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Interserve, Inc., et al v. Fusion Garage Pte. Ltd


February 9, 2011


The opinion of the court was delivered by: Richard Seeborg United States District Judge

**E-filed 2/9/11**

For the Northern District of California



This action arises from an alleged cooperative effort between plaintiffs and defendant to develop and bring to market a tablet computer that was to be known as the "Crunchpad." Shortly before the planned product launch, defendant announced that it would no longer work with plaintiffs, and instead would release a tablet computer under the name "joojoo." Plaintiffs' claims for fraud and unfair competition as pleaded in the original complaint herein were dismissed, with leave to amend. Defendant now moves to dismiss those claims as repleaded in the Amended Complaint. Pursuant to Civil Local Rule 7-1(b), the motion has been submitted without oral argument. For the reasons explained below, it will be denied.


The general background of this suit has been described in prior orders and will not be repeated here. As noted, the fraud and unfair competition counts of the original complaint were 4 dismissed with leave to amend. That complaint included, among other things, a count under the Lanham Act, which was also dismissed with leave to amend, but which plaintiffs have not attempted 6 to replead. The Lanham Act claim was predicated on a variety of allegedly false statements made 7 by defendant. Additionally, the allegations of the original complaint encompassed a plethora of 8 purported other misrepresentations, false promises, and failures to disclose on defendant's part. As 9 the order dismissing the fraud claim observed, the result was a "hodgepodge that renders it difficult 10 to differentiate between mere conclusions of falsity and any factual representations that might be court sufficient to establish that material misrepresentations were presented, that promises were made without intent to perform, or that there was a duty to disclose matters omitted." Order entered For the Northern District of California

August 24, 2010 at 14:12-15.

Furthermore, by the time the prior motion to dismiss was being briefed and decided, plaintiffs had already conducted substantial discovery, which they contended had uncovered additional instances and evidence of misrepresentations. While such material could not properly be considered in support of plaintiffs' argument that the then-existing complaint adequately pleaded fraud, it did serve as an additional reason to require plaintiffs to amend before proceeding with their claim. See id. at 14:17-15:2.

Although the Amended Complaint has incorporated additional material from the discovery proceedings, it is fundamentally narrower than the original, in that entire counts have been 22 eliminated (including some as to which leave to amend was granted), and the fraud claim is more 23 focused. For example, the original complaint included an assertion that defendant misrepresented 24 its existing software when the parties first discussed working together in 2008, and alleged that 25 plaintiffs were induced to enter the relationship with defendant through promissory fraud. By 26 contrast, the fraud claim of the Amended Complaint is based on alleged misrepresentations by defendant concealing its purported plan to abandon plaintiffs and market the joojoo on its own, 2 beginning in the latter half of 2009.*fn1

7 a misrepresentation, such as a false representation or a concealment of fact; (2) knowledge of falsity 8 or concealment; (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) 9 resulting damage." Milne Employees Ass'n v. Sun Carriers, 960 F.2d 1401, 1408 (9th Cir. 1991)

does not challenge the adequacy of the pleading of misrepresentations, knowledge, and intent. The issue is whether plaintiffs have alleged sufficient facts showing they relied on any of the purported misrepresentations.*fn2

The parties are in agreement that under Rule 9(b) of the Federal Rules of Civil Procedure, "a 15 party must state with particularity the circumstances constituting fraud or mistake." Plaintiffs and defendant part company, however, over whether the particularity required by Rule 9(b) applies to pleading the reliance and damages elements of a fraud claim. Defendant cites cases such as Roque 18 v. Suntrust Mortg., Inc., 2010 WL 546896, *5 (N.D. Cal. 2010) and Applied Elastomerics, Inc. v. Z-19 Man Fishing Prods., Inc., 2007 WL 703606, *3 (N.D. Cal. March 5, 2007), which generally assert that all of the elements of a fraud claim must be pleaded with specificity, but which do not consider Statements Before and During the Project." (Emphasis added). This heading appears to be an inadvertent carry-over from the original complaint. The allegations under the heading do not include any matters preceding the inception of the project, or even from its early stages. In contrast, the corresponding section of the original complaint alleges misrepresentations were made before the project and during its first few months.


A. Fraud

Under the California common law applicable here, the elements of a claim for fraud are, "(1) (citing Cicone v. URS Corp., 183 Cal.App.3d 194, 200 (1986)). In this case, defendant's motion For the Northern District of California

or address whether or not there is a basis under Rule 9(b) for distinguishing those elements relating 2 to the "circumstances constituting fraud," from those relating to reliance and damages.*fn3

Plaintiffs, in turn, rely on Asis Internet Serv's v Subscriberbase Inc., 2009 WL 4723338 (N.D. Cal. 2009) and Menjivar v. Trophy Prop. IV DE, LLC, 2006 WL 2884396 (N.D. Cal. 2006) to 5 argue that a party need only satisfy the general requirements of Rule 8, when pleading the reliance 6 and damages elements of a fraud claim. Asis involved a statutory claim that "sounded in fraud," 7 thereby implicating Rule 9(b), but that did not include reliance and damages elements. As such, the 8

Asis court did not have before it the question of whether a common law fraud claim requires those 9 elements to be pleaded with specificity. Nevertheless, there is considerable persuasiveness to the 10 observation in Asis that "pleading reliance and damages with specificity is not likely to be of much use in helping a defendant to prepare an adequate response; rather, it is the specific description of the other aspects of the fraud, 'the who, what, when, where, and how,' that will be most important in allowing a defendant to prepare its answer." 2009 WL 4723338 at * 3.

For the Northern District of California

Menjivar directly supports plaintiffs' position that federal pleading standards do not require "fraud damages be pled with more specificity than required under normal notice pleading." 2006

WL 2884396 at *13. While Menjivar does not expressly discuss reliance, its conclusion is equally

applicable to that element of a fraud claim. Defendant's response to Menjivar is that it should be viewed as outdated, given later cases such as Roque and Applied Elastomerics.

The Ninth Circuit has not addressed this issue directly, but has described Rule 9(b) as requiring a plaintiff to allege the "who, what, where, when, and how" of the charged misconduct.

Vess v. Ciba-Geigy Corp. U.S.A., 317 F.3d 1097, 1106 (9th Cir. 2003). As Vess explained, "the 22 circumstances constituting the alleged fraud must be specific enough to give defendants notice of 23 the particular misconduct so that they can defend against the charge and not just deny that they have 24 done anything wrong." Id.

Even assuming, however, that those elements are part of the "circumstances" of fraud to which the 3 rule refers, the Amended Complaint includes sufficient allegations of fact to show how and why 4 plaintiffs relied on the purported misrepresentations to their detriment. The gravamen of the claim 5 is that plaintiffs continued their efforts to develop and support the Crunchpad project, reasonably 6 believing that defendant was working with them in bringing the device to market, when in fact 7 defendant was already preparing to introduce the joojoo as its own product.*fn4 Defendant points out 8 that as alleged in the Amended Complaint, the purported fraud is limited to a narrow window of 9 time. As a result, plaintiffs may have difficulty establishing there is much they could have done 10 differently had they known of defendant's true plans earlier, or that they incurred any significant

additional costs after the point in time when the alleged misrepresentations began. The actual damages may therefore prove nominal or non-existe state a claim and the motion must be denied.

Finally, defendant asserts that the Amended Complaint does not allege facts showing that it 15 entered into the alleged joint venture with an intent to deceive them. Citing Legal Additions LLC v. Kowalski, 2010 WL 335789 (N.D. Cal. 2010), defendant argues that plaintiffs have thereby failed to state a claim for false promise fraud. Defendant is correct that the Amended Complaint would be 18 insufficient to state such a claim, but unlike the original complaint, it does not purport to do so.

The unfair competition claim brought under California Business and Professions Code §17200 in the original complaint was dismissed on the grounds that the underlying fraud had not Accordingly, Rule 9(b) may not apply to the reliance and damages elements of a fraud claim.

For the Northern District of California

nt. The allegations, though, are sufficient to

B. Unfair Competition

been adequately alleged. In the present motion, defendant's sole challenge to the claim as repleaded 2 is the contention that it again falls with the fraud count. In light of the conclusion above that the

Amended Complaint states a claim for fraud with sufficient particularity, the motion must be denied 4 as to the unfair competition claim as well.*fn5


The motion to dismiss is denied. Defendant shall file an answer within 20 days of the date of this order. The parties shall appear for a Case Management Conference on March 17, 2011, at 9 10:00 a.m., with a joint case management conference statement to be filed one week in advance thereof.

For the Northern District of California




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