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finding a failure by defendants in their counterclaim to allege an enterprise "pursuant to the numerous agreements that were negotiated and executed between the plaintiff and Chinese suppliers as well as through their course of conduct" since there were no facts offered "indicating how the enterprise is organized, explaining the `chain of command or operation of the enterprise'"
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No. C 04-1664 SBA, [Docket No. 11].
November 5, 2004
ORDER
This matter comes before the Court on Plaintiff Smith Hawken, Ltd.'s ("Plaintiff") motion to dismiss Defendants Gardendance, Inc. ("Gardendance") and Mark Donley's (collectively, "Defendants") Second, Third, Fourth, Fifth and Sixth Counterclaims and to strike Defendants' prayer for punitive damages [Docket No. 11]. Having read and considered the papers submitted by the parties and being fully informed, the Court finds this matter appropriate for resolution without a hearing. The Court hereby GRANTS Plaintiff's motion to dismiss. Defendants are granted leave to file amended counterclaims in accordance with this Order.
BACKGROUND
Plaintiff is a provider of home and garden products. Compl. ¶ 8. Among its garden products, Plaintiff manufactures, markets and sells an outdoor garden torch, product number 759704 ("Torch"). Id. ¶ 9.
On January 15, 2004, Plaintiff received a letter from outside counsel for Gardendance, which alleged that Gardendance owned "copyright VA-967-403 for a Tiki Design Torch" and demanded that Plaintiff cease and desist from selling the "infringing torches," "item # 759704." Id. ¶ 10. On April 28, 2004, Plaintiff filed the instant complaint for declaratory relief, seeking a determination that it had not infringed any copyright owned by Defendants by reason of its sale of the Torches. Ibid.
On June 25, 2004, Defendants filed an answer and asserted six counterclaims [Docket No. 7]. Defendants allege that between March 1999 and January 2001, Plaintiff ordered 3,555 Torches from Defendants. Counterclaim ¶ 1. Defendants claim that Plaintiff copied Defendants' Torches "down to the smallest detail" and imported the copies from China. Id. ¶ 5. Defendants further assert that Plaintiff "has the infringing torches made for it in China by workers who are not paid decent wages, workers who live under slave-like conditions, by employees of the People's Liberation Army and by prison workers." Id. ¶ 7. Defendants contend that Plaintiff's actions have cost them "hundreds of thousands of dollars in lost sales." Id. ¶ 8. Defendants assert six counterclaims: Copyright Infringement (First Counterclaim); Trade Dress Infringement (Second Counterclaim); Unfair Competition (Third Counterclaim); RICO (Fourth and Fifth Counterclaims); and Declaratory and Injunctive Relief (Sixth Counterclaim). Defendants pray for compensatory and special damages in the amount of two million dollars and punitive damages in the amount of one hundred million dollars.
On August 2, 2004, Plaintiff filed the instant motion to dismiss Defendants' Second, Third, Fourth, Fifth and Sixth Counterclaims and to strike Defendants' prayer for punitive damages [Docket No. 11].
LEGAL STANDARDS
A. Rule 12(b)(6)
Under FRCP 12(b)(6), a motion to dismiss should be granted only if it appears beyond a doubt that the plaintiff "can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). For purposes of such a motion, the complaint is construed in a light most favorable to the plaintiff and all properly pleaded factual allegations are taken as true. Jenkins v. McKeithen, 395 U.S. 411, 421 (1969); Everest and Jennings, Inc. v. American Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994). All reasonable inferences are to be drawn in favor of the plaintiff. Jacobson v. Hughes Aircraft, 105 F.3d 1288, 1296 (9th Cir. 1997).
As a general rule, "a district court may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion." Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (citation omitted). There are, however, two exceptions to the requirement that consideration of extrinsic evidence converts a 12(b)(6) motion to a summary judgment motion. Id. First, a court may consider "material which is properly submitted as part of the complaint" on a motion to dismiss without converting the motion to dismiss into a motion for summary judgment. Id., citing, Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994). If the documents are not physically attached to the complaint, they may be considered if the documents' "authenticity . . . is not contested" and "the plaintiff's complaint necessarily relies" on them. Id., citing, Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998). Second, under Fed.R.Evid. 201, a court may take judicial notice of "matters of public record." Id. at 688-89, citing, Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986).
The court does not accept as true unreasonable inferences or conclusory legal allegations cast in the form of factual allegations. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981); see Miranda v. Clark County, Nev., 279 F.3d 1102, 1106 (9th Cir. 2002) ("[C]onclusory allegations of law and unwarranted inferences will not defeat a motion to dismiss for failure to state a claim."); Sprewell v. Golden State Warriors, 266 F.3d 979, 987 (9th Cir. 2001) ("Nor is the court required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences."), as amended, 275 F.3d 1187 (9th Cir. 2001); McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th Cir. 1988) ("[C]onclusory allegations without more are insufficient to defeat a motion to dismiss for failure to state a claim.").
When a complaint is dismissed for failure to state a claim, "leave to amend should be granted unless the court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency." Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). The court should consider factors such as "the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment." Moore v. Kayport Package Express, 885 F.2d 531, 538 (9th Cir. 1989). Of these factors, prejudice to the opposing party is the most important. See Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990) (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330-31 (1971)). Leave to amend is properly denied "where the amendment would be futile." DeSoto Yellow Freight Sys., 957 F.2d 655, 658 (9th Cir. 1992).
ANALYSIS
A. Second Counterclaim (Trade Dress Infringement)
"Trade dress refers to the total image of a product and may include features such as size, shape, color, color combinations, texture or graphics." International Jensen, Inc. v. Metrosound U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993) (internal quotation marks and citation omitted). If a seller uses a trade dress that is confusingly similar to a competitor's, that conduct is actionable as unfair competition under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a). Vision Sports, Inc. v. Melville Corp., 888 F.2d 609, 613 (9th Cir. 1989).
"To state an infringement claim under § 43(a) — whether it be a trademark claim or a trade dress claim — a [counterclaimant] must meet three basic elements: (1) distinctiveness, (2) nonfunctionality, and (3) likelihood of confusion." Kendall-Jackson Winery v. E. J. Gallo Winery, 150 F.3d 1042, 1046-1047 (9th Cir. 1998).
The Second Counterclaim is wholly deficient. Defendants merely assert that the Torch has secondary meaning and that Plaintiff's copying of Defendants' Torch "causes confusion to consumers and retailers and constitutes a violation of Section 43(a) of the Lanham Act." Counterclaim ¶¶ 15-18. Defendants fail to allege or plead nonfunctionality. Defendants offer no explanation as to the nature, scope or elements making up its allegedly protectable "trade dress." The counterclaim does not even describe the Torch. Given this, there are no facts in Defendants' counterclaim that would allow the Court to determine whether the Torches are distinctive, whether they are nonfunctional or whether there exists a likelihood of confusion. Because Defendants have failed to provide anything but conclusory allegations to support this counterclaim, Plaintiff's motion to dismiss is GRANTED with respect to Defendants' Second Counterclaim. See, e.g., Accuimage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 949-950 (N.D. Cal. 2003) (dismissing claim for trade dress infringement because plaintiff's complaint did "little more than mimic the language of the statute," because plaintiff failed to plead with specificity how the trade dress was unique and inherently distinctive, and because plaintiff failed to plead sufficient facts for the court to determine whether the alleged trade dress was nonfunctional). The Second Counterclaim is DISMISSED WITHOUT PREJUDICE. Defendants are granted leave to amend their Second Counterclaim in accordance with this Order.
B. Third Counterclaim (Unfair Competition)
In their Third Counterclaim, Defendants appear to bring a state law unfair competition claim. Counterclaim ¶¶ 19-23. Defendants claim that Plaintiff wrongfully misappropriated, sold and distributed unauthorized duplications of Defendants' Torches and that stores and consumers alike have been confused by these "inferior" duplications, believing that Defendants were the source of the duplications. Id.
Defendants do not specifically allege common law unfair competition as opposed to statutory unfair competition under Cal. Bus. Prof. Code § 17200. The common law tort of unfair competition is generally thought to be synonymous with the act of "passing off" one's goods as those of another and requires a showing of competitive injury. Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1263 (1992). In contrast, statutory "unfair competition" extends to all unfair and deceptive business practices. Id. at 1264.
Plaintiff argues that Defendants' unfair competition claim is preempted by federal copyright law. And to the extent that Defendants' unfair competition claim is not preempted by federal copyright law, Plaintiff further argues that Defendants have failed to state a claim.
1. Preemption
"A state law cause of action is preempted by the Copyright Act if two elements are present. First, the rights that a [counterclaimant] asserts under state law must be `rights that are equivalent' to those protected by the Copyright Act. Second, the work involved must fall within the `subject matter' of the Copyright Act as set forth in 17 U.S.C. §§ 102 and 103." Kodadek v. MTV Networks, 152 F.3d 1209, 1212 (9th Cir. 1998). In order to survive preemption, "the state claim must have an `extra element' which changes the nature of the action." Watermark Publrs. v. High Tech. Sys., 1997 U.S. Dist. LEXIS 22512, at *13 (S.D. Cal. 1997), citing, Del Madera Properties v. Rhodes Gardner, Inc., 820 F.2d 973, 977 (9th Cir. 1987).
To establish a claim of copyright infringement, the counterclaimant must prove that (1) it owns a valid copyright on a work and (2) the counterclaim-defendant copied constituent elements of the work that are original. Watermark Publrs., 1997 U.S. Dist. LEXIS 22512, at *22, citing, Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 113 L. Ed. 2d 358, 111 S. Ct. 1282 (1991).
In Kodadek, the plaintiff's complaint alleged that defendants "have been publishing and placing on the market for sale products bearing the images subject to the copyright ownership of the plaintiff and has thereby been engaging in unfair trade practices and unfair competition against plaintiffs [sic] and to plaintiffs' [sic] irreparable damage." Id. Plaintiff's unfair competition claim incorporated by reference paragraphs from the copyright infringement claim. Id. Specifically, plaintiff alleged that defendants released a cartoon derived from plaintiff's drawings without plaintiff's authorization and released merchandise derived from plaintiff's drawings without plaintiff's authorization. Id. at 1212-13. The Ninth Circuit held that plaintiff's complaint "expressly base[d] his unfair competition claim on rights granted by the Copyright Act." Because "[t]he Copyright Act grants rights `to reproduce the copyrighted work in copies,' `to prepare derivative works based upon the copyrighted work,' `to distribute copies . . . to the public,' and `to display the copyrighted work publicly," the court held that plaintiff's state law unfair competition claim was based "solely on rights equivalent to those protected by the federal copyright laws." Id. The court further found that the drawings-at-issue were "pictorial works" as defined by 17 U.S.C. § 102(a)(5); thus, the work that plaintiff sought to protect was clearly a work that fell within the "subject matter" of the Copyright Act. Id. Given this, the court found that plaintiff's state law unfair competition claim was preempted. Id.
In this case, Defendants allege that they own a copyright on the Torch. Counterclaim ¶¶ 1, 11. According to Defendants, Plaintiff "wrongfully misappropriated, sold and distributed unauthorized duplications of the [D]efendants' designs." Id. ¶ 21. And "[a]s a direct and proximate result of this unauthorized copying, [D]efendants have suffered injury to its reputation and a loss of income." Id. ¶ 23. Defendants fail to allege an "extra element" that changes the nature of the action from that of an infringement action. Thus, as in Kododek, Defendants' Third Counterclaim is based solely on rights equivalent to those protected by federal copyright laws.
With respect to the second Kododek prong, construing the counterclaim in a light most favorable to Defendants and taking all properly pleaded factual allegations as true, the Court finds that the Torch is a "sculptural work" as defined by 17 U.S.C. § 102(a)(5) and thus falls within the subject matter of the Copyright Act. Counterclaim ¶ 11 ("Defendants are owners of copyright VA-967-403 for a Tiki Design Torch"); see 1-2 Nimmer on Copyright § 2.08 (noting the general rule that "any useful article, at least if it is aesthetically pleasing in appearance, is subject to copyright protection with respect to its form"); but see Carol Barnhart, Inc. v. Economy Cover Corp., 773 F.2d 411, 418 (2d Cir. 1985) (if a useful article has aesthetic features that cannot be identified separately from the article, copyright protection is not available).
Accordingly, to the extent that Defendants' Third Counterclaim is based on rights equivalent to those protected by the Copyright Act, the counterclaim is preempted by the Copyright Act. See, e.g., Sony Pictures Entm't, Inc. v. Fireworks Entm't Group, Inc., 156 F. Supp. 2d 1148, 1164 (C.D. Cal. 2001) (finding statutory and common law claims for unfair competition preempted by the Copyright Act).
Defendants appear to concede as much. See Opp. at 5 ("While the copyright laws may preempt unlawful business practices, they do not preempt unfair or fraudulent business practices. . . . Assuming that there was no copyright at issue, [D]efendants contend that they should be allowed to pursue an unfair competition claim during discovery.")
2. Failure to State a Claim
In their opposition, Defendants argue that their unfair competition counterclaim is not preempted by the Copyright Act because they are asserting a counterclaim for unfair and/or fraudulent business practices, based on their allegation that Plaintiff has wrongfully substituted an imported Torch for the domestic Torch Plaintiff formerly sold. Opp. at 5. Assuming, arguendo, that such a claim would not be preempted by the Copyright Act, Defendants have failed to state a claim upon which relief can be granted. a. Statutory Unfair Competition
It is unclear from the counterclaim whether Defendants intend to bring a statutory unfair competition claim or a common law unfair competition claim. Regardless, as discussed, infra, Defendants' allegations are insufficient to support either claim.
"A [counterclaimant] alleging unfair business practices under the unfair competition statutes `must state with reasonable particularity the facts supporting the statutory elements of the violation.'" Silicon Knights v. Crystal Dynamics, 983 F. Supp. 1303, 1316 (N.D. Cal. 1997), citing, Khoury v. Maly's of California, 14 Cal. App. 4th 612, 619 (1993). Cal. Bus. Prof. Code § 17200 defines unfair competition as "any unlawful, unfair or fraudulent business act or practice" and establishes three types of unfair competition — unlawful, unfair, or fraudulent acts or practices. Qarbon.com, Inc. v. eHelp Corp., 315 F. Supp. 2d 1046, 1051 (N.D. Cal. 2004), citing, Schnall v. Hertz Corp., 78 Cal. App. 4th 1144, 1153 (2000). "Unlawful" practices are those practices that are prohibited by law, whether "civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made." Saunders v. Superior Court, 27 Cal. App. 4th 832, 839 (citing People v. McKale, 25 Cal. 3d 626, 632 (1979)). "Unfair" practices are those practices "whose harm to the victim outweighs its benefits." Id. (citing Motors, Inc. v. Times Mirror Co., 102 Cal. App. 3d 735, 740 (1980)). "Fraudulent" practices are those practices that are likely to deceive the public and do not refer to the tort of fraud. Id.; Heighley v. J.C.Penney Life Ins. Co., 257 F. Supp. 2d 1241, 1259 (C.D. Cal. 2003) (citing Committee on Children's Television, Inc. v. General Foods Corp., 35 Cal. 3d 197, 211 (1983).
As noted, supra, Defendants argue that they are asserting a claim for "unfair" and/or "fraudulent" business practices. Opp. at 5.
The California Courts of Appeal have stated that an "`unfair' business practice occurs when it offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers." People v. Casa Blanca Convalescent Homes, Inc., 159 Cal. App. 3d 509, 530 (1984); see Bernardo v. Planned Parenthood Federation of America, 115 Cal. App. 4th 322, 353 (2004) (noting that some recent California Courts of Appeal have found that any finding of unfairness to competitors under [Business and Professions Code] section 17200 must "be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition"). Here, Defendants have alleged that Plaintiff's infringing Torches were made in China by workers "who are not paid decent wages, workers who live under slave-like conditions, by employees of the People's Liberation Army and by prison workers." Counterclaim ¶ 7. But Defendants provide no factual support whatsoever for these allegations. Moreover, Defendants' Third Counterclaim fails to identify an established public policy which is offended by these practices or allege that these practices are immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Counterclaim ¶¶ 19-23.
"The `fraud' prong of Business and Professions Code section 17200 is unlike common law fraud or deception. A violation can be shown even if no one was actually deceived, relied upon the fraudulent practice, or sustained any damage. Instead, it is only necessary to show that members of the public are likely to be deceived." Shvarts v. Budget Group, Inc., 81 Cal. App. 4th 1153, 1159-1160 (2000). While Defendants have alleged that Plaintiff's Torches have "virtually identical shapes and designs" to Defendants' Torches and that customers have "been confused by plaintiff's products," there are no facts to support these conclusory allegations. As noted, supra, Defendants do not even describe the Torches in question and have provided no facts that suggest that the Torches have "virtually identical shapes and designs." Accordingly, the Court cannot determine whether members of the public are likely to be deceived by Plaintiff's conduct.
In light of the foregoing, the Court finds that, to the extent that Defendants' statutory unfair competition claim is not preempted by the Copyright Act, Defendants have nevertheless failed to allege sufficient facts to state a statutory unfair competition claim.
b. Common Law Unfair Competition
While it is unclear from Defendants' pleading whether they intend to bring a common law unfair competition claim, Defendants have similarly failed to allege sufficient facts to support such a claim.
As noted, supra, "the common law tort of unfair competition is generally thought to be synonymous with the act of `passing off' one's goods as those of another." Bank of the West v. Superior Court, 2 Cal. 4th at 1263; Trovan, Ltd. v. Pfizer, Inc., 2000 U.S. Dist. LEXIS 7522, at *19-20 (C.D. Cal. 2000). As explained by the Bank of the West court, "the tort developed as an equitable remedy against the wrongful exploitation of trade names and common law trademarks that were not otherwise entitled to legal protection." Id. (citing 1 Callmann, Unfair Competition, Trademarks Monopolies (4th ed. 1981) §§ 2.01-2.03.). The court recognized that the tort also includes "acts analogous to `passing off,' such as the sale of confusingly similar products, by which a person exploits a competitor's reputation in the market." Id. The cause of action has three elements: "(1) the [counterclaimant] has invested substantial time and money in development of its . . . `property'; (2) the [counterclaim] defendant has appropriated the [property] at little or no cost; and (3) the [counterclaimant] has been injured by the [counterclaim] defendant's conduct." Balboa Ins. Co. v. Trans Global Equities, 218 Cal. App. 3d 1327, 1342 (1990) (modifications in original).
While Defendants allege that they spent "more than $40,000" producing the Torch, and that Plaintiff has produced an "identical" Torch, Defendants do not provide a description of either their Torch or Plaintiff's Torch. Accordingly, the Court cannot determine whether or not Plaintiff has appropriated Defendants' Torch. Although Defendants further allege that they have lost "hundreds of thousands of dollars" in sales, there are no facts in the counterclaim to suggest that this injury was caused by Plaintiff's conduct. Thus, to the extent that Defendants' common law unfair competition claim is not preempted by the Copyright Act, Defendants have nevertheless failed to allege sufficient facts to state such a claim.
3. Summary
Given the dearth of factual support for any of the allegations in Defendants' Third Counterclaim, coupled with Defendants' failure to allege an "extra element" to distinguish this claim from a copyright infringement claim, Plaintiff's motion to dismiss the Third Counterclaim is GRANTED. The Third Counterclaim is DISMISSED WITHOUT PREJUDICE. Defendants are granted leave to amend the Third Counterclaim in accordance with this Order. Any such amendment must clearly state whether Defendants are pursuing a statutory unfair competition claim or a common law unfair competition claim or both. C. Fourth and Fifth Counterclaims (RICO)
In order to avoid preemption, Defendants must provide sufficient facts in their amended counterclaim to support a finding that an "extra element" exists to distinguish this claim from a copyright infringement claim. Watermark Publrs., 1997 U.S. Dist. LEXIS 22512 at *14. However, the Court takes no position with respect to the possible preemption of any amended unfair competition claim.
RICO provides a private right of action to "any person injured in his business or property by reason of a violation of section 1962 of this chapter." Diaz v. Gates, 354 F.3d 1169, 1171 (9th Cir. 2004), citing, 18 U.S.C. § 1964(c) (2003). Section 1962, in turn, lists four separate acts which form the basis for RICO liability: (a) investing income derived from a pattern of racketeering activity in an enterprise; (b) acquiring or maintaining an interest in an enterprise through a pattern of racketeering activity; (c) conducting the affairs of an enterprise through a pattern of racketeering activity; or (d) conspiring to commit any of the above acts. Id., citing, 18 U.S.C. § 1962(a)-(d).
Defendants bring their Fourth and Fifth Counterclaims under 18 U.S.C. §§ 1962(a), (c) (d). 1. 18 U.S.C. § 1962(c)
Liability under RICO, 18 U.S.C. § 1962(c), requires (1) the conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996), citing, Sun Savings Loan Assoc. v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 1987). "Racketeering activity" is any act indictable under several provisions of U.S.C. Title 18, as enumerated in 18 U.S.C. § 1961.
a. Enterprise
The United States Supreme Court has held that, for RICO purposes, an enterprise is an "entity . . . associated together for a common course of conduct." United States v. Turkette, 452 U.S. 576, 583, 69 L. Ed. 2d 246, 101 S. Ct. 2524 (1981). In the Ninth Circuit, "a RICO enterprise must have an ascertainable structure separate and apart from the structure inherent in the conduct of the pattern of racketeering activity." Chang v. Chen, 80 F.3d 1293, 1295 (9th Cir. 1996). That is, a RICO enterprise "at a minimum . . . must exhibit `some sort of structure . . . for the making of decisions, whether it be hierarchical or consensual.' The structure should provide `some mechanism for controlling and directing the affairs of the group on an on-going, rather than an ad hoc, basis.'" Id. at 1299 (internal citations omitted). The organization must have an "existence beyond that which is merely necessary to commit the predicate acts of racketeering." Id.
A court must grant a RICO counterclaim defendant's motion to dismiss where the counterclaimant has failed to "allege a structure to the organization beyond that which [is] inherent in the alleged acts of racketeering activity," and failed to allege that the defendant "utilized a structure separate and apart from the predicate acts to distribute proceeds of the transactions." Id. at 1300; see also Simon v. Value Behavioral Health, Inc., 208 F.3d 1073, 1083-84 (9th Cir. 2000).
Defendants do not allege any facts that meet the Chang test. In support of their RICO claims, Defendants allege that "pursuant to the numerous agreements that were negotiated and executed between the [P]laintiff and Chinese suppliers as well as through their course of conduct" Plaintiff has formed a "series of association-in-fact enterprises" for the "purpose of committing numerous acts of racketeering activity." Counterclaim ¶ 29. The enterprise is identified as "the Peoples [sic] Liberation Army of China (PLA)" and "Departments of the Government of the People's Republic of China" and "other Chinese suppliers." Id. Defendants do not allege that Plaintiff, the People's Liberation Army of China, various unnamed "Departments of the Government" of China and various other unnamed Chinese suppliers, have established a decision making structure that exists "beyond that which is merely necessary to commit the predicate acts of racketeering." Indeed, the counterclaim fails to provide any facts to explain how Plaintiff, a commercial supplier of home and garden products, could be part of an alleged RICO enterprise with arms of the sovereign government of China as well as unnamed Chinese suppliers. Defendants have offered no facts indicating how the enterprise is organized, explaining the "chain of command" or operation of the enterprise, or how Plaintiff is involved in the enterprise at all. Clearly, Defendants have failed to allege sufficient facts to establish the existence of an independent decision-making structure or an independent proceeds-distributing structure, which is what Chang requires "at a minimum" to sustain an allegation of enterprise. See Chang, 80 F.3d at 1299-1300; Wagh v. Metris Direct, Inc., 2002 U.S. Dist. LEXIS 2905, at *8-9 (N.D. Cal. 2002). Accordingly, Defendants' § 1962(c) counterclaim must be dismissed.
b. Pattern of Racketeering Activity
Defendants have also failed to establish a pattern of racketeering activity. A pattern of racketeering activity requires the commission within a ten year period of at least two predicate acts that violate laws listed in 18 U.S.C. § 1961(1). See Royce Int'l Broadcasting Corp. v. Field, 2000 U.S. Dist. LEXIS 2369, at *7-8 (N.D. Cal. 2000). These acts must be related and must amount to, or threaten the continued likelihood of, continued criminal activity. See H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 109 S.Ct. 2893, 2899 (1989).
Defendants claim that Plaintiff has committed the following "predicate acts": theft, theft of services, receiving stolen property and copyright infringement. Counterclaim ¶ 36. Defendants allege in a conclusory fashion that Plaintiff's acts constitute a "pattern of racketeering activity." Id. ¶¶ 30, 38.
Defendants also allege that the "importation of products made by slave and prison labor in violation of 19 U.S.C. § 1307" is "racketeering activity." Counterclaim ¶ 29. However, a violation of this statute is not "racketeering activity" as defined by 18 U.S.C. § 1961(1).
Defendants first allege that Plaintiff's acts constitute the predicate act of robbery. See 18 U.S.C. § 1961(1)(A). In order to constitute "racketeering activity" said robbery must be "chargeable under State law and punishable by imprisonment for more than one year." Id. Defendants, however, merely allege that Plaintiff "took and used the copyrights and trademarks of [D]efendants with the intent to permanently deprive them of remuneration for those services" and "knowingly received the stolen services of [D]efendants." Counterclaim ¶ 36. Even construing the counterclaim in a light most favorable to Defendants, Defendants have provided no basis whatsoever in their counterclaim to support a finding that Plaintiff's acts constitute felonious robbery, as defined in 18 U.S.C. § 1961(1)(A).
In the alternative, Defendants allege that Plaintiff's acts constitute "racketeering activity" because they are acts "`indictable under' any of a number of provisions of" Title 18 United States Code. See 18 U.S.C. § 1961(1)(B). However, Defendants do not identify a single applicable provision enumerated in § 1961(1)(B). Thus, the Court cannot determine whether any of Plaintiff's acts constitute racketeering activity. Moreover, in order to state a RICO claim, Defendants must establish two related acts of racketeering activity. Considering that Defendants have failed to allege that any racketeering activity even occurred, it is clear that they cannot establish a pattern of racketeering activity. c. Summary
In an attempt to establish a pattern of racketeering activity, Defendants state that "Plaintiff has stolen the trade dress rights of Belle Mead Hot Glass as described in more detail in the counterclaim filed in this court in Case No. C 03-0002 VRW," that "Plaintiff has stolen the patent and trade dress rights of Steven Lecon as described in the complaint filed in this court in Case No. 4:02CV04960," and that "Plaintiff has stolen the trade dress rights and copyrights of Mary Taylor as described in the complaint filed in Case No. 2:04cv00819 in the United District Court for the Western District of Washington." Counterclaim ¶¶ 31-33. This is the extent to which these cases are discussed in Defendants' pleading. These complaints are not attached to Defendants' counterclaims and these cases have not been related to the instant case. Moreover, Plaintiff asserts that it has no record of any counterclaim being filed in the Belle Mead Hot Glass Case. Hilbert Decl ¶ 2. Defendants have failed to allege any facts to suggest that these cases involved racketeering activity or that the acts alleged in these cases are somehow related to this one. Defendants' counterclaim must be self-contained; it is inappropriate to reference documents that were filed in other cases, which are not before this Court, without providing any factual basis whatsoever in the pleading itself to explain the relevance of these other cases to the instant case. Given this, Defendants' bare citation to these other cases is insufficient to establish a pattern of racketeering activity.
In light of the above analysis, it is clear that Defendants' § 1961(c) counterclaim must be dismissed for failure to state a claim upon which relief may be granted. Defendants' pleading and theory of liability regarding Plaintiff's allegedly wrongful conduct is far too scant and cursory for this Court to give it any credence. Accordingly, Plaintiff's motion to dismiss Defendants' § 1961(c) counterclaim is GRANTED. Defendants' § 1961(c) counterclaim is DISMISSED WITHOUT PREJUDICE. Defendants are granted leave to amend this counterclaim in accordance with this Order.
2. 18 U.S.C. § 1962(a) 18 U.S.C. § 1962(a) provides in relevant part:
It shall be unlawful for any person who has received any income derived . . . from a pattern of racketeering activity or through collection of an unlawful debt . . . to use or invest . . . any part of such income . . . in acquisition of any interest in, or the establishment or operation of, any enterprise.Id.
As discussed, supra, Defendants have failed to allege either an "enterprise" or a "pattern of racketeering activity." Accordingly, Defendants' § 1962(a) counterclaim must also be DISMISSED WITHOUT PREJUDICE for failure to state a claim. Defendants are granted leave to amend this counterclaim in accordance with this Order.
3. 18 U.S.C. § 1962(d) 18 U.S.C. § 1962(d) provides that "it shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section." Since Defendants have not satisfied the pleading requirements for any of those sub-sections, they have also not alleged sufficient facts to state a claim under this section of the RICO statute. See Wagh v. Metris Direct, Inc., 363 F.3d 821, 831 (9th Cir. 2003) (dismissing RICO conspiracy claim when plaintiff failed to satisfy the pleading requirements for subsection (a), (b), or (c)). Accordingly, Defendants' § 1962(d) counterclaim is DISMISSED WITHOUT PREJUDICE. Defendants are granted leave to amend this counterclaim in accordance with this Order.
D. Sixth Counterclaim (Declaratory and Injunctive Relief)
In their Sixth Counterclaim, Defendants seek declaratory and injunctive relief. Counterclaim ¶¶ 49-53. Given that the Court dismisses without prejudice Defendants' Second, Third, Fourth and Fifth Counterclaims, to the extent that the Sixth Counterclaim depends on those counterclaims, it is also DISMISSED WITHOUT PREJUDICE. Defendants are granted leave to amend this counterclaim in accordance with this Order.
E. Punitive Damages
Defendants seek an award of $100 million in punitive and exemplary damages. Defendants argue that this prayer should be stricken because punitive damages are not available under the Copyright Act. Design Art v. NFL Props., Inc., 2000 U.S. Dist. LEXIS 20172, at *14 (C.D. Cal. 2000), citing, Oboler v. Goldin, 714 F.2d 211, 213 (2d Cir. 1983) ("Punitive damages are not available under the Copyright Act.").
"[P]unitive damages are not available under the Lanham Act." Duncan v. Stuetzle, 76 F.3d 1480, 1490 (9th Cir. 1996). However, Defendants have been granted leave to amend their state law unfair competition claim. While punitive damages are not available under section 17200 of the Business and Professions Code, see Czechowski v. Tandy Corp., 731 F. Supp. 406, 410 (N.D. Cal. 1990), such damages may be available under a sufficiently alleged common law unfair competition claim. Duncan, 76 F.3d at 1490, citing, Cal. Civil Code § 3294 ("We are aware of no authority which suggests that [punitive damages under § 3294] may not be applied to common law unfair competition claims."). Nevertheless, because Defendants' unfair competition claim has been dismissed with leave to amend, Defendants' request for punitive damages is also STRICKEN WITHOUT PREJUDICE. Defendants are granted leave to reassert their prayer for punitive damages in accordance with this Order, if appropriate.
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED THAT Plaintiff's motion to dismiss Defendants' Second, Third, Fourth, Fifth and Sixth Counterclaims and to strike Defendants' prayer for punitive damages [Docket No. 11] is GRANTED. Defendants' Second, Third, Fourth, Fifth and Sixth Counterclaims are DISMISSED WITHOUT PREJUDICE. Defendants' prayer for punitive damages is STRICKEN WITHOUT PREJUDICE. Defendants are granted leave to file amended counterclaims, in accordance with this Order, by no later than thirty (30) days from the date of this Order. Any and all amended counterclaims must specifically set forth each cause of action that Defendants seek to bring against Plaintiff and provide factual allegations consistent with the original pleading sufficient to support each such cause of action. Defendants are further advised that any such amendment must comply with Federal Rule of Civil Procedure 11. If Defendants fail to file amended counterclaims that comply with this Order by the above-indicated date, the Court may dismiss Defendants' counterclaims with prejudice, either sua sponte or on motion of the Plaintiff.
IT IS FURTHER ORDERED THAT the case management conference currently scheduled for November 9, 2004 is VACATED. The parties shall appear for a telephonic Case Management Conference on Thursday, January 6, 2005 at 3:30 p.m. The parties shall meet and confer prior to the conference and shall prepare a joint Case Management Conference Statement which shall be filed no later than ten (10) days prior to the Case Management Conference. Plaintiff shall be responsible for filing the statement as well as for arranging the conference call. All parties shall be on the line and shall call (510) 637-3559 at the above indicated date and time.
IT IS SO ORDERED.