UCP Biosciences, Inc. v. American Screening LLC

Background

UCP Biosciences, Inc. manufactures and supplies in vitro diagnostic tests. According to UCP’s complaint, it began doing business with American Screening, LLC in 2008. American Screening placed purchase orders for drug-screening devices, and UCP fulfilled the orders and sent invoices payable within 30 days.

UCP alleged that American Screening repeatedly failed to pay its invoices while continuing to place new orders. UCP also alleged that American Screening representatives repeatedly reassured it that payments were forthcoming. In 2018 and 2019, Ronald Kilgarlin allegedly proposed settling American Screening’s debt by giving UCP an equity interest in American Screening and Biostat Laboratories, but UCP alleged that American Screening did not provide requested financial information. UCP also alleged that Bradley Herriage promised weekly payments of at least $150,000, but those payments soon stopped.

UCP alleged that, as of January 31, 2020, American Screening had unpaid balances on 778 invoices totaling $15,720,778.39, plus $3,722,329.78 in accrued interest. UCP and American Screening continued doing business, but UCP required payment in advance for new orders.

Claims and Motion

UCP asserted claims for breach of contract, fraud, intentional misrepresentation, negligent misrepresentation, violation of the Racketeer Influenced and Corrupt Organizations Act, conspiracy to violate that Act, violation of California’s Unfair Competition Law, and unjust enrichment. The defendants moved to dismiss claims two through eight under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Fraud and Misrepresentation Claims

The court considered UCP’s allegations that the defendants promised to make payments on past-due invoices, agreed to pay for new orders, and promised an equity-for-debt settlement. Fraud-based claims require facts supporting an intent to deceive. Federal Rule of Civil Procedure 9(b) also requires the circumstances of alleged fraud to be stated in detail, including who made the statement, what was said, when and where it was said, and how it was misleading.

The court held that UCP had not plausibly alleged fraudulent intent. The allegations were also consistent with an alternative explanation: American Screening may simply have been unable to pay its bills, and Ronald Kilgarlin may have been unable to produce a settlement proposal based on an informal assessment of the companies’ value. The court stated that UCP’s allegations did not provide facts that ruled out that alternative explanation.

The court also noted that Ronald Kilgarlin provided at least two equity-for-debt proposals. The fact that the proposals did not satisfy the full scope of his promise did not establish that the promise was false when made. The court therefore granted the motion to dismiss UCP’s second claim for fraud, third claim for intentional misrepresentation, and fourth claim for negligent misrepresentation, with leave to amend.

Racketeering Claims

UCP’s fifth claim alleged a violation of the Racketeer Influenced and Corrupt Organizations Act, and its sixth claim alleged a conspiracy to violate that Act. The court held that, because UCP had not adequately alleged fraud, it had not established the pattern of racketeering activity required for its racketeering claims. The court granted the motion to dismiss claims five and six with leave to amend.

Unfair-Competition Claim

UCP’s seventh claim under California’s Unfair Competition Law was based on its fraud and misrepresentation allegations. Because the court found that UCP had not stated a fraud claim, it also granted the motion to dismiss the unfair-competition claim with leave to amend.

Unjust-Enrichment Claim

UCP’s eighth claim alleged unjust enrichment. The court explained that California law does not recognize unjust enrichment as an independent cause of action, although a court may treat such a claim as seeking restitution under a quasi-contract theory. Such a claim generally cannot proceed when an express contract covers the same subject matter, unless the plaintiff alleges that the contract is void, rescinded, or otherwise unenforceable.

The court held that UCP did not allege that its contract with American Screening was obtained by fraud or was otherwise unenforceable. It therefore granted the motion to dismiss claim eight. Because the defect resulted from UCP’s own allegations, the court dismissed the claim without leave to amend.

Disposition

The court granted the defendants’ motion to dismiss. Claims two through seven were dismissed with leave to amend. Claim eight was dismissed without leave to amend. UCP was required to file an amended complaint by August 31, 2020, and could not add claims or parties without further court permission. The court stated that if UCP failed to meaningfully amend its factual allegations, a later dismissal would be with prejudice. The order did not change the court’s earlier permission for jurisdictional discovery, which UCP was allowed to continue.