ClearOne v. RSM US LLP
MEMORANDUM DECISION AND ORDER granting in part and denying in part 11 Motion to Dismiss for Failure to State a Claim. Signed by Judge David Nuffer on 3/6/17 (alt)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRALCENTRAL DIVISION
CLEARONE, INC., a Utah Corporation.
RSM US LLP, an Iowa limited liability
MEMORANDUM DECISION AND
ORDER DENYING IN PART AND
GRANTING IN PART DEFENDANT’S
MOTION TO DISMISS
Case No. 2:16-cv-00736-DN
District Judge David Nuffer
Defendant RSM US LLP (“RSM”), relying on Rules 9(b) and 12(b)(6), moves to dismiss
(“Motion”) 1 six out of seven claims for relief asserted in Plaintiff ClearOne, Inc.’s (“ClearOne”)
Complaint (“Complaint”). 2 The Complaint alleges seven causes of action: (1) professional
negligence, 3 (2) breach of contract, 4 (3) breach of the covenant of good faith and fair dealing, 5
(4) fraudulent misrepresentation, 6 (5) fraudulent non-disclosure, 7 (6) estoppel, 8 and (7) unjust
enrichment. 9 RSM seeks to dismiss all claims except professional negligence. 10 ClearOne
Partial Motion to Dismiss Under Federal Rules of Civil Procedure 12(b)(6) (“Motion”), docket no. 11, filed August
Complaint (”Complaint”), docket no. 2, filed June 28, 2016.
Id. ¶¶ 71–78.
Id. ¶¶ 79–84.
Id. ¶¶ 85–92.
Id. ¶¶ 93–98.
Id. ¶¶ 99–104.
Id. ¶¶ 105–109.
Id. ¶¶ 110–113.
Motion at 1.
opposes dismissal of any of the claims (“Opposition”). 11 RSM submitted a Reply (“Reply”) to
support its arguments. 12 For the reasons set forth below, the Motion is GRANTED IN PART and
DENIED IN PART.
TABLE OF CONTENTS
TABLE OF CONTENTS ................................................................................................................ 2
ALLEGED FACTS ......................................................................................................................... 2
STANDARD FOR RULE 12(B)(6) MOTION TO DISMISS ....................................................... 5
STANDARD FOR PLEADING FRAUD CLAIMS ...................................................................... 7
DISCUSSION ................................................................................................................................. 7
The Contract Claims ........................................................................................................... 8
The Contract Claims Are Not Redundant ............................................................... 9
The Contract Claims Do Not “Sound in Tort” and Are Not Redundant of the
Professional Negligence Claim ................................................................. 11
Even if the Contract Claims “Sound in Tort,” They Will Not Be Dismissed ....... 14
Fraudulent Misrepresentation ........................................................................................... 14
Fraudulent Non-Disclosure ............................................................................................... 18
RSM Did Not Have a Duty to Notify ClearOne of Unrelated SEC Investigations
There is No Showing that RSM Knew Its Independence Had Been Compromised
in February 2015 ....................................................................................... 20
Equitable Claims ............................................................................................................... 22
CONCLUSION ............................................................................................................................. 24
ORDER ......................................................................................................................................... 26
ALLEGED FACTS 13
ClearOne is a publicly traded company, and is required to file periodic, independently
audited financial statements with the U.S. Securities and Exchange Commission (the “SEC”). 14
In June 2012, ClearOne retained RSM as an independent public accounting firm to perform
Opposition to Defendant’s Partial Motion to Dismiss Under Fed. R. Civ. P. 12(b)(6) (“Opposition”), docket no.
19, filed September 9, 2016.
Reply Brief For Defendant’s Partial Motion to Dismiss under Federal Rules of Civil Procedure 12(b)(6)
(“Reply”), docket no. 20, filed September 30, 2016.
The allegations provided in this section derive from ClearOne’s Complaint and the parties’ briefing. For purposes
of this memorandum decision and order, the Plaintiff’s allegations are assumed to be true.
Complaint ¶¶ 6–7.
auditing, tax, and consulting services for ClearOne in order to meet the requirements of the
SEC. 15 ClearOne alleges that “RSM and ClearOne executed contractual agreements to govern
the work to be performed by RSM, including letters from RSM’s Mel Hudson to Scott
Hunstman, Chairman of the Audit Committee for Clear One, on April 15, 2014, and April 28,
2015 (collectively, the ‘Agreements’).” 16
ClearOne alleges that on or about October 8, 2015, RSM “abruptly and without warning
resigned” as ClearOne’s public accounting firm. 17 “In conjunction with its resignation,”
ClearOne alleges, “RSM withdrew its audit report of ClearOne’s financial statements for the
previous year ended December 31, 2014, as well as all interim reports issued by RSM in
ClearOne alleges that “[a]s ClearOne’s auditor, “RSM owed a number of contractual and
independent duties (the ‘RSM Duties’), including to conduct its audits in accordance with
Generally Accepted Accounting Principles (‘GAAP’), Generally Accepted Auditing Standards
(‘GAAS’), and other binding industry standards, such as those established by the Public
Company Accounting Oversight Board (“PCOAB”)[.]” 19 ClearOne refers to all of these alleged
duties as “Binding Industry Standards.” 20
ClearOne alleges that RSM also owed ClearOne a number of other duties, “including the
bedrock principle that an auditor is at all time[s] to be independent” (“Independence Duty”) 21 as
Id. ¶¶ 7, 24, 28 (citing 17 C.F.R. §210.2–01(b) (requiring that all accountants be independent when auditing for a
client under the SEC rules)).
Complaint ¶ 47.
Id. ¶ 52.
Id. ¶ 53.
Id. ¶ 26.
Id. ¶ 27.
well as a “duty to know and understand the [SEC] rules” 22 of independence; “a duty to establish
and follow internal controls” (“Internal Controls Duty”) 23 to ensure independence; as well as to
“perform . . . customary, periodic, and appropriate conflict checks prior to undertaking any work
for a client that might threaten RSM’s status as ‘independent’” (“Conflict Check Duty”); 24 and a
“duty to timely discover any potential conflict related to RSM’s independence, and to provide
immediate notice to ClearOne” (“Timely Notice Duty”). 25 ClearOne alleges that “RSM’s failure
to identify the potential threat to its independence . . . constitute[s] a breach of RSM’s
contractual, ethical, and other duties to ClearOne[.]” 26
On February 2, 2015, before RSM allegedly resigned as ClearOne’s auditor, RSM
allegedly “expressly represented to ClearOne that, as of that date, RSM was ‘independent with
respect to the Company in compliance with PCOAB Rule 3520,’ in addition to the
‘independence criteria set out in the rules and regulations of the SEC under the federal securities
laws.’” 27 However, ClearOne alleges that this representation regarding independence was not
true. “[B]eginning in 2014,” ClearOne alleges, “an RSM affiliate in Hong Kong, RSM Nelson
Wheeler, provided to ClearOne’s Hong Kong subsidiary certain accounting and consulting
services, including representing ClearOne’s Hong Kong subsidiary with an income-tax related
issues [sic].”This work, ClearOne alleges, “resulted in fees of approximately $2,000, was de
minimis, unrelated to the audit work performed by RSM for ClearOne” 28 and was undertaken
Id. ¶ 29.
Id. ¶ 32 (“Internal Controls Duty”).
Id. ¶ 33 (“Conflict Check Duty”).
Id. ¶ 34 (“Timely Notice Duty”).
Id. ¶ 55.
Id. ¶ 43.
Id. ¶ 40.
“without advising ClearOne that the work might or would threaten RSM’s ‘independence’ with
respect to RSM’s audit under the Binding Industry Standards.” 29 “RSM expressly acknowledged
[in February 2015] that it had considered the work done by RSM Nelson Wheeler in Hong
Kong” for ClearOne’s subsidiary and that it considered the services “preapproved.” 30
According to ClearOne, RSM’s October 2015 resignation letter (the “Resignation
Letter”) stated that RSM’s “independence had been impaired…because ‘an associated entity of
[RSM] 31 ha[d] provided certain prohibited non-audit services to an international subsidiary of
ClearOne.’” 32 ClearOne therefore alleges that “RSM’s failure to identify the potential threat to
its independence and the abrupt resignation constitute a breach of RSM’s contractual, ethical,
and other duties to ClearOne, including the Internal Controls Duty, the Conflict Check Duty, and
the Timely Notice Duty.” 33 RSM moves to dismiss ClearOne’s Complaint with respect to all
causes of action except professional negligence.
STANDARD FOR RULE 12(B)(6) MOTION TO DISMISS
Defendant is entitled to dismissal under Rule 12(b)(6) when the complaint, standing
alone, is legally insufficient to state a claim for which relief may be granted. 34 When considering
a motion to dismiss for failure to state a claim, the thrust of all well-pleaded facts in the
complaint is presumed, but conclusory allegations need not be considered. 35 A court is not bound
Id. ¶ 41.
Id. ¶ 44.
According to the Complaint, RSM was “formerly McGladrey LLP.” Id. ¶ 2.
Id. ¶ 54.
Id. ¶ 55.
See Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999).
See Cory v. Allstate Ins., 583 F.3d 1240, 1244 (10th Cir. 2009).
to accept the complaint’s legal conclusions and opinions, whether or not they are couched as
The United States Supreme Court has held that satisfying the basic pleading requirements
of the federal rules “demands more than an unadorned, the defendant-unlawfully-harmed-me
accusation. A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the
elements of a cause of action will not do.’” 37 “[T]he tenet that a court must accept as true all of
the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” 38
“[N]aked assertions devoid of further factual enhancement,” 39 do not state a claim sufficiently to
survive a motion to dismiss.
“But where the well-pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged—but it has not ‘show[n]’—‘that the pleader
is entitled to relief.’” 40 That is, “[t]he allegations must be enough that, if assumed to be true, the
plaintiff plausibly (not just speculatively) has a claim for relief.” 41 “This requirement of
plausibility serves not only to weed out claims that do not (in the absence of additional
allegations) have a reasonable prospect of success, but also to inform the defendants of the actual
grounds of the claim against them.” 42
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); see Brown v. Zavaras, 63 F.3d 967, 972 (10th Cir. 1995).
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly , 550 U.S. at 555).
Iqbal, 556 U.S. at 678.
Id.at 679 (quoting Fed. R. Civ. P. 8(a)(2)).
Robbins v. Oklahoma 519 F.3d 1242, 1247–48 (10th Cir. 2008).
Id. at 1248.
STANDARD FOR PLEADING FRAUD CLAIMS
Claims alleging fraud must meet the heightened pleading standard found in Rule 9(b). 43
This standard requires that a Plaintiff, “[i]n alleging fraud or mistake . . . must state with
particularity the circumstances constituting fraud or mistake.” 44 Pleading with particularity
requires “set[ting] forth the who, what, when, where and how of the alleged fraud and . . . the
time, place, and contents of the false representation, the identity of the party making the false
statements and the consequences thereof.” 45 “Malice, intent, knowledge, and other conditions of
a person’s mind may be alleged generally.” 46 “But ‘generally’ is a relative term. In the context of
Rule 9, it is to be compared to the particularity requirement applicable to fraud or mistake. Rule
9 merely excuses a party from pleading discriminatory intent under an elevated pleading
standard. It does not give him license to evade the less rigid—though still operative—strictures
of Rule 8.” 47 The plausibility standard still “obliges a pleader to amplify a claim with some
factual allegations” to meet the pleading standards under Rule 8. 48
RSM argues that dismissal is warranted for all claims in the Complaint except the first
cause of action for professional negligence. 49 Thus, RSM moves to dismiss the following claims:
breach of contract;
breach of the implied covenant of good faith and fair dealing;
Fed. R. Civ. P. 9(b).
Id.; Armed Forces Ins. Exch. v. Harrison, 70 P.3d 35, 40 (Utah 2003).
United States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 727 (10th Cir. 2006).
Fed. R. Civ. P. 9(b).
Iqbal, 556 U.S. at 686-87.
Id. at 670.
Motion at 14 –16.
Each of these claims will be discussed in turn, with the breach of contract claim and
breach of the implied covenant of good faith and fair dealing claim (collectively, the “Contract
Claims”) discussed together.
The Contract Claims
RSM raises two challenges to the Contract Claims. First, RSM argues that the Contract
Claims are redundant, and that because the breach of the implied covenant claim is based on the
same conduct as the breach of contract claim, the implied covenant claim must be dismissed. 50
Second, RSM argues that the Contract Claims “sound in tort” and should be dismissed because
the professional negligence claim “arise[s] from identical alleged operative facts and duties[.]” 51
Both of these arguments are incorrect.
First, viewing the allegations in the Complaint in the light most favorable to the
nonmovant, ClearOne, the Contract Claims are not redundant. That is, the breach of contract
claim and the breach of implied covenant claim may be reasonably viewed to be based on
separate grounds. ClearOne’s breach of contract claim may be reasonably read to be based on
RSM’s alleged failure to provide auditing services according to the express provisions found in
the Agreements, while ClearOne’s breach of implied covenant claim may be reasonably read to
be based on implied duties not expressly contained within the Agreements such as the
Independence Duty, the Internal Controls Duty, the Conflict Check Duty, and the Timely Notice
Id. at 16 (“Therefore, Plaintiff’s implied covenant claim should be dismissed as it alleges facts that are identical to
the breach of contract claim.”).
Id. at 17 (emphasis in original).
Second, while the professional negligence claim sounds in tort, the Contract Claims can
be read as sounding in contract, not in tort. Accordingly, the Contract Claims can be viewed as
non-duplicative of the professional negligence claim.
RSM correctly notes that there is some overlap in the Complaint regarding the alleged
conduct to support each of these three claims. 52 Ultimately, to prevail on these claims, ClearOne
will be required to provide evidence to support these allegations. But at this stage of litigation,
where allegations are presumed to be true and are construed in the light most favorable to
ClearOne, ClearOne has sufficiently alleged separate claims. Therefore, RSM’s arguments for
dismissing the Contract Claims are incorrect.
The Contract Claims Are Not Redundant
RSM argues that ClearOne’s “breach of implied covenant claim rests on allegations that
are identical to its breach of contract claim[.]” 53 RSM then argues that “[t]he Complaint does not
allege any contractual breach, or damages, besides the failure to adhere to professional standards
[of care].” 54 RSM is correct that in order to allege a breach of contract claim and a breach of
implied covenant claim, the implied promise for the covenant must be separate from the breach
of contract. 55 However, ClearOne’s Complaint adequately provides a separate basis for its
Contract Claims and cannot be dismissed for reasons of redundancy.
Compare Complaint ¶¶ 75-76 with ¶ 83 and ¶ 89.
Motion at 15.
Id. at 18.
Id. at 15; See Canopy Corp. v. Symantec Corp., 395 F. Supp. 2d 1103, 1111 (D. Utah October 20, 2005) (holding
that the plaintiff could not maintain a claim for breach of implied covenant of good faith and fair dealing because he
failed to demonstrate an implied promise separate from the breach of agreements claim).
ClearOne’s breach of contract claim, as alleged, stems from RSM’s failure to provide
auditing services in accordance with Binding Industry Standards. 56 On the other hand,
ClearOne’s breach of implied covenant claim, as alleged, stems from RSM’s “failure to perform
customary, periodic, and appropriate conflict checks . . . and to provide timely notice to
ClearOne of a potential conflict impairing its qualification . . . .” 57 These statements show that
ClearOne’s breach of contract argument rests on an alleged failure to provide auditing services as
part of the express provisions of the Agreements, while the breach of implied covenant argument
rests on additional “independent duties[.]” 58 ClearOne makes factual allegations to support these
separate claims. To support the breach of contract claim, ClearOne alleges that the parties
entered into valid and binding Agreements that contained specific obligations for RSM to
provide auditing services. 59 ClearOne also alleges that RSM performed some auditing services
but then withdrew those services and did not ultimately fulfill all of the services that were agreed
upon. 60 These factual allegations, if true, support a claim for breach of contract.
To support the breach of implied covenant claim, ClearOne alleges that there were certain
duties RSM was impliedly obligated to fulfill by virtue of the Agreements, but which RSM failed
to fulfill. 61 Those duties include performing conflict checks, giving timely notice of a potential
conflict, and following generally accepted auditing standards. 62 ClearOne also alleges that RSM
Complaint ¶ 80 (“ClearOne and RSM entered into valid and binding Agreements for auditing services.”), ¶ 81
(“The Agreements required that RSM provide auditing services in exchange for payment from ClearOne.”), ¶ 83
(“RSM breached its contractual duties by failing to provide services in accordance with the Binding Industry
Id. ¶ 89.
Id. ¶ 26.
Id. ¶ 80.
Id. ¶ 53.
Id. ¶¶ 55, 89.
waited until October 2015 to give notice of the conflict even though it knew or should have
known of the conflict before that time. 63 If true, these allegations support a separate claim for
breach of implied covenant. Thus, ClearOne’s Contract Claims should not be dismissed for
The Contract Claims Do Not “Sound in Tort” and Are Not Redundant of the Professional
RSM also argues that the Contract Claims sound in tort and should be dismissed because
they are duplicative of ClearOne’s Professional Negligence claim regarding auditing, which also
sounds in tort. 64 RSM cites heavily from two cases to support this argument: Boyd v. Jones 65 and
DOIT, Inc. v. Touche. 66 In Boyd, the plaintiff, Mr. Boyd, sued his former attorney for breach of
contract. “In his claim for breach of contract, Boyd alleged that [his former attorney] failed to
‘perform the contract in good faith and with skill, care, and diligence.’” 67 The problem was,
according to the court, that Boyd “did not cite any portion of a contract that specified a particular
contractual standard of skill, care, or diligence.” 68 In other words, Boyd’s breach of contract
claim was based on duties that were not expressly part of the parties’ agreement. The court
determined that the plaintiff’s claim sounded in tort “because the duty of care related by Boyd’s
complaint is imposed . . . by the common law and not more particularly specified . . . .” 69 That is
not the case here. Here, the breach of contract claim can be viewed to be based on RSM entering
into “valid and binding Agreements for auditing services” but “failing to provide” those
Id. ¶¶ 34, 54–55.
Motion at 16.
Id. at 16–18; Boyd v. Jones, 85 F. App’x 77 (10th Cir. 2003).
Motion at 16–18; DOIT, Inc. v. Touche, Ross & Co., 926 P.2d 835 (Utah 1996).
Boyd, 85 F. App’x at 80–81.
Id. at 81.
services. 70 The breach of contract claim therefore can be viewed as different from the breach of
contract claim in Boyd.
RSM disagrees, arguing that “the only wrong that Plaintiff alleges is that RSM failed to
perform these audits in accordance with industry standards.” 71 According to RSM, this same
argument was made in DOIT and was interpreted by the Utah Supreme Court to be an argument
sounding in tort. 72 In DOIT, RSM argues, contract claims were interpreted as tort claims because
they were simply rephrased negligence claims governed by the professional standards of the
accounting profession. 73 But DOIT is distinguishable from this case because in DOIT it was
undisputed that “the audits were performed, completed, and delivered.” 74 In fact, the plaintiffs in
DOIT did not even argue that the accountant defendants “failed to perform their contracts.” 75
Here, ClearOne’s Complaint does not allege that RSM fulfilled its express obligations under the
Agreements. Instead, ClearOne alleges that “RSM’s abrupt withdrawal as ClearOne’s
independent public auditor, and its withdrawal of its previously issued financial reports, rendered
valueless to ClearOne all of the work done by RSM . . . .” 76 This allegation supports the
argument that RSM breached the express provisions of the contract by not providing the auditing
services it agreed to provide.
Complaint ¶¶ 80, 83.
Motion at 18 (emphasis added).
Reply at 9 n. 4.
DOIT, 926 P.2d at 842 n. 13.
Id. at 849.
Complaint ¶ 56.
Thus, even though it is true that the Complaint states that “RSM breached its contractual
duties by failing to provide services in accordance with the Binding Industry Standards[,]” 77 this
does not mean that DOIT applies and the breach of contract claim sounds in tort. The breach of
contract claim can be reasonably read to be based in express contractual provisions and therefore
based in contract. Further, DOIT also makes clear that “a plaintiff will not be permitted to
characterize a tort action as one in contract in order to avoid the bar of the statute of
limitations.”78 There is no indication ClearOne is attempting to avoid any statute of limitations.
There is no reason to conclude that the breach of contract claim sounds in tort. It is therefore not
duplicative of the professional negligence claim.
Similarly, there is no reason to conclude that the breach of implied covenant claim
sounds in tort. The breach of implied covenant claim is based on the existence of “binding and
enforceable contracts between ClearOne and RSM” 79 which contained implied promises from
RSM that it would not “intentionally or purposefully do anything which would destroy or injure
ClearOne’s right to receive the fruits of the Agreements.” 80 A fair reading of these allegations
shows that the breach of implied covenant claim arises from the existence of the Agreements. It
can be reasonably concluded, then, that the breach of implied covenant claim sounds in contract,
not in tort. Accordingly, it is not duplicative of the professional negligence claim. 81
Id. ¶ 83.
DOIT, 926 P.2d at 842 n. 13.
Complaint ¶ 86
Id. ¶ 88.
The Agreements which are alleged to have formed the contract between the parties have not been provided to the
court. Without the Agreements, the court cannot determine what the Agreements state. Nevertheless, the allegations
contained within the Complaint are sufficient to support the Contract Claims.
Even if the Contract Claims “Sound in Tort,” They Will Not Be Dismissed
RSM is correct that the Complaint is not a model of clarity in describing the alleged
conduct giving rise to the Contract Claims. Indeed, RSM has a strong argument that “[a]t the
heart of [ClearOne]’s contract-based and professional negligence claims is the same allegation
that RSM failed to comply with alleged Binding Industry Standards.” 82 But even if the Contract
Claims are read to arise in tort, and are based on “the common law and not more particularly
specified,” 83 dismissal of the Contract Claims would not be mandated. “In a relationship with a
professional, there may be several sources of liability on which a client can bring a claim: (1)
duties imposed by operation of law, (2) contractual obligations, or (3) coextensive tort and
contract duties.” 84 “[W]ith respect to duties that arise both in tort and contract, . . . a plaintiff
may elect to bring a tort action, a contract action, or both.” 85 Thus, ClearOne is authorized under
Utah law to bring a professional negligence claim arising in tort and Contract Claims arising in
contract or tort, or both. ClearOne may only recover on one of those theories, 86 but these claims
may coexist in the same lawsuit. 87 The Contract Claims will not be dismissed for redundancy.
ClearOne’s fourth cause of action is based on fraudulent misrepresentation. ClearOne
94. RSM made representations to ClearOne which include, but are not limited to,
representations that RSM was independent as of February 2, 2015.
Reply at 8 (emphasis in original).
Boyd, 85 F. App’x at 81.
Guardian Title Co. of Utah v. Mitchell, 54 P.3d 130, 132 (Utah 2002).
Id. at 133 (emphasis added).
Id. at 133 n.3.
Id. at 132–33.
95. RSM’s representations were material; false at the time they were made or
made recklessly, knowing that there was insufficient knowledge upon which to
base such representations; and for the purpose of inducing ClearOne to act.
96. ClearOne, acting in reasonable reliance upon RSM’s fraudulent
representations and in ignorance of their falsity, did in fact rely upon these false
representations to ClearOne’s detriment, including as alleged above.
97. As a direct and proximate result of RSM’s fraudulent misrepresentations,
ClearOne has been damaged and are therefore entitled to a judgment for damages
against RSM in an amount to be determined at trial.
98. RSM’s conduct was willful and malicious or intentionally fraudulent conduct,
or conduct that manifests a knowing and reckless indifference toward, and
disregard of, the rights of ClearOne, entitling ClearOne to an award of punitive
damages against RSM under Utah Code Ann. § 78B-8-201. 88
To establish a claim for fraudulent misrepresentation, the following elements must be
(1) a representation;
(2) concerning a presently existing material fact;
(3) which was false;
(4) which the representer either
(a) knew to be false, or
(b) made recklessly, knowing that he had insufficient knowledge on
which to base such representation;
(5) for the purpose of inducing the other party to act upon it;
(6) that the other party, acting reasonably and in ignorance of its falsity;
(7) did in fact rely upon it;
(8) and was thereby induced to act;
(9) to his injury and damage. 89
As the elements above indicate, a claim for fraudulent misrepresentation can be
established by alleging either actual knowledge (“knew to be false”) or recklessness (“made
recklessly . . . .”). While “malice, intent [and] knowledge” can be alleged generally, 90 such
Complaint ¶¶ 94–98.
Secor v. Knight, 716 P.2d 790, 794 (Utah 1986) (emphasis added); Armed Forces Ins. Exch., 70 P.3d at 40.
Fed. R. Civ. P. 9(b).
claims must be supported by facts. 91 A Plaintiff cannot simply “plead the bare elements of his
cause of action, affix a label ‘general allegation,’ and expect [the] complaint to survive a motion
to dismiss.” 92 Because ClearOne’s allegations regarding fraudulent misrepresentation are
conclusory and lack specificity, and ClearOne fails to allege facts that support knowledge of
falsity or recklessness, RSM is correct that the fraudulent misrepresentation claim should be
ClearOne does not adequately allege a “knowing misrepresentation” sufficient to support
its fraudulent misrepresentation claim because ClearOne does not plausibly allege that RSM had
the requisite intent necessary to establish fraud. 93 There is nothing in the Complaint that suggests
RSM had a plausible motive to deceive. 94 While ClearOne has sufficiently alleged that a
misrepresentation was made, that is not enough to establish fraudulent misrepresentation. There
must be more than an allegation of mistake; there must be knowledge of fraud by either
knowledge of false representation or recklessness, and recklessness is shown by alleging
knowledge that there was not enough information on which to base the misrepresentation. 95
ClearOne’s allegation that RSM stated its independence in the February 2, 2015 letter 96 does not
show either knowledge or recklessness. Conversely, it shows that RSM did not believe its
independence was at risk and had made an inquiry into the matter—indicating there was
Iqbal, 556 U.S.at 686-87 (2009); Koch v. Koch Indus., Inc., 203 F.3d 1202, 1237 (10th Cir. 2000) (dismissing
allegations of fraud where complaint failed to set forth a sufficient factual basis for plaintiffs’ belief that defendant
acted with fraudulent intent or fraudulent purpose).
Iqbal, 556 U.S. at 687.
Motion at 6.
Id. at 7.
Complaint ¶ 94.
sufficient knowledge on which to base its representations. While this representation did not
ultimately turn out to be true, this does not mean RSM engaged in fraudulent misrepresentation.
Even construing the allegations in the light most favorable to ClearOne, and drawing all
reasonable inferences in ClearOne’s favor, it is not plausible that RSM would deliberately
conceal knowledge of its affiliate’s work for $2,000 “knowing that it would create an
independence problem jeopardizing hundreds of thousands of dollars in auditing fees it would
otherwise earn from [ClearOne].” 97 This is not a plausible claim, and there are no specific factual
allegations showing that RSM either knew its independence claim was false or that RSM made
its claim of independence recklessly, knowing that it had insufficient knowledge on which to
base such representation.
ClearOne’s fraudulent misrepresentation claim is more a formulaic recitation of elements
than a specific statement of the “who, what, when, where and how of the alleged fraud . . . .” 98
And although ClearOne argues that “a reasonable juror could infer that RSM knew, or at least
suspected, that there was a problem with its independence, but nevertheless turned a blind eye
and recklessly pushed forward by misrepresenting the situation to ClearOne in order to continue
its business with ClearOne[,]” 99 this argument is not supported by factual allegations. The only
factual allegations ClearOne makes with regard to this position are that (1) RSM sent the
February 2, 2015 letter to ClearOne stating RSM was independent; and (2) “RSM had been
accused of failing to adequately monitor its independence with other clients[.]”100 As explained
above, the February 2, 2015 letter supports the argument that a representation was made about a
Motion at 4–5.
Sikkenga, 472 F.3d at 727.
Opposition at 4.
Id. at 5 (citing Complaint ¶ 45).
material fact that ultimately proved incorrect, but it does not support the argument that the false
representation was made fraudulently (i.e., knowing it was false or knowing there was not
enough information on which to base the representation). Further, the allegation that RSM had
been accused of failing to monitor its independence with other clients is too attenuated to meet
the specific pleading requirements for fraud. Other clients’ experiences do not explain why this
representation to ClearOne was allegedly made fraudulently. Rule 9(b) “do[es] not require
courts to credit a complaint’s conclusory statements without reference to its factual context. 101
Yet that is precisely what ClearOne is requesting this court to do—to consider a scenario in
which a reasonable juror could conclude, based on the conclusory, formulaic statements in the
Complaint, that fraudulent misrepresentation has occurred. But the scarcity of factual context is
fatal to ClearOne’s fraudulent misrepresentation claim. Perhaps the claim would survive standard
dismissal analysis, but it does not satisfy the heightened pleading requirements of Rule 9(b). 102
ClearOne’s fifth cause of action is based on fraudulent non-disclosure. ClearOne alleges
that RSM “owed a duty to ClearOne to communicate and disclose to ClearOne material facts,
including, but not limited to, the effect of the work of RSM Nelson Wheeler on RSM’s
independence and the SEC investigation into RSM for similar independence issues with other
clients . . . .” 103 ClearOne alleges that “RSM had knowledge of the material information and had
the opportunity to disclose it to ClearOne” 104 but “intentionally did not disclose . . . that RSM’s
Rich Media Club L.L.C. v. Mentchoukov, No. 2:11-cv-01202-TS, 2012 WL 1119505, at *6 (D. Utah Apr. 3,
2012) (quoting Iqbal, 556 U.S. at 686) (alteration in original).
See Armed Forces Ins. Exch., 70 P.3d at 40 (dismissing under Utah R. Civ. P. 9(b) conclusory allegations,
strikingly similar to those advanced by ClearOne, that “merely recite the elements of fraud”).
Complaint ¶ 100.
Id. ¶ 102.
representations as to its independence were false . . . .” 105 ClearOne alleges that if the
information had been properly disclosed, “it would have materially impacted ClearOne’s
relationship with and decisions regarding RSM, and ClearOne would not have been damaged to
the same extent.” 106
Fraudulent non-disclosure rests on three elements: “(1) a legal duty to communicate,
(2) undisclosed material information, and (3) a showing that the information was known to the
party who failed to disclose.” 107 The first element, the legal duty, “should be analyzed before any
other elements. . . . After all, if there is not duty to communicate information, there is no
entitlement to remedy.” 108 The existence of a legal duty to disclose “grows out of the relationship
between the parties, and the duties created by that relationship.” 109
RSM argues that ClearOne’s fraudulent non-disclosure allegations fail for two reasons.
First, “RSM does not have a legal duty to communicate to [ClearOne about] the existence of
unrelated SEC investigations into RSM’s business[.]”110 Second, RSM argues that ClearOne’s
Complaint “fails to plausibly allege that RSM had knowledge of the effect of Nelson Wheeler’s
tax-representation work on RSM’s independence.” 111 RSM is correct on both accounts.
RSM Did Not Have a Duty to Notify ClearOne of Unrelated SEC Investigations
RSM first argues that ClearOne failed to allege facts sufficient to state a claim for
fraudulent non-disclosure because RSM did “not have a legal duty to communicate . . . the
Id. ¶ 101.
Id. ¶ 102.
Moore v. Smith, 158 P.3d 562, 572 (Utah Ct. App. Mar. 22, 2007) (citing to Yazd v. Woodside Homes Corp., 109
P.3d 393 (Utah Ct. App. Feb. 25, 2005)).
Moore, 158 P.3d at 572.
Motion at 8.
existence of unrelated SEC investigations into RSM’s business and, even if it did, that
information was immaterial.” 112
The legal duties RSM owes to ClearOne, including the Independence Duty, the Internal
Controls Duty, the Conflict Check Duty, and the Timely Notice Duty, do not include the duty to
keep ClearOne apprised of unrelated SEC investigations. To the extent RSM had a duty to
disclose information to ClearOne, that duty was limited to the disclosure of information material
to RSM’s work for ClearOne. 113 ClearOne alleges that information regarding SEC investigations
“would have materially impacted ClearOne’s relationship with and decisions regarding RSM,” 114
but, as explained above, an investigation related to a separate entity is too attenuated to be
material. Thus, while ClearOne alleges that RSM owed certain duties, none of those alleged
duties include the obligation to notify ClearOne of SEC investigations with unrelated entities.
RSM is correct that the fraudulent non-disclosure claim cannot be supported by the argument
that RSM failed to disclose information relating to SEC investigations of other, unrelated clients.
There is No Showing that RSM Knew Its Independence Had Been Compromised in
As separate and additional grounds for dismissing the fraudulent non-disclosure claim,
RSM is also correct that the fraudulent non-disclosure claim cannot be based on non-disclosure
of the effect of the work done by RSM Nelson Wheeler. As explained previously, the Complaint
does not adequately allege with specific facts that RSM had actual knowledge at the time it made
the representation that its independence had been tainted. This is a critical failure since the third
element of fraudulent non-disclosure requires that “the information was known to the party who
Moore, 158 P.3d at 572 (citing to Yazd, 109 P.3d 393).
Complaint ¶ 102.
failed to disclose.” 115 In order to satisfy this element, ClearOne “must demonstrate that [RSM]
had actual knowledge of undisclosed information.” 116 Actual knowledge requires more than a
conclusory allegation of knowledge. 117 That is, ClearOne must allege that RSM knew its
independence had been destroyed but represented the opposite. ClearOne does not make that
allegation. Instead, the allegations establish that RSM “expressly represented to ClearOne that,
as of [February 2015], RSM was ‘independent with respect to the Company in compliance with
PCOAB Rule 3520,’ in addition to the ‘independence criteria set out in the rules and regulations
of the SEC under the federal securities laws.’” 118
Because ClearOne does not provide specific factual information regarding whether RSM
had actual knowledge of the effect of Nelson Wheeler’s work (i.e., that it had destroyed RSM’s
independence), RSM’s arguments are correct that ClearOne fails to allege sufficient facts to
support its fraudulent non-disclosure claim. RSM may have been incorrect in its analysis
regarding its independence, but the fact that it made an error in its analysis does not lead to the
conclusion that RSM acted fraudulently. The critical point is that ClearOne fails to allege, with
any specific support beyond a conclusory allegation, 119 that RSM knew its independence had
been destroyed and failed to disclose that to ClearOne. The Complaint states that there are
“additional unlawful nondisclosures and concealments which have yet to be discovered,” 120 but
this allegation does not nudge the claim across the line from conceivable to plausible, 121 and
Moore, 158 P.3d at 572.
Anderson v. Kriser, 266 P.3d 819, 821 (Utah Ct. App. 2009).
Iqbal, 556 U.S. at 686–87 (2009); Koch, 203 F.3d at 1237 (dismissing allegations of fraud where complaint failed
to “set forth any factual basis to support” plaintiffs’ belief that defendant acted with actual knowledge).
Complaint ¶ 43.
Id. ¶¶ 101, 102.
Id. ¶ 101.
Twombly, 550 U.S. at 570.
certainly does not satisfy the heightened pleading standards when asserting allegations of fraud
under Rule 9. Accordingly, RSM is correct that the fraudulent non-disclosure claim cannot be
ClearOne’s sixth and seventh causes of action are based on equitable claims: estoppel and
unjust enrichment. 122
RSM first contends that ClearOne cannot assert a claim for “estoppel” under Utah law
because a claim for “estoppel” is imprecise. Rather, RSM argues, ClearOne must claim either
“equitable estoppel” or “promissory estoppel.” 123 RSM cites to a decision from this court
explaining the difference between “equitable estoppel” and “promissory estoppel”: “The primary
difference between promissory and equitable estoppels is that the former is offensive and can be
used for the affirmative enforcement of a promise, whereas the latter is defensive and can be
used only for preventing the opposing party from raising a particular claim or defense.” 124
“Presumably,” RSM argues, ClearOne “intended to allege promissory estoppel.” 125 ClearOne
does not challenge this. 126 Thus, ClearOne’s “estoppel” claim is construed as a “promissory
But RSM argues that even if the “estoppel” claim is construed as a “promissory estoppel”
claim, the promissory estoppel and unjust enrichment claims must fail because they rely upon the
Complaint ¶¶ 105–113; Andreason v. Aetna Cas. & Sur. Co., 848 P.2d 171, 174–75 (Utah Ct. App. 1993) (noting
that “estoppel is an equitable claim for relief”); American Towers Owners Ass’n. v. CCI Mech., 930 P.2d 1182, 1193
(Utah 1996) (stating that unjust enrichment is also an “equitable remedy”).
Motion at 12.
Water Servs. v. Zoeller Co., No. 2:12-cv-00723-TS, 2013 WL 5964457, at *5 (D. Utah Nov. 7, 2013)
(unpublished) (quoting 28 Am. Jur. 2d Estoppel and Waiver § 34 (2013)).
Motion at 12.
Opposition at 10.
lack of an enforceable written or oral contract. 127 The Complaint, RSM argues, does not allege
the lack of an enforceable written or oral contract. 128 Instead, according to RSM, the Complaint
alleges just the opposite—it alleges that there was a valid and enforceable contract. 129 RSM is
correct. While a plaintiff is permitted to plead a breach of contract claim and an equitable claim
in the alternative, 130 the plaintiff must still sufficiently plead facts to support each of the claims
asserted in the Complaint. 131 Thus, to prevail against RSM’s motion to dismiss the sixth and
seventh causes of action for promissory estoppel and unjust enrichment, ClearOne must show
that its Complaint alleges the non-existence of a binding contract. 132 ClearOne has not made that
“As a prerequisite to bringing [an equitable claim], the plaintiff must establish that the
parties do not have a formal contract controlling their rights and obligations.” 133 Rather than
alleging that the parties do not have a formal contract, ClearOne alleges that there are “valid,”
“binding,” and “enforceable” “Agreements” “between ClearOne and RSM.” 134 Nowhere in the
Complaint does ClearOne allege that there is not a binding contract between the parties. Thus,
Motion at 11–14.
Id. (citing Complaint ¶ 80).
E & H Land, Ltd. v. Farmington City, 336 P.3d 1077, 1087 (Utah Ct. App. 2014) (citing Northgate Vill. Dev., LC
v. Orem City, 325 P.3d 123 (Utah App. 2014)) (“[A] plaintiff who believes it is entitled to relief under a contract is
free to assert both breach of contract and promissory estoppel claims in a complaint.”).
Iqbal, 556 U.S. at 678 (2009) (quoting Twombly, 550 U.S. at 570 (2007)) (“a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”).
Global Fitness Holdings LLC v. Fed. Recovery Acceptance Inc., 127 F. Supp. 3d 1228,* 1237 (D. Utah August
31, 2015) (“As a prerequisite to bringing a promissory estoppel claim, the plaintiff must establish that the parties do
not have a formal contract”); Water Servs., 2013 WL 5964457 at *17 “([R]ecovery under an unjust enrichment
theory is available only ‘when no enforceable written or oral contract exists.’”).
Global Fitness, 127 F. Supp. 3d at 1238 (quoting Mile High Indus. v. Cohen, 222 F.3d 845, 859 (10th Cir.
2000)); E&H Land, 336 P.3d at 1086 (same); American Towers, 930 P.2d at 1193 (“if a legal remedy is available,
such as breach of an express contract, the law will not imply the equitable remedy of unjust enrichment”).
Complaint ¶¶ 47, 80, 86.
ClearOne’s Complaint does not sufficiently state a claim for relief under its equitable claims
because it fails to allege the non-existence of a valid contract.
Fed. R. Civ. P. 8(d)(3) allows a plaintiff to “state as many separate claims or defenses as
it has, regardless of consistency.” 135 Therefore, ClearOne is clearly permitted to state
inconsistent allegations. For example, ClearOne could allege that the parties have a valid
contract and that no valid contract exists. These allegations are inconsistent, but they are
permissible when pleading in the alternative. ClearOne makes only one allegation: that there are
valid and enforceable Agreements between the parties. 136
ClearOne argues in its Opposition that its estoppel and unjust enrichment claims are “a
form of alternative relief[.]” 137 While such claims are permitted to be plead in the alternative
under Rule 8, 138 the problem is that ClearOne failed to allege an essential element of its equitable
claims—the non-existence of a valid contract. Therefore, the equitable claims are dismissed for
failure to state a claim upon which relief may be granted.
Because the breach of contract claim may be reasonably read to arise from the alleged
failure to provide auditing services according to the express terms of the Agreements, and the
implied covenant claim may be reasonably read to arise from the alleged failure to abide by
implied duties arising from the Agreements, they are not redundant of one another and are not
redundant to the professional negligence claim. Therefore, the Contract Claims have been
adequately alleged and will not be dismissed.
Fed. R. Civ. P. 8(d)(3).
Complaint ¶¶ 80, 86.
Opposition at 9.
Fed. R. Civ. P. 8(d)(3).
However, because ClearOne does not adequately allege the claims for fraudulent
misrepresentation and fraudulent nondisclosure, those claims are dismissed. Similarly,
ClearOne’s equitable claims for promissory estoppel and unjust enrichment are inadequately
alleged because the Complaint fails to allege the non-existence of a binding contract between the
IT IS HEREBY ORDERED that the Motion 139 is GRANTED in part and DENIED in
part. The Motion is GRANTED as to the claims for fraudulent misrepresentation, fraudulent
non-disclosure, promissory estoppel (“estoppel”), and unjust enrichment, which are dismissed
without prejudice. The Motion is DENIED as to the claims for breach of contract and breach of
the implied covenant of good faith and fair dealing.
Signed March 6, 2017.
BY THE COURT
United States District Judge
Partial Motion to Dismiss Under Federal Rules of Civil Procedure 12(b)(6) (“Motion”), docket no. 11, filed Aug.
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