Opinion
No. 2:07-cv-00393-MCE-KJM.
March 20, 2008
MEMORANDUM AND ORDER
Through the present action, Plaintiff Qwest Communications Corporation ("Qwest") seeks damages from Defendants Herakles, LLC ("Herakles"), Sandy Beaches I LP ("Sandy Beaches"), Riptide I LP ("Riptide"), and Capital Lease Funding, Inc. and Capital Lease Funding, LP, for deceptive advertising, breach of contract, constructive fraud and breach of fiduciary duty, statutory and common law unfair competition, tortious interference with both prospective economic advantage and with contract, unjust enrichment, civil conspiracy, and aiding and abetting. Pursuant to Federal Rule of Civil Procedure 12(b)(6), Herakles, Sandy Beaches, and Riptide (collectively "Defendants") filed the present Motions to Dismiss all counts pled against them. As set forth below, those Motions will be granted in part and denied in part.
The two other named Defendants, Capital Lease Funding, Inc. and Capital Lease Funding LP ("CapLease Funding Defendants"), have collectively filed another Motion to Dismiss in this matter. Because both the allegations levied against the CapLease Funding Defendants, as well as the resolution of their motion, vary from the other Defendants considered herein, the CapLease Funding Motion will be addressed by separate Order.
BACKGROUND
This section is derived from the allegations in Plaintiff's Complaint.
This action arises from the circumstances surrounding the performance of three contracts, which governed the construction, occupation, and management of a Data Center in Sacramento, California. Originally, Qwest and Wavve Telecommunications, Inc. ("Wavve") contemplated entering only one agreement to achieve these objectives. However, when the now defunct Wavve was unable to obtain financing from the CapLease Defendants, the parties restructured their arrangement via the three current contracts. First, Qwest leased the Data Center from Sandy Beaches ("Lease"). Next, Qwest subleased a portion of the Data Center to Riptide ("Sublease"). Finally, Qwest entered a Real Estate Services Agreement ("RESA") with Wavve for the management of Qwest's portion of the Data Center.
Riptide subsequently assigned its rights in the Sublease to Herakles. Wavve assigned its rights in the RESA to Surferr LLC, an entity alleged to be related to Herakles, Sandy Beaches, and Riptide. Surferr LLC then assigned its rights in the RESA to Riptide, who subsequently re-assigned those rights to Herakles. Qwest alleges that Herakles is now both its competitor and sublessor tenant, as well as the manager of Qwest's portion of the Data Center.
The Lease terms extend for a period of ten years, with the option to renew for another nine. Qwest uses the leased space to provide co-location, data center, telecommunications, internet access, content hosting, network management, and internet security services. The Lease provides for a "Tier IV data center" with 99.999% operational availability and contains a confidentiality clause, which, according to Qwest, Sandy Beaches has violated.
Qwest alleges that the RESA requires Herakles to act as Qwest's "exclusive agent" in managing the Data Center and Qwest further alleges that the parties agreed that the Data Center manager would be the "face of Qwest" to Qwest's customers and potential customers. However, Qwest now claims that, instead, Herakles, as the current manager, diverted customers from Qwest to itself, in its separate capacity as Qwest's sublessor.
Qwest also claims that Herakles engaged in deceptive advertising by making statements purporting to be the Data Center owner on the Herakles website and within the Data Center. Additionally, Qwest alleges that Herakles misrepresented the property in Data Center sign-in sheets by omitting Qwest's name on the logs and that Herakles took Qwest's proprietary customer and potential customer information.
Qwest further states that Herakles has failed to perform certain construction work as obligated under the RESA and that, in its capacity as sublessor, Herakles has failed to hire a required third-party manager for its own portion of the Data Canter. Instead, despite being a competitor of Qwest, Herakles allegedly manages both the Qwest facility and its own facility, to save itself added management costs.
Finally, Qwest alleges that Herakles, Riptide, Sandy Beaches and the CapLease Defendants are alter egos of one another. Qwest alleges that the Defendants have common ownership, use one company as a conduit for another, and share offices, employees, and bank accounts. Qwest alleges that this practice enables Herakles to breach its contract without liability, all the while collecting Qwest's rent payments through Sandy Beaches and diverting customers to itself.
STANDARD
A. Motion to Dismiss Under Rule 12(b)(6)
On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996).
Rule 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, ___ U.S. ___, 127 S. Ct. 1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the "grounds" of his "entitlement to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Id. at 1964-65 (internal citations and quotations omitted). Factual allegations must be enough to raise a right to relief above the speculative level. Id. at 1965 (citing 5 C. Wright A. Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004) ("The pleading must contain something more . . . than . . . a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).
A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. A court should "freely give" leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant, . . . undue prejudice to the opposing party by virtue of . . . the amendment, [or] futility of the amendment. . . ." Fed.R.Civ.P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is denied only when it is clear the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).
B. General Pleading Requirements
"Rule 8(a)(2) . . . requires a 'showing,' rather than a blanket assertion of entitlement to relief. Without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests." Id. at 1965 n. 3. (Factual allegations necessary to plead "grounds" on which claim rests.)
A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 1974. If the "plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Id. Nevertheless, "[a] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and 'that a recovery is very remote and unlikely.'" Id. at 1965.
Federal Rule of Civil Procedure 9(b) provides that "a party must state with particularity the circumstances constituting fraud." "A pleading is sufficient under Rule 9(b) if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations."Neubronner v. Milken, 6 F.3d 666, 671-672 (9th Cir. 1993) (internal quotations and citations omitted). "The complaint must specify such facts as the times, dates, places, benefits received, and other details of the alleged fraudulent activity."Id. at 672.
ANALYSIS
A. Defendants' Alter Ego Liability"A basic tenet of American corporate law is that the corporation and its shareholders are distinct entities." Dole Food Co. v. Patrickson, 538 U.S. 468, 474 (2003). Alter ego liability, however, provides a means to pierce the corporate veil for purposes of imposing liability on a defendant for an underlying cause of action. See Dion LLC, v. Infotek Wireless, Inc., 2007 WL 3231738 at *3 (N.D. Cal. Oct. 30, 2007) (quotingLocal 159 v. Nor-Cal Plumbing, Inc., 185 F.3d 978, 985 (9th Cir. 1999)).
Assessing a corporate entity's alter ego status is an equitable determination within the province of the trial court. Assoc. Vendors, Inc., v. Oakland Meat Co., Inc., 210 Cal. App. 2d 825, 837 (1st Dist. 1962). Decisions are necessarily fact-dependent and "vary according to the circumstances in each case." Id. (internal quotations omitted). Nevertheless, the general requirements for proving liability are "1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and 2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow." Id. "Bad faith in one form or another is an underlying consideration and will be found in . . . those cases wherein the trial court was justified in disregarding the corporate entity." Id. at 838.
Among the factors supporting a "unity of interest" finding are "financial issues (e.g., was the corporation adequately capitalized?); corporate formality questions (e.g., was stock issued, are minutes kept and officers and directors elected, are corporate records segregated?); ownership issues (e.g., what is the stock ownership picture?); commingling issues (e.g., are corporate assets commingled, does the parent company merely use the corporate shell of the subsidiary to obtain goods and services for the parent company?); etc." Tomaselli v. Transamerica Ins. Co., 25 Cal. App. 4th 1269, 128 n. 13. (citingAssoc. Vendors, Inc. at 837-842). Notably, "[t]he mere fact of sole ownership and control does not eviscerate the separate corporate identity that is the foundation of corporate law."Katzir's Floor and Home Design, Inc. v. M-MLS.com, 394 F.3d 1143, 1149 (9th Cir. 2004) (citing Dole Food Co. at 475).
Under the second prong of the doctrine, "[a]lter ego is . . . invoked only where recognition of the corporate form would work an injustice to a third person." Id. (quoting Tomaselli at 1285). "The injustice that allows a corporate veil to be pierced is not a general notion of injustice; rather, it is the injustice that results only when corporate separateness is illusory." Katzir's Floor and Home Design at 1149. Facts relevant to the "injustice" inquiry include "inadequate capitalization, commingling of assets, [a] disregard of corporate formalities . . . [and] any other facts which demonstrate the critical element: that an inequitable result would have followed." Tomaselli at 1285.
Conclusory allegations are not sufficient to support an alter ego finding. Hokama v. E.F. Hutton Co., Inc., 566 F. Supp. 636, 647 (C.D. Cal. 1983); Maganallez v. Hilltop Lending Corp., 505 F. Supp. 2d 594, 607 (N.D. Cal. 2007). In Brennan v. Concord EFS, Inc., the Northern District determined that a statement alleging only that "Bank One exercised such dominion and control over Bank One, NA and Bank One Arizona that it [was] liable according to the law for the acts of Bank One" was an inadequate legal conclusion. 369 F. Supp. 2d 1127, 1136 (N.D. Cal. 2005).
Similarly, in Nordberg v. Trilegiant Corp., the Northern District granted a motion to dismiss, stating that allegations of "routine control by a parent [were] insufficient to support the contention that a subsidiary is a mere instrumentality." 445 F. Supp. 2d 1082, 1102 (N.D. Cal. 2006). Additionally, in Long v. Postorivo, the plaintiffs' allegations "that Postorivo was the founder and former CEO and president of National . . . that Postorivo worked 'in close coordination' with National, . . . that Postorivo personally assured [plaintiff] of the success of their business transactions," and that defendant sold off corporate assets to prevent recovery were "only slightly beyond conclusory" and insufficient to withstand defendants' motion for judgment on the pleadings. 2007 WL 2990457 at *1-2 (N.D. Cal. 2007).
Other plaintiffs, however, have met the minimum factual pleading threshold. In Maganallez v. Hilltop Lending Corp., the Northern District found the following allegations sufficient to allege alter ego liability:
"[Hilltop Lending] was inadequately capitalized, failed to maintain corporate formalities and was designed to limit the liability of Nguyen. There was such a unity of interest and ownership between Nguyen and [Hilltop Lending] that the individuality and separateness of Nguyen and [Hilltop Lending] has ceased to exist and adherence to the fiction of the separate existence of [Hilltop Lending] would sanction fraud and promote injustice."505 F. Supp. 2d 594, 607 (N.D. Cal. 2007).
Likewise, in In re Napster, Inc. Copyright Litigation, the allegation that the defendant exercised "essentially full operational control" over Napster was sufficient to withstand a motion to dismiss. 354 F. Supp. 2d 1113, 1122 (N.D. Cal. 2005). Furthermore, in Dion LLC v. Infotek Wireless, Inc., the plaintiff successfully alleged that
"[t]he unity of interest and ownership between [the defendants] . . . prevented the two from functioning as separate entities . . . [The two companies] conduct[ed] the same type of business, shared the same office space, used the same business address, and had the same bookkeeper, lawyers and CPA . . . [I]t would be inequitable to allow [the defendant] to now assert a distinction between the corporations to avoid liability."2007 WL 3231738 at *3 (N.D. Cal. 2007).
In this case, Qwest specifically alleges the following:
Herakles is located at 1100 North Market Boulevard in Sacramento, California. Compl., ¶ 6. The Data Center is also housed at 1100 North Market Boulevard. Compl., ¶ 12.
Sandy Beaches, Riptide, and the now defunct Wavve all operated out of 9322 Tech Center Drive, in Sacramento, California. Compl., ¶¶ 7-8, 10.
The Defendants share common officers and directors. For example, Lou Kirchner is both the President and CEO of Herakles, as well as the CEO of Sandy Beaches, and he sits on the Board of Directors of Sandy Beaches. As a further example, William Pollert and Shawn Seale of the CapLease Defendants are also officers of Riptide.
Finally, the Lease, RESA, and Sublease were all signed by Diana Bushard as "Vice President of Legal." Compl., ¶ 53.
On information and belief, the Defendants have substantially similar equitable ownership. Compl., ¶ 53.
On information and belief, the Defendants use the same offices and employees. For example, on information and belief, some of the senior managers of the CapLease Defendants are part owners of the Data Center. Sandy Beaches, Wavve, and Riptide have the same address. Compl., ¶ 53.
On information and belief, the Defendants use one entity as a mere conduit for the affairs of the other, e.g., the parent company merely uses the subsidiary to take Qwest's Lease payments (which, upon information and belief, the parent company uses to remain financially afloat) in one hand, and with the other hand, misappropriates Qwest of the business that is the essential purpose of the Lease. Compl., ¶ 53.
On information and belief, the Defendants commingle corporate assets. For example, Qwest pays rent to a common account for Sandy Beaches and Herakles. Indeed, Herakles' [sic] has presented itself on its website as the owner of Sandy Beaches' main asset, the Data Center. Compl., ¶ 53.
The circumstances surrounding the execution of the Lease, RESA and Sublease, including the cost structure and language of the three agreements establish that the agreements should be construed together and that Sandy Beaches should be construed as the real party-in-interest or that the Defendants should be treated as one entity or the alter egos of each other. Compl., ¶ 53.
Honoring the Defendants' corporate shells would promote a fraud or injustice against Qwest because the same officers, directors, and employees have caused Herakles to breach its agreements and fiduciary duties to Qwest, depriving Qwest of its ability to obtain and serve customers . . . while simultaneously collecting rent from Qwest under the Lease. Compl., ¶ 54.
The above allegations are far from conclusory, and allege a unity of interest that renders the Defendants' separate entities illusory.
Qwest's allegations that it would be unjust to allow Defendants to hide behind this illusory shield are sufficient as well. Accordingly, the Court finds that Qwest's allegations that Herakles, Sandy Beaches, and Riptide are the alter egos of one another meet the requirements of Rule 8(a).
B. Qwest's Claims Against Defendants
1. Count I — False Advertising in Violation of the Lanham Act, 15 U.S.C. § 1125, Sections 43(a) and 43(b) (Against Herakles/All Defendants)
"The elements of the Lanham Act § 43(a) false advertising claim are: (1) a false statement of fact by the defendant in a commercial advertisement about its own or another's product; (2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience; (3) the deception is material, in that it is likely to influence the purchasing decision; (4) the defendant caused its false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant or by a lessening of the goodwill associated with its products."Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997).
Notably, Herakles does not challenge this Count in its Motion to Dismiss. Additionally, Sandy Beaches raises a challenge only on its own behalf stating, "All of these allegations implicate Herakles' conduct, but make absolutely no mention of [Sandy] Beaches."
Sandy Beaches' Motion to Dismiss, 15:12-13. Similarly, Riptide states, "Qwest's Lanham Act allegations implicate only Herakles, not Riptide." Riptide's Motion to Dismiss, 4:23-24. Neither Sandy Beaches nor Riptide raised any challenges to the sufficiency of the allegations against Herakles. Therefore, Defendants' collective lack of opposition to Qwest's claim against Herakles, coupled with Plaintiff's alter ego allegations, which could extend liability to all Defendants, are sufficient to withstand Defendants' Motions to Dismiss.
Even if that were not the case, Plaintiff's allegations are independently sufficient to withstand a Motion to Dismiss. Plaintiff alleges that Herakles made numerous inaccurate or false statements regarding Data Center ownership and services on Herakles' website. Plaintiff further alleges facts sufficient to show that the statements were both material and damaging. These allegations provide sufficient notice to allow Defendants to answer the Complaint. Hence, Defendants' Motions to Dismiss Count I are DENIED.
2. Counts II — IV — Breach of Contract — Lease (Against Sandy Beaches/All Defendants); RESA — (Against Herakles/All Defendants); Sublease (Against Herakles/All Defendants)
To prove a breach of contract claim, Plaintiff must show: 1) a contract; 2) Plaintiff's performance or excuse for nonperformance; 3) Defendant's breach; and 4) resulting damage to the Plaintiff. Wise v. Southern Pac. Co., 223 Cal. App. 2d 50, 59 (1st Dist. 1963), overruled on other grounds by Applied Equipment Corp. v. Litton Saudi Arabia Limited, 7 Cal. 4th 503 (1994).
Defendants are correct that "[u]nder California law, only a signatory to a contract may be liable for any breach." Clemens v. American Warranty Corp., 193 Cal. App. 3d 444, 452 (2d Dist. 1987). In reliance on that proposition, Defendants spend much of their arguments pointing out that the allegations of breach of the various agreements were not made against them individually, but were made based on the actions of their Co-Defendants. At no point do any of the Defendants argue that the allegations against the actual parties to each contract are insufficient.
As an example, Sandy Beaches states, "[w]hile the Complaint is replete with allegations regarding Herakles' conduct in connection with various other claims and Agreements, Qwest does not identify any conduct by [Sandy] Beaches that could support a breach of contract claim against [Sandy] Beaches." Sandy Beaches' Motion to Dismiss, 6:10-12. Sandy Beaches' argument serves to emphasize the thoroughness of the allegations against Herakles, its alleged alter ego.
Therefore, Defendants' Motions fail. Plaintiff has pled all elements of breach of contract as to each agreement. Since Plaintiff has also pled sufficient facts to support the alter ego liability of all Defendants, Defendants' Motions to Dismiss Counts II through IV are DENIED. 3. Count V — Common Law and Cal. Civ. Code § 1573 — Constructive Fraud — Breach of Fiduciary Duty (Against Herakles/All Defendants)
The parties dispute whether Qwest's filing of this suit is premature in light of contract provisions in the Lease purporting to give Sandy Beaches an opportunity to cure. Construing all pleadings in the light most favorable to Qwest, for purposes of the current Motions the disputed Contract provision will be interpreted as Qwest suggests, to indicate just one of the remedies available to it.
Case law cited by Defendants is inapposite because it involves a standstill provision related to a settlement agreement and the parties in that case disputed only the calculation of the applicable period, not the application of the actual provision.See Willis Corroon Corp. of Utah, Inc. v. United Capital Ins. Co., 1998 WL 30069 (N.D. Cal. 1998).
"In its generic sense, constructive fraud comprises all acts, omissions and concealments involving a breach of legal or equitable duty, trust, or confidence, and resulting in damages to another. Constructive fraud exists in cases in which conduct, although not actually fraudulent, ought to be so treated-that is, in which such conduct is a constructive or quasi fraud, having all the actual consequences and all the legal effects of actual fraud." Barrett v. Bank of America, 183 Cal. App. 3d 1362, 1368-1369 (4th Dist. 1986) (internal citations and quotations omitted).
The elements of constructive fraud are: 1) a fiduciary or confidential relationship; 2) an act, omission, or concealment involving a breach of that duty; 3) reliance; and 4) resulting damage. Neilson v. Union Bank of California, 290 F. Supp. 2d 1101, 1142 (C.D. Cal. 2003). Breach of fiduciary duty constitutes a constructive fraud. California Real Estate Loans, Inc. v. Wallace, 18 Cal. App. 4th 1575, 1581 (1st Dist. 1993).
An agency relationship creates a fiduciary duty. Maganallez v. Hilltop Lending Corp., 505 F. Supp. 2d 594, 608 (N.D. Cal. 2007). The parties primary current disagreement is whether Herakles is an agent of Qwest for purposes of the RESA. To properly allege this fiduciary relationship and the remaining elements of the Count, Qwest must meet Rule 9(b)'s particularity requirements for pleading fraud.
To meet its pleading threshold, Qwest specifically alleges that Herakles was contractually obligated to act as its "exclusive agent." Herakles subsequently points to language in the same paragraph to support its argument that Herakles is an "independent contractor." This apparently contradictory language is not dispositive, however, because an independent contractor can also be an "agent." In re Coupon Clearing Service, Inc., 113 F.3d 1091, 1100 (9th Cir. 1997); Channel Lumber Co., Inc. v. Porter Simon, 78 Cal. App. 4th 1222, 1230 (3d Dist. 2000); City of Los Angeles v. Meyers Bros. Parking System, Inc., 54 Cal. App. 3d 135, 138 (2d Dist. 1975).
Herakles argues that Qwest cannot claim that a fiduciary relationship arises out of the parties' contractual obligations. This argument is misguided. Herakles relies on Rickel v. Schwinn Bicycle Co., which states, "Plaintiffs have failed to allege facts which imply that anything more than a contractual relationship existed here; a fiduciary relationship does not exist." 144 Cal. App. 3d 648, 655 (2d Dist. 1983). However, this ignores the preceding language, "California law is that parties to a contract, by that fact alone, have no fiduciary duties toward one another." Id. at 654. This language would not apply if the parties contracted to enter a fiduciary relationship, as is alleged here. It would be an absurd result indeed if the contract itself negated the fiduciary duties arising from an alleged agency agreement.
"One who contracts to act on another's behalf and is subject to the other's control . . . may still be acting as an agent and also as an independent contractor." In re Coupon Clearing Service, Inc., 113 F.3d 1091, 1100 (9th Cir. 1997). "One of the chief characteristics of an agency relationship is the authority to act for and in the place of the principal for the purposes of bringing him or her into legal relations with third parties." DSU Aviation, LLC v. PCMT Aviation, LLC, 2007 WL 3456564, *5 (N.D. Cal. 2007). "The other important aspect in determining the existence of an agency relationship is the degree of control exercised by the principal over the activities of the agent." Id. "If the principal has the right to control the agent's day-to-day operations, then an agency relationship exists. If, however, the principal has no control over the day-to-day operations and only has [the] right to dictate the end result of the agent's activities, then an 'independent contractor' relationship exists." Figi Graphics, Inc. v. Dollar General Corp., 33 F. Supp. 2d 1263, 1266 (S.D. Cal. 1998) (citing Coupon Clearing Services at 1099-1100).
In DSU Aviation, the plaintiffs' allegations that the defendants were responsible for securing insurance and had the authority to enter into contracts with third-parties were sufficient to evidence that those plaintiffs had relinquished to the defendants the "authority to transact . . . or manage some affair." DSU Aviation at *5 (citing Coupon Clearing Services at 1099).
The Southern District, in Figi Graphics, in analyzing a motion to dismiss for lack of personal jurisdiction, determined that allegations were insufficient to show the requisite "right to control." Figi Graphics at 1266. In that case there was no evidence that the alleged principal decided where the alleged agent would find its products, what products it would buy, from whom it would purchase or the price it would pay. Id. at 1266-1267.
Plaintiff's agency allegations similarly fall short of the mark. Plaintiff alleges that under its contemplated agreement with Wavve, "Wavve was to be the face of Qwest to Qwest's customers and prospective customers." Compl., ¶ 12. However, Plaintiff does not allege that this agreement ever came to fruition. Rather, Plaintiff alleges that the three agreements replacing the originally contemplated agreement "were intended to and did provide Qwest with the same operational rights and commitments that the contemplated agreement between Qwest and Wavve envisioned; namely . . . a third-party manager who was the face of Qwest at the Data Center." Id. ¶ 14. Plaintiff otherwise relies on the contract term "exclusive agent" and further alleges that under the original contemplated agreement with Waave, "the parties agreed that the manager under the RESA would conduct themselves at all times as Qwest's fiduciary and exclusive agent." Compl., ¶ 27. Qwest's allegations do not show that Qwest controlled Herakles in any manner or that Herakles had the "authority to transact . . . or manage some affair" on Qwest's behalf.
Plaintiff's allegations that Herakles acted as its agent are wholly conclusory. Even without applying Rule 9(b)'s heightened pleading standard, Qwest has not sufficiently alleged the required elements to establish the existence of an agency relationship and, therefore, is unable to establish the breach of such a relationship. Hence, Defendants' Motions to Dismiss Count V are GRANTED, with leave to amend.
4. Count VI — Violation of the Unfair Competition Act, Cal. Bus. Prof. Code §§ 17200, 17500 et seq. (Against Herakles/All Defendants)
Herakles does not challenge the allegations in this Count. Both Sandy Beaches and Riptide argue that this claim is directed only at Herakles and does not implicate them individually. Therefore, considering the lack of opposition to the allegations against Herakles in conjunction with the above alter ego allegations, Defendants' Motions to Dismiss must fail. Hence, the Motions to Dismiss Count VI are DENIED.
5. Count VII — Common Law Unfair Competition (Against All Defendants)
"Claim[s] of unfair competition can encompass a variety of theories." Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 467 (9th Cir. 1990). There is some confusion among the parties as to the theory of competition on which Qwest relies. Nevertheless, regardless of theory, in order for competition to rise to the level of "unfair," it must involve "wrongful conduct such as fraud, misrepresentation, intimidation, coercion, [or] obstruction." Scudder Food Products v. Ginsberg, 21 Cal. 2d 596, 599 (1943) (quoting Katz v. Kapper, 7 Cal. App. 2d 1, 4 (2d Dist. 1935)).
Defendants argue that Qwest only alleged one theory of unfair competition, misappropriation. Under this theory Plaintiff must prove that it "invested substantial time and money in development of its . . . property, . . . that [D]efendant[s] appropriated the property at little or no cost, and . . . that [Qwest] has been injured by the [D]efendant[s]' conduct." Self Directed at 467 (quoting Balboa Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1342 (3d Dist. 1990) (internal quotations omitted)).
Qwest alleges that Herakles misappropriated the names and identities of customers and potential customers whose relationships Qwest cultivated. Defendants counter that Qwest could not have spent the requisite labor, skill, and money to compile customer information since the visitors to the Data Center provided their own information to Herakles via the visitor sign-in sheets.
Defendants' argument is flawed for two reasons. First, since Qwest alleges that Herakles was acting as Qwest's "exclusive agent" when Herakles acquired the relevant information, it can be inferred that Qwest invested funds in management fees to Herakles to acquire that data. Second, it can also be inferred that Qwest invested time and funds in cultivating customer and potential customer relationships in the first place.
Because this Court finds that Plaintiff adequately alleged a claim for unfair competition based on misappropriation, there is no need for this Court to address all additional potential unfair competition claims that Plaintiff might have intended. Defendants' Motion to Dismiss Count VII is DENIED.
6. Count VIII — Tortious Interference with Prospective Economic Advantage (Against Herakles/All Defendants); Count IX — Tortious Interference with Contract (Against Herakles/All Defendants); Count X — Tortious Interference with Contract (Against Herakles)
"In order for [Qwest] to prove tortious interference with prospective economic advantage [("TIPEA")], it must show 1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; 2) [D]efendant[s'] knowledge of the relationship; 3) intentional, wrongful acts on the part of [D]efendant[s] designed to disrupt the relationship; 4) actual interference with or disruption of the relationship; and 5) economic harm to the [P]laintiff proximately caused by the acts of the [D]efendant[s]." Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1153-1154 (2003).
"This tort . . . 'protects the expectation that the relationship eventually will yield the desired benefit, not necessarily the more speculative expectation that a potentially beneficial relationship will arise.'" Id. at 1164 (quotingWestside Center Associates v. Safeway Stores 23, Inc., 42 Cal. App. 4th, 507, 524 (5th Dist. 1996). Additionally, the requisite wrongfulness must derive from something other than the fact of interference itself. Id. at 1153. "[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable standard." Id. at 1159. Finally, Plaintiff need not prove that Defendants specifically intended to interfere with its business expectancy, but must show that Defendants "knew that the interference was certain or substantially certain to occur as a result of [their] action[s]." Id. at 1154.
Alternatively, in order for Plaintiff to properly allege tortious interference with contract ("TIC"), Plaintiff must show 1) the existence of a valid contract with a third party; (2) Defendants' knowledge of that contract; (3) Defendants' intentional acts designed to induce a breach or to disrupt the contractual relationship, (4) actual breach or disruption of the contractual relationship, and (5) resulting damage. Bank of N.Y. v. Fremont General Corp., ___ F.3d ___, 2008 WL 269458 (9th Cir. 2008).
The intent requirement is the same for claims of tortious interference with contract as it is for tortious interference with prospective business advantage. See Korea Supply Co. at 1155-1157. However, the California Supreme Court has cautioned against conflating the claims stating, "Our courts should . . . firmly distinguish the two kinds of business contexts, bringing a greater solicitude to those relationships that have ripened into agreements, while recognizing that relationships short of that subsist in a zone where the rewards and risks of competition are dominant." Id. at 1157 (quoting Della Penna v. Toyota Motor Sales, U.S.A., 11 Cal. 4th 376, 378 (1995)). Though Plaintiff can plead both causes of action simultaneously, claims for tortious interference with contract do not require pleading that Defendants' conduct was independently wrongful because "intentionally interfering with a contract is a wrong in and of itself." Id. at 1158.
Turning now to the pertinent allegations of Plaintiff's Complaint, Defendants challenge Qwest's TIPEA claim as alleged in Count VIII, arguing that Qwest has failed to identify specific prospective customers with which it had a relationship. Qwest alleges that it had relationships with prospective customers who were in the market for the services Qwest provides and who had taken steps toward engaging Qwest. Therefore, Qwest alleges that it had existing relationships with a finite group of potential customers sufficient to state a viable cause of action.
Qwest's allegations in that regard are more substantial than those rejected in Janda v. Madera Community Hosp. 16 F. Supp. 2d 1181, 1189 (E.D. Cal. 1998). In that case, the court dismissed the plaintiff's TIPEA claim because he alleged only that the defendants had interfered with his relationship with "'future' lost patients." Id. Qwest's allegations differ because Qwest actually pointed Defendants to prospective customers with whom Qwest had already engaged in some form of relationship. The pool of parties in the market for Qwest's services is much smaller than the pool in the market for a doctor's services. Additionally, Qwest alleges that Herakles, as manager of the Data Center, has access to the list of prospective customers via the visitor logs. Therefore, Qwest's allegations are sufficient to satisfy its obligations under Rule 8, and Defendants' Motions to Dismiss Count VIII are accordingly DENIED.
Defendants also challenge Qwest's TIC claim against all Defendants (Count IX, for alleged interference with current customer relationships) for failure to identify any specific current customers. However, again for the purposes of Rule 8, it is sufficient that Plaintiff identified "third party customers."See Id. Qwest's allegations point Defendants to a discrete group of third parties with which Qwest had already contracted. Additionally, Qwest again alleges that Herakles would have known of Qwest's contracts with its customers via information gleaned from its position as manager of the Data Center. Finally, Qwest alleges that Herakles' actions caused at least one of Qwest's customers to breach its agreement with Qwest. Therefore, Qwest met its pleading burden as to Count IX and Defendants' Motions to Dismiss that Count are DENIED.
Finally, Defendants challenge Qwest's allegation that Herakles interfered with the Lease, as stated in Count X. Qwest specifically repeated and realleged each and every one of the Complaint's prior allegations into this Count. Therefore, Qwest alleges that Herakles, Sandy Beaches, and Riptide are alter egos of one another while it simultaneously argues that Herakles interfered with the Sandy Beaches' Lease.
However, "[t]he tort duty not to interfere with contract falls only on strangers." Applied Equip, at 514. A party to the contract cannot be held liable for tortious interference with that contract. Id. Herakles could not, as a matter of law, interfere with a contract to which it is alleged to be a party.
Qwest finds no relief in its argument that it is pleading in the alternative. Though Plaintiff is correct that it could plead alternative and inconsistent theories for relief, Plaintiff failed to do so here. "Inconsistent allegations can be made in separate claims or defenses under Federal Rule of Civil Procedure 8(e)(2), but no authority is known . . . which permits blowing hot and cold in the same cause of action." Steiner v. Twentieth Century-Fox Film Corp., 140 F. Supp. 906, 908 (D.C. Cal. 1953);See also Friendship Medical Center, Ltd. v. Space Rentals, 62 F.R.D. 106 (N.D. Ill. 1974).
This case was decided under a prior version of Rule 8. However, the most recent amendments were stylistic only and did not affect the substance of the Rule.
Qwest inadvertently acknowledges its pleading failure in its Opposition to the Defendants' Motions to Dismiss. Qwest addresses an unpublished case raised by Herakles and states that because that plaintiff had included allegations of alter ego in every cause of action, it was appropriate for the court to dismiss. See Rachford v. Air Line Pilots Ass'n, Int'l, 2006 WL 1699578 (N.D. Cal. 2006). Qwest cannot avoid the fact that it similarly incorporated its alter ego allegations into Count X, thereby depriving itself of its own cause of action. Qwest's claim against Herakles cannot stand, and Defendant's Motion to Dismiss that claim will be GRANTED, with leave to amend.
7. Count XI — Unjust Enrichment (Against Herakles/All Defendants)
Defendants are correct that "[u]njust enrichment is not a cause of action . . . or even a remedy, but rather 'a general principle, underlying various legal doctrines and remedies. . . . It is synonymous with restitution." McBride v. Boughton, 123 Cal. App. 4th 379, 387 (1st Dist. 2004) (quoting Melchior v. New Line Productions, Inc., 106 Cal. App. 4th 779, 793 (2d Dist. 2003)). Indeed, "[u]njust enrichment has . . . been characterized as describing 'the result of a failure to make restitution. . . .'"Id. (quoting Dunkin v. Boskey, 82 Cal. App. 4th 171, 198 n. 15 (1st Dist. 2000)).
However, this Court must "ignore [e]rroneous or confusing labels . . . if the complaint pleads facts which would entitle the plaintiff to relief." McBride (quoting Saunders v. Cariss, 224 Cal. App. 3d 905, 908 (4th Dist. 1990)). The court in McBride looked "to the actual gravamen of [the] complaint to determine what cause of action, if any, [was] stated, or could have [been] stated if given leave to amend. In accordance with this principle, [the court] construed [the] purported cause of action for unjust enrichment as an attempt to plead a cause of action giving rise to a right to restitution." Id. at 387-388.
This construction is consistent with the liberal pleading standards embodied in Rule 8. See Ritchie v. United Mine Workers of America, 410 F.2d 827, 832 (6th Cir. 1969) ("The designation of counts is not controlling of the interpretations to be placed on these claims."). "A pleading, according to the liberal concepts of Rule 8, is to be judged by its substance rather than by its form or label." In re Blewett, 14 B.R. 840, 842 (9th Cir. 1981). "It would be improper to dismiss a claim which raises a cognizable cause of action where that claim is mislabeled." Id. (quoting Voytko v. Ramada Inn of Atlantic City, 445 F. Supp. 315, 325 (D.C.N.J. 1978)).
Voytko cited a prior version of Rule 8, but the subsequent amendments to the Rule have merely been in form, not substance.
"There are several potential bases for a cause of action seeking restitution. For example, restitution may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason." McBride at 388. "Alternatively, restitution may be awarded where the defendant obtained a benefit from the plaintiff by fraud, duress, conversion, or similar conduct. In such cases, the plaintiff may choose not to sue in tort, but instead to seek restitution on a quasi-contract theory." Id.
Riptide challenges this Count, arguing that it is inconsistent with Qwest's allegations that the parties expressly contracted with one another. Riptide Motion to Dismiss, 3:8-13, 12:11-15. "Under California law, unjust enrichment is an action in quasi-contract. An action based on quasi-contract cannot lie where a valid express covering the same subject matter exists between the parties." Gerlinger v. Amazon.com, Inc., 311 F. Supp. 2d 838, 856 (N.D. Cal. 2004); see also Kessler v. Sapp, 169 Cal. App. 2d 818, 824 (2d Dist. 1959).
Plaintiff again argues that it is pleading in the alternative. However, "[e]ven though Rule 8(e)(2) . . . allows a party to state multiple, even inconsistent claims, it does not alter a substantive right between the parties and accordingly does not allow a plaintiff [to invoke] state law to an unjust enrichment claim while also alleging an express contract." Gerlinger at 856. Since Qwest incorporated all prior allegations, including those stating that the parties expressly contracted with one another, into its claim for restitution, Count XI must fail. The Defendants' Motions to Dismiss Count XI are GRANTED, with leave to amend.
8. Count XII — Civil Conspiracy (Against All Defendants)
"[C]ivil conspiracy is not a separate and distinct cause of action under California law." Accuimage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 947 (N.D. Cal. 2003). "To state a cause of action for conspiracy, the complaint must allege (1) the formation and operation of the conspiracy, (2) the wrongful act or acts done pursuant thereto, and (3) the damage resulting from such act or acts. General allegations of agreement have been held sufficient, and the conspiracy averment has even been held unnecessary, providing the unlawful acts or civil wrongs are otherwise sufficiently alleged." Chicago Title at 316.
"The conspiracy 'may be inferred from the nature of the acts done, the relations of the parties, the interests of the alleged conspirators, and other circumstances." Id. (internal quotations and citations omitted). "As long as two or more persons agree to perform a wrongful act, the law places civil liability for the resulting damages on all of them, regardless of whether they actually commit the tort themselves. The effect of charging . . . conspiratorial conduct is to implicate all . . . who agree to the plan to commit the wrong as well as those who actually carry it out." Wyatt v. Union Mortgage Co., 24 Cal. 3d 773, 784 (1979) (internal citations and quotations omitted).
Nevertheless, it is logical that a party cannot conspire with itself. See Webber v. Inland Empire Investments, 74 Cal. App. 4th 884, 910 (4th Dist. 1999) ("If [the defendant] was the alter ego of all the corporations, there could be no coconspirators.") As in Count XI, Qwest incorporated its alter ego allegations into this claim, ultimately sabotaging its viability because of those allegations.
Hence, Defendants' Motions to Dismiss Count XII are GRANTED, with leave to amend.
9. Count XIII — Aiding and Abetting (Against All Defendants)
"Liability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person. Mere knowledge that a tort is being committed and the failure to prevent it does not constitute aiding and abetting. As a general rule, one owes no duty to control the conduct of another. . . ."Fiol v. Doellstedt, 50 Cal. App. 4th, 1318, 1326 (2d Dist. 1996) (internal citations and quotations omitted).
The very elements of this cause of action show that, as in Counts X and XII, a party cannot aid and abet itself. The cause of action presumes the presence of more than one party. Since Plaintiff incorporated its alter ego allegations into this cause of action, it defeated its own argument. Hence, Defendants' Motions to Dismiss Count XIII are GRANTED, with leave to amend.
CONCLUSION
Pursuant to Rule 12(b)(6), Defendants' Motions to Dismiss Counts I-IV and VI-IX are DENIED and Defendants' Motions to Dismiss Counts V and X-XIII are GRANTED with leave to amend. Plaintiff is directed to file a Second Amended Complaint, should he choose to do so, not later than thirty (30) calendar days following the date of this Order.IT IS SO ORDERED.