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.