JAMES V. SELNA, District Judge.
Defendants Usman Vakil and Farooq Vakil (collectively, "the Vakils") move to dismiss the Complaint of Plaintiff Federal Trade Commission ("the FTC") pursuant to Rules 9(b) and 8(a) of the Federal Rules of Civil Procedure. The FTC opposes this motion. For the following reasons, the Court GRANTS the motion.
The Vakils are the sole shareholders of Defendant Lights of America, Inc. ("LOA"). Usman is the President and has a fifty-one percent ownership interest in LOA. (Compl. ¶ 7.) Farooq is the Vice President and has a forty-nine percent ownership interest in LOA. (Id. ¶ 8.) The FTC contends that, at all times relevant to this action, the Vakils "formulated, directed, controlled, had authority to control, or participated in" the allegedly deceptive acts. (Id. ¶ 7-8.)
The FTC has filed this action against LOA and the Vakils (collectively, "Defendants") alleging violations of sections 5(a)(1) and 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45(a)(1) and 53(b). (Compl. 111.) The FTC Act prohibits "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." 15 U.S.C. § 45(a)(1). The FTC asserts that Defendants violated this Act by distributing promotional materials claiming that their Light Emitting Diode ("LED") lamps possessed particular watt equivalency, lumen output, and life spans, despite the fact that these representations were "false or were not substantiated." (See Compl. ¶¶ 10-14, 17, 19, 21.)
Under Rule 12(b)(6),
In resolving a 12(b)(6) motion under Twombly, the Court must follow a twopronged approach. First, the Court must accept all well-pleaded factual allegations as true, but "[t]hread-bare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. Nor must the Court "accept as true a legal conclusion couched as a factual allegation." Id. at 1949-50 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Second, assuming the veracity of wellpleaded factual allegations, the Court must "determine whether they plausibly give rise to an entitlement to relief." Id. at 1950. This determination is context-specific, requiring the Court to draw on its experience and common sense, but there is no plausibility "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct." Id.
Under Rule 9(b), a plaintiff must plead each of the elements of a fraud claim with particularity, i.e., a plaintiff "must set forth more than the neutral facts necessary to identify the transaction." Cooper v. Pickett, 137 F.3d 616, 625 (9th Cir.1997)
The FTC Act prohibits "unfair or deceptive acts or practices in or affecting commerce." 15 U.S.C. § 45(a)(1). In resolving the FTC's motion to dismiss, the central issue is whether the FTC's claim that the Vakils engaged in "unfair or deceptive acts or practices" in violation of this act are subject to the heightened pleading standard of Rule 9(b). This issue appears to be one of first impression in this Circuit.
The FTC contends that other courts have already disposed of this issue. For example, the FTC asserts that the Tenth Circuit, "the only circuit court to opine on... Rule 9(b)'s applicability to a Section 5(a) action[,] concluded that Rule 9(b) does not apply." (Opp'n Br. 7.) However, the Tenth Circuit decision cited by the FTC did not involve an appeal of a district court's decision to grant a motion to dismiss under Rule 9(b); rather, the decision involved an appeal of a district court's decision to award attorney fees against the FTC for maintaining a case "maliciously and without probable cause." FTC v. Freecom Commc'ns, Inc., 401 F.3d 1192, 1200 (10th Cir.2005). The Tenth Circuit held that, because the FTC's claim was not "entirely without color," the district court abused its discretion in awarding attorney fees. Id. at 1208. The court's comments regarding the inapplicability of Rule 9(b) to the FTC's allegations in that case were purely dicta. See id. at 1204 n. 7.
The FTC also cites four district court cases declining to apply Rule 9(b) to claims of violation of the FTC Act. (Opp'n Br. 8.) However, the Court is not persuaded by the reasoning of these cases. In FTC v. Medical Billers Network, the court expressed doubt as to the applicability of Rule 9(b) to claims for violation of the FTC Act. 543 F.Supp.2d 283, 314 (S.D.N.Y.2008). However, this decision relied on FTC v. Communidyne, an unpublished decision from the Northern District of Illinois that, contrary to well-established Ninth Circuit law, assumed that claims must include all of the elements of a claim for fraud or mistake in order to trigger Rule 9(b). No. 93 C 6043, 1993 WL 558754, at *2 (N.D.Ill. Dec. 3, 1993). Moreover, the Court in Medical Billers explicitly declined to decide whether Rule 9(b) applied to the FTC's claim because the defendants raised the argument for the first time in their reply brief. 543 F.Supp.2d at 314. Similarly, the other cases cited by the FTC summarily rejected the application of Rule 9(b) to a claim for violation of the FTC Act in reliance on either Freecom or Communidyne, which, for the reasons stated above, are not compelling authorities on this issue. See FTC v. Nat'l Testing Servs., LLC, No. 3:05-0613, 2005 WL 2000634, at *2 (M.D.Tenn. Aug. 18, 2005); FTC v. Innovative Mktg., 654 F.Supp.2d 378, 388 (D.Md.2009); FTC v. Skybiz.com, Inc., No. 01-CV-396-K(E), 2001 WL 1673649, at *11 (N.D.Okla. Aug. 2, 2001). Thus, the decisions cited by the FTC as having already resolved this issue
Finally, the FTC points out that another court in this district recently denied a defendant's motion to dismiss a similar complaint for violation of the FTC Act. (Opp'n Br. 4); FTC v. Commerce Planet, Inc., Case No. SACV 09-1324 CJC (RNBx) (C.D.Cal. Feb. 12, 2010). However, the defendant in that case moved to dismiss on the ground that the FTC had failed to meet the general pleading requirements of Rule 8(a). The Court did not address whether Rule 9(b) applied.
On the other hand, the Vakils argue that at least one court in the Ninth Circuit has endorsed their argument that Rule 9(b) applies to claims for violation of the FTC Act. In FTC v. Swish Marketing, the Northern District of California extensively analyzed the applicability of Rule 9(b) to claims for violations of section 5 of the FTC Act and concluded that it "is a real prospect" that such claims are subject to the heightened pleading requirements of Rule 9(b). No. C 09-03814 RS, 2010 WL 653486, at *4 (N.D.Cal. Feb. 22, 2010). However, the court explicitly declined to decide the motion under Rule 9(b) and, instead, granted the defendant's motion to dismiss on the ground that the complaint failed to meet the general pleading standard of Rule 8(a)(2). Id. at *11.
Thus, the parties have not cited and the Court has not found any case within this Circuit that has decided whether claims for violation of the FTC Act are subject to the heightened pleading standard of Rule 9(b). Similarly, the Court is unaware of any cases in any jurisdiction directly addressing whether claims for violation of the FTC Act "sound in fraud."
"Rule 9(b) applies when (1) a complaint specifically alleges fraud as an essential element of a claim, (2) when the claim `sounds in fraud' by alleging that the defendant engaged in fraudulent conduct... and (3) to any allegations of fraudulent conduct, even when none of the claims in the complaint `sound in fraud.'" Davis v. Chase Bank U.S.A., N.A., 650 F.Supp.2d 1073, 1089-90 (C.D.Cal.2009) (citing Vess, 317 F.3d at 1102-06). The Vakils do not argue that the FTC's Complaint specifically alleges fraud as an essential element of its claim or that the Complaint makes allegations of fraudulent conduct. Rather, they argue that the claim for violation of the FTC Act "sounds in fraud" and, therefore, is subject to the heightened pleading requirement of Rule 9(b). (See Mot. Br. 6-11.)
A claim "sound[s] in fraud" where the plaintiff "allege[s] a unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of [the] claim. In that event, ... the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." Vess, 317 F.3d at 1104-05. The FTC has alleged that the Vakils distributed promotional materials that made specific representations about the watt equivalency, lumen output, and life spans of their LED lamps, that these representations were "false or not substantiated,"
In reaching this conclusion, the Court finds the similarity between claims for violation of the FTC Act and claims for negligent misrepresentation particularly persuasive. "It is well-established in the Ninth Circuit that . . . claims for . . . negligent misrepresentation must meet Rule 9(b)'s particularity requirements." Neilson v. Union Bank of California, 290 F.Supp.2d 1101, 1141 (C.D.Cal.2003) (citations omitted). To state a cause of action for negligent misrepresentation, a plaintiff must allege (a) misrepresentation (i.e., false representation, concealment, or nondisclosure), (b) intent to induce reliance, (c) justifiable reliance, and (d) resulting damage. See id. at 1140-41. Similarly, to state a cause of action against an individual for violation of the FTC Act, the FTC must allege (a) misrepresentations or omissions (b) of material fact (c) of a kind usually relied upon by reasonably prudent persons, (d) that consumer injury resulted, and (e) that the individual participated directly in the acts or had the authority to control them. Swish Mktg., 2010 WL 653486, at *3. While the elements of causes of action for violation of the FTC Act and negligent misrepresentation are not identical, they are analogous. Likewise, the particular allegations supporting the FTC's claim against the Vakils mirror the type of allegations required to prove a cause of action for negligent misrepresentation.
Even more instructive is the Ninth Circuit's analysis of claims under California's consumer protection statutes. Contrary to the FTC's position, a claim does not need to include all of the elements of a claim for fraud or negligent misrepresentation in order for it to trigger the heightened pleading standard of Rule 9(b). (See Opp'n Br. 8-9.) The Ninth Circuit has "specifically ruled that Rule 9(b)'s heightened pleading standards apply to claims for violations of California's Consumers Legal Remedies Act ("CLRA") and Unfair Competition Law ("UCL") even though "fraud is not a necessary element of a claim under the CLRA and UCL." Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir.2009). The CLRA prohibits "unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale ... of goods or services to any consumer." Cal. Civ.Code § 1770 (emphasis added). The UCL prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Cal. Bus. & Prof.Code § 17200 (emphasis added). As with claims of negligent misrepresentation, claims for violation of the FTC Act are analogous to, if not entirely congruent with, claims for violation of California's CLRA and UCL even though "fraud is not a necessary element" of any of these claims. Kearns, 567 F.3d at 1125. Accordingly, the Court concludes that the pleading requirements of Rule 9(b) apply to the FTC's claim against the Vakils.
The FTC has not argued that its Complaint meets the pleading requirements of Rule 9(b). Indeed, the Complaint fails to allege the "who, what, when, where, and how" of the Defendants' course of conduct. The allegations do not differentiate between conduct committed by LOA, Usman Vakil, and Farooq Vakil, nor do they explain when or where the alleged misrepresentations were made. Thus, the Court finds that the Complaint fails to
For the foregoing reasons, the Court GRANTS the motion without prejudice. The FTC is granted leave to replead by February 4, 2010 in accordance with the federal pleading standards discussed above.
IT IS SO ORDERED.