Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_15-cv-00754/USCOURTS-cand-3_15-cv-00754-2/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

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

WHITECRYPTION CORPORATION,

Plaintiff,

v.

ARXAN TECHNOLOGIES, INC.,

Defendant.

Case No. 15-cv-00754-WHO 

ORDER GRANTING MOTION TO 

DISMISS COUNTERCLAIMS WITH 

LEAVE TO AMEND

Re: Dkt. No. 23

INTRODUCTION

Counter-defendant Intertrust Technologies Corporation moves to dismiss defendant and 

counterclaimant Arxan Technologies, Inc.’s breach of contract counterclaims on the grounds that 

it is not liable for the contractual obligations of its subsidiary, plaintiff and counter-defendant

whiteCryption Corporation, the party to the contract. Because Arxan did not allege sufficient facts 

to show that whiteCryption was acting as Intertrust’s agent with respect to the conduct at issue,

that Intertrust and whiteCryption were alter egos, or that Intertrust ratified whiteCryption’s 

conduct, its breach of contract counterclaims against Intertrust are DISMISSED WITH LEAVE 

TO AMEND.

BACKGROUND

whiteCryption and Arxan provide data protection solutions. In February 2015, 

whiteCryption sued Arxan for breach of contract, copyright infringement, and related business 

torts. Compl. [Dkt. No. 1]. Arxan filed counterclaims against whiteCryption and its parent 

company, Intertrust for (i) breach of contract – software license agreement; (ii) breach of contract 

– reseller agreement; (iii) copyright infringement; (iv)-(v) intentional interference with contractual 

relations; (vi) intentional interference with prospective economic advantage; and (vii) unfair 

competition. Counterclaims [Dkt. No. 18].

Only the first two counterclaims for breach of contract are at issue here. They arise from 

two contracts between Arxan and whiteCryption—a software license agreement entered into on 

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December 13, 2011 and a reseller agreement entered into on June 2, 2011. Id. ¶ 2. Arxan alleges 

that whiteCryption breached the software licensing agreement by improperly using the licensed 

technology to “develop, market and deploy a competing product under [whiteCryption’s] brand.” 

Id. ¶ 3. Arxan contends that whiteCryption breached the reseller agreement by failing to provide 

ongoing support and maintenance to customers in accordance with the contract, directly 

communicating with and soliciting Arxan’s customers, and improperly disclosing that the software 

product distributed by Arxan was made by whiteCryption. Id. ¶ 4. Arxan names both 

whiteCryption and its parent company, Intertrust, as counter-defendants, alleging that Intertrust is 

liable for whiteCryption’s conduct because “whiteCryption was, at all relevant times, acting under 

Intertrust’s directions when it carried out the unlawful acts alleged in this Counterclaim.” Id. ¶ 12. 

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint 

if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to 

dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its 

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007). A claim is facially plausible when 

the plaintiff pleads facts that “allow the court to draw the reasonable inference that the defendant 

is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation 

omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. 

While courts do not require “heightened fact pleading of specifics,” a plaintiff must allege facts 

sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570. 

In deciding whether the plaintiff has stated a claim upon which relief can be granted, the 

court accepts the plaintiff’s allegations as true and draws all reasonable inferences in favor of the 

plaintiff. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court 

is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of 

fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 

2008).

If the court dismisses the complaint, it “should grant leave to amend even if no request to 

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

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by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000). In making 

this determination, the Court should consider factors such as “the presence or absence of undue 

delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, 

undue prejudice to the opposing party and futility of the proposed amendment.” Moore v. Kayport 

Package Express, 885 F.2d 531, 538 (9th Cir. 1989).

DISCUSSION

Intertrust moves to dismiss Arxan’s breach of contract counterclaims on the grounds that it 

is not a party to either the license agreement or the reseller agreement and there is no theory under 

which it can be liable.1 In opposition, Arxan argues that Intertrust is liable under an agency 

theory. 

I. LIABILITY OF PARENT COMPANIES UNDER AGENCY THEORY

It is “a general principle of corporate law deeply ingrained in our economic and legal 

systems that a parent corporation . . . is not liable for the acts of its subsidiaries.” United States v. 

Bestfoods, 524 U.S. 51, 61 (1998) (internal citations and quotations omitted). Accordingly, parent 

corporations are held directly or indirectly liable under California law for the acts of their 

subsidiaries only in unusual situations. Federal courts in California have recognized three such 

situations: 

(i) Where the circumstances of the organization of the two 

entities are such that the corporate form should be 

disregarded (“alter ego” liability); 

(ii) where the subsidiary acts as an agent of the parent 

corporation; or 

(iii) where the parent corporation aids, abets, or ratifies the acts 

of the subsidiary corporation.

E. & J. Gallo Winery v. EnCana Energy Services, Inc., 2008 WL 2220396, at *5 (E.D. Cal. May 

27, 2008) (citing Bowoto v. Chevron Texaco Corp., 312 F. Supp. 2d 1229, 1235 (N.D. Cal. 2004)).

 

1

Intertrust has not moved to dismiss Arxan’s other counterclaims. The eighth counterclaim, for 

declaratory relief, is only asserted against whiteCryption.

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The parties only briefed the agency theory of liability.

2

 A subsidiary company may be 

considered an agent of the parent corporation where “the parent so controls the subsidiary as to 

cause the subsidiary to be [sic] become merely the instrumentality of the parent.” Pantoja v. 

Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1192 (N.D. Cal. 2009) (citation omitted). 

To meet this standard, “the parent must be shown to have moved beyond the establishment of 

general policy and direction for the subsidiary and in effect taken over performance of the 

subsidiary’s day-to-day operations in carrying out that policy.” Barrous v. BP P.L.C., 10-cv02944-LHK, 2011 WL 4595205, at *4 (N.D. Cal. Oct. 3, 2011) (citation omitted). An agency 

relationship may also be established by showing that “the subsidiary performs services that are 

sufficiently important to the [parent] corporation that if it did not have a representative to perform 

them, the corporation’s own officials would undertake to perform substantially similar services.” 

Id. (internal quotations omitted). The agency inquiry “should focus on the relationship between 

the parent and subsidiary corporation surrounding the conduct that gives rise to the plaintiff’s 

claim;” a “financial link” between the parent and subsidiary companies, without more, is not 

enough to establish an agency relationship. Id. at *5. 

II. ARXAN HAS NOT ADEQUATELY ALLEGED AGENCY LIABILITY

Arxan alleges that whiteCryption is a subsidiary of Intertrust; that whiteCryption and 

Intertrust have overlapping management and key employees; and that Intertrust’s managers were 

involved in many of the communications surrounding the formation of the software license 

agreement and reseller agreement. Counterclaims ¶ 11. These allegations are not sufficient to 

establish liability under an agency theory. See, e.g., Bestfoods, 524 U.S. at 70 (parent-subsidiary 

relationship and overlapping directors, without more, does not establish agency); Bastidas v. Good 

Samaritan Hosp., 13-cv-04388-SI, 2014 WL 3362214, at *4 (N.D. Cal. July 7, 2014) (dismissing 

claims against parent company where plaintiff did not adequately allege that overlapping 

executives acted in parent’s interests); see also Doe v. Unocal Corp., 248 F.3d 915, 929 (9th Cir. 

 

2 Arxan does not allege that Intertrust is liable under the “alter ego” theory, though it maintains 

that it may discover facts that allow it to prove the existence of an alter ego relationship. Despite 

the lack of briefing on the aiding, abetting or ratifying issue, I discuss it in Section III, below. 

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2011) (relationship between parent and subsidiary companies does not necessarily imply an 

agency relationship).

As the Supreme Court stated in Bestfoods:

[I]t is entirely appropriate for directors of a parent corporation to 

serve as directors of its subsidiary, and that fact alone may not serve 

to expose the parent corporation to liability for its subsidiary’s 

acts. . . . directors and officers can and do change hats to represent 

the two corporations separately, despite their common ownership. [] 

[C]ourts generally presume that the directors are wearing their 

subsidiary hats and not their parent hats when acting for the 

subsidiary.

524 U.S. at 70 (emphasis added and internal citations omitted). “To defeat this presumption, a 

plaintiff would need to allege facts demonstrating that the dual status individuals were acting in 

the parent’s interest, and not the subsidiary’s, when they engaged in the challenged conduct.” 

Bastidas, 2014 WL 3362214, at *4.

The cases cited by Arxan do not support its position. Only Bowoto and Dion v. Infotek 

Wireless, Inc., 07-cv-1431-SBA, 2007 WL 3231738 (N.D. Cal. Oct. 30, 2007), involve allegations 

of an agency relationship between two companies, and those cases are inapposite. Bowoto 

involved an extensive factual inquiry on a motion for summary judgment and does not establish a 

standard for pleading agency. See Bowoto, 312 F. Supp. 2d at 1233. Dion involved agency 

allegations against two sister corporations, not parent and subsidiary companies, and included

factual allegations which the court deemed sufficient to support agency liability. See Dion, 2007 

WL 3231738 at **1, 4 (complaint alleged that “[sister company] created [other sister company] 

and sought the Consulting Agreement with [plaintiff] as a vehicle for funding and growing [sister

company’s] existing business”). That is not the case here.

At oral argument, counsel for Arxan argued that its allegations are not subject to the 

Bestfoods presumption because several Intertrust managers who were involved in either breaching 

or forming the contracts at issue were not also whiteCryption employees and therefore could not 

have been wearing their whiteCryption “hats” during the conduct at issue. He referenced Arxan’s 

allegations that Intertrust’s CEO informed Arxan’s CEO “that whiteCryption would not honor its 

obligation to provide ongoing maintenance and support for remaining customers for the length of 

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their existing Arxan customer contracts;” that Intertrust’s Senior Vice President informed an 

analyst that the “white-label whiteCryption product sold under Arxan’s brand, was actually an 

Intertrust product;” and that a general manager of Intertrust Europe tried to convince Arxan 

customers to replace Arxan products with Intertrust products. Counterclaims ¶¶ 50, 58, 63. 

Without more, these allegations involve conduct which is too sporadic to establish the 

necessary day-to-day control over whiteCryption’s contractual relationship with Arxan to support 

a reasonable inference that whiteCryption was merely an instrumentality of Intertrust. See Sonora 

Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 542 (2000) (“the parent must be shown 

to have moved beyond the establishment of general policy and direction for the subsidiary and in 

effect taken over performance of the subsidiary’s day-to-day operations in carrying out that 

policy”) (emphasis in original); Wallis v. Centennial Ins. Co., Inc., 2013 WL 3803971, at *4 (E.D. 

Cal. July 19, 2013) (plaintiffs survived a motion to dismiss because they alleged facts establishing 

that the parent company’s control over the subsidiary was “pervasive and continual,” such as the 

parent company assuming full control and responsibility for all correspondence and activities 

related to the defense of a lawsuit against the subsidiary). 

III. AIDING, ABETTING AND RATIFICATION

Nor do Arxan’s allegations support a ratification theory of liability. “Ratification is the 

voluntary election by a person to adopt in some manner as his own an act which was purportedly 

done on his behalf by another person, the effect of which, as to some or all persons, is to treat the 

act as if originally authorized by him.” Rakestraw v. Rodrigues, 8 Cal. 3d 67, 73 (1972). Arxan’s

allegations do not plausibly allege that Intertrust adopted the contract and whiteCryption’s alleged 

breaches of it as its own. 

While Arxan argues that its counterclaims contain allegations sufficient to satisfy the 

aiding and abetting standard, it has not identified the standard nor described how its allegations are 

sufficient. I assume that the pertinent allegations are the same ones as discussed above. However, 

Arxan provided no authority, and I am aware of none, recognizing a cause of action for aiding and 

abetting a breach of contract under California law. Bowoto, which Arxan relies on, involved 

alleged human rights abuses, not breach of contract. Bowoto, 312 F. Supp. 2d at 1247. Other 

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California cases discussing aiding and abetting liability in a civil context likewise involve tort 

claims, not breach of contract.3 See, e.g., Schulz v. Neovi Data Corp., 152 Cal. App. 4th 86, 93

(2007). 

whiteCryption’s allegations may support its causes of action against Intertrust for 

intentional interference with contractual relations and prospective economic advantage, and unfair 

competition, but they do not plausibly show that Intertrust made and breached a contract with 

whiteCryption or ratified it. Arxan has asserted no facts suggesting that whiteCryption’s and 

Intertrust’s overlapping management acted solely in Intertrust’s, not whiteCryption’s, interest in 

forming or purportedly breaching the contracts. It has not alleged sufficient facts to overcome the 

Bestfoods presumption that the directors at issue were wearing their “subsidiary” as opposed to 

“parent” hats at the relevant time. See Bestfoods, 524 U.S. at 70; Bastidas, 2014 WL 3362214, at 

*4. Accordingly, its breach of contract counterclaims are DISMISSED.

CONCLUSION

Intertrust’s motion to dismiss is GRANTED. Arxan’s counterclaims for breach of the 

software license agreement (first cause of action) and breach of the reseller agreement (second 

cause of action) are DISMISSED WITH LEAVE TO AMEND. Any amended counterclaims shall 

be filed within 20 days of this order. 

IT IS SO ORDERED.

Dated: June 18, 2015

______________________________________

WILLIAM H. ORRICK

United States District Judge

 

3 Other states also do not recognize claims for aiding and abetting a breach of contract. See, e.g.,

Allen v. El Paso Pipeline GP Co., 113 A.3d 167, 193 (Del. Ch. 2014) (“Delaware generally does 

not recognize a claim for aiding and abetting a breach of contract.”); Pomerance v. McGrath, 124 

A.D.3d 481, 484 (N.Y. App. Div.) (“no cause of action exists for aiding and abetting a breach of 

contract”); Montgomery v. Aetna Plywood, Inc., 231 F.3d 399, 413 n.6 (7th Cir. 2000) (“counsel 

cites, and we have discovered, no Illinois case recognizing a cause of action for aiding and 

abetting a breach of contract”); R. Prasad Indus. v. Flat Irons Envtl. Solutions Corp., 2013 WL 

2217831, at *8 (D. Ariz. May 20, 2013) (“Prasad has provided no authority—and the Court has 

found none—recognizing a cause of action for aiding and abetting a breach of contract”).

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