March 19, 2019 Articles

California’s Choice-of-Law Jurisprudence and Its Application to Internet Fraud

Tracking the genesis of California’s choice-of-law analysis, the current state of the law, and how that analysis ought to apply in the relatively new realm of e-commerce cases.

By Jonathan Udell

The ancient Roman author Publius Syrus once wrote, “Divide the fire, and you will the sooner put it out.” As all class-action practitioners know, strength comes in numbers: With few class members, the risks of litigation frequently outweigh the rewards of a potential recovery. Challenges to nationwide classes, therefore, often determine the fate of putative class actions.

The Development of California’s Choice-of-Law Analysis: Toward a Perfect Circle?

For the first half of the twentieth century, courts across America typically resolved conflicts of law through resort to territorial rules. See Peter Hay et al., Conflict of Laws 18–24 (5th ed. 2010). Then, starting in the 1950s, California courts spearheaded what commentators refer to as a “judicial revolution” that shunned the formal application of territorial rules in favor of a “policy-oriented approach[ ] that consider[s] a variety of factors.” Michael H. Hoffheimer, “California’s Territorial Turn in Choice of Law,” 67 Rutgers U. L. Rev. 167, 167 (2015). 

The revolution commenced with People v. One 1953 Ford Victoria, 311 P.2d 480, 482–83 (Cal. 1957), which involved a car seizure following a marijuana-trafficking arrest. After the seizure, a corporation holding a mortgage on the car asserted its ownership interest, but California contended that the entity had not satisfied its duty to investigate the car owner’s “moral responsibility, character and reputation,” as required by California law. Because Texas law imposed no such obligation and the car owner bought the car in Texas, California’s courts faced a conflict of law. The trial court first ruled that because the mortgage agreement occurred in Texas, the law of Texas applied. California’s Supreme Court affirmed but for more complex reasons. The court based its holding on the premise that Texan financiers “cannot reasonably be expected to familiarize [themselves] with . . . the statutes of the forty-eight or more jurisdictions into which the automobile could possibly be taken without his consent and in violation of express contractual prohibitions.” Thus, instead of formalistically applying an ironclad territorial rule, the court examined practical considerations and legislative policy goals. That trend continued in Bernkrant v. Fowler, 55 Cal. 2d 588 (Cal. 1961), where the court resolved a conflict by looking to the expectations of the parties and the policies motivating the laws at issue. In both cases, although the geographic location of the parties and transactions affected the court’s opinion, the crux of the opinion’s reasoning concerned policy considerations and the parties’ expectations.

The slow march away from formalism continued in the late 1960s and early 1970s, as the court used its policy-oriented approach to resolve false conflicts of law, where only one state possessed an interest in having its law applied. For example, Reich v. Purcell, 432 P.2d 727 (Cal. 1967), involved a car accident where two Ohio residents died on their way to California as they passed through Missouri. At issue was whether a Missouri law limiting wrongful-death damages applied to the dispute. (Neither Ohio nor California limited damages.) Clearly, Missouri represented the “place of the wrong,” as the court stated. The court further recognized that “[f]or many years courts applied the law of the place of the wrong in tort actions regardless of the issues before the court.” The defendant argued that doing so “promotes uniformity of decisions, prevents forum shopping, and avoids the uncertainties that may result from ad hoc searches for a more appropriate law. . . .” Nevertheless, the Reich court (1) “conclude[d] that the law of the place of the wrong is not necessarily the applicable law for all tort actions,” (2) overruled any cases to the contrary, and (3) held that Ohio law applied, where the plaintiffs were domiciled and their estates were administered, because although Missouri had the “predominant interest” in regulating conduct within its borders, “[l]imitations of damages for wrongful death . . . have little or nothing to do with conduct,” and none of the parties lived in Missouri. Then, seven years later, the court decided another false-conflicts case in Hurtado v. Superior Court, 522 P.2d 666 (Cal. 1974), where it held that California law determined the measure of damages arising from a car accident that occurred in California, not because California was the place of the wrong but because Mexico—“the domicile and residence of both plaintiffs and their decedent”—had no interest in limiting the damages imposed on an American citizen.

Finally, in 1976, the court adopted the comparative-impairment test for true conflicts, bringing its policy-oriented “judicial revolution” to a culmination. In Bernhard v. Harrah’s Club, 546 P.2d 719 (Cal. 1976), a gambling and drinking club in Nevada sought the business of California residents, and eventually a California resident drank heavily at the club, drove back to California, and killed another California resident while in California. The trial court ruled that a Nevada statute, which immunized tavern keepers from tort liability to third parties who suffered harm from an intoxicated patron, shielded the defendant from liability. On appeal, the California Supreme Court reversed. The case presented a true conflict, per the court, because Nevada had an interest in protecting its tavern keepers from liability, and California had an interest in protecting the general public from injuries resulting from excessive drinking. To resolve the conflict, the court adopted the “comparative impairment” approach, which “seeks to determine which state’s interest would be more impaired if its policy were subordinated” to that of another state. Rather than assessing the wisdom of the states’ competing policies, the court considered the appropriate scope of those policies.

Having settled on a conflict-of-law rule, the court turned its attention to comparing the laws and policies at issue. First, the court noted that although “Nevada does not impose . . . [c]ivil liability on its tavern keepers, nevertheless they are subject to [c]riminal penalties under a statute making it unlawful to sell or give intoxicating liquor to any person who is drunk or known to be an habitual drunkard.” Then, it stated that the defendant solicited business from California, thus “put[ting] itself at the heart of California’s regulatory interest. . . .” Meanwhile, California could not “reasonably effectuate its policy” of public safety if out-of-state defendants could “regularly and purposely sell intoxicating beverages to California residents . . . under conditions in which it is reasonably certain the[ ] residents will return to California” while intoxicated. Accordingly, because applying California law would not “impose an entirely new duty” on Nevada businesses, and imposing liability only on establishments that solicit California business would not significantly impair “Nevada’s interest in protecting its tavern keepers from civil liability of a boundless . . . nature,” the court opted to apply the California rule of law.

In two later cases, the California Supreme Court offered further instruction on how the comparative-impairment tests functions in situations presenting a true conflict. First, in Offshore Rental Co., Inc. v. Continental Oil Co., 583 P.2d 721 (Cal. 1978), the court determined that Louisiana had a greater interest in applying its law forbidding corporations from recovering for an executive’s personal injuries than California possessed in having its contrary law applied. In reaching its conclusion, the court noted the importance of considering whether a minority rule is “attenuated and anachronistic and [should be] limited to domestic occurrences. . . .” Moreover, the court stated that a “chief criterion in the comparative impairment analysis is the ‘maximum attainment of underlying purposes by all governmental entities [and that] necessitates identifying the focal point of concern of the contending lawmaking groups and ascertaining the [c]omparative pertinence of that concern to the immediate case.” Additionally, “the policy underlying a statute may also be less ‘comparatively pertinent’ if the same policy may easily be satisfied by some means other than enforcement of the statute itself.” Therefore, because California’s rule was in the minority and the plaintiff could have been compensated through insurance, the court applied the Louisiana rule of law. Later, in 2006, the court held that a California statute—prohibiting firms from recording long-distance phone calls with Californians who have not provided consent—extended to a Georgia-based operation because although both states had an interest in applying their laws, California’s legislature and courts fiercely protected privacy rights, which demonstrated the state’s strong interest in applying its privacy statute.

Recent California and Ninth Circuit Cases

In recent years, California’s Supreme Court and, to an even greater extent, the Ninth Circuit have effectively resorted to territorial analyses, but interestingly, they conduct their analysis under the auspices of the comparative-interest approach and have not overruled any earlier cases.

The territorial turn commenced with the 2010 case McCann v. Foster Wheeler LLC. In McCann, the court held that Oklahoma’s statute of limitations barred the claims of a California resident who became ill in California after his exposure to asbestos decades earlier in Oklahoma, when the plaintiff observed the installation of a boiler that was manufactured by a defendant who was headquartered in New York. The trial court decided that Oklahoma law governed the dispute because the plaintiff was in Oklahoma when his injury occurred, but the court of appeals reversed. It reasoned that Oklahoma lacked a real interest in applying its law, which served to “provid[e] for a measure of security for building professionals,” because the defendant was not an Oklahoman, and the defendant’s design and manufacturing occurred outside of Oklahoma. California’s Supreme Court overturned the court of appeals, finding that Oklahoma had a strong interest in incentivizing non-resident enterprises to conduct business in Oklahoma. In rejecting the possibility that a potential plaintiff’s subsequent move to another state ought to affect courts’ analysis, the supreme court concluded that “subjecting . . . a defendant to a different rule of law based upon the law of a state to which a potential plaintiff ultimately may move would significantly undermine Oklahoma’s interest in establishing a reliable rule of law governing a business’s potential liability for conduct undertaken in Oklahoma.” Consequently, the court held that Oklahoma’s interest in attracting non-resident business exceeded California’s interest in securing just compensation for a long-time resident who suffered injury in Oklahoma.

The movement picked up steam the next year in Sullivan v. Oracle Corp. (2011). The Sullivan court held that California’s overtime law applied to out-of-state laborers who worked in California, but that California law did not apply to California corporations while they operated outside of California. Addressing the first issue, the court reasoned that California’s law furthers strong state policies and that not applying the law to out-of-state workers would frustrate those policies by encouraging companies to import workers from other states. Consequently, California had a strong interest in applying its law to all people who worked within its borders and California law applied. Turning to the second question, the court found that the plaintiffs’ legal claims implicated the “so-called presumption against extraterritorial application.” Namely, because the language and legislative history of California’s Unfair Competition Law (UCL) did not indicate that the UCL have extraterritorial application, it lacks force “with respect to occurrences outside the state.” Although the defendant’s decision-making process regarding employee classification occurred in California, the court concluded that the decision to misclassify workers was not at issue, but rather the failure to pay workers what they were due. Because it was unclear where the defendant paid the workers, the court did not expressly answer the latter question. Nevertheless, for the second time in a row, California’s Supreme Court resolved its choice-of-law analysis by strongly considering the place of wrong/injury.

In Mazza v. American Honda Motor Co., the Ninth Circuit applied McCann and Sullivan to nationwide consumer-fraud class actions relying on California law, and cemented an ironclad territorial rule into federal jurisprudence. The court concluded that consumer-protection laws across the country differ materially and that each state possessed an overwhelming interest in having its law applied to transactions within its borders, as the states carefully balanced pro-consumer and pro-business development policies. Interestingly, the court supported its conclusion by reading McCann as defining the “place of the wrong” as “the state where the last event necessary to make the actor liable occurred,” a verbatim quote from the first Restatement that McCann never used.

Accordingly, California’s jurisprudence appears to have traced a perfect circle. Prior to the 1950s, the place of the wrong always defined the choice of law, as called for by the first Restatement. Then in the 1960s–70s, the California Supreme Court expressly rejected the overriding importance of the place of the wrong, holding “the law of the place of the wrong is not necessarily the applicable law. . . .” Now, though, at least in federal courts, the law of the place of the wrong is once again applicable without question.

Application of the Governmental Interest Analysis to Consumer Fraud on the Internet

To more closely examine the present state of law, let’s take a look at how it might apply to the following set of facts. A consumer located in Arizona goes online to purchase an “all-natural” food product from ABC Inc., a California corporation that manufactures its products in California and makes its advertising decisions in California. Upon receiving the product, the consumer grows suspicious, has the product tested, and realizes that it contains artificial ingredients. Consequently, the consumer files a class action in federal court in California, alleging violations of California’s consumer-protection laws. The evidence is mixed as to whether the consumer had reason to believe that the product contained artificial ingredients prior to his purchase.

Subsequently, the defendant moves to dismiss the California claims on the grounds that Arizona’s consumer-fraud act ought to apply to the dispute because the consumer purchased his product in Arizona. First, in line with well-established precedent, the court will determine whether the laws at issue have meaningful differences. Likely, the court will find a meaningful difference because under California law, a plaintiff merely needs to show that advertising will deceive a reasonable consumer, while some Arizona precedent suggests that its consumer-fraud act requires actual deception on the part of the consumer bringing the case. Therefore, the court will likely move to the next steps, identifying each state’s interests in having its law applied.

In a typical brick-and-mortar fact pattern, where a consumer walks into a physical store and purchases a product, the following steps would be straightforward in federal court. The court would determine that although California has an interest in regulating conduct that occurs within its borders, Arizona has a greater interest because that is where the sale occurred, and the state has a predominant interest in protecting its consumers and luring businesses into its state. Therefore, Arizona law would apply to the dispute.

In the context of purely online sales, however, the outcome remains unclear. After all, if a defendant operates no stores in Arizona, the consumer could make a strong argument for the application of California law. First, the consumer may argue that “the place of the wrong” is unclear. Although the consumer was located in Arizona, the product was—to some extent—purchased in California, where the server hosting the website is located. That argument finds support from courts in other jurisdictions that have held in slightly different contexts that when “tortious conduct occurs over an Internet website, ‘the situs of this tort is considered to be where the website or servers which maintain the website, are located.’” Emory Grp. LLC v. ID Solutions, LLC, 2014 WL 1415021, at *3 (N.D. Ga. Apr. 10, 2014) (quoting Gucci Am., Inc. v. Frontline Processing Corp., 721 F. Supp. 2d 228, 241 (S.D.N.Y. 2010)); see also Eurotech, Inc. v. Cosmos European Travels Aktiengesellschaft, 189 F. Supp. 2d 385, 390 n.6 (E.D. Va. 2002) (stating, in tortious interference action involving a website, that the location of the server was relevant to determining the place of the wrong).

By thus minimizing the place of the wrong, the consumer could turn his argument to the traditional late twentieth-century approach of the California courts. The consumer can then argue that a narrowly tailored rule applying California law to purely web-based transactions wouldn’t impinge on another state’s interest in attracting brick-and-mortar businesses because transactions at such locations would be immune from the rule. Further, applying California law would not frustrate Arizona’s interest in protecting its consumers because California’s law is more consumer-friendly. Thus, although the consumer lives in Arizona, he can strongly argue that Arizona has a minimal interest in seeing its law applied to a dispute with a California defendant. Consequently, a court could reasonably conclude that California’s interest exceeds that of Arizona’s, although this approach has not been tried in court.

Conclusion

California’s choice-of-law analysis has lurched, over the past 70 years, from formalistically focusing on the place of the wrong, to adopting a flexible policy-oriented approach, back to formalistic place-of-the-wrong approach, at least in federal courts. For many cases, the current state of the law therefore precludes nationwide class actions. However, in today’s web-driven economy, there may remain opportunities to certify nationwide classes under California law for defendants who do not operate brick-and-mortar retail stores.

Jonathan Udell is an attorney at Rose Law Group pc in Scottsdale, Arizona, and cochairs the Section of Litigation’s Consumer Litigation Committee’s Marketing & Advertising Subcommittee.  


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