Schulz v. Neovi Data Corp.

• Decision Date: 15 June 2007
• Docket Number: No. G033879.,G033879.
• Citation: 60 Cal.Rptr.3d 810,152 Cal.App.4th 86
• Court: California Court of Appeals Court of Appeals
• Parties: Timothy W. SCHULZ, Jr., Plaintiff and Appellant, v. NEOVI DATA CORPORATION et al., Defendants and Respondents.

60 Cal.Rptr.3d 810

152 Cal.App.4th 86

Timothy W. SCHULZ, Jr., Plaintiff and Appellant, v. NEOVI DATA CORPORATION et al., Defendants and Respondents.

No. G033879.

Court of Appeal, Fourth District, Division 3.

June 15, 2007.

Lakeshore Law Center and Jeffrey Wilens, Yorba Linda, for Plaintiff and Appellant.

Law Offices of Eric D. Morton and Eric D. Morton, Oceanside, for Defendant and Respondent Neovi Data Corporation.

Kelly, Herlihy & Klein, Thomas M. Herlihy, Michael G. Glanzberg, San Francisco; and Mukesh Advani, San Francisco, for Defendant and Respondent Ginix, Inc.

Gibson, Dunn & Crutcher, Gail E. Lees, Los Angeles, Elizabeth A. Brem and Christopher Chorba, Los Angeles, for Defendant and Respondent PaySystems, Inc.

Cooley Godward, Michael G. Rhodes, San Diego, Lori R.E. Ploeger, San Francisco, and James R. Patterson for Defendant and Respondent PayPal, Inc.

OPINION

RYLAARSDAM, ACTING P.J.

Plaintiff Timothy W. Schulz, Jr., appeals from a judgment entered after the demurrer to his seconded amended complaint was sustained without leave to amend. He contends he sufficiently pleaded a cause of action for unfair competition under Business and Professions Code section 17200 et seq., specifically alleging that defendants Neovi Data Corporation, Ginix, Inc., Pay-Systems, Inc., and PayPal, Inc. aided and abetted the operation of an illegal lottery. We agree as to Ginix and PaySystems and reverse as to those defendants on that basis. We affirm the judgment in favor of PayPal and Neovi because the causes of action against them are not pleaded sufficiently.

We remand to give plaintiff an opportunity to amend the complaint to allege facts required under the unfair competition law as amended by Proposition 64 as to the causes of action against Ginix and PaySystems.

FACTS AND PROCEDURAL HISTORY

On appeal from a judgment entered after a demurrer is sustained without leave to amend, we assume all facts properly pleaded in the complaint are true. (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 193, 126 Cal.Rptr.2d 908, 57 P.3d 372.) In his second amended complaint (complaint) plaintiff alleged that defendant EZ Expo (not a party to this appeal) operated an "Internet Matrix." He described it as an Internet site where a consumer is given the opportunity to "receive expensive electronic products for a fraction of the price. The catch is that the participant receives the expensive prize only by paying a fee to enter a `matrix' and then only if a number of consumers also join the `matrix' after him."

On EZ's site, to obtain a 50-inch plasma television valued at $5,500, a participant enters the plasma television matrix by purchasing the required three "E-books" for $150. Upon payment, he or she receives a link to download the E-books and has his or her name placed on the list of those eligible to receive the television. "[W]hen 50 persons have each paid $150, the first person to enter will receive the plasma television `for free' and his name is removed from the list." In that event, the second name on the list moves to the top and 50 more people need to enter for that person to receive the television. EZ "encourages participants to recruit others to enter the matrix."

Plaintiff alleged he entered five matrices, including the plasma television matrix, paying more than $500. When he realized the EZ matrix "was a scam," he asked for a refund, which EZ refused. He further alleges the E-books have minimal, if any, value, and that "[b]y offering the chance to win valuable prizes, EZ ... has sold the worthless [E]-books for millions of dollars."

Plaintiff alleged that "PaySystems and Ginix are the former and current credit card processing and billing services for EZ" whom many of the matrix participants used to pay for their purchases. He pleaded that EZ requested these defendants process credit card orders and sent its website to them for their review. He alleged PaySystems and Ginix realized EZ's site was an unlawful lottery and knew EZ was making false claims and engaging in unfair business practices, but authorized EZ to use their payment services "with the knowledge and specific intent of aiding and abetting and facilitating the illegal lottery ...." Plaintiff further alleged that these defendants perceived that use of credit cards "would lend an aura of respectability" to the site, deceive consumers into believing the activity was legal, and make participation easier, thereby generating more revenue.

Plaintiff alleged PaySystems and Ginix contracted with EZ to display their logos and create links to their respective websites so they could process payments. The orders were actually placed on defendants' websites, where defendants charged the credit cards, collected the money, and then paid EZ after deducting what EZ owed them for processing the transactions.

As to PayPal, plaintiff alleged it is a payment processor, which "allows consumers to create virtual accounts by depositing money with [it]." When a customer does business with a company that contracts with PayPal, in this case EZ, the customer is transferred to PayPal's website where the transaction is completed. After deducting its commission, PayPal then pays EZ. Plaintiff also alleged PayPal contracted with EZ after reviewing its website and determining that it operated an illegal lottery. It authorized a link with EZ "with the knowledge and intent of aiding and abetting and facilitating the operation of the EZ Expo website in a manner similar to that described ... with respect to Ginix and PaySystems."

Plaintiff alleged Neovi's relationship with EZ was similar to that of Ginix and PaySystems, except customers paid with a " Virtual' check." Plaintiff pleaded Neovi knew EZ's operations were illegal but "knowingly and intentionally aided and abetted the operation" and "directly profited ... by receiving a percentage of each check transaction or collecting a fee...."

In the first cause of action for unfair competition, plaintiff alleged the conduct of all defendants was an "`unlawful' business act or practice within the meaning of [Business and Professions Code] section 17200 because the EZ Expo Internet Matrix constitutes a `lottery' within the meaning of California Penal Code section 319 and/or an `Endless Chain Scheme' within the meaning of California Penal Code section 327." This cause of action alleged plaintiff acted in three capacities, as an individual, as a private attorney general under Business and Professions Code sections 17203 and 17204, and as the representative in a class action.

Plaintiff brought the second, third, and fourth causes of action for unfair competition solely as a private attorney general under Business and Professions Code sections 17203 and 17204 against Ginix, Pay-Systems, and PayPal, respectively, for their payment processing services to entities other than EZ.

Ginix, PaySystems, and PayPal each demurred to the causes of action alleged against them; Neovi joined in PaySystems's demurrer. Essentially, all defendants argued the complaint did not sufficiently allege facts to support a cause of action for aiding and abetting unfair competition. The trial court sustained the demurrers without leave to amend and entered judgment.

After the appeal was filed and briefing was completed, on November 2, 2004, the voters passed Proposition 64, which amended several sections of the Unfair Competition Law. We asked the parties for letter briefs addressing whether the amendments applied to this case.

In April 2005 we issued an opinion in which we held that Proposition 64 barred plaintiff from proceeding against all defendants except Ginix and that plaintiff sufficiently pleaded a cause of action against it for aiding and abetting unfair competition. We remanded to allow plaintiff the opportunity to amend that cause of action to allege sufficient facts to comply with the requirements of the amended unfair competition law. The California Supreme Court granted review and subsequently transferred the case to this court with directions to vacate our prior opinion and reconsider the matter in light of Branick v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, 46 Cal.Rptr.3d 66, 138 P.3d 214.

DISCUSSION

1. Proposition 64

The amendments to the Unfair-Competition Law in Proposition 64 became effective on November 3, 2004. (Cal. Const., art II, § 10, subd. (a).) Prior to the amendment, Business and Professions Code section 17204 authorized "any person acting for the interests of itself, its members or the general public" to bring an action to enjoin and to seek restitution for unfair competition. The amended section now allows a party other than a public prosecutor to file or maintain an action only if the party "has suffered injury in fact and has lost money or property as a result of such unfair competition." (Bus. & Prof.Code, § 17204.) In addition, a private plaintiff must now "compl[y] with Section 382 of the Code of Civil Procedure [dealing with class actions]...." (Bus. & Prof.Code, § 17203.) As the Supreme Court explained in Californians for Disability Rights v. Mervyn's LLC (2006) 39 Cal.4th 223, 227, 46 Cal.Rptr.3d 57, 138 P.3d 207, the amendments apply to causes of action in cases pending at the time of enactment.

The complaint in its current form does not meet the new pleading requirements. However, plaintiff represented in his letter brief and at oral argument that he used the payment processing services of Ginix and is able to amend the first cause of action to allege the requisite facts of actual injury as to that defendant. It is appropriate to allow plaintiff this opportunity to amend. (Okun v. Superior Court (1981) 29 Cal.3d 442, 460, 175 Cal.Rptr. 157, 629 P.2d 1369 [the plaintiff must be allowed to amend if any reasonable possibility he can state cause of action] disapproved on another ground in Milkovich v. Lorain Journal Co. (1990) 497 U.S. 1, 19-21, 110 S.Ct. 2695, 111...