JS Products, Inc. v. Kabo Tool Company

Filing 33

ORDER Granting #10 Motion to Dismiss claims Two and Three with Leave to Amend. Signed by Chief Judge Robert C. Jones on 2/24/12. (Copies have been distributed pursuant to the NEF - ASB)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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JS PRODUCTS, INC.,

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Plaintiff,
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v.
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KABO TOOL COMPANY; JOHN DOE
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ENTITIES I-X; and JOHN DOES XI-XX,
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Defendants.
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___________________________________ )

2:11-cv-1856-RCJ-GWF
ORDER

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This is a patent infringement case which includes state-law claims of intentional

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interference with contractual relations and commercial disparagement. Defendant Kabo Tool

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Company (“Kabo”) has filed a motion to dismiss the two state-law claims against it pursuant

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to Rule 12(b)(6). (Mot. to Dismiss (#10)). For the following reasons, Kabo’s motion to dismiss

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the two state-law claims is granted.

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BACKGROUND

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Plaintiff JS Products, Inc. (“JSP”) is a Nevada corporation with offices located in Las

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Vegas, Nevada which imports and sells tools. (Compl. (#1) at 1-2). Defendant Kabo is a

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Taiwanese company that owns U.S. Patent No. 7,066,057 (the “ ‘057 Patent”), which is for a

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wrench with jaws that have different tilt angles. (Id. at 1-2; ‘057 Patent (#1) Ex. A).

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On August 29, 2011, counsel for Kabo sent JSP a letter (the “Cease and Desist Letter”)

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stating that Kabo is the owner of the ‘057 Patent and that Kabo believed certain JSP wrenches

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imported into the United States and sold by JSP (the “Accused Products”) infringed on the

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‘057 Patent. (Compl. (#1) at 2). Kabo further demanded that JSP cease and desist the
alleged infringing activity. (Id. at 2-3). JSP responded to Kabo’s Cease and Desist Letter by

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acknowledging receipt of Kabo’s demand but disagreeing with Kabo’s assertions regarding the

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alleged infringement, specifically detailing inaccuracies in Kabo’s basis for asserting that the

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Accused Products infringe the ‘057 Patent. (Id. at 3).

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JSP filed a complaint in this Court on November 17, 2011 against Kabo, claiming: (1)

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JSP is entitled to a declaratory judgment of non-infringement and invalidity and/or

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unenforceability of the ‘057 Patent (claim 1); (2) intentional interference with contractual

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relations and/or prospective economic advantage (claim 2); and (3) commercial disparagement

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and/or corporate defamation (claim 3). (Id. at 3-5).

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On December 7, 2011, Kabo filed a motion to dismiss claims two and three for

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intentional interference with contractual relations and/or prospective economic advantage and

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commercial disparagement and/or corporate defamation pursuant to Rule 12(b)(6). (Mot. to

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Dismiss (#10)). Kabo contends that claims two and three should be dismissed because JSP

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failed to allege all the required elements to state a claim for these causes of action and

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because these state-law claims are preempted by federal law. (Id. at 4-10). JSP filed an

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opposition to Kabo’s motion to dismiss on January 6, 2012.1 (Opp’n to Mot. to Dismiss (#25)).

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Kabo’s reply brief was filed on January 17, 2012. (Reply (#26)).
LEGAL STANDARD

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The purpose of a Rule 12(b)(6) motion to dismiss for failure to state a claim is to test

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the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001).

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“[T]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled

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to offer evidence to support the claims.” Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th

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Cir. 1997) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).

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To avoid a Rule 12(b)(6) dismissal, a complaint must plead “enough facts to state a

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claim to relief that is plausible on its face.” Clemens v. DaimlerChrysler Corp., 534 F.3d 1017,

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1022 (9th Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim

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A stipulation for extension of time was filed on December 22, 2011, giving JSP until

January 6, 2012 to file its opposition. (Stipulation (#14)).
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is plausible on its face “when the plaintiff pleads factual content that allows the court to draw

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the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v.

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Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009). Although detailed factual allegations are

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not required, the factual allegations “must be enough to raise a right to relief above the

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speculative level.” Twombly, 550 U.S. at 555. While a court “must take all of the factual

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allegations in the complaint as true,” it is “not bound to accept as true a legal conclusion

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couched as a factual allegation.” Iqbal, 129 S.Ct. at 1949-50 (quoting Twombly, 550 U.S. at

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555).

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If the court grants a motion to dismiss a complaint or any causes of action within a

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complaint, it must then decide whether to grant leave to amend. The court should freely give

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leave to amend when there is no “undue delay, bad faith or dilatory motive on the part of the

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movant, . . . undue prejudice to the opposing party by virtue of allowance of the amendment,

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[or] futility of amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962); see also FED . R. CIV.

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P. 15(a). Generally, leave to amend is only denied when it is clear that the deficiencies of the

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complaint or the cause of action cannot be cured by amendment. DeSoto v. Yellow Freight

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Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).
DISCUSSION

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Kabo contends that the state-law causes of action contained in claims two and three

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should be dismissed for two reasons. First, Kabo argues that JSP has failed to properly plead

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all the necessary elements of a cause of action for these state-law claims. (Mot. to Dismiss

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(#10) at 7-10). Second, Kabo argues that even if Plaintiff has properly pled the requisite

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elements for these claims, the claims are preempted by federal law. (Id. at 4-7).

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I.

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The Elements of the State-Law Claims are Properly Pled
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Intentional Interference with Contractual Relations and/or Prospective
Economic Advantage

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JSP’s second claim is for intentional interference with contractual relations and/or
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prospective economic advantage. To state a claim for contractual interference under Nevada
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law, the plaintiff must show: “(1) a valid and existing contract; (2) the defendant’s knowledge
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of the contract; (3) intentional acts intended or designed to disrupt the contractual relationship;

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(4) actual disruption of the contract; and (5) resulting damage.” Sutherland v. Gross, 772 P.2d

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1287, 1290 (Nev. 1989).

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Kabo asserts that this claim fails because JSP has not properly pled that any

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contractual relationships were actually disrupted. (Mot. to Dismiss (#10) at 8). JSP however

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has alleged that Kabo’s conduct has “negatively impact[ed] JSP’s existing and prospective

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contractual relationships and disparag[ed] JSP” and that JSP “has suffered financial and

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business losses, including damage to its reputation.” (Compl. (#1) at 3). JSP has therefore

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adequately alleged that it suffered an actual disruption of its contractual relationships.

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B.

Commercial Disparagement and/or Corporate Defamation

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The elements of a state-law claim for business disparagement are: “(1) a false and

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disparaging statement, (2) the unprivileged publication by the defendant, (3) malice, and (4)

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special damages.” Clark Cnty. Sch. Dist. v. Virtual Educ. Software, Inc., 213 P.3d 496, 504

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(Nev. 2009).

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Kabo asserts that JSP has failed to state a claim for business disparagement because

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the complaint omits any factual allegations that the statements made to vendors were

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disparaging. (Mot. to Dismiss (#10) at 10). A statement is “disparaging” if it “is understood to

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cast doubt upon the quality of another’s land, chattels or intangible things, or upon the

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existence or extent of his property in them” and the publisher intends the statement to cast

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doubt or the recipient’s understanding of it as casting doubt was reasonable. RESTATEMENT

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(SECOND ) OF TORTS § 629 (1977)). Although JSP has not directly asserted that the statements

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to the vendors were disparaging, it has alleged that Kabo contacted JSP’s vendors and

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informed them of Kabo’s claim that JSP is infringing on the ‘057 Patent. Claims for patent

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infringement by their very nature imply that the alleged infringer does not have proper rights

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to distribute the purportedly infringing product. Such claims are also intended to cast doubt

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on the alleged infringer’s rights in the allegedly infringing product and are reasonably

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understood by the recipient to cast such doubt. JSP has thus properly pled that it was

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disparaged by Kabo’s statements to JSP’s vendors informing them that JSP was infringing on
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the ‘057 patent.

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II.

As Alleged, the State-Law Claims are Preempted by Federal Law

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Although Plaintiff has properly pled all the necessary elements to state a claim under

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its state-law causes of action, the claims must be dismissed because they are preempted by

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federal law. Ancillary to a patentee’s right to exclude, “a patentee must be allowed to make

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its rights known to a potential infringer so that the latter can determine whether to cease its

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allegedly infringing activities, negotiate a license if one is offered, or decide to run the risk of

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liability and/or the imposition of an injunction.” Globetrotter Software, Inc. v. Elan Computer

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Grp., Inc., 362 F.3d 1367, 1374 (Fed. Cir. 2004) (citations omitted). Accordingly, the Federal

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Circuit has held that federal patent law “preempts state-law tort liability for a patent holder’s

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good faith conduct in communications asserting infringement of its patent and warning about

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potential litigation.” Id. To avoid preemption, “bad faith must be alleged and ultimately proven,

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even if bad faith is not otherwise an element of the tort claim.” Id. (quoting Zenith Elecs. Corp.

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v. Exzec, Inc., 182 F.3d 1340, 1355 (Fed. Cir. 1999)).

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The “bad faith” standard contains both objective and subjective components. See

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Mikohn Gaming Corp. v. Acres Gaming, Inc., 165 F.3d 891, 897 (Fed. Cir. 1998). “The

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subjective component relates to a showing that the patentee in enforcing the patent

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demonstrated subjective bad faith.” 800 Adept, Inc. v. Murex Sec., Ltd., 539 F.3d 1354, 1370

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(Fed. Cir. 2008). The Federal Circuit however has held that “[s]ubjective considerations of bad

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faith are irrelevant if the [challenged] assertions are not objectively baseless.” GP Indus., Inc.

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v. Eran Indus., Inc., 500 F.3d 1369, 1375 (Fed. Cir. 2007) (citing Prof'l Real Estate Investors,

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Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 60 (1993)). Accordingly, the bad faith

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standard cannot be satisfied “in the absence of a showing that the claims asserted were

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objectively baseless.” Globetrotter, 362 F.3d at 1375. To be objectively baseless, the

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infringement allegations must be such that “no reasonable litigant could realistically expect

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success on the merits.” GP Indus., 500 F.3d at 1374 (citing Prof' l Real Estate Investors, 508

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U.S. at 60).

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In this matter, JSP has not adequately alleged bad faith. The complaint alleges JSP
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responded to the Cease and Desist Letter by detailing the inaccuracies in Kabo’s claim for

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infringement and that despite this response Kabo contacted at least one vendor who had a

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contractual relationship with JSP and informed them of JSP’s allegedly infringing activities.

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(Compl. (#1) at 3). The complaint further makes the conclusory allegations that the claims for

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infringement were baseless and timed to interfere with JSP’s contractual relationships. (Id.

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at 4).

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First and foremost, JSP has not properly alleged in its complaint that Kabo’s

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infringement claim was objectively baseless, which is required to satisfy the bad faith standard.

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See Globetrotter, 362 F.3d at 1375. JSP has only made the conclusory allegation that Kabo

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“assert[ed] baseless claims of infringement and liability.” (Compl. (#1) at 4). No facts have

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been alleged in the complaint that would lead the Court to conclude that Kabo’s claim of

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infringement was objectively baseless or that no reasonable litigant could realistically expect

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success on the merits. JSP simply makes the legal conclusion that Kabo’s infringement claim

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was baseless and expects the Court to accept it as true without any other allegations

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supporting the assertion. Because the Court need not accept as true legal conclusions

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couched as factual allegations such as this, see Twombly, 550 U.S. at 555, JSP has failed to

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properly allege that Kabo’s infringement claim was objectively baseless and thus in bad faith.

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JSP has also failed to properly allege that Kabo demonstrated subjective bad faith in

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enforcing its patent. The mere fact that Kabo contacted at least one JSP vendor after

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receiving JSP’s response to its Cease and Desist Letter does not properly allege Kabo

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contacted the vendors in bad faith because no facts are alleged that would demonstrate Kabo

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did not honestly believe it had a valid claim for infringement, despite JSP’s conclusion to the

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contrary. Furthermore, the conclusory allegation that Kabo’s contact with the vendors was

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timed to interfere with JSP’s contractual relations alone does not plausibly allege that the bad

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faith requirement has been satisfied. See Twombly, 550 U.S. at 570. It is just as likely based

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on the facts alleged that Kabo first attempted to contact JSP to resolve the situation amicably

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and then contacted JSP’s vendors after it became apparent that JSP would not stop the

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allegedly infringing activities.
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Although JSP’s second and third claims for relief as pled are preempted by federal law

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because the complaint fails to allege that Kabo engaged in conduct amounting to bad faith,

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the Court finds that JSP may be able cure the deficiency if allowed to amend its complaint.

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JSP notes in its opposition to the motion to dismiss that it believes the claim for infringement

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is simply retaliatory because JSP purchased the Accused Products from a rival manufacturer

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rather than from Kabo, from which it had previously purchased its supplies. (Opp’n to Mot. to

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Dismiss (#1) at 2). The opposition further notes that Kabo’s Cease and Desist Letter was

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based on the conclusions of an “expert” who had no knowledge of U.S. Patent Law and who

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blatantly manipulated his results—which could lead to the conclusion that the infringement

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claim was objectively baseless and in bad faith. (Id. at 3). JSP also notes discrepancies in

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the timing and the substance of the letters Kabo sent to JSP’s vendors. (Id. at 5). For these

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reasons, the Court will permit JSP to amend its complaint to properly allege that Kabo’s

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communication to JSP’s vendors was conducted in bad faith.

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CONCLUSION
For the foregoing reasons, IT IS ORDERED that Kabo’s motion to dismiss claims two
and three is granted and that those claims are dismissed with leave to amend.

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DATED: This _____ day of February, 2012.
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_________________________________
United States District Judge

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