BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
SB 1188 (Jackson)
As Amended April 9, 2014
Hearing Date: May 6, 2014
Fiscal: No
Urgency: No
TH
SUBJECT
Consumer Legal Remedies Act: Facts
DESCRIPTION
Existing law, the Consumer Legal Remedies Act (CLRA), renders
unlawful specified acts identified as unfair methods of
competition or unfair or deceptive acts or practices.
California courts have construed the Act to encompass fraudulent
omissions by those who are obliged to disclose material facts.
This bill would codify that, under the CLRA, fraud or deceit may
consist of the suppression or omission of a material fact by one
who is bound to disclose it or who gives information of other
facts that are likely to mislead for want of communication of
that fact. This bill would specify that a fact is material if a
reasonable person would attach importance to its existence or
nonexistence in determining a choice of action in a transaction,
and that materiality is not limited to circumstances in which a
product poses a threat to health or safety.
BACKGROUND
The Consumer Legal Remedies Act (CLRA) is a consumer protection
statute intended "to protect consumers against unfair and
deceptive business practices and to provide efficient and
economical procedures to secure such protection." (Civ. Code
Sec. 1760.) Among other things, it prohibits merchants from
representing that goods have "characteristics, ingredients,
uses, benefits, or quantities which they do not have," or
representing that goods "are of a particular standard, quality,
(more)
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or grade" when they are of another. (Civ. Code Sec. 1770.)
Consumers who are harmed by unlawful practices specified in the
Act have a right of action under the CLRA to recover damages and
other remedies.
Passed by the Legislature in 1970, the CLRA is intended to be
"liberally construed" by the courts and "applied to promote its
underlying purposes." (Civ. Code Sec. 1760.) Courts have,
until recently, allowed plaintiffs to bring CLRA claims based on
allegations that a merchant fraudulently omitted to disclose a
material fact in the course of a transaction, such as failing to
disclose information about a product's known defects. However,
following the decision in Daugherty v. American Honda Motor Co.,
Inc. (Cal.App.2d Dist. 2006), 144 Cal.App.4th 824, by a
California Appellate Court, both federal and state courts are
divided over whether claims can be brought under the CLRA for
fraudulent omissions not involving threats to health and
safety.<1> This disagreement among the courts creates a
situation where a court might find that the CLRA does not
protect consumers from certain fraudulent business practices
except in a narrow range of cases involving threats to health or
safety. Consequently, manufacturers may potentially escape
liability for concealing known product defects so long as the
defect does not pose a safety risk to consumers.
To address the split in opinion among the courts, this bill
would clarify that fraudulent omission claims under the CLRA are
not limited to cases involving threats to health or safety.
CHANGES TO EXISTING LAW
Existing law , the Consumer Legal Remedies Act (CLRA), prohibits
unfair methods of competition, acts or practices by any person
which either results in or is intended to result in the sale or
lease of goods or services to any consumer. (Civ. Code Sec.
1770.)
---------------------------
<1> Compare, for example, Smith v. Ford Motor Co., 749
F.Supp.2d 980, 987 (N.D.Cal. 2010) [to be actionable under CLRA,
fraudulent omissions "must pose safety concerns"] with
Chamberlan v. Ford Motor Co., 369 F.Supp.2d 1138 (N.D.Cal. 2005)
[upholding CLRA claim alleging fraudulent omission not involving
risk to health or safety] and Tait v. BSH Home Appliances Corp.,
289 F.R.D. 466 (C.D.Cal. 2012) [rejecting the argument that CLRA
claims must involve threats to health or safety].
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Existing law enumerates several methods of unfair competition,
acts, or practices, including:
representing that goods or services have sponsorship,
approval, characteristics, ingredients, uses, benefits, or
quantities which they do not have; and
representing that goods or services are of a particular
standard, quality, or grade, or that goods are of a particular
style or model, if they are of another. (Civ. Code Sec.
1770.)
Existing law provides that any consumer who suffers damage as a
result of a practice declared to be unlawful under the CLRA may
bring an action against that person to recover damages, as
specified. Existing law allows for a class action suit to be
filed on behalf of a class of consumers adversely affected by an
unfair method of competition, act, or practice. (Civ. Code
Secs. 1780, 1781.)
Existing Law provides that the CLRA shall be liberally construed
and applied to promote its underlying purposes, which are to
protect consumers against unfair and deceptive business
practices and to provide efficient and economical procedures to
secure such protection. (Civ. Code Sec. 1760.)
This bill would specify that, under the CLRA, fraud or deceit
may consist of the suppression or omission of a material fact by
one who is bound to disclose it or who gives information of
other facts that are likely to mislead for want of communication
of that fact.
This bill would specify that a fact is material if a reasonable
person would attach importance to its existence or nonexistence
in determining a choice of action in the transaction in
question.
This bill would further specify that materiality is not limited
to circumstances in which a product poses a threat to health or
safety.
COMMENT
1.Stated need for the bill
The author writes:
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The Legislature passed the Consumer Legal Remedies Act (CLRA)
in 1970. The Act prohibits sellers from making fraudulent
claims about their goods and services, or from fraudulently
withholding (omitting) information about goods and services
from California consumers. From the consumer standpoint, the
CLRA is one of the most important consumer protection
statutes. It was designed to prevent unfair and deceptive
business practices from taking hold in the marketplace.
Over the past eight years, a disagreement has developed among
courts as to whether CLRA claims alleging fraudulent omissions
are limited to matters involving safety hazards. As a
consequence, consumers may be unable to rely on the CLRA to
protect them from certain fraudulent business practices not
involving safety risks. Without clarification of the CLRA
from the Legislature, manufacturers can potentially escape
liability for concealing known product defects so long as the
defect does not pose a safety risk to consumers.
This bill would clarify that CLRA fraudulent omission claims
are not limited solely to matters involving health and safety
hazards, but rather include all cases where a merchant
violates the Act by fraudulently failing to disclose a
material fact. This clarification would ensure that the CLRA
continues to broadly protect California consumers from
deceptive business practices.
2.Consumer Protection
The Legislature has long considered consumer protection to be a
matter of high importance. State law is replete with statutes
aimed at protecting California consumers from unfair, dishonest,
or harmful market practices. For example, California's Unfair
Practices Act has protected California consumers from "unlawful,
unfair or fraudulent business act[s] or practice[s]" for over 70
years. (Bus. & Prof. Code Sec. 17200.) The CLRA, similarly,
was enacted "to protect the statute's beneficiaries from
deceptive and unfair business practices," and to provide
aggrieved consumers with "strong remedial provisions for
violations of the statute." (Am. Online, Inc. v. Superior Court
(2001) 90 Cal.App.4th 1, 11.)
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This bill would further California's longstanding public policy
of protecting consumers from unscrupulous behavior in the
marketplace. As noted above, both federal and state courts are
in disagreement over whether the CLRA provides a remedy to
consumers who are misled by a merchant's fraudulent omissions.
This confusion leaves open the possibility that a California
consumer harmed by deceptive business practices might be left
without recourse in certain situations, particularly those
involving fraudulent omissions not related to health or safety.
To put the issue in perspective, consider a consumer who
purchases a mobile telephone with a two-year service contract
from a merchant that knows the telephone will likely last only
one year due to a design defect, yet fails to disclose that
fact, even though the merchant has full knowledge the consumer
expects the product to function for the life of the contract.
According to one line of CLRA cases, this consumer would be
without a remedy unless they could show that the merchant's act
of concealing the defect somehow related to health or safety.
This bill would bring certainty back to CLRA jurisprudence by
clarifying that an action based on the fraudulent omission of a
material fact may be maintained irrespective of whether or not
it involves a threat to health and safety. Writing in support,
the California Alliance for Retired Americans (CARA) states:
The CLRA is one of the few laws that can help consumers harmed
by such fraudulent practices. SB 1188 is necessary to
maintain consumer rights to hold businesses accountable when
they defraud customers. The seniors who CARA represents are
often the victims of these fraudulent practices, and need the
protections that SB 1188 offers. Without them, merchants in
all but the most dangerous cases will be able with impunity to
sell products they know are faulty.
From a policy standpoint, the clarification brought about by
this bill will help ensure that the CLRA continues to be a
strong consumer protection statute in all cases, not just the
most egregious where life and limb are put at risk.
3.CLRA Applies to Fraudulent Omissions
While the CLRA typically applies to false or misleading
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affirmative statements, such as purposefully inaccurate product
advertising, California courts recognized shortly after its
passage that fraudulent omissions also fall within the scope of
the Act. In Outboard Marine Corp. v. Superior Court, a
California appellate court explained the connection between
fraudulent omissions and affirmative misrepresentations,
stating:
It is fundamental that every affirmative misrepresentation of
fact works a concealment of the true fact. . . . Where failure
to disclose a material fact is calculated to induce a false
belief, the distinction between concealment and affirmative
misrepresentation is tenuous. Both are fraudulent. An active
concealment has the same force and effect as a representation
which is positive in form. (Outboard Marine Corp. v. Superior
Court (Cal.App.3d Dist. 1975) 52 Cal.App.3d 30, 37.)
With this connection firmly drawn, the court in Outboard Marine
held that, under the CLRA, actionable "[f]raud or deceit may
consist of the suppression of a fact by one who is bound to
disclose it or who gives information of other facts which are
likely to mislead for want of communication of that fact."
(Id.) (See also Civ. Code Sec. 1710.)
This bill would codify the court's holding in Outboard Marine,
specifying that under the CLRA, fraud or deceit may consist of
the suppression or omission of a material fact by one who is
bound to disclose it or who gives information of other facts
that are likely to mislead for want of communication of that
fact.
4.CLRA Imposes a Duty to Disclose "Material" Facts
Under California law, a party is duty bound to disclose
information to another in a commercial context when: "(1) []
the defendant is in a fiduciary relationship with the plaintiff;
(2) [] the defendant had exclusive knowledge of material facts
not known to the plaintiff; (3) [] the defendant actively
conceals a material fact from the plaintiff; and (4) [] the
defendant makes partial representations but also suppresses some
material facts." (Heliotis v. Schuman (Cal.App.1st Dist. 1986)
181 Cal.App.3d 646, 651.) In the context of consumer
transactions, California courts have long held that individuals
who fail to disclose information, which they are duty bound to
disclose, exposes them to liability under the CLRA, so long as
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the information withheld was "material." (See Collins v.
eMachines, Inc. (Cal.App.3d Dist. 2011) 202 Cal.App.4th 249,
256; Khan v. Shiley (Cal.App.4th Dist. 1990) 217 Cal.App.3d 848,
858 ["a manufacturer of a product may be liable for fraud when
it conceals material product information from potential users.
This is true whether the product is a mechanical heart valve or
frozen yogurt."].) According to the California Supreme Court,
under the CLRA "[a] misrepresentation is judged to be material
if a reasonable man would attach importance to its existence or
nonexistence in determining his choice of action in the
transaction in question." (In re Tobacco II Cases (Cal. 2009)
46 Cal.4th 298, 327.)
This bill would codify the Supreme Court's holding in In re
Tobacco II Cases, specifying that under the CLRA, a fact is
material if a reasonable person would attach importance to its
existence or nonexistence in determining a choice of action in
the transaction in question.
5."Materiality" Under the CLRA
As noted in Comment 4, California law imposes a duty on
commercial actors to disclose information to another party when,
for example, a merchant has exclusive knowledge of material
facts not known to another, when a merchant actively conceals a
material fact from a customer, and when a merchant makes partial
representations but also suppresses some material facts.
Despite this broad duty to disclose material facts, some courts
have held that, for purposes of the CLRA, parties are not under
a duty to disclose material facts unless they relate to a health
or safety risk.<2> According to the Consumer Attorneys of
California:
Federal courts have eroded California law by requiring a
showing of a safety defect in order to bring a claim for fraud
under the CLRA. This recent and disturbing trend not only
--------------------------
<2> See e.g. Wilson v. Hewlett-Packard Co. (9th Cir. Cal. 2012)
668 F.3d 1136, 1141 ["California courts have generally rejected
a broad obligation to disclose" except when "physical injury or
any safety concerns [are] posed by [a] defect"]; but see Tait v.
BSH Home Appliances Corp. (C.D. Cal. 2012) 289 F.R.D. 466, 488
[California law "itself says nothing about a general rule
rejecting a broad obligation to disclose under the CLRA, and the
Ninth Circuit [in Wilson] cited no California case reaching this
holding."].
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eviscerates the original intent of the CLRA, but also gives
companies the ability to lie and conceal known defects in
their products. As a consequence, consumers may be unable to
rely on the CLRA to protect them from certain fraudulent
business practices not involving risks to health and safety.
In line with California's public policy of providing California
residents with strong consumer protections, this bill would
provide that materiality under the CLRA is not limited to
circumstances in which a product poses a threat to health or
safety.
6.Warranty Law Distinguished
Several entities in opposition argue that this bill would
unfairly expose merchants to tort liability after the expiration
of a product's express warranty. According to the California
Chamber of Commerce:
This definition will significantly expand product defect
litigation, especially class actions, as any alleged product
defect will be deemed "material" once it has occurred, and the
buyer will undoubtedly claim knowledge of this defect would
have impacted the decision to purchase. Such an expansion of
liability would render warranties absolutely meaningless, as
all manufacturers and sellers would have to ensure the
everlasting lifetime of a product.
Staff notes that this point of objection improperly conflates
contract and tort law. The law governing express warranties,
which sounds in contract, permits the formation of "a
contractual promise from the seller that the goods [will]
conform to the promise. If they do not, the buyer is entitled
to recover the difference between the value of the goods
accepted by the buyer and the value of the goods had they been
as warranted." Daugherty v. American Honda Motor Co., Inc.
(Cal.App.2d Dist. 2006) 144 Cal. App. 4th 824, 830.) California
warranty law permits a seller "to limit its liability for
defective goods by disclaiming or modifying a warranty,"
including specifying set time limits on the duration of express
warranties. (Krieger v. Nick Alexander Imports, Inc.
(Cal.App.2d Dist. 1991), 234 Cal.App.3d 205, 213.)
In contrast, consumer protection statutes like the CLRA sound in
tort. These statutes seek not to enforce contractual
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arrangements between parties, but to provide remedies to
"personal wrongs" committed by tortfeasors, which in the case of
the CLRA would be a seller who engages in specified deceptive
business practices. Unlike warranties, protection from tortious
conduct cannot be disclaimed by the parties. (See Civ. Code
Sec. 1751 ["Any waiver by a consumer of the provisions of this
title [the CLRA] is contrary to public policy and shall be
unenforceable and void."].) Indeed, in a landmark decision by
Justice Traynor, the California Supreme Court noted that "rules
defining and governing warranties that were developed to meet
the needs of commercial transactions cannot properly be invoked
to govern the manufacturer's liability to those injured by its
defective products unless those rules also serve the purposes
for which such liability is imposed." (Seely v. White Motor Co.
(Cal. 1965) 63 Cal.2d 9, 16.) As a result, it appears difficult
to argue that manufacturers' express warranties are intended to
protect consumers from deceptive business practices, and that
the terms of those warranties ought to govern the full reach of
a manufacturer's potential liability for defective products.
Staff also notes that it is unlikely any court would interpret
this bill as imposing a lifetime guarantee obligation on product
manufacturers. As with other claims advanced under the CLRA, a
claim based on an alleged fraudulent omission would have to be
evaluated from the standpoint of a "reasonable consumer."
(Williams v. Gerber Prods. Co. (9th Cir. Cal. 2008) 552 F.3d
934, 938 [CLRA "governed by the "reasonable consumer" test].)
It would be patently unreasonable to conclude that the
reasonable consumer would believe all manufactured products
would last forever.
Support : California Advocates for Nursing Home Reform;
California Alliance for Retired Americans; California Conference
Board of the Amalgamated Transit Union; California Conference of
Machinists; California Public Interest Research Group;
California Rural Legal Assistance Foundation; California
Teamsters Public Affairs Council; Congress of California
Seniors; Consumer Watchdog; Consumers for Auto Reliability and
Safety; Consumers Union; Engineers and Scientists of California,
IFPTE Local 20, AFL-CIO; International Longshore and Warehouse
Union; Professional and Technical Engineers, IFPTE Local 21,
AFL-CIO; Unite Here, AFL-CIO; Utility Reform Network; Utility
Workers Union of America, Local 132
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Opposition : American Insurance Association; American
International Group; Association of California Insurance
Companies; California Automotive Business Coalition; California
Building Industry Association; California Citizens Against
Lawsuit Abuse; California Chamber of Commerce; California
Grocers Association; California Manufacturers and Technology
Association; California Pool and Spa Association; California
Retailers Association; Civil Justice Association of California;
International Franchise Association; National Federation of
Independent Businesses; Personal Insurance Federation of
California; Tech America
HISTORY
Source : Consumer Attorneys of California; Consumer Federation
of California
Related Pending Legislation : None Known
Prior Legislation :
AB 1108 (Nielsen, 2011) would have revised the Consumer Legal
Remedies Act to require a court to award court costs and
attorney's fees to the prevailing party in an action. This bill
died in the Assembly Committee on Judiciary.
AB 292 (Hayes, Ch. 1550, Stats. 1970) enacted the Consumer Legal
Remedies Act, which authorizes a consumer who suffers damage
from the use of specified unfair methods of competition and
unfair or deceptive acts to bring an action to recover damages
or other relief.
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