Monday, August 06, 2012

Fraud must be alleged with quotation marks

Gross v. Symantec Corp., 2012 WL 3116158 (N.D. Cal.)
Gross filed a putative class action against Symantec and its subsidiary PC Tools, alleging they fraudulently induced him to buy security software through a free trial that was supposed to identify weaknesses in his computer’s security but didn’t and wasn’t designed to.  He alleged a violation of California’s UCL, fraudulent inducement, breach of express warranty, breach of contract, and breach of the implied covenant of good faith and fair dealing (along with unjust enrichment, which wasn’t allowed because there was an actual contractual relationship between the parties setting the terms of their dealings).
Symantec allegedly recommends that consumers download a free version of its sofware and conduct a “free diagnostic” scan, purporting to detect problems on a user’s computer.  But “the software allegedly invariably reports that there are numerous—often ‘high priority’—errors and other problems on the computer and represents that the software can ‘fix’ the supposed problems, but only if the consumer registers and pays for the full price version of the software.”  However, Gross alleged, the software isn’t actually designed to accurately identify and fix errors and improve performance.  Instead, it misrepresents and exaggerates the severity and existence of errors/risks, inducing consumers to pay for the full version.
After Gross allegedly relied on this scan, he engaged a computer forensic expert to examine the software.  The expert “ran a series of diagnostic tests in a controlled environment and determined that Symantec had deceptively designed its software to invariably report that the computer's ‘System Health,’ ‘Privacy Health,’ and ‘Disk Health’ are ‘LOW,’ and that ‘High Priority’ errors exist on the system. Plaintiff's expert further found that the software is designed to identify problems on a user's computer (even where none actually exist), and artificially inflate the number of errors detected, all without performing any actual assessment of these issues and regardless of the actual status of the system.”
The court granted the motion to dismiss without prejudice.  As to fraud, the court found the claim insufficiently specified under Rule 9(b), but rejected Symantec’s argument that Gross couldn’t state a claim based on representations of future performance, as well as its argument that the allegations of fraud were so contradictory as to make them implausible.
Symantec argued that the complaint failed to identify the specific content and location of the misrepresentations concerning the functionality of software; failed to identify the location or description of the individual “high priority” errors allegedly detected by the free trial scan on Gross’s computer; and failed to identify a basis for believing that Gross’s computer “health” was not “low” as reported.  The court rejected the last two arguments.  It was the results of an investigation by an expert that allegedly revealed the falsity of Symantec’s representations; the software allegedly would have reported the same results no matter what was going on with Gross’s actual computer.  Those allegations established a basis for believing Symantec’s statements to be false. 
But the complaint failed to allege what Symantec actually said about the functional capabilities of its software (though it did satisfactorily allege the where and when of the misrepresentations).  It didn’t have direct quotes, only paraphrases.  (I guess if oral misrepresentations are made to you and you don’t have a photographic memory, you can’t be defrauded!  So sorry!  Indeed, that is the import of the case on which the court relied here.  Another case allowed a case to proceed without direct quotes, but there were numerical specifics alleged about the promised performance of the printer at issue, and that was enough “technical precision.”)  “Without direct quotations from the PC Tools website or other marketing materials, the Court cannot determine exactly how Symantec advertised its products. This is critical to the fraud analysis because Plaintiff's entire suit turns on how Symantec's representations compare to the actual funtionality of its software. This defect, while curable, is fatal to all Plaintiff's claims because the same allegations of fraudulent conduct support each claim.”
For purposes of repleading: alleged misrepresentations of future performance were not the full basis of the claim.  Under California law, a mere promise of future performance isn’t actionable as fraud.  But here, the allegations described the software as it existed when the representations were made: tasks the software had supposedly been programmed to perform, and software design was properly characterized as “an existing fact subject to scrutiny in a fraud claim, not a promise to produce certain results in the future.”
As for the argument about contradictions: Symantec argued that there was a contradiction between allegations that the software “did not perform an actual evaluation of Plaintiff's computer” and allegations that “the ‘free scan’ was performed.”  This lost sight of the core grievance: Gross alleged that the free trial software didn’t perform a meaningful evaluation: “even if the software does perform some function, it cannot perform those specific functions advertised. This does not present a contradiction that defeats plausibility.”
As to the UCL, Gross alleged that the challenged conduct emanated from Symantec’s California offices, but an allegation of the location of a company’s headquarters isn’t enough to create a plausible inference that unlawful conduct emanated from that location.  “Specifically, because the fraudulent scheme materialized ‘during the marketing and sale of [Symantec's] computer software products,’ Plaintiff should allege that Symantec's sales and marketing departments operate out of it California offices.”
Symantec additionally argued that the California UCC didn’t govern software licenses.  That law
defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale....”  Since software often straddles the goods/services line, software contracts must be analyzed case by case.  A license for mass-produced software, whether sold on a CD or downloaded from the internet as here, was more like a good.  Symantec argued that its EULA defined the program as a “revocable license to use the software for a temporary subscription period.”  But Symantec didn’t explain how that should affect the UCC analysis, and anyway the EULA wasn’t part of the complaint.
Symantec argued that there could be no express warranty because the representations alleged were vague puffery.  Gross could amend the complaint to be more specific about the terms.  But the challenged statements weren’t too vague to be actionable.  “According to the FAC, Symantec marketed its software to suggest an ability to perform specific functions related to computer security and system optimization. This is not opinion about the quality of the software's performance or a ‘vague superlative’ that a ‘consumer could not reasonably believe.’  Rather, the alleged statements offer objective descriptions of software utility, which inform the consumer of the specific functions that Symantec's software has been programmed to perform.”  Thus, if Gross were to replead exact statements, he could state a claim.
What about the warranty disclaimer in the EULA? (“PC Tools does not guarantee that the Software will detect, remove or rectify any errors on your computer....” and “PC Tools makes no warranties in relation to the software, including warranties as to the performance or fitness for purpose of the Software.”) Well, it wasn’t part of the complaint, for one thing, and Gross challenged its enforceability anyway.  Plus, California courts generally regard warranty disclaimers as void when they contradict the express terms of the alleged warranty.  The disclaimer also didn’t make the alleged express warranties implausible, despite Symantec’s argument that it would be unreasonable to believe a guarantee of successful error-removal for every computer since every computer has unique problems.  But that misstated the content of the alleged warranty, which went to intended utility, not specific results.
The breach of contract claim was also dismissed for insufficient allegation of the exact terms; a new complaint could suffice.  But even so, the complaint didn’t allege a plausible breach, since the allegations pointing to breach concerned the performance of the software prior to purchase of the full version.  Any breach from defects in the free trial version occurred before the contract formed.  The implied covenant of good faith and fair dealing was no different.  (The two are duplicative unless a party acted in bad faith to frustrate the contract’s actual benefits; but that exception doesn’t apply when the bad faith alleged pertains only to inducement to enter into the contract, as here.)

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