Ninth Circuit Affirms Dismissal of Unmanifested Defect Class Action for Lack of a Duty to Disclose
The Ninth Circuit issued an important opinion last Thursday, holding that an Unfair Competition Law class action cannot be premised on a so-called "duty" to disclose that a product might cease to perform after the expiration of the limited warranty. See Wilson v. Hewlett-Packard Co., No. 10-16249 (9th Cir. Feb. 16, 2012).
In Wilson the plaintiff alleged that certain of the defendant's notebook computers have a "defect" in the design of the powerjack that causes them to fail after the expiration of the two-year limited warranty. Plaintiff argued that the "useful life" of the computer is much longer than two years, and that the manufacturer had a duty to disclose the fact that the powerjack had an increased tendency to fail within this "useful life," and that the manufacturer violated the UCL and the Consumer Legal Remedies Act ("CLRA") by "concealing" that fact.
Plaintiff alleged that HP violated the CLRA by "representing that goods or services have . . . characteristics . . . which they do not have," and "representing that goods or services are of a particular standard, quality, or grade" that they are not. Slip op. at 1827.
The Ninth Circuit's opinion is a strong affirmation of the basic principle that if you are warranting a product for a period of time, you have no duty to disclose -- and thus cannot be liable for "concealing" -- information about product difficulties that may arise after the warranty period has expired (unless they present significant health or safety concerns). As the court explained:
California courts have generally rejected a broad obligation to disclose, adopting instead the standard enumerated by the California Court of Appeal in Daugherty v. American Honda Motor Co., 144 Cal. App. 4th 824 (Ct. App. 2006). Daugherty held that a manufacturer is not liable for a fraudulent omission concerning a latent defect under the CLRA, unless the omission is "contrary to a representation actually made by the defendant, or an omission of a fact the defendant was obliged to disclose." The Daugherty court found the plaintiff alleged no facts that the manufacturer was "bound to disclose," as the complaint did not allege "any instance of physical injury or any safety concerns posed by the defect." The court noted that the plaintiff merely alleged that the risk posed by the alleged defect was the cost to repair the product, which did not give rise to a duty to disclose. Consequently, the court also rejected plaintiff's UCL claim, since absent a duty to disclose, the failure to disclose a defect "that might, or might not" shorten the useful life of a car that "functions precisely as warranted throughout the term of its express warranty" is not an unfair or fraudulent business practice under the UCL.
California federal courts have generally interpreted Daugherty as holding that "[a] manufacturer's duty to consumers is limited to its warranty obligations absent either an affirmative misrepresentation or a safety issue."
Courts have also cited policy considerations to limit the duty to disclose, noting that to broaden the duty to disclose beyond safety concerns "would eliminate term limits on warranties, effectively making them perpetual or at least for the 'useful life' of the product." Under a contrary rule, as the Court of Appeal noted in Daugherty, the "[f]ailure of a product to last forever would become a 'defect,' a manufacturer would no longer be able to issue limited warranties, and product defect litigation would become as widespread as manufacturing itself."
Slip op. at 1827-29 (citations omitted).
The Ninth Circuit went on to analyze whether plaintiffs had pled the existence of an unreasonable safety defect, holding that they had not. Plaintiffs' second amended complaint had considerable detail about the alleged defect: that the powerjack, over time, would lose the solder on the pins connecting it to the motherboard, causing it to stop delivering power to the motherboard. The complaint also pled that some users had experienced severe overheating and fires with the computers. What the complaint did not do, however, was connect the alleged design defect to the fires in any way. Slip op. at 1834 ("As Plaintiffs do not plead any facts indicating how the alleged design defect, i.e., the loss of the connection between the power jack and the motherboard, causes the Laptops to burst into flames, the District Court did not err in finding that Plaintiffs failed to plausibly allege the existence of an unreasonable safety defect.").
The Ninth Circuit also noted that knowledge and intent were elements of plaintiffs' causes of action, and it held that plaintiffs had failed to adequately allege that HP had knowledge of the alleged safety condition. Slip op. at 1835. The mere fact alone that HP had access to aggregate information about product performance did not, according to the Ninth Circuit, establish the knowledge element. Of itself, it was far too speculative. Similarly, the fact that some customers had registered complaints about overheating was not enough to establish knowledge of a defect. The complaints merely established that some customers were complaining, and "[b]y themselves they are insufficient to show that [the manufacturer] had knowledge [of the defect]." Slip op. at 1839 (citation omitted).
Wilson is a strong decision that defendants should have in their armamentarium when faced with class actions alleging unmanifested defects.
