Petition for review filed in UCL/CLRA case: Daugherty v. American Honda Motor Co.

On November 8, 2006, the Court of Appeal (Second Appellate District, Division Eight) published its opinion in Daugherty v. American Honda Motor Co., ___ Cal.App.4th ___ (Oct. 31, 2006). The opinion is well summarized in the petition for review that was filed with the Supreme Court on December 19, 2006. See Daugherty v. American Honda Motor, no. S148931. Many thanks for counsel for Ms. Daugherty for sharing his brief. Both the opinion and the review petition are worth reading.

In Daugherty, the Court of Appeal affirmed the judgment that resulted after the trial court sustained the defendant's demurrer to all causes of action without leave to amend. The complaint alleged that a design defect in certain Honda vehicles "causes oil loss and contamination of nearby engine parts and, in severe cases, requires repair or replacement of the engine." Slip op. at 2. According to the plaintiffs, Honda knew or should have known about the defect, yet failed to disclose it to consumers. The complaint pleaded causes of action for breach of warranty and for violation of the Magnuson-Moss Warranty–Federal Trade Commission Improvement Act, the CLRA, and the UCL. Id. at 3. The Court of Appeal's treatment of the latter two causes of action is particularly problematic.

Regarding the CLRA, the court held that Honda had no duty to disclose the alleged defect because the defect did not represent a safety risk. Id. at 11-13. The court further held that the CLRA does not impose liability for a defendant's failure to disclose material facts absent an independent duty to disclose. Unless the defect presents a safety risk, the court held, there is no such duty. See id. at 12. In other words, according to the Daugherty court, the CLRA only prohibits affirmative misrepresentations. This holding is contrary to well-established CLRA jurisprudence, most notably Massachusetts Mutual Life Ins. Co. v. Superior Court, 97 Cal.App.4th 1282 (2002). It also contravenes the CLRA's statutorily-declared consumer protection purpose by curtailing the CLRA's scope. Civ. Code § 1780.

The UCL claim fared no better with the Daugherty court. The "unlawful" prong claim failed because the statutory claims on which it was predicated (including the CLRA claim) failed. Slip op. at 15. The "fraudulent" prong claim failed because: "We cannot agree that a failure to disclose a fact one has no affirmative duty to disclose is 'likely to deceive' anyone within the meaning of the UCL. " Id. at 16. And the "unfair" prong claim failed, too: "[T]he failure to disclose a defect that might, or might not, shorten the effective life span of an automobile part that functions precisely as warranted throughout the term of its express warranty cannot be characterized as causing a substantial injury to consumers, and accordingly does not constitute an unfair practice under the UCL." Id. at 18 (citing Camacho v. Automobile Club of Southern California, 142 Cal.App.4th 1394, 1403 (2006) (adopting FTC Act formulation of of "unfair" )).

The "fraudulent" prong holding is particularly problematic. Plenty of cases hold that failure to disclose material information to consumers violates the "fraudulent" prong. See, e.g., Mass. Mutual, 97 Cal.App.4th at 1292 (failure to disclose information that "should have been disclosed given the characteristics” of the transaction); Day v. AT&T Corp., 63 Cal.App.4th 325, 333 (1998) (“failure to disclose other relevant information”); Podolsky v. First Healthcare Corp., 50 Cal.App.4th 632, 651 (1996) (failure to disclose “all the pertinent facts”); Schnall v. Hertz Corp., 78 Cal.App.4th 1144, 1164 (2000) (concealment of information “relevant to the … decision” faced by the consumer). Failure to disclose information about a design defect that could affect a product's value should be actionable under the UCL's fraudulent prong. Restitution would then be measured based on the proportion of the purchase price attributable to the non-disclosure. See Colgan v. Leatherman Tool Group, Inc., 135 Cal.App.4th 663 (2006).

For this and other reasons, the Supreme Court should take a close look at this case. It represents the danger of conflating the UCL and the CLRA with warranty law—a entirely separate body of law intended to remedy different wrongs. The Supreme Court should either take the case up or depublish it.

Comments

[John Hurley]

I have to disagree with your statement that this decision is contrary to well-established jurisprudence holding that an ommission can form the basis of a CLRA claim.

In Massachusetts Mutual, the case was founded on an alleged fraudulent ommission, but there was no analysis by the court as to whether such allegations fit any of the categories of proscribed conduct set forth in the CLRA. The issue was whether individual issues of reliance could preclude class certification. The decision came on a writ petition challenging a grant of class certification, so it would have been inappropriate for the Court of Appeal to address merits issues and the court did not address them. The case should not be cited for authority on a point it did not decide.

On the other hand, I agree with you that the UCL issue on fraudulent practices was poorly decided. Essentially, the Court of Appeal applied pre-Pfizer law and held that where there is an express warranty period, that effectively establishes the baseline of how long a reasonable consumer would believe the product should last without malfunctioning.

Although I like the idea of bright-line rules when possible, the issue of what counstitutes a fraudulent business practice does not lend itself to bright line rules. The warranty in question was only 3-years or 36,000 miles. I think most people would agree that a car should last a lot longer than that -- the average consumer these days takes out a 5-year loan on a car, and one of the name plaintiffs suffered total engine failure at only 57,000 miles.