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TD Ameritrade, Inc. v. Matthews

United States District Court, D. Alaska

October 25, 2017

TD AMERITRADE, INC., TD AMERITRADE HOLDING CORPORATION, INC., TD AMERITRADE IP COMPANY, INC., and TD AMERITRADE SERVICES COMPANY, INC., Plaintiffs,
v.
JAMES RICHARD MATTHEWS, Defendant.

          ORDER RE MOTION TO DISMISS

          SHARON L. GLEASON, UNITED STATES DISTRICT JUDGE

         Before the Court at Docket 41 is Plaintiffs' Rule 12(b)(6) Motion to Dismiss. The motion has been fully briefed.[1] Oral argument was not requested and was not necessary to the Court's decision.

         Plaintiffs (collectively, "TD Ameritrade") initiated this action on June 27, 2016.[2] TD Ameritrade's Amended Complaint asserts three causes of action: declaratory judgment, cancellation and release of claimed nonconsensual common law lien pursuant to Alaska law, and injunctive relief.[3] Defendant James Matthews filed an Answer to the Amended Complaint that also asserted a counterclaim for copyright infringement.[4] On March 20, 2017, Mr. Matthews filed an Amended Answer asserting seven additional counterclaims.[5]

         The Court has jurisdiction as to Mr. Matthews' copyright infringement claims under federal question jurisdiction.[6] The Court has supplemental jurisdiction over Mr. Matthews' state law counterclaims.[7]

         STANDARD OF REVIEW

         TD Ameritrade moves to dismiss all of Mr. Matthews' counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6) and the Supreme Court's interpretation of that rule in Ashcroft v. Iqbal[8] "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'"[9] Iqbal does not require a litigant to prove his case in his pleading, but it requires the litigant to "state 'enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the misconduct alleged].'"[10] The pleading must contain "enough facts to state a claim to relief that is plausible on its face."[11] This inquiry requires a court to "draw on its judicial experience and common sense."[12] When reviewing a Rule 12(b)(6) motion, a court considers only the complaint and other pleadings, documents incorporated into the pleadings by reference, and matters on which a court may take judicial notice.[13]

         When a motion to dismiss for failure to state a claim is granted, a court "should freely give leave when justice so requires."[14] But leave to amend is properly denied as to those claims for which amendment would be futile.[15]

         BACKGROUND

         For purposes of TD Ameritrade's Motion to Dismiss, the Court accepts the factual allegations in Mr. Matthews' operative pleading as true and "construe[s] them in the light most favorable" to him.[16] According to the First Amended Answer and Counterclaims, in April 2012, Mr. Matthews applied for an unfunded user-modifiable investment account with TD Ameritrade.[17] At or about the same time as he opened the account, Mr. Matthews entered into a Client Agreement with TD Ameritrade.[18] The account provided Mr. Matthews access to TD Ameritrade's "thinkorswim" applications program interface ("API"), which gave him the ability to create his own analytical tools for a self-directed trading environment.[19] Mr. Matthews alleges that users such as him were permitted to download the API and "were encouraged to devise their own software programs" by "modifying software routines available on the site."[20] Mr. Matthews alleges that "all copyrighted routines created by TD Ameritrade [were] locked, and thus could not be modifiable."[21] After signing up for an account, Mr. Matthews alleges that he used the API to create analytical routines "in a novel manner."[22] By May 27, 2012, Mr. Matthews alleges that he had created source code for over 100 routines to work with the thinkorswim API.[23]

         On May 27, 2012, Mr. Matthews alleges that TD Ameritrade "perpetrated a cyber attack" which "destroyed [Mr. Matthews'] hard drive controller."[24] Mr. Matthews had saved 84 of the routines he had developed on another hard drive, so they were not destroyed by the cyber attack.[25] However, Mr. Matthews asserts that TD Ameritrade had copied the routines he had created, all or most of which had copyright notices that Mr. Matthews had imbedded in them.[26] After obtaining Mr. Matthews' software, TD Ameritrade is alleged to have inserted its own copyright notice and date into Mr. Matthews' software.[27] TD Ameritrade alleges that it terminated its business relationship with Mr. Matthews in early June 2012.[28] Mr. Matthews maintains that TD Ameritrade had "effectively wrongfully terminated" his account on May 27, 2012.[29]

         Mr. Matthews filed a copyright notice for the 84 routines under United States Copyright Registration Number TXu1-822-654 effective June 28, 2012.[30] Mr. Matthews asserts that TD Ameritrade has been using his routines and allows at least 6.5 million of its funded users to use Mr. Matthews' code without his authorization.[31]

         DISCUSSION

         Mr. Matthews alleges eight counterclaims: a copyright infringement claim in violation of 17 U.S.C. § 101 etseq.; one claimed violation of 17 U.S.C. §§ 1201 and 1202; a claim seeking injunctive relief on claims one and two; a violation of Alaska Statute 45.50.471, the Unfair Trade Practices Act; two claims of breach of contract and breach of the implied covenant of good faith and fair dealing; trespass on real property; and a demand for accounting.[32] TD Ameritrade moves to dismiss each counterclaim for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court will address each claim in turn, and consistent with the Supreme Court's guidance in Iqbal, "begin[s] by taking note of the elements a plaintiff must plead to state a claim."[33]

         1. Copyright Infringement

         Mr. Matthews' First Counterclaim alleges copyright infringement. To state a prima facie case of direct copyright infringement under 17 U.S.C. § 101, et seq., a party must satisfy two requirements: "(1) they must show ownership of the allegedly infringed material and (2) they must demonstrate that the alleged infringers violate at least one exclusive right granted to copyright holders under 17 U.S.C. § 106."[34]

         TD Ameritrade asserts that Mr. Matthews "does not have ownership rights in any asserted copyrightable work" and that it holds "all copyrights relative to the thinkorswim software."[35] Mr. Matthews responds that registration of a copyright is prima facie evidence of a valid copyright.

         "[T]he registration of the copyright certificate itself establishes a prima facie presumption of the validity of the copyright in a judicial proceeding . . ., "[36] But the statutory presumption of validity can be rebutted.[37] To rebut this presumption, a party disputing validity of the copyright "must simply offer some evidence or proof to dispute or deny the plaintiffs prima facie case of infringement."[38]

         Although Mr. Matthews alleges that he has obtained a copyright registration for his code, TD Ameritrade points to the Client Agreement to rebut the presumption of the copyright's validity. Mr. Matthews acknowledges he signed and agreed to the terms of the Client Agreement, which states that "[m]y use of [TD Ameritrade's] Services will not confer any title, ownership interest, or intellectual property rights to me."[39] The agreement also expressly prohibits Mr. Matthews from creating derivative works: "I will not. . . create derivative works from, distribute, redistribute, display, sell or transfer, or create derivative products from the Services."[40] Thus, even if Mr. Matthews obtained a copyright registration for work he claims is original and novel, he appears to be precluded from obtaining a copyright of any derivative works by the terms of the Client Agreement.

         Yet Mr. Matthews alleges in his First Amended Answer and Counterclaims that users of TD Ameritrade's API "were permitted and encouraged to modify certain software routines available on the site . . . ."[41] However, Mr. Matthews has not alleged any facts as to who, how, or when he was "permitted and encouraged" to modify TD Ameritrade's software. Moreover, Mr. Matthews has not alleged any basis to disregard the restriction on derivative works in the Client Agreement.

         In reply, TD Ameritrade asserts that dismissal is warranted because Mr. Matthews has provided no factual allegations to support his claim that TD Ameritrade permitted and encouraged him to use its software.[42] The Court agrees. Mr. Matthews' claim that he had been given the authority to create and copyright derivative work appears to be directly at odds with the Client Agreement. While such a claim is possible, Mr. Matthews has failed to allege any facts to demonstrate that the claim is plausible.[43] Accordingly, TD Ameritrade's Motion to Dismiss as to the First Counterclaim will be granted. However, leave to amend will be accorded so as to permit Mr. Matthews the opportunity to allege nonconclusory facts that explain why Mr. Matthews' alleged software modifications to TD Ameritrade's API are protected by a valid copyright.

         2. Digital Millennium Copyright Act

         Mr. Matthews' Second Counterclaim alleges violations under 17 U.S.C. §§ 1201 and 1202 of the Digital Millennium Copyright Act. Section 1201(a) provides "[n]o person shall circumvent a technological measure that effectively controls access to a work protected under this title." TD Ameritrade contends that Mr. Matthews has not provided facts to show that TD Ameritrade bypassed the requisite technological measure in accessing and obtaining Mr. Matthews' code.[44] Mr. Matthews asserts that "it is . . . common knowledge that hard drives have for many years . . . used encryption technology to secure information on the hard drives."[45]

         A technological measure "effectively controls access to a work if the measure, in the ordinary course of its operation, requires the application of information, or a process or a treatment, with the authority of the copyright owner, to gain access to the work."[46] The House Judiciary Committee provided the following analogy:

[t]he act of circumventing a technological protection measure put in place by a copyright owner to control access to a copyrighted work is the electronic equivalent of breaking into a locked room in order to obtain a copy of a book.[47]

         Mr. Matthews' First Amended Answer and Counterclaims alleges that TD Ameritrade hacked his computer, "destroyed Defendant's hard drive controller, " and "copied the routines" he had created.[48] But Mr. Matthews did not allege any facts regarding the security of his hard drive or facts to indicate that his hard drive had encryption technology that was circumvented by TD Ameritrade. Although a hard drive with adequate protections could be a "technological measure, " Mr. Matthews has failed to allege sufficient facts to push this claim "across the line from conceivable to plausible."[49]

         Mr. Matthews also alleges that TD Ameritrade violated 17 U.S.C. § 1202 of the Digital Millennium Copyright Act.[50] Section 1202(b) provides that "[n]o person shall, without the authority of the copyright owner or the law . . . (1) intentionally remove or alter any copyright management information ... ."[51] Under the statute, "copyright management information" includes "[t]he name of, and other identifying information about, the author of a work."[52]

         TD Ameritrade asserts that Mr. Matthews "does not provide any copyright management information" and did not allege that TD Ameritrade "intentionally removed or altered such information."[53] But in Mr. Matthews' First Amended Answer and Counterclaims, Mr. Matthews alleges that after TD Ameritrade stole his software, it removed or struck through his copyright notice that he had imbedded in the software.[54]However, as discussed above, Mr. Matthews has not shown valid ownership of a copyright.[55] Ownership of a valid copyright is a predicate to asserting a claim under the Digital Millennium Copyright Act.[56] As discussed above with regard to the copyright infringement counterclaim, the existence of a valid copyright has not been adequately pleaded. Accordingly, Mr. Matthews' Second Counterclaim will be dismissed with leave to amend.

         3. Injunctive Relief

         Mr. Matthews' Third Counterclaim seeks injunctive relief as it relates to both the First and Second Counterclaims. As discussed above, Mr. Matthews has not pleaded facts to establish a plausible claim for either copyright infringement or violations to the Digital Millennium Act. Therefore, Mr. Matthews' claim for injunctive relief will also be dismissed with leave to amend.

         4. Unfair Trade Practices Act

         Mr. Matthews' Fourth Counterclaim alleges TD Ameritrade violated Alaska's Unfair Trade Practices Act.[57] Mr. Matthews does not oppose dismissal of this claim, but asserts it should be without prejudice. In an affidavit appended to TD Ameritrade's Complaint, Mr. Matthews stated that "on or about, April 11, 2012 Affiant discovered his, (copyrighted source code) was appropriated, copied and placed in [TD Ameritrade's] publicly accessible library for use by all other system users."[58] Mr. Matthews was aware of TD Ameritrade's alleged misappropriation in 2012, yet he did not file this counterclaim until 2016, considerably more than two years after the statute of limitations on this claim had run.[59] Based on the foregoing, TD Ameritrade's Motion to Dismiss Mr. Matthews' Fourth Counterclaim under the Unfair Trade Practices Act will be granted with prejudice and without leave to amend.

         5. Breach of Contract and Implied Covenant of Good Faith and Fair Dealing

         Mr. Matthews' Fifth and Sixth Counterclaims each allege breach of contract and breach of implied covenant of good faith and fair dealing under Nebraska, Alaska, and/or Illinois law.[60] To establish a breach of contract claim in Alaska, Nebraska, or Illinois, a claimant must establish the existence of a contract, a breach of that contract, and resultant damages.[61]

         Mr. Matthews' Fifth Counterclaim alleges that TD Ameritrade violated a licensing agreement published on TD Ameritrade's website. The pleading references the agreement as being annexed as Exhibit A; but no agreement was annexed. Mr. Matthews has failed to state a claim for breach of contract in his Fifth Counterclaim. He has failed to clearly identify the contractual agreement that existed between TD Ameritrade and himself; he has failed to identify the specific provision(s) of that agreement that he is alleging was breached by TD Ameritrade and when and how that breach occurred; and he has failed to identify the damages he incurred as a result of that alleged breach. However, because it appears there was some contractual relationship between the parties at some point, one final opportunity to amend as to this claim will be granted. Since Mr. Matthews fails to identify the contract he is alleging that TD Ameritrade breached, he has also not pleaded enough facts to establish a claim for breach of the implied covenant of good faith and fair dealing. Accordingly, the Fifth Counterclaim will be dismissed with leave to amend.

         Mr. Matthews' Sixth Counterclaim alleges that TD Ameritrade's cancellation of his account constituted a breach of contract.[62] However, the Client Agreement between the parties specifies that TD Ameritrade "reserve[s] the right to suspend and deny access to the Services without prior notice or for any reason."[63] It is not plausible that TD Ameritrade's cancellation of Mr. Matthews' account constituted a breach of contract. Nor has Mr. Matthews pleaded any facts that could plausibly support a claim for a breach of the implied covenant of good faith and fair dealing based on the ...


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