Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-03746/USCOURTS-cand-5_04-cv-03746-9/pdf.json

Nature of Suit Code: 820
Nature of Suit: Copyright
Cause of Action: 17:101 Copyright Infringement

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 This disposition is not designated for publication and may not be cited.

Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

**E-Filed 2/10/06**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

CREATIVE SCIENCE SYSTEMS, INC.,

 Plaintiff,

 v.

FOREX CAPITAL MARKETS, LLC, et al.,

 Defendants.

Case Number C 04-03746 JF (RS)

ORDER1 GRANTING MOTION FOR

LEAVE TO AMEND ANSWER AND

COUNTERCLAIMS

[Docket No. 95]

I. BACKGROUND

Plaintiff Creative Science Systems, Inc. (“CSS”) is a software company that develops and

markets NetZyme Enterprise software (“NetZyme”), among other software products. NetZyme is

a type of “middleware,” a category of software that facilitates communication between multiple

software applications or hardware. Defendant Forex Capital Markets, LLC (“FXCM”) is an

electronic foreign currency broker that licensed NetZyme from CSS. 

On September 7, 2004, CSS filed its original complaint in the instant action against

Case 5:04-cv-03746-JF Document 131 Filed 02/10/06 Page 1 of 7
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 On December 14, 2005, Refco filed notice with the Court of an automatic stay of the

proceedings with respect to Refco because it had filed for Chapter 11 bankruptcy.

3

 The lay discovery deadline had previously been November 18, 2005, but was extended

by approximately one month in early November, 2005.

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

Defendants FXCM and Refco Group, Ltd. LLC (“Refco”).2 On September 23, 2004, CSS filed

its First Amended Complaint, alleging: (1) copyright infringement in violation of the Copyright

Act, (2) false designation of origin under section 43(a) of the Lanham Act, (3) misappropriation

under California common law, and (4) breach of implied-in-fact contract. CSS alleges generally

that FXCM copied or Netzyme, installed it on more servers than were authorized, and failed to

make certain payments.

On November 22, 2004, FXCM filed an Answer and Counterclaim against CSS, asserting

the following counterclaims: (1) breach of contract, (2) breach of warranty, (3) false advertising

under section 43(a) of the Lanham Act, (4) false advertising under the California Business and

Professional Code § 17500, and (5) unjust enrichment. FXCM alleges generally that CSS

misrepresented to FXCM that NetZyme would be able to support 50,000 simultaneous users, and

that NetZyme was never able to perform as was promised.

During discovery, in March, 2005, FXCM requested from CSS “all documents relating to

the number of concurrent client-server sessions that could be supported by NetZyme, including

documents relating to any tests of such capabilities,” and all such documents and tests relating to

“the number of simultaneous users who could be supported by NetZyme.” Bovich Decl., Ex. A,

Nos. 9 and 10. FXCM renewed this request in November, 2005. Id., Ex. C. CSS produced the

requested documents at the end of November, 2005, approximately one month prior to the

December 16, 2005 lay discovery deadline.3Id., Ex. F. These documents included a report

describing a test program—“sessionloadtest.java”—which was used to test the performance of

NetZyme in September 2002, during the parties’ negotiations and prior to the execution of the

licensing agreement. This program arguably shows that CSS was aware at the time that NetZyme

could not sustain as many simultaneous users as CSS had represented to FXCM. Id., Ex. E.

On January 12, 2006, FXCM requested that CSS stipulate to FXCM’s proposed filing of

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

its First Amended Answer and Counterclaims, which request CSS refused. Id., Exs. G and H. 

On January 25, 2006, FXCM filed the instant motion for leave to file its First Amended Answer

and Counterclaims. FXCM seeks to add counterclaims alleging: (1) deceit, (2) suppression of

fact, (3) promise made without intention to perform, and (4) negligent misrepresentation. 

FXCM’s First Amended Answer and Counterclaims also include an additional affirmative

defense of “unclean hands” and additional factual allegations relating to the new counterclaims

and affirmative defense. CSS has filed opposition to the motion. The Court heard oral argument

on February 10, 2006.

II. DISCUSSION

The request for leave to amend is governed by Federal Rule of Civil Procedure 15(a),

which provides that “leave shall be freely given when justice so requires.” In deciding whether

to grant leave to amend, the Court will consider several factors, including: (1) undue delay by

the party seeking the amendment; (2) prejudice to the opposing party; (3) bad faith; (4) futility of

amendment; and (5) whether the party previously has amended its pleadings. Bonin v. Calderon,

59 F.3d 815, 845 (9th Cir. 1995). The Court has discretion in decided whether to grant leave to

amend, but it “‘must be guided by the underlying purpose of Rule 15—to facilitate decision on

the merits rather than on the pleadings or technicalities.’” DCD Programs, Ltd. v. Leighton, 833

F.2d 183, 186 (9th Cir. 1987) (quoting United States v. Webb, 655 F.2d 977, 979 (9th Cir.1981)).

CSS argues that FXCM’s additional counterclaims are based on two separate categories

of factual allegations: the “50,000 concurrent user” theory and the “24x7 reliability” theory. 

These two theories are related. The factual allegations relating to the 24x7 reliability theory

include:

In addition, Dreyband promised that NetZyme could provide “24x7 reliability,”

with knowledge that NetZyme’s ability to provide such reliability would be greatly

impacted by the above performance issues.

FXCM is now aware that the representations made by Creative Science were in

fact false. The true facts were that NetZyme could not sustain 50,000 concurrent clientserver sessions per CPU in the manner represented by Creative Science and relied upon

by FXCM, and (2) that NetZyme could not provide “24x7 reliability.”

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

 Bovich Decl., Ex. G, ¶¶ 112-13. Although the “24x7 reliability theory” was not identified as

such in earlier pleadings, and may expand the scope of the counterclaims, the new factual

allegations relate directly to FXCM’s the general allegation that CSS knew during contract

negotiations that it was making false promises. All of the new factual allegations and

counterclaims allegedly arise from the recently discovered sessionloadtest.java program, which

may demonstrate knowledge of significant performance limitations. Additionally, CSS argues

that FXCM neither identifies the basis for its additional affirmative defense of “unclean hands”

nor explains why it could not have been asserted earlier. FXCM responds that this defense is

based on the same factual allegations underlying the additional counterclaims: that CSS

knowingly defrauded FXCM during contract negotiations. Accordingly, for the purpose of the

instant motion, the Court will evaluate together the two theories and the additional affirmative

defense.

CSS opposes FXCM’s motion on the ground that the proposed additions would change

significantly the theory underlying FXCM’s counterclaims. CSS identifies as FXCM’s primary

ground for the instant motion the allegation by FXCM that the recent document discovery

revealed, for the first time, that CSS interpreted the term “50,000 concurrent client-server

sessions” differently than “50,000 concurrent users.” CSS disputes that this was the first time

that FXCM was aware of this critical distinction. CSS has submitted deposition testimony of

Yuri Miroshnikov, FXCM’s Chief Technology Officer, indicating that he understood the

distinction between a “connection” and a “session.” Frewing Decl., pp. 262-64. However,

FXCM responds that its new allegations, counterclaims, and affirmative defense are based on

more than the distinction between these two terms. FXCM argues that it is immaterial which

term is used, as NetZyme did not support anything close to 50,000 concurrent users or clientserver sessions. Bovich Decl., Ex. E ¶ 54. Additionally, FXCM argues that CSS did not reveal

to FXCM the disclaimers or limitations of the sessionloadtest.java program, which arguably are

material to the performance of the software. Id., ¶ 43. Accordingly, the allegations that FXCM

knew of the distinction between the relevant terms is not enough to show that FXCM’s additional

counterclaims and affirmative defense are futile or that it has acted in bad faith or unduly delayed

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

the filing of the instant motion.

CSS argues that it will be prejudiced if the Court grants the instant motion because it

would cause CSS to incur additional expenses, discovery is closed, and the March 3, 2006

deadline for filing summary judgment motions is approaching. FXCM represents that additional

discovery and modification of the current schedule is not necessary, but that it is amenable to

reopening discovery for both parties for the limited purpose of conducting discovery related to

the amendments to the pleadings. As the Court advised counsel at the February 10, 2006

hearing, the Court’s schedule necessitates a delay of the presently scheduled trial date by at least 

45 to 60 days, which would accommodate any additional discovery that would be required by

granting the instant motion. Accordingly, given the very liberal standard for motions for leave to

amend and the absence of notable prejudice to CSS, the Court will grant the instant motion.

However, it is not entirely clear whether FXCM first learned of the sessionloadtest.java

program, upon which it bases all of its new allegations and claims, as a result of the November,

2005 document discovery. Yakov Dreyband, co-founder, Chief Operating Officer, and primary

software architect of CSS, stated in his declaration that he demonstrated the sessionloadtest.java

program for FXCM personnel during a December 2002 training session, and left a copy of this

program on a FXCM computer. Dreyband Decl., ¶¶ 11(c), 12. In its reply brief, FXCM ignores

this allegation, and argues incorrectly that “CSS does not contend that it ever revealed the

disclaimers or limitations contained in SessionLoadTest.java to anyone at FXCM.” Because of

the liberal standard for motions for leave to amend, CSS’s own delayed production of the

sessionloadtest.java program, and the inconclusive evidence regarding whether FXCM in fact

had possession of the test at the earlier date, the Court will grant the instant motion. However,

based on these concerns and the representation of counsel at the February 10, 2006 hearing that

further discovery would financially burden CSS, FXCM shall produce its witness(es) for

deposition in California.

III. ORDER

Good cause therefore appearing, IT IS HEREBY ORDERED that the instant motion for

leave to amend answer and counterclaims is GRANTED.

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

The current pre-trial and trial schedule is vacated. The new trial date is June 16, 2006. 

The new last date to hear dispositive motions is May 26, 2006. All other dates are 45 dates later

than the dates to which parties stipulated in the December 22, 2005 Order.

IT IS SO ORDERED

DATED: February 10, 2006

 

JEREMY FOGEL

United States District Judge

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Case No. C 04-03746 JF (RS)

ORDER GRANTING MOTION FOR LEAVE TO AMEND ANSWER AND COUNTERCLAIMS

(JFLC1)

This Order has been served upon the following persons:

John P. Bovich jbovich@reedsmith.com, edorrington@reedsmith.com

Robert T. Cruzen rcruzen@howardrice.com,

Scott H. Frewing scott.h.frewing@bakernet.com, diane.e.pierson@bakernet.com;

renata.thorgersen@bakernet.com; fsay@bakernet.com

Tod L. Gamlen tod.l.gamlen@bakernet.com, frances.m.say@bakernet.com;

renata.m.thorgersen@bakernet.com

Martin R. Glick mglick@howardrice.com,

Jonah D. Mitchell jmitchell@reedsmith.com, Drothschild@reedsmith.com

William R. Overend woverend@reedsmith.com, nctuttle@reedsmith.com

Maxim H. Waldbaum mwaldbaum@schiffhardin.com, jsanchez@schiffhardin.com

Keith L. Wurster keith.l.wurster@bakernet.com, robin.m.robledo@bakernet.com 

Case 5:04-cv-03746-JF Document 131 Filed 02/10/06 Page 7 of 7