contributory liability possible for lawyers in timeshare exit cases

Diamond
Resorts U.S. Collection Development, LLC v. Pandora Marketing, LLC, 2021 WL
1573073, CV 20-5486 DSF (ADSx) (C.D. Cal. Apr. 12, 2021)

Another
timeshare company v. timeshare exit company case. Here, Diamond sued both the
marketers who seek exit clients and also the lawyers who worked with them. The
marketers allegedly referred Diamond owners to the lawyer defendants, who
allegedly instructed owners to refrain from paying anything owed under their timeshare
contracts, and to change their address on file with Diamond to the address of a
lawyer, but had “no legal or viable method to assist the Diamond Owners in
exiting the Timeshare Contracts.”

The
lawyer defendants allegedly interfered with the timeshare contracts by (1)
participating in the marketing defendants’ false and misleading advertising;
(2) encouraging or directing the nonpayment of fees owed to Diamond; and (3)
keeping the owners in the dark regarding the adverse financial consequences
resulting from the nonpayment of fees. The lawyers allegedly added legitimacy
and effectiveness to the scheme because the marketing defendants advertise that
they work with a “team of professionals” and “attorney[s],” which helps “close
the deal” with new customers. The lawyers were allegedly aware of the false and
misleading nature of the advertisements before accepting referrals, and
allegedly encouraged the ads by corroborating their involvement on their own
websites. Diamond alleged that early discovery showed that owners wouldn’t have
engaged the exit company but for the assurances made about the lawyer
defendants’ involvement.

Contributory
false advertising under the Lanham Act: The Ninth Circuit has held that for
contributory liability, “a defendant must have (1) ‘intentionally induced’ the
primary infringer to infringe, or (2) continued to supply an infringing product
to an infringer with knowledge that the infringer is mislabeling the particular
product supplied.” The Eleventh Circuit has a slightly different standard: “[f]irst,
the plaintiff must show that a third party in fact directly engaged in false
advertising that injured the plaintiff,” and “[s]econd, the plaintiff must
allege that the defendant contributed to that conduct either by knowingly
inducing or causing the conduct, or by materially participating in it.” This
requires a culpable state of mind, either intent to participate or actual
knowledge. A court may consider: (1) “the nature and extent of the
communication between the third party and the defendant regarding the false
advertising;” (2) “whether or not the defendant explicitly or implicitly
encouraged the false advertising;” (3) “whether the false advertising is
serious and widespread, making it more likely that the defendant knew about and
condoned the acts;” and (4) “whether the defendant engaged in bad faith refusal
to exercise a clear contractual power to halt the false advertising.”

Regardless
of which standard applied, Diamond successfully alleged contributory false
advertising. The lawyers allegedly knew about the false advertising and “at
least implicitly induced it by including information about their timeshare
services on their websites, knowing the alleged false advertising relied on
promising lawyers, and continuing to accept referrals despite the allegedly
false nature of the advertisements.”

Tortious
interference with contractual relations/prospective economic relations: This
didn’t work as well against the lawyers, who weren’t directly advertising to
consumers. The main elements of the tort occurred after the lawyers had been
engaged, and they were then the owners’ agents when they told the owners to
stop paying; an agent cannot tortiously interfere with the contracts of the
principal simply by acting on the principal’s behalf and being paid by the
principal. It wasn’t enough to allege that they got an additional financial
advantage in the form of a stream of referrals from the scheme. “Undoubtedly
most lawyers hope their services for clients result in an increase in
referrals.” But they still only obtained the fees that the clients paid.

However,
Diamond did successfully allege that the lawyers aided and abetted tortious
interference before they became agents of the owners. (This seems a relatively
dangerous principle given the ways in which many lawyers find clients.) Given the
allegations, it was plausible that the lawyers knew of the scheme and gave
substantial assistance by agreeing to be the lawyers needed to carry out the
scheme.

UCL
claim: Diamond didn’t have to allege its own reliance if it lost money or
property as a result of the conduct.

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