Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-05368/USCOURTS-cand-3_04-cv-05368-18/pdf.json

Nature of Suit Code: 380
Nature of Suit: Other Personal Property Damage
Cause of Action: 28:1331 Fed. Question

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

BEILSTEIN-INSTITUT ZUR FÖRDERUNG

DER CHEMISCHEN WISSENSCHAFTEN, et

al.,

Plaintiffs,

 v.

 MDL INFORMATION SYSTEMS, INC.,

Defendant.

 /

No. C 04-05368 SI

ORDER GRANTING IN PART AND

DENYING IN PART DEFENDANT’S

MOTION TO DISMISS, AND DENYING

DEFENDANT’S MOTION TO STRIKE

On November 3, 2006, the Court heard argument on defendant MDI Information Systems, Inc.’s

motions to: (1) dismiss plaintiffs’ claim for conversion; (2) dismiss plaintiffs’ claim for unfair

competition; and (3) strike plaintiffs’ demand for statutory and treble damages. Having considered the

arguments of counsel and the papers submitted, the Court hereby GRANTS defendant’s motion to

dismiss plaintiffs’ claim for conversion, DENIES defendant’s motion to dismiss plaintiffs’ claim for

unfair competition, and DENIES defendant’s motion to strike for the reasons set forth below.

BACKGROUND

Plaintiff Beilstein-Institut Zur Förderung Der Chemischen Wissenschaften (“Beilstein-Institut”)

is a German non-profit foundation involved in research in the chemical sciences. Beilstein-Institut has

created the Beilstein Database, which is an electronic database in the area of organic chemistry and is

Beilstein-Institut’s primary revenue source. The database consists of more than nine million organic

chemical compounds and excerpts of scientific literature. Plaintiff Beilstein GmbH is one of two

subsidiaries of Beilstein-Institut, created to maintain and exploit the Beilstein Database. The other such

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subsidiary is Beilstein Informationssysteme GmbH.

On January 23, 1998, an agreement was entered between plaintiff Beilstein-Institut and Beilstein

Informationssysteme GmbH, which granted an exclusive license to Beilstein Informationssysteme

GmbH to exploit the Beilstein Database in exchange for a fixed licensing fee. Beilstein

Informationssysteme GmbH was subsequently acquired by the Reed Elsevier Group and the company

was renamed MDL Information Systems GmbH (“MDL GmbH”).

Plaintiffs contend that MDL GmbH violated the provisions of the licensing agreement. In

December 2001, plaintiff Beilstein-Institut commenced arbitration proceedings against MDL GmbH in

Germany. On September 20, 2004, the arbitration panel issued a Partial Arbitration Award, holding that

MDL GmbH breached its contractual obligations and awarding damages and injunctive relief to

Beilstein-Institut. The panel ordered MDL GmbH to “cease and desist from modifying the content of

the Beilstein Database and/or mingling such content with other data or databases or having such data

modified and/or marketed via the sublicenses thereof, particularly via MDL Information Systems Inc.”

Defendant MDL Information Systems, Inc. (“MDL Inc.”) is a Delaware corporation with its

principal place of business in San Leandro, California. The complaint alleges that defendant MDL Inc.

“shares a common corporate parent with MDL GmbH” and markets the Beilstein Database on behalf

of MDL GmbH. Plaintiffs assert that defendant MDL Inc. has continued to mingle the Beilstein

Database with data from other sources, despite the Partial Arbitration Award. As a result, plaintiffs filed

a copyright action against defendant MDL Inc. in a German district court on March 31, 2003. In

December, 2004, plaintiffs also filed suit in this Court against defendant MDL Inc., asserting claims of

tortious interference with contract and declaratory relief. In February, 2005, plaintiffs filed an Amended

Complaint adding a claim for common law unfair competition.

Defendant MDL Inc. filed a motion to dismiss plaintiffs’ claim for declaratory relief, which the

Court granted, with leave to amend. Thereafter, plaintiffs filed a Second Amended Complaint (“SAC”)

dropping the claim for declaratory relief and adding a claim for enforcement of German judgment.

Defendant MDL Inc. filed a motion to dismiss plaintiffs’ new claim for enforcement of German

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judgment, which the Court also granted.

Plaintiffs then filed a Third Amended Complaint (“TAC”) dropping the claim for enforcement

of German judgment and adding claimsfor copyright infringement, conversion, trespass to chattels, trade

secret misappropriation, Lanham Act violations & common law unfair competition, constructive trust

and unjust enrichment, and unfair and unlawful business acts or practices in violation of California

Business & Professions Code § 17200 et seq. Defendant MDL Inc. moved to dismiss the entire TAC.

The Court granted in part and denied in part, denying defendant’s motion as to tortious interference with

contract, copyright infringement, trade secret misappropriation, and violations of the Lanham Act, but

granting the remainder of defendant’s motion, with leave to amend one last time.

Plaintiffs finally filed a Fourth Amended Complaint (“FAC”) which includes claims for

copyright infringement, Lanham Act violations, tortious interference with contract, trade secret

misappropriation, conversion, and unfair and unlawful business acts or practices in violation of

California Business & Professions Code § 17200 et seq. Defendant MDL Inc. now moves to dismiss

plaintiffs’ claims for conversion and unfair and unlawful business acts or practices. Defendant also

moves to strike plaintiffs’ demand for statutory and treble damages under the Lanham Act.

LEGAL STANDARD

A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff

can prove no set of facts which would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45–46, 78

S. Ct. 99, 102 (1957); Fidelity Fin. Corp. v. Federal Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir.

1986). All material allegations in the complaint will be taken as true and construed in the light most

favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The

Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no request

to amend the pleading was made, unless it determines that the pleading could not possibly be cured by

the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations and internal

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1The exclusive rights granted under the Copyright Act include the rights: “to reproduce the

copyrighted works in copies,” “to prepare derivative works based upon the copyrighted work,” “to

distribute copies . . . to the public,” and “to display the copyrighted work publicly.” 17 U.S.C. § 106.

4

quotation marks omitted).

Federal Rule of Civil Procedure 12(f) provides that “the court may order stricken from any

pleading anyinsufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” “[A]

motion to strike may be used to strike any part of the prayer for relief when the damages sought are not

recoverable as a matter of law.” Bureerong v. Uvawas, 922 F. Supp. 1450, 1478 n.34 (C.D. Cal. 1996).

DISCUSSION

I. Plaintiffs’ cause of action for conversion is preempted.

Defendant moves for dismissal of plaintiffs’ conversion claim, arguing that the claim is barred

by the Copyright Act’s express preemption of any state law or claim asserting “rights equivalent to any

of the exclusive rights.”1 17 U.S.C. § 301. In general, to determine whether a state law claim is

preempted by the Copyright Act, the Court must determine: (1) whether the “subject matter” of the state

law claim falls within the subject matter of copyright; and (2) whether the rights asserted in the state law

claim are “equivalent” to the rights granted by the Copyright Act. Del Madera Properties v. Rhodes &

Gardner, Inc., 820 F.2d 973, 977–978 (9th Cir. 1987), overruled on other grounds by Fogerty v.

Vantasy, Inc., 510 U.S. 517, 114 S. Ct. 1023 (1994). A conversion claim involving tangible property,

however, is immune from preemption. See Oddo v. Ries, 743 F.2d 630, 635 (9th Cir. 1984).

Plaintiffs argue that their conversion claim only relates to tangible items and does not relate to

copyright or other intellectual property rights governed by the Copyright Act. Defendant argues that no

truly tangible property has been taken, and that plaintiffs merely seek damages for intangible intellectual

property that was allegedly “taken” by MDL Inc. for use in another database. Plaintiffs’ conversion

claim, defendant argues, is simply a copyright infringement claim dressed like a conversion claim.

In response, plaintiffs refer to their allegation that “defendant is in possession of printed and/or

electronic media (e.g., disks, hard drives, servers) constituting tangible material related to excerpts, the

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Beilstein Database and its related components, and/or the MDL Patent Chemistry Database.” FAC ¶ 73.

Plaintiffs assert that only those tangible materials allegedly possessed by defendant—not plaintiffs’

intangible intellectual property—are at issue in the conversion claim.

The Court is not persuaded by plaintiffs’ characterization of the “tangible” items at issue. In an

analogous case, a plaintiff software developer provided to defendant corporation a limited version of his

program for evaluation and determination as to whether defendant wished to include it in defendant’s

upcoming software package release. Firoozye v. Earthlink Network, 153 F. Supp. 2d 1115, 1117–18

(N.D. Cal. 2001). After completing its evaluation, defendant informed plaintiff of its desire to include

plaintiff’s program in defendant’s next software package release and asked to receive a fully-enabled

version of the program for immediate testing. Id. at 1118. Plaintiff provided the fully-enabled version,

but only after receiving defendant’s assurance that plaintiff’s intellectual property would not be included

in defendant’s software package release until a formal licensing agreement could be finalized. Id.

Several months later, plaintiff received a copy of defendant’s next software package release, which

included plaintiff’s fully-enabled program, even though defendant had not paid plaintiff or entered into

any license agreement with him. Id. In determining whether plaintiff’s cause of action for conversion

was preempted by the Copyright Act, the court in Firoozye noted that plaintiff did not seek return of a

tangible piece of property. Id. at 1130. Instead, plaintiff sought relief for defendant’s wrongful

reproduction and use of his program without his permission—“the essence of a claim for copyright

infringement.” Id. Explaining that “where a plaintiff is only seeking damages from a defendant’s

reproduction of a work -- and not the actual return of a physical piece of property -- the claim is

preempted,” the court dismissed plaintiff’s conversion claim. Id.

Similarly, although plaintiffs’ FAC refers to “disks, hard drives, and servers,” the thrust of

plaintiffs’ grievance is that defendant remains in possession of materials related to plaintiffs’ intellectual

property. Plaintiffs’ concern is not with the printed and/or electronic media itself, but rather with the

information that is contained in such media. Plaintiffs’ inability to identify any of the “tangible”

property at issue highlights this point. See FAC ¶ 73. Plaintiffs’ claim is based on all tangible materials

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“related to” the intellectual property, no matter what form that material takes. See FAC ¶ 74. Plaintiffs

are thus not concerned with the conversion of a particular hard drive, but rather with any hard drive

containing the intellectual property.

Plaintiffs contend that the original licensing agreement between Beilstein-Institut and Beilstein

InformationssystemeGmbHrecognized plaintiffs’ property rights in all projects and undertakings falling

within the “Scientific Area” of plaintiffs’ intellectual property, including all tangible materials related

to the Beilstein Database. Plaintiffs argue, therefore, that tangible materials related to plaintiffs’

intellectual property may serve as the basis for a conversion claim. By definition, however, all

copyrighted works must be fixed in some tangible medium. See 17 U.S.C. §§ 101, 102(a). It does not

follow that the existence of any such “tangible medium” therefore permits a conversion claim that is

immune from preemption by the Copyright Act. Were that so, any claim under the Copyright Act could

also be pled as a conversion claim and the Copyright Act’s preemption provision would be of no impact.

See 17 U.S.C. § 301. Defendant’s motion to dismiss as to plaintiffs’ conversion claim is therefore

GRANTED.

II. Plaintiffs’ cause of action for unfair and unlawful business acts or practices is pled with

sufficient particularity as to fraudulent business practices.

Defendant also moves the Court to dismiss plaintiffs’ unfair competition claim under California

Business and Professions Code § 17200 et seq. Defendant contends that plaintiffs’ unfair competition

claim merely incorporates by reference the allegations pertaining to its copyright claims. Defendant

argues that the unfair competition claim is therefore preempted by the Copyright Act. As the California

Supreme Court has explained, however, “the [California] unfair competition law’s scope is broad. . . .

[It] borrows violations of other laws and treats them as unlawful practices that the unfair competition

law makes independently actionable.” Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20

Cal. 4th 163, 180 (1999) (emphasis added) (internal quotation marks and citations omitted). California’s

definition of unfair competition includes three prongs—unlawful, unfair, and fraudulent—any one of

which may independently operate as the theory for a cause of action under § 17200. William L. Stern,

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Bus. & Prof.C. § 17200 Practice, § 3:15 (2005). Thus, even if the copyright infringement allegation

underlying the “unlawful” prong of plaintiff’s § 17200 claim is preempted, plaintiffs may assert a claim

for unfair competition under an independent alternate theory. Plaintiffs have done so by alleging

fraudulent business practices.

In asserting that defendant engaged in fraudulent business practices that entitle plaintiffs to relief

under the California unfair competition law, plaintiffs have alleged facts with sufficient particularity.

Federal Rule of Civil Procedure 9(b) provides that “[i]n all averments of fraud . . . , the circumstances

constituting fraud . . . shall be stated with particularity.” The Ninth Circuit has articulated the standard

for such particularity as “specific enough to give defendant[] notice of the particular misconduct which

is alleged to constitute the fraud charged.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).

Additionally, the pleading must “identif[y] the circumstances constituting fraud so that the defendant

can prepare an adequate answer from the allegations.” Moore v. Kayport Package Express, 885 F.2d

531, 540 (9th Cir. 1989).

Plaintiffs’ FAC alleges specific information with regards to how MDL Inc. “actively concealed

the existence of the MDL Patent Chemistry Database as it was being developed into a marketable

product and previewed for potential customers,” and exchanged documents and communications with

MDL GmbH that directed both companies to engage in fraudulent behavior. FAC ¶ 84. Plaintiffs’

unfair competition claim identifies the circumstances constituting fraud, and is neither vague nor

conclusory. The Court finds it to be stated with sufficient particularity to enable defendant to prepare

an adequate answer. Defendant’s motion to dismiss as to plaintiffs’ claim for unfair and unlawful

business acts or practices in violation of California Business and Professions Code § 17200 et seq. is

therefore DENIED.

III. Plaintiffs’ demand for statutory and treble damages is permitted under the Lanham

Act.

Defendant additionally moves the Court to strike plaintiffs’ demand for statutory and treble

damages under the Lanham Act, asserting that the Lanham Act does not provide for such damages under

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the instant circumstances. For the reasons discussed below, defendant’s argument is misguided.

Section 35(b) of the Lanham Act provides, in relevant part:

[T]he court shall . . . enter judgment for three times such profits or damages . . . in the

case of any violation of [certain statutes] that consists of intentionally using a mark or

designation, knowing such mark or designation is a counterfeit mark . . . in connection

with the sale, offering for sale, or distribution of goods or services.

15 U.S.C. § 1117(b). Defendant correctly points out that plaintiffs do not allege use of a “counterfeit

mark” within the meaning of the Lanham Act, and treble damages under § 35(b) are therefore

unwarranted. Defendant also points out that the Court has already found punitive damages to be

unavailable for plaintiffs’ Lanham Act claim. See Order, Doc. No. 151, at 1 n.2 (July 28, 2006) (“[T]he

Court agrees with defendant that punitive damages are unavailable for plaintiff’s Lanham Act claim.

It therefore STRIKES plaintiff’s request for punitive damages in connection with its Lanham Act

claim.”).

Defendant acknowledges, however, that under § 35(a) of the Lanham Act the Court may “enter

judgment, according to the circumstances of the case, for any sum above the amount found as actual

damages, not exceeding three times such amount,” and that “[s]uch sum . . . shall constitute

compensation and not a penalty.” 15 U.S.C. § 1117(a) (emphasis added). Although the Court has

stricken plaintiffs’ request for punitive damages, a treble damages award under § 35(a) does not

constitute a penalty and may be granted in the Court’s discretion.

Defendant cites Ono’s Trading Company, LLC v. Parnell, 2006 U.S. Dist. LEXIS 60247,

*19–*21 (S.D. Ala. Aug. 15, 2006), for the premise that § 35(a) does not authorize statutory damages

for claims arising under the Lanham Act. The Ono’s Trading Company court did not so hold. Although

the defendants in that case had engaged in unfair competition, plaintiffs sought to receive statutory

damages pursuant to § 35(c) of the Lanham Act, which pertains to statutory damages for use of

counterfeit marks. Ono’s Trading Co., 2006 U.S. Dist. LEXIS 60247, at *18–*19. No counterfeit mark

having been used, the court in Ono’s Trading Company denied statutory damages. Id. at *20.

Here, plaintiffs do not allege use of a counterfeit mark and therefore cannot demand statutory

damages under § 35(c). Plaintiffs may, however, seek discretionary statutory damages, not exceeding

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three times the actual damages, as expressly permitted under § 35(a). Defendant’s motion to strike

plaintiffs’ demand for statutory and treble damages under the Lanham Act is therefore DENIED.

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby GRANTS defendant’s

motion to dismiss plaintiffs’ conversion claim, DENIES defendant’s motion to dismiss plaintiffs’ unfair

competition claim, and DENIES defendant’s motion to strike plaintiffs’ demand for statutory and treble

damages (Docket No. 168).

IT IS SO ORDERED.

Dated: November 7, 2006 

SUSAN ILLSTON

United States District Judge

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