Scotty Mahlum v. Adobe Systems, Inc.
690 F. App'x 474
| 9th Cir. | 2017Background
- Plaintiff Scotty Mahlum alleged Adobe charged an impermissible early termination fee (ETF) when he canceled a service, violating California’s ban on unlawful liquidated damages.
- Mahlum sued; Adobe moved to dismiss under Rule 12(b)(6). The district court granted the motion and dismissed the complaint.
- Mahlum appealed, arguing the ETF was a penalty in substance and that the complaint pleaded sufficient facts to survive dismissal.
- The Ninth Circuit reviews de novo and considered whether the ETF is an unenforceable penalty or a lawful alternative performance (a lump-sum buyout).
- California precedent treats lump-sum termination payments for early exit as an alternative to performance, not a penalty, unless facts show the fee functions as a penalty.
- Mahlum declined to amend his complaint to add factual allegations showing the ETF operated as a penalty; the court found his complaint contained only conclusory allegations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the ETF is an unenforceable liquidated-damages penalty | ETF is a penalty in substance and not merely alternative performance | ETF is a permissible lump-sum alternative to performance under California law | ETF, as pleaded, is an alternative method of performance, not a penalty |
| Whether the complaint pleaded sufficient factual allegations to show ETF functions as a penalty | Complaint (and requested judicial notice) shows ETF could be applied as a penalty; courts should look to substance over form | Complaint lacks factual allegations showing the ETF operates as a penalty; legal conclusions insufficient | Complaint lacked factual allegations; dismissal under 12(b)(6) proper |
| Whether the district court improperly resolved factual disputes on dismissal | Factual disputes exist that should preclude dismissal | No material factual allegations were pleaded that would change the legal characterization | No factual issues pleaded; dismissal appropriate |
| Whether judicial notice of other court filings (DirecTV, Hutchinson) should be taken to supplement the record | Judicial notice of filings would support claim that ETFs have functioned as penalties | Those filings are irrelevant to the sufficiency of Mahlum’s complaint on appeal | Requested judicial notices denied as irrelevant or improper attempt to supplement pleadings |
Key Cases Cited
- Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005 (9th Cir.) (standard of review for 12(b)(6) de novo)
- Morris v. Redwood Empire Bancorp, 27 Cal. Rptr. 3d 797 (Cal. Ct. App.) (lump-sum early termination payments are alternative performance, not penalties)
- Blank v. Borden, 524 P.2d 127 (Cal. 1974) (same principle regarding termination payments)
- Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 182 Cal. Rptr. 3d 235 (Cal. Ct. App.) (courts may examine substance over form for penalty analysis)
- In re DirecTV Early Cancellation Litig., 738 F. Supp. 2d 1062 (C.D. Cal. 2010) (example of factual pleading sufficient to show termination fee functions as penalty)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (conclusory allegations insufficient to survive a 12(b)(6) motion)