Watershed Asset Management, L.L.C. v. Watershed Capital, LLC

Filing 45

ORDER GRANTING 36 MOTION TO DISMISS COUNTERCLAIMS AND VACATING HEARING. (whalc2, COURT STAFF) (Filed on 2/25/2014).

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court
For the Northern District of California

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WATERSHED ASSET MANAGEMENT,
L.L.C., a California limited liability company,
No. C 13-03852 WHA

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Plaintiff,

ORDER GRANTING
MOTION TO DISMISS
COUNTERCLAIMS AND
VACATING HEARING

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v.
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WATERSHED CAPITAL, LLC, a Tennessee
limited liability company,
Defendant.
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AND RELATED COUNTERCLAIM.
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INTRODUCTION
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In this trademark infringement action, an asset management firm moves to dismiss
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counterclaims asserted by a consulting firm in its answer. For the reasons stated below, the
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motion is GRANTED. The hearing on February 27 is VACATED.
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STATEMENT
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Defendant Watershed Capital, LLC is a consulting firm that advises companies and fund
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managers that advance a sustainable economy. Latham & Watkins LLP is a law firm and is
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counsel for plaintiff Watershed Asset Management, LLC in this action. In 2011, Latham hosted
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and sponsored a cleantech event for defendant in its San Francisco office. Defendant, in turn,
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listed Latham as the top law firm for cleantech. These cross-promotional activities included
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referring potential clients to each other and defendant believed it was authorized to use
Latham’s logo for those efforts (Ans. 9, ¶¶ 8–15).

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In August 2013, plaintiff, represented by Latham, filed this action alleging trademark

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infringement of the “Watershed” mark. Soon after commencement of this action, Latham

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ordered defendant to remove its mark from defendant’s website (id. ¶ 16).

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In its answer, defendant asserted four counterclaims: (1) tortious interference with

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contractual relations; (2) tortious interference with prospective economic advantage; (3) unfair

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competition under California Business and Professional Code Section 17200; and

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(4) cancellation of federal trademark registration (Dkt. No. 12). Plaintiff now moves to dismiss

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all counterclaims.

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United States District Court
For the Northern District of California

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ANALYSIS
A motion to dismiss under Rule 12(b)(6) is proper only “where there is no cognizable

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legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.”

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Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). As a general rule, courts may not consider

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material outside the complaint when ruling on a motion to dismiss; however, a non-appended

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document may be incorporated by reference if the plaintiff “refers extensively to the document

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or the document forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d

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903, 908 (9th Cir. 2003).

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1.

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In opposition to the Rule 12(b)(6) motion, defendant submits four exhibits. Exhibit A is

EXTRINSIC EVIDENCE.

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an e-mail exchange between Latham and defendant wherein Latham attached its logo. Exhibit

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B is an online profile of Michele Kyrouz, who was a partner at Latham prior to her current role

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as general counsel for plaintiff, and identifies her employment periods. Exhibit C is a web page

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from plaintiff’s website showing biographies of its staff, including that of Ms. Kyrouz. Exhibit

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D is an e-mail from Latham, dated August 22, 2013, that requested defendant to immediately

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remove Latham’s logo from defendant’s website and to refrain from any future use. Plaintiff

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contends that these exhibits go against the well-established prohibition against raising extrinsic

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evidence on a Rule 12(b)(6) motion.

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Under Ritchie, these exhibits may be incorporated by reference if defendant’s answer
and counterclaims referred extensively to them or they form the basis of defendant’s

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counterclaims. Defendant’s answer, however, does not do so. At best, defendant implicitly, but

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not expressly, relies upon Exhibits A and D when it claims it “understood that it was authorized

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by [Latham] to use the [Latham] name” and Latham “summarily terminated the partnership with

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[defendant]” after filing this action (Ans. 9-10, ¶¶ 14, 16). Nor do they form the basis of

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defendant’s counterclaims. The underlying basis for the counterclaims is alleged wrongful

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conduct by plaintiff. Extrinsic evidence that shows a possible relationship between defendant

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and Latham cannot form the basis of defendant’s counterclaims as alleged. Exhibits A and D,

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United States District Court
For the Northern District of California

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therefore, are not incorporated by reference for purposes of this motion and this order will not

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rely on them.

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Same for Exhibits B and C. Nowhere in the answer does defendant include any factual

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allegations that Ms. Kyrouz, as a previous partner at Latham and now general counsel for

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plaintiff, played a role in the alleged interference underlying defendant’s counterclaims. The

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answer only alleges that plaintiff and “its agents and/or representatives knew of the existence of

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the agreement between [Latham] and [defendant]” (Ans. 10, ¶ 21). This is a bare assertion, and

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insufficient. Defendant has failed to demonstrate that Exhibits A through D have been

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incorporated by reference, and may not rely on them in surviving the instant motion to dismiss.

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2.

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Defendant, in its opposition, alleges it had a valid contract with Latham, and that

TORTIOUS INTERFERENCE OF CONTRACTUAL RELATIONS.

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plaintiff interfered with this contractual relationship by retaining Latham as counsel to initiate

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this action. Of relevance is paragraph 18 of defendant’s answer and counterclaims because it is

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the only factual allegation attributed to plaintiff. Paragraph 18 states, “[plaintiff’s] actions have

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resulted in [defendant’s] loss of its mutually beneficial relationship with [Latham] and continue

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to strain [defendant’s] relations with its clients and deprive [it] of referrals from [Latham]”

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(Ans. 10, ¶ 18). The elements of tortious interference of contractual relations are:

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(1) a valid contract between plaintiff and a third party; (2)
defendant's knowledge of this contract; (3) defendant's intentional
acts designed to induce a breach or disruption of the contractual
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relationship; (4) actual breach or disruption of the contractual
relationship; and (5) resulting damage.

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Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (1990).
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Fatal to defendant’s tortious interference of contractual relations counterclaim is the lack
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of any facts supporting the existence of intentional acts by plaintiff “designed to induce a
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breach or disruption of the contractual relationship.” Ibid. Though defendant lays out factual
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allegations that allude to a possible relationship between it and Latham, nowhere in the answer
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and counterclaims does defendant plead facts to suggest plaintiff took intentional actions to
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interfere and disrupt this possible relationship (Ans. 9, ¶¶ 8–15). To the contrary, defendant’s
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allegation that Latham severed ties with it “for the chance to represent a billion-dollar hedge
United States District Court
For the Northern District of California

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fund” suggests no conduct taken by plaintiff meant to interfere or disrupt (Ans. 10, ¶ 17). The
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only factual allegation that attributes any role to plaintiff is in paragraph 18 of the answer and
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counterclaims where defendant alleges “actions” taken by plaintiff that resulted in defendant’s
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“loss.” Such conclusory allegations devoid of any factual support cannot survive a Rule
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12(b)(6) motion.
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Defendant also raises — in its opposition but not in the answer — the possibility of an
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attorney-client relationship with Latham (Opp. 7). Defendant uses this contention to bolster its
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counterclaims against plaintiff and to impute certain duties on Latham (ibid.). An opposition to
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a Rule 12(b)(6) motion is not the appropriate way to introduce new allegations, and therefore,
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any reliance on a possible attorney-client relationship cannot save defendant from dismissal of
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this claim. Accordingly, defendant’s tortious interference of contractual relations counterclaim
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is dismissed.
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3.

TORTIOUS INTERFERENCE OF PROSPECTIVE ECONOMIC ADVANTAGE.

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Defendant also asserts a tortious interference of prospective economic advantage
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counterclaim. The elements are:
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(1) an economic relationship between the plaintiff and some third
party, with the probability of future economic benefit to the
plaintiff; (2) the defendant's knowledge of the relationship; (3)
intentional acts on the part of the defendant designed to disrupt
the relationship; (4) actual disruption of the relationship; and (5)
economic harm to the plaintiff proximately caused by the acts of
the defendant.
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Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1153 (2003). In addition, the

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California Supreme Court held that a “plaintiff must plead that the defendant engaged in an

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independently wrongful act.” Id. at 1158.

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Defendant’s claim for tortious interference of prospective economic advantage fails for
the same reason as the preceding claim. Defendant simply did not plead enough factual

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allegations to support an inference that plaintiff intentionally interfered and disrupted its alleged

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relationship with Latham. Moreover, a tortious interference of prospective economic advantage

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claim further requires an “independently wrongful act” other than the act of interference itself.

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United States District Court
For the Northern District of California

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Defendant devoted a single sentence alleging plaintiff’s “actions,” but nowhere in the answer

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are these “actions” supported by facts. Such conclusory allegations cannot survive a Rule

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12(b)(6) motion. Accordingly, defendant’s tortious interference of prospective economic

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advantage counterclaim is dismissed.

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4.

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Section 17200 of California’s Unfair Competition Law (“UCL”) prohibits any

UNFAIR COMPETITION UNDER CALIFORNIA LAW.

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“unlawful, unfair or fraudulent business act or practice.” Cal. Bus. & Prof. Code § 17200

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(1992). Our court of appeals has held that the heightened pleading standards of Rule 9(b) apply

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to claims grounded under the fraudulent prong of the UCL. Kearns v. Ford Motor Co., 567

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F.3d 1120, 1125 (9th Cir. 2009). Unfair business acts or practices under the UCL include

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“conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit

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of one of those laws . . . or otherwise significantly threatens or harms competition.” Cel-Tech

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Comm., Inc. v. L.A. Cellular Telephone Co., 20 Cal. 4th 163, 187 (1999).

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Defendant contends that engaging Latham “as counsel can be characterized as an unfair

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business practice” (Opp. 10). It further asserts that plaintiff used its “superior economic

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capacity” to lure Latham away, harming “defendant’s business prospects and leaving

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[defendant] without its business partner and advisor in [Latham]” (ibid.). The fact that

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defendant is “involved in a business sector designed to improve the public welfare only

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buttresses its claim of unfair competition” and that the “commingling of [] personnel raises

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suspicions of potentially improper practices” (ibid.).

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Defendant raises these contentions for the first time in the opposition — not in the

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answer. Nothing in the answer raises an inference that plaintiff took unlawful, unfair, or

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fraudulent conduct that would be actionable under the UCL. Furthermore, defendant’s

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conclusory allegation that plaintiff’s “actions” resulted in defendant’s loss without any factual

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support fails to meet the heightened pleading standard required under the fraudulent prong of

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the UCL.

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As to defendant alleging unfair conduct under the UCL, there is nothing in defendant’s

United States District Court
For the Northern District of California

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answer to suggest that plaintiff violated antitrust laws or the policy or spirit of those laws.

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Moreover, it is well-established that antitrust laws are meant to protect competition, not

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competitors. Defendant’s alleged deprivation of business prospects and that by virtue of it

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being “involved in a business sector designed to improve the public welfare” does not

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“buttress[] its claim of unfair competition” because it is alleging a harm to itself, not

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competition.

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Defendant’s UCL counterclaim under the unlawful prong fails too. Defendant contends

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that plaintiff interfered with defendant’s contractual relationship with Latham by initiating suit

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against defendant and retaining Latham as counsel (Opp. 10). Again, this was raised for the

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first time in the opposition. Moreover, defendant has not alleged any factual allegations in its

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answer and counterclaims that demonstrate unlawful conduct by plaintiff. Defendant, therefore,

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has failed to plead sufficient factual allegations to support its UCL counterclaim under all three

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prongs, and the counterclaim is dismissed
CANCELLATION OF FEDERAL TRADEMARK REGISTRATION.

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5.

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In its opposition, defendant withdraws its counterclaim for cancellation of plaintiff’s

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federal trademark (Opp. 11). Plaintiff, in its reply, stated that an “order dismissing the claim

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with prejudice is appropriate” because defendant did “not respond to any of the points

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supporting dismissal” (Reply 10). This order declines to dismiss with prejudice defendant’s

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cancellation claim because plaintiff has voluntarily withdrawn it.
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CONCLUSION
For the foregoing reasons, the motion to dismiss counterclaims is GRANTED. Defendant

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has until NOON ON APRIL 30 to file a motion, noticed on the normal 35-day track, for leave to

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file an amended answer. Defendant must append to its motion a proposed amended answer.

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The motion should clearly explain how the amendments to the answer cure the defects

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identified herein. Moreover, the hearing on February 27 is VACATED.

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IT IS SO ORDERED.

United States District Court
For the Northern District of California

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Dated: February 25, 2014.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

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