In a recent case, the Central District of California held that the CFPB’s claims against a credit repair service under the Telemarketing Sales Rule (“TSR”) must meet Federal Rule of Civil Procedure 9(b)’s heightened pleading requirement. CFPB v. Prime Marketing Holdings, LLC, CV 16-07111-BRO, Dkt. No. 32 (C.D. Cal. Nov. 15, 2016). Applicable to cases sounding in fraud, Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud.” A plaintiff satisfies this requirement by pleading “the time, place, and specific content of the false representations.” Prime Marketing Holdings, Dkt. No. 32 at 7.
The CFPB alleged that the defendant violated the TSR (and, therefore, Dodd-Frank) by: 1) requesting payment of a fee to remove derogatory credit information before demonstrating the promised results; 2) claiming, without a reasonable basis, that defendant raised consumers’ credit scores by an average of 100 points; 3) failing to disclose truthfully in a clear and conspicuous manner all material terms and conditions regarding a refund or cancellation of services; and 4) misrepresenting the total cost of services. The court held that the second, third, and fourth claims were subject to Rule 9(b), and dismissed them without prejudice.
In holding that Rule 9(b) applied to the CFPB’s claims, the Court noted the similarities between the elements of fraud and the elements of a TSR claim. The elements of a TSR claim are a material misrepresentation likely to mislead consumers. Fraud has two additional elements – intent and damages – but the elements are otherwise substantially similar. And as the court stated, there was “no indication from [the CFPB’s] Complaint that any of the misrepresentations were accidental or the result of a mistake.” Prime Marketing Holdings, Dkt. No. 32 at 10. Instead, the CFPB alleged “that [d]efendant participated in a unified course of fraudulent conduct, multiple portions of which violated the TSR.” Id.
The court dismissed all of the CFPB’s claims except the first – which was not subject to Rule 9(b) – because the CFPB did not plead with the requisite particularity. The CFPB made general assertions of misrepresentation rather than pointing to specific representations that were either false or misleading.
The opinion is an example of a court taking seriously its role as a gatekeeper when a party brings fraud claims based on vague or generic allegations. But it could also have the adverse consequence of encouraging the CFPB to conduct a more detailed investigation before bringing a claim. The more detailed investigation will often come at significant expense to the entity being investigating and could lead to the discovery of wrongdoing that the CFPB otherwise would not have discovered. More detailed factual allegations – including specific misrepresentations – may also serve as a roadmap for plaintiff’s lawyers to bring private litigation covering the same conduct.