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.

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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.

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We all know about pheromones, right?  They are chemicals that one animal secretes to attract members of the opposite sex.  There's apparently a lot of research about the role of pheromones in the lives of insects. There's less research demonstrating any real role in the human species.

But pheromones are part of our popular culture.  As a nod to my friends at Abnormal Use, I'll note that many comic-book heroes have powers based on pheromones.  Stand-up comics joke about pheromones.  Part of the joke is that we all know they don't have any huge impact on men or women.  It's not like you can rub some magic elixir on your neck and instantly become an irresistable Cassanova.  Or George Clooney.  It's too bad, really.  Some of us need the help.  Which is part of what makes it fun to fantasize about such a possibility. 

Dial has capitalized on this in a humorous advertising campaign for a Men's Body Wash called "Magnetic," which it describes as "Pheromone-Infused, Attraction Enhancing Body Wash.".  Even the packaging is part of the joke.  Its instructions for use include this tongue-in-cheek fourth step:  "Stand back and watch the magic happen."  Dial promotes this product with advertising, a website, and a Facebook page, all of which uses the same wink-and-a-nod type of humor.

Of course, some lawyer had to bring a class action lawsuit about this product, claiming that its marketing creates the false perception that it's going to help consumers attract women.  But what's really surprising to me is that more than one humorless prig has filed such a suit, so now there can be a contest for control of the "litigation."  Who knows?  Perhaps someday there may even be a "Pheromone MDL"!

Ronald A. Marron of San Diego appears to be the first attorney to file suit, on February 3, 2012.  His masterpiece of a complaint is available here.  He even found a "representative" plaintiff, Mr. Robert A. Margolis, who actually was willing to plead under oath that he was "deceived by Defendants' representations about the quality and attributes of the Products, including but not limited to the purported ability of the Products to attract women because of pheromones in the Products, whereas ordinary soap does not contain pheromones."  He even pleads that he would not have bought the products if he had known that the claims about attracting women were untrue.  Mr. Margolis purports to represent a class of "[a]ll persons within the United States who purchased . . . [the Products] from the Products' release date in 2009 to the present . . ."

Apparently this suit seemed like such a brilliant idea that attorneys Craig Sean Mellon of San Diego -- along with Jeffrey M. Salas and John C. Wang of Chicago -- decided to copy it.  (Imitation is the highest form of flattery.)  They, too, filed suit in San Diego, on February 9.  Incredibly, they, too, found a "representative" plaintiff, Mr. Frank Ortega, to plead under oath that he relied on the statements about pheromones and wouldn't have bought the soap if he had known it would not attract women.  Mr. Ortega also purports to represent a nationwide class of frustrated men who bought the products from 2009 to the present.

This is the state of American class action practice, ladies and gentlemen.  Really.

How did we ever sink this low?  Well, I can tell you this much:  it's no mistake that this suit was filed in California.  California's Unfair Competition Law is often misinterpreted by its courts as removing fundamental elements of legal claims (such as reliance and causation) in the name of promoting the efficiency of class actions.  This has led to the UCL being used for purposes far, far removed from righting actual wrongs.  Instead, it's a hook that greedy attorneys use to play a game of "gotcha" with defendants.  In these suits, clients don't search for lawyers; lawyers come up with the idea for a suit and then search for clients.  They count on the fact that it will be costly enough and risky enough for a defendant to extricate itself -- even from ridiculous cases -- that the defendant will be willing to pay nuisance value to make the suit go away.  And the result often is settlements that provide next to nothing to the class, but real dollars to plaintiffs' lawyers.

I, for one, hope Dial doesn't have to spend a single dollar on this incredibly stupid, wasteful litigation.  But I know it will.  So instead I hope every dollar will be spent fighting these suits, with not a dime in tribute.

Until the law is changed, or such suits otherwise become no longer economically viable for plaintiffs' lawyers, wasteful, "gotcha" class actions like these will continue to plague our courts, crowding out suits based on real grievances.

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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.

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Yesterday I opined that consumer fraud litigation against the maker of Nutella was frivolous because the amount of saturated fats, the calorie count, and the fact that Nutella contains sugar were all disclosed on the label of the product.  As such, a consumer's purported reliance on advertising puffery about Nutella being part of a healthy breakfast to conclude otherwise was per se unreasonable, I harrumphed.

Late last night Bryan Redding at Lexis Nexis wrote me about a decision that came up online just as my post went up, denying the defendant's motion to dismiss.  There's also an article about it at Product Liability Law360.  Apparently basic fraud law does not apply in the People's Republic of California, I lamented.  But perhaps I was too quick to reach an opinion on the subject.

In In re Ferrero Litigation, Case No. 11-CV-205-H (CAB), Slip op. (S.D. Cal. Aug. 29, 2011), the defendant argued that plaintiffs lacked standing because they had not identified a "long-term" advertising campaign for Nutella.  The TV campaign, the defendant said, had only begun in 2009.  

Citing the California Supreme Court's decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), the court opined that the plaintiffs did not need to identify with specificity the misrepresentations they relied on where they alleged exposure to a long-term advertising campaign.  Slip op. at 3.  Because there was a dispute as to whether such a long-term campaign existed -- and the complaint alleged that it did -- the court gave the plaintiffs the benefit of the doubt and denied the motion to dismiss, observing that issue could be one upon which the defendant would prevail on summary judgment or at class certification.

The court also held that the UCL allegations met the Rule 9(b) pleading standard by identifying specific statements in the advertisements that were part of the "long-term" advertising campaign and explaining how they are allegedly deceptive.  Slip op. at 4.

Interestingly, the defendant's motion does not appear to have argued that there can be no deception as a matter of law where the label itself discloses the ingredients, calories, and the amount of saturated fats.  Of course, I have posted previously about decisions holding that where the product contains the ingredients listed on the label, mere advertising puffery describing the product as "healthy" is not enough to sustain a consumer fraud claim. 

We'll see if Ferrarro ultimately is successful in getting these putative class actions dismissed.  Maybe, maybe not.  But I stand behind my belief that the JPML, in concluding that these cases did not present complicated fact issues, had in the back of its mind that this was frivolous litigation that ought to be dismissed, not consolidated into a federal MDL to manage massive pre-trial discovery.

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On June 1 the Ninth Circuit granted a motion for panel rehearing and issued a new opinion in Carijano v. Occidental Petroleum Corp., No. 08-56187 (9th Cir. June 1, 2011) that unduly restricts a district court's authority in granting forum non conveniens dismissal and provides a roadmap for foreign plaintiffs to defeat forum non conveniens motions.

In Carijano, 25 members of a tribe indigenous to the Peruvian rainforest sued the defendant for its former Peruvian subsidiary's 30 years of allegedly polluting the rainforest and water supplies with the discharge of toxic oil byproducts.  These plaintiffs sued in California state court in 2007, asserting claims for strict liability, negligence, battery, medical monitoring, wrongful death, fraud, misrepresentation, public and private nuisance, trespass, and intentional infliction of emotional distress, as well as a violation of California's Unfair Competition Law.

After the defendant removed the case to federal court and evinced its intention to move for forum non conveniens dismissal, plaintiffs amended their complaint to add as a plaintiff a U.S. advocacy group, Amazon Watch, that had been assisting plaintiffs for some time.

Defendant moved for forum non conveniens dismissal and, not surprisingly, the district court granted the motion.  The alleged pollution and contamination was in Peru.  It allegedly was discharged by what was a Peruvian company.  The alleged victims all were exposed in Peru, treated in Peru, and live in Peru.

The district court had looked at the Piper Aircraft factors and held that the private and public interest factors favored dismissal in favor of Peru.  It considered expert evidence to conclude that Peru would provide an adequate alternative forum.  The Ninth Circuit did not disagree with this conclusion.

It did, however, take the district court to task for discounting the domestic status of Amazon Watch.  The district court concluded that this plaintiff's choice of forum was entitled to reduced deference because the main subject of the suit was compensation of Peruvian residents like the 25 original plaintiffs to the suit.  The Ninth Circuit held that the district court committed reversible error by not giving substantial deference to Amazon Watch's status as an American citizen.  The clear import of the Carijano opinion is that if you are a foreign national that wants to avoid forum non conveniens dismissal, add a U.S. advocacy group to your lawsuit as a plaintiff.

Notably, the defendant had strong arguments that Amazon Watch had no direct injury and thus lacked Article III standing and standing under California's Unfair Competition Law to bring a suit at all.  The Ninth Circuit twisted the holding in a case in which the argument for forum non conveniens dismissal was so strong that the Supreme Court held that the issue could be decided before even reaching Article III jurisdiction.  See Slip op. at 7136 (citing Sinochem Int'l Co. v. Malaysia Int'l Shipping Corp., 549 U.S. 422 (2007).  It used this holding to presume that Amazon Watch properly had standing and thus concluded that its choice of forum as a domestic plaintiff was entitled to full Piper deference, i.e., "a strong presumption that its choice of forum was convenient."  This was so even though Amazon Watch was added as an afterthought upon removal and was accompanied by 25 foreign nationals asserting personal injuries from conduct arising on foreign soil by a foreign subsidiary.

The Ninth Circuit panel also concluded that it did not matter that a US court could not compel the attendance of witnesses from Peru because by filing the lawsuit, the plaintiffs had evinced a willingness to travel to New York.  It chided the defendant for not being able to identify individuals who would not travel to the U.S.  This, despite the fact that all of the injuries allegedly occurred in Peru, were treated in Peru, and allegedly were the result of the activities of former employees of a subsidiary in Peru.  At the pleading stage, it is simply unreasonable to require a defendant to identify individuals who have expressed an unwillingness to travel when all of the sources of proof reside in another country.

The Ninth Circuit panel held that California had an interest in "providing a forum for those harmed by the actions of its corporate citizens" that was at least as strong as Peru's interest in compensating the physical injuries of its residents.  Slip op. at 7145-46.  That seems highly improbable.  Certainly the interest of a domestic defendant's state of residence is not given the same weight in conflicts of law interest analysis as that of a state where a plaintiff was injured.  And this analysis ignores the corporate formalities between the defendant and its former Peruvian subsidiary.

One other problem with the court's analysis is its consideration of the statute of limitations issue.   Slip op. at 7149.  The court held that the defendant's clear intention to use the statute of limitations as a defense in Peru makes Peru an inadequate forum.  The statute of limitations, of course, is part of the foreign nation's sovereign law.  And while it may be reasonable for a court considering a forum non conveniens motion to condition dismissal on the defendant agreeing to tolling during the pendency of the U.S. action, it is manifestly unreasonable to require a defendant to agree to foregoing the statute of limitations defense altogether where the claim expired years before it was ever filed in the United States.  This is particularly true when one considers that a U.S. court applying foreign law would itself be bound to apply the foreign state's statute of limitations.

The panel's opinion on rehearing indicates that the parties are free to file new petitions for panel rehearing and rehearing en banc.  Here's hoping an en banc panel of the Ninth Circuit will reverse some of the damage to forum non conveniens law that was done by the Carijano opinion.

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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."

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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.

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A number of commentators, including the UCL Practitioner and Bailey Class Action Dailey, were quick to report the California Supreme Court's recent decision holding that a plaintiff who pleads that he read a misrepresentation, relied on it in buying a product, and would not have bought the product but for the misrepresentation, has pled sufficient facts to establish standing to bring a claim under California's Unfair Competition Law.  See Kwikset Corp. v. Superior Ct., No. S171845 (Cal. Jan. 27, 2011).  A number of defense firms have issued client alerts, some of which sound like the sky is falling.

Although I obviously don't agree with the California Supreme Court's statutory analysis, I am a "glass-half-full" kind of guy, and there are some details of the opinion that give me some encouragement on the issue of UCL class actions for restitution.

In Kwikset, the plaintiff had bought a lock labelled "Made in the USA."  Some of the screws or pins had been made in Taiwan.  And for some of defendant's products, the latch subassembly had been performed in Mexico.  But the lock itself had been assembled in the good ole US of A.  This is the stuff of class actions, you ask?  It is in California.

In 2004 the trial court had conducted a bench trial and entered judgment against the defendant.  It found that the defendant violated California's Made in the USA statute (yes, there's a statute for that in California), it's "Geographic Origin" statute (ditto), the UCL, and the False Advertising Law.  The trial court enjoined the defendant "from labeling any lockset intended for sale in the State of California 'All American Made,' or 'Made in the USA,' or similar unqualified language, if such lockset contains any article, unit, or part that is made, manufactured, or produced outside of the United States."  Slip op. at 3.  Using its equitable powers, the trial court also ordered the defendant to notify its retailers and distributors about the falsely labeled products and give them a chance to return them for refund or replacement.

Interestingly, the trial court denied the plaintiff's request for restitution to consumers/end purchasers.  The trial court:

concluded restitution "would likely be very expensive to administer, and the balance of the equities weighs heavily against such a program" where the violations had ceased and "the misrepresentations, even to those for whom the 'Made in the USA' designation is an extremely important consideration, were not so deceptive or false as to warrant a return and/or refund program or other restitutionary relief to those who have been using their locksets without other complaint.

Slip op. at 4.

During the appeals process, California's voters passed Proposition 64, which requires a UCL claimant to have an "injury in fact" and have "lost money or property" as a result of the alleged unfair business practice.  (My problem with the majority's opinion in Kwikset is that it equates the two separate requirements and does not give the phrase "lost money or property" its ordinary meaning.  Instead, the majority assumes money or property is lost when a claimant buys a product that she otherwise would not have bought.  But what if the product she bought performs perfectly and is cheaper than what she would have bought had she known about the Taiwanese screws?  I would argue -- as Justice Chin did in the dissent -- that there is no loss of money or property, even though there may otherwise be an injury in fact that might meet the first element.)

Having passed Prop 64, there was lots of wrangling in California over whether it applied to pending cases.  Ultimately, the Supreme Court held that it did, and that for such cases plaintiffs should be given leave to replead.

In Kwikset, the plaintiff was allowed on remand to add plaintiffs and replead the complaint to state that plaintiffs saw the misrepresentations, relied upon them in buying the products, and would not have bought the products but for the misrepresentations.  The defendant demurred, arguing that plaintiffs had no standing under Prop. 64 because they did not adequately plead that they lost money or property.  The trial court rejected that demurrer.  But on appeal, the Court of Appeal reversed.  Plaintiffs' "patriotic desire to buy fully-American-made products was frustrated," but they otherwise got what they paid for and thus did not experience a loss of money or property as the UCL now requires, the Court of Appeal held.  This was the conclusion that the California Supremes reversed.

But in finding that the plaintiffs had pled standing, the California Supremes were clear that reliance and causation were factual issues that plaintiffs would still bear the burden of proving in order to recover under the UCL.  Citing their earlier decision in In re Tobacco II Cases, the Kwikset Court reiterated that a UCL plaintiff relying on the fraud prong of the statute "must demonstrate actual reliance on the allegedly deceptive or misleading statements."  Slip op. at 16; see also id. at n.11 ("At succeeding stages, it will be plaintiffs' obligation to produce evidence to support, and eventually to prove, their bare standing allegations.  If they cannot, their action will be dismissed.").

Interestingly, the California Supremes never once in the Kwikset opinion criticize the trial court's refusal to grant a restitution remedy or its reasoning therefor.  Indeed, much of what the Supreme Court says seems to indicate that the proof for restitution would need to be individual.  For example:  "For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same."  Slip op. at 20.  Of course, the inverse would be that consumers who do not rely on the label or who are not deceived by the representations do not suffer the economic harm, which the court describes as making a purchase they otherwise would not have made. 

Put differently, by affirmatively stating that the harm must flow from actual deception that causes the consumer to enter a transaction she otherwise would not enter (slip op. at 21), the court makes it plain that any entitlement to restitution is going to be subject to individualized inquiries into whether any putative class member saw the alleged misrepresentation, actually relied on it, and wouldn't have entered the transaction without it.  Otherwise, there is no economic harm, under the Kwikset Court's own reasoning.

Notably, the Court instructs in a footnote that once the threshold issue of standing is addressed,

it will remain the plaintiff's burden thereafter to prove the elements of standing and of each alleged act of unfair competition, and the trial court's role to exercise its considerable discretion to determine which, if any, of the various equitable and injunctive remedies provided for by sections 17203 and 17535 may actually be warranted in a given case.

Slip op. at 22 n.15.

In rejecting the standards for restitution as the standard for standing (slip op. at 29-31), the Court made it plain that "[r]estitution under section 17203 is confined to restoration of any interest in 'money or property, real or personal, which may have been acquired by means of such unfair competition.'"  Slip op. at 30 (citation omitted).  Without proof of loss of money or property caused by the alleged deception, a claimant is not entitled to restitution.

In sum, although the Kwikset decision may have held that "ineligibility for restitution is not a basis for denying standing" under the UCL, it certainly did not change California's restitution prerequisites or the UCL to make it easier to certify a class action for restitution under the UCL.  In fact, if anything, Kwikset highlights that entitlement to restitution is still a highly fact-specific, individualized inquiry into what claimants saw, relied upon, and what they would have done absent the challenged conduct.

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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.

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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.

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This is yet another case that serves as a reminder to defense lawyers not to neglect the class definition requirements -- which are not articulated in the class action rule -- when challenging class certification.

In Sevidal v. Target Corp., 2010 WL 4260891 (Cal. App. -- 4th Dist. Oct. 29, 2010), the plaintiff sued Target because he bought two pairs of running shorts and a tie that had been described on Target's website as "Made in the U.S.A.," when in fact they were not.  Plaintiff claimed this violated California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, as well as constituted fraudulent concealment and unjust enrichment.  He sought certification of a statewide class of:

any California consumer who purchased any product from Target.com on or after November 21, 2003 which was identified on Target.com as 'Made in the USA,' when such product was actually not manufactured or assembled in the United States.

Id. at *2. 

The trial court denied class certification, and the Court of Appeal affirmed on two grounds.  First, it held that the class was unascertainable.  Second, it held that the class was impermissibly overbroad.

The ascertainability determination turned, in part, on the facts involving Target's website.  The "Made in the USA" designation was not seen by all users of the website who viewed the affected items.  Rather, it was in a subroutine of a subroutine of the program.  In other words, once one clicked on the product, one had to click on "View Details" and then "Additional Info" before the "Made in the USA" designation would appear.  Based on Target's 5-month test, 80% of customers did not click on the "Additional Info" tab at all and thus never could have seen the "Made in the USA" designation.

Moreover, the mis-designation as "Made in the USA" was the result of a computer bug that only sometimes would cause the mis-designation to appear.  In other words, sometimes the information displayed in "Additional Info" was correct, and sometimes it wasn't.  And Target had no record of who saw what.  Plaintiffs argued that this was Target's fault and should not impair a class, but the court observed that "Target had no contractual or statutory duty to maintain records pertaining to a consumer's selection of the 'Additional Info' icon."  Id. at *10.

Plaintiff relied heavily on In re Tobacco II Cases (2009) 46 Cal.4th 298, which held that absent class members subjected to a pervasive advertising campaign do not have to demonstrate reliance to obtain relief in a UCL class action.  The importance of Sevidal lies in its holding that Tobacco II does not excuse a UCL class action from meeting the other class action requirements, including ascertainability.  The court explained:

A class representative has the burden to define an ascertainable class.  Although the representative is not required to identify individual members, he or she must describe the proposed class by specific and objective criteria. Ascertainability is achieved "'by defining the class in terms of objective characteristics and common transactional facts making the ultimate identification of class members possible.'" . . .

"'Ascertainability . . . goes to the heart of the question of class certification," and "'requires a class definition that is precise, objective, and presently ascertainable . . . .'"  The purpose of the ascertainability requirement is to ensure it is possible "'to give adequate notice to class members'" and "'to determine after the litigation has concluded who is barred from relitigating.'"  The ascertainability requirement is satisfied if "the potential class members may be identified without unreasonable expense or time and given notice of the litigation, and the proposed class definition offers an objective means of identifying those persons who will be bound by the results of the litigation."

Sevidal, 2010 WL 4260891 at *7-*8 (citations omitted).

The Court of Appeal held that because the computer glitch did not consistently misidentify the goods as "Made in the USA," and because there was no record of who received the misidentifications, and because a substantial majority of those who used the website never visited the portions of the website where misidentifications could occur, the court held that the trial court was correct in finding that the class was unascertainable and thus could not be certified.  And the Court of Appeal observed that "[t]hese conclusions are fully consistent with Tobacco II's holding that UCL claims brought as class actions remain subject to the statutory class certification rules, including the requirement that the plaintiff show an ascertainable class."  Id. at *10.

The Court of Appeal separately held that the class was not certifiable because the class definition was overbroad.  The plaintiff argued that Tobacco II removed any causation requirement that absent class members demonstrate a loss caused by misconduct in order to be entitled to restitution under the UCL.  The Court of Appeals, in rejecting plaintiff's conclusion, focused on the language of Cal. Bus. & Prof. Code section 17203, which provides that parties are entitled to restitution "to restore to any person in interest any money or property, real or personal, which may have been acquired by means of the unfair practice."  Here, the court reasoned, the vast majority of the class never saw the misidentification of the goods because they never viewed the "Additional Info" area for a product on the website.  Thus, they definitively are not people from whom money "may have been acquired by means of the unfair practice," and thus cannot properly be part of the class.  As the court explained:

But the Tobacco II court did not state or suggest there are no substantive limits on absent class members seeking restitution when a defendant has engaged in an alleged unlawful or unfair business practice.  Instead, the court recognized that under the UCL's statutory language, a person is entitled to restitution for money or property which may have been acquired by means of the unfair or unlawful practice. . . .  Even after the Tobacco II decision, the UCL and FAL still require some connection between the defendant's alleged improper conduct and the unnamed class members who seek restitutionary relief.

Id. at *12.  The court relied heavily on Pfizer, Inc. v. Superior Ct. (2010) 182 Cal. App. 4th 622, 631, which held that "one who was not exposed to the alleged misrepresentations and therefore could not possibly have lost money or property as a result of the unfair competition is not entitled to restitution" under the UCL.

Because the class definition included primarily people who were not entitled to recovery under the UCL, it was impermissibly overbroad and the class could not be certified.

Sevidal is an important reminder that -- even in the face of substantive causes of action that loosen the restrictions on causation and reliance -- the class definition is still an important first line of defense against class certification.

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I never cease to be amazed by people who believe that other people owe them a duty to save them money.  I've defeated a class action premised on this theory before, and so I was gratified to come across the recent decision in Levine v. Blue Shield of California, 2010 WL 4369797 (Cal. App. -- 4th Dist. Nov. 5, 2010).

In Levine, the plaintiff brought a putative class action against a health plan.  Literally.  He was both the named plaintiff AND the counsel for the putative class.  Here's his beef:  Blue Shield didn't tell him that if he had bought a different policy, he could have saved quite a bit of money in premiums.

You see, when 40-year-old Michael Levine first bought his policy, he was single.  He bought a policy for himself, and one for each of his two dependents.  A few years later, when he married his 25-year-old wife, she submitted an application to be added to his plan.  But if they instead had bought a new policy with the young wife as the primary insured and the dependents as part of a single family plan, they could have obtained the same benefits for significantly less premiums.  Michael alleged that Blue Shield had a legal duty to tell him this, and brought causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of the Unfair Competition Law.

Both the trial court and the Fourth District Court of Appeal disagreed.  The appellate court noted:

[T]he Levines fail to cite any case in which a court has concluded that the covenant of good faith and fair dealing requires an insurer to disclose to the purchaser of insurance the lowest price that the insurer is willing to accept for insurance coverage.

Id. at *5.  The court relied on California Service Station etc. Ass'n v. American Home Assurance Co. (1998) 62 Cal. App. 4th 1166 to hold that the insurer has no duty to disclose pricing information to potential customers in an arm's length transaction.  In doing so, the court noted, "[W]e can conceive of no principled basis for concluding that Blue Shield owed the Levines a duty to disclose how the Levines could obtain the same health care coverage for a lower price, in view of the California Service Station court's holding that the insurer did not owe a duty to disclose the 'final negotiated price' itself."  Id. at *7.  It explained that although an insurer may have a duty to explain details about the coverage terms of a policy or how claims under it are processed, it has no duty regarding the price:

The amount of money that an insurer is willing to accept in exchange for coverage is not information that implicates the special relationship between an insurer and its insured, because it does not relate to coverage or the processing of claims.  We therefore reject the Levines' contention that the purported 'special relationship' between the Levines and Blue Shield gives rise to a duty of disclosure in this case.

Id. at 9 (citation omitted).

Because the plaintiffs could not plead a legal duty that the defendant violated, the court in Levine affirmed the trial court's dismissal of the entire case with prejudice.

Levine is an excellent reminder that parties negotiating a contract stand at arm's length and are not fiduciaries. 

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Today the Ninth Circuit, in an unpublished opinion, affirmed an MDL transferee's Rule 12 dismissal of a putative class action brought by third party payors against a biotech company for allegedly fraudulent promotion of off-label uses for its medicines that promote blood cell production.  See United Food & Commercial Workers Central Pennsylvania & Regional Health & Welfare Fund v. Amgen, Inc., No. 90-56118, Slip op. (9th Cir. Oct. 21, 2010).  Because I helped brief the appeal for the defendant, I won’t editorialize here.

Plaintiffs had asserted a federal RICO claim, as well as a claim under California's Unfair Competition Law (Cal. Bus. & Prof. Code sec. 17200).  They alleged that the defendant promoted its medicines Epogen and Aranesp for uses that had not been approved by the FDA.  The trial court initially had dismissed the claims, granting plaintiffs leave to replead and encouraging them to provide sufficient particularity regarding the alleged fraud and how it purportedly caused them harm.  Plaintiffs filed an amended complaint, which the defendant again moved to dismiss.  The trial court granted the motion, dismissing the case with prejudice.

The Ninth Circuit affirmed, holding that the third party payors had not alleged with sufficient particularity the fraudulent nature of defendant’s conduct:

The complaint did not identify statements or representations made by Amgen that were literally false or misleading at the time they were made, as required in a civil RICO action based on mail and wire fraud.  Nor did the complaint identify material omissions in derogation of an independent statutory or fiduciary duty to disclose.

Slip op. at 2 (citations omitted)

The court also independently held that plaintiffs failed to allege proximate causation with sufficient particularity, i.e., they did not allege a direct causal connection between the defendant’s conduct and plaintiffs' alleged injury:

Instead, the complaint proffered an attenuated causal chain that involved at least four independent links, namely, (1) the USP-DI’s listing of Aranesp for anemia of cancer, (2) Medicare’s decision to cover Aranesp for anemia of cancer, (3) third-party payors’ decision to cover Aranesp for anemia of cancer (in addition to covering Aranesp for anemia in heart failure patients and cancer directly, and Epogen for all of those uses), and (4) doctors’ decisions to prescribe Aranesp and Epogen for these uses.  This causal theory is too attenuated to satisfy the Supreme Court’s proximate causation requirement in the RICO context.  Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 989 (2010) . . .

The complaint also failed to satisfy Rule 9(b) with respect to its UCL claims, because it did not explain why Amgen’s conduct was fraudulent or allege an adequate theory of causation or reliance. . . .

Slip op. at 3 (citations omitted).

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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.

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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.

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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.

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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.

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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.

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I've always wondered how people end up becoming plaintiffs in consumer class actions.  Thanks to the recent decision in Farokhzadeh v. Too Faced Cosmetics, B213306, Slip Op. (Cal. App. -- 2d Dist. Apr. 26, 2010), now I know.

A woman goes to the cosmetics store looking for lip gloss.  She see's an in-store display for "FUZE Slenderize Guilt Free Lip Gloss" that promises:  "Always on the lips . . . Never on the hips!"  She buys it for "about like $20."

The woman uses the lip gloss for a couple of weeks and begins talking about it with her friend, an unemployed lawyer.  He asks her if the product has helped her to lose weight.  She says "no."  He says "like, oh, you should contact [a lawyer]."  A few days later, she calls him and gets a referral to a plaintiffs' law firm.

Despite the fact that she had determined the lip gloss was not performing on its promise to help her lose weight, plaintiff continued to use the lip gloss and did not return it to the retailer "because, in her own word, of 'laziness.'"   Indeed, she still had the lip gloss in her purse at the time of her deposition, some 10 months after having purchased it.

The trial court had ruled on the plaintiff's motion for class certification some six months before the California Supremes' decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009).  The trial court questioned plaintiff's standing, given that she did not return the lip gloss and still used it, and that the lip gloss was cheaper than other products that were just pure lip gloss without "appetite supression qualities."

Applying Tobacco II, the Court of Appeal, in an unpublished decision, held that the plaintiff had standing and had "lost money" within the terms of the statute even though the Fuze lip gloss was cheaper than some standard lip gloss products that did not tout weight loss properties.

But the court upheld the trial court's holding that plaintiff was an inadequate class representative:

There is substantial evidence in the record supporting the trial court's conclusion that Garokhzadeh had no interest in vindicating her own consumer rights, let alone protecting the rights of any other consumer.  In fact, she did nothing until after she had been prompted by a friend with a legal background to "contact [a lawyer]."  By her own admission, she suffered from "laziness" when it came to vindicating her own rights.  We believe that the trial court reasonably concluded that she was not a person who would willingly assume the fiduciary responsibility to prosecute a UCL action on behalf of absent class members.

Slip op. at 8.

This decision highlights the importance of using discovery to thoroughly explore adequacy of representation issues, even in those jurisdictions that seem predisposed to find adequacy where class counsel themselves are adequate.  Where, as here, the plaintiff has been less than vigilant in pursuing her own claim, you may be able to argue that she cannot adequately pursue claims on behalf of others and effectively manage class counsel.

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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.

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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.

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This is the kind of decision that causes lawyers to write paragraphs like those hideous releases in settlement agreements that go on for pages and have more commas, semicolons and parentheses than a Costco-sized Barrel of Monkeys.

By this point, everybody who has an Internet browser already knows what click fraud is.  Internet advertising often is priced by how many people "click" on an ad's link and travel to the advertiser's website.  Competitors, hooligans, and other cyber-rapscallions have developed programs to generate numerous clicks on such ads, thereby driving up the cost of the ads.  Many sites that host advertising have gone to extraordinary lengths to develop software to detect click fraud and thereby protect advertisers on their sites.  There have been many class action lawsuits regarding "click fraud," including settlements.

Along comes a website that is sort of popular -- Facebook.  It's not locked in the Stone Ages; it has heard of click fraud.  And so it decides to eliminate the possibility of future "click fraud" class actions by its advertisers by including within it's terms and conditions the following disclaimer:

I . . . UNDERSTAND THAT THIRD PARTIES MAY GENERATE IMPRESSIONS, CLICKS, OR OTHER ACTIONS AFFECTING THE COST OF THE ADVERTISING FOR FRAUDULENT OR IMPROPER PURPOSES, AND I ACCEPT THE RISK OF ANY SUCH IMPRESSIONS, CLICKS, OR OTHER ACTIONS.  FACEBOOK SHALL HAVE NO RESPONSIBILITY OR LIABILITY TO ME IN CONNECTION WITH ANY THIRD PARTY CLICK FRAUD OR OTHER IMPROPER ACTIONS THAT MAY OCCUR.

Seems straightforward, right?  And if some numskull were to actually sue Facebook for click fraud with this HUGE disclaimer in his contract, you would expect a court to immediately throw him out on his tuchus, right?

Not in California.

See In re Facebook PPC Advertising Litigation, Case Nos. 5:09-cv-03043-JF, 5:09-cv-03519-JF, 5:09-cv--03430-JF, Slip op. (N.D. Cal. Apr. 22, 2010).

Three plaintiffs who agreed to Facebook's terms and conditions and became advertisers on Facebook's website brought a class action against Facebook alleging that they had been charged for "invalid clicks" and "fraudulent clicks."  The complaint attributed these clicks to:  "'(a) technical problems; (b) system implementation errors; (c) various types of unintentional clicks; (d) incomplete clicks that fail to open the advertiser's web page; and (e) improperly recorded or unreadable clicks originating in some cases from an invalid proxy server or unknown browser types.'  The complaint describes 'click fraud' as the 'result of a competitor clicking on an advertiser's ad in order to drive up the cost of an ad or deplete the competitor's budget for placing ads.'"  Slip op. at 3 (quoting complaint).

Not surprisingly, Facebook moved to dismiss the complaint for failure to state a claim, pointing to its GIGANTIC DISCLAIMER.

In analyzing the breach of contract count, the court analyzed whether the contract language was ambiguous and susceptible to the plaintiffs' interpretation.  The court held that the agreement was unambiguous in disclaiming liability for third party click fraud.  Slip op. at 6.

BUT . . . the court held the disclaimer:

may be ambiguous with respect to whether it covers only "click fraud and other improper actions" by "third parties".  Plaintiffs claim that they have been charged for "invalid clicks" that are the result of Defendant's own conduct. . . . [The invalid clicks described in the complaint] arguably need not be fraudulent, improper, or the result of actions of third parties.

Slip op. at 6-7.

Thus, the court dismissed the breach of contract count to the extent it related to "click fraud" performed by third parties, but it refused to dismiss the breach of contract count to the extent it relied on Facebook's failure to prevent so-called "invalid clicks."  The court dismissed the claim for breach of the implied covenant of good faith and fair dealing because the statements in the complaint did not go beyond a mere breach of contract, and thus the implied covenant may be "disregarded as superfluous."  And it dismissed the unjust enrichment claim because there was an adequate remedy at law.

As for the Unfair Competition Law count, the court once again split the baby, allowing the claim to proceed for so-called "direct injury" claims against Facebook, but holding that the third party click fraud allegations failed to state a claim.  California's UCL has three prongs:  fraud, unlawfulness, and unfairness.  The court held that plaintiffs could not allege reliance sufficiently to maintain the fraud prong of the UCL.  But it determined that -- with respect to "direct injury" claims -- plaintiffs' allegation of systematic breach of contract met the unlawful conduct prong of the UCL.  Moreover, it held that the "unfairness" prong was met, borrowing the FTC's standard for unfairness in 15 U.S.C. sec. 45(n).  (This, of course, is inconsistent with other California precedent requiring a violation of a legislatively-announced policy in order for conduct to be "unfair.")

The bottom line is this:  despite a disclaimer that very clearly absolved Facebook of responsibility for clicks driving up the cost of advertising, a finding of some "ambiguity" in the provision will allow the claim  to proceed to costly class action discovery.  The lesson to lawyers is that in drafting disclaimers, one must make it doubly and even triply clear that under no conceivable set of circumstances is the client to be responsible for what is disclaimed.  The challenge -- particularly in light of opinions like this one -- is to do that with simple, crisp language, and resist the urge that such opinions create to add every conceivable synonym and scenario to the disclaimer.  Ironically, doing the latter may increase the likelihood of a court finding ambiguity.

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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.

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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.

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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. 

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Continuing with our settlement theme, this post discusses True v. American Honda Motor Co., 2010 WL 707338 (C.D. Cal. Feb. 26, 2010), in which U.S. District Judge Virginia A. Phillip ultimately rejected as unfair a class action settlement that she had preliminarily approved last August.  What changed in 6 months' time?  And can the settlement be salvaged?

Plaintiffs in True had sued Honda under California's Unfair Competition Law, the False Advertising Act, and unjust enrichment, alleging that Honda had falsely advertised the fuel economy of its Honda Civic Hybrid vehicles between 2003 and 2008 and claiming that the class had relied on these misrepresentations in paying a premium price for the vehicles.

It would appear that this is yet another one of those lawsuits that claims that the federal fuel efficiency standards that are required to be posted on new vehicles require certain kinds of driving for hybrid vehicles that some people may not understand actually promotes fuel efficiency, so that when they buy the car and drive it as they would other non-hybrid vehicles, they do not achieve the same fuel efficiency as the advertised performance using the federal standard.

After 11 months of discovery, the parties engaged in mediation and negotiated a nationwide class action settlement that the District Court preliminarily approved.  Notice went out to the class.  Ultimately, there were a number of objectors and a coalition of 25 state Attorneys General that filed oppositions to the initial proposed settlement.  The parties modified the settlement to meet many of the objections, and then moved for final approval by the District Court.

The proposed settlement did not create a settlement fund, but instead created certain categories of relief for class members.  Every class member would receive a DVD that Honda would produce that would demonstrate how to maximize the fuel efficiency of their hybrid vehicles.  Class members also could receive one of two rebates.  Option A gave a $1,000 cash rebate to those who sell their Civic Hybrid and trade it in on an eligible Honda vehicle.  Option B gave a $500 cash rebate to those who kept their Civic Hybrid and bought another eligible Honda vehicle.  In addition, a small subset of class members could receive a $100 cash payment, but only if they complained to their dealer or Honda and the dealer or Honda kept a written record of it. Finally, there was "injunctive" relief requiring Honda to change the advertising phrase "actual mileage may vary" to "actual mileage will vary."

The proposed settlement provided a full release to Honda of all claims relating to the fuel economy of the Civic Hybrid, and it allowed for incentive payments of $10,000 and $12,500 to the named plaintiffs, respectively.  Plaintiffs' counsel sought an award of $2,950,000, which Honda did not oppose.

Judge Phillip held that the class met the numerosity, commonality, and typicality requirements of Rule 23, but it failed the adequacy of representation requirement because the two named plaintiffs were part of the small subset of class members who would receive an actual $100 cash payment.  This presented an inherent conflict with the other class members, the court explained.  The court also held that the predominance and superiority requirements of Rule 23(b)(3) were met.

In assessing the fairness and adequacy of the settlement, the court challenged whether the sub-class of people who received a cash payment was fair at all.  They had no stronger or weaker legal claims than anyone else in the class.  And whether the defendants kept a record of their complaints was not in their control.  The court concluded that "the settlement here draws an arbitrary distinction among class members with identical claims and injuries, and allows some to receive a cash award, and others only a DVD and a limited rebate.  This is patently unfair, and counsels against approval of the proposed settlement."  Id. at *11.

The court also assessed the value of the rebates, noting that this is a coupon settlement that is generally disfavored.  The court analyzed whether the value of the settlement was reasonable in relation to the value of the class claims.

The court determined that the plaintiffs had reasonably strong claims.  It rejected the defendant's preemption defense, discounted the issue of whether California law could apply to a nationwide class, and then proceeded to discuss how strong the California Supreme Court's decision in In re Tobacco II, 46 Cal. 4th 298 (2009) was for the class.  The court did acknowledge, however, that a number of class members had objected to the settlement, indicating that they were pleased with their Honda Civic Hybrids and had achieved the mileage that Honda had advertised.  Id. at *15.  Indeed, the "majority of class members who opted-out . . . cited their satisfaction with the gas mileage they were receiving from their HCHs, or otherwise opposed the merits of the suit."  Id. at *23.

The court rejected the conclusions of plaintiffs' expert, which had assigned monetary values to the rebates and the DVD.

The court also expressed great concern about class counsel's requested fee, noting that a "lodestar amount is particularly inappropriate where, as here, the benefit achieved for the class is small and the lodestar award is large."  Id. at 20.  The court also expressed concern about the procedures used to negotiate the fee:

The size of the fee request also raises concerns in light of the fact that it was negotiated at the same time as the substantive relief to the class.  "Ordinarily, 'a defendant is interested only in disposing of the total claim asserted against it . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense.'" . . .

Here, of all of the components of the settlement, the only components with any determinative value are the attorneys' fees and incentive payments.  Under the terms of the settlement, there is no certainty that class members will receive any cash payments or rebates at all, but class counsel will receive a three million dollar payment regardless of whether one or 10,000 class members file valid claims.  Since there is no guarantee that [Honda] will pay any money out of the settlement to either class members or a cy pres beneficiary, to award three million dollars to class counsel who may have achieved no financial recovery for the class would be unconscionable.

Id. at *21 (citations omitted).

As a result of its analysis, the court concluded that the value of the settlement weighed against approval.

The decision in True demonstrates the continuing difficulty of obtaining approval of coupon settlements, even for weak claims that have little, if any, merit.

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When the California Supreme Court issued its opinion last summer in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), many commentators viewed it as a fundamental sea change in California's Unfair Competition Law jurisprudence, reading concepts of standing completely out of UCL class actions.  Others, however, were mindful of the context in which it arose, observing that the rules developed in tobacco and asbestos cases often are not rules of general application.

The Second District Court of Appeal recently issued a decision that suggests the latter view may be right.  In Pfizer v. Superior Ct., 2010 WL 660359 (Cal. App. Feb. 25, 2010), a consumer had sued the manufacturer of Listerine for a promotion it had run in 2004 to 2005 in which some TV ads and some product labels suggested Listerine was as effective as flossing in preventing plaque buildup.  The trial court had certified the following broad class:  "all persons who purchased Listerine, in California, from June 2004 through January 7, 2005."

The Court of Appeal had reversed, holding that the class definition was overbroad because it included numerous people who had no claim as a matter of law.  After the California Supreme Court decided In re Tobacco II, holding that Proposition 64's injury requirements do not apply to absent class members, it directed the Second District to reconsider its decision in light of the new opinion.

The Second District did so, and once again reversed the class certification.  In examining In re Tobacco II, the court noted that the tobacco case involved a decades-long campaign of allegedly deceptive and misleading advertising to which nearly everyone was exposed.  Id. The Second District held that although Tobacco II allows a plaintiff who actually relied on the misleading advertising to represent others who may have lost money as a result of it, "Tobacco II does not stand for the proposition that a consumer who was never exposed to an alleged false or misleading advertising or promotional campaign is entitled to restitution."  Id.

The court held that the class was overbroad because it encompassed many people who have no cause of action.  The court noted that "unlike the saturation advertising promulgated by the tobacco defendants, the Listerine 'as effective as floss' campaign was limited in its scope and lasted just over six months."  This led the court to conclude:

[L]arge numbers of class members were never exposed to the 'as effective as floss' labels or television commercials.  As to such consumers, there is absolutely no likelihood they were deceived by the alleged false or misleading advertising or promotional campaign.  Such persons cannot meet the standard of section 17203 of having money restored to them because it 'may have been acquired by means of' the unfair practice.  In the language of section 17203, with respect to perhaps a majority of class members, there is no doubt Pfizer did not obtain any money by means of the alleged UCL violation.

Id.  See also id. ("one who was not exposed to the misrepresentations and therefore could not possibly have lost money or property as a result of the unfair competition is not entitled to restitution").

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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.

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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.

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