False advertising claims not arbitrable when ads predated agreement

Mohebbi v. Khazen, Case No. 13-cv-03044, 2014 WL 6845477 (N.D. Cal. Dec. 4, 2014)

Mohebbi sued Khazen over Mohebbi’s agreement to invest over $1 million in a partnership in exchange for defendants’ help in getting him qualified for the federal EB–5 immigrant visa program.  He sought recission and brought 22 claims against defendants.  The court found the arbitration agreement he signed enforceable and required him to arbitrate everything but his false advertising and recission claims, and stayed the false advertising claims pending the completion of arbitration.

Mohebbi’s false advertising claims concerned defendants’ alleged misrepresentations on their website, including an alleged misrepresentation of defendants’ business as a qualified Regional Center designated by the US Customs and Immigration Service for the purpose of assisting investors in applying for EB–5 visas.  False advertising claims are arbitrable, but the false advertising and reliance occurred before Mohebbi signed the agreement with the arbitration clause.  The agreement didn’t explicitly encompass claims predating its signing.  An agreement must be retroactive on its face to cover claims that predate its execution, and thus the false advertising claims were not arbitrable.

The arbitration clause was, however, enforceable and Mohebbi failed to meet his heavy burden to show that it was fraudulently induced, so he was not entitled to recission. 

The court then rejected defendants’ motion to dismiss the Lanham Act claim (California false advertising claims also survived but defendants apparently didn’t make separate arguments about them).  Along with the “Regional Center” claims, defendants allegedly promised to help “achiev[e] the fastest path to U.S. residency and citizenship.”  This adequately alleged falsity with respect to defendants’ services.  (The court didn’t address the obvious Lexmark problem of “standing,” that is, Mohebbi was a customer, not a competitor or other type of market participant.  But that wouldn’t get rid of the California claims anyway.)  The court then stayed the litigation pending the completion of arbitration, as required by the FAA.  Note that if arbitration is more trouble for Mohebbi than for defendants, then defendants gained an advantage in the non-arbitrable claims because Mohebbi brought arbitrable claims; there’d have been no stay without them.