Statistical Sampling in Class Action Trial Violated Defendant's Due Process Rights

In a unanimous decision, the California Supreme Court on May 29 reversed a class action verdict for a class which was based on a flawed statistical model to determine liability and damages. Duran v. U.S. Bank National Association.

In Duran, plaintiffs brought a class action to challenge U.S. Bank’s (“USB”) classification of its business banking officers (“BBO’s”) as exempt under the “outside salesperson” exemption under California Labor Code section 1171

At trial, USB sought to introduce evidence demonstrating that a substantial amount of the class members performed more than 50% of their work engaged in outside sales and thus fell within the “outside salesperson” exemption. The trial court barred this evidence and instead relied on testimony from its sample size of 21 class members to find USB liable to the entire class for misclassification.  With respect to damages, the trial court accepted the estimate of plaintiffs’ expert (with an admitted 43.3% margin of error) that each class member on average worked approximately 11.87 hours of overtime per week. 

In reversing the verdict, the Supreme Court gave a scathing review of the class action trial plan at issue, specifically, its sole reliance on evidence from a flawed statistical sample of the class and its refusal to permit litigation of relevant affirmative defenses outside of the sample.

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Personal Injury Coverage Does not Apply to Data Breach

According to a Law360 report, Sony Units Denied Coverage For Suits Tied To Cyber Attack (subscription required), a New York state judge ruled last Friday in the Zurich v. Sony insurance litigation that the stealing of consumer information through a cyber attack did not constitute “personal injury” under a commercial general liability policy because third-party hackers and not the insured committed the offense.  If upheld on appeal, the decision would compliment other authority holding that personal injury coverage applies only to potential liability from the insured’s purposeful acts.  

The Sony coverage litigation resulted from a 2011 data breach. Zurich American Insurance Company and Mitsui Sumitomo Insurance Company had issued primary commercial general liability policies to Sony. In April 2011, computer hackers broke into Sony networks and stole personal and financial information of over 100 million users. 

Immediately following the breach, Sony was named as a defendant in numerous class actions. Sony tendered the defense of these actions to its insurers. Mitsui denied coverage. Zurich responded by filing a declaratory relief action in New York state court seeking a declaration that Zurich had no duty to defend.

The parties later filed cross-motions for partial summary judgment. The resolution of the motions turned on whether the data breach constituted a “personal injury” offense. Among other enumerated offenses, the policies provided coverage for a “publication, in any manner, of material that violates a person’s right of privacy”

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Did the judge make the right call in XL Specialty v. St. Paul Mercury?

At first glance, the holding of the California 4th District Court of Appeal in XL Specialty Insurance Co. v. St. Paul Mercury Insurance Co. seems harsh. The court upheld the dismissal of XL Specialty Insurance Co.’s suit against one of two (D&O liability insurers seeking to recover its $9.3 million payment to a failed bank’s unsecured creditors. It did so on the primary ground that the $9.3 million was paid by XL not to protect the insureds from the claims of the unsecured creditors, but to extricate itself from the insureds’ own bad-faith claims against it.

In upholding the dismissal of XL’s claims, the court’s analysis focused on cases that were almost completely on point which XL failed to distinguish. It also focused on the obvious public policy concerns of allowing excess insurers to be more confident about refraining from initial settlement discussions because of the possibility of shifting later payouts to primary carriers on an equitable subrogation theory. In short, far from issuing a controversial ruling, the court had no real choice but to uphold the dismissal of XL’s claims after its analysis of the relevant authorities.

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Originally published in Westlaw Journal - Corporate Officers & Directors Liability, Volume 29 | Issue 15

One Policy Term, May Have Two Meanings

A California Court of Appeal held in Transport Ins. Co. v. Superior Ct. (R.R. Street & Co.) that a named insured’s reasonable expectations of coverage can be different from those of an additional insured’s. This ruling leaves open the possibility that the same policy language can be interpreted differently in the same lawsuit, depending upon whether the named insured or an additional insured is seeking coverage.

Transport issued an excess and umbrella commercial general liability policy to Legacy Vulcan Corp. R.R. Street & Co. was named as an additional insured by endorsement. These two companies were named as defendants in lawsuits alleging that they distributed and sold dry cleaning products that caused environmental contamination. 

A dispute arose between Transport and Legacy about the duty to defend. The dispute turned on whether the term “underlying insurance” included only the specifically scheduled policies identified in the Transport or all potentially applicable primary policies. 

In a previously published opinion, the Court of Appeal held that the term “underlying insurance” was ambiguous in the context of the Transport policy and should be construed in accordance with Legacy’s objectively reasonable expectations.

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Meaning of "Mass Actions" Under CAFA clarified by SCOTUS

By James Castle and Natalie Ferrall

In one of its first decisions of the year, the United States Supreme Court unanimously held that a civil action filed solely by the State of Mississippi did not constitute a “mass action” under the Class Action Fairness Act of 2005 (“CAFA”) (Mississippi ex rel. Hood v. AU Optronics Corp.).

CAFA permits defendants in civil suits to remove “mass actions,” a statutorily defined term, from state to federal court. CAFA defines a “mass action” as “any civil action . . . in which monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” 28 U.S.C. § 1332(d)(11)(B)(i)

In Hood, the State of Mississippi sued a group of LCD manufacturers in Mississippi state court, alleging violations of state law. The suit sought restitution for injuries suffered by Mississippi citizens. The defendants, the LCD manufacturers, removed the case to U.S. District Court, asserting that federal jurisdiction was appropriate under CAFA’s mass action provision. 

The District Court agreed with the defendants and found that the suit qualified as a “mass action” under CAFA because it sought recovery of restitution on behalf of more than 100 Mississippi residents. However, the District Court still remanded to state court on the ground that it fell within CAFA’s “general public” exception. 

The Fifth Circuit reversed, agreeing with the district court that the suit was a mass action but finding that the “general public” exception did not apply. The Fifth Circuit’s ruling created a split with the Fourth, Seventh, and Ninth Circuits, all of which had previously held that similar lawsuits were not “mass actions.” 

On review, and in order to alleviate the split between the Circuits, the Supreme Court unanimously held that removal was improper. The Court stated that CAFA’s “100 or more persons” condition does not include unnamed individuals who are real parties in interest to claims brought by named plaintiffs. 

Rather, a mass action must involve monetary claims brought by 100 or more named plaintiffs. Here, because the State of Mississippi was the sole named plaintiff, the Supreme Court found the lawsuit did not constitute a mass action under CAFA, and therefore, was remanded to state court.

 

SCOTUS DECIDES: Three-Year Contractual Limitations Period Enforceable in ERISA LTD Plan

In Heimeshoff v. Hartford Life & Acc. Ins. Co. the United States Supreme Court held that a contractual limitations period in an ERISA long-term disability plan was enforceable and began to accrue before the administrator had made a final determination on the claim because the three-year limitations period was reasonable. 

In other words, under the terms of the Plan, the contractual limitations period commenced before a final benefit determination was made and before the claimant had exhausted her administrative remedies under the Plan.

The Plan at issue provided as follows: “Legal action cannot be taken against The Hartford . . . 3 years after the time written proof of loss is required to be furnished according to the terms of the policy.” As to proof of loss, the Plan required that “[w]ritten proof of loss must be sent to The Hartford within 90 days after the start of the period for which The Hartford owes payment.”  

Thus, the Plan provided that the limitations period would begin to run before any final determination on the claim was made and before the Plan’s administrative remedies were exhausted.

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Evolving Expectations of Privacy: Klayman v. Obama

In a 68-page opinion, Federal District Judge Richard J. Leon of the District of Columbia ruled yesterday in Klayman v. Obama that the NSA's systematic collection of telephone metadata of millions of citizens violates the Fourth Amendment's prohibition on unreasonable searches.  

The opinion highlights an important issue that will have implications beyond the constitutional dispute in that case -- how expectations of privacy are evolving in light of changing technologies and the rapidly expanding use of the internet and mobile phones.    

Judge Leon's ruling concerns the government's collection of "metadata" about telephone calls, such as information about what numbers were called, when calls were made, and how long they lasted.  The government maintains that, under the program at issue, the NSA were not storing information about the content of calls or the participants' names, addresses or financial information.   

Relying on the United States Supreme Court opinion in Smith v. Maryland, government lawyers argued that individuals have no expectation of privacy, let alone a reasonable one, with respect to telephone service provider metadata.  Smith involved an investigation into threatening and obscene phone calls that a robbery victim had received.  Without obtaining a warrant or court order, the police installed a "pen register" to record numbers dialed from a telephone at Smith's home.

The Supreme Court ruled that Smith had no reasonable expectation of privacy in the numbers dialed, since he voluntarily submitted this information to the phone company and reasonably should have known that the company maintained this information as business records.  

Leon did not find the government's precedent compelling.  As the judge phrased the issue,

When do present-day circumstances -- the evolutions in the Government's surveillance capabilities, citizen's phone habits, and the relationship between the NSA and telecom companies -- become so thoroughly unlike those considered by the Supreme Court thirty-four years ago that a precedent like Smith simply does not apply?"  

For Leon, that time had come. He found Smith distinguishable; the case involved the collection of limited telephone data for a few weeks. Klayman on the other hand concerns the creation and maintenance of a historical database containing information about calls made by everyone in the country.    

The government's ability to store, collect, and analyze phone data not only is much greater now than in 1979, but the amount and type of available metadata are much greater as well. As the judge noted,

[data that] once would have revealed a few scattered lines of information about a person now reveal an entire mosaic -- a vibrant and constantly updating picture of the person's life." 

Some would argue that changes in technology and the ubiquitous storing and analysis of metadata by companies and the government would lower individual expectations of privacy.  Taking the opposite view, Judge Leon assumed that these trends have resulted in greater expectations of privacy.

This decision will not be the last word on the subject.  Other courts have reached the opposite conclusion, and the government certainly will appeal the ruling. Regardless of the ultimate outcome, Judge Leon makes an obvious point -- courts cannot analyze present-day expectations of privacy by reference to technology and cultural norms that existed over three decades ago.  

 

The Potential Pitfalls of Joint Representation

A recent California Court of Appeal opinion, Yanez v. Plummer, provides a cautionary tale for in-house counsel or outside attorneys who jointly represent their institutional client’s employees or agents in depositions. If handled inappropriately, joint representation can result in liability for the lawyer and undercut the institution’s own interests.

Plaintiff Michael Yanez worked for a railroad. He was a witness with respect to a workplace accident that injured a co-employee, Robert Garcia. Yanez prepared two statements related to the incident – one directly after the accident and the other an hour later. 

In the first statement, he wrote: “I was watching motor come up while Boby went downstairs & went to retrieve tool had sliped & fell on concrete floor, soaked in oil & grease.” Yanez’s supervisor asked him to write a second statement because the first lacked details. In the second statement, Yanez wrote in relevant part: “I saw Boby slip & fall down on oil soaked floor . . . .”

The injured employee sued the railroad and deposed Yanez. The railroad assigned in-house counsel to defend the lawsuit. Prior to the deposition, Yanez met with the attorney to prepare for the testimony. Yanez told the attorney that he had not actually seen the slip and fall. Yanez expressed concern about his job security in giving testimony unfavorable to the railroad and sought assurances that the attorney would “protect” him at the deposition. Counsel assured Yanez that his job would not be affected as long as he told the truth. They did not discuss the discrepancies between the two witness statements or conflicts of interest between Yanez and the railroad.

At the deposition, the injured employee’s attorney elicited testimony that Yanez had not seen the fall. In addition, the attorney asked Yanez about several unsafe conditions at the site of the accident. In-house counsel also questioned Yanez. The attorney had Yanez confirm that his “testimony today” was that the accident was not within his “line of sight.”  Counsel then asked Yanez about the sentence in his second witness statement that he “saw Boby slip & fall.” Counsel did not provide Yanez an opportunity to explain the discrepancy or mark the other witness statement as an exhibit. Counsel’s reasons for impeaching Yanez are not entirely clear. Yanez contended that the attorney was attempting to undercut Yanez’s credibility and his other testimony about unsafe working conditions.

A railroad representative was present at the deposition. After listening to Yanez’s testimony, the representative recommended that the railroad initiate a disciplinary hearing for dishonesty, which eventually resulted in Yanez’s termination. At that proceeding, Yanez maintained that he simply miswrote his second witness statement and meant to state, “I saw Bobby had slipped and fell down on oil soaked floor.” 

Yanez sued the railroad for wrongful discharge and sued in-house counsel for malpractice, breach of fiduciary duty, and fraud. The attorney claimed that, since he had not prepared Yanez’s two witness statements or participated in the process leading to his termination, Yanez could not prove causation. The court of appeal disagreed.

 

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California Court Releases Insurers From Strict Duty To Settle

Larry Golub was quoted in an October 23, 2013, article published by Law360 about a California appeals court decision, Paul Reid v. Mercury Insurance Co., which held that insurers generally don’t have to launch settlement discussions with those injured by their policyholders in high stakes cases, freeing insurers from the greater bad faith liability.

This ruling put to bed confusion that was stirred up by the Ninth Circuit's ruling in Du v. Allstate Insurance Co. which said California insurers must proactively work toward a settlement when it's clear that the policyholder is liable, even if claimants have not made a settlement demand.

Golub told Law360 that it would have been helpful for the appeals court to rule that claimants must make a formal settlement demand before insurers have a duty to settle.

Insurance companies often hold off on responding to claimants' requests for policy limits because they need more information, especially in cases where there are multiple injured parties and there is little insurance available, Golub said.

He explained that an explicit rule requiring formal settlement demands would ensure that all parties act in good faith.

There should be a bright line rule because there are going to be disputes," Golub said. “It's easy for the insured or the insured's attorney to make a settlement demand formally, and there's no question."

For more information on the decision, see this blog's discussion No Settlement Offer, No Bad Faith Liability for Insurer.

Accrual of Statute of Limitations for ERISA Disability Claim to be heard by SCOTUS

By James A. Hazlehurst

On October 15, 2013, the United States Supreme Court will conduct oral argument in Heimeshoff v. Hartford Life & Accident Ins. Co., et al., addressing the accrual of the statute of limitations for judicial review of an adverse benefit determination under an employee benefit plan governed by the Employee Retirement Income Security Act (“ERISA”).

As discussed below, the District Court of Connecticut granted defendants’ motion to dismiss, holding that plaintiff’s lawsuit was time-barred given the plan’s contractual limitation requiring legal action to be commenced within three years “after the time written proof of loss is required to be furnished.” The Second Circuit Court of Appeals affirmed in an unpublished per curiam opinion. In granting the petition for review, the Supreme Court limited the scope of its inquiry to a single question, rejecting consideration of two others that had been posed.

This blog entry will therefore “tee up” Tuesday’s oral argument before the Supreme Court, summarizing the underlying District Court and Second Circuit decisions and clarifying what are – and what are not – the core issues to be resolved.

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No Settlement Offer, No Bad Faith Liability for Insurer

By Samuel Sorich and Larry Golub

On October 7, 2013, the California Court of Appeal for the Second Appellate District held in Reid v. Mercury Insurance Company that an insurer that acknowledged its insured’s liability for a third party’s injuries and recognized that there was a substantial likelihood of a recovery in excess of policy limits had no liability for bad faith failure to settle in the absence of a settlement demand by the claimant or any other manifestation that the claimant was interested in settlement.

The Court of Appeal’s decision in this case provides guidance on the scope of an insurer’s duty to settle. The issue became confused when, in June 2012, the Ninth Circuit ruled in Du v. Allstate Insurance Company that an insurer had a duty to initiate settlement once liability was reasonably clear even though the injured party made no settlement demand. The Ninth Circuit retracted that portion of its  ruling in October 2012. The Du rulings are discussed on this blog here and here.

The Court of Appeal’s decision puts any confusion resulting from Du to rest in stating,

In short, nothing in California law supports the proposition that bad faith liability for failure to settle may attach if an insurer fails to initiate settlement discussions, or offer its policy limits, as soon as an insured’s liability in excess of policy limits has become clear. Nor will this court make such a rule of law, for which neither precedent nor sound policy considerations have been offered.”   

This case involves a Mercury insured who failed to stop at a red light and collided with another car. The driver of the other car was seriously injured. Within a few weeks of the accident, Mercury advised the injured party’s representative that Mercury “was accepting liability and that there may be a ‘limits issue.’”

Mercury requested medical records from the injured party, which were not made available. Mercury and the injured party’s attorney exchanged correspondence on the medical records and other matters, but the injured party never made a settlement demand.

The injured party filed a lawsuit against Mercury’s insured. The lawsuit resulted in a $5.9 million judgment against the insured. The Mercury policy covering the insured had a $100,000 policy limit.

Mercury was sued for bad faith failure to settle. The lawsuit alleged that the insurer’s failure to make a settlement offer exposed the insured to a judgment in excess of policy limits.

Mercury filed a motion for summary judgment, arguing that the plaintiff could not establish a bad faith action because the injured party never made a settlement demand. The trial court granted Mercury’s motion. The Court of Appeal affirmed the trial court’s decision.

The Court of Appeal explained that in a case where the insured is exposed to a judgment in excess of policy limits, in order to establish a bad faith action against an insurer for failure to pursue settlement discussions:

there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating that the insurer knew that settlement within policy limits could feasibly be negotiated.” 

The court concluded that there no evidence in this case that could support a finding Mercury knew or should have known that the injured party was interested in settlement. The court ruled, “Accordingly, defendant cannot be liable for bad faith failure to settle.”

Reasoning Behind Punitive Damages Calculations Provided By California Appellate Court

Royal Oakes was quoted extensively in an Oct. 7, 2013, Claims Journal article, California Court Of Appeals Decision Provides Reasoning Behind Punitive Damages Calculations, about a significant insurance case where $19 million in punitive damages were awarded, then later shot down by the California Court of Appeals, which found the verdict excessive. The court capped the award at $350,000.

The case, Nickerson v. Stonebridge Life Ins. Co., involved a former Marine who sought payment for 109 days in the hospital due to a fall after his insurance company concluded that only 19 of the days were medically necessary. The jury awarded him $35,000 for emotional distress and $19 million in punitive damages.

Oakes told the publication that traditionally the way in which punitive damages have been calculated has varied.

“For years the appellate courts have been trying to interpret the various pronouncements by the U.S. Supreme Court about the issue of the size of punitive damages and specifically, the ratio of punitive damages to compensatory damages. The reason it has been a bit of a struggle on occasion is because of the high court and the appellate courts, in general, are not prepared to impose a strict bright line test, limiting punitive damages to a single digit ratio,” Oakes said.

“Having said that, this new case is one of many cases that have come very close to seeing that, in the absence of exceptionally reprehensible conduct, then it is a due process violation to exceed a ratio of 9 or 10 to 1. In fact, many appellate courts have suggested that far smaller ratios are appropriate in virtually all cases.”

Oakes also said that the decision is significant to insurers because it doesn’t include breach-of-contract damages.

“The significance of this decision is to reinforce the idea that though evidence of reprehensible conduct may have been found by a jury; nonetheless, it is almost impossible for an appellate court to find that a ratio of more than 10 to 1 between punitives and the compensatory damages satisfies constitutional due process requirements. There’s another very significant and separate aspect to this decision. When you figure out how much compensatory damages exist in order to come up with the punitives to compensatory ratio, do you have to decide what components of damages should be included in compensatory damages? This new Nickerson case reaffirms the idea that in computing compensatory damages, you do not include breach of contract damages. Instead, you only include damages for torts, such as bad faith and emotional distress,” he said.

According to Oakes, in Nickerson the court concluded that in determining compensatory damages, “for purposes of computing a ratio between punitive and compensatory, you do not include the breach of contract damages.

 “The reason for that is that punitive damages relate to tortuous conduct. You don’t get punitive for a breach of contract. You might get punitive for tort, depending on the tort and depending on whether the punitive damage standard is met, such as malice, oppression or fraud. And so, this case is an important reminder that in computing compensatory damages for purposes of arriving at a ratio between punitives and compensatory you exclude breach of contract damages and you include tort damages,” he said.

In general, if a contract is breached and the party who breached it is sued, damages are limited to contractor damages, the article notes.

“However, years ago, the courts decided that because of the special relationship between a policy holder and an insurance company that if a policyholder is suing for breach of contract and can also go beyond that and prove additional conduct such as bad faith or emotional distress then the policy holder is entitled to try to assert those causes of action,” Oakes said.

Oakes also told the Claims Journal that there have been several court decisions that have come close to saying it’s a due process violation to exceed the ratio of 9 or 10 to 1 between punitive and compensatory damages.

“I think that we have been moving in the direction of a bright line test limiting punitive damages to a single digit ratio. It may be that because every case is different and you occasionally see cases that suggest an extreme level of reprehensibility, there will continue to be a reluctance to impose a bright line test,” Oakes said.

Don't Forget To Select Your Arbitrator

In HM DG, Inc. v. Amini, the California Court of Appeal for the Second Appellate District held that an arbitration clause was enforceable even though it did not specify the agency to arbitrate the dispute or otherwise provide for a method of selecting an arbitrator. 

The underlying dispute involved the quality of work on an upscale home remodel. The arbitration clause at issue recited multiple possible alternatives for selecting an arbitrator, but the parties did not agree upon any given method. 

The defendant filed a motion to compel arbitration pursuant to the parties’ contract, but the trial court held that the arbitration clause was unenforceable because it was uncertain as to the arbitrator. The court therefore determined that there was a lack of consent between the parties to arbitrate their dispute.

The California Court of Appeal reversed based on the plain language of California Code of Civil Procedure Section 1281.6. Under that section, a party can petition the court to appoint an arbitrator where the contract lacks an agreed upon method to select an arbitrator or if the agreed upon method fails for any reason.  

The appellate court therefore held that,

the presence of multiple alternative methods for selecting an arbitrator in the Arbitration Clause does not render the clause invalid or unenforceable.” 

Rather, under those circumstances, any party to the contract can petition the court to appoint an arbitrator. 

Amini cautions that the failure to select an arbitrator leaves the arbitrator’s selection open to the court. To avoid that result, contracting parties should ensure that their arbitration clauses either identify an arbitration agency and/or a method for selecting an arbitrator.

Class Certification Rules Clarified: Harder for Plaintiffs to Certify Classes

On September 3, 2013, in Wang v. Chinese Daily News, Inc., the Ninth Circuit clarified the restrictions on class certification imposed by Wal-Mart Stores, Inc. v. Dukes. The net effect of this ruling is to make it harder for plaintiffs to certify classes.

In Wang, named plaintiffs were employees of Chinese Daily News (“CDN”) who alleged that they had been made to work more than eight hours per day and more than forty hours per week. They also alleged that they were wrongfully denied overtime compensation, meal and rest breaks, and accurate and itemized wage statements.

Plaintiffs sought to certify a class of non-exempt employees at a single facility (consisting of about 200 affected employees) as to violations of the Fair Labor Standards Act. The Ninth Circuit held that, in light of Dukes, the district court had wrongly certified the class.

The district court had purported to certify the class under several different parts of Federal Rules of Civil Procedure, Rule 23. In each instance, the Ninth Circuit explained why class certification had been inappropriate, and remanded the rulings for further consideration in light of applicable law.

Rule 23(a)

As the Court explained, Rule 23(a) ensures that the named plaintiffs are appropriate representatives of the class whose claim they wish to litigate. It requires the party seeking certification to satisfy four requirements, one of which is “commonality,” specifically Rule 23(a)(2) After ruling that CDN had not waived its right to challenge the district court’s finding of commonality, the Ninth Circuit held that such finding was incorrect. Quoting Wal-Mart, the Court noted that

What matters to class certification is not the raising of common questions – even in droves – but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. . . . If there is no evidence that the entire class was subject to the same allegedly discriminatory practice, there is no question common to the class.”

Furthermore, the “rigorous analysis” under Rule 23(a) “sometimes [requires] the court to probe behind the pleadings before coming to rest on the certification question.” The Ninth Circuit remanded the district court’s Rule 23(a)(2) commonality finding for reconsideration in light of Wal-Mart.

Rule 23(b)(2)

In its earlier opinion, the Ninth Circuit had affirmed the district court’s certification under Rule 23(b)(2), which provides for relief “when a single injunction or declaratory judgment would provide relief to each member of the class.” The Supreme Court had reversed this decision, making clear that individualized monetary claims cannot be asserted under Rule 23(b)(2). The Court remanded to the district court to determine, in light of Dukes, whether the previously granted certification under Rule 23(b)(2) should continue for the purposes of injunctive relief. As with Rule 23(a)(2), the commonality requirement would need to be met.

Rule 23(b)(3)

Rule 23(b)(3) provides that class certification is permissible if the court finds that the questions of law or fact common to the class members predominate over questions affecting only individual members and that a class action is superior to other available methods. As the Ninth Circuit noted, the predominance analysis under Rule 23(b)(3) focuses on “the relationship between the common and individual issues” in the case and “tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation.”

The Court remanded the certification question under Rule 23(b)(3) to the district court for reconsideration for three reasons: (1) The commonality requirement must again be met for certification under Rule 23(b)(3) to be appropriate; (2) the trial court erred in basing its predominance decision on the mere fact that CDN had a uniform policy classifying all reporters and account executives as exempt employees, but should have focused on other potential individual issues relevant to the predominance inquiry; (3) in the recent decision, Brinker Restaurant Corp. v. Superior Court, the California Supreme Court had held that an employer need not ensure that its employees take meal breaks, and, the Ninth Circuit ruled, the district court should reconsider its decision in light of Brinker.

The above ruling replaced and superseded the previous opinion issued March 4, 2013.

Please contact the author if you have any questions regarding class certification or any other issues addressed in Wang v. Chinese Daily News.

Originally posted to Barger & Wolen's Employment Law Observer.

California Court Clarifies What Triggers the Right to "Cumis Counsel"

Nearly 30 years ago, the California Court of Appeal announced its landmark decision in San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358 (1984), holding that if a conflict of interest exists between an insurer and its insured arising out of possible noncoverage under the insurer’s policy, the insurer is obligated to offer independent counsel to the insured, which is to be paid for by the insurer.  Shortly after the issuance of the Cumis case, the California Legislature passed Civil Code section 2860 to codify and clarify the rights and responsibilities of insureds and insurers when a claim of conflict of interest is asserted.

Since that time, a number of decisions have weighed in on the scope of the right to Cumis counsel and the meaning of section 2860, and the most recent decision is Federal Insurance Company v. MBL, Inc., decided August 26, 2013. Significantly, MBL confirms that not every reservation of rights entitles an insured to independent counsel.

Following the filing of an environmental remediation action against a dry cleaner for PCE contamination of soil and groundwater, the dry cleaner filed a third-party action against MBL, a supplier of dry cleaning products.  MBL retained defense counsel, who tendered MBL’s defense to multiple insurers and requested that the insurers provide MBL with Cumis counsel. 

While all of the insurers accepted the defense subject to various reservations of rights, only one, Great American Insurance Company, agreed to the retention of Cumis counsel. The rest of the insurers contended that their reservation of rights did not create a conflict of interest that required the appointment of independent Cumis counsel. /p> In June 2008, all of the insurers except Great American filed an action for declaratory relief against MBL, seeking a declaration that they were not obligated to provide independent counsel based on their various reservations of rights, which they contended did not create any conflict of interest between them and MBL. Shortly thereafter, Great American filed a separate action against MBL for declaratory relief also seeking to establish that it did not need to provide Cumis counsel, and it further filed a claim for contribution against the other insurers seeking to have them share in the cost of such counsel. The actions were later consolidated.

The trial court granted summary judgment to the insurers, finding there was no actual conflict of interest and thus no right to Cumis counsel. The Court of Appeal affirmed.

After detailing the development of the of the right to independent/Cumis counsel under California law, the Court of Appeal emphasized that

not every conflict of interest entitles an insured to insurer-paid independent counsel. Nor does every reservation of rights entitle[] an insured to select Cumis counsel.

For example, the court advised that where the coverage issue is independent of, or extrinsic to, the issues in the underlying case, or where the damages are only partially covered by the policy, there is no right to Cumis counsel. Rather, it is only when there is a reservation of rights and the outcome of that coverage issue can be controlled by the defense counsel retained by the insurer is independent counsel required to be appointed.

MBL contended that there were conflicts of interest because the insurers reserved their rights as to the applicability of various pollution exclusions, the policy limits for each accident or occurrence, and that there was no coverage for any damages outside of the insurers’ policy periods. In the context of this case, however, the court found that none of these reservations created a conflict of interest triggering the right to Cumis counsel under section 2860.  The court also found no conflict on interest merely because some of the insurers were defending other insureds that had interests adverse to MBL.

MBL further argued that the insurers’ “general reservation of rights” provided the basis for a conflict of interest. To this, the Court of Appeal concluded,

To the extent MBL contends the Insurers’ general reservations of rights gave rise to a conflict of interest, we reject that argument.  General reservations are just that: general reservations.  At most, they create a theoretical, potential conflict of interest – nothing more.

Finally, as to Great American, which had paid MBL’s independent counsel, subject to a reservation of the right to seek reimbursement from MBL, the court concluded that since Great American was not obligated to pay those fees in the first place, it could only seek reimbursement from MBL itself, and not from the other insurers who had no obligation to provide Cumis counsel to MBL.

Health Insurer Again Evades TCPA Suit Over Jobs Calls

Larry Golub was quoted in an Aug. 14, 2013, Law360 article, Health Insurer Again Evades TCPA Suit Over Jobs Calls, about the dismissal of a case against United American Insurance Co. alleging that the insurance company's prerecorded telephone calls advertising job openings violated the Telephone Consumer Protection Act.

Golub is one of the attorneys representing United American in Jordan Friedman v. Torchmark Corp. et al., a putative class action which claimed that the company was engaging in unsolicited advertising.

On Aug. 13, a judge tossed the suit ruling that the plaintiff had not stated an actionable claim. The plaintiff Jordan Friedman alleged that the recorded messages were actually an attempt by the company to encourage people to invest in its brokerage services, an argument that the court rejected. The court instead found that the messages were not intended to sell goods, but rather to inform recipients of an independent contractor position.

The court found this didn’t change the basic nature of what the alleged telephone call was,” Golub told the publication.

Barger & Wolen partners Kent Keller and Larry Golub represented United American Insurance Company in this action.

Zhang Ruling Yanks Insurer Shield Against UCL Claims

Larry Golub was quoted in an Aug. 2, 2013, Law360 article, Zhang Ruling Yanks Insurer Shield Against UCL Claims, (subscription required) about the California Supreme Court's ruling which found that consumers can accuse insurance companies of violations of California's unfair competition law.

Some court watchers believe the ruling could invite more class actions and give plaintiffs a new means of obtaining premium refunds, injunctions and attorneys' fees.

The ruling against California Capital Insurance Co. could also motivate attorneys to add unfair competition claims to breach-of-contract and bad faith claim lawsuits against insurers, the article said.

Although violators of the unfair competition law can be forced to pay restitution and potentially attorneys' fees, doing so is not an easy task, according to Golub. Policyholders would have to demonstrate that they had done something significant for the public interest.

“In the run-of-the-mill bad-faith case, I don't think you're going to be able to establish that just because you fought an insurance company, you've done something for the public good,” he said.

Mr. Golub recently reviewed the Zhang decision on this blog, California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist.

Barger & Wolen partner skeptical that Zhang will increase suits against insurers

Larry Golub was quoted in an August 2, 2013, Daily Journal article, High Court Sides with Consumers Against Insurance Industry, (subscription required) about two recent decisions by the California Supreme Court that increase the circumstances under with consumers can sue insurance carriers, banks and other companies for unfair business practices.

The two cases, Zhang v. Superior Court of San Bernardino County and Rose v. Bank of America involve the Unfair Competition Law. Zhang says that private citizens can sue insurance companies over the way they handle claims while Rose says that federal law can serve as the basis for an unfair competition action in state court.

Some court watchers believe the rulings will lead to a new practice area for plaintiffs lawyers intent on filing unfair competition claims while others predicted it would simply prompt lawyers to add unfair competition claims to existing lawsuits.

Golub, who represents insurance companies, was skeptical that there would be a big change.

“I don't know if you are going to see more lawsuits,” he told the paper.

Mr. Golub recently reviewed the Zhang decision on this blog, California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist.

 

Could Medpay Be The Latest Target In California Bad Faith Claims?

Marina Karvelas was quoted in a July 18, 2013, article published by Claims Journal, Could Medpay Be The Latest Target In California Bad Faith Claims, about a recent appeals court decision in California dealing with bad faith claims related to medical payments coverage.

The case, Justin Barnes v. Western Heritage Insurance Company, involved a plaintiff who was injured at 11 years old when a table fell on his back during a recreational program. A superior court found that the plaintiff could not sue the recreational program provider's insurance for bad faith for denying him coverage in part because the plaintiff had already settled a suit against the program provider. The appeals court reversed the trial court's decision.

Karvelas told the Claims Journal that she thought the decision could increase bad faith claims relating to medical payments coverage if the decision survives scrutiny by the California Supreme Court.

The Barnes decision muddies the waters on the collateral source rule which up until this decision was fairly clear in California,” she said. “An insurance policy taken out and maintained by the alleged wrongdoer, including its medpay provisions, is not wholly independent of him/her and thus cannot be considered to be a collateral source.

“Stated simply, the injured plaintiff cannot recover against the tortfeasor under the liability provisions of the tortfeasor’s insurance policy and then sue the insurance company under the medpay provision of that same policy. The Barnes court concluded differently. The medpay provision in a tortfeasor’s liability policy can be construed as a collateral source. As a third party beneficiary of the medpay provisions, all the injured plaintiff has to do is allege the insurance company committed a wrongful act against him/her when handling the medpay claim. In Barnes, Western Heritage allegedly failed to notify the injured plaintiff of the one-year time limit to present medpay claims. The alleged failure violated California’s regulations governing the fair settlement of claims,” Karvelas said. “The Barnes decision is problematic for insurers not only with respect to the collateral source rule but reflects an ever increasing effort by California’s plaintiff’s bar to create private rights of action for violation of the fair claims settlement regulations.”

Karvelas also told the publication that policy changes to medical payments coverage may be looming.

“It may behoove insurers to add provisions to their liability policies that the Barnes court found were missing in the policy at issue. These would include provisions that reflect an intent that payment under the liability provisions of the policy extinguishes the insurer’s obligation under the medpay provisions of that same policy,” Karvelas said.

Originally posted to Barger & Wolen's Life, Health & Disability Insurance Law blog.

California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist

On August 1, 2013, the California Supreme Court issued its long-awaited decision in Zhang v. Superior Court, holding that an insured may assert a claim against an insurer based on California’s Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”) for conduct that allegedly constitutes common law bad faith, even if the alleged conduct also happens to violate the Unfair Insurance Practices Act (UIPA).   

The Supreme Court’s decision resolves a simmering conflict among lower court decisions. A number of courts held that the Supreme Court’s landmark ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988), which abolished any private right of action to enforce the UIPA, precluded UCL claims based on specific unfair practices prohibited by Insurance Code section 790.03(h), which is part of the UIPA. Other courts found that Moradi-Shalal did not bar UCL claims when the basis for the UCL claim was common law bad faith, as opposed to the UIPA – even though the asserted “bad faith” practices are also prohibited under the UIPA.  The Supreme Court adopted the latter position, concluding:

We hold that Moradi-Shalal does not preclude first party UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.

While the Court’s opinion does not dwell on the facts of the case, the claim involved an insured’s purchase of a liability policy to cover her commercial property. The insured disputed the insurer’s handling of her fire damage claim and sued the insurer for breach of contract, breach of the implied covenant of good faith and fair dealing (i.e., bad faith), and a violation of the UCL. 

The UCL claim alleged “unfair, deceptive, untrue, and/or misleading advertising” in that the insurer made promises as to coverage “when it had no intention of paying the true value of its insureds’ covered claims.”  The Court observed that the insured alleged “causes of action for false advertising and bad faith, both of which provide grounds for a UCL claim independent from the UIPA.”

The Zhang case was decided on demurrer. Thus, the Court considered only the allegations of the complaint, and it had to assume the truth of those factual allegations.

After presenting a thorough history of prior decisions over the last quarter century that have considered Moradi-Shalal’s effect on UCL lawsuits against insurers (and other defendants), the Supreme Court allowed the insured to pursue her UCL claim and observed,

Because Moradi-Shalal barred only claims brought under section 790.03, and expressly allowed first party [common law] bad faith actions, it preserved the gist of first party UCL claims based on allegations of [common law] bad faith. Moradi-Shalal imposed a formidable barrier, but not an insurmountable one.

As a result, the insured’s alleged claim of false advertising and “litany of bad faith practices” were “sufficient to support a claim of unlawful business practices.”

In summarizing its holding, the Court stated:

Private UIPA actions are absolutely barred, a litigant may not rely on the proscriptions of section 790.03 as the basis for a UCL claim. . . . However, when insurers engage in conduct that violates both the UIPA and obligations imposed by other statutes or the common law, a UCL action may lie.  The Legislature did not intend the UIPA to operate as a shield against any civil liability.

A concurring opinion written by Justice Werdegar and joined in by Justice Liu agreed with the majority conclusion that the insured should be allowed to pursue her UCL lawsuit against the insurer, but disagreed with the conclusion that no UCL claim could ever be based on violations of the UIPA unless the Legislature affirmatively intended to preclude such indirect enforcement.

While the Zhang decision is likely to generate much attention and be cited extensively in the future, the Court’s holding is nevertheless quite limited and the following points should be noted:

  • The decision is restricted to UCL claims brought by first parties; that is, by insureds.  The Court specifically advised two times that whether third parties may pursue UCL claims “is a matter beyond the scope of this case.”
  • The decision reiterated that while the scope of a UCL claim is broad (“any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising”), the remedies are very narrow – restitution and injunctions. Damages in any form are not recoverable.
  • The UCL does not allow for attorney’s fees (except in those cases where the plaintiff could qualify as a private attorney general under California Code of Civil Procedure section 1021.5).
  • Since the UCL is solely an equitable claim, the trial court possesses “broad discretion” in issuing orders or judgments with respect to any restitution or injunctive relief, and defendants are allowed to advance not only various defenses to the UCL claim but also “equitable considerations” that could minimize or even eliminate a finding of a UCL violation.
  • The restrictions to a UCL claim added by Proposition 64 (standing to assert a UCL cause of action and complying with the class action requirements in any UCL action brought on behalf of others) still apply.
  • The Court referenced another lingering issue in UCL claims – what is the standard for determining what business acts or practices are “unfair” mean in the consumer context under the UCL. This issue, however, remains unsettled and for the Court to decide another day.

Finally, the most likely consequence of the Zhang decision is that insureds may, as a matter of course, add UCL claims to bad faith cases as one more cause of action, incorporating by reference the prior alleged bad faith allegations. Since any UCL claim does not allow a damage remedy, and the only monetary remedy is restitution, the ultimate impact of adding a UCL claim may be minimal.

How has New York law on bad faith claims against insurers developed since the Bi-Economy and Panasia decisions?

R. Steven Anderson and Kyle M. Medley provide analysis and historical perspective of two 2008 decisions from New York’s highest court. The full article, Tempest in a Teapot: New York’s Bi-Economy Decision Five Years Later, appears in The Association of Insurance & Reinsurance Run-Off Companies (AIRROC) quarterly journal, an excerpt appears below:

New York courts have a general reputation as being insurer-friendly in their resistance to policyholder claims for damages beyond policy coverage terms and limits. Historically, New York courts refused to recognize contract-based bad faith claims for breach of a first-party insurance contract. Insureds have fared no better proceeding under a tort theory of bad faith liability, absent “egregious tortious conduct” and “a pattern of similar conduct directed at the public generally.” See Roconova v. Equitable Life Assurance Society, 83 N.Y. 603, 615 (N.Y. 1994).

In 2008, however, two decisions by New York’s highest court – Bi-Economy Market, Inc. v. Harleysville Insurance Co., 10 N.Y.3d 187 (N.Y. 2008), and a companion decision handed down on the same day, Panasia Estates, Inc. v. Hudson Insurance Co., 10 N.Y.3d 200 (N.Y. 2008) – threatened to alter the legal landscape in New York by recognizing a policyholder’s right to seek recovery of consequential damages beyond policy limits where such damages were the direct consequence of insurer claims  handling that violated the insurer’s obligation of good faith and fair dealing and were foreseeable by the parties at the time the policy was issued.

The Bi-Economy decision initially caused jurists and insurers to speculate as to whether the decision had opened the floodgates to claims against insurers beyond policy limits. Much of the speculation centered on Judge Robert S. Smith’s strongly-worded dissent in Bi-Economy, which predicted that the majority’s decision would “open the door” to punitive damage claims against insurers in New York ..."

Click here to continue reading the full article

SCOTUS Rules: Right or wrong, arbitrator's interpretation stands

The United States Supreme Court in Oxford Health Plans LLC v. Sutter held that an arbitration agreement in a fee-for-services contract between physicians and a health insurance company required arbitration of a class dispute arising under the contract.

Sutter, a physician, entered into a contract with Oxford, a health insurer, to provide medical services to members of Oxford’s network. Oxford agreed to pay for Sutter’s services at an agreed upon rate. Sutter later filed suit against Oxford on behalf of himself and a proposed class of other physicians who also contracted with Oxford. Sutter’s complaint alleged that Oxford failed to reimburse the putative class as required by the contract and applicable state law.

Oxford moved to compel arbitration, relying upon a provision in the contract requiring arbitration of “any dispute arising under this Agreement.” The motion was granted, and the arbitrator determined that the contract authorized class arbitration. In doing so, the arbitrator relied upon the language of the contract’s arbitration provision.

Oxford moved to vacate the arbitrator’s decision on the grounds that he exceeded his powers under the Federal Arbitration Act (“FAA”) Section 10(a)(4) by, in effect, misinterpreting and/or improperly applying the arbitration provision. 

The Supreme Court held that the arbitrator’s decision could not be vacated because it was arguably based upon the arbitrator’s interpretation of the parties’ contract, and, right or wrong, the parties had contracted to arbitrate their disputes. 

In so holding, the Court observed that in construing whether an arbitrator exceeded his powers under the FAA, “the question for a judge is not whether the arbitrator construed the parties’ contract correctly, but whether he construed it at all.” 

 

Oppression and Surprise Render Arbitration Provision Unenforceable

By James Hazlehurst

In Vargas v. SAI Monrovia, the California Court of Appeal for the Second Appellate District addressed the enforceability of an arbitration provision in a vehicle purchase agreement. The court held that the arbitration provision was unenforceable because it was both procedurally and substantively unconscionable. The arbitration clause therefore could not be used to preclude a class action. 

The court ruled that the arbitration clause was procedurally unconscionable because elements of oppression and surprise existed in the formation of the contract. In particular, the arbitration provision was located on the back of the two-sided contract while the buyer’s signature lines were on the front of the contract. The sales manager also allegedly told the buyers where to sign and did not give them an opportunity to fully review the contract before signing. 

Substantively, the arbitration provisions were unconscionable because they were too one-sided, containing “overly harsh terms that favor the car dealer to the detriment of the buyer.” Certain provisions, such as limiting appeals to awards that exceed $100,000 and to awards of injunctive relief, primarily benefited the dealer. Similarly, the exclusion of self-help remedies – like vehicle repossession – from arbitration only had benefit to the dealer.    

Vargas reinforces that arbitration clauses in form contracts are more likely to be enforceable when the consumer is given clear notice of the clause and where the benefits of the arbitration clause apply equally to both parties.  

Insurer Has No Duty To Verify Accuracy of Insurance Application Representations

by James Hazlehurst

In American Way Cellular, Inc. v. Travelers Property Casualty Company of America, issued May 30, 2013, the California Court of Appeal for the Second Appellate District reaffirmed that insurers are not obligated to investigate and verify the accuracy of insurance application representations. 

American Way involved a commercial property policy issued by Travelers Property Casualty Company. American Way’s broker procured the policy and then submitted the application to Travelers’ agent on American Way’s behalf. The application, which had been completed by the broker, erroneously indicated that the subject property was equipped with smoke detectors, fire extinguishers and fire sprinklers. In fact, the property did not have fire sprinklers, and American Way’s principal purportedly never told the broker that the property was so equipped.

Travelers issued a policy to American Way which required it to maintain the fire sprinkler system as a condition of coverage. The policy further provided that Travelers had the right – but not the obligation – to inspect the property at any time.     

American Way subsequently made a claim on the policy for a fire loss. Travelers paid the claim pending its investigation of the loss; however, upon discovering that the property was not equipped with fire sprinklers, it informed American Way that the loss did not appear to be covered and that it would seek to recover the claim payment. 

American Way then sued Travelers for declaratory relief, breach of contract, bad faith and negligence. Travelers cross-complained for declaratory relief and reimbursement of the claim payment. The trial court granted summary judgment in favor of Travelers on both American Way’s complaint and Travelers’ cross-complaint. 

On appeal, American Way argued, among other things, that the trial court erred in granting summary judgment because Travelers negligently wrote an insurance policy without inspecting the premises and because there were triable issues of material fact regarding whether the broker was Travelers’ actual or ostensible agent. 

The appellate court disagreed, explaining that “an insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations.” “Rather, it is the insured’s duty to divulge fully all he or she knows.” Moreover, while the policy permitted Travelers to inspect the property, it did not require that Travelers do so.   

Additionally, in order to prevail against Travelers, American Way had to show that the broker also acted as Travelers’ agent. The evidence presented to the trial court on summary judgment – including the broker’s own admission – showed that the broker acted on behalf of American Way only and was not Travelers’ agent. Accordingly, the appellate court concluded that Travelers could not be liable for the broker’s purported negligence.

HP Inkjet Printer Litigation: Fee Award Fails to Comply With Provisions of the Class Action Fairness Act

By David McMahon

In In re: HP Inkjet Printer Litigation, 2013 DJDAR 6149 (2013) the Ninth Circuit Court of Appeals reversed the approval of an attorney's fee award. The Ninth Circuit concluded that the fee award did not comply with the provisions of the Class Action Fairness Act (CAFA)Specifically, the Ninth Circuit found that the district court awarded fees that were “attributable” to the coupon relief offered in the settlement, but failed to first calculate the redemption value of the coupons as required by applicable law.

Plaintiffs filed three class actions alleging that HP engaged in unfair business practices relating to the use of ink cartridges. HP reached a settlement with the consumers, who purchased inkjet printers. The district court approved the settlement, which provided for coupons for the class members as well as injunctive relief. In addition, the district court approved an award of attorney fees of $1.5 million and a significant award of costs. 

The district court reviewed the fee request and awarded lodestar fees based on its conclusion that the settlement value to the class was $1.5 million. Recognizing that it would be improper to award fees that were higher than the class benefit, the court ordered HP to pay a reduced lodestar of $1.5 million down from a potential of $7 million in fees. Two class members objected, contending the reduced fee award still violated the provisions of CAFA.

The Ninth Circuit reversed the lower court’s decision on fees. The Ninth Circuit noted that under CAFA, when a settlement provides for coupon relief, the court must first calculate the redemption value of the coupon, as a prerequisite to considering the claim for attorney fees. As such, the Ninth Circuit concluded that under the provisions of CAFA, the district court was required to first calculate the redemption value of the e-credits in making its determination of attorney fees. 

Because the record did not reflect such an analysis, the Ninth Circuit remanded the case to the District Court to make a determination consistent with the required analysis under CAFA.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

Installment Fees May Still be Considered Premium for Tax Purposes Despite Recent California Appellate Decision

A recent California appellate decision (In Re Insurance Installment Fee Cases, 211 Cal. App. 4th 1395) held that an installment fee – i.e, a fee charged to a policyholder who pays premium in installments under a payment plan separate from the policy – is not considered “premium.” 

The court found that the fee was consideration for a benefit separate from the insurance and paid under an agreement separate from the policy. As such, the insurer was not required to either:

  1. state the fee on the declarations page or elsewhere in the policy under California Insurance Code sections 381 and 383.5 or
  2. obtain approval of the fee from the California Insurance Commissioner in its rate filing under California Insurance Code section 1861.01 et seq.

However, insurers should be aware that the ruling in In Re Insurance Installment Fee Cases does not overrule or conflict with an existing line of California cases analyzing whether installment fees are part of “gross premium” for purposes of premium tax reporting and payment.

The premium tax cases suggest that installment fees collected by insurers are not gross premium if they represent the time value of money (e.g., interest that the insurer could collect by investing the premium rather than allowing the insured to pay later). However, fees intended to cover the insurer’s administrative costs (e.g., expenses of collecting multiple payments) may be includable as gross premium.

The In Re Insurance Installment Fee Cases court did not rely on the premium tax cases “because those cases and opinions … [are in] a different context than that presented by this case.”  We note that the different treatment of installment fees in different context is not without justification. In premium tax cases, the question is whether the fees constitute part of an insurer’s income. For purposes of policy and rate issues under the Insurance Code, however, the focus is instead on the bargain between the insurer and the policyholder.

Judicial Notice Doctrine Bolstered by Court of Appeal Decision

A recent California decision should make it easier for insurers to attack allegations at the pleading stage in state court actions. 

In Scott v. JP Morgan Chase Bank, the California Court of Appeal clarified that, when ruling on the sufficiency of a plaintiff’s allegations, a trial court may take judicial notice not only of legally operative documents relevant to a plaintiff’s claims but also of facts that can be derived from the documents’ contents. This procedural holding should be useful to insurers when challenging complaints through a demurrer, motion to strike, or motion for judgment on the pleadings.

Federal courts have well-recognized procedures for considering documents outside the pleadings when ruling on motions to dismiss. District courts may take judicial notice of contracts or other key documents mentioned in the pleadings where there is no factual dispute about the documents’ authenticity or enforceability. In the Ninth Circuit, district courts may even take judicial notice of documents that the pleadings don’t mention, provided the documents are integral to the plaintiff’s claims. See, e.g., Parrino v. FHP, Inc., 146 F.3d 699 (1998).

In contrast to federal practice, California state court decisions have not provided clear guidance with respect to those facts that a court may consider at the pleading stage. A trial court does not have to accept the truth of allegations contradicted by documents incorporated into the pleading by reference. In many instances, however, parties do not attach contracts to complaints or expressly incorporate them by reference. Although some California decisions have permitted trial courts to take judicial notice of documents outside the pleadings, these authorities have not provided consistent guidance about what documents a court may consider and to what extent. 

The Scott decision provides some needed clarity.

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California Supreme Court Hears Argument on Whether Insurance Code Limits UCL Lawsuits Against Insurers

By Samuel Sorich and Larry Golub

On May 8, 2013, the California Supreme Court convened to hear oral argument in Zhang v. Superior Court. The case presents the issue of whether conduct of an insurer, which is related to conduct that would violate California’s Unfair Insurance Practices Act, Insurance Code, §790.03(h) et seq. (UIPA), can be the basis for a private civil cause of action against the insurer under California’s Unfair Competition Law, Business & Professions Code, §17200 et seq. (UCL).

The Court of Appeal in Zhang had ruled in October 2009 that an insurer may be sued by a private citizen for conduct prohibited by the UCL even though the conduct is within the scope of the UIPA. The Supreme Court accepted review of the matter in February 2010.

At the oral argument session, counsel for the insurer relied on the California Supreme Court’s 1988 ruling in Moradi-Shalal v. Fireman’s Fund Insurance Companies, which held that violations of the UIPA may be prosecuted only by administrative action taken by the Insurance Commissioner, not by civil action by private citizens. Counsel argued that the holding in Moradi-Shalal bars a UCL action against an insurer when the action is based on insurer conduct that is governed by the UIPA.

Counsel for the plaintiff insured responded that Moradi-Shalal does not preclude the insured’s UCL action against the insurer, pointing to language in the Moradi-Shalal decision which noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.”

We have monitored the Zhang case and other appellate court decisions on the interplay between the UIPA and the UCL in prior blogs. Please see here, here, here and here.

The Supreme Court is required to issue a written opinion in the Zhang case within 90 days of the date of the oral argument, or by August 6, 2013.

The Supreme Court focused on the UCL this week. On May 7, 2013, the Court heard oral argument in Rose v. Bank of America which presents an issue analogous to the issue in Zhang. The question in Rose is whether a cause of action under the UCL can be predicated on an alleged violation of the Truth in Savings Act (12 U.S.C. $4301 et seq.) despite Congress’s repeal of the private right of action initially provided for under that Act.

 

Recent Regulatory Rulings May Provide Leverage for Insurers

As recently reported in this blog post, Los Angeles Superior Court Judge Gregory Alarcon invalidated the California Department of Insurance's regulation on estimating replacement costs for homeowners insurance (10 CCR 2695.183) in Association of California Insurance Companies (ACIC) and Personal Insurance Federation of California v. Jones. This represents the second judicial determination that the Department has overstepped its regulatory authority under the Unfair Practices Act in less than a year. 

In the earlier ruling (the “Torchmark” case), issued in August of 2012, Administrative Law Judge Stephen Smith found that the Department's Fair Claims Settlement Practices Regulations (FCPR) may not be used by the Department to make Unfair Practices allegations under Insurance Code section 790.03(h). A discussion of the Torchmark administrative case, which was argued by Barger & Wolen's senior insurance regulatory attorney, Robert Hogeboom, is available here

In both cases, it was determined that the Department:

  1. unlawfully expanded the intended scope of section 790.03 and
  2. failed to follow the statutory procedures mandated by Insurance Code section 790.06 for taking action against insurers based on unfair practices not listed in section 790.03.

The insurance industry raised the ruling by Judge Smith, as persuasive authority, in the ACIC case as well as in another pending administrative action. While it remains to be seen what affect the Torchmark ruling will have in these other cases, the decision may be helping insurers gain some much-needed leverage when dealing with the Department and its sometimes strong-arm enforcement actions.

The Department, for its part, has sought to downplay the significance of the Torchmark decision, noting that it is not precedential. At least one senior attorney for the Department has urged that Torchmark is not a "final" decision - a claim that we discount.

The trend in the courts, nonetheless, appears to be moving towards holding the Department to the intended limits of the Unfair Practices Act. We will continue to monitor future activities in this area.

Liability Insurers May Have Duty to Defend Against Federal Prosecutions, California Court of Appeal Holds

By James Hazlehurst

The Second Appellate District of California held on May 1 in Mt. Hawley Ins. Co. v. Lopez that California Insurance Code section 533.5(b) does not eliminate a liability insurer’s duty to defend against a federal prosecution where the policy provides for a defense against criminal proceedings. 

Section 533.5(b) precludes an insurer from defending against “any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” California’s unfair competition law under Business and Profession Code section 17200 et seq. “in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor or any county counsel.” 

Mt. Hawley involved Dr. Richard Lopez’s federal criminal prosecution for his role in a liver transplant. Dr. Lopez was a medical director of St. Vincent’s Medical Center. He allegedly diverted a liver designated for one patient to another patient who was much farther down the transplant wait list in violation of regulations promulgated under the National Organ Transplant Act. Dr. Lopez then allegedly covered up his actions by conspiring with others, making false statements and falsifying records. 

Dr. Lopez was indicted by a grand jury and tendered his defense to Mt. Hawley, which declined to defend him on the basis that Section 533.5(b) precludes an insurer from providing a defense to a criminal prosecution. Mt. Hawley filed a declaratory relief action against Dr. Lopez and prevailed on summary judgment. 

In reversing the trial court, the appellate court examined in great detail the legislative history of section 533.5, as well as several maxims of construction of statutes, ultimately reasoning that the legislative purpose behind Section 533.5(b) was to preclude insurers from providing a defense only to civil and criminal actions brought under California’s unfair competition laws and false advertising laws, which could only be brought by state and local – not federal – agencies. The court therefore concluded that Section 533.5(b) did not apply to federal prosecutions. The court also relied on the Ninth Circuit’s decision in Bodell v. Walbrook Ins. Co. which reached the same conclusion regarding the applicability of Section 533.5(b) to federal prosecutions.

The court of appeal stated that its interpretation “allows insurers to contract to provide a defense to certain kind of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes.” The court further noted that its interpretation was consistent with the goal of encouraging individuals to serve on the boards of directors of corporations or as trustees of charitable trusts, observing that “unless directors can rely on the protections given by D & O policies, good and competent men and women will be reluctant to serve on corporate boards.”

 

Court of Appeal Applies Howell Rule to Future Medical Expenses and Noneconomic Damages

In Howell v. Hamilton Meats & Provisions, Inc., the California Supreme Court ruled that where a plaintiff’s medical care provider, pursuant to a prior agreement with the plaintiff’s health care provider, accepted less than the billed amount as full payment, evidence of the full amount billed is not relevant on the issue of past medical expenses. The Howell ruling is discussed in this post.

In its Howell ruling, the Supreme Court expressly declined to decide whether evidence of the full amount billed is relevant or admissible on the issues of future medical expenses and noneconomic damages.

The California Court of Appeal (Second Appellate District) addressed those issues in its April 30, 2013, decision in Corenbaum v. Lampkin. Guided by the reasoning in Howell, the Court of Appeal made these three key holdings:

  1. The full amount billed for past medical services is not relevant to the amount of future medical expenses and is inadmissible for that purpose.
  2. Evidence of the full amount billed for past medical services cannot support an expert opinion on the reasonable value of future medical services.
  3. Evidence of the full amount billed for past medical services is not admissible to determine the amount of noneconomic damages.

The Corenbaum decision is the latest appellate court case to apply the Howell ruling.

Last month, the Court of Appeal held in Luttrell v. Island Pacific Supermarkets Inc. that the Howell rule should be applied where the plaintiff’s health care was paid by Medicare. The court also explained how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages. The Luttrell case is discussed in this post.        

And, in March 2012, the Court of Appeal applied Howell’s holding to the analogous situation in which the insured employee’s medical expenses are paid through workers’ compensation. That decision, Sanchez v. Brooke, was the subject of this post.

California Court of Appeal Again Finds No Stacking of Liability Policy Limits

Nearly two years ago, the California Court of Appeal for the Second Appellate District issued a decision that upheld the concept of horizontal exhaustion of primary liability policy limits before triggering the obligation of an excess insurer, but also concluded that, in the context of that case, there was no stacking of liability insurance policies. The case was Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, and we reported on it in this blog.

The California Supreme Court accepted review of Kaiser Cement, but then returned the case to the Court of Appeal after the Supreme Court issued its decision in State of California v. Continental Insurance Co., 55 Cal. 4th 186 (2012), a decision we also reported on in a prior blog

In Continental, the Supreme Court adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. With respect to the stacking issue, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” The Court, however, advised that insurers may be able to enforce “anti-stacking” provisions in their policies to avoid such a result.  

In the unanimous opinion of the Court of Appeal panel in Kaiser Cement, the primary policy considered in that case contained such language that precluding stacking of policy limits. Other than its addition of a brief section on the Continental decision (and some other minor revisions), the second opinion in Kaiser Cement, issued April 8, 2013, is virtually identical to the prior opinion issued June 3, 2011.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser, and in an even earlier decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence.

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years, and ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Kaiser and Truck both argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The 2013 Kaiser Cement decision, just like the one in 2011, issued three holdings:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy.

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence. Specifically, the court cited the language in the insuring agreement stating that,

the Company’s liability as respects any occurrence . . . shall not exceed the per occurrence limit designated in the Declarations. (Italics added by court.) 

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

It was in this part of the Court’s analysis that it considered and analyzed the Continental decision, explaining that its “conclusion that Kaiser may not ‘stack’ Truck’s annual liability limits is consistent with the Supreme Court’s analysis in Continental” because Truck’s policy language was the type of provision envisioned by the Continental decision that precluded the stacking of policy limits for any one occurrence.  

Finally, as with the prior decision in Kaiser Cement, the Court of Appeal found that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

As of the moment, the Kaiser Cement decision remains citable law, though its status could change if review is sought from the Supreme Court and such review is accepted.

Barring such action, the case is helpful to excess insures as it affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context.

For primary insurers, the case affords the opportunity to avoid stacking of policy limits in those situations in which specific policy language precludes triggering more than one policy limit per occurrence. As we noted in our prior blog on the Kaiser Cement case, a careful review of the specific policy language found in each primary and excess policy at issue is required.

Howell Rule Applies When Medical Services Were Paid by Medicare, Court of Appeal Concludes

In Howell v. Hamilton Meats & Provisions, Inc. the California Supreme Court ruled that a plaintiff’s recovery of medical damages is limited to the amount paid by the plaintiff’s health insurer and accepted by the health care provider as full payment. The Supreme Court’s ruling was discussed by Larry Golub in Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer.

In its April 8, 2013, decision in Luttrell v. Island Pacific Supermarkets, Inc., the California Court of Appeal, First Appellate District held that the Howell rule applied to a case where the plaintiff’s health care was paid by Medicare.

The Court of Appeal’s decision also explains how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages.

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Judge Invalidates California Regulation on Estimating Replacement Costs for Homeowners Insurance

By Samuel Sorich and Larry Golub

On March 25, 2013, Los Angeles Superior Court Judge Gregory Alarcon issued a decision which found the California Department of Insurance’s regulation on estimating replacement costs for homeowners insurance to be invalid. The decision is Association of California Insurance Companies and Personal Insurance Federation of California v. Jones.

California Code of Regulation section 2695.183 was adopted by the insurance commissioner in 2010; the regulation went into effect on June 27, 2011. Section 2695.183 requires insurers to use a detailed method for estimating replacement costs for homeowners insurance. The regulation specifies that an insurer that communicates an estimate which does not comport with the regulation’s method makes a misleading statement in violation of Insurance Code section 790.03.

Two insurer trade associations, the Association of California Insurance Companies and Personal Insurance Federation of California, challenged the validity of section 2695.183. The associations petitioned the Los Angeles Superior Court for a judgment declaring section 2695.183 to be invalid because its adoption is beyond the insurance commissioner’s authority. Judge Alarcon granted the associations’ petition.

Insurance Code section 790.03 defines unfair and deceptive acts or practices in the business of insurance. Subdivision (b) of section 790.03 states that the definition of unfair or deceptive acts includes making a statement “which is known, or which by the exercise of reasonable care should be known, to be untrue, deceptive, or misleading.” The insurance commissioner relied on section 790.03(b) as authority to adopt section 2695.183, contending that the regulation simply interpreted section 790.03 by identifying one type of misleading statement.

Judge Alarcon rejected the commissioner’s reliance on section 790.03(b). The judge’s decision explains,

By characterizing all estimates of replacement costs as misleading (save the one provided by 10 CCR § 2695.183), Defendant, in exercising its authority under § 790.10, expands the meaning of something ‘known’ or which ‘should be known’ to be misleading beyond the parameters of § 790.03(b).”

Judge Alarcon’s decision notes that “[t]he limits of the authority granted by § 790.03 are underscored by Cal Ins Code § 790.06 which provides a special process which the commissioner can determine how acts not listed in § 790.03 can be defined as unfair or deceptive.”

The need to interpret the authority granted to the insurance commissioner by Insurance Code section 790.03 in light of Insurance Code section 790.06 was also central to the recent decision of California Administrative Law Judge Stephen J. Smith, who found that the Fair Claims Settlement Practices Regulations may not be used by the insurance commissioner to constitute unfair claims acts under section 790.03, which was discussed in this blog post.

Supreme Court Directs Trial Courts To Look At The Merits In Determining Whether To Certify A Class

Comcast v Behrend is the latest in a series of United States Supreme Court cases in recent years that have restricted the ability of plaintiffs to certify federal class actions. In so doing, it has expanded the scope of the Court's landmark 2011 decision, Walmart v. Dukes (click here for our analysis of that decision).

In Comcast, plaintiffs were subscribers to Comcast's cable-television services. Plaintiffs alleged that Comcast engaged in a practice called "clustering," a strategy of concentrating operations within a particular region, and that this practice violated antitrust law. In particular, plaintiffs alleged that the clustering scheme harmed subscribers in the Philadelphia area by eliminating competition and elevating prices.

Plaintiffs sought to certify the class under Federal Rules of Civil Procedure, Rule 23(b)(3), which permits certification only if:

the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members." 

The district court held that to meet this predominance requirement, plaintiffs needed show:

  1. that the existence of individual injury "was capable of proof at trial through evidence that [was] common to the class rather than individual members" and
  2. that the damages resulting from the injury were measurable "on a class-wide basis" through the use of a "common methodology."

Plaintiffs proposed four theories of antitrust impact. Of these four theories, the district court concluded that only one was capable of class-wide proof, and rejected the rest. 

In establishing that damages could be calculated on a class-wide basis, plaintiffs introduced the testimony of an expert, who introduced a model that calculated damages of over $875 million for the entire class. However, despite the fact that the district court had rejected three, and allowed only one, theory of antitrust impact, the model introduced by the expert did not isolate damages resulting from any one theory of antitrust impact.

The District Court approved the certification of the class, and Third Circuit Court of Appeal affirmed.  The Supreme Court, in a 5-4 decision authored by Justice Antonin Scalia, overturned these rulings, holding that the class action was improperly certified.

As Justice Scalia explained,

a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.  If the model does not even attempt to do that, it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3)." 

The Court rejected the reasoning of the Third Circuit that such inquiry would involve consideration into the "merits," which, the Third Circuit believed, has "no place in the class certification inquiry."  To the contrary, Justice Scalia explained, "our cases requir[e] a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim." 

Comcast is part of a recent trend in Supreme Court jurisprudence allowing, and indeed even requiring, district courts to examine the merits of the claim in determining the suitability of class certification. 

This principle was announced in Walmart v. Dukes, and it is no accident that the Court begins the analysis section of Comcast with an invocation from that 2011 ruling. Moreover, Comcast extends the ruling of Walmart v. Dukes, which considered only Rule 23(a) (the requirement that plaintiffs establish commonality), to the predominance requirement of Rule 23(b)(3).

Denial Of Class Certification As To Alleged Wage And Hour Violations Affirmed by Court of Appeal

In Daily v. Sears, the Fourth Appellate District, Division One, affirmed the trial court's granting of the defendant's motion to preclude class certification.

Plaintiff Dailey was a former employee of Sears, who asserted wage and hour claims individually and on behalf of a proposed class of similarly situated managers and assistant managers.

Dailey argued that Sears uniformly categorized Managers and Assistant Managers as exempt from overtime and meal/rest break requirements, but nonetheless implemented policies that had the effect of requiring the proposed class members to work at least 50 hours per week, spending the majority of their time on nonexempt activities. Sears argued that determining how the class members actually spend their time requires individualized evidence and cannot be proven on a classwide basis. The trial court granted Sears' motion.

The Court of Appeal affirmed, ruling that the trial court had not abused its discretion in denying class certification. As the Court of Appeal explained, class certification requires, among other things, "a well-defined community of interest." The "community of interest requirement," in turn, embodies three factors:

  1. predominant common questions of law or fact;
  2. class representatives with claims or defenses typical of the class; and
  3. class representatives who can adequately represent the class.

For class certification purposes, the court went on to explain, Dailey was required to present substantial evidence that proving both the existence of Sears' uniform policies and practices and the alleged illegal effects of Sears' conduct could be accomplished efficiently and manageably within a class setting. Dailey presented such evidence, and Sears presented contrary evidence, which showed that whether it misclassified Managers and Assistant Managers as exempt required individual inquiries.

The trial court, weighing evidence for both sides, found the evidence Sears presented more compelling, and thus ruled that Dailey had not satisfied his burden for establishing commonality. Dailey argued on appeal that the trial court had improperly focused on the merits. The Court of Appeal disagreed:

Dailey is correct that the validity of the complaint's allegations generally is not at issue on class certification. . . . By the same token, however, the focus of the class certification inquiry is on 'the nature of the legal and factual disputes likely to be presented' [citation omitted] as those disputes are framed not only by the complaint but also by defendant's answer and affirmative defenses. . . . Critically, if the parties' evidence is conflicting on the issue of whether common or individual questions predominate (as it often is and as it was here), the trial court is permitted to credit one party's evidence over the other's in determining whether the requirements for class certification have been met—and doing so is not, contrary to Dailey's apparent view, an improper evaluation of the merits of the case.

Thus, the Court of Appeal affirmed, substantial evidence supported the trial court's finding that common questions did not predominate.

In addition, among its other rulings, the Court of Appeal rejected Dailey's argument that a random sampling methodology he proposed could have been used to managing the individual questions requiring adjudication. In particular, Dailey sought to use such a methodology to establish both liability and damages.

As the Court of Appeal explained, sampling methodologies, while sometimes appropriate to establish damages, have never been accepted to establish liability on a class wide basis. Such a method may not "be used to manufacture predominate common issues where the factual record indicates none exist."

Indeed, the Court noted, "[i]f the commonality requirement could be satisfied merely on the basis of a sampling methodology proposal such as the one before us, it is hard to imagine that any proposed class action would not be certified." (Emphasis in original).

This opinion affirms that a trial court may indeed credit one side's evidence over another's in the class certification context. This points to high importance, for both sides, of marshalling the best evidence at the class certification stage, since it can operate as a miniature bench trial.

Please call or e-mail the author to further discuss the issues in this article.

Originally posted to Barger & Wolen's Employment Law Observer blog.

Will Liability Insurers Have a Duty to Defend the NFL in Concussion Litigation?

The recent expanse of litigation against the National Football League for concussions and other brain injury related claims contains hall of fame names and headline worthy accusations of failed safety measures. The bigger fight, however, may be between the NFL and its liability insurers to determine what, if any, coverage and indemnity will be provided to the NFL.   

In fact, several coverage cases have already begun. Helmet manufacturer Riddell filed the first suit seeking declaratory relief against 13 insurers on April 12, 2012, in California Superior Court, Riddell v. Ace American Ins. Co.. On August 13, 2012, Alterra America Insurance Company filed suit against the NFL in New York Supreme Court seeking a declaration of its duty to defend the NFL in approximately 93 underlying concussion related claims, Alterra America Ins. Co. v. NFL

The NFL responded two days later with its own complaint in the California Superior Court against 32 insurers (dating back to the 1960s) seeking a declaration of the insurers’ duty to defend the NFL and indemnify it for damages in at least 143 concussion related suits, NFL v. Fireman’s Fund Ins. Co., Case No. BC490342. And finally, on August 22, 2012, subsidiaries of Travelers Companies Inc. filed an insurer-commenced declaratory judgment action against the NFL in New York Supreme Court, Discovery Prop. & Cas. Co. v. NFL, Case No. 652933/2013.      

Due to procedural motions, these cases are progressing slower than an NFL replay.

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Supreme Court Closes CAFA Loophole

A unanimous decision by the United States Supreme Court has restored the integrity of the Class Action Fairness Act, or CAFA. At issue in Standard Fire Insurance Co. v. Knowles was the transparent attempt by a named plaintiff to ouster federal court jurisdiction by “stipulating” that the damages sought through a class action complaint would not exceed the $5,000,000 minimum jurisdictional limit of CAFA. 

In a brief and direct decision, Justice Stephen Breyer disallowed the use of such a pre-certification stipulation, concluding that prior to the issuance of any certification order, a named plaintiff does not have the ability to bind absent class members and to concede the value of those class members’ claims.

Knowles was the named plaintiff in an action filed in Arkansas state court against Standard Fire concerning an alleged practice of failing to include general contractor fees in homeowner’s insurance loss payments. The complaint filed by Knowles, as well as an attachment to the complaint, contained a stipulation that Knowles and the Class would not seek to recover damages “in excess of $5,000,000 in the aggregate.” 

Accordingly, after Standard Fire removed the action to federal court under CAFA jurisdiction, Knowles moved to remand the action back to state court based on the stipulation that Knowles claimed made the “amount in controversy” fall beneath the $5,000,000 CAFA threshold and therefore defeated jurisdiction under CAFA. While the federal district court agreed with Knowles, other cases reached the opposite view, and thus the issue ended up at the Supreme Court.

In Knowles, the district court had found that the amount at issue would have exceeded the $5,000,000 minimum limit, but for the stipulation. As such, the Supreme Court had little difficulty concluding that the stipulation was ineffective to bind absent class members because, at the precertification stage, the proposed class members are not yet – and potentially never will be – parties to the action, and thus the named plaintiff cannot bind those non-parties. At the pre-certification stage, the named plaintiff cannot bind “anyone but himself.”

In enacting CAFA, Congress sought to relax the jurisdictional threshold of class actions and ensure “Federal court consideration of interstate cases of national importance.” The unilateral “stipulation” attempted in Knowles and in other cases not only frustrated the intent of Congress but also prejudiced the claims of absent class members. The Supreme Court correctly restored the balance in CAFA.

An Employee's Umbrella Insurance Policy Must Be Exhausted Before Seeking Contribution From Policies Covering The Employer

When an employer is vicariously liable to a third party for its employee’s negligence, and both the employer and employee have primary and umbrella policies covering liability to the third party, the employee’s primary and umbrella policies must first be exhausted before the employer’s policies are implicated.

The California Court of Appeal, Fourth Appellate District in GuideOne Mutual Insurance Company v. Utica National Insurance Group recently held that priority of liability among primary and umbrella insurers of an employer and employee “is based upon principles of vicarious liability, not more general rules government primary and excess policies.” 

GuideOne was an equitable contribution action involving the following scenario: Gary West was a pastor who worked for Crosswinds Community Church (“Crosswinds”) and Christian Evangelical Assemblies (“CEA”). During the course of his work, West was driving and struck a motorcyclist, Robert Jester, who sustained severe injuries. Jester filed suit against West, Crosswinds and CEA for personal injuries, and the case settled for $4.5 million. The liability of Crosswinds and CEA was entirely vicarious to the liability of West.

GuideOne issued primary and umbrella policies to Crosswinds which covered negligent acts by an employee. Utica issued primary and umbrella policies to CEA that covered only the employer. After the underlying case settled, GuideOne filed an equitable contribution action against Utica seeking a pro rata share of the settlement amount

The Court of Appeals ruled that the trial court erred in awarding equitable contribution to GuideOne on a pro rata basis. In support of its decision, the Court held that an employer is only vicariously liable for the actions of the tortfeasor employee, and therefore all of the insurance policies covering the employee, primary and excess, must be exhausted before the umbrella policy of an insurer that covered only the employer must make a contribution. 

Recovery From Dissolved Corporation's Liability Insurer Barred By Foreign Survival Statute

The recent case of Greb v. Diamond International Corp. highlights the need for dissolved corporations and their insurers to consider the survival statute of their state of incorporation when defending against actions brought in California.

In Greb, the California Supreme Court held that California law does not preclude the application of a foreign jurisdiction’s survival statute. The defendant, a Delaware corporation, argued that Delaware’s three-year survival statute barred the action. Plaintiffs contended that California corporate law – which places no time limit on suits against dissolved corporations – governed their suit.

The trial court agreed with the defendant and sustained its demurrer with prejudice on the grounds that Delaware’s survival statute barred the action which was filed more than three years after defendant dissolved. The court of appeal affirmed.

The Supreme Court unanimously affirmed the appellate court’s judgment. The opinion, authored by Chief Justice Cantil-Sakauye, rejected plaintiffs’ arguments that foreign corporations that qualified to do business in California were thereby organized under the laws of California.

The court found “no evidence” that the legislature intended to accomplish that “dramatic result.” Furthermore, “such a scheme would require foreign corporations to ‘follow a litany of requirements regarding various corporate activities that their home state already regulates.’”

Originally posted to Barger & Wolen's Life, Health and Disability Insurance Law blog.

FINRA Panel Rules on Charles Schwab's Challenge to FINRA Rules Prohibiting Class Action Waiver Clauses

In October 2011, Charles Schwab ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement.

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules.

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules: first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated."

On February 21, 2013, a FINRA arbitration panel ruled on FINRA's and Schwab's cross-motions for summary judgment (Department of Enforcement v. Charles Schwab & Company). The panel found that:

Enforcement [of the FINRA rules preserving judicial class actions] is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act." 

However, the panel also ruled that Schwab's arbitration language violated FINRA Rule 2268(d)(1). Rule 2268(d)(1) specifies the circumstances in which arbitrators may arbitrate consolidated claims. The panel noted that since FINRA rules prohibit arbitration on a class action basis,

it is clear that consolidation [under Rule 2268(d)(1)] is a non-representative type of procedure, distinguished from class actions." 

The panel reasoned that the Federal Arbitration Act does not bar enforcement of Rule 2268(d)(1) because the Act does not dictate how an arbitration forum should be governed and operated or prohibit the consolidation of individual claims. Therefore, Schwab was, inter alia, ordered to "cease using the portion of the Waiver purporting to delimit the authority of the arbitrators" to consolidate individual (non-representative) claims and notify customers that such a limitation is not effective. In addition, the panel fined Schwab $500,000.

While the dispute involved the arbitration provision in Schwab's customer agreements, the panel's decision potentially opens the door for the insertion of similar class action waiver clauses in employment agreements for those working in the financial services industry.

The panel's decision is subject to appeal to, and/or review by, FINRA's National Adjudicatory Council within 45 days.

Winning Insurers Gain Clarity on Defense Duty During Appeals

Larry Golub was quoted in a Feb. 13, 2013, article by Law360, Winning Insurers Gain Clarity on Defense Duty During Appeals (subscription req.), about a recent federal court decision that found an insurer had not violated its contract when it ceased defending a policyholder after a trial court win on coverage, despite the fact that the victory was later overturned. The case is National Union Fire Insurance Co. of Pittsburgh, Pa., et al. v. Seagate Technology Inc.

Golub told the publication that carriers will sometimes continue to defend their policyholders after winning at the trial court level if a coverage win doesn't appear to be strong enough to survive an appeal. The reason is that they could end up paying high interest on defense costs they might ultimately owe, he said.

Maybe they should play it safe and just keep defending under a reservation of rights and ensure that they don't have ultimate exposure,” Golub said.

Golub also noted that if other courts agree with the decision, insurers who have won temporary victories will not have to face bad faith claims or punitive damages.

 

Two California Appellate Court Decisions Vacate Forfeiture of Bail Bonds

Two recent decisions by California Courts of Appeal reversed trial court rulings which denied surety company motions to vacate the forfeiture of bail bonds.

People v. International Fidelity Insurance Company was ordered published by the Court of Appeal for the Sixth Appellate District on January 24, 2013.

Saul Contreras was arrested on misdemeanor complaints of driving under the influence. International Fidelity posted bonds for his appearance in court. Contreras’s attorney, Michael Paez, appeared on Contreras’s behalf at arraignments and pretrial conferences. At the pretrial conferences, Paez advised the court that he had lost contact with Contreras and that he suspected Contreras was in Mexico.

The trial ordered the forfeiture of the bonds. International Fidelity filed motions to vacate the forfeiture of the bonds, arguing that Paez was authorized to appear on behalf of Contreras at the court proceedings. The Santa Clara County Counsel opposed the motions, arguing that Paez’s loss of contact with Contreras demonstrated the termination of Paez’s authority to represent Contreras at the proceedings. The trial court denied the motions to vacate the forfeiture of the bail bonds.

The Court of Appeal reversed the trial court’s denial of the motions. The court pointed to Penal Code section 977, which provides that an attorney may appear on behalf of a defendant in a misdemeanor driving under the influence case unless the court orders the defendant to be at a proceeding. In this case, there was no evidence that the court ordered Contreras to personally appear. The court rejected the argument that Paez’s lose of contact with Contreras removed his authority to represent Contreras; there was no evidence that Paez no longer had Contreras’s authorization to represent Contreras in court.

In the second case, the Court of Appeal for the Second Appellate District issued its decision in People v. Western Insurance Company on January 30, 2013.  

Chester Dizon was arrested on a felony complaint. Western Insurance Company posted a bond for Dizon’s appearance in court. After the posting of the bond, the trial court granted Dizon permission to travel to the Philippines and ordered Dizon to appear for trial on the day after his specified return date. Dizon failed to appear for trial. The trial court ordered forfeiture of the bail bond. Western filed a motion to vacate the forfeiture. Western contended that the trial court failed to advise Western of Dizon’s request to travel to the Philippines and argued that “there’s no way our company would have agreed” to it. The trial court denied Western’s motion to vacate the forfeiture of the bail bond.

The Court of Appeal reversed the trial court’s denial of the motion. The court concluded that Western’s liability under the bail bond agreement was discharged because the court order permitting Dizon to leave the United States materially increased Western’s risk.

The Court of Appeal’s opinion cites the United States Supreme Court’s 1869 decision in Reese v. United States. In the Reese case, the Supreme Court explained that:

there is an implied covenant on the part of the principal with his sureties, when he is admitted to bail, that he will not depart out of this territory without their assent. There is also an implied covenant on the part of the government, when the recognizance of bail is accepted, that it will not in any way interfere with this covenant between them, or impair its obligation, or take any proceedings with the principal which will increase the risks of the sureties, or affect their remedy against him.”

The Court of Appeal noted that over a century later the ruling in the Reese case continues to be valid.  

 

Canon Ruling May Spur Unfair Competition Claims In Calif.

Law360 quoted Larry Golub in a Jan. 24, 2013, article, Canon Ruling May Spur Unfair Competition Claims in Calif (subscription req.), about the California Supreme Court's ruling in Jamshid Aryeh v. Canon Business Solutions Inc.

The ruling, which is expected to spark similar cases, held that equitable tolling doctrines apply to claims brought under California's Unfair Competition Law.

Golub told Law360 that the ruling could encourage more plaintiffs to bring Unfair Competition Law claims against California businesses.

The decision opens up a limited door to avoiding the statute of limitations for UCL claims that involve a continuing or recurring business practice,” Golub said. “Plaintiffs bringing UCL claims in the future will try to characterize claims as a continuous practice to try to fall within the Aryeh rule.”

Click here to read Mr. Golub’s full analysis of the case.

 

Reconsidering the Fraud Exception to the Parol Evidence Rule

The California Supreme Court has removed a legal barrier for litigants seeking to invalidate contracts on the basis of fraud. 

Overruling a 75-year old decision, the Supreme Court ruled that the parol evidence rule does not exclude evidence of allegedly false promises or representations that directly contradict a contract’s written terms. See Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assoc. (filed Jan. 14, 2013). 

This case did not specifically concern insurance, but the ruling could have ramifications for contract disputes between insurers and insureds. 

Insurance coverage disputes sometimes involve allegations that the insurer or its agents misrepresented policy terms. Insurers have a number of potential defenses to respond to these claims, including the parol evidence rule. As applied prior to Riverisland, the rule excluded evidence of any alleged false promise that directly contradicted the express terms of the insurance policy. See, e.g., Diamond State Ins. Co. v. Marin County Bikes, 2012 U.S. Dist. LEXIS 181329 ** 39-41 (N.D. Cal. Dec. 21. 2012) (dismissing fraud claim because alleged misrepresentations about coverage contradicted policy terms).

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California Supreme Court Allows "Continuous Accrual" Doctrine to Avoid Statute of Limitations for "Unfair" UCL Claim

Seeking to clarify the extent to which the four-year statute of limitations applies to claims under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), a unanimous California Supreme Court today issued its decision in Aryeh v. Canon Business Solutions, Inc., allowing at least a portion of the plaintiff’s UCL claim to proceed beyond demurrer.

Relying on the continuous accrual doctrine, the Court explained that this equitable exception to the usual rules governing limitations periods would permit the plaintiff to pursue:

at least some [alleged unfair] acts within the four years preceding suit, [and thus] the suit is not entirely time-barred.”

Background

The plaintiff ran a copying business and entered into two agreements with Canon (one in November 2001 and one in February 2002) to lease copiers. The agreements required the plaintiff to pay monthly rent for each copier, subject to a maximum copy allowance. If plaintiff exceeded the monthly allowance, he had to pay an additional per copy charge. The agreements also provided that Canon would service the copiers. 

Beginning in 2002, plaintiff noticed discrepancies between meter readings taken by Canon employees and the actual number of copies made on each copier, and he began compiling independent records. Plaintiff alleged that Canon employees had run thousands of test copies during 17 service visits between February 2002 and November 2004, which he claimed resulted in him exceeding his monthly allowances and having to pay excess copy charges and fees to Canon.

Plaintiff delayed until January 2008 before he filed a single-claim complaint for violation of the UCL. In that complaint, plaintiff alleged that Canon’s practice of charging for test copies implicated both the unfair and fraudulent prong of the UCL.

Canon demurred to the complaint, contending that plaintiff’s claim was barred by the four-year statute of limitations for UCL claims. After permitting plaintiff leave to amend the complaint two times, the trial court dismissed the action. The Court of Appeal, in a 2-1 decision, affirmed the dismissal and held that neither the “delayed discovery” rule nor the “continuing violation doctrine” applied to avoid the statute of limitations. The dissenting opinion would have allowed plaintiff to proceed with a portion of his claim under the “continuous accrual” theory for those parts of the claim that were not time-barred.

Supreme Court Decision

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Trial Court Abuses Its Discretion by Forcing Insurer to Bear the Cost of Giving Notice to Putative Class Members

In In re Insurance Installment Fee Cases, 2012 DJDAR 16696 (2012), the California Court of Appeal for the Fourth Appellate District decided an important class action cost recovery issue. The case arose in the insurance context.

A class action was filed against State Farm (“State Farm”) by a class representative. The representative pursued discovery seeking access to the class members’ personal and payment information, designed to identify which insureds might be eligible as plaintiffs in the class.  State Farm objected to the discovery requests. The plaintiff filed motions to compel the requested documents and the parties agreed to refer the dispute to a discovery referee. The discovery referee overruled State Farm’s objections. State Farm filed written objections to the referee’s recommendation which were subsequently overruled by the trial judge. The trial court also ordered State Farm to pay for and to mail out the notices regarding the discovery propounded by the plaintiffs. The merits of the litigation were subsequently decided in favor of State Farm.

State Farm filed a memorandum of costs after prevailing at the trial court level. In the cost memorandum State Farm sought to recover the $713,463 it incurred in sending out the notices to putative class members. The plaintiffs filed a motion to tax those costs. The trial court granted the motion to tax costs in its entirety.

The court of appeal reversed the trial court’s decision in part, and concluded the trial judge abused his discretion in taxing the costs relating to the mailing of the notices to putative class members. 

The court of appeal noted that certain cost items may be awarded in the trial court’s discretion if they are “reasonably necessary to the conduct of the litigation.” CCP § 1033.5(c)(2) and Seever v. Copley Press, 141 Cal. App. 4th 1550, 1558 (2006). 

However, when a party demands discovery involving significant “special attendant costs” beyond those typically involved in responding to routine discovery, the demanding party should bear those costs if the party is not successful in prevailing in the litigation. 

In reversing the trial court’s decision, the court of appeal reasoned that the costs State Farm incurred in providing the notice were “special attendant” costs beyond those involved in responding to routine discovery.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

Tripartite Attorney-Client Relationship Arises when Insurer Hires Law Firm to Prosecute Action on Behalf of its Insured

It is well settled that a tripartite attorney-client relationship arises when an insurer retains counsel to defend an action against its insured. As a consequence, confidential communications between counsel and the insurer or the insured are protected, and both the insurer and the insured are holders of the privilege.  

The California Court of Appeal for the Fourth Appellate District clarified that a tripartite attorney-client relationship also can exist where the insurer hires a law firm to prosecute an action on behalf of its insured. See Bank of America v. Superior Court of Orange County (Pacific City Bank), 2013 DJDAR 654 (2013). 

In Pacific City Bank, Fidelity National Financial (Fidelity) was the insurer and Bank of America was the insured under a lender's title policy insuring a deed of trust. Pacific City Bank (PCB) had recorded a deed of trust on the same property and sent a notice of trustee sale. Bank of America tendered the claim to Fidelity, which hired a law firm to institute an action on behalf of its insured, Bank of America, to protect its security interest. In the ensuring litigation, PCB served subpoenas on Fidelity seeking communications between the law firm and Fidelity. Bank of America moved to quash the subpoenas to exclude communications between the law firm and Fidelity on the grounds of privilege. The trial court held that the tripartite attorney-client doctrine did not apply because the law firm was retained to prosecute the underlying action rather than defending litigation. According to the trial court, Fidelity did not have a "favored position" or "sacred role" in the litigation.

The Court of Appeal reversed, holding that the trial court erred as a matter of law in making this artificial distinction. The court's holding turned on an analysis of the title insurer's duties to its insured. The court reasoned that a title insurer's obligation to defend a lawsuit and to take other appropriate action, such as prosecuting an action to protect the integrity of an insured's title, are "kindred duties" addressing the "same fundamental concern" and that there is no logical reason why a tripartite relationship should exist in one situation but not the other. 

The court rejected PCB's arguments that no tripartite relationship arose because there was no formal retainer agreement between the insurer and counsel hired to protect its insured's interest. The mere retention of the law firm was sufficient to establish the tripartite relationship. It also did not matter that Fidelity had reserved rights. The law firm was not acting as Cumis counsel, and, even if it were, the privilege would still apply to all confidential communications among the insurer, insured and law firm except those pertaining to coverage.

PCB maintained that Fidelity waived any right to object to the production because it did not bring its own motion to quash the subpoena. The court rejected this argument as well, noting that Bank of America was a holder of the privilege and thus had standing to assert the privilege itself.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog

Insurance Cases to Watch in 2013

Larry Golub was quoted in a Jan. 1, 2013, article published on Law360, Insurance Cases to Watch in 2013 (subscription required) about key insurance cases lawyers, and those in the insurance industry, should keep an eye out for in 2013. Among other things, the article mentioned litigation filed over Hurricane Sandy losses, cyber liability claims and a much-anticipated California Supreme Court ruling on whether the state's unfair competition law can be used to accuse insurance companies of bad faith.

Golub's comments dealt with that case before the California Supreme Court, Zhang v. The Superior Court of San Bernardino County, which will decide whether policyholders can sue insurers for misrepresentation and false advertising for not promptly paying claims.

Golub told the publication that the state's courts have been split on the issue although insurers insist that Zhang is at odds with the California Supreme Court's decision in a 1988 case prohibiting private rights of action for violations of the Unfair Insurance Practices Act.

Prior to that ruling, insurance companies raised rates fearing they would be hit with private lawsuits brought under that law, a pattern that could repeat itself depending on what the Supreme Court decides, Golub said. The state's unfair competition law allows for restitution but not damages.

The remedies may be limited, but the breadth of the statute is very broad,” he said. “Since there are so many cases coming out on both sides of the issue, it's one that demands resolution.”

California Supreme Court's Reconsideration of Henkel Decision Will Re-Assess Consent-to-Assignment Clauses

Larry Golub was quoted in a Dec. 18, 2012, Law360 article, Calif. High Court's 2nd Stab At Henkel Could Help M&A (subscription required) about the California Supreme Court's determination to reconsider its 2003 ruling in Henkel Corp. v. Hartford dealing with the transfer of insurance rights.

According to the article, the court agreed to grant a petition to review Fluor Corp.'s lawsuit against Hartford Accident and Indemnity Co. which could ultimately eliminate a barrier preventing the transfer of insurance rights during mergers, acquisitions, and corporate restructurings.

Golub told the publication that should Henkel be overturned, insurers would likely need to be more diligent about underwriting and really weigh what potential liabilities they might have to cover in the future.

"The consent-to-assignment clauses are intended to make sure they are underwriting the risks they intended to underwrite,” Golub said. “Insurers [would] need to probably be more careful in the risks they underwrite and to be more diligent when they're renewing policies.”

Golub also told Law360 that the Supreme Court may be taking up the Fluor case because it hasn't had the chance to consider the 1872 statute at the heart of Henkel. That California law purports to allow companies to assign their rights under insurance policies to successors after a loss, but has never been interpreted in the 140 years since it was enacted.

“It's hard to know how the Supreme Court will deal with that other than the fact that the whole panel appears to be interested in resolving this one way or the other,” he said.

District Court Finds Class Action Waiver Clauses in Employment Agreements Are Permissible Under FINRA Rules 13204(a) and (b)

On December 4, 2012, in Cohen v. UBS Financial Services, Inc., et al, 12-CIV-2147 ("Cohen"), the United States District Court for the Southern District of New York addressed whether Rules 13204(a) and (b) of the FINRA Code of Arbitration Procedure precluded enforcement of class action waiver clauses in arbitration agreements with financial advisors.

In Cohen, financial advisors filed a putative class action alleging claims for purported violations of the Fair Labor Standards Act, the California Labor Code, and the California Unfair Competition Law.  The financial advisors' compensation plan included an arbitration provision that provided as follows:

[Y]ou and UBS agree that any disputes between you and UBS including claims concerning compensation, benefits or other terms or conditions of employment . . . Will be determined by arbitration . . . By agreeing to the terms of this Compensation Plan . . . , you waive any right to commence, be a party to or an actual or putative class member of any class or collective action arising out of or relating to your employment with UBS . . ."

Rules 13204(a) and (b) of the FINRA Code of Arbitration Procedure state that "class action claims may not be arbitrated under the Code" and that "[a]ny claim that is based upon the same facts and law, and involves the same defendants as in a . . . Putative class action . . . shall not be arbitrated under the Code." 

The financial advisors argued that these rules precluded enforcement of the class action waiver clauses.

The Court disagreed stating that "Plaintiffs' selective reading of the Code as absolutely prohibiting class and collective waiver is incorrect." The Court reasoned that Rule 13204 also provides that its subparagraphs:

do not otherwise affect the enforceability of any rights under the Code or any other agreement. [emphasis in Court's Order.] The rule therefore: (1) recognizes that parties may choose to enter into additional agreements beyond the scope of the Code; and (2) provides that the Code does not affect the enforceability of these additional agreements. That the arbitration agreements here would preclude Plaintiffs from pursuing a class or collective action does not change the Court's view."

Courts Take Divergent Positions on "Disparagement" Under Advertising Injury Coverage

Within the last four months, two divisions of the California Court of Appeal’s Second Appellate District have taken different positions on the requirements for “disparage,” as that term is used in commercial liability insurance policies that provide coverage for “advertising injury.”

On June 21, 2012, Division One of the Second Appellate District decided Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. In that case, Travelers issued a commercial liability policy that promised to defend Charlotte Russe, a retailer, against any suit that sought damages for advertising injury claims. The policy provided that it covered claims alleging injury arising out of the publication of material that disparages a person’s goods, products or services.

Charlotte Russe had a contract to become the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel. Displays in Charlotte Russe stores announced the sale of People’s Liberation jeans at 70% to 85% price markdowns. Versatile sued Charlotte Russe, alleging that the retailer’s pricing practices would result in significant and irreparable damage to the People’s Liberation brand. Charlotte Russe asked Travelers to defend the lawsuit. Travelers refused. The insurer maintained that coverage was not available because reduction of the price of a product is not a disparagement of the product.

The trial court granted Travelers’ motion for summary judgment, but Division One reversed the trial court’s ruling. (While initially unpublished, the appellate court’s decision was certified for publication on July 13, 2012.) The decision concluded that an allegation of disparagement may be implied. The Division One court held that the key issue is not whether Versatile expressly alleged that Charlotte Russe disparaged Versatile’s products, but instead whether Charlotte Russe’s statements and conduct could be understood to disparage Versatile’s products.

The Second Appellate District’s Division Three took an opposite view in its October 29, 2012, decision in Hartford Casualty Insurance Co. v. Swift Distribution, Inc.,which also involved a claim for coverage under a policy’s advertising injury coverage. The Division Three court ruled that the insurer in that case had no duty to defend because the lawsuit against the insured did not allege that the insured published an injurious falsehood directed at the plaintiff’s products. The court expressed disagreement “with the theory of disparagement apparently recognized in Charlotte Russe.” The court explained,

Charlotte Russe held that this reduced pricing was enough to constitute disparagement, which triggered the duty to defend. We fail to see how a reduction in price—even a steep reduction in price—constitutes disparagement.”

In September, the California Supreme Court denied review of the Charlotte Russe decision; the time to seek review in the Hartford Casualty has not yet run.

Another Decision Uses the UCL to Circumvent the Moradi-Shalal Restriction as to Private Rights of Action Against Insurers

In a decision issued October 24, 2012, the California Second Appellate District, Division Four became the most recent decision applying California’s unfair competition law, Business & Professional Code, § 17200 et seq. (“UCL”), to bring bad faith claims against insurers, undercutting a key aspect of the decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos.

In Ocie E. Henderson v. Farmers Group, Inc., the court analyzed and rejected the determinations of one line of California decisions issued in the years since Moradi-Shalal that precluded a private right of action under the UCL against insurers for violations of California’s Unfair Insurance Practices Act (“UIPA”), Ins. Code, § 790.03(h) et seq. See Textron Financial Corp. v. National Union Fire Ins. Co., and Safeco Ins. Co. v. Superior Court, abrogated on other grounds by Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.

Henderson instead followed the same reasoning applied by the Fourth Appellate District, Division Two in Zhang v. Superior Court (review granted Feb. 10, 2010).

Zhang held that a cause of action for violation of the UCL based on conduct that allegedly violates the UIPA is not an end-run around Moradi-Shalal so long as that conduct also supports a claim against the insurer for something other than a UIPA violation. 

The conduct at issue in Zhang involved alleged fraudulent misrepresentations and misleading advertising regarding coverage. 

The conduct at issue in Henderson involved denial of property damage claims based on the failure to submit a proof of loss and late notice.  

Both Zhang and Henderson rely on State Farm Fire & Casualty Co. v. Superior Court, which held that a breach of contract or bad faith cause of action could serve as a predicate for a UCL claim even if the conduct supporting the claim also constitutes a violation of the UIPA. 

Additional decisions following Zhang include: Hughes v. Progressive Direct Ins. Co., review granted September 28, 2011, but deferred pending consideration and disposition of Zhang; Williams v. Prudential Ins. Co., 2010 U.S. Dist. LEXIS 14566 (N.D. Cal. 2010); Burdick v. Union Sec. Ins. Co., 2009 U.S. Dist. LEXIS 121768 (C.D. Cal. 2009).  

In Sanders v. Choice Mfg. Co., 2011 U.S. Dist. LEXIS 137365 (N.D. Cal. 2011), the district court refused to apply Zhang because of its unpublished status but nonetheless applied reasoning similar to Zhang in holding that plaintiff’s allegations regarding untrue and deceptive statements alleged more than just a violation of the UIPA because the conduct also involved allegations of the sale of insurance without first obtaining a license or certificate. 

Despite these holdings, other recent decisions in the district courts continue to apply broadly Moradi-Shalal and Textron but have left open their decisions pending the California Supreme Court’s determination in Zhang. See Wayne Merritt Motor Co. v. N.H. Ins. Co., 2011 U.S. Dist LEXIS 122320 (N.D. Cal. 2011) (dismissal without prejudice of UCL claim based on allegations that the insurer misrepresented coverage by “burying” a limitation of liability clause in the endorsement); Willbanks v. Progressive Choice Ins. Co., 2010 U.S. Dist. LEXIS 128144 (E.D. Cal. 2010) (dismissed without prejudice of UCL claim based on unfair claims practices).

While Zhang has been fully briefed since June 2010, oral argument has yet to be set. Presumably, the Supreme Court’s long-awaited decision in Zhang will bring certainty to these conflicting decisions and reconcile the interplay of the UCL and the UIPA.

We will continue to report on the developments in this significant area of insurance litigation.

 

Can a Plaintiff Evade CAFA's Jurisdictional Threshold By Stipulating to the Amount of Damages the Plaintiff Will Seek on Behalf of the Class?

On August 31, 2012, the United States Supreme Court granted review in Standard Fire Ins. Co. v. Knowles. The issue presented is whether a plaintiff can preclude removal of his state class action complaint under the Class Action Fairness Action of 2005 (“CAFA”) (PDF) by stipulating that he will not seek damages for the class in excess of the $5 million jurisdictional threshold. 

Knowles attached to his putative class action complaint a signed stipulation in which he stated he will not “seek damages for the class as alleged in the complaint . . . in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).”

Although the Arkansas federal district court determined that the aggregated claims of the individual class members exceeded the $5 million threshold, it remanded the case to state court. Central to the district court’s ruling is the principle that the plaintiff is “master of his complaint” and can plead to avoid federal jurisdiction. It found dispositive the fact that plaintiff signed a stipulation that he would not seek damages in excess of the jurisdictional threshold and that he was bound by that stipulation. 

The stipulation comported with a recent Arkansas statute that permits a plaintiff to specify an amount in controversy in the complaint in order to establish subject matter jurisdiction. The district court further reasoned that should plaintiff amend its complaint down the road to seek additional damages that trigger CAFA, then Standard Fire could file another motion to remove the case.

In its opening brief, filed on October 22, 2012, Standard Fire hits hard on the Arkansas venue to support its arguments that plaintiff’s stipulation cannot circumvent CAFA. 

Plaintiff filed this putative class action . . . in Miller County Circuit Court, a court known to be a ‘magnet jurisdiction’ for class action plaintiffs’ lawyers because of its willingness to force defendants to engage in prohibitively expensive and wide-ranging discovery that coerces substantial settlements prior to class certification, and its willingness to certify classes that have been rejected in other jurisdictions.” 

Under this backdrop, Standard Fire presents several strong arguments. These include arguments that:

  1. the district court’s remand order violates the fundamental policy behind CAFA to curtail state court class action abuses by authorizing defendants to remove sizeable interstate class actions to federal court;
  2. CAFA, unlike traditional diversity jurisdiction, specifies a methodology for determining the jurisdictional threshold;
  3. under that methodology, which expressly permits aggregation of individual claims, if the aggregate total of the individual class member’s claims exceed $5 million, CAFA has been triggered and the jurisdictional inquiry ends; and,
  4. under basic class action doctrine and due process principles, a plaintiff has no authority to bind absent individual class members to a stipulation to reduce their individual claims before a class has been certified.

Knowles’ brief is due November 28, 2012. Amicus briefs will also be coming down the pipe, and indeed the National Association of Manufacturers filed an amicus brief on October 29 suggesting reversal of the district court’s remand to state court. We will report on future developments on this case.

California Supreme Court Depublishes Decision that Found Claims Adjusters Not Exempt from California's Overtime Pay Requirement

 

By Larry Golub and Sam Sorich

On July 23, 2012, we reported that the California Court of Appeal (Second Appellate District) held in Harris v. Superior Court that claims adjusters for two insurers were not exempt from California’s overtime compensation laws. More specifically, the court concluded that the duties of those adjusters functioned as the day-to-day operations of the insurers and were not “directly related to management policies or general business operations” to fall within exempt status under California law.

The Court of Appeal’s earlier decision in the case was reversed and remanded by the Supreme Court on December 29, 2011, and the intermediate court was told to apply the correct analysis. Consequently, our prior report expected this second decision, as issued by a divided panel of the Court of Appeal, again to be presented to the Supreme Court seeking a petition for review.

Indeed, Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation, the insurers sued in the action, filed a Petition for Review on September 4, 2012, followed by a request to have the Court of Appeal’s decision depublished, as submitted by the California Employment Law Council.

On October 24, the Supreme Court ended the appellate proceedings in this case by (1) denying the Petition for Review and (2) depublishing the Court of Appeal decision. By this action, while the case is final as between the plaintiff claims adjusters and the insurers, the decision cannot be cited as authority in any other case.

With removal of this case from the precedential decisions of California law, the issue as to whether insurance adjusters in other cases and other contexts are exempt employees will continue to be litigated.

9th Circuit Ruling Won't Stop Push For Proactive Insurance Deals

Larry Golub was quoted in a Oct. 15, 2012, Law360 article (subscription required) about the Ninth Circuit Court of Appeals amending an earlier ruling in which it found that insurance companies had a broad duty to settle claims when an insured's liability is clear – even when the injured party has not made settlement demand.

According to the article, insurers are now applauding the court's change of heart, but experts warn that policyholders will continue to fight the issue.

Golub told the publication that, had the earlier 9th Circuit ruling stood, insurers would have faced more pressure settle cases,even when there was little likelihood of resolution. He also said he hopes the court's amended ruling will shut down further efforts to expand insurers' duty to settle under California law.

“It was an aberration that developed in June and by October, the universe righted itself,” Golub said.

You can Mr. Golub's update on the case, Du v. Allstate Insurance Company, here.

 

Du Two - Ninth Circuit Backs Off on Controversial Duty to Settle Decision

 

In June 2012, the Ninth Circuit Court of Appeals issued a decision in Du v. Allstate Insurance Company that asserted a liability insurer must “effectuate” or initiate a settlement within policy limits after liability has become reasonably clear. That decision generated extensive criticism, including on this blog.

Less than four months later, some semblance of balance has been restored with the issuance of the Ninth Circuit’s October 5, 2012 amended decision in Du. The amended decision replaces the court’s prior ruling and, most significantly, relegates its prior ruling as to the duty to “effectuate” settlement to merely raising the concept but concluding that it “need not resolve” this legal issue. 

Whatever the reason for the court’s retreat, the Ninth Circuit panel found, as it did in its original decision, that a jury instruction proffered by the plaintiff that raised the duty to “effectuate” settlement issue was not supported by the evidence and thus the trial court did not abuse its discretion in rejecting the instruction.

While the amended decision still references case law that it asserts extends “the duty to settle beyond mere acceptance of a reasonable settlement demand,” it also cites to California case law “suggesting no breach of the good faith duty to settle can be found in the absence of a settlement demand, the typical context in which the duty has been found.”  While this language will remain in the final decision, at most it is only dicta.

The amended decision also backtracked on another criticized finding, namely, that the “genuine dispute doctrine” does not apply to third party duty to settle cases.  Once again, while the original decision found the doctrine did not apply in third party cases, the amended decision advised: “[w]e need not resolve” this legal issue. 

Hopefully, with the issuance of the amended decision in Du, the parameters of the “duty to settle” under California law have been substantially restored.

Standard CGL Policy "Personal Injury" Coverage Excludes Defense for Housing Discrimination, But Broader Umbrella Policy Provides Duty to Defend

By Samuel Sorich and Larry Golub

In Federal Insurance Company v. Steadfast Insurance Company, issued September 24, the California Court of Appeal, Second Appellate District, held that two primary liability policies that provided “personal injury” coverage for wrongful eviction, wrongful entry and invasion of the right of private occupancy did not impose a duty to defend a complaint alleging discriminatory in housing. At the same time, an umbrella policy that specifically covered discrimination did obligate that insurer to defend the insured.

Sterling managed rental properties. The U.S. Department of Justice filed a complaint against Sterling alleging discrimination based on race, national origin and familial status in violation of the Fair Housing Act. The complaint alleged, among other things, that Sterling perpetuated an environment that was hostile to non-Korean tenants, provided inferior treatment to non-Korean tenants, and refused to rent and discriminated against African Americans. The Department of Justice asserted that Sterling’s discriminatory practices included entering a tenant’s apartment without notice or knocking.

Sterling had two primary liability policies, one for two years with Steadfast Insurance Company followed by three years of coverage with Liberty Surplus Insurance Corporation, and excess-umbrella policies for several years with Federal Insurance Company. The Steadfast and Liberty policies were standard primary policies and provided coverage for “personal injury” resulting from wrongful eviction, wrongful entry or invasion of the right of private occupancy. The umbrella portion of the Federal policies’ “personal injury” coverage not only defined such coverage to include wrongful eviction, wrongful entry and invasion of the right of private occupancy but also covered discrimination based on race or national origin.

Sterling tendered its defense of the Fair Housing Act complaint to the three insurers. When Steadfast and Liberty refused to defend the action, Federal defended under a reservation of rights and then brought a coverage action against the two primary insurers. Steadfast also brought a cross-action against Federal.  

Federal contended that Steadfast and Liberty, as primary insurers, had a duty to defend; and because the insurers had a duty to defend, Federal’s duty to defend under its umbrella coverage did not attach. Federal based its position on the argument that Sterling’s creation of a hostile environment for the tenants amounted to a claim of constructive eviction, thus falling under the personal injury coverage for wrongful eviction, wrongful entry, and the invasion of the right of private occupancy in the Steadfast and Liberty policies. 

The trial court, on cross-motions for summary judgment, found that only Federal’s umbrella policy provided coverage, and not the two primary policies. An appeal followed..

The Court of Appeal affirmed the trial court’s decision, holding that even though the complaint for discrimination alleged acts that might involve wrongful evictions, wrongful entries, or invasions of the right of private occupancy, the essential nature of the complaint was a Fair Housing Act enforcement action.

The court concluded the complaint “cannot be construed as asserting common law theories of wrongful eviction, wrongful entry, or invasion of the right of private occupancy. Only the tenant can claim wrongful eviction, wrongful entry, or invasion of the right of private occupancy.”

The court ruled that neither Steadfast nor Liberty had a duty to defend the Fair Housing Act action, but Federal did have a duty to defend Sterling. The court’s opinion explained,

Because the Sterling action was based on discrimination and only the Federal policies, and not the Steadfast or Liberty policies, provided coverage for discrimination claims, the umbrella coverage in the Federal policies ‘dropped down’ to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the Sterling action.

A Duty (to Settle) Too Far

Larry Golub wrote an article that appeared in the Insurance Journal on September 10, 2012, A Duty (to Settle) Too Far, about a recent decision by the Ninth Circuit Court of Appeals that threatens to upend law developed decades ago involving a liability insurer's duty to settle third party claims.

According to Golub, the Ninth Circuit panel's July 11, 2012, ruling in Du v. Allstate Insurance Company would “open the floodgates to higher insurance premiums not to mention more (and wholly unnecessary) bad faith litigation. Indeed, such a rule change would make settlement less likely, contrary to the accepted public policy in favor of settlement and protecting insureds from personal liability.”

In its decision, the court stated that insurers have a duty to try to settle when the liability of the insured is fairly clear, even if the injured party has not made a settlement demand made. Without a demand from a third party, Golub notes, the insurer is left with little to base a settlement on.

“As a federal court decision seeking to apply California state law, but based on no actual state court authority, California courts are under no obligation to follow the Du reasoning and hopefully it will be ignored,” he wrote. “Better yet, when next confronted with a bad faith failure to settle case, perhaps the California Supreme Court or one of the panels of the California Court of Appeal will relegate Du to the graveyard of appellate decisions dead on arrival.”

Longstanding Liability Rule Abandoned by California Supreme Court

On August 23, 2012, the California Supreme Court overturned a common law rule that has been followed by California courts for more than 100 years. Under the common law release rule, which has its origins in English common law, a plaintiff’s settlement with, and release from liability of, one joint tortfeasor also releases from liability all other tortfeasors.

The facts in Leung v. Verdugo Hills Hospital involve a post-birth brain injury. A lawsuit, brought on behalf of the infant, alleged negligence by the infant’s pediatrician and the hospital in which the infant was born. 

Prior to trial, the infant’s representative settled with the pediatrician for $1 million. At trial, the jury found both the pediatrician and the hospital negligent. The jury awarded $15 million in economic damages and apportioned negligence as follows: 55 percent to the pediatrician, 40 percent to the hospital, and 5 percent to the infant’s parents. The judgment stated that, subject to a $1 million setoff, representing the amount of the pediatrician’s settlement, the hospital was jointly and severally liable for 95 percent of all economic damages awarded to the infant.

The hospital appealed the judgment. The hospital argued that under the common law release rule, the infant’s settlement with, and release of liability claims against, the pediatrician also released the hospital from liability for the infant’s economic damages. The Court of Appeal reluctantly agreed with the hospital. The Court of Appeal observed that even though the California Supreme Court has criticized the common law release rule, the Court has not abandoned it.   

Looking at the facts in this case, the Supreme Court noted that application of the common law release rule would mean that the infant “would be compensated for only a tiny fraction of his total economic damages, a harsh result.” The Court considered the rationale for the rule and concluded that the rationale is no longer justified. The court’s unanimous opinion announces,

In light of the unjust and inequitable results the common law release rule can bring about, as shown in this case, we hold that the rule is no longer to be followed in California."

The court then addressed the question of how, in the absence of the common law release rule, liability should be apportioned. The court took note of section 877 of the Code of Civil Procedure, which modifies the common law rule when there is a good faith settlement and release of one joint tortfeasor. However, in this case, the trial court determined that the pediatrician’s settlement was not made in good faith. After considering alternatives, the court adopted the “setoff-with-contribution” alternative. The court concluded,

Accordingly, we hold that when a settlement with a tortfeasor has judicially been determined not to have been made in good faith, nonsettling joint tortfeasors remain jointly and severally liable, the amount paid in settlement is credited against any damages awarded against the nonsettling tortfeasors, and the nonsettling tortfeasors are entitled to contribution from the settling tortfeasor for amounts paid in excess of their equitable shares of liability."

While the impact of the Court’s decision is unclear, the opinion was warmly welcomed by plaintiffs’ attorneys and provides difficult choices for defendants.

The result points up the need for any settling defendant to attempt to obtain a good faith settlement under section 877, and if such a motion is unsuccessful, rethink the advisability of proceeding with the settlement (since the non-settling defendant could still bring a claim against the settling defendant for contribution).  

The decision also places non-settling defendants in a hazardous position, as the settling defendant may not be available or able to reimburse the non-settling defendant the allocated share of its responsibility.

Supreme Court Defines Scope of "Power Press" Exception to Work Comp Exclusive Remedy Rule

In its August 20, 2012 decision in LeFiell Manufacturing Company v. Superior Court, the California Supreme Court held that an injured employee’s spouse is not allowed to pursue a claim for loss of consortium in the employee’s civil lawsuit brought under the “power press” exception to the workers’ compensation exclusive remedy rule.

Generally, workers’ compensation is the exclusive remedy for injuries that occur while an employee is performing services arising from his or her employment. However, there are exceptions to the exclusive remedy rule. California Labor Code section 4558 provides that an employee “or his or dependents in the event of the employee’s death” may file a civil action for damages when the employee’s injuries are caused by the employer’s removal of a safety guard on a power press.  

In this case, an employee filed a civil action against his employer based on section 4558. The employee’s spouse joined in the action, claiming damages for loss of consortium.

The Court of Appeal ruled that the spouse could pursue her claim for loss of consortium damages in her husband’s section 4558 lawsuit. The Court of Appeal recognized that the exclusive remedy rule bars derivative civil actions by the injured employee’s family members. Further, the court recognized that in this case the spouse’s claim was not authorized by the express language of section 4558 since the employee’s injuries did not result in his death. Nevertheless, the court reasoned that the spouse’s claim was viable because, according to section 4558, both the claims of the employee and his spouse fell outside the workers’ compensation system altogether, and thus, the exclusive remedy rule did bar the spouse’s loss of consortium claim.

The Supreme Court disagreed with the Court of Appeal’s conclusion. The Supreme Court held that section 4558’s authorization of a civil action for damages for a power press injury does not suggest that such an injury is entirely outside the workers’ compensation system.

In reversing the Court of Appeal’s ruling, the Supreme Court gave this interpretation to section 4558:

Should the power press injury result in death, the Legislature has expressly provided that the worker’s dependents may pursue the civil cause of action authorized by section 4558 on the worker’s behalf. But where, as here, the worker’s power press injuries do not prove fatal, the Legislature has expressly restricted standing to bring the action at law authorized under subdivision (b) of section 4558 to the injured worker alone. The availability of a civil remedy for the injured worker, to augment his or her workers’ compensation benefits should he or she prevail in court, does not take the case outside the workers’ compensation system. Consequently, derivative claims of dependent family members, such as spouse’s claim for loss of consortium here, remain barred under the workers’ compensation law’s exclusivity rule.” (Emphasis by the Court.)

Stacking of Policy Limits - Podcast interview regarding State of California v. Continental Insurance

Barger & Wolen partner Larry Golub breaks down a California Supreme Court decision, State of California v. Continental Insurance, involving the stacking of policy limits, and whether or not an insured can collect on damages over a period of many years.

Click here for the AM Best Podcast. Attorney Golub on Stacking of Policy Limits.

For a detailed analysis of the decision, please see California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases.

California Court Says Insureds Can Stack Policies For Max Coverage

Partner Larry Golub was quoted in a Law360 (subscription required) article published on Aug. 9, 2012, about a key California Supreme Court ruling that insurance policyholders with long-term property damage and personal injury claims could force carriers to cover damage outside their policy periods and stack coverage to maximize recovery.

The case, State of California v. Continental Insurance, stemmed from battle between the state of California and six excess insurance over an environmental cleanup estimated to cost as much as $700 million. The court found in the high-profile case that, “all sums” language in California's excess insurance policies means that carriers must cover all damage up to their policy limits and that stacking is allowed because the policies lacked language specifically prohibiting the practice.

Rather than stacking, the insurance companies involved in the case preferred a formula whereby carriers would be assigned a specific amount of damages to cover.

"There were other ways to allocate the loss other than saying basically all the policies, all the time, especially in the case where you had a sophisticated insured like the state of California that chose for a good portion of the time not to insure itself," Golub, who represents insurance companies but was not involved in the case, told the publication. He also said that he thought the ruling might prompt insurers to start including anti-stacking provisions in their policies.

Click here to read Mr. Golub's full analysis of the decision.

State Supreme Court Rules Against Insurers in Stringfellow Acid Pits Case

Larry Golub was quoted in an Aug. 9, 2012, article by The Recorder (subscription required) on the state Supreme Court ruling in State of California v. Continental Insurance, involving the cleanup of the Stringfellow Acid Pits, a notorious hazardous waste site in Riverside County. The court ruled that the insurance company defendants must pay “all sums” due on the insurance policies. It also allowed for the “stacking” of policies.

While considered a blow to insurance companies, the court did say that insurers could include anti-stacking clauses in future policies and rules to limit indemnity.

"Assuming an insurance company puts that language in there, and it's clear and unambiguous ... that may be a way to solve the problem for insurance companies," Golub said. "But a lot of these cases go back a long time."

Click here to read Mr. Golub's full analysis of the decision.

California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases

In a unanimous and long-waited decision, the California Supreme Court today (August 9) adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. The decision is The State of California v. Continental Insurance Co., as authored by Justice Ming Chin.

The specific facts of the case addressed the State of California’s ability to obtain insurance coverage for environmental remediation at the Stringfellow Acid Pits waste site. The State operated the waste disposal site from 1956 to 1972, and the various insurers that were parties to the case provided the State with excess commercial liability insurance coverage from 1964 to 1976. Property damage occurred over the course of many years, including those in which the insurers provided coverage.

The Court addressed two issues: (1) when continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer’s policy limits? and (2) if so, is the “stacking” of limits permitted?  

The Court of Appeal had answered both questions in the affirmative. An earlier Court of Appeal decision, FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), ruled that the State could not stack the policy limits of successive insurance policies, but rather had to pick a single policy year and recover the full amounts of the limits from that period. 

In deciding these issues, the Supreme Court relied on an interpretation of the policy language that was found in the insurers' commercial general liabilility policies, as well as rules announced in two of its past decisions, to find first that each insurer who provided coverage to the insured when some property damage occurred would be “on the loss” and its indemnity obligations triggered up to the extent of its policy limits:

We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was “on the loss.” The coverage extends to the entirety of the ensuing damage or injury . . . and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.

The Court explained that it was not writing on a blank slate on this issue and observed that its decision was in line with a “growing number of states [that] have similarly adopted this interpretation of the all sums language.” It rejected a contrary line of cases from other jurisdictions that have adopted a pro rata allocation of the damage.

In terms of allocating that continuous loss among all similarly implicated insurers, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” In so doing, it expressly disapproved of the FMC Corp. decision. The Court did note, however, that insurers may be able to add “anti-stacking” provisions in their policies to avoid such a result, and indeed such provisions have been used for a number of years. 

The Court also accepted for review, but has held pending the decision in Continental, another Court of Appeal case in which the issue of “stacking” was not permitted, Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of PennsylvaniaWe commented on that case shortly after it was decided in June 2011. Presumably, now that the Continental decision has been issued, the Kaiser Cement case will be returned to the lower court to issue a decision in line with Continental.

Court of Appeal Affirms Buss Reimbursement of Non-Covered Settlement to Insurer

By Larry Golub and Sam Sorich

On August 3, 2012, the California Court of Appeal, Second Appellate District, after affirming a trial court’s ruling that a liability policy did not provide coverage for tenants’ claims against apartment owners for unsafe and unsanitary conditions at the apartments, further affirmed that the insurer was entitled to be reimbursed by the insureds for the full amount the insurer had paid in settlement of the tenants’ action.  The decision is Axis Surplus Ins. Co. v. Reinoso.

In so doing, the Court found that, having timely reserved its rights and having notified the insureds of the intent to accept a proposed settlement offer and affording the insureds the opportunity to assume the defense if the insureds did not agree to the proposed settlement offer, the insurer was entitled to be reimbursed by the insureds for the indemnity payment once it established the claim against the insureds was not covered. This is the procedure first provided for under the California Supreme Court’s decision in Buss v. Superior Court, 16 Cal. 4th 35, 50-51 (1997).

However, since the insurer was not able to meet its burden to show that there was never a “potential” for coverage, it was not able to recoup the defense costs it incurred in defending the claims against the insureds, again a procedure permitted under the Buss decision.

Edgar and Linda Reinoso were co-owners and managers of a number apartment buildings in Southern California. Tenants of one of these apartment building sued the Reinosos for alleged habitability deficiencies at the apartments.  The Reinosos sought coverage under their commercial general liability policies issued by Axis Surplus Lines Insurance Company. Axis agreed to represent the Reinosos under a reservation of rights.

The tenants’ lawsuit settled for $3 million, with Axis paying the majority of the settlement. Axis then sued the insured for the recovery of its settlement contribution and the defense costs it incurred. The trial court concluded that the Axis policy did not cover the tenants’ claims (since the policy and California law did not allow coverage for intentional and willful acts), and it ordered the Reinosos to pay back to Axis the insurer’s settlement contribution jointly and severally.  The couple appealed.  Edgar’s appeal was dismissed, but Linda’s claims went forward.

In her appeal, Linda argued that the trial court erred when it found that she was not an innocent insured entitled to benefits under the policy because the trial court wrongly applied the objective rather than the subjective standard in determining whether she knew about the conditions in the apartments. The Court of Appeal acknowledged that whether an injury is expected or intended under an insurance policy is determined by the insured’s subjective mental state. The appellate court concluded, however, that the trial court, in fact, did apply the subjective standard and found that there was substantial evidence that Linda knew about the conditions at the apartments and how the apartments were being managed.

Linda also challenged the trial court’s determination that she was jointly and severally liable with her husband for the repayment to Axis. The Court of Appeal rejected this argument as well, noting that, as co-owner of the apartments and as a participant in the management of the property, Linda had sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer for the full amount paid by the insurer to settle the tenants’ lawsuit would amount to unjust enrichment.

The lesson for insurers is that reimbursement of liability policy proceeds may be possible with the issuance of a timely and comprehensive reservation of rights letter in those cases in which the claims can be shown not actually to be covered and/or a portion of the defense costs can be shown to have not even presented a potential for coverage.

Bill That Could Nullify Howell Moves Forward

California trial lawyers have made no secret of their intent to nullify the Howell v. Hamilton Meats & Provisions, Inc. decision with new legislation this year. Please see our previous blog posts on the Howell decision here and here.

If Howell is nullified or restricted by legislation this year, the changes will be achieved with Senate Bill 1528

SB 1528 is authored by Senate president pro tem Darrell Steinberg and is sponsored by the Consumer Attorneys of California. When the Senate passed SB 1528 on May 30, the bill contained just intent language. It provided, “It is the intent of the Legislature to establish a framework for compensating persons with injuries due to the fault of third parties.”

When SB 1528 arrived in the Assembly, it was assigned to the Assembly Judiciary Committee. On June 27 the bill was amended. As amended, SB 1528 still includes the intent language and also contains provisions which would give counties lien rights to settlements when counties have provided medical services to injured persons.

The Assembly Judiciary Committee held a hearing on SB 1528 on July 3. Senator Steinberg and a former president of the Consumer Attorneys of California made no mention of Howell in their opening testimony. They testified that SB 1528 simply extends county lien rights to recover medical expenses to cases that settle before going to judgment. 

That testimony was followed by a long line of insurer and business representatives who opposed the bill because they believe that there are plans to amend SB 1528 with Howell nullification language after the bill leaves the committee. Senator Steinberg responded by acknowledging that there are ongoing discussions about further changes to SB 1528 but he assured the committee that if the bill is amended, it will be brought back to the committee for another hearing. 

The 11-member Assembly Judiciary Committee approved SB 1528 with a 6-2 vote. SB 1528 is now being sent to the Assembly floor but it won’t be voted on any time soon. Legislators will take their summer recess from July 6 to August 6.

It is expected that sometime during August an effort will be made to amend SB 1528 with provisions affecting the Howell decision. This year’s regular legislative session will end on August 31. It is possible that Howell may emerge as a major issue in the last days, or hours, of the session.

 

Supreme Court Rules Affordable Care Act is Constitutional

By John M. LeBlanc and Natalie J. Ferrall

In a 5-4 decision, the United States Supreme Court ruled that the Patient Protection and Affordable Care Act (“ACA”) is constitutional. The majority opinion, authored by Chief Justice Roberts, upheld the centerpiece of the ACA—the individual mandate—requiring citizens to obtain health insurance or pay a penalty to the IRS beginning in 2014. The Court construed the penalty as a tax on persons who choose not to purchase health insurance and thus within Congress’ taxing power. The Chief Justice, however, rejected the argument that the individual mandate was constitutional under the Commerce Clause. He stated that the Commerce Clause “authorizes Congress to regulate interstate commerce, not to order individuals to engage in it.” Justices Scalia, Kennedy, Thomas, and Alito filed a dissenting opinion in which they also found that the individual mandate could not be upheld under the Commerce Clause.

The Court further addressed the so-called Medicaid expansion provision, which required states to extend Medicaid coverage by 2014 to all individuals under the age of 65 with incomes below 133% of the federal poverty line; if a state fails to do so, the federal government could withdraw all of the state’s existing Medicaid funds. The Court held that it was unconstitutional under the Spending Clause for the federal government to coerce states into accepting changes to Medicaid, describing this financial threat as a “gun to the head”, leaving states with no meaningful choice but to accept the terms of the Medicaid expansion. The Court struck the provision, but left the remaining portions of the ACA intact.

Click here to read the full decision (pdf).

Originally posted on Barger & Wolen's Life, Health and Disability Insurance Law blog.

Action Against Workers' Comp Claims Administrator Not Covered by Insurer's Arbitration Provision, Court of Appeal Rules

by Gail E. Cohen

In DMS Services, Inc. v. Superior Court, the Plaintiff brought suit in California state court for breach of contract, bad faith and related claims against the third-party administrator, or TPA, responsible for managing its workers’ compensation claims. It also sued its workers’ compensation insurer, Zurich Insurance, for declaratory relief contending that the insurer’s high deductible insurance agreement (also known in the industry as a payment agreement) containing an arbitration clause was invalid under California Insurance Code section 11658 since it was not approved by the Department of Insurance.

In a pattern not uncommon in these cases, Plaintiff’s lawsuit came on the heels of the insurer’s demand and pursuit of arbitration for monies owed by the insured for insurance claim deductibles and unpaid losses.

In response, the insurer and TPA filed a joint petition to compel arbitration of all of the state court claims under the arbitration clause contained in the insurer’s high-deductible agreement, or, in the alternative, to stay the action pending the outcome of the arbitration between the insured and insurer. DMS, in turn, filed a separate motion to stay the arbitration arguing that there was the “possibility of conflicting rulings on common issues of law and fact.” The trial court granted the petition, rejected the Plaintiff’s request for a stay, and Plaintiff appealed.

The California Court of Appeal, Second Appellate District, reversed, holding that the claims against the TPA were not subject to arbitration and that, as a consequence, it need not address the merits of the Plaintiff’s contentions concerning the invalidity of the deductible agreement.

In reversing the ruling as to the arbitrability of the claims against the TPA, the court of appeal emphasized that the TPA was not a signatory to the deductible agreement containing the arbitration clause and further highlighted the fact that there was a separate claims service agreement between the TPA and the insured which did not contain an arbitration provision. It also reasoned that the insured’s claims against the TPA for breach of its administration agreement were not “founded in” and “inextricably intertwined” with the insurance policies, the test for binding a nonsignatory to an arbitration agreement under the equitable estoppel doctrine. E.g., Molecular Analytical Systems v. Cipergen Biosystems, Inc., 186 Cal. App. 4th 696, 708 (2010), cited with approval.

Note: A pivotal factor underlying the court of appeal’s conclusion was its finding that the TPA, though affiliated with the insurer Zurich, was not, nor alleged to be, an agent of the insurer. In so ruling, the court factually distinguished the federal district court’s decision in NS Holdings LLC Inc. v. American International Group Inc. According to the DMS court, in NS Holdings, the TPA at issue (also a company related to the insurer) entered into a claims services agreement with the insurer, and thus was its agent and covered by the insurer’s arbitration agreement with its insured, even if it was not a signatory to that agreement.

Action Based on 7-Eleven's Payroll System Fails, Court of Appeal Rules

In Aleksick v. 7-Eleven, Plaintiff Aleksick represented a class claiming that 7-Eleven's payroll system violated California Business and Professional Code 17200. The complaint alleged that 7-Eleven's method of converting partial hour worked from minutes to hundredths of an hour sometimes docked employees of few seconds of time, and therefore shorted them commensurate pay. The trial court had granted 7-Eleven's summary judgment motion. The California Court of Appeal, Fourth Appellate District, Division One, affirmed.

First, the Court held, raising a 17200 claim based on "unlawful" conduct required Aleksick to point to a particular statute that 7-Eleven had violated, since "section 17200 'borrows' violations of other laws and treats them as unlawful practices." Although Aleksick cited to various Labor Code sections in her appellate papers, she had not cited to any in her complaint. The Court ruled that Aleksick should have sought leave to amend to allege such violation, but did not do so, and therefore she had forfeited her argument under the Labor Code wage statutes.

Second, even if her complaint had alleged violation of the Labor Code wage statutes, the Court still would have found against her because the Labor Code governs "the employer-employee relationship, and undisputed evidence shows 7-Eleven was not the class members' employer." Aleksick's employer was the franchisee who operated a 7-Eleven franchise. 7-Eleven was the franchisor. Aleksick conceded that 7-Eleven was not her employer. The Court held that 7-Eleven's provision of payroll services to its franchisees did not change this relationship or render 7-Eleven liable under the Labor Code.

Third, Aleksick failed to establish "unfair" conduct on the part of 7-Eleven under section 17200. Where an "unfair" act is predicated on public policy, the Court explained, "the public policy which is a predicate to the action must be 'tethered' to specific constitutional, statutory, or regulatory provisions." Aleksick argued that 7-Eleven's payroll practices are "tethered" to the public policy in favor of full payment to employees of all hours worked, as codified in the Labor Code. However, because 7-Eleven was not the employer, these statutes did not apply to it.

Comment:
The narrow basis of this ruling is simply that 7-Eleven was not the employer, and therefore a 17200 claim based on violation of Labor Code statutes could not apply to it. It is important to note that the Court of Appeal explicitly did not rule on the issue of whether an employer could be liable under the Labor Code wage statutes and section 17200 for using the payroll practices that 7-Eleven uses. (See Opinion, at 22, fn. 6.) Thus, this ruling provides no guidance to employers as to whether the practice of converting partial hours worked from minutes to hundredths of an hour is permissible. As the Court recounts, the trial court had determined that the amounts docked were too minimal to be a sufficient basis for a 17200 claim -- however, the Court of Appeal did not affirm this part of the trial court's ruling.

Originally posted at Barger & Wolen's Employment Law Observer blog.

NRLB Takes Aim At 24 Hour Fitness Over Employee Arbitration Opt-Out Policy

As reported in The Recorder, (subscription required) the National Labor Relations Board has filed a formal complaint against 24 Hour Fitness, alleging the gym company's arbitration opt-out policy compels employees to waive their rights to utilize the civil litigation system, and in particular, class actions.

According to The Recorder, 24 Hour Fitness requires employees to opt out of the mandatory arbitration agreement within 30 days of receiving the employee handbook. Opting out requires the employee to request a form and then mail it in.

The NLRB alleges this policy is coercive and constitutes a violation of the protections guaranteed by the National Labor Relations Act.

The NLRB has previously found that mandatory arbitration clauses violate federal labor law -- a decision now on appeal. See D.R. Horton Inc., 374 NLRB No. 184 (the employer, a home building company, violated Section 8(a)(1) of the Act by maintaining, as a condition of employment, a mandatory arbitration agreement that did not allow its employees to file joint, class, or collective employment-related claims in any forum, arbitral or judicial.)

Arbitration has a long history. Sir Edward Coke’s report in Vynior’s Case (1609) was the first published decision about arbitration in our jurisprudence, but in fact it is older than English common law itself. Indeed, Romans and even the ancient Egyptians utilized it.

For many years in the early history of our country, the American judiciary viewed this method of dispute resolution with hostility. But that ended with the passage of the Federal Arbitration Act in 1925 (“FAA”), when Congress announced a complete reversal of the governmental attitude towards arbitration, signaling a rejection of “generalized attacks on arbitration” that “res[t] on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30 (1991).

Thus, the FAA established a governmental policy favoring arbitration and requiring the rigorous enforcement of agreements to arbitrate, preempting contrary state law.

The seasaw is now moving in the other direction, with Federal authorities viewing arbitration agreements as a hindrance to the rights of employees to form classes and utilize the court system.

Barger & Wolen will continue to follow developments in this area.

No Attorney Fees Can Be Awarded for Non-Payment of Rest Breaks, California Supreme Court Rules

In Kirby v. Immoos Fire Protection, Inc., the California Supreme Court held that neither California Labor Code section 1194 nor section 218.5 authorize the payment of attorney fees in an action seeking recovery for denial of required rest breaks under section 226.7.

Section 1194 authorizes recovery of attorney fees by a prevailing employee on a claim for unpaid minimum or overtime wages. It provides for one-way fee-shifting to plaintiffs.

Section 218.5, by contrast, provides for attorney fees to be paid to the prevailing party in any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions. It is thus a two-way fee-shifting statute. However, it is also limited, since it does not apply to any action for which attorney’s fees are recoverable under section 1194.

Section 226.7 imposes an obligation upon employers to provide mandated meal and rest breaks.

Plaintiffs, employees of Defendant (“IFP”), sued the employer for nonpayment of mandated rest breaks, but subsequently dismissed this claim. IFP sought roughly $50,000 of attorney fees for successfully defending this claim.

The first question the Supreme Court had to address was whether attorney fees would have been recoverable under 1194. The Supreme Court found that fees would not have been recoverable under 1194, since rest breaks do not constitute a type of “minimum wage,” as Plaintiffs had argued.

The second question was whether, in that case, attorney fees were recoverable under the two-way fee-shifting of section 218.5. Here, it was IFP that argued that non-payment of rest breaks constituted a “wage,” and therefore qualified under section 218.5. Again, the Supreme Court disagreed. Rest breaks do not constitute wages of any kind.

Thus, the Court held, attorney fees were not recoverable in actions seeking mandated rest breaks under section 226.7.

What makes this case interesting (and a little ironic) from a procedural standpoint is that it was the defendant employer seeking the attorney fees, and the employee plaintiffs who resisted. Thus, in losing their claim for attorney fees, the employer ended by establishing law generally advantageous to employers. And in winning this battle over the payment of roughly $50,000 in fees, the employees essentially nullified the ability of future plaintiffs to seek attorney fees in actions based on the denial of required rest breaks.

Originally posted on Barger & Wolen's Employment Law Observer blog.

California Supreme Court Refines the Scope of Considering "the Merits" of the Case in Class Certification Motions

by Larry M. Golub and Sandra I. Weishart

On April 12, 2012, the California Supreme Court issued its long-awaited decision in Brinker Restaurant Corp. v. Superior Court. Plaintiffs had sought to certify three subclasses of California restaurant employees based on the employer’s alleged violations of California’s wage and hour laws relating to rest breaks and meal breaks. The decision provides critical guidance for all employers, including insurers, as to how they should address the issue of rest breaks and meal breaks for their employees.

The trial court in San Diego certified the three subclasses, and the Court of Appeal, Fourth Appellate District, reversed that order, rejecting certification of all three subclasses. The Supreme Court accepted review in October 2008 and, on review, affirmed certification of one subclass, rejected certification of one subclass, and remanded the case to the trial court for further proceedings as to whether the third subclass should be certified. More significantly, the Supreme Court clarified when trial courts may consider the merits of a claim at the certification stage – and the Court itself addressed the merits on one issue in the case so as to provide guidance to the trial court in the next phase of the lawsuit.

In the course of its opinion, the Supreme Court also provided important substantive rulings as to the nature of employers’ duty to provide rest periods and meal breaks to non-exempt restaurant employees, in particular, and non-exempt employees in other industries, more generally. This post addresses the Court’s class certification rulings, and Michael Newman of this office analyzes the substantive employment law questions here

Considering the Merits:

After reviewing the basic class certification principles, the Supreme Court addressed the often-disputed issue as to when a trial court should consider the merits of a plaintiff’s claims in deciding a motion for class certification. In Brinker, the only class certification element at issue was whether individual questions or questions of common interest predominated with respect to the three subclasses the plaintiffs sought to certify. 

The trial court ruled that the three subclasses presented common questions that predominated and, in certifying the class, it refused to consider the correctness of the employer’s legal position concerning its obligations to provide rest breaks and meal breaks. In contrast, the court of appeal concluded the refusal to consider the merits was erroneous because the trial court needed to resolve the “threshold issue” of duty in determining whether individual or common issues predominated. The Supreme Court charted a mid-course between these two extremes.

In analyzing the issues, the Supreme Court reviewed a number of its prior decisions, confirming that class certification is essentially a procedural device “that does not ask whether an action is legally or factually meritorious,” and that “resolution of disputes over the merits of a case generally must be postponed until after class certification has been decided.”  The Court nevertheless explained that there are “issues affecting the merits of a case [that] may be enmeshed with class action requirements.” In those instances, when “evidence or legal issues germane to the certification question bear as well on aspects of the merits, a court may properly evaluate them.” In other words:

“To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them.”

Independent of these basic tenets of class certification, the Supreme Court next explained that a trial court can, at the parties’ request, examine the merits of their substantive legal disputes. Quoting its well-known decision on the ability of trial courts to consider the merits on class certification motions, Linder v. Thrifty Oil Co., 23 Cal. 4th 429, 443 (2000), the Court stated:

“[W]e see nothing to prevent a court from considering the legal sufficiency of claims when ruling on certification where both sides jointly request such action.”

While the Court did not address any merits issues “enmeshed” with the class action requirements, it did nevertheless analyze a merits issue specifically requested by the parties concerning whether the employer’s duties to provide employee rest periods and meal breaks are common issues in the plaintiffs’ three subclasses. 

The Class Certification Rulings:

The first subclass the Court examined was the “rest period subclass” that covered class members “who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties.” On this subclass, the plaintiffs merely asserted that the employer failed to provide the requisite rest periods for non-exempt employees based on the employer’s own “uniform corporate rest break policy” that allegedly violated the applicable Wage Order.  The Court observed that the employer “conceded” the existence of “a common, uniform rest break policy.” 

The Court rejected the employer’s argument that employees could waive their rest breaks and that this was an individual issue, advising that “[n]o issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it.”  Accordingly, the Court concluded that the “rest period subclass” was certifiable and that this issue was not “dependent upon resolution of threshold legal disputes over the scope of the employer’s rest break duties.”

The Court then turned to the “meal period subclass,” defined as class members “who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties.” On this subclass, the Court found, among other issues, that the subclass not only covers every employee who might have a claim under the plaintiffs’ failure to provide meal periods theory, but also, because of the timing as to when a meal break was taken, might include employees with no possible claim under the applicable Wage Order or Labor Code statute.  

The Supreme Court merits ruling concerning the existence of employees who would have no claim was, as noted above, specifically requested by the parties.  The Court found the subclass definition adopted by the trial court to be over-inclusive since it “embraces individuals who now have no claim” against the employer. Accordingly, the Court remanded the certification question as to this subclass to the trial court to reconsider based on the clarification of the substantive law provided by the Court.

Finally, the Court addressed the “off-the-clock subclass,” which was an offshoot of the meal period subclass, and was composed of class members who worked without pay, allegedly because the employer “required employees to perform work while clocked out during their meal periods” and “they were neither relieved of all duty nor afforded an uninterrupted 30 minutes, and were not compensated.” 

For this claimed subclass, the Court found that, unlike the rest period subclass, there was no common policy or apparent common method of proof. Rather, the “only formal Brinker off-the-clock policy submitted disavows such work, consistent with state law.”  Additionally, plaintiffs had failed to present “substantial evidence of a systematic company policy to pressure or require employees to work off the clock.” Consequently, “proof of off-the-clock liability would have had to continue in an employee-by-employee fashion, demonstrating who worked off the clock, how long they worked, and whether Brinker knew or should have known of their work.” Such individual issues and a lack of common issues required dismissing any “off the clock subclass.”

California Court of Appeal Issues Two Rulings on Bail Bonds

During the past two weeks, the California Court of Appeal for the Fifth Appellate District handed down two decisions on the forfeiture of bail bonds.

On March 21, 2012, the court in People v. International Fidelity Insurance Company directed the trial court to vacate the forfeiture of a surety’s $65,000 bail bond. The Court of Appeal characterized bail bonds as a contract between the government and the surety. In this case, the government failed to provide the additional security on which the surety relied when the surety posted the $65,000 bail bond. As a result, the bond was void and the trial court was in error when it ordered the forfeiture of the bond. The Court of Appeal noted that voiding the bond was consistent with the policy disfavoring forfeitures in general and forfeiture of bail in particular.

On April 2, 2012, the court refused to vacate the forfeiture of the bail bond at issue in People v. Western Insurance Company. Western posted a $50,000 bond to secure the release of a criminal defendant. The trial court declared the bond forfeited when the defendant did not appear at a hearing. Western’s bail agent found the defendant in India. The prosecuting agency advised Western that the government was seeking extradition. Based on these developments, Western filed a motion to vacate the forfeiture of the bond.

Penal Code section 1305(g) provides that where a defendant is not in custody and is beyond the jurisdiction of the state, the court is to vacate the forfeiture of a bond when the prosecuting agency does not seek extradition. The facts of this case did not fit within section 1305(g) because the prosecuting agency was seeking extradition, even though the extradition process was not complete and the defendant was not in custody within the appearance period called for in the bond.

Western argued that, under the doctrine of equitable tolling, the trial court should have tolled the appearance period to allow the extradition process to run its course. The Court of Appeal ruled that equitable tolling was inappropriate because equitable tolling is inconsistent with explicit provision of section 1305(g).

 

Ninth Circuit Holds Federal Arbitration Act Preempts California Law Prohibiting Arbitration of Claims for Broad Public Injunctive Relief

On March 7, 2012, the Ninth Circuit Court of Appeals issued an opinion that significantly limits the power of California, and other states, to restrict the enforcement of arbitration agreements and class action waiver clauses.

In Kilgore, et al. v. KeyBank, et al., the plaintiffs were students of a private helicopter vocational school that had taken out private student loans from KeyBank. The helicopter school filed for bankruptcy before the students completed their training. 

The students brought an action under California's Unfair Competition Law ("UCL"), Business and Prof. Code section 17200, alleging that KeyBank had knowledge that "the private student loan industry - and particularly aviation schools - was a slowly unfolding disaster," yet continued to make loans to students. The students sought an injunction preventing KeyBank from attempting to collect on the student loans or from reporting students who failed to pay their loans to credit rating agencies. KeyBank moved to compel arbitration under a contractual arbitration provision in the promissory notes the students had signed. The arbitration provision provided:

IF ARBITRATION IS CHOSEN BY ANY PARTY WITH RESPECT TO A CLAIM, NEITHER YOU NOR I WILL HAVE THE RIGHT TO LITIGATE THAT CLAIM IN COURT OR HAVE A JURY TRIAL ON THAT CLAIM  . . .  FURTHER, I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OF CLAIMANTS  . . .  I UNDERSTAND THAT OTHER RIGHTS THAT I WOULD HAVE IF I WENT TO COURT MAY ALSO NOT BE AVAILABLE IN ARBITRATION.  THE FEES CHARGED BY THE ARBITRATION ADMINISTRATOR MAY BE GREATER THAN THE FEES CHARGED BY A COURT.

There shall be no authority for any Claims to be arbitrated on a class action basis.  Furthermore, an arbitration can only decide your or my Claim(s) and may not consolidate or join the claims of other persons that may have similar claims.” 

The arbitration clause also permitted the students to opt-out of the arbitration provision if they gave written notification within sixty days of signing the note.

The United States District Court refused to order arbitration under California's Broughton-Cruz rule which prohibited the arbitration of claims for broad, public injunctive relief such as those made under the UCL and the California Legal Remedies Act.  The Ninth Circuit reversed. 

The Ninth Circuit noted that the Federal Arbitration Act ("FAA") has a savings clause that allows arbitration agreements to be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract."  9 U.S.C. section 2.  The FAA, therefore,

preserves generally-applicable contract defenses and thus allows for invalidation of arbitration agreements in limited circumstances - that is, if the clause would be unenforceable 'upon such grounds as exist at law or in equity for the revocation of any contract.'  9 U.S.C. section 2. 

However, any other state law rule that purports to invalidate arbitration agreements is preempted because the Act 'withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.'" 

In applying these principles, the Ninth Circuit recognized that the United States Supreme Court has identified two situations where the state law rule will be preempted. The first is when the state law rule provides an outright prohibition to the arbitration of a particular type of claim. The other, more complicated, situation is when a doctrine thought to be generally applicable, such as duress or unconscionability, is applied in a fashion that disfavors arbitration. 

The Ninth Circuit held that the Broughton-Cruz rule was an outright prohibition on the arbitration of a particular type of claim, specifically claims for broad public injunctive relief, and was, therefore, preempted by the FAA.  In so holding, the Ninth Circuit recognized that its ruling would undercut the public policy behind state statutes:

We are not blind to the concerns engendered by our holding today. It may be that enforcing arbitration agreements even when the plaintiff is requesting public injunctive relief will reduce the effectiveness of state laws like the UCL  It may be that FAA preemption in this case will run contrary to a state's decision that arbitration is not as conducive to broad injunctive relief claims as the judicial forum.  And it may be that state legislatures will find their purposes frustrated. These concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court in Concepcion."

In addition, the Ninth Circuit found that the arbitration clause at issue was not unconscionable, reasoning that it was conspicuous, plainly set forth, and provided a means of opting-out.

California Court of Appeal Extends Howell v. Hamilton Meats Rule to Limit Injured Person's Medical Expenses to Discounted Amounts Paid Under Workers' Compensation

Last year, the California Supreme Court held in Howell v. Hamilton Meats & Provisions, Inc. that an injured plaintiff whose medical expenses were paid through private health insurance could not recover as economic damages against a tortfeasor any more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount did not fall within the collateral source rule.  We reported on that decision at the time.

The California Court of Appeal has now extended that holding to the analogous situation in which the insured employee’s medical expenses are paid through workers’ compensation. The decision is Sanchez v. Brooke, decided March 8, 2012 by the Second Appellate District of the Court of Appeal.

In Sanchez, the plaintiff was a home health care worker who provided care for an elderly woman. The woman was smoking in bed and, after the bed caught fire, the plaintiff was seriously injured in her efforts to rescue the woman, who died in the fire. The workers’ compensation insurer for plaintiff’s employer paid her medical benefits at the statutory workers’ compensation rates, and plaintiff was not responsible for the costs of her medical case above those paid amounts. At trial, the jury found that the employer and the estate of the deceased woman were both 50% at fault. The workers’ compensation carrier filed a lien against plaintiff’s potential recovery against the estate.

While plaintiff argued that the amount of her damages should be the total amount of her economic damages (as then offset by the amount of workers’ compensation benefits received as attributable to the employer’s liability), the defendant trustees contended that the starting amount must be further reduced to reflect the fact that the injured person’s medical expenses have been paid in full by workers’ compensation and the injured employee is not liable for the unpaid balance. The trial court ruled in favor of plaintiff, but the Court of Appeal reversed.

Noting that the Howell decision was pending while the trial court case proceeded, the Court of Appeal concluded that Howell should be extended to the workers’ compensation context:

“Applying the court’s reasoning in Howell to this case, we conclude that where an employer is required under the workers’ compensation laws to pay in full an injured employee’s medical expenses, the injured employee may not recover, as economic damages from a third party tortfeasor, medical fees that the provider is precluded, either by agreement or by law (including the statutory fee schedule), from collecting from the employer.  Because fees that the provider may not collect from the employer under the workers’ compensation law do not represent an economic loss for the employee, they are not recoverable in the first instance.”

The appellate court remanded the case back to the trial court to determine the limited issue as to whether the workers’ compensation insurer paid the full amount sought by the medical providers and, if so, then that amount would establish the past medical expenses recoverable by the plaintiff as economic damages from defendants, which amount would then need to be offset to reflect the percentage attributable to the employer’s negligence.

While the extension of the Howell holding into the workers’ compensation context appears to be the correct result, undoubtedly the plaintiff will seek Supreme Court review of the unanimous Court of Appeal decision. We will report on any further developments.

FINRA and Charles Schwab Battle over Class Action Waiver Clauses

Last October, Charles Schwab & Company ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement. 

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules. 

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules:  first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated." 

On the same day that FINRA instituted the disciplinary proceeding, Schwab filed a lawsuit, Charles Schwab v. Financial Industry Regulatory Authority, Inc., in United States District Court, Northern District of California, seeking a declaration that FINRA may not enforce its rules to limit class action waiver clauses in arbitration agreements on the ground that such rules run afoul of the Federal Arbitration Act. 

FINRA has noticed a motion to dismiss Schwab's complaint that is currently scheduled for hearing on April 3, 2012. In turn, Schwab has filed a motion for a preliminary injunction against FINRA that is also scheduled for April 3, 2012.   

Barger & Wolen will continue to follow this case as it can impact other financial service and insurance companies. If you have any questions, please contact Gregory Eisenreich at geisenreich@bargerwolen.com.

Ninth Circuit Strikes Down California "Armenian Genocide" Insurance Claims Statute

By John C. Holmes and Richard B. Hopkins

In an 11-0 en banc published decision, the Ninth Circuit Court of Appeals struck down California Code of Civil Procedure section 354.4 which purported to recognize the Armenian Genocide.

Section 354.4 revived the statute of limitations for claims made by “Armenian Genocide victims” or their heirs, voided contractual forum-selection clauses, and vested California courts with jurisdiction to hear disputes regarding such claims.

Overturning contrary rulings in the same case by the District Court and a 3-judge Ninth Circuit panel, the en banc panel in Movsesian v. Versicherung AG, Case No. 07-56722, held that because section 354.4 does not concern an area of traditional state responsibility and intrudes on the field of foreign affairs entrusted exclusively to the federal government, section 354.4 is preempted under the foreign affairs doctrine.

The Court found that section 354.4 “expresses a distinct point of view on a specific matter of foreign policy.” 

The Court also noted that the phrase “Armenian Genocide” is a "hotly contested matter of foreign policy” and that:

President Obama was careful to avoid using the word ‘genocide’ during a commemorative speech in an attempt to avoid alienating Turkey, a NATO ally, which adamantly rejects the genocide label.” 

Emphasizing the highly political nature of the statute, the Court noted that the California Legislature:

intended to send a political message on an issue of foreign affairs by providing relief and a friendly forum to a perceived class of foreign victims.” 

The Court distinguished the law from merely “expressive” government proclamations, such as commemorations of the Armenian Genocide, on the ground that section 354.4 imposes a concrete policy of redress for “Armenian Genocide victim[s],” subjecting foreign insurance companies to suit in California by overriding forum-selection provisions and greatly extending the statute of limitations for a narrowly defined class of claims. 

Moreover, the Court held that section 354.4:

has a direct impact upon foreign relations and may well adversely affect the power of the central government to deal with those problems.” 

Therefore, the Court concluded that section 354.4 intrudes on the federal government’s exclusive power to conduct and regulate foreign affairs.

Barger & Wolen has represented and currently represents life insurers in matters involving litigation brought by “Armenian Genocide victims” and similarly situated parties.

California Supreme Court Rules that Court of Appeal Used Incorrect Legal Analysis in Deciding that Claims Adjusters Are Not Exempt from Overtime Pay Requirement

By Sam Sorich and Larry Golub

In a unanimous opinion handed down on December 29, 2011, the California Supreme Court ruled in Harris v. Superior Court that the Court of Appeal used an erroneous analysis when it decided that claims adjusters are not exempt from California’s overtime pay requirement. 

The California Labor Code sets forth a general requirement that employees are entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

Claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime pay.

The California Court of Appeal rejected the insurance companies’ argument, primarily relying on a prior Court of Appeal decision in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001). The companies asked the California Supreme Court to review the Court of Appeal’s decision.

The Supreme Court’s ruling concluded that the Court of Appeal used an incorrect analysis when it rejected the argument that the adjusters were administrative employees. According to the Supreme Court, the Court of Appeal relied too heavily on the administrative/production worker dichotomy used in the Bell decision and failed to consider more recent regulations issued by the California Industrial Welfare Commission and applicable federal regulations which are supposed to guide California in applying the administrative employee exemption to the general overtime requirement.

In reversing the Court of Appeal’s decision, the Supreme Court remanded  the case back to the Court of Appeal with directions that it apply the legal standards that are set forth in the Supreme Court’s ruling.

Court Confirms Arbitral Order of Pre-Hearing Security Against a Policyholder and in Favor of Insurer

by Evan L. Smoak and Kyle M. Medley

In a Barger & Wolen victory, the U.S. District Court in Manhattan has confirmed an arbitration panel’s interim order, which required a policyholder to post pre-hearing security in the amount sought by an insurer. On Time Staffing, LLC v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 10 Civ. 9583 (JSR), 2011 U.S. Dist. LEXIS 50683 (S.D.N.Y. May 11, 2011).   

In On Time, the arbitration panel issued an interim order of pre-hearing security in favor of National Union against one of its policyholders, On Time. National Union had argued that the policyholder was financially unable or simply unwilling to pay on the amount National Union sought in the arbitration for premiums, fees, and expenses. 

The policyholder asked the court to vacate the order of pre-hearing security on two grounds. First, the policyholder argued that the panel had exceeded its authority by awarding pre-hearing security (under Section 10(a)(4) of the Federal Arbitration Act “FAA”). Second, the policyholder argued that the Panel’s order of pre-hearing security before a full evidentiary hearing constituted “misconduct” by the Panel (under Section 10(a)(3) of the FAA). Judge Jed S. Rakoff rejected both of the policyholder’s arguments.

First, the court found that the arbitration panel had not exceeded its authority, noting that the language of the arbitration clause gave the Panel broad authority to resolve “any” dispute and to make its award “final and binding”. The court stated:

Prior to the rendering of its final decision, the Panel, in the absence of language expressly to the contrary, possesses the inherent authority to preserve the integrity of the arbitration process to which the parties have agreed by, if warranted, requiring the posting of security. Otherwise, an arbitration panel with a well-founded concern that a party was financially unable to satisfy an eventual award would have no recourse to protect itself against the risk that its significant expenditures of time and effort would be for naught. 

On Time, 2011 U.S. Dist. LEXIS 50683 at *12 (underline added). 

Second, the court rejected the policyholder’s argument that the Panel had committed misconduct when it ordered security without a full evidentiary hearing. The court found that the arbitrators “need not follow all of the niceties observed by the federal courts”, but instead had to “merely grant a fundamentally fair hearing”. Id. at *13. In any event, the court found the policyholder had “an ample opportunity to oppose the motion for pre-hearing security, and did, in fact, vigorously oppose it”. Id. at *14.

This significant victory confirms a pre-hearing security order against a policyholder and in favor of an insurer.

For additional information about this decision, or the arguments considered by the court, please contact Evan Smoak (esmoak@bargerwolen.com) or Kyle Medley (kmedley@bargerwolen.com) in Barger & Wolen’s New York office (212-557-2800).

Are Insurance Adjusters Eligible for Overtime Pay to be Decided by California Supreme Court

On October 3, 2011, the California Supreme Court heard argument in Francis Harris et al v. Superior Court, Case No. S156555. The issue here is whether insurance adjusters should be eligible for overtime pay under California’s wage and hour laws. 

In 2007, the California Court of Appeal, Second District, Division One, ruled that insurance adjusters who sued Golden Eagle and Liberty Mutual were nonexempt from California’s overtime laws. The insurers had argued that the adjustors were subject to the “administrative exemption” to California’s overtime rules, which provides that persons employed in “administrative, executive, or professional capacities” are exempt from overtime.

In a 2-1 ruling, the Court of Appeal disagreed. 

Justice Rothschild wrote the opinion of the Court, pursuing a lengthy and complicated analysis of California and federal law to reach the conclusion that adjustors were not exempt. 

Noting that California law requires that exempt administrative employees be “primarily engaged in office or non-manual work” that is “directly related to management policies or general business operations,” the Court concluded that this requirement was only satisfied if such work relates to the administrative operations of a business as distinguished from production or, in retail services, sales work. 

Applying this “administrative/production worker dichotomy,” the Court held, adjustors were not subject to the administrative exemption, since their work involved the daily carrying out of the insurance business’ affairs, and had no effect on the policies adopted by the Company or general business operations.

Justice Vogel dissented, wryly noting that “[t]he majority’s analysis is complex. Mine is not.” 

Noting that federal regulations, which are incorporated into California’s regulations by reference, specifically note that claims adjustors constitute administrative employees, Justice Vogel would have rejected the “administrative/production” dichotomy as a test. Instead, she pointed to applicable federal regulations, which specifically provide that work performed by employees who advise, plan, negotiate, and represent management are administrative employees. 

Watch this space. We’ll keep you posted on developments as they occur.

 

Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule. The decision is Howell v. Hamilton Meats & Provisions, Inc., decided August 18, 2011.

Rebecca Howell was injured in an automobile accident caused by a driver of Hamilton Meats & Provisions, Inc. The total amount billed by her medical providers for her medical care up to the time of trial was $189,978.63, but due to the preexisting contracts those providers had entered into with Howell’s health insurer, the bills were reduced by $130,286.90, such that the amounts paid to (and accepted by) the providers was only $59,691.73. 

At trial, Howell sought to recover the full amount of her medical bills, not the amount that her medical providers had accepted. While allowing Howell to present her the full-billed amounts to the jury, the trial court reduced those amounts in post-trial motion to the $59,691.73 paid to and accepted by the providers.

The Fourth District Court of Appeal reversed the reduction order on the ground that it violated the collateral source rule, and the Supreme Court accepted review of the case to resolve the following issue: 

Is the negotiated rate differential – the difference between the full billed rate for medical care and the actual amount paid as negotiated between a medical provider and an insurer – a collateral source benefit under the collateral source rule, which allows a plaintiff to collect that amount as economic damages, or is the plaintiff limited in economic damages to the amount the medical provider accepts as payment?

After providing a detailed discussion of the history of the collateral source rule, as “unequivocally reaffirmed” by the Court’s in the decision Helfend v. Southern Cal. Rapid Transit Dist., 2 Cal.3d 1, 6 (1970), and how that rule has been addressed over the past 40 years in case law (mostly involving Medi-Cal benefits) or excepted by statute in limited contexts, the Supreme Court explained that none of the prior cases had “discussed the question, central to the arguments in this case, of whether restricting recovery to amounts actually paid by a plaintiff or on his or her behalf contravenes the collateral source rule.” 

The Court then proceeded to resolve the four issues necessary to answer this question:

First, based on certain California Civil Code sections and the provisions of the Restatement of Torts, and as guided by a prior Court of Appeal decision involving Medi-Cal benefits, Hanif v. Housing Authority, 200 Cal. App. 3d 635 (1988), the Court held that

“a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less.” (Emphasis by Court.)  

This is based on the well-established rule that a plaintiff’s expenses, to be recoverable, must not only be incurred but reasonable, and that this rule “applies when a collateral source, such as the plaintiff’s health insurer, has obtained a discount for its payments on the plaintiff’s behalf.”

Second, the basis for the limitation on recovery as to Medi-Cal recipients, adopted in the Hanif case, similarly applies to plaintiffs like Howell who possess private medical insurance. Since, by the purchase of such insurance, Howell’s prospective liability was limited to the amounts her medical insurer had agreed to pay the providers for the medical services they were to render, Howell could not “meaningfully be said ever to have incurred the full charges” or ever been personally liable for the full charges. 

Third, as to the argument that the tortfeasor (Hamilton in this case) would obtain a windfall “merely because the injured person’s health insurer has negotiated a favorable rate of payment with the person’s medical provider,” the Court disagreed. After addressing the “complexities of contemporary pricing and reimbursement patterns for medical providers,” the Court observed that the “negotiated prices” medical providers accept from health insurers “makes at least as much sense, and arguably more, than” the full prices that are billed by such providers where there is no negotiation between buyer and seller. 

“Accordingly, a tortfeasor who pays only the discounted amount as damages does not generally receive a windfall and is not generally underdeterred from engaging in risky conduct.”

Finally, in response to the contention by Howell that the “negotiated rate differential” is a benefit provided to the insured plaintiff under her policy and should be recoverable under the collateral source rule, the Court disagreed with this assertion as well. 

Since Howell did not incur liability for the full bills generated by the medical providers, due to the fact that her providers had agreed with her insurer on a different price schedule, she could not recoup those full bills as damages for economic loss under the collateral source rule. Moreover, the rule does not apply to the negotiated rate differential since it is not primarily a benefit to the plaintiff but the “primary benefit of discounted rates for medical care goes to the payer of those rates – that is, in largest part, to the insurer.”

As noted above, the Court’s decision was not wholly unanimous, as one Justice dissented. That Justice’s position was that, while Howell should not be able to recoup “the gross amount of her potentially inflated medical bills,” neither should they “be capped at the discounted amount her medical providers agreed to accept as payment in full from her insurer.” Instead, the dissent opted for an intermediate position, claiming this is the majority rule across the country: “Howell should be entitled to recover the reasonable value or market value of such services, as determined by expert testimony at trial.”  

With six Justices signing off on the Court’s opinion, however, the collateral source rule will not require defendants (or their liability insurers) in California to pay any amount greater for medical expenses than the discounted amounts paid by the insured person’s health insurer and accepted by her medical providers.

California Courts Continue to Rein in Class Certification in the Marketing and Sale of Insurance

By Larry Golub and Marina Karvelas

In Fairbanks v. Farmers New World Life Ins. Co., decided July 13, 2011, California's Second Appellate District, Division Three, upheld the trial court’s denial of class certification for a proposed nationwide class of universal life insurance policyholders. Plaintiffs sued Farmers New World Life Insurance Company and Farmers Group, Inc. (collectively, “Farmers”) alleging violations of the Unfair Competition Law (Bus. & Prof. Code, 17200, “UCL”) in the marketing and sale of universal life insurance policies.  

The decision, authored by Justice Walter Croskey, contains in its opening pages an extensive discussion of universal life insurance policies. Justice Croskey’s discussion is well worth the read as it presents in simple and understandable terms many of the intricacies of universal life insurance.

Plaintiffs alleged in their complaint numerous theories of wrongdoing against Farmers; however, their motion for class certification was narrowly tailored and based only on one of the three prongs of the UCL, that of a fraudulent business practices. 

Relying on a series of recent decisions (Knapp v. AT&T Wireless Services, Inc., 195 Cal. App. 4th 932 (2011); Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830 (2009), and Pfizer Inc. v. Superior Court, 182 Cal. App. 4th 622 (2010)), the Fairbanks opinion reiterates the requirements for class certification under the fraudulent prong of the UCL:

“[W]hen the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.”

Finding the case “virtually identical” to Kaldenbach, the Court of Appeal upheld the trial court’s determination that the alleged misrepresentations were not commonly made to members of the class and thus class certification was properly denied.  (For a discussion of the Kaldenbach case, see our firm’s prior blog.)

Plaintiffs argued that the class action should proceed on the theory that the language in the policies was misleading. However, the class certification motion was not based on the theory that the policy language standing alone was misleading. Even if it were, “it is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them.” 

In addition, the Fairbanks Court determined that the materiality of the alleged misrepresentation was likewise not subject to common proof. Relying on the Supreme Court’s recent decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 332 (2011), the standard for materiality is whether “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question.” While noting that the standard is objective, the Court of Appeal nonetheless agreed with the trial court that the materiality of the representations at issue in the case was a matter of individual proof for any given policyholder. 

In concluding, the Court of Appeal refused to address whether commonality existed with respect to any other purported classes. None of the alternative theories were presented to the trial court in the class certification motion. “[W]e leave it to the trial court’s discretion, on remand, to determine whether it should consider any subsequent motion for class certification, should plaintiffs choose to proceed on an alternative basis.”

As is often the case in the class certification context, plaintiffs will seek to define as narrow a class as possible to present a “common issue” for certification purposes, which attempt sometimes undercuts not only the ability to obtain certification (as in the Fairbanks situation) but, even if it does survive certification, sets up a defense motion for summary judgment.

Attorney-Client Privilege and Work Product Privilege Clarified by California Court of Appeal

Recently, the California Court of Appeal for the Second Appellate District Division Three issued its opinion in Fireman’s Fund Insurance Company v. Superior Court (Front Gate Plaza, LLC). The opinion resolved two issues, one involving the attorney-client privilege and the other the work product privilege.

The first issue resolved was whether the attorney-client privilege applies to only communications directly between an attorney and the client and not to communications between lawyers in the same firm. 

Surprisingly, the trial court held that the privilege only applied to communications directly between an attorney and his client. According to the trial court, the privilege provided no protection for communications between attorneys and staff in a firm. 

The notion that discussions between lawyers in the same firm regarding a case are not protected would, I believe, surprise most California lawyers. What we know is that the holding surprised Justice H. Walter Croskey, since he authored the Fireman’s Fund opinion which reversed the trial court ruling, holding:

Surely, third persons to whom the information (in this case, an attorney’s legal opinions) may be conveyed without destroying confidentiality include other attorneys in the law firm representing the client.

If the first holding of Fireman’s Fund was predictable, the second holding cannot be so labeled. 

The second issue was whether the absolute work product privilege of the California Code of Civil Procedure Section 2018.030(a) protects work product that is not contained in writing

The trial court found that unwritten work product was not protected by section 2018.030(a). 

In reaching this conclusion, the trial court seemed to be on solid ground as section 2018.030(a) states that:

a writing that reflects an attorney’s impressions, conclusions, opinions or legal research of theories is not discoverable under any circumstances.” (Emphasis added.) 

Despite that language, Division Three held that the absolute work product privilege does protect work product that has not been reduced to writing. 

Fireman’s Fund is an important decision explaining and seemingly expanding the protection given California lawyers by the attorney-client and work product privileges. Adding to the significance of the opinion is that its author, again Justice Croskey, is one of the most respected members of the Court of Appeal.

No Certification in Massive Wal-Mart Class Action

By Larry M. Golub and Misty A. Murray

On June 20, 2011, the United States Supreme Court issued its long-anticipated decision in Wal-Mart Stores Inc. v. Dukes et al., 564 U.S. ____ (2011), decertifying a class of 1.5 million female Wal-Mart employees who alleged that they were discriminated against on the basis of their sex and were denied equal pay and promotions. Justice Scalia issued the majority opinion, parts of which were joined in by all nine Justices. 

The proposed nationwide class in Wal-Mart consisted of

[a]ll women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart’s challenged pay and management track promotion policies and practices.” 

The three class representatives did not allege that Wal-Mart had an express corporate policy of discrimination, but rather that local managers had broad discretion over pay and promotions and exercised that discretion disproportionately in favor of men and that the corporate culture permitted bias against women. 

The primary evidence of the alleged uniform corporate practice consisted of statistical evidence of salaries and promotions heavily favoring male employees and anecdotal reports of female employees, along with the testimony of a sociologist who conducted a “social” analysis of Wal-Mart’s corporate culture. 

The requested relief sought an injunction to prohibit Wal-Mart’s discriminatory practices, and also a claim to recover back pay.

The District Court certified the class, finding that the class met the threshold requirements of Federal Rule of Civil Procedure 23(a)(2) that are required for all class actions, and then the requirements of Rule 23(b)(2), which requires that the

party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” 

In other words, a Rule 23(b)(2) class is typically limited to injunctive or corresponding declaratory relief.

A divided en banc Ninth Circuit panel affirmed the trial court ruling, finding that the commonality requirement was met and that the back pay claim did not predominate over the injunctive relief request.

The Ninth Circuit also found that the class could be manageably tried and that Wal-Mart would not be denied its right to present statutory defenses because the District Court could permit Wal-Mart to present individual defenses to randomly selected sample cases. 

The United States Supreme Court granted a writ of certiorari on December 6, 2010, and we reported on that event. The Court limited its review to whether claims for monetary relief could be certified under Rule 23(b)(2) and, if so, under what circumstances.

In this week’s ruling, the Supreme Court reversed the Ninth Circuit’s decision and decertified the class. Writing for five of the nine members of the Court, Justice Scalia first found that common issues were lacking under Rule 23(a)(2). Under that part of Rule 23, the Court reiterated that

“[c]ommonality requires the plaintiff to demonstrate that the class members ‘have suffered the same injury,’” (citation omitted) and that the plaintiff’s “common contention . . . must be of such a nature that it is capable of classwide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” 

The majority opinion further advised that

“Rule 23 does not set forth a mere pleading standard,” but an affirmative demonstration that each of the components of that rule have been met after the trial court has made a “rigorous analysis,” which frequently “will entail some overlap with the merits of the plaintiff’s underlying claim.”

With respect to the case before it, the majority opinion explained that “‘significant proof’ that Wal-Mart ‘operated under a general policy of discrimination’” was “entirely absent here.” It also observed that the testimony of plaintiff’s sociologist as to his analysis if Wal-Mart’s corporate culture was “worlds away” from “significant proof that Wal-Mart operated under a general policy of discrimination.” 

The opinion found that the statistical and anecdotal evidence “falls well short” and even if such evidence was taken at face value, it was “insufficient to establish that respondents’ theory can be proved on a class wide basis” or that “one named plaintiff’s experience of discrimination” was sufficient “to infer that ‘discriminatory treatment is typical of [the employer’s employment] practices.” 

Given the lack of proof of a uniform corporate practice, the commonality requirement of Rule 23(a)(2) was lacking.

The majority opinion also concluded that the back pay claims were improperly certified under Rule 23(b)(2) because claims for individualized monetary relief do not satisfy the Rule’s requirement that a single injunction or declaratory judgment provide relief for the entire class. 

Here, given the individualized nature of each employee’s claim, individualized proof of damages as to back pay would be required, making the class unmanageable under Rule 23(b)(2). Rather, Justice Scalia wrote, “we think it clear that individualized monetary claims belong in Rule 23(b)(3)” and the “procedural protections attending the (b)(3) class.” 

The minority opinion, joined in by four Justices, only agreed with the second basis for the majority opinion’s ruling, and expressly dissented from the finding that there was no commonality. Writing for the concurring/dissenting opinion, Justice Ginsburg observed:

“The evidence reviewed by the District Court adequately demonstrated that resolving those [gender discrimination] claims would necessitate examination of particular policies and practices alleged to affect, adversely and globally, women employed at Wal-Mart’s stores.  Rule 23(a)(2), setting a necessary but not a sufficient criterion for class-action certification, demands nothing further.”

Justice Ginsburg also would have remanded the case to the trial court to determine if plaintiffs could have complied with the requirements for monetary claims under a Rule 23(b)(3) class, but observing that the majority opinion “disqualifies the class at the starting gate, holding that the plaintiffs cannot cross the ‘commonality’ line set by Rule 23(a)(2).”

In the few days since the Supreme Court issued the Wal-Mart decision, numerous legal and non-legal commentators have expressed their opinion as to the reach of the decision, with some bemoaning the purported demise of class action litigation and others observing that the decision can be limited to its facts and the employment context. Time will tell whether the Wal-Mart decision substantially alters the nature of class litigation.

Another Toehold in Using the UCL to Scale the Barriers of Moradi-Shalal

In 1988, the California Supreme Court issued its landmark decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, disallowing private rights of action based on violations of the Unfair Insurance Practice Act (“UIPA”), otherwise known as third-party bad faith claims. Shortly thereafter, the prohibition was extended to first-party bad faith claims.

Most significantly, a series of Court of Appeal decisions disallowed violations of the UIPA to be brought as claims under the California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or the “UCL”). 

As one court concluded:

we have no difficulty in [holding] the Business and Professions Code provides no toehold for scaling the barriers of Moradi-Shalal.” Safeco Ins. Co. v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990). 

More recently, another court held that “parties cannot plead around Moradi-Shalal’s holding by merely relabeling their cause of action as one for unfair competition.” Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061, 1070 (2004).

In November 2009, we reported on Zhang v. Superior Court, a case that rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. 

The case was short-lived, as the Supreme Court accepted review in February 2010 and the decision became depublished. While the Zhang case is fully briefed, the Supreme Court has not yet set oral argument.

On June 15, however, another Court of Appeal decision issued again sought to undercut the prohibition on using the UCL to pursue UIPA-like claims. 

In Hughes v. Progressive Direct Ins. Co., the plaintiff sued his insurer in a purported class action based on the automobile insurer’s alleged company-wide practice of steering its insureds to repair shops that were part of Progressive’s Direct Repair Program (DRP) and misrepresenting their ability to take their vehicle to a non-DRP repair shop. 

The sole claim alleged was under the UCL, but the predicate statute relied on to support the UCL claim was Insurance Code section 758.5.

That statute, which prohibits insurers from requiring an insured’s vehicle to be repaired at a specific repair shop, or suggesting a specific shop be used, unless the insured is informed in writing of his or her rights to select another repair shop, does not, just like the UIPA, permit a private right of action but only enforcement by the Insurance Commissioner pursuant to the UIPA. 

Accordingly, the trial court sustained the insurer’s demurrer to the complaint, concluding that just as the UCL could not be used to circumvent UIPA claims under Moradi-Shalal, neither could a UCL claim proceed based upon Section 758.5.    

The Court of Appeal reversed, and concluded that Moradi-Shalal does not bar a claim by an insured against an insurer under the UCL based solely on the allegations the insurer violated Section 758.5. 

After discussing in detail the decisions issued since the time of Moradi-Shalal vis-à-vis the UCL, as well as the legislative history of Section 758.5, and then relying on a parsed reading of the language of the UCL in which its remedies are “cumulative” to other laws unless otherwise “expressly” provided, the court found that an alleged violation of a statute like Section 758.5, so long as it does not involve conduct violating the UIPA, “may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.”  

The decision, however, was not one of clear unanimity. One of the three Justices on the appellate panel issued his own concurring opinion, in which he expressed his “considerable misgivings” as to the majority opinion. After noting that the opinion “hangs precipitously on one word, namely ‘express,” Justice Fred Woods lamented that the social problems sought to be addressed by the Moradi-Shalal decision and various legislative remedies might now be undone, and that he saw “storm warnings on the horizon.”

Perhaps, just as the Supreme Court accepted review of the Zhang case last year to address that appellate decision seeking to create a chink in the armor of Moradi-Shalal, it will similarly accept review of Hughes to address this latest attack on the scope of Moradi-Shalal and bring some certainty to whether the reach of the UCL is as broad as these two lower appellate courts have held

Horizontal Exhaustion Analyzed by California Court in Continuous Damage Case

By Larry M. Golub and Travis Wall

On June 3, 2011, the California Court of Appeal for the Second Appellate District issued a decision in Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania that should be of interest to insureds, primary insurers and excess insurers as to the issues of horizontal exhaustion and stacking of liability insurance policies.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser.

In a previous decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. 

Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years. ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Both Kaiser and Truck argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The Kaiser court issued three holdings in its decision:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy. It advised that this ruling was consistent with prior California law addressing the issue of horizontal exhaustion. 

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence.

Specifically, the court cited the language in the insuring agreement stating that,

the Company's liability as respects to one occurrence . . . shall not exceed the per occurrence limit designated in the Declarations." (Italics added.)  

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

The final holding by the court was that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

For excess insurers, this case affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context. 

The anti-stacking ruling also should have a fairly limited scope -- it would only apply to situations in which there is a single insurer providing coverage under all triggered primary policies. 

And, above all, the case requires a careful review of the specific policy language found in each primary and excess policy at issue.

California Court Dismisses UCL Claim Over Fiji Water

 

Sometimes a green drop is just a green drop.

Last week, the California Court of Appeal, First Appellate District, dismissed a purported class action against the owners of Fiji Water, finding as a matter of law that the company’s use of a green drop on its bottle, along with a slogan “Every Drop is green,” would not mislead a reasonable consumer. The case, Hill v. Roll International Corporation, is the most recent decision to disallow the use of California’s Unfair Competition Law, Business & Professions Code section 17200 et seq. (“UCL”), to restrict the marketing of a product that fails to contain any misleading symbol, slogan or message.

At issue in the case was Fiji Water’s labeling for its bottled water and specifically the use of a green drop on the front of the product, which the plaintiff contended “looks similar to environmental ‘seals of approval’ . . . by several independent, third–party organizations.” The plaintiff asserted that the use of the green drop connotes approval by such third-party organizations and that the green drop is “deceptive because it conveys that the products is environmentally sound and superior to other bottled waters that do not contain the Green Drop.” 

In addition to the UCL claim, the plaintiff sued under the False Advertising Law, Business & Professions Code section 17500 et seq.; the Consumer Legal Remedies Act, Civil Code section 1750 et seq.; and common law claims for fraud and unjust enrichment. The trial court dismissed the complaint on demurrer, without further leave to amend.

On appeal, the court first observed that, in resolving an appeal based on the reasonable consumer standard following a judge trial, some courts have evaluated whether an advertisement is deceptive as a pure question of law, while other courts have generally – though not invariably – found it to raise a question of fact such that it cannot be decided on demurrer. 

Here, however, the court found that accepting all the facts in the complaint as true, “no reasonable consumer would be mislead to think that the green drop on Fiji water represents a third party organization’s endorsement or that Fiji water is environmentally superior to that of the competition.” (Emphasis by Court.)

The plaintiff specifically relied on the California Environmental Marketing Claims Act, Business & Professions Code section 17580 et seq., along with Guidelines for the Use of Environmental Marketing Claims, issued by the Federal Trade Commission (“FTC”) to support her claims. Despite accepting for purposes of demurrer that all of plaintiff’s claims as to being misled were true, her claims still did not satisfy the reasonable consumer standard as expressed in the FTC guidelines and California’s consumer laws, which require her to “show potential deception of consumers acting reasonably in the circumstances – not just any consumers.”   This is not a “least sophisticated consumer,” an “unwary consumer,” or an “overly suspicious consumer” standard, but “a reasonable consumer in the circumstances.” And, the court emphasized that “the context of the symbol is important.”

Finally, the Court of Appeal took the occasion to distinguish this case from the recent Supreme Court decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), which involved misleading product labeling on the defendant’s locksets which were not wholly “Made in the U.S.A.”  (Our blog on Kwikset is found here.)   Unlike the Kwikset case, which concerned the issue of standing under the UCL, this case did not raise any issue of standing. Moreover, agreeing “wholeheartedly” with the Supreme Court’s statement that “labels matter,” in this case the court only held, once again, that “no reasonable consumer would be mislead to think that the green drop represents a third party organization’s endorsement of that Fiji water is environmentally superior to that of the competition.”

United States Supreme Court Holds that Summary Plan Descriptions are Not Part of the Plan

In a significant loss for employees, the United States Supreme Court has determined that a pension plan's Summary Plan Description ("SPD") is not a part of the plan itself (CIGNA Corp. v. Amara). 

The decision, supported by all eight justices who participated, severely limits the ability of plan participants to sue for benefits based upon claimed irregularities in the SPD.

Until 1998, CIGNA's pension plan provided a retiring employee with an annuity based on pre-retirement salary and length of service. The new plan replaced the annuity with a cash balance based on a defined annual contribution from CIGNA, plus interest. The new plan translated earned benefits under the previous plan into an opening amount in the cash balance account. 

Plaintiffs, beneficiaries under CIGNA's pension plan (and the plan itself), acting on behalf of approximately 25,000 beneficiaries, challenged the new plan in a class action, claiming CIGNA failed to give them proper notice of the changes, particularly because the new plan provided less generous benefits. 

The District Court held that CIGNA's descriptions of the new plan were significantly incomplete and inaccurate and that CIGNA intentionally misled its plan participants, violating sections 102(a), 104(b) and 204(h) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").  See 29 U.S.C. §§ 1022(a), 1024(a), 1054(h)

The District Court found that only class members who had suffered harm due to CIGNA's disclosure improprieties could obtain relief, but it did not require each class member to show individual injury. 

Instead, it found the evidence raised a presumption of "likely harm" suffered by class members and that, because CIGNA failed to rebut this presumption as to some or all participants, the evidence warranted class-applicable relief. 

Although section 204(h) of ERISA permits invalidation of plan amendments imposed without proper notice, the District Court did not do so here, reasoning that striking the new plan would further harm, rather than help, injured class members. 

Instead, granting relief under section 502(a)(1)(B) of ERISA, which authorizes a civil action to recover "benefits due" under the terms of the plan, the District Court reformed the new plan, substituted a more generous retirement payment, and ordered CIGNA to pay benefits under the plan, as reformed.  See 29 U.S.C. § 1132(a)(1)(B). 

The Court of Appeals for the Second Circuit affirmed. 

The Supreme Court held that the lower court improperly relied upon section 502(a)(1)(B) of ERISA, as that section does not authorize the District Court to change plan terms, rather than enforce existing terms. 

The Court rejected the argument that the District Court merely enforced existing terms of the plan because it enforced the SPD, which is part of the plan. 

In rejecting this theory, the Supreme Court reasoned that the SPD is not part of the plan, but merely information about the plan.  See 29 U.S.C. § 1022(a)

The Court commented that the argument ignores the distinction between the plan sponsor (which creates the plan and the procedures for making plan amendments) and the plan administrator (which manages the plan and provides the SPD in readily understandable form). 

The Court explained that, even where the duties of the plan sponsor and the plan administrator are performed by the same entity, the division of responsibilities between sponsor and administrator is significant. 

Imposing a rule that makes the SPD part of the plan and, therefore, allows statements in the SPD to modify the plan "might bring about complexity that would defeat the fundamental purpose of the summaries." 

While the Supreme Court did not find authority to reform plans under section 502(a)(1)(B), it nevertheless held that such authority exists under section 502(a)(3), which allows "other appropriate equitable relief" to redress violations of ERISA or plan terms.  See 29 U.S.C. § 1132(a)(3). 

Accordingly, even though a legal remedy such as compensatory damages is not permitted, the Supreme Court concluded that the District Court had the power to impose equitable remedies, including reformation of plan terms, injunctions to enforce plan terms, and orders to refrain from taking already accrued benefits (i.e., equitable estoppel).  

The Supreme Court noted ERISA does not establish a particular standard for determining harm, but requires the plan administrator to distribute written notice that is "'sufficiently accurate and comprehensive to reasonably apprise'" participants of "'their rights and obligations'" under the plan (quoting § 102(a)).

Thus, the Court explained the requirement of harm must come from the law of equity. Moreover, to determine if "detrimental reliance" must be proved to obtain equitable relief, the lower court must look to the specific equitable remedy it seeks to impose.  

With respect to the action against CIGNA, the Supreme Court explained that, to obtain relief by surcharge for the claimed ERISA violations, a plan participant or beneficiary must show that the violation caused injury--i.e., harm and causation, but not necessarily detrimental reliance, and that the prejudice standard, if applicable, must be borrowed from equitable principles, as modified by the obligations and injuries identified by ERISA itself. 

The Supreme Court remanded the case, allowing the District Court to further evaluate the remedy it will impose in light of its opinion.   

Although this case arose in the context of alleged irregularities concerning pension benefits, the decision will apply with equal force to other forms of plan benefits, including SPDs concerning insurance benefits.

Originally posted on Barger & Wolen's Life, Health, Disability Insurance Law blog.

U.S. Supreme Court Invalidates California's Discover Bank Rule on Classwide Arbitration in AT&T Mobility v. Concepcion

By Richard B. Hopkins and John C. Holmes

On April 27, 2011, the United States Supreme Court issued an important decision in AT&T Mobility vs. Concepcion, No. 09-893, impacting the ability of defendants to move to compel arbitration in response to consumer class action complaints.

In a 5-4 decision, the Court overturned a Ninth Circuit ruling that had held an arbitration provision in AT&T Mobility contracts to be invalid. 

The arbitration provision in question required all disputes to be brought in the party’s

individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.

Plaintiffs originally filed an individual claim in federal district court alleging that AT&T improperly charged approximately $30 in sales taxes on mobile phones that AT&T advertised as free. The case was consolidated into a putative class action. 

The question presented in the case was whether §2 of the Federal Arbitration Act preempts California’s rule classifying most collective-arbitration waivers in consumer contracts as unconscionable. This rule is known as the Discover Bank rule, after the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

The majority of the Supreme Court held that requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. The Court further held that class arbitration, to the extent it is mandated by Discover Bank rather than consensual, is inconsistent with the FAA.

The Court noted that arbitration is poorly suited to the higher stakes of class litigation. 

In litigation, a defendant may appeal a certification decision on an interlocutory basis and, if unsuccessful, may appeal from a final judgment as well. 

However, in arbitration, decisions are subject to very limited review. 

Moreover, the Court noted, arbitrators are seldom experienced in class action procedure and classwide arbitration consistently takes years to resolve. 

Indeed, the Court noted that as of September 2009, the American Arbitration Association had opened 283 class arbitrations. Of those, 121 remained active, and 162 had been settled, withdrawn, or dismissed. Not a single one, however, had resulted in a final award on the merits.

The Court also emphasized that the district court and Ninth Circuit found that the arbitration provision at issue was

sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be ‘essentially guarantee[d]” to be made whole.’

At issue was an agreement which permitted customers to initiate a dispute by completing a form on AT&T’s website. Thereafter, AT&T was permitted under its agreement to offer to settle the claim. If it did not settle within 30 days, the customer was required to submit the claim to arbitration. 

The agreement required that in the event of arbitration, AT&T must pay all costs for nonfrivolous claims and that the arbitration must take place in the county in which the customer was billed. The agreement also provided, for claims under $10,000, that the customer could elect to conduct the arbitration via telephone, in-person or on written submissions only and that either party may bring a claim in small claims court in lieu of arbitration. The agreement also permitted the arbitrator to award any form of individual relief, including injunctions and presumably punitive damages. 

The agreement also denied AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, required AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

Justice Scalia delivered the opinion of the Court, in which Justices Robert, Kennedy, Thomas and Alito joined. Thomas filed a concurring opinion. Breyer filed a dissenting opinion, in which Justices Ginsburg, Sotomayor and Kagan joined.

 

Two Air Ambulance Suits Grounded in Two Days by Federal and State Courts

 

Over the course of two days at the end of March, the Ninth Circuit Court of Appeals and the Sonoma County Superior Court issued two separate decisions dismissing claims by air ambulance companies that sought to obtain medical provider benefits under workers’ compensation without following the dictates of the California workers’ compensation system. In both instances, the courts found that they did not have subject matter jurisdiction to consider the claims alleged by the air ambulance companies.

In early 2009, California Shock Trauma Air Rescue (“CALSTAR”) filed two virtually identical actions in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. 

CALSTAR’s lead lawsuit in the consolidated actions, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of CALSTAR being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).

In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule. CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

As reported in this blog, the federal district court dismissed CALSTAR’s lawsuits on July 24, 2009, finding, on a number of grounds, that it lacked federal subject matter jurisdiction to consider CALSTAR’s claims. CALSTAR appealed the dismissal of its two actions to the Ninth Circuit.

On March 31, 2011, the Ninth Circuit published its opinion in the two consolidated appeals, affirming the decision of the trial court and concluding that the well-pleaded complaint rule precluded the federal court’s exercise of federal subject matter jurisdiction with respect to purely state law claims.

More specifically, the three-judge panel found that CALSTAR’s claims did not “arise under” the laws of the United States, and its attempt to obtain a determination as to federal preemption of the Fee Schedule was, at most, in anticipation of its response to the defense that would be posited by the defendants – and this is not adequate to create federal court jurisdiction. 

The Ninth Circuit further dismissed CALSTAR’s attempt to fall within the case law that allows federal court jurisdiction over state law claims that “implicate significant federal issues,” since, once again, CALSTAR could not satisfy the well-pleaded complaint rule, and its state law claims do not turn on a federal issue.

Finally, the Court concluded that the mere fact that CALSTAR had alleged claims for declaratory relief in addition to its state law claims did not allow the “procedural” device of such a declaratory relief claim to confer “arising under” jurisdiction. This is especially true here, since CALSTAR’s actions did not sue any state official, which the Supreme Court and other federal circuits had found to be a prerequisite to allowing any such Supremacy Clause claims to proceed in federal court.

One of the defenses raised by the insurers and self-insured employers in CALSTAR, but never addressed by the federal trial and appellate courts was that, even if there were federal subject matter jurisdiction, the air ambulance company’s action must still be dismissed because the claims are subject to the exclusive jurisdiction of the Workers’ Compensation Appeals Board (“WCAB”) and fall within the exclusive remedies of the Workers’ Compensation Act

The day before the Ninth Circuit issued its decision, a California state trial court in Sonoma County had the occasion to address that precise issue, dismissing claims by another air ambulance company due to the exclusive jurisdiction of the WCAB and the exclusive remedy the Act.

REACH Air Medical Services LLC sued many of the same defendant insurers and self-insured employers as did CALSTAR, and the defendants demurred to REACH’s state court complaint on the grounds of exclusive jurisdiction/exclusive remedy. On March 30, Sonoma County Superior Court Judge Elliot Daum issued his Order sustaining the demurrers and dismissing the action without leave to amend. If REACH wanted to pursue its claims for additional benefits beyond those paid by the Fee Schedule under worker’s compensation, it could only do so within the exclusive remedies provided by the Act and before the exclusive jurisdiction of the WCAB.

One final note. In October 2010, CALSTAR filed its own state court action in Solano County Superior Court against many of the same defendant insurers and self-insured employers. That action seeks further payment of medical provider benefits for services rendered after the time CALSTAR filed its federal court action. The defendants have demurred to that state court complaint, and a hearing on their demurrers is set for April 21.

Larry Golub of Barger & Wolen has represented a number of the defendants in all three lawsuits.

 

Insurers Can Only Seek to Pay "Cumis" Rates if They are Actually Defending the Insured

In a decision issued March 25, 2011, The Housing Group v. PMA Capital Insurance Co., the California Court of Appeal held that an insurer who is not actually defending its insured cannot pursue its rights under California Civil Code section 2860, and specifically the right to arbitrate the issue as to the hourly rate for “independent counsel” chosen by the insured when there is a conflict of interest between the insured and the insurer.

Under section 2860(c), an insurer’s obligation to pay such independent counsel “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” 

Since substantial evidence supports the trial court’s finding that the insurer failed to provide a defense in the underlying litigation, the insurer was precluded from invoking the arbitration remedy for Cumis fee disputes in section 2860(c).

This recent decision was discussed in more length in a blog posted by David McMahon in Barger & Wolen’s Litigation Management & Attorney Fee Analysis blog.

Large "Bad Faith" Verdict Raises Two Intriguing Issues

The verdict by a Los Angeles jury last week awarding a health insurance claimant over $19 million raises a pair of issues of interest to health and disability insurers. 

In Thomas Nickerson v. Stonebridge Life Insurance Company, the plaintiff, an ex-Marine, sought payment for 109 days in the hospital after a fall. The insurance company believed expenses for only 19 of those days were medically necessary. A jury awarded Nickerson $35,000 in emotional distress damages, plus $19 million in punitive damages. 

As this case undoubtedly proceeds, first in a motion directed to the trial judge, and then likely on appeal, one issue that will be addressed is the appropriate amount of punitive damages that should be permitted (assuming any punitive damages survive). 

Case law in recent years has established that except in the most extraordinary circumstances, punitive damages should not exceed other compensatory damages by more than a single digit ratio. Some courts have even opined that a 4:1 ratio is the maximum amount to be awarded, and that a 2:1 or even 1:1 ratio would be more appropriate. 

Here, the ratio of punitive damages to compensatory damages somewhat exceeds the above guidelines -- it pencils out to 543:1. It's true that depending on the level of reprehensibility of a defendant's conduct, and where compensatory damages are nominal, the courts may be open to approving punitive awards in excess of a the above ratios, but those circumstances do not appear to apply in this case. 

The second issue raised by the Nickerson case is the alleged obligation by an insurer to accept or give great deference to the opinion of an insured's physician, with respect to the question of medical necessity under a health policy. 

Nickerson's lawyer, William Shernoff of the Claremont, California firm of Shernoff Bidart & Echeverria LLP, has expressed the hope that this case will lead to a recognition by the courts that the medical judgment of policyholders' treating physicians should be accepted by carriers. 

In fact, this case is unlikely to lead to such a result.  

Appellate courts have long recognized that the issue of medical necessity should not be one that is dictated by the view of any particular expert or practitioner, but instead should turn on which party presents the most compelling evidence on the coverage question. 

The notion that a policyholder's doctor has a monopoly on truth or good judgment, especially when that physician may hold a view based on a longstanding affinity for a patient, and an unquestioning acceptance of self-reported symptoms that may or may not be reliable in light of clinical or objective testing, is unlikely to find favor with the bench officers asked to decide coverage questions.

California Supreme Court Holds that Zip Codes Constitute "Personal Identification Information" under the Song-Beverly Credit Card Act, Triggering a Flurry of Consumer Lawsuits

by Misty A. Murray and Larry M. Golub

In Pineda v. Williams-Sonoma Stores Inc., 2011 Cal. LEXIS 1355 (February 10, 2011), the California Supreme Court addressed the issue of whether a person’s zip code constitutes “personal identification information” under the Song-Beverly Credit Card Act of 1971, Cal. Civ. Code §§ 1747 et seq. (Credit Card Act). 

The Court held that it did, and that its holding operated retrospectively, triggering numerous lawsuits since the Court’s decision a week ago.

The Credit Card Act was enacted to protect consumers from unfair business practices during credit card transactions. Relevant to the Court’s decision is section 1747.08 of the Credit Card Act, which prohibits businesses from requiring consumers to provide "personal identification information" during credit card transactions and then recording that information. Cal. Civ. Code, § 1747.08(a)(2).

Pineda brought an action against Williams-Sonoma, asserting violations of the Credit Card Act, unfair competition laws and invasion of privacy, based on the fact that the retailer asked Pineda for her zip code during a credit card transaction, recorded that information, and then used that information to obtain her undisclosed address from a database in order to market its products and sell her private information to other businesses. 

Williams-Sonoma argued that a zip code does not constitute "personal identification information" under section 1747.08. 

The trial court agreed and the Court of Appeal affirmed, relying on Party City Corp. v. Superior Court (2008) 169 Cal.App.4th 497, which held that a zip code, without more, is not “personal identification information” as defined in the Credit Card Act.

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California Supreme Court Announces Expansive Standing Rule Under the UCL

Since the passage of Proposition 64 in November 2004 by the California electorate, which sought to limit the scope of frivolous or “shakedown” lawsuits under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), courts in California have waited for the California Supreme Court to clarify the scope of standing for a plaintiff to pursue a UCL claim. In 2009, the Court issued its decision in In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), which held that only the named plaintiffs bringing a UCL claim had to demonstrate standing, not each class member that the named plaintiffs sought to represent. 

Now, in Kwikset Corporation, Inc. v. Superior Court, decided January 27, 2011, the Court finally analyzed the scope of the Prop 64 language that limited UCL standing to “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” In a 5-2 opinion, the Court cut back Prop 64’s limitation on standing, which will allow more UCL cases to at least proceed beyond the demurrer stage.

Kwikset involved named plaintiffs who purchased a lockset that said on the packaging “Made in U.S.A,” but it was substantially made in Taiwan and Mexico. While there were no claims that the lockset was defective or worth less than ones actually made in the United States, the sole contention made in an amended complaint was that the persons would not have purchased the lockset had it not been important to them that it was made in the United States: “When purchasing the locksets each plaintiff ‘saw and read Defendants’ misrepresentations . . . and relied on such misrepresentations in deciding to purchase . . . them. [Each plaintiff] was induced to purchase and did purchase Defendants’ locksets due to the false representation that they were “Made in U.S.A.” and would not have purchased them if they had not been so misrepresented.’”

The Court of Appeal had found that the complaint should be dismissed based on the UCL standing requirements imposed by Prop 64, explaining that although the plaintiffs “had adequately alleged injury in fact, they had not alleged any loss of money or property,” and that while their “patriotic desire to buy fully American-made products was frustrated,” such an injury “was insufficient to satisfy the standing requirements” of the UCL.

The Supreme Court, in a lengthy decision, reversed and found that

“plaintiffs who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue.” 

The Kwikset case sets forth a standing test broader than just for product mislabeling cases, as the Court later stated as follows:

“As we shall explain, a party who has lost money or property generally has suffered injury in fact. Consequently, the plain language of these clauses suggests a simple test: To satisfy the narrower standing requirements imposed by Proposition 64, a party must now (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.” (Emphasis by Court.) 

And, to provide further guidance for future cases, the Court observed:

“There are innumerable ways in which economic injury from unfair competition may be shown. A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary.” 

The majority opinion in Kwikset also reaffirmed that, apart from demonstrating economic injury in the form of loss of money or property, the named plaintiff must still allege the causal element of reliance (“that the misrepresentation was an immediate cause of the injury-producing conduct”), as earlier set forth in the Court’s Tobacco II decision. The Court also held that there is no need to show for standing purposes that the lost money or property would otherwise qualify as restitution, the only monetary remedy permitted under the UCL. This was a point noted by the Court in its rent decision in Clayworth v. Pfizer, Inc., 49 Cal.4th 758 (2010), which found that parties may seek an injunction under the UCL whether or not restitution is also available.

Despite the breadth of the Kwikset opinion and the position by Prop 64 proponents that this decision will undercut the protections against frivolous lawsuit intended by the proposition, in two reassuring footnotes, the Court also confirmed that it was only considering matters at the demurrer stage, where a court “must take the allegations as true,” and that “[o]nce this threshold pleading requirement has been satisfied, it will remain the plaintiff’s burden thereafter to prove the elements of standing and of each alleged act of unfair competition, and the trial court’s role to exercise its considerable discretion to determine which, if any, of the various equitable and injunctive remedies provided for by sections 17203 and 17535 may actually be warranted in a given case.”

Finally, in a powerful dissent, two of the Supreme Court justices explained how they would have affirmed the Court of Appeal’s decision and dismissed the lawsuit since the majority’s opinion disregards Prop 64’s actual statutory language and the intent of the electorate to limit standing under the UCL. Indeed, the dissent even references the fact that proponents of Prop 64 included the Kwikset case on their website as an example of a “shakedown lawsuit” that the proposition sought to curb. Ending its minority opinion, the dissent concluded that the majority opinion had relieved plaintiffs of the burden to show standing imposed by Prop 64:  

“All plaintiffs now have to allege is that they would not have bought the mislabeled product. . . . This cannot be what the electorate intended when it sought ‘unequivocally to narrow the category of persons who could sue businesses under the UCL.’”

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Decision Stands: Proposition 103 Approved Insurance Rates Cannot be Attacked in a Civil Action

California Supreme Court Rejects Requests to Depublish MacKay

by Kent R. Keller

On October 6, 2010, Division Three of the Second Appellate District issued a landmark decision in MacKay v. Superior Court, 188 Cal. App. 4th 1427 (2010), declaring that approved insurance rates subject to Proposition 103 cannot thereafter be collaterally attacked in a civil action.

In brief, MacKay was a certified Unfair Competition Law (UCL) class action involving more than 500,000 class members who contended that 21st Century Insurance Company had used two illegal “rating factors” in developing automobile insurance premiums. The two factors had been included in rate and class plan filings approved on multiple occasions by the Insurance Commissioner. 

The issue, as the Court explained, was:

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” MacKay, supra at 1434. 

In a detailed opinion, authored by Justice H. Walter Croskey, the Court concluded that approval did preclude a collateral attack in a civil action. 

This decision is of critical importance to insurers and consumers subject to rate approval pursuant to Proposition 103. 

Prior to MacKay, it was not clear whether approval precluded civil actions. As a result, many insurers were sued, virtually always in class actions, by parties challenging approved rates on one basis or another. 

The result was that, while insurers were required to obtain rate approval before putting a rate into effect and once approval was obtained could had to use the approved rate, they did so at the peril of a class action lawsuit. 

Whether such lawsuits benefited insureds or simply increased premiums in the future is a continuing debate. What, however, was clear was that such actions often produced large attorneys’ fees awards.

Given the value of these class actions to the plaintiffs’ bar, it was not surprising that requests to depublish MacKay were numerous. 

In addition to a request from counsel for the plaintiffs in MacKay, requests were filed by Consumer Watchdog, the City and County of San Francisco, the Consumer Attorneys of California, Public Advocates, the Mexican American Legal Defense & Education Fund, the Southern Christian Leadership Conference of Greater Los Angeles, United Policyholders, the California State Insurance Commissioner, and others. 

Indeed, by a letter dated January 10, 2011, new Commissioner Dave Jones advised the California Supreme Court that he, like his predecessor, supported depublication.

Despite this tsunami of support for depublication, on January 12, 2011 the Supreme Court denied all requests and declared the case closed

While the reasons for denying or granting depublication are never certain, we have to believe that the Supreme Court recognized the correctness of Justice Crokey’s decision. As a result of the Supreme Court’s action, MacKay remains valid and precedential authority.

21st Century Insurance Company was represented in this case by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

U.S. Supreme Court to Hear Dukes v. Wal-Mart Petition on Scope of Class Actions

By Sandra I. Weishart

On December 6, 2010, the United States Supreme Court granted certiorari in Wal-Mart Stores, Inc., v. Dukes, no. 10-277, agreeing to hear Wal-Mart's appeal of a California district court's order certifying a class alleging sex discrimination in the workplace.

Although the claims in Dukes specifically relate to Wal-Mart's alleged unfair employment practices concerning paying and promoting women, the Supreme Court's decision, expected in summer of 2011, could dramatically affect the class action landscape for all large companies, including insurers. 

Class action litigators following Dukes have been particularly interested in whether a class can be "too big" to certify.

In Dukes, six named plaintiffs allege that Wal-Mart -- the nation's largest employer -- discriminates against women in violation of Title VII of the Civil Rights Act of 1964. They seek to certify a nationwide class encompassing thousands of women employed by Wal-Mart at any time since December 26, 1998, in a range of positions, from part-time, entry-level hourly employees to salaried managers. The proposed class involves 3,400 Wal-Mart stores in 41 regions. Wal-Mart's counsel estimates the class size could exceed 1.5 million women. Given the size of this class, billions of dollars are potentially at stake. 

The district court certified for class treatment all of plaintiffs' claims for injunctive relief, declaratory relief and back pay, and included a separate opt-out class for employees seeking punitive damages.

On appeal, the Ninth Circuit affirmed the district court's certification, under Federal Rule of Civil Procedure ("FRCP") 23(b)(2), of a class of current employees with respect to the claims for injunctive relief, declaratory relief, and back pay and, as to the punitive damages claims, it remanded the case to the district court to make further rulings under FRCP 23(b)(2) and (b)(3). 

As to former Wal-Mart employees, the Ninth Circuit remanded the action to the district court to consider whether to certify an additional class or classes under FRCP 23(b)(3). See Dukes v. Wal-Mart Stores, 605 F.3d 571 (9th Cir. 2010).

In addition to the arguments that class action counsel routinely make to defeat class certification, such as whether the issues are sufficiently common and the claims of named class members are typical of others in the class, Wal-Mart's counsel argued that a class action this size would be inherently unmanageable and coercive. The allegations cover diverse job positions held by thousands of employees with different supervisors in numerous geographic locations. There is no way that all of the evidence relating to these plaintiffs can be presented. Further, it is unlikely that evidence relating to a "representative sample" of plaintiffs can prove the case as to the more than a million class members. 

For these reasons, if classes of this size are going to be certified, independent of the manageability issue, there is also a significant Due Process concern. Moreover, if such huge classes are certified, there is a far greater likelihood that defendants will feel compelled to settle, regardless of the merits of the action, to avoid potential billion-dollar litigation.   

Although the "too big to certify" argument is of great importance to class action lawyers and their clients, it is unclear whether or to what degree the Supreme Court will resolve that issue.

The Court granted certiorari on only one, narrow issue raised in Wal-Mart's petition:

Whether claims for monetary relief can be certified under FRCP 23(b)(2) — which by its terms is limited to injunctive or corresponding declaratory relief — and, if so, under what circumstances." 

The Court denied certiorari as to the broader issues of "whether the class certification order conforms to the requirements of Title VII, the Due Process Clause, the Seventh Amendment, the Rules Enabling Act, and FRCP 23."

Nevertheless, the Court instructed the parties to brief the issue of "whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a)." Although this vaguely worded request leaves open the door to discussion of the broader issues, it appears unlikely that the Court will focus its decision on the bigger issues.  

If the Supreme Court affirms the order granting class certification, Dukes will be the largest class action in United States history. Given the size of the class, the case potentially affects all large companies that may find themselves embroiled in class action litigation. Therefore, regardless of which way the Supreme Court decides Dukes, the case is likely to have a significant impact on future class action practice.

 

California Supreme Court Again Confirms a Penalty is Not Restitution Under the UCL

Recently, we reported on the California Supreme Court’s decision in Clark v. Superior Court (National Western Life Insurance Company), wherein the Court confirmed that the only monetary remedy available under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”) is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.  

The Court echoed that holding in a new decision issued November 18, 2010, Pineda v. Bank of America, N.A. As with Clark, Pineda was a unanimous opinion by the Court.

At issue in Pineda were penalties provided for under California Labor Code section 203 when an employer fails to timely pay final wages to an employee. The first issue addressed by the Court was whether a one-year or three-year statute of limitations applied to a claim for such penalties when an employee sues only to recover the penalties and not the final wages themselves (which had already been paid). On that issue, the Court held that the longer, three-year statute applied.

Turning to the second issue, whether Section 203 penalties can be recovered as restitution under the UCL, the Court explained once again that a penalty is not restitution because it does not function to restore to a plaintiff the status quo or something in which the plaintiff had a vested interest. Relying on its earlier decision in Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000), which held that unpaid overtime wages were able to recovered as restitution under the UCL, the Court contrasted such unpaid wages to a penalty for not paying wages. The former are consider to be the earned property of the employee and thus restitutionary in nature whereas the latter are not compensation for work performed or restoring to the employee funds in which the employee has a vested ownership interest, but rather a payment to encourage employers to timely pay their employees and to punish them if they do not do so.

One would hope that, with the holdings of the Clark and Pineda cases, the issue of what is restitution and the limited monetary remedies available for a private action under the UCL can now be laid to rest.

"Any One Act Test" Rejected by Court in Favor of "Totality of the Circumstances"

In a non-published decision issued on November 18, 2010, the California Court of Appeal affirmed summary judgment against class-action lawyers seeking refunds on broker fees in Munn v. Eastwood Insurance Services.  

The decision rejected the argument that if a broker performs any act on behalf of the insurer, the broker is a de facto agent, and subjects the broker to a refund of all broker fees collected. 

The court rejected the “any one act test” and followed the “totality of the circumstances test,” which has been advocated by this firm for several years as the appropriate test to distinguish the difference between an agent and broker.

The “totality of the circumstances test” was codified into law by legislation in 2008 (AB 2956) that Barger & Wolen Senior Regulatory Partner Robert Hogeboom helped draft.

The court’s decision upheld the FSC comparative rater and the electronic Zap App systems as the appropriate mechanisms for brokers to input information and process applications, and it rejected the plaintiffs’ claim that it was a process to encourage upfront underwriting and binding by the broker. 

Finally, the court recognized that the recent amendment to California Insurance Code section 1623, which includes the definition of “broker” and creates a presumption, did provide the court with “guidance in assessing the facts as part of the totality of the circumstances.” 

Barger & Wolen’s Robert Hogeboom and Suh Choi served as special consultants on the broker fee issue to Eastwood’s counsel, Milford Dahl and Zack Broslavsky of Rutan & Tucker, and to Judi Partridge, former owner of Eastwood. 

If you have any questions, please contact Robert Hogeboom via e-mail or at (213) 614-7304.

Insurer Has No Duty to Disclose Means of Obtaining Lower Premiums

by Sandra Weishart

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

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Employers Are Not "Big Brother" and Cannot Force Employees to Actually Take Breaks

In Hernandez v. Chipotle Mexican Grill, Inc., published October 28, 2010, the California Court of Appeal held that, while employers must provide employees with breaks, they need not ensure employees actually take their breaks. 

Rogelio Hernandez (Hernandez) brought this class action against Chipotle Mexican Grill, Inc. for allegedly denying employees meal and rest breaks. In moving for certification, Hernandez submitted statistical evidence allegedly showing that a overwhelming majority of employees missed their breaks, e.g. 92% of employees missed at least one meal break.

Chipolte also filed a motion, but to deny certification, and it presented evidence of a company-wide policy encouraging meal and rest breaks. As noted by the Court, Chipotle provides employees with free food and beverages during breaks. Because Chipotle paid employees during breaks, the employee time records may not reflect whether breaks were actually taken.

In determining whether certification was appropriate, both the trial court and appellate court addressed the legal issue of whether employers must only provide breaks, or whether employers must also ensure that breaks are actually taken.

The Court recognized that this issue was currently pending review before the California Supreme Court (Brinker v. Public Storage, S166350, and Brinkley v. Public Storage, S168806), but ruled that the Supreme Court would likely hold that employers need not ensure that breaks are actually taken.

The Court stated that placing this obligation on employers would place an

undue burden on employers whose employees are numerous or who … do not appear to remain in contact with the employer during the day.”

It would also create

perverse incentives, encouraging employees to violate company meal break policy in order to receive extra compensation under California wage and hour laws.”

The decision is significant not only for its substance, but also for procedural reasons. 

Class counsel often times will argue on certification motions that their legal theory of liability and damages should not be decided on certification, because certification is only a procedural, not a merits question. This misstates what a trial court may be obligated to review for certification.

In order to decide whether common or individual issues predominate, it must be determined at the certification stage how the law requires liability and damages to be proven at trial. This inquiry may not be able to be satisfied without the trial court actually addressing what the law is at the certification stage, and in certain cases where the certification issues are intertwined with the merits issues some analysis of the merits is permitted.

As noted by the Hernandez trial court, if the law does require employers to ensure breaks are actually taken, class treatment of this case would be appropriate. Having held that the law only requires employers to provide breaks, certification in this action was inappropriate.

Landmark Proposition 103 Decision Reached

On October 6, 2010, the California Court of Appeal issued a landmark decision involving Proposition 103 insurance rate approval in MacKay v. Superior Court, B220469 & B223772. 

The legal issue, as Division Three of the Second Appellate District explained, was

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.”  

In MacKay, the plaintiff class sued 21st Century Insurance Company asserting that its use of certain rating factors (persistency and accident verification) was illegal and therefore actionable under California’s Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200

In a unanimous decision, written by Justice Croskey, the Court held "that the statutory provisions for an administrative process . . . are the exclusive means of challenging an approved rate,” precluding a UCL action and therefore ordered the trial court to enter judgment for 21st Century.

Prior to this decision, previous decisions had created uncertainty as to whether insurers, having fully complied with the requirements of Proposition 103 rate approval, could charge approved rates free from subsequent civil challenges. 

While Walker v. Allstate Indemnity Co, 77 Cal. App. 4th 750 (2000) held that approved rates could not thereafter be civilly challenged, Donabedian v. Mercury Ins. Co., 116 Cal. App. 4th 968 (2004) created confusion on this issue.

The MacKay decision resolves all prior confusion in declaring that approved rates and rating factors cannot thereafter be civilly challenged.

21st Century Insurance Company was represented in this action by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

California Court Determines No Coverage Based on Unambiguous Motor Vehicle Exclusion

The California Court of Appeal recently held that an insurer properly denied coverage and had no duty to defend its insured where the policy unambiguously excluded coverage for claims arising from the operation of a motor vehicle by an insured. 

In Sprinkles v. Associated Indemnity Corporation (published September 1, 2010), Plaintiffs were the heirs of a motorcyclist who died in an accident caused by an employee, Juan Bibinz (“Bibinz”), of Sinco Co., Inc. (“Sinco”). Plaintiffs sued Sinco and Bibinz (the “Sinco action”) alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record, who negligently drove his vehicle causing the death of Plaintiffs’ heir. Plaintiffs also alleged that Bibinz was an employee acting within the scope of his authority.

At the time of the accident, Sinco had a commercial automobile policy, an excess and umbrella policy, and a commercial general liability (“CGL”) policy, the latter issued by Fireman’s Fund Insurance Company.  While the auto policy and excess policy paid their limits toward settlement of the claim, Fireman’s Fund denied coverage and a duty to defend under the CGL policy. 

After an arbitrator awarded Plaintiffs more than $27 million in the underlying action, Plaintiffs took an assignment from Sinco and brought claims against Fireman’s Fund for bad faith, wrongful refusal to settle, wrongful failure to defend, and breach of contract, as well as a direct judgment creditor claim under Insurance Code section 11580

On demurrer, Fireman’s Fund contended that no coverage existed for Sinco because Bibinz was an insured under the CGL policy, and therefore the exclusion in the policy for claims arising out of the use of an automobile applied. 

Plaintiffs alleged that Bibinz was not an insured under the policy because, at the time of the accident, Bibinz was not performing duties related to the conduct of Sinco’s business and there was a potential for a finding that Bibinz was not acting in the scope of his employment with Sinco. 

The trial court sustained the demurrer without leave to amend, holding that the CGL policy provided no coverage for the automobile accident that caused Plaintiffs’ damages. 

The appellate court held that as an insured under the policy, Bibinz’s acts were not covered due to an exclusion for bodily injury or property damage “arising out of the . . . use . . . of any . . . acts by any insured.” The court deemed Bibnz’s use of the vehicle as “related to” the conduct of business, in that he was required to use his vehicle to reach various locations for maintenance work. 

The court accordingly upheld the dismissal of all claims against the insurer.

Take the Money or Rescind -- Not Both

In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company (decided August 30, 2010), the California Supreme Court rejected an insured’s attempt to sue State Farm for fraud in inducing settlement of the insured’s property damage claim. The insured alleged the settlement was procured by State Farm’s undervaluing of the earthquake loss and misrepresentation of the policy limits to be only $4,979,900, while the limits were allegedly $11,905,500. 

While the settlement agreement between State Farm and the insured released all known and potential claims related to the Northridge Earthquake damage claims, the insured insisted it need not seek to rescind the settlement agreement but could instead elect to affirm the settlement and release, and also then sue for fraud damages. 

As noted by the Court, the insured “seeks to affirm those parts of the agreement that benefit it, but to invalidate a major part of the agreement that benefits State Farm.” This is a rescission remedy and the party seeking to rescind must restore benefits received under the contract.  Civ. Code § 1688 et seq. 

The Court recognized that other jurisdictions, relying on common law principles, have allowed a party challenging a settlement to “affirm and sue” for fraud in the inducement without restoring benefits.

In significant contrast, the California Legislature has spoken in this area and specifically rejected the “affirm and sue” principle.

Instead, the Civil Code requires the aggrieved party to rescind and restore consideration received in their original settlement and release with the caveat that any actual return of benefits may be delayed until final judgment unless it substantially prejudices the defendant. Civ. Code § 1693

The Court rejected public policy arguments that an “affirm and sue” principle was necessary to combat fraud in settlements. In closing, the Court stated: 

The Legislature has created a fair and equitable remedy to address the alleged fraud problem:  rescission of the release, followed by suit. When restoration is impossible because the settlement monies have been spent, the financially constrained parties can turn to section 1693 to delay restoration until judgment, unless the defendants can show substantial prejudice. Our statutory scheme therefore effectively ensures that plaintiffs who may have been defrauded in the settlement process will be allowed access to the courts.”

 

Dismissal of Class Allegations at Pleading Stage Disallowed - Again

Another California appellate decision has restricted the ability to challenge class action allegations at the pleading stage, reiterating that the determination of class suitability in most instances should be made at the time of a motion for class certification.

In Gutierrez v. California Commerce Club, Inc. (published August 23, 2010), the class representative filed suit alleging the defendant unlawfully denied meal and rest breaks to hourly, non-union employees. After a challenge to the third amended complaint, the trial court sustained the demurrer to the class action allegation without leave to amend, observing that the plaintiffs had failed to “notify the court who is in the class, what they do, how they are related and why plaintiffs are the proper persons to represent this all-inclusive class.” 

Division One of the Court of Appeal reversed, finding the trial court’s dismissal of the class premature and that the allegations of the operative complaint adequate to move beyond the pleading stage. 

In so concluding the class could proceed, the court observed:

Judicial policy in California has long discouraged trial courts from determining class sufficiency at the pleading stage and directed that this issue be determined by a motion for class certification.

Quoting another recent decision from last year, the court explained that “the wisdom of permitting the action to survive a demurrer is elementary.” The court elaborated as follows:

It is clear that the more intimate the judge becomes with the character of the action, the more intelligently he may make the determination. If the judicial machinery encourages the decision to be made at the pleading stages and the judge decides against class litigation, he divests the court of the power to later alter that decision. . . . Therefore, because the sustaining of demurrers without leave to amend represents the earliest possible determination of the propriety of class action litigation, it should be looked upon with disfavor.

While the court did reference a number of California decision that had permitted class allegations to be dismissed or stricken at the pleading stage, it relegated those decisions to cases involving “mass torts or other actions in which individual issues predominate.” And, in the context of wage and hour cases (as was the situation in Gutierrez), the court explained that such cases “routinely proceed as class actions” since they “usually involve” a single set of facts that apply to all putative class members and a sole common question of law, usually involving “institutional practices.” The court then noted that “numerous courts” had “reached the same result in wage and hour cases.”

In light of this latest decision, defendants should consider very carefully the wisdom of challenging class allegations at the pleading stage of a lawsuit. Unless it is plainly evident from the allegations of the complaint that individual issues exists, the challenge to class allegations is more efficiently made at the time of a motion for class certification.

Insurer's Denial of Business Interruption Claim, Since There Was No "Accidental Direct Physical Loss," Affirmed by California Court of Appeal

On August 4, 2010, the California Court of Appeal for the Second Appellate District affirmed a summary judgment in favor of State Farm in connection with the insurer’s denial of a claim under a first party business interruption policy (MRI Healthcare Center v. State Farm General Insurance Company). The case involved a damage claim to an MRI machine and loss of income after the machine did not “ramp up” after it was voluntarily “ramped down.” 

The appellate court affirmed the trial court’s ruling that the MRI machine did not sustain “physical loss,” nor was the alleged loss the result of an “accident” as required under the policy.

Background

MRI Healthcare Center of Glendale utilized an MRI machine for scanning purposes. To operate properly, the MRI machine had to be kept in a specially designed and constructed room to keep out electrical or radio wave interference. MRI Healthcare had used the MRI machine for more than 14 years before the claimed loss. 

As a result of storms, MRI Healthcare’s landlord was required to repair the roof over the room housing the MRI machine. These repairs could not be undertaken until the MRI machine was demagnetized, or “ramped down.” MRI Healthcare was informed that due to the age of the machine, there was no guarantee that the machine could be successfully “ramped up” again. 

After the MRI machine was ramped down and the repairs to the roof were made, the machine failed to ramp back up as previously warned. 

MRI Healthcare then submitted a claim to State Farm, alleging that the failure of the MRI machine to ramp back up constituted “damage” which was proximately caused by the storms that damaged the roof. State Farm denied the claim.

Decision

The appellate court found that, under the undisputed facts, MRI Healthcare could not meet the fundamental precondition to coverage of “accidental direct physical loss” to insured property. The court held that the ramp down procedure was the event that damaged the MRI machine, and that it did not cause “physical loss” to the machine. 

For there to be a “loss” under the meaning of the policy, the court stated that some external force must have acted upon the insured property to cause a physical change in the condition of the property. The court further found that ramping down of the MRI machine was intentional and not “accidental” as it was not “unintended and unexpected by the insured.” 

Finally, the court rejected MRI Healthcare’s contention that the storms were the “efficient proximate cause” of the loss. The court held that, even if the storms set in motion the course of events leading to the ramp down of the MRI machine, it ultimately was the ramping down procedure itself that was the sole, and predominate, cause of MRI Healthcare’s loss.

The California Supreme Court Reiterates Analysis for Determining Whether a Statutory Violation Confers a Private Cause of Action

Yesterday, the California Supreme Court issued its unanimous opinion in Lu v. Hawaiian Gardens Casino, Inc., in which the high court found that a specific Labor Code provision could not be enforced by private litigants. This opinion is important in that it reiterates important cases and analyses that can be used to defeat a plaintiff’s attempt to set forth a private cause of action where no such right was intended by the legislature. Unfortunately, however, the Supreme Court declined to further address the question of whether a statute that cannot independently confer a private cause of action can still be utilized as a predicate for a cause of action under the “unlawful” prong of the Unfair Competition Laws (“UCL”).

Louie Lu (“Lu”) was a card dealer at the Hawaiian Islands Casino in Southern California. As a dealer, he was provided tips. However, not all of the tips were his to keep. Instead, he was required to provide 15% to 20% of his tips to a community fund that was then split among other employees who were offering services to the card players, but were not as routinely tipped as the dealers (i.e., floormen, poker tournament coordinators, concierges, etc.)

The tip pool policy specifically prohibited managers and supervisors from receiving any money from the pool. This exclusion of managerial persons from sharing in the tips is important, as Labor Code Section 351 prohibits an employer from taking, collecting or receiving employees’ tips. However, California courts have long-held that the pooling of tips to be split amongst like-situated employees, such as waiters and waitresses on the same shift, is not a violation of Section 351. Similarly, courts have held that the pooling of tips in the casino setting when those tips are spread among the non-managerial staff is perfectly acceptable and not a violation of Section 351. Lu contended that “agents” of the casino (presumably managerial employees) were improperly sharing in the pooled tips, and set forth causes of action for violation of Section 351 and Section 17200 of the UCL. 

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California Supreme Court Holds Treble Damages Not Permitted under the Unfair Competition Law - Restitution is the Sole Monetary Remedy

Earlier today, the California Supreme Court issued its unanimous opinion concluding that Civil Code section 3345, which allows treble damages to be awarded to seniors when a statute provides for a fine or penalty, is not permitted under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”)

The decision, Clark v. Superior Court (National Western Life Insurance Company), confirms that the only monetary remedy available under the UCL is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.

The plaintiffs in the case filed a class action lawsuit against National Western Life Insurance Company arising out of the sale of deferred annuities issued to California residents who were senior citizens. The trial court denied certification as to all claims except one under the UCL. In addition to seeking restitution in the UCL claim, the plaintiffs sought treble damages on their restitution claim under section 3345.

As reported in our earlier blog post last September when the Supreme Court accepted review, in the more than two decades since the enactment of section 3345, no case had ever permitted any sort of damages, be they compensatory, treble or punitive, under the UCL. The trial court dismissed the claim for treble damages, but the Court of Appeal reversed, finding that the plain meaning of section 3345 applied to a private action seeking restitution under the UCL.

In reversing the decision issued by the Court of Appeal, the Supreme Court focused on two issues. First, the Court considered whether a claim under section 3345 only applies to treble amounts awarded under the Consumer Legal Remedies Act (“CLRA”), since the first subsection of section 3345 makes reference to and cites language from the CLRA. The Court concluded that a claim under section 3345 is not so limited, observing that, if trebling was to apply only to a claim under the CLRA, there would have been no need for a separate statute (section 3345); the Legislature could have just amended the CLRA. Nevertheless, the Supreme Court did not articulate any other statutes that might be able to be trebled under section 3345.

After this, the Supreme Court specifically addressed whether section 3345 trebling was permitted under the UCL. The Court focused on the salient language of section 3345 where it requires the underlying statute to impose a “fine, or a civil penalty . . . or any other remedy the purpose of which is to punish or deter,” and found that it cannot refer to the UCL. First, citing to a number of its past decisions, the Court reiterated that the only monetary remedy under the UCL is restitution. 

Next, the Court relied on the well-established canon of statutory construction that when there is a general term followed by various specific terms, as is the case in the language of section 3345 just quoted, the general term must be limited to the nature of the specific terms. In other words, “any other remedy” must refer to a remedy in the nature of a penalty, and thus section 3345 trebling is only allowed when a statute permits a remedy that is in the nature of a penalty. The UCL, however, is not such a statute. Confirming that restitution only allows the restoration of something taken, or a return to the status quo, restitution under the UCL is not a penalty, which is a recovery without reference to the actual damage sustained. In sum, the Supreme Court concluded:

Because restitution in a private action brought under the unfair competition law is measured by what was taken from the plaintiff, that remedy is not a penalty and hence does not fall within the trebled recovery provision of Civil Code section 3345, subdivision (b).

Kent Keller and Larry Golub of Barger & Wolen represent National Western Life Insurance Company in the Clark case.

Ninth Circuit Applies California UCL Standards, Confirming Recent State Law Precedents

In a follow up to last week’s post regarding the Nelson v. Pearson opinion, the Ninth Circuit has now applied similar principles when applying California state law. In Rubio v. Capital One Company, the Ninth Circuit further confirmed that all that is required to establish a plaintiff’s standing under the California Unfair Competition Law (“UCL”) is an allegation of some lost “money or property” fairly traceable to unlawful, unfair, and/or fraudulent conduct by the defendant.

Raquel Rubio (“Rubio) received a credit card solicitation from Capital One Bank (“Capital One”) offering a 6.99% fixed rate. The fixed rate was further explained in smaller text on the page as being fixed, so long as none of three conditions occurred: (1) a late payment; (2) charges are made over the credit limit; and (3) a payment is returned for any reason. Rubio did not allow any of those conditions to occur; however, three years later, Rubio received a letter noting that her APR of 6.99% would increase to 15.9%. Rubio could avoid the increase only by closing her credit card account and paying off the balance on the card by the end of the next month. Capital One defended the hike in interest rate by referring to additional language in eight-point type, found under the heading “Terms of Service,” that stated “[m]y Agreement terms (for example, rates and fees) are subject to change.”

Rubio brought suit alleging violations of the federal Truth in Lending Act (“TILA”), the UCL and breach of contract. The Ninth Circuit agreed with the District Court by finding that there was no breach of contract because the solicitation was not a contract, and therefore, Capital One was not bound by its terms. The Ninth Circuit found however that it was error for the District Court to dismiss Rubio’s TILA claims because Capital One failed to show that its APR disclosure in the solicitation was “in a reasonably understandable form and readily noticeable to the consumer.” Therefore, the Court reversed the trial court’s decision to dismiss the TILA claim, sending it back for further proceedings.

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Court Offers Guidance as to Requirements for Alleging Harm to Establish UCL Standing

The California Court of Appeal, in Nelson v. Pearson Ford Co., issued a lengthy 50-page opinion on July 15 addressing numerous issues, including violations of the Automobile Sales Finance Act (“ASFA”), the Unfair Competition Law (“UCL”), the Consumer Legal Remedies Act (“CLRA”), class treatment and the right to recover fees in class actions.

Most poignant for insurers were the portions of the opinion addressing the UCL claim, and more specifically, the named plaintiff’s standing to pursue his UCL claim.

Reginald Nelson (“Plaintiff”) decided to purchase a used vehicle from Pearson Ford (“Pearson”) and executed a sales contract to that effect. Because, at the time of purchase, Plaintiff lacked auto insurance, an insurance broker was summoned to the dealership and sold Plaintiff an auto policy. A premium of $250 was added to the vehicle’s price. 

One week after the parties had completed the agreement, Pearson had additional paperwork for Plaintiff to sign. The new paperwork rescinded the original contract and entered the parties into a new agreement. The parties backdated the second contract to the date they signed the original contract. As a result of changing interest rates between the time the first and second contracts were entered, the backdating resulted in Plaintiff having to pay an additional $27 finance charge. The second contract disclosed the total finance charge, but the additional $27 was not separately itemized. Additionally, the second contract improperly added the $250 insurance premium to the cash price of the vehicle, which caused Plaintiff to pay $30 in additional sales tax and financing charges on the insurance premium.

Plaintiff later filed a class action complaint seeking to establish two distinct classes (both of which would ultimately be certified): (1) a class regarding the backdating of financing agreements (the “backdating class”); and (2) the improper inclusion of the price of insurance into the price of the vehicle (the “insurance class”). 

Following a bench trial, the court found Pearson had violated the UCL with regard to the backdating class, granting injunctive relief and setting restitution in the amount of $50 per class member. 

For the insurance class, the court found that Pearson violated the ASFA and the UCL by failing to disclose the cost of insurance and adding the insurance cost to the cash price of the car. It also enjoined Pearson from adding the price of insurance to the cash price of a vehicle in the future. Following the entry of judgment, Pearson appealed on numerous grounds. 

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California Supreme Court Precludes Pass-On Defense in Clayton Act Claim and Finds Standing Under the UCL

The Supreme Court of California today issued its decision in Clayworth v. Pfizer, Inc., addressing issues raised under California’s antitrust statute, The Clayton Act, and California’s Unfair Competition Law (“UCL”). Under each statute, the Court rejected defenses raised by the defendants and reversed a summary judgment issued in their favor.

An array of retail pharmacies brought suit against pharmaceutical manufacturers over the defendants’ alleged price-fixing in the sale of brand-name pharmaceuticals in the United States, whereby the cost of such drugs sold in this country were artificially inflated. The manufacturers contended that the pharmacies were not damaged since they were able to pass along the forced overcharges to third party customers or their health insurance plans. In cross-motions for summary judgment, the manufacturers urged that the “pass-on defense” precluded the pharmacies’ claims under both the Clayton Act and the UCL. 

The trial court agreed with the manufacturers and held that the pass-on defense was available under the Clayton Act to show the pharmacies suffered no compensable damages and further demonstrated the lack of standing under the UCL since the pharmacies could not show any “lost money or property.”  After the Court of Appeal affirmed the ruling, the Supreme Court granted review.

The bulk of the Supreme Court’s decision addressed the Cartwright Act claim. After discussing the statutory language of both federal (i.e., the Sherman Act) and state antitrust law, and the development of the pass-on defense under each, the Court found that, unlike federal law, the Cartwright Act provides that indirect purchasers as well as direct purchasers may sue for price fixing. As a consequence, with the exception of a few situations not applicable in the case before it, antitrust violators may not assert as a defense that any illegal overcharges had been passed on by a direct purchaser plaintiff to indirect purchasers, and therefore the full measure of the overcharge is recoverable by the direct purchaser.  

In turning to the UCL claim, the issue was primarily one of standing. The Court concluded that the plaintiff pharmacies possessed standing even under the more restrictive standard established in 2004 by Proposition 64 since the pharmacies had “lost money or property as a result of the defendant’s unfair business practices,” with the lost money being the overcharges they had paid due to the price-fixing scheme. That the pharmacies may have passed along their increased costs to consumers and thus not be able to prove any right to restitution was beside the point, since the Court would not “conflate[] the issue of standing with the issue of the remedies to which a party may be entitled.” The same rule applied as to the defense of mitigation of damages – it is not a basis to extinguish standing. 

As for the issue of “remedies” under the UCL claim, and for which the pharmacies sought only restitution and injunctive relief, the Court avoided the issue of restitution and focused solely on the issue of injunctive relief, finding the asserted lack of monetary loss to be no obstacle to the clam for injunctive relief. Since there was standing, there was the right to pursue injunctive relief, and there was no need for the plaintiffs to have a viable claim for restitution in order to seek injunctive relief. The Court found that there is nothing in the UCL that “conditions a court’s authority to order injunctive relief on the need in a given case to also order restitution” because the “two are wholly independent remedies.” Since a finding that the pharmacies could pursue injunctive relief was sufficient to preclude summary judgment for the manufacturers, the Court expressed “no opinion . . . . [as to] whether the pharmacies may eventually be entitled to restitution.” 

Clayworth is but the first of several UCL cases pending before the California Supreme Court, as discussed in one of our prior blogs.

California Court of Appeal Opinions Uphold Class Settlements Over Claims of Objectors

In a pair of decisions published this month by two separate Districts of the California Court of Appeal, the appellate panels upheld class action settlements and rejected numerous claims asserted by objectors. Both cases demonstrate that, when a class action settlement is well-documented, and the trial court carefully considers the requisite factors, a settlement will be approved as fair, adequate and reasonable.

In Nordstrom Commissions Cases, the class plaintiffs sued Nordstrom in 2004 over its alleged improper policy of paying net sales commissions in violation of the California Labor Code (the actual net sales commissions plan had been approved in a prior class action settlement).  In 2009 the parties reached a settlement in which Nordstrom would pay money, provide merchandise vouchers, and make prospective changes to its calculation, payment and reporting of commissions. After preliminary approval of the settlement by the trial court, an objector contended the settlement was unfair, which objection the trial court found to lack merit. The objector appealed.

After confirming that the role of the appellate court is not to make any independent determination as to whether the settlement terms are fair, adequate and reasonable, but merely to ensure that the trial court acted within its broad discretion, the Court of Appeal for the Fourth Appellate District (Division Three) proceeded to address each of the assertions raised by the objector. The basic theory of the objector was that the plaintiffs' case was strong and not properly considered by the trial court in approving the settlement.

However, the appellate court found that the evidence as to the purported "willfulness" of Nordstrom in its alleged improper commission payment practices was subject to a good faith dispute since, among other things, Nordstrom paid the plaintiffs according to its written commission agreements, the payment plan had been approved in a prior class action settlement, and the Labor Commissioner had refused to find a violation in two different cases raising similar issues. The court also rejected the objector's claims that the trial court had not properly considered the issue of penalties under the Private Attorneys General Act of 2004 (Labor Code Section 2699) and that the settlement was partially funded by in-store merchandise coupons. On the latter claim, the court cited a number of recent appellate decisions where settlements involving coupons or merchandise vouchers were upheld.

In another case involving alleged improper wage practices and violation of the Labor Code, the Second Appellate District (Division Eight) reached the same conclusion that a class settlement was properly approved within the trial court's discretion in Munoz v. BCI Coca-Cola Bottling Company of Los Angeles.   There, the plaintiffs contended that the defendant has allegedly misclassified production supervisors and merchandising supervisors as exempt employees. After the trial court preliminarily approved that settlement, one person objected, and when the objection was overruled, he appealed the finding of fairness. While asserting a panoply of claims against the settlement, the gist of the objector's claim was that the parties had not provided the trial court with adequate information to make a determination of fairness.

Like the Nordstrom case, this case also involved a prior class action settlement against the defendant, which resolution was used by the parties in support of the current proposed settlement. As such, the appellate court easily found that the trial court had an understanding as to the amount in controversy and the realistic range of outcomes of the litigation, "despite the absence of a statement of the maximum value of all claims." 

As concerns the contention that the parties in this second class action against the defendant had not conducted adequate discovery, the court found that the prior and ample discovery in the first class action, raising the same issues, could be used by the trial court to find that the factual record had been sufficiently developed to satisfy the trial court that the release of the class members' claims was reasonable in light of the strengths and weakness of the case. As such, and after rejecting a number of other issues raised by he objector, the Court of Appeal found there was no abuse of discretion in the trial court's approval of the settlement.

Class action settlements inevitably result in claims by objectors, whether in the form of "professional" objectors or persons who legitimately believe the settlement reached between the parties was "unfair." So long as the parties, in reaching and documenting their settlement, provide the trial court with the requisite data to find that the settlement was fair, adequate and reasonable, it will be the rare case in which appellate review will second-guess the broad discretion provided to trial courts to resolve these types of lawsuits.

Imprecise Policy Language Results in Umbrella Policy Becoming Primary for Duty to Defend Purposes

On June 11, 2010, the California Court of Appeal for the Second Appellate District reissued its decision (following rehearing) in Legacy Vulcan v. Superior Court (Transport Insurance Company), and held that an umbrella insurer became a “primary umbrella” insurer and was obligated to defend its insured since no scheduled underlying insurance applied, and the $100,000 self-insured retention under the umbrella policy was applicable only to the insurer’s indemnity obligation. 

The decision, while providing a detailed analysis of the umbrella/excess policy issued by Transport, presents more of an isolated instance of an insurer not carefully limiting the scope of its defense obligation under a policy issued nearly 30 years ago, rather than an opinion providing any broad pronouncement that umbrella insurers are to provide a duty to defend from dollar one.

Vulcan was named in multiple lawsuits claiming environmental contamination and alleging damages occurring over a number of years, including when Transport’s Excess Catastrophe Liability Policy was in effect. Vulcan tendered the defense of the actions to several insurers, including Transport, but none of the insurers offered a defense. Vulcan paid for its own defense and settled the lawsuits. Transport filed a declaratory relief action against Vulcan to determine its rights and obligations under the policy.

The coverage action proceeded with the parties stipulating to resolve certain legal issues before trial, and many of the facts of the dispute (including the reasons why the underlying insurers did not provide a defense to Vulcan) did not make their way into the Court of Appeal’s decision. The trial court found that Transport had no duty to defend Vulcan until it established that the applicable underlying insurance had been exhausted and upon a showing that the claims were actually covered.  

In analyzing coverage under the Transport policy, the appellate court went into great detail examining the language used by Transport in its insuring agreements, limits of liability section, definitions, and conditions. The court held that the Transport policy provided both excess and umbrella coverage. With respect to the umbrella coverage portion, and based on the ambiguity of the policy’s use of the unqualified term “underlying insurance” in the insuring agreement, the court held that, under the facts of this case (where no primary or underlying insurer defended Vulcan), Transport’s umbrella coverage was primary umbrella defense coverage. 

Finding the umbrella coverage to be primary, the ordinary rules regarding a primary insurer’s duty to defend applied. As such, Transport was obligated to defend Vulcan regardless of the exhaustion of any underlying insurance and regardless of the provision for a $100,000 retained limit (which, in this case, was found to only apply to the duty to indemnify). Moreover, Vulcan did not need to establish that the claims were actually covered under the Transport policy to trigger the duty to defend, but merely show a potential for coverage. 

In its analysis, the court made clear that the result here was based on the policy language at issue. For example, the court observed that “the impact of a policy reference to a ‘self-insured retention’ or ‘retained limit’ on the duty to defend will depend on the language of a particular policy,” and it referenced cases where policy language expressly stated there was no duty to defend unless the retained limit was exhausted. 

This case therefore stands as another warning to insurers to be careful in drafting policy language, and this is especially true when it come to the duty to defend.

California Supreme Court Resolves Coverage Dispute Over Interplay Between Intentional Acts Exclusion and Severability Clause

Scott Minkler sued David Schwartz and David’s mother, Betty Schwartz, alleging that David, an adult, sexually molested Scott, who was then a minor. The complaint alleged several causes of action against David, including sexual battery and intentional infliction of emotional distress, along with a single cause of action for negligent supervision against Betty, based on allegations that David molested Scott in Betty’s home, that Betty knew her son was molesting Scott, but that Betty failed to take reasonable steps to stop her son from doing so. Safeco Insurance Company of America insured Betty under a number of homeowners policies, in which David was an additional insured. Relying on the intentional acts exclusion, Safeco denied coverage as to both David and Betty.  This insurance coverage issue eventually made its way to the California Supreme Court.

Last week, the Supreme Court issued its decision in Minkler v. Safeco Insurance Company of America (June 17, 2010).  The Court determined that, despite the policy’s exclusion for injury that was “expected or intended” by “an” insured, or was the foreseeable result of “an” insured’s intentional act, the policy’s severability-of-interests clause (which provides that “[t]his insurance applies separately to each insured”) created an ambiguity with respect to a co-insured who did not act intentionally such that coverage would be resolved in favor of the co-insured.

After reiterating the rules by which insurance policies are to be interpreted under California law, the Supreme Court framed the issue as follows:

The issue presented is whether this severability or “separate insurance” clause created ambiguity as to the scope of the exclusion for intentional acts by “an” insured, and if so, whether the ambiguity must be resolved in favor of an interpretation whereby the exclusion applied only to the insured who committed such acts. We conclude that the answer to both questions is yes.  

In so concluding that the policy provided coverage for Betty, the Court disposed of a number of arguments raised by Safeco (such as the holding would encourage “householders to turn a ‘blind eye’ to acts of sexual abuse taking place in their homes”) as well as finding that the history of the introduction of the severability clause into liability policies in the 1950s further supported the Court’s determination of ambiguity. 

Moreover, the Court recognized that courts throughout the country have split over the issue, with the majority “concluding that a severability clause does not alter the collective application of an exclusion for intentional, criminal, or fraudulent acts by ‘an’ or ‘any’ insured.” Despite these “greater number of cases,” the Court found that its holding would preserve the objectively reasonable expectations of the insured that there would be coverage so long as the insured’s own conduct did not fall within the intentional acts exclusion.

Finally, the Court also sought to downplay the breadth of its holding by noting that many insurers’ policies contain an explicit exclusion for claims arising from sexual molestation, or that Safeco could have avoided this uncertainty to begin with by modifying its severability clause to only address the available limits under the policy rather than create an ambiguity between that clause and the intentional acts exclusion.

Insurers File Motion to Dismiss Government's Medicare Reimbursement and Double Damages Claims from $300 Million Settlement

By David J. McMahon and Donielle Colich

On June 10, 2010, Defendant liability insurers for global manufacturing company Solutia, Inc. filed their Reply Brie in support of a motion to dismiss two counts in the complaint filed by the federal government in United States v. James Stricker, et al., Case No.CV-09-02423-KOB (“Stricker”). 

The Reply is the latest in a multitude of briefings filed with the United States District Court for the Northern District of Alabama in the Stricker litigation, which arises from the government’s complaint to recover Medicare conditional payments that were made to approximately 907 Medicare beneficiaries involved in a $300 million class action liability settlement (the “Abernathy Settlement”). 

In its Complaint, the government alleges that the insurers had an obligation under the Medicare Secondary Payer (“MSP”) Statute, 42 U.S.C. § 1395y(b)(2), to make primary payments for services provided to Medicare beneficiaries, for which Medicare had conditionally paid. The federal regulations implementing the MSP Statute, in particular 42 C.F.R. § 411.25, require settling parties, their counsel, and their insurers to notify Medicare of any settlement, judgment, award or other payment that was made when the case was resolved.

The government asserts that none of the parties to the Abernathy Settlement notified it of the settlement and failed to reimburse Medicare for conditional payments made on behalf of plaintiff beneficiaries. Two counts of the Complaint specifically seek reimbursement of Medicare’s conditional payments and double damages from the insurers, defined as “primary plans” under the MSP Statute, for their alleged failure to provide for primary payment or appropriate reimbursement of these conditional Medicare payments.

In support of their motion to dismiss, the insurers assert that the government failed to file suit within either of the potentially applicable three-year or six-year statutes of limitations. The insurers also dispute the government’s claims due to the fact that the government provided no specifics as to individual Plaintiff Medicare beneficiaries (i.e. the identity of beneficiaries, the physical injuries suffered, any medical treatments).

The Stricker lawsuit reinforces Medicare’s published statutory recovery rights and insurers potentially liability for reimbursement of conditional payments even where insurers have previously paid out the settlement proceeds. It also illustrates the importance of early case investigation as to potential plaintiff Medicare beneficiaries and serves as a warning to counsel and insurance carriers that the government’s lenient collection efforts under the MSP Statute are a thing of the past. If parties fail to account for Medicare’s interests, they may lose their right to appeal the conditional payment amount, and the government may be entitled to seek double damages from insurers.

Putative Class Action Lawsuits May Remain in Federal Court Even After Court Denies Class Certification

In United Steel et al. v. Shell Oil Co., et al., the Ninth Circuit Court of Appeals held that putative class action lawsuits properly removed to federal court under the Class Action Fairness Act of 2005 ("CAFA") [28 USC 1332(d), 1453 ] may remain in federal court even after the court denies class certification.

If the putative class action was properly removed to begin with, the subsequent denial of Rule 23 class certification does not divest the district court of jurisdiction. The case remains removed and is not to be remanded to state court."
In construing CAFA, the Ninth Circuit reasoned that if:
Congress intended that a properly removed class action be remanded if a class is not eventually certified, it could have said so." 
The Ninth Circuit joins the Seventh and Eleventh Circuits on this point.

Use of Credit-Scoring Factors in the Pricing of Homeowner's Insurance Under the FHA and the McCarran-Ferguson Act

by Gregory O. Eisenreich and Marina Karvelas

In a putative class action, Ojo v. Farmers Group, Inc., et al., Case No. 06-55522 (9th Cir. April 9, 2010), an en banc panel of the Ninth Circuit Court of Appeals decided a case where the Plaintiff alleged that the use of credit-scoring factors in the pricing of homeowner's insurance in Texas had a disparate impact on minorities in violation of the federal Fair Housing Act ("FHA"), 42 U.S.C. sections 3601-19.

The Ninth Circuit held that the FHA prohibits discrimination in the denial and pricing of homeowner's insurance. In doing so, it joined the Sixth and Seventh Circuits and disagreed with the Fourth Circuit on the issue of whether the FHA applied to homeowner's insurance.

It should be noted that the Court did not reach the issue of whether the use of credit-scoring factors actually violates the FHA, noting that there could be a "legally sufficient, nondiscriminatory reason" causing a disparate impact and that the defendant is also entitled to rebut the facts of an alleged prima facie case.  

After addressing whether the FHA applied to homeowner's insurance, the Court held that the McCarran-Ferguson Act may "reverse-preempt" claims under the FHA. However, the Ninth Circuit did not decide the critical question.

[B]ecause the issue's resolution will have pervasive implications for future claims brought against Texas insurers, we have concluded that the appropriate course of action is to certify the issue to the Supreme Court of Texas.

Under the McCarran-Ferguson Act, state law preempts a federal statute if:

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California Confirms Insurer's Right to Intervene in Underlying Action to Protect Its Own Interests

 

In Gray v. Begley, (filed March 22, 2010), the Second Appellate District, Division Three (Justice Croskey), confirmed that an insurer defending its insured may intervene in the underlying action to protect its interests against a private settlement between the insured and the injured party. This right exists even if the insurer has reserved its rights to deny coverage later.

Dicta in prior case law suggested that, in reservation of rights situations, insurers did not have a sufficient interest to justify intervention. The Begley decision, however, confirms that the right to intervene is no different in a situation where the insurer has admitted coverage than a situation where the insurer defends under a reservation of rights.

[T]he key factor in determining whether an insurer is bound by a settlement reached without the insurer’s participation is whether the insurer provided the insured with a defense, not whether the insurer denied coverage.’ It therefore follows that an insurer providing a defense, even though subject to a reservation of rights, may intervene in the action when the insured attempts to settle the case to the potential detriment of the insurer.” Begley at pp. *20-22, citing Safeco Ins. Co. v. Superior Court, 71 Cal. App. 4th 782, 785, 787 (1999).

The necessity for such a rule was evident from the facts of the particular case.

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Los Angeles Jury Finds Health Insurer is Required to Pay for Out-of-State Liver Transplant

With the backdrop of the raging battle over healthcare reform, a Los Angeles jury rendered on Monday a verdict in favor of an insured against Anthem Blue Cross arising out of the health insurer’s refusal to provide coverage for an out-of-state liver transplant. The case, Ephram Nehme v. Wellpoint, Inc.; Blue Cross of California d/b/a/ Anthem Blue Cross, initially filed on August 14, 2008, has been closely followed in the legal and health insurance communities.

As reported in the Los Angeles Times, the jury found, by a vote of 10-2, that Anthem Blue Cross had breached its contract by refusing to pay for the cost of the out-of-state transplant operation, and by a vote of 9-3 that Anthem Blue Cross had acted in bad faith. Anthem Blue Cross stated in the article that its contract provides that transplants must be preformed in California and that it had approved Nehme for a transplant at UCLA Medical Center once his name came up on the UCLA waiting list. The same article stated that the jury awarded Nehme $206,000 for the cost of the operation, and that he would also be able to recoup his legal fees. (Under California law, pursuant to the decision in Brandt v. Superior Court, upon a finding that an insurer has acted in bad faith, the insured is able to seek to recover only those attorney’s fees incurred to obtain the contract benefits, but not the fees incurred to show bad faith.) The jury did not, however, award any punitive damages against Anthem Blue Cross.

The trial court proceedings are not yet concluded, with further post-trial motions to be filed, and it is unknown whether Anthem Blue Cross will appeal the jury’s verdict.

Unfair Competition Law Cases Still Occupy Numerous Spaces on the California Supreme Court's Docket

 

In November 2004, the voters of California passed Proposition 64, which was intended to rein in certain abuses in and bring some clarity to the Unfair Competition Law, California Business & Professions Code sections 17200 et. seq. (“the UCL”). Five years later, and after a number of decisions issued by the California Supreme Court construing the changes made by Prop 64, that clarity is still elusive.

Take, for example, the Court’s May 18, 2009 decision In re Tobacco II Cases, 46 Cal. 4th 298 (2009), which concluded that the new standing requirements for a UCL claim created by Prop 64 only require the named plaintiff/class representative to establish standing and not absent class members. In the months since the issuance of Tobacco II, a number of decisions have considered whether the Court’s conclusion as to “standing” applies to a trial court’s determination when it comes to considering the issue of “commonality” (i.e., whether common issues predominate over individual issues) for purposes of a class certification motion. Our firm’s blogs have reported on two intermediate appellate cases that found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’”  See Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009); Kaldenbach v. Mutual of Omaha Life Insurance Co., 178 Cal. App. 4th 830 (2009). 

Cohen is now the subject of a Petition for Review pending before the Supreme Court, along with several requests for depublication of the intermediate court’s opinion. The court is expected to decide whether the case is to be accepted for review or depublished by March 1, 2010.

But Cohen is just one case on the Supreme Court’s plate. The following are cases now actual pending before the Supreme Court that address issues relating to the UCL, along with the date the Court accepted review and the issue(s) presented on the Court’s website:

Loeffler v. Target Corporation, Case No. S173972 (June 19, 2009) 

Does article XIII, section 32 of the California Constitution or Revenue and Taxation Code section 6932 bar a consumer from filing a lawsuit against a retailer under the Unfair Competition Law (Bus. & Prof. Code sections 17200 et seq.) or the Consumers Legal Remedies Act (Civ. Code, section 1750 et seq.) alleging that the retailer charged sales tax on transactions that were not taxable?  [The Court also issued a “grant and hold” on November 19, 2009 in Yabsley v. Cingular Wireless, Case No. S173972, pending consideration and disposition of a related issue in Loeffler v. Target Corp.]

Clark v. Superior Court (National Western Life Insurance Co.), Case No. S174229 (September 9, 2009)

Is Civil Code section 3345, which permits an enhanced award of up to three times the amount of a fine, civil penalty, or “any other remedy the purpose or effect of which is to punish or deter” in actions brought by or on behalf of senior citizens or disabled persons seeking to “redress unfair or deceptive acts or practices or unfair methods of competition,” applicable in an action brought by senior citizens seeking restitution under the Unfair Competition Law?

Kwikset Corp. v. Superior Court, Case No. S171845 (June 10, 2009)

Does a plaintiff's allegation that he purchased a product in reliance on the product label's misrepresentation about a characteristic of the product satisfy the requirement for standing under the Unfair Competition Law that the plaintiff allege a loss of money or property, or is such a plaintiff unable to allege the required loss of money or property because he obtained the benefit of his bargain by receiving the product in exchange for the payment?

Pineda v. Bank of America, Case No. S170758 (April 22, 2009)

Can penalties under Labor Code section 203 (late payment of final wages) be recovered as restitution in an Unfair Competition Law action?

Sullivan v. Oracle Corp., Case No. S170577 (April 22, 2009)

Request that the Supreme Court deicide questions of California law presented in a matter pending in the United States Court of Appeals for the Ninth Circuit.  (Sullivan v. Oracle Corp., 547 F.3d 1177 (9th Cir. 2008) (now withdrawn))  The questions presented are: (1) Does the California Labor Code 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? (2) Does the UCL apply to the overtime work described in question one? (3) Does the UCL apply to overtime work performed outside of California for a California-based employer by out-of-state plaintiffs in the circumstances of this case if the employer failed to comply with the overtime provisions of the federal Fair Labor Standards Act (29 U.S.C. section 207 et seq.)?

Clayworth v. Pfizer, Inc., Case No. S166435 (November 19, 2008)

This case presents the following issues: (1) When plaintiffs pay overcharges on goods or services as a result of the anticompetitive conduct of defendant sellers but recover the overcharges through increased prices at which the goods or services are sold to end users, may defendants assert a “pass-on” defense and argue that plaintiffs were not injured because they did not suffer financial loss as a result of the anticompetitive conduct? (2) Is restitution available under the Unfair Competition Law to plaintiffs who recovered from third persons the overcharges paid to defendants? (3) When plaintiffs recover from third persons the overcharges paid to defendants, have they suffered actual injury and lost money or property for purposes of establishing standing under the Unfair Competition Law, as amended by Proposition 64?

Court of Appeal Reaffirms Need for Insurers to Notify Insureds of Contractual Limitation Periods and to Re-Check the Insured's Application Statements

California Insurance Code of Regulations, specifically 10 CCR § 2695.4, requires that an insurer notify its insureds of any contractual time limitation after the insured or beneficiary submits his or her claim. In the California Court of Appeal’s January 21, 2010 decision in Superior Dispatch v. Insurance Corporation of New York, the court found the failure to provide the notice required by § 2695.4 results in the insurer’s inability to rely on the contractual limitation provision in precluding litigation. 

In legal parlance, the appellate court found that the insurer was “equitably estopped” from benefiting from the contractual limitation provision. Being “estopped” from doing something is the same as being barred or blocked from doing something. When someone or an entity is equitably estopped from doing something, they are being barred or blocked from doing something based upon traditional notions of fairness or justice. 

Based on prior precedents, the court held that enforcing compliance with § 2695.4 in a way to negate the contractual limitation provision (despite how conspicuous the term was in the policy) was needed to “remedy the trap for the unwary.” This is especially troubling for insurers who are not intending to “trap” anyone, but expect that the policy will be enforced as a contract between the insurer and the insured (i.e., an insurer who expects the terms of policies that were agreed to by both parties to be enforced). Thus a warning to insurers is necessary: Just because the insured agrees to a term by purchasing the policy and has the opportunity to read the entire policy, the insurer cannot expect that all the terms will be enforced by California courts. In this case, the insurer must go beyond what is required in the policy and provide specific notice of the provision in the policy, despite the insured’s ability to read it for himself. The court went further in holding that the insurer needs to still provide notice of the contractual limitation even when the insurer knows that the insured is represented by counsel. 

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California Court of Appeal Upholds Insurer's Rescission of Health Insurance Policy

In Nieto v. Blue Shield of California Life & Health Insurance Company (issued January 19, 2010), the California Court of Appeal found that an insurer properly rescinded an insured’s individual health insurance policy based on medical history misrepresentations contained in the application submitted to the insurer. The court also concluded that the insurer had no statutory duty to physically attach the application to the policy or to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of the insured’s representations before it issued the policy. The Nieto decision is addressed in Barger & Wolen’s Life, Health and Disability Insurance Law blog.

Federal Court Denies Class Certification Motion Involving Deferred Annuities

The United States District Court for the Southern District of California denied certification to a purported class of purchasers of deferred annuities. In a decision issued earlier today by United States District Judge Janis Sammartino in In re National Western Life Insurance Deferred Annuities Litigation, Case No. 05-CV-1018-JLS (JSP), the court denied certification as to a nationwide class alleging RICO violations and a California state class alleging multiple statutory violations, including claims under the Unfair Competition Law (California Business & Professions Code sections 17200 et seq.).

Plaintiffs claimed that National Western “orchestrated a nationwide scheme to target senior citizens and lure them into purchasing its high cost and illiquid deferred annuities,” basing their claim on three alleged misrepresentations and/or omissions – the failure to disclose the high commissions paid to agents, the presence of an illusory bonus on premiums paid, and the use of an increasing asset fee, each of which impacted the interest credited on the annuities. Focusing solely on the commonality and typicality requirements to establish a viable class, the court found that such requirements were lacking. For example, the court emphasized that none of the class representatives possessed an annuity with an asset fee that was increased. Moreover, the court found plaintiffs had not met their burden in demonstrating that all of National Western’s more than twenty annuity products contained the alleged same misrepresentations and omitted the same information.  While the court did observe that National Western used standardized forms, they were not identical, and the evidence presented by plaintiffs failed to support their contention that those materials contained the same alleged misrepresentations and omissions.

The court denied the motion for class certification without prejudice and also explained that its ruling did not address any of the numerous other arguments advanced by the parties.

Larry Golub and Kent Keller of Barger & Wolen were co-counsel for National Western Life Insurance Company.

California Supreme Court Ruling Reaffirms Sacredness of Attorney-Client Communications in Refusing to Allow Disclosure of Opinion Letter

In Costco Wholesale Corporation v. Superior Court, Costco had retained a law firm to provide it with legal advice regarding whether certain Costco warehouse managers in California were exempt from California’s wage and overtime laws. As part of the analysis, Costco’s attorney interviewed two warehouse managers. Afterward, the attorney generated an opinion letter.

Several years later, plaintiffs filed an action claiming that Costco had misclassified some of its managers as exempt employees, and thus did not pay them overtime to which they were otherwise entitled. In the course of discovery, plaintiffs sought to obtain a copy of the attorney’s opinion letter. Costco resisted producing the letter on the basis that it was a privileged attorney-client communication. The plaintiffs disagreed, contending that the letter was not privileged because it contained non-privileged factual information regarding the managers’ job duties that had been obtained during the course of the attorney’s interview of the managers.

The trial court ordered a discovery referee to review the opinion letter in camera to determine whether the attorney-client privilege and/or attorney work product doctrine should prevent its disclosure.

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California Supreme Court Adopts 1:1 Ratio for Punitive Damages

On November 30, 2009, the California Supreme Court held in Roby v. McKesson Corporation, et al. that a punitive damage to compensatory damage ratio of one-to-one is the U.S. Constitutional maximum permissible under the Due Process Clause where the compensatory damage award is substantial.

Plaintiff Charlene Roby brought wrongful discharge and harassment claims against her former employer, McKesson Corporation ("McKesson"). The jury awarded her $3,511,000 in compensatory damages and $15 million in punitive damages. After finding that the appropriate compensatory award was approximately $1,900,000, the Supreme Court turned to whether the punitive damage award which had already been reduced to $2 million by the Court of Appeal was excessive.

The Court first analyzed the reprehensibility of McKesson's conduct through the following factors:

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Second District Court of Appeal Confirms That Plaintiff Must Prove Reliance When Bringing Misrepresentation Claim Under UCL, FAL and CLRA

 

In the recently issued decision Princess Cruise Lines, LTD v. Superior Court, plaintiffs sued Princess Cruise Lines, Ltd. (“Princess”) over charges added to the price of shore excursions taken during a cruise. They alleged causes of action for violation of California’s Unfair Competition Law (UCL), False Advertising Law (FAL), Consumers Legal Remedies Act (CLRA) and common law fraud and negligent misrepresentation.

Princess moved for summary judgment and summary adjudication. The trial court granted summary adjudication on the fraud and negligent misrepresentation claims because plaintiffs could not show they relied on Princess’ alleged misrepresentations. It denied summary judgment because it concluded that on the UCL, FAL and CLRA causes of action, plaintiffs did not have to show that they relied on Princess’ alleged misrepresentations.

Princess took a writ of mandate to the Court of Appeal. Citing to the recent California Supreme Court decision in In Re Tobacco II Cases, the Court of Appeal confirmed that

a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions.

Relying further on language from Tobacco II, the Court of Appeal specified that reliance must be proven only in situations where a UCL action is based on a fraud theory involving false advertising and misrepresentations to consumers. It further held that the Tobacco II’s analysis of the phrase “as a result” in the UCL was equally applicable to identical language in the CLRA statute.

 

Class Certification Can Properly be Denied When Individual Showings of Damages Predominate

A common perception in class action litigation is that, where damages are individualized, this will not usually mean that a class action cannot be certified. However, in certain cases, where individualized questions of damages exist – and indeed predominate over one or more common issues – a trial court may deny class certification and that denial should be upheld on appeal. The recent decision in Evans v. Lasco Bathware, Inc. presents such a case.

In Evans, the plaintiff brought suit against Lasco claiming that the shower pans that had been installed in thousands of residential showers were defectively designed, resulting in water leakage and consequential damages to adjacent components of the homes’ shower system. The plaintiff sought to certify a class alleging claims for strict products liability and negligence, and asserted that its expert had concluded that the shower pan design was defective (a common issue) and that damage could be resolved by calculating some formula to estimate the average cost to replace the shower pan with a new generation of shower pan and thereby avoid the need for class members to submit the individualized damage estimates.

The trial court denied class certification, holding that the need for individualized proof of the amount of damages for removing and replacing the shower pans predominated over the common questions. The Court of Appeal affirmed, explaining that while

a trial court has discretion to permit a class action to proceed where the damages recoverable by the class must necessarily be based on estimations, the trial court equally has discretion to deny certification when it concludes the fact and extent of each member’s injury requires individualized inquiries that defeat predominance.

On this basis, it asserted that the trial court did not abuse its discretion in declining to certify the class as to common issues of liability and causation since those issues required individualized proof from each class member.

 

California Appellate Court Clarifies Issues Raised in Tobacco II

A California Court of Appeal decision published on October 28, 2009, analyzes whether UCL “standing” rules announced by the California Supreme Court in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), carry over when a trial court considers the requisite elements to certify a class action. The answer, at least from the Eighth Appellate District, is that they do not. 

In Cohen v. DIRECTV, Inc., the plaintiff sued the satellite television company under both the Unfair Competition Law or “UCL” (Business & Professions Code sections 17200 et seq.) and the Consumers Legal Remedies Act or “CLRA” (Civil Code sections 1750 et seq.), claiming that the company falsely advertised the quality of the High Definition (“HD”) resolution that it was transmitting to its customers. Cohen sought to certify a nationwide class. In opposition to a motion for class certification, DIRECTV presented a number of declarations from its customers that explained that their individual decisions to purchase the HD upgraded system were not based on seeing any advertising or promotional materials from the company, but rather on word of mouth, lower prices, or just because they bought an HDTV. On those facts, the trial court denied certification, finding that common legal and factual issues did not predominate.

On appeal, the court first found that no common legal issues predominated, agreeing with the trial court that the subscribers’ legal rights would vary from state to state and that subscribers outside of California may not be protected by the UCL or the CLRA. It also rejected the plaintiff’s attempt to redefine the class to include only California residents, reasoning that, even with a California-only class, plaintiff still could not show that common factual issues would predominate over individual factual issues.

As for whether common issues predominated, the court concluded that there were myriad reasons why subscribers had purchased the HD upgrade that were far removed from the alleged misleading advertisements as to resolution of the HD transmission. More particularly, the court found commonality lacking since actual reliance would need to be shown for an award of damages under the CLRA and for restitution/injunctive relief under the UCL. As for the decision in Tobacco II, the court explained that the Supreme Court in that case had been concerned with the issue of standing under the UCL and that, in the context of standing, only the class representative needed to satisfy the requirement and that there was no need for the class members to show actual reliance.

However, at the time of considering class certification, the Cohen court found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’” Rather, at the time of considering class certification, the trial court was concerned that the UCL and CLRA claims alleged by plaintiff and the other class members “would involve factual questions associated with their reliance on DIRECTV’s alleged false representation,” which was a proper criterion to consider for commonality – “even after Tobacco II.”

Cohen is the second case published last week that affirmed the denial of class certification of a UCL claim and addressed the impact, or, more correctly, the lack of impact, of the decision in Tobacco II. The other decision is Kaldenbach v. Mutual of Omaha et al., published October 26, 2009, a decision in which Barger & Wolen represented the defendant, and is discussed in the Life, Health and Disability Insurance Law blog.

Court of Appeal Hands UCL Win to Plaintiffs, Shrinks Impact of Moradi-Shalal

A recent ruling by the California Court of Appeal in a UCL action will likely lead to a showdown in the California Supreme Court over the reach of Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287 (1988), the ruling that barred private actions seeking to enforce California’s Unfair Insurance Practices Act, namely, Insurance Code Section 790.03, et seq. (“Section 790.03”). 

For years plaintiffs’ lawyers and insurers have grappled over the question of whether causes of action for violation of California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or “UCL”) may allege conduct that violates Section 790.03. Insurers have generally prevailed in demonstrating that to allow a UCL suit to include thinly-disguised Section 790.03 violations would be an impermissible circumvention or end run around Moradi-Shalal. The California Court of Appeal supported the insurers’ position on this issue in Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004).

Now, the Fourth Appellate District, in Zhang v. Superior Court (October 29, 2009), has rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact a plaintiff asserts what appear to be violations of Section 790.03 is not necessarily an end run around Moradi-Shalal.

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New Decision on Arbitrators' Authority

Recent Barger & Wolen Victory Answers Who Decides What to Do After Hall Street

by Evan L. Smoak and Alison J. Shilling

In March 2008, the United States Supreme Court held that parties may not contractually expand the scope of judicial review to include “errors of law.” Hall Street Assocs., LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008). Therefore, the Supreme Court declined to enforce an arbitration clause provision that allowed judicial review of an arbitrator’s errors of law. 

In the wake of Hall Street, parties have disputed whether an “error of law” provision in an arbitration clause invalidates the entire arbitration agreement, and whether such a dispute should be decided by the courts or by arbitrators.

A Barger & Wolen victory this month in a New York appellate court has answered who should decide the issue. See Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, __, N.Y.S.2d. __, No. 602934/08, 2009 WL 3255942 (1st Dep’t Oct. 13, 2009). That question is for the arbitrators where the arbitration clause incorporates AAA or similar rules.

In Life Receivables, the arbitration clause contained an “errors of law” provision. The appellants asked the court to enjoin pending arbitrations, arguing that Hall Street invalidated the arbitration clause. The motion court refused to enjoin the arbitrations, and the appellate court affirmed. The arbitration clause at issue provided for arbitration of all disputes and incorporated the AAA rules by reference. Noting that the AAA rules authorize arbitrators to determine the “existence, scope or validity” of an arbitration agreement, the appellate court held that the arbitrators would determine what to do in light of Hall Street, even though that question is usually for the court:

Although the question of arbitrability is generally an issue for judicial determination, when the parties’ agreement specifically incorporates by reference the AAA rules, which provide that the tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement, and employs language referring all disputes to arbitration, courts will leave the question of arbitrability to the arbitrators. Id. (internal citations omitted).

As a result, the appellate court ordered that the disputes return to arbitration, as Barger & Wolen’s client had argued.

For additional information about this decision, or the Hall Street arguments considered by the court, please contact Steven Anderson (sanderson@bargerwolen.com) or Evan Smoak (esmoak@bargerwolen.com) in Barger & Wolen’s New York office (212-557-2800).

Staying an Insurer's Declaratory Relief Action - the Rules Clarified

A recent decision issued by the California Court of Appeal, Second Appellate District, analyzed under what circumstances a liability insurer’s declaratory relief action seeking to withdraw from the duty to defend an underlying lawsuit may be stayed – or allowed to proceed. 

In Great American Insurance Company v. Superior Court (Angeles Chemical Company, Inc.), issued October 9, 2009, the appellate court remanded the case back down to the trial court to re-evaluate whether the trial court had properly stayed the insurer’s declaratory relief action. In so doing, and in a case where there was no overlapping factual issues between the underlying action and the declaratory relief coverage action, the trial court was directed to exercise its discretion and balance the potential prejudice to both the insured and the insurer.

The underlying case involved a complex environmental claim against a number of insureds covered under a general liability policy issued by Great American. After settling a portion of the case and claiming that its $500,000 policy limits were exhausted, Great American sought to extricate itself from any further obligation to defend the insureds by bringing a declaratory relief action. The insureds moved to stay the declaratory relief action, claiming that there were factual issues that overlapped between the underlying action and the declaratory relief coverage action, such that trying the declaratory relief action would prejudice the insured’s rights in the underlying action. The trial court found the potential for some overlap and therefore issued a stay.

Great American filed a writ petition and the appellate court requested briefing on the propriety of the stay order. In analyzing three claims of “overlapping factual issues” asserted by the insureds, the appellate court found that two of those issues would not overlap between the underlying and declaratory relief actions, and that the third issue, involving some as-of-yet-unfiled bad faith claim, was premature, and thus the trial court had erred in staying the coverage action due to “overlapping factual issues.”

That did not end the dispute, however, as the appellate court then explained that even if “there is no such factual overlap and the declaratory relief action can be resolved on legal issues or factual issues unrelated to the issues in the underlying action, the question as to whether to stay the declaratory relief action is a matter entrusted to the trial court’s discretion,” and in “exercising such discretion, however, the trial court should consider the possibility of prejudice to both parties.” (Emphasis by court.) The court then set forth the three possible types of potential prejudice that could exist for an insured in having to fight a “two-front” war and the possible prejudice to an insurer in having to continue to pay defense costs indefinitely in a case where it no longer has any defense obligation.

Since the trial court had only issued its stay order on the factual overlap issue and not made any determination as to the balancing of possible prejudice to the insured and insurer, the appellate court remanded the case back to the trial court to exercise its discretion and perform the requisite balancing of prejudices. The appellate court also provided the trial court with its observations as to certain undisputed facts that may assist the trial court in making its determination.

This case presents an excellent primer on the subject of when an insurer’s declaratory relief action is to be stayed pending the resolution of an underlying liability lawsuit and when an insurer is to be allowed to attempt to show when its declaratory relief claim may proceed to determine if any duty to defend still exists.

Ninth Circuit Overrules Denial of Class Certification Ruling in Annuity Litigation, Adopting a De Novo Standard of Review

On August 28, the Ninth Circuit Court of Appeals issued a decision that found the Hawaii District Court had erred in denying class certification in a case involving the sale of annuities to senior citizens. While expressing no opinion as to the merits of the case, the Court of Appeals concluded that the class in Yokoyama v. Midland National Life Insurance Company should have been certified.

According to the Ninth Circuit, the plaintiffs in Yokoyama limited their claim to one that specifically targeted the misrepresentations made by Midland National in its brochures that promoted the annuities as appropriate for seniors. (No actual brochure language is quoted in the case.) Significantly, the claim was alleged solely under the Hawaii Deceptive Practices Act (“DPA”), which appears to be similar to a claim under the Unfair Competition Law in California. 

The District Court’s opinion issued in 2007 found that each plaintiff would have to show subjective, individualized reliance on deceptive practices related to each plaintiff’s purchase of an annuity, and thus class certification was denied. In contrast, the Ninth Circuit found that the District Court had erred in denying class certification, based on the fact that “this action has been narrowly tailored to rely only on Hawaii law,” that the DPA only requires an objective test to determine reliance, and that the plaintiffs were not basing their claim on the individual solicitations by agents.

The Ninth Circuit concluded: “Accordingly, there is no reason to look at the circumstances of each individual purchase in this case, because the allegations of the complaint are narrowly focused on allegedly deceptive provisions of Midland’s own marketing brochures, and the fact-finder need only determine whether those brochures were capable of misleading a reasonable consumer.” 

In addition, the Ninth Circuit opinion also rejected Midland National’s argument (and the District Court’s holding) that the potential existence of individualized damage assessments made the action unsuitable for class treatment. The Court of Appeals explained that “[in] this circuit, however, damage calculations alone cannot defeat certification.”

Much of the Yokohama decision is focused on the standard of review for a district court’s ruling as to certification, with the Ninth Circuit announcing that the standard of review is de novo, rather than the accepted abuse of discretion standard typically used in reviewing class certification rulings on appeal, at least in situations where the underlying issue is purely one of law.  On this point, however, there was a split among the three-judge panel. 

The third judge on the panel forcefully rejected this de novo standard and observed that it is “an assault on Ninth Circuit precedent.” The Judge concluded his separate opinion by advising that it “is an en banc panel who should make this determination to depart from longstanding Circuit precedent, not two judges who would make the standard of review less deferential.” The third Judge nevertheless concurred in the Court’s ultimate conclusion that the denial of class certification was to be reversed even under the de novo standard. Whether Midland National will seek en banc review in the case is presently unknown.

Ultimately, the Yokoyama opinion sanctions that, if plaintiff’s counsel in a case can craft the claims asserted against the defendant in a narrow manner so as to avoid individual variance among the class members, then even in a situation where class certification would seem not to be appropriate due to the inherent individualized issues, certification may nevertheless be permitted on that narrowed claim.  

California Court of Appeal Issues Ruling on Class Certification: Conclusory Class Allegations Are Defeated

The pen is mightier than the sword, and a variation on that theme – the declaration is mightier than conclusory class action allegations – has just been embraced by the Fourth District California Court of Appeal in the case of Ali v. USA Cab Ltd. (August 24, 2009).

In Ali a putative class of drivers who leased taxis from USA Cab claimed the company wrongfully classified the drivers as independent contractors rather than employees.  As a result, plaintiffs claimed, USA Cab improperly withheld workers’ compensation insurance, minimum wages and meal/rest breaks.  Although the complaint asserted the drivers assumed no risk and provided no tools, USA Cab attacked plaintiffs’ motion for class certification by filing declarations showing the drivers were not subject to USA Cab’s control, that the drivers provided their own maps, cell phones, computers and GPS systems, and that they paid for their own advertising and business cards. 

The use of dozens of drivers’ declarations proved to be a powerful weapon against plaintiffs’ motion for class certification.  The trial court found common issues did not predominate, as putative class members presented a vast variety of factual circumstances not susceptible to class resolution.  Because proof of liability as to a sampling of class members would not establish proof of liability as to the class, the Court of Appeal affirmed the trial court’s denial of the certification motion.

The Court of Appeal also held the suit failed the superiority test, concluding plaintiffs failed to demonstrate class treatment would be superior to individual actions, because the putative class action would be “extremely difficult to manage.”  The opinion found that even if judgment were to be rendered for the class, the need to litigate each member’s right to recover would eliminate any efficiencies resulting from the class mechanism.

The lesson of the Ali case is clear:  The notion that common issues predominate is easy to assert, but if declarations can disprove commonality, they can be a devastating weapon in defeating a putative class action. 

California Court Confirms Application of Common Interest Doctrine: Joint Defense Agreements Do Not Waive Attorney-Client Privilege

In an opinion issued yesterday, Meza v. H. Muehlstein & Co., the Second District Court of Appeal confirmed that defense counsel who represent different defendants in a civil case can share information, strategy, and protected information with one another, without the risk of waiving attorney-client privilege, so long as they are all working toward a common interest.

The "Common Interest Doctrine" question came before the Second District due to an interesting, albeit unusual, factual/procedural situation.  A single plaintiff named 17 different defendants in one action for exposure to dangerous chemicals.  One of those defendants was Jack's Plastics, who was represented by an attorney named Brett Drouet.  The trial court in that action entered judgment in defendants' favor.  The plaintiff appealed.  While the case was on appeal, Mr. Drouet left his firm that was representing Jack's Plastics and joined the firm that was representing the plaintiff in the underlying action.  In other words, one of the defendant's attorneys was now employed by the plaintiff's attorney, while the appeal was still pending.  Nothing would have likely resulted if the Court of Appeal had upheld the judgment in favor of the defendants in the underlying case.   However, the Court of Appeal vacated the judgment in favor of the defendants and the case was back in front of the trial court.  Upon learning that one of the former defense attorneys was now working at the firm representing the plaintiff, one of the defendants filed a motion to disqualify the plaintiff's firm from the case (i.e., if granted, the plaintiff would need to get new counsel).  The motion was based upon the theory that the information disclosed to the former defense counsel needed to be protected from disclosure to plaintiff's counsel.

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Appellate Court Finds Insured's Failure to Allege the Actual Theory of Liability on Which the Trial Court Based Its Judgment Requires Reversal of Bad Faith Judgment

In a lengthy decision issued by the California Court of Appeal, Fourth Appellate District, and one that examined and summarized a whole host of liability insurance issues (including an insurer’s duty to defend, what constitutes “unreasonable” conduct for “bad faith” purposes, how changes in the law impact the issue of bad faith, and the ability of an insurer to recoup defense costs under a reservation of rights), the court reversed an $11 million judgment against an insurer and then ruled in favor of the insurer.

Griffin Dewatering Corp. v. Northern Ins. Co. of New York, issued July 31, 2009, involved a groundwater pumping and control company that purchased a CGL policy from Northern Insurance Company. In exchange for renewing that coverage, Northern orally promised during a meeting in 1997 that it would not rely on the policy’s total pollution exclusion with respect to “future” claims involving sewage. There had been a prior claim involving a faulty sewer bypass constructed by the insured that the insurer had denied. When there was a future claim that related to the prior claim, the insurer denied coverage again, and one of the questions was whether this future claim was covered by the oral promise. (The insurer shortly thereafter accepted coverage for the claim, but that did not short circuit the insured’s bad faith lawsuit.)

The insured prevailed at trial against the insurer based on the oral promise, and it obtained a judgment of $11 million, mostly in bad faith tort damages. The insurer appealed and prevailed.  The Court of Appeal based its decision in large part on the failure of insured to have actually pled in its complaint a cause of action based on the oral promise through which it had obtained the judgment.  Instead, the complaint was predicated on the straightforward coverage question as to whether the insurer had misconstrued the language of the exclusion provision so as to unreasonably deny coverage.  Moreover, the complaint had never been amended to include any “stand alone” cause of action based on the oral promise, and counsel for the insured conceded that it was only going to use the promise as a “concession” that the insurer’s “coverage position had been unreasonable all along.”

The Court of Appeal’s decision, while very detailed, makes for interesting reading as it effectively distills current California law as to a number of bad faith and duty to defend topics.   Further, the decision is interspersed with humor and a search for the real story, conceding in its opening words, “At first we did not know what to make of this case.”  By the end of the decision, the court had found the answer.  

 

California Supreme Court Finds No Duty to Defend Insured for Assault and Battery Claim Where Injured Party Alleged Insured Acted Under an Unreasonable Belief in the Need for Self-Defense

In a long-anticipated decision, the California Supreme Court issued its August 3, 2009 decision in Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, finding that the contention (by the injured party) that the insured acted in self-defense when sued for assault and battery did not constitute an “accident” within the meaning of a liability policy and thus the insurer had no duty to defend the action. The decision is also noteworthy as it distinguished a number of prior cases, including Supreme Court cases, that had touched on similar issues.

Delgado arose out of altercation where the insured under a homeowner’s policy issued by Interinsurance Exchange of the Automobile Club of Southern California “hit and kicked 17-year old Jonathan Delgado.” Delgado sued the insured, setting forth two causes of action, one for intentional tort and one alleging that the insured “‘negligently and unreasonably believed’ he was engaging in self-defense ‘and unreasonably acted in self-defense . . . .’” 

The insured tendered the suit to his insurer, which denied coverage, including any duty to defend, on the basis that the claim did not constitute an “occurrence” under the policy, which term was defined as “an accident.” Delgado then dismissed the intentional tort claim and settled the remaining “negligent belief in self-defense” claim with the insured, who stipulated to judgment and assigned his rights to Delgado. Delgado then sued the insurer as a judgment creditor and for bad faith. While the trial court dismissed the action on demurrer, the Court of Appeal reversed, finding that the allegations potentially were an “accident” under the policy.

On review the Supreme Court first addressed the issue as to what constitutes “an accident” under a liability policy, which substantial case law had found to be “an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown case.” The Court rejected Delgado’s reliance on prior decisions of the Court that Delgado had contended held that the term “accident” was to be determined from the perspective of the injured party. The Court observed that, under such reasoning, plainly intentional acts like child molestation, arson and premeditated murder, if contended to be based on an unreasonable belief in the need for self-defense, could be considered an “accident” within the policy coverage. 

The Court also took the occasion to dismiss Delgado’s attempt to claim that prior decisions of the Court, such as Gray v. Zurich Insurance Co., 65 Cal. 2d 263 (1966), supported a duty to defend. The Court explained that Gray and cases like it involved situations whether the claim fell within the broad insuring provisions of the policy and the insurer sought to avoid a duty to defend based on the policy’s exclusion for injury “caused intentionally by or at the direction of the insured.” This is in contrast to the present case, where there was no exclusion at issue and the insured had the burden to demonstrate “an accident” and thereby fall within the policy’s insuring provision. 

In conclusion, the Court stated that “an insured unreasonable belief in the need for self-defense does not turn the resulting purposeful and intentional act of assault and battery into ‘an accident’ within the policy’s coverage clause . . .[and thus the insurer] had no duty to defend its insured in the lawsuit brought against him by the injured party.”

 

Federal Court Dismisses Claim by Air Ambulance Company Seeking to Avoid California Workers' Compensation Official Medical Fee Schedule

Earlier this year, California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California, filed an action in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. CALSTAR’s lawsuit, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of it being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70.  

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).  In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule.  CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

The defendants filed motions to dismiss on a variety of grounds. Prominent among the bases for the motions was the claim that the federal court lacked subject matter jurisdiction over CALSTAR’s action.  Another basis for the lack of federal court subject matter jurisdiction was that CALSTAR’s claims are subject to California’s exclusive workers’ compensation system and which claims can and should be resolved through lien requests by CALSTAR at the Workers’ Compensation Appeals Board. 

 

In a detailed ruling issued July 24, 2009, the federal court granted the motions to dismiss on the basis that the court lacked subject matter jurisdiction over CALSTAR’s claim. The fact that CALSTAR sought to use a federal statute, the FAA/ADA, to claim that certain state laws were preempted was inadequate to support jurisdiction in the federal courts under well-established case law.  The court also observed that CALSTAR had not sued the State challenging its power to enforce the Fee Schedule, but rather only sued third parties (i.e., insurers and self-insured employers) who have neither “the ability to enact or enforce state laws.” In short, CALSTAR was asking the federal court for an advisory opinion as to the preemption of the Fee Schedule, something it lacked the power to do.

Barger & Wolen represented a number of the defendants in the litigation.

The Federal Fair Credit Reporting Act & State Regulation of Credit Scoring: Chartered & Unchartered Territory for Insurance Companies Post Safeco V. Burr

Co-authored with Marina Karvelas

Introduction

Two summers ago, in June 2007, the United States Supreme Court issued Safeco Ins. Co. et al. v. Burr, 551 U.S. 47, 127 S.Ct. 2201 (2007). Two years later, Safeco v. Burr, remains a watershed event for insurance companies using credit scoring (or insurance scoring) to assist in underwriting and rating personal insurance policies. As insurance companies re-tool their insurance scoring models or newly enter the field of insurance scoring, they face newly defined obligations under the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. §§ 1681 et seq. because of Safeco v. Burr

In Safeco v. Burr, the Supreme Court held that: (a) FCRA’s “adverse action” notifications apply to the initial rate offered for new personal insurance, and (b) the trigger for such notification rests not on the failure of the consumer to obtain the “best rate,” but rather, on the insurer’s determination of a “neutral” benchmark. 

This article explores several ramifications of the Safeco v. Burr decision that may require future clarification in the courts. For example, while Safeco v. Burr sets forth a “neutral” benchmark as the standard for determining when an insurance company should issue a notice of “adverse action,” it is unclear how much leeway insurance companies have in determining that “neutral” benchmark.

In addition, several state statutes contain definitions of “adverse action” that expressly require an insurance company to issue notice of “adverse action” in circumstances when the consumer fails to receive the “best rate.” These statutes which potentially conflict with FCRA as interpreted by Safeco v. Burr may be preempted.

Finally, although Safeco v. Burr involved a credit-based consumer report, the holdings in this case could be applied to non credit based consumer reports. If so, insurance companies may be saddled with issuing “adverse action” notices when using C.L.U.E. reports or MVRs when they rate new customers for personal insurance.

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Court Holds Insurer Not Required to Prove Prejudice to Deny Coverage Based on Notice Condition

In Venoco, Inc. v. Gulf Underwriters Ins. Co., 2009 WL 1875640 (July 1, 2009), the Second District Court of Appeal affirmed a summary judgment entered in favor of Gulf Underwriters Insurance Company (“Gulf”) with regard to Venoco’s suit brought against Gulf for indemnification and a defense for lawsuits filed against it by former students and employees of Beverly Hills High School for personal injuries allegedly arising out of exposure to toxic pollution from Venoco’s oil and gas operations performed adjacent to the high school campus.

Gulf asserted that Venoco’s claim for a defense under the policy was not covered by virtue of an exclusion for instances of toxic pollution. However, an exception to the exclusion, a “buy-back” provision, provided that if Venoco notified Gulf of an occurrence within sixty (60) days of such occurrence, the toxic pollution exclusion would not apply so as to preclude coverage. 

 

Gulf moved for summary judgment in the trial court claiming it had no duty to defend or indemnify Venoco because it had failed to provide notice of the lawsuits brought by the former high school students and employees within the 60-day notice period. Venoco argued in part that the notice requirement was invalid, unfair and unusual because it was hidden in the policy, and it was also a violation of public policy.  It further argued that Gulf’s reliance on the notice requirement was barred by California’s “notice-prejudice” rule which operates to bar insurance companies from disavowing coverage on the basis of lack of timely notice unless the insurance company can show actual prejudice from the delay.  

 

Specifically, Venoco argued that because Gulf could not show it was actually prejudiced as a result of Venoco’s delay in reporting, that it could not rely on the notice requirement to deny coverage. The trial court granted Gulf’s motion finding that it was undisputed that Venoco did not comply with the 60-day notice requirement, that the 60-day requirement was not unusual or unfair under the law, and that the notice-prejudice rule did not bar Gulf’s disavowal of coverage. 

 

The Second District Court of Appeal affirmed. It held that pollution buy-back provisions containing reporting time limits were not unusual in the oil industry, and further were not unfair or against public policy. It further rejected Venoco’s argument that the 60-day reporting requirement was unenforceable because Gulf did not prove it would suffer prejudice if notice were given later than 60 days.  Rather, it held that where a policy provides that special coverage for a particular type of claim is conditioned on express compliance with a reporting requirement, the time limit is enforceable without proof of prejudice.

Ninth Circuit Upholds Use of "Preemptive" Motion to Deny Class Certification

In most lawsuits seeking to certify a class action, the motion to determine whether a class can be certified is brought by the plaintiff(s). But not always. In a new case issued July 7 by the Ninth Circuit Court of Appeals, Vinole v. Countrywide Home Loans, Inc., (Case No. 08-55223), the Appellate Court found that the District Court had properly considered and granted the defendant’s motion to deny certification.

The Vinole action was brought by a proposed class of current and former Home Loan Consultant employees of Countrywide, who claimed they were misclassified as exempt employees and thus not paid overtime and other wages. While Countrywide applied a uniform wage exception to these employees and therefore contended it was not obligated to pay them overtime, Countrywide also presented evidence that it had no control over what the employees did on a daily basis and did not monitor their work performance. As a consequence, Countrywide contended that these employees were exempt from overtime under California and Federal law.

Ten months after the lawsuit was filed – and before plaintiffs moved to certify a class – Countrywide filed a motion to deny certification of the class. The District Court granted the motion and the plaintiffs took an interlocutory appeal to the Ninth Circuit. The primary argument raised on appeal was the assertion that it was per se procedurally improper for the District Court to have decided a motion to deny class certification, before the plaintiffs had brought their affirmative motion for class certification. The court advised, however, “[a]lthough we have not previously addressed this argument directly, we conclude that Rule 23 does not preclude a defendant from bringing a ‘preemptive’ motion to deny certification.” 

In support of that conclusion, the court first explained that nothing in Federal Rule of Civil Procedure 23 “either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question.” It then rejected plaintiffs’ argument that allowing such motions to deny certification would open “troubling new territory,” since federal courts have “repeatedly considered defendants’ motions to deny class certification.” It also rejected plaintiffs’ reliance on cases that plaintiffs claimed espoused a “per se rule” disallowing such preemptive motions.

The plaintiffs argued that it was procedurally unfair for Countrywide to move to deny class certification prior to the pre-trial motion deadline and before plaintiffs had sufficient time to conduct discovery. The Ninth Circuit quickly disposed of these assertions, finding that there was no timing restriction violated by Countrywide and the plaintiffs had nearly ten months to conduct informal and formal discovery to oppose Countrywide’s motion. In other words, there is no procedural unfairness in the trial court deciding Countrywide’s motion when it did.

 

Finally, plaintiffs argued that the District Court had abused its discretion by finding common issues did not predominate in light of the uniform wage exemption employed by Countrywide as to the plaintiffs. The Ninth Circuit found, however, that despite using such a uniform exemption, there were still individualized inquiries that would need to be made as to how each of the employees carried out his or her work, perhaps requiring “several hundred mini-trials” with respect to each employee’s actual work performance.

 

The lesson to be learned from Vinole is that, in the appropriate case, defendants should consider the filing of a motion to deny class certification, which may be an effective vehicle to short-circuit a putative class action.

Insurer Not Obligated to Pay Attorney's Fees for Defending Claims Against Insured that Were Not Subject to Coverage

In State Farm v. Mintarsih, (pdf) (Case No. B202888), the Second Appellate District of the California Court of Appeal found that an insurer is not liable under a policy’s supplementary payment provision for an attorney’s fee award resulting from claims that were not potentially covered under the policy.

This ruling was in sharp contrast to a previous ruling by the Court of Appeal in Pritchard v. Liberty Mutual, 84 Cal. App. 4th 890 (2000) that held that in a suit that the insurer defends, the supplementary payment provision covers attorney’s fees “despite the absence of even the possibility of coverage for the causes of action that generated the large cost award.” The Mintarsih ruling, drafted by the well-regarded Justice Walter Croskey, is a very favorable ruling for insurers.

State Farm’s insureds were found to have held their domestic servant a virtual slave, awarding the servant $87,000 in damages on four tort theories – negligence, negligence per se, false imprisonment and fraud. Additionally, $740,000 was awarded for Labor Code violations. State Farm had defended the insureds under a reservation of rights.

While it was uncontested that State Farm was not required to cover the $740,000 in Labor Code violations, there was a question as to whether State Farm was required to pay the attorney’s fees that the household servant was entitled to receive under the Labor Code, due to the inclusion of the supplementary payment provision of the insureds’ policy, in which State Farm agreed to pay “claim expenses” over and above the limits of liability, including “expenses we incur and costs taxed against an Insured in suits we defend.” 

The Court recognized that the suit initiated by the domestic servant against the insured was a “mixed claims” case – a case presenting claims where there was a potential for coverage (the tort claims) and claims where there was no potential for coverage (the Labor Code claims).

 

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California Supreme Court Further Clarifies Scope of UCL Claims Following Proposition 64

On June 29, 2009, the California Supreme Court issued two decisions that restrict the use of California Business & Professions Code section 17200, otherwise known as the Unfair Competition Law (UCL). Both cases addressed aspects of the UCL as it now exists since the passage of Proposition 64, which occurred in November 2004. 

In one case, the Court, relying on the ballot materials that accompanied the proposition, confirmed that a private party may only pursue a representative claim under the UCL if that party complies with class action requirements. In the other case, the Court held that a labor union, which itself has not suffered actual injury, may not bring a UCL claim on behalf of its members, even if such members have assigned their rights to the union or if those rights are based on the doctrine of “associational standing.” These two nearly unanimous decisions come just weeks after the Court, in a divided 4-3 decision, In Re Tobacco II Cases (decided May 18, 2009), found that following Proposition 64 only the class representatives (and not the absent class members) need to meet the “actual injury” standing requirement of the UCL.

The first decision, Arias v. Superior Court (Angelo Dairy) (pdf), involved a dairy employee who sued his former employer and others for a variety of California Labor Code violations and other labor regulatory violations. He also brought claims under the UCL on behalf of himself and other current and former employees of the defendants. The trial court struck the UCL claims on the grounds that plaintiff had failed to satisfy the pleading requirements for a class action.  The Court of Appeal agreed, and the Supreme Court accepted review. In affirming the judgment below, the Court reviewed the Proposition 64 portion of the Voter Information Guide prepared by the Secretary of State issued in connection with the November 2, 2004 election, observing that there is “no doubt” that “one purpose of Proposition 64 was to impose class action requirements on private plaintiffs’ representative actions brought under the” UCL. In California, those class action requirements arise out of California Code of Civil Procedure section 382.

The second decision, Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.) (pdf), also addressed another aspect of the UCL modified by the passage of Proposition 64, specifically the standing requirement under Business & Professions Code section 17203 that a private party claim may only be brought by a “person who has suffered injury in fact and has lost money or property as a result of the unfair competition.”

 

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Ninth Circuit Rules Complaint Must Specifically Allege Conduct Amounting To Fraud

In Kearns v. Ford Motor Company, --- F.3d ----, 2009 WL 1578535 (9thCir. June 8, 2009), plaintiff William Kearn sued Ford for alleged violations of California’s Consumers Legal Remedies Act (“CLRA”) and California’s Unfair Competition Law (“UCL”) arising out of Ford’s Certified Pre-Owned (“CPO”) vehicle program. Kearn’s complaint generically alleged that Ford had made false and misleading statements concerning the safety and reliability of its CPO vehicles (without identifying who made the statements, the specific content of the statements, or when and how Kearn was exposed to such statements), and failed to disclose to consumers Ford’s lack of actual oversight in determining whether used vehicles qualify for the CPO program.  Kearn alleged that he was harmed by the foregoing conduct because he had paid a higher price for a CPO vehicle then he would have paid for a non-CPO vehicle, even though there was no difference between the two. While Kearn alleged that Ford’s conduct constitutes an unfair business practice under California law, he did not assert any claims for fraud in the complaint.

In the district court, Ford brought a motion to dismiss Kearn’s complaint for failure to comply with the heightened pleading standards of Federal Rule of Civil Procedure 9(b). The district court granted the motion and Kearn appealed, principally arguing that Rule 9(b) does not apply to California’s consumer protection statutes because California courts have not applied Rule 9(b) to such statutes, and that Rule 9(b) does not apply to his CLRA and UCL claims because they are not grounded in fraud. 

 

In rejecting Kearn’s arguments, the Ninth Circuit held that it is well established that the Federal Rules of Civil Procedure – including Rule 9(b) – apply in federal court, “irrespective of the source of the subject matter jurisdiction, and irrespective of whether the substantive law at issue is state or federal.” The Court further noted that while a federal court examines state law to determine whether the elements of fraud have been sufficiently pled to state a cause of action, the Rule 9(b) requirement that fraud be pled with specificity is a federally imposed rule. The Court also held that, while fraud is not a necessary element of a claim under the CLRA or UCL, if the plaintiff nevertheless alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of the CLRA or UCL claim, the CLRA or UCL claim is considered to be “grounded in fraud” or sounding in fraud such that the complaint as a whole must satisfy the particularity requirement of Rule 9(b).

     

Get a copy of the opinion here.