Case3:04-cv-05368-SI Document185 Filed11/07/06 Page1 of 9
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF CALIFORNIA
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`BEILSTEIN-INSTITUT ZUR FÖRDERUNG
`DER CHEMISCHEN WISSENSCHAFTEN, et
`al.,
`
`Plaintiffs,
`
` v.
` MDL INFORMATION SYSTEMS, INC.,
`Defendant.
` /
`
`No. C 04-05368 SI
`ORDER GRANTING IN PART AND
`DENYING IN PART DEFENDANT’S
`MOTION TO DISMISS, AND DENYING
`DEFENDANT’S MOTION TO STRIKE
`
`On November 3, 2006, the Court heard argument on defendant MDI Information Systems, Inc.’s
`motions to: (1) dismiss plaintiffs’ claim for conversion; (2) dismiss plaintiffs’ claim for unfair
`competition; and (3) strike plaintiffs’ demand for statutory and treble damages. Having considered the
`arguments of counsel and the papers submitted, the Court hereby GRANTS defendant’s motion to
`dismiss plaintiffs’ claim for conversion, DENIES defendant’s motion to dismiss plaintiffs’ claim for
`unfair competition, and DENIES defendant’s motion to strike for the reasons set forth below.
`
`BACKGROUND
`Plaintiff Beilstein-Institut Zur Förderung Der Chemischen Wissenschaften (“Beilstein-Institut”)
`is a German non-profit foundation involved in research in the chemical sciences. Beilstein-Institut has
`created the Beilstein Database, which is an electronic database in the area of organic chemistry and is
`Beilstein-Institut’s primary revenue source. The database consists of more than nine million organic
`chemical compounds and excerpts of scientific literature. Plaintiff Beilstein GmbH is one of two
`subsidiaries of Beilstein-Institut, created to maintain and exploit the Beilstein Database. The other such
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`Case3:04-cv-05368-SI Document185 Filed11/07/06 Page2 of 9
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`subsidiary is Beilstein Informationssysteme GmbH.
`On January 23, 1998, an agreement was entered between plaintiff Beilstein-Institut and Beilstein
`Informationssysteme GmbH, which granted an exclusive license to Beilstein Informationssysteme
`GmbH to exploit the Beilstein Database in exchange for a fixed licensing fee. Beilstein
`Informationssysteme GmbH was subsequently acquired by the Reed Elsevier Group and the company
`was renamed MDL Information Systems GmbH (“MDL GmbH”).
`Plaintiffs contend that MDL GmbH violated the provisions of the licensing agreement. In
`December 2001, plaintiff Beilstein-Institut commenced arbitration proceedings against MDL GmbH in
`Germany. On September 20, 2004, the arbitration panel issued a Partial Arbitration Award, holding that
`MDL GmbH breached its contractual obligations and awarding damages and injunctive relief to
`Beilstein-Institut. The panel ordered MDL GmbH to “cease and desist from modifying the content of
`the Beilstein Database and/or mingling such content with other data or databases or having such data
`modified and/or marketed via the sublicenses thereof, particularly via MDL Information Systems Inc.”
`Defendant MDL Information Systems, Inc. (“MDL Inc.”) is a Delaware corporation with its
`principal place of business in San Leandro, California. The complaint alleges that defendant MDL Inc.
`“shares a common corporate parent with MDL GmbH” and markets the Beilstein Database on behalf
`of MDL GmbH. Plaintiffs assert that defendant MDL Inc. has continued to mingle the Beilstein
`Database with data from other sources, despite the Partial Arbitration Award. As a result, plaintiffs filed
`a copyright action against defendant MDL Inc. in a German district court on March 31, 2003. In
`December, 2004, plaintiffs also filed suit in this Court against defendant MDL Inc., asserting claims of
`tortious interference with contract and declaratory relief. In February, 2005, plaintiffs filed an Amended
`Complaint adding a claim for common law unfair competition.
`Defendant MDL Inc. filed a motion to dismiss plaintiffs’ claim for declaratory relief, which the
`Court granted, with leave to amend. Thereafter, plaintiffs filed a Second Amended Complaint (“SAC”)
`dropping the claim for declaratory relief and adding a claim for enforcement of German judgment.
`Defendant MDL Inc. filed a motion to dismiss plaintiffs’ new claim for enforcement of German
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`judgment, which the Court also granted.
`Plaintiffs then filed a Third Amended Complaint (“TAC”) dropping the claim for enforcement
`of German judgment and adding claims for copyright infringement, conversion, trespass to chattels, trade
`secret misappropriation, Lanham Act violations & common law unfair competition, constructive trust
`and unjust enrichment, and unfair and unlawful business acts or practices in violation of California
`Business & Professions Code § 17200 et seq. Defendant MDL Inc. moved to dismiss the entire TAC.
`The Court granted in part and denied in part, denying defendant’s motion as to tortious interference with
`contract, copyright infringement, trade secret misappropriation, and violations of the Lanham Act, but
`granting the remainder of defendant’s motion, with leave to amend one last time.
`Plaintiffs finally filed a Fourth Amended Complaint (“FAC”) which includes claims for
`copyright infringement, Lanham Act violations, tortious interference with contract, trade secret
`misappropriation, conversion, and unfair and unlawful business acts or practices in violation of
`California Business & Professions Code § 17200 et seq. Defendant MDL Inc. now moves to dismiss
`plaintiffs’ claims for conversion and unfair and unlawful business acts or practices. Defendant also
`moves to strike plaintiffs’ demand for statutory and treble damages under the Lanham Act.
`
`LEGAL STANDARD
`A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff
`can prove no set of facts which would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45–46, 78
`S. Ct. 99, 102 (1957); Fidelity Fin. Corp. v. Federal Home Loan Bank, 792 F.2d 1432, 1435 (9th Cir.
`1986). All material allegations in the complaint will be taken as true and construed in the light most
`favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).
`If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The
`Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no request
`to amend the pleading was made, unless it determines that the pleading could not possibly be cured by
`the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (citations and internal
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`quotation marks omitted).
`Federal Rule of Civil Procedure 12(f) provides that “the court may order stricken from any
`pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” “[A]
`motion to strike may be used to strike any part of the prayer for relief when the damages sought are not
`recoverable as a matter of law.” Bureerong v. Uvawas, 922 F. Supp. 1450, 1478 n.34 (C.D. Cal. 1996).
`
`I.
`
`DISCUSSION
`Plaintiffs’ cause of action for conversion is preempted.
`Defendant moves for dismissal of plaintiffs’ conversion claim, arguing that the claim is barred
`by the Copyright Act’s express preemption of any state law or claim asserting “rights equivalent to any
`of the exclusive rights.”1 17 U.S.C. § 301. In general, to determine whether a state law claim is
`preempted by the Copyright Act, the Court must determine: (1) whether the “subject matter” of the state
`law claim falls within the subject matter of copyright; and (2) whether the rights asserted in the state law
`claim are “equivalent” to the rights granted by the Copyright Act. Del Madera Properties v. Rhodes &
`Gardner, Inc., 820 F.2d 973, 977–978 (9th Cir. 1987), overruled on other grounds by Fogerty v.
`Vantasy, Inc., 510 U.S. 517, 114 S. Ct. 1023 (1994). A conversion claim involving tangible property,
`however, is immune from preemption. See Oddo v. Ries, 743 F.2d 630, 635 (9th Cir. 1984).
`Plaintiffs argue that their conversion claim only relates to tangible items and does not relate to
`copyright or other intellectual property rights governed by the Copyright Act. Defendant argues that no
`truly tangible property has been taken, and that plaintiffs merely seek damages for intangible intellectual
`property that was allegedly “taken” by MDL Inc. for use in another database. Plaintiffs’ conversion
`claim, defendant argues, is simply a copyright infringement claim dressed like a conversion claim.
`In response, plaintiffs refer to their allegation that “defendant is in possession of printed and/or
`electronic media (e.g., disks, hard drives, servers) constituting tangible material related to excerpts, the
`
`1The exclusive rights granted under the Copyright Act include the rights: “to reproduce the
`copyrighted works in copies,” “to prepare derivative works based upon the copyrighted work,” “to
`distribute copies . . . to the public,” and “to display the copyrighted work publicly.” 17 U.S.C. § 106.
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`Beilstein Database and its related components, and/or the MDL Patent Chemistry Database.” FAC ¶ 73.
`Plaintiffs assert that only those tangible materials allegedly possessed by defendant—not plaintiffs’
`intangible intellectual property—are at issue in the conversion claim.
`The Court is not persuaded by plaintiffs’ characterization of the “tangible” items at issue. In an
`analogous case, a plaintiff software developer provided to defendant corporation a limited version of his
`program for evaluation and determination as to whether defendant wished to include it in defendant’s
`upcoming software package release. Firoozye v. Earthlink Network, 153 F. Supp. 2d 1115, 1117–18
`(N.D. Cal. 2001). After completing its evaluation, defendant informed plaintiff of its desire to include
`plaintiff’s program in defendant’s next software package release and asked to receive a fully-enabled
`version of the program for immediate testing. Id. at 1118. Plaintiff provided the fully-enabled version,
`but only after receiving defendant’s assurance that plaintiff’s intellectual property would not be included
`in defendant’s software package release until a formal licensing agreement could be finalized. Id.
`Several months later, plaintiff received a copy of defendant’s next software package release, which
`included plaintiff’s fully-enabled program, even though defendant had not paid plaintiff or entered into
`any license agreement with him. Id. In determining whether plaintiff’s cause of action for conversion
`was preempted by the Copyright Act, the court in Firoozye noted that plaintiff did not seek return of a
`tangible piece of property. Id. at 1130. Instead, plaintiff sought relief for defendant’s wrongful
`reproduction and use of his program without his permission—“the essence of a claim for copyright
`infringement.” Id. Explaining that “where a plaintiff is only seeking damages from a defendant’s
`reproduction of a work -- and not the actual return of a physical piece of property -- the claim is
`preempted,” the court dismissed plaintiff’s conversion claim. Id.
`Similarly, although plaintiffs’ FAC refers to “disks, hard drives, and servers,” the thrust of
`plaintiffs’ grievance is that defendant remains in possession of materials related to plaintiffs’ intellectual
`property. Plaintiffs’ concern is not with the printed and/or electronic media itself, but rather with the
`information that is contained in such media. Plaintiffs’ inability to identify any of the “tangible”
`property at issue highlights this point. See FAC ¶ 73. Plaintiffs’ claim is based on all tangible materials
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`“related to” the intellectual property, no matter what form that material takes. See FAC ¶ 74. Plaintiffs
`are thus not concerned with the conversion of a particular hard drive, but rather with any hard drive
`containing the intellectual property.
`Plaintiffs contend that the original licensing agreement between Beilstein-Institut and Beilstein
`Informationssysteme GmbH recognized plaintiffs’ property rights in all projects and undertakings falling
`within the “Scientific Area” of plaintiffs’ intellectual property, including all tangible materials related
`to the Beilstein Database. Plaintiffs argue, therefore, that tangible materials related to plaintiffs’
`intellectual property may serve as the basis for a conversion claim. By definition, however, all
`copyrighted works must be fixed in some tangible medium. See 17 U.S.C. §§ 101, 102(a). It does not
`follow that the existence of any such “tangible medium” therefore permits a conversion claim that is
`immune from preemption by the Copyright Act. Were that so, any claim under the Copyright Act could
`also be pled as a conversion claim and the Copyright Act’s preemption provision would be of no impact.
`See 17 U.S.C. § 301. Defendant’s motion to dismiss as to plaintiffs’ conversion claim is therefore
`GRANTED.
`
`II.
`
`Plaintiffs’ cause of action for unfair and unlawful business acts or practices is pled with
`sufficient particularity as to fraudulent business practices.
`Defendant also moves the Court to dismiss plaintiffs’ unfair competition claim under California
`Business and Professions Code § 17200 et seq. Defendant contends that plaintiffs’ unfair competition
`claim merely incorporates by reference the allegations pertaining to its copyright claims. Defendant
`argues that the unfair competition claim is therefore preempted by the Copyright Act. As the California
`Supreme Court has explained, however, “the [California] unfair competition law’s scope is broad. . . .
`[It] borrows violations of other laws and treats them as unlawful practices that the unfair competition
`law makes independently actionable.” Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20
`Cal. 4th 163, 180 (1999) (emphasis added) (internal quotation marks and citations omitted). California’s
`definition of unfair competition includes three prongs—unlawful, unfair, and fraudulent—any one of
`which may independently operate as the theory for a cause of action under § 17200. William L. Stern,
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`Bus. & Prof.C. § 17200 Practice, § 3:15 (2005). Thus, even if the copyright infringement allegation
`underlying the “unlawful” prong of plaintiff’s § 17200 claim is preempted, plaintiffs may assert a claim
`for unfair competition under an independent alternate theory. Plaintiffs have done so by alleging
`fraudulent business practices.
`In asserting that defendant engaged in fraudulent business practices that entitle plaintiffs to relief
`under the California unfair competition law, plaintiffs have alleged facts with sufficient particularity.
`Federal Rule of Civil Procedure 9(b) provides that “[i]n all averments of fraud . . . , the circumstances
`constituting fraud . . . shall be stated with particularity.” The Ninth Circuit has articulated the standard
`for such particularity as “specific enough to give defendant[] notice of the particular misconduct which
`is alleged to constitute the fraud charged.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985).
`Additionally, the pleading must “identif[y] the circumstances constituting fraud so that the defendant
`can prepare an adequate answer from the allegations.” Moore v. Kayport Package Express, 885 F.2d
`531, 540 (9th Cir. 1989).
`Plaintiffs’ FAC alleges specific information with regards to how MDL Inc. “actively concealed
`the existence of the MDL Patent Chemistry Database as it was being developed into a marketable
`product and previewed for potential customers,” and exchanged documents and communications with
`MDL GmbH that directed both companies to engage in fraudulent behavior. FAC ¶ 84. Plaintiffs’
`unfair competition claim identifies the circumstances constituting fraud, and is neither vague nor
`conclusory. The Court finds it to be stated with sufficient particularity to enable defendant to prepare
`an adequate answer. Defendant’s motion to dismiss as to plaintiffs’ claim for unfair and unlawful
`business acts or practices in violation of California Business and Professions Code § 17200 et seq. is
`therefore DENIED.
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`III.
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`Plaintiffs’ demand for statutory and treble damages is permitted under the Lanham
`Act.
`Defendant additionally moves the Court to strike plaintiffs’ demand for statutory and treble
`damages under the Lanham Act, asserting that the Lanham Act does not provide for such damages under
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`the instant circumstances. For the reasons discussed below, defendant’s argument is misguided.
`Section 35(b) of the Lanham Act provides, in relevant part:
`[T]he court shall . . . enter judgment for three times such profits or damages . . . in the
`case of any violation of [certain statutes] that consists of intentionally using a mark or
`designation, knowing such mark or designation is a counterfeit mark . . . in connection
`with the sale, offering for sale, or distribution of goods or services.
`15 U.S.C. § 1117(b). Defendant correctly points out that plaintiffs do not allege use of a “counterfeit
`mark” within the meaning of the Lanham Act, and treble damages under § 35(b) are therefore
`unwarranted. Defendant also points out that the Court has already found punitive damages to be
`unavailable for plaintiffs’ Lanham Act claim. See Order, Doc. No. 151, at 1 n.2 (July 28, 2006) (“[T]he
`Court agrees with defendant that punitive damages are unavailable for plaintiff’s Lanham Act claim.
`It therefore STRIKES plaintiff’s request for punitive damages in connection with its Lanham Act
`claim.”).
`Defendant acknowledges, however, that under § 35(a) of the Lanham Act the Court may “enter
`judgment, according to the circumstances of the case, for any sum above the amount found as actual
`damages, not exceeding three times such amount,” and that “[s]uch sum . . . shall constitute
`compensation and not a penalty.” 15 U.S.C. § 1117(a) (emphasis added). Although the Court has
`stricken plaintiffs’ request for punitive damages, a treble damages award under § 35(a) does not
`constitute a penalty and may be granted in the Court’s discretion.
`Defendant cites Ono’s Trading Company, LLC v. Parnell, 2006 U.S. Dist. LEXIS 60247,
`*19–*21 (S.D. Ala. Aug. 15, 2006), for the premise that § 35(a) does not authorize statutory damages
`for claims arising under the Lanham Act. The Ono’s Trading Company court did not so hold. Although
`the defendants in that case had engaged in unfair competition, plaintiffs sought to receive statutory
`damages pursuant to § 35(c) of the Lanham Act, which pertains to statutory damages for use of
`counterfeit marks. Ono’s Trading Co., 2006 U.S. Dist. LEXIS 60247, at *18–*19. No counterfeit mark
`having been used, the court in Ono’s Trading Company denied statutory damages. Id. at *20.
`Here, plaintiffs do not allege use of a counterfeit mark and therefore cannot demand statutory
`damages under § 35(c). Plaintiffs may, however, seek discretionary statutory damages, not exceeding
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`three times the actual damages, as expressly permitted under § 35(a). Defendant’s motion to strike
`plaintiffs’ demand for statutory and treble damages under the Lanham Act is therefore DENIED.
`
`CONCLUSION
`For the foregoing reasons and for good cause shown, the Court hereby GRANTS defendant’s
`motion to dismiss plaintiffs’ conversion claim, DENIES defendant’s motion to dismiss plaintiffs’ unfair
`competition claim, and DENIES defendant’s motion to strike plaintiffs’ demand for statutory and treble
`damages (Docket No. 168).
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`IT IS SO ORDERED.
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`Dated: November 7, 2006
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`SUSAN ILLSTON
`United States District Judge
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