Neo4j, Inc. v. PureThink, LLC

Background

Neo4j USA and Neo4j Sweden sued PureThink LLC, iGov Inc., and John Mark Suhy over the defendants’ continued use of the Neo4j mark after the defendants’ license ended. PureThink had entered into a solution-partner agreement with Neo4j USA in 2014. The agreement allowed PureThink to support users of Neo4j’s commercial software and gave it a limited license to use Neo4j marks for marketing and promotion.

The agreement also restricted PureThink, during the agreement and for 36 months after its termination or expiration, from developing, marketing, distributing, or offering services related to certain community-edition products. Neo4j USA notified PureThink and Suhy of an alleged breach in May 2017 and terminated the agreement on July 11, 2017. The 36-month restrictions expired on July 11, 2020.

After the termination, according to the defendants’ allegations, Neo4j USA contacted 18 potential customers and told them that PureThink could not support open-source versions of Neo4j for 36 months. The defendants claimed that these communications disrupted their economic relationships and asserted counterclaims for intentional interference with prospective economic advantage and declaratory relief. They also asserted affirmative defenses based on the claimed invalidity of restrictions in the agreement under California Business and Professions Code § 16600 and the GNU Affero General Public License.

Legal standard

The plaintiffs moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). This type of motion tests whether the opposing party’s pleadings are legally sufficient. The court accepts material factual allegations as true and asks whether the moving party is entitled to judgment as a matter of law. The court explained that the standard is essentially the same as the standard for dismissing a claim for failure to state a claim.

Interference counterclaim

Under California law, an intentional-interference claim requires an economic relationship likely to produce a future benefit, the defendant’s knowledge of that relationship, an intentionally wrongful act designed to disrupt it, actual disruption, and economic harm caused by the defendant’s conduct.

The defendants alleged that the agreement’s restriction on community-edition services was invalid under § 16600 and that Neo4j USA’s communications about the restriction therefore constituted an independently wrongful act. The court applied the California Supreme Court’s rule that, for a contract between businesses, § 16600 requires a “rule of reason” analysis examining whether the restraint harms competition more than it helps. The court found that the defendants’ allegations were largely conclusory and did not provide facts supporting that the restriction was unreasonable. The court rejected the defendants’ attempt to characterize the agreement as one involving an individual or an employment relationship because those theories were unsupported by the counterclaim and conflicted with its allegations that the agreement was between two businesses.

The court also found that the defendants had not adequately alleged actual disruption. Their allegations that Neo4j USA intended to and did disrupt their economic relationships merely repeated the legal requirement without supporting facts. The court noted that the alleged IRS communication produced only an initial question about whether services would stop, not evidence that the IRS terminated or modified a contract or that another business relationship actually failed. Because actual disruption was inadequately alleged, the court also found that proximate causation was inadequately alleged.

The court held that the interference counterclaim failed for these reasons but concluded that amendment would not necessarily be futile. Plaintiffs’ motion was therefore granted as to the First Counterclaim, which was dismissed with leave to amend.

Declaratory-relief counterclaims

The Fifth Counterclaim sought a declaration that section 4.3.2 of the partner agreement was void under § 16600. The Sixth Counterclaim sought a declaration that sections 4.3.1 and 4.3.2 were void under the GNU Affero General Public License.

The court did not reach the plaintiffs’ arguments about the substantive validity of those restrictions. Instead, it found that the defendants had not shown a live legal dispute. The agreement had been terminated, the restrictions had expired, and the plaintiffs were not seeking to enforce either restriction. The defendants did not claim that they continued to face damages, a risk of violating the restrictions, or a future injury that a declaration could remedy. The court also rejected the argument that a declaration could help the defendants restore relationships with third parties, reasoning that this would not establish a live controversy between the parties.

The court found the declaratory-relief counterclaims moot and held that amendment would be futile because the restrictions had expired. The plaintiffs’ motion as to the Fifth and Sixth Counterclaims was granted, and those counterclaims were dismissed without leave to amend.

Affirmative defenses

The First Affirmative Defense asserted that section 4.3.2 could not be enforced because it was void under § 16600. The Second Affirmative Defense asserted that sections 4.3.1 and 4.3.2 violated the GNU Affero General Public License.

The court found these defenses immaterial and impertinent because the plaintiffs were not seeking to enforce either restriction in the operative complaint. The complaint mentioned section 4.3.2 as part of the reason for terminating the agreement in 2017, but the plaintiffs’ breach-of-contract claim sought recovery for alleged breaches of other provisions. The court also found that the defenses did not explain how the alleged invalidity of sections 4.3.1 and 4.3.2 would provide a defense to the claims actually asserted.

The plaintiffs’ motion as to the First and Second Affirmative Defenses was granted. The court stated in its discussion that the defenses were stricken under Rule 12(f), and the conclusion stated that they were dismissed without leave to amend.

Disposition

In Neo4j, Inc. v. PureThink, LLC, Judge Edward J. Davila granted in part the plaintiffs’ motion for judgment on the pleadings: (1) the First Counterclaim for intentional interference with prospective economic advantage was dismissed with leave to amend; (2) the Fifth and Sixth Counterclaims for declaratory relief were dismissed without leave to amend; and (3) the First and Second Affirmative Defenses were dismissed without leave to amend. The defendants were given 21 days to file amended pleadings concerning the counterclaim that remained amendable.