The UCL Practitioner

New class certification decision: Bomersheim v. Los Angeles Gay and Lesbian Center

In Bomersheim v. Los Angeles Gay and Lesbian Center, ___ Cal.App.4th ___ (May 26, 2010), the Court of Appeal (Second Appellate District, Division One) reversed an order denying class certification of a negligence claim against a medical clinic that gave a group of patients the wrong treatment. 

The opinion has an interesting discussion of classwide "causation":

An inference of causation arises when a material event impacts an individual whose subsequent actions constitute a reasonable response. In the class context, where individuals are uniformly subjected to a material stimulus and thereafter uniformly act in a manner consistent with a reasonable response, a classwide inference is raised that the stimulus caused the response.

Here, putative class members all came to the Center seeking treatment for syphilis, a potentially life-threatening disease. They were given the wrong medication. After being informed that the treatment may have been ineffective, they sought retreatment. A reasonable inference as to the entire class is that the initial mistreatment caused members to seek retreatment. Causation can therefore be presumed on common proof.

Slip op. at 12-13. The causation discussion cites Occidental Land, Vasquez, and Massachusetts Mutual.  

New Seventh Circuit class certification decision: Pella Corp. v. Saltzman

Here's a rare Seventh Circuit opinion affirming an order granting class certification in a consumer fraud case:

While consumer fraud class actions present challenges that a district court must carefully consider, there are circumstances where certification is appropriate. We conclude that this case is one of those circumstances.

Pella Corp. v. Saltzman, ___ F.3d ___ (7th Cir. May 20, 2010) (per curiam) (slip op. at 11).   Many thanks to the attorney who brought this case to my attention. 

New Ninth Circuit FTC Act opinion: FTC v. Neovi, Inc.

In Federal Trade Commission v. Neovi, Inc., ___ F.3d ___ (9th Cir. May 14, 2010), the Ninth Circuit construed the Federal Trade Commission Act, 15 U.S.C. § 45(n). 

The opinion is an interesting one, especially to the extent that some Court of Appeal panels may be adopting the FTC Act standard as a third formulation of the UCL's "unfair" prong.  See, e.g., Davis v. Ford Motor Credit Co., 179 Cal.App.4th 581 (2009). But see Overstock.com, Inc. v. Gradient Analytics, Inc., 151 Cal.App.4th 688, 715 (2007) ("the California UCL contains no directive to interpret our consumer protection statute consistently with the FTC Act"). 

Here is a notable passage:

To support its argument that the FTC’s showing of causation was insufficient, Qchex urges us to seek interpretive guidance from several California state cases that were decided under California Business & Professions Code § 17200—the so-called “Little FTC Act.” We decline the invitation. While it is common practice for states with consumer protection statutes modeled on the FTC Act to rely on federal authority when interpreting those statutes, the reverse is not the case. As the FTC points out, given the abundance of state laws on which such interpretations could be based, this practice would likely result in a sea of inconsistent rulings. See Orkin Exterminating Co., Inc. v. FTC, 849 F.2d 1354, 1363 (11th Cir. 1988) (noting that there is nothing constraining the FTC “to follow judicial interpretations of state statutes in construing the agency’s section 5 authority”).

Slip op. at 6994.  I have not seen the briefs, so I don't know whether the defendant cited Davis and Camacho, which expressly adopted the FTC Act standard for "unfair" conduct (creating a three-way split in authority), or other UCL cases that did not.

New UCL preemption decision: Parks v. MBNA America Bank, N.A.

Many thanks to the blog reader who wrote to draw my attention to Parks v. MBNA America Bank, N.A., ___ Cal.App.4th ___ (May 12, 2010).  In Parks, the Court of Appeal (Fourth Appellate District, Division Three) held that federal law did not preempt plaintiffs' UCL "unlawful" prong claim, which was predicated on alleged violations of Civil Code section 1748.9. 

Interestingly, in so holding, the Court expressly declined to follow a contrary Ninth Circuit decision, Rose v. Chase Bank USA, N.A., 513 F.3d 1032 (9th Cir. 2008):

Although we are reluctant to create a split of authority with the Ninth Circuit Court of Appeals on a point of federal law, our understanding of the authorities discussed above requires us to do so. It is still possible MBNA may demonstrate that section 1748.9 imposes burdens on national banks that significantly impair the authority granted to it by the [National Bank Act]. But there is no basis for preempting section 1748.9 without a factual record.

Slip op. at 19-20 (footnote omitted).

Three cases of interest set for oral argument in late May and June

The Supreme Court has set three cases of interest for argument on its late May and June calendars.

Tuesday, May 25, 2010, 9:00 a.m. (San Francisco): Lu v. Hawaiian Gardens Casino, Inc., no. S171442. This case addresses whether Labor Code section 351, which prohibits employers from taking "any gratuity or part thereof that is paid, given to, or left for an employee by a patron," creates a private right of action for employees.

Wednesday, May 26, 2010, 9:00 a.m. (San Francisco):  Reid v. Google, Inc., no. S158965.  This is the case involving summary judgment motion standards.

Wednesday, June 2, 2010, 9:00 a.m. (Los Angeles): Clark v. Superior Court (Western Life Ins. Co.), no. S147229.  This case addresses whether statutory penalties for elder abuse are recoverable as restitution under the UCL.  It was set for argument amazingly fast.   

I am not planning to attend any of these arguments. If you would like to do so and provide a report for posting here, please let me know by email ([email protected]).

Two upcoming MCLE programs

Two MCLE programs of interest are coming up in San Francisco next week, including one at which I am speaking: 

• Tuesday, May 18, 2010, 12:00-1:30 p.m.: Settling, or Not Settling, Antitrust Cases, sponsored by the Bar Association of San Francisco's Antitrust and Business Regulation Section.  The program will be moderated by Judith Zahid of Zelle Hoffmann Voelbel & Mason LLP.   

• Thursday and Friday, May 20-21, 2010: Antitrust Institute 2010: Developments and Hot Topics, sponsored by the Practising Law Institute.  I will be on the consumer protection panel on the morning of day 2, along with Albert J. Boro, Jr. of SoloPower, Inc., David M. Newman of the Federal Trade Commission, and Kathrin E. Sears of the California Attorney General's office.

New Ninth Circuit CAFA opinion: United Steel v. Shell Oil Co.

On April 21, 2010, the Ninth Circuit handed down a new CAFA opinion, United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO, CLC v. Shell Oil Co., ___ F.3d ___ (9th Cir. Apr. 21, 2010).  The court held that once a case is properly removed under CAFA, the federal courts continue to have jurisdiction even if class certification is ultimately denied: 

Defendants removed this putative class action from state court pursuant to the Class Action Fairness Act of 2005 (CAFA), 28 U.S.C. §§ 1332(d), 1453. After denying class certification, the district court concluded that it no longer had jurisdiction and remanded the case to state court. We accepted defendants’ appeal to consider whether the denial of class certification divests federal courts of jurisdiction over cases removed under § 1332(d). Today we join the Seventh and Eleventh Circuits in holding that it does not. If the putative class action was properly removed to begin with, the subsequent denial of Rule 23 class certification does not divest the district court of jurisdiction. The case remains removed and is not to be remanded to state court.

Slip op. at 6025-26 (footnote omitted).   In so holding, the court followed the lead of two sister circuits: 

Only the Seventh and Eleventh Circuits have squarely considered this issue, and both have held that the post-removal denial of class certification does not divest federal courts of jurisdiction. See Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 806-07 (7th Cir. 2010); Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1268 n.12 (11th Cir. 2009).

Id. at 6029-30.

New UCL competitor decision: Silvaco Data Systems v. Intel Corp.

Silvaco Data Systems v. Intel Corp., ___ Cal.App.4th ___ (Apr. 29, 2010) is a case for misappropriation of trade secrets in which the plaintiff also brought a UCL claim.  See pp. 37-41 for the Sixth District's discussion of standing (which, strangely, makes no mention of Tobacco II, a case undoubtedly relevant to the discussion). 

Oral argument report: County of Santa Clara v. Superior Court (Atlantic Richfield Co.)

On Wednesday, May 5, 2010, the Supreme Court heard oral argument in County of Santa Clara v. Superior Court (Atlantic Richfield Co.), no. S163681. 

Justices Baxter and Corrigan were both recused.  Justice Maria P. Rivera of the First Appellate District, Division Four, and Justice James A. Richman of the First Appellate District, Division Two, sat in their stead.

Philip Curtis of Arnold & Porter (representing Atlantic Richfield Co.) and Elwood Lui of Jones Day (representing Sherwin-Williams Co.) divided the defense argument time.  San Francisco Deputy City Attorney Owen Clements presented the public entities' position.  [Note:  Messrs. Curtis and Clements also argued this case in the Sixth District in 2008.  See this blog post for my report on that argument.] 

Mr. Curtis argued first.  The Court, he began, should reverse the Court of Appeal's judgment and reinstate the trial court's order disapproving the public entities' contingency-fee agreement with outside counsel.  He briefly summarized the basic background facts of these public nuisance actions, emphasizing that the actions sought a form of relief -- an order of abatement -- available only to government plaintiffs.  He then gave three reasons why the public entities should not be permitted to retain outside contingency-fee counsel to handle the case: (1) the need for prosecutorial neutrality, even-handedness, and balance; (2) the destructive effect of a contingency-fee arrangement on that neutrality; and (3) the incurability of the problem and the inefficacy of contract provisions purporting to limit the outside lawyers' control.

Chief Justice George then interrupted:  I assume you'll address the extent to which the government lawyers' control over the litigation is relevant and the extent to which the Clancy case applies.  [People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985).]  Mr. Curtis said he would address that now.  The payment of contingency fees would destroy neutrality.  Can some form of control by government lawyers restore neutrality? The answer is no for three reasons. First, control is not realistic.  As the lower court said, the lawyer is not a potted plant.  There are any number of acts that can affect the outcome of a case.  This Court has repeatedly pointed out that the need for neutrality goes to so many decisions such as which witnesses to call, trial strategy, and more.

Chief Justice George:  Aren't those akin to the tasks performed by a deputy city attorney?  Curtis:  It would be improper for a deputy city attorney to receive a contingency fee.  Chief Justice George:  But we're talking now about the ability to form independent judgments and the extent to which you have to be subject to control.  The same decisions would be subject to the control of one's supervisor in a public office.  Curtis:  They would be subject to the supervision or control of the superior or the client.  All attorneys are subject to the control of the client.  It doesn't eliminate the lawyer exercising influence over the outcome.  In part one of the Eubanks case, it said having an interest runs afoul of neutrality.  [People v. Eubanks, 14 Cal.4th 580 (1996).] 

Chief Justice George:  But Eubanks was a criminal case.  Are you equating these civil cases with that?  Curtis:  I am doing so and this court did in Clancy.  Public nuisance cases should require neutrality in the same way as criminal cases.

Justice Moreno:  Isn't the control here quite distinct from the lack of control in Clancy?  Curtis: It was not.  The facts are very much like the facts here.  We asked the Court to take judicial notice of the contract in that case.  

Justice Moreno:  You're saying it's virtually impossible to get sufficient control.  Curtis:  Yes, it's unrealistic and therefore impossible.  This is so for two other reasons.  Circumstances can arise during the course of the prosecution. It's inherent in the contingency-fee agreement.  It provides an opportunity to profit from a successful prosecution.

Chief Justice George:  But your position is that not all civil prosecutions are subject to the Clancy rule.  Curtis:  Not all are subject to the neutrality requirement, that's correct.

Chief Justice George:  I'm having trouble equating a criminal proceeding, where someone's freedom is at stake, with the proceeding here against a manufacturer of lead paint.  Curtis:  There are two sources for a neutrality requirement in civil matters.  First, Clancy talks about the prosecutor's need for weighing competing interests.  In a public nuisance case, the question is whether the conduct is a reasonable invasion of the public interest.  Second, in the first section of Eubanks, where it says the neutrality rule arises from the fact that the lawyer is representing the public as a whole.  That is especially so here.  Those are the origins of the application of the neutrality rule in a civil case.

Justice Richman:  The balance in a public nuisance case is between the public and the property owners who would be affected by the abatement order.  Are the defendants property owners?  Curtis:  That was true in Clancy.  The defendants aren't property owners but the question will be whether many members of the public who own property will be affected.  Justice Richman:  And your client has the right to assert those interests?  Curtis:  We have the right to assert a neutrality requirement.

Justice Chin:  You have asked for discovery on the question of control and you ran into the attorney-client privilege.  What problems does that raise?  Curtis:  This leads to my third point.  It's not possible to cure lack of neutrality through control.  It would have to get into the most sensitive strategy matters.  When we tried to get to this we were stopped. 

Chief Justice George:  The language of the declaration of the public officer says we have complete control of the litigation.  Isn't that pretty comprehensive or are you saying unless you're a fly on the wall you would not have the assurance you need?  Curtis:  We would not and the public and the court would not.  This is not about the integrity of the public officials.  This is about letting an outside actor in. 

Mr. Curtis then yielded the floor to Mr. Lui. 

First, Mr. Lui referenced Chief Justice George's initial question, and distinguished the control of a district attorney over his deputy.  That relationship is unaffected by any contingency-fee arrangement, he said.  One failing of the Sixth District's opinion was they accepted blindly that these statements in the contract and declarations mean what they say and that there can be this type of supervision.  What Clancy stands for -- and we think it's good law -- is ensuring the integrity of the judicial process.  So whether you strip aside the attorney-client privilege you still have a contingency.  There is an absolute bar to the court's reviewing the conversations about strategy and control.  The harm that can result is not worth the risk. 

He went on.  Clancy lays down a bright line, a prophylactic rule.  The government lawyer said you must trust us, have the trial court judge supervise.  But the trial court judge can't ask the questions that would be necessary.  Then he discussed a number of cases including Vasquez.  [People v. Vasquez, 39 Cal.4th 47 (2006).]

Justice Moreno:  But aren't those criminal cases?  Lui: Because the case involves the state's soveriegn powers it's the same as the criminal cases.  He then quoted language from Eubanks and other cases, and also mentioned the Rhode Island Supreme Court case.  [Rhode Island v. Lead Industries Ass'n, 951 A.2d 428 (R.I. 2008).]  Justice Moreno:  But these are all criminal cases.  You're saying that in this civil case we should import those principles.  Lui:  Yes. 

Chief Justice George:  The Rhode Island case seems in every respect the same as this one.  The Rhode Island case involved the control exception and said Clancy was not a bright-line rule, didn't it?  Lui:  Yes and that takes us back to the origins of Clancy.  This court is the best court to decide what Clancy means.

Justice Moreno:  It's evidence that public counsel does not have enough resources because they are asking private lawyers to come in.  Chief Justice George:  If we're comparing resources I have a hard time seeing this as a David and Goliath situation when you have Atlantic Richfield and Sherwin-Williams on one side and a cash-strapped government agency on the other.  It's not like you're facing a huge government power.  Lui: But the government agencies choose which cases to prioritize. 

Justice Rivera:  In Clancy, the issues of concern to the court were the delicate balance of harms.  The interest of the public vs. the landowner.  In this case where would that misalignment occur? Where could there be a misalignment between the plaintiffs' lawyers' interests and the public?  What outcome could create that? 

Lui:  Knowing what's happened in other states, these cases have not been successful.  Contingency lawyers are not going to want to dismiss because they want to protect their investment.  For six years the contingency lawyers have been litigating this case.  Justice Rivera:  What are the realistic potential outcomes?  Lui:  An abatement order directed to the defendants for injunctive relief, not monetary.  There could be a difference of opinion with the public prosecutors.

Chief Justice George:  Should we not presume such an agreement is valid and consider that these are attorneys, they are officers of the court, with ethical duties?  You seem to assume they're not telling the truth.  Lui:  The risk of harm is too high even if they are telling the truth.  And in Clancy you didn't accept the same types of clauses re control.  They should not be accepted now because of the risk. 

[Note:  I have to say that's a very good answer to that difficult question and a strong note on which to end his argument.]

Mr. Clements then argued for the public entities.  Defendants, he said, are arguing for an absolute rule where all public agencies would be precluded from hiring outside lawyers.  This would negatively impact our ability to bring such cases. 

Justice Chin: Don't you have to rely heavily on private counsel's judgment and recommendations?  And aren't you going to private counsel because of their expertise in those areas?  Clements:  That's one of the reasons.  Also, the amount of work was not sustainable by a public office.  Also these particular counsel had past experience and knowledge of these issues.  So yes we do.  Just as we would with hourly lawyers.  But that's not financially viable. 

Chief Justice George:  You yourself are a deputy and your boss directs how you handle this prosecution.  Clements:  Absolutely.  The public lawyers have appeared, taken a very active role, and they have veto power. 

Justice Werdegar: Contingency fee means monetarily something has to be awarded, doesn't it?  Clements:  Typically, yes.  Justice Werdegar:  So, so far there's no basis for fees?  Clements:  Yes.  Justice Werdegar:  You are now seeking an order of abatement.  Clements:  Yes.  Justice Werdegar:  What are the other remedies?  Clements:  That's not clear yet.  Justice Werdegar:  Would the attorneys be influenced in deciding what relief to argue for?  Clements:  Yes, and that's where we would exercise control. 

Justice Werdegar:  If the outside lawyers invested money, would not the city be influenced by loyalty to them?  Clements:  No, we understand our responsibility.  Werdegar:  But wouldn't it impact the remedies you decide to seek?  Clements: There could be many available remedies and the government attorneys would decide.  Werdegar:  Wouldn't you be influenced and like to see those attorneys compensated?  Clements:  Yes, there are always incentives even with hourly lawyers and we would monitor those as well.  In Clancy, a private attorney appeared instead of the public one.  That's improper under any fee arrangement.  It's an excessive delegation of public authority.

Justice Werdegar:  Your opponent argues for a bright-line rule.  What rule would you advance?  Clements:  One bright-line rule is the one in the Rhode Island case.  Contingency-fee contracts are allowed in civil cases and not criminal cases.  We've advocated a case-by-case analysis.  The court should look at the fee contract.  And it's not true that we gave no discovery.  We produced the agreements and the correspondence surrounding their formation. 

Justice Chin:  But discovery regarding strategy was withheld.  Clements:  In part.  Justice Chin:  So how do we monitor control?  Clements:  First, look at the contingency agreement and make sure there's no improper delegation.  Next, look at the declarations from the private and public attorneys on foundational facts regarding who exercises control.  For example, as in the Anaheim case involving Priceline.  [Priceline.com v. City of Anaheim, 180 Cal.App.4th 1130 (2010).]  [See this blog post for a discussion of that case.] 

Justice Rivera:  Are those the only things?  Clements:  You'd require the public attorney to appear in the case as counsel of record.  If defendants come forward with evidence of improper delegation then you go into case-by-case analysis.  Justice Rivera:  Under Clancy there's no element other than control?  Clements:  The contract and control.  Justice Rivera:  Anything else?  Clements:  Actual likelihood of a miscarriage of justice.  Overlap with criminal case ramifications.

Justice Rivera:  Regarding remedies, wouldn't use of the common fund or substantial benefit doctrine be an end-run around the cases saying that public entities aren't entitled to fees in a public nuisance case.  Clements:  No.  That's cost spreading vs. cost shifting.  Justice Rivera:  Where do you get a fund?  Clements:  There could be a fund created when property owners apply for a share of money to make repairs.  Justice Rivera:  Can you cite a case where such a fund was created?  Clements:  Not off the top of my head.

Justice Chin:  Why should this case be treated differently from Clancy?  Clements:  The main reason is the public attorneys appear as counsel of record.  Justice Chin:  How do we ensure that the public attorneys are appropriately monitoring the case?  What do we write in the opinion?  Clements:  You can do what the Court of Appeal did in the Priceline case.  The parties' declarations.  The public attorneys affirm they have maintained control and there's not an excess delegation of authority.  Justice Chin:  How does the other side show excess delegation of authority?  Clements:  From their observations during the course of the case as in any other case of prosecutorial misconduct.

Chief Justice George:  Would it help if there were guidelines as in the Rhode Island case, such as control, veto power by the public attorneys, public attorneys involved in all stages?  Perhaps adding public attorneys must be involved in all decisions to settle or dismiss?  This could be included in the opinion. 

[Note: So here, the Chief Justice simply answered Justice Chin's question himself.]

Clements:  Absolutely.  It would give private attorneys every incentive not to overstep the bounds or risk disqualification.  Justice Chin:  Do you have any other factors?  Clements:  Those are sufficient.  You're relying on the professional judgment and good faith of the public attorneys and the ethics of the outside lawyers not to let their interests trump those of the clients.  This is precisely what courts presume.  Absent a prima facie showing that the public attorneys are not exercising control, then the arrangement should be allowed.  That is how courts handle all cases of prosecutorial misconduct.  This is strictly a civil case and the attorneys have no power to seek warrants etc. 

He went on.  Authorities following Clancy have been unanimous in allowing these arrangements except in one nonpublished superior court order issued by Judge Ikola who later authored the Priceline decision as Justice Ikola. 

Justice Rivera:  But the facts were different.  Clements:  In the twenty years since Clancy you have an absence of authority for the rule defendants advance.  We are talking about a balancing vs. a per se test.  A per se test would assume the conduct in question is necessarily bad.  The Rhode Island case recognized that there are some cases that can only be brought with this arrangement.  A rule prohibiting it is unwarranted.

And Mr. Clements ended his argument there, although his time was not up.

Before Mr. Curtis began his rebuttal, Justice Chin made a request:  Please address whether the protections adopted in the Rhode Island case are adequate.  Curtis:  They are not adequate.  They are window-dressing.  They are explicit but they are not specific.  They don't come to grips with the reality that there are myriad instances in the prosecution of a case where an attorney with an interest can influence the case. 

Justice Werdegar:  In this case where would that come up?  Curtis:  What remedies to seek; what witnesses to call; how to question them.  Justice Werdegar:  How would those decisions be impacted?  Witnesses, I don't see that.  Curtis:  Whether the case should be dismissed.  Whether to proceed with the case at all.  Contingency fee lawyers would have a natural tendency to expand the litigation and interpret the law as broadly as possible.

[Note:  I have to disagree with that.  In deciding what cases to take, the strength of the legal arguments and the likelihood of success on the merits are critical considerations.  No contingency-fee lawyer is going to take a dud case.  It makes no sense to take on the risk.  The goal is to take cases with as little risk as possible, which means the strongest possible cases based on existing law, not the reverse.]  

Chief Justice George:  But if the public entity has veto power; and requiring a senior member of the public office to participate; allowing them to decide to settle without any input from the private attorney: those aren't specific?  Curtis:  They are not adequately specific.  Chief Justice George: Does your argument stand or fall with the analogy to criminal cases?  Curtis:  It does indeed.  We believe Clancy was correctly decided and properly put the facts of that case in the criminal column.

Justice Chin:  If we were to adopt the Rhode Island factors what would you change or add to them?  Curtis:  I don't know how to answer that.  Justice Chin: Answer quickly.  [The courtroom laughed.]  Curtis at this point reiterated that he couldn't say what should be changed or added because he did not think any protections were adequate. 

Justice Moreno asked the final question:  Can you describe the remedy from which attorneys' fees might come?  Curtis:  I cannot; we don't know yet.

And then Mr. Curtis, likewise, concluded before his time was up.

I think Chief Justice George agrees with the Rhode Island analysis and will follow it.  The question is whether his colleagues will go along.  Justice Chin obviously has serious concerns about how to monitor the attorneys.  On the other hand, the Chief Justice ends up in the majority in nearly every case.  They say that appellate judges use the questioning to communicate with each other as much as to gain information from the attorneys.  This argument exemplified that.  We'll find out what happens in 90 days. 

"Public-Private Suits May Get Justices' OK"

Here is the Recorder's report on yesterday's oral argument in County of Santa Clara v. Superior Court (Atlantic Richfield Co.). 

Recent U.S. Supreme Court cases of interest: Purdue and Stolt-Nielsen

I attended yesterday's argument in County of Santa Clara v. Superior Court (Atlantic Richfield Co.), but I have not yet had time to write up my report.  Meanwhile, the U.S. Supreme Court has handed down two decisions of interest over the past couple of weeks:

• In Purdue v. Kenny A., ___ U.S. ___ (April 21, 2010), the Supreme Court addressed calculation of attorneys' fees in federal civil rights cases, and in particular, the propriety of lodestar enhancements.  Blawgletter has an interesting post on the opinion, and this was my prior blog post on the case.

• In Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., ___ U.S.___ (April 27, 2010), the Supreme Court addressed class arbitration. 

Oral argument preview: County of Santa Clara v. Superior Court (Atlantic Richfield Co.)

This morning at 9:00 a.m., the Supreme Court will hear oral argument in County of Santa Clara v. Superior Court (Atlantic Richfield Co.), no. S163681.  This case addresses whether governmental entities may hire outside counsel on a contingency-fee basis.  I am planning to attend and hope to post a report here tomorrow.

On Monday, I mentioned the announcement that Justice Kennard would miss a number of oral arguments in May and June because she is having surgery.  The docket in this case indicates that by letter dated April 28, 2010, all counsel were asked to stipulate that Justice Kennard may participate by reviewing the video recording of the argument.  All parties advised the Court that they had "no objection to Justice Kennard's participation in the deliberations and decision in this matter notwithstanding her absence from oral argument."

The docket also indicates two pro tem assignments: "Hon. Maria Rivera, CA 1/4 (for Baxter, J.) Hon. James Richman, CA 1/2 (for Corrigan, J.)."

Oral argument report: Clayworth v. Pfizer, Inc.

On Monday, May 3, 2010, the Supreme Court heard oral argument in Clayworth v. Pfizer, Inc., no. S166435.

The seven-Justice court included three pro tem members.  Justice Ignazio J. Ruvolo of the First Appellate District, Division Four, sat in for Justice Kennard.  Justice Ronald B. Robie of the Third Appellate District sat in place of Justice Chin.  And Justice Douglas P. Miller of the Fourth Appellate District, Division Two, took Justice Corrigan's seat. 

Joseph M. Alioto, Jr. of the Alioto Law Firm argued for the plaintiffs, while William J. Fenrich of Davis Polk & Wardwell presented the defense position.  Procedurally, the case was before the court following entry of summary judgment in the defendants' favor on Cartwright Act and UCL claims. 

Mr. Alioto began by restating the question on review -- whether the Court should recognize a "pass-on" defense that would allow defendants to escape all liability for their wrongful conduct.

Justice Werdegar interrupted, wanting to know if that was a fact, that there would be no way the defendant would be accountable.  Mr. Alioto replied that it was a fact, and that it was one of four facts he wanted to impress upon the Court.  First, plaintiffs paid an overcharge.  Second, plaintiffs passed it on as any reasonable business would do.

Justice Moreno then interrupted asking when do you maintain the injury was suffered?  Alioto:  At the moment the purchase was made.  Justice Moreno: Do you agree there was no net loss because it was passed on?  Alioto:  You could say that if later events are taken into account; but defendants have not made a showing that the plaintiffs have suffered no injury; only that the overcharge was passed on.  And there is a difference.

He went on.  Third, defendants are presumed liable for purposes of this appeal.  They are presumed to have fixed prices.  Fourth, no other plaintiff (such as an end-user) has brought suit, which goes to Justice Werdegar's question a moment ago.

The Cartwright Act must be interpreted such that the plaintiff suffers injury at the moment of purchase.  Justice Baxter then interjected:  Are you saying that the pass-on defense does not apply only if the ultimate consumers are not involved, or that it would not apply in any case?  Alioto:  We contend the latter but as an alternative holding, adopt the reasoning of the dissent in Illinois Brick.  Baxter:  Then how does the court avoid the issue of duplication of damages?  Alioto: That's what drove the decision in Illinois Brick, and some history behind that decision may be helpful.  He discussed three lines of authority leading up to that decision.  In one line of cases, the one adopted by the Illinois Brick dissent, the courts held that the possiblity of duplication of damages can be avoided through existing procedural mechanisms such as compulsory joinder.

Justice Moreno: How did our Legislature react to Illinois Brick?  Alioto:  They roundly rejected it.  In fact, 25 states rejected Illinois Brick.  And, eleven of those jurisdictions have considered the pass-on defense, and every one of those rejected it. 

Chief Justice George put in his first question:  Are you relying on legislative acquiescence?  Alioto:  Not exactly because the Legislature acted so quickly as to overrule Illinois Brick, but what we are relying on is the purpose behind the law, which should drive the interpretation; on the fact that the Legislature did seem to adopt certain parts of Hanover Shoe in several enactments; and that in 1978 the Legislature added a provision to deal with multiple liability in parens patriae actions, one patterned after the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  Justice Robie:  You mean the provision that says no double recovery?  Alioto:  Yes. 

Justice Ruvolo:  Regarding your argument that no pass-on defense should ever be allowed, in your case the plaintiffs used percentage-based pricing so that when the price went up so would the profit.  Would you exclude that profit from the recovery or would you allow that and treble it? 

Alioto:  No.  The damages are those calculated at the time plaintiff made the purchase.  Ruvolo:  So would the defendant be entitled to an offset for profit?  Alioto:  No.  Nothing that happens after the purchase should be considered.  This effectuates the purpose of the law.  This is no different than what California law already provides.  It's no different from the collateral source rule.

Justice Ruvolo:  Then how do you account for consequential damages?  Doesn't your theory wipe that remedy out?

Alioto:  No because there are three types of damages in Cartwright Act cases.  First, the overcharge.  Second, lost sales (i.e., when prices are higher you sell less).  Third, loss of the business value as a going concern.  Those are all available.  Justice Ruvolo:  The first one is the only type calculated at the time of purchase?  Alioto:  Yes.  The other two we've waived in this case. 

Justice Werdegar:  In other cases where they are not waived they would be available if proven?  Alioto:  That's correct. 

Alioto then discussed the UCL claim.  He said the first issue is one of standing.  The First District said in its opinion that the plaintiffs lacked standing because restitution was not an available remedy.  Justice Robie here interrupted:  Standing depends on whether the plaintiff suffered damage or not.  Is the damage suffered under the Cartwright Act enough to confer standing?  Alioto:  There are two parts to standing.  The first is injury in fact under the U.S. Constitution. Plaintiffs have standing by virtue of the purchase.  Justice Robie:  Are you saying that's not enough?  Alioto:  No.  The second element is lost money.  This Court has not had an opportunity to address this elelement.  The Court of Appeal has in Aron v. U-Haul and Hall v. Time, Inc.

[Note:  As a plaintiffs' attorney I would not have chosen those particular cases to illustrate the "lost money "element of UCL standing.  They are not exactly the most plaintiff-favorable cases.] 

Justice Ruvolo:  Is there any difference between the standing requirements under the UCL and the Cartwright Act?  Alioto:  Not for all practical purposes.  I'm arguing that the Court should adopt the reasoning of Aron and Hall.  Here, it's uncontroverted that plaintiffs paid more for the drugs than they were worth and they did not get the benefit of their bargain.  [Note:  I guess I can see why he thought those cases were good ones to cite given the particular facts of his case, but this leads straight into the Benson v. Kwikset problem.]

Alioto:  Now on to the restitition issue.  The First District relied almost exclusively on Madrid v. Perot Systems.  The defendants have abandoned Madrid and not cited it in their briefs.   In Tobacco this Court said that the restitution language is "patently less stringent" than the standing language.  If the plaintiffs have standing then they necessarily can recover restitution. 

And that was the end of his time.

Mr. Fenrich began by observing that at the beginning of Mr. Alioto's presentation he conceded that the plaintiffs have not sustained damage.  He said the lower courts properly applied the plain meaning of the Cartwright Act and the UCL under the unique facts of this case.  On this unique record, plaintiffs strategically chose only to seek one kind of damages -- the overcharge.  The record is undisputed that plaintiffs passed on 100% of the overcharge.

Justice Werdegar:  But the argument they make is depending on when the overcharge was paid.   Fenrich:  We think they've conflated two elements, injury and damages.  Justice Miller:  So are you conceding they have standing and suffered injury?  Fenrich:  Well it's an interesting issue on these unique facts.  This Court need not decide it because for the Cartwright Act claim, they have suffered no damages that could be recovered under the Cartwright Act's private right of action.  This centers on plaintiffs' ability to recover damages.  For the UCL claim, it's fair to say plaintiffs have not lost money or property, but again the Court need not reach that issue because they can't recover restitution. 

Justice Werdegar:  You keep saying this case is unique. Why is this case unique?  Fenrich: In another case a plaintiff might seek a variety of damages for an antitrust violation, but here, for strategic reasons, they chose to waive much of it and also concede that they passed on 100%.  It's only in this case and on this record that the result would be that the defendant escapes liability.  Nor do we concede that defendants should be presumed to have violated the law.  Whenever defendants' prices went up so too did plaintiffs'.  This would not be the result in other cases.

Chief Justice George:  What interpretation do you have of the State legislative history?  Fenrich:  You're referring to the 1978 amendments?  [The Chief Justice nods.]  It's California's reaction to Illinois Brick.  Chief Justice George:  What about Hanover Shoe?   Fenrich: There's no mention of Hanover Shoe surrounding the 1978 amendments.  Nor can it be interpreted as consistent with Hanover Shoe because once indirect purchasers have standing California is implicitly disagreeing with the policy underpinnings of Illinois Brick and Hanover Shoe, including (a) that pass-on is too difficult to show; and (b) the choice to place full recovery in the hands of the direct purchasers.  California is free to make different policy choices and this is reflected in what the Legislature did.

Justice Miller:  What is the purpose of the Cartwright Act?  Is it deterrence, compensation, disgorgement?  Fenrich:  All of the above.  Justice Miller:  Then there'd be no deterrence in this case.  Fenrich:  Compensation is the primary purpose.  Our argument would continue to allow damaged persons to recover treble damages.  Therefore our argument is consistent with all three purposes.  Plaintiffs' would denigrate the compensation purpose.  It's the Legislature's job to balance these purposes.  When a court is faced with two interpretations, one consistent with one purpose and the other three with all three purposes, the court should choose the one consistent with all three.

Justice Ruvolo:   Do you agree that for purposes of damage one looks solely at the time of purchase, and if so, what do you do with the Hanover Shoe language about cost-plus contracts?  Fenrich:  No we do not agree.  Going back to the 1800s (and he cited cases) damages has meant actual loss and recoupment.  One must necessarily look at what happened after.  Nothing shows that the Legislature in 1907 when it enacted the Cartwright Act meant to adopt some other rule.

Justice Robie:  Isn't passing it on a subsequent act?  They paid too much for the product so they then charge too much.  They are two separate actions.  Fenrich:  That's injury, but not damages.  (And then he discussed several cases to support this point.)  California did not adopt Hanover Shoe in 1978 or otherwise.  It's a rule based on policy not text.  California made other policy choices regarding where the incentives should lie in the distribution chain.  As for other states, there is no uniformity.  In eleven states the pass-on defense was rejected through legislative action.  There's no authority for courts doing that when interpreting language that's silent.

Justice Ruvolo:  You would be better off if the end-user consumers had been joined because there would be an offset of the profit?  In response, Fenrich acknowledged that the consumers would have suffered that damage.  Ruvolo:  But you've got a different case here.  Where the consumer plaintiffs are barred by the statute oflimitations you've developed a case that's symmetrical with federal law.  Fenrich:  This case could not have been brought under federal law because the pharmacies are not direct purchasers.  They bought from wholesalers who were direct purchasers.  There may be less risk of multiple recovery where the ultimate purchasers have a statute of limitations problem.  Justice Ruvulo:  Federal courts would rather have direct purchasers recover than let defendants get away with it entirely.

Justice Werdegar:  You said that the issue was decided in the federal courts based on policy not language.  But here is a quotation, and she read some language from California v. ARC America Corp., which did appear to say that the holding in question was text-based.  Fenrich:  What the court did not do was start with the language.  Justice Werdegar:  But the language is similar isn't it?  Fenrich:  Yes.  Justice Werdegar:  So they've told us what it means.  Fenrich:  Yes as a matter of federal law but we think it's not a reasonable interpretation under state law. 

Fenrich: Plaintiffs' lost profit waiver is unequivocal.  So the lost profits argument is a distraction.  The Utilicorp (phonetic) decision cemented the Illinois Brick ban on indirect purchaser recovery.  Pass-on is too hard to prove.  Regarding the 1978 enactment of the parens patriae multiple-liability provision (Bus. & Prof. Code section 16760), plaintiffs say this reflects California's adoption of Hanover Shoe.  We say the Legislature would have done it explicitly.

Fenrich then turned to the UCL claim.  For the same reasons plaintiffs aren't entitled to damages, they are not entitled to restitution.

Justice Werdegar:  Are they entitled to an injunction?  Fenrich:  That claim has been waived in this case, so no.  The Court doesn't have to answer that question.  On restitution, though, it is our position that whatever interest they had in the overcharge was passed on.  Plaintiffs say they somehow kept it, but when the wholesalers sold to them ithe interest passed, and then it passed again.

Mr. Fenrich then concluded his argument before his time had been called.

In rebuttal, Mr. Alioto first addressed the UCL claim.  First, the Tobacco II case said that restitution must be read to prevent a wrongdoer from retaining the fruit of its illegality.  Second, regarding the injunction waiver, plaintiffs were opposing defendants' motion, which said nothing about the injunction claim.  And here he read from the statement of undisputed material facts.  Justice Ruvolo:  You pleaded that as an alternative?  Alioto:  That's correct.  Defendants' motion did not mention injunctive relief.  They waived it.

Justice Robie:  But if you have standing don't you have it regardless of the remedy?  I'd think if you have standing you can seek either remedy.  They are separate issues, standing and remedy, are they not?  Alioto:  That's correct.  That's what the Court said in Tobacco.  Restitution is patently less stringent.  Otherwise you violate the maxim that a wrongdoer shall not profit from his wrong.

Alioto then turned to the Cartwright Act and read a quotation from the 1978 amendment's legislative history.  It's a pro-enforcement amendment, he said.  It cannot be read to create a loophole for defendants.  Bruno rejected federal cases that said compensation was the only purpose.  Prevention and punishment is not an insignifcant purpose.  As for cost-plus contracts, that is not an issue in this case.  Plaintiffs have no contracts requiring them to buy a fixed amount regardless of price.  The issue was not briefed before the Court of Appeal and on rehearing, that court struck its discussion of that issue from its opinion. 

Alioto then turned back to Justice Ruvolo's question:  You are right this is a perfect case to apply Hanover Shoe.

Then he, too, concluded his argument before his time was up. 

If I were to try to read some tea leaves, I'd say the argument with the most traction was that the pass-on defense would allow a defendant to keep its ill-gotten gains.  Several of the justices' questions suggested that they did not think this should happen.  We can expect an opinion within 90 days (i.e., by August 1, 2010). 

Oral argument preview: Clayworth v. Pfizer, Inc.

This afternoon at 1:30 p.m., the Supreme Court will hear oral argument in Clayworth v. Pfizer, Inc., no. S166435.  In that case, the question is whether an intermediate purchaser (of, for example, price-fixed goods) may recover damages under the Cartwright Act or restitution under the UCL.  In other words, can the defendant assert a "pass-on" defense if the plaintiff resold the goods and passed on the overcharges?  I am planning to attend the argument and provide a report here tomorrow. 

Also, a recent article in the Recorder said that Justice Kennard is going to miss a number of upcoming arguments while she recovers from surgery, including this week's arguments:

An avid and persistent questioner, Kennard would still get to participate by viewing videotapes of the arguments, unless the parties refuse to stipulate to her absence. If that happens, Chief Justice Ronald George said he would need to decide on a case-by-case basis whether to continue the matter or appoint a pro tem justice from the appellate courts to hear it instead.

The Clayworth docket indicates that three pro tem justices have been assigned to the case: "Hon. Ignazio J. Ruvolo, CA 1/4 (for Kennard, J.); Hon. Ronald B. Robie, CA 3 (for Chin, J.); Hon. Douglas P. Miller, CA 4/2 (for Corrigan, J.) ."