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Luxul Technology Inc. v. Nectarlux, LLC

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

June 16, 2016

LUXUL TECHNOLOGY INC., Plaintiff,
v.
NECTARLUX, LLC, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART CROSS-MOTIONS FOR SUMMARY JUDGMENT AND DENYING CROSS-MOTIONS FOR SANCTIONS Re: Dkt. Nos. 85, 92, 93, 94

          Lucyh H. Koh United States District Judge

         Plaintiff and Counterdefendant Luxul Technology, Inc. ("Luxul") moves for summary judgment and for sanctions against Defendants and Counterclaimants NectarLux LLC, JKenney Consulting, Inc., and James Keeney (collectively, "NectarLux"). ECF Nos. 85 ("Luxul Sanctions Mot."), 94 ("Luxul Summ. J. Mot."). NectarLux also moves for summary judgment and for sanctions against Luxul. ECF Nos. 92 ("NectarLux Sanctions Mot."), 93 ("NectarLux Summ. J. Mot."). For the reasons explained below, the Court GRANTS IN PART and DENIES IN PART Luxul's Motion for Summary Judgment; DENIES Luxul's Motion for Sanctions; GRANTS IN PART and DENIES IN PART NectarLux's Motion for Summary Judgment; and DENIES NectarLux's Motion for Sanctions.

         I. BACKGROUND

         A. Factual Background

         Plaintiff Luxul Technology Inc. is a California corporation with a principal place of business in Santa Clara, California. Sec. Am. Compl. ("SAC"), ECF No. 38, ¶ 1. Defendant NectarLux, LLC is a New York limited liability company with a principal place of business in Syracuse, New York. Id. ¶ 2. Luxul is a producer of energy efficient light emitting diode ("LED") products. Id. ¶ 9.

         1. Luxul's Allegations against NectarLux

         On April 6, 2014, Luxul entered into a written "Sales Representation and Marketing Consulting Agreement" ("April 2014 Agreement") with Defendant NectarLux. Id. ¶ 13.; see ECF No. 116-2, Ex. 2. Under the Agreement, NectarLux served as Luxul's "exclusive, independent representative for the sale of Luxul products" in certain regions, for certain customers. SAC ¶ 13. NectarLux and Luxul were jointly obligated to "work together to ensure that Sales Commitments" were achieved and to meet regularly. April 2014 Agreement ¶ 1.a.

         The Agreement also provided for Luxul to disclose certain confidential information to NectarLux, including information relating to building science technologies, trade secrets, product design, manufacturing, pricing, marketing, distribution, business opportunities and relationships, industry experts, legal entities, and individuals. SAC ¶ 16. Under Section 3 of the Agreement, NectarLux agreed that Luxul was "the owner of all right, title, and interest in the Confidential information, including all tangible copies and . . . electronic versions thereof." Id. ¶ 17. NectarLux agreed that it would not disclose confidential information unless necessary to satisfy its obligations under the Agreement. Id. ¶ 18.

         In April 2014, James Pan ("Pan"), Luxul's chief executive officer, and Adam Lilien, NectarLux's Managing Director of Nectar Energy, met with a potential manufacturer in New York. Id. ¶ 27. Luxul continued to negotiate directly with the New York manufacturer. Id. Luxul alleges that in July 2014, Lilien and Keeney contacted the same New York manufacturer to discuss alternative proposals and set up meetings with competing LED companies. Id. ¶ 28.

         On August 12, 2014, Luxul terminated the Agreement with NectarLux. Id. ¶ 30.

         2. NectarLux's Allegations Against Luxul

         NectarLux presents a different version of the allegations summarized above. NectarLux agrees that parties entered into an Agreement related to sales of Luxul's LED bulbs through NectarLux's distribution network. Countercl. ¶ 1. However, NectarLux alleges that Luxul acquired NectarLux's propriety information, including "pricing, marketing and distribution, business opportunities, business relationships influential in purchasing decisions, business entities who may be interested in OEM/resale relationships, as well as other like terms, " and then Luxul wrongfully terminated the parties' contracts. Id. ¶ 1. NectarLux alleges that Luxul "misappropriated NectarLux's information to employ these confidential strategies and to market and sell light bulbs in NectarLux's exclusive territorial regions and to NectarLux's protected clients without compensating NectarLux for the sales." Id.

         Additionally, NectarLux begins the allegations in its countercomplaint with reference to an earlier contract, entered into on January 29, 2014 ("January 2014 Agreement"). Id. ¶ 20 & Ex. 1. The counterclaims allege that the January 2014 Agreement was negotiated by Adam Lilien; Shawn Colvin, a Luxul representative; and Dennis Malone of DM Lighting. Id. ¶¶ 15, 18, 19 ("Colvin, Malone, and Lilien discussed and negotiated a potential partnership between Luxul and NectarLux."). According to the counterclaims, the January 2014 Agreement "appointed NectarLux as the exclusive representative for the sale of Luxul products" for certain clients and certain geographic areas. Id. ¶ 20. The counterclaims further allege that "[o]n or about March 18, 2014, Luxul informed NectarLux the contract was invalid because Colvin had no authority to execute contracts on behalf of Luxul." Id. ¶ 22. Thereafter, the parties entered into the April 2014 Agreement discussed above, but "Luxul and Pan used duress and wrongfully coerced NectarLux to materially modify the terms of the contract to Luxul's and Pan's benefit." Id. ¶ 25.

         The parties now agree that NectarLux was never a party to the January 2014 Agreement because the January 2014 Agreement was executed by Adam Lilien on behalf of a different company named Nectar Partners and its affiliate Nectar Energy. See January 2014 Agreement; Luxul Summ. J. Mot. at 4 ("NectarLux is not named as a party to the January 29, 2014 contract."); ECF No. 106 ("Opp. to Luxul Summ. J. Mot.") at 1 ("The first contract was executed by Nectar Partners and Luxul on January 29, 2014"); ECF No. 104 ("Opp. to Luxul Sanctions Mot.") at 3 ("The first contract was executed by Nectar Partners and [Luxul] on January 29, 2014. There is no dispute the first contract was executed by these parties."). The parties additionally agree that the April 2014 Agreement was a binding contract between Luxul and NectarLux. Compl. ¶ 13 ("On or about April 6, 2014, Luxul entered into a written ‘Sales Representation and Marketing Consulting Agreement' (‘the Agreement') with NectarLux."); Ans. ¶ 13 ("Defendants admit the allegations in Paragraph 13"); see also Luxul Sanctions Mot. at 2 ("Luxul and NectarLux entered into a written ‘Sales Representation and Marketing Consulting Agreement' dated April 6, 2014."); Opp. to Luxul Sanctions Mot. at 4 ("It is beyond dispute that Luxul and NectarLux agreed to terms and executed the second contract.").

         NectarLux alleges that following execution of the April 2014 Agreement, "NectarLux continued to act in good faith" under the terms of the April 2014 Agreement. Countercl. ¶ 26. NectarLux alleges that in August 2014, NectarLux discovered that Luxul had registered a fraudulent purchase order from NectarLux and "that Luxul was selling light bulbs directly and/or through third parties in NectarLux's territory and to NectarLux's clients without compensating NectarLux for the sales." Id. ¶ 31. When NectarLux requested compensation for these sales, "Luxul refused, terminated the contract, and severed all business ties with NectarLux." Id.

         B. Procedural History

         Luxul filed its original Complaint on August 12, 2014. ECF No. 1. Luxul filed a First Amended Complaint ("FAC") pursuant to stipulation on October 31, 2014. ECF No. 19. NectarLux filed a motion to dismiss on November 21, 2014. ECF No. 21. The Court granted in part and denied in part the motion to dismiss on January 26, 2015, ECF No. 36, and Luxul filed a Second Amended Complaint ("SAC") on February 13, 2015, ECF No. 38. NectarLux filed an Answer to the Second Amended Complaint, Third Party Complaint against Pan, and Counterclaims against Luxul on February 27, 2015. ECF No. 42. NectarLux's Answer alleged four counterclaims against Luxul and four cross-claims against Pan. Id.

         Luxul and Pan filed a motion to strike and motion to dismiss on March 27, 2015. ECF No. 45. Luxul and Pan moved to strike portions of NectarLux's counterclaims and moved to dismiss one of NectarLux's counterclaims and all of NectarLux's cross-claims. Id. The Court denied the motion to strike and granted the motion to dismiss NectarLux's third counterclaim and all of NectarLux's cross-claims. ECF No. 61.

         Luxul then filed an Answer to NectarLux's counterclaims on August 20, 2015, ECF No. 62, and an Amended Answer to NectarLux's counterclaims on September 10, 2015, ECF No. 65.

         Luxul filed a motion for sanctions on April 11, 2016. ECF No. 85 ("Luxul Sanctions Mot."). NectarLux filed an opposition on April 25, 2016. ECF No. 104 ("Opp. to Luxul Sanctions Mot."). Luxul filed a reply on May 2, 2016. ECF No. 128 ("Reply to Luxul Sanctions Mot.").

         Luxul filed a motion for summary judgment on April 12, 2016. ECF No. 94 ("Luxul Summ. J. Mot."). NectarLux filed an opposition on April 26, 2016. ECF No. 106 ("Opp. to Luxul Summ. J. Mot."). Luxul filed a reply on May 3, 2016. ECF No. 138 ("Reply to Luxul Summ. J. Mot.").

         NectarLux filed a motion for sanctions on April 12, 2016. ECF No. 92 ("NectarLux Sanctions Mot."). Luxul filed an opposition on April 26, 2016. ECF No. 111 ("Opp. to NectarLux Sanctions Mot."). NectarLux filed a reply on May 3, 2016. ECF No. 132 ("Reply to NectarLux Sanctions Mot.").

         NectarLux filed a motion for summary judgment on April 12, 2016. ECF No. 93 ("NectarLux Summ. J. Mot."). Luxul filed an opposition on April 26, 2016. ECF No. 112 ("Opp. to NectarLux Summ. J. Mot."). NectarLux filed a reply on May 3, 2016. ECF No. 134 ("Reply to NectarLux Summ. J. Mot.").

         On April 28, 2016, the Court granted the parties' joint stipulation for dismissal with prejudice of Luxul's first, fifth, and sixth causes of action. ECF No. 121.

         Thus, Luxul's SAC has five remaining causes of action against NectarLux: (1) Claim Two for violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200 et seq.; (2) Claim Three for breach of contract; (3) Claim Four for breach of the implied covenant of good faith and fair dealing; (4) Claim Seven for copyright infringement in violation of 17 U.S.C. § 101 et seq.; (5) Claim Eight for account stated. NectarLux's counterclaims have three remaining causes of action against Luxul: (1) Counterclaim One for breach of contract; (2) Counterclaim Two for breach of the implied covenant of good faith and fair dealing; (3) Counterclaim Four for an accounting.

         II. LEGAL STANDARD

         A. Summary Judgment

         Summary judgment is appropriate if, viewing the evidence and drawing all reasonable inferences in the light most favorable to the nonmoving party, there are no genuine issues of material fact, and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 321 (1986). At the summary judgment stage, the Court "does not assess credibility or weigh the evidence, but simply determines whether there is a genuine factual issue for trial." House v. Bell, 547 U.S. 518, 559-60 (2006). A fact is "material" if it "might affect the outcome of the suit under the governing law, " Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), and a dispute as to a material fact is "genuine" if there is sufficient evidence for a reasonable trier of fact to decide in favor of the nonmoving party, id. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. (citations omitted).

         The moving party bears the initial burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of material fact. Celotex Corp., 477 U.S. at 323. Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party, but on an issue for which the opposing party will have the burden of proof at trial, the party moving for summary judgment need only point out "that there is an absence of evidence to support the nonmoving party's case." Id. at 325; accord Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). Once the moving party meets its initial burden, the nonmoving party must set forth, by affidavit or as otherwise provided in Rule 56, "specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 250.

         B. Sanctions

         1. Rule 11 Sanctions

         Rule 11 sanctions are appropriate "when a filing is frivolous, legally unreasonable, or without factual foundation, or is brought for an improper purpose." Estate of Blue v. Cty. of L.A., 720 F.3d 982, 985 (9th Cir. 1997). Accordingly, Rule 11 sanctions may be imposed: "[(1)] where a litigant makes a ‘frivolous filing, ' that is where he files a pleading or other paper which no competent attorney could believe was well grounded in fact and warranted by law; and [(2)] where a litigant files a pleading or paper for an ‘improper purpose, ' such as personal or economic harassment." Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir. 1987).

         A frivolous filing is one that is "both baseless and made without a reasonable and competent inquiry." In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 434 (9th Cir. 1996). Thus, when a complaint is challenged under Rule 11, a district court must conduct a two-prong inquiry to determine whether the complaint is frivolous: "(1) whether the complaint is legally or factually baseless from an objective perspective, and (2) if the attorney has conducted a reasonable and competent inquiry before signing and filing it." Holgate v. Baldwin, 425 F.3d 671, 676 (9th Cir. 2005); see also Conn. v. Borjorquez, 967 F.2d 1418, 1421 (9th Cir. 1992) (noting that courts look to whether "a reasonable basis for the position exist[ed] in both law and in fact at the time the position [was] adopted"). The "baseless" and "reasonable inquiry" requirements are conjunctive, not disjunctive. Therefore, "[a]n attorney may not be sanctioned for a [filing] that is not well- founded, so long as she conducted a reasonable inquiry." In re Keegan, 78 F.3d at 434. By the same token, an attorney cannot "be sanctioned for a complaint which is well-founded, solely because she failed to conduct a reasonable inquiry." Id. (emphasis omitted).

         When Rule 11 sanctions are party-initiated, the burden is on the moving party to demonstrate why sanctions are justified. See Tom Growney Equip., Inc. v. Shelley Irrigation Dev., Inc., 834 F.2d 833, 837 (9th Cir. 1987). The Ninth Circuit has held that Rule 11 sanctions are "an extraordinary remedy, one to be exercised with extreme caution." Operating Eng'rs Pension Trust v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 1988). Sanctions are reserved for "rare and exceptional case[s] where the action is clearly frivolous, legally unreasonable or without legal foundation, or brought for an improper purpose." Id. at 1344. "Rule 11 must not be construed so as to conflict with the primary duty of an attorney to represent his or her client zealously." Id.

         2. Discovery Sanctions

         "There are two sources of authority under which a district court can sanction a party who has despoiled evidence: [1] the inherent power of federal courts to levy sanctions in response to abusive litigation practices, and [2] the availability of sanctions under Rule 37 against a party who ‘fails to obey an order to provide or permit discovery.'" Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006) (quoting Fed.R.Civ.P. 37(b)(2)). Where the conduct for which sanctions are sought is not in violation of a specific discovery order governed by Rule 37, the district court must rely on its "inherent authority" to impose sanctions. Id.

         The Court may dismiss a party's claims pursuant to the Court's inherent authority "when a party has engaged deliberately in deceptive practices that undermine the integrity of judicial proceedings." Id. (citing Anheuser-Busch, Inc. v. Natural Beverages Distribs., 69 F.3d 337, 348 (9th Cir. 1995)). Because dismissal is a harsh sanction, the Court must weigh five factors to determine whether dismissal is an appropriate sanction:

(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.

         Anheuser-Busch, 69 F.3d at 348 (citing Henry v. Gill Indus., Inc., 983 F.2d 943, 948 (9th Cir. 1993)). Dismissal is appropriate only upon a finding of "willfulness, fault, or bad faith." Leon, 464 F.3d at 958. Additionally, "[d]ue process concerns further require that there exist a relationship between the sanctioned party's misconduct and the matters in controversy such that the transgression threatens to interfere with the rightful decision of the case." Anheuser-Busch, 69 F.3d at 348 (internal quotation marks and brackets omitted).

         III. DISCUSSION

         NectarLux moves for summary judgment on all eight of Luxul's claims and on all three of NectarLux's counterclaims. NectarLux also moves for sanctions against Luxul. Luxul moves for summary judgment on all three of NectarLux's counterclaims and for sanctions against NectarLux. In opposition to NectarLux's motion, Luxul also raises evidentiary objections to several declarations submitted by NectarLux in support of NectarLux's motions and moves for additional sanctions against NectarLux.

         The Court begins by addressing Luxul's evidentiary objections. The Court next addresses both parties' summary judgment motions together. The Court then turns to each of the motions for sanctions.

         A. Luxul's Evidentiary Objections to Declarations Submitted by NectarLux in Support of NectarLux's Motions for Summary Judgment and Sanctions

         In Luxul's opposition to NectarLux's motion for summary judgment, Luxul raises evidentiary objections to and moves to strike six of the declarations filed by NectarLux in support of NectarLux's motions for summary judgment and sanctions. Opp. to NectarLux Summ. J. Mot. at 21-25. Because the Court's conclusions on Luxul's evidentiary objections affect the evidence the Court considers in ruling on the pending motions, the Court begins its analysis by addressing Luxul's evidentiary objections to the NectarLux declarations.

         1. Declaration of Michael C. McKay in Support of Motion for Summary Judgment

         Luxul moves to strike the declaration of Michael C. McKay filed in support of NectarLux's motion for summary judgment ("McKay Declaration"), ECF No. 176-1, for failing to comply with 28 U.S.C. § 1746.

         To satisfy 28 U.S.C. § 1746, a declaration must include a statement in "substantially the following form: . . . ‘I declare (or certify, verify, or state) under penalty of perjury that the foregoing is true and correct.'" The Ninth Circuit has held that a declaration need only "substantially comply with the statute's suggested language" for the Court to consider the declaration as evidence. Commodity Futures Trading Com'n v. Topworth Intern., Ltd., 205 F.3d 1107, 1112 (9th Cir. 1999) (internal quotation marks omitted). Substantial compliance requires the declarant to make two assertions in the declaration: (1) that the statements in the declaration were made "under penalty of perjury, " and (2) "that the contents were true and correct." Schroeder v. McDonald, 55 F.3d 454, 460 n.10 (9th Cir. 1995); see also Nissho-Iwai Am. Corp. v. Kline, 845 F.2d 1300, 1306 (5th Cir. 1988) (28 U.S.C. § 1746 "permits unsworn declarations to substitute for an affiant's oath if the statement contained therein is made ‘under penalty of perjury' and verified as ‘true and correct.' . . . [The declarant] never declared her statement to be true and correct; therefore, her affidavit must be disregarded as summary judgment proof."); Aviles v. Quick Pick Express, LLC, No. CV-15-5214-MWF (AGR), 2015 WL 5601824, at *2 (C.D. Cal. Sept. 23, 2015) (refusing to consider declarations made "under penalty of perjury" with the promise that the declarant "could and would testify" to the contents of the declaration if called as a witness but missing an attestation of truth because "the notation of ‘under penalty of perjury' requires the corollary attestation that the declaration is true"); United States v. 8 Gilcrease Lane, Quincy Fla. 32351, 587 F.Supp.2d 133, 139 (D.D.C. 2008) ("[T]here are two statements that are essential to a proper verification under § 1746: (i) an assertion that the facts are true and correct; and (ii) an averment that the first assertion is made under penalty of perjury."); Barroca v. Santa Rita Jail, No. C04-0482 VRW (PR), 2006 WL 571355 (N.D. Cal. Mar. 3, 2006) ("A declaration is not admissible as evidence if not verified as true and correct and signed under penalty of perjury."); Sterling Fifth Assocs. v. Carpentile Corp., Inc., No. 03 Civ. 6569(HB), 2003 WL 22227960, at *5 (S.D.N.Y. Sept. 26, 2003) ("Section 1746 permits an unsworn declaration made under penalty of perjury to substitute for a sworn affidavit, but only if the claimant states that its contents are true and correct."); Kersting v. United States, 865 F.Supp. 669, 676 (D. Haw. 1994) ("As long as an unsworn declaration contains the phrase ‘under penalty of perjury' and states that the document is true, the verification requirements of 28 U.S.C. § 1746 are satisfied.").

         Luxul objects to the McKay Declaration for failing to comply with Section 1746. However, Luxul does not explain in what way the McKay Declaration fails to comply with Section 1746. Opp. to NectarLux Summ. J. Mot. at 22. McKay states in the declaration: "I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and subject to the penalty of perjury under the laws of California." This satisfies both of the requirements of Section 1746. See 28 U.S.C. § 1746; Commodity Futures Trading Com'n, 205 F.3d at 1112. Therefore, Luxul's objection on this basis is overruled.

         Luxul additionally objects to the contents of certain paragraphs within the McKay Declaration for "improperly characteriz[ing] the contents" of various exhibits attached to the McKay Declaration and for making "conclusory and argumentative statements regarding the contents of these exhibits." Opp. to NectarLux Summ. J. Mot. at 22. The Court concludes that the McKay Declaration accurately describes the exhibits attached to the declaration and that the descriptions are neither conclusory nor argumentative. For example, Luxul objects to the statement "A true and correct copy of Greg Frank's email thanking NectarLux and Luxul for visiting HTC is attached as Exhibit 24." McKay Declaration ¶ 25. Exhibit 24 is an email from Greg Frank of HTC (also known as Human Technologies Corporation) to Adam Lilien of NectarLux and James Pan of Luxul in which Greg Frank states "THANK YOU for visiting and for showing the confidence in Human Technologies, our mission, and our people." ECF No. 175-10, Ex. 24. Luxul does not explain why McKay's description of this email as "Greg Frank's email thanking NectarLux and Luxul for visiting HTC" is inaccurate, ...


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