California Procedure,  Unfair Competition

Prop. 64 Knocks Out Unfair Competition Plaintiff Initially on Standing; Insufficient Substantive Allegations Finish Him Off

In Schulz v. Neovi Data Corp., case no. G033879 (June 15, 2007), a decision following remand from the California Supreme Court, the Fourth District Court of Appeal tackles the issue of whether plaintiff can amend his complaint to state a cause of action against online payment services Neovi, PayPal, Inc., PaySystems, Inc., and Ginix, Inc. for abetting an alleged unlawful “matrix scheme” run by by allowing their payment services to be used by participants to make payments into the scheme.  (This Wikipedia entry gives more background on matrix schemes and claims that is widely believed to be the first such known scheme.  The decision itself also describes the scheme fairly well.)  All of the defendants’ demurrers to plaintiff’s second amended complaint were sustained by the trial court.

Proposition 64 was enacted while the case was on appeal.  It requires a plaintiff suing on behalf of the public for unfair competition under Business and Professions Code section 17200 et seq. to allege his own injury in fact. The Court of Appeal held that under Prop. 64, Schulz lacked standing to sue anyone but Ginix, since Ginix was the only service he used.  The Supreme Court granted review and eventually remanded the case to the Court of Appeal to reevaluate under the holding of Branick v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, in which the Supreme Court held that an unfair competition plaintiff who lost standing due to the enactment of Prop. 64 must be given an opportunity to seek leave to amend the complaint to substitute new plaintiffs who would have standing under the amended provisions of the unfair competition law.

On remand, the Court of Appeal reverses as to two defendants but affirms as to Paypal and Neovi.  Even if Schulz could amend to name plaintiffs with standing to sue Neovi and PayPal, the substantive pleading deficiencies against these two defendants are enough to sustain the demurrer.  Conclusory allegations of the defendants’ knowledge of the alleged matrix scheme were not enough to meet the knowledge element, especially when compared to the detailed allegations against the other defendants.  Further, since Schulz had already amended his complaint twice and did not suggest how he might cure the defects, the court found no reasonable possibility that he could successfully amend.