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Stocco v. Gemological Institute of America, Inc.

United States District Court, S.D. California

September 24, 2013

FREDERICK STOCCO, an individual; KATHLEEN STOCCO, an individual; and GIA FLORENCE SRL, an Italian company. Plaintiffs,
GEMOLOGICAL INSTITUTE OF AMERICA, INC., a California Corporation; and Does 1 through 100, Defendant

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For Frederick Stocco, an individual, Kathleen Stocco, an individual, Plaintiffs: Dennis Patrick Hickman, LEAD ATTORNEY, Robert P Robinson, Hickman & Robinson LLP, San Diego, CA.

For GIA Florence SRL, an Italy company, Plaintiff: Dennis Patrick Hickman, Hickman & Robinson LLP, San Diego, CA.

For Gemological Institute of America, Inc., a California Corporation, Defendant: Amanda Catherine Fitzsimmons, LEAD ATTORNEY, DLA Piper LLP (USA), San Diego, CA; Christopher James Beal, LEAD ATTORNEY, Dillon & Gerardi, APC, Carlsbad, CA; Nancy O Dix, LEAD ATTORNEY, DLA Piper U.S. LLP, San Diego, CA.


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WILLIAM Q. HAYES, United States District Judge.

The matter before the Court is the Motion to Dismiss filed by Defendant Gemological Institute of America, Inc (" GIA" ). (ECF No. 33).


On April 19, 2012, Plaintiffs Frederick Stocco and Kathleen Stocco filed a Complaint against GIA in the Superior Court of California for the County of San Diego. (ECF No. 1). On May 29, 2012, GIA removed the Complaint to this Court. (ECF No. 1-3).

On July 10, 2012, Plaintiffs Frederick and Kathleen Stocco filed a First Amended Complaint, alleging the following claims for relief against GIA: (1) fraudulent misrepresentation; (2) negligence; (3) breach of written contract; (4) fraud in the inducement; (5) failure to provide franchise offering circular in violation of California Corporation Code § 31119; and (6) unfair business practices in violation of California Business & Professions Code § 17203. Id.

On July 20, 2012, GIA filed a motion to dismiss claims three, four, five, and six of the Complaint. (ECF No. 10). On January 3, 2013, the Court granted GIA's motion to dismiss in its entirety. (ECF No. 14). The Court concluded that Plaintiffs Frederick and Kathleen Stocco lacked standing to assert claim three, for breach of contract, because " there are no facts alleged in the Complaint to support [the] claim that they are direct beneficiaries to any agreement between the founding members of the Firgem Foundation after acquiring GIA Italy." Id. at 10. The Court concluded that claim five, for failure to provide franchise offering circular, was barred by the applicable statute of limitations because " the signing of the License Agreement[] occurred on December 20, 2007, over four years and five months before [Plaintiffs Frederick and Kathleen Stocco] filed this action...." Id. at 13.

On May 28, 2013, Plaintiffs Frederick Stocco, Kathleen Stocco, and GIA Florence SRL (" GIA Italy" ) (collectively, " Plaintiffs" ) filed the Second Amended Complaint (" Complaint" ) against GIA. The Complaint contains the following claims for relief: (1) fraudulent misrepresentation, brought by Plaintiffs Frederick and Kathleen Stocco; (2) negligence, brought by Plaintiffs Frederick and Kathleen Stocco; (3) breach of written contract, brought by GIA Italy; and (4) failure to provide franchise offering circular in violation of California Corporation's Code § 31119, brought by all Plaintiffs. (ECF No. 29).

On June 7, 2013, GIA filed the Motion to Dismiss claims three and four of the Complaint. (ECF No. 33). On July 1, 2013, Plaintiffs filed an opposition. (ECF No. 34).

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On July 8, 2013, GIA filed a reply. (ECF No. 36).


Plaintiffs Frederick and Kathleen Stocco are United States Citizens. GIA, " the global leader in gem grading," is a California corporation with its " principal place of business/headquarters in the City of Carlsbad, ... California." (Complaint ¶ ¶ 1, 9, ECF No. 29). " [GIA Italy] is an Italy company, wholly owned by the Stoccos." Id. ¶ 3.

" GIA represent[s] itself ... as a nonprofit institute, whose mission is to 'ensure the public trust in gems and jewelry by upholding the highest standard of integrity, academics, science, and professionalism through education, research, laboratory services, and instrument development.'" Id. " A GIA gem grading certificate significantly increases the value of a gem across the world. The GIA gem grading certificates can only be issued by gem grading labs authorized by GIA to issue GIA gem grading certificates. GIA's gem grading certificates are therefore highly valuable, and the gem grading labs and/or GIA gem drop-off locations that are authorized to issue such certificates have a huge advantage over and are much more highly regarded than those that lack GIA affiliation." Id.

" Beginning in 1991, and during relevant times, the Stoccos were employees of GIA. [O]n December 1, 1991, the Stoccos entered into an employment agreement, with GIA-GEM Instruments Corporation, a wholly owned subsidiary of GIA." Id. ¶ 10. " The employment agreements were entered into by the Stoccos, and required the Stoccos to open GIA's first European GIA location and to relocate to Vicenza, Italy to do so." Id. " The employment agreements provided: 'Point of Origin/Country of Origin: Santa Monica, CA U.S.A.'" Id. (quoting Pl. Exh. 1, ECF No. 29-2 (copies of employment agreements)).

" GIA-GEM Instruments Corporation's principal place of business was located in Santa Monica, California and the employment agreements were entered into in California. GIA-GEM Instruments is no longer a viable entity, having merged back into Defendant GIA. GIA is the principal and successor to GIA-GEM Instruments, and GIA's principal place of business is located in Carlsbad, California." Id. ¶ 11.

" In 1992, the Stoccos relocated from the United States to Italy for the sole purpose of establishing the first European GIA location for GIA. Pursuant to their employment agreement obligations, the Stoccos organized, opened and directed the first GIA European location in Vicenza, Italy, (GIA Italy), to establish a gem grading school on behalf of GIA. GIA Italy was created by GIA, and GIA Italy was a foreign affiliate and subsidiary wholly owned by GIA (as of 1992)." Id. ¶ 12.

" In early 1992, GIA Italy opened under the leadership of the Stoccos." Id. ¶ 13. " By 2003, GIA Italy had approximately 60 graduate gemologists per year. GIA Italy had about 200 students enrolled in extension and design classes, and another approximately 400 in the distance education classes. GIA Italy enrollment included students from the United States. Similarly, Italian students worked in and visited California, U.S., while earning GIA gemologist degrees." Id.

From 1993 to 2007, " the Stoccos continued to work and live in Italy, drawing salaries from GIA Italy, which was wholly owned by Defendant GIA...." Id. ¶ 15. " At all times, the Stoccos' employee reviews were exemplary. In 1992, Bill Boyajean, GIA's President, wrote the Stoccos a letter indicating that the Stoccos were doing a great job for GIA." Id. ¶ 16. " Thereafter,

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GIA executives continued to visit Italy and issue reports on the progress being made there. GIA had control and oversight of all operations at GIA in Italy." Id. ¶ 17.

" In 2005, GIA and the [Florence] Chamber of Commerce negotiated an agreement whereby the Chamber of Commerce would provide financial support to GIA Italy so long as GIA Italy agreed to allow the construction of a gem grading lab or GIA gem drop-off location that would be authorized to issue GIA gem grading certificates." Id. ¶ 17.

On March 17, 2005, " GIA, by and through its attorney, indicated that it may establish a GIA lab but only with GIA's written consent, and would agree to conduct a feasibility study regarding establishing a GIA gem drop-off location that would be used for GIA gem grading. GIA further indicated in this letter that the decision to establish a GIA gem drop-off location in Florence would be at the sole discretion of GIA Italy." Id. ¶ 18.

" In 2005, Donna Baker, GIA's President, on behalf of GIA, entered into a written agreement with the Florence Chamber of Commerce to move GIA Italy to Florence, and open a GIA school and a GIA gem drop-off location authorized to issue GIA gem grading certificates." Id. ¶ 19; see also Pl. Exhs. 3-4, ECF No. 29-2 (copies of the Italian original and English translation of the 2005 " agreement," entitled the " Articles of Incorporation" of the " Firenze Scienze Gemmologiche Foundation," referred to by Plaintiffs as " the Firgem Agreement" ).

This agreement ('Firgem Agreement') was made and signed by Baker on behalf of GIA and GIA Italy. In exchange for GIA agreeing to open a GIA school and GIA gem drop-off location authorized to issue GIA gem grading certificates, the Florence Chamber of Commerce (a quasi-governmental entity) agreed to provide GIA Italy with substantial financial support for a twenty (20) year period. Without agreeing to move forward with at least a GIA gem drop-off location authorized to issue GIA gem grading certificates, the Florence Chamber of Commerce would not have entered into the Firgem Agreement.

(Complaint ¶ 19, ECF No. 29).

GIA Italy was an intended third-party beneficiary to the Firgem Agreement.... The Firgem Agreement provided that GIA would 'Manage the analysis of precious stones and metals by issuing GIA Carlsbad certificates (reports) recognized worldwide.' This clause in the Firgem Agreement means that GIA agreed to allow the issuance of GIA gem grading certificates. The Firgem Agreement further provided that it had a 'duration of twenty years.' The Firgem Agreement provided support for both the local Ital[ian] community and GIA Italy.

Id. ¶ 43.

" A bank loan of approximately $350,000 Euros was taken out by GIA Italy with GIA's express and written permission to build out a space required for the new school and gem grading lab. This bank loan was obtained while the Stoccos, personally and as directors of GIA Italy, relied upon GIA's promise to authorize access to GIA gem grading certificates." Id. ¶ 20.

On October 31, 2007, " Tawfic Farah, GIA's Vice-President for International Operations, sent a letter to the Florence Chamber of Commerce thanking it for its support of GIA and its Italy operations." Id. ¶ 21.

" In or before 2007, GIA developed a scheme whereby it would attempt to convert GIA Italy to a franchise, and convert

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the Stoccos from employees to franchisees, and then withdraw support of GIA Italy." On August 20, 2007, " Tawfic Farah informed the Stoccos ... that he was authorized to negotiate and conclude an agreement with the Stoccos to take over GIA Italy. Tawfic Farah pitched the idea as recognition for the Stoccos' 16 years of hard work and dedication for GIA. Unbeknownst to the Stoccos, this was actually part of GIA's plan to vacate its Italy operation (and concurrently vacate its support for the Firgem Agreement)." Id. ¶ 22.

In late 2007, GIA approached the Stoccos and offered them ownership of GIA Italy under a franchise agreement. Concurrent with discussions regarding making the Stoccos franchisee owners, GIA sent the Stoccos a letter dated November 12, 2007, entitled 'Resignation from Personnel Employment Agreement' seeking to have the Stoccos state that they had been paid all salary accrued vacation and reimbursable expenses to which they were entitled under their employment agreements. GIA further sought to force the Stoccos to agree that they had no claims against GIA....

Id. ¶ 23; Pl. Exh. 5, ECF No. 29-3 (copy of November 12, 2007 letter); Pl. Exhs. 6-7, ECF Nos. 29-3, 29-4 (copies of the 2007 and 2009 " franchise agreements" ). " GIA offered the Stoccos ownership of GIA Italy under [the] franchise agreement, and Frederick Stocco, as President of GIA Florence SRL, ultimately entered into [the] franchise agreement with GIA." Id. ΒΆ 50. " GIA ... transferred full ownership of GIA's ...

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