Insurance Litigation Law Blog | Regulatory Law | Bad Faith | California | Lawyer | Attorney | Barger & Wolen

By Sam Sorich and Larry Golub

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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By Larry Golub and Marina Karvelas

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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By Larry M. Golub and Misty A. Murray

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

The proposed nationwide class in Wal-Mart consisted of

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

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

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

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

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

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

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

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

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

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

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

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

The majority opinion further advised that

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

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

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

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

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

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

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

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

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

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

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

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

As one court concluded:

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

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

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

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

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

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

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

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

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

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

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

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

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

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By Larry M. Golub and Travis Wall

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

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

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

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

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

The Kaiser court issued three holdings in its decision:

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

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

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

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

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

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

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

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

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

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Sometimes a green drop is just a green drop.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Court of Appeals for the Second Circuit affirmed. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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By Richard B. Hopkins and John C. Holmes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Over the course of two days at the end of March, the Ninth Circuit Court of Appeals and the Sonoma County Superior Court issued two separate decisions dismissing claims by air ambulance companies that sought to obtain medical provider benefits under workers’ compensation without following the dictates of the California workers’ compensation system. In both instances, the courts found that they did not have subject matter jurisdiction to consider the claims alleged by the air ambulance companies.

In early 2009, California Shock Trauma Air Rescue (“CALSTAR”) filed two virtually identical actions in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. 

CALSTAR’s lead lawsuit in the consolidated actions, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of CALSTAR being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70. 

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).

In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule. CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

As reported in this blog, the federal district court dismissed CALSTAR’s lawsuits on July 24, 2009, finding, on a number of grounds, that it lacked federal subject matter jurisdiction to consider CALSTAR’s claims. CALSTAR appealed the dismissal of its two actions to the Ninth Circuit.

On March 31, 2011, the Ninth Circuit published its opinion in the two consolidated appeals, affirming the decision of the trial court and concluding that the well-pleaded complaint rule precluded the federal court’s exercise of federal subject matter jurisdiction with respect to purely state law claims.

More specifically, the three-judge panel found that CALSTAR’s claims did not “arise under” the laws of the United States, and its attempt to obtain a determination as to federal preemption of the Fee Schedule was, at most, in anticipation of its response to the defense that would be posited by the defendants – and this is not adequate to create federal court jurisdiction. 

The Ninth Circuit further dismissed CALSTAR’s attempt to fall within the case law that allows federal court jurisdiction over state law claims that “implicate significant federal issues,” since, once again, CALSTAR could not satisfy the well-pleaded complaint rule, and its state law claims do not turn on a federal issue.

Finally, the Court concluded that the mere fact that CALSTAR had alleged claims for declaratory relief in addition to its state law claims did not allow the “procedural” device of such a declaratory relief claim to confer “arising under” jurisdiction. This is especially true here, since CALSTAR’s actions did not sue any state official, which the Supreme Court and other federal circuits had found to be a prerequisite to allowing any such Supremacy Clause claims to proceed in federal court.

One of the defenses raised by the insurers and self-insured employers in CALSTAR, but never addressed by the federal trial and appellate courts was that, even if there were federal subject matter jurisdiction, the air ambulance company’s action must still be dismissed because the claims are subject to the exclusive jurisdiction of the Workers’ Compensation Appeals Board (“WCAB”) and fall within the exclusive remedies of the Workers’ Compensation Act. 

The day before the Ninth Circuit issued its decision, a California state trial court in Sonoma County had the occasion to address that precise issue, dismissing claims by another air ambulance company due to the exclusive jurisdiction of the WCAB and the exclusive remedy the Act.

REACH Air Medical Services LLC sued many of the same defendant insurers and self-insured employers as did CALSTAR, and the defendants demurred to REACH’s state court complaint on the grounds of exclusive jurisdiction/exclusive remedy. On March 30, Sonoma County Superior Court Judge Elliot Daum issued his Order sustaining the demurrers and dismissing the action without leave to amend. If REACH wanted to pursue its claims for additional benefits beyond those paid by the Fee Schedule under worker’s compensation, it could only do so within the exclusive remedies provided by the Act and before the exclusive jurisdiction of the WCAB.

One final note. In October 2010, CALSTAR filed its own state court action in Solano County Superior Court against many of the same defendant insurers and self-insured employers. That action seeks further payment of medical provider benefits for services rendered after the time CALSTAR filed its federal court action. The defendants have demurred to that state court complaint, and a hearing on their demurrers is set for April 21.

Larry Golub of Barger & Wolen has represented a number of the defendants in all three lawsuits.

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In a decision issued March 25, 2011, The Housing Group v. PMA Capital Insurance Co., the California Court of Appeal held that an insurer who is not actually defending its insured cannot pursue its rights under California Civil Code section 2860, and specifically the right to arbitrate the issue as to the hourly rate for “independent counsel” chosen by the insured when there is a conflict of interest between the insured and the insurer.

Under section 2860(c), an insurer’s obligation to pay such independent counsel “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” 

Since substantial evidence supports the trial court’s finding that the insurer failed to provide a defense in the underlying litigation, the insurer was precluded from invoking the arbitration remedy for Cumis fee disputes in section 2860(c).

This recent decision was discussed in more length in a blog posted by David McMahon in Barger & Wolen’s Litigation Management & Attorney Fee Analysis blog.

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by Misty A. Murray and Larry M. Golub

In Pineda v. Williams-Sonoma Stores Inc., 2011 Cal. LEXIS 1355 (February 10, 2011), the California Supreme Court addressed the issue of whether a person’s zip code constitutes “personal identification information” under the Song-Beverly Credit Card Act of 1971, Cal. Civ. Code §§ 1747 et seq. (Credit Card Act). 

The Court held that it did, and that its holding operated retrospectively, triggering numerous lawsuits since the Court’s decision a week ago.

The Credit Card Act was enacted to protect consumers from unfair business practices during credit card transactions. Relevant to the Court’s decision is section 1747.08 of the Credit Card Act, which prohibits businesses from requiring consumers to provide "personal identification information" during credit card transactions and then recording that information. Cal. Civ. Code, § 1747.08(a)(2).

Pineda brought an action against Williams-Sonoma, asserting violations of the Credit Card Act, unfair competition laws and invasion of privacy, based on the fact that the retailer asked Pineda for her zip code during a credit card transaction, recorded that information, and then used that information to obtain her undisclosed address from a database in order to market its products and sell her private information to other businesses. 

Williams-Sonoma argued that a zip code does not constitute "personal identification information" under section 1747.08. 

The trial court agreed and the Court of Appeal affirmed, relying on Party City Corp. v. Superior Court (2008) 169 Cal.App.4th 497, which held that a zip code, without more, is not “personal identification information” as defined in the Credit Card Act.

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Since the passage of Proposition 64 in November 2004 by the California electorate, which sought to limit the scope of frivolous or “shakedown” lawsuits under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), courts in California have waited for the California Supreme Court to clarify the scope of standing for a plaintiff to pursue a UCL claim. In 2009, the Court issued its decision in In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), which held that only the named plaintiffs bringing a UCL claim had to demonstrate standing, not each class member that the named plaintiffs sought to represent. 

Now, in Kwikset Corporation, Inc. v. Superior Court, decided January 27, 2011, the Court finally analyzed the scope of the Prop 64 language that limited UCL standing to “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” In a 5-2 opinion, the Court cut back Prop 64’s limitation on standing, which will allow more UCL cases to at least proceed beyond the demurrer stage.

Kwikset involved named plaintiffs who purchased a lockset that said on the packaging “Made in U.S.A,” but it was substantially made in Taiwan and Mexico. While there were no claims that the lockset was defective or worth less than ones actually made in the United States, the sole contention made in an amended complaint was that the persons would not have purchased the lockset had it not been important to them that it was made in the United States: “When purchasing the locksets each plaintiff ‘saw and read Defendants’ misrepresentations . . . and relied on such misrepresentations in deciding to purchase . . . them. [Each plaintiff] was induced to purchase and did purchase Defendants’ locksets due to the false representation that they were “Made in U.S.A.” and would not have purchased them if they had not been so misrepresented.’”

The Court of Appeal had found that the complaint should be dismissed based on the UCL standing requirements imposed by Prop 64, explaining that although the plaintiffs “had adequately alleged injury in fact, they had not alleged any loss of money or property,” and that while their “patriotic desire to buy fully American-made products was frustrated,” such an injury “was insufficient to satisfy the standing requirements” of the UCL.

The Supreme Court, in a lengthy decision, reversed and found that

“plaintiffs who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue.” 

The Kwikset case sets forth a standing test broader than just for product mislabeling cases, as the Court later stated as follows:

“As we shall explain, a party who has lost money or property generally has suffered injury in fact. Consequently, the plain language of these clauses suggests a simple test: To satisfy the narrower standing requirements imposed by Proposition 64, a party must now (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.” (Emphasis by Court.) 

And, to provide further guidance for future cases, the Court observed:

“There are innumerable ways in which economic injury from unfair competition may be shown. A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary.” 

The majority opinion in Kwikset also reaffirmed that, apart from demonstrating economic injury in the form of loss of money or property, the named plaintiff must still allege the causal element of reliance (“that the misrepresentation was an immediate cause of the injury-producing conduct”), as earlier set forth in the Court’s Tobacco II decision. The Court also held that there is no need to show for standing purposes that the lost money or property would otherwise qualify as restitution, the only monetary remedy permitted under the UCL. This was a point noted by the Court in its rent decision in Clayworth v. Pfizer, Inc., 49 Cal.4th 758 (2010), which found that parties may seek an injunction under the UCL whether or not restitution is also available.

Despite the breadth of the Kwikset opinion and the position by Prop 64 proponents that this decision will undercut the protections against frivolous lawsuit intended by the proposition, in two reassuring footnotes, the Court also confirmed that it was only considering matters at the demurrer stage, where a court “must take the allegations as true,” and that “[o]nce this threshold pleading requirement has been satisfied, it will remain the plaintiff’s burden thereafter to prove the elements of standing and of each alleged act of unfair competition, and the trial court’s role to exercise its considerable discretion to determine which, if any, of the various equitable and injunctive remedies provided for by sections 17203 and 17535 may actually be warranted in a given case.”

Finally, in a powerful dissent, two of the Supreme Court justices explained how they would have affirmed the Court of Appeal’s decision and dismissed the lawsuit since the majority’s opinion disregards Prop 64’s actual statutory language and the intent of the electorate to limit standing under the UCL. Indeed, the dissent even references the fact that proponents of Prop 64 included the Kwikset case on their website as an example of a “shakedown lawsuit” that the proposition sought to curb. Ending its minority opinion, the dissent concluded that the majority opinion had relieved plaintiffs of the burden to show standing imposed by Prop 64:  

“All plaintiffs now have to allege is that they would not have bought the mislabeled product. . . . This cannot be what the electorate intended when it sought ‘unequivocally to narrow the category of persons who could sue businesses under the UCL.’”

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California Supreme Court Rejects Requests to Depublish MacKay

by Kent R. Keller

On October 6, 2010, Division Three of the Second Appellate District issued a landmark decision in MacKay v. Superior Court, 188 Cal. App. 4th 1427 (2010), declaring that approved insurance rates subject to Proposition 103 cannot thereafter be collaterally attacked in a civil action.

In brief, MacKay was a certified Unfair Competition Law (UCL) class action involving more than 500,000 class members who contended that 21st Century Insurance Company had used two illegal “rating factors” in developing automobile insurance premiums. The two factors had been included in rate and class plan filings approved on multiple occasions by the Insurance Commissioner. 

The issue, as the Court explained, was:

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” MacKay, supra at 1434. 

In a detailed opinion, authored by Justice H. Walter Croskey, the Court concluded that approval did preclude a collateral attack in a civil action. 

This decision is of critical importance to insurers and consumers subject to rate approval pursuant to Proposition 103. 

Prior to MacKay, it was not clear whether approval precluded civil actions. As a result, many insurers were sued, virtually always in class actions, by parties challenging approved rates on one basis or another. 

The result was that, while insurers were required to obtain rate approval before putting a rate into effect and once approval was obtained could had to use the approved rate, they did so at the peril of a class action lawsuit. 

Whether such lawsuits benefited insureds or simply increased premiums in the future is a continuing debate. What, however, was clear was that such actions often produced large attorneys’ fees awards.

Given the value of these class actions to the plaintiffs’ bar, it was not surprising that requests to depublish MacKay were numerous. 

In addition to a request from counsel for the plaintiffs in MacKay, requests were filed by Consumer Watchdog, the City and County of San Francisco, the Consumer Attorneys of California, Public Advocates, the Mexican American Legal Defense & Education Fund, the Southern Christian Leadership Conference of Greater Los Angeles, United Policyholders, the California State Insurance Commissioner, and others. 

Indeed, by a letter dated January 10, 2011, new Commissioner Dave Jones advised the California Supreme Court that he, like his predecessor, supported depublication.

Despite this tsunami of support for depublication, on January 12, 2011 the Supreme Court denied all requests and declared the case closed. 

While the reasons for denying or granting depublication are never certain, we have to believe that the Supreme Court recognized the correctness of Justice Crokey’s decision. As a result of the Supreme Court’s action, MacKay remains valid and precedential authority.

21st Century Insurance Company was represented in this case by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

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By Sandra I. Weishart

On December 6, 2010, the United States Supreme Court granted certiorari in Wal-Mart Stores, Inc., v. Dukes, no. 10-277, agreeing to hear Wal-Mart's appeal of a California district court's order certifying a class alleging sex discrimination in the workplace.

Although the claims in Dukes specifically relate to Wal-Mart's alleged unfair employment practices concerning paying and promoting women, the Supreme Court's decision, expected in summer of 2011, could dramatically affect the class action landscape for all large companies, including insurers. 

Class action litigators following Dukes have been particularly interested in whether a class can be "too big" to certify.

In Dukes, six named plaintiffs allege that Wal-Mart -- the nation's largest employer -- discriminates against women in violation of Title VII of the Civil Rights Act of 1964. They seek to certify a nationwide class encompassing thousands of women employed by Wal-Mart at any time since December 26, 1998, in a range of positions, from part-time, entry-level hourly employees to salaried managers. The proposed class involves 3,400 Wal-Mart stores in 41 regions. Wal-Mart's counsel estimates the class size could exceed 1.5 million women. Given the size of this class, billions of dollars are potentially at stake. 

The district court certified for class treatment all of plaintiffs' claims for injunctive relief, declaratory relief and back pay, and included a separate opt-out class for employees seeking punitive damages.

On appeal, the Ninth Circuit affirmed the district court's certification, under Federal Rule of Civil Procedure ("FRCP") 23(b)(2), of a class of current employees with respect to the claims for injunctive relief, declaratory relief, and back pay and, as to the punitive damages claims, it remanded the case to the district court to make further rulings under FRCP 23(b)(2) and (b)(3). 

As to former Wal-Mart employees, the Ninth Circuit remanded the action to the district court to consider whether to certify an additional class or classes under FRCP 23(b)(3). See Dukes v. Wal-Mart Stores, 605 F.3d 571 (9th Cir. 2010).

In addition to the arguments that class action counsel routinely make to defeat class certification, such as whether the issues are sufficiently common and the claims of named class members are typical of others in the class, Wal-Mart's counsel argued that a class action this size would be inherently unmanageable and coercive. The allegations cover diverse job positions held by thousands of employees with different supervisors in numerous geographic locations. There is no way that all of the evidence relating to these plaintiffs can be presented. Further, it is unlikely that evidence relating to a "representative sample" of plaintiffs can prove the case as to the more than a million class members. 

For these reasons, if classes of this size are going to be certified, independent of the manageability issue, there is also a significant Due Process concern. Moreover, if such huge classes are certified, there is a far greater likelihood that defendants will feel compelled to settle, regardless of the merits of the action, to avoid potential billion-dollar litigation.   

Although the "too big to certify" argument is of great importance to class action lawyers and their clients, it is unclear whether or to what degree the Supreme Court will resolve that issue.

The Court granted certiorari on only one, narrow issue raised in Wal-Mart's petition:

Whether claims for monetary relief can be certified under FRCP 23(b)(2) — which by its terms is limited to injunctive or corresponding declaratory relief — and, if so, under what circumstances." 

The Court denied certiorari as to the broader issues of "whether the class certification order conforms to the requirements of Title VII, the Due Process Clause, the Seventh Amendment, the Rules Enabling Act, and FRCP 23."

Nevertheless, the Court instructed the parties to brief the issue of "whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a)." Although this vaguely worded request leaves open the door to discussion of the broader issues, it appears unlikely that the Court will focus its decision on the bigger issues.  

If the Supreme Court affirms the order granting class certification, Dukes will be the largest class action in United States history. Given the size of the class, the case potentially affects all large companies that may find themselves embroiled in class action litigation. Therefore, regardless of which way the Supreme Court decides Dukes, the case is likely to have a significant impact on future class action practice.

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Recently, we reported on the California Supreme Court’s decision in Clark v. Superior Court (National Western Life Insurance Company), wherein the Court confirmed that the only monetary remedy available under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”) is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.  

The Court echoed that holding in a new decision issued November 18, 2010, Pineda v. Bank of America, N.A. As with Clark, Pineda was a unanimous opinion by the Court.

At issue in Pineda were penalties provided for under California Labor Code section 203 when an employer fails to timely pay final wages to an employee. The first issue addressed by the Court was whether a one-year or three-year statute of limitations applied to a claim for such penalties when an employee sues only to recover the penalties and not the final wages themselves (which had already been paid). On that issue, the Court held that the longer, three-year statute applied.

Turning to the second issue, whether Section 203 penalties can be recovered as restitution under the UCL, the Court explained once again that a penalty is not restitution because it does not function to restore to a plaintiff the status quo or something in which the plaintiff had a vested interest. Relying on its earlier decision in Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000), which held that unpaid overtime wages were able to recovered as restitution under the UCL, the Court contrasted such unpaid wages to a penalty for not paying wages. The former are consider to be the earned property of the employee and thus restitutionary in nature whereas the latter are not compensation for work performed or restoring to the employee funds in which the employee has a vested ownership interest, but rather a payment to encourage employers to timely pay their employees and to punish them if they do not do so.

One would hope that, with the holdings of the Clark and Pineda cases, the issue of what is restitution and the limited monetary remedies available for a private action under the UCL can now be laid to rest.

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In a non-published decision issued on November 18, 2010, the California Court of Appeal affirmed summary judgment against class-action lawyers seeking refunds on broker fees in Munn v. Eastwood Insurance Services.  

The decision rejected the argument that if a broker performs any act on behalf of the insurer, the broker is a de facto agent, and subjects the broker to a refund of all broker fees collected. 

The court rejected the “any one act test” and followed the “totality of the circumstances test,” which has been advocated by this firm for several years as the appropriate test to distinguish the difference between an agent and broker.

The “totality of the circumstances test” was codified into law by legislation in 2008 (AB 2956) that Barger & Wolen Senior Regulatory Partner Robert Hogeboom helped draft.

The court’s decision upheld the FSC comparative rater and the electronic Zap App systems as the appropriate mechanisms for brokers to input information and process applications, and it rejected the plaintiffs’ claim that it was a process to encourage upfront underwriting and binding by the broker. 

Finally, the court recognized that the recent amendment to California Insurance Code section 1623, which includes the definition of “broker” and creates a presumption, did provide the court with “guidance in assessing the facts as part of the totality of the circumstances.” 

Barger & Wolen’s Robert Hogeboom and Suh Choi served as special consultants on the broker fee issue to Eastwood’s counsel, Milford Dahl and Zack Broslavsky of Rutan & Tucker, and to Judi Partridge, former owner of Eastwood. 

If you have any questions, please contact Robert Hogeboom via e-mail or at (213) 614-7304.

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by Sandra Weishart

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200. 

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

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In Hernandez v. Chipotle Mexican Grill, Inc., published October 28, 2010, the California Court of Appeal held that, while employers must provide employees with breaks, they need not ensure employees actually take their breaks. 

Rogelio Hernandez (Hernandez) brought this class action against Chipotle Mexican Grill, Inc. for allegedly denying employees meal and rest breaks. In moving for certification, Hernandez submitted statistical evidence allegedly showing that a overwhelming majority of employees missed their breaks, e.g. 92% of employees missed at least one meal break.

Chipolte also filed a motion, but to deny certification, and it presented evidence of a company-wide policy encouraging meal and rest breaks. As noted by the Court, Chipotle provides employees with free food and beverages during breaks. Because Chipotle paid employees during breaks, the employee time records may not reflect whether breaks were actually taken.

In determining whether certification was appropriate, both the trial court and appellate court addressed the legal issue of whether employers must only provide breaks, or whether employers must also ensure that breaks are actually taken.

The Court recognized that this issue was currently pending review before the California Supreme Court (Brinker v. Public Storage, S166350, and Brinkley v. Public Storage, S168806), but ruled that the Supreme Court would likely hold that employers need not ensure that breaks are actually taken.

The Court stated that placing this obligation on employers would place an

undue burden on employers whose employees are numerous or who … do not appear to remain in contact with the employer during the day.”

It would also create

perverse incentives, encouraging employees to violate company meal break policy in order to receive extra compensation under California wage and hour laws.”

The decision is significant not only for its substance, but also for procedural reasons. 

Class counsel often times will argue on certification motions that their legal theory of liability and damages should not be decided on certification, because certification is only a procedural, not a merits question. This misstates what a trial court may be obligated to review for certification.

In order to decide whether common or individual issues predominate, it must be determined at the certification stage how the law requires liability and damages to be proven at trial. This inquiry may not be able to be satisfied without the trial court actually addressing what the law is at the certification stage, and in certain cases where the certification issues are intertwined with the merits issues some analysis of the merits is permitted.

As noted by the Hernandez trial court, if the law does require employers to ensure breaks are actually taken, class treatment of this case would be appropriate. Having held that the law only requires employers to provide breaks, certification in this action was inappropriate.

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On October 6, 2010, the California Court of Appeal issued a landmark decision involving Proposition 103 insurance rate approval in MacKay v. Superior Court, B220469 & B223772. 

The legal issue, as Division Three of the Second Appellate District explained, was

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.”  

In MacKay, the plaintiff class sued 21st Century Insurance Company asserting that its use of certain rating factors (persistency and accident verification) was illegal and therefore actionable under California’s Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200. 

In a unanimous decision, written by Justice Croskey, the Court held "that the statutory provisions for an administrative process . . . are the exclusive means of challenging an approved rate,” precluding a UCL action and therefore ordered the trial court to enter judgment for 21st Century.

Prior to this decision, previous decisions had created uncertainty as to whether insurers, having fully complied with the requirements of Proposition 103 rate approval, could charge approved rates free from subsequent civil challenges. 

While Walker v. Allstate Indemnity Co, 77 Cal. App. 4th 750 (2000) held that approved rates could not thereafter be civilly challenged, Donabedian v. Mercury Ins. Co., 116 Cal. App. 4th 968 (2004) created confusion on this issue.

The MacKay decision resolves all prior confusion in declaring that approved rates and rating factors cannot thereafter be civilly challenged.

21st Century Insurance Company was represented in this action by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

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The California Court of Appeal recently held that an insurer properly denied coverage and had no duty to defend its insured where the policy unambiguously excluded coverage for claims arising from the operation of a motor vehicle by an insured. 

In Sprinkles v. Associated Indemnity Corporation (published September 1, 2010), Plaintiffs were the heirs of a motorcyclist who died in an accident caused by an employee, Juan Bibinz (“Bibinz”), of Sinco Co., Inc. (“Sinco”). Plaintiffs sued Sinco and Bibinz (the “Sinco action”) alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record, who negligently drove his vehicle causing the death of Plaintiffs’ heir. Plaintiffs also alleged that Bibinz was an employee acting within the scope of his authority.

At the time of the accident, Sinco had a commercial automobile policy, an excess and umbrella policy, and a commercial general liability (“CGL”) policy, the latter issued by Fireman’s Fund Insurance Company.  While the auto policy and excess policy paid their limits toward settlement of the claim, Fireman’s Fund denied coverage and a duty to defend under the CGL policy. 

After an arbitrator awarded Plaintiffs more than $27 million in the underlying action, Plaintiffs took an assignment from Sinco and brought claims against Fireman’s Fund for bad faith, wrongful refusal to settle, wrongful failure to defend, and breach of contract, as well as a direct judgment creditor claim under Insurance Code section 11580. 

On demurrer, Fireman’s Fund contended that no coverage existed for Sinco because Bibinz was an insured under the CGL policy, and therefore the exclusion in the policy for claims arising out of the use of an automobile applied. 

Plaintiffs alleged that Bibinz was not an insured under the policy because, at the time of the accident, Bibinz was not performing duties related to the conduct of Sinco’s business and there was a potential for a finding that Bibinz was not acting in the scope of his employment with Sinco. 

The trial court sustained the demurrer without leave to amend, holding that the CGL policy provided no coverage for the automobile accident that caused Plaintiffs’ damages. 

The appellate court held that as an insured under the policy, Bibinz’s acts were not covered due to an exclusion for bodily injury or property damage “arising out of the . . . use . . . of any . . . acts by any insured.” The court deemed Bibnz’s use of the vehicle as “related to” the conduct of business, in that he was required to use his vehicle to reach various locations for maintenance work. 

The court accordingly upheld the dismissal of all claims against the insurer.

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In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company (decided August 30, 2010), the California Supreme Court rejected an insured’s attempt to sue State Farm for fraud in inducing settlement of the insured’s property damage claim. The insured alleged the settlement was procured by State Farm’s undervaluing of the earthquake loss and misrepresentation of the policy limits to be only $4,979,900, while the limits were allegedly $11,905,500. 

While the settlement agreement between State Farm and the insured released all known and potential claims related to the Northridge Earthquake damage claims, the insured insisted it need not seek to rescind the settlement agreement but could instead elect to affirm the settlement and release, and also then sue for fraud damages. 

As noted by the Court, the insured “seeks to affirm those parts of the agreement that benefit it, but to invalidate a major part of the agreement that benefits State Farm.” This is a rescission remedy and the party seeking to rescind must restore benefits received under the contract.  Civ. Code § 1688 et seq. 

The Court recognized that other jurisdictions, relying on common law principles, have allowed a party challenging a settlement to “affirm and sue” for fraud in the inducement without restoring benefits.

In significant contrast, the California Legislature has spoken in this area and specifically rejected the “affirm and sue” principle.

Instead, the Civil Code requires the aggrieved party to rescind and restore consideration received in their original settlement and release with the caveat that any actual return of benefits may be delayed until final judgment unless it substantially prejudices the defendant. Civ. Code § 1693. 

The Court rejected public policy arguments that an “affirm and sue” principle was necessary to combat fraud in settlements. In closing, the Court stated: 

The Legislature has created a fair and equitable remedy to address the alleged fraud problem:  rescission of the release, followed by suit. When restoration is impossible because the settlement monies have been spent, the financially constrained parties can turn to section 1693 to delay restoration until judgment, unless the defendants can show substantial prejudice. Our statutory scheme therefore effectively ensures that plaintiffs who may have been defrauded in the settlement process will be allowed access to the courts.”

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Another California appellate decision has restricted the ability to challenge class action allegations at the pleading stage, reiterating that the determination of class suitability in most instances should be made at the time of a motion for class certification.

In Gutierrez v. California Commerce Club, Inc. (published August 23, 2010), the class representative filed suit alleging the defendant unlawfully denied meal and rest breaks to hourly, non-union employees. After a challenge to the third amended complaint, the trial court sustained the demurrer to the class action allegation without leave to amend, observing that the plaintiffs had failed to “notify the court who is in the class, what they do, how they are related and why plaintiffs are the proper persons to represent this all-inclusive class.” 

Division One of the Court of Appeal reversed, finding the trial court’s dismissal of the class premature and that the allegations of the operative complaint adequate to move beyond the pleading stage. 

In so concluding the class could proceed, the court observed:

Judicial policy in California has long discouraged trial courts from determining class sufficiency at the pleading stage and directed that this issue be determined by a motion for class certification.

Quoting another recent decision from last year, the court explained that “the wisdom of permitting the action to survive a demurrer is elementary.” The court elaborated as follows:

It is clear that the more intimate the judge becomes with the character of the action, the more intelligently he may make the determination. If the judicial machinery encourages the decision to be made at the pleading stages and the judge decides against class litigation, he divests the court of the power to later alter that decision. . . . Therefore, because the sustaining of demurrers without leave to amend represents the earliest possible determination of the propriety of class action litigation, it should be looked upon with disfavor.

While the court did reference a number of California decision that had permitted class allegations to be dismissed or stricken at the pleading stage, it relegated those decisions to cases involving “mass torts or other actions in which individual issues predominate.” And, in the context of wage and hour cases (as was the situation in Gutierrez), the court explained that such cases “routinely proceed as class actions” since they “usually involve” a single set of facts that apply to all putative class members and a sole common question of law, usually involving “institutional practices.” The court then noted that “numerous courts” had “reached the same result in wage and hour cases.”

In light of this latest decision, defendants should consider very carefully the wisdom of challenging class allegations at the pleading stage of a lawsuit. Unless it is plainly evident from the allegations of the complaint that individual issues exists, the challenge to class allegations is more efficiently made at the time of a motion for class certification.

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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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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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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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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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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 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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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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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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