Certiorari denied in Ticketmaster, et al. v. Stearns, et al.

On the consumer litigation front, today the United States Supreme Court denied certiorari in Ticketmaster, et al. v. Stearns, et al. (Sup. Ct. Case No. 11-983).  Stearns v. Ticketmaster Corp., 655 F.3d 1013 (9th Cir. 2011) examined a number of consumer law concepts in the class context.  For example, the Ninth Circuit shot down the federal court standing challenge attempted in UCL actions post-Tobacco II.  And, on the issue of reliance in CLRA claims, the Court said:

A CLRA claim warrants an analysis different from a UCL claim because the CLRA requires each class member to have an actual injury caused by the unlawful practice. Steroid Hormone Prod. Cases, 181 Cal.App.4th 145, 155-56, 104 Cal. Rptr.3d 329, 337 (2010). But "[c]ausation, on a classwide basis, may be established by materiality. If the trial court finds that material misrepresentations have been made to the entire class, an inference of reliance arises as to the class." Vioxx, 180 Cal.App.4th at 129, 103 Cal.Rptr.3d at 95; see also Vasquez v. Superior Court, 4 Cal.3d 800, 814, 484 P.2d 964, 973, 94 Cal.Rptr. 796, 805 (1971); Steroid, 181 Cal. App.4th at 156-57, 104 Cal.Rptr.3d at 338. This rule applies to cases regarding omissions or "failures to disclose" as well. See McAdams v. Monier, Inc., 182 Cal.App.4th 174, 184, 105 Cal.Rptr.3d 704, 711 (2010) (holding that because of defendant's failure to disclose information "which would have been material to any reasonable person who purchased" the product, a presumption of reliance was justified); Mass. Mut. Life Ins. Co. v. Superior Court, 97 Cal. App. 4th 1282, 1293, 119 Cal.Rptr.2d 190, 198 (2002) ("[H]ere the record permits an inference of common reliance. Plaintiffs contend Mass Mutual failed to disclose its own concerns about the premiums it was paying and that those concerns would have been material to any reasonable person contemplating the purchase...." If proved, that would "be sufficient to give rise to the inference of common reliance on representations which were materially deficient.").

Stearns, at 1022.

"Hot gas" case against Chevron lives to fight another day in Klein v. Chevron U.S.A., Inc.

Hot gas.  This is not a term of art describing oral argument.  It literally refers to gasoline, and its propensity to expand as it gets warmer.  In Klein v. Chevron U.S.A., Inc. (January 25, 2012), the Court of Appeal (Second Appellate District, Division Seven) dispensed wisdom, a drop at a time, about the viability of claims related to hot gas.  Before I pump up this case any more, allow me to fuel your appetite with some background.  After that we'll motor on to the significant holdings.

How does hot gas work again?  The Court explained:

Motor fuel expands in volume as it is heated. As a result of this thermal expansion, a gallon of motor fuel at a warmer temperature has less mass and less energy content than a gallon of motor fuel at a cooler temperature. A temperature increase of 15 degrees causes motor fuel to expand in volume by approximately one percent, with a corresponding one percent decrease in energy output. For example, when 231 cubic inches of motor fuel, which equals one volumetric gallon, is heated from 60 degrees Fahrenheit to 75 degrees Fahrenheit, the motor fuel will expand to occupy a volume of approximately 233 cubic inches.

Slip op., at 4.  Ahh.  Anyhow, after a lot of discussion about regulations, and how fuel must be temperature adjusted if sold in amounts about 5,000 gallons, the Court turned to the theories impacted by the trial court's rulings on a demmurer and motion for judgment on the pleadings.

First, the Court held that the trial court erred when it dismissed the plaintiffs' claims arising under the CLRA and UCL:

Chevron's arguments are predicated on the assumption that the only possible form of relief in this case is a court order mandating that Chevron offer its retail consumers temperature-adjusted motor fuel through the implementation of ATC technology or other similar technologies. The plaintiffs' complaint, however, seeks other relief, including a disclosure requirement that, if granted, might not require substantial changes to the way Chevron currently sells motor fuel at the retail level.

Slip op., at 26.  That "other relief" mentioned by the Court includes injunctive relief compelling disclosure to consumers.  The Court next concluded that no alternative means exist for addressing the plaintiffs' issues.  On that basis, the Court concluded that judicial abstention was improper.

The Court then turned to specific claims, beginning with a half-hearted standing challenge.  The Court wasn't impressed: "Chevron concedes that, at the pleading stage, a plaintiff asserting a UCL or CLRA claim 'satisfies its burden of demonstrating standing by alleging an economic injury.' (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 254.)"  Slip op., at 35.  (Had to get that Boschma cite in there - my colleague, J. Mark Moore, argued that appeal.)

Next, the Court tackled the prongs of the UCL, beginning with the "unfair" prong:

At the pleading stage, we cannot presume that these alleged harms are not “substantial” or are otherwise outweighed by benefits that consumers derive from Chevron's practice of selling non-temperature adjusted motor fuel at the retail level. (Camacho, supra, 142 Cal.App.4th at p. 1403.) Although the evidence in this case may show that consumers do not suffer any substantial injury from the sale of nontemperature adjusted fuel or that the costs associated with remedying such injuries outweigh any benefit to consumers, we agree with the trial court‟s conclusion that such issues must “be determined on a developed factual basis.”

Slip op., at 37.  Chevron argued that it was not obligated to pass along or disclose its profit margins.  The Court distinguished Chevron's authority:

There are, however, important distinctions between this case and McCann. First, the holding in McCann has no relevance to plaintiffs' claim that, by selling non-temperature adjusted fuel at retail, Chevron is able to charge consumers more in purported motor fuel tax than it is required to pay to the government. Plaintiffs' tax-based claim has nothing to do with Chevron's failure to disclose its profit margins or the price at which it procures motor fuel at wholesale.

Second, unlike in McCann, the “gist” of plaintiffs‟ unfairness claim is not that Chevron was required to “disclose their own costs or profit margins” to consumers. (McCann, supra, 129 Cal.App.4th at pp. 1387, 1395 [“gist” of plaintiff's claim was that defendant “fails to disclose . . . that it gets a more advantageous rate of exchange on the wholesale market than it gives the customer”].) Instead, plaintiffs argue that, by failing to compensate for temperature variations in retail motor fuel, Chevron is engaging in a practice that misleads consumers as to the actual amount of motor fuel they are purchasing and the actual price that they are paying for that fuel. By contrast, the plaintiffs in McCann were informed of the specific exchange rate they would receive in their retail transactions (id. at p. 1382), but argued that the money transmitter had a duty to disclose the more favorable wholesale rate at which it was able to purchase foreign currency and pass those benefits on to consumers.

Were plaintiffs in this case simply alleging that Chevron had a duty to disclose the price at which it procured motor fuel at wholesale, McCann might foreclose such a claim. However, nothing in McCann suggests that the UCL does not, as a matter of law, apply to conduct that allows a retailer to charge more in taxes than it is required to pay to the government or to obscure the true cost of goods at retail.

Slip op., at 39.  The Court then dismantled a "safe harbor" argument, explaining that the "safe harbor" statute must "explictly" prohibit liability for the conduct.  Chevron's attempt to fashion a "safe harbor" by implication was rejected.

The Court then concluded that plaintiffs stated a claim under the "fraudulent" prong:

At the pleadings stage, we cannot say, as a matter of law, that consumers are not likely to be deceived in the manner alleged by plaintiffs. As the trial court observed, plaintiffs have alleged “facts which, if true, may reveal that members of the public . . . [assumed] that . . . they were receiving standardized units of motor fuel when, in fact, the energy content of each gallon depended on the temperature of the motor fuel at the time of purchase.” Plaintiffs have also alleged facts that, if true, may reveal that consumers were deceived as to the true price of motor fuel, which may vary depending on the temperature at which it is sold.

Slip op., at 43.  The Court distinguished Bardin v. Daimlerchrysler Corp. (2006) 136 Cal.App.4th 1255 on the ground that the plaintiffs alleged a specific expectation in the public about what they receive at a gasoline pump.  Following that discussion, the Court immediately turned to the CLRA, noting that conduct which is "fraudulent" under the UCL also violates the CLRA.  And, stay with me here, since the plaintiffs stated a claim under the CLRA, based on the same deceptive conduct that satisfied a UCL "fraudulent" claim, they, by definition, stated a UCL claim under the "unlawful" prong, since it borrows the CLRA violation.  Presto.

The breach of contract and unjust enrichment claims didn't do so well.  Saved you eight pages of reading right there.

And to think that I was not impressed with the "hot gas" theory when I heard it years ago.  What was I thinking?

Supreme Court activity for the week of February 13, 2012

With a lot of catching up to do, I'm starting easy.  The California Supreme Court held its (usually) weekly conference on February 15, 2012.  Notable results include:

• On a petition for review, review was granted in In re Cipro Cases I & II.  This case is one to follow if you practice in the area of anti-competitive behavior.  There's a big dash of pre-emption thrown in, along with some procedural questions about a trial court's obligation to rule on evidentiary objections at summary judgment.
• On a petition for review, review and depublication were denied in Collins v. eMachines, discussed on this blog here. The Court of Appeal held that “injury in fact” can be satisfied by alleging as damages the difference between the actual purchase price and the fair market value of a defective product. 

Court revives claims of failure to disclose and active concealment of defects from computer purchasers

Reporting on this case pains me greatly.  I should be pleased to report on a CLRA and UCL decision that revives consumer claims.  But all I feel is pain.  Let me explain by quoting from the case.  The very first sentence says, "In this class action alleging a failure to disclose a computer defect involving a microchip that controlled floppy disk data transmission, plaintiffs Tammy Collins and Rudolph Roma appeal from a judgment on the pleadings."  Huh?  Floppy disk data transmission.  Rings a bell.  Nope, can't place it.  Must be some highfalutin, newfangled technology.  I recognize "data."  Anyhow, in Collins v. eMachines, Inc. (pub. ord. December 21, 2011), the Court reviewed a trial court order granting a motion for judgment on the pleadings.

It was alleged that defendant failed to disclose and actively concealed the disk controller defect from potential purchasers. Despite knowing of the defect and knowing that the defect could result in critical data corruption, executives of eMachines directed the company to continue to sell the defective computers after October 31, 1999. eMachines actively concealed the existence of the defect from purchasers by, among other practices specified in the FAC, continuing to issue the warranty knowing the computers had the defect, and engaging in misleading “customer service” practices that concealed the defect in online “customer support” guides, in customer service diagnoses of computer problems, and at call centers.  The case was stayed for four years while cases in other states moved forward.

Turning first to the CLRA, the Court restated the LiMandri circumstances giving rise to actionable deceit.  The Court recognized the FAC as alleging factor (2), when the defendant has exclusive knowledge of material facts not known or reasonably accessible to the plaintiff, and factor (3), when the defendant actively conceals a material fact from the plaintiff.  The Court then agreed that a "reasonable" consumer would certainly find data corruption to be material information in connection with a computer.

Next, the Court distinguished Daugherty, observing that, in Daugherty, the only represetation made was the warranty, and the vehicles performed adequately as warranted.  The Court was similarly dismissive of Bardin, in which it was alleged that exhaust manifolds were likely to fail after the warranty period.  The Court explained that the manifolds in Bardin worked they way they were supposed to under the warranty.  Contrasting the circumstances, the Court said, "Because a floppy disk, at the time of the complaint, was integral to the storage, access, and transport of accurate computer data, the floppy disk was central to the function of a computer as a computer. The exhaust manifolds at issue in Bardin, by contrast, were just blowing smoke."  Slip op., at 12.  That's funny.  You see, the exhaust manifold vents combustion byproducts...

Regarding the UCL, the Court relied on its discussion about Daugherty and Bardin to conclude that a claim under the UCL was easily stated as well.  The Court agreed that consumers certainly had an expectation about data integrity when they purchased the affected computers.

After also concluding that the allegations supported a claim for common law fraud, the Court concluded that legal remedies were adequate, rendering an unjust enrichment claim unnecessary.

I should also tag this one with "Dinosaurs," given the discussion of floppy disk drives.  That reminds me that I should tell you about the time I saved data on a bent floppy disk drive by removing the casing and putting the raw disk in a disk drive.  The year was 1985.  Madonna, Huey Lewis, Duran Duran and Wham! were dominating the charts...

[extended period of blank stares]

...and that's how I saved all that data!

Lopez v. Nissan N.A. provides an example of Cel-Tech safe harbor under the UCL

In the realm of UCL jurisprudence, Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163 (1999) is a major decision, cited for numerous propositions, including the broad scope of the UCL. But Cel-Tech is also cited for something known as the "safe harbor" rule.   Under the "safe harbor" rule as enunciated in Cel-Tech, if the Legislature expressly declares conduct to be "lawful," or expressly forbids a claim for certain conduct, then that conduct falls within a "safe harbor" where no UCL claim may be asserted.  Cel-Tech, at 182.

In Lopez v. Nissan North America, Inc. (Dec. 5, 2011), the Court of Appeal (Second Appellate District, Division Four) considered a trial court decision granting summary judgment in a case alleging that Nissan calibrated odometers to over-register miles driven by at least two percent.  Nissan moved for summary judgment, arguing that California law considers an automobile odometer  "correct" if it registers the actual mileage within a tolerance of plus or minus four percent (Bus. & Prof. Code § 12500(c)).  The trial court granted summary judgment for Nissan, concluding that California's "safe harbor" provision – section 12500(c) – does not protect manufacturers from liability for intentional miscalibration, but that plaintiffs failed to raise a triable issue as to whether Nissan had deliberately designed its odometers to overregister mileage.

The Court of Appeal agreed, holding:

We hold that passenger vehicle odometers are "correct" if they register actual mileage within the four percent tolerance and the designer or manufacturer does not deliberately miscalibrate them to underregister or overregister mileage. This standard is substantially the same as that applied by the trial court in granting summary judgment for Nissan.

Slip op., at 2.  The Court found section 12500(c) to be a "safe harbor" provision, provided that intentional miscalibration was not demonstrated.  Explaining itself, the Court said:

Similarly, we conclude that section 12500, subdivision (c) provides a safe harbor against UCL claims complaining about the accuracy of odometers that qualify as “correct” under that provision. (§ 12500, subd. (c); Cel-Tech, supra, 20 Cal.4th at p. 183.) California law specifically permits a slight measure of inaccuracy in odometers because it is uniformly understood that “errorless value or performance of mechanical equipment [including odometers] is unattainable.” (NIST Handbook, Appx. A, § 2.1.) Just as “[n]o law generally requires a manufacturer to use the most expensive or most durable materials in the manufacture of its products” (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1273), neither the UCL nor any other law requires Nissan to employ the most accurate possible odometer design. (See Alvarez, supra, 656 F.3d at p. 935.) With respect to an odometer that qualifies as “correct” even though it may not be 100 percent accurate, the Legislature has implicitly determined that any slight injury to consumers does not outweigh the harm if more stringent requirements for precision were to apply. In deeming qualifying odometers “correct,” section 12500, subdivision (c) “clearly permit[s]” their design (CelTech, supra, 20 Cal.4th at p. 183), and we “may not use the unfair competition law to condemn actions the Legislature permits.” (Id. at p. 184.)

Slip op., at 25.

There are many pages of discussion about the evidence in the case.  Had the plaintiffs established an intentional miscalibration, it would have been a different game.   But they didn't, at least to any court's satisfaction.  Not much to say beyond that.

Another Court of Appeal lines up behind Cohen v. DIRECTV, Inc.

Bad facts make bad law.  Presumably the corollary is that good facts make good settlements, and never become law.  And this is all relevant to the recent decision from the Court of Appeal (Second Appellate District, Division Three).  In Davis-Miller v. Automobile Club of Southern California (pub. Nov. 22, 2011), the Court considered consolidated appeals of the denial of class certification in a case concerning a roadside battery service program that provides jump-starts and sells and installs batteries for stranded motorists.

The trial court concluded that common issues did not predominate.  In particular, the trial court credited evidence showing that most class members needed the batteries they were sold and very few class members were exposed to the alleged false advertising about the roadside assistance program.  Thus, concluded the trial court, commonality could not be satisfied.  Whether you agree with that conclusion depends, in part, upon where you come down on the issue of classwide reliance in UCL cases.  How you apply this case beyond its facts also depends on your point of view.

The Davis-Miller Court embraced the Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009) treatment of Tobacco II.  But it did so in the face of sharp criticism.  Steroid Product Hormone Cases concluded that Cohen appeared to have disregarded Tobacco II, saying:

We agree that Tobacco II did not dispense with the commonality requirement for class certification. But to the extent the appellate court's opinion might be understood to hold that plaintiffs must show class members' reliance on the alleged misrepresentations under the UCL, we disagree. As Tobacco II made clear, Proposition 64 did not change the substantive law governing UCL claims, other than the standing requirements for the named plaintiffs, and "before Proposition 64, 'California courts have repeatedly held that relief under the UCL is available without individualized proof of deception, reliance and injury.'[Citation.]" (Tobacco II, supra, 46 Cal.4th at p. 326.)

So how does one resolve this conflict?  Literally applying Tobacco II, its seems inconsistent with the Supreme Court's construction of the UCL to apply any evidence associated with reliance to class claims.  If the named plaintiff has standing, that's the end of the inquiry.  The "likely to deceive" standard of the fraudulent prong of the UCL has not been repealed or changed.  New standing requirements apply only to the named class representative. 

Pragmatically, of course, it's a different story.   Many courts philosophically disagree with the UCL's amalgamation of strict liability and quasi-fraud theories.  Then again, legislation is the perogative of the legislature.  Until the legislature or another ballot initiative changes the UCL's scope substantively, it should be applied consistent with its plain language and the construction supplied by the California Supreme Court.

Register for the Golden State Antitrust and Unfair Competition Law Institute

The 21st Annual Golden State Antitrust and Unfair Competition Law Institute is now open for registration.  This informative MCLE program is sponsored by the State Bar of California, Antitrust and Unfair Competition Law Section.  The full day Institute (followed by the Antitrust Lawyer of the Year Award Dinner) will take place on Thursday, October 27, 2011 at the Westin St. Francis Hotel in San Francisco.

View the complete program here.

View a printable brochure here.

Register here.

I attended this program last year as a speaker, and I can tell you from personal experience that the panels are heavy-duty stuff.

Degelmann v. Advanced Medical Optics applies Kwikset to support UCL standing but finds medical device preemption applies

I've been swamped at work, so posts around here have been few and far between.  But there haven't been many class-related decisions to write about either, so maybe you didn't miss much.  Today, however, when the legal profession is repenting, I at least have some time to write.  In Degelmann v. Advanced Medical Optics (9th Cir. Sept. 28, 2011), the Ninth Circuit examined UCL standing and medical device preemption.  In Degelmann, the plaintiffs sought to represent a putative class of purchasers of contact lens solution. Their suit alleged that defendant violated California’s Unfair Competition Law (“UCL”) and False Advertising Law (“FAL”) by marketing Complete MoisturePlus (“MoisturePlus”) as a product that cleans and disinfects lenses. The district court granted defendant's motion for summary judgment, ruling that plaintiffs lacked standing.

First, the Court examined the plaintiffs' standing under the UCL:

Here, as in Kwikset, the plaintiffs allege that they paid more for a product due to reliance on false advertising. The district court in this case was likely correct that Degelmann and Lin would have bought other contact lens solution had they not purchased MoisturePlus. However, as elucidated by the Kwikset court’s discussion, it does not necessarily follow that they did not suffer economic harm. Degelmann and Lin presented evidence that they were deceived into purchasing a product that did not disinfect as well as it represented. Had the product been labeled accurately, they would not have been willing to pay as much for it as they did, or would have refused to purchase the product altogether. The district court’s reasoning—that class members would have bought other contact lens solution, and therefore suffered no economic harm— conceived of injury in fact too narrowly.

Slip op., at 18565.  In that same discussion, the Court distinguished Birdsong v. Apple, Inc.:

The inquiry into injury in fact in this case, where the class makes claims under both the UCL’s fraud prong and the FAL, is not controlled by Birdsong v. Apple, Inc., 590 F.3d 955 (9th Cir. 2009). In that case, purchasers of iPod headphones pursued a claim under the UCL’s “unfair” and “unlawful” prongs, asserting that listening to loud music on the headphones could result in hearing loss. They did not allege economic harm from having purchased headphones in reliance on false advertising, but rather claimed that the inherent risk of the headphones reduced the value of their purchase and deprived plaintiffs of the benefit of their bargain. Id. at 961. The court in that case found that the claim of economic harm was not sufficient to plead injury in fact in part because, in distinct contrast to the MoisturePlus labeling at issue in this case, Apple had not represented that the headphones were safe at high volume. Rather, “Apple provided a warning against listening to music at loud volumes.” Id. Because there is allegedly false labeling and advertising at issue in this case, Birdsong does not aid our disposition here.

Slip op., at 18565-66.  So far, so good for the plaintiffs.  But then the Court discusses preemption.  The Court found that the lens solution at issue satisfied FDA requirements for labelling contact lens solution.  The Court concluded that, having met the standard, the UCL and FAL would necessarily have to impose additional obligations in order for the plaintiffs to state any claim, which would then invoke preemption, immediately precluding the claim:

In order for the class to recover in this lawsuit, a court would have to hold that California’s UCL and FAL required something different than what the FDA required in order for AMO to label MoisturePlus a disinfectant. Those California laws would have to require that AMO test for Acanthamoeba, and show that MoisturePlus kills it in sufficient quantities. That is, California law would have a requirement that is additional to the federal requirements.

Slip op., at 18569.  And that, as they say, was that.  You have standing, but you lose.  At least it's good to have some guidance from the Ninth Circuit on the application of Kwikset to federal standing arguments.

Strong-ARM tactics dealt a stunning setback in Boschma v. Home Loan Center, Inc.

After the great real estate implosion, lenders have been very busy, attempting to justify a number of questionable practices and products.  One such loan product, the Option ARM, has been challenged in state and federal courts.  Option ARM loans are complex forms of adjustable rate loans that generally include several payments options during the early years of the loan.  One payment option includes the ability to make a "minimum" payment for several years.  However, many Option ARM loan minimum payments are insufficient to pay accruing interest after an initial "teaser" interest rate that is very low.  Once the "teaser" rate period expires, the unpaid interest is added onto the loan, increasing the principal balance owed on the loan (negative amortization).  Because of their complexity, clear disclosures to borrowers are essential.  In Boschma v. Home Loan Center, Inc. (August 10, 2011), the Court of Appeal (Fourth Appellate District, Division Three) held that a complaint alleging a lender's failure to disclose that negative amortization would definitely occur (instead describing that scenario as merely possible), was sufficient to state violations of the UCL and common law fraud.

The Court described the claims of the Second Amended Complaint:

The gravamen of plaintiffs' operative complaint is that defendant failed to disclose prior to plaintiffs entering into their Option ARMs: (1) "the loans were designed to cause negative amortization to occur"; (2) "the monthly payment amounts listed in the loan documents for the first two to five years of the loans were based entirely upon a low 'teaser' interest rate (though not disclosed as such by Defendants) which existed for only a single month and which was substantially lower than the actual interest rate that would be charged, such that these payment amounts would never be sufficient to pay the interest due each month"; and (3) "when [plaintiffs] followed the contractual payment schedule in the loan documents, negative amortization was certain to occur, resulting in a significant loss of equity in borrowers' homes, and making it much more difficult for borrowers to refinance the loans [because of the prepayment penalty included in the loan for paying off the loan within the first three years of the loan]; thus, as each month passed, the homeowners would actually owe more money than they did at the outset of the loan, with less time to repay it."

Slip op., at 13.  The Court began its analysis by explaining what was not at issue in the case at this time:

It is important to demarcate the boundaries of this dispute. The following is not at issue in this case: (1) should it be legal to offer Option ARMs to typical mortgage borrowers; and (2) should it be legal to utilize "teaser" ("discounted") interest rates (here 1.25 percent for the first month of a 30 year loan), which bear no relation to the actual cost of credit? Our only concern in this case is whether plaintiffs stated a cause of action under state law based on defendant‘s allegedly misleading, incomplete, and/or inaccurate disclosures in the Option ARM documents provided to plaintiffs.

Slip op., at 15.  The Court then observed that no California state court had addressed the exact issues presented in the case.  However, the Court noted that a number of federal courts had examined similar issues.

The Court began by addressing the Defendant's contention that strict compliance with TILA provided it with a safe harbor of sorts:

A string of cases (involving strikingly similar Option ARM forms/disclosures to those used in the instant case) have held that a borrower states a claim for a violation of TILA based on, among other disclosure deficiencies, the failure of the lender to clearly state that making payments pursuant to the TILDS payment schedule will result in negative amortization during the initial years of the loan.

Slip op., at 18.  The Court concluded that, since the allegations could support a cause of action for TILA violations, it would be nonsensical to dismiss the claims at this stage, based on a claim of compliance with TILA disclosure obligations.  Note:  There was no TILA claim asserted in this action, only UCL and fraudulent concealment claims.

Next, the Court considered the state law fradulent concealment claims.  The Court began its discussion by citing a number of federal cases that allowed state law claims to proceed along with TILA claims.  The Court then turned to the sufficiency of the fraud pleading.  The Court found that the failure to disclose the exceedingly low teaser rate adequately was a sufficient omission to suppor the fraudulent concealment claim: "The teaser rate creates an artificially low (compared to the actual cost of credit) initial payment schedule and guarantees that the actual applicable interest rate (after the first month of the loan) will exceed the interest rate used to calculate the payment schedule for the initial years of the loan."  Slip op., at 24.

Turning to the UCL, the Court found that the allegations were sufficient to support a UCL under all three prongs.  The "unfair" prong discussion was the most interesting of the three:

As noted above in our discussion of damages, it may be difficult for plaintiffs to prove they could not have avoided any of the harm of negative amortization — they could have simply paid more each month once they discovered their required payment was not sufficient to pay off the interest accruing on the loan. But plaintiffs may show they were unable to avoid some substantial negative amortization. And we see no countervailing value in defendant's practice of providing general, byzantine descriptions of Option ARMs, with no clear disclosures explaining that, with regard to plaintiffs' particular loans, negative amortization would certainly occur if payments were made according to the payment schedule. To the contrary, a compelling argument can be made that lenders should be discouraged from competing by offering misleading teaser rates and low scheduled initial payments (rather than competing with regard to low effective interest rates, low fees, and economically sustainable payment schedules). Finally, to the extent an "unfair" claim must be "tethered" to specific statutory or regulatory provisions, TILA and Regulation Z provide an adequate tether even though plaintiffs are not directly relying on federal law to make their claims.

Slip op., at 29.

Fun fact: the Court cited Kwikset when rejecting the Defendant's contention that the Plaintiffs did not adequately allege standing under the UCL.

Disclosure:  J. Mark Moore of Spiro Moss argued this matter before the Court of Appeal and contributed significantly to the briefing on appeal.

Sullivan v. Oracle Corporation addresses how California law applies to nonresident employees working both in and outside California

Today, the California Supreme Court issued an Opinion following its acceptance of questions about the construction of California law from the United States Court of Appeals for the Ninth Circuit.  In Sullivan v. Oracle Corporation (June 30, 2011), the Court addressed (1) whether the Labor Code's overtime provisions apply to plaintiffs' claims for compensation for work performed in this state [with the ancillary question of whether the same claims can serve as predicates for claims under California's unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.)], and (2) whether the plaintiffs' claims for overtime compensation under the federal Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. § 201 et seq.; see id., § 207(a)) for work performed in other states can serve as predicates for UCL claims.

The Court responded "yes" to the first question group, and "no" to the second.

On the first issue, the Court said:  "The California Labor Code does apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week. (See Sullivan III, supra, 557 F.3d 979, 983.)"  (Slip op., at 18.)

On the related UCL question, the Court said: "Business and Professions Code section 17200 does apply to the overtime work described in question one. (See Sullivan III, supra, 557 F.3d 979, 983.)"  Slip op., at 19.)

The full answer to the last issues was:  "Business and Professions Code section 17200 does not apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case based solely on the employer's failure to comply with the overtime provisions of the FLSA."  (Slip op., at 23.)

The Opinion was issued by a unanimous Court.

Update on 2011-06-30 17:42 by The Complex Litigator

The post title was corrected after the initial posting.