Los Angeles Business Litigation Blog : Los Angeles Business Litigation Lawyer & Attorney : Daniel Reisman Law Firm : California Civil Litigation & Contracts

In Kearns v. Ford Motor Co., No. 07-55835, 2009 WL 1578535 (9th Cir. June 8, 2009), the Ninth Circuit held that Federal Rule of Civil Procedure ("FRCP") 9(b) applies to causes of action under California's unfair competition laws brought in federal court. FRCP 9(b) requires that

when fraud is alleged, "a party must state with particularity the circumstances constituting fraud . . . ." [FRCP] 9(b). Where fraud is not an essential element of a claim, only those allegations of a complaint which aver fraud are subject to Rule 9(b)'s heightened pleading standard. Id. at *2.

Kearns brought a class action against Ford alleging that Ford Motor Company and its licensed dealerships conspired to mislead customers into paying more for "Certified Pre-owned Vehicles," which weren't actually any better than equivalent non-certified used cars.

According to Kearns, Ford misled its customers by making false statements regarding the overall safety and road-worthiness of Ford-certified pre-owned vehicles when compared to regular used cars. As a result of Ford's false statements, consumers were led to believe that the certified pre-owned vehicles were guaranteed safer than non-certified used cars when, in fact, they were not.

Kearns argued that Ford never maintained much oversight over the certification process. Thus, the certified pre-owned cars were really no safer than average used cars, and the average price difference between a certified pre-owned car and a regular used car was somewhere around $1,080.

Kearns further argued that Ford's behavior with regard to the certified pre-owned vehicles constituted violations of California's Consumer Legal Remedies Act, and California's Unfair Competiton Law. However, the district court dismissed the case because Kearns' complaint failed to state his claims with the requisite heightened particularity.

The Ninth Circuit affirmed the district court's decision, holding that since essentially all of Kearn's claims were grounded in fraud, his pleadings had to meet the "heightened particularity" requirement as articulated in FRCP 9(b). Kearns' claims that he relied on false or misleading television advertisements, and other misleading sales materials were too unspecific to satisfy FRCP 9(b). As the Ninth Circuit states,

[n]owhere...does Kearns specify what the television advertisements or other sales material specifically stated. Nor did Kearns specify when he was exposed to them or which ones he found material. Kearns also failed to specify which sales material he relied upon in making his decision to buy a [certified pre-owned] vehicle. Id. at *4.

• What's the Point of the "Heightened Particularity" Standard for Fraud Claims?

Fraud claims are unique as they are basically excepted from the relatively loose federal notice pleading standard because of how potentially damaging they may be to the defendant's reputation. As the Ninth Circuit explains,

[FRCP] 9(b) serves three purposes: (1) to provide defendants with adequate notice to allow them to defend the charge and deter plaintiffs from the filing of complaints "as a pretext for the discovery of unknown wrongs"; (2) to protect those whose reputation would be harmed as a result of being subject to fraud charges; and (3) to "prohibit [ ] plaintiff[s] from unilaterally imposing upon the court, the parties and society enormous social and economic costs absent some factual basis." In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996) (quoting Semegen v. Weidner, 780 F.3d 727, 731 (9th Cir. 1985)). Id. at *3.

In short, the heightened standard is supposed to deter serious accusations of fraud and conspiracy that lack a real basis in fact; however, I've never been quite convinced that it actually serves that purpose. Rather, it seems that it serves to deter accusations of fraud and conspiracy that lack a basis in specific facts known to the plaintiff when filing a claim. But, isn't formal discovery at least in part designed to give the parties access to evidence that independent investigation and other methods of informal discovery might otherwise fail to uncover?

I also find it odd that of the three purposes behind FRCP 9(b), as stated by the courts, not one of them specifically mentions that a successful fraud claim can lead to large punitive damages awards. What other "enormous social and economic costs" could the Ninth Circuit be referring to?

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• "Undo Send"—Five More Seconds to Change Your Mind

Gmail Labs added a new feature a few weeks ago—Undo Send. If enabled, a user has about 5 seconds to "hit the panic button" before the message is sent.

On one hand, given the time limitation, the feature's uses are limited. On the other hand, five seconds may, for example, be just long enough to realize that one made the commonly embarrassing and potentially damaging mistake of selecting "Reply to All" instead of "Reply."

• Hitting the Panic Button Too Late—Moreno v. Hanford Sentinel, Inc.

Unfortunately, there generally isn't a simple way to undo the damage an ill-conceived email or blog post (or Tweet) can do—as is the case in Moreno v. Hanford Sentinel, Inc., No. F054138, 2009 WL 866795 (Cal. Ct. App. April 2, 2009). See also Mike Mckee, MySpace Musings Aren't Private, Appeals Court Rules, Law.com, April 6, 2009.

• Background: Moreno v. Hanford Sentinel, Inc.

In 2005, after returning from a visit with her family in her hometown of Coalinga, CA, Cynthia Moreno, an undergraduate at UC Berkeley, wrote "An Ode to Coalinga" and posted it on her MySpace page. Apparently, she didn't have anything positive to say. As the court describes it,

[t]he Ode opens with "the older I get, the more I realize how much I despise Coalinga" and then proceeds to make a number of extremely negative comments about Coalinga and its inhabitants. Moreno, No. F054138, 2009 WL 866795, at *1-2.

Six days after posting the Ode, Moreno decided to take it down, but it was too late. Cynthia's high school principal in Coalinga had already read the post and given a copy to his friend, the editor of a local newspaper. The editor then republished Ode in the paper, and, of course, attributed it to Cynthia Moreno. Id. at *2.

Moreno's family received hate mail and death threats. Her father was forced to close the 20 year-old family business, and, ultimately, the family was forced to move. Id.

The family sued the principal, the school district, the editor, and the newspaper for invasion of privacy and intentional infliction of emotional distress ("IIED"). The editor and the newspaper were dismissed as defendants after winning an anti-SLAPP motion and motion to strike. The principal and the school district demurred to both of the plaintiffs' theories of liability, and the trial court sustained the demurrer on both claims without leave to amend.

On appeal, the court upheld the trial court's dismissal of the invasion of privacy claim, holding that the author of an article published on MySpace.com cannot state a cause of action for invasion of privacy against those who republished the article in a local newspaper. However, the court still allowed the case to move forward on at least one theory of liability by reversing the ruling of the trial court with regard to the claim of IIED. See Id.

• Where nothing private is revealed, there is no invasion of privacy.

Eric Goldman, at his Technology & Marketing Blog, explains the court's decision as follows:

The privacy invasion claim was easily rejected. Once Moreno posted the essay to an open-to-the-public MySpace page (even if only briefly), it was no longer private. As the court says, "the fact that Cynthia expected a limited audience does not change the above analysis. By posting the article on myspace.com, Cynthia opened the article to the public at large. Her potential audience was vast." It also did not matter that Moreno did not use her last name on her MySpace page; the court says that her identity was readily ascertainable from her MySpace page (which included a photo)...

• So, does publication on the internet necessarily bar invasion of privacy actions?

In Moreno, the court doesn't entirely foreclose upon the possibility that one may still have a right to keep something private, even if published on the internet, but it certainly doesn't provide a clear test.

Using language borrowed from a case where alleged trade secrets were leaked online, the court states "[t]he publication was not so obscure or transient that it was not accessed by others." Id. at *3. This language raises at least two questions. First, does the work have to obscure and transient even if it isn't accessed by others? Second, can a work be accessed by others, and still be obscure and transient enough to retain its private status?

The trade secrets case that the court cites in Moreno doesn't provide much guidance because, with regard to leaked trade secrets,

[t]he concern is whether the information has retained its value to the creator in spite of the publication. Publication on the Internet does not necessarily destroy the secret if the publication is sufficiently obscure or transient or otherwise limited so that it does not become generally known to the relevant people, i.e., potential competitors or other persons to whom the information would have some economic value. DVD Copy Control Ass'n Inc. v. Bunner 116 Cal. App. 4th 241, 251 (2004) (citations omitted).

Since there is no dispute over the economic value of Cynthia Moreno's Ode, most of the analysis above is inapplicable in her case. Also, the court in Moreno seems to have conspicuously omitted the language about becoming known to the relevant people.

What if Cynthia Moreno's high school principal was the only person who read the Ode? Would the Ode have then been "transient and obscure" enough to remain private?

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It seems that legal trade publications may have finally tired of reporting on the mass layoffs at big firms as they have — day after day — for the past several months. Either that, or the numbers of daily layoffs at major law firms have decreased enough since late February and early March to appear less newsworthy. See e.g., Martha Neil, March Mayhem: Law Firm Layoffs in 1 Week Total Nearly 1,500, Mar. 4, 2009. In any case, I find it a welcome respite.

Instead, (in what I would call a trend for the better) reports of how lawyers are dealing with the current financial crisis and reshaping their practices accordingly are finding their way to publications' front pages. For example, last Tuesday the Daily Journal (subscription required) featured former San Diego City Attorney Mike Aguirre discussing his ambition to develop his new law firm into the "center of credit derivative litigation." According to the article, "[Aguirre] wants nothing short of effecting regulatory reforms, he said. 'I've never been interested in putting on blinders and doing litigation in the abstract,' he said. 'Long term solutions need to be hammered out in Congress." And, according to a founding partner at a successful securities litigation boutique, also in San Diego, "'[C]ertainly, given the credit crisis and mortgage meltdown we are experiencing now, there is more than enough opportunities to represent victims. There is certainly enough fraud to go around these days.'" See Pat Broderick, Former City Attorney Pins Hope on Derivatives, L.A. Daily Journal, Mar. 17, 2009, at 1.

Coincidentally, on Friday, Division One of the Fourth Appellate District Court of Appeal (in only the second published California case to even address the topic) ruled on the somewhat controversial "group pleading doctrine" in the context of state securities litigation. See Bains III v. Moores, No. D052533, 2009 WL 723530 (Cal. Ct. App. Mar. 20, 2009). "The doctrine, where applicable, allows a party to attribute collective statements made by a company to individual members of the company's board of directors." Id. at *15.

The facts of the case revolve around allegedly fraudulent accounting and financial statements made by Peregrine Systems, Inc. Id. at *1.

In short, the plaintiffs in Moores filed suit against three former directors of Peregrine Systems, Inc. alleging accounting and financial fraud under California Blue Sky Laws as well as common law theories of fraud and deceit. The trial court granted summary judgment in favor of the defendants because the plaintiffs failed to identify information from which a jury could find that the defendants knew about the alleged fraud. Id. at *15, *1. The plaintiffs argued that the group pleading doctrine should apply; therefore, any fraudulent statements that the company may have made could be imputed to the defendants. The Court disagreed.

The Court held "that the group published information doctrine, or group pleading doctrine, as its alternative name suggests, is a pleading device that has no application in the summary judgment context." Thus, "'the group pleading doctrine' does not apply in determining whether a party has present sufficient evidence of its claims to avoid summary judgment, under California law." Id. at *19.

The only other published California case dealing with the group pleading doctrine is Kamen v. Lindly, 91 Cal. App. 4th 197 (2001). There, the Kamen court adopted the Ninth Circuit's view of the group pleading doctrine, or group published information doctrine. The Ninth Circuit developed the doctrine as follows:

In cases of corporate fraud where false and misleading information is conveyed in prospectuses, registration statements, annual reports, press releases or other ‘group-published information,’ it is reasonable to presume that these are the collective actions of the officers. Under such circumstances, a plaintiff fulfills the particularity requirement of [Rule 9(b) of the Federal Rules of Civil Procedure (28.U.S.C.) ] by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations. Moores, No. D052533, 2009 WL 723530, at *16.

And, subsequent decisions extended the doctrine to apply to outside directors in addition to officers, who are responsible for day-to-day operation of the company. Id.

The Court agrees with the decision in Kamen based on the rationale that it is difficult for a plaintiff to obtain enough information regarding the perpretrators of corporate fraud to plead fraud with the requisite heightened particularity. But the court in Kamen only addressed the doctrine with regard to the sufficiency of the pleadings. Id. at *17. Here, in Moores, the Court must address it in the context of an evidentiary motion.

In explaining its decision, the Court first notes that the "rationale for invoking the doctrine is less compelling in the context of a summary judgment when discovery is complete." Id. at *18. Second, the Court points out that there is a circuit split as to whether the doctrine should even apply at all because of the stringent pleading requirements adopted in the Private Securities Litigation Reform Act of 1995 ('PSLRA'). (The PSLRA requires that allegations of fraud based on information and belief must "state with particularity all facts on which that belief is formed." 15 USC § 78u-4(b)(1).). Given these factors, the Court concludes "that the doctrine is one that applies, if at all, only in determining the sufficiency of a plaintiff's pleadings." Id. at *19.

Overall, although it appears that the group pleading doctrine is recognized under California law, its future seems rather uncertain.

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Prior to 2004, challenging a 17200 claim based on the plaintiff’s lack of standing was nearly impossible. Now, less than five years later, the Court of Appeal not only embraced the 2004 amendment to section 17204, it gave it teeth.

Section 17204 of the California Business and Professions Code used to allow almost anyone to sue under California's Unfair Competition Law (‘UCL’) (Cal. Bus. & Prof. Code § 17200), so long as the person was acting in the interest of the general public.

In 2004, Proposition 64 passed, and the relevant section of code was amended to include an actual standing requirement for private causes of action under the UCL. Now, only a “person who has suffered injury in fact and has lost money or property as a result of the unfair competition” (§ 17204) has the requisite standing.

At first glance, section 17204’s standing requirement still seems rather broad. However, in Troyk v. Farmers Group, Inc., No. D049983, 2009 WL 597256 (Cal. Ct. App. Mar. 10, 2009), the Court of Appeal suggested otherwise by reversing a summary judgment in favor of the plaintiff because the plaintiff did not sufficiently allege that he met the standing requirement of section 17204.

The plaintiff, Thomas Troyk, filed a class action against the defendant insurance company because his agreement with the defendant required him to pay a five dollar monthly service charge for the payment of his car insurance policy’s one-month term, which was not stated in his policy. Id. at *12, *30. Troyk alleged that the extra monthly charge violated the Insurance Code, which requires that the entire premium be stated in an insurance policy, because the monthly service charge was not included in the premium. The trial court granted Troyk’s motion for summary judgment. On appeal, the court agreed with Troyk’s argument regarding the interpretation of ‘premium’ under the Insurance Code; however, the court reversed the summary judgment motion because Troyk did not specifically address how he suffered an injury “as a result of” the defendant's conduct. Id. at *12-13.

The stated intent behind Proposition 64’s amendment to section 17204 is “to prohibit attorneys from filing lawsuits for unfair competition where they have no client who has been injured in fact under the standing requirements of the United States Constitution.” Id. at *33 (citing Buckland v. Threshold Enterprises, Ltd., 155 Cal. App. 4th 798 (2007)) (emphasis in original). However, as the court notes, only the first element of the three required for federal standing—the injury in fact—is incorporated into the amended code section. Nevertheless, the court breaks down section 17204’s standing requirement into three elements as well. They are (1) injury in fact, (2) lost money or property, and (3) causation.

In Troyk’s case, the court found that parts one and two were satisfied because “Troyk’s alleged payment of money in addition to the premium stated in his insurance policy sufficiently allege[d] lost money.” Troyk, No. D049983, 2009 WL 597256, at *34 (emphasis in original). However, since Troyk did not sufficiently allege causation, i.e., how his lost money was the result of the defendant's conduct, the court reversed the summary judgment motion because Troyk did not satisfy his “burden of production to make a prima facie showing of the nonexistence of any triable issue of material fact regarding his UCL cause of action.” Id. at *35.

The court also notes that the

UCL’s standing requirements appear to be more stringent than the federal standing requirements. Whereas a federal plaintiff’s ‘injury in fact’ may be intangible and need not involve lost money or property, Proposition 64, in effect, added a requirement that a UCL plaintiff’s ‘injury in fact’ specifically involve ‘lost money or property.’ Id. at *34 n. 31.

While the amended text of section 17204 can be parsed so as to treat it as a three-part test, the intent behind Proposition 64 doesn’t necessarily call for it. Frivolous, and unscrupulous 17200 claims were undoubtedly a problem prior to 2004, and section 17204’s pre-2004 standing requirement was ridiculously broad. But, the facts in Troyk are particularly clear with regard to causation. Troyk and the other class members suffered economic injury because they paid a monthly service fee in violation of the Insurance Code.

The analysis in Troyk is sound, but the decision doesn’t strike me as mandated by the language of section 17204 and/or the intent behind Proposition 64. I think section 17204 could reasonably be construed so as to minimize the need for a clear economic injury, and I don’t see why causation can't be inferred in clear cases such as this one.

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Christenten v. Smith, Consol. Case Nos. G039923 & G040103, 2009 WL 499748 (Cal. Ct. App. Feb. 28, 2009), upheld the general rule that arbitration awards are not subject to appellate review based on legal error of the arbitrator.

The Court's decision hinged upon its construction of the rule set forth in the California Supreme Court's recent decision in Cable Connection, Inc. v. DIRECTV, Inc. 44 Cal.4th 1334 (2008). There, the supreme court held that parties to a contract may narrow the scope of the the powers of an arbitrator by expressly stating that the arbitrator shall not have the power to commit errors of law and legal reasoning and that such errors would be subject to judicial review.

Here, in Christensen, the plaintiff argues that the same rule should apply because the arbitration clause in the contract at issue states that the arbitrator “shall render an award in accordance with substantive California law” (emphasis in original). The Court disagrees, stating that the phrase “substantive California law” merely amounts to a forum selection clause. Since the arbitration agreement did not expressly limit the powers of the arbitrator, the arbitration award is not subject to appellate review.

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Last week, on February 20, 2009, the Ninth Circuit refused to extend the definition of obscenity to encompass portrayals of violence under the First Amendment, and thereby held a California law prohibiting the sale or rental of violent video games to minors an unconstitutional content-based restriction on freedom of expression. See Video Software Dealers Association v. Schwarzenegger, No. 07-16620, 2009 WL 415582 (9th Cir. Feb. 20, 2009).

In 2005, California passed a law prohibiting sales and rentals of violent video games to minors. If the law had gone into effect, the penalty for a violation would have been a $1000 fine. And, all video games, determined to be violent by the State, would have to have been labeled ‘18’ on the front of the packaging.

Thankfully, two industry trade groups, the Video Dealers Association (‘VDSA’), and the Entertainment Software Association (‘ESA’), quickly filed suit.

The district court granted a preliminary injunction prohibiting enforcement of the law before it went into effect, and later granted the plaintiffs' motion for summary motion judgment permanently enjoining the enforcement of the law on constitutional grounds.

The Ninth Circuit affirmed the district court's rulings in Video Software Dealers Association v. Schwarzenegger. The opinion, drafted by Judge Callahan, holds that obscenity laws cannot be applied to violent content under the First Amendment.

I imagine the ruling comes as more of a relief than a surprise to the ESA, who defeated a similar law in Illinois. Nevertheless, it is a major victory for the video game industry, retailers, and for a variety related businesses in California.

Video games are a multi-billion dollar industry, and, according to the ESA, “California is the largest employer of computer and video game personnel in the nation, accounting for 40 percent of the total industry employment nationwide.” Although the video game industry is probably not as “recession proof” as it appeared to be a month or two ago, it is still not being hit as hard as other other sectors of the economy. See e.g., The Los Angeles Times (detailing Electronic Arts’ projections for 2009).

Admittedly, this is just speculation on my part, but laws prohibiting the sales and/or rentals of violent video games, and levying fines on those that violate them, would hurt not only the video game industry, but a number of related industries as well, and could drive an already-shrinking economy further into recession. I know first hand that students in film school, music school, and recording school are increasingly looking toward the video game industry for employment as the music industry is in shambles and post-production jobs in the film industry are difficult to get.

I am not suggesting that, as matter of policy, business interests and the economy should be put ahead of protecting children from real risks of harm. And, I think it is fairly clear that not all video games are suitable for young children. However, a quantifiable risk of actual harm to a child's psychological and neurological well-being from playing ‘violent’ video games is anything but proven.

Moreover, I concede that beating up hookers in Grand Theft Auto completely lacks educational value, but other games, despite being gory and violent, may not. As the Ninth Circuit puts it,

Many of these games have extensive plot lines that involve or parallel historical events, mirror common fictional plots, or place the player in a position to evaluate and make moral choices. Id.

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In Roodenberg v. Pavestone Company, L.P., 171 Cal. App. 4th 185 (2009), the California Court of Appeal held that section 3287(a) of the California Civil Code is inapplicable when prejudgment interest is expressly provided for in a contract. Thus, no showing of certainty regarding the amount of prejudgment interest due is required on the part of the defendant.

The general rule with respect to allowance of interest, when there is no contract to pay interest, is that the law awards interest upon money from the time it becomes due and payable if such time is certain and the sum is certain or can be made certain by calculation. Id. at 191 (citing Schmidt v. Waterford Winery, 177 Cal. App. 2d 28, 34 (1960)) (emphasis in original).

In this case, the contract clearly stated that when the sum became due, the defendant had 30 days to pay it. If unpaid after 30 days, interest accrued at the rate of one and a half percent per month. Therefore, the general rule regarding certainty is inapplicable.

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