LIVE FACE ON WEB, LLC v. THE CONTROL GROUP MEDIA COMPANY, INC. et al
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE J. CURTIS JOYNER ON 6/23/16. 6/27/16 ENTERED AND COPIES E-MAILED.(mbh, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
LIVE FACE ON THE WEB, LLC
THE CONTROL GROUP MEDIA
COMPANY, INC. a/k/a THE
CONTROL GROUP, INSTANT
CHECKMATE, INC., and INSTANT
MEMORANDUM AND ORDER
June 23, 2016
Before this Court are Defendants' Motion for Leave to File
an Amended Answer and Add Counterclaims (Doc. No. 38),
Plaintiff’s opposition thereto (Doc. No. 39), and Defendants’
Reply Brief in Support of their Motion (Doc. No. 40). For the
reasons outlined in this memorandum, we will grant Defendants’
Motion in part, permitting Defendants’ amended answer and the
addition of proposed counterclaims I-VI, IX, and XI.
Plaintiff Live Face on the Web, LLC (“Plaintiff”) filed an
action for willful direct copyright infringement, vicarious
copyright infringement, contributory copyright infringement,
inducing copyright infringement, breach of contract, and unjust
enrichment against Defendants, The Control Group Media Company,
Inc. and Instant Checkmate, Inc.1 (“Defendants”) on March 3,
2015. (Doc. No. 1). On June 2, 2015, Plaintiff’s Amended
Complaint dropped the claim for unjust enrichment. (Doc. No. 14).
Defendants succeeded in part on a Motion to Dismiss in December
2015 and Plaintiff’s claims for vicarious and contributory
copyright infringement were thereafter dismissed. (Doc. Nos. 19,
Defendants filed a Motion for Leave to file an Amended
Answer and Add Counterclaims to Plaintiff’s pending action
against them on May 23, 2016. (Doc. No. 38). Plaintiff opposes
Defendants’ Motion to Amend only with respect to adding eleven
counterclaims. (Doc. No. 39 at 2 of 9, n.1) It does not contest
Defendants’ answer and affirmative defenses. Id. Defendants’
proposed counterclaims include four counts seeking declaratory
judgments, fraud, breach of contract and good faith, three counts
for violation of California state law, one count for violation of
federal law — The Computer Fraud and Abuse Act — and one count
for reformation per a mutual mistake of the parties. (Doc. No. 38
at 34-51 of 65). The dispute is centered on the End User
Licensing Agreement(s) (“EULA(s)”) that governed the transactions
Instant Checkmate, LLC was converted into Instant Checkmate, Inc.
between Plaintiff and Defendants between the years 2011-2014, the
language of those agreements, their enforceability, and alleged
breaches of them by both parties. Defendants contend that their
counterclaims are compulsory and should be added. (Doc. No. 38 at
56-59 of 65). Plaintiff primarily contends that Defendants’
request to add counterclaims is unduly delayed and prejudicial,
and argues further that the claims are futile. (Doc. No. 38 at 38 of 9). Defendants insist that both new information and new
documents explaining Plaintiff’s conduct throughout their
dealings have recently surfaced during discovery. (Doc. No. 38 at
59-63 of 65). We will address the parties’ averments in turn.
A. Legal Standard
Defendants’ Motion to Amend is governed by Fed. R. Civ. P.
15(a), which requires “the court’s leave” or “the opposing
party’s consent” to amend when amendments are not made “as a
matter of course.” Id.
Leave to amend a pleading shall be freely
granted “when justice so requires.” Id. The Third Circuit has
interpreted this standard liberally, or to mean that “prejudice
to the non-moving party is the touchstone for the denial of an
amendment.” Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993)
(internal quotation and citation omitted). Absent such prejudice,
a district court retains discretion to deny an amendment, but
such a denial is proper only where it appears “from the record
that (1) the moving party has demonstrated undue delay, bad
faith, or dilatory motives, [or that] (2) the amendment would be
futile.” Lake v. Arnold, 232 F.3d 360, 373 (3d Cir. 2000); see
Lorenz, 1 F.3d at 1414 (citation omitted); McCarthy v. Komori Am.
Corp., 200 F.R.D. 507, 508 (E.D. Pa. 2001).
B. Nature of the Counterclaims
Defendants aver that their proposed counterclaims are
compulsory as they arise “out of the same transaction or
occurrence that is the subject matter of the opposing party’s
claim” and do not require the addition of a party outside of the
Court’s jurisdiction. Fed. R. Civ. P. 13(a). The Third Circuit
generously construes what makes a counterclaim compulsory, and
its approach aligns with the Federal Rules’ policies for
promoting judicial economy. See Transamerica Occidental Life Ins.
Co. v. Aviation Office of Am., Inc., 292 F.3d 384, 389 (3d Cir.
2002). Compulsory counterclaims are ones that “bear a logical
relationship to the opposing party’s claim.” Id. (citation
omitted). Because Defendants’ counterclaims, if added, will
involve an interpretation of allegedly breached EULAs and
allegedly infringed copyrights, as well as an investigation of
each party’s contractual obligations and conduct throughout the
course of their commercial transactions, we view them as
compulsory. Courts should deny the addition of compulsory
counterclaims only when their reasons for doing so are compelling
— because “an omitted compulsory counterclaim cannot be asserted
in subsequent cases and the pleader will lose the opportunity to
have the claim adjudicated.” Perfect Plastics Indus., Inc. v.
Cars & Concepts, Inc., 758 F. Supp. 1080, 1082 (W.D. Pa. 1991)
(citations omitted). Moreover, “the Federal Rules . . .
the principle that the purpose of pleading is to facilitate a
proper decision on the merits.” Foman v. Davis, 371 U.S. 178,
181-82 (1962) (citation omitted). At this stage in the pleadings,
we find no compelling reason to deny Defendants the opportunity
to test certain of their compulsory counterclaims on the merits.
C. Undue Delay
Plaintiff asserts that Defendants have unduly delayed in
asserting their proposed counterclaims. Defendants’ justification
for proposing counterclaims at this stage is that recent fact
discovery revealed to them previously undiscovered evidence about
Plaintiff’s conduct. Among these facts is evidence that: (1)
registered and copyrighted fourteen video
presentations that included Defendants’ own intellectual property
(scripts and videos), (2) Plaintiff substantially altered the
EULAs’ terms amid its transactions with Defendants without notice
and thus unreasonably changed the limits and obligations
governing those transactions, (3) Plaintiff monitored Defendants’
confidential information beyond the extent disclosed in any EULA,
and (4) Plaintiff knew how its products were being used by
Defendants and induced further purchases from them without
informing them of any suspected infringement.
Plaintiff contends that these facts were known to Defendants
for more than eighteen months before they filed their Motion to
Amend and thus their amendments should be denied for undue delay.
In support of this, Plaintiff cites cases where this Court denied
leave to amend to movants who knew for several months the facts
that formed the basis of their amendments. In one of those cases,
the movant had not cited any specific discovery testimony that
justified its amendment. See Sherlock v. Herdelin, No. Civ.A. 043438, 2006 WL 2668531, at *3 (E.D. Pa. Sept. 11, 2006). In the
other, the movant similarly offered no explanation for its
amendment and delayed filing its motion until after multiple
extended deadlines from the Court had passed. See McCarthy, 200
F.R.D. at 508.
Plaintiff here supports its claim of undue delay with an
email from Defendants’ former counsel acknowledging a specific
term of the 2014 EULA and Defendants’ compliance with that term.
Plaintiff adds that Defendants sought technical support for the
product’s monitoring feature and thus cannot retroactively deny
that they knew such a monitoring feature existed. In our opinion,
this information proves only that Defendants had read the current
version of the EULA (2014) after having been noticed that this
lawsuit would be brought against them and that Defendants had
consented to Article 7.1 of that EULA which did not disclose how
far and to what extent its monitoring capabilities would stretch.
The information does not prove that, before recent
interrogatories had been answered and documents had been
produced, Defendants had knowledge of all three versions of the
EULA during their transactions with Plaintiff, that any
modifications made to the original EULA had been set forth in a
signed writing pursuant to Article 14.3 of 2014’s EULA, or that
Defendants knew anything other than Plaintiff’s software code had
been copyrighted. Because the Third Circuit “requires that we
focus on the movant’s reason[s] for not amending sooner,” Cureton
v. Nat’l Collegiate Athletic Ass’n, 252 F.3d 267, 273 (3d Cir.
2001) (citation omitted), and we view Defendants’ recent
discovery of previously unknown information to be a sound reason,
we find Defendants have not unduly delayed in seeking to add
Since Defendants’ delay was reasonable, we cannot conclude
that Plaintiff will be unfairly prejudiced in defending itself
against certain new and related claims. Plaintiff’s burden here
is more than “merely claiming prejudice.” Heyl & Patterson Int'l,
Inc. v. F. D. Rich Hous. of Virgin Islands, Inc., 663 F.2d 419,
426 (3d Cir. 1981) (citation omitted). Plaintiff must show rather
that “it was unfairly disadvantaged or deprived of the
opportunity to present facts or evidence which it would have
offered” if Defendants’ amendments had been timely. Id; see
Arthur v. Maersk, Inc., 434 F.3d 196, 206 (3d Cir. 2006)
Plaintiff has not explained how it will be unfairly
disadvantaged by Defendants’ proposed counterclaims. Plaintiff
instead points to circumstances under which courts in this
circuit have found prejudice. See, e.g., Cureton, 252 F.3d at 274
(“[T]he proposed amendment would essentially force the NCAA to
begin litigating this case again.”). We add that under other
circumstances prejudice was unfounded and leave to amend granted
where the party opposing amendment “ha[d] not argued that the
delay impaired its ability to defend against the suit.” Arthur,
434 F.3d at 206. While Plaintiff’s response to Defendants’ motion
alludes to impairments such as increased discovery and costs, it
is difficult to imagine that such discovery and costs were
unforeseen when Plaintiff yielded to Defendants’ Amended
Affirmative Defenses and acknowledges how similar those defenses
are to the proposed counterclaims. It is even more difficult to
justify the proposed counterclaims as prejudicial when “[i]n all
likelihood, the questions raised by the counterclaims would . . .
be litigated in the action as defenses.” Perfect Plastics, 758 F.
Supp. at 1082. With about a month remaining before discovery is
scheduled to conclude, we cannot find that Plaintiff is
prejudiced in defending itself against certain of Defendants’
Lastly, Plaintiff asserts that Defendants’ proposed
counterclaims are futile. A proposed counterclaim “is futile when
it would be subject to dismissal under Rule 12(b)(6) of the
Federal Rules of Civil Procedure, and the Third Circuit has
stated that in such cases the motion to amend should be denied.”
Sur. Adm'rs, Inc. v. Samara, No. CIV.A. 04-5177, 2006 WL 891430,
at *9 (E.D. Pa. Apr. 6, 2006) (citing Shane v. Fauver, 213 F.3d
113, 115 (3d Cir.2000)). A proposed amendment is not futile
[where it] “would withstand a motion to dismiss.” Free Speech
Coal., Inc. v. Att’y Gen. of U.S., 677 F.3d 519, 545 (3d Cir.
2012). Plaintiff argues that Defendants’ proposed counterclaims
are futile because they were filed late in the litigation and are
founded on theories already asserted in Defendants’ affirmative
defenses. This argument sounds in redundancy but does not explain
how Defendants’ counterclaims fail to state a claim for which
relief could be granted under Fed. R. Civ. P. 12(b)(6) standards.
We find that only Counts VII, VIII, and X of Defendants’
proposed counterclaims, which are based on violations of
California state law, are futile. Assuming the Pennsylvania
choice of law provision in each of the EULAs at issue is valid,
see Kruzits v. Okuma Mach. Tool, Inc., 40 F.3d 52, 55 (3d Cir.
1994) (“Pennsylvania courts generally honor the intent of the
contracting parties and enforce choice of law provisions in
contracts executed by them”), it precludes Defendants from
litigating those counts in this case. Count IX alleges a
violation of the Computer Fraud and Abuse Act — a federal statute
courts in this Circuit interpret regularly. See, e.g., Bro-Tech
Corp. v. Thermax, Inc., 651 F. Supp. 2d 378, 405-08 (E.D. Pa.
2009); P.C. Yonkers, Inc. v. Celebrations the Party & Seasonal
Superstore, LLC, 428 F.3d 504, 508 (3d Cir. 2005). Defendants
here, in that count and in counts I-VI and XI, have sufficiently
pled facts to raise their claims above the level of mere
speculation required for a Rule 12(b)(6) dismissal in this
Circuit, see Phillips v. County of Allegheny, 515 F.3d 224, 233
(3d Cir 2008), and accordingly, above the level required for
denial under a theory of futility.
For the reasons outlined above, we grant Defendants’ Motion
to Amend and Add Counterclaims except as to Counts VII, VIII, and
X of Defendants’ proposed counterclaims. An Order follows.
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