July 06, 2018 Practice Points

Recent Ninth Circuit Decision Highlights Uncertainty Regarding the Duty to Disclose a Product Defect under California Law

By the CADS Emerging Issues Subcommittee

In Hodsdon v. Mars, Inc., No. 16-15444, 2018 WL 2473486 (9th Cir. June 4, 2018), the Ninth Circuit affirmed dismissal of a putative class action that was based on the defendant’s failure to disclose that its chocolate products may have been produced using slave labor. The court held that, “[i]n the absence of any affirmative misrepresentations by the manufacturer, we hold that the manufacturers do not have a duty to disclose the labor practices in question, even though they are reprehensible, because they are not physical defects that affect the central function of the chocolate products.” Id. at *1. The court’s discussion of when California law imposes a duty of disclosure for a product defect highlights a key area of potential uncertainty that may affect many consumer class actions.

The leading Ninth Circuit case in this area is Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1141 (9th Cir. 2012), which held that, absent a material misrepresentation, a defendant’s disclosure obligation is limited to situations where a product defect presents a known safety issue. But there are California appellate decisions that arguably can be read to require disclosure even in the absence of a safety issue.

The plaintiff in Hodsdon relied on Collins v. eMachines, Inc., 202 Cal. App. 4th 249 (2011), and Rutledge v. Hewlett-Packard Co., 238 Cal. App. 4th 1164 (2015), both of which found a duty of disclosure in the absence of a safety issue. The alleged defect in Collins was an issue that could cause critical data corruption on the hard drive of a computer. 202 Cal. App. 4th at 256. In Rutledge, the alleged defect could cause the laptop monitor to go blank, rendering the computer unusable. 238 Cal. App. 4th at 1176.

According to the Ninth Circuit, the basis for these decisions was not entirely clear, but both still required a “physical defect [that] was central to the product’s function.” Hodsdon, 2018 WL 2473486 at **5–6. The court reasoned that, even if Collins and Rutledge correctly stated California law, Hodsdon’s allegations did not state a claim because “the alleged lack of disclosure about the existence of slave labor in the supply chain is not a physical defect at all, much less one related to the chocolate’s function as chocolate.” Id. at *5. In other words, in a “pure omissions case concerning no physical product defect relating to the central function of the chocolate and no safety defect, Plaintiff has not sufficiently pleaded that Mars had a duty to disclose on its labels the labor issues in its supply chain.” Id. at *6.

The Hodsdon court declined to address the continuing vitality of Wilson, saving that decision for another day. The court noted that Wilson, Collins, and Rutledge might be reconciled because “Wilson may still apply where the defect in question does not go to the central functionality of the product, but still creates a safety hazard.” Hodsdon, 2018 WL 2473486 at *6. But courts are sure to face the question of how to square these cases, as well as what constitutes a “physical product defect relating to the central function” of a product under Collins and Rutledge.

 

Members of the Class Actions and Derivative Suits Emerging Issues subcommittee contributed to this Practice Point.

CADS Emerging Issues Subcommittee – July 6, 2018