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Class Action Defense Cases-Schulz v. Neovi Data: California Court Affirms Defense Judgment In Class Action As To Certain Defendants But Grants Plaintiff Leave To Amend Class Action Claims Against Other Defendants

Following Defense Judgment in Class Action Complaint for Aiding and Abetting Intentional Tort, California Court Affirms as to PayPal and Neovi Defendants but Holds Plaintiff is Entitled to Opportunity to Amend as to PaySystems and Ginix Defendants

Plaintiff filed a putative class action lawsuit in California state court against Neovi Data Corporation, Ginix, PaySystems and PayPal, alleging that they aided and abetted the operation of an illegal lottery. Schulz v. Neovi Data Corp., 152 Cal.App.4th 86, 60 Cal.Rptr.3d 810, 812-13 (Cal.App. 2007). The trial court sustained a demurrer to the second amended class action complaint without leave to amend, id., at 812. The appellate court affirmed the judgment as to Neovi and PayPal, but reversed as to Ginix and PaySystems, concluding that plaintiff should be given an additional opportunity to amend the class action complaint in an effort to state a claim against those defendants, id., at 812-13.

The second amended class action complaint alleged that defendant EZ Expo operated an Internet site that purportedly provided consumers the chance to “receive expensive electronic products for a fraction of the price” but requires that participants “pay[] a fee to enter a ‘matrix’” and that other consumers “join the ‘matrix’ after him.” Schulz, at 813. The class action alleged that to get a $5500, 50-inch plasma television at EZ’s website, a consumer “enters the plasma television matrix by purchasing the required three ‘E-books’ for $150” and their name is then “placed on the list of those eligible to receive the television.” Id. According to the class action complaint, “[W]hen 50 persons have each paid $150, the first person to enter will receive the plasma television ‘for free’ and his name is removed from the list.” Id. The appellate court explained at page 813 that once a participant gets the TV then “the second name on the list moves to the top and 50 more people need to enter for that person to receive the television.” Plaintiff alleged further that EZ “encourage[d] participants to recruit others to enter the matrix.” Id. The complaint alleged that the E-books themselves have “minimal” value and that EZ sold millions of dollars in E-books. Id.

The class action claims against PaySystems and Ginix were premised on their role in processing credit card payments from EZ’s customers; plaintiff alleged that these defendants “realized EZ’s site was an unlawful lottery and knew EZ was making false claims and engaging in unfair business practices, but authorized EZ to use their payment services ‘with the knowledge and specific intent of aiding and abetting and facilitating the illegal lottery’” Schulz, at 813. These defendants also had “contracted with EZ to display their logos and create links to their respective websites so they could process payments.” Id. Similarly, the class action complaint named PayPal based on the fact that EZ’s customers could pay for E-books using PayPal’s website, and that “PayPal contracted with EZ after reviewing its website and determining that it operated an illegal lottery” and “authorized a link with EZ ‘with the knowledge and intent of aiding and abetting and facilitating the operation of the EZ Expo website in a manner similar to that described … with respect to Ginix and PaySystems.’” Id., at 814. Finally, the claims against Neovi were founded on the fact that EZ’s customers could use Neovi to pay for E-books by “virtual check”; the class action alleged that Neovi “knew EZ’s operations were illegal but ‘knowingly and intentionally aided and abetted the operation’ and ‘directly profited … by receiving a percentage of each check transaction or collecting a fee.’” Id.

The complaint alleged causes of action against all defendants for unfair business practices under California’s unfair competition law (UCL) on the ground that EZ’s scheme constituted a “lottery” and/or an “endless chain scheme” under California law. Schulz, at 814. It also alleged separate claims against Ginix, PaySystems and PayPal (second through fourth causes of action) based on the payment processing services they provided, id. Defense attorneys for Ginix, PaySystems, and PayPal each demurred to the class action complaint for failure to allege sufficient facts to support a claim for aiding and abetting a violation of the UCL; Neovi joined in PaySystem’s demurrer. Id. The trial court agreed with the defense arguments and sustained the demurrers without leave to amend, id.

The appellate court began its analysis by discussing the impact of Proposition 64 – passed by by California voters during the pendency of the appeal – on plaintiff’s UCL claims. Schulz, at 815. In broad terms, Proposition 64 amended the UCL to require that a plaintiff suffer actual injury in order to have standing to pursue claims thereunder, and the California Supreme Court has held that Proposition 64 applies to complaints pending at the time of the law’s enactment, id. (citations omitted). On appeal, plaintiff admitted that he did not use the services of Neovi, PaySystem or PayPal, but represented that he did use Ginix and would be able to amend the class action complaint to include the requisite allegations to establish standing under Proposition 64. Id. The appellate court held that plaintiff should be given an opportunity to amend the complaint, id. (citations omitted).

With respect to the other defendants, while plaintiff admitted that he did not use any of their services, plaintiff’s lawyer argued that he had “alternative parties he could substitute in as plaintiffs that were directly harmed by those defendants and seeks the opportunity to amend the complaint to make such allegations and to allege a class action in those causes of action.” Schulz, at 815. Relying on the Supreme Court opinion in Branick v. Downey Sav. & Loan Ass’n, 39 Cal.4th 235 (Cal. 2006), the appellate court concluded that plaintiff should be provided the opportunity to amend the class action claims against PaySystems, Schulz, at 815-16. However, it affirmed the judgment in favor of PayPal and Neovi, holding that the class action complaint failed to allege “sufficient substantive facts” to state a claim against them for aiding and abetting an illegal lottery and further holding that “held that “plaintiff has no right to amend as to these defendants.” Id., at 816. The court’s analysis may be found at pages 816 through 820.

NOTE: Under California law, liability for aiding and abetting an intentional tort requires knowledge that “‘the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act.’” Schulz, at 816 (citation omitted). The appellate court at page 816 quoted with approval from the Restatement Second of Torts, which provides that “Advice or encouragement to act operates as a moral support to a tortfeasor and if the act encouraged is known to be tortious it has the same effect upon the liability of the adviser as participation or physical assistance…. It likewise applies to a person who knowingly gives substantial aid to another who, as he knows, intends to do a tortious act.” Rest.2d Torts, § 876 , com. d, p. 317.

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