Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-04407/USCOURTS-cand-4_05-cv-04407-9/pdf.json

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

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

TERARECON, INC.,

Plaintiff,

v.

FOVIA, INC.; FOVIA MEDICAL, INC.;

KENNETH FINEMAN; ROGER KATEN; GEORGE

BUYANOVSKY; IGOR OKULIST; and JOSEF

GOREK,

Defendants.

 /

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

GEORGE BUYANOVSKY,

Counterclaimants, 

v.

TERARECON, INC., MOTOAKI SAITO; and

ROBERT TAYLOR,

Counterdefendants.

 /

No. C 05-4407 CW

ORDER GRANTING

COUNTERDEFENDANTS'

MOTION TO DISMISS

SECOND AMENDED

COUNTERCLAIMS IN

PART AND DENYING

IT IN PART

Counterdefendants TeraRecon, Inc., Motokai Saito and Robert

Taylor move to dismiss, pursuant to Federal Rule of Civil Procedure

12(b)(6), the second, third and fourth claims for relief of the

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1The TeraRecon parties do not move to dismiss the first

counterclaim for copyright infringement brought by Buyanovsky and

Fovia. The second, third and fourth counterclaims are bought by

Fovia alone.

2

second amended counterclaim filed by Counterclaimants Fovia, Inc.

and Fovia Medical, Inc. (collectively, Fovia) and George

Buyanovsky.1 Fovia opposes this motion. The matter was decided on

the papers. Having considered all of the papers filed by the

parties, the Court grants in part the TeraRecon parties' motion to

dismiss and denies it in part.

BACKGROUND

As explained in the Court's July 6, 2006 order, TeraRecon

brought this action against its competitor Fovia and the individual

Defendants who founded Fovia. Fovia and Buyanvoksy, a former

TeraRecon employee and one of the individual Defendants, filed a

counterclaim against TeraRecon and two additional

counterdefendants: Mitoaki Saito, TeraRecon's Chief Executive

Officer, and Robert Taylor, TeraRecon's Chief Operating Officer. 

The counterclaim was for copyright infringement, unfair business

practices, intentional interference with prospective economic

advantage and negligent interference with prospective economic

advantage. 

The TeraRecon parties moved to dismiss the second, third and

fourth claims of the counterclaim. After they filed their motion

to dismiss, Fovia filed a stipulation and proposed order granting

them leave to file their first amended counterclaim. The Court

signed the proposed order. The TeraRecon parties argued that, even

after amending their counterclaim, Fovia's second, third and fourth

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causes of action failed to state claims upon which relief could be

granted. The Court agreed, and, on July 6, 2006, it dismissed with

leave to amend the second, third and fourth claims. 

On July 20, 2006, Fovia and Buyanovsky filed their second

amended counterclaim. The TeraRecon parties again move to dismiss

the second, third and fourth claims brought by Fovia.

LEGAL STANDARD

I. Motion to Dismiss

A motion to dismiss for failure to state a claim will be

denied unless it is “clear that no relief could be granted under

any set of facts that could be proved consistent with the

allegations.” Falkowski v. Imation Corp., 309 F.3d 1123, 1132 (9th

Cir. 2002), citing Swierkiewicz v. Sorema N.A., 534 U.S. 506

(2002). All material allegations in the complaint will be taken as

true and construed in the light most favorable to the claimant. 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). In all averments of fraud or

mistake, however, the circumstances constituting fraud or mistake

must be stated with particularity. Fed. R. Civ. P. 9(b). The

allegations must be “specific enough to give defendants notice of

the particular misconduct which is alleged to constitute the fraud

charged so that they can defend against the charge and not just

deny that they have done anything wrong.” Semegen v. Weidner, 780

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F.2d 727, 731 (9th Cir. 1985). These rules “do not require a

claimant to set out in detail the facts upon which he bases his

claim. To the contrary, all the Rules require is ‘a short and

plain statement of the claim’ that will give the defendant fair

notice of what the plaintiff’s claim is and the grounds on which it

rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957). 

When granting a motion to dismiss, a court is generally

required to grant a plaintiff, or counterclaimant, leave to amend,

even if no request to amend the pleading was made, unless amendment

would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection

Serv. Inc., 911 F.2d 242, 246-47 (9th Cir. 1990). In determining

whether amendment would be futile, a court examines whether the

complaint could be amended to cure the defect requiring dismissal

“without contradicting any of the allegations of [the] original

complaint.” Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th

Cir. 1990). Leave to amend should be liberally granted, but an

amended complaint cannot allege facts inconsistent with the

challenged pleading. Id. at 296-97. 

DISCUSSION

Fovia's second claim is for intentional interference with

prospective economic advantage; its third claim is for negligent

interference with prospective economic advantage. The fourth claim

is for unfair business practices in violation of California

Business and Professions Code § 17200. The TeraRecon parties

contend that all three causes of action fail to state a claim upon

which relief may be granted and should be dismissed without leave

to amend.

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I. Intentional Interference with Prospective Economic Advantage

The Court dismissed this claim with leave to amend. Fovia,

however, did not amend its intentional interference claim. 

Instead, it states in its opposition that it stands on this

counterclaim as previously plead. It argues that the underlying

facts of this claim are not subject to Federal Rule of Civil

Procedure 9(b), an argument the Court has already rejected. 

As the Court explained in its prior order, Vess v. Ciba-Geigy

Corp. USA, 317 F.3d 1097 (9th Cir. 2003), is controlling. Under

Vess, even where fraud is not a necessary element of a claim,

allegations of fraudulent conduct must satisfy the heightened

pleading requirement of Rule 9(b). If they do not, then the

allegations of fraudulent conduct must be disregarded. 317 F.3d at

1105. 

Fovia states that it does not aver fraud. But, as noted

above, it did not change its allegations in this claim. The Court

has already found that the allegations of "false and misleading

statements" and misrepresentations by the TeraRecon parties to

Fovia's prospective customers are allegations of fraudulent

conduct. See Meridian Project Systems, Inc. v. Hardin Construction

Co., 404 F. Supp. 2d 1214, 1219 (E.D. Cal. 2005) ("It is wellsettled in the Ninth Circuit that misrepresentation claims are a

species of fraud, which must meet Rule 9(b)'s particularity

requirement."). 

Because the false and misleading statements and

misrepresentations are not plead with particularity, the Court must

again disregard them. This leaves only the allegation that the

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TeraRecon parties intentionally interfered with Fovia's prospective

business relationship "through improper means." The Court again

finds that Fovia fails to provide the TeraRecon parties fair notice

of what their claim is and the grounds on which it rests. The

Court has already given Fovia a chance to replead this claim. 

Fovia did not. The Court dismisses the second amended counterclaim

for intentional interference without leave to amend.

II. Negligent Interference with Prospective Economic Advantage

Fovia likewise did not amend its third claim for negligent

interference with prospective economic advantage, except to add

Saito and Taylor as individual Counterdefendants on that claim. 

Fovia now states that it did not intend to assert this claim

against Saito or Taylor; the two names were added due to a

typographical error. Therefore, the Court dismisses without leave

to amend the third claim against Saito and Taylor. The Court also

dismisses without leave to amend the third claim against TeraRecon. 

As Fovia notes, the TeraRecon parties did not raise Vess until

their reply. At the hearing, Fovia argued that Vess does not apply

to claims for innocent or negligent misrepresentations, which it

contends are at the heart of its negligent interference claim. See

Vess, 317 F.3d at 1105 ("The only consequence of a holding that

Rule 9(b) is violated with respect to a § 11 claim would be that

any allegations of fraud would be stripped from the claim. The

allegations of innocent or negligent misrepresentation, which are

at the heart of a § 11 claim, would survive."). The Court,

however, found that Fovia's negligent interference claim, like the

intentional interference claim, was based on TeraRecon's alleged

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misleading statements to prospective customers and TeraRecon's

alleged misrepresentations concerning its rights in the engine

created by Buyanovsky. 

In its current opposition, Fovia points out that, in its

negligent interference claim, it does not allege that TeraRecon

made false statements; Fovia alleges only that TeraRecon made

misleading statements to Fovia's customers, that Fovia copied

TeraRecon's software, and misrepresentations relating to

TeraRecon's rights to the engine. Fovia argues that the Ninth

Circuit acknowledged in Vess that alleging misrepresentation is not

tantamount to alleging fraud. Fovia, however, fails to provide a

citation to such an acknowledgment in Vess. Nor does it provide

any other case supporting its position. 

As the TeraRecon parties note, many courts have found that

negligent misrepresentation claims are subject to the heightened

pleading requirements of Rule 9(b). See, e.g., Scognamillo v.

Credit Suisse First Boston LLC, 2005 WL 645446, *6 (N.D. Cal.

2005); Neilson v. Union Bank, 290 F. Supp. 2d 1101, 1141 (C.D. Cal.

2003) (noting that, under California law, negligent

misrepresentation is a form of deceit). They also cite Benchmark

Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 723 (5th Cir.

2003), finding that the heightened pleading requirement is applied

to a negligent misrepresentation claim when that claim is based on

the same underlying facts as a fraud claim. The TeraRecon parties

argue that, because the underlying facts of the intentional and

negligent interference claims are the same, those underlying facts

must be plead in accordance with Rule 9(b). The TeraRecon parties

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neglect to mention the one difference in the alleged underlying

facts: in its negligent interruption claim, Fovia does not allege

that the misleading statements were false. Nonetheless,

subtracting an adjective does not alter the underlying factual

allegations, nor does it free Fovia from complying with the

specificity required by Rule 9(b). There may be situations were

alleging a misrepresentation or misleading statement is not

tantamount to alleging fraudulent conduct; this, however, is not

one of those situations.

Because Fovia's allegations involving fraudulent conduct,

i.e., the misleading statements and misrepresentations, must be

disregarded, Fovia again is left with nothing more than stating

that TeraRecon has negligently interfered with Fovia and Fovia

Medical's prospective business relationships. As the Court stated

in its prior order, conclusory allegations are insufficient to

defeat a motion to dismiss for failure to state a claim. Epstein

v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996). Thus,

this claim is dismissed without leave to amend.

IV. Unfair Business Practices in Violation of California Business 

and Professions Code § 17200

Unlike its second and third counterclaims, Fovia amended its

fourth counterclaim for unfair business practices. Fovia states

that it cured the alleged defects in this counterclaim by

(1) incorporating its allegations of interference with prospective

economic advantage; (2) setting forth in detail the false promises

Saito and TeraRecon made to Buyanovksy; and (3) alleging bodily

appropriation of the engine, an extra element of the unfair

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business practices claim that distinguishes it from the copyright

infringement claim. Fovia argues that each of these amendments

provides an independent basis for denying the motion to dismiss. 

The TeraRecon parties disagree.

A. Incorporation of Interference Claims

The Court dismisses the claims for intentional and negligent

interference with prospective economic advantage. Therefore, those

claims do not support a claim for unfair business practices.

B. False Promises

As discussed in the Court's prior order, the Copyright Act

preempts State law claims for unfair competition arising out of

conduct encompassed by the Copyright Act, unless the State law

claims include an additional element that makes the right asserted

qualitatively different from those protected under the Copyright

Act. Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079, 1089 (9th

Cir. 2005). Fovia now includes that additional element. It

alleges in sufficient particularity that Saito and TeraRecon made

false promises and misrepresentations. Firoozye v. Earthlink

Network, 153 F. Supp. 2d 1115, 1129 (N.D. Cal. 2001) ("A state-law

misrepresentation claim, even where the defendant's only alleged

misrepresentation involved a promise not to use the plaintiff's

work, contains an additional element that makes the claim

qualitatively different from a copyright right [sic] claim and is

therefore not preempted."). 

The TeraRecon parties argue that the false promise allegations

do not rescue this claim. They note that the alleged false

promises and misrepresentations were made to Buyanovksy, years

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before Fovia came into existence. They therefore contend that

Fovia cannot bring this claim. But, as Fovia notes, the TeraRecon

parties cite no authority to suggest that Fovia, the company

Buyanovsky founded, and to which he assigned all rights, cannot

have suffered injury from these misrepresentations and false

promises and cannot bring this claim. 

The Court finds that the allegations of false promises provide

grounds for maintaining this claim against TeraRecon and Saito; the

allegations, however, do not save the claim against Taylor. 

C. Bodily Appropriation of the Engine

In its July 6, 2006 order, the Court determined that, to the

extent Fovia based its unfair business practice claim on a reverse

passing-off claim, the unfair business practice claim was

preempted. As stated in Aagard v. Palomar Builders, Inc., 344 F.

Supp. 2d 1211, 1217 (E.D. Cal. 2004), "Reverse palming off claims

are preempted unless they allege bodily appropriation and the

claimant seeks more than mere monetary damages." In its first

amended counterclaim Fovia did not allege bodily appropriation. 

Now, it does. The TeraRecon parties argument otherwise is

unavailing. 

The Court finds that this allegation provides additional

grounds for maintaining the fourth claim against TeraRecon and

Saito. In addition, this allegation provides grounds for

maintaining this claim against Taylor.

CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART the

TeraRecon parties' Motion to Dismiss Second Amended Counterclaims

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(Docket No. 61) and DENIES it IN PART. The Court dismisses without

leave to amend Fovia's second and third claims for intentional and

negligent interference with prospective economic advantage; Fovia's

fourth claim for unfair business practices is not dismissed. 

IT IS SO ORDERED.

Dated: 9/20/06 

CLAUDIA WILKEN

United States District Judge

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