Fulltime Fantasty Sports LLC v. Rindner et al

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

W.D. Wash.September 14, 2017

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 The Honorable James L. Robart UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON SEATTLE DIVISION FULLTIME FANTASY SPORTS, LLC a Delaware limited liability company, Plaintiff, v. STEVEN and JANE DOE RINDNER, and their marital community; MARK and JANE DOE STIEGLITZ, and their marital community; DOUG and JANE DOE SMITH, and their marital community; CRAIG and JANE DOE MALITZ, and their marital community; ROSS and JANE DOE LEVINSOHN, and their marital community; ROSS and JANE DOE LUKATSEVITCH, and their marital community; JOE and JANE DOE ROBINSON, and their marital community; TAMMER and JANE DOE FAHMY, and their marital community; MAYO and JANE DOE STUNTZ, and their marital community; JAMES and JANE DOE HECKMAN, and their marital community, PAUL and JANE DOE MCNICHOL, and their marital community thereof; ANDREW and JANE DOE RUSSELL, and their marital community thereof; HOWARD and JANE DOE LIPSON, and their marital community thereof, PILOT GROUP, GP, LLC, a Delaware corporation; and JANE and JOHN DOES 1 through 8, Defendants. Case No. 2:17-cv-00920-JLR DIRECTOR DEFENDANTS’ MOTION TO DISMISS PLAINTIFF’S FIRST AMENDED COMPLAINT NOTE ON MOTION CALENDAR: October 27, 2017 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 1 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS PAGE DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT i. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 I. INTRODUCTION ............................................................................................................. 1 II. STATEMENT OF FACTS ................................................................................................ 3 A. FTF Enters Into an Asset Purchase Agreement. .................................................... 4 B. FTF Rescinds the APA. ......................................................................................... 6 C. The 2016 “Prize Fund”........................................................................................... 6 D. Procedural History ................................................................................................. 7 III. APPLICABLE LEGAL STANDARDS ............................................................................ 7 IV. ARGUMENT ................................................................................................................... 10 A. FTF’s Rescission of the APA Bars Its Misrepresentation-Based Claims. ........... 10 B. FTF’s Securities-Fraud Claim under Section 10(b) Must Be Dismissed for Failure To Plead Fraud with Particularity. ........................................................... 13 1. The FAC fails to plead falsity. ................................................................. 13 2. The FAC fails to plead a strong inference of scienter. ............................. 15 C. FTF Fails To State a WSSA Claim for Seller or Control Person Liability. ......... 16 1. FTF does not plead a primary violation of RCW 21.20.010. ................... 16 2. FTF fails to plead control person liability. ............................................... 17 D. The FAC Fails To State a Claim for Violations of the CPA. ............................... 18 E. FTF’s Claim for Negligent Misrepresentation ..................................................... 19 F. The FAC Fails To Plead Even a Single Element of a UFTA Claim. ................... 21 G. The FAC Fails To State a Claim for Conversion ................................................. 23 V. CONCLUSION ................................................................................................................ 24 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 2 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT ii. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 TABLE OF AUTHORITIES PAGE(S) CASES Aqua-Chem, Inc. v. Marine Systems, Inc., No. C13-2208JLR, 2014 WL 795922 ................................................................................. 8, 21 Aventa Learning, Inc. v. K12 Inc., No. C10-1022JLR, 2011 WL 13100748 (W.D. Wash. Mar. 28, 2011) .............................. 8, 17 Ballow Brasted O‘Brien & Rusin, P.C. v. Logan, 435 F.3d 235 (2d Cir. 2006) .................................................................................................... 10 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................. 7 Bolling v. Dendreon Corp., No. C13-0872JLR, 2014 WL 12042559 (W.D. Wash. Jan. 28, 2014) ............................... 8, 18 Brin v. Stutzman, 89 Wash. App. 809, 951 P.2d 291 (1998) ............................................................................... 16 Brody v. Transitional Hospitals Corp., 280 F.3d 997 (9th Cir. 2002) ..................................................................................................... 9 Callan v. Motricity, No. C11-1340 TSZ, 2013 WL 195194 (W.D. Wash. Jan. 17, 2013) ........................................ 8 Capital Ventures International v. Network Commerce, Inc., No. C02-0682L, 2006 WL 681033 (W.D. Wash. Mar. 16, 2006) .......................................... 18 Carpenters Retirement Trust of Western Washington v. Miller, No. C10-145 RSL, 2011 WL 780894 (W.D. Wash. Mar. 2, 2011) ........................................ 23 Fines v. West Side Implement Co., 56 Wash.2d 304, 352 P.2d 1018 (1960) .................................................................................. 11 Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) ................................................................................................... 14 Guarino v. Interactive Objects, Inc., 122 Wash. App. 95, 86 P.3d 1175 (2004) .............................................................................. 16 Haberman v. Washington Public Power Supply System, 109 Wash. 2d 107, 744 P.2d 1032 (1988) ............................................................................... 16 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 3 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT iii. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Hamer Electric, Inc. v. TMB-NW Liquidation, LLC, No. 3:12-cv-5332 RBL, 2012 WL 3239190 (W.D. Wash. Aug. 7, 2012) .............................. 22 Helenius v. Chelius, 131 Wash. App. 421, 120 P.3d 954 (2005) ............................................................................. 12 Hines v. Data-Line Systems, Inc., 114 Wash. 2d 127, 787 P.2d 8 (1990) ............................................................................... 16, 18 Humphreys v. Ocwen Loan Servicing, LLC, No. 08-cv-08154-MMM-RCX, 2009 WL 10672594 (C.D. Cal. Feb. 23, 2009) ...................... 8 In re Coinstar Inc. Securities Litigation, No. C11-133 MJP, 2011 WL 4712206 (W.D. Wash. Oct. 6, 2011) ................................. 14, 15 In re Daou Sys., Inc. Securities Litigation, 411 F.3d 1006 (9th Cir. 2005) ................................................................................................... 9 In re Galena Biopharma, Inc. Securities Litigation, 117 F. Supp. 3d 1145 (D. Or. 2015) ....................................................................................... 15 In re Hydrogen, L.L.C., 431 B.R. 337 (Bankr. S.D.N.Y. 2010) .................................................................................... 21 In re Impac Mortgage, 554 F. Supp. 2d 1083 (C.D. Cal. 2008)................................................................................... 14 In re New Century, 588 F. Supp. 2d 1206 (C.D. Cal. 2008)............................................................................. 15, 16 In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014) ................................................................................................... 9 In re Rigel Pharmaceuticals, Inc. Securities Litigation, 697 F.3d 869 (9th Cir. 2012) ................................................................................................. 8, 9 In re Vantive Corp. Securities Litigation, 110 F. Supp. 2d 1209 (N.D. Cal. 2000), aff’d, 283 F.3d 1079 (9th Cir. 2002) ......................... 9 In re Watchgaurd Securities Litigation, No. C05-678J, 2006 WL 2038656 (W.D. Wash. Apr. 21, 2006) ..................................... 15, 16 International Paper Co. v. Stuit, No. C11-2139JLR, 2012 WL 1857143 (W.D. Wash. May 21, 2012) ......................... 8, 18, 19 Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) ........................................................................................................ 14 Kearns v. Ford Motor Co., 567 F.3d 1120 (9th Cir. 2009) ............................................................................................. 8, 23 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 4 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT iv. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Keybank National Association v. Moses Lake Industries, Inc., No. CV-09-162-EFS, 2010 WL 933973 (E.D. Wash. Mar. 11, 2010) ............................... 8, 20 Lapiner v. Camtek, Ltd., No. C 08-01327 MMC, 2011 WL 445849 (N.D. Cal. Feb. 2, 2011) ...................................... 14 Lawson v. BNSF Railway Co No. 2:15-CV-0094-TOR, 2015 WL 6442741 (E.D. Wash. Oct. 23, 2015) ...................... 20, 21 Letres v. Wash. Co-op Chick Association, 8 Wash.2d 64, 111 P.2d 594 (1941) ........................................................................................ 10 Lieberfarb v. MOD Systems Inc., C08-1246-JCC, 2009 WL 927944 (W.D. Wash. Apr. 2, 2009) .............................................. 19 Malone v. Nuber, No. C07-2046RSL, 2009 WL 481290 (W.D. Wash. Feb. 23, 2009) ...................................... 12 Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) .................................................................................................................... 9 MGIC Financial Corp. v. H.A. Briggs Co., 24 Wash. App. 1, 600 P.2d 573 (1979) ................................................................................... 24 Montclair United Soccer Club v. Count Me In Corp., No. C08-1642-JCC, 2009 WL 2985475 (W.D. Wash. Sept. 14, 2009) .................................. 24 Pennsylvania Ave. Funds v. Borey, No. C06-1737RAJ, 2008 WL 426509 (W.D. Wash. Feb. 13, 2008) ........................................ 8 Pletcher v. Porter, 177 Wash. 560, 33 P.2d 109 (1934) ........................................................................................ 11 Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681 (9th Cir. 2011) ................................................................................................... 14 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ............................................................................................. 10, 15 Steckman v. Hart Brewing Inc., 143 F.3d 1293 (9th Cir. 1998) ................................................................................................... 7 Swartz v. Deutsche Bank, No. C03-1252MJP, 2008 WL 1968948 (W.D. Wash. May 2, 2008) ..................................... 17 Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007) ........................................................................................... 7, 8, 19 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .......................................................................................................... 10, 15 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 5 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT v. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 United States v. Ritchie, 342 F.3d 903 (9th Cir. 2003) ..................................................................................................... 7 Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136 (9th Cir. 2003) ................................................................................................... 7 Water & Sanitation Health, Inc. v. Rainforest Alliance, Inc., No. C15-75RAJ, 2015 WL 12657110 (W.D. Wash. Dec. 29, 2015) ................................ 18, 19 Wessa v. Watermark Paddlesports, Inc., No. C06-5156 FDB, 2006 WL 1418906 (W.D. Wash. May 22, 2006) .................................. 20 Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir. 2007) .................................................................................................... 14 Woodhull v. Minot Clinic, 259 F.2d 676 (8th Cir. 1958) ................................................................................................... 11 Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 1990) ............................................................................................... 9, 10 STATUTES 15 U.S.C. § 78u-4 ...................................................................................................................... 9, 15 N.Y. RAC. PARI-M L. § 1404 (McKinney 2017) .......................................................................... 22 § 1402..................................................................................................................................... 22 § 1404..................................................................................................................................... 22 Private Securities Litigation Reform Act ............................................................................... passim RCW 19.40.041 ............................................................................................................................. 22 RCW 19.40.041(1)(a).................................................................................................................... 21 RCW 19.40.041(2)(a).................................................................................................................... 23 RCW 20.20.010 ............................................................................................................................. 16 RCW 21.20.010 ....................................................................................................................... 16, 17 RCW 21.20.430(1) ........................................................................................................................ 16 RCW 21.20.430(3) ........................................................................................................................ 17 RCW 21.20.900 ............................................................................................................................. 16 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 6 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT vi. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Rule 10b-5 (17 C.F.R. 240.10b-5) .......................................................................... 8, 12, 13, 14, 15 Section 10(b) (15 U.S.C. § 78j)....................................................................................... 2, 8, 13, 14 OTHER AUTHORITIES Restatement (Second) of Contracts § 382 ........................................................................................................................................ 10 Restatement (First) of Restitution § 68(2) ..................................................................................................................................... 11 § 68, cmt. d .............................................................................................................................. 11 § 162 cmt.d .............................................................................................................................. 24 Restatement (Second) of Torts § 223 cmt. b ............................................................................................................................. 24 § 228 cmt. c ............................................................................................................................. 13 § 896 cmt. b ............................................................................................................................. 11 Fed. R. Civ. P. 8 ...................................................................................................................... 17, 19 Fed. R. Civ. P. 9(b) ................................................................................................................ passim Fed. R. Civ. P. 12(b)(6) ................................................................................................................... 7 Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 7 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 I. INTRODUCTION Plaintiff Fulltime Fantasy Sports, LLC’s (“FTF”) First Amended Complaint (“FAC”) is a case study in the purpose of pleading standards under the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”). The FAC is a grab-bag of six claims against 12 individuals, comprising 55 paragraphs—only 10 of which purport to allege “facts,” and none with any description of any individual Defendant’s role in the alleged conduct. Because the FAC fails to satisfy the letter or spirit of Rule 9(b) and the PSLRA, Defendants Tammer Fahmy, Howard Lipson, Ross Lukatsevich, Craig Mallitz, Paul McNichol, Joe Robinson, Andrew Russell, and Mayo Stuntz (the “Director Defendants”)1 move to dismiss each of FTF’s claims against them. FTF generally claims to have been harmed by (1) being fraudulently induced, in 2014, to enter an asset purchase agreement (“APA”) with an entity it identifies as “Scout,” in reliance on vaguely described misrepresentations by one or more unnamed “Defendants”; and (2) after voluntarily rescinding the APA in 2016, paying some $900,000 in “prize funds” that “Scout” allegedly owed to FTF or unidentified “players” for a fantasy football event. But the FAC pleads no details regarding the purported misrepresentations, does not state when these alleged representations were made, how they were made, or who specifically made them. Nor does the FAC explain where the “prize funds” came from, where they went, to whom they were owed, or any Defendant’s role with respect to any part of the nebulously described chain of events. The FAC’s blunderbuss pleading approach suggests that FTF simply corralled as many defendants as possible without alleging any basis for individual culpability—nor even explaining at the most basic level why any particular Defendant has been dragged into this litigation. FTF’s failure to meet its threshold pleading burden precludes it from charging ahead into discovery and thereby pressuring individual defendants into settlement with the threat of costly litigation. The numerous deficiencies in the FAC requiring dismissal are both substantive and procedural. First, in 2016 FTF sought and obtained Scout’s agreement to rescind the same APA 1 The FAC names Jane Doe spouses and the marital communities for each Defendant. The terms “Director Defendants” and “Defendants,” as used herein, refers only to the defendants identified by name as alleged directors or officers of the entity identified as “Scout” in the FAC. However, this Motion seeks dismissal on behalf of the Director Defendants as well as each of their respective Jane Does and marital communities. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 8 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 2. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 FTF claims to have been fraudulently induced to enter in 2014. FTF’s strategic gambit to rescind the APA bars all of its claims as a matter of law—each of which sounds in fraud or alleges misrepresentations relating to the formation or performance of the APA. Neither common law nor equity permits a plaintiff that elects and receives the remedy of rescission to then assert claims for damages that affirm the rescinded contract. Moreover, the rescission precludes FTF from pleading at least one essential element of each of its claims. FTF made its election and received its remedy more than a year ago. The Court should reject FTF’s attempt to recover inconsistent remedies against these Defendants by dismissing the FAC entirely. Second, and even if the Court holds that FTF’s rescission of the APA is not fatal, the securities-fraud claims asserted in the FAC must be dismissed for failure to meet applicable pleading standards. FTF is obligated under the PLSRA and Rule 9(b) to plead its claim under Section 10(b) with particularity as to the elements of falsity and scienter. The FAC falls woefully short of meeting those standards, as it lacks any particularized allegation regarding the challenged statements or omissions—when the challenged statements were made, how they were made, or even whether they were made by any of the Defendants. Third, FTF’s claim under the Washington State Securities Act (“WSSA”) fails to meet Rule 9(b)’s heightened pleading standards for the same reasons as its Section 10(b) claim. Although FTF is not required to plead scienter for its WSSA claim, the total absence of particularized factual allegations regarding the challenged statements prevents FTF from pleading seller or control person liability under the WSSA as to any Defendant. Fourth, FTF’s claim for violations of Washington’s Consumer Protection Act (“CPA”) is based on the same alleged stock-purchase transaction as its Section 10(b) and WSSA claims—and suffers from the same fatal lack of specificity required by Rule 9(b). In addition, the private transaction FTF claims to have been fraudulently induced to enter (the APA) does not “affect the public interest,” as required to state a CPA claim. Fifth, FTF cannot escape its pleading burden under Rule 9(b) via its claim for negligent misrepresentation. That claim too requires FTF to allege with particularity the who, what, when, Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 9 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 3. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 where, and how of the alleged misrepresentations. The FAC fares no better in doing so for the negligent-misrepresentation claim than it does for any other. Sixth, FTF’s attempt to plead a claim under Washington’s Uniform Fraudulent Transfers Act (“UFTA”) is so lacking in supporting factual allegations as to be almost unintelligible. This claim can and should be dismissed for the same failure to plead fraud with the particularity required by Rule 9(b). But beyond that, the FAC does not plausibly allege any transfer by any Defendant of any property that interfered with the rights of any creditor (FTF or anyone else). Seventh, and finally, FTF’s claim for common-law conversion is plagued with the same pleading deficiencies as the entire FAC and should be dismissed under Rule 9(b) or 8(a). The FAC does not adequately allege that FTF itself was entitled to possession of the allegedly converted funds nor that a Defendant willfully deprived it of those funds. For these reasons, explained in detail below, the Director Defendants respectfully request that the Court dismiss each of FTF’s claims against them. II. STATEMENT OF FACTS This case arises from a dispute between FTF, a Nevada-based company that hosts fantasy sports contests, and one or more entities alleged to be affiliated with Scout Media Holdings, Inc., a Delaware corporation. (See ¶¶ 47, 2.2) The Director Defendants are mentioned by name in the FAC only once: in the prefatory allegations identifying the parties. (See ¶¶ 5–9, 11–13.) Each Director Defendant is alleged to have been a member of the board of directors3 for “Scout,” an entity the FAC varyingly defines that to mean “Scout Media, Inc. and its parent company, Scout Media Holdings” (¶ 2) or “Scout Media Holdings, Inc. and NAMG” (¶ 16). There are no allegations in the FAC as to when any of the Director Defendants joined or departed “Scout’s” board, other than asserting that six of the eight Director Defendants no longer served on the board 2 All citations to “¶ _” are to Plaintiff’s First Amended Complaint (“Complaint” or “FAC”) (Dkt. No. 2, at 25–35). All citations to “Ex. _” are to the exhibits attached to the Declaration of Christopher B. Durbin in support of the Director Defendants’ Request for Judicial Notice, filed herewith. 3 Defendant Paul McNichol is also alleged to have served as an “Executive Vice President” (¶ 11), but the FAC contains no allegations regarding what (if any) additional responsibilities that position entailed nor the time period during which Mr. McNichol allegedly served in that capacity. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 10 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 4. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 when the FAC was filed in May 2017. (See ¶¶ 5–9, 11–13.) The FAC also does not allege that any Director Defendant was paid salary for his board service. A. FTF Enters Into an Asset Purchase Agreement. As alleged in the FAC, the genesis of this dispute was a December 26, 2014, Asset Purchase Agreement (“APA”) between FTF and non-parties FTF Acquisition, LLC (“Acquisition”) and North American Membership Group, Inc. (“NAMG”). FTF alleges that it was fraudulently induced to enter the APA by unnamed “Defendants,” one or more of whom made the following alleged false or misleading statements to FTF or its agents: • “Scout was a financially healthy business”; • “Scout [w]as a profitable company with a valuation of between $150-200 million”; • “Scout had a long-term strategy and ability to grow and diversify in the industry”; and • “Scout would enable [FTF] to grow in the industry and become more profitable.” (¶ 17) The FAC does not identify who made these statements, to whom they were made, when they were made, whether they were made in writing or orally, or whether any individual Defendant was aware (or approved) of any other Defendant making such statements. FTF also does not allege that any individual Defendant played any role in the negotiation, execution, or performance (or lack thereof) of the APA by Acquisition, NAMG, or any other entity. On this point, the FAC includes only a conclusory allegation that “a board consent [] was completed commensurate with this transaction” (¶ 21), without identifying which Defendants had any role with any of the relevant entities at the time. Nor does FTF allege that any Director Defendant made any of the alleged false, misleading, or negligent statements to FTF or its agents relating to the APA before or after execution. Pursuant to the APA, FTF sold certain of its assets to Acquisition in exchange for what the FAC describes as shares of “Scout stock.” (¶ 16.) Contrary to these allegations, the APA actually states that FTF sold its assets to Acquisition in exchange for shares in Acquisition’s “Parent” company, which is defined in the APA as NAMG. (See Ex. A at 1 & ¶¶ 1.73, 1.104, 2.1, 7.5.) The APA makes no mention of an entity named “Scout.” (See generally id.) The FAC goes on to allege that, at some unspecified point “[s]ubsequent to the APA,” Acquisition “became a wholly- Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 11 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 5. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 owned subsidiary of Scout Media Holdings, Inc. and North American Membership Group Inc. ceased to exist.” (¶ 16.) But the FAC does not allege why or how, “[s]ubsequent to the APA,” an obligation to deliver shares of “Scout stock” was substituted for the APA’s provisions requiring Acquisition to provide shares of NAMG’s stock, or which “Scout” entity’s shares were supposed to be delivered to FTF pursuant to the APA. One of the assets transferred by FTF pursuant to the APA, as alleged in the FAC, was a “prize fund” containing approximately $900,000 in cash relating to a 2016 fantasy football event. (See ¶¶ 20, 26.) The FAC fails to identify any provision of the APA mentioning a “prize fund” of $900,000 in cash. In fact, the APA explicitly excludes from the assets to be transferred by FTF in the sale “all cash and cash equivalents” and “all [FTF] bank accounts.” (RJN, Ex. A, ¶ 2.3(a), (d).) The only reference to a “prize fund” in the APA is to Acquisition’s agreement to assume a liability of $48,597 “for prize money due to participant’s in [FTF]’s 2014 fantasy football tournaments” (Id., ¶ 2.4 (emphasis added).) The FAC does not allege that the $900,000 prize fund it claims as damages in this case is related in any way to the 2014 “prize money” referenced in the APA. The APA also contains no references to any joint or shared responsibilities or liabilities with respect to fantasy events following execution, or any mention of any entity’s obligations with respect to the collection, segregation, or payout of funds derived from or to be used for fantasy events. The APA was effective as of December 2014, and FTF alleges it continued to perform through late 2016 despite never receiving the contractually promised “shares of Scout stock” as consideration for the sale of its assets. (See ¶¶ 22, 32, 37.) The FAC alleges that unnamed Defendants made additional false or misleading statements at some point during that period, such as “falsely assur[ing] [FTF] that the transfer [of shares] was imminent” and that Scout was “listing [FTF]’s shareholders on Scout’s capitalization table” (¶ 22); telling FTF “on ten separate occasions” that “they would ‘make it right’” (¶ 23); and “promising [FTF] that the transfer of their stock was either imminent or had already been completed” (¶ 32). As with the pre-APA alleged misrepresentations, the FAC does not identify who made these statements, to whom they were made, when they were made, how they were made (in writing or orally), or whether any individual Defendant was aware (or approved) of any other Defendant making such statements. Nor does the Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 12 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 6. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 FAC allege that any Defendant played any role in the preparation of capitalization tables, the delivery of stock certificates, or more generally Scout’s day-to-day performance under the APA. B. FTF Rescinds the APA. As alleged in the FAC, in September 2016, FTF and Scout Media Holdings, Inc. (“SMH”) mutually agreed to rescind the APA—at FTF’s insistence—“in order to preserve [FTF]’s reputation in the industry, mitigate damages, and preserve value (goodwill) of the assets purchased in the APA.” (See ¶ 25.) FTF urged SMH to “immediately rescind” the APA to “return [FTF] and Scout Media to the relative positions they were in prior to the APA.” (RJN, Ex. B.) FTF threatened SMH that refusal to execute the proffered Rescission Agreement would “irreparably harm” SMH’s reputation and “lead to substantial potential liabilities” (Id.) FTF further explained its unambiguous intent to render the APA void ab initio. (Id.) In response to FTF’s threats, SMH executed the Rescission Agreement via its then-president, Craig Amazeen. (Id.) The FAC contains no allegation that any individual Defendant played any role in the negotiation, terms, execution, or performance of the Rescission Agreement. None of the Defendants were parties (or even signatories) to the Rescission Agreement, nor did that contract impose any obligations on any of them personally. (See RJN, Ex. B.) C. The 2016 “Prize Fund” After executing the Rescission Agreement, FTF alleges that, “in order to mitigate its damages, [FTF] had to replenish the prize fund with $921,000 to be in conformity with applicable law and had to pay the Tropicana Hotel $70,000 to host the 2016-2017 fantasy football event.” (¶ 26.) The FAC does not explain any of the circumstances relating to “the 2016-2017 fantasy football event,” including whether any contract governed the alleged obligations by any Scout entity, FTF, or the “Tropicana Hotel” with respect to the event; or whether any Scout entity or FTF itself was primarily responsible for any liabilities relating to the event (the prize fund or amounts owed to the “Tropicana Hotel”). Nor does the FAC describe the source of the “approximately $900,000 prize fund.” No individual Defendant is alleged to have had any involvement in, responsibility for, or knowledge of any aspect of “the 2016-2017 fantasy football event.” Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 13 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 7. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 D. Procedural History FTF originally filed this action in King County Superior Court in January 2017 (Dkt. No. 2 at 4–9) and the FAC on May 4, 2017 (id. at 25–35). The Director Defendants removed the case to this Court on June 14, 2017. (Dkt. No. 1.) Pursuant to the Court’s stipulated order (Dkt. No. 16), this motion is timely filed as the Director Defendants’ responsive pleading to the FAC. III. APPLICABLE LEGAL STANDARDS Rule 8(a) and Rule 12(b)(6). Under Rule 12(b)(6), a complaint must be dismissed if it does not plead sufficient facts to state a claim that is “plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). In ruling on a Rule 12(b)(6) motion, the Court may consider facts alleged in the complaint, documents attached to or referenced within the complaint, and matters subject to judicial notice. See United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Conclusory allegations and unwarranted inferences are insufficient to defeat a dismissal motion. Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003). Moreover, the Court is not required to accept facts in the complaint that contradict facts in documents referred to in the complaint. Steckman v. Hart Brewing Inc., 143 F.3d 1293, 1295–96 (9th Cir. 1998). Rule 9(b). All of the claims set forth in the FAC are subject to Rule 9(b)’s heightened pleading requirements because they are either fraud-based or sound in fraud. Rule 9(b) requires FTF to “state with particularity the circumstances constituting fraud or mistake.” FED. R. CIV. P. 9(b). This particularized pleading requirement mandates “specificity including an account of the time, place, and specific content” of any alleged misrepresentations “as well as the identities of the parties to the misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (affirming dismissal of fraudulent conspiracy claims against bank and advisory firm where complaint “failed to specify any false representations made by them” was “shot with general allegations that the ‘defendants’ engaged in fraudulent conduct”). It does not suffice to “merely lump multiple defendants together”; Rule 9(b) “require[s] plaintiffs to differentiate their allegations when suing more than one defendant . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.” Id. at 765 (internal quotation omitted). Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 14 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 8. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 In a fraud suit involving multiple defendants, “a plaintiff must, at a minimum, identif[y] the role of [each] defendant[] in the alleged fraudulent scheme.” Id. (internal quotation omitted). To adequately identify a statement under Rule 9(b), FTF “must set forth facts such as the statement’s contents, the time and place at which it was made, and the party who made it.” Callan v. Motricity, No. C11-1340 TSZ, 2013 WL 195194, *6 (W.D. Wash. Jan. 17, 2013), aff’d, 649 Fed. App’x 526 (9th Cir. 2016). FTF must also explain why each challenged statement was false or misleading when made. In re Rigel Pharms., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012). When a cause of action “allege[s] a unified course of fraudulent conduct and rel[ies] entirely on that course of conduct as the basis of that claim . . . the claim is said to be ‘grounded in fraud’ or to ‘sound in fraud,’” and the complaint “as a whole must satisfy the particularity requirement of Rule 9(b).” Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Complaints sounding in fraud therefore must allege “the who, what, when, where, and how” of the alleged fraudulent conduct. Id. at 1126. This heightened standard applies to all claims sounding in fraud, regardless of whether fraud is an essential element of the underlying claim. Id. at 1124. Here, each of FTF’s claims is subject to Rule 9(b)’s heightened pleading requirements because they all are fraud-based or sound in fraud. Bolling v. Dendreon Corp., No. C13-0872JLR, 2014 WL 12042559, at *5-6 (W.D. Wash. Jan. 28, 2014) (Section 10(b) and Rule 10b-5); Aventa Learning, Inc. v. K12 Inc., No. C10-1022JLR, 2011 WL 13100748, at *8 (W.D. Wash. Mar. 28, 2011) (WSSA); Int’l Paper Co. v. Stuit, No. C11-2139JLR, 2012 WL 1857143, at *10 (W.D. Wash. May 21, 2012) (CPA); Aqua-Chem, Inc. v. Marine Sys., Inc., No. C13-2208JLR, 2014 WL 795922, at *6 (UFTA); Keybank Nat’l Ass’n v. Moses Lake Indus., Inc., No. CV-09-162-EFS, 2010 WL 933973, at *4 (E.D. Wash. Mar. 11, 2010) (negligent misrepresentation); Humphreys v. Ocwen Loan Servicing, LLC, No. 08-cv-08154-MMM-RCX, 2009 WL 10672594, at *7 (C.D. Cal. Feb. 23, 2009) (conversion). PSLRA. The FAC’s Section 10(b) claim also is governed by the PSLRA, which is the “death knell for the ‘customary latitude’ a court affords a complaint in considering a motion to dismiss.” Pennsylvania Ave. Funds v. Borey, No. C06-1737RAJ, 2008 WL 426509, at *2 (W.D. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 15 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 9. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Wash. Feb. 13, 2008). The PSLRA “require[s] that a complaint ‘plead with particularity both falsity and scienter.’” Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 1990). Falsity. “Under the PSLRA, to properly allege falsity, a securities fraud complaint must now ‘specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, . . . state with particularity all facts on which that belief is formed.’” Rigel, 697 F.3d at 877 (quoting 15 U.S.C. § 78u-4(b)(1)). As with Rule 9(b), the PSLRA requires a plaintiff, for each challenged statement, to provide the reasons why the statement was false or misleading when made. Id. at 876–77; In re Vantive Corp. Sec. Litig., 110 F. Supp. 2d 1209, 1216 (N.D. Cal. 2000), aff’d, 283 F.3d 1079 (9th Cir. 2002) (“This requirement is the PSLRA’s single most important weapon against pleading fraud by hindsight because it forces plaintiffs to reveal whether they base their allegations on an inference of earlier knowledge drawn from later disclosures or from contemporaneous document or other facts.”). Moreover, “[s]ilence, absent a duty to disclose, is not misleading” as there is no “affirmative duty to disclose any and all material information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011). Rather, material information must be disclosed only if its omission would “affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Scienter. “To adequately plead scienter under the PSLRA, the complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Rigel, 697 F.3d at 877. “Thus, the complaint must allege that the defendants made false or misleading statements either intentionally or with deliberate recklessness.” In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1015 (9th Cir. 2005). Deliberate recklessness requires “a highly unreasonable omission, involving . . . an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1053 (9th Cir. 2014). To demonstrate the existence of intentional or deliberate recklessness when the false or misleading statements were made, the complaint must contain Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 16 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 10. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 allegations of specific “contemporaneous statements or conditions.” Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir. 2001). The scienter analysis at the pleading stage is “inherently comparative.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007). “A court must compare the malicious and innocent inferences cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as any opposing innocent inference.” Zucco, 552 F.3d at 991. “[O]missions and ambiguities [in the complaint] count against inferring scienter.” Tellabs, 551 U.S. at 326. IV. ARGUMENT A. FTF’s Rescission of the APA Bars Its Misrepresentation-Based Claims. FTF made a strategic choice one year ago to seek and obtain an agreement rescinding the APA, which by its express terms rendered the APA “void ab initio.” (RJN, Ex. B.) The legal effect of that Rescission Agreement is to erase—as if it never existed at all—the only contract from which any of FTF’s tort claims could have arisen. Having elected and received the remedy of rescission, FTF is barred as a matter of law from recovering damages via misrepresentation- based claims that inherently affirm the rescinded APA. See, e.g., Ballow Brasted O‘Brien & Rusin, P.C. v. Logan, 435 F.3d 235, 238 (2d Cir. 2006) (“[A] party induced to enter into a contract by fraud or misrepresentation must make a choice; the party may either ‘elect to accept the situation created by the fraud and seek to recover his damages or he may elect to repudiate the transaction and seek to be returned to the status quo;” explaining that “as a general rule . . . the defrauded party cannot both rescind and maintain an action for deceit’”). Because all of FTF’s claims sound in fraud (see supra, Section III.D) and most are based on alleged misrepresentations, the FAC as a whole must be dismissed on these grounds. The effect of the Rescission Agreement is to bar (or waive) any claim by FTF that inherently affirms the APA’s validity. See RESTATEMENT (SECOND) OF CONTRACTS § 382 (“If a party has effectively exercised his power of avoidance [i.e., rescission], a subsequent manifestation of intent to affirm is inoperative . . . .”); Letres v. Wash. Co-op Chick Ass’n, 8 Wash.2d 64, 68, 111 P.2d 594 (1941) (“If a contract is rescinded by mutual consent or by demand on one side acquiesced in by the other, and there is no express reservation of claims for damages previously Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 17 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 11. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 sustained under it, there is an implied waiver of any such claims.”); see also RESTATEMENT (FIRST) OF RESTITUTION § 68(2) (“A person who avoids a transaction is not entitled subsequently to affirm the transaction . . . .”). Such claims include not only breach of contract, but also claims arising from alleged fraud or misrepresentations in the contract’s formation. See RESTATEMENT (FIRST) OF RESTITUTION § 68 cmt. d (action for fraud constitutes affirmance of contract); Fines v. West Side Implement Co., 56 Wash.2d 304, 309, 352 P.2d 1018 (1960) (“The plaintiff, on discovering the fraud in connection with the sale . . . , had a choice of remedies: damages or rescission. The first involved an affirmance of the contract, and the latter a repudiation of the contract.”). The reason FTF is barred from pursuing fraud- or misrepresentation-based claims post- rescission is not mere formalism. Under the election-of-remedies doctrine, a plaintiff must choose either to (1) disavow the contract and seek rescission (and restitution, if necessary) or (2) affirm the contract via breach or fraud claims for damages. See RESTATEMENT (SECOND) OF TORTS § 896 cmt. b (“In an exchange transaction that is voidable by one of the parties for fraud or duress, that party is entitled to maintain an action of tort for damages or to rescind the transaction and receive back the subject matter.”). While this allows a plaintiff to plead alternative theories or seek alternative forms of relief, here FTF has already elected and received rescission as its remedy. And although a plaintiff may pursue restitution (i.e., reliance damages) necessary to restore it to the status quo ante, the FAC does not allege facts entitling FTF to the amount of the purported $900,000 prize fund or its out-of-pocket expenses in restitution. There is no provision in the APA referencing the prize fund or expenses claimed as damages—much less obligating FTF to have paid those amounts—so FTF cannot be said to have incurred those expenses pursuant to the rescinded contract. (See generally RJN, Ex. A); see also Pletcher v. Porter, 177 Wash. 560, 565, 33 P.2d 109 (1934) (allowing for restitution to compensate plaintiff for property delivered to defendant pursuant to rescinded contract). Having received its elected remedy, FTF may not disregard it and pursue damages via its claims in the FAC. See Pletcher, 177 Wash. at 564–65 (“[R]emedies by rescission and by action for damages are inconsistent and an election to pursue one of them prevents the party who makes such an election from pursuing the other.”); Woodhull v. Minot Clinic, 259 F.2d 676, 679 (8th Cir. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 18 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 12. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 1958) (“[Rescission] abrogates and undoes the contract from the beginning, so that the transaction is thereby caused to be left without remaining form or substance. . . . And it is not open to a party to escape that obliterating consequence, for when he once elects, he must abide by his decision.”). If FTF has any viable claim following rescission, it does not sound in statutory securities fraud or in tort. As explained below, the Rescission Agreement defeats at least one element of each of FTF’s claims as a matter of law: First, because the Rescission Agreement rendered the APA void ab initio, there was no “purchase or sale of a security” from which FTF’s 10b-5 claim could arise. Further, FTF’s allegations that unnamed Defendants “promis[ed] Fulltime Fantasy that the transfer of their stock was either imminent or had already been completed” (¶ 32) are alleged promises that Scout would fulfil its obligations under the now-rescinded APA (see id., ¶ 22 (“After execution of the APA, Scout failed to deliver the promised shares.”) (emphasis added)). Second, and for the same reasons, FTF’s foundational allegation supporting its WSSA claim—i.e., that “Defendants sold shares of Scout Media to Plaintiff” (¶ 28)—fails as a matter of law. Indeed, FTF has already received the primary (default) form of relief under the WSSA. See Helenius v. Chelius, 131 Wash. App. 421, 432–33, 120 P.3d 954 (2005), ¶¶ 22–25; see also id., Helenius, 131 Wash. App. at 434, ¶ 28 (noting that Uniform Securities Act permits claim for damages only as alternative remedy to rescission); Malone v. Nuber, No. C07-2046RSL, 2009 WL 481290, at *8 (W.D. Wash. Feb. 23, 2009) (dismissing WSSA rescission claim: “Plaintiffs have not cited any authority permitting them to seek both rescission of and damages under the same contract. Accordingly, plaintiffs’ rescission claim is dismissed.”). Third, FTF’s CPA claim also fails as matter of law; the rescission of the APA precludes a claim that Defendants “fraudulently induced [FTF] to enter into the APA by misrepresenting the financial health of Scout” (¶ 41). Fourth, FTF’s negligent-misrepresentation claim sounds in fraud and inherently affirms a contract FTF has voluntarily and effectively rescinded. (See ¶ 45 (“Defendants failed to exercise reasonable care in supplying false information to [FTF] at the time of the APA.”).) Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 19 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 13. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Fifth, FTF’s UFTA claim fails as a matter of law (a) inasmuch as FTF alleges that it paid the prize fund pursuant to the APA (see ¶ 26); and (b) to the extent FTF alleges that Defendants’ knowledge and/or obligations with respect to the segregation or use of prize fund arises from the APA (¶ 49). Sixth, FTF’s conversion claim rests in part on the rescinded contract. (See ¶ 53 (alleging that “Defendants had no ownership rights to the [prize] funds, [but] nevertheless took possession of the funds . . . .”).) To the extent FTF alleges that Defendants’ “use” of the prize funds was prohibited by the APA, the conversion claim cannot stand post-rescission. See RESTATEMENT (SECOND) OF TORTS § 22 cmt. c (for conversion claim, “limits of the permitted use ordinarily are determined by the terms, express or reasonably to be implied, of the contract or other agreement between the parties . . . .”). FTF sought and obtained rescission of the APA via an agreement that it drafted, and its decision constituted a binding election of remedy that bars as a matter of law its fraud- and misrepresentation-based claims. Because the legal effect of the Rescission Agreement cannot be cured in an amended complaint, the Court should dismiss FTF’s claims with prejudice. B. FTF’s Securities-Fraud Claim under Section 10(b) Must Be Dismissed for Failure To Plead Fraud with Particularity. FTF’s Section 10(b) claim suffers from at least two other fatal defects. First, the FAC fails to adequately allege any false or misleading statement with particularity. Second, the FAC fails to allege any facts supporting a “cogent” and “compelling” inference of scienter. 1. The FAC fails to plead falsity. FTF alleges that “Defendants violated Rule 10b-5 by misrepresenting Scout’s financial health to Fulltime Fantasy” during the APA’s negotiation, and that “Defendants continue to falsely assure Fulltime Fantasy that Scout’s stock transfer was imminent and that its ownership shares were represented on Scout’s capitalization tables” after the APA was executed. (¶¶ 36–37.) The FAC fails to identify a single false or misleading statement with anything close to the particularity required under Rule 9(b) or the PSLRA. Indeed, the FAC does not allege that any Defendant made any statement, much less a false or misleading one. The FAC does not plead the specific content Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 20 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 14. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 of any challenged statements or the identity of any speaker of any such statement. Instead, it lumps together all 14 Defendants, asserting in conclusory terms that “Defendants” or “Scout,” as a group, engaged in certain behavior, without differentiating between, or providing a single fact specific to, any one of them. (See, e.g., ¶ 17 (“Defendants represented . . .”; “Defendants portrayed . . .”); ¶ 18 (“Scout . . . artificially inflated . . .”); ¶ 19 (“. . . decision by Defendants . . .”); ¶ 22 (“Defendants falsely assured . . .”); ¶ 23 (“Fulltime Fantasy . . . was told by Defendants . . .”).) The FAC does not even state when the alleged representations were made or how they were made (i.e., written or oral). These allegations are entirely insufficient to meet FTF’s pleading burden. Under Janus Capital Grp., Inc. v. First Derivative Traders, only the “maker” of a statement can be held liable for alleged misrepresentations and omissions under Section 10(b). 564 U.S. 135, 142 (2011). Janus thus “sets the pleading bar even higher in private securities fraud actions seeking to hold defendants primarily liable for the misstatements of others” and requires that FTF plead facts that would allow the Court to infer that the Director Defendants were the makers of the alleged false statements in the FAC. See Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 694, n.8 (9th Cir. 2011). Although Janus did not specifically address the group pleading doctrine, the Third, Fifth, and Eleventh Circuits, as well as the “majority of district courts within the Ninth Circuit[,] have concluded that group pleading is no longer viable under the PSLRA.” Lapiner v. Camtek, Ltd., No. C 08-01327 MMC, 2011 WL 445849, at *3 (N.D. Cal. Feb. 2, 2011); see also, e.g., Glazer Cap. Mgmt., LP v. Magistri, 549 F.3d 736, 743–45 (9th Cir. 2008) (declining to consider viability of group-pleading doctrine in opinion, but noting its rejection by Fifth and Eleventh Circuits); Winer Family Trust v. Queen, 503 F.3d 319, 337 (3d Cir. 2007). Moreover, to the extent the FAC relies on oral statements—it is impossible to know—group pleading is otherwise wholly inapplicable. See In re Impac Mortgage, 554 F. Supp. 2d 1083, 1092 (C.D. Cal. 2008) (“Plaintiffs ignore the well-established rule that even under the ‘group published doctrine,’ oral statements cannot be attributed to a group.”). This Court’s opinion in In re Coinstar Inc. Securities Litigation is particularly instructive. There, plaintiff alleged that defendants, including five company officers, violated Rule 10b-5 by providing misleading revenue guidance while aware of factors adversely affecting the company’s Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 21 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 15. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 business. No. C11-133 MJP, 2011 WL 4712206, at *1 (W.D. Wash. Oct. 6, 2011). Because the complaint alleged that only two of the officers actually made any of the challenged statements, the Court held that the remaining three corporate officers “are not liable under Rule 10b-5”: As held in [Janus], liability does not expand beyond the person or entity that ultimately has authority over a false statement or omission. While [Janus] considered whether a business entity could be held liable for a prospectus issued by a separate entity, its analysis applies equally to whether Kaplan, Rench, and Smith may be held liable for the misstatements of their co-defendants. Here, the only statements that are actionable are those of other executive officers at various conferences. To the extent Plaintiff relies . . . on the group pleading doctrine even after Janus, the Court finds the argument unavailing. Id. at *10. The Court should find the same here. The FAC does not allege that any Director Defendant made any challenged statement or omission. Instead, the FAC relies on wholly conclusory allegations referring only generically to “Defendants” or to “Scout” (Scout is not a party to this litigation), but pleading no substantive facts—particularized or otherwise—regarding any Defendant, as required by the PSLRA and Rule 9(b). FTF’s Section 10(b) claim should be dismissed for this reason alone. See In re Galena Biopharma, Inc. Sec. Litig., 117 F. Supp. 3d 1145, 1164, n.15 (D. Or. 2015) (dismissing complaint because it “impermissibly lumps all Defendants together in alleging that ‘Defendants’ performed some act or knew about some fact. . . . In evaluating the [complaint] under the PSLRA and Rule 9(b), the Court considers the allegations and incorporated documents specific to each defendant and not the impermissible allegations attributing something to all Defendants as a single unit.”) (emphasis added). 2. The FAC fails to plead a strong inference of scienter. FTF’s Section 10(b) claim should be dismissed for yet another independent reason: its allegations do not to support a “strong inference” of scienter. See 15 U.S.C. § 78u-4(b)(2); Tellabs, 551 U.S. at 323. “Under the PSLRA, plaintiffs must plead facts that give rise to a strong inference of scienter as to each material misrepresentation that a Defendant is alleged to have made.” In re Watchgaurd Sec. Litig., No. C05-678J, 2006 WL 2038656, at *3 (W.D. Wash. Apr. 21, 2006), (citing Ronconi, 253 F.3d at 429)). Group pleading is insufficient. In re New Century, 588 F. Supp. 2d 1206, 1224 (C.D. Cal. 2008) (“These PSLRA references to ‘the defendant’ may only reasonably be understood to mean ‘each defendant’ in multiple defendant cases, as it is Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 22 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 16. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 inconceivable that Congress intended liability of any defendants to depend on whether they were all sued in a single action or were sued each alone in several separate actions.”). As with FTF’s falsity allegations, the FAC relies only on generic allegations that “Defendants” (as a group) or “Scout” acted with the requisite intent. (See, e.g., ¶ 18 (“Scout set the deal up this way because it new [sic] . . . .”); ¶ 36 (“Defendants knew . . . .”; “Not only did they know . . . .”); ¶ 37 (“Defendants knew . . . .”).) Again, these allegations are far from sufficient. See New Century, 588 F. Supp. 2d at 1224; Watchguard, 2006 WL 2038656, at *8 (dismissing claims for failure to plead scienter where allegations did “not point a finger at any individual Defendant”; “[w]ithout more particularized allegations, the court cannot infer that Defendants knew about or were deliberately reckless with respect to” the challenged statements). The FAC does not identify the statements themselves, let alone provide the exacting detail required by the PSLRA to plead a strong inference of scienter sufficient to survive a motion to dismiss. The bald assertion that “Defendants knew the representations were false” does not provide a particularized basis for a strong inference that any Defendant acted intentionally or with deliberate recklessness. C. FTF Fails To State a WSSA Claim for Seller or Control Person Liability. 1. FTF does not plead a primary violation of RCW 21.20.010. Under the WSSA,4 it is unlawful when selling “or purchas[ing] . . . any security, directly or indirectly . . . [t]o make any untrue statement of a material fact or to omit [material facts].” RCW 21.20.010. There are two essential elements of a WSSA claim: (1) that the defendant was a ‘seller’ of securities under RCW § 21.20.430(1), and (2) that the plaintiff relied on the defendant’s alleged misstatements in connection with the sale of securities. See Hines v. Data- Line Sys., Inc., 114 Wash. 2d 127, 134, 787 P.2d 8 (1990). A “seller” includes parties whose acts were a “substantial contributive factor” to the sale. Haberman v. Washington Pub. Power Supply Sys., 109 Wash. 2d 107, 131, 744 P.2d 1032 (1988). 4 The WSSA is patterned after the federal securities laws. Brin v. Stutzman, 89 Wash. App. 809, 832, 951 P.2d 291 (1998). The WSSA is “to be construed as to effectuate its general purpose to make uniform the law of those states which enact it and to coordinate the interpretation and administration of [RCW ch. 21.20] with . . . related federal regulation.” RCW 21.20.900; Guarino v. Interactive Objects, Inc., 122 Wash. App. 95, 110, 86 P.3d 1175 (2004) (“The related federal regulations are Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78j(b), and [SEC] Rule 10b-5”). Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 23 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 17. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 While the WSSA does not require FTF to plead scienter, the FAC must still comply with Rule 9(b). Aventa, 2011 WL 13100748, at *8 (applying Rule 9(b) to WSSA claim: “the amended complaint, must allege ‘the who, what, when, where, and how’ of the alleged fraudulent conduct” and “identify the role of each defendant”). FTF fails to allege facts sufficient under Rule 9(b) to plead seller liability as to any Defendant under the WSSA.5 The FAC contains no allegations that any Defendant was a “substantial contributive factor” to the sale, a basic element for seller liability under the WSSA. Instead, FTF relies on the same generalized and conclusory allegations underlying its Section 10(b) claim, failing to identify the content of any misstatement or the identity of the speaker. (See supra, Section IV(A)(1)(a).) For example, the FAC alleges that “Defendants . . . induc[ed] [FTF] into purchasing the shares by falsely representing Scout’s financial health.” (¶ 31.) The FAC includes no accounting of the time, place, or specific content of these purported representations; it merely lumps all Defendants together without providing any of the required detail regarding their alleged participation in the fraud. Rule 9(b) demands much greater specificity to survive a motion to dismiss. The WSSA claim must also be dismissed because it falls woefully short of pleading any actionable misrepresentation or omission. For the same reasons that FTF’s Section 10(b) claim fails for lack of particularized pleading, so does the WSSA claim under Rule 9(b). See Coinstar, 2011 WL 4712206, at *10; (see also supra, Section IV.B.1). 2. FTF fails to plead control person liability. The FAC also fails to plead control person liability under RCW 21.20.430(3), which requires a plaintiff to first plead a primary violation of RCW 21.20.010. Swartz v. Deutsche Bank, No. C03-1252MJP, 2008 WL 1968948, at *19 (W.D. Wash. May 2, 2008). FTF’s control person claims fail because the FAC neither states a claim for a primary violation of RCW 21.20.010 nor pleads that each (or any) Director Defendant was in a position to control the activity upon which the FAC is predicated. To show control, a plaintiff must “‘establish, first, that the defendant . . . 5 Even if Rule 9(b) did not apply to the WSSA claim—which it does—the FAC would not pass muster even under Rule 8’s Iqbal/Twombly standard. The FAC’s conclusory assertion that all defendants took part in each of a series of unspecified statements over the course of two years is not plausible on its face. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 24 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 18. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 actually participated in (i.e., exercised control over) the operations of the corporation in general; then he must prove that the defendant possessed the power to control the specific transaction or activity upon which the primary violation is predicated . . .’.” Hines , 114 Wash. 2d at 136 (citation omitted). The FAC does not allege facts supporting an inference that any Director Defendant exercised sufficient control to be considered a control person. Rather, the only allegation remotely relevant to control person liability is the conclusory assertion that “[a]s officers and directors of Scout, Defendants actually participated in the operations of the corporation and possessed the power to control the specific transaction.” (¶ 33.) See Capital Ventures Int’l v. Network Commerce, Inc., No. C02-0682L, 2006 WL 681033, at *2 (W.D. Wash. Mar. 16, 2006) (“general allegations that [officer] had exercised ‘power and influence’ over NCI’s conduct and had ‘direct involvement in or intimate knowledge of the day-to-day operations of NCI” were insufficient to plead control person liability) (citation omitted). FTF’s control person liability claims should be dismissed. D. The FAC Fails To State a Claim for Violations of the CPA. To state a claim for a violation of the CPA, FTF must plead facts establishing: “(1) an unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) public interest impact; (4) injury to [a person’s] business or property; and (5) causation.” Bolling, 2014 WL 12042559, at *15. The FAC fails to do so. First, FTF’s CPA claim must satisfy Rule 9(b) because it explicitly sounds in fraud and relies on the same conduct as FTF’s securities fraud claims. See Water & Sanitation Health, Inc. v. Rainforest All., Inc., No. C15-75RAJ, 2015 WL 12657110, at *2 (W.D. Wash. Dec. 29, 2015); Int’l Paper, 2012 WL 1857143, at *10 (noting Rule 9(b) applies to CPA claims sounding in fraud). FTF’s CPA claim not only incorporates the same unified course of alleged fraudulent conduct underlying FTF’s securities, UFTA, and negligent misrepresentation claims (¶ 40), it expressly alleges fraud by claiming that “Defendants’ fraudulently induced Fulltime Fantasy to enter into the APA by misrepresenting the financial health of Scout and promising employment at and stock in Scout.” (¶ 41 (emphasis added).) Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 25 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 19. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 FTF’s CPA claim (like all of its claims) is premised entirely on vague allegations that unidentified “Defendants” misrepresented and omitted information about Scout’s financial health or the transfer of stock under the APA. These generic allegations do not satisfy FTF’s pleading burden for its CPA claim under Rule 9(b) or even Rule 8. Swartz v. KPMG, 476 F.3d at 764-65; see also Water & Sanitation Health, 2015 WL 12657110, at *3 (dismissing CPA claim under Rule 9(b)). Second, even if FTF could satisfy Rule 9(b), the CPA claim would still fail as FTF has asserted a purely private dispute that does not affect the public interest. See Lieberfarb v. MOD Sys. Inc., C08-1246-JCC, 2009 WL 927944, at *2 (W.D. Wash. Apr. 2, 2009) (“Ordinarily, a breach of contract that only affects the contract’s parties is not an act or practice that affects the public interest and is not actionable under the CPA.”); Int’l Paper, 2012 WL 1857143, at *10. (private dispute affects public interest when there is a “‘likelihood that additional plaintiffs have been or will be injured in exactly the same fashion’”) (emphasis added; citation omitted). Courts consider four non-dispositive factors in determining whether a private dispute affects the public interest: (1) whether plaintiff was acting in the course of his business, (2) whether plaintiff advertised to the general public, (3) whether defendant actively solicited plaintiff, and (4) whether the parties had unequal bargaining positions. Lieberfarb, 2009 WL 927944, at *2. The FAC fails to adequately plead these above factors. The FAC does not allege that the APA was advertised to the general public and, there is no allegation in the FAC that any Defendant, let alone a Director Defendant, solicited FTF into entering the APA. Indeed, the APA describes a mutual negotiation between the parties prior to entering the APA. The FAC also does not allege unequal bargaining positions between the Scout and FTF. To the contrary, the APA expressly states that the parties are sophisticated Delaware business entities who engaged in an arms-length transaction with the support of legal counsel. (RJN, Ex. A at 1, 39–40.) E. FTF’s Claim for Negligent Misrepresentation Fails as a Matter of Law. The FAC fails to state a claim for negligent misrepresentation for the same reasons as its securities-fraud and CPA claims. Under Washington law, a negligent misrepresentation occurs when “one who, in the course of his business . . . supplies false information for the guidance of Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 26 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 20. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating information.” Wessa v. Watermark Paddlesports, Inc., No. C06- 5156 FDB, 2006 WL 1418906, at *2 (W.D. Wash. May 22, 2006). A “‘false representation’ as to a presently existing fact is a prerequisite to liability for both fraud and negligent misrepresentation.” Id. The FAC’s complete lack of particularity in alleging the who, what, where, when, and how of the allegedly negligent misrepresentations requires dismissal. “Negligent misrepresentation claims must be pled with particularity because it is necessary for the defendant to be aware of the specific statement at issue in order to prepare a proper defense, as is the case with fraud.” Keybank Nat’l Ass’n, 2010 WL 933973, at *4. Here, the FAC does not identify any Defendant as having communicated anything—much less false information—to FTF at any time. And regardless, the FAC’s vague, conclusory descriptions of the alleged misrepresentations are insufficiently particularized. See id. (“Although [plaintiff] pled the time and place of the misrepresentation and the relevant parties for the initial misrepresentation, it did not plead that statement’s specific content.”). A useful comparison is presented by Lawson v. BNSF Railway Co., in which the plaintiffs alleged that “BNSF represented to [them] it was taking steps to improve its [on time percentage]” and “knew or should have known that these statements were false.” No. 2:15-CV-0094-TOR, 2015 WL 6442741, at *8 (E.D. Wash. Oct. 23, 2015). The court dismissed the negligent misrepresentation claim because these allegations did not satisfy Rule 9(b): Plaintiffs do not state who at BNSF was making these alleged misrepresentations. Plaintiffs do not provide sufficient information as to when and where these statements were made. Plaintiffs allege “BNSF reiterated these statements at the March 4, 2014 meeting,” but only generally state that the alleged misrepresentations were first made “[t]hroughout the latter part of 2013 and well into 2014” and “other times.” Moreover, besides the March 4, 2014 meeting, Plaintiffs do not state how these misrepresentations were made. For instance, whether the statements were made in person, over the phone, or written in electronic or letter correspondence. The Court finds Plaintiffs have not pled its claims with sufficient particularity to satisfy Rule 9(b). Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 27 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 21. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Id. (citation omitted). FTF’s allegations are far less specific or particularized, and nowhere near sufficient. The Court should dismiss FTF’s negligent-misrepresentation claim. F. The FAC Fails To Plead Even a Single Element of a UFTA Claim. For fraudulent transfers, the Iqbal/Twombly standard requires that the plaintiff allege facts sufficient to identify a specific avoidable transfer. See In re Hydrogen, L.L.C., 431 B.R. 337, 355 (Bankr. S.D.N.Y. 2010). Because the UFTA requires a plaintiff to establish that a particular transaction was conducted with “actual intent to hinder, delay, or defraud any creditor” (RCW 19.40.041(1)(a)), such claims must also pass muster under Rule 9(b). See Aqua-Chem, 2014 WL 795922, at *6. FTF’s allegations in support of its UFTA claim do not meet its pleading obligations under Rule 9(b). The “Defendants” who allegedly “transferred the prize money funds from the account where they were held” are not identified. (¶ 47.) Nor does FTF even allege which Defendants were officers or directors at the time of the allegedly fraudulent transfer. Nowhere in the FAC does FTF allege what specific transfers occurred, when they occurred, or in what amounts. Even more egregious are FTF’s inconsistent and conclusory allegations that unnamed “Defendants” “took possession of the funds,” “directed Scout to spend the funds on its expenses,” (¶ 53), and “fraudulently transferred the funds to themselves in the form of salaries” (¶ 49). Tellingly, FTF does not allege (nor could it) that any Director Defendant was paid a salary for their board service. These pleading deficiencies require, at a minimum, dismissal pursuant to Rule 9(b). Even if FTF’s UFTA allegations were not fatally vague, the FAC fails to state a UFTA claim as a matter of law. Under Washington law, “fraudulent transfers may be set aside if they are made with actual intent to hinder, delay, or defraud a creditor, or if they are made without receiving reasonably equivalent value.” Aqua-Chem, 2014 WL 795922, at *4. Accordingly, at a minimum FTF must plead that one or more Defendants disposed of “Scout’s” assets with actual (not constructive) intent to frustrate or impede a creditor’s rights to payment from the transferred assets. See id. at *3-4. The FAC contains no such allegations. Beyond failing to plead when or how any transfer occurred, the FAC is entirely silent as to which (if any) “creditor” was allegedly defrauded and any factual basis for the unnamed creditors’ Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 28 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 22. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 supposed rights to the prize funds. FTF inconsistently alleges that the prize funds were its own property (¶ 26) and belonged to “the players” (¶ 53), but fails to identify any contract or other basis for any third-party’s “rights” to the prized funds. The APA contains no such provisions (even if it were not rescinded), and the FAC does not allege any other contract establishing rights or restrictions with respect to any entity’s possession or use of the prize funds. Instead, FTF’s UFTA claim hinges on a New York statute that supposedly established certain creditors’ rights to the prize fund and Defendants’ knowledge of “legal” obligations to segregate and preserve the funds. (See ¶ 48, citing 2016 N.Y. Sess. Laws § 1404(1)(l).) Article 14 of New York’s Racing, Pari-Mutuel Wagering and Breeding Law—including the provision cited in the FAC—was enacted on August 3, 2016. See N.Y. RAC. PARI-M L. § 1404 (McKinney 2017). FTF does not allege whether the transfer occurred before or after that date, whether or how any Defendant became aware of the newly enacted law, nor that any Director Defendant was involved in any Scout entity’s day-to-day operations to such a degree that he could have become aware. More fundamentally, FTF does not allege facts even suggesting that the law created any rights or obligations relating to the prize fund. By its express terms, the law applies only to entities registered with the New York Gaming Commission and only to funds paid by New York residents.6 But FTF does not allege that any Scout entity was registered with the New York Gaming Commission nor that a single dollar of the prize fund originated from an “authorized player” in New York. In sum, FTF fails to allege any facts establishing any person’s or entity’s supposed rights or obligations regarding the prize fund allegation—much less that any Defendant knew of any such rights or obligations at the time of the alleged transfer. Further, absent any allegations regarding the Defendants’ knowledge of the supposed restrictions on the prize fund, FTF necessarily fails to plead actual fraudulent intent as required by RCW 19.40.041. See Hamer Elec., Inc. v. TMB-NW Liquidation, LLC, No. 3:12-cv-5332 RBL, 2012 WL 3239190, at *2-3 (W.D. Wash. Aug. 7, 2012) 6 See id. §§ 1404(1) (“As a condition of registration in New York state, each operator and registrant shall implement the following measures: . . . .”); 1402(1) (defining “authorized player” as “an individual located in New York state . . . that participates in an interactive fantasy sports contest offered by a registrant”); 1404(1)(l) (mandating segregation of fund paid by “authorized players”). Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 29 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 23. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 (reciting factors relevant to intent under RCW 19.40.041(2)(a)). For all of these reasons, FTF’s UFTA claim should be dismissed. G. The FAC Fails To State a Claim for Conversion. FTF’s conversion claim suffers from the same deficiencies as its UFTA claim, and should be dismissed for similar reasons. Because FTF alleges a unified course of fraudulent conduct as the factual nucleus for all of its claims, the FAC “as a whole must satisfy the particularity requirement of Rule 9(b).” Kearns, 567 F.3d at 1125. FTF’s allegations supporting its conversion claim are just as deficient under Rule 9(b) as for each of its other claims. FTF’s conversion claim fails for the additional and independent reason that it does not allege that it was entitled to possession of the prize funds and that a Defendant willfully deprived it of those funds. See Carpenters Ret. Tr. of W. Wash. v. Miller, No. C10-145 RSL, 2011 WL 780894, at *3 (W.D. Wash. Mar. 2, 2011) (“Conversion is the unjustified, willful interference with a chattel which deprives a person entitled to the property of possession. Money may be the subject of conversion if it was wrongfully received by a person charged with conversion, or if a person was obligated to return the specific money to the person claiming it.”) (emphasis added; citations omitted). Absent from the FAC is any allegation regarding which Defendant(s) converted the funds, when the conversion occurred, and how it was accomplished. Instead, FTF’s conversion claim (like its UFTA claim) rests exclusively on Scout’s alleged “legal obligation . . . to segregate the fantasy sports prize funds and hold them for the rightful owners, the players” under New York law. (See ¶ 52.) But the APA contains no reference to any prize funds relating to a “2016-2017 fantasy football event” (¶ 26), and instead disclaims FTF’s transfer of any cash and any assumption of any liabilities that could plausibly include a 2016 prize fund. (See RJN, Ex. A, ¶¶ 2.3, 2.4.) The FAC simply does not explain from whence the prize funds came or what (if any) contract entitled FTF to possession of those funds. As a fallback, the FAC asserts in conclusory fashion that FTF’s right to possess the prize funds is somehow derivative of “the players.” (¶ 54.) This “equitable subrogation” theory fails as a matter of law. The FAC does not plead facts showing that any “player” had any rights to the Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 30 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 24. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 prize fund under New York law—which is the only basis FTF offers for characterizing the alleged use of the funds as tortious. (See supra, Section IV.F.) FTF thus fails to plead that any such use could have “interfer[ed] with the rights of [any] players who were deprived of the possession thereof” (¶ 53). And FTF itself cannot assert rights to the funds that the “players” themselves did not have. See RESTATEMENT (FIRST) OF RESTITUTION § 162 cmt. d (1937) (equitable subrogee has only such “rights and powers” as persons to whom defendant originally owed debt); MGIC Fin. Corp. v. H.A. Briggs Co., 24 Wash. App. 1, 6, 600 P.2d 573 (1979) (citing § 162 with approval). Even if FTF had adequately alleged its rights to the prize funds, its conversion claim still fails for failure to plead any facts or plausible inferences that any Defendant acted willfully to convert the prize funds. FTF points again to New York law as evidencing Defendants’ knowledge (¶ 52), but fails to allege facts showing that the cited statute applied in any way—much less that it put the Defendants on notice of any Scout entity’s supposed legal obligation to pay the prize funds directly to FTF upon demand. Moreover, the “responsible corporate officer” doctrine requires FTF to plead that a Defendant participated in alleged wrongful conduct or knowingly approved such conduct. See Montclair United Soccer Club v. Count Me In Corp., No. C08-1642-JCC, 2009 WL 2985475, at *8 (W.D. Wash. Sept. 14, 2009). Absent any facts establishing any Defendant’s knowledge of any restrictions on any Scout entity’s use of the prize funds, the FAC pleads (at best) negligence—which does not suffice to state a claim for the intentional tort of conversion. See RESTATEMENT (SECOND) OF TORTS § 223 cmt. b (1934) (“Conversion is always an intentional exercise of dominion or control over the chattel. Mere non-feasance or negligence, without such an intent, is not sufficient for conversion.”) (emphasis added). Under Rule 9(b) or 8(a), the FAC fails to state a claim for conversion. V. CONCLUSION For the reasons stated above, the Director Defendants respectfully request that the Court dismiss each of the claims asserted in the FAC. Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 31 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 DIRECTOR DEFS.’ MOT. TO DISMISS FIRST AMENDED COMPLAINT 25. CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 Dated: September 14, 2017 COOLEY LLP By: /s/ Christopher B. Durbin Christopher B. Durbin (No. 41159) Jeffrey D. Lombard (No. 50260) 1700 Seventh Ave., Suite 1900 Seattle, WA 98101-1355 Tel.: (206) 452-8700 Fax: (206) 452-8800 Email: cdurbin@cooley.com jlombard@cooley.com Attorneys for Defendants TAMMER and JANE DOE FAMHY, HOWARD and JANE DOE LIPSON, ROSS and JANE DOE LUKATSEVICH, CRAIG and JANE DOE MALLITZ, PAUL and JANE DOE MCNICOL, JOE and JANE DOE ROBINSON, ANDREW and JANE DOE RUSSELL, and MAYO and JANE DOE STUNTZ Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 32 of 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CERTIFICATE OF SERVICE CASE NO. 2:17-CV-00920-JLR COOLEY LLP 1700 SEVENTH AVE., SUITE 1900 SEATTLE, WA 98101-1355 (206) 452-8700 CERTIFICATE OF SERVICE I hereby certify that on September 14, 2017, I electronically filed the foregoing Director Defendants’ Motion To Dismiss Plaintiff’s First Amended Complaint with the Clerk of the Court using the CM/ECF system, which will send an email notification of such filing to the attorney(s) of record listed below. Gulliver A. Swenson RYAN, SWANSON & CLEVELAND, PLLC 1201 Third Ave., Suite 3400 Seattle, WA 98101-3034 Tel.: (206) 464-4224 Fax: (206) 583-0359 Email: swenson@ryanlaw.com Attorneys for Plaintiff FULLTIME FANTASY SPORTS, LLC Brad Fisher DAVIS WRIGHT TREMAINE LLP 1201 Third Ave., Suite 2200 Seattle, WA 98101-3045 Tel.: (206) 757-8042 Fax: (206) 757-7042 Email: bradfisher@dwt.com Attorneys for Defendants JAMES HECKMAN and JANE DOE HECKMAN Stellman Keehnel Andrew R. Escobar Jeffrey DeGroot DLA PIPER LLP (US) 701 Fifth Ave., Suite 7000 Seattle, WA 98104-7044 Tel.: (206) 839-4800 Fax: (206) 839-4801 Email: stellman.keehnel@dlapiper.com andrew.escobar@dlapiper.com jeffrey.degroot@dlapiper.com Attorneys for Defendants DOUG SMITH and JANE DOE SMITH, and MARK STIEGLITZ and JANE DOE STIEGLITZ /s/ Christopher B. Durbin Christopher B. Durbin Case 2:17-cv-00920-JLR Document 18 Filed 09/14/17 Page 33 of 33