Support Community, Inc. v. MPH International LLC

Background

Support Community filed the original complaint against MPH International LLC in California state court. MPH later filed an answer and cross-complaint and removed the action to federal court. After the parties stipulated that MPH could amend its answer and counterclaims, MPH filed an amended counterclaim that included no answer. Support Community moved to strike the counterclaim and moved under Federal Rule of Civil Procedure 12(b)(6), the rule allowing dismissal for failure to state a legally sufficient claim, as to MPH’s first four counterclaims.

MPH alleged that it develops and licenses customized web and mobile software. It alleged that the parties agreed in 2016 that MPH would develop and maintain applications for Support Community and that an unsigned development agreement gave Support Community a nonexclusive license to use the software but did not transfer the copyrights or source code. MPH further alleged that Support Community obtained source code, reproduced software elements without authorization, and used the code and other materials to develop competing software. MPH asserted direct and contributory copyright infringement, trade-secret misappropriation, and breach of an agreement under which it waived fees in exchange for a 3% interest in Support Community. The opinion also notes that MPH asserted claims for unjust enrichment and tortious interference.

Motion to Strike

The court granted Support Community’s motion to strike. It explained that the federal rules list the permitted pleadings and do not list a counterclaim as a separate pleading. The usual practice is to include a counterclaim in an answer. The court nevertheless addressed whether MPH’s allegations stated claims for relief.

Direct Copyright Infringement

The court granted the motion to dismiss MPH’s direct copyright-infringement counterclaim, with leave to amend. MPH adequately alleged ownership of four United States copyright registrations covering web and mobile versions of its software. But because MPH alleged that it had licensed the software to Support Community, it also needed facts showing that Support Community exceeded the license’s scope. The court found MPH’s allegations that Support Community made unauthorized copies and derivative works, including source-code and user-interface elements, too conclusory to show copying.

Contributory Copyright Infringement

The court granted the motion to dismiss the contributory copyright-infringement counterclaim, with leave to amend. A contributory-infringement claim requires allegations that the defendant knew about a third party’s infringement and induced, caused, or materially contributed to it. Because MPH had not adequately pleaded direct infringement, the court concluded that the contributory claim also failed. The court separately found that MPH had not alleged facts showing an act of infringement in the United States. The court noted that MPH’s allegations on that point were based on information and belief without stating the facts supporting that belief.

Trade-Secret Misappropriation

The court granted in part and denied in part the motion to dismiss the trade-secret counterclaim, with leave to amend. It found that allegations concerning MPH’s source code were sufficient at the pleading stage because source code may qualify as a trade secret and MPH alleged that its development-team members were bound by confidentiality agreements. The court found insufficient, however, MPH’s allegations concerning information about staff in the Philippines and its methods, processes, and procedures for working across cultures. MPH did not provide facts showing how it protected that information as secret. The court also stated that, on the record before it, it could not find that the source-code claim was preempted by copyright law.

Breach of Contract

The court denied the motion to dismiss the breach-of-contract counterclaim. MPH alleged that it agreed to waive monthly fees in exchange for a 3% interest in Support Community and that Support Community failed to transfer that interest. The court concluded that MPH sufficiently alleged the legal effect of the agreement.

Disposition

The court granted Support Community’s motion to strike and granted in part and denied in part its motion to dismiss. The court granted MPH leave to amend. MPH was required to file a single document containing its answer and counterclaims by January 31, 2024; Support Community’s response was due February 21, 2024. The parties were also directed to file a joint case-management-conference statement by March 1, 2024, and attend the conference.