Commercial Litigation and Arbitration

Fraudulent Inducement As an Exception to the Economic Loss Rule

Arena Rest. & Lounge LLC v. S. Glazer's Wine & Spirits, LLC, 2018 U.S. Dist. LEXIS 60981 (N.D. Cal. Apr. 9, 2018):

Plaintiffs Arena Restaurant and Lounge LLC, Pacifica Restaurants, LLC, Vine and Barrel LLC, and Daniel Flores ("Plaintiffs") filed this putative class action against Southern Glazer's Wine and Spirits, LLC and Southern Glazer Wine & Spirits of America, Inc. ("Defendants"). Before the Court [*2]  is Defendants' motion to dismiss the second amended complaint. Having considered the parties' briefs, the relevant law, and the record in this case, the Court GRANTS the motion to dismiss.

I. BACKGROUND

A. Factual Background

Plaintiffs accuse Defendants, which are liquor wholesalers, of a range of anticompetitive behavior. As context for their claims, Plaintiffs explain that the Federal Alcohol Administration Act (27 U.S.C. § 201, et seq.) was enacted in 1935 to establish a regulatory scheme for the liquor industry. ECF No. 30 ("SAC") ¶ 36. This regulatory scheme created a three-tiered system that distinguishes between alcohol producers, wholesalers, and retailers. Id. ¶ 39 (referencing 27 U.S.C. § 205)). According to Plaintiffs, "the three-tier system provides that (1) producers cannot either wholesale or retail alcohol, (2) wholesalers cannot be producers or retailers, and (3) retailers cannot wholesale or produce alcohol." Id. Instead, "manufacturers (tier 1) sell to licensed importers, distributors and control boards." Id. "Licensed importers and distributors (tier 2) act in cooperation with the federal and state governments; they help ensure that alcohol beverage taxes are reliably collected. The prohibition against tier [*3]  2 entities owning or operating retailers (those at tier 3) ensures that suppliers cannot coerce retailers to favor their brands." Id. "Licensed outlets like liquor stores, bars or restaurants (tier 3) ensure that alcohol is sold to those who are of legal age to purchase it." Id. Plaintiffs explain that "this three-tier regulatory system provides for 'checks and balances' to the way alcohol is distributed and sold throughout the system, from one licensed tier to another. These . . . rules dictate that no individual or entity (except the state regulator itself) is allowed to own and operate more than one tier of the system." Id.

Glazer's Wholesale Distributors, a predecessor to Glazer's, Inc., was founded in 1933, about the time of the repeal of Prohibition, and has, in various corporate forms, distributed food, drink, and tobacco products on a wholesale basis in various states throughout the country. SAC ¶ 18. In 1968, Southern Wine and Spirits of America, Inc.1 began distributing and selling food, drink, and tobacco products on a wholesale basis. Id. ¶ 19. In 2016, Defendant Southern Wine & Spirits of America, Inc. merged with Glazer's, Inc. to form Defendant Southern Glazer's Wine & [*4]  Spirits, LLC, which is a wholesaler of food, drink, and tobacco products. Id. ¶ 20. Plaintiffs refer to Southern Wine & Spirits of America, Inc. and Southern Glazer's Wine & Spirits, LLC collectively as "Southern Glazer." Id. ¶ 1. Plaintiffs allege that Southern Glazer is the largest wine and spirits distributor in the United States, with more than 20,000 employees. Id. ¶ 23. Plaintiffs allege that Southern Glazer distributes more than 150 million cases of wine and spirits annually to 350,000 retail and restaurant accounts across 44 states, the District of Columbia, Canada, and the Caribbean. Id.

Plaintiffs are California-based businesses that "had accounts with Southern Glazer, wherein they and authorized agents thereof were permitted to purchase liquor from Southern Glazer using [Plaintiffs'] respective liquor licenses (issued by the California Department of Alcoholic Beverage Control) and/or [their] Southern Glazer-issued account numbers." Id. ¶ 14. Plaintiffs seek to represent two putative classes, a California class and a national class. Id. ¶ 32. The California class is composed of "[a]ll persons/entities, within the State of California, who had an account with Southern [*5]  Glazer Glazer's Wine & Spirits, LLC [sic] and/or Southern Glazer Wine & Spirits of America, Inc. within the applicable time period." Id. The national class is similarly defined, except that the geographical scope encompasses the United States rather than only California. Id. Plaintiffs do not define "the applicable time period."

Plaintiffs allege that applying for a California liquor license "includes submission of documentation of business status, an individual financial affidavit, totals of investments in the business, banking information, and undergoing a background check." Id. ¶ 49. If the application is granted, a "unique liquor license number is then issued for the particular bar/restaurant/liquor store. In California this number is registered with the State Board of Equalization, so that the Board can collect taxes on retail sales of alcohol." Id. To become a Southern Glazer customer, a liquor license holder was "required to submit evidence of [its] liquor license[]," as well as a credit application, personal guarantee, "Appendix A California resale certificate," "optional e-check authorization/autopay and proof of deliver forms," a "Direct Warehouse Sales Authorization form, [*6]  which lists the authorized purchases for the retailer," and "[c]opies of state-issued beverage licenses and Certificates of Resale." Id. ¶ 51. "Once these papers were approved, each class member was given a unique account number which the class members could then use to purchase liquor from Southern Glazer." Id. ¶ 52. Plaintiffs allege that Southern Glazer agreed in writing that "[e]xcept as agreed herein, Southern Glazer will not disclose your private information unless it is required to do so by law, to verify your continuing financial stability or in an effort or action to collect your unpaid debt to Southern Glazer." Id. ¶ 55. Plaintiffs also identify eleven other "additional express and/or implied promises by Southern Glazer upon which class members reasonably relied," such as "Southern Glazer would not add so-called authorized purchasers to class members' Direct Warehouse Sales Authorization to Purchase Forms, without class members' knowledge and consent." Id. ¶ 57. Plaintiffs do not specify which of these eleven other promises were express and which were implied.

Citing various court filings and press releases, Plaintiffs allege that Southern Glazer has been fined, "punished [*7]  [for,] and/or charged" with various misdeeds, including racial discrimination, illegal kickbacks, unlawful carrying charges, and anti-competitive conduct. Id. ¶¶ 61-63.

With respect to Plaintiffs and the putative class, Plaintiffs allege that "Southern Glazer committed various unlawful and/or unfair business practices, including, but not necessarily limited to" the following list, which Plaintiffs offer without elaboration:

a. Adding so-called authorized purchasers on Representative Plaintiffs' and class members' Direct Warehouse Sales Authorization to Purchase Forms, without their knowledge or consent;

b. Leading Representative Plaintiffs and members of both classes to misreport their tax obligations to state and/or federal taxing authorities;

c. Compelling Representative Plaintiffs and members of both classes to restate their tax obligations for prior tax cycles to state and/or federal taxing authorities, and to incur time and expense in retaining legal and financial professionals therefor;

d. Selling liquor to bars/restaurants/clubs that do not possess liquor licenses using Representative Plaintiffs' and class members' liquor license numbers and/or their Southern Glazer account numbers; [*8] 

e. Singling out customers who pay C.O.D. and/or are known to maintain poor accounting practices (e.g., for "ghost shipping" and/or "phantom invoicing" practices), causing them monetary damages and/or tax liabilities;

f. Selling liquor to third-parties on Representative Plaintiffs' and class members' accounts at lower prices than to legitimate/licensed purchasers;

g. Selling liquor to different parties at different prices, in violation of federal alcohol regulations and state and/or federal law;

h. Permitting its officers, managers, agents and/or other employees to purchase liquor on Representative Plaintiffs' and class members' licenses/accounts, using cash and/or charging class members for the liquor, then storing (i.e., not delivering it) in order to meet quotas (and in violation of 4 CCR § 76);

i. Permitting its officers, managers, agents and/or other employees to give away liquor, by pricing such at $.01;

j. Permitting its officers, managers, agents and/or other employees to give away liquor by printing sample labels for full regular-sized bottles;

k. Permitting its officers, managers, agents and/or other employees to purchase liquor using class members' liquor license numbers and/or their Southern [*9]  Glazer account numbers, temporarily store the liquor (in violation of 4 CCR § 76), then returning the liquor later, in order to meet quotas, oftentimes without refunding the money;

l. Using so-called "A Forms" (which lack bar codes and invoice numbers and are, thus, nearly impossible to locate) to facilitate liquor transactions, in violation of 4 CCR § 17;

m. Not providing annual invoices, unless requested, in order to conceal the practices cited herein;

n. Permitting its officers, managers, agents and/or other employees to purchase liquor "off-invoice";

o. Permitting its officers, managers, agents and/or other employees to sell "off-invoice" liquor to retailers without licenses, or to retailers who will then resell the liquor to other retailers, in violation of state and/or federal law;

p. Permitting its officers, managers, agents and/or other employees to sell "off-invoice" liquor to private individuals, in violation of state and/or federal law;

q. Threatening to cut off supplies to customers who do not buy a sufficient quantity of liquor, or liquor of select varieties;

r. Refusing to sell products to class members without them purchasing "tie-ins" (other types of liquor than those the customer wishes to purchase); [*10] 

s. Giving kickbacks, free samples and other unlawful incentives to restaurants/retailers (in violation of, inter alia, 4 CCR § 106), in order to keep them from reporting the violations specified above;

t. Working and/or conspiring with third-parties to allow for the unfair/unlawful practices above and below;

u. Ignoring complaints from sales representatives and/or retailers about the unfair and unlawful business practices detailed herein[;]

v. Unlawfully manipulating a "will call" system to effectuate unauthorized purchases and deliveries, collecting money from retailers vis-à-vis an automatic payment system.

Id. ¶ 65(a)-(v).

Plaintiff Arena alleges that it "found that it had been assessed thousands of dollars in taxes for liquor supposedly purchased, but not actually purchased, from Southern Glazer." Id. ¶ 25. Plaintiff Vine and Barrel alleges that it received "falsified sales invoices" from Southern Glazer. Id. Neither Plaintiff offers any other details related to these allegations.

B. Procedural History

James Nguyen originally filed this case on July 5, 2017. ECF No. 1. Nguyen alleged that he was the liquor license holder on behalf of Arena Restaurant and Lounge. Id. at 4. On August 22, 2017, Defendants filed [*11]  a motion to dismiss. ECF No. 13. On September 5, 2017, Nguyen filed a first amended complaint as of right. ECF No. 16. Accordingly, the Court denied Defendants' motion to dismiss the original complaint as moot on September 6, 2017. ECF No. 17.

On September 19, 2017, Defendants filed a motion to dismiss the first amended complaint. ECF No. 19. Nguyen opposed the motion to dismiss on October 3, 2017. ECF No. 22. Defendants filed a reply on October 9, 2017. ECF No. 25. On December 19, 2017, the parties filed a stipulation to allow Nguyen to file a second amended complaint to change and add plaintiffs. ECF No. 28. The Court granted the stipulation that same day. ECF No. 29.

Accordingly, the second amended complaint was filed on December 19, 2017. ECF No. 30 ("SAC"). On December 20, 2017, the Court denied as moot the motion to dismiss the first amended complaint. ECF No. 31. Defendants filed a motion to dismiss the SAC on January 3, 2018. ECF No. 32. Plaintiffs filed an opposition on January 17, 2018, in which Plaintiffs pointed out that Defendants' motion failed to comply with Civil Local Rule 7-4(a)(2), which requires briefs longer than ten pages to include tables of contents and authorities. ECF No. 35 ("Opp'n"). [*12]  On January 18, 2018, Defendants filed the instant amended motion to dismiss the SAC, in which Defendants added tables of contents and authorities in order to comply with the Civil Local Rule 7-4(a)(2). ECF No. 36 ("Mot."); ECF No. 37 (Declaration of Daniel Purcell stating that the only difference between the original motion and the amended motion is the addition of the tables of contents and authorities). Accordingly, the Court DENIES AS MOOT the motion to dismiss at ECF No. 32. On January 24, 2018, Defendants filed a reply. ECF No. 38 ("Reply").

II. LEGAL STANDARD

A. Motion to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)

Rule 8(a)(2) of the Federal Rules of Civil Procedure requires a complaint to include "a short and plain statement of the claim showing that the pleader is entitled to relief." A complaint that fails to meet this standard may be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6). The United States Supreme Court has held that Rule 8(a) requires a plaintiff to plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009). "The plausibility standard is not akin to a probability requirement, but it asks [*13]  for more than a sheer possibility that a defendant has acted unlawfully." Id. (internal quotation marks omitted). For purposes of ruling on a Rule 12(b)(6) motion, the Court "accept[s] factual allegations in the complaint as true and construe [s] the pleadings in the light most favorable to the nonmoving party." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008).

The Court, however, need not accept as true allegations contradicted by judicially noticeable facts, see Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000), and it "may look beyond the plaintiff's complaint to matters of public record" without converting the Rule 12(b)(6) motion into a motion for summary judgment, Shaw v. Hahn, 56 F.3d 1128, 1129 n.1 (9th Cir. 1995). Nor must the Court "assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Fayer v. Vaughn, 649 F.3d 1061, 1064 (9th Cir. 2011) (per curiam) (internal quotation marks omitted). Mere "conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss." Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004).

B. Motion to Dismiss Under Federal Rule of Civil Procedure 9(b)

Federal Rule of Civil Procedure 9(b) requires that allegations of fraud be stated with particularity. Specifically, the Ninth Circuit has held that averments of fraud "be accompanied by 'the who, what, when, where, and how' of the misconduct charged." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). When an "entire claim within a complaint[] is grounded in fraud and its allegations fail to satisfy the [*14]  heightened pleading requirements of Rule 9(b), a district court may dismiss the . . . claim." Id. at 1107. The Ninth Circuit has recognized that "it is established law in this and other circuits that such dismissals are appropriate," even though "there is no explicit basis in the text of the federal rules for the dismissal of a complaint for failure to satisfy 9(b)." Id. A motion to dismiss a complaint "under Rule 9(b) for failure to plead with particularity is the functional equivalent of a motion to dismiss under Rule 12(b)(6) for failure to state a claim." Id.

C. Leave to Amend

If the Court determines that a complaint should be dismissed, it must then decide whether to grant leave to amend. Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend "shall be freely given when justice so requires," bearing in mind "the underlying purpose of Rule 15 to facilitate decisions on the merits, rather than on the pleadings or technicalities." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (alterations and internal quotation marks omitted). When dismissing a complaint for failure to state a claim, "a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Id. at 1130 (internal quotation [*15]  marks omitted). Accordingly, leave to amend generally shall be denied only if allowing amendment would unduly prejudice the opposing party, cause undue delay, or be futile, or if the moving party has acted in bad faith. Leadsinger, Inc. v. BMG Music Publ'g, 512 F.3d 522, 532 (9th Cir. 2008).

III. DISCUSSION

Plaintiffs assert eleven claims: (1) promissory fraud, (2) below cost sales, (3) loss leader sales, (4) secret rebates, (5) unlawful threats and intimidation, (6) constructive trust, (7) breach of fiduciary duty, (8) common law fraud, (9) unfair business practices, (10) breach of contract, and (11) breach of the implied covenant of good faith and fair dealing. SAC ¶¶ 68-149. Defendants argue that the first and eighth claims should be dismissed based on the economic loss doctrine and failure to plead fraud with particularity as required by Rule 9(b). Defendants argue that the second and third claims should be dismissed because only competitors have standing to bring such claims. Defendants assert that the second, third, fourth, and fifth claims should be dismissed for failure to plead an adequate factual basis under Iqbal. Defendants argue the sixth claim for constructive trust should be dismissed because it is actually a remedy and not a claim for relief. Defendants [*16]  contend the seventh claim for breach of fiduciary duty fails because Defendants owe no such duty to their customers as a matter of law. Defendants argue that the ninth claim under California's Unfair Competition Law is derivative of Plaintiffs' other insufficiently stated claims and so fails as a result. Defendants argue the tenth claim for breach of contract should be dismissed for failure to sufficiently plead the details of the relevant contract. Finally, Defendants assert that the eleventh claim for breach of the implied covenant should be dismissed as entirely redundant of the contract claim. The Court addresses these arguments in turn.

A. Fraud-Related Claims (Claims One and Eight)

Two of Plaintiffs' claims involve fraud: the first claim for promissory fraud and the eighth claim for common law fraud. Fraud-based claims sound in tort. JMP Securities LLP v. Altair Nanotechnologies Inc., 880 F. Supp. 2d 1029, 1042 (N.D. Cal. 2012). Defendants argue that Plaintiffs fraud-based claims are barred by the economic loss rule and are not alleged with sufficient particularity under Rule 9(b). Mot. at 7-10.

Under the economic loss rule, a plaintiff suffering only economic damages "may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations." Aas v. Superior Court, 24 Cal. 4th 627, 643, 101 Cal. Rptr. 2d 718, 12 P.3d 1125 (2000), superseded [*17]  by statute on other grounds as recognized in Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 135 Cal. Rptr. 2d 361, 70 P.3d 351 (2003); Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 979, 988, 22 Cal. Rptr. 3d 352, 102 P.3d 268 (2004) ("[The economic loss rule] requires a purchaser to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise."). The purpose of the rule is to "prevent[] the law of contract and the law of tort from dissolving one into the other." Robinson Helicopter Co., 34 Cal. 4th at 988 (internal quotation marks and citation omitted). "Courts have applied the economic loss rule to bar fraud claims where the damages plaintiffs seek are the same economic losses arising from the alleged breach of contract." Foster Poultry Farms v. Alkar-Rapidpak-MP Equip., Inc., 868 F. Supp. 2d 983, 991 (E.D. Cal. 2012) (internal quotation marks omitted).

Courts have recognized exceptions to the economic loss rule where (1) a "special relationship" exists between the plaintiff and the defendant, J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 804, 157 Cal. Rptr. 407, 598 P.2d 60 (1979); Biakanja v. Irving, 49 Cal. 2d 647, 650, 320 P.2d 16 (1958), or (2) the conduct "violates a duty independent of the contract arising from principles of tort law," Erlich v. Menezes, 21 Cal. 4th 543, 551, 87 Cal. Rptr. 2d 886, 981 P.2d 978 (1999) (citation omitted). Neither party contends that the special relationship exception applies. Thus, only the independent duty exception is at issue here. The independent duty exception to the economic loss rule applies where the defendant's conduct "violates a duty independent of the contract arising from principles [*18]  of tort law." Erlich, 21 Cal. 4th at 551. The California Supreme Court has recognized an independent duty outside the insurance context (1) where a defendant's actions that constituted breach of contract also caused physical injury; (2) for wrongful discharge in violation of fundamental public policy; or (3) where the plaintiff was fraudulently induced to enter a contract. Erlich, 21 Cal. 4th at 551-52; see also Oracle USA, Inc. v. XL Global Servs., No. C 09-537 MHP, 2009 U.S. Dist. LEXIS 59999, 2009 WL 2084154, at *4 (N.D. Cal. July 13, 2009) ("Exceptions have been permitted only where: a breach of duty causes a physical injury; the covenant of good faith and fair dealing is breached in an insurance contract; an employee was wrongfully discharged in violation of a fundamental public policy; or a contract was fraudulently induced." (citing Butler-Rupp v. Lourdeaux, 134 Cal. App. 4th 1220, 36 Cal. Rptr. 3d 685 (2005)).

"[F]raudulent inducement is a well-recognized exception to the economic loss rule." Lee v. Fed. St. L.A., LLC, No. 2:14-cv-6264-CAS(SSx), 2016 U.S. Dist. LEXIS 59423, 2016 WL 2354835, at *9 (C.D. Cal. May 3, 2016); United Guar. Mortg. Indem. Co. v. Countrywide Fin. Corp., 660 F. Supp. 2d 1163, 1188 (C.D. Cal. 2009) ("[I]t has long been the rule that where a contract is secured by fraudulent representations, the injured party may elect to affirm the contract and sue for fraud." (quoting Lazar v. Superior Court, 12 Cal. 4th 631, 645, 49 Cal. Rptr. 2d 377, 909 P.2d 981 (1996))). Fraudulent inducement occurs when "the promisor knows what he is signing but his consent is induced by fraud, mutual assent [*19]  is present and a contract is formed, which, by reason of the fraud, is voidable." Rosenthal v. Great W. Fin. Sec. Corp., 14 Cal. 4th 394, 415, 58 Cal. Rptr. 2d 875, 926 P.2d 1061 (1996).

Here, Plaintiffs clearly frame both their promissory fraud and common law fraud claims as arising from a breach of express contract terms. Specifically, Plaintiffs allege that "Southern Glazer agreed in writing to every class member that '[e]xcept as agreed herein, Southern Glazer will not disclose your private information unless it is required to do so by law, to verify your continuing financial stability or in an effort or action to collect your unpaid debt to Southern Glazer.'" SAC ¶ 55. Plaintiffs allege that notwithstanding this promise, Defendants used Plaintiffs' private account information to sell liquor to unlicensed third parties. Id. ¶¶ 69, 75, 122. Plaintiffs allege that Defendants' conduct caused Plaintiffs "to suffer economic losses and other general and specific damages." Id. ¶¶ 75 (promissory fraud claim), 127 (common law fraud claim). Plaintiffs assert the same underlying facts and the same damages in their breach of contract claim. See id. ¶¶ 137-41. Thus, Plaintiffs' promissory fraud and common law fraud claims are barred by the economic loss doctrine unless an exception applies.  [*20] See Foster Poultry Farms, 868 F. Supp. 2d at 992.

Plaintiffs contend that the fraudulent inducement exception to the economic loss rule applies here based on their promissory fraud allegations. Opp'n at 13-14. The California Supreme Court has held that fraudulent inducement can exist where a contract is induced through promissory fraud. See Lazar, 12 Cal. 4th at 638. However, district courts in this circuit are split on whether promissory fraud alone may give rise to the fraudulent inducement exception to the economic loss rule. Some district courts in this circuit have held that promissory fraud is insufficient if the promise becomes part of an enforceable contract. See, e.g., JMP Sec., 880 F. Supp. 2d at 1044 (holding that exceptions to the economic loss doctrine do not apply where the fraudulent misrepresentations are "also alleged to be a stand-alone contract").

In contrast, other district courts have held that an adequately pled promissory fraud claim that induces the formation of a contract is sufficient to trigger the fraudulent inducement exception to the economic loss rule. See Joli Grace, LLC v. Country Visions, Inc., No. 2:16-1138 WBS EFB, 2016 U.S. Dist. LEXIS 165441, 2016 WL 6996643, at *9 n.6 (E.D. Cal. Nov. 30, 2016) (rejecting argument "that the economic loss rule will always preclude recovery of fraud [*21]  claims when the misrepresentations arose from the underlying contract and caused the injured party to enter into a contract" because "such a view ignores the California Supreme Court's position that the economic loss rule does not preclude recovery for fraudulent inducement"); J2 Cloud Servs. v. Fax87, No. 13-5353 DDP (AJWx), 2016 U.S. Dist. LEXIS 161132, 2016 WL 6833904, at *4 (C.D. Cal. Nov. 18, 2016) (finding claim not barred by the economic loss rule because promissory fraud cause of action was adequately alleged).

"Th[is] Court follows the latter cases, which more closely follow the California Supreme Court's Lazar holding that, if the promise that forms the basis of a promissory fraud cause of action 'is enforceable [as a contract], the [plaintiff] . . . has a cause of action in tort as an alternative at least, and perhaps in some instances in addition to his cause of action on the contract.'" R Power Biofuels, LLC v. Chemex LLC, No. 16-CV-716-LHK, 2017 U.S. Dist. LEXIS 47129, 2017 WL 1164296, at *6 (N.D. Cal. Mar. 29, 2017) (quoting Lazar, 12 Cal. 4th at 645 (citations and internal quotation marks omitted)). Thus, the economic loss doctrine will not bar Plaintiffs' fraud-based claims if Plaintiffs' promissory fraud claim is adequately pled. Cf. Robinson Helicopter, 34 Cal. 4th at 993 (recognizing that heightened pleading standard for fraud applies to exception to economic loss rule). The Court turns now to [*22]  whether Plaintiffs' fraud-based claims are adequately pled.

Federal courts deciding state law fraud claims look to state law for the elements of a fraud claim but also apply Rule 9(b)'s heightened pleading standard.2Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). "This means that allegations of fraud must be stated with 'specificity including an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations.'" SVGRP LLC v. Sowell Fin. Servs., LLC, No. 5:16-cv-7302-HRL, 2017 U.S. Dist. LEXIS 59271, 2017 WL 1383735, at *4 (N.D. Cal. Apr. 18, 2017) (quoting Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007)). To survive a motion to dismiss, "allegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Swartz, 476 F.3d at 764 (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001)).

To state a claim for fraud under California law, a plaintiff must allege: (1) a misrepresentation (false representation, concealment, or non-disclosure); (2) knowledge of falsity (or scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage. Lazar, 12 Cal. 4th at 638. "Promissory fraud is a subspecies of fraud. A plaintiff asserting a promissory fraud claim must plead [*23]  and prove that the defendant made a promise to him that it had no intention of performing." SVGRP, 2017 U.S. Dist. LEXIS 59271, 2017 WL 1383735 at *4 (quoting UMG Recordings, Inc. v. Glob. Eagle Entm't, Inc., 117 F. Supp. 3d 1092, 1109 (C.D. Cal. 2015)); see also Fleet v. Bank of Am. N.A., 229 Cal. App. 4th 1403, 1411, 178 Cal. Rptr. 3d 18 (2014) (explaining that to state a claim for promissory fraud under California law, a plaintiff must plead "that the promissor did not intend to perform at the time the promise was made, that the promise was intended to deceive and induce reliance, that it did induce reliance, and that this reliance resulted in damages").

Plaintiffs' promissory fraud and common law fraud claims fall far short of Rule 9(b)'s requirement to plead fraud with specificity. The theory of falsity underlying both claims is that Defendants promised to keep Plaintiffs' account information confidential, but despite this promise Defendants allegedly used Plaintiffs' account information to make sales to third parties. See SAC ¶¶ 65, 69, 74-75, 122. However, Plaintiffs fail to plead any specific facts about these alleged third-party sales. The only facts in the SAC are the conclusory allegations that Defendants used Plaintiffs' liquor license numbers and/or their Southern Glazer account numbers to sell liquor to "bars/restaurants/clubs that do not possess liquor licenses." Id. ¶ 65(d). Plaintiffs do not allege who made [*24]  the alleged third-party sales, when the sales were made, or what was sold. Nor do Plaintiffs identify the third parties. Plaintiffs argue that they will require discovery to specifically plead the facts of such fraudulent behavior. Opp'n at 7. However, Plaintiffs do not even allege any specific details about information that would already be under Plaintiffs' control, such as alleging that they had been billed or had paid for products that they did not order or receive.

Vague allegations that unspecified Southern Glazer employees used Plaintiffs' account numbers to sell an unspecified amount of liquor to unspecified parties during an unspecified time period are nowhere near "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Swartz, 476 F.3d at 764 (quoting Bly-Magee, 236 F.3d at 1019).

Perhaps attempting to avoid dismissal under Rule 9(b), Plaintiffs attach a number of declarations to their opposition. In these declarations, Plaintiffs offer more specific allegations about being billed for products they neither ordered nor received. See, e.g., Declaration of Jason Jenkins, ECF [*25]  No. 35-2; Declaration of Daniel Flores, ECF No. 35-3. However, the relevant question is whether Plaintiffs's SAC pleads with the particularly that Rule 9(b) requires. See Schneider v. Cal. Dep't of Corr., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998) ("In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff's moving papers, such as a memorandum in opposition to a defendant's motion to dismiss.").

Because the SAC fails to allege with specificity the conduct underlying Plaintiffs' theory of falsity, Plaintiffs' claim for promissory fraud fails because Plaintiffs have not adequately alleged that Defendants failed to perform the promise to keep Plaintiffs' account information confidential. Similarly, Plaintiffs' common law fraud claim fails because Plaintiffs have not adequately alleged a misrepresentation. The Court GRANTS Defendants' motion to dismiss the first and eighth claims for promissory fraud and common law fraud. Moreover, because Plaintiffs have not adequately pled their promissory fraud claim, Plaintiffs do not qualify for the fraudulent inducement exception to the economic loss rule. Thus, the Court also dismisses Plaintiffs' first and eighth claims because they are barred by the economic loss rule. However, because [*26]  the Court finds that Plaintiffs may be able to amend their complaint to adequately plead these claims and, relatedly, to establish that they qualify for the fraudulent inducement exception to the economic loss rule, the Court grants Plaintiffs leave to amend.

***


The case caption in this case names "Southern Glazer Wine & Spirits of America, Inc." as a defendant, but the text of the SAC refers to "Southern Wine & Spirits of America, Inc." See, e.g., SAC ¶¶ 19-20. The Court assumes that these names refer to the same corporate entity.

Even if Federal Rule of Civil Procedure 9(b) did not apply to state law claims, California law requires that "fraud must be pled specifically; general and conclusory allegations do not suffice." Robinson Helicopter, 34 Cal. 4th at 993.

Share this article:

Facebook
Twitter
LinkedIn
Email

Recent Posts

Archives