Insurance Litigation & Regulatory Law Blog : California Insurance Lawyer & Attorney : Barger & Wolen Law Firm : CA Insurance & Bad Faith Litigation

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.

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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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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.

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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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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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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.

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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.

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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.

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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.

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By David J. McMahon and Donielle Colich

On June 10, 2010, Defendant liability insurers for global manufacturing company Solutia, Inc. filed their Reply Brief  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.

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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."

Congress intended that a properly removed class action be remanded if a class is not eventually certified, it could have said so." 

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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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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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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.

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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?

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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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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.

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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.

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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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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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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.

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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.

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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.

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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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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).

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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.

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On September 9, 2009, a unanimous panel of the California Supreme Court accepted review of the Court of Appeal decision in Clark v. Superior Court (National Western Life Insurance Company). In so doing, the Supreme Court will address an issue of first impression under California law – whether a statute that provides for trebling of penalties and fines can be applied to private actions under California’s Unfair Competition Law (UCL) that allows only restitution as the sole monetary remedy.

In the Court of Appeal decision issued May 21, 2009, the appellate panel found that Civil Code section 3345, which permits trebling of penalties and fines in cases involving seniors, could be applied to restitution awards under the UCL. No case had ever so held this trebling remedy to apply to private UCL actions since the enactment of section 3345 in 1988, and no case had ever permitted any sort of damages, be they compensatory, treble or punitive, under the UCL. On June 29, 2009, National Western Life Insurance Company filed its Petition for Review with the Supreme Court, raising a number of arguments as to why the Court of Appeal decision was in error and that the case raised an important question of law. Several parties submitted amicus curiae letters in support of the Petition.

With the granting of review, the Court of Appeal decision is now automatically de-published and no longer citable as precedent. Briefing before the Supreme Court will occur over the next several months, but a decision from the Supreme Court is not expected until at least the end of 2010.

Kent Keller and Larry Golub of Barger & Wolen are counsel for National Western Life Insurance Company and filed the Petition for Review.
 

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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.  

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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. 

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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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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.  

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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.”

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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.

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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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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.

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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.

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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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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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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.

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The Supreme Court in Travelers Indemnity Company v. Bailey, 57 U.S. ___ (2009) last week reversed a Second Circuit opinion that could have caused insurance companies concerns when contributing to a settlement fund to resolve mass tort claims in Bankruptcy Court. 

More than 20 years ago, in 1986, a federal bankruptcy court issued an order that discharged one of the largest producers of products containing asbestos, Johns-Manville Corporation, and each of its insurers from all future tort liability arising under the company’s indemnity policies. Johns-Manville’s primary indemnity insurer, Travelers, deposited $80 million (the full value of their policies) into a settlement trust for all potential claimants, which was intended to cut-off all of Travelers’ future liability due to relationship with the company. 

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How does one insurer get another insurer to contribute to the defense costs of a common insured? Until now, the issue under California law was murky. That murkiness dissipated with the June 24, 2009, decision of the California Court of Appeal in OneBeacon America Insurance Company v. Fireman’s Fund Insurance Company, et al.

In OneBeacon America, the court concluded that one liability insurer’s claim for equitable contribution for defense costs against another liability insurer arises once notice is provided to the latter insurer which, upon diligent inquiry by that latter insurer, reveals the potential for exposure to a claim for equitable contribution and provides the insurer the opportunity to investigate and participate in the defense in the underlying litigation.

The case arises out of an underlying lawsuit for environmental contamination involving a number of related insureds (a corporation and several individuals) filed in 1998. In 1999, certain of those insureds sent notice of the underlying action to OneBeacon America Insurance Company, which began defending the insureds at that time. Fireman’s Fund Insurance Company and Insurance Company of the West (ICW) also provided insurance coverage to one or more of the insureds, and in early 1999, counsel for certain of the insureds, began sending notice letters and other correspondence to Fireman’s Fund and ICW.

Neither insurer agreed to participate in the defense of any of the insureds at that time, but ultimately in 2002 or 2003 they agreed to share in the defense of the insureds with OneBeacon, but only from 2002 forward. OneBeacon filed an action for equitable subrogation in 2005, seeking to recover from Fireman’s Fund and ICW a “time-on-the-risk” allocation of the defense costs OneBeacon paid for alone between 1999 and 2002.

While the precise facts involving “notice” and the communications with each insurer were convoluted and somewhat distinct, essentially Fireman’s Fund and ICW contended that they did not have actual or constructive adequate notice that they has issued policies to the insureds providing coverage. The trial court found in favor of Fireman’s Fund and ICW, but the Court of Appeal reversed.

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