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

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

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

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

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

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

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

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

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Sometimes if you shake them, you can coax a few more pages out of them.

No, not associates.  Printer ink cartridges. 

It's hardly news to those of us who actually change printer cartridges that there's some little bit of ink left in there.  We've all tried to coax it out when trying to print a last-minute brief or presentation and we've forgotten to stock up on backup cartridges.  And, at least intellectually, we know that extra bit of ink is in there to keep us from ruining the printer by running it completely dry, as we otherwise would if left to our own devices.

But who would've thought you could make a federal case about it?  Apparently at least one California resident.

In Baggett v. Hewlett-Packard Co., Case No. SACV 07-0667 AG (RNBx), Slip op. (C.D. Cal. Sept. 29, 2009), plaintiff brought a putative class action against HP because its laser jet printers shut down printer operations before the toner cartridges are really empty.  According to plaintiff, the average amount of toner left in the cartridge was 9% for Black, 26% for Cyan, 30% for Magenta, and 19% for Yellow.  The User Manual did not disclose that toner would remain in the cartridges when they reached "empty," but rather advised that the cartridges would yield up to 2,000 color pages.  Plaintiff sued for trespass to chattels, conversion, violation of the Unfair Competition Law, and fraudulent concealment.  The court granted the defendant's motion for summary judgment, thus mooting plaintiff's motion for class certification.

The court granted summary judgment on the trespass to chattels and conversion counts, applying the economic loss doctrine, which "requires a purchaser to recover in contract, and not tort, for 'purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise.'"  Slip op. at 3 (citation omitted).  The purpose of the rule is to ensure that the law of sales is not overrun by tort law.  Id.  The court rejected plaintiff's argument that the rule did not apply to intentional torts.  Id. at 4.

The court also rejected plaintiff's UCL claim, finding that the fact that he might have been able to print more pages with his original cartridge if HP had not instituted its automatic "hard stop" was irrelevant.  Id. at 5-6.  Rather, Plaintiff was promised the ability to print up to 2,000 color pages, which he apparently could do.  As such, "Plaintiff received exactly what he paid for, and his "loss" of toner beyond that which he was promised cannot confer standing under the UCL.

Finally, the court considered and rejected plaintiff''s fraudulent concealment theory, which was based on the computer providing messages that toner must be replaced and the manufacturer failing to disclose that cartridges still contain "'a significant amount of toner'" when that message comes on.  Id. at 6-7 (citation omitted).  The court noted that "at no point did HP represent to Plaintiff that no toner remained in the cartridge," and observed that:

Under California law, a defendant can only be held liable for an omission where it is 'contrary to a representation actually made by the defendant, or an omission of fact the defendant was obligated to disclose.'"

Id. at 7 (citations omitted).

Because all of Plaintiff's causes of action had run dry, the court dismissed the case, holding that plaintiff's motion for class certification was moot.

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

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

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

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

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

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

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

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

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

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When I teach my product liability course as an adjunct professor, I often include on the exam a class action question.  It's always a traditional issue-spotting exam, and I expect to see students set forth the elements for class certification and analyze them in the course of their answer.

One of the elements of class certification that all but the best of my students often ignore is the class definition.  Although Federal Rule of Civil Procedure 23 does not have any express requirements for class definitions, courts recognize that there is an inherent rule for all class actions that the class be objectively identifiable and ascertainable at the outset of the litigation.  Otherwise, how could one tell who would be bound by the class adjudication?

I previously have written about a decision in which a court refused to certify a class based on problems with the class definition.  Today, I proffer to you another -- which, incidentally, was won by my new colleagues John Beisner and Jessica Miller.

In Solo v. Bausch & Lomb, Inc., MDL No. 1785, Slip Op. (D.S.C. Sept. 25, 2009) (AmLaw Daily registration may be required), the court refused to certify two classes of California and Pennsylvania consumers, respectively, who bought contact lens  solution between September 1, 2004 and April 10, 2006 and discarded it after the defendant told consumers to do so.

The ReNu with MoistureLoc litigation is familiar to everyone.  It was posited that ReNu was responsible for an increase in cases of eye infection and blindness due to a fungus, fusarium keratitis.  The infections were first noticed in Asia, and after the CDC noted an increase in fusarium keratitis infections in the United States, the defendant recalled its product and advised consumers to switch to another contact lens solution.  In exchange, the defendant offered a refund or a coupon applicable to others of its contact lens solutions.

Nevertheless, there were a slew of lawsuits seeking recovery for "economic harm" allegedly suffered by ReNu consumers.  The MDL court had refused to certify a nationwide class action, and subsequently refused to certify a class action involving just California-only and Pennsylvania-only classes.

Plaintiffs filed another amended complaint for Pennsylvania-only and California-only classes, asserting various breach of warranty claims, consumer fraud claims, and unjust enrichment claims.  The court dismissed the warranty claims, but allowed the California statutory claims and the California and Pennsylvania unjust enrichment claims to proceed.

Interestingly, one of the three named plaintiffs in the action subsequently voluntarily dismissed her claims after changing her story about whether she bought and discarded Renu in 2006.  But the claims of two plaintiffs (one California, one Pennsylvania) made it to the certification motion.  For each state class, the definition was:

All people in [California/Pennsylvania] who purchased MoistureLoc, other than for resale, from September 1, 2004 through April 10, 2006, who lack full reimbursement for any quantity discarded following Bausch's MoistureLoc recall.

Id. at 5. 

The court described the class definition as "'an essential prerequisite to maintaining a class action,.'"  Id. at 6 (citation omitted).  Citing Wright, Miller & Kane, the court declared that the class definition must be "'sufficiently definite so that it is administratively feasible for a court to determine whether a particular individual is a member,'" and noted that the definition "'must not depend on subjective criteria or the merits of the case or require an extensive factual inquiry to determine who is a member.'"  Id. at 7 (citations omitted).  Thus, "[w]here determining membership in the class would require fact-intensive mini-trials, the class is not ascertainable, and the court should deny certification."  Id. at 8.  Citing the court's decision in In re Phenylpropanolamine (PPA) Products Liability Litigation, 214 F.R.D. 614 (W.D. Wash. 2003), the court exhibited great sensitivity to how class members would prove that they bought the product, as well as how much was left when they discarded it,  Slip op. at 9.  

The court was especially aware that memories fade over time, and it noted the varying testimony of the two remaining named plaintiffs, as well as the named plaintiff who had voluntarily dismissed her claim after changing her testimony about whether she bought and discarded the product.  The court also recognized that determining who "lack[ed] full reimbursement" for their losses would require mini-trials.  Would a consumer who used most of the solution and received an $8 replacement coupon be a class member?  What if he failed to use the coupon?  Id. at 11.

The court concluded that mini-trials were unavoidable, and that they made any class unmanageable:

[T]he membership of plaintiffs' proposed class would require countless factual inquiries into the individual circumstances of potential class members, most of whom will have long ago forgotten the details relevant to plaintiffs' allegations.  Moreover, it is hard to fathom how thousands of unnamed putative class members could possibly provide credible testimony about their class membership more than three years after the fact when the proposed class representatives themselves have presented conflicting testimony that changed over time. . . . While the court realizes it is likely that many individuals incurred some monetary loss as a result of the MoistureLoc recall, plaintiffs must still meet the requirements for class certification.

Id. at 14.

The opinion in Solo should prove useful in other cases where consumer products have already been consumed and proving loss is a difficult case of recall, rather than documents. 

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My Grandaddy used to advise me never to look a gift horse in the mouth.  I've generally followed his advice, although I sometimes engage in "re-gifting."  But my Grandaddy was never a plaintiffs' lawyer in California.  There, looking a gift horse in the mouth apparently can be quite lucrative.

Last week a California federal court refused to dismiss a putative class action against McDonald's brought buy a man who tried to exchange his $5 gift card for cash at the fast food restaurant.  See Marilao v. McDonald's Corp., 2009 WL 3007368 (S.D. Cal. Sept. 21, 2009).  The case will proceed under two counts:  (1) California's Unfair Competition Law, and (2) unjust enrichment.

California Civil Code section 1749.5(b)(2) provides that "any gift certificate with a cash value of less than ten dollars ($10) is redeemable in cash for its cash value."  Plaintiff purports to represent a class of individuals who received McDonald's gift cards and want to redeem them for cash.  The cards provide on the back side that "[t]he value on this card may not be redeemed for cash . . . unless required by law."  McDonald's allegedly refused to give plaintiff cash when he tried to redeem his card.

Plaintiff pled a UCL claim, alleging a violation of section 1749.5(b)(2) as the predicate illegal act.  McDonald's challenged plaintiff's standing to bring a UCL claim, arguing that such claims can only be brought by one who suffered injury in fact and lost money or property as a result of the alleged unfair competition.  Because plaintiff could still exchange the card for five dollars' worth of McDonald's merchandise, he had suffered no injury and no loss of money or property, the defendant argued.  The court squarely rejected the argument, observing that plaintiff pled he was denied money to which he has a right under law.  That was sufficient to establish standing under the UCL, the court concluded.

And because the plaintiff adequately alleged a violation of the UCL based on McDonald's purported failure to comply with Civil Code section 1749.5(b)(2), he also sufficiently alleged an unjust enrichment claim, the court concluded.

The court did, however, dismiss the claim pled under California's False Advertising Law.  There, plaintiff had alleged that the language on the back of the card failed to apprise consumers of their right to request cash and deceived consumers into not requesting cash.  Plaintiff, however, did not allege that he had relied on that language and been injured thereby.  Accordingly, the court dismissed the claim.

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

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

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

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

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

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

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

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One of the favorite arguments of plaintiffs' counsel is that choice of law problems can be solved by simply applying one law -- the law of the manufacturer's residence -- to the entire class of purchasers.  Typically, that argument is made in support of class certification.  And typically -- unless you happen to be in Oklahoma state court -- that argument is flatly rejected.  Using the factors of the Restatement (Second) Conflicts of Law, it simply makes no sense to apply the law of, say, Michigan to a transaction that occurred in, say, Texas involving a Texas resident and the alleged failure of the product in Texas.  The Texas consumer's legitimate expectations are that the law of her state will govern in such a transaction.

A recent decision out of the Central District of California follows the trend of rejecting the law of the manufacturer's residence as the sole law governing a nationwide consumer class action, but does so in a somewhat unique context:  deciding whether to enforce an arbitration provision.  See In re DirecTV Early Cancellation Fee Litigation, 2009 WL 2912656 (C.D. Cal. Sept. 9, 2009).

In DirecTV, plaintiffs alleged that the defendant's policy of requiring a minimum commitment period and imposing early cancellation fees on those who stopped their service before the end of the commitment period violated California's Unfair Competition Law and the consumer protection laws of various states.  They also pled counts for unjust enrichment, money had and received, and declaratory relief.

The Customer Agreement provided to every subscriber included an arbitration clause.  It adopted the rules of JAMS, waived anyone's right to a class action, and chose the law of the customer's home state to govern the "interpretation and enforcement" of the agreement.  The named plaintiffs were residents of Florida and Virginia.  DirecTV is a California resident.

The court was faced with the question whether to enforce the arbitration agreement.  Although it noted a trend toward not enforcing such agreements -- particularly where they contain class action waivers -- the court noted that the language of the Federal Arbitration Act is mandatory, and the exceptions to it are narrow.  Thus, unless the arbitration provision was unconscionable, the court was required to enforce it.  Unconscionability, the court noted, is governed by the appropriate state law.

Because the court sat in California, it had to use California's conflicts of law rules to determine whether to enforce the Customer Agreement's choice of law provision.  California courts have a strong policy favoring enforcement of choice of law provisions, and only refuse to enforce such provisions where the chosen state has no relationship to the parties or transaction and there is no reasonable basis for the parties' choice, or where applying the law of the chosen state would be contrary to a fundamental policy of California law where California has a materially greater interest in the determination of the issue than the chosen state.  2009 WL 2912656 at *4 (citing Restatement (Second) sec. 187(2)).

Obviously, the states where the plaintiffs lived had a relationship to the contract.  So plaintiffs argued that California, as the home of the manufacturer, had a materially greater interest in applying its law.  The court disagreed, citing Klussman v. Cross Country Bank, 134 Cal. App. 4th 1283, 1299 (2005) for the proposition that a state's interest in general matters of corporate regulation were materially outweighed by a state with a number of significant contacts to a consumer transaction.  Accordingly, the court chose to apply the law of Virginia and Florida to determine whether the Customer Agreement was unconscionable.  Not surprisingly, the court concluded that it was not.  Florida law only voids contracts for unconscionability where there is proof of both procedural and substantive unconscionability.  And in Virginia "unconscionability is 'a narrow doctrine' that invalidates only the most inequitable of contracts."  Id. at *6.

This decision illustrates once again that conflicts of law principles matter in class action litigation, and different states have different rules that impact the claims of their citizens.  Lawyers would be wise to pay close attention to conflicts of law issues in class action cases.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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California's Unfair Competition Law has an admittedly broad reach, but Californians took an important step to rein in the abuse of this statute by passing Proposition 64, which requires UCL plaintiffs to have suffered an actual injury in order to bring a claim.  Courts interpreting Proposition 64 have carefully enforced this requirement.

In Klein v. Avis Rent a Car System, Inc., 2009 WL 151521 (C.D. Cal. Jan. 21, 2009), plaintiff and/or his counsel had brought a total of 8 putative class actions against car rental companies.  The defendants were alleged to have sold extended protection insurance coverage that they either underwrote themselves or with third party entities, at coverage rates that had not received the necessary approvals from California's Insurance Commissioner.  

Although plaintiff alleged that at least once in 2007 he bought the extended coverage with a vehicle he rented, plaintiff did not identify whose coverage he purchased.  Suing under California's Unfair Competition Law, plaintiff sought recovery on behalf of a nationwide class of people who bought extended coverage in California in the last 4 years.  Plaintiff sought declaratory and injunctive relief, as well as restitution and disgorgement of all monies defendants had received from the class for extended coverage.

The defendants moved to dismiss the complaint, arguing that the plaintiff had not pled an injury that he suffered as a result of the alleged wrongful conduct.  The District Court agreed, granting the motion.

As the court noted, Californians passed Proposition 64 precisely to limit the ability to bring UCL claims to only those people who have "suffered injury in fact and [have] lost money or property as a result of the unfair competition."  Citing two recent California decisions, the court explained that the plaintiff did not suffer an economic loss as a result of the mere failure to get regulatory approval for the rates charged.  He received the coverage he paid for, did not have a claim denied, and did not allege he paid more for the coverage than he would have if the defendants had obtained the necessary regulatory approvals of the rates.  Thus, the plaintiff was barred by Proposition 64 from bringing a UCL claim. 

The court did give the plaintiff leave to amend his complaint to identify the insurance he bought and to plead additional facts about the insurance he purchased that would establish an actual injury resulting from the lack of regulatory approval.  But the import of the court's opinion was clear:  unless plaintiff can establish that he paid more than he would have had to pay for Commissioner-approved coverage, plaintiff has no injury and no claim.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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