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Payoda, Inc. v. Photon Infotech, Inc.

United States District Court, N.D. California, San Jose Division

July 30, 2015

PAYODA, INC., Plaintiff,
v.
PHOTON INFOTECH, INC., et al., Defendants.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS WITH LEAVE TO AMEND [Re: ECF 49]

BETH LABSON FREEMAN, District Judge.

In this commercial tort dispute, defendant Photon Infotech, Inc. ("Photon U.S.") seeks to dismiss the claims that plaintiff Payoda, Inc. ("Plaintiff") has asserted against it on the ground that Plaintiff failed to adequately allege that Photon U.S. is an alter ego of defendant Photon Infotech Private Ltd. ("Photon India, " collectively with Photon U.S., "Defendants"), the true target of Plaintiff's ire.[1] The Court heard Photon U.S.'s motion to dismiss on July 23, 2015. For the reasons stated herein, Photon U.S.'s Motion to Dismiss is GRANTED with leave to amend.

I. BACKGROUND

The Court assumes familiarity with the facts alleged by Plaintiff, whose substantive claims remain substantially the same. Compare Compl. ¶¶ 1-34, ECF 1; First Am. Compl. ("FAC") ¶¶ 1-49, ECF 46. The dispute hinges on three allegedly false and defamatory letters sent by Defendants' attorney (who represents both entities) on Photon India's behalf to Plaintiff's customers: Verizon, Hedgemark International, and Bank of America. FAC ¶¶ 17, 23. In these letters, Photon India claims that "Payoda Technologies ("Payoda") a Coimbatore, India based IT services provider" with whom each of the customers worked stole Photon India's intellectual property and that such theft was being actively investigated in India. The letters furthermore suggested that Plaintiff's customers might be subject to legal action if they failed to cooperate with the investigation. Id. Exhs. A-C. According to Plaintiff, these accusations are false and entirely based upon emails that "Photon" fabricated, purporting to show that Thennavan Asaithambi, a current employee for Plaintiff who previously worked for Defendants, sent emails to Plaintiff attaching proprietary sales information. FAC ¶¶ 18-20; id. Exhs. E-G. Based on those allegations, Plaintiff asserts claims for defamation, trade libel, intentional interference with prospective economic advantage, and unfair competition. FAC ¶¶ 29-49.

Relevant to the present motion (whether Photon U.S. and Photon India are alter egos), Plaintiff alleges that Photon U.S. and Photon India have the same leadership with some of the key leadership figures based in the United States. Id. ¶¶ 8-12. Plaintiff further alleges that Photon U.S. and Photon India hold themselves out to the public to be the same entity on their website, that public filings indicate that Photon India's "U.S. headquarters are located in San Jose, California, " and that records relating to Photon India's U.S. customers are maintained in either San Jose or Chennai, India. Id. ¶ 7. On information and belief, Plaintiff alleges that the two entities "comingle their assets, including their "facilities, finances, website, email address, phone number, employees, and customers." Id. ¶¶ 6, 13. Additionally, Plaintiff alleges that Photon U.S. and Photon India intentionally create public confusion regarding their relationship in order to "confuse and mislead customers, competitors, creditors, potential claimants, and other members of the public as to the appropriate entity against whom to seek legal or equitable relief." Id. ¶ 14.

II. LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock Inc., 349 F.3d 1191, 1199-200 (9th Cir. 2003). Dismissal under Rule 12(b)(6) may be based on either the "lack of a cognizable legal theory" or on "the absence of sufficient facts alleged." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988).

To survive a motion to dismiss, a complaint must plead sufficient factual matter that, when accepted as true and construed in the light most favorable to the non-moving party, "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The court does not accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir.2008). A pleading that offers "labels and conclusions, " "a formulaic recitation of the elements of a cause of action, " or "naked assertions devoid of further factual enhancement" will not survive a motion to dismiss. Iqbal, 556 U.S. at 678 (citing and quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 557 (2007)).

III. DISCUSSION

Photon U.S. moves to dismiss Plaintiff's claims against it on the ground that Plaintiff's allegations are insufficient to hold Photon U.S. liable as an alter ego of Photon India. Def.'s Mot., ECF 49. There is no dispute that the FAC contains no allegations of independent conduct by Photon U.S. and that the allegations relating to Plaintiff's claims for relief assume that Photon U.S. and Photon India are the same. The sufficiency of Plaintiff's claims against Photon U.S. thus depends entirely on the sufficiency of its alter ego allegations.

Under California law, two conditions must be met to invoke the alter ego doctrine. "First, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist. Second, there must be an inequitable result if the acts in question are treated as those of the corporation alone." Sonora Diamond Corp. v. Superior Court, 83 Cal.App.4th 523, 538 (2000); see also Harris Rutsky & Co. Ins. Servs. v. Bell & Clements Ltd., 328 F.3d 1122, 1134 (9th Cir. 2003) (requiring a prima facie showing of the same two requirements). California courts look to a number of factors to determine whether the doctrine is to be applied, including "commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, " "use of one as a mere shell or conduit for the affairs of the other, " "inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers." Sonora, 83 Cal.App.4th at 538-39. No single characteristic is dispositive. As the Ninth Circuit recently explained with respect to the "unity of interest" prong, "this test requires a showing that the parent controls the subsidiary to such a degree as to render the latter the mere instrumentality of the former'" and "envisions pervasive control over the subsidiary, such as when a parent corporation dictates every facet of the subsidiary's business - from broad policy decisions to routine matters of day-to-day operation.'" Ranza v. Nike, Inc., ___ F.3d ___, No. 13-35251, 2015 WL 4282986, at *9 (9th Cir. July 16, 2015) (quoting Doe v. Unocal Corp., 248 F.3d 915, 926 (9th Cir. 2001)). "Total ownership and shared management personnel are alone insufficient to establish the requisite level of control." Id. (citing Harris Rutsky, 328 F.3d at 1135.

Here, Photon U.S. asserts that Plaintiff does not adequately allege either prong of the alter ego test: there is no unity of interest apparent from the allegations, nor is it alleged in any non-conclusory manner that an inequitable result would follow if the two companies were considered as separate entities. Def.'s Mot. 4-6. Indeed, Photon U.S. argues, Plaintiff has not even alleged that Photon India and Photon U.S. are parent and subsidiary. Id. at 4. Plaintiff counters that the allegations are sufficient at the pleading stage and requests leave to take discovery if the Court deems them insufficient. Pl.'s Opp., ECF 54.

A. Parent-Subsidiary Relationship

Turning to the parent-subsidiary relationship first, Plaintiff requests that the Court take notice of a number of public filings wherein Photon India represents that Photon U.S. is a subsidiary. Pl.'s Request for Judicial Notice ("RJN") Exhs. A-C, ECF 55. Photon U.S. does not oppose this request and the Court finds that the documents are appropriately subject to judicial notice.[2] Fed.R.Evid. 201(b). Furthermore, the judicially noticeable documents reflect that at least as late as March 31, 2012, Photon U.S. was considered a subsidiary of Photon India. Pl.'s RJN Exh. C. While it is curious why Plaintiff omitted this allegation from its FAC, the ability to allege Photon U.S.'s subsidiary status is clearly not a roadblock to Plaintiff's alter ego ...


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