software Engineering, Inc. v. Foray Technologies, LLC, Case
5
No. 1-09-CV-149780. The most recent iteration of the complaint in that action, Veripic’s Fifth
6
Amended Complaint (“5AC”), alleges twelve causes of action, including false advertising in violation
7
of the Lanham Act, 15 U.S.C. § 1125(a), and false advertising and unfair competition under California
8
law. On July 18, 2012, nearly three years after filing the first suit, Veripic filed another a complaint
9
against the same corporate defendants in this Court. As later amended, the federal complaint asserts
10
United States District Court
For the Northern District of California
3
seven causes of action, including three that are identical to those asserted in the state court action: false
11
advertising in violation of the Lanham Act, 15 U.S.C. § 1125(a)(fifth cause of action); false advertising
12
(sixth cause of action); and unfair competition under California law (seventh cause of action). See
13
FAC.
14
Defendant’s instant motion seeks either dismissal or stay of the fifth, sixth, and seventh causes
15
of action in Veripic’s federal suit based on the Colorado River abstention doctrine, which permits a
16
federal court to refuse jurisdiction when there are concurrent state and federal proceedings involving
17
the same matter. See Colorado River Conservation Dist. v. United States, 424 U.S. 800, 817 (1976).
18
Defendants argue that abstention is warranted here because the state court claims are substantially
19
similar to the federal claims. While plaintiff admits that the causes of action are identical, plaintiff
20
disputes that they are substantially the same claims because the federal and state court actions are
21
premised on entirely different facts, circumstances and evidence. As such, plaintiffs argue that the three
22
federal causes of action at issue here could survive even if plaintiff fails to prove the identical causes
23
of action in state court.
24
25
LEGAL STANDARD
26
Generally, considerations of “wise judicial administration, giving regard to conservation of
27
judicial resources and comprehensive disposition of litigation” may counsel granting a stay when there
28
are concurrent state proceedings involving the same matter in the federal district court. Colorado River,
2
1
424 U.S. 800, 817 (1976). The threshold for applying the Colorado River doctrine is whether the two
2
cases are substantially similar. Ross v. U.S. Bank Nat. Ass'n., 542 F. Supp. 2d 1014, 1021 (N.D. Cal.
3
2008). Substantial similarity does not mean that the cases must be identical. Nakash v. Marciano, 882
4
F. 2d 1411, 1416 (9th Cir. 1989). However, “[o]nly exceptional circumstances justify such a stay, and
5
whether these circumstances exist is determined by weighing a complex of factors.” Intel Corp. v.
6
Advanced Micro Devices, 12 F.3d 908, 912 (9th Cir. 1993). The Ninth Circuit has held that the
7
existence of a substantial doubt as to whether the state proceedings will resolve the federal action is a
8
dispositive factor against a stay or dismissal under the Colorado River analysis. See Intel Corp., 12 F.3d
9
at 913; see also Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 28 (1983).
United States District Court
For the Northern District of California
10
R.R. Street & Co. Inc. v. Transport Ins. Co. , 656 F.3d 966, 978-79 (9th Cir. 2011) drew from
11
Colorado River the following factors: (1) which court first assumed jurisdiction over any property at
12
stake; (2) the inconvenience of the federal forum; (3) the desire to avoid piecemeal litigation; (4) the
13
order in which the forums obtained jurisdiction; (5) whether federal law or state law provides the rule
14
of decision on the merits; (6) whether the state court proceedings can adequately protect the rights of
15
the federal litigants; (7) the desire to avoid forum shopping; and (8) whether the state court proceedings
16
will resolve all issues before the federal court. Whether the claims are substantially similar comes into
17
play when analyzing whether the state court proceedings will resolve all issues before the federal court.
18
Id. at 982-983. Courts must carefully balance the relevant factors, with the balance heavily weighted
19
in favor of the exercise of jurisdiction. Id. at 983.
20
21
DISCUSSION
22
The threshold for applying the Colorado River doctrine is whether the two cases are substantially
23
similar. The actions are “substantially similar” where “the same parties are contemporaneously litigating
24
substantially the same issues.” Natomas Gardens Investment Group LLC v. Sinadinos, No. 08-2308,
25
2009 U.S. Dist. LEXIS 39907, at * 24 (E.D. Cal. May 12, 2009). To exercise abstention, the Ninth
26
Circuit has said that the state court proceedings must be “sufficiently similar to the federal proceedings
27
to provide relief for all of the parties' claims.” Intel Corp., 12 F.3d at 913 n.4. A federal court should
28
not grant a stay or dismissal if there is “substantial doubt” that the state court action will result in a
3
1
“complete and prompt resolution of the issues between the parties” with the federal court having
2
“nothing further to do in resolving any substantive part of the case.” Id. at 913.
To demonstrate that the fifth, tenth, and eleventh causes of action in the state court action are
4
substantially similar to the fifth, sixth, and seventh causes of action in the federal court action, defendant
5
simply quotes the general averments in each complaint. Mot. to Dis. At 3-4. For example, the 5AC
6
claims that defendants’ “false and misleading advertising . . . is likely to, and has, caused deception of
7
the general public” and that defendant conducted “unlawful and unfair business practices . . . that
8
constitute unfair competition.” Id. However, as plaintiff observes, the general averments for unfair
9
competition and false advertising in its complaints are likely similar to hundreds of complaints in state
10
United States District Court
For the Northern District of California
3
and federal court. Pl.'s Opp. at 1. What issues that matter for substantial similarity, plaintiffs assert, are
11
the facts and circumstances that give rise to each cause of action. Id. The Court agrees.
12
The facts and circumstances that give rise to the 5AC in the state court action are quite distinct
13
from those that give rise to the FAC in this Court. First, the parties to the suit are not identical. The
14
plaintiffs in the state court action are Veripic as well as John Kwan, CEO of Veripic. The defendants
15
are Foray, Does 5-10, and several Foray employees: David Witzke, Michal Temple, Donnie McFall,
16
Thomas Hennings. See 5AC. In the federal case, Veripic and Foray are the only parties. See FAC.
17
Second, the crux of Veripic’s state court action is libel, with the unfair competition and false
18
advertising claims closely related to the defamation allegations. 5AC ¶ 1. Specifically, it alleges that
19
Foray formed a conspiracy to “systematically disparage plaintiff’s business reputations as well as its
20
digital asset management products” at least from September 2008, and possibly before, id. ¶ 15, through
21
a mass e-mail campaign, phone calls, in-person conferences with Veripic’s customers, prospective
22
clients, partners, competitors, and the public throughout the United States and Canada. Id. ¶ 19-22, 30.
23
As a result, Veripic alleges it lost more than $25 million in business. Id. ¶ 38. By contrast, the federal
24
action sounds in copyright, with the unfair competition and false advertising claims arising from facts
25
related to the copyright allegations: 1) copyright infringement of Veripic’s copyrighted Digital Photo
26
Lab software and Calibration Module add-on, id. ¶ 10-21, and 2) false advertising as to the true nature
27
of Foray’s Authenticated Digital Asset Management System (“ADAMS”) software. Id. ¶ 22-23.
28
Specifically, Veripic alleges Foray induced Veripic’s customers to breach their End User License
4
1
Agreements (“EULA”) for Veripic’s proprietary Digital Photo Lab software and Calibration Module
2
add-on by providing unauthorized copies of it to Foray employees, id. ¶ 17-18, which Foray then used
3
to produce derivative works sold as an update to Foray’s Image Calibration Utility. Id. ¶ 19-20.
4
Moreover, Veripic alleges Foray implemented a scheme to deceive customers in the law enforcement
5
community as to the nature of its product by advertising its Authenticated Digital Asset Management
6
System (“ADAMS”) software as authentication software that complies with guidelines promulgated by
7
the Scientific Working Group on Imaging Technology (“SWGIT”), id. ¶ 22-29, when in fact the
8
ADAMS software ensures the integrity of software and does not authenticate it. Id. ¶ 30-34.
Given the different facts and circumstances plaintiffs allege in each action, the Court finds that
10
United States District Court
For the Northern District of California
9
the claims are not substantially similar. First, plaintiffs have demonstrated that their claims could
11
survive in each court without the other, as they are based on different sets of facts. Second, the state
12
court action will not result in a “complete and prompt resolution of the issues between the parties,” Intel
13
Corp., 12 F.3d at 913, because the fifth, sixth, and seventh causes of action in federal court are based
14
on Foray’s alleged copyright infringement of Veripic’s Digital Photo Lab software and the resulting
15
unfair competition, and Foray’s alleged false advertising as to the nature of its ADAMS software.
16
Federal courts have exclusive jurisdiction over copyright claims pursuant to 28 U.S.C. § 1338(a). And
17
resolution of the copyright claims here seems closely related to resolution of the disputed causes of
18
actions. Therefore, it is unlikely that the state court action could resolve the issues presented on the
19
same causes of action in this Court.
20
Defendant also raises “inevitable res judicata concerns,” arguing that Veripic will likely want
21
to assure that all of its claims for false advertising and unfair competition are properly included in
22
whichever action goes to trial first. Mot. to Dismiss at 8. The Court disagrees. “Res judicata, also
23
known as claim preclusion, bars litigation in a subsequent action of any claims that were raised or could
24
have been raised in the prior action.” Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708, 713
25
(9th Cir. 2001) (citing Western Radio Servs. Co v. Glickman, 123 F.3d 1189, 1192 (9th Cir. 1997). Res
26
judicata applies whenever there is 1) an identity of claims, 2) a final judgment on the merits, and 3)
27
identity or privity between the parties. Id. The possibility of future amendment is irrelevant, as
28
plaintiffs argue, because “the question of parallelism must be determined in accordance with how the
5
1
state court proceedings currently exist, rather than how the state court proceedings may be modified by
2
amended cross-complaints or joinder of additional parties.” Pl.’s Opp. at 9. Thus, defendant’s res
3
judicata concern is not ripe, as there has been no final judgment on the merits; in fact, the state court
4
action has not even commenced trial. Mot. to Dismiss at 5.
The Supreme Court and the Ninth Circuit have made clear that Colorado River abstention is an
6
“exceptional” doctrine. Colorado River, 424 U.S. at 818 (emphasis in original). Thus, “[o]nly the
7
clearest of justifications will warrant dismissal.” Id. at 829 (emphasis in original); accord Travelers
8
Indemnity Co. v. Madonna, 914 F.2d 1364, 1369 (9th Cir. 1990) (“Any doubt as to whether a factor
9
exists should be resolved against a stay, not in favor of one”). Defendant has failed to show, as a
10
United States District Court
For the Northern District of California
5
threshold matter, that the claims are substantially similar. Therefore, the Court declines to apply this
11
exceptional doctrine to the instant case.
12
13
14
CONCLUSION
For the foregoing reasons, the Court DENIES defendant’s motion to dismiss or stay.
15
16
IT IS SO ORDERED.
17
18
Dated: November 1, 2012
19
SUSAN ILLSTON
United States District Judge
20
21
22
23
24
25
26
27
28
6
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?