No strict liability on UCL "fraudulent" claims

Kowalsky v. Hewlett-Packard Co., — F. Supp. 2d —-, 2011 WL 1466136 (N.D. Cal.) The court reconsidered its earlier decision and dismissed this class action complaint. Kowalsky alleged that HP represented that its 8500 printer could scan and copy documents through its 50-sheet automatic document feeder at speeds of 34-35 pages per minute, but that it actually had a design defect rendering the feeder usable for only 2-3 sheets at a time. Kowalsky sued under the UCL, FAL, CLRA, and for breach of express warranty/breach of implied warranty of merchantability. The court initially dismissed the warranty claims, along with the FAL and portions of the UCL and CLRA claims, because Kowalsky hadn't plausibly alleged that HP knew, or should have known, of the alleged defect at the time that Plaintiff purchased his printer. However, it preserved Kowalsky's fraudulent and unlawful UCL claims and related CLRA claims because the UCL imposes strict liability. Now it reconsidered. It acknowledged that the UCL's fraudulent prong requires only a showing of likely consumer deception, not of fraud (and specifically not of knowledge of falsity); that the UCL's coverage is sweeping; and that the UCL imposes strict liability. HP argued, however, that strict liability had not been applied to product defect claims. Federal district courts in such cases "have generally required a plausible showing that the defendant knew of the alleged defect when it made the representations alleged to be deceptive." The court was persuaded by these cases (though it didn't explain those cases' reasoning). Moreover, the court agreed with HP's distinction of California cases explictly imposing strict liability: those cases involved defendants with "knowledge of the basic facts that rendered their statements misleading at the time the statements were made." For example, one case found that Honda ads might be misleading because they suggested that a driver could achieve a high gas mileage by driving the Civic Hybrid just as one would drive a conventional car. "In that case, Honda may not have intended to deceive consumers, and it may not have known that its advertisements would have a deceptive effect, but it knew that drivers could not achieve the gas mileage advertised without driving the Hybrid in a special manner." Likewise, in Williams v. Gerber Products Co., 552 F.3d 934 (9th Cir.2008),"while Gerber may not have intended to deceive consumers or known that its packaging would be misleading, it was aware of basic facts that rendered its advertisement deceptive–that its product did not contain the fruits depicted on the packaging." Thus, the UCL imposes strict liability only in that defendants aware of facts that render their misrepresentations misleading can be held liable regardless of their motivations or of their subjective assessment of whether their statements were deceptive. However, when a defendant lacked knowledge of the facts that rendered its representations misleading when made, the California Court of Appeal found that the "unwitting" and "unintentional" distribution of contaminated dog food did not constitute a deceptive practice under the fraudulent prong of the UCL. Klein v. Earth Elements, Inc., 59 Cal. App. 4th 965, 970, 69 Cal. Rptr. 2d 623 (Cal. Ct. App. 1997). In a footnote, the court described the "extraordinary" circumstances of Klein, wherein the defendant distributed pet food that was manufactured and tested for quality by a different corporation, the mold toxin that contaminated the pet food was difficult to detect because it was unevenly distributed in the grain, and the defendant took extensive measures to recall the contaminated pet food and reimburse consumers for any damages once it learned of the contamination, a fact on which the Klein court relied at least in part. Other courts have been unwilling to impose liability "in cases where the defendant was unaware of critical facts at the time that allegedly misleading or deceptive statements were made," such as when studies proving ineffectiveness were published after the defendant made the statements at issue. So, since the plaintiff didn't adequately allege that HP knew, or through the exercise of reasonable care should have known, of the printer defect at the time it marketed and advertised the printer's capabilities, HP "lacked awareness of the basic fact that allegedly rendered its representations about the printer misleading or deceptive" and thus the UCL claim under the fraudulent prong was not sufficiently well pleaded. However, plaintiff was granted leave to amend. (The court also noted that HP may have had a duty to correct its representations once it learned or should have learned of the alleged defect.) The CLRA claim fell for the same reasons. While a product defect may give rise to breach of warranty claims, a CLRA claim requires more, such as defendant's awareness of the defect. "[A] representation is not 'deceptive' under the UCL or the CLRA simply because an unanticipated product defect calls the prior representation into question." Comment: while I understand the impulse to cabin strict liability, I don't think this way of doing it is a good idea for the law, and if followed it will increase variability and unpredictability, compounded by Iqbal/Twombly issues. Consider the health claim "this supplement reduces the risks of heart disease." Suppose a defendant has bad studies or anecdotes that it (sincerely) believes justify the claim. But, in part because reasonable consumers expect a minimum level of substantiation, the claim is misleading. I have no hesitation saying there ought to be state-law liability in such a circumstance: the burden of being wrong is on the commercial seller. And perhaps we can work our way to that result for my supplement example under the present case's standards: a reasonable person would have assessed the evidence objectively and should have known that the claim wasn't substantiated. But then why can't the plaintiff here just plead that, given that the product was a mass market product made by a major corporation, a reasonable corporation would have tested the product for its conformance with explicit claims made and that therefore the defendant should have known of the falsity? And/or plead that implicit in the statement about the printer's capacity was the representation that HP, a major corporation with a lot more knowledge of the product than the consumer, had confirmed this capacity with reliable tests that, if done, would have disclosed the defect? The Klein case suggests that when there was nothing else the defendant could have done it should have a defense, but that's not the same as putting the burden of ignorance on the consumer. The deeper problem is that the court seems to be operating from a model of misleading claims (facially true claims that mislead consumers as to appropriate inferences, as with the Honda and Gerber cases), but there are also often questions of falsity. The printer either can process 50 sheets at a time, as claimed, or it can't. We may dispute the standards for certainty on these things, but at any given level of certainty there's likely to be an answer. And for that, California law has been pretty clear that strict liability attaches to falsity (with the Klein special circumstances exception). Under this new rule, it may be easier to impose liability for misleadingness than for falsity, which seems somewhat odd at best. And if courts start applying a knowledge standard to falsity itself, that will mark a big (and misguided) change in the law.

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