MARILYN HALL PATEL, District Judge.
Plaintiff DocMagic, Inc. ("DocMagic"), a corporation providing online loan document preparation services, brought this action against defendant Ellie Mae, Inc. ("Ellie Mae"), a corporation providing various types of software and services to mortgage professionals. DocMagic's first amended complaint alleges that Ellie Mae unlawfully denied DocMagic access to Ellie Mae's online transaction network, and used DocMagic's proprietary information to create a competing document preparation service. On the basis of these allegations, DocMagic asserts thirteen claims for relief for antitrust violations, trademark infringement, copyright infringement, interference with contractual relationships, breach of contract, trade secret misappropriation and unfair competition. In response, Ellie Mae filed a first amended counterclaim alleging that DocMagic unlawfully accessed Ellie Mae's computer system, and used Ellie Mae's proprietary software to create a new program that permits DocMagic to interact directly with Ellie Mae customers without using Ellie Mae's online transaction network. Ellie Mae asserts nine counterclaims, including copyright infringement, computer fraud, breach of contract, interference with contractual relationships and unfair competition. Before the court are the parties' cross-motions to dismiss. Ellie Mae moves to dismiss DocMagic's complaint in its entirety, and DocMagic moves to dismiss Ellie Mae's first through fifth and seventh through ninth counterclaims. Having considered the parties' arguments and submissions, and for the reasons discussed below, the court enters the following memorandum and order.
A brief description of how loans are prepared electronically is necessary to understand the factual background to this case. The process of loan preparation typically begins when a loan originator, such as a mortgage broker or a lender, enters data about the prospective loan into a computer program known as a loan origination system ("LOS"). Docket No. 38 (First Am. Compl. ("Compl.")) ¶¶ 29-30. The advantage of using an LOS is that once the information has been entered into the LOS, the LOS can provide that data in an electronic format to compatible computer programs, making it unnecessary to engage in the time-consuming and error-prone process of manually re-keying the loan information. Id. ¶ 30. Large lenders, like Bank of America and Wells Fargo, develop their own proprietary LOSs. The rest of the market uses third-party LOSs, which are produced by a number of different companies. Id. ¶¶ 102, 104.
Settlement service providers, or "vendors," can use the electronically-stored data in the LOS to perform the various tasks necessary to actually prepare a loan. The services provided by these vendors include, for example, document preparation services, appraisals, credit reports, fraud reports, flood information and title and escrow services. Id. ¶¶ 20, 95. However, a vendor will only be able to use the data in the LOS if the LOS and the vendor's own programs are compatible.
In order to connect a loan originator to a vendor and ensure that the loan originator's LOS is compatible with the vendor's programs, corporations have set up online transaction networks. These networks permit loan originators to find and hire vendors providing the services they need. Id. ¶ 20. A network can also automatically convert the data in the loan originator's
If a LOS and/or a vendor are not connected to a network, it is more difficult to achieve compatibility between the LOS and the vendor's programs. To achieve compatibility without using a network, the LOS can be equipped with a software development kit ("SDK"), a program which retrieves data that has been entered into the LOS and converts it into a format usable by the vendor. Id. ¶ 67. The vendor can then provide an adapter program that will transfer the data from the SDK into the vendor's programs, thus creating a bridge from the LOS, to the SDK, to the adapter program, to the vendor's services. Id. ¶ 68.
Ellie Mae is a LOS developer, and the creator of a LOS called Encompass. Docket No. 35 (First Am. Counterclaim ("Counterclaim")) ¶ 6. According to DocMagic, Ellie Mae's share of the third-party LOS market, defined below, is greater than 50%, and probably greater than 60%. Compl. ¶ 105. Ellie Mae is also the owner and operator of ePASS, an online transaction network of the type described above. Id. ¶ 20. According to DocMagic, Ellie Mae's share of the network market, also defined below, is as much as 60%. Id. ¶ 99. Ellie Mae also developed a SDK for Encompass, called Encompass SDK, capable of making Encompass compatible with vendors who are not on ePASS. Id. ¶ 67.
DocMagic is a vendor providing loan document preparation services ("DPS"). Id. ¶ 15.
In November 2003, Ellie Mae and DocMagic entered into an agreement, known as the "Bridge Agreement," by which DocMagic became one of the vendors on ePASS. Id. ¶ 38; Docket No. 44 (King Dec.), Exh. H (Electronic Bridge Agreement Between Ellie Mae and Participator ("Bridge Agreement")). In exchange for access to the network, DocMagic agreed to pay a fee of between one and three dollars, depending on volume, per transaction that it made over ePASS. Bridge Agreement, Exh. A § 2(b). DocMagic also agreed to provide Ellie Mae with proprietary information about DocMagic's document preparation program, so that Ellie Mae could connect DocMagic's program to Ellie Mae's network and ensure compatibility between the LOSs accessing ePASS and DocMagic's program. Id. § 1. The Bridge Agreement acknowledged that each party would have access to the other's proprietary customer information, and provided that neither party would disclose such proprietary information or use it for any purpose outside those contemplated by the agreement. Id. § 10.4. The Bridge Agreement stated that it would automatically renew every year, unless terminated upon notice given 120 days prior to the beginning of the next automatic renewal. Id. § 9.2.
In September 2006, Ellie Mae and DocMagic also entered into a Reseller Agreement. Compl. ¶ 41; King Dec., Exh. G (Reseller Agreement). Under the Reseller Agreement, Ellie Mae became a non-exclusive reseller of certain DocMagic document preparation services, which Ellie Mae was authorized to re-brand with Ellie Mae trademarks. Reseller Agreement § 1. The Reseller Agreement also acknowledged that each party would disclose proprietary
On April 27, 2009, Ellie Mae sent DocMagic notice terminating the Reseller Agreement, effective on August 30, 2009. King Dec., Exh. A. On April 28, 2009, DocMagic likewise sent Ellie Mae notice terminating the Reseller Agreement, effective September 1, 2009. Id., Exh. B. On May 21, 2009, Ellie Mae sent DocMagic notice terminating the Bridge Agreement, effective August 30, 2009. Id., Exh. D.
The parties' characterization of why these contracts were terminated, and of the events that followed, diverge dramatically. Under DocMagic's version of the story, Ellie Mae stole DocMagic's document preparation software and used it to create a competing product. DocMagic then alleges that Ellie Mae attempted to drive DocMagic out of the document preparation business by denying DocMagic access to customers using the Encompass LOS, forcing DocMagic off ePASS and forbidding Encompass users from connecting to DocMagic through the Encompass SDK. Ellie Mae contends, on the other hand, that DocMagic refused to negotiate reasonable fees to be a part of ePASS; rather than pay those reasonable fees, Ellie Mae alleges that DocMagic illegally accessed and copied Ellie Mae's software in order to write an adapter program that would connect DocMagic to Encompass users for free.
DocMagic begins by alleging that Ellie Mae purchased a DPS vendor called Online Documents, and then used DocMagic's proprietary information (to which Ellie Mae had access under the Bridge and Reseller Agreements) in combination with Online Documents' technology to effectively copy DocMagic's software and services. Compl. ¶¶ 48-50, 53-58. Specifically, DocMagic claims that Ellie Mae's new DPS, Ellie Mae Docs, intentionally copied the "structures, workflows, and data . . . screens, terminology, and overall look and feel of the DocMagic software," id. ¶ 50, and in particular, the organization and presentation of the DocMagic document audit report, including the use of the terms "WARNING" and "FATAL" to point out errors in the data provided, id. ¶¶ 51-57, 170. According to DocMagic, Ellie Mae next terminated the Reseller Agreement so that Ellie Mae could replace the rebranded DocMagic services, available to loan originators accessing ePASS, with Ellie Mae's own services. Id. ¶¶ 60-62. According to DocMagic, Ellie Mae then terminated the Bridge Agreement so that DocMagic would not be able to access ePASS and compete with Ellie Mae's DPS available on ePASS. Id. DocMagic alleges that Ellie Mae's stated reason for terminating the Bridge Agreement, that the fees set by the Bridge Agreement were too low, was a pretext for Ellie Mae's anti-competitive larger plan of forcing DocMagic out of the document preparation market. Id. ¶¶ 62-65. DocMagic finally alleges that having ejected DocMagic from ePASS, Ellie Mae began preventing Encompass LOS users from accessing DocMagic by means of the Encompass SDK. Id. ¶¶ 70-73. DocMagic had created an adapter program, DocMagic XL, that
Ellie Mae's counterclaim tells a very different story. It begins by denying any wrongdoing in the termination of the Bridge Agreement. Instead, Ellie Mae alleges that after sending the termination notice to DocMagic, it attempted to renegotiate a new bridge agreement with DocMagic, but was rebuffed. Counterclaim ¶ 18. Then, according to Ellie Mae, DocMagic devised an illegal way for it to connect to Encompass customers for free, by bypassing ePASS. Ellie Mae alleges that after the termination of the Bridge Agreement, DocMagic used log-in credentials and license keys belonging to other Ellie Mae clients to obtain unauthorized access to Ellie Mae's computers (specifically, the Encompass servers). Id. ¶¶ 19-20. Next, Ellie Mae alleges that DocMagic engaged in unauthorized use of the Encompass and Encompass SDK software, including using the Encompass SDK as a basis for creating the adapter program DocMagic XL. Id. ¶¶ 19-22. Ellie Mae also claims that DocMagic encouraged Encompass licensees to use the Encompass SDK and DocMagic XL to connect to DocMagic's DPS, in violation of the licensees' licenses, so that DocMagic would not have to join ePASS and pay Ellie Mae a transaction fee. Id. ¶¶ 76-78. Finally, Ellie Mae claims that DocMagic breached the Reseller Agreement by, inter alia, terminating for cause on a mere pretext to avoid the obligatory transition period; failing to notify Ellie Mae of scheduled downtimes; misusing Ellie Mae's proprietary information; and failing to properly update and service the re-branded services. Id. ¶¶ 31-41, 85.
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief can be granted against that defendant. A motion to dismiss under Rule 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1990). A motion to dismiss should be granted if a plaintiff fails to plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544,
"[A]llegations of material fact are taken as true and construed in the light most favorable to the nonmoving party." Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir.1996). The court need not, however, accept as true pleadings that are no more than legal conclusions or the "formulaic recitation of the elements of a cause of action." Iqbal, 129 S.Ct. at 1949-50 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955); Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.2001); Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir.1994). "[A] court may take judicial notice of `matters of public record,'" Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir.2001) (quoting Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir.1986)), and may also consider "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading" without converting a motion to dismiss under Rule 12(b)(6) into a motion for summary judgment, Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir.2002). "The district court will not accept as true pleading allegations that are contradicted by facts that can be judicially noticed or by other allegations or exhibits attached to or incorporated in the pleading." 5C Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1363 (3d ed. 2004).
Ellie Mae moves to dismiss all of the claims that DocMagic asserts in its complaint. The court addresses each claim for relief in turn
DocMagic's first through fourth claims seek relief for alleged anticompetitive activities engaged in by Ellie Mae in violation of section 2 of the Sherman Act, 15 U.S.C. § 2. Section 2 provides that "[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. . . ." 15 U.S.C. § 2. A private right of action for violations of section 2 is provided in 15 U.S.C. section 15. In this case, all four of DocMagic's claims against Ellie Mae are for attempting to monopolize the DPS market. An attempted monopolization claim requires showing three elements: (1) specific intent to monopolize; (2) anticompetitive conduct; and (3) a dangerous probability that the defendant will achieve monopoly power. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993).
DocMagic's first, third and fourth antitrust claims allege discrete types of anticompetitive conduct. The first claim is for monopoly leveraging
The allegations in the first, third and fourth claims render the second claim, for attempted monopolization generally, entirely redundant. In DocMagic's complaint, the second claim merely incorporates the allegations in the first claim for relief. In addition, DocMagic has not identified any theory of attempted monopolization, other than monopoly leveraging, refusal to deal and denial of access to an essential facility, upon which the second claim could rest. The second claim for relief therefore marshals no new factual allegations nor any new legal theories upon which DocMagic could obtain relief. Federal Rule of Civil Procedure 12(f) permits the court to strike from a complaint any "redundant . . . matter." Fed. R. Civ. P 12(f). The second claim for relief meets that standard. Accordingly, as a threshold matter, the second claim for relief, for attempted monopolization, is dismissed without leave to amend.
The arguments for dismissal of the remaining three antitrust claims requires much lengthier discussion. Ellie Mae raises four arguments for dismissal of DocMagic's claims. Firstly, Ellie Mae argues that DocMagic has not pled facts sufficient to establish the existence of an upstream network market or a downstream DPS market. Secondly, Ellie Mae argues that even if such markets exist, DocMagic has not pled facts showing that Ellie Mae has monopoly power in the LOS market or the network market, or a dangerous probability of achieving monopoly power in the DPS market. Thirdly, Ellie Mae argues
Contrary to Ellie Mae's contentions, DocMagic has pled facts sufficient to establish the existence of the alleged markets. DocMagic's antitrust claims all falter, however, because of DocMagic's failure to plead facts showing that Ellie Mae has a dangerous probability of achieving monopoly power in the DPS market. Because each of DocMagic's remaining antitrust claims necessarily depends on Ellie Mae's attempted monopolization of the DPS market, each requires adequate allegations of a dangerous probability of monopoly power in the DPS market. Since DocMagic's complaint falls short in that regard, DocMagic's first, third and fourth claims are dismissed with leave to amend.
In order to state an antitrust claim, a plaintiff must identify a relevant market within which the defendant has market power. Newcal Indus., Inc. v. Ikon Office Solution, 513 F.3d 1038, 1044 (9th Cir.2008), cert. denied, ___ U.S. ___, 129 S.Ct. 2788, 174 L.Ed.2d 290 (2009). The relevant market need not be pled with specificity. Id. at 1045. "An antitrust complaint therefore survives a Rule 12(b)(6) motion unless it is apparent from the face of the complaint that the alleged market suffers a fatal legal defect. . . . [T]he validity of the `relevant market' is typically a factual element rather than a legal element. . . ."
In support of its claims, DocMagic alleges the existence of three relevant product markets: the LOS market, the network market and the DPS market. Compl. ¶¶ 94-110. Ellie Mae raises three arguments, none of which carry the day, for why DocMagic's allegations identifying relevant markets are insufficient.
Firstly, Ellie Mae contends that DocMagic has not sufficiently alleged the geographic scope of any of the three markets. Geographic scope, covering the "area of effective competition," is an important factor in identifying the relevant market. See Tanaka v. Univ. of S. Cal., 252 F.3d 1059, 1063 (9th Cir.2001). DocMagic has alleged that the geographic scope of each of these markets is the United States, and has supported this allegation with further factual allegations. Compl. ¶ 94; see also id. ¶¶ 18, 99, 105. Although DocMagic has also alleged that some DPS vendors do not operate nationwide, id. ¶ 127, there is no contradiction between the existence of a national DPS market and the simultaneous existence of local DPS markets that compete only at the regional level. DocMagic's allegations of geographic scope are therefore sufficient to survive Ellie Mae's motion to dismiss.
Secondly, Ellie Mae argues that DocMagic's factual allegations are not sufficient to plausibly show the existence of a market for networks. A product market consists of "commodities reasonably interchangeable by consumers for the same purposes." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). Ellie Mae asserts that DocMagic has not alleged that reasonably interchangeable products compete within the network market. This argument rests largely on Ellie Mae's factual assertion that only Encompass users can access ePASS, so that ePASS is not "reasonably interchangeable" with other networks. However, that assertion contradicts the allegations in the complaint.
Thirdly, Ellie Mae suggests that DocMagic has failed to allege facts supporting the existence of a DPS market. DocMagic alleges that the DPS market consists of "online document preparation services to brokers and lenders using third-party LOS's in conjunction with residential mortgage transactions." Id. ¶ 108. Under this definition, the alleged DPS market includes document preparation services provided either to users of Ellie Mae's Encompass LOS or to users of any other third-party LOS. DocMagic's factual allegations describe the alleged market, the product which this market provides, and the competitors and customers in the market. Id. ¶¶ 15-18, 47-58, 94, 108-110, 126-31. These factual allegations are sufficient to plausibly support the existence of a market in which reasonably interchangeable DPS vendors compete.
As well as identifying a relevant market, a plaintiff bringing antitrust claims must allege that the defendant has market power within that market. Rick-Mik Enters., Inc. v. Equilon Enters. LLC, 532 F.3d 963, 972 (9th Cir.2008); Newcal, 513 F.3d at 1044. "Market power is the ability to raise price profitability by restricting output"; when a party has sufficient market power to exclude competition or control prices, that party possesses monopoly power. IIB Phillip E. Areeda et al., Antitrust Law ¶ 501 (2007) (hereinafter Areeda). Market power need not be pled with specificity, and whether a defendant actually possesses market power is a factual question. Newcal, 513 F.3d at 1045, 1051. A plaintiff can show market power directly, by establishing that the defendant, by actually reducing its own output, raised market prices; or indirectly, by showing that the defendant has a dominant share of the market, that there are significant barriers to entry into that market, and that existing competitors cannot increase their production in the short run. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir.1995).
DocMagic has provided sufficient factual allegations describing Ellie Mae's position in the LOS and network markets to plausibly conclude that Ellie Mae has market power in both markets. Compl. ¶¶ 99, 105-07, 113-14, 143-44. Ellie Mae argues that DocMagic's allegations are insufficient, because DocMagic has not alleged that Ellie Mae actually controlled prices or excluded competitors in the LOS and network markets. With respect to the LOS market, DocMagic has in fact alleged actual exclusion of competitors. Id. ¶ 114 ("Ellie Mae has imposed restrictions on its LOS customers that essentially lock them into the Encompass environment, thereby excluding legitimate competition from LOS companies. . . ."). In any event, DocMagic is not required to show actual price control or competitor exclusion; it need only plausibly allege facts showing monopoly power over the market, not the exercise of that power. See Rebel Oil, 51 F.3d at 1434 (holding that market power may be demonstrated either by showing exercise of that power, or circumstantially by showing the structure of the market). DocMagic has done so by alleging facts showing that Ellie Mae has a significant market share in the LOS and network markets, that there are high barriers to entry for both markets, and that competitors cannot effectively increase their output to return the market to an efficient price level. See Compl. ¶¶ 98-101, 105-107, 113-115.
According to the facts alleged in the complaint, Ellie Mae had a significant market share in both the LOS and network markets. See, e.g., id. ¶ 105 (alleging Ellie Mae has a greater than 50%, and likely greater than 60%, market share in the LOS market); id. ¶ 99 (alleging Ellie Mae has a 60% market share in the network market). Ellie Mae's arguments to the contrary inappropriately dispute facts alleged in the complaint.
Furthermore, DocMagic has alleged facts showing that there are high barriers to entry in each of these markets, and that competitors could not effectively make up for an increase in Ellie Mae's prices by increasing their own output. With respect to the LOS market, DocMagic has alleged that there are high barriers to switching LOS providers. Id. ¶ 107. This both provides a barrier to entry, since new competitors in the LOS market will be unable to attract business that is "locked in" to old LOS providers, and indicates that Ellie Mae's competitors cannot effectively increase production to compensate for a rise in Ellie Mae's prices, since customers will be unable to take advantage of any increased supply of LOS services provided by Ellie Mae's competitors. Cf. Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451, 476, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992) (noting that high switching costs can force "locked-in" consumers to tolerate supracompetitive prices rather than changing providers).
With respect to the network market, DocMagic has alleged that the "network effect" creates a high barrier to entry into the market. "In markets characterized by network effects, one product or standard tends towards dominance, because `the utility that a user derives from consumption of the good increases with the number of other agents consuming the good.'" United States v. Microsoft Corp., 253 F.3d 34,
DocMagic's factual allegations are not, however, adequate to show a dangerous probability that Ellie Mae will attain monopoly power in the DPS market, as the DPS market is defined by DocMagic, because DocMagic has not provided plausible allegations that there are any barriers to entry into the DPS market. As alleged, the DPS market consists of all online document preparation services provided to users of third-party LOSs. Id. ¶ 108. DocMagic has alleged that Ellie Mae has been able to obtain a market share of 60% in this market. Id. ¶ 110. DocMagic also contends that there are barriers to entry into the DPS market, based on its allegations that Ellie Mae has prevented Encompass users from connecting to DocMagic or any other DPS provider that is not a vendor on ePASS. Id. ¶¶ 70-72, 149-50. However, the contractual and technical limitations that Ellie Mae has placed on Encompass users' choice of DPS vendors have not created a barrier to entry into the DPS market as a whole. Rather, DocMagic's allegations show only that there is a barrier to entry for the submarket consisting of document preparation services provided to Encompass users. See L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1427-28 (9th Cir.1993) (defining barriers to entry); cf. Newcal, 513 F.3d at 1045 (recognizing the difference between a market and an economically distinct submarket); United States v. Syufy Enters., 903 F.2d 659, 666-67 (9th Cir.1990) (describing structural barriers to market entry that prevent any new competitors from joining the market). Unlike in the LOS market, where it is difficult for new LOS vendors to reach any existing customers because they are all "locked in" to their current LOSs, and unlike in the network market, where the network effect makes it difficult to establish a competing new network, there is nothing (at least according to DocMagic's complaint) to prevent new DPS vendors from competitively entering the market. A new DPS vendor wishing to enter the DPS market but excluded from ePASS can sell its product to any customers except those who are also Encompass users. Therefore, while DocMagic's allegations may be sufficient to show a dangerous probability that Ellie Mae will attain (or perhaps already has) monopoly power in the submarket consisting of document preparation services provided to Encompass users, the complaint does not plausibly aver a dangerous probability of monopoly power over the DPS market as a whole.
It is possible that the control which Ellie Mae allegedly exercises over current Encompass users' choice of DPS vendor could constitute a barrier to entry into the market as a whole. See generally Areeda ¶ 421f (explaining how inadequate access to customers in the market may constitute barrier to entry). Likewise, it is possible that there are other barriers to entry into the DPS market beyond those alleged in the complaint, and that these other barriers make the 40% of the DPS market not controlled by Ellie Mae as inefficient as the 60% of the market which is controlled by Ellie Mae. However, DocMagic has not at present alleged facts plausibly supporting either of these two conclusions.
Because DocMagic has failed to allege facts showing a dangerous probability that Ellie Mae will acquire monopoly power in the DPS market, Ellie Mae's motion to dismiss DocMagic's first, third and fourth claims for relief is granted; those claims are dismissed with leave to amend.
DocMagic's fifth claim for relief alleges that Ellie Mae violated section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by designing its document preparation services (Ellie Mae Docs) to create audit reports that infringe on DocMagic's trade dress and trademarks. In order to state a trade dress infringement claim, DocMagic must allege facts showing that: "(1) the trade dress is inherently distinctive or has acquired distinctiveness through secondary meaning; (2) there is a likelihood that the public will be confused by the infringing use; and (3) the trade dress is non-functional." Stephen W. Boney, Inc. v. Boney Servs., Inc., 127 F.3d 821, 828 (9th Cir.1997). DocMagic alleges that its trade dress in the audit report consisted of a "3-column table-like list without internal borders, with field names on the left, a message describing the deficiency in the middle and space for additional details on the right." Compl. ¶ 55. The field names DocMagic allegedly utilized were the word "FATAL," in red, followed by a description of the deficiency in red, and the word "WARNING," in yellow, followed by a description of the (less-vital) deficiency in black. Id. ¶¶ 54, 167. DocMagic further alleges that it possesses trademarks in the words "FATAL" and "WARNING" as they appear in DocMagic's audit reports. Id. ¶ 51. According to DocMagic, Ellie Mae has copied this trade dress and these trademarks in their entirety, except that the word "WARNING" in Ellie Mae's audit report appears in black rather than yellow. Finally, DocMagic avers that by organizing the audit reports in Ellie Mae Docs in a manner identical to DocMagic's trade
Firstly, DocMagic has adequately alleged that its trade dress in the format of its audit reports have "acquired distinctiveness through secondary meaning."
Secondly, DocMagic's complaint contains factual allegations from which the court can infer a likelihood of confusion. Ellie Mae attacks DocMagic's confusion allegations on two separate grounds. To begin with, Ellie Mae suggests that as a factual matter, there is no likelihood of public confusion between Ellie Mae Docs and DocMagic because the products are dissimilar in appearance. To support this contention, Ellie Mae submitted two screenshots of DocMagic computer audit reports. The screenshots, and therefore Ellie Mae's arguments founded upon them, are not admissible to support Ellie Mae's motion to dismiss. "[A] district court ruling on a motion to dismiss may consider a document the authenticity of which is not contested, and upon which the plaintiff's complaint necessarily relies." Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). However, DocMagic contends that its complaint relies on a different version of its audit report than that submitted by Ellie Mae. Since DocMagic's claim does not necessarily rely on the versions of the audit reports submitted by Ellie Mae, they are inadmissible. The court cannot decide at this stage the factual question of whether DocMagic's audit reports actually appeared as they are described in the complaint; therefore, Ellie Mae's argument provides no basis for dismissing this claim.
Next, Ellie Mae contends that even if the court refuses to admit the screenshots submitted by Ellie Mae, DocMagic has not adequately alleged consumer confusion. Such is not the case. DocMagic has alleged that Ellie Mae's audit report is nearly indistinguishable from its own, that Ellie Mae intentionally copies DocMagic's trade dress, and that it is offered to consumers who previously used DocMagic's products and who associate the trade dress in question with DocMagic's products. Compl. ¶¶ 57, 170. These facts are sufficient to raise a plausible inference of consumer confusion, either as to the source of the document preparation services or as to the affiliation of DocMagic with Ellie Mae's services. See Cairns v. Franklin Mint Co., 292 F.3d 1139, 1149-50 (recognizing that consumer confusion may
Finally, DocMagic has also alleged sufficient facts to support a barely plausible inference that its claimed trade dress is nonfunctional. "A product feature is functional and cannot serve as a trademark if the product feature is essential to the use or purpose of the article or if it affects the cost or quality of the article, that is, if exclusive use of the feature would put competitors at a significant, non-reputation-related disadvantage." Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 165, 115 S.Ct. 1300, 131 L.Ed.2d 248 (1995) (internal quotation marks omitted). Although DocMagic may have great difficulty proving that the features it alleges as its trade dress could be denied to other competitors without putting them at a non-reputation-related disadvantage, the question of whether DocMagic's trade dress is functional or nonfunctional is a factual one that cannot be resolved on a motion to dismiss. See Clicks Billiards, Inc. v. Sixshooters Inc., 251 F.3d 1252, 1258 (9th Cir.2001); Axis Imex, Inc. v. Sunset Bay Rattan, Inc., No. C 08-3931 RS, 2009 WL 55178, at *3 (N.D.Cal. Jan. 7, 2009) (Seeborg, Mag. J.). Construing DocMagic's complaint liberally, it has alleged facts showing that competitors would not need the features of its audit report which it identifies as its trade dress in order to compete without disadvantage. Compl. ¶ 56 ("[T]he information to be displayed in the audit report could be selected, arranged, and presented in any number of ways. . . . Indeed, the audit report format had been used by no one else in the field until Ellie Mae decided to replicate DocMagic's software in 2009.").
As another basis for its Lanham Act claim, DocMagic argues that it holds a trademark in the words "WARNING" and "FATAL" as used on its audit reports. As described above, the court is skeptical of DocMagic's ability to adduce evidence proving that it holds a protectable trademark in these words, particularly in showing that these words are inherently distinctive or have acquired secondary meaning, and that they are not functional.
DocMagic's sixth claim for relief alleges that Ellie Mae committed false advertising in violation of section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by sending a letter to its customers stating that Ellie Mae's document preparation service, in contrast to DocMagic's service,
Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir.1997).
Ellie Mae argues that DocMagic has not alleged sufficient facts to plausibly support any of these five elements. A quick examination of the complaint indicates that DocMagic has failed to adequately allege even the first element of the claim. The alleged misrepresentation constitutes non-actionable puffery. Puffery consists of statements that are "extremely unlikely to induce consumer reliance." Newcal, 513 F.3d at 1038. "Ultimately, the difference between a statement of fact and mere puffery rests in the specificity or generality of the claim. . . . Thus, a statement that is quantifiable, that makes a claim as to the `specific or absolute characteristics of a product,' may be an actionable statement of fact while a general, subjective claim about a product is non-actionable puffery." Id. (quoting Cook, Perkiss & Liehe v. N. Cal. Collection Serv., Inc., 911 F.2d 242, 246 (9th Cir. 1990)). The claims that Ellie Mae's program will provide "greater automation, safeguards and control" and will "help you easily stay compliant now" are neither quantifiable, nor claims as to the specific or absolute characteristics of its product. Cf. id. at 1053 (finding that the "general assertion that IKON provides its customers with low costs and with flexibility" is "classic puffery"); Cook, 911 F.2d at 246 (holding that general assertions of superiority, such as claiming comparable services at lower rates, are "not . . . the kind of detailed or specific factual assertions that are necessary to state a false advertising cause of action"). Because the alleged misrepresentations are not actionable as a matter of law and do not come close to stating a claim for false advertising, Ellie Mae's motion to dismiss DocMagic's sixth claim is granted, and the claim is dismissed without leave to amend.
DocMagic's seventh claim is for copyright infringement, based on Ellie Mae's alleged copying of various elements in DocMagic's audit reports to create Ellie Mae's own audit reports. Specifically, DocMagic alleges that the following elements in its audit reports constitute protectable expression and were copied by Ellie Mae: "(1) the selection of deficiencies and field names; (2) the arrangement of deficiencies into two groups with specific field names; and (3) the arrangement and display of field names and deficiencies in a color-coded format." Compl. ¶ 184-185.
Except under certain exceptions not relevant here, 17 U.S.C. section 411(a) requires that "no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim shall have been made in accordance with this title." Pursuant to this
DocMagic's eighth claim is for intentional interference with contractual relations, based on Ellie Mae's alleged actions to disrupt and destroy DocMagic's relationships with its customers. However, DocMagic appears to misunderstand the nature of this tort. The tort of intentional interference with contractual relations under California law is what is known as "inducement of breach of contract" in other jurisdictions. See 5 Witkin, Summary of California Law § 731. It requires the following five elements:
Reeves v. Hanlon, 33 Cal.4th 1140, 1148, 17 Cal.Rptr.3d 289, 95 P.3d 513 (2004). Here, DocMagic does not allege any facts plausibly showing that Ellie Mae's actions caused the breach or disruption of any existing contracts which DocMagic and its customers were in the process of fulfilling at the time Ellie Mae's actions were taken. See Compl. ¶¶ 15-18, 38 (indicating that DocMagic's interactions with customers consisted of discrete transactions, rather than long-term contracts). Because DocMagic's allegations do not show that DocMagic had existing contracts—as opposed to mere economic relations—that were breached or disrupted as the result of Ellie Mae's actions, Ellie Mae's motion to dismiss the eighth claim for relief is granted, and this claim is dismissed with leave to amend.
DocMagic's ninth claim for relief is for intentional interference with prospective economic advantage (IIPEA), based on its allegations that Ellie Mae acted to cut DocMagic off from access to
Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1153, 131 Cal.Rptr.2d 29, 63 P.3d 937 (2003). In addition, the intentional acts alleged as the third element must have been "wrongful by some legal measure other than the fact of interference itself." Id. (quoting Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal.4th 376, 393, 45 Cal.Rptr.2d 436, 902 P.2d 740 (1995)); see also Korea Supply, 29 Cal.4th at 1158-59, 131 Cal.Rptr.2d 29, 63 P.3d 937 ("The tort of intentional interference with prospective economic advantage is not intended to punish individuals or commercial entities for their choice of commercial relationships or their pursuit of commercial objectives, unless their interference amounts to independently actionable conduct.").
DocMagic alleges generally that it had existing economic relationships with third parties—Encompass LOS and ePASS users—that gave it the prospect of future economic benefits—additional agreements to prepare loan documents for loan originators or lenders using a third-party LOS. See Compl. ¶¶ 15-18, 192-204. That said, DocMagic does not identify any particular relationship that was disrupted because of Ellie Mae's actions. At this stage and given the nature of the harm alleged by DocMagic, DocMagic need not specify every single economic relationship with which Ellie Mae interfered. Twombly, 550 U.S. at 570, 127 S.Ct. 1955 ("[W]e do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face."). However, in order to provide Ellie Mae with sufficient information to answer the complaint, DocMagic must, for at least one actual relationship, plead facts sufficient to satisfy all of the elements of an IIPEA claim. Because such allegations are missing from the complaint, Ellie Mae's motion to dismiss DocMagic's ninth claim for relief is granted, and this claim is dismissed with leave to amend.
DocMagic's tenth and eleventh claims are for breach of contract, based on Ellie Mae's alleged breach of the Reseller Agreement and Bridge Agreement respectively. Specifically, DocMagic claims Ellie Mae breached these agreements by misappropriating and misusing proprietary information, including both technology and customer information, that DocMagic provided to Ellie Mae pursuant to these agreements. To assert a claim for relief for breach of contract, a plaintiff must plead: (1) the existence of the contract, (2) the plaintiff's performance or excuse for non-performance, (3) the defendant's breach of the contract, and (4) the resulting damages to the plaintiff. Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas Co., 116 Cal.App.4th 1375, 1391 n. 6, 11 Cal.Rptr.3d 412 (2004). DocMagic has adequately pled each of these elements in its complaint with respect to each contract, and supported them with factual allegations. See Compl. ¶¶ 39-42, 45, 47-49, 58, 74-80, 205-26. Contrary to Ellie Mae's contention, DocMagic has not only pled
DocMagic's twelfth claim for relief, for trade secret misappropriation, is also based on Ellie Mae's alleged misappropriation and misuse of the proprietary information that DocMagic provided to Ellie Mae under the Reseller Agreement and Bridge Agreement. In California, a trade secret misappropriation claim has "two primary elements: (1) the existence of a trade secret, and (2) misappropriation of the trade secret." AccuImage Diagnostics Corp v. Terarecon, Inc., 260 F.Supp.2d 941, 950 (N.D.Cal.2003) (Patel, J.) (citing Cal. Civ. Code § 3426.1(b)). DocMagic's allegations are sufficient to support each of those elements. As discussed above, DocMagic need not plead with specificity what particular proprietary information was misappropriated by Ellie Mae; the description of the proprietary information given in the complaint is sufficient to satisfy Rule 8(a). See Compl. ¶¶ 228-232; Twombly, 550 U.S. at 570, 127 S.Ct. 1955; see also StonCor Grp., Inc. v. Campton, No. C05-1225JLR, 2006 WL 314336, at *5 (W.D.Wash. Feb. 7, 2006) (finding alleged misappropriation of "proprietary and confidential information concerning . . . sales and marketing strategies, pricing and pricing policies, and customer lists and installers" sufficient to state a claim). DocMagic's factual allegations are also sufficient to support a plausible inference of misappropriation. Compl. ¶¶ 47-50, 57-58 (technical information); id. ¶¶ 74-78 (customer information). Likewise, DocMagic alleges facts supporting Ellie Mae's actual misuse of its proprietary trade secret information, in creating Ellie Mae Docs and in soliciting DocMagic's customers. Id.
Ellie Mae's argument that it already had independent access to all of the customers in question, and so that it is implausible to infer that Ellie Mae misappropriated DocMagic's customer information, ignores DocMagic's allegation that the customer information which it had compiled was only obtained and made usable at significant expense. Id. ¶ 231. Given the alleged difficulty of independently obtaining the customer information at issue, it becomes plausible that Ellie Mae would misappropriate DocMagic's compiled customer information rather than preparing its own. The alleged difficulty of obtaining customer information distinguishes this case from Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal.App.4th 853, 863, 27 Cal.Rptr.2d 573 (1994), on which Ellie Mae relies. In that case, only a single customer was at issue, and the evidence presented showed that the customer had independently given the alleged misappropriator all of the alleged trade secret information that it had provided to the plaintiff. In this case, by contrast, DocMagic's customer information allegedly relates to a relatively wide client base, and it is too early a stage in the litigation for any evidence to show whether Ellie Mae compiled
DocMagic's thirteenth claim for relief is brought under California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200 et seq., alleging that all of Ellie Mae's acts described in the complaint constituted unfair competition within the meaning of that statute. Section 17200 prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising. . . ." Cal. Bus. & Prof. Code § 17200. Because section 17200 is written in the disjunctive, "a business act or practice need only meet one of the three criteria— unlawful, unfair, or fraudulent—to be considered unfair competition under the UCL." Daro v. Superior Court, 151 Cal.App.4th 1079, 1093, 61 Cal.Rptr.3d 716 (2007). In its complaint, DocMagic alleges that Ellie Mae's conduct violated both the unlawful and unfair prongs of the UCL.
"Under its `unlawful' prong, the UCL borrows violations of other laws. . . and makes those unlawful practices actionable under the UCL." See Berryman v. Merit Prop. Mgmt., 152 Cal.App.4th 1544, 1554, 62 Cal.Rptr.3d 177 (2007) (internal quotation marks and citation omitted; alteration in original). "Thus, a violation of another law is a predicate for stating a cause of action under the UCL's unlawful prong." Id.; see Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal.App.4th 700, 717-18, 113 Cal.Rptr.2d 399 (2001) (holding the unlawful prong forbids "anything that can be properly called a business practice and that at the same time is forbidden by law"). Here, as is discussed above, DocMagic has plausibly alleged that Ellie Mae committed trademark and trade dress violations, and misappropriated and misused its trade secrets. These actions may serve as the basis for an unfair competition claim under section 17200. See Acad. of Motion Picture Arts & Scis. v. Creative House Promotions, Inc., 944 F.2d 1446, 1457 (9th Cir.1991) (trademark); Imax Corp. v. Cinema Tech., Inc., 152 F.3d 1161, 1169 (9th Cir.1998) (trade secret misappropriation). DocMagic also argues that its unfair competition claim can be based on Ellie Mae's breach of the Reseller Agreement and Bridge Agreement. A breach of contract may only form the basis of a section 17200 claim if that breach itself is "unlawful, unfair, or fraudulent." Puentes v. Wells Fargo Home Mortg., Inc., 160 Cal.App.4th 638, 645, 72 Cal.Rptr.3d 903 (2008). As is discussed above, DocMagic alleges that Ellie Mae breached its contracts by misappropriating and misusing DocMagic's proprietary information, Compl. ¶¶ 211, 222. The breach of contract claims are thus coterminous with the trade secret misappropriation claim in the basis which they provide for DocMagic's unfair competition claim.
DocMagic has not plead facts sufficient to state a claim for a violation of the UCL's unfair prong. The California Supreme Court has defined an "unfair" business act or practice as "conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of
In summary, Ellie Mae's motion to dismiss is GRANTED in part and DENIED in part. DocMagic's first (monopoly leveraging), third (refusal to deal), fourth (denial of access to essential facility), seventh (copyright infringement), eighth (intentional interference with contractual relationship), and ninth (IIPEA) claims for relief are dismissed with leave to amend. DocMagic's second (attempted monopolization) and sixth (false advertising) claims for relief are dismissed with prejudice. DocMagic's thirteenth claim for relief (UCL) is dismissed with leave to amend to the extent it is predicated on a violation of the UCL's unfair prong. In all other respects, Ellie Mae's motion to dismiss is denied.
DocMagic moves to dismiss Ellie Mae's first through fifth and seventh through ninth counterclaims. (DocMagic does not move to dismiss Ellie Mae's sixth counterclaim, which alleges that DocMagic breached the Reseller Agreement.) The court addresses each counterclaim in turn.
Ellie Mae's first counterclaim alleges that DocMagic directly infringed Ellie Mae's copyright on the Encompass LOS and the Encompass SDK software, by copying, using and distributing the Encompass software and SDK without Ellie Mae's consent. Counterclaim ¶ 47; see also id. ¶¶ 19-24. The same counterclaim also alleges that DocMagic contributorily infringed Ellie Mae's copyrights on the same software by knowingly inducing others to engage in similarly unauthorized copying and use. Id. ¶ 48; see also id. ¶¶ 21-26.
"To establish copyright infringement, the holder of the copyright must prove both valid ownership of the copyright and infringement of that copyright by the alleged infringer." Entm't Research Grp., Inc. v. Genesis Creative Grp., Inc., 122 F.3d 1211, 1217 (9th Cir. 1997). Infringement may consist of any violation of the copyright-holder's exclusive rights guaranteed by the Copyright Act, 17 U.S.C. § 101 et seq., including the right to reproduce—that is, copy—and distribute the work. 17 U.S.C. § 106; Kelly v. Arriba Soft Corp., 336 F.3d 811 (9th Cir. 2003). DocMagic does not contest that Ellie Mae possessed a copyright in the Encompass software or the Encompass SDK. Instead, DocMagic contends that Ellie
DocMagic argues firstly that Ellie Mae's allegations of direct infringement are too vague, due to the counterclaim's repeated use of the term "and/or" to refer to alternative acts. While the use of "and/or" in pleadings is not encouraged, especially in the wake of Twombly and Iqbal, Ellie Mae's allegations nevertheless satisfy Federal Rule of Civil Procedure 8(a). Ellie Mae plainly alleges that once DocMagic was lawfully denied access to the ePASS network and Encompass users, DocMagic sought alternative mechanisms for connecting with Encompass users. As part of their conduct, Ellie Mae alleges that DocMagic used Encompass and the Encompass SDK without authorization and copied the Encompass SDK without authorization, actions which constitute copyright infringement. Specifically, the counterclaim alleges that DocMagic "illegally obtained unauthorized access to, and used, the Encompass software, including the SDK," Counterclaim ¶ 19; that DocMagic "reverse engineered, duplicated, modified, and/or otherwise used the SDK . . . without Ellie Mae's authorization, to create software [i.e., DocMagic XL]," id. ¶ 21; and that "DocMagic XL . . . uses, duplicates, incorporates, and/or invokes Ellie Mae's Encompass SDK," id. ¶¶ 22. These allegations contain "enough facts to state a claim to relief that is plausible on its face," Twombly, 550 U.S. at 570, 127 S.Ct. 1955, and give DocMagic sufficient notice to prepare its defense.
Notwithstanding DocMagic's protestations to the contrary, unauthorized use of a copyrighted computer program constitutes copyright infringement. In order to use a software program on a computer, the program must be copied from a storage device, such as a hard disk, into the computer's random access memory ("RAM"). The Ninth Circuit has held that loading the program into the computer's RAM constitutes an act of "copying" for the purposes of copyright law. MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 518 (9th Cir.1993). DocMagic's assertion that its alleged "use" of the copyrighted software cannot serve as the basis of a copyright claim rests erroneously on Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079 (9th Cir.2005). In Altera, the court found that a state law tort claim was not preempted by federal copyright law, because "the unauthorized use of the software's end-product is not within the rights protected by the federal Copyright Act." Id. at 1090 (emphasis added). The unauthorized use of a software's end-product is, however, legally and factually distinct from the unauthorized use of the software itself. As Ellie Mae's counterclaim alleges unauthorized use of copyrighted software, not unauthorized use of a copyrighted software's end-product, its allegations related to use state a claim for direct copyright infringement.
Ellie Mae's claims of contributory infringement also state a claim upon which relief can be granted. "The three elements required to prove a [party] liable under the theory of contributory copyright infringement are: (1) direct infringement
In its motion, DocMagic argues that Ellie Mae has only alleged that DocMagic instructed third parties to engage in unauthorized use of Ellie Mae's software, and not that any third parties did so. Such is not the case; Ellie Mae has sufficiently alleged that third parties, with DocMagic's encouragement, engaged in actual use and copying of copyrighted material. See Counterclaim ¶¶ 22-26, 48 ("DocMagic has. . . knowingly induced, caused, and/or materially contributed to the unauthorized copying, distribution, and/or use . . . of the Encompass software and SDK by DocMagic XL . . . users.").
Additionally, DocMagic argues that Ellie Mae's licensees' alleged unauthorized use of Encompass and the Encompass SDK is not copyright infringement (and so cannot support a claim of contributory infringement). However, as discussed above, the unauthorized loading of a software program onto the RAM of a computer constitutes an act of copying, and thus of copyright infringement. MAI, 991 F.2d at 518. Insofar as Ellie Mae has alleged that the DocMagic XL program is itself a copy of the Encompass SDK, see Counterclaim ¶¶ 21-22, the licensees' act of loading the DocMagic XL program onto their computers allegedly created a new, unauthorized copy of the Encompass SDK. This alleged infringement by the licensees is sufficient to support a claim of contributory infringement against DocMagic. Furthermore, Ellie Mae's allegation that DocMagic induced Ellie Mae's licensees to "use" Encompass and the Encompass SDK outside the scope of the respective licenses by encouraging the licensees to use DocMagic XL, also states a claim for relief. See Counterclaim ¶ 25 ("[D]ocMagic has instructed Encompass licensees to use the DocMagic XL Technology in conjunction with Encompass and the SDK . . . in direct violation of the SDK license terms in order to connect directly to DocMagic."). Exceeding the scope of a license granted by a copyright holder constitutes copyright infringement, see LGS Architects, Inc. v. Concordia Homes of Nev., 434 F.3d 1150, 1156 (9th Cir.2006); thus, to the extent that DocMagic XL provided Encompass and Encompass SDK users with a means for exceeding the scope of their licenses and DocMagic knowingly encouraged them to do so, DocMagic engaged in contributory copyright infringement. Therefore, DocMagic's motion to dismiss the first counterclaim is denied.
Ellie Mae's second counterclaim alleges that DocMagic violated the Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030, by accessing Ellie Mae's protected computers without authorization and taking Ellie Mae's proprietary information. DocMagic in response argues firstly that Ellie Mae has not pled facts showing that Ellie Mae has a private right of action under the CFAA, and secondly
The CFAA establishes that a civil action may be brought by "[a]ny person who suffers damage or loss by reason of a violation of this section . . . [but] only if the conduct [complained of] involves 1 of the factors set forth in subclauses (I), (II), (III), (IV), or (V) of subsection (c)(4)(A)(I)." 18 U.S.C. § 1030(g). Subclause (I) of subsection (c)(4)(A)(i)(I), the only subclause relevant to this case, covers conduct resulting in "loss to 1 or more persons during any 1-year period . . . aggregating at least $5,000 in value." Id. § 1030(c)(4)(A)(i)(I). The statute defines "loss" as "any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service." 18 U.S.C. § 1030(e)(11). Ellie Mae's counterclaim contains only a single, generalized allegation related to loss from conduct that violated the CFAA: that "Ellie Mae has suffered damages and loss . . . including, without limitation, harm to Ellie Mae's data and/or computer(s) and other losses and damages in an amount to be proven at trial, but in any event, over $5000 aggregated over a one-year period." Counterclaim ¶ 59.
Such an allegation is insufficient to satisfy the CFAA's loss requirement for at least two reasons. To begin with, the averment verges on the type of conclusory, "formulaic recitation of the elements of a cause of action," that Iqbal and Twombly require a court to disregard. Iqbal, 129 S.Ct. at 1949-50 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). More importantly, even if the court were to consider the allegation, paragraph 59 fails to plead facts sufficient to meet the CFAA's requirement for a private cause of action. In the counterclaim, Ellie Mae alleges that it suffered "damages and loss . . . over $5000 aggregated over a one-year period." Counterclaim ¶ 59 (emphasis added). The statute, however, requires that an entity suffer a "loss . . . during any 1-year period. . . aggregating at least $5,000 in value." 18 U.S.C § 1030(c)(4)(A)(i)(I). Because it is impossible to determine from Ellie Mae's counterclaim whether its loss, as loss is defined by the CFAA, standing alone and excluding damages, would aggregate to more than $5000 in a given year, Ellie Mae's counterclaim fails to adequately plead facts necessary to support a cause of action under the CFAA. Accordingly, DocMagic's motion to dismiss the second counterclaim for relief is granted, and the counterclaim is dismissed with leave to amend.
Ellie Mae's third counterclaim, seeks relief under the California Comprehensive Computer Data Access and Fraud Act ("CCDAFA"), Cal.Penal Code § 502(e). The CCDAFA is similar to the CFAA, but prohibits a wider range of conduct. See Cal.Penal Code § 502(c)(1)-(9). Furthermore, it contains no loss requirement in order to support a private right of action. Ellie Mae asserts that DocMagic engaged in four of the nine types of conduct prohibited by the CCDAFA: (1) "[k]nowingly access[ing] and without permission. . . us[ing] any data, . . . computer system, or computer network in order to. . . wrongfully control or obtain money, property, or data," id. § 502(c)(1); (2) "[k]nowingly access[ing] and without permission. . . us[ing] . . . any data from a computer, computer system, or computer network, or tak[ing] or cop[ying] any supporting
DocMagic contends that, for two reasons, the counterclaim fails to state a claim under any of these provisions. First, DocMagic asserts that Ellie Mae has not made any factual allegations from which it could be inferred that DocMagic engaged in prohibited conduct with the requisite intent. Each of the provisions at issue requires that a plaintiff plead and prove that the defendant, in accessing or inducing access to a computer, acted knowingly. Contrary to DocMagic's characterization of the counterclaim, Ellie Mae adequately alleges that DocMagic acted intentionally and knowingly. Ellie Mae avers that DocMagic's unauthorized access was "systematic" and "repeated," and involved the use of other parties' license keys and "pre-textual" log-in credentials. Counterclaim ¶ 20; see Iqbal, 129 S.Ct. at 1952 (2009) (holding that factual allegations can permit inference of wrongful intent). Ellie Mae's allegations are therefore sufficient to satisfy the scienter element of its claims under the CFAA.
Next, DocMagic argues that using a third-parties' log-in credentials, with the third-parties' consent, to access DocMagic's servers and remove information from the servers, does not, as a matter of law, state a claim for relief. See Counterclaim ¶ 20. Again, DocMagic is mistaken. "Penal Code section 502 prohibits knowing access, followed by unauthorized (i.e., `without permission') taking, copying, or use of data," including where the access is by means of a third-parties', voluntarily-provided log-in credentials. Facebook, Inc. v. ConnectU LLC, 489 F.Supp.2d 1087, 1091 (N.D.Cal.2007) (Seeborg, Mag. J.); see Cal. Penal Code § 502(c)(2).
Ellie Mae's fourth counterclaim seeks relief for DocMagic's alleged breach of the Bridge Agreement. Specifically, Ellie Mae alleges that DocMagic breached Section 1 of the Bridge Agreement, which forbade DocMagic from reverse engineering,
DocMagic argues briefly that Ellie Mae has alleged no facts showing that Section 1 was breached. However, Ellie Mae has alleged that DocMagic "has reverse engineered, duplicated, modified, and/or otherwise used . . . Ellie Mae Proprietary Information, without Ellie Mae's authorization, to create software [the DocMagic XL program]." Counterclaim ¶ 21. Ellie Mae defines "Ellie Mae Proprietary Information" in its counterclaim as "certain confidential or proprietary information" that it provided DocMagic "[i]n connection with the . . . Bridge Agreement . . . to facilitate DocMagic's connectivity with Ellie Mae's licensees through the ePASS technology embedded in the Encompass software." Id. ¶ 13. These allegations are sufficient to state a claim that DocMagic violated the Bridge Agreement by reverse engineering, duplicating, or modifying the ePASS technology in order to create DocMagic XL. While the court agrees with DocMagic that this claim could have been more clearly explained in the counterclaim, Ellie Mae's pleadings are not so deficient as to violate Rule 8(a).
DocMagic argues in more detail that Ellie Mae has failed to state a claim for breach of section 10.4 of the Bridge Agreement, because Ellie Mae has not alleged that DocMagic used information "obtained in connection with" the Bridge Agreement outside the purposes of the agreement. Instead, DocMagic asserts, Ellie Mae has only alleged that DocMagic used information obtained from third parties, such as the Ellie Mae's licensees' license keys and log-in credentials. However, DocMagic misunderstands Ellie Mae's counterclaim. As noted above, Ellie Mae has defined "Ellie Mae Proprietary Information" in the counterclaim to include information provided to DocMagic under the Bridge Agreement. Id. ¶ 13. Ellie Mae alleges that DocMagic "retained its access to Encompass users through the unauthorized and illegal access of Ellie Mae Proprietary Information, including the Encompass SDK."
Ellie Mae's fifth counterclaim is for inducement of breach of contract, based on its allegations that DocMagic encouraged and instructed Encompass licensees to breach the terms of their licenses with Ellie Mae. Id. ¶¶ 77-79. The elements of a claim for inducement of breach of contract, which are identical to the elements for intentional interference with contractual relationships, are discussed
Under Iqbal and Twombly, Ellie Mae need not identify each and every party that DocMagic induced into breaching contracts with Ellie Mae. But what Ellie Mae has done—identify a group of entities, Encompass licensees (i.e., entities that had entered into the Encompass Software License Agreement and the Encompass SDK license Agreement), who entered into contracts with Ellie Mae that were breached as a result of DocMagic's conduct—is not sufficient at the pleading stage. Counterclaim ¶ 73-77. As with DocMagic's IIPEA claim for relief, in order to provide DocMagic with sufficient information to answer the complaint, Ellie Mae must, for at least one actual contractual relationship, plead facts sufficient to satisfy all of the elements of an inducement of breach of contract claim. Because such allegations are missing from the complaint, DocMagic's motion to dismiss the fifth counterclaim is granted, and the counterclaim is dismissed with leave to amend.
Ellie Mae's seventh counterclaim is for intentional interference with contractual relationships. Id. ¶¶ 89-94. Although elements required to prove this claim and the inducement of breach of contract are identical, see 5 Witkin, Summary of California Law § 731, the conduct that Ellie Mae alleges DocMagic engaged in differs in the fifth and seventh counterclaims.
In its seventh counterclaim for relief, Ellie Mae alleges that DocMagic interfered with contracts between Ellie Mae and Encompass licensees for Ellie Mae to provide the licensees with document preparation services. Specifically, Ellie Mae alleges that it had "contractual relationships with various Ellie Mae Clients . . . for access to closing document preparation software through Encompass." Counterclaim ¶ 89. Ellie Mae also avers that "DocMagic, knowing of Ellie Mae's contractual relationships with the Ellie Mae Clients, intended to and did disrupt the contractual relationship between Ellie Mae and the Ellie Mae Clients by promoting and inducing the direct access to DocMagic Products by the Ellie Mae Clients in lieu of accessing Rebranded [DocMagic] products from Ellie Mae." Id. ¶ 91. This claim, however, contains a fatal defect; it fails to include an allegation that contracts for document preparation services, as opposed to the possibility of contracts for document preparation, existed between Ellie Mae and Encompass users. As alleged, the Encompass and Encompass SDK license agreements precluded Encompass users from using document preparation services other than Ellie Mae's rebranded DocMagic service or those on the ePASS network. But nowhere has Ellie Mae alleged that Encompass users were required to purchase any document preparation services. Ellie Mae alleges only that "Ellie Mae has entered into valid contractual relationships with various Ellie Mae Clients . . . for access to closing document preparation software." Id. ¶ 89 (emphasis added). The access to closing document preparation software is not a contractual provision that could be breached by the Ellie Mae clients; the access is a right or privilege, not a duty or obligation. The only inference that can be drawn from the counterclaim is that it was necessary for Encompass users to enter into a separate contract with a loan document preparation service provider, either Ellie Mae or another loan document service provider on the ePASS network, in order to have loan documents prepared. And only if DocMagic induced Ellie Mae
Ellie Mae's eighth counterclaim is for intentional interference with prospective economic advantage ("IIPEA"), based on DocMagic's actions in creating the DocMagic XL program and soliciting Ellie Mae's customers to use DocMagic's services (via the DocMagic XL adapter) rather than Ellie Mae's. Id. ¶¶ 96-98; see also Docket No. 54 (Ellie Mae Opp'n) at 18. The elements of an IIPEA claim are discussed above.
The conduct at issue in the eighth counterclaim for relief is similar to, albeit slightly more expansive than, that alleged in the seventh counterclaim for relief. Ellie Mae alleges that it had "valid and existing business relationships with the Ellie Mae Clients," Counterclaim ¶ 96, and has defined "Ellie Mae Clients" as the Encompass users who had access to Ellie Mae's re-branded document preparation services, id. ¶ 29. Ellie Mae further avers that DocMagic was aware of the relationships, acted to and actually did disrupt the relationships, thereby causing Ellie Mae damages. Id. ¶ 97-101.
As with DocMagic's IIPEA claim, Ellie Mae's cause of action must be dismissed for failure to identify at least one specific, ongoing business relationship that was disrupted by DocMagic. The generalized reference to Encompass users is too broad to provide DocMagic with sufficient information to answer the counterclaim. Accordingly, DocMagic's motion to dismiss the eighth counterclaim for relief is granted, and the counterclaim is dismissed with leave to amend. In amending the counterclaim, Ellie Mae must, for at least one actual relationship, plead facts sufficient to satisfy all of the elements of an IIPEA claim.
Ellie Mae's ninth counterclaim alleges that DocMagic's conduct, as described throughout the counterclaim, constitutes unfair competition in violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq. From the counterclaim itself, which simply "realleges and incorporates by reference all previous paragraphs of its Counterclaim. . .," Counterclaim ¶ 102, it is difficult to discern under which prong of the UCL Ellie Mae seeks to ground its claim. At the hearing on this motion, however, Ellie Mae explained that it was pursuing a UCL claim under only the unfair prong. As is discussed above an "unfair" business act or practice is "conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition." Cel-Tech, 20 Cal.4th at 187, 83 Cal.Rptr.2d 548, 973 P.2d 527.
Even at the pleading stage, Ellie Mae's counterclaim, which does not identify a single specific instance of unfair competition by DocMagic, is too vague and conclusory to support a viable cause of action. At the hearing, Ellie Mae indicated, in a general manner, that DocMagic's actions have allowed it to acquire an advantage over other DPS providers. Not only is the purported "advantage" not specified in the
In summary, DocMagic's motion to dismiss Ellie Mae's first through fifth and seventh through ninth counterclaims for relief is GRANTED in part and DENIED in part. The second (CFAA), fifth (inducement of breach of contract), seventh (intentional interference with contractual relationship), eighth (intentional interference with contractual relationship) and ninth (IIPEA) counterclaims are dismissed with leave to amend. In all other respects, DocMagic's motion is denied.
Ellie Mae's motion to dismiss is GRANTED in part and DENIED in part. DocMagic's first (monopoly leveraging), third (refusal to deal), fourth (denial of access to essential facility), seventh (copyright infringement), eighth (intentional interference with contractual relationship), and ninth (IIPEA) claims for relief are dismissed with leave to amend. DocMagic's second (attempted monopolization) and sixth (false advertising) claims for relief are dismissed without leave to amend. DocMagic's thirteenth claim for relief (UCL) is dismissed with leave to amend to the extent it is predicated on a violation of the UCL's unfair prong. In all other respects, Ellie Mae's motion to dismiss is denied.
DocMagic's motion to dismiss Ellie Mae's first through fifth and seventh through ninth counterclaims for relief is GRANTED in part and DENIED in part. The second (CFAA), fifth (inducement of breach of contract), seventh (intentional interference with contractual relationship), eighth (intentional interference with contractual relationship) and ninth (IIPEA) counterclaims are dismissed with leave to amend. In all other respects, DocMagic's motion is denied.
In conclusion, the court observes that the parties have done little to efficiently and effectively manage this case. Good lawyering does not require pleading every cause of action that may even remotely appear possible. Rather, it requires careful analysis and selectivity. To assist in this endeavor the parties shall submit with their amended complaint proposed jury instructions necessary to each claim the party asserts.
IT IS SO ORDERED.
For a facility to be essential, it must be otherwise unavailable, and impossible to reasonably or practically replicate. MetroNet, 383 F.3d at 1129-30. Furthermore, "[a] facility that is controlled by a single firm will be considered `essential' only if control of the facility carries with it the power to eliminate competition in the downstream market." Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 544 (9th Cir.1991) (emphasis original).
