The opinion of the court was delivered by: David G. Larimer United States District Judge
This action was commenced in October 2008 by plaintiff Ironforge.com ("Ironforge") in the United States District Court for the Central District of California in October 2008, against defendant Paychex, Inc. That court transferred the action to this district in May 2009, pursuant to 28 U.S.C. § 1404(a).
In January 2009, Ironforge filed the first amended complaint ("FAC"), which, inter alia, added two additional plaintiffs, Handyman Home Solutions d/b/a Mr Handyman of Eastern Monroe County, Inc. ("Handyman"), and Road Service, Inc. Plaintiffs assert several claims against Paychex, on behalf of themselves and "[a]ll persons in the United States who have been or currently are Paychex customers from January 22, 2003, to January 22, 2009...." FAC (Dkt. #18) ¶ 13.
The FAC alleges that Paychex is in the business of providing payroll and human resources services for small- to medium-size companies, and that plaintiffs are or have been clients of Paychex. Plaintiffs assert claims for breach of contract, fraud, and various other torts, and violations of federal and California statutes, based on allegations that Paychex has charged plaintiffs unjustified, unauthorized, hidden fees. Plaintiffs also allege that Paychex has unlawfully profited from interest earned on funds that Paychex held on plaintiffs' behalf to use for satisfaction of plaintiffs' payroll, tax and related obligations.
Paychex has filed a motion to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) (Dkt. #26), as well as an alternative motion to strike certain claims (Dkt. #27). Those motions were filed prior to the transfer of this action from California to this district. Having heard oral argument on defendants' motions, the Court grants in part and denies in part the motion to dismiss, and denies in its entirety the motion to strike.*fn1
According to the complaint, Paychex offers payroll and related administrative and tax assistance to small businesses across the United States. A Paychex client typically delegates most of its tasks in those areas to Paychex, including calculation, preparation and delivery of employee checks, as well as preparation and payment of payroll taxes. The client gives Paychex access to the client's and the client's employees' financial data, to enable Paychex to perform those tasks. Paychex's revenue is derived from several sources, including fees for its services, as well as interest earned on funds held for its clients between the time that the funds were collected from the clients and the time that the funds were paid out to the appropriate tax or regulatory agencies, or to the clients' employees.
As stated, all the plaintiffs have contracted with Paychex to provide payroll and other services. The complaint alleges that Ironforge began its contractual relationship with Paychex on or around March 28, 2003, and cancelled Paychex's services in June 2007. FAC ¶ 36. The complaint does not appear to state precisely when Road Service and Handyman contracted with Paychex, though it does allege that Rikk Foringer, the owner of Road Service, discovered at some point that Paychex had engaged in certain allegedly wrongful acts in January and February 2008. FAC ¶ 48.
Plaintiffs allege that Paychex engages in several forms of fraud with respect to its clients. First, they allege that Paychex "skims" money from its clients' accounts by charging unjustified, undisclosed fees. FAC ¶ 28. The complaint is short on specifics about exactly how Paychex does this. As alleged "examples," however, the FAC sets forth a number of comments posted on an internet site, www.epinions.com, where individuals have complained about alleged overcharges and excessive fees imposed by Paychex. FAC ¶ 29. Plaintiffs also quote a similar complaint found an a website entitled, "Companies that Suck." FAC ¶ 30. None of the authors of those complaints are identified in the FAC, and it appears that many, if not all of the complaints were posted anonymously.
Plaintiffs also allege that Paychex wrongfully keeps for itself interest earned on its clients' funds, which are temporarily held by Paychex pending disbursement of those funds to the clients' employees or government agencies, to satisfy the clients' payroll, tax or related obligations. Plaintiffs allege that Paychex withdraws those funds sooner than necessary, or holds them for longer than necessary, in order to generate more interest for itself.*fn2 For example, plaintiffs allege that Paychex withdraws clients' money to pay the clients' taxes months before the taxes are due, so that Paychex can earn interest on those funds. FAC ¶¶ 31-34.
With regard to these particular plaintiffs, the complaint alleges that Paychex has made unauthorized withdrawals from Ironforge's bank account totaling over $1000. FAC ¶ 35. Some of those withdrawals are alleged to have occurred after Ironforge terminated Paychex's services in June 2007. FAC ¶¶ 37-39.
Plaintiffs also allege that in January and February 2008, Paychex withdrew at least $850 from Road Service's bank account, ostensibly to be put towards Foringer's 401(k) plan. Plaintiffs allege that those funds never were transferred to Foringer's 401(k) plan, and that they remain unaccounted for to this day. FAC ¶¶ 46-48.
As to Handyman, the complaint alleges that Handyman's president, Kathryn Miller, learned at some point that some of Handyman's five employees had been getting paid their "bonus" rate when they should have been receiving their standard hourly rate. Miller then hired an accountant to review Handyman's financial records, and the accountant informed her that Paychex had been making unauthorized withdrawals from Handyman's bank account for over a year. FAC ¶ 53. Plaintiffs allege that Miller contacted Paychex about the matter, but Paychex refused to reimburse Handyman for the withdrawn funds. FAC ¶ 54.
The FAC asserts twelve causes of action. The first asserts a claim for fraud, based on the allegation that Paychex has misrepresented or failed to disclose its policies and practices with regard to fees, its retention and use of customer assets, and the other activities described above. The second cause of action asserts a claim for restitution based on a theory of unjust enrichment.
The third through eighth causes of action are based upon various provisions of the California Civil Code. The third cause of action asserts a claim under the California Consumer Legal Remedies Act, Cal. Civ. Code. § 1750 et seq. The fourth cause of action asserts a claim for unfair business practices under Cal. Civ. Code § 17200 et seq. The fifth cause of action asserts a claim of false advertising under Cal. Bus. & Prof. Code § 17500 et seq.
The sixth cause of action asserts a claim for fraud or deceit under Cal. Civ. Code §§ 1709 and 1710. The seventh cause of action asserts a claim for actual fraud under Cal. Civ. Code § 1572. The eighth cause of action asserts a claim for constructive fraud under Cal. Civ. Code § 1573.
Counts 9, 10 and 11 assert claims for breach of fiduciary duty, conversion and breach of contract, respectively. Count 12 asserts a claim under the Electronic Fund Transfer Act ("EFTA"), 15 U.S.C. § 1693 et seq. Plaintiffs seek injunctive relief, a constructive trust upon all monies and assets that Paychex has acquired as a result of its allegedly unfair practices, restitution, and compensatory and punitive damages.
I. Motions to Dismiss under Rule 12(b)(6): General Principles
In deciding whether to grant a motion to dismiss for failure to state a claim, the court must accept the factual allegations contained in the complaint as true, and draw all reasonable inferences in favor of the plaintiff. Kuck v. Danaher, 600 F.3d 159, 166 (2d Cir. 2010). At the same time, however, "a plaintiff's obligation... requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); accord Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949 (2009).
Accordingly, where a plaintiff "ha[s] not nudged [his] claims across the line from conceivable to plausible, [his] complaint must be dismissed." Twombly, 550 U.S. at 570. A "plausible" entitlement to relief exists when the allegations in the complaint move the plaintiff's claims across the line separating the "conclusory" from the "factual," and the "factually neutral" from the "factually suggestive." Id. at 557 n. 5. See also Iqbal, 129 S.Ct. at 1950 ("only a complaint that states a plausible claim for relief survives a motion to dismiss"); accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d 55, 58-59 (2d Cir. 2010).
Paychex argues that the California state law claims are barred by the choice-of-law provisions in the parties' contracts, all of which provide that they are to be governed by New York law. See Dkt. Nos. 27-6, 27-7, 27-8, 27-9, 27-10. In addition, Paychex contends that even aside from the choice-of-law provision, New York law should apply because New York has more substantial contacts with and interests in this action than California does. Paychex also states that, when they entered into these contracts, the parties here agreed to be bound by the rules of the National Automated Clearing House Association ("NACHA"), which also contain a New York choice-of-law provision. See Dkt. #27-5.*fn3
Plaintiffs respond that the Court should ignore the choice-of-law provisons in the contracts, because the contracts are unenforceable. According to plaintiffs, these are contracts of adhesion that purport to completely relieve Paychex of any liability for its own negligence or breach of contract, and as such the contracts are unconscionable.
In general, a federal district court must apply the choice-of-law rules of the state in which it sits. Eggleton v. Plasser & Theurer Export Von Bahnbaumaschinen Gesellschaft, MBH, 495 F.3d 582, 585 (8th Cir. 2007); Harris v. Provident Life and Acc. Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002). "This rule is not absolute, however. For example, if a district court in one state transfers an otherwise properly filed case to a district court in another state solely '[f]or the convenience of parties and witnesses,' 28 U.S.C. § 1404(a), the transferee court applies the choice-of-law rules of the state in which the transferor court sits." Eggleton, 495 F.3d at 585-86 (quoting Ferens v. John Deere Co., 494 U.S. 516, 531 (1990)). The reason for that rule is that "[t]here is nothing... in the language or policy of § 1404(a) to justify its use by defendants to defeat the advantages accruing to plaintiffs who have chosen a forum which, although it was inconvenient, was a proper venue." Van Dusen v. Barrack, 376 U.S. 612, 633-34 (1964). See also Valley Juice Ltd., Inc. v. Evian Waters of France, Inc., 87 F.3d 604 (2d Cir. 1996) ("where... a case is transferred from one federal jurisdiction to another at the behest of the defendant pursuant to 28 U.S.C. § 1404, 'a transferee court applies the substantive state law, including choice-of-law rules, of the jurisdiction in which the action was filed'") (quoting Menowitz v. Brown, 991 F.2d 36, 40 (2d Cir. 1993)).
This Court, then, is bound to apply California law with respect to the choice-of-law issue. In that regard, the Supreme Court of California has stated that "California courts shall apply the principles set forth in Restatement section 187, which reflects a strong policy favoring enforcement of such [choice-of-law] provisions." Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-469, (1992).
Utilizing those principles, the court must first determine either: (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties' choice of law. If neither of these tests is met, that is the end of the inquiry, and the court need not enforce the parties' choice of law. If, however, either test is met, the court must next determine whether the chosen state's law is contrary to a fundamental policy of California. If there is no such conflict, the court shall enforce the parties' choice of law. If, however, there is a fundamental conflict with California law, the court must then determine whether California has a "materially greater interest than the chosen state in the determination of the particular issue...." (Rest., § 187, subd. (2).) If California has a materially greater interest than the chosen state, the choice of law shall not be enforced, for the obvious reason that in such circumstance [the court] will decline to enforce a law contrary to [California]'s fundamental policy.
Brack v. Omni Loan Co., Ltd., 164 Cal.App.4th 1312, 1321 (4th Dist. 2008) (quoting Nedlloyd Lines, 3 Cal.4th at 464-66).
In the case at bar, New York clearly has a substantial relationship to the parties here. According to the FAC, Paychex is a Delaware corporation with its headquarters in Rochester, New York. FAC ¶ 10. Two out of the three plaintiffs, Road Service and Handyman, are businesses operating in the Rochester area. Indeed, the transferor court noted that "a majority of the respective parties have greater contact with the Western District of New York than with the Central District of California." Dkt. #41 at 5.
The next step in the inquiry, then, is to determine whether New York law is contrary to a fundamental policy of California. Plaintiffs have failed to point out any respects in which that is so.
While plaintiffs contend that the contract is an unenforceable contract of adhesion, "California... has no public policy against the enforcement of choice-of-law provisions contained in contracts of adhesion where they are otherwise appropriate." Brack, 164 Cal.App.4th at 1322 (quoting Washington Mutual Bank, FA v. Superior Court, 24 Cal.4th 906, 917 (2001)). To avoid enforcement of a choice-of-law provision, the weaker party to the contract must show that "'substantial injustice' would result from its enforcement or that superior power was unfairly used in imposing the contract." Washington Mutual, 24 Cal.4th at 918. See also Dotson v. Amgen, Inc., 181 Cal.App.4th 975, 347 (2d Dist. 2010) (agreeing with trial court's statement that "[a] contract of adhesion is not per se unenforceable. Only when its provisions are unfair does it become unenforceable").
Again, plaintiffs have not made such a showing. Plaintiffs point to certain clauses in the contracts that are arguably favorable in certain respects to Paychex, but those provisions are not so one-sided as to render the contracts unfair, nor is there any evidence that Paychex imposed the contracts on plaintiffs or coerced them into accepting their terms. See Walnut Producers of California v. Diamond Foods, Inc., 187 Cal.App.4th 634, ___, 2010 WL 3213613, at *8 (3d Dist. 2010) ("A provision is substantively unconscionable if it 'involves contract terms that are so one-sided as to "shock ...