Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_08-cv-03414/USCOURTS-cand-5_08-cv-03414-4/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 15:1125 Trademark Infringement (Lanham Act)

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

*E-FILED -2/26/10*

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

RSI CORP., dba RESPONSIVE SYSTEMS

COMPANY, a New Jersey corporation,

v.

INTERNATIONAL BUSINESS MACHINES

CORPORATION; and DOE DEFENDANTS

1-20,

Defendant.

No. C-08-3414 RMW (RS)

ORDER GRANTING IN PART AND

DENYING IN PART DEFENDANT'S

MOTIONS TO DISMISS AND TO STRIKE

AND SETTING CASE MANAGEMENT

CONFERENCE

[Re Docket No. 72 ]

Defendant International Business Machines Corporation ("IBM") moves pursuant to Federal

Rule of Civil Procedure 12(b)(6) to dismiss the first cause of action ("Breaches of Contract") and

fourth cause of action ("Intentional Interference with Prospective Economic Advantage") in plaintiff

RSI Corp.'s ("RSI") Second Amended Complaint ("SAC") and to strike from the SAC pursuant to

Rule 12(f) RSI's request for restitution and punitive damages. For the reasons set forth below, the

court grants in part and denies in part defendant's motions.

I. BACKGROUND

 RSI and defendant IBM entered into agreements on June 23, 1997 and April 21, 1998

(collectively "Developer Agreement"). (SAC ¶¶ 5, 10). The Developer Agreement specified that

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

2

IBM would license RSI's "Buffer Pool Tool" to third parties and would remit to RSI royalties based

upon the volume and type of usage by end users. Under the Agreement, each party was to maintain

auditable records to support invoices issued or payments made to the other for three years from the

date of invoice or payment. (Developer Agreement at 3.6). Upon request by either party not made

more than once per year, the other party would make the records available to an independent auditor

chosen by the requesting party. Id. The Developer Agreement also provided that "neither of us will

bring a legal action against the other more than two (2) years after the cause of action arose." Id. at

13.3.

RSI alleges that it heard through third party conversations that IBM was using and licensing

the Buffer Pool Tool without compensating RSI as called for in the Developer Agreement. (SAC ¶

52). RSI does not allege in its SAC when it first heard this but in its prior complaint it alleged that

"[i]n 2004, RSI was informed that third parties may have been using the Buffer Pool Tool with

IBM's permission, but IBM was either not charging an appropriate licensing fee and/or not remitting

royalties from licensing fees to RSI." (First Amended Complaint ("FAC") ¶ 10). RSI also alleges

that IBM copied portions of the Buffer Pool Tool to create a competing piece of software called the

"Buffer Pool Analyzer," and proceeded to give away the Buffer Pool Analyzer while overcharging

for the Buffer Pool Tool. (Id. ¶¶ 11, 59, 66, 67). In 2004, RSI first exercised its right to procure

audit records and continued to do so until October 2008, several months after RSI brought this

claim. (SAC ¶ 13-46). 

On February 15, 2008, RSI filed a complaint against IBM in the District Court for the

District of Hawaii, which was then transferred to this court. This court granted IBM's motions to

dismiss directed at the original complaint and FAC. IBM now moves to dismiss the first and fourth

causes of action in the SAC and to strike RSI's requests for restitution and punitive damages.

II. ANALYSIS

Under Rule 12(b)(6), in light of Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft

v. Iqbal, 550 U.S. , 129 S.Ct.1937 (2009), a plaintiff is required to plead enough facts to "state a

claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. Iqbal confirmed that this

pleading standard applies "in all civil actions and proceedings in the United States district courts."

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

3

Iqbal, 129 S.Ct. at 1953 (internal citation omitted). "A pleading that offers 'labels and conclusions'

or 'a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint

suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id at 1949. (citation

omitted). When a party seeks leave to amend, it should ordinarily be "freely given." Foman v.

Davis, 371 U.S. 178, 182 (1962). However, a court can deny leave to amend in cases of "undue

delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by

amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the

amendment, futility of amendment." Id. 

A. Breach of Contract

In the SAC, RSI essentially alleges that IBM breached two provisions of the Developer

Agreement: (1) it used and licensed the Buffer Pool Tool software without compensating RSI (SAC

¶ 52); and (2) it breached its duty to provide RSI with auditable information. (SAC ¶ 54).

1. Breaches Resulting From Alleged Failure to Make Royalty Payments

Within the Limitation Period

In granting RSI leave to amend its complaint, the court explained that leave was given to

allow RSI to allege a breach within the limitations period or to allege facts justifying the tolling of

the statute of limitations based upon equitable estoppel. (Order Granting Def's Mot. to Dismiss or

Strike dtd. Mar. 9, 2009 ("FAC Dmsl. Order") at 5:3-6). RSI asserts that "data in IBM's sole

possession and control will show that IBM made multiple, repeated, separate and ongoing breaches

of the Developer Agreement, accruing at various times, that continue to this day." (SAC ¶ 48). RSI

then says in its opposition brief to the motion to dismiss that RSI believes that breaches of contract

occurred "in 2004, 2005, 2006, 2007, 2008 and 2009, on specific dates known only to IBM." (Opp.'n

to Mot. to Dismiss at 7:24-5). The statement in the brief is not part of the SAC. Nevertheless, the

court finds that RSI marginally, but sufficiently, alleges in the SAC breaches within the two years

prior to the filing of the complaint.

2. Equitable Estoppel

RSI seeks to toll the running of the statute of limitations. The court previously suggested

that "RSI needs to plead facts showing some misrepresentation or affirmative misconduct on which

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

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it relied and which caused it not to file suit." (FAC Dmsl. Order at 4:12-14). Although RSI cites

several exchanges between the parties with respect to RSI's unsuccessful requests for audit

information, it does not plead facts, as opposed to legal conclusions, sufficient to show that IBM

misrepresented its intent or engaged in affirmative misconduct that induced RSI not to file suit. In

fact, RSI pleads that as early as February 2005 IBM had failed to provide audit information as

requested. RSI also does not plead that IBM ever made any representation that it would extend the

two-year period for filing suit or forego a limitation defense. 

In the analogous case of Allman v. UMG Recordings, 530 F. Supp. 2d 602, 608-10

(S.D.N.Y. 2008), the court considered whether the running of a contractual limitation period should

be tolled based upon equitable estoppel principles. The court found that a party's intentional delay

of an audit to which the other party had a right under their agreement did not equitably toll the

running of the contractual limitation period or justify reliance by the requesting party that the

delaying party would forego its rights under the limitation provision. Id. In this case RSI does

allege that some data provided was incomplete, and that RSI was led to believe that full data existed. 

(SAC ¶ ¶13-48). Nonetheless, as in Allman, RSI could not have justifiably relied on IBM's alleged

delay and promises to supply audit information to toll the running of the two-year limitation period. 

First, as noted above, plaintiff does not allege that IBM engaged in any affirmative misconduct that

reasonably induced reliance. Second, IBM's obligation to pay royalties on sales and its obligation to

provide audit information are independent requirements of the contract. IBM made no

representation that it would extend or waive enforcement of the limitation period. While RSI does

provide numerous examples of IBM's delaying or frustrating RSI's attempt to exercise its right to

audit, it does not provide any examples of IBM making an affirmative misrepresentation with

regards to the royalty provision. Therefore, the court concludes that IBM's alleged

misrepresentations with respect to providing audit data cannot serve as the basis for equitable tolling

of the two-year contractual limitation period for filing suit on the failure to pay royalties.

3. Breach of Audit Provision of the Developer Agreement

RSI's SAC includes a claim for breaches of the provision of the Developer Agreement

requiring production of records for an audit. Part 3.6 of the Developer Agreement provides that 

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

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Both parties will maintain auditable records to support invoices issued or payments

made to the other. The records will be retained and made available for three (3) years

from the date of the related payment or invoice. If a party requests, the other party

will make the records available to an independent auditor chosen and compensated by

the requesting party.

While some of the audit breaches RSI pleads may be outside of the limitations period, the

determination of the date of the alleged breaches would appear to present factual issues dependent

on the circumstances including when the requests for records were made and what IBM represented

with respect to making the records available. For instance, RSI alleges that shortly after October 25,

2006, it requested audit records from IBM and provided IBM with a Confidential Disclosure

Agreement, but that IBM "did not reciprocate with any information." (SAC ¶ 44). 

IBM asserts that RSI's requests within the limitations period were merely renewals of

requests that began outside of the limitations period and do not revive time-barred claims.

(Mot. to Dismiss at 4:19-5:12). A plaintiff cannot renew stale claims simply by requesting

reconsideration of that claim. See Micciche v. Kemper Nat. Services, 560 F.Supp. 2d 204, 214.

(E.D.N.Y. 2008) (citation omitted). If it could, this would create the absurd result that a plaintiff

could bring a claim within the limitations period by asking a defendant to reconsider a claim that

occurred outside the period. Id. However, RSI pleads numerous factual representations by IBM's as

to when audit records would be provided. (SAC ¶ 14-47). In cases arising under diversity

jurisdiction, "[s]tate law . . . determines . . . what events serve to commence an action and to toll the

statute of limitations." Personis v. Oiler, 889 F.2d 424, 426 (2nd Cir. 1989). The court cannot

dismiss RSI's breach of contract claims for failure to provide audit records on a motion to dismiss

because the dates upon which the statute of limitations commenced to run on those claims appear to

present triable issues of fact.

B. Intentional Interference with Prospective Economic Advantage

Under New York law, a plaintiff must allege that "(1) it had a business relationship with a

third party; (2) that the defendant knew of that relationship and intentionally interfered with it; (3)

the defendant acted solely out of malice, or used dishonest, unfair, or improper means; and (4) the

defendant's interference caused injury to the relationship." Johnson & Johnson v. American Nat. 

Red Cross, 528 F.Supp. 2d 462, 464 (S.D.N.Y. 2008). "Tortious interference claims have a limited

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

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scope and an extremely high pleading standard." Diario El Pais v. The Nielsen Co., Inc., 2008 WL

4833012, *7 (S.D.N.Y. 2008). The business relationship with a third party can be a "continuing

business or other customary relationship not amounting to a formal contract," but must nevertheless

be some form of a current business relationship, and it must be between the plaintiff and a third

party. Hannex Corp v. GMI, Inc., 140 F.3d 194, 205 (2d Cir. 1998). The plaintiff must not only

provide a factual allegation that the defendant tortiously interfered with the plaintiff's relationship

with a third party, but additionally that "but for Defendants alleged acts, Plaintiff would have entered

into contracts with specific prospective [companies] or maintained consistent levels of advertising

with their existing [clients.]" Diario El Pais, 2008 WL 4833012 at *7.

In this case, RSI fails to state a claim. RSI does not clearly and specifically plead the

business relationship it had with any third party. RSI lists seventeen "current and prospective"

clients and then alleges that IBM knew of RSI's relationship with these seventeen clients and

tortiously interfered with them. (SAC ¶¶ 73, 74). This list is inadequate both because it does not

show whether RSI has any current relationship with each client, and because RSI fails to specify

whether these are its direct customers or, alternatively, whether they are "customers" only in the

sense that IBM licenses them to use RSI's tools. RSI pleads that IBM "charg[ed] RSI's existing and

potential customers extra fees to run the Buffer Pool Tool," and "refus[ed] to provide technical

support to potential customers who wished to switch from the Buffer Pool Analyzer and license the

Buffer Pool Tool from RSI." (SAC ¶ 74(d), 74(e)). These allegations imply that RSI's customers

may be, in fact, customers of IBM, who license RSI's software through IBM pursuant to the

Developer Agreement. If that is the case, the parties need to address whether such an arrangement

can provide the relationship necessary for an intentional interference claim.

Even assuming that each of the seventeen clients had a business relationship with RSI, the

claim still fails to allege any facts to support the claim that these seventeen clients discontinued its

business relationship with RSI because of IBM's misconduct. In its Opposition to the Motion to

Dismiss the Second Amended Complaint, RSI simply states that "IBM interfered with these 17

customers/prospects by making false representations about the pricing, features and capabilities of

the Buffer Pool Analyzer and Buffer Pool Tool, while it bundled the Buffer Pool Analyzer with

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

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other software programs." (Opp. to Mot. to Dismiss 17:12-15). RSI fails to allege in the SAC or

even in its opposition facts sufficient to support an interference with prospective economic

advantage claim. Diario el Pais, 2008 WL 4833012, at *7. The allegations are "devoid of any

factual support for the assertions . . . that, but for Defendants' alleged act, Plaintiff would have

entered into a contract with . . . customers." Genal Strap, Inc. v. Irat Dar, et al, 2005 WL 525547 *3 

(E.D.N.Y. 2005).

C. Requests for Relief

1. Restitution

"The basic rule of damages in a case of unfair competition is the amount which the plaintiff

would have made, except for the defendant's wrong." Ronson Art Metal Works, Inc. v. Gibson

Lighter Mfg. Co., 159 N.Y.S. 2d 606, 611 (App. Div. 1957). Nevertheless, accounting for damages

from unfair competition may in certain circumstances include "profits earned by the defendant that

are derived from unfair competition." 24/7 Records v. Sony Music Entertainment, Inc., 566 F.Supp.

2d 305, 320 (S.D.N.Y. 2008).

While IBM correctly observes that disgorgement of profits is not the usual remedy in an

unfair competition claim, its motion to strike is denied at this time. RSI alleges that IBM unfairly

competed by copying the Buffer Pool Tool to create its own Buffer Pool Analyzer, and confusing

and deceiving clients as to "origin, developer, and capabilities," of the two pieces of software. (SAC

¶ 66, 68). RSI’s request for disgorgement of profits from IBM survives because RSI may be able to

prove that IBM's profit through wrongful conduct is an accurate measure of RSI's damage. At this

stage, RSI's request is not too speculative. 

2. Punitive Damages

Under New York law, a party cannot generally recover punitive damages on a breach of

contract claim. Rocanova v. Equitable Life Assur. Soc. of U.S., 83 N.Y. 2d 603, 613 (1994). Where

the breach of contract claim "also involves a fraud evincing a 'high degree of moral turpitude' and

demonstrating 'such wanton dishonesty as to imply a criminal indifference to civil obligations',

punitive damages are recoverable if the conduct was 'aimed at the public generally." Id. Therefore,

RSI cannot recover punitive damages on its breach of contract claim because it does not plead that

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

8

IBM's misconduct was aimed at the public generally. See (SAC ¶ 49-57). Nor can RSI recover

punitive damages under its Lanham Act claim. Getty Petroleum Corp. v. Bartco Petroleum Corp.,

858 F. 2d 103 (2nd Cir. 1988) (in light of the statutory language, legislative history and relevant case

law, "the Lanham Act does not authorize an additional award of punitive damages for willful

infringement of a registered trademark.") Notwithstanding the fact that RSI cannot recover punitive

damages under either its breach of contract or Lanham Act causes of action, the court denies IBM's

motion to strike punitive damages because RSI may be able to recover punitive damages under its

unfair competition cause of action. "In the context of unfair competition . . . New York law clearly

permits punitive damages where a wrong is aggravated by recklessness or willfulness . . . whether or

not directed at the public generally." Getty Petroleum Corp. v. Island Transp. Corp., 878 F. 2d 650,

657 (2nd Cir. 1989) (internal quotations omitted). RSI alleges that IBM has made its Buffer Pool

Analyzer available to its customers for free to gain a commercial advantage, concealed its customers'

use to avoid royalty obligations and used the term "Buffer Pool" to cause mistake, confusion, and

deception. (SAC ¶ 67-68).

III. ORDER 

For the foregoing reasons, the court:

1. grants the motion to dismiss RST's breaches of contract claim without leave to amend

as to the failure to pay royalty fees except as to those falling due within two years before

the suit was filed; 

2. grants the motion to dismiss RSI's claim for intentional interference with prospective

economic advantage with twenty days leave to amend;

3. denies the motion to dismiss RSI's claim for breaches of contract as to the audit

provision;

4. denies the motion to strike restitution in the form of disgorgement of profits;

5. grants the motion to strike punitive damages except as to the unfair competition claim;

and

6. sets a case management conference for March 26, 2010 at 10:30 a.m. 

DATED: 2/25/10

RONALD M. WHYTE

United States District Judge

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTIONS TO DISMISS AND STRIKE AND SETTING

CASE MANAGEMENT CONFERENCE —No. C-08-3414 RMW (RS)

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THIS SHALL CERTIFY THAT A COPY OF THIS ORDER WAS PROVIDED TO:

Counsel for plaintiff:

Edmund W.K. Haitsuka

Gary G. Grimmer ggrimmer@carlsmith.com

Robert D. Triantos

Forrest Booth fb@severson.com

Ryan Conor Donlon rcd@severson.com

Counsel for defendant:

Shon Morgan shonmorgan@quinnemanuel.com

Scott Watson scottwatson@quinnemanuel.com

Valerie Roddy valerieroddy@quinnemanuel.com

Shirley Kawamura skawamura@kltlaw.com

Counsel are responsible for distributing copies of this document to co-counsel that have not registered

for e-filing under the court's CM/ECF program.

Date: 2/26/10 /s/ JG 

Chambers of Judge Whyte

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