HealthBanc International v. Synergy Worldwide et al

Filing 54

MEMORANDUM DECISION granting 31 Counterclaim Defendant's Motion to Dismiss Counterclaim. Synergy has not adequately pled its fraudulent inducement cause of action. The dismissal is without prejudice. Synergy has leave from the court to amend the fraud in the inducement cause of action contained within its counterclaim on or before October 7, 2016. Signed by Judge Jill N. Parrish on 9/22/16. (jlw)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

HEALTHBANC INTERNATIONAL, LLC
and BERNARD FELDMAN,
Plaintiffs and Counterclaim Defendants,

MEMORANDUM DECISION AND ORDER
GRANTING COUNTERCLAIM
DEFENDANT’S MOTION TO DISMISS
COUNTERCLAIM

v.
Case No. 2:16-cv-00135-JNP-PMW
SYNERGY WORLDWIDE, INC.;
NATURE’S SUNSHINE PRODUCTS,
INCORPORATED; and DAN NORMAN;

District Judge Jill N. Parrish

Defendants and Counterclaim Plaintiffs.
Before the court is a motion to dismiss brought by counterclaim defendant HealthBanc
International, LLC against counterclaim plaintiff Synergy Worldwide, Inc. (Docket 31).
HealthBanc argues that Synergy failed to plead its third cause of action for fraudulent
inducement with particularity. HealthBanc further asserts that this cause of action is barred by
the economic loss doctrine. The court agrees that Synergy did not plead this cause of action with
particularity and dismisses it without prejudice.
BACKGROUND
HealthBanc created a recipe for a powder comprised of various grasses and other
components called “the greens formula.” The greens formula can be combined with water to
create a nutritional supplement.
HealthBanc entered into a royalty contract with Synergy, a multi-level marketing
company. The contract gave Synergy the exclusive right to distribute the greens formula in

exchange for an agreement to pay HealthBanc a fixed sum of money for each bottle of the greens
formula Synergy sold.
About nine years after entering into the contract, HealthBanc sued Synergy. Synergy filed
a counterclaim against HealthBanc, alleging, among other things, that HealthBanc fraudulently
induced Synergy into entering into the royalty contract by falsely representing that HealthBanc
owned intellectual property rights to the greens formula.
HealthBanc moved to dismiss Synergy’s fraudulent inducement cause of action. First,
HealthBanc argues that Synergy failed to plead this cause of action with particularity as required
by rule 9(b) of the Federal Rules of Civil Procedure. Second, HealthBanc contends that the
economic loss doctrine bars this cause of action.
APPLICABLE LAW
A federal court exercising either diversity jurisdiction or supplemental jurisdiction
“applies the substantive law, including choice of law rules, of the forum state.” BancOklahoma
Mortg. Corp. v. Capital Title Co., 194 F.3d 1089, 1103 (10th Cir. 1999) (citation omitted). Utah
applies “the ‘most significant relationship’ approach as described in the Restatement (Second) of
Conflict of Laws in determining which state’s laws should apply to a given circumstance.”
Waddoups v. Amalgamated Sugar Co., 54 P.3d 1054, 1059 (Utah 2002).
Neither HealthBanc nor Synergy engaged in a Utah choice of law analysis to determine
which jurisdiction’s substantive law governs Synergy’s fraud in the inducement cause of action.
Instead, both parties have assumed that Utah law governs this tort claim and have exclusively
cited Utah’s substantive law. Absent any indication to the contrary in the facts alleged in
Synergy’s counterclaim, this court also applies Utah’s substantive law. But this court applies
federal law when determining whether dismissal of a cause of action is appropriate under rule
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9(b) or rule 12(b)(6) of the Federal Rules of Civil Procedure. See Stickley v. State Farm Mut.
Auto. Ins. Co., 505 F.3d 1070, 1076 (10th Cir. 2007) (“[W]e are governed by federal law in
determining the propriety of the district court’s grant of summary judgment [under rule 56(c).”).
ANALYSIS
I.

The Particularity Requirement.
Rule 9(b) of the Federal Rules of Civil Procedure requires that “[i]n alleging fraud or

mistake, a party must state with particularity the circumstances constituting fraud or mistake.”
“At a minimum, Rule 9(b) requires that a plaintiff set forth the ‘who, what, when, where and
how’ of the alleged fraud.” United States ex rel. Sikkenga v. Regence Bluecross Blueshield of
Utah, 472 F.3d 702, 726–27 (10th Cir. 2006) (citation omitted). In other words, “a complaint
alleging fraud [must] ‘set forth the time, place and contents of the false representation, the
identity of the party making the false statements and the consequences thereof.’” Koch v. Koch
Indus., 203 F.3d 1202, 1236 (10th Cir. 2000).
Synergy’s fraudulent inducement cause of action is principally based upon the following
allegations:
HealthBanc made numerous false statements of material fact, with
the intent of inducing Synergy into entering into the Agreement.
Specifically, in negotiations leading up to the Agreement and in the
Agreement itself, HealthBanc misrepresented that it owned
intellectual property rights in the Specified Greens Formula.
Further, in negotiations leading up to the Agreement and in the
Agreement itself, HealthBanc misrepresented that it had the
exclusive right to use, assign or sell the Specified Greens Formula.
These representations were false as HealthBanc owned no
intellectual property rights in the Specified Greens Formula and
did not possess the exclusive right to use, assign, or sell the
Specified Greens Formula.

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[Docket 25, ¶ 52]. Synergy asserts two broad categories of fraudulent communications: (1)
misrepresentations made during negotiations prior to signing the contract and (2)
misrepresentations made in the signed contract itself. The court addresses each of these
categories in turn. Finally, the court will address HealthBanc’s argument that Synergy failed to
plead damages with particularity.
A.

Allegations of misrepresentations during contract negotiations.

Synergy alleges in general terms that HealthBanc “misrepresented that it owned
intellectual property rights” to the greens formula and “had the exclusive right to use, assign or
sell” it during negotiations leading up to the signing of the contract. These general allegations do
not meet the particularity requirement of rule 9(b).
The Tenth Circuit has held that a general allegation that “misrepresentations were made
‘during 1982 and continuing to the present time’” did not comply with rule 9(b) because the
allegation did not provide a “sufficiently precise timeframe,” “the place at which any
misrepresentations were made,” or “identify any specific Defendant who made these alleged
fraudulent misrepresentations.” Koch, 203 F.3d at 1237. Additionally, this court has concluded
that an allegation that false representations were made “during the course of negotiating [a
contract]” was insufficient because it “failed to indicate the time of the misrepresentations, where
the misrepresentations were made and the identity of the person making such representations.”
Associated Diving & Marine Contractors, L.C. v. Granite Const. Co., No. 2:01CV330 DB, 2003
WL 25424908, at *8 (D. Utah July 11, 2003).
Similarly, Synergy’s counterclaim does not identify when or where the alleged
misrepresentations were made, whether the misrepresentations were written or verbal in nature,
or who made the misrepresentations. Nor does the counterclaim provide a specific account of the
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“contents of the false representation.” Koch, 203 F.3d at 1236 (citation omitted). Thus, Synergy’s
general allegations regarding misrepresentations made during contract negotiations do not
comply with rule 9(b).
B.

Allegations of misrepresentations contained in the signed contract.

Synergy also alleges that misrepresentations contained in the royalty contract itself
constitute fraudulent inducement. The counterclaim asserts that the royalty contract states that
“HealthBanc ‘represents and warrants that it is the sole and exclusive owner of the entire rights,
title and interest, including without limitation all patent, trademark, copyright and other
intellectual property rights, in and to’ the Specified Greens Formula.” [Docket 25, ¶ 26]. In
addition, the contract allegedly provides that “HealthBanc ‘represents and warrants that it has the
right to provide the Greens Formula to Synergy on an exclusive basis.’” [Docket 25, ¶ 27]
But these allegations regarding the contents of the signed contract cannot be evidence of
a fraudulent representation that induced Synergy to sign the contract. The tort of fraudulent
inducement requires a fraudulent communication that precedes the signing of the contract.
Otherwise, there can be no causal link between the fraudulent communication and the act of
entering into the contract.1
Although the contract language that Synergy complains about likely existed in drafts
before the contract was signed, Synergy fails to allege the necessary particulars of this process.
For example, the counterclaim does not reveal whether an agent of HealthBanc drafted this
language with the intent to fraudulently induce Synergy to enter into the contract. Nor does the
Moreover, if Synergy wishes to assert a theory of fraud based upon the alleged warrantees
contained in the royalty contract rather than a fraud in the inducement claim, it must contend
with the economic loss rule that it raises in its motion to dismiss HealthBanc’s cause of action for
fraud. [Docket 45].
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complaint allege that an agent of Synergy read the draft language; that the language caused the
Synergy agent to falsely believe that HealthBanc owned patent, copyright, or trademark rights to
the greens formula; or that this false belief caused the Synergy agent to sign the final royalty
contract. Absent allegations regarding the “who, what, when, where and how” of the drafting
process that resulted in the final contract, Synergy has failed to plead with particularity a
fraudulent misrepresentation that allegedly induced it to enter the agreement.2 See Bluecross, 472
F.3d at 726–27.
C.

Allegations of harm.

Finally, HealthBanc argues that Synergy’s allegations of harm do not meet the heightened
pleading requirements of rule 9(b). Because rule 9(b) only requires particularity regarding “the
circumstances constituting fraud,” there is some question as to whether this heightened pleading
standard applies to allegations of harm resulting from the fraud. See Rezin v. Barr (In re Barr),
188 B.R. 565, 570 (Bankr. N.D. Ill. 1995) (“[I]t is not necessary that a plaintiff plead each
element of fraud, so long as the circumstances constituting fraud have adequately been set
forth.”). The Tenth Circuit, however, has held that that the particularity requirement of rule 9(b)
requires a party alleging fraud to “set forth the time, place and contents of the false
representation . . . and the consequences thereof.’” Koch v. Koch Indus., 203 F.3d 1202, 1236

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The court also notes an inconsistency between the allegations contained in Synergy’s
counterclaim for fraudulent inducement and the arguments it advances in its motion to dismiss
HealthBanc’s claims for trade secret violations. In its counterclaim, Synergy alleges that
HealthBanc’s representations in the contract were false because “HealthBanc owned no
intellectual property rights” to the greens formula. [Docket 25, ¶ 52]. But in its motion to dismiss
HealthBanc’s causes of action for trade secret violations, Synergy argues that HealthBanc transferred
its trade secret right to the greens formula to Synergy. [Docket 45, 50].
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(10th Cir. 2000) (emphasis added). This court, therefore, applies the rule 9(b) standard to
Synergy’s allegations of harm resulting from the allegedly fraudulent misrepresentations.
Synergy’s allegations of harm do not meet this standard. Synergy asserts in its
counterclaim that it “was harmed” and that it “incurred costs, expenses, and attorneys’ fees as a
result of HealthBanc’s misrepresentations.” [Docket 25, ¶¶ 55, 56]. Absent more definite
allegations regarding the harmful consequences of entering into the royalty contract, these
assertions do not meet rule 9(b)’s particularity requirement.
D.

Dismissal is without prejudice.

Because Synergy has not pled its fraudulent inducement cause of action with
particularity, it is hereby dismissed. Synergy argues that such a dismissal should be without
prejudice. Because HealthBanc does not oppose granting Synergy an opportunity to amend its
counterclaim, see FED. R. CIV. P. 15(a)(2), and because the fault in Synergy’s pleading lies in the
lack of particularity rather than a legal impediment to the validity of the cause of action as pled,
the dismissal is without prejudice. Synergy has leave from the court to amend the fraud in the
inducement cause of action contained within its counterclaim within 15 days of the date that this
order is filed.
II.

The Economic Loss Rule
HealthBanc also argues that Synergy’s fraudulent inducement cause of action is barred by

the economic loss rule. Under Utah law, “[t]he economic loss rule is a judicially created doctrine
that marks the fundamental boundary between contract law, which protects expectancy interests
created through agreement between the parties, and tort law, which protects individuals and their
property from physical harm by imposing a duty of reasonable care.” Reighard v. Yates, 285 P.3d
1168, 1176 (Utah 2012) (citation omitted). “Thus, ‘when a conflict arises between parties to a
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contract regarding the subject matter of that contract, “the contractual relationship controls, and
parties are not permitted to assert actions in tort in an attempt to circumvent the bargain they
agreed upon.” ’ ” Id. (citation omitted).
There appears to be no binding precedent, however, on the question of whether Utah’s
economic loss rule applies to a fraudulent inducement claim. Utah courts have not squarely
addressed this question. See Donner v. Nicklaus, 778 F.3d 857, 873–75 (10th Cir. 2015).
Moreover, the federal courts are in disagreement as to the status of Utah law on this point. The
United States District Court for the District of Utah has found on several occasions that the
economic loss rule does not apply to fraudulent inducement claims under Utah law. DeMarco v.
LaPay, No. 2:09-CV-190 TS, 2012 WL 3597540, at *2 (D. Utah Aug. 20, 2012) (“a claim for
fraud in the inducement is not barred by the economic loss rule in Utah.”); MP Nexlevel, LLC v.
Codale Elec. Supply, Inc., No. 2:08-CV-0727 CW, 2010 WL 1687985, at *4 (D. Utah Apr. 26,
2010) (“[C]laims arising from pre-contract misrepresentations are not barred by the economic
loss rule”); Worldwide Mach., Inc. v. Wall Mach., Inc., No. 2:06-CV-130DS, 2006 WL 2666411,
at *4 (D. Utah Sept. 12, 2006) (“It is fundamental . . . that a claim for fraud in the inducement
cannot be barred by the economic loss doctrine.”); Associated Diving & Marine Contractors,
L.C. v. Granite Const. Co., No. 2:01-CV-330 DB, 2003 WL 25424908, at *7 (D. Utah July 11,
2003) (“A claim for fraud in the inducement cannot be barred by the economic loss doctrine.”).
But the Tenth Circuit disagrees. It recently held that the economic loss rule applies to fraudulent

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inducement claims under Utah law. Donner, 778 F.3d at 873 (“Utah courts have not confined the
economic loss doctrine to wrongdoing taking place after entry into a contract.”).3
Given that that the status of Utah law on this point remains in doubt, and because the
court dismisses the fraudulent inducement cause of action without prejudice, the court declines to
rule on HealthBanc’s argument that Utah’s economic loss rule bars Synergy’s fraudulent
inducement cause of action. If Synergy is able to successfully plead this cause of action at a
future date, this court can revisit the issue or certify the question to the Utah Supreme Court for
resolution.
CONCLUSION
Synergy has not adequately pled its fraudulent inducement cause of action. Accordingly,
the court hereby GRANTS HealthBanc’s motion to dismiss this counterclaim. (Docket 31). The
dismissal is without prejudice. Synergy has leave from the court to amend the fraud in the
inducement cause of action contained within its counterclaim on or before October 7, 2016.
Signed September 22, 2016.
BY THE COURT

______________________________
Jill N. Parrish
United States District Court Judge

At the hearing on this motion, it appeared that counsel for Synergy was aware of the Donner
opinion, but did not cite it in Synergy’s brief when it raised the fraudulent inducement exception.
The court recognizes that the question of whether Donner’s holding regarding the status of Utah
law binds this court is a difficult one. But citing Donner and addressing its holding would have
been the better option for counsel.
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