Outlaw Laboratory, LP v. DG in PB, LLC

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Case No.: 3:18-cv-840-GPC-BGS IN RE OUTLAW LABORATORY, LP consolidated with 3:18-cv-1882-GPC- 12 LITIGATION BGS 13 ORDER 14 15 (1) GRANTING COUNTERCLAIMANTS’ MOTION 16 FOR LEAVE TO FILE A SECOND 17 AMENDED COUNTERCLAIM AND THIRD-PARTY COMPLAINT [ECF 18 No. 92]; 19 (2) DENYING OUTLAW’S MOTION 20 TO STRIKE [ECF No. 99]; 21 (3) OVERRULING OUTLAW’S 22 EVIDENTIARY OBJECTIONS [ECF 23 No. 100.]

24 Before the Court is Defendant/Counterclaimant Roma Mikha, Inc., and Third-Party 25 Plaintiffs NMRM, Inc. and Skyline Market, Inc.’s (collectively, “Counterclaimants’”) 26 July 1, 2019 motion for leave to file a Second Amended Counterclaim and Third-Party 27 Complaint to add three new defendants. (ECF No. 92.) On July 15, 2019, 28 1 Plaintiff/Counterdefendant Outlaw Laboratory, LP (“Outlaw”) filed a response brief in 2 opposition; on July 22, 2019, Counterclaimants returned a reply. (ECF Nos. 97, 98.) 3 While that motion was pending, the dispute over amendment spawned two 4 ancillary filings. Both pertain to the validity of the new information set forth by 5 Counterclaimants as justification for leave to amend. 6 The first such motion was filed on July 24, 2019 by Outlaw. In that motion, 7 Outlaw seeks to strike the reply declaration of Mark Poe, counsel for Counterclaimants. 8 (ECF No. 99.) That same day, Outlaw filed set of evidentiary objections, which restated 9 in evidentiary terms its objections to Mr. Poe’s reply declaration. (ECF No. 100.) On 10 July 28, 2019, Counterclaimants filed a response to the motion to strike. (ECF No. 101.) 11 The Court held a hearing on the motions on August 16, 2019. For reasons stated 12 below, the Court will GRANT Counterclaimants’ motion for leave to file an amended 13 pleading, DENY Outlaw’s motion to strike and OVERRULE its related evidentiary 14 objections. 15 I. FACTUAL AND PROCEDURAL BACKGROUND1 16 A. Outlaw initiates two lawsuits, both now consolidated before the Court 17 The instant litigation arises out of two complaints filed by Outlaw. The two cases 18 have since been consolidated before the Court. The first case, Case No. 18-CV-840, 19 referred to the parties as the “DG in PB action,” was filed in May of 2018. Initially, a 20 number of defendants in the DG in PB action were represented by the Law Offices of 21 Steven A. Elia. The later-filed case, Case No. 18-CV-1882, referred to by the parties as 22 the “San Diego Outlet action,” was removed to federal court in August of 2018 by 23 defendant Roma Mika, who is represented by the law firm Gaw | Poe LLP (“Gaw Poe”). 24 On June 29, 2019, the Court granted a motion to substitute Gaw Poe as counsel for the 25 26 1 The Court has discussed this litigation in its previous Orders dated November 27, 2018, March 27 14, 2019, and June 4, 2019. (ECF Nos. 31, 56, 85.) Those Orders may be referenced for additional background. 28 1 defendants who were previously represented by Steven A. Elia in the DG in PB action. 2 With some small differences not relevant here, the complaints in the San Diego 3 Outlet and DG in PB actions were almost identical. In each, Outlaw alleged that a large 4 number of gas station and corner store defendants were engaged in a conspiracy to 5 distribute and sell unlawful and misbranded male sexual enhancement drugs—i.e., the 6 Rhino products—in violation of the Lanham Act and California’s Unfair Competition 7 Law, and that the scheme had diverted sales away from its legitimate, FDA-approved 8 “TriSteel” male enhancement pill. 9 B. Counterclaimant stores file a counterclaim and third-party class action 10 complaint against Outlaw 11 On August 24, 2018, Counterclaimants filed a counterclaim and third-party 12 complaint against Outlaw in DG in PB, Case No. 3:18-CV-1882. Counterclaimants 13 sought to represent a class of gas station and corner store owners who received what 14 Counterclaimants characterize as extortionate and demonstrably-false demand letters sent 15 by Outlaw. Outlaw’s letters warned that sale of Rhino products exposed recipients to 16 RICO and Lanham Act liability for amounts greater than $100,000, which Outlaw would 17 forego for a much smaller settlement sum. According to Counterclaimants, Outlaw’s 18 demand letters were designed to coerce settlement; Outlaw targeted mostly immigrant- 19 run businesses, made allegations of illegality and adulteration which Counterclaimants 20 claim are unfounded, and often included on-site photographs taken by “investigators” of 21 the recipient’s storefronts and sale of Rhino products. 22 The original counterclaims asserted three causes of action: (1) civil RICO, 18 23 U.S.C. § 1962(c), (2) RICO conspiracy, 18 U.S.C. § 1962(d), and (3) rescission of any 24 settlement agreements entered into as a result of Outlaw’s demand letters. Specifically, 25 Counterclaimants described a RICO enterprise between Outlaw, its attorneys, Tauler 26 Smith LLP, and other as-yet-unnamed individuals, aimed at perfecting a legal 27 “shakedown” of small-time San Diego convenience stores. Counterclaimants averred 28 that the “TriSteel” products “were created as artifices” to “found the false advertising 1 claims,” and that Outlaw itself was no more than a front for the unlawful enterprise. 2 C. Counterclaimants’ action dismissed, then sustained twice by Court 3 On November 27, 2018, the Court granted in part and denied in part Outlaw’s 4 motion to dismiss the original counterclaims (ECF No. 31), finding that Counterclaimants 5 insufficiently alleged that Outlaw’s demand letters fell within the sham litigation 6 exception to the Noerr-Pennington doctrine. See Sosa v. DIRECTV, Inc., 437 F.3d 923, 7 929 (9th Cir. 2006) (explaining that Noerr-Pennington generally confers First 8 Amendment immunity against liability arising from a party’s pre-litigation, petitioning 9 conduct but that baseless sham litigation conduct is not protected). After 10 Counterclaimants filed a first amended counterclaim (ECF No. 32), Outlaw moved once 11 more to dismiss. The Court held that upon amendment, Counterclaimants sufficiently 12 pleaded the sham litigation exception and denied Outlaw’s motion on March 14, 2019. 13 (ECF No. 56.) Thereafter, Outlaw filed a motion for judgment on the pleadings, which 14 the Court denied on June 4, 2019. (ECF No. 85.) 15 D. Ongoing discovery issues 16 During this flurry of dispositive motions practice, and because a scheduling order 17 was issued in the DG in PB action, but not the San Diego Outlet action, some confusion 18 arose as between the parties as to the effect of the scheduling order in the earlier-filed 19 matter on the later. On April 22, 2019, the parties submitted a Joint Motion to Amend 20 scheduling Order and Convene Scheduling Conference. On June 8, 2019, Magistrate 21 Judge Bernard G. Skomal issued a scheduling order setting the cut-off for class discovery 22 for September 6, 2019, all fact discovery for December 4, 2019, and determined that “[a]s 23 to amendment of the pleadings, Federal Rule of Civil Procedure 15(a) shall govern.” 24 (ECF No. 86, at 5–6.) Given the parties’ shared uncertainty about the schedule, limited 25 discovery has occurred to date. 26 E. The Instant Motion for Leave to File Amended Pleadings 27 On July 1, 2019, Counterclaimants filed a motion for leave to file a second 28 amended counterclaims and third-party complaint (hereinafter “second amended 1 counterclaims”). (ECF No. 92.) Counterclaimants seek to add three new defendants— 2 Outlaw’s legal counsel, Tauler Smith LLP, and Michael Wear and Shawn Lynch, the two 3 principals of Outlaw—to all three original causes of action. In conformity with the Civil 4 Local Rules, Counterclaimants have submitted the proposed amendments as attachments 5 to their motion. (ECF No. 92-2; 92-3.) 6 According to Counterclaimants, discovery by the DG in PB defendants (taken by 7 former counsel, Steven A. Elia), and recent investigations by Vice News, a media source 8 compiling a documentary on the matters in this lawsuit, have revealed new information as 9 to these entities’ respective roles in conceiving and conducting the affairs of the alleged 10 RICO scheme. (ECF No. 92-1, at 2.) Counterclaimants’ proposed amendments describe 11 how Tauler Smith LLP is alleged to have dispatched persons to investigate and take 12 photos of gas stations and corner stores as early as August 2017, but that no “TriSteel” 13 products can be found online until October 2017. This, Counterclaimants urge, indicates 14 that Tauler Smith LLP first “rounded up potential targets of the scheme, then worked 15 with its ‘clients’ to launch the ‘TriSteel’ product online, for the purpose of serving as a 16 vehicle by which Outlaw Laboratory, L.P., its principals Michael Wear and Shawn 17 Lynch, and Tauler Smith LLP could extort ‘settlements’ from its victims, and then share 18 in the proceeds.” (Id. at 3.) Counterclaimants also argue that the three proposed 19 defendants must be joined as required parties under Fed. R. Civ. P. 19(a)(1). (ECF No. 20 98, at 10.) 21 F. Outlaw’s Motion to Strike and Evidentiary Objections 22 On July 4, 2019, Outlaw moved to strike a declaration from Mr. Poe submitted in 23 support of Counterclaimants’ reply brief. (ECF No. 99.) It also filed a related set of 24 evidentiary objections to specific parts of Mr. Poe’s declaration and attached exhibits. 25 (ECF No. 100.) The fracas over this declaration relates to Outlaw’s contention that 26 Counterclaimants could not have actually relied on any reporting done by Vice News, 27 and thus their invocation of the same to support amendment must be illusory. The 28 parties’ dispute on this issue will be discussed in the Court’s analysis of bad faith. 1 E. Motion Hearing on August 16, 2019 2 On August 16, 2019, the Court held a hearing on the motion for leave to amend 3 and the motion to strike. The Court provided the parties with a tentative order and gave 4 each side an opportunity to articulate their positions on the tentative. 5 At the hearing, the Court also referred the parties to its August 15, 2019 order 6 denying Outlaw’s motion for Rule 11 sanctions. (ECF No. 110.) The Court discussed its 7 observations on the conduct of counsel in advancing the litigation and put both parties’ 8 counsel on notice of the expectations of the Court. The Court advised that it required 9 counsel to abide by the demonstrate professionalism, respect, and civility to each other in 10 any proceedings, filings, or interactions ahead.2 11 I. Motion for Leave to File a Second Amended Counterclaim 12 The Court will appraise the propriety of amendment under Rule 15(a) pursuant to 13 the Foman factors, and address Outlaw’s contentions in the order presented in its 14 briefing. 15 A. Legal Standard under Rule 15(a) 16 Under Rule 15(a), leave to amend a complaint after a responsive pleading has been 17 filed may be allowed by leave of the court and “shall freely be given when justice so 18 requires.” Foman v. Davis, 371 U.S. 178, 182 (1962); FED. R. CIV. P. 15(a). Granting 19 leave to amend rests in the sound discretion of the trial court. Int’l Ass’n of Machinists & 20 Aerospace Workers v. Republic Airlines, 761 F.2d 1386, 1390 (9th Cir. 1985). However, 21 this discretion must be guided by the strong federal policy favoring the disposition of 22 cases on the merits and permitting amendments with “extreme liberality.” DCD 23 Programs Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). “This liberality in 24 granting leave to amend is not dependent on whether the amendment will add causes of 25 26 2 Civil Local Rule 83.4. (“Professionalism . . . . An attorney in practice before this court will . . . Be 27 courteous and civil in all communications, oral and written, and in all proceedings conduct herself/himself 28 with dignity and respect . . . . Attempt to informally resolve disputes with opposing counsel.”). More 1 action or parties.” Id.; cf. Union Pacific R.R. Co. v. Nevada Power Co., 950 F.2d 1429, 2 1432 (9th Cir. 1991) (In practice, courts more freely grant plaintiffs leave to amend 3 pleadings in order to add claims than new parties). 4 Because Rule 15(a) greatly favors amendment, the nonmoving party bears the 5 burden of demonstrating why leave to amend should not be granted. Genentech, Inc. v. 6 Abbott Labs., 127 F.R.D. 529, 530–31 (N.D. Cal. 1989). In assessing the propriety of 7 amendment, courts consider several factors: (1) undue delay, (2) bad faith or dilatory 8 motive; (3) repeated failure to cure deficiencies by amendments previously permitted; (4) 9 prejudice to the opposing party; and (5) futility of amendment. Foman, 371 U.S. at 182; 10 United States v. Corinthian Colleges, 655 F.3d 984, 995 (9th Cir. 2011). These factors 11 are not equally weighted; the possibility of delay alone, for instance, cannot justify denial 12 of leave to amend, DCD Programs, 833 F.2d at 186, but when combined with a showing 13 of prejudice, bad faith, or futility of amendment, leave to amend will likely be denied. 14 Bowles v. Reade, 198 F.2d 752, 758 (9th Cir. 1999). “Futility of amendment can, by 15 itself, justify the denial of a motion for leave to amend.” Bonin v. Calderon, 59 F.3d 815, 16 845 (9th Cir. 1995). 17 B. Undue Delay 18 Outlaw argues that Counterclaimants’ motion is dilatory because the discovery 19 taken by Steven A. Elia in the DG in PB action, which gives rise to some of 20 Counterclaimants’ proffered amendments, was served on January 31, 2019, almost six 21 months before Counterclaimants requested leave to amend. (ECF No. 97, at 14.) 22 Counterclaimants retort that in assessing undue delay, courts are primarily 23 concerned “whether the moving party knew or should have known the facts and theories 24 raised by the amendment in the original pleading.” AmerisourceBergen Corp. v. 25 Dialysist W., Inc., 465 F.3d 946, 953 (9th Cir. 2006). Counterclaimants point out that 26 their first amended counterclaims were filed on November 30, 2018, before any 27 discovery was produced to Steven A. Elia on January 31, 2019. When viewed under 28 AmerisourceBergen, Counterclaimants argue, it is clear that there was no undue delay 1 because at the filing of the earlier counterclaim, because they could not have known at 2 that point of any information uncovered on January 31, 2019. 3 The Court does not find that there has been undue delay. First, the DG in PB 4 discovery information did not exist at the filing of the earlier counterclaim. Second, 5 Counterclaimants rely not only on that discovery, but also on information obtained 6 through the reporting conducted by Vice News, which investigation continued through 7 June of 2019, the month immediately preceding their July 1, 2019 motion. And, in any 8 event, “[u]ndue delay by itself is insufficient to justify denying leave to amend.” United 9 States v. United Healthcare Ins. Co., 848 F.3d 1161, 1184 (9th Cir. 2016). 10 C. Bad Faith 11 Outlaw argues that Counterclaimants’ motion is made in bad faith because the two 12 items they rely upon as new information are suspect. First, Outlaw questions how 13 Counterclaimants purport to have received information from Vice News when no 14 documentary has been released,3 and when “Vice News denies that it has provided 15 Counterclaimants[] with any information relating to this lawsuit.” (ECF No. 97, at 5.) 16 Second, Outlaw believes Counterclaimants’ reliance on the DG in PB discovery 17 responses as support for its claim that would-be defendants engaged in a ‘collect 18 evidence first, create a product later’ scheme is less than genuine, since such a theory is 19 contradicted by the responses themselves, which state that TriSteel was sold as early 20 October 10, 2016, one year prior to when Tauler Smith LLP is alleged to have dispatched 21 investigators to take photos of Counterclaimants’ storefronts. (Id.) 22 In determining whether an amendment is brought in bad faith, a court focuses on 23 the plaintiff’s motives for not amending the complaint earlier. Adams v. Gould Inc., 739 24 25 3 At the time of the parties’ briefing on the motion for leave to amend, Vice News had not 26 published any material as to the subject matter of this litigation. The Court has since been advised— through the parties’ submissions as to Outlaw’s motion for Rule 11 sanctions—that the documentary 27 was released on August 1, 2019. The Court does not find it necessary at this juncture to take notice of the documentary, and accordingly has not viewed or considered its contents to decide this motion, or any 28 1 F.2d 858, 868 (3d Cir. 1984). Courts have denied leave to amend due to bad faith where 2 the court determines that the plaintiff’s motion was brought “to avoid the possibility of an 3 adverse summary judgment ruling” and to prejudice the defendant by requiring the 4 reopening of discovery. See Acri v. Int’l Ass’n of Machinists & Aerospace Workers, 781 5 F.2d 1393, 1398–99 (9th Cir. 1986). Courts have also denied leave to amend based on a 6 finding of bad faith where the plaintiff’s motive was to destroy diversity jurisdiction. See 7 Sorosky v. Burroughs Corp., 826 F.2d 794, 805 (9th Cir. 1987). Bad faith may also be 8 found where a movant files repetitive motions to amend. Wood v. Santa Barbara 9 Chamber of Commerce, Inc., 705 F.2d 1515 (9th Cir. 1983). Bad faith, however, will not 10 be found “where the record demonstrates that [the movants’] allegations were not 11 frivolous and that they were endeavoring in good faith to meet the [sic] pleading 12 requirements.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1053 (9th Cir. 13 2003). 14 1. New Information Based on Reporting by Vice News 15 Outlaw’s quarrel with Counterclaimants’ information from the Vice News 16 investigation does not evince bad faith or cast any doubt on Counterclaimants’ motives 17 for amendment. 18 Counterclaimants state in their motion for leave that the new information 19 animating their request for amendment are “based on new details concerning the creation 20 and conduct of the Outlaw Enterprise that were recently unearthed by . . . the 21 investigation undertaken by the investigative reporters from Vice News.” (ECF No. 92- 22 1, at 5.) 23 Outlaw construes Counterclaimants as claiming in their motion that Vice News had 24 shared their reporting and documentary with Counterclaimants. Based on this 25 understanding, Outlaw argues that Counterclaimants must be telling falsehoods about the 26 provenance of their new information because “Vice News denies that it has provided 27 Counterclaimants[] with any information relating to this lawsuit.” (ECF No. 97, at 5.) 28 For this proposition, Outlaw cites two emails exchanged between Vice News’s VP, 1 Yonatan Berkovitz, and Robert Tauler, on July 1 and July 2, 2019. (ECF No. 97-2, at 2- 2 3–24 (Decl. of Robert Tauler, dated July 15, 2019).) 3 The Court’s review of the cited emails belie Outlaw’s characterization that Vice 4 News ever denied providing information to Counterclaimants. The email shows Mr. 5 Berkovitz writing in response to an earlier message in which Mr. Robert Tauler, a lawyer 6 at Tauler Smith LLP, inquired about the extent to which Vice News had been sharing its 7 reporting with Mr. Poe. In his email, Mr. Berkovitz assured Mr. Tauler that “neither Poe 8 nor his clients has seen our video, nor have we provided them with any inside 9 information.” (Id.) Viewed in context, it is apparent that Vice News does not deny that it 10 has ever shared any information at all information with Counterclaimants, only that Vice 11 News did not release its documentary or other inside information to Mr. Poe, or his 12 clients. 13 Although Counterclaimants’ motion could have been more clear about whether 14 they relied on Vice News reporting, or whether they simply gleaned new details from 15 Vice News during the course of its investigations, the Court is satisfied that it is the latter. 16 As Counterclaimants explain in their reply, Counterclaimants obtained additional 17 information, not because Vice News actually shared its reporting, videos, or confidential 18 information with them, but as a result of interacting with Vice News and its reporters 19 during the course of Vice News’s documentary-related investigations. (ECF No. 98, at 54 20 21 22 4 On July 4, 2019, Outlaw moved to strike a declaration from Mark Poe in support of Counterclaimants’ reply brief. (ECF No. 99 (Outlaw’s motion to strike); ECF No. 98-1 (Decl. of Mark 23 Poe, dated July 22, 2019).) Mr. Poe’s declaration addresses Outlaw’s allegations that Counterclaimants invoked the Vice News documentary baselessly and in bad faith. In the declaration, Mr. Poe confirms 24 that Vice News had not shared its documentary with him, and explains that the new information 25 undergirding the request for leave to amend stemmed from the investigatory efforts of Oliver Noble, a reporter for Vice News. (ECF No. 98-1, at 2.) Mr. Poe clarified that Mr. Noble reached out for an 26 interview via email on February 25, 2019, and that thereafter, the two continued to communicate about the subject of the documentary. Specifically, Mr. Noble asked Mr. Poe whether he “could confirm 27 several leads,” some of which “prompted Mr. Poe to conduct [his] own further investigation into Outlaw’s activities,” and such further investigation gave rise to the allegations in the proposed 28 1 (“Vice contacted the Stores’ counsel at least 36 times to chase down leads about its 2 Outlaw Enterprise investigation between February and June 2019—and the Stores 3 uncovered new facts set forth in the proposed amendments as a result.”).) The Court 4 5 Outlaw argues that Mr. Poe’s declaration should be stricken on two grounds. First, Outlaw 6 argues that the declaration impermissibly includes new facts not presented in Counterclaimants’ original moving papers—i.e., its motion for leave to amend. (ECF No. 99, at 4.) Second, Outlaw contends that 7 sanctions under Rule 37 are appropriate because a potential witness, i.e., Mr. Noble, and additional evidence, i.e., the fact that Mr. Noble and Mr. Poe exchanged 36 emails, were not disclosed by 8 Counterclaimants in their Rule 26(a) initial disclosures, served July 15, 2019. Outlaw has also filed a 9 separate set of evidentiary objections with the same arguments. (ECF No. 100.) Neither of these arguments are winning. First: although the Court agrees with Outlaw that in the 10 ordinary case “[i]t is improper for a moving party to introduce new facts or different legal arguments in the reply brief than those presented in the moving papers,” U.S. ex rel. Giles v. Sardie, 191 F. Supp. 2d 11 11117, 1127 (C.D. Cal. 2000), evidence that “rebut[s] arguments first raised by Plaintiff in its opposition” is not “new evidence,” and is properly considered by the Court. E.E.O.C. v. Creative 12 Networks, LLC & Res-Care, Inc., No. CV-05-3032-PHX-SMM, 2008 WL 5225807, at *2 (D. Ariz. Dec. 13 15, 2008). Thus, because the challenged “documents respond directly to [Outlaw’s] allegations made in [its] opposition brief, the Court finds it may properly consider this rebuttal evidence even though it was 14 offered for the first time in [Counterclaimants’] reply brief.” United States v. Taibi, No. 10-CV-2250 JLS, 2012 WL 553143, *4 (S.D. Cal. Feb. 21, 2012). 15 Second, the Court does not find Rule 37 sanctions necessary. In this case, Outlaw cannot credibly assert that it was unaware of Vice News’s documentary or Mr. Noble’s reporting; indeed, Mr. 16 Tauler’s email correspondence with Mr. Berkovitz references and discusses “communications Poe had 17 with Oliver [Noble].” (ECF No. 97-2, at 2–3.) Indeed, on June 28, 2019, Outlaw subpoenaed Vice News for “[a]ll communications between [Vice News] and POE referring to,” inter alia, Robert Tauler, 18 Tauler Smith LLP, Outlaw Laboratory, Shawn Lynch, and Mike Wear; that same day, Outlaw issued a notice of deposition for Mr. Noble, set for August 5, 2019. (ECF No. 101-1, 101-2, at 8.) Thus, by the 19 time of Counterclaimant’s July 15, 2019 initial disclosures, Outlaw was well-apprised of Mr. Noble’s interactions with Mr. Poe. 20 Rule 26(e) requires supplementation of a Rule 26(a) disclosure where “additional or corrective 21 information has not otherwise been made known to the other parties during the discovery process or in writing.” FED. R. CIV. P. 26(e). As evidenced by its move to depose him, Outlaw was on notice of Mr. 22 Noble and his communications with Counterclaimants, and any failure to disclose may be rectified by a later supplementation. See Am. Gen. Life Ins. Co. v. Vistana Condo. Owners Ass’n, No. CV-01324- 23 JAD(NJK), 2016 WL 1611585, at *2 (D. Nev. Apr. 21, 2016). Rule 37 commands a similar conclusion: “A failure to disclose witness information is harmless if the other party was well aware of the identity of 24 the undisclosed witness and the scope of their relevant knowledge.” PSM Holding Corp. v. Nat'l Farm 25 Fin. Corp., No. CV0508891MMMFMOX, 2013 WL 12080306, at *8 (C.D. Cal. Oct. 8, 2013), aff’d in part, 884 F.3d 812 (9th Cir. 2018) 26 Accordingly, the Court DENIES Outlaw’s motion to strike. The related evidentiary objections are consequently OVERRULED, and for the additional reason that Counterclaimants are “under no 27 obligation to demonstrate that [their] documents would be admissible at trial when those documents are considered for the very limited purpose of evaluating whether leave to amend should be granted.” Burns 28 1 discerns no bad faith arising from Counterclaimants’ reliance of information they 2 generated as a result of having been involved in the Vice News investigation. 3 2. New Information Based on DG in PB discovery 4 Outlaw’s objection to use of the DG in PB discovery materials is similarly 5 unwarranted. Outlaw argues that it is mere speculation for Counterclaimants to allege 6 that Outlaw engaged in evidence-gathering before creating the TriSteel product in late 7 2017, especially when the DG in PB discovery responses specifically aver that Outlaw 8 began to sell TriSteel as early as October 10, 2016. (ECF No. 97, at 6.) But, as 9 Counterclaimants correctly point out, Outlaw’s argument is not so much a bad faith 10 allegation as it is a merits contention better resolved upon a motion to dismiss. See 11 Defazio v. Hollister, Inc., No. 06cv1726–GGH, 2008 WL 2825045, at *3 n.5 (E.D. Cal. 12 July 21, 2008) (“[O]pposition papers arguing the merits of plaintiffs’ proffered 13 amendments [are] premature in that they require the court to assume that there are no 14 facts that could support plaintiff’s proposed claims.”). 15 The Court finds no bad faith or improper motive in the timing of 16 Counterclaimants’ motion for leave to amend. Adams, 739 F.2d at 868. 17 D. Repeated Failures to Cure Deficiencies By Amendments Previously 18 Permitted 19 “Repeated failure to cure deficiencies by amendments previously allowed is 20 another valid reason for a district court to deny a party leave to amend.” McGlinchy v. 21 Shell Chem. Co., 845 F.2d 802, 809–10 (9th Cir. 1988). Counterclaimants were given an 22 opportunity to amend their original counterclaims; the first amended counterclaims were 23 challenged twice, first by Outlaw’s motion to dismiss (ECF No. 38) and then again by its 24 motion for judgment on the pleadings (ECF No. 80). The first amended counterclaims 25 were sustained both times. Outlaw does not dispute that Counterclaimants’ success in 26 amending their original pleadings counts in their favor. 27 E. Prejudice to New Counterclaim Defendants 28 In considering the potential prejudice of any amendment, the Court considers 1 whether the amended complaint “would ‘greatly change the parties’ positions in the 2 action, and require the assertion of new defenses.’” See Phoenix Solutions, Inc. v. Sony 3 Elec., Inc., 637 F. Supp. 2d 683, 690 (N.D. Cal. 2009) (citing Morongo Band of Mission 4 Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990)). 5 Outlaw argues that adding new defendants would require the modification of the 6 operative scheduling order, since the new defendants would have the right to propound 7 discovery and raise Rule 12 motions. (ECF No. 97, at 6.) Specifically, Outlaw argues 8 that any leave to amend would require the Court “to amend its scheduling order, given 9 the current discovery cut off of September 6, 2019,” which in turn necessitates a showing 10 of “good cause” under Rule 16, rather than a Rule 15(a) analysis.5 (Id. at 6–7.) 11 However, as Counterclaimants point out, the September 6, 2019 deadline is for class 12 discovery; the deadline for fact discovery is not until December 4, 2019, undermining 13 Outlaw’s suggestion that the addition of new parties would necessarily require an 14 amendment of the scheduling order. (ECF No. 98, at 6; ECF No. 86, at 5). 15 Consequently, the Court discerns no present need to amend the scheduling order. In any 16 event, the scheduling order itself specifies that Rule 15(a) “shall govern” amendment of 17 the pleadings. (ECF No. 86, at 5.) 18 Outlaw also argues that naming Mr. Lynch and Mr. Wear, as well as their legal 19 representation, would “fundamentally change the parties’ positions, since the parties 20 would need to obtain new counsel.” (ECF No. 97, at 8.) While the Court recognizes that 21 Outlaw will be impacted by obtaining substitute counsel if Tauler Smith LLP is named as 22 a co-defendant, the Court does not find that such impact would fundamentally change the 23 parties’ positions. For one, as counsel to, and constituent members of Outlaw, none of 24 the three proposed defendants can argue unfair surprise. Cf. Luma Pictures, Inc. v. 25 26 27 5 Even assuming that Rule 16 applies, the Court finds that good cause exists for the proposed amendments given Counterclaimants’ reasonable diligence in filing the motion for leave to amend after 28 1 Betuel, No. CV 16-2625-GW(PLAX), 2016 WL 11519331, at *3 (C.D. Cal. Sept. 29, 2 2016) (expressing hesitation about granting leave to amend to add a new third party 3 because the same “has no reason to know of this lawsuit”). Indeed, Counterclaimants 4 have long alleged in their pleadings—as early as Counterclaimants’ August 24, 2018 5 answer and original countercomplaint6—that the lawyers at Tauler Smith LLP, and 6 Outlaw’s principals, jointly participated in the RICO scheme. 7 Second, even if the amendment will require Outlaw to secure new counsel, the 8 Court does not find the inconvenience prejudicial given the relative infancy of the stage 9 of discovery. Jefferson v. Rowe, No. S-06-0299 RRBDADP, 2008 WL 669894, at *1-2 10 (E.D. Cal. Mar. 7, 2008) (“Although the addition of a new party may result in some 11 additional discovery and may delay the final resolution of this action to some degree, 12 [Counterclaimants] ought to be granted an opportunity to test [their] claims on the 13 merits.”). As the district court in Luma recognized, “prejudice is inherent in an 14 amendment;” therefore, the “need for additional discovery, expenses, or delay is 15 insufficient” to deny amendment unless there is a “showing of an inability to respond to 16 the proposed amendment.” Luma, 2016 WL 11519331, at *3. To the extent that the 17 present scheduling order proves constrictive, the Court would be prepared to entertain 18 motions seeking deadline extensions required in the event of a change in counsel. Id. 19 The Court will not bar the proposed amendment based on prejudice. 20 F. Futility of Amendment 21 Outlaw makes four arguments for why amendment would be futile. The Court 22 addresses them in turn. 23 1. Lack of Specificity for Fraud Pleadings 24 Outlaw asserts that amendment would be futile because Counterclaimants’ RICO 25 allegations—which are premised on predicate acts of mail fraud—are not pled with 26 27 28 1 specificity under Rule 9(b) as to each new party. 2 However, the Court agrees with Counterclaimants that given the liberal 3 amendment standards, arguments concerning the sufficiency of the proposed pleadings, 4 even if meritorious, are better left for briefing on a motion to dismiss. Lillis v. Apria 5 Healthcare, No. 12cv52-IEG(KSC), 2012 WL 4760908, at * 1 (S.D. Cal. Oct. 5, 2012). 6 As such, “the Court is not willing to decide a Rule 9(b) motion prematurely,” at the Rule 7 15(a) threshold, “without the parties having had a full opportunity to brief the issue.” 8 Gross v. Hanover Ins. Co., No. 91 CIV. 0079 (PKL), 1991 WL 102401, at *3 (S.D.N.Y. 9 June 5, 1991). 10 In any event, the Court is prepared to hold in the alternative that Counterclaimants’ 11 allegations are specific enough with respect to each new proposed defendant. 12 Fed. R. Civ. P. 9(b) provides that in “all averments of fraud or mistake, the 13 circumstances constituting fraud or mistake shall be stated with particularity.” This rule 14 requires the identification of the circumstances constituting fraud so that the defending 15 parties can prepare an adequate answer from the allegations. Walling v. Beverly 16 Enterprises, 476 F.2d 393, 397 (9th Cir. 1973). To satisfy this requirement, 17 Counterclaimants must state the time, date and specific content or nature of the fraudulent 18 representations or omissions. Misc. Service Workers, Etc. v. Philco–Ford Corp., 661 19 F.2d 776, 782 (9th Cir. 1981). In addition, Counterclaimants must satisfy the above 20 requirements for each defendant. McFarland v. Memorex Corp., 493 F. Supp. 631, 637– 21 39 (N.D. Cal. 1980); see also Bruns v. Ledbetter, 583 F. Supp. 1050, 1052 (S.D. Cal. 22 1984). 23 Here, the Court is satisfied that the proposed amendments adequately identify the 24 circumstances constituting fraud with respect to each defendant. And to the extent that 25 Outlaw has suggested that two predicate acts are necessary with respect to each defendant 26 under the RICO conspiracy count, that notion must also be rejected. See Carlin v. 27 Dairyamerica, Inc., No. 1:09-CV-0430 AWI DLB, 2016 WL 1734182, at *8 (E.D. Cal. 28 May 2, 2016) (“The requirement that a conspirator participate or agree to participate in at 1 least two predicate offenses was expressly overruled by the Supreme Court in Salinas v. 2 United States, 522 U.S. 52 (1997).”). 3 2. Proximate Cause 4 Outlaw also contends that the Counterclaimants have failed to allege that the 5 proposed defendants’ RICO violations was a substantial factor, or proximate cause, of 6 any injury they sustained. (ECF No. 97, at 9.) 7 Outlaw argues that Counterclaimants Roma Mikha and NMRM have not suffered 8 any injury because they continue to sell the Rhino products, despite the fact that they 9 claim to have pulled the Rhino products from their shelves as a result of the demand 10 letter. (ECF No. 97, citing Declaration of Michael Wear, dated July 15, 2019 (ECF No. 11 97-8).). The Court does not find a lack of proximate cause here. Counterclaimants plead 12 that Roma Mikha and NMRM suffered injury because they “initially believed the demand 13 letter’s false assertions, and removed the[ Rhino products] from [their] shelves, thereby 14 losing legitimate sales.” This statement articulates a loss of business profits resulting 15 from allegedly unlawful RICO conduct, and is not contradicted by the fact that the two 16 stores may have resumed selling the products after “initially” withdrawing the products. 17 Similarly, Outlaw argues that there in no injury in Counterclaimant Skyline 18 Market’s cause of action for rescission because rescission is not a cause of action under 19 California law, and that in any event there can be no such claim because Skyline Market, 20 had been represented by counsel when it signed the settlement agreement. Both these 21 arguments were previously addressed by the Court in its order denying Outlaw’s motion 22 to dismiss: “While rescission is not an “‘affirmative’ claim,” California courts have 23 recognized that “claims such as ‘economic duress’ can be asserted offensively.” 24 CrossTalk Prods. Inc. v. Jacobson, 65 Cal. App. 4th 731, 845 (1998). Moreover, there is 25 no authority for Outlaw’s proposition that the presence of a lawyer vitiates a claim of 26 economic duress as a matter of law. (See ECF No. 38, at 20 (“Even assuming an attorney 27 was hired, however, a reasonable person in Skyline Market’s position might nonetheless 28 have felt powerless against the threat of $100.000 in liabilities.”).) As before, these 1 arguments are unavailing. 2 3. Futility as to Mr. Wear and Mr. Lynch 3 Outlaw argues amendment would be futile because there are no allegations 4 demonstrating that Mr. Wear and Mr. Lynch were the “moving, active conscious force” 5 behind the wrongdoing of Outlaw, the corporate entity. (ECF No. 97, at 10 (quoting 6 BioZone Labs., Inc. v. Next Step Labs. Corps., Case No. 17-CV-02768-NC, 2017 WL 7 5665658, at *4 (N.D. Cal. Nov. 27, 2017).) To plead personal liability against a 8 corporate officer or director, “[m]ere authority to direct the infringing behavior is not 9 enough; personal involvement is necessary.” (Id.) 10 Here, the Court finds allegations of Mr. Wear and Mr. Lynch’s personal 11 involvement sufficient to state that they were a “moving, active conscious force” in the 12 alleged RICO scheme. Counterclaimants allege that Mr. Wear and Mr. Lynch 13 “participate with the other members of the Outlaw Enterprise in conducting the 14 enterprise’s affairs, including by creating the ‘competing’ TriSteel products upon which 15 to found the false advertising claims, and by working with other members to decide the 16 geographies in which to conduct the scheme, and by signing for, and accepting receipt of 17 the ill-gotten gains” from settlement agreements like the one entered into by Skyline 18 Market. (ECF No. 92-2, at 21.) There are also additional allegations that “Tauler Smith 19 worked directly with Mr. Wear and Mr. Lynch to orchestrate the very formation of this 20 shakedown scheme.” (Id. at 22.) Any amendment including Mr. Wear and Mr. Lynch 21 would not be futile on the ground asserted by Outlaw. 22 4. Futility as to Tauler Smith LLP 23 Finally, Outlaw urges that amendment would be futile to Tauler Smith because its 24 conduct would be protected under the Noerr-Pennington doctrine. (ECF No. 97, at 11.) 25 In so arguing, Outlaw repeats many of the arguments it previously raised in connection 26 with its motion to dismiss the RICO claims; it also urges an especial First Amendment 27 protection for lawyers who engage in pre-litigation petitioning conduct on the part of a 28 client. 1 The Court disagrees, and sees no need to revisit its previous determination with 2 respect to the Frist Amended Counterclaims that Counterclaimants satisfied Noerr- 3 Pennington’s heightened pleading standard and sufficiently alleged Outlaw’s demand 4 letters—which Tauler Smith LLP is alleged to have masterminded—fall within the 5 doctrine’s sham litigation exception. (ECF No. 56, at 18–19.) The Court rejects 6 Outlaw’s attempt to relitigate the issue in the Rule 15(a) posture. 7 Moreover, the fact that Tauler Smith, LLP is a law firm does not change the sham 8 litigation analysis or give it any additional Noerr-Pennington leeway. Although Outlaw 9 raises the hue and cry about the potential chilling effect of allowing suits against law 10 firms “for simply sending letters, filing complaints, and negotiating settlements,” (ECF 11 No. 97, at 13), it is apparent that Counterclaimants are alleging more than just garden- 12 variety advocacy. To wit, Counterclaimants have alleged that “Tauler Smith’s role in the 13 Outlaw Enterprise far exceeded that of merely serving as its legal counsel,” and 14 encompassed the firm’s genesis of the scheme, its creation of “TriSteel” as a front 15 product, and its dispatch of “investigators” to take photos of storefronts to identify new 16 demand letter recipients. (ECF No. 92-2, at 22–25.) 17 Where a law firm “crosses the line between traditional rendition of legal services 18 and active patriation in directing the enterprise,” it, like any other entity cognized by law, 19 may be held to account under RICO. Handeen v. Lemaire, 112 F.3d 1339, 1349 (8th Cir. 20 1997). As the Eighth Circuit held in Handeen, neither case law nor “RICO exempts 21 professionals, as a class, from the law’s proscriptions, and the fact that a defendant has 22 the good fortune to possess the title ‘attorney at law’ is, standing alone, completely 23 irrelevant to the analysis dictated by the Supreme Court.” Id. Indeed, “[a]n attorney’s 24 license is not an invitation to engage in racketeering, and a lawyer no less than anyone 25 else is bound by generally applicable legislative enactments.” Id. 26 There is no futility to naming Tauler Smith LLP. In so holding, this Court, like the 27 Eighth Circuit in Handeen, “underscore[s] that [it has] no basis for speculating whether 28 [Counterclaimants] will, in the end, be able to substantiate th[eir] narrative.” Id. at 1350. 1 || But, for purposes of this motion for leave to amend, the Court concludes that “relief is 2 || available under a set of facts that could be proved consistent with the allegations.” Jd. 3 || (quotation marks and citations omitted). 4 C. Conclusion as to Counterclaimants’ motion for leave to amend 5 As the opposing party, Outlaw bore the burden of proving why amendment should 6 ||not be freely granted. Genentech, Inc., 127 F.R.D. at 530-31. It did not bear that burden. 7 || Accordingly, the Court GRANTS Counterclaimants’ motion for leave to file a second 8 ||amended counterclaim. The amended pleading must be submitted no later than five (5) 9 || days after the entry of this order.’ 10 || VII. Conclusion 11 In light of the foregoing, the Court GRANTS Counterclaimants’ motion for leave 12 || to file a second amended counterclaim. (ECF No. 102.) The amended pleading must be 13 || docketed no later than five (5) days after the entry of this order. 14 Outlaw’s motion to strike the reply declaration of Mr. Poe (ECF No. 99) is 15 || DENIED, and its evidentiary objections thereto ace OVERRULED (ECF No. 100). 16 17 Dated: August 19, 2019 =< (Qrowtos Cx LE 18 Hon. Gonzalo P. Curiel 19 United States District Judge 20 21 22 23 24 jj 25 7 As discussed at the August 16, 2019, hearing, Counterclaimants need not submit a carbon copy 26 || of the proposed amendments which they attached to their motion for leave to file a second amended counterclaim. They may, within reason, add additional supporting factual allegations to the filing which 27 |! do not dramatically stray from their original proposed claims. 28 Counterclaimants are also reminded of the Court’s concerns about some of the editorializing language in the proposed amended counterclaims. 19