Ordinary agency principles apply in UCL and FAL cases

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And now I get to try and play catch-up after spending so much time with the back-end issues that have to be ironed out to start a podcast.  To many visitors, this may be old news, but I'd like to note significant cases from the last month so they are here for reference.  I've faced down the issue of whether agency principles apply in UCL and FAC cases.  In People v. JTH Tax, Inc. (January 17, 2013), the Court of Appeal (First Appellate District, Division Two) tackled that exact issue.  Of primary significance as far as I am concerned is the fact that the Court criticized two cases commonly cited by defendants on this issue, People v. Toomey, 157 Cal.App.3d 1 (1985) and Emery v. Visa Internat. Service Assn., 95 Cal. App. 4th 952 (2002).

The background is complex, but a brief summary puts the discussion in context.  Liberty provides certain tax preparation and related loan services throughout the United States.  Liberty had more than 2,000 franchised and company-owned stores throughout the United States.  Liberty offered tax preparation services, e-filing, “refund anticipation loans” (RAL) and “electronic refund checks” (ERC).  The Attorney General filed a complaint against Liberty, alleging that Liberty had violated the UCL and the FAL.  The lawsuit claimed there were misleading or deceptive statements in print and television advertising by Liberty and its franchisees regarding Liberty's RAL's and ERC's and inadequate disclosures to customers in Liberty's RAL and ERC applications regarding debt collection, certain costs and interest on the extension of credit, the time it takes to receive money under refund options offered, and other matters. The remedies the People sought included injunctive relief, civil penalties, and an order of restitution.

When the Court turned to the legal issue of agency liability for UCL and FAL violations, the Court said:

Also, as the People point out, our Supreme Court has held, without the limitations urged by Liberty in the present case, that “section 17500 [the FAL] incorporates the concept of principal-agent liability.” (Ford Dealers Assn. v. Department of Motor Vehicles (1982) 32 Cal.3d 347, 361 ( Ford Dealers ).) Since violations of the UCL “include any . . . unfair, deceptive, untrue or misleading advertising and any act prohibited by [the FAL]” (§ 17200), Ford Dealers establishes that persons can be found liable for misleading advertising and unfair business practices under normal agency theory. To the extent that Toomey, supra, 157 Cal.App.3d 1, or Emery, supra, 95 Cal.App.4th 952 hold otherwise, which defendant implies without stating outright in the course of arguing its limiting theories, these cases are mistaken.

It is clear that, as the trial court recognized, we must be mindful that we are applying agency theory in the context of the franchisor-franchisee relationship. A franchisee, by definition, operates a business “under a marketing plan or system prescribed in substantial part by a franchisor,” which operation “is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor . . . .” (Corp. Code, § 31005, subd. (a)(1), (2).) Accordingly, “the franchisor's interest in the reputation of its entire [marketing] system allows it to exercise certain controls over the enterprise without running the risk of transforming its independent contractor franchise into an agent.” (Cislaw , supra, 4 Cal.App.4th at p. 1292, quoted in Kaplan, supra, 59 Cal.App.4th at p. 745.) Thus, a franchisor may exercise a right of control over such activities as advertising to protect its marks and goodwill.

However, it is equally clear that the franchisor's unique interests do not eliminate or alter the application of agency theory if the franchisor exercises a right of control that goes beyond its interests in its marks and goodwill. It is a question of fact as to whether, as the court considered in Cislaw, the franchisor retains " 'the right to control the means and manner in which the result is achieved' " and exercises "complete or substantial control over the franchisee." ( Cislaw, supra, 4 Cal.App.4th at p. 1288.) This is precisely the standard applied by the trial court. Therefore, Liberty's argument that the court applied the wrong legal standard to determine that it was liable for its franchisees' misleading advertising lacks merit.

Slip op., at 24-25.  The opinion, overall, is massive, since much of the discussion focuses on the factual record in the trial court.  The legal discussion of principle-agent liability for UCL and FAL violations is sure to work its way into civil litigation.

A note on the Class Re-Action Podcast

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I have received some feedback on the sound quality, and I want anyone who has listened to the premier episode to know that the sound quality isn't where I want it either, but it will get there.  I had to process out a lot of background noise coming in from one of the connections, and heavy noise removal causes other issues.  In the long run, I will likely provide better microphones to repeat guests.  There simply is no comparison between a good microphone and the built-in microphone that comes with many laptops or webcams.  Anyhow, thanks to all the people that have given the show a first listen.

Class Re-Action Podcast now available through iTunes

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The Class Re-Action Podcast has been accepted in the iTunes store.  You can follow this link to the iTunes preview page, which can then lauch iTunes and allow subscription to the podcast.

Recent California Supreme Court Activity

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While I configured and wired a veritable recording studio, the world marched on, with the issuance of interesting appellate opinions here and elsewhere in U.S.  The California Supreme Court has been up to some interesting activity this year as well.  For instance, the recent debpulication of opinion from the Second Appeallate District, Division Eight, that seemed inconsistent with the manner in which Brinker instructed courts to evaluate class issues, at least in the wage & hour field.  And in the last few weeks the California Supreme Court's Conference events included the following item of note:

  • The Court granted review in Ayala v. Antelope Valley Newspapers, Inc. (pub ord. Oct. 17, 2012), previously published at 210 Cal. App. 4th 77.  In Ayala the Court of Appeal partially reversed a trial court order denying class certification.  The wage & hour case stems from the classification of workers as independent contractors.

The grant of review in Ayala raises the question of whether Bradley v. Networkers International LLC, 211 Cal. App. 4th 1129 (2012), as modified (Jan. 8, 2013), might turn on some issue that the Supreme Court intends to resolve in Ayala.

First episode of Class Re-Action now available for streaming

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Episode 1 of the Class Re-Action podcast is now available for streaming.  It should also be available for subscription through iTunes shortly.  I think it's a respectable first production, though technical aspects should improve with tinkering and practice.  CLE credit for listening will be offered as an option soon.  It was a lot of fun to putting this together, though it diverted a lot of my spare time that I could have used to try to keep current with updated posts.  Hopefully the podcast will settle into a routine and take less time going forward.  Feel free to suggest topics that would interest you or guests that you'd like me to try and get on future shows.

The Class Re-Action Podcast is almost here!

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That's right; it was not an empty promise.  It took a lot of wires and audio gear, a boatload of software, and some new skill development, but the inaugural episode of the Class Re-Action podcast is in the can!  I need to navigate a few more hoops to get to the finish line, but I will hopefully have the first episode syndicated out through iTunes and the Microsoft Xbox Music store in the next day or so.  Until then, thanks to my first episode guests of Tim Blood (Blood, Hurst & O'Reardon), Michael Singer (Cohelan, Khoury & Singer) and Tom Kaufman (Sheppard Mullin).

Continuing accrual applies to UCL claims

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When does a claim under the UCL accrue?  When the first wrong occurs?  No so, says the California Supreme Court!  Recurring wrongs give rise to continuing accrual.  In Aryeh v. Canon Business Solutions, Inc. (January 24, 2013), the Supreme Court examined continuing accrual, concluding that the theory applies to actions brought under the UCL:

The common law theory of continuous accrual posits that a cause of action challenging a recurring wrong may accrue not once but each time a new wrong is committed. We consider whether the theory can apply to actions under the unfair competition law (Bus. & Prof. Code, § 17200 et seq.; hereafter UCL) and, if so, whether it applies here to save plaintiff Jamshid Aryeh‟s suit from a limitations bar. We conclude: (1) the text and legislative history of the UCL leave UCL claims as subject to the common law rules of accrual as any other cause of action, and (2) continuous accrual principles prevent Aryeh‟s complaint from being dismissed at the demurrer stage on statute of limitations grounds. Accordingly, we reverse the Court of Appeal‟s judgment.

Slip op., at 1.  The plaintiff leased a copier under terms that required montly payments with a copoy cap.  After noting discrepancies between copies made and copies billed, the plaintiff concluded that during service visits, Canon employees were running test copies (at least 5,028 copies over the course of 17 service visits). These copies resulted in the plaintiff exceeding his monthly allowances and owing excess copy charges and late fees to Canon.  The issue was whether the UCL claim accrued at the first instance of plaintiff's discovery of the overcharge, or whether each overcharge was an independent wrong, giving rise to a new claim.  The trial court and a divided court of appeal agreed that the UCL claim accrues with the first wrong.

But it's not how you start, it's how you finish.  Congratulations to my colleagues on this result.  Jennifer L. Connor wrote the appellate briefs while at her prior firm, and J. Mark Moore and Denise Diaz authored portions of an amicus brief on behalf of CAOC, in support of plaintiff.  Jennifer's sister, Sarah, took no part in the briefing due to her demanding project defending humanity from evil, self-aware robots bent on the destruction.

Pendergrass Rule Ends Run a Little Shy of 80 Years

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Since Bank of America etc. Assn. v. Pendergrass, 4 Cal. 2d 258, 263 (1935) (Pendergrass), California Courts have, to various degrees, excluded evidence of fraud when the fraud is directly contrary to the terms of a written agreement.  In Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Association (January 14, 2013), the California Supreme Court revisited the Pendergrass rule, concluding that it was time to overrule Pendergrass.

The plaintiffs in Riverisland restructured debt, secured by real property. They defaulted and the Association recorded a notice of default. After the plaintiffs repaid their loan, the Association dismissed the foreclosure proceedings. The plaintiffs then sued for fraud, contending that they were promised two years of forbearance by the Association’s Vice President in exchange for additional collateral. The plaintiffs did not read the subsequently prepared agreement and simply signed it. The trial court granted summary judgment, excluding evidence of fraud at odds with the writing pursuant to the Pendergrass rule. On appeal, the Court of Appeal reversed, narrowly construing Pendergrass. The Supreme Court granted review.

The Supreme Court observed that the Pendergrass rule has been criticized but followed by California courts, although Courts attempting to avoid its result have narrowly construed it.  The Supreme Court noted that the Court of Appeal in this case adopted such a narrow construction, deciding that evidence of an alleged oral misrepresentation of the written terms themselves is not barred by the Pendergrass rule.

Plaintiffs asked the Supreme Court to reconsider Pendergrass.  The Court agreed that there were good reasons to do so:

There are good reasons for doing so. The Pendergrass limitation finds no support in the language of the statute codifying the parol evidence rule and the exception for evidence of fraud. It is difficult to apply. It conflicts with the doctrine of the Restatements, most treatises, and the majority of our sister-state jurisdictions. Furthermore, while intended to prevent fraud, the rule established in Pendergrass may actually provide a shield for fraudulent conduct. Finally, Pendergrass departed from established California law at the time it was decided, and neither acknowledged nor justified the abrogation. We now conclude that Pendergrass was ill-considered, and should be overruled.

Slip op., at 2.

While this case arises in the context of an individual suit for fraud, it provides substantial relief for consumer class action cases alleging claims of fraud stemming from misrepresentations about the subject of a later written agreement.