Antitrust and Unfair Competition Law

Competition: Spring 2017, Vol 26, No. 1

CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge1

I. INTRODUCTION

This outline provides a selection of litigation developments that may be of particular interest to the members of the Antitrust, Unfair Competition Law and Privacy Section presenting developments in cases brought under the Cartwright Act, the Unfair Practices Act, the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law. The outline also highlights developments regarding covenants not to compete and privacy law.

II. CARTWRIGHT ACT

A. First Appellate District Revives Class Action against Ford Canada

In re Automobile Antitrust Cases I and II2

The First Appellate District breathed new life into a long-pending California class action against carmaker Ford Motor Co. of Canada and others, and in doing so provided a detailed insight into the contemporary application of the pleading standards governing Cartwright Act conspiracy cases after Aguilar v. Atlantic Richfield Co.3

In 2003, groups of California car purchasers brought later-consolidated class actions alleging that Ford Motor Co. (Ford Motor), Ford Motor Co. of Canada (Ford Canada), and various other car manufacturers, distributors, and trade associations violated the Cartwright Act and the Unfair Competition Law by conspiring to prevent the export of Canadian cars into California. In July of 2016, at the end of a decade-plus litigation process that eliminated many of the original carmaker defendants, the First Appellate District affirmed summary judgment as to defendant Ford Motor Co., but reversed the Superior Court’s grant of summary judgment as to Ford Canada.

The First Appellate District, per Judge Reardon, first resolved key evidence questions, and then held that under the conspiracy pleading standards of Aguilar, the evidence of Ford Motor’s alleged coordination with competitors and others was not sufficient to allow a jury to conclude that it was "more likely than not" that it was part of an unlawful agreement. However, as to Ford Canada, the appellate court found that plaintiffs had introduced sufficient evidence "that tends to exclude . . . the possibility that the [defendants] acted independently rather than collusively," necessitating remand for further proceedings as to that defendant.4

[Page 80]

Factual background. At issue was an alleged industrywide reaction by carmakers and others to the problem of "cross-border sales" of new cars. During 2001 to 2003, arbitragers purchased new cars in Canada at favorable prices (given changing currency exchange rates) and then brought those cars into the U.S., in violation of carmaker anti-export policies, for resale at prices lower than U.S. dealers could charge. The plaintiffs alleged that the major carmakers and various distributors and trade associations conspired to strengthen and enforce their anti-export policies to halt this arbitrage process, resulting in unlawful higher prices for U.S. car buyers.

Over the lengthy course of the litigation, most of the defendant car manufacturers, including GM and Chrysler affiliates and a number of international carmakers, were dismissed out of the case, went bankrupt, or settled. Ford Motor and its Canadian affiliate were the principal remaining defendants. The Superior Court ultimately certified the class but granted the summary judgment motions of both Ford Motor and Ford Canada.

Evidence admissibility. As a key threshold issue, the First District decided the admissibility of several crucial portions of the plaintiffs’ evidence. Most important was the statement of a Toyota Canada executive, Pierre Millette, who testified that at a major trade group meeting "everyone supported the concept of trying to keep the vehicles in Canada" and that there was "some consensus" on the anti-export plan among "everyone at the meeting."

The court concluded that Millette’s testimony about the "consensus" was not subject to exclusion as hearsay since the testimony was his "general impressions and conclusions" rather than the reporting of third-party statements.5 And testimony from his "personal knowledge and observations" was not inadmissible expert opinion evidence.6

Sufficient evidence to establish conspiracy. The First Appellate District next analyzed the plaintiffs’ evidence in order to rule on the Superior Court’s grant of summary judgment in favor of both Ford Motor and Ford Canada. The appellate court expressly undertook to determine if the evidence presented met the California Supreme Court’s standard for adequate pleading of agreement as enunciated in Aguilar v. Atlantic Richfield Co. There the Supreme Court required that a trial court ruling on Cartwright Act conspiracy pleadings must determine that there is sufficient evidence to permit a reasonable jury to conclude that "it is more likely than not" that a defendant entered into an illegal agreement with another alleged co-conspirator.7

In contemporary antitrust pleading analysis after Mitsubishi, Twombly, and Aguilar, this determination turns on the sufficiency of the so-called "plus factors" that tend to eliminate the possibility of independent decision-making by the alleged conspirators.

[Page 81]

Ford Motor. As to Ford Motor Co., the First District affirmed the Superior Court’s grant of summary judgment, finding that the plaintiffs’ "plus factor" evidence was insufficient to adequately show Cartwright Act conspiracy.

First, the appellate court determined that, under the intracorporate conspiracy standard of Copperweld Corp. v. Independence Tube Corp.,8 the communications between Ford Motor and its wholly-owned Canadian subsidiary Ford Canada were not probative evidence of illegal conspiracy since the two related firms were not separate entities capable of antitrust conspiracy. Next, the court ruled that Ford Motor’s motive to stop cross-border sales could not demonstrate conspiracy by itself without more. Finally, the court ruled insufficient the plaintiffs’ proof of internal messages within the corporation and their proof of Ford Motor’s efforts to gather information about other competitors’ actions.

Based on this finding of insufficiently probative "plus" factors, the court ruled that no reasonable jury could properly conclude that Ford Motor had entered into an illegal agreement.9

Ford Canada. As to Ford Canada, the Court of Appeal again applied the Aguilar standard but reached a different result, holding that the plaintiffs’ evidence here was sufficient to permit a jury to find Ford Canada had engaged in an unlawful agreement. At the outset, the appellate court rejected Ford Canada’s argument that Ford’s long history of anti-export policies prior to the alleged conspiracy disproved the existence of the alleged unlawful agreement, concluding that even collusive agreement to perpetuate existing industry policies could form the basis for a Cartwright Act violation.10

The First District then considered the evidence supporting the theory of an alleged unlawful industry agreement involving Ford Canada. The court evaluated the plaintiffs’ additional "plus" factors, including the motivations of the alleged conspiracy group, the communications among the defendants aimed at reducing the cross-border sales, the efforts of Ford Canada and others to limit exports, and the information shared among the distributors.

Unlike the proof regarding Ford Motor, this evidence was sufficient for a reasonable jury to conclude that Ford Canada was party to an anticompetitive conspiracy. Taken together, the Millette testimony, the meeting evidence, and the other contextual factors constituted "evidence that tends to exclude the possibility that the alleged co-conspirators acted independently rather than collusively. Thus, [the evidence] is sufficient to support reversal of the trial court’s summary judgment decision in favor of Ford Canada."11

Conclusion. This careful differentiation between these related fact-patterns is of special interest to all California practitioners dealing with Cartwright Act conspiracy cases. Here, as to one defendant, the First District found insufficient the plaintiffs’ evidence of intracorporate discussions of plans, invitations to meet with competitors, and certain types of information exchanged among competitorsā€”factors that have been used successfully in prior federal and state collusion cases. But the same court found credible witness testimony, meeting details, and certain related facts sufficient to meet the plaintiffs’ burden as to another defendant.

[Page 82]

A review of the types of "plus factors" that didā€”and did notā€”suffice to support an inference of agreement here will be important to those litigating Cartwright Act collusion cases and especially to those designing discovery plans to search for evidence of the requisite factors.

Note on federal court analysis. The First District also provided an important reminder for California practitioners in the post-CAFA era when many state law class action claims, including antitrust and consumer claims, are pursued in federal court. In the First District’s review of the issue of Cartwright Act conspiracy here, the court’s opinion specifically noted that the federal district court’s previous analysis of the viability of state law conspiracy claims "was not binding on [the California court] in any way."12

B. Second District Affirms Summary Judgment for DirecTV

Basic Your Best Buy, Inc. v. DirecTV, Inc.13

In an unpublished decision providing an insight into state group boycott and distributional restraints analysis, the Second Appellate District affirmed a trial court’s grant of summary judgment to DirecTV in an antitrust lawsuit brought by plaintiff Basic Your Best Buy (Basic), one of DirecTV’s previous authorized retailers.

Basic, terminated as a reseller by DirecTV, claimed it was then forced to sell its valuable sales leads at below-market prices because of DirecTV’s collusion with remaining retailers who would have bid more for the leads. Basic sued DirecTV under the Cartwright Act, alleging a conspiracy to restrain trade consisting of DirecTV’s actions prohibiting other dealers from bidding on Basic’s sales leads, which actions limited competition in the market for those sales leads.

The Second District affirmed the trial court’s grant of summary judgment, holding that DirecTV was not a horizontal competitor of its alleged co-conspirators, the authorized resellers barred from bidding on the leads. Regarding the relationship between DirecTV and its resellers, the court interpreted the opinion in Bert G. Gianelli Distributing Co. v. Beck & Co.14 to require that the plaintiff in a group boycott case involving a supplier must produce evidence that horizontal competitors "used their economic power or position to influence the manufacturer to act, not for its own advantage, but solely for the advantage of those competitors."15 The appellate court held that in fact DirecTV had coerced its authorized dealers, rather than the reverse, so there could be no per se horizontal group boycott on these facts.16

[Page 83]

The appellate court also considered the plaintiff’s vertical restraints theory and concluded that Basic had provided insufficient product market evidence to support a vertical price-fixing cause of action.17

This unpublished opinion provides an insight into one California appellate court’s analysis of group boycotts with vertical and horizontal elements. In particular, it raises a significant question whether the Gianelli opinion should be viewed as establishing a more stringent requirement in Cartwright Act cases than is found in analogous federal Sherman Act opinions regarding proof of the requisite horizontal element in such group boycott cases.

C. First District Rejects Enforcement of Healthcare Provider’s Arbitration Clause in Cartwright Act and UCL Action

UFCW & Employers Benefit Trust v. Sutter Health18

Plaintiff, a healthcare benefits trust for group of employees (UEBT), brought a putative class action against defendant Sutter Health, a healthcare provider in the trust’s health network, for damages, restitution, and injunctive relief under the Cartwright Act and the Unfair Competition Law (UCL). UEBT claimed that the terms of Sutter Health’s provider contracts effectively prevented its employee members from seeking lower-cost services, forcing the employees to pay supracompetitive prices for Sutter Health’s services.

The Superior Court denied the provider’s motion to compel arbitration on the grounds that the plaintiff UEBT was not a direct signatory to the contract with the arbitration clause, which was signed by a contracting agent for plaintiff. Defendant appealed. The First Appellate District affirmed the Superior Court’s refusal to mandate arbitration, holding that neither the Knox-Keene Act nor the doctrines of equitable or ostensible agency operated to make an arbitration agreement between Sutter Health and a contracting agent for the employees’ healthcare trust binding on the trust itself.

Defendant Sutter Health had moved to compel arbitration on the basis of a mandatory arbitration clause in Sutter Health’s "Provider Contract" with Blue Shield, and also a provision purporting to bind Blue Shield’s payors to that clause. When the plaintiff trust later contracted to use Blue Shield’s provider network, it did so under an agreement that expressly disavowed any contractual relationship between UEBT and providers. Nonetheless, Sutter Health subsequently claimed that the Provider Contract applied to all disputes between Sutter Health and any payors, via the agreement with contracting agent Blue Shield, even when the payors themselves were not signatories to that contract.

[Page 84]

The First District affirmed the trial court’s denial of this motion to compel arbitration, holding that the healthcare benefits trust is not bound to arbitrate its claims "pursuant to an agreement it had not signed or even seen."19

In so ruling, the court held that: (1) The Knox-Keene Health Care Service Plan Act20 does not require adherence to the arbitration provision in the underlying contract since that statute protects health care providers from being compelled to adhere to contracts they did not approve (it does not regulate the conduct or duties of payors in the healthcare system); (2) Plaintiff did not avail itself of the terms of the Provider Contract, so it was not equitably estopped from rejecting the arbitration provision in that contract; and (3) Ostensible authority did not apply here, since the employees’ use of Blue Shield cards to obtain medical services from Sutter Health did not bind them to this contract: "[W]e fail to see how UEBT members’ use of Blue Shield cards to obtain services from Sutter providers reasonably suggests that UEBT had authorized Blue Shield to bind UEBT to all terms of the Provider Contract."21

D. Other Cartwright Act developments:

Salveson v. JP Morgan Chase & Co.22

The District Court here ultimately dismisses the Cartwright Act cause of action brought against the defendant national bank, but the court provides a detailed discussion of its interpretation of Cartwright Act standing, including the observation: "When considering the application of the directness factor to a Cartwright Act claim, the Court is aware that California law allows recovery for antitrust injuries that result from a more attenuated and indirect causal chain than is permitted under federal law."23

Oneok, Inc. v. Learjet, Inc.24

The U.S. Supreme Court noted that the states have "long recognized power to regulate combinations in restraint of trade" in tandem with the Sherman Act, citing California v. ARC America Corp.25

In re Capacitors Antitrust Litigation26

The Northern District of California held here that indirect purchasers of capacitors sufficiently alleged the injury-in-fact required to establish Article III standing to bring their antitrust conspiracy suit against defendant capacitor manufacturers under the Sherman Act, the Cartwright Act, and the UCL.

[Page 85]

Feitelson v. Google, Inc.27

Internet users/consumers brought this putative class action against defendant Google, operator of the predominant Internet search engine, alleging that Google restrained trade in the Internet search market by a collusive arrangement with cell phone manufacturers. The District Court granted Google’s summary judgment motion, finding the consumers’ allegations of antitrust impact and injury too speculative and remote to confer standing, and reiterating that antitrust tying statutes, including California’s Cartwright Act tying provision (Cal. Bus. & Prof. Code § 16727), are applicable only to tangible commodities and thus do not apply to services such as the Internet search service here.

III. UNFAIR PRACTICES ACT

A. What "Costs" Count in an Unfair Practices Act Below Cost Pricing Case?

California Public Records Research, Inc. v. County of Stanislaus28

The Unfair Practices Act prohibits businesses from selling any article or product at less than its cost for the purpose of injuring competitors or destroying competition.29 The courts have held that "cost" in the Unfair Practices Act means fully allocated cost. There are many ways of fully allocating costs, but "[t]o be legally acceptable, the allocation of indirect or fixed overhead costs to a particular product or service must be reasonably related to the burden such product or service imposes on the overall cost of doing business."30 California Public Records Research, Inc. v. County of Stanislaus is largely devoted to a dispute over the appropriate measure of reproduction costs in a Public Records Act matter, but the opinion includes a worthwhile discussion of the "reasonably related" standard used in interpreting "costs."31

IV. COVENANTS NOT TO COMPETE

A. First District Upholds Injunction against Enforcing Franchisor’s Non-Competition Clause

Robinson v. U-Haul Co. of California32

Plaintiff Robinson, a former U-Haul franchisee, pursued two lengthy lawsuits against franchisor U-Haul, alleging violations of California’s prohibition on covenants not to compete (Cal. Bus. & Prof. Code § 16600 et seq.) and of the Unfair Competition Law. At issue was the non-competition clause in U-Haul’s standard franchising contract and U-Haul’s alleged long history of malicious prosecution in enforcing the clause it knew to be unlawful in California.

[Page 86]

After ten years of proceedings, during which U-Haul eventually ceased enforcement of its invalid non-competition clause, the Superior Court entered judgment for plaintiff Robinson on his malicious prosecution and UCL causes of action. The trial judge then issued a permanent injunction and an order authorizing plaintiff to recover $834,008 in private attorney general’s fees pursuant to Civil Code section 1071.5. Defendant appealed the injunction and the fees order.

The First Appellate District upheld both trial court orders, after first commenting that the form of noncompetition agreement used by U-Haul was certainly unlawful under section 16600, and noting that the defendant no longer contested this.

As to the injunction, the First District concluded that where an unlawful practice has ceased, "[t]here is case authority saying an injunction may be denied on that basis . . . [b]ut simply because a request for permanent injunctive relief may be denied based on voluntary submission to its terms does not mean such a request must be denied on that basis."33

The trial court’s decision properly depends on the case circumstances. "Where, as here, a company has not taken action to bind itself legally to a violation-free future, there may be reason to doubt the bona fides of its newly established law-abiding policy."34 Further, where, as here, there is evidence of a long-term practice, the trial court has good reason to impose an injunction:

"Evidence of such an ingrained, long-term, knowingly illegal corporate practice provides support for a finding of likely repetition in the future."35

The trial court’s injunction was affirmed, as was the trial court’s determination that this was a matter of special public interest warranting private attorney general fees.

V. CONSUMER LEGAL REMEDIES ACT

A. Fourth District Rejects Inadequate Class Settlement in Consumer Legal Remedies Act (CLRA)/False Advertising Law (FAL) Weight Loss Case

Duran v. Obesity Research Institute, LLC36

In a strongly critical opinion, the Fourth Appellate District rejected as unfair and inadequate the proposed nationwide settlement in a consumer class action under the CLRA, UCL, and FAL against weight-loss supplement firm Obesity Research Institute (ORI) and Wal-Mart Stores (Wal-Mart).

Plaintiff Duran filed a putative nationwide class action alleging that the defendants falsely claimed that ORI’s products, Lipozene and MetaboUp, have "miracle" weight-loss benefits allowing one to lose weight "without changing your lifestyle." Plaintiff and defendants then submitted a proposed claims-made nationwide settlement providing that class members submitting a claim without receipt would receive $15, and those submitting receipt(s) would receive one refund of double the unit price paid (roughly $28 to $68). The settlement also provided that ORI would cease making certain assertions in product advertising, and defendants agreed to plaintiff’s attorneys’ fees of $100,000.

[Page 87]

The Fourth District reversed the trial court’s approval of the settlement and remanded with instructions to re-evaluate the fairness of the settlement after adequate notice was provided to the nationwide class. The court first determined that the notice to class members contained three clear factual errors about the settlement, and also that the notice method, using a settlement Web site and publication in USA Today, was clearly inadequate. "The judgment must be reversed because the class notice failed in its fundamental purposeā€”to apprise class members of the terms of the proposed settlement . . ." and "[t]he erroneous notice injected a fatal flaw into the entire settlement process and undermines the court’s analysis of the settlement’s fairness."37 Further, the publication notice did not have "a reasonable chance of reaching a substantial percentage of class members."38 Thus the appellate court remanded for adequate notice and reconsideration after that notice.

The Fourth District was also rejected as inadequate the proposed injunctive relief, which only modestly changed the "lifestyle" claims and only required change from "millions of people" experiencing successful weight-loss to "countless people." The court concluded: "[I]t is difficult to conceive how this injunctive relief adds value."39

The appellate court was also harshly critical of the overall fairness of a nationwide class action that would have returned only $31,800 to victims while securing $100,000 in attorneys’ fees. The court alluded to evidence suggesting potential collusion between plaintiffs’ and defense counsel to forestall more meaningful relief in a similar pending action, but ultimately determined "not to resolve these accusations" at this time.40

Counsel in consumer class actions should carefully review the court’s strongly worded critique of this settlement. The court’s ire is thinly veiled and suggests that California courts may scrutinize the fairness of such consumer settlements more closely in the days ahead.

[Page 88]

VI. UNFAIR COMPETITION LAW

A. SCORECARD: Arbitration and Unconscionability Issues in Consumer and Employment Contracts after Conception, Sanchez, and Iskanian

The U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Conception,41 upholding the preemptive effect of the Federal Arbitration Act (FAA)42 on inconsistent state policies, has erected a formidable barrier to UCL or FAL actions challenging the unfair business practices or employment policies of defendants using contracts with mandatory arbitration clauses.

Since Concepcion, the California Supreme Court has acknowledged (in cases such as Iskanian v. CLS Transp. L.A., LLC43) the broad preemptive scope of the FAA and has abrogated prior California doctrines limiting mandatory arbitration. However, the relationship between arbitration provisions and unconscionability principles remains the subject of extensive litigation.

Significantly, in the wake of Iskanian and the Supreme Court’s 2015 Sanchez v. Valencia Holding Co.44 opinion, plaintiffs are now turning to new legal theories and mechanismsā€”including the Labor Code Private Attorneys General Actā€”to reach beyond arbitration clauses and bring disputes over consumer contracts and employment practices before trial courts instead of arbitrators.

The following "scorecard" first reviews the California Supreme Court’s two major statements on arbitration and unconscionability principles in the past two years, and then surveys some of the recent and prominent UCL appellate opinions applying those principles to a variety of factual situations in the post-Concepcion legal environment:

1. California Supreme Court Upholds Auto Contract Arbitration Provisions But Affirms Continuing Applicability of Unconscionability to California Contracts

Sanchez v. Valencia Holding Co.45

In Sanchez v. Valencia Holding Co., the lead case on this issue statewide, the Second District Court of Appeal had held that the class-action waiver and arbitration clause in the industry-standard auto contract were unconscionable under general California contract principles, notwithstanding the Federal Arbitration Act and Conception.46

[Page 89]

In August of 2015 the California Supreme Court delivered its long-awaited opinion, upholding the arbitration clause in the industry-standard auto purchase/sale contract but emphasizing that unconscionability principles remain applicable to all California contracts and must be applied to each set of facts on a case-by-case basis.

2. California Supreme Court: Conception Abrogates Gentry But Does Not Bar Labor Code Private Attorneys General Act (PAGA) Actions

Iskanian v. CLS Transportation Los Angeles, LLC47

Significantly altering the landscape of labor law rights in California, the Supreme Court held that Concepcion impliedly overruled Gentry v. Superior Court48 and thus mandatory arbitration provisions must be enforced even when they require arbitration of wage and hour issues protected by California’s labor laws. However, the Court also ruled that an arbitration agreement requiring an employee to give up the right to bring representative actions under the Labor Code Private Attorneys General Act (PAGA)49 is against public policy and unenforceable.

The holding in Iskanian, carving out PAGA actions from the realm of private arbitration governed by the FAA, has given rise to a new wave of plaintiffs’ lawsuits and class actions utilizing this exception in employment and wage-and-hour disputes. Examples, among many others, are: Williams v. Superior Court (Pinkerton Governmental Services, Inc.),50 Franco v. Arakelian Enterprises, Inc.,51 and Mohamed v. Uber Technologies, Inc.,52 discussed below.

3. Arbitration Clauses Valid and Enforceable:

Sandquist v. Lebo Automotive, Inc.53 Addressing the "who decides?" (court or arbitrator) issue regarding class arbitration, the California Supreme Court affirmed a Second District decision and held that California contract law, and not federal principles under the Federal Arbitration Act (FAA), governs the question of whether class arbitration is available under a valid California contract. The Court concluded that there is no state law presumption that the "who decides?" question be allocated to a court, rather than to the arbitrator, thus the Supreme Court enforced the contract’s terms specifying that the arbitrator should decide in the instant case. (See further discussion, infra.)

[Page 90]

Nguyen v. Applied Medical Resources Corp. 54 The Fourth Appellate District enforced the arbitration clause in an employment contract required as a condition of employment, finding no procedural unconscionability since the provision called for arbitration under AAA rules applicable to both parties, and finding no substantive unconscionability as the agreement to arbitrate was a mutually-binding condition of employment. However, under the principle announced in Lebo Automotive,55 the Fourth District held that the trial judge erred in denying class certification rather than referring the class certification decision to the arbitrator as provided in the contract.

Tompkins v. 23andMe.Inc.56 The prevailing-party clause and the forum-selection clause in defendant’s contract were not unconscionable where they were expressly bilateral in application and where there was no showing that the expense of arbitration in the designated forum would have imposed an extreme burden on the plaintiffs.

4. Arbitration Clauses Rejected and/or Limited:

Carlson v. Home Team Pest Defense, Inc. 57 The First Appellate District held the arbitration provision in a retailer’s employment contract was unconscionable and unenforceable notwithstanding the FAA and Concepcion. The court expressly relied on the California Supreme Court’s opinion in Sanchez for the proposition that unconscionability principles remain applicable to California contracts and are not ousted entirely by FAA principles, but rather must be adjudicated on a case-by-case basis. As Concepcion itself states, the FAA savings clause allows arbitration terms to be invalidated by "generally applicable contract defenses, such as fraud, duress, or unconscionability."58

The First District held that the arbitration agreement in this case was both procedurally and substantively unconscionable and was thus unenforceable, and noted that its conclusion was supported by the Supreme Court’s opinion in Sanchez, which endorsed continued appropriate application of unconscionability principles to California contracts.59

Long v. Provide Commerce, Inc.60 The Second Appellate District rejected the enforcement of an arbitration term in internet seller Provide Commerce’s online "browsewrap" agreement. The plaintiff consumer did not unambiguously agree to the term, which was only accessible via a hyperlink at the bottom of the computer screen, simply by placing an order through Provide Commerce’s online website. The appellate court held that the hyperlink reference did not put the plaintiff on reasonable notice of the website’s terms of use.

[Page 91]

Mango v. College Network, Inc. 61 The Fourth District rejected enforcement of the arbitration term in the consumer contracts of defendant The College Network, an education company headquartered in Marion County, Indiana. The appellate court found the provision both procedurally and substantively unconscionable, primarily because the forum selection clause required arbitration in Marion County, Indiana, and was thus inherently unequal and unfair.

Esparza v. Sand & Sea, Inc. 62 The Second District rejected enforcement of an arbitration clause included in an employer’s "employee handbook" containing "policies, practices, and procedures" of the company, rather than in a mutually agreed employment contract. The employee’s signing of an acknowledgement of receipt of the employees’ handbook was not sufficient to establish the employee’s agreement to a binding arbitration agreement.

UFCW and Employers Benefit Trust v. Sutter Health. 63 Plaintiff, an employees’ healthcare benefits trust, brought a class action against defendant Sutter Health, a healthcare provider in the trust’s health network, for damages, restitution, and injunctive relief under the Cartwright Act and the UCL. The healthcare benefits trust claimed that the terms of Sutter Health’s provider contracts effectively prevented its employee members from seeking lower-cost services.

The First Appellate District affirmed the trial court’s refusal to enforce arbitration, holding that neither the Knox-Keene Act nor the doctrines of equitable or ostensible agency operated to make an arbitration agreement between Sutter Health and a contracting agent for the employees’ trust binding on the trust itself. (See discussion in Cartwright Act section, supra.)

5. Arbitration Clauses Limiting PAGA Rights Rejected:

Franco v. Arakelian Enterprises, Inc.64 In a case decided earlier but subsequently remanded after Iskanian, the Second District held that plaintiff employee’s right to prosecute a Private Attorneys General Act (PAGA) action could not be waived, and that the Federal Arbitration Act (FAA) does not preempt California’s state-law rule precluding pre-dispute waivers of enforcement rights under the PAGA.

The court determined that the class-representative waiver in plaintiff’s employment contract was itself enforceable under the principles of Concepcion and Iskanian. However, because the rights asserted in an action under PAGA are those of the state rather than of the plaintiff-employee, the right to prosecute such an action cannot be waived by private agreement.

[Page 92]

Mohamed v. Uber Technologies, LLC. 65 The Ninth Circuit distinguishes between two separate forms of defendant Uber’s contract with its drivers, finding one plaintiff’s purported contractual waiver of PAGA rights to be unenforceable, but ruling that the enforceability of another version of the contract must be decided by the arbitrator.

6. Supreme Court Addresses "Who Decides?" Issue and Holds the FAA Does Not Override State Law Interpretation of California Contracts

Sandquist v. Lebo Automotive, Inc. 66

In a decision with significance for the future viability of class arbitrations, the California Supreme Court has concluded that state contract law, not FAA principles, governs the issue of "who decides?"ā€”the court or the arbitratorā€”whether class arbitration is available.

Plaintiff, a former employee of defendant Lebo Automotive, filed a class action discrimination complaint against his former employer alleging violations of the Fair Employment and Housing Act (FEHA) and the UCL. After defendant’s successful motion to enforce arbitration, the Second District reversed, finding that the question of whether the parties agreed to arbitration of class claims was for the arbitrator, rather than the court, to decide.

The California Supreme Court granted review and affirmed the Second District’s decision, holding that California contract law, and not federal principles under the Federal Arbitration Act (FAA), govern the question of whether class arbitration is available under a valid California contract. The Court determined that there is no state law presumption requiring that the "who decides?" question be allocated to a court rather the arbitrator.

Writing for the Court, Judge Werdegar concluded: "[W]e agree . . . that the determination whether a particular agreement allows for class arbitration is precisely the kind of contract interpretation matter arbitrators regularly handle. . . . [W]e find nothing in the FAA or its underlying policies to support the contrary presumption, that this question should be submitted to a court rather than an arbitrator unless the parties have unmistakably provided otherwise."67 Thus, the trial court’s original choice to decide the class arbitration availability issue itself was reversible error, and the Court remanded for the arbitrator to make the class-arbitration availability decision, as provided in the contract.

The opinion provides further evidence that the current California Supreme Court will seek ways to support the continuing vitality of California contract law principles even as it applies the mandate of the FAA and Concepcion.

[Page 93]

B. SCORECARD: Preemption of UCL Actions by 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 again produced a number of important results this year.

1. Holdings of no preemption of UCL action:

Quesada v. Herb Thyme Farms, Inc.68 The California Supreme Court reversed the Second Appellate District and held unanimously that state false advertising claims challenging produce allegedly mislabeled as "organic" are not preempted by the federal Organic Foods Act.69 (See discussion in False Advertising Law, below.)

Ebner v. Fresh, Inc.70 The Ninth Circuit ultimately upheld the grant of a cosmetic maker’s motion to dismiss plaintiff’s UCL/FAL class action alleging deceptive packaging. However, the plaintiff’s case was not preempted by the federal Food, Drug, and Cosmetic Act71 since the defendant’s obligations under both the FDCA and California’s Sherman Law72 are identical. "Because the Sherman Law does not amount to something ‘different from or in addition to’ what federal law already requires, under 21 U.S.C. § 379s [of the FDCA], preemption does not bar Plaintiff’s claim."73

2. Holdings of preemption of UCL action:

People v. Delta Air Lines, Inc.74 The California Attorney General’s Office brought a UCL action against defendant Delta Air Lines for alleged violations of California’s Online Privacy Protection Act75 involving its website and mobile application (Fly Delta), including failure to establish a privacy policy and notify consumers about its uses of the accumulated personal identifying information.

The First Appellate District sustained the trial court’s demurrer without leave to amend, concluding that the Attorney General’s UCL suit was preempted by the federal Airline Deregulation Act76 (ADA) which expressly bars any action under state law "related to the price, route, or service of an air carrier." (See further discussion, infra.)

[Page 94]

The First District summarized: "We therefore hold that state enforcement of the OPPA’s privacy policy requirements as applied to Delta’s Fly Delta mobile application is expressly preempted by the ADA. To compel Delta to comply with the OPPA would effectively interfere with the airline’s "selection and design" of its mobile application, a market mechanism ‘appropriate to the furnishing of air transportation service,’ for which state enforcement has been held to be expressly preempted by the ADA."77

Roberts v. United Healthcare Services, Inc.78 Plaintiffs sued defendant United Healthcare, a healthcare provider, for alleged misrepresentations in marketing Medicare Advantage plans. The Second Appellate District held that the federal Medicare Act expressly preempts this UCL/FAL action, and further concluded that the plaintiffs’ claims of denial of benefits were subject to dismissal for failure to exhaust the administrative remedies of the Medicare Act before proceeding with this action.

3. First District Upholds Injunction against Former Practices in UCL/Non-Competition Clause Franchise Case

Robinson v. U-Haul Co. of California79

In a longstanding non-competition clause/UCL challenge by former franchisee Robinson against truck-rental franchisor U-Haul, the First Appellate District upheld both the trial court’s injunction and its order for private attorney general’s fees. Defendant appealed, asserting it had ceased enforcement of the unlawful non-competition clause and thus should not be enjoined.

The First District concluded that where an unlawful practice has ceased, "[t]here is case authority saying an injunction may be denied on that basis . . . [b]ut simply because a request for permanent injunctive relief may be denied based on voluntary submission to its terms does not mean such a request must be denied on that basis."80 The trial court’s decision properly depends on the circumstances of the case. "Where, as here, a company has not taken action to bind itself legally to a violation-free future, there may be reason to doubt the bona fides of its newly established law-abiding policy."81

Further, the First District concluded that where there is evidence of a long-term practice, the trial court has good reason to impose an injunction even on behavior that has ceased: "Evidence of such an ingrained, long-term, knowingly illegal corporate practice provides support for a finding of likely repetition in the future."82

The trial court’s injunction was affirmed, as was the trial court’s determination that this was a matter of special public interest warranting private attorney general fees.

[Page 95]

VII. FALSE ADVERTISING LAW

A. California Supreme Court: Federal Organic Foods Act Does Not Preempt FAL/UCL Case

Quesada v. Herb Thyme Farms, Inc.83

Continuing in its mission to instruct that "labels matter,"84 the California Supreme Court reversed the Second Appellate District and held unanimously that state false advertising claims challenging produce allegedly mislabeled as "organic" are not preempted by the federal Organic Foods Act (OFA).85

Plaintiff Michelle Quesada, a purchaser of organic herbs, brought a putative class action against defendant herb grower Herb Thyme Farms, alleging violations of the false advertising law, the UCL, and the Consumers Legal Remedies Act through false claims on product labels that the defendant’s herbs were organic. Herb Thyme Farms allegedly mixed organic and non-organic products in packages labeled "Fresh Organic" and in some cases put entirely non-organic produce into packages so labeled. The trial court granted judgment to defendant Herb Thyme Farms on the pleadings, and the Second Appellate District affirmed.

The Supreme Court reversed and remanded. Writing for the Court, Justice Werdegar concluded that the federal Organic Foods Act does not expressly preempt a suit under California’s general consumer protection laws based on allegedly improper labeling of products as "organic," nor does the OFA impliedly preempt such a lawsuit under the doctrine of object preemption.86

The Court summarized its findings: "When Congress entered the field in 1990, it confined the areas of state law expressly preempted to matters related to certifying production as organic, leaving untouched enforcement against abuse of the label ‘organic.’"87 Importantly, a "central purpose [of the U.S. Congress in] adopting a clear national definition of organic production was to permit consumers to rely on organic labels and curtail fraud . . . ," so "prosecution[s] of such fraud . . . can only serve to deter mislabeling and enhance consumer confidence." Thus, the Court concluded that the Congressional purposes are directly promoted, rather than hindered, by state consumer protection lawsuits of this kind.88

[Page 96]

VIII. PRIVACY ISSUES AND PUBLIC ENFORCEMENT ACTIVITIES

A. AG’s UCL Privacy Action against Delta Air Lines Is Grounded by Federal Airlines Deregulation Act

People v. Delta Air Lines, Inc.89

The California Attorney General’s Office brought a UCL action against defendant Delta Air Lines for alleged violations of California’s Online Privacy Protection Act90 involving its website and mobile application (Fly Delta), including failure to establish a privacy policy and notify its consumers about its uses of the accumulated personal identifying information.

The First Appellate District sustained the trial court’s demurrer without leave to amend, concluding that the Attorney General’s UCL suit was preempted by the federal Airline Deregulation Act (ADA),91 which expressly bars any action under state law that is "related to the price, route, or service of an air carrier."

The First District summarized its holding: "We therefore hold that state enforcement of the OPPA’s privacy policy requirements as applied to Delta’s Fly Delta mobile application is expressly preempted by the ADA. To compel Delta to comply with the OPPA would effectively interfere with the airline’s "selection and design" of its mobile application, a market mechanism ‘appropriate to the furnishing of air transportation service,’ for which state enforcement has been held to be expressly preempted by the ADA."92

B. District Attorneys and AG Enforce Invasion of Privacy Act in Recording Disclosure Case

People v. Wells Fargo Bank, N.A.93

The District Attorneys of Los Angeles, San Diego, Riverside, Ventura and Alameda Counties and the Attorney General jointly brought a civil law enforcement action under the Unfair Competition Law alleging that defendant Wells Fargo Bank’s employees failed to provide timely and adequate notice of Well Fargo’s recording of confidential communications between bank employees and its customers, a practice unlawful under California’s Invasion of Privacy Act, Penal Code sections 632 and 632.7.

The law enforcement action was concluded with a stipulated final judgment, entered in Los Angeles Superior Court, in which Wells Fargo agreed to provide full and timely disclosure of its recording of its confidential communications with customers and agreed to pay $8.5 million in civil penalties, agency costs, and restitution.

[Page 97]

——–

Notes:

1. Thomas A. Papageorge is the head of the Consumer Protection Unit, San Diego District Attorney’s Office. The views expressed in this Article are those of the author and do not necessarily reflect those of the San Diego District Attorney’s Office. This Article is adapted from a presentation delivered at the Golden State Antitrust, Unfair Competition and Privacy Law Institute on November 3, 2016 and reflects developments as of that date.

2. 1 Cal. App. 5th 127 (2016).

3. 25 Cal. 4th 826 (2001).

4. 1 Cal. App. 5th at 152 (citations omitted).

5. Id. at 144.

6. Id. at 147.

7. Id. at 151.

8. 467 U.S. 752 (1984).

9. In re Auto. Cases I and II, 1 Cal. App. 5th at 159.

10. Id. at 160.

11. Id. at 168 (internal citations omitted).

12. Id. at 137, n.8.

13. No. B258061 (Cal. Ct. App. 2nd Dist., Jan. 29, 2016) (unpublished). Unpublished cases are presented here for their insights into relevant legal trends, but such opinions may not be cited or relied on by a court or a party in any action in California state courts (see generally, California Rules of Court, rule 8.1115; Dunbar v. Albertson’s, Inc., 141 Cal. App. 4th 1422 (2006); Faitz v. Ruegg, 114 Cal. App. 3d 967 (1981).

14. 172 Cal. App. 3d 1020 (1985).

15. Id. at 1047.

16. Basic Your Best Buy, Inc., supra n. 13, slip op. at 12.

17. Id. at 15.

18. 241 Cal. App. 4th 909 (2015).

19. Id. at 914.

20. Cal. Health & Safety Code § 1375.7(d).

21. Sutter Health, 241 Cal. App. 4th at 932.

22. 166 F. Supp. 3d 242 (E.D.N.Y. 2016).

23. Id. at 263.

24. 135 S.Ct. 1591 (2015).

25. 490 U.S. 93 (1989); Oneok, 135 S.Ct. at 1602.

26. 106 F. Supp. 3d 1051 (N.D. Cal. 2015).

27. 80 F. Supp. 3d 1019 (N.D. Cal. 2015).

28. 246 Cal. App. 4th 1432 (2016).

29. Cal. Bus. & Prof. Code § 17043.

30. Turnbull & Turnbull v. ARA Tramp., Inc., 219 Cal. App. 3d 811, 822 (1990).

31. 246 Cal. App. 4th at 1455-56.

32. 4 Cal. App. 5th 304 (2016).

33. Id. at 315 (emphasis in original) (internal citations omitted).

34. Id. at 316.

35. Id.

36. 1 Cal. App. 5th 635 (2016).

37. Id. at 638.

38. Id. at 651 (citations, quotations omitted).

39. Id. at 652.

40. Id. at 654, n.5.

41. 563 U.S. 333 (2011).

42. 9 U.S.C. §§ 1-16.

43. 59 Cal. 4th 348 (2014).

44. 61 Cal. 4th 899 (2015).

45. Id.

46. 201 Cal. App. 4th 74 (2011), rev’d, 61 Cal. 4th 899 (2015).

47. 59 Cal. 4th 348 (2014).

48. 42 Cal. 4th 443 (2007), superseded by statute as stated in Vitolo v. Bloomingdale’s, Inc., No. CV 097728, 2011 WL 13162460 (C.D. Cal. May 23, 2011).

49. Cal. Labor Code §§ 2698-2699.5.

50. 237 Cal. App. 4th 642 (2015).

51. 234 Cal. App. 4th 94 7 (2015).

52. 836 F.3d 1102 (2016), amended and superseded on denial of reh’g by 848 F.3d 1201 (9th Cir. 2017).

53. 1 Cal. 5th 233 (2016).

54. 4 Cal. App. 5th 232 (2016).

55. 1 Cal. 5th 233.

56. 840 F.3d 1016 (9th Cir. 2016).

57. 239 Cal. App. 4th 619 (2015).

58. Id. at 637 (citations, quotations omitted).

59. Id. at 640.

60. 245 Cal. App. 4th 855 (2016).

61. 1 Cal. App. 5th 277 (2016).

62. 2 Cal. App. 5th 781 (2016).

63. 241 Cal. App. 4th 909 (2015).

64. 234 Cal. App. 4th 947 (2015).

65. 836 F.3d 1102 (2016).

66. 1 Cal. 5th 233 (2016).

67. Id. at 260.

68. 62 Cal. 4th 298 (2015).

69. 7 U.S.C. § 6501 et seq.

70. 838 F.3d 958 (9th Cir. 2016).

71. 21 U.S.C. § 301 et seq.

72. Cal. Health & Safety Code § 109875 et seq.

73. Ebner, 838 F.3d at 965.

74. 247 Cal. App. 4th 884 (2016).

75. Cal. Bus. & Prof. Code §§ 22575-22579.

76. 49 U.S.C. §41713 et seq.

77. Delta Airlines, 247 Cal. App. 4th at 906.

78. 2 Cal. App. 5th 132 (2016).

79. 4 Cal. App. 5th 304 (2016).

80. Id. at 315 (emphasis in original) (internal citations omitted).

81. Id at 316.

82. Id.

83. 62 Cal. 4th 298 (2015).

84. Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 327 (2011).

85. 7 U.S.C. § 6501 et seq.

86. Quesada, 62 Cal. 4th at 324.

87. Id. at 303.

88. Id. at 303, 316-17.

89. 247 Cal. App. 4th 884 (2016).

90. Cal. Bus. & Prof. Code §§ 22575-22579.

91. 49 U.S.C. §41713 et seq.

92. Delta Airlines, 247 Cal. App. 4th at 906.

93. LA Super. Ct. No. BC 611105 (Mar. 28, 2016).

Forgot Password

Enter the email associated with you account. You will then receive a link in your inbox to reset your password.

Personal Information

Select Section(s)

CLA Membership is $99 and includes one section. Additional sections are $99 each.

Payment