United States District Court, N.D. California, San Jose Division
ORDER RE PLAINTIFF'S MOTION FOR LEAVE TO AMEND
AND DEFENDANTS' MOTIONS TO DISMISS [RE: ECF 123, 142,
LABSON FREEMAN United States District Judge.
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”).
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.
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
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.
motion for leave to amend and Defendants' motions to
dismiss are addressed as follows.
SUMOTEXT'S MOTION FOR LEAVE TO AMEND
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.
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.
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.
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.
DEFENDANTS' MOTIONS TO DISMISS
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.
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
Claim 4 for Breach of the Implied Covenant
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.
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.
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.
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
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.
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).
motion to dismiss Claim IV is GRANTED WITHOUT LEAVE TO AMEND.
Claim 7 for Conspiracy to Monopolize - Sherman Act § 2
and Claim 9 for Conspiracy to Restrain Trade
- Sherman Act § 1
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