Antitrust and Unfair Competition Law

Ninth Circuit Clarifies Pleading Mandates in Pure Omission Cases

Reid Gaa, Summer Associate
Cotchett, Pitre & McCarthy, LLP

On June 4, 2018, the U.S. Court of Appeals for the Ninth Circuit affirmed the U.S. District Court for the Northern District of California’s dismissal of a class action brought by a consumer against the chocolate manufacturer Mars, Inc. (“Mars”). Reviewing the case de novo, the Ninth Circuit concluded that the plaintiff failed to state a claim under California consumer protection laws, holding, “[i]n the absence of any affirmative misrepresentations . . . manufacturers do not have a duty to disclose the labor practices [by which a product is produced] . . . because they are not physical defects that affect the central function of chocolate products.” Hodson v. Mars, Inc., 891 F.3d 857, 860 (9th Cir. 2018).

Addressing the alleged duty to disclose at the core of plaintiff’s California consumer protection law claims, Judge A. Wallace Tashima attempted to reconcile Collins v. eMachines, Inc., 202 Cal. App. 4th 249 (2011) and Rutledge v. Hewlett-Packard Co., 238 Cal. App. 4th 1164 (2015)—two recent California Courts of Appeals cases—with the Ninth Circuit’s holding in Wilson v. Hewlett-Packard Co., 668 F.3d 1136 (9th Cir. 2012). Declining to reexamine the court’s precedent in Wilson, Circuit Judge Tashima applied plaintiff’s proposed state court tests and dismissed the case. In so doing, the Ninth Circuit clarified when a duty to disclose exists pursuant to California consumer protection laws.

Summary

Relying on a pure omission theory of consumer fraud, the class action alleged that Mars violated the Consumers Legal Remedies Act (“CLRA”), Unfair Competition Law (“UCL”), and False Advertising Law (“FAL”) by failing to disclose on its labels that its supply chains may include child and slave labor. Hodson, 891 F.3d at 861. Accordingly, the Ninth Circuit first addressed the duty to disclose under California consumer protection laws before turning to the individual claims.

The court confronted two recent interpretations of the duty to disclose from the California Courts of Appeal, which conflicted with the Ninth Circuit’s precedent in Wilson. The plaintiff advocating for the court to deviate from its precedent in Wilson, argued that Collins and Rutledge rendered the Ninth Circuit’s interpretation of California law incorrect. Hodson, 891 F.3d at 860. Without reexamining Wilson, the Ninth Circuit applied the tests set out in Collins and Rutledge, concluding that the plaintiff failed to state a claim under either test. Id.at 862.

In interpreting Collins, the Ninth Circuit determined that a manufacturer only has a duty to disclose physical defects that relate to a product’s central function and arise during the warranty period. Id.Thus, the duty to disclose did not encompass the means by which a product is produced. Id. The Ninth Circuit next turned to Rutledge, stating that while the reasoning in the case was far from clear, it could stand for one of three propositions: 1) there is a duty to disclose in light of affirmative misrepresentations; 2) there is a duty to disclose defects that go to the central function of the product; or 3) there is a duty to disclose defects that go to the central function of the product and which arise during the warranty period. Id. at 863.

Noting that Collins and Rutledge were vague as to the exact test for determining when a defendant has a duty to disclose, the Ninth Circuit ultimately concluded that the cases sanction a UCL omission claim when: 1) the plaintiff alleges the omission was material, 2) the plaintiff pleads that the defect was central to the product’s function, and 3) the plaintiff alleges circumstances that constitute actionable fraud, as identified in LiMandri v. Judkins, 52 Cal. App. 4th 326 (1997). Hodson, 891 F.3d at 863. Operating under this framework, the Ninth Circuit determined the plaintiff was required to allege that the existence of slave or child labor in the supply chain relates to the central functionality of Mars’ chocolate products but failed to do so. Id. at 864. As a result, the court concluded that the plaintiff failed to establish that Mars had a duty to disclose the child and slave labor in its supply chain. Id.

Having resolved whether Mars possessed a duty to disclose, the Ninth Circuit next addressed the plaintiff’s individual claims. Under the CLRA, the plaintiff alleged Mars misrepresented the source, characteristics, and standard of its chocolate products by omitting information about labor practices on its label. Id. at 865. However, the Ninth Circuit concluded Mars did not violate the CLRA because it was under no obligation to disclose these details about its supply chain. Id.

Next, the Ninth Circuit addressed the plaintiff’s UCL claims. Under the UCL, the plaintiff alleged Mars’ omissions violated the UCL’s prohibition on any “unlawful, unfair, or fraudulent business act or practice.” Id. The court disposed of the claims predicated on the unlawful and fraudulent prongs of the UCL by relying on the earlier conclusion Mars had no duty to disclose its labor practices on the label of its chocolate. Id.

Following this, the court turned to the plaintiff’s claim under the unfairness prong of the UCL, noting the definition of “unfair” was currently in flux among California courts. Id. at 866. The Ninth Circuit first applied the test found in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163 (1999) (“Cel-TechTest”), which defines “unfair” conduct as that which threatens an incipient violation of an antitrust law, violates the spirit or policy of one of those laws, or otherwise significantly threatens or harms competition. Cel-Tech, 83 Cal. Rptr.2d at 187. Cel-Tech further requires that any finding of unfairness to competitors be “tethered to some legislatively declared policy or proof of some actual or threatened impact on competition.” Id. at 186-87. In finding the plaintiff could not state a claim under the Cel-Tech test, the Ninth Circuit rejected the plaintiff’s contention that his claims were tethered to the “legislative policies” forbidding slavery and the worst forms of child labor passed by the United Nations and the International Labor Organization. Hodson, 891 F.3d at 867. Specifically, the court reasoned there was not a close enough nexus between these policies and the failure to place disclosures on consumer labels. Id.

The court next applied the test in South Bay Chevrolet v. General Motors Acceptance Corp., 72 Cal. App. 4th 861 (1999) (“South Bay Test”), which defined unfair conduct as occurring “when [a] practice offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. South Bay, 72 Cal. App. 4th at 886. The Ninth Circuit reasoned that Mars’ failure to disclose its labor practices was not substantially injurious, immoral, or unethical, because it did not have a duty to do so. Hodson, 891 F.3d at 867. The court then rejected the plaintiff’s final attempt to bring Mars’ actions within the scope of the South Bay Test, stating that participation in an immoral activity would not suffice when the challenge is against the failure to disclose. Id.

Lastly, the Ninth Circuit concluded that the plaintiff could not state a claim under the FAL because the misleading nature of an advertisement is determined by whether a reasonable consumer would likely be deceived. Id. 867-68. Again relying on the absence of a duty to disclose, the court reasoned that “a failure to disclose a fact one has no affirmative duty to disclose is [not] likely to deceive anyone.” Id. at 868.

Implications

Although the Ninth Circuit declined to directly reexamine its holding in Wilson, the court acknowledged that Collins and Rutledge did not deprive Wilson of precedential value. Id. at 864. Instead, the court declared that the California Courts of Appeal decisions show “that Wilson’s safety hazard pleading requirement is not necessary in all omission cases” and “the requirement may remain applicable in some circumstances.” Id.

The court further clarified by explaining that “where the challenged omission does not concern a central functional defect, the plaintiff may still have to plead a safety hazard to establish that the defendant had a duty to disclose.” Hodson, 891 F.3d at 864. In dicta, the Ninth Circuit then offered an example of such situation, suggesting Wilson could still apply where the defect in question creates a safety hazard but is not an aspect of the central functionality of the product. Id.

Furthermore, the court delineated the kind of disclosures required by California consumer protection laws, declaring that manufacturers are not obligated to label goods as possibly being produced by child or slave labor if they do not affect the central function of the product. Id. at 860. In doing so, the Ninth Circuit emphasized that such disclosures are related to physical defects that affect the central function of a product. Id. As a result, the Ninth Circuit preserved the precedent it set in Wilson, while clarifying the pleading requirement for consumer fraud claims relying on a pure omission theory.

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