In re Outlaw Labs., LP Litig.

• Decision Date: 27 November 2018
• Docket Number: Case No.: 3:18-cv-840-GPC-BGS (consolidated with 3:18-CV-1882-GPC-BGS)
• Citation: 352 F.Supp.3d 992
• Parties: IN RE OUTLAW LABORATORIES, LP LITIGATION
• Court: U.S. District Court — Southern District of California

352 F.Supp.3d 992

IN RE OUTLAW LABORATORIES, LP LITIGATION

Case No.: 3:18-cv-840-GPC-BGS (consolidated with 3:18-CV-1882-GPC-BGS)

United States District Court, S.D. California.

Signed November 27, 2018

ORDER

(1) GRANTING IN PART AND DENYING IN PART OUTLAW'S MOTION TO DISMISS

(2) DENYING OUTLAW'S MOTION TO STRIKE

Hon. Gonzalo P. Curiel, United States District Judge

Before the Court are two motions. The first is a motion by Plaintiff/Counterdefendant Outlaw Laboratory, LP ("Outlaw") to dismiss the counterclaims of Defendant/Counterclaimant Roma Mikha, Inc., and Third-Party Plaintiffs NMRM, Inc. and Skyline Market, Inc. (collectively, "Counterclaimants") (ECF No. 15.)¹ The motion is fully briefed. (See ECF Nos. 28, 33.) The second is Outlaw's motion to strike Counterclaimants' third cause of action for rescission pursuant to California Code of Civil Procedure § 425.16. This motion has similarly received the benefit of full adversarial briefing. (See ECF Nos. 29, 32.)

Pursuant to Civil Local Rule 7.1(d)(1), the Court finds the matter suitable for adjudication without oral argument. For the reasons explained below, Outlaw's motion to dismiss will be granted in part and denied in part ; its motion to strike will be denied in full.

I. Factual Background and Procedural History

A. Outlaw Laboratories LP

According to its pleadings, Outlaw is a Texas-based manufacturer of male-enhancement products called "TriSteel" and "TriSteel 8 hour." Outlaw's products are made in the United States and distributed for sale in all 50 states, and are claimed to be in compliance with the Dietary Supplement Health and Education Act. According to Counterclaimants, Outlaw was formed in Texas in September 2016.

B. Outlaw's demand letters

Sometime starting in 2017 and continuing through 2018, Outlaw, through its attorneys at Tauler Smith LLP, began mailing demand letters to proprietors of gas stations, liquor stores, and corner stores in California, and beyond. Those recipients allegedly sold male-enhancement pills designated by the word "Rhino," which Outlaw alleges contain undisclosed sildenafil, a prescription pharmaceutical regulated by the FDA.

Outlaw's demand letters warned recipients that they were "selling illegal sexual enhancement drugs," which "subject your company to legal action for racketeering ... under RICO (Racketeer Influenced Corrupt Organizations) and the Federal Lanham Act" and obligate the recipients to pay to Outlaw "profits from the sale of Illicit Products dating back four years ... Attorney's fees ... Punitive damages ... Triple damages...." The letter estimates the recipients' liabilities at "over $100,000" but states that Outlaw is "willing to settle all claims in exchange for a one-time settlement agreement [$9,765, in the sample demand letter enclosed at ECF No. 4, Ex.

A] and your agreement to stop selling the Illicit Products."

The letters conclude by warning that "[i]f this matter is not fully resolved before [a date typically within 30 days]," that a lawsuit will be filed against the recipient. Attached to the letters are three exhibits: (1) "photographs taken at your place of business capturing your sale of the Illicit Products," (2) "notices from the Food and Drug Administration regarding the illegality of the Illicit Products," and (3) a draft complaint with the recipient's name filled in as defendant.

Some recipients, like Third-Party Plaintiff Skyline Market, Inc., acquiesced to the demand letter and settled with Outlaw. Others, like defendants Roma Mikha, Inc., and NMRM, Inc., resisted.

C. Outlaw files suit

True to its word, on July 24, 2018, Outlaw filed a complaint in San Diego Superior Court against a high volume of defendants, all of whom it had previously mailed a demand letter. (ECF No. 1-2, at 13 (Complaint).) Roma Mikha, Inc. was named in the complaint; NMRM, Inc., was not. Outlaw's complaint alleges that the defendants are engaged in a scheme to distribute and sell unlawful Rhino products.² It further claims that laboratory testing and public announcements by the Federal Drug Administration ("FDA"), have revealed that Rhino products contain hidden drug ingredients like sildenafil

(a prescription drug found in Viagra ), desmethyl carbodenafil (an analogue of sildenafil ), dapoxetine (an anti-depressant drug), and tadalafil (a prescription drug found in Cialis ).

Outlaw claims that, by selling the Rhino products at their stores, defendants disseminate the false statements on Rhino products stating that they are "all natural," contain "no harmful synthetic chemicals," "no prescription necessary," and have limited side effects. (Id. at 57.) Outlaw further asserts that the defendants' scheme has diverted sales away from its legitimate "TriSteel" male enhancement products, in violation of California Business and Profession Code § 17200 (prohibiting unlawful, unfair, or fraudulent business acts), § 17500 (prohibiting false and misleading advertising), and § 43(a)(1)(B) of the Lanham Act (prohibiting false advertising).

D. Counterclaimants file their counterclaim

On August 12, 2018, Roma Mikha, Inc. removed the action to federal court. Thereafter, on August 24, 2018, Roma Mikha, Inc., NMRM, Inc., and Skyline Market, Inc. filed a Third Party Complaint (the "Cross-Complaint") against Outlaw. (ECF No. 4.) Their Cross-Complaint allege a class action against Outlaw for (1) civil RICO violation, 18 U.S.C. § 1962(c), (2) RICO conspiracy, 18 U.S.C. § 1962(d), and (3) rescission of any settlement agreements like the one entered into by Skyline Market.

With respect to the RICO counts, Counterclaimants allege a RICO enterprise between Outlaw, Tauler Smith LLP, and other as-yet-unnamed individuals, aimed at perfecting a legal "shakedown" of small-time San Diego convenience stores. (ECF No. 4, at 11.) They claim that the "TriSteel" products "were created as artifices" to "found the false advertising claims," and that Outlaw itself is no more than a front for the unlawful enterprise. (Id. at 14.)

Counterclaimants take especial umbrage with the demand letters sent by Outlaw, claiming that they were aimed at a "vulnerable community of victims," comprised of mostly "small, immigrant-run businesses." (Id. at 7, 11.) They urge that Outlaw's demand letters are not only manipulative, but also fraudulent, because Counterclaimants believe that the Rhino "products are not illegal to sell." (Id. at 12 (internal quotation marks omitted).) Sending those fraudulent letters through the U.S. Mails, therefore, constitutes mail fraud under 18 U.S.C. § 1341 ; committing mail fraud multiple times forms a pattern of racketeering under RICO. Counterclaimants further liken the conduct of Tauler Smith LLP to that of the Prenda Law Inc., and the Trevor Law Group, two law firms that have become the posterchildren for abusive litigation. See Ingenuity 13 LLC v. John Doe , No. 2:12-CV-8333-ODW, 2013 WL 1898633 (C.D. Cal. May 6, 2013) (describing, and then sanctioning, the coercive schemes of the Prenda Law Inc.); People ex rel. Lockyer v. Brar , 115 Cal. App. 4th 1315, 9 Cal.Rptr.3d 844 (2004) (comparing the appellant's unsavory conduct to the actions of the Trevor Law Group).

Counterclaimants' second cause of action for RICO conspiracy is based on Outlaw's actions in conspiring "with the other as-yet-unnamed members of the Outlaw Enterprise." (ECF No 4, at 20.) Counterclaimants' final request, for rescission of Skyline Market's "Confidential Settlement Agreement and Release" with Outlaw, and restitution of benefits conferred as a result thereof, is premised on their claim that Skyline Market had signed the agreement under duress, and that the contract was voidable as a result of Outlaw's scheme to defraud. (Id. at 22.) Counterclaimants further contend that Skyline Market's is not the only settlement agreement that must be rescinded; rather, all settlements entered into as a result of Outlaw's fraudulent demand letters must also be invalidated.

E. Outlaw files a motion to dismiss and a motion to strike

In response, Outlaw moved to dismiss all claims asserted in the Cross-Complaint. It also has moved to strike the third cause of action for rescission pursuant to California's anti-SLAPP law. The Court addresses these motions in turn.

II. Motion to Dismiss

A. Rule 12(b)(6) Standard

A Rule 12(b)(6) motion attacks the complaint as not containing sufficient factual allegations to state a claim for relief. "To survive a motion to dismiss [under Rule 12(b)(6) ], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). In this respect, "[d]ismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp Med. Ctr. , 521 F.3d 1097, 1104 (9th Cir. 2008).

While "detailed factual allegations" are unnecessary, the complaint must allege more than "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. "In sum, for a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Serv. , 572 F.3d 962, 969 (9th Cir. 2009).

"Generally, a court may not consider material beyond the complaint in ruling on a Fed. R. Civ. P. 12(b)(6) motion." Intri-Plex Techs., Inc. v. Crest Grp., Inc. , 499 F.3d 1048, 1052 (9th Cir. 2007). However, "[a] court may take judicial notice of ‘matters of public record’ without converting a motion to dismiss into a motion for summary judgment," as long as the facts noticed are not "subject to reasonable dispute." Lee v. City of Los Angeles , 250 F.3d...