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Lee Myles Associates Corp. v. Paul Rubke Enterprises

March 11, 2008

LEE MYLES ASSOCIATES CORP., PLAINTIFF,
v.
PAUL RUBKE ENTERPRISES, INC., ET, DEFENDANTS.



The opinion of the court was delivered by: M. James Lorenz United States District Court Judge

ORDER (1) GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS; AND (2) GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO STRIKE

In this breach of contract and trademark infringement action, Plaintiff Lee Myles Associates Corp. claims that Defendants Paul Rubke Enterprises, Inc., Paul S. Rubke and Rilla R. Rubke breached a license agreement with Plaintiff for an automobile transmission servicing franchise and infringed on Plaintiff's trademarks, among other things. The court has federal question jurisdiction over the claims for trademark infringement, unfair competition, and false description pursuant to 15 U.S.C. §§ 1114 and 1125. The court has supplemental jurisdiction over the remaining state law claims.

Defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) and strike pursuant to Rule 12(f), which Plaintiff opposed. Plaintiff stipulated to dismissal of its claim for injury to business reputation. For the reasons which follow, Defendants' motions are granted in part and denied in part.

On April 19, 2003, Plaintiff entered into a License Agreement ("License") with Defendants to grant them the right to use Plaintiff's registered marks, its system for transmission servicing, repair and replacement, and a related business operations and marketing plan in exchange for a license fee, royalties, and other payments for a fifteen-year term. (Compl. Ex. C (License) at 1-3.) Plaintiff alleges Defendants failed to make the appropriate effort to successfully operate their Lee Myles Center, in part because they failed to participate in Plaintiff's training programs. (Compl. ¶ 13.) In addition, Defendants failed to pay the advertising fees as required under the License and therefore did not have sufficient advertising to support their business. (Id. ¶ 14.) Defendants also refused to make other payments under the License. (Id. ¶ 15.)

In March 2005, Defendants attempted to terminate the License by subleasing the premises; however, Plaintiff objected to and prevented the sublease. (Id. ¶ 16.) Subsequently, Defendants refused to report their gross sales and pay royalties as required by the License. (Id. ¶ 17.) Defendants also began making disparaging and untrue statements about Plaintiff to several of Plaintiff's Area Development Representatives ("ADR") and franchisees in other markets, and caused Plaintiff to lose prospective contracts. (Id. ¶ 18.) Defendants continued to use Plaintiff's Lee Mayles marks to gain customers and advance their own transmission and auto care business. (Id. ¶ 19.) On April 27, 2007, Defendants attempted to terminate the License without good cause. (Id. ¶ 25.) The License requires a showing of good cause for a licensee to terminate before the expiration of the 15-year term. (Id. Ex. C § 14.1.)

On July 6, 2007, Plaintiff filed a complaint in state court alleging causes of action for breach of contract, misappropriation of trade secrets, defamation, intentional interference with prospective economic advantage, fraud, trademark infringement, unfair competition under California Unfair Competition Law and the Lanham Act, false description and injury to business reputation. Plaintiff seeks damages, including liquidated and punitive damages, and injunctive relief. (Id. at 20-23.) Defendants removed the case to this court and moved to dismiss all but the breach of contract claim and to strike certain demands for relief.

Initially, Defendants argue that statute of limitations has expired on claims for misappropriation of trade secrets, defamation, fraud, and intentional interference with prospective economic advantage. While California substantive law applies in this diversity case to determine the elements of the legal claims alleged and the applicable statutes of limitations, procedure is governed by federal law. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) (internal quotation marks, brackets and citations omitted). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. , 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions need not be taken as true merely because they are cast in the form of factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998.)

"A motion to dismiss based on the running of the statute of limitations period may be granted only 'if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove the statute was tolled.'" Supermail Cargo, Inc. v. United States, 68 F.3d 1204, 1206-07 (9th Cir. 1995), quoting Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980). The motion must be denied if the factual and legal issues are not sufficiently clear to permit a determination with certainty whether the action was timely. See Supermail Cargo, 68 F.3d at 1207.

Defendants argue that the statute of limitations for misappropriation of trade secrets has expired. The parties agree that "[a]n action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. . . ." Cal. Civ. Code § 3426.6. Defendants point to Paragraphs 13 and 21 of the Complaint (Reply at 1), which allege that "[f]rom the time of contracting [on or about April 19, 2003], Defendants failed to make the appropriate effort to successfully operate the Lee Myles Center [and] spent much of their time out of their Center running another family business." Defendants argue that these allegations demonstrate Plaintiff was on notice of and therefore should have discovered, the alleged misappropriation from the date of the License. Reading Paragraphs 13 and 21, as well as the Complaint in its entirety, in the light most favorable to the nonmoving party, Cahill, 80 F.3d at 337-38, and without drawing any unwarranted inferences, Pareto, 139 F.3d at 699, the court finds that Defendants' interpretation is without support. Based on the allegations, the time of Plaintiff's discovery is unclear. The untimeliness of the complaint must appear beyond doubt on the face of the complaint, before a claim will be dismissed as time-barred. See Supermail Cargo, 68 F.3d at 1206-07. Accordingly, to the extent Defendants seek dismissal of the misappropriation of trade secrets claim as time barred, their motion is denied.

Defendants next contend that the defamation claim is time barred. The parties agree that the applicable statute of limitations is one year pursuant to California Code Civil Procedure Section 340(c). Defendants point to paragraphs 16 and 18, which state that Defendants attempted to sublease their premises in March 2005 and started spreading untrue disparaging representations about Plaintiff after that time. Defendants interpret the complaint to allege that the disparagement commenced "directly after" March 2005. (Defs' P&A at 5.) Nowhere in the complaint does Plaintiff allege when the disparaging representations commenced. Reading the Complaint in the light most favorable to the nonmoving party and without drawing any unwarranted inferences, the court finds it alleges that the disparagement started at some point after March 2005. To the extent Defendants contend that the defamation claim is untimely, their motion to dismiss is denied.

Defendants also maintain that the statute of limitations for intentional interference with prospective economic advantage has expired. They rely on Paragraph 47 of the Complaint (Defs' P&A at 5-6; Reply at 1-2), which states that after Plaintiff denied Defendants' attempt to sublease the licensed location, Defendants . . . intentionally interfered with Plaintiff's prospective economic relationships by making false, defamatory representations to Plaintiff's existing and potential ADRs and franchisees.

Because the Complaint does not allege when the intentional interference occurred, the untimeliness does not appear on its face, regardless of the length of the applicable statute of limitations. Accordingly, to the extent Defendants contend the interference claim is untimely, their motion to dismiss is denied.

Defendants next argue that the three-year statute of limitations bars the fraud claim. See Cal. Code Civ. Proc. § 338(d). Defendants rely on Paragraphs 13 and 52 of the Complaint, which allege:

From the time of contracting, Defendants, and each of them, failed to make the appropriate effort to successfully operate the Lee Myles Center. . . . Defendants spent much of their time out of their Center running another family business. . . .

Defendants made representations of material fact to Plaintiff, in that Defendants represented to Plaintiff that Defendants intended to contract with Plaintiff for the purpose of gaining the right to own and operate a Lee Myles franchise.

Defendants argue that these facts put Plaintiff on notice at the time of contracting. (Defs' P&A at 6.) The statute begins to run when the plaintiff discovered or by the use of reasonable diligence could have discovered the fraud. Cal. Code Civ. Proc. § 338(d). The Complaint does not allege when Plaintiff discovered the alleged fraud or when it could have discovered it. To the extent Defendants contend the fraud claim is untimely, their motion to dismiss is denied.

Defendants next argue that the claims for trademark infringement, unfair competition under California and federal law, and false description are all time barred. Defendants' argument as to all these causes of action depends on their interpretation of Paragraph 62 of the Complaint which alleges that Following Plaintiff's rejection of Defendants' attempted sublease, Defendants changed the name of the transmission service business at the licensed location from "Lee Myles" to Paul's Transmissions. Defendants also refused and failed to provide Plaintiff with Defendants' gross sales numbers and refused and failed to pay Plaintiff royalties as Plaintiff's franchisee.

Defendants argue that this paragraph shows the infringement commenced on or about March 2005, when Plaintiff rejected their attempted sublease. (Defs' P&A at 11-12.) As previously discussed, this interpretation of the Complaint is not warranted. Accordingly, to the extent Defendants contend the trademark infringement, unfair competition under California ...


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