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holding that conversion claim based on misappropriation of proprietary materials was not superseded because plaintiff "did not incorporate by reference its allegation that its proprietary materials are trade secrets in its proposed claim for conversion"; thus plaintiff's conversion claim was "an alternative theory, which [plaintiff] [was] allowed to plead"
Summary of this case from Sunpower Corp. v. Solarcity Corp.Opinion
No. C 05-4407 CW.
July 6, 2006
ORDER GRANTING COUNTERDEFENDANTS' MOTION TO DISMISS COUNTERCLAIMS AND GRANTING PLAINTIFF'S MOTION TO AMEND COMPLAINT
Counterdefendants TeraRecon, Inc., Motokai Saito and Robert Taylor move to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), the second, third and fourth claims for relief of the counterclaim filed by Counterclaimants Fovia, Inc., Fovia Medical, Inc. and George Buyanovsky. The Fovia parties oppose this motion. In addition, Plaintiff TeraRecon seeks leave to file its second amended complaint. Defendants Fovia, Inc., Fovia Medical, Inc., Kenneth Fineman, Roger Katen, George Buyanovsky, Igor Okulist and Josef Gorek oppose this motion in part. The matter was heard on May 12, 2006. Having considered all of the papers filed by the parties and oral argument on the motions, the Court grants the TeraRecon parties' motion to dismiss, with leave to amend, and grants the motion for leave to amend.
BACKGROUND
According to TeraRecon, it is a leader in advanced image processing and 3-D visualization techniques, providing imaging systems for medical and other visualization applications. In 1997, it created a volume rendering apparatus, now named Aquarius. TeraRecon has invested, and continues to invest, large amounts of time, effort and money in developing Aquarius. Fovia is TeraRecon's competitor; it develops and sells medical imaging applications that compete with TeraRecon's Aquarius. Fovia was formed by TeraRecon's former employees: Buyanovksy, Fineman, Katen, and Okulist. On October 28, 2005, TeraRecon filed this action against Fovia, Fovia Medical, its former employees, and Gorek, the fifth member of the Fovia management team, alleging copyright infringement, misappropriation of trade secrets and other State law claims.
In February, 2006, Fovia, Fovia Medical and Buyanovsky filed counterclaims against TeraRecon and two additional counterdefendants: Mitoaki Saito, TeraRecon's Chief Executive Officer, and Robert Taylor, TeraRecon's Chief Operating Officer. The counterclaims were for copyright infringement, unfair business practices, intentional interference with prospective economic advantage and negligent interference with prospective economic advantage. The Fovia parties allege that, before joining TeraRecon, Buyanovsky created a powerful software-based volume rendering engine that could perform perspective and parallel volume rendering. This engine is copyrightable subject matter under the Copyright Act. Shortly after Buyanovksy was hired, Saito asked him to develop and integrate perspective rendering into a TeraRecon hardware-based product or, alternatively, to produce a software-based perspective rendering engine. Saito wanted this done quickly, before the 87th Scientific Assembly and Annual Meeting of the Radiological Society of North America was held on November 24, 2001. This was impossible. After receiving pressure from Saito and Taylor, Buyanovksy agreed to adapt his previously created software engine solely for demonstration purposes at the Radiological Society meeting. Buyanovksy did not grant TeraRecon rights to use his engine in TeraRecon products after the Radiological Society meeting. But TeraRecon continued to use Buyanovksy's engine, or derivatives thereof, in its commercial products without Buyanovksy's permission.
LEGAL STANDARD
I. Motion to DismissA motion to dismiss for failure to state a claim will be denied unless it is "clear that no relief could be granted under any set of facts that could be proved consistent with the allegations."Falkowski v. Imation Corp., 309 F.3d 1123, 1132 (9th Cir. 2002), citing Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff or counterclaimant. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).
A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). "Each averment of a pleading shall be simple, concise, and direct. No technical forms of pleading or motions are required." Fed.R.Civ.P. 8(e). These rules "do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is 'a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds on which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957).
When granting a motion to dismiss, a court is generally required to grant a plaintiff, or counterclaimant, leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-47 (9th Cir. 1990). In determining whether amendment would be futile, a court examines whether the complaint could be amended to cure the defect requiring dismissal "without contradicting any of the allegations of [the] original complaint." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990). Leave to amend should be liberally granted, but an amended complaint cannot allege facts inconsistent with the challenged pleading. Id. at 296-97.
II. Leave to Amend Complaint
Federal Rule of Civil Procedure 15(a) provides that leave of the court allowing a party to amend its pleading "shall be freely given when justice so requires." Leave to amend lies within the sound discretion of the trial court, which discretion "must be guided by the underlying purpose of Rule 15 to facilitate decision on the merits, rather than on the pleadings or technicalities." United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981) (citations omitted). Thus, Rule 15's policy of favoring amendments to pleadings should be applied with "extreme liberality." Id.; DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987).
DISCUSSION
I. Motion to Dismiss Second, Third and Fourth Counterclaims
After the TeraRecon parties filed their motion to dismiss, the Fovia parties filed a stipulation and proposed order granting them leave to file their first amended counterclaims. The Court signed the stipulation and proposed order. The Fovia parties contend that these revisions addressed and cured the issues raised in the motion to dismiss. The TeraRecon parties disagree and pursue their motion to dismiss with prejudice the second, third and fourth counterclaims.
A. Unfair Competition in Violation of California Business and Professions Code § 17200
Both parties acknowledge that the Copyright Act preempts State law claims for unfair competition arising out of conduct encompassed by the Copyright Act. See, e.g., Summit Mach. Tool Mfg. Corp. v. Victor CNC Sys., Inc., 7 F.3d 1434, 1439-50 (9th Cir. 1993). But, as the Ninth Circuit has held, "If a state law claim includes an 'extra element' that makes the right asserted qualitatively different from those protected under the Copyright Act, the state law claim is not preempted by the Copyright Act."Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079, 1089 (9th Cir. 2005). The Fovia parties contend that they have plead the additional elements of affirmative misrepresentation and misleading promises and thus their unfair competition claim is not preempted. The TeraRecon parties disagree, arguing that the alleged misrepresentations are nothing more than a re-characterization of the Fovia parties' copyright claims and that the misrepresentations are not sufficiently plead. In addition, the TeraRecon parties argue that the Fovia parties' "reverse passing off" and "appropriation" allegations do not support a claim under § 17200 and that the Fovia parties do not state a valid claim as to Saito and Taylor.
1. Misrepresentation and False Promises
The amended counterclaim alleges:
TeraRecon's regular practice of using images rendered by the Buyanovsky Engine in its marketing materials, thereby improperly implying that they were created by TeraRecon's products constitutes an unfair business practice in violation of California Business and Professions Code § 17200.
TeraRecon's regular practice of falsely representing that its 3D volume rendering software taken from the Buyanovsky Engine is exclusively its own product, was created exclusively by its own employees and does not incorporate the work of others constitutes an unfair business practice in violation of California Business and Professions Code § 17200.
Amended Counterclaim (ACC) ¶ 162-63.
A claim for copyright infringement need not contain an element of deceit or misrepresentation. See 17 U.S.C. § 102. The Fovia parties argue that therefore they have alleged an extra element and the Copyright Act does not preempt their unfair competition claim. See Valente-Kritzer Video v. Pinckney, 881 F.2d 772, 776 (9th Cir. 1989) ("VKV does allege the element of misrepresentation that distinguishes this claim from one based on copyright."). It is not that simple. Courts do not automatically conclude that, if misrepresentation or deceit is alleged, a claim is not preempted by the Copyright Act. See Litchfield v. Spielberg, 736 F.2d 1352, 1358 (9th Cir. 1984) (finding that insofar as the State law claims for unfair competition and misrepresentation "are restatements of the copyright infringement claims, they are preempted by federal copyright law"). Rather, the Court must determine if the State law claim is equivalent to any of the exclusive rights within the general scope of copyright as specified by 17 U.S.C. § 106. Valente-Kritzer Video, 881 F.2d at 776. Section 106 grants the copyright owner exclusive rights of reproduction, production of derivative works, distribution, and display. See 17 U.S.C. § 106. As noted above, to survive preemption, the State claim must protect rights which are qualitatively different from copyright rights and "must have an 'extra element' which changes the nature of the action." Valente-Kritzer Video, 881 F.2d at 776.
The cases that the Fovia parties cite include an extra element, which changed the nature of the action. For example, inValente-Kritzer Video, the plaintiff alleged that the defendant intentionally misrepresented its intent to perform a contract. The court found that the fraud cause of action, based on the allegation that the defendant misrepresented its intent to perform a contract, "is not substantially equivalent to a claim for copyright infringement." Id. In Dielsi v. Falk, 916 F. Supp. 985 (C.D. Cal. 1996), the alleged misrepresentation was also more than copying and distributing copyrighted work and passing it off as one's own. There, the plaintiff alleged that the defendants fraudulently promised that they would honor his copyrighted work and compensate him for it, while concealing from him that they were developing a television show based on his work. Id. at 991. The court stated that it was "a close case, because Plaintiff's misrepresentation causes of action stray dangerously close to restating copyright claims." Id. But, the court concluded that, under Valente-Kritzer Video, the plaintiff added an additional element, i.e., that the defendants fraudulently promised not to violate his authorship rights.
Here, the Fovia parties do not allege that the TeraRecon parties fraudulently promised to honor Buyanovsky's right to his engine. They state in their opposition that TeraRecon obtained the engine by Saito's misrepresentations to Buyanovsky regarding the limited uses to which the engine would be put to use. As the TeraRecon parties point out, however, the paragraphs in the amended counterclaims on which the Fovia parties rely do not allege facts to support a claim of false promise.
The Fovia parties' unfair competition claim, founded on allegations that the TeraRecon parties misrepresented that TeraRecon's 3-D volume rendering software is exclusively its own product and that images in TeraRecon's marketing materials were created by its own product, does not address rights which are qualitatively different from copyright rights. Still at issue is the copyright owner's exclusive rights of reproduction, production of derivative works, distribution, and display. See 17 U.S.C. § 106; Wharton v. Columbia Pictures Industries, Inc., 907 F. Supp. 144, 146 (D. Md. 1995) (holding that the plaintiff's misrepresentation claim was "equivalent" to the right to prepare derivative works because it concerned the central allegation that the defendants plagiarized his copyrighted screenplay and thus the claim was preempted); Aagard v. Palomar Builders, Inc., 344 F. Supp. 2d 1211 (E.D. Cal. 2004) (California unfair competition claims were preempted by federal copyright law to extent they asserted that defendant had reproduced and distributed claimant's architectural plans as her own). The alleged misrepresentation claims do not add an extra element which changes the nature of the action. See Valente-Kritzer Video, 881 F.2d at 776. Therefore, they cannot be the basis for a violation of California Business and Professions Code § 17200, and the claim will be dismissed with leave to amend.
Even if the allegations of misrepresentation as currently plead were not preempted by federal copyright law, the Fovia parties would be required to amend the allegation regarding TeraRecon's false representations because the allegation fails to satisfy the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) requires that in "all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b); see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-05 (9th Cir. 2003). In Vess, the plaintiff argued that Rule 9(b) did not apply to the claims he brought under the California Consumer Remedies Act and California's unfair business practice laws because those claims do not require a showing of fraud. The Ninth Circuit found that he was correct that fraud is not an essential element of his State law claims, but he was "not correct in concluding that his averments of fraud therefore escape the requirements of the rule." 317 F.3d at 1103. The court stated,
This circuit has not analyzed the application of Rule 9(b) in a case where fraud is not an essential element of the claim, and where allegations of both fraudulent and non-fraudulent conduct are made in the complaint. Two of our sister circuits have provided such an analysis, however, and we now join them in holding that in a case where fraud is not an essential element of a claim, only allegations ("averments") of fraudulent conduct must satisfy the heightened pleading requirements of Rule 9(b). Allegations of non-fraudulent conduct need satisfy only the ordinary notice pleading standards of Rule 8(a). As the Fifth Circuit wrote:
Where averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated.Id. at 1104-05 (quoting Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th Cir. 2001)) (emphasis added).
Vess is controlling. The misrepresentation allegations must be disregarded because they are not alleged with the required specificity. Without those allegations, a claim for unfair business practices has not been stated, and would be dismissed. If the Fovia parties want their misrepresentation and false promise allegations to be considered, they must be replead to give the TeraRecon parties notice of the particular misconduct alleged so that they can defend against the charge and not just deny that they have done anything wrong. Id. at 1106. As the Ninth Circuit instructs, "Averments of fraud must be accompanied by 'the who, what, when, where, and how' of the misconduct charged." Id. (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)).
2. Reverse Passing Off
The TeraRecon parties contend that the Fovia parties' "reverse passing off" allegations do not support a claim under § 17200. The Ninth Circuit explains that reverse passing off, or reverse palming off, occurs with the direct misappropriation of the services or goods of another. Summit Mach., 7 F.3d at 1437. The Fovia parties state that they have not asserted a Lanham Act claim for reverse passing off. Regardless, to the extent that they allege reverse passing off, their unfair competition counterclaims are preempted. See Aagard, 344 F. Supp. 2d at 1217 ("Reverse palming off claims are preempted unless they allege bodily appropriation and the claimant seeks more than mere monetary damages.").
3. Misappropriation
The TeraRecon parties also contend that the Fovia parties' misappropriation allegations do not support a claim for unfair competition under § 17200. According to the amended counterclaim, the TeraRecon parties have a regular practice of depriving Fovia and Fovia Medical of the value of their products and services by misappropriating the engine created by Buyanovsky and incorporating it into TeraRecon's commercially distributed products. ACC ¶ 161. The Fovia parties do not address whether their misappropriation allegations are preempted or whether the allegations support a claim for unfair competition. They point to these allegations only to show wrongful conduct by Saito and Taylor. It appears that this allegation would also be preempted and thus could not support an unfair competition claim. See Summit Mach., 7 F.3d at 1441 (noting that, in the cases finding that a claim for misappropriation is not preempted, "the extra element tends to be apparent").
4. Saito and Taylor
The TeraRecon parties contend that the amended counterclaim fails to state a claim under § 17200 against Saito and Taylor because it describes no conduct by either Saito or Taylor and because the claim is time-barred.
The Fovia parties point to allegations in the complaint of wrongful conduct by Saito and Taylor. As noted above, the Fovia parties allege that Saito and Taylor misappropriated the engine. It is also alleged that Saito and Taylor "misrepresented TeraRecon's rights relating to the Buyanovsky Engine to the medical imaging community and to Fovia and Fovia Medical's prospective customers." ACC ¶ 171. These allegations, however, fail for the reasons stated above: a claim based on misappropriation of the engine appears to be preempted and the alleged misrepresentations must be disregarded, pursuant to Vess, because they are not alleged with the required specificity.
This unfair competition claim against Saito and Taylor, however, is not time-barred. A claim can be dismissed as time-barred only where it is evident on the face of the complaint that the claim is necessarily barred. See, e.g., Mertens v. Hewitt Associates, 948 F.2d 607, 613 (9th Cir. 1991), aff'd, 508 U.S. 248 (1993) (dismissing "on statute of limitations grounds is improper where the complaint merely shows that the action may have been barred") (inner quotation omitted). The statute of limitations on a claim under § 17200 is four years, and it begins "to run on the date the cause of action accrued, not on the date of discovery." Karl Storz Endoscopy Am., Inc. v. Surgical Techs., Inc., 285 F.3d 848, 857 (9th Cir. 2002); Cal. Bus. Prof. Code § 17208. Thus, a delay in discovering that TeraRecon was allegedly using the engine without permission does not save the claim from the time bar. It is not clear from the complaint exactly when TeraRecon incorporated and used the engine in its products. It is only alleged that TeraRecon did so after the Radiological Society meeting, because Buyanovsky allegedly did not grant TeraRecon rights to use the engine in its products after the conference. Because it is not clear on the face of the complaint that this counterclaim is time-barred, the Court need not address whether the statute of limitations is tolled as to claims asserted against officers and directors of a corporation when the corporation commences litigation.
B. Intentional Interference with Prospective Economic Advantage
The Fovia parties state that they have revised their third counterclaim for intentional interference with prospective economic advantage to cure all the alleged pleading defects the TeraRecon parties raised in their motion to dismiss. The amended counterclaim now alleges that TeraRecon, Saito and Taylor have intentionally interfered with the Fovia parties' business relationships "through improper means, including by making false and misleading statements to Fovia and Fovia Medical's prospective customers that Fovia and Fovia Medical have copied TeraRecon's software, have misused TeraRecon's trade secrets, and no longer have the right, authority and license to use, produce and distribute their medical imaging products. TeraRecon, Saito and Taylor have also misrepresented TeraRecon's rights relating to the Buyanovsky Engine to the medical imaging community and to Fovia and Fovia Medical's prospective customers." ACC ¶ 170.
As the TeraRecon parties note, this allegation does not satisfy the requirements of Rule 9(b). Rule 9(b) "requires that a plaintiff plead with sufficient particularity attribution of the alleged misrepresentations or omissions to each defendant." In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 752 (N.D. Cal. 1997). The Fovia parties contend that Rule 8(a), not Rule 9(b), applies to intentional interference claims and, thus, they have meet their pleading requirements. Citing a case from a Florida District Court, the Fovia parties state that Rule 9(b)'s heightened pleading requirement is limited to claims of common law and statutory fraud. See Lockheed Martin Corp. v. Boeing Co., 2005 WL 729685, *2 (M.D. Fla. Mar. 21, 2005). That is incorrect. As discussed above, even where fraud is not a necessary element of a claim, where a party alleges that the other party engaged in some fraudulent and some non-fraudulent conduct, the allegations of fraud must be plead with particularity or be disregarded. Vess, 317 F.3d at 1103-04.
In Meridian Project Systems, Inc. v. Hardin Construction Co., 404 F. Supp. 2d 1214, 1220 (E.D. Cal. 2005), the defendant brought a counterclaim for intentional interference with prospective economic advantage based on the plaintiff's alleged misrepresentations to prospective customers that it had infringed the plaintiff's copyright. The court found that, while fraud was not an element of an intentional interference with prospective economic advantage claim, the counterclaim had alleged that the counterdefendant engaged in fraudulent conduct, i.e., the allegedly false statement that the counterclaimant violated the counterdefendant's copyright. Thus, the court applied Rule 9(b) to the allegations that the counterdefendant made intentional misrepresentations. Some of the allegations passed muster under Rule 9(b) "because they described the who, what, where, when and how of the alleged misrepresentations." Id. at 1220. The allegations that did not satisfy the requirements of Rule 9(b) were disregarded in determining whether a claim was stated.
Without the intentional misrepresentation allegations that do not meet the specificity requirements of Rule 9(b), the Fovia parties allege that the TeraRecon parties interfered with their business relationships through "improper means." Although the Rules do not require the Fovia parties to describe in detail these "improper means," they must provide the TeraRecon parties fair notice of what their claim is and the grounds on which it rests. They do not. Therefore, the third counterclaim is also dismissed with leave to amend.
C. Negligent Interference with Prospective Economic Advantage
The Fovia parties amended their fourth claim to delete Saito and Taylor and to add specific allegations of negligence. As they note, however, this claim also alleges that TeraRecon made misleading statements to prospective customers, in addition to misrepresenting its rights relating to the engine. Those allegations, like the similar allegations discussed above, are not plead with the specificity required by Rule 9(b) and thus must be disregarded. See Vess, 317 F.3d at 1105. Without those allegations, the counterclaim only states that TeraRecon has negligently interfered with Fovia and Fovia Medical's prospective business relationships. Conclusory allegations are insufficient to defeat a motion to dismiss for failure to state a claim. Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996). Thus, the fourth counterclaim is also dismissed with leave to amend.
II. Motion for leave to amend complaint
Plaintiff TeraRecon seeks leave to file its proposed second amended complaint. The proposed second amended complaint would add new claims for relief, amend claims for relief already plead and omit some claims against one of the defendants. According to Plaintiff TeraRecon, the proposed second amended complaint also corrects certain errors and clarifies ambiguous language.
Recognizing the liberal policy favoring amendment under Rule 15, Defendants state that they do not object to Plaintiff TeraRecon's amended factual allegations. Nor do Defendants object to Plaintiff TeraRecon's proposed amended claims for declaratory relief and interference with prospective economic advantage. But Defendants contend that the conversion claim is futile and that the trade secrets misappropriation, section 17200 and contract claims are futile in part; thus, Defendants argue that Plaintiff TeraRecon's motion for leave to amend should be denied in part.
The Supreme Court has identified four factors relevant to whether a motion for leave to amend should be denied: undue delay, bad faith or dilatory motive, futility of amendment and prejudice to the opposing party. Foman v. Davis, 371 U.S. 178, 182 (1962). Here, only futility is at issue. As Defendants note, "Futility of amendment can, by itself, justify the denial of a motion for leave to amend." Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). The Ninth Circuit instructs that "a proposed amendment is futile only if no set of facts can be proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense." Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988); see also SAES Getters S.p.A. v. Aeronex, Inc., 219 F. Supp. 2d 1081, 1086 (S.D. Cal. 2002) ("an amendment is 'futile' only if it would clearly be subject to dismissal").
A. Conversion
Plaintiff TeraRecon seeks to allege that Defendants unlawfully converted its property rights in its trade secrets. It defines its trade secrets as including the computer code, confidential information concerning its customers and potential customers, business plans and other corporate planning documents, and products plans. Defendants argue that Plaintiff TeraRecon's proposed conversion claim is futile for three reasons: (1) conversion does not apply to intellectual or intangible property; (2) the claim is preempted by the Copyright Act; and (3) the claim is preempted by California's Trade Secret Act.
1. Intangible property
Citing Olschewski v. Hudson, 87 Cal. App. 282, 286 (1927), Defendants contend that the tort of conversion applies only to tangible, certain and definite property. The Ninth Circuit, however, has found otherwise. Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003). As Defendants acknowledge, the court in Kremen found that a claim for conversion of an internet domain name can be brought under California law. Defendants assert that the court's holding was limited to its finding that a domain name could be unlawfully converted because it was a well-defined interest and because the connection between the domain names and an electronic domain name server database was sufficient to satisfy any merger requirement under California law. The court's holding in Kremen, however, was not so limited. After a detailed analysis of conversion of intangibles, the court concluded:
In short, California does not follow the Restatement's strict requirement that some document must actually represent the owner's intangible property right. On the contrary, courts routinely apply the tort to intangibles without inquiring whether they are merged in a document and, while it's often possible to dream up some document the intangible is connected to in some fashion, it's seldom one that represents the owner's property interest. To the extent Olschewski endorses the strict merger rule, it is against the weight of authority. That rule cannot be squared with a jurisprudence that recognizes conversion of music recordings, radio shows, customer lists, regulatory filings, confidential information and even domain names. . . . Assuming arguendo that California retains some vestigial merger requirement, it is clearly minimal, and at most requires only some connection to a document or tangible object.Id. at 1033. Here, Plaintiff TeraRecon meets that minimal requirement; Plaintiff TeraRecon's computer code, confidential information concerning its contracts with customers, business plans and product plan are reflected in or have the necessary connection to paper and electronic documents.
Furthermore, as Plaintiff TeraRecon notes, Kremen is not the only case to distinguish Olschewski, the main case Defendants rely upon. In Palm Springs-La Quinta Development Co. v. Kieberk Corp., 46 Cal. App. 2d 234 (1941), the court upheld a conversation claim for intangible information in a customer list when some of the index cards on which the information was recorded were destroyed, allowing damages for both the value of the cards and the value of the intangible information lost. The court explained that the defendant in Olschewski "was charged with selling the good-will of a business in a specified district" and that the court "merely held that was an intangible property right which is not susceptible of conversion." 46 Cal. App. 2d at 240.
Defendants' argument that Plaintiff TeraRecon's conversion claim is futile because conversion does not apply to intellectual or intangible property fails.
2. Preemption by copyright law
As discussed above, a State law claim is preempted by federal copyright law unless it contains an additional element that changes the nature of the action so that it is qualitatively different from a copyright infringement claim. Defendants contend that Plaintiff TeraRecon's conversion claim is directed to the copying or use of the computer code, which is protected by the Copyright Act, and thus it is preempted. Plaintiff TeraRecon's conversion claim, however, encompasses more than just its computer code. As mentioned above, Plaintiff TeraRecon alleges that Defendants have also converted its business plans and customer information, materials that are outside the scope of the Copyright Act. The Court finds that Plaintiff TeraRecon has sufficiently alleged the additional elements of its conversion claim to defeat Defendants' preemption argument.
Defendants' argument that Plaintiff TeraRecon's conversion claim is futile because it is preempted by copyright law also fails.
3. Preemption by California's Trade Secret Statute
Defendants argue that to the extent it is premised on the use of any trade secret information, Plaintiff TeraRecon's proposed conversion claim is precluded by California's trade secret statute, which preempts all common law claims that are based on misappropriation of a trade secret. See Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005). Plaintiff TeraRecon notes that it did not incorporate by reference its allegation that its proprietary materials are trade secrets in its proposed claim for conversion and that, for this claim, it does not allege such. Plaintiff TeraRecon states that this is an alternative theory, which it is allowed to plead.
Defendants' argument that Plaintiff TeraRecon's conversion claim is futile because it is preempted by California's Trade Secret Act also fails. The Court concludes that Plaintiff TeraRecon's claim for conversion is not futile.
B. Breach of Contract Claim
Plaintiff TeraRecon states that its proposed amendments to its breach of contract claims clarify those claims by asserting separate claims against separate Defendants. Defendants respond that they do not seek to prevent amendment of Plaintiff TeraRecon's proposed breach of contract claims insofar as they allege that Buyanovsky, Fineman, Katen and Okulist were prohibited from using or disclosing Plaintiff TeraRecon's trade secrets after termination of their employment. Nor do Defendants object to the amendments to the extent that they focus solely on the use of trade secrets to solicit Plaintiff TeraRecon's customers. But, to the extent Plaintiff TeraRecon alleges that the individual Defendants breached their agreements with Plaintiff TeraRecon by competing against Plaintiff TeraRecon, Defendants contend that those claims are barred by California Business and Professions Code § 16600, which provides that a contract "by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Defendants argue that Plaintiff TeraRecon fails to restrict its claims exclusively to those based on the use of trade secrets, and, because those restrictions are not explicitly incorporated into the amendments, the amendments are futile.
As Plaintiff TeraRecon notes, however, its proposed amended pleading clarifies that it is not alleging breach based solely on Defendants' competition with Plaintiff TeraRecon. Nowhere in the amended claims does Plaintiff TeraRecon allege that Defendants breached their employment contracts by competing with Plaintiff TeraRecon after leaving Plaintiff TeraRecon's employ. Furthermore, Defendants provide no authority to support their argument that "legal restrictions must be explicitly incorporated into the amendments or the amendments are futile." The Court finds that Plaintiff TeraRecon's amended breach of contract claims are not futile.
C. Trade Secrets Misappropriation Claim
Plaintiff TeraRecon's first amended complaint alleged trade secrets, "including but not limited to, the Computer Code." Plaintiff TeraRecon now seeks to amend its complaint to allege that its trade secrets include "Computer Code; confidential information concerning TeraRecon's customers and potential customers, including TeraRecon's contractual relations with GEMS IT, Siemens, and others; business plans and other corporate planning documents; and product plans."
Defendants contend that Plaintiff TeraRecon's amendment would be futile because it adds new trade secrets claims that are time-barred. As discussed above, a claim is barred by the statute of limitations as a matter of law if it is untimely on the face of the pleadings. The statute of limitations for a claim under California's Trade Secret Act is three years. Cal. Civ. Code § 3426.6. According to Defendants, the complaint alleges that the statute of limitations began to run in January, 2003, when Fineman resigned, allegedly taking Plaintiff TeraRecon's laptop, containing its trade secrets, with him. Plaintiff TeraRecon's original complaint, filed in 2005 before the statute of limitations expired, mentioned only the computer code and not any other trade secrets. Now, after three years have passed, Plaintiff TeraRecon attempts to add other trade secrets.
As Plaintiff TeraRecon notes, however, Defendants' argument fails to address the relation back doctrine addressed in Plaintiff TeraRecon's motion for leave to amend. There is no dispute that these amended claims arise "out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Fed.R.Civ.P. 15(c). Therefore, the amendments relate back to the date of the original complaint.See, e.g., Kern Oil Refining Co. v. Tenneco Oil Co., 840 F.2d 730 (9th Cir. 1988). Even if these are new trade secrets, as Defendants contend, these added claims would not be time-barred.
The Court finds that Plaintiff TeraRecon's amended trade secrets misappropriation claim would not be futile.
D. § 17200 Claim
Plaintiff TeraRecon seeks to eliminate the "pattern" language, which is not required by § 17200, and to incorporate by reference the general allegations of trade secret misappropriation. Defendants state that they do not object to the proposed amended claim to the extent that it is based solely on an alleged breach of fiduciary duty. But, to the extent that Plaintiff TeraRecon's proposed amendment to its § 17200 claim relies on factual allegations of copyright infringement or trade secret misappropriation, Defendants contend that the claim is preempted by both federal copyright law and California's trade secret law. That may be; however, that does not make Plaintiff TeraRecon's amendment futile. As stated above, denial of an amendment as futile is appropriate only if no set of facts can be proved under the amendment which would constitute a valid claim. Miller, 845 F.2d at 214. Plaintiff TeraRecon states that Defendants have committed acts, alleged in the complaint, that violate California's Unfair Competition Law. As long as one of those alleged acts is not preempted, then Plaintiff TeraRecon's amendment to this claim is not futile. Because not all of the alleged acts are preempted, the Court finds that Plaintiff TeraRecon's amended § 17200 claim is not futile.
CONCLUSION
For the foregoing reasons, the Court GRANTS the TeraRecon parties' motion to dismiss counterclaims (Docket No. 23). The Fovia parties' second, third and fourth claims for relief are dismissed with leave to amend. They must file their second amended counterclaims within fourteen days from the date of this order. Plaintiff TeraRecon's motion for leave to amend its complaint (Docket No. 27) is also GRANTED.
IT IS SO ORDERED.