In two recent decisions, federal district courts have dismissed at least some of the claims brought by federal and state authorities, finding the complaints insufficiently specific in alleging that a defendant’s conduct met the relevant statutory requirements and/or insufficiently clear regarding their allegations as a whole. These rulings may provide a useful roadmap for future challenges to complaints brought by federal and state regulatory agencies and/or attorneys general.
Federal Trade Commission and People of the State of New York, by James, v. Quincy
We’ve blogged previously about the FTC and State of New York’s challenge to the advertising for cognitive supplement Prevagen. If your memory is good, you will recall that Judge Stanton dismissed the case, but the Second Circuit reversed on the issue of whether the studies Prevagen mentions in its ads support the claims in its ads. In addition to the product manufacturer and marketer, Quincy Bioscience, LLC, Prevagen, Inc., and Quincy Bioscience Manufacturing, LLC, the government also named as defendants Quincy’s co-founders and two largest shareholders, Mark Underwood and Michael Beaman.
After the remand, on July 24, 2019, the United States District Court for the Southern District of New York granted the defendants’ motion to dismiss the claims against Beaman, while denying the defendants’ motion to dismiss the claims against Underwood and rejecting their other arguments for dismissal. In so ruling, the court applied the normal standard for individual liability under the FTC Act: “An individual may be held liable . . . for a corporation’s deceptive acts or practices if, with knowledge of the deceptive nature of the scheme, he either participate[s] directly in the practices or acts or ha[s] authority to control them.” The knowledge requirement may be met by showing that the individual has “actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth.” Similarly, the New York statutes invoked in the complaint, New York Executive Law § 63(12) and New York General Business Law §§ 349-50, provide that corporate officers and directors “may be held liable for fraud if they participate in it or have actual knowledge of it.”
The court found that the complaint adequately alleged that Underwood had the authority to control the corporate defendants’ advertising practices and that he “participated directly in the alleged false advertising of Prevagen.” Beyond his overall positions of leadership—as Quincy’s largest shareholder, a co-founder and the president of Quincy and two of the three subsidiaries, and a director of all three subsidiaries—the complaint alleged that Underwood “made final decisions on advertising claims, wrote advertising materials, and appeared in Prevagen advertisements.” Furthermore, the court cited the allegations that Underwood “directed the research, translated scientific data into marketing language, and wrote a user guide explaining the science behind Prevagen” as sufficient to “support an inference that he knew what the research and studies concluded and thus had knowledge of the deceptive nature of the advertisements.”
By contrast, the court concluded that the complaint’s allegations against Beaman fell short of the mark. The court noted that Beaman’s comparable leadership positions—as Quincy’s second largest shareholder, a co-founder, former president, and current CEO of Quincy and two of the three subsidiaries, and chair of the board of directors of all three subsidiaries—gave him, as well as Underwood, “the authority to control the corporate defendants’ advertising practices.” Nevertheless, the court found that the complaint’s allegations regarding Beaman’s conduct—namely, that he “has given media interviews, signed research agreements, pre-approved research proposals, and reviewed Defendants’ advertising”—were “insufficient to show that he knew the results of the research or participated in the false advertising.” Thus, the court dismissed the claims against Beaman, with leave to amend. What the FTC can add and whether it does so remain to be seen.
Consumer Financial Protection Bureau v. Ocwen Financial Corporation, et al.
A lack of sufficient specificity and clarity similarly led to dismissal of claims brought by the CFPB against Ocwen Financial Corporation (“OFC”) and two subsidiaries. The CFPB alleged that the mortgage servicing practices of OFC and the two subsidiaries—Ocwen Mortgage Servicing, Inc. (“OMS”) and Ocwen Loan Servicing, LLC (“OLS”)—violated provisions of the Consumer Financial Protection Act (“CFPA”), Fair Debt Collections Practices Act (“FDCPA”), Real Estate Settlement Procedures Act (“RESPA”), Truth in Lending Act (“TILA”), and Homeowners Protection Act of 1998 (“HPA”), and related federal regulations. Defendants moved to dismiss the complaint on a variety of grounds.
In a September 5, 2019 ruling, the United States District Court for the Southern District of Florida agreed with the defendants that the CFPB’s claims under the FDCPA must be dismissed because the complaint failed to allege facts plausibly showing that each of the defendants acted as a “debt collector” as defined by the FDCPA. Specifically, while “[t]he Complaint plausibly alleges that Defendants collect or attempt to collect [their] own debts . . . [it] fails to plead factual allegations from which the Court can plausibly infer that Defendants regularly collect or attempt to collect on debts owed or due another at the time of collection.” The court granted the CFPB leave to re-plead its FDCPA claims in an amended complaint.
The defendants also launched a more sweeping attack against the CFPB’s complaint, arguing that “all Counts should be dismissed because the Complaint is an impermissible ‘shotgun’ pleading and it fails to distinguish among the Defendants.” The court agreed with the defendants that the complaint “constitute[d] improper shotgun pleading . . . requiring dismissal of the CFPB’s complaint without prejudice.” As the court observed, the term “shotgun pleading” can encompass a variety of improper pleadings, including complaints that “contain multiple counts where each count adopts the allegations of all preceding counts,” as well as complaints with counts that contain “conclusory, vague, and immaterial facts not obviously connected to any particular cause of action.” The court found that the complaint in Ocwen Financial Corp. was an improper shotgun pleading because it “is ninety-two pages long and incorporates all 220 paragraphs of allegations into each of the fourteen counts, regardless of whether the factual allegations pertain to the cause of action.”
At the same time, the court rejected the defendants’ argument that the CFPB’s complaint relied on improper group pleading and failed to specify what each defendant had allegedly done for each cause of action. The court found that the complaint plausibly alleged common enterprise liability—under which it is not necessary to allege that each defendant committed a particular wrongful act.
In both cases, the government has been given the opportunity to replead. Thus, whether these victories are long-lasting or short-lived remains to be seen. The cases do, however, provide useful guidance on what the government needs to plead to succeed.