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.