More on Morgan, et al. v. AT&T Wireless Services, Inc.

As promised shortly after Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) was published, here is a longer post on the first substantial application of In re Tobacco II Cases, 46 Cal. 4th 298 (2009) by a California Court of Appeal.  Before commenting on the analysis in Morgan, a brief summary of the facts of the case are in order.  The plaintiffs alleged that they were ripped off when they purchased the premium Sony Ericsson T68i cell phone for use on the AT&T network but weren't told that AT&T was abandoning the 1900 MHz GSM spectrum in favor of the 850 MHz spectrum, rendering the phones useless.  Then AT&T sent the T68i owners an inferior replacement that they called an "upgrade."  After three successive rounds of pleadings, the trial court held that plaintiffs could not state any actionable claims.  In case you were wondering, I just summarized 20 pages of opinion for you.

 First, the Court examined the UCL cause of action by recapitulating the elements of a valid UCL cause of action:

[D]espite the changes to the standing requirements, the Proposition 64 amendments to the UCL "'left entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted.'" (In re Tobacco II Cases (2009) 46 Cal.4th 298, 314 (Tobacco II).) Thus, pre-Proposition 64 caselaw that describes the kinds of conduct outlawed under the UCL is applicable to post-Proposition 64 cases such as the present case. The only difference is that, after Proposition 64, plaintiffs (but not absent class members in a class action) must establish that they meet the Proposition 64 standing requirements. (Tobacco II, supra, 46 Cal.4th at p. 320.)

Slip op., at 20.  Then the Court cut through the extraneous allegations of the Third Amended Complaint to determine whether any prong of the UCL was sufficiently alleged:

The definitions of unlawful and fraudulent business practices are straightforward and well established. An unlawful business practice under the UCL is "'"'anything that can properly be called a business practice and that at the same time is forbidden by law.'"'" (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 (Cel-Tech).) A fraudulent business practice is one in which "'"'members of the public are likely to be "deceived."'"'" (Tobacco II, supra, 46 Cal.4th at p. 312.)

Slip op., at 21-22.  The Court also noted the unsettled definition of "unfair" in cases not involving commercial competitors, but it did not need to resolve the dispute, concluding that the other two prongs were sufficient to resolve the appeal.  Returning to the fraudulent prong of the UCL, after underscoring that "fraudulent" under the UCL is distinct from common law fraud, the Court provided more detail about the type of conduct that is "fraudulent" under the UCL:

As noted above, a fraudulent business practice is one that is likely to deceive members of the public. (Tobacco II, supra, 46 Cal.4th at p. 312.) A UCL claim based on the fraudulent prong can be based on representations that deceive because they are untrue, but "'"also those which may be accurate on some level, but will nonetheless tend to mislead or deceive. . . . A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable under"' the UCL." (McKell, supra, 142 Cal.App.4th at p. 1471.) For example, in Pastoria v. Nationwide Ins., supra, 112 Cal.App.4th 1490, the plaintiffs alleged: (1) they purchased insurance policies based upon the defendant insurance company's description of the premiums, lack of deductibles, and other policy benefits; (2) less than two months later the insurer notified them of significant changes to their policies, including material increases in premiums and substantial deductibles; and (3) the insurer knew of the impending changes to the policies at the time plaintiffs purchased them, but did not communicate that to the plaintiffs. (Id. at p. 1493.) We held that those allegations were sufficient to state a claim for relief under the fraudulent business practices prong of the UCL. (Id. at p. 1499.)

Slip op., at 23-24.  The Court then identified the allegation from Morgan that were comparable:

In the present case, plaintiffs alleged that (1) AT&T marketed and sold expensive T68i phones (which could be operated only on the AT&T GSM/GPRS network) in conjunction with multi-year service plans, and touted the improvements it was making to its GSM/GPRS network; (2) the improvements AT&T made to the network significantly degraded the portion of the network on which the T68i phones operated; and (3) AT&T knew at the time it sold the T68i phones that the improvements it was going make would soon render the T68i phones essentially useless.

Slip op., at 24.  Having concluded that a UCL fraudulent prong violation was alleged, the Court then determined that the plaintiffs had standing to bring the claim, citing Tobacco II:

In Tobacco II, supra, 46 Cal.4th 298, the Supreme Court held that this standing requirement applies only to the named plaintiffs in a class action (id. at pp. 320-321), and that it imposes an actual reliance requirement on named plaintiffs seeking relief under the fraudulent prong of the UCL (id. at p. 326). The court went on to explain what a plaintiff must plead and prove: “while a plaintiff must allege that the defendant's misrepresentations were an immediate cause of the injury-causing conduct, the plaintiff is not required to allege that those misrepresentations were the sole or even the decisive cause of the injury-producing conduct. Furthermore, where, as here, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements.” (Id. at p. 328.)

Slip op., at 27.  The Court found that the allegations of an extensive advertising campaign by AT&T, coupled with the plaintiffs' online research and similar representations made to them in AT&T stores sufficiently alleged the necessary reliance element.

The Court did not reach the same conclusion when it turned to the cause of action under the FAL (False Advertising Law), which was based on the claim that the T68i replacement phone was an "upgrade":

AT&T argues that plaintiffs do not have standing to bring this claim. AT&T is correct. Proposition 64 made identical changes to the standing requirements to bring an action under the FAL as it made to the requirements under the UCL. (Californians for Disability Rights v. Mervyn’s, LLC, supra, 39 Cal.4th at p. 229, fn. 2.) A person bringing an action under the FAL must establish that he or she “has suffered injury in fact and has lost money or property as a result of a violation of [the FAL].” (Bus. & Prof. Code, § 17535.) Even if it could be said that the return of a phone that plaintiffs alleged was “useless” constituted an injury in fact, plaintiffs alleged that each of them declined to return their T68i phone. Therefore, they cannot truthfully allege that they lost money or property as a result of AT&T's offer. Accordingly, the trial court did not err by sustaining the demurrer to the FAL cause of action.

Slip op., at 29.

Regarding the CLRA claim, the Court of Appeal clearly resolved a question with respect to CLRA notices for corrective action.  The question is whether the notice must be sent before the initial complaint is filed to permit an amendment seeking damages, or, alternatively, whether it can issue after the initial complaint is filed so long as at least 30 days pass before an amendment seeking damages is filed.  This question gained some traction when a federal district court ruled that the notice must be sent before the initial complaint is filed.  The Court of Appeal disagreed:

The federal district court cases upon which AT&T relies for its assertion that failure to comply with the notice requirement requires dismissal with prejudice fail to properly take into account the purpose of the notice requirement. That requirement exists in order to allow a defendant to avoid liability for damages if the defendant corrects the alleged wrongs within 30 days after notice, or indicates within that 30-day period that it will correct those wrongs within a reasonable time. (See, e.g., Meyer v. Sprint Spectrum L.P., supra, 45 Cal.4th at p. 642; Kagan v. Gibraltar Sav. & Loan Assn., supra, 35 Cal.3d at p. 590.) A dismissal with prejudice of a damages claim filed without the requisite notice is not required to satisfy this purpose. Instead, the claim must simply be dismissed until 30 days or more after the plaintiff complies with the notice requirements. If, before that 30-day period expires the defendant corrects the alleged wrongs or indicates it will correct the wrongs, the defendant cannot be held liable for damages.

Slip op., at 31.  I've been on the short end of this argument, and I'm glad that a California Court of Appeal put an end to what I viewed as an argument disconnected from the purpose of the statutory language.

Regarding the fraud cause of action, the Court of Appeal noted the general rule that fraud must be pled with particularity; however, it then described an important exception:

[T]he Supreme Court has noted, there are “certain exceptions which mitigate the rigor of the rule requiring specific pleading of fraud.” (Children’s Television, supra, 35 Cal.3d at p. 217.) For example, where a fraud claim is based upon numerous misrepresentations, such as an advertising campaign that is alleged to be misleading, plaintiffs need not allege the specific advertisements the individual plaintiffs relied upon; it is sufficient for the plaintiff to provide a representative selection of the advertisements or other statements to indicate the language upon which the implied misrepresentations are based. (Id. at p. 218.) But the court also noted that where a claim of fraud is based upon a long-term advertising campaign, which “may seek to persuade by cumulative impact, not by a particular representation on a particular date . . . [p]laintiffs should be able to base their cause of action upon an allegation that they acted in response to an advertising campaign even if they cannot recall the specific advertisements.” (Id. at p. 219.)

Slip op., at 33.

This opinion offers the first evidence that Tobacco II will prove to be yet another instance where the California Supreme Court has substantially redirected an anti-consumer trend in appellate and trial court rulings.