Whitecryption Corp. v. Arxan Technologies, Inc.

          ORDER REGARDING MOTION TO DISMISS Re: Dkt. No. 66

          WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE

         INTRODUCTION

         Counter defendants whiteCryption Corporation and Intertrust Technologies Corporation seek to dismiss Arxan Technologies Inc.’s counterclaims for interference with contractual relations, prospective economic advantage, and violation of California’s Unfair Competition Law because Arxan failed to plausibly allege facts sufficient to state a claim against either counter defendant. whiteCryption also seeks to dismiss the claim for declaratory judgment as simply a mirror of its own causes of action. Intertrust further seeks dismissal because Arxan has not pleaded viable alter ego and agency theories of liability, and does not assert direct allegations against Intertrust in its breach of contract cause of action.

         For the most part, Arxan’s counterclaims mush the counter defendants’ alleged actions together. For the reasons stated below, I agree with Intertrust that the alter ego and agency allegations are insufficient and STRIKE the legal conclusions asserting them from the counterclaims. I also find that the breach of contract, interference with the Moss Adams contract and declaratory relief causes of action are not plausibly stated against Intertrust, and dismiss Intertrust from them. And I DENY the motion to dismiss concerning the claims against whiteCryption and the remaining claims against Intertrust.^[1]

         BACKGROUND

         Arxan’s principal business is providing application protection and anti-tamper solutions for a variety of commercial software. First Amended Counterclaims (“FACC”) ¶ 18. Among other things, Arxan provides a product commonly referred to as “code-hardening” software which enables developers and security engineers to protect an application by inserting “guards” into the code. Id. Arxan’s software is often licensed to customers for periods of time with the goal that the customer will be interested in renewing the license. Id. ¶ 21.

         In mid-2011, Arxan began negotiations with Intertrust regarding a reseller relationship whereby Arxan would sell Intertrust’s recently acquired software protection technology, whiteCryption’s White Box Cryptography product, to its customers under one of Arxan’s own labels, TransformIT. Id. ¶¶ 24, 27. After a few test transactions, Arxan and whiteCryption entered into a reseller agreement (the “Reseller Agreement”) under which Arxan obtained a nonexclusive distribution license for the White Box Cryptography product. Id. ¶ 29. The Reseller Agreement was drafted, negotiated, and Dated: behalf of whiteCryption by William Rainey, the Senior Vice President, General Counsel, and Secretary for Intertrust, as Secretary for whiteCryption. Id. ¶ 30. Arxan sold the whiteCryption security software under its TransformIT label from June 2011 to June 2013. Id. ¶ 35.

         Arxan alleges that whiteCryption breached various obligations under the Reseller Agreement. One “critical” component of the Reseller Agreement was whiteCryption’s obligation to provide software maintenance and support services as defined by the agreement. Id. ¶ 48. In July 30, 2013, approximately two months after the Reseller Agreement ended, Tala Shamoon, Intertrust’s Chief Executive Officer, informed Arxan that whiteCryption would no longer honor its obligation to provide ongoing maintenance and support for remaining customers for the length of their existing contracts with Arxan. Id. ¶ 52. Arxan contends that this constituted a violation of the express terms of the Reseller Agreement that affected Arxan as well as over twenty of its customers. Id. ¶ 54.

         The Reseller Agreement also allegedly prohibited whiteCryption from unauthorized direct contact with Arxan’s customers. Id. ¶ 55. In contravention of this agreement, whiteCryption contacted at least three of Arxan’s customers and “demanded that they stop using whiteCryption’s products that were properly provided by Arxan.” Id. ¶ 56. whiteCryption and Intertrust also breached the agreement by publically disclosing that the White Box Cryptography product sold under Arxan’s brand was actually whiteCryption’s technology. Id. ¶¶ 59, 62. As a result, at least one customer asked for pricing information to determine whether to purchase from counter defendants directly and another customer began to negotiate a non-disclosure agreement with Intertrust so that it could discuss its needs directly with Intertrust. Id. ¶¶ 63-64.

         In November 2013, whiteCryption retained Moss Adams LLP to conduct an audit pursuant to the Reseller Agreement which provided certain limited inspection rights. Id. ¶ 77. Arxan and Moss Adam executed an Auditor Non-disclosure Agreement (the “NDA”) that provided that Moss Adams would not disclose any confidential information it received from Arxan to whiteCryption or third parties. Id. ¶ 80. Thereafter Arxan provided confidential customer information to Moss Adams in order to facilitate the audit process. Id. ¶ 83. Despite the requirements of the NDA, Moss Adams did not provide Arxan with its final report five days before providing the report to whiteCryption so that it could insure that none of its confidential information was included. Id. ¶ 91. Instead, Moss Adams emailed whiteCryption and Arxan at the same time with a copy of the final report that contained highly confidential information belonging to Arxan, including customer names and pricing. Id. ¶¶ 89, 92. Arxan alleges Intertrust and whiteCryption “intentionally induced” Moss Adams to breach the NDA to obtain Arxan’s confidential customer information and gain a competitive advantage in the marketplace. Id. ¶ 95.

         Arxan’s counterclaims encompass six causes of action: (1) breach of contract; (2) intentional interference with contractual relations- relationships with customers; (3) intentional interference with contractual relations - Moss Adams Contract; (4) intentional interference with prospective economic advantage; (5) violation of California Business and Professions Code § 17200 et. seq. (the “UCL”); and (6) a claim declaratory judgment claim. Arxan asserts that Intertrust should be held liable not only for its own actions but also for whiteCryption’s conduct on the basis of an alter ego or agent theory of liability. Id. ¶¶ 102-113.

         LEGAL STANDARD

         I. MOTION TO DISMISS

         To survive a motion under Federal Rule of Civil Procedure 12(b)(6), the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when the plaintiff pleads facts that “allow 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) (citation omitted). There must be “more than a sheer possibility that a defendant has acted unlawfully.” Id. While courts do not require “heightened fact pleading of specifics, ” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555, 570.

         In deciding whether the plaintiff has stated a claim upon which relief can be granted, the court accepts the plaintiff’s allegations as true and draws all reasonable inferences in favor of the plaintiff. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to 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). If the court dismisses the complaint, it “should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000).

         II. HEIGHTENED PLEADING STANDARD FOR FRAUD OR MISTAKE

         Claims sounding in fraud or mistake are subject to the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires that such claims “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). To satisfy this standard, a plaintiff must identify “the time, place, and content of [the] alleged misrepresentation[s], ” as well as the “circumstances indicating falseness” or “manner in which the representations at issue were false and misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994) (internal quotation marks and modifications omitted). The allegations “must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).

         DISCUSSION

         Counter defendants argue that all claims against Intertrust and that all but one claim, the breach of contract claim, against whiteCryption should be dismissed.^[2] Intertrust contends that it cannot be held liable under an alter ego or agency theory, but does not otherwise attempt to differentiate its arguments about the insufficiency of the complaint from whiteCryption’s.

         I. INTENTIONAL INTERFERENCE WITH CONTRACTUAL RELATIONS -CUSTOMER RELATIONSHIPS

         To state a claim for intentional interference with contractual relations, a plaintiff must show: (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. Pac. Gas & Elec. Co. v. Bear Stearns & Co., 50 Cal.3d 1118, 1126 (1990).

         Counter defendants’ motion regarding the Second Cause of Action focuses on the fourth element. They argue Arxan has failed to allege facts demonstrating an actual breach or disruption of any then existing contractual relationships. Mot. at 4 [Dkt. No. 66]. Under California law, an express breach is unnecessary to state a claim for the tort of inducing breach of contract. Ramona Manor Convalescent Hosp. v. Care Enters., 177 Cal.App.3d 1120, 1131 (Ct. App. 1986). “Rather, liability may be imposed where the defendant does not literally induce a breach of contract, but makes plaintiff’s performance of the contract more expensive or burdensome.” Solyndra Residual Trust, by & through Neilson v. Suntech Power Holdings Co., 62 F.Supp.3d 1027, 1048 (N.D. Cal. 2014) (internal quotation marks omitted).

         Arxan claims that “Counter-Defendants contacted key decision makers of [Arxan’s] customers and demanded that they terminate existing contracts with Arxan or not renew their Arxan contracts.” FACC ¶ 70. The complaint provides several examples of the counter defendants’ alleged interference. For example, in March 2013, Oliver Mills, General Manager of Intertrust Europe, “directly approached Arxan customers in an effort to convince them to replace Arxan products with Intertrust product(s).” Id. ¶ 71. A month later “a representative of Intertrust approached an officer of one of Arxan’s customers, in an effort to pressure it to purchase white-box cryptography directly from Intertrust.” Id. ¶ 72. The customer later informed Arxan that he was “confused and extremely offended by Intertrust’s conduct.” Id. “Indeed, after informing one Arxan customer about the reseller relationship, that customer began to negotiate a non-disclosure agreement with Intertrust so that the customer could discuss their needs and pricing directly with Intertrust.” Id. ¶ 64. Similarly, in or around the third quarter of 2013, “whiteCryption threatened several of Arxan’s customers and demanded that they stop using whiteCryption products” and “further demanded that Arxan’s customers sign a new contract with whiteCryption in order to keep using the white-box cryptography product that was provided by Arxan.” Id. ¶ 73. As a result of counter defendants’ interference, a number of existing Arxan customers either terminated existing contracts, did not renew their contracts, or chose not to enter into contracts with Arxan. Id. ¶ 5.

         These allegations are sufficient to support a reasonable inference that such actions constituted a disruption of Arxan’s contracts with its customers. Counter ...