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SILICON KNIGHTS, INC. v. CRYSTAL DYNAMICS

October 23, 1997

SILICON KNIGHTS, INC., Plaintiff,
v.
CRYSTAL DYNAMICS, INC., ET AL., Defendants.



The opinion of the court was delivered by: INFANTE

 I. INTRODUCTION

 Individual Defendants J.E. Ardell, Rob Dyer, Jon Horsley, Jon Miller, and Daniel A. Dorison ("Defendants") move to dismiss Plaintiff Silicon Knights, Inc.'s complaint for failure to state a claim upon which relief may be granted, pursuant to Rule 12(b)(6), F.R.Civ.P. For the reasons set forth below, Defendants' motion is GRANTED in part and DENIED in part.

 II. BACKGROUND

 Plaintiff Silicon Knights, a Canadian corporation, creates, designs, and develops interactive entertainment products, including video game software and related materials. Complaint P 19, 20. Defendant Crystal Dynamics, a California Corporation, is engaged in the business of publishing, distributing, and developing interactive entertainment products, including video game software and related materials. P 15. The individual defendants are present and former employees and officers of Crystal Dynamics: Ardell is the CEO of Crystal Dynamics; Dyer is the President of Crystal Dynamics; Horsely is the Executive Producer and Vice President of Crystal Dynamics; Dorosin is the former Senior Vice President of Business Affairs and General Counsel of Crystal Dynamics; and Miller is the Executive Producer and Vice President of Crystal Dynamics. P 3-7. The complaint alleges on information and belief that "in committing the fraudulent and otherwise wrongful actions alleged herein, Crystal Dynamics acted by and though the other individual Defendants named herein." P 2.

 The complaint alleges that Silicon Knights conceived, created, and developed an innovative new interactive video game entitled "Blood Omen: Legacy of Kain" ("Kain"). P 13. Because Silicon Knights was not well funded and needed financial assistance to complete Kain, Plaintiff entered into negotiations with Crystal Dynamics in late 1993 to fund the development of Kain in exchange for publication rights to the game. P 28. On or about January 3, 1994, the two companies signed a Letter of Intent pertaining to Kain, and signed a "Development Agreement" on February 16, 1994. Id. Under "financial duress" of which Crystal Dynamics was aware, Silicon Knights agreed to assign all of Silicon Knights' intellectual property rights in Kain, including the rights to any derivative works, to Crystal Dynamics. In return, Crystal Dynamics made two critical promises to Silicon Knights: (1) the potential of substantial later royalties from Silicon Knights' development of Kain derivative works, including Silicon Knights' right to make the first bid on any derivative works, and (2) publication credits identifying Silicon Knights as developer and originator of Kain and prominent credit as originator in connection with any and all Kain derivative works and Kain products, irrespective of who developed these works. P 29, 39. Defendants Crystal Dynamics, Dorosin, and Ardell repeatedly promised Silicon Knights that Defendant would comply with these terms, and memorialized its promises of Silicon Knights' right of first bid in writing in Paragraph 5.2 of the Kain Development Agreement. P 29. Additionally, Silicon Knights accepted a lower percentage of Crystal Dynamics' net revenues as its sales royalty than was standard in the industry since Defendant Crystal Dynamics was acting as both a distributer and publisher of Kain. P 32.

 The complaint alleges that Crystal Dynamics made these promises without intent to perform, and breached the development agreement by: (1) adding increasingly stringent requirements to Silicon Knights' duties under the Kain Development Agreement while refusing to cooperate and respond to Silicon Knights' requests for assistance, resulting in several months of delay; (2) hindering Silicon Knights' ability to meet its deadlines under the agreement; (3) withholding royalty advances at critical stages of the Kain development and refusing to account for royalties in 45-day intervals as required by the Development Agreement; (4) secretly soliciting and employing third party contractors to "shadow" Silicon Knights' efforts in producing various versions of Kain and supplying these third parties with Silicon Knights' confidential, proprietary and trade secret information in an effort to eventually supplant Plaintiff as developer of Kain; and (5) making numerous other efforts and attempts to prevent Silicon Knights from performing and/or meeting its purported deadlines and duties under the Agreement. P 40, 44, 45.

 The complaint also alleges that Crystal Dynamics further breached its agreement with Silicon Knights in the Fall of 1996 by selling certain rights to Kain and all Kain derivative works to Activision for approximately $ 2 million dollars. P 61. By entering into this agreement with Activision, Defendant abdicated its agreed role as publisher on the Kain project, which decreased the revenues payable to Silicon Knights to as little as 1/4 of the originally promised amount. P 64. Defendant did grant Plaintiff a higher royalty percentage to compensate for the fact that Crystal Dynamics would not distribute Kain in a November 20, 1996 modification of the Kain Development Agreement. However, Crystal Dynamics failed to advise Silicon Knights of several aspects of the CD-Activision deal, including, but not limited to the fact that Activision would be taking over both the publication and distribution of Kain, and that Crystal Dynamics had fraudulently substituted itself as "developer" for Kain in the CD-Activision deal, which eliminated the potential for derivative work revenues to Silicon Knights as developer of any future Kain works. P 67. Although Crystal Dynamics intended to exit the software publishing business at this time, the complaint alleges that Crystal Dynamics, Dorosin, and Ardell did not inform Silicon Knights of this intention, but represented to Plaintiff both orally and in writing that; (a) Crystal Dynamics intended to remain a publisher; (b) that the CD-Activision Deal would transfer only the Kain "distribution rights" to Activision; and (c) that the CD-Activision Deal would not affect Crystal Dynamics' obligations under Section 5.2 of the Development Agreement concerning Silicon Knights' right of first bid to develop derivative works. P 69. At the time Crystal Dynamics made these representations, it had fired most, if not all, of its publishing personnel as a part of its plan to leave the publishing business. P 70.

 Although Crystal Dynamics represented itself as developer of Kain and the derivative Kain II, Activision was allegedly displeased with Crystal Dynamics' work and approached other developers, including Silicon Knights, for potential assistance on the artwork for Kain II. Activision and Silicon Knights apparently entered into an agreement whereby Plaintiff would provide artwork for the game. Upon learning of this potential re-entry of Silicon Knights into Kain development, Defendants made false, misleading, and commercially disparaging statements about Silicon Knights' technical abilities and Silicon Knights' involvement in the creation and development of Kain to Activision and others in the video game industry. P 76.

 Crystal Dynamics also directly and indirectly solicited Silicon Knights' employees to leave and either join Crystal Dynamics or start one or more companies in competition with Silicon Knights to cripple and prevent Silicon Knights from performing its obligations under the SK-Activision Contract, to enable Crystal Dynamics to meet Activision's standards, and to develop derivative works on terms more favorable to Crystal Dynamics than the Kain Development Agreement. P 80. These actions also induced Silicon Knights' employees to breach their non-disclosure and non-competition agreements with Plaintiff. P 78, 81.

 On July 3, 1997, Plaintiff filed a complaint against Defendant Crystal Dynamics seeking, inter alia., rescission or reformation of the contract and damages for breach of contract. Additionally, the complaint asserts the following claims against Defendant Crystal Dynamics and some or all of the Individual Defendants: Statutory Unfair Competition, pursuant to Cal. Bus & Prof. C. ┬ž 17200 & 17500 et seq.; Common Law Unfair Competition; Intentional Interference with Contractual Relations with Silicon Knights' former employees; Intentional Interference with Contractual Relations with Activision; Intentional Interference with Prospective Economic Advantage with Activision; International Interference with Prospective Economic Advantage (generally); Negligent Interference with Economic Advantage (generally); Defamation and Commercial Disparagement; Fraud; and Negligent Misrepresentation.

 III. LEGAL STANDARDS

 Pursuant to Rule 12(b)(6), F.R.Civ.P., a complaint may be dismissed for failure to state a claim upon which relief can be granted. For purposes of evaluating a motion to dismiss, the complaint is construed in the light most favorable to plaintiff and its allegations are taken as true. Abramson v. Brownstein, 897 F.2d 389, 391 (9th Cir. 1990). However, the court need not accept as true conclusory allegations or legal characterizations cast in the form of factual allegations. Western Mining Counsel v. Watt, 643 F.2d 618, 624 (9th Cir. 1981), cert. denied, 454 U.S. 1031, 70 L. Ed. 2d 474, 102 S. Ct. 567 (1981). Dismissal can be based on either 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); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). The court may not consider matters outside the pleadings in ruling on a motion pursuant to Rule 12(b)(6). Rule 12(b)(6), F.R.Civ.P. However, the court may consider "the complaint and 'documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the pleading.'" In re Syntex Corp. Securities Litigation, 95 F.3d 922, 926 (9th Cir.1996).

 A complaint should not be dismissed under Rule 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957).

 As to those portions of a complaint which the court finds do not state a claim for relief, leave to amend is ordinarily given freely. Fed.R.Civ.P. 15(a). A complaint or any claim in it should be dismissed without leave to amend only if the deficiencies of the complaint cannot possibly be cured by amendment. Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995).

 IV. DISCUSSION

 A. The allegations are sufficient to allege that Individual Defendants' directed the alleged wrongful acts.

 In addition to challenging each claim asserted against the Individual Defendants on various substantive grounds, Individual Defendants challenge all claims asserted against them in the complaint on the grounds that personal liability cannot be conferred upon them based solely upon their roles as employees and officers of Crystal Dynamics, and that the complaint fails to allege any facts upon which Individual Defendants could be found personally liable for the claims asserted against them. Silicon Knights opposes this position, contending that the complaint alleges various fraudulent statements made by specific defendants, and that the complaint contains "detailed allegations ... regarding the Individual Defendants' positions of control and authority at Crystal Dynamics, as well as the fact that each of the named defendants directed, controlled, participated in, or executed all, or virtually all, of the torts alleged in the complaint." Silicon Knights' Opposition to Amended motion to Dismiss Defendants Ardell, et al. ("Opposition"), p. 5:1-3.

 As asserted by Plaintiff, under California law, "directors or officers of a corporation do not incur personal liability for the torts of the corporation merely by reason of their official position, unless they participate in the wrong or authorize or direct that it be done. They may be liable, under the rules for tort and agency, for tortious acts committed on behalf of the corporation. [Cites.]" United States Liability Ins. Co. v. Haidinger-Hayes, Inc., 1 Cal. 3d 586, 595, 83 Cal. Rptr. 418, 423, 463 P.2d 770 (1970); See, also, Wyatt v. Union Mortgage Co., 24 Cal. 3d 773, 785, 157 Cal. Rptr. 392, 399, 598 P.2d 45 (1979).

 Pursuant to Rule 8(a)(2), F.R.Civ.P, a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief ..." To assert claims against individual defendants, a complaint must contain allegations indicating "how the defendant violated the law or injured the plaintiff' in order to survive a motion to dismiss. Morabito v. Blum, 528 F. Supp. 252, 262 (S.D.N.Y. 1981); Messina v. Mazzeo, 854 F. Supp. 116 (E.D.N.Y.1994). Rule 8(a)(2) does not require that the complaint set forth a "defendant's precise role in the injurious conduct," but that defendants be "put on notice as to the nature of the allegations against them" and "their relationship to the actions at issue in the case." Messina, supra., 854 F. Supp. at 126.

 Consequently, "courts have consistently held that, where the complaint names a defendant in the caption but contains no allegations indicating how the defendant violated the law or injured the plaintiff, a motion to dismiss in regard to that defendant should be granted." Morabito v. Blum, 528 F. Supp. 252, 262 (S.D.N.Y. 1981); See also, Alfaro Motors, Inc. v. Ward, 814 F.2d 883, 886 (2nd Cir.1987) ("Although the caption of appellants' complaint names as defendants Benjamin Ward, Police Commissioner of the City of New York, and Anthony Savarese, a sergeant in the New York City Police Department, the complaint is entirely devoid of any allegations of their personal involvement in denying appellants either a prompt hearing or the additional medallions sought. Having failed to allege, as they must, that these defendants were directly and personally responsible for the purported unlawful conduct, their complaint is 'fatally defective' on its face."); and Kirkland v. Bianco, 595 F. Supp. 797, 799-800 (S.D.N.Y.1984) (dismissing individual defendants from complaint where defendants were named in the caption, but the complaint provided no basis to ascertain how defendants violated the law in some manner so as to injure plaintiff).

 Courts have denied motions to dismiss a complaint against individual defendants where the complaint alleged that all defendants engaged in the alleged tortious acts, although the complaint did not set forth the specific acts committed by each defendant. Brook v. Thornburgh, 497 F. ...


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