Case 2:12-cv-00567-SMM Document 126 Filed 03/28/14 Page 1 of 12
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`WO
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE DISTRICT OF ARIZONA
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`No. CV-12-567-PHX-SMM
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`ORDER
`
`))))))))))))))
`
`The ACT Group, Inc.,
`Plaintiff,
`
`vs.
`James Hamlin, et al.,
`Defendants.
`
`And Related Counterclaim.
`_________________________________
`
`Pending before the Court is Defendant James Hamlin’s (“Hamlin”) motion for
`summary judgment. (Doc. 89.) The motion is fully briefed. (Docs. 90, 99-102.) Also
`pending is Plaintiff The Act Group Inc.’s (“ACT”) motion to modify the case management
`order and for leave to file a second amended complaint. (Doc. 97.) This motion is also fully
`briefed. (Docs. 103, 105.) After review and consideration,1 the Court will deny Hamlin’s
`motion for summary judgment and deny ACT’s motion to modify the case management order
`and for leave to file a second amended complaint.
`///
`
`1Hamlin’s request for oral argument is denied because the parties have had an
`adequate opportunity to present their written arguments, and oral argument will not aid the
`Court’s decision. See Lake at Las Vegas Investors Grp., Inc. v. Pac. Malibu Dev., 933 F.2d
`724, 729 (9th Cir. 1991).
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`Case 2:12-cv-00567-SMM Document 126 Filed 03/28/14 Page 2 of 12
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`BACKGROUND
`ACT provides training and education services to Heating, Ventilation and Air
`Conditioning (“HVAC”) distributors, dealers and their representatives nationwide. (Doc. 47.)
`In the course of its business, ACT developed copyrighted sales training materials, which it
`labeled “The Works,” containing both sales training materials and written hand-outs. (Docs.
`100-4 at 1-6, 90-1, 90-2.) The Works comprises the titles “No Pressure Selling” and “Trane
`Boot Camp: A Comprehensive Study Guide to In-Home Sales.” (Id.) Defendant James
`Hamlin, a one-time provider of sales training for ACT, left ACT to go to work for Defendant
`WaterFurnace (“WaterFurnace”) as a national sales trainer. (Doc. 47.) WaterFurnace is a
`geothermal manufacturer and distributor of HVAC systems, which also provides sales
`training to HVAC dealers and representatives. (Id.)
`Mr. Hamlin had access to The Works while working as a sales trainer for ACT. (Id.)
`ACT alleges that Mr. Hamlin utilized ACT Group’s proprietary sales training concepts and
`materials to perform sales training services for WaterFurnace. (Id.) Further, ACT alleges
`that Mr. Hamlin copied ACT’s copyrighted materials and now uses materials that are, as a
`whole substantially similar to The Works, and that some of the materials used by Mr. Hamlin
`are identical to some of The Works. (Id.) Hamlin’s sales training presentation is entitled to
`“Smarter Sales Training.” (Doc. 90-3.) ACT’s first amended complaint alleges copyright
`infringement, breach of duty of loyalty, aiding and abetting breach of duty of loyalty, and
`unfair competition. (Doc. 47.)
`STANDARD OF REVIEW
`
`I. Summary Judgment
`A court must grant summary judgment if the pleadings and supporting documents,
`viewed in the light most favorable to the nonmoving party, “show that there is no genuine
`issue as to any material fact and that the moving party is entitled to judgment as a matter of
`law.” Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);
`Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law
`determines which facts are material. See Anderson v. Liberty Lobby, 477 U.S. 242, 248
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`(1986); see also Jesinger, 24 F.3d at 1130. “Only disputes over facts that might affect the
`outcome of the suit under the governing law will properly preclude the entry of summary
`judgment.” Anderson, 477 U.S. at 248. The dispute must also be genuine, that is, the
`evidence must be “such that a reasonable jury could return a verdict for the nonmoving
`party.” Id.; see Jesinger, 24 F.3d at 1130.
`A principal purpose of summary judgment is “to isolate and dispose of factually
`unsupported claims.” Celotex, 477 U.S. at 323-24. Summary judgment is appropriate
`against a party who “fails to make a showing sufficient to establish the existence of an
`element essential to that party’s case, and on which that party will bear the burden of proof
`at trial.” Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir.
`1994). The moving party need not disprove matters on which the opponent has the burden
`of proof at trial. See Celotex, 477 U.S. at 323. The party opposing summary judgment may
`not rest upon the mere allegations or denials of the party’s pleadings, but must set forth
`specific facts showing that there is a genuine issue for trial. See Fed. R. Civ. P. 56(e);
`Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda
`Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).
`II.
`Motion to Amend
`After the district court has filed a pretrial case management order pursuant to Federal
`Rule of Civil Procedure 16 that establishes a timetable for amending pleadings, Rule 16
`standards control any modification. See Johnson v. Mammoth Recreations, Inc., 975 F.2d
`604, 607-08 (9th Cir. 1992). The case management schedule shall not be modified except
`by leave of court upon a showing of good cause. Fed. R. Civ. P. 16(b)(4). The good cause
`standard primarily considers the diligence of the party seeking the amendment. See Johnson,
`975 F.2d at 609. The district court may modify the pretrial schedule if amendment cannot
`reasonably be sought despite the diligence of the party seeking the modification. Id.
`If the party is able to establish good cause for amendment, the party must also
`demonstrate that amendment is proper under Rule 15. See id. at 608. Under Rule 15,
`although leave to amend “shall be freely given when justice so requires,” it “is not to be
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`granted automatically.” Zivkovic v. Southern California Edison Co., 302 F.3d 1080, 1087
`(9th Cir. 2002) (citing Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990). The
`district court may deny a motion for leave to amend if permitting an amendment would,
`among other things, cause an undue delay in the litigation or prejudice the opposing party.
`See Jackson, 902 F.2d at 1387; see also Solomon v. North Am. Life & Cas. Ins. Co., 151
`F.3d 1132, 1139 (9th Cir. 1998) (affirming the district court’s denial of motion to amend
`pleadings filed on the eve of the discovery deadline). The Court’s discretion to deny leave
`to amend is particularly broad where Plaintiff has previously been permitted to amend their
`complaint. Sisseton–Wahpeton Sioux Tribe v. United States, 90 F.3d 351, 355 (9th Cir.
`1996). Repeated failure to cure deficiencies is one of the factors to be considered in deciding
`whether justice requires granting leave to amend. See Moore v. Kayport Package Express,
`Inc., 885 F.2d 531, 538 (9th Cir. 1989).
`DISCUSSION
`I. Hamlin’s Motion for Summary Judgment
`Hamlin moves for summary judgment against ACT’s copyright infringement claim.
`(Doc. 89.) Hamlin alleges that ACT’s The Works only uses common ideas, techniques, and
`phrases of the sales industry and that there is nothing unique or original about The Works that
`would entitle it to copyright protection. (Id. at 5-6.) Hamlin further alleges that even if The
`Works is entitled to copyright protection, substantially all of the portions of The Works
`claimed to have been copied by Hamlin are common phrases in the public domain, and not
`subject to copyright protection by ACT. (Id.) Therefore, there has been no copyright
`infringement.
`ACT contends that The Works are “original” because they were independently created
`by ACT and reflect more than the minimal degree of creativity required for copyright
`protection. (Doc. 99 at 5.) ACT contends that Hamlin’s motion be denied as to originality
`because it ignores the applicable elements in copyright infringement of literary works, and
`instead focuses on the inapplicable principle that copyright protection does not extend to
`ideas, methods, processes and the like. (Doc. 99 at 2.) ACT further contends that Hamlin’s
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`motion be denied as to infringement because there are disputed issues of material fact, such
`as the substantial similarity between The Works and Hamlin’s Smarter Sales Training. (Id.)
`In its first amended complaint, ACT claims copyright infringement against
`Defendants. (Doc. 47.) In order to prove copyright infringement, ACT must prevail on both
`prongs: “(1) ownership of a valid copyright, and (2) copying of constituent elements of the
`work that are original.” Feist Publ’n, Inc. v. Rural Tel. Serv. Co., Inc., 499 U.S. 340, 361
`(1991). In Hamlin’s motion for summary judgment, he attacks both prongs alleging that
`ACT cannot prevail on either prong. (Doc. 89.)
`Originality
`Hamlin first argues that ACT, as a matter of law, cannot establish that The Works is
`properly entitled to copyright protection because there is nothing unique or original about
`The Works. (Doc. 89 at 6.) Hamlin argues that “[c]opyright protection does not extend to
`ideas, procedures, processes, methods of operation, concept, principle or discovery,
`regardless of the form in which it is described, explained, illustrated, or embodied in such
`work.” (Id. at 4, (quoting from 17 U.S.C. § 102(b)).) Therefore, it is argued that copyright
`protection does not extend to any process or method of providing sales training. (Id. at 5.)
`Next, Hamlin argues that The Works is not entitled to copyright protection because it only
`uses common ideas, techniques and common phrases taken from the sales industry. (Id. at
`6.)
`
`To be entitled to copyright protection, a work must be original to the creator. See
`Feist, 499 U.S. at 345 (1991). “Original,” in copyright terms means “only that the work was
`independently created by the author (as opposed to copied from other works), and that it
`possesses at least some minimal degree of creativity.” Id. (further citation omitted). The
`requisite level of creativity is “extremely low; even a slight amount will suffice. The vast
`majority of works make the grade quite easily, as they possess some creative spark, no matter
`how crude, humble or obvious it might be.” Id. (internal citations omitted). The Feist Court
`further stated that while facts and ideas are not copyrightable, factual compilations can be
`protected by copyright. Id. at 348. It is the author’s organization and expression of the facts,
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`methods, or ideas contained in the work that enjoys copyright protection. Id.; see also B2B
`CFO Partners, LLC v. Kaufman, 787 F. Supp.2d 1002, 1007 (D. Ariz. 2011); Folio
`Impressions, Inc. v. Byer California, 752 F. Supp. 583, 590 (S.D.N.Y. 1990) (stating that a
`valid copyright protects not the idea itself, but rather the particular expression of that idea).
` It is undisputed that ACT registered The Works with the United States Copyright
`Office. ACT’s certificate of copyright registration entitles them to a “rebuttable presumption
`of originality” for The Works. See BSB, 787 F. Supp.2d at 1006. Consequently, Hamlin
`must show why The Works is not copyrightable. Hamlin contends that The Works is but a
`teaching method which is not copyrightable and it only uses common phrases that are
`generally employed in the sales industry. (Doc. 89 at 5-7.)
`The Court finds that The Works is entitled to copyright protection. The Works is
`comprised of two different sales training manuals, entitled “No Pressure Selling” and “Trane
`Boot Camp, A Comprehensive Study Guide to In-Home Sales.” (See Doc. 90-1 at 2-105, 90-
`2 at 2-101.) As the Feist Court evaluated, surmised, and stated, the vast majority of works
`pass the “originality” grade quite easily, because they possess some creative spark that is
`original with the creator. In this case, The Works is a particular original expression of ACT
`regarding how to train sales representatives. (See id.) It is the author’s organization and
`expression of the facts, ideas, and common phrases regarding how to train sales
`representatives that entitles The Works to copyright protection. Hamlin has not demonstrated
`the invalidity of its copyright and Hamlin is not entitled to summary judgment on the ground
`that The Works lacks the requisite originality.
`Infringement
`Next, Hamlin argues that he is entitled to summary judgment because ACT cannot
`demonstrate that he copied elements of The Works that are original. (Docs. 89, 101.) In
`order to demonstrate infringement, ACT highlighted portions of Hamlin’s Smarter Sales
`Training materials and portions of ACT’s The Works for comparison in order to argue that
`Hamlin copied specific expressive elements of the materials. (Doc. 100-2.) Hamlin contends
`that the highlighted portions are not original expressions by ACT but merely common
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`expressions within the sales industry that are in the public domain. (Doc. 101 at 2.) Hamlin
`further argues that while ACT’s and his materials both deal with sales training, the
`expressions he utilized, the appearance of the materials, the products that are the subject of
`the materials (geothermal vs. standard HVAC equipment), and the techniques necessary to
`sell the equipment to which the materials are directed are not the same, and therefore the
`materials are not substantially similar. (Id.)
`The owner of a copyright has the exclusive right to “copy” the copyrighted work; that
`is, to make a copy of the work, to prepare derivative works based on the work, or to distribute
`copies of the work to the public. See 17 U.S.C. § 106(1)-(3); S.O.S., Inc. v. Payday, Inc.,
`886 F.2d 1081, 1085 n.3 (9th Cir. 1989) (stating that “copying” is shorthand for the copyright
`owner’s exclusive rights). Copyright plaintiffs must therefore satisfy two requirements to
`establish direct infringement: (1) they must show that they own the allegedly infringed
`copyright, and (2) they must show that the alleged infringer has violated at least one of the
`exclusive rights granted to copyright holders. See A & M Records, Inc. v. Napster, Inc., 239
`F.3d 1004, 1013 (9th Cir. 2001).
`In order to show infringement, ACT must demonstrate that Hamlin had access to The
`Works and that The Works and Smarter Sales Training are “substantially similar in idea and
`in expression of the idea.” (Doc. 99 at 7, (quoting B2B, 787 F. Supp.2d at 1007).)
`The Ninth Circuit has adopted a two-part test to determine whether two works are
`substantially similar. See Smith v. Jackson, 84 F.3d 1213, 1218 (9th Cir. 1996.) The
`“extrinsic test” is an “objective comparison of specific expressive elements”; it focuses on
`the “articulable similarities” between the two works. L.A. Printex Indus., Inc. v.
`Aeropostale, Inc., 676 F.3d 841, 848 (9th Cir. 2012). The “intrinsic test” is a subjective
`comparison that focuses on “‘whether the ordinary, reasonable audience’ would find the
`works substantially similar in the ‘total concept and feel of the works.’” Id. As further
`explained in B2B:
`Courts use a two-part test to determine whether two works are substantially
`similar. The extrinsic test addresses whether two works share a similarity of
`ideas and expression based on external, objective criteria. If the plaintiff
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`satisfies the extrinsic test, then the subjective, intrinsic test examines whether
`a reasonable, ordinary observer would find a substantial similarity of
`expression of the shared idea. For summary judgment, only the extrinsic test
`is relevant. If plaintiff satisfies the extrinsic test, the intrinsic test’s subjective
`inquiry must be left to the jury and summary judgment must be denied.
`B2B, 787 F. Supp.2d at 1007.
`When applying the extrinsic test, the Court will require a lower standard of proof on
`similarity if Hamlin had a high degree of access to the subject work. See Smith, 84 F.3d at
`1218 (stating that “a lesser showing of substantial similarity [is required] if there is a strong
`showing of access.”); see also B2B, 787 F. Supp.2d at 1007. Additionally, when applying
`the extrinsic test, the Court, given that Hamlin moved for summary judgment, will view the
`evidence and supporting documents in the light most favorable to ACT, the nonmoving party.
`Here, there is no dispute but that Hamlin had a high degree of access to copies of The
`Works. Hamlin worked as a Sales Trainer for ACT for nine years. This leaves the question
`of whether The Works and copied materials are substantially similar under the lesser degree
`of similarity required due to Hamlin’s high degree of access.
`Hamlin argues that the extrinsic test is not satisfied because substantially all of the
`portions of The Works claimed to have been copied by Hamlin are common phrases in the
`public domain, and thus not subject to grounds for copyright infringement. (Doc. 89 at 6.)
`Hamlin contends that substantial similarity cannot be found if only small, common phrases
`appear in both the allegedly infringing work and the complaining work. (Id.)
`The Court has reviewed ACT’s exhibit, which shows the alleged similarities in a side-
`by-side manner. (See Doc. 100-2.) The Court has considered this evidence under the
`appropriate extrinsic test standard and finds that ACT has demonstrated substantial similarity
`in the wording and effect between The Works and Smarter Sales Training. (Id.) In this
`review, there are multiple occasions of Hamlin using the same common phrases as in The
`Works, not minimally as argued by Hamlin. (Id.) Furthermore, there are other times where
`copying is evident. (Id.) Thus, viewing the evidence in the light most favorable to ACT, the
`extrinsic test for infringement has been satisfied by ACT.
`Under the Ninth Circuit standard, the remaining intrinsic test is a fact question that
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`will be left for the jury–whether a reasonable, ordinary observer would find a substantial
`similarity of expression of the shared idea. Consequently, Hamlin has not prevailed on the
`infringement prong.
`In summary, the Court will deny Hamlin’s motion for summary judgment. Hamlin
`has failed to establish the The Works is not copyrightable due to lack of originality and
`Hamlin has failed to establish that he did not infringe on ACT’s copyrighted manual, The
`Works.
`II. ACT’s Motion to Amend
`ACT moves the Court to modify the case management deadline to amend pleadings
`and grant leave to file a second amended complaint allowing it to add two indirect copyright
`infringement claims, a claim for “vicarious infringement” and a claim for “contributory
`infringement.” (Doc. 97.) ACT states that it did not have a basis for alleging these
`additional indirect legal theories until it obtained discovery from WaterFurnace in April and
`June 2013 to the effect that it was only Hamlin who was involved in copying The Works, not
`any employee or agent of WaterFurnace. (Id. at 11-15.)
`WaterFurnace contends that amendment be denied because ACT was not diligent in
`pursuing amendment of its first amended complaint. (Doc. 103.) WaterFurnace contends
`that it informed ACT before litigation began that it was not involved in any copying of The
`Works and that Hamlin was not an employee of WaterFurnace. (Id. at 2.)
`Indirect Copyright Infringement
`Vicarious liability for copyright infringement arises where “the right and ability to
`supervise” the conduct of the infringer coalesces with “an obvious and direct financial
`interest in the exploitation of copyrighted materials.” Shapiro, Bernstein & Co. v. H.L.
`Green Co., 316 F.2d 304, 307 (2nd Cir. 1963); see Fonovisa, Inc. v. Cherry Auction, Inc.,
`76 F.3d 259, 262 (9th Cir. 1996) (following Shapiro as the landmark case on vicarious
`copyright liability). This is so whether or not the superior has actual knowledge of the
`infringement. Shapiro, 316 F.2d at 307.
`A defendant is a contributory infringer if it (1) has knowledge of a third party’s
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`infringing activity, and (2) induces, causes, or materially contributes to the infringing
`conduct. See Ellison v. Robertson, 357 F.3d 1072, 1076 (9th Cir. 2004). A defendant is not
`a contributory infringer in the absence of direct infringement by a third party. See A&M
`Records, 239 F.3d at 1013 n.2.
`Discussion
`The Court finds that ACT was not diligent in seeking to amend its first amended
`complaint to add these indirect theories of liability against WaterFurnace. The parties
`correctly cite the standards for modifying a case management deadline. After the district
`court has filed a pretrial case management order, Rule 16 standards control any modification
`for amending pleadings. See Johnson, 975 F.2d at 607-08. The case management schedule
`shall not be modified except by leave of court upon a showing of good cause. Rule 16(b)(4).
`The good cause standard primarily considers the diligence of the party seeking the
`amendment. See Johnson, 975 F.2d at 609. Here, ACT seeks amendment despite evidence
`showing that WaterFurnace disclaimed prior to the commencement of litigation any
`participation in direct infringement and that Hamlin was not an employee of WaterFurnace.
`(See Docs. 103-1-105-1.) In addition, in answers to interrogatories dated December 4, 2012,
`WaterFurnace indicated to ACT that it did not have a copy of The Works, know the content
`of The Works, and that Hamlin was an independent contractor for WaterFurnace. (Doc. 103
`at 5, Doc. 105-1 at 2-10.) Thus, given WaterFurnace’s pre-litigation factual allegations, ACT
`knew that it needed to consider indirect claims of copyright infringement as part of its
`complaint. ACT chose not to include these indirect claims in its complaint or in its first
`amended complaint. Moreover, ACT did not seek leave to amend after receipt of
`WaterFurnace’s answers to interrogatories. On this basis, ACT was not diligent and has not
`established good cause for modifying the case management deadline for amending pleadings,
`which was November 16, 2012. (See Doc. 33.)
`ACT states that it in April and June 2013, it obtained through discovery sworn
`testimony that WaterFurnace did not perform any copying of The Works, that it was Hamlin,
`and that Hamlin’s acts were those of a nonagent independent contractor. (Doc. 97 at 10.)
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`ACT argues that due to the sworn testimony it now has sufficient evidence to request leave
`to amend to add its indirect infringement claims, which it filed in August 2013. (Id.)
`Moreover, ACT also advises that recent discovery from WaterFurnace establishes that
`individuals at WaterFurnace, other than Hamlin, were involved in directly copying The
`Works. (Doc. 105 at 3.
`The Court rejects ACT’s propositions regarding the type of evidence it believed was
`necessary before it could properly allege indirect infringement claims in its complaint.
`Under Rule 8(a)(2), the Rules require a short and plain statement of the claim. Based upon
`Rule 8(a)(2)’s pleading standard, the Rules then generally rely on discovery and summary
`judgment to flesh out the disputed facts. See Swierkiewicz v. Sorema N.A., 534 U.S. 506,
`512 (2002) (stating that before discovery has unearthed the relevant facts and evidence, it is
`difficult to define the precise formulation of the required prima facie case in each particular
`case); cf. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (stating that to survive a
`Rule 12(b)(6) motion to dismiss, a complaint must contain more than “labels and
`conclusions” or a “formulaic recitation of the elements of a cause of action”; it must contain
`factual allegations sufficient to “raise a right to relief above the speculative level.”).
`Based on this record, the Court finds that ACT had enough information available to
`it to include indirect infringement claims in its complaint and lacked diligence in failing to
`so include them. The Court further finds that it was not incumbent upon ACT to wait until
`it had sworn testimony before concluding that it had enough evidence to proceed with its
`indirect infringement claims. The Twombly plausibility standard is not erected against
`claims that suffer from a factual basis not grounded in deposition testimony or sworn answers
`to interrogatories. The Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009),
`stressed that Twombly’s plausibility standard “is not akin to a ‘probability requirement,’ but
`it asks for more than a sheer possibility that a defendant has acted unlawfully.” Furthermore,
`ACT’s lack of diligence is shown by not pursuing a leave to amend after receipt of answers
`to interrogatories from WaterFurnace further established a factual basis for ACT to claim
`indirect copyright infringement.
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`Consequently, the Court finds that ACT was not diligent and has not established good
`cause for amendment. Therefore, the Court will not modify its case management order to
`allow ACT to file a second amended complaint to add the indirect infringement claims.
`Accordingly, on the basis of the foregoing,
`IT IS HEREBY ORDERED denying Hamlin’s motion for summary judgment.
`(Doc. 89.)
`IT IS FURTHER ORDERED denying ACT’s motion to modify the case
`management order and motion for leave to file second amended complaint. (Doc. 97.)
`DATED this 28th day of March, 2014.
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