Morici v. HashFast Technologies LLC

Filing 58

ORDER granting 34 Motion to Dismiss; denying as moot 57 Motion to Appear by Telephone. Any amended complaint shall be filed on or before 3/16/2015. The hearing scheduled for 3/5/2015 is VACATED. Signed by Judge Edward J. Davila on 2/27/2015. (ejdlc1S, COURT STAFF) (Filed on 2/27/2015)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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PETE MORICI,

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Case No. 5:14-cv-00087-EJD

Plaintiff,
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ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS

v.
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HASHFAST TECHNOLOGIES LLC, et al.,

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Re: Dkt. No. 34

United States District Court
Northern District of California

Defendants.
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This action is about Bitcoin1 and “Baby Jets.” Plaintiff Pete Morici (“Plaintiff”) alleges

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that he placed an order with Defendants Hashfast Technologies LLC and/or Hashfast LLC (the

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“Hashfast Entities”) for two Bitcoin mining computers, fittingly named “Baby Jets,” but did not

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receive them when promised. When he finally did receive a shipment, he was no longer interested

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in “Baby Jets” and requested a refund. He did not receive one, though, because he would not sign

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According to Plaintiff’s Complaint, and for those who are not familiar with it:
Bitcoin is a peer-to-peer payment network that uses digital currency
known as “Bitcoin” (abbreviated as “BTC”). The Bitcoin network is
decentralized, with no authority overseeing its operation, and uses
open-source encryption software for transactions . . . .
Payment transactions are processed by a network of private
computers distributed throughout the world which, typically, have
been specially configured for processing Bitcoin transactions. These
computers are commonly referred to as “Bitcoin computers,” and
the operators of such computers are known as “miners.” Miners are
partially compensated for the work they perform by receiving fees
for the Bitcoin transactions that they process through their Bitcoin
computers.

See Compl., Docket Item No. 1, at ¶¶ 9-10.
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Case No.: 5:14-cv-00087-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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a release.

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Plaintiff filed the Complaint underlying this case on January 7, 2014, against the Hashfast

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Entities and its officers, Simon Barber (“Barber”) and Eduardo deCastro (“deCastro”)2 for breach

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of contract, fraud, violation of the Unfair Competition Law (“UCL”), California Business and

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Professions Code § 17200, and declaratory relief. Presently before the court is a Motion to

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Dismiss filed by Barber and deCastro.3 See Docket Item No. 34. Plaintiff has filed written

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opposition to the motion. See Docket Item No. 35.

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Federal jurisdiction arises under 28 U.S.C. § 1332. Having carefully reviewed the parties’

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arguments, the court finds this matter suitable for decision without oral argument pursuant to Civil
Local Rule 7-1(b). The hearing scheduled for March 5, 2015, will therefore be vacated and the

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United States District Court
Northern District of California

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Motion to Dismiss will be granted for the reasons explained below.

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I.

FACTUAL BACKGROUND
Plaintiff is a resident of Maryland and, importantly for this lawsuit, is a member of the

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Bitcoin community. See Compl., Docket Item No. 1, at ¶¶ 1, 15. So are Barber, deCastro, and the

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Hashfast Entities. Id. at ¶ 15. They develop specialized computers to conduct Bitcoin mining. Id.

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at ¶ 13.

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In conjunction with their enthusiasm for Bitcoin, Plaintiff and Defendants were

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participants in an internet message board knowns as Bitcoin Talk. Id. at ¶ 15. Starting in July,

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2013, Defendants made several posts about their soon-to-be-launched Bitcoin mining computer

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(the aforementioned “Baby Jet”), and further posted, on August 5th and August 8, 2013, that they

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would begin shipping the product in October, 2013. Id. at ¶¶ 16-17.

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On August 10, 2013, Plaintiff visited Defendants’ website and decided he wanted to

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purchase a “Baby Jet” after viewing the computer’s technical specifications. Id. at ¶ 19. He relied

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on a statement on the website which listed the “Baby Jet” model as “in stock,” and noted that

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Barber, deCastro and the Hashfast Entities are referred to collectively as “Defendants.”

This case has been stayed with respect to the Hashfast Entities due to ongoing bankruptcy
proceedings. See Docket Item No. 23.
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shipments of the product would begin “October 20-30.” Id. at ¶ 20. Since the website could not

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process orders electronically, Plaintiff ended up placing an order manually during which process

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he was assured that the October, 2013, delivery dates were “firm.” Id. at ¶¶ 22-23. He ordered

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two “Baby Jets” for a total transaction cost of $11,507.38. Id. at ¶ 23. Plaintiff paid a deposit of

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110.647885 BTC that same day. Id. at ¶ 26.

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Plaintiff explains that the delivery date of the “Baby Jet” was crucial due to how Bitcoin

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works. Bitcoin miners are incentivized to process payment transactions “by allowing miners to

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create new Bitcoins for themselves based on the number of ‘blocks’ discovered.” Id. at ¶ 11.

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“Blocks are files containing data regarding Bitcoin transactions that have yet to be recorded in the
public ledger,” and are discovered by “calculating a SHA256 hash, an algorithm that is very

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United States District Court
Northern District of California

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difficult to solve, over and over again until the miner finds an input that matches an expected

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output.” Id. Since a miner’s chances of discovering a Bitcoin relative to another miner is “based

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on the miner’s hash rate relative to the total hash rate of all Bitcoin miners on the network,”

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miners are continuously seeking to increase their rate of processing through acquisition of the

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latest technology. Id. However, because the “difficulty of Bitcoin mining is continually adjusted

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based on the rate at which blocks are created,” “a Bitcoin mining computer continually becomes

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less valuable over time, as it becomes relatively less efficient at processing Bitcoin blocks.” Id. at

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¶ 12. “Eventually, without upgrading technology, the electricity required for processing will cost

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a miner more than the Bitcoin computer is able to generate.” Id.

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Despite previous reassurances, Defendants informed Plaintiff on October 23, 2013, that his

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order would be delayed. Id. at ¶ 39. On November 7, 2013, Defendants told Plaintiff that his

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order would be delayed further and would not be shipped until mid-December. Id. at ¶ 41. In

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response, Plaintiff notified Defendants on November 11, 2013, that he was cancelling his order,

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and requested a full refund of his deposit in Bitcoin. Id. at ¶ 43. Defendants did not respond to

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Plaintiff’s notification until over a month later. Id. at ¶ 44.

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On December 27, 2013, Defendants sent an email to customers stating that “Baby Jet”

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shipments were “on track” for December 31st, but that customers interested in a refund “could

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initiate refunds and be paid Bitcoin calculated at the exchange rate on the date of the refund.” Id.

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at ¶ 45. This statement surprised Plaintiff, since Defendants had previously represented that

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refunds would be paid in Bitcoin. Id. at ¶¶ 25, 45.

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On December 31, 2013, Defendants sent another email to Plaintiff stating it still would not

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be able to fulfill his order until a later date. Id. at ¶ 46. Attached to the email was a “detailed and

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onerous” release that had to be completed in order to obtain a refund. Id. at ¶ 47.
Defendants eventually did send a shipment to Plaintiff, which he alleges was partial and

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“too late.” Id. at ¶ 48. He therefore refused it and cancelled the order. Id. This action followed.
II.

LEGAL STANDARD
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient

United States District Court
Northern District of California

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specificity to “give the defendant fair notice of what the . . . claim is and the grounds upon which

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it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A

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complaint which falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim

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upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “Dismissal under Rule 12(b)(6) is

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appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support

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a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th

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Cir. 2008). Moreover, the factual allegations “must be enough to raise a right to relief above the

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speculative level” such that the claim “is plausible on its face.” Twombly, 550 U.S. at 556-57.

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Causes of action based in fraud require more detail. “In alleging fraud or mistake, a party

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must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. Proc.

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9(b). These allegations must be “specific enough to give defendants notice of the particular

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misconduct which is alleged to constitute the fraud charged so that they can defend against the

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charge and not just deny that they have done anything wrong.” Semegen v. Weidner, 780 F.2d

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727, 731 (9th Cir.1985). To that end, the allegations must contain “an account of the time, place,

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and specific content of the false representations as well as the identities of the parties to the

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misrepresentations.” Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir.2007). In other words,

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claims of fraudulent conduct must generally contain more specific facts than is necessary to

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support other causes of action.
When deciding whether to grant a motion to dismiss, the court generally “may not consider

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any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d

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1542, 1555 n. 19 (9th Cir.1990). However, the court may consider material submitted as part of

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the complaint or relied upon in the complaint, and may also consider material subject to judicial

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notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-69 (9th Cir.2001).
In addition, the court must generally accept as true all “well-pleaded factual allegations.”

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Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The court must also construe the alleged facts in the

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light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir.1988).
However, “courts are not bound to accept as true a legal conclusion couched as a factual

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United States District Court
Northern District of California

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allegation.” Id.

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III.

DISCUSSION

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Barber and deCastro argue for dismissal of all claims in the Complaint. However, Plaintiff

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indicates that the claims for breach of contract and declaratory relief are not being asserted against

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Barber and deCastro. See Opp’n, Docket Item No. 35, at pp. 3:26-4:1. Thus, the court examines

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only the fraud and UCL claims.

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A.

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Barber and deCastro argue that the fraud claim must be dismissed as asserted against them

Fraud

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because the factual allegations do not satisfy the heightened pleading standard imposed by Rule

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9(b). Specifically, they contend that Plaintiff improperly lumped all of the defendants into one

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designation in the Complaint - namely, “Hashfast” - and then failed to differentiate the fraudulent

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conduct attributable to each defendant. The court agrees with Barber and deCastro that the claim

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for fraud is deficient under Rule 9(b).

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A plaintiff alleging fraud under California law must plead facts demonstrating five

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elements: (1) a misrepresentation; (2) the speaker’s knowledge of falsity; (3) the intent to defraud

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or induce reliance; (4) justifiable reliance; and (5) resulting damage. See, e.g., Lazar v. Super. Ct.,

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12 Cal. 4th 631, 638 (1996).

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In federal court, it is undisputed that these elements, save for perhaps certain aspects of the

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second and third,4 must be plead with particularity. The purpose of this requirement is to ensure

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that adequate notice is provided to the parties accused of fraudulent conduct in order to allow for a

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meaningful defense. Indeed, “[w]ithout such specificity, defendants in these cases would be put to

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an unfair disadvantage, since at the early stages of the proceedings they could do no more than

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generally deny any wrongdoing.” Concha v. London, 62 F.3d 1493, 1502 (9th Cir. 1995).
Rule 9(b)’s heightened pleading requirement also acts as a barrier to weak or unfounded -

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and potentially costly - claims of fraudulent conduct. See Bly-Magee v. California, 236 F.3d

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1014, 1018 (9th Cir. 2001). Because they must provide more than just the superficial “short and
plain statement” permitted for other claims, plaintiffs who seek to assert fraud must consider

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United States District Court
Northern District of California

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whether the facts known at the time of filing can withstand a Rule 9 challenge. Indeed, by

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requiring extra detail, “the rule requires the plaintiff to conduct a precomplaint investigation in

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sufficient depth to assure that the charge of fraud is responsible and supported, rather than

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defamatory and extortionate.” Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir.

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1969).
It is therefore unsurprising that allegations suggesting that “everyone did everything” or

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that “all defendants made every misrepresentation” are insufficient. See Destfino v. Reiswig, 630

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F.3d 952, 958 (9th Cir. 2011). Although “there is no absolute requirement that where several

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defendants are sued in connection with an alleged fraudulent scheme, the complaint must identify

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false statements made by each and every defendant,” plaintiff must nonetheless offer enough

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factual matter to establish each defendant’s participation in the fraudulent scheme. Swartz, 476

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F.3d at 764 (emphasis preserved). In other words, “[i]n the context of a fraud suit involving

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multiple defendants, a plaintiff must, at a minimum, ‘identif[y] the role of [each] defendant[] in

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the alleged fraudulent scheme.’” Id. (quoting Moore v. Kayport Package Express, Inc., 885 F.2d

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531, 541 (9th Cir. 1989)).

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“Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”
Fed. R. Civ. P. 9(b).
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Here, after collectively defining all of the named defendants, including individual

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defendants Barber and deCastro, as “Hashfast,” Plaintiff attributes nearly every fraudulent

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statement to this “Hashfast” conglomerate without distinguishing which entity or individual was

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actually responsible for the misrepresentation. For example, Plaintiff alleges that “Hashfast”

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stated the “Baby Jets” would ship in October, 2013. See Compl., at ¶ 17. Similarly, he alleges

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that “Hashfast” represented that “Baby Jets” were “in stock” and that “Hashfast” misrepresented

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the computing power of its product. Id. at ¶¶ 20, 33. But under this style of pleading, Barber and

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deCastro are left to wonder which statements they are alleged to have made as individuals, and in

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turn, which statements they must defend against as individuals. Indeed, it cannot be, without
something more, that both are responsible for making each and every statement ascribed to

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United States District Court
Northern District of California

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“Hashfast,” since Plaintiff’s definition of “Hashfast” includes two business entities in addition to

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Barber and deCastro.

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In opposition, Plaintiff clarifies that the “something more” - or the fact that makes Barber

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and deCastro liable for every misrepresentation of “Hashfast” - is their positions as corporate

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officers or directors, which he alleges in the Complaint. He further alleges that “Hashfast” was a

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participant in Bitcoin Talk and made several posts about the launch of “Baby Jet.”

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These allegations are insufficient as pled because they are not specific enough to satisfy

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Rule 9(b). Indeed, as Plaintiff’s own authorities establish, “[t]o maintain a tort claim against a

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director in his or her personal capacity, a plaintiff must first show that the director specifically

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authorized, directed or participated in the allegedly tortious conduct; or that although they

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specifically knew or reasonably should have known that some hazardous condition or activity

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under their control could injure plaintiff, they negligently failed to take or order appropriate action

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to avoid the harm.” Frances T. v . Village Green Owners Ass’n, 42 Cal. 3d 490, 508 (1986)

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(emphasis added and internal citations omitted). What is missing from Plaintiff’s Complaint is the

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“specific” part, which is required both by the legal standard for director liability as it exists under

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California law and by Rule 9(b). These allegations are important because, in general, directors are

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jointly liable with the corporation only “if they personally directed or participated in the tortious

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conduct.” Id. at 504.
Nor has Plaintiff alleged sufficient facts under Rule 9(b) to establish that Barber and

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deCastro were the agents of the Hashfast entities. “To allege an agency relationship, a plaintiff

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must allege: (1) that the agent or apparent agent holds power to alter legal relations between

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principal and third persons and between principal and himself; (2) that the agent is a fiduciary with

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respect to matters within scope of agency; and (3) that the principal has right to control conduct of

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agent with respect to matters entrusted to him.” Palomares v. Bear Stearns Residential Mortg.

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Corp., No. CV 07-1899 WQH (BLM), 2008 U.S. Dist. LEXIS 19407, at *11, 2008 WL 686683

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(S.D. Cal. Mar. 13, 2008) (citing Garlock Sealing Techs. LLC v. NAK Sealing Techs. Corp., 148
Cal. App. 4th 937, 965 (2007)). And to be sure, the agency relationship must be pleaded with

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United States District Court
Northern District of California

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particularity when a claim for fraud, brought in federal court, purports to impose liability on such a

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theory. See RPost Holdings, Inc. v. Trustifi Corp., No. CV 11-2118 PSG (SHx), 2011 U.S. Dist.

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LEXIS 117260, at *9-10, 2011 WL 4802372 (C.D. Cal. Oct. 11, 2011) (rejecting Plaintiff’s

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argument that agency allegations are not subject to Rule 9(b) because it “ignores the purpose of

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Rule 9, which is to give fair notice of fraud-based claims so a defendant may respond

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accordingly”); Jackson v. Fischer, No. C 11-2753 PJH, 2013 U.S. Dist. LEXIS 179233, at *53,

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2013 WL 6732872 WL (N.D. Cal. Dec. 20, 2013) (“[W]here a plaintiff alleges that a defendant is

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liable for fraud under an agency theory, Rule 9(b) requires that the existence of the agency

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relationship be pled with particularity.”). Plaintiff’s conclusory and formulaic agency allegations,

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which merely state that “defendants, and each of them, were an owner, a co-owner, an agent

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and/or later ego of their co-defendants,” are not enough and have been rejected by other courts as

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insufficient. See, e.g., Buchanan v. Neighbors Van Lines, No. CV 10-6206 PSG (RCx), 2010 U.S.

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Dist. LEXIS 130511, at *7-8, 2010 WL 4916644 (C.D. Cal. Nov. 29, 2010).5
Moreover, the statements that are specifically attributed to Barber and deCastro in the

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Plaintiff also alleges that the domain name hasfast.com is registered to deCastro. See Compl., at
¶ 18. That allegation still is not enough under Rule 9(b) to impose director liability or show
agency because it does not describe the extent of deCastro’s involvement in the Hashfast Entities
or his participation the fraudulent scheme.
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Case No.: 5:14-cv-00087-EJD
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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Complaint cannot support a claim for fraud against either individual based on the factual

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allegations overall. Specific to Barber, Plaintiff alleges he posted a statement on Bitcoin Talk on

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August 10, 2013, in which he advised that refunds would be issued in Bitcoin. See Compl., at ¶

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25. As to deCastro, Plaintiff alleges he posted a statement on Bitcoin Talk on August 11, 2013,

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that “Hashfast” would meet its October, 2013, shipping deadline and would protect its customers

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against “hashrate increases.” Id. at ¶ 37. But Plaintiff does not allege that he relied on these

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statements when he decided to order “Baby Jets,” and, notably, these allegations follow those

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describing how he placed his order.

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Accordingly, the claim for fraud against Barber and deCastro will be dismissed. Plaintiff
will be permitted leave to amend because he may be able to supply additional factual content to

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United States District Court
Northern District of California

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satisfy the Rule 9(b) pleading standard.

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B.

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The court now addresses the UCL claim. Plaintiff clarifies that this claim is “premised on

UCL

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the unfair practice of selling a product while making misleading claims about the availability of

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the product.” See Opp’n, at 11:11-12.

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A business practice is “unfair” under the UCL if it causes substantial consumer injury, is

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not outweighed by any countervailing benefit to consumers or to competition, and is not an injury

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the consumers themselves could have reasonably avoided. In re Apple In-App Purchase Litig.,

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855 F. Supp. 2d 1030, 1040 (N.D. Cal. 2012). Plaintiff’s clarification about the scope of this

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claim - which is focused on some of the same “misleading” statements as the claim for fraud -

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subjects it to Rule 9(b). See Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009)

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(holding that UCL claims based on a “unified course of fraudulent conduct” must meet the

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particularity requirement of Rule 9(b)).

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The UCL claim is deficiently plead for the same reasons described above. Plaintiff’s use

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of the “Hashfast” moniker for all defendants, corporate and individual, is especially problematic

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for this claim because an “unfair practices claim under section 17200 cannot be predicated on

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vicarious liability.” Emery v. Visa Int’l Serv. Ass’n, 95 Cal. App. 4th 952, 960 (2002).

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Furthermore, this claim is not saved by Plaintiff’s agency allegations because, again, they are

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nothing more than formulaic conclusion.
Thus, the UCL claim asserted against Barber and deCastro will also be dismissed with

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leave to amend.

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IV.

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ORDER
Based on the foregoing, Barber and deCastro’s Motion to Dismiss (Docket Item No. 34) is

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GRANTED. The claim for fraud and the claim under the UCL are each DISMISSED WITH

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LEAVE TO AMEND. Any amended complaint shall be filed on or before March 16, 2015.

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The hearing scheduled for March 5, 2015, is VACATED, and the motion to appear
telephonically (Docket Item No. 57) is DENIED AS MOOT.

United States District Court
Northern District of California

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IT IS SO ORDERED.
Dated: February 27, 2015
______________________________________
EDWARD J. DAVILA
United States District Judge

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