Edu-Science (USA) Inc. v. Intubrite, LLC
Filing
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ORDER granting Defendants' 102 Motion to Dismiss Third Amended Cross Complaint for Failure to State a Claim; denying Edu-Science (USA) Inc.'s 113 Motion for Leave to File Second Amended Complaint. Edu-HK's Third Amended Crossclaim is dismissed without prejudice. Signed by Judge Cynthia Bashant on 3/10/2015. (jah). Modified on 3/10/2015 - Edited text. Regenerated NEF (jah).
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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EDU-SCIENCE (USA) INC.,
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INTUBRITE LLC,
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Case No. 12-cv-1078 BAS (JLB)
ORDER:
(1) GRANTING
DEFENDANT’S MOTION
TO DISMISS; AND
(2) DENYING EDU-HK’S
MOTION FOR LEAVE TO
AMEND
[ECFs 102, 113]
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AND RELATED
COUNTERCLAIMS AND CROSSCLAIMS
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On September February 16, 2012, Plaintiff Edu-Science (USA) Inc. (“Edu-
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USA”) sued Defendant IntuBrite LLC (“IntuBrite”) for breach of contract. ECF 2.
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Plaintiff now seeks to file a Second Amended Complaint, adding fraud claims
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against Intubrite and its alleged agent, prospective Defendant Robert Hicks.
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While Plaintiff iterated its complaint, Cross-Claimant Edu-Science (HK)
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Ltd. (“Edu-HK”) and Cross-Claimants and Defendants Intubrite and Robert Hicks
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Plaintif
v.
Defend
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filed Cross-Complaints. These Cross-Complaints have also been amended
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repeatedly.
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As it currently stands, Edu-USA has moved for leave to file a Second
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Amended Complaint (ECF 113); Edu-HK has filed a Third Amended Crossclaim
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(ECF 98), which Defendants are moving to dismiss (ECF 102); and IntuBrite’s
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First Amended Counterclaim (ECF 99) against Edu-USA and Edu-HK has been
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answered (ECFs 103, 104).
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For the following reasons, Defendants’ motion to dismiss is GRANTED
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(ECF 102) and Edu-USA motion for leave to file a Second Amended Complaint is
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DENIED (ECF 113).
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I.
BACKGROUND
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On February 16, 2013, Edu-USA sued IntuBrite for breach of contract. Edu-
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USA alleges that IntuBrite breached its contract to purchase custom-manufactured
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instruments for tracheal intubation from Edu-USA. According to Edu-USA,
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although IntuBrite paid for some of the product, IntuBrite did not fulfill its
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obligations under the contracts (purchase orders issued by IntuBrite).
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IntuBrite, in a counterclaim/cross-claim, alleged that the products delivered
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were defective and untimely. IntuBrite’s Amended Counterclaim (“IACC”) ¶¶ 33–
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35. IntuBrite further claims it paid fully for the products it actually received. IACC
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¶ 36. IntuBrite asserts seven claims against Edu-USA and Edu-HK: (1) breach of
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contract; (2) breach of the implied warranty of merchantability; (3) negligence; (4)
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intentional interference with prospective economic advantage; (5) negligent
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interference
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misrepresentation of fact; and (7) negligent misrepresentation of fact.
with
prospective
economic
advantage;
(6)
intentional
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Edu-USA and Edu-HK now attempt to assert fraud claims in addition to
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Edu-USA’s previously asserted breach of contract claims. In Edu-HK’s Third
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Amended Crossclaim (“TACC”) and Edu-USA’s proposed Second Amended
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Complaint (“SAC”), Edu-HK and Edu-USA allege that IntuBrite and its agents
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induced Edu-HK and Edu-USA to manufacture the products by falsely
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representing that it had sufficient financial backing for the purchase orders.
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II.
MOTION TO DISMISS
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Defendants’ motion to dismiss Edu-HK’s Third Amended Crossclaim
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(“TACC”) alleges that Edu-HK’s amendments do not satisfy the requirements of
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the court’s previous Order dismissing the First Amended Crossclaim.1 ECF 86. In
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that Order, the court identified four insufficiencies that Edu-HK must remedy to
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survive a motion to dismiss. First, Edu-HK needed to show that the challenged
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statements were false or misleading when made. Second, Edu-HK needed to show
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it was in a position to rely on IntuBrite’s statements. Third, Edu-HK needed to
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show that Edu-HK, not Edu-USA, bore the brunt of the losses caused by reliance.
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Last, Edu-HK needed to allege its claims were not time-barred. The Court finds
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that Edu-HK has failed to properly plead falsity, and therefore Edu-HK’s TACC
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are dismissed.
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A court may dismiss fraud claims if the “allegations fail to satisfy the
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heightened pleading requirements of Rule 9(b)[.]” Vess v. Ciba-Geigy Corp. USA,
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317 F.3d 1097, 1107 (9th Cir. 2003). To satisfy the particularity requirement of
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Rule 9(b), “[a]verments of fraud must be accompanied by ‘the who, what, when,
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where, and how’ of the misconduct charged.” Vess, 317 F.3d at 1106 (quoting
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Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). Plaintiffs must plead
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enough facts to give defendants notice of the time, place, and nature of the alleged
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fraud together with an explanation of the statement and why it was false or
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misleading. See id. at 1107.
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In Edu-HK’s First Amended Crossclaim (“FACC”), Edu-HK failed to
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properly allege why the challenged statements were false. Under Rule 9(b), they
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are required to “set forth what is false or misleading about a statement, and why it
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The Court previously dismissed Edu-HK’s Second Amended Crossclaim because it did not
properly allege diversity. As a result, the Court did not address its factual allegations. ECF 96.
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is false.” Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir. 1999). In the
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FACC, Edu-HK alleged that “[d]iscovery obtained in the present case confirmed
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that Intubrite’s [sic] representations about its financial condition and resources
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were false.” FACC ¶ 63.2
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In the TACC, Edu-HK again challenges IntuBrite’s statements, through
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William Goodrich and Defendant Robert Hicks, that IntuBrite was well-funded,
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had the financial resources to enter into an order of the magnitude discussed, and
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was backed by Hicks and another individual, Todd McKinney, who were wealthy
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and had made substantial money from other inventions and investments. TACC
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¶¶27–33. Edu-HK now claims these statements were false when made because
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SEC filings and financial documents obtained during discovery showed IntuBrite
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operated at a $400,000 annual loss during the relevant period and relied on revenue
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from the sale of Edu-HK’s shipments to purchase further orders. TACC ¶¶ 73–77.
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However, the SEC filings seem at best tangential to the falsity of Hicks and
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Goodrich’s statements. IntuBrite is a privately-held limited liability company, of
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which Hicks is a member, and Hicks and McKinney’s personal wealth may have
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financed or backed the purchase orders. There are no alleged facts contradicting
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this. Financial backing and cash reserves are independent from annual profits or
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losses, and without facts that IntuBrite was actually insolvent at the time the deal
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was entered into, stating it must be so is impermissibly conclusory. Even if
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IntuBrite relied on proceeds from the sale of Edu-HK manufactured instruments to
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purchase subsequent orders, it does not mean that IntuBrite did not have access to
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other assets. TACC ¶ 67.
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Edu-HK also added claims that IntuBrite’s alleged agreement with a
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Pakistani manufacturer to produce the instruments at lower cost illustrates
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IntuBrite acted fraudulently. TACC ¶ 60. While this might be evidence that
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As stated in the court’s previous Order dismissing the FACC, paragraphs 50 and 51 are legal
conclusions, not facts. Order Dismissing FACC 4:16–17, ECF 86.
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IntuBrite intended to breach the contract, it does not show that IntuBrite was in
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dire financial straits either at the time or breach or when entering into the contract.
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At this point, Edu-HK’s claims fail to show that IntuBrite made false or
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misleading statements about its financial situation. If later facts reveal that Hicks or
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McKinney either could not or would not financially back the contract at the time
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Hicks and Goodrich made those statements, Edu-HK might be able to state a claim.
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As it currently stands, Edu-HK has not properly alleged falsity. Accordingly, this
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Court will GRANT Defendants’ motion to dismiss the TACC and dismisses it
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WITHOUT PREJUDICE. ECF 102.
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III.
LEAVE TO AMEND
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The Court now turns its attention to Edu-USA’s motion for leave to file a
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Second Amended Complaint. ECF 113. Intubrite opposes the motion on three
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bases: (1) Edu-USA unduly delayed asserting its fraud claims, (2) the proposed
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amendment would be prejudicial, and (3) the proposed amendment would be futile
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because it would not survive a motion to dismiss. For the following reasons,
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amending the complaint to assert fraud claims would be futile.
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Rule 15(a) of the Federal Rules of Civil Procedure provides that after a
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responsive pleading has been served, a party may amend its complaint only with
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the opposing party’s written consent or the court’s leave. Fed. R. Civ. P. 15(a).
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“The court should freely give leave when justice so requires,” and apply this policy
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with “extreme liberality.” Id.; DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186
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(9th Cir. 1987). However, leave to amend is not to be granted automatically.
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Zivkovic v. S. Cal. Edison Co., 302 F.3d 1080, 1087 (9th Cir. 2002) (citing Jackson
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v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990)). Granting leave to amend
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rests in the sound discretion of the district court. Pisciotta v. Teledyne Indus., Inc.,
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91 F.3d 1326, 1331 (9th Cir. 1996).
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The Court considers five factors in assessing a motion for leave to amend:
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(1) bad faith, (2) undue delay, (3) prejudice to the opposing party, (4) futility of the
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amendment, and (5) whether the plaintiff has previously amended the complaint.
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Johnson v. Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004); see also Foman v. Davis,
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371 U.S. 178, 182 (1962). The party opposing amendment bears the burden of
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showing any of the factors above. See DCD Programs, 833 F.2d at 186. Of these
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factors, prejudice to the opposing party carries the greatest weight. Eminence
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Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). However,
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absent prejudice, a strong showing of the other factors may support denying leave
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to amend. See id.
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“Futility of amendment can, by itself, justify the denial of a motion for leave
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to amend.” Bonin v. Calderon, 59 F.3d 815, 845 (9th Cir. 1995). Futility is a
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measure of the amendment’s legal sufficiency. “[A] proposed amendment is futile
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only if no set of facts can be proved under the amendment . . . that would constitute
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a valid and sufficient claim or defense.” Miller v. Rykoff-Sexton, Inc., 845 F.2d
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209, 214 (9th Cir. 1988). Thus, the test of futility is identical to the one applied
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when considering challenges under Rule 12(b)(6) for failure to state a claim upon
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which relief may be granted. Baker v. Pac. Far E. Lines, Inc., 451 F. Supp. 84, 89
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(N.D. Cal. 1978); see Saul v. United States, 928 F.2d 829, 843 (9th Cir. 1991) (“A
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district court does not err in denying leave to amend . . . where the amended
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complaint would be subject to dismissal.” (citation omitted)).
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Here, Magistrate Judge Jill L. Burkhardt issued a scheduling order on
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September 30, 2014 requiring any request to amend the pleadings be filed by
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November 24, 2014. In fact, Edu-USA did move to file an amended pleading on
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that date. This deadline was set, in part, because of the threshold issues of standing
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the Court took time to carefully consider before this litigation could proceed.
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Because this delay resulted from that cogitation, it should not be blamed on Edu-
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USA. As a result, this Court declines to weigh this factor against granting leave to
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amend.
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Secondly, Intubrite challenges the amendment as prejudicial. Intubrite
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claims that their discovery deadlines are fast-approaching, and that the fraud
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claims will require additional discovery requests. However, this prejudice can be
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mitigated by extending the discovery deadline. The Court therefore does not weigh
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this factor against Edu-USA.
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Lastly, however, the proposed amendment would be futile. Edu-USA
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attempts to assert the same fraud claims previously asserted in Edu-HK’s TACC.
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For the same reasons stated above, Edu-USA also fails to meet Rule 9(b)’s
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requirement that claimants show falsity. Without such factual basis, the fraud
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claims could not survive a motion to dismiss. Accordingly, the Court DENIES
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Edu-USA leave to amend its complaint. ECF 113.
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IV.
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For the foregoing reasons, the Court GRANTS Defendants’ motion to
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dismiss Edu-HK’s TACC. ECF 102. Edu-HK’s TACC is DISMISSED
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WITHOUT PREJUDICE. ECF 98. For the reasons stated, the Court also
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DENIES Edu-USA’s motion for leave to amend its complaint. ECF 113.
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CONCLUSION
IT IS SO ORDERED.
Dated: March 10, 2015
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