Income Allocation, LLC v. TruChoice Financial Group, LLC

Background

Income Allocation, LLC sued TruChoice Financial Group, LLC over alleged continued use of intellectual property after the parties’ licenses ended. The original lawsuit asserted breach of contract, copyright infringement, contributory copyright infringement, false designation of origin, trademark infringement, conversion, and a violation of the Minnesota Deceptive Trade Practices Act.

Income Allocation sought permission under Federal Rule of Civil Procedure 15(a)(2) to add six copyright-related claims, two trade-secret misappropriation claims, and an unjust-enrichment claim. TruChoice opposed the motion as untimely and futile. The court had previously required Income Allocation to correct filing deficiencies in its original motion, including the lack of a memorandum, meet-and-confer statement, and proposed order. The court treated the renewed motion as timely because Income Allocation had filed its original motion before the amendment deadline and then complied with the court’s order to correct the filing.

Legal standard

A proposed amendment is futile when the amended complaint would not survive a motion to dismiss for failure to state a plausible claim. At this stage, the court accepts the complaint’s factual allegations as true and asks whether they support a reasonable inference that the defendant is liable. Because the amendment deadline had passed, the court also explained that a later amendment would require a showing of good cause, measured primarily by the moving party’s diligence.

Copyright claims

The court found that the proposed complaint plausibly alleged ownership of a valid copyright in the book, identified as the ‘427 copyright. It found that the later-registered software copyright, identified earlier in the opinion as the ‘532 copyright, did not receive the statutory presumption of validity because it was registered more than five years after publication. The court nevertheless treated the ‘532 copyright as not automatically invalid; it held that Income Allocation had not pleaded facts showing that the software was original or protectable.

The court found the proposed claim concerning derivative software futile because the complaint did not explain what software was involved or what portions of the book had been copied. The proposed claim concerning reports was also futile because the complaint did not describe how the reports were related to the book or software in a way that could establish substantial copying.

The court found the allegations concerning the e-book plausible because Income Allocation alleged that TruChoice had access to the book and later made an unauthorized copy of the entire book. The court also found the allegations concerning the whiteboard video plausible because the complaint alleged that the video was based on, and a derivative work of, the book and that TruChoice displayed it without a license. Distribution and contributory-infringement claims were allowed only insofar as they concerned the e-book and whiteboard video; the court found the allegations involving the software and reports insufficient.

Trade-secret claims

Income Allocation proposed claims under the federal Defend Trade Secrets Act and the Minnesota Uniform Trade Secret Act. The court analyzed the claims together. It held that the proposed complaint defined the alleged trade secrets too broadly, potentially including source code, unpublished data, copyrights, trademarks, presentations, training materials, writings, videos, software, calculators, and publicity rights. The complaint then asserted the required trade-secret elements in conclusory terms without identifying facts showing that the information had independent economic value because of secrecy, was not readily ascertainable, and was protected by reasonable secrecy efforts. The court therefore found both trade-secret claims futile.

Unjust-enrichment claim

The court found the proposed Minnesota unjust-enrichment claim futile for two independent reasons. First, to the extent it was based on alleged unauthorized use of copyrighted works, it was preempted by the Copyright Act because it sought to protect rights equivalent to the copyright owner’s exclusive rights. Second, the Mutual Termination Agreement governed the parties’ use of the works, and Minnesota law does not allow unjust-enrichment recovery when an enforceable contract provides the governing rights and obligations.

Disposition

The court ordered that Income Allocation’s motion to amend the complaint was GRANTED IN PART AND DENIED IN PART. It GRANTED leave to add Amended Counts III, V, VI, and VII alleging copyright infringement, unauthorized distribution, and contributory copyright infringement concerning the e-book and whiteboard video. It found Amended Counts II, IV, X, XI, and XIV futile and DENIED leave to amend as to those claims. Income Allocation was ordered to file its amended complaint by June 16, 2023.

The court also noted that the discovery stay had ended on June 6, 2023. It found that Mr. Gaylor’s full participation was necessary for the case to proceed and that his daughter was not an acceptable representative under Rule 30(b)(6) based on the reasons identified in TruChoice’s filing.

Classification note

This is a procedural order under the stated classification rules because it primarily decides whether proposed claims were adequately pleaded and whether the complaint could be amended. It does not finally decide liability for the underlying copyright, trade-secret, or unjust-enrichment claims.