Yan Guo v. Kyani, Inc.
311 F. Supp. 3d 1130
| C.D. Cal. | 2018Background
- Plaintiffs Yan Guo and Ju Jin Guo are California residents who purchased Kyäni distributorships and allege Kyäni, its CEO Michael Breshears and Chairman Kirk Hansen operate an illegal pyramid (endless-chain) scheme that fraudulently induces distributors to pay startup and other fees.
- Plaintiffs' First Amended Complaint asserts ten causes of action (state and federal fraud, UCL, false advertising, CSAMPA, RICO, federal securities fraud, unjust enrichment, declaratory relief) and seeks class treatment for nationwide purchasers since 2011.
- Kyäni is an Idaho corporation; its online Independent Distributor Agreement (IDA) includes Idaho choice-of-law and forum-selection language and an AAA-based arbitration clause requiring arbitration in Idaho Falls.
- Defendants filed AAA arbitration demands and moved to dismiss for forum non conveniens, to dismiss under Rule 12(b)(6), and to stay proceedings pending arbitrability/PSLRA considerations.
- The court denied the forum non conveniens motion (holding the forum clause did not cover the plaintiffs’ non-contractual fraud-based claims), granted in part and denied in part the 12(b)(6) motion (dismissing RICO claims), and denied the motion to stay (finding delegation to arbitrator not clearly and unmistakably established).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IDA forum-selection clause/choice-of-law covers Plaintiffs' claims | Claims arise from Kyäni's fraudulent business model and misrepresentations, not contract interpretation; thus forum clause doesn't apply | Forum-selection clause requires Idaho venue for any suit "to interpret or enforce" the IDA; it should control and dismissal is appropriate | Denied: forum clause limited to disputes interpreting/enforcing IDA; Plaintiffs' statutory and fraud claims adjudicable without interpreting the IDA |
| Whether several statutory and fraud claims survive Rule 12(b)(6)/Rule 9(b) | The endless-chain, UCL, false advertising, CSAMPA and fraudulent concealment claims are adequately pleaded (pyramid-scheme facts) and satisfy Rule 9(b) | Claims are grounded in fraud and fail heightened Rule 9(b) particularity and are preempted by choice-of-law to Idaho | Granted in part/Denied in part: court held those claims are plausibly pleaded and satisfy Rule 9(b); choice-of-law in IDA did not bar California statutory claims |
| Whether RICO and related causes of action are viable | Plaintiffs contend the distributor payments are not securities and RICO can apply | Defendants argue payments are investment contracts (securities) in a pyramid scheme so securities laws/PSLRA, not RICO, govern and RICO is barred | RICO claims (6th & 7th) dismissed without prejudice and without leave to amend: payments treated as securities in pyramid-scheme context, so RICO unavailable |
| Whether arbitration clause delegates arbitrability to arbitrators and whether the case should be stayed pending arbitrator decision or under PSLRA | Plaintiffs: clause and AAA incorporation do not clearly and unmistakably delegate arbitrability; PSLRA stay not warranted because securities claim survives | Defendants: arbitration clause (incorporating AAA rules) delegates arbitrability; court should stay action pending arbitrator or apply PSLRA stay | Denied: court found no clear-and-unmistakable delegation to arbitrator (unsophisticated applicants, no access to AAA rules); PSLRA stay moot because securities claim survives pleading challenge |
Key Cases Cited
- Atlantic Marine Constr. Co. v. U.S. Dist. Court for the W. Dist. of Tex., 571 U.S. 49 (forum-selection clause shifts burden to plaintiff to show public-interest factors overwhelmingly disfavor dismissal)
- Manetti-Farrow, Inc. v. Gucci Am., Inc., 858 F.2d 509 (9th Cir.) (forum-selection clause can apply to tort claims that relate to contract interpretation)
- Webster v. Omnitrition Intern., Inc., 79 F.3d 776 (9th Cir.) (payments into pyramid schemes can be securities; pyramid operation violates Rule 10b-5)
- S.E.C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir.) (investment-contract test for securities in pyramid schemes)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter in securities claims requires showing a strong inference at least as compelling as opposing inferences)
- Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir.) (Rule 9(b) applies to fraud allegations and particular averments of fraud)
- Brennan v. Opus Bank, 796 F.3d 1125 (9th Cir.) (incorporation of AAA rules can constitute clear-and-unmistakable delegation of arbitrability)
- Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (clear-and-unmistakable delegation requirement pertains to parties' manifested intent)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading must offer more than conclusory statements)