Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-04407/USCOURTS-cand-4_05-cv-04407-7/pdf.json

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

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

TERARECON, INC.,

Plaintiff,

v.

FOVIA, INC.; FOVIA MEDICAL, INC.;

KENNETH FINEMAN; ROGER KATEN; GEORGE

BUYANOVSKY; IGOR OKULIST; and JOSEF

GOREK,

Defendants.

 /

FOVIA, INC.; FOVIA MEDICAL, INC.; and

GEORGE BUYANOVSKY,

Counterclaimants, 

v.

TERARECON, INC., MOTOAKI SAITO; and

ROBERT TAYLOR,

Counterdefendants.

 /

No. C 05-4407 CW

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

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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. 

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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 softwarebased 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. 

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LEGAL STANDARD

I. Motion to Dismiss

A 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

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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.

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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.

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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

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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, in

Valente-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

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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

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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

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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.").

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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

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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 timebarred 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 timebarred, the Court need not address whether the statute of

limitations is tolled as to claims asserted against officers and

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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

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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.

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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

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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").

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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:

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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.

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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.

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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

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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 timeCase 4:05-cv-04407-CW Document 58 Filed 07/06/06 Page 22 of 25
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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

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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 

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(Docket No. 27) is also GRANTED.

IT IS SO ORDERED.

Dated: 7/6/06 

CLAUDIA WILKEN

United States District Judge

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