Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-02469/USCOURTS-cand-4_06-cv-02469-13/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,

v.

Z-MAN FISHING PRODUCTS, INCORPORATED,

a South Carolina corporation,

Defendant.

 /

AND RELATED COUNTERCLAIMS.

 /

No. C 06-2469 CW

ORDER GRANTING IN

PART DEFENDANT'S

MOTION FOR LEAVE

TO AMEND ANSWER

AND GRANTING

PLAINTIFF'S

MOTION TO DISMISS

COUNTERCLAIMS

Defendant Z-Man Fishing Products, Inc. moves for leave to

amend its answer to add three additional affirmative defenses and

to correct errors made in its original pleading. Plaintiff Applied

Elastomerics, Inc. opposes this motion and, in a separate motion,

moves to dismiss Defendant's two counterclaims. Defendant opposes

Plaintiff's motion in part, limiting the factual predicate of its

first counterclaim and agreeing to dismiss its second counterclaim. 

The matter was heard on March 2, 2006. Having considered all of

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1

The factual background of this case is described in the

Court's August 10, 2006 and November 8, 2006 orders. 

2

On February 27, 2007, the Court related and consolidated the

transferred case, assigned Case No. C. 07-0011, to this case. 

2

the papers filed by the parties and oral argument, the Court grants

in part Defendant's motion for leave to amend its answer and denies

it in part; Plaintiff's motion to dismiss is granted.

BACKGROUND

As explained in the Court's prior orders, Plaintiff invents

and patents certain chemical compositions, composites and articles

made from these compositions and composites. Many of its patents

concern gel polymers. Plaintiff commercializes its technology by

licensing its patents, proprietary technology and know-how to third

parties. Plaintiff's president, John Chen, handles all of the

business aspects of commercializing the technology he invents and

develops. Defendant develops and manufactures fishing lure

components and fishing lures for major lure manufacturers. In

2001, Mike Shelton, Defendant's Vice President of Marketing and

Sales and Director of Technology, contacted Mr. Chen concerning a

fishing lure product that he was trying to develop, the

"superworm."1

On April 7, 2006, Plaintiff brought this suit for breach of

contract and breach of the covenant of good faith and fair dealing.

Defendant filed a motion to dismiss for lack of personal

jurisdiction, which the Court denied. On July 13, 2006, Defendant

filed a complaint against Plaintiff in the District of South

Carolina; that case has been transferred to this district.2

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Defendant filed its answer and twelve counterclaims, alleging

(1) breach of the license agreement for failure to provide

formulations covered by Plaintiff's patent rights; (2) breach of

the license agreement for failure to maintain exclusivity;

(3) breach of the covenant of good faith and fair dealing;

(4) fraud in the inducement; (5) negligent misrepresentations;

(6) fraud in the execution; (7) 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 and/or that worked for its

intended purpose; (8) declaratory judgment of no breach of contract

by Defendant, due to lack of consideration resulting from

Plaintiff's failure to maintain exclusivity; (9) 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 in failing to

provide Defendant with a formula within Plaintiff's patent rights

and/or that was appropriate for its intended use; (10) 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 in failing to

maintain exclusivity; (11) declaratory judgment of no breach of

contract by Defendant for failure to pay royalties because of noninfringement; and (12) restitution for unjust enrichment.

Plaintiff moved to dismiss ten of the twelve counterclaims. 

The Court granted Plaintiff's motion in part, dismissing nine of

the counterclaims with leave to amend, including Defendant's

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counterclaims for fraudulent and negligent misrepresentation. 

Defendant then filed its first amended counter-complaint,

which contained five causes of action: (1) fraud; (2) negligent

misrepresentation; (3) restitution; (4) breach of the covenant of

good faith and fair dealing and (5) declaratory relief. With

Plaintiff's stipulation, Defendant filed a second amended countercomplaint on January 3, 2007. The second amended counter-complaint

contains only two claims for relief: breach of the covenant of good

faith and fair dealing and declaratory judgment of no breach of

contract for failure to pay royalties because of non-infringement. 

Plaintiff did not stipulate to allow Defendant to file an

amended answer. According to Plaintiff, the affirmative defenses

Defendant sought to add were futile. On January 4, 2007, Defendant

moved for leave to file its amended answer. The next day,

Plaintiff filed its motion to dismiss Defendant's remaining two

counterclaims. 

LEGAL STANDARD

I. Motion for Leave to Amend

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

decisions on the merits rather than on the pleadings or

technicalities." United States v. Webb, 655 F.2d 977, 979 (9th

Cir. 1981). Thus, Rule 15's policy of favoring amendments to

pleadings should be applied with "extreme liberality." Id.; see

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also DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir.

1987). 

 Four factors are 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. See

Foman v. Davis, 371 U.S. 178, 182 (1962). However, these factors

are not of equal weight; specifically, delay alone is insufficient

ground for denying leave to amend. See Webb, 655 F.2d at 980. 

Futility of amendment, by contrast, can alone justify the denial of

a motion for leave to amend. See Bonin v. Calderon, 59 F.3d 815,

845 (9th Cir. 1995). A proposed amendment is futile "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). In other

words, if the proposed amended complaint cannot withstand a motion

to dismiss, it should be denied as futile. See id. (citing 3 J.

Moore, Moore's Federal Practice § 15.08[4] (2d ed. 1974)). 

II. 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)). 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).

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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).

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. Defendant's Motion for Leave to Amend

Defendant states that its proposed amended answer makes

"technical corrections" to its earlier answer, designed to clarify

that the parties did not enter into the contract that forms the

basis of Plaintiff's complaint, and adds three additional

affirmative defenses: fraud, negligent misrepresentation and

mistake. Plaintiff challenges only the three affirmative defenses

that Defendant seeks to add. According to Plaintiff, all three of

these affirmative defenses are futile and, thus, leave to amend

should be denied.

A. Fraud

In order to state an affirmative defense for fraud, Defendant

must plead with specificity the following elements:

misrepresentation, scienter, intent to defraud, justifiable

reliance and resulting damage. See, e.g., Lazar v. Super. Ct., 12

Cal. 4th 631, 638 (1996). Defendant claims that it alleges each of

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these elements with the requisite detail. According to the

proposed amended answer, Mr. Shelton told Mr. Chen that Defendant

wanted all of Plaintiff's relevant patents licensed to it

exclusively. Mr. Chen told him that the license agreement included

all of Plaintiff's patents that would be relevant to the fishing

lures. The falsity of this representation was allegedly

demonstrated when Mr. Chen later informed Mr. Shelton that the

patents covered by the License Agreement included only "the

Cadillac of the product" but did not include the "Volkswagen." 

Defendant alleges that it justifiably relied on Mr. Chen's false

statement that the license agreement covered all relevant patents

and that it was damaged as a result of Plaintiff's fraudulent

assertion.

Plaintiff responds that Defendant's affirmative defense

closely resembles Defendant's fraudulent inducement counterclaim,

which the Court dismissed. The Court previously found that the

license agreement is fully integrated and that the agreement

explicitly states that the parties have not made any representation

or warranties other than those set forth in the agreement. Section

10.1 of the agreement provides:

EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT,

NEITHER COMPANY NOR AEI MAKES ANY REPRESENTATIONS OR

WARRANTIES OF ANY KIND CONCERNING THE PATENT RIGHTS, EXPRESS

OR IMPLIED. . . . Specifically, and not to limit the

foregoing, AEI makes no warranty or representation

(i) regarding the validity or scope of the Patent Rights,

(ii) that the exploitation of the Patent Rights or any

Licensed Product will not infringe any patents or other

intellectual property rights of AEI or of a third party, and

(iii) that AEI or a third party is not currently infringing

or will not infringe the Patent Rights.

License Agreement, § 10.1. Therefore, the Court found that

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Defendant's reliance that the patents Plaintiff licensed to it

would provide what Defendant needed for its superworm fishing lure

was "unjustified as a matter of law" because the agreement

contradicts any such representation. November 8, 2006 Order at 12;

see also Bank of the West v. Valley Nat'l Bank, 41 F.3d 471, 477

(9th Cir. 1994) ("the clear and explicit language of the contract

prevented justifiable reliance"). Plaintiff argues that reliance

on the purported misrepresentation that the license agreement

contained "all" relevant patents similarly is unjustified as a

matter of law. It contends that this alleged misrepresentation 

contradicts the unambiguous statement that Plaintiff made no

representation concerning the Patent Rights or the scope of the

Patent Rights.

As Defendant notes, however, the license agreement, in

section 1.7(a), defines "Patent Rights" as "the United States and

international patents listed on Schedule A" and "other United

States and international patents in which the claims of such

patents read on the Licensed Products and are acquired or otherwise

owned by AEI during the term of this Agreement in which the Valid

Claims of said patents read on the Licensed Product." According to

Defendant's proposed amended answer, a purported "Volkswagen"

patent was not included in Schedule A and is not part of the Patent

Rights. Unlike its prior allegation that Plaintiff misrepresented

that its patents would provide what Defendant needed for its

superworm fishing lure, Defendant's allegation that Plaintiff

misrepresented that it was getting all of Plaintiff's relevant

patents does not contradict any unambiguous statement in the

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agreement. Therefore, Defendant's reliance is not, as a matter of

law, unjustified. Because it would not be futile, the Court grants

Defendant leave to amend its answer to add its fraud affirmative

defense.

B. Negligent Misrepresentation

According to the proposed amended answer, Mr. Chen made the

following three misrepresentations: (1) that the license agreement

included all of Plaintiff's patents that were relevant to the

development of the superworm fishing lure; (2) that the sample gels

he provided were covered by the Patent Rights reflected in the

draft license agreement; and (3) that "subsequent Plaintiff's

technology, i.e., material in the form of gel formulation, he

forwarded to Defendant was covered by the Patent Rights." 

Plaintiff argues that, because negligent misrepresentation,

like fraudulent misrepresentation, includes justifiable reliance as

one of its elements, Defendant's negligent misrepresentation

affirmative defense fails for the same reason as its fraudulent

misrepresentation affirmative defense. See Walters v. Marler, 83

Cal. App. 3d 1, 17 (1978), disapproved on other grounds in Gray v.

Don Miller & Associates, Inc., 35 Cal.3d 498 (1984). As discussed

above, the Court did not find that Defendant's fraudulent

misrepresentation affirmative defense failed as a matter of law.

Nor does the Court find that the alleged misrepresentation

concerning whether the subsequent technology was covered by the

patent rights expressly contradicts any provision in the agreement;

however, it is not clear what the reliance is and what the damage

to Defendant would be. But the Court does find that the alleged

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misrepresentation concerning whether the sample gels were covered

by the patent rights expressly contradicts the unambiguous

provision in the agreement that Plaintiff made no representation

concerning the Patent Rights or the scope of the Patent Rights. 

Therefore, Defendant's reliance upon that alleged misrepresentation

is unjustified as a matter of law and Defendant's affirmative

defense based on that ground is futile. 

Claims for negligent misrepresentation must meet the

heightened pleading requirement of Rule 9(b). See November 8, 2006

Order at 14 (citing Glen Holly Entm't, Inc. v. Tektronix, Inc., 100

F. Supp. 2d 1086, 1093 (C.D. Cal. 1999)). Defendant's allegations

concerning negligent misrepresentation are not plead with

particularity. The first ground on which Defendant bases its

negligent misrepresentation defense can be plead with the same

facts as its fraud affirmative defense; Defendant may also include

its subsequent technology theory as part of its negligent

misrepresentation defense if it can do so with particularity. 

C. Mistake

According to the proposed amended answer, in late July, 2001,

Plaintiff sent a revised license agreement to Mr. Shelton for his

signature. Mr. Shelton signed the document and, on July, 25, 2001,

sent it to Mr. Chen with the express understanding and intention

that (1) the license agreement provided Defendant with all of

Plaintiff's relevant patents and technology that could be used in

the fishing lures, (2) the samples that had been provided were

covered by Plaintiff's Patent Rights and (3) lower minimum royalty

amounts would be agreed upon when customer orders for the product

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3

Plaintiff notes that, although Defendant discusses revision

and cites the California Civil Code governing when a contract may

be revised, Defendant's affirmative defense itself seeks only

rescission. See Defendant's Proposed Amended Answer at ¶ 50.

4

Plaintiff also argues that Defendant cannot meet the

requirements for rescission under California Civil Code Sections

1691 and 1693. Whether Defendant can meet the requirements for

rescission is not at issue in determining whether an amendment is

futile; what is at issue is whether the allegations would withstand

a motion to dismiss.

11

were received. In a transmittal memorandum sent with the signed

license agreement, Mr. Shelton attached the sales forecast and

royalty numbers and noted that the license agreement covers any and

all fishing lures made from Plaintiff's patent formula. Mr.

Shelton asked Mr. Chen to advise Defendant if that statement was

incorrect.

Based on these and additional facts, Defendant contends that

the license agreement, so far as it was entered into, must be

revised or rescinded due to a mistake.3

 Plaintiff responds that

Defendant's affirmative defense is not plead with particularity and

does not allege a legally cognizable mistake.4

Federal Rule of Civil Procedure 9 provides, "In all averments

of fraud or mistake, the circumstances constituting fraud or

mistake shall be stated with particularity." As Moore's Federal

Practice explains:

In pleading mistake, the circumstances of the error must be

set forth with the same high degree of specificity. A good

averment of mistake should include:

1. the act or writing intended;

2. the act or writing done;

3. the cause of the mistake; and

4. whether the mistake was mutual, unilateral, or merely 

 that of a scrivener.

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Cagan v. Intervest Midwest Real Estate Corp., 774 F. Supp. 1089,

1097 (N.D. Ill. 1991) (quoting Moore's Federal Practice ¶ 9.03[1],

at 9-26 (2d ed. 1990) (footnote omitted)).

Defendant does not dispute that mistake must be plead with

particularity; rather, it argues that it has done so. It has not. 

Therefore, Defendant's motion for leave to amend to include this

affirmative defense is denied for failure to plead with the

required particularity.

Further, based on its non-specific pleading, Defendant does

not plead a legally cognizable mistake: 

California Civil Code § 1689(b) provides for unilateral

rescission of a contract “[i]f the consent of the party

rescinding . . . was given by mistake.” Plaintiffs allege

that they were mistaken as to whether the contract required

the University to procure royalties, and that this was a

mistake of material fact. However, under California law, “[a]

party is bound, even if he misunderstood the terms of a

contract and actually had a different, undisclosed intention.” 

The fact that plaintiffs were “simply mistaken” in their

belief that the contract contained a royalty requirement does

not serve to release them from their contract. 

Kucharczyk v. Regents of University of California, 946 F. Supp.

1419, 1433 (N.D. Cal. 1996) (inner citations omitted; alterations

in original); see also Hedging Concepts, Inc. v. First Alliance

Mortgage Co., 41 Cal. App. 4th 1410, 1420-22 (1996) (unilateral,

subjective misinterpretation of contract is not a "mistake"

constituting grounds for rescission).

II. Plaintiff's Motion to Dismiss Counterclaims

As noted above, Defendant's second amended counterclaim

includes only two causes of action: breach of the covenant of good

faith and fair dealing and declaratory relief. Plaintiff moves to

dismiss both causes of action. 

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A. First Counterclaim

Defendant's first counterclaim alleges that Plaintiff breached

the implied covenant of good faith and fair dealing by: (1) failing

to conduct its test of infringing products in a reasonable fashion

or to maintain exclusivity of its patent; (2) attempting to license

other patents to Defendant that it had represented already to be

within the license agreement; (3) failing to provide Defendant with

Plaintiff's technology that was covered by Plaintiff's Patent

Rights; and (4) attempting to extract additional royalty payments

not warranted under the license agreement by claiming infringement

where none was present and by demanding royalties in excess of the

agreed amount. Defendant states that it limits its breach of the

covenant claim to its first two theories. Plaintiff responds that,

even with this limitation, Defendant's claim fails and should be

dismissed without leave to amend.

The implied covenant of good faith and fair dealing

supplements "the express contractual covenants, to prevent a

contracting party from engaging in conduct that frustrates the

other party's rights to the benefits of the agreement." Waller v.

Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 36 (1995). The

California Supreme Court explains, "Absent that contractual right,

however, the implied covenant has nothing upon which to act as a

supplement, and 'should not be endowed with an existence

independent of its contractual underpinnings.'” Id. (quoting Love

v. Fire Ins. Exchange, 221 Cal. App. 3d 1136, 1153 (1990)); see

also Guz v. Bechtel Nat. Inc., 24 Cal. 4th 317, 349-50 (2000) (the

implied covenant of good faith and fair dealing "cannot impose

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substantive duties or limits on the contracting parties beyond

those incorporated in the specific terms of their agreement"). 

Indeed, "courts are not at liberty to imply a covenant directly at

odds with a contract's express grant of discretionary power except

in those relatively rare instances when reading the provision

literally would, contrary to the parties' clear intention, result

in an unenforceable, illusory agreement." Third Story Music, Inc.

v. Waits, 41 Cal. App. 4th 798, 808 (1995).

For an implied covenant to be imposed, “'(1) the implication

must arise from the language used or it must be indispensable to

effectuate the intention of the parties; (2) it must appear from

the language used that it was so clearly within the contemplation

of the parties that they deemed it unnecessary to express it;

(3) implied covenants can only be justified on the grounds of legal

necessity; (4) a promise can be implied only where it can be

rightfully assumed that it would have been made if attention had

been called to it; (5) there can be no implied covenant where the

subject is completely covered by the contract.'” Id. at 804

(quoting Lippman v. Sears, Roebuck & Co., 44 Cal.2d 136, 142

(1955)).

1. Exclusivity

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 . . . . " License

Agreement, § 7.2. It 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

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at its sole expense. . . ." License Agreement, § 7.5. 

Defendant acknowledges that, under the agreement, Plaintiff is

not required to maintain the exclusivity of the licensed patents

and, therefore, Plaintiff was not required to undertake any testing

on potentially infringing products. See November 8, 2006 Order at

11. It states that it is not arguing that Plaintiff breached the

covenant of good faith and fair dealing by failing to maintain

exclusivity of the licensed patents, but rather that Plaintiff

engaged in conduct that interfered with Defendant's right to enjoy

the exclusivity of the licensed patents. According to the second

amended counter-complaint, Defendant notified Plaintiff of

potential infringement of the patents; Plaintiff stated that it

would take care of it, but then unreasonably delayed the testing it

said it would undertake. Had Plaintiff not promised to "take care

of it," Defendant contends that it would have not have waited for

Plaintiff to conduct the testing. Nonetheless, because the

agreement did not require Plaintiff to test the potentially

infringing products but rather gave it discretion to do so, the

covenant of good faith and fair dealing cannot impose on Plaintiff

the obligation of testing the products in a reasonable manner. 

Defendant identifies no other conduct by Plaintiff that allegedly

interfered with its right to enjoy the exclusivity of the licensed

patents. Therefore, to the extent that Defendant's claim for

breach of implied covenant of good faith and fair dealing is based

on these grounds it is dismissed. Defendant does not proffer any

amendment that would remedy the deficiency of its claim, but, in an

abundance of caution, the Court once again grants it leave to amend

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5

As the Court found in its prior order, "Defendant may plead

alternative theories." November 8, 2006 Order at 16. 

16

to attempt to do so.

2. Additional Patents 

As discussed above, Defendant alleges that, although Plaintiff

stated that the license agreement covered all patents relevant to

the superworm fishing lure, Plaintiff later informed Defendant that

it had licensed only the "Cadillac of the product" and not the

"Volkswagen." Plaintiff sought an additional $10,000 to license

additional patents. Defendant does not make clear which patent is

the "Volkswagen." 

In its opposition, Defendant states that its allegation that

Plaintiff attempted to license patents to Defendant that Plaintiff

represented already to be within the license agreement is the basis

of its affirmative defenses, and that its counterclaim for breach

of the implied covenant of good faith and fair dealing is based on

its allegation that, if Plaintiff did license all of its pertinent

patents to Defendant, Plaintiff's insistence on a $10,000 payment

to add the "Volkswagen" patent interfered with Defendant's right to

the exclusivity of all of the patents that Plaintiff contends that

it licensed to Defendant. 

Plaintiff responds that this theory fails because it is based

on facts not included in the counter-complaint, contradicts the

factual allegations in the counter-complaint and negates

Defendant's fraud affirmative defense.5

 Defendant alleges in its

counter-complaint that Plaintiff has represented that additional

patents, the "Non-Fishing Lure Patents," were included in the

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license agreement. Second Amended Counter-Complaint, ¶ 30. 

Nonetheless, Defendant does not allege that any of the Non-Fishing

Lure Patents is the "Volkswagen" patent. For purposes of a Rule

12(b)(6) motion, "review is limited to the contents of the

complaint." Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th

Cir. 1994). Defendant's argument that it states a claim for breach

of implied covenant of good faith and fair dealing is based on

allegations not included in its counter-complaint. For this

reason, the Court dismisses this claim. Defendant is granted to

leave to amend its counter-complaint to include these allegations

if it can do so truthfully. The Court dismisses with prejudice

Defendant's breach of the covenant claim to the extent it is based

on an allegation that Plaintiff attempted to license patents to

Defendant that Plaintiff had represented already to be within the

license agreement, a theory Defendant has abandoned. 

B. Second Counterclaim

Defendant's second counterclaim seeks declaratory relief. 

Defendant agrees to the dismissal of this claim. Nonetheless, it

addresses at length whether a contract was formed and, if so, what

it entailed. Plaintiff responds, requesting that the Court treat

its motion to dismiss the declaratory judgment claim as a motion

for judgment on the pleadings and decide the underlying issues of

contract formation and the applicable minimum royalty schedule. 

The Court will not do so. Defendants' second counterclaim for

declaratory relief is dismissed with prejudice.

CONCLUSION

 For the foregoing reasons, Defendant's Motion for Leave to

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File an Amended Answer (Docket No. 76) is GRANTED IN PART and

DENIED IN PART. The Court grants Defendant leave to amend its

answer to correct errors made in its original pleading and to

include its affirmative defense of fraud. But the Court denies

Defendant leave to amend its answer to include an affirmative

defense based on the alleged misrepresentation that the sample gels

were covered by the patent rights. Defendant may amend its

negligent misrepresentation affirmative defense to allege the same

facts that support its fraud affirmative defense and may try to

amend its negligent misrepresentation affirmative defense

concerning subsequent technology and its mistake affirmative

defense, but only if it can do so with particularity and within the

bounds of Rule 11. Plaintiff's Motion to Dismiss Counterclaims

(Docket No. 78) is GRANTED. Defendant is granted leave to amend

its first counterclaim consistent with this order; its second

counterclaim, however, is dismissed without leave to amend. 

Defendant must submit its third amended counterclaims and its

amended answer within ten days from the date of this order. As

discussed at the hearing, Defendant shall include in this pleading

any viable claims it wishes to pursue from the transferred South

Carolina action.

IT IS SO ORDERED.

Dated: 3/5/07 

CLAUDIA WILKEN

United States District Judge

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