Digital Dynamics Software, Inc. v. Eclipse Gaming Systems, LLC, et al
Filing
25
MEMORANDUM Opinion and Order signed by the Honorable Virginia M. Kendall on 6/1/2018. Defendant's Motion to Dismiss 13 is granted without prejudice. Amended shall be filed by 6/19/2018. Status hearing set for 6/12/2018 at 9:00 AM. Mailed notice(lk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
DIGITAL DYNAMICS SOFTWARE, INC.,
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Plaintiff,
v.
ECLIPSE GAMING SYSTEMS, LLC; ELITE
GAMES, LLC; and ACCELERATED
MARKETING SOULTIONS,
Defendants.
18 C 892
Hon. Virginia M. Kendall
MEMORANDUM ORDER AND OPINION
Plaintiff Digital Dynamics Software, Inc. (“Digital”) sued Defendants Eclipse Gaming
Systems, LLC (“Eclipse”), Elite Games, LLC (“Elite”), and Accelerated Marketing Solutions
(“AMS”), alleging that they used and copied certain computer software developed by Digital
without authorization in violation of the Copyright Act of 1976, 17 U.S.C. § 501, and the Digital
Millennium Copyright Act (“DMCA”), 17 U.S.C. § 1202.
Currently before the Court is
Defendants’ Motion to Dismiss. (Dkt. 13). For the reasons set forth below, Defendants’ motion
is granted without prejudice to Digital seeking leave to further amend Digital’s and Anthony
Antonucci’s amended countercomplaint in Eclipse Gaming Systems, LLC v. Antonucci, No. 17 C
196 (N.D. Ill.) (the “2017 Lawsuit”).
BACKGROUND1
Digital and Eclipse have been engaged in litigation since June 2016, with the litigation
before this Court commencing in January 2017.
The Court will set out the factual and
procedural background of this long running litigation as it pertains to the current action. See
1
The Court takes the following allegations from the complaint and treats them as true for the
purposes of this motion. See Gillard v. Proven Methods Seminars, LLC., 388 F. App’x 549 (7th
Cir. 2010).
1
Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir. 1994) (explaining that a court may take
judicial notice of matters in public record, including court documents, in deciding a motion to
dismiss without converting it to a motion for summary judgment).
Plaintiff Digital is a corporation based in Lake Zurich, Illinois that generally provides
software “solutions” for electronic gaming machines in the casino and gambling industry.
Anthony Antonucci owns Digital (directly and beneficially through a trust) and serves as its
president. (Dkt. 1) at ¶¶ 1, 9. In 2003, Digital developed source code and security software for
gaming machines called the Slot Accounting Systems (“SAS”) Engine.
In 2006, Digital
developed another software product called the SAS Gateway. Id. at ¶ 10. Digital also developed
a Gaming Application-Programming-Interface Protocol (“GAP”), which it defines as a
“definition of a set of messages that an electronic gaming machine, such as a slot machine, uses
to communicate with a casino backend system.” Id. at ¶ 8. Essentially, the GAP provides a
universal mechanism for a gaming machine to communicate with a Casino Host System,
regardless of whether the gaming machine is running SAS or some other type of software. Id.
Although the complaint alleges that the GAP was developed in 2002 (id. at ¶ 102), the “GAP –
Game API Protocol” was not copyrighted by Digital until December 21, 2016. See (Dkt. 1-1)
(Certificate of Registration) (listing the year of completion as 2015). The distinction between the
GAP and SAS Engine and SAS Gateway software is not entirely clear. According to Digital, the
GAP Protocol “includes” the SAS Engine software. (Dkt. 1) at ¶¶ 14, 15, 17, 20, 22, 24, 28, 30,
31, 32, 33, 35, 40, 42, 44, 45, 52, 54, 55, 56, 58, 62, 64, 66, 67, 74, 75, 77, 78, 79, 81, 83, 85, 87,
89, 90, 102, 104, 124, 140; see also id. at ¶ 10 (the SAS “software applications are part of the
GAP protocol”). But see id. at ¶ 12 (“The SAS Engine and the SAS Gateway are based upon the
GAP Protocol rules and protocols. The GAP Protocol was independently created and written by
2
[Digital]”). That is, Digital’s allegations in the current litigation appear to indicate the SAS
Engine software appears to be a part of or somehow contained within the GAP Protocol.
In 2008, Antonucci and others came together to form Eclipse, a Texas limited liability
company, that works to “build and assemble electronic gaming machines to deploy into casinos
and other gambling or gaming facilities for the purpose of earning revenue and entering into
revenue sharing agreements with casinos and gambling or gaming facilities.” Id. at 15. The
machines need software to operate, and therefore Eclipse “sought to license the GAP Protocol
software, including the SAS Engine” from Digital. Id. Digital thereafter orally agreed to license
the “GAP Protocol, including the SAS Engine, on Eclipse owned and operated electronic gaming
machines” at a cost of $100 per machine, plus the cost of a “license dongle”—an external device
that contains a security key that communicates with the software and must be plugged in to
enable software operations. Id. at ¶¶ 17, 21, 110; see Eclipse Gaming Sys., LLC v. Antonucci,
2017 WL 3071258, at *1 (N.D. Ill. July 18, 2017). The dongles were produced by a third-party
supplier, Gemalto. (Dkt. 1) at ¶¶ 110–111.
On March 14, 2015, Digital and Eclipse signed a written Master License Agreement
(“MLA”) which granted Eclipse a “limited, nonexclusive license during the term of this MLA to
use, sell, import, export, distribute, transmit, reproduce and publicly display copies of [the SAS
Engine software and SAS Gateway] as electronic files . . . .” (2017 Lawsuit, Dkt. 1-2) (Master
License Agreement) at 2, 3; see also Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *1.
Through the MLA, Eclipse agreed to pay Digital a one-time “run-time” license fee of $100 for
each gaming machine, plus a quarterly maintenance fee of $5,000 for all the machines. Eclipse
Gaming Sys., LLC, 2017 WL 3071258, at *1. The MLA further describes the license rights
3
granted to Eclipse and details Eclipse’s promises regarding dissemination (sale, transfer,
sublease, etc.) of the software. See (2017 Lawsuit, Dkt. 1-2) at 2–3, 5–6.
At some time before July 2015, Defendant Elite—an LLC that is wholly owned by David
Lawrence and Greg Drew—and Robert Drew together became the majority owners of Eclipse.
In July, Elite and Robert Drew removed Eclipse’s manager and installed Greg Drew as the new
manager. (Dkt. 1) at ¶¶ 3, 25. In September, Greg Drew fired three members of the Eclipse
management team, including Antonucci, the Chief Technology Officer.
Antonucci’s
termination, however, was rescinded and he remained employed. Id. at ¶ 25. Around this time,
Antonucci allegedly “became suspicious that Eclipse was wrongfully copying [Digital’s]
software, including the GAP Protocol and SAS Engine,” so Digital and Antonucci demanded an
accounting of the number of electronic gaming machines that contained copies of the Digital
software. Id. at ¶¶ 26, 107. Antonucci also requested financial information relating to Eclipse’s
contracts and revenues earned from its electronic gaming machine operations, including its
Weekly Cash Summary Reports. Id. at ¶ 108. Eclipse did not provide the accounting or
financial information.
In May 2016, Antonucci contacted other shareholders of Eclipse to request a buy-out of
his 17.18% membership interest in Eclipse. Id. at ¶ 116; Eclipse Gaming Sys., LLC, 2017 WL
3071258, at *1. The other shareholders rejected his offer, and Eclipse sought to enforce the
terms of the MLA.
A.
The 2016 State Court Proceedings
On June 16, 2016, Digital filed suit in the Cook County Circuit Court against Eclipse
seeking a declaratory judgment that the MLA was null and void and unenforceable. (Dkt. 1) at
¶¶ 116, 117; Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *1; see also (Dkt. 14-1) at Ex. 2
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(Verified Complaint for Declaratory Relief). The complaint was later amended to include claims
brought by Antonucci for breach of fiduciary duty against Greg Drew and Boris Amegadjie
(Eclipse’s current Chief Executive Officer) related to, among other things, Eclipse’s alleged
failure to provide requested business information to Antonucci, namely an accounting and access
to Eclipse’s books and records. See (2017 Lawsuit, Dkt. 15-2) (Amended Verified Complaint
for Declaratory Relief).
On August 25, 2016, while the lawsuit was pending, Eclipse terminated Antonucci’s
employment. Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *1. Then, on November 30,
2016, Eclipse filed a new suit against Digital in the Circuit Court of Cook County, alleging that
Digital had threatened to render the SAS Engine software on several hundred of Eclipse’s
gaming machines inoperable. Specifically, Eclipse alleged that on November 18, 2016, Digital
sent Eclipse a letter stating that “unless Eclipse pays Digital $300,000 and enters into a new
master license agreement with Digital, the ‘SAS Engine [software] will become un-operable in
December’” and indicated that Eclipse needed to purchase new dongles to continue operating
their machines.
(2017 Lawsuit, Dkt. 22-2) (Verified Complaint for Declaratory Judgment,
Anticipatory Breach/Breach of Contract, And Specific Performance) at ¶ 13.
Accordingly,
Eclipse sought to enjoin Digital from disrupting the software, a declaration that the MLA is valid
and enforceable, and an order directing Digital’s specific performance, requiring Digital to
deliver necessary software updates without rendering the gaming machines inoperable. Id. at 6;
Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *1.
On December 5, 2016, the state court heard Eclipse’s motion for a temporary restraining
order, which it granted. Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *2; see also (2017
Lawsuit, Dkt. 52) at 5–6 (12/5/16 Agreed Order). As per an agreement between the parties,
5
Eclipse purchased 500 dongles from Digital for use with their electronic gaming machines for
$65,000, comprised of $15,000 for the actual dongles, and $50,000 for license fees. (2017
Lawsuit, Dkt. 52) at 5. Upon receipt of the dongles, Eclipse implemented emergency procedures
to avoid the shutdown, including performing tests, warning clients of the possibility of shutdown,
sending technicians to casino locations across the country, and deploying personnel at client
locations to monitor the machines’ performance. Despite these emergency procedures, some of
Eclipse’s machines shut down for approximately seven days as a result of Digital’s software
modification. Eclipse Gaming Sys., LLC, 2017 WL 3071258, at *2.
B.
The 2017 Lawsuit
On January 10, 2017, Eclipse brought a nine-count complaint against Antonucci, Eclipse
Gaming Systems, LLC v. Antonucci, 17 C 196 (N.D. Ill.). Specifically, Eclipse alleged that
Antonucci had violated two provisions of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030,
and the Illinois Computer Crime Prevention Law, 720 ILCS 5/17-51, when he secretly
programmed and installed “an expiration date or a ‘time bomb’” in updated versions of the SAS
Gateway and SAS Engine software that required Eclipse to buy new dongles or else have its
machines rendered inoperable on December 7, 2016. (2017 Lawsuit, Dkt. 1) at ¶¶ 33, 38, 85,
72–97. Although Eclipse had brought the state court action, received a temporary restraining
order, and purchased 500 dongles that could override the “time bomb,” some of its machines had
shut down on account of the time bomb. Id. at ¶¶ 49–51. Eclipse alleged that the shut downs
caused it substantial expense in implementing remedial measures and lost revenue, as well as
harm to its goodwill and reputation with its customers.
In addition to the computer claims, Eclipse asserted multiple other state common law
claims.
See id. at ¶¶88–98 (tortious interference with contractual relations under Illinois
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common law), ¶¶ 99–107 (breach of fiduciary duty as employee under Illinois common law),
¶¶ 108–16 (breach of fiduciary duty as employee under Georgia common law), ¶¶ 117–21
(breach of employment agreement under Georgia common law), ¶¶ 122–30 (breach of fiduciary
duty of a Texas limited liability company under Texas common law), ¶¶ 131–39 (conversion
under Illinois common law). These claims are largely predicated on allegations that Antonucci
had interfered with Eclipse’s ability to purchase dongles by telling Gemalto that Digital was the
owner of the security keys contained within the dongles. In particular, according to Eclipse,
while employed as the CTO, Antonucci had the authority to act on Eclipse’s behalf in
authorizing Gemalto to make dongles for Eclipse’s gaming machines, and he was responsible for
ordering the four kinds of dongles used on Eclipse’s machines. Id. at ¶¶ 57–59. On November
3, 2016, Eclipse submitted a routine purchase order for several hundred dongles with the
MAMMC and RWIID security keys. Id. at ¶ 61. But because Antonucci had instructed Gemalto
not to sell dongles to Eclipse, Gemalto informed Eclipse that it was no longer authorized to
purchase any dongles. Id. at ¶¶ 62–64. As a result, Eclipse has been unable to obtain any
dongles without Antonucci’s approval—which Antonucci has withheld. All told, Eclipse seeks
damages, disgorgement of Antonucci’s compensation from June 17, 2016 to August 25, 2016,
forfeiture of his membership interest in Eclipse, an injunction prohibiting Antonucci from taking
certain actions with regard to Gemalto, punitive damages, fees and costs. Id. at 25–26.
Antonucci moved to dismiss the Computer Fraud and Abuse Act claims as insufficiently
pled, and the Court denied the motion. (2017 Lawsuit, Dkts. 15, 23); see also Eclipse Gaming
Sys., 2017 WL 3071258. On August 8, 2017, Antonucci filed an 25-page countercomplaint
against Greg Drew, David Lawrence and Boris Amegadjie. (2017 Lawsuit, Dkt. 25-1). On
October 6, 2017, Antonucci petitioned the Court for a temporary restraining order against David
7
Lawrence.
(2017 Lawsuit, Dkt. 41).
As relevant, the petition stated that “Antonucci has
determined that Eclipse uses [Digital’s] software without paying licensing fees, that it has
installed [Digital’s] software on machines owned or operated by [Elite] and [AMS]. . . .
Licensing fees remain due and owing for the use of the SAS engine and SAS Gateway software
and Eclipse has refused to provide an accounting of the number of electronic gaming machines
using the [Digital] software.” Id. at 2. The petition largely complained about David Lawrence’s
and Greg Drew’s actions in managing and running Eclipse, and it specifically sought to prevent
David Lawrence from purchasing the membership interests of two other members, allegedly in
violation of the Eclipse Operating Agreement. Id. After conducting a hearing on the motion, the
Court denied it as moot. (2017 Lawsuit, Dkt. 44).
On January 29, 2018, Antonucci filed an amended eight-count countercomplaint against
Eclipse, Greg Drew and David Lawrence, in which Digital joined him as a counter-plaintiff.
(2017 Lawsuit, Dkt. 51). There, Antonucci and Digital alleged the following: (1) a member
derivative action against Greg Drew and David Lawrence for breaches of their fiduciary duties
and corporate waste; (2) declaratory judgment actions seeking declarations that the Master
License Agreement is unenforceable for various reasons; (3) a claim for breach of Antonucci’s
employment agreement with Eclipse and wrongful discharge; (4) a claim for injunctive relief,
seeking in part the production of business information; and (5) a claim for breach of fiduciary
duty and violation of the minority oppression doctrine. Id. As relevant, the countercomplaint
clarifies that Elite and AMS (another LLC that is wholly owned by Drew and Lawrence), were
both distributors of Eclipse gaming machines that paid Eclipse a certain percentage of the gross
revenue received from casino accounts. In addition, the countercomplaint alleges that Eclipse
“provided the SAS Engine to machines owned or operated by” Elite and AMS. Id. at ¶ 41. With
8
this background, the fiduciary duty and corporate waste claims are based on Greg’s and
Lawrence’s actions of allegedly allowing revenue belonging to Eclipse from one of its clients,
the Speaking Rock Casino in El Paso, Texas, to be paid to Elite and/or AMS; refusing to produce
to Antonucci financial information and reports concerning Elite’s and/or AMS’s financial
obligations to Eclipse with regard to the Speaking Rock Casino and an Alabama casino, Rivers
Edge Casino; allowing Elite and AMS to maintain machines and servers using Eclipse’s
resources for free; collecting excessive and unnecessary expenses and inflated salaries from
Eclipse; maintaining excessively large and extravagant offices for Eclipse; and otherwise
mismanaging Eclipse. Id. at ¶ 26. As relief, Antonucci and Digital seek damages, back pay, lost
benefits, disgorgement of Drew’s and Lawrence’s salaries and other compensation, restitution, a
declaration that the Master License Agreement is void and unenforceable, and various forms of
injunctive relief, including an order requiring Eclipse to produce an accounting and certain
information and records and an order removing David Lawrence as the manager of Eclipse.
C.
The 2018 Lawsuit
Just four days after filing the amended countercomplaint in the 2017 Lawsuit, Digital
brought the current lawsuit against Eclipse, Elite, and AMS, alleging multiple counts of
copyright infringement—direct and vicarious—and numbers violations of the DMCA. (Dkt. 1).
Digital alleges that Elite owns or operates 650 gaming machines at the Speaking Rock Casino
and 230 machines at the Rivers Edge Casino, and that Elite and AMS own and/or operate
thousands more gaming machines across the United States. Id. at ¶¶ 24, 82. With respect to the
infringement claims, Digital alleges that Eclipse copied the GAP Protocol, including the SAS
Engine software, onto more than 1000 electronic gaming machines—its own machines and those
owned or operated by Elite and AMS—in violation of the oral agreement between Eclipse and
9
Digital, without authority or permission from Digital, and despite the fact that Eclipse has only
paid Digital 832 license fees. Id. at ¶¶ 16–22, 74. Digital further alleges that Elite and AMS
unlawfully copied the GAP Protocol, including the SAS Engine, onto their own gaming
machines at Speaking Rock Casino and Rivers Edge Casino without any license agreement from
Digital or paying Digital. Id. at ¶¶ 33–36, 56–59.
Digital also brings claims pursuant to the DMCA, which addresses liability for
circumventing systems that protect copyrights. See 17 U.S.C. § 1201(a)(1)(A) (“No person shall
circumvent a technological measure that effectively controls access to a work protected under
this title.”).
Here, Digital alleges that after Eclipse failed to comply with Antonucci’s
information demands, Digital “updated its software in January 2016 to restrict access to only
users who had a valid license. The software update was designed to begin checking for licenses
effective upon the date of December 7, 2016.” (Dkt. 1) at ¶¶ 105–09. Digital calls this the
“License Verification.” Id. Digital also “terminated the authority of Eclipse to order [Digital’s]
RWIID dongles from Gemalto.” Id. at ¶ 122. It was not until November 10, 2016 that Digital
“issued notice to Eclipse that unlicensed copies of its software would no longer operate,” thereby
causing Eclipse to file its state court lawsuit and pay Digital $65,000 for 500 RWIID dongles.
Id. at ¶¶ 119, 121. Still, Digital alleges that in 2017, Eclipse reverted to an older version of the
SAS Engine software that did not contain any license verification or operation disruption
measures. Id. at ¶¶ 124–25, 128. According to Digital, “Eclipse would have no cause to install
older versions of the GAP Protocol or SAS Engine software onto any properly licensed
electronic gambling machine, [therefore] Eclipse must have copied unlicensed software onto an
unknown and undisclosed number of electronic gaming machines” both owned by Eclipse and
by Elite and/or AMS. Id.
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LEGAL STANDARD
On a motion to dismiss for failure to state a claim under Rule 12(b)(6), this Court
construes all facts in the light most favorable to the non-moving party. See Appert v. Morgan
Stanley Dean Witter, Inc., 673 F.3d 609, 622 (7th Cir. 2012). The Court also takes all wellpleaded factual allegations as true. See Yeftich v. Navistar, Inc., 722 F.3d 911, 915 (7th Cir.
2013). Dismissal for failure to state a claim under Rule 12(b)(6) is proper “when the allegations
in a complaint, however true, could not raise a claim of entitlement to relief.” See Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 558 (2007). The Court may take judicial notice of matters in
public record, including court documents, in deciding a motion to dismiss without converting it
to a motion for summary judgment. Henson, 29 F.3d at 284.
DISCUSSION
Defendants Eclipse, Elite, and AMS move to dismiss the 2018 Lawsuit on multiple
grounds. Defendants argue that (1) the claims in the 2018 Lawsuit arise from the same operative
facts as Antonucci’s and Digital’s countercomplaint in the 2017 Lawsuit and therefore cannot be
alleged in an independent suit; (2) Digital’s copyright infringement claims are barred by the
work-for-hire doctrine and Antonucci’s employment agreement; and (3) Digital’s DMCA claims
fail to state a claim under that statute. (Dkt. 14). Because Defendants’ claim-splitting argument
is dispositive, the Court will refrain from addressing Defendants’ other arguments for dismissal.
I.
Claim Splitting
Defendants argue that Digital’s claims in the present suit must be dismissed because they
arise from the same set of operative facts underlying the 2017 Lawsuit—including those
supporting Digital’s and Antonucci’s countercomplaint, which was filed mere days before the
complaint in the current copyright proceeding. Under the doctrine of claim splitting, a form of
res judicata, a party cannot split a cause of action into separate grounds of recovery and bring
11
successive lawsuits. Nalco Co. v. Chen, 843 F.3d 670, 674 (7th Cir. 2016); Kim v. Sara Lee
Bakery Grp., Inc., 412 F. Supp. 2d 929, 941 (N.D. Ill. 2006).2 Rather, a party must bring in one
lawsuit “all legal theories arising out of the same transaction or series of transactions.” Kim v.
Sara Lee Bakery Grp., Inc., 412 F. Supp. 2d 929, 941 (N.D. Ill. 2006); see also Chicago Title
Land Tr. Co. v. Potash Corp. of Saskatchewan Sales, 664 F.3d 1075, 1081 (7th Cir. 2011)
(“[T]he principle that res judicata prohibits a party from later seeking relief on the basis of issues
which might have been raised in the prior action also prevents a litigant from splitting a single
cause of action into more than one proceeding.”); Wilson v. City of Chicago, 120 F.3d 681, 686
(7th Cir. 1997) (“Two claims arising from the same set of facts are one claim for res judicata
purposes, and may not be split . . . by making each claim the subject of a separate suit[.]”);
Restatement (Second) of Judgments § 24, comment d (“When a defendant is accused of . . . acts
which though occurring over a period of time were substantially of the same sort and similarly
motivated, fairness to the defendant as well as the public convenience may require that they be
dealt with in the same action.”). “As a general rule, a federal suit may be dismissed for reasons
of wise judicial administration . . . whenever it is duplicative of a parallel action already
pending.” Serlin v. Arthur Andersen & Co., 3 F.3d 221, 223 (7th Cir. 1993)) (citation and
internal quotation marks omitted). Unlike res judicta, the doctrine of claim splitting applies
before there is a final judgment in a prior action. Anderson v. Guaranteed Rate, Inc., 2013 WL
2319138, at *4 (N.D. Ill. May 28, 2013); Kim, 412 F. Supp. 2d at 941–42; CIVIX-DDI, LLC v.
Expedia, Inc., 2005 WL 1126906, at *4 (N.D. Ill. May 2, 2005) (collecting cases).
2
Neither party addresses the applicable preclusion law. But since both the 2017 Lawsuit and the instant
action are predicated on federal-question jurisdiction (that is, the 2017 Lawsuit brings bases its
jurisdiction on Computer Fraud and Abuse Act claims, and instant suit bases its jurisdiction on the
Copyright Act and the DMCA), “[t]he preclusive effect of a federal-court judgment is determined by
federal common law.” Taylor v. Sturgell, 553 U.S. 880, 891 (2008); see also Firishchak v. Holder, 636
F.3d 305, 308 (7th Cir. 2011).
12
Digital makes three general arguments as to why the doctrine of claim splitting should
not apply: the two actions involve “a different set of actions involving different parties” and the
damages sought in the two actions are different. See (Dkt. 20). The Court will address each
argument in turn.
A.
Identity of Causes of Action
Digital first generally argues that the “actions asserted” in the 2017 Lawsuit and the
present case “do not arise from the same incidents, events or transactions.” (Dkt. 20) at 3. These
arguments, however, are shortsighted and underdeveloped. That is, they are supported only by
Digital’s repeated conclusory statements that they actions are different, not by any relevant case
law. See, e.g., (Dkt. 20) at 3 (“An examination of the [counterclaims in the 2017 Lawsuit]
demonstrates the actions and parties are not the same—there is no unity.”). Digital breaks down
the counts contained in its counterclaims in the 2017 Lawsuit and argues that each one involves a
discrete set of parties and characteristics that make it different from any of the copyright claims
asserted here. Id. at 3–4. For example, Digital attempts to distinguish the two actions on the
basis of the legal theories alleged, arguing that two of the eight counts in the counterclaims
involve the “fiduciary duties and statutory obligations owed by Drew and Lawrence,” which are
wholly separate and distinct from the facts pertaining to the [copyright case].” See (Dkt. 20) at 3.
Part of the confusion likely results from Digital’s misstatement of the preclusion standard:
Digital argues that the operative facts underlying its amended countercomplaint in the 2017
Lawsuit are not “identical” to those underlying the current proceeding. See (Dkt. 20) at 2, 5, 7.
However, instead of looking myopically at the specific legal theories asserted or
individual facts alleged to find an exact match, the Court looks to the transactions underlying the
2017 Lawsuit as a whole, not just those specifically attached to each of the counterclaims. See
13
Nalco Co., 843 F.3d at 674 (“Having elected to take the offensive, [the defendant] was obliged to
raise all claims that stem from the same transaction or series of related transactions (what courts
sometimes call the ‘core of operative facts’).”). Section 24 of the Restatement (Second) of
Judgments teaches:
What factual grouping constitutes a “transaction” and what groupings constitute a
“series”, are to be determined pragmatically, giving weight to such considerations
as whether the facts are related in time, space, origin, or motivation, whether they
form a convenient trial unit, and whether their treatment as a unit conforms to the
parties’ expectations or business understanding or usage.
Restatement (Second) of Judgments § 24(2); see Marrese v. Am. Acad. of Orthopaedic Surgeons,
470 U.S. 373, 382–83 (1985) (Restatement of Judgments reflects contours of federal common
law of claim preclusion). In other words, a cause of action is defined as “a ‘single core of
operative facts’ which give rise to a remedy.” Petit v. City of Chicago, 766 F. Supp. 607, 611
(N.D. Ill. 1991) (quoting Alexander v. Chicago Park Dist., 773 F.2d 850, 854 (7th Cir. 1985)).
Once a transaction has caused injury, all claims arising from that transaction must be brought in
one suit. See Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 593 (7th Cir. 1986). Thus, a
“mere change in the legal theory does not create a new cause of action.” Petit, 766 F. Supp. at
611. In other words, that separate suits are different in some respects, including the legal
theories advanced and some of the facts a claimant intends to use to prove its right to relief, is
not enough to defeat a finding that two claims rely on the same fundamental facts. Ross ex rel.
Ross v. Bd. of Educ. of Twp. High Sch. Dist. 211, 486 F.3d 279, 283 (7th Cir. 2007). This
principal is set forth in § 25 of the Restatement: “The rule of § 24 applies to extinguish a claim
by the plaintiff against the defendant even though the plaintiff is prepared in the second action
(1) To present evidence or grounds or theories of the case not presented in the first action, or
(2) To seek remedies or forms of relief not demanded in the first action.” Restatement (Second)
of Judgments § 25; see also Nalco Co., 843 F.3d at 674.
14
Looking then at the factual circumstances undergirding the two actions, the 2017 Lawsuit
and the present copyright action arise out of the same transactions or occurrences, specifically
(1) the parties’ agreement regarding Eclipse’s use of the SAS Engine software (oral and/or
MLA) and (2) Elite and/or AMS machines at establishments including the Speaking Rock
Casino and Rivers Edge Casino and Eclipse’s involvement with these machines. See (2017
Lawsuit, Dkt. 25) (Answer) at 1 (“At the heart of this litigation is [Eclipse’s] unauthorized use of
[Antonucci’s] SAS Engine Software. The use was unauthorized because [Eclipse] failed to pay
the required license fees.”); (2017 Lawsuit, Dkt. 57) (“The [amended counterclaim] alleges that
Eclipse provided the SAS Engine to [Elite] . . . . and that Eclipse has failed to account for the
number of machines using the SAS Engine and has failed to pay licensing fees due and owing to
[Digital].”); (Dkt. 1) (“The actions identified in the Complaint arise from the unauthorized use
and copying of computer software commonly known as the ‘GAP Protocol’,” which includes the
SAS Engine software).3 Although Digital attempts to factually distinguish the two actions, its
narrow arguments fail for the following reasons.
1.
Copyright Infringement Claims (Counts I, II, III, and IV)
First, the doctrine of claim splitting precludes Digital from bringing claims based on the
use of the SAS Engine software on Eclipse gaming machines (Count III). The 2017 Lawsuit
involves the agreements between Digital and Eclipse for use of the SAS Engine software on its
gaming machines. Specifically, Eclipse’s claims involve the “time bomb’s” disruption of the
software and the operation of its machines; Antonucci’s and Digital’s counterclaims involve the
overall enforceability of the 2015 MLA between the parties. See (2017 Lawsuit, Dkts. 1, 51).
3
Digital notably does not argue that the GAP Protocol and the SAS Engine are separate and different
computer applications, nor could it in good faith argue as such based on the allegations in the complaint.
(Dkt. 1). Therefore, any distinction between the two programs, to the extent that there is one, is not fatal
to the Court’s analysis. Indeed, Digital’s response contends that the two programs are not licensed
separately and that they are “inherently linked.” See (Dkt. 20) at 8.
15
The copyright-infringement claim against Eclipse in the present lawsuit, that Eclipse copied the
software—the GAP Protocol, including the SAS Engine—onto more than 1,000 machines while
only paying 832 license fees, directly implicates the licensing agreement(s) between the parties.
See (Dkt. 1) at ¶¶ 73–95. Therefore, Count III is based on the same operative facts underlying
the 2017 Lawsuit, namely the parties’ licensing agreements and their compliance therewith.
Digital’s claims regarding the use of the SAS Engine software on Elite and AMS
machines (and its claim for “vicarious infringement” by Eclipse based on software use on Elite
and/or AMS machines) (Counts I, II, and IV) are also precluded by claim-splitting. Specifically,
both suits involve Elite and/or AMS machines placed at the Speaking Rock Casino and Rivers
Edge Casino either by contract with Eclipse or otherwise. In the 2017 Lawsuit, Digital and
Antonucci assert a two counterclaims against Drew and Lawrence in part for actions taken as
managers of Eclipse from September 2015 to the present, either personally or through the current
manager, related to (1) revenue from (a) more than 600 gaming machines at the Speaking Rock
Casino that was allegedly diverted away from Eclipse and to Elite and AMS and (b) gaming
machines at the Rivers Edge Casino that was not received by Eclipse, and (2) Elite’s and AMS’s
other instances of failing to pay Eclipse for services. (2017 Lawsuit, Dkt. 51) at ¶ 26. Digital’s
claims in the current lawsuit that Elite, AMS, and Eclipse committed copyright infringement
stem from the same alleged mismanagement and gaming machines at the Speaking Rock Casino
and Rivers Edge Casino. That is, Digital’s copyright infringement claims are based on the same
operative facts underlying Digital’s and Antonucci’s counterclaims in the 2017 Lawsuit. It is not
logical to argue that claims regarding the revenue generated by these specific machines should be
tried separately from claims regarding the software used on the machines to generate that same
revenue.
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Further, Counts I, II, and IV also involves the parties’ business understandings related to
their licensing agreement(s), the scope of the agreements, and the parties’ compliance with the
agreements. See (2017 Lawsuit, Dkt. 1-2) at 2–3, 5–6 (describing the license rights granted to
Eclipse including those regarding sale, transfer, sublease, etc. of the software). To the extent that
Digital argues that its counterclaims regarding the validity of the MLA in the 2017 Lawsuit
relate only to the proposed acquisition of Eclipse and that any facts or evidence supporting the
copyright claims is not relevant to the counterclaims, this argument is without merit. (Dkt. 20) at
3–4. The MLA counterclaims and the infringement claims in this case unquestionably regard the
parties’ understanding regarding the licensing of Digital’s software to Eclipse and Eclipse’s
actions of providing the SAS Engine software to machines owned or operated by Elite and AMS.
See (2017 Lawsuit, Dkt. 51) at ¶ 41 (alleging, in support of the contract-validity counts, that
Eclipse provided the SAS Engine to Elite and AMS machines).
2.
Digital Millennium Copyright Act Claims (Counts V, VI, VII, and
VIII)
In addition, the doctrine of claim splitting precludes Digital from bringing claims based
on actions taken by Eclipse in connection with the December 7, 2017 “time bomb” or “License
Verification.” To start, there can be no serious dispute that the “time bomb” and “License
Verification” are the same thing, as Digital itself recognizes. See (Dkt. 20) at 5 (“The Eclipse
damages arise from the License Verification mechanism (aka ‘time bomb’).”). Accordingly,
both the 2017 Lawsuit and Digital’s DMCA claims involve the same set of operative facts—
Eclipse’s use of the SAS Engine software, the software disruption in December 2016, and
Eclipse’s actions following the disruption.
Therefore, Digital’s claims resulting from the
December 2017 software disruption cannot be divided.
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Digital acknowledges that the chronology alleged by Eclipse in the 2017 Lawsuit “is a
subset of the chronology” for the instant copyright action, but it further argues that that the
operative facts of the copyright action are more expansive because they include actions taken by
Eclipse after the “time bomb”/License Verification was triggered in December 2016. (Dkt. 20)
at 5–6. Although Digital is correct that its DMCA claims include allegations that go beyond
December 2016, Digital is wrong that this fact creates a new, separate transaction or core of
operative facts. To the contrary, Digital’s arguments further confirm that its claims arise out of
the same operative facts underpinning the 2017 Lawsuit. There, Eclipse alleges that some of its
machines were rendered inoperable on account of the “time bomb” and that it suffered damages
in the service disruption in bringing them back online still using the SAS Engine software. In
this case, Digital takes issue with the steps that Eclipse has taken post License Verification to run
the SAS Engine software. Both the 2017 Lawsuit and Digital’s DMCA claims are based on the
fallout from the “time bomb”/License Verification. Moreover, the MLA at issue in the 2017
Lawsuit grants Eclipse “the right to modify and maintain the Software directly as long as
[Digital’s] rights are acknowledged.” See (2017 Lawsuit, Dkt. 1-2) at 3. This provides further
support that the two cases are connected and cannot logically be separated.
B.
Identity of Parties
Next, Digital argues that since Elite and AMS are not parties to the 2017 Lawsuit, and
since Greg Drew and David Lawrence are not parties to the current copyright action, the doctrine
of claim splitting does not apply. However, “just as the adoption of a new legal theory will not
salvage litigation arising from a set of facts that has already been litigated, a party may not avoid
the rule against claim splitting by slightly altering the parties in subsequent actions.” Pa.
Chiropractic Ass'n v. Blue Cross Blue Shield Ass'n, 2013 WL 5951505, at *3 (N.D. Ill. Nov. 7,
18
2013) (citing Zarniecki v. City of Chicago, 633 F.3d 545, 549 (7th Cir. 2011)). If the new parties
are in privity with the parties in the original action, the doctrine of claim splitting will still apply.
See Zurich Capital Markets Inc. v. Coglianese, 383 F. Supp. 2d 1041, 1048 (N.D. Ill. 2005).
Courts apply a “functional approach” to determining whether parties are in privity.
Serv.
Employees Int’l Union Local 1 v. Digby’s Detective & Sec. Agency, Inc., 2009 WL 721003, at *2
(N.D. Ill. Mar. 18, 2009). “It is the identity of interest that controls in determining privity, not
the nominal identity of the parties.” Chicago Title Land Trust Co., 664 F.3d at 1080 (citation
and internal quotation marks omitted).
Digital has alleged that Drew and Lawrence are the sole owners of the membership
interests of Elite and AMS. See (2017 Lawsuit, Dkt. 51) at ¶ 26(A) (“Elite is owned one-half by
David Lawrence and one-half by Greg Drew.”), ¶ 26(B) (“Like Elite, AMS is owned one-half by
Lawrence and one-half by Drew.”); (Dkt. 1) at ¶¶ 3, 4. For purposes of preclusion, “limited
liability companies are in privity with their individual owners, particularly, as is the case here,
when the owner[s have] exclusive control over the LLC.” Kramer v. Stelter, 588 F. Supp. 2d
862, 867 (N.D. Ill. 2008); see also VitalGo, Inc. v. Kreg Therapeutics, Inc., 2017 WL 1163741,
at *7 (founder, owner, president, and CEO of corporation was in privity with corporation) (N.D.
Ill. Mar. 29, 2017); Arlin-Golf, LLC v. Vill. of Arlington Heights, 2010 WL 918071, at *6 (N.D.
Ill. Mar. 9, 2010) (LLCs are in privity with their individual owners; “[t]his is not surprising,
given the close alignment of the interests of an LLC like [the plaintiff] with the interests if its
two owners.”), aff’d, 631 F.3d 818 (7th Cir. 2011); Direct Marketing Concepts v. Trudeau, 266
F. Supp. 2d 794, 796 (N.D. Ill. 2003) (“In light of [plaintiff’s] self-created total control over both
[LLCs] . . . it would represent the height of artificiality . . . to view the [LLC’s] as anything other
19
than in privity with [plaintiff] as an individual.”); accord Carr v. Tillery, 2010 WL 1963398, at
*9 (S.D. Ill. May 17, 2010).
In addition to alleging that Drew and Lawrence own and control Elite and AMS, Digital
has set forth further allegations that indicate that Drew and Lawrence are in privity with Elite and
AMS. In particular, in setting forth its copyright-infringement claims, Digital alleges that Elite
and AMS acted willfully or in conscious disregard of Digital’s rights, because “[t]he owners of
Elite, Greg Drew and David Lawrence, are controlling owners of Eclipse and are on actual notice
that [Digital] has demanded that Eclipse account for Infringing Machines and terminate their
unlawful copying behavior. Elite is actually aware that [Digital] has not been compensated for
its copyrighted software – the GAP Protocol, including the SAS Engine – and that [Digital’s]
property is being copied without [Digital’s] consent.” (Dkt. 1) at ¶ 42; see also id. at ¶ 64
(asserting same allegations with respect to AMS). Digital’s allegations rely on a unity of interest
between Drew and Lawrence and Elite and AMS, and therefore its arguments to the contrary in
opposition to Defendants’ motion to dismiss are without merit.
C.
Damages
Finally, just as a change in legal theories does not create a new cause of action, a change
in remedies sought also does not create a new cause of action if the remedies all arise from the
same factual underpinnings. In other words, “it is the cause of action, and not the remedy, which
determines whether claim preclusion applies: a claim can be barred even though the plaintiff
seeks remedies or forms of relief not demanded in the original action.” Humphrey v. Tharaldson
Enters., Inc., 95 F.3d 624, 626 (7th Cir. 1996) (citing Pliska v. City of Stevens Point, Wisc., 823
F.2d 1168, 1172–73 (7th Cir. 1987)). Indeed, as explained in Restatement § 25, “[t]he rule of
§ 24 [against claim splitting] applies to extinguish a claim by the plaintiff against the defendant
20
even though the plaintiff is prepared in the second action . . . [t]o seek remedies or forms of relief
not demanded in the first action.” See Nalco Co., 843 F.3d at 674. Accordingly, the fact that
Antonucci’s and Digital’s counterclaims in the 2017 Lawsuit seek injunctive relief (an
accounting and other business information), declaratory relief regarding the MLA, business
damages, and employment damages does not mean that the current action seeking infringement
damages is necessarily separate and distinct. And, for the reasons already laid out above, the
Court concludes that the factual underpinnings of the remedies in both actions are the same.
Digital’s arguments to the contrary are circular and conclusory. See (Dkt. 20) at 5 (“Once [the
“time bomb”] damages occur, the operative facts surrounding those damages constitute Eclipse’s
operative facts.”).
In sum, the doctrine of claim splitting precludes Digital from bringing a separate action
based on Defendants’ use (or misuse) of the SAS Engine software, including claims that
Defendants allegedly infringed on Digital’s copyright through their implementation of any
version of the SAS Engine software on gaming machines. And although Digital asserts, in a
single sentence, that an “appropriate remedy would be to join the relevant count with the
[amended counterclaims in the 2017 Lawsuit] pursuant to Rule 15(a)” ((Dkt. 20) at 7), this is not
the proper manner in which to request leave to amend in the 2017 Lawsuit. See, e.g., VitalGo,
Inc., 2017 WL 1163741, at *8 (“Plaintiffs’ embedding of a request for leave to amend in a
footnote of a response brief is improper.”). Instead, if Digital wishes to purse its copyrightrelated claims in the 2017 Lawsuit, it must file a motion for leave to amend its counterclaims in
that action.
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CONCLUSION
For the foregoing reasons, Defendant’s Motion to Dismiss (Dkt. 13) is granted.
____________________________________
Hon, Virginia M. Kendall
United States District Judge
Date: June 1, 2018
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