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.

Consumer Attorneys of California makes it to the bleeding edge: Twitter and Facebook

Consumer Attorneys of California (CAOC) is breaking into new media territory with presence on Facebook and Twitter.  You can find CAOC on Twitter by following @ConsumerAttysCA.  You can become a fan of CAOC on Facebook here.  Personally, I've almost given up on Facebook, purely because of its deplorable disregard for user privacy.  Facebook needs to keep its act clean for a while just to get back to zero with me.  The problem is, half the planet is using Facebook, so my protestations are unlikely to start a grass roots movement.

California Supreme Court activity for the week of January 18, 2010

The California Supreme Court held its (usually) weekly conference on January 20, 2010.  The only interesting, if not significant bit of information, is the fact that some well-known cases are still kicking around:

• Review denied in Gattuso v. S.C. (Harte-Hanks Shoppers)
• Review denied in Harper v. S.C. (24 Hour Fitness) (Successful plaintiff-appellant in initial appeal challenged the striking of their 170.6 challenge on remand.  Court of Appeal affirmed.)

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.

Ninth Circuit holds that a class representative can voluntarily settle individual claims but retain a personal stake sufficient to appeal the denial of class certification

In the last few years, California Courts of Appeal have examined the question of whether an putative class representative can voluntarily settle individual claims while "agreeing" with the defendant that the plaintiff would retain a right to appeal the denial of class certification.  That examination hasn't gone well for plaintiffs:  "The parties' intent cannot compel this court to issue an advisory opinion on issues in which, after the settlement, Larner no longer retains any individual, personal stake."  Larner v. Los Angeles Doctors Hospital Associates, LP, 168 Cal. App. 4th 1291, 1298 (2008).  However, the Larner Court suggested that, had Larner "reserved any right to shift attorney fees to other class members," she might have retained an interest in the litigation sufficient to support her right to appeal.  Larner, at 1304.

After Larner, the trend continued, and with increasing momentum against plaintiffs.  Watkins v. Wachovia Corp., 172 Cal. App. 4th 1576 (2009) actually criticized Larner: "We believe that it is illogical to import the law governing 'pick off' cases into the context of a voluntary settlement."  Watkins, at 1591.  Watkins bluntly declared, "There are no public policy interests implicated by a settlement voluntarily accepted."  Watkins, at 1591.

The Ninth Circuit had occasion to examine this same issue.  In Narouz v. Charter Communications (9th Cir. Jan. 15, 2010), the Court examined "whether the settlement and voluntary dismissal by a class representative of his personal claims in a putative class action lawsuit renders moot his appeal of the denial of class certification."  Slip op., at 1172.  Identifying the issue as one open in the Ninth Circuit, the Court began its analysis with an examination of decisions arising in the context of "involuntary" claim expiration:

The Supreme Court held in Geraghty that when a class representative’s claims expire involuntarily, that representative “retains a ‘personal stake’ in obtaining class certification sufficient” to maintain jurisdiction to appeal a denial of class certification. Id. at 404. The Court reasoned that the class representative maintained at least an interest in spreading litigation costs and shifting fees and expenses to the other litigants with similar claims. Id. at 403; see also Deposit Guar. Nat’l Bank, Jackson Miss. v. Roper, 445 U.S. 326, 334 n.6 (1980).

Slip op., at 1175.  Much like the Larner Court, the Ninth Circuit held:

We hold that when a class representative voluntarily settles his or her individual claims, but specifically retains a personal stake as identified by Geraghty and Roper, he or she retains jurisdiction to appeal the denial of class certification. In so holding, we join several other circuits. See Richards v. Delta Air Lines, Inc., 453 F.3d 525 (D.C. Cir. 2006); Potter v. Norwest Mortgage, Inc., 329 F.3d 608 (8th Cir. 2003); Toms v. Allied Bond & Collection Agency, Inc., 179 F.3d 103 (4th Cir. 1999); Love v. Turlington, 733 F.2d 1562 (11th Cir. 1984).

Slip op. at 1175.  The Court then emphasized that "a class representative cannot release any and all interests he or she may have had in class representation through a private settlement agreement" and still assert the existence of a "personal stake" in the litigation.  Slip op. at 1175.

The Court then briefly criticized the District Court's failure to create a proper record for review when it refused to certify the proposed class for settlement purposes:  "It is clear here that the district court erred in denying class certification without providing any findings or providing any analysis of the Rule 23 factors."  Slip op., at 1179.  The Court succinctly said, "Meaningful appellate review is impossible."  Slip op., at 1179.

There was also a spirited exchange between District Judge Korman (Senior United States District Judge for the Eastern District of New York, sitting by designation), who concurred in the decision, and Circuit Judge Rymer, who dissented.

United States District Court Judge Florence Marie Cooper passes

As reported by the Los Angeles Times, United States District Court Judge Florence Marie Cooper died of lymphoma on January 15, 2010.  Judge Cooper was appointed to the federal bench by President Bill Clinton in 1999.

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.

California Supreme Court activity for the week of January 11, 2010

The California Supreme Court held its (usually) weekly conference today.  The only notable result (in my view) was:

• A depublication request was denied in Clement v. Alegre (September 23, 2009) (conduct during discovery)

The Supreme Court also issued a number of "Grant and Hold" orders in criminal cases.

Los Angeles County Superior Court set to close one complex litigation courtroom

According to the Daily Journal (subscription required), Los Angeles Superior Court will close one of its seven complex litigation courtrooms as of April 12, 2010.  The closure is projected to save the Court $600,000.  "Judge Peter Lichtman will be transferred from his current assignment at Central Civil West to the Stanley Mosk courthouse downtown, and employees working in his courtroom will be reassigned."  The complex litigation program has, in the last year, declined to take class actions with increasing frequency.  The closure of one of the complex litigation courtrooms is a significant loss for the people of Los Angeles County.  The concentration of experience with the management of complex litigation matters and class actions simply cannot be duplicated in the general civil departments.  But here we see yet another casualty of the grossly incompetent management of California's fiscal affairs.

Update on 2010-01-14 06:38 by The Complex Litigator

A reader asks an important question: how will closing the department and moving the Judge and staff save $600,000?  Good question.  This reader points out that the cases won't go away, so the work will get distributed to other judges.  Assuming that a net reduction of staff occurs, i.e., that the staff of this department fill vacancies elsewhere and the system continues with one less department, it is still not obvious that you arrive at a figure of $600,000 from the salaries and benefits cut.  Anyhow, so much for our co-equal third branch of government, which gets to stand in the soup line and wait for the other two branches to figure a way out of the mess they've made of things.

In Weinstat v. Dentsply International, Inc., Court of Appeal reverses decertification order based on Tobacco II decision

While the appellate court opinions that have avoided Tobacco II received extensive commentary in the media, including here, not all Courts of Appeal have followed that course.  In Weinstat v. Dentsply International, Inc. (January 7, 2010), the Court of Appeal (First Appellate District, Division Four) considered an appeal from an order decertifying a class of dentists as to their causes of action under the unfair competition law (UCL) and for breach of express warranty against the manufacturer of the Cavitron ultrasonic scaler (Cavitron).   The trial court decertified the class, based upon an "appellate court decision interpreting the Proposition 64 amendments to the UCL as requiring that all class members—not just the representatives—show an injury in fact."  Slip op., at 1.  The Court was swift in rejecting that basis for decertification:  "Recently, the state's high court issued its decision in In re Tobacco II Cases (2009) 46 Cal.4th 298 (Tobacco II). Tobacco II rejects the legal premises underpinning the decertification order as to the UCL claim and mandates reversal."  Slip op., at 1.

The Court of Appeal continued with its summary of its Order reversing the decertification order:

We must also reverse the order decertifying the class as to the breach of express warranty claims. Procedurally, the order was improper because it was rendered in the absence of new law or evidence. Substantively, the order was contrary to law because it improperly grafted an element of prior reliance onto the express warranty claims; this error infected the entire ruling as to those claims.

Slip op., at 1.  As did the Court of Appeal in Vioxx, the Court here outlined the contours of a UCL claim after Tobacco II:

In Tobacco II, our Supreme Court rejected the rationale that informed the trial court's decertification order. First, it held that Proposition 64's standing requirements for UCL actions apply only to the class representatives. (Tobacco II, supra, 46 Cal.4th at p. 306.) Second, the standing requirements as modified by Proposition 64 impose an actual reliance requirement on representative plaintiffs prosecuting a private enforcement action under the fraud prong of the UCL. (Id. at p. 326.) Further, while only the class representative need establish personal reliance on the defendant's misrepresentation or nondisclosure resulting in damage, the representative need not show that such reliance was “ ' “the sole or even the predominant or decisive factor in influencing his conduct. . . . It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision.” [Citation.] [¶] Moreover, a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material. [Citations.]' ” (Id. at pp. 326-327.) A misrepresentation is “material” if a reasonable person would attach importance to its existence or nonexistence in deciding his or her course of action in the transaction in question. (Id. at p. 327.) Finally, the class representative need not demonstrate individualized reliance on a specific misrepresentation. (Ibid.)

Slip op., at 7.  The defendant, at oral argument, "took a different tack" and argued that the Court of Appeal should "affirm the UCL decertification order because one of the trial court's UCL decertification rulings was untainted by Proposition 64 standing concerns, namely the ruling that the UCL claims were inappropriate for class treatment because individual issues about the nature and extent of any material misrepresentation would predominate over common issues," citing Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal.App.4th 830, 844 (2009).  Slip op., at 7, n. 8.  While not directly commenting on Kaldenbach, the Court said:

First, procedurally this ruling was improper because Dentsply offered no new law or newly discovered evidence regarding the nature and extent of any material misrepresentation. (See post, pt. II.B.2.) Second, the ruling was substantively wrong.

The UCL prohibits as unfair competition “any unlawful, unfair or fraudulent business act or practice . . . .” (Bus. & Prof. Code, § 17200.) The act focuses on the defendant’s conduct, rather than the plaintiff's damages, in keeping with its larger purpose of protecting the general public against unscrupulous business practices. (Tobacco II, supra, 46 Cal.4th at p. 312.) This case involves alleged uniform fraudulent practices—misrepresentations regarding the Cavitron's safety for surgical use and the concomitant nondisclosure of biofilm risk—by Dentsply, directed to the entire class. To sustain a UCL cause of action based on such fraudulent or deceptive practices, a plaintiff must show that “ ' “members of the public are likely to be deceived.” ' ” (Aron v. U-Haul Co. of California (2006) 143 Cal.App.4th 796, 806, quoting Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 211; Massachusetts Mutual Life Ins. Co. v. Superior Court (2002) 97 Cal.App.4th 1282, 1291; accord, Kaldenbach v. Mutual of Omaha Life Ins. Co., supra, 178 Cal.App.4th at p. 847.)

A plaintiff's burden thus is to demonstrate that the representations or nondisclosures in question would likely be misleading to a reasonable consumer. (See Aron v. U-Haul Co. of California, supra, 143 Cal.App.4th at p. 807.) The question of materiality, in turn, is whether a reasonable person would attach importance to the representation or nondisclosure in deciding how to proceed in the particular transaction—in other words, would a reasonable dentist attach importance to Dentsply's claim that the Cavitron was safe for use in surgery. (Tobacco II, supra, 46 Cal.4th at p. 327.) The safety of the Cavitron would be material to any dentist regardless of when the representation was made. The materiality of Dentsply's representations concerning the Cavitron's safety for surgical uses was established objectively by appellants' actual use of the device for oral surgery, in accordance with those representations, regardless of whether appellants saw the Directions before or after purchasing the device. There are no individual issues concerning the nature and extent of material misrepresentations.

Slip op., at 8, n. 8.  The Court then directed the trial court to consider the limited question of whether the plaintiffs could meet the standing requirement outlined in Tobacco II:  "We remand for the limited purpose of determining whether the named representatives can meet the UCL standing requirements announced in Tobacco II and if not, whether amendment should be permitted."  Slip op., at 9.

The Court of Appeal then considered the decertification ruling as it related to the breach of warranty claim.  In doing so, the Court held that a party seeking to decertify a certified class must demonstrate new facts and circumstances, as with any other motion for reconsideration:

Dentsply is adamant that there is no requirement of changed circumstances or new evidence when the trial court revisits certification prior to a decision on the merits. The dicta in Green v. Obledo, supra, 29 Cal.3d 126, quoted above, concerning prejudgment decertification, would suggest otherwise. The standard announced in Green allows flexibility while curtailing defendant abuse. In the case at hand, Dentsply's motion for decertification was accompanied by changed circumstances, most notably the Pfizer decision. However, this circumstance only pertained to the UCL cause of action. Nevertheless, the trial court went on to address Dentsply's reassertions as to why the breach of warranty class should be decertified as well. Decertifying one theory should not sanction decertifying another absent some commonality with the changed circumstance or some other situation justifying reconsideration. Here there was none.

Slip op., at 11-12.  Then, over another 11 pages of opinion, the Court of Appeal explained the basis for the following observation:

The lower court ruling rests on the incorrect legal assumption that a breach of express warranty claim requires proof of prior reliance. While the tort of fraud turns on inducement, as we explain, breach of express warranty arises in the context of contract formation in which reliance plays no role.

Slip op., at 12.  Does this opinion add any fuel to the Cohen Petition for Review currently before the California Supreme Court?