Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-02030/USCOURTS-cand-3_04-cv-02030-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1446 Breach of Contract- Insurance

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

RAE SYSTEMS, INC.,

Plaintiff,

 v.

TSA SYSTEMS, LTD., GAMMA

NEUTRON PRODUCTS, INC., and

DOES 1-100, inclusive,

Defendants. /

No. C 04-2030 FMS

ORDER ON MOTION 

TO DISMISS FOR LACK OF

PERSONAL JURISDICTION AND

FAILURE TO STATE A CLAIM

INTRODUCTION

Defendant Gamma Neutron Products, Inc. (“GNP”) moves to dismiss this action for breach

of contract as against itself. GNP argues that the Court lacks personal jurisdiction over GNP and

that Plaintiff RAE Systems, Inc. (“RAE”) fails to state a claim against GNP in seven out of nine

causes of action in its First Amended Complaint. Having considered the pleadings and relevant

authority, the Court DENIES the motion and VACATES the hearing.

BACKGROUND

Plaintiff RAE is a publicly-traded company that is a Delaware corporation with its principle

place of business in Sunnyvale, California. RAE manufactures monitoring devices and systems used

to detect dangerous atmospheric contaminants and conditions such as combustible gas and vapor

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 accumulations, oxygen deficiencies, and toxic gases. Defendants TSA Systems, Ltd. (“TSA”) and

GNP are privately-held Colorado corporations with their principle places of business in Longmont,

Colorado. TSA and GNP are in the business of marketing and distributing radiation detection

devices. Allan Frymire is the President and the Chairman of the Board of Directors of both TSA and

GNP. 

The present action arises from a set of business agreements negotiated in 2003 among RAE,

TSA, and Polimaster Ltd. (“Polimaster”), a business entity headquartered in Minsk, Belarus which

develops technology for radiation detection devices. In 2002, RAE initiated discussions with

Polimaster regarding the possibility of a business relationship wherein RAE would manufacture

Polimaster-developed radiation detection devices. Polimaster encouraged RAE to open a dialogue

with TSA, such that RAE and TSA might work together in distributing Polimaster-developed

products in the United States. 

After several meetings between representatives of RAE and Polimaster in Minsk, and RAE,

Polimaster, and TSA in Sunnyvale, RAE entered into written agreements with both Polimaster and

TSA on January 15, 2003. The agreements concern the manufacture and distribution of four

Polimaster-developed radiation monitoring devices, the PM 1703M Gamma pager, the PM1703GN

Gamma-Netron Pager, the PM 1401 GN Gamma-Neutron Monitor; and the PM 1710GN GammaNeutron Monitor (the “Licensed Products”). The agreement entered into by RAE and Polimaster

(as well as an additional party, NA&SE Trading Co.) was entitled “Nonexclusive License for

Proprietary Information Usage.” This agreement included among its provisions that RAE “shall be

granted an exclusive right for manufacture, usage, import, sale offer, sale, and other introduction of

the license products into the economic turnover in the territory of the USA with agreeing conditions

with company TSA Systems Ltd, CO, USA.” The agreement with TSA referenced therein entered

was entitled “Agreement between RAE Systems, Inc., and TSA System, Ltd.” This agreement set

forth the terms under which TSA would distribute Polimaster products manufactured by RAE. 

RAE asserts that soon after entering into the agreement with RAE, TSA became concerned

that RAE’s ability to manufacture and distribute the Licensed Products would make TSA’s

participation in the distribution chain unnecessary and that TSA engaged in activities of “industrial

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espionage” to find out about RAE’s business relationship with Polimaster. RAE also asserts that

TSA attempted to evade its contractual obligations by transferring its rights to manufacture and sell

Polimaster Licensed Products to GNP, a corporation formed in June 2003 by TSA employees and

members of TSA’s Board of Directors. 

 RAE alleges that TSA ordered 15 to 25 Licensed Products made by RAE in April 2003,

delivery of which was taken by GNP rather than by TSA. Plaintiff also alleges that on or after June

2003, a distributor for TSA won a contract to supply the United States Coast Guard with 1,300

Licensed Products. Plaintiff alleges that, rather than place an order with RAE for the Licensed

Products as allegedly required under their agreement, TSA formed GNP and TSA and/or GNP

persuaded Polimaster to manufacture the Licensed Products needed to fill the Coast Guard Order. 

RAE also alleges that TSA and GNP continued to solicit confidential information pertaining to

RAE’s business with Polimaster in an effort to interfere with RAE’s business interests and its

contract with Polimaster.

RAE filed its complaint against TSA in San Francisco Superior Court on April 20, 2004. On

May 24, 2004, it was removed to this Court. On April 28, 2005, RAE filed an Amended Complaint,

adding GNP as a defendant. Causes of action include (1) Breach of Contract, (2) Breach of

Covenant of Good faith and Fair Dealing, (3) Promissory Estoppel, (4) Intentional Interference with

Prospective Economic Advantage, (5) Cause of Action, (6) Tortious Interference with Contract, (7)

Unfair Business Practices, (8) Fraud-False Promise, and (9) Declaratory Relief. GNP timely filed

the instant motion to dismiss on May 31, 2005. 

LEGAL STANDARD

A motion to dismiss for lack of personal jurisdiction may be brought pursuant to Rule

12(b)(2) of the Federal Rules of Civil Procedure. Although defendant is the moving party, plaintiff

bears the burden of proof on the necessary jurisdictional facts. Flynt Distrib. Co. v. Harvey, 734 F.2d

1389, 1392 (9th Cir. 1984). When defendant’s motion to dismiss is made as its initial response,

plaintiff need only make a prima facie showing that personal jurisdiction exists. Data Disc, Inc. v.

Systems Technology Assoc., Inc., 557 F.2d 1280, 1285 (9th Cir. 1977). For purposes of the prima

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 facie case, conflicts between the factual submissions must be resolved in the plaintiff's favor. AT&T

v. Compagnie Bruxelles Lambert, 94 F.3d 586, 588 (9th Cir. 1996).

Dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is

appropriate if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his

claim which would entitle him to relief.” Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135,

1138 (9th Cir. 2003), citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All allegations of material

fact are taken as true and construed in the light most favorable to the nonmoving party. Roe v. City

of San Diego, 356 F.3d 1108, 1112 (9th Cir. 2004).

Dismissal of a claim of fraud under Federal Rule of Civil Procedure 9(b) is appropriate when

the circumstances constituting the are not stated with particularity. The Ninth Circuit requires

plaintiffs to provide the time, place and nature of the alleged fraudulent activities. In re GlenFed,

Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). “‘Mere conclusory allegations of fraud are

insufficient.’” Id. (quoting Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.

1989)).

DISCUSSION

A. Personal Jurisdiction

A federal court can assert personal jurisdiction over any defendant “who could be subjected

to the jurisdiction of a court of general jurisdiction in the state in which the district court is located.”

Fed. R. Civ. P. 4(k)(1)(A). In California, the long-arm statute provides that “[a] court of this state

may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or the

United States.” See Cal. Code Civ. Proc. § 410.10. Thus, personal jurisdiction is available in

California to the fullest extent due process permits.

Due process requires that the nonresident defendant have sufficient minimum contacts with

the forum state such that the exercise of personal jurisdiction does not offend notions of fair play and

substantial justice. International Shoe Co. v. Washington, 326 U.S. 310 (1945). Two alternate tests,

referred to as “general” and “specific” jurisdiction, are used to determine whether a defendant

satisfies this constitutional standard. General jurisdiction exists when a defendant has contacts with

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the forum which are unrelated to the action, but which are “substantial” or “continuous and

systematic.” Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 839 (9th Cir. 1986). 

Specific jurisdiction exists when there is “a strong relationship between the quality of the

defendant's forum contacts and the cause of action.” Id. (quoting Burger King v. Rudzewicz, 471

U.S. 462 (1985)).

RAE contends, and this Court agrees, that personal jurisdiction over GNP can be found based

on RAE’s allegations that GNP is the alter ego of TSA. Under the federal law governing the

exercise of personal jurisdiction, if a corporation is the alter ego of an individual defendant, or one

corporation the alter ego of another, the Court may “pierce the corporate veil” jurisdictionally and

attribute “contacts” accordingly. Certified Building Products, Inc. v. NLRB, 528 F.2d 968, 969 (9th

Cir. 1975). When a court pierces the corporate veil, “not only would the acts of the part be imputed

to the whole, as in any case of agency, but also the in-state ‘presence’ of one part may render the

out-of-state part present in the forum as well.” Wells Fargo & Co. v. Wells Fargo Express Co., 556

F.2d 406, 420, n.13 (9th Cir. 1977). Here, it is undisputed that TSA is subject to this Court’s

exercise of personal jurisdiction. It follows that if GNP is the alter ego of TSA, then GNP is also

subject to this Court's exercise of personal jurisdiction. 

Under California law, the party asserting that one company is the alter ego of another must

make out a prima facie case comprised of two elements: (1) that there is such unity of interest and

ownership that the separate personalities of the two corporations no longer exist and (2) that failure

to disregard the corporation would result in fraud or injustice. Watson v. Commonwealth Insurance

Co., 8 Cal. 2d 61, 68 (1936); see also AT&T, 94 F.3d at 586. The trier of fact must consider a wide

variety of factors to determine whether both prongs of this test are satisfied. Associated Vendors,

Inc. v. Oakland Meat Co., Inc., 210 Cal. App. 2d 825, 837 (1962). At the pleading stage, conclusory

allegations that a corporate entity is the alter ego of the defendant are insufficient to survive a

motion to dismiss. See, e.g., Hockey v. Medhekar, 30 F. Supp. 2d 1209, 1211 n.1 (N.D. Cal. 1998);

Hokama v. E.F. Hutton & Company, Inc., 566 F. Supp. 636, 647 (C.D. Cal. 1983).

Here, Plaintiff has included allegations which go beyond “conclusory allegations” in support

of its alter ego theory. Plaintiff alleges the following facts to support that there is a unity of interest

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When a court denies a Rule 12(b)(2) motion because a prima facie case has been shown, the

movant can nevertheless continue to contest personal jurisdiction, either at a pretrial evidentiary hearing

or at the trial itself. See Ado Finance, AG v. McDonnell Douglas Corp., 931 F. Supp 711 at 717, n. 2

(citing Metropolitan Life Ins. Co. v. Neaves, 912 F.2d 1062, 1064, n.1 (9th Cir. 1990)).

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and ownership between TSA and RAE: that GNP and TSA have the same president and chairman of

the board; that GNP was created under TSA’s direction; that GNP was funded by TSA’s president;

that GNP was and is managed by a former TSA employee in conjunction with TSA’s current

president; that there is a unity of management between the companies; and that GNP’s cross-over

employees take direction from TSA. The Court observes that RAE’s allegations with respect to the

unity of management between the companies is partially contradicted in a reply declaration by Allan

Frymire in which Frymire states that he is the only person that jointly serves as a shareholder,

director and officer of both companies. With respect to how a failure to disregard the corporate form

would result in injustice, RAE alleges that TSA transferred all of its interest in Polimaster products

to GNP in order to evade TSA’s contractual obligations to RAE and that TSA used GNP to interfere

with RAE’s contractual relationship with Polimaster. 

The Court finds that Plaintiff’s allegations of alter ego liability are sufficient at this stage of

the litigation. Cf. Mieuli v. Debartolo, 2001 U.S. Dist. LEXIS 22518 (N.D. Cal., 2001) (Rule

12(b)(6) motion denied where plaintiff alleged unity of interest and undercapitalization of the

corporate entity); Federal Reserve Bank of San Francisco v. HK Systems, 1997 U.S. Dist. LEXIS

5573 (N.D. Cal., 1997) (Rule 12(b)(6) motion to dismiss denied where plaintiff alleged that the

defendant parent corporation “dominated and controlled” the subsidiary, that the parent “disregarded

the corporate form of the subsidiary,” and that the subsidiary was so inadequately capitalized that its

capitalization was “illusory.”). Because RAE has made a prima facie showing that GNP is an alter

ego of TSA, the instant motion to dismiss for lack of personal jurisdiction is denied.1

 Cf. Ado

Finance, AG v. McDonnell Douglas Corp., 931 F. Supp. 711, 713 (C.D. Cal., 1996) (denying Rule

12(b)(2) motion to dismiss for lack of personal jurisdiction where plaintiff made a prima facie

showing of alter ego liability).

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B. Sufficiency of the Pleadings

Defendant GNP also moves to dismiss seven of nine causes of action in RAE’s First

Amended Complaint for failure to state a claim. The causes of action that GNP moves to dismiss

include: breach of contract, breach of covenant of good faith and fair dealing, promissory estoppel,

negligent interference with prospective economic advantage, unfair business practices, fraud-false

promise, and declaratory relief. GNP does not move to dismiss the causes of action for intentional

interference with prospective economic advantage, and tortious interference with contract. 

GNP moves to dismiss the stated causes of action because they allege no direct wrongdoing

by GNP. Rather, plaintiff alleges wrongdoing by TSA and seeks to have GNP held responsible as

TSA’s alter ego. GNP also specifically requests dismissal of RAE’s cause of action for fraud-false

promise under Federal Rule of Civil Procedure 9(b)’s particularity standard. In this cause of action,

RAE alleges that TSA falsely and intentionally misrepresented to plaintiff that it intended to

purchase any Licensed Products distributed in the United States exclusively from RAE. RAE

further asserts that it relied on this false promise in entering the agreement with TSA and expending

resources on marketing and manufacturing Licensed products. Neither GNP nor TSA contend that

this cause of action is not stated with sufficient particularity with respect to TSA.

Because the Court has concluded that RAE’s allegations that GNP is the alter ego of TSA are

sufficient at this stage of litigation, these causes of action must also survive this motion to dismiss. 

CONCLUSION

For the reasons stated above, GNP’s motion to dismiss is DENIED and the hearing set for

June 29, 2005 is VACATED. The parties shall not file any additional motions pending reassignment of this matter.

IT IS SO ORDERED.

Dated: June 24, 2005

/s/ 

FERN M. SMITH

UNITED STATES DISTRICT JUDGE

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