Derive Power et al v. EZ Lynk Sezc et alMOTION TO DISMISS FOR FAILURE TO STATE A CLAIM and Memorandum in Support Defendant H&S Performance LLC's CounterclaimsD. UtahDecember 19, 2016Brent O. Hatch (5715) bhatch@hjdlaw.com Phillip J. Russell (10445) prussell@hjdlaw.com HATCH, JAMES, & DODGE, P.C. 10 West Broadway, Suite 400 Salt Lake City, Utah 84101 Telephone: (801) 363-6363 Facsimile: (801) 363-6666 Mark A. Klapow (pro hac vice) mklapow@crowell.com Michael J. Songer (pro hac vice) msonger@crowell.com CROWELL & MORING LLP 1001 Pennsylvania Avenue NW Washington, DC 20004 Telephone: (202) 624-2500 Facsimile: (202) 628-5116 Attorneys for Plaintiffs Derive Power, LLC and Derive Systems, Inc. UNITED STATES DISTRICT COURT DISTRICT OF UTAH DERIVE POWER, LLC; and DERIVE SYSTEMS, INC.; Plaintiffs, v. EZ LYNK, SEZC; H&S PERFORMANCE, LLC; THOMAS WOOD; LANCE HUNTER, TECHIT, LLC; GDP TUNING, LLC; and POWER PERFORMANCE ENTERPRISES, INC.; Defendants. PLAINTIFFS’ RULE 12(b)(6) MOTION TO DISMISS DEFENDANT H&S PERFORMANCE LLC’S COUNTERCLAIMS Case No. 2:16-cv-01066-BSJ Judge Bruce S. Jenkins H&S PERFORMANCE, LLC; Counterclaimant, v. DERIVE POWER, LLC; and DERIVE SYSTEMS, INC.; Counterclaim Defendants. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 1 of 13 2 STATEMENT OF RELIEF SOUGHT AND GROUNDS FOR MOTION Pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and DUCivR 7-1(a), Plaintiffs Derive Power, LLC and Derive Systems, Inc. (together, “Derive”), by and through counsel of record, hereby move the Court to dismiss H&S Performance, LLC’s (“H&S”) Counterclaims [Dkt. 63] in their entirety or in part. Even if this Court were to accept all of its allegations as true, H&S has failed to state a claim for relief for all three of its asserted counterclaims: declaratory judgment, breach of contract, and/or “attorneys’ fees and costs.” First, H&S has failed to state a claim for declaratory judgment and breach of contract because each counterclaim is contingent on the Licensing Agreement’s continued existence, but H&S has acknowledged that the agreement has been terminated. Second, the doctrines of redundancy, equitable estoppel, quasi-estoppel, and waiver bar H&S’s claim for declaratory judgment. Third, H&S has failed to state a claim for breach of contract because it is estopped from alleging a breach of the Licensing Agreement, it has failed to alleged damages, and it has waived any breach of the Licensing Agreement’s forum-selection clause. Lastly, H&S’s claim for “attorneys’ fees and costs” is not a valid independent cause of action. This motion is based on H&S’s Counterclaims, the Consent Agreement between H&S and the Environmental Protection Agency (“EPA”) that H&S attached to its Opposition to Derive’s Motion for a Temporary Restraining Order [Dkt. 36-3] and which this Court may consider in a Rule 12(b)(6) motion, and this Motion. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 2 of 13 3 H&S’S COUNTERCLAIM ALLEGATIONS This case concerns the theft of Derive’s trade secrets and infringement of Derive’s copyrights by defendants, including H&S, for their own use in illegal products. As explained in detail in Derive’s Complaint [Dkt. 2], and relevant here, after the termination of a license agreement between Bully Dog Technologies (“BDT”) (which Derive acquired) and H&S, H&S continued to make and sell performance programmers that incorporated Derive’s copyrighted software and that appeared substantially similar to Derive’s performance programmers. See, e.g., id. ¶¶ 5, 30-38, 41-42. H&S supported these unlicensed devices with Derive’s trade secrets. See, e.g., id. ¶¶ 5, 30-33, 37-38, 41-42, 54, 57-61, 65. All of these events occurred after February 2014, when the prior license agreement had been terminated. Yet now, faced with a lawsuit related to its continued unlicensed sales, H&S has attempted to resurrect the license and assert that it continues to this day. Thus, H&S alleges that in 2012, “H&S and Bully Dog entered into [an] Amended and Restated Software License and Hardware Purchase Agreement (‘Licensing Agreement’) which amended and restated [a] 2008 Agreement.” H&S Counterclaims [Dkt. 63] ¶ 9; see also id. [Dkt. 63-1] Ex. A (copy of said agreement). But H&S further alleges that it “has never received any written notice of termination” of the Licensing Agreement and that Derive “refused to sell any electronic control units as required under the Licensing Agreement any time after 2014.” Id. ¶¶ 14, 16. Based on these allegations, H&S asserts claims for declaratory judgment, breach of contract, and “attorneys’ fees and costs.” Id. at pp. 20-22. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 3 of 13 4 As set forth herein, this attempted transformation of the terminated license into a valid, active agreement is counter to the facts and the law, and H&S’s counterclaims should be dismissed with prejudice. STANDARD To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must “state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). The plaintiff “must provide ‘enough facts to state a claim to relief that is plausible on its face,’ which requires ‘more than an unadorned, the- defendant-unlawfully harmed-me accusation.’” McCartney v. United States, 31 F. Supp. 3d 1340, 1343 (D. Utah 2014) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). A complaint that tenders “naked assertion[s],” which are devoid of “further factual enhancement,” is insufficient. Twombly, 550 U.S. at 557. Moreover, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678. ARGUMENT I. H&S’s First and Second Counterclaims For Declaratory Judgment and Breach of Contract Fail to State a Claim Because Each Is Contingent on the Licensing Agreement’s Continued Existence, But H&S Has Acknowledged that the Agreement Has Been Terminated. As part of its first and second counterclaims for declaratory judgment and breach of contract, H&S specifically alleges that the Licensing Agreement continues to exist. H&S Counterclaims [Dkt. 63] ¶¶ 18-24, 27. H&S, however, has admitted that the agreement was terminated. In the absence of a valid underlying contract, both counterclaims fail to state a claim upon which relief can be granted. See FED. R. CIV. P. 8(a)(2). Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 4 of 13 5 H&S conceded that the Licensing Agreement was terminated in its January 2015 Consent Agreement with the EPA. H&S submitted a copy of the Consent Agreement as Exhibit C to its Opposition to Derive’s Motion for a TRO [Dkt. 36-3, Ex. C]. In the fact section of the Consent Agreement, H&S stipulated that it was “is no longer selling, offering for sale or transferring Defeat Devices, primarily due to the involuntary termination of a hardware and software contractual agreement with Bully Dog Technologies, LLC in January of 2015.” Id. ¶ 32 (emphasis added). This is a clear disavowal of the Licensing Agreement by H&S. While the EPA Consent Agreement is “outside the four corners” of the counterclaims, the Court may take judicial notice of its contents when determining a motion to dismiss. On a Rule 12(b)(6) motion, if matters outside the pleadings are presented to and not excluded by the court, the motion may be treated as one for summary judgment. FED. R. CIV. P. 12(d). “However, facts subject to judicial notice may be considered in a Rule 12(b)(6) motion without converting the motion to dismiss into a motion for summary judgment.” Tal v. Hogan, 453 F.3d 1244, 1265 n.24 (10th Cir. 2006). Courts may take judicial notice of “a fact that is not subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” FED. R. EVID. 201(b). And “‘allegations that contradict a properly considered document are not well-pleaded facts that the court must accept as true.’” Garcia-Rodriguez v. Gomm, 169 F. Supp. 3d 1221, 1230 (D. Utah 2016) (quoting Farrell- Cooper Min. Co. v. United States, 728 F.3d 1229, 1237 n.6 (10th Cir. 2013)). These requirements have been met with the EPA Consent Decree. Its source and authenticity cannot be disputed: H&S itself submitted the copy to the Court [Dkt. 36-3], H&S manager Bentley Hugie agreed to and approved it [id. at 21], and H&S’s owner and co-manager, Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 5 of 13 6 Casey Shirts, submitted a declaration on November 2, 2016 that confirmed its veracity under penalty of perjury [Dkt. 37 ¶ 22].1 FED. R. EVID. 201(b); see also Garcia-Rodriguez, 169 F. Supp. 3d at 1227-30 (taking judicial notice of multiple documents outside the pleadings and other filings, on motion to dismiss, for purposes of rebutting plaintiffs’ allegations and claims). Accordingly, H&S has no basis to maintain its declaratory judgment and breach of contract counterclaims. It has acknowledged that the Licensing Agreement was terminated previously, and this Court need not accept as true its current allegations to the contrary.2 H&S cannot have it both ways. It cannot admit that the Licensing Agreement has been terminated but then deny its admission to assert counterclaims in this case. As such, H&S’s declaratory judgment and breach of contract counterclaims should be dismissed with prejudice. II. H&S’s First Counterclaim for a Declaratory Judgment Also Fails to State a Claim for Relief under the Doctrines of Redundancy, Equitable Estoppel, Quasi Estoppel, and/or Waiver. A. Redundancy As discussed above, H&S’s first counterclaim seeks a declaratory judgment that the “Licensing Agreement is valid and has not been cancelled.” H&S Counterclaims [Dkt. 63] ¶ 25. It bases this claim on allegations that the Licensing Agreement has not been terminated. Id. ¶¶ 20-24. In short, H&S is alleging the “mirror image” of the claim brought by Derive-that the 1 The Consent Agreement is also a public document. It is listed on the EPA’s “Clean Air Act Vehicle and Engine Enforcement Case Resolutions” webpage at https://www.epa.gov/enforcement/2016-clean-air-act-vehicle-and-engine-enforcement-case- resolutions under “H&S Performance, LLC.” 2 Derive’s claim for breach of the terminated Licensing Agreement is proper because the agreement specifically states that certain provisions, including the prohibitions against using Derive intellectual property, survive termination. H&S Counterclaims [Dkt. 63-1], Ex. A §§ 6.3- 6.4. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 6 of 13 7 Licensing Agreement has been terminated, that unlicensed sales have continued, and that H&S has continued to use Derive’s intellectual property. H&S’s “Declaratory Judgment” counterclaim is thus redundant with and subsumed in Derive’s breach of contract claim (Compl. [Dkt. 2] ¶¶ 119-23). It is even redundant and duplicative of H&S’s own breach of contract counterclaim [Dkt. 63 at ¶¶ 26-33]. To resolve Derive’s claim, the Court will necessarily have to determine whether the Licensing Agreement is still in effect or if it has been terminated and, if so, what provisions survived termination. Accordingly, the Court need not exercise its discretion to hear this redundant claim and it can be dismissed. See 28 U.S.C. § 2201(a); Wilton v. Seven Falls Co., 515 U.S. 277, 286-87 (1995). B. Estoppel and Waiver In addition, for the simple reason that H&S has already admitted that the Licensing Agreement has in fact been terminated, H&S is equitably estopped, quasi-estopped, and/or has waived its right to assert that the Licensing Agreement is now valid, and dismissal under Rule 12(b)(6) is appropriate. See Strong v. Yellow Transp., Inc., No. 09-CV-00061-WYD-MJW, 2009 WL 1655028, at *3 (D. Colo. June 12, 2009) (granting Rule 12(b)(6) motion to dismiss on basis of judicial estoppel). The key elements to invoke equitable estoppel are well established: “(1) an admission, statement, or act inconsistent with the claim afterwards asserted, (2) action by the other party on the faith of such admission, statement, or act, and (3) injury to such other party resulting from allowing the first party to contradict or repudiate such admission, statement, or act.” See, e.g., Celebrity Club, Inc. v. Utah Liquor Control Comm’n, 602 P.2d 689, 694 (Utah 1979). Similarly, quasi-estoppel precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position it has previously taken. E.g., Wohnoutka v. Kelley, 330 P.3d Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 7 of 13 8 762, 764 (Utah Ct. App. 2014). Finally, a party may waive a right that it knows of and expresses an intention to relinquish. Soter’s, Inc. v. Deseret Fed. Sav. & Loan Ass’n, 857 P.2d 935, 942 (Utah 1993). All of the requisite elements for estoppel, quasi-estoppel, and waiver are present here. Both H&S and Derive have acted for over two years in a manner consistent with their understanding that the License Agreement was terminated in 2014. See H&S Counterclaims [Dkt. 63] ¶ 16; see also Compl. [Dkt. 2] ¶¶ 5, 34-36. Derive relied on this termination, ceasing all hardware sales and software licensing to H&S in early 2014. See H&S Counterclaims [Dkt. 63] ¶ 16; see also Compl. [Dkt. 2]) ¶¶ 5, 34-36. H&S has even admitted that Derive “refused to sell any electronic control units as required under the Licensing Agreement any time after 2014.” H&S Counterclaims [Dkt. 63] ¶ 16. Notably, H&S does not allege whatsoever that it sought to buy any “electronic control units” at any time after 2014, which supports Derive’s understanding of the termination and faith in its cessation of sales and licensing. H&S’s abrupt “change of mind” and its attempt to revive the Licensing Agreement is clearly injurious to Derive. H&S’s change in position not only forces Derive to incur significant time and costs to defend an unfounded claim but also gives rise to the implication that Derive sold H&S hardware and software that enabled illegal defeat devices. Derive, however, stopped selling hardware and licensing software to H&S following the EPA’s mandate that caused H&S to “suspend all sales,” as H&S’s counsel informed the court during the hearing on Derive’s TRO. See Nov. 9, 2016 Hr’g. Tr. 65:20-66:6. H&S’s declaratory judgment counterclaim should thus be dismissed with prejudge. III. H&S’s Second Counterclaim for Breach of Contract Fails to State a Claim for Relief. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 8 of 13 9 H&S’s second counterclaim asserts that Derive breached the Licensing Agreement in three separate ways. First, H&S asserts a breach because Derive unilaterally cancelled the license. H&S Counterclaims [Dkt. 63] ¶ 28. Second, H&S asserts a breach because Derive “refused to sell any hardware to H&S.” Id. ¶ 30. Finally, H&S asserts a breach because Derive did not bring a lawsuit for breach of the contract in Power County, Idaho. Id. ¶ 32. The elements of a prima facie case for breach of contract include a contract, breach, and damages. Edged In Stone, Inc. v. Nw. Power Sys., LLC, 321 P.3d 726, 730 (Idaho 2014); Am. W. Bank Members, L.C. v. State, 342 P.3d 224, 230-31 (Utah 2014). As an initial matter, H&S’s second counterclaim for breach of contract must fail for reasons identical to the first counterclaim for declaratory relief: H&S has admitted that a contract no longer exists (and is estopped from claiming otherwise), and cannot claim that it now exists and has been breached. There are also several additional alternative bases for the Court to dismiss H&S’s breach of contract counterclaim. First, H&S has not alleged any damages flowing from the alleged breach, and therefore has not stated a claim for relief. At no point in its “General Allegations” (H&S Counterclaims [Dkt. 63] ¶¶ 7-16) or “Second Claim for Relief” (id. ¶¶ 26-33) does H&S allege any damages it has suffered as a result of Derive’s three alleged breaches of the Licensing Agreement. H&S states only that it is “entitled to damages” generally. Id. ¶ 33. This legal conclusion is not to be accepted as true. Iqbal, 556 U.S. at 678. Moreover, H&S omits any allegations tying any alleged breach to any damages. H&S’s barebones recitation of the element of damages alone is plainly insufficient to state a claim. See, e.g., Belanger v. Bank of N.Y. Mellon, No. 1:12-CV-1055, 2013 WL 318294, at *6 (W.D. Mich. 2013) (holding “sole reference to damages,” in breach of contact claim, that “[a]s a result of Defendants’ actions, Plaintiffs have Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 9 of 13 10 been damaged” failed to plead damages sufficiently, requiring dismissal for failure to state a claim); see also Washington v. Washington, 605 F. App’x. 716, 718 (10th Cir. 2015) (upholding dismissal of breach of contract claim based on “threadbare recitals of the elements of a breach of contract, supported by mere conclusory statements” (internal citation and quotation marks omitted)). Notably, the lack of damages is consistent with H&S’s allegation that Derive “ha[s] refused to sell any electronic control units as required under the Licensing Agreement any time after 2014” (H&S Counterclaims [Dkt. 63] ¶ 16 (emphasis added)) and H&S’s statement to the Court that it “suspend[ed] all sales at the end of 2014” (Nov. 9, 2016 Hr’g. Tr. 65:20-66:6 (emphasis added)). There simply are no grounds for H&S to seek damages. Second, H&S has also waived its ability to assert any breach of the Licensing Agreement’s forum-selection clause. H&S alleges “the exclusive forum and venue for any suit related to the Licensing Agreement” is Power County, Idaho, and Derive breached this forum- selection clause “by failing to bring this suit” there. H&S Counterclaims [Dkt. 63] ¶¶ 31-32. H&S, however, has waived its ability to assert this claim. See Silver v. Quora, Inc., No. 16- 2173, -- F. App’x --, 2016 WL 6892146, at *2 (10th Cir. Nov. 23, 2016) (holding a defendant may raise an affirmative defense by a motion to dismiss if the defense is apparent from the face of the complaint). In general, “the appropriate way to enforce a forum-selection clause . . . is through the doctrine of forum non conveniens,” under 28 U.S.C. § 1404(a). Atl. Marine Const. Co. v. U.S. Dist. Court for W. Dist. of Texas, 134 S. Ct. 568, 580 (2013). A motion concerning forum non conveniens should be filed within a reasonable time after a party knows or could have reasonably Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 10 of 13 11 known the facts or circumstances supporting the motion. See Cable News Network L.P., L.L.L.P. v. CNNews.com, 177 F. Supp. 2d 506, 528 (E.D. Va. 2001), aff’d in part, vacated in part on other grounds, 56 F. App’x 599 (4th Cir. 2003). Moreover, a party may waive a right that it is aware of and expresses an intention to relinquish. See Montalbano v. Saint Alphonsus Reg’l Med. Ctr., 264 P.3d 944, 949 (Idaho 2011); Soter’s, 857 P.2d at 942. H&S has clearly known about the forum-selection clause in its own agreement for some time, and it could have invoked the forum-selection clause and forum non conveniens on day one (see H&S TRO Opposition [Dkt. 36] ¶ 3), but it opted not to do so. Now H&S has decided to allege that Derive breached the Licensing Agreement by bringing suit in Utah, even though H&S never filed suit in Idaho, never sought to move this case, filed not only an answer but also counterclaims in this court, and wholly failed to allege any damages stemming from such an alleged breach.3 H&S’s actions are untimely and distinctly evidence a voluntary waiver. H&S’s breach of contract counterclaim should thus be dismissed with prejudge. IV. H&S’s Third Counterclaim for “Attorneys’ Fees and Costs” Fails to State a Claim for Relief Because It Is Not a Legitimate Independent Cause of Action. H&S’s third counterclaim seeks attorneys’ fees and costs under Licensing Agreement § 11.8 for Derive’s alleged breach of the agreement. H&S Counterclaims [Dkt. 63] ¶¶ 35-38. Section 11.8 provides: In any action, suit or other proceeding to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party will be entitled to recover its costs and expenses (including, without limitation, attorneys’ fees) reasonably incurred in connection with such proceeding, or any appeal thereof. 3 In fact, H&S is at home in Utah. See H&S Counterclaims [Dkt. 63] ¶ 1. Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 11 of 13 12 H&S Counterclaims [Dkt. 63-1] Ex. A § 11.8. This “claim” must be dismissed because it is nothing more than a supplemental remedy related to H&S’s breach of contract counterclaim and not a valid, distinct claim under Rule 8.4 See FED. R. CIV. P. 8(a); see also H&S Counterclaims [Dkt. 63] ¶¶ 36-38. Under the express terms of Section 11.8, this contractual remedy cannot be invoked unless and until a party “prevails” in any action to enforce or interpret the Licensing Agreement. H&S Counterclaims [Dkt. 63-1] Ex. A § 11.8; see also H&S Counterclaims [Dkt. 63] ¶ 38 (“Since Counterclaim Defendants had breached the Licensing Agreement . . . .” (emphasis added)). Because no one has prevailed at this time, no claim for relief exists, and H&S’s Third Counterclaim should be dismissed. 4 H&S has also not pleaded, nor could it, such “attorneys’ fees and costs” as an item of damages under its breach of contract claim. See Doe v. Shoshone-Bannock Tribes, 367 P.3d 136, 143 (Idaho 2016) (“A grant of attorney fees in Idaho must be supported by statutory authority or by contract: ‘We continue to adhere to the so-called ‘American rule’ to the effect that attorney fees are to be awarded only where they are authorized by statute or contract.’” (quoting Hellar v. Cenarrusa, 682 P.2d 524, 531 (Idaho 1984))); see also H&S Counterclaims [Dkt. 63-1] Ex. A § 11.9 (Licensing Agreement to be construed under Idaho law). Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 12 of 13 13 CONCLUSION For the foregoing reasons, the Court should dismiss all of H&S’s Counterclaims. Moreover, the Court should dismiss H&S’s Counterclaims with prejudice, because H&S cannot overcome their deficient allegations or prior position on the termination of the Licensing Agreement. DATED this 19th day of December, 2016. Respectfully submitted, By: /s/ Phillip J. Russell Brent O. Hatch Phillip J. Russell HATCH, JAMES & DODGE, P.C. Mark A. Klapow Michael J. Songer CROWELL & MORING LLP Case 2:16-cv-01066-BSJ Document 74 Filed 12/19/16 Page 13 of 13
