On September 19, 2017, the U.S. District Court for the Northern District of California dismissed three of the six counts in the Federal Trade Commission’s (“FTC’s”) January 2017 complaint against D-Link Systems, Inc., allowing the FTC until October 20, 2017 to amend its complaint.
The FTC’s complaint alleged that D-Link engaged in unfair and deceptive practices by marketing its routers and Internet-protocol (“IP”) cameras as providing the “latest wireless security features to help prevent unauthorized access” and the “best possible encryption” protections, but nonetheless failing to protect its products from “widely-known and reasonably foreseeable risks of unauthorized access.”
The court found that, in addition to the pleading requirements of Federal Rules of Civil Procedure (“FRCP”) 12(b)(6) and 8(a), the heightened pleading standards of FRCP 9(b) applied to the FTC’s deception claims. FRCP 9(b) requires that parties alleging fraud or mistake “must state with particularity the circumstances constituting fraud or mistake,” which is a more stringent requirement than those of FRCP 12(b)(6) and 8(a). The court rejected the FTC’s argument that, unlike fraud claims, the FTC did not need to prove scienter, reliance, or injury to establish its deception claims. Relying on Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1003-04 (9th Cir. 2003), the court held that claims alleging fraudulent conduct must satisfy FRCP 9(b) when any fraudulent conduct is alleged, regardless of whether fraud is a necessary element of the claim. Similar to Vess, the court found that the FTC’s deception claims relied on misleading or false statements about a product, and, as a result, FRCP 9(b) must apply. This holding is significant, because the Ninth Circuit has not yet determined whether FTC deception claims are subject to Vess and must meet FRCP 9(b)’s heightened pleading standard. Should this case reach the Ninth Circuit, it could set a new precedent for pleading requirements for FTC deception claims.
Applying the heightened standard, the court dismissed two deception counts alleging misrepresentation in promotional materials for IP cameras and graphic user interfaces. The court found that the only support for the claims was a brochure containing no representations about the products’ digital security. Other evidence provided was undated, and thus lacked specificity to give D-Link fair notice of its allegedly deceptive conduct. D-Link’s challenge to the other three deception claims was rejected.
The court did not decide whether FRCP 9(b) would apply to the FTC’s unfairness claim, finding that it failed under FRCP 8(a); however, it stated that the question was closer. Specifically, the court noted that unfairness claims are less rooted in fraud than deception claims, but are nonetheless based on the same core set of facts. The court explained that whether FRCP 9(b) would apply to the unfairness claim would depend on how the claim was stated should the FTC choose to amend its complaint. Applying FRCP 8(a), the court held that the FTC’s unfairness claim failed to allege any actual injury, instead relying on the “mere possibility of injury.” The court added that the unfairness claim against D-Link “stands in sharp contrast to complaints that have survived motions to dismiss in other cases involving data security issues.” Per the court, the FTC may have had a more colorable claim had it “tied [its] unfairness claim to representations underlying the deception claims.”
This case merits continued attention as we wait to see whether the FTC will amend its complaint to meet the heightened pleading standard imposed by the court.