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July 18, 2012 Articles

Ninth Circuit Reshapes California Consumer-Protection Law

In a stark departure from prior case law, Mazza side-stepped controlling California substantive law and substituted its own understanding of federal policy.

By Elizabeth J. Cabraser, Jonathan D. Selbin, Jahan C. Sagafi, and Jason L. Lichtman

On January 12, 2012, a divided three-judge panel of the Ninth Circuit issued an unusual opinion that modifies decades of California consumer-protection law and could reshape the relationship between federal courts and the states. Mazza v. Am. Honda Motor Co., 666 F.3d 581 (9th Cir. 2012), reh’g denied, Mar. 16, 2012. The importance and complexity of this issue is emphasized by the dozens of opinions citing Mazza in the short time since it was issued, many of which approach the case from starkly different angles. See Kowalsky v. Hewlett-Packard Co., No. 5:10-cv-02176, 2012 U.S. Dist. LEXIS 34597, at *20–21 (N.D. Cal. Mar. 14, 2012) (following Mazza); Bruno v. Eckhart Corp., No. 11-0173, 2012 U.S. Dist. LEXIS 30873, at *2 (C.D. Cal. Mar. 6, 2012) (rejecting Mazza on grounds similar to those articulated in this article); see also Keegan v. Am. Honda Motor Co, Inc., No. 10-9508, slip op. at 55–57 (C.D. Cal. June 12, 2012) (distinguishing Mazza).

The plaintiffs in Mazza brought claims under California law against American Honda Motor Company, Inc., a corporation both incorporated and headquartered in California. The plaintiffs asserted that Honda had failed to disclose that its allegedly sophisticated braking system did not function in inclement weather—the very situation in which consumers would most need such a system, the plaintiffs asserted.

The plaintiffs moved to certify a national class under California law. The district court granted that motion, but the Ninth Circuit reversed, finding that the class lacked commonality and that California law could not apply nationwide. Mazza,666 F.3d at 585, 590. Judge Dorothy W. Nelson dissented from the panel’s decision, which was written by Judge Ronald M. Gould, joined by U.S. District Judge James S. Gwin from the Northern District of Ohio. Judge Nelson cautioned that the majority’s opinion was “devastating to consumers,” and she explained that state-court precedent should have compelled the panel to affirm the district court’s order. Id. at 598.

The majority opinion is particularly notable because the panel appears to have applied federal policy when it interpreted state law, rather than applying the law as California’s own courts would. Contra, e.g., Johnson v. Wells Fargo Home Mortg., Inc., 635 F.3d 401, 420 (9th Cir. 2011) (“A federal court applying state substantive law is bound to follow the choice-of-law rules of the forum state.”). In particular, the panel held that the law of the place of the injury governed when a California corporation (headquartered in California) was sued for conduct that took place in, and/or emanated from, California. Mazza, 666 F.3d; contra Diamond Multimedia Sys., Inc. v. Superior Court, 968 P.2d 539, 556–57 (Cal. 1999); Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 243 (Cal. Ct. App. 2001). The panel majority also concluded that California residents asserting claims for fraudulent omission must prove that absent class members were exposed to the allegedly fraudulent advertising, even though California state courts do not require this of unnamed class members. See Mazza, 666 F.3d; contra In re Tobacco II Cases, 207 P.3d 20, 29, 36 (Cal. 2009); Mass. Mut. Life Ins. Co. v. Superior Court, 97 Cal. App. 4th 1282 (Cal. Ct. App. 2002).

Mazza’s application of a federal “gloss” to effectively change state law for purposes of overturning class certification was both unprecedented and erroneous. See, e.g., Johnson, 635 F.3d at 420. (The authors of this article represented consumer amici curiae who filed a brief in support of rehearing en banc, including Consumers for Auto Reliability and Safety, Public Justice, Public Citizen, National Consumer Law Center, Consumer Attorneys of California, Center for Responsible Lending, Consumer Federation of California, Utility Consumers’ Action Network, and Consumer Watchdog.)

The Panel Majority Ignored Settled Choice-of-Law Principles
As explained above, the panel first held that California consumer-protection law does not apply when a California corporation’s conduct in California harms consumers in other states. Mazza, 666 F.3d at 594. It concluded that applying that law would impair the ability of foreign states to “calibrate liability to foster commerce.” Id. Put another way, it held that the law of the place of the injury (lex loci) will essentially always govern.

The California Supreme Court, on the other hand, has made clear that California law applies in situations like those in Mazza because California has an overarching interest in governing the conduct of its resident corporations regardless of the location of those injured:

[California] has a clear and substantial interest in preventing fraudulent practices in this state which may have an effect both in California and throughout the country. . . . California also has a legitimate and compelling interest in preserving a business climate free of fraud and deceptive practices. California business depends on a national investment market to support our industry. The California remedy for market manipulation helps to ensure that the flow of out-of-state capital necessary to the growth of California business will continue.

Diamond, 968 P.2d at 556–57.

“The linchpin of Diamond’s analysis is that state statutory remedies may be invoked by out-of-state parties when they are harmed by wrongful conduct occurring in California.” Norwest Mortg., Inc. v. Superior Court, 72 Cal. App. 4th 214, 224–25 (Cal. Ct. App. 1999); see also Clothesrigger, Inc. v. GTE Corp., 191 Cal. App. 3d 605, 616 (Cal. Ct. App. 1987). In other words, California’s consumer-protection law, unlike the consumer-protection law in many other jurisdictions, is intended to police and deter improper conduct by California-based companies; it does not merely protect California’s own consumers. See, e.g., Tobacco II, 207 P.3d at 30 (citing Fletcher v. Sec. Pac. Nat’l Bank, 591 P.2d 51, 57–58 (Cal. 1979)).

The panel majority’s implicit resurrection of the old lex loci choice-of-law rule is particularly troubling because “California has specifically rejected the . . . ‘place of the wrong’ rule.” CRS Recovery, Inc. v. Laxton, 600 F.3d 1138, 1142 (9th Cir. 2010). The panel’s application of lex loci, then, was in error. Although Mazza recited the correct choice-of-law test under California law (the “governmental interest test”), it mistakenly superimposed its view of federal policy onto that test and elevated the interests of the states where the injury occurred over those of the state (California) from which the misconduct emanated.

Once the constitutional due process standards of Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), were met—as the majority correctly found they were, see Mazza, 666 F.3d at 590—the panel should have applied California’s choice-of-law rules exactly as those rules would have been applied by a California state court. From a constitutional perspective, applying California law would have posed no difficulty. Indeed, choice of law is flexible, not rigid; “a particular set of facts giving rise to litigation could justify, constitutionally, the application of more than one jurisdiction’s laws.” Phillips, 472 U.S. at 823. For this reason, “in many situations a state court [or federal court sitting in diversity] may be free to apply one of several choices of law.” Id.

Confusingly, the opinion in Mazza conflicts with the Ninth Circuit’s own authority regarding which choice-of-law principles apply when federal jurisdiction is premised on diversity. See Tanoh v. Dow Chem. Co., 561 F.3d 945, 952 (9th Cir. 2009); see also Carijano v. Occidental Petroleum Corp., 643 F.3d 1216, 1232–33 (9th Cir. 2011). Carijano is particularly instructive. In that case, the plaintiffs alleged that a California corporation had released hazardous waste in a Peruvian village. See id. at 1222. The events forming the basis for the suit occurred primarily in Peru, and almost all relevant evidence also was in Peru. See id. at 1222–23. The Ninth Circuit reversed the district court’s forum non conveniens dismissal, holding that California’s interests in the litigation were at least equal to Peru’s. See id. at 1229–34. The court explained that state choice-of-law rules apply in a federal court exercising diversity jurisdiction, even when the plaintiffs, the evidence, and the events forming the basis for the suit are all in another jurisdiction. In Tanoh and Carijano, as in Mazza, diversity jurisdiction was premised on the Class Action Fairness Act of 2005 (CAFA), Pub. L. No. 109-2, 119 Stat. 4 (2005), which is discussed in more detail below.

Whether California’s substantive law on this point represents a wise balancing of individual and corporate interests should have been irrelevant in Mazza. A federal court sitting in diversity should apply state substantive law, including choice of law, without incorporating federal policy considerations. See, e.g., Johnson, 635 F.3d at 420.

The Panel Majority Misinterpreted the Consumer-Protection Law
Another anomalous holding of Mazza was the panel’s conclusion that consumers cannot sustain a claim for fraudulent omission under the Consumer Legal Remedies Act, Cal. Civ. Code § 1750 et seq., unless the entire class of consumers could demonstrate that they saw particular, allegedly misleading, advertisements. As Judge Nelson explained in dissent, however, this rule, “devastating to consumers,” essentially eliminates an entire cause of action for omission-based fraud (because a consumer can never prove that he or she heard that which was never said). See Mazza, 666 F.3dat 598. Setting aside the wisdom of any particular policy choice, however, the problem is that the majority’s new rule directly conflicts with California’s settled substantive consumer-protection law: In an omissions case under California law, consumers must prove merely that particular material information was not communicated; they need not prove actual reliance. Engalla v. Permanente Med. Grp., Inc., 938 P.2d 903, 919 (Cal. 1997); Lovejoy v. AT&T Corp., 92 Cal. App. 4th 85, 97 (Cal. Ct. App. 2001); see also Tobacco II, 207 P.3d at 36 (“Defendants maintained . . . that [all] class member[s] must have standing to bring the action individually. . . . We reject these arguments.”); Mass. Mut. Life Ins. Co. v. Superior Court, 97 Cal. App. 4th 1282, 1292–93 (Cal. Ct. App. 2002) (“The fact a defendant may be able to defeat the showing of causation as to a few individual class members does not transform the common question into a multitude of individual ones. . . .”).

The plaintiffs in Mazza had alleged that Honda deceived consumers by failing to disclose that its sophisticated braking system does not actually function in inclement weather—in other words, this is a case that turned on what Honda did not say. Yet, the panel majority reasoned that the plaintiffs could not sustain this claim because some members of the proposed class may not have seen Honda’s advertising (its affirmative statements to consumers). See Mazza, 666 F.3d at 594–96; contra Massachusetts Mutual, 97 Cal. App. 4th at 1292–93; Stearns v. Ticketmaster Corp., 655 F.3d 1013, 1022 (9th Cir. 2011) (collecting cases for rule that a class may include individuals who were not exposed to material information); Hanon v. Dataproducts Corp., 976 F.2d 497, 509 (9th Cir. 1992) (“[T]he defense of non-reliance is not a basis for denial of class certification.”) (citing Blackie v. Barrack, 524 F.2d 891, 901 n.17 (9th Cir. 1975)).

There was also another problem implicit in the panel’s ruling. The majority essentially demanded that the class be defined to include only those who have been injured. The function of certification, however, is normally preclusive: to bind the members of an objectively defined class to the determinations of the common questions in the case, not to predetermine the outcome on the merits by guaranteeing that all in the class will prevail or recover on their claims. Fed. R. Civ. P. 23(c)(2)(B)(iii), (c)(3). As Judge Richard Posner has explained, “a class will often include persons who have not been injured by the defendant’s conduct; indeed this is almost inevitable. . . . Such a possibility or indeed inevitability does not preclude class certification. . . .” Kohen v. Pac. Inv. Mgmt. Co. LLC & PIMCO Funds, 571 F.3d 672, 677 (7th Cir. 2009). On the other hand, a class consisting of only those who have been injured is known as a “fail-safe” class:

one that is defined so that whether a person qualifies as a member depends on whether the person has a valid claim. Such a class definition is improper because a class member either wins or, by virtue of losing, is defined out of the class and is therefore not bound by the judgment.

Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 825 (7th Cir. 2012) (collecting cases).

CAFA Does Not Empower Federal Courts to Ignore State Law
In support of its authority to consider federal policy (rather than to simply apply state law), the panel majority relied on a post-enactment statement of purpose signed by some of the legislators who had supported CAFA. See Mazza, 666 F.3d at 593. The Ninth Circuit, however, previously dismissed that same statement as being of “minimal, if any, value”:

[Defendant] relies heavily on a Senate Committee report that was not printed until ten days after CAFA’s passage into law. See S. Rep. No. 109-14, at 79 (2005), reprinted in 2005 U.S.C.C.A.N. 3, 73; Abrego Abrego, 443 F.3d at 683. The Report is therefore of minimal, if any, value in discerning congressional intent, as it was not before the Senate at the time of CAFA’s enactment. See Blockbuster, Inc. v. Galeno, 472 F.3d 53, 57-58 (2d Cir. 2006) (specifically disclaiming reliance on S. Rep. No. 109-14).

Tanoh, 561 F.3d at 954 n.5 (9th Cir. 2009) (emphasis added).

CAFA is a procedural rule that merely extends diversity jurisdiction; it does not displace substantive state law. Indeed, the express purposes of CAFA is to

assure fair and prompt recoveries for class members with legitimate claims; restore the intent of the framers . . . by providing for Federal court consideration of interstate cases of national importance under diversity jurisdiction; and benefit society by encouraging innovation and lowering consumer prices. CAFA § 2, 119 Stat. at 5.

Tanoh, 561 F.3d at 952.

These express purposes do not authorize or mandate the remaking of state substantive law, including choice-of-law doctrine, when state law claims find themselves in federal court courtesy of CAFA. Presumably for this reason, other Ninth Circuit decisions have consistently applied California’s choice-of-law analysis precisely as it would be applied by California state courts, without subordinating preexisting federal law to post-legislative statements presumed to signal federal policy. See Masters v. DirecTV, Inc., No. 08-55825, 2009 U.S. App. LEXIS 25479, at *4 (9th Cir. Nov. 19, 2009) (unpublished) (“California has a materially greater interest than Montana or Georgia in the current dispute because California is home to the sole defendant and because the appellees assert claims under California law alone.”); CRS Recovery, 600 F.3d at 1142 (“California has specifically rejected the . . . ‘place of the wrong’ rule.”); see also Kaltwasser v. Cingular Wireless, LLC, No. 08-15962, 2009 U.S. App. LEXIS 21565, at *3 (9th Cir. Oct. 1, 2009) (unpublished); Pecover v. Elec. Arts Inc., No. 08-2820, 2010 U.S. Dist. LEXIS 140632, at *55–57 (N.D. Cal. Dec. 21, 2010); Parkinson v. Hyundai Motor Am., 258 F.R.D. 580, 598 (C.D. Cal. 2008); In re Pizza Time Theatre Sec. Litig., 112 F.R.D. 15, 20–21 (N.D. Cal. 1986).

In a stark departure from California’s—and its own—prior case law, Mazza side-stepped—and side-swiped—normally controlling California substantive law and substituted its own understanding of federal policy. But the majority’s opinion, rightly described by dissenting Judge Nelson as “devastating to consumers,” suffers from two significant legal departures: It runs roughshod over the states’ exclusive sovereignty to determine their own substantive law, and it directly contradicts Ninth Circuit precedent. Because of the novel approach to law in the decision, its precedential usefulness and legacy are uncertain.

Unfortunately, the ruling suggests a potential return of activist federal courts, such as those from the pre-Erie days of Swift v. Tyson, 41 U.S. 1 (1842), when federal courts thought of state common law as a “brooding omnipresence,” about which they could make their own judgments. CAFA was not intended to change state substantive law, nor to supplement either Phillips Petroleum or the states’ own rules in determining which state’s law to apply to a class action in federal court. Mazza is an outlier, and with jurisprudential luck or, more precisely, judicial adherence to established principles of federal diversity jurisdiction, it will remain so.

Keywords: litigation, class actions, derivative suits, choice of law, diversity jurisdiction, law of the place of injury, lex loci, Class Action Fairness Act

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