U.S., EX REL. BENNETT v. MEDTRONIC, INC. (S.D.Tex. 9-30-2010)

SMITH, Justice.

In two separate petitions, Par Pharmaceutical, Inc., and Mylan Inc. (formerly known as Mylan Laboratories, Inc.), Mylan Pharmaceuticals Inc., and UDL Laboratories, Inc., petition this Court for a writ of mandamus, asking us to vacate an order of the Montgomery Circuit Court that consolidates for a single trial under Rule 42, Ala. R. Civ. P., the cases filed against the petitioners by the State of Alabama as a part of cases the State has filed against multiple pharmaceutical companies. See generally AstraZeneca LP v. State, 41 So.3d 15 (Ala. 2009). We deny the petitions.

This opinion represents the fourth opinion from this Court addressing some aspect of the underlying litigation by the State against the pharmaceutical companies. See Ex parte Novartis Pharm. Corp., 975 So.2d 297 (Ala. 2007) (" Novartis I"); Ex parte Novartis Pharm. Corp., 991 So.2d 1263 (Ala. 2008) (" Novartis II"); and AstraZeneca, supra. The following background as stated in Novartis II is relevant to the present petitions:

"This action is part of the Alabama Medicaid Pharmaceutical average wholesale price (`AWP') litigation, in which the State has sued 73 pharmaceutical companies, including AstraZeneca [AstraZeneca LP and AstraZeneca Pharmaceuticals LP], GSK [SmithKline Beecham Corporation d/b/a GlaxoSmithKline], and Novartis [Pharmaceuticals Corporation]. According to Novartis, the State alleges that each pharmaceutical company independently `engaged in false, misleading, wanton, unfair, and deceptive acts and practices in the pricing and marketing of their prescription drug products' by reporting false pricing benchmarks and by failing to disclose to Alabama Medicaid the discounts or rebates made available by the pharmaceutical companies to Alabama physicians and pharmacies who dispensed the drugs (`the providers'). Novartis's petition at 2-3. The State asserts that [the] Alabama Medicaid [program] relied on these allegedly false disclosures and deceptive nondisclosures, and that, as a result, Alabama Medicaid compensated the providers more for the prescription drugs than the drugs actually cost the providers. Id. Thus, according to the State, these fraudulent practices by the pharmaceutical companies caused the State to overpay for Medicaid prescription drugs. The State alleges that each defendant pharmaceutical company marketed this profit margin or `spread' (the difference between what the providers actually paid for the drugs and the amounts reimbursed to providers by Alabama Medicaid) to the providers to encourage them to use that company's products rather than those of its competitors. See generally Novartis I, 975 So.2d 297.

"Originally, the State brought a single action against all 73 defendant pharmaceutical companies. Many of the defendant pharmaceutical companies moved to sever the claims against them from those of the other defendants; however, the trial court summarily denied the motions to sever. Forty-four defendant pharmaceutical companies filed mandamus petitions in this Court challenging the trial court's ruling on the severance issue; those petitions resulted in the opinion in Novartis I. At issue in Novartis I was whether joinder of all 73 defendants in a single action was improper under Rule 20(a), Ala. R. Civ. P., which permits joinder of multiple defendants in a single action when the two requirements of Rule 20(a) are met. First, `the plaintiff must assert against each defendant a "right to relief in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences,"` and, second, `there will arise in the action "any question of law or fact common to all defendants." ` Novartis I, 975 So.2d at 299 (quoting Rule 20(a), Ala. R. Civ. P.). In Novartis I, this Court found that the joinder of all the defendants was improper because the facts of the case did not satisfy the first requirement of permissive joinder. We concluded that the State was not asserting a right to relief against all defendants arising out of the same transaction or occurrence; rather, the State was suing each defendant pharmaceutical company for independently committing logically unrelated, yet `coincidentally similar,' fraudulent acts that were not part of a conspiracy or a series of coordinated transactions or occurrences. Novartis I. Because the State's claims against the pharmaceutical companies did not satisfy the first requirement of permissive joinder, this Court did not reach the second requirement; thus, it did not decide in Novartis I whether `any question of law or fact common to all defendants [would] arise in the action.' See Ala. R. Civ. P. 20(a).

"Justice Lyons concurred specially in Novartis I and was joined by Chief Justice Cobb; he noted that the Court's finding of misjoinder in Novartis I did not preclude the prospect of consolidated trials under Rule 42(a), Ala. R. Civ. P. Rule 42(a) vests trial courts with the discretion to order a joint trial `of any or all the matters in issue' in `actions involving a common question of law or fact,' whether or not the right to relief asserted by the plaintiff against all defendants arises out of the same transaction or occurrence. Ex parte Flexible Prods. Co., 915 So.2d 34, 43 (2005). Justice Lyons encouraged the trial court to consider, in response to Novartis I, `the extent to which some number of trials less than 73 might be appropriate,' 975 So.2d at 305, but cautioned the trial court against the opaque manner in which it had arrived at an earlier `consolidation' order grouping the defendant pharmaceutical companies into four tracks for trial:

"`In the proceedings that led to the present petitions, the trial court, as best I can determine, announced that there would be four trials consisting of four tracks of defendants. The trial court then sought the assistance of two special masters, placing them in what appears to be a Procrustean bed of four trials. The special masters' report and any bases therein for selecting the parties for the four trials was not made available to the parties. The trial court entered an order based upon the report in which it created four tracks of defendants without identifying its rationale for clustering various defendants in the various tracks.

"`The validity of the prior order of consolidation is not before us because we have found a misjoinder of parties, necessitating our setting aside the trial court's order. I will not speculate on the result that might have been reached had it been necessary to address the order of consolidation. Suffice it to say that, upon remand, a more transparent proceeding not so ostensibly lacking in a principled basis would better serve the ends of justice. For example, if the trial court once again seeks the input of special masters, its announcement of the number of tracks without stating any basis therefor before the masters' participation, its failure to disclose to the parties the recommendation of the masters, and its failure to identify the reasoning upon which any clusters of defendants are created for resolution of this proceeding in any order calling for fewer than 73 trials will substantially increase the State's burden in sustaining its protestations against this Court's micromanagement of the trial court's exercise of discretion should there be a subsequent mandamus proceeding challenging consolidation.'

" NovaHis I, 975 So.2d at 305 (Lyons, J., concurring specially).

"After this Court, issued its opinion in NovaHis I, the trial court ordered a joint trial of AstraZeneca LP and AstraZeneca Pharmaceuticals LP, to begin on February 11, 2008. AstraZeneca did not object to the order scheduling the joint trial of the State's claims against it. Subsequently, the State moved the trial court to consolidate the AstraZeneca trial with 14 similar fraud cases against other defendant, pharmaceutical companies, including GSK and Novartis. The various defendant pharmaceutical companies opposed the State's consolidation motion, and the trial court conducted a hearing on the motion. After the hearing, the trial court issued a nine-page order that granted the State's motion in part and consolidated the trial of the State's claims against AstraZeneca with the trials of the State's claims against GSK and Novartis. . . The trial court denied the State's consolidation motion as to the remaining 12 pharmaceutical companies the State had sought to join in a single trial.

"AstraZeneca, GSK, and Novartis (collectively `the pharmaceutical manufacturers') each petitioned this Court for the writ of mandamus directing the trial court to vacate its order consolidating the cases. . . ."

In NovaHis II, this Court held that the trial court had not exceeded its discretion in consolidating for trial the claims against GSK and Novartis. We first held that there were common questions of law and fact in the State's fraudulent-misrepresentation and fraudulent-suppression claims against GSK and Novartis. Specifically, we noted, as to the fraudulent-misrepresentation claim, that

"The factual basis of the State's fraudulent-misrepresentation claim against the pharmaceutical manufacturers is that they `reported or caused to be reported AWP [average wholesale price], WAC [wholesale acquisition cost], and Direct Price for their products . . . for publication and dissemination to state Medicaid agencies such as Alabama Medicaid.' State's second amended complaint, Appendix, Vol. 1 at Exhibit 1, at 38. The State asserts that `Alabama Medicaid reasonably relied on the false pricing data in setting prescription drug reimbursement rates and making payment on such rates.' State's second amended complaint, Appendix, Vol. 1 at Exhibit 1, at 38. Thus, it appears that in this case there will be a common question of fact as to whether the pricing information published in the third-party publications was material and whether the State, in fact, relied on that information. Although the other elements of the State's claim may `produce proof pertaining to individual actors and actions,' Novartis's petition at 11, whether the prices submitted to and published in the third-party publications were material and whether the State relied on the third-party publications in calculating the amounts to reimburse the providers appear to be questions common to both GSK and Novartis."

991 So.2d at 1275.

As to the fraudulent-suppression claim, we stated:

"The State specifically alleges that the pharmaceutical manufacturers `voluntarily undertook to report or cause to be reported AWP, WAC, and Direct Price for their products . . . for publication and dissemination to state Medicaid agencies including Alabama Medicaid' and that they `had a duty under the particular circumstances to provide accurate and complete AWP, WAC, and Direct Price information.' State's second amended complaint, Appendix, Vol. 1 at Exhibit 1, at 39. In its answer, GSK admits that it `distributes, markets or sells certain prescription drugs that are reimbursed by Alabama Medicaid' and that `from time to time, GSK provided price communications to third party publications which contained "WACs" [wholesale acquisition costs] or similar list prices for wholesalers for certain of its drugs.' GSK's answer, Appendix, Vol. 1 at Exhibit 4, pp. 7 and 19. Similarly, Novartis admits that `it distributes, markets or sells . . . prescription drugs that are reimbursed by Alabama Medicaid' and that `from time to time during the relevant period, Novartis provided price lists to third party publications which contained, inter alia, "AWPs" [average wholesale prices] and "WACs" [wholesale acquisition costs] for certain of its drugs. . . . ` Novartis's answer, Appendix, Vol. 1 at Exhibit 3, pp. 6 and 12.

"`[T]he existence of a duty is a question of law to be determined by the trial judge. State Farm Fire Cas. Co. v. Owen, 729 So.2d 834, 839 (Ala. 1998). Thus, it appears that there is a common question of law as to whether the pharmaceutical manufacturers, in participating in Alabama's Medicaid program and reporting prescription drug prices to the third-party reporting services, had a duty to accurately disclose their prescription drug priices to the third-party publications.

"Similarly, it appears that common to both actions on this claim is the question whether the State, in fact, acted to its injury with regard to the information provided to the third-party publications."

991 So.2d at 1276.

We rejected the pharmaceutical companies' alternative argument that consolidation was "inappropriate because, they sa[id], the consolidation [would] prejudice the parties, confuse the jury, and waste judicial resources." 991 So.2d at 1277. We concluded that under the particular circumstances, "any prejudice and/or confusion [could] be avoided or minimized by careful trial management." 991 So.2d at 1280.

The present petitions involve the State's claims against Par Pharmaceutical, Inc. ("Par"), and Mylan Inc. (formerly known as Mylan Laboratories, Inc.), Mylan Pharmaceuticals Inc., and UDL Laboratories, Inc. ("UDL") (collectively "Mylan"). As noted above in Novartis II, the State's second amended complaint sets forth the same basic allegations against the? 73 pharmaceutical companies. Both Par and Mylan were named as defendants in that complaint; thus, the basic allegations against the defendants in Novartis II appear to be the same basic allegations against Par and Mylan.

On March 30, 2010, the trial court ordered, under Rule 42(a), Ala. R. Civ. P., consolidation of the actions against Par and Mylan. On April 15, 2010, Par and Mylan separately petitioned this Court for the writ of mandamus, asking us to vacate the trial court's consolidation order and to stay all proceedings in this matter in the trial court. On April 27, 2010, Par and Mylan filed summary-judgment motions in the trial court. On May 12, 2010, the State filed a brief and materials in opposition to those motions, and on May 18, 2010, the trial court held a hearing on the pending summary-judgment motions. On May 25, 2010, this Court stayed all proceedings in the trial court.

"`"`Mandamus is a drastic and extraordinary writ, to be issued only where there is (1) a clear legal right in the petitioner to the order sought; (2) an imperative duty upon the respondent to perform, accompanied by a refusal to do so; (3) the lack of another adequate remedy; and (4) properly invoked jurisdiction of the court.'"'

" Novartis I, 975 So.2d at 299 (quoting Ex parte Perfection Siding, Inc., 882 So.2d 307, 309-10 (Ala. 2003), quoting in turn Ex parte Integon Corp., 672 So.2d 497, 499 (Ala. 1995)). "`In cases involving the exercise of discretion by an inferior court, [the writ of] mandamus may issue to compel the exercise of that discretion. It may not, however, issue to control or review the exercise of discretion, except in a case [where the trial court exceeds its discretion].'"` Ex parte Monsanto Co., 794 So.2d 350, 351-52 (Ala. 2001) (quoting Ex parte Auto-Owners Ins. Co., 548 So.2d 1029, 1030 (Ala. 1989), quoting in turn Ex parte Edgar, 543 So.2d 682, 685 (Ala. 1989))."

Par and Mylan argue first that based on this Court's decision in AstraZeneca, a common question of law or fact no longer exists because AstraZeneca, they contend, considered the reliance and causation issues central to the State's misrepresentation and fraudulent-suppression claims and found them without merit based on the documentary evidence in AstraZeneca detailing the State's knowledge, policy decisions, surveys, and calculations. That evidence in AstraZeneca, this Court held, conclusively demonstrated that "the State determined for itself the appropriate reimbursement formulas based on its own surveys and calculations," 41 So.3d at 33, and therefore "[t]he State failed to produce substantial evidence that it reasonably relied on the misrepresentations and/or fraudulent suppression it alleged AstraZeneca, GSK, and Novartis engaged in in these cases." 41 So.3d at 33. Par and Mylan contend that the same evidence regarding the State's conduct will be admissible in the underlying actions and will be dispositive of the State's claims against them.

In response, the State asserts generally that AstraZeneca is limited to its particular facts. However, the State focuses its arguments primarily on whether Par's and Mylan's arguments — and the ultimate relief they seek of a declaration from this Court that the AstraZeneca decision disposes of the State's claims against Par and Mylan — are properly reviewable on a petition for the writ of mandamus. The State contends that Par's and Mylan's arguments as to the applicability of the AstraZeneca decision are "summary-judgment arguments" — i.e., arguments that would be better addressed by the trial court when it rules on the pending summary-judgment motions. The State argues that the petitions in this Court are an attempt to perform "an end-run on the summary-judgment process and violate[] the rule that this Court will not review on mandamus the denial of summary judgment (which has not yet even occurred)." (State's answer, p. 12.) Further, the State contends: "If the trial court ruled in favor of Mylan and Par on summary judgment, there would have been no need for a mandamus petition by them. If the trial court ruled against them, then they would have had no legal grounds to seek mandamus." (State's answer, p. 4.) In their petitions to this Court, Par and Mylan acknowledged that although they had not yet done so, they would file motions arguing that the decision in AstraZeneca entitles them to a summary judgment. As noted above, since petitioning this Court for mandamus but before this Court stayed the proceedings in the trial court, both Par and Mylan indeed have moved for a summary judgment. At the time this Court stayed the trial-court proceedings, the trial court had not yet ruled on those motions.

In its motion to dismiss under Rule 12(b)(6), Medtronic argues that the relators have not alleged that it made or caused any false claim to be submitted to Medicare. Medtronic emphasizes both that the complaint does not link Medtronic's marketing practices to the submission of a false claim and that Medtronic's promotional tactics are not "material" to the government's decisions to pay Medicare claims for surgical ablations. Medtronic also argues that the relators did not allege sufficient facts to support a reasonable inference that hospitals or physicians falsely certified compliance with the antikickback statute. Finally, Medtronic argues that the relators have not met Federal Rule of Civil Procedure 9(b)'s heightened pleading requirements for fraud because they fail to identify the "who, what, when, where, and how of the alleged fraud." See United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997).

The relators respond that Medtronic's promotional efforts caused physicians and hospitals to perform more surgical ablations to treat atrial fibrillation than would otherwise have been performed and, as a result, more that were not medically necessary. As a result, physicians and hospitals submitted claims for reimbursement for procedures that were not medically necessary and that would not have been submitted but for the off-label promotion. (Docket Entry No. 45, at 8); 42 U.S.C. § 1320c-5(a)(3) ("medically necessary"); 42 U.S.C. § 1395y(a)(1)(A) ("reasonable and necessary"). The relators argue that using the Cardioblate system in minimally invasive closed-chest procedures to treat atrial fibrillation is never medically necessary because the Cardioblate system is not FDA approved, is experimental, and is not a first-line treatment for this purpose. The relators also argue that by marketing hospitals' ability to upcode stand-alone ablation procedures using the

Cardioblate system, Medtronic was the "but for" cause of hospitals and doctors submitting claims for payment with three false statements: that the code used accurately represented the procedure performed; that the procedure was the most economical, as required by 42 U.S.C. § 1320c-5(a)(1), and that the procedure was "medically necessary," as required by 42 U.S.C. § 1320c-5(a)(3). The relators also argue that Medtronic's kickbacks caused physicians and hospitals to falsely certify — either implicitly in claims for payment, or expressly in annual compliance statements — compliance with the antikickback statute. The relators argue that Medtronic's promotional efforts were material because their "natural tendency" was to cause the submission of false claims. Finally, the relators respond that they have provided sufficient factual allegations to demonstrate a scheme to defraud.

In its reply, Medtronic argues that although the FDA has not specifically approved the Cardioblate system for surgically treating Atrial Fibrillation, such use can be and often is "medically necessary." Medtronic emphasizes that the decision whether to use its device in surgically treating atrial fibrillation is a medical decision, made by a physician, and that nothing in the complaint alleges that any physician made such a decision knowing that it was not a medically necessary treatment in the specific use. Medtronic argues that the relators' failure to plead any specific unnecessary procedure means that they cannot meet Rule 9(b)'s particularity requirement. For both relators' antikickback claims and upcoding claims, Medtronic argues that the relators have failed to meet Rule 9(b) because they fail to identify any physicians or hospitals who upcoded or submitted false certifications — implied or express — of compliance.

Each argument and response is analyzed below.

Medtronic moves to dismiss the allegations based solely on the alleged off-label promotion of the Cardioblate surgical ablation devices and the allegations of the antikickback statute in connection with the sale of these devices under Rule 12(b)(6). Medtronic also moves to dismiss under Rule 9(b) because of the failure to plead fraud with the requisite particularity. Claims brought under the FCA are fraud claims that must comply with the requirements of Rule 9(b). Hopper v. Solvay Pharms., 588 F.3d 1318, 1325 (11th Cir. 2009); Thompson, 125 F.3d at 903; United States ex rel. Longhi v. Lithium Power Techs., Inc., 575 F.3d 458, 468 (5th Cir. 2009). The parties also analyze the application of 31 U.S.C. § 3729(a).

Rule 12(b)(6) allows dismissal if a plaintiff fails "to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). In Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), and Ashcroft v. Iqbal, 129 S.ct. 1937 (2009), the Supreme Court confirmed that Rule 12(b)(6) must be read in conjunction with Rule 8(a), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2). To withstand a Rule 12(b)(6) motion, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). "The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (citing Twombly, 550 U.S. at 556). "To survive a Rule 12(b)(6) motion to dismiss, a complaint `does not need detailed factual allegations,' but must provide the plaintiff's grounds for entitlement to relief — including factual allegations that when assumed to be true `raise a right to

relief above the speculative level." Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (footnote omitted) (quoting Twombly, 550 U.S. at 555); see also S. Scrap Material Co. v. ABC Ins. Co. (In re S. Scrap Material Co.), 541 F.3d 584, 587 (5th Cir. 2008) (quoting Twombly, 550 U.S. at 555), cert. denied, 129 S.ct. 1669 (2009). "Conversely, `when the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court.'" Cuvillier, 503 F.3d at 401 (quoting Twombly, 550 U.S. at 558).

When a plaintiff's complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend under Rule 15(a) before dismissing with prejudice. See Great Plains Trust Co. v. Morgan Stanley Dean Witter Co., 313 F.3d 305, 329 (5th Cir. 2002) ("[D]istrict courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal."); see also United States ex rel. Adrian v. Regents of the Univ. of Cal, 363 F.3d 398, 403 (5th Cir. 2004) ("Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification . . . is considered an abuse of discretion." (internal citation omitted)). However, a plaintiff should be denied leave to amend a complaint if the court determines that "the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its face. . . ." 6 CHARLES A. WRIGHT, ARTHUR R. MILLER MARY KAY KANE, FEDERAL PRACTICE AND PROCEDURE § 1487 (2d ed. 1990); see also Ayers v. Johnson, 247 F. App'x 534, 535 (5th Cir. 2007) (unpublished) (per curiam) ("`[A] district court acts within its discretion when dismissing a motion to amend that is frivolous or futile.'" (quoting Martin's Herend Imports, Inc. v. Diamond Gem Trading United States of Am. Co., 195 F.3d 765, 771 (5th Cir. 1999)).

"In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." FED. R. CIV. P. 9(b). "At a minimum, Rule 9(b) requires that a plaintiff set forth the `who, what, when, where, and how' of the alleged fraud." Thompson, 125 F.3d at 903 (quoting Williams v. WMX Techs., Inc., 112 F.3d 175, 179 (5th Cir. 1997)). The pleader must "specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Williams, 112 F.3d at 177. "`Rule 9(b)'s ultimate meaning is context specific, and thus there is no single construction of Rule 9(b) that applies in all contexts.'" United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 188 (5th Cir. 2009) (quoting Williams, 112 F.3d at 178). In the context of the FCA, the parties dispute whether it is appropriate to relax the Rule 9(b) standard. The relators acknowledge that they have failed to identify a specific false claim but argue that this should not be required because the facts relating to the alleged fraud are "peculiarly within the perpetrator's knowledge" and the alleged fraud occurred over a multi-year period. (Docket Entry No. 45, at 20-22). Medtronic responds that, to the contrary, the relevant information on billing and reimbursements are in the hands of third parties, including physicians, hospitals, and Medicare, and that there is no basis in the case law to relax the Rule 9(b) requirements in such circumstances. (Docket Entry No. 47, at 13-15).

In United States ex rel. Longhi v. Lithium Power Techs., Inc., the Fifth Circuit adopted a four-prong test for § 3729(a) claims. 575 F.3d 458 (5th Cir. 2009). The Fifth Circuit requires: "(1) a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys." Id. at 467 (adopting the test stated in United States ex rel. Wilson v. Kellogg Brown Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008)).

A threshold issue is whether the amended or earlier version of 31 U.S.C. § 3729 applies. The Fraud Enforcement Recovery Act of 2009 (FERA) amended sections of the False Claims Act, including two subsections implicated in this action, 31 U.S.C. § 3729(a)(1) and (2). Pub.L. No. 111-21, § 386, 123 Stat. 1617 (2009). FERA became law on May 20, 2009. It contained a retroactivity provision stating as follows:

The amendments made by this section shall take effect on the date of enactment of this Act and shall apply to conduct on or after the date of enactment, except that (1) subparagraph (B) of section 3729(a)(1) of title 31, United States Code, as added by subsection (a)(1), shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act ( 31 U.S.C. 3729 et seq.) that are pending on or after that date.

[A]ny request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, guarantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.

Most of the district courts that have ruled on this issue have reached the same conclusion. See, e.g., United States ex rel. Compton v. Circle B Enters., Inc., No. 7:07-CV-32, 2010 WL 942293, at *2 n. 5 (M.D. Ga. Mar. 11, 2010) ("The revised version of section (a)(1)(B) does not apply to this case because none of Defendants' claims (the . . . reimbursement claims) at issue here were pending on or after June 7, 2008."); United States ex rel. Putnam v. E. Idaho Reg'l Med. Ctr., No. CIV. 4:07-192, 2010 WL 910751, at *4 (D. Idaho Mar. 10, 2010) ("[B]ecause the claims for Medicaid reimbursement at issue in this case were neither pending on nor filed after June 7, 2008, the pre-FERA version of § 3729(a)(2) governs. . . ."); Mason v. Medline Indus., Inc., No. 07-C-5615, 2010 WL 653542, at *3 (N.D. Ill. Feb. 18, 2010) ("The court interprets § 4(f)(1) to apply to `claims' as defined in the FCA. Accordingly, FERA's amendment does not apply retroactively to this case."); United States ex rel. Sanders v. Allison Engine Co., Inc., 667 F. Supp. 2d 747, 752 (S.D. Ohio 2009) ("[T]he clear indication from Congress is that the revised language at issue here is applicable to `claims' pending on June 7, 2008, and not to `cases' pending on June 7, 2008. Since the Defendants in this case had no `claims' pending on June 7, 2008, the retroactivity clause does not apply to them. . . ."); United States v. Sci. Applications Int'l Corp., 653 F. Supp. 2d 87, 107 (D. D.C. 2009) ("[S]ection 4(f)(1) will be interpreted to apply to `claims' as defined in § 3729, that is, requests or demands for money or property. Thus, FERA has no impact on the present action.").

The relators' amended complaint does not appear to involve claims pending on or after June 7, 2008. The amended complaint refers to 31 U.S.C. § 3729(a)(2), not 31 U.S.C. § 3729(a)(1)(B). The relators' allegations of unlawful promotional tactics date back to 2001. (Docket Entry No. 12, ¶ 17). The relators' allegations of false or fraudulent claim submission refer to 1,000 claims submitted at various times before February 2008 by physicians at LDS Hospital in Salt Lake City. (Id. at ¶ 132). Finally, the amended complaint contains no allegations of false claims pending after June 7, 2008. Medtronic has pointed out that the FCA has been amended, (Docket Entry No. 30, at 6 n. 6). The relators have not argued whether the amended FCA or the prior version applies to their claims. Medtronic argues that the result is the same under either version and the relators have not addressed this issue. (Docket Entry No. 30, at 6 n. 6). In an abundance of caution, the analysis is conducted under both the pre- and post-FERA versions of the FCA because the amended complaint may cover claims pending on or after June 7, 2008.

1. A False or Fraudulent Claim

The Supreme Court has cautioned that the FCA does not punish every type of fraud committed upon the government. See United States v. McNinch, 356 U.S. 595, 599 (1958). "The [FCA] attaches liability, not to the underlying fraudulent activity, but to the `claim for payment.'" United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266-67 (9th Cir. 1996) (finding on summary judgment that violation of Individuals with Disabilities Education Act regulations is not also an FCA violation unless compliance certification is a prerequisite to receive federal funds); see also United States ex rel. Siewick v. Jamieson Sci. And Eng., Inc., 214 F.3d 1372, 1376-77 (D.C. Cir. 2000) (upholding district court's determination on summary judgment that even if the defendants had violated 18 U.S.C. § 207, "a criminal statute aimed at `revolving door' abuses by former government employees," there was no fact issue as to an FCA violation because defendants were not required to certify compliance with the statute); United States ex rel. Willard v. Humana Health Plan of Tex Inc., 336 F.3d 375, 382-83 (5th Cir. 2003) (upholding district court's dismissal because the plaintiff only alleged violations of HMO enrollment antidiscrimination laws but did not allege that the United States "conditioned payment . . . on any implied certification of compliance with the anti-discriminatory provisions"); United States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818, 824 (8th Cir. 2009) (upholding district court's dismissal because the plaintiff alleged violations of the FDA medical-device-reporting regulations by selling defective products but did not allege that certification with these regulations was a prerequisite to payment).

In the specific context of reimbursement claims for using a drug or device in a way that violates the FDA, the courts have held that the "mere fact" of "violating FDA regulations does not translate into liability for causing a false claim to be filed." United States ex rel. Polansky v. Pfizer, No. 04-cv-0704 (ERK), 2009 WL 1456582, at *7 (E.D.N.Y. May 22, 2009); see also United States ex rel. Rost, 507 F.3d 729, 732 (1st Cir. 2007), overruled on other grounds by Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008) (noting that the alleged marketing practices, "while illegal, are not a sufficient basis for an FCA action because they do not involve claims for government reimbursement"); Thompson, 125 F.3d at 902 ("[C]laims for services rendered in violation of a statute do not necessarily constitute false or fraudulent claims under the FCA.").

The courts have held that a claim may be false or fraudulent under the FCA because it includes a certification of compliance with a federal statute, regulation, or contract that is a prerequisite to obtaining the government benefit. United States ex rel. Graves v. ITT Educ. Servs., Inc., 284 F. Supp. 2d 487, 497 (S.D. Tex. 2003), aff'd, 111 Fed. App'x 296 (5th Cir. Oct. 20, 2004). Such "legally false" certification differs from "factually false" certification, which involves an incorrect description of goods or services provided or a request for reimbursement for goods or services never provided. See Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001). The Fifth Circuit has held that a claim is "legally false" only when a party affirmatively and explicitly certifies compliance with a statute or regulation and the certification is a condition to receiving the government benefit. See Thompson, 125 F.3d at 902. In addition to express certifications of compliance, other circuits have found that FCA liability may exist under an "implied theory" of certification. See Willard, 336 F.3d at 82 (discussing cases). "The theory of implied certification rests on the notion that `where the government pays funds to a party, and would not have paid those funds had it known of a violation of a law or regulation, the claim submitted for those funds

contained an implied certification of compliance with the law or regulation and was fraudulent.'" United States ex rel. Foster v. Bristol-Myers Squibb Co., 587 F. Supp. 2d 805, 823 (E.D. Tex. 2008) (citing United States ex rel. Barrett v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 28, 33 (D.D.C. 2003)). For example, the Sixth Circuit has found that FCA liability "can attach if the claimant violates its continuing duty to comply with the regulations on which payment is conditioned." Willard, 336 F.3d at 82 (quoting United States ex rel. Augustine v. Century Health Servs., Inc., 289 F.3d 409, 415 (6th Cir. 2002)). The Fifth Circuit has never adopted implied certification as a theory of FCA liability. United States ex rel. Marcy v. Rowan Cos., Inc., 520 F.3d 384, 389 (5th Cir. 2008) (citing Willard, 336 F.3d at 381-82); United States v. Southland Mgmt. Corp., 326 F.3d 669, 679 (5th Cir. 2003) (en banc) (Jones, J. concurring). Instead, the Fifth Circuit has held that "[t]he violation of the statute or regulation does not create a cause of action under the False Claims Act; liability arises only if the defendant has made a false certification of compliance with the statute or regulation, when payment is conditioned on that certification." Graves, 284 F. Supp.2d at 497.

Liability under both the pre- and post-FERA versions of the FCA requires that an actionable false statement be "material." Longhi, 575 F.3d at 467 (citing Thompson, 125 F.3d at 899); see also Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S.ct. 2123, 2126 (2008) (explaining that a § 3729(a)(2) "plaintiff must prove that the defendant intended that the false statement be material to the Government's decision to pay or approve the false claim"). The Fifth Circuit applies the "natural tendency" test to determine materiality. Longhi, 575 F.3d at 470. This test asks whether "the false or fraudulent statements either (1) make the government prone to a particular impression, thereby producing some sort of effect, or (2) have the ability to effect the government's actions, even if this is a result of indirect or intangible actions on the part of the Defendants." Id. "All that is required under the test for materiality, therefore, is that the false or fraudulent statements have the potential to influence the government's decisions." Id.

An FCA claim must allege that the false statements were "knowingly" made or caused to be made. The FCA defines "knowing or knowingly" to mean "that a person, with respect to information," (i) "has actual knowledge of the information"; (ii) "acts in deliberate ignorance of the truth or falsity of the information"; or (iii) "acts in reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b)(1-3). Because an FCA claim alleges a fraudulent or false statement knowingly made or caused to be made, Longhi, 575 F.3d at 468, "[c]laims brought under the FCA must comply with Rule 9(b)." Thompson, 125 F.3d at 903 (5th Cir. 1997); see also Hopper v. Solvay Pharms., 588 F.3d 1318, 1325 (11th Cir. 2009). However, "[i]n contrast to common law fraud, the FCA "lacks the element of reliance and damages." Grubbs, 565 F.3d at 189. "It is adequate to allege that a false claim was knowingly presented regardless of its exact amount; the contents of the bill are less significant because a complaint need not allege that the Government relied on or was damaged by the false claim." Id. "To plead with particularity the circumstances constituting fraud for a FCA section [3729(a)(1)(A)] claim, a relator's complaint, if it cannot allege the details of an actually submitted false claim, may nevertheless survive by alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted." Id. at 190. To plead with the requisite particularity a § 3729(a)(1)(B) claim, the complaint need not "allege details of fraudulent bills actually presented to the government." Id. at 192. The relators must, however, allege facts linking a scheme to submit false claims to the submission of false claims. Solvay Pharms., 588 F.3d at 1325.

Although the parties' discussion of Rule 12(b)(6) cites Twombly and Iqbal as the most recent statements by the Supreme Court under the rule, the arguments do not turn on a claim that the analysis and result in this case are different under those decisions than they would have been earlier. The parties' briefs do not argue whether the facts alleged are sufficient to make the claim of an FCA violation "plausible." Rather, Medtronic argues that taking the facts alleged as true, as a matter of law, the FCA does not provide a basis for relief for the promotional activities and remuneration alleged. (Docket Entry No. 30, at 14, 22).

The relators do argue for a relaxed application of Rule 9(b). The cases are clear that Rule 9(b) applies in FCA cases. Longhi, 575 F.3d at 468, Thompson, 125 F.3d at 903; Hopper, 588 F.3d at 1325. The cases also recognize two exceptions that the relators urge. "It is possible that the pleading requirements of Rule 9(b) may be relaxed in certain circumstances — when, for instance, the facts relating to the fraud are `peculiarly within the perpetrator's knowledge.'" United States ex rel. Doe v. Dow Chem. Co., 343 F.3d 325, 330 (5th Cir. 2003) (quoting United States ex rel. Russell v. Epic Healthcare Mgmt. Grp., 193 F.3d 304, 308 (5th Cir. 1999). "Fraud may be pleaded on information and belief under such circumstances." United States ex rel. Willard v. Humana Health Plan of Texas Inc., 336 F.3d 375, 385 (5th Cir. 2003). But the Fifth Circuit has held that a plaintiff should not be relieved from complying with the Rule 9(b) requirements "where the documents containing the requisite information are in the possession of, and presumably available from, other sources." United States ex rel. Rafizadeh v. Cont'l Common, Inc., 553 F.3d 869, 873 n. 6 (5th Cir. 2008) (citing Doe, 343 F.3d at 330); see also Polansky, 2009 WL 1456582, at *8 ("The rationale for reducing the pleading burden when information is in the defendant's possession appears to spring from the fact that an adverse party would not willingly divulge incriminating information. Where the information needed to fill out the complaint is in the hands of third parties, rather than defendants, this rationale for reducing the pleading burden does not apply.").

The Eleventh Circuit has held that the pleading standard should not be relaxed for qui tam plaintiffs who may only have access to information through discovery in suits where the government refuses to intervene, even though the government would have access to those documents without discovery. Atkins, 70 F.3d at 1360 n. 17. The court reasoned,

The qui tam relator bring the action on behalf of the federal government. The relator stands in the government's shoes — in neither a better nor worse position than the government stands when it brings suit. Accordingly, we cannot furnish a qui tam relator with an easier burden than the government would bear if it intervened and assumed the prosecution of the case. Permitting a qui tam relator to go forward with his complaint, when we would not allow the government to proceed, might encourage the government to evade its burden by merely recruiting a willing relator to file a qui tam action.

The relators argue that this court should relax the pleading standard because they do not have access to certain information. In the Fifth Circuit, the pleading standard is not relaxed when such information is available from third party entities and individuals. Rafizadeh, 553 F.3d at 873 n. 6. Medtronic notes that it does not have billing or reimbursement information; doctors, hospitals, and government agencies do. There is no basis to relax the Rule 9(b) pleading standard in this case under the applicable precedents. See Polansky, 2009 WL 1456582, at *8 (refusing to relax the pleading the standard in off-label qui tam against drug manufacturer because the needed information available was in the hands of third parties).

Even under a relaxed pleading standard, the relators must still state a factual basis for their beliefs. See United States ex rel. King v. Alcon Labs., Inc., 232 F. Supp. 2d 568, 572 (N.D. Tex. 2005) (finding that even under a relaxed pleading standard, the relators failed to plead fraud with particularity because the relator did not identify a single person involved in the alleged fraud, did not did not identify specific fraudulent claims, and did not identify a single date on which fraudulent activity occurred); United States ex rel. Lam v. Tenet Healthcare, 481 F. Supp. 2d 673, 688 (W.D. Tex. 2006) (finding that even under a relaxed pleading standard, the relators failed to set forth a factual basis for their beliefs because they failed to name one physician who violated the anti-referral statute; did not specifically identify one fraudulent transaction; and failed to specifically allege the fraud's "when" by alleging only that the fraudulent events occurred "at some point in the 1980s, between 1995 and 2002, and in 1999). Cf. Rost, 507 F.3d at 732-33 (recognizing that Rule 9(b) may be satisfied where "although some questions remain unanswered, the complaint as a whole is sufficient to pass muster under the FCA," but upholding dismissal because the relator did not identify specific physicians who submitted claims for reimbursement for off-label prescriptions).

In addition, "some district courts in the Fifth Circuit [] relaxed Rule 9(b)'s pleading standard where the alleged fraud occurred over an extended period of time and consists of numerous acts." Bristol-Myers Squibb Co., 587 F. Supp. 2d at 821 (listing cases). In such cases, courts have allowed the plaintiff to "plead the fraudulent scheme with particularity and provide representative examples of specific fraudulent acts conducted pursuant to that scheme." United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 509-10 (6th Cir. 2007); see also Barrett, 251 F. Supp. 2d at 35 ("While a complaint that covers a multi-year period may not be required by Rule 9(b) to contain a detailed allegation of all facts supporting each and every instance of submission of a false claim, some information on the false claims must be included." (citing United States ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1051 (9th Cir. 2001)). The relators have not, however, provided a "representative sample" or even an "instance of submission." Bledsoe, 501 F.3d at 509-10; Barrett, 251 F. Supp. 2d at 35. Nor have the relators provided a factual basis to support a belief that a specific physician or hospital submitted a false claim. Willard, 336 F.3d at 385. Instead, the relators rely on their allegations that some physicians performed a high number of surgical ablations. There relators have identified no basis to relax the Rule 9(b) pleading standard under the applicable law.

Recently, a number of qui tam actions alleging FCA violations caused by off-label marketing by drug companies have been filed in federal courts. Both parties discuss three such cases: United States ex rel. Franklin v. Parke-Davis, 147 F. Supp. 2d 39 (D. Mass. 2001); United States ex rel. Hess v. Sanofi-Synthelabo Inc., No. 4;05CV570MLM, 2006 WL 1064127 (E.D. Mo. Apr. 21, 2006); Hopper v. Solvay Pharms. Inc., 588 F.3d 1318 (11th Cir. 2009). In addition, both parties discuss In re Cardiac Devices Qui Tam Litig., a qui tam case alleging FCA violations caused by unlawful use of medical devices by hospitals. 221 F.R.D. 318 (D. Conn. 2004).

In Franklin v. Parke-Davis, the relator, a doctor formerly employed by Parke-Davis to promote its drug Neurotonin, alleged that Parke-Davis engaged in a "fraudulent scheme to promote the sale of the drug Neurotonin for `off-label uses' . . . and that this illegal marketing campaign caused the submission of false claims to the Veterans Administration and to the federal government for Medicaid reimbursement." 147 F. Supp. 2d at 43. The FDA approved Neurotonin "for use as an adjunctive treatment for epilepsy in doses from 900 to 1800 mg per day." Id. at 45. The relator alleged that Parke-Davis promoted Neurotonin for off-label use "as mono-therapy for epilepsy, for control of bipolar disease, and as treatment for attention deficit disorder." Id. Parke-Davis's alleged off-label promotional tactics included using medical liaisons such as the relator to make "exaggerated or false claims concerning the safety and efficacy of Parke-Davis drugs for off-label uses"; rewarding physicians who prescribed large quantities of Parke-Davis drugs with kickbacks; and paying physicians to create "sham" studies urging off-label uses that "had no scientific value." Id. at 45-46.

The relator also alleged that "when questions arose concerning the availability of reimbursement for prescriptions for off-label uses of Parke-Davis drugs" Parke-Davis made efforts to conceal the fraud. Id. at 46. Medical liasons "were instructed to coach doctors on how to conceal the off-label nature of the prescription" and Parke-Davis "shredd[ed] documents, falsif[ied] documents, and encourag[ed] medical liaisons to conduct their marketing activities without leaving a paper trail." Id.

Parke-Davis moved to dismiss. Unlike the medical device case in which there is FDA approval for general use related to the specific purpose being promoted, there was no dispute as to whether "an off-label prescription submitted for reimbursement is a false claim within the meaning of the FCA." Id. at 51. The court granted Parke-Davis's motion in part and denied it in part. Id. at 44.

The court found that the complaint met Rule 9(b)'s pleading requirements with respect to submissions to Medicaid because it sufficiently alleged fraudulent schemes to "increase the submission of off-label prescriptions for Neuortonin for payment by Medicaid" and "to induce off-label prescriptions for Neurotonin" by physicians. Id. at 48. It reasoned that the relator identified the fraud's "who" by naming Parke-Davis employees who instructed medical liaisons on how to fraudulently promote off-label use of Neurotonin, listing the medical liaisons by name, and identifying the physicians contacted; identified the fraud's "what" by alleging that the off-label promotion resulted in the submission of ineligible claims for reimbursement for off-label use of Neurtonin; identified the fraud's "when" by alleging the term of the relator's employment; and the fraud's "how" by alleging a detailed description of the marketing scheme that included "misleading" materials Id. The relator also alleged eleven "specific examples of fraudulent statements which medical liaisons . . . were trained to give to physicians, and did give to physicians, to induce the purchase of Neurotonin for off-label uses." Id. In contrast, the court found that the complaint did not sufficiently allege a fraudulent scheme to cause false submissions to the Veterans Administration because it did not "specify which Parke-Davis personnel engaged in this conduct, where such conduct took place, which VA personnel were involved, or any specific fraudulent statements made to personnel at the [VA]." Id. at 50.

With respect to the Medicaid allegations, the court rejected Parke-Davis's causation challenges. Parke-Davis argued that the FCA does not impose liability for violating FDA regulations because such violations do not involve a claim or statement to the government. The court stated:

It is true that the FCA cannot be used to enforce compliance with every law or regulation . . . the FCA can be used to create liability where failure to abide by a rule or regulation amounts to a material misrepresentation made to obtain a government benefit. . . . Thus, the failure of Congress to provide a cause of action for money damages against a pharmaceutical manufacturer for marketing off-label drugs does not preclude an FCA claim where the manufacturer has knowingly caused a false statement to be made to get a false claim paid or approved by the government in violation of 31 U.S.C. § 3729(a).

However, the Parke-Davis Court dismissed the relator's kickback allegations. The court rejected the relator's argument that a violation of the antikickback statute is a per se violation of the FCA. It reasoned that though an FCA violation might arise based on a theory of "`implied certification' [of compliance with the antikickback statute] by virtue of the defendant's participation in the federal program," the relator "failed to allege that physicians either expressly certified or, through their participation in a federally funded program, impliedly certified their compliance with the federal antikickback statute as a prerequisite to participating in the federal program." Id. The court reasoned further that "while Defendant's payment of kickbacks may well be illegal," the relator did not allege that "Parke-Davis caused or induced a doctor and/or pharmacist to file a false or fraudulent certification regarding compliance with the anti-kickback statute." Id. at 55.

In Hess, the relator alleged that Sanofi-Snythelabo's off-label promotion of its drugs Eloxatin — approved for "second line treatment of fourth stage colorectal cancer" — and Elitek — approved for the treatment and prevention of tumor lyses syndrome — caused the submission of false claims for payment for off-label uses of the respective drugs. 2006 WL 1064127, at *2. The relator alleged that Sanofi-Synthelabo promoted Eloxatin for treatment in both "first-line" and "adjuvant" settings by training sales representatives to use off-label data when promoting Eloxatin to physicians, creating sales goals impossible to meet without off-label usage, and by providing sales representatives with monographs containing information on adjuvant and first-line trials for Eloxatin. Id. at *8. The relator further alleged that the data provided to physicians was "immature, unreliable, and misleading." Id. With respect to Elitek, the relator alleged that Sanofi-Synthelabo trained sales representatives to promote off-label uses and pressured sales representatives to derive a substantial number of sales from off-label use. Id. at *6. Sanofi-Synthelabo moved to dismiss arguing that the relator did not allege any false representations to physicians or the government, any improper prescriptions, or that doctors who prescribed the drugs also sought reimbursement from Medicare. Sanofi-Synthelabo also argued that the relator failed to alleged fraud with the required particularity. Id. at *4. Specifically as to Eloxatin, Sanofi-Synthelabo argued that because Medicare does not require a physician to specify the stage of cancer in submitting claims for reimbursement, physicians made no false statements in submitting claims for use of Eloxatin to treat colorectal cancer in first-line and adjuvant setting. Id. at *8. The court granted Sanofi-Synthelabo's motion to dismiss, addressing the allegations involving each drug separately.

The court dismissed the allegations related to Elitek under Rule 9(b) because the relator failed to allege the "who, what, when, where, and how of fraud." Id at *6. The court noted that the relator did not allege "the time or place of the allegedly false representations regarding Elitek," "the nature or content of claims made which were allegedly fraudulent," or "that doctors to whom Plaintiff promoted off-label use of Elitek actually submitted false claims to the Government for off-label

uses of this prescription drug." Id. The court deemed the relator's allegations "vague" and "conclusory" and dismissed for "lack of the requisite specificity to withstand a motion to dismiss pursuant to either Rule 12(b)(6) or Rule 9(b)." Id.

The court also dismissed the Eloxatim allegations because the relator did not allege a "material" misrepresentation. In United States ex rel. Costner v. United States, the 8th Circuit adopted a materiality requirement for FCA claims requiring that the misrepresentation have the natural tendency to influence an agency action, the same test adopted by the Fifth Circuit in Longhi. 317 F.3d 883, 887-88 (8th Cir. 2003). The court accepted Sanofi-Synthelabo's argument that the alleged false claims for reimbursement did not contain a material false statement because the reimbursement forms did not require that the physician indicate the stage of cancer, only that the patient has cancer. Thus the only statement material to Medicare reimbursement is that the patient has cancer; the government does not inquire further into whether the drug is approved for a particular cancer stage. Id. at *7.

Though the court's decision on the Eloxatim allegations rested on this ground, the court considered other arguments. It agreed with Sanofi-Synthelabo's argument that the relator did not sufficiently plead the FCA's knowledge requirement because the plaintiff did not allege that the "Defendant deliberately lied nor that the data provided by Defendant either to its sales representatives or to doctors was incorrect or false." Id. at *9. The court distinguished the alleged promotion tactics in Parke-Davis by noting that "none of the actions which Plaintiff alleges on the part of the Defendant . . . involve conduct which was designed to present false information; rather . . . the Defendant sought to disseminate date and information from trials and studies." Id. at *10. Further, the court found that the relator did not sufficiently allege any false statements to Medicare. The court noted that while typically Medicare reimburses only on-label prescriptions, "such approval is not necessarily a requirement." Id. The court also noted that — unlike the facts in Parke-Davis — the relevant Medicare administrator chose to apply an exception allowing coverage for off-label prescriptions of Eloxatin and concluded that "because . . . the Medicare administrator included off-label uses of Eloxatin for reimbursement purposes, Plaintiff can prove no set of facts to establish that Defendant violated the FCA." Id. at *9. Finally, the court, applying Parke-Davis, found that the relator did not allege fraud with the particularity required by Rule 9(b). The court found that the complaint did not identify the fraud's "who" because it did not "identify doctors whom sales representatives allegedly contacted nor . . . doctors who allegedly made claims for Medicare reimbursement for off-label uses" or the fraud's "how" because it did not provide "examples of the allegedly false information which Defendant allegedly gave its sales representatives." Id.

In Solvay, the relators alleged that Solvay Pharmaceuticals's off-label promotion of Marinol caused the submission of false claims for reimbursement to Medicare. 588 F.3d at 1321. The FDA approved Marinol, a synthetic form of THC, a hallucinogenic compound found in marijuana, for use as an appetite stimulant for AIDS patients and for the treatment of nausea and vomiting associated with cancer chemotherapy. Id. at 1322. The relators alleged that Solvay promoted Marinol off-label for appetite loss in cancer patients and for treatment of nausea in HIV patients. The alleged off-label promotional activities included "a sophisticated marketing plan" and "kickbacks to physicians and other healthcare providers to induce them to prescribe Marinol for off-label purposes." Id. at 1323. The district court referred the case to a magistrate judge who recommended dismissal. The district court adopted the magistrate's recommendation in full and the relators appealed. Id. "The sole issue on appeal" was whether the Complaint, which did not include allegations of specific false claims or allege that Solvay intended for its statements to influence the government's decision to pay any

claims, satisfies the particularity requirements of Rule 9(b)." Id.

The Eleventh Circuit upheld the district court's dismissal. In reaching this conclusion, the Eleventh Circuit discussed its decisions in United States ex rel. Clausen v. Lab Corp. of Am., 290 F.3d 1301 (11th Cir. 2002); United States ex rel. Corsello v. Lincare, Inc., 428 F.3d 1008 (11th Cir. 2005); and United States ex rel. Atkins v. McInteer, 470 F.3d 1350 (11th Cir. 2006). In Clausen, the court upheld the district court's dismissal of a complaint alleging the submission of claims for reimbursement focission12 C.F.R. § 226.23(a)(3). Material disclosures are defined by the Federal Reserve's Regulation Z as: "the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in § 226.32(c) and (d)." 12 C.F.R. § 226.23(a)(3) n. 48.

This Court has previously held that failure to adequately disclose the risk of negative amortization does not constitute a material violation that may extend the statute of limitations for rescission of the loan. See Order on Motion for Summary Judgment, July 1, 2009, at 9 [Docket No. 207] ("July 1 Order"). This Court also determined that APR was a material disclosure that could extend TILA's statute of limitations for rescission, and held that if plaintiffs prevailed on the merits of their TILA claim they were entitled to rescission against defendants Paul Financial, Luminent Mortgage Capital, Inc., and HSBC. Id. However, any TILA rescission claims have been extinguished by the statute of limitations against RBS. Plaintiffs Mr. and Mrs. Goldhaber entered into an agreement with Paul Financial on July 28, 2005. Under the plain language of the statute and Regulation Z, the latest date plaintiffs could exercise their rescission claim was July 28, 2008 . The Goldhabers were added to this complaint on July 24, 2009 — almost a full year after this period had elapsed — and RBS was not named as a defendant until October 13, 2009, more than fourteen months after the expiration of the statute of limitations.

Plaintiffs' assertion that the initial class action complaint related to Jordan's loan, filed on August 30, 2007, "tolled the statute of limitations for the Goldhabers and all other putative Class members" is unpersuasive in this case. Plaintiffs rely on Demarest v. Quick Loan Funding, Inc., No. 09-1687, 2009 WL 940377, at *7 (C.D. Cal. Apr. 6, 2009) to argue that "service of [the original] complaint upon Paul Financial renders the Goldhabers' rescission claim timely as to RBS." However, Demarest only held that a rescission request to the loan originator is equally effective against an assignee. Id. RBS is an assignee of the Goldhabers' loan, but not of Jordan's loan; therefore, RBS could not be put on notice that it would be subject to this suit until plaintiffs Mr. and Mrs. Goldhaber joined the suit on July 24, 2009.

Plaintiffs cite American Pipe Construction Company v. Utah, 414 U.S. 538 (1974) ("American Pipe") to suggest that the filing of the initial complaint tolled the statute of limitations for all class members. However, American Pipe is not on point. American Pipe related to the addition of class members who might subsequently participate in a suit in addition to the named plaintiffs. Id. at 551. The Supreme Court reasoned that requiring new class members to file a separate lawsuit which individually meets timeliness requirements would frustrate the purpose of Federal Rule of Civil Procedure 23. Id. at 550. This is substantially different from plaintiffs' suggestion that the filing of an initial complaint tolled the statute of limitations for all possible class members against any and all potential defendants which might be implicated by the addition of new class members.

Under Federal Rule of Civil Procedure 15(c)(1)(B), plaintiffs can use the relation-back doctrine to amend a complaint to include allegations that "arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original pleading." An amendment may change the party or name of party "against whom a claim is asserted if Rule 15(c)(1)(B) is satisfied, and if within the period specified by Rule 4(m) for serving the summons and complaint, the party to be brought in by the amendment: (I) received such notice of the action that it will not be prejudiced in defending on the merits; and (ii) knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party's identity." Fed.R.Civ.P. 15(c)(1)(C). Rule 4(m) specifies 120 days to amend unless "plaintiff shows good cause for the failure." Here, the 120 days specified in Rule 4(m) have elapsed by a considerable margin, and plaintiffs do not plead good cause for failing to meet this requirement.

Although plaintiffs asserted at oral argument that the Master Loan Purchase and Interim Servicing Agreement between Paul Financial and RBS was sufficient to toll the statute of limitations against RBS, the complaint does not allege facts which support this contention. Plaintiffs do not allege in the FAC that the MLPA required Paul Financial to give notice to RBS if a representation or warranty was breached in connection with a loan not affecting the financial interest of RBS. The complaint states only that "[t]he MLPA requires that upon discovery by either PAUL FINANCIAL or RBS of a breach of any representation or warranty in the MLPA which materially and adversely affects the value of the mortgage loans or the interest of RBS, the party discovering such breach shall give prompt written notice to the other." Id. ¶ 45 (emphasis added). Thus, the MLPA controlling the relationship between RBS and Paul Financial does not provide a basis to relate the addition of RBS back to the date of the filing of the original complaint that named only Jordan as a plaintiff.

Accordingly, plaintiffs' TILA rescission claims have expired as they relate to RBS and RBS' motion to dismiss the rescission claims is GRANTED with prejudice.

Plaintiffs next contend that RBS violated its duty under common law to disclose material facts. Opp. at 8. In particular, plaintiffs cite provisions in the loan agreement which they allege are misleading, such as the portion of the loan which states that "my monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal." FAC, Ex. 2 ¶ 3(E). Plaintiffs allege that under the terms of the loan it was not a possibility but a certainty that the monthly payment would be insufficient to repay the unpaid principal and interest because of the teaser rate. Moreover, plaintiffs allege that in basing the payment schedule on the low teaser rate while simultaneously disclosing a higher APR, defendants "failed to disclose the actual interest costs that borrows were going to incur on their loans." Opp at 9; FAC ¶ 88. Citing common law, plaintiffs assert that these partial representations and the omission of material facts violated defendants' duty to disclose material facts.

Defendant contends that any state law fraudulent omissions claim is preempted by TILA. The Supreme Court has identified three instances under which state laws are preempted by federal law governing the same subject matter: 1) express preemption, 2) implied conflict preemption and 3) field preemption. Hillsborough County Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 713 (1985). Citing Silvas v. E*Trade Mortgages, 514 F.3d 1001, 1007 (9th Cir. 2008), RBS argues that TILA occupies the whole field of disclosures in connection with credit transactions. Mtn. to dismiss, at 19. The plaintiff in Silvas was attempting to bring a time-barred TILA claim for damages under the "unlawful" prong of the UCL. 514 F.3d at 1007. ("An attempt by Appellants to go outside the congressionally enacted limitation period of TILA is an attempt to enforce a state regulation in an area expressly preempted by federal law."). The court did not determine that state claims for deceptive, fraudulent, or unfair conduct were categorically preempted by TILA.

Where a statute has an express preemption clause, "the task of statutory construction must in the first instance focus on the plain wording of the clause, which necessarily contains the best evidence of Congress' preemptive intent." CSX Transp., Inc. v. Easterwood, 507 U.S. 658, 664 (1993). TILA's preemption provision states:

Except as provided in subsection (e) of this section, this part and parts B and C of this subchapter do not annul, alter, or affect the laws of any State relating to the disclosure of information in connection with credit transactions, except to the extent that those laws are inconsistent with the provisions of this subchapter and then only to the extent of the inconsistency. Upon its own motion or upon the request of any creditor, State or other interested party which is submitted in accordance with procedures prescribed in regulations of the Board, the Board shall determine whether any such inconsistency exists. If the Board determines that a State-required disclosure is inconsistent, creditors located in that State may not make disclosures using the inconsistent term or form, and shall incur no liability under the law of that State for failure to use such term or form, notwithstanding that such determination is subsequently amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

However, TILA's preemption provision preserves state laws "relating to the disclosure of information in connection with credit transactions" which are not inconsistent with TILA. 15 U.S.C. § 1610(a)(1). The Commentary on Regulation Z provides that "[s]tate law requirements that call for the disclosure of items of information not covered by the Federal law, or that require more detailed disclosures, do not contradict the Federal requirements." 12 C.F.R. Pt. 226, Supp. I, 28(a)(3). Thus, TILA preempts state law only to the extent state disclosure requirements are explicitly inconsistent with federal law.

Additionally, while TILA protects creditors from inconsistent state disclosure requirements, it does not protect creditors from state statutes prohibiting unfair or deceptive practices. See Therrien v. Resource Fin. Group, Inc., 704 F.Supp. 322, 329 (D.N.H. 1989) ("TILA and Regulation Z specify only the required disclosures by a creditor. They do not permit or otherwise regulate the particulars of a loan agreement. Conduct that complies with the federal disclosure requirements still could constitute an unfair or deceptive practice."); People ex rel. Spitzer v. Applied Card Sys., Inc., 805 N.Y.S.2d 175, 179 (2005) (allegations which pertain to unfair or deceptive acts are not preempted). Therefore, to the extent plaintiffs' claim is based upon a claim of deceptive or unfair conduct, it is not preempted by TILA.

A claim for fraud under California law requires that a plaintiff plead "`(a) misrepresentation, (b) knowledge of falsity (or scienter), (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting in damage.'" In re Napster, Inc. Copyright Litig., 479 F.3d 1078, 1096 (9th Cir. 2007) (quoting Small v. Fritz Cos., Inc., 65 P.3d 1255, 1258 (2003)); see generally Cal. Civ. Code §§ 1709- 10. California Civil Code section 1710 defines deceit related to the omission of a material fact as the "suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact."

Under Federal Rule of Civil Procedure 9(b), an allegation of fraud must be averred with enough particularity to give specific notice to defendants of misconduct so that they can adequately defend against the charge and not simply offer a general denial. Fed.R.Civ.P. 9(b); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). Plaintiffs may satisfy this heightened requirement by providing "an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007). Additionally, "[i]n the context of a fraud suit involving multiple defendants, a plaintiff must, at a minimum, identify the role of each defendant in the alleged fraudulent scheme." Id. at 765. (quotation omitted) (citing Moore v. Kayport Package Express, Inc., 885 F.2d 531, 541 (9th Cir. 1989)).

Here, plaintiffs' evidence is the mortgage instrument, which provides the specific content of the allegedly false representations related to negative amortization, as well as the date and place of the alleged fraud. While the precise identities of the employees responsible at Paul Financial are not specified in the loan instrument, defendants possess the superior knowledge of who was responsible for crafting these loan documents. The nature of the claim is apparent and sufficient to put defendants on notice of the claims against them. See Vess, 317 F.3d at 1106 (Rule 9(b) requires that allegations of fraud "be `specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.'" (citations omitted)); see also Fed.R.Civ.P. 8(f) ("all pleadings shall be construed so as to do substantial justice"). Additionally, plaintiffs have sufficiently alleged reliance by stating that they would have behaved differently had they known about the certainty of negative amortization. See Mirkin v. Wasserman, 5 Cal. 4th 1082, 1093 (1993) (reliance for a fraudulent omission can be shown where a plaintiff proves that "had the omitted information been disclosed, one would have been aware of it and behaved differently"). Therefore, plaintiffs have alleged with sufficient particularity a case for fraudulent omissions against Paul Financial.

Plaintiffs assert that RBS is liable for fraudulent omissions in the loan documents under a theory of aiding and abetting. FAC ¶ 85; Opp. at 11. Liability in California for aiding and abetting "may be imposed on one who aids and abets the commission of an intentional tort if the person knows the other's conduct constitutes a breach of a duty and gives substantial assistance or encouragement to the other to so act." In re First Alliance Mortg. Co., 471 F.3d 977, 993 (9th Cir. 2006) (citing Casey v. U.S. Bank Nat'l Ass'n., 127 Cal.App. 4th 1138, 1144 (2005) (ellipses omitted)). This Court previously stated that if plaintiffs could present evidence that HSBC had an agreement "to take a financial interest in the loans at some point after the loan was consummated," such evidence "could support plaintiff's claim that HSBC acted as an aider and abettor in Paul Financial's scheme to originate loans based on false and misleading disclosures." July 1 Order, at 23.

Plaintiff now alleges that such an agreement existed between Paul Financial and RBS. Plaintiffs allege that Paul Financial and RBS had a MLPA which specified an ongoing business enterprise arising from the sale of loans like those sold to plaintiffs. FAC ¶¶ 38-45. Plaintiffs also allege that defendant RBS "actively participated in creating, designing and formulating the Loan Documents and/or dictated the terms of the Option ARM loans sold to Plaintiffs" FAC ¶ 38. Plaintiffs also allege that RBS reviewed loan portfolios "for issues including, but not limited to, credit, documentation, litigation, default and servicing related concerns as well as a thorough compliance review with loan level testing." FAC ¶ 40. According to plaintiffs, the MLPA also provided a right to RBS to underwrite the loans and review the mortgage files at issue here. FAC ¶ 44. The question of whether RBS had "actual knowledge" of the alleged misrepresentations in the loan documents here is a question of fact. See In Re First Alliance Mortg. Co., 471 F.3d at 994. At this stage, however, plaintiffs have sufficiently stated a claim for aiding and abetting by alleging that RBS provided substantial assistance to Paul Financial to carry out its financial scheme. Accordingly, plaintiffs are entitled to pursue a theory of aiding and abetting against RBS.

Plaintiffs also assert that a joint venture theory of liability can be applied to RBS. FAC ¶ 85; Opp. at 13. A joint venture theory requires plaintiffs to allege that two or more persons who are fiduciaries that have "a duty of disclosure and liability to account for profits" acted "to carry out a single business enterprise for profit." Weiner v. Fleschman, 54 Cal. 3d 476, 482 (1991); see also Short v. Wells Fargo Bank Minnesota, N.A., 401 F. Supp. 2d 549 (S.D.W. Va. 2005). This Court previously stated that plaintiffs supplied "no evidence that HSBC and Paul Financial had any interaction whatsoever, much less that they formed an agreement to create a single business enterprise." July 1 Order, at 22. In their FAC, plaintiffs have now adequately alleged that RBS and Paul Financial were engaged in a single business enterprise by alleging a MLPA existed between the parties. The MLPA specifies an ongoing business relationship between the parties which allegedly provided the "stream of funding" that enabled Paul Financial to sell loans to plaintiffs. Thus, plaintiffs are entitled to pursue a theory of joint venture liability against RBS.

Accordingly, this Court DENIES RBS's motion to dismiss plaintiffs' fraudulent omissions claim.

A. Preemption

Plaintiffs assert that Paul Financial engaged in unfair, unlawful, and fraudulent business practices in violation of California's Unfair Competition Law ("UCL"). Defendants argue that any UCL claim is also preempted by TILA. As stated above, this Court agrees that Congress intended to preempt any state laws which are inconsistent with TILA. To the extent that plaintiffs seek to "plead around" TILA's one-year statute of limitations for damages by using the UCL, their claim is preempted by TILA. Therefore, any claim under the "unlawful" prong of the UCL cannot use TILA as the predicate violation if the claim is time-barred.

However, the "[t]he UCL does not, on its face, relate to the disclosure of information in connection with credit transactions, let alone impose disclosure requirements that are different than TILA's in any way." Plascencia v. Lending 1st Mortgage, 583 F. Supp. 2d 1090, 1099 (N.D. Cal. 2008). Moreover, as previously stated, TILA does not categorically preempt state regulation of unfair or deceptive practices. Thus, the "unfair" prong of the UCL does not set forth a disclosure requirement inconsistent with TILA, but rather imposes liability for the allegedly unfair business practice of minimizing the likelihood of negative amortization.

Plaintiffs' first UCL claim arises under the statute's "unlawful" prong. This prong of the UCL incorporates other laws to make them actionable. Generally, "violation of almost any law may serve as a basis for a UCL claim." Plascencia v. Lending 1st Mortg., 259 F.R.D. 437, 448 (N.D. Cal. 2009). However, as this Court has previously stated, if plaintiffs' UCL claims are predicated on a TILA violation which is time-barred, that TILA violation may not form the predicate violation for a UCL claim. Having concluded that plaintiffs' TILA claims against RBS are now time-barred, the Court also finds that any UCL claims flowing from the TILA claims are not actionable under the UCL's "unlawful prong."

Nevertheless, plaintiffs argue that even if defendants' conduct did not violate TILA, it violated the FTC Act, 15 U.S.C. § 45(a)(1), which proscribes "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive practices in or affecting commerce." Plaintiffs do not bring a separate FTC Act claim because that statute does not provide for a private cause of action. See Dreisbach v. Murphy, 658 F.2d 720, 730 (9th Cir. 1981). They assert instead that the FTC Act provisions can serve as a predicate for a UCL claim. If so, however, Plaintiffs' FTC Act claim is predicated on allegations of deceptive conduct subject to Rule 9(b)'s heightened pleading requirements. The FAC does no more than mention the FTC Act; it makes no effort to tie the FTC Act claim to any of the facts in the complaint. Accordingly, the Court GRANTS RBS's motion to dismiss plaintiffs' claims under the UCL's "unlawful" prong, with leave to amend.

Plaintiffs assert that RBS's conduct violated the UCL's "fraudulent" prong. Although fraud is not an essential element of a UCL claim, because plaintiffs are proceeding in federal court, Rule 9(b)'s heightened pleading requirement applies. See Vess, 317 F.3d at 1106; Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). As previously stated, plaintiffs have sufficiently alleged a theory of fraud against RBS and Paul Financial with the requisite particularity under Rule 9(b).

Accordingly, the Court DENIES RBS's motion to dismiss plaintiffs' UCL fraud claim.

Plaintiffs' final claim is that defendants' conduct was unfair under the UCL because "the loan documents did not disclose [the certainty of negative amortization]," only its possibility. FAC, ¶ 25. Plaintiffs maintain that they only learned of the certainty of negative amortization after they were "`locked' into the loan by a draconian prepayment penalty. . . . designed to deter anyone from refinancing the loan during the applicable time period." Id., ¶ 30.

A business practice which is neither unlawful nor fraudulent may nevertheless be unfair under the UCL. Cel-Tech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 973 P.2d 527, 540 (Cal. 1999) ("Cel-Tech"). However, a business practice which is specifically deemed lawful by the legislature cannot be "pled around" by "recasting the cause of action as one for unfair competition." Id. at 541. Where conduct is specifically permitted by statute, the statute forms a "safe harbor" for businesses which protects against claims under the "unfair" prong of the UCL. Id. A safe harbor exists only where conduct is expressly permitted, and not merely because conduct is not expressly prohibited. Id.

Here, no statute clearly permits the structure of defendants' loan nor the disclosures at issue, although neither has expressly been deemed unlawful. While this Court has determined that TILA does not consider defendants' omissions "material" for purposes of rescission, TILA does not expressly permit lenders to issue loan documents which omit the certainty of negative amortization and state only that it is possible. Therefore, defendants' omissions and alleged misrepresentations do not fall within a "safe harbor" that would preclude liability under the UCL.

To establish whether conduct is unfair under the UCL, courts look to jurisprudence arising under section 5 of the FTC Act. Cel-Tech, 973 P.2d at 565. The factors which define unfairness under section 5 are: "(1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to the consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided." Zlotnik v. U.S. Bancorp, No. 09-3855, 2009 WL 5178030, *5 (N.D. Cal. Dec. 22, 2009) (citing Camacho, 48 Cal. Rptr. 3d at 777)).

In Zlotnik, the plaintiff alleged that the defendant "encouraged consumers to obtain purchase money financing using complicated mortgage instruments that were difficult to understand. . . . emphasizing low initial monthly payments while misrepresenting the later increase in the monthly payments that would result at the expiration of the `teaser' rate." Id. The court determined there was no evidence of any countervailing benefit to consumers, and plaintiffs purportedly could not have avoided an injury stemming from a misrepresented loan. Id. Therefore, the plaintiffs had a cause of action under the "unfair" prong of California's UCL.

Here, plaintiffs' complaint relies entirely on the face of the loan documents and does not allege that RBS made any affirmative misrepresentations . . . Applying a section 5 analysis, there is no question that plaintiffs have alleged a substantial injury. Additionally, although the existence of a teaser rate and minimum monthly payment less than the amount owed on a variable loan could provide a theoretical benefit to consumers in a different economic climate, in practice the arrangement served to put plaintiffs' homes further and further into debt. On the face of the complaint and in a light most favorable to plaintiffs, the injuries created by this loan agreement outweighed any benefits to ordinary consumers.

The third element of a section 5 analysis is more complex. RBS correctly points out that the loan documents specify the terms of the loan and the possibility of negative amortization. A sophisticated consumer might have been able to deduce from the loan documents that negative amortization was certain to occur because the minimum payments listed in the payment schedule were based upon a "teaser" rate rather than the APR, which was displayed in a box above the payment schedule. Thus, a consumer could have paid an amount greater than the minimum payments required in order to prevent negative amortization. However, "the fact that Defendant may have provided a technically accurate disclosure does not excuse the potentially inadequate or misleading character of other disclosures it provided or lessen the resulting potential for confusion." Amparan v. Plaza Home Mortgage, Inc., No. 07-4498, 2008 WL 5245497, at *9 (N.D. Cal. Dec. 17, 2008). Therefore, at issue is whether plaintiffs' allegations establish that they could have reasonably avoided the injury, not whether it was merely possible to avoid the injury.

Plaintiffs have sufficiently alleged that they did not discover the certainty of negative amortization until they were "locked in" with a harsh prepayment penalty under the terms of the agreement. They allege that the loan documents do not clearly specify the certainty of negative amortization. The provision in the loan documents detailing negative amortization states only that "[m]y monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe." Tussey Decl., ex 18. at 92 (emphasis added). Additionally, the payment schedule does not clearly indicate it is based upon the teaser rate rather than the APR listed on the top of the page. Thus, plaintiffs have sufficiently alleged that an ordinary consumer relying on the plain language of the loan agreement might not have been able to avoid the injury of negative amortization because they did not understand it was certain to occur. This is sufficient to allege a violation of the "unfair" prong of the UCL.

Accordingly, the Court DENIES RBS's motion to dismiss plaintiffs' claim under the UCL's "unfair" prong.

For the foregoing reasons and for good cause shown, the Court hereby GRANTS RBS's motion to dismiss plaintiffs' TILA claims with prejudice, DENIES RBS's motion to dismiss plaintiffs' fraudulent omissions claim, and GRANTS in part and DENIES in part RBS's motion to dismiss plaintiffs' UCL claim. (Docket No. 253).

IT IS SO ORDERED.

Dated: September 30, 2010