Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-02424/USCOURTS-cand-3_07-cv-02424-2/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

FIRST ADVANTAGE BACKGROUND SERVICES

CORP., a Florida corporation,

Plaintiff,

v.

PRIVATE EYES, INC., a California

corporation, DOES 1-10

Defendants. 

AND RELATED COUNTER-CLAIMS

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No. C-07-2424 SC

ORDER GRANTING IN

PART AND DENYING IN

PART PLAINTIFF'S

MOTION TO DISMISS THE

FOURTH THROUGH NINTH

CAUSES OF ACTION IN

DEFENDANT'S

COUNTERCLAIMS

I. INTRODUCTION

Presently before the Court is a motion by Plaintiff First

Advantage Background Services Corp. ("Plaintiff" or "First

Advantage") to dismiss the Fourth through Ninth Causes of Action

asserted by Defendant Private Eyes, Inc. ("Defendant", "Private

Eyes", or "PEI") in its Counterclaims. 

For the reasons described herein, Plaintiff's motion to

dismiss is GRANTED in part and DENIED in part.

II. BACKGROUND

Private Eyes performs employment background checks on a

contract basis. See Docket No. 12, Counterclaim ("CC"), ¶ 1. In

2002, PEI entered into a verbal contract with Coca-Cola

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Enterprises ("CCE") to perform background checks on applicants and

employees, including verification of motor vehicle records

("MVR"). Id. at ¶ 8. PEI was authorized by the verbal contract

to subcontract services to third-party vendors. Id. On March 29,

2002, PEI entered into a written contract with EIS, a predecessor

to First Advantage. Id. at ¶ 10. After assuming the contract,

First Advantage confirmed in writing that it would not use any

confidential information it received from PEI to solicit business

from CCE. Id. at ¶ 13, Exs. A and B. As the basis for its

Counterclaims, PEI asserts that First Advantage solicited the MVR

business from CCE. Id. at ¶ 14. In addition, PEI alleges that

First Advantage disclosed proprietary information to CCE,

including PEI's costs and profit margins. Id. at ¶ 20. PEI

attempted to negotiate a resolution to the MVR dispute, resulting

in an agreement that First Advantage pay PEI $1.80 for each MVR

First Advantage performed for CCE. Id. at ¶ 17. By June 2005,

First Advantage stopped making the MVR payments. Id. at ¶ 18, 68. 

Subsequenty, PEI learned that First Advantage was soliciting the

remaining services from CCE and disclosing confidential

information. Id. at ¶¶ 19-20. In September 2006, CCE informed

PEI that it planned to assign future work to other vendors, which

PEI believes was due to First Advantage's performance. Id. at ¶

21. PEI claims to have suffered damages as a result of First

Advantage's actions. In this motion to dismiss, First Advantage

seeks to dismiss six causes of action from PEI's Counterclaim. 

While First Advantage asserts that each of the claims fails for

various reasons, the predominant argument is that PEI has added

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claims sounding in tort for claims already covered by contract

causes of action.

III. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a motion to

dismiss can be granted if the plaintiff fails "to state a claim

upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). 

When evaluating a motion to dismiss, the court accepts the facts

as stated by the nonmoving party and draws all inferences in its

favor. See Everest & Jennings, Inc. v. Am. Motorists Ins. Co., 23

F.3d 226, 228 (9th Cir. 1994). Furthermore, courts must assume

that all general allegations "embrace whatever specific facts

might be necessary to support them." Peloza v. Capistrano Unified

Sch. Dist., 37 F.3d 517, 521 (9th Cir. 1994). At the pleading

stage, the plaintiff "need only show that the facts alleged, if

proved, would confer standing upon him." Warren v. Fox Family

Worldwide, Inc., 328 F.3d 1136, 1140 (9th Cir. 2003). If a

complaint is dismissed for failure to state a claim, "leave to

amend should be granted unless the court determines that the

allegation of other facts consistent with the challenged pleading

could not possibly cure the deficiency." Schreiber Distrib. Co.

v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986).

The parties agree that California substantive law applies to

all claims in this case pursuant to the Erie doctrine. See Erie

R.R. v. Tompkins, 304 U.S. 64, 78 (1938). 

//

//

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IV. DISCUSSION

1. Fourth Cause of Action

The Fourth Cause of Action in PEI's Counterclaim is for

Intentional Interference with an Existing Contractual

Relationship. See CC, ¶¶ 48-55. PEI alleges that First Advantage

engaged in wrongful conduct by soliciting business from CCE and

disclosing PEI's confidential information to CCE. See id. As its

basis for dismissal, First Advantage asserts that this claim is

barred by the applicable 2-year statute of limitations. According

to the Complaint, "In or about spring 2005, PEI learned for the

first time that First Advantage was soliciting all remaining

services from CCE." Id. at ¶ 19. PEI alleges the same time

period for the disclosure of confidential information. Id. at ¶

20. Though First Advantage points out that "spring 2005" ended on

June 20, outside the statute of limitations period, this is

insufficient to defeat PEI's claim at this stage. Having

liberally construed the pleadings, the Court finds that PEI's

language dating the claim "In or about spring 2005" is sufficient

to bring the claim within the applicable 2-year period. At a

later stage in the case, PEI will have to prove that its claim

indeed falls within the statute of limitations. The Court notes

that ¶ 14 and ¶ 16 contain allegations from early 2004, which

clearly fall outside the statute of limitations. As a result,

First Advantage's motion is DENIED with respect to the Fourth

Cause of Action. 

2. Fifth Cause of Action

The Fifth Cause of Action in PEI's Counterclaim is for

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Intentional Interference with Prospective Economic Relations. See

CC, ¶¶ 48-55. The Court finds that this claim is not barred by

the 2-year statute of limitations for the same reasons discussed

with respect to the Fourth Cause of Action. 

First Advantage also asserts that PEI fails to adequately

state a claim for intentional interference with prospective

economic relations. As part of this claim, PEI must allege an

intentional act that is "independently wrongful," an act that is

"wrongful by some measure beyond the fact of the interference

itself." Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal.

4th 376, 385 (1995). PEI has failed to satisfy this requirement. 

The contract between PEI and First Advantage prohibited

solicitation and disclosure of confidential information. CC, ¶

13. As alleged by PEI, First Advantage breached this contract by

soliciting business from CCE and disclosing confidential

information to CCE. Id. at ¶ 52. Nowhere in the claim does PEI

allege an independently wrongful act outside a simple breach of

contract by First Advantage. PEI's allegations sound in contract,

not in tort, and PEI asserted its breach of contract claim in the

First Cause of Action. See JRS Prods., Inc. v. Matsushita Elec.

Corp. of Am., 115 Cal. App. 4th 168, 181-82. (2004); Khoury v.

Maly's of California, Inc., 14 Cal. App. 4th 612, 618 (1993). As

a result, PEI's Fifth Cause of Action is DISMISSED without

prejudice. 

3. Sixth Cause of Action

The Sixth Cause of Action in PEI's Counterclaim is titled

Fraud-False Promise I. See CC, ¶¶ 56-68. PEI asserts that even

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though First Advantage promised not to solicit business from CCE,

in early 2004 and June of 2005 First Advantage solicited and

gained MVR business from CCE. Id. As a basis for dismissing this

claim, First Advantage asserts that it is barred by the three-year

statute of limitations for fraud claims. See Cal. Civ. Proc. Code

§ 338(d). In the Counterclaim, PEI states that it learned of the

alleged fraud in April of 2004, yet waited over three years, until

June of 2007, to file the claim. PEI claims that the statute of

limitations should be tolled until June of 2005 because the

parties reached a verbal agreement for settling the MVR claims. 

See CC, ¶ 68. As both parties discuss in their briefs, PEI's

claim would have violated the statute of limitations unless the

period is equitably tolled until June 2005 based on the alleged

verbal agreement between First Advantage and PEI concerning the

MVR business. PEI alleges that First Advantage stopped making the

agreed payments in June 2005 and thus its cause of action accrued

at that time. Contrary to PEI's arguments, the Counterclaim

indicates that the parties settled the MVR claims. See id. This

settlement operates as a bar to reopening the controversy or

tolling the statute of limitations. See Doran v. N. State

Grocery, Inc., 137 Cal. App. 4th 484, 492 (2006); 65 Butterfield

v. Chicago Title Ins. Co., 70 Cal. App. 4th 1047, 1062 (1999). 

While First Advantage's alleged failure to pay under this

agreement may qualify as a breach of contract, it cannot be styled

as a fraud claim. 

In addition, PEI has not alleged sufficient facts to qualify

for equitable estoppel. Equitable estoppel requires: (1) the

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party to be estopped must be apprised of the facts; (2) that party

must intend that his or her conduct be acted on, or must so act

that the party asserting the estoppel had a right to believe it

was so intended; (3) the party asserting the estoppel must be

ignorant of the true state of facts; and (4) the party asserting

the estoppel must reasonably rely on the conduct to his or her

injury. See Honig v. San Francisco Planning Dep't, 127 Cal. App. 

4th 520, 529 (2005). PEI has failed to allege that First

Advantage's conduct directly prevented PEI from filing its fraud

claim in time. Furthermore, PEI's claim fails to satisfy the

heightened pleading standards for fraud under Rule 9(b) of the

Federal Rules of Civil Procedure. PEI has failed to give a

specific account of the alleged fraud "including an account of the

time, place, and specific content of the false representations as

well as the identities of the parties to the misrepresentations." 

Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (internal

quotation omitted). As a result, PEI's Sixth Cause of Action is

DISMISSED without prejudice.

4. Seventh Cause of Action

The Seventh Cause of Action in PEI's Counterclaim is FraudFalse Promise II. See CC, ¶¶ 69-78. PEI alleges that First

Advantage promised to bill all services it performed for CCE

through PEI. PEI contends that First Advantage never intended to

perform, and made the promise so that PEI would forfeit its legal

rights to set-off amounts it allegedly owed to First Advantage. 

Under California law, a cause of action for fraud based on a false

promise must allege: (1) a material promise, (2) knowledge of its

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falsity, (3) intent to defraud or induce reliance, (4) justifiable

reliance, and (5) resulting damage. See Lazar v. Superior Court,

12 Cal. 4th 631, 638 (1996). PEI's claim fails to allege the

specific facts necessary to satisfy Rule 9(b). See Swartz, 476

F.3d at 764. For instance, from the bare facts alleged, the Court

cannot determine whether PEI has shown justifiable reliance. 

There is no indication as to what statements were made, whether

they were expressed verbally or in writing, or to whom they were

made. Furthermore, PEI admits that it inadequately alleged the

reliance damages. As a result, PEI's Seventh Cause of Action is

DISMISSED without prejudice.

5. Eighth Cause of Action

The Eighth Cause of Action in PEI's Counterclaim is FraudFalse Representation. See CC, ¶¶ 79-89. PEI alleges that First

Advantage wrote that "First Advantage has not endeavored to

directly sell its services to Coca Cola, or in anyway circumvent

the relationship that Private Eyes has had with Coca Cola." CC,

Ex. D. PEI asserts that it relied on this statement to its

detriment and continued to assign services to First Advantage. 

See CC, ¶ 86. 

Under California law, a cause of action for fraud based on

misrepresentation of fact must allege: (1) a representation of a

material fact, (2) knowledge of its falsity, (3) intent to

defraud, (4) justifiable reliance, and (5) resulting damage. See

Lazar, 12 Cal. 4th at 638. This type of claim is also subject to

the heightened pleading standards of Rule 9(b). See Textainer

Equip. Mgmt. (U.S.) Ltd. v. TRS Inc., 2007 WL 1795695, *4 (N.D.

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Cal. June 20, 2007).

PEI's claim fails for several reasons. First, PEI

misconstrues the statement. It is phrased in the past tense, "has

not endeavored to sell," which cannot be interpreted as a promise

to not solicit in the future. Second, PEI cannot show justified

reliance, because in the remainder of the Counterclaim it asserts

that it already knew that First Advantage had solicited CCE

business as early as 2004. 

Finally, the First Advantage letter cannot be used as the

basis for a fraud claim because it is subject to the litigation

privilege under Cal. Civ. Code § 47(b). The privilege applies "to

all torts other than malicious prosecution, including fraud,

negligence, and negligent misrepresentation." Harris v. King, 60

Cal. App. 4th 1185, 1188 (1998). It covers letters, such as this,

sent by Senior Associate Counsel for First Advantage, intended "to

achieve the objects of the litigation" or having "some connection

or logical relation to the action." Silberg v. Anderson, 50 Cal.

3d 205, 212 (1990). As such, the privilege "applies to

prelitigation communications as well as those occurring during the

course of actual litigation." Nguyen v. Proton Tech. Corp., 69

Cal. App. 4th 140, 147 (1999). From its face, the letter meets

all the requirements to apply for litigation privilege and PEI's

claim based on statements in the letter fails. Because the

defects in this claim are incurable, PEI's Eighth Cause of Action

is DISMISSED with prejudice.

6. Ninth Cause of Action

The Ninth Cause of Action in PEI's Counterclaim is for unfair

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trade practices under California Business and Professions Code §

17200 et seq. ("UCL"). See CC, ¶¶ 90-95. PEI alleges that the

allegations contained in its preceding claims, ¶¶ 1-22 and 41-89,

are sufficient to state a claim under section 17200. However, "an

action under the UCL is not an all-purpose substitute for a tort

or contract action." Korea Supply Co. v. Lockheed Martin Corp.,

29 Cal. 4th 1134, 1150 (2003). 

When a plaintiff who claims to have suffered injury from a

direct competitor's “unfair” act or practice invokes section

17200, the word “unfair” in that section means conduct that

threatens an incipient violation of an antitrust law, or

violates the policy or spirit of one of those laws because

its effects are comparable to or the same as a violation of

the law, or otherwise significantly threatens or harms

competition.

Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20

Cal. 4th 163, 187 (1999). Under the UCL, "[i]njury to a

competitor is not equivalent to injury to competition; only the

latter is the proper focus of antitrust laws." Id. at 186. 

California courts do not allow competitors to transform contract

and tort claims into UCL claims. See Stevenson Real State Servs.,

Inc. v. CB Richard Ellis Real Estate, 138 Cal. App. 4th 1215,

1224-25 (2006) PEI's UCL claim also fails to state a claim for

unfair practices because PEI cannot show that the public "is

likely to be deceived" by First Advantage's conduct. Watson

Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099,

1121 (C.D. Cal. 2001). Finally, PEI cannot save this claim by

including a trade secret claim under the California Uniform Trade

Secrets Act ("CUTSA"), Cal. Civ. Code § 3426. The CUTSA preempts

claims for unfair competition under the UCL. See AirDefense, Inc.

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v. AirTight Networks, Inc., 2006 WL 2092053, *5 (N.D. Cal., July

26, 2006); Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d

1025, 1033-34 (N.D. Cal. 2005). Because the defects in this claim

are incurable, PEI's Ninth Cause of Action is DISMISSED with

prejudice.

V. CONCLUSION

For the reasons discussed herein, Plaintiff's Motion to

Dismiss the Fourth through Ninth Causes of Action in Defendant's

Counterclaim is GRANTED in part and DENIED in part. The Motion is

DENIED as to the Fourth Cause of Action and GRANTED as to the 

Fifth, Sixth, Seventh, Eighth, and Ninth Causes of Action. PEI

has thirty days from the date of this Order to file an Amended

Counterclaim.

IT IS SO ORDERED.

Dated: September 5, 2007 

UNITED STATES DISTRICT JUDGE 

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