SAMUEL A. CONTI, District Judge.
Now before the Court are Defendant LookSmart Ltd.'s ("Defendant") combined motions to dismiss Plaintiff WeBoost Media S.R.L.'s first amended complaint under Federal Rule of Civil Procedure 12(b)(6) and for partial summary judgment under Rule 56. ECF Nos. 17 ("FAC"), 24 ("Mot."). The motions are fully briefed. ECF Nos. 25 ("Opp'n"), 26 ("Reply"). The Court finds them appropriate for decision without oral argument. Civ. L.R. 7-1(b). As explained below, Defendant's motion to dismiss is GRANTED in part and DENIED in part, and its motion for partial summary judgment is DENIED.
Defendant acts as an intermediary between online "publishers," which provide content from which they hope to generate ad revenue, and "advertisers," which pay to place ads for goods or services on publishers' websites. FAC ¶ 7. Intermediaries like Defendant help advertisers place ads on publishers' websites, in exchange for a fee.
The online advertising model relevant to this case is called "pay-per-click."
Plaintiff owns and operates an international network of websites.
Though it is not a party to this lawsuit, Google and its businesses are highly relevant to this case. Google is the biggest intermediary in the pay-per-click advertising market.
"Click fraud" is when a person or computer program clicks on an online ad solely to generate the fees resulting from pay-per-click advertising models — not to view the ad's underlying content.
As Defendant stated in that 10-K, it had previously been subject to advertiser complaints and litigation regarding click fraud, and it anticipated continuing to respond to such behavior.
Plaintiff entered the contract with Defendant around October 31, 2011.
However, around May 2012, Plaintiff became aware that a "significant portion" of the clicks for which Defendant was billing were being identified by Google as click fraud.
Eventually, Plaintiff's AdSense account was reduced to a negative balance, and in December 2012, Plaintiff abandoned the account.
Based on the facts described above, Plaintiff asserted the following causes of action against Defendant: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) fraudulent concealment, (4-5) negligent and intentional interference with prospective economic advantage, (6) intentional interference with contractual relations, and (7) violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200
The Court agreed, since Plaintiff's tort claims as pled did not rest on any allegations or duties independent of Plaintiff's contract claim. The Court held those claims barred by the economic loss doctrine.
Plaintiff's FAC now provides more detail to the original complaint's allegation that "substantially all" of the traffic that Google identified as click fraud was associated with Defendant's websites. The Court noted in the February 28 Order that the circumstances of this allegation were unclear.
Plaintiff alleges, further, that Defendant itself "initiated automated software processes designed to make it appear as if legitimate on-line consumers were visiting these bogus websites" and then clicking ads, for which Defendant would charge Plaintiff.
Based on these facts, Plaintiff asserts its seven causes of action anew. It contends that its tort claims are based on duties that arose independently of those created by contract, thereby avoiding the economic loss rule: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) fraudulent concealment, (4-5) negligent and intentional interference with prospective economic advantage, (6) intentional interference with contractual relations, and (7) violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim."
Claims sounding in fraud are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which requires that a plaintiff alleging fraud "must state with particularity the circumstances constituting fraud."
Entry of summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). Summary judgment should be granted if the evidence would require a directed verdict for the moving party.
As a preliminary matter, Plaintiff asserts in an apparent contradiction that "the bogus websites never actually displayed advertising links to [Plaintiff's] sites," even though Plaintiff's claims are based on Defendant charging it for allegedly fraudulent clicks on Plaintiff's advertisements.
However, drawing all reasonable inferences in Plaintiff's favor,
Defendant's sole argument in favor of dismissal is that the economic loss rule bars Plaintiff's tort claims because they are not independent of Plaintiff's breach of contract claims. Reply at 1.
The economic loss rule, in summary, "is that no tort cause of action will lie where the breach of duty is nothing more than a violation of a promise which undermines the expectations of the parties to an agreement."
Limiting recovery to contract damages makes it easier for parties to "estimate in advance the financial risks of their enterprise."
Defendant contends, as it did in its briefs on the first complaint, that the T&C establishes that payments are due on a pay-per-click basis, and that such charges would be determined based only on Defendant's technology with disputes governed by Defendant's reconciliation system. Reply at 5. As Defendant describes the contract, these dispute-resolution provisions plus the T&C's limitation of liability clause prove that the parties specifically allocated the risk for click fraud, whatever its source. Therefore, Defendant maintains that Plaintiff's FAC's intentional tort claims fail for the same reason they did in the February 28 Order: they are based on the same allegations of breach of contract via illegitimate pay-per-click charges, and Defendant could not have assumed any duties related to click fraud that did not arise from the parties' contract.
In its February 28 Order, the Court held that "any duties Defendant owed to Plaintiff apart from the general duty to act reasonably arose at the moment of contract formation." Feb. 28 Order at 10 (citing
Plaintiff's FAC, as opposed to its original complaint, explains Plaintiff's view of the difference between (1) contract and tort claims based on illegitimate clicks charged under the T&C due to Defendant's insufficient prevention of, or willful blindness to, fraudulent clicks, which the T&C anticipated and for which it allocated risk; and (2) tort claims based on the Defendant's alleged manipulation of its own advertising technology system to charge Plaintiff for fraudulent clicks and to direct fraudulent traffic through Plaintiff's Google ads, coupled with Defendant's alleged fraudulent concealment of its misdoings. This requires the Court to examine Plaintiff's allegations more closely than either party's brief seems to anticipate.
Plaintiff alleges that Defendant alone knew the truth about its "bogus" websites and click-fraud bots. FAC ¶¶ 22-30. Plaintiff further states that it would not have entered the T&C had it known the truth about Defendant's operation.
To establish a claim for fraudulent concealment, a plaintiff must allege that: (1) the defendant concealed or suppressed a material fact, (2) the defendant was under a duty to disclose the fact to the plaintiff, (3) the defendant intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff was unaware of the fact and would not have acted as she did if she had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff sustained damage.
The Court finds that Plaintiff's fraudulent concealment claims are barred by the economic loss rule. Plaintiff's fraud claim, as pled, is based on Defendant's charging Plaintiff for fraudulent clicks (either produced or merely permitted by Defendant) and Defendant's operation of sham websites. FAC ¶¶ 49-54. This is exactly what Plaintiff pled as to its breach of contract claims, but with the addition of fraudulent intent and concealment: "[Defendant] has breached the Agreement by generating and billing [Plaintiff] for illegitimate `click-fraud' traffic in addition to clicks that may have been initiated by legitimate prospective customers."
Further, to the extent that Plaintiff asserts that its fraudulent concealment claim should be interpreted as a fraudulent inducement claim,
Plaintiff's fraudulent concealment claim is accordingly DISMISSED with leave to amend. If Plaintiff re-pleads this cause of action, it must explain how it is distinct from its breach of contract claims. To the extent that Plaintiff must alter its breach of contract claims to explain how the tort and contract claims are independent, it may do so. Plaintiff also has leave to amend its fraudulent concealment claim to plead it as a claim for fraudulent inducement. Regardless of the choice Plaintiff makes, it must meet the heightened requirements of Rule 9(b).
The parties do not brief any issue concerning Plaintiff's negligent and intentional interference claims — intentional interference with contractual relations, and negligent and intentional interference with prospective economic advantage — except to the extent that Defendant claims they are all precluded under the economic loss rule. The gist of these claims, as amended, is that Defendant knew of Plaintiff's relationship with Google, but directed fraudulent traffic to Plaintiff's websites knowing that it would result in deductions from Plaintiff's AdSense account and possible damage to Plaintiff's professional relationship with Google. As explained below, the Court finds that these claims survive the economic loss rule because they do not seek only to recover Plaintiff's contractual expectations from Defendant. They arise entirely independently of the T&C.
To plead a claim for intentional interference with contractual relations, a plaintiff must allege the following elements: (1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant's knowledge of that contract; (3) the defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.
The elements of the intentional interference with prospective economic advantage tort are similar: (1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant's knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.
As an additional pleading requirement, California Supreme Court has explained that the torts of negligent and intentional interference with prospective economic advantage additionally require plaintiffs to prove that "[d]efendant not only knowingly interfered with the plaintiff's expectancy, but engaged in conduct that was wrongful by some legal measure other than the fact of interference itself."
The Court finds that Plaintiff's claims for intentional interference with contractual and prospective economic relations are sufficiently independent of Plaintiff's breach of contract claim. They avoid being barred by either the economic loss rule or
Plaintiff has pled that it had existing contractual relations and prospective economic relations with Google, and that Defendant knew it but intentionally directed click-fraud traffic through Plaintiff's websites toward Plaintiff's Google AdSense ads. Concerning the disrupted relationships, Plaintiff alleges that it lost money due to Google's click-fraud deductions, such that its performance under its contract with Google became more expensive, and also that its future relationship with Google was jeopardized and has still not recovered. Plaintiff also alleges specific monetary losses related to Defendant's conduct. As a pleading matter, Plaintiff's FAC states claims for intentional interference with contractual and prospective economic relations.
As to Defendant's argument that Plaintiff's intentional interference claims are barred by the economic loss rule, the Court finds that Plaintiff's intentional interference claims are based on the click-fraud traffic that Defendant purportedly directed onto Plaintiff's own sites and through the Google AdSense ads that Plaintiff published. These factual differences can serve as the bases for torts even absent a contractual relationship between Plaintiff and Defendant, such that they are independent of Plaintiff's breach of contract claim, thereby avoiding the economic loss rule's bar.
The Court also finds that, as to Plaintiff's intentional interference with prospective economic advantage claim, Plaintiff has sufficiently pled that the wrongful conduct on which it bases its intentional interference claim is distinct from the interference itself.
The Court therefore finds that Plaintiff's intentional interference claims survive Defendant's motion to dismiss based on the economic loss rule, to the extent that they are based on Defendant's direction of click-fraud traffic past Plaintiff's ads on Defendant's own site toward the Google AdSense ads that Plaintiff hosted. Defendant's motion to dismiss those claims is DENIED. The Court notes that, given the economic loss rule and the structure of the pay-per-click ad market in general, this is a narrow ruling, supported by Plaintiff's specific allegations in this case. Whether Plaintiff can prove its claims will be the subject of a different motion.
Plaintiff's negligent interference with prospective economic advantage is somewhat different from the above torts, as it requires Plaintiff to plead that Defendant owed it a duty of care. It did so, albeit in a conclusory fashion, FAC ¶ 59, but Defendant did not challenge it on pleading grounds. Defendant only raised a general motion to dismiss as to the economic loss rule, and Plaintiff did not further explain its allegations in its opposition brief. Even so, given California's general reticence to grant purely economic relief for negligence claims in breach of contract cases,
Since Plaintiff has already had leave to amend its negligent interference with prospective economic advantage claim, and it has not indicated that further amendment would cure the defect, the Court finds that amendment would be futile. Dismissal is therefore WITH PREJUDICE.
The UCL prohibits unfair competition, including "any unlawful, unfair or fraudulent business act." Cal. Bus. & Prof. Code § 17200. "Because [section 17200] is written in the disjunctive, it establishes three varieties of unfair competition — acts or practices which are unlawful, or unfair, or fraudulent."
Defendant did not specifically move to dismiss Plaintiff's UCL claim in this round of briefing, nor did Plaintiff specifically defend its allegations, despite the UCL claim's apparently conclusory pleading. In its February 28 Order, the Court dismissed Plaintiff's UCL claims to the extent that they were predicated on claims barred by the economic loss rule. To the extent Plaintiff's UCL claims are based on Plaintiff's intentional interference or breach of contract claims, they survive at this stage. To the extent they are based on Plaintiff's claims precluded by the economic loss rule, they are DISMISSED WITH LEAVE TO AMEND. If Plaintiff chooses to amend either its UCL claims or claims that it contends are the predicates to its UCL claims, Plaintiff must account both for the amendment guidelines provided above and the fact that the UCL's three-part structure commends specific allegations as to each prong.
With at least a few of the FAC's intentional tort claims no longer precluded, the Court must revisit the effect of the T&C's limitation of liability clause. In the February 28 Order, the Court held that for breach of contract or negligence claims, Plaintiff's damages would be capped by the T&C's limitation of liability clause, and that the parties had agreed to limit any potential damages to direct contractual damages. Now the situation is different. The relevant contractual language reads:
T&C § 8.
Plaintiff argues that the limitation of liability clause is precluded as to Plaintiff's intentional tort claims under California Civil Code section 1668. Opp'n at 6. Section 1668 reads: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." Since all but one of the disputed claims (negligent interference) is an intentional tort, Plaintiff claims that Defendant's position renders Section 8 invalidated to the extent that Defendant seeks to use it to limit liability for future intentional torts.
Defendant's reply suggests that regardless of which tort claims survived, Plaintiff's damages would be limited to the amount paid under the contract per the T&C's limitation of liability clause. Reply at 6. That would have been true on the claims that survived the February 28 Order — both breach of contract claims — and would also be true for negligence torts, but it is not necessarily true for all intentional torts, as discussed below. The Court's holding on this issue from the February 28 Order was made specifically in the context of the economic loss rule's barring Plaintiff's blended tort-contract claims.
The Court finds that section 1668 renders the T&C's limitation of liability unenforceable to the extent that it would insulate Defendant from intentional tort liability. "[Contractual] releases of future liability for fraud and other intentional wrongs are invariably invalidated."
Defendant's motion to dismiss based on the T&C's limitation of liability clause is accordingly DENIED IN PART. The T&C's limitation of liability does not extend to Plaintiff's intentional interference torts. Since Defendant's alternative motion for partial summary judgment is based on the same arguments, that motion is DENIED. Defendant failed to carry its burden to show that there is no genuine issue of material fact concerning the application of the limitation of liability clause to Plaintiff's claims.
As explained above, Defendant LookSmart Ltd.'s motion to dismiss Plaintiff WeBoost Media S.R.L.'s first amended complaint is GRANTED in part and DENIED in part. Its motion for partial summary judgment is DENIED.
Plaintiff has leave to amend its fraud claims (and, if necessary, its contract claims) either to explain how its fraudulent concealment theory avoids being barred by the economic loss rule, to reframe its fraud theory in terms of fraudulent inducement, or both. Plaintiff also has leave to amend its UCL claim to the extent it is dismissed as vague or based on dismissed predicate claims.
If Plaintiff chooses to amend its pleadings, it must do so within thirty days of this Order's signature date, or the deficient claims may be dismissed with prejudice.
