Distance Learning Co. v. Maynard

• Court: U.S. District Court — Northern District of California
• Writing for the Court: KANDIS A. WESTMORE United States Magistrate Judge
• Decision Date: 04 June 2020
• Docket Number: Case No. 19-cv-03801-KAW
• Citation: Distance Learning Co. v. Maynard, Case No. 19-cv-03801-KAW (N.D. Cal. Jun 04, 2020)
• Parties: THE DISTANCE LEARNING COMPANY, Plaintiff, v. DERICK GENE MAYNARD, et al., Defendants.

THE DISTANCE LEARNING COMPANY, Plaintiff, v. DERICK GENE MAYNARD, et al., Defendants.

Case No. 19-cv-03801-KAW

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

June 4, 2020

ORDER GRANTING MOTION TO DISMISS

Re: Dkt. No. 43

Plaintiff The Distance Learning Company filed this putative class action against Defendants Bethany Susan Maynard and Derick Gene Maynard, asserting that Defendants are seeking "to suppress competition and maintain control in the field of online traffic schools." (First Amended Compl. ("FAC") ¶ 2, Dkt. No. 39.)

Pending before the Court is Defendants' motion to dismiss. (Defs.' Mot. to Dismiss, Dkt. No. 43.) Having considered the parties' filings and the relevant legal authority, the Court GRANTS Defendants' motion.

I. BACKGROUND

Plaintiff and the putative class operate online driver's education and traffic schools in California. (FAC ¶ 9, 14.) The California Department of Motor Vehicles ("DMV") permits any company to set up a new traffic school by paying a $450 application fee if they have a course curriculum, place of business, operator, and bond. (FAC ¶ 32.) California law requires that the DMV maintain a list of driving schools, both on-line and in hard copy for distribution in traffic courts. (FAC ¶ 28.) Plaintiff alleges that schools that appear on this list do not need to spend money on advertising or marketing because they must be added to the list. (FAC ¶ 29.) The list is not alphabetized, but auto-rotates every time a user accesses the DMV's website, displaying a random list of several dozen traffic schools. (FAC ¶¶ 47-48.)

Defendants are a husband and wife who also own and operate online traffic schools. (FAC ¶¶ 30, 40.) Plaintiff asserts that Defendants have abused a "loophole" in the current DMV statute and regulations. (FAC ¶ 33.) Specifically, Plaintiff alleges that Defendants have registered hundreds of traffic schools that operate out of the same office space, with the intent of flooding the DMV's list with numerous schools operated by the same owner and operator. (FAC ¶ 35.) "Defendants' schools, in many cases, have different names, but utilize the exact same website, place of business, curriculum, and instructor." (FAC ¶ 35.) Defendants jointly and severally run the traffic schools, which are located at the same physical access and "offer identical services for identical prices." (FAC ¶¶ 39, 41.) Altogether, Plaintiff alleges that Defendants "jointly operate 1,500 of the 2,790 of the DMV's licensed traffic schools, or 53.8% of the licensed traffic schools," including setting up 501 schools on a single day in January 2019. (FAC ¶¶ 37-38.)

Plaintiff alleges that Defendants have admitted in published news articles that the sole purpose of opening so many traffic schools "was to flush out businesses who were charging lower prices for the same services as Defendants." (FAC ¶ 44.) By creating so many traffic schools, "Defendant[s] can attempt to monopolize the DMV's website, and to create high barriers to entry for new traffic schools, in order to discourage competition." (FAC ¶ 39.) In short, by creating so many "alter-ego proxy schools," Defendants can "increase their likelihood of appearing at or near the top of the randomized list, thereby bettering their chance of being selected by a consumer, not through any legitimate competitive advantage, but through sheer volume and luck of the randomized draw." (FAC ¶ 50.) This is because consumers are unlikely "to scroll through and research all 2,700 plus traffic schools to find a suitable and competitive option, especially given the relatively low price point of these traffic school programs[. Thus], schools listed at or near the top of these randomized lists are the most likely to be selected by a consumer." (FAC ¶ 49.)

Plaintiff further alleges that Defendants' actions encourage price collusion. (FAC ¶ 72.) Plaintiff asserts that the average price of an online traffic school is $17.00/person, but that Defendants agreed to have their schools charge $7.00 higher than the industry average, an increase of 41% from the industry average. (FAC ¶¶ 70, 72.) Plaintiff believes consumers are unlikely tonotice the change or care, permitting Defendants to "gouge consumers and prevent law-abiding legitimate competitors, such as Plaintiff, from being exposed to consumers . . . ." (FAC ¶ 76.)

On June 28, 2019, Plaintiff filed the instant case. (Compl., Dkt. No. 1.) On January 6, 2020, Plaintiff filed the operative complaint, alleging claims for: (1) violation of the Sherman Act § 1 (unlawful collusion), (2) violation of the Sherman Act § 2 (unlawful monopolization), (3) violation of the Sherman Act § 2 (attempted monopolization), (4) violation of the Unfair Competition Law ("UCL"), and (5) violation of the Cartwright Act. (FAC ¶¶ 81-136.)

On February 3, 2020, Defendants filed the instant motion to dismiss. On March 4, 2020, Plaintiff filed its opposition. (Pl.'s Opp'n, Dkt. No. 48.) On March 18, 2020, Defendants filed their reply. (Defs.' Reply, Dkt. No. 49.)

On May 5, 2020, the Court vacated the hearing, and requested supplemental briefing. (Dkt. No. 54.) On May 11, 2020, Plaintiff filed its supplemental brief. (Pl.'s Supp. Br., Dkt. No. 55.) On May 15, 2020, Defendants filed their supplemental brief. (Defs.' Supp. Br., Dkt. No. 56.)¹

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a party may file a motion to dismiss based on the failure to state a claim upon which relief may be granted. A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims asserted in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001).

In considering such a motion, a court must "accept as true all of the factual allegations contained in the complaint," Erickson v. Pardus, 551 U.S. 89, 94 (2007) (per curiam) (citation omitted), and may dismiss the case or a claim "only where there is no cognizable legal theory" or there is an absence of "sufficient factual matter to state a facially plausible claim to relief." Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 677-78 (2009); Navarro, 250 F.3d at 732) (internal quotationmarks omitted).

A claim is plausible on its face when a plaintiff "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678 (citation omitted). In other words, the facts alleged must demonstrate more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

"Threadbare recitals of the elements of a cause of action" and "conclusory statements" are inadequate. Iqbal, 556 U.S. at 678; see also Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996) ("[C]onclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim."). "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully . . . . When a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557) (internal citations omitted).

If the court grants a motion to dismiss, it should grant leave to amend even if no request to amend is made "unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (citations omitted).

III. DISCUSSION

A. Sherman Act § 1 (Antitrust Conspiracy)

"Section 1 of the Sherman Act prohibits '[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.'" Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1046 (9th Cir. 2008) (quoting 15 U.S.C. § 1). Defendants contend this claim must be dismissed because: (1) Plaintiffs fail to allege sufficient facts demonstrating an agreement or conspiracy between Defendants, and (2) Defendants are legally incapable of conspiring amongst themselves because there is a unity of interest. (Defs.' Mot. to Dismiss at 7, 8.)

i. Sufficiency of the Pleading

To plead a § 1 violation, a plaintiff must "plead not just ultimate facts (such as conspiracy),but evidentiary facts which, if true, will prove: (1) a contract, combination or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intended to harm or restrain trade or commerce among the several States, or with foreign nations; (3) which actually injures competition." Kendall, 518 F.3d at 1047. Conclusory allegations that the defendants entered into a contract, combination or conspiracy are insufficient; instead, a plaintiff must plead "enough factual allegations to suggest an agreement was made." Jones v. Micron Tech., Inc., 400 F. Supp. 3d 897, 914-15 (N.D. Cal. 2019); see also Kendall, 518 F.3d at 1047.

"Factual allegations concerning an agreement to restrain trade can take two forms: direct or circumstantial. Direct evidence factual allegations are explicit and require no inferences to establish the existence of a conspiracy." Jones, 400 F. Supp. 3d at 915 (internal quotation omitted). The Supreme Court has "suggested that to allege an agreement between antitrust co-conspirators, the complaint must allege facts such as a 'specific time, place, or person involved in the alleged conspiracies' . . . ." Kendall, 518 F.3d at 1047 (quoting Twombly, 550 U.S. at 565 n.10). In contrast, a plaintiff relying on circumstantial evidence "must present allegations of parallel conduct of the defendants as well as so-called 'plus factors.' Parallel conduct occurs when competitors act similarly or follow the same...