Case Name: NetApp Inc. v. YAM Special Holdings, Inc., et al.
Case No.: 16-CV-301833

Plaintiff/cross-defendant NetApp, Inc. (“NetApp”) demurs to the cross-complaint (“Cross-Complaint”) filed by cross-complainant/cross-defendant Curvature, Inc. f/k/a SMS Systems Maintenance Services, Inc. (“Curvature”).

The underlying complaint in this action arises out of a contract dispute between NetApp and GoDaddy. According to the allegations of the underlying complaint (“Complaint”), NetApp and GoDaddy entered into a Master Purchase Agreement (“MPA”) under which NetApp would sell its products and services and license its software to GoDaddy. (Complaint, ¶ 11.) NetApp agreed to grant GoDaddy a nonexclusive, nontransferable license to use certain software in accordance with the terms of the MPA and other documentation, including but not limited to an End User License Agreement (“EULA”). (Id. at ¶ 12.) When a user, such as GoDaddy, would attempt to download NetApp’s software, the EULA would appear electronically and require the user to accept its terms first. (Ibid.)

Pursuant to the MPA, GoDaddy agreed to submit to NetApp a written purchase order specifying the products and/or services to be purchased or software to be licensed. (Id. at ¶ 13.) Over the course of the MPA’s term, GoDaddy purchased certain products and services and licensed certain software. (Ibid.)

Pursuant to the MPA and EULA, NetApp also had the right to conduct an audit of GoDaddy’s use of its products and software to ensure it was not violating the terms of the parties’ agreement. (Id. at ¶ 14.) In March 2015, NetApp informed GoDaddy that it intended to audit GoDaddy’s use of its products. (Id. at ¶ 15.) The audit revealed that GoDaddy and/or other defendants violated the parties’ licensing agreements in three respects. (Ibid.) First, the audit revealed that Defendants’ hardware contained unlicensed copies of NetApp’s software that had not been paid for. (Ibid.) The audit also revealed that Defendants were using five of NetApp’s data storage system controllers purchased from the secondary market. (Ibid.) As such, Defendants violated the EULA by not purchasing the licenses for the software from NetApp or obtaining its permission to transfer the licenses from the original end users. (Ibid.) Lastly, the audit revealed that Defendants downloaded and installed unauthorized upgrades to NetApp’s “ONTAP” operating system software on several controllers. (Ibid.) These upgrades were unauthorized because they took place after the support period provided to Defendants by NetApp had expired, something the EULA clearly prohibits. (Ibid.)

In May 2015, NetApp advised Defendants of the forgoing software license violations. However, Defendants denied liability and refused to pay for the unauthorized software upgrades and unlicensed software. (Id. at ¶¶ 15-16.)

Based on the foregoing allegations, on October 27, 2016, NetApp filed the Complaint asserting the following causes of action: (1) breach of contract; (2) breach of implied covenant of good faith and fair dealing; (3) common counts for goods sold and delivered; (4) unjust enrichment; and (5) unfair competition law.

On March 28, 2017, Defendants filed their initial cross-complaint against NetApp and cross-defendant SMS Systems Maintenance Services, Inc. (“SMS”), and filed the FACC on July 21, 2017. According to the allegations of this pleading, the most recent MPA entered into between the parties provided that GoDaddy could purchase other “Support Offerings … [and] Professional Services” but was not required to do so. (FACC, ¶ 9 and Exhibit A.) The former is defined in the agreement as technical and maintenance services, while the latter is defined as technical services not covered by Support Offerings. (Id.)

On information and belief, GoDaddy alleges that it developed software that allowed NetApp’s on-site experts to deploy various NetApp software programs across GoDaddy’s server environment at NetApp’s request. (FACC, ¶ 11.) The software required the on-site experts to check a box for each NetApp software program scheduled by NetApp for deployment, and in deploying the software against GoDaddy’s server environment, NetApp’s on-site experts consistently checked every box, ensuring the deployment of all available NetApp software across GoDaddy’s systems. (Id.) This full-scale deployment was not done at GoDaddy’s request. (Id.) GoDaddy did not use the majority of the deployed software, and thus was generally unaware of the breadth of its employment prior to its receipt of the results of NetApp’s audit. (Id.)

In addition to the deployment of NetApp software, the company’s on-set specialists were also responsible for maintenance and repair of the NetApp server controllers purchased by GoDaddy; included within this work was the replacement of motherboards when they failed. (FACC, ¶ 12.) At no point during the relationship between the parties did NetApp or its on-site experts claim that a separate license was need for the installation or use of such replacements; as a result, GoDaddy alleges, it believes that it either paid for and received a standalone perpetual license, or NetApp did not have any ownership interest in the motherboard software in the first place. (Id.)

In 2013, GoDaddy decided to look for an alternative maintenance service and aftermarket part provider and identified SMS as a possible replacement vendor. (FACC, ¶ 13.) SMS represented that it could source additional refurbished NetApp equipment as needed and could provide support and maintenance at more competitive rates than NetApp. (Id.) Based on these representations, GoDaddy and SMS started negotiations, which culminated in the parties entering into a written agreement with one another on January 22, 2014 (the “SMS Agreement”). (Id., ¶¶ 13-14 and Exhibit B.) The agreement imposed upon SMS a duty to indemnify, defend or hold GoDaddy harmless on claims by third parties “based upon any representations or warranties arising out of or in connection with the respective products or services, representations … of the parties, or upon alleged patent, trademark, or copyright infringement or unfair competition in connection with the respective products or services or representations of the parties.” (FACC, ¶ 15 and Exhibit B at § 7.) At the time it entered into this agreement, GoDaddy notified NetApp of its intent not to renew the parties’ maintenance agreement; in response, NetApp notified GoDaddy of its intent to conduct an audit of GoDaddy’s network environment. (Id., ¶ 18.) On April 22, 2014, SMS represented to GoDaddy that the two controllers SMS was selling to it came with various NetApp licenses. (FACC, ¶ 17 and Exhibit C.)

On August 21, 2015, NetApp notified GoDaddy that its audit revealed that GoDaddy had over-deployed NetApp’s software and consequently demanded past and prospective licensing fees, despite the fact that it was responsible for said deployment. (FACC, ¶ 19.) NetApp additionally claimed that GoDaddy had sourced certain refurbished NetApp equipment and software from “unauthorized channels.” (Id., ¶ 20.) Specifically, NetApp alleged that the licenses SMS claimed were transferred from two controllers GoDaddy purchased from SMS were not transferrable under the licensing agreement with the original purchaser of those controllers and thus, GoDaddy’s use of the hardware and related software infringed on NetApp’s intellectual property rights. (Id.) NetApp further alleged that GoDaddy’s replacement of motherboards from parts obtained from SMS on controllers purchased from NetApp also violated NetApp’s licensing agreement. (Id.) GoDaddy alleges that the operating software for the motherboard was placed into the public domain by NetApp long before GoDaddy acquired the replacement motherboards and therefore no fees were owed for its use. (Id.)
NetApp subsequently demanded that GoDaddy compensate it $1,273,174 for the latter’s use of the two controllers and three motherboards sold to it by SMS- the amount GoDaddy allegedly would have paid NetApp if it had renewed the maintenance agreement rather than cancelling it in January 2014. (FACC, ¶ 21 and Exhibit D.) After providing SMS with notice of NetApp’s claims in October 2015, GoDaddy made three written demands for SMS to indemnify, defend, and hold it harmless pursuant to the SMS Agreement. (Id., ¶ 22.) SMS refused to accept GoDaddy’s demand based, in part, on its claim that the original purchaser of the equipment had received authorization from NetApp to transfer the licenses for the two controllers at issue. (Id.)

On February 4, 2016, NetApp sent a second demand letter to GoDaddy in which it claimed that its hardware and software could only be purchased and licensed directly from NetApp or authorized resellers, or legitimized via a software license transfer authorized by NetApp. (FACC, ¶ 23.) NetApp increased its demand and threatened litigation in the event that GoDaddy did not acquiesce. (Id. and Exhibit E.) A third demand letter was sent on April 5, 2016 that was nearly identical to the preceding letter. (Id., ¶ 24 and Exhibit F.) In response, GoDaddy challenged NetApp’s contention that it was required to purchase all NetApp software exclusively through NetApp or its authorized resellers. (Id., ¶ 25.) In a further letter dated May 31, 2016, NetApp, through its counsel, continued to claim that GoDaddy’s use of software contained in any refurbished hardware required a license. (Id., ¶ 26 and Exhibit G.)

Based on the foregoing, GoDaddy filed the FACC asserting the following causes of action: (1) breach of implied warranty of title (against NetApp); (2) violation of Business & Professions Code § 17200 et seq. (the “UCL”) (against NetApp); (3) declaratory relief (against NetApp); (4) declaratory relief (against NetApp and SMS); (5) breach of contract (against SMS); (6) breach of express and implied warranties (against SMS); (7) intentional misrepresentation (against SMS); (8) negligent misrepresentation (against SMS); (9) comparative equitable indemnity (against SMS); and (10) total equitable indemnity (against SMS). A subsequent demurrer by NetApp to each of the four causes of action asserted against it in the FACC was overruled in its entirety by the Court on December 1, 2017.

On December 6, 2017, SMS (Curvature) filed the Cross-Complaint that is the subject of the instant demurrer by NetApp. According to the allegations of the Cross-Complaint, shortly after entering into the SMS Agreement with GoDaddy, SMS contracted with one of its suppliers in April 2014, Rockland IT (“Rockland”), to purchase refurbished NetApp controllers and other equipment, including replacement motherboards as requested by GoDaddy. (Cross0Complaint, ¶¶ 16-17.) On April 24, 2014, employees at Rockland represented to SMS employees that the two controllers it was purchasing came with various NetApp licenses as memorialized in the purchase order (the “Purchase Order”). (Id., ¶ 17 and Exhibits C and D.) Rockland further represented that the NetApp controllers were sourced from either a university or a law firm, who had purchased the equipment from a NetApp value added reseller. (Id., ¶ 19.) Additionally, Rockland represented that the controllers game with valid and transferable licenses for the software they contained, leading SMS to believe that the hardware licenses were valid and transferable to downstream purchasers. (Id., ¶ 20.) The controllers were subsequently shipped to GoDaddy and installer into its server network. (Id., ¶ 21.)

Separately, GoDaddy replaced three motherboards obtained from SMS which were installed by NetApp’s own on-site specialists, who at no point advised GoDaddy that it was required to purchase licenses for the replacement of any motherboards. (Cross-Complaint, ¶ 22.)

Based on an audit conducted on GoDaddy’s system environment, it is NetApp’s position that GoDaddy’s purchase of refurbished NetApp equipment is from “unauthorized channels,” particularly SMS (Curvature). (Cross-Complaint, ¶ 23.) NetApp maintains that the software licenses transferred with the two controllers were not transferrable under its licensing agreement with the original purchaser of those controllers, and therefore use of the hardware and software infringed on NetApp’s intellectual property rights. (Id.) NetApp further asserts that the motherboards purchased by GoDaddy further violated its licensing agreements. (Id.)

In 2016, Rockland merged with MSDI, LLC to form a new entity, Congruity LLC (“Congruity”), which assumed the liabilities and obligations of Rockland which existed at that time. (Cross-Complaint, ¶ 2.) SMS’s (Curvature) Cross-Complaint is asserted against Congruity (Rockland), NetApp, and GoDaddy and asserts the following causes of action: (1) declaratory relief (against all cross-defendants); (2) breach of contract (against Rockland); (3) breach of warranty of title (against Rockland); (4) negligent misrepresentation (against Rockland); (5) negligence (against Rockland); (6) comparative equitable indemnity (against Rockland); and (7) total equitable indemnity (against Rockland). On January 24, 2018, NetApp filed the instant demurrer to the first cause of action in the Cross-Complaint on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Curvature (SMS) opposes the motion.

In arguing that no claim for declaratory relief against it has been stated, NetApp makes the following arguments: (1) the Cross-Complaint fails to allege an “actual controversy” because (a) any actual dispute between NetApp and Curvature is not ripe, (b) Curvature lacks standing to seek declaratory relief against NetApp, (c) the Cross-Complaint fails to allege the judicial declaration sought; (2) the claim is improperly based on past alleged misconduct; and (3) the claim is redundant of NetApp and GoDaddy’s claims and cross-claims against one another.

As a general matter, “[t]he fundamental basis of declaratory relief is the existence of an actual, present controversy over a proper subject.” (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 79.) The language of the statutory basis for a declaratory relief cause of action, Code of Civil Procedure section 1060, is relatively broad and provides as follows:

Any person interested under a written instrument, excluding a will or a trust, or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property, … may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint … for a declaration of his or her rights and duties in the promises, including a determination of any question of construction or validity arising under the instrument or contract.

Despite the broad language, courts “will nevertheless evaluate in the context of a demurrer whether the factual allegations of the complaint for declaratory relief reveal that an actual controversy exists between the parties.” (Otay Land Co. v. Royal Indem. Co. (2008) 169 Cal.App.4th 556, 562.) The controversy must be “justiciable,” a concept which involves “the intertwined criteria of ripeness and standing.” (California Water & Tel. Co. v. Los Angeles County (1967) 253 Cal.App.2d 16, 22.) “A controversy is ‘ripe’ when it has reached, but has not passed, the point that the facts have sufficiently congealed to permit an intelligent and useful decision to be made.” (Id.) A party seeking declaratory relief does not have “standing” to maintain the action “if he, or those whom he properly represents, does not have a real interest in the ultimate adjudication because the actor has neither suffered nor is about to suffer any injury of sufficient magnitude reasonably to assure that all of the relevant facts and issues will be adequately presented.” (Id. at 23.)

Here, as set forth above, NetApp first maintains that any dispute between itself and Curvature is not yet ripe because the allegations of the Cross-Complaint only allege a dispute between NetApp and GoDaddy, and Curvature (SMS), NetApp and Congruity, but not between Curvature and NetApp. NetApp emphasizes that Curvature has not pleaded the existence of any transaction or contract between itself and NetApp, nor alleged that NetApp has accused Curvature of committing any misconduct. Its dispute, NetApp emphasizes, relates only to its software licensing agreements with GoDaddy, an agreement to which Curvature is not a party. NetApp also takes umbrage with Curvature’s contention in the Cross-Complaint that there is an “issue” as to whether it “is able to control or dictate the downstream users of motherboards or controllers that may or may not contain copyright protectable software” (Cross-Complaint, ¶ 26) because Curvature is not alleged to be a “downstream user[]”; only GoDaddy is. Finally, NetApp notes that while Curvature alleges that it is “wrongfully asserting copyright claims that are invalid” (Cross-Complaint ¶ 29) and is “misusing its licenses with regard to aftermarket parts and unfairly and improperly punishing its customers” (Cross-Complaint, ¶ 30), NetApp has not asserted any copyright claims against Curvature and does not allege that it has any licensing agreement with the company.

As for the second component of justiciability, NetApp argues that Curvature lacks standing to seek declaratory relief as to NetApp because the Cross-Complaint fails to allege any business or contractual relationship between the two companies, much less a sufficient factual basis for any future business or contractual relationship that might give rise to the need for a judicial declaration. With the foregoing, NetApp posits, Curvature has no legal interest in the dispute that is actually alleged, i.e., the one between NetApp and GoDaddy.

The Court does not find the foregoing arguments by NetApp to be persuasive. With regard to standing, while it is true, as NetApp contends, that no direct business or contractual relationship between itself and Curvature has been alleged, “standing” for the purposes of asserting a claim for declaratory relief has not been so narrowly defined. To reiterate, a party has standing to maintain such a claim where he has “a real interest in the ultimate adjudication” because he has “suffered [or will suffer] … [an] injury of sufficient magnitude reasonably to assure that all of the relevant facts and issues will be adequately presented.” (California Water & Tel. Co., supra, 253 Cal.App.2d at 22-23.) Because Curvature has alleged that it has been sued by GoDaddy for its actions relating to the sale of the replacement controllers and motherboards to the company that contained NetApp software, and these transaction are also the basis of NetApp’s claims against GoDaddy, Curvature clearly has a “real interest in the ultimate adjudication.” If it is determined that GoDaddy violated its licensing agreement with NetApp by purchasing aftermarket parts containing its software from vendors such as Curvature (SMS), Curvature would realize an injury because its business hinges in part on its ability to buy, refurbish, and resell (or install) used computer equipment, including that originally manufactured by NetApp. If NetApp is able to bring copyright claims against Curvature’s customers as a result of Curvature’s sale of used NetApp equipment, than Curvature’s ability to sell that equipment will be completely hampered. As its ability to do so is already in question due to NetApp claims against GoDaddy, the controversy at issue is “ripe.” Thus, Curvature has sufficiently pleaded a justiciable, actual controversy.

With regard to its next argument, that the Cross-Complaint fails to allege the judicial declaration being sought, NetApp maintains that this is the case because Curvature merely alleges that a “judicial declaration is necessary so that each of the parties may ascertain their rights and duties with respect to the refurbished aftermarket NetApp equipment purchased by SMS from Rockland IT, and provided to and sold to GoDaddy,” which fails to specify what rights it believes it has in the equipment. (Cross-Complaint, ¶ 31.)

The Court finds NetApp’s contention unavailing. Upon review of the declaratory relief claim in toto, it is clear that Curvature is seeking a determination as to whether or not it may legally sell refurbished NetApp hardware which contains NetApp software. Where a party has “set forth facts showing the existence of an actual controversy and [has] requested that these rights be adjudged by the court in a matter in which the court is competent to grant declaratory relief, [it] has stated a legally sufficient complaint.” (Jefferson, Inc. v. City of Torrance (1968) 266 Cal.App.2d 300, 302.) Curvature has stated such facts.

NetApp next argues that the declaratory relief claim is demurrable because it is based entirely on past alleged misconduct, and “there is no basis for declaratory relief where only past wrongs are involved.” (Osseous Technologies of America, Inc. v. DiscoveryOrtho Partners LLC (2010) 191 Cal.App.4th 357, 366 [internal citation omitted].) While this is a true statement of law, Curvature, with its claim for declaratory relief, also seeks a declaration of it rights for the purpose of determining whether its current business practices might lead to future copyright claims against its customers as a result of its sale of used NetApp equipment. Critically, “[d]eclaratory relief operates prospectively, serving to set controversies at rest. If there is a controversy that calls for a declaration of rights, it is no objection that past wrongs are also to be addressed; but there is no basis for declaratory relief where only past wrongs are involved.” (Id. [emphasis added].) Thus, simply because the declaratory relief claim is predicated on acts which already took place (i.e., the transactions between GoDaddy and Curvature for the controllers and motherboards) is not a reason to sustain NetApp’s demurrer because the claim is not predicated solely on those past alleged wrongs.

Finally, NetApp asserts that Curvature’s declaratory relief claim is redundant of it and GoDaddy’s claims and cross-complaints, as it is also predicated on the dispute between NetApp and GoDaddy arising from GoDaddy’s allegedly unlicensed installation and use of NetApp’s proprietary software, a violation of those parties’ licensing agreement. While the Court agrees that Curvature’s claim shares many similarities with those asserted by NetApp and GoDaddy, it does not agree that the claim is redundant because with it, Curvature seeks prospective relief in the face of potential future copyright claims by NetApp against Curvature’s customers that is specific to Curvature and not GoDaddy. This makes this claim distinct from those asserted by NetApp and GoDaddy. Thus, this argument is without merit.

In accordance with the foregoing analysis, NetApp’s demurrer to Curvature’s first cause of action on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.