The California Court of Appeals for the Second District has upheld a trial court finding that may effectively limit and discourage attorneys from filing class actions based on misrepresentations in the sale of insurance policies through agents.  In Fairbanks et al. v. Farmers New World Life Ins. Co. et al., __ Cal. App. 3d __ (2011), the court of appeal affirmed the trial court’s denial of class certification on the basis that common issues did not prevail, and that the issue was incapable of common proof.  The case involved Farmers’ marketing and sale of universal life insurance policies.  It was alleged that Farmers created a common marketing strategy with respect to the marketing and sale of such policies, and that Farmers instructed its agents to implement such strategy by using Farmers’ marketing materials in the agents’ sales pitch to prospective customers.  After a lengthy discussion of the types of life insurance policies at issue, the appellate court focused on the actual narrow bases on which Plaintiffs sought relief, which was based on a single unified theory relating to fraudulent misrepresentations and concealments made by agents during the marketing of the policies to the individual prospective customers.  The court determined that the bases for class certification “were not four separate bases for class relief, but part of one overarching allegedly fraudulent scheme.”  The court noted, “Plaintiffs argued that proof of this fraudulent scheme could be established by common, rather than individual, proof, based on a combination of common policy language, common language in annual policyholder statements, and a common marketing scheme.”  Plaintiffs sought to certify a class based on very broad conduct involving myriad misrepresentations made in written marketing materials as well as alleged misrepresentations by Farmers’ agents.  Farmers argued that plaintiffs’ broad theory could not sustain a certifiable class in that it would require independent proof as to each policyholder.  Specifically, it would require proof as to the individual representations made to each policyholder, and the materiality of such representations as to each policyholder.

Nonetheless, a class action cannot proceed for a fraudulent business practice under the UCL when it cannot be established that the defendant engaged in uniform conduct likely to mislead the entire class.  (Knapp v. AT&T Wireless Services, Inc. (2011) 195 Cal.App.4th 932, 942-943 petn. for review filed June 1, 2011; Kaldenbach, supra, 178 Cal.App.4th at p. 850.)  Specifically, when the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 944-945, Kaldenbach, supra, 178 Cal.App.4th at p. 850; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)  “ ‘[W]e 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.’ ”  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 945; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)

The court discussed at length Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830, 848 (2009), which was a case in which it was alleged, as in Fairbanks, that the insurer had utilized uniform marketing materials in the sale of insurance policies, and directed its agents to use those materials in their sales pitch to prospective customers.  The court in Kaldenbach found, based on evidence provided by the insurer, that there was no evidence that the sales presentations were actually common.  The Fairbanks court followed the lead of the Kaldenbach court and found similarly that there was no evidence that the sales presentations, and therefore the alleged misrepresentations made by Defendants’ agents were common to all policyholders and prospective class members.  The court held that “In the absence of a common marketing scheme, the class action fails.”  In essence, the court held that the broad scope of the alleged misrepresentations made it impossible to certify a common class based on common proof.  The Court here distinguished Massachusetts Life Insurance Company v. Superior Court, 97 Cal. App. 4th 1282, 848 (2002) on the basis that Massachusetts Mutual “involved identical misrepresentations and/or nondisclosures by the defendants to the entire class.” 

In an effort to overturn the trial court’s ruling, Plaintiffs argued in the alternative on appeal that a class could be certified based solely on the misrepresentations made in the policies themselves.  However, in dicta, the court also rejected this argument, stating, “[I]t is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them. “ (citation omitted.)  The court therefore indicated that alleged misrepresentations in the policies could not be evaluated independent from the sales presentations made by the agents when evaluating whether the allegations could be established by common proof.  Such a statement brings into question the potential for certification of any class based on representations in an insurer’s marketing materials and/or policy. 

The court also noted that the issue of materiality of the representations was not subject to common proof.  The court noted that under the circumstances of this case, the possible reasons for which an individual policyholder purchased the type of insurance at issue were many, and therefore must be a matter of individual proof.  The Court left it to the trial court to determine on remand whether plaintiffs could successfully establish any other basis for class certification.

Kawakita purchased her health insurance policy through Blue Shield’s alleged agent, Steven Stendal, and claimed that Stendal was responsible for any misstatements on her application.  Blue Shield rescinded Kawakita’s policy in August 2006, and she filed her lawsuit in July 2009, asserting causes of action for breach of contract, tortious breach on the implied covenant of good faith and fair dealing and declaratory relief.

Blue Shield filed a motion for summary adjudication, arguing that the bad faith claim was barred by the two-year statute of limitations imposed by California Code of Civil Procedure Section 339 and Love v. Fire Insurance Exchange, 221 Cal. App. 3d 1136, 1144 n.4 (1990).  The trial court rejected Blue Shield’s motion, and with Blue Shield of California Life & Health Insurance Company v. Superior Court (Kawakita), No. B225632, Blue Shield sought a peremptory writ of mandate directing the trial court to reverse its order.  While the California Court of Appeal did not agree with the trial court’s reasoning, it did agree with the result and allowed Kawakita to proceed with her bad faith cause of action.

Based on this provision, with its broad application to “any other matter arising out of the Plan,” the Court of Appeal ruled that Kawakita’s bad faith claim needed to be filed no later than three years after the coverage was first denied; which it was.  With this ruling, Kawakita’s attempt to impose bad faith liability of Blue Shield’s decision to rescind her coverage case can proceed.

Shady Grove Orthopedic Associates (“Shady Grove”) filed a class action lawsuit in federal court, arguing that Allstate Insurance Company (“Allstate”) violated New York law in failing to pay interest to policyholders. The district court dismissed the case on the grounds that New York law prevented a class action lawsuit in this context, and the Second Circuit affirmed. This case concerned the application of state law in federal court under the Erie Doctrine, particularly whether New York class action law applies in federal court and whether it conflicts with Rule 23 of the Federal Rules of Civil Procedure. 

Shady Grove argued that Rule 23 is the comprehensive class action rule for federal courts, and that New York law cannot undermine federal court procedure. Allstate claimed that state law applies because plaintiffs would have different rights in state and federal court.

Shady Grove and Galvez filed a class action lawsuit in the Federal District Court for the Eastern District of New York, proposing a class of all persons to whom Allstate owes interest payments under New York insurance laws since April of 2000. Allstate filed a motion to dismiss the case, arguing that New York law barred Shady Grove and Galvez from filing this class action lawsuit. Allstate specifically alleged that, under Section 901(b) of the New York Civil Practice Law and Rules (“CPLR”), Shady Grove and Galvez could not use a class action lawsuit to collect a statutory penalty unless specifically authorized under the statute. Shady Grove and Galvez argued that CPLR 901(b) did not apply in federal courts because it was merely a procedural rule and conflicted with Federal Rule of Civil Procedure 23, which governs class action lawsuits in federal court.

The district court granted the motion to dismiss. The court found that New York insurance laws did not specifically authorize a class action for the recovery of interest, and, therefore, CPLR 901(b) prevented the filing of the class action. The district court held that the New York’s restriction on class actions applies in federal court because the law substantively affected plaintiffs’ rights to bring lawsuits in New York courts. Shady Grove appealed. The Second Circuit affirmed dismissal of the suit. First, it found that CPLR 901(b) and Rule 23 did not conflict. Next, it found that federal court should apply CPLR 901(b) because otherwise class action plaintiffs could recover in federal court even though they could not in state court. Finally, the court found that CPLR 901(b) did not undermine the authority of the federal system.

Scalia rejected arguments by Allstate and the Second Circuit that Rule 23 and the New York law did not conflict because they addressed different issues. Allstate contended that Rule 23 is procedural, governing whether a class should be certified, while the New York law is substantive, determining whether a particular type of claim is eligible for class treatment. He called the "eligibility-certifiability" distinction "entirely artificial," explaining that both are prerequisites for maintaining a class action. Scalia wrote expansively of Rule 23’s sweep: "Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules' prerequisites are met." "We cannot contort its text, even to avert a collision with state law that might render it invalid." Justice Stevens joined this part of the Scalia opinion but he also said that he agreed that Rule 23 “must apply in this case.” The New York law against a penalty remedy, Stevens said, was a procedural rule only, and had to give way to Rule 23. But the remainder of the Stevens’ concurring opinion made it clear that he diverged significantly from Scalia on the general question of whether federal courts, applying what they considered to be federal procedural rules in a state-law case, would always trump a state procedural rule.

There is little question that the Court's decision is good for those who use class actions as a remedy to rectify corporate wrongdoing. The decision will effectively overturn a large number of state statutes that limit remedies which can be sought by class actions or that outright prohibit certain class actions. It is noteworthy that in its Supreme Court brief, Allstate said at least 22 states limit remedies recoverable in class actions and at least 23 prohibit class actions for certain claims.

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

This was a departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004), which was previously interpreted to bar UCL “unlawful” prong claims against insurers based on conduct prohibited by § 790.03.  The court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.”  The court explained that that where, however, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

On February 10, 2010, the California Supreme Court granted the Petition for Review of this case.  It is therefore no longer citable. 

On the same day the California Supreme Court denied a Petition for Review and Depublication in Cohen v. DIRECTV, Inc. (October 28, 2009).  Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009).

The appellate court affirmed.   In discussing the UCL claim, the appellate court noted that Tobacco II, 46 Cal. 4th 298 (2009) was irrelevant to class certification because it addressed only the issue of standing, and did not instruct the "state's trial courts to dispatch with an examination of commonality when addressing a motion for class certification."  Id. at p. 981.  The court then concluded that the trial court's concern that the plaintiff's UCL and CLRA claims would involve individual factual issues regarding class members' reliance on the alleged misrepresentations "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."  Id.

The Court may very well have viewed the issues as premature, given that Cohen has been heavily criticized by other decisions recently.  Most recently, the modified opinion in Steroid Hormone Product Cases, __ Cal. App. 4th __ (February 8, 2010) rejected the Cohen analysis.  The court stated:

“But to the extent the appellate court's opinion might be understood to hold that plaintiffs must show class members' reliance on the alleged misrepresentations under the UCL, we disagree.  As Tobacco II made clear, Proposition 64 did not change the substantive law governing UCL claims, other than the standing requirements for the named plaintiffs, and "before Proposition 64, 'California courts have repeatedly held that relief under the UCL is available without individualized proof of deception, reliance and injury.'  [Citation.]"  (Tobacco II, supra, 46 Cal.4th at p. 326.)  But in any event, the Cohen court's discussion regarding the appropriateness of considering class members' reliance when examining commonality is irrelevant here, where the UCL claim is based upon the unlawful prong of the UCL and thus presents no issue regarding reliance.”

Yokoyama v. Midland National Life Insurance Co., __ F.3d __ (9th Cir. February 8, 2010), also amounts to a rebuke of Cohen, although the court did not cite to Cohen and even though the court interpreted Hawaii law.  It ruled that class members, relative to Hawaii’s version of California’s UCL, did not need to show reliance on misrepresentations because the Hawaii statute required an “objective” standard.  Like California’s UCL, under Hawaii law, a deceptive act or practice is: (1) a representation, omission, or practice that (2) is likely to mislead consumers acting reasonably under the circumstances [where] (3) the representation, omission, or practice is material.  Likewise, claims under California unfair business practices statutes are governed by the “reasonable consumer” test.  Freeman v. Time, Inc., 68 F.3d 285, 289 (9th Cir.1995) (“[T]he false or misleading advertising and unfair business practices claim must be evaluated from the vantage of a reasonable consumer.” (citation omitted)); Lavie v. Procter & Gamble Co., 105 Cal. App. 4th 496, 506-07 (2003) (“[U]nless the advertisement targets a particular disadvantaged or vulnerable group, it is judged by the effect it would have on a reasonable consumer.”).

It will be interesting to when the California Supreme Court will resolve these conflicts.

In In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), the California Supreme Court resolved that debate. Specifically, the Court addressed two questions: “First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representative or all unnamed class members, in order for the class action to proceed?” and “Second, what is the causation requirement for purposes of establishing standing under the UCL and in particular what is the meaning of the phrase ‘as a result of’ in section 17204?” In response to the first question, the Court concluded that the new standing requirements of Prop 64 applied only to the named plaintiff/class representative and not to absent class members. In reaching this conclusion, the Court reasoned that “the references in section 17203 to one who wishes to pursue UCL claims on behalf of others are in the singular; that is, the ‘person’ and the ‘claimant’ who pursues such claims must meet the standing requirements of section 17204 and comply with Code of Civil Procedure section 382.” The Court concluded that these singular references must be interpreted to relate only to the individual representative plaintiff.  The Court further reasoned that there was nothing in Prop 64 that indicated it was to have any affect on absent class members and the way in which class actions operate in the context of the UCL, or on the remedies available under the UCL, which did not always require actual injury to absent class members.

In response to the second question, the Court concluded that the named plaintiff/class representative must demonstrate actual reliance on the alleged deceptive or misleading representations, consistent with the element of reliance required in common law fraud actions. The Court, however, indicated that while the representative plaintiff must show that the alleged misrepresentation was “an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause.” In other words, it is enough that the plaintiff’s reliance “played a substantial part” and was “a substantial factor, in influencing his decision.”

Finally, while the Court made clear that the new standing requirements of Prop 64 applied only to the named plaintiff/representative, the Court also noted that Prop 64 “explicitly mandates that a representative UCL action comply with Code of Civil Procedure section 382,” which requires that class representative’s claims be typical of the unnamed class members and that common questions of law and fact predominate. See Basurco v. 21^st Century Ins. Co., 108 Cal. App. 4th 110, 117 (2003).

Justice Moreno authored the opinion for a divided Court, and Justice Baxter wrote a concurring and dissenting opinion.

Before 2004, any person could assert representative claims under the unfair competition law to obtain restitution or injunctive relief against unfair or unlawful business practices. Such claims were not required to be brought as a class action, and a plaintiff had standing to sue even without having personally suffered an injury. (See Former §§ 17203, 17204; Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 561 (1998)).

In 2004, however, the California electorate passed Proposition 64, amending the unfair competition law to provide that a private plaintiff may bring a representative action under this law only if the plaintiff has “suffered injury in fact and has lost money or property as a result of such unfair competition” and “complies with Section 382 of the Code of Civil Procedure . . . .” This statute provides that “when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.” The Court has previously interpreted Code of Civil Procedure section 382 as authorizing class actions. See Richmond v. Dart Industries, Inc., 29 Cal. 3d 462, 470 (1981).

In Arias v. Superior Court of San Joaquin (Angelo Dairy), 46 Cal. 4th 969 (2009), the Court held that employees can pursue penalties for wage-and-hour violations under the Private Attorneys General Act, or (“PAGA”), without having to qualify their lawsuit as a class action.

Justice Joyce L. Kennard, writing for the majority, also analyzed the effect of Proposition 64. Plaintiff contended that because Proposition 64’s amendment of the unfair competition law required compliance only with “[s]ection 382 of the Code of Civil Procedure” and because that statute makes no mention of the words “class action,” his representative lawsuit brought under the unfair competition law need not comply with the requirements governing a class action. The Court rejected this assertion, explaining:

In light of this strong evidence of voter intent, we construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law only if the party “complies with Section 382 of the Code of Civil Procedure” to mean that such an action must meet the requirements for a class action. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1092, fn. 9.)

In a concurring opinion by Justice Werdegar, she disagreed with the majority’s “nonliteral interpretation of Proposition 64 (Gen. Elec. (Nov. 2, 2004)), which forecloses a variety of representative actions the measure clearly permits. Unlike the majority, I do not believe we would frustrate the voters’ intent by enforcing the measure according to its plain language.”

Similarly, in Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), 46 Cal. 4th 993 (2009), the Court ruled that the requirement that a plaintiff be one “who has suffered injury in fact,” combined with the PAGA requirement that a labor action be initiated by an “aggrieved employee,” prevents a union from bringing a UCL action based on associational standing.

Iqbal was a 5 to 4 decision delivered on May 18, 2009 by Justice Kennedy held that Iqbal’s complaint failed to plead sufficient facts to state a claim for purposeful and unlawful discrimination.

Under Federal Rule of Civil Procedure 8(a)(2), a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” “[D]etailed factual allegations” are not required (Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)), but the Rule does call for sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face,” Id. at 570. A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.  Id. at 556.

The Court held that Iqbal’s pleadings did not comply with Rule 8 under Twombly. The Court found that several of his allegations – that petitioners agreed to subject him to harsh conditions as a matter of policy, solely on account of discriminatory factors and for no legitimate penological interest, that Ashcroft was that policy's "principal architect", and that Mueller was "instrumental" in its adoption and execution, were conclusory and not entitled to be assumed true. The Court decided that given that the September 11 attacks were perpetrated by Arab Muslims, it was not surprising that a legitimate policy directing law enforcement to arrest and detain individuals because of their suspected link to the attacks would produce a disparate, incidental impact on Arab Muslims, even though the policy's purpose was to target neither Arabs nor Muslims. Even if the complaint's well-pleaded facts gave rise to a plausible inference that Iqbal’s arrest was the result of unconstitutional discrimination, that inference alone did not entitle him to relief since his claims rested solely on their ostensible policy of holding detainees categorized as “of high interest,” but the complaint does not contain facts plausibly showing that their policy was based on discriminatory factors.

The Court rejected Iqbal’s arguments. First, the Court found that Iqbal's claim that Twombly should be limited to its antitrust context was not supported by that case or the Federal Rules. Second, the Court found that Rule 9(b), which requires particularity when pleading "fraud or mistake" but allows "other conditions of a person’s mind [to] be alleged generally," did not require courts to credit a complaint's conclusory statements without reference to its factual context.

Law professor Herman Schwarzt discusses the aftermath of Iqbal in his article published Sept. 30th in The Nation

In the few months since the decision in Iqbal came down, it has resulted in the dismissal of 1500 District Court and 100 appellate court cases, many if not most of which would probably have survived; more dismissal motions are pending. Complaints against drug and other companies for multi-organ failure after taking an epilepsy drug, for false marketing and for excessive lead in baby bottle coolers have all been thrown out at the pleading stage, as have many civil rights cases. Iqbal has also been used to dismiss a First Amendment suit by anti-Bush protesters against the Secret Service, and complaints against Coca-Cola and its Colombian subsidiaries for the murder and torture of trade unionists. In all these cases, the mental element--what defendants knew and when they knew it--is usually crucial, and without going into a defendant's files and oral questioning of knowledgeable people, that cannot be determined.

With the future of thousands of potential lawsuits at stake, many of these insurance class actions, expect a battle royale between lobbyists for the trial lawyers and the business community.