Fan v. US Zhimingde International Group, LLC

Background

Ruixue Fan alleged that Yuan Zhu and Yinling Zeng promoted herbal supplements manufactured and marketed by US Zhimingde International Group, LLC. Promotional brochures allegedly stated that the products had been approved by the U.S. Food and Drug Administration and that the U.S. Department of Health and Human Services had issued a Certificate of Free Sale. Fan purchased $4,000 of the products and later electronically signed an investment agreement and invested $484,925 between August 19 and October 8, 2014.

Fan alleged that, at an October 2014 conference in Beijing, Zhongquan Zou—who represented himself as US Zhimingde’s president—offered her 685,811 shares after she complained that she had received no return on her investment. Fan later made information and accounting requests. She alleged that US Zhimingde disabled her online account when she requested the investment agreement and that she eventually sold her New Jersey house to satisfy a loan used to make the investment.

Fan’s complaint asserted claims under Sections 5(a) and 5(c) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rules 10b-5 and 12g-2; Section 301(b) of the Federal Food, Drug, and Cosmetic Act; Section 4 of the Fair Packaging and Labeling Act; Section 43(a) of the Lanham Act; and New York state law. US Zhimingde, the only remaining defendant, moved to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(1), 12(b)(3), and 12(b)(6). The other defendants had previously been dismissed without prejudice because Fan did not timely serve them.

Federal Securities Claims

The court dismissed Counts I, II, and VI. It held that the complaint did not plead enough facts to show that Fan’s investment was a “security” covered by federal securities laws. Fan had not provided the investment agreement or alleged its terms. The later offer of 685,811 shares did not clarify the original investment because it occurred months after the investment had been completed and may have been an offer of a substitute agreement.

The court also gave alternative reasons for dismissal. For Count I, which asserted securities fraud under Section 10(b) and Rule 10b-5, Fan did not adequately plead economic loss. The complaint did not state the number of shares acquired, the price per share at the time of investment, or the difference between that price and a later price. The court also held that Fan did not plead loss causation—a causal connection between the alleged misconduct and the claimed financial harm—because the alleged misrepresentations concerned herbal supplements and had no connection to the price of her house. The court dismissed Count I.

For Count II, based on Sections 5(a) and 5(c) of the Securities Act, the court held that the claim was barred by the statute of repose, which the court described as an absolute time limit. Fan invested between August 19 and October 8, 2014, but filed suit more than three years after the alleged investment. The court dismissed Count II with prejudice.

For Count VI, based on Securities and Exchange Commission Rule 12g-2, the court held that the rule did not provide a private right of action. The court dismissed Count VI. It further noted that, if the claim concerned failure to register shares, it would have to be brought under Section 12(a)(1) of the Securities Act, which the court had already found time-barred.

Other Federal Claims

The court dismissed Count III, Fan’s claim under Section 301(b) of the Federal Food, Drug, and Cosmetic Act, because Fan identified no provision or legal authority creating a private right to enforce that statute.

The court dismissed Count IV, based on Section 4 of the Fair Packaging and Labeling Act, for the same reason: Fan identified no private right of action under that statute.

The court dismissed Count V, Fan’s false-advertising claim under Section 43(a) of the Lanham Act, for lack of standing. The court explained that a plaintiff generally must be a competitor who alleges harm to a commercial interest in reputation or sales. Fan’s purchase of the supplements made her a consumer, and her investment-related injury did not concern her reputation or sales. The complaint also did not allege that Fan sold competing products or competed with US Zhimingde in any market.

Jurisdiction and State Claims

US Zhimingde argued that the court lacked diversity jurisdiction because the parties were not citizens of different states. The parties did not dispute that US Zhimingde was a New York corporation, but US Zhimingde disputed Fan’s claimed New Jersey citizenship. The court found that Fan had submitted only a bare statement of New Jersey citizenship, an allegation that she had owned a New Jersey house until July 2016, and an unsigned, undated portion of a 2018 federal tax return showing a New Jersey address. The court concluded that Fan had not established her domicile when the complaint was filed and therefore had not carried her burden of establishing diversity jurisdiction.

After dismissing the federal claims and finding no diversity jurisdiction, the court declined to exercise supplemental jurisdiction—the authority to hear related state-law claims—in reliance on 28 U.S.C. § 1367(c)(3). It dismissed the complaint in its entirety and stated that it expressed no view on the viability of Fan’s state-law claims.

Disposition

Judge Naomi Reice Buchwald granted US Zhimingde’s motion to dismiss and dismissed the complaint in its entirety. The order resolved docket entry No. 16 and directed the Clerk of Court to close the case.