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Avaya Inc. v. Pearce

United States District Court, N.D. California

July 18, 2019

AVAYA INC., Plaintiff,
v.
RAYMOND BRADLEY PEARCE, et al., Defendants.

          ORDER DENYING MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM FILED BY DEFENDANTS ATLAS SYSTEMS, INC. AND TELEPHONE MAN OF AMERICA LLC RE: DKT. NOS. 76, 77

          SUSAN ILLSTON UNITED STATES DISTRICT JUDGE.

         On July 12, 2019, the Court held a hearing on defendants' motions to dismiss the complaint. For the reasons set forth below, the Court DENIES the motions.

         BACKGROUND

         On January 31, 2019, Avaya Inc. filed this lawsuit against Jason Hines; Dedicated Business Systems International, LLC (“DBSI”); U.S. Voice & Data, LLC (“US Voice”); Raymond Bradley Pearce; Atlas Systems, Inc.; and Telephone Man of America LLC. Atlas and Telephone Man move to dismiss Avaya's first amended complaint (“FAC”) for failure to state a claim.

         I. The Parties

         Avaya provides hardware, software, and business communication solutions to a broad range of companies, from small businesses to large firms and government organizations. FAC ¶ 21 (Dkt. No. 59). Avaya is incorporated in Delaware and its principal place of business is in California. Id. ¶ 6. Avaya also offers IP Office (“IPO”), a telephone system that can support anywhere from five to thousands of users at up to 150 different physical locations. Id. ¶ 23. Each phone or computer on the system requires a software license to work. Id. Avaya sells the IPO software licenses to authorized resellers, and then distributes the software to end customers through unique software license keys. Id.

         Atlas is a Michigan corporation. Id. ¶ 10. Telephone Man is a Florida citizen and Avaya reseller. Id. ¶ 11. Plaintiff alleges Atlas and Telephone Man participated in the distribution scheme of unauthorized Avaya software licenses. Id. ¶ 37.

         II. The Underlying Factual Allegations

         Plaintiff alleges the defendants “perpetrat[ed] a massive illegal software piracy operation, which resulted in the theft and subsequent resale of thousands of unauthorized Avaya Internal Use Software Licenses (‘Internal Use Licenses') to end customers duped into buying pirated software, rather than buying genuine Avaya software licenses through authorized Avaya distribution channels.” FAC ¶ 1.

         Avaya licenses its software through authorized resellers instead of selling its software directly to end customers or on third-party marketplaces. Id. ¶ 33. The software is licensed to a specific end customer and is generally non-transferrable. Id. Plaintiff claims the defendants have been selling unauthorized Avaya software licenses in competition with authorized Avaya software and misusing Avaya's trademarks to do so. Id. Avaya uncovered the unauthorized software license sales through purchasing sample software licenses resold by the defendants. Id. ¶ 35. Avaya tracked the unauthorized software licenses to a former employee, defendant Pearce. Id.

         Pearce, an Oklahoma citizen, was an Avaya employee from 2000-2018. Id. ¶ 7. He allegedly distributed thousands of unauthorized software licenses worth millions of dollars. Id. ¶ 35. Pearce worked in an Oklahoma-based Avaya call center and would generate Internal Use Licenses to help resolve customer support issues. Id. ¶ 34. Pearce used his employee account and other former employee accounts to generate unauthorized software licenses and to avoid Avaya internal controls he knew were in place. Id. ¶¶ 35, 37. Pearce provided the unauthorized software licenses to reseller Hines to distribute to customers and other resellers such as Atlas and Telephone Man. Id. ¶ 37. The Internal Use Licenses are functionally no different than the software licenses sold to customers. Id. ¶ 34. But the Internal Use Licenses are billed to Avaya instead of to the distributor or customer. Id. These unauthorized software licenses had no associated revenue or related customer orders. Id.

         In 2016, plaintiff allegedly received a customer complaint regarding a high phone failure rate for a purchase of over a thousand Avaya-branded phones. Id. ¶ 49. Avaya discovered the phones were counterfeit, with “fake serial numbers, fake manufacturing codes, internal components that had been hacked and programmed to bypass internal software controls, and counterfeit factory seal box labels.” FAC ¶ 49. The phones were traced back to Atlas. Id.

         Plaintiff alleges that because Atlas and Telephone Man were authorized Avaya resellers, they should have known that Pearce and Hines were selling unauthorized software licenses because the prices were below Avaya's authorized resale price. Id. ¶ 98. Plaintiff also claims Hines' login credentials to Avaya's software licensing portal were used in Auburn Hills, Michigan, where Atlas has its principal place of business, and in the Tampa-area of Florida near Plant City, where Telephone Man has its principal place of business. Id. ¶¶ 11, 99.

         III. Defendants' 12(b)(6) Motions to Dismiss for Failure to State a Claim

         Atlas moves to partially dismiss plaintiff's fourth cause of action because defendant does not traffic in circumventing technology. Atlas also argues plaintiff's seventh causes of action fails to allege how ...


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