Client Opposes Motion to Dismiss Complaint Against Jackson Hewitt, Others

LUIS LOMELI, individually and on behalf of a class of similarly situated individuals,
Plaintiff,
v.
JACKSON HEWITT, INC.; TAX SERVICES OF AMERICA, INC.
d/b/a JACKSON HEWITT TAX SERVICE; JJF & AC, INC.
d/b/a Guanajuato Insurance Agency and Jackson Hewitt Tax Service;
JUAN FLORES, an individual; and DOES 1-50, inclusive,
Defendants.

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

PLAINTIFF’S OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS

Date: October 2, 2017
Time: 1:30 p.m.
Place: Courtroom 5D

Dylan Ruga, Esq. (SBN 235969)
dylan@stalwartlaw.com
Paul A. Traina, Esq. (SBN 155805)
paul@stalwartlaw.com
Ji-In Lee Houck, Esq. (SBN 280088)
jiin@stalwartlaw.com
Ian P. Samson, Esq. (SBN 279393)
ian@stalwartlaw.com
STALWART LAW GROUP
1100 Glendon Avenue, 17th Floor
Los Angeles, California 90024
Tel: (310) 954-2000

Attorneys for Plaintiff and the Proposed Class

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TABLE OF CONTENTS

I. INTRODUCTION

II. LEGAL STANDARD

III. ARGUMENT

V. CONCLUSION

TABLE OF AUTHORITIES

Cases

Allwaste, Inc. v. Hecht, 65 F.3d 1523 (9th Cir. 1995)

Ashcroft v. Iqbal, 556 U.S. 662 (2009)

Bates v. United Parcel Serv., Inc., 511 F.3d 974 (9th Cir. 2007)

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)

Bias v. Wells Fargo & Co., 942 F. Supp. 2d 915 (N.D. Cal. 2013)

Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008)

Bristol-Myers Squibb Co. v. Sup. Ct., 137 S. Ct. 1773 (2017)

Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158 (2001)

Cislaw v. Southland Corp., 4 Cal. App. 4th 1284 (1992)

Cisneros v. Instant Capital Funding Grp., Inc., 263 F.R.D. 595 (E.D. Cal. 2009)

Collazo v. Wen by Chaz Dean, Inc., No. 15-cv-01974, 2015 WL 4398559 (C.D. Cal. July 17, 2015)

Demedicis v. CVS Health Corp., No. 16-cv-5973, 2017 WL 569157 (N.D. Ill. Feb. 13, 2017)

Des Roches v. Cal. Physicians’ Serv., 2017 WL 2591874 (N.D. Cal. Jun. 15, 2017)

Diaz v. Gates, 420 F.3d 897 (9th Cir. 2005)

Doe 1 v. AOL LLC, 719 F. Supp. 2d 1102

Forcellati v. Hyland’s, Inc., 876 F. Supp. 2d 1155 (C.D. Cal. 2012)

Gullen v. Facebook, Inc., No. 15 C 7681, 2016 WL 245910 (N.D. Ill. Jan. 2016)

H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229 (1989)

Hart v. Colvin, 310 F.R.D. 427 (N.D. Cal. 2015)

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)

In re 5-hour ENERGY Marketing and Sales Practices Litig., No. MDL 13-2438 PSG, 2014 WL 5311272 (C.D. Cal. Sept. 4, 2014)

In re Experian Data Breach Litig., 15-cv-1592, 2016 WL 7973595 (C.D. Cal. Dec. 29, 2016)

In re Jamster Marketing Litig., No. 2009 WL 1456632 (S.D. Cal. May 22, 2009)

In re Steroid Hormone Prod. Cases, 181 Cal. App. 4th 145 (2010)

Kennedy v. Full Tilt Poker, No. CV 09-07964 MMM, 2010 WL 1710006 (C.D. Cal. Apr. 26, 2010)

Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010)

Kwikset Corp. v. Sup. Ct., 51 Cal. 4th 310 (2011)

Luman v. Theismann, 647 F. App’x 804 (9th Cir. 2016)

Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025 (9th Cir. 2006)

Martin v. Tradewinds Beverage Co., No. CV16-9249 PSG (MRWX), 2017 WL 1712533 (C.D. Cal. Apr. 27, 2017)

Odom v. Microsoft Corp., 486 F.3d 541 (9th Cir. 2007)

Olson v. Sperry, No. 2:14–CV–07901–ODW, 2015 WL 846547 (C.D. Cal. Feb. 26, 2015)

People v. JTH Tax, Inc. 212 Cal. App. 4th 1219 (2013)

Petersen v. Allstate Indem. Co., 281 F.R.D. 413 (C.D. Cal. 2012)

Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp. 221 Cal. App. 4th 867 (2013)

Rahman v. Mott's LLP, No. CV 13-3482 SI, 2014 WL 325241 (N.D. Cal. Jan. 29, 2014)

Reves v. Ernst & Young, 507 U.S. 170 (1993)

Rhynes v. Stryker Corp., No. 10–5619 SC, 2011 WL 2149095 (N.D. Cal. May 31, 2011)

Snellink v. Gulf Resources, Inc., 870 F. Supp. 2d 930 (C.D. Cal. 2012)

Sonoma Cty. Ass’n of Ret. Employees v. Sonoma Cty., 708 F.3d 1109 (9th Cir. 2013)

U.S. v. Stargell, 738 F.3d 1018 (9th Cir. 2013)

Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987)

Statutes

18 U.S.C. § 1962(c)

Rules

Cal. Civ. Code § 1798.82(a)

Cal. Civ. Code § 3294(b)

F.R.C.P. 8

F.R.C.P. 9(b)

F.R.C.P. 12(b)(6)

F.R.C.P. 23(b)(2)

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MEMORANDUM OF POINTS AND AUTHORITIES

I. INTRODUCTION

Defendants Jackson Hewitt, Inc. (“JH, Inc.”) and Tax Services of America, Inc. (“TSA,” and referred to with JH, Inc. as “Defendants” unless otherwise specified) move to dismiss Plaintiff Luis Lomeli’s First Amended Complaint (“FAC”) for several reasons. Each lacks merit, as explained in detail below.

Defendants’ stated grounds for the motion seem little more than a vehicle for their invitation for the Court to compare the FAC with what they call the “relevant documents.” Defendants apparently believe that, if the Court does so, it will conclude that the FAC’s allegations do not add up, and that this case is little more than a parochial spat between Plaintiff and one of Defendants’ franchisees. But because this is a Rule 12(b)(6) motion, now is not the time to weigh evidence. Defendants’ efforts to skirt this prohibition are transparent; rather than ask that the Court consider the documents directly, Defendants characterize them as wholly undermining the FAC and suggest where they may be found (hint: their motion to compel arbitration).

The Court should decline Defendants’ invitation to review documents outside the pleadings but, in the unlikely chance the Court considers them, it will discover that the documents are far from discrepant with the FAC; they corroborate it. Indeed, for each of the relevant tax years, there are two sets of tax returns with two different dates and two different signatures. There is no reason for that kind of duplication — unless, perhaps, if one wished to substitute a doctored return for a legitimate one and conceal it from the victim, as the FAC alleges. And that’s before even trying to conjure up a legitimate reason why signatures purportedly from the same person would be markedly different on different dates. By referencing the documents, Defendants score the slam dunk they thought they had; trouble is that they did so on their own basket.

Defendants’ primary argument — that the FAC purportedly “lumps” all Defendants together — is the poster-child for Defendants’ hide-the-ball litigation strategy. Just as with Defendants’ debunked insistence that the FAC is inconsistent with to the underlying documents, Defendants apparently hope that their characterization of the FAC will overcome its allegations. No such luck. The FAC includes sufficient detail of the fraudulent scheme, when and where it happened, who did it, and how it was done. Defendants cannot claim that they lack sufficient notice — after all, they affirmatively identified and submitted to the Court what they call the “relevant documents.” This argument, like the rest of Defendants’ brief, lacks merit.

Defendants’ effort to distance themselves from their franchisees likewise falls flat. Citing cases involving convenience stores and hotels, Defendants paint themselves as distant and uninvolved franchisors. That again contrasts with the FAC’s allegations, this time straight from a Jackson Hewitt franchise agreement. As the FAC alleges, Defendants choreograph nearly everything about the day-to-day operations of their franchisees’ businesses. They also retain the right to unilaterally alter their rules — and, therefore, their franchisees’ operations — at any time for any reason. That right to control the means and manner of operations is the touchstone of agency. Defendants cannot escape the conclusion, at this stage at least.

The remainder of Defendants’ arguments fail for specific reasons stated below. As such, Plaintiff respectfully submits that Defendants motion should be denied in its entirety.

II. LEGAL STANDARD

A motion to dismiss tests whether a complaint alleges “enough facts to state a claim to relief that is plausible on its face.” Olson v. Sperry, No. 2:14–CV–07901– ODW, 2015 WL 846547, at *1 (C.D. Cal. Feb. 26, 2015) (Wright, J.) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Plausibility does not mean probability. Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Instead, a complaint must contain “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Factual allegations in the complaint are accepted as true, and inferences are drawn in plaintiff’s favor. Id. (citing Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2006)).

III. ARGUMENT

A. The FAC Adequately Alleges Each Defendant’s Involvement, Including the Existence of a Principal-Agent Relationship

Defendants devote much of their brief to reiterating the same argument: the FAC is inadequate because it fails to detail the inner-workings of events the FAC alleges were deliberately concealed from Plaintiff. As explained next, nothing in Rule 9(b) (let alone Rule 8) requires such detail, and Defendants’ argument fails.

1. The FAC Satisfies Rules 8 and 9(b)

Defendants devote considerable amount of space to discussing Rule 9(b), but they lose sight of its ultimate purpose in their argument.¹ The rule exists to ensure that “allegations of fraud are specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” Collazo v. Wen by Chaz Dean, Inc., No. 15-cv-01974, 2015 WL 4398559, at *2 (C.D. Cal. July 17, 2015) (Wright, J.) (citation omitted). As such, it requires a plaintiff to plead the “circumstances” of fraudulent activity, which are the “who, what, when, where, and how.” Petersen v. Allstate Indem. Co., 281 F.R.D. 413, 416 (C.D. Cal. 2012). While such matters must be pled with particularity, “intent, knowledge, and other conditions of a person’s mind may be alleged generally” — after all, absent a defendant who provides a detailed, pre-filing confession, these matters will rarely be within a plaintiff’s knowledge at the outset of the case. Fed. R. Civ. P. 9(b). For the same reason, courts recognize that Rule 9(b)’s particularity requirement may be “relaxed as to matters peculiarly within the opposing party’s knowledge.” Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), superseded on other grounds by Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990) (en banc). Further, while Rule 9(b) mandates identification of “the role of each defendant in a fraud suit involving multiple defendants,” it does not require allegations of “participation by each conspirator in every detail in execution of the conspiracy.” Collazo, 2015 WL 4398559, at *6.

Although Defendants claim that the FAC’s violates “every one” of Rule 9(b)’s parameters, in reality they take issue with the FAC’s pleading of who. They are wrong about that, but are right to concede that the remaining particularities are pled, as shown below:

• What. The FAC alleges that Jackson Hewitt (1) collected fees from Plaintiff on the pretense that they would truthfully and accurately prepare his tax returns; (2) instead used his returns to generate false refund checks, which were cashed without Plaintiff’s knowledge; and (3) enrolled Plaintiff in an unnecessary “Assisted Refund” program to further the scheme, collect even more fees, and cover their tracks. (FAC ¶¶ 18-36.)

• When. Plaintiff alleges each of the times he visited the South Gate Jackson Hewitt and paid fees to prepare his tax returns for Tax Years 2014, 2015, and 2016. (Id. ¶¶ 18, 25, 31.) He likewise alleges when the fraudulent cashier’s checks were issued without his knowledge. (Id. ¶¶ 23, 29.)

• Where. The FAC identifies the South Gate Jackson Hewitt at 9212 California Avenue in South Gate as the location where Plaintiff interacted with Defendants. (Id. ¶¶ 18, 25, 31.)

• How. Plaintiff alleges how Defendants accomplished the scheme: (1) including fraudulent deductions unclaimed by Plaintiff on his legitimate tax return (id. ¶¶ 21-22, 27-28, 34); (2) enrolling Plaintiff in the Assisted Refund program to facilitate the refund (id. ¶¶ 23, 29, 33-34); and (3) forging Plaintiff’s signature on the resulting cashier’s checks (id. ¶¶ 24, 30). Further, Defendants sought to instill trust to convince consumers to use the service by promoting Jackson Hewitt’s allegedly commitment to “accuracy” and protecting individuals’ information, thereby conning Plaintiff and others into ponying up for tax preparation. (Id. ¶¶ 37-45.)

The FAC’s allegations more than adequately satisfy the “who” element of Rule 9(b) because they identify each Defendant, describe their relationship, and provide allegations concerning their role in the scheme. Defendant Flores, who was the Jackson Hewitt representative for Plaintiff in each of the relevant years, is in control of and an agent of Defendant JJF & AC, which operated the South Gate Jackson Hewitt. (FAC ¶¶ 11-12, 18, 25, 31.) As such, those two were in turn agents of Defendants JH, Inc. and TSA, Inc. (Id. ¶¶ 14-17.) Defendants JH, Inc. and TSA, Inc. designed, maintained, and oversaw the operation of Jackson Hewitt’s tax preparation software, which was used to generate and submit the doctored returns to the government. (Id.) Additionally, they controlled all other aspects of each Jackson Hewitt location’s operations, including the location in South Gate, including: “preparing, checking and electronically filing income tax returns using [their] software, accounting methods, merchandising, equipment selection, advertising, promotional techniques, personnel training and quality standards.” (Id.) Finally, they disseminated both in-store and out-of-store advertisements designed to win and maintain customer trust in their commitments to “accuracy” and proper handling of consumer information. (Id. ¶¶ 37-45.) These allegations adequately plead the “who” component of Rule 9(b). Cf. Collazo, 2015 WL 4398559, at *6 (finding that complaint adequately alleged “who” with particularity by identifying the defendants, describing their relationship, and including “detailed allegations describing the respective roles of” each defendant).

There is nothing surprising, let alone violative of Rule 9(b), about allegations that Defendants, via their collective “Jackson Hewitt” enterprise (or, as Defendants put it elsewhere in this round of briefing, the “Jackson Hewitt System”), accomplished portions of the scheme. Cf. id. at *6 (“Plaintiffs adequately allege that Chaz Dean and Guthy-Renker acted ‘jointly’ in the design, manufacture, marketing, sale, and distribution of WEN products.”). Many of the relevant actions the FAC alleges — changing the returns to show higher deductions; submitting the doctored returns to the government; directing the government where to issue a refund; creating an Assisted Refund account to receive the refund; causing the refund to be distributed in a cashier’s check; and cashing it (see FAC ¶¶ 20-24, 27-30, 33-36) — were deliberately concealed from Plaintiff. Behind-the-scenes details of the fraud are classic examples of matters “peculiarly within the opposing party’s knowledge,” Wool, 818 F.2d at 1439, and unnecessary allegations of “participation by each conspirator in every detail in execution of the conspiracy,” Collazo, 2015 WL 4398559, at *6. At bottom, Defendants’ argument would reward concealment of fraud by creating an inescapable, circular argument: So long as defendants conceal the precise details of who among them accomplished each of the steps alleged in the complaint, a plaintiff may never adequately plead fraud. That exculpatory position is not the law.

Moreover, Defendants’ “lumping together” argument is “disingenuous” given their intertwined relationship. Id. Each of the four entities operates separately and collectively as a “Jackson Hewitt.” Before this motion, in which Defendants act as if each is a stranger to the other, Defendants made no bones about the unity of their operation; indeed, their advertisements projected the stability and safety of their corporate form, emphasizing the distinction between their locations and the “mom and pops” who compete for tax preparation business. (Id. ¶ 45 (emphasis added).) Since Defendants operate as an enterprise, Plaintiff identified the person with whom he interacted from the enterprise (Defendant Flores) and what was said and done. Accordingly, the FAC plainly satisfies the standard set forth by Defendants because it “alleges the name of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” MTC Arb. at 4 (quoting Cisneros v. Instant Capital Funding Grp., Inc., 263 F.R.D. 595, 607 (E.D. Cal. 2009)). Defendants cite no case holding that a plaintiff must allege in detail an enterprise’s inner workings in the same manner to satisfy Rule 9(b), especially where those inner workings were deliberately concealed from the plaintiff. Accordingly, the FAC satisfies Rule 9(b)’s requirements.

2. The FAC Adequately Alleges Agency

Defendants next argue that the FAC fails to adequately plead a principal-agent relationship between Defendants JH, Inc. and TSA on the one hand and Defendants JJF & AC, Inc. and Juan Flores on the other. Not so. Conceding that a franchisor-franchisee relationship is not mutually exclusive of a principal-agent relationship, Defendants recognize that allegations that a franchisor “retains complete or substantial control over the daily activities of the franchisee’s business” adequately plead agency. MTD at 7 (citation omitted, emphasis in original). The FAC meets that pleading standard because it alleges the relevant franchise agreements delegate complete and total authority to JH, Inc. and TSA to dictate every aspect of their franchisees’ businesses. (FAC ¶¶ 14-17.) Defendants’ reliance on Cislaw v. Southland Corp. (1992) 4 Cal. App. 4th 1284, misses the mark. In Cislaw, the parents of a teenager who suffered fatal respiratory failure after smoking cigarettes he purchased from a 7-11 convenience store sued both the franchisees and franchisor for wrongful death. The court of appeal affirmed the trial court’s entry of summary judgment for the franchisor on the ground that the franchisees were not its agents. The court reached that conclusion because the evidence showed that the franchise agreement delegated control to the franchisees, and not the franchisor, over “the manner and means of the store’s operation,” including “all employment, inventory and marketing decisions” and all “operational decisions.” Id. at 1294. Further, the court found that the franchisor was bound to a lengthy agreement with the franchisee rather than one in which the franchisor could change the deal at will. Id.

A far more apt case — right down to the industry — is People v. JTH Tax, Inc. (2013) 212 Cal. App. 4th 1219, 1242, in which the California Court of Appeal found that a nationwide tax preparation franchisor was liable under agency theories for the conduct of its franchisees. The franchise agreement in JTH Tax retained several aspects of control over franchisees’ businesses, far exceeding that “reasonably need[ed] to protect its trademark and goodwill.” Id. at 1245. That included, among other things: the franchisor’s requirement for the franchisees to offer certain products; the franchisor’s prohibition of products offered without its consent; the franchisor’s control over details of the franchisees’ business operations, such as store hours; the franchisor’s requirement that the franchisees use its “prescribed filing system and the setup for the tax return processing center”; and the franchisor’s control over franchisees’ pricing decisions. Id. at 1239. Also important was the franchisor’s ability to unilaterally alter its franchise agreement at any time — because “[e]ach franchise owner was required to comply with the policies and procedures of the operations manuals,” the franchisor’s “open-ended right to modify the operations manual without the consent of the franchisees” gave it “essentially complete control over franchisee operations.” Id. at 1245. Ultimately, and focusing on the advertisements at the center of the dispute in JTH Tax, the court of appeal held that the evidence sufficiently supported the trial court’s conclusion that the franchisees were agents of the franchisor, thereby imposing vicarious liability on the franchisor. Id. at 1247.

Comparison of the facts of this matter with Cislaw and JTH Tax demonstrates that the FAC adequately alleges a principal-agent relationship between JH, Inc. and TSA on the one hand and JJF & AC, Inc. and Flores on the other. Unlike the 7-11 franchisor in Cislaw, who had no operational, marketing, or business-related control, the FAC alleges that JH, Inc. and TSA had the right to exercise near total control over their franchisees, a right enforced by coercive penalties and termination. (FAC ¶¶ 14-17.) Jackson Hewitt franchises are not loosely confederated by a shared trademark; instead, like the tax preparation franchises in JTH Tax, they are branches subject to highly-specific, centrally-planned, and contractually-mandated control by franchisors JH, Inc. and TSA. (Id.) That control “exceed[s] that necessary [for the franchisor] to protect its legitimate interests” in its trademark and goodwill. Cislaw, 4 Cal. App. 4th at 1295.

The FAC’s allegations on this point are not conclusory or speculative, but instead come directly from Jackson Hewitt’s franchise agreement:

(FAC ¶ 15.) The franchise agreement affords JH, Inc. and TSA at least substantial, if not complete, control over the relevant aspects of its franchisees’ business. (Id. ¶ 16.) Indeed, the FAC details the specific aspects of JH, Inc. and TSA’s rights of control, including, among other things:

• Franchisees’ obligations to “operate [their] business in full compliance with all [of JH, Inc. and TSA’s] rules, specifications, standards, and procedures . . .”;

• JH, Inc. and TSA’s right to coerce compliance with fines;

• JH, Inc. and TSA’s right to dictate how franchisees furnish their offices;

• JH, Inc. and TSA’s complete control over its franchisees’ advertisements, including prohibition of unapproved advertisements and a right to use advertisements developed by franchisees “without payment to [the franchisee] of any kind”;

• JH, Inc. and TSA’s ability to set training standards;

• Franchisees’ obligation to use JH, Inc. and TSA’s tax preparation software and to obtain their consent before using any other software;

• JH, Inc. and TSA’s ability to dictate equipment purchased by franchisees;

• Franchisees’ obligation to offer products as mandated by JH, Inc. and TSA; and

• JH, Inc. and TSA’s right to set pricing for franchisees’ products and services.

(Id. ¶ 17.) Moreover, as in JTH Tax, JH, Inc. and TSA retain the right to change its operations manual at any time. (Id. ¶ 17(h).) Coupled with franchisees’ obligation to operate their businesses as dictated by JH, Inc. and TSA’s rules, (id. ¶ 15), the unilateral right to change the agreement gives JH, Inc. and TSA “essentially complete control over franchisee operations.” JTH Tax, 212 Cal. App. 4th at 1245. That includes the “instrumentality . . . alleged to have caused the harm” — Defendants’ mandated systems for tax preparation and filing. Compare MTD at 7 n.5 with FAC ¶¶ 14-17.

Defendants’ characterization of their franchise agreement as nothing more than boilerplate common to franchise agreements forgets that Defendants mount a pleading challenge; it is the FAC’s allegations, and not extraneous and unspecified franchise agreements, that are within their motion’s purview. It likewise overlooks Defendants’ own case law — compared with the franchise agreements in Cislaw, which Defendants mistakenly cite in support of their boilerplate argument, the agreements here afford nearly all operational control to JH, Inc and TSA. Instead, they are like the franchise agreements from JTH Tax, and, for the same reasons, demonstrate that JH, Inc. and TSA have forged a principal-agent relationship with their franchisees.

Finally, the FAC similarly alleges apparent agency, although reaching this question is unnecessary given the existence of actual agency. Defendants’ position that “everyone knows” that individual locations are franchisees rather than corporate-owned branches misses the point. Whatever the corporate form, JH, Inc. and TSA strove to “separate themselves from the mom and pops” by emphasizing the unity of their enterprise, franchisees and all. (FAC ¶¶ 37-45.) Apparent agency is pled, too.

B. Defendants’ Injury and Standing Arguments Are Misplaced

Defendants raise two arguments concerning injury. The first argument, which concerns the FAC’s manipulated refund claims, is essentially “no harm, no foul”: Because Plaintiff did not expect a refund, and the government paid the false refund amount, Plaintiff suffered no injury. The second claims that because the FAC seeks damages, Plaintiff lacks standing to seek certain equitable relief. Plainly, Defendants want it both ways: On the one hand, Plaintiff was not damaged; however, because he was, his other claims must fail. Defendants’ circular reasoning falls flat.

1. The FAC Adequately Alleges Injury

The FAC pleads two injuries related to the manipulated return claims: (1) the up-front fees paid for tax preparation (FAC ¶¶ 18, 25, 31); and (2) the usurpation of identity to create fraudulent refunds (id. ¶¶ 18-36). Either satisfies the injury-in-fact requirement. Further, category (1) satisfies the “lost money and property” or analogous requirements under the statutes.

Neither injury is speculative. Plaintiff alleges that he paid hundreds of dollars each year based upon false pretenses — that his tax return would be accurately submitted, instead of doctored as part of a scheme to collect money from the government — and that he would not have used Defendants’ services (and therefore incurred the fee) had he known. (Id. ¶¶ 18, 25, 31, 83, 99.) That direct, pecuniary loss has long been recognized as injury sufficient to confer standing. See, e.g., Kwikset Corp. v. Sup. Ct. (2011) 51 Cal. 4th 310, 330 (holding that consumer who alleges he or she would not have bought product but for misrepresentative label states sufficient “loss to money or property” under the UCL).

Likewise, Plaintiff also suffered injury when Defendants stole his identity. A plaintiff need not suffer out-of-pocket loss to adequately allege injury relating to identity theft; pleading a “credible threat of harm” that is “both real and immediate, not conjectural or hypothetical” will do. Krottner v. Starbucks Corp., 628 F.3d 1139, 1142-43 (9th Cir. 2010). The FAC easily satisfies that standard — in fact, it goes a step beyond Krottner and alleges that Defendants actually used Plaintiff’s identity to submit a fraudulent tax return to the IRS and collect a false refund in his name. (FAC ¶¶ 18-36.) Defendants’ claim that Plaintiff “did not suffer injury” thus fails.

Defendants also appear to take the position that the manipulated refund claims lack causation, primarily for want of reliance on the manipulated returns themselves. This argument ignores the FAC’s allegations. Of course, Plaintiff did not contemporaneously rely on the manipulated returns — he did not even know about them. But he did rely on Defendants’ representations that they would submit his taxes accurately, both in ponying up fees and trusting them with his personally-identifying information. That reliance was justifiable and detrimental.² The FAC’s causation allegations are sufficient.

Finally, the FAC’s injury allegations satisfy any claim specific requirements. RICO requires an injury to “business or property” resulting from the “racketeering activities.” Diaz v. Gates, 420 F.3d 897, 902 (9th Cir. 2005) (en banc). Either injury alleged in the FAC satisfies that standard. The UCL and False Advertising Law (“FAL”) only permit a plaintiff who has “lost money or property” “as a result of” the complained activities to pursue a claim.³ Plaintiff clearly satisfies that standard, too. See, e.g., Kwikset, 51 Cal. 4th at 330. Finally, Plaintiff’s allegations of misappropriation of his identity are precisely the kind of “statutory injury” Defendants say is required under the California Customer Records Act: By failing to tell their customers (including Plaintiff) of the unauthorized uses of their identities, Plaintiff and class members suffered injury. See Cal. Civ. Code § 1798.82(a). Defendants’ injury arguments fail.

2. Plaintiff Has Standing for Equitable Relief

Defendants next argue that Plaintiff lacks standing for equitable relief because he has an adequate legal remedy for each of the injuries he alleges. See MTD at 11. It is hard to reconcile this argument with Defendants’ position just pages before that Plaintiff has not been damaged. In any event, Defendants overread the cases on which they rely. Those cases do not preclude equitable relief simply because a complaint alleges damages; instead, equitable relief is unavailable when it is established that there is an adequate remedy at law.

As noted, the FAC contains three distinct injuries: (1) upfront fees; (2) misappropriation of identity vis-à-vis tax returns; and (3) additional fees incurred from unknowing Assisted Refund enrollment. Plaintiff seeks all available relief for these three injuries, including damages and equitable relief. To the extent any of the injuries alleged has an adequate remedy at law, then equitable relief would be duplicative. That said, dismissal of equitable relief at this stage of the case is premature — for one thing, Defendants themselves argue that Plaintiff is not entitled to any legal remedy, let alone an adequate one.

3. Plaintiff Has Standing for an Injunction

Defendants argue that Plaintiff lacks standing for “injunctive relief” because he does not allege that he will use Jackson Hewitt’s tax preparation services in the future. This argument misses the mark. First, though Defendants say that all injunctive relief is off the table, the only cases they cite concern prospective injunctive relief. There are other kinds of injunctive relief, including examples that approximate the relief Plaintiff would seek for himself and class members with respect to the manipulated return claims — for instance, resubmission of correct tax returns, explanation to the government about how the bogus returns and refunds were not caused by Plaintiff and class members, and payment of any associated penalties and interest. See, e.g., Des Roches v. Cal. Physicians’ Serv., 2017 WL 2591874, at *19-21 (N.D. Cal. Jun. 15, 2017) (certifying a Rule 23(b)(2) class with respect to an ERISA “reprocessing injunction”); Hart v. Colvin, 310 F.R.D. 427, 438-39 (N.D. Cal. 2015) (certifying a Rule 23(b)(2) class with respect to request injunctive relief that would, inter alia, require reevaluations of denied social security claims). The particulars of any such relief, of course, need not be hashed out now; suffice to say that Defendants’ efforts to categorize all injunctions as prospective fail. Cf. Des Roches, 2017 WL 2591874, at *22 (certifying reprocessing injunction class but denying prospective injunction class for insufficient demonstration of future harm).

That is not to say that Plaintiff lacks standing for prospective injunctive relief. The touchstone for that relief is “a real and immediate threat of repeated injury.” Bates v. United Parcel Serv., Inc., 511 F.3d 974, 985 (9th Cir. 2007) (en banc). Defendants cite cases involving various consumer products: over-the-counter supplements (Luman and In re 5-hour Energy), iced tea (Martin), and applesauce (Rahman). See MTD at 12 (citing cases). In each case, the court found that prospective injunctive relief was improper because the plaintiffs failed to allege that they would buy the products in the future. Defendants say that Plaintiff is in the same boat since the FAC fails to allege that he will return to Jackson Hewitt.

Defendants’ cases are distinguishable. Besides the obvious difference between applesauce and tax preparation, the cases Defendants cite require an act by the plaintiff — purchasing the product — as the necessary future antecedent to the harm an injunction would cure. Here, by contrast, the FAC alleges that Defendants misappropriated Plaintiff’s identity as part of a refund generation scheme. No future act by Plaintiff is necessary for Defendants to repeat the harm — they have his personal information, and, as the FAC alleges, have been fabricating the returns for years. Dismissing prospective relief out-of-hand at this stage of the case is unwarranted and premature. Defendants’ request that the Court do so should be denied.

C. The FAC Adequately States Claims under RICO

1. The FAC Sufficiently Alleges Mail and Wire Fraud

Defendants offer two reasons supporting their contention that the FAC fails to adequately allege mail and wire fraud: first, that the FAC does not adequately allege mail and wire fraud; and second, that the FAC does not plead reliance “by someone” on the fraud. Both fail.

Defendants’ first argument ignores the FAC’s allegations, imagining that the only facts pled to support mail and wire fraud are a “conclusory” allegation that such fraud occurred. Not so. Allegations like those made by the FAC support claims for mail or wire fraud. See, e.g., U.S. v. Stargell, 738 F.3d 1018, 1022 (9th Cir. 2013) (discussing similar allegations in context of criminal prosecution for wire fraud). Unlike the cases cited by Defendants, the FAC pleads dates, specific acts, and specific content of the misrepresentations underlying the claim, all of which support the inference that the mails or wires were used in facilitating the manipulated refunds:

• Dates. The FAC pleads each date Plaintiff visited for the relevant tax year. (FAC ¶¶ 18, 25, 30.) He also pleads the date that the cashier’s checks were issued without his knowledge. (Id. ¶¶ 23, 29.)

• Specific acts. The FAC alleges the manipulation of Plaintiff’s return, the submission of it to the IRS, and the IRS’s reliance thereon. Further, these acts allow for the inference that the mail or wires were used. Allwaste, Inc. v. Hecht, 65 F.3d 1523, 1530 (9th Cir. 1995). For instance, Plaintiff received a letter from Jackson Hewitt confirming that his return had been “filed electronically with the IRS.” (FAC ¶ 20.)

• Specific content. The FAC details how the returns were manipulated, including alteration of deductions to lower tax liability. (Id. ¶¶ 20-24, 27-30, 33.)

Defendants’ second argument also misses the mark. First party reliance is not necessary for a RICO claim — instead, the complaint must allege that someone relied on the mail or wire fraud to the plaintiff’s detriment. Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 658 (2008). In Bridge, the Supreme Court held that the plaintiff’s allegations that the defendants submitted fraudulent bids to a county tax auction stated a claim for RICO even though the county, and not the plaintiff, relied on the mail fraud. Id. Likewise, the FAC clearly pleads that “someone” relied on the relevant mail and wire fraud: the government, which paid the tax refunds generated by Defendants’ manipulation of Plaintiff’s returns. The FAC could not be clearer in this regard:

(FAC ¶ 28 (emphasis added); see also id. ¶ 22.) Again, Defendants simply ignore these allegations, but they exist and more than satisfy any reliance “element” vis-à-vis RICO, including causation. See, e.g., Bridge, 553 U.S. at 658 (noting that while reliance is not an “element” of a RICO claim, it may often be necessary to establish causation).

2. The FAC Adequately Alleges an Enterprise

Defendants argue that the FAC fails to plead an “enterprise.” They offer three iterations of this argument: (1) a repetition of their attack on the “who” element of the FAC’s pleading; (2) lack of common purpose; and (3) insufficiently pleading of an “ongoing organization.” Defendants are mistaken on each front.

RICO requires allegations of an “enterprise” separate from a “person.” Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 161 (2001) (quoting 18 U.S.C. § 1962(c)). That requirement, referred to as “distinctness,” requires only a limited degree of “separateness” to effectively plead an enterprise. Id. at 163. The FAC meets this burden by identifying the members of the enterprise, including those which Defendants repeatedly argue are separate entities. (FAC ¶¶ 11-12, 14-18, 25, 31, 37-45.)

The FAC also meets the “common purpose” standard. At the outset, the existence of a “common purpose” is “fact-determinative” and cannot be resolved on a motion to dismiss. Bias v. Wells Fargo & Co., 942 F. Supp. 2d 915, 942 (N.D. Cal. 2013). Nevertheless, the FAC adequately alleges “common purpose” at this stage by explaining how each entity operates within the tax return manipulation scheme. See Section III.A.1. That goes far beyond “ordinary business practices.”

Defendants’ reliance on In re Jamster Marketing Litig., No. 2009 WL 1456632, at *5 (S.D. Cal. May 22, 2009), proves Plaintiff’s point. The Jamster court held that allegations that entities collected bills fraudulently merely restated their “ordinary business practices” with “adjectives.” Id. By contrast, the FAC does not merely allege that Defendants’ preparation of legitimate tax returns — their “ordinary business” — was tainted with fraud. (That contrast is apparent within the FAC itself, which alleges RICO only for the manipulated return claims and not the undisclosed fee claims.) It alleges an entirely fraudulent enterprise focused on misappropriating identities and using them to create fake returns.

For the same reason, the FAC adequately alleges an “ongoing organization.” Defendants criticize the FAC by claiming that it must answer “common sense” questions such as the communication of “orders” and the intricacies of its hierarchical structure. Yet Odom v. Microsoft Corp., 486 F.3d 541, 552 (9th Cir. 2007), on which Defendants rely for these “common sense” questions, asks nothing of the sort. Instead, the court there found an “ongoing organization” due to interrelated computer networks used to commit the fraud and agreed upon marketing plans, and a “continuing unit” based upon “an almost two-year time span” of alleged conduct. Id. Those allegations are similar to the FAC, which pleads that JH, Inc. and TSA controlled its franchisees’ operations, including their computer networks used to submit the fraudulent tax returns, and engaged in a course of marketing designed to bolster the enterprise’s credibility with consumers. (FAC ¶¶ 14-17, 37-45.) It likewise alleges that this conduct occurred over at least three years. Thus, the FAC adequately alleges an ongoing organization.

3. The FAC Adequately Alleges Control

Defendants’ arguments regarding “operation” and “management” miss the mark. Defendants misunderstand the standards set forth in Reves v. Ernst & Young, 507 U.S. 170 (1993). The “direction” of affairs required does not, as Defendants’ brief implies, limit RICO’s application to those with “primary responsibility for the enterprise’s affairs.” Id. at 179. Instead, it applies to participants of all levels, so long as they play “some part in directing the enterprise’s affairs.” Id. (emphasis in original). And the word “operation” should be construed broadly; even “lower rung participants” may be said to “operate” an entity. Id. at 184.

With that legal backdrop in mind, the FAC satisfies the relevant standards. As discussed, the FAC alleges that JH, Inc. and TSA controlled their franchisees’ operations, including their computer networks used to submit the fraudulent tax returns, and engaged in a course of marketing designed to bolster the enterprise’s credibility with consumers. (FAC ¶¶ 14-17, 37-45.) Kennedy v. Full Tilt Poker, No. CV 09-07964 MMM, 2010 WL 1710006, at *8 (C.D. Cal. Apr. 26, 2010), does not help Defendants, because the FAC contains “factual allegations that suggest direct involvement” by JH, Inc. and TSA in the enterprise. Neither does Defendants’ repeated insistence that their control is “directly related to their own business activities.” The FAC alleges that it is not, but is instead part of the return manipulation enterprise. Determination of that factual question is not appropriate at this stage. Bias, 942 F. Supp. 2d at 942.

4. The FAC Adequately Alleges a Pattern

Defendants’ only argument with respect to the FAC’s supposedly deficient allegations of a “pattern” is that it alleges only two instances of the relevant conduct. See MTD at 18. Defendants oversimplify the analysis; the question is not merely the number of acts, but whether they evidence sufficient “continuity.” H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 242 (1989). But even accepting Defendants’ legal conclusion as correct solely to respond to their argument, Defendants’ position fails in the face of the FAC’s allegations. The FAC does not allege just two instances. It alleges three with respect to Plaintiff, (see FAC ¶¶ 21, 27, 34), and countless more with respect to similarly-situated individuals. Thus, even if limited to Plaintiff, Defendants’ argument fails on its own terms. Moreover, the acts tend to show a continuous pattern consistent with RICO’s requirements. Either way, Defendants’ argument falls flat.

5. The RICO Conspiracy Claim Should Not Be Dismissed

Defendants are correct that the fate of the FAC’s RICO conspiracy claim depends upon the FAC’s RICO claim. Defendants are wrong, however, that the RICO claim should be dismissed. It follows that the conspiracy claim should not be, either.

D. Defendants’ Other Claim-Based Challenges Are Meritless

1. The FAC Adequately States Fraud, UCL and CLRA Claims

Defendants mistakenly argue that the FAC fails to allege fraudulent conduct and reliance. Beyond repeating their “lumping together” arguments, the best Defendants can muster is that the FAC fails to specify the fraud on which Plaintiff relied. That ignores the FAC’s plain allegations concerning Defendants’ misrepresentations (that they would prepare and submit a legitimate return) and omission (that they were not doing that). (See, e.g., FAC ¶¶ 78-81.) The FAC further alleges that these representations were false when made — the tax return submitted was not the one Plaintiff authorized, and he never agreed to duplicative fees — and were plainly material. (Id. ¶ 79)

Defendants’ reliance arguments fare no better. The FAC plainly pleads that Plaintiff relied on the fraud and that, had he known the truth, he would not have placed his trust in Jackson Hewitt. For instance, the FAC alleges:

(FAC ¶¶ 82-83.) Defendants’ contrary argument should be rejected.

2. The FAC Properly Alleges FAL and Negligence Claims

Defendants claim-specific arguments for Plaintiff’s FAL and negligence claims simply repeat their “lumping together” argument discussed in Section III.A. For the same reasons as it above, it fails here, too.

3. The FAC Properly Alleges a CCRA Claim

Defendants also mistakenly argue that the CCRA claim is not properly pled. The FAC, however, pleads that an “unauthorized person” acquired Plaintiff’s data — the person within Jackson Hewitt who, without Plaintiff’s authorization, used his data to create and submit a fraudulent tax return. It likewise alleges that Defendants knew about the breach precisely because they were involved in the scheme. Finally, Plaintiff pleads that he was injured from the failure to inform him of the breach — after all, after the first misuse, he returned to Jackson Hewitt only to have his identity stolen again. (FAC ¶ 121.) Courts have held that similar allegations of actual damage resulting from the use of stolen identities support a CCRA claim. See, e.g., In re Experian Data Breach Litig., 15-cv-1592, 2016 WL 7973595, at *5, *9 (C.D. Cal. Dec. 29, 2016) (finding that plaintiffs’ complaint adequately alleged that “the delayed notification injured” them).

E. Plaintiff’s Class Allegations Should Not Be Stricken

Defendants raise three arguments concerning Plaintiff’s class allegations: (1) that Plaintiff lacks standing to pursue claims under other states’ laws, specifically their “consumer protection statutes”; (2) that this Court lacks jurisdiction over Defendants; and (3) that California statutes apply only to California. The first two arguments are wrong, and the third is nonresponsive.⁴ All fail.

1. Plaintiff Has Standing for Each of the FAC’s Claims

Defendants’ first argument is premature and premised upon a misreading of the FAC. Plaintiff asserts no claims under other state’s “consumer protection statutes.” Instead, the only consumer protection statutes he alleges are under California law (e.g., the UCL, FAL, etc.), and those counts and their classes are expressly limited to California residents. (FAC Counts 5-8, 11-13 (limited to California classes).) Though Defendants invent an extraterritoriality argument based upon these statutes, they do not quibble with Plaintiff’s standing to assert these claims. That leaves the FAC’s other claims — RICO, negligence, and fraud — as within the purview of Defendants’ argument. RICO, as a federal claim, may be swiftly removed from the list, as it is not a “state law” claim. Thus, boiled to its essentials, Defendants’ argument is that Plaintiff lacks standing for the FAC’s fraud and negligence claims insofar as they apply to non-Californians.

That argument fails. The Article III analysis at this stage asks whether Plaintiff has standing for the claims he asserts. Bates v. United Parcel Service, Inc., 511 F.3d 974, 985 (9th Cir. 2007) (en banc) (“In a class action, standing is satisfied if at least one named plaintiff meets the requirements.”). He does, and that is all that is required at this stage. Id. Unable to quarrel with that conclusion, Defendants argue that Plaintiff must go one step further and show that he has standing for other people’s claims, too. That is not the law. Plaintiff’s standing is premised upon his injuries, not anyone else’s. At best, Defendants’ argument conflates standing with choice-of-law vis-à-vis nationwide class actions. That question is another ball of wax, consideration of which at this stage is premature. See, e.g., Forcellati v. Hyland’s, Inc., 876 F. Supp. 2d 1155, 1159 (C.D. Cal. 2012). Of course, had Plaintiff asserted claims under consumer protection laws of other states, then the Article III analysis would be appropriate as to his standing under those laws whether this was a class action or not. That is the point made by the cases Defendants cite. But nothing in those cases stands for the proposition that, at this juncture, a court must resolve choice-of-law issues concerning nationwide classes when the proposed class representative (Plaintiff) unquestionably alleges Article III standing for each of the asserted claims.

2. The Court Has Sufficient Jurisdiction

Defendants’ argument that this Court lacks personal jurisdiction misreads the FAC and confuses the relevant law. Bristol-Myers Squibb Co. v. Sup. Ct., 137 S. Ct. 1773 (2017), does not, as Defendants contend, require Plaintiff to demonstrate specific jurisdiction for every potential class member. As an initial matter, Bristol-Myers specifically limited its holding to state court’s exercise of jurisdiction, noting that its holding did not apply to federal court jurisdictional questions. Id. at 1783-84 (“[S]ince our decision concerns the due process limits on the exercise of specific jurisdiction by a State, we leave open the question whether the Fifth Amendment imposes the same restrictions on the exercise of personal jurisdiction by a federal court.”). In any event, there are several important distinctions between this matter and Bristol-Myers. The latter concerned hundreds of individual, non-California plaintiffs who sued a non-California drug manufacturer in California state court. The non-California manufacturer was not alleged to have extensive operations in California, and none of the non-California plaintiffs had any connection to the state, either. Bristol-Myers is nothing like this case, which alleges a common course of conduct from a common nucleus of facts.

Defendants’ other authority — two out-of-circuit cases from the Northern District of Illinois — does not help them, either. The court in Gullen v. Facebook, Inc., No. 15 C 7681, 2016 WL 245910, at *2 (N.D. Ill. Jan. 2016), found no specific jurisdiction over Facebook related to a biometric data claim made by a non-Facebook user simply because Facebook’s website could be accessed in Illinois. The lack of specific jurisdiction in that matter is nothing like this case, in which Defendants repeatedly and systematically targeted California with their activities.

And though Demedicis v. CVS Health Corp., No. 16-cv-5973, 2017 WL 569157 (N.D. Ill. Feb. 13, 2017), produces a soundbite for Defendants, the facts of that case again have no application here. There, the court held that an Illinois plaintiff could not maintain claims against a Rhode Island corporation for violations of other states’ “consumer protection statutes.” While the court styled the reasoning as a “lack of jurisdiction,” that holding cannot be read in a vacuum. Instead, the real problem with the plaintiff’s complaint was not jurisdiction — it was standing, because the plaintiff conceded that he suffered no injury cognizable under the other states’ consumer protection statutes. Id. at *4. By contrast, Plaintiff has standing for each of the claims he alleges. Demecidis is not applicable here.

F. Plaintiff’s Punitive Damages Prayer Should Not Be Stricken

Finally, Defendants argue that Plaintiff’s claim for punitive damages should be stricken. First, Defendants repeat their argument that the FAC fails to comply with Rule 9(b)’s requirements; it fails for the same reasons as repeatedly stated herein.

Defendants’ other argument — that the FAC fails to name a competent corporate representative — is premature. Plaintiff alleges that Defendants’ agent — Defendant Flores — directly participated in the “oppression, fraud and malice” pled in the FAC, a far cry from the plaintiff in Rhynes v. Stryker Corp., No. 10–5619 SC, 2011 WL 2149095, at *6 (N.D. Cal. May 31, 2011), who did not “allege[ ] a single fact tending to show” the availability of punitive damages. Defendants dispute that Defendant Flores is their agent, managing or otherwise. Nevertheless, whether he is a “managing agent” pursuant to California Civil Code section 3294(b) is a question of fact. See Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp. (2013) 221 Cal. App. 4th 867, 885-86. Questions of fact cannot be resolved via a motion to dismiss. See, e.g., Snellink v. Gulf Resources, Inc., 870 F. Supp. 2d 930, 937-38 (C.D. Cal. 2012) (Wright, J.). Coupled with Plaintiff’s sufficient allegations of a principal-agent relationship, see supra Section III.A.2, Defendants’ request to strike punitive damages is premature.

G. Alternatively, Plaintiff Should Be Provided Leave to Amend

It is axiomatic that “a court should liberally allow a party to amend its pleading.” Sonoma Cty. Ass’n of Ret. Employees v. Sonoma Cty., 708 F.3d 1109, 1117 (9th Cir. 2013). To the extent the Court determines that the FAC fails to adequately allege any necessary component of the claims it asserts, any such defects may be cured by amendment. Defendants identify no prejudice from such relief. Thus, Plaintiff alternatively requests leave to amend.

V. CONCLUSION

For the foregoing reasons, Plaintiff respectfully requests that Defendants’ motion to dismiss be denied in its entirety.

Dated: August 28, 2017

STALWART LAW GROUP

By: Ian P. Samson
Dylan Ruga, Esq.

Ji-In Lee Houck, Esq.
Paul A. Traina, Esq.
Ian P. Samson, Esq.

Attorneys for Plaintiff and the Proposed Class