Shred-It America, Inc. v. MacNaughton et al

Filing 158

ORDER: (1) GRANTING IN PART AND DENYING IN PART ACCESS'S MOTION TO DISMISS 133 ; (2) DISMISSING WITHOUT PREJUDICE COUNT I OF THE SECOND AMENDED COMPLAINT; (3) GRANTING MOTION FOR JOINDER 131 . Signed by JUDGE DAVID ALAN EZRA on 5/13/2011. (af c)CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII

SHRED-IT AMERICA, INC. and
SHRED-IT USA, INC.,

)
)
)
Plaintiffs,
)
)
vs.
)
)
EDWARD MACNAUGHTON; SIH, )
LLC; ACCESS INFORMATION
)
MANAGEMENT OF HAWAII,
)
LLC; ROBERT EGBERT; and
)
BRIGITTE EGBERT,
)
)
Defendants.
)
_____________________________ )

CV NO 10-00547 DAE-KSC

ORDER: (1) GRANTING IN PART AND DENYING IN PART ACCESS’S
MOTION TO DISMISS; (2) DISMISSING WITHOUT PREJUDICE
COUNT I OF THE SECOND AMENDED COMPLAINT;
(3) GRANTING MOTION FOR JOINDER
On May 12, 2011, the Court heard Defendant Access Information
Management of Hawaii, LLC’s Motion to Dismiss Count I of Second Amended
Complaint for Failure to State Claim for Which Relief Can Be Granted (“Motion to
Dismiss,” Doc. # 133) as well as Defendants Edward MacNaughton, SIH, LLC,
Robert Egbert, and Brigitte Egbert’s Motion for Joinder in the Motion to Dismiss
(“Motion for Joinder,” Doc. # 131). Milton M. Yasunaga, Esq., and Quentin R.
Wittrock, Esq., appeared at the hearing on behalf of Plaintiffs Shred-it America,

Inc. and Shred-it USA, Inc. (collectively, “Shred-it”); Jason H. Kim, Esq., and
Thomas E. Bush, Esq., appeared at the hearing on behalf of Defendant Access
Information Management of Hawaii, LLC (“Access”); Miles B. Furutani, Esq.,
appeared at the hearing on behalf of Defendants Edward MacNaughton, SIH, LLC,
Robert Egbert, and Brigitte Egbert. After reviewing the motions and the
supporting and opposing memoranda, the Court GRANTS IN PART AND
DENIES IN PART Access’s Motion to Dismiss (Doc. # 133), DISMISSES
WITHOUT PREJUDICE Count I of the Second Amended Complaint, and
GRANTS the Motion for Joinder (Doc. # 131).
BACKGROUND
The parties and the Court are all very familiar with the issues in this
case. Accordingly, the Court only recites those facts that are relevant to
determination of the instant motion. Shred-it America, Inc., and Shred-it USA,
Inc. (collectively, “Shred-it”), operate company-owned and franchised secure
document destruction businesses in various locations throughout the United States,
Canada, and other parts of the world. (SAC ¶ 15.) In July 1998, Shred-it entered
into a written Franchise Agreement with Edward MacNaughton (“MacNaughton”),
granting him the exclusive right to operate a Shred-it business in the State of
Hawaii through SIH, LLC (“SIH”). (Id. ¶ 17.) In September 2010, SIH sold the
2

majority of its operating assets to Access Information Management of Hawaii,
LLC (“Access”). (Id. ¶ 23.) After learning of this sale, on September 24, 2010,
Shred-it filed a Complaint in this Court against MacNaughton, SIH, and Access
(Doc. # 1) as well as a Motion for Temporary Restraining Order and Order to
Show Cause for Preliminary Injunction (“TRO Motion,” Doc. # 4). On September
30, 2010, the Court heard Shred-it’s TRO Motion and issued an Order requiring
the parties to take various actions to maintain the status quo pending resolution of
this case on the merits. (Doc. # 32.)
Shred-it filed a First Amended Complaint on September 29, 2010.
(“FAC,” Doc. # 20.) On October 6, 2010, Shred-it filed a purported Second
Amended Complaint (Doc. # 36), which U.S. Magistrate Judge Kevin S.C. Chang
struck on November 16, 2010 pursuant to Federal Rules of Civil Procedure 15
(Doc. # 93).
On January 12, 2011, with leave of the Court (Docs. ## 122,
127), Shred-it filed a Second Amended Complaint against MacNaughton, SIH,
Access, Robert Egbert, and Brigitte Egbert. (“SAC,” Doc. # 126.) Shred-it’s
Second Amended Complaint alleges Counts: (Count I) federal antitrust violations
by Access and SIH (id. ¶¶ 49–57); (Count II) false/misleading statements,
infringement, unfair competition under federal Lanham Act (id. ¶¶ 58–61);
3

(Count III) unfair competition (id. ¶¶ 62–66); (Count IV) deceptive trade practices
(id. ¶¶ 67–72); (Count V) breach of the Franchise Agreement by MacNaughton and
SIH (id. ¶¶ 73–78); (Count VI) breach of duty of good faith by MacNaughton and
SIH (id. ¶¶ 79–83); (Count VII) specific performance requiring MacNaughton and
SIH to perform the contractual obligations set forth in the Franchise Agreement
(id. ¶¶ 84–88); (Count VIII) conversion of Shred-it’s assets by MacNaughton, SIH,
and Access (id. ¶¶ 89–92); (Count IX) misappropriation of trade secrets by
MacNaughton, SIH, and Access (id. ¶¶ 93–99); (Count X) interference with
contract by Access (id. ¶¶ 100–103); (Count XI) constructive trust, equitable lien,
fraudulent transfer, injunction to prevent dissipation of proceeds, unjust enrichment
(id. ¶¶ 104–107).
On January 27, 2011, Access filed a Motion to Dismiss Count I of
Second Amended Complaint for Failure to State a Claim for Which Relief Can Be
Granted (“Motion to Dismiss”). (“MTD,” Doc. # 133.) Access also requests that
the Court decline to assert supplemental jurisdiction over Shred-it’s state law
claims, namely Counts III through XI of the Second Amended Complaint. On
January 26, 2011, MacNaughton, SIH, Robert Egbert, and Brigitte Egbert joined
the Motion to Dismiss. (Docs. ## 131, 137). Shred-it filed an Opposition to the

4

Motion to Dismiss on April 4, 2011.1 (“Opp’n,” Doc. # 147.) Access filed a Reply
on April 28, 2011. (“Reply,” Doc. # 154.)
STANDARD OF REVIEW
Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure
(“Rule”), a motion to dismiss will be granted where the plaintiff fails to state a
claim upon which relief can be granted. Review is limited to the contents of the
complaint. See Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir.
1994). A complaint may be dismissed as a matter of law for one of two reasons:
“(1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable
legal claim.” Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.
1984) (citation omitted). Allegations of fact in the complaint must be taken as true
and construed in the light most favorable to the plaintiff. See Livid Holdings Ltd.
v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir. 2005).
A complaint need not include detailed facts to survive a Rule 12(b)(6)
motion to dismiss. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555–56 (2007).
In providing grounds for relief, however, a plaintiff must do more than recite the
formulaic elements of a cause of action. See id. at 556–57; see also McGlinchy v.

1

On May 5, 2011, Shred-it filed a Listing of Additional Authority in Support
of its Opposition. (Doc. # 156.)
5

Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988) (“[C]onclusory allegations
without more are insufficient to defeat a motion to dismiss for failure to state a
claim.”) (citation omitted). “The tenet that a court must accept as true all of the
allegations contained in a complaint is inapplicable to legal conclusions,” and
courts “are not bound to accept as true a legal conclusion couched as a factual
allegation.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (internal quotations
and citations omitted). Thus, “bare assertions amounting to nothing more than a
formulaic recitation of the elements” of a claim “are not entitled to an assumption
of truth.” Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009) (“[T]he
non-conclusory ‘factual content,’ and reasonable inferences from that content,
must be plausibly suggestive of a claim entitling the plaintiff to relief.”) (internal
quotations and citations omitted).
A court looks at whether the facts in the complaint sufficiently state a
“plausible” ground for relief. See Twombly, 550 U.S. at 570. A plaintiff must
include enough facts to raise a reasonable expectation that discovery will reveal
evidence and may not just provide a speculation of a right to relief. Id. at 586.
When a complaint fails to adequately state a claim, such deficiency should be
“exposed at the point of minimum expenditure of time and money by the parties
and the court.” Id. at 558 (citation omitted). If a court dismisses the complaint or
6

portions thereof, it must consider whether to grant leave to amend. Lopez v.
Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (finding that leave to amend should be
granted “if it appears at all possible that the plaintiff can correct the defect”)
(internal quotations and citations omitted).
DISCUSSION
For the reasons set forth below, the Court concludes that Shred-it’s
antitrust claim must be dismissed for failure to allege a legally cognizable relevant
market. Additionally, because Access’s request to dismiss Shred-it’s state law
claims is somewhat premature, the Court denies it without prejudice.
I.

Count I: Shred-it’s Antitrust Claim
Shred-it alleges that the September 2010 sale of SIH’s assets to

Access violates Sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1, 2,
and Section 7 of the Clayton Antitrust Act, 15 U.S.C. § 18. (SAC ¶¶ 49–57.)
Shred-it seeks relief for these violations pursuant to Sections 4 and 16 of the
Clayton Act, 15 U.S.C. §§ 15, 26. (SAC ¶ 57.)
Section 1 of the Sherman Act prohibits “[e]very contract, combination
in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations.” 15 U.S.C. § 1. To state a claim
under Section 1, “‘claimants must plead not just ultimate facts (such as a
7

conspiracy), but evidentiary facts which, if true, will prove: (1) a contract,
combination or conspiracy among two or more persons or distinct business entities;
(2) by which the persons or entities intended to harm or restrain trade or commerce
. . . (3) which actually injures competition.’” William O. Gilley Enters., Inc. v.
Atlantic Richfield Co., 588 F.3d 659, 669 (9th Cir. 2009) (per curiam) (quoting
Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1047 (9th Cir. 2008)); see also Coal.
for ICANN Transparency, Inc. v. VeriSign, Inc., 611 F.3d 495, 501–02 (9th Cir.
2010) (same).
Section 2 of the Sherman Act makes it illegal to “monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several States, or with
foreign nations.” 15 U.S.C. § 2. Monopolization and attempted monopolization
are the two traditional claims asserted under Section 2. To state a claim for
monopolization, the plaintiff must sufficiently allege: “‘(1) the possession of
monopoly power in the relevant market and (2) the willful acquisition or
maintenance of that power as distinguished from growth or development as a
consequence of a superior product, business acumen, or historic accident.’” John
Doe 1 v. Abbott Labs., 571 F.3d 930, 933 n.3 (9th Cir. 2009) (quoting Eastman
Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 481 (1992)); Alaska

8

Airlines v. United Airlines, Inc., 948 F.2d 536, 540–41 (9th Cir. 1991) (same); see
also MetroNet Servs. Corp. v. Qwest Corp., 383 F.3d 1124, 1130 (9th Cir. 2004)
(listing the elements of a monopolization claim).
To state a claim for attempted monopolization, the plaintiff must
allege: “‘(1) that the defendant has engaged in predatory or anticompetitive
conduct with (2) a specific intent to monopolize and (3) a dangerous probability of
achieving monopoly power.’” Cascade Health Solutions v. PeaceHealth, 515 F.3d
883, 893 (9th Cir. 2008) (quoting Spectrum Sports, Inc. v. McQuillan, 506 U.S.
447, 456 (1993)); see also VeriSign, 611 F.3d at 506 (same).
Sections 1 and 2 of the Sherman Act thus “focus on different
problems.” See Alaska Airlines v. United Airlines, Inc., 948 F.2d 536, 540–41
(9th Cir. 1991). Whereas “concerted conduct is subject to sanction [under
Section 1] if it merely restrains trade, unilateral conduct is subject to sanction
[under Section 2] only if it either actually monopolizes or threatens
monopolization.” Id. at 541 (citing Copperweld Corp. v. Independence Tube
Corp., 467 U.S. 752, 767–69 (1984)); see also Am. Needle, Inc. v. Nat’l Football
League, 130 S. Ct. 2201, 2208–09 (2010) (stating that although Section 1 applies
only to concerted action that restrains trade, Section 2 covers both concerted and

9

independent action, but only if that action monopolizes or threatens actual
monopolization, a category which is narrower than restraint of trade).
Finally, Section 7 of the Clayton Act forbids mergers whose effect
“may be substantially to lessen competition, or to tend to create a monopoly.” 15
U.S.C. § 18. Section 7 is a “prophylactic measure,” Brunswick Corp. v. Pueblo
Bowl-O-Mat, Inc., 429 U.S. 477, 485 (1977), which proscribes “[m]ergers with a
probable anticompetitive effect,” Brown Shoe Co. v. United States, 370 U.S. 294,
323 (1962).
Regardless of the provision purportedly violated, an antitrust plaintiff
must demonstrate that the injury in question is “injury of the type the antitrust laws
were intended to prevent.”2 Brunswick, 429 U.S. at 489. Indeed, the antitrust laws
“were enacted for ‘the protection of competition, not competitors.’” Id. at 488

2

This is different from antitrust standing. See Cargill, Inc. v. Monfort of
Colo., Inc., 479 U.S. 104, 110–11 nn. 5–6 (1986) (noting that antitrust injury is
necessary, but not always sufficient, to establish standing under Section 4 and that
the standing analysis under Section 16 may differ from that for Section 4); see also
Associated Gen. Contractors of Cal., Inc. v. Cal. State Counsel of Carpenters, 459
U.S. 519, 535–46 (1983) (articulating factors that courts should consider when
determining whether a plaintiff has standing under Section 4); Lucas Auto. Eng’g,
Inc. v. Bridgestone/Firestone, Inc. (Lucas I), 140 F.3d 1228, 1232–37 (9th Cir.
1998) (examining whether a plaintiff had standing to assert claims for damages and
injunctive relief under Sections 4 and 16 of the Clayton Act); Amarel v. Connell,
102 F.3d 1494, 1506–07 (9th Cir. 1996) (summarizing the factors relevant to
determine whether a plaintiff has standing to pursue a damages claim under
Section 4).
10

(quoting Brown, 370 U.S. at 320); see also Cascade Health Solutions, 515 F.3d at
501–02 (recognizing the Supreme Court’s “long and consistent adherence to the
principle that the antitrust laws protect the process of competition, and not the
pursuits of any particular competitor”).
A plaintiff seeking damages pursuant to Section 4 of the Clayton Act
must show causal antitrust injury, and to obtain injunctive relief pursuant to
Section 16 of the Clayton Act, a plaintiff must allege threatened antitrust injury.3
Cargill, 479 U.S. at 109–13. The purpose of the antitrust injury requirement is to
“ensure[] that the harm claimed by the plaintiff corresponds to the rationale for
finding a violation of the antitrust laws in the first place, and it prevents losses that
stem from competition from supporting suits by private plaintiffs for either
damages or equitable relief.” Atlantic Richfield Co. v. USA Petroleum, Inc., 495
U.S. 328, 342 (1990). As such, “[t]o show antitrust injury, a plaintiff must prove
that his loss flows from an anticompetitive aspect or effect of the defendant’s
behavior [because] it is inimical to the antitrust laws to award damages for losses

3

Section 4 of the Clayton Act provides treble damages to “any person who
shall be injured in his business or property by reason of anything forbidden in the
antitrust laws.” 15 U.S.C. § 15. Section 16 of the Clayton Act provides that “[a]ny
person, firm, corporation, or association shall be entitled to sue for and have
injunctive relief . . . against threatened loss or damage by a violation of the antitrust
laws.” 15 U.S.C. § 26.
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stemming from acts that do not hurt competition.” Rebel Oil Co., Inc. v. Atlantic
Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995) (citing Atlantic Richfield, 495
U.S. at 334); see also Cascade Health Solutions, 515 F.3d at 902 (“‘Plaintiffs must
prove antitrust injury, which is to say injury of the type the antitrust laws were
intended to prevent and that flows from that which makes defendants’ acts
unlawful. The injury should reflect the anticompetitive effect either of the
violation or of anticompetitive acts made possible by the violation.’”) (quoting
Brunswick, 429 U.S. at 489).
In addition to antitrust injury, antitrust plaintiffs must also properly
allege a relevant market. See Brown Shoe, 370 U.S. at 324–25, 334–35
(concluding that defining the relevant product and geographic markets within
which the competitive effects of the transaction are to be assessed is a “necessary
predicate” to finding anticompetitive effect for a Section 7 claim); Newcal Indus.,
Inc. v. Ikon Office Solution, 513 F.3d 1038, 1044 (9th Cir. 2008) (finding that to
state a claim under either Section 1 or Section 2 of the Sherman Act, the plaintiff
must sufficiently allege a relevant market); Lucas Auto. Eng’g, Inc. v.
Bridgestone/Firestone, Inc. (Lucas II), 275 F.3d 762, 766 (9th Cir. 2001) (stating
that in a case brought under Section 7 of the Clayton Act, “the relevant market

12

must be defined in order to evaluate the competitive consequences of an alleged
restraint of trade”) (citations omitted).
The Ninth Circuit recently addressed the legal principles that govern
definition of a relevant market, and it reaffirmed that a complaint may be dismissed
under Rule 12(b)(6) if its relevant market definition is “facially unsustainable.”
Newcal Indus., 513 F.3d at 1045 (citing Queen City Pizza, Inc. v. Domino’s Pizza,
Inc., 124 F.3d 430, 436–37 (3d Cir. 1997)). The relevant market includes both the
product market and the geographic market.4 Brown Shoe, 370 U.S. at 324; Newcal
Indus., 513 F.3d at 1045 n.4. As to the product market, it must “encompass the
product at issue as well as all economic substitutes for the product.” Newcal
Indus., 513 F.3d at 1045 (citing Brown Shoe, 370 U.S. at 325). It must therefore
include “the group of sellers or producers who have the ‘actual or potential ability
to deprive each other of significant levels of business.’” Forsyth v. Humana, Inc.,
114 F.3d 1467, 1476 (9th Cir. 1997) (quoting Thurman Indus., Inc. v. Pay ‘N Pak
Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989)); see also Brown Shoe, 370 U.S.
at 325 (“The outer boundaries of a product market are determined by the
reasonable interchangeability of use or the cross-elasticity of demand between the

4

Because Access does not challenge Shred-it’s alleged geographic market,
the Court only addresses its asserted product market.
13

product itself and substitutes for it.”). “In limited settings, however, the relevant
product market may be narrowed beyond the boundaries of physical
interchangeability and cross-price elasticity to account for identifiable submarkets
or product clusters.” Thurman Indus., 875 F.2d at 1374 (citation omitted). To
establish the existence of a legally cognizable submarket, “the plaintiff must be
able to show (but need not necessarily establish in the complaint) that the alleged
submarket is economically distinct from the general product market.” Newcal
Indus., 513 F.3d at 1045; see also Brown Shoe, 370 U.S. at 325 (listing several
“practical indicia” of an economically distinct submarket).
Here, contrary to the abundant weight of authority, Shred-it devoted
merely seven words of its thirty-two page complaint to defining the relevant
market. Shred-it asserts that the relevant market is the “mobile, on-site document
destruction industry in Hawaii” (SAC ¶ 50), but the complaint is utterly devoid of
any explanation or elaboration to support this contention. For instance, the
complaint does not contain any allegations concerning economic substitutes for
Shred-it’s proposed product market, and it is entirely unclear to the Court whether
Shred-it is attempting to establish a submarket for its product. Nor is there any
allegation to explain why Shred-it defined the relevant market in the way that it
did.

14

In its opposition, Shred-it argues that if Access “desires to test the
accuracy of the relevant market pleaded by Shred-it, that test should be conducted
at summary judgment or trial, and not on a motion to dismiss.” (Opp’n at 21.)
Although the validity of the relevant market is “typically a factual element rather
than a legal element,” there is no per se prohibition against dismissal of antitrust
claims for failure to plead a relevant market. Newcal Indus., 513 F.3d at 1045.
Indeed, in Newcal Industries, the Ninth Circuit cited with approval Queen City
Pizza, in which the Third Circuit opined:
Where the plaintiff fails to define its proposed relevant market with
reference to the rule of reasonable interchangeability and
cross-elasticity of demand, or alleges a proposed relevant market that
clearly does not encompass all interchangeable substitute products
even when all factual inferences are granted in plaintiff’s favor, the
relevant market is legally insufficient and a motion to dismiss may be
granted.
Queen City Pizza, 124 F.3d at 436–37. Moreover, even before Twombly and
Iqbal, in a case involving an alleged Sherman Act violation, the Supreme Court
acknowledged that “a district court must retain the power to insist upon some
specificity in pleading before allowing a potentially massive factual controversy to
proceed.” Associated Gen. Contractors, 459 U.S. at 528 n.17; see also Twombly,
550 U.S. at 558 (“[I]t is one thing to be cautious before dismissing an antitrust
complaint in advance of discovery . . . , but quite another to forget that proceeding

15

to antitrust discovery can be expensive.”); Kendall, 518 F.3d at 1046–47
(concluding that the Supreme Court clarified the Sherman Act pleading
requirements in Twombly “because discovery in antitrust cases frequently causes
substantial expenditures and gives the plaintiff the opportunity to extort large
settlements even where he does not have much of a case”) (citing Twombly, 550
U.S. at 558–59).
Shred-it’s assertion that its alleged relevant market can be tested only
with a motion for summary judgment or at trial is thus simply incorrect. Because
Shred-it has provided nothing more than the legal conclusion that the relevant
market is the “mobile, on-site document destruction industry in Hawaii,” it has not
alleged a legally cognizable relevant market and its antitrust claim must be
dismissed. Accordingly, the Court GRANTS Access’s Motion to Dismiss Count I
of the Second Amended Complaint.5
The Court recognizes, however, that it may be possible for Shred-it to
state an antitrust claim if provided the opportunity to amend its complaint.

5

Because of this determination, the Court need not reach the remainder of
Access’s arguments, including its contention that Shred-it has not sufficiently
alleged antitrust injury and its assertion that the Copperweld doctrine bars Shredit’s Section 1 claim except to the extent that it challenges the asset acquisition
itself. Although the Court does not address these arguments, it is nonetheless
concerned by the vagueness of Shred-it’s alleged antitrust injury.
16

Accordingly, Count I of the Second Amended Complaint is DISMISSED
WITHOUT PREJUDICE with leave to amend no later than 30 days from the filing
of this Order. Failure to file an amended complaint and to cure the pleading
deficiencies will result in dismissal of Shred-it’s antitrust claim with prejudice.
II.

Counts III through XI: Shred-it’s State Law Claims
Counts III through XI of Shred-it’s Second Amended Complaint all

allege state law claims. The Court has federal question jurisdiction over Shred-it’s
Sherman Act, Clayton Act, and Lanham Act claims, and the parties do not dispute
that the Court has supplemental jurisdiction over Shred-it’s state law claims
pursuant to 28 U.S.C. § 1367(a).6 Access, however, urges the Court to decline to
exercise supplemental jurisdiction over these claims, and argues that “exceptional
circumstances” exist, pursuant to 28 U.S.C. § 1367(c)(4), which justify dismissal
without prejudice of Counts III through XI of Shred-it’s Second Amended
Complaint.7
6

Shred-it initially claimed that the Court had diversity jurisdiction over the
instant lawsuit, but it subsequently abandoned this basis for subject matter
jurisdiction. (SAC ¶ 12.)
7

Access also argues that Shred-it’s state law claims raise novel and complex
issues under Hawaii’s Franchise Investment Law and that Shred-it’s state law
claims predominate over its federal claims, such that dismissal is warranted under
28 U.S.C. § 1367(c)(1), (2). (MTD at 18; Reply at 10–11.) The Court has not thus
far been required to examine the merits of Shred-it’s Second Amended Complaint
with sufficient specificity to make a determination on this argument. Access’s
17

Under 28 U.S.C. § 1367(c), a district court may decline to exercise
supplemental jurisdiction over state law claims if:
(1)

the claim[s] raise[] a novel or complex issue of State law,

(2)

the claim[s] substantially predominate[] over the claim or claims over
which the district court has original jurisdiction,

(3)

the district court has dismissed all claims over which it has original
jurisdiction, or

(4)

in exceptional circumstances, there are other compelling reasons for
declining jurisdiction.

28 U.S.C. § 1367(c)(1)–(4).
The Ninth Circuit has specified that “declining jurisdiction [under
Section 1367(c)(4)] should be the exception, rather than the rule.” Exec. Software
N. Am., Inc. v. U.S. Dist. Court, 24 F.3d 1545, 1558 (9th Cir. 1994), overruled in
part on other grounds by Cal. Dep’t of Water Res. v. Powerex Corp., 533 F.3d
1087 (9th Cir. 2008); see also Itar-Tass Russian News Agency v. Russian Kurier,
Inc., 140 F.3d 442, 448 (2d Cir. 1998) (citing Executive Software for this
proposition). When determining whether exceptional circumstances exist, the
Court must: (1) articulate why the circumstances are sufficiently exceptional for
declining jurisdiction; and (2) inquire into whether the Gibbs values of “economy,

contentions on this point are therefore premature.
18

convenience, fairness, and comity” provide compelling reasons for declining
jurisdiction in such circumstances. Exec. Software, 24 F.3d at 1557–58 (citing
United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 726–27 (1966)); see also
San Pedro Hotel Co. v. City of L.A., 159 F.3d 470 (9th Cir. 1998) (acknowledging
that Executive Software requires district courts to articulate why the circumstances
are exceptional before declining jurisdiction pursuant to 28 U.S.C. § 1367(c)(4)).
Access asserts that exceptional circumstances exist here because this
lawsuit overlaps with two pending Hawaii state court proceedings. As set forth in
this Court’s December 27, 2010 Order (Cv. No. 10-00621, Doc. # 34), this action
is one of three related cases involving similar parties and issues. On September 22,
2010, SIH and Access filed suit in Hawaii state court against Shred-it, seeking a
determination that the Franchise Agreement between SIH and Shred-it is void as
violative of Hawaii law. (Cv. No. 10-00614, Doc. # 1-1.) Access and SIH
subsequently filed a first amended complaint in this state court action, joining
MacNaughton as a plaintiff and adding state law claims for unfair competition,
deceptive trade practices constituting unfair competition, intentional interference
with prospective economic advantage, and conversion/trespass to chattels. (Cv.
No. 10-00614, Doc. # 1-2.) On October 20, 2010, Shred-it removed the action to
this Court (Cv. No. 10-00614, Doc. # 1), and MacNaughton, SIH, and Access

19

dismissed the suit without prejudice on October 21, 2010 (Cv. No. 10-00614, Doc.
# 4).
On the same day, rather than refile the lawsuit they had voluntarily
dismissed, MacNaughton, SIH, and Access filed two lawsuits in Hawaii state court,
which essentially reasserted their previous claims. First, MacNaughton, SIH, and
Access filed a lawsuit against Shred-it, seeking a determination that the Franchise
Agreement is void as violative of Hawaii state law. (Cv. No. 10-00621, Doc. # 11.) On October 25, 2010, Shred-it removed the action to federal court (Cv. No. 1000621, Doc. # 1), and on December 27, 2010, this Court remanded it to Hawaii
state court (Cv. No. 10-00621, Doc. # 34). Second, Access filed a lawsuit against
Shred-it, alleging claims for unfair competition, unfair and deceptive trade
practices, intentional interference with prospective economic advantage, and
conversion/trespass to chattels. (Cv. No. 10-00622, Doc. # 1-1.) Shred-it removed
the action to federal court on October 25, 2010 (Cv. No. 10-00622, Doc. #1), and
on November 5, 2010, U.S. District Judge J. Michael Seabright remanded it to
Hawaii state court (Cv. No. 10-00622, Doc. # 20).

20

Meanwhile, on September 24, 2010, Shred-it filed the instant action
against MacNaughton, SIH, and Access.8 (Doc. # 1.) Shred-it’s state law claims
include unfair competition, deceptive trade practices, conversion, misappropriation
of trade secrets, interference with contract, and breach of the Franchise Agreement.
(SAC ¶¶ 62–107.)
According to Access, the issues presented in the two state court
lawsuits are “mirror images” of Shred-it’s state law claims in the instant federal
action. (MTD at 16–17.) Whereas in Hawaii state court, MacNaughton, SIH, and
Access seek a declaration that the Franchise Agreement is void as violative of
Hawaii law, in this action, Shred-it seeks to enforce the Franchise Agreement.
Additionally, Access argues that it “make[s] little sense” for this Court to
adjudicate Shred-it’s unfair competition and deceptive trade practices claims
because Access asserts those same claims against Shred-it in state court. (Id.)
Access therefore contends that if this Court were to retain jurisdiction over Shredit’s state law claims, it would “waste judicial resources and create the risk of
inconsistent adjudications.” (Id. at 17.)

8

In its Second Amended Complaint, filed January 12, 2011, Shred-it added
Robert Egbert and Brigitte Egbert as defendants.
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Shred-it, in turn, asserts that although the three actions between the
parties “arguably have the same set of operative facts,” the lawsuits all involve
different parties and different claims, such that they are not sufficiently duplicative
to constitute an “exceptional circumstance.” (Opp’n at 31–32.) Shred-it also
argues that because this Court would still have to adjudicate Shred-it’s federal
claims, declining to assert supplemental jurisdiction over the state law claims
would result in “duplicative litigation, wasted judicial resources, needless
expenditures, conflicting case schedules, and the possibility of inconsistent
verdicts.” (Opp’n at 32–33.)
Upon review, and considering the parties’ arguments at the hearing on
this matter, the Court concludes that it is currently premature to reach a
determination on this issue. Accordingly, the Court DENIES WITHOUT
PREJUDICE Access’s Motion to Dismiss Counts III through XI of the Second
Amended Complaint. Access shall have leave to refile its motion when
circumstances are more appropriate.
CONCLUSION
For the reasons set forth above, the Court GRANTS IN PART AND
DENIES IN PART Access’s Motion to Dismiss (Doc. # 133), DISMISSES

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WITHOUT PREJUDICE Count I of Shred-it’s Second Amended Complaint, and
GRANTS the Motion for Joinder (Doc. # 131).
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, May 13, 2011.

_____________________________
David Alan Ezra
United States District Judge

Shred-it America, Inc. v. MacNaughton, et al., Cv. No. 10-00547 DAE-KSC;
ORDER: (1) GRANTING IN PART AND DENYING IN PART ACCESS’S
MOTION TO DISMISS; (2) DISMISSING WITHOUT PREJUDICE COUNT I
OF THE SECOND AMENDED COMPLAINT; (3) GRANTING MOTION FOR
JOINDER

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