Saturday, October 31, 2009

Fourth District Rules Fraud Prong of the UCL Not Barred by the UPA in Zhang v. Superior Court

On October 29, 2009, the Fourth District (Division Two) issued an opinion in Zhang v. Superior Court, __ Cal. App. 4th __ (2009), concluding that insurers are not immune from liability under the fraud prong of the UCL for conduct that would violate the “Unfair Insurance Practices Act” (Insurance Code § 790.03 et seq.).

In reversing the trial court’s demurrer, the court concluded that that the California Supreme Court’s decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988) did not stand for the proposition “that insurers who violate the Unfair Insurance Practices Act can never be liable in tort to the injured party” [id., at 7], as the Supreme Court’s decisions in both Moradi-Shalal and Manufacturers Life Ins. Co. v. Superior Court, 10 Cal.4th 257, 267 (1995) expressly acknowledged that the Unfair Insurance Practices Act did not stand as a substantive bar to existing tort law remedies. See id., at 7-8. Rather, drawing from the analysis in both Moradi-Shalal and Manufacturers Life, the Zhang court reasoned that a UCL claim can be barred only if “a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited…” See id., at 8.

Thus, in the words of Zhang, “if a plaintiff expressly alleges conduct expressly prohibited by the UCL, such as fraudulent conduct likely to deceive the public [] or false advertising, there is simply no reason to apply Moradi-Shalal to prohibit the cause of action." See id., at 10-11.

Wednesday, October 28, 2009

Bailey Daily Blog Mentions

I'd like to take a minute to thank Curt Cutting of the California Punitive Damages blog and Kimberly Kralowec of The UCL Practitioner for their mentions of my burgeoning blog.  Their posts can be found here and here.  Also, welcome to the new visitors who have come to check things out.  Feel free to drop me a line.

Second District Orders Publication of Cohen v. DirecTV, Inc

On October 28, 2009, the Second District (Division Eight) granted requests to publish its opinion in Cohen v. DirecTV, Inc.  Prior discussion of this opinion may be found here and here.

Tuesday, October 27, 2009

Ninth Circuit Finds AT&T's "New and Improved" Class Action Waiver Unconscionable In Laster v. AT&T Mobility LLC

On October 27, 2009, the Ninth Circuit issued an opinion in Laster v. AT&T Mobility LLC concluding a class action waiver used by AT&T in connection with a “free phone” sales promotion was unconscionable under California law. 

Significantly, AT&T sought to distinguish it’s class action waiver from the pack by including a provision providing consumers the potential to collect a premium contractual payment of $7500 (the maximum amount of a small claims claim in California). However, as noted by the Court, the consumer would receive this payment “only if AT&T does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected.” The Court reasoned that this provision did not overcome the "small damage" claim issue that rendered similar provisions substantively unconscionable in prior decisions such as Shroyer v. New Cingular Wireless Servs., 498 F.3d 976 (9th Cir. Cal. 2007) and Discover Bank v. Superior Court, 36 Cal. 4th 148 (Cal. 2005), as “AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500.”

Under authority such as Discover Bank and Shroyer, class action waivers have been deemed substantively unconscionable because the class action mechanism provides incentive to bring small damage claims, and as such, is necessary for adjudication of consumer rights. As explained by the California Supreme Court, the class action mechanism is not simply a procedural device when small damages are alleged, as the class mechanism in such cases is “inextricably linked to the vindication of substantive rights.” See Discover Bank v. Superior Court, 36 Cal. 4th 148, 161 (2005).

Monday, October 26, 2009

Fourth District Orders Publication of Opinion in Kaldenbach v. Mutual of Omaha Life Insurance Co.

On October 26, 2009, the Fourth District (Division Three) ordered its opinion upholding denial of certification in Kaldenbach v. Mutual of Omaha Life Insurance Co., __ Cal.App.4th___ (2009) be published.  This decision was previously discussed here.

In this case, the plaintiff asserted claims under the UCL and CLRA predicated upon the sale of alleged “vanishing premium” life insurance policies. With regard to the UCL claim, the plaintiff asserted that reversal was required under Tobacco II because the trial court improperly premised its order denying certification on each class member having to establish reliance and injury.  However, the Court disagreed, concluding that even if the trial court improperly premised its order denying class certification on such grounds, the trial court’s denial was also based on its finding that individualized inquiry would be required to establish defendant's liability:
There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual’s training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.
See Kaldenbach, at 21.

As reasoned by the Court, this justification supported the trial court’s denial of certification, as “there was no evidence linking those common tools to what was actually said or demonstrated in any individual sales transaction[,]” but rather, “[t]he record demonstrates Mutual’s training materials and methods were not uniform throughout the class period of 1988 through 1995.” See id., at 18, 22-23.

New Unpublished UCL Restitution Opinion Issued by Second District in In re Baycol Cases I & II

On October 20, 2009, the Second District (Division Seven) issued an unpublished opinion in In re Baycol Cases I & II, reversing the trial court's dismissal of the plaintiff’s individual UCL claim. The opinion is noteworthy, not for the ruling upholding dismissal of the class allegations on technical grounds, but for the court’s approval of a restitionary theory premised on the defendant charging inflated prices for a product through the challenged deceptive advertising. The court’s analysis was as follows:
The focus of the UCL is "on the defendant's conduct, rather than the plaintiff's damages, in service of the statute's larger purpose of protecting the general public against unscrupulous business practices." (In re Tobacco II Cases (2009) 46 Cal.4th 298, 312.)


The trial court sustained the demurrer as to Shaw's individual claims on the ground that he "did not plead that he did not receive health benefits, that he did not get what he paid for, or that he has any basis for injunctive relief." However, Shaw alleged that due to Bayer's unfair, unlawful and deceptive acts in  marketing Baycol, it sold more Baycol at inflated prices than would otherwise have been the case. At a minimum, it is reasonably probable that Shaw could amend his complaint to allege that due to Bayer's unfair, unlawful and deceptive acts in marketing Baycol, he purchased Baycol and he purchased it at a higher price, than would have been the case had Bayer not engaged in unfair, unlawful and deceptive acts. Accordingly, he should have been given the opportunity to amend the complaint to provide more specificity as to his individual claims. (Schifando v. City of Los Angeles, supra, 31 Cal.4th at p. 1081; City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 68 Cal.App.4th at p. 459.)
In re Baycol Cases I & II, 2009 Cal. App. Unpub. LEXIS 8352 (2d Dist. Oct. 20, 2009).

As I previously discussed here (The Scope of Class Restitution in the Wake of In Re Tobacco II Cases), this theory would permit adjudication of a UCL claim on behalf of a class that includes persons who never saw or relied upon the deceptive advertising. 

Saturday, October 24, 2009

California District Court Denies Motion to Decertify Punitive Damages Class in Iorio v. Allianz Life Ins. Co..

On October 21, 2009, a California District Court judge denied a motion to decertify a punitive damages class in Iorio v. Allianz Life Ins. Co. of N. Am., 2009 U.S. Dist. LEXIS 97657 (S.D. Cal., Oct. 21, 2009). The plaintiff’s case – certified on behalf of a class of California senior citizens who purchased deferred annuities from Allianz Life Insurance Company of North America – alleges that Allianz employed false and misleading statements to promote the sale of its annuities. In seeking decertification, the defendant asserted that recent U.S. Supreme Court punitive damage decisions precluded class adjudication of punitive damage claims as a matter of law. The district court disagreed, reasoning as follows:

First, the court concluded that adjudication of punitive damages using the class mechanism is not precluded by Philip Morris USA v. Williams, 549 U.S. 346 (2007). The court reasoned that unlike Williams, which held that the “Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that inflicts upon those who are, essentially, strangers to the litigation” [Williams, 549 U.S. at 353], “the non-representative class members who received notice and did not opt out are parties to the litigation.” See Iorio, 2009 U.S. Dist. LEXIS 97657, at 11-14. The court further reasoned that “even though Williams suggests that the Defendant should have the opportunity to present the defenses of reliance and knowledge for each member [], this Court has already found that such individual examination is not necessary because every class member received the same alleged misrepresentation and relied on those misrepresentations.” See id., at 15.

Second, the court disagreed that evaluation of the proportionality of the punitive award to each class member's compensatory damages would require individualized hearings for each class member. See Iorio, 2009 U.S. Dist. LEXIS 97657, at 17-22. As reasoned by the court, “compensatory damages will be calculated depending on the group in the class where each member falls” and “[a]fter compensatory damages have been assessed, a ratio between punitive and compensatory damages can be calculated based on the factors set forth in Campbell.” See id., at 17-18.

Finally, the court concluded that the defendant did not have a due process right to assert an individualized defense against each class member to rebut their reliance and knowledge where all class members were presented with the same alleged misrepresentations by defendant. See Iorio, 2009 U.S. Dist. LEXIS 97657, at 22-24 (“[i]n light of the uniform written misrepresentations and the well-established presumption of reliance created by California law, the Court finds [the due process] argument to lack merit.”).

However, as the court properly notes, this very issue is currently pending before the Ninth Circuit in Dukes v. Wal-Mart, Inc. Thus, whether such analysis ultimately survives remains to be seen.

Friday, October 23, 2009

Ninth Circuit Denies Petition to Appeal Order Granting Class Certification in Friedman v. 24 Hour Fitness USA, Inc..

On October 20, 2009, the Ninth Circuit issued an order denying the petition of 24 Hour Fitness to appeal the district court’s order granting class certification in Friedman v. 24 Hour Fitness USA, Inc., 2009 U.S. Dist. LEXIS 81975 (C.D. Cal., Aug. 25, 2009). (The district court's certification order may be found here).  In Friedman, plaintiffs are alleging that 24 Hour Fitness violated RICO when it fraudulently represented to payment processors that it had member authorization to withdraw membership dues using Electronic Funds Transfer (EFT) in instances where members had previously cancelled their membership.

As reflected in the district court’s certification order, common issues were deemed to predominate on the RICO claim because “the predicate fraud for the RICO claim here turns on Defendant's warranties to the payment processors and the payment processors' reliance on those warranties, not on Defendant's representations to the individual consumers.” See Friedman, 2009 U.S. Dist. LEXIS 81975, at 25. As reasoned by the court, “[t]his situation falls within … ‘a narrow exception to the requirement that the plaintiff prove direct reliance on the defendant's fraudulent predicate act’ … that ‘comes into play when the plaintiff can demonstrate injury as a direct and contemporaneous result of fraud committed against a third party.’” See id. Based on this principle, the court concluded that “there is no need for each class member to prove his own direct reliance on these misrepresentations in order for his injury to have been directly caused by the alleged misrepresentation to the payment processors.” See id.

This principle is an important one to remember, as many modern fraudulent schemes are currently being predicated upon this very fact pattern. An example would include cellular phone cramming, a practice wherein a company submits fraudulent billing to third party cellular phone providers, who in turn impose charges on a consumer’s cellular phone bill to collect monthly fees for services (such as ringtones, games, and joke-lines) which the consumer has not provided authorization or consent. Some courts have deemed this fact pattern to reside outside the reach of state consumer protection statutes due to the fact the consumer lacks the requisit element of reliance on the fraudulent activity that caused the resulting damage.

Tuesday, October 20, 2009

Multiple Requests For Publication Filed in Cohen v. DirecTV, Inc.

Between the period of October 16, 2009 and October 19, 2009, four separate publication requests were filed in Cohen v. DirecTV.  The requests are contained here, here, here and here.

In Cohen, the Second District upheld denial of certification of a UCL class because the proposed class included persons who had not viewed alleged deceptive promotions by DirecTV. The Court reasoned predominance could not be met under circumstances, and in fact, went so far as to state that “we find Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of “commonality.”

As I discussed in a prior post, Cohen is poorly reasoned, as the California Supreme Court rejected this very line of analysis in In Re Tobacco II Cases.

Wednesday, October 14, 2009

New FTC Guidelines on Product Testimonials and Endorsements - a Useful Resource to California Practitioners

On October 5, 2009, the FTC announced approval of final revisions to the guidance it gives to advertisers on how to keep their endorsement and testimonial ads in line with the FTC Act.  As explained in the official press release, the new guidelines address endorsements by consumers, experts, organizations, and celebrities, as well as the disclosure of important connections between advertisers and endorsers. These changes, discussed in detail here, compel the following affirmative disclosures to avoid deceptive advertising:
1.  Atypical Results: advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.

2.  All Forms of Paid Endorsement, Including Sponsored Research: The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. Examples where disclosure would be required include (1) the post of a blogger who receives cash or in-kind payment to review a product, or (2) reference to the findings of a research organization that conducted research sponsored by the company. A paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.

3.  Celebrity Disclosure of Relationship with Advertisers: In addition to reinforcing existing precedent that celebrities may be held personally liable for false or unsubstantiated claims made in an endorsement – or for failure to disclose material connections between the advertiser and endorsers, the revised Guides also make it clear that celebrities have a duty to disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media.
These new guidelines may be a useful tool to California practitioners, as the California Supreme Court has long held that California Courts may seek guidance from interpretations of Section 5 of the FTA when interpreting the provisions of the UCL. See e.g. Barquis v. Merchants Collection Assn., 7 Cal. 3d 94, 110 (1972); Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 186 (1999)

Monday, October 12, 2009

A Good Exemplar UCL Certification Opinion: Baghdasarian v. Amazon.Com, Inc.

This morning I stumbled across Baghdasarian v. Amazon.Com, Inc., 2009 U.S. Dist. LEXIS 92777 (C.D. Cal. July 6, 2009) – a class certification decision out the Central District of California. In that case, the plaintiff sought certification under the deception prong of the UCL for Amazon’s alleged practice of retaining a portion of shipping fees that were unilaterally set by Amazon without seller input in its Amazon Marketplace platform. See id., at 2-3. The Court’s analysis is noteworthy for its adherence to the principles set forth in In Re Tobacco II Cases.

For example, the Court’s discussion of UCL standing properly acknowledges that “[p]laintiff does not need to show affirmative proof that each individual class member relied on Defendant's deceptive conduct.” See id. at 8-9. Moreover, despite the defendant’s efforts to focus on individual issues relating to individual class member reliance [id., at10-12], the Court’s certification analysis properly focuses on the defendant’s conduct:
common questions of law and fact predominate over individual issues of proof. Specifically, the case deals with whether Defendant's shipping and handling disclosure misleadingly stated or implied that the fee was for shipping and handling, and whether it misleadingly stated or implied that the fee is passed on in full to Marketplace Sellers to compensate them for actual shipping and handling costs. These questions are "common to the entire class and [require] no separate inquiry into the actions or beliefs of individual class members." Simer v. Rios, 661 F.2d 655, 673 (7th Cir. 1981). Further, these questions are significant because they have a direct bearing on the ability of each class member to prove Defendant's liability. See Klay v. Humana, Inc., 382 F.3d 1241, 1255 (11th Cir. 2004). Common questions predominate over any individual questions in this case.
Baghdasarian, 2009 U.S. Dist. LEXIS 92777, 16-17.

Under principles espoused in In Re Tobacco II Cases, the defendant’s conduct is the only relevant issue bearing on UCL liability (previously discussed here and here).

Thursday, October 8, 2009

Central District Court Denies Class Certification of UCL Class Based on Issues Relating to Restitution

On September 14, 2009, class certification of a construction defect action brought (in part) under the UCL was denied in Kingsbury v. U.S. Greenfiber, LLC, 2009 U.S. Dist. LEXIS 92014 (C.D. Cal. Sept. 14, 2009).  The plaintiff alleged, among other things, that he and the putative class had “purchased mass-produced homes containing a type of ‘cellulose insulation’… that can cause dangerous and difficult-to-detect mold growth because it retains too much water during and after installation.” See id., at 3.  As to claims under the UCL, plaintiff pursued various theories, including that the defendant had used false and deceptive advertising to conceal the risks and dangers of the insulation from the original home purchasers. Id., at 25-26.

While the plaintiff asserted that his UCL claim warranted certification under the principles espoused in In re Tobacco II, the District Court disagreed.  The Court denied certification of the UCL claim on the grounds that the proposed class definition was overly inclusive “because it included current owners of Pulte-built homes who did not purchase their homes from Pulte and thus have no claim to restitutionary relief under the UCL.” See id., at 26.  The Court further reasoned that the remedy sought by Plaintiff – the cost of repair – was not restitutionary in nature, but rather constituted damages (which are not recoverable under the UCL). Id., at 27.  Finally, the Court concluded that the named plaintiff failed to establish Prop 64 standing, as he testified at deposition that he did not rely on the defendant’s promotional materials. Id., at 29-30.

Putting the standing issue aside, the Court's opinion is troubling insofar as the court's analysis travels heavily into the merits of the case.  Moreover, the Court's analysis regarding class member restitution conflicts with the analysis in In re Tobocco II (discussed in earlier posts here and here), as the California Supreme Court concluded that the issue of putative class member injury is not properly a part of a court's certification calculous under the UCL.  Out of fairness to the Court, however, the plaintiff in this case may be partially to blame by failing to articulate a restitutionary theory that was viable under the UCL (and tailored to the proposed class).  However, resolution of this issue relates to the merits of the case, and as such, would have been more properly addressed by way of a motion to dismiss.

Wednesday, October 7, 2009

Life Imitating Life: Class Action Filed Against Second Life for Trademark Infringement; Motion to Change Venue Certain to Follow



Time to dust off my avatar (Matt Ballyhoo), there is a legal storm brewing in the land of Linden. On September 15, 2009, a class action complaint was filed in the Northern District of California against Second Life operator, Linden Laboratories, for trademark infringement. The suit alleges that Linden was an active participant in Second Life users' misappropriation of virtual goods (in the case of the named plaintiff, virtual beds) that netted real-life creators hundreds of thousands in actual revenue (that is U.S. dollars, as opposed to the Linden dollar).

The potential for real lifers to make a living in Second Life is no joke.  At one time I actually contemplated hanging out a shingle in SL, and apparently, I was not alone.  As reported by the ABA, some attorneys have set up office within second life.  Indeed, Second Life has its own Bar (Second Life Bar Association), and a burgeoning court system.  I anticipate some serious venue and jurisdictional challenges on the horizon.

Monday, October 5, 2009

Fourth District Upholds Trial Court's Denial of Certification of UCL Class

On September 30, 2009, the Fourth District Court of Appeal affirmed the trial court's denial of class certification in Kaldenbach v. Mut. of Omaha Life Ins. Co., 2009 Cal. App. Unpub. LEXIS 7907 (Cal. App. 4th Dist. Sept. 30, 2009). The Court’s opinion, which is unpublished, recognized that In re Tobacco II precluded focus on issues relating to class member reliance and injury.  The Court's analysis is seemingly contrary to the Second District's unpublished opinion in Cohen v. Direct TV (discussed previously here). Notwithstanding this finding, however, the Court ultimately concluded that the trial court did not abuse its discretion insofar as the court's findings regarding predominance were supported on other grounds.  The thrust of the Court's analysis on these points was as follows:
Relying upon In re Tobacco II Cases, supra, 46 Cal.4th 298, and Massachusetts Mutual Life Ins. Co. v. Superior Court (2002) 97 Cal.App.4th 1282 (Massachusetts Mutual), Kaldenbach argues reversal is required because the trial court improperly premised its order denying class certification on the complexities of establishing each absent class members' reliance on the representations made and their injury. But that was only one of the individualized issues the court found predominated and could not be proven on a class-wide basis. As we have already noted, we affirm the order denying class certification if any of the trial court's stated reasons are sufficient to justify the order. (Lebrilla, supra, 119 Cal.App.4th at pp. 1074-1075; Caro, supra, 18 Cal.App.4th at pp. 655-656.) There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual's training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.
Kaldenbach v. Mut. of Omaha Life Ins. Co., at 21-22.