USDC one-two punch for the knockout

Bob, and his corporation Bobco, enter the boxing ring of jurisprudence suing Angel Inc. and various co-defendants. Bobco claims that its business was unlawfully gutted after its employees left to join a new business formed by co-defendants called NewCo. Bob claims that Angel is partially to blame and personally defrauded him. Bob and Bobco further sue Angel for alleged violations of California's Business and Professions Code Section 17200 (UCL), seeking an injunction and restitution. The co-defendants are similarly sued.

During discovery, Angel's lawyer noticed subtle defects in Bob and Bobco's claims. It seemed like Bob claimed damages that could be attributed only to Bobco. For example, while Bob ranted about a loss of personal income caused by the demise of Bobco's business, his income claims flowed from Bobco's overlapping loss of business damages. Bob also held Angel through a holding company and did not personally own Angel. And, while both Bob and Bobco offered facts supporting their UCL claims, they struggled to identify a remedy for Angel's alleged conduct because only the co-defendants owned and operated NewCo.

When discovery concluded, Angel's lawyer recommended a terminating motion but Angel scoffed at its lawyer's zealousness. Move to dismiss factually based fraud and UCL claims? Nonsense. Angel told its lawyer not to bother; it didn't want to spend a lot of money on motion practice only to end up with a large hole in its wallet, still facing a lengthy trial defending such claims. Angel's lawyer persisted, claiming that a "one-two punch" available under the federal rules of civil procedure was the answer. With a furled brow, Angel reluctantly went along. A month later, Angel brought its motion to dispose of Bob and Bobco's claims in entirety. Angel's co-defendants looked on with amazement.

Angel moved simultaneously using Rule 56 (no surprise) and Rule 12 of the federal rules. Many recognize Rule 56 as the more familiar attack just before trial. Under this rule, entitling a party to move for summary judgment, Angel needed to show that no genuine dispute of any material fact existed. "Material" need only mean something that might affect the outcome of the lawsuit or is helpful to establish an element of a claim. Angel's lawyer thought his client had a chance under Rule 56 to knock out the UCL claim based on his belief that the plaintiffs' case evidenced no available remedy. However, obtaining the same result on a heavily factual fraud claim was unlikely. Angel needed that second punch; a request for dismissal under Rule 12(b)(1), arguing that the court lacked subject matter jurisdiction under Article III of the U.S. Constitution over Bob's claims for lack of damages.

Rule 12 attacks can be facial or factual. Angel really liked this statute because - unlike Rule 56 - a factual attack allowed the court to weigh evidence without converting the motion into one for summary judgment. Angel could go toe to toe with the evidence and avoid the plaintiffs' typical arguments that sufficient facts existed in the record to require trial. Weighing the evidence also improved Angel's chances that the court would learn more about Angel's conduct (which it believed was appropriate), and find interest in its defenses.

Bob and Bobco found this attack laughable. In their opposition, they argued it was impossible to award summary judgment to Angel given the abundant evidence that existed in the record supporting their allegations of fraud and unfair business practices. Bob had shown a significant decline in his income and his Bentley lease was past due. Bob and Bobco further argued in defense of their UCL claim, pointing out that Angel's unfair business practices also harmed others and justified injunctive relief at a minimum. The plaintiffs also argued that Rule 12 was no longer available to Angel because a motion brought thereunder should have been made at the onset of the dispute.

The court carefully considered the arguments of the parties. And then, in an extensive written ruling, the court dismissed Bob's fraud and UCL claims and granted summary judgment of Bobco's UCL claim. Angel scored a knockout just one round before the case was set for trial. How could this be?

The court ultimately relied on both statutes to end the claims against Angel. Preliminarily, the court disagreed with the plaintiffs' view that consideration of standing under Article III of the U.S. Constitution was untimely. Standing is a jurisdictional issue, and federal courts must first confront a challenge to standing before addressing the merits of the dispute. After analyzing the pleadings and weighing the evidence, the court agreed with Angel's Rule 12 argument that Bob lacked standing to bring his claims under Article III. As Angel established, Bob failed facially (the allegations of the complaint were insufficient to invoke federal jurisdiction), and factually (he failed to show a "cognizable injury") to meet his burden of proof, because his claimed damages were proven to be Bobco's damages.

However, the court disagreed with Angel in applying Rule 12 to Bobco's remaining UCL claim. The court found Bobco established Article III standing within its pleadings, and this was sufficient to survive a Rule 12 attack. But then, after considering whether Bobco had established a genuine dispute pertaining to the remedies offered by the UCL, the court granted summary judgment under Rule 56. The court failed to see how Angel could pay restitution to Bobco. The court also rejected the notion that enjoining Angel's alleged conduct would be of benefit to Bobco because only co-defendants operated NewCo. The court lastly dispatched Bobco's remaining plea that Angel's conduct be enjoined for the benefit of others, citing the passage and application of Proposition 64.

Interestingly, had Angel relied only on Rule 56 (as most practitioners do) to defeat the fraud and UCL claims, Bob's factual evidence, standing alone, may have sufficed to defeat Angel's motion attack on his fraud claim. Had Angel relied only on Rule 12 to dismiss Bobco's UCL claim, it would again have missed the mark. Using a boxing metaphor, while Angel led with the Rule 12 left, the plaintiffs only crumbled to the canvas once struck by its Rule 56 right. Knockout achieved.

As with the outcome of any great boxing match, some intrigue is necessary. Because the court dismissed Bob's claims under Rule 12 for lack of standing, it then concluded that it lacked jurisdiction to consider Angel's arguments under Rule 56. Would the court have granted Angel's motion to defeat Bob's fraud claim on this basis instead? Does it matter? Recall that Rule 12 results in dismissal, while Rule 56 may result in a judgment. There are obvious differences - particularly if the court dismisses without prejudice. But, the actual impact of these differences depends on the timing and preclusive effect of the rulings. Angel was careful to bring its Rule 12 motion after discovery closed and the parties were no longer entitled to amend their pleadings. This may be the most important detail. Applying a defense like this too early may only result in timely amendment of the pleadings, and for sure, a more robust discovery effort and resulting evidentiary showing. Not "helping the plaintiffs out" by attacking their pleadings too quickly under Rule 12 (or by demurrer in state court) is thus helpful in achieving the above result.

One thing is certain: Had Angel moved only for summary judgment, Bob's fraud claim may have proceeded to trial, thereby exposing Angel to substantial cost, unpleasantness and perhaps an undesirable result. Had Angel brought its motion relying only on Rule 12, Bobco's claim would have proceeded to trial against it, again resulting (at a minimum) in substantial cost. Worse, if during trial Bobco convinced a sympathetic court that it must amend its pleadings to add further causes of action against Angel according to proof, who knows where Angel might have ended up.

Using both weapons removed Angel from the litigation entirely, and avoided a prolonged, expensive and dangerous trial.