COVETRUS INC et al v. ACTIAN CORPORATION

UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
COVETRUS INC., and VETERINARY )
DATA SERVICES, INC., 	)
)
Plaintiffs and Counterclaim 	)
Defendants, 	)
)
v. 	) 	No. 2:21-cv-00097-LEW
)
ACTIAN CORPORATION, 	)
)
Defendant and Counterclaim 	)
Plaintiff. 	)
ORDER ON MOTION TO DISMISS
The controversy in this case arises out of a software lease and copyright law. The
Defendant, Actian Corporation, is a software company. One of its copyrighted products is
Data Integrator. Plaintiffs, Covetrus, Inc. and Veterinary Data Services, Inc. (“VDS”), are
related business entities. According to their Complaint (ECF No. 1), VDS – but not
Covetrus – utilizes Data Integrator in its business and is party to an end user license
agreement (“EULA”) with Actian that authorizes it to do so.
The dispute relates to whether or not Plaintiffs violated the EULA by installing Data
Integrator on more computers than authorized, allowing more individuals to utilize the
software than is permitted under the EULA, and/or utilizing the software beyond the scope
of the use authorized in the EULA. Plaintiffs filed suit preemptively in this Court1 to
1 Covetrus, parent of VDS, is a Maine domiciliary. Actian is domiciled in California.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 1 of 12 PageID #:
<pageID>

2
request a judgment declaring that VDS has not violated Actian’s copyright or breached the
terms of the EULA, and that Covetrus is not a party to or liable for breach of the EULA
and has no liability for copyright infringement because it is not a user of the software. In
response, Actian has asserted Amended Counterclaims against both Plaintiffs for breach of
the EULA and violation of Actian’s copyright in the software.
The matter is before the Court on Plaintiffs’ Motion for Partial Dismissal of
Defendant’s Amended Counterclaim (ECF No. 45). Plaintiffs argue the counterclaims do
not state any claim against Covetrus and do not state a breach of contract claim against
VDS. 	The 	motion 	papers 	also 	raise 	the 	possibility 	for 	further 	amendment 	of 	the
counterclaims’ supporting allegations; Actian requests leave to amend in the event the
Court finds the allegations in the Amended Counterclaim deficient on the issue of
Covetrus’s liability as corporate parent to VDS. Actian’s Opp’n 16-21 (ECF No. 59);
Proposed Second Am. Counterclaims (ECF No. 59-2).
B ACKGROUND
The introduction to this order sufficiently outlines the relevant facts for decision,
except for the adequacy of Actian’s allegations that Covetrus is a proper counter-defendant.
On that issue, Actian’s Amended Counterclaim (ECF No. 37) states as follows:
5. Actian is informed and believes, and on that basis alleges, that at all
relevant times, each of the Counter-Defendants was, and is, the agent, servant
and/or employee of each of the other [Counter] Defendants, and that all of
the things alleged to have been done by each [Counter] Defendant were done
in the capacity of and as agent of the other [Counter] Defendants.
6. Actian is informed and believes, and on that basis alleges that Counter-
Defendants were each acting as the agents of each other are alter egos and
are, therefore, jointly and severally liable for the counterclaims asserted by
Actian.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 2 of 12 PageID #:
<pageID>

3
In addition to these essentially conclusory allegations, Actian alleges that both
Counter-Defendants used the software outside the scope of the use authorized in the EULA.
Amended Counterclaim ¶¶ 26-27, 44, 51.
In its proposed Second Amended Counterclaim (ECF No. 59-2), Actian expands its
allegations concerning Covetrus’s participation in matters giving rise to the litigation. The
expanded allegations are as follows:
7. There has existed and currently exists substantial continuing involvement
by Covetrus specifically with respect to the infringing activity of VDS.
Additionally, there has been inadequate observance of corporate formalities
between Covetrus and VDS, inadequate maintenance of separate accounting
systems on the part of VDS, Covetrus is exercising complete authority over
the daily operations of VDS, and Covetrus has a high degree of control over
the general policy and administration of the VDS. Facts evidencing the
foregoing include but are not limited to all of the following:
A. Covetrus took responsibility to pay for the Actian Software. For
example, Exhibit B hereto is a Sales Order directing Actian to send VDS bills
to a Maine address that is identical to that of plaintiff Covetrus, as admitted
by Plaintiffs in their First Amended Complaint, ¶ 7 (alleging that “Covetrus
is a Delaware Corporation with its headquarters located at 7 Custom House
Street, Portland, Maine 04101.”)
B. Covetrus employees were directly, substantially and continuously
involved in the process of negotiating for the procurement of software to be
ostensibly used by VDS, and likely Covetrus as well, and such Covetrus
employees that were in essence running VDS’ operations include but are not
limited to: …
C. As of on or about February 27, 2021, prior to the filing of this lawsuit,
there were no VDS employees involved in Plaintiffs’ discussions with Actian
relating to VDS and Covetrus’ wrongful use of the Software, and all such
discussions were being handled solely by Covetrus employees, or individuals
with “covetrus.com” email addresses and who represented themselves to be
employees of Covetrus, Inc.;
D. VDS employees who were formerly involved with interactions with
Actian, including but not limited to Chauncey Fannin and Josh Johnson, have
quit VDS, been fired by VDS, or are otherwise no longer working for VDS,
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 3 of 12 PageID #:
<pageID>

4
and their job responsibilities have been transferred to Covetrus employees
including but not limited to those Covetrus employees named above;
E. In or about December 2020 – January 2021, when Actian sent a self-
audit form 	to VDS, the self-audit form response by VDS to Actian was
managed and handled by Covetrus employee Kristen Parisien …, rather than
an employee at VDS;
F. At least some employees of Covetrus also have email addresses of
VDS …;
G. In its annual reports, e.g., 2020 10K p. 63, Covetrus represents to
investors that it provides “data integrations” including “data conversions,”
which is the same service that VDS claims to be providing using Actian’s
DataConnect software;
H. Covetrus’ then-Chief Commercial Officer Todd Haedrich represented
to third parties, e.g., on or about March 12, 2021, that “Covetrus, Inc.” is the
“successor-in- interest to Veterinary Data Services, Inc.,” and referred such
third parties who had previously interacted directly with VDS, to interact
with Covetrus employees, including Covetrus’ Senior Director of Product
Management Rocco Toppi, Covetrus’ EVP & President Georgia Wraight,
and Covetrus’ Vice President, Digital & B2B eCommerce Delivery Sal
Shaikh;
I. By and through its counsel, Covetrus represented on or about October
1, 2021 that there is “nothing to inspect” in VDS’s physical office location
in Lexington Kentucky, and has represented that the VDS office in Kentucky
is an “empty office”;
J. VDS’s “Meet the Team” website lists employees who represent to the
public that they are employees of “Covetrus,” including but not limited to
…;
K. Covetrus has posted jobs and is actively recruiting for employees to
work in the Lexington, KY area where VDS claims to be located, indicating
that VDS’ operations are in fact being managed by none other than Covetrus;
L. VDS has few or no employees that work in the areas of legal, finance,
or business operations, indicating that Covetrus is in fact controlling and
managing the business operations of VDS;
M. Covetrus has represented through counsel that Covetrus employees
will testify on behalf of VDS in a corporate capacity, and VDS has not
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 4 of 12 PageID #:
<pageID>

5
identified any employees who will testify in a corporate capacity on behalf
of VDS;
N. VDS’ website at vetdata.com represents that Covetrus products are
their 	own, 	stating, 	e.g., 	“We 	Build 	the 	Tools 	for 	the 	Vet 	Industry,”
referencing a product called “Covetrus Connect Marketplace”; and
O. Covetrus, a public company, has represented to its investors that it was
“very important” for investors to understand that, from “day 1,” the Company
had “brought together these different business groups into a single face to
customer” (including VDS), and that they were no longer operating as
“standalone legacy businesses,” and that Covetrus had “achieved a deep
integration” in the Company’s core operations critical to its financial health,
and that they had “brought our… 3 various sales organizations … together
into a now tightly integrated, stood-up, aligned group that’s now representing
the total scope of our capabilities,” and further that because of such “deep
integration” of software and sales forces (including VDS), Covetrus already
had rising sales in the second quarter of 2019 (“Q2 2019”) and was outpacing
the competition as it was in “share-gaining mode in the market.”
D ISCUSSION
A. Timeliness
Before turning to Covetrus’s and VDS’s arguments for dismissal, Actian says their
Motion tp Dismiss should be denied as untimely. Actian filed its Amended Counterclaim
on September 1, 2021 (see ECF No. 37). Covetrus and VDS did not file their Motion to
Dismiss until September 22, 2021 (see ECF No. 45). Rule 15(a)(3) allows for a response
to an amended pleading to be filed within the timeframe for responding to the original
pleading or 14 days after service of the amended pleading, whichever is later, unless the
court orders otherwise. Covetrus and VDS missed the deadline by six days. Ordinarily, a
late filing must be introduced by a motion for leave to file. Covetrus and VDS omitted a
motion for leave to file.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 5 of 12 PageID #:
<pageID>

6
Despite the shortcomings outlined above, I overrule the tardiness objection. The
docket reflects that the parties have repeatedly extended the scheduling order’s deadlines
and I see no basis for crying foul under the circumstances, especially where the deadline
was missed by a mere six days.
B. Merits
Actian alleges in its Amended Counterclaim that its breach of contract and copyright
claims are based in substantial part2 on version 9 of its Data Integrator software, purchased
by VDS in January 2020, and that the EULA associated with version 9 defines the scope
of the license to use version 9. Am. Counterclaim ¶¶ 10-13, 18. Covetrus and VDS argue
the allegations are insufficient to state anything more than a copyright claim against VDS
and they request the dismissal of the entire Amended Counterclaim against Covetrus and
the breach of contract counterclaim against VDS.
A motion to dismiss tests the adequacy of a pleading’s allegations. Fed. R. Civ. P.
12. In this instance, the test is whether the allegations in Actian’s Amended Counterclaim
(ECF No. 37) state plausible counterclaims against Covetrus and a plausible contract
counterclaim against VDS. Fed. R. Civ. P. 12(b)(6); Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009); Germanowski v. Harris, 854 F.3d 68, 71 (1st Cir. 2017). If they do, Actian is
content proceeding on its Amended Counterclaim. If they do not, Actian seeks leave to
amend so that it can proceed on its proposed Second Amended Counterclaim. The Second
Amended Counterclaim is designed, specifically, to keep Covetrus as a counterclaim
2 VDS obtained a license to one or more earlier versions of the software. Whether those earlier versions
support or undermine the claims or counterclaims is an issue, but it is not an issue demanding resolution at
the pleading stage.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 6 of 12 PageID #:
<pageID>

7
defendant. I begin with the breach of contract claim before considering whether the
allegations make Covetrus a proper counterclaim defendant.
1. 	Breach of contract
VDS and Covetrus observe that the EULA states that the license it grants is
terminated upon any breach of the EULA’s terms, without specifying other remedies. Mot.
7. Based on the termination provision, VDS reasons that the very first time it allegedly
engaged in unauthorized use of the software the license immediately terminated, and
consequently Actian’s “recovery for any alleged unauthorized use by Covetrus [sic] after
the first breach is limited to retaining the paid-up royalty and other past payments, and
recovery based on copyright infringement.” Id. Based on this logic, VDS argues the breach
of contract claim should be dismissed for lack of an available damages remedy. Id. at 7-8.
The EULA for version 9 states that Texas law governs its terms. Under Texas law,
“[d]amages are an essential element of a breach of contract claim.” Miner Dederick Const.,
LLP v. Gulf Chem. & Metallurgical Corp., 403 S.W.3d 451, 463 (Tex. App.—Houston [1st
Dist.] 2013, pet. denied). The question is whether, under Texas law, a EULA with such a
termination provision can support an award of damages based on unpaid licensing fees. If
Covetrus and VDS are correct, it would suggest that Texas affords no common law remedy
to a software designer for breach of a EULA in the absence of federal copyright law. That
strikes me as a doubtful proposition.
Actian requests contract-based damages in its pleadings. For purposes of a motion
to dismiss, that strikes me as enough to state a claim for damages in this particular scenario,
at least in the absence of an on-point, Texas authority to the contrary. VDS and Covetrus
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 7 of 12 PageID #:
<pageID>

8
have not cited authority on that narrow issue, and I see no reason why I should resolve the
issue at the pleading stage since, practically speaking, it will do nothing to reduce the
factual scope or complexity of this case moving forward.3 Furthermore, Texas law is
consistent with other jurisdictions in allowing persons harmed by a breach of contract to
recover, inter alia, expectation damages, “the amount necessary to place [the plaintiff] in
the position it would have occupied if the contract had been performed,” Range v. Calvary
Christian Fellowship, 530 S.W.3d 818, 831 (Tex. App. 2017), or restitution damages,
which “restore to the plaintiff a benefit that it had conferred on the defendant,” Atrium Med.
Ctr., LP v. Houston Red C LLC, 595 S.W.3d 188, 193 (Tex. 2020). The question, it seems,
is whether the parties contemplated that there would be a fee associated with graduated
license rights. For purposes of a motion to dismiss, an inference to that effect is plausible.
So too is the inference that a software vender experiences a pecuniary loss measured by the
licensing fees a user should have paid for greater-than-licensed use of the software. See,
e.g., Med. Coll. of Wisconsin Inc. v. Attachmate Corp., No. 15-CV-151-JPS, 2016 WL
697145, at *16 (E.D. Wis. Feb. 19, 2016) (finding that plaintiff was entitled to lost license
fees resulting from breach). Because liability in damages based on unpaid licensing fees
appears to be one plausible outcome for the contract counterclaim, the request to dismiss
due to the supposed unavailability of damages is denied.
2. 	Covetrus
Actian alleges that Covetrus and VDS are integrated enterprises that serve as the
3 Covetrus and VDS say it would simplify future proceedings, but they do not elaborate. Reply 4 (ECF No.
62).
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 8 of 12 PageID #:
<pageID>

9
mutual agents of one another and/or are alter egos, and consequently they share liability to
Actian for breach of the EULA and copyright violations. Am. Counterclaim ¶¶ 5-6.
Covetrus argues the allegations of integration and alter ego status are too conclusory or
plain vanilla to extend these counterclaims to Covetrus, which was never named a party to
a EULA for Data Integrator.4 Mot. 3, 5. Covetrus cites precedent holding that a disclosed
agent is not liable for contracts executed on behalf of a principal and that a non-signatory
to a contract is not considered a party to the contract. Id. at 3 n.2, 5. Here, however, the
alter ego allegations assert more than a one-way agency relationship. Plaintiffs also cite
precedent stating that a parent is not liable for copyright infringement carried out by its
subsidiary, simply by dint of parenthood status. Id. at 6. Again, the allegations suggest a
role for Covetrus beyond mere ownership of VDS, although that role is merely labeled in
conclusory fashion in the Amended Counterclaim.
That brings us to Actian’s proposed Second Amended Counterclaim, through which
Actian offers to amplify its factual pleadings on the co-agency/alter-ego/participation
score. My reading of the proposed second amended pleading supports a plausible finding
of shared liability, such that Covetrus could be liable, depending on the evidence, for
participation in the events giving rise to this litigation, even if the evidence would not
support piercing the corporate veil for all purposes. For example, a corporate parent can be
liable for “direct participation” in transaction-specific conduct that produces breaches of
4 Covetrus also notes that it was organized in 2019 and argues this fact means it could not be party to a
relevant contract with Actian. Mot. 5 n.3. However, Covetrus’s 2019 organization is not a sufficient ground
for dismissal of the counterclaims. According to the pleadings, VDS purchased version 9 of the software in
January 2020, after Covetrus’s initial organization.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 9 of 12 PageID #:
<pageID>

10
the EULA and/or copyright violations. Esmark, Inc. v. N.L.R.B., 887 F.2d 739, 756 (7th
Cir. 1989) (citing Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265,
267 (2d Cir. 1929) (Hand, J.)). See also Pearson v. Component Tech. Corp., 247 F.3d 471,
487 (3d Cir. 2001) (citing Esmark and describing a “a kind of ‘transaction-specific’ alter
ego theory”); Two-Way Media LLC v. Akamai Techs., Inc., No. CV-CC-8-116, 2009 WL
10697544 (S.D. Tex. Jan. 24, 2009) (applying federal law, but in conformity with common
law principles). See also cf. United States v. Kayser-Roth Corp., 272 F.3d 89, 102 (1st Cir.
2001) 	(involving 	roughly 	analogous 	discussion 	of 	“operator 	liability” 	for 	parent
corporation involved in subsidiary’s CERCLA violations).
Actian needs to allege facts sufficient to support a finding that Covetrus plausibly
is liable for the alleged breaches of the EULA and violations of copyright law. For the
contract claim, this requires allegations sufficient to support an inference of liability under
Texas law; for the copyright claims, federal law will set the bar. However, under either
Texas law or this Circuit’s federal law, presumably such theories of liability are cognizable,
though neither party has assisted the Court in nailing the issue down definitively.
Ultimately, regardless of which law applies, “[e]valuating whether a complaint states a
plausible claim for relief is ‘a context-specific task that requires the reviewing court to
draw on its judicial experience and common sense.’” Cebollero-Bertran v. Puerto Rico
Aqueduct & Sewer Auth., 4 F.4th 63, 70 (1st Cir. 2021) (quoting Iqbal, 556 U.S. at 679).
Given that the request for leave to amend is not the product of undue delay or bad
faith and would not result in undue prejudice, it should be granted “freely” when “justice
so requires,” Fed. R. Civ. P. 15(a), unless the proposed amendment would be futile.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 10 of 12 PageID #:
<pageID>

11
Foeman v. Davis, 371 U.S. 178, 182 (1962). Futility, in this context, means that the
amended pleading would still fail to state a plausible claim. Boston & Me. Corp. v.
Hampton, 987 F.2d 855, 868 (1st Cir. 1993).
My judicial experience and common sense point me in the direction of freely
granting Actian leave to proceed on its proposed Second Amended Counterclaim and,
based on that pleading, to deny Covetrus’s request to be relieved of counter-defendant
status. Viewing the facts alleged in the Second Amended Counterclaim in the light most
favorable to Actian, and granting Actian the benefit of all reasonable inferences that arise
from the allegations, Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011),
Actian has stated a plausible basis for relief against Covetrus. Although the bar is set high
when it comes to disregarding separate corporate status, and although my analysis may rely
heavily on inferences, if Covetrus is, as alleged, running the show at VDS, simultaneously
promoting in its own name the same services that VDS supplies, and controlling
contractual decisions about which rights to license and pay to support the provision of said
services, it is plausible that Actian may be entitled to relief from Covetrus as well as VDS.
For purposes of a motion to dismiss, these recitals are more than “threadbare,” and they
raise the possibility of relief above the “speculative” or “merely conceivable” level. Id. at
12. Accordingly, Actian’s alternative response to the Motion – its request for leave to file
the proposed Second Amended Counterclaim – is granted. Based on my review of the
expanded allegations found therein, specifically paragraphs 7 and 7A through 7O,
Covetrus’s request that it be dismissed as a counterclaim defendant based on its separate
corporate status is denied.
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 11 of 12 PageID #:
<pageID>

12
C ONCLUSION
For the reasons set forth above, the Motion for Partial Dismissal of Defendant’s
Amended Counterclaim (ECF No. 45) is DENIED and Actian’s motion in the alternative
for leave to file the proposed Second Amended Counterclaim (see ECF No. 59) is
GRANTED. Actian will file the Second Amended Counterclaim within fourteen (14) days
of this Order.
SO ORDERED .
Dated this 20th day of January, 2021.
/s/ Lance E. Walker
UNITED STATES DISTRICT JUDGE
Case 2:21-cv-00097-SDN Document 88 Filed 01/20/22 Page 12 of 12 PageID #:
<pageID>