Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_12-cv-01291/USCOURTS-casd-3_12-cv-01291-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

FREDERICK STOCCO, an individual

and KATHLEEN STOCCO, an

individual,

Plaintiffs,

CASE NO. 12-CV-1291 WQH

(DHB)

ORDER

vs.

GEMOLOGICAL INSTITUTE OF

AMERICA, INC., a California

Corporation; and Does 1 through 100,

Defendant.

HAYES, Judge:

The matter before the Court is the Motion to Dismiss filed by Defendant Gemological

Institute of America, Inc. (ECF No. 10). 

PROCEDURAL BACKGROUND

On April 19, 2012, Plaintiffs Frederick Stocco and Kathleen Stocco filed a complaint

in San Diego Superior Court against Defendant. (ECF No. 1). On May 29, 2012, Defendant

removed the complaint to this Court. (ECF No. 1-3).

On July 10, 2012, Plaintiffs filed the First Amended Complaint (“Complaint”) against

Defendant, asserting the following claims for relief: (1) fraudulent misrepresentation; (2)

negligence; (3) breach of written contract; (4) fraud in the inducement; (5) failure to provide

franchise offering circular, in violation of California Corporation’s Code section 31119; and

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(6) unfair business practices, in violation of California Business & Professions Code section

17203. Id.

On July 20, 2012, Defendant filed a Motion to Dismiss as to claims three, four, five, and

six of the Complaint. (ECF No. 10). On August 13, 2012, Plaintiffs filed a Response. (ECF

No. 12). On August 20, 2012, Defendant filed a Reply. (ECF No. 13). 

ALLEGATIONS OF THE COMPLAINT

... 9. At all relevant times, GIA represented itself (and continues to represent

itself) as a nonprofit institute, whose mission is to "ensure the public trust in

gems and jewelry by upholding the highest standard of integrity, academics,

science, and professionalism through education, research, laboratory services,

and instrument development." GIA is the global leader in gem grading. A GIA

gem grading certificate significantly increases the value of a gem across the

world. The GIA gem grading certificates can only be issued by gem grading labs

authorized by GIA to issue GIA gem grading certificates. GIA's gem grading

certificates are therefore highly valuable, and the gem grading labs and/or GIA

gem drop-off locations that are authorized to issue such certificates have a huge

advantage over and are much more highly regarded than those that lack GIA

affiliation.

10. Beginning in 1991, and during all relevant times, the Stoccos were

employees of GIA. As referenced above, on or about December 1, 1991, the

Stoccos entered into an employment agreement, with GIA-GEM Instruments

Corporation, a wholly owned subsidiary of GIA. GIA issued pay checks and

W2s to the Stoccos. The employment agreement was entered into by the

Stoccos, and required the Stoccos to open GIA's first European GIA location and

to relocate to Vicenza, Italy to do so. The employment agreements provided:

"Point of Origin/Country of Origin: Santa Monica, CA U.S.A." A copy of the

employment agreements and initial pay check is attached as Exhibit" 1" hereto.

11. GIA-GEM Instruments Corporation's principal place of business was located

in Santa Monica, California and the employment agreements were entered into

in California. GIA-GEM Instruments is no longer a viable entity, having merged

back into Defendant GIA. GIA is the principal and successor to GIA-GEM

Instruments, and GIA's principal place of business is located in Carlsbad,

California.

12. In 1992, the Stoccos relocated from the United States to Italy for the sole

purpose of establishing the first European GIA location for GIA. Pursuant to

their employment agreement obligations, the Stoccos organized, opened and

directed the first GIA European location in Vicenza, Italy, (hereinafter "GIA

Italy"), to establish a gem grading school on behalf of GIA. GIA Italy was

created by GIA, and GIA Italy was a foreign affiliate and subsidiary wholly

owned by GIA.

 13. In early 1992, GIA Italy opened under the leadership of the Stoccos. GIA

Italy rapidly became the hub of GIA's activities in Europe. In 1998, the GIA

school moved to an 8,000-square-foot state-of-the-art facility in Vicenza, Italy.

By 2003, GIA Italy had approximately 60 graduate gemologists per year. GIA

Italy had about 200 students enrolled in extension and design classes, and

another approximately 400 in the distance education classes. GIA Italy

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enrollment included students from the United States and California. Similarly,

Italian students worked in and visited California, U.S., while earning GIA

gemologist degrees....

15. From 1993-2007, the Stoccos continued to work and live in Italy, drawing

salaries from GIA Italy, which was wholly owned by Defendant GIA and an

affiliate for purposes of the Social Security Administration. During this time

period, the Stoccos asked GIA for documentation regarding their employment

agreements as well as participation in pension, retirement and other employment

benefit plans, but were repeatedly rebuffed in their requests for information.

GIA did issue a proposed Salary Agreement between GIA and the Stoccos. The

Agreement was dated February 2000, and signed by both Brook Ellis, Vice

President of Education for GIA, and Seung-Hae Moon, Director of Global

Education for GIA. A true and correct copy of the salary agreement is attached

as Exhibit "2" hereto.

16. At all times, the Stoccos employee reviews were exemplary. In 1992, Bill

Boyajean, GIA's President, wrote the Stocco's a letter indicating that the Stoccos

were doing a great job for GIA. Thereafter, GIA executives continued to visit

Italy and issue reports on the progress being made there. GIA had control and

oversight of all operations at GIA in Italy.

17. In 2005, GIA and the Florence Chamber of Commerce negotiated an

agreement whereby the Chamber of Commerce would provide financial support

to GIA Italy so long as GIA Italy agreed to allow the construction of a gem

grading lab or GIA gem drop-off location that would be authorized to issue GIA

gem grading certificates.

18. In March 17,2005, GIA, by and through its attorney, indicated that it would

establish a GIA lab but only with GIA's written consent, and would agree to

conduct a feasibility study regarding establishing a GIA gem drop-off location

that would be used for GIA gem grading. GIA further indicated in this letter that

the decision to establish a GIA gem drop-off location in Florence would be at

the sole discretion of GIA Italy.

19. In 2005, Baker, on behalf of GIA, entered into a written agreement with the

Florence Chamber of Commerce to move GIA Italy to Florence, and open a GIA

school, and a gem grading lab or GIA gem drop-off location authorized to issue

GIA gem grading certificates. This agreement ("Firgem Agreement") was made

and signed by Baker on behalf of GIA and GIA Italy. In exchange for GIA

agreeing to open a GIA school and gem grading lab or GIA gem drop-off

location authorized to issue GIA gem grading certificates, the Florence Chamber

of Commerce (a quasi-governmental entity) agreed to provide GIA Italy with

substantial financial support for a twenty (20) year period. [The Firgem

Agreement provided support for both the local community, and GIA's operation

in Italy which was headed and run by the Stoccos. (ECF No. 7 at 11:13-15)]

Without agreeing to move forward with a gem grading lab and/or GIA

gemdrop-off location, authorized to issue GIA gem grading certificates, the

Florence Chamber of Commerce would not have entered into the Firgem

Agreement. A true and correct copy of the Firgem Agreement, and a certified

translation thereof, are attached as Exhibits "3" and "4" hereto.

20. A bank loan of approximately $350,000 Euros was taken out by GIA Italy

with GIA's express and written permission to build out a space required for the

new school and gem grading lab. This bank loan was obtained while the

Stoccos, personally and as directors of GIA Italy, relied upon GIA's promise to

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authorize access to GIA gem grading certificates.

21. On about October 31, 2007, Tawfic Farah, GIA's Vice-President for

International Operations, sent a letter to the Florence Chamber of Commerce

thanking it for its support of GIA and its Italy operations.

22. In or before 2007, GIA developed a scheme whereby they would attempt to

convert GIA Italy to a franchise, and convert the Stoccos from employees to

franchisees, and then withdraw support of GIA Italy. Tawfic Farah informed the

Stoccos on or about August 20, 2007, that he was authorized to negotiate and

conclude an agreement with the Stoccos to take over GIA Italy. Tawfic Farah

pitched the idea as recognition for the Stocco's 16 years of hard work and

dedication for GIA. Unbeknownst to the Stoccos, this was actually part of GIA's

plan to vacate its Italy operation (and concurrently vacate its support for the

Firgem Agreement).

23. In late 2007, GIA approached the Stoccos and offered them ownership of

GIA Italy under a franchise agreement Concurrent with discussions regarding

making the Stoccos franchisee owners, GIA sent the Stoccos a letter dated

November 12, 2007, entitled "Resignation from Personnel Employment

Agreement" seeking to have the Stoccos state that they had been paid all salary

accrued vacation and reimbursable expenses to which they were entitled under

their employment agreement. GIA further sought to force the Stoccos to agree

that they had no claims against GIA. A true and correct copy of the attempted

waiver of liability dated November 12, 2007, is attached as Exhibit "5" hereto....

25. Ultimately, a franchise agreement was entered into by GIA and GIA Italy.

Concurrently, the stock of GIA Italy was transferred to the Stoccos personally.

GIA did not provide the Stoccos a copy of the franchise offer circular. A true

and correct copy of the franchise agreement is attached as Exhibit "6" hereto.

26. On or about April 10, 2008, Donna Baker resigned from the Firgem

Agreement council personally, and delegated all of GIA's authority within the

Firgem Agreement to GIA Italy. GIA Italy's authority to open a GIA gem

drop-off location was confirmed in correspondence from Baker dated April 10,

2008, which stated that GIA, as a member of the Firgem Agreement, delegates

GIA Italy all powers to make any and all decisions and enter into any

agreements related to the Firgem Agreement. The Stoccos relied on the grants

of authority and the Firgem Agreement in continuing to work with the Florence

Chamber of Commerce towards a construction of a gem lab. A true and correct

copy of the letter conferring GIA authority on GIA Italy is attached as Exhibit

"7" hereto. [The existence of the gem grading lab agreement formed a material

basis for the Stoccos agreeing to the franchise agreement. (ECF No. 7 at 12:27-

18)]

27. In or about September 2010, construction on an actual lab for the purpose of

issuing GIA gem certificates began in Florence, Italy. The Florence Chamber of

Commerce issued all funds for the construction of the lab to GIA specifications

for it to have the ability to issue GIA gem grading certificates. A director was

also pursued [and retained (ECF No. 7 at 12:1-2)] to support operation of the

new lab.

28. On or about March 22, 2011, GIA sent the Florence Chamber of Commerce

a letter indicating that GIA would no longer allow a GIA drop-off service at the

lab location in Florence, Italy. A true and correct copy of the letter dated March

22, 2011, is attached as Exhibit "8" hereto.

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29. Later in 2011, the Stoccos were informed that the Florence Chamber of

Commerce would not continue its support of GIA Italy because an authorized

gem grading lab had still not been opened, GIA was no longer going to authorize

GIA gem grading certificates, and GIA had seemingly withdrawn its support of

GIA Italy. As a result of the loss of this expected source of significant revenue,

the Stoccos are losing the revenue opportunity afforded other GIA locations, and

GIA Italy is now going out of business. GIA Italy has lost all of the enrollments

in its school, and has lost Florence Chamber of Commerce support....

46. GIA breached, and continues to breach, this written agreement by failing to

comply with the terms of the agreement and by failing to provide any support

to GIA Italy for the purpose of opening a gem grading lab authorized to issue

GIA grading lab certificates.

47. The Stoccos have performed all of the conditions, covenants and promises

required by them to be performed in accordance with the terms and conditions

of the contract.

48. As a direct and proximate result of GIA' s breach in its contractual

obligations, the Stoccos have been damaged thereby in the sum not less than

$3,150,000 (Three Million One Hundred and Fifty Thousand U.S. Dollars), plus

interest at the legal rate according to proof....

52. In 2007, GIA represented to the Florence Chamber of Commerce and to the

Stoccos that they intended to continue to support the gem lab and/or drop off

location pursuant to the Firgem Agreement, but this representation was false.

GIA did not intend to continue such support, and hid that fact until well after the

franchise agreement with the Stoccos was complete. GIA entered into the

franchise agreement with the Stoccos in 2007. Under the franchise agreement,

the Stoccos were given the right to distribute GIA goods and services that bear

the GIA trademark and name, GIA maintained significant control over

operations, and GIA required payment for same. GIA ultimately withdrew

support for the Firgem Agreement and GIA Italy, causing damages to the

Stoccos in the amount not less than $3,150,000.

53. These representations were made by Defendant's President, Donna Baker,

verbally to Plaintiffs in Florence, Italy, in or about 2007. Donna Baker also

previously signed the Firgem Agreement with the President Luca Mantellassi of

the Florence Chamber of Commerce. The Stoccos reasonably relied on these

representations when entering into the franchise agreement, and would not have

entered into the franchise agreement but for these representations. On September

7, 2011, the Stoccos discovered that GIA did not intend to abide by the Firgem

Agreement, when Baker, on behalf of GIA terminated the agreement with the

Stoccos and withdrew support from GIA Florence. The Florence Chamber of

Commerce's backing and financial support of the Stoccos and the gem lab was

premised on GIA's involvement and when GIA withdrew support, the Florence

Chamber of Commerce followed suit.

54. As a direct and proximate result of GIA's breach in its contractual

obligations, the Stoccos have been damaged thereby in the sum not less than

$3,150,000 (Three Million One Hundred and Fifty Thousand U.S. Dollars), plus

interest at the legal rate according to proof. GIA acts and omissions were willful

wanton, malicious and oppressive, to the extent that should justify exemplary

and punitive damages....

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57. GIA's principal place of business and domicile is Carlsbad, California. As

such, GIA had a duty to provide the Stoccos a copy of the franchise offering

circular pursuant to California Corporations Code §31119 and other applicable

law. GIA breached this duty and failed to disclose and provide the Stoccos a

copy of the franchise offering circular required by law. GIA also had a duty to

register the franchise, but failed to do so.

58. GIA's breach of duties and failure to disclose and provide the Stoccos a copy

of the franchise offering circular has directly and proximately caused the

Stoccos to suffer damages in an amount not less than $850,000, according to

proof.

59. GIA's breach of duties and failure to disclose and provide the Stoccos a copy

of the franchise offering circular was willful, and in addition to monetary

damages is grounds for the Stoccos' rescission of the franchise agreement

pursuant to California Corporations Code §31300 and other applicable law....

61. GIA has engaged in and continues to engage in, unlawful, fraudulent and

unfair practices, such as offering scholarships to students attending classes at

wholly owned locations only, which are substantially likely to prejudice the fair

competition of GIA Italy with other wholly owned GIA or gem grading schools

in Europe. GIA engaged in conduct, severely injuring its employees, by using

its powerful and trusted position as employer to induce its employees into

entering into an agreement that would relieve GIA of certain of its obligations,

cast those obligations on its employees, and then disassociating with those

employees leaving its (prior) employees without the reasonable ability to satisfy

those obligations.

62. The Florence Chamber of Commerce promised GIA Italy a 45% ownership

stake in the gem lab in Florence, but then later GIA fraudulently and unfairly

cancelled their support for the Stoccos and GIA Italy, directly and proximately

causing damages to the Stoccos in the amount of $2,800,000 plus $1,150,000 per

year.

63. As a direct and proximate result of GIA's conduct, as set forth herein,

Defendants have received ill-gotten gains and/or profits, including, but not

limited to money. Therefore, Defendants were and are unjustly enriched.

Pursuant to Business & Professions Code § 17203, Plaintiffs seek injunctive

relief and request restitution and/or disgorgement of all sums, including profits,

obtained in violation of Business & Professions Code § 17200, et seq.

(ECF No. 7 at 3-15).

APPLICABLE STANDARD

Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a 

claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Federal Rule of Civil

Procedure 8(a) provides: “A pleading that states a claim for relief must contain . . . a short and

plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.

8(a)(2). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable

legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica

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Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

To sufficiently state a claim for relief and survive a Rule 12(b)(6) motion, a complaint

“does not need detailed factual allegations” but the “[f]actual allegations must be enough to

raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

555 (2007). “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’

requires more than labels and conclusions, and a formulaic recitation of the elements of a cause

of action will not do.” Id. (quoting Fed. R. Civ. P. 8(a)(2)). When considering a motion to

dismiss, a court must accept as true all “well-pleaded factual allegations.” Ashcroft v. Iqbal,

556 U.S. 662, 129 S. Ct. 1937, 1950 (2009). “In sum, for a complaint to survive a motion to

dismiss, the non-conclusory factual content, and reasonable inferences from that content, must

be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv.,

572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted).

DISCUSSION

Claim Three for Breach of Written Contract

In Plaintiffs’ third claim for relief – breach of written contract – Plaintiffs allege that

the Defendant breached an agreement known as the “Firgem Agreement” which Plaintiffs

allege was entered into by Defendant and the Florence Chamber of Commerce when the

Articles of Incorporation were signed on May 23, 2005. (ECF No. 7 at 11-12). Plaintiffs

allege that “as a direct and proximate result of [Defendant’s] breach in its contractual

obligations, [Plaintiffs] have been damaged....” Id.

A. Contentions of the Parties

Defendant contends that claim three of the Complaint should be dismissed pursuant to

Federal Rule of Civil Procedure 12(b)(6) because “Plaintiffs’ conclusory allegations do not

come close to satisfying the pleading standards recognized by the U.S. Supreme Court in

Twombly or Ashcroft.” (ECF No. 10-1 at 7). Defendant asserts that “the ‘Firgem Agreement’

is not an agreement at all. Rather, it is the articles of incorporation for the foundation, and it

does not memorialize any such bargained for exchange between the Florence Chamber of

Commerce and [Defendant], nor does it impose the obligations alleged by Plaintiffs.” Id. at

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12. Alternatively, Defendant contends that Plaintiffs lack standing to assert a claim for breach

of any contract because Plaintiffs were employees of Defendant when the Articles of

Incorporation were signed and were neither parties nor intended third-party beneficiaries to

any contract. Id. at 15-16.

Plaintiffs assert that the Firgem Agreement is an enforceable contract and that it

obligated Defendant “to authorize issuance of their globally recognized certificates.” (ECF No.

12 at 11). Plaintiffs contend that they are parties to the Articles of Incorporation because

Plaintiff Frederick Stocco was “individually appointed in the Firgem Agreement as ‘Mr.

Frederico Stocco, ... so that, in his own name and behalf, he may intervene at the signing of

the [Firgem Agreement]....’” Id. Alternatively, Plaintiffs contend that they have standing to

bring this claim as third-party beneficiaries on the grounds that “Plaintiffs are both individually

and members of a class intended to benefit from the Firgem Agreement.” Id. Finally,

Plaintiffs contend that they are direct beneficiaries under the Articles of Incorporation because

“GIA Italy is a stated beneficiary of the Firgem Agreement” and the Defendant “sold GIA Italy

to the Plaintiffs, and assigned all rights and obligations under the Firgem Agreement to the

Plaintiffs.” Id.

B. Discussion

In order to state a claim for breach of contract, a plaintiff must allege: (1) the existence

of a contract; (2) performance by the plaintiff or excuse for nonperformance; (3) breach by the

defendant; and (4) damages. First Commercial Mortgage Co. v. Reece, 89 Cal. App. 4th 731,

745 (Cal. Ct. Appeal 2001); 4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, § 476, p. 570. 

“In an action based on a written contract, a plaintiff may plead the legal effect of the contract

rather than its precise language.” Constr. Protective Servs., Inc., v. TIG Specialty Ins. Co., 29

Cal. 4th 189, 198-99 (2002).

“A contract, made expressly for the benefit of a third person, may be enforced by him

at any time before the parties thereto rescind it.” Cal. Civ. Code § 1559. In addition, “[a] third

party that is only incidentally benefitted [sic] by a contract does not have standing to enforce

the contract.” Andrew Smith Co. v. Paul’s Pak, Inc., 754 F. Supp. 2d 1120, 1133 (N.D. Cal.

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2010) (citing Shurpin v. Elmhirst, 148 Cal. App. 3d 94, 103 (1983) (“enforcement of contracts

by those who are only incidentally benefitted is prohibited”)). “[T]he contracting parties' intent

to confer a benefit on the third party must appear in the terms of the agreement.” Andrew

Smith Co., 754 F. Supp. 2d at 1133 (citing Brinton v. Bankers Pension Services, Inc., 76 Cal.

App. 4th 550, 558 (1999) (internal quotations omitted)). It is not necessary that the third party

be named or identified individually to be an express beneficiary. Spinks v. Equity Residential

Briarwood Apartments, 171 Cal. App. 4th 1004, 1023 (2009) (citations omitted) (internal

quotations omitted). Rather, a third party can show “that he is a member of a class of persons

for whose benefit [the contract] . . . was made.” Id. 

In this case, documents attached to the Complaint show that representatives of

Defendant, the Florence Chamber of Commerce and the University of Florence signed the

Articles of Incorporation on May 23, 2005, forming the "Firenze Scienze Gemmologiche’

Foundation.” (ECF No. 7-1 at 96-114). The Articles of Incorporation state that Plaintiff

Frederick Stocco was “present to this Act in his capacity as a proxy of [Defendant] by virtue

of a special proxy issued to him by the President of [Defendant] GIA.” Id. at 98. The Articles

of Incorporation state that “Federico Stocco” was one of seven members appointed to “the first

Board of the Foundation.” Id. at 100-101. Plaintiffs allege that they acquired GIA Italy in

“late 2007," over two years after the Articles of Incorporation were signed on May 23, 2005. 

(ECF No. 7 at 6). On April 10, 2008, Defendant’s President, Donna Baker (“Baker”), sent a

letter to the “Firgem Foundation c/o FIA Florence s.r.l.” stating that Defendant was “resigning

as Council Member of the Firgem Foundation” and that Defendant “delegates GIA Florence

s.r.l. with offices in Florence ... all powers to make any decisions and conclude any agreements

relative to the Foundation.” (ECF No. 7-2 at 55).

There are no facts alleged in the Complaint to support Plaintiffs’ claim that they are

parties to any contract formed by the Articles of Incorporation; Plaintiff Frederick Stocco

signed the Articles of Incorporation as a proxy on Defendant’s behalf, and his membership on

the Board of the “Firgem Foundation” brought with it no contractual rights or obligations. 

There are no facts alleged in the Complaint to support Plaintiffs’ claim that they are third-party

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beneficiaries to any contract formed by the Articles of Incorporation. Plaintiffs have alleged

no facts showing that they “expressly ... benefit[ted]” from the Articles or that Plaintiffs belong

to a “class of persons” that the founders intended to benefit when the Articles were signed. See

Cal. Civ. Code § 1559; see also Andrew Smith Co., 754 F. Supp. 2d at 1133 (“A third party

that is only incidentally benefitted [sic] by a contract does not have standing to enforce the

contract.”); Shurpin, 148 Cal. App. 3d at 103 (“Enforcement of contracts by those who are

only incidentally benefitted is prohibited.”); Spinks, 171 Cal. App. at 1023. There are no facts

alleged in the Complaint to support Plaintiffs’ claim that they are direct beneficiaries to any

agreement between the founding members of the Firgem Foundation after acquiring GIA Italy;

in the April 10, 2008 letter, Baker permitted Plaintiff to “make any decisions” and “conclude

any agreements” related to the Foundation, but did not assign to Plaintiff any contractual rights

or obligations that Defendant may have had pursuant to the Articles of Incorporation. Based

on the facts alleged in the Complaint, the Court concludes that Plaintiffs lack standing to assert

a breach of contract claim against Defendant. The Motion to Dismiss as to claim three of the

Complaint is granted. 

Claim Four for Fraud in the Inducement

In Plaintiffs’ fourth claim for relief – fraud in the inducement – Plaintiffs allege that

they reasonably relied on false representations of the Defendant when they entered into the

franchise agreement to operate GIA Italy in Florence. (ECF No. 7 at 12-13). Plaintiffs allege

that the Defendant’s false representations, which they “reasonably relied on,” formed the

material basis for Plaintiffs’ agreement to franchise with Defendant and that Plaintiffs would

not have entered into the franchise agreement but for these representations. Id. Plaintiffs

allege that “[a]s a direct and proximate result of [Defendant’s] breach of [the Firgem

Agreement], [Plaintiffs] have been damaged....” Id. at 13.

A. Contentions of the Parties

Defendant asserts that “Plaintiffs cannot plausibly claim that they were induced to enter

into a 2007 License Agreement” based upon any representations of Defendant that it would

open a gem grading lab authorized to issue certificates. (ECF No. 13 at 9). Defendant

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contends that Plaintiff could not have reasonably relied on any representations from Defendant

that it would open a gem grading lab because the 2007 License Agreement “expressly prohibits

[Plaintiffs] from operating such a lab or drop-off location.” Id. Defendant asserts that any

alleged oral agreement to the contrary “is simply not plausible and should be disregarded.” 

(ECF No. 10-1 at 21). Defendant contends: “[i]t is clear ... that in light of the actual language

of the Firgem articles and the provision of the Licensing Agreement prohibiting [Plaintiffs]

from operating a gem grading laboratory ... [the] allegations ... should be dismissed.” Id. at

19.

Plaintiffs contend that the Complaint “meets [the] pleading requirements, and the

motion to dismiss should be denied.” (ECF No. 12 at 13). Plaintiffs assert that Defendant had

an obligation under the Articles of Incorporation to “authorize issuance of GIA certificates”

and that this obligation served as a “primary basis for the [Plaintiffs] agreeing to accept

ownership of GIA Italy.” Id. at 12. Plaintiffs contend that “[b]y cutting off the lifelines of

GIA Italy (and intending to do so at the time of entering into the Franchise Agreement as

specified in the Defendant’s moving papers), [Defendant] committed fraud.” Id. at 12-13.

B. Discussion

To recover for common law fraud under California law, Plaintiffs must demonstrate:

(1) misrepresentation, (2) knowledge of its falsity, (3) intent to defraud, (4) justifiable reliance,

and (5) resulting damage. Lazar v. Super. Ct., 12 Cal.4th 631, 638, 49 Cal.Rptr.2d 377, 909

P.2d 981 (1996). Claims of fraud and fraudulent conduct are subject to the heightened pleading

standards of Federal Rule of Civil Procedure 9(b). Vess v. Ciba–Geigy Corp. USA, 317 F.3d

1097, 1102–03 (9th Cir.2003); see also Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th

Cir.2004) (explaining that Rule 9(b) requires that the claimant allege “the time, place and

specific content of the false representations as well as the identities of the parties to the

misrepresentations.”).

In the Complaint, Plaintiffs alleged:

In 2007, GIA represented to the Florence Chamber of Commerce and to the

Stoccos that they intended to continue to support the gem lab and/or drop off

location pursuant to the Firgem Agreement, but this representation was false....

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These representations were made by Defendant's President, Donna Baker,

verbally to Plaintiffs in Florence, Italy, in or about 2007. Donna Baker also

previously signed the Firgem Agreement with the President Luca Mantellassi of

the Florence Chamber of Commerce. The Stoccos reasonably relied on these

representations when entering into the franchise agreement, and would not have

entered into the franchise agreement but for these representations. 

(ECF No. 7 at 13). However, Plaintiffs attached to the Complaint a 2007 License Agreement,

entered into by Plaintiffs and Defendant, which stated in part:

3.6 No Gem Grading or Identification Services. Licensee, its affiliates, owners,

managers, members, agents, and employees will not operate any trade-service

laboratory for the purpose of diamond grading, colored stone grading, or gem

identification, without the prior written consent of GIA in each instance....

(ECF No. 7-2 at 7). In light of the License Agreement’s provision explicitly prohibiting

Plaintiffs from operating a grading laboratory, the Court concludes that it is not plausible for

Plaintiffs to have reasonably relied on any prior representations of continued support for such

a laboratory when they signed the License Agreement. The Motion to Dismiss as to claim four

of the Complaint is granted. See Balistreri, 901 F.2d at 699 (Dismissal under Rule 12(b)(6)

is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support

a cognizable legal theory).

Claim Five for Failure to Provide Franchise Offering Circular

In the fifth claim for relief, Plaintiffs allege that the Defendant willfully breached its

duty to provide Plaintiffs with a copy of the “franchise offering circular” and register the

franchise, in violation of California Corporations Code section 31119. (ECF No. 7 at 14). 

Plaintiffs allege that the Defendant’s breach of duty “directly and proximately caused the

Stoccos to suffer damages" and “is grounds for [Plaintiff’s] rescission of the franchise

agreement pursuant to California Corporations Code § 31300 and other applicable law.” Id.

A. Contentions of the Parties

Defendant contends that claim five should be dismissed on the grounds that California

Corporations Code section 31119 does not apply to the franchise agreement and the claim is

time-barred by the statute of limitations. (ECF No. 10-1 at 21-22). Defendant asserts that

Plaintiffs were residents of Italy at the time the 2007 “International GIA Authorized Education

Agreement” (“License Agreement”) was signed and that “California’s Franchise Investment

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Law specifically exempts extraterritorial franchise sales.” Id. at 22. Defendant asserts that

Plaintiffs claim was not brought within the four year statutory period pursuant to California

Corporations Code section 31303. Id.

Plaintiffs contend that California Corporations Code section 31119 applies to the sale

of GIA Italy to Plaintiffs because “the franchise’s business and services were provided to

customers located inside California” and “GIA Italy enrollment included students from the

United States and California.” (ECF No. 12 at 13). Plaintiffs contend that the statute of

limitations has not expired on their fifth claim because it “was filed within one year of

Plaintiffs’ discovery of the Defendant’s breach.” Id.

B. Discussion

California Corporations Code section 31303 provides:

No action shall be maintained to enforce any liability created under Section

31300 unless brought before the expiration of four years after the act or

transaction constituting the violation, [or] the expiration of one year after the

discovery by the plaintiff of the fact constituting the violation ... whichever

shall first expire. 

Cal. Corp. Code § 31303 (West 2012) (emphasis added). 

Documents attached to the Complaint show that the “act or transaction” in this case, i.e.

the signing of the License Agreement, occurred on December 20, 2007, over four years and

five months before Plaintiffs filed this action on May 29, 2012. (ECF No. 7-2 at 4-30). The

Court concludes that claim five is barred by the statute of limitations. See People ex rel. Dep't

of Corps. v. Speedee Oil Change Systems, Inc., 95 Cal.App.4th 709, 727, 116 Cal.Rptr.2d 497

(Cal.Ct.App.2002) (“Once the four-year ... period expires, a plaintiff's belated discovery of the

fact constituting the violation cannot serve to extend the statute of limitations. In other words,

the four-year ban in section 31303 ... [is] absolute.”). The Motion to Dismiss as to claim five

of the Complaint is granted.

Claim Six for California Unfair Business Practices

In the sixth claim for relief, Plaintiffs allege that the Defendant “engaged in[,] and

continues to engage in, unlawful, fraudulent and unfair [business] practices ... directly and

proximately causing damages to [Plaintiffs]” in violation of California Business & Professions

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Code section 17203. (ECF No. 7 at 15).

A. Contentions of the Parties

Defendant contends that Plaintiffs’ sixth claim should be dismissed on the grounds that

Plaintiffs have failed to “allege any facts to allow the Court ... to determine if its claim is

‘plausible on its face.’” (ECF No. 10-1 at 23). Defendant asserts that the allegations in claim

six are “mere conclusions couched as fact” and that “there is no reasonable inference that the

defendant is liable for the misconduct alleged.” (ECF No. 13 at 11). Alternatively, Defendant

contends that California Business & Professions Code section 17200 does not apply to this

claim because Plaintiffs are not California residents and the allegedly harmful conduct of

Defendant did not occur in California, but in Italy. Id. Defendant asserts that California

Business & Professions Code section 17200 “was neither designed nor intended to regulate

claims of non-residents arising from conduct occurring entirely outside of California.” (ECF

No. 10-1 at 24). 

Plaintiffs assert that in order for claim six to survive a motion to dismiss, “[a]ll that is

required is that the Defendant receive fair notice of the claim and its grounds.” (ECF No. 12

at 14). Plaintiff contends: 

As pleaded, the Defendant is on fair notice of the claim and its grounds. It is an

unfair business practice to enter into agreements that significantly benefit a

subsidiary, and then to sell that subsidiary to an employee via a franchise

agreement (or license agreement, as referenced by the Defendant), only to then

breach those agreements claiming they don’t exist and leaving the

franchisee/licensee without the benefits of the original bargain. That is bad faith,

and the Defendant should not be rewarded for such conduct.

Id.

B. Discussion

California’s Unfair Competition Law (“UCL”) “bans unfair business practices and

authorizes injunctive and restitutionary relief against any person who engages in unfair

competition.” Norwest Mortgage, Inc. v. Superior Court, 72 Cal. App. 4th 214, 222 (1999)

(citing Cal. Bus. Prof. Code §§ 17200, 17203) (internal quotations omitted). In Norwest

Mortgage, Inc. v. Superior Court, the court held that “state statutory remedies may be invoked

by out-of-state parties [only] when they are harmed by wrongful conduct occurring in

California.” Norwest Mortgage, Inc., 72 Cal.App.4th at 224–225; see also Sullivan v. Oracle

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Corp., 51 Cal. 4th 1191, 1207 (2011) (“Neither the language of the UCL nor its legislative

history provides any basis for concluding the Legislature intended the UCL to operate

extraterritorially. Accordingly, the presumption against extraterritoriality applies to the UCL

in full force.”).

In the Complaint, Plaintiffs allege that Defendant “offer[ed] scholarships to students

attending classes at wholly owned locations only, which are substantially likely to prejudice

the fair competition of GIA Italy with other wholly owned GIA or gem grading schools in

Europe.” (ECF No. 7 at 14). Plaintiffs allege that Defendant “use[d] its powerful and trusted

position as employer to induce its employees into entering into an agreement that would relieve

[Defendant] of certain of its obligations, cast those obligations on its employees, and then

disassociating with those employees leaving its (prior) employees without the reasonable

ability to satisfy those obligations.” Id. at 15. Plaintiffs allege that “[t]he Florence Chamber

of Commerce promised GIA Italy a 45% ownership stake in the gem lab in Florence, but then

later [Defendant] fraudulently and unfairly cancelled their support for the Stoccos and GIA

Italy....” Id.

Plaintiffs do not allege that the Defendant engaged in any unfair business practices

within California. Plaintiffs, as residents of Italy, are not permitted to bring a claim for unfair

business practices under California’s UCL for conduct that allegedly occurred entirely outside

of California. See Norwest Mortgage, Inc., 72 Cal.App.4th at 224–225 (explaining that the

presumption against extraterritoriality cannot be overcome with respect to the UCL because

the statute “contains no express declaration that it was designed or intended to regulate claims

of nonresidents arising from conduct occurring entirely outside of California."). The Court

concludes that Plaintiffs have failed to allege facts that are “plausibly suggestive of a claim

entitling the plaintiff to relief” under California’s UCL. Moss, 572 F.3d at 969. The Motion

to Dismiss as to claim six of the Complaint is granted.

//

//

//

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CONCLUSION

IT IS HEREBY ORDERED that the Motion to Dismiss (ECF No. 10) filed by

Defendant Gemological Institute of America, Inc. is GRANTED. Claims three, four, five

and six of the Complaint are dismissed.

DATED: January 3, 2013

WILLIAM Q. HAYES

United States District Judge

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