Monday, January 23, 2017

Are you being served? Omission claim based on "virtualized" server survives

Schellenbach v. LLC, 2017 WL 192920, No. CV-16-00746 (D. Ariz. Jan. 18, 2017)

In 2014, GoDaddy issued a press release titled “GoDaddy Launches New Dedicated and VPS Servers with Added Support for Designers and Developers.” Plaintiffs are website designers based in Los Angeles. They bought a “Dedicated Server” hosting plan maintained by Defendant. Plaintiffs allege that, after experiencing “crippling performance issues relating to the server[,]” they hired an independent server expert to diagnose and resolve those issues. They learned that they were actually being provided with a virtualized server, and alleged that they were deceived by GoDaddy’s failure to disclose this.  They brought claims for fraudulent concealment under Arizona law, negligent misrepresentation under California law, violations of the Arizona Consumer Fraud Act (“ACFA”), and violations of California’s FAL and UCL.

The court considered printouts from GoDaddy’s website that were incorporated in the complaint.  GoDaddy argued that one page’s identification of the Dedicated Server as a “single-tenant VM” constituted a clear disclaimer of the virtualized nature of the server. However, GoDaddy didn’t show that plaintiffs or other members of the public understood “VM,” and also the page was from a time after plaintiffs allegedly stopped using the service.

GoDaddy argued that the ACFA claim was barred by a one-year statute of limitations, but the discovery rule applied, and that couldn’t be sorted out on a motion to dismiss. 

GoDaddy then argued that it didn’t have any duty to disclose.  However, the ACFA itself imposes a duty “to refrain from an omission of any material fact with intent that others rely thereon.”  The virtual nature of the “dedicated server” was plausibly a material fact, and plaintiffs sufficiently alleged intentional concealment and reliance.  This also preserved the claim for fraudulent concealment under Arizona law.

However, the California negligent misrepresentation claim was dismissed, because that required a positive assertion; an implied assertion or omission wasn’t enough.

FAL and UCL: The California courts have, though not with consistency, identified four circumstances in which an omission may constitute actionable fraud: “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.”  The court found that (2), GoDaddy’s exclusive knowledge, plausibly applied here. 

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