District Court Dismisses Pending Trade Practice Case, With Leave to Amend

by McDermott Will & Emery

McDermott Will & Emery

This month, the United States District Court for the Northern District of California issued an opinion in Arena Restaurant and Lounge, Inc. v. Southern Glazer’s Wine and Spirits, No. 17-CV-03805-LHK. The Arena case, also called Nguyen after its original named Plaintiff, seeks to certify a class action against Southern Glazer’s for a wide range of allegedly fraudulent, deceptive, and otherwise illegal acts related to the sale and distribution of wine and spirits in California. The court’s recent order, issued on April 9 and amended on April 16, 2018, dismisses all claims brought by the Plaintiffs in their Second Amendment Complaint (SAC). Significantly, however, the court will allow the Plaintiffs to file an amended complaint within 30 days in an attempt to cure defects in many of the SAC’s claims.

At the center of the Arena case are allegations that Southern Glazer’s engaged in practices such as selling to unlicensed persons and hiding such sales by recording them as sales to licensed retailers like the Plaintiffs. These “phantom” sales, in turn, allegedly created tax problems for the Plaintiff retailers. The SAC also alleges price discrimination between different retailers, selling to retailers without delivering the inventory in order to meet sales quotas, engaging in giveaways of free product to retailers, engaging in illegal “tie-in sales” practices, and a host of other alleged wrongs. The SAC packages these wide-ranging allegations into no fewer than eleven claims for relief.

Southern Glazer’s moved to dismiss the SAC under FRCP Rule 12(b)(6). In its April opinion, the court dismissed all eleven claims for relief. The court reasoned:

  1. Turning first to plaintiffs’ promissory fraud and common law fraud claims, the court rejected Southern Glazer’s argument that the claims were barred by the “economic loss prohibits,” which bars fraud claims if the claims also arise from a contractual relationship. But the court went on to dismiss both claims for failure to meet FRCP Rule 9(b)’s heightened pleading standard for fraud. Examining Plaintiffs’ claim that Southern Glazer’s fraudulently used their tax and license information to make third-party sales, the court explained: “Plaintiffs do not allege who made the alleged third-party sales, when the sales were made, or what was sold. Nor do Plaintiffs identify the third parties.” The court accordingly dismissed both fraud counts, with leave to amend in order to plead these claims with the required specificity.
  2. The court next turns to four claims arising from California’s Unfair Practices Act and alleging illegal below-cost sales, loss-leader sales, secret rebates and unlawful intimidation. The court first rejected Southern Glazer’s argument that only a competing wholesaler has standing to bring claims for below-cost or loss-leader sales, explaining that the statute clearly gives any “person” harmed the right to sue. But the court found that all four claims fail to state a claim for relief as they merely make conclusory allegations and fail to cite a single specific instance of alleged unlawful practices. As with the fraud claims, however, the court gave the Plaintiffs a chance to amend their complaint by pleading facts with more specificity.
  3. The court dismissed with prejudice Plaintiffs’ constructive trust claim, explaining that a constructive trust is a remedy, not a claim and, in any event, Plaintiffs appear to have abandoned the argument.
  4. The court also dismissed with prejudice Plaintiffs’ breach of fiduciary duty claim, explaining that under California law no fiduciary duties arise from a commercial buyer-seller relationship.
  5. The court next turned to Plaintiffs’ claim under California’s Unfair Competition Law, which prohibits unlawful, unfair and fraudulent conduct. The court dismissed the claim as Plaintiffs failed to plead its claim with sufficient specificity and did not adequately allege that they suffered economic harm as a result of Southern Glazer’s allegedly unlawful, unfair, and fraudulent conduct. Once again, however, the court allowed Plaintiffs to amend their complaint to plead this claim with greater specificity.
  6. The breach of contract claim was also dismissed with leave to amend. According to the court, Plaintiffs failed to specify the contracts upon which they based their breach claim.
  7. The court ended on Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing. Because this claim relied entirely on the same allegations as those underlying the breach of contract claim, the court dismissed it as duplicative.

The court ends its opinion by giving Plaintiffs’ 30 days to cure the deficiencies identified in the claims dismissed with leave to amend/without prejudice. Plaintiffs may not, however, add new causes of action or new parties without the permission of the court.

On May 16 we will know if the Plaintiffs will rise to the court’s challenge and re-plead their claims.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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