Case: Schultz v. Neovi Data Corp., No. G033879 (Cal. Ct. App. 6/15/07)

The One Sentence Summary: Complaint alleging that credit card processors had knowledge of and provided substantial assistance to web site’s operation of illegal lottery, wherein consumers had to make online purchases for the chance to win expensive home electronics products, stated a cause of action for aiding and abetting unfair competition under California Business and Professions Code section 17200.

What They Were Fighting About:

Plaintiff Schultz alleged that defendant EZ Expo operated a web site “matrix” wherein a consumer could receive expensive home electronics products (such as a 50-inch plasma television) for a fraction of the price, if he paid a $150 fee for three “E-books” and if 50 other consumers also joined the same matrix after him. Defendants PaySystems and Ginix allegedly provided credit card processsing and billing services for EZ and were used by matrix customers to pay for their purchases of E-books.

Plaintiff’s complaint pleaded, on behalf of himself and as a representative in a class action, an unfair competition cause of action against all defendants pursuant to California Business and Professions Code section 17200 et. seq. Plaintiff alleged that the credit card processors aided and abetted EZ’s operation of an illegal lottery or pyramid scheme in violation of California statutes. Trial court sustained demurrers by PaySystems and Ginix (as well as defendants PayPal and Neovi) on the grounds that the complaint failed to state facts sufficient to constitute a cause of action for aiding and abetting unfair competition. Plaintiff appealed.

Court Holdings: Court of appeal reversed the granting of PaySystems’ and Ginix’s demurrers (while affirming as to PayPal and Neovi) and held that plaintiff had adequately pleaded facts to support aiding and abetting unfair competition. Court reasoned that:

  • The elements of aiding and abetting an intentional tort by another are (1) knowing that the other’s conduct constitutes a breach of duty, and (2) giving substantial assistance or encouragement to the other to so act. Plaintiff’s complaint contained facts satisfying each.
  • Plaintiff alleged that PaySystems and Ginix reviewed EZ’s web site and recognized that it was an illegal lottery, that it generated substantial revenue, and that it could be very profitable for them as credit card processors. Plaintiff also claimed that PaySystems and Ginix knew that the money being paid by consumers for E-books was for purposes of participation in the lottery. These allegations satisfied the knowledge element.
  • As for the substantial assistance or enouragement element, plaintiff alleged that PaySystems and Ginix authorized EZ to configure its web site so consumers could click on their logos and be linked directly to their sites for credit card payment processing. Plaintiff further alleged that they did this with the intent of aiding and abetting EZ’s illegal lottery operation and realized that their services would “lend an aura of respectability” to EZ’s operation and encourage consumer participation. These allegations were sufficient to defeat PaySystems’ and Ginix’s demurrers.
  • By contrast, plaintiff’s conclusory allegations did not plead sufficient facts to satisfy the elements of knowledge and substantial assistance as to defendants PayPal and Neovi.
  • Court of appeal remanded the case as to defendants PaySystems and Ginix and instructed the trial court to give plaintiff the opportunity to amend the complain to plead facts satisfying the standing and class action requirements of section 17200 as amended by Proposition 64 in November 2004 (which added injury-in-fact requirement to section 17200 during pendency of plaintiff’s appeal).