California Insurance Litigation Blog

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.

In a significant blow to business but a boon for consumers, the Supreme Court ruled yesterday that certain class actions barred or limited by state laws may proceed in federal courts. In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company, __ U.S. __ (March 31, 2010) a 5-4 majority, led by Justice Antonin Scalia, the Supreme Court decided that Rule 23 controls when a class-action lawsuit can be filed in federal court, even when such a case in federal court will be decided based on state law. New York’s law and Rule 23, the opinion said, are directly contradictory: both seek to control whether this class-action lawsuit could be filed at all in federal court, but Rule 23 prevails. The Court ruled that if Rule 23’s specific terms are met on who may file a class-action lawsuit, the case may proceed in federal court. The result: Rule 23 does exactly what it says - it empowers a federal court to certify a class in each and every case where the Rule’s criteria are met.

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.

Following the passage of Proposition 64 on November 2, 2004, in order to bring a representative claim under the unfair competition law (“UCL”), a plaintiff must meet the following standing requirements: (1) establish that he or she “has suffered injury in fact and has lost money or property as a result of such unfair competition” and (2) comply with the class action requirements as set forth in California Code of Civil Procedure Section 382. Bus. & Prof. Code §§ 17203, 17204 and 17535. After the passage of Prop 64, litigants continued to debate whether only the named plaintiff or all class members had to meet the more stringent standing requirements of injury in fact and loss of money or property as a result of the alleged conduct. 

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.

Ashcroft v. Iqbal, 556 U.S. ___, 129 S. Ct. 1937 (2009), the 5-month-old U.S. Supreme Court decision that has made federal pleadings standards much more stringent, will get a Capitol Hill airing on Tuesday October 27, 2009. The House Judiciary Committee is scheduled to hold the first congressional hearing on the far-reaching May ruling, which raised the pleading standard for most civil complaints, making it more difficult to keep cases from being dismissed.

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.