In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action.  Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%.  The lawsuit, filed in state court, alleged two causes of action:  violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act).  Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of "any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.”  The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

Because the Fossens' state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens' motion to remand and exercised jurisdiction over this case.

Next, the Ninth Circuit evaluated whether ERISA preempts the plaintiffs’ statutory unfair insurance practice claim, considering both express preemption under ERISA § 514 (29 U.S.C. § 1144) and conflict preemption under ERISA § 502 (29 U.S.C. § 1132).  With respect to express preemption, the court applied the two-part test detailed in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003) and determined that because statute is both “specifically directly toward entities engaged in insurance” and substantially affect[s] the risk pooling arrangement between the insurer and the insured” it is exempt from express preemption. 

As to conflict preemption, the court again applied Davila, and determined that the unfair insurance practice claim was not preempted by ERISA because it sought relief (i.e., restitution) that was consistent with ERISA’s enforcement scheme, but that no provision of ERISA expressly guarantees the same rights as the statute. 

Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA.  Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of "health status-related factor[s]," 29 U.S.C. § 1182(b)(1); Mont. Code Ann. § 33-22-526(2)(a), the unfair insurance practices statute applies more broadly to bar "any unfair discrimination" with respect to premiums, Mont. Code Ann. § 33-18-206(2) (emphasis added); see, e.g., McCarter v. Glacier Gen. Assurance Co., 546 P.2d 249, 251 (Mont. 1976).  Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded this claim for further consideration of the plaintiffs’ allegations that Blue Cross violated Montana’s Unfair Trade Practices Act.

(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.

On appeal, the court explained that Moradi-Shalal did not stand for the proposition that insurers who violate the Unfair Insurance Practices Act can never be liable in tort to the injured party.  Instead, the court noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.”  Moradi-Shalal, at 304-305.

This was 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 section 790.03.  Instead, 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.”  Where, however, as in Zhang, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

In response to those who make the “end run” argument, the Zhang court observed in a footnote that, as established in State Farm v. Superior Court, 45 Cal. App. 4th 1093 (1994), a UCL plaintiff is not entitled to seek compensatory and punitive damages, only restitution and injunction.  Accordingly, “if a plaintiff expressly alleges conduct that was prohibited by the UCL, then there is no reason to apply Moradi-Shalal to prohibit the cause of action.”

As a result, the Court of Appeal found that the trial court erred in sustaining the demurrer and issues an order overruling the lower court’s decision.

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.

Applying the delayed discovery doctrine, the Court of Appeal reversed.  It held, as a matter of law, that the placement of the disclaimers – “buried in a sea of same-sized capitalized print” – coupled with the absence of “any cautionary language” on the first page of Guardian’s policy illustration precluded such a determination.  In so holding, the court added to the conflict in published decisions on the issue of whether the "delayed discovery" rule applies to unfair competition claims. See, e.g., Snapp & Associates Ins. Services, Inc. v. Robertson, 96 Cal. App. 4th 884, 891 (2002) (holding the "delayed discovery" rule does not apply to unfair competition claims).

Marin General Hospital (“Hospital”) contended that its representative spoke to a representative of Medical Benefits Administrators of M.D. Inc. (“Medical Benefits”) on April 8, 2004 to confirm that a prospective patient had health insurance through a plan provided by his employer, Modesto & Empire Traction Co., and administered by Medical Benefits.  The Hospital contended that the Medical Benefits representative verbally verified the patient’s coverage, authorized treatment, and agreed to cover ninety-percent of the patient’s medical expenses. The Hospital sued Medical Benefits and Modesto & Empire in state court and the defendants successfully removed the case to the U.S. District Court for the Northern District of California, claiming that ERISA completely preempted the claims. The district court subsequently dismissed the Hospital’s complaint, concluding that the only remedy available was under ERISA § 502(a)(1)(B).

The Ninth Circuit first found the parties “have not clearly understood the difference between complete preemption under ERISA § 502(a), 29 U.S.C. § 1132(a), and conflict preemption under ERISA § 514(a), 29 U.S.C. § 1144(a).” Complete preemption under § 502(a) is a jurisdictional doctrine. A party seeking removal based on federal question jurisdiction must show either that the state-law causes of action are completely preempted by § 502(a) of ERISA, or that some other basis exists.

The court then explained that removal was only proper if the Hospital’s state law claims were completely preempted under section 502(a)(1)(B) of ERISA. It then examined whether the claims asserted by the Hospital were completely preempted by ERISA, concluding that they were not. In reaching this conclusion, the Ninth Circuit clarified a distinction between complete preemption under section 502(a) and conflict preemption under section 514(a). Citing to Franciscan Skemp Healthcare, Inc. v. Central States Joint Board Health & Welfare Trust Fund, 538 F.3d 594, 596 (7th Cir. 2008), the Ninth Circuit explained that complete preemption under section 502(a) is “really a jurisdictional rather than a preemption doctrine, [as it] confers exclusive federal jurisdiction in certain instances where Congress intended the scope of a federal law to be so broad as to entirely replace any state-law claims.” In contrast, the “rule is that a defense of federal preemption of state-law claims, even conflict preemption under section 514(a) of ERISA, is an insufficient basis for original federal question jurisdiction.”

Relying on Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004), the Ninth Circuit explained that a state-law cause of action is completely preempted by section 502(a)(1)(B) if: (1) “an individual, at some point in time, could have brought [the] claim under ERISA section 502(a)(1)(B);” and (2) “where there is no other independent legal duty that is implicated by a defendant’s actions.” Based on this conjunctive two-prong test, the Ninth Circuit concluded that the Hospital’s state-law claims were not pre-empted.