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Prim Limited Liability Company; Prim Ltd.; and Fun Factory, Inc v. Pace-O-Matic

January 30, 2012

PRIM LIMITED LIABILITY COMPANY; PRIM LTD.; AND FUN FACTORY, INC.,
PLAINTIFF,
v.
PACE-O-MATIC, INC., DEFENDANT.



The opinion of the court was delivered by: Susan Oki Mollway Chief United States District Judge

ORDER GRANTING PLAINTIFFS PRIM LLC AND PRIM LTD.'S MOTION TO DISMISS COUNTS IV AND V OF PACE-O-MATIC, INC.'S AMENDED COUNTERCLAIM

I. INTRODUCTION.

This case concerns an exclusive distribution agreement between the manufacturer and a distributor of the electronic game Island Fruit. Plaintiffs PRIM LLC and PRIM LTD (collectively, "Prim"), a distributor of Island Fruit in Hawaii and the Pacific Rim, and FUN FACTORY, an amusement center company that owns and operates Island Fruit in Hawaii, allege that Defendant PACE-OMATIC ("Pace") violated the distribution agreement and tortiously interfered with Prim's reasonable expectation of business. See Second Amended Compl. ¶ 3, Aug. 30, 2011, ECF No. 79. Pace has counterclaimed against Prim, asserting, inter alia, breach of contract, fraud, and misrepresentation claims. See Def./Counterclaimant Pace-O-Matic, Inc.'s Amended Counterclaim Against Pls./Counterclaim Defendants Prim Limited Liability Company and Prim Ltd. at 11, Sept. 09, 2011, ECF No. 83-1 ("Amended Counterclaim").

Prim now seeks dismissal of two counts asserted in the Amended Counterclaim--Count IV: "Intentional and Negligent Misrepresentation" and Count V: "Fraud, Fraudulent Concealment, and Deceit"--on the ground that they do not meet the heightened pleading standard for fraud set forth by Rule 9(b) of the Federal Rules of Civil Procedure. Although Prim acknowledges that negligent misrepresentation is not subject to Rule 9(b), Prim also seeks dismissal of that claim. The court construes that request as seeking dismissal for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The court grants Prim's motion.

II. FACTUAL BACKGROUND.

Pace designs, manufacturers, and sells various electronic games, including Island Fruit. Second Amended Compl. ¶ 1. Prim is a distributor of electronic games in Hawaii and the Pacific Rim. Id. ¶ 16. On November 7, 2008, Prim and Pace entered into a distribution agreement naming Prim the exclusive distributor of Pace games and game "fills"---codes that enable continuous operation of the games--in Hawaii and the Pacific Rim ("Agreement"). Id. ¶ 19; Amended Counterclaim ¶ 7. The Agreement stated that Prim would "exercise its best efforts" to develop markets for Pace's games; that Pace would sell games and fills to Prim; and that Pace would not authorize any other entity to sell its games in the designated territory for two years from the date of the Agreement, so long as Prim purchased reasonable amounts of games and fills and continued its best efforts to distribute the games. Amended Counterclaim ¶ 7.

On October, 22, 2010, Plaintiffs filed this action, claiming, among other things, that Pace had terminated the exclusivity provision of Prim's distributorship and barred Prim from obtaining fills, thereby violating the Agreement and tortiously interfering with Prim's reasonable expectation of business from its customers. Second Amended Compl. ¶ 3. On November 10, 2010, Pace asserted three counterclaims against Prim: breach of contract, unfair competition, and violations of the Sherman Act, 15 U.S.C § 1 et seq. On August 30, 2011, Plaintiffs filed their Second Amended Complaint. On September 12, 2011, Pace filed the Amended Counterclaim, which added Count IV--"Intentional and Negligent Misrepresentation" and Count V--"Fraud, Fraudulent Concealment, and Deceit."

The Amended Counterclaim alleges that Prim has violated the Agreement by failing to purchase a reasonable amount of games and fills, by failing to use its best efforts to distribute the games, and by failing to exercise its best efforts to develop markets for the games. Id. ¶ 8. It further alleges that Prim has limited most of its sales to Fun Factory, which is allegedly controlled by the same individuals that control Prim. Id. ¶ 9. Excluding fills sold to a pre-existing Pace customer, Nickels and Dimes, Prim has allegedly sold seven million fills, which, Pace contends, is a low amount. Id. ¶ 10. Prim has purchased forty-three games for Hawaii, sixty games for Guam, and nine games for Nickels and Dimes. Id. Pace says that, in other markets, it usually requires distributors to purchase approximately 100 to 200 games per state each month. Id. ¶ 11.

Pace alleges that Prim has "hindered the sale of games and fills to other businesses in Hawaii" by quoting higher prices than are reasonable and/or making unreasonable demands of prospective purchasers. Id. ¶ 13. Pace says that witnesses have reported that Prim refused to sell potential purchasers Pace games unless the purchasers provided Prim with additional compensation. Id. Pace states that Prim "intentionally restricted sales in Hawaii to protect or enhance Hawaii operations (controlled by Prim or its affiliates, i.e[.] Fun Factory, Inc.) from competition." Id.

According to the Amended Counterclaim, on October 15, 2010, Pace notified Prim that its account would be cancelled if Pace did not receive past-due payments from Prim by October 18, 2010. Id. ¶ 15. On October 18, 2010, Pace allegedly terminated the exclusive nature of Prim's distributorship, while allowing Prim to continue to distribute games and fills. Id. ¶ 16. At one point, Pace terminated Prim's access to obtain fills, id., but later reinstated access. Id. ¶ 20. Pace ultimately terminated the Agreement on or about March 2, 2011, citing concern about whether operating Island Fruit was legal in Hawaii. Id. ¶ 25. The question of legality had been raised by the court in temporary restraining order proceedings on October 26, 2010. See ECF No. 4. The specific issue was whether Island Fruit was a gambling machine that was illegal under Hawaii law, and whether that rendered the Agreement unenforceable. ECF No. 22. Pace alleges that Prim had "previously" assured Pace that operating Island Fruit was legal in Hawaii. Amended Counterclaim ¶ 23.

The motion now before this court seeks dismissal of the two new counts (misrepresentation and fraud) in the Amended Counterclaim.

III. LEGAL STANDARDS.

A. Rule 9(b).

Usually, a party's pleading need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). However, Rule 9(b) requires that, when fraud or mistake is alleged, "a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). Rule 9(b)'s purposes are to provide defendants with adequate notice to allow them to defend against a charge, to protect those whose reputation would be harmed as a result of being subject to fraud charges, and to prohibit plaintiffs from unilaterally imposing upon the court, the parties, and society social and economic costs without some factual basis. Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009).

An allegation of fraud is sufficient if it "identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993) (internal citations and quotations omitted). "Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged." Kearns, 567 F.3d at 1124 (quoting Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003)) (internal quotation marks omitted). That is, to sufficiently identify the circumstances that constitute fraud, a plaintiff must identify such facts as the times, dates, places, or other details of the alleged fraudulent activity. Neubronner, 6 F.3d at 672. A plaintiff must also explain why the alleged conduct or statements are fraudulent. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 n.7 (9th Cir. 1994) (en banc), superseded by statute on other grounds by 15 U.S.C. § 78u-4.

A court treats a motion to dismiss under Rule 9(b) like a motion to dismiss under Rule 12(b)(6):

A motion to dismiss a complaint or claim "grounded in fraud" under Rule 9(b) for failure to plead with particularity is the functional equivalent of a motion to dismiss under Rule 12(b)(6) for failure to state a claim. If insufficiently pled averments of fraud are disregarded, as they must be, in a complaint or claim grounded in fraud, there is effectively nothing left of the complaint. In that event, a motion to dismiss under Rule 12(b)(6) would obviously be granted. Because a dismissal of a complaint or claim grounded in fraud for failure to comply with Rule 9(b) has the same consequence as a dismissal under Rule 12(b)(6), dismissals under the two rules are treated in the same manner.

Vess, 317 F.3d at 1107.

When a court exercises diversity jurisdiction, state substantive law determines the elements of the claims. "[W]hile a federal court will examine state law to determine whether the elements of fraud have been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with particularity is a ...


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