Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02469/USCOURTS-cand-4_06-cv-02469-6/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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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

APPLIED ELASTOMERICS, INCORPORATED, a

California corporation,

Plaintiff/CounterDefendant,

v.

Z-MAN FISHING PRODUCTS, INCORPORATED,

a South Carolina corporation,

Defendant/CounterComplainant.

 /

No. C 06-2469 CW

ORDER GRANTING IN

PART PLAINTIFF'S

MOTION TO DISMISS

DEFENDANT'S

COUNTER-CLAIMS

AND DENYING IT IN

PART 

Plaintiff Applied Elastomerics, Incorporated (AEI) has filed a

motion to dismiss ten of the twelve counter-claims filed by

Defendant and Counter-Complainant Z-Man Fishing Products,

Incorporated. (Docket No. 40.) Plaintiff moves to dismiss the

first counter-claim for breach of the license agreement for failure

to provide formulas covered by Plaintiff's patent rights, the

second counter-claim for breach of the license agreement for

failure to maintain exclusivity, the fourth counter-claim

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for fraudulent inducement, the fifth counter-claim for negligent

misrepresentations, the sixth counter-claim for fraud in the

execution, the seventh counter-claim for declaratory judgment of no

breach of contract by Defendant, due to lack of consideration

resulting from Plaintiff's failure to provide Defendant with a

formula within the scope of Plaintiff's patent rights or that

worked for its intended purpose, the eighth counter-claim for

declaratory judgment of no breach of contract by Defendant, due to

lack of consideration resulting from Plaintiff's failure to

maintain exclusivity, the ninth counter-claim for declaratory

judgment of no breach of contract by Defendant because Defendant's

performance under the license agreement is excused by Plaintiff's

prior material breach of the license agreement by failing to

provide Defendant with a formula within Plaintiff's patent rights

or that was appropriate for its intended use, the tenth counterclaim for declaratory judgment of no breach of contract by

Defendant because Defendant's performance under the license

agreement is excused by Plaintiff's prior material breach of the

license agreement by failing to maintain exclusivity, and the

twelfth counter-claim for restitution for unjust enrichment

pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). 

Defendant opposes this motion. The matter was heard on November 3,

2006. Having considered all of the papers filed by the parties and

oral argument on the motion, the Court GRANTS Plaintiff's motion in

part and DENIES it in part.

BACKGROUND

The following facts are taken from Defendant's CounterCase 4:06-cv-02469-CW Document 67 Filed 11/08/06 Page 2 of 17
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For the Northern District of California

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Complaint and Exhibit A, the Patent License Agreement (the

Agreement). Plaintiff develops and distributes products containing

gel composites, particularly gel toys. Defendant develops and

manufactures fishing lure components and fishing lures for major

lure manufacturers. Defendant has been known for its original

development and manufacture of silicone skirts for lures.

For many years prior to 2001, Mike Shelton, Defendant's Vice

President of Marketing and Sales and Director of Technology, had

been leading efforts to develop improved plastic lures for

Defendant. In doing so, he conducted extensive polymer research

and testing.

In July, 2001, Plaintiff and Defendant executed the Agreement. 

The Agreement recites that Plaintiff owns and has rights to license

certain "Patent Rights." (Agreement, Recitals.) Patent Rights are

defined in the Agreement as "the United States and international

patents listed on Schedule A . . . ." Schedule A lists four United

States patents owned by Plaintiff. (Agreement, Schedule A.)

In the Agreement, Plaintiff grants Defendant "a nonexclusive,

royalty-bearing license under its rights in the Patent Rights, to

the extent not prohibited by other patents, to develop, make, have

made, use, offer to sell, sell, lease, export and import Licensed

Products . . . ." (Agreement, § 2.1(a).) Licensed Products are

defined as 

one or more fishing lure products . . . which is

developed, manufactured, . . . or purchased from a third

party for marketing by [Defendant] under [Defendant's]

specifications and trademarks . . . as listed by product

item number, described, defined, and with the designation

of the type of gel composition used on Schedule B . . .

that cannot be manufactured made, used, offered for sale,

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leased or sold, in whole or in part, without infringing

one or more of the Patent Rights.

(Agreement, § 1.3.) Schedule B lists one product, a fishing lure

made from SEEPS gel. (Agreement, Schedule B.)

The Agreement also grants Defendant a "nonexclusive license to

use AEI Technology in connection with the manufacture, use, and

sale of Licensed Products." (Agreement, § 2.1(b).) AEI Technology

is defined as "materials, any information relating to manufacturing

techniques, know-how, processes, developments, experimental works,

works in progress, trade secrets, or any other matter relating to

the business of [Plaintiff] or developed by [Plaintiff] . . .

related to Licensed Product(s)." (Agreement, § 1.13.) 

In partial consideration for this grant of rights, Defendant

was obliged under the Agreement to pay running royalties based on

its revenue from sales of Licensed Products. (Agreement, § 4.2.) 

Defendant was also obliged to pay Plaintiff minimum royalties each

calendar quarter. (Agreement, § 4.6(a).)

Regarding infringement of the Patent Rights, the Agreement

provides that Defendant "shall have the right, under its own

control and at its own expense, to prosecute any third party

infringement of the Patent Rights . . . . " (Agreement, § 7.2.) 

The Agreement also provides that Plaintiff "shall have the right,

at its sole discretion, to prosecute such infringement, or answer

such declaratory judgment action, under its sole control and at its

sole expense, and any recovery obtained shall be given to

[Plaintiff]." (Agreement, § 7.5.) 

The Agreement contains a clause specifying that "EXCEPT AS

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OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER

[DEFENDANT] NOR [PLAINTIFF] MAKES ANY REPRESENTATIONS . . . OF ANY

KIND CONCERNING THE PATENT RIGHTS, EXPRESS OR IMPLIED, . . . ." 

(Agreement, § 10.1.) The Agreement also contains an "Entire

Agreement" clause: "Except for the Confidential Agreement . . . ,

this Agreement constitutes the entire agreement between the parties

with respect to its subject matter and supercedes all prior

agreements or understandings between the parties relating to its

subject matter." (Agreement, § 10.12.) 

The Agreement also contains a "Governing Law" clause, which

specifies that the Agreement "and all disputes arising out of or

related to [it], or the performance, enforcement, breach or

termination thereof, and any remedies relating thereto, shall be

construed, governed, interpreted and applied in accordance with the

laws of the State of California, U.S.A., without regard to conflict

of laws principles . . . ." (Agreement, § 10.8.)

Defendant first began shipping its CYBERFLEXXX products at the

end of the first quarter of 2002. Customers reported that these

products deformed when exposed to heat. In March, 2002, the

products were taken off the market to allow examination of the

problem. Plaintiff began shipping an improved second line of

products late in the third quarter of 2002. 

Although the distortion problem was solved, the new products

became tacky and undesirable upon wetting and drying and were

considered too soft by some. In February, 2003, the products were

again taken off the market to examine the new problems. Around

this time, Defendant notified Plaintiff through Plaintiff's

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president, John Chen, of infringing products in the marketplace. 

In response, Plaintiff assured Defendant that it would notify the

infringing producers of the infringement and demand that it stop. 

Plaintiff did not, however, prosecute the infringing producers. 

During Defendant's product development process, Mr. Chen, on

behalf of Plaintiff, provided Defendant with a limited number of

gel formulas. These gels were incorporated into Defendant's first

and second product lines. The formulas were represented to be

within the scope of the Patent Rights, but in fact were not. 

Defendant then researched and developed a third line of

products without input from Plaintiff. By May 5, 2005, this

research and development resulted in a line of usable lures. 

LEGAL STANDARD

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)). Dismissal of a complaint can be based on either the lack

of a cognizable legal theory or the lack of sufficient facts

alleged under a cognizable legal theory. Balistreri v. Pacifica

Police Dept., 901 F.2d 696, 699 (9th Cir. 1990).

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).

Although the court is generally confined to consideration of

the allegations in the pleadings, when the complaint is accompanied

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by attached documents, such documents are deemed part of the

complaint and may be considered in evaluating the merits of a Rule

12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265,

1267 (9th Cir. 1987).

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). However, "[i]n all averments of

fraud or mistake, the circumstances constituting fraud or mistake

shall be stated with particularity." Fed. R. Civ. P. 9(b). 

DISCUSSION

I. First, Seventh and Ninth Counter-Claims

Plaintiff contends that Defendant fails to state a claim for

breach of contract for failure to provide formulas covered by the

patent rights because Plaintiff is not obliged under the Agreement

to provide formulas covered by the Patent Rights. Rather,

Plaintiff argues, its only obligation under the Agreement is not to

sue Defendant for infringement of the Patent Rights. 

Defendant argues that Plaintiff, by granting Defendant a

license to make Licensed Products, became obliged to provide

Defendants with certain formulas that would enable Defendant to

make those products. Or, if the Agreement does not expressly

oblige Plaintiff to provide formulas, Defendant claims that it is

ambiguous as to whether the Agreement creates such an obligation.

However, the license agreement only grants Defendant the right to

use patents that Plaintiff already had -- the Patent Rights -- and

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technology Plaintiff had already developed or might develop -- AEI

Technology. Additionally, Defendant could use these patents and

this technology only to make lures with SEEPS gel. The Agreement

permits Defendant to create and sell these lures; it does not

oblige Plaintiff to provide Defendant with the specific formulas

necessary to make them. Therefore, Defendant's first counter-claim

does not state a claim for which relief can be granted. 

Additionally, Defendant argues that, if Plaintiff was not

obliged under the Agreement to provide specific formulas for making

the lures, the Agreement is void for failure of consideration. 

However, even if Defendant never produced the lures covered by the

Agreement, the exclusive right to produce such lures was a benefit

that accrued to Defendant under the Agreement. Therefore, although

the Agreement did not oblige Plaintiff to provide Defendant with

specific formulas, the Agreement is not void for failure of

consideration. Accordingly, Defendant's first counter-claim is

dismissed. 

Regarding the Seventh and Ninth Counter-Claims, Plaintiff

argues that Defendant has failed to state a claim for a declaratory

judgment that Defendant has not breached the Agreement because of

failure of consideration due to Plaintiff's failure to provide

formulas that either were within the scope of the Patent Rights or

that worked for their intended purposes. Plaintiff also argues

that Defendant has failed to state a claim for a declaratory

judgment that Defendant has not breached the Agreement because

Defendant's performance is excused due to Plaintiff's failure to

provide formulas that were either within the scope of the Patent

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Rights or appropriate for their intended use. 

As discussed above, the Agreement did not oblige Plaintiff to

provide Defendant with any specific formulas. The Agreement only

obliges Plaintiff to permit Defendant to use certain patents and

technology that Plaintiff had developed or might develop. 

Therefore, Defendant's seventh and ninth counter-claims do not

state claims for which relief can be granted. Accordingly,

Defendant's seventh and ninth counter-claims are dismissed. 

Defendant does not proffer any amendment to the first, seventh, or

ninth counter-claims that would remedy the deficiencies described

but, in an abundance of caution, the Court grants it leave to amend

to attempt to do so. 

II. Second, Eighth and Tenth Counter-Claims

Plaintiff contends that Defendant fails to state a claim for

breach of contract for failure to maintain exclusivity. Plaintiff

argues that the unambiguous terms of the Agreement do not oblige

Plaintiff to maintain exclusivity. Defendant argues that the

Agreement does so expressly. The Agreement permits Plaintiff to

maintain exclusivity. However, the Agreement provides only that

Plaintiff has the option of maintaining exclusivity, not the

obligation. Therefore, the Agreement does not expressly oblige

Plaintiff to maintain exclusivity. 

Defendant also alleges that Plaintiff made a collateral

agreement to maintain exclusivity. Defendant argues that because

assuming such an obligation is not inconsistent with the language

of the Agreement, the parole evidence rule does not bar any of its

counter-claims based on allegations of such a collateral agreement. 

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However, when parties have agreed that a writing is a complete

and final embodiment of their agreement, parole evidence cannot be

used to add to or vary its terms. A. Kemp Fisheries, Inc. v.

Castle & Cook, Inc., 852 F.2d 493, 495 (9th Cir. 1988) (quoting

Masterson v. Sine, 68 Cal. 2d 222, 225 (1968)). Plaintiff and

Defendant have expressed their intent that the Agreement

constitutes the entire agreement between the parties relating to

its subject matter. (Agreement, § 10.12.) 

Section seven of the Agreement specifically addresses the

parties' rights and obligations in the event that the Patent Rights

are infringed upon. Because section seven does not oblige

Plaintiff to maintain exclusivity, any collateral agreement that

Plaintiff would assume such an obligation would vary the terms of

this section. Under California's parole evidence rule, Defendant

will therefore not be able to prove this collateral agreement. 

Because proof of such an agreement is necessary to Defendant's

second counter-claim, it does not state a claim for which relief

can be granted. Accordingly, Defendant's second counter-claim is

dismissed.

Plaintiff also contends that Defendant's eighth counter-claim,

declaratory judgment of no breach due to failure of consideration

for failure to maintain exclusivity, and tenth counter-claim,

declaratory judgment of no breach because performance is excused

due to prior material breach for failure to maintain exclusivity,

fail to state a claim for which relief can be granted. Plaintiff

argues that, because it is not obliged under the Agreement to

maintain exclusivity, its failure to prosecute infringing users

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resulted in neither a failure of consideration nor a material

breach on its part. 

As discussed above, Plaintiff is not obliged under the

Agreement to maintain exclusivity. Therefore, the fact that

Plaintiff did not prosecute infringing users did not result in a

failure of consideration or a material breach. Accordingly,

Defendant's eighth and tenth counter-claims do not state claims for

which relief can be granted. Defendant's second, eighth and tenth

counter-claims are dismissed. Defendant does not proffer any

amendment to the second, eighth, or tenth counter-claims that would

remedy the deficiencies described, but in an abundance of caution,

the Court grants it leave to amend to attempt to do so. 

III. Fourth Counter-Claim

Plaintiff argues that Defendant's claim for fraud in the

inducement must be dismissed for failure to state a claim. 

Specifically, Plaintiff argues that Defendant does not and cannot

plead an essential element of the claim: justifiable reliance on

Plaintiff's alleged misrepresentations. 

Reliance on representations that contradict clear and

unambiguous terms of an agreement is unjustified as a matter of

law. Hadland v. NN Investors Life Ins. Co., 24 Cal. App. 4th 1578,

1588 (1994). Defendant alleges that Mr. Chen represented that

Plaintiff would maintain exclusivity and that it had been enforcing

and would continue to enforce its patents. (Counter-Complaint, ¶

64, allegations 2 and 4.) However, as discussed above, the

Agreement contradicts any such representation by providing that

Plaintiff had the option to maintain exclusivity at its sole

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discretion. Therefore, Defendant's reliance on any contrary

representation is unjustified as a matter of law. Accordingly,

Defendant cannot state a claim for fraud in the inducement based on

allegations that Plaintiff represented that it would maintain

exclusivity.

Defendant also alleges that Mr. Chen represented that the

patents Plaintiff was licensing would provide Defendant with what

it needed for its line of lures. (Counter-Complaint, ¶ 64,

allegation 1.) However, the Agreement contradicts any such

representation by stating that, except as provided in the

Agreement, Plaintiff makes no representations concerning the patent

rights. (Agreement § 10.1.) Therefore, Defendant's reliance on

any such representation is unjustified as a matter of law. 

Accordingly, Defendant cannot state a claim for fraud in the

inducement based on allegations that Plaintiff represented that the

licensed patents would provide Defendant with what it needed for

its lures.

Defendant argues that a contract provision that provides that

no party is relying on any extrinsic representations does not

prohibit a party from introducing parole evidence to prove

fraudulent misrepresentation. Defendant relies on Ron Greenspan

Volkswagen, Inc. v. Ford Motor Land Development Corp., 32 Cal. App.

4th 985, 994-95 (1995) for this proposition. However, the

Agreement does not contain a general disclaimer that no party has

relied on any representations of any kind outside of the Agreement,

as was the case in Ron Greenspan. Rather, the provision in the

Agreement specifies that all representations concerning the patent

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rights are expressed in the Agreement. Therefore, Ron Greenspan is

distinguishable.

Defendant makes one allegation which states a claim for

fraudulent inducement: that Mr. Chen represented that he would

maintain the confidentiality of Defendant's proprietary

information. (Counter-Complaint, ¶ 64, allegation 3.) However,

Plaintiff also argues that Defendant's fourth counter-claim should

be dismissed for failure to plead fraud with particularity. 

Defendant's fraudulent inducement claim sounds in fraud and so

must be plead with the particularity required by Federal Rule of

Civil Procedure 9(b). Vess v. Ciba-Geigy Corp., 317 F.3d 1097,

1106 (9th Cir. 2002). To satisfy this particularity requirement, a

party alleging fraud must state the time, place, and specific

content of the false representations as well as the identities of

the parties to the misrepresentation. Edwards v. Marin Park, Inc.,

356 F.3d 1058, 1066 (9th Cir. 2004). Additionally, the party must

include an explanation as to why the statement was untrue or

misleading when made. Yourish v. California Amplifier, 191 F.3d

983, 993 (9th Cir. 2004).

Defendant concedes that it has failed to state when, where and

to whom Mr. Chen allegedly represented that he would maintain the

confidentiality of Defendant's proprietary information and the

specific contents of this representation. Furthermore, Defendant

seems to concede that it has not provided an explanation as to why

this representation was untrue or misleading when made. Because

all of these allegations are required to plead fraud, Defendant's

fourth counter-claim is dismissed. Defendant is granted leave to

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amend this counter-claim to allege when, where, and to whom Mr.

Chen made this representation, the specific contents of this

representation, and an explanation as to why this representation

was untrue when made.

IV. Fifth Counter-Claim

Defendant bases its claim of negligent misrepresentation on

the same four alleged misrepresentations that form the basis of its

claim for fraud in the inducement. The rulings regarding these

misrepresentations apply to this claim as well. Accordingly,

Defendant was unjustified as a matter of law in relying on

representations by Plaintiff that it would maintain exclusivity and

that the patents would provide Defendant with all that it needed

for its line of lures. 

Plaintiff argues that Defendant fails to plead its negligent

misrepresentation claim with sufficient particularity. Claims for

negligent misrepresentation must meet the heightened pleading

requirement of Rule 9(b). Glen Holly Entm't, Inc. v. Tektronix,

Inc., 100 F. Supp. 2d 1086, 1093 (C.D. Cal. 1999). For the one

alleged misrepresentation upon which Defendant can base this claim,

Defendant fails to specify when, where or to whom it was made or

its specific content. Therefore, Defendant's fifth counter-claim

is not plead with sufficient specificity and is dismissed. 

Defendant is granted leave to amend this counter-claim to allege

when, where and to whom this misrepresentation was made and its

specific content. 

V. Sixth Counter-Claim

Plaintiff argues that Defendant has failed to state a claim

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for fraud in the execution of the contract. Under California law,

a claim for fraud in the execution addresses the inception of the

agreement, claiming that the promissor is deceived as to the nature

of his act and actually does not know what he is signing or does

not intend to enter into a contract at all. Rosenthal v. Great

Western Fin. Sec. Corp., 14 Cal. 4th 394, 415 (1996). 

Defendant alleges that it was deceived as to whether the

Agreement would provide everything it needed to make its lures and

therefore it was deceived into signing something other than what it

thought it was signing. However, Defendant does not allege that it

was deceived as to the nature of its act or did not know it was

entering into a contract when Mr. Shelton executed the Agreement,

as required for a claim for fraud in the execution. Rather,

Defendant seems to concede that it knew that it was entering into a

contract. Therefore, Defendant fails to state a claim for fraud in

the execution and its sixth counter-claim is dismissed. Defendant

may amend its counter-complaint if it can adequately state a claim

for fraud in the execution.

However, Defendant's claim for fraud in the execution appears

to be more properly characterized as another basis for a claim of

fraud in the inducement. Specifically, Defendant appears to

contend that it relied on Plaintiff's misrepresentation that

Plaintiff had provided Defendant with all of Plaintiff's patents

that would be applicable to Defendant's line of lures. Therefore,

Defendant may amend its fourth and fifth counter-claims to plead

another basis for claims of fraud and misrepresentation. As

discussed above, such claims for fraud and misrepresentation must

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be plead with the particularity required by Rule 9(b) of the

Federal Rules of Civil Procedure.

VI. Twelfth Counter-Claim

Plaintiff argues that Defendant's counter-claim for unjust

enrichment is barred as a matter of law because, under California

law, unjust enrichment claims cannot be made where there is an

express contract that defines the parties' rights. Plaintiff

relies on California Med. Ass'n, Inc. v. Aetna U.S. Healthcare of

California, 94 Cal. App. 4th 151, 172 (2001) for this proposition. 

However, another California court of appeal case has held that

within the same action a party may seek rescission and,

alternatively, damages based upon contract in the event rescission

cannot be obtained. Walters v. Marler, 83 Cal. App. 3d 1, 16

(1978).

California appellate courts may be split on whether contract

and quasi-contract claims may be alleged in the same complaint. 

However, Federal Rule of Civil Procedure 8(e)(2) provides, “A party

may set forth two or more statements of a claim or defense

alternately or hypothetically, either in one count or defense or in

separate counts or defenses. . . . A party may also state as many

separate claims or defenses as the party has regardless of

consistency and whether based on legal, equitable, or maritime

grounds.” Under this Rule, Defendant may plead alternative

theories. Therefore, the motion to dismiss this claim is denied.

CONCLUSION

For the foregoing reasons, Plaintiff's motion to dismiss

Defendant's first, second, fourth, fifth, sixth, seventh, eight,

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ninth and tenth counter-claims is GRANTED and those claims are

dismissed with leave to amend. Plaintiff's motion to dismiss

Defendant's twelfth counter-claim is DENIED. 

Defendant may amend its counter-complaint to remedy the

deficiencies in the claims that it had attempted to plead in its

first counter-complaint. However, if Defendant wishes to plead

counter-claims based on new theories it must move for leave to file

an amended counter-complaint, pursuant to Rule 15 of the Federal

Rules of Civil Procedure. Before moving for such leave, Defendant

shall confer with Plaintiff to seek a stipulation to include such

new theories in its amended counter-claims, subject to another

motion to dismiss. Defendant shall file its amended countercomplaint no later than November 23, 2007. 

If the related South Carolina case is transferred to the

Northern District of California, Defendant may include in its

amended counter-complaint any claims alleged that case that have

not yet been alleged in the case at bar. This will enable

Plaintiff to move at once to dismiss Defendant's amended counterclaims as well as Defendant's claims from the South Carolina case.

IT IS SO ORDERED.

Dated: 11/8/06 

CLAUDIA WILKEN

United States District Judge

Case 4:06-cv-02469-CW Document 67 Filed 11/08/06 Page 17 of 17