Terms and Marketing of Annuity Insufficient to Support RICO Fraud Claims

In 2007, Paul Harrington purchased a MarketPower Bonus Index Annuity (the “Annuity”) from Equitrust Life Insurance.  The Annuity uses “index accounts” to generate “index credits” that increase the annuity’s total amount based on periodic changes in the closing value of the S&P 500.  The Annuity also permitted annual withdrawals to an extent with no penalty; larger withdrawals were subject to diminishing surrender charges and market value adjustments.  The Annuity also included a premium bonus whereby Equitrust added 10% of the premiums paid in the first year. In 2009, Harrington brought a putative class action against Equitrust (Harrington v. EquiTrust Life Ins. Co., 2015 U.S. App. LEXIS 2717) for violations of RICO and Arizona law.  After Harrington filed a motion for class certification, Equitrust moved for summary judgment.  The district court granted summary judgment, entered judgment for Equitrust, but declined to award costs without any explanation.  Both parties appealed.

Harrington specifically alleged RICO violations of mail fraud (18 USC §1341) and wire fraud (18 USC §1343).  The violations can either be premised on a non-disclosure or an affirmative representation, but non-disclosure can support fraud only if the person charged breached an independent duty.  Harrington based his complaint entirely on the language of the Annuity contract and marketing materials - specifically, the (1) promise of premium bonuses, (2) the application of the Annuity’s market value adjustment, and (3) the circumvention of state nonforfeiture laws.

The Ninth Circuit agreed with the district court finding no actionable predicate acts.  Harrington claimed that the bonus was fraudulent because Equitrust failed to disclose that no additional money is invested when the bonus is credited and that the bonus is recouped by Equitrust crediting lower index credits than it might have in a contract without bonuses.  However, Equitrust delivered exactly what it promised.  Equitrust accurately described the program and it was unclear whether the Annuity would not outperform a non-bonus annuity.  As to the market value adjustment, Harrington alleged that the marketing materials failed to disclose a constant used for calculating the adjustment.  Again the Court rejected Harrington’s argument, noting the meticulous explanation and examples of the adjustment formula.  Finally, Harrington argued that the Annuity had an optional maturity date, based on Equitrust’s policy of affording annuitants relief from fixed-date terms upon request, which violated Arizona non-forfeiture law.  His argument failed because he offered no authority for his proposition and suffered no recognizable injury from his claim.

Addressing Equitrust’s appeal, the Ninth Circuit explained that a court is within its discretion to deny costs to a prevailing party under F.R.Civ.P. 54(d), but must explain the denial.

The Ninth Circuit affirmed summary judgment, vacated the order denying costs, and remanded to the district court for an explanation.

Clear and Unmistakeable Intent Gives Arbitrator Decision of Arbitrability of Class Claims

In Universal Protection Service, LP v. Superior Court (2015 Cal. App. LEXIS 189), employer Universal sought a writ of mandate challenging the superior court’s order granting employee Franco’s demand for arbitration and ruling that the arbitrator decides the arbitrability of class action claims. In 2008, Franco signed an arbitration agreement pursuant to her employment with Universal.  The agreement provided arbitration of “any and all disputes or claims” related to the employment and that it be conducted “in accordance with the National Rules for the Resolution of Employment disputes set forth by the American Arbitration Association.”  In 2014, Franco filed a class action suit against Universal for various Labor Code and wage orders violations.  Universal sought declaratory judgment regarding the decision-maker for arbitrability of class claims and on the grounds that the agreement required arbitration on an individual basis only.  The trial court agreed with Franco that reference to the AAA rules placed the question of class arbitrability in the hands of the arbitrator and granted Franco's petition to compel arbitration.

The Court of Appeals held that the order compelling arbitration based on Garcia v. DIRECTV, Inc (115 Cal.App.4th 297) was an error.  The court in Garcia cited to Green Tree Financial Corp. v. Bazzle, where the Supreme Court held (in a nonbinding, plurality decision) that the arbitrator must decide whether an agreement prohibits or permits class arbitrations.   Although improperly based on Garcia, the trial court was nevertheless correct.

The Court stated that in deciding whether parties’ agreed to arbitrate certain claims, ordinary state-law principles governing contract formation should be applied, subject to the qualification that courts should not assume an agreement to arbitrate without clear and unmistakable evidence of the parties’ intent.  Here the parties referred to the AAA rules in the arbitration agreement, including specifically, AAA rules for class action arbitration.  In addition to the reference to the specific rules, the AAA Employment Rules include the Supplementary Rules for Class Arbitrations.  These rules place the question of arbitrability in the hands of the arbitrator.  The Court also held the decision to be consistent with general contract law principles.

The Court denied Universal’s petition.

Individual Issues Predominate Commonality in Retailer Class Action Against Apple

In a recent unpubished opinion (Siechert & Synn et al v. Apple Inc., 2015 Cal. App. Unpub. LEXIS 859), the California Court of Appeals affirmed the trial court’s denial of class certification in a suit brought by retailers against Apple. The plaintiffs originally brought suit against the computer giant in 2005, alleging that Apple’s decision to open its own retail stores was meant to drive the independent retailers out of business.  They asserted that Apple made fraudulent representations as to their intentions with the independent retailers, concealed the scheme, induced them into continuing business with Apple, deliberately withheld products from the plaintiffs, and gave “secret rebates” to favored resellers but not the plaintiffs.  They pleaded causes of action for breach of contract, unfair competition, misappropriation of trade secrets, fraud and deceit, breach of the covenant of good faith and fair dealing, violations of the Cartwright Act, and violations of the Unfair Practices Act.  The trial court denied certification, holding that each member would have to prove individualized evidence regarding the representations they were told, reliance, and damages.  The plaintiffs appealed.

Under Brinker Restaurant Corp. v. Superior Court (53 Cal.4th 1004) the ‘ultimate question’ for predominance is whether the issues which may be jointly tried, when compared to those requiring separate adjudication, are so numerous or substantial that the maintenance of a class action would be advantageous to the courts and litigants.

Here the individual issues predominated and the Court of Appeals affirmed.  As to plaintiffs’ fraud claims, each plaintiff would have to demonstrate when they were told the fraudulent representation, because it was not simultaneously made, which subjected many to the statute of limitations.  The same issue arose with reliance on the alleged fraud.  Some class members contradicted the class allegations, claiming to not have heard the representations, or testifying that they were unaffected by it.  For causation, because each retailer had different locations, different proximities to Apple stores, and other factors that contributed to each member’s harm, individualized issues predominated.  The plaintiffs’ expert testimony for damages also was dismissed on the grounds that the expert conceded that his calculations were hypothetical.  The plaintiffs’ contracts were individualized, defeating any contract class claims.  And finally, for a claim of “secret rebates” each plaintiff would have to demonstrate the extent to which each specific plaintiff competed with the resellers Apple provided the “secret rebates” to - another individualized harm.

The Court affirmed denial of class certification.

Weak evidence defeats class certification against Walgreens for Lunch Break Violations

In  In Re Walgreen Co Overtime Cases (231 Cal. App. 4th 437) the Court of Appeals affirmed denial of class certification in the putative class action for lunch break violations.  Plaintiffs provided both contradictory and questionable evidence in their attempt for certification and the Court quickly rejected their claim. Lead plaintiff Larry Collins brought suit against Walgreens charging the drug store chain for violating employees’ rights to meal breaks.  According to Brinker Restaurant Corp. v. Superior Court (53 Cal.4th 1004), an employer must make lunch breaks available, but does not need to ensure that employees take the provided breaks.

This was Collin's first mistake.  Collins’ provided expert testimony, emails, and declarations to support his motion for class certification.  His expert testimony failed because the expert assumed a violation where the employees did not take breaks – applying an ensure standard instead of the make available standard.  Collins’ second mistake was providing a Walgreens’ email that repeatedly stressed break requirements to management to prevent violations of the Labor Code.  Collins’ third mistake was his worst.  He submitted 44 form declarations, mostly identical, and recanted by many of the declarants through testimony.  The trial court judge gave no weight to the declarations, admonished class counsel and the Court of Appeals agreed.

The trial court order was affirmed and Walgreens was granted costs.

Sleep time compensable for wage claim class action

In Mendiola v. CPS Securities Solutions, Inc. (60 Cal. 4th 833), Plaintiff security guards brought two class action lawsuits against the security company for failure to pay wages.  The plaintiffs alleged minimum wage and overtime violations for their on-call 24-hour work schedule. The facts of the case were undisputed.  During the week days, CPS guards worked 8 hour shifts, were on call for the following 8 hours, and then would have 8 hours off.  On the weekends, guards worked 16 hour shifts, with 8 hours on-call directly after.  CPS provided a trailer for on-duty guards, which they were required to stay in pursuant to their employment agreement. Guards would have to notify a supervisor if leaving the site and could not leave until a relief arrived.  The guards were paid for their hourly time spent patrolling the sites, but only received compensation while on call if responding to an alarm or waiting for and being denied a reliever.

After the trial court consolidated the two suits, both sides sought declaratory relief as to the lawfulness of CPS’s compensation policy.  The trial court concluded that CPS violated IWC Wage order 4.  Since the guards were subject to CPS’s control during on-call time and their presence was for the benefit of CPS, all on-call hours constituted compensable time.  CPS appealed, the Court of Appeals affirmed in part and reversed in part, and both sides petitioned the California Supreme Court for review.

The Court explained Wage Order 4.  Citing Morillion v. Royal Packing Co. (22 Cal.4th 575), the two factors considered under Wage Order 4 are: (1) the time during which an employee is subject to the [employers] control, and (2) the time the employee is suffered or permitted to work, whether or not required to.   The Supreme Court agreed with the appellate court in that the hours worked were compensable.  CPS argued for adoption of 29 CFR 785.23 to treat time for meals, rest, and other private pursuits as non-compensable.  However, unlike other Wage Orders, which explicitly created an exemption incorporating federal law, Wage Order 4 did not.  Applying the standard here would eliminate significant employee protections, a direct contradiction to state employment laws.

The Court affirmed the Court of Appeals decision holding the hours compensable and reversed the decision incorporating the federal regulation.