Cisco Systems, Inc. et al v. Beccela's Etc., LLC, No. 5:2018cv00477 - Document 105 (N.D. Cal. 2019)

Court Description: ORDER GRANTING WITHOUT LEAVE TO AMEND IN PART AND DENYING IN PART 84 PLAINTIFFS' MOTION TO DISMISS AND/OR STRIKE DEFENDANTS' AMENDED COUNTERCLAIMS AND REQUESTS FOR RELIEF. Signed by Judge Beth Labson Freeman on 8/21/2019.(blflc2S, COURT STAFF) (Filed on 8/21/2019)

Download PDF

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 CISCO SYSTEMS, INC., et al., Plaintiffs, 8 v. 9 10 BECCELA’S ETC., LLC, et al., Defendants. 11 United States District Court Northern District of California Case No. 18-cv-00477-BLF 12 ORDER GRANTING WITHOUT LEAVE TO AMEND IN PART AND DENYING IN PART PLAINTIFFS’ MOTION TO DISMISS AND/OR STRIKE DEFENDANTS’ AMENDED COUNTERCLAIMS AND REQUESTS FOR RELIEF [Re: ECF 84] 13 14 Before the Court is Plaintiffs Cisco Systems, Inc. and Cisco Technology, Inc.’s 15 16 (collectively, “Cisco”) motion to dismiss Defendants Beccela’s Etc., LLC (“BecTech”) and 17 Arbitech, LLC’s (“Arbitech”) (collectively, “Defendants”) counterclaims and certain requests for 18 relief. Mot., ECF 84. The Court held a hearing on the motion on July 18, 2019. For the reasons 19 that follow, the motion is GRANTED WITHOUT LEAVE TO AMEND IN PART AND DENIED 20 IN PART. 21 I. BACKGROUND1 Cisco is a technology company that develops, implements, and sells technologies for 22 23 networking communications, as well as information technology products and services. First Am. 24 Compl. (“FAC”) ¶¶ 17–19, ECF 51. Cisco owns several trademarks and copyrights on their 25 networking hardware and software products and services. FAC ¶¶ 20–23, 28–30. Cisco also 26 27 28 1 The background facts are drawn from the allegations of the complaint and counter-complaint, which are accepted as true for purposes of the motion to dismiss. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). 1 offers various supports for its products, including a warranty program (from 90 days to lifetime) 2 and a “more comprehensive suite of service and support offered to customers for a fee” called 3 SMARTnet Service (“SMARTnet”). FAC ¶ 31. Because of its size, Cisco relies on independent 4 distributors and resellers throughout the world, known to Cisco as “Authorized Channel Partners” 5 or “Authorized Resellers,” to distribute and sell its products. FAC ¶ 32. Cisco contracts with 6 Authorized Resellers to allow them to purchase Cisco products at a discount and the Authorized 7 Resellers agree to purchase Cisco products only from Cisco or authorized distributors and to sell 8 those products only to end users (not to other resellers). FAC ¶ 33. United States District Court Northern District of California 9 BecTech sells Cisco products but is not a Cisco Authorized Reseller. FAC ¶¶ 35–36. 10 Cisco alleges that BecTech sells the products without, among other things, a manufacturer’s 11 warranty or customer support, which would be material to a customer’s purchasing decision. FAC 12 ¶ 36. Cisco alleges that in July 2017, BecTech sold 37 Cisco products, advertised as “Brand New 13 Factory Sealed” that were not in fact factory sealed. FAC ¶ 38; see also FAC ¶¶ 59, 62–63. Cisco 14 alleges that BecTech also resold stolen Cisco products. FAC ¶¶ 64–66. Arbitech also sells Cisco 15 products. FAC ¶ 39. Cisco alleges that Arbitech has a history of selling counterfeit Cisco 16 products. FAC ¶¶ 39–45, 52–66. Cisco also alleges that Arbitech and BecTech sold a SMARTnet 17 contract to an end user without authorization. FAC ¶ 67. Cisco alleges that Defendants must have 18 induced a Cisco Authorized Reseller to sell them the SMARTnet contract in violation of the 19 Reseller’s contract with Cisco. FAC ¶ 67. 20 Based on Defendants’ alleged actions, on January 22, 2018, Cisco filed the instant action 21 against Defendants asserting various causes of action for trademark infringement and 22 counterfeiting, unfair competition under California law, and other state law claims. See generally 23 Compl., ECF. On August 13, 2018, Cisco amended its complaint to add a copyright infringement 24 claim. See generally FAC. 25 On September 11, 2018, Defendants answered the amended complaint and filed 26 counterclaims. See generally ECF 65. On January 2, 2019, Defendants filed an amended answer 27 with counterclaims. See Am. Ans., ECF 81. Defendants allege that they sell genuine Cisco 28 products on a lawful “secondary market” of resellers, Am. Ans. ¶¶ 147, 191–95, and that Cisco 2 1 unfairly and anticompetitively attempts to control the secondary market by attempting to shut 2 down these lawful sales of its goods, Am. Ans. ¶¶ 145, 162–67. On the secondary market, 3 resellers sell lawfully-obtained Cisco goods for a discounted price, which allegedly benefits 4 consumers. Am. Ans. ¶¶ 157–60, 167. Defendants allege that the resale of the goods is lawful 5 under the “first sale doctrine.” Am. Ans. ¶ 168. United States District Court Northern District of California 6 Specifically, Cisco allegedly unlawfully interferes with the secondary market in multiple 7 ways as an end run around the first sale doctrine. First, Cisco embeds its hardware with software 8 that it licenses to consumers through its End User License Agreement (“EULA”). Am. Ans. ¶ 9 170. As a result, when an end user purchases Cisco’s hardware, it cannot actually use the 10 hardware without complying with the software EULA, which requires end users to purchase the 11 software from an “Approved Source” (i.e., not on the secondary market). Am. Ans. ¶¶ 170–71. 12 Defendants allege that Cisco “does not require end users to acknowledge, read, or accept a license 13 agreement before using Cisco goods sold by [Defendants],” and that Cisco does not inform 14 customers of this limitation until “after their purchases.” Am. Ans. ¶ 170. Defendants also allege 15 that Cisco misrepresents to consumers that they cannot use the software without a license, even 16 though they have purchased the hardware. Am. Ans. ¶¶ 173–74. 17 Second, Cisco allegedly impedes the secondary market by offering its SMARTnet services 18 and essential software updates only to end users who have purchased their products from 19 authorized (non-secondary market) sellers. See Am. Ans. ¶¶ 176–84. Cisco allegedly often does 20 not inform customers at the time of purchase that they can only purchase these essential updates 21 through Cisco, and that they will only get such updates through a validly purchased SMARTnet 22 contract. Am. Ans. ¶ 178. Thus, consumers only learn about such limitations after they have 23 substantially invested in Cisco’s products. Am. Ans. ¶ 179. Though Defendants lawfully 24 purchase the SMARTnet contract for the product they are reselling, Cisco voids certain 25 SMARTnet contracts “without refunding payments” if it learns the contracts were purchased on 26 the secondary market. Am. Ans. ¶¶ 182, 184 27 28 Third, Cisco “selectively classifies genuine, lawfully obtained Cisco products as ‘used,’ ‘stolen,’ ‘counterfeit’ or ‘scrapped,’ simply because these products were traded on the secondary 3 1 market.” Am. Ans. ¶ 185. Cisco allegedly misinforms customers who contact it by telling them 2 that products sold on the secondary market are used, which it defines as “previously owned 3 equipment that is now owned by a party other than the original customer,” including both “opened 4 and unopened equipment.” Am. Ans. ¶ 186. Defendants allege that this definition of the word 5 “used” misleads consumers into thinking that all products sold on the secondary market have 6 previously been opened, even though Defendants and others on the secondary market sell brand 7 new, never-before-opened products. Am. Ans. ¶¶ 187–88. Defendants allege that this 8 misrepresentation deceives consumers and leads them to not purchase products on the secondary 9 market. Am. Ans. ¶¶ 187–88. United States District Court Northern District of California 10 Finally, Defendants allege that Cisco wrongfully denies warranty coverage for products 11 sold on the secondary market. See Am. Ans. ¶¶ 189–96. Cisco withholds the warranty to prevent 12 the sale of counterfeits; however, Cisco knows that most of the products on the secondary market 13 are genuine. Am. Ans. ¶ 189. 14 Based on these alleged actions, Defendants assert four causes of action against Cisco: 15 First, Defendants assert a declaratory judgment claim under 28 U.S.C. §§ 2201–02, asserting that 16 Defendants’ “sale of genuine Cisco products which Cisco has unilaterally deemed ineligible for 17 warranty services, do not violate the Lanham Act, 15 U.S.C. §§ 1114, 1125,” because sale of a 18 product that lacks a warranty does not alone violate the Lanham Act. Am. Ans. ¶ 198. Second, 19 Defendants assert a declaratory judgment claim under 28 U.S.C. §§ 2201–02, asserting that 20 Cisco’s failure to warrant genuine Cisco products sold on the secondary market violates New 21 York General Business Law § 369-b and is unenforceable in New York. Am. Ans. ¶ 205. Third, 22 Defendants assert a claim under California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. 23 Code §§ 17200, et seq., based on Cisco’s allegedly anticompetitive actions that “are tantamount to 24 violations of the antitrust laws.” Am. Ans. ¶ 212. And, fourth, Defendants assert a claim under 25 the Lanham Act, 15 U.S.C. § 1125(a)(1)(B), for false advertising based on Cisco’s alleged 26 misrepresentations with respect to (1) consumers’ need to purchase the EULA software license 27 before they can use legally purchased hardware; and (2) Cisco’s use of the term “used” with 28 respect to unopened products sold on the secondary market. Am. Ans. ¶¶ 218–19. In their request 4 1 for relief, Defendants seek, among other things, damages and lost profits, as well as attorneys’ 2 fees. See Am. Ans., Prayer ¶¶ d–e. On February 13, 2019, Cisco moved to dismiss or strike Defendants’ counterclaims. ECF 3 4 84. Defendants jointly opposed. Opp., ECF 99. Cisco submitted a brief in reply. Reply, ECF 5 101. The Court held a hearing on the motion on July 18, 2019. ECF 103. 6 7 II. LEGAL STANDARD A. “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a 8 United States District Court Northern District of California Motion to Dismiss for Failure to State a Claim 9 claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation 10 Force v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 11 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts 12 as true all well-pled factual allegations and construes them in the light most favorable to the 13 plaintiff. Reese, 643 F.3d at 690. However, the Court need not “accept as true allegations that 14 contradict matters properly subject to judicial notice” or “allegations that are merely conclusory, 15 unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 16 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations omitted). While a 17 complaint need not contain detailed factual allegations, it “must contain sufficient factual matter, 18 accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 19 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is 20 facially plausible when it “allows the court to draw the reasonable inference that the defendant is 21 liable for the misconduct alleged.” Id. On a motion to dismiss, the Court’s review is limited to 22 the face of the complaint and matters judicially noticeable. MGIC Indem. Corp. v. Weisman, 803 23 F.2d 500, 504 (9th Cir. 1986); N. Star Int’l v. Ariz. Corp. Comm’n, 720 F.2d 578, 581 (9th Cir. 24 1983). 25 In deciding whether to grant leave to amend, the Court must consider the factors set forth 26 by the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the 27 Ninth Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2009). A district 28 court ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1) 5 1 undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by 2 amendment, (4) undue prejudice to the opposing party, or (5) futility of amendment. Eminence 3 Capital, 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries 4 the greatest weight.” Id. However, a strong showing with respect to one of the other factors may 5 warrant denial of leave to amend. Id. 6 B. As required by Article III, courts may adjudicate only actual cases or controversies. U.S. 7 United States District Court Northern District of California Motion to Dismiss for Lack of a Case or Controversy 8 Const. art. III, § 2, cl. 1. “When presented with a claim for a declaratory judgment, therefore, 9 federal courts must take care to ensure the presence of an actual case or controversy, such that the 10 judgment does not become an unconstitutional advisory opinion.” Rhoades v. Avon Prods., Inc., 11 504 F.3d 1151, 1157 (9th Cir. 2007) (citing Pub. Serv. Comm'n v. Wycoff, Co., 344 U.S. 237, 244 12 (1952)). “Absent a true case or controversy, a complaint solely for declaratory relief under 28 13 U.S.C. § 2201 will fail for lack of jurisdiction under Rule 12(b)(1).” Id. (citation omitted). “[T]he 14 question in each case is whether the facts alleged, under all the circumstances, show that there is a 15 substantial controversy, between parties having adverse legal interests, of sufficient immediacy 16 and reality to warrant the issuance of a declaratory judgment.” Delphix Corp. v. Embarcadero 17 Techs., Inc., 749 F. App’x 502, 504 (9th Cir. 2018). 18 19 C. Motion to Strike Federal Rule of Civil Procedure 12(f) permits a court to “strike from a pleading an 20 insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” The 21 function of a motion made under this rule is “to avoid the expenditure of time and money that 22 must arise from litigating spurious issues by dispensing with those issues prior to trial.” 23 Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 973 (9th Cir. 2010) (quoting Fantasy, Inc. v. 24 Fogerty, 984 F.2d 1524, 1527 (9th Cir.1993), rev’d on other grounds by Fogerty v. Fantasy, Inc., 25 510 U.S. 517 (1994)) (internal quotation marks omitted). “While a Rule 12(f) motion provides the 26 means to excise improper materials from pleadings, such motions are generally disfavored because 27 the motions may be used as delaying tactics and because of the strong policy favoring resolution 28 on the merits.” Barnes v. AT & T Pension Ben. Plan-Nonbargained Program, 718 F. Supp. 2d 6 1 1167, 1170 (N.D. Cal. 2010). The decision to strike a portion of a party’s pleading is within the sound discretion of the 2 3 court. Nurse v. United States, 226 F.3d 996, 1000 (9th Cir. 2000). If a claim or defense is 4 stricken, leave to amend should be freely given when doing so would not cause prejudice to the 5 opposing party. Wyshak v. City Nat. Bank, 607 F.2d 824, 826 (9th Cir. 1979) (per curiam). 6 III. Cisco moves to dismiss all four of Defendants’ counterclaims. It also argues that the Court 7 8 should strike the request for attorneys’ fees in Defendants’ prayer for relief. The Court discusses 9 each issue in turn. 10 A. 11 United States District Court Northern District of California DISCUSSION Declaratory Judgment Claim: No Lanham Act Violation for Sale of Unwarranted Cisco Products Cisco argues that the Court should dismiss Defendants’ Lanham-Act declaratory judgment 12 claim for two reasons: (1) the claim would not resolve a controversy between the parties; and (2) 13 the Noerr-Pennington doctrine bars this claim. As discussed below, the Court disagrees on both 14 fronts. 15 16 1. Defendants’ Declaratory Judgment Claim Would Resolve a Controversy Between the Parties 17 In their first claim, Defendants seek a declaratory judgment that their “sale of genuine 18 Cisco products which Cisco has unilaterally deemed ineligible for warranty services[] do[es] not 19 violate the Lanham Act” because sale of a product that lacks a warranty does not alone violate the 20 Lanham Act. Am. Ans. ¶ 198. Cisco argues that this claim does not identify a controversy 21 between the parties because Cisco does not allege in its complaint that Defendants violate the 22 Lanham Act by selling products that are “genuine” but otherwise lack a warranty. See Mot. at 6– 23 7. Instead, Cisco argues, it alleges that Defendants violate the Lanham Act by selling alleged 24 Cisco products that differ in several material respect from Cisco products, only one of which is the 25 lack of warranty. See id. (citing FAC ¶¶ 39–45, 52–68). 26 The Court agrees with Defendants that Cisco “put warranty coverage squarely at issue” in 27 its First Amended Complaint, such that a controversy exists. Opp. at 9. Though Cisco’s 28 complaint does not explicitly allege that lack of warranty alone renders the products Defendants 7 United States District Court Northern District of California 1 sell infringing, it does expressly allege that the absence of a warranty is a “material[] differen[ce]” 2 between the products Defendants sell and genuine Cisco products. FAC ¶ 24; see also FAC ¶ 36 3 (“BecTech does not disclose that the Cisco products it sells do not come with a manufacturer 4 warranty. While not disclosed, knowing the difference between Cisco’s warranty and support and 5 the inferior warranty and support provided by the Arbitech Defendants would be highly relevant 6 and material to a consumer’s purchasing decision.”). Thus, Cisco directly raises the relationship 7 between the presence or absence of a warranty and Defendants’ alleged infringement. As 8 Defendants rightly put it, “what fundamentally is at issue here is whether, and in what situations, 9 [Defendants] may legally resell Cisco products.” Opp. at 9. Likewise, the Court does not find this 10 claim to be “useless,” see Reply at 3–4, because it could fully resolve the question of whether 11 Defendants’ products, to the extent they are all genuine but lack a warranty, infringe. Because 12 Cisco’s complaint “show[s] that there is a substantial controversy, between parties having adverse 13 legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory 14 judgment,” the Court has jurisdiction to adjudicate the claim. Delphix, 749 F. App’x at 504. 15 2. Defendants’ Declaratory Judgment Claim Does Not Violate the NoerrPennington Doctrine 16 17 Cisco also argues that the Noerr-Pennington doctrine bars Defendants’ declaratory judgment claim because Defendants point only to Cisco’s litigation activity as evidence that there 18 is a case or controversy subject to a declaratory judgment. Mot. at 7–8. Defendants argue that the 19 doctrine does not apply to declaratory judgment claims. Opp. at 10–11. 20 Noerr-Pennington stands for the proposition that “those who petition any department of 21 the government for redress are generally immune from statutory liability for their petitioning 22 conduct.” Sosa v. DirecTV, Inc., 437 F.3d 923, 929 (9th Cir. 2006) (citing Eastern Railroad 23 Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and United Mine 24 Workers of America v. Pennington, 381 U.S. 657 (1965)). This doctrine arose in the context of 25 26 antitrust law, see, e.g., Noerr, 365 U.S. 127, but the Ninth Circuit has applied its “equally in all contexts,” with limited exceptions. White v. Lee, 227 F.3d 1214, 1231 (9th Cir. 2000) 27 Protected petitioning activity includes bringing a lawsuit, defending a lawsuit brought by 28 8 1 another, and filing papers with a court. See, e.g., Freeman v. Lasky, Haas & Cohler, 410 F.3d 2 1180, 1184 (9th Cir. 2005) (defining petitioning activity as any “communication to the court” and 3 concluding that Noerr-Pennington applies to defensive pleadings “because asking a court to deny 4 one’s opponent’s petition is also a form of petition”). “[C]onduct incidental to a petition is 5 protected by Noerr-Pennington if the petition itself is protected.” Id. (internal quotation marks 6 omitted) (quoting Theofel v. Farey-Jones, 359 F.3d 1066, 1078 (9th Cir. 2004)). In the Ninth 7 Circuit, the Noerr-Pennington doctrine provides immunity from both federal and state statutory 8 and common-law liability. Theme Promotions, Inc. v. News Am. Mktg. FSI, 546 F.3d 991, 1008 9 (9th Cir. 2008) (finding immunity from liability under California common law). United States District Court Northern District of California 10 The Court agrees with Defendants that Noerr-Pennington does not bar their declaratory 11 judgment claim here. Defendants’ declaratory judgment claim is not seeking to hold Cisco liable 12 for its protected activity of filing its complaint. Instead, the claim seeks a declaration that 13 Defendants are not liable for infringement under the Lanham Act. The claim thus is outside the 14 ambit of Noerr-Pennington. Put another way, Defendants do not seek remedies (be it damages or 15 otherwise) from Cisco on this claim. Moreover, Cisco has already filed its complaint, such that 16 Defendants’ declaratory judgment claim does not burden Cisco’s petitioning rights—Cisco has 17 already exercised those rights by filing this suit. 18 Thus, this Court reaches the same conclusion as the court in Shell Gulf of Mexico, Inc v. 19 Ctr. for Biological Diversity, Inc., No. 3:12-CV-0048-RRB, 2012 WL 12865419, at *9–*10 (D. 20 Alaska June 26, 2012), which held that Noerr-Pennington “immunizes a party from liability and 21 not from an entire claim.” The facts of Westlands Water District Distribution District v. Natural 22 Resources Defense Council, Inc., 276 F. Supp. 2d 1046, 1054 (E.D. Cal. 2003), render that 23 decision of little persuasive value because the petitioning activity in that case (which was not in 24 court) was still ongoing at the time the declaratory judgment claim was filed, such that the lawsuit 25 might dissuade the ongoing activity. Further, the Court agrees with Defendants that, unlike 26 Westlands Water, Cisco’s litigation-related conduct does not form the factual basis for the asserted 27 claim. To the extent these factual distinctions are not controlling, the Court finds the Shell Gulf 28 decision more persuasive. 9 1 If the Noerr-Pennington doctrine barred a declaratory judgment claim in this case, where 2 the petitioning activity is a filed complaint and the claim seeks to adjudicate a controversy put at 3 issue in the complaint, then a startling proportion of declaratory judgment claims under the 4 Declaratory Judgment Act would seemingly be barred. There is an apparent tension between the 5 “actual case or controversy” requirement and the Noerr-Pennington doctrine. Oftentimes, the case 6 or controversy is first crystallized through a pre-suit demand letter, which Noerr-Pennington 7 ostensibly protects. See Sosa v. DIRECTV, Inc., 437 F.3d 923, 929 (9th Cir. 2006)). Given the 8 prevalence of this factual scenario in litigation, Cisco’s failure to cite more than a single case in 9 support of its position quiets any concern this Court might have that Noerr-Pennington may bar 10 United States District Court Northern District of California 11 12 the claim here. As such, the Court holds that the Noerr-Pennington doctrine does not bar Defendants’ declaratory judgment claim. Cisco’s motion is DENIED as to Defendants’ first claim. 13 B. 14 Defendants seek declaratory judgment that Cisco violates N.Y. Gen. Bus. Law § 369-b by Declaratory Judgment Claim: Violation of N.Y. Gen. Bus. Law § 369-b 15 limiting its warranty to products sold by Authorized Sellers. See Am. Ans ¶ 205. Cisco argues 16 that the Court should dismiss Defendants’ New-York-law declaratory judgment claim for two 17 reasons: (1) there is no private right of action under N.Y. Gen. Bus. Law § 369-b; and (2) 18 Defendants do not state a claim under that statute. Because the Court agrees that Section 369-b 19 does not have a private right of action, it does not address Cisco’s second argument. 20 Section 369-b states that “A warranty or guarantee of merchandise may not be limited by a 21 manufacturer doing business in this state solely for the reason that such merchandise is sold by a 22 particular dealer or dealers . . . . Any attempt to limit the manufacturer’s warranty or guarantee for 23 the aforesaid reason is void.” N.Y. Gen. Bus. Law § 369-b. Section 369-b does not expressly 24 provide a private right of action. “Absent an express private right of action, New York courts will 25 only conclude that ‘a private right of action may fairly be implied’ where: (1) the plaintiff is one of 26 the class for whose particular benefit the statute was enacted; (2) recognition of a private right of 27 action would promote the legislative purpose; and (3) creation of such a right would be consistent 28 with the legislative scheme.” Wright v. Publishers Clearing House, Inc., 372 F. Supp. 3d 61, 65 10 1 United States District Court Northern District of California 2 (E.D.N.Y. 2019) The Court agrees with the reasoned decision in Worldhomecenter.com, Inc. v. KWC 3 America, Inc., No. 10 CIV. 7781 NRB, 2011 WL 4352390, at *8 (S.D.N.Y. Sept. 15, 2011) that 4 there is no private right of action under Section 369-b. In that case, the plaintiff sought 5 declaratory judgment that the defendant’s practices violated Section 369-b, among other statutes. 6 The district court held that Section 369-b does not allow for a private right of action. The court 7 concluded that “the legislative scheme embodied in Article 24-A of the General Business Law, 8 where § 369-a and § 369-b are found, only envisions enforcement by the New York Attorney 9 General, and does not refer to enforcement by private citizens.” Id. at *8 (citing N.Y. Gen. Bus. 10 Law § 369-e, § 369-ee, § 369-eee). It then noted that because “[t]he Attorney General is also 11 empowered to take action under N.Y. Executive Law § 63(12) against any person who 12 demonstrates ‘persistent fraud or illegality in the carrying on, conducting or transaction of 13 business,’” it would be “inconsistent with the legislature’s chosen scheme of enforcing Article 24- 14 A through action by the Attorney General” to hold that Section 369-b affords a private right of 15 action. Id. at *8–*9; cf. Application of Whitehaven S.F., LLC v. Spangler, 45 F. Supp. 3d 333, 349 16 n.11 (S.D.N.Y. 2014), aff’d sub nom. Whitehaven S.F., LLC v. Spangler, 633 F. App’x 544 (2d 17 Cir. 2015) (“[T]he Legislature specifically amended the law in 1980 to create a private right of 18 action under GBL § 349, but declined to do so in other areas, including the Executive Law.” 19 (citing KWC Am.)). Though the language of Section 369-b differs from Sections 369-a and 369-e, 20 the Court agrees that the legislative scheme demonstrates that the New York legislature intended 21 that the Attorney General would enforce this law, such that there is no private right of action under 22 the statute. 23 Defendants cannot bring a declaratory judgment claim based on a statute for which there is 24 no private right of action. See N. Cty. Commc’ns Corp. v. Cal. Catalog & Tech., 594 F.3d 1149, 25 1162 (9th Cir. 2010). As such, further amendment would be futile, and Defendants’ claim is 26 DISMISSED WITHOUT LEAVE TO AMEND. 27 C. 28 Cisco argues that the Court should dismiss Defendants’ Lanham Act claim because Lanham Act False Advertising Claim 11 1 2 Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B), “forbids the use of false 3 designations of origin and false descriptions or representations in the advertising and sale of goods 4 and services.” Smith v. Montoro, 648 F.2d 602, 603 (9th Cir. 1981). A false advertising claim 5 under section 43(a) requires Defendants to plead five elements: 6 7 8 9 United States District Court Northern District of California Defendants do not state a claim for false advertising under the Act. (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. 10 Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997). “[A] false 11 advertising cause of action under the [Lanham] Act is not limited to literal falsehoods; it extends 12 to false representations made by implication or innuendo.” Cook, Perkiss & Liehe, Inc. v. No. 13 Calif. Collection Serv., Inc., 911 F.2d 242, 245 (9th Cir.1990). While the Ninth Circuit has yet to 14 decide whether Rule 9(b) applies to Lanham Act claims, several district courts in the Ninth Circuit 15 have applied Rule 9(b) to false advertising claims brought under the Lanham Act because such 16 claims are grounded in fraud. See Bobbleheads.com, LLC v. Wright Bros., Inc., 259 F. Supp. 3d 17 1087, 1094 (S.D. Cal. 2017). 18 Cisco argues that Defendants fail to allege (1) any false or misleading statements; (2) 19 deception or materiality; or (3) proximate cause. See Mot. at 17–21. The Court discusses each 20 element in turn. 21 22 1. False or Misleading Statements Cisco first argues that it has not made any false or misleading statements with respect to 23 Defendants’ or its own goods and services. Defendants assert that Cisco has made two such 24 misrepresentations: (1) it “misclassifies secondary market goods” by defining them as “used” even 25 though they are unopened, Opp. at 20–21; and (2) it misrepresents that its licensing agreement (the 26 EULA) is legally binding, though it is not binding, id. at 21. The Court addresses each alleged 27 misrepresentation. 28 12 1 2 Defendants allege that Cisco misclassifies Defendants’ products by describing them as 3 “used,” even though they have never been opened. Am. Ans. ¶¶ 185–88. Cisco defines the term 4 as “previously owned equipment that is now owned by a party other than the original customer,” 5 including both “opened and unopened equipment.” Am. Ans. ¶ 186. Defendants allege that this 6 definition of “used” is “contrary to common consumer understanding, and that consumers are 7 misled by [Cisco’s] use of the term.” Am. Ans. ¶ 188; see also Am. Ans. ¶¶ 219–20. Cisco 8 argues that its definition of “used” is not literally false or misleading because, in context, it is 9 susceptible to more than one reasonable interpretation. See Mot. at 19. 10 United States District Court Northern District of California a. “Used” The Court agrees with Defendants that the question of whether Cisco’s use of the term 11 used is literally false or would mislead a reasonable consumer is a question of fact not suitable for 12 resolution on a motion to dismiss. See Kwan Software Eng’g, Inc. v. Foray Techs., LLC, No. C 13 12-03762 SI, 2014 WL 572290, at *5 (N.D. Cal. Feb. 11, 2014) (“Literal falsity is a question of 14 fact.”). The “full context” of the misrepresentations cannot be assessed without additional facts 15 that will come to light during discovery. It is certainly not unreasonable as a matter of law that a 16 consumer would believe the term “used” does not mean “preowned” and does not apply to 17 unopened goods. As such, Defendants have sufficiently alleged that Cisco’s use of the term used 18 is a misrepresentation under the Lanham Act. 19 20 b. Binding Effect of the EULA Defendants allege that Cisco misrepresents the binding effect of its EULA by telling 21 consumers that the EULA is binding when it is not. Specifically, Cisco tells consumers of 22 secondary-market goods that that the “embedded Cisco software that runs on the hardware” is 23 nontransferable, and that the consumers “must acquire a new license from Cisco before the 24 software can be used.” Opp. at 22 (citing Am. Ans. ¶ 171). Defendants claim this representation 25 is false advertising because the EULA is unenforceable under the first sale doctrine, which dictates 26 that trademark rights are extinguished upon the first sale of a good. See Am. Ans. ¶ 173. Cisco 27 argues that the first sale doctrine does not apply to software licenses, even when the software is 28 embedded in hardware. While the Court agrees with Cisco that the first sale doctrine does not 13 1 apply to software licensees even when the software is embedded in lawfully purchased hardware, 2 the Court finds that there are questions of fact regarding whether consumers of Cisco’s goods 3 sufficiently agreed to the software license, such that it would bind them. United States District Court Northern District of California 4 As Defendants recognize, Opp. at 17–18, the Ninth Circuit has held that the first sale 5 doctrine does not apply to software licensees who never owned the software. In Vernor v. 6 Autodesk, Inc., the Ninth Circuit held that the first sale doctrine did not bar defendant Autodesk 7 from restricting reselling of its software because reseller was merely a licensee of the software and 8 not an owner. See 621 F.3d 1102, 1104–05 (9th Cir. 2010). The question at issue in Vernor was 9 whether the reseller owned or merely licensed the software. See id. at 1107. The Ninth Circuit 10 first surveyed its own case law deciding whether certain consumers were licensees or owners of 11 the copyrighted property. Id. at 1108–09. Based on these precedents, the court established the 12 following rule: “a software user is a licensee rather than an owner of a copy where the copyright 13 owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to 14 transfer the software; and (3) imposes notable use restrictions.” Id. at 1111. It then applied this 15 test to the facts of the case and found that Autodesk’s license agreement rendered the consumer a 16 licensee and not an owner. Because the consumer was a mere licensee, the first-sale doctrine did 17 not apply. See also Apple Inc. v. Psystar Corp., 658 F.3d 1150, 1159 (9th Cir. 2011) (holding that 18 first sale doctrine did not apply because purchasers were licensees, not owners). Thus, under 19 Ninth Circuit precedent, if Cisco can show that Defendants were mere licensees and not owners of 20 the resold products, then the first sale doctrine does not apply. See also Int’l Equip. Trading, Ltd. 21 v. AB SCIEX LLC, No. 13 C 1129, 2013 WL 4599903, at *7 (N.D. Ill. Aug. 29, 2013) (“Since the 22 allegations in the Complaint establish that AB Sciex licensed its software to purchasers, the first 23 sale doctrine is inapplicable.”). 24 The Court declines to distinguish these cases, which involved standalone software, from 25 cases involving software embedded in hardware, as is the case here. The Ninth Circuit in these 26 cases did not distinguish the first sale doctrine’s application between software and hardware; it 27 distinguished it only between licensees and owners. Indeed, both opinions were careful to make 28 clear that copyright owners have long restricted the use of their goods subject to conditions in 14 United States District Court Northern District of California 1 licenses. See, e.g., Psystar, 658 F.3d at 1159 (“[C]ourts have long held that copyright holders may 2 also use their limited monopoly to leverage the right to use their work on the acceptance of 3 specific conditions.”); Vernor, 621 F.3d at 1108 (discussing as controlling Ninth Circuit precedent 4 in which copyright owners had transferred copies of their motion pictures pursuant to certain 5 conditions in distribution agreements (citing United States v. Wise, 550 F.2d 1180 (9th 6 Cir.1977))). The Court has not located (and Defendants do not cite, see Opp. at 17–18) any case 7 law that would suggest that application of this well-established law to software embedded in 8 hardware would run afoul of the first sale doctrine. Indeed, if the Court were to apply the first sale 9 doctrine to embedded software as a matter of law, such a holding would render the above case law 10 a nullity in a huge swath of software licensing cases. Defendants have pointed to no authority for 11 extending the scope of the first sale doctrine so broadly. 12 Defendants argue that this holding will lead to a parade of anticompetitive horribles, given 13 that software embedded in hardware is so pervasive in the modern world. See Opp. at 18–19. But 14 there are significant limitations on the general rule that software licenses are not subject to the first 15 sale doctrine. First, as Vernor and Psystar make clear, if the consumer is an owner, and not 16 simply a licensee, the first sale doctrine will apply. These cases set forth a multi-factor test for 17 determining whether the consumer is an owner or a licensee, indicating that software “licenses” 18 may still lead to ownership if they have the right characteristics. See Adobe Sys. Inc. v. 19 Christenson, 809 F.3d 1071, 1078 (9th Cir. 2015). 20 Second, the Court agrees with Defendants that the consumer must agree to the software 21 license in order to be bound by it. See Vernor, 621 F.3d at 1104 (finding software license where 22 consumers were required to accept the agreement before installing the software and could return 23 the software for a full refund if they did not accept). This follows directly from contract law, in 24 which parties must mutually assent to any agreement. See Norcia v. Samsung Telecomms. Am., 25 LLC, 845 F.3d 1279, 1284 (9th Cir.) (describing California contract requirements). Though an 26 offeree’s silence may demonstrate assent to the contract in certain scenarios, an offeree’s silence 27 does not constitute acceptance “when the offeree reasonably did not know that an offer had been 28 made.” Id. at 1285; see also Knutson v. Sirius XM Radio Inc., 771 F.3d 559, 566 (9th Cir. 2014). 15 1 In this case, the question of whether consumers reasonably knew of the EULA such that they 2 could accept it (or return the product if they did not accept) is a question of fact not appropriate for 3 disposition on a motion to dismiss. Defendants allege that Cisco does not inform consumers until 4 “after their purchases” that they will have to license the embedded software and that Cisco “does 5 not require end users to acknowledge, read, or accept a license agreement before using the Cisco 6 goods sold by [Defendants].” Am. Ans. ¶ 170; contra Blizzard Entm’t Inc. v. Ceiling Fan 7 Software LLC, 941 F. Supp. 2d 1227, 1237 (C.D. Cal. 2013) (holding no anticompetitive acts 8 where “purchasers agreed to [the EULA] upfront”). These allegations call into question whether 9 the consumers of Cisco’s products accepted the EULA such that the first sale doctrine might United States District Court Northern District of California 10 apply. 11 In sum, the Court holds that the first sale doctrine would not apply to a consumer who is 12 only a licensee of the embedded software, but it can apply where the consumer is found to have 13 not accepted the license. Thus, Defendants have alleged sufficient facts to support the claim. If 14 the EULA cannot bind the consumers, Cisco’s representations about the EULA’s binding effect 15 may be misrepresentations under the Lanham Act. 16 2. Deception and Materiality 17 Cisco argues that even if Defendants have alleged false and misleading statements, they 18 have not alleged that any misrepresentation “actually deceives or has the tendency to deceive a 19 substantial segment of its audience, [or] that it’s likely to influence purchasing decisions”—that is, 20 that the statements are deceptive or material to consumers. TrafficSchool.com, Inc. v. Edriver Inc., 21 653 F.3d 820, 828 (9th Cir. 2011). 22 The Court agrees with Defendants that they have sufficiently alleged that the 23 representations above are deceptive and material to consumer-purchasing decisions. Defendants 24 allege that these misrepresentations “successfully deter consumers from purchasing Cisco goods 25 on the secondary market”; that Defendants have “on information and belief . . . lost sales of 26 products that would have been made but for Cisco’s false representations to consumers,” Am. 27 Ans. ¶ 174; and that but for these representations “consumers would . . . purchase products on the 28 secondary market,” Am. Ans. ¶¶ 188, 220. They also allege that Cisco discourages consumers 16 1 from purchasing goods on the secondary market, including by telling consumers that “unopened” 2 does not necessarily mean new. Am. Ans. ¶ 186, see also Am. Ans. ¶ 166. These allegations are 3 sufficient to allege that the alleged misrepresentations are deceptive and material to consumers’ 4 purchasing decisions. 5 United States District Court Northern District of California 6 3. Proximate Cause Finally, Cisco argues that Defendants have not alleged that Cisco’s alleged 7 misrepresentations proximately caused Defendants harm. “[A] plaintiff suing under § 1125(a) 8 ordinarily must show economic or reputational injury flowing directly from the deception wrought 9 by the defendant’s advertising; and that that occurs when deception of consumers causes them to 10 withhold trade from the plaintiff.” Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 11 U.S. 118, 133 (2014). 12 The Court agrees with Defendants that they have alleged that the alleged 13 misrepresentations harmed them. Defendants have alleged that on information and belief, they 14 have lost sales of products as a result of Cisco’s representations to consumers and that Cisco 15 discouraged consumers from purchasing goods on the secondary market based on these alleged 16 misrepresentations. See Am. Ans. ¶¶ 171–75, 188. They also allege that Cisco makes additional 17 profits by “extort[ing]” consumers into purchasing goods from authorized sources, from which the 18 Court can infer that consumers are purchasing from Cisco in lieu of purchasing from Defendants. 19 Am. Ans. ¶¶ 175, 188. 20 These allegations are sufficient to allege proximate cause. *** 21 22 For the foregoing reasons, the Court holds that Defendants have stated a valid claim under 23 the Lanham Act for false advertising. Because the Lanham Act claim remains, the Court denies 24 Cisco’s request to strike Defendants’ request for lost profits and damages. See Mot. at 21–22. 25 Defendants’ motion to dismiss the Lanham Act claim is DENIED. 26 D. 27 Cisco argues that the Court should dismiss Defendants’ UCL claim because Defendants do 28 UCL Claim not state a claim under the UCL’s unlawful, unfair, or fraudulent prongs. 17 The Court has already concluded that Defendants state a valid claim under the Lanham Act 1 2 for Cisco’s alleged misrepresentations. This alleged violation satisfies both the UCL’s unlawful 3 and fraudulent prongs. To allege a violation of the unfair prong, Defendants must plead “conduct that threatens an United States District Court Northern District of California 4 5 incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because 6 its effects are comparable to or the same as a violation of the law, or otherwise significantly 7 threatens or harms competition.” Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 8 Cal. 4th 163, 187 (1999). The Court holds that Defendants state a claim under the UCL’s unfair 9 prong by alleging that Cisco attempts to enforce its EULA against consumers, even though the 10 EULA might not bind the consumers because consumers may not have the opportunity to assent to 11 it. Defendants allege that Cisco extorts consumers into purchasing Cisco products by falsely 12 claiming that the consumers cannot lawfully use purchased products unless they pay for the 13 software license. Am Ans. ¶ 175. In so doing, Cisco allegedly unfairly stifles competition by 14 forcing consumers to purchase products from it and not from resellers on the secondary market. 15 See, e.g., Am. Ans. ¶¶ 162, 168, 186, 212. As alleged, these actions could constitute a violation of 16 the UCL, but additional facts and context are necessary to so decide. 17 Based on at least these theories, Cisco’s motion is DENIED as to Defendants’ UCL claim.2 18 E. 19 Defendants’ seek an award of attorney’s fees under California Code of Civil Procedure 20 § 1021.5. To determine whether attorney’s fees are warranted under Section 1021.5, the court 21 must evaluate whether Defendants’ action “(1) served to vindicate an important public right; (2) 22 conferred a significant benefit on the general public or a large class of persons; and (3) imposed a 23 financial burden on [Defendants] which was out of proportion to their individual stake in the 24 matter.” Baggett v. Gates, 32 Cal. 3d 128, 142 (1982). Cisco seeks to strike this request from the Request for Attorney’s Fees 25 26 27 28 Although the Court has denied Cisco’s motion to dismiss the UCL claim under the unlawful prong based on sufficient allegations of Lanham Act violations, the Court GRANTS the motion as to Defendants’ § 369-b theory. As discussed above, the New York law applies only to sales in New York and the UCL applies only to conduct in California. Sullivan v. Oracle Corp., 51 Cal. 4th 1191, 1209 (2011). 18 2 1 prayer for relief. Mot. at 22–23. Given that this test requires a fact-intensive inquiry, the Court finds this issue not suitable United States District Court Northern District of California 2 3 for resolution on a motion to dismiss. The Court cannot say as a matter of law that Defendants’ 4 counterclaims do not serve to vindicate an important public right or confer a benefit on the public, 5 or that Defendants will not bear a financial burden out of proportion with their individual stakes. 6 As Defendants note, they bring several consumer-protection claims and assert several theories of 7 liability that might benefit a large group of individuals—namely, Cisco customers and secondary 8 market resellers. Opp. at 24 – 25; cf. Walker v. Countrywide Home Loans, Inc., 98 Cal. App. 4th 9 1158, 1179 (2002) (“If a plaintiff prevails in an unfair competition law claim, it may seek attorney 10 fees as a private attorney general pursuant to Code of Civil Procedure section 1021.5.”). Thus, the 11 requested relief is premised on a viable claim. As such, this issue is more appropriately 12 adjudicated at a later stage of the proceedings on a more established record. Cisco’s motion to strike the requested relief is DENIED. 13 14 15 IV. ORDER For the foregoing reasons, Cisco’s motion is DENIED as to all claims except Defendants’ 16 second claim for a declaratory judgment of a violation of N.Y. Gen. Bus. Law § 369-b, which is 17 DISMISSED WITHOUT LEAVE TO AMEND. Cisco’s Answer is due on or before 21 days 18 from the date of this Order. 19 20 IT IS SO ORDERED. 21 22 23 24 Dated: August 21, 2019 ______________________________________ BETH LABSON FREEMAN United States District Judge 25 26 27 28 19

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.