Ninth Circuit holds that the Higher Education Act (HEA), and its Federal Family Education Loan Program (FFELP), preempt state law claims for unfair billing practices

The Higher Education Act (HEA) was passed “to keep the college door open to all students of ability, regardless of socioeconomic background.” Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1030 (9th Cir. 2009).  Congress also Congress established the Federal Family Education Loan Program (FFELP), a system of loan guarantees meant to encourage lenders to loan money to students and their parents on favorable terms. See 20 U.S.C. §§ 1071-1087-4; Rowe, 559 F.3d at 1030.  In Chae, et al. v. SLM Corporation, dba Sallie Mae, et al. (9th Cir. January 25, 2010), the Ninth Circuit considered whether the HEA and FFELP preempted state law consumer protection claims in a putative class action alleging false and misleading disclosures about billing practices.

The Court excluded field preemption from its analysis, noting: "Turning now to the issues before us, we have previously held that field preemption does not apply to the HEA."  Chae, at 1382.  With that, the Court analyzed whether "express preemption" or "conflict preemption" were present.

The Ninth Circuit found that express preemption applied to the claims in Chae:

Congress has enacted several express preemption provisions applicable to FFELP participants. See, e.g., 20 U.S.C. §§ 1078(d), 1091a(a)(2)(B), 1091a(b)(1)-(3), 1095a(a), 1098g. These provisions expressly preempt the operation of state usury laws, statutes of limitations, limitations on recovering the costs of debt collection, infancy defenses to contract liability, wage garnishment limitations, and disclosure requirements. This last provision, 20 U.S.C. § 1098g, is entitled, “Exemption from State disclosure requirements.” The text of the statute reads: “Loans made, insured, or guaranteed pursuant to a program authorized by Title IV of the Higher Education Act . . . shall not be subject to any disclosure requirements of any State law.” Id. The FFELP falls within Title IV of the HEA, and is thus subject to its express preemption provision. 

Chae, at 1383.  The Court then explained its disagreement with the plaintiffs' characterization of their claims as misrepresentation claims, not disclosure claims:

At bottom, the plaintiffs’ misrepresentation claims are improper-disclosure claims. The plaintiffs do not contend that California law prevents Sallie Mae from employing any of the three loan-servicing practices at issue. We consider these allegations in substance to be a challenge to the allegedly misleading method Sallie Mae used to communicate with the plaintiffs about its practices. In this context, the state-law prohibition on misrepresenting a business practice “is merely the converse” of a state-law requirement that alternate disclosures be made. See Cipollone, 505 U.S. at 527. 

Chae, at 1384.  The Court was not sympathetic to the plaintiffs' argument that a finding of preemption would eliminate any recourse for unfair practices by Sallie Mae.  The Court, in a footnote, suggested that the plaintiffs' only remedy was to complain to the Department of Education.  Chae, at 1384-85, n. 6.

Finally, the Court concluded, after a lengthy discussion, that application of state consumer protection laws would directly conflict with the uniformity and stability goal behind the FFELP.

Breaking News: New appellate court decision in Steroid Hormone Product Cases at odds with Cohen panel's rebuke of Tobacco II

The initial appellate decisions in which In re Tobacco II Cases (2009) 46 Cal.4th 298, 311 (Tobacco II) was ignored or criticized are beginning to see an equalizing counterbalance from appellate decisions that approvingly apply Tobacco II.  Today, in Steroid Hormone Product Cases (January 21, 2010), the Court of Appeal (Second Appellate District, Division Four) reversed an order denying class certification.  While the Court didn't directly address Cohen, it did include this footnote with a very interesting choice of language that was ostensibly directed at the trial court's order:

GNC tries to avoid the required reversal by arguing in its respondent's brief that the trial court's ruling does not conflict with Tobacco II because Tobacco II addressed standing, while the trial court specifically stated that standing was irrelevant to the certification analysis.  Although the court did state that standing was irrelevant, it nevertheless found that Proposition 64 added actual injury as an element of a cause of action for restitution under the UCL, and therefore injury must be established for each class member. Tobacco II made clear, however, that Proposition 64 only affected the named plaintiff's standing in a UCL class action seeking restitution; it did not add an additional element to be satisfied by all class members. (Tobacco II, supra, 46 Cal.4th at p. 321.)

Slip op., at 11, n. 8 (bold emphasis added).  This is a direct repudiation of Cohen's analysis.  The question this decision raises is whether it will encourage the California Supreme Court to depublish Cohen and send a signal that the analysis of Steroid Hormone Product Cases is the correct construction, take up Cohen to explicitly resolve this split, or let more Courts of Appeal weigh in on the issue.

I may write a longer summary and analysis of this decision at a later time, but, for now, the quote above is where most of the action can be found.

in brief: service of a complaint on a consumer is a "communication" under the FDCPA

While I can't say that this will ultimately prove to be a class issue, the Fair Debt Collection Practices Act (“FDCPA”) is receiving increased attention in recent years, particularly as an increase in the number of consumers in economic distress increases their interactions with debt collectors.  It is with this in mind that I pass on one sentence from a case involving the FDCPA.  In Donohue v. Quick Collect, Inc., (9th Cir. January 14, 2009), the Ninth Circuit held:  "We . . . conclude that a complaint served directly on a consumer to facilitate debt-collection efforts is a communication subject to the requirements of §§ 1692e and 1692f."  Slip op., at 1006.

The Ninth Circuit agrees: if you play your iPod at 115 decibels for 12 hours and nuke your ears, it's your own fault

Plaintiffs Joseph Birdsong and Bruce Waggoner filed a class action complaint claiming that Apple, Inc.’s iPod is defective because it poses an unreasonable risk of noise-induced hearing loss to users.  The district court, concluding that the plaintiffs failed to state any claim and lacked standing under the Unfair Competition Law ("UCL"), dismissed.  In Birdsong v. Apple, Inc. (December 30, 2009) the Ninth Circuit affirmed.

First, the Court noted the warning that accompanied every iPod:

Permanent hearing loss may occur if earphones or headphones are used at high volume. You can adapt over time to a higher volume of sound, which may sound normal but can be damaging to Permanent hearing loss may occur if earphonesor headphones are used at high volume. You can adapt over time to ahigher volume of sound, which maysound normal but can be damaging to your hearing. Set your iPod’s volume to a safe level before that happens. If you experience ringing in your ears, reduce the volume or discontinue use of your iPod.

Slip op., at 16870-71.  The Court then concluded that the Implied Warranty of Merchantability claim failed on the pleadings:

The district court did not err. The plaintiffs admit that the iPod has an “ordinary purpose of listening to music,” and nothing they allege suggests iPods are unsafe for that use or defective. The plaintiffs recognize that iPods play music, have an adjustable volume, and transmit sound through earbuds. The third amended complaint includes statements that (1) the iPod is capable of playing 115 decibels of sound; (2) consumers may listen at unsafe levels; and (3) iPod batteries can last 12 to 14 hours and are rechargeable, giving users the opportunity to listen for long periods of time. Taken as true, such statements suggest only that users have the option of using an iPod in a risky manner, not that the product lacks any minimum level of quality. See Am. Suzuki, 37 Cal. App. 4th at 1296.

Slip op., at 16873.  After identifying claims that were apparently abandoned on appeal, the Court then examined standing under the UCL.  First, the Court noted that because the underlying Implied Warranty claim failed, the plaintiffs could not state a UCL claimed predicated upon unlawful conduct, leaving only the assertion of "unfair" practices.  Slip op., at 16876.  Next, the Court concluded that the plaintiffs had not alleged an injury of any form to themselves:

Although the plaintiffs allege that Apple has sold more than 100 million iPods, they do not claim that they, or anyone else, have suffered or are substantially certain to suffer hearing loss from using an iPod. As discussed above, as a result of this omission, the plaintiffs fail to state an implied warranty claim, and they have no standing to assert a UCL claim. The plaintiffs simply do not plead facts showing that hearing loss from iPod use is actual or imminent, as required. Buckland, 155 Cal. App. 4th at 814. To the contrary, the plaintiffs’ third amended complaint reveals the conjectural and hypothetical nature of the alleged injury as the plaintiffs merely assert that some iPods have the “capability” of producing unsafe levels of sound and that consumers “may” listen to their iPods at unsafe levels combined with an “ability” to listen for long periods of time.

Slip op., at 16878.  The plaintiffs tried to work around this problem by claiming that they did not receive the benefit of their bargain, but the Court noted that the plaintiffs admitted they received the volume warning and received no promises of performance that were not fulfilled.

I've had at least 5 iPods of varying types.  I still hear fine.  It's my daughter I worry about.  Me:  "Eat your dinner!"  Her:  Glassy-eyed stare into the distance.  It must be hearing loss.  I just can't figure out how my iPods did it, seeing as how she is 4 and doesn't listen to my iPods.

in brief: Evans v. Lasco Bathware, Inc. has a little something for everyone

While it deserves a more substantial discussion, Evans v. Lasco Bathware, Inc. (November 6, 2009) requires at least a brief mention.  In Evans, the Court of Appeal (Fourth Appellate District, Division One) reviewed an Order denying class certification.  The Court of Appeal affirmed.  The interesting elements of the opinion include (1) a discussion of when, in the Evans Court's view, damages become an issue of sufficient complexity to justify a denial of certification and (2) a discussion of "liability only" certification.  In this case, the complications arising when a defective shower pan caused varying degrees of damages in different homes convinced the Court to reject the "liability only" certification option in this case.  Nevertheless, that aspect of class actions is so infrequently discussed in California that it is of note that it was even considered here.

Battle Royale: Latest round of lower court versus Supreme Court found in Cohen v. DIRECTV, Inc.

The more time I spend reviewing decisions in the complex litigation/class action arena, the more I am convinced that the lower Courts of California are, in many instances, at odds with the California Supreme Court.  The most recent decision to suggest this schism is Cohen v. DIRECTV, Inc. (October 28, 2009) from the Court of Appeal (Second Appellate District, Division Eight).   Cohen is the most recent California appellate court Opinion to comment on the treatment of UCL claims by In re Tobacco II Cases, 46 Cal.4th 298 (2009), the prior two decisions being Kaldenbach v. Mutual of Omaha Life Insurance Company, et al. (October 26, 2009) (discussed on this blog here) and Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) (discussed on this blog here).  Cohen affirmed a trial court's denial of class certification of CLRA and UCL claims, but its analysis runs head first into Tobacco II and other Supreme Court decisions.  The UCL Practitioner has an extensive post analyzing Cohen against Tobacco II.  I will comment on the Cohen holding, but I also want to offer some thoughts as to why this divergence between California's highest court and the other courts throughout the state might be happening.

Since some of my comments depend upon the subject matter of Cohen, I begin by providing some background about the claims in that matter.  Cohen concerns an allegation that DIRECTV advertised that the channels in its HD Package were broadcast in the 1080i HD standard (an interlaced resolution of 1920x1080 pixels), at  19.4 Mbps, but later compressed each HD channel down to 6.6 Mbps.  The 19.4 and 6.6 figures refer to the volume of data being transmitted each second, expressed as Megabits per second.   So, expressed another way, the Cohen action complained that the quality of the video broadcast on HD channels was degraded by an increase in the amount of data compression.  By way of background, the raw data rate for uncompressed HD video in the 1080i format can be well in excess of 100 Mbps, depending on frame rate and color information.  This "raw" video is then compressed.  In fact, it must be compressed - there is no practical system in place to deliver 100 Mbps to your television right now.  The older mpeg-2 compression codec, or newer codecs, like H.264, compress the "raw" HD video into something smaller, using complex formulas that reduce the data used to transmit the images.  The goal of compression is to obtain the best video-quality-to-size compromise.  In the DIRECTV case, 19.4 Mbps is compressed video that would look very good, but "degradation" artifacts would still be visible on a good HD television (some "smearing" on fast action or a blocky, pixelated appearance in areas of solid color, blacks in particular).  6.6 Mbps is very compressed 1080i HD content; it is compressed to one third the size of the already compressed 19.4 Mbps feed.  You would see more compression artifacts on a good/larger HD television.

There are a number of certification issues in Cohen.  Ascertainability receives some significant discussion.  But the portion that is likely of greatest interest is the discussion of reliance under the UCL; it is the area in which Cohen diverges from Tobacco II.  Regarding reliance in UCL actions, the Trial Court in Cohen said: "Even pre-Prop. 64 cases only allow inferred reliance where the misrepresentations were common to all class members. An inference of classwide reliance cannot be made where there is no showing that representations were made uniformly to all members of the class."  Slip op., at 7.  The Cohen Court started its discussion about the UCL with this observation that presages the outcome:

Although the rules under the UCL may or may not be different following our Supreme Court's recent decision in In re Tobacco II Cases (2009) 46 Cal.4th 298 (Tobacco II), an issue which we address below, we do not understand the UCL to authorize an award for injunctive relief and/or restitution on behalf of a consumer who was never exposed in any way to an allegedly wrongful business practice.

Slip op., at 14.  The Cohen Court then stated its view of the holding from Tobacco II in two separate ways.  First, it offered a brief summary of the decision:

On review, the Supreme Court specifically addressed two questions: “First, who in a UCL class action must comply with Proposition 64's standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed? . . . Second, what is the causation requirement for purposes of establishing standing under the UCL . . . ?” (Tobacco II, supra, 46 Cal.4th at p. 306, italics added.) This past spring, the Supreme Court answered these two questions by ruling (1) only the class representatives must meet Proposition 64's standing requirements of actual injury and causation; (2) only the class representatives must establish reliance in accordance with fraudulent inducement principles in order for the class action to proceed; and (3) the class representatives do not have to show reliance on particular advertisements or marketing materials with “unrealistic” specificity. (Tobacco II, supra, 46 Cal.4th at pp. 321-329.)

Slip op., at 15.  Then, the Cohen Court offered its own summary of what it believes that the California Supreme Court actually meant:

Viewed from the other direction, Tobacco II held that, for purposes of standing in context of the class certification issue in a “false advertising” case involving the UCL, the class members need not be assessed for the element of reliance. Or, in other words, class certification may not be defeated on the ground of lack of standing upon a showing that class members did not rely on false advertising. In short, Tobacco II essentially ruled that, for purposes of standing, as long as a single plaintiff is able to establish that he or she relied on a defendant‟s false advertising, a multitude of class members will also have standing, regardless of whether any of those class members have in any way relied upon the defendant's allegedly improper conduct.

Slip op. at 15.  Notice the interesting language used by the Cohen Court: "Tobacco II essentially ruled...."  One can say that the Supreme Court "did" or "did not" rule a certain way.  But saying that it "essentially" ruled a certain way is problematic for everyone.  This suggests an outcome that is implied by Tobacco II, but not stated.  To sort that out, we have to compare Cohen to Tobacco II and determine what Tobacco II does and does not say.

Returning to Cohen, the Court was more direct when it stated its intention to disregard Tobacco II as offering a controlling decision for the case before it:  "In the contextual setting presented by Cohen's present case, we find Tobacco II to be irrelevant because the issue of 'standing' simply is not the same thing as the issue of 'commonality.'"  Slip op., at 15.  The Court continued:  "In short, the trial court's concerns that the UCL and the CLRA claims alleged by Cohen and the other class members would involve factual questions associated with their reliance on DIRECTV's alleged false representations was a proper criterion for the court's consideration when examining 'commonality' in the context of the subscribers'motion for class certification, even after Tobacco II."  Slip op., at 16.  Thus, the Cohen Court devised an analysis that permits circumvention of Tobacco II, holding that a trial court can't use classwide reliance issues for a "standing" challenge, but can use those same issues to bar certification.  I posit that what we have here is most likely either a reverse engineered holding or a generally negative reaction to Tobacco II.  The limited analysis of reliance issues as they pertain to the UCL was devised to support the desired outcome.  The alternative is that the Cohen Court didn't examine Tobacco II carefully, and I find that less likely than the notion that the panel simply does not agree with the Tobacco II analysis or doesn't like the claims in the case.

I turn now to Tobacco II and argue that it directly addresses the contentions made in Cohen.  In Tobacco II, the Supreme Court summarized the trial court's decision in that matter:

The trial court found that the “simple language” of Proposition 64 required that “for standing purposes, a showing of causation is required as to each class member's injury in fact.... [T]he injury in fact that each class member must show for standing purposes in this case would presumably consist of the cost of their cigarette purchases. But significant questions then arise undermining the purported commonality among the class members, such as whether each class member was exposed to Defendants' alleged false statements and whether each member purchased cigarettes ‘as a result’ of the false statements. Clearly ... individual issues predominate, making class treatment unmanageable and inefficient.”

Tobacco II, 46 Cal. 4th at 310-311.  One can almost excuse the Cohen Court's narrow construction of Tobacco II as a "standing" decision.  After all, the paragraph above does talk quite a bit about standing.  But this overlooks the fact that causation is entangled with standing, and, for the named plaintiff, showing reliance is the method by which that plaintiff shows standing under a UCL claim asserting a "fraudulent" prong (likely to deceive) standard.  What Cohen ignores is the fact that, according to Tobacco II, the causation showing (in this instance, a reliance showing) is not an element of a UCL claim, except that, after Proposition 64, the named plaintiff must make that showing.  In fact, the next page of Tobacco II removes any doubt that pre-Proposition 64 decisions construing the UCL remain viable:  "'[T]o state a claim under either the UCL or the false advertising law, based on false advertising or promotional practices, "it is necessary only to show that 'members of the public are likely to be "deceived." ' " ' (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 951, 119 Cal.Rptr.2d 296, 45 P.3d 243.)"  Tobacco II, 46 Cal. 4th at 312.

Continuing, the Supreme Court said:

The fraudulent business practice prong of the UCL has been understood to be distinct from common law fraud. “A [common law] fraudulent deception must be actually false, known to be false by the perpetrator and reasonably relied upon by a victim who incurs damages. None of these elements are required to state a claim for injunctive relief” under the UCL. ( Day v. AT & T Corp.(1998) 63 Cal.App.4th 325, 332, 74 Cal.Rptr.2d 55; see State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1105, 53 Cal.Rptr.2d 229.) This distinction reflects the UCL's focus on the defendant's conduct, rather than the plaintiff's damages, in service of the statute's larger purpose of protecting the general public against unscrupulous business practices. (Fletcher v. Security Pacific National Bank (1979) 23 Cal.3d 442, 453, 153 Cal.Rptr. 28, 591 P.2d 51.)

Tobacco II, 46 Cal.4th at 312.  This discussion is at odds with Cohen's treatment of Tobacco II.  Tobacco II said that "the UCL class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim, in compliance with Code of Civil Procedure section 382, to achieve the remedial goals outlined above. It does not change that substantive law, however."   Tobacco II, 46 Cal.4th at 313.  And Tobacco II unambiguously holds (i.e., not "essentially" holds) that:

[T]he language of section 17203 with respect to those entitled to restitution-“to restore to any person in interest any money or property, real or personal, which may have been acquired ” (italics added) by means of the unfair practice-is patently less stringent than the standing requirement for the class representative-“any person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” (§ 17204, italics added.) This language, construed in light of the “concern that wrongdoers not retain the benefits of their misconduct” (Fletcher v. Security Pacific National Bank, supra, 23 Cal.3d 442, 452, 153 Cal.Rptr. 28, 591 P.2d 51) has led courts repeatedly and consistently to hold that relief under the UCL is available without individualized proof of deception, reliance and injury. (E.g., Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1267, 10 Cal.Rptr.2d 538, 833 P.2d 545; Committee on Children's Television, Inc. v. General Foods Corp., supra, 35 Cal.3d at p. 211, 197 Cal.Rptr. 783, 673 P.2d 660.)  Accordingly, to hold that the absent class members on whose behalf a private UCL action is prosecuted must show on an individualized basis that they have “lost money or property as a result of the unfair competition” (§ 17204) would conflict with the language in section 17203 authorizing broader relief-the “may have been acquired” language-and implicitly overrule a fundamental holding in our previous decisions, including Fletcher, Bank of the West and Committee on Children's Television.

Tobacco II, 46 Cal.4th at 320.  If "reliance" is not an element of a UCL claim, why is there still the perception that reliance has a role to play in UCL actions (outside of named plaintiff standing)?  The Tobacco II decision may have supplied that answer as well:

Our conclusion with respect to the remedies set forth in section 17203 has nothing to do with the nonrestitutionary disgorgement disallowed in Kraus v. Trinity Management Services, Inc., supra, 23 Cal.4th 116, 96 Cal.Rptr.2d 485, 999 P.2d 718. In Kraus, we concluded that section 17203 does not allow a court to order disgorgement into a fluid recovery fund, e.g., to “compel a defendant to surrender all money obtained through an unfair practice even though not all is to be restored to the persons from whom it was obtained or those claiming under those persons.” (Id. at p. 127, 96 Cal.Rptr.2d 485, 999 P.2d 718.) This prohibition against nonrestitutionary disgorgement did not overrule any part of Fletcher v. Security Pacific National Bank, supra, 23 Cal.3d 442, 153 Cal.Rptr. 28, 591 P.2d 51, under which restitution may be ordered “without individualized proof of deception, reliance, and injury if necessary to prevent the use or employment of an unfair practice.” (Bank of the West, supra, 2 Cal.4th at p. 1267, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

Tobacco II, 46 Cal.4th at 320, n. 14.  This suggests that, in some circumstances, the quantum of a restitution order might ultimately depend upon a showing of injury by class members.  Since reliance on an unfair practice can act as a surrogate of sorts for injury (under the the right facts and right species of UCL claim), this may explain why the belief persists that reliance is an unstated element of a UCL claim.  It's either that, or a petulant refusal to understand that the UCL's fraudulent prong has nothing to do with common law fraud.

Tobacco II has already been circumvented by two of three California Courts of Appeal to apply it.  The important question is why?  Options include, at least, a desire not to reverse a trial court, a dislike of the holding of Tobacco II, a dislike of the theory of the case, or a general resistance to class actions (or some amalgam of those options).

The first option exists as an element of all appeals.  Courts of Appeal begin their analysis with a presumption that the trial court will be affirmed.  I cannot conclude that this is the primary factor in the Cohen Court's dismissive analysis.

The second option is certainly possible.  The Cohen Court sounded almost disdainful of Tobacco II when it said, "In the contextual setting presented by Cohen's present case, we find Tobacco II to be irrelevant...."  Slip op., at 15.  I find this option to be a plausible explanation.

The third option is also possible.  I do not find it a stretch to imagine the initial judicial reaction being something akin to, "Megawho per second?  You're kidding, right?"  When that happens, I think it is human nature to look for reasons not to facilitate the case or claim.  If my comments offend any judicial sensibilities, I apologize for that.  But we must recognize every participant in the judicial system -- clerk, judge, lawyer -- are human beings, with all of our prejudices and predispositions.  I also find this option to be a plausible explanation.

The fourth option is also possible.  When the various Districts and Divisions are examined over time, I have little doubt that some find panels find great utility in the class action device, while others find them abusive.  Again, this has more to do with the predisposition of the observer than anything else, as it is as easy to find a class action of great social utility as it is to find one of questionable or zero worth.  It's also worth noting that the second of my proposed options can be a subset of this fourth option.  In other words, discomfiture about the Tobacco II opinion can be motivated either by that particular opinion or by an overall judicial fatigue regarding class actions generally.

I do not want to suggest that I know which of my theories, if any, explains Cohen.  I suspect that some combination of class action fatigue and specific resistance to the claims in this particular case are at work here, but that is speculative on my part.  However, I am certain that a growing rift exists between the Supreme Court's view of major legal questions and the views held by trial and intermediate appellate courts.  As I am doubtful that anything can be done about this issue other than to raise awareness and hope for the best from our courts, I do not believe it is an issue that will resolve itself any time soon.

It is my intention to write more about the nature of this judicial divide here or elsewhere.

Back to the drawing board: AT&T's arbitration agreement that bans class actions is still unconscionable

It seems to me that the telecommunications and credit card industries are more determined to make an arbitration agreement with a class action ban stick than any other industry.  Most employers have given up that dream, but not the phone company and not the bank.  The latest arbitration agreement with a class action ban comes to us compliments of AT&T Mobility LLC.  But, in Laster v. AT&T Mobility LLC (October 27, 2009), the Ninth Circuit sends another class action ban to the unconscionability graveyard, and just in time for Halloween.

Those crazy mad scientists in the secret AT&T Arbitration Agreement Drafting Lab (also known as the "Triple A - DL" to those in the know), their latest scheme to ban class actions was ingenious, and could have helped them take over the world!  The plan was to circumvent the holding of Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) with a little bonus payment clause:

[T]he phone company points to a new wrinkle: unlike the arbitration clause in Shroyer, this arbitration clause provides for a “premium” payment of $7,500 (the jurisdictional limit of California’s small claims court) if the arbitrator awards the customer an amount greater than the phone company’s last written settlement offer made before selection of an arbitrator. Hence, says the phone company, the arbitration clause is not an artifice that has the practical effect of rendering it immune from individual claims.

Slip op., at 14391.  The Ninth Circuit disagreed, and shot down a preemption argument along the way:

We will find, on second blush, the new “premium” payment does not distinguish this case from Shroyer, and that under California law, the present arbitration clause is unconscionable and unenforcable [sic]. Further, we will also find no merit to the phone company’s claim the Federal Arbitration Act (FAA) preempts California unconscionability law.

Slip op., at 14391.  Back to the Triple A - DL, Snidely.  For those not satisfied with just the holding, the Court's analysis relied heavily on Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005):

The California Supreme Court addressed the unconscionability of class action waivers in arbitration agreements for the first time in Discover Bank v. Sup. Ct., 113 P.3d 1100 (Cal. 2005), holding that class action waivers were at least sometimes unconscionable under California law. 113 P.3d at 1108. Class actions, the court reasoned, serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money. Id. at 1105. Class action waivers pose a problem because, “small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Id. at 1106. In this way, the class action waiver allows the company to insulate itself from liability for its wrongdoing and the policy behind class actions is thwarted. Id. at 1109.

Slip op., at 14394.  The Court then explained how it interpreted the test in Discover Bank:

We have interpreted Discover Bank as creating a three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) is the agreement a contract of adhesion; (2) are disputes between the contracting parties likely to involve small amounts of damages; and (3) is it alleged that the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money. Id. at 983. In Shroyer, we noted that “there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied.” Id. Because we hold that the class action waiver at issue satisfies all three parts of the test, as was true in Shroyer, “it is unnecessary to explore those circumstances here.” Id.

Slip op., at 14395.  The application of the Discover Bank test tracks Shroyer.  The Court then disposed of AT&T's contention that the promise of a premium payment distinguished this agreement from Shroyer:

The $7,500 premium payment is available only if AT&T does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected. This means that if a customer files for arbitration against AT&T, predictably, AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22. We held in Shroyer that a claim worth a few hundred dollars did not provide adequate incentive for a customer to bother pursuing individual arbitration. 498 F.3d at 986. The $30.22 at issue here is even less of an incentive to file a claim. As a result, aggrieved customers will predictably not file claims—even if the odds are that after the letter-writing and arbitrator-choosing, they will get a $30.22 offer—thereby “greatly reduc[ing] the aggregate liability” AT&T faces for allegedly mulcting small sums of money from many consumers. See id. The premium payment provision has no effect on this conclusion, nor do any of the other provisions of AT&T’s revised arbitration clause. The actual damages a customer will recover remain predictably small, thus under the rationale of Discover Bank and Shroyer, AT&T’s class action waiver is in effect an exculpatory clause, hence substantively unconscionable.

Slip op., at 14397-98.  I'll spare you any excerpts from the preemption discussion.  It's sufficient to say that the Court was impressed with a repeat of arguments rejected in Shroyer.

In re Tobacco II Cases receives more attention in Kaldenbach v. Mutual of Omaha

In re Tobacco II Cases hasn't been out long, but its significance is already hard to deny.   Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) was the first published opinion by a California Court of Appeal to apply In re Tobacco II Cases.  See blog post.  In Kaldenbach v. Mutual of Omaha Life Insurance Company, et al. (October 26, 2009), the Court of Appeal (Fourth Appellate District, Division Three) had occasion to discuss In re Tobacco II Cases in the context of an appeal of the denial of class certification in a "vanishing premiums" action.

Before discussing the opinion, a definition is in order.  “Generally speaking, so called ‘[v]anishing premium policies are paid dividends which in some instances can be sufficient to cause the premium to “offset” whereby dividend values are used to pay the premium. In such an instance, the cash premium “vanishes” and is no longer due from the insured.’”  Keyes v. Guardian Life Ins. Co. of America, 194 F.R.D. 253, 254, n. 1 (S.D. Miss. 2000), quoting Phillips v. New England Mut. Life Ins. Co., 36 F.Supp.2d 345, 347 (S.D. Miss. 1998).)  In other words, the theory is that a larger sum is paid into a policy for a few years, and then the investment of those funds should generate a dividend that is sufficient to pay the premium thereafter.

Returning to the opinion, the Court of Appeal spent significant time discussing the facts of the case and the nature of "vanishing premium" policies before summarizing the Trial Court's Order denying class certifiation:

The trial court denied the motion for class certification. It concluded Kaldenbach had not demonstrated numerosity other than his assertion that over 4,000 policies were sold.  Kaldenbach had not shown ascertainability as there was no evidence as to how it could be shown which of the policyholders had received illustrations during the sales presentation.

The court concluded Kaldenbach had not shown typicality because Meyerson testified in his deposition that the sale to Kaldenbach was not typical as he had a clearly defined dominant need, Kaldenbach testified he never received any explanation from Meyerson about how the policy worked, how interest rates or costs of insurance were determined, what the extent of his obligation to pay annual premiums was, and what might happen if he stopped paying premiums. By contrast, Meyerson testified he fully explained the policy to Kaldenbach. “If [Kaldenbach] and Meyerson cannot even agree as to what was stated during the [sales] presentation to [Kaldenbach], how can [Kaldenbach's] claim be typical [and] be used to prove 4,000 claims? . . . It will take . . . individual evaluation of each claim to determine liability.”

The court also found Kaldenbach had not established commonality. Kaldenbach primarily relied upon uniformity in Mutual‟s sales materials, training, and illustrations, but there was no evidence linking those common tools to what was actually said or demonstrated in any individual sales transaction. The training materials and methods were not uniform throughout the class period. None of the allegedly scripted or memorized sales materials covered the alleged misrepresentations. And there was no evidence that uniform training or sales materials were used with each putative class member. There was no evidence all independent agents were required to take the offered training, took the offered training, had the same training, or used the same training or materials in their sales presentations. In fact “[t]here was evidence that the agents were free to ignore the training and written manuals.” Mutual‟s agents were independent contractors over whom Mutual had little or no control. Meyerson testified he did not follow his training or manuals in making the presentation to Kaldenbach. Kaldenbach had argued commonality could be found based solely on the use of illustrations, but Kaldenbach testified he never looked at the entire illustration, he only looked at the part of the illustration that showed the premium could vanish in four years because that was what Kaldenbach wanted.

The court also believed varying applicability of the statute of limitations and the delayed discovery rule to each putative class member‟s claim precluded class certification. The court noted the 70 percent lapse rate Kaldenbach alleged occurred with the policy at issue did not establish class-wide liability. There was no evidence it was an unusual lapse rate and no evidence as to why the policies had lapsed. For example, individual policyholders may have taken loans out against the cash accumulation, they may have decided to purchase a different product, or no longer needed the coverage. “[A]nalysis of why a policy lapsed is just one more issue that would need to be addressed on an individual and not class wide basis.”

Finally, the court listed the individualized issues that predominated and which could not be proven on a class-wide basis including: (1) did the agent take Mutual‟s training and read Mutual‟s manuals; (2) did the agent always use the training and materials; (3) what materials, disclosures, representations, and explanations were given to any given purchaser; (4) was an illustration used; (5) what information was input into the illustration; (6) did the purchaser rely on representations made in the sales presentation; (7) what were the customer‟s individual needs; (8) when did each class member‟s cause of action accrue; and (9) did the individual class member‟s policy lapse, and if so, why?

Slip op., at 11-13.   After describing the valuable benefits of class actions, and noting that the reasoning of the Trial Court is scrutinized when reviewing an order denying certification, the Court of Appeal observed:  "We may not reverse, however, simply because some of the court's reasoning was faulty, so long as any of the stated reasons are sufficient to justify the order. (Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 655-656 (Caro).)"  Slip op., at 14-15.

As the Court of Appeal turned to the merits, it began its discussion by cataloging a number of federal court decisions where class certification was denied on the same theory.  Parenthetically, the placement of this discussion suggests that the conclusions of those federal cases persuaded the Court of Appeal to affirm the Trial Court.

Eventually, the Court of Appeal turned to the promised discussion of In re Tobacco II Cases as it analyzed the denial of class certification for the UCL Cause of Action.  The language selected by the Court of Appeal for italicization clearly suggests the outcome:

A private person “may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements . . . and complies with [s]ection 382 of the Code of Civil Procedure.” (Bus. & Prof. Code, § 17203.) Recently, in In re Tobacco II Cases (2009) 46 Cal.4th 298, 3245, the Supreme Court held in the UCL class action context, the “injury in fact” standing requirement imposed by Proposition 64 applies only to the class representative and not to “absent class members in a UCL class action where class requirements have otherwise been found to exist.” (Italics added.) UCL relief is available on a class basis “without individualized proof of deception, reliance and injury. [Citations.]” (Id. at p. 320.)

Slip op., at 20.  The Plaintiff argued that the Trial Court incorrectly "premised its order denying class certification on the complexities of establishing each absent class members' reliance on the representations made and their injury."  Slip op., at 20.  The Court of Appeal wasn't concerned with this error:

There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual's training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.

Slip op., at 21.  The Court of Appeal went on to distinguish Kaldenbach's case from In re Tobacco II Cases and Massachusetts Mutual:

[B]oth In re Tobacco II Cases and Massachusetts Mutual involved identical misrepresentations and/or nondisclosures by the defendants made to the entire class. In re Tobacco II Cases targeted the tobacco industries' deceptive advertisements and statements disseminated to the public about the health effects of tobacco use. Massachusetts Mutual concerned the insurer's failure to disclose to policy purchasers and its agents its plan to decrease its discretionary dividend. In other words, there was no issue about defendants' uniform business practices giving rise to the UCL claim.

But here there is no such uniformity. Although Kaldenbach claimed Mutual's presentations relating to ALPs were uniform, it utilized standardized training methods, materials, and scripts to which agents were required to adhere, the evidence showed the opposite. Mutual's policies were sold by independent agents, and during the class period, they were not required to attend training or utilize any given sales materials. Agents were not required to adhere to a scripted sales presentation. Indeed Meyerson, who sold Kaldenbach his policy, testified at his deposition he did not use a scripted sales presentation or any training materials in making the sale to Kaldenbach.

Slip op., at 22.  If nothing else, analyses like this will encourage sales policies that state vague guidelines and some variation in sales approaches to eliminate uniformity of representations to consumers.  In any event, Kaldenbach's argument that he was entitled to an "inference of injury" for his fraud claim met with a similar fate, as the Court of Appeal noted that the inference is only available where the misrepresentations are uniform.

The Court of Appeal ignored the balance of the Trial Court's Order, concluding that the predominance of individualized issues was a sufficient ground for denying class certification.  A complicated set of facts coupled with a seemingly conservative Court of Appeal made this outcome all but a formality.

En banc hearing requests denied in Gorman v. Wolpoff & Abramson

On October 21, 2009, in Gorman v. Wolpoff & Abramson (previously discussed by this blog here), the Ninth Circuit panel issued an amended Opinion that does not substantively alter the original Opinion and denied all petitions for panel rehearing or rehearing en banc.  When everybody wants a case reheard en banc, it was either a very good opinion or a disasterously bad opinion.  In this instance, it's much closer to the former.  Read the Opinion for pointers on how to be an effective disgruntled consumer and provide sufficient notice to your credit card company that you are royally ticked off about some goods you've received to reduce the likelihood of unqualified negative credit report entries.

This time it's the big corporation suing after a Justice Department anti-trust investigation: AT&T sues LCD manufacturers for price fixing

The AmLaw Litigation Daily, part of the law.com network of websites, is reporting that AT&T (a collection of various AT&T entities) have filed "an antitrust suit filed against liquid crystal display screen makers after four LCD makers paid a historic $585 million in criminal antitrust fines last November."  Alison Frankel, Crowell & Moring Files AT&T's Antitrust Complaint Against Liquid Crystal Display Manufacturers (October 21, 2009) www.law.com.  According to the complaint, AT&T purchased over 300 million handsets with LCD screens (Paragraph 5) that were impacted by the alleged price-fixing conspiracy.  That does not include LCD panels purchased by AT&T in all other forms, including computer monitors used internally by AT&T.  As AmLaw notes, an antitrust suit by a corporate reseller is not something you see every day.

I guess this means that I paid too much for all of my LCD screens too.  If I didn't have the tail end of a cold, I'd be angry about that.  On a related note, I have to assume that, if there aren't consumer anti-trust suits on file yet, there will be soon.

Update on 2009-10-21 23:40 by The Complex Litigator

It occurs to me after looking over the complaint filed by AT&T that even major law firms need me to write my planned opus on the use of Microsoft Word in law firms.  For instance, doesn't it bother you when the text of a document doesn't align with the line numbers for the balance of a page after a single-spaced quote?  It bothers me.  In any event, if you'd like the occasional Word tip on this blog, leave a comment and let me know if that would interest you.