SA Luxury Expeditions, LLC v. Schleien

Background

SA Luxury Expeditions, LLC provides tours in Latin America and competes with Peru for Less, LLC and other entities controlled by Bernard Schleien. In 2015, SA Luxury and Schleien entered into a settlement agreement resolving an earlier lawsuit. The agreement prohibited Schleien from making written or oral comments disparaging SA Luxury, including statements that could reasonably portray it negatively.

SA Luxury alleged that four-star reviews appeared on Trustpilot during 2020 and 2021. Although the reviews were not explicitly negative, SA Luxury alleged that they lowered its overall rating. SA Luxury also alleged that, beginning in 2022, it experienced fraudulent advertising clicks and false client leads that increased its expenses. It alleged that an investigation traced at least two false leads to Schleien and an employee of Peru for Less and that it suffered at least $350,000 in damages.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Breach of Contract

The court held that SA Luxury's contract claim was not subject to the heightened pleading requirements for fraud claims because it was based on alleged violations of the settlement agreement. The court nevertheless concluded that the claim failed under the agreement's text.

SA Luxury acknowledged that the reviews contained no negative portrayal of SA Luxury or its services. The court interpreted the agreement as reaching statements that were, by themselves, disparaging. The alleged purpose or effect of the four-star reviews—lowering SA Luxury's overall rating—did not make the reviews a breach of the agreement. The court therefore dismissed the breach-of-contract claim with prejudice.

New York Unfair Competition

The court explained that New York common-law unfair competition generally requires bad-faith misappropriation of another party's work and expenditures, along with special damages—that is, sufficiently specific losses caused by the alleged misconduct. Although SA Luxury discussed fraudulent clicks in the complaint's background, its New York claim was based solely on alleged false leads.

The court found the allegations about the false leads vague and conclusory. The complaint did not clearly explain how or to whom leads were submitted, adequately connect the alleged leads to the defendants, or provide the details required for a fraud-based claim, such as when and where the leads were submitted and what they contained. The court also found that alleging $350,000 in damages, without explaining how the defendants' conduct caused that amount or identifying qualifying special damages, was insufficient.

The court granted the motion to dismiss the New York unfair-competition claim, but allowed SA Luxury to seek leave to amend.

California Unfair Competition

The court rejected the defendants' argument that the settlement agreement's choice-of-law provision required the California unfair-competition claim to be governed by New York law. The court found that the alleged false leads were separate from the conduct involved in the earlier lawsuit and were not sufficiently related to the settlement agreement. The court also noted that Peru for Less was not a party to that agreement.

The court applied the heightened pleading standard for fraud because SA Luxury alleged a fraudulent course of conduct. SA Luxury adequately alleged economic injury by claiming that it incurred unnecessary advertising expenses and spent resources investigating false leads. But the complaint did not provide the required details about who submitted the leads, when and how they were submitted, how SA Luxury determined they came from the defendants, or what the leads said.

The court granted the motion to dismiss the California unfair-competition claim, while allowing SA Luxury to seek leave to amend.

Disposition

Judge Valerie Caproni granted the defendants' motion in full. The motion as to the breach-of-contract claim was granted with prejudice. The motions to dismiss the New York and California unfair-competition claims were granted without prejudice to SA Luxury seeking leave to amend. Any motion for leave to amend had to be filed by October 3, 2022 and include both redlined and clean versions of the proposed amended complaint. If SA Luxury did not seek leave to amend, the case would be dismissed.