Farm Fresh Direct by a Cut Above, LLC v. Downey (Maryland U.S.D.C.)

Filed: October 26, 2017

Opinion by: Judge Ellen Lipton Hollander

Holding:

Under Maryland law, the liability protections afforded to limited liability company (“LLC”) members with respect to obligations of an LLC did not support dismissal of claims that an individual engaged in unfair competition and deceptive trade practices by forming and participating in an LLC, where the plaintiff alleged conduct supporting direct claims against the individual.

Facts:

A Maryland LLC, Farm Fresh Direct by a Cut Above LLC (“Plaintiff”), brought suit against multiple defendants, including another Maryland LLC, Farm Fresh Direct Home Food Services, LLC (“Defendant LLC”), and an individual who allegedly filed Defendant LLC’s Articles of Organization with the Maryland State Department of Assessments and Taxation (“Defendant Individual” and together with Defendant LLC, the “Defendants”), alleging that the Defendants engaged in unfair competition in violation of both Section 43(a) of the Lanham Act, codified at 15 U.S.C. § 1125(a), and Maryland common law, by establishing and engaging in a competing business under a name which was confusingly similar to the name of the Plaintiff.  The Defendant Individual moved, pro se, to dismiss the action.  Despite construing the motion liberally in favor of the Defendant Individual, the district court denied the motion, holding that the Plaintiff had alleged sufficient facts to satisfy the pleading requirements of Fed. R. Civ. P. 8(a).    

Analysis: 

The district court analyzed as a threshold issue whether the Defendant Individual was subject to suit in light of the Defendant LLC’s status as a Maryland LLC.  The district court’s analysis begins with a review of Maryland and Fourth Circuit law regarding the corporate shield and the corresponding LLC shield.  The court then notes that, notwithstanding the LLC shield, which generally protects LLC members from personal liability for obligations of the LLC, the LLC shield does not protect LLC members from direct liability for that member’s own actions.  Because Plaintiff alleged that the Defendant Individual formed the Defendant LLC and acted as its resident agent, the district court held that Plaintiff had alleged sufficient facts to plead direct claims against the Defendant Individual.  Further, because Plaintiff alleged that the name of the Defendant LLC was confusingly similar to the name of the Plaintiff and that the Defendant LLC engaged in substantially the same business as the Plaintiff, the district court held that Plaintiff alleged sufficient facts to plead claims of unfair competition and deceptive trade practices under Maryland and Federal law.  Accordingly, the district court denied Defendant Individual’s motion to dismiss.

The full opinion is available in PDF.

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North Valley GI Medical Group v. Prudential Investments LLC (Maryland U.S.D.C.)

Filed: August 23, 2016

Opinion by: James K. Bredar

Holding:  In a claim alleging breach of fiduciary duty under section 36(b) of the Investment Company Act of 1940, with respect to the receipt of compensation for services by the investment advisor of a registered investment company, a pleading of comparable fund fees is not required in order to state a viable claim. 

Facts:  Plaintiffs were investors in mutual funds and brought suit on behalf of those funds against Defendant, the investment advisor to the funds.  Plaintiffs alleged Defendant violated its fiduciary duties with respect to the fees paid by the funds to the Defendant.  Plaintiffs alleged, among other matters, that (i) the fees received by Defendant were so disproportionately large that they bore no relationship to the value of the services provided and were not the product of arm’s-length negotiation, (ii) Defendant delegated to subadvisors substantially all of Defendant’s responsibilities while retaining over half of the fees received from the funds and (iii) most of the money received by Defendant as fees represented pure profits and not compensation for services rendered.

 

Plaintiffs made further allegations as to each of the funds growth in assets under management and compared the responsibilities of Defendant and the subadvisors under the applicable management agreements.  Each of the funds is required to pay Defendant an annual fee (the “Advisor Fee”) calculated as a percentage of the applicable assets under management.  The Defendant pays the subadvisor an annual fee that, Plaintiffs alleged, equals approximately 50% of the Advisor Fee “for the nearly identical services” required of Defendant. 

While recognizing the affiliations between the Defendant and subadvisors, Plaintiffs alleged that the subadvisors had an incentive to negotiate the highest possible fees and that these negotiations were therefore conducted at arm’s length.  Consequently, Plaintiffs alleged that the fees negotiated by the subadvisors were indicative of a reasonable fee for services required under the Defendant’s management agreements with the funds.  Plaintiffs made a series of additional allegations regarding Defendant’s lack of care in negotiation of advisory fees and the fund’s boards.

Analysis:  Section 36(b) of the Investment Company Act of 1940 provides that an investment advisor of a registered investment company has a fiduciary duty with respect to “receipt of compensation for services.”  Security holders are permitted to sue the investment advisor, on behalf of the funds, for breach of this duty and may recover damages resulting from such breach up to the amount of compensation received by the advisor.  The Supreme Court has provided that to face liability under Section 36(b), “an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not” have been negotiated at arm’s length.  Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010).  In analyzing whether an investment advisor has breached its duty, the Supreme Court has:  (i) noted that all relevant circumstances must be considered; (ii) declined to implement a “categorical rule regarding the comparisons of the fees charged”; and, (iii) explained that “the appropriate measure of deference to a board’s judgment in approving an investment advisor’s compensation varies according to the circumstances.”

Defendant moved to dismiss for failure to state a claim on the basis of three arguments.  First, Defendant argued that the complaint did not include any facts about fees paid by comparable funds.  The Court believed that this argument misstated precedent and explained that, at least for purposes of the Fourth Circuit, Jones does not require pleading of comparable fund fees to state a viable claim. 

Second, Defendant argued that the complaint improperly challenged the “manager of managers” structure used by the funds, which is widely used by other funds and approved by the SEC.  The Court noted that the structure is not being attacked.  Rather, Plaintiffs challenged the amount of fees. 

Third, Defendant argued that Plaintiffs did not sufficiently offer allegations to “overturn the Independent Trustees’ business judgment” in their approval of the management agreements.  The Court explained that Plaintiff’s allegations regarding what “entities are actually performing” the services allow an inference either that a business judgment to approve the compensation was not one based on full information or that it was not reached through arm’s length negotiation.  Accordingly, the Court denied Defendant’s motion to dismiss for failure to state a claim.

The opinion is available in PDF.

White v. Green Tree Servicing, LLC (Maryland U.S.D.C.)

Filed:  August 4, 2015

Opinion by:  Richard D. Bennett

Holdings:  (1) Fair Credit Reporting Act (''FCRA'') claims alleging provision of false information and failure to investigate such information were dismissed to the extent plaintiff premised her claim on a theory of negligence.  (2) Plaintiff satisfied 12(b)(6) sufficiency standard by merely alleging she notified consumer reporting agency of disputed information.

Facts:  In 2001, Plaintiff acquired property in Baltimore City with her former husband, becoming sole owner after a 2007 divorce.  Five years later, servicing rights for the loan were transferred to Defendant.  Following the June 1, 2013 date of transfer Plaintiff alleged she made every ensuing payment in full and on time.

In October 2013, Plaintiff attempted to refinance the loan through her personal bank, receiving approval and a commitment letter conditioned on Plaintiff resolving unrelated disputes on her credit report.  Plaintiff fulfilled the conditions in January 2014, but Defendant soon thereafter reported to Plaintiff, Plaintiff’s personal bank, and the three major credit reporting agencies that she was no longer current on her mortgage payments.  Pursuant to the FCRA, 15 U.S.C. §1681, et seq., on January 27, 2014, Plaintiff notified the reporting agencies and Defendant that she disputed Defendant’s reporting of late mortgage payments.  One day later, Plaintiff’s bank denied her for final approval of the refinanced mortgage.

Defendant responded in February 2014, maintaining its position that Plaintiff was behind on her payments.  Defendant thereafter issued several letters indicating it would investigate disputed payment information, but ultimately sent another statement in March 2014 informing Plaintiff she had fallen farther behind on her mortgage, incurring additional late fees.

In June 2014, Plaintiff filed in Circuit Court for Baltimore City, alleging violations of the Maryland Consumer Protection Act (''MCPA''), Debt Collection Act, (''MCDCA''), and Mortgage Fraud Protection Act, (''MMFPA''), contending Defendant failed to investigate or correct the payment information and that she suffered economic damages.  Defendant moved to dismiss, arguing the complaint was preempted by the FCRA.  Plaintiff thereafter amended her complaint to allege identical state claims but add FCRA claims.  Defendant again moved to dismiss the common law claims as preempted by the FCRA, and to dismiss the FCRA claim because Plaintiff had failed to state a claim on which relief could be granted.

Analysis:  The court began by explaining that the FCRA’s preemption provisions –  15 U.S.C. §1681t(b)(1)(F) as to state statutory claims and 15 U.S.C. §1681h(e) as to state common law claims – had been consistently interpreted to preempt claims arising from inaccurate information provided to credit reporting agencies.  Accordingly, the court dismissed Plaintiff’s counts alleging violations of the MCPA, MCDCA and MMFPA as a result of Defendant’s purported materially false, misleading oral or written statements, omissions, or representations related to the Plaintiff’s loan status or mortgage lending process.

The court next moved to Plaintiff’s FCRA claims, which focused on Defendant’s provision of allegedly false information and failure to investigate the allegedly false information.  To the former, Plaintiff alleged Defendant’s liability in defamation for making a series of false and misleading statements as to the late mortgage payments.  Here, the court cited §1681h(e):

[No] consumer may bring any action …in the nature of defamation… with respect to the reporting of information against …any person who furnishes information to a consumer reporting agency, … based on information disclosed by a user of a consumer report to or for a consumer against whom the user has taken adverse action, based in whole or in part on the report except as to false information furnished with malice or willful intent to injure such consumer.

Accordingly, the court granted Defendant’s motion to dismiss the defamation claim in part and only to the extent the claim was premised on a theory of negligence.

Plaintiff’s second FCRA claim alleged that Defendant violated §1681s-2(b) by a failure to investigate allegedly false information for several months after it was informed of the disputed information.  FCRA §1681s-2(b) imposed a duty to investigate disputed information after receiving notice [from a credit reporting agency].  Defendant moved to dismiss, arguing Plaintiff failed to explicitly allege that Defendant received such notice.  Finding no controlling Fourth Circuit authority, the court looked to decisions of the U.S. Courts of Appeal for the Seventh and Ninth Circuits, indicating that under the FCRA a plaintiff triggered a defendant-furnisher’s duty to investigate by merely notifying the consumer reporting agency of a dispute.  In the court’s view, all that was required to meet the Rule 12(b)(6) pleading sufficiency standard was plaintiff’s allegation that she notified the reporting agency of disputed credit information.  As a result, Plaintiff’s second FCRA claim survived Defendant’s motion to dismiss.

The full opinion is available in PDF.

United States of America ex rel. Cornelius Harris et al. v. Dialysis Corporation of America (Maryland U.S.D.C.)

Filed:  October 2, 2013

Opinion by Judge James K. Bredar

Held:  Relators brought four claims alleging Defendant violated the False Claims Act (“FCA”).  The Court held that Relators stated one viable claim for relief for Defendant’s alteration of Body Mass Index (“BMI”) numbers  in relation to Defendant’s billing the U.S. government for medical claims because BMI information was material to the Government’s payment approval decisions.  Relators’ three other claims were dismissed for failure to state a claim upon which relief can be granted or lack of subject-matter jurisdiction.

Facts:  Relators Harris and Boonie worked for Defendant Dialysis Corporation of America ("DCA") for approximately one year and both former employees’ responsibilities related to billing. 

In their suit against DCA Relators alleged Defendant violated four provisions of the FCA, 31 U.S.C. §3729 et seq. by knowingly presenting false or fraudulent claims for payment or approval to the Government, knowingly making false records or statements to get false or fraudulent claims paid or approved by the Government, conspiring to defraud the Government by getting false or fraudulent claims paid, and knowingly making false records or statements to conceal, avoid, or decrease obligations to pay the Government.  Specifically, Relators alleged Defendant altered Social Security numbers on medical claims, changed patients’ BMI numbers on medical claims, overbilled for Epogen, and overbilled D.C. and Ohio Medicaid.

Defendant moved to dismiss the Relators' complaint under Rule 12(b)(6) for failure to state a claim upon which relief can be granted.  Defendant’s motion to dismiss was granted in part and denied in part.

Analysis:  The Court first analyzed Relators’ allegation that Defendant altered Social Security numbers on Medicare claims.  The Court examined whether the alleged inaccuracy of the Social Security numbers was material to the Government’s decision to pay for or approve the claims, because the governing standard in the Fourth Circuit at the time this case was filed required a false statement to be material to the Government’s payment approval decision.  UnitedStates ex rel. Berge v. Bd. Trs., Univ. of Ala., 104 F.3d 1453, 1459-60 (4th Cir. 1997).  A false statement is “material” in the context of FCA claims if it “has a natural tendency to influence agency action or is capable of influencing agency action.”  Id. at 1460.  Since the Government relies on information other than just Social Security numbers to process Medicare claims, the Court found no plausible inference that inaccurate Social Security numbers were capable of influencing agency action.  The Court could not infer that Defendant made false, material statements to the Government in violation of the FCA, and therefore Relators’ allegations as to Social Security numbers failed to state a claim under Rule 12(b)(6).

The Court then investigated Relators’ claim that Defendant changed patients’ BMI numbers on medical claims in order that patients would qualify for Medicare reimbursement for excess dialysis treatments.  Relators stated that on multiple occasions, they personally observed Defendant enter the billing system and alter BMI numbers without the proper physician authentication.  Because a patient’s BMI number must be above a certain threshold for excess dialysis treatments to qualify for Medicare reimbursement, the Court found that these false statements were material and Relators stated a valid claim upon which relief could be granted.

Next, the Court analyzed Relators’ claim that Defendant overbilled for Epogen.  The Court found that this claim failed under both Rule 12(b)(1) for lack of subject matter jurisdiction and Rule 12(b)(6).  The claim failed under Rule 12(b)(1) because the first-to-file bar contained in the False Claims Act prevents bringing false claims actions related to civil actions for false claims already filed.  31 U.S.C.A. 3730(b)(5).  The Fourth Circuit follows a “same material elements” test when considering whether a fraud claim is barred under the first-to-file bar.  United States ex rel. Carter v. HalliburtonCo., 710 F.3d 171, 181-82 (4th Cir. 2013).  This claim failed because when Relators’ claim was filed, another case against Defendant was before the Court alleging the same material elements for overbilling of Epogen.

Finally, the Court considered the claim that Defendant overbilled D.C. and Ohio Medicaid.  Because Relators did not allege this fraud claim with particularity, the claim failed to meet the pleading standards of Rule 9 (b) and was dismissed.

The full opinion is available in PDF here.

Schelhaus v. Sears Holding Co. (Maryland U.S.D.C.)

Filed: December 3, 2009
Opinion by Judge J. Frederick Motz

Held: Plaintiff’s complaint against employment agency and former employer claiming that reporting the reason for the plaintiff's prior termination to a new employer violated the Fair Credit Reporting Act was sufficient to survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6).

Facts: Plaintiff was an employee in a Sears department store until he was fired for “award fraud” for giving a discount to a customer, giving away a power cord to an appliance, and taking other actions to improperly garner benefits under a sales program. The plaintiff made a written statement to Sears security personnel admitting to this conduct but contended that his supervisors knew and approved of his conduct.

Following his termination from Sears, the plaintiff was hired by a new employer. The new employer conducted a background check on the plaintiff by contacting the employment agency for information. Sears had previously sent a report to the employment agency indicating the reasons for the plaintiff’s dismissal. The agency told the new employer that the plaintiff was fired for committing award fraud. The new employer then fired the plaintiff.

The plaintiff complained to the employment agency, challenging the veracity of his employment history report. The employment agency asked Sears to provide all information supporting the report of a termination for award fraud. In response, Sears provided the employment agency with the plaintiff's written statement admitting to the conduct. The employment agency then told the plaintiff that it had deleted all information from his employment record that had not been verified. The plaintiff later discovered that his employment record remained unaltered, including the allegations of award fraud, and filed suit against Sears and the employment agency.

Both defendants moved to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6).

Analysis: The Fair Credit Reporting Act (FCRA) imposes investigation obligations on those who learn that information they have furnished to credit reporting agencies is inaccurate. Further, a consumer reporting agency violates the FCRA if (1) the consumer report contains inaccurate information and (2) the reporting agency did not follow reasonable procedures to assure maximum possible accuracy.

The plaintiff alleged that Sears violated the FCRA because it failed to conduct an investigation into the veracity of the conclusion that the plaintiff committed award fraud, failed to provide the employment agency with information supporting its report, and then failed to amend its initial report of award fraud.

The plaintiff alleged that the employment agency violated the FCRA because it failed to follow reasonable procedures to assure the maximum possible accuracy of Sears’ report when it did not conduct an independent evaluation, possessed no supporting documentation at the time of its report to the new employer, ultimately failed to review any foundation for Sears’ report, and failed to conduct a reasonable investigation to determine whether the disputed information was accurate.

The defendants argued that the plaintiff’s written statement admitting to the alleged fraudulent conduct precluded the plaintiff from bringing actions against them under the FCRA.

The Court held that the plaintiff’s written statement to Sears security personnel did not preclude the plaintiff from raising plausible FCRA claims . The Court noted that while the plaintiff admitted to certain conduct in his written statement, he also contended that he acted with managerial knowledge and supervision. Without details of Sears’ policies and procedures and any definition of “award fraud” the Court could not find that the plaintiff’s claims were deficient.

The full opinion is available in PDF.

Federal Trade Commission v. Innovative Marketing, Inc. (Maryland U.S.D.C.)

Filed September 16, 2009
Opinion by Judge Richard D. Bennett

Held: Under the recently articulated Iqbal "plausibility" standard, the FTC sufficiently pleaded a cause of action against a corporate officer for personal liability for deceptive marketing practices.

Facts: The FTC sued multiple companies and their officers for marketing software using misleading "scareware" tactics. One officer moved to dismiss for failure to state a claim against him in his individual capacity. Under the FTC Act, upon establishment of corporate liability for deceptive marketing, individual defendants may be held personally liable upon proof that they "participated directly" in the acts or "had authority to control them." In addition, the FTC must prove the individual had some knowledge of the conduct.

Regarding the individual, the FTC alleged that 1) he was a corporate officer, 2) he handled the company's finances and merchant accounts, 3) this was important because of the difficulty maintaining payment processors due to a high rate of chargebacks and complaints, and 4) his credit card was used by another defendant to buy advertising. The court held that these allegations were sufficient to support a claim for personal liability under the Act.

*Concerning the knowledge requirement, the court relied on the defendant's degree of participation in business affairs, the small size of the enterprise, and the breadth of the scheme to infer that he had knowledge.

The full opinion is available in PDF.