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holding that "section 1668 renders the T & C's limitation of liability unenforceable to the extent that it would insulate Defendant from intentional tort liability" where the clauses at issue, like those here, barred consequential damages and limited liability to "the total amount paid . . . to Defendant under this Agreement," but did exculpate liability for the claims at issue
Summary of this case from Peregrine Pharm., Inc. v. Clinical Supplies Mgmt., Inc.Opinion
Case No. C 13-5304 SC
06-12-2014
WEBOOST MEDIA S.R.L., Plaintiff, v. LOOKSMART LTD. and DOES 1-100, Defendants.
ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO
DISMISS, AND DENYING MOTION FOR
PARTIAL SUMMARY JUDGMENT
I. INTRODUCTION
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.
II. BACKGROUND
A. The Parties and the Pay-Per-Click Ad Industry
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. See id.
The online advertising model relevant to this case is called "pay-per-click." Id. In this model, advertisers place their ads on publishers' websites and are charged a fixed sum each time a user clicks the ad. Id. ¶ 9. Part of this "pay-per-click" fee is then paid to the publisher on whose website the ad appeared, and part goes to the intermediary that helped to place the ad. Id.
Plaintiff owns and operates an international network of websites. Id. ¶ 11. In the online advertising ecosystem, Plaintiff is primarily a publisher, and its primary source of income is the revenue generated through the placement of ads on its websites. Id. Plaintiff entered a contract with Defendant under which Defendant would act as both intermediary and publisher. Id. ¶ 17. Defendant, like Plaintiff, owns a network of websites, and as part of the contract, it agreed to display ads promoting Plaintiff's website network on its own websites. Id. Plaintiff agreed to pay Defendant based on the total number of clicks on those ads, based on Defendant's monthly invoices listing the number of clicks and the total amount owed. Id. The price per click varied depending on the market, but it ranged between $0.01 and $0.05. Id.
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. Id. ¶ 10. In this capacity it operates a service called Google AdSense. Id. Plaintiff was a Google AdSense customer. Id. ¶ 12. Google was Plaintiff's most important intermediary partner before Plaintiff contracted with Defendant. Id. As part of that contractual arrangement, Plaintiff acted as a publisher, using Google to locate and place appropriate online ads on Plaintiff's network of websites. Id. Under its contract with Google, Plaintiff received 51 to 68 percent of pay-per-click revenue generated from clicks on the AdSense ads that Google placed on Plaintiff's websites. Id. Google took the remainder, though it was also permitted by contract to deduct more money from Plaintiff's AdSense account if it determined that ad clicks originating from Plaintiff's websites were illegitimate. Id. These illegitimate clicks are called "click fraud" in the online ad industry. Id.
"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. Id. Advertisers get no benefit from this behavior, since the fraudulent clicker does not engage with whatever the advertiser is offering (e.g., the perpetrator of click fraud does not buy the product advertised), but the publishers and intermediaries still get paid per click. Id. Click fraud is a risk for online advertising publishers because, as Defendant noted in a recent 10-K filing, publishers on whose sites click fraud is perpetrated must sometimes issue credits or refunds to advertisers or pay revenue share to distribution network partners. Id. ¶ 14. This hurts the publishers' profitability and branding. Id.
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. Id. Some small percentage of click fraud is considered unavoidable and is tolerated within the pay-per-click ad industry, though Plaintiff states that prior to its agreement with Defendant, its monthly deductions for pay-per-click traffic that Google considered illegitimate averaged less than .5 percent of the total pay-per-click traffic generated on Plaintiff's websites. Id. ¶ 16.
Plaintiff entered the contract with Defendant around October 31, 2011. Id. ¶ 17. As part of this contract, Plaintiff signed Defendant's standard "Terms and Conditions" ("T&C"). ECF No. 1 Ex. A ("Compl.") Ex. A (also called the "Agreement"). Between December 2011 and June 2012, Plaintiff paid Defendant $105,273.92, pursuant to seven invoices. Id. ¶ 18. Throughout this time, Plaintiff believed it was paying Defendant for legitimate pay-per-click traffic, not for fraudulent clicks. Id.
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. Id. ¶ 19. Between April and July 2012, Google deducted nearly $250,000 from Plaintiff's AdSense account due to suspicious click fraud activity, substantially all of which came to Plaintiff's websites from websites affiliated with Defendant. Id. Then, around July 3, 2012, Google informed Plaintiff that an additional $191,000 in gross revenue (the amount prior to Google taking its share) was being deducted from Plaintiff's AdSense account due to click fraud originating on Plaintiff's website www.pay-it-less.co.uk. Id. ¶ 20. This deduction led to a loss of $130,000 for Plaintiff. Id. Between August and December 2012, Google deducted an additional $12,500 from Plaintiff's AdSense account as additional compensation for the unusually high volume of click-fraud traffic originating from Plaintiff's websites, substantially all of which Plaintiff maintains was traceable to Defendant's websites or conduct. Id. ¶ 23.
Eventually, Plaintiff's AdSense account was reduced to a negative balance, and in December 2012, Plaintiff abandoned the account. Id. ¶ 26. Plaintiff's business relationship with Google deteriorated, leading it to use less profitable pay-per-click intermediary alternatives, and only recently has Plaintiff begun to repair its relationship with Google, though its previous levels of usage and profit have yet to return. Id. ¶ 27.
B. Procedural History and Plaintiff's New Allegations
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 et seq. Defendant conceded the first cause of action, but argued that Plaintiff is still subject to the T&C's limitation of liability for every claim. Defendant moved to dismiss all of Plaintiff's claims except the conceded breach of contract claims, arguing in part that California's economic loss doctrine (discussed in more legal detail below) barred tort claims that were merely breach of contract claims in disguise.
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. The Court also agreed that, absent tort liability that could trigger a legal exception to the limitation on liability clause, Plaintiff's damages were limited by the T&C to direct damages based on Plaintiff's contractual payments. The Court gave Plaintiff leave to amend its complaint to explain how its tort claims could avoid the economic loss rule's bar, which could potentially effect the T&C's limitation of liability clause.
The Court held that both Plaintiff's breach of contract and breach of the implied covenant claims survived, treating the latter as a contract claim. Feb. 28 Order at 12.
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. See ECF No. 16 ("Feb. 28 Order") at 4 n.1. Plaintiff's FAC now alleges in some detail that Defendant actually created a series of "bogus websites" that were, in truth, "nothing more than decoys, designed to provide cover for [Defendant's] fraudulent activities." FAC ¶¶ 21-23. According to Plaintiff, most of these websites actually contained "duplicative content appearing to advertise bogus companies," like purportedly fake asset management companies. Id. ¶ 26. Some of the websites apparently contained nothing but non-functional "search engines," with no advertisements shown. Id. ¶¶ 25-28.
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. Id. ¶ 24. The point of Plaintiff's new allegations, compared to the original complaint, is that Defendant did not just allow Plaintiff to be billed for click fraud. Rather, Defendant engineered the click fraud itself, so that it could charge Plaintiff more money and potentially disrupt Plaintiff's arrangement with Google by allowing its automated processes to proceed from Defendant's properties to Plaintiff's, where they generated clicks on Plaintiff's Google ads. Even so, Plaintiff also asserts that to the extent that Defendant itself is not responsible for generating all or part of the fraudulent traffic, it should have taken steps to detect fraudulent traffic and notify Plaintiff of it in a timely way. Id. ¶ 32.
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 et seq.
III. LEGAL STANDARD
A. Motion to Dismiss
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal 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. 1988). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
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." See Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009). "To satisfy Rule 9(b), a pleading must identify the who, what, when, where, and how of the misconduct charged, as well as what is false or misleading about [the purportedly fraudulent] statement, and why it is false." United States ex rel Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (quotation marks and citations omitted).
B. Summary Judgment
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. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). The moving party bears the initial burdens of production and persuasion. Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099, 1102 (9th Cir. 2000).
IV. DISCUSSION
A. Contradictions in Plaintiff's FAC
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. Compare FAC ¶ 25 (stating that none of Defendant's fraudulent websites displayed Plaintiff's ads), with FAC ¶ 17 (affirming that the parties agreed to show Plaintiff's ads on Defendant's sites, and Plaintiff would pay Defendant for each click on Plaintiff's ads).
However, drawing all reasonable inferences in Plaintiff's favor, Murphy v. Schneider Nat'l, 362 F.3d 1133, 1138 (9th Cir. 2004), the Court finds that Plaintiff must mean that at least some of Defendant's allegedly fraudulent clicks were not directed through Plaintiff's ads on Defendant's sites, but were nevertheless directed through Defendant-owned properties and billed to Plaintiff as clicks under the T&C. The invoices Plaintiff provides, for example, leave no doubt that Defendant actually invoiced Plaintiff for clicks, and that Plaintiff allegedly paid. The technical question of how Defendant generated, counted, or directed those clicks is less clear from the pleadings, but the Court is able to infer from Plaintiff's allegations and incorporated evidence that Plaintiff's allegations on these points are plausible. Neither party addresses these apparent inconsistencies at this stage, but discovery could clarify matters.
B. The Economic Loss Rule
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." Oracle USA, Inc. v. XL Global Services, Inc., C 09-00537 MHP, 2009 WL 2084154, at *4 (N.D. Cal. July 13, 2009). This rule serves to prevent every breach of a contract from giving rise to tort liability and the threat of punitive damages: "Quite simply, the economic loss rule prevents the law of contract and the law of tort from dissolving one into the other." Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979, 988 (Cal. 2004) (internal quotation marks and brackets omitted). California has historically distinguished tort and contract law based on each body of law's purpose and remedies. See Hunter v. Up-Right, Inc., 6 Cal. 4th 1174, 1180 (Cal. 1993). "Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate 'social policy.'" Foley v. Interactive Data Corp., 47 Cal. 3d 654, 683 (Cal. 1988) (citing William Prosser, Law of Torts 613 (4th ed. 1971)).
Limiting recovery to contract damages makes it easier for parties to "estimate in advance the financial risks of their enterprise." Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal. 4th 85, 106 (Cal. 1995) (quoting Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 515 (Cal. 1994)). As a result, the rule is particularly applicable when a party alleges "commercial activities that negligently or inadvertently [went] awry." Robinson Helicopter, 34 Cal. 4th at 991 n.7. However, the economic loss rule can still bar fraud and other intentional tort liability if those claims do not arise independently of the breach of contract claims. See id. at 990.
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. Id. at 5. Accordingly, Defendant concludes that all of Plaintiff's tort claims, including fraudulent concealment, are barred by the economic loss doctrine. Id. at 5-6.
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 Robinson Helicopter, 34 Cal. 4th at 991. This holding was based on the fact that Plaintiff's original complaint's tort claims were based on Plaintiff's having been charged for "illegitimate" third-party clicks to which Defendant was either willfully blind or negligent in preventing.
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.
i. Fraudulent Concealment
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. Id. ¶¶ 30, 50-51. Plaintiff's fraudulent concealment theory is essentially that Defendant induced Plaintiff to enter the contract, see id. ¶ 22-30, but then hid the fact that it was charging Plaintiff for worthless clicks that would never convert to legitimate ad clicks on Plaintiff's Google ads.
Defendant asserts that Plaintiff was engaged in "click arbitrage" with its Google AdSense program. See MTD at 8 n.2. That is, Plaintiff was purportedly paying Defendant to send traffic to Plaintiff's sites, after which at least some of that traffic would click through to ads Plaintiff published through Google AdSense. See id. Supposing that the AdSense revenue Plaintiff obtained was greater than what it paid to Defendant for traffic, Plaintiff could be said to have "arbitraged" clicks. If that were the case, the alleged click-fraud traffic for which it paid would not be so worthless (at least until Google detected the click fraud and docked Plaintiff's account). This is a factual inquiry that the Court cannot evaluate in this Order.
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. Hahn v. Mirda, 147 Cal. App. 4th 740, 748 (Cal. Ct. App. 2007). "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). A complaint meets this standard if it alleges "the time, place, and content of the alleged fraudulent misrepresentation or omission; the identity of the person engaged in the fraud; and 'the circumstances indicating falseness' of 'the manner in which [the] representations [or omissions] were false and misleading.'" Genna v. Digital Link Corp., 25 F. Supp. 2d 1032, 1038 (N.D. Cal. 1997) (brackets in original) (quoting In re GlenFed Sec. Litig., 42 F.3d 1541, 1547-58 n.7 (9th Cir. 1994)).
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." Id. ¶ 42 (stating Plaintiff's breach of contract claim). "In the absence of an independent tort, punitive damages may not be awarded for breach of contract 'even where the defendant's conduct in breaching the contract was wilful, fraudulent, or malicious.'" Applied Equip. Corp., 7 Cal. 4th at 516 (quoting Myers Bdlg. Indus., Ltd. v. Interface Tech., Inc., 13 Cal. App. 4th 949, 959 (Cal. Ct. App. 1993)).
Further, to the extent that Plaintiff asserts that its fraudulent concealment claim should be interpreted as a fraudulent inducement claim, see Opp'n at 5, the Court finds that Plaintiff's FAC fails to meet Rule 9(b)'s heightened pleading requirements. The FAC fails to explain with requisite specificity how Plaintiff relied on any of Defendant's misrepresentations or omissions at the time the parties entered the T&C.
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. Regardles sof the choice Plaintiff makes, it must meet the heightened requirements of Rule 9(b).
ii. Negligent and Intentional Interference with Contractual and Potential Economic Relations
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. Reeves v. Hanlon, 33 Cal. 4th 1140, 1148 (Cal. 2004).
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. Korea Supply Co. v. Lockheed Martin Co., 29 Cal. 4th 1134, 1153 (Cal. 2003). The only different element in a negligent interference with prospective economic advantage claim is that the plaintiff must allege that the defendant owed a special or general duty of care. J'Aire Corp. v. Gregory, 24 Cal. 3d 799, 803-04 (Cal. 1979).
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." Della Penna v. Toyota Motor Sales, USA, Inc., 11 Cal. 4th 376, 393 (Cal. 1995). In explaining the meaning of "wrongful acts," that decision upheld the plaintiff's jury instruction which defined "wrongful acts" as conduct "outside the realm of legitimate business transactions" and that "[w]rongfulness may lie in the method used or by virtue of an improper motive." Id. at 380 n.1 (Mosk, J., concurring). The point of this requirement is to distinguish actionable "interference" with prospective economic relationships from non-actionable competitive conduct. See id. at 392 (Mosk, J., concurring).
This holding also applies to the tort of intentional interference with prospective contractual relations, but Plaintiff only pled intentional interference with existing contractual relations.
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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 Della Penna's requirement that a plaintiff plead "wrongful acts."
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. See Erlich v. Menezes, 21 Cal. 4th 543, 551 (Cal. 1999) (explaining that in cases finding tort damages appropriate when a breach of contract concerning the same activity is also alleged, "the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to cause harm"). Plaintiff's breach of contract claim is legally and analytically distinct from Plaintiff's intentional interference claims, which are independent of the parties' obligations under the T&C and were intended to cause harm. Id.
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. See Della Penna, 11 Cal. 4th at 392-93. Plaintiff alleged that Defendant's generation and direction of click-fraud traffic through Plaintiff's websites to the AdSense- hosted ads was both malicious and commercially useless, since those actions only served to enrich Defendant while depriving both Plaintiff and Google of useful commerce. See FAC ¶¶ 22-30. Further, the underlying "interference" is essentially based on Plaintiff's fraud claim, which is barred by the economic loss rule but is otherwise adequate to indicate that Defendant's behavior is based on unlawful conduct. See Korea Supply, 29 Cal. 4th at 1158 (explaining that an "independently wrongful" act must be proscribed by, among other things, some common law or other determinable legal standard). Plaintiff's allegations satisfy the "improper motive" and "outside the realm of legitimate business transactions" tests for wrongful acts as explained in Della Penna.
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, see Erlich, 21 Cal. 4th at 553-54, and Plaintiff's failure to explain how this general duty is different from Defendant's contractual duties, the Court DISMISSES Plaintiff's negligent interference with prospective economic advantage claim. See id. (instructing courts faced with issues like this one to focus on intentional conduct rather than permit every negligent breach to give rise to tort damages).
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.
iii. UCL Claims
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." Berryman v. Merit Prop. Mgmt., Inc., 152 Cal. App. 4th 1544, 1554 (Cal. Ct. App. 2007).
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.
C. Limitation of Liability
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:
(I) Under no circumstances will either party be liable to the other party, whether in contract, tort or otherwise, for indirect, incidental, consequential, special or exemplary damages (even if such damages are foreseeable and whether or not the indemnified party has been advised of the possibility of such damages) arising from this agreement; andT&C § 8.
(II) Neither party will be liable to the other party for more than the total amount paid or payable (plus applicable fees and costs) to [Defendant] under this Agreement.
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. Id. at 6-7.
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." Farnham v. Super. Ct., 60 Cal. App. 4th 69, 71 (Cal. Ct. App. 1997); see also McQuirk v. Donnelley, 189 F.3d 793, 796 (9th Cir. 1999) (quoting the rule from Farnham). Defendant's only response to Plaintiff's citation of this rule is to refer to the February 28 Order, which, as noted above, addressed these claims under a different posture. Defendant does not otherwise address section 1668. The Court finds nothing in the pleadings or briefs that would override the conclusion that section 1668 invalidates the T&C's limitation of liability as it concerns Plaintiff's intentional interference claims. However, the limitation still applies to Plaintiff's breach of contract claims, as Plaintiff concedes. Opp'n at 7 & n.1.
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.
V. CONCLUSION
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.
IT IS SO ORDERED.
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UNITED STATES DISTRICT JUDGE