Cisco Systems, Inc. v. Dexon Computer, Inc.

Background

Cisco Systems, Inc. and Cisco Technology, Inc. sued Dexon Computer, Inc. over trademark infringement, trademark counterfeiting, false designation of origin, unfair business practices, and unjust enrichment. The court had previously dismissed eleven counterclaims Dexon had filed. In its amended pleading, Dexon asserted four counterclaims: a claim under the Lanham Act, intentional interference with contractual relations, intentional interference with prospective economic advantage, and trade libel.

Dexon is a secondary-market reseller of computer networking products, including new, refurbished, and discontinued Cisco hardware. Dexon alleged that Cisco made two misleading representations. First, Cisco allegedly represented that secondary-market purchasers might lack a valid license to use the embedded software in Cisco hardware. Second, Cisco allegedly defined “used” equipment broadly enough to include equipment that had been opened or unopened but sold by someone other than an authorized Cisco reseller.

Dexon also alleged that Cisco’s Brand Protection Team contacted four Dexon customers: Fort Bend Independent School District, Lockridge Grindal and Nauen, Accuray Inc., and Meadowridge. According to Dexon, these communications caused customers to question the validity of software licenses or the status of the equipment. Fort Bend cancelled a contract with Dexon for more than $1.3 million in Cisco equipment. Dexon did not allege that Lockridge, Accuray, or Meadowridge cancelled contracts or refused to do business with Dexon.

Legal standard

Cisco moved to dismiss under Rule 12(b)(6), which allows dismissal when a pleading does not state a legally sufficient claim for relief. The court was required to presume that well-pleaded factual allegations were true and draw reasonable inferences for Dexon. Because Dexon’s claims involved alleged intentional misrepresentations, the court applied Rule 9(b)’s requirement that fraud be pleaded with particularity, including the who, what, when, where, and how of the alleged misconduct.

Lanham Act counterclaim

The court dismissed Dexon’s Lanham Act false-advertising claim. A Lanham Act claim requires a false statement of fact in commercial advertising, actual or likely deception of a substantial part of the audience, materiality to purchasing decisions, entry into interstate commerce, and injury caused by the statement.

As to the embedded software license, the court held that Cisco’s statement that its end-user license agreement applied to secondary-market products was not an actionable statement of fact. The alleged deception depended on resolving a disputed legal question about the consequences of the initial sale and whether the original purchaser accepted or was bound by the license. The court therefore concluded that Dexon had not plausibly alleged a Lanham Act misrepresentation on that theory.

As to Cisco’s definition of “used,” the court did not decide that the definition could never be misleading. Instead, it held that Dexon had not adequately alleged the other required elements. The court concluded that the definition was not plausibly material to customers’ purchasing decisions and did not proximately cause Dexon’s injury. In the court’s view, customers changed their behavior because they were told that Dexon was not an authorized reseller and that the products might lack valid licenses—not because of Cisco’s broad definition of “used.” The court also found Dexon’s allegations of reputational injury too conclusory.

California counterclaims

The court dismissed Dexon’s claims for intentional interference with contractual relations, intentional interference with prospective economic advantage, and trade libel. Each required Dexon to allege harm. Dexon alleged no damages or financial loss from Cisco’s communications with Lockridge, Accuray, and Meadowridge. The court therefore dismissed the California claims to the extent they relied on those three interactions.

Dexon did adequately describe harm from Cisco’s communication with Fort Bend, because Fort Bend cancelled its contract. But the court held that Dexon still failed to state the California claims based on that interaction because it did not allege a false statement or other independently wrongful conduct. The court concluded that Cisco’s statements about Dexon’s lack of authorized-reseller status and the possible absence of valid software licenses were not plausibly false or misleading statements of fact. The court also found it implausible that Cisco’s website definition of “used,” rather than the concern about whether the equipment could be used with valid licenses, caused Fort Bend to cancel.

Disposition

The court granted Cisco’s motion to dismiss and dismissed Dexon’s counterclaims. The court granted leave to amend one last time, and ordered that Dexon could file amended counterclaims within 21 days. The opinion does not state that the dismissal was with or without prejudice.