RLFSHOP, LLC et al v. American Express Co. et al

Filing 28

ENTRY AND ORDER granting in part and denying in part 4 Motion to Dismiss of Defendant Paypal, Inc. Signed by Judge Thomas M. Rose on 8-23-2018. (de)

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
RLFSHOP, LLC, et al.,
Plaintiffs,
v.
AMERICAN EXPRESS COMPANY, et al.,
Defendants.

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Case No. 3:17-cv-405
Judge Thomas M. Rose

ENTRY AND ORDER GRANTING IN PART AND DENYING IN PART
MOTION TO DISMISS (DOC. 4) OF DEFENDANT PAYPAL, INC.
This case is before the Court on the Motion to Dismiss (Doc. 4) filed by Defendant
Paypal, Inc. (“PayPal”). Plaintiffs RLFShop, LLC d/b/a Shopsmith (“Shopsmith”) and
Robert L. Folkerth (“Folkerth”) (collectively, “Plaintiffs”) allege that Defendants
American Express Company (“American Express”) and PayPal are liable for fraudulent
purchases made by one of Plaintiffs’ former employees on a company American Express
card through PayPal’s platform. PayPal denies the Plaintiffs’ allegations and moves to
dismiss all of their claims under Fed. R. Civ. P. 12(b)(6). Plaintiffs oppose PayPal’s Motion
to Dismiss, which is fully briefed and ripe for review. (See Docs. 10, 17.) For the reasons
below, the Court GRANTS IN PART and DENIES IN PART the Motion to Dismiss.
I.

BACKGROUND

As alleged in the Complaint, Shopsmith is in the business of manufacturing and
selling woodworking tools and accessories. (Doc. 2 at ¶ 1.) As Shopsmith’s principal

owner and manager, Folkerth is responsible for the company’s day-to-day operations.
(Id. at ¶ 2.) Folkerth is also the holder of the American Express credit card account at the
center of this lawsuit. (Id.)
In 2009, after acquiring the assets of a separate company called Shopsmith, Inc.,
Shopsmith hired Defendant Wesley Powell (“Mr. Powell”), one of Shopsmith, Inc.’s
former employees. (Id. at ¶ 8.) Mr. Powell was primarily assigned IT department
responsibilities, providing computer maintenance and support and related services. (Id.)
Over the years, Mr. Powell was assigned responsibility for the purchase of certain
materials and supplies in connection with Shopsmith’s manufacturing and distribution
operations, in addition to purchases involving the IT department. (Id. at ¶ 9.)
For convenience and to provide “direct financial support” for Shopsmith’s
business operations, Folkerth permitted Mr. Powell and other Shopsmith employees with
purchasing responsibilities to use American Express credit cards issued under Folkerth’s
American Express credit card account. (Id. at ¶ 10.) Employees were not authorized to
use the credits cards for personal use; rather, they were authorized only for the limited
purpose of purchasing services, materials and supplies for Shopsmith. (Id.)
Shopsmith maintained financial controls and procedures to monitor employee use
of the American Express credit cards. (Id. at ¶ 11.) Shopsmith relied primarily upon its
review of American Express’s billing statements to identify unauthorized purchases. (Id.)
Shopsmith scrutinized the billing statement to confirm that credit card purchases were
for approved services, materials and products from companies with which it had an
established relationship. (Id.) Financial controls might also include requiring purchase
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orders, invoices or receipts in support of transactions, which were the accounting
department then reconciled against the American Express billing statements. (Id.)
At some point, Mr. Powell began using his company credit card to make “fictitious
purchases” for his personal benefit. (Id. at ¶ 12.) These purchases appeared to be
purchases of authorized goods and services from known vendors, but, in reality, they
were purchases from accounts created by Mr. Powell for the purposes of defrauding
Shopsmith.
Mr. Powell initiated this scheme by opening PayPal accounts in his name and in
his mother’s name, Dorthy, aka Dorothy, Powell (“Ms. Powell”). (Id. at ¶ 13.) Mr. Powell
then used his company American Express card to purchase non-existent, fictitious goods
and services from Ms. Powell’s PayPal account. (Id.) When Mr. Powell made these
purchases, he was able to falsely record the name of the seller of the fictitious goods as
an established Shopsmith vendor, instead of his mother.

(Id.)

After Shopsmith’s

payments for the fictitious goods were deposited into Ms. Powell’s PayPal account, Mr.
Powell transferred the funds to his own PayPal account for distribution to himself and
Ms. Powell. (Id.) Using this scheme, Mr. Powell allegedly stole more than $400,000 from
Shopsmith through fraudulent credit card charges. (Id. at ¶ 22.)
American Express and PayPal issued transaction reports and billing statements
that showed the fictitious purchases in the same manner as genuine purchases. These
records also displayed the false information input by Mr. Powell, instead of showing that
the fictitious goods were sold by (and Shopsmith’s monies were paid into) Ms. Powell’s
PayPal account. Accordingly, American Express sent billing statements to Folkerth at
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Shopsmith showing the date of purported credit card purchases, naming an established
Shopsmith vendor as the merchant, identifying a product suitable for use by Shopsmith
as the product purchased, and stating the charge for the purchase. (Id. at ¶ 14.) As a
result, Folkerth’s review of American Express’s billing statements did not alert him to
Mr. Powell’s fraudulent purchases. (Id.)
Folkerth entered into a contract with American Express for the use of his credit
card, which contained certain representations and warranties regarding the processing
and reporting of credit cards. (Id. at ¶ 17.) Plaintiffs also allege, upon information and
belief, that American Express and PayPal entered into an agreement authorizing PayPal
to process and report American Express credit card payments for purchases made
through PayPal accounts. (Id. at ¶ 18.)

These contracts form the basis of several of

Plaintiffs’ claims.
On October 30, 2017, Plaintiffs brought this action against American Express and
PayPal in the Montgomery County Court of Common Pleas. On December 1, 2017,
PayPal removed the action to this Court pursuant to its federal question jurisdiction. In
the Complaint, Plaintiffs allege against PayPal claims for breach of contract, negligence,
fraud, negligent misrepresentation, and unjust enrichment. PayPal moves to dismiss all
of the claims against it for failure to state a claim as a matter of law.
II.

LEGAL STANDARD ON MOTION TO DISMISS

Federal Rule of Civil Procedure 8(a)(2) requires that a complaint contain a “short
and plain statement of the claim showing that the pleader is entitled to relief.” While this
Rule “does not require ‘detailed factual allegations’ . . . it demands more than an
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unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
To survive a Rule 12(b)(6) motion to dismiss, the complaint must contain sufficient
factual allegations “to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at
697 (2009), quoting Twombly, 550 U.S. 544, 547 (2007). A claim is facially plausible when
it includes “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. This standard is
not the same as a probability standard, but “asks for more than a sheer possibility that a
defendant has acted unlawfully.” Id.
When ruling on a motion to dismiss, the Court must accept the factual allegations
of the complaint as true and construe them in a light most favorable to the non-moving
party. Twombly, 550 U.S. at 554-55. “The Court need not accept as true, however, a legal
conclusion couched as factual allegations.” Id. If Plaintiff “ha[s] not nudged [its] claims
across the line from conceivable to plausible, [its] complaint must be dismissed.”
Twombly, 550 U.S. at 570.
III.

ANALYSIS
A. Plaintiffs’ Claim for Breach of Contract

Plaintiffs’ breach-of-contract claim against PayPal is based on an alleged contract
between American Express and PayPal “with respect to the use of AMEX credit cards,
with the intention that AMEX credit card account holders benefit from the terms of these
contracts.”

(Doc. 2 at ¶ 25.)

Plaintiffs allege that the contract’s terms include

“requirements that PayPal take reasonable precautions to avoid credit card fraud, assure
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the identity of the parties to credit card transactions, comply with laws pertaining to
credit card use, and provide protections to credit card account holders as required by
law.” (Id.) Plaintiffs allege that American Express imposed these requirements on PayPal
for the specific benefit and protection of its account holders, like Folkerth. (Id.)
Plaintiffs allege that PayPal breached its contract with American Express by failing
to take “reasonable precautions to avoid credit card fraud, correctly identify the
Merchants and confirm the existence and legitimacy of credit card transactions processed
through its accounts.” (Id. at ¶ 28.) Plaintiffs further allege that PayPal recklessly
processed fraudulent credit card charges, failed to provide accurate transaction
statements, and misrepresented the identify of merchants and products sold in
connection with fraudulent charges. (Id.)
The parties agree that Plaintiffs’ breach-of-contract claim is based on a third-party
beneficiary theory of liability. PayPal argues, however, that this claim nonetheless fails
because Plaintiffs do not allege that they were specifically intended beneficiaries of the
contract between American Express and PayPal.
Under Ohio law, in order to state a breach-of-contract claim as a third-party
beneficiary, the plaintiff must allege that a promisee under the contract specifically
intended for him to benefit from the contract. Laverick v. Children’s Hosp. Medical Center
of Akron, Inc., 43 Ohio App. 3d 201, 204, 540 N.E.2d 305 (9th Dist. 1988); see also Norfolk &
W. Co. v. United States, 641 F.2d 1201, 1208 (6th Cir. 1980). Ohio law applies the aptly
named “intent to benefit” test to determine whether a third party is an intended
beneficiary who can bring suit or only an incidental beneficiary with no enforceable rights
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under the contract. Hill v. Sonitrol of Southwestern Ohio, Inc., 36 Ohio St.3d 36, 40, 521
N.E.2d 780 (1988). Under this test, “if the promisee * * * intends that a third party should
benefit from the contract, then that third party is an ‘intended beneficiary’ who has
enforceable rights under the contract.” Norfolk, 641 F.2d at 1208. Conversely, “[i]f the
promisee has no intent to benefit a third party, then any third-party beneficiary to the
contract is merely an ‘incidental beneficiary,’ who has no enforceable rights under the
contract.” Id. The “mere conferring of some benefit on the supposed beneficiary by the
performance of a particular promise in a contract is insufficient; the performance of the
promise must also satisfy a duty owed by the promisee to the beneficiary.” Id.
The “intent to benefit” test sets a high bar for plaintiffs seeking to assert rights as
a third-party beneficiary. In Reisenfeld & Co. v. Network Group, Inc., 277 F.3d 856 (6th Cir.
2002), for example, the Sixth Circuit observed that it was not sufficient to allege that a
promisee had an “ancillary intention” to confer benefits on the third party to state a claim
under Ohio law. Id. at 863. Instead, “[i]n order that a third person may enforce a promise
made for his benefit, it must appear that the contract was made and entered into directly
or primarily for the benefit of such third person.” Id. (quoting Hines v. Amole, 4 Ohio
App.3d 263, 448 N.E.2d 473, 479 (Ohio Ct. App. 1982)). The third person need not be
directly named in the contract, but an “incidental or indirect benefit to a third party is not
sufficient to provide the third party with a cause of action.” Alexander v. Motorists Mut.
Ins. Co., 2012-Ohio-3911, ¶ 27.
PayPal cites several cases in which courts have found that a plaintiff was not a
third-party beneficiary under a contract. The most compelling cases that the Court has
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reviewed, however, were decided on summary judgment or at trial after review of the
contract in question. See, e.g., Huff v. FirstEnergy Corp., 2011-Ohio-5083, ¶ 14, 130 Ohio St.
3d 196, 201, 957 N.E.2d 3, 7 (affirming summary judgment for defendant on breach-ofcontract claim where review of contract did not create genuine issue of fact regarding
whether plaintiffs were intended beneficiaries); Fed. Ins. Co. v. Fredericks, 2015-Ohio-694,
¶ 51, 29 N.E.3d 313, 326 (affirming trial court’s finding of no liability on third-party
beneficiary theory where subcontract extended no benefits to plaintiff); Alexander, 2012Ohio-3911, ¶ 26 (affirming summary judgment for defendant on alleged third-party
beneficiary’s breach-of-contract claim where nothing in the language of the contract
indicated plaintiff was an intended beneficiary); Reisenfeld & Co. v. Network Grp., Inc., 277
F.3d 856, 864 (6th Cir. 2002) (affirming summary judgment for defendant on breach-ofcontract claim where it was “clear that the specific provision in the contract mentioning
[plaintiff] was not entered into for [plaintiff’s] benefit”).
Here, Plaintiffs have alleged that they are intended beneficiaries under a contract
between American Express and PayPal.

Plaintiffs specifically allege that PayPal is

required to take certain actions under the contract to protect American Express account
holders, like Plaintiffs. (Doc. 2 at ¶ 25.) The Court must accept these factual allegations
as true. Because the contract is expressly identified in the Complaint, PayPal could have
submitted it for the Court’s review in consideration of its Motion to Dismiss. The Court
then might have been in a position to evaluate whether Plaintiffs’ allegations concerning
the contract’s terms are plausible. Without the contract, the Court has only Plaintiffs’
allegations regarding its contents. Construing these factual allegations in the light most
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favorable to Plaintiffs, they state a claim for relief. It is plausible that, in exchange for its
account holders’ business, a credit card company might require service providers to take
certain precautions to protect those account holders. For this reason, at this stage of the
case, the Court must deny PayPal’s Motion to Dismiss Plaintiffs’ breach-of-contract claim.
B. Plaintiffs’ Claim for Negligence
To state a claim for negligence, the Complaint must contain factual allegations
showing the existence of a duty owed to the plaintiff, a breach of that duty, and an injury
proximately resulting from the breach. Jeffers v. Olexo, 43 Ohio St. 3d 140, 142, 539 N.E.2d
614 (1989). “[T]he existence of a duty depends upon the foreseeability of harm; if a
reasonably prudent person would have anticipated that an injury was likely to result
from a particular act, the court could find that the duty element of negligence is satisfied.”
Wallace v. Ohio DOC, 96 Ohio St.3d 266, 2002-Ohio-4210, 773 N.E.2d 1018, ¶ 23.
PayPal moves to dismiss Plaintiffs’ negligence claim on the grounds that the
Complaint does not allege facts showing the existence of any duty owed to Plaintiffs and
that Plaintiffs are not permitted to bring a claim in tort against PayPal under the economic
loss doctrine. (Doc. 4 at 6 (citing Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 106
Ohio St.3d 412, 2005-Ohio-5409, ¶ 6).)
As the Supreme Court of Ohio explained in Shook:
The economic-loss rule generally prevents recovery in tort of damages for
purely economic loss. See Chemtrol Adhesives, Inc. v. Am. Mfrs. Mut. Ins. Co.
(1989), 42 Ohio St.3d 40, 45, 537 N.E.2d 624; Floor Craft Floor Covering, Inc. v.
Parma Community Gen. Hosp. Assn. (1990), 54 Ohio St.3d 1, 3, 560 N.E.2d 206.
“’[T]he well-established general rule is that a plaintiff who has suffered
only economic loss due to another's negligence has not been injured in a
manner which is legally cognizable or compensable.’” Chemtrol, 42 Ohio
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St.3d at 44, 537 N.E.2d 624, quoting Nebraska Innkeepers, Inc. v. Pittsburgh–
Des Moines Corp. (Iowa 1984), 345 N.W.2d 124, 126. See, also, Floor Craft, 54
Ohio St.3d at 3, 560 N.E.2d 206. This rule stems from the recognition of a
balance between tort law, designed to redress losses suffered by breach of
a duty imposed by law to protect societal interests, and contract law, which
holds that “parties to a commercial transaction should remain free to
govern their own affairs.” Chemtrol, 42 Ohio St.3d at 42, 537 N.E.2d 624. See
also, Floor Craft, 54 Ohio St.3d at 7, 560 N.E.2d 206, quoting Sensenbrenner v.
Rust, Orling & Neale Architects, Inc. (1988), 236 Va. 419, 425, 374 S.E.2d 55.
“‘Tort law is not designed * * * to compensate parties for losses suffered as
a result of a breach of duties assumed only by agreement. That type of
compensation necessitates an analysis of the damages which were within
the contemplation of the parties when framing their agreement. It remains
the particular province of the law of contracts.’” Floor Craft, 54 Ohio St.3d
at 7, 560 N.E.2d 206, quoting Sensenbrenner, 236 Va. at 425, 374 S.E.2d 55.
Shook, 2005-Ohio-5409, ¶ 6.
Plaintiffs acknowledge the economic loss doctrine, but argue that an exception to
that doctrine applies where the duty of care arises independent of the contract at issue.
They contend that PayPal’s duty arose from its “special relationship” with Folkerth and
Shopsmith “as to the means and manner of AMEX credit card transactions and how those
transactions are reported.” (Doc. 2 at ¶ 33.) Specifically, Plaintiffs argue that the duty of
care arises as a result of PayPal’s exercise of substantial control over the credit card
purchases involving Plaintiffs’ credit card accounts and the foreseeability of harm to
Plaintiffs arising from their relationship with PayPal. (Doc. 10 at 6-7 (citing Federal Steel
& Wire Corp. v. Ruhlin Constr. Co. (1989), 45 Ohio St. 3d 171, 174).)
Plaintiffs contend other jurisdictions have found the existence of a duty of care in
connection with financial transactions. (Id. at 7 (citing Sovereign Bank v. BJ’s Wholesale
Club, Inc., 395 F. Supp. 2d 183, 194, 194 (M.D. Penn. 2005); FleetBoston Fin. Corp. v. Advanta
Corp., No. CIV. A. 16912-NC, 2003 WL 240885, at *34 (Del. Ch. Jan. 22, 2003); Merrick Bank
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Corp. v. Valley Nat'l Bank, No. CV 13-7756, 2017 WL 5951583, at *6 (D.N.J. Nov. 30, 2017);
In re: The Home Depot, Inc., Customer Data Sec. Breach Litig., No. 1:14-MD-2583-TWT, 2016
WL 2897520, at *4 (N.D. Ga. May 18, 2016). As noted by PayPal, however, Sovereign Bank
actually supports PayPal’s Motion to Dismiss and the other cases cited by Plaintiffs are
distinguishable on their facts.
Sovereign Bank stemmed from the breach of a retailer’s computer system and
consequent theft of credit card information belonging to Sovereign Bank’s customers.
Sovereign Bank brought a negligence claim against the retailer and Fifth Third Bank,
which processed the retailer’s credit card transactions. 395 F. Supp. 2d at 187. The district
court held that Sovereign Bank had a sufficient relationship with the retailer to support
the existence of a duty and therefore a negligence claim. As to Fifth Third Bank, however,
the district court found that the economic loss doctrine precluded a negligence claim. Id.
at 203-05. Under the applicable Pennsylvania law, there were two rationales for the
economic loss doctrine: (1) the “putative tortfeasor could not foresee the harm,” and (2)
“public policy dictated a limitation on the right of recovery in negligence for economic
losses.” Id. at 204. As a matter of public policy, Pennsylvania courts had determined that
permitting anyone “in the economic chain” to sue for purely financial losses would overly
burden the economic system. Id. This public policy rationale provided an independent
basis for application of the doctrine, even if harm to Sovereign Bank was foreseeable.
Here, PayPal’s relationship with Plaintiffs is more analogous to Sovereign Bank’s
relationship with Fifth Third Bank than its relationship with the retailer.

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In Advanta, the parties’ dispute arose out of the acquisition of a consumer credit
card business. Advanta Corp., 2003 WL 240885, at *1. The acquiring corporation, referred
to as “Fleet”, sued the selling corporation, called “Advanta”, for damages. Advanta
asserted counterclaims and the case was tried to the court. Among the counterclaims,
Advanta asserted a negligent interference claim based on Fleet’s solicitation of Advanta’s
business card customers. Considering whether Fleet owed any duty to Advanta, the
Delaware Court of Chancery found that Advanta had “surrendered substantial control
over certain of its business card customer accounts” to Fleet under an interim services
agreement. 2003 WL 240885, at *34 (Del. Ch. Jan. 22, 2003). Pursuant to the agreement,
Fleet processed payments for Advanta and had access to its proprietary customer
information, including information about its business card customers. Id. This special
relationship was sufficient to impose a duty on Fleet not to negligently interfere with
Advanta’s business. In contrast, in the instant case, Plaintiffs do not allege that they gave
PayPal unfettered access to their proprietary information. In addition, Plaintiffs had a
direct relationship with American Express, not PayPal.
In Merrick Bank, a bank was accused of negligently mismanaging an escrow
account. 2017 WL 5951583, at *1. The escrow account held funds from the purchase of
airline tickets, which were to be used to refund passengers for cancelled flights. The
airline failed and, due to mismanagement of the escrow account, many passengers never
received their refunds. The district court considered several factors in finding that the
bank had a duty of care in its management of the escrow account, including “the risk, the
foreseeability, or the likelihood of injury all weighed against the social utility of the actor's
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conduct, the opportunity and ability to exercise care to prevent the injury and the
consequences of placing the burden of the duty on the actor.” Id. at *6 (quoting J.S. v.
R.T.H., 155 N.J. 330, 337, 714 A.2d 924, 928 (1998)). The district court found the risk to the
airline’s customers plainly foreseeable—if there was no money in the escrow account,
customers could not be reimbursed. It further recognized the escrow account as the only
recourse for customers who paid by check for their tickets.
The district court distinguished New Jersey caselaw holding banks had no duty to
a third party. Id. (citing cases). In some of those cases, the bank had an ancillary role,
such as cashing a check, in a fraudulent scheme perpetrated by someone else. See Brunson
v. Affinity Federal Credit Union, 199 N.J. 381, 407 (2009) (bank did not owe duty to victim
of identity theft who was incarcerated after importer used victim’s identity to cash
fraudulent checks); City Check Cashing, Inc. v. Manufacturers Hanover Trust Co., 166 N.J. 49,
62 (2001) (bank had no duty of care to the plaintiff, a check cashing service, when the
bank incorrectly verified the authenticity of a check); Penn. Nat’l Turf Club, Inc. v. Bank of
West Jersey, 385 A.2d 932, 934 (N.J. App. Div. 1978), cert. denied, 77 N.J. 506 (1978)
(dismissing negligence claim where bank deviated from good banking practices by
failing to dishonor a depositor’s returned checks within midnight deadline required by
the Uniform Commercial Code). None of the cited cases involved mismanagement of an
escrow account. The district court found imposition of a duty was also consistent with
fairness and policy considerations because it would protect consumers from financial loss
in the case of a flight operator’s insolvency. Id. at *7.

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Returning to this case, the relationship between Plaintiffs and PayPal is different
from the relationship between the airline customers and the bank managing the airline’s
escrow account in Merrick Bank. PayPal was not responsible for holding funds against
which Plaintiffs might have a claim. Nor did PayPal represent the only recourse for
Plaintiffs to obtain refunds for the fictitious goods purchased by Mr. Powell. PayPal has
more in common with the banks in the caselaw distinguished by the district court in
Merrick Bank. Like those banks, PayPal processed a transaction in which someone else,
here the Powells, allegedly defrauded Plaintiffs.
Plaintiffs also rely on In re: The Home Depot, Inc., Customer Data Sec. Breach Litig.,
No. 1:14-MD-2583-TWT, 2016 WL 2897520, at *4 (N.D. Ga. May 18, 2016). In that case,
the district court held that a negligence claim could proceed against Home Depot where
it stored customers’ credit card information, which was subsequently stolen. Id. at *3-4.
The district court reasoned, “A retailer's actions and inactions, such as disabling security
features and ignoring warning signs of a data breach, are sufficient to show that the
retailer caused foreseeable harm to a plaintiff and therefore owed a duty in tort.” Id. at
*3. Here, PayPal was not the retailer and did not interact directly with Plaintiffs.
In sum, Plaintiffs do not allege the kind of special relationship that would impose
a duty of care on PayPal, even under the caselaw cited by Plaintiffs.
Plaintiffs also argue, however, that PayPal is liable based upon its violation of
statutory enactments, which would constitute negligence per se. (Doc. 10 at 8 (citing
Chambers v. St. Mary’s Sch. (1998), 82 Ohio St. 3d 563, 565; Thornton v. State Farm Mut. Auto
Ins. Co., 2006 U.S. Dist. LEXIS 83968, *43 (N.D. Ohio 2006).) Plaintiffs specifically argue
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that PayPal violated section 5 of the Federal Trade Commission (“FTC”) Act, 15, U.S.C. §
45(a), and the Ohio Deceptive Trade Practices Act (“ODTPA”), Ohio Rev. Code §
4165.02(A)(1) and (2).
Section 5 of the FTC Act is the basic consumer protection statute enforced by the
Federal Trade Commission. Section 5 prohibits “unfair or deceptive acts and practices in
or affecting commerce.” 15 U.S.C. § 45(a)(1). PayPal argues that Section 5 is inapplicable
because it applies only to unfair or deceptive acts directed toward consumers. (Doc. 17
at 5, citing FTC v. OMICS Grp. Inc., 2017 U.S. Dist. Lexis 161910, *5 (D. Nev. Sep. 29, 2017)
and

https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority.)

PayPal

reasons that Plaintiffs—a business (Shopsmith) and its owner (Folkerth)—are not
consumers and, therefore, no violation of Section 5 is alleged.
Plaintiffs cite FTC v. Inc21.com Corp., 745 F.Supp. 2d 975 (N.D. Cal. 2010) for the
standard for proving deceptive billing practices in violation of Section 5 of the FTC Act.
In that case, the defendants billed consumers for internet-based products and services by
placing monthly charges on their telephone bills. Id. at 1000. On the parties’ motions for
summary judgment, the district court noted that, under Section 5, “[a]n act or practice is
deceptive if ‘first, there is a representation, omission, or practice that, second, is likely to
mislead consumers acting reasonably under the circumstances, and third, the
representation, omission, or practice is material.’” Id. (quoting FTC v. Gill, 265 F.3d 944,
950 (9th Cir. 2001)). The district court found undisputed evidence established that nearly
97 percent of the defendants’ customers had not agreed to purchase the products for
which they were billed. In addition, the court found that placement of the charges on
15

consumer telephone bills constituted an affirmative representation that the consumers
had in fact authorized the purchases. Id. The representation was material because it
involved “information that is important to consumers and, hence, likely to affect their
choice of, or conduct regarding, a product.” Id. at 1001, (quoting FTC v. Cyberspace.Com
LLC, 453 F.3d 1196, 1201 (9th Cir.2006)).
Among other arguments, the Inc21.com defendants argued that they subjectively
believed their customers had authorized the charges on their telephone bills. The district
court dismissed this argument, however, observing that defendants’ subjective belief was
immaterial to liability under Section 5—which turns on only whether a reasonable
consumer was likely to be misled. Id. at 1003 (citing Gill, 265 F.3d at 950). The district
court dismissed defendants’ other arguments and granted summary judgment for the
FTC on the claim.
Even construing the Complaint’s allegations in the light most favorable to
Plaintiffs, they have not alleged a violation of Section 5 of the FTC Act. This is because
the Complaint does not contain factual allegations about how consumers, or the public
generally, perceived, and therefore would have been misled by, the PayPal account used
to execute the Powells’ alleged fraudulent scheme. Instead, Plaintiffs allege that a
business and its principal were deceived by the intentional fraud committed by an
employee. Moreover, Plaintiffs allege that they were deceived because they could not
detect the fraud in their American Express billing statement. There is no indication that
a consumer, interacting directly with the fraudulent PayPal account, would have been
fooled into believing that the account actually belonged to a legitimate business.
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As to the ODTPA, to establish a claim, a party must demonstrate an intent to
engage in deception or unfairly compete. Olde Towne Windows v. Baker, 96 Ohio App. 3d
204, 205 (Ohio 6th Dist. 1994) (dismissal of ODTPA claim proper where plaintiff failed to
present facts which would establish intent to deceive). Plaintiffs do not allege that PayPal
acted with an intent to deceive, but that PayPal was negligent in permitting others to act
with such intent. Plaintiffs’ negligence per se theory of liability therefore also fails.
The Court grants the Motion to Dismiss Plaintiffs’ negligence claim.
C. Plaintiffs’ Claim for Fraud
Under Ohio law, a well-pled claim for fraud alleges: “(1) a representation (or
concealment of a fact when there is a duty to disclose) (2) that is material to the transaction
at hand, (3) made falsely, with knowledge of its falsity or with such utter disregard and
recklessness as to whether it is true or false that knowledge may be inferred, and (4) with
intent to mislead another into relying upon it, (5) justifiable reliance, and (6) resulting
injury proximately caused by the reliance.” Volbers-Klarich v. Middletown Mgt., Inc., 2010Ohio-2057, ¶ 27, 125 Ohio St. 3d 494, 501. In addition, under Fed. R. Civ. P. 9(b), a plaintiff
must allege “with particularity the circumstances constituting fraud or mistake.” “So
long as a relator pleads sufficient detail—in terms of time, place and content, the nature
of a defendant’s fraudulent scheme, and the injury resulting from the fraud—to allow the
defendant to prepare a responsive pleading, the requirements of Rule 9(b) will generally
be met.” U.S. ex rel. SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496, 504 (6th Cir. 2008).
PayPal argues that Plaintiffs’ claim for fraud must be dismissed because the
Complaint does not allege PayPal made any representations to Plaintiffs and fails to
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plead the details of any alleged fraudulent statements with the particularity required by
Rule 9(b).

In response, Plaintiffs persuasively argue that the Complaint meets the

particularity requirements of Rule 9(b), but fail to address the argument that their
allegations, even if sufficiently detailed, do not state a cause of action under Ohio law.
(Doc. 10 at 9-11, citing, inter alia, U.S. ex rel. SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496,
504 (6th Cir. 2008).)
This Court has previously recognized that, under Ohio law, “[a] party may not
be held liable for fraudulent acts in which he does not participate, or for false
representations which were neither induced by him nor made with his knowledge.”
Firestone v. Galbreath, 747 F. Supp. 1556, 1569–70 (S.D. Ohio 1990) (citing Klein v. Equitable
Life Assurance Soc., 17 Ohio App.3d 50, 477 N.E.2d 1190 (1984)), aff’d in relevant part, 976
F.2d 279 (6th Cir. 1992), certified question answered, 67 Ohio St. 3d 87, 616 N.E.2d 202
(1993), and aff’d in part, rev’d in part, 25 F.3d 323 (6th Cir. 1994). A party may be held
liable, however, if it or someone with authority to act on its behalf procures the fraud.
Klein, 477 N.E.2d at 1193; see also Fed. Mgt. Co. v. Coopers & Lybrand, 137 Ohio App. 3d 366,
381–82, 738 N.E.2d 842, 853 (2000).
Here, at most, the Complaint alleges that PayPal knowingly permitted the Powells
to misidentify the seller in the fraudulent transactions they charged to Plaintiffs’
American Express account.

(Doc. 2 at ¶ 13.)

Such allegations do not amount to

participating in the fraud in a manner for which PayPal may be held liable under Ohio
law.

Plaintiffs have not offered any rebuttal to this argument. Their fraud claim is

therefore dismissed.
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D. Plaintiffs’ Claim for Negligent Misrepresentation
In order to state a claim for negligent misrepresentation under Ohio law, a plaintiff
must allege facts establishing that the defendant had “a duty to provide accurate
information to the plaintiff that goes beyond the common-law duty to exercise reasonable
care to prevent foreseeable harm.” 425 Beecher, LLC v. Unizan Bank, 186 Ohio App.3d 214,
2010-Ohio-412, 927 N.E.2d 46, ¶ 51 (10th Dist.); accord Ford v. New Century Mtge. Corp.,
797 F.Supp.2d 862, 872 (N.D. Ohio 2011) (“A core requirement in a claim for negligent
misrepresentation is a special relationship under which the defendant supplied
information to the plaintiff for the latter’s guidance in its business transaction.”). As
discussed above, Plaintiffs have not alleged a special relationship that would give rise to
such a duty. In addition, Plaintiffs allege a misrepresentation by the Powells, not a
misrepresentation by PayPal. For these reasons, Plaintiffs’ negligent misrepresentation
claim must be dismissed.
E. Plaintiffs’ Claim for Unjust Enrichment
Plaintiffs’ claim for unjust enrichment against PayPal is based “upon PayPal
having received fees for each fraudulent credit card transaction that PayPal processed
through PayPal’s account, knowing (or with reckless disregard of the truth) that the credit
card transactions were fraudulent.” (Doc. 10 at 13, citing Doc. 2 at ¶¶ 20, 46, 57.) PayPal
argues that, despite Plaintiffs’ assertion, the Complaint is devoid of facts showing that
PayPal retained any of the alleged unauthorized credit card charges or any other benefit
from Plaintiffs. PayPal also suggests that it would not be unjust to permit PayPal to retain

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any funds because Plaintiffs failed to examine their billing statements to discover the
Powell’s fraud. In other words, Plaintiffs are to blame for their losses, not PayPal.
A claim for unjust enrichment has three elements: (1) a benefit conferred by the
plaintiff upon the defendant; (2) knowledge by the defendant of the benefit; and (3)
retention of the benefit by the defendant under circumstances where it would be unjust
to do so without payment. Reisenfeld & Co. v. Network Group, Inc., 277 F.3d 856, 860 (6th
Cir.2002). A plaintiff is not required to allege an injury in excess of the harm inherent in
the defendant’s unjust retention of the benefit. Delahunt v. Cytodyne Techs., 241 F. Supp.
2d 827, 836 (S.D. Ohio 2003).
Plaintiffs have alleged that they conferred a benefit on PayPal through the
payment of transaction fees via their American Express account.

They have also

sufficiently alleged that PayPal had knowledge of its receipt of this benefit. The only
issue is whether Plaintiffs allege the third element—that PayPal’s retention of this benefit
would be unjust under the circumstances. PayPal has not cited any caselaw supporting
its contention that Plaintiffs’ allegations are insufficient as a matter of law to state a claim
for unjust enrichment. Rather, the question of whether retention of a benefit would be
unjust is a mixed question of fact and law—a question difficult to rule upon at the
pleading stage without apposite, binding precedent. For this reason, the Court denies
the motion to dismiss Plaintiffs’ unjust enrichment claim.

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IV.

CONCLUSION

For the reasons above, the Court GRANTS IN PART and DENIES IN PART
PayPal’s Motion to Dismiss (Doc. 4).

Plaintiffs’ negligence, fraud and negligent

misrepresentation claims are DISMISSED. Plaintiffs’ other claims shall proceed.
DONE and ORDERED in Dayton, Ohio, this Thursday, August 23, 2018.
s/Thomas M. Rose
________________________________
THOMAS M. ROSE
UNITED STATES DISTRICT JUDGE

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