VISIONSHAPE INC v. KOFAX IMAGE PRODUCTS INC

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Court of Appeal, Fourth District, Division 1, California.

VISIONSHAPE, INC., Plaintiff and Appellant, v. KOFAX IMAGE PRODUCTS, INC., Defendant and Respondent.

No. D036993.

Decided: April 17, 2001

Law Office of Joe Utzurrum and Joe Utzurrum, for Plaintiff and Appellant. Stradling, Yocca, Carlson & Rauth, John F. Cannon, Robert C. Wallace and David E. Outwater, Newport Beach, for Defendant and Respondent.

Plaintiff Visionshape, Inc. (Visionshape), appeals from a judgment of dismissal entered after the court sustained, without leave to amend, a demurrer filed by defendant Kofax Image Products, Inc. (Kofax), to Visionshape's third amended complaint.   Visionshape and Kofax both marketed software that was compatible with certain video scanner hardware or “video boards” manufactured and marketed by Kofax.   The genesis of the instant action was Kofax's introduction of a new video board that was compatible with software concurrently released by Kofax but not with Visionshape's software.   Visionshape contends it sufficiently pleaded the following causes of action:  (1) unlawful loss leader sales;  (2) unlawful sales below cost;  (3) unlawful tying arrangement;  (4) intentional interference with prospective economic advantage;  (5) negligent interference with prospective economic advantage;  and (6) unfair competition.   We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

 Because this is an appeal of a judgment of dismissal entered after the sustaining of a general demurrer, “we accept as true all the material allegations of the complaint.”  (Shoemaker v. Myers (1990) 52 Cal.3d 1, 7, 276 Cal.Rptr. 303, 801 P.2d 1054.) Visionshape alleges the following facts in its third amended complaint (the complaint):

Kofax manufactures video boards used to connect document scanners to personal computers.   Video boards are marketed to “integrators/developers” and Kofax has a 70 percent share of that market.   Kofax also manufactures and markets a separate “intermediate application” product called Image Controls, which Kofax refers to as a “developer's tool-kit” or “imaging components tool-kit.”   Kofax markets Image Controls to integrators/developers, who integrate it with video boards and then market the integrated applications to end users of scanners.   The integrated application enables the end user to perform a variety of functions, including scanning, viewing, printing and image indexing.   Visionshape refers to the to integrator/developer market for Image Controls as the “intermediate application market.”   An integrator/developer who sells an end user application typically pays a royalty or licensing fee to the manufacturer of the intermediate application.

Visionshape directly competes with Kofax in the intermediate application market with an intermediate application called Vision Tools.   Like Image Controls, Vision Tools is integrated with video boards made by Kofax and other manufacturers to create end user applications.   It is standard in the video board integration industry for manufacturers of video boards to provide competing manufacturers of intermediate applications access to a “low level tool kit,” which is integrated with the video board to provide basic scanning and printing functions.   The low level tool kit assists the intermediate application manufacturers in developing high level intermediate applications to sell to integrators/developers.

In September 1997, Kofax began to market a new line of video boards called Adrenaline.   The Adrenaline boards were higher performance boards than those previously manufactured by Kofax.   Kofax notified integrators/developers that the Adrenaline boards would not be available with a low level tool kit and would not be compatible with Kofax's former low level tool kit, and Image Controls was the only high level intermediate application that could be integrated with the new boards.   Kofax then started giving away Image Controls or selling it below cost to purchasers of Adrenaline boards, with the intent of eliminating or reducing competition in the intermediate application market.

By not making a low level tool kit available and representing that the only way to integrate the Adrenaline board is through Image Controls, Kofax eliminated competition.   Integrators/developers who want to integrate an Adrenaline board with a high level intermediate application other than Image Controls are forced to use Image Controls instead of a low level tool kit to achieve the integration.   When this is done, the two high level applications compete and “wrap” around each other, making integration inefficient and unpredictable.   By denying its competitors access to a low level tool kit (also referred to as a “bedrock code”) for Adrenaline boards, Kofax has created a code/lock that denies access by its competitors to the level of code necessary to develop efficient and competitive intermediate applications.

After Kofax answered Visionshape's first amended complaint, Visionshape successfully moved to file a second amended complaint.   The court sustained Kofax's demurrer to the second amended complaint with leave to amend, ruling Visionshape failed to state any cause of action against Kofax.   The court sustained Kofax's demurrer to the third amended complaint without leave to amend and dismissed the action.

DISCUSSION

I. Standard of Review

 In reviewing a judgment of dismissal following the sustaining of a general demurrer without leave to amend, our task “is to determine whether the complaint states, or can be amended to state, a cause of action.   For that purpose we accept as true the properly pleaded material factual allegations of the complaint, together with facts that may properly be judicially noticed.  [Citations.]”  (Crowley v. Katleman (1994) 8 Cal.4th 666, 672, 34 Cal.Rptr.2d 386, 881 P.2d 1083.)

 We review the court's denial of leave to amend for abuse of discretion.  (Hendy v. Losse (1991) 54 Cal.3d 723, 742, 1 Cal.Rptr.2d 543, 819 P.2d 1.)   A court abuses its discretion in denying leave to amend if there is a reasonable probability the defect in a complaint can be cured by amendment.   However, the burden is on the plaintiff to show how the complaint might be amended to cure the defect.  (Ibid.)

II. Loss Leader and Sales Below Cost

In its first cause of action Visionshape alleges the following:  Kofax sold Image Controls at less than cost and also gave it away for the purpose of promoting sales of Adrenaline boards.   The sales at less than cost had the effect of misleading the buyers in the intermediate application market that the use of other intermediate applications like Vision Tools was unnecessary and impractical.   Kofax also misled buyers by representing its boards could only be integrated by using Image Controls.   Kofax engaged in such conduct with the intent to injure or eliminate competition in the intermediate application market.   The second cause of action reiterates that Kofax gave away Image Controls and sold it at less than cost with the intent to injure or eliminate its competition in the intermediate application market.

 Business and Professions Code 1 section 17043 provides:  “It is unlawful for any person engaged in business within this State to sell any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition.”   Section 17044 provides:  “It is unlawful for any person engaged in business within this State to sell or use any article or product as a ‘loss leader’ as defined in Section 17030․” Section 17030 defines “loss leader” as “any article or product sold at less than cost:  [¶] (a) Where the purpose is to induce, promote or encourage the purchase of other merchandise;  or [¶] (b) Where the effect is a tendency or capacity to mislead or deceive purchasers or prospective purchasers;  or [¶] (c) Where the effect is to divert trade from or otherwise injure competitors.”   Although sections 17044 and 17030 contain no language requiring a culpable mental state for an unlawful loss leader, courts consistently have interpreted section 17044 to require the same mental state as section 17043-i.e., the intent to injure competitors or destroy competition.  (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 175-178, 83 Cal.Rptr.2d 548, 973 P.2d 527.)

 To satisfy the pleading requirements of section 17043, the plaintiff must allege, in other than conclusory terms, the defendant's sales price, costs in the product and cost of doing business.   (G.H.I.I. v. MTS, Inc. (1983) 147 Cal.App.3d 256, 275, 195 Cal.Rptr. 211.) The same pleading requirements apply to section 17044 because a violation of that statute also requires a sale below cost.  (Independent Journal Newspapers v. United Western Newspapers, Inc. (1971) 15 Cal.App.3d 583, 587, 93 Cal.Rptr. 299.)   In addition, the plaintiff must allege specific facts supporting the conclusory allegation that a sale below cost was done with the intent of injuring competitors or destroying competition, as such a conclusory allegation, whether viewed as a conclusion of fact or law, is not admitted by a demurrer. (Id. at p. 586, 93 Cal.Rptr. 299.)

 In its first and second causes of action, Visionshape alleges Kofax sold Image Controls at less than cost.   However, Visionshape fails to allege the sales price of Image Controls, Kofax's costs in the product or Kofax's cost of doing business.   Hence, the first and second causes of action fall short of the pleading requirements of sections 17043 and 17044.   We note Visionshape's failure to satisfy those pleading requirements was a basis of Kofax's previous demurrer to Visionshape's second amended complaint.   The court sustained that demurrer with leave to amend in part because Visionshape had “only alleged conclusions.”   Visionshape filed a third amended complaint but did not amend its first and second cause of action for loss leader and sales below costs.   When a plaintiff is given leave to amend a cause of action on the sustaining of a demurrer but elects not to amend or files an amended complaint that fails to cure the pleading defect, the court acts within its discretion in denying further leave to amend, as it can reasonably presume the plaintiff has stated as strong a cause of action as possible.  (Green v. Travelers Indemnity Co. (1986) 185 Cal.App.3d 544, 556, 230 Cal.Rptr. 13;  Logan v. Southern Cal. Rapid Transit Dist. (1982) 136 Cal.App.3d 116, 127, 185 Cal.Rptr. 878.)

 Visionshape argues cost is not an issue because it alleged Kofax gave away Image Controls in addition to selling it below cost.   However, Visionshape also failed to plead the element of intent to injure competitors and destroy competition with the required specificity.  (Independent Journal Newspapers v. United Western Newspapers, Inc., supra, 15 Cal.App.3d at p. 586, 93 Cal.Rptr. 299.)   Section 17071 provides that “proof of one or more acts of selling or giving away any article or product below cost ․, together with proof of the injurious effect of such acts, is presumptive evidence of the purpose or intent to injure competitors or destroy competition.”  (Italics added.)   Although the first and second causes of action contain conclusory allegations that Kofax acted with the intent to injure or eliminate competition in the intermediate application market and competition was injured, the complaint also alleges Image Controls was the only intermediate application that could be integrated effectively with the Adrenaline boards because Kofax denied competitors the level of code necessary to develop competing applications.   Thus, the complaint read as a whole shows that giving away or selling Image Controls below cost for use with Adrenaline boards could not have injured or destroyed competition by Visionshape because Visionshape's allegedly competing product, Vision Tools, was incompatible with the Adrenaline boards.   The allegation that Vision Tools cannot effectively be used to integrate Adrenaline boards is inconsistent with the conclusory allegation that Kofax acted with the intent to injure or eliminate competition in the intermediate application market, and the complaint sets forth no other specific facts supporting the latter allegation.

The court properly sustained Kofax's demurrer to the first and second cause of action without leave to amend.

III. Tying

 Visionshape's third cause of action alleges an unlawful tying arrangement in violation of section 16727, which is part of the Cartwright Act. (See Morrison v. Viacom, Inc. (1998) 66 Cal.App.4th 534, 538, 78 Cal.Rptr.2d 133.)   In Freeman v. San Diego Assn. of Realtors (1999) 77 Cal.App.4th 171, 91 Cal.Rptr.2d 534, this court discussed the pleading requirements of an illegal tying claim.  “A tying arrangement under antitrust laws exists when a party agrees to sell one product (the tying product) on the condition that the buyer also purchases a different product (the tied product), thereby curbing competition in the sale of the tied product.  [Citation.]  ․ [¶] The threshold element for a tying claim is the existence of separate products or services in separate markets.  [Citation.]   Absent separate products in separate markets, the alleged tying and tied products are in reality a single product.  [Citation.]  [¶] Assuming that separate products in separate markets exist, a plaintiff claiming an illegal tying arrangement must plead:  ‘(1) a tying agreement, arrangement or condition existed whereby the sale of the tying product was linked to the sale of the tied product;  (2) the party had sufficient economic power in the tying market to coerce the purchase of the tied product;  and (3) a substantial amount of sale was effected in the tied product.’  [Citation.]”  (Id. at pp. 183-184, 91 Cal.Rptr.2d 534.)   An additional element of a tying claim is that the plaintiff sustained pecuniary loss as a result of the unlawful tying.  (Morrison v. Viacom, Inc., supra, 66 Cal.App.4th at p. 542, 78 Cal.Rptr.2d 133.)

 Visionshape's tying cause of action is defective because Visionshape fails to allege an unlawful tie between Image Controls and the Adrenaline video boards-i.e., that Kofax required buyers to purchase Image Controls as a condition to purchasing an Adrenaline board.   Rather, Visionshape alleges Kofax has “conditioned the sale of Adrenaline by creating a circumstance in which purchasers of such video board must purchase [Kofax's] separate product Image Controls if such video board is to be integrated.   It is necessary for the video boards to be integrated into an end user application.”  (Italics added.)   The alleged “circumstance” created by Kofax, as established by other allegations in the complaint, is that Adrenaline can be integrated only with Image Controls and not with Vision Tools or other applications in the intermediate application market.

 The fact the Adrenaline boards are technologically interrelated and compatible with Image Controls but incompatible with Vision Tools and other similar products does not give rise to a tying claim. The Ninth Circuit Court of Appeals in Foremost Pro Color v. Eastman Kodak Co. (9th Cir.1983) 703 F.2d 534 (Foremost), addressed a similar claim under the federal Sherman Antitrust Act.2 The plaintiff in Foremost, an independent photofinishing company, alleged Eastman Kodak violated various provisions of the antitrust statutes by introducing a new camera that could only use a new Kodak film, which could only be processed by using a new line of Kodak papers and processing chemicals.   The plaintiff claimed Kodak had unlawfully tied the sale of cameras to film and the film was unlawfully tied to the new Kodak chemicals and paper.  (Id. at p. 537.)   Affirming the dismissal of the antitrust claims for failure to state a claim, Foremost noted that to satisfy the element of coercion for a per se unlawful tying arrangement, a plaintiff had to establish the defendant actually conditioned the sale of a product on the buyer's purchase of another product or agreement not to purchase the other product from any other supplier.  (Id. at pp. 541-542.)  “[T]echnological interrelationship among complementary products is [insufficient] to establish the coercion essential to a per se unlawful tying arrangement.   Indeed, such a rule could become a roadblock to the competition vital for an ever expanding and improving economy.”  (Id. at p. 542.)   Observing that “a mere technological tie does not present the competitive evils ․ the per se prohibition of tying arrangements is designed to prevent” (ibid.), Foremost held “the development and introduction of a system of technologically interrelated products is not sufficient alone to establish a per se unlawful tying arrangement even if the new products are incompatible with the products then offered by the competition and effective use of any one of the new products necessitates purchase of some or all of the others.   Any other conclusion would unjustifiably deter the development and introduction of those new technologies so essential to the continued progress of our economy.”  (Id. at pp. 542-543.)

 Foremost's analysis is on point.   Like the plaintiff in Foremost, Visionshape has not stated an unlawful tying claim because it does not allege Kofax itself required the purchase of Image Controls as a condition to a purchase of an Adrenaline board.   Rather, Visionshape alleges buyers are required to buy Image Controls by the “circumstance” that Image Controls is the only intermediate application that can effectively be integrated with an Adrenaline board.   The incompatibility of Adrenaline boards with intermediate applications offered by Kofax's competition, standing alone, cannot support an unlawful tying cause of action under the Cartwright Act.3 To state such a cause of action it must be alleged the defendant itself conditioned the sale of the alleged tying product on the purchase of the tied product.  (Freeman v. San Diego Assn. of Realtors, supra, 77 Cal.App.4th at p. 183, 91 Cal.Rptr.2d 534.)   The court properly sustained Kofax's demurrer to the third cause of action without leave to amend.

IV. Intentional Interference With Prospective Economic Advantage

 In its fourth cause of action Visionshape alleges that by making Adrenaline boards incapable of being integrated or developed without the use of Image Controls and by giving away and selling Image Controls below cost, Kofax tortiously interfered with the prospective economic advantage Visionshape otherwise would have realized from its economic relationships with certain integrators/developers.

 The elements of a cause of action for intentional interference with prospective economic advantage are:  “ ‘ “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff;  (2) the defendant's knowledge of the relationship;  (3) intentional acts on the part of the defendant designed to disrupt the relationship;  (4) actual disruption of the relationship;  and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.”  [Citations.]’  [Citation.]”  (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 339, 60 Cal.Rptr.2d 539.)   In addition, the plaintiff must plead and prove that the defendant's conduct was wrongful by some legal measure other than the fact of interference itself.  (Id. at p. 340, 60 Cal.Rptr.2d 539;  Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 393, 45 Cal.Rptr.2d 436, 902 P.2d 740.)

Visionshape alleges Kofax's conduct “was wrongful in that it violated certain provisions of the Business and Professions Code as alleged in the four [sic ] causes of action above.”   However, we have concluded Visionshape failed to plead statutory violations in its first through third causes of action.   Accordingly, the allegations of those causes of action do not satisfy the pleading requirement of independently wrongful conduct.

 The gravamen of Visionshape's entire action is that it was unlawful or wrongful for Kofax to fail to provide its competitors in the intermediate application market a low level tool kit or other means to design intermediate applications that could be integrated with the Adrenaline boards and thus compete with Image Controls.   However, we are aware of no authority for the proposition that when a company introduces a product incorporating new technology, it is legally obligated to help its competitors design related and supporting products to compete with its own related and supporting products.   Although Kofax's introduction of the Adrenaline boards may have adversely impacted Visionshape's economic relationships with certain integrators/developers who used Vision Tools to integrate earlier generations of Kofax boards, Kofax's conduct cannot be deemed a tortious interference with those economic relationships.   As Foremost noted, development and introduction of new technologies is essential to the continued progress of our economy.  (Foremost Pro Color, Inc. v. Eastman Kodak Co., supra, 703 F.2d at p. 543.)   As a matter of policy, a manufacturer should not be held liable in tort to its competitors for upgrading its products with new technologies that render the competitors' related products ineffective or obsolete, or for choosing not to share its new technologies with competitors so they can develop competing related products.   Visionshape's complaint fails to state a cause of action for intentional interference with prospective economic advantage.

V. Negligent Interference With Economic Relationship

 In its fifth cause of action for “negligent interference with economic relationship” Visionshape alleges Kofax breached a duty of care it owed Visionshape by manufacturing and marketing Adrenaline boards in such a way they could not be integrated and developed by integrators/developers without the use of Image Controls.

 An action for negligent interference with prospective economic advantage will not lie unless the defendant owes the plaintiff a duty of care.  (LiMandri v. Judkins, supra, 52 Cal.App.4th at p. 348, 60 Cal.Rptr.2d 539.)   Visionshape's conclusory allegation Kofax owed it a duty of care is negated by allegations clearly establishing Visionshape and Kofax are business competitors.  (Stolz v. Wong Communications Limited Partnership (1994) 25 Cal.App.4th 1811, 1825, 31 Cal.Rptr.2d 229.)   Kofax did not owe Visionshape a duty to manufacture and market Adrenaline boards in such a way that they could be integrated and developed with intermediate applications sold by Visionshape and other competitors of Kofax.

Further, this court has held the requirement of independent wrongfulness-i.e., the defendant's conduct was wrongful by some legal measure other than the fact of interference itself-applies to claims of negligent interference with prospective economic advantage as well as claims of intentional interference with prospective economic advantage.  (National Medical Transportation Network v. Deloitte & Touche (1998) 62 Cal.App.4th 412, 439-440, 72 Cal.Rptr.2d 720.)   As we discussed in the preceding section, Visionshape failed to allege any conduct constituting a tortious interference with Visionshape's economic relationships, let alone conduct that was wrongful by some legal measure other than the alleged interference.   The complaint fails to state a cause of action for negligent interference with Visionshape's economic relationships.

VI. Unfair Competition

 Visionshape's sixth cause of action is for unfair competition under section 17200 et seq., Section 17209 provides:  “If a violation of this chapter is alleged or the application or construction of this chapter is in issue in any proceeding in the Supreme Court of California, a state court of appeal, or the appellate division of a superior court, the person who commenced that proceeding shall serve notice thereof, including a copy of the person's brief or petition and brief, on the Attorney General, directed to the attention of the Consumer Law Section, and on the district attorney of the county in which the lower court action or proceeding was originally filed.   The notice, including the brief or petition and brief, shall be served within three days after the commencement of the appellate proceeding, provided that the time may be extended by the Chief Justice or presiding justice or judge for good cause shown.   No judgment or relief, temporary or permanent, shall be granted until proof of service of this notice is filed with the court.”

 The purpose of section 17209 is to afford the Attorney General and local district attorney an opportunity to participate in appeals involving the unfair competition statutes (§ 17200 et seq.) as amici curiae.   (Californians for Population Stabilization v. Hewlett Packard Co. (1997) 58 Cal.App.4th 273, 285, 67 Cal.Rptr.2d 621 (Californians).)  Californians interpreted section 17209 as requiring service of the appellant's opening brief, rather than the notice of appeal, on the Attorney General and local district attorney within three days of its being filed.  (Ibid.) Although Californians held section 17209 is not jurisdictional (Id. at p. 284, 67 Cal.Rptr.2d 621), it stated:  “If the Attorney General and/or the local district attorney are not served with the opening briefs within three days of their being filed, and if time for serving the brief has not been extended for good cause shown, no judgment or relief may be granted by the court.”  (Id. at p. 285, 67 Cal.Rptr.2d 621;  Soldate v. Fidelity National Financial, Inc. (1998) 62 Cal.App.4th 1069, 1076, 72 Cal.Rptr.2d 404 [“Failure to comply with section 17209 will preclude appellate relief in the appropriate case.”])

Because the record does not show Visionshape complied with section 17209, we asked the parties to submit letter briefs addressing whether we should decline to review the court's sustaining of Kofax's demurrer as to the sixth cause of action.   Kofax submitted a letter brief, arguing Visionshape's noncompliance with section 17209 precludes appellate relief as to the sixth cause of action.   Visionshape did not submit a letter brief.   In light of Visionshape's failure to comply with section 17209, ask for an extension of time to comply, or file a supplemental brief on the matter, we decline to review the dismissal of the sixth cause of action.

VII. Denial of Leave to Amend

Although Visionshape contends the court abused its discretion by denying leave to amend in sustaining Kofax's demurrer, Visionshape does not address, and therefore has not met its burden of showing, how the defects in its causes of action could be cured by amendment.   Consequently, we conclude the court did not abuse its discretion in sustaining the demurrer without leave to amend.

DISPOSITION

The judgment is affirmed.   Costs are awarded to respondent.

FOOTNOTES

FN1. All further statutory references are to the Business and Professions Code..  FN1. All further statutory references are to the Business and Professions Code.

2.   California courts have looked to federal case law interpreting the Sherman Act as helpful in interpreting the Cartwright Act because of the similarity in language and purpose between the two acts.  (Morrison v. Viacom, Inc., supra, 66 Cal.App.4th at p. 541, fn. 2, 78 Cal.Rptr.2d 133.)

3.   The existence of an unlawful tying arrangement is further belied by Visionshape's allegation that integrators/developers need only purchase Image Controls one time to develop an intermediate application to be used to integrate Adrenaline boards.

BENKE, Acting P.J.

HALLER, J., and McINTYRE, J., concur.