Patz v. Utility Software of America Inc et al

Filing 78

ORDER granting 52 Motion for Reconsideration. The court DISMISSES PlaintiffNelson Patz's claim against these Defendants for unjust enrichment as set out. Signed by Honorable J Michelle Childs on 2/10/12.(awil)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION

Nelson Patz,

)
)
)
Plaintiff,
)
)
v.
)
)
)
Utility Software of America, Inc., Utility
)
Partners of America, Inc., UPA
)
Acquisition Co., LLC, Michael Cale, and
)
System One Holdings, LLC,
)
)
Defendants.
)
____________________________________)

C.A. No.: 6:10-cv-01149-JMC
ORDER AND OPINION

This matter is before the court on Defendants System One Holdings, LLC (“System One”)
and UPA Acquisition Co., LLC’s (“UPA Acquisition,” and collectively “Defendants”) Motion for
Reconsideration of the Court’s March 11, 2011, Order Denying Defendants’ Motion to Dismiss
[Doc. 52]. For the reasons stated below, the court grants Defendants’ motion for reconsideration.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff Nelson Patz is a minority shareholder of Defendant Utility Software of America, Inc.
("USA"), a South Carolina corporation. USA was involved in the business of programming and
development of the Automated Work Order System and Automatic Logging Software used in smart
metering applications. Defendant Utility Partners of America, Inc. ("UPA") is in the business of
installing "smart automatic meter reading (AMR) meters." A majority of UPA's clients are utility
companies nationwide. Plaintiff initiated this action, claiming a "freeze out" by USA and its majority
shareholder, Michael Cale. Cale is also alleged to be the majority shareholder of UPA. The
complaint alleges that Cale breached his fiduciary duty to the minority shareholders of USA by
causing certain software supposedly owned by USA to be renamed and fraudulently misappropriated
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by UPA. Plaintiff alleges UPA entered into an Asset Purchase Agreement with UPA Acquisition,
and contrary to the interests of USA, intentionally misappropriated the software assets of USA, to
the company's detriment, and, allegedly to the benefit of UPA and System One, under the guise of
UPA Acquisition. Plaintiff’s only claim against Defendants UPA Acquisition and System One is
one for unjust enrichment.
Defendants made a motion before this court seeking dismissal of Plaintiff’s unjust
enrichment claim against them. The court denied the motion, noting that Plaintiff had sufficiently
pleaded his cause of action for unjust enrichment. Defendants now request that the court reconsider
its denial of Defendants’ motion to dismiss. On reconsideration, Defendants do not dispute the
court’s finding that Plaintiff’s Complaint was sufficient to withstand scrutiny under the Iqbal1 and
Twombly2 standards. Instead, Defendants argue that the court overlooked and did not address two
dispositive legal arguments raised in Defendants’ motion papers. Specifically, Defendants contend
that the court overlooked the fact that Plaintiff failed to make a demand on the board of directors of
Utility Software of America, Inc. (“USA”) prior to filing suit as required under South Carolina law.
Additionally, Defendants assert that the court overlooked Defendants’ legal argument that Plaintiff’s
unjust enrichment claim is preempted by federal copyright law.
STANDARD OF REVIEW
A court may alter or amend a judgment if the movant shows either (1) an intervening change
in the controlling law; (2) new evidence that was not available at the time of the ruling; or (3) that
there has been a clear error of law or a manifest injustice. See Robinson v. Wix Filtration Corp., 599
F.3d 403, 407 (4th Cir. 2010).

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See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).

2

See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S. Ct. 1955, 1965 (2007)
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DISCUSSION
I.

Demand Prerequisite
Defendants argue that the court should reconsider its order denying their request for dismissal

of Plaintiff’s unjust enrichment claim against them because Plaintiff failed to make a proper demand
on the USA board of directors prior to filing suit or explain with particularity why such a demand
would have been futile, as required by South Carolina law and Rule 23.1(b) of the Federal Rules of
Civil Procedure.
In evaluating a derivative claim brought in federal court, the court must determine the
adequacy of pleading under federal law, but must apply the substantive law of the state of
incorporation to determine the sufficiency of a pre-suit demand. See Kamen v. Kemper Fin. Servs.,
Inc., 500 U.S. 90, 108-09 (1991). Under Federal Rule of Civil Procedure 23.1(b)(3), a complaint
must “state with particularity: a) any effort made by the plaintiff to obtain the desired action from
the directors or comparable authority and, if necessary, from the shareholders or members; and b)
the reasons for not obtaining the action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3). Under
South Carolina law, “[a]t a minimum, a demand must identify the alleged wrongdoers, describe the
factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief.
Such a pre-suit demand must be alleged, not in a conclusory fashion, but through particularized
allegations.” Carolina First Corp. v. Whittle, 343 S.C. 176, 189, 539 S.E.2d 402, 409-10 (Ct. App.
2000) (citations and quotation marks omitted).
In his Complaint, Plaintiff makes two allegations directly addressing the matter of a pre-suit
demand. Specifically, Plaintiff alleges that “The Plaintiff is entitled to a full accounting of the
finances of USA, which he, as well as his Counsel, requested on numerous occasions without
success.” See Complaint ¶ 15 [Doc. 1]. Plaintiff further alleges that “Because Defendant Cale was,
at all times relevant hereto, the President of USA, as well as a majority shareholder, making a

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demand on USA via Defendant Cale would have been futile. Nonetheless, on July 14, 2009, the
Plaintiff made such demand through Counsel. A copy of this Demand is attached hereto as Exhibit
‘B’.” Id. at ¶ 20. The letter attached to the Complaint outlines Plaintiff’s intention to”commence
a derivative action” and further notes that the “claim arises out of the failure of the corporation to
issue an appropriate accounting after repeated demands, as well as multiple breaches of fiduciary
duty engaged in by the majority shareholders.” See [Doc. 36-2]. Notably, the letter does not identify
UPA Acquisition or System One as the alleged wrongdoers, describe any wrongful acts by UPA
Acquisition or System One, or indicate what actions Plaintiff wanted the corporation to take to
redress the alleged wrongful conduct. As a result of the deficiencies outlined above, the court finds
that Plaintiff did not make a sufficient pre-suit demand.
However, Plaintiff also alleges that such demand should be excused because it would have
been futile. South Carolina law excuses pre-suit demands in derivative actions where the demand
would be made to the alleged wrongdoers, such as circumstances where the majority shareholders
are alleged to have committed the wrong against the corporation. See Grant v. Gosnell, 266 S.C.
372, 376, 223 S.E.2d 413, 414-15 (1976). In this case, Plaintiff has alleged that Defendant Michael
Cale is the majority shareholder of USA and served in the capacity as president of USA and various
positions with other defendants in this action. Plaintiff also alleged that he had made repeated
requests to Defendant Cale for an accounting which were rejected by Defendant Cale. Taking
Plaintiff’s allegations as true, the court finds that Plaintiff has pleaded sufficient facts to support a
finding that his failure to make a proper pre-suit demand should be excused.
II.

Preemption
Alternatively, Defendants argue that Plaintiff’s claim against them for unjust enrichment

should be dismissed because the claim is preempted by federal copyright law.

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A South Carolina state law claim for unjust enrichment will be preempted by federal
copyright law where the work at issue is “within the scope of the subject-matter of copyright law”
and “the rights granted under state law are equivalent to the exclusive rights within the scope of
federal copyright as set out in 17 U.S.C. § 106.” Microstrategy, Inc. v. Netsolve, Inc., 368 F.Supp.2d
533, 535 (E.D. Va. 2005) (quoting United States ex rel. Berge v. Bd. of Trs. of the Univ. of Ala., 104
F.3d 1453, 1463 (4th Cir.1997)) (quotation marks omitted).
In his Complaint, Plaintiff alleges that UPA Acquisition and System One have been unjustly
enriched by their use of USA software which Plaintiff further alleges was conveyed to UPA
Acquisition and System One through Defendants Cale and UPA’s fraudulent misappropriation of
the software. See Complaint, at ¶ 10 [Doc. 1]. Plaintiff concedes that the software at issue in this
case falls within the subject-matter of copyright law. However, Plaintiff asserts that he is seeking
to vindicate rights that are outside the scope of federal copyright. Plaintiff argues to the court that
he is not asserting a claim of copyright infringement against Defendants, but instead, one more in
the nature of a claim for a failure to pay. In support of this argument, Plaintiff notes that his claim
against Defendants is “focused on his rights as a purported co-owner of the intellectual property to
receive an accounting and share of the proceeds derived from the work.” Plaintiff’s Memorandum
in Opposition to Defendant’s System One’s and UPA Acquisition’s Motion for Reconsideration of
the Court’s March 11, 2011 Order Denying Defendants’ Motion to Dismiss, at 17 [Doc. 59].
However, Plaintiff’s right to an accounting and share of the proceeds is a claim to be pursued against
the co-owner of the copyright. Additionally, the factual allegations in the Complaint, to which the
court is confined on review of a motion to dismiss, indicate that Plaintiff’s unjust enrichment claim
against Defendants arises from their use and distribution of software which was allegedly wrongfully
derived from Defendants Cale and UPA’s misappropriation of the USA software. Accordingly, the

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court rejects Plaintiff’s assertion that his unjust enrichment claim is qualitatively different from the
rights protected by federal copyright law and finds that the claim is preempted.
CONCLUSION
For the foregoing reasons, the court GRANTS Defendants System One Holdings, LLC and
UPA Acquisition Co., LLC’s Motion for Reconsideration of the Court’s March 11, 2011, Order
Denying Defendants’ Motion to Dismiss [Doc. 52]. Accordingly, the court DISMISSES Plaintiff
Nelson Patz’s claim against these Defendants for unjust enrichment.
IT IS SO ORDERED.

United States District Judge

February 10, 2012
Greenville, South Carolina

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