This post examines an opinion a U.S. District Court Judge
who sits in the U.S. District Court for the Northern District of California
issued at the end of February: Morici v. Hashfast Technologies, LLC, 2015 WL 906005. The judge begins
the opinion by explaining that the lawsuit is
about Bitcoin and `Baby Jets.’
Plaintiff Pete Morici . . . alleges that he placed an order with Defendants
Hashfast Technologies LLC and/or Hashfast LLC (the `Hashfast Entities’) for two
Bitcoin mining computers, fittingly named `Baby Jets,’ but did not receive them
when promised. When he finally did receive a shipment, he was no longer
interested in `Baby Jets’ and requested a refund. He did not receive one,
though, because he would not sign a release.
Morici v. Hashfast
Technologies, LLC, supra.
He goes on to explain that Morici filed the Complaint in
this case on January 7, 2014,
against the Hashfast Entities and its
officers, Simon Barber (`Barber’) and Eduardo deCastro (`deCastro’) for
breach of contract, fraud, violation of the Unfair Competition Law (`UCL’), CaliforniaBusiness and Professions Code § 17200, and declaratory relief. Presently before
the court is a Motion to Dismiss filed by Barber and deCastro. . . .
Plaintiff has filed written opposition to the motion. . . . .
Morici v. Hashfast
Technologies, LLC, supra.
The judge then outlined how the lawsuit arose, noting that
Morici is a resident of
Maryland and, importantly for this
lawsuit, is a member of the Bitcoin community. . . . So are Barber,
deCastro, and the Hashfast Entities. . . . They develop specialized
computers to conduct Bitcoin mining. . . .
In conjunction with their enthusiasm
for Bitcoin, [Morici] and Defendants were participants in an internet message
board known as Bitcoin Talk. . . . Starting in July, 2013,
Defendants made several posts about their soon-to-be-launched Bitcoin mining
computer (the aforementioned `Baby Jet’), and further posted, on August 5th and
August 8, 2013, that they would begin shipping the product in October, 2013. .
. .
On August 10, 2013, [Morici] visited
Defendants' website and decided he wanted to purchase a `Baby Jet’ after
viewing the computer's technical specifications. . . . He relied on a statement on the website which
listed the `Baby Jet’ model as `in stock,’ and noted that shipments of the
product would begin `October 20–30.’ . . . Since the website could not
process orders electronically, [Morici] ended up placing an order manually
during which process he was assured that the October, 2013, delivery dates were
`firm.’ . . . He ordered two `Baby Jets’ for a total transaction cost of
$11,507.38. . . . [Morici] paid a deposit of 110.647885 BTC that
same day. . . .
Morici v. Hashfast
Technologies, LLC, supra.
The opinion then outlines what happened next:
[Morici] explains that the delivery
date of the `Baby Jet’ was crucial due to how Bitcoin works. Bitcoin miners are
incentivized to process payment transactions `by allowing miners to create new
Bitcoins for themselves based on the number of ‘blocks' discovered.’ . . . `Blocks
are files containing data regarding Bitcoin transactions that have yet to be
recorded in the public ledger,’ and are discovered by `calculating a SHA256
hash, an algorithm that is very difficult to solve, over and over again until
the miner finds an input that matches an expected output.’ . . . Since a
miner's chances of discovering a Bitcoin relative to another miner is `based on
the miner's hash rate relative to the total hash rate of all Bitcoin miners on
the network,’ miners are continuously seeking to increase their rate of
processing through acquisition of the latest technology. . . .
However, because the `difficulty of
Bitcoin mining is continually adjusted based on the rate at which blocks are
created,’ `a Bitcoin mining computer continually becomes less valuable over
time, as it becomes relatively less efficient at processing Bitcoin blocks.’ .
. . . `Eventually, without upgrading technology, the electricity required for
processing will cost a miner more than the Bitcoin computer is able to
generate.’ . . .
Despite previous reassurances,
Defendants informed [Morici] on October 23, 2013, that his order would be
delayed. . . . On November 7, 2013, Defendants told [Morici] that
his order would be delayed further and would not be shipped until
mid-December. . . . In response, [Morici] notified Defendants on
November 11, 2013, that he was cancelling his order, and requested a full
refund of his deposit in Bitcoin. . . . Defendants did not respond to [his] notification
until over a month later. . . .
Morici v. Hashfast
Technologies, LLC, supra.
Finally, the judge explains what, exactly, let to the filing
of this lawsuit, noting that on
December 27, 2013, Defendants sent
an email to customers stating `Baby Jet’ shipments were `on track’ for
December 31st, but that customers interested in a refund `could initiate
refunds and be paid Bitcoin [Morici], since Defendants had previously
represented that refunds would be paid in Bitcoin. . . .
On December 31, 2013, Defendants sent
another email to [Morici] stating it still would not be able to fulfill his
order until a later date. . . . Attached to the email was a `detailed and
onerous’ release that had to be completed in order to obtain a refund. . . .
Defendants eventually did send a
shipment to [Morici], which he alleges was partial and `too late.’ . . . He
therefore refused it and cancelled the order. . . .This action followed.
Morici v. Hashfast
Technologies, LLC, supra.
The judge then outlined the legal standard he was required
to apply in ruling on the defendants’ motion to dismiss under Rule 12(b)(6) of
the Federal Rules of Civil Procedure. Morici v. Hashfast Technologies, LLC, supra. He noted that
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient specificity
to `give the defendant fair notice of what the . . . claim is and the grounds
upon which it rests. Bell Atlantic Corp. v. Twombly, 550 U.S.544 (2007). . . . A complaint which falls short of the Rule
8(a) standard may be dismissed if it fails to state a claim upon which
relief can be granted. Rule 12(b)(6). `Dismissal under Rule
12(b)(6) is appropriate only where the complaint lacks a cognizable legal
theory or sufficient facts to support a cognizable legal theory.’ Mendiondo
v. Centinela Hospital Medical Center, 521 F.3d 1097 (U.S. Court of Appeals
for the 9th Circuit 2008). Moreover, the factual allegations `must be enough to
raise a right to relief above the speculative level’ such that the claim `is
plausible on its face.’ Bell Atlantic Corp. v. Twombly, supra.
Causes of action based in fraud require
more detail. `In alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.’ FederalRules of Civil Procedure 9(b). These allegations must be `specific enough to
give defendants notice of the particular misconduct which is alleged to
constitute the fraud charged so that they can defend against the charge and not
just deny that they have done anything wrong.’ Semegen v. Weidner, 780
F.2d 727 (U.S. Court of Appeals for the 9th Circuit 1985).
To that end, the allegations must contain
`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 (U.S.
Court of Appeals for the 9th Circuit 2007). In other words, claims of
fraudulent conduct must generally contain more specific facts than is necessary
to support other causes of action.
Morici v. Hashfast
Technologies, LLC, supra.
The judge went on to explain that when a judge is deciding
whether to grant a
motion to dismiss, the court generally
`may not consider any material beyond the pleadings.’ Hal Roach
Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542 (U.S. Court
of Appeals for the 9th Circuit 1990). However, the court may consider material
submitted as part of the complaint or relied upon in the complaint, and may
also consider material subject to judicial notice. See Lee v. City
of Los Angeles, 250 F.3d 668 (U.S. Court of Appeals for the 9th
Circuit 2001).
In addition, the court must generally
accept as true all `well-pleaded factual allegations. Ashcroft v. Iqbal, 556 U.S. 662 (2009).
The court must also construe the alleged facts in the light most favorable to
the plaintiff. Love v. U.S., 915 F.2d 1242 (U.S. Court of
Appeals for the 9th Circuit 1988). However, `courts are not bound to accept as
true a legal conclusion couched as a factual allegation.’ Love v.
U.S., supra.
Morici v. Hashfast
Technologies, LLC, supra.
The judge then began his analysis of the motion to dismiss,
noting that
Barber and deCastro argue for dismissal of all claims in the Complaint. However, [Morici] indicates that the claims for breach of contract and declaratory relief are not being asserted against Barber and deCastro. . . . Thus, the court examines only the fraud and [Unfair Competition Law] claims.
Morici v. Hashfast
Technologies, LLC, supra.
The judge began his analysis of the adequacy with which
Morici pled the fraud claim by noting that Barber and deCastro argued that the
fraud claim against them should be dismissed because
the factual allegations do not satisfy
the heightened pleading standard imposed by Rule 9(b). Specifically, they
contend [Morici] improperly lumped all of the defendants into one designation
in the Complaint -- namely, `Hashfast’ -- and then failed to differentiate the
fraudulent conduct attributable to each defendant. The court agrees with Barber
and deCastro that the claim for fraud is deficient under Rule 9(b).
Morici v. Hashfast
Technologies, LLC, supra.
He goes on to explain why he agrees with them, noting that a
plaintiff alleging
fraud under California law must plead
facts demonstrating five elements: (1) a misrepresentation; (2) the speaker's
knowledge of falsity; (3) the intent to defraud or induce reliance; (4) justifiable
reliance; and (5) resulting damage. See, e.g., Lazar v. Superior Court,
12 Cal.4th 631 (California Supreme Court 1996).
In federal court, it is undisputed that
these elements, save for perhaps certain aspects of the second and third, must
be plead with particularity. The purpose of this requirement is to ensure that
adequate notice is provided to the parties accused of fraudulent conduct in
order to allow for a meaningful defense. Indeed, `[w]ithout such specificity,
defendants in these cases would be put to an unfair disadvantage, since at the
early stages of the proceedings they could do no more than generally deny any
wrongdoing.’ Concha v. London, 62 F.3d 1493, 1502 (U.S. Court
of Appeals for the 9th Circuit ).
Morici v. Hashfast
Technologies, LLC, supra. The judge goes on to explain that
Rule 9(b)'s heightened pleading
requirement also acts as a barrier to weak or unfounded -- and potentially
costly -- claims of fraudulent conduct. See Bly–Magee v. California,
236 F.3d 1014 (U.S Court of Appeals for the 9th Cir.2001). Because they
must provide more than just the superficial `short and plain statement’
permitted for other claims, plaintiffs who seek to assert fraud must consider
whether the facts known at the time of filing can withstand a Rule 9 challenge.
Indeed, by requiring extra detail, `the rule requires the plaintiff to
conduct a precomplaint investigation in sufficient depth to assure that the
charge of fraud is responsible and supported, rather than defamatory and extortionate.’
Ackerman v. Northwest Mutual Life Ins. Co., 172 F.3d 467 (U.S. Court of Appeals for the 7th Circuit 1969).
It is therefore unsurprising that
allegations suggesting `everyone did everything’ or that `all defendants made
every misrepresentation’ are insufficient. See Destfino v. Reiswig,
630 F.3d 952 (U.S. Court of Appeals for the 9th Circuit 2011). Although `there
is no absolute requirement that where several defendants are sued in connection
with an alleged fraudulent scheme, the complaint must identify false statements
made by each and every defendant,’ plaintiff must nonetheless offer enough
factual matter to establish each defendant's participation in the fraudulent
scheme. Swartz v. KPMG LLP, supra. . . .
Here, after collectively defining all
of the named defendants, including . . . Barber and deCastro, as `Hashfast,’ [Morici]
attributes nearly every fraudulent statement to this `Hashfast’ conglomerate
without distinguishing which entity or individual was actually responsible for
the misrepresentation. For example, [he] alleges that `Hashfast’ stated the `Baby
Jets’ would ship in October, 2013. See Compl., at ¶ 17. Similarly,
he alleges that `Hashfast’ represented that `Baby Jets’ were `in stock’ and
that `Hashfast’ misrepresented the computing power of its product. . .
. But under this style of pleading, Barber and deCastro are left to wonder
which statements they are alleged to have made as individuals, and in turn,
which statements they must defend against as individuals. Indeed, it cannot be,
without something more, that both are responsible for making each and every
statement ascribed to `Hashfast,’ since [Morici’s] definition of `Hashfast’ includes
two business entities in addition to Barber and deCastro.
Morici v. Hashfast
Technologies, LLC, supra.
The judge outlined what this involves, noting that Morici
argued that the
`something more’ -- or the fact that
makes Barber and deCastro liable for every misrepresentation of `Hashfast’ -- is
their positions as corporate officers or directors, which he alleges in the
Complaint. He further alleges that `Hashfast’ was a participant in Bitcoin Talk
and made several posts about the launch of `Baby Jet.’
These allegations . . . because they
are not specific enough to satisfy Rule 9(b). Indeed, as [Morici’s] own
authorities establish, `[t]o maintain a tort claim against a director in his or
her personal capacity, a plaintiff must first show that the director specifically authorized, directed or
participated in the allegedly tortious conduct; or that although they specifically knew
or reasonably should have known that some hazardous condition or activity under
their control could injure plaintiff, they negligently failed to take or order
appropriate action to avoid the harm.’ Frances T. v. Village Green
Owners Ass'n, 42 Cal.3d 490 (California Supreme Court 1986) (emphasis
added). . . . What is missing from Plaintiff's Complaint is the `specific’
part, which is required both by the legal standard for director liability as it
exists under California law and by Rule 9(b). These allegations are
important because, in general, directors are jointly liable with the
corporation only `if they personally directed or participated in the
tortious conduct.’ Frances T. v. Village Green Owners Ass'n, supra.
Morici v. Hashfast
Technologies, LLC, supra.
The judge on to note that Morici had not alleged “sufficient
facts under Rule 9(b)” to
establish that Barber and deCastro were
the agents of the Hashfast entities. `To allege an agency relationship, a
plaintiff must allege: (1) that the agent or apparent agent holds power to
alter legal relations between principal and third persons and between principal
and himself; (2) that the agent is a fiduciary with respect to matters within
scope of agency; and (3) that the principal has right to control conduct of
agent with respect to matters entrusted to him.’ Palomares v. Bear
Stearns Residential Mortg. Corp., 2008 WL 686683 (U.S. District Court for the Southern District of California 2008). . . .
[T]he agency relationship must be
pleaded with particularity when a claim for fraud. . . purports to impose
liability on such a theory. See RPost Holdings, Inc. v. Trustifi
Corp., 2011 WL 4802372 (U.S. District Court for the Central District of California 2011). . . . [Morici’s] conclusory and formulaic agency allegations,
which merely state that `defendants, and each of them, were an owner, a
co-owner, an agent and/or later ego of their co-defendants’ . . . have been
rejected by other courts as insufficient. See, e.g., Buchanan v.
Neighbors Van Lines, 2010 WL 4916644 (U.S. District Court for the Central
District of California, 2010).
Morici v. Hashfast
Technologies, LLC, supra.
Finally, the judge explained that the statements that were
“specifically” attributed to
Barber and deCastro in the Complaint
cannot support a claim for fraud against either individual based on the factual
allegations overall. Specific to Barber, [Morici] alleges he posted a statement
on Bitcoin Talk on August 10, 2013, in which he advised refunds would be issued
in Bitcoin. . . . As to deCastro, [Morici] alleges he posted a
statement on Bitcoin Talk on August 11, 2013, that `Hashfast’ would meet its
October, 2013, shipping deadline and would protect its customers against
`hashrate increases.’ . . .
But [Morici] does not allege that he
relied on these statements when he decided to order `Baby Jets,’ and, notably,
these allegations follow those describing how he placed his order. Accordingly, the claim for fraud against
Barber and deCastro will be dismissed. [Morici] will be permitted leave to
amend because he may be able to supply additional factual content to satisfy
the Rule 9(b) pleading standard.
Morici v. Hashfast
Technologies, LLC, supra.
Finally, the judge took up Morici’s claim under California’s
UCL law, which Morici said was based on “the unfair practice of selling a
product while making misleading claims about the availability of the product.” Morici
v. Hashfast Technologies, LLC, supra.
He found that the UCL claim was
deficiently plead for the same reasons
described above. [Morici’s] use of the `Hashfast’ moniker for all defendants,
corporate and individual, is especially problematic for this claim because an `unfair
practices claim under § 17200 cannot be predicated on vicarious liability.’ Emery
v. Visa Int'l Serv. Ass'n, 95 Cal.App. 4th 952 (California Court of Appeals 2002). Furthermore, this claim is not saved by [Morici’s] agency
allegations because, again, they are nothing more than formulaic conclusion.
Morici v. Hashfast Technologies,
LLC, supra. He therefore held that the UCL claim
against Barber and deCastro would be “dismissed with leave to amend”. Morici
v. Hashfast Technologies, LLC,
supra. In other words, Morici can
try again.
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