Neo4j, Inc. v. PureThink, LLC et al, No. 5:2018cv07182 - Document 168 (N.D. Cal. 2023)
Court Description: ORDER Granting in Part 132 Motion for Judgment on the Pleadings. Signed by Judge Edward J. Davila on 1/6/2023. (ejdlc2, COURT STAFF) (Filed on 1/6/2023)
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Neo4j, Inc. v. PureThink, LLC et al Doc. 168 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 1 of 16 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 NEO4J, INC., et al., 8 Plaintiffs, 9 v. 10 ORDER GRANTING IN PART PLAINTIFFS' MOTION FOR JUDGMENT ON THE PLEADINGS PURETHINK, LLC, et al., 11 United States District Court Northern District of California Case No. 5:18-cv-07182-EJD Defendants. 12 Re: Dkt. No. 132 This action involves disputes relating to Defendants PureThink LLC’s, iGov Inc.’s, and 13 14 John Mark Suhy’s (collectively, “Defendants”) use of graph database management software 15 belonging to Plaintiffs Neo4j, Inc. (“Neo4j USA”) and Neo4j Sweden AB (“Neo4j Sweden,” 16 collectively with Neo4j USA, “Plaintiffs”). Plaintiffs assert various claims arising out of 17 Defendants’ continued use of the Neo4j mark after Defendants’ license expired, while Defendants 18 assert counterclaims for interference with prospective economic advantage and declaratory relief. 19 Presently before the Court is Plaintiffs’ motion for judgment on the pleadings (“Motion”) 20 to dismiss Defendants’ First, Fifth, and Sixth Counterclaims, as well as Defendants’ First and 21 Second Affirmative Defenses. ECF No. 132. On January 4, 2022, the Court took the Motion 22 under submission without oral argument pursuant to Civil L.R. 7-1(b). ECF No. 139. Having 23 considered all briefs filed in support of and opposition to the Motion, the Court GRANTS IN 24 PART Plaintiffs’ Motion. 25 I. 26 FACTUAL BACKGROUND The Court has previously set forth the facts at length on multiple occasions (see ECF Nos. 27 70, 85, 118) and, accordingly, will summarize here only the facts pertinent to this Order. 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 1 Dockets.Justia.com Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 2 of 16 1 A. 2 Plaintiff Neo4j USA is a Delaware corporation in San Mateo, California, specializing in 3 graph database management systems. Third Amended Complaint (“TAC”) ¶ 2, ECF No. 90. 4 Plaintiff Neo4j Sweden is a wholly owned subsidiary of Neo4j USA and owns all copyrights 5 relating to the widely used Neo4j graph database platform, including the source code. Id. ¶ 4. 6 United States District Court Northern District of California Plaintiffs and NEO4J Software Plaintiffs have historically offered a free and open-source version of their Neo4j software 7 called NEO4J Community Edition (“NEO4J CE”), subject to the GNU General Public License 8 (“GPL”). Id. ¶ 24. For commercial users, Plaintiffs offered a paid-for version of Neo4j called 9 NEO4J Enterprise Edition (“NEO4J EE”), which, compared to the free NEO4J CE version, 10 contains significant additional functionality and provides support for advanced commercial 11 operations. Id. The NEO4J EE software was historically offered under both a paid-for 12 commercial license and the free GNU Affero General Public License (“AGPL”), but as of 13 November 2018, NEO4J EE is only offered under the commercial license. Id. ¶¶ 25, 27. Defendants’ Partner Agreement with Plaintiffs 14 B. 15 On September 30, 2014, Neo4j USA entered into a NEO4J Solution Partner Agreement 16 (“Partner Agreement”)—then under its prior name, “Neo Technology, Inc”—with Defendant 17 PureThink LLC (“PureThink”). Id. ¶ 2; Second Amended Counterclaim (“SACC”) ¶ 15. 18 Under the Partner Agreement, Defendant PureThink would provide support to end-users of 19 NEO4J EE software in exchange for annual partner program fees and shared revenue. SACC ¶ 20 12; TAC ¶ 29. PureThink also received a non-exclusive and non-transferable limited license to 21 use the Neo4j marks “solely to market and promote” the Neo4J commercial products. SACC, Ex. 22 B, NEO4J Solution Partner Agreement (“SPA”) § 4.1. The Partner Agreement also provided: 23 24 25 26 During the term of this Agreement and up until thirty-six (36) months after the termination or expiration of this Agreement, Partner may not develop, market, distribute or offer any services related to any Neo Technology Community Edition Products, derivative works of such products, or any Partner software code made to work with Neo Technology Community Edition Products (including, without limitation, hosting services, training, technical support, configuration and customization services, etc.). 27 SPA § 4.3.2. Under this Partner Agreement, Defendant PureThink procured NEO4J EE 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 2 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 3 of 16 1 subscriptions for the Maryland Procurement Office, Sandia National Laboratories, and the FBI 2 with Neo4j USA’s approval. SACC ¶ 18. 3 4 open-source Neo4j software and designed for government clients. SACC ¶¶ 16-17. PureThink 5 called this new software package “Neo4j Government Edition” or “Neo4j Enterprise Government 6 Edition.” Id. PureThink pitched Neo4j Government Edition with “consulting services” to the 7 Internal Revenue Service (“IRS”) “completely outside the Partner Agreement.” Id. ¶ 20. 8 9 United States District Court Northern District of California During this period, PureThink also worked on a “Neo4j Government Package,” based on On May 30, 2017, Neo4J USA notified Defendants PureThink and Suhy that they had breached the Partner Agreement by performing services using Neo4j open-source software and 10 creating a consulting business around those open-source software products. ECF No. 98-1, Ex. 9. 11 Per the Partner Agreement, the Agreement would be terminated if Defendants did not cure the 12 breach within 30 days. SPA § 7.2. On July 11, 2017, Neo4j USA notified Defendants that the 13 Partner Agreement was terminated. TAC ¶ 35. Plaintiffs’ Communications with Defendants’ Customers 14 C. 15 Defendants allege that, after Neo4j USA terminated the Partner Agreement with 16 PureThink, Neo4j USA also contacted and informed eighteen (18) of PureThink’s potential 17 customers that “PureThink was terminated as a solution partner and could not support open source 18 versions of Neo4j for a period of 36 months following termination.” SACC ¶ 27. The SACC 19 specifically references and appends Neo4j USA’s communication to the IRS that the PureThink’s 20 Partner Agreement was terminated and PureThink was no longer authorized to procure a Neo4j 21 subscription on behalf of the IRS or to provide consulting services and support on open source 22 Neo4j products. SACC, Ex. D. 23 Defendants allege that Neo4j USA’s actions were “intended to and did disrupt the 24 economic relationship” between Defendants and their potential business opportunities, and that 25 their relationship with those customers were “actually and totally disrupted by NEO4J USA’s 26 wrongful interference.” SACC ¶¶ 28, 31. 27 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 3 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 4 of 16 1 II. Although this action has an extensive and bifurcated procedural history, the present Motion 2 3 is only concerned with the counterclaims asserted in Defendant’s SACC (ECF No. 72) and the 4 affirmative defenses in Defendant’s Answer to Plaintiffs’ TAC (ECF No. 91). Accordingly, the 5 Court here only recounts the procedural history relevant to this Motion. On November 28, 2018, Plaintiffs brought this suit against Defendants for, inter alia, 6 7 violations of the Lanham Act and California’s Unfair Competition Law, based on Defendants’ 8 alleged infringement of Neo4j USA’s federally registered Neo4j mark. ECF No. 1. Plaintiffs 9 have since amended their Complaint significantly, culminating in the Third Amended Complaint, 10 filed September 28, 2020. ECF No. 90. On January 9, 2019, Defendants filed their initial countercomplaint, asserting—most 11 United States District Court Northern District of California PROCEDURAL HISTORY 12 relevant for this Motion—counterclaims for intentional interference with prospective economic 13 advantage (“IIPEA”) and declaratory relief that certain restrictions in the Partner Agreement are 14 void under California Business & Professions Code § 16600 and the AGPL. ECF No. 22. 15 Defendants’ countercomplaint has also undergone significant amendments, resulting in the current 16 Second Amended Counterclaim. ECF No. 72. In addition to their counterclaims, Defendants 17 have also asserted affirmative defenses that are substantially identical to their declaratory relief 18 counterclaims—i.e., the restrictions are void under § 16600 and the AGPL. ECF No. 91, at 14-16. On September 3, 2021, Plaintiffs filed the instant Motion for judgment on the pleadings 19 20 pursuant to Federal Rule of Civil Procedure 12(c), specifically as to Defendants’ First, Fifth, and 21 Sixth counterclaims and Defendants’ First, Second, and Sixth affirmative defenses. ECF No. 132. 22 After the Motion was fully briefed and taken under submission without oral argument, Defendants 23 stipulated to dismiss its Sixth Affirmative Defense, consistent with a subsequently issued Ninth 24 Circuit memorandum disposition in this case. ECF No. 146 ¶ 2; see also ECF No. 141. 25 III. LEGAL STANDARD 26 Federal Rule of Civil Procedure 12(c) provides that “[a]fter the pleadings are closed—but 27 early enough not to delay trial—a party may move for judgment on the pleadings.” A Rule 12(c) 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 4 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 5 of 16 1 motion challenges the legal sufficiency of the opposing party’s pleadings. Judgment on the 2 pleadings is appropriate when, even if all material facts in the pleadings are true, the moving party 3 is entitled to judgment as a matter of law. Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009). United States District Court Northern District of California 4 On a motion for judgment on the pleadings, “all material allegations in the complaint are 5 accepted as true and construed in the light most favorable to the non-moving party.” Turner v. 6 Cook, 362 F.3d 1219, 1225 (9th Cir. 2004). “A motion for judgment on the pleadings may be 7 granted if, after assessing the complaint and matters for which judicial notice is proper, it appears 8 ‘beyond doubt that the [non-moving party] cannot prove any facts that would support his claim for 9 relief.’” Williams v. Nichols Demos, Inc., 2018 WL 3046507, at *3 (N.D. Cal. June 20, 2018) 10 (citing Morgan v. County of Yolo, 436 F. Supp. 2d 1152, 1155 (E.D. Cal. 2006)). In other words, 11 the standard for a Rule 12(c) motion is essentially the same as that for a Rule 12(b)(6) motion. 12 Chavez v. United States, 683 F.3d 1102, 1108 (9th Cir. 2012). 13 Rule 12(c) may be used to challenge individual causes of action, as well as affirmative 14 defenses. See Strigliabotti v. Franklin Res., Inc., 398 F. Supp. 2d 1094, 1097 (N.D. Cal. 2005); 15 Spears v. First Am. eAppraiseIt, 2013 WL 1748284, at *6 (N.D. Cal. Apr. 23, 2013) (noting that 16 affirmative defenses are evaluated for sufficiency under the same “plausibility” standard, 17 regardless of whether challenged under a Rule 12(c) or Rule 12(f) motion); F.T.C. v. Meta 18 Platforms Inc., 2022 WL 16637996, at *1 (N.D. Cal. Nov. 2, 2022) (“In this district, defendants 19 provide ‘fair notice’ of an affirmative defense by meeting the Twombly/Iqbal pleading standard.”). 20 Although Rule 12(c) makes no mention of leave to amend, “courts have discretion both to 21 grant a Rule 12(c) motion with leave to amend . . . and to simply grant dismissal of the action 22 instead of entry of judgment.” Mitchell v. Corelogic, Inc., 2019 WL 7172978, at *4 (C.D. Cal. 23 Nov. 20, 2019) (citing Carmen v. S.F. Unified Sch. Dist., 982 F. Supp. 1396, 1401 (N.D. Cal. 24 1997)). Leave to amend should be freely granted absent “undue delay, bad faith or dilatory motive 25 on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, 26 undue prejudice to the opposing party by virtue of allowance of the amendment [or] futility of 27 amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962). 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 5 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 6 of 16 1 2 3 4 IV. DISCUSSION A. First Counterclaim: Interference with Prospective Economic Advantage Plaintiffs first move for judgment on Defendants’ First Counterclaim for Intentional Interference with Prospective Economic Advantage (“IIPEA”). To prevail on this claim under California law, Defendants must allege five elements: “(1) 5 the existence, between the [Defendants] and some third party, of an economic relationship that 6 contains the probability of future economic benefit to the plaintiff; (2) the [Plaintiffs’] knowledge 7 of the relationship; (3) intentionally wrongful acts designed to disrupt the relationship; (4) actual 8 9 disruption of the relationship; and (5) economic harm proximately caused by the [Plaintiffs’] action.” Roy Allan Slurry Seal, Inc. v. Am. Asphalt S., Inc., 2 Cal. 5th 505, 512 (2017) (citing 10 Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1153 (2003)). With respect to the United States District Court Northern District of California 11 12 third factor, the intentionally wrongful acts must be “wrongful by some legal measure other than the fact of interference itself.” Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal. 4th 376, 13 393 (1995). 14 Here, Plaintiffs argue that Defendants have failed to allege that (1) Plaintiffs committed a 15 wrongful act independent from the interference itself and (2) Plaintiffs’ actions—wrongful or 16 otherwise—proximately caused the disruption of an actual business relationship. Mot. 7-11. The 17 Court addresses both arguments in turn. 18 19 1. Independent Wrongful Act Defendants allege that Section 4.3.2 is void under California Business & Professions Code 20 § 16600 and, therefore, Plaintiffs’ communications to Defendants’ clients regarding Section 4.3.2 21 were independently wrongful actions. SACC ¶ 29. 22 California Business & Professions Code § 16600 broadly provides that, with limited 23 exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, 24 trade, or business of any kind is to that extent void.” Cal. Bus. & Prof. Code § 16600. Section 25 4.3.2 of the Partner Agreement states: 26 27 28 During the term of this Agreement and up until thirty-six (36) months after the termination or expiration of this Agreement, Partner may not develop, market, Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 6 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 7 of 16 1 2 3 distribute or offer any services related to any Neo Technology Community Edition Products, derivative works of such products, or any Partner software code made to work with Neo Technology Community Edition Products (including, without limitation, hosting services, training, technical support, configuration and customization services, etc.). SPA § 4.3.2; see also SACC ¶¶ 55. 4 However, the state high court has recently clarified that contracts restraining a business 5 from engaging in lawful trade or business with another business is not per se invalid under § 6 16600. Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1162 (2020). In Ixchel, the Ninth 7 Circuit certified a question regarding § 16600 to the California Supreme Court, which was 8 9 rephrased as, “What is the proper standard to determine whether section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business?” 10 Id. at 1140. To answer this question, Justice Liu conducted a searching inquiry, delving into the 11 United States District Court Northern District of California statutory text, legislative history, a broad survey of California high court precedent, harmonization 12 within the broader statutory context, and public policy competition concerns. Id. at 1148–62. As 13 relevant here, the California Supreme Court held that (1) § 16600 applies to business contracts, id. 14 at 1149, and (2) the “rule of reason applies to determine the validity of a contractual provision by 15 which a business is restrained from engaging in a lawful trade or business with another business,” 16 as distinguished from employment contracts. Id. at 1162. The referenced “rule of reason” inquiry 17 is the same analysis used to assess antitrust violations under the Cartwright Act, i.e., whether the 18 restraint “harms competition more than it helps [in consideration of] the facts peculiar to the 19 business in which the restraint is applied, the nature of the restraint and its effects, and the history 20 21 of the restraint and the reasons for its adoption.” Id. at 1150 (internal quotation marks omitted). Here, the SACC pleads itself into Ixchel’s scope by alleging that the Partner Agreement 22 was between two businesses: PureThink and Neo4j USA. SACC ¶ 15. Accordingly, Defendants 23 must allege sufficient facts that would support the unlawfulness of the Partner Agreement 24 restrictions under Ixchel, that is, the restrictions harm competition more than they help. Ixchel, 9 25 26 Cal. 5th at 1150. Presently, Defendants’ allegations fail to meet this threshold as they are largely conclusory, e.g., “these restrictions are invalid under California Business and Professions Code § 27 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 7 United States District Court Northern District of California Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 8 of 16 1 16600” (SACC ¶ 13), “NEO4J USA’s interference was an independent wrongful act as it violated 2 California Business and Professions Code § 16600” (SACC ¶ 29). Indeed, Defendants themselves 3 appear to concede this point in their Opposition. Opp. 6 (“[I]t is unclear if claims by entities must 4 now allege the restriction violates the rule of reason. If such an element must be plead, Purethink 5 should be permitted to do so.”). 6 Defendants’ efforts to distance the Partner Agreement from Ixchel’s holding are not 7 persuasive. They argue that, because Plaintiffs have claimed that Defendant PureThink is an alter 8 ego of individual Defendant John Mark Suhy, the Partner Agreement is essentially one between a 9 business entity and an individual. Opp. 6. Defendants also advance the argument that Defendant 10 Suhy is actually Plaintiffs’ employee, because he performed work within Plaintiffs’ course of 11 business and was controlled by Plaintiffs. Id. Not only are these newly proposed theories 12 unsupported by any factual allegations in the SACC, but they also conflict with the affirmative 13 allegations asserted by Defendants themselves. See SACC ¶¶ 13–20 (stating that the Partner 14 Agreement was between PureThink and Neo4j USA and describing the parties’ arms-length 15 business negotiations). 16 Because the § 16600 violation is the only independent wrongful act asserted in support of 17 Defendants’ First Counterclaim, see SACC ¶ 29, Defendants have failed to state a claim for 18 IIPEA. However, the Court finds that permitting Defendants leave to amend would not be futile, 19 as this deficiency can conceivably be cured by pleading additional facts that supports the 20 unreasonableness of Section 4.3.2. of the Partner Agreement. Indeed, Defendants have not yet had 21 an opportunity to conform their pleadings to the California Supreme Court’s recent decision, 22 because Ixchel was issued two months after Defendants filed their SACC. ECF No. 72. 23 However, in addition to the failure to plead an independently wrongful act, the Court also 24 notes that the SACC contains additional pleading deficiencies that may defeat their IIPEA claim. 25 2. Actual Disruption and Causation 26 Plaintiffs also move to dismiss Defendants’ IIPEA claim for failure to allege actual 27 disruption that was caused by Neo4j USA’s conduct. Mot. 9-10. Although it is not clear if 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 8 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 9 of 16 1 Plaintiffs are attacking the “actual disruption” or the “proximate causation” IIPEA elements, the 2 Court finds that the SACC is insufficient as to both. First, the SACC’s allegations of “actual disruption” are wholly conclusory. The only United States District Court Northern District of California 3 4 allegations that could support this requirement are (1) Plaintiffs “intended to and did disrupt the 5 economic relationship” and (2) Defendants’ economic relationship “was actually and totally 6 disrupted by [Plaintiffs’] wrongful interference.” SACC ¶¶ 28, 31; see also Opp. 7-8 (citing the 7 same). These barebone statements are near verbatim recitals of the “actual disruption” legal 8 requirement and are not supported by any further factual allegations. For example, Defendants do 9 not allege that the IRS terminated or insisted on modifying its contract with Defendants. SACC ¶¶ 10 20–21. The only apparent consequence resulting from Plaintiffs’ alleged interference is a single 11 “initial” question from the IRS asking if Defendants’ services would be stopped, far short of the 12 conclusory actual and total disruption alleged in the SACC. SACC, Ex. D (“One question I have 13 for this existing contract is if services are stopped due to what Neo4j states below regarding 14 Purethink’s inability to provide open-source version support in the below? Now this is me asking 15 from an initial statement. . . .”). 16 Second, Defendants must not only establish that Plaintiffs actually disrupted their 17 economic relationship, but they must also show that such disruption was the result of Plaintiffs’ 18 communications with those third parties. See Korea Supply, 29 Cal. 4th at 1153. Because the 19 Court finds that Defendants have not alleged any non-conclusory “actual disruption” of their 20 economic relationships, they are also unable to meet the “proximate causation” requirement. 21 Paragraphs 28 and 31 of the SACC are again insufficient to satisfy this element, as Defendants 22 have provided no basis for the Court to even infer that the supposed disruption was caused by 23 Plaintiffs.1 Similar barebones allegations were rejected by the Ninth Circuit in Sybersound 24 Records and this district in Silicon Knights. Sybersound Recs., Inc. v. UAV Corp., 517 F.3d 1137, 25 26 27 28 The Court notes that Exhibit D to the SACC could suggest that Plaintiffs’ communication to the IRS was the proximate cause of the IRS’s request for further clarification from Defendants. However, as noted in the preceding paragraph, the IRS’s question does not evidence an “actual disruption” to the economic relationship. Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 9 1 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 10 of 16 1 1151 (9th Cir. 2008) (“[Plaintiff] merely states in a conclusory manner that it ‘has been harmed 2 because its ongoing business and economic relationships with Customers have been disrupted.’ 3 [Plaintiff] does not allege, for example, that it lost a contract nor that a negotiation with a 4 Customer failed.”); Silicon Knights, Inc. v. Crystal Dynamics, Inc., 983 F. Supp. 1303, 1312 (N.D. 5 Cal. 1997) (“[A]llegations that Defendants’ undisclosed statements caused potential customers not 6 to buy [Plaintiff’s] video game software assert[] the type of speculative economic relationship 7 disapproved of in [Westside].”) (citing Westside Ctr. Assocs. v. Safeway Stores 23, Inc., 42 Cal. 8 App. 4th 507, 522 (1996)). United States District Court Northern District of California 9 In sum, Defendants have failed to plead either required elements of “actual disruption” and 10 “proximate causation,” which are two independent bases to dismiss Defendants’ First 11 Counterclaim. However, as with the other IIPEA deficiency, the Court does not find that 12 amendment would be futile. The deficiencies identified could conceivably be remedied with 13 additional factual allegations regarding disruption Defendants experienced. 14 15 Accordingly, Plaintiffs’ Motion is GRANTED as to Defendants’ First Counterclaim, which is DISMISSED with LEAVE TO AMEND. 16 B. 17 Plaintiffs also move to dismiss Defendants’ Fifth and Sixth Counterclaims requesting 18 declaratory relief. Plaintiffs’ Motion seeks dismissal of these counterclaims on mootness and 19 inadequate pleading grounds. 20 Declaratory Relief Counterclaims The Declaratory Judgment Act provides, in relevant part, “In a case of actual controversy 21 within its jurisdiction . . . any court of the United States, upon the filing of an appropriate 22 pleading, may declare the rights and other legal relations of any interested party seeking such 23 declaration. . . .” 28 U.S.C. § 2201(a). To determine whether a “case of actual controversy” 24 exists, courts must evaluate “whether the facts alleged, under all the circumstances, show that 25 there is a substantial controversy, between parties having adverse legal interests, of sufficient 26 immediacy and reality to warrant the issuance of a declaratory judgment.” Maryland Cas. Co. v. 27 Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941). The party seeking a declaratory judgment has the 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 10 United States District Court Northern District of California Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 11 of 16 1 burden of establishing the existence of an actual case or controversy. Cardinal Chem. Co. v. 2 Morton Int’l, Inc., 508 U.S. 83, 95 (1993). The primary purpose of the Act is to “avoid accrual of 3 avoidable damages to one not certain of his rights and to afford him an early adjudication without 4 waiting until his adversary should see fit to begin suit, after damage had accrued.” Cunningham 5 Bros. v. Bail, 407 F.2d 1165, 1167–68 (7th Cir. 1969). 6 Defendants’ counterclaims here seek declarations that certain Partner Agreement 7 restrictions are void. Specifically, the Fifth Counterclaim seeks a “declaration that § 4.3.2. of the 8 Partner Agreement is void under California Business and Professions Code § 16600,” and their 9 Sixth Counterclaim requests a “declaration that §§ 4.3.1 and 4.3.2 of the Partner Agreement are 10 void under the AGPL as the restriction violate [sic] the terms of the AGPL.” SACC ¶¶ 57, 61. 11 The Court finds that Defendants have not established the existence of an actual case or 12 controversy with respect to the referenced Partner Agreement restrictions and, therefore, does not 13 reach Plaintiffs’ arguments to dismiss these counterclaims on the merits. It is undisputed that the 14 Partner Agreement was terminated on July 11, 2017, and that the restrictions in § 4.3.2 expired 15 thirty-six months later on July 11, 2020. Mot. 12-13; Opp. 7-10; see also ECF No. 100, at 17 16 (Defendants’ acknowledging the same in separate briefing). Furthermore, Plaintiffs are not 17 seeking to enforce either of the restrictions implicated by Defendants’ declaratory relief claims. 18 Cf. SACC ¶ 13 (noting that Plaintiffs had removed and “waiv[ed] a breach of contract claim based 19 on [§ 4.3.2]” in their First Amended Complaint); see also Mot. 12-13 (same). Accordingly, 20 Defendants are not currently bound by or at risk of incurring damages on either expired restriction. 21 The Ninth Circuit has stated, in no uncertain terms, that “[t]here is no basis for awarding 22 declaratory relief on an expired agreement.” S. California Painters & Allied Trades, Dist. Council 23 No. 36 v. Rodin & Co., 558 F.3d 1028, 1035 (9th Cir. 2009). District courts have also consistently 24 denied declaratory relief where the disputed contract terms had expired and the opposing party 25 was not seeking to enforce the expired terms. See Imtiaz Khan v. K2 Pure Sols., LP, 2013 WL 26 4734006, at *4 (N.D. Cal. Sept. 3, 2013) (finding lack of actual controversy where disputed non- 27 compete agreements had already expired); Smith v. Bioworks, Inc., 2007 WL 273948, at *6 (E.D. 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 11 United States District Court Northern District of California Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 12 of 16 1 Cal. Jan. 29, 2007) (“Because the non-compete clause expired well before this issue came before 2 the court, and because there is no evidence to indicate that plaintiff faces any further liability 3 under this clause, plaintiff’s claims for declaratory relief . . . are MOOT.”); Gutierrez v. Martin 4 Eng’g, 2007 WL 9702235, at *1 (S.D. Fla. Mar. 16, 2007) (“The challenged non-compete 5 provisions expired by their terms in December, 2006, rendering [plaintiff’s] request for declaratory 6 relief on the validity of these clauses moot.”). These holdings are consistent with the Declaratory 7 Judgment Act’s forward-looking purpose of avoiding “accrual of avoidable damages,” as damages 8 typically would not continue to accrue on expired contracts. See Morcote v. Oracle Corp., 2005 9 WL 3157512, at *5 (N.D. Cal. Nov. 23, 2005) (finding no “actual controversy where there is no 10 possibility that any further damages can accrue under the [contract] in light of the fact that it has 11 expired”). Defendants’ sole case cited in support of their declaratory relief—Applied Materials, 12 Inc. v. Advanced Micro-Fabrication Equip. (Shanghai) Co., 630 F. Supp. 2d 1084 (N.D. Cal. 13 2009)—is distinguishable, because that decision involved a motion for summary judgment that did 14 not implicate any justiciability or mootness issues, which are the bases for Plaintiffs’ Motion and 15 the Court’s opinion here. Defendants have not represented that they are accruing further damages or that they are at 16 17 risk of violating the now-expired Partner Agreement restrictions. They also have not identified 18 any risk of future injury or adverse effects that a declaratory judgment may remedy. See Opp. 9. 19 Defendants only argues that, “[w]ith an ajudication [sic] of the [restrictions’] unlawfulness, 20 Purethink may revive its relationships long tarnished with NEO4J’s clearly shown enforcement 21 efforts.”2 Opp. 9. This point is inapposite because it only purports to establish the redressability 22 of declaratory relief—Plaintiffs’ Motion, however, asserts that the dispute is moot, not that a 23 favorable decision will provide inadequate remedy.3 Second, even regarding the possible redress 24 25 26 27 28 Notably, Defendants do not argue that Plaintiffs’ withdrawal of their contract claims falls under the “voluntary cessation” exception to mootness. See, e.g., Friends of the Earth, Inc. v. Laidlaw Env't Servs. (TOC), Inc., 528 U.S. 167, 189 (2000). To the contrary, Defendants appear to take the position that Plaintiffs’ withdrawal of those claims constitute waiver. SACC ¶ 13. 3 Indeed, a lack of redressability would be a separate basis to dismiss Defendants’ declaratory relief for lack of standing. See Mayfield v. United States, 599 F.3d 964, 971 (9th Cir. 2010) (“To Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 12 2 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 13 of 16 1 mentioned in Defendants’ Opposition, the Ninth Circuit has disapproved of granting declaratory 2 judgment where, as here, the primary redress would be to improve a plaintiff’s position in future 3 dealings with third parties. See S. California Painters, 558 F.3d at 1035 (“[Plaintiff] stated, 4 however, that . . . it could use such a judgment in its dealings with other contractors and it would 5 strengthen [plaintiff’s] position in future dealings. . . . This sort of declaratory relief would 6 constitute an advisory opinion and does not evidence a live dispute between the parties in this 7 case.”). Accordingly, Defendants’ argument that they may use the requested declaratory judgment 8 to “revive its relationships long tarnished” is insufficient to support the existence of a live 9 controversy for justiciability purposes. United States District Court Northern District of California 10 Because the Partner Agreement restrictions at issue are no longer in effect and Plaintiffs 11 have withdrawn their efforts to enforce those restrictions, Defendants’ counterclaims for 12 declaratory relief are moot. Furthermore, amendment would be futile, as it is undisputed that the 13 contested restrictions have expired. Plaintiffs’ Motion as to Defendants’ Fifth and Sixth 14 Counterclaims are GRANTED WITHOUT LEAVE TO AMEND. 15 C. 16 Finally, Plaintiffs seek to dismiss Defendants’ First and Second Affirmative Defenses to Affirmative Defenses 17 the Third Amended Complaint. The affirmative defenses assert the same general theories as 18 Defendants’ Fifth and Sixth Counterclaims, i.e., that Sections 4.3.1 and 4.3.2 of the Partner 19 Agreement are void pursuant to the AGPL and California Business & Professions Code § 16600, 20 respectively. ECF No. 91, at 14–16. Plaintiffs likewise move to dismiss these affirmative 21 defenses on the same bases as they did Defendants’ counterclaims. 22 Although Plaintiffs challenge these affirmative defenses as a Rule 12(c) motion for 23 judgment on the pleadings, the Motion appear to request that these affirmative defenses, in effect, 24 be stricken as per Rule 12(f). See Fed. R. Civ. P. 12(f) (“The court may strike from a pleading an 25 26 27 28 establish standing, a plaintiff must also show that a favorable decision will likely redress his injury.”); cf. Gen. Elec. Co. by Levit v. Cathcart, 980 F.2d 927, 934 (3d Cir. 1992) (denying review because the court could only grant “equitable relief with respect to the expired terms by doing the impossible: enjoining the directors from serving expired terms”). Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 13 United States District Court Northern District of California Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 14 of 16 1 insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”). Courts 2 often apply the same plausibility pleading standard to affirmative defenses, regardless of whether 3 they are challenged under either Rule 12(c) or 12(f). See Spears, 2013 WL 1748284, at *6. Under 4 Rule 12(f), an immaterial matter is “that which has no essential or important relationship to the 5 claim for relief or the defenses being pleaded,” and an impertinent matter “consists of statements 6 that do not pertain, and are not necessary, to the issues in question.” Fantasy, Inc. v. Fogerty, 984 7 F.2d 1524, 1527 (9th Cir. 1993), rev’d on other grounds, 510 U.S. 517 (1994) (quoting 5 Charles 8 A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1382, at 706–07 (1990)). If the 9 court strikes a defense, “leave to amend should be freely given so long as there is no prejudice to 10 the moving party.” G & G Closed Cir. Events, LLC v. Nguyen, 2010 WL 3749284, at *2 (N.D. 11 Cal. Sept. 23, 2010) (citing Wyshak v. City Nat. Bank, 607 F.2d 824, 826–27 (9th Cir. 1979)). 12 Here, Defendants’ First Affirmative Defense pleads, in relevant part, that “[t]he restriction 13 under Section 4.3.2 cannot be enforced against Defendants as the restriction is void under 14 California Business and Professions Code § 16600.” ECF No. 91, at 14. However, as discussed 15 above, Plaintiffs do not attempt to enforce Section 4.3.2 of the Partner Agreement in the TAC. 16 The TAC only cites once to Section 4.3.2—and Defendants’ breach thereof—as the basis for 17 Plaintiffs’ decision to terminate the Partner Agreement in 2017, not as the basis of any current 18 claims in the TAC. TAC ¶ 138; see also SACC ¶ 13. Although Plaintiffs are asserting a breach of 19 contract claim, their claim only seeks to recover for breaches of Sections 3.1, 4.1 and 7.3—not 20 Section 4.3.2—of the Partner Agreement. TAC ¶ 143. Accordingly, even if the affirmative 21 defense’s conclusory allegation is accepted as true and Section 4.3.2 is void, it would bear “no 22 essential or important relationship to the claim[s] for relief,” nor would it “pertain, and [be] 23 necessary, to the issues in question.” Fantasy, 984 F.2d at 1527. 24 The Second Affirmative Defense fares much the same as the First. Defendants assert that 25 “[t]he restrictions in Paragragraphs [sic] 4.3.1 and 4.3.2 violate the GNU AFFERO GENERAL 26 PUBLIC LICENSED VERSION 3 for Neo4J enterprise software.” ECF No. 91, at 15. Here as 27 well, the TAC does not reflect any attempt to enforce either of the two restrictions asserted in the 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 14 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 15 of 16 1 Second Affirmative Defense. In fact, Plaintiffs are not attempting to enforce any provision from 2 Section 4.3 of the Partner Agreement titled “Restrictions.” SPA § 4.3; see generally TAC ¶¶ 134- 3 147. Defendants’ Second Affirmative Defense, as a result, is also subject to be stricken as an 4 immaterial or impertinent defense. Defendants argue that, because the TAC references and alleges a breach of Section 4.3.2 at United States District Court Northern District of California 5 6 paragraph 138, they are entitled to raise the “illegality of the contract in the answer as an 7 affirmative defense,” citing to Federal Rule of Civil Procedure 8(c)(1). Opp. 9. However, the 8 referenced TAC allegation only cites Section 4.3.2 as a basis for Plaintiffs’ decision in 2017 to 9 terminate the Partner Agreement—the TAC does not seek to recover damages for an alleged 10 breach of that Section. TAC ¶ 143. Nor would the illegality of one provision necessarily result in 11 the illegality of the entire contract. Defendants’ affirmative defenses, as pled, do not purport to 12 render the entire Partner Agreement void and do not contain any facts to support such a theory.4 13 Under any interpretation, Defendants’ cursory arguments do not establish how the “illegality” of 14 Sections 4.3.1 and 4.3.2 would result in any kind of defense to the claims in the TAC. Because Plaintiffs are not suing Defendants on any of the restrictions that are the focus of 15 16 the First and Second Affirmative Defenses, the Court finds those defenses to be immaterial and 17 impertinent per Rule 12(f). The Court will GRANT Plaintiffs’ Motion as to those affirmative 18 defenses. The Court also finds that further amendment would be futile, because no amount of 19 additional pleading from Defendants can change the fact that none of the TAC’s claims turn on the 20 validity of Sections 4.3.1 or 4.3.2. See Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 21 1988) (“[A] proposed amendment is futile only if no set of facts can be proved under the 22 amendment to the pleadings that would constitute a valid and sufficient claim or defense.”). Accordingly, Defendants’ First and Second Affirmative Defenses are STRICKEN 23 24 WITHOUT LEAVE TO AMEND. 25 26 27 28 In any event, the Partner Agreement appears to contain a severability clause. SPA § 10.6 (“If any term or provision of this Agreement is found to be invalid under any applicable statute or rule of law then, that provision notwithstanding, this Agreement will remain in full force and effect and such provision will be deemed omitted. . . .”). Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 15 4 Case 5:18-cv-07182-EJD Document 168 Filed 01/06/23 Page 16 of 16 1 2 V. CONCLUSION Based on the foregoing, the Court GRANTS IN PART Plaintiffs’ Motion, as follows: 1. Defendants’ First Counterclaim for Intentional Interference with Prospective 3 Economic Advantage is DISMISSED WITH LEAVE TO AMEND; 4 2. Defendants’ Fifth and Sixth Counterclaim for Declaratory Relief are DISMISSED 5 WITHOUT LEAVE TO AMEND; and 6 3. Defendants’ First and Second Affirmative Defenses are DISMISSED WITHOUT 7 LEAVE TO AMEND. 8 Defendants shall file any amended pleadings within 21 days of this Order. 9 IT IS SO ORDERED. 10 Dated: January 6, 2023 United States District Court Northern District of California 11 12 13 14 EDWARD J. DAVILA United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Case No.: 5:18-cv-07182-EJD ORDER GRANTING IN PART MOTION FOR JUDGMENT ON THE PLEADINGS 16
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