Opinion
Case No. 2:19-cv-10309-ODW (GJSx)
11-25-2020
FISCHLER KAPEL HOLDINGS, LLC, et al., Plaintiffs, v. FLAVOR PRODUCERS, LLC et al., Defendants.
ORDER DENYING DEFENDANT'S MOTION FOR PRELIMINARY INJUNCTION [45] AND GRANTING DEFENDANTS' MOTION TO DISMISS [40]
I. INTRODUCTION
On December 4, 2019, Fischler Kapel Holdings, LLC ("FKH"), Richard Fischler ("Fischler"), and Paula Kapel ("Kapel") (collectively, "Plaintiffs") initiated this action against Flavor Producers, LLC ("FPI") and Jeffrey Harris ("Harris") (collectively, "Defendants"). (Compl., ECF No. 1.) On May 1, 2020, Plaintiffs filed a First Amended Complaint ("FAC"), and Defendants moved to Dismiss on May 29, 2020. (FAC, ECF No. 36; Mot. Dismiss, ECF No. 40.) On June 29, 2020, Defendant FPI moved for a preliminary injunction to prohibit Plaintiffs from pursuing arbitration of a breach of contract claim against the company. (Mot. Prelim. Inj., ECF No. 45.) For the reasons discussed below, the Court DENIES FPI's Motion for Preliminary Injunction and GRANTS Defendants' Motion to Dismiss Plaintiffs' FAC. (ECF Nos. 45, 40.)
After considering the papers submitted in connection with the Motions, the Court deemed the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78(b); C.D. Cal. L.R. 7-15.
II. FACTUAL BACKGROUND
At the heart of Plaintiffs' numerous allegations are the core accusations that Defendants manufactured fraudulent financial information and made several false representations related to the financial health of certain companies to lure Plaintiffs into entering unprofitable employment agreements and investing into a failing company. (See FAC ¶ 1.) The Court summarizes the allegations for the purposes of ruling on Defendants' Motions.
A. CFC Acquisition
Fischler and Kapel's company, Creative Flavor Concepts, Inc. ("CFC") had two businesses: (1) the design and manufacture of flavors that it sold to sellers of food, beverage, sports nutrition, and dietary products ("Flavor Business"); and (2) the manufacture of food, beverage, sports nutrition, and dietary products that it sold directly to retail brands and manufacturers ("Non-Flavor Business"). (Id. ¶¶ 27-29.)
In 2015, Harris, on behalf of FPI, pitched the concept of FPI purchasing CFC. (Id. ¶ 34.) The parties engaged in negotiations through over-the-phone and in-person meetings. (Id. ¶¶ 38, 40.) Plaintiffs allege that during these meetings, Harris and David Bergstein (FPI's agent), represented to Fischler that they wished to maximize CFC's revenues and income. (Id. ¶¶ 40, 87.) The meetings led to a stock acquisition agreement ("CFC Purchase Agreement") in June 2015, where ultimately, FPI and CFC agreed that FPI would purchase a majority interest in CFC ("CFC Acquisition"). (Id. ¶¶ 38, 77.) During these negotiations the parties agreed that, as part of the CFC Acquisition, Fischler and Kapel would enter into seven-year employment agreements ("CFC Employment Agreements"). (Id. ¶ 42.) Additionally, FPI incorporated CFCAC, Inc., a newly formed corporate entity of FPI. (Id. ¶ 43.) Plaintiffs allege that during the negotiations of the CFC Acquisition, Harris and Bergstein made false representations regarding their intent to maximize the value of CFC. (Id. ¶¶ 210-12.)
B. Amendments to CFC Acquisition Documents
In March 2016, Defendants required that the parties amend certain CFC Acquisition documents, and thus CFCAC, CFC, Fischler, and Kapel entered into the First Amendment to Stock Purchase and Redemption Agreement ("Amended CFC Purchase Agreement"). (Id. ¶¶ 101-06.) Plaintiffs allege the Amended CFC Purchase Agreement contemplated that FPI would acquire CFC's Flavor Business for an amount equal to the Flavor Business's fair value. (Id. ¶ 103.) According to Plaintiffs, during negotiations for the Amended CFC Purchase Agreement, Harris and Bergstein also represented to Fischler (in person, during meetings, and by telephone) that they wished to maximize the revenues of CFC but that those representations were false. (Id. ¶¶ 107-08.)
On or around March 4, 2016, CFC and FPI entered into a First Amendment to Service Agreement that required FPI to pay CFC a flat fee and allowed FPI to receive and retain all revenues from the business referred by CFC. (Id. ¶¶ 111, 113.) Plaintiffs allege that through these agreements FPI was allowed to manipulate the value of CFC and drive it down, to allow FPI to purchase CFC at a bargain. (Id. ¶¶ 115-30.)
C. CFC Asset Sale
Plaintiffs allege that in January 2017, "FPI's scheme came to fruition"; "[b]ecause of [FPI's] actions, FPI and a wholly owned subsidiary [Creative Concepts Holdings, LLC ("CCH")] acquired the majority interest in CFC at a markedly reduced price, [and thus] Fischler and Kapel had no option but to proceed with [an] asset sale as FPI, Harris[,] and Bergstein intentionally gutted the CFC business." (Id. ¶ 131.) On April 28, 2017, FPI, CCH, and CFC entered into an Asset Purchase Agreement, in which "FPI purchased the Flavor Business and CCH purchased the Non-Flavor Business ("CFC Asset Sale"). (See id. ¶¶ 134, 136.) In exchange for the Non-Flavor Business, CCH issued a 22% membership interest in CCH ("CCH Stock"), which was distributed to Fischler and Kapel. (Id. ¶ 138.) Fischler and Kapel contributed that 22% membership interest in CCH to FKH. (Id. ¶ 139.)
On May 12, 2017, Defendants formed CCH Acquisition Group, LLC ("CAG") to "spinoff" the stock or assets of CCH. (Id. ¶ 154.) Plaintiffs allege, upon information and belief, that FPI transferred its interest in CCH to CAG "as part of a large-scale plan to transfer all stock in CCH to CAG, and reduce FPI's ownership by soliciting additional investors ('CCH Spinoff')." (Id. ¶ 155.) Plaintiffs claim that in May 2017, Bergstein and Harris "prepared fraudulent financial information pertaining to CCH" and its wholly owned subsidiary Biozone Laboratories, Inc. ("Biozone") and disseminated that information to potential CAG investors, including Plaintiffs. (Id. ¶ 156.) Plaintiffs allege that in reliance on FPI, Harris, and Bergstein's fraudulent representations, FKH transferred its interest in CCH to CAG, in exchange for an interest in CAG. (Id. ¶¶ 171-75.) But had FKH been aware of the true financial status of CAG and its subsidiaries, it would not have invested in CAG. (Id. ¶ 173.)
D. Biozone Employment Agreements
On July 1, 2017, Plaintiffs allege that, in reliance on Defendants' fraudulent financial representations, Fischler and Kapel agreed to employment with Biozone ("Biozone Employment Agreements"). (Id. ¶¶ 180-81.) The Biozone Employment Agreements provided lower base compensation than Fischler and Kapel normally received, and a bonus structure based on CAG's earnings. (Id. ¶¶ 181-82.) Plaintiffs allege that they would not have agreed to the Biozone Employment Agreements had Defendants been honest about the financial health of CCH and Biozone. (Id. ¶ 258.) Fischler and Kapel claim they received $233,333 and $87,500 less compensation, respectively, than they would have if they were not fraudulently induced into the agreements. (Id. ¶¶ 259-60.)
E. Plaintiffs File Claims for Fraudulent Inducement and Securities Fraud
On January 4, 2019, Plaintiffs initiated this action against Defendants, and filed their FAC on May 1, 2020. In the FAC, Plaintiffs allege several claims related to their business dealings with Defendants: (1) fraudulent inducement of the CFC Acquisition; (2) fraudulent inducement of the CFC Employment Agreements; (3) fraudulent inducement of the CFC Asset Sale; (4) fraudulent inducement of the Biozone Employment Agreements; (5) fraudulent inducement of the CCH Spinoff; (6) fraudulent inducement of the CAG investment; (7) securities fraud (FKH against Defendants); (8) securities fraud (Fischler and Kapel against Defendants); and (9) securities fraud (scheme liability). On May 29, 2020, Defendants filed their Motion to Dismiss Plaintiffs' FAC.
F. Arbitration Before JAMS
In April 2020, Plaintiffs commenced arbitration against FPI before JAMS asserting a claim for breach of contract related to the CFC Employment Agreements ("Arbitration"). (Mot. Prelim. Inj. 1-2.) FPI contends that Arbitration is improper because FPI is not a party to the CFC Employment Agreements and never assumed the agreements, and that Plaintiffs' arbitration claim is duplicative of the claims in the FAC. (Id.) On April 30, 2020, FPI filed an objection in the Arbitration "on the grounds that JAMS lacked jurisdiction over the Plaintiffs' claims because FPI is not a party" to the CFC Employment Agreements. (Id. at 8.) After considering the full briefing on the issue, JAMS issued a notice stating that "[the] arbitrator has the authority to determine jurisdictional issues as a preliminary matter" and informed the parties that "[a]ccordingly, JAMS will proceed with the administration of this matter." (Decl. of Jeffrey Harris ("Harris Decl."), ¶ 30, Ex. S, ECF Nos. 45-2, 45-21.)
On June 5, 2020, JAMS issued a Notice of Commencement of Arbitration, and in response FPI notified JAMS and Plaintiffs that it objected to the Arbitration and planned to file a motion for preliminary injunction. (Id. ¶¶ 31-32, Exs. T-U, ECF Nos. 45-22, 45-23.) On June 29, 2020, Defendants filed their Motion for Preliminary Injunction.
III. PRELIMINARY INJUNCTION
The Court first addresses FPI's motion for preliminary injunction to enjoin Plaintiffs from pursuing Arbitration for a breach of contract claim related to the CFC Employment Agreements formed in June 2015. (See Mot. Prelim. Inj. 1.) For the following reasons, the Court DENIES FPI's motion.
A. Legal Standard
Federal Rule of Civil Procedure ("Rule") 65 governs the issuance of preliminary injunctions. "An injunction is an exercise of a court's equitable authority," which should not be invoked as a matter of course, but "only after taking into account all of the circumstances that bear on the need for prospective relief." Salazar v. Buono, 559 U.S. 700, 714 (2010). To obtain a preliminary injunction, the moving party must show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm to the moving party in the absence of preliminary relief; (3) that the balance of the equities tips in the moving party's favor; and (4) that an injunction is in the public interest. Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008).
A preliminary injunction is "an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief." Id. at 22. The moving party bears the burden of meeting all four Winter elements. DISH Network v. FCC, 653 F.3d 771, 776-77 (9th Cir. 2011).
B. Discussion
FPI seeks a preliminary injunction to prohibit Plaintiffs from pursuing a breach of contract claim against FPI in Arbitration. (See Mot. Prelim. Inj. 1.) As previously mentioned, FPI contends the claim in Arbitration is duplicative of a claim Plaintiffs assert in this case concerning the CFC Employment Agreements, and that because FPI is not a party to the CFC Employment Agreements, the arbitrator lacks jurisdiction to decide the dispute. (Id.) Thus, on these grounds FPI moves to enjoin Plaintiffs and argues that this Court—not the arbitrator—must decide the threshold issue of arbitrability. (Id.) In opposition, Plaintiffs assert that the Court lacks the authority to grant FPI's motion for preliminary injunction because the issue of whether the arbitration agreement is enforceable against FPI is outside the scope of the issues presented in Plaintiffs' FAC. (See Opp'n Mot. Prelim. Inj. 10, ECF No. 46.)
A preliminary injunction is appropriate only where it "grant[s] intermediate relief of the same character as that which may be granted finally," and does not "deal[] with a matter lying wholly outside the issues in the suit." De Beers Consol. Mines v. United States, 325 U.S. 212, 220 (1945); see also Profil Institut Fur Stoffwechselforschung GmbH v. ProSciento, Inc., No. 3:16-cv-01549-LAB (BLM), 2017 WL 1394089, at *1 (S.D. Cal. Feb. 28, 2017) ("Federal courts can issue preliminary injunctions only to the extent they pertain to pending underlying claims—in other words, where the preliminary injunction would temporarily grant the same kind of relief as the underlying claims, if successful, would ultimately merit." (citing Pac. Radiation Oncology, LLC v. Queen's Med. Ctr., 810 F.3d 631, 636 (9th Cir. 2015))). Thus, absent a relationship between the injury claimed in the motion for injunctive relief and the conduct asserted in the complaint "the district court lacks authority to grant the relief requested." Pac. Radiation, 810 F.3d at 636.
Here, FPI has no claim presently before the Court upon which it could issue final relief comparable to the intermediate relief that FPI seeks. See De Beers, 325 U.S. at 220. FPI is a defendant in this action and has not filed a complaint or counterclaim. While Plaintiffs bring myriad claims for fraudulent inducement and seek monetary damages for their alleged harm, if Plaintiffs do not ultimately prevail on their claims, FPI would not be entitled to any final relief. (See generally FAC.) As another district court has explained: "Where, as here, the party is bringing no claims, there is no basis for issuance of a preliminary injunction. And in fact, the Court lacks authority to do so." ProSciento, 2017 WL 1394089, at *1 (citing Pac. Radiation, 810 F.3d at 636). FPI has no underlying claim, thus the Court finds that it lacks authority to grant FPI's request for intermediate relief. See Pac. Radiation, 810 F.3d at 636. Therefore, FPI's Motion for Preliminary Injunction is DENIED. (ECF No. 45.)
IV. MOTION TO DISMISS
Next, the Court addresses Defendants' Motion to Dismiss Plaintiffs' FAC pursuant to Rule 12(b)(6) for failure to state a claim. (Mot. Dismiss 7.) First, Defendants contend that Plaintiffs' fraudulent inducement claims (claims one through six) fail as a matter of law because Plaintiffs' allegations fail to satisfy the heightened pleading requirements of Rule 9(b). (Id. at 7-8.) Second, Defendants assert that the economic loss-doctrine bars Plaintiffs' claims related to the employment agreements (claims two and four). (Id. at 13-14, 16-17.) Finally, Defendants argue that Plaintiffs' claims for securities fraud (claims seven through nine) fail because (1) the statements are barred by the Private Securities Litigation Reform Act of 1995 ("PSLRA") "safe harbor"; (2) Plaintiffs fail to allege facts that demonstrate Defendants made an actionable misrepresentation; and (3) Plaintiffs do not adequately allege scheme liability. (Id. at 18-25.)
A. Legal Standard
Dismissal under Rule 12(b)(6) "can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). "To survive a motion to dismiss . . . under Rule 12(b)(6), a complaint generally must satisfy only the minimal notice pleading requirements of Rule 8(a)(2)"—a short and plain statement of the claim. Porter v. Jones, 319 F.3d 483, 494 (9th Cir. 2003); see also Fed. R. Civ. P. 8(a)(2). The "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). The "complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Id. (citing Twombly, 550 U.S. at 555).
Whether a complaint satisfies the plausibility standard is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. A court is generally limited to the pleadings and must construe "[a]ll factual allegations set forth in the complaint . . . as true and . . . in the light most favorable to [the plaintiff]." Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). But a court need not blindly accept conclusory allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).
Where a district court grants a motion to dismiss, it should generally provide leave to amend unless "it is clear . . . the complaint could not be saved by any amendment." Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1034 (9th Cir. 2008); see Fed. R. Civ. P. 15(a) ("The court should freely give leave when justice so requires").
B. Plaintiffs' Fraudulent Inducement Claims Fail
In claims one through six, Plaintiffs allege that Defendants fraudulently induced them to enter into the: (1) CFC Acquisition, (2) CFC Employment Agreements, (3) CFC Asset Sale, (4) Biozone Employment Agreements, (5) CCH Spinoff, and (6) CAG investment. (FAC ¶¶ 206-345.) Defendants contend that Plaintiffs' claims fail to satisfy Rule 9(b)'s heightened pleading requirements for allegations of fraud. (Mot. Dismiss 8-18.)
1. Plaintiffs Fail to Satisfy Rule 9(b)'s Heightened Pleading Requirements
"To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a complaint generally must satisfy only the minimal notice pleading requirements of Rule 8(a)(2)." Porter, 319 F.3d at 494. However, "where a complaint includes allegations of fraud, [Rule] 9(b) requires more 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.'" Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (quoting Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004)). Plaintiffs must also set forth "what is false or misleading about the purportedly fraudulent statement, and why it is false." Salameh v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013) (quoting Cafasso, U.S. ex rel v. Gen. Dynamics C4 Sys. Inc., 637 F.3d 1047, 1055 (9th Cir. 2011)); see also Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (same). Thus, to satisfy the requirements of Rule 9(b) "the circumstances constituting the alleged fraud must be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong." Vess, 317 F.3d at 1106 (internal quotation marks omitted). "[M]ere conclusory allegations of fraud are insufficient," and "[b]road allegations that include no particularized supporting detail do not suffice." United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1180 (9th Cir. 2016).
i. Claim One
To support their first claim (fraudulent inducement of the CFC acquisition), Plaintiffs allege that "Harris and Bergstein both represented to Fischler that they wished to maximize the revenues" of CFC during the negotiation of the CFC Purchase Agreement (from January 2015 to June 2015) and during the negotiation of the Amended CFC Agreement (from January 2015 to March 2016). (Opp'n Mot. Dismiss 8, ECF No. 41 (citing FAC ¶¶ 87, 107).) According to Plaintiffs, Harris and Bergstein's representations regarding maximizing CFC's revenue were false because they "had no intention of maximizing revenue." (Id. at 9 (citing FAC ¶¶ 88, 108).) Plaintiffs further allege that Harris and Bergstein made these representations "in person, during meetings, and by telephone" throughout the fifteen-month period. (Id. at 8 (citing FAC ¶¶ 40, 87, 107).)
Defendants contend that Plaintiffs' allegations fail to satisfy Rule 9(b) because they do not specifically allege "what representations were made, who made each representation, when, where, or to whom each representation was made, or why any alleged representation was false." (Id. at 9.) The Court agrees.
To start, Plaintiffs do not plead the content of the purported representations, and thus their allegations as to "what" fraudulent representations were made are deficient under Rule 9(b). See UMG Recordings, Inc. v. Global Eagle Ent., Inc., 117 F. Supp. 3d 1092, 1106 (C.D. Cal. 2015) (explaining that general allegations are insufficient, plaintiffs must state the "specific content of the false representations.") In the FAC, Plaintiffs rely solely on the allegations that over the course of fifteen months Harris and Bergstein falsely "represented" that they wished to maximize CFC's revenues. (Opp'n Mot. Dismiss 8 (citing FAC ¶¶ 87, 107).) Based on these allegations, it is not clear what Harris and Bergstein specifically represented to Fischler regarding their "wish" to maximize the revenues of CFC. (See id.) Plaintiffs' allegations are utterly deficient and cannot support fraudulent inducement claims; Plaintiffs must specifically allege the content of Harris and Bergstein's purported representations that they "wished to maximize" the CFC revenues so that Defendants can adequately defend against Plaintiffs' claims. See Vess, 317 F.3d at 1106; see also Swartz, 476 F.3d at 764 (explaining that Rule 9(b) requires an account of the content of the allegedly false representations).
With respect to "when"—Plaintiffs allege the representations were made "several times throughout the period from January 2015 through March 2, 2016"—a fifteen-month time frame. (Opp'n Mot. Dismiss 8 (citing FAC ¶¶ 87, 107).) However, Plaintiffs' allegations do not "specify the time and date" of the alleged misrepresentations, and thus do not satisfy Rule 9(b) for this additional reason. See, e.g., R Power Biofuels, LLC v. Chemex LLC, No. 16-CV-00716-LHK, 2016 WL 6663002, at *13 (N.D. Cal. Nov. 11, 2016) ("[S]pecifying an eight-month time-frame is not significantly more specific than stating 'in 2011 and 2012.' With allegations of 'repeated' conversations over an eight-month time[-]frame . . . it is unclear how [d]efendant will be able to identify the particular conversation at issue.").
The allegations concerning "where" the representations were made are equally deficient. Plaintiffs rely solely on the allegations that the representations were made "in the course of several phone calls and in[-]person meetings." (Opp'n Mot. Dismiss 8 (citing FAC ¶¶ 87, 107).) But such vague allegations do not put Defendants on notice as to where these various in-person meetings and conversations took place.
Finally, Plaintiffs fail to allege what was false or misleading about the purported representations that Harris and Bergstein wished to maximize the revenues of CFC (see FAC ¶¶ 87, 108), and why they were false when made, see Vess, 317 F.3d at 1106 ("The plaintiff must set forth what is false or misleading about a statement, and why it is false."). Plaintiffs' conclusory allegations that the purported representations were false because Defendants "had no intention of maximizing revenue" do not suffice. (Mot. Dismiss 9); see United Healthcare Ins. Co., 848 F.3d at 1180 ("[M]ere conclusory allegations of fraud are insufficient.").
ii. Claims Two, Three, Four, Five, and Six
Plaintiffs' other fraudulent inducement claims (claims two through six) suffer from the same deficiencies. (See FAC ¶¶ 217-91.) In support of claim two (fraudulent inducement of the CFC Employment Agreements), Plaintiffs allege only that (1) FPI assumed the agreements as part of the CFC Asset Sale, and (2) prior to entering into the agreements, Harris confirmed that he was prepared for FPI to pay Fischler and Kapel under the terms of the agreements. (Id. ¶¶ 223-26.) But Plaintiffs' well-plead allegations do not set forth when the purported fraudulent statement was made, why the statement was false, or that the statement was false when it was made. (See generally id.)
In support of claims three through six, Plaintiffs allege Harris and Bergstein made fraudulent representations during the CFC Asset Sale, CCH Spinoff, and CAG investment regarding the value of CCH Stock and the financial health of CCH and Biozone. (Id. ¶¶ 236, 250-52, 271, 282-83.) These representations were allegedly made "during in-person meetings and telephone calls and by email." (Id. ¶¶ 235-36, 270, 282.) The allegations in support of these fraud based claims, however, also fail to meet the heightened pleadings requirements of Rule 9(b).
For example, Plaintiffs fail to allege that a false representation was made regarding the CFC Asset Sale (third claim), or when the purported false representation was made. (Mot. Dismiss 15-16 (citing FAC ¶¶ 236-241).) Plaintiffs further allege in conclusory fashion that the representations concerning the CFC Asset Sale were false when they were made, but as noted, such conclusory allegations are insufficient under Rule 9(b). (See FAC ¶ 237.) Additionally, Plaintiffs allege that the term sheet and other financial representations that Bergstein emailed Fischler (underlying their fourth, fifth, and sixth claims) were false, but fail to put forth any specific factual allegations to support that matter-of-fact conclusion. (See id. ¶¶ 251-57, 269-71, 282-87, 157-65.) At bottom, Plaintiffs fail to put forth specific allegations to support any of their fraud based claims, and instead rely on vague assertions and conclusory allegations. See United Healthcare, 848 F.3d at 1180 ("[M]ere conclusory allegations of fraud are insufficient," and "[b]road allegations that include no particularized supporting detail do not suffice.").
iii. Conclusion
In sum, while Plaintiffs claim their 345-paragraph FAC is "painstakingly detailed" (see Opp'n Mot. Dismiss 1), Plaintiffs do not sufficiently support their accusations that Defendants made fraudulent representations, see, e.g., In re Hansen Nat. Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1153 (C.D. Cal. 2007) ("A complaint can be long-winded, even prolix, without pleading with particularity. Indeed, such a garrulous style is not an uncommon mask for an absence of detail." (quoting Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997))).
Therefore, Plaintiffs' claims that are premised on purported fraudulent representations related to the CFC, CCH, and CAG business dealings (claims one, two, three, four, five, and six) are DISMISSED. As it is not clear that amendment would be futile, the Court GRANTS Plaintiffs leave to amend claims one and three through six.
2. The Economic Loss Doctrine Bars Plaintiffs' Second Claim
Defendants contend that Plaintiffs' second claim (fraudulent inducement of the CFC Employment Agreements) should be dismissed with prejudice because it is barred by the economic loss doctrine. (Mot. Dismiss 13-14, 25.) "The economic loss [doctrine] generally provides that parties who allege purely economic injuries from the breach of a contract must sue in contract, rather than in tort." Veasna Chan Hun v. Hajjar, No. CV 18-10330 PSG (KSx), 2019 WL 4509302, at *7 (C.D. Cal. May 30, 2019) (citing Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979, 988 (2004)). A party that alleges only economic loss from a contractual breach is thus limited to contract remedies, "unless [it] can demonstrate harm above and beyond a broken contractual promise." Robinson, 34 Cal. 4th at 988. In sum, under the economic loss doctrine "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." JMP Sec. LLP v. Altair Nanotechnologies Inc., 880 F. Supp. 2d 1029, 1042 (N.D. Cal. 2012).
Here, Plaintiffs' allegations underlying their second claim are based on solely on FPI's purported promise to pay Plaintiffs pursuant to the terms of the CFC Employment Agreements, and FPI's subsequent failure to pay Plaintiffs the amounts owed under those agreements. (See FAC ¶¶ 222, 224.) In other words, Plaintiffs allege only economic losses based on a purported broken promise related to the employment agreements. (See, e.g., id. ¶¶ 230-31 ("[Plaintiffs] ha[ve] been damaged by FPI's fraudulent inducement of the [CFC Employment Agreements] in an amount equal to the unpaid compensation thereunder.").) It is clear then that Plaintiffs' allegations fail to allege harm beyond a broken contractual promise, and therefore cannot support a fraud claim. See Robinson, 34 Cal. 4th at 988; see also Veasna Chan Hun, 2019 WL 4509302, at *7 ("A fraudulent [inducement] claim must be based on something other than simply a claim that the plaintiff was induced to enter into a contract by a promise that the defendant would perform its contractual obligations.")
The Court perceives no way that Plaintiffs could successfully frame their second claim for fraudulent inducement of the CFC Employment Agreements by amending their pleadings. No matter how the allegations are framed, Plaintiffs' second claim falls within the scope of the economic loss doctrine. Accordingly, this claim is DISMISSED without leave to amend. See Carrico v. City & Cnty. of San Francisco, 656 F.3d 1002, 1008 (9th Cir. 2011) (explaining that leave to amend "is properly denied . . . if amendment would be futile.").
C. Plaintiffs Fail to State a Claim for Securities Fraud
Plaintiffs also assert three claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934, related to the CAG investment and CFC Acquisition (claims seven through nine). (FAC ¶¶ 292-345.)
Defendants contend that Plaintiffs fail to allege a claim for securities fraud under Rule 10b-5 because: (1) Plaintiffs' claims are barred by the PSLRA "safe harbor"; (2) Plaintiffs fail to plead an actionable misrepresentation; and (3) Plaintiffs fail to plead a manipulative act. (Mot. Dismiss 19-24.)
1. Rule 10-b(5) and the PSLRA "Safe Harbor"
Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to this section, the Securities and Exchange Commission promulgated Rule 10b-5, which makes it unlawful, in connection with the purchase or sale of any security:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading, or[,]
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person . . . .17 C.F.R. § 240.10b-5. Rule 10b-5(b) applies to misrepresentation or omission claims, and Rules 10b-5(a) and (c) apply to scheme liability claims. See, e.g., In re CytRx Corp. Sec. Litig., No. CV 14-1956-GHK (PJWx), 2015 WL 5031232, at *3-4 (C.D. Cal. July 13, 2015); Oaktree Prinicipal Fund V, LP v. Warburg Pincus LLC, No. CV 15-8574 PSG (MRWx), 2016 WL 6782768, at *14 (C.D. Cal. Aug. 9, 2016).
Additionally, the PSLRA safe harbor provides a defensive "barrier at the pleading stage" for "forward-looking statements," such as "projection of revenues, income (including income loss), earnings . . . or other financial items." In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010) (citing 15 U.S.C. § 78u-5(i)(1)(A)). For forward-looking statements to fall under the safe harbor, they must be accompanied by "meaningful cautionary" language that identifies "important factors that could cause actual results to differ materially from those in the forward-looking statement[s]." Id. (quoting 15 U.S.C. § 78u-5(c)(1)(A)(i)).
2. The PSLRA Safe Harbor Does Not Apply
Defendants contend that the PSLRA safe harbor applies to Plaintiffs' Rule 10b-5(b) claims because they "rely on allegations regarding 'forward-looking'" projections regarding "future revenue, gross profits, cash, and cash equivalents" pertaining to CCH and Biozone. (Mot. Dismiss 19-20.) Plaintiffs argue that the relevant statements are not forward-looking. (Opp'n Mot. Dismiss 19 (citing FAC ¶ 166 (alleging that the 2017 projected balance sheet stated how much CCH " possessed . . . [in] cash [and] cash equivalents." (emphasis added))).) Regardless of whether the purported representations are "forward-looking," the representations, as alleged in the FAC, do not fall under the PSLRA safe harbor. First, Plaintiffs do not allege the representations contained cautionary language. (See generally FAC.) Second, Defendants do not argue their purported forward-looking statements were accompanied by any meaningful cautionary language. (See generally Mot. Dismiss; Reply (lacking any argument that the purported statements were accompanied by any cautionary language, as required to fall under the PSLRA safe harbor).)
3. Plaintiffs Fail to Plead a Claim Under Rule 10b-5(b)
Although the purported financial representations are not protected by the safe harbor, Plaintiffs still fail to state a claim for securities fraud under Rule 10b-5(b) (claims seven and eight). The heightened pleading requirements are "no small hurdle" for a plaintiff alleging securities fraud; they require that "[a] complaint under § 10(b) and Rule 10b-5 . . . satisfy the dual pleading requisites of [Rule] 9(b) and the PSLRA." In re Verifone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012). Rule 9(b) requires that the allegations are pleaded with particularity, 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." Swartz, 476 F.3d at 764. And the PSLRA "mandates that 'the complaint shall specify each statement alleged to have been misleading, and the reason or reasons why the statement is misleading.'" In re Verifone, 704 F.3d at 701 (brackets omitted) (quoting 15 U.S.C. § 78u-4(b)(1)(B)). If allegations regarding a false statement under the securities act are based on information and belief, the plaintiff must "state with particularity all facts on which that belief is formed." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009), as amended (Feb. 10, 2009).
Plaintiffs aver upon information and belief that in May 2017, Bergstein formed CAG to allow for a spinoff of CCH's stock and assets. (FAC ¶ 294.) Plaintiffs further allege, upon information and belief that in May 2017, Bergstein "prepared fraudulent financial information pertaining to CCH and Biozone" that included "grossly inflated" numbers for CCH and Biozone, which he later emailed to potential investors including Plaintiffs. (Id. ¶¶ 165, 297.) For example, according to Plaintiffs, Bergstein emailed Fischler the term sheet, summary financials, and the presentation related to CAG that indicated, "CCH has a very strong balance sheet with $21 [m]illion in assets and $2.8 [m]illion in liabilities." (Id. ¶ 299.) Plaintiffs allege that the financial information related to CCH and Biozone (CAG's subsidiaries) "were false" and "Fischler was induced to make a loan to CCH in the amount of $145,000 and Kapel was induced to make a loan to CCH in the amount of $50,000." (Id. ¶¶ 302-04.) Finally, Plaintiffs allege, "[w]hen the misrepresentations made by Defendants regarding the financial health of CAG, CCH[,] and Biozone came to light, the value of the CAG stock massively declined in value," and that this decline damaged Plaintiffs. (Id. ¶ 306.)
Plaintiffs' Rule 10b-5(b) claims are plagued by the same deficiencies found throughout the FAC—the allegations are vague and lack the specificity that Rule 9(b), and here, the PSLRA, mandate. First, Plaintiffs fail to sufficiently allege facts to support that the financial information purportedly presented in the term sheet, summary financials, and presentation were false. Plaintiffs offer only the conclusory allegation that the "representations were false at the time [FPI and Bergstein] made them." (FAC ¶¶ 302-03). These allegations are insufficient to support a claim for securities fraud. See Ark. Teacher Ret. Sys. v. OSI Sys., Inc., No. 2:17-cv-08841-VAP-(SKx), 2019 WL 2895625, at *4 (C.D. Cal. May 7, 2019) (dismissing a Rule 10b-5(b) claim where the plaintiffs' complaint was "no more than a litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements [were] false." (brackets omitted) (quoting Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1070-72 (9th Cir. 2008))).
Second, Plaintiffs attempt to support their securities fraud claims with allegations based only on "information and belief" that the numbers in the financial reports were "grossly inflated" (FAC ¶ 165), yet Plaintiffs fail to "state with particularity all facts on which that belief is formed," see Zucco, 552 F.3d at 991. In addition, the PSLRA mandates that Plaintiffs "specify each statement alleged to have been misleading, and the reason or reasons why the statement is misleading," which Plaintiffs fail to do. See Verifone, 704 F.3d at 701. Thus, Plaintiffs cannot rely on their deficient allegations to support claims under Rule 10b-5(b).
4. Plaintiffs Fail to Plead a Claim Under Rule 10b-5(a) and (c)
Plaintiffs' claim for scheme liability under Rule 10b-5(a) and (c) (claim nine) also fails to satisfy the heightened pleading requirements of Rule 9(b). See Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 605 (9th Cir. 2014) (explaining that "Rule 9(b) applies to all elements of a securities fraud action."). Here, Plaintiffs rely on the same deficient allegations that from June 2015 through March 2016, Harris and Bergstein falsely represented that they wished to maximize the revenues and earnings of CFC during in-person meetings and by telephone. (FAC ¶¶ 337-43.) As the Court previously held, these allegations do not satisfy the requirements of Rule 9(b); they fail to establish specifically what representations were made, when they were made, and that the representations were false when made. See Vess, 317 F.3d at 1106.
Accordingly, Plaintiffs' claims for securities fraud under Rules 10b-5(b), (a), and (c) (claims seven through nine) are DISMISSED. As it is not clear that amendment would be futile, the Court GRANTS Plaintiffs leave to amend these claims. /// /// /// /// /// /// /// /// /// /// /// /// ///
V. CONCLUSION
For the reasons discussed above, the Court hereby DENIES FPI's Motion for Preliminary Injunction. (ECF No. 45.) The Court GRANTS Defendants' Motion to Dismiss claims one, three, and four through nine with leave to amend, and claim two without leave to amend. (ECF No. 40.) If Plaintiffs choose to amend their pleadings, they shall file a second amended complaint ("SAC") in conformance with this Order no later than twenty-one (21) days from the date of this Order. If Plaintiffs file a SAC, Defendants shall file a response no later than fourteen (14) days from the date of the SAC filing.
IT IS SO ORDERED.
November 25, 2020
/s/ _________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE