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DO IT BEST CORPORATION v. PASSPORT SOFTWARE

July 23, 2004.

DO IT BEST CORPORATION, Plaintiff,
v.
PASSPORT SOFTWARE, INC. Defendant, PASSPORT SOFTWARE, INC. Counter-Plaintiff, v. DO IT BEST CORPORATION f/k/a HARDWARE WHOLESALERS, INC., and THOMAS BURROUGHS, Counter-Defendants.



The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Do it Best Corp. ("DIB") is a member-owned cooperative that distributes hardware, lumber and building materials to approximately 4,500 member retailers worldwide. In 1989, DIB entered into a software licensing agreement with Defendant Passport Software, Inc. ("PSI"), a licensed reseller of certain point-of-sale software owned by RealWorld Corp. ("RealWorld"). In September 2000, a dispute arose concerning DIB's alleged misuse of the software. On October 4, 2001, DIB filed this lawsuit seeking a declaration that it did not breach, and is not in default under, the 1989 agreement. PSI responded with several counterclaims, which it has amended several times, alleging breach of contract, trade secret misappropriation under the Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. ("ITSA"), civil conspiracy, copyright infringement under the Copyright Act of 1976, 17 U.S.C. § 101 et seq., fraud, false designation of origin under § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), and tortious interference with contract against DIB. PSI has also named Thomas Burroughs ("Burroughs"), DIB's former corporate counsel, as an additional counter-defendant, charging Mr. Burroughs with contributory copyright infringement under the Copyright Act. PSI seeks permanent injunctive relief as well as damages in excess of $60 million against DIB and $1.8 million against Mr. Burroughs. DIB moves to dismiss PSI's fraud, false designation of origin, and tortious interference with contract counterclaims Burroughs moves to dismiss PSI's contributory copyright infringement claim. For the reasons set forth below, DIB's motions are granted in part and denied in part, and Burroughs's motion is denied.

FACTUAL BACKGROUND*fn1

  According to the Third Amended Counterclaims ("TAC"), on or about March 22, 1984, RealWorld and PSI entered into a Master Distributor Agreement ("MDA") granting PSI rights to reproduce, distribute, and enhance certain point-of-sale accounting software owned by RealWorld*fn2 (the "Accounting Suite"). (TAC ¶¶ 6-8.) This agreement was supplemented by a Master Value Added Distributor Agreement ("MVADA"), executed on July 1, 1988. (Id. ¶ 9.) On unspecified dates, PSI "developed many enhancements, modifications, and additions to the Accounting Suite" (the "Enhancements"). (Id. ¶ 10.) In addition. "PSI created some original software which it also delivered as Enhancements to the enhanced Accounting Suite . . . (the `Original Works') which were integrated into the enhanced Real[]World software." (Id. ¶ 11.) PSI owns these Enhancements and Original Works. (Id. ¶ 12.)

  On an unspecified date, DIB*fn3 contacted RealWorld to inquire about purchasing the Accounting Suite for use in DIB's member stores. (Id. ¶ 15.) RealWorld referred DIB to PSI, as RealWorld knew PSI had developed Enhancements to the Accounting Suite that satisfied one of DIB's critical system requirements: that multiple terminals have simultaneous access to a single computer system. (Id. ¶¶ 14-17.) On January 19, 1989, DIB and PSI executed a Dealer License Agreement (the "License Agreement") for the Accounting Suite and certain Original Works and Enhancements created by PSI (the "Licensed Software"). (Id. ¶¶ 18, 20-21.) PSI included copyright notices in all such Original Works and Enhancements. (Id. ¶¶ 11, 19.) The License Agreement permitted DIB to grant sublicenses to its member retailers within the continental United States, subject to certain conditions not spelled out in PSI's allegations. (Id. ¶ 23.) The agreement required DIB to pay a royalty fee to PSI for use of the Licensed Software (whether owned by PSI or RealWorld) based on modules*fn4 distributed to its members. (Id. ¶ 22.) Under the agreement, PSI and RealWorld retained all copyright, trade secret, patent, and other intellectual property rights in the Licensed Software, (Id. ¶ 24.) Beginning in 1993, PSI "authored computer programs and computer program Enhancements to RealWorld computer programs [(the "Programs")] consisting of original material and registered the [Programs] with the U.S. Copyright Office as unpublished textual works with an effective registration date of May 29, 2002." (TAC Count XI ¶ 38.)*fn5 On or about January 14, 1994, five days before the License Agreement was set to expire, DIB and PSI orally agreed to extend operation of the agreement until approximately January 2001. (Id. ¶¶ 25-26; Count IX (Amended) Fraud (hereinafter, "Am. Count IX") ¶¶ 19-20.)

  At some point "[i]n or about 1990," Gary Zoller ("Zoller") of DIB*fn6 told John Miller ("Miller"), President of PSI, by telephone that a module relating to purchase order operations did not suit its business needs. (Am. Count IX ¶ 21.) During that conversation, Zoller claimed "that DIB would not use the purchase order module which PSI had delivered but would create its own purchase order module from scratch."*fn7 Years later, at some point "[i]n or about 1996," Zoller introduced Miller to Jennings at DIB's office and told Miller that Jennings was creating DIB's purchase order module. (Id. ¶ 23.) On unspecified dates, PSI alleges. Jim Jennings ("Jennings") and Scott Everson ("Everson"), programmers for DIB, wrote DIB's purchase order module using source code that they knew had been copied from PSI original source code and RealWorld source code for which PSI was entitled to royalties. (Am. Count IX ¶¶ 24-25, 27.)*fn8

  PSI claims that "DIB knew" that Zoller's statements that DIB had created its purchase order on its own was not true. (Id. ¶ 26.) Instead, "[a]t the time Zoller made the representation to Miller that DIB was creating its own purchase order module, DIB by its agents Jennings and [Everson] knew DIB had or intended to incorporate source code which belonged to PSI in the various modules." (Id. ¶ 28.) PSI also contends that Zoller's statement that DIB's purchase order module was original "was made with the intent that PSI rely on the statement, be deterred from discovering that DIB had included source code in its purchase order module which was not original and had been delivered so that PSI would not invoice DIB or its members for the use of the PSI and Real[]World source code contained in DIB's purchase order module." (Id. ¶ 29.) PSI alleges that it relied on Zoller's statements and did not invoice DIB or its members for the use of PSI or Real World source code. (Id. ¶ 30.)

  PSI does not indicate which of Zoller's alleged statements it is referring to in paragraphs 26, 28, 29 and 30. As the court reads the allegation in paragraph 28 involving "the representation to Miller that DIB was creating its own purchase order module," that paragraph refers to the allegation in paragraph 23 that in 1996 Zollertold Miller that Jennings was creating DIB's purchase order module. It is unclear whether the claims in paragraphs 26, 29, and 30 refer to Zoller's alleged 1990 statements, his asserted 1996 statement, or other unidentified remarks.

  In or about August 2000, PSI alleges, DIB "began scheming to make, use, copy, and distribute [the Programs] for its own and its members['] use without abiding by the terms of the [License Agreement]." (Count X (Amended) Contributory Copyright Infringement (against Thomas Burroughs) (hereinafter, "Am. Count X") ¶ 11.) Also in or about August 2000, a committee of DIB employees (the "Committee"), including corporate counsel Thomas Burroughs, "took acts to determine ownership of the [Programs] and consulted with third parties who advised DIB that it would need to purchase or license PSI's rights to continue to use PSI software." (Id. ¶¶ 12-13.)*fn9 On or about August 31, 2000, Karla Wygant, a DIB employee,*fn10 wrote to the Committee that "I have run this software and modified programs with this information a million times and not noticed [the copyright notices]. This definitely throws another wrench in the works." (Id. ¶ 14.)*fn11

  As of 2000, the MVADA*fn12 between PSI and RealWorld, which had been modified several times, provided that PSI had the right to reproduce, distribute, and enhance the RealWorld Accounting Suite through 2010. (TAC Count XII ¶ 38.) In or about August 2000, DIB informed PSI that DIB was interested in purchasing an unlimited license for the Licensed Software. (Id. Count VI ¶ 19.)*fn13 In or about September 2000, PSI asked RealWorld "if it could purchase a license from [RealWorld] for sale to [DIB] for unlimited use of the Accounting Suite incorporated into the Licensed Software." PSI did not identify DIB in its initial discussions with RealWorld. (Id. Count VI ¶ 20.) PSI alleges that it did not initially disclose DIB's identify to RealWorld "because it had been cut out of a deal by [RealWorld] in which it had invested substantial time and effort." (Id. Count VI ¶ 22.)*fn14 After RealWorld and PSI signed an agreement in which RealWorld agreed "not to intervene or interfere with the transaction between PSI and its client," PSI informed RealWorld that DIB was the client for whom PSI wished to purchase unlimited use of the Accounting Suite. (Id. Count VI ¶ 21.) In or about September 15, 2000, RealWorld agreed that "for $200,000,00 PSI could purchase a license for unlimited use of . . . the Accounting Suite for sale to DIB." (Id. Count VI ¶¶ 20, 23.) On an unspecified date, PSI informed DIB of this agreement and offered to sell to DIB for $1.8 million an unlimited license for a derivative work of customizations and enhancements to the Accounting Suite that PSI had developed (the "Derivative Work"). (Id. Count VI ¶¶ 24-27.)*fn15 On an unspecified date after PSI made this offer, RealWorld, through one of its distributors, approached DIB directly and offered to sell to DIB an unlimited license to the Accounting Suite for significantly less than PSI had offered. (Id. Count VI ¶ 30.) On approximately November 30, 2000, DIB and RealWorld entered into a Source Code Agreement in which RealWorld agreed (1) to deliver to DIB a copy of the Accounting Suite and (2) "to cooperate in any litigation which would be brought by PSI related to the unlimited license for the Accounting Suite and to indemnify it from PSI's claims." (Id. Count VI ¶¶ 35, 38-39, Count XII ¶¶ 40-41.) PSI alleges that DIB entered into this agreement, "in part, in a wrongful attempt to legitimize DIB's use of PSI's copyrighted code without PSI's consent." (Id. Count XII ¶ 41.) PSI and RealWorld maintained good business relations until DIB and RealWorld entered into the Source Code Agreement, which PSI characterizes as "a sham transaction." (Id. Count XII ¶ 40.)*fn16 DIB did not in fact install or use the copy of the Accounting Suite that RealWorld had provided; instead, DIB continued to use the Licensed Software it had obtained from PSI. (Id. Count VI ¶ 40.) When PSI questioned DIB about its continued use of the Licensed Software, DIB claimed that its Source Code Agreement with RealWorld gave it the right to continue to use PSI's Derivative Work, a claim which PSI contends DIB knew was false. (Id. Count VI ¶ 43.)*fn17

  In or about September 2000, PSI discovered that DIB had incorporated certain PSI and RealWorld source code into its purchase order module, as described below. (Am. Count IX ¶ 31.) During a telephone conversation on or about October 1, 2000, Burroughs acknowledged to PSI President John Miller that DIB had made, sold, and distributed copies of the purchase order module "without PSI's permission and without PSI's copyright notices." (Am. Count X ¶¶ 15-16.) As of November 2000, with Burroughs's knowledge, DIB had made, sold, and distributed more than 400 copies of the Programs which did include a PSI copyright notice on a "splash screen." (Id. ¶¶ 17-18.)*fn18 In or about January 2001, DIB employees, under Burroughs's direction and with his participation, removed PSI's copyright notices from copies of the Programs and replaced them with DIB copyright notices without PSI's knowledge or consent. (Id. ¶¶ 19, 21-22; TAC Count XI ¶¶ 41-42, 45.) PSI claims that Burroughs's "personal conduct aided and assisted DIB to make, use, sell and distribute copies of the Programs with PSI's copyright notice removed," although it is not clear whether this allegation refers to Burroughs's participation in removing PSI's copyright notices or some unspecified acts. (Am. Count X ¶ 24.)

  On or about February 14, 2001, PSI served DIB with a Notice of Default letter alleging that DIB had failed to comply with the terms of the License Agreement. (TAC ¶ 27.) The letter demanded that DIB (1) pay fees, charges, and royalties owed to PSI, (2) report on sublicensing activity for the last six months of 2000, (3) stop using and sublicensing the Licensed Software, (4) certify in writing that DIB had destroyed all copies of the Licensed Software, (5) stop using all enhancements and features subject to the terms of the License Agreement and federal copyright law, (6) destroy all software containing enhancements and features, pursuant to the License Agreement, and (7) assign all sublicenses to PSI within 30 days. (Id. ¶ 28.) As a result of DIB's failure to comply with these demands within 30 days, PSI alleges, the parties' oral agreement was terminated on March 14, 2001. (Id. ¶ 29.) Prior to February 14, 2001, pursuant to the License Agreement, DIB was authorized to use and distribute to its members copies of the Programs. (TAC Count XI ¶ 39.) From February 14, 2001 through the present, however, DIB has made, used, sold, and distributed more than 700 copies of the Programs to its members throughout the United States without PSI's consent or permission, including more than 400 copies to members that had previously received the software that did include PSI's copyright notices. (TAC Count VII ¶ 42; Am. Count X ¶¶ 20, 23; TAC Count XI ¶ 40, 43.)*fn19

  In or about March 2001, DIB induced RealWorld to terminate the MVADA with PSI, although RealWorld had no legitimate basis for doing so. (Id. Count XII ¶¶ 43-44.) PSI alleges that, "[o]n information and belief, DIB sought to have Real[]World terminate PSI's M[VA]DA in order to limit or reduce damages which PSI could seek from DIB for DIB's wrongful use of PSI's copyrighted source code which was incorporated into a derivative work which PSI delivered to DIB in or about 1999." (Id. Count XII ¶ 45.)*fn20 In or about May 2001, RealWorld did in fact terminate the MVADA. (Id. Count XII ¶ 46.)*fn21 As a result of that termination, PSI experienced "interference with existing customers which PSI was serving pursuant to the MVADA, the loss of business opportunities and business expectancies." (Id. Count XII ¶ 47.) On an unspecified date during the discovery process in this action, PSI became aware that DIB had breached the License Agreement by sublicensing several modules containing PSI-created Enhancements and Original Works to its members, presumably with the "splash screen" removed and without compensating PSI. (Id. Count I ¶ 35.)

  PSI's common law fraud counterclaim essentially alleges that DIB fraudulently represented to PSI that it had created the purchase order module independently of any Licensed Software when it had in fact incorporated source code from the Programs. (Am. Count IX ¶¶ 21-30.) The common law tortious interference counterclaim asserts that DIB induced RealWorld to wrongfully terminate its MVADA with PSI. (TAC Count XII ¶ 43, 47.) The false designation of origin counterclaim alleges that DIB violated § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), by removing PSI's copyright notices from portions of the Programs and replacing them with its own such notices. (Id. Count XI ¶¶ 37, 48.) Finally, PSI's contributory copyright infringement counterclaim contends that Burroughs's personal actions assisted DIB in making, using, selling, and distributing copies of the Programs on which PSI's copyright notices had been replaced with DIB's notices. (Am. Count X ¶¶ 22, 24.) As noted above, Defendant DIB moves to dismiss PSI's fraud, false designation of origin, and tortious interference counterclaims; Defendant Burroughs moves to dismiss the contributory copyright infringement counterclaim.

  DISCUSSION

  I. Legal Standard

  On a motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6), the court accepts all well-pleaded allegations in a counterclaim as true and draws all reasonable inferences in favor of the plaintiff. Cozzilron & Metal, Inc. v. U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001). The court must accept a pleading's factual allegations because "a motion to dismiss tests the legal sufficiency of a pleading." Szabo v. Bridgeport Machs., Inc., 249 F.3d 672, 675 (7th Cir. 2001). Dismissal under Rule 12(b)(6) is appropriate only if "it appears beyond doubt that the [nonmoving party] can prove no set of facts in support of his claim which would entitle him to relief." Lee v. City of Chicago, 330 F.3d 456, 459 (7th Cir. 2003) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

  II. Fraud (Amended Count IX)

  DIB contends that PSI's fraud counterclaim should be dismissed on three grounds. First, DIB urges that PSI fails to plead its fraud counterclaim with the level of particularity required by FED. R. CIV. P. 9(b). (Motion of Do it Best Corp. to Dismiss Amended Count IX of Passport Software, Inc.'s Third Amended Counterclaims (hereinafter, "Am. Count IX Motion") ¶ 3.) Second, according to DIB, the counterclaim "fails to state more than a breach of contract claim." (Id.) Finally, DIB contends that the fraud counterclaim is preempted by the ITSA. (Motion of Do it Best Corp. and Thomas Burroughs to Dismiss Counts IX, X, XI and XII of Passport Software, Inc.'s Third Amended Counterclaims (hereinafter, "Counts IX-XII Motion") ¶ 3.)*fn22 DIB urges this court to dismiss PSI's fraud counterclaim with prejudice on the ground that PSI has had sufficient time to draft a fraud claim that would survive a 12(b)(6) motion, but has failed to do so. (Am. Count IX Motion ¶ 4.) The court considers each argument in turn.

  A. Particularity

  DIB claims that PSI has not pleaded its fraud claim with the particularity required by Rule 9(b). Rule 9(b) provides that "[i]n all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." While Rule 9(b) does not require PSI to plead facts that if true would show that DIB's alleged misrepresentations were indeed false, it does require PSI to state "the identity of the person making the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the [PSI]." Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (internal quotation marks and citations omitted). In other words, PSI's pleading must include "the who, what, when, where, and how: the first paragraph of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). On the other hand, PSI is "not required to go further and allege the facts necessary to show that the alleged fraud ...


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