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The Gold Refinery, LLC, A Michigan Limited Liability v. Aloha Island Gold

February 15, 2012

THE GOLD REFINERY, LLC, A MICHIGAN LIMITED LIABILITY COMPANY,
PLAINTIFF,
v.
ALOHA ISLAND GOLD, LLC, A HAWAIIAN LIMITED LIABILITY COMPANY,
SAM TIMAS, AN INDIVIDUAL; SANDY WARD, AN INDIVIDUAL; TAMMIE AKAU, AN INDIVIDUAL;
KRISTY ARAUJO-NAGAO, AN INDIVIDUAL; LANA ATON, AN INDIVIDUAL; MARY KAY CARVALHO, AN INDIVIDUAL; SUNNY COLLO, AN INDIVIDUAL; PRISCILLA GRAY, AN INDIVIDUAL; CHISTOPHER HENRIQUES, AN INDIVIDUAL; RAINA SANTOS, AN INDIVIDUAL; GARY SCHLEIF, AN INDIVIDUAL; KAREN SCHLEIF, AN INDIVIDUAL; DENISE CABEL, AN INDIVIDUAL; OSWALDO CABEL, AN INDIVIDUAL; TIERRA HULIHEE, AN INDIVIDUAL; HOLLY KEANAAINA, AN INDIVIDUAL; CASSANDRA RYUSAKI, AN INDIVIDUAL; TAMMY MATTOS, AN INDIVIDUAL;
JASON ATON, AN INDIVIDUAL; BRANDI PAGALA, AN INDIVIDUAL, DEFENDANTS.



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

ORDER (1) GRANTING PLAINTIFF'S MOTION TO PARTIALLY DISMISS DEFENDANTS SAM TIMAS AND SANDY WARD'S COUNTERCLAIM TO PLAINTIFF'S COMPLAINT, AND (2) GRANTING PLAINTIFF'S MOTION TO DISMISS DEFENDANT ALOHA ISLAND GOLD, LLC'S COUNTERCLAIM

I. INTRODUCTION.

Plaintiff The Gold Refinery, LLC ("TGR"), buys and resells gold, usually in the form of personal jewelry. TGR is suing Independent Agents ("IAs"), individuals that, in return for commissions, solicited customers to sell gold to TGR. Compl. ¶¶ 2, 4, Aug 25, 2011, ECF No. 1. TGR claims that, while serving as TGR's IAs, Defendants Sam Timas and Sandy Ward formed Aloha Island Gold ("Aloha Island"), a company that competed directly with TGR. Id. ¶¶ 22-23. TGR sues Aloha Island as well as Timas, Ward, and eighteen other former or current IAs, claiming that Defendants have stolen TGR's proprietary business methods, customer lists, and distributors. Id. ¶ 1. Timas and Ward have counterclaimed, and Aloha Island has filed a separate counterclaim.

Two motions brought by TGR are now before the court. The first seeks dismissal of nine claims in the Timas and Ward counterclaim, and the second seeks dismissal of the Aloha Island counterclaim. The court grants both motions.

II. FACTUAL BACKGROUND.

Both TGR and Aloha Island buy and resell gold. They use "multi-level" or "network" marketing. Compl. ¶ 11; Sam Timas and Sandy Ward's Counterclaim Against The Gold Refinery, LLC For Violation of Hawai`i Franchise Investment Law, Unfair Competition, Breach of Contract, Tortious Breach of Contract, Defamation, Negligent Misrepresentation, Breach of Implied Covenant of Good Faith, Illegal Restraint of Trade, and Punitive Damages ("Timas and Ward Counterclaim") ¶ 9, Sept. 9, 2011, ECF No. 17-1; Defendant Aloha Island Gold, LLC's Counterclaim ("Aloha Island Counterclaim") ¶ 8, Oct, 20, 2011, ECF No. 4. Multi-level marketing usually involves independent contractors who earn commissions through sales on behalf of a company. Those independent contractors may also recruit other independent contractors and earn commissions based on sales by those recruits. TGR refers to its IAs' recruits as "junior IAs." Timas and Ward Counterclaim ¶ 11. Amway and Avon are well-known examples of multi-level marketing companies. See Compl. ¶¶ 1-4.

TGR enlists IAs to arrange home-based gold-selling parties or events. Id. ¶ 2. Potential customers are invited to a party or event at which an IA purchases gold, usually personal jewelry, from the attendees, using money advanced by TGR. Id.; Timas and Ward Counterclaim ¶ 9. The IAs then turn the gold over to TGR. Timas and Ward Counterclaim ¶ 9. According to TGR, Aloha Island also hosts gold-selling parties and competes directly with TGR. Compl. ¶ 22.

One becomes a TGR IA by signing up online. Timas and Ward Counterclaim ¶ 10. The potential IA "agrees" to TGR's "Terms and Conditions" by clicking an "I agree" box on TGR's website. Id.

On September 15, 2010, Timas and Ward allegedly agreed to be IAs for TGR. Id. ¶ 12. They allege that, from the beginning of their relationship with TGR, TGR "engaged in conduct that was designed to, and ultimately did, sabotage" their business and their relationships with their junior IAs. Id. ¶ 14. For example, TRG allegedly "constantly berated" Timas and Ward and failed to advance them enough funds to host their parties. Id. ¶ 14. TGR also allegedly failed to assist Timas and Ward in training their junior IAs. Id. ¶ 15.

Timas and Ward terminated their relationships with TGR about two months after having signed up. Id. ¶ 19. In November or December 2010, a number of other TGR IAs also terminated their relationships with TGR (collectively, the "former IAs"). Aloha Island Counterclaim ¶ 10. Some of them entered into independent contractor agreements with Aloha Island. Id.; Timas and Ward Counterclaim ¶ 19. According to TGR, on December 16, 2010, Timas and Ward formed Aloha Island. Compl. ¶ 22.

Aloha Island alleges that, when TGR discovered its former IAs' agreements with Aloha Island, TGR sent the former IAs cease and desist letters threatening legal action if they continued to work with Aloha Island. Aloha Island Counterclaim ¶ 11. In their separate counterclaim, Timas and Ward describe the same cease and desist letters but do not mention Aloha Gold at all. Timas and Ward allege that TGR sent their junior IAs cease and desist letters threatening legal action if they worked with Timas and Ward to host gold-selling parties. Timas and Ward Counterclaim ¶ 19. Timas and Ward contend that, as a result, their junior IAs "quit the gold party business permanently," causing Timas and Ward to lose several weeks of profits and many party representatives. Id. For its part, Aloha Gold makes nearly identical allegations, except that the agreement and relations it says many of the former IAs allegedly terminated or abandoned were with Aloha Island. Id. ¶ 13.

On August 25, 2011, TGR filed suit against Defendants, alleging, inter alia, that Defendants misappropriated TGR's trade secrets, tortiously interfered with TGR's contracts and TGR's prospective business advantage, were unjustly enriched, competed unfairly, and violated the Hawaii Uniform Deceptive Trade Practice Act. Compl. ¶¶ 45-123. On September 25, 2011, Timas and Ward counterclaimed against TGR, asserting ten counts, including, inter alia, breach of contract, defamation, and violations of the Hawaii Franchise Act and the Hawaii Antitrust Act. TGR seeks dismissal of nine of those counts, moving under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim and under Rule 9(b) of the Federal Rules of Civil Procedure for failure to plead fraud with particularity.

On October 20, 2011, Aloha Island counterclaimed against TGR for tortious interference with contractual relations, and for tortious interference with prospective business advantage. TGR seeks dismissal of those counts on the ground that Aloha Island fails to state a claim.

III. LEGAL STANDARDS. A. Rule 12(b)(6).

Rule 12(b)(6) of the Federal Rules of Civil Procedure provides: "Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defense[] by motion: . . .

(6) failure to state a claim upon which relief can be granted[.]" Dismissal under Rule 12(b)(6) may be based on either

(1) the lack of a cognizable legal theory, or (2) insufficient facts to support a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988) (citing Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984)). To state a claim, a pleading 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). While Rule 8 does not demand detailed factual allegations, "it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).

On a Rule 12(b)(6) motion to dismiss, the court takes all allegations of material fact as true and construes them in the light most favorable to the nonmoving party. Marcus v. Holder, 574 F.3d 1182, 1184 (9th Cir. 2009). To survive a motion to dismiss, a complaint must contain sufficient factual matter to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. (citing Twombly, 550 U.S. at 554). Whether a complaint states a plausible claim for relief is "context-specific," and such a determination "requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950.

When reviewing motions to dismiss brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court is generally limited to the contents of the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996). If matters outside the pleadings are considered, the Rule 12(b)(6) motion is treated as one for summary judgment. See Keams v. Tempe Tech. Inst., Inc., 110 F.3d 44, 46 (9th Cir. 1997);

Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir. 1996). However, courts may "consider certain materials--documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice--without converting the motion to dismiss into a motion for summary judgment." United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Documents with contents that are alleged in a complaint may also be considered in ruling on a Rule 12(b)(6) motion to dismiss, if no party questions its authenticity. See Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir. 1994), overruled on other grounds by Galbraith v. Cnty of Santa Clara, 307 F.3d 1119, 1125 (9th Cir. 2002). B. 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).

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). 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.

When a court exercises diversity jurisdiction, state substantive law determines the elements of the claims, but federal procedural requirements apply. "[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 federally imposed rule." Kearns, 567 F.3d at 1125 (internal citations and quotations omitted).

A court treats a motion to dismiss under Rule 9(b) like a motion to dismiss under Rule 12(b)(6). Vess, 317 F.3d at 1107.

IV. ANALYSIS.

A. Timas and Ward's ...


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