The California Supreme Court Reiterates Analysis for Determining Whether a Statutory Violation Confers a Private Cause of Action

Posted on August 10, 2010 by James Castle

Yesterday, the California Supreme Court issued its unanimous opinion in Lu v. Hawaiian Gardens Casino, Inc., in which the high court found that a specific Labor Code provision could not be enforced by private litigants. This opinion is important in that it reiterates important cases and analyses that can be used to defeat a plaintiff’s attempt to set forth a private cause of action where no such right was intended by the legislature. Unfortunately, however, the Supreme Court declined to further address the question of whether a statute that cannot independently confer a private cause of action can still be utilized as a predicate for a cause of action under the “unlawful” prong of the Unfair Competition Laws (“UCL”).

Louie Lu (“Lu”) was a card dealer at the Hawaiian Islands Casino in Southern California. As a dealer, he was provided tips. However, not all of the tips were his to keep. Instead, he was required to provide 15% to 20% of his tips to a community fund that was then split among other employees who were offering services to the card players, but were not as routinely tipped as the dealers (i.e., floormen, poker tournament coordinators, concierges, etc.)

The tip pool policy specifically prohibited managers and supervisors from receiving any money from the pool. This exclusion of managerial persons from sharing in the tips is important, as Labor Code Section 351 prohibits an employer from taking, collecting or receiving employees’ tips. However, California courts have long-held that the pooling of tips to be split amongst like-situated employees, such as waiters and waitresses on the same shift, is not a violation of Section 351. Similarly, courts have held that the pooling of tips in the casino setting when those tips are spread among the non-managerial staff is perfectly acceptable and not a violation of Section 351. Lu contended that “agents” of the casino (presumably managerial employees) were improperly sharing in the pooled tips, and set forth causes of action for violation of Section 351 and Section 17200 of the UCL. 

The trial court dismissed both causes of action. As to the Section 351 claim, the trial court found that the section did not provide a private cause of action, as the enforcement of that provision was explicitly provided solely to the Department of Industrial Relations. The trial court likewise found that the UCL claim must also be dismissed because Section 351 could not serve as a predicate for the “unlawful prong” of the UCL unless it could be enforced in a private cause of action, and since it could not, the UCL cause of action too could not be maintained. Lu appealed.

The appellate court agreed with the trial court that Lu could not assert a private cause of action under Section 351 itself. However, the appellate court disagreed with the trial court by finding that Section 351 could still afford Lu a private cause of action by using it as a predicate for the “unlawful” prong of the UCL. More specifically, the Court of Appeal held:

Nevertheless, Lu alleged a cause of action under the UCL for violation of Labor Code sections 351 and 450. “Virtually any law -- federal, state or local -- can serve as a predicate for an action under Business and Professions Code section 17200. The UCL is a proper avenue for Lu to challenge violations of these Labor Code provisions.

The California Supreme Court accepted Lu’s petition for review on the sole question of whether Section 351 itself afforded a private right of action – leaving the Court of Appeal’s ruling that the section can be utilized as a predicate for a UCL claim in limbo (as the entire Court of Appeal decision became depublished when the petition for review was accepted on the Section 351 issue). 

The Supreme Court’s opinion provides a lengthy analysis of why Section 351 does not provide a private right of action on its own; citing with approval a number of case (including Moradi-Shalal v. Fireman’s Fund, Vikco Insurance Services Inc.  v. Ohio Indemnity Co., Crusader v. Scottsdale Insurance Co. and Middlesex Ins. Co. v. Mann) that Barger & Wolen attorneys have utilized to argue that a plaintiff does not have a private cause of action for perceived violations of the Insurance Code, including sections 790.03 and 1763. The Supreme Court decision in Lu provides additional fodder to combat plaintiffs who seek to expand the civil enforcement of statutory provisions by the private litigants where no such right was intended. 

While the Supreme Court chose not to address the UCL aspects that were presented by the conflicting trial and appellate court decisions, that fight will surely return to California’s high court on another day.   

Barger & Wolen attorneys have significant experience is defending UCL claims in state and federal court, as well as presenting arguments against plaintiffs’ attempts to assert private causes of action based on Insurance Code statutes.

 
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Court Offers Guidance as to Requirements for Alleging Harm to Establish UCL Standing

Posted on July 22, 2010 by James Castle

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. 

A majority of the Court of Appeal opinion focuses on whether the Pearson violated various provisions of the ASFA. After concluding that it had, the court turned to the UCL.   

Most notably, the Court addressed whether Plaintiff possessed Proposition 64 standing to sue under the UCL. 

After the 2004 amendment of the UCL by Proposition 64, a private person has standing to sue only if he or she "'has suffered injury in fact and has lost money or property as a result of [such] unfair competition.'" (In re Tobacco II Cases (2009) 46 Cal.4th 298, 305 (Tobacco II), citing Bus. & Prof. Code, § 17204, italics added.) 

On appeal, Pearson argued that Plaintiff did not suffer an injury “as a result of” its unfair competition under the UCL. More specifically, Pearson argued that Plaintiff was required to show that he would not have purchased the car had he been aware of (1) the additional interest and financing fees; and (2) the lumping of the insurance cost into the sales price of the vehicle. In support of this argument, Pearson cited Troyk v. Farmers Group, Inc., 171 Cal.App.4th 1305 (2009). 

In Troyk, an insured filed a class action against his automobile insurer alleging the insurer violated the UCL by requiring him to pay a service charge for payment of his automobile insurance policy premium and, because the service charge was not stated in his policy, the insurer violated Insurance Code section 381, subdivision (f), requiring that this be done. (Troyk, supra, 171 Cal.App.4th at p. 1314.)  

Although the Troyk court found that the insurer had violated the Insurance Code as alleged, it concluded that causation under the UCL did not exist because plaintiff did not show that had the insurer disclosed the monthly service charges in the policy documents as required by the Insurance Code, he would not have paid them. Significantly, the lack of disclosure of proper charges, not illegal charges, violated the UCL in Troyk.  

Pearson’s argument was, essentially, that Plaintiff would have purchased the car even if he was aware he was paying the extra $57 dollars that was obfuscated by the signing of the second contract – therefore any subversion was harmless.

The Court of Appeal disagreed with Pearson’s argument that there was no standing because Plaintiff suffered no injury “as a result of” its unfair competition.”  More specifically, the Court held:

The failure of Pearson Ford to comply with the ASFA caused Nelson to suffer an injury and lose money as to both classes because he paid pre-consummation interest (the backdating class), and paid sales tax and financing charges on the insurance premium (the insurance class).  Unlike Troyk, these illegal charges violated the UCL and Pearson Ford improperly collected additional funds from Nelson.  UCL causation exists because Nelson would not have paid pre-consummation interest, or sales tax and financing charges on the insurance premium had Pearson Ford complied with the ASFA.  Because Nelson had standing to pursue claims under the UCL, we reject Pearson Ford's argument that the judgment in favor of both classes should be vacated to the extent it grants relief under the UCL.  

 - Slip op. at 34 (emphasis added).

In short, the court held that UCL causation existed because Plaintiff would not have paid the additional fees and costs had Pearson complied with the ASFA. The court found this holding consistent with the Tobacco II footnote explaining that "the concept of reliance" will have "no application" in many UCL cases.  In re Tobacco II Cases, 46 Cal.4th 298, 325 n.17 (2009).   

The above discussion provides some illumination as to what is required of a Plaintiff when alleging harm in the situation where an unlawful act underlies the imposition of a charge or fee. 

According to the court, the plaintiff need not plead that the product or service wouldn't have been purchased had the truth been disclosed; rather, it is enough to plead that money was spent on the product or service and that the amount charged included some unlawful component that would not have been charged had the law been followed.

The parties also disputed on appeal the trial court’s award of attorney’s fees and costs. In particular, the trial court denied Pearson’s request to recover its attorney’s fees and costs under Code Civ. Proc. §998 on the ground that Pearson’s lump-sum offer to settle both class claims and Plaintiff’s individual claims was invalid. For more on that aspect, please see our firm’s Litigation Management and Attorney Fee Analysis Blog.
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Ninth Circuit Rules Complaint Must Specifically Allege Conduct Amounting To Fraud

Posted on June 30, 2009 by Lee Cirsch

In Kearns v. Ford Motor Company, --- F.3d ----, 2009 WL 1578535 (9thCir. June 8, 2009), plaintiff William Kearn sued Ford for alleged violations of California’s Consumers Legal Remedies Act (“CLRA”) and California’s Unfair Competition Law (“UCL”) arising out of Ford’s Certified Pre-Owned (“CPO”) vehicle program. Kearn’s complaint generically alleged that Ford had made false and misleading statements concerning the safety and reliability of its CPO vehicles (without identifying who made the statements, the specific content of the statements, or when and how Kearn was exposed to such statements), and failed to disclose to consumers Ford’s lack of actual oversight in determining whether used vehicles qualify for the CPO program.  Kearn alleged that he was harmed by the foregoing conduct because he had paid a higher price for a CPO vehicle then he would have paid for a non-CPO vehicle, even though there was no difference between the two. While Kearn alleged that Ford’s conduct constitutes an unfair business practice under California law, he did not assert any claims for fraud in the complaint.

In the district court, Ford brought a motion to dismiss Kearn’s complaint for failure to comply with the heightened pleading standards of Federal Rule of Civil Procedure 9(b). The district court granted the motion and Kearn appealed, principally arguing that Rule 9(b) does not apply to California’s consumer protection statutes because California courts have not applied Rule 9(b) to such statutes, and that Rule 9(b) does not apply to his CLRA and UCL claims because they are not grounded in fraud. 

 

In rejecting Kearn’s arguments, the Ninth Circuit held that it is well established that the Federal Rules of Civil Procedure – including Rule 9(b) – apply in federal court, “irrespective of the source of the subject matter jurisdiction, and irrespective of whether the substantive law at issue is state or federal.” The Court further noted that while a federal court examines state law to determine whether the elements of fraud have been sufficiently pled to state a cause of action, the Rule 9(b) requirement that fraud be pled with specificity is a federally imposed rule. The Court also held that, while fraud is not a necessary element of a claim under the CLRA or UCL, if the plaintiff nevertheless alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of the CLRA or UCL claim, the CLRA or UCL claim is considered to be “grounded in fraud” or sounding in fraud such that the complaint as a whole must satisfy the particularity requirement of Rule 9(b).

     

Get a copy of the opinion here.

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