Aegis Senior Communities LLC v. UKG Inc.

Background

Aegis provides assisted living and memory care in California, Nevada, and Washington. In 2019, Aegis and Kronos Incorporated, UKG’s subsidiary, entered into a Workforce Central Software Agreement for hosted employee-timekeeping software. The agreement stated that the services were not guaranteed to be error-free or uninterrupted, provided service credits as the exclusive remedy for service outages, waived indirect and consequential damages, and limited indemnification. Aegis entered into another agreement with UKG for the same services in 2022.

In December 2021, a criminal ransomware attack targeted the Kronos Private Cloud and caused an outage lasting almost six weeks. Aegis alleged that the loss of timekeeping and payroll services caused it to pay employees incorrectly and led to two wage-and-hour class actions against Aegis.

Claims and Motion

Aegis’s First Amended Complaint asserted claims for gross negligence, fraudulent misrepresentation, negligent misrepresentation, and violations of California’s Unfair Competition Law. UKG moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally recognized claim. UKG also moved alternatively under Rule 12(f) to strike impermissible allegations. Because the court found dismissal appropriate, it did not reach the motion to strike.

Gross Negligence

Aegis alleged that UKG acted with gross negligence by failing to prevent or properly respond to the ransomware attack. The court held that the claim was based on a duty arising from the parties’ Workforce Central Agreement and sought recovery for purely economic losses. Under California’s economic-loss rule, financial losses without physical or property damage generally cannot be recovered through a negligence claim when the claim arises from the parties’ contract.

The court found that the agreement specifically addressed service outages and allocated the related risk by providing service credits as the exclusive remedy. It rejected Aegis’s argument that an exception for professional services applied. The court concluded that Aegis had not established an extra-contractual duty or harm beyond purely economic loss and granted UKG’s motion to dismiss the gross-negligence claim.

Fraudulent and Negligent Misrepresentation

The court also dismissed both misrepresentation claims. It held that the alleged statements about UKG’s payroll and information-technology services, security standards, data replication, and restoration times related to the contracts and therefore were not independent of them. The economic-loss rule consequently applied.

The court additionally found that Aegis did not plead the alleged fraudulent statements with the particularity required by Rule 9(b), which requires specific facts about the who, what, when, where, and how of an alleged fraud. Aegis relied on general references to marketing materials and inferred that UKG’s statements must have been false because the ransomware attack occurred, but it did not identify what was false when the statements were made. The court further held that Aegis could not plausibly allege justified reliance in light of the agreements’ integration clause, their treatment of service interruptions, and Aegis’s decision to enter a new agreement after the attack.

Unfair Competition Law Claim

Aegis alleged that UKG engaged in unlawful, unfair, or fraudulent business practices under California’s Unfair Competition Law. The court held that the claim could not proceed because Aegis sought contractual payments and money it had paid to third parties, including fees related to defending the wage-and-hour class actions. The court stated that the Unfair Competition Law does not permit contract damages or recovery of money paid to third parties. It also found that Aegis had not alleged that it lacked an adequate legal remedy, and that Aegis’s other damages claims showed it could not do so plausibly.

Disposition

The court declined to permit further amendment. Aegis had previously been given an opportunity to amend, but the amended complaint did not cure the defects. The court also found that several claims were barred by the economic-loss rule and that further amendment would be futile.

The court granted UKG’s motion to dismiss with prejudice. It did not decide UKG’s alternative motion to strike. Judge Araceli Martinez-Olguin entered the order on September 4, 2024.