Whitecryption Corporation v. Arxan Technologies, Inc.
Filing
89
ORDER regarding 66 MOTION to Dismiss. Signed by Judge William H. Orrick on 06/15/2016. (jmdS, COURT STAFF) (Filed on 6/15/2016)
1
2
3
4
UNITED STATES DISTRICT COURT
5
NORTHERN DISTRICT OF CALIFORNIA
6
7
WHITECRYPTION CORPORATION,
Plaintiff,
Case No. 15-cv-00754-WHO
8
9
10
United States District Court
Northern District of California
11
12
13
v.
ARXAN TECHNOLOGIES, INC.,
Defendant.
ORDER REGARDING MOTION TO
DISMISS
Re: Dkt. No. 66
INTRODUCTION
Counter defendants whiteCryption Corporation and Intertrust Technologies Corporation
14
seek to dismiss Arxan Technologies Inc.’s counterclaims for interference with contractual
15
relations, prospective economic advantage, and violation of California’s Unfair Competition Law
16
because Arxan failed to plausibly allege facts sufficient to state a claim against either counter
17
defendant. whiteCryption also seeks to dismiss the claim for declaratory judgment as simply a
18
mirror of its own causes of action. Intertrust further seeks dismissal because Arxan has not
19
pleaded viable alter ego and agency theories of liability, and does not assert direct allegations
20
against Intertrust in its breach of contract cause of action.
21
For the most part, Arxan’s counterclaims mush the counter defendants’ alleged actions
22
together. For the reasons stated below, I agree with Intertrust that the alter ego and agency
23
allegations are insufficient and STRIKE the legal conclusions asserting them from the
24
counterclaims. I also find that the breach of contract, interference with the Moss Adams contract
25
and declaratory relief causes of action are not plausibly stated against Intertrust, and dismiss
26
Intertrust from them. And I DENY the motion to dismiss concerning the claims against
27
28
1
whiteCryption and the remaining claims against Intertrust. 1
BACKGROUND
2
Arxan’s principal business is providing application protection and anti-tamper solutions for
3
4
a variety of commercial software. First Amended Counterclaims (“FACC”) ¶ 18. Among other
5
things, Arxan provides a product commonly referred to as “code-hardening” software which
6
enables developers and security engineers to protect an application by inserting “guards” into the
7
code. Id. Arxan’s software is often licensed to customers for periods of time with the goal that
8
the customer will be interested in renewing the license. Id. ¶ 21.
In mid-2011, Arxan began negotiations with Intertrust regarding a reseller relationship
9
whereby Arxan would sell Intertrust’s recently acquired software protection technology,
11
United States District Court
Northern District of California
10
whiteCryption’s White Box Cryptography product, to its customers under one of Arxan’s own
12
labels, TransformIT. Id. ¶¶ 24, 27. After a few test transactions, Arxan and whiteCryption
13
entered into a reseller agreement (the “Reseller Agreement”) under which Arxan obtained a
14
nonexclusive distribution license for the White Box Cryptography product. Id. ¶ 29. The Reseller
15
Agreement was drafted, negotiated, and signed on behalf of whiteCryption by William Rainey, the
16
Senior Vice President, General Counsel, and Secretary for Intertrust, as Secretary for
17
whiteCryption. Id. ¶ 30. Arxan sold the whiteCryption security software under its TransformIT
18
label from June 2011 to June 2013. Id. ¶ 35.
19
Arxan alleges that whiteCryption breached various obligations under the Reseller
20
Agreement. One “critical” component of the Reseller Agreement was whiteCryption’s obligation
21
to provide software maintenance and support services as defined by the agreement. Id. ¶ 48. In
22
July 30, 2013, approximately two months after the Reseller Agreement ended, Tala Shamoon,
23
Intertrust’s Chief Executive Officer, informed Arxan that whiteCryption would no longer honor its
24
obligation to provide ongoing maintenance and support for remaining customers for the length of
25
their existing contracts with Arxan. Id. ¶ 52. Arxan contends that this constituted a violation of
26
1
27
28
Because I realized that it would take me longer to finish this opinion than is my custom, I issued
a short order on May 19, 2016 granting the motion to dismiss as to Arxan’s alter ego and agency
theories against Intertrust but denied it as to the causes of action asserted against whiteCryption.
Dkt. No.86. This Order explains my reasoning and addresses additional related issues.
2
1
the express terms of the Reseller Agreement that affected Arxan as well as over twenty of its
2
customers. Id. ¶ 54.
3
The Reseller Agreement also allegedly prohibited whiteCryption from unauthorized direct
4
contact with Arxan’s customers. Id. ¶ 55. In contravention of this agreement, whiteCryption
5
contacted at least three of Arxan’s customers and “demanded that they stop using whiteCryption’s
6
products that were properly provided by Arxan.” Id. ¶ 56. whiteCryption and Intertrust also
7
breached the agreement by publically disclosing that the White Box Cryptography product sold
8
under Arxan’s brand was actually whiteCryption’s technology. Id. ¶¶ 59, 62. As a result, at least
9
one customer asked for pricing information to determine whether to purchase from counter
defendants directly and another customer began to negotiate a non-disclosure agreement with
11
United States District Court
Northern District of California
10
Intertrust so that it could discuss its needs directly with Intertrust. Id. ¶¶ 63-64.
12
In November 2013, whiteCryption retained Moss Adams LLP to conduct an audit pursuant
13
to the Reseller Agreement which provided certain limited inspection rights. Id. ¶ 77. Arxan and
14
Moss Adam executed an Auditor Non-disclosure Agreement (the “NDA”) that provided that Moss
15
Adams would not disclose any confidential information it received from Arxan to whiteCryption
16
or third parties. Id. ¶ 80. Thereafter Arxan provided confidential customer information to Moss
17
Adams in order to facilitate the audit process. Id. ¶ 83. Despite the requirements of the NDA,
18
Moss Adams did not provide Arxan with its final report five days before providing the report to
19
whiteCryption so that it could insure that none of its confidential information was included. Id. ¶
20
91. Instead, Moss Adams emailed whiteCryption and Arxan at the same time with a copy of the
21
final report that contained highly confidential information belonging to Arxan, including customer
22
names and pricing. Id. ¶¶ 89, 92. Arxan alleges Intertrust and whiteCryption “intentionally
23
induced” Moss Adams to breach the NDA to obtain Arxan’s confidential customer information
24
and gain a competitive advantage in the marketplace. Id. ¶ 95.
25
Arxan’s counterclaims encompass six causes of action: (1) breach of contract; (2)
26
intentional interference with contractual relations- relationships with customers; (3) intentional
27
interference with contractual relations – Moss Adams Contract; (4) intentional interference with
28
prospective economic advantage; (5) violation of California Business and Professions Code §
3
1
17200 et. seq. (the “UCL”); and (6) a claim declaratory judgment claim. Arxan asserts that
2
Intertrust should be held liable not only for its own actions but also for whiteCryption’s conduct
3
on the basis of an alter ego or agent theory of liability. Id. ¶¶ 102-113.
LEGAL STANDARD
4
5
I.
MOTION TO DISMISS
To survive a motion under Federal Rule of Civil Procedure 12(b)(6), the plaintiff must
6
7
allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v.
8
Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when the plaintiff pleads facts
9
that “allow the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). There must
11
United States District Court
Northern District of California
10
be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not
12
require “heightened fact pleading of specifics,” a plaintiff must allege facts sufficient to “raise a
13
right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.
In deciding whether the plaintiff has stated a claim upon which relief can be granted, the
14
15
court accepts the plaintiff’s allegations as true and draws all reasonable inferences in favor of the
16
plaintiff. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court
17
is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of
18
fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir.
19
2008). If the court dismisses the complaint, it “should grant leave to amend even if no request to
20
amend the pleading was made, unless it determines that the pleading could not possibly be cured
21
by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000).
22
II.
23
HEIGHTENED PLEADING STANDARD FOR FRAUD OR MISTAKE
Claims sounding in fraud or mistake are subject to the heightened pleading standard of
24
Federal Rule of Civil Procedure 9(b), which requires that such claims “state with particularity the
25
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy this standard, a
26
plaintiff must identify “the time, place, and content of [the] alleged misrepresentation [s],” as well
27
as the “circumstances indicating falseness” or “manner in which the representations at issue were
28
false and misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994)
4
1
(internal quotation marks and modifications omitted). The allegations “must be specific enough to
2
give defendants notice of the particular misconduct which is alleged to constitute the fraud
3
charged so that they can defend against the charge and not just deny that they have done anything
4
wrong.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).
DISCUSSION
5
Counter defendants argue that all claims against Intertrust and that all but one claim, the
6
7
breach of contract claim, against whiteCryption should be dismissed. 2 Intertrust contends that it
8
cannot be held liable under an alter ego or agency theory, but does not otherwise attempt to
9
differentiate its arguments about the insufficiency of the complaint from whiteCryption’s.
INTENTIONAL INTERFERENCE WITH CONTRACTUAL RELATIONS –
I.
11
United States District Court
Northern District of California
10
CUSTOMER RELATIONSHIPS
To state a claim for intentional interference with contractual relations, a plaintiff must
12
13
show: (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this
14
contract; (3) defendant’s intentional acts designed to induce breach or disruption of the contractual
15
relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting
16
damage. Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126 (1990).
Counter defendants’ motion regarding the Second Cause of Action focuses on the fourth
17
18
element. They argue Arxan has failed to allege facts demonstrating an actual breach or disruption
19
of any then existing contractual relationships. Mot. at 4 [Dkt. No. 66]. Under California law, an
20
express breach is unnecessary to state a claim for the tort of inducing breach of contract. Ramona
21
Manor Convalescent Hosp. v. Care Enters., 177 Cal. App. 3d 1120, 1131 (Ct. App. 1986).
22
“Rather, liability may be imposed where the defendant does not literally induce a breach of
23
contract, but makes plaintiff’s performance of the contract more expensive or burdensome.”
24
Solyndra Residual Trust, by & through Neilson v. Suntech Power Holdings Co., 62 F. Supp. 3d
25
2
26
27
28
Counter defendants seek to dismiss any claims in so far as they are based on plaintiffs’ allegation
that they “misus[ed] Arxan’s software to launch a competitive code-hardening product.” FACC ¶
69. Arxan does not respond to this argument. Considering the identified representation is a minor
isolated reference to software misuse, I do not read this allegation as supporting any of the counter
claims. If Arxan intended to rely on a theory of software misuse by counter defendants, they
should have clearly alleged so.
5
1
1027, 1048 (N.D. Cal. 2014) (internal quotation marks omitted).
Arxan claims that “Counter-Defendants contacted key decision makers of [Arxan’s]
2
customers and demanded that they terminate existing contracts with Arxan or not renew their
4
Arxan contracts.” FACC ¶ 70. The complaint provides several examples of the counter
5
defendants’ alleged interference. For example, in March 2013, Oliver Mills, General Manager of
6
Intertrust Europe, “directly approached Arxan customers in an effort to convince them to replace
7
Arxan products with Intertrust product(s).” Id. ¶ 71. A month later “a representative of Intertrust
8
approached an officer of one of Arxan’s customers, in an effort to pressure it to purchase white-
9
box cryptography directly from Intertrust.” Id. ¶ 72. The customer later informed Arxan that he
10
was “confused and extremely offended by Intertrust’s conduct.” Id. “Indeed, after informing one
11
United States District Court
Northern District of California
3
Arxan customer about the reseller relationship, that customer began to negotiate a non-disclosure
12
agreement with Intertrust so that the customer could discuss their needs and pricing directly with
13
Intertrust.” Id. ¶ 64. Similarly, in or around the third quarter of 2013, “whiteCryption threatened
14
several of Arxan’s customers and demanded that they stop using whiteCryption products” and
15
“further demanded that Arxan’s customers sign a new contract with whiteCryption in order to
16
keep using the white-box cryptography product that was provided by Arxan.” Id. ¶ 73. As a result
17
of counter defendants’ interference, a number of existing Arxan customers either terminated
18
existing contracts, did not renew their contracts, or chose not to enter into contracts with Arxan.
19
Id. ¶ 5.
20
These allegations are sufficient to support a reasonable inference that such actions
21
constituted a disruption of Arxan’s contracts with its customers. Counter defendants’ motion to
22
dismiss this claim is DENIED.
23
II.
24
INTENTIONAL INTERFERENCE WITH CONTRACTUAL RELATIONS – NDA
Counter defendants contend that Arxan’s Third Cause of Action should be dismissed
25
because Arxan alleges “nothing more than efforts by whiteCryption to enforce its existing
26
contractual rights under [] the Reseller Agreement.” Mot. at 4.
27
The Reseller Agreement provides whiteCryption with a limited right to inspect and audit
28
6
1
Arxan’s records. RJN, Exh. A [Dkt. No. 67]. 3 Under the terms of the Reseller Agreement, Arxan
2
agreed to cooperate with whiteCryption by providing it “access to the relevant records, data,
3
information,” etc. Id. In order to protect confidential information from disclosure to
4
whiteCryption and third parties, Arxan entered into the NDA with Moss Adams and relied on it to
5
provide documents for the audit. FACC ¶ 83. Arxan alleges that the NDA did not modify any of
6
its obligations under the Reseller Agreement and that counter defendants acknowledged this fact
7
in an email to Arxan. Id. ¶¶ 80, 93. But despite counter defendants’ knowledge of the NDA,
8
whiteCryption insisted that Moss Adams have access to all documents without redaction and
9
ultimately induced Moss Adams to breach its contractual obligations by providing counter
defendants with Arxan’s confidential customer information in an effort to gain a competitive
11
United States District Court
Northern District of California
10
advantage over Arxan. Id. ¶¶ 81, 94-95.
12
Arxan has plausibly pleaded that whiteCryption intended to interfere with its contractual
13
relations with Moss Adams. The counter claims meet the pleading requirements, as provided in
14
the previous section, by plainly alleging that: (1) Arxan and Moss Adams had a valid contract, the
15
NDA; (2) whiteCryption was aware of the NDA; (3) whiteCryption induced Moss Adams to
16
breach the contract in order to gain a competitive advantage; (4) the breach caused the disclosure
17
of Arxan’s confidential information; and (5) Arxan suffered damage as a result. Id. ¶¶ 133 - 135.
whiteCryption’s reliance on Lawless v. Brotherhood of Painters, Decorators &
18
19
Paperhangers of America, 143 Cal. App. 2d 474 (1956) does not alter this conclusion. In Lawless,
20
cross-complainant Herbert Sorrell alleged that an international union unjustifiably induced the
21
breach of his employment contract with the local union when the international instituted a
22
prosecution against him. 143 Cal. App. at 477. The prosecution resulted in Sorrell’s suspension
23
and made him ineligible to hold office with the local union. Id. Sorrell argued that his suspension
24
was unlawful and that the parent union unjustifiably induced the breach of his employment
25
contract with the local union.
26
27
28
3
Because the Reseller Agreement is incorporated by reference into the complaint and its
authenticity has not been questioned, I consider it for the purposes of this motion. See Lee v. City
of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001).
7
1
The Lawless court held that the parent union was not liable for interference with
contractual relations because “[o]ne who is in a confidential relationship with a party to a contract
3
is privileged to induce the breach of that contract.” Id. at 478. whiteCryption relies on this
4
language to argue that it was similarly privileged to induce a breach of the NDA because it was
5
only attempting to enforce the terms of the Reseller Agreement. But Lawless’s analysis is
6
premised on the notion that a “server may induce his master to breach a contract with a third
7
person.” Id. The court reasoned that because the relationship between an international union and
8
a local union are “close and interwoven, having common objectives and existing under the same
9
system of internal laws and management” their relationship was akin to that of master-servant. Id.
10
Multiple courts have cabined Lawless’s finding to analogous situations in which the parties have a
11
United States District Court
Northern District of California
2
close or interdependent relationship. See, e.g., Pasadena Unified Sch. Dist. v. Pasadena Fed’n of
12
Teachers, 72 Cal. App. 3d 100, 111 (1977) (“In Lawless, the local was simply an organ of the
13
international union, with no real separate existence. The international could not, therefore, be
14
charged with interference with itself. No such relationship exists between the union and its
15
members who obviously have a separate existence.”); Kozlowsky v. Westminster Nat’l Bank, 6
16
Cal. App. 3d 593, 599-60 (1970) (characterizing Lawless as a “manager’s privilege case” and
17
finding it inapplicable); Aalgaard v. Merchants Nat’l Bank, Inc., 224 Cal. App. 3d 674, 685 n.9
18
(1990) (explaining that Lawless “simply states a servant is privileged to induce breach of a
19
master’s contract without any discussion of the factual context.”).
20
Whether an actor’s conduct is privileged involves a consideration of numerous factors. See
21
Restatement (Second) of Torts § 767 (1979) (setting forth the factors to be considered in making
22
that determination including the interferer’s motive, the interests sought to be advanced, the social
23
interest in protecting the freedom of the action, and the relationship between the parties); see also
24
Kentucky Cent. Life Ins. Co. v. LeDuc, 814 F. Supp. 832, 840 (N.D. Cal. 1992) (“Finally, the
25
determination whether the interference is privileged involves consideration of numerous factual
26
matters.”). Neither party has addressed these factors in their briefing. Arxan and whiteCryption
27
are competitors in the same market and do not share a master-servant or manager-subordinate type
28
relationship. Arxan does allege that the NDA did not alter Arxan’s obligation under the Reseller
8
Agreement, that the released customer information was protected under the NDA, that it was not
2
necessary to the audit, and that whiteCryption induced the disclosure in order to gain a
3
competitive advantage. See FACC ¶¶ 80-83, 93-95. These allegations go further than simply
4
conveying whiteCryption’s desire to enforce the terms of the Reseller Agreement and support a
5
plausible claim that whiteCryption interfered with Arxan’s NDA with Moss Adams in order to
6
gain access to the confidential information. See Ariba, Inc. v. Rearden Commerce, Inc., No. 11-
7
cv-01619-EDL, 2011 WL 4031140, at *8 (N.D. Cal. Sept. 8, 2011) (refusing to dismiss a
8
counterclaim for interference with contractual relations despite the existence of a contract between
9
the parties because “[d]efendants have alleged more than a breach of contract, including, among
10
other things, that [plaintiff’s] conduct was intentionally aimed at disrupting the merger, which it
11
United States District Court
Northern District of California
1
saw as a competitive threat”). This states a plausible claim against whiteCryption.
12
whiteCryption’s motion to dismiss this claim is DENIED.
On the other hand, there are no allegations that Intertrust induced Moss Adams to breach
13
14
its contract with Arxan. For reasons discussed later, the alter ego and agency allegations are
15
insufficient. Accordingly, Intertrust’s motion to dismiss this claim is GRANTED.
16
III.
17
UCL CLAIM
The UCL prohibits “any unlawful, unfair or fraudulent business act or practice.” Cal. Bus.
18
& Prof. Code § 17200. “Each of these three adjectives captures a separate and distinct theory of
19
liability.” Rubio v. Capital One Bank, 613 F.3d 1195, 1203 (9th Cir. 2010) (quotation marks
20
omitted). The UCL’s “coverage is sweeping, embracing anything that can properly be called a
21
business practice and that at the same time is forbidden by law.” Wilson v. Hewlett-Packard Co.,
22
668 F.3d 1136, 1140 (9th Cir. 2012).
23
A.
Unlawful Prong
24
The “unlawful” prong of the UCL “borrows violations of other laws and treats them as
25
independently actionable.” Daugherty v. Am. Honda Motor Co., Inc., 51 Cal. Rptr. 3d 118, 128
26
(Ct. App. 2006). This includes common law torts. Cortez v. Global Ground Support, LLC, No.
27
09-cv-4138-SC, 2009 WL 4282076, at **2-3 (N.D. Cal. Nov. 25, 2009).
28
The Ninth Circuit has held that intentional interference with contractual relations is
9
1
sufficient to establish a UCL claim. CRST Van Expedited, Inc. v. Werner Enters., Inc., 479 F.3d
2
1099, 1107 (9th Cir. 2007). Because Arxan adequately pleaded counter defendants’ intentional
3
interference with Arxan’s customer relationships and whiteCryption’s intentional interference with
4
the NDA, it has likewise sufficiently pleaded a UCL claim against counter defendants under the
5
unlawful prong. See Brocade Commc’ns Sys., Inc. v. A10 Networks, Inc., No. 10-cv-03428-LHK,
6
2011 WL 1044899, at *11 (N.D. Cal. Mar. 23, 2011) (“Because the Court has found that Brocade
7
adequately stated a claim for interference with contract, it likewise finds that Brocade has
8
adequately alleged a UCL violation based on this predicate act.”).
9
10
B.
Fraudulent Prong
A defendant violates the “fraudulent” prong of the UCL by engaging in conduct by which
United States District Court
Northern District of California
11
“members of the public are likely to be deceived.” Davis v. HSBC Bank Nevada, N.A., 691 F.3d
12
1152, 1169 (9th Cir. 2012). “‘Likely to deceive’ implies more than a mere possibility that the
13
advertisement might conceivably be misunderstood by some few consumers viewing it in an
14
unreasonable manner. Rather, the phrase indicates that the [representation] is such that it is
15
probable that a significant portion of the general consuming public or of targeted consumers,
16
acting reasonably in the circumstances, could be misled.” Garcia v. Sony Computer Entm’t Am.,
17
LLC, 859 F. Supp. 2d 1056, 1062 (N.D. Cal. 2012). The heightened pleading standard of Rule
18
9(b) applies to UCL claims that are “grounded in” or “sound in” fraud. Kearns v. Ford Motor Co.
19
(9th Cir. 2009) 567 F3d 1120, 1125. “To satisfy Rule 9(b), a pleading must identify the ‘who,
20
what, when, where, and how’ of the misconduct charged, as well as what is false or misleading
21
about the purportedly fraudulent statement, and why it is false.” Cafasso, U.S. ex rel. v. Gen.
22
Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011).
23
Arxan’s relied upon allegations do not satisfy Rule 9(b)’s heightened standard. It alleges
24
that an Intertrust representative made public misrepresentations falsely implying that all of
25
Arxan’s products were actually Intertrust products. FAC ¶¶ 62, 75. However, the counterclaims
26
do not explain what the statements actually were or how they falsely implied that Arxan’s
27
products were Intertrust’s products. In addition, Arxan contends that counter-defendants “falsely
28
told Arxan customers that whiteCryption code-hardening technology could replace Arxan code10
1
hardening technology” and improperly stated that “their customer agreements with Arxan were
2
invalid in order to convince customers to terminate their relationship with Arxan.” Id. ¶¶ 73, 74.
3
These allegations fail to provide with specificity: (1) who made these statements, utilizing only a
4
generalized reference to “counter defendants”; (2) when they were made, providing only that these
5
were made during some of “these” customer interactions without much clarity as to the time
6
frame; and, relatedly, (3) which customers were affected by these statements.
7
Accordingly, Arxan has not adequately pleaded a UCL claim under the “fraudulent” prong.
8
C.
9
In cases involving unfairness to competitors, the California Supreme Court has defined
Unfair Prong
“unfair” as “conduct that threatens an incipient violation of an antitrust law, or violates the policy
11
United States District Court
Northern District of California
10
or spirit of one of those laws because its effects are comparable to or the same as a violation of the
12
law, or otherwise significantly threatens or harms competition.” Cel-Tech Commc’ns, Inc. v. Los
13
Angeles Cellular Tel. Co., 20 Cal. 4th 163, 187 (1999).
14
Counter defendants argue that Arxan fails to tether its allegations of unfairness to any
15
violation of antitrust law or any threat to competition. Arxan’s primary opposition is based on its
16
view that because it has successfully established a violation of the UCL under the “fraudulent”
17
prong, it has also established a violation under the “unfair” prong. But Arxan identifies nothing its
18
counterclaims that demonstrates an emerging violation of antitrust law or significant threat to
19
competition. While whiteCryption’s actions may have harmed Arxan’s own business interests,
20
such harm does not demonstrate injury to competition. See id. at 186 (“Injury to a competitor is
21
not equivalent to injury to competition; only the latter is the
22
proper focus of antitrust laws”); Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d
23
1099, 1119 (C.D. Cal. 2001) (to establish claim under the “unfair” prong of the UCL a plaintiff
24
must show a significant threat of harm to competition, not merely harm to the plaintiff’s own
25
commercial interests).
26
27
In sum, Arxan may proceed on its UCL claim under the “unlawful” prong in the Fifth
Cause of Action. Counter defendants’ motion to dismiss this claim is DENIED.
28
11
1
IV.
2
ADVANTAGE
3
INTENTIONAL INTERFERENCE WITH PROSPECTIVE ECONOMIC
Arxan also brings the Fourth Cause of Action for intentional interference with prospective
4
economic advantage based on allegations that counter defendants contacted Arxan’s customers,
5
disclosed the terms of the Reseller Agreement, and made false representations about Arxan’s
6
products in order to disrupt Arxan’s relationships with its customers and unfairly compete with
7
Arxan. FACC ¶¶ 140-142. The elements of an interference with prospective economic advantage
8
claim are: “(1) an economic relationship between the plaintiff and some third party, with the
9
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;
11
United States District Court
Northern District of California
10
(4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused
12
by the acts of the defendant.” CRST Van Expedited, Inc., 479 F.3d at 1108. The primary
13
difference between the intentional interference with prospective economic advantage and
14
intentional interference with contractual relations is that interference with prospective economic
15
advantage requires a plaintiff to allege an act that is wrongful independent of the interference
16
itself. Id. “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some
17
constitutional, statutory, regulatory, common law, or other determinable legal standard.” Korea
18
Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1159 (2003).
19
Counter defendants attack Arxan’s claim for interference with prospective economic
20
advantage on the basis that Arxan fails to allege a wrongful act independent from the interference
21
itself. But the Ninth Circuit has held a violation of the UCL can serve as the wrongful act
22
necessary to support an intentional interference with economic advantage claim. CRST Van
23
Expedited, Inc., 479 F.3d at 1109. While this may appear to create an end run around the
24
“independent act” requirement, the Ninth Circuit squarely considered this functional merger of the
25
two torts and found it to be consistent with the requirements of California law. See id. at 1110
26
(“We are aware that our reasoning works a practical merger of the two common law torts of
27
intentional interference with existing contract and intentional interference with prospective
28
economic relationships, where the two are alleged to coexist along with a contemporaneous and
12
1
derivative UCL violation” but find it to be consistent with California Supreme Court decisions.).
2
Because Arxan has successfully pleaded a UCL claim against counter defendants, as well
3
as fulfilling the other requirements of an interference with prospective economic advantage claim,
4
counter defendants’ motion to dismiss this claim is DENIED.
5
V.
6
ALTER EGO OR AGENCY LIABILITY
Intertrust moves to dismiss all claims to the extent its liability rests on alter ego or agency
7
liability. It is “a general principle of corporate law deeply ingrained in our economic and legal
8
systems that a parent corporation . . . is not liable for the acts of its subsidiaries.” United States v.
9
Bestfoods, 524 U.S. 51, 61 (1998) (internal citations and quotations omitted). It is the unusual
circumstance in which a parent corporation will be held directly or indirectly liable for the acts of
11
United States District Court
Northern District of California
10
its subsidiaries. E. & J. Gallo Winery v. EnCana Energy Services, Inc., 2008 WL 2220396, at *5
12
(E.D. Cal. May 27, 2008). Federal courts in California have recognized three such situations:
13
“where the circumstances of the organization of the two entities are such that the corporate form
14
should be disregarded (“alter ego” liability);” “where the subsidiary acts as an agent of the parent
15
corporation;” or “where the parent corporation aids, abets, or ratifies the acts of the subsidiary
16
corporation.” Id. Here, the parties focus on only two of the three theories of liability, alter ego
17
and agency. I address each one below.
18
A.
19
“The alter ego doctrine arises when a plaintiff comes into court claiming that an opposing
20
party is using the corporate form unjustly and in derogation of the plaintiff’s interests.” Mesler v.
21
Bragg Mgmt. Co., 39 Cal.3d 290, 300 (1985). The doctrine has two elements: (1) “there must be
22
such a unity of interest and ownership between the corporation and its equitable owner that the
23
separate personalities of the corporation and the shareholder do not in reality exist” and (2) “there
24
must be an inequitable result if the acts in question are treated as those of the corporation alone.”
25
Sonora Diamond Corp. v. Super. Ct. of Tuolumne Cnty., 83 Cal. App. 4th 523, 538 (2000).
26
Alter Ego
With regard to the first prong, courts look to a number of factors including “commingling
27
of funds and other assets of the two entities, the holding out by one entity that it is liable for the
28
debts of the other, identical equitable ownership in the two entities, use of the same offices and
13
1
employees,” “use of one as a mere shell or conduit for the affairs of the other,” “inadequate
2
capitalization, disregard of corporate formalities, lack of segregation of corporate records, and
3
identical directors and officers.” Id. at 538-39. No one characteristic governs. “[T]his test
4
requires a showing that the parent controls the subsidiary to such a degree as to render the latter
5
the mere instrumentality of the former” and “envisions pervasive control over the subsidiary, such
6
as when a parent corporation dictates every facet of the subsidiary’s business – from broad policy
7
decisions to routine matters of day-to-day operation.” Ranza v. Nike, Inc., 793 F.3d 1059, 1073
8
(9th Cir. 2015) (internal quotation marks omitted). “Total ownership and shared management
9
personnel are alone insufficient to establish the requisite level of control.” Id.
10
Arxan alleges that Intertrust and whiteCryption share the same headquarters, officers,
United States District Court
Northern District of California
11
directors, and other employees. FACC ¶¶ 103-105. Additionally, many of the emails produced
12
during early discovery exchanged between the parties revealed emails from individuals with an
13
Intertrust-related email address discussing whiteCryption’s products. Id. ¶ 107. These emails
14
showed that individuals such as Tala Shamoon and Walt Marcinkiewicz, who facially have no role
15
in whiteCryption, were involved in conversations or decisions related to whiteCryption including:
16
changing whiteCryption’s website, pricing whiteCryption’s new products, identifying customers
17
for whiteCryption to pursue, monitoring whiteCryption’s transactions, approving the withholding
18
of technical support from Arxan, and negotiating issues with Arxan in relation to the Reseller
19
Agreement. Id. ¶¶ 111, 113.
20
While these allegations establish Intertrust’s significant involvement in whiteCryption’s
21
operations, they are insufficient to establish alter ego liability. A “plaintiff does not meet the unity
22
of interest and ownership prong when the evidence shows only an active parent corporation
23
involved directly in decision-making about its subsidiaries’ holdings, but each entity observes all
24
of the corporate formalities necessary to maintain corporate separateness.” Ranza, 793 F.3d at
25
1073. Here, there are no allegations of commingled funds, undercapitalization, or the disregard of
26
corporate formalities.
27
28
Arxan analogizes its case to that of Toho-Towa Co. v. Morgan Creek Prods., Inc., 217 Cal.
App. 4th 1096, 1109 (2013) and Monaco v. Liberty Life Assur. Co., No. 06-cv-07021-MJJ, 2007
14
1
WL 1140460 (N.D. Cal. Apr. 17, 2007). However, both are meaningfully distinguishable. In
2
Toho, the California Court of Appeal held that there existed substantial evidence to support the
3
trial court’s finding that the relevant parties, Morgan Creek Productions (“MCP”), B.V. and
4
Morgan Creek International Ltd. (“Ltd.”), were part of a single business enterprise. The evidence
5
included that:
6
7
8
9
The entities were all owned by the same person, who was the sole
decision maker for all of the Morgan Creek entities; the three
entities exploited the same assets; the ‘work’ of B.V. and Ltd. was
performed by the employees of MCP,…. and although B.V. entered
into contracts which required that monetary payments be made to
them, no money was remitted, but rather was transferred directly to
Ltd.’s lender.
Toho-Towa Co, 217 Cal. App. 4th at 1109. The court found that this evidence supported the
11
United States District Court
Northern District of California
10
conclusion that “MCP so dominated the finances, policies and practices of B.V. and Ltd. that the
12
latter had no separate ‘mind, will or existence’ of their own, but were merely conduits through
13
which MCP conducted its business.” Id. Here, the counter claims lack allegations that Intertrust
14
was the sole decision maker for Arxan, that all or the majority of whiteCryption’s work was
15
performed by Intertrust employees, or that money intended for whiteCryption was transferred
16
directly to Intertrust or its debtors.
17
Additionally, with regard to the second prong, the Toho court also found that it would be
18
inequitable to uphold B.V.’s separate existence because although the plaintiff had been assured
19
there would be sufficient assets to pay it any money due under its agreement, the plaintiff was not
20
told that “B.V.’s financial operations were structured by MCP in such a way that it never received
21
any money from its licensees, and thus would not have funds to meet its payment obligations
22
under the agreement.” Id. at 1109. Here, no such payment structure is alleged. Arxan’s only
23
allegation towards this prong simply alleges that an inequitable result will follow if counter
24
defendants are treated as separate entities because “much of the alleged misconduct was
25
performed by Intertrust officers or employees directly or with the approval of these Intertrust
26
individuals.” FACC ¶ 114. Even if true, this allegation does not approximate the allegations at
27
issue in Toho and is insufficient to satisfy this prong. See also Orosa v. Therakos, Inc., No. 11-cv-
28
2143-EMC, 2011 WL 3667485, at *7 (N.D. Cal. Aug. 22, 2011) (“Merely alleging that Plaintiff
15
1
will suffer an inequitable result if [a third party] is not a defendant is not sufficient.”) (citing
2
cases).
3
Arxan’s reliance on Monaco is similarly unpersuasive. Reviewing the plaintiff’s
4
complaint, the Monaco court identified a litany of factual allegations that supported a finding of
5
unity of interest between defendant Liberty Life and its parent organization Liberty Mutual
6
including:
7
8
9
10
United States District Court
Northern District of California
11
12
13
14
15
16
17
18
19
20
21
22
Liberty Mutual controlled and managed Liberty Life's claims
operation such that the entities acted as a single company []; Liberty
Mutual is the parent company of Liberty Life and owns 90% of
Liberty Life []; the entities share a common corporate headquarters
address []; the entities are part of Liberty Mutual’s holding company
structure []; Liberty Mutual fully guarantees the insurance policy
and annuity contract obligations of Liberty Life []; the entities share
services of personnel, equipment, telephone, computers, and other
business machines []; Liberty Mutual markets Liberty Life's
products []; the entities share a common chairman of their respective
boards []; the entities share several other officers []; five of the seven
directors of Liberty Life are also directors of Liberty Mutual []; the
entities share a common web page []; Liberty Mutual employs the
claims personnel who handle Liberty Life disability claims [];
Liberty Mutual handles Liberty Life disability administrative
appeals []; Liberty Life and Liberty Mutual share the same computer
system []; Liberty Mutual provides training for Liberty Life’s claims
employees []; Liberty Life's Claims Procedure Manual indicates that
Liberty Mutual prepared or participated its preparation []; Liberty
Life's Claims Procedure Manual refers to “Liberty” without drawing
a distinction between Liberty Mutual and Liberty Life []; Liberty
Mutual’s logo appears in numerous locations in Liberty Life’s Claim
Procedure Manual []; the entities use the same agent for the service
of process []; the entities use the same counsel []; the entities use the
same logo[]; Liberty Life’s operations are integrated with its parent
via an administrative services agreement with all employees
maintained by Liberty Mutual [].
Monaco, 2007 WL 1140460, at *5. Here, Arxan’s allegations are not nearly as numerous or
23
detailed and lack many of the allegations the Monaco court relied on. For example, Arxan does
24
not allege that the two corporations act as single company, that Intertrust fully guarantees
25
whiteCryption’s contracts or obligations, that Intertrust trains whiteCryption employees, or that
26
the two entities share the same telephones, computers, and other systems.
27
Even if Arxan’s allegations satisfied the “unity of interest” prong, it has not met its burden
28
16
1
on the second prong. As described above, Arxan’s sole allegation that an inequitable result would
2
follow simply because Intertrust’s employees engaged in or approved the alleged misconduct is
3
insufficient. See Neilson v. Union Bank of California, N.A., 290 F. Supp. 2d 1101, 1117 (C.D.
4
Cal. 2003) (“California courts generally require some evidence of bad faith conduct on the part of
5
defendants before concluding that an inequitable result justifies an alter ego finding.”); Leek v.
6
Cooper, 194 Cal. App. 4th 399, 418 (2011) (holding that plaintiff must plead “some conduct
7
amounting to bad faith that makes it inequitable for [the defendant] to hide behind the corporate
8
form”).
9
10
B.
Agency Liability
“The independence of a subsidiary from the parent corporation is to be presumed.” E. & J.
United States District Court
Northern District of California
11
Gallo Winery, 2008 WL 2220396, at *5. However, a subsidiary company may be considered an
12
agent of the parent corporation where “the parent so controls the subsidiary as to cause the
13
subsidiary to be [sic] become merely the instrumentality of the parent.” Pantoja v. Countrywide
14
Home Loans, Inc., 640 F. Supp. 2d 1177, 1192 (N.D. Cal. 2009) (citation omitted). To meet this
15
standard, “the parent must be shown to have moved beyond the establishment of general policy
16
and direction for the subsidiary and in effect taken over performance of the subsidiary’s day-to-
17
day operations in carrying out that policy.” Barrous v. BP P.L.C., 10-cv-02944-LHK, 2011 WL
18
4595205, at *4 (N.D. Cal. Oct. 3, 2011) (citation omitted) (emphasis in original). An agency
19
relationship may also be established by showing that “the subsidiary performs services that are
20
sufficiently important to the [parent] corporation that if it did not have a representative to perform
21
them, the corporation’s own officials would undertake to perform substantially similar services.”
22
Id. (internal quotations omitted).
23
While Arxan’s amended counter claims add further factual allegations regarding the
24
relationship between whiteCryption and Intertrust, including information gleaned in discovery,
25
Arxan still has not sufficiently established agency liability. Arxan claims Intertrust employees
26
were “heavily involved in whiteCryption’s day-to-day business functions.” FACC ¶ 109. It relies
27
on whiteCryption employees’ use of @intertrust email addresses, Shamoon’s role in making
28
branding decisions, approving the withholding of technical support, and communicating with
17
Arxan in relation to the Reseller Agreement, and Marcinkiewicz’s involvement in naming
2
whiteCryption’s products, identifying whiteCryption customers, pricing its products, and
3
developing marketing strategies. Id. ¶¶ 107, 111, 113. Although Arxan characterizes these
4
activities as constituting “day-to-day” operations, beyond the use of Intertrust associated email
5
addresses, the acts appear to be more consistent with higher level policy and strategy decisions.
6
See Sonora Diamond Corp., 83 Cal. App. 4th at 541 (control must be “so pervasive and continual
7
that the subsidiary may be considered nothing more than an agent or instrumentality of the parent,
8
notwithstanding the maintenance of separate corporate formalities”); Wallis v. Centennial Ins. Co.,
9
Inc., 2013 WL 3803971, at *4 (E.D. Cal. July 19, 2013) (plaintiffs survived a motion to dismiss
10
because they alleged facts establishing that the parent company’s control over the subsidiary was
11
United States District Court
Northern District of California
1
“pervasive and continual”). Agency requires more than “the degree of direction and oversight
12
normal and expected from the status of ownership.” Sonora Diamond Corp., 83 Cal. App. 4th at
13
540. Accordingly, I find the allegations insufficient to establish agency liability.
Arxan seeks to hold Intertrust liable under the First Cause of Action for breach of contract
14
15
solely on the basis of its alter ego and agency theories. Because of the insufficiency of those
16
theories, Arxan has not stated a claim against Intertrust for breach of contract.
17
VI.
18
DECLARATORY RELIEF
The Sixth Cause of Action for declaratory relief is only stated against whiteCryption,
19
which argues that Arxan’s request for a declaratory judgment merely mirrors whiteCryption’s
20
claims against it and thus should be dismissed. Mot. at 17. Arxan does not respond to this
21
argument.
22
Declaratory relief is a remedy available “at the discretion of the district court.”
23
Chesebrough-Pond’s, Inc. v. Faberge, Inc., 666 F.2d 393, 396 (9th Cir. 1982). Under the
24
Declaratory Relief Act, a court may “declare the rights and other legal relations of any interested
25
party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. §
26
2201. While a district court may exercise its discretion to dismiss a counterclaim for declaratory
27
relief when it is redundant of the complaint’s claims or affirmative defense, “this should only be
28
done where the counterclaim truly serves no useful purpose in addition to the claims in the
18
1
complaint.” Allstate Ins. Co. v. Pira, No. 11-cv-3511-CW, 2012 WL 1997212, at *5 (N.D. Cal.
2
June 4, 2012) (internal quotation marks omitted). “The existence of another adequate remedy does
3
not preclude a declaratory judgment that is otherwise appropriate.” Fed. R. Civ. P. 57. Indeed,
4
“[t]he safer course for the court to follow is to deny a request to dismiss a counterclaim for
5
declaratory relief unless there is no doubt that it will be rendered moot by the adjudication of the
6
main action.” Fourth Age Ltd. v. Warner Bros. Digital Distribution Inc., No. 129912ABCSJHX,
7
2013 WL 11316952, at *3 (C.D. Cal. July 11, 2013).
8
9
Because the extent to which Arxan’s requested declaratory relief and whiteCryption’s
complaint are perfectly aligned is better assessed at a later stage in the litigation, whiteCryption’s
motion to dismiss the declaratory relief claim is DENIED.
11
United States District Court
Northern District of California
10
CONCLUSION
12
I DENY the motion to dismiss with respect to the causes of action asserted against
13
whiteCryption. I GRANT it regarding the First and Third Causes of Action against Intertrust
14
without leave to amend, STRIKE the legal conclusions alleged regarding the alter ego and agency
15
theories, and DENY the remainder of the motion.
16
17
18
19
IT IS SO ORDERED.
Dated: June 15, 2016
______________________________________
WILLIAM H. ORRICK
United States District Judge
20
21
22
23
24
25
26
27
28
19
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?