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Sumotext Corp. v Zoove, Inc.

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

June 26, 2017

SUMOTEXT CORPORATION, Plaintiff,
v.
ZOOVE, INC., et al., Defendants.

          ORDER RE PLAINTIFF'S MOTION FOR LEAVE TO AMEND AND DEFENDANTS' MOTIONS TO DISMISS [RE: ECF 123, 142, 146, 148]

          BETH LABSON FREEMAN United States District Judge.

         The following motions are before the Court: (1) a motion for leave to amend the complaint filed by Plaintiff Sumotext Corporation (“Sumotext”); (2) a motion to dismiss filed by Defendant Mblox, Inc. (“Mblox”); (3) a motion to dismiss filed by Defendants Zoove Corporation (“Zoove”) and Virtual Hold Technology LLC (“VHT”); and (4) a motion to dismiss filed by Defendant StarSteve, LLC (“StarSteve”).

         I. BACKGROUND[1]

         This action involves the various parties' rights to operate StarStar numbers, which are vanity mobile dial codes such as “**LAW” and “**MOVE.” Zoove has the exclusive rights to operate StarStar numbers for AT&T, Verizon Wireless, T-Mobile, and Sprint. Second Am'd Compl. (“SAC”) ¶¶ 6, 15-16, ECF 124. Sumotext, a provider of mobile marketing software and services, built a business around leasing StarStar numbers from Zoove and then subleasing them to end-users while providing additional services related to the StarStar numbers. Id. ¶¶ 21-28. In 2014, Mblox acquired Zoove as a wholly owned subsidiary. Id. ¶¶ 7, 29. During Mblox's ownership, Sumotext continued to lease StarStar numbers and sublease them to its customers while also providing additional services. Id. ¶¶ 29-35. However, in 2015 Mblox sold Zoove to an entity known as VHT StarStar LLC (“VHT StarStar”), which allegedly was formed by VHT and StarSteve for the purpose of acquiring Zoove and monopolizing the market for StarStar numbers. Id. ¶¶ 7, 10, 66-74. Sumotext claims that VHT, StarSteve, and VHT StarStar intended to and did interfere with Sumotext's existing relationships with its StarStar customers by terminating Sumotext's StarStar leases and persuading Sumotext's customers to deal directly with VHT, StarSteve, and VHT StarStar. Id. ¶¶ 75-87, 107-13. Sumotext warned Mblox that VHT, StarSteve, and VHT StarStar were conspiring to exclude Sumotext from the market, and asked Mblox not to sell Zoove, but Mblox nonetheless completed the sale of Zoove to VHT StarStar. Id. ¶¶ 88-106.

         In November 2016, the Court dismissed Sumotext's first amended complaint (“FAC”) with leave to amend. See Order Granting Motion to Dismiss, ECF 117. The Court advised Sumotext that leave to amend was limited to the claims asserted in the FAC and it directed Sumotext not to add new claims or parties without express leave of the Court. Id. at 6. On January 3, 2017, Sumotext filed a second amended complaint (“SAC”) which addresses the deficiencies identified in the Court's dismissal order but also adds a new party, VHT StatStar, and new claims. On the same date that it filed the SAC, Sumotext filed a motion for leave to amend. See Motion for Leave, ECF 123. Sumotext's choice to combine into a single document amendments permitted by the Court's dismissal order and proposed amendments requiring leave of court has resulted in a confusing series of briefs in which Defendants have both opposed leave to amend and moved to dismiss Sumotext's old and new claims under Federal Rule of Civil Procedure 12(b)(6). Newly added defendant VHT StarStar has not appeared, presumably because when the SAC was filed Sumotext had not obtained leave to add VHT StarStar as a party and it was not clear that the Court would grant such leave.

         The SAC asserts claims for: (1) breach of contract against VHT and StarSteve; (2) breach of contract against Zoove; (3) breach of the implied covenant of good faith and fair dealing against Zoove; (4) breach of the implied covenant of good faith and fair dealing against Mblox; (5) tortious interference with contract against VHT, StarSteve, VHT StarStar, and Zoove; (6) monopolization and joint monopolization in violation of the Sherman Act § 2 against Zoove, VHT, StarSteve, and VHT StarStar; (7) conspiracy to monopolize in violation of the Sherman Act § 2 against all defendants; (8) anticompetitive merger under the Clayton Act § 18 against VHT, StarSteve, VHT StarStar, and Zoove; and (9) conspiracy to restrain trade in violation of the Sherman Act § 1 against all defendants. See SAC, ECF 124.

         Sumotext's motion for leave to amend and Defendants' motions to dismiss are addressed as follows.

         II. SUMOTEXT'S MOTION FOR LEAVE TO AMEND

         A. Legal Standard

         Where, as here, the Court's scheduling orders do not set a deadline for amendments to the pleadings, a motion for leave to amend is evaluated under Federal Rule of Civil Procedure 15. See Soto v. Castlerock Farming & Transp., Inc., No. 09-00701, 2011 WL 3489876, at *2 (E.D. Cal. Aug. 9, 2011) (“When the scheduling order does not set a deadline for amendment, Rule 16's good cause standard does not apply.”). Rule 15 provides that “[t]he court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). In deciding whether to grant leave to amend, the Court must consider the factors set forth by the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the Ninth Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2009). A district court ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1) undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by amendment, (4) undue prejudice to the opposing party, and (5) futility of amendment. Eminence Capital, 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries the greatest weight.” Id. However, a strong showing with respect to one of the other factors may warrant denial of leave to amend. Id.

         B. Discussion

         With respect to the first factor, undue delay, Defendants contend that Sumotext could have sought to make the proposed amendments earlier. Defendants also note that although Sumotext's motion seeks leave to add only VHT StarStar as a new party and a Sherman Act § 1 claim, the SAC contains other significant changes that arguably are not within the scope of the leave to amend granted by the Court. For example, the SAC adds a new claim for breach of a nondisclosure agreement (Claim 1) and adds existing defendants to claims to which they were not previously parties. In response, Sumotext argues that the defendants affirmatively misled it regarding numerous facts giving rise to this lawsuit, including the existence of VHT StarStar and the fact that VHT StarStar was the entity that purchased Zoove. While the Court cannot resolve these factual disputes at the pleading stage, the Court is satisfied that for purposes of Rule 15 Sumotext has proffered an adequate explanation for the timing of its proposed amendments.

         Turning to the second factor, bad faith or dilatory motive, the record does not suggest any bad faith on the part of Sumotext. The third factor, repeated failure to cure deficiencies, does not weigh against amendment because the Court has dismissed Sumotext's claims only once previously. Permitting amendment would not unduly prejudice the parties, the fourth factor, given that this case is still at the pleading stage. And finally, while several defendants argue that leave to amend should be denied under the fifth factor, futility, that argument would require the Court to evaluate the adequacy of Sumotext's claims. Given that the defendants also have moved to dismiss Sumotext's claims under Federal Rule of Civil Procedure 12(b)(6), and in light of the liberal standard for amendment under Rule 15, the Court concludes that the most appropriate course is to grant the motion for leave to amend and evaluate the adequacy of Sumotexts' claims in the context of Defendants' motions to dismiss.

         Accordingly, Sumotext's motion for leave to amend is GRANTED. In the future any motion for leave to amend must be submitted with a proposed pleading which clearly indicates what new claims or parties Sumotext seeks to add. Sumotext may not file any pleading containing new claims or parties without express advance authorization by the Court.

         III. DEFENDANTS' MOTIONS TO DISMISS

         A. Legal Standard

         “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted ‘tests the legal sufficiency of a claim.'” Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts as true all well-pled factual allegations and construes them in the light most favorable to the plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the Court need not “accept as true allegations that contradict matters properly subject to judicial notice” or “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) (internal quotation marks and citations omitted). While a complaint need not contain detailed factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         B. Mblox

         Mblox moves to dismiss all claims against it, which include: Claim 4 for breach of the implied covenant of good faith and fair dealing, Claim 7 for conspiracy to monopolize in violation of the Sherman Act § 2, and Claim 9 for conspiracy to restrain trade in violation of the Sherman Act § 1. Before turning to Mblox's specific arguments regarding the adequacy of those claims, the Court addresses Mblox's contention that Sumotext improperly has included in the SAC allegations that were not authorized by the Court's dismissal order or that contradict allegations contained in Sumotext's earlier pleadings. The argument regarding unauthorized allegations lacks merit given the Court's determination, discussed above, that broad leave to amend is warranted under Rule 15 and Foman. The argument regarding contradictions between Sumotext's current and earlier pleadings likewise is unavailing. “[T]here is nothing in the Federal Rules of Civil Procedure to prevent a party from filing successive pleadings that make inconsistent or even contradictory allegations.” PAE Gov't Servs., Inc. v. MPRI, Inc., 514 F.3d 856, 860 (9th Cir. 2007). Absent a showing of bad faith under the standards set forth in Federal Rule of Civil Procedure 11, inconsistent allegations provide no basis for disregarding a plaintiff's allegations. Id. Sumotext has asserted that any inconsistencies between the iterations of its pleadings are attributable to the defendants' concealment of the relevant facts. Accordingly, the Court has considered all of the allegations of the SAC in determining whether Sumotext has stated a claim upon which relief may be granted.

         1. Claim 4 for Breach of the Implied Covenant

         The implied covenant of good faith and fair dealing “requires each contracting party to refrain from doing anything to injure the right of the other to receive the benefits of the agreement.” Avidity Partners, LLC v. State, 221 Cal.App.4th 1180, 1204 (2013) (internal quotation marks and citation omitted). “Although breach of a specific provision of the contract is not a necessary prerequisite to a claim of breach of the implied covenant, it is universally recognized the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract.” Id. (internal quotation marks, citation, and brackets omitted). “The implied covenant of good faith and fair dealing does not impose substantive terms and conditions beyond those to which the parties actually agreed.” Id.

         Sumotext alleges that when Mblox was negotiating the sale of Zoove to VHT StarStar, Mblox knew that Zoove and VHT StarStar had no intention of honoring Sumotext's existing contracts. SAC ¶¶ 155-65. Mblox nonetheless went forward with the sale and assignment of Sumotext's contracts. Id. Sumotext claims that Mblox's sale of Zoove and assignment of Sumotext's contracts under those circumstances breached the implied covenant of good faith and fair dealing. Id. The claimed injury flowing from that alleged breach is the decision by VHT StarStar and Zoove to terminate Sumotext's StarStar leases. Id.

         Mblox argues that Sumotext fails to state a claim for breach of the implied covenant because it fails to identify any particular contractual provision that has been frustrated. See Plastino v. Wells Fargo Bank, 873 F.Supp.2d 1179, 1191 (N.D. Cal. 2012) (“Importantly, to state a claim for breach of the implied covenant of good faith and fair dealing, a plaintiff must identify the specific contractual provision that was frustrated.”) (internal quotation marks and citation omitted). In particular, Mblox notes that the contracts between the parties do not contain any limitation on Mblox's power to sell Zoove and assign StarStar leases. Mblox argues that Sumotext's claim thus is based on frustration of a non-existent contract term.

         Sumotext asserts that it has identified with particularity those contracts whereby Sumotext leased StarStar numbers from Mblox, see SAC ¶ 65, and that an implied covenant claim may be based on the theory that Mblox's conduct resulted in total frustration of those contracts. Sumotext relies primarily on district court decisions arising in the foreclosure context which are factually distinguishable from the present case. For example, in Chaghouri, the district court concluded that a borrower had stated a claim for breach of the implied covenant where the borrower alleged that the defendant bank induced her to default on her mortgage so that she could be considered for loan modification and then initiated foreclosure proceedings based on the default. See Chaghouri v. Wells Fargo Bank, N.A., No. 14-CV-01500-YGR, 2015 WL 65291, at *3-4 (N.D. Cal. Jan. 5, 2015). In the present case, there is no allegation that Mblox induced Sumotext to default or take any other action which would permit Mblox to exploit Sumotext in the manner described in Chaghouri and other cases cited by Sumotext.

         Sumotext also argues that “[t]he covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” Carma Developers (Cal.), Inc. v. Marathon Dev. California, Inc., 2 Cal.4th 342, 372 (1992). Carma Developers involved the parties' rights under a commercial lease that contained a “recapture clause” which permitted the landlord to terminate the lease upon the lessee's notice of intent to sublet the premises. Id. at 374. The clause expressly permitted the landlord to “recapture” any increased rental value of the premises by leasing directly to the proposed sublessee or to another. Id. The lessee argued that the implied covenant prohibited the landlord from exercising its discretionary power under the recapture clause absent a reasonable objection to the proposed sublet. Id. at 373-74. The California Supreme Court rejected that argument, noting that the recapture clause expressly permitted the landlord's conduct and stating that “[w]e are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement.” Id. at 374.

         Carma Developers offers Sumotext no support. The case is factually distinguishable, as Sumotext does not allege that Mblox abused discretionary power conferred on it by the parties' contracts. Moreover, the case went against the plaintiff. Presumably, Sumotext cites Carma Developers merely for the general proposition that unreasonable exercise of discretionary power may, in appropriate circumstances, give rise to a claim for breach of the implied covenant. However, Sumotext cites no case suggesting that Carma Developers may be extended to impose liability based on a company's sale of its subsidiary to a buyer who intends to terminate a particular customer's contracts after the sale. Absent such authority, the Court concludes that Sumotext's theory is untenable. Given this conclusion, leave to amend would be futile. See Eminence Capital, 316 F.3d at 1052 (a strong showing on any one of the Foman factors, which include futility of amendment, may warrant denial of leave to amend).

         Mblox's motion to dismiss Claim IV is GRANTED WITHOUT LEAVE TO AMEND.

         2. Claim 7 for Conspiracy to Monopolize - Sherman Act § 2 and Claim 9 for Conspiracy to Restrain Trade - Sherman Act § 1

         Claim 7 asserts conspiracy to monopolize in violation of the Sherman Act § 2. The elements of that claim are: (1) the existence of a combination or conspiracy to monopolize; (2) an overt act in furtherance of the conspiracy; (3) the specific intent to monopolize; and (4) causal antitrust ...


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