restated plaintiffs claim for misappropriation of trade secrets. /d. As the ITSA defines
misappropriation as an acquisition by improper means, including by misrepresentation, the court
found, the ITSA preempted plaintiff's fraud claim. /d. (citing 765 ILCS 1065/2(a))

PSI's misappropriation counterclaim alleges that the Original Works and Enhancements
constitute trade secrets of PSI pursuant to the ITSA. (TAC Count Il {| 41.) As noted, PSI's
common law fraud counterclaim alleges that DIB fraudulently misrepresented to PSI that it had
created the purchase order module independently of any Licensed Software when it had in fact
incorporated source code from the Programs, for which PSI was entitled to royalties. (Am. Count
IX J] 21-30.) Asin Thomas & Betts, this court finds that PSI’s fraud counterclaim merely restates
its trade secret misappropriation claim. As noted, both claims are premised on DIB’s alleged
misappropriation and use of certain Enhancements that PSI had created. The court finds that PSI's
fraud counterclaim is premised on an acquisition by misrepresentation, and therefore is preempted
by the ITSA.

D. Undue Delay

DIB argues that the fraud counterclaim should be dismissed with prejudice at this point, as
PSI “has exercised undue delay, and has had more than a sufficient amount of time to adequately
plead a cause of action.” (Am. Count IX Mem., at 8-9.) In support, DIB cites a single unreported
district court opinion, Oasis indus., Inc. v. G.K.L. Corp., No. 92 C 4814, 1996 U.S. Dist. LEXIS
15233, at *15-16 (N.D. Ill. Oct. 9, 1996), where Magistrate Judge Guzman recommended that the
court decline to permit a further amended pleading where defendants had enjoyed “several
opportunities to amend their pleadings during the course of four years of discovery.” PSI responds
that “the parties have only been engaged in active discovery since June of 2003.” Further, PSI

claims “it has been greatly hindered because of the inability of multiple DIB deponents to recall

6 As noted, the court presumes the Programs constitute a subset of those

Enhancements described in PSI’s trade secret misappropriation counterclaim

19



(RealWorld), (TAC Count XII J 40), as well as relations with PSI’s relations with its existing
customers, rather than on DIB’s misappropriation of trade secrets. (Id. 147.) In other words, PSI's
ITSA claim is based on DIB’s alleged misappropriation of PSI’s trade secrets in violation of its
License Agreement with PSI, while PSI's tortious interference with contract claim stems from DIB's
alleged interference with the MVADA between PSI and RealWorld. As these claims involve two

distinct contracts, the court finds that PSI's counterclaim is not preempted by the ITSA.
CONCLUSION

The court grants in part and denies in part the Motion of Do It Best and Thomas Burroughs
to Dismiss Counts IX, X, XI, and XII (Doc. No. 121-1). Specifically, the court dismisses PSI’s
Amended Count IX without prejudice to refiling, but denies the motion to dismiss with respect to
Amended Counts X, XI, and XII. The court denies Thomas Burroughs’s Motion to Dismiss
Amended Count X (Doc. No. 152-1), and grants Do It Best's Motion to Dismiss Amended Count
IX (Doc, No. 153-1) without prejudice. Defendants are directed to file answers to Amended Counts

X, XI, and XII within 21 days.

ENTER:

Dated: July 23, 2004 Cibcer SPH ap
REBECCA R. PALLKAEY aA

United States District Judge

36


Mem."), at 8.) The court notes that, in Illinois, a party has five years from the date he knew or
reasonably should have known that a fraud has been perpetrated upon him to bring a claim for
common law fraud. 735 ILCS 5/13-205; Horbach v. Kaczmarek, 288 F.3d 969, 977 (7th Cir. 2002);
Boyd Mach. & Repair Co. v. American Int'l Homes, Ltd., 100 F. Supp. 2d 898, 901 (N.D. Ill. 2000).
PSI alleges that it did not discover that DIB had made fraudulent statements until September 2000,
(Am. Count IX | 31), while PSI filed its initia! fraud counterclaim on October 30, 2003, within five
years of the time it claims to have discovered the fraud. The court concludes that PS! has
sufficiently pleaded the relevant date-the date it discovered the alleged fraud-in its fraud
counterclaim to survive a motion to dismiss.

Turning next to the questions of “who, what, when, where and how,” DIB also claims it
cannot determine where or by what method the alleged misrepresentations were made. (Am.
Count IX Mem., at 8.) The court notes that PSI did, in fact, identify the location and mode of
transmission of all three alleged statements-the first two were made by telephone, and the third
was uttered in person at DIB’s office. (Am Count IX JJ] 21-23.)

The matters of “who, what, and how” are more troublesome. In its response brief, PS!
insists that its fraud counterclaim alleges that “DIB, though its agent Gary Zoller,” made three false
statements of material fact. (Response of Passport Software in Opposition to the Motion of Do it
Best Corp. to Dismiss Passport’s Fraud Claim (hereinafter, “Am. Count IX Opp. Mem.”), at 3.)
First, at some point “{iJn or about 1990,” Zoller told PSI President John Miller by telephone that DIB
would not use the purchase order module that PSI delivered to DIB. (Am, Count 1X {/21.) Second,
during that conversation, Zolier claimed that DIB would create its own purchase order module “from

scratch.” (/d. 22.) Third, Zoller told Miller “{iJn or about 1996” that Jennings was the programmer

2s PS} also claims it alleged that Jim Jennings made false statements of material fact.

The court notes, however, that the fraud counterclaim contains no allegations that Jennings made
any statements whatsoever.

13


Burroughs claims that removal of copyright notices, without more, does not constitute an
act of copyright infringement, and is only punishable by criminal sanction pursuant to § 506(d) of
the Copyright Act, 17 U.S.C. § 506(d), which prescribes a criminal fine of up to $2,500 for removing
or altering a notice of copyright from a copy of a copyrighted work with fraudulent intent. (Am
Count X Mem., at 3-4.) At least some authority supports his argument. In Scarves by Vera, Inc.
v. American Handbags, Inc., 188 F. Supp. 255, 257 (S.D.N.Y. 1960), the court concluded it had
no power to enjoin defendant from removing plaintiff's copyright notices. See also 4 NIMMER §
15.02, at 12-91 (“[R]emoval or alteration of a copyright notice upon a copyrighted work (whether
or not with fraudulent intent) likewise does not give rise to civil liability for copyright infringement’)
Burroughs also notes that the right to place or remove a copyright notice is not enumerated as a
protected act in § 106 of the Copyright Act. (Am. Count X Mem., at 4.) In addition, Burroughs cites
Donald Frederick Evans & Assocs., Inc. v. Continental Homes, Inc., 785 F.2d 897, 913 (11th Cir.
1986), in which the court stated that “permitting private plaintiffs to seek relief under section 506
is inconsistent with the overall scheme of the legislation . . .." Burroughs fails to cite the remainder
of the court’s statement, however: “private parties have adequate means available by which to seek

relief under other provisions of the Act which will yield more appropriate relief.” /d.

Burroughs also cites Cinema Concepts Theatre Serv. Co. v. Filmack Studios, No. 89 C
0024, 1989 WL 55092, at *2 (N.D. Ill. May 17, 1989), but as the court reads that case, it addressed
state law claims. Plaintiff in Cinema Concepts alleged, inter alia, that defendant misappropriated
its property and engaged in unfair competition by removing its copyright notice from its films without
its consent or authorization. In dismissing these state law claims, the court noted that plaintiff
sought to recover for injuries allegedly sustained as a result of the removal of the copyright notice,
not for the subsequent acts of reproduction. /d. Defendant's removal of the notice allegedly

“facilitat{ed] the copying of plaintiff's copyrighted films” and allowed customers to purchase films

23


about January 14, 1994, five days before the License Agreement was set to expire, DIB and PSI
orally agreed to extend operation of the agreement until approximately January 2001. (/d. {J 25-
26; Count IX (Amended) Fraud (hereinafter, “Am. Count |X”) {IJ 19-20.)

At some point “[i]n or about 1990,” Gary Zoller (“Zoller”) of DIB® told John Miller (“Miller”),
President of PSI, by telephone that a module relating to purchase order operations did not suit its
business needs. (Am. Count IX f 21.) During that conversation, Zoller claimed “that DIB would
not use the purchase order module which PSI had delivered but would create its own purchase
order module from scratch.” Years later, at some point “[i]n or about 1996,” Zoller introduced Miller
to Jennings at DIB’s office and told Miller that Jennings was creating DIB’s purchase order module.
(id. J 23.) On unspecified dates, PSI alleges, Jim Jennings (“Jennings”) and Scott Everson
(‘Everson’), programmers for DIB, wrote DIB's purchase order module using source code that they
knew had been copied from PSI original source code and RealWorld source code for which PSI
was entitled to royalties. (Am. Count IX 9] 24-25, 27.)°

PSI claims that “DIB knew’ that Zoller's statements that DIB had created its purchase order

on its own was not true. (/d. 9.26.) Instead, “[a]t the time Zoller made the representation to Miller

5(...continued)
significance of these Programs, or what prompted PSI to begin creating the Programs in 1993
(three years after Zoller allegedly told Miller that DIB needed to make its own adjustments to the
software). Although PSI does not indicate how the Programs differ from the Enhancements
described in paragraph 10 of the TAC and in PSI's trade secret misappropriation counterclaim, the
court presumes the Programs constitute a subset of those Enhancements.

8 None of PSI’s counterclaims identifies Mr. Zoller’s position.

7 Although paragraph 22 does not indicate the date on which Zoller made this
statement, the court presumes he uttered this alleged statement on the same date as the
statement described in paragraph 21.

8 At least one commentator suggests that the circumstances alleged here are not
unusual. See Jason Krause, Code Name: Trouble, ABA Journal (July 9, 2004) (noting that,
according to a recent survey, “75 percent of all coders use blocks of computer code they have
appropriated from other software”), at http://www.abanet.org/journal/ereport/jy9code. htm.

4



developed computer software and agreed to license it to defendant Rockenbach Chevrolet Sales,
Inc. (“Rockenbach”), an automobile dealership, on the condition that Rockenbach not re-license
or sell the software to third parties and not copy or create derivative works from the software.
Plaintiff claimed that Rockenbach breached this agreement by allowing defendant Auto
eDirect.Com, Inc. (“Auto eDirect”), which also developed and sold software to automobile
dealerships, to view, access, and copy that software. /d. Plaintiff also brought a tortious
interference with contract claim against Auto eDirect based on Auto eDirect creating software that
“closely functioned and resembled [plaintiff's] licensed software.” /d. at 959. In concluding that the
Copyright Act preempted plaintiff's tortious interference claim, the court found that claim was based
on Auto eDirect’s creation of software that resembled and functioned similarly to plaintiff's licensed
software, and thus that the allegations were not qualitatively different from unauthorized copying,

the conduct necessary to support a copyright infringement claim. /d.

In contrast, PSI’s counterclaim is based on DIB’s alleged inducement of a licensor of
copyrighted material (RealWorld) to breach its contract with PSI, rather than on DIB’s creation of
allegedly infringing software. In the court's view, DIB’s alleged inducement of RealWorld to breach
its License Agreement with PSI constitutes an “additional element” that differs in kind from those
necessary for the alleged infringement of PSI’s underlying copyright. Balt. Orioles, Inc. v. Major
League Baseball Players Ass'n, 805 F.2d 663, 677 n.26 (7th Cir. 1986). In other words, PSI’s
tortious interference with contract claim is based on DIB's allegedly inducing RealWorld to
terminate its MVADA with PSI, not on DIB’s infringement of PS|-owned software. The court notes,
further, that PSI alleges all five elements of a tortious interference claim: (1) it had a valid and
enforceable contract with RealWorld; (2) DIB was aware of this contractual relation; (3) DIB
intentionally and unjustifiably induced breach of the contract; (4) RealWorld subsequently breached

the contract, caused by DIB’s wrongful conduct; and (5) PSI sustained damages. See Voelker, 353

34


relevant events and the late delivery of 60,000 incomplete documents to PSI... .” (Counts IX-XII
Opp. Mem., at 6 n.2.) The court notes that PSI initially filed its fraud counterclaim on October 30,
2003, and amended it once, on February 9, 2004. Despite DIB’s alleged noncompliance with
discovery, PSI has in fact filed several previous counterclaims. The court declines at this time to
bar any further amendments, but notes it has difficulty in understanding how PS! might plead a
fraud counterclaim that will not be vulnerable to the legal defenses DIB has raised in this motion.
Wl. Contributory Copyright Infringement (Count X)

Thomas Burroughs urges that PSI's counterclaim against him should be dismissed on the
grounds that (1) PSI does not sufficiently plead a predicate act of copyright infringement, and (2)
PSI fails to specifically allege that Burroughs “directed, supervised and/or participated in the
removal of any copyright notices or that his conduct aided and assisted DIB to make, use, sell and
distribute copies of the [Programs] with PSI's copyright notice removed.” (Thomas Burroughs’{s]
Motion to Dismiss Count X (Amended) of Counter-Plaintiff['s] Third Amended Counterclaims J 5.)
PSI responds that its counterclaim satisfies the notice pleading requirements of Rule 8(a).
(Response of Passport Software, Inc. in Opposition to the Motion to Dismiss of Thomas Burroughs
(hereinafter, “Am. Count X Opp. Mem.”), at 2-3.) In fact, unlike its fraud counterclaim, PSI’s
contributory copyright infringement counterclaim need contain only “a short and plain statement of
the claim showing that the pleader is entitled to relief.” FED. R. Civ. P. 8(a)(2). Such a statement
need merely “give the defendant fair notice of what the plaintiff's claim is and the grounds upon
which it rests.” Swierkiewicz v. Sorema N. A., 534 U.S. 506, 507 (2002) (citation omitted). A party
need not plead either facts or law under Rule 8(a). Johnson v. Wattenbarger, 361 F.3d 991, 994
(7th Cir, 2004) (citations omitted).

A contributory infringer is one who “was in a position to control the use of copyrighted works

by others and had authorized the use without permission from the copyright owner.” Sony Corp.

20



encouraged corporate defendant's allegedly offending conduct. In dismissing claims against the
individual defendants, the court found that plaintiff's allegations were insufficient as plaintiff failed
to identify any specific activity based upon personal knowledge or wrongdoing, as opposed to their
membership in the broader organizational structure. /d. at*3 (citing Cinema Concepts, 1989 WL
55092). Here, in contrast, PSI has alleged, albeit in conclusory fashion, that Burroughs knew about
DIB's alleged infringement and that he directed and participated in acts that furthered DIB’s

allegedly infringing conduct.

in The Drink Group, Inc. v. Gulfstream Communications, Inc., 7 F. Supp. 2d 1009 (N.D. Ill.
1998), Plaintiff sought to hold corporate officers individually liable for trademark infringement on
the ground that they were “a principal of and a driving force behind” the allegedly infringing
conduct. The court dismissed these claims, citing Dangler and Hoover Group, Inc. v. Custom
Metalcraft, inc., 84 F.3d 1408, 1411 (Fed. Cir. 1996), in which the court explained that “when a
person in a control position causes the corporation to commit a civil wrong, imposition of personal
liability requires consideration of the nature of the wrong, the culpability of the act, and whether the
person acted in his/her personal interest or that of the corporation.” In Drink Group, plaintiff failed
to allege any acts of wrongdoing by the defendant officers. /d. at 1010-11. The mere fact that
these individuals had formed a corporation that allegedly infringed was insufficient, absent any
allegations of improper motivation. /d. at 1011. {n other words, the court found that “[p]laintiff's
averments fall woefully short of the ‘special showing’ requirement in Dangler.” /d. Similarly, in
Cinema Concepts, 1989 WL 55092, at *2, the court dismissed a claim for contributory copyright
infringement on the ground that there were no factual allegations to establish that the individual
defendants supervised, influenced, or otherwise knowingly participated in the alleged infringement,

or that either defendant derived financial benefit from it.

To support its contention that its counterclaim does adequately allege Burroughs’s

26


infringement by a third party”) (citation omitted); 3 MELVILLEB. NIMMER & DAVID NIMMER, NIMMER ON
COPYRIGHT (hereinafter, “NIMMER’) § 12.04[A][3][a], p. 12-91 (2004) (“[T]he rule should generally
prevail that third party liability, as its name implies, may exist only when direct liability, i.e.,
infringement, is present”). Copyright infringement is actionable under § 501(a) of the Copyright
Act, which provides that “[a]nyone who violates any of the exclusive rights of the copyright owner
as provided by sections 106 through 122 . . . is an infringer of the copyright... .” 17 U.S.C. §
501(a). The exclusive rights of a copyright holder include reproducing, preparing derivative works
of, and distributing copies of the copyrighted work. 17 U.S.C. § 106(1)-(3). Thus, PSI must show
(1) the existence of a predicate act of infringement, and (2) that Burroughs induced, caused, or

materially contributed to the infringing conduct. The court considers each element in turn.
A. Predicate Act of Copyright Infringement

According to Burroughs, PSI’s contributory copyright infringement is premised solely on its
allegation that in or about January 2001, DIB employees, under Burroughs's direction and with his
participation, removed PSI's copyright notices from the Programs’ splash screens without PSI's
knowledge or consent and replaced them with DIB’s copyright notices. (Memorandum of Law in
Support of Thomas Burroughs’[s] Motion to Dismiss Count X (Amended) of Counter-Plaintiff[‘s]
Third Amended Counterclaims (hereinafter, “Am. Count X Mem.”), at 3.) PSI points to its allegation
that Burroughs was a member of the committee of DIB employees that was advised by third parties
that DIB needed to purchase or license PSI's rights in order to continue using PS! software. (Am.
Count X ff] 12-13.) It also cites its allegation that Burroughs’s “personal conduct aided and
assisted DIB to make, use, sell and distribute copies of the Programs with PSI's copyright notice

removed.” (/d. | 24.) Burroughs does not address these allegations.

a7 PSI’s pleadings do not indicate whether Burroughs advised DIB of the potential legal

implications of its actions.

22


F.3d at 527-28. The court finds, therefore, that the Copyright Act does not preempt PSI's tortious

interference counterclaim.
B. Preemption by Illinois Trade Secrets Act

Finally, DIB claims that the ITSA preempts PSI's tortious interference counterclaim on the
ground that it is predicated on the same alleged conversion of information or property that gives
tise to its trade secret misappropriation claim. (Counts IX-XIl Mem., at 13.) As with its Copyright
Act preemption argument, DIB notes that PSI alleges in its tortious interference counterclaim that
DIB entered into the November 30, 2000 Source Code Agreement with RealWorld “in part, ina
wrongful attempt to legitimize DIB’s use of PSI's copyrighted code without PSI's consent.” (TAC
Count XII 41.) DIB urges that this allegation merely states that DIB misappropriated PSI’s trade
secret and that all of the other acts alleged in PSI’s tortious interference counterclaim relate back
to such misappropriation. (Counts IX, XI, XIl Reply Mem., at 11.) In support, DIB notes that in
Thomas & Betts, 108 F. Supp. 2d at 974, the court granted summary judgment to defendants on
plaintiff's tortious interference with business relations claim on the basis of preemption under § 8
of the ITSA. The court noted that plaintiff cited the same acts of wrongdoing that comprised its
unfair competition allegations and argued that this conduct damaged its relationships with its
customers. /d, “In other words, [plaintiff] claims that defendants tortiously interfered with [its]
relationships with its customers by engaging in a misappropriation of-i.e., unauthorized ‘use of

(765 ILCS 1065/2(b)(2))-trade secrets and confidential information.” Id.

PSI responds that its tortious interference counterclaim is based on DIB’s alleged
interference with the MVADA between PS! and RealWorld, not on misappropriation of trade
secrets, and that its tortious interference counterclaim “would lie irrespective of whether DIB took
PSI's trade secrets.” (Counts IX-XIl Opp. Mem., at 11-12.) As noted above, unlike plaintiff in

Thomas & Betts, PSI alleges that DIB interfered with its relationship with a licensor of software

35


alleged breach of the License Agreement. (Compare Am. Count !X 1 32 with TAC Count | {ff 34,
36.)

As DIB notes, our Court of Appeals has stated that a party asserting a fraud claim “must
show that, had it not been for the fraud, he would have been spared an injury and thus would be
better off." Midwest Commerce, 4 F.3d at 524-25 (citation omitted). In this case, PSI has not
alleged that Zoller's misrepresentations per se caused it to forego some non-contractual remedy
it would have had absent those statements. Instead, PSI's alleged reliance on DIB's
misrepresentations, as well as the injuries PSI allegedly sustained as a result of such reliance,
involve PSI's failure to invoice DIB for royalties owed under the License Agreement. PSI does not
allege that it would have discovered DIB's alleged breach of the License Agreement any sooner,
or invoiced DIB for greater royalty amounts, had Zoller not lied about DIB’s actions. Even if it had
so alleged, those circumstances might explain PSI's delay in filing its claims against DIB, but would
not constitute an independent claim for relief. As PSI does not allege harm beyond its contractual
expectations, the court concludes that PSI's fraud counterclaim fails to state a claim upon which
relief can be granted.

c. Preemption by lilinois Trade Secrets Act

DIB claims that the ITSA preempts PSI's fraud counterclaim on the ground that the fraud
counterclaim is predicated on the alleged misappropriation of the same property that gives rise to
PSI’s trade secret misappropriation claim. (Counts IX-XII Mem., at 13.) Specifically, DIB urges that
PSI's fraud counterclaim merely repeats the allegations in PSI’s trade secret misappropriation
counterclaim, and that the fraud claim is “nothing more than another way of arguing that [DIB] took
PSI’s allegedly secret information, for which the ITSA is the exclusive remedy.” (Reply in Support
of Do it Best Corp.'s Motion to Dismiss Counts IX, XI and XI} of Passport Software, Inc.'s Third

Amended Counterclaims (hereinafter, “Counts IX, XI, XII Reply Mem.”), at 13; Counts IX-XI| Mem.,

17


certify in writing that DIB had destroyed all copies of the Licensed Software, (5) stop using all
enhancements and features subject to the terms of the License Agreement and federal copyright
law, (6) destroy all software containing enhancements and features, pursuant to the License
Agreement, and (7) assign all sublicenses to PSI within 30 days. (/d. 28.) As a result of DIB’s
failure to comply with these demands within 30 days, PSI alleges, the parties’ oral agreement was
terminated on March 14, 2001. (/d. J 29.) Prior to February 14, 2001, pursuant to the License
Agreement, DIB was authorized to use and distribute to its members copies of the Programs. (TAC
Count XI 4] 39.) From February 14, 2001 through the present, however, DIB has made, used, sold,
and distributed more than 700 copies of the Programs to its members throughout the United States
without PSI’s consent or permission, including more than 400 copies to members that had
previously received the software that did include PSI's copyright notices. (TAC Count VII. 42; Am.
Count X if] 20, 23; TAC Count XI J 40, 43.)

In or about March 2001, DIB induced RealWorld to terminate the MVADA with PSI, although
RealWorld had no legitimate basis for doing so. (/d. Count XII fff] 43-44.) PSI alleges that, “[oJn
information and belief, DIB sought to have Real[]World terminate PSI’s M[VAJDA in order to limit
or reduce damages which PSI could seek from DIB for DIB’s wrongful use of PSI's copyrighted
source code which was incorporated into a derivative work which PSI delivered to DIB in or about
1999.” (/d. Count XII 4] 45.)”° In or about May 2001, RealWorld did in fact terminate the MVADA.

(1d. Count XII | 46.)"" As a result of that termination, PSI experienced "interference with existing

8 PSI does not indicate whether DIB instructed these 400 members to destroy the

previously-distriputed copies that included PSI’s copyright notices.

2 PSI does not describe the derivative work that was delivered to DIB in or about 1999
or indicate whether this was the same derivative work described in paragraphs 24 through 27 of
Count VI of the TAC. Nor does PS! explain how termination of the PSi/RealWorld MVADA limited

damages that PSI might otherwise have been able to recover from DIB.

a The TAC does not indicate what reasons, if any, RealWorld proffered for terminating
(continued...)



notices. (TAC Count XI [ff 41-42, 45.) According to PSI, since February 14, 2001, DIB has made,
used, and distributed copies of the Programs to its members throughout the United States without
PSI's consent. (/d. Count X! 9 40, 43.) Indeed, DIB acknowledges that “PSI does not allege that
{D18] did anything more than replace [its] copyright notice.” (Counts IX, XI, Xll Reply Mem., at 4
n.4.) Inthe court's view, it is possible that PSI could demonstrate that DIB “merely repackaged [the

Programs] as its own.” See Dastar, 539 U.S. at 31.

DIB notes that several paragraphs in PSI’s Lanham Act claim are nearly identical to the
allegations set forth in its copyright infringement claim. (Compare Count VII {J 38-42 with Am.
Count X {ff 38-41.) DIB points out that several district courts in this circuit have applied the
preemption principles for § 301(a) of the Copyright Act to claims brought under § 43(a) of the
Lanham Act and found that claims which merely state that a copyright notice was removed must
be dismissed. See Natkin v. Winfrey, 111 F. Supp. 2d 1003, 1013-14 (N.D. Ill. 2000) (collecting
cases and rejecting Lanham Act claims because “plaintiffs have done nothing more than reallege
their copyright claims under the guise of the Lanham Act”). The court notes, however, that these
decisions, which are not precedential, predate Dastar, which is binding on this court. In light of the
principles set forth in Dastar and the liberal pleading standards of Rule 8(a)(2), discussed above,
and drawing all inferences in favor of PSI, the court declines to dismiss PSI’s false designation of
origin counterclaim.

Vv. Tortious Interference with Contract (Count XIl)

In Count XII of the Third Amended Counterclaim, PSI alleges that DIB tortiously interfered
with the MVADA between PSI and RealWorld by inducing RealWorld to terminate that contract.
As with the fraud counterclaim, DIB contends that PSI's tortious interference counterclaim should

be dismissed on the ground that itis preempted by both the Copyright Act and the ITSA. (Counts

IX-XIl Motion 4] 4.) The court considers each argument in turn.

32


infringement by defendant, have been held sufficient under the rules.” /d. at 421 n.8 (quoting 5
CHARLES A. WRIGHT & ARTHUR A. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1237, at 283

(1990)) (quotations marks omitted)

In light of Kirk and Aimster, 334 F.3d at 645-46, the court concludes that PSI's claim for
contributory copyright infringement requires no more than the following three allegations: (1) that
PSI owned a valid copyright; (2) that it registered in compliance with the applicable statute; and (3)
that Burroughs aided and abetted DIB's infringement. In the court's view, PSI has satisfied these
requirements. PSI alleges that PSI owned a valid, registered copyright. Further, PSI claims that
(1) Burroughs was a member of the committee of DIB employees that was told by third parties that
DIB needed to purchase or license PSI's rights to continue to use PSI software, (2) Burroughs
acknowledged to Miller that, without PSI’s permission, DIB had made, sold, and distributed copies
of the purchase order module from which copyright notices had been removed, (3) Burroughs
directed and participated in the removal of PSI’s copyright notices without PSI’s knowledge or
consent, and (4) Burroughs’s “personal conduct aided and assisted DIB to make, use, sell and
distribute copies of the Programs with PSI’s copyright notice removed.” (/d. [If] 12-13; 15-16, 19,
21-22, 24.) Mr. Burroughs is, of course, invited to raise any defenses to PSI’s claim, such as
evidence of his belief that deleting PSI’s copyright notice was appropriate for some reason or a lack
of evidence that he was aware of DIB’s infringement, in a motion for summary judgment. His

12(b)(6) motion is denied.
Iv. False Designation of Origin (Count X})

DIB contends that the Copyright Act takes precedence over PSI’s false designation of origin
counterclaim, as PSI’s copyright infringement and false designation of origin claims “are effectively
the same.” (Counts IX-XIl Mem., at 12.) inits false designation of origin counterclaim, PSI alleges

that DIB violated § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by removing PSI’s copyright

29


On or about August 31, 2000, Karla Wygant, a DIB employee,” wrote to the Committee that “I have
run this software and modified programs with this information a million times and not noticed [the
copyright notices]. This definitely throws another wrench in the works.” (id. $ 14.)""

As of 2000, the MVADA” between PSI and RealWorld, which had been modified several
times, provided that PSI had the right to reproduce, distribute, and enhance the RealWorld
Accounting Suite through 2010. (TAC Count XI ¢38.) In or about August 2000, DIB informed PS!
that DIB was interested in purchasing an unlimited license for the Licensed Software. (/d. Count
VI{19.)"* in or about September 2000, PSI asked RealWorld “if it could purchase a license from
[RealWorld] for sale to [DIB] for unlimited use of the Accounting Suite incorporated into the
Licensed Software.” PSI did not identify DIB in its initial discussions with RealWorld. (/d. Count
VI { 20.) PSI alleges that it did not initially disclose DIB’s identify to RealWorld “because it had
been cut out of a deal by [RealWorld] in which it had invested substantial time and effort.” (/d.
Count VI {] 22.)"* After RealWorld and PSI signed an agreement in which RealWorld agreed “not
to intervene or interfere with the transaction between PSI and its client,” PSI informed RealWorld
that DIB was the client for wnom PSI wished to purchase unlimited use of the Accounting Suite.

(!d, Count VI ¥ 21.)

PSI’s counterclaims do not identify Ms. Wygant's position.

" PSI does not indicate when the Committee ceased its efforts to ascertain ownership
of the Programs.

" As noted, paragraph 9 of the TAC alleges that the MDA was supplemented by the
MVADA, executed on July 1, 1988. Count XIl, however, does not mention the MVADA, and refers
only to the MDA between RealWorld and PS| Although PSI does not explain this discrepancy, the
court presumes that allegations in Count XII that relate to the MDA after 1988 properly refer instead
to the MVADA.

8 As noted, according to PSI, at this time the Committee was in the process of
ascertaining ownership of the Programs. (Am. Count X qi 11-13.)

" PS! does not explain the nature of this alleged deal

6


that DIB was creating its own purchase order module, DIB by its agents Jennings and [Everson]
knew DIB had or intended to incorporate source code which belonged to PSI in the various
modules.” (/d. J 28.) PSI also contends that Zoller's statement that DIB’s purchase order module
was original “was made with the intent that PSI rely on the statement, be deterred from discovering
that DIB had included source code in its purchase order module which was not original and had
been delivered so that PS! would not invoice DIB or its members for the use of the PSI and
Real{JWorld source code contained in DIB’s purchase order module.” (/d. | 29.) PSI alleges that
it relied on Zoller's statements and did not invoice DIB or its members for the use of PSI or Real
World source code. (/d. J] 30.)

PS! does not indicate which of Zoller’s alleged statements it is referring to in paragraphs
26, 28, 29 and 30. As the court reads the allegation in paragraph 28 involving “the representation
to Miller that DIB was creating its own purchase order module,” that paragraph refers to the
allegation in paragraph 23 that in 1996 Zoller told Miller that Jennings was creating DIB's purchase
order module. [tis unclear whether the claims in paragraphs 26, 29, and 30 refer to Zoller’s alleged
1990 statements, his asserted 1996 statement, or other unidentified remarks.

In or about August 2000, PSI alleges, DIB “began scheming to make, use, copy, and
distribute [the Programs] for its own and its members['] use without abiding by the terms of the
[License Agreement].” (Count X (Amended) Contributory Copyright Infringement (against Thomas
Burroughs) (hereinafter, “Am. Count X”) | 11.) Also in or about August 2000, a committee of DIB
employees (the “Committee”), including corporate counsel Thomas Burroughs, “took acts to
determine ownership of the [Programs] and consulted with third parties who advised DIB that it

would need to purchase or license PSI's rights to continue to use PSI software.” (/d. J] 12-13.)°

8 PSI does not indicate whether ownership of the Programs was in doubt prior to

August 2000 nor explain how PSI learned about consultations between the Committee and these
unspecified third parties.


at 13.)

PSI urges that its fraud counterclaim is “fully independent” of its trade secret
misappropriation counterclaim for two reasons. First, PSI insists that its fraud counterclaim “seeks
to recover damages from DIB for its fraudulent misrepresentations related to payment due under
the License Agreement.” (Counts !X-XI| Opp. Mem., at 12.) Second, PSI claims that “at the time
the initial fraudulent representation was made regarding the purchase order module, none of PSI['s]
trade secrets which it is enforcing in this litigation existed[; those trade secrets arose later in the
relationship between PSI and DIB.” (/d.) The court presumes that the phrase “the initial fraudulent
representation” refers to Zoller’s alleged 1990 statements that DIB would not use the purchase
order module that PSI delivered to DIB and that DIB would create its own purchase order module
“from scratch.” (Am. Count IX {If[ 21-22.) The court also presumes that the trade secrets PSI
refers to are the Programs, which it allegedly began developing in 1993. PSI cites no factual
support for this contention, nor does it cite any authority (and the court found none) to support its
implicit argument that a fraud claim is not preempted by the ITSA if the trade secret at issue did
not exist when the alleged misrepresentation was made.

The !TSA abolished conflicting common law causes of action, except for contractual
remedies, for misappropriation of trade secrets. 765 ILCS 1065/8; PepsiCo, Inc. v. Redmond, 54
F.3d 1262, 1271 (7th Cir. 1995) (citations omitted). To state a claim for misappropriation of trade
secrets under the ITSA, a claimant must show that (1) its trade secret (2) was misappropriated and
(3) was used in the opposing party’s business. Learning Curve Toys, Inc. v. PlayWood Toys, inc.,
342 F.3d 714, 721 (7th Cir. 2003) (citations omitted). In Thomas & Betts Corp. v. Panduit Corp.,
108 F. Supp. 2d 968, 974 (N.D. Ill. 2000), plaintiff alleged, inter alia, that its former employee and
his current employer fraudulently misrepresented and concealed that they took and used plaintiff's
computers, disks, and documents containing confidential information. In granting summary
judgment to defendants on plaintiff's fraud claim, the court found that the fraud allegations merely

18


DIB knew was false. (/d. Count VI 1 43.)'’

In or about September 2000, PSI discovered that DIB had incorporated certain PSI and
RealWorld source code into its purchase order module, as described below. (Am. Count IX {] 31.)
During a telephone conversation on or about October 1, 2000, Burroughs acknowledged to PSI
President John Miller that DIB had made, sold, and distributed copies of the purchase order module
“without PSI’s permission and without PSI’s copyright notices.” (Am. Count X ff] 15-16.) As of
November 2000, with Burroughs’s knowledge, DIB had made, sold, and distributed more than 400
copies of the Programs which did include a PSI copyright notice on a “splash screen.” (/d. 9] 17-
18.)"° In or about January 2001, DIB employees, under Burroughs’s direction and with his
participation, removed PS!I's copyright notices from copies of the Programs and replaced them with
DIB copyright notices without PSI's knowledge or consent. (/d. ff] 19, 21-22; TAC Count XI ff] 41-
42, 45.) PSI claims that Burroughs’s “personal conduct aided and assisted D!B to make, use, sell
and distribute copies of the Programs with PSI's copyright notice removed,” although it is not clear
whether this allegation refers to Burroughs’s participation in removing PSI’s copyright notices or
some unspecified acts. (Am. Count X ¥ 24.)

On or about February 14, 2001, PS! served DIB with a Notice of Default letter alleging that
DIB had failed to comply with the terms of the License Agreement. (TAC {[ 27.) The letter
demanded that DIB (1) pay fees, charges, and royalties owed to PSI, (2) report on sublicensing

activity for the last six months of 2000, (3) stop using and sublicensing the Licensed Software, (4)

7

PSI does not identify the individuals at PSI or DIB who participated in this exchange,
nor does PS! state which DIB official knew the representations were false.

6 A “splash screen” is “[aJn initial screen displayed by interactive software, usually
containing a logo, version information, author credits and/or a copyright notice.” See
http://foldoc.doc.ic.ac.uk/foldoc/foldoc.cgi?query=splash+screen. The allegations summarized here
are puzzling, as they indicate that, though DIB had removed PSI’s copyright notices in October
2000, by the following month PSI’s copyright notices were once again included in the software DIB
distributed to its members.



from defendant that they otherwise would not purchase, but removal of the notices did not itself
injure the plaintiffs. Accordingly, the removal claims were preempted by § 301 of the Copyright Act
Id. at *3. As in Cinema Concepts, PSI was injured not by deletion of its copyright notices, but by

the alleged misuse of its copyrighted work.

Removal of copyright notices may not, standing alone, be actionable under the Copyright
Act, but PSI’s claims against Mr. Burroughs will survive a 12(b)(6) motion if they sufficiently allege
Burroughs's participation in actions that do constitute copyright infringement. At least one Circuit
Court of Appeals has found that removal and replacement of a copyright notice can constitute
evidence of copyright infringement. Superior Form Builders, Inc. v. Dan Chase Taxidermy Supply
Co., Inc., 74 F.3d 488, 497 (4th Cir. 1996) (“[T]he most telling evidence of willful infringement in this
case is [individual defendant's] underhanded purchase of [copyrighted animal mannequins] using
pseudonyms, his removal of [plaintiff's] copyright notice from those forms, and his attachment of
his own copyright notice”). In this case, PSI alleges that Burroughs's participation in removing and
replacing PSI’s copyright notices aided and abetted DIB in infringing PSI’s copyright. The court
turns, then, to consider whether these acts of participation are sufficient to satisfy the notice

pleading requirements of Rule 8(a).
B. Burroughs’s Alleged Contribution to Copyright Infringement

Burroughs contends that PSI has not alleged sufficient facts tegarding Burroughs’s
contribution to allegedly infringing acts to support its claim that Burroughs aided and abetted the
alleged infringement. (Am. Count X Mem., at 5.) Specifically, Burroughs urges that PSI does not
allege that he knew DIB intended to infringe PSI’s copyright, that he induced, caused, or materially
contributed to the making, using, selling, or distributing of PSI software, or that he participated in
making, using, selling, or distributing copyrighted works. (/d. at 9-10; Thomas Burroughs'[s] Reply

Brief in Support of His Motion to Dismiss Count X (Amended) of Counter-Plaintiff{‘s] Third Amended

24


Minute Order For (06/97)

United States District Court, Northern District of linois

Name of Assigned Jud; Sitting Judge if Och
or Magistrate Judge Rebecca R. Pallmeyer tan Assigned Judge
CASE NUMBER 01 C 7674 DATE 7/23/2004
CASE Do It Best Corporation vs. Passport Software, Inc.
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: Of the motion being presented.]

DOCKET ENTRY:

qd) o Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

GB) im) Answer brief to motion due__. Reply to answer brief due

(4) Oo Ruling/Hearing on ss setfor at

(S) o Status hearing[held/continued to] [set for/re-set forlon___—_set for at

(6) Q Pretrial conference[held/continued to] [set for/re-set for]on__—_setfor___—sat_
(7) Oo Trial[set for/re-set for]on at

(8) 0 [Bench/Jury trial] [Hearing] held/continuedto__—__aat

(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) OLocal Rule 41.1 CFRCP4I(a\(1) 0 FRCP41(a)(2).

co) [Other docket entry] | Enter Memorandum Opinion And Order. The court grants in part and denies in part the
motion of Do It Best and Thomas Burroughs to dismiss Counts IX, X, XI, and XII (Doc. No. 121-1). Specifically, the court
dismisses PSI’s Amended Count IX without prejudice to refiling, but denies the motion to dismiss with respectto Amended
Counts X, XI, and XII. The court denies Thomas Burrough’s motion to dismiss amended Count X (Doc. No. 152-1), and
grants Do It Best’s motion to dismiss amended Count IX (Doe. No. 153-1) without prejudice, Defendants are directed to
file Answers to Amended Count X, XI, and XII within 21 days.

(11) a (For further detail see order attached to the original minute order.]

Document
Number

No notices required, advised in open court.
5

No notices required.
° ees requ umber of notices:

Y | Notices mailed by judge’s staff,

Notified counsel by telephone.

Docketing to mail notices.

sobs

7123/2004

Mail AO 450 form.

(A4

Copy to judge/magistrate judge.

dare mailed sotice

courtroom
ETV deputy’s, eTv
initials

Dateltiine'received.in ai
central Clerk’s Office mailing deputy initials



plaintiff. Cozzi/ron & Metal, inc. v. U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001). The
court must accept a pleading’s factual allegations because “a motion to dismiss tests the legal
sufficiency of a pleading.” Szabo v. Bridgeport Machs., Inc., 249 F.3d 672, 675 (7th Cir 2001).
Dismissal under Rule 12(b)(6) is appropriate only if “it appears beyond doubt that the [nonmoving
party] can prove no set of facts in support of his claim which would entitle him to relief.” Lee v. City
of Chicago, 330 F.3d 456, 459 (7th Cir. 2003) (quoting Conley v. Gibson, 355 U.S. 41, 45-46
(1957)).
U. Fraud (Amended Count IX)

DIB contends that PSI’s fraud counterclaim should be dismissed on three grounds. First,
DIB urges that PSI fails to plead its fraud counterclaim with the level of particularity required by
Feb. R. Civ. P. 9(b). (Motion of Do it Best Corp. to Dismiss Amended Count IX of Passport
Software, Inc.'s Third Amended Counterclaims (hereinafter, “Am. Count IX Motion”) 4 3.) Second,
according to DIB, the counterclaim “fails to state more than a breach of contract claim.” (Id.)
Finally, DIB contends that the fraud counterclaim is preempted by the ITSA. (Motion of Do it Best
Corp. and Thomas Burroughs to Dismiss Counts IX, X, X! and XiIl of Passport Software, Inc.’s

Third Amended Counterclaims (hereinafter, “Counts IX-XIl Motion”) {| 3.)” DIB urges this court to

22 DIB also contends the fraud counterclaim is preempted by § 301 (a) of the Copyright

Act. The court notes, however, that at least one Court of Appeals, as well as several district courts,
have held that § 301 of the Copyright Act does not preempt common law fraud claims. See
Valente-Kritzer Video v. Pinckney, 881 F.2d 772, 776 (9th Cir 1989); Cooper v. Sony Music Entm't
Inc., No. Civ.A. 01-0941, 2002 WL 391693, at “5 (S.D. Tex. Feb. 22, 2002); Tracy v. Skate Key,
Inc., 697 F. Supp. 748, 751 (S.D.N.Y. 1988); Brignoli v. Balch Hardy & Scheinman, inc., 645 F.
Supp. 1201, 1205 (S.D.N.Y. 1986); see also H.R. REP. No. 94-1476 (1976), reprinted in 1976
U.S.C.C.A.N. 5659, 5748 (“[T]he general laws of defamation and fraud .. . remain unaffected as
long as the causes of action contain elements . . . that are different in kind from copyright
infringement’); 1 MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT § 1.01[B][1][3], p.
1-27 (2004) (“[T]he element of misrepresentation or deception . . . is no part of a cause of action
for copyright infringement. Thus, there is no preemption of the state law of fraud . . .”). As the
court finds PSI's fraud counterclaim fails to satisfy the requirements of Rule 9(b), does not state
more than a breach of contract claim, and is preempted by the ITSA, the court need not determine
whether that counterclaim is also preempted by the Copyright Act.

11


customers which PSI was serving pursuant to the MVADA, the loss of business opportunities and
business expectancies.” (/d. Count XII 47.) On an unspecified date during the discovery process
in this action, PSI became aware that DIB had breached the License Agreement by sublicensing
several modules containing PSlI-created Enhancements and Original Works to its members,
presumably with the “splash screen” removed and without compensating PSI. (/d. Count | 7] 35.)

PSI's common law fraud counterclaim essentially alleges that DIB fraudulently represented
to PSI that it had created the purchase order module independently of any Licensed Software when
it had in fact incorporated source code from the Programs. (Am. Count IX {IJ 21-30.) The common
law tortious interference counterclaim asserts that DIB induced RealWorld to wrongfully terminate
its MVADA with PS!. (TAC Count XII | 43, 47.) The false designation of origin counterclaim
alleges that DIB violated § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by removing PS!'s
copyright notices from portions of the Programs and replacing them with its own such notices. (/d.
Count XI {If 37, 48.) Finally, PS!'s contributory copyright infringement counterclaim contends that
Burroughs’s personal actions assisted DIB in making, using, selling, and distributing copies of the
Programs on which PSI’s copyright notices had been repiaced with DIB’s notices. (Am. Count X
{1 22, 24.) As noted above, Defendant DIB moves to dismiss PSI's fraud, false designation of
origin, and tortious interference counterclaims; Defendant Burroughs moves to dismiss the
contributory copyright infringement counterclaim.

DISCUSSION

L Legai Standard

On a motion to dismiss pursuant to FeD. R. Civ. P. 12(b)(6), the court accepts all well-

pleaded allegations in a counterclaim as true and draws all reasonable inferences in favor of the

?*(__ continued)
the MVADA, or how such termination violated the MVADA, if at all

10



539 U.S. 23, 27 n.1 (2003) (citation omitted), Such claims often merely involve removing the
owner's mark from a product, adding the infringer’s own mark, and selling the product without
altering it in any other way. Montgomery, 168 F.3d at 1299 n.27. In Dastar, plaintiff Twentieth
Century Fox Film Corporation (“Fox”), the owner of a copyright on “Crusade in Europe,” a television
series about World War Il, allowed the copyright to expire, leaving the series in the public domain.
539 U.S. at 25-26. Subsequently, plaintiffs SFM Entertainment (“SFM”) and New Line Home Video,
Inc. (“New Line”), in turn, acquired from Fox the exclusive rights to manufacture and distribute
videos of the series. /d. at 26. When defendant Dastar Corp. released a video set based on the
series, without mentioning the Crusade television series, plaintiffs Fox, SFM, and New Line sued
inter alia under § 43(a), claiming false designation of origin. /d. at 26-27. The Court explained that
the phrase “origin of goods” in § 43(a) “refers to the producer of the tangible goods that are offered
for sale, and not to the author of any idea, concept, or communication embodied in those goods.”
Id. at 37. To hold otherwise, the Court explained, “would be akin to finding that § 43(a) created a
species of perpetual patent and copyright, which Congress may not do.” /d. Had defendant bought
some of plaintiffs’ videotapes and “merely repackaged them as its own,” the Court would have
sustained plaintiffs’ false designation of origin claim. /d. at 31. As defendant had accurately
identified itself as the manufacturer of the videos, however, the Court found that no false

designation of origin had occurred. /d.

DIB urges that PSI's copyright infringement and false designation of origin counterclaims
are predicated on the same wrongful act, i.e., replacement of PSI’s copyright notices with DIB’s
notices. (Counts IX-XIl Mem., at 12-13.) In light of Dastar, however, the fact that Copyright and
Lanham Act claims are predicated on the same wrongful act is not fatal to PSI’s Lanham Act claim.
In this case, PSI alleges that DIB employees removed PSI’s copyright notices from the Programs’

spiash screens without PSI’s knowledge or consent and replaced them with its own copyright

31


notices from portions of the Programs and replacing them with its own such notices. (TAC Count
XI {1 37, 48.) To prevail, PSI must prove the following three elements: “(1) that [DIB] used a false
designation of origin . . . in connection with goods or services; (2) that such goods or services
entered interstate commerce; and (3) that [PSI]. . . believes [it] is likely to be damaged as a result
of the misrepresentation.” Kennedy v. Nat'l Juvenile Detention Ass'n, 187 F.3d 690, 695-96 (7th
Cir. 1999) (citation omitted). Put more simply, PSI may prevail if it establishes “(1) that it has a
protectible trademark, and (2) a likelihood of confusion as to the origin of [DIB’s] product.” Ty, Inc.

v. Jones Group, Inc., 237 F.3d 891, 897 (7th Cir. 2001) (quotation marks and citation omitted)

The Copyright Act does not preempt the Lanham Act, or vice versa, and therefore a party
may recover under both statutes. See, e.g., Alameda Films SA de CV v. Authors Rights
Restoration Corp., 331 F.3d 472, 482-83 (5th Cir. 2003); Nintendo of Am., Inc. v. Dragon Pac. Int'l,
40 F.3d 1007 (9th Cir. 1994). As Professor Nimmer explains, the Copyright Act “does not in any
manner repeal or otherwise affect other federal statutes that may in some degree overlap with the
Copyright Act .... Nonetheless, courts have limited application of the Lanham Act so as not to
encroach on copyright interests.” 1 NIMMER § 1.01[D], p. 1-66.6 (2004). The Second Circuit has
found that, “as a matter of law, a false copyright notice alone cannot constitute a false designation
of origin within the meaning of 43(a) of the Lanham Act.” Lipton v. Nature Co., 71 F.3d 464, 473
(2d Cir. 1995). Several district courts, however, have disagreed with the Lipton court's conclusion
that the act of placing a copyright notice on an infringing product cannot be a false designation of
origin under section 43(a). Montgomery v. Noga, 168 F.3d 1282, 1298 (11th Cir. 1999) (collecting

cases).

Aithough neither party so characterizes it, the court observes that PSI's false designation
of origin counterclaim amounts to a “reverse passing off” claim, in which a producer misrepresents

someone else’s goods or services as its own. Dastar Corp. v. Twentieth Century Fox Film Corp.,

30


in or about September 15, 2000, RealWorld agreed that “for $200,000.00 PSI could
purchase a license for unlimited use of . . . the Accounting Suite for sale to DIB.” (/d. Count VI
11 20, 23.) On an unspecified date, PSI informed DIB of this agreement and offered to sell to DIB
for $1.8 million an unlimited license for a derivative work of customizations and enhancements to
the Accounting Suite that PSI had developed (the “Derivative Work"). (/d. Count VI If] 24-27.)'5
On an unspecified date after PS! made this offer, RealWorld, through one of its distributors,
approached DIB directly and offered to sell to DIB an unlimited ticense to the Accounting Suite for
significantly less than PS! had offered. (/d. Count Vi J 30.) On approximately November 30, 2000,
DIB and RealWorld entered into a Source Code Agreement in which RealWorld agreed (1) to
deliver to DIB a copy of the Accounting Suite and (2) “to cooperate in any litigation which would be
brought by PSI related to the unlimited license for the Accounting Suite and to indemnify it from
PSI's claims.” (/d. Count VI Jf] 35, 38-39, Count XII fff] 40-41.) PSI alleges that DIB entered into
this agreement, “in part, in a wrongful attempt to legitimize DIB’s use of PSI’s copyrighted code
without PSI’s consent.” (/d. Count XH {| 41.) PSI and RealWorld maintained good business
relations until DIB and RealWorld entered into the Source Code Agreement, which PSI
characterizes as “a sham transaction.” (/d. Count XI! | 40.)'® DIB did not in fact install or use the
copy of the Accounting Suite that RealWorld had provided; instead, DIB continued to use the
Licensed Software it had obtained from PSI. (/d. Count VI 4/40.) When PS! questioned DIB about
its continued use of the Licensed Software, DIB claimed that its Source Code Agreement with

RealWorld gave it the right to continue to use PSI’s Derivative Work, a claim which PSI contends

6 PS! does not indicate how this so-called Derivative Work differs, if at all, from the

Licensed Software.
8 PSI does not indicate whether its relations with RealWorld deteriorated subsequent
to execution of the Source Code Agreement.


of Am. v. Universal City Studios, Inc., 464 U.S. 417, 418 (1984). A party may be held jointly and
severally liable for infringement if he has knowledge of the infringing activity and directly
participates in the infringing activity or induces, causes, or materially contributes to the infringing
conduct of another. Gershwin Publ’g Corp. v. Columbia Artists Mgmt., Inc., 443 F.2d 1159, 1162
(2d Cir. 1971); Microsoft Corp. v. Logical Choice Computers, Inc., No. 99 C 1300, 2001 WL 58950,
at*10(N.D. Ill, Jan. 22, 2001); Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077, 1090 (D. Md.
1995). Our Court of Appeals has explained that a copyright holder may sue a contributor to
copyright infringement in effect as an aider and abettor. /n re Aimster Copyright Litig., 334 F.3d
643, 645-46 (7th Cir. 2003). “[O}ne thinks of a contributory infringer as someone who benefits
directly from the infringement that he encourages.” /d. at 654. The court in Dangler v. Imperial
Mach. Co., 11 F.2d 945, 947 (7th Cir. 1926), held that “in the absence of some special showing,
the managing officers of a corporation are not liable for the infringements of such corporation,
though committed under their general direction.” The Dangier court explained that an officer is held
jointly liable with the company when he “acts willfully and knowingly-that is, when he personally
participates in the manufacture or sale of the infringing article (acts other than as an officer), or
when he uses the corporation as an instrument to carry out his own willful and deliberate
infringements, or when he knowingly uses an irresponsible corporation with the purpose of avoiding
personal liability.” /d. One district court has explained that “despite its vintage, Dangler remains
the law of this Circuit.” Syscon, inc. v. Vehicle Valuation Servs., Inc., 274 F. Supp. 2d 975 (N.D.
\Il. 2003) (citing Kohler Co. v. Kohler Int'l, Lid., 196 F. Supp. 2d 690, 694 (N.D. Ill. 2002); The Drink

Group, Inc. v. Gulfstream Communications, Inc., 7 F. Supp. 2d 1009, 1010 (N.D. Ill. 1998)).

In order to establish contributory infringement, a party must establish a predicate act of
direct infringement. See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1013 n.2 (9th Cir.

2001) (“Secondary liability for copyright infringement does not exist in the absence of direct

21


participation in infringing activities, PSI relies chiefly on Syscon, in which defendants engaged
plaintiff to develop a customized software program. 274 F. Supp. 2d 975. The relationship ended
before plaintiff completed the software, and defendants engaged a third party to complete the
program using the source code that plaintiff had already developed. /d. Plaintiff sought to hold Neil
Blitstein, president of defendant corporation, personally liable for the alleged acts of copyright
infringement on the source code. /d. In moving to dismiss the claim against him, Blitstein argued
that plaintiff had not alleged that he acted in an individual capacity, as opposed to his capacity as
the corporation's president. /d. at 975-76. The court declined to dismiss the claim, however, noting
that the complaint included numerous specific allegations that Blitstein had personally directed and

participated in allegedly infringing activity, and had personally authorized that activity. /d. at 977.7

PSI also points to Peaceable Planet, inc. v. TY, Inc., 185 F. Supp. 2d 893, 894-95, 896-97
(N.D. Ill. 2002), in which plaintiff alleged that H. Ty Warner, the founder, president, CEO, and sole
shareholder of defendant corporation, was liable for infringement. The court noted that the
complaint alleged the Warner was responsible for overseeing the development, marketing, and
sales of the infringing items; personally participated in the design of the infringing items; approved
and authorized the corporation’s actions; and personally promoted the sales of the infringing items.
id. at 896-897. These allegations were adequate, in the court's view, to survive a 12(b)(6) motion,

as they supported the inference that Warner personally participated in the manufacture or sale of

28 The allegations concerning Blitstein’s conduct were considerably more detailed than

those before this court. Specifically, the complaint alleged that Blitstein had provided third parties
with copies of the software; was in a position to control the Copyrighted Software; had authorized
the copying, modification and use of the Copyrighted Software; had “induced and/or materially
contributed to the infringing conduct of the other defendants”; had personally directed and
authorized the unlawful conduct; had personally profited from the acts of copyright infringement;
had used, distributed, sold, offered for sale, displayed, advertised, and promoted, without plaintiff's
consent, the Copyrighted Software; had “personally directed and participated in the copying of the
source code and authorized its dissemination and use for making additional copies and/or
derivative works”; and had acted willfully and with knowledge of plaintiff's copyrights. Syscon, 274
F. Supp. 2d at 976-77.

27


Enhancements and Original Works. (/d. {J 12.)

On an unspecified date, DIB® contacted RealWorld to inquire about purchasing the
Accounting Suite for use in DIB’s member stores. (/d. 1 15.) RealWorld referred DIB to PSI, as
RealWorld knew PSI had developed Enhancements to the Accounting Suite that satisfied one of
DIB's critical system requirements: that multiple terminals have simultaneous access to a single
computer system. (/d. I] 14-17.) On January 19, 1989, DIB and PSI executed a Dealer License
Agreement (the “License Agreement”) for the Accounting Suite and certain Original Works and
Enhancements created by PSI (the “Licensed Software”). (/d. {IJ 18, 20-21.) PSI included
copyright notices in all such Original Works and Enhancements. (id. 1111, 19.) The License
Agreement permitted DIB to grant sublicenses to its member retailers within the continental United
States, subject to certain conditions not spelled out in PSI’s allegations. (/d. 1/23.) The agreement
required DIB to pay a royalty fee to PSI for use of the Licensed Software (whether owned by PSI
or RealWorld) based on modules’ distributed to its members. (!d. {| 22.) Under the agreement,
PS! and RealWorld retained all copyright, trade secret, patent, and other intellectual property rights
in the Licensed Software. (/d. J 24.) Beginning in 1993, PSI “authored computer programs and
computer program Enhancements to RealWorld computer programs [(the “Programs”)] consisting
of original material and registered the [Programs] with the U.S. Copyright Office as unpublished

textual works with an effective registration date of May 29, 2002.” (TAC Count XI  38.)° On or

$ Until March 16, 1998, Do it Best was known as Hardware Wholesalers, Inc, See

http:/Avww.doitbestcorp.com/history/ For simplicity’s sake, the court refers to Plaintiff as “Do it
Best” throughout this opinion.
4 In the context of computing, the Oxford English Dictionary defines a module as
“[a]ny of a number of distinct units from which a computer program may be built up, or into which
a complex process or activity is analy[zJed (usually for computer simulation), each of which is
complete in itself but bears a definite relationship to the other units.” OXFORD ENGLISH DICTIONARY
(2d ed. 1989).
8 PSI does not explain why it registered the Programs effective May 29, 2002, the
(continued...)


who was creating DIB’s purchase order module. (/d. | 23.) PSI claims in its response brief that
the fraud counterclaim “alleged that at the time the representations were made, DIB knew or
believed the statement was false.” (Am. Count IX Opp. Mem., at 3-4 (citing Am. Count IX I] 24-
28).) PSI! also urges that its fraud counterclaim alleges that “DIB intended to induce PSI to act” and
that “PSI alleged that it did act in reliance [on] DIB’s representation that it was creating its own
purchase order module from scratch . . . [t}hat is, PSI did not invoice DIB for the use of source code
[for] which it was entitled to license fees.” (Am. Count IX Opp. Mem., at 4 (citing Am. Count IX ff
29-30).)

\n its reply brief, DIB insists that PSI’s allegations have “a gaping hole,” in that paragraphs
26, 28, 29, and 30 do not indicate on what date the alleged statements by Zoller were made.
(Reply in Support of the Motion of Do it Best Corp. to Dismiss Amended Count 1X of Passport
Software, Inc.’s Third Amended Counterclaims (hereinafter, “Am. Count IX Reply Mem.”), at 7-8.)
As discussed above, it is not evident to this court which of Zoller’s alleged statements paragraphs
26, 29, and 30 refer to.% Paragraph 26 involves an alleged representation by Zoller “that the
purchase order module that [DIB] had created was its own creation’; paragraph 29 to a
representation “that DIB’s purchase order module was an original work of DIB”, and paragraph 30
to "statements that [DIB] had created its own purchase order module.” It is unclear whether
these claims refer to Zoller’s alleged 1990 statements, his alleged 1996 statement, or other
unidentified remarks. The court finds therefore that DIB has not sufficiently pleaded “the who,

what, and how” of its fraud counterclaim.*

ia As noted, it is clear that the allegation in paragraph 28, involving “the representation

to Miller that DIB was creating its own purchase order module,” refers to the allegation in paragraph
23 “that Jennings was creating DIB’s purchase order module.”

25 As the court finds that the fraud counterclaim does not describe the alleged
misstatements with the requisite particularity, the court need not consider DIB’s remaining
arguments regarding Rule 9(b): (1) that the six-year gap between Zoller's first two allegedly false

(continued...)

14



PSI to believe that the purchase order module which PSI had delivered to DIB was not satisfactory

for its business purposes.” (Am. Count IX Opp. Mem., at 5.) PSI urges that
DIB’s conduct was a part of an intentional scheme to conceal DIB’s use of PSI’s and
Real[]World’s source code from PSI, to create a work utilizing PSI's and
Real[]World’s source code without paying the appropriate fees or obtaining the
appropriate licensing, to engage in unauthorized conversion of PSI’s and
Real[]World’s source code to create a derivative work, and to cheat PSI out of its
rightful royalties and fees.

(id. at 6.) In the court’s view, PSI's use of the phrase “intentional scheme’ reveals that its fraud

counterclaim amounts to a claim for promissory fraud. (Am. Count IX Reply Mem., at 7.) Our

Court of Appeals has explained that, in Illinois, “[p]romissory fraud’ is a false representation of
intent concerning future conduct, such as a promise to perform a contract when there is no actual
intent to do so.” Houben v. Telular Corp,, 231 F.3d 1066, 1074 (7th Cir. 2000) (citation omitted)
“AS a general rule, promissory fraud is not actionable in Illinois unless the promise is part of a
‘scheme’ to defraud.” /d. (emphasis added). In the court's view, PSI’s fraud counterclaim does not
contain any allegations to support its assertion that “DIB’s conduct was a part of an intentional
scheme” to defraud PSI. Thus, as a claim for promissory fraud, PSI's claim fails.

Even if PSI’s claim is not properly characterized as one for promissory fraud, the court finds
PSI has not adequately alleged that it relied on Zoller's misrepresentations and was injured as a
result of that reliance, as opposed to being injured by DIB's failure to pay royalties. As noted, PSI
alleges that it “relied upon the statements by DIB, through its agent Zoller, that it had created its
own purchase order module and did not invoice DIB or its members for the use of PSI or
Real{]World source code in the purchase order module.” (Am. Count IX 30.) The court agrees
with DIB, (Am. Count IX Reply Mem., at 5), that the fact that PSI’s alleged reliance consisted solely
of its failure to invoice DIB or its members for use of PSI and RealWorld source code demonstrates

that PSI's fraud counterclaim alleges no more than that DIB intentionally breached the License

Agreement. Indeed, as noted, PSI’s fraud counterclaim seeks damages relating only to DIB’s

16


also named Thomas Burroughs (“Burroughs”), DIB’s former corporate counsel, as an additional
counter-defendant, charging Mr. Burroughs with contributory copyright infringement under the
Copyright Act. PSI seeks permanent injunctive relief as well as damages in excess of $60 million
against DIB and $1.8 million against Mr. Burroughs. DIB moves to dismiss PSI’s fraud, false
designation of origin, and tortious interference with contract counterclaims; Burroughs moves to
dismiss PSI’s contributory copyright infringement claim. For the reasons set forth below, DIB’s
motions are granted in part and denied in part, and Burroughs’s motion is denied.
FACTUAL BACKGROUND'

According to the Third Amended Counterclaims (“TAC”), on or about March 22, 1984,
ReaiWorld and PSI entered into a Master Distributor Agreement (‘MDA’) granting PSI rights to
reproduce, distribute, and enhance certain point-of-sale accounting software owned by RealWorld?
(the “Accounting Suite”). (TAC {i 6-8.) This agreement was supplemented by a Master Value
Added Distributor Agreement (“MVADA’), executed on July 1, 1988. (/d. 9.) On unspecified
dates, PSI “developed many enhancements, modifications, and additions to the Accounting Suite”
(the “Enhancements’). (/d. 10.) In addition, “PSI created some original software which it also
delivered as Enhancements to the enhanced Accounting Suite . . . (the ‘Original Works’) which

were integrated into the enhanced Real[JWorld software.” (/d. § 11.) PSI owns these

' The facts presented in this section were compiled from Passport’s Third Amended

Counterclaims and Additional Claims, filed on October 30, 2003, as well as its amended fraud
counterclaim against DIB and its amended contributory copyright infringement counterclaim against
Thomas Burroughs, both of which were filed on February 9, 2004. For purposes of the latter two
amended counterclaims, the court considers only the facts set forth in the February 2004 amended
counts. See Kelley v. Crosfield Catalysts, 135 F.3d 1202, 1204-05 (7th Cir. 1998) (“It is well-
established that an amended pleading supersedes the original pleading; facts not incorporated into
the amended pleading are considered functus officio’) (citations omitted).

2 The court notes that in 1999 RealWorld was acquired by Great Plains Software, Inc.
(“Great Plains”), which in turn was acquired by Microsoft Corporation in 2000. See, e.g.,
http://www.dchubbell.com/products. htm; http:/Awww.microsoft.com/presspass/features/2000/Dec00/
12-21gp.asp. For simplicity’s sake, the court refers to RealWorld and its successors as
“RealWorld.”


Counterclaims, at 7.) To support these contentions, Burroughs cites several district court

decisions. (Am. Count X Mem., at 5-6.)

In Cable News Network, L.P. v. GoSMS.com, Inc., No. 00 Civ. 4812(LMM), 2000 WL
1678039, at *6 (S.D.N.Y. Nov. 6, 2000), plaintiffs alleged that defendant's manager and director,
by virtue of their positions and shareholdings, controlled the affairs of defendant and were
personally involved in the alleged infringing conduct. Absent allegations of acts of infringement,
supervision, or control over the direct infringers, or contribution to the infringement, the court
concluded that plaintiffs’ allegations were “insufficient to plead either direct copyright or trademark
infringement or either contributory infringement or vicarious liability.” /d. The court explained that
copyright infringement claims require “allegations of acts of infringement, supervision or control
over the direct infringers, or contribution to the infringement.” /d. (citing Carell v. The Shubert Org.,
Inc., 104 F. Supp. 2d 236, 271 (S.D.N.Y. 2000)). Although PSI does not address this case, the
court finds it distinguishable. As noted, PSI has alleged that Burroughs knew, through his
membership on a DIB committee, that DIB needed to purchase or license PS!’s rights to avoid
infringing PSI's copyright, and that Burroughs acknowledged to Miller that, without PSI’s
permission, DIB had made, sold, and distributed copies of the purchase order module from which
copyright notices had been removed. Despite this knowledge, Burroughs allegedly directed and
participated in removing PSI copyright notices and replacing them with DIB notices. (Am. Count
X FJ 12-13, 15-16, 19, 21-22.)

In DEV Industries, Inc. v. Rockwell Graphic Systems, Inc., No. 91 C 7197, 1992 WL
100908, at “1, *3 (N.D. Ill. May 4, 1992), plaintiff alleged that individual officers of defendant
corporation had been engaged in a “complex and integrated scheme to eliminate [plaintiff] as a

competitor and to drive it out of business,” that they were “the moving, conscious, and dominant

force” behind corporate defendant's unfair trade practices, and that they knew about and/or

25


UNITED STATES DISTRICT COURT n
NORTHERN DISTRICT OF ILLINOIS ae
EASTERN DIVISION a

JUL 3

& 2004

DO IT BEST CORPORATION,
Plaintiff,

v. No. 01 C 7674

PASSPORT SOFTWARE, INC. Judge Rebecca R. Pallmeyer

Defendant,

Counter-Plaintiff,
v.
DO IT BEST CORPORATION

fikia HARDWARE WHOLESALERS, INC.,

)

)

)

)

)

)

)

)

}

PASSPORT SOFTWARE, INC. )
)

)

)

)

)

and THOMAS BURROUGHS, )
)

)

Counter-Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiff Do it Best Corp. (“DIB”) is a member-owned cooperative that distributes hardware,
lumber and building materials to approximately 4,500 member retailers worldwide. In 1989, DIB
entered into a software licensing agreement with Defendant Passport Software, Inc. ("PSI"), a
licensed reseller of certain point-of-sale software owned by RealWorld Corp. (“RealWorld”). In
September 2000, a dispute arose concerning DIB's alleged misuse of the software. On October
4, 2001, DIB filed this lawsuit seeking a declaration that it did not breach, and is not in default
under, the 1989 agreement. PSI responded with several counterclaims, which it has amended
several times, alleging breach of contract, trade secret misappropriation under the Illinois Trade
Secrets Act, 765 ILCS 1065/1 et seg. (“ITSA’), civil conspiracy, copyright infringement under the
Copyright Act of 1976, 17 U.S.C. § 101 et seq., fraud, false designation of origin under § 43(a) of

the Lanham Act, 15 U.S.C. § 1125(a), and tortious interference with contract against DIB. PSI has

(4


A. Preemption by Copyright Act

The elements of a tortious interference with contract claim are: “(1) the existence of a valid
and enforceable contract between the plaintiff and another; (2) the defendant's awareness of this
contractual relation; (3) the defendant's intentional and unjustified inducement of a breach of the
contract; (4) a subsequent breach by the other, caused by defendant's wrongful conduct; and (5)
damages.” Voelker v. Porsche Cars N. Am., Inc., 353 F.3d 516, 527-28 (7th Cir. 2003) (quoting
HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 131 Ill.2d 145, 154-55, 545 N.E.2d 672, 676
(1989)). DIB maintains that the Copyright Act preempts PSI’s tortious interference counterclaim
on the ground that it is equivalent to its copyright infringement counterclaim, as both counterclaims
are based on the same alleged wrongful use of PSI’s software. (Counts IX-XIIl Mem., at 9.) DIB
notes that PSI alleges in its tortious interference counterclaim that DIB entered into the Source
Code Agreement,® “in part, in a wrongful attempt to legitimize DIB’s use of PSI’s copyrighted code
without PSI’s consent.” (TAC Count XII 41.) The remaining allegations in the counterclaim, DIB
contends, “only involve the alleged repercussions of [DIB’s] purported copyright infringement.”
(Counts !X, XI, Xil Reply Mem., at 7.) PSI responds that its tortious interference counterclaim is
predicated on DIB’s alleged inducement to RealWorld to terminate its Master Distributor Agreement
with PSI. (Counts IX-XI1 Opp. Mem., at 7.) As noted, PSI alleges that, in or about March 2001,
DIB induced RealWorld to terminate the MVADA with PSI, although RealWorld had no legitimate

basis for doing so. (TAC Count XII fff 43-44.)

\n Higher Gear Group, Inc. v. Rockenbach Chevrolet Sales, Inc., 223 F. Supp. 2d 953, 956

(N.D. Ill. 2002), plaintiff, which developed and sold software to automobile dealerships, had

30 As noted, PSI alleges that the Source Code Agreement between RealWorld and DIB
provided that RealWorld would (1) deliver to DIB a copy of the Accounting Suite and (2) “cooperate
in any litigation which would be brought by PSI related to the unlimited license for the Accounting
Suite and to indemnify it from PSI’s claims.” (/d. Count VI If] 35, 38-39, Count XII {ff 40-41.)

33


the infringing article. /d. at 897

Burroughs notes that, unlike the individual defendants in Syscon and Peaceable Planet, he
was not an officer of DIB. As the court reads these cases, status as an officer of a corporation that
has allegedly infringed a copyright, without more, is not a basis for liability as a contributory
infringer; instead, the alleged contributory infringer must have acted “willfully or knowingly” or must
have “personally participated” in the alleged infringement. None of these cases suggests, however,

that one must be an officer in order to be held liable as a contributory infringer.”°

The court notes that PSI did allege that Burroughs acted “willfully and knowingly” by
“personally participating] in the manufacture or sale of the infringing article.” In the court's view,
a requirement that, at the pleading stage, PSI must make a further “special showing” of
participation in copyright infringement would go beyond the requirements of Rule 8(a)(2), The court
notes that Dangler apparently involved a judgment on the merits, rather than a motion to dismiss
See 11 F.2d at 945 (citing Maxim Mfg. Co. v. Imperial Mach. Co,, 286 F. 79 (7th Cir. 1923)).
Indeed, the Danger decision did not involve application of Rules 8 or 12(b)(6), as the Federal Rules
of Civil Procedure were adopted 14 years after Dangler was decided. Thus, Dangler arguably sets
forth an evidentiary standard, rather than a heightened pleading requirement for contributory
copyright infringement claims. Notably, in Mid America Title Co. v. Kirk, 991 F.2d 417, 421 (7th Cir
1993), our Court of Appeals rejected defendant’s contention claim of copyright infringement
requires heightened specificity. Such a requirement, the court explained, would be akin to Rule
Q9(b). Id. Instead, the court explained, “{c]omplaints for copyright infringement simply alleging

present ownership by plaintiff, registration in compliance with the applicable statute, and

29

Burroughs cites three other cases, but the court finds them distinguishable as the
courts did not address the pleading requirements for a contributory copyright infringement claim.
See Assessment Techs. v. WiREdata, Inc., 350 F.3d 640, 644 (7th Cir. 2003); Microsoft Corp. v.
V3 Solutions, Inc., No. 01 C 4693, 2003 WL 22038593 (N.D. Ill. Aug. 28, 2003); Apple Computer,
Inc. v. Microsoft Corp., 821 F. Supp. 616, 625 (N.D. Cal. 1993), aff'd, 35 F.3d 1435 (9th Cir. 1994)

28


dismiss PSI's fraud counterclaim with prejudice on the ground that PSI has had sufficient time to
draft a fraud claim that would survive a 12(b)(6) motion, but has failed to do so. (Am. Count IX
Motion {| 4.) The court considers each argument in turn.

A. Particularity

DIB claims that PSI has not pleaded its fraud claim with the particularity required by Rule
9(b). Rule 9(b) provides that “[i]n all averments of fraud . . ., the circumstances constituting fraud
. .. Shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a
person may be averred generally.” While Rule 9(b) does not require PSI to plead facts that if true
would show that DIB’s alleged misrepresentations were indeed false, it does require PSI to state
“the identity of the person making the misrepresentation, the time, place and content of the
misrepresentation, and the method by which the misrepresentation was communicated to the
[PSI].” Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (internal quotation
marks and citations omitted). In other words, PSI’s pleading must include “the who, what, when,
where, and how: the first paragraph of any newspaper story.” DiLeo v. Ernst & Young, 901 F.2d
624, 627 (7th Cir. 1990). On the other hand, PSI is “not required to go further and allege the facts
necessary to show that the alleged fraud was actionable.” Midwest Commerce Banking Co. v.
Elkhart City Centre, 4 F.3d 521, 524 (7th Cir. 1993). Allegations that fail to identify the agents who
speak for a corporate entity do not satisfy Rule 9(b). Kriendler v. Chem. Waste Mgmt., 877 F.
Supp. 1140, 1155 (N.D. Il. 1995).

Before reaching the “newspaper” questions, the court considers a threshold argument: the
statute of limitations. DIB contends that it is unable from the year-long time periods alleged (1990
and 1996) to determine whether PS!’s counterclaim might be barred by the statute of limitations
for fraud claims. (Memorandum of Law in Support of the Motion of Do it Best Corp. to Dismiss

Count IX of Passport Software, Inc.’s Third Amended Counterclaims (hereinafter, “Am. Count IX

12


B. Comparison with Breach of Contract Claim

In Illinois, to establish common law fraud a plaintiff must prove the following elements: “(1)
a false statement of material fact (2) known or believed to be false by the party making it; (3) intent
to induce the other party to act [or to refrain from acting]; (4) action [or inaction] by the other party
in justifiable reliance on the truth of the statement; and (5) damage to the other party resulting from
such reliance.” Hefferman v. Board of Trustees of Illinois Community College Dist. 508, 310 F.3d
522, 525 (7th Cir. 2002) (quoting Gerill Corp. v. Jack L Hargrove Builders, Inc., 128 Ill.2d 179, 193,
538 N.E.2d 530, 536 (1989)); Minor v. Fashion Enters., Inc., 342 IL App.3d 405, 420, 794 N.E.2d
902, 916 (1st Dist. 2003); Chicago Title & Trust Co. v. First Arlington Nat'l Bank, 118 lll App.3d 401,
406, 454 N.E.2d 723, 728 (1st Dist. 1983) (citing RESTATEMENT (SECOND) OF TORTS § 537 (1977))

DIB contends that PSI’s fraud counterclaim amounts to a cause of action for intentional
breach of contract, which is not cognizable under Illinois law. See Lester v. Resolution Trust Corp.,
994 F.2d 1247, 1253 (7th Cir. 1993) (citing Morrow v. L.A. Goldschmidt Assocs., Inc., 112 IlI.2d 87,
94, 492 N.E.2d 181, 183-84 (1986)). DIB points out that PSI alleges that DIB incorporated PSI and
Real World source code into DIB’s purchase order module but failed to pay required royalties under
the License Agreement. (Am. Count IX {If 14-16, 25, 32.) DIB also notes that all of the damages
claimed in PSI’s fraud counterclaim—“loss of fees, charges, and royalties from DIB; losses from the
unauthorized conversion and use of its property; and attorney fees and costs"~are contained in its
breach of contract claim. (Compare Am. Count IX § 32 with TAC Count | 11 34, 36.)

In its response brief, PSI insists that its counterclaim asserts that “DIB intentionally misled

?5(__continued)
statements and the third representation “begs the question of what both [DIB] and [PSI] were doing
during that six year time frame”, (2) that paragraph 30 does not indicate when PSI relied on Zoller’s
statement that DIB had created its own purchase order module by not invoicing DIB or its
members; and (3) that DIB cannot determine which of Zoller’s statements Paragraph 27 refers to
or whether Zoller knew “at the time of his alleged misrepresentation in Paragraph 27 that [DIB] ‘had
intended to incorporate source code which belonged to PSI."” (Am. Count IX Reply Mem., at 8.)

15