Little v. KPMG LLP

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

July 10, 2009

No. 08-50100 Charles R. Fulbruge III

Clerk

DOUGLAS ALAN LITTLE, On Behalf of Themselves and All Others

Similarly Situated; LITTLE, ROBERTS & COMPANY, PC, On Behalf of

Themselves and All Others Similarly Situated

Plaintiffs - Appellants-Cross-Appellees

v.

KPMG LLP; FRANKLIN W MARESH; DAVID J KIRKPATRICK; ROBERT

W LAMBERT; JERRY WAYNE CLAIBORNE; JAMES TERRY STRANGE,

JR; JACK TURNER TAYLOR, JR; RICHARD E SEXTON; SARA LOU

BROWN; LARRY EVANS

Defendants - Appellees-Cross-Appellants

No. 08-50104

DESERT EAGLE DISTRIBUTING OF EL PASO INC

Plaintiff - Appellant-Cross-Appellee

NC VENTURES INC; ST JAMES CAPITAL PARTNERS LP

Intervenor Plaintiffs - Appellants-Cross-Appellees

v.

KPMG LLP; FRANKLIN W MARESH; DAVID J KIRKPATRICK; ROBERT

W LAMBERT; JERRY WAYNE CLAIBORNE; JAMES TERRY STRANGE,

JR; JACK TURNER TAYLOR, JR; RICHARD E SEXTON; SARA LOU

BROWN; LARRY EVANS

No. 08-50100 consolidated with 08-50104

Defendants - Appellees-Cross-Appellants

Appeals from the United States District Court

for the Western District of Texas

Before JOLLY, DeMOSS, and PRADO, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

John Hudson (“Hudson”) was a partner at KPMG LLP from 1984 until

1999, practicing public accountancy in Texas. He did not, however, have the

required Texas license to practice. It is alleged that KPMG LLP’s Texas license

and registration were therefore improper; its participation in Texas’s public-

accountancy market, unlawful. It is further alleged that KPMG LLP managed

to maintain its Texas license and registration only by concealing Hudson’s

unlicensed practice from the relevant authorities.

In 2005, a public accountant and a public-accountancy firm in Texas

brought a putative class action against KPMG LLP and several of its partners

(collectively, “KPMG”). The putative class (the “competitors”) contends that,

from 1984 until 1999, its members lost business to KPMG when KPMG

participated in Texas’s public-accountancy market unlawfully.

A second putative class action was brought against KPMG by a group of

its Texas clients. This putative class (the “clients”) contends that, from 1984

until 1999, KPMG misrepresented the nature of its public-accountancy services

and overcharged for them unlawfully. Over KPMG’s opposition, NC Ventures

Inc. (“NC Ventures”) and St. James Capital Partners LP (“St. James”)

intervened as plaintiffs.

The district court dismissed both actions on the pleadings. The court held

that the competitors’ claim of injury is too speculative to confer Article III

standing or to give rise to a claim for which relief can be granted. It held that

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the clients have failed to plead actual, concrete injury sufficient to give rise to

a claim for which relief can be granted. The putative classes appeal from the

dismissals. The clients also appeal from a ruling to strike two exhibits that they

attached to their second-amended complaint. KPMG cross-appeals from

ancillary rulings in both actions.

We have consolidated the actions for appeal. We hold that, as the district

court decided, the competitors’ claim of injury is too speculative to confer

Article III standing. The clients have failed to plead actual, concrete injury

sufficient to survive dismissal under Federal Rule of Civil Procedure 12(b)(6).

We affirm.

I.

The putative class actions arise from the same factual allegations.

Because these appeals are from dismissals on the actions’ pleadings, we must

assume the allegations are true and describe them as if they were fact.

The Texas Public Accountancy Act (“TPAA”), as in force from 1984 until

1999, required firms of certified public accountants to register annually with the

Texas State Board of Public Accountancy (the “State Board”). A firm did not

qualify to register unless each of its partners practicing public accountancy in

Texas held a Texas public-accountancy license and certification. The State

Board enforced this requirement by having firms annually submit, under oath,

the name and Texas license number of each partner who practiced public

accountancy in Texas.

Registration, in turn, was a statutory prerequisite to obtain a firm license.

The TPAA mandated that the State Board revoke the registration and license

of any firm not meeting each qualification for registration.

John Hudson practiced public accountancy as a partner in KPMG’s

Houston office from January 1, 1984, until January 1, 1999. Hudson held a New

York public-accountancy license, but he never held a Texas public-accountancy

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license. Despite Hudson’s unlicensed practice, KPMG registered and received

a license to practice public accountancy in Texas every year from 1984 until

1999. KPMG did so by concealing Hudson’s lack of a Texas license from the

State Board: In 1984 and 1985, KPMG omitted Hudson’s name from the list of

Texas partners that it submitted to the State Board as part of the annual

registration process. In 1986, KPMG included Hudson’s name but provided his

New York license number instead of a Texas license number. The State Board

caught this anomaly and brought it to KPMG’s attention, which responded that

Hudson was “in the process of applying for his Texas license.” KPMG again

omitted Hudson’s name from its list of Texas partners each year between 1987

and 1999. Hudson retired effective January 1, 1999.

Despite KPMG’s representation in 1986 that Hudson was in the process

of applying for a Texas public-accountancy license, Hudson did not actually

apply for a Texas license until 1992. He applied at the direction of Franklin

Maresh (“Maresh”), the managing partner of KPMG’s Houston office. Three of

Hudson’s coworkers in that office—defendants Richard Sexton, Larry Evans, and

Sara Lou Brown—signed Hudson’s application as character witnesses. Another

of Hudson’s coworkers, defendant Jerry Claiborne, certified on behalf of KPMG

that Hudson’s statements in his application were true and correct. Each

coworker knew that Hudson had engaged in the unlicensed practice of public

accountancy since 1984. Each coworker also knew that Hudson’s application

contained false statements. The State Board denied Hudson’s application, and

Hudson never reapplied.

From 1993 until 1999, Maresh furthered KPMG’s concealment of Hudson’s

unlicensed practice even though Maresh had retired from KPMG. In 1993,

Maresh joined the State Board’s Major Cases Committee, which was the State

Board committee that would have been charged with investigating KPMG’s

license and registration. Maresh continued to work for the State Board, and he

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became the State Board’s Chairman in 1996. He personally knew of Hudson’s

unlicensed public-accountancy practice (and, consequently, of KPMG’s

ineligibility to register in Texas), but he never disclosed these facts to the State

Board. The State Board never investigated Hudson’s unlicensed public-

accountancy practice, and it never investigated KPMG’s eligibility to register.

At all times from 1984 until 1999, KPMG represented to prospective and

actual clients that it was a partnership registered and licensed to practice public

accountancy in Texas. This representation was true: at all times material to

these appeals, KPMG was registered and licensed to practice public accountancy

in Texas. KPMG did not disclose, however, that it had obtained the registration

and license fraudulently, or that it was unqualified under the TPAA to hold a

firm registration or license. Hudson’s unlicensed practice came to light only in

2005, well after KPMG’s annual licenses and registrations for the years 1984

through 1999 had expired.

Again, these allegations are taken from the putative classes’ relevant

pleadings. We must accept them as true for our purposes today.

II.

The two putative classes raise distinct legal arguments, and the two

actions’ procedural histories differ. We first describe the competitors’ legal

arguments and their action’s procedural history. We next describe the clients’

legal arguments and their action’s procedural history.

A.

In the competitors’ action, the live pleading is the original complaint. The

competitors’ legal argument is as follows. From 1984 until 1999, KPMG

participated in Texas’s public-accountancy market—and obtained clients who

otherwise would have hired the competitors—unlawfully. KPMG’s participation

in Texas’s public-accountancy market was unlawful because Hudson’s unlicensed

public-accountancy practice caused KPMG to be ineligible to register in Texas.

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No. 08-50100 consolidated with 08-50104

Had the State Board learned of KPMG’s ineligibility to register, it would have

revoked KPMG’s registration and license to practice public accountancy in

Texas. See T EX. O CC. C ODE § 901.504(2) (1999) (“[T]he board . . . shall revoke the

registration and license of a . . . partnership . . . that does not meet each

qualification for registration prescribed by this chapter.”). Further, the

competitors allege, KPMG managed to obtain 1984-1999 registrations and

licenses only through acts of concealment and conspiracy. They contend that

this conduct constituted constructive fraud, conspiracy to commit constructive

fraud, tortious interference with prospective contractual relations, conspiracy to

commit tortious interference with prospective contractual relations, Lanham Act

violations, Racketeer Influenced and Corrupt Organizations Act (“RICO”)

violations, and Sherman Act violations. The competitors seek the disgorgement

of all revenues or profits that KPMG generated through its Texas operations

from 1984 until 1999, as well as punitive damages, statutory damages (including

attorney’s fees), and costs.

KPMG (on behalf of all defendants except Maresh) moved to dismiss under

Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). KPMG argued that: (A)

the State Board possesses exclusive jurisdiction over this dispute; (B) the

competitors’ claim of injury is too speculative to confer Article III standing; (C)

the competitors’ claim of injury is too speculative to give rise to a claim for which

relief can be granted; and (D) injury aside, the competitors fail for various

reasons to state a claim for which relief can be granted under the legal theories

that they assert. The competitors responded to KPMG’s motion to dismiss,

KPMG replied, and the competitors sur-replied.

Maresh separately filed a motion to dismiss, in which he adopted by

reference the other defendants’ arguments for dismissal. Maresh also filed a

motion for partial summary judgment on the bases of absolute and qualified

immunity. The competitors opposed these motions.

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The district court held that the competitors’ claim of injury is too

speculative to confer Article III standing or to give rise to a claim for which relief

can be granted. It dismissed the action under Federal Rule of Civil Procedure

12(b)(1) or, alternatively, under Federal Rule of Civil Procedure 12(b)(6).

Having dismissed the action on these grounds, the district court resolved

only part of KPMG’s alternative arguments. It concluded that the State Board

does not possess exclusive jurisdiction over the action and that the competitors

pleaded fraud with enough particularity to satisfy Federal Rule of Civil

Procedure 9(b). The district court did not consider other of the parties’

arguments, such as whether the competitors sufficiently pleaded a conspiracy

or a RICO enterprise. The district court dismissed Maresh’s motion for partial

summary judgment as moot. The competitors timely appealed from the

action’s dismissal. KPMG timely cross-appealed (on behalf of all defendants,

including Maresh). KPMG challenges the grounds of the dismissal, urging that

the State Board possesses exclusive jurisdiction over this dispute.1

B.

In the clients’ action, the live pleading is the second-amended complaint.

In the original complaint, the putative class’s named plaintiffs were NAB Asset

Venture I L.P. (“NAB I”), NAB Asset Venture II L.P. (“NAB II”), NAB Asset

Venture III L.P. (“NAB III”), NAB Asset Venture IV L.P. (“NAB IV”), and Asset

Collectors L.P. (“Asset Collectors”). In the first-amended complaint, Desert

Eagle Distributing of El Paso, Inc. (“Desert Eagle”) replaced NAB II, NAB III,

and NAB IV as named plaintiff. The second-amended complaint reflected

1

KPMG gave notice of challenging the denial of Maresh’s motion for partial summary

judgment, but it did not pursue the argument in its appellate briefs. “Because arguments not

asserted in an original brief are generally deemed to be abandoned, we will not address this

argument.” LaBarge Pipe & Steel Co. v. First Bank, 550 F.3d 442, 449 n.5 (5th Cir. 2008).

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changes to the clients’ causes of action and relief sought. It continued to name

as plaintiffs NAB I, Asset Collectors, and Desert Eagle.

When NAB I, Asset Collectors, and Desert Eagle filed the second-amended

complaint, NC Ventures and St. James moved to intervene as plaintiffs. KPMG

opposed the motion, and it also alleged that NAB I and Asset Collectors lack

standing. The district court granted the motion to intervene. The parties

stipulated to the dismissal of NAB I and Asset Collectors. The action’s current

plaintiffs are Desert Eagle, NC Ventures, and St. James.

The clients’ substantive legal argument proceeds as follows. From 1984

until 1999, KPMG represented that it was properly registered and licensed to

practice public accountancy in Texas. As KPMG’s partners knew, this

representation was false. KPMG did not qualify to register in Texas because

Hudson practiced public accountancy there without a license and certification.

As a consequence of KPMG misrepresentations, the clients bargained for and

paid for the services of a properly-registered accounting firm. They instead

received the services of an accounting firm whose registration and license were

subject to mandatory revocation.

The market price for a properly-registered accountancy firm’s services, the

clients allege, exceeds the market price for the identical services of a firm whose

registration and license are subject to mandatory revocation. This is so because

the latter firm’s services carry an element of risk: if the State Board revokes the

firm’s registration and license, the client: (A) must incur additional expenses to

have the accounting work checked by a licensed accountant or accountancy firm

and (B) may incur civil liability for sharing the firm’s work with third parties

while representing the work as having been performed by a firm that was

registered and licensed.

The clients thus assert that, because of KPMG’s misrepresentations, they

bargained and paid for risk-free accounting services but instead received less-

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valuable, risk-bearing accounting services. They contend that KPMG’s conduct

toward them constituted actual and constructive fraud, breach of fiduciary duty,

simple or gross negligence, negligent misrepresentation, breach of contract,

breach of warranty, Texas Deceptive Trade Practices Act violations, and RICO

violations. They seek to recover the services’ overcharge (measured as benefit-of-

the-bargain damages, out-of-pocket damages, lost profits, equitable

disgorgement, or pecuniary damages), statutory damages (including attorney’s

fees), and punitive damages. To support their assertions, the clients attached

to their second-amended complaint an affidavit of Wanda Lorenz (a former State

Board member) and a declaration of Herbert Warner (a former KPMG partner).

On behalf of all defendants except Maresh, KPMG moved to dismiss the

clients’ action under Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 9(b).

KPMG argued in favor of dismissal that: (A) the State Board possesses exclusive

jurisdiction over this dispute; (B) the clients’ action is an impermissible

collateral attack of the State Board’s 1984-1999 registration decisions; (C) the

clients lack standing to enforce the TPAA through a private right of action for

damages; (D) the clients failed to plead actual, concrete injury; and (E) injury

aside, the clients otherwise fail to state a claim for which relief can be granted

under the particular legal theories that they assert.

The clients responded to the motion to dismiss, KPMG replied, and the

clients sur-replied. Maresh separately filed a motion to dismiss, in which he

adopted by reference the other defendants’ arguments in favor of dismissal.

Maresh also filed a motion for partial summary judgment on the bases of

absolute and qualified immunity. The clients opposed these motions.

The district court rejected KPMG’s arguments that the State Board

possesses exclusive jurisdiction over this dispute, that the action is a collateral

attack of the State Board’s registration and licensing decisions, and that the

clients lack standing because the TPAA does not create a private right of action

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for damages. It held, however, that the clients failed to plead actual, concrete

injury sufficient to give rise to a claim for which relief can be granted. It

dismissed the action under Federal Rule of Civil Procedure 12(b)(6). Having

dismissed the action on these grounds, the district court denied KPMG’s motion

to dismiss insofar as KPMG sought dismissal under Federal Rule of Civil

Procedure 9(b); the clients’ allegations were particular enough to satisfy that

rule.

KPMG separately moved to strike the Lorenz and Warner exhibits. It

contended that the exhibits constituted expert-opinion testimony and that

expert-opinion testimony is inappropriate at an action’s pleading stage. The

clients opposed the motion, characterizing Lorenz and Warner as “uniquely

qualified” experts but also contending that the exhibits contained non-expert

factual testimony. That testimony, the clients asserted, was not additive of the

complaint’s factual allegations (in the sense of providing fresh allegations) but

instead merely gave context to the complaint’s allegations.

The district court granted KPMG’s motion to strike the Lorenz and

Warner exhibits. It concluded that the exhibits contained expert testimony and

that any non-opinion testimony that they contained was inextricably intertwined

with the expert testimony. Under this court’s precedents, the district court held,

expert testimony is inappropriate at the pleading stage. It ordered the Lorenz

and Warner exhibits stricken from the second-amended complaint.

The clients have timely appealed from the action’s dismissal and from the

partial grant of KPMG’s motion to strike the Lorenz and Warner exhibits.

KPMG (on behalf of all defendants, including Maresh) timely cross-appealed

from the grant of NC Ventures’s and St. James’s motion to intervene. KPMG

also cross-appealed from the grounds of dismissal and, on cross-appeal, raises

a new argument opposing federal-court jurisdiction: the clients’ claim of injury

is too speculative to confer Article III standing.

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III.

We have appellate jurisdiction under 28 U.S.C. § 1291. We first consider

the cross-appeals from the competitors’ action. We next consider the cross-

appeals from the clients’ action.

A.

We review a dismissal for lack of standing de novo. E.g., Roark & Hardee

LP v. City of Austin, 522 F.3d 533, 542 (5th Cir. 2008).2 “Over the years, our

cases have established that the irreducible constitutional minimum of standing

contains three elements.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560

(1992). These elements are “(1) an ‘injury in fact’ that is (a) concrete and

particularized and (b) actual or imminent; (2) a causal connection between the

injury and the conduct complained of; and (3) the likelihood that a favorable

decision will redress the injury.” Croft v. Governor of Texas, 562 F.3d 735, 745

(5th Cir. 2009) (citing Lujan, 504 U.S. at 560-61). “The party invoking federal

jurisdiction bears the burden of establishing these elements.” Lujan, 504 U.S.

at 561. At the pleading stage, allegations of injury are liberally construed. See

id. (“[O]n a motion to dismiss we ‘presum[e] that general allegations embrace

those specific facts that are necessary to support the claim’ [of standing].”

(quoting Lujan v. Nat’l Wildlife Fed., 491 U.S. 871, 889 (1990))). However,

allegations of injury that is merely conjectural or hypothetical do not suffice to

confer standing. See DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 344-46, 350

(2006). A claim of injury generally is too conjectural or hypothetical to confer

2

The competitors contend that the jurisdictional question is factual: “KPMG based

its motion to dismiss on a challenge to a fact—whether Little suffered a concrete, non-

speculative injury in that KPMG took business from him while unlawfully competing against

him in El Paso—that is central to the merits of Little’s substantive causes of action.” This

contention is without merit; whether Little suffered injury that is concrete and non-speculative

presents a legal question. See, e.g., Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 37, 46

(1976) (vacating denial of motion to dismiss for lack of standing, and remanding with

instructions to dismiss, because the alleged injury was insufficiently concrete and non-

speculative).

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standing when the injury’s existence depends on the decisions of third parties

not before the court. See, e.g., Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26,

41 (1976) (“[I]njury at the hands of a hospital is insufficient by itself to establish

a case or controversy in the context of this suit, for no hospital is a defendant.”).

Here, the competitors’ claim of injury is lost business: KPMG provided

public-accountancy services to Texas clients who, the competitors assert, would

have hired a putative class member in KPMG’s absence from the market. This

claim of injury requires the following chain of causation. First, had KPMG’s

Texas registration been revoked, KPMG’s Texas clients would have sought to

replace KPMG. Second, the clients would have replaced KPMG with one or more

of the plaintiffs. Third, the clients would have paid for the plaintiffs’ services.

That KPMG’s Texas clients would have sought to replace KPMG requires

speculation. The TPAA permits a firm whose registration has been revoked to

apply for reinstatement. See T EX. O CC. C ODE § 901.507 (1999) (“On receipt of a

written application, and after notice and hearing, the board may . . . (2)

reregister a person whose registration was revoked . . . .”). The competitors

allege that the State Board would have revoked KPMG’s license and registration

because of a single partner’s unlicensed practice (out of as many as seven

hundred Texas partners). The competitors also allege that, from 1984 until

1999, KPMG garnered hundreds of millions of dollars in business from

participating in Texas’s public-accountancy market. KPMG’s motivation to

correct the cause of revocation and to seek reinstatement—quickly—would have

been obvious. It is no less likely that KPMG’s Texas clients would have waited

for KPMG’s reinstatement as that they would have sought to replace KPMG

with another service provider.

That the clients would have replaced KPMG with one or more of the

plaintiffs requires speculation. Had KPMG’s Texas registration been revoked,

as many as about seven hundred licensed and certified public accountants would

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have found themselves at a firm with potentially diminished capacity to obtain

business. Under such circumstances, some of the accountants may have chosen

to leave KPMG. Clients of the departing accountants, deciding to replace

KPMG, could have taken their business to KPMG’s former partners instead of

the plaintiffs.

That clients who chose to take their business to the plaintiffs ultimately

would have paid the plaintiffs as they had KPMG also requires speculation, but

we will not further belabor the point. The competitors’ claim of injury depends

on several layers of decisions by third parties—at minimum, KPMG’s Texas

clients—and is too speculative to confer Article III standing. We affirm the

dismissal of the competitors’ action under Federal Rule of Civil Procedure

12(b)(1).3

B.

We affirm the dismissal of the clients’ action, dismiss as moot the clients’

appeal from the order striking the Lorenz and Warner exhibits, and do not reach

the merits of KPMG’s cross-appeal from the grant of NC Ventures’s and

St. James’s motions to intervene.

1.

We review a dismissal under Federal Rule of Civil Procedure 12(b)(6) de

novo. “To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead

‘enough facts to state a claim to relief that is plausible on its face.’” Severance v.

Patterson, 566 F.3d 490, 501 (5th Cir. 2009) (quoting Bell Atl. Corp. v. Twombly,

127 S. Ct. 1955, 1974 (2007)).

3

Because the plaintiffs lack standing, we lack jurisdiction to determine whether:

(A) the plaintiffs’ claim of injury is too speculative to give rise to a claim for which relief can

be granted; or (B) injury aside, the competitors otherwise fail to state a claim for which relief

can be granted under the legal theories that they assert. Also, we do not reach the merits of

KPMG’s cross-appeal insofar as it requests an alternative holding that the State Board

possesses exclusive jurisdiction over the competitors’ action.

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The clients allege that they bargained for, and paid for, the risk-free

services of a properly-registered accounting firm but that they received the risk-

bearing services of an improperly-registered accounting firm. As the clients

allege, however, nobody outside of KPMG discovered Hudson’s unlicensed public-

accountancy practice until 2005. The clients do not contest that 2005 was too

late for the State Board to revoke KPMG’s 1984-1999 Texas registrations and

licenses. Without the possibility that KPMG’s registration and license might

have been revoked, the clients’ claim for relief collapses: the clients faced no

prospect of needing to incur additional expenses to have KPMG’s work checked

by a licensed accountant or accountancy firm, and any representations that they

made to third parties that KPMG’s work was the work of a registered and

licensed firm were true. Furthermore, because the potential basis for revoking

KPMG’s license and registration came to light too late for the State Board to do

anything about it, any other claimed difference in market value between

KPMG’s “properly-licensed” and “improperly-licensed” services—even if

theoretically conceivable—is simply implausible.

Whatever the status of KPMG’s registrations and licenses from 1984 until

1999 may have been—“proper” or “improper”—is now only of academic interest

and is immaterial as far as establishing any relief. We affirm the action’s

dismissal under Federal Rule of Civil Procedure 12(b)(6).

2.

The clients also appeal from the ruling to strike the Lorenz and Warner

exhibits. We dismiss the appeal as moot. The clients represented to the district

court that the Lorenz and Warner exhibits are not additive of the complaint’s

factual allegations but instead merely provide context to those allegations. For

the reasons stated above, the complaint’s allegations fail to state a claim for

which relief can be granted. Exhibits that merely give context to those

allegations cannot cure this deficiency.

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3.

KPMG cross-appeals from the grant of NC Ventures’s and St. James’s

motions to intervene as plaintiffs in the clients’ action. We interpret KPMG’s

cross-appeal to be in the nature of an argument in the alternative, seeking to

divide the plaintiffs if KPMG cannot achieve a blanket victory. Because KPMG

prevails against all of the clients under Rule 12(b)(6), reaching this cross-

appeal’s merits is unnecessary.

IV.

For the foregoing reasons, the district court’s judgments are

AFFIRMED.

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