Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

As I have noted repeatedly in prior posts, statements about the nutritional value or health effects of food and beverage products often serve as the basis for putative consumer fraud class actions.  Increasingly, however, courts are taking a critical view of these theories, dismissing claims based on puffery or representations that no reasonable consumer would rely upon.

For example, in Carrea v. Dreyer's Grand Ice Cream, Inc., No. 11-15263, Slip op. (9th Cir. Apr. 5, 2012), the plaintiffs had alleged that the defendant had violated California's Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Law, and New York's GBL section 349 by putting various statements on the packaging for its delicious Drumsticks product.  Plaintiffs alleged that putting "0g Trans Fat" on the front label was deceptive because there were trace amounts (less than 0.5 grams per serving) of trans fat in a serving.  Plaintiffs argued that although the FDA allows such a statement to be made in the Nutrition Facts label, it was fraud to put this statement on the front label unqualified by the statement "per serving."

The Ninth Circuit affirmed the trial court's dismissal of the claim as preempted by the Nutrition and Labeling Act.  Similarly, the court affirmed the trial court's holding that it would be implausible for a reasonable consumer to interpret the following statements to mean that Drumsticks are more nutritious or "wholesome" than competing products:  "Original Sundae Cone," "Original Vanilla," and "Classic."  The court noted that "it strains credulity to claim that a reasonable consumer would be misled to think that an ice cream dessert, with 'chocolate coating topped with nuts,' is healthier than its competitors simply by virtue of these 'Original' and 'Classic' descriptors."  Id. at 3.

Last week the maker of Muscle Milk was largely successful in having a number of allegations dismissed from a putative consumer fraud class action alleging that statements about its nutritional value were deceptive.  In Delacruz v. Cytosport, Inc., No. 11-3532 CW, Slip op. (N.D. Cal. Apr. 11, 2012), the plaintiffs claimed that Muscle Milk's beverage "Ready to Drink" and its snack bars ("Muscle Milk Bars") were deceptively marketed because they contained so many calories, saturated fat, and total fat, but still claimed to be healthy and nutritious.

The court looked to each set of representations allegedly made on the product, in advertising, and on the web.  With respect to representations on the product itself, the only ones that the court found to be potentially actionable were the use of the terms "healthy fats" and "nutritional shake."  The former suggests that the product has more unsaturated fats than it does, the court said.  The latter gave rise to an overall allegation of nutritiousness that could be actionable, the court explained.

The defendant argued that because the fats and other components were specifically listed in the Nutrition Facts panel, there could be no deception as a matter of law. But the court rejected this argument, reasoning that where the package has an affirmative misrepresentation, the defendant should not be allowed to rely on the small print of the Nutrition Facts panel to contradict it.  Slip op. at 13 (citing Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th cir. 2008); Yumul v. Smart Balance, Inc., 733 F. Supp. 2d 1117 (C.D. Cal. 2010)).

But the court rejected plaintiff's claim that the statement "Healthy, Sustained Energy" on the product labels was misleading, reasoning that "the term 'healthy' is difficult to define and Plaintiff has not alleged that the drink contains unhealthy amounts of fat, saturated fat, or calories from fat, compared to its protein content, based on any objective criteria."  Slip op. at 13-14.  Plaintiffs had compared the fat content of defendants' products to Krispy Kreme donuts.  But the court held that this was unhelpful because plaintiff did not "explain how much protein, vitamins and minerals are in such a doughnut or posit an objectively healthy ratio of protein to fat.  Slip op. at 14.  With respect to the snack bars, plaintiff had also alleged that "healthy" was deceptive because it did not disclose that the bars contain saturated fats, fractionated palm kernel oil, and partially hydrogenated palm oil.  The court rejected this, stating that plaintiff did not allege that these fats were trans fats.

Looking at the advertising, the court rejected plaintiffs' claim based on the following statements, which it concluded were non-actionable puffery: 

Go from cover it up to take it off.

From invisible to OMG!

From frumpy to fabulous.

Slip op. at 14.

And in analyzing the website, the court considered this statement:  "Ready-to-Drink is an ideal nutritional choice [if] you are . . . on a diet."  The court concluded that this, too, is puffery:  "The word 'ideal' is vague, highly subjective, and non-actionable, like 'superb, uncompromising quality,' addressed in Oesteicher v. Alienware Corp., 544 F. Supp. 2d 964, 973 (N.D. Cal. 2008), and 'high performance' and 'top of the line,' addressed in Brothers v. Hewlett-Packard Co., 2006 WL 3093685, at *4-*5 (N.D. Cal. 2006)."  Slip op. at 15.

Thus, after all of the statements challenged by plaintiffs, the court concluded:

the sole cognizable misrepresentation that Plaintiff has plead is the 'healthy fats' statement on the fourteen ounce Muscle Milk RTD container, buttressed by the 'nutritious snack' statement.

Id.

These decisions -- particularly coming, as they do, from the People's Republic of California -- provide some encouragement that courts are becoming increasingly comfortable with excluding challenged representations as non-actionable as a matter of law where they are puffery or could not be reasonably relied upon by a reasonable consumer to produce an injury.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I like Nutella.  I like peanut butter better, and that's usually what's on my toast in the morning.  But sometimes I like to switch it up with Nutella.

I don't know the precise amount of sugar or oil that it contains.  But I know where to look for such information:  right on the label, in the box marked "Nutrition Facts."

I have voiced my opinion in previous posts about the bogus nature of lawsuits where lawyers have invented class action "misrepresentation" claims out of Nutella's claim that the tasty spread can be part of a healthy breakfast. No one can be deceived into thinking that Nutella has suddenly become wheat germ.  A simple look at the Nutrition Facts on the label tells anyone who is curious what they want to know.

And so it was with great disappointment that I read the decision certifying a class of California purchasers of Nutella.  See In re Ferrero Litigation, Case No. 11-CV-205 H(CAB), Slip op. (S.D. Cal. Nov. 15, 2011) (Law 360 subscription required).  Plaintiffs' consolidated complaint asserted claims under California's Unfair Competition Law, its False Advertising Act, Consumer Legal Remedies Act, and for breach of express and implied warranties.  It claims that "Ferrero misleadingly promotes its Nutella spread as healthy and beneficial to children when it in fact contains dangerous levels of fat and sugar."  Slip op. at 2.

The opinion gives great lip service to the Supreme Court's decision in Wal-Mart v. Dukes, quoting it often on rigorous analysis and commonality.  And yet it ultimately certifies a class in which most of the class members likely were not deceived and would have bought Nutella even if they had read the label and thus knew the facts that plaintiffs claim were concealed.  The district court reasoned:

To the extent that Defendant interprets the decision in Wal-Mart as requiring plaintiffs to prove common class-wide injury at the class certification stage, the Court disagrees.  Rather, Plaintiffs must show that the claims of the class "depend on a common contention . . . of such a nature that it is capable of classwide resolution--which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke."  Wal-Mart Stores, Inc., 131 S. Ct. at 2551.  In this case, the claims made on behalf of the proposed class are based on a common advertising campaign, and include common questions such as whether Ferrero's advertising campaign misrepresented that Nutella is healthier or more nutritious than it actually is, or makes a more significant contribution to a balanced breakfast than it actually does, including for children.  Thus, Rule 23(a)(2)'s commonality requirement is satisfied.

Slip op. at 6.

One of the fundamental questions that remains unaddressed in the district court's opinion is the obvious overbreadth of the class definition.  The class is defined as a classic "all purchasers" class:  "all persons who . . . bought one or more Nutella products in the United States for their own household use rather than resale or distribution."  Slip op. at 2.  This, of course, sweeps into the class everyone, even those who used and enjoyed the product and would purchase it again and again.  Like me.  Or like plaintiff Hohenberg, who testified at her deposition that she "does not regret buying Nutella and continued using the spread after she learned about its sugar content."  Slip op. at 8-9.

Of course, where a class includes a large number of people who have no damages and have not been injured, the class definition is imprecise and overbroad.  Courts routinely deny class certification in such circumstances. See, e.g., State ex rel. The Coca-Cola Company v. Nixon, 249 S.W.3d 855 (Mo. 2008) (class of all purchasers of fountain Diet Coke was overbroad because many did not care that the product contains saccharin and would drink it anyway).  But the court in the Nutella litigation did not even consider the issue.  Nor did it consider how class members would provide objective proof at the outset of the litigation that they are class members.  Ascertainability, too, is a problem for this class.

The bright side, to the extent that there is one, is that the district court clearly recognized that the consumer protection laws of the 50 states are far too different for a nationwide class to pass muster under the predominance requirement, and California could not properly impose its consumer protection statutes on transactions that occurred outside its borders involving nonresidents.  Slip op. at 10-11.  Thus, the court certified a California-only class.  And it limited the class period to the start of the defendant's advertising campaign in August 2009, rather than the January 2000 start-date the plaintiffs had requested.

Still, that means that the maker of Nutella must endure merits discovery and a classwide trial over the claims of many Californians who have not experienced an injury or suffered any damages.  Here's hoping they have the fortitude to stick it out and put the "class" to its proofs.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

What is it about the People's Republic of California that makes one feel as if everything he learned in law school is exactly wrong? 

Get this:  a guy walks into a car dealership.  He buys a used car -- A USED MERCEDES BENZ WORTH NEARLY $50,000 -- AND HE DOESN'T READ THE CONTRACT!!!!!  The contract has an arbitration provision.  It's at the end of the contract -- where you'd expect an arbitration provision to be, since you'd logically discuss all of the contract terms and required performances first, before discussing what happens if the whole deal breaks down.  It isn't in 16-point type, but it's in a box entitled "ARBITRATION CLAUSE" and captioned with the admonition to "PLEASE REVIEW -- IMPORTANT -- AFFECTS YOUR LEGAL RIGHTS."  And remember, it's a guy who doesn't care enough about his $50,000 purchase to even read the contract.  Absent something extraordinarily awful in the substance of the arbitration provision, those of you who didn't sleep through first year contracts class would assume that the arbitration provision would be enforceable, right?

Not in the PRC, my friend!  California's Second District Court of Appeal just issued an opinion holding that such an arbitration provision was procedurally unconscionable.  Why?  Well, first because it was a contract of adhesion:  the poor fellow spending $50,000 wasn't allowed to negotiate the terms of the clause he didn't read, and it wasn't clear that he could go elsewhere and spend $50,000 on a used (er, "pre-owned") car with a dealer who wouldn't also insist on an arbitration clause.  (No, I'm not twisted enough to make this stuff up.)  Second, the clause's location on the back page of the contract made it unnoticeable to the guy who didn't bother reading the contract in the first place.  See Sanchez v. Valencia Holding Company, 2011 WL 5027488 (Cal. App. 2d Dist. Oct. 24, 2011).

I suppose if you're a used (er, "pre-owned") car dealer in California after Sanchez, you should put your arbitration provision on the front page of the contract, hold a gun to your customer's head while he reads it, and then offer him the option of paying $10,000 more for the car if he wants it without an arbitration provision.

Was Sanchez really just a nutty opinion, or was there something else going on?  Well, earlier this year the US Supreme Court decided AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), in which it held that the PRC could not invalidate class action waivers as a condition to enforcing arbitration provisions.  The Supreme Court stressed enforcing the parties' agreement as written, and if the defendant had not agreed to arbitrate a class action, the PRC could not force it to.

The arbitration clause at issue in Sanchez had a class action waiver provision.  In fact, that provision said that if the class action waiver was held to be unenforceable, the whole arbitration provision was unenforceable.  That's hardly unreasonable for a defendant that wanted to make clear it was not consenting to adjudicating class actions through the arbitration process.

The trial court had held that the class action waiver was unenforceable under California law and, based on this "poison pill" provision, refused to enforce the arbitration clause.  Subsequently, Concepcion came down, making the class action waiver enforceable.  

The Court of Appeal in Sanchez refused to consider whether the class action waiver was enforceable.  Instead, it skinned the cat a different way, by declaring the entire arbitration provision to be unconscionable, thus allowing for a potential class action to proceed in state court.

Aside from "procedural unconscionability," the court in Sanchez also identified four ways in which the arbitration provision was purportedly "substantively unconscionable."

First, the court found unconscionable the provision that allowed for either party to appeal if the award was $0 or over $100,000.  Despite the fact that this provision, as drafted, would benefit a customer who recovered nothing, the court held that it really benefitted the seller unfairly.  Remember, of course, that the used (er, "pre-owned") car was worth a little less than $50,000.  So the $100,000 threshold was more than two times the value of the car.  Nevertheless, the court (citing cases that had thresholds of $25,000 and $50,000) held that the clause was unconscionable because the dealer's obligations under various consumer laws could lead to awards well in excess of $100,000.  "A truly bilateral clause would allow a buyer to appeal an award below $100,000," the court concluded.

Second, the court held that it was unconscionably one-sided to allow an appeal if the arbitrator issued an award containing injunctive relief, since injunctive relief likely would only be issued against the dealer. 

Of course, the third independent reason the court held the arbitration provision substantively unconscionable was that it preserved and exempted from arbitration the dealer's -- and only the dealer's -- self-help remedies, such as repossessing the car.  "As several courts have held, arbitration provisions are unconscionable if they provide for the arbitration of claims most likely to be brought by the weaker party but exempt from arbitration claims most likely to be filed by the stronger party," the court reasoned.

Reasons two and three, however, leave the dealer on the horns of a dilemma.  If it can't use self-help to preserve the status quo (and the car itself), then it may well need to seek preliminary injunctive relief in arbitration to do so.  That, of course, would make the appeal rights truly two-sided.  But the court did not consider this, and was unwilling to invalidate just one provision, like the self-help provision.

Fourth, the court found the fee clauses in the appeal provision to unfairly benefit the dealer.  The arbitration provision allowed either party to seek an appeal to a three-arbitrator panel if it recovered nothing.  "The appealing party requesting a new arbitration shall be responsible for the filing fee and other arbitration costs subject to a final determination by the arbitrators of a fair apportionment of costs."  The Sanchez court noted that under California's Consumer Legal Remedies Act, a consumer does not have to pay arbitration costs or fees that she cannot afford or that are prohibitively high.  It held that having the appealing party -- who may be the consumer -- advance both side's costs violated this provision, in part because there was no procedure in place for the party to challenge his ability to pay.

The court refused to simply strike those clauses it found unconscionable; rather, it held the entire arbitration agreement to be unconscionable.  In doing so, it achieved the same result as the trial court, which had been effectively overruled by the US Supreme Court in Concepcion.

After Concepcion, many journalists and commentators questioned whether that decision spelled the end of consumer class actions.  Sanchez suggests that -- at least in California -- it may not.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

For those interested in charting the effects of AT&T Mobility LLC v. Concepcion, 131 S, Ct. 1740 (2011), see the new opinion by U.S. District Judge William Alsup in Arellano v. T-Mobile USA, Inc., 2011 WL 1842712 (N.D. Cal. May 16, 2011).

In Arellano, the plaintiffs had sued the defendants for injunctive relief under, inter alia, California's Unfair Competition Law, the Consumer Legal Remedies Act, and the False Advertising Act.  California's Supreme Court previously had held that suits for injunctive relief under those statutes were not subject to arbitration as a matter of public policy.

The defendant moved to compel arbitration, and the plaintiffs resisted, citing the California precedents.  The court held that Concepcion compels a finding that the Federal Arbitration Act preempts the state court decisions because it "decided that states cannot refuse to enforce arbitration agreements based on public policy."  Id. at *2.  Thus, "despite public policy arguments thought to be persuasive in California, Concepcion has trumped these considerations, at least for cases in federal court."

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A putative class action over "Cobra Sexual Energy" once again raises the issue of whether a plaintiff with claims for economic loss only can represent a class that includes people who may have claims for personal injuries.  In Peviani v. Natural Balance Inc., 2011 WL 1648952 (S.D. Cal. May 2, 2011), a woman who bought for her husband a male aphrodisiac from CVS brought a putative class action, claiming not only that the product didn't work (sorry, Mr. Peviani), but also that it puts those who take it at risk of developing hypertension, stroke, cardiac arrythmia, manic-like symptoms, suicidal tendencies, and missed diagnosis of prostate cancer.  Id. at *1.

What causes one to make a federal case out of frustrated expectations?  Apparently, the packaging.  This "dietary supplement" claimed to be a "powerful men's formula" that "provides 'sexual energy' by '[s]cientifically blending select, high-quality herbs, like "horny goat weed" and "other organic substances."  It also, apparently, made claims of providing numerous health benefits.

Plaintiff -- a resident of (where else?) California -- brought on behalf of a nationwide class claims for violation of California's Unfair Competition Law, False Advertising Law, and the Consumer Legal Remedies Act.  Interestingly, she apparently made no breach of warranty claims.

The class was defined broadly as "all persons . . . who purchased, on or after November 30, 2006, Defendant's Cobra Sexual Energy in the United States for household use rather than resale or distribution."  Id. at *1.

The court considered plaintif's motion to certify a class under Rules 23(b)(2) and 23(b)(3).  Citing the Ninth Circuit's decision in Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010), U.S. District Judge Anthony Battaglia recognized that he must subject the motion to "rigorous analysis" and consider facts relating to the underlying merits if necessary to make findings under Rule 23.  2011 WL 1648952 at *2.

The court held that Mrs. Peviani failed the typicality requirement for this class of purchasers of a male aphrodisiac because she had not actually taken the product and thus had not experienced and was not at risk of experiencing the physical symptoms that formed part of her claim.  The court concluded that "[i]n this significant respect, Plaintiff's interests are not aligned with the claims of male consumers, specifically those males experiencing the serious health consequences alleged by Plaintiff."  Id. at *3. 

The court acknowledged that she had standing to bring her claim for economic loss based on her reliance on the allegedly deceptive statements in deciding to purchase the product, but held that such economic loss "alone is insufficient to certify a class under Rule 23(a)(3) inasmuch as class members that consumed Cobra would likely have causes of action unavailable to the Plaintiff.

For similar reasons, the court held that Mrs. Peviani was an inadequate representative of males who, like Mr. Peviani, consumed Cobra and may suffer differing injuries and have differing causes of action.  Id. at *4.

Peviani is a classic example of courts rejecting a class that risks res judicata on absent class members' personal injury claims while prosecuting only economic loss claims.  Admittedly, however, this class definition was not as artful as some, in that it did not attempt to carve out of the class those people who had suffered actual personal injury from the Cobra product.  Still, it seems clear that Mrs. Paviani's experience of the product was quite different from that of the rest of the class, and that Judge Battaglia likely would have had ruled the same way on typicality and adequacy of representation even if the class definition had expressly carved out personal injury claims.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Well, the nattering nutrition nannies are at it again!  The Center for Science in the Public Interest has sued McDonald's in a putative class action alleging consumer fraud.  See Parham v. McDonald's Corp., Case No. ______, (Cal. Super. -- San Francisco Dec. 15, 2010) (Class Complaint).

What evil can such a corporate behemoth have perpetrated?  Did it make any false statements in advertising?  No, that's not alleged.  Did it fail to disclose some questionable food additive?  No, that's not alleged.  So what is this awful thing that McDonald's has done?

It puts free toys in Happy Meals.

Yes, ladies and gentlemen, that's the evil that CSPI has chosen to expend its resources on.  Toys in Happy Meals.

A Happy Meal, for those of us who don't have kids, consists of a hamburger, cheeseburger, or 4 chicken McNuggets with a side (small fries or apple slices that can be dipped in a caramel sauce) and a drink (soft drink, low-fat milk, or apple juice).

Happy Meals don't make CSPI happy.  It claims they have too many calories, saturated fat, sugars, and sodium, and not enough complex carbohydrates (because McDonald's uses white flour, rather than whole wheat flour, in its buns).

So what's so wrong about putting toys in Happy Meals, you ask?  Well, it makes kids want them.  And that, according to CSPI, is inherently deceptive.

Here's the basic argument from CSPI's complaint:

1.  Children 8 and under don't understand that advertising is trying to persuade them.

2.  The FTC says advertising to adults that does not disclose that it is advertising designed to persuade is inherently deceptive.

3.  Thus, advertising to children 8 and under is inherently deceptive.

4.  Such advertising -- particularly with toys -- interferes with parents' relationships with their kids because it causes the kids to nag the parents to got to McDonald's.  When parents don't give in, it creates animosity.  When they do, kids consume "unhealthy" meals.

Plaintiffs clearly have pled this complaint to avoid federal court.  They assert a class of California parents and a class of California children (age 8 and under) who have seen Happy Meal marketing in the last 4 years.  In an attempt to avoid CAFA removal, they seek only injunctive relief and disclaim any relief constituting restitution, penalties or damages.  Compl. para. 20.  (Given the rules against claim-splitting, that raises certain adequacy of representation concerns, doesn't it?)  The complaint pleads that "the amount in controversy is far below $75,000 [and] [n]o matter how evaluated, the amount in controversy falls far short of $5,000,000."  Id.

The complaint pleads two basic causes of action:  violation of California's Unfair Competition Law and its Consumer Legal Remedies Act.  Interestingly, the UCL claim appears to only rely on the "unlawful" prong, pleading a violation of the CLRA as a predicate violation for the UCL claim.

Here are the plaintiff-specific allegations for the plaintiff in this case:

94.  Maya, age six, continually clamors to be taken to McDonald's "for the toys."

95.  Maya and other members of the Children Class have been deceived by McDonald's marketing practices.

96.  Maya does not understand that McDonald's marketing efforts are intended to make her want to eat Happy Meals.  Maya interprets this marketing as good advice for proper eating.

97.  Often, Maya wants Happy Meals because toys based on trusted characters from television and movies (such as Shrek) endorse the Happy Meals in McDonald's advertising.

* * *

100.  McDonald's has unfairly influenced Maya.  It's Happy Meals advertising aimed at Maya has influenced her desire to eat the poor-nutrition Happy Meals, thereby harming Maya's health without her knowledge or comprehension.

* * *

103.  . . . Maya's friends are McDonald's viral marketers.

104.  Maya learns of Happy Meal toys from other children in her playgroup, despite [her Mother's] efforts to restrict Maya's exposure to McDonald's advertising and access to Happy Meal toys.  This is McDonald's advertising directive -- to subvert parental authority and mobilize pester power in order to sell unhealthful meals to kids using the lure of a toy.

* * *

107.  Although [her Mother] frequently denies Maya's repeated requests for Happy Meals, these denials have angered and disappointed Maya, thus causing needless and unwarranted dissension in their parent-child relationship.

Compl. paras. 94-107.

Based on these allegations, plaintiffs want the court to "[e]njoin McDonald's from continuing to advertise Happy Meals to California children featuring toys."

CSPI's complaint fundamentally challenges whether any product manufacturer can lawfully advertise products to children.  Under it's theory, no advertising to children would be lawful because children purportedly don't understand the concept of advertising.  (Notably, there are many social science articles that discuss how young people actually do understand that advertisers are trying to persuade them.) 

But the simple fact is that advertising to children -- which has been studied and considered by the Federal Trade Commission -- is lawful.  It's also commercial speech protected by the First Amendment.  And while activist groups like CSPI might like to turn off all media, home school our kids, and force them to eat like Euell Gibbons, no state's consumer fraud law allows them to impose such a viewpoint on the rest of us.  Parents decide where and what their children ages 8 and under will eat, and there is no "deception" or falsehood in the advertising that plaintiffs complain about that prevents parents from making those decisions responsibly.

Let's hope the court that ultimately decides this lawsuit -- whether it is a federal court or state court -- will recognize that CSPI's suit requests a dangerous extension of consumer fraud statutes that has no basis in California law.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

In In re Sony Frand Wega KDF-E A 10/A20 Series Rear Projection HDTV Television Litigation, Lead Case No. 08-CV-2276-IEG (WVG), Slip op. (S.D. Cal. Nov. 30, 2010) (Gonzalez, J.) (Law360 subscription required), the plaintiffs alleged that the technology used in Sony's rear projection televisions was defective and tended to generate color spots and blemishes after more than a year of use.  The limited warranty that came with the televisions, however, was only one year in duration.  Plaintiffs sued under a variety of California statutes (the Unfair Competition Law, the False Advertising Law, the Consumer Legal Remedies Act, and the Song-Beverly Consumer Warranty Act), the consumer protection statutes of other states, the federal Magnuson-Moss Warranty Act, and breach of express warranty and breach of implied warranty.  The defendant moved to dismiss, and the court granted the motion with prejudice.

The court began by analyzing the common elements of the UCL, FAL, and CLRA.  It held that plaintiffs failed to allege fraud with suffidient specificity under Federal Rule of Civil Procedure 9(b).  Basically, plaintiffs alleged that Sony knew its TVs would eventually exhibit color spots and blemishes, but it didn't tell customers and instead advertised the TVs as being of "high," "superior" and "excellent" quality. 

The court held that the claims under the statutes -- including the consumer protection statutes of the various states -- failed "because the alleged misrepresentations are nothing more than mere puffery" that cannot form the basis for a fraud claim.  Slip op. at 8-9.  Moreover, the court held, a product that performs throughout its warranty period cannot form the basis of a fraud claim, because "[w]here a manufacturer has expressly warranted a product, consumers can only expect that product to function properly for the length of the manufacturer's express warranty."  Third, the court held that plaintiffs failed to plead with sufficient particularity that Sony was actually aware of the alleged defect at the time the plaintiffs bought the TVs.

Going statute-by-statute, the court then explained additional reasons why the UCL claims should fail.  First, it held that plaintiffs had not established that a law was broken to support an "unlawfulness" prong.  Second, the unfairness prong could not be met as a mater of law where the product functioned as warranted throughout the warranty period.  Slip op. at 12.  Third, the fraud prong of the UCL was not satisfied because plaintiffs did not sufficiently plead that the representations were false when made, they only pled non-actionable puffery, and the representations did not relate to the claimed defect, thus meaning that plaintiffs could not sufficiently allege reliance.  Id. at 13-14.

Similarly, the plaintiffs' FAL claim failed because plaintiffs failed to identify specific ads, when and where they enountered them, and why the ads were untrue or misleading.  Id. at 15.  And the statements identified were puffery and were not shown to be false when made.

The court also dismissed the CLRA claim because the identified representations are mere puffery and "Plaintiffs have not claimed that Sony made any representations that run counter to the allegedly omitted fact:  that the televisions' optical block wore out over time."  Slip op. at 16.  The court also held that Sony had no independent duty to disclose:  "a manufacturer's duty to disclose information related to [a] defect that manifests itself after the expiration of an Express Warranty is limited to issues related to product safety."  Id. at 17.

The court dismissed the claims asserted under other states' laws for the same reasons it dismissed the UCL claim.  And it dismissed the SBCWA claim because plaintiffs failed to plead that they bought their TVs at retail, and that they tendered them for repair within the express Warranty period.  Id. at 20-21.

As for the express warranty claim, the court dismissed the claim because a warranty does not cover repairs that are necessary only after the warranty period has expired.  Id. at 22.

Because plaintiffs did not adequately plead a Song-Beverly Act claim, vertical privity was still a requirement for the implied warranty count.  And the durational limit on the express warranty applied to the implied warranty with equal vigor.

Finally, the MMWA claim failed because all of the state law claims failed, too.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I can't say much about it because I am involved in the case, but Judge Andrew J. Guilford just issued an interesting opinion dismissing claims under California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act.  See Baxter v. Intellius, Case No. SACV-09-1031 AG (MLGx), Slip op. (C.D. Cal. Sept. 16, 2010).  In Baxter, the plaintiffs had signed up for membership discount programs in response to Internet offers that were made after they already had bought a product on the Internet.  The court analyzed the disclosures that accompanied the offer, as well as the methods for confirming registration in the membership programs, and held that they were not deceptive as a matter of law.  It also held that plaintiffs had failed to allege actual reliance, as required by Proposition 64.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Nattering Nutrition Nannies scored a victory last week in the Eastern District of New York -- a victory against beverage giant The Coca-Cola Company and, more important, a victory against common sense and personal responsibility.  Last Wednesday, the Center for Science in the Public Interest and its co-counsel persuaded a federal court to deny Coca-Cola's motion to dismiss a putative nationwide consumer fraud class action challenging the beverage "vitaminwater" made by Coca-Cola's subsidiary, Glaceau.  See Ackerman v. The Coca-Cola Company, No. CV-09-0395 (JG) (RML), Slip op. (E.D.N.Y. July 21, 2010).

In Ackerman, Plaintiffs allege that the name, "vitaminwater," along with a description of the vitamins in the water and slogans about health are deceptive because they mislead people to believe that the beverages do not have sugar or calories in them.  As the court described plaintiffs' theory:

The plaintiffs have sufficiently alleged that the collective effect of the challenged statements was to mislead a reasonable consumer into believing that vitaminwater is either composed solely of vitamins and water, or that it is a beneficial source of nutrients rather than a "food of little or no nutritional value [which has been fortified] for the sole purpose of" claiming or implying that it is "healthy."  58 Fed. Reg. 2478, 2522.

Slip op. at 32.

Of course, there's one major problem with that theory:  the nutrition facts label on every bottle of vitaminwater discloses that there are a certain number of grams of sugar in the product, and that an 8 ounce serving of the drink contains a certain number of calories.  So the fact that there is an ingredient other than vitamins and water -- namely, sugar -- is plain to anyone who can read.  Nevertheless, the court allowed this claim to survive the pleading stage, so now there will be lots of expensive discovery and motion practice on a theory that is patently ridiculous.

(An additional sign to the consumer that there is something besides vitamins and water in the product is the fact that it is sweet -- some might even complain that it is cloyingly sweet.  This has led Glaceau to release "vitaminwater 10," which has ten calories per serving, and now  "vitaminwater zero," which has -- you guessed it -- zero calories per serving.  The court ducked the sweetness argument by stating that "there is no evidence before me concerning vitaminwater's taste."  Slip op. at 35.)

The court's response to the fact that sugar is listed as an ingredient right on the label was to declare that "the presence of a nutritional panel, though relevant, does not as a matter of law extinguish the possibility that reasonable consumers could be misled by vitaminwater's labeling and marketing."  Slip op. at 34.  The court relied heavily on Williams v. Gerber Products Co., 552 F.3d 934 (9th Cir. 2008), in which the Ninth Circuit had held that the packaging of a product called "Fruit Juice Snacks" could be misleading where it pictured various fruits on the label, but did not actually contain the juice of any of the pictured fruits, and only revealed this fact on the product label.

But Ackerman is no Williams.  There were no allegations that the packaging or marketing for vitaminwater contained any false statements or pictures.  Unlike the "Fruit Juice Snacks" at issue in Williams, which did not contain the juice of the pictured fruits, vitaminwater actually contains the vitamins the marketing discusses.  And the fact that it also contains sugar is stated right on the Nutrition Facts label in close proximity to the disclosures of the percentages of the vitamins and minerals that would surely interest vitaminwater's consumers.

This complaint is as deficient on its face as the Crunchberries complaint that I discussed earlier this month.  Reasonable people should not, as a matter of law, be allowed to claim surprise at the presence of an ingredient that is clearly disclosed on the Nutrition Facts label.

Although the court in Ackerman gave lip service to the pleading requirements of Twombly and Iqbal, it ultimately held that conclusory allegations met the pleading standard.  Indeed, it credited the following as adequately pleading the fact of reliance:

Each plaintiff relied on Defendants' . . . misrepresentations that VitaminWater is a beneficial dietary supplement beverage including, but not limited to, "vitamins + water = all you need" and the name of the product itself -- "VitaminWater" -- in deciding to purchase vitaminwater.  Had Plaintiffs known the truth that the statements they relied on were false, misleading, deceptive, and unfair, they would have neither purchased VitaminWater nor paid the premium price Defendants charged for it.

Slip op. at 40. 

The court refused to dismiss causes of action under California's Unfair Competition Law, False Advertising Law, and the Consumer Legal Remedies Act, as well as under New York's General Business Law sections 349 and 350.  It also refused to dismiss plaintiffs' common law misrepresentation claims for NY and CA plaintiffs and the unjust enrichment claims for all plaintiffs. 

Notably, the court was forced to conclude that plaintiffs' claims under the New Jersey Consumer Fraud Act failed to state a claim because they failed to plead enough specifics as required by Federal Rule of Civil Procedure 9(b). 

The court also held that plaintiffs failed to plead a claim for breach of express warranty because they failed to set forth any statement made about the product that the product failed to meet.  In addition, the court dismissed the implied warranty claims because -- even crediting the complaint as true -- "plaintiffs cannot establish that vitaminwater failed to constitute a merchantable product."  This, of course, begs the question:  if, as a matter of law, everything the defendant said was true (such that it did not constitute a breached warranty), and the sugar content was listed on the product itself and did not make the product unmerchantable, how could the packaging and marketing be "fraudulent"? 

The first half of the court's opinion is comprised of a recitation of the regulatory history regarding adding nutrients to foods and beverages.  Ultimately, the court rejected the defendants' arguments that the lawsuit was expressly and/or impliedly preempted by statutes and regulations preventing states from imposing labeling requirements that are different from those imposed by the FDA.  See, e.g., Slip op. at 27.  The court concluded that although plaintiffs' claims were premised on violations of the federal statutes and regulations, they were not preempted because they sought to impose "identical" requirements under state law as those imposed by the federal scheme.  The court also rejected the defendants' primary jurisdiction argument, stating that the question of what could mislead a reasonable consumer is one courts typically handle, and reasoning that the "FDA is aware of plaintiffs' concerns but lacks the resources to take enforcement action in every instance in which its policies are violated."  Slip op. at 30.

But plaintiffs legal assault on the fortified beverage industry ignores one important fact:  the public wants nutritionally-enhanced foods and beverages.  Indeed, fortified beverages are one of the fastest-growing market segments.  Consumers are capable of reading nutrition labels and ingredients and making dietary choices for themselves, and they do not need the FDA or self-appointed nutrition nannies like CSPI to limit the products from which they can legitimately choose.  Although the FDA has articulated policies about adding nutrients to foods and beverages, it has not acted to eliminate the category of nutritionally-enhanced products from the market.  One benefit of limited regulatory resources is prioritization, and instances of actual fraud should take (and generally have taken) enforcement priority. 

The Ackerman court's opinion on express and implied warranties makes it clear that there is no real fraud or misrepresentation in the marketing or packaging of vitaminwater.  The label clearly discloses the product's sugar content.  As such, CSPI should move on to lawsuits that fight actual fraud, rather than trying to co-opt the courts into doing what the FDA to date has refused to do.

To read CSPI Litigation Project Director Steve Gardner's take on the decision, click here.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

This seems to be turning into food and beverage week at Ye Olde Consumer Class Actions Blogge.  First, we had our Tort Twits suing Yoo-hoo out the ying-yang.  And now these two decisions, which demonstrate a judicial willingness -- even on a motion to dismiss -- to employ some common sense and dismiss claims that obviously fail to plead a plausible fraud.

The first decision -- Werberl v. Pepsico, Inc., 2010 WL 2673860 (N.D. Cal. July 2, 2010) -- was covered earlier this week by Sean Wajert over at Mass Tort Defense.  I won't completely rehash the case here, other than to note that Werberl is an excellent example of a jurist who does not feel compelled to check her brain at the door when adjudicating Rule 12 motions.  In Werberl, plaintiff alleged that the packaging for Cap'n Crunch's Crunch Berries cereal -- which is delicious and was a favorite of mine growing up -- is deceptive because the name and the pictures lead one to believe that it has actual berries in it when it does not.  Of course, anyone who has ever seen a box of Crunch Berries knows that this allegation is pure horse puckey.  (As does anyone who has actually tasted the cereal.)

Many judges faced with such a ridiculous theory still might hesitate to dismiss such claims pled under California's pro-plaintiff Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Law.  They might be tempted to allow some discovery, or say the theory presents a jury question.  But not Judge Saundra Brown Armstrong!  She began her analysis by noting that although the question whether a business practice is deceptive is generally a question of fact not suitable for resolution in a motion to dismiss, "where a court can conclude as a matter of law that members of the public are not likely to be deceived by the product packaging, dismissal is appropriate."  Id. at *3.

She then looked to the facts pled in the putative class action to conclude as a matter of law that there was no deception here:

[T[here are no pictures or images of any berries or any other fruit depicted on the Cap'n Crunch cereal box.  Nor are there any representations that the cereal is made with real fruit or is nutritious.  Rather, the Crunch Berries -- which are not fruit -- are described as a "SWEETENED CORN & OAT CEREAL" and shown as brightly-colored balls of cereal that no reasonable consumer would believe are made from real berries. . . . [T]here simply is nothing in the Cap'n Crunch packaging that would lead a reasonable consumer to believe that the brightly-colored cereal balls depicted on the product cover and described as Crunch Berries are, in fact, made or derived from berries or fruit.

Id. at *4.  Accordingly, the court dismissed the UCL, CLRA, and FAL claims.  It also dismissed the intentional misrepresentation claims for lack of a misrepresentation and because any reliance by the consumer to conclude that the cereal had real berries would be unreasonable per se.  The court also dismissed the breach of express and implied warranties as frivolous because there was no express or implied representation on the packaging that Crunch Berries contain real fruit.  The court even refused to grant leave to amend the complaint because no amendment could cure the fact that the packaging was not deceptive as a matter of law.

Judge Armstrong's analysis is an excellent example of a court that -- faced with a motion to dismiss a ridiculous claim -- was not hamstrung by the rules to avoid applying basic common sense to a consumer fraud claim.  We need more judges like that.

The second opinion I wanted to share in today's post was Mason v. The Coca-Cola Co., 2010 WL 2674445 (D.N.J. June 30, 2010).  In Mason, the plaintiffs brought a putative nationwide class action against Coca-Cola alleging that Diet Coke Plus was misleading under federal and state law because "'the term "Plus" connotes a more robust amount of vitamins and minerals in the product when, in fact, that was not the case at all.'"  Id. at *1.

The defendant began by invoking the primary jurisdiction doctrine and federal preemption to dismiss the claims.  The court wasn't buying it.  As for primary jurisdiction, the court concluded that the lawsuit asked the court to do what courts routinely do:  apply federal regulations.  Indeed, the court said that "[a]t its heart, this case calls for the determination of whether Plaintiffs received what they bargained for."  Id. at *2. 

The court also rejected the defendant's express preemption and conflict preemption arguments.  It quickly dispatched the express preemption argument, reasoning that plaintiffs were simply seeking a state law remedy for a violation of federal labeling requirements, and this was not expressly preempted by the Food, Drug and Cosmetics Act.  As for conflict preemption, the defendant argued that the FDA had established a regulation defining use of the term "Plus," and if the state law claim were allowed to proceed, it might result in a conflicting definition.  The court strongly rejected this argument, reasoning:

Were the Court to permit the application of implied conflict preemption in this case, it would turn regulatory definitions such as 21 C.F.R. sec. 101.54(e) into suits of armor capable of immunizing parties who mislead the public from any potential civil liability, even before it is determined whether the party complied with the definition.  Congress could not have intended such a perverse result when it granted the FDA authority to regulate in this area.

Id. at *4.

But once the court moved to an analysis of plaintiffs' causes of action, it applied basic common sense to conclude that plaintiffs had failed to plead consumer fraud.  In analyzing the claim under the New Jersey Consumer Fraud Act, the court noted that plaintiffs must plead:  (1) unlawful conduct, (2) an ascertainable loss, and (3) a causal relationship between the two.  The court began its analysis by observing that although plaintiffs say that the term "Plus" connoted more vitamins and minerals than were actually in the product, the actual amount of added vitamins and minerals were listed on the product itself.  Indeed, a warning letter sent by the FDA to defendant, which was attached to the complaint, indicated that:

the ingredient list includes the following added vitamins and minerals:  magnesium sulfate (declared at 10% of the Daily Value (DV) for magnesium in the Nutrition Facts panel), zinc gluconate (declared at 10% of the DV for zinc), niacinamide (declared at 15% of the DV for niacin), pyridoxine hydrochloride (declared at 15% of the DV for vitamin B6), and cyanocobalamine (declared at 15% of the DV for vitamin B12).

Id. at *6.  In light of these disclosures right on the product, the court held that plaintiffs had failed to allege with particularity what further expectations they had for the product or how it fell short of such expectations.  Thus, they had failed to plead the first element of an NJCFA claim. 

The court held that they also failed to plead the ascertainable loss element of such a claim because they do not plead how what they received was of a lesser value than what they were promised.  They bought a tasty beverage, they drank a tasty beverage.  They don't allege that they paid more for it than other beverages.  And they don't allege that they would not have bought the Diet Coke Plus but for the allegedly fraudulent misrepresentations.  Thus, they failed to plead an ascertainable loss under the NJCFA.  Id. at *6-*7. 

The court held that, for the same reasons, plaintiffs failed to state a claim for negligent or intentional misrepresentation.  Id. at *7.  And it dismissed plaintiffs' unjust enrichment claim because New Jersey does not recognize unjust enrichment as a separate tort cause of action, and where the underlying tort claims fail, the unjust enrichment claim should be dismissed as well.  Id.

Unlike the court in Werberl, the court in Mason gave plaintiffs an opportunity to re-plead their claims.  But given the fact that the added vitamins and minerals were fully disclosed on the Nutrition Facts section of the product label, plaintiffs will have a very difficult time pleading anything that could give rise to a fraud or misrepresentation claim.

Taken together, Werberl and Mason provide strong encouragement for courts to throw out consumer fraud claims where the contents of the food or beverage product are apparent from the product's packaging and labeling.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Law 360 recently reported (subscription required) on another federal decision that dismissed a "diminished value" class action for lack of standing because the named plaintiffs had not actually experienced any problem with their automobiles; rather, they were merely suing for an unmanifested defect.  See Contreras v. Toyota Motor Sales USA, Inc., No. C 09-06024 JSW, Slip op. (N.D. Cal. June 18, 2010) (opinion available at Law360).

In Contreras, plaintiffs sued on behalf of all persons "who own or lease 2009 and 2010 Toyota Corolla, and Toyota Corolla Matrixes and 2009 and 2008 and 2009 Scion xD vehicles with 1.8 liter engines."  Slip op. at 1.  The class excluded anyone who suffered a personal injury.  Plaintiffs sued for alleged violations of California's Consumer Legal Remedies Act ("CLRA") and the Unfair Competition Law ("UCL"), as well as breaches of express and implied warranties,

Toyota had recalled the cars in December 2009 because it discovered that, under certain driving conditions in extremely low temperatures, condensation from the crank case freezes in such a way that it blocks the brake vacuum's suction port, making the brakes much more difficult to apply.  The recall was only for 19 states in which temperatures might get so low as to cause the problem to manifest, but Toyota also sent a service campaign notice to vehicle owners in the other states, informing them of the potential problem and instructing them to get free service on the vehicle if there was any chance it would be driven in those 19 states.  Approximately 57% of the vehicle owners in the warmer states had obtained the free service on their cars.

The district court dismissed plaintiffs' complaint for lack of standing because plaintiffs never experienced a problem with braking themselves, they had received the free service that would prevent it from happening, and they could not plead that they were in imminent danger of the "defect" manifesting.  In doing so, it relied heavily on the Ninth Circuit's decision in Birdsong v. Apple, Inc., 590 F.3d 955 (9th Cir. 2009), in which rejected standing for plaintiffs with an unmanifested defect and rejected the so-called "diminished value" theory of harm -- that the product with a putative defect was worth less than they had paid for it -- because it rested on a hypthetical risk of loss to others that may or may not happen.

Criticizing plaintiffs' complaint, the district court noted:

First, Plaintiffs do not allege that their vehicles have manifested the alleged defect.  Second, setting aside any possible dispute as to the specific conditions that would be necessary for the alleged defect to manifest itself, Plaintiffs have not alleged that it is reasonably likely that they intend to drive their vehicles in the conditions set forth in the Special Service Campaign Notice or in one of the Recall States. . . .  Plaintiffs do not allege that they were forced to replace their vehicles after learning of the alleged defect or that they incurred any out-of-pocket damages.  Finally, Plaintiffs allegation that their vehicles are worth substantially less than they would be without the alleged defect is conclusory and unsupported by any facts.

Slip op. at 9.  Accordingly, the court dismissed the plaintiffs statutory and breach of warranty counts.  Moreover, because the complaint already had been amended once, the court found that amendment would be futile and therefore dismissed the complaint with prejudice.

Contreras is yet another example of the growing body of authority recognizing that litigants lack standing where their product has not malfunctioned.  So-called "diminished value" claims fail to state a warranty or consumer fraud claim.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

It seems to be such a basic proposition:  the statute of limitations for breach of warranty begins running with tender of the goods for delivery.  But it's amazing how often the issue gets litigated, with plaintiffs asserting a discovery rule. 

In Mitchell v. Skyline Homes, the court granted the defendant's motion to dismiss on various warranty and other claims.  Plaintiffs alleged that the "manufactured homes" sold by defendant were defective because they lacked a secondary water barrier.  The defendant asserted the statute of limitations as a defense, noting that plaintiff's mobile home was purchased in 1997, but the action was not brought in court until June 2009.  

The express warranty provided that "manufacturing defects reported to Skyline within 15 months after original retail delivery will be corrected without charge within a reasonable time."  Even if the 15-month period extended the statute of limitations beyond the four years after delivery, it did not reach all the way to 2009.  The court held the express warranty claim was time-barred.

As for the implied warranty claim, the court held that even if the bar to vertical privity could be overcome, the statute only ran from the date of delivery, i.e., from 1997 to 2001.

The court also dismissed the Consumer Legal Remedies Act claim because the product performed properly throughout the express warranty period.

It also dismissed the Unfair Competition Law claim because it was necessarily dependent upon the breach of express warranty claim, which was time-barred.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Loyal reader Fred Burnside at Davis Wright Tremaine has sent along news of two wins his firm received for T-Mobile from the Ninth Circuit.  Both cases involve class action challenges to the defendant passing along charges to customers, specifically charges for the Universal Service Fund and the Regulatory Programs Fee.

In Lowden v. T-Mobile USA Inc., No. 09-35201, Slip op. (9th Cir. May 10, 2010), the court explained that the USF subsidizes telecommunications service for low-income and rural consumers.  The FCC expressly permits companies to recover their mandatory contributions from consumers as line-item charges.

The RPF is charged to carriers to cover government mandates like wireless number pooling, local number portability, and enhanced 911. 

In Lowden, plaintiffs argued that passing along these charges to consumers on the bill was a breach of contract and a violation of the State of Washington's Consumer Protection Act.  The district court had held that plaintiffs lacked standing to bring these claims.  The Ninth Circuit declined to address the standing issue, instead holding that plaintiffs had failed to state a claim under Rule 12(b)(6).  It reasoned that the carrier's contracts "adequately disclosed that it would pass along regulatory fees such as the USF fee and the RPF to its customers.  Moreover, until 2005 the FCC expressly excluded wireless providers from the requirement that 'charges contained on telephone bills must be accompanied by a brief, clear, non-misleading, plain language description of the service or services rendered.'"  Slip op. at 4.

In Janda v. T-Mobile USA, Inc., No. 09-15770, Slip op. (9th Cir. May 10, 2010), two California residents brought the same claim, asserting violations of California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, as well as breach of contract.  The Ninth Circuit was not buying plaintiffs' claim here, either. 

The court held that the complaint failed to allege above a speculative level that any advertising was likely to deceive members of the public.  Moreover, the service agreements and terms and conditions of sale were clear:  regulatory charges could be recovered.  The court considered each of the three prongs of the UCL, ultimately concluding that no UCL violation was adequately alleged.  The court also noted that plaintiffs failed to give proper pre-suit notice under the CLRA, and held that plaintiffs had not alleged a representation "likely to deceive a reasonable consumer."  Slip op. at 7.

The Ninth Circuit also dismissed the breach of contract for failing to meet the one-year statute of limitations contained in the agreement.  The court explained that "[e]ven if a contract is one of adhesion, a provision shortening the applicable statute of limitations is enforceable so long as the limitations period is substantively reasonable."  Slip op. at 8.

Congrats, Fred, on two opinions that use the clarity of contractual disclosures to dismiss putative consumer fraud class actions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The last post involved a case that refused to fully enforce a disclaimer.  This one is the polar opposite:  it enforces contractual provisions to prevent a class action.

In Leong v. Square Enix of Am. Holdings, Inc., 2010 WL 1641364 (C.D. Cal. Apr. 20, 2010), the defendant was the developer of the online role-playing game "Final Fantasy XI Online."  To play the game, one must buy the software, create an online user's account, pay a monthly subscription fee, and buy one or more game characters that explore the game's virtual world on various "quests" and collect items. 

As you might imagine of role-playing gamers, they become pretty attached to the characters and items they collect.  As you also might imagine, a number of them have trouble paying their monthly subscription fees because they really ought to get a job instead of playing role playing games all day.  The user's agreement that comes in the package with the software takes this into account, providing that the failure to pay the monthly subscription fee for three months will result in the deletion of the user's account and the characters and items they have collected.  Deadbeat role-playing gamers don't like this, so they filed a putative consumer fraud class action alleging violations of California's False Advertising Law, the Consumer Legal Remedies Act, the Unfair Competition Law, section 1671 of the California Civil Code, and unjust enrichment.

The deadbeats argued that despite the fact that they must accept the terms of the user's agreement before establishing an online account, they should not be bound by the user's agreement because it was contained within the shrink-wrapped software package and its "onerous" terms were not disclosed prior to sale.  Indeed, they argued that because retailers would not take a return of the gaming software once the package had been unwrapped, they had been the victims of fraudulent concealment. 

The problem was, according to the court, none of the named plaintiffs had actually attempted to return the software, and each of them proceeded to open online accounts by accepting the terms and conditions of the user's agreement after they had opened the software and presumably read the user's agreement.  Accordingly, the court held, they had no standing to sue on fraud-based claims like the FAL and the CLRA, because they could not establish their "individual reliance upon the nondislcosures in making their initial purchasing decision."  Id. at *3.

As for the section 1671 claim, that provision generally prohibits liquidated damages for breach of contract.  Plaintiffs argued that the forfeiture of their accounts and characters was the forfeiture of property without any relation to compensating Defendant for the breach of contract.  The court rejected this approach because the user's agreement clearly states that users do not own the game data, like their accounts, characters, and accumulated items.  Thus, plaintiffs did not forfeit any of their property, and there was no illegal penalty.  Id. at *6.

The court also dismissed the plaintiffs' UCL claims.  Their claim under the UCL's illegality prong was premised on violation of section 1671, so it was easily dismissed.  Their claim under the unfairness prong was that the forfeiture of game characters -- and the requirement of payment of a premium for reinstatement -- was "immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers."  The court disagreed:  "Defendants provide a for-profit service to users, and Plaintiffs fail to provide any facts that suggest they were in any way coerced or forced to spend any money at all by Defendants."  Id. at *7.  The fraud prong of their UCL claim was barred for lack of standing, the court concluded, citing In re Tobacco II Cases.

Plaintiffs also asserted a claim of unconscionability under the CLRA, arguing that the user agreement is "'hidden in small print at the end of a 144-page manual'" and that the forfeiture clause "'shock[s] the conscience.'"  Once again, the court disagreed:

However, the Court does not find the revocation of accounts of non-paying users sufficiently shocking.  Indeed, as argued Defendants, "[i]f such a clause were unconscionable, Square Enix and all of its competitors would be forced to make their games available in perpetuity, or face class action suits for loss of data."

Id. at *10.

The decision in Leong is a strong example of how clearly-worded contractual provisions can form the basis of a motion to dismiss on the pleadings.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The Fourth District of California's Court of Appeal recently issued an important opinion affirming a demurrer on a UCL claim, holding that the "actual reliance" requirement of In re Tobacco II applies to claims brought under the "unlawful" prong of the UCL where they are grounded in deception or misrepresentation.

In Durrell v. Sharp Healthcare, No. D054261, Slip op. (Cal. App. -- 4th Dist. Apr. 19, 2010), the plaintiff had been admitted to the defendant's hospital five times for treatment.  Plaintiff alleged that Sharp billed uninsured patients wildly inflated rates called "Chargemaster rates" for services, while it billed patients covered by Medicare and private insurance substantially less.  For example, plaintiff alleged, Sharp allegedly charged uninsured patients 412% of the Medicare reimbursement rates for typical reimbursements.  Slip op. at 4.  Plaintiff alleged that this violated the Agreement for Services, which only obligates a patient to pay Sharp's "usual and customary charges for . . . services."  Slip op. at 2-3.  Plaintiff asserted causes of action under the UCL, the Consumer Legal Remedies Act, breach of contract, breach of the duty of good faith and fair dealing, and unjust enrichment.  The trial court had granted the defendant's demurrer, finding primarily that the Second Amended Complaint ("SAC") failed to adequately allege causation.

The court in Durrell traced the history of Proposition 64, which limited standing to sue to those who suffered an injury in fact as a result of the defendant's challenged conduct.  The purpose of this restriction "'was unequivocally to narrow the category of persons who could sue businesses under the UCL."  Slip op. at 8.  This was done to eliminate incentives that encouraged the filing of frivolous lawsuits that clog California courts and threaten the very survival of small businesses. 

The question, of course, is what does the phrase "as a result of" mean in the context of each of the three prongs of the UCL.  (The UCL precludes fraud, "unlawful" conduct, and "unfair" conduct.  Plaintiff had dropped his claim under the fraud prong of the UCL on appeal, leaving only "unlawful" and "unfair" conduct.)

Last summer, in a seminal opinion, the California Supreme Court determined that -- within the context of the UCL's "fraud" prong -- the requirement that injury be "as a result of" the fraudulent conduct actually meant that the plaintiff must have actually relied on the misstatement; no lesser standard would satisfy the purpose of Prop. 64.  See Slip op. at 12-13 (discussing In re Tobacco II).

But what did "as a result of" mean here, where the plaintiff alleged that the defendant violated the "unlawful" prong of the UCL by making false promises to provide affordable health care and instead charging unreasonable and inflated prices"?  Slip op. at 12.

The Court of Appeal held that it meant "actual reliance," just as in In re Tobacco II:

[W]e conclude the reasoning of Tobacco II applies equally to the "unlawful" prong of the UCL when, as here, the predicate unlawfulness is misrepresentation and deception.  A consumer's burden of pleading causation in a UCL action should hinge on the nature of the alleged wrongdoing rather than the specific prong of the UCL the consumer invokes.  This is a case in which the "concept of reliance" unequivocally applies, and omitting an actual reliance requirement when the defendant's alleged misrepresentation has not deceived the plaintiff "would blunt Proposition 64's intended reforms."

Id. at 14 (citations omitted).

Because the complaint did not allege that the plaintiff relied on Sharp's website or the language in the Agreement for Services, there simply was no causation credibly pled, making the trial court's demurrer proper.

The court proceeded to analyze the "unfair" prong of the UCL.  Plaintiffs said that his allegation that Sharp's conduct was "unfair, immoral, unethical, oppressive and unscrupulous" satisfied the UCL.  The Court of Appeal disagreed, holding that this was a "vague test of unfairness" that must be rejected.  The court outlined the debate in California law regarding whether Cel-Tech applies in consumer cases or not, and ultimately concluded that a complaint that is not "tethered to any underlying constitutional, statutory or regulatory provision, or . . . threatens an incipient violation of antitrust law" cannot satisfy the "unfairness" prong of the UCL in a consumer fraud case.

The court sustained the demurrer on the CLRA count for lack of causation:  the complaint "does not allege Durell relied on any representation by Sharp in seeking or accepting treatment at its facility."  Slip op. at 20.

The breach of contract and breach of implied covenant counts failed because plaintiff failed to plead that he performed his allegations under the contract.  Rather, he was trying to escape paying even the reasonable value for the services he received.  Id. at 20-24.  And the unjust enrichment count was dismissed because the complaint pleads the existence of express contracts, which must govern here. 

Durell is an important opinion demonstrating the restrictive standard by which California courts will judge standing in UCL claims brought under the "unlawful" and "unfair" prongs of the UCL in the wake of Proposition 64.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

When I teach Product Safety and Liability, I often find that one of the most difficult questions to answer is who -- or really, what branch of government -- should be making a decision on a particular issue.  Institutionally, courts have inherent limitations.  They work within the confines of actual disputes between individuals; they are not legislators and have no broad factfinding powers.  They often have limited capabilities when it comes to questions of science and require expert testimony.  And when the causes of action at issue allow for a jury trial, a group of individuals who are "scientifically challenged" may be the ones actually charged with finding the facts. 

Regulatory agencies, too, have their limitations.  But often when the question is one of pure science, I often find myself advocating that the question is better left to regulators to decide.  You can make that argument in a number of ways.  For example, you may in certain circumstances be able to argue that Congress itself made that determination by preempting state law claims.  But where preemption is not an option, one can appeal to the judge's inherent discretion under doctrines such as equitable abstention or primary jurisdiction. 

Usually, my colleagues give such arguments about a snowball's chance in Hell of prevailing.  But a decision reported by Law360 today demonstrates that climate change occasionally affects Hades as well.

In Gordon v. Church & Dwight Co., No. C 09-5585 PJH, Slip op. (N.D. Cal. Apr. 2, 2010) (Law360 subscription required), plaintiffs sued the makers of Trojan-Enz condoms, alleging that the spermicidal lubricant Nonoxynol-9 (which is used in some condoms) can increase the risk of HIV infection.  Plaintiffs sued to impose warnings on the products under California's False Advertising Law, its Unfair Competition Law, and its Consumer Legal Remedies Act. 

As U.S. District Judge Phyllis J. Hamilton explained, the Food and Drug Administration has been considering the issue of whether to alter the FDA-required warnings on N-9 lubricated condoms to account address this issue.  Slip op. at 3.  Indeed, FDA already has required that labeling for over-the-counter vaginal contraceptives containing N-9 include the following warnings:

Studies have raised safety concerns that products containing the spermicide nonoxynol 9 can irritate the vagina and rectum.  Sometimes this irritation has no symptoms.  This irritation may increase the risk of getting HIV/AIDS from an infected partner.

. . .

Use a latex condom without nonoxynol 9 if you or your sex partner has HIV/AIDS, multiple sex partners, or other HIV risk factors.

73 Fed. Reg. 66522 at n.1.

Judge Hamilton ultimately concluded that it was the FDA -- rather than a court -- that should be making the determination at issue in plaintiffs' suit, and thus she granted the defendant's motion for dismissal without prejudice under the "primary jurisdiction" doctrine.  As Judge Hamilton explained, primary jurisdiction is a prudential doctrine in which a court may defer initial decisionmaking where a regulatory agency is considering the question.  Courts apply 4 factors in determining whether to apply the doctrine:  "'(1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration.'"  Slip op. at 2 (citation omitted).

The court noted that FDA has exerted regulatory authority over condoms as medical devices, including regulating the substance of the warnings, instructions, and statements of use.  Judge Hamilton concluded that the primary jurisdiction doctrine was appropriate here:

The issue of medical device labeling requires expertise as well as uniformity in administration.  The plaintiffs' claims involve a technical area over which the FDA has more expertise than the courts; and, while the claims are based on state law, their effect is to challenge the wording in the warnings that are required to be included in the latex condom packaging pursuant to federal law.

The court notes in particular that the FDA has stated that it is still considering public comments and other data in connection with warnings similar to those that plaintiffs seek to have the court impose on C&D.  Thus, this issue remains under review.  It would be inappropriate for this court to assume the FDA's regulatory role, and to interpret scientific studies or other evidence to determine whether the labeling of the N9 latex condoms should be changed to include an additional warning . . .

Slip op. at 3.

The Gordon decision is an excellent example of a court taking stock of its inherent capabilities and limitations and deferring to a regulatory agency to make a decision in the first instance where the agency is better able than the court to do so.  It remains to be seen how influential Judge Hamilton's decision will be in other courts.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On March 25, U.S. District judge Jeffrey White dismissed a lawsuit brought by the litigation project at the Center for Science in the Public Interest ("CSPI").  See Center for Science in the Public Interest v. Bayer Corporation, et al., No. C 09-05379, Slip op. (N.D. Ca. Mar. 25, 2010) (Law360 subscription required to view pdf).  CSPI had sued Bayer over its One a Day Men's Multivitamins, which purportedly contain selenium and which Bayer allegedly has been marketing as promoting prostate health.  CSPI sued for injunctive relief under California's Unfair Competition Law and its Consumer Legal Remedies Act.

The district court granted Bayer's motion to dismiss, holding that CSPI lacked standing to sue in a representative capacity on behalf of its members, and it had not suffered an injury itself that gave rise to standing as an institution.  The UCL, as we have noted many times on this blog, was amended by Proposition 64 to limit standing to sue only to those people who have suffered an injury in fact and lost money or property as a result of the allegedly deceptive conduct.  CSPI did not meet this standard, the court held.

Similarly, the CLRA applies only to consumers of services for personal, family, or household purposes.  Again, that is not CSPI.

The court analyzed CSPI's claim of institutional standing, in which it claimed to have suffered injury from Bayer's representations about its vitamins.  The court rejected any allegation of injury to CSPI, noting:  "[T]he allegations as currently pled indicate that, in reaction to Bayer's alleged misrepresentations, CSPI as an organization reacted by disseminating information about nutritional science and by educating its members.  This conduct, rather than causing CSPI to incur injury, fulfilled the espoused purpose of the organization.  Accordingly, CSPI fails to allege any property loss or any interference with its institutional activities or ability to operate."  Slip op. at 6.  The court granted the motion to dismiss the UCL claim and the claim for declaratory relief with leave to amend, and granted dismissal of the CLRA claim with prejudice. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Well, this is a little awkward.  I mean, it's the New Year . . . Christmas is over . . . and I didn't get you anything.  I got a Nano and a couple of gift cards for iTunes.  But what to get you . . .

I know!  A boxed set of three decisions involving Apple, circa December 2009!

In Hovespian v. Apple, Inc., 2009 WL 5069144 (N.D. Cal. Dec. 17, 2009), the court granted Apple's motion to dismiss and its motion to strike class allegations.  (It was a good holiday for Apple, too, apparently.)  Plaintiff -- a Florida resident -- had brought a class action in California federal court, purporting to represent all people who bought iMAC G5 personal computers.  Plaintiff alleged that the display screen was prone to developing vertical lines that ultimately rendered the screen unusable, that Apple knew of this fact and concealed it, refusing to repair the machines because the lines developed after the one year express warranty had run on the machine.  (Plaintiff bought his Mac in October 2006, but the lines did not appear until March 2008.)  Plaintiff's Second Amended Complaint ("SAC") pled causes of action under California's Consumer Legal Remedies Act, the Unfair Competition Law, for fraudulent omission, for unjust enrichment, and for a declaration that the one-year warranty limitation was unenforceable.

The court dismissed plaintiff's CLRA claim without leave to amend because it failed to state with particularity -- as required by Rule 9(b) -- "when and where Apple made an affirmative misrepresentation, if any, that contradicts its alleged omissions."  Id. at *3.  The complaint contained only generalized allegations that Apple had exclusive knowledge of the problem and concealed it.  This was insufficient -- without affirmative statements that contradict the omitted information -- to state a CLRA claim.

The court also granted dismissal of the UCL claim without leave to amend.  Citing to Clemens v. DaimlerChrysler Corp., 534 F.3d 1017 (9th Cir. 2008), the court held that an alleged defect that may shorten the life span of a product that performs as warranted throughout the express warranty term does not cause a substantial injury to consumers and cannot serve as the basis for a UCL claim.

The court granted dismissal of the common law fraudulent omission claim for the same reason it dismissed the CLRA claim, but it made the dismissal without prejudice to give plaintiff leave to re-plead to elaborate on what duty to speak Apple had that it allegedly had violated.

The court also dismissed the unjust enrichment claim with prejudice, holding that an unjust enrichment claim that is premised on the same course of conduct that underlies the statutory and common law tort claims cannot stand alone as an independent claim for relief.  Id. at *5.  It fails for the same reason the other claims fail.

The court also granted Apple's motion to strike the class allegations, citing its authority under Federal Rules of Civil Procedure 23(c)(1)(A), 23(d)(1)(D), and 12(f).  Plaintiff defined the class as all persons who purchased iMAC G5 personal computers from Defendant Apple, Inc.  The court held that the complaint failed to state a valid class action claim against Apple:

First, the class is not ascertainable because it includes members who have not experienced any problems with their iMAC display screens.  Such members have no injury and no standing to sue.  Second, the class is not maintainable under Rule 23(b)(3) because it includes members who can have no claim against Apple.  For example, the putative class includes members who (a) did not purchase the particular iMac model or the type of iMac screen that Hovespian alleges is defective and (b) experienced the alleged defect after their warranty expired.  Finally, the class is not maintainable under Rule 23(b)(1) or Rule 23(b)(2).  These types of class actions are not suitable for actions where recovery of money damages is the primary relief sought by the plaintiff.

Id. at *6.  The court struck the class allegations without prejudice, thus allowing amendment after plaintiff amended his fraudulent concealment claim.

The second case in our Apple boxed set was well reported on:  Birdsong v. Apple, Inc., 2009 WL 5125776 (9th Cir. Dec. 30, 2009).  Birdsong involved a class action challenge to Apple's iPod based on the potential for hearing loss.  Plaintiffs alleged that the iPod was defective in that it could achieve sounds of 115 decibels, the long battery life allows those sounds to be played over long periods of time, the ear buds are designed to be placed deep in the ears (rather than over the ears), the ear buds lack noise cancelling properties, and the iPod lacks a volume meter that tells users they are listening at dangerous levels. 

Apple includes this warning with each iPod:

Warning:  Permanent hearing loss may occur if earphones or headphones are used at high volume.  You can adapt over time to a higher volume of sound, which may sound normal but can be damaging to your hearing.  Set your iPod's volume to a safe level before that happens.  If you experience ringing in your ears, reduce the volume or discontinue use of your iPod.

Id. at *1.

The Ninth Circuit affirmed dismissal of the implied warranty of merchantability count, observing that nothing in the complaint says the iPod is defective for its ordinary purpose of listening to music.  Rather, the statements in the complaint merely suggest that users have the option of using the iPod in a risky manner, but it does not suggest the product lacks any minimum level of quality.  Where, as here, the complaint merely seeks additional features to make the product safer, it fails to allege the sort of lack of baseline utility that would support a breach of the implied warranty of merchantability claim.  Id. at *2-*3.

Plaintiffs abandoned the breach of express warranty and breach of the implied warranty of fitness for a particular purpose claims on appeal. 

The Ninth Circuit also affirmed dismissal of the Unfair Competition Law claim because they failed to allege the requisite injury to have standing to bring the claim.  To begin with, the complaints did not allege that the plaintiffs themselves ever suffered hearing loss or were at risk of imminent hearing loss.  Nor did they allege that plaintiffs themselves ever used their iPods in a way that exposed them to a risk of hearing loss.  Rather, they cast their allegations as potential impacts on unidentified users.  This was insufficient to meet the injury requirement for Article III standing.  Id. at *4.

The court also held that plaintiffs failed to allege an economic harm (lost money or property) that would confer standing to sue under the UCL because "the alleged loss in value does not constitute a distinct and palpable injury that is actual or imminent because it rests on a hypothetical risk of hearing loss to other consumers who may or may not choose to use their iPods in a risky manner."  Id. at *5.  And the court rejected plaintiffs' "benefit of the bargain" theory, holding that the "plaintiffs' alleged injury in fact is premised on the loss of a 'safety' benefit that was not part of the bargain to begin with."  Id.

The third case in our boxed set is a lump of coal:  Owens v. Apple, Inc., 2009 WL 5126940 (S.D. Ill. Dec. 21, 2009).  Plaintiffs brought a putative nationwide class action, alleging that Apple breached a contract and violated various consumer fraud statutes when it sold gift cards to people with the representation that songs cost $.99 a song, and then on April 7, 2009 raised the price of certain songs to $1.29.

Apple moved to dismiss, asserting a privity defense to the breach of contract claims.  The court rejected it outright, where the gift card at issue was marketed by Apple and could be used only on Apple's website. 

The court also held that there was nothing vague about the representation:  "Songs are 99 cents, and videos start at $1.99."  The complaint alleged plaintiffs relied on the price guarantee as part of the basis of the bargain, and that plaintiffs were damaged as a result of the price increase.  The court refused to dismiss the breach of contract counts.

The court also refused to dismiss the consumer fraud counts.  Apple had argued that the statement "Songs are 99 cents," did not mean that the price of all songs was 99 cents, but rather that some songs were 99 cents.  Plaintiffs argued that this interpretation was a "slippery slope" that would allow Apple to market its gift cards in the same way so long as one song was 99 cents.  The court refused to find that the phrase was not deceptive as a matter of law.

So that's it.  A boxed set of Apple decisions for you.  If they don't fit and you want to exchange them for a sweater vest I received this Christmas, just let me know.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Yesterday Merck won an important appeal in a California Vioxx class action in which plaintiffs had argued that the California Supreme Court's recent decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009) required the reversal of a trial court's refusal to certify a class action under California's Unfair Competition Law.  See In re Vioxx Class Cases, No. B216521 (Cal. App. -- 2d Dist. Dec. 15, 2009).  The Vioxx Class Cases decision is important because it recognizes that although Tobacco II imposed a new understanding of the UCL's standing requirement, it did not fundamentally alter the other elements of the statute, and a proposed class can still fail the class action prerequisites where the relief requested requires individualized determinations and where the named plaintiffs' claims are not typical of those of other class members.

Vioxx was a Non-Steroidal Anti-Inflammatory Drug ("NSAID") that was used to treat pain until it was removed from the market in 2004.  Unlike aspirin or naproxen, which are NSAIDs that can cause gastrointestinal complications, Vioxx was a "COX-2" inhibitor that was expressly designed to avoid the gastrointestinal effects inherent in NSAIDs like naproxen.  Vioxx was removed from the market after studies determined that it presented a risk of adverse cardiovascular effects.

Plaintiffs brought a statewide class action under the UCL, the False Advertising Act, the Consumer Legal Remedies Act, and common law unjust enrichment.  They sought classwide restitution of the difference in price between what they paid for Vioxx and what they would have paid for a safer, equally effective, pain reliever.  Their economist calculated that price differential to be $8.3 billion nationally, but did not break it down to what allegedly was owed to California purchasers.

Plaintiffs' theory of liability was simple:  Merck knew its drug presented cardiovascular risks, but concealed that fact and marketed Vioxx as safe to the public and to doctors.  Slip op. at 7.  As a result, they said, they were entitled to classwide restitution of the difference between the price of Vioxx and the price of generic naproxen.

Interestingly, in discovery, plaintiffs would not say that they would have taken naproxen instead of Vioxx.  Rather, they would only say that they would not have taken Vioxx if they had known the risks, and that the drug they would have used instead was irrelevant.  Slip op. at 6.

In the trial court, Merck had established that roughly 16,500 people in the US died from gastrointestinal bleeds -- the most common NSAID complication -- each year, and over 100,000 were hospitalized.  It presented medical testimony that for patients with a history of serious gastrointestinal problems who could not tolerate traditional NSAIDs, COX-2 inhibitors like Vioxx were the only appropriate option.  Further, it presented evidence from third party payors -- who were included in the class of purchasers, even though the named plaintiffs were all individuals -- establishing that some third party payors' Pharmaceutical and Therapeutics committees had studied the risks of Vioxx thoroughly and only approved the drug for use with patients who had a history of gastrointestinal disease and had first tried one or two traditional NSAIDs without success.  The third party payors' records also established that when Vioxx was removed from the market, most patients did not switch to generic NSAIDs like naproxen, but rather switched to another branded COX-2 inhibitor with a price comparable to Vioxx.

Merck also established in the trial court that doctors apply their clinical judgment to each patient's unique situation in choosing which pain medicine to prescribe, looking at eight different factors.  Merck also established that doctors rely on different sources of information, with some even rejecting out of hand research the company provides.

On appeal, plaintiffs challenged three conclusions of the trial court.  First, they challenged the trial court's conclusion that the individual plaintiffs' claims were not typical of the claims of third party payors.  Second, they said the trial court erred in concluding that individual issues of reliance barred a class action.  And third, they urged that their method of calculating damages was subject to common, class-wide proof, making classwide restitution appropriate.

Typicality and Third Party Payors

Plaintiffs argued that the individual plaintiffs could represent the interests of the third party payors -- like union health benefit plans -- because if an individual relied on Merck's alleged misrepresentations to buy Vioxx, then the third party payor who paid for most of that prescription should be entitled to recover, too.  The Court of Appeal held that the flaw in this analysis is that it treats the third party payor as a passive entity that pays without having any say in what is prescribed.  But the evidence showed that, at least for some large third party payors, their Pharmaceutical and Therapeutics committees conducted literature reviews and studies, and made their own decisions about what they were going to pay for.  As a result, evidence about what alleged misrepresentations the individuals received or relied upon could not apply to third party payors, and the court could not presume reliance across all third party payors based on any individual's reliance.  Slip op. at 21.  Indeed, for third party payors who only paid for Vioxx where there was a history of gastrointestinal problems and the patient could not tolerate other NSAIDs, every penny it paid for Vioxx was for a patient who benefited from the prescription.  Id. at 22.  Accordingly, the individuals' claims were not typical of the third party payors.

Individual Issues of Reliance Predominate the CLRA Claim

California's Consumer Legal Remedies Act requires some form of causation between the unlawful act and the consumer's damages:  it gives a cause of action to "[a]ny consumer who suffers any damage as a result of the use or employment" of an unlawful act.  Cal. Civ. Code sec. 1780(a) (emphasis added).  Some California cases have held that an "inference of reliance" may arise for the class where a material misrepresentation has been made to the whole class.  But "if the issue of materiality or reliance is a matter that would vary from consumer to consumer, the issue is not subject to common proof, and the action is not properly certified as a class action."  Slip op. at 16.

Plaintiffs suggested that hiding an increased risk of death from cardiovascular complications is about as material as a misrepresentation can get, and that reliance should be inferred to the whole class for purposes of the CLRA.  But the Court of Appeal rejected this notion for four reasons.

First, Vioxx did not present an increased risk of death for all patients, because there were patients with gastrointestinal problems who would have been more likely to die from complications with traditional NSAIDs like naproxen.  Second, the record evidence reflected that there were patients who would still take Vioxx if it were on the market today, and physicians who would still prescribe it.  Thus, for some subset of the class, the cardiovascular risks were not material to their decision whether to take the medicine.  Third, the differences in how doctors study and evaluate the risks of medicines prevented a classwide inference of materiality.  And fourth, the patient-specific factors that doctors evaluate in prescribing a pain medicine also made a presumption of materiality not viable.  For example, a doctor might downplay the clotting risk of Vioxx for a patient already receiving a blood thinner like Coumadin.  Slip op. at 24. 

Individual Issues Regarding Injury and Restitution Predominate the UCL and FAA Claims

The Court of Appeal noted that although the UCL liberalizes the standards for finding liability, it narrowly prescribes the remedies available under the statute:  injunctive relief and restitution.  There was no need for injunctive relief, since the product had been pulled from the market.  So the question was one of restitution.  Plaintiffs' economist proposed comparing the price of Vioxx with the price of generic naproxen, using the difference as the amount of restitution. 

But the Court of Appeal concluded that this approach could not be applied to the class as a whole, because there was substantial record evidence that after Vioxx was withdrawn from the market, most Vioxx patients switched to other similarly-priced brand-name COX-2 inhibitors, not generic naproxen.  Plaintiffs argued that adjudicating the validity of naproxen as a comparison improperly went to the merits of the action, but the Court of Appeal said no.  Rather, it went to whether a "measurable amount" of restitution could be proven on a classwide basis.  The court held that it could not, and that class members thus would have to individually establish the appropriate comparator medicine, and then whether he suffered an injury.  This was a patient-specific issue, the court held, "incorporating the patient's medical history, treatment needs, and drug interactions."

Dicta on the Class Definition

The Court of Appeal was highly critical of the plaintiffs' class definition, which included "all individuals or entities in California who . . . paid some or all of the purchase price for the prescription drug Vioxx."  Slip op. at 6-7.  Besides improperly lumping individuals and third party payors together, the Court of Appeal also was clearly troubled that there was no carve-out for people who suffered physical injuries (slip op. at 5-6, n.4), thereby presenting problems of claim-splitting.  The court said the class definition was overbroad, and that those with physical injuries "should not be bound in an action pursuing only economic damages for the price of Vioxx."  Slip op. at 20, n.16.  Moreover, the class definition also was overbroad because it included those with flat co-payment obligations who would have paid the same amount of co-payment regardless of what drug was applied; they would have suffered no injury, and thus should not be in the class.  Id. 

Moreover, given the fact that -- as the Court of Appeal noted -- many of the class members actually derived benefit from Vioxx's lack of gastrointestinal effects, I would argue that the class definition also should have been required to exclude those people from the class.

The decision in Vioxx Class Cases is an important reminder that the elements of the causes of action for UCL, CLRA, FAA and unjust enrichment claims in California provide important defenses to class certification.  Just because a UCL claim may survive a demurrer does not mean that it can be tried on a classwide basis.  Defendants would be wise to follow Merck's lead and develop strong factual bases for why classwide presumptions are not viable and individual proof of injury should be required.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Despite conventional wisdom, cruises aren't for everyone.  Roger and Vivian Wang took a two-week European cruise with their two daughters in 2005, and they ended up bringing a class action against Princess Cruise Lines over it.  Their complaint, in a nutshell, was that the cruise line allegedly overcharged for shore excursions, and the Wangs sought to represent a class of "all California residents who were passengers on cruises operated by petitioner who paid prices for shore excursions that were 'in excess of the shore excursion operator's actual price.'"

The Wangs pled five causes of action, including violations of California's Unfair Competition Law, False Advertising Act, and Consumer Legal Remedies Act, as well as common law fraud and negligent misrepresentation.  The trial court granted summary judgment on the two common law claims because the Wangs did not rely upon any alleged misrepresentations made by the defendant.  But it refused to grant summary judgment on the statutory claims, holding that such claims do not require plaintiffs to plead or prove reliance.

This week the California Court of Appeal reversed, holding that the statutory claims should have been dismissed for lack of reliance.  See Princess Cruise Lines, Ltd. v. Superior Court, 2009 WL 3747211 (Nov. 10, 2009).

The evidence on lack of reliance was clear.  Neither of the Wangs had spoken with the defendant prior to purchasing the cruise, nor had they read any of defendant's materials.  Moreover, Ms. Wang had told her travel agent that she wanted to go on the shore excursions whatever they cost.  Thus, not only had the plaintiffs not received any alleged misrepresentations about the price of the shore excursions from defendant, but even if they had, they would not have relied upon them in making the decision to take the shore excursions.

The Court of Appeal looked to the California Supreme Court's recent decision in In re Tobacco II, 46 Cal. 4th 298 (2009), which held that although absent class members do not have to meet the standing requirements imposed on the Unfair Competition Law by Proposition 64, named class representatives do.  As the Court of Appeal in Princess Cruise Lines explained, the Tobacco II decision was clear that named plaintiffs asserting a misrepresentation theory under the UCL must demonstrate actual reliance on the allegedly false or misleading statements.  2009 WL 3747211 at *4.  Because the Wangs had no contact with the defendant, did not read its literature, and based their decision to take the shore excursions on reasons other than representations, "there is no reason to delve into the contention that what is at issue here is a prolonged advertising campaign and that the Wangs do not have to show individualized reliance on specific misrepresentations."  Id. at *5.

The Court of Appeal also used the Tobacco II court's analysis of the phrase "as a result" to conclude that the CLRA also requires proof of actual reliance.  Id. at *7.  (The CLRA grants a cause of action to a consumer "who suffers any damage as a result of the use" of a proscribed act.)

Accordingly, the Court of Appeal held that the trial court should have granted summary judgment not just on the common law claims, but also on each of the statutory claims, for plaintiffs' failure to prove actual reliance.  This decision is an important application of the new standard articulated by the California Supreme Court in In re Tobacco II, and we hope to see more decisions like it in the coming months.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As consumer fraud claims go, the high fructose corn syrup ("HFCS") claims really are scraping the bottom of the barrel.  Some activists and class action lawyers attempt to blame HFCS for the so-called "obesity epidemic," but even the activist group the Center for Science in the Public Interest has counseled that this is an "urban myth" and that "[t]here isn't a shred of evidence that HFCS is any more harmful (or healthier) than sugar."

That is why it was so satisfying to see a federal court recently use the recent U.S. Supreme Court decision in Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) to dismiss (without prejudice) an HFCS class action brought under California's Unfair Competition Law, False Advertising Act, and Consumer Legal Remedies Act.  See Wright v. General Mills, Inc., Civ. A. No. 08cv1532 L(NLS), Slip op. (S.D. Cal. Sept. 30, 2009).

In Wright, plaintiffs alleged that the defendant had defrauded the public by using the term "100% Natural" on its Nature Valley crunchy granola bars and chewy trail mix bars at a time in the past when they had contained HFCS.  Applying Iqbal, the court held that the following allegation from the complaint was too conclusory and speculative to meet the Rule 8 pleading standard:

As a direct result of its misleading, deceptive, untrue advertising and its unlawful, unfair and fraudulent business practices related to the "100% Natural" products listed above, Defendant caused Plaintiff and other members of the class to purchase, purchase more of, or pay more for, these Nature Valley products.

Slip op. at 8.  The plaintiff failed to plead facts supporting the elements of her statutory claims and, to the extent that she alleged fraud, failed to meet the requirements of Federal Rule of Civil Procedure 9(b) that she aver "'the who, what, when, where, and how' of the misconduct charged."  Slip op. at 9.  The court, however, gave plaintiff leave to replead.

The court also held that plaintiff's claim for injunctive relief failed because the defendant already had stopped using HFCS in its Nature Valley products and there were no facts pled indicating that a recurrence of the use of HFCS was likely.  Slip op. at 8.  Again, plaintiff was given leave to replead.

Interestingly, the defendant's use of the term "natural" was perfectly consistent with federal law.  As the court noted, "[t]he FDA follows a policy of not taking enforcement action charging that a product labeled as 'natural' is misbranded, as long as the product has no 'added color, synthetic substances, and flavors.'"  Slip op at 5 (citation omitted).  HFCS is not synthetic, of course.  Rather, it is made from corn.

Nevertheless, the court denied the defendant's motion to dismiss based on federal preemption.  In doing so, the court relied, in large part, on the savings clause in the Nutrition Labeling and Education Act of 1990:  "Congress stated that '[t]he [NLEA] shall not be construed to preempt any provision of State law, unless such provision is expressly preempted under section 403A of the Federal Food, Drug, and Cosmetic Act.'"  Slip op. at 3 (citation omitted).  The court reasoned that the inclusion of this clause negated any intention to occupy the field of food labeling.  Id. at 4.  The court also rejected the defendant's conflict preemption argument, finding no conflict where the FDA has deferred taking action to specifically define the term "natural."  Id.  The defendant also had asserted the defense of primary jurisdiction, asking the court to stay proceedings pending action by the FDA.  But the court concluded that the issue did not meet the criteria for invoking this prudential doctrine.

Although the court in Wright gave plaintiffs another bite at the apple, it remains to be seen whether they can truthfully plead their statutory and fraud claims with the specificity required by Iqbal.

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link

In Wilson v. Hewlett-Packard Co., 2009 WL 3021240 (N.D. Cal. Sept. 17, 2009), the court packed a lot of legal issues into a short opinion.

The plaintiff brought a putative class action, claiming that HP's laptop computers have a defect in the power jack's attachment to the motherboard that causes the solder connection to be interrupted, resulting in the ultimate failure of the laptops.  Initially, plaintiff brought the putative class action in state court alleging that an "abnormally high" number of such laptops were defective, and representing that the individual class members' claims were under $75,000 and that the aggregate liability was under $5 million.  Subsequently, they amended the complaint to allege that all HP laptops of certain models had the defect.  HP removed to federal court under CAFA 129 days after the filing of the original complaint, and plaintiff moved to remand.  The court retained jurisdiction, finding that HP had been justified in relying upon the monetary allegations in the initial complaint to refrain from investigating whether the amount in controversy exceeded $5 million.

The court also granted defendant's motion to dismiss, giving plaintiffs leave to amend.  Plaintiffs had pled three causes of action:  California's Consumer Legal Remedies Act, California's Unfair Competition Law, and breach of warranty.

The court held that the allegations at issue did not impose upon the defendant any duty to disclose under the CLRA, noting that the alleged defect did not involve a risk of physical injury.

It also held that the allegations were insufficient to state a UCL claim under Federal Rule of Civil Procedure 9(b).  Although the complaint alleged violation of ten statutory prohibitions, it gave no facts as to how those prohibitions were violated.  Moreover, the court held that the following statements were non-actionable puffery:  that laptops are designed to "'perform . . . flawlessly,'" that they provide "'easy-to-use technology'" and that they "'enable greater mobility and resource sharing within homes or small offices.'"  Id. at *2.

The court also held that the breach of warranty claim failed because plaintiff's computer failed after the running of the two-year warranty period.  The court rejected plaintiff's argument that a two-year warranty period was unconscionable.

One disappointing bit of dictum in the Wilson decision is the court's statement that, at the pleading stage, California's UCL constitutionally could apply to the claims of out-of-state plaintiffs because the defendant's actions and representations are alleged to have emanated from California.  The decision, however, engages in no conflict of laws analysis and fails to consider any of the large number of decisions that refuse to apply the law of the defendant's residence to facilitate a class action.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The court's recent decision in In re OnStar Contract Litigation, 2009 WL 415990 (E.D. Mich. Feb. 19, 2009) is a grab bag of rulings favoring both plaintiffs and defendants.

Plaintiffs in OnStar are buyers and lessees of four manufacturers' autos equipped with the OnStar in-vehicle telecommunications system that provided "automatic crash notification to emergency responders, stolen vehicle location, remote door unlock and remote diagnostics in the event of problems with airbags, anti-lock brakes or other systems."  Id. at *1.  Plaintiffs allege that by August 2002, the manufacturers knew that because the Federal Communications Commission ruled that cell phone companies need not support analog signals after February 2008, the analog OnStar equipment would stop working by 2008.  Plaintiffs allege the manufacturers' failure to tell buyers this fact violated various state laws.  They brought a putative class action against four auto manufacturers and OnStar, alleging breach of warranties and violations state consumer protection statutes.

The defendants moved to dismiss.  They won some, and lost some.

The court began by noting the importance of a proper choice of law analysis, particularly for class certification.  But plaintiffs alleged that they needed discovery to conduct a proper analysis.  Accordingly, the court tabled any issue that required a choice of law analysis.

Except one.  None of the plaintiffs were Michigan residents, and yet they had brought a claim for violation of Michigan's Consumer Protection Act, arguing that this was proper because Michigan is the defendants' primary place of business.  The court looked to the text of the MCPA, which limits class actions under the MCPA to people "residing or injured" in Michigan.  The court rejected plaintiffs' argument that because they paid money that ultimately flowed into Michigan, they were "injured in" Michigan.  Accordingly, it dismissed the MCPA claim.  Id. at *4-*5.

But the court tabled the determination regarding other states' consumer protection statute claims because it would involve individual state-by-state analysis into whether a plaintiff may have the benefit of a discovery rule or equitable tolling of the statute of limitations due to fraudulent concealment.  Id. at *5-*6.

A number of defendants made individual arguments about the statutory claims that the court rejected.  For example:

1.  The court rejected OnStar's argument that the consumer protection act claims failed for failure to plead with particularity under Rule 9(b).  The court observed that these claims were based on a variety of theories, including warranty theories, that were not fraud-based.

2.  The court also rejected OnStar's argument that the plaintiffs failed to adequately plead a "co-venture" that would make OnStar liable for other defendants' actions.

3.  The court rejected Honda's argument that the California, New York, and Washington consumer protection act claims failed because they were inconsistent with the terms of the express warranty.  The court relied on the safety-related allegations about not having On-Star to conclude that it was possible those states would recognize a CPA claim that goes beyond the term of the express warranty.

4.  The court also rejected Subaru's argument that the fraud claims should fail because the complaint establishes that plaintiffs received constructive notice from the FCC that the analog equipment would cease to work.

5.  In addition, the court rejected Subaru's argument that the consumer protection act claims should be dismissed for being predicated on express warranty claims that are unsustainable.

6.  Volkswagen argued that plaintiffs had not pled a "transaction" under California's Consumer Legal Remedies Act because plaintiffs bought the cars from dealers, not VW directly.  The court wholly rejected the argument.

7.  The court also rejected VW's proposed interpretation of Colorado's consumer protection statute, holding that the statute does not preclude class actions for damages.

VW did, however, win one important issue regarding the statutory counts.  Section 901(b) of the New York statute precludes class actions for exemplary damages unless such a class action is expressly authorized by another statute.  Plaintiffs argued that this provision was merely procedural and thus did not apply in federal court.  The OnStar court disagreed, holding that it was substantive law that applies in federal court.  Id. at *14.

The defendants also scored an important victory on the warranty counts.  Defendants challenged the warranty claims because the OnStar equipment was fully functional for the entire term of the durational warranty.  Citing an Illinois decision, the court recognized that allowing claims beyond the durational limits in the warranty would make the manufacturer the insurer for the product and extend the relationship beyond what it had contracted.  Id. at *16.  Thus, the court held that because the Limited Warranty expired before any plaintiff first asserted a warranty claim, the express and implied warranty claims of those plaintiffs whose claims were governed by the UCC must be dismissed.  The court also held that the complaint failed to plead that the warranty terms were unconscionable.  Id. at 19.

For the remaining implied warranty claims, the court refused to rule because they required a conflicts of law determination.  And because the implied warranty claims impacted the claim asserted under the Magnuson-Moss Warranty Act, the court deferred decision on that count, too.

The OnStar decision is a good example of the use of a motion to dismiss to whittle away certain claims, leaving the others ripe for summary judgment after discovery.  Given that the remaining claims are primarily those premised on various states' consumer protection statutes, it seems clear that the defendants have strong arguments opposing the certification of a class in the action because of the difficulty of applying various states' laws in a single trial.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A few weeks ago a federal court in California issued a decision that has profoundly troubling implications for consumer fraud class actions.  See Wiener v. Dannon Co., 2009 WL 383650 (C.D. Cal. Jan. 30, 2009). 

In Wiener, the plaintiff challenged two of Dannon's brands that contain probiotic bacteria:  (1) Activia yogurt, which is advertised as "'scientifically proven' to naturally regulate digestion when eaten daily for two weeks," and (2) DanActive drinkable dairy product, which is marketed as "'clinically proven' to strengthen the immune system."  Id. at *1.  Dannon claims to have approximately twelve studies that support its claims about Activia, and approximately twenty-one that support its claims about DanActive.

The decision in Wiener starts off uncontroversially enough.  Plaintiff sought to represent a class of "[a]ll persons who purchased in California at any time up to August 1, 2008, DanActive, Activia or Activia Li[ght]," asserting claims under California's Unfair Competition Law, its Consumer Legal Remedies Act, and a claim for breach of express warranty.  The court denied class certification, holding that the plaintiff -- who had bought Activia, but had never bought DanActive -- was not typical of absent class members who had bought DanActive:

In cases involving a variety of products, courts, emphasizing that different products have different functions and different consumers, have held that a named plaintiff that purchased a different product than that purchased by unnamed plaintiffs fails to satisfy the typicality requirement of Rule 23(a)(3). . . . Dannon has made different health benefit claims regarding Activia and DanActive, which feature different types of probiotic bacteria . . . Therefore, the products target consumers with different health issues.  Moreover, different studies allegedly substantiate these health benefits.  Furthermore, the advertising and marketing of the two products is separate. . . .  In other words, the evidence needed to prove Wiener's claims involving Activia . . . is not probative of the claims of unnamed class members who purchased DanActive . . .

Id. at *4-*5 (citations omitted).  Nevertheless, the court gave plaintiff leave to amend to substitute into the case an appropriate class representative.  As a result, the court did not stop its analysis with typicality, but proceeded to address the other class action prerequisites.  The opinion goes downhill from there.   

The court found that the remaining prerequisites of Rule 23(a) were satisfied.  In analyzing predominance under Rule 23(b), the court acknowledged that reliance on the alleged misrepresentation was an element of plaintiff's causes of action.  Dannon argued that because there was a variety of different print, TV, in-store and other marketing materials, the nature of the alleged misrepresentation -- as well as whether it was material to the consumer's decision to buy the product -- would be individual issues that would have to be litigated for each class member.

The court disagreed, opining that at trial, plaintiffs could rely on an "inference of reliance" that "arises if material misrepresentations were 'made to persons whose acts thereafter were consistent with reliance upon the misrepresentation.'"  Id. at *8 (citation omitted).  Numerous courts, of course, have rejected just such a presumption of reliance, noting that although it may make sense in an "efficient market" like the securities market, which is capable of rapidly assimilating new information into the prices of stocks, the market for consumer goods is not "efficient," in that buyers often fail to take into account new information and make their purchase decisions based on any number of other factors, such as taste, personal preferences, brand loyalty and the like.  See, e.g., McLaughlin v. American Tobacco Co., 522 F.3d 215, 223-25 (2d Cir. 2008); International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., 929 A.2d 1076, 1088 (N.J. 2007).

The district court -- although aware that people buy consumer products for different reasons -- seemed to penalize Dannon for not having submitted expert proof as to what all of those individual reasons for purchase might be:

The record clearly establishes that the characteristic that distinguishes the Products from others on the market is their respective alleged health benefit.  Dannon has not pointed to any meaningful difference in flavor, serving size, or the like that might influence consumers' purchases. . . .  The Court is aware that many factors influence all consumers' purchasing decisions, a point which Dannon emphasizes, yet given the alleged misrepresentations are the distinguishing characteristic of the Products, the Court finds that these representations induced consumer purchases because without the alleged misrepresentations, there is no reason, even with sales, coupons, or other promotions, to suggest that purchasers would have selected the Products over other Dannon products or similar, generally less expensive, products by other brands. . . .  Thus, the Court finds that the evidence presently before the Court allows for an inference of reliance in this case.

Wiener, 2009 WL 383650 at *9 (citations omitted).

Interestingly, the court acknowledged that Dannon would have the right to rebut the inference of reliance, but it did not explain how that could be done manageably at trial.  Id. at *8.

Dannon also had pointed out the difficulty of proving individual damages in consumer products cases, where the products may have had very different prices, been subject to coupons or rebates, and may even have been returned for a refund.  The court, however, was having none of that argument.  It merely repeated the mantra that the calculation of individual damages should not defeat class certification, and posited that "actual damages for these claims can be calculated by subtracting the value of the Products without the claimed health benefits, a uniform value to be determined based on the evidence presented at trial, from the price that the particular class member is able to prove he or she paid."  Id. at *10.

Once the plaintiff in Wiener amends the complaint to add into the action another named plaintiff who actually bought DanActive, we can expect the court to certify the class action using the specious "presumption of reliance" that robs the defendant of its ability to present individual defenses regarding what actually motivated the product purchase decision.  Thankfully, Wiener lies far outside the mainstream of thought on reliance issues in consumer products cases.  But the opinion represents a troubling undercurrent of thought that too readily sacrifices the defendant's right to challenge individual claims in order to make it easier to try them in the aggregate.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

In the recent decision in Lyons v. Coxcom, Inc., 2009 WL 347285 (S.D. Cal. Feb. 6, 2009), the court granted a motion to dismiss, highlighting the need to plead damages resulting from wrongful conduct in actions brought under California's consumer protection statutes.

In Lyons,  the plaintiff upgraded her internet service to the defendant's "premier" service with "PowerBoost" package in order to take advantage of "blazing fast" internet service and "up to 33% faster downloads."  Plaintiff alleged that despite these advertised advantages of upgraded service, the defendant slowed or severely limited her coverage and that of a nationwide class by transmitting certain unauthorized hidden codes to prevent customers' computers from executing certain peer-to-peer filesharing. 

The defendant moved to dismiss certain counts pursuant to Rule 12(b)(1) for lack of standing, and moved to dismiss the rest of the complaint under Rule 12(b)(6).  Basically, defendant argued that although plaintiff's complaint identified representations in advertising and declared that she had upgraded her service to take advantage of increased internet speed, it failed to plead reliance or causation:  "she fails to allege that she [bought] Cox's internet service as a result of any advertisement."  Id. at *2.

The court concluded that California's Unfair Competition Law, its False Advertising Law, and its Consumer Legal Remedies Act all require that a claimant suffer an injury in fact and incur damages as a result of the challenged conduct.  Because plaintiffs' complaint did not allege that reliance/causation element, the court dismissed these counts without prejudice, giving plaintiffs a chance to replead.  The court also dismissed a count based on the consumer protection statutes from 27 other states and the District of Columbia, holding that because plaintiff could not establish standing under her own state's statutes, she (as a non-resident) could not seek relief on behalf of a class of residents of other states.  Again, plaintiff was given leave to replead.

As for the defendant's Rule 12(b)(6) motion, the court took judicial notice of the defendant's Subscriber's Agreement ("SU"), Acceptable Use Policy ("AUP"), Terms and Conditions, and Limitations of Service.  Each of these documents was mentioned in the plaintiff's complaint.  The court dismissed the breach of contract count, giving effect to the terms of the SA, which required the application of Georgia law.  The court noted that the SA and the AUP reserve to defendant the right to manage its network and to take actions against subscribers whose use impedes the use of others.  Because plaintiff failed to plead a provision of the contract in which the defendant promised to provide unlimited access without interruption or to provide unlimited use of peer-to-peer applications, the court dismissed the breach of contract count, giving plaintiff leave to amend.  The court also dismissed the count alleging a breach of the covenant of good faith and fair dealing, because Georgia law does not allow such a cause of action independent of a breach of contract claim.

The court dismissed without prejudice the count alleging violation of the federal Computer Fraud and Abuse Act because plaintiff did not allege that she personally suffered damages in an amount in excess of $5,000.

Although the court had dismissed the California statutory counts for lack of standing, it proceeded to analyze the substantive challenges to them as well.  It noted that the CLRA claim was not pled with the particularity necessary for a fraud claim because it left out the "who, what, when, where, and how" of the claim.  But the court rejected the defendant's argument that the statements plaintiff identified were non-actionable puffery.  "Plaintiff does allege statements that may be demonstrated to be true or false, such as download speeds of up to 20 Mbps and whether upload speed is indeed doubled and downloads are indeed 33% faster. . . .  Plaintiff has sufficiently pled statements likely to deceive under the CLRA."  Id. at *11.

As for the UCL claim based on fraudulent acts and practices, the court rejected the defendant's argument that Rule 9(b) applied and held that plaintiff's claim as pled had sufficient specificity to establish a likelihood to deceive and was not mere puffery.  Nevertheless, the claim remained dismissed without prejudice for failure to sufficiently allege standing.  (The court also held that two UCL counts based on "unlawful acts" and "unfair acts," respectively, failed to state a claim.) 

As for the False Advertising Law count, the court rejected the defendant's argument that a Rule 9(b) pleading standard applied, but reiterated that the count was dismissed for failure to plead standing.

The defendant also had made the argument -- somewhat akin to a preemption argument -- that the court should delay its consideration of the case because the Federal Communications Commission (which has primary regulatory authority over internet services) was in the process of deciding the appeal of a dispute involving a different provider (Comcast), which might resolve the key questions in this case.  The court refused to defer to the FCC under the defendant's "primary jurisdiction" theory, noting that where the issues involved are primarily grounded in contract, false advertising and unfair competition, they fall squarely within the court's traditional functions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Until a few years ago, a plaintiff suing under California's Unfair Competition Law was not required to have suffered an economic loss in order to have standing to bring a UCL claim.  Any Californian -- no matter how removed from the allegedly wrongful conduct -- was deputized to use the UCL to enforce California law.  Then, Californians passed Proposition 64, making actual economic loss a prerequisite to bringing a UCL claim.

The much-publicized debate over Proposition 64 and its impact on an uninjured plaintiffs' standing to bring UCL claims has obscured somewhat the controversy over the UCL's less-popular, but ubiquitous, sibling:  the Consumer Legal Remedies Act.  The CLRA (Cal. Civ. Code sec. 1750 et seq.) is often pled in tandem with the UCL.  The CLRA delineates a series of actions deemed to be unfair or deceptive when undertaken in the sale or lease of goods or services to a consumer.  Unlike the UCL, the CLRA requires a plaintiff to provide the defendant with notice of the allegedly unlawful conduct and an opportunity to cure it prior to filing suit.

Yesterday, the California Supreme Court was faced with the question whether a plaintiff who has suffered no economic harm nevertheless may bring a CLRA claim for injunctive relief and/or damages.  Carefully analyzing the text of the CLRA, the court concluded that some form of damages -- pecuniary loss, opportunity costs, or transaction costs -- is necessary in order to bring a CLRA claim.  See Meyer v. Sprint Spectrum L.P., 2009 WL 197560 (Cal. Jan. 29, 2009). 

Plaintiffs had alleged that their cellular provider breached the CLRA by including in their contracts unconscionable provisions, such as a binding arbitration provision, a class action waiver, a waiver of the right to a jury trial, a fee-splitting provision, a disclaimer of warranties, and a $150 early termination fee.  But the plaintiffs had made no claim against Sprint, and thus Sprint had not attempted to enforce any of these provisions in the service agreement against them.  The court characterized the suit as a "preemptive lawsuit to strike these terms should any dispute arise.  The question is whether the CLRA gives standing to permit such preemptive suits."

Section 1780(a) of the CLRA provides that:  "Any consumer who suffers any damage as a result of the use or employment by any person of a method, act, or practice declared to be unlawful by Section 1770 may bring an action against that person to recover or obtain any of the following:  (1) Actual damages . . . (2) An order enjoining the methods, acts, or practices. (3) Restitution of property. (4) Punitive damages. (5) Any other relief that the court deems proper."

The court began its analysis by noting that plaintiffs were correct that "actual damages" and "any damage" mean different things.  "Actual damages," the court observed, clearly refers to pecuniary harm, which is plainly recoverable under the CLRA.  The question, however, is what does "any damage as a result of" an unlawful act mean?  Plaintiffs asserted that it means merely being subjected to the unlawful conduct itself.

The court disagreed, holding that it means that the plaintiff must have suffered some type of increased costs (whether costs of suit, or opportunity costs) as a result of the unlawful conduct:

The statute speaks plainly about the use of an unlawful practice resulting in some sort of damage.  Thus, the statute provides that in order to bring a CLRA action, not only must a consumer be exposed to an unlawful practice, but some kind of damage must result.  If the Legislature had intended to equate "any damage" with being subject to an unlawful practice itself, it presumably would have omitted the causal link between "any damage" and the unlawful practice, and instead would have provided something like "any consumer who is subject to a method, act, or practice declared to be unlawful by Section 1770 may bring an action" under the CLRA.

To reach this sensible construction of the CLRA -- which also is in line with current UCL law -- the California Supreme Court had to backtrack on the broad dicta from a mid-1980s opinion that addressed a different, but related, issue.  In Kagan v. Gibraltar Savings & Loan Association, 35 Cal.3d 582 (1984), the defendant had represented that it would not charge management fees for an individual retirement account ("IRA").  After the plaintiff opened the IRA, the defendant informed plaintiff that there would be a $7.50 fee for administering it.  Plaintiff hired a lawyer, who made demands on behalf of the plaintiff and a class of those similarly situated.  The defendant decided not to charge the fee to the plaintiff, but refused to identify and reimburse other customers who had been charged the fee.

The defendant argued that the plaintiff in Kagan had no standing because he had not suffered any damage, since the defendant had not charged him the fee.  The California Supreme Court disagreed, holding that a defendant could not pick off prospective class action plaintiffs and thereby avoid CLRA class actions.  It then went on to say:

We thus reject Gibraltar's effort to equate pecuniary loss with the standing requirement that a consumer "suffer any damage."  As it is unlawful to engage in any of the deceptive business practices enumerated in section 1770, consumers have a corresponding legal right not to be subjected thereto.  Accordingly, we interpret broadly the requirement of section 1780 that a consumer "suffer[] any damage" to include the infringement of any legal right as defined by section 1770.

Kagan, 35 Cal.3d at 592-93.

In Meyer, the California Supreme Court distinguished Kagan and disapproved of its broadest dicta:

Although the Kagan court equated the infringement of any legal right under section 1770 with "suffering any damage" pursuant to section 1780(a), its holding ultimately was not based on an analysis of that language, but on the provisions of section 1782, subdivision (c), that once a person has been the victim of a proscribed practice under the CLRA and makes a demand on behalf of a class, remedying the plaintiff's individual complaint does not disqualify her as a class representative.  Moreover, . . . the plaintiff [in Kagan] was able to avoid the fee only by expending time and money threatening Gibraltar with a lawsuit.  As discussed, the expenditure of such transaction costs to avoid the consequences of a deceptive practice falls within the broad meaning of suffering "any damage as a result of the use or employment" of an unlawful practice, whether or not those transaction costs are cognizable as "actual damages."  The plaintiff in Kagan may have also incurred opportunity costs, because Gibraltar's alleged misrepresentations may have diverted the plaintiff from finding a financial institution that did not charge administrative fees.

Thus, the Meyer court "decline[d] to extend Kagan to situations in which an allegedly unlawful practice under the CLRA has not resulted in some kind of tangible increased cost or burden to the consumer," and it expressly disapproved of Kagan's dictum that "'we interpret broadly the requirement of section 1780 that a consumer "suffer[] any damage" to include the infringement of any legal right as defined by section 1770.'"  Meyer, 2009 WL 197560 at n.3.

The Meyer court also placed into perspective the wide array of precedents holding that the CLRA must be interpreted liberally:

It is evident that any rule that would expand the ability of individuals to bring lawsuits has costs as well as benefits.  It is also apparent that the Legislature, in weighing these costs and benefits in drafting the CLRA, set a low but nonetheless palpable threshold of damage, and did not want the costs of a lawsuit to be incurred when no damage could yet be demonstrated.

Finally, the court in Meyer also faced a challenge to the trial court's refusal to exercise its jurisdiction under the Declaratory Judgments Act ("DJA") to declare what provisions of the service agreement were invalid.  The court recognized that the DJA allows a court to refuse declaratory relief where it "is not necessary or proper at the time under all the circumstances."  Cal. Code Civ. Proc. sec. 1061.  Because there was no live dispute between the parties that required interpretation of the contract, the court held that the trial court had not abused its discretion in sustaining a demurrer to plaintiff's declaratory judgment count.  The court explained:  "But when resolution of the controversy over future remedies would have little practical effect in terms of altering parties' behavior, courts have considerable discretion . . . to deny declaratory relief because it 'is not necessary or proper at the time under all the circumstances.'"

Meyer is an extremely important opinion that brings the CLRA in line with the UCL in refusing to deputize people to prosecute class actions over alleged statutory violations with which they have no real connection.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

There has been lots of commentary -- academic and not-so-scholarly -- about the enforceability of class action waivers.  Particularly in California, the law seems to be that such waivers typically are held unenforceable as against public policy.

On Friday, the Ninth Circuit issued an opinion in a consumer class action interpreting a forum selection clause.  The contract at issue did not contain a class action waiver, and the defendant was not arguing that class actions were barred under the agreement; it simply wanted the benefit of its Virginia forum.  Thus, class action waiver law should not come up in the opinion, right? Ah, if only the law were that easy.

In Doe1 v. AOL LLC, 2009 WL 103657 (9th Cir. Jan. 16, 2009), plaintiffs were members of an on-line service provider that was alleged to have made roughly 658,000 members' personal data (including addresses, phone numbers, credit card numbers, and internet search terms) available to the public.  Plaintiffs sued for violation of the federal Electronic Communications Privacy Act, federal common law unjust enrichment, and a subclass of California residents sued for violations of California's Consumer Legal Remedies Act, False Advertising Act, Unfair Competition Law, Customer Records Act, and for the California common law tort of public disclosure of private facts.

The Members Agreement governing the class members' claims did not seek to bar class actions.  Rather, it provided that Virginia law governed members' claims, and it had a forum selection clause providing that "exclusive jurisdiction resides in the courts of Virginia."  The defendant moved to dismiss for improper venue under Fed. R. Civ. P. 12(b)(3), and the trial court granted the motion.

The Ninth Circuit, however, chose to parse prepositions.  The forum selection clause says "courts of Virginia," not "courts in Virginia."  Accordingly, the Ninth Circuit concluded, despite the protestations of the defendant that presumably authored the Members Agreement, the forum selection clause only allows for actions to be brought in the state courts of Virginia, not those federal courts that exist within Virginia's borders.

This presents a problem, the Ninth Circuit concluded, because Virginia state courts do not allow for consumer class actions.  The court then used the test set forth in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) to determine whether the forum selection clause is unenforceable:  "'if enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or judicial decision.'"

The analysis was hardly difficult.  The California Court of Appeal already had concluded that the exact same forum selection clause was unenforceable because it violated public policy favoring class actions, and it amounted to a disfavored waiver of rights under the Consumer Legal Remedies Act.  See America Online, Inc. v. Superior Ct. of Alameda County, 108 Cal. Rptr. 2d 699 (Cal. App. 2001).

Thus, the Ninth Circuit concluded that the Bremen test had been met, and the "forum selection clause in the instant member agreement is unenforceable as to California resident plaintiffs bringing class action claims under California consumer law."  Accordingly, it reversed and remanded the trial court's decision.

Judge Bea filed a concurrence arguing that on remand, the plaintiff class representatives should have to plead and prove that they "really are California consumers by stating facts which make California substantive law applicable to them, pursuant to the well-known rules of federal choice of law, set forth in the Restatement."  According to Judge Bea, "it doesn't really require one to be 'imaginative and creative' to suspect the class representatives may not have become California residents for reasons other than class action litigation and are not really California consumers entitled to California protection."

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

California’s Fourth District Court of Appeal issued an opinion last Monday that illustrates once again why splitting the baby is never a satisfying result.  See Paduano v. American Honda Motor Co., 2009 WL 57806 (Cal. App. Jan. 12, 2009).  The case was straightforward enough:  plaintiff bought a hybrid car expecting it to get 51 miles per gallon, which was what the brochure said was the EPA’s fuel economy estimate for manual transmission versions of the car.  But the car didn’t come close.  Instead, it averaged roughly 30 miles per gallon when plaintiff drove the car.  Apparently EPA’s method of testing hybrid cars differs substantially from how some drivers typically drive them, so that the EPA estimates can be significantly better than actual experience.

Plaintiff sued for breach of one federal and two state warranty statutes, as well as for violations of California’s Unfair Competition Law (“UCL”) and its Consumer Legal Remedies Act (“CLRA”).

The trial court granted summary judgment on all claims, finding, inter alia, that they were preempted by the federal Energy Policy and Conservation Act.  The Court of Appeal, however, affirmed dismissal of the warranty claims, but reversed on the UCL and CLRA claims, holding that they were not preempted.

The court was right to affirm dismissal of the warranty claims because Honda clearly made no warranty about the EPA’s fuel economy estimate.  Rather, the label stated – as required by federal law – “ACTUAL MILEAGE will vary with options, driving conditions, driving habits and vehicle’s conditions.”  And 49 U.S.C. § 32908(d) “clearly provides that ‘[a] disclosure about fuel economy or estimate annual fuel costs under this section does not establish a warranty under the law of the United States or a State.’”  Id. at *7.

Ultimately, however, the majority held that the plaintiff’s UCL and CLRA claims were not preempted.  In doing so, it applied a presumption against preemption from the California Supreme Court’s “colored salmon” case:  Farm Raised Salmon Cases, 42 Cal.4th 1077, 1087-88 (2008), cert. denied sub nom., Albertson’s, Inc. v. Kanter, 2009 WL 56199 (U.S. Jan. 12, 2009).  Paduano, 2009 WL 57806 at *12-*13.  It then applied the U.S. Supreme Court’s recent decision in Altria Group v. Good, 2008 WL 5204477 (U.S. Dec. 15, 2008) to hold that the language of the Energy Policy and Conservation Act does not expressly preempt the plaintiff’s claims.  Paduano, 2009 WL 57806 at *15.  Because the UCL and the CLRA are laws of general applicability that are not based specifically on the disclosure of fuel economy or fuel operating costs, the court held that the federal act’s express preemption provision did not apply.

The majority then found that there might be viable UCL and CLRA claims arising out of two statements from the defendant’s sales brochure:  (1)  “Just drive the Hybrid like you would a conventional car and save on fuel bills,” and (2) “IS THERE ANYTHING SPECIAL I HAVE TO DO?  You just have to love saving money and getting terrific gas mileage.”   Id. at *10-*11.

As Justice Terry O’Rourke points out in the dissent, these statements are “mere unspecific, nonfactual assertions constituting non-actionable puffery.”  Id. at *32-*33.  And the first statement, taken in context, is actually just differentiating this Hybrid from an electric car the owner would have to plug in to charge.  Id. at *23.

But more important, Justice O’Rourke makes it plain that the plaintiff’s sole theory of liability is premised exclusively on the EPA’s mileage estimate, and that the sought-after relief – eliminating or reducing the EPA’s mileage estimate –  actually was expressly preempted by the federal statute because it would impose a legal obligation “related to fuel economy standards.”  Id. at *25.  The Supreme Court’s recent Good decision, Justice O’Rourke explains, is wholly irrelevant to the issue at hand.

The majority and dissenting opinions in Paduano highlight the difficulty of consistently applying the Supreme Court’s preemption precedents.  There is much too much detail in the two sides’ positions to analyze in this blog post.  But certain fundamental questions – such as when to apply the presumption against preemption, and when does a statute of general applicability “impose” obligations within the meaning of an express preemption provision – clearly remain hotly disputed.  One hopes the California Supreme Court will accept review of Paduano, which seems certain to be appealed, and provide some additional clarity in this area.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The nation’s self-appointed nanny, the Center for Science in the Public Interest (“CSPI”), truly outdid itself last week, filing a class action lawsuit in San Francisco federal court to “protect” Californians from Vitamin Water, which CSPI blames, in part, for America’s "obesity epidemic."  What could possibly be wrong with Vitamin Water, you ask? Not the FDA-required nutritional information on the label, apparently.  CSPI concedes that it accurately reflects the amount of vitamins and other ingredients in this line of beverages.

The fraud – according to CSPI – is that the beverages also contain sugar, while the label and the marketing touts the possible energy and health benefits of the other added ingredients.  Of course, both the amount of sugar and the amount of calories are squarely stated in the “Nutrition Facts” on the label.  And although the beverages do not purport to be “Sugar Free” or “Diet,” they do taste sweet, which should give the calorie-conscious consumer some clue to check the label for sugar content and calories.

Although CSPI claims throughout the complaint that the beverages are “misbranded” and marketed in a “false,” “misleading” and “deceptive” manner in violation of California’s Unfair Competition law (Cal. Bus. & Prof. Code § 17200), its Consumer Legal Remedies Act (Cal. Civ. Code § 1750) and its False Advertising Act (Cal. Bus. & Prof. Code § 17500), the simple fact is this:  the complaint never identifies a single false, misleading or deceptive statement, nor can it truthfully say that the calories or sugar content of these beverages are concealed from the consumer.

The complaint suffers from too many infirmities to list here.  In the unjust enrichment count, it asks for class members to get their money back even though they received the benefit they paid for, drank it, and can’t return it to the defendant.  The complaint also pleads fraud with no particularity whatsoever.  It does not limit the class definition to purchases that were made in California, thus creating choice of law problems.  And it premises liability on satirical marketing copy – such as “this combination of zinc and fortifying vitamins can . . . keep you healthy as a horse” – that obviously would be puffery under California law.  See, e.g., Consumer Advocates v. Echostar Satellite Corp., 113 Cal.App.4th 1351, 1361 (Cal. App. 2003) (“boasts” and “meaningless superlatives” that are not “factual representations that a given standard is met” are akin to puffing and are not actionable).

CSPI’s grandstanding lawsuit against one of America’s most respected product manufacturers – which it filed with two for-profit plaintiffs’ firms as co-counsel – is precisely the sort of abuse of legal process that gives consumer fraud class actions a bad name.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link