aiding and abetting liability in false advertising cases

 Bonus: Civil RICO claims survive!

Sihler v. Fulfillment Lab, Inc., 2021 WL 1293839, No. 3:20-cv-01528-H-MSB
(S.D. Cal. Apr. 7, 2021)

Defendants allegedly used fake celebrity endorsements and
reviews and misrepresentations about price and limited availability to induce
consumers to buy weight-loss pills, then charged consumers more than they
originally agreed to pay, made it difficult or impossible to return the
products or receive a refund, and operated “false front” websites to mislead
banks and credit card companies investigating chargebacks.

For example, plaintiff Sihler saw an internet ad for “InstaKeto,”
claiming that it was featured on Shark Tank. She chose “Buy 3 bottles, Get 2
free” promotion with the expectation that she would be billed for three bottles
of the product at $39.74 each, but her debit card was charged for $198.70, the
price of all five bottles. When she called, the representative told her she
would have to ship the bottles back at her own expense to obtain a partial
refund; she didn’t receive any money back.

Defendants’ ads allegedly are deleted after a few weeks or
months to avoid detection; the terms and conditions of purchases, including the
refund and return policy, are hidden or buried on the landing page, and consumers
do not need to read or acknowledge the terms in order to complete their
purchase. When consumers dispute charges with banks or credit card companies,
defendants allegedly used a “false front” website that was similar to the
original landing page, but the terms and conditions were clearly stated, the
false advertisements are removed, and the actual purchase prices of the
different options were listed, thus deceiving the investigators. Defendants also
allegedly used multiple shell companies, each of whom signs up for a unique
merchant account, which are rotated so that they won’t flagged for fraud due to
high levels of chargebacks.

Plaintiffs’ amended complaint, like their first one, stated
claims for violations of the CLRA, FAL, and the unfair, fraudulent, and
unlawful prongs of the UCL. They identified multiple problems with the ads and
alleged how they’d be false or misleading to a reasonable consumer: the
pictured and quoted celebrities have not in fact endorsed the Keto Products in
question, there is not actually a limited supply of Keto Products remaining,
and they will not “Buy 3 Get 2 Free.” And using a “false front” website for financial
institutions would also be misleading and deceptive to a reasonable consumer.

The remaining issue was whether specific defendants were
plausibly alleged to be directly or indirectly liable.

Plaintiffs alleged that defendant Beyond Global created the ads
containing the false statements; created and operated the landing pages viewed
by consumers and the “false fronts”; opened hundreds of merchant accounts; and
charged one plaintiff’s credit card. That was enough for direct liability.

Plaintiffs also alleged that defendants TFL and Nelson aided
and abetted Beyond Global’s violations and conspired with it to violate the
CLRA, FAL, and UCL. These allegations were also sufficient: aiding and abetting
requires facts making it plausible “that defendants either ‘(a) [knew] the
other’s conduct constitute[d] a breach of duty and [gave] substantial
assistance or encouragement to the other to so act or (b) [gave] substantial
assistance to the other in accomplishing a tortious result and the person’s own
conduct, separately considered, constitute[d] a breach of duty to the third
person.’ ”

The court focused on (a); a plaintiff must “plead sufficient
facts to permit a ‘reasonable inference’ that [the defendant] knew of the
‘specific wrongful act[s]’ of fraud by the [principal(s)] at the relevant
time.” Although states of mind can be alleged generally, the pleader still has
the burden of alleging “the nature of the knowledge a defendant purportedly
possessed,” here actual knowledge of the pirmary violation.  A defendant’s “decision to ignore suspicious
activity or red flags is sufficient to demonstrate actual knowledge” for aiding
and abetting liability. Allegations about a defendant’s knowledge and
familiarity with the structure and operation of an alleged fraudulent scheme are
also relevant. Similarly, “ordinary business transactions” can satisfy the
substantial assistance element of an aiding and abetting claim “if the
[defendant] actually knew those transactions were assisting the [principal] in
committing a specific tort. Knowledge is the crucial element.” Defendants didn’t
contest the substantial assistance element.

Here, plaintiffs alleged that TFL and Nelson had actual
knowledge: they knew how the fraudulent scheme worked, that they were shipping
products sold using deceptive and unfair advertising, that the ads and websites
were false and misleading, and the nature of the tortious conduct being
committed by Beyond Global and Doe defendants. They allegedly “directly run” ad
campaigns for their clients, including Beyond Global. TFL’s website allegedly provides
a variety “Affiliate Marketing Resources,” and its marketing director’s
LinkedIn profile states that his duties include “Run[ning] and monitor[ing]
marketing campaigns.” TFL and Nelson also allegedly integrated TFL’s custom
software into the landing pages, which would have necessitated knowledge of the
deceptive and misleading content on those websites. In addition, they allegedly
ignored “a significant number of red flags,” receiving and processing customer
returns and complaints. They also received complaints on TFL’s BBB page, one of
which specifically mentioned viewing a false Shark Tank advertisement; TFL/Nelson
“responded to several of these comments, demonstrating that they read them and
were aware of their contents” and supporting a reasonable inference that they
were aware of comments to which they did not directly respond in the same
period.

The court also rejected the argument that providing order
fulfillment software didn’t mean they would have been aware of the website
content. “It is plausible that an entity responsible for integrating order
fulfillment software with a client’s website would have knowledge of the
content, representations, and general nature of the website. And it is very
plausible that providing assistance with advertising campaigns for clients
would necessitate knowledge of the content of the advertisements and the nature
of the campaign.” Of course this could be revisited on summary judgment.

Shockingly, civil RICO claims also survived, despite being civil
RICO claims.

Tan v. Quick Box, LLC, 2021 WL 1293862, No.
3:20-cv-01082-H-DEB (S.D. Cal. Apr. 7, 2021)

A similar case. Noted because the court found that the
following allegations sufficiently pled aiding and abetting liability: The
relevant defendants had prior experience helping other clients run free trial
scams, knew the elements and hallmark characteristics of such schemes, and knew
the main defendants were operating such a scheme. The design, implementation,
and utilization of the relevant defendants’ load balancing software
necessitated the their knowledge of the entire scheme: it was designed and used
for rotating merchant accounts to avoid detection of a scheme to defraud
consumers. The relevant defendants provided coaching services on how to apply
for, manage, and rotate merchant accounts, as well as designing and
implementing advertisements, and participated in a months-long onboarding
process with the main defendants.

Defendants argued that they merely licensed legitimate,
commercial software for lawful use only. But under Twiqbal, plaintiff
alleged more: They specifically advertised their ability to help companies who
had been “shut down” by helping them “get real merchant accounts” and providing
“chargeback mitigation.” The aiding/abetting defendants’ website and press
materials make several references to “load balancers” and merchant account
managing. Load balancing, defined as “distribution of Transactions between or
among Merchant ID numbers in order to avoid minimum thresholds,” is expressly
prohibited by VISA and Mastercard. Plaintiff alleged that there is no
legitimate reason to be rotating hundreds of merchant accounts and employing
chargeback caps and pointed out that the aiding/abettind defendants didn’t
offer a potential lawful purpose for their load balancing software. They could
try at summary judgment.

Civil RICO claims also survived here.

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