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ClearOne v. RSM U.S. LLP

United States District Court, D. Utah, Central Division

March 6, 2017

CLEARONE, INC., a Utah Corporation. Plaintiff.
v.
RSM U.S. LLP, an Iowa limited liability partnership. Defendant.

          MEMORANDUM DECISION AND ORDER DENYING IN PART AND GRANTING IN PART DEFENDANT'S MOTION TO DISMISS

          David Nuffer, United States District Judge

         District Judge David Nuffer Defendant RSM U.S. LLP (“RSM”), relying on Rules 9(b) and 12(b)(6), moves to dismiss (“Motion”)[1] six out of seven claims for relief asserted in Plaintiff ClearOne, Inc.'s (“ClearOne”) Complaint (“Complaint”).[2] The Complaint alleges seven causes of action: (1) professional negligence, [3] (2) breach of contract, [4] (3) breach of the covenant of good faith and fair dealing, [5](4) fraudulent misrepresentation, [6] (5) fraudulent non-disclosure, [7] (6) estoppel, [8] and (7) unjust enrichment.[9] RSM seeks to dismiss all claims except professional negligence.[10] ClearOne opposes dismissal of any of the claims (“Opposition”).[11] RSM submitted a Reply (“Reply”) to support its arguments.[12] For the reasons set forth below, the Motion is GRANTED IN PART and DENIED IN PART.

         TABLE OF CONTENTS

         TABLE OF CONTENTS ................................................................................................................ 2

         ALLEGED FACTS ......................................................................................................................... 2

         STANDARD FOR RULE 12(B)(6) MOTION TO DISMISS ....................................................... 5

         STANDARD FOR PLEADING FRAUD CLAIMS ...................................................................... 7

         DISCUSSION ................................................................................................................................. 7

         The Contract Claims ........................................................................................................... 8

         The Contract Claims Are Not Redundant ............................................................... 9

         The Contract Claims Do Not “Sound in Tort” and Are Not Redundant of the Professional Negligence Claim ................................................................. 11

         Even if the Contract Claims “Sound in Tort, ” They Will Not Be Dismissed ....... 14

         Fraudulent Misrepresentation ........................................................................................... 14

         Fraudulent Non-Disclosure ............................................................................................... 18

         RSM Did Not Have a Duty to Notify ClearOne of Unrelated SEC Investigations ................................................................................................................... 19

         There is No Showing that RSM Knew Its Independence Had Been Compromised in February 2015 ....................................................................................... 20

         Equitable Claims ............................................................................................................... 22

         CONCLUSION ............................................................................................................................. 24

         ORDER ......................................................................................................................................... 26

         ALLEGED FACTS[13]

         ClearOne is a publicly traded company, and is required to file periodic, independently audited financial statements with the U.S. Securities and Exchange Commission (the “SEC”).[14]In June 2012, ClearOne retained RSM as an independent public accounting firm to perform auditing, tax, and consulting services for ClearOne in order to meet the requirements of the SEC.[15] ClearOne alleges that “RSM and ClearOne executed contractual agreements to govern the work to be performed by RSM, including letters from RSM's Mel Hudson to Scott Hunstman, Chairman of the Audit Committee for Clear One, on April 15, 2014, and April 28, 2015 (collectively, the ‘Agreements').”[16]

         ClearOne alleges that on or about October 8, 2015, RSM “abruptly and without warning resigned” as ClearOne's public accounting firm.[17] “In conjunction with its resignation, ” ClearOne alleges, “RSM withdrew its audit report of ClearOne's financial statements for the previous year ended December 31, 2014, as well as all interim reports issued by RSM in 2015.”[18]

         ClearOne alleges that “[a]s ClearOne's auditor, “RSM owed a number of contractual and independent duties (the ‘RSM Duties'), including to conduct its audits in accordance with Generally Accepted Accounting Principles (‘GAAP'), Generally Accepted Auditing Standards (‘GAAS'), and other binding industry standards, such as those established by the Public Company Accounting Oversight Board (“PCOAB”)[.]”[19] ClearOne refers to all of these alleged duties as “Binding Industry Standards.”[20]

         ClearOne alleges that RSM also owed ClearOne a number of other duties, “including the bedrock principle that an auditor is at all time[s] to be independent” (“Independence Duty”)[21] as well as a “duty to know and understand the [SEC] rules”[22] of independence; “a duty to establish and follow internal controls” (“Internal Controls Duty”)[23] to ensure independence; as well as to “perform . . . customary, periodic, and appropriate conflict checks prior to undertaking any work for a client that might threaten RSM's status as ‘independent'” (“Conflict Check Duty”);[24] and a “duty to timely discover any potential conflict related to RSM's independence, and to provide immediate notice to ClearOne” (“Timely Notice Duty”).[25] ClearOne alleges that “RSM's failure to identify the potential threat to its independence . . . constitute[s] a breach of RSM's contractual, ethical, and other duties to ClearOne[.]”[26]

         On February 2, 2015, before RSM allegedly resigned as ClearOne's auditor, RSM allegedly “expressly represented to ClearOne that, as of that date, RSM was ‘independent with respect to the Company in compliance with PCOAB Rule 3520, ' in addition to the ‘independence criteria set out in the rules and regulations of the SEC under the federal securities laws.'”[27] However, ClearOne alleges that this representation regarding independence was not true. “[B]eginning in 2014, ” ClearOne alleges, “an RSM affiliate in Hong Kong, RSM Nelson Wheeler, provided to ClearOne's Hong Kong subsidiary certain accounting and consulting services, including representing ClearOne's Hong Kong subsidiary with an income-tax related issues [sic].”This work, ClearOne alleges, “resulted in fees of approximately $2, 000, was de minimis, unrelated to the audit work performed by RSM for ClearOne”[28] and was undertaken “without advising ClearOne that the work might or would threaten RSM's ‘independence' with respect to RSM's audit under the Binding Industry Standards.”[29] “RSM expressly acknowledged [in February 2015] that it had considered the work done by RSM Nelson Wheeler in Hong Kong” for ClearOne's subsidiary and that it considered the services “preapproved.”[30]

         According to ClearOne, RSM's October 2015 resignation letter (the “Resignation Letter”) stated that RSM's “independence had been impaired…because ‘an associated entity of [RSM][31] ha[d] provided certain prohibited non-audit services to an international subsidiary of ClearOne.'”[32] ClearOne therefore alleges that “RSM's failure to identify the potential threat to its independence and the abrupt resignation constitute a breach of RSM's contractual, ethical, and other duties to ClearOne, including the Internal Controls Duty, the Conflict Check Duty, and the Timely Notice Duty.”[33] RSM moves to dismiss ClearOne's Complaint with respect to all causes of action except professional negligence.

         STANDARD FOR RULE 12(B)(6) MOTION TO DISMISS

         Defendant is entitled to dismissal under Rule 12(b)(6) when the complaint, standing alone, is legally insufficient to state a claim for which relief may be granted.[34] When considering a motion to dismiss for failure to state a claim, the thrust of all well-pleaded facts in the complaint is presumed, but conclusory allegations need not be considered.[35] A court is not bound to accept the complaint's legal conclusions and opinions, whether or not they are couched as facts.[36]

         The United States Supreme Court has held that satisfying the basic pleading requirements of the federal rules “demands more than an unadorned, the defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.'”[37] “[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”[38]“[N]aked assertions devoid of further factual enhancement, ”[39] do not state a claim sufficiently to survive a motion to dismiss.

         “But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'”[40] That is, “[t]he allegations must be enough that, if assumed to be true, the plaintiff plausibly (not just speculatively) has a claim for relief.”[41] “This requirement of plausibility serves not only to weed out claims that do not (in the absence of additional allegations) have a reasonable prospect of success, but also to inform the defendants of the actual grounds of the claim against them.”[42]

         STANDARD FOR PLEADING FRAUD CLAIMS

         Claims alleging fraud must meet the heightened pleading standard found in Rule 9(b).[43]This standard requires that a Plaintiff, “[i]n alleging fraud or mistake . . . must state with particularity the circumstances constituting fraud or mistake.”[44] Pleading with particularity requires “set[ting] forth the who, what, when, where and how of the alleged fraud and . . . the time, place, and contents of the false representation, the identity of the party making the false statements and the consequences thereof.”[45] “Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.”[46] “But ‘generally' is a relative term. In the context of Rule 9, it is to be compared to the particularity requirement applicable to fraud or mistake. Rule 9 merely excuses a party from pleading discriminatory intent under an elevated pleading standard. It does not give him license to evade the less rigid-though still operative-strictures of Rule 8.”[47] The plausibility standard still “obliges a pleader to amplify a claim with some factual allegations” to meet the pleading standards under Rule 8.[48]

         DISCUSSION

         RSM argues that dismissal is warranted for all claims in the Complaint except the first cause of action for professional negligence.[49] Thus, RSM moves to dismiss the following claims:

• breach of contract;
• breach of the implied covenant of good faith and fair dealing;
• fraudulent misrepresentation;
• fraudulent non-disclosure;
• estoppel; and
• unjust enrichment.

         Each of these claims will be discussed in turn, with the breach of contract claim and breach of the implied covenant of good faith and fair dealing claim (collectively, the “Contract Claims”) discussed together.

         The Contract Claims

         RSM raises two challenges to the Contract Claims. First, RSM argues that the Contract Claims are redundant, and that because the breach of the implied covenant claim is based on the same conduct as the breach of contract claim, the implied covenant claim must be dismissed.[50]Second, RSM argues that the Contract Claims “sound in tort” and should be dismissed because the professional negligence claim “arise[s] from identical alleged operative facts and duties[.]”[51]Both of these arguments are incorrect.

         First, viewing the allegations in the Complaint in the light most favorable to the nonmovant, ClearOne, the Contract Claims are not redundant. That is, the breach of contract claim and the breach of implied covenant claim may be reasonably viewed to be based on separate grounds. ClearOne's breach of contract claim may be reasonably read to be based on RSM's alleged failure to provide auditing services according to the express provisions found in the Agreements, while ClearOne's breach of implied covenant claim may be reasonably read to be based on implied duties not expressly contained within the Agreements such as the Independence Duty, the Internal Controls Duty, the Conflict Check Duty, and the Timely Notice Duty.

         Second, while the professional negligence claim sounds in tort, the Contract Claims can be read as sounding in contract, not in tort. Accordingly, the Contract Claims can be viewed as non-duplicative of the professional negligence claim.

         RSM correctly notes that there is some overlap in the Complaint regarding the alleged conduct to support each of these three claims.[52] Ultimately, to prevail on these claims, ClearOne will be required to provide evidence to support these allegations. But at this stage of litigation, where allegations are presumed to be true and are construed in the light most favorable to ClearOne, ClearOne has sufficiently alleged separate claims. Therefore, RSM's arguments for dismissing the Contract Claims are incorrect.

         The Contract Claims Are Not Redundant

         RSM argues that ClearOne's “breach of implied covenant claim rests on allegations that are identical to its breach of contract claim[.]”[53] RSM then argues that “[t]he Complaint does not allege any contractual breach, or damages, besides the failure to adhere to professional standards [of care].”[54] RSM is correct that in order to allege a breach of contract claim and a breach of implied covenant claim, the implied promise for the covenant must be separate from the breach of contract.[55] However, ClearOne's Complaint adequately provides a separate basis for its Contract Claims and cannot be dismissed for reasons of redundancy.

         ClearOne's breach of contract claim, as alleged, stems from RSM's failure to provide auditing services in accordance with Binding Industry Standards.[56] On the other hand, ClearOne's breach of implied covenant claim, as alleged, stems from RSM's “failure to perform customary, periodic, and appropriate conflict checks . . . and to provide timely notice to ClearOne of a potential conflict impairing its qualification . . . .”[57] These statements show that ClearOne's breach of contract argument rests on an alleged failure to provide auditing services as part of the express provisions of the Agreements, while the breach of implied covenant argument rests on additional “independent duties[.]”[58] ClearOne makes factual allegations to support these separate claims. To support the breach of contract claim, ClearOne alleges that the parties entered into valid and binding Agreements that contained specific obligations for RSM to provide auditing services.[59] ClearOne also alleges that RSM performed some auditing services but then withdrew those services and did not ultimately fulfill all of the services that were agreed upon.[60] These factual allegations, if true, support a claim for breach of contract.

         To support the breach of implied covenant claim, ClearOne alleges that there were certain duties RSM was impliedly obligated to fulfill by virtue of the Agreements, but which RSM failed to fulfill.[61] Those duties include performing conflict checks, giving timely notice of a potential conflict, and following generally accepted auditing standards.[62] ClearOne also alleges that RSM waited until October 2015 to give notice of the conflict even though it knew or should have known of the conflict before that time.[63] If true, these allegations support a separate claim for breach of implied covenant. Thus, ClearOne's Contract Claims should not be dismissed for redundancy.

         The Contract Claims Do Not “Sound in Tort” and Are Not Redundant of the Professional Negligence Claim

         RSM also argues that the Contract Claims sound in tort and should be dismissed because they are duplicative of ClearOne's Professional Negligence claim regarding auditing, which also sounds in tort.[64] RSM cites heavily from two cases to support this argument: Boyd v. Jones[65] and DOIT, Inc. v. Touche.[66] In Boyd, the plaintiff, Mr. Boyd, sued his former attorney for breach of contract. “In his claim for breach of contract, Boyd alleged that [his former attorney] failed to ‘perform the contract in good faith and with skill, care, and diligence.'”[67] The problem was, according to the court, that Boyd “did not cite any portion of a contract that specified a particular contractual standard of skill, care, or diligence.”[68] In other words, Boyd's breach of contract claim was based on duties that were not expressly part of the parties' agreement. The court determined that the plaintiff's claim sounded in tort “because the duty of care related by Boyd's complaint is imposed . . . by the common law and not more particularly specified . . . .”[69] That is not the case here. Here, the breach of contract claim can be viewed to be based on RSM entering into “valid and binding Agreements for auditing services” but “failing to provide” those services.[70] The breach of contract claim therefore can be viewed as different from the breach of contract claim in Boyd.

         RSM disagrees, arguing that “the only wrong that Plaintiff alleges is that RSM failed to perform these audits in accordance with industry standards.”[71] According to RSM, this same argument was made in DOIT and was interpreted by the Utah Supreme Court to be an argument sounding in tort.[72] In DOIT, RSM argues, contract claims were interpreted as tort claims because they were simply rephrased negligence claims governed by the professional standards of the accounting profession.[73] But DOIT is distinguishable from this case because in DOIT it was undisputed that “the audits were performed, completed, and delivered.”[74] In fact, the plaintiffs in DOIT did not even argue that the accountant defendants “failed to perform their contracts.”[75]Here, ClearOne's Complaint does not allege that RSM fulfilled its express obligations under the Agreements. Instead, ClearOne alleges that “RSM's abrupt withdrawal as ClearOne's independent public auditor, and its withdrawal of its previously issued financial reports, rendered valueless to ClearOne all of the work done by RSM . . . .”[76] This allegation supports the argument that RSM breached the express provisions of the contract by not providing the auditing services it agreed to provide.

         Thus, even though it is true that the Complaint states that “RSM breached its contractual duties by failing to provide services in accordance with the Binding Industry Standards[, ]”[77] this does not mean that DOIT applies and the breach of contract claim sounds in tort. The breach of contract claim can be reasonably read to be based in express contractual provisions and therefore based in contract. Further, DOIT also makes clear that “a plaintiff will not be permitted to characterize a tort action as one in contract in order to avoid the bar of the statute of limitations.”[78] There is no indication ClearOne is attempting to avoid any statute of limitations. There is no reason to conclude that the breach of contract claim sounds in tort. It is therefore not duplicative of the professional negligence claim.

         Similarly, there is no reason to conclude that the breach of implied covenant claim sounds in tort. The breach of implied covenant claim is based on the existence of “binding and enforceable contracts between ClearOne and RSM”[79] which contained implied promises from RSM that it would not “intentionally or purposefully do anything which would destroy or injure ClearOne's right to receive the fruits of the Agreements.”[80] A fair reading of these allegations shows that the breach of implied covenant claim arises from the existence of the Agreements. It can be reasonably concluded, then, that the breach of implied covenant claim sounds in contract, not in tort. Accordingly, it is not duplicative of the professional negligence claim.[81]

         Even if the Contract Claims “Sound in Tort, ” They Will Not Be Dismissed

         RSM is correct that the Complaint is not a model of clarity in describing the alleged conduct giving rise to the Contract Claims. Indeed, RSM has a strong argument that “[a]t the heart of [ClearOne]'s contract-based and professional negligence claims is the same allegation that RSM failed to comply with alleged Binding Industry Standards.”[82] But even if the Contract Claims are read to arise in tort, and are based on “the common law and not more particularly specified, ”[83] dismissal of the Contract Claims would not be mandated. “In a relationship with a professional, there may be several sources of liability on which a client can bring a claim: (1) duties imposed by operation of law, (2) contractual obligations, or (3) coextensive tort and contract duties.”[84] “[W]ith respect to duties that arise both in tort and contract, . . . a plaintiff may elect to bring a tort action, a contract action, or both.”[85] Thus, ClearOne is authorized under Utah law to bring a professional negligence claim arising in tort and Contract Claims arising in contract or tort, or both. ClearOne may only recover on one of those theories, [86] but these claims may coexist in the same lawsuit.[87] The Contract Claims will not be dismissed for redundancy.

         Fraudulent Misrepresentation

         ClearOne's fourth cause of action is based on fraudulent misrepresentation. ClearOne alleges that:

94. RSM made representations to ClearOne which include, but are not limited to, representations that RSM was independent as of February 2, 2015.
95. RSM's representations were material; false at the time they were made or made recklessly, knowing that there was insufficient knowledge upon which to base such representations; and for the purpose of inducing ClearOne to act.
96. ClearOne, acting in reasonable reliance upon RSM's fraudulent representations and in ignorance of their falsity, did in fact rely upon these false representations to ClearOne's detriment, including as alleged above.
97. As a direct and proximate result of RSM's fraudulent misrepresentations, ClearOne has been damaged and are therefore entitled to a judgment for damages against RSM in an amount to be determined at trial.
98. RSM's conduct was willful and malicious or intentionally fraudulent conduct, or conduct that manifests a knowing and reckless indifference toward, and disregard of, the rights of ClearOne, entitling ClearOne to an award of punitive damages against RSM under Utah Code Ann. § 78B-8-201.[88]

         To establish a claim for fraudulent misrepresentation, the following elements must be alleged:

(1) a representation;
(2) concerning a presently existing material fact;
(3) which was false;
(4) which the representer either
(a) knew to be false, or
(b) made recklessly, knowing that he had insufficient knowledge on which to base such representation;
(5) for the purpose of inducing the other party to act upon it;
(6) that the other party, acting reasonably and in ignorance ...

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