UPDATE ON CALIFORNIA STATE ANTITRUST AND UNFAIR COMPETITION LAW AND FEDERAL AND STATE PROCEDURAL LAW

By Thomas A. Papageorge and Thomas Greene^*

Editor’s Note: Every year, at the October Golden State Institute, Tom Papageorge and Tom Greene provide an extensive overview of recent developments in, respectively, state antitrust substantive law and relevant federal procedural law. Their outlines are thorough and well-done. The Committee receives numerous requests for copies of their fine work. In order to provide their outlines to as many of our members are possible, The Editors of Competition have decided to publish their work herein. Please note that, while the authors have done their best to annotate this outline, this Update reflects new cases and developments as of October 2013. Furthermore, these are a selection of developments that may be particular important to members of the Section. Please consult other references for all of the developments that may be important to your practice.

I. CALIFORNIA DEVELOPMENTS: SUBSTANTIVE LAW

A. Cartwright Act (Business and Professions Code § 16720 et seq.)

1. California Supreme Court Will Decide Cartwright Act Applicability to "Pay-for-Delay" Patent Settlements

In re Cipro Cases I & II, 200 Cal.App.4th 442 (2011), (review granted, 137 Cal. Rtr.3d 248, February 12, 2012)

The California Supreme Court will join the U.S. Supreme Court in the high-stakes debate over "reverse payment" or "pay-for-delay" patent settlements and decide the proper standard for determining when such settlements violate the Cartwright Act. At issue is the confluence of, and potential conflict between, federal patent rights and antitrust principles of competition.

The lengthy coordinated class action matter in In re Cipro Cases I & II involves plaintiffs’ antitrust claims concerning ciprofloxafin (branded as "Cipro"), an antibiotic patented by Bayer Corporation. Plaintiffs alleged that Bayer and several generic drug manufacturers violated the Cartwright Act, the Unfair Competition Law, and common law monopolization principles by entering into a patent infringement settlement in which Bayer agreed to make payments (ultimately totaling $398 million) in exchange for the generic manufacturers’ agreement not to manufacture the generic version of Cipro until the patent expired—an arrangement characterized by the plaintiffs as "pay-for-delay" monopolization and by the defendants as legitimate "reverse payments" to settle bona fide patent litigation.

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The trial court granted defendants’ summary judgment motion, ruling the settlements were neither illegal per se under the Cartwright Act nor unreasonable under the rule of reason, and finding no triable issue as to whether the agreements produced "anticompetitive effects beyond the exclusionary scope of the patent itself."

The Fourth District Court of Appeal affirmed summary judgment for defendants (id. at 478), adopting defendants’ proposed legal standard, derived from the Second Circuit Court of Appeals opinion in In re Tamoxifen Citrate Antitrust Litigation (2d Cir. 2006) 466 F.3d 187, which held that "in the absence of any plausible allegation that a patent infringement lawsuit [is] baseless or that the Settlement Agreement otherwise restrained competition beyond the scope of the . . . patent," the plaintiff’s antitrust complaint fails to state a claim on which relief can be granted. (Id. at 221.)

Reviewing the Tamoxifen rule and similar holdings, the Fourth District held those principles properly govern this issue under the Cartwright Act. Since "the Cipro agreements did not restrain competition outside the exclusionary zone of the . . . patent, we cannot view the Cipro agreements as lacking any redeeming virtue . . . Accordingly, we conclude they are not unlawful per se." (200 Cal.App.4th at 467.) And under the rule of reason, the court found reverse payment agreements to be consistent with federal and state policies favoring dispute resolution and are a "natural byproduct of patent litigation" under current federal law, such that prohibiting them would "harm competition by reducing the incentive to challenge patents by reducing the challenger’s settlement options." (Id. at 469-470.) Thus, unless such patent settlements "restrain competition beyond the exclusionary scope of the [underlying] patents, they do not violate the Cartwright Act." (Id. at 470.)

Triable issues would be presented if the patent enforcement action were objectively baseless, or if the patent were procured by fraud, but neither issue could be properly pleaded in the Cipro matter. Federal law preempted the sham litigation claim here because it "necessarily depends on resolution of a substantial question of federal patent law" (the validity of certain "inequitable conduct" by Bayer in securing its patent). (Id. at 473.)

Summarizing the court’s version of the Tamoxifen rule, "[w]e conclude that unless a patent was procured by fraud, or a suit for its enforcement was objectively baseless, a settlement of the enforcement suit does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent." (Id. at 467.)

Status update: The California Supreme Court granted Plaintiffs’ petition for review on February 15, 2012 (137 Cal.Rptr.3d 24), and extensive amici participation was anticipated. However, briefing was stayed in September of 2012, pending the U.S. Supreme Court’s consideration of these issues in FTC v. Actavis, Inc., ___ U.S. ___(2013), 133 S.Ct. 2223, which held that the FTC’s section 5 unfair competition allegations in the AndroGel reverse payment matter were not forestalled by patent law principles. The Supreme Court remanded the matter for trial under rule of reason principles.

Further proceedings in In re Cipro Cases I & II are currently stayed pending trial court approval of a proposed settlement with defendant Bayer.

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2. Ninth Circuit Confirms Broad Extraterritorial Scope of Cartwright Act

At&T Mobility v. AU Optronics Corp., 707 F.3D 1106 (9th Cir.2013)

Because California has a valid interest in protecting competition within its borders, the Ninth Circuit has held that an antitrust price-fixing conspiracy arranged in California is subject to the Cartwright Act and UCL even if all the sales of the price-fixed products occur in other states.

As part of the global LCD panel antitrust litigation, plaintiffs (AT&T-related companies) sued LCD panel manufacturers under the Cartwright Act and UCL, alleging a conspiracy to fix prices for LCD screens used in AT&T phones, all of which phones were sold outside of California. Focusing on the loci of those sales, the U.S. District Court twice dismissed plaintiffs’ California claims, ruling that the California antitrust laws cannot apply to price-fixed sales occurring exclusively in other states.

The Ninth Circuit reversed. The district court’s analysis incorrectly focused on just one aspect of the conspiracy (the phone sales) and erroneously ignored other aspects of the conspiracy, including that the formation of the conspiracy had occurred, at least in part, in California. "The district court’s conclusion ignores conduct that may give rise to a cause of action under the Cartwright Act . . . A reading of the plain text of the Cartwright Act reveals that the district court’s place-of-purchase focus severely truncates the scope of the anticompetitive conduct that the Act proscribes." (Id. at 1110.)

Rejecting the defendants’ due process objections, the court found "perpetration of anticompetitive activities within California ‘creat[es] state interests’ in applying California law to that conduct." (Id. at 1112.) The Ninth Circuit cited the California Supreme Court’s statement of Cartwright Act goals in Clayworth v. Pfizer, Inc., 49 Cal.4th 758 (2010), and found that "[a]pplying California law to anticompetitive conduct undertaken within California advances the Cartwright Act’s overarching goals of maximizing effective deterrence of antitrust violations, enforcing the state’s antitrust laws against those violations that do occur, and ensuring disgorgement of any ill-gotten proceeds." (Id.) A conspiracy occurring in California can undermine these interests even if the resulting sales occur elsewhere.

The court also concluded that this analysis governs UCL claims: "We focus on Plaintiffs’ claims under the California Cartwright Act . . . but the principles articulated herein apply equally to Plaintiffs’ claims under California’s Unfair Competition Law . . . The UCL provides a cause of action for harms caused by ‘any unlawful, unfair or fraudulent business act or practice.’ Because a violation of the Cartwright is, by definition actionable under the UCL, we do not belabor our analysis in this case with respect to Plaintiffs’ UCL claims." (Id. at 1107, n. 1)

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3. Federal Natural Gas Act Does Not Preempt Certain State Antitrust Enforcement Actions

In Re Western States Natural Gas Antitrust Litigation, 715 F.3d 716 (9th Cir.2013)

The Ninth Circuit has determined that the federal Natural Gas Act does not preempt state antitrust claims when plaintiffs’ alleged damages result from retail purchases not subject to federal law.

Natural gas company defendants were sued by commercial and industrial consumers of natural gas on allegations that the defendants colluded to submit false information to publishers of two major natural gas price indices (Gas Daily and Inside FERC) in order to manipulate market prices during the 2000-2002 energy crisis. Consolidated as an MDL matter in Nevada federal court, this lengthy litigation ultimately resulted in the district court dismissing the state law claims as preempted by the Natural Gas Act, which gives the federal government authority over wholesale natural gas sales and transportation, but reserves to the states jurisdiction over sales to end-use consumers. Recognizing that the published index prices were used to set rates in both wholesale transactions governed by federal law, and in retail transactions subject to state law, the district court concluded that section 5(a) of the Natural Gas Act, which gives the Federal Energy Regulatory Commission (FERC) jurisdiction over practices that affect wholesale rates, preempted state law from being used to regulate alleged index price manipulation that would have affected both wholesale and retail rates in the same way.

In April 2013, the Ninth Circuit reversed, concluding that section 5(a) does not preempt state antitrust claims "arising out of false price reporting and other anticompetitive behavior associated with nonjurisdictional sales." Noting that a prior Ninth Circuit opinion involving some of the same transactions at issue in Western States had already concluded that "the removal of certain transactions from FERC’s jurisdiction meant that claims arising out of those transactions were not preempted by the NGA" (id. at 731), the Western States court concluded that "federal preemption doctrines do not preclude state law claims arising out of transactions outside of FERC’s jurisdiction."

Defendants filed a cert petition in August 2013 and in December 2013 the Supreme Court invited the Solicitor General’s office to file a brief expressing the views of the United States.

B. Unfair Practices Act (Business and Professions Code § 17000 et seq.)

1. Sales Below Cost and Loss Leader Allegations Dismissed in Medical Labs Case

Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., et al., (N.D.Cal.2013) 2013 U.S.Dist. LEXIS 89208; 2013-1 Trade Cas. (CCH) ¶ 78,442

Illustrating the challenges facing antitrust plaintiffs in the post-Twombly era, the U.S. District Court for the Northern District of California has dismissed plaintiffs’ Unfair Practices Act allegations of sales below cost (§ 17043) and loss leader sales (§ 17044) as part of a dismissal of the entirety of an antitrust suit involving medical laboratory billing practices.

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Plaintiffs, medical diagnostic laboratories in California engaged in the "commercial reference laboratory business," sued three health insurers and the largest competing laboratory, Quest Diagnostics, Inc., for conspiring to exclude plaintiffs from the diagnostic testing market through a series of contracts making it difficult or impossible for plaintiffs to participate in the insurers’ preferred networks. Plaintiffs also sued Quest for attempted monopolization and violations of the UPA, including sales under cost and loss leaders, undertaken to harm competitors and competition in the California marketplace.

In addition to dismissing the balance of the complaint (with leave to amend) based largely on Twombly "plausibility" analysis, the district court dismissed the plaintiffs’ UPA claims against Quest. Plaintiffs had alleged that Quest engaged in loss-leader pricing on certain capitated contracts in exchange for more lucrative fee-for-service business, but the district court found the allegations "too conclusory to state a plausible UPA claim." (Id. at LEXIS 45.) The court concluded that the plaintiffs failed to adequately allege "Quest’s sales prices, costs, or cost of doing business" and plaintiffs’ generalized allegations of pricing "below cost" were insufficient to survive demurrer. (Id. at LEXIS 46.)

C. Covenants Not to Compete (Business and Professions Code § 16600 et seq.)

1. Section 16600 Does Not Abrogate Officer’s Duty of Loyalty During His Employment

Angelica Textile Services, Inc. v. Park, 220 Cal.App.4th 495 (2013) (review denied, Jan. 29, 2014)

Although our non-competition-covenant principles permit an employee wide latitude to seek other employment, California law does not authorize a current employee (while still employed) to transfer his loyalty to a competitor, the Fourth District Court of Appeal has ruled.

Plaintiff Angelica Textile Services, a large-scale laundry business serving San Diego hospitals, sued defendant Emerald (a new competitor) and Park, a former Angelica employee now working for Emerald, alleging violations of California’s Uniform Trade Secrets Act (UTSA), unfair competition, and various contract breaches and business torts. The trial judge dismissed all the non-UTSA theories, and at trial the jury found none of the information at issue was a trade secret within the meaning of UTSA, resulting in judgment for defendants. Plaintiff Angelica then appealed the dismissal of the non-UTSA claims.

The Fourth District reinstated the non-trade-secret claims. Considering plaintiff’s claims implicating California policy on covenants not to compete, the appellate court confirmed that section 16600 "has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his employment ends. However, the statute does not affect limitations on an employee’s conduct or duties while employed." (Id. at 509; emphasis original.)

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The court noted: "While California law does permit an employee to seek other employment and even to make some ‘preparations to compete’ before resigning, California law does not authorize an employee to transfer his loyalty to a competitor. During the term of employment, an employer is entitled to its employees’ ‘undivided loyalty.’" (Id.)

This has particular force where the employee in question is a corporate officer. As such an officer, "Park owed the corporation a fairly broad duty of loyalty . . . which demands of a corporate officer or director . . . the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation, but also to refrain from doing anything that would work injury to the corporation . . . ." (Id. at 510.) During his employment at Angelica, Park had assisted Emerald by disparaging Angelica to a local bank, and by granting contractual cancellation rights to Angelica customers in violation of Angelica’s policies. Angelica’s claim that Park breached the non-competition clause of his contract by these actions was not defeated by section 16600 principles and could go forward.

D. Consumer Legal Remedies Act (Civil Code § 1750 et seq.)

1. FTC Holder in Due Course Rule Applies and Permits CLRA Claim Against Lender

Lafferty v. Wells Fargo Bank, 213 Cal.App.4th 545 (2013)

The Third Appellate District has held that the FTC Holder in Due Course Rule (16 C.F.R. 433.2) allowed the purchaser of a motorhome to assert all claims it had against the RV dealership also against the lending institution to which the buyer’s loan had been assigned.

Plaintiff spouses (the Laffertys) sued a motorhome manufacturer, the RV dealer, and Wells Fargo Bank, to whom the purchase contract was assigned, for warranty breach and violations of the CLRA and other state consumer protection statutes relating to a "lemon" motor home plaintiffs had purchased. Plaintiffs appealed the trial court’s order granting Wells Fargo’s demurrer to the CLRA and related claims, and the Third Circuit reversed as regards to those claims. "[W]e decline to depart from the clear language required by the Holder Rule . . . In short, the Holder Rule allows the Laffertys to assert the same ‘claims and defenses’ against Wells Fargo that they might otherwise have had against [the dealer]." (Id. at 563.) However, "the Holder Rule limits the Laffertys to recovering no more than what they have paid under the installment contract." (Id. at 556.)

2. Auto Club’s Billing Policy Not Subject to CLRA/UCL Class Action Challenge

Thompson v. Automobile Club of Southern California, 217 Cal.App.4th 719 (2013)

Plaintiffs sought certification for a class action alleging CLRA and UCL violations by defendant Auto Club regarding its membership renewal billing practices. The Auto Club provided a grace period after membership expiration, but the putative representative plaintiff objected to receiving less than a full year’s membership when he took advantage of the grace period to renew without a $20 processing fee.

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The Fourth Appellate District held the trial court did not abuse its discretion when it refused to certify a class under the CLRA and UCL. The appellate court found insoluble problems with the ascertainability of the class and the predominance of common questions of law and fact due to differences among putative class members regarding receipt of membership services during the delinquency period, disclosure of the renewal policy, and economic benefits or detriments from differing renewal choices. "The predominance of these individual issues makes the class action mechanism unmanageable in this case." (Id. at 732.)

Other recent CLRA opinions:

Flores v. West Covina Auto Group, 212 Cal.App.4th 895 (2013) review granted, deferred pending review in Iskanian v. CLS Transportation of Los Angeles, 15 Cal.Rptr.3d 651 (2013). Depublished pending Supreme Court review of Iskanian (see discussion, infra), the Second District’s opinion held that the Federal Arbitration Act preempted the California Consumer Legal Remedies Act’s prohibition against class waivers in an automobile sales contract governed in part by federal law.

Chapman v. Skype Inc., 220 Cal.App.4th 217 (2013); 2013 Cal.App. LEXIS 794. The Second Appellate District held that CLRA claims against VOIP provider Skype included adequate allegations of the requisite CLRA elements to avoid demurrer. (See discussion, infra).

E. Unfair Competition Law (Business and Professions Code § 17200 et seq.)

1. California Supreme Court: All Equitable Exceptions Apply to UCL Statute of Limitations

Aryeh v. Canon Business Solutions, Inc., 55 Cal.4th 1185 (2013)

The California Supreme Court has clarified the governing principles of the statute of limitations in Unfair Competition Law cases, holding that "the text and legislative history of the UCL leave UCL claims as subject to the common law rules of accrual as any other cause of action." (Id. at 1185.)

Plaintiff Aryeh leased a photocopier from defendant Canon and sued when he discovered service practices that allegedly resulted in overcharges under the lease. Defendant’s demurrer on statute of limitations grounds was sustained and plaintiff appealed, claiming his on-going leasing contracts with Canon justified the application of the "continuous accrual" equitable exception to the usual four-year statute of limitations period of the UCL. A divided Second District Court of Appeal upheld the order of dismissal, and the California Supreme Court granted review.

The Supreme Court reversed and reinstated plaintiff’s claim. After a detailed review of the historical development of various equitable exceptions to the usual limitations principles, the Supreme Court held that the "last element" principle—the cause of action does not fully accrue until the last necessary element takes place—governs the UCL.

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As a result, all the common law exceptions to the "last element" principle apply to relevant UCL factual situations as with any other statutory scheme: "Accordingly, we conclude the UCL is governed by common law accrual rules to the same extent as any other statute. That a cause of action is labeled a UCL claim is not dispositive; instead, ‘the nature of the right sued upon’ [citation] and the circumstances attending its invocation control the point of accrual. The common law last element accrual rule is the default [citation] while exceptions to that rule apply precisely to the extent the preconditions for their application are met, as would be true under any other statute. We disapprove Snapp and Associates Ins. Svs. Inc. v. Robertson, 96 Cal.App.4th 884 (2002) and Salenga v. Mitsubishi Motors Credit of America, Inc., 183 Cal.App.4th 986 (2010) to the extent they hold otherwise." (55 Cal.4th at 1194.)

In the Aryeh case facts, the equitable exception for "continuous accrual" was applicable where Canon was alleged to have engaged in a recurring breach of a contractual obligation, so that "each alleged breach must be treated as triggering a new statute of limitations." (Id. at 1200.) Thus, "continuous accrual principles prevent Aryeh’s complaint from being dismissed at the demurrer stage on statute of limitations grounds." (Id. at 1185.) And depending on the factual circumstances, the other equitable exceptions to the "last element" doctrine, including delayed discovery, equitable tolling, fraudulent concealment, and continuing violations, may apply if their factual preconditions are met. (Id. at 1194.)

2. Applying Aryeh, Third District Holds Fraudulent Concealment Doctrine Applies to UCL

Fuller v. First Franklin Financial Corp., 216 Cal.App.4th 955 (2013)

Following the Supreme Court’s guidance in Aryeh v. Canon Business Solutions, Inc. (supra), the Third District has held the doctrine of fraudulent concealment applies to an action against a loan broker and lender, extending plaintiff borrowers’ time for filing their UCL claim.

Plaintiffs sued defendants (a mortgage lender and its agents) for deceptive and fraudulent practices in connection with home loans which defendants allegedly manipulated to obtain illegal kickbacks. Plaintiffs did not discover key misrepresentations of loan terms concealed by the defendants until more than four years after the loans were made. When they sued on UCL and other theories, the trial court sustained defendants’ demurrers on statute of limitations grounds.

Taking plaintiffs’ facts as true for demurrer purposes, the court found the plaintiffs "had sufficiently alleged delayed discovery of facts that defendants had purposely withheld from them . . . ," which was sufficient to invoke the fraudulent concealment equitable exception applicable to UCL statute of limitations matters after Aryeh. (Id. at 959). "The allegations establish with adequate specificity nondisclosures and misrepresentations . . . and the absence of any circumstances to trigger plaintiffs’ reasonably inquiry in to available facts revealing the true nature of the loans." (Id. at 966.) The court reversed the judgments of dismissal with directions to overrule the demurrers. (Id. at 959.)

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3. Scorecard: UCL Preemption or Bar Arising From Federal or State Regulatory Schemes

The California and federal courts continue to wrestle with the multi-faceted issue of the applicability of the Unfair Competition Law to specific business practices and contexts where other regulatory schemes are involved. Claims of federal preemption, or preclusion or bar by state regulatory schemes, have recently produced a number of important results.

a. Holdings [final or provisional] of no preemption of or bar to UCL action:

Rose v. Bank of America, N.A., 57 Cal.4th 390 (2013)

In an opinion widely viewed as a significant expansion of UCL private actions in federal regulatory contexts,¹ the California Supreme Court has held that the elimination by Congress of a private right of action under the federal Truth in Savings Act (TISA, 12 U.S.C. § 4301 et seq.) did not preclude the filing of a UCL claim predicated on TISA violations.

Plaintiffs filed a putative class action under the UCL alleging that defendant Bank of America had engaged in an unlawful and unfair business practice of failing to adequately notify customers of account fee increases. Since Congress had amended TISA in 1996 to sunset that law’s private right of action, defendant Bank of America argued on demurrer that Congress had intended to bar all private actions alleging TISA violations. The trial court sustained the demurrer and the Second District affirmed, concluding that the UCL could not be used now to redress TISA violations.

A unanimous California Supreme Court reversed. "May a claim of unlawful business practice under California’s unfair competition law be based on violations of a federal statute, after Congress has repealed a provision of that statute authorizing civil actions for damages? We hold that it may, when Congress has also made it plain that state laws consistent with the federal statute are not superseded." (Id. at 393.) The Court found TISA’s savings clause determinative: "By leaving TISA’s savings clause in place, Congress explicitly approved the enforcement of state laws ‘relating to the disclosure of yields payable or terms for accounts’ . . . The UCL is such a state law." (Id. at 395.)

The Supreme Court emphasized that "by borrowing requirements from other statutes, the UCL does not serve as a mere enforcement mechanism. It provides its own distinct and limited equitable remedies for unlawful business practices, using other laws only to define what is ‘unlawful,’" reflecting "the Legislature’s intent to discourage business practices that confer unfair advantages in the marketplace . . . ." (Id. at 397.) Because the UCL is meant "to provide remedies cumulative to those established by other laws, absent express provision to the contrary (Bus. & Prof. Code, § 17205)," a UCL action is "only barred if a statute expressly prohibits such an action or expressly permits the conduct in question." (Id. at 398-399.)

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People ex rel. Harris v. Pac Anchor Transportation, Inc., 195 Cal.App.4th 765 (2011) (review granted, 2011 Cal. LEXIS 9188, Aug. 31, 2011)

The Second District held a UCL case filed by the attorney general for improper classification of employees as independent contractors was not preempted by the Federal Aviation Administration Authorization Act (49 U.S.C. § 14501 et seq.), as it was not related to rates, routes, or services. The California Supreme Court granted review on August 31, 2011, and briefing was still continuing in August of 2013.

b. Holdings [final or provisional] of preemption of or bar to UCL action:

Simpson v. Kroger Corporation, 219 Cal.App.4th 1352 (2013)

Plaintiffs appealed the trial court’s dismissal with prejudice (on preemption grounds) of their UCL challenge, based on California’s Milk and Milk Products Act (MMPA) (Food & Agr. Code § 32501 et seq.) and other theories, to defendant Kroger’s labeling of its dairy products combining butter with canola oil or olive oil. The Second District held California’s MMPA is preempted to the extent its provisions are inconsistent with the terms of the federal Food, Drug and Cosmetic Act (21 U.S.C. § 301), as they are here. While plaintiff’s cause of action based on California’s Sherman Food, Drug and Cosmetic Law (Health & Safety Code § 109875 et seq.) was not preempted, it nonetheless also failed because the court found as a matter of law that plaintiff failed to demonstrate that a reasonable consumer would be misled by the product labels.

Rodriguez v. RWA Trucking Company, Inc., 219 Cal.App.4th 692 (2013) (review granted, 162 Cal.Rptr.3d 250, Dec. 11, 2013)

Plaintiffs, independent-contractor truck drivers, sued the defendant trucking company under the UCL for selling auto liability insurance improperly and for charging unlawfully for workers’ compensation insurance. After trial judgment for plaintiffs, the Second Appellate District found that the auto liability insurance UCL claim under the California Insurance Code was preempted by the Truth-in-Leasing regulations of the federal Motor Carrier Act (49 U.S.C. § 14101 et seq.; 49 C.F.R. § 376 et seq.), but held that the workers compensation UCL cause of action for Labor Code violations was not preempted by the Federal Aviation Administration Authorization Act of 1994 (49 U.S.C. § 14501 et seq.).

Parks v. MBNA America Bank, 54 Cal.4th 376 (2012)

Reversing the Fourth Appellate District, which had found no necessary preemption, the California Supreme Court held that the National Banking Act of 1864 (13 Stat. 99) (NBA) preempted a UCL class action against defendant MBNA America Bank for alleged failure to provide certain convenience-check disclosures required by Civil Code section 1748.9. "We conclude that the NBA preempts Civil Code section 1748.9 because the state law stands as an obstacle to the broad grant of power given by the NBA to national banks to conduct the business of banking." (Id. at 380.) The Civil Code provisions "exceed any requirements in federal law" (Id. at 387), and are not part of the "general legal backdrop to Congress’ enactment of federal banking legislation." (Id. at 390.)

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4. Scorecard: Arbitration and Unconscionability in Consumer Contracts after Concepcion

The U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, ___ U.S. ____, 131 S.Ct. 1740 (2011), upholding the preemptive effect of the Federal Arbitration

Act (9 U.S.C. § 1 et seq.) on inconsistent state principles, stands as a bar to UCL or FAL actions challenging unfair business practices or false advertising by businesses using contracts with mandatory arbitration clauses. The full scope of the Concepcion principle, and its impact on California arbitration and unconscionability principles, continues to be the subject of extensive litigation. The following is a survey of some of the more prominent unfair competition matters raising these issues of mandatory arbitration and contract unconscionability after Concepcion:

a. Arbitration Clauses Upheld:

Iskanian v. CLS Transportation, 206 Cal.App.4th 949 (2012) (review granted, 2012 Cal. LEXIS 8925, September 19, 2012)

Disagreeing with a division in its own district, the Second Appellate District (Division Two) held that the California Supreme Court’s opinion in Gentry v. Superior Court, 42 Cal.4th 443 (2007), holding that the statutory right to receive overtime pay was unwaivable and thus not subject to a mandatory class arbitration waiver, was no longer valid after Concepcion (cf. Brown v. Ralph’s Grocery Co., 197 Cal.App.4th 489 (2011) (2nd DCA, Div. 5); Kinecta Alternative Financial Services, Inc. v. Superior Court, 205 Cal.App.4th 506 (2012) (2nd DCA, Div. 3) (assuming Gentry remains valid). Based on this analysis, the court ruled that the arbitration requirement in a trucking company’s contract must be enforced. (206 Cal.App.4th at 954.)

In light of the conflicts on this issue among three divisions within the Second District and others, the California Supreme Court granted review on Iskanian on September 19, 2012. The Supreme Court’s guidance on the fate of Broughton-Cruz and Gentry in the aftermath of Concepcion is clearly needed. The landscape of consumer contracts in California will likely be altered significantly by the Court’s opinion, whatever its substantive conclusions may be.

Kilgore v. KeyBank, 78 F.3d 1052 (9th Cir. 2013)

In the original opinion expressing remorse about the result, a three-judge Ninth Circuit panel held that AT&T Mobility, Inc. v. Concepcion mandated the conclusion that the Federal Arbitration Act (9 U.S.C. § 1 et seq.) preempts the California Supreme Court’s rulings in Broughton v. Cigna Healthplans, 21 Cal.4th 1066 (1999) and Cruz v. Pacificare Health Systems, Inc., 30 Cal.4th 303 (2003) that UCL and Consumer Legal Remedies Act (CLRA) actions seeking injunctive relief on behalf of the public cannot be the subject of arbitration. "Although the Broughton-Cruz rule may be based upon the sound public policy judgment of the California legislature, we are not free to ignore Concepcion’s holding that state public policy cannot trump the FAA when that policy prohibits the arbitration of a ‘particular type of claim’. . . . Therefore we hold that the conflicting [Broughton-Cruz] rule is displaced by the FAA." (673 F.3d at 963.)

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The panel then found that the arbitration clause at issue was not procedurally unconscionable, based on its clear disclosure and 60-day opt-out period, and thus was enforceable. (Id. at 964.) However, the panel took pains to note that Concepcion "did not overthrow the common law contract defense of unconscionability whenever an arbitration clause is involved. Rather, [Concepcion] reaffirmed that the savings clause preserves generally applicable contract defenses such as unconscionability, so long as those doctrines are not ‘applied in a fashion that disfavors arbitration.’" (Id. at 963, quoting Concepcion.)

On September 21, 2012, the Ninth Circuit’s judges ordered rehearing en banc, and on April 11, 2013, the court filed this en banc opinion. The larger panel reversed the district court’s denial of defendant’s motion to compel arbitration. However, the court did not hold that Concepcion abrogates the Broughton-Cruz rule, but rather held that the rule only applies to requests for public injunctions and is thus inapplicable because plaintiffs here sought private injunctive relief. Since KeyBank had withdrawn completely from the business at issue, "the injunctive relief sought, thus, for all practical purposes relates only to past harms suffered by members of the putative class." Thus, [e]ven assuming the continued viability of the Broughton-Cruz rule, Plaintiffs’ claims do not fall within its purview" and plaintiffs’ challenge to the mandatory arbitration clause fails. (Id. at 1060).

b. Arbitration Clauses Rejected:

Natalini v. Import Motors, 213 Cal.App.4th 587 (2013) (review granted, 155 Cal. Rptr. 3d 831, May 1, 2013)

The First Appellate District sided with the Sanchez and Goodridge courts (see infra) and found that an arbitration clause in an industry-standard motor vehicle installment sales contract was unconscionable and thus unenforceable notwithstanding Concepcion. "We conclude that the arbitration provision in the present case is substantively unconscionable because it is designed in several ways to systematically favor the car dealer." (Id. at 596.) Further, "both aspects of procedural unconscionability [oppression and surprise] are present in this case." (Id.) Thus the contract’s arbitration clause was unconscionable and unenforceable. The California Supreme Court granted review on May 1, 2013, adding this matter to the series of cases in queue including Sanchez and Iskanian (infra).

Sanchez v.Valencia, 201 Cal. App. 4th 74 (2012) (review granted, 139 Cal. Rptr.3d 2, March 21, 2012)

Division One of the Second District Court of Appeal had held an arbitration clause in the defendant’s standard auto purchase contract to be unconscionable under general California contract principles, notwithstanding the Concepcion issue of the class action waiver in the contract. The panel held: "The [arbitration] provision is adhesive— involving oppression and surprise—and contains harsh one-sided terms that favor the car dealer to the detriment of the buyer . . . . We cannot sever all of the offending language. Thus, regardless of the validity of the class action waiver, the trial court properly declined to compel arbitration." (Id. at 80.)

The California Supreme Court granted review on March 21, 2012. The Sanchez opinion relied in part on Broughton and thus its fate may depend on the California Supreme Court’s conclusion on the survival of its Broughton-Cruz rule in this review and the Iskanian review (discussed supra) presently underway.

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Other recent arbitration/unconscionability opinions:

Vasquez v. Greene Motors, Inc., 214 Cal.App.4th 1172 (2013) (reviewgranted, 156 Cal. Rptr.3d 260, June 26, 2013). The First Appellate District disagreed with its sister panel in Natalini, supra, and held the arbitration clause in the standard vehicle sales contract not unconscionable and thus enforceable.

Vargas v. SAI Monrovia B, Inc., 216 Cal.App.4th 1269 (2013) (reviewgranted, 2013 Cal. LEXIS 6925, Aug. 21, 2013). The same Second District panel that decided Sanchez, supra, again found that the usual arbitration clause used by most car dealerships in California is unconscionable and thus unenforceable.

Goodridge v. KDF Automotive, 209 Cal.App.4th 325 (2012). The Fourth District held the auto purchase contract to be unconscionable in the requisite procedural and substantive dimensions and is thus unenforceable.

Compton v. Superior Court (American Mgmt. Services, LLC), 214 Cal.App.4th 873 (2013) (review granted, 157 Cal.Rptr.3d 570, June 12, 2013). The Second District found the arbitration clause in an employment contract to be so one-side as to be unconscionable and unenforceable, notwithstanding Concepcion.

c. Scorecard: Standing, Injury, and Reliance Pleadings after Tobacco II and Kwikset

Chapman v. Skype Inc., 220 Cal.App.4th 217 (2013)

Plaintiff Chapman, a customer of VOIP provider Skype, sought to certify a UCL and FAL class action against Skype based on allegations of misrepresentations of the terms of Skype’s "Unlimited" use plan. Applying the standing principles of Tobacco II and Kwikset, the Second Appellate District found that plaintiff’s UCL, FAL, and CLRA allegations were improperly dismissed because she adequately alleged the tendency or likelihood of deception and adequately pled actual reliance on the misrepresentations at issue. Both the likelihood of misleading a reasonable consumer and the materiality of the misrepresentations in influencing plaintiff’s purchase were sufficiently alleged and "cannot be decided as a question of law on this record." (Id. at Cal. App. LEXIS 794, at 18.)

Other recent standing/reliance/injury opinions:

Schwartz v. Provident Life and Accident Ins. Co., 216 Cal.App.4th 607 (2013). The First District held that an insured lacked standing to sue defendant disability insurers for alleged deceptive practices based on plaintiff’s claim that some insureds — but not plaintiff — were wrongfully denied benefits. Actuarial evidence of alleged higher premiums did not constitute the requisite showing of individual harm required after Proposition 64.

Faulkinbury v. Boyd and Associates, Inc., 216 Cal.App.4th 220 (2013). The Fourth Circuit, pursuant to directions from the California Supreme Court, reconsidered its prior order denying class certification to plaintiff security guards in their UCL action alleging Labor Code and UCL violations relating to off-duty meal breaks and overtime pay, and directed the trial court to certify all three classes proposed by plaintiffs in light of the Supreme Court’s Brinker standards.

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5. Antitrust Uses of Unfair Competition Law Addressed

Law Offices of Matthew Higbee v. Expungement Assistance Services, 214 Cal. App.4th 544 (2013)

The Fourth Appellate District has held that the trial court erred in sustaining a defendant’s demurrer in a UCL competitor-versus-competitor suit in which the plaintiff law office contended that it lost profits because of the unlawful conduct of the defendant with which plaintiff had no direct business dealings. Reversing the trial court’s order, the appellate court concluded: "Bearing in mind the UCL was originally conceived to protect business competitors . . . and also that the deterrence of unfair competition is an important goal of the UCL . . . we conclude that the lack of direct dealings between two business competitors is not fatal to UCL standing, provided the plaintiff competitor has suffered injury in fact and lost money or property . . . ." (Id. at 547.) Further, the alleged added expenses and lost profits resulting from decreased market share could constitute the requisite injury in a competitor-on-competitor antitrust action under the UCL. (Id. at 561.)

AT&T Mobility v. AU Optronics Corp., 707 F.3d 1106 (9th Cir.2013)

The Ninth Circuit concluded that its extraterritoriality analysis focusing on all aspects of an antitrust conspiracy including its place of origin (see discussion, supra), also governs UCL claims: "We focus on Plaintiffs’ claims under the California Cartwright Act . . . but the principles articulated herein apply equally to Plaintiffs’ claims under California’s Unfair Competition Law . . . The UCL provides a cause of action for harms caused by ‘any unlawful, unfair or fraudulent business act or practice.’ Because a violation of the Cartwright is, by definition actionable under the UCL, we do not belabor our analysis in this case with respect to Plaintiffs’ UCL claims." (Id. at 1107, n. 1)

6. Supreme Court Resolves Moradi-Shalal Controversy (But Prolongs Uncertainty on the "Unfairness" Legal Standard in UCL Consumer Cases)

Zhang v. Superior Court (California Capital Insurance), 57 Cal.4th 354 (2013)

In an opinion with multiple impacts, the California Supreme Court has held that its opinion in Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal.3d 287 (1988), does not prevent an insured from filing a UCL action against an insurer alleging false advertising and bad faith claims handling, notwithstanding that those practices are also addressed in California’s Unfair Insurance Practices Act (UIPA) (Ins. Code § 790 et seq.).

Plaintiff owner of a commercial building bought insurance from the defendant insurance company, and after a fire damaged the building, there was a lengthy dispute about defendant’s obligation to pay under the policy. Plaintiff sued alleging breach of contract and related theories and also alleging a UCL violation consisting of false advertising and bad faith in honoring claims. The trial court sustained defendant’s demurrer, ruling that the principle of Moradi-Shalal, which limits remedies for California’s UIPA, foreclosed plaintiff’s UCL cause of action on these insurance practices. The Fourth Appellate District reversed, holding Moradi-Shalal did not bar the action.

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The Supreme Court affirmed. "We hold that Moradi-Shalal does not preclude first party UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03. We have made it clear that while a plaintiff may not use the UCL to ‘plead around’ an absolute bar to relief, the UIPA does not immunize insurers from UCL liability for conduct that violates other laws in addition to the UIPA." (57 Cal.4th at 369, disapproving Textron Financial Corp. v. National Union Fire Insurance Co. 118 Cal.App.4th 1061 (2004))

On the topic of UCL "unfairness" doctrine, in its now superseded opinion in Rose v. Bank of America, 200 Cal.App.4th 1441 (2011) (review granted, 139 Cal.Rptr.3d 1), the Second Appellate District accurately noted that "[o]ur Supreme Court has not announced a definitive test for unfair business practices in consumer cases." This unfortunate state of affairs continues in 2013, as the California Supreme Court in Zhang passed over an important opportunity to provide essential guidance on which of the four (or more) differing theories of UCL "unfairness" should be used to analyze such allegations in consumer—as opposed to antitrust—cases.

While providing an important result for insurance litigation in California, the Zhang opinion prolonged rather than resolved the continuing uncertainty over the correct legal standard to apply in UCL "unfairness" cases involving consumers. The Court noted:

The standard for determining what business acts or practices are "unfair" in consumer actions under the UCL is currently unsettled. (See Aleksick v. 7-Eleven, Inc. (2012) 205 Cal.App.4th 1176, 1192 [public policy that is predicate for action must be tethered to specific constitutional, statutory or regulatory provisions]; Ticconi v. Blue Shield of California Life & Health Ins. Co. (2008) 160 Cal.App.4th 528, 53 [applying balancing test, but also examining whether practice offends established public policy or is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers]; Camacho v. Automobile Club of Southern California (2006) 142 Cal.App.4th 1394, 1403 [consumer injury must be substantial, and neither outweighed by countervailing benefits nor avoidable by consumers]; Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 285 [37 Cal. Rptr. 3d 434] [impact of the act or practice on victim is balanced against reasons, justifications and motives of the alleged wrongdoer].) The parties here do not address this question, nor do we. (57 Cal.4th at 380, n.9.)

As an example of the continuing analytical problems arising from this doctrinal uncertainty, in Aspiras v. Wells Fargo Bank, N.A., 219 Cal.App.4th 948 (2013), the Fourth District rejected plaintiffs’ UCL claims against defendant for unfair and unlawful mortgage foreclosure practices and in doing so applied the "tethering" analysis of Cel-Tech to a consumer case without acknowledging or distinguishing between competitor/antitrust "unfairness" and "unfairness" in consumer contexts. (Cf. Cel-Tech Communications, Inc., supra, 20 Cal.4th at 186-187.)

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F. False Advertising Law (Business and Professions Code § 17500 et seq.)

1. Ninth Circuit: Price Misrepresentations "Matter," Conferring Kwikset Standing

Hinojos v. Kohl’s Corp., 718 F.3d 1098 (9th Cir.2013)

The Ninth Circuit has concluded that the broader Proposition 64 standing principles enunciated by the California Supreme Court in Kwikset are not limited to the Kwikset context of misrepresentations regarding where merchandise is manufactured.

In Hinojos v. Kohl’s Corp. , plaintiffs brought a false advertising and UCL class action against defendant retailer Kohl’s for engaging in multiple continuing misrepresentations about "sale" pricing and reductions from "original" prices. The Ninth Circuit, relying on the California Supreme Court’s analysis in Kwikset Corp. v. Superior Court, 51 Cal.4th 310 (2011), rejected defendant’s contention that the Kwikset standing principle only governs place-of-origin matters. The court concluded "Kwikset cannot be . . . limited" to its facts of manufacturing origin claims. Where there are allegations of "misrepresentations that induced [plaintiff] to buy products he would not ordinarily have purchased . . . but for the misrepresentation, he has standing to sue under the UCL and FAL because he has suffered economic injury." (Id. at 1107, n. 8.)

The court described the wrongful economic motivations behind phony-sales ploys and the consumer harm that results. Echoing the widely-quoted phrase of the Kwikset Court ("Simply stated, labels matter."), the Ninth Circuit concluded that "a product’s ‘regular’ or ‘original’ price matters." (Id. at 1105.) Plaintiffs had properly pleaded sufficient Proposition 64 "actual injury" to establish standing under the FAL and UCL. (Id.)

2. First Appellate District Confirms Principal-Agent Liability in False Advertising Matters

People v. JTH Tax, Inc., 212 Cal.App.4th 1219 (2013)

With specific reference to the false advertising law and the Unfair Competition Law, the First District Court of Appeal has affirmed that "the California Supreme Court has held that ‘section 17500 incorporates the concept of principal-agent liability’ . . . ." (Id. at 1242.)

The California Attorney General sued JTH Tax (parent company of the Liberty Tax franchised system of tax preparers) for false advertising and related deceptive business practices. Defendant JTH attempted to avoid liability by disclaiming responsibility for the deceptive conduct of its franchisees. Defendant cited People v. Toomey, 157 Cal.App.3d 1 (1984), for the proposition that there is no vicarious liability under the UCL or false advertising law, and Emery v. Visa International Service Assn., 95 Cal.App.4th 952 (2002), for the claim that California courts refuse to impose vicarious liability in UCL and false advertising cases when the relationship between the alleged principal and agent is remote.

The First District rejected those propositions. Since violations of the UCL "’include any . . . unfair, deceptive, untrue or misleading advertising and any act prohibited by [section 17500],’ [the Supreme Court’s opinion in] Ford Dealers establishes that ‘persons can be found liable for misleading advertising and unfair business practices under normal agency theory.’ To the extent that Toomey, supra, 157 Cal.App.3d 1, or Emery, supra, 95 Cal.App.4th 952, hold otherwise . . . these cases are mistaken." (212 Cal.App.4th at 1242.)

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The court also concluded that California civil liability for the acts of a corporation’s agents turns on the right of control, as well as the actual control, of those acts by the principal. Speaking in a franchising context, the court found that in California "[t]he general rule is where a franchise agreement gives the franchisor the right of complete or substantial control over the franchisee, an agency relationship exists. (2 Witkin, Summary of Cal. Law (9th ed. 1987) Agency and Employment, § 6, pp. 24—25.). . . ‘The significant test of an agency relationship is the principal’s right to control the activities of the agent. [Citations.] It is not essential that the right of control be exercised or that there be actual supervision of the work of the agent; the existence of the right establishes the relationship." (212 Cal.App.4th at 1242.)

II. CALIFORNIA AND FEDERAL DEVELOPMENTS: PROCEDURAL LAW

A. Jurisdiction

1. U.S. Supreme Court Enforces Limits on "All Purpose" or "General" Jurisdiction

Daimler AG v. Bauman, ___ U.S.___, 134 S.Ct. 746, 187 L.Ed.2d 624 (January 14, 2014)

Bauman was an action brought on behalf of employees of MB Argentina, an Argentine subsidiary of Mercedes-Benz. The gravamen of the case was an allegation that MB Argentina collaborated with local security forces to detain and torture MB employees during that country’s "Dirty War" between 1976 and 1983. The action was filed in the U.S. District Court for the Northern District of California alleging wrongful death and intentional infliction of mental distress under California and Argentine law. The question on appeal was whether Daimler AG, the owner of Mercedes, had sufficient contacts with the California forum to allow review of the Argentine employees’ claims in the face of a Due Process challenge.

California is an important market for Mercedes-Benz, representing $2 billion in revenue and 10% of all U.S. sales. Mercedes also had multiple California-based facilities, including a regional office in Costa Mesa, a Vehicle Preparation Center in Carson, and a Classic Center in Irvine. (Bauman, 187 L.Ed.2d at 631.)

However, writing for a near-unanimous Court, Justice Ginsberg concluded that, while the contacts with California were substantial, they did not give rise to "general jurisdiction," as articulated in Goodyear Dunlop Tires Operations S.A v. Brown, 546 U.S. ___, 131 S.Ct. 2846 (2011).² Reprising principles announced in Goodyear, the Court concluded that general jurisdiction, that is, jurisdiction not based on activities of alleged wrong-doing in the forum state, required more than substantial business activity in the forum state, but a showing that the defendant was "at home" in the forum state. A corporation is typically "at home" where it is incorporated or has its principal place of business. (Bauman, 187 L.Ed.2d at 639-641)

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Justice Sotomayor agreed with the result but rejected Ginsberg’s analysis, arguing that for large, multi-national companies, substantial local activity should be enough to confer general jurisdiction on a forum state. (Id. at 643 et seq.)

2. In a Post-McIntyre Decision, the Third District Court of Appeal Concludes Canadian Company had Insufficient Contacts with California Forum

Bombardier Recreational Prods., Inc. v. Dow Chemical Canada ULC, 216 Cal. App.4th 157 (2013)

In light of the U.S. Supreme Court’s splintered decision on special jurisdiction in J. McIntyre Machinery Ltd. v. Nicastro, ___ U.S. ___, 131 S.Ct. 2780 (2011)³, Bombardier provides a useful primer on special jurisdiction from the perspective of a California intermediate appellate court.

Bombardier arose from a cross-complaint for indemnity against Dow Chemical Canada for a fuel tank and fuel tank filler neck it manufactured that was implicated in a fire in a Sea-Doo watercraft built by Bombardier. Dow Canada had never had an agent for service of process in California, never manufactured any products in California, never had any employees, officers or other facilities in California, and never advertised or sold products in California or to customers in California. (Bombardier, 216 Cal.App.4th at 595.) Bombardier did not dispute these facts, but nonetheless argued that jurisdiction was proper because Dow had known that "Bombardier would incorporate its fuel tanks and fuel tank filler necks in personal watercraft it intended to sell in the United States, including California." (Ibid.)

Both parties to the litigation invoked the McIntyre decision to support their respective claims. After reviewing the decision, the Third District Court of Appeal concluded that while "[s]ix justices of the United States Supreme Court now hold mere foreseeability that a product may enter a foreign state is insufficient to establish minimum contacts with the a forum state…the high court has not agreed on exactly what more besides foreseeability must be shown." (Bombardier, 216 Cal.App.4th at 602.)

Given the limited usefulness of the McIntyre decision to guide its analysis, the court fell back on existing California law, albeit colored by the McIntyre precedent, writing:

We thus rely on the California Supreme Court’s most recent description of the purposeful availment requirement as our guide to resolving this case, understood in light of J. McIntyre’s holdings that mere foreseeability is insufficient to establish minimum contacts, and that the existence of jurisdiction is determined based on an individualized assessment of the facts. "The purposeful availment inquiry… focuses on the defendant’s intentionality [Citation.] This prong is only satisfied when the defendant purposefully and voluntarily directs [its] activities toward the forum so that [it] should expect, by virtue of the benefit it receives, to be subject to the court’s jurisdiction based on'[ its] contact with the forum. (Pavlovich, supra, 29 Cal.4th at p. 269, quoting U.S. v. Swiss American, Ltd.) 274 F.3d 610, 623-624 (1st Cir. 2001.)

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Applying California precedents, the Third District concludes that there were insufficient contacts between Dow Canada and California to support jurisdiction in a California court. (Bombardier, 2126 Cal.App.4th at 602.)

B. Class Actions

1. U.S. Supreme Court Denies Class Certification Because Damage Model Did Not Distinguish Between the Theory of Harm Adopted by the Trial Court and Plaintiffs’ Alternate Theories

Comcast Corp. v. Behrend, U.S. ___, 133 S.Ct. 1426 (November 26, 2012)

An ideologically divided U.S. Supreme Court concluded that plaintiffs in a putative class action against a national cable services provider failed to meet the requirements of Rule 23(b)(3) because plaintiffs’ damage model did not distinguish among the effects of plaintiffs various theories of harm.

The basic allegation in the case was that defendant Comcast traded service areas with its competitors, resulting in high market shares for Comcast in some markets. The focus of this case was the effect of this "clustering" tactic in the Philadelphia area, where nine different trades resulted in an increase in Comcast’s share from 23.9% to 69.5%.

Plaintiffs asserted four distinct theories of harm. At the certification stage, only one of these theories was accepted by the trial court. The issue that the Court focused on was the fact that the plaintiffs’ economic expert had not distinguished the effects of the accepted theory of harm from the three rejected theories of harm.

Because the damage modeling did not map to the accepted theory of harm, and only that theory of harm, Justice Scalia, writing for a majority consisting of ChiefJustice Roberts and Justices Kennedy, Thomas and Alito, opined that ". . . respondents’ model falls far short of establishing that damages are capable of measurement on a classwide basis. Without presenting another methodology, respondents cannot show Rule 23(b)(3) predominance: Questions of individual damage calculations will inevitably overwhelm questions common to the class." (Comcast, 133 S.Ct. at 1432.)

This drew a stinging dissent from Justices Ginsburg and Breyer, joined by Justices Sotomayor and Kagan. First, the dissent argued that the majority had changed the question presented in mid-process, making the briefing largely irrelevant to the modified question presented. Second, the dissent scored the majority for misapprehending the actual modeling done by the plaintiffs’ expert. Finally, the dissenters argued that this decision was "good for this case and this case only." (Id. at 1438.)

There are perhaps three takeaways from this decision. First, and most important, damage modeling must match the theory of harm. Given modern econometrics and regression techniques, this probably means a relatively simple adjustment for plaintiffs. Second, a pregnant footnote suggests that modeling must show effects in each area in which a restraint is alleged to have restrained trade. (Id. at 1435, n. 6.) The level of detail suggested by this footnote may have long-term effects on class litigation of antitrust cases. Third, the Court reiterates that lower courts must inquire into merits issues if necessary to decide class certification issues. (Id. at 1432.)

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2. Comcast Appears to Have Had Limited Impact on California Courts

Leyva v. Medline Industries, Inc. , 716 F.3d 510 (9th Cir. 2013)

Gaudin v. Saxon Mortgage Services, Inc., 2013 U.S. LEXIS 110727 (N.D. Cal., August 5, 2013)

Barbosa v. Cargill Meat Solutions Corp., 2013 U.S. LEXIS 93194 (E.D.Cal.,July 2, 2013)

Leyva was a class action brought on behalf of hourly workers who were allegedly denied overtime pay, and subjected to waiting time penalties. The Ninth Circuit concluded that Comcast was not apposite because, "unlike in Comcast, if putative class members prove Medline’s liability, damages will be calculated based on the wages each employee lost due to Medline’s unlawful practices." (Leyva, 716 F.3d at 514.)

Gaudin was a class action challenge to the alleged failure of a financial institution to reform home mortgages consistent with post-financial crisis reforms. In response to defendant’s invocation of Comcast, the court simply distinguished the case, noting that "Plaintiff proposes no calculations that would assess damages on the basis of dismissed or abandoned theories of liablity." (Gaudin, 2013 U.S. Dist. LEXIS 110727 at *30.)

Barbosa is another wage and hour case, but reviewed in the context of settlement approval. In a footnote, the court observes that plaintiffs argued that in this case, "unlike Behrend, there is no damages model that improperly measures a broader pool of damages that conflict with a more narrowly defined class." On this basis, the court concludes Behrend does not bar the settlement. (Barbosa, 2013 U.S. Dist. LEXIS 93149 at *27, n. 2.)

3. Two U.S. Supreme Court Decisions Enforce Letter of Arbitration Agreements

Oxford Health Plans v. Sutter ___ U.S. ___, 133 S.Ct. 2064 (2013) American Express v. Italian Colors Restaurant ___ U.S. ___, 133 S.Ct. 2304 (2013)

In two important cases, the Supreme Court applies contract principles to the determination of the scope and effect of contractual arbitration agreements. Although the two cases are largely defense wins, the cases underscore the need for clarity in drafting arbitration agreements.

In Oxford Health, a physician had signed an arbitration agreement with a health insurer. He filed a class action several years later on behalf of himself and a class of other physicians asserting that Oxford had not paid claims fully and promptly. Defendant moved to compel arbitration, and the court referred the matter to arbitration. The agreement between Dr. Sutter and Oxford Health precluded "any civil action," and required that all disputes were subject to "final and binding arbitration." The parties agreed that the arbitrator could decide whether the agreement provided for class arbitration. Reviewing the language of the agreement, the arbitrator concluded that "any civil action" included a class action, so class arbitration was authorized.

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Oxford filed a motion under § 10(a)(4) of the Federal Arbitration Act, asserting that the arbitrator had exceeded his authority. Writing for a unanimous Court, Justice Kagan noted that, "[u]nder the FAA, the courts may vacate an arbitrator’s decision "only in very unusual circumstances." [citation omitted]. (Oxford Health, 133 S.Ct. at 2068.) Those circumstances were not found here. Distinguishing a case relied on by Oxford, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. 559 U.S. 662 (2010), the Court found that:

In Stoldt-Nielsen, the arbitrators did not construe the parties’ contract, and did not identify any agreement authorizing class proceedings. So in setting aside the arbitrators’ decision, we found not that they had misinterpreted the contract, but had abandoned their interpretive role. Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties’ intent. But § 10(a)(4) bars that course. (Oxford Health, 133 S.Ct. at 2069.)

In American Express, an ideologically split court determined that the language of an arbitration agreement trumped consumer interests in an efficient remedy. Writing for the conservative majority, Justice Scalia concluded that merchants who signed an arbitration agreement with American Express could not escape its prohibitions against seeking judicial remedies for alleged antitrust violations. According to Justice Scalia: "No contrary congressional command requires us to reject the waver of class arbitration here. Respondents argue that requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to vindication of every claim." (American Express, 133 S.Ct. at 2309.)

A dissent authored by Justice Kagan, joined by Justices Ginsburg and Breyer,⁴summarized the effects of the majority’s opinion as follows:

Here is the nutshell version of this case. . . The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form of contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. (American Express, 133 S.Ct. at 2313.)

This is a sweeping win for American Express. Given the majority’s apotheosis of freedom of contract principles over consumer protection concerns, this case suggests that companies should review their strategic use of arbitration agreements. In light of Oxford, these agreements must be drafted with care, but the pay-off can be substantial.

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4. U.S. Supreme Court Decides that an Attorney General’s Enforcement Action Is Not a "Mass Action" Within the Meaning of CAFA

Mississippi ex rel. Hood v. AU Optronics, ___ U.S. ___, 134 S.Ct. 736, 187 L.Ed.2d 654, 2014 U.S. LEXIS 645 (January 14, 2014)

Mississippi Attorney General Jim Hood brought an enforcement action in state court against an alleged price-fixer under his state’s antitrust and consumer protection statutes. Hood sought, among other forms of relief, restitution for Mississippi citizens who had purchased allegedly price-fixed liquid crystal displays or LCD-containing products. Hood, as a representative of his state, was the only named plaintiff.

On the basis of defendant’s argument that since the number of citizens who might receive restitution was numerous, his case was characterized a "mass action" within the meaning of the Class Action Fairness Act (28 U.S.C. §1332(d)(1)(B).), and removed to federal court.

Justice Sotomayor, writing for a unanimous Court, concluded that the plain text of the statute did not support the conclusion that a state enforcement action brought by a single plaintiff was subject to CAFA.

According to the Court, since the "mass action" definition in the statute spoke in terms of 100 or more "plaintiffs", it did not cover real parties in interest, like citizens who bought LCDs. The Court tested its conclusion by asking what a trial court would have to do in order to determine the real parties in interest in such cases, and found that exercise "surpassingly difficult." By contrast, if "plaintiff" meant plaintiff—a party in a legal action—the statute evinces a "straightforward, easy to administer rule under which a court would examine whether the plaintiffs have pleaded in good faith the requisite amount." (AU Optronics, 187 L.Ed.2d at 666.)

Since California has laws analogous to those employed by General Hood, this decision has important California implications. Strategically, it guarantees that enforcement actions such as those under the UCL brought by California’s attorney general, California DA’s and some city attorneys will stay in state court, even if such actions seek restitution for thousands (or millions) of citizens.

5. U.S. Supreme Court Holds that Class Plaintiff Cannot Stipulate to Damages of Less than $5 million to Avoid CAFA

Standard Fire Ins. Co. v. Knowles, ___U.S. ___, 133 S.Ct. 1345 (2013)

Plaintiff filed a class action in state court in Arkansas challenging a standard provision in a widely sold insurance product. Plaintiff averred that potentially "thousands" of people could be affected by the suit. But apparently in order to avoid the $5 million trigger for the Class Action Fairness Act, plaintiff agreed to limit his damage claims to less than $5 million.

Justice Breyer, writing for a unanimous court, rejected this tactic. The Court noted that "a plaintiff who files a class action cannot legally bind members of the proposed class before the class is certified." (Standard Fire, 133 S.Ct. at 1349.) Therefore, the proposed stipulation did not bind anyone but the named plaintiff.

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The Court concluded that:

We do not agree that CAFA forbids federal courts to consider, for purposes of determining the amount in controversy, the very real possibility that a nonbinding, amount-limiting, stipulation may not survive the class certification process. This potential outcome does not result in the creation of a new case not now before the federal court. To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run counter to CAFA’s primary objective: ensuring "Federal court consideration of interstate cases of national importance. [citation omitted].

(Id. at 1350.)

6. Ninth Circuit Rewards Facially Inconsistent Pleadings in CAFA decision

Visendi v. Bank of America, 733 F.3d 863 (9th Cir. 2013)

Plaintiffs were over 100 individuals allegedly injured by various financial firms through deceptive mortgage lending and securitization practices. Plaintiffs’ action was initially filed in state court. Upon removal, defendant successfully argued that plaintiffs’ action was a "mass action" within the meaning of CAFA because it was a civil action containing "monetary relief claims of 100 or more persons proposed to be tried jointly on the grounds that the plaintiffs’ claims involve common questions of law or fact." (28 U.S.C. § 1332(d)(11)(B)(i).) Once before the U.S. District Court, however, defendants challenged the joinder of plaintiffs because their claims had no common elements. Although the district court characterized this sequence of filings as "gamesmanship and bad faith," (Visendi, 733 F.3d at 868.), the Ninth Circuit ultimately agreed with defendants.

The Ninth Circuit reasoned that jurisdiction to transfer the case from state court to federal court was proper because a mass action under CAFA is one in which a joint action is "proposed to be tried jointly on the ground that the plaintiffs" claims involve common questions of law or fact." This predicate for jurisdiction was supplied by plaintiffs’ complaint. (Visendi, 733 F.3d at 868.)

Once before the district court, according to the Ninth Circuit, it was proper for the trial court to determine whether the complaint met the two-part requirement for permissive joinder under Fed.R.Civ.P. 20(a), specifically that (1) the plaintiffs assert a right . . . arising from the same transaction and occurrence, and (2) some question of law or fact is common to all plaintiffs. Concluding that individual plaintiffs had disparate claims arising from different transactions, the court concluded that the requirements of Rule 20 were not met, (Id. at 870.), and ordered remand with instructions for the trial court to dismiss all plaintiffs except the lead plaintiff, Carla Visendi. (Id. at 871.)

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7. Ninth Circuit Reverses Class Action Settlement Because Incentive Awards to Class Representatives Contingent on Support of Settlement

Radcliffe v. Experian Information Solutions, Inc. , 715 F.3d 1157 (9th Cir. 2013)

Radcliffe involved the settlement of a class action against credit rating agencies that issued negative credit reports after debts were discharged or settled. Class representatives were to receive incentive payments, which are ordinarily allowed, but in this case the incentive payments were contingent on support for the settlement. The court concluded that such payments, "corrupt the settlement by undermining the adequacy of the class representatives and class counsel." (Radcliffe, 715 F.3d at 1164.) Because of this problem, the Ninth Circuit held that approval by the district court of the settlement was an abuse of discretion and the case remanded for further proceedings consistent with the opinion. (Id. at 1168.)

C. Discovery

1. Southern District Orders Cost-Shifting for Overbroad E-Discovery Request

Connecticut Gen. Life Ins. Co. v. Earl Scheib, Inc., 2013 U.S. Dist. LEXIS 16234 (S.D.Cal., February 6, 2013)

Plaintiff claimed $119,515.49 in damages. However, in discovery, plaintiff sought an estimated 219 gigabytes of electronically stored information. Defendant estimated that the costs of responding to this request would be $121,000, not counting attorney review time.

Applying an earlier Northern District decision, OpenTV v. Liberate Technologies, 219 F.R.D. 309, 318 (N.D.Cal. 2003), the court decided that cost-shifting was appropriate. It concluded that "if plaintiff believes that this information is important to its case, then plaintiff can perform its own cost-benefit analysis and determine whether it wants to fund the discovery." (Connecticut General, 2013 U.S. Dist. LEXIS 16234 at *10.)

2. Antitrust Division Opens Door to Use of Predictive Coding

Last year, the Southern District of New York issued the first decision approving the use of predictive coding in a litigated case, Da Silva Moore v. Publicis Groupe S.A2012 U.S. Dist. LEXIS 58742 (S.D.N.Y., Feb. 24, 2012). Soon after this decision, the Wall Street Journal reported that the Antitrust Division was already giving parties the opportunity to use predictive coding strategies to produce documents in selected matters, saving as much as 50% on the costs of production. (J. Palazzola, Software: The Attorney Who Is Always on the Job, Wall St. J., May 6, 2013, at http://online.wsj.com/news/articles/SB10001424127887324582004578460860324234712.)

In a major speech a few days later, Deputy Assistant Attorney General Renatta Hesse reported:

Another innovation we have been testing over the past several years to help streamline our process is allowing parties to use predictive coding in their document productions. When it works well, predictive coding reduces the document review and production burden on parties while still providing the division with the documents it needs to fairly and fully analyze transactions and conduct. Of course, for predictive coding to work for the division, we require a high degree of cooperation and transparency about the implementation and structure of the predictive coding process. That being said, we have allowed parties to use predictive coding in some matters already.

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(Renatta Hesse, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice, IP, Antitrust and Looking Back on the Last Four Years, Address at the Global Competition Review (February 8, 2013), at http://www.justice.gov/atr/public/speeches/292573.pdf.)

Given the dramatically lower cost of predictive coding, this is a significant development for those practicing before or against the Antitrust Division.

3. California Legislature Amends CCP to Clarify When Waiver Occurs After Receipt of Discovery Response

AB 1183 (Jones), codified at Cal. Civ. Proc. §§ 2030.300, 2031.310 & 2033.290

Pre-existing law provided 45 days from the receipt of a response to interrogatories, a demand for documents or requests for admissions within which to move to compel a further response. In the event that no motion to compel is filed within that period, the receiving party is deemed to have waived any right to compel any further response.

This legislation keeps the 45-day rule of repose, but the trigger is receipt of "a verified response or supplemental verified response." This language is added to CCP provisions relating to specific discovery tools:

Civ. Proc. § 2030.300(c) (Interrogatories)
Civ. Proc. § 2031.310(c) (Demands for Inspection)
Civ. Proc. § 2033.290(c) (Requests for Admissions)

D. Expert Opinion

1. Post-Sargon Decisions Illuminate Gatekeeper Role of State Judges

Sargon Enterprises, Inc. v. University of Southern California, 55 Cal.4th 747 (2012) Garrett v. Howmedica Osteonics Corp. , 214 Cal.App.4th 173 (2nd DCA, 2013) Corenbaum v. Lampkin, 215 Cal.App.4th 1308 (2nd DCA, 2013)

In its 2012 Sargon decision, the California Supreme Court reinvigorated the role of state judges as gatekeepers for expert testimony. Relying on the text of both sections 801 and 802 of the California Evidence Code, the Sargon court clarified and strengthened the power of state judges to exclude expert testimony or opinion that does not meet minimum standards of reliability. Sargon is not a decision adopting federal Daubert jurisprudence; indeed, the Court explicitly notes that its decision neither alters California’s "general acceptance" test nor its rejection of Daubert in People v. Leahy, 8 Cal.4th 587 (1994). (Sargon, 55 Cal.4th at 772, n.6.) Rather, the Court concluded:

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Thus, under Evidence Code sections 801, subdivision (b) and 802, the trial court acts as a gatekeeper to exclude expert opinion testimony that is (1) based on matter of a type on which an expert may not reasonably rely, (2) based on reasons unsupported by the material on which the expert relies, or (3) speculative. Other provisions of law, including decisional law, may also provide reasons for excluding expert opinion testimony.

(Id. at 771-72.)

The Court warned that California trial courts "must also be cautious in excluding expert testimony" and that "[t]he goal of trial court gatekeeping is simply to exclude ‘clearly invalid and unreliable’ expert opinion [citation omitted]. (Id. at 772.) Applying its new rule to the facts before it, the Court sustained exclusion of a plaintiff’s expert’s lost profits analysis because of its Herculean assumption that plaintiff’s small company would grow into a world leader in a short time.

Subsequent DCA opinions begin to illuminate what this new standard means in state trial courts. Perhaps the most important takeaway is that the gate can swing both ways under Sargon. In Howmedica Ostionics, the Second DCA reversed a trial court decision excluding an expert affidavit in a product liability case. There, plaintiff’s expert, a metallurgist, averred that part of a replacement femur included titanium pieces, rather than much stronger chrome molybdenum steel parts, resulting in failure of the femur-replacement within two years of implantation. The trial court excluded the expert’s affidavit in a response to a summary judgment motion because the expert (i) did not name the specific tests he employed to determine the strength of the materials in the limb, and (ii) did not identify the ASTM hardness standard that the softer pieces of the limb did not meet.

The Court of Appeal quoted the expert’s report in which he said that he used "visual examination, optical microscopic examination, x-ray radiography, fluorescent dye penetrant examination, scanning electronic, microscopy, and such destructive testing as hardness testing, micro hardness testing, microstructural analysis, and chemical analysis." Howmedica Ostionics, 214 Cal.App. 4th at 187.) The DCA determined that the expert’s "failure to more particularly describe the results of that testing do not in any manner indicate that his conclusions are speculative, conjectural or lack a reasonable basis." (Ibid.) This conclusion was buttressed by the requirement that a court must "liberally construe the evidence submitted in opposition" to a summary judgment motion. (Id. at 189.)

On the other hand, the same DCA sustained exclusion of proffered expert opinion in Lampkin. In this personal injury case, the issue was the use of the undiscounted costs of medical care. The court concluded that, "evidence of the full amounts billed for [plaintiffs’], medical care was not relevant to the amount of their damages for past medical expenses, future medical expenses, and it was not offered in evidence for any other purpose." (Lampkin, 215 Cal.App.4th at 1333.) Since the evidence was not properly admissible, the expert opinion using this evidence was properly excluded under Sargon.

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Sargon and its progeny give new powers to state judges to exclude expert opinion that is either speculative or contrary to public policy. At the same time, it seeks to preserve the role of juries in assessing testimony, including expert testimony, in most cases. The line between what is properly before a jury and what is not is still being determined, but these cases represent an important development for practitioners before state courts.

E. California Supreme Court Revamps Parol Evidence Rule

Riverisland Cold Storage v. Fresno-Madera Prod. Credit Assn., 55 Cal.4th 1169 (2013)

This decision revamps California’s historic approach to the use of parol evidence with respect to fraud claims. Indeed, Riverisland rejects a 78-year-old decision that substantially limited the use of extrinsic evidence to support fraud allegations in a contract dispute, Bank of Am. Assn. v. Pendergrass (1935) 4 Cal.2d 258.

The essential facts in Riverisland were that a couple fell behind on loans totaling over $775,000 on two ranches. The lender agreed to hold off on foreclosure if the couple (1) made specified payments, and (2) pledged several additional properties as collateral. The couple failed to make all of the required payments and the lender recorded a notice of default on all of the pledged properties.

Eventually, the couple repaid their loans and foreclosure proceedings ceased. The couple then sued the lender for fraud, asserting that the lender’s vice-president had assured them that (1) the lender would extend their loan for two years in exchange for the additional collateral, and (2) only the original two properties would be foreclosed upon in the event of default.

California’s parol evidence rule is codified in Code of Civil Procedure section 1856. This establishes the familiar rule that the terms of a written contract cannot be trumped by extrinsic evidence. However, subsection (f) provides a broad exception to this general rule with respect to issues of formation (as opposed to the terms of a contract). This subsection provides that: "Evidence to prove that the instrument is void or voidable for mistake, fraud, duress, undue influence, illegality, alteration, lack of consideration, or another invalidating cause is admissible. The evidence does not contradict the terms of an effective integration, because it shows that the purported instrument has no legal effect."

(Code of Civ.Proc. § 1856(f).)

Although the language of subsection (f) is broad, the Pendergrass court required evidence that "must tend to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing." (Pendergrass, 4 Cal.2d at 263 (emphasis added).)

This judicial gloss was both hard to apply and arguably protected fraudulent practices from review. (Riverisland, 55 Cal.4th at 1177.) Indeed, in overturning the Pendergrass rule, the Court, quoting Corbin on Contracts, wrote that:

The best reason for allowing fraud…to be proven extrinsically is the obvious one: [i]f there was fraud it is unlikely that is was bargained over or will be recited in the document. To bar extrinsic evidence would be to make the parol evidence rule a shield to protect misconduct or mistake.

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(Ibid. (citation omitted).)

With the Pendergrass rule out of the way, the Court decided that extrinsic evidence could be used to prove fraud, but underscored that:

. . . the intent element of promissory fraud entails more than proof of an unkept promise or mere failure of performance. We note also that promissory fraud, like all forms of fraud, requires a showing of justifiable reliance on the defendant’s misrepresentation.

(Id. at 1183.)

This decision harmonizes California law with the law of most other jurisdictions, the Restatement of Contracts and the text of the Code of Civil Procedure. For California businesses and law firms, this means that negotiators have to be far more careful with oral statements. For us, this new rule opens up either a new avenue of potential liability or a new vulnerability to discuss with clients. This is a major decision that warrants special review.

F. New Rules and Regulations

1. FTC Clarifies H-S-R Reporting Requirements for Pharmaceuticals and Increases Reporting Threshold to $75.9 Million

Federal Trade Commission, Premerger Notification, Reporting and Waiting Period Requirements, 78 Fed.Reg. 68705 (November 15, 2013) (to be codified at 16 C.F.R. Part 801)

Federal Trade Commission, Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 79 Fed.Reg. 3814 (January 23, 2014)

The Federal Trade Commission, with the concurrence of the Antitrust Division, has amended the regulations for the Hart-Scott-Rodino Act to clarify reporting requirements for pharmaceuticals. The problem addressed by the new rule is when should transfer of some—but not all—rights in a patented pharmaceutical be reportable under the Act. Under the amended rule, a reporting obligation exists if there is an acquisition of "all commercially significant rights" in a patented pharmaceutical. "The rule clarifies that, in the pharmaceutical industry, a patent licensing arrangement constitutes an asset acquisition if it transfers all commercially significant rights to the patent in a particular therapeutic area or specific indication within a therapeutic area." (78 Fed.Reg. at 68707.) The notice specifically states that the new rule "ensures that transactions in which the licensor retains only the right to manufacture exclusively for the licensee.. .will be reported if the relevant HSR statutory threshold are met. (Ibid. at 68708.)

On January 17, 2014, the FTC announced that the H-S-R reporting threshold under Section 7A(a)(2)(B)(i) of the Clayton Act will be increased from $70.9 million to $75.9 million for 2014. This new threshold will become effective on February 24, 2014.

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2. HIPPA Regulations Impose Privacy Requirements on Additional Entities, Including Law Firms.

Department of Health and Human Services, Modifications to the HIPPA Privacy, Security, Enforcement and Breach Notification Rules,78 Fed.Reg.5566 (January 25, 2013)

The Department of Health and Human Services issued new rules in January imposing additional requirements on businesses, including law firms, that handle confidential health records. Major changes include:

• Makes "business associates" of already covered entities directly liable for compliance with privacy requirements under the Health Insurance Portability and Accountability Act (HIPPA)
• Strengthens limitations on the use and disclosure of protected health information
• Requires specified notice of breaches of protected health information
• Imposes penalties for violation of the new rule

The Notice of Final Rule is 138 pages long, with detailed standards for properly and legally managing protected health information. If your client or firm handles such information, this is a must-read rule.

3. U.S. International Trade Commission Amends its Procedural Rules

Rules of General Application and Adjudication and Enforcement, 78 Fed.Reg. 23474 (April 19, 2013)

The International Trade Commission has issued new rules regulating its adjudicatory procedures. Major changes include:

• Content of a complaint. (19 C.F.R. §210.12.)
• Default and types of relief available. (19 C.F.R. §210.15.)
• Limitation of depositions to no more than five fact depositions per respondent but no more than twenty fact depositions. (19 C.F.R. §210.28.)
• Limitations of written interrogatories that any party may serve upon any other party to not more than 175 interrogatories, including subparts. (19 C.F.R. §210.29.)
• Initial determinations by the ALJ. (19 C.F.R. § 210.42.)
• Commission action. (19 C.F.R. §210.50.)

4. Amendments to the Federal Rules

In mid-2013, the Supreme Court transmitted proposed changes in the Federal Rules of Procedure, the Federal Rules of Evidence and the Federal Rules of Evidence to Congress. These amendments became effective on December 1, 2013 because Congress did not disapprove or alter them. Relevant changes follow:

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a. Federal Rules of Civil Procedure

Rule 37, relating to disclosures and cooperation in discovery, and Rule 45, relating to subpoenas are both amended.

The changes in Rule 45 are the more important. Key elements include:

In an effort to streamline the rule, all of the compliance provisions are combined into a new subsection Rule 45(c).
Rule 45(c)(2)(A) now provides for production "within 100 miles of where the person [subject to the subpoena] resides, is employed or regularly transacts business in person."
The Committee Note makes clear that a subpoena is not required for depositions of parties, party officers, directors or managing agents.
The new rule disapproves a line of cases starting with In re Vioxx Prod. Liab. Lit., 438 F.Supp.2d 664. (E.D.La. 2006) (requiring an officer of a defendant corporation, who lived and worked in New Jersey, to testify in New Orleans even though he was not served within Louisiana under Rule 45(b)(2)). New Rule 45(c)(1) now specifies that a subpoena may command any person to testify, but only within the limits that apply to all witnesses.

Rule 37(b)(1) receives a conforming amendment providing that:

If a deposition-related motion is transferred to the court where the action is pending, and the court orders a deponent to be sworn or to answer a question and the deponent fails to obey, the failure may be treated as contempt in either the court where the discovery is taken or the court where the action is pending.

b. Federal Rules of Evidence

Rule 803(10), relating to the hearsay exception for a certification of the absence of a public record, is amended to take into account the Supreme Court’s decision in Melendez-Diaz v. Massachusetts 557 U.S. 305 (2009). Melendez-Diaz held that the introduction of a certificate of lack of a public record in a criminal case was "testimonial," thus requiring a live witness in order to avoid a Confrontation Clause challenge. The amended rule provides a notice-and-demand process that cures this problem. The new rule requires a prosecutor who intends to use a certificate to notify the defense at least 14 days before trial of the proposed use of a certificate from a custodian in lieu of live testimony, and requires the defense to object 7 days before trial. If the defense does not timely object under this procedure, the Melendez-Diaz live testimony requirement is waived.

c. Federal Rules of Appellate Procedure

In a victory for good writing, Federal Rule of Appellate Procedure 28 is amended to create a new "statement of the case," bringing together in a single section a statement of facts and a procedural history. Amended Rule 28(a)(6) requires "a concise statement of the case setting out the facts relevant to the issues submitted for review, describing the relevant procedural history, and identifying the rulings presented for review, with appropriate references to the record." An Advisory Committee Note will indicate that subheadings may be used.

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5. Amendments to the California Rules of Court

The Judicial Council adopted amendments to the California Rules of Court concerning electronic filing in a series of amendments to Rules 2.250 — 2.259. Key changes include:

Rule 2.251(b) allows parties to agree to electronic service of documents.

Rule 2.253(b) gives courts broad authority to order electronic service in:

• Specific cases
• Cases assigned to a specific department or courthouse
• Broad categories of cases, including all civil cases or all complex cases

Rule 2.259 makes clear that "documents received electronically before midnight on a court day are deemed filed on that day, and documents received after midnight are deemed filed on the next court day."

These amendments became effective on July 1, 2013.

G. Other Developments

1. Ninth Circuit Begins Audio and Video Streaming of Arguments

Starting in mid-December 2013, the Ninth Circuit began video streaming en banc arguments from its San Francisco courthouse. Jonny Bonner, "Live Internet Streaming Coming to the 9th Circuit," Courthouse News Service (December 3, 2013), at http://www.courthousenews.com/2013/12/03/63396.htm. This was the first time a federal appellate court used its technology to deliver live video of its proceedings over the Internet. (The Ninth Circuit has made available video streams of en banc arguments at its various courthouses since 2010.) En banc cases streamed during December 2013 can be found at: http://www.ca9.uscourts.gov/content/view.php?pk_id=0000000710.

On January 2, 2014, the court announced that it would provide live audio streaming of all of its proceedings. Internet users can listen to proceedings online by visiting http://www.ca9.uscourts.gov/, and clicking on links listed under "Live Oral Arguments."

Digital audio and video files of prior arguments are available at http://www/ca9.uscourts.gov/media/

2. Federal Judicial Center Issues Benchbook for Federal Trial Judges

Federal Judicial Center, Benchbook for U.S. District Court Judges (6th ed. 2013) at http://www.fjc.gov/public/pdf.nsf/lookup/Benchbook-US-District-Judges-6TH-FJC-MAR-2013-Public.pdf/$file/Benchbook-US-District-Judges-6TH-FJC-MAR-2013-Public.pdf.

On the theory that it is useful to read what your judge is reading, you may wish to review the most recent edition of the Federal Judicial Center’s Benchbook for U.S. District Court Judges. This new edition contains a detailed discussion of effective management ofBrady material in federal criminal cases as well as best practices for pre-trial proceedings, among other topics. This is available as a free download from the Federal Judicial Center.

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Notes:

^*. Thomas A. Papageorge is the Head Deputy District Attorney of the Consumer Protection Unit in the San Diego District Attorney’s Office. Thomas Greene is Special Litigation Counsel in the Bureau of Competition of the Federal Trade Commission. The views expressed here are those of the authors and do not necessarily reflect those of the Federal Trade Commission or the San Diego District Attorney’s Office.

^1. See e.g., thecomplexlitigator.com/in-rose-v-bank-of-america-california (Aug. 1, 2013) ("The UCL still has teeth in the view of the California Supreme Court, it would seem.")

^2. Goodyear was discussed in the 2011 Developments program.

^3. MacIntyre was also discussed in the 2011 Developments program.

^4. Justice Sotamayor did not participate in this decision.