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Qwest Communication v. Herakles

August 18, 2008

QWEST COMMUNICATION, PLAINTIFFS,
v.
HERAKLES, LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Through the present action, Plaintiff Qwest Communications Corporation ("Qwest") seeks damages from Defendants Herakles, LLC ("Herakles"), Sandy Beaches I LP ("Sandy Beaches"), Riptide I LP ("Riptide"), and Capital Lease Funding, Inc. and Capital Lease Funding, LP (collectively "CapLease Defendants")*fn1 , for deceptive advertising, breach of contract, constructive fraud and breach of fiduciary duty, statutory and common law unfair competition, tortious interference with both prospective economic advantage and with contract, unjust enrichment, civil conspiracy, and aiding and abetting.

Pursuant to Federal Rule of Civil Procedure 12(b)(6)*fn2, Herakles, joined by Sandy Beaches and Riptide (collectively "Defendants"), filed the present Motion to Dismiss Count VI of Qwest's First Amended Complaint ("FAC") - Common Law and California Civil Code § 1573 - Constructive Fraud and Breach of Fiduciary Duty. As set forth below, the Motion is GRANTED with leave to amend.*fn3

BACKGROUND*fn4

This action arises from the circumstances surrounding the performance of three contracts which governed the construction, occupation, and management of a data center ("Data Center") in Sacramento, California. Originally, Qwest and Wavve Telecommunications, Inc. ("Wavve") contemplated entering into only one agreement to achieve these objectives. However, when the now defunct Wavve was unable to obtain financing from the CapLease Defendants, the parties restructured their arrangement via the three current contracts.

First, Qwest leased the Data Center from Sandy Beaches ("Lease"). Next, Qwest subleased a portion of the Data Center to Riptide ("Sublease"). Finally, Qwest entered a Real Estate Services Agreement ("RESA") with Wavve for the management of Qwest's portion of the Data Center.

Riptide subsequently assigned its rights in the Sublease to Herakles. Wavve assigned its rights in the RESA to Surferr LLC, an entity alleged to be related to Herakles, Sandy Beaches, and Riptide. Either Surferr LLC then assigned its rights in the RESA to Riptide, who subsequently re-assigned those rights to Herakles, or Surferr LLC assigned its rights directly to Herakles. Qwest alleges that Herakles is now both its competitor/sublessor tenant and the manager of Qwest's portion of the Data Center.

The Lease terms extend for a period of ten years, with the option to renew for another nine. Qwest uses the leased space to provide co-location, data center, telecommunications, internet access, content hosting, network management, and internet security services. The Lease provides for a "Tier IV data center" with 99.999% operational availability and contains a confidentiality clause, which, according to Qwest, Sandy Beaches has violated.

Qwest alleges that the RESA and an alleged oral agreement between Qwest and Herakles require Herakles to act as Qwest's "exclusive agent" in managing the Data Center and Qwest further alleges that the parties agreed that the Data Center manager would be the "face of Qwest" to Qwest's customers and potential customers.

However, Qwest claims that, instead, Herakles, as the current manager, diverted customers from Qwest to itself, in its separate capacity as Qwest's sublessor.

Qwest also claims that Herakles engaged in deceptive advertising by making statements purporting to be the Data Center owner on the Herakles website and within the Data Center. Additionally, Qwest alleges that Herakles misrepresented the property in Data Center sign-in sheets by omitting Qwest's name on the logs and that Herakles took Qwest's proprietary customer and potential customer information.

Qwest further states that Herakles has failed to perform certain construction work as obligated under the RESA and that, in its capacity as sublessor, Herakles has failed to hire a required third-party manager for its own portion of the Data Center. Instead, despite being a competitor of Qwest, Herakles allegedly manages both the Qwest facility and its own facility, to save itself added management costs.

Finally, Qwest alleges that Herakles, Riptide, and Sandy Beaches are alter egos of one another. Qwest alleges that the Defendants have common ownership, use one company as a conduit for another, and share offices, employees, and bank accounts. Qwest alleges that this practice enables Herakles to breach its contract without liability, all the while collecting Qwest's rent payments through Sandy Beaches and diverting customers to itself.

On April 21, 2008, Plaintiff filed its FAC in this Court under federal question jurisdiction. Plaintiff alleges multiple causes of action in its FAC, namely: deceptive advertising, breach of contract, constructive fraud and breach of fiduciary duty, statutory and common law unfair competition, tortious interference with both prospective economic advantage and with contract, unjust enrichment, civil conspiracy, and aiding and abetting. Plaintiff seeks both ...


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