BILL ANALYSIS �
SB 1188
Page 1
Date of Hearing: June 24, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 1188 (Jackson) - As Amended: May 20, 2014
SENATE VOTE : 21-14
SUBJECT : CONSUMER LEGAL REMEDIES ACT: FRAUD AND DECEIT
KEY ISSUE : SHOULD FRAUD BE UNLAWFUL UNDER THE CONSUMER LEGAL
REMEDIES ACT WHEN A BUSINESS SUPPRESSES OR OMITS 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 WITHOUT REGARD TO WHETHER THE PRODUCT POSES A
THREAT TO HEALTH OR SAFETY?
SYNOPSIS
This measure would amend the Consumer Legal Remedies Act (CLRA)
to make clear that actionable fraud may consist of the
suppression or omission of a material fact. The bill also
specifies 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. The author and supporters
argue that the bill is a needed response to a line of recent
federal court decisions that have misinterpreted and unduly
constrained the CLRA by holding that it does not protect
consumers from fraudulent business practices except in a narrow
range of cases involving threats to health or safety. Without
clarification of the CLRA from the Legislature, supporters
contend, manufacturers can potentially escape liability for
concealing known product defects so long as the defect does not
pose a safety risk to consumers. Opponents made up of various
business associations argue that the bill represents a
substantial and worrisome expansion of liability that will lead
to unwarranted law suits.
SUMMARY : Clarifies consumer protection against fraud and
deceit. Specifically, this bill :
1)Provides that fraud or deceit under the Consumer Legal
Remedies Act may consist of the suppression or omission of a
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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.
2)Specifies 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.
3)Clarifies that the bill does not expand or restrict warranty
rights or obligations.
EXISTING LAW :
1)Pursuant to the Consumer Legal Remedies Act (CLRA), prohibits
unfair methods of competition, acts or practices by any person
which either result in or is intended to result in the sale or
lease of goods or services to any consumer. (Civ. Code Sec.
1770.)
2)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.)
3)Provides that a 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,
and permits 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.)
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
COMMENTS : The author explains that the purpose of the bill is
to protect consumers against fraud and deceit by clarifying that
the CLRA covers the fraudulent omission of any material defect,
not just those that implicate health or safety. According to
the author:
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The CLRA ? prohibits sellers from making fraudulent claims
about their goods and services, or from fraudulently
omitting information about goods and services from
consumers.
In recent years, 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 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.
SB 1188 codifies long-standing law on the CLRA's
"materiality" standard. Since the CLRA passed in 1970, it
has been well established that the test for whether a fact
is material is whether "a reasonable man would attach
importance to its existence or nonexistence in determining
his choice of action in the transaction." Engalla v.
Permanente Medical Group, Inc., 15 Cal.4th 951, 976 (1997).
To prove that undisclosed information is "material," a
consumer must be able to show that "had the omitted
information been disclosed, one would have been aware of it
and behaved differently." Mirkin v. Wasserman, 5 Cal. 4th
1082, 1093 (1993). Given what is and has been the
prevailing materiality standard for years, the existence of
a safety risk is clearly not a required element. Further,
a reading of the original statute and legislative history
shows that health or safety risks were never referenced in
the original statute.
Background on Consumer Legal Remedies Act. While encouraging
commerce and innovation, the Legislature has long considered the
profit-seeking goals of business to be appropriately balanced by
reasonable protection of consumers against careless or
unscrupulous commercial activities. State law is replete with
statutes aimed at protecting California consumers from unfair,
dishonest, or harmful market practices. The Consumer Legal
Remedies Act (CLRA) is one of California's basic laws "to
protect consumers against unfair and deceptive business
practices and to provide efficient and economical procedures to
secure such protection." (Civ. Code Sec. 1760.) The CLRA was
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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.) Among other things, the Act 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, or grade" when they are of another. (Civ. Code Sec.
1770.) Consumers who are harmed by unlawful practices specified
in the Act may recover damages and other remedies.
Apparent Disagreement Regarding Material Omissions. Both
supporters and opponents appear to agree that the law requires
disclosure of material facts in a commercial transaction in a
number of circumstances. Supporters state:
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.)
Opponents appear to agree, stating:
Under current law, a plaintiff may sue for an omission
contrary to a representation actually made by the
defendant, or when the defendant has exclusive knowledge of
material facts not known or reasonably accessible to the
plaintiff, or when the defendant actively conceals a
material fact from the plaintiff, or when the defendant
makes partial representations that are misleading because
some other material fact has not been disclosed.
The disagreement appears to center on whether 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. Unfortunately, opponents apparently do not
address the supporters' argument that existing case law
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establishes this rule, as set forth below. If these cases are
good law, as supporters argue, the question might well be asked
whether there is a sound reason to limit the rule to omissions
that pose a threat to health or safety, as discussed below.
Is It Sound Public Policy To Limit The CLRA Only To Fraudulent
Omissions That Pose a Threat To Health or Safety? It is widely
recognized that the CLRA applies to affirmative statements that
are false or misleading, such as purposefully inaccurate product
advertising. Shortly after its passage, California courts
recognized that fraudulent omissions also fall within the scope
of the Act, noting that "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.)
Specifically, supporters argue that 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 principle was
recognized for many years, supporters contend, with courts until
recently allowing 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. (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.").)
More recently, however, some courts have evidently begun to
limit this principle only to cases involving health and safety
defects, as reflected in Daugherty v. American Honda Motor Co.,
Inc. (Cal.App.2d Dist. 2006), 144 Cal.App.4th 824. Currently
state and federal courts are apparently divided over whether
claims can be brought under the CLRA for fraudulent omissions
not involving threats to health and safety. (Compare Smith v.
Ford Motor Co., 749 F.Supp.2d 980, 987 (N.D.Cal. 2010) (to be
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actionable under CLRA, fraudulent omissions "must pose safety
concerns") and 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"); 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, and noting that
the Ninth Circuit in Wilson cited no California case reaching
this holding.).)
Supporters of this measure argue that it is unfair and
irrational to allow defendants to potentially escape liability
for concealing known product defects so long as the defect does
not pose a safety risk to consumers. This bill would appear to
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," with the
additional clarification that materiality is not limited to
circumstances in which a product poses a threat to health or
safety.
With respect to materiality, supporters argue that the
California Supreme Court has made clear under the CLRA that "[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 appear to codify this case law 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.
In this regard it might be noted that, consistently with the
bill, the materiality of an omitted fact would not appear to
depend solely on whether the product presents a threat to health
or safety.
Opposition Concerns Regarding Express Warranties. As noted
below, several opponents argue that this bill would unfairly
expose businesses to tort liability after the expiration of a
product's express warranty. For example, a coalition of
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business groups lead by the Chamber of Commerce argues:
Absent a health or safety risk, latent defects are not
actionable because a manufacturer would in essence have to
insure a product for a lifetime. All defects would result
in a "material" omission because the failure of a product
to last forever would become a 'defect,' and product defect
litigation would become as widespread as manufacturing
itself.
By making manufacturers liable for any latent defect or
other undisclosed condition for the life of any product
based on a claim that some future purchaser is willing to
say was "material" to his or her purchase, this bill has
the practical effect of making warranties irrelevant. As a
result, the bill would require businesses to warrant
products for every imaginable condition, known and unknown
that could be conceived of regarding the product, both
during the warranty period and thereafter, effectively for
the lifetime of the product. Lawsuits over safety concerns
outside the warranty period are permitted today because the
average consumer expects products to not pose unreasonable
safety risks irrespective of the passage of time.
The opposition unfortunately does not appear to say why it
contends that every product defect will be deemed material under
the bill. As discussed above, the bill is explicitly limited to
the omission of a material fact by one who is bound to disclose
it or who gives information of some facts that are likely to
mislead in the absence of other facts. Moreover, the bill
expressly states that a fact is material when a reasonable
person would attach importance to its existence or nonexistence
in determining a choice of action in the transaction.
In any event, it is not clear why liability for material
omissions might be said to require business to ensure that a
product will last forever - a fact most reasonable people would
find impossible. The bill does not appear to alter the existing
limitation of the CLRA that a claim based on an alleged
fraudulent omission must 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).)
In addition, supporters argue, fraud claims must meet a
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heightened pleading standard in order to be heard by a court.
For example, in a fraudulent omission case a potential plaintiff
would have to plead not only that a product was defective, but
that the merchant knew the product was defective, and
intentionally decided to withhold that knowledge from a
purchaser. These standards would not appear to be satisfied by
a claim that a product was defective simply because it did not
have an unlimited lifetime.
ARGUMENTS IN OPPOSITION: The California Chamber of Commerce and
other business advocates oppose the bill. Their argument is
presented in its entirety below:
Recent amendments do not change the impact that SB 1188
would have on substantially expanding the number of product
lawsuits whenever a dissatisfied consumer claims outside of
the product warranty, "I wouldn't have bought the item but
for what you failed to tell me." SB 1188 would
significantly expand the type of lawsuits that not only can
be brought under California's Consumer Legal Remedies Act
("CLRA", Civil Code Section 1750 et seq.), but also that
could be brought under California's Unfair Competition Law
("UCL", Business and Professions Code Section 17200).
Existing law already allows lawsuits against product
manufacturers for fraud or misrepresentation. The example
sponsors use of a business deliberately and secretly
installing a chip in a product to make it malfunction the
day after the warranty expires is a false concern. First,
we are not aware of this ever happening, and it is hard to
imagine any manufacturer, hoping to build a brand and
encourage repeat customers, installing a "kill switch" that
disables a product the day after the warranty lapses.
Second, if it has actually happened, this would already be
actionable under existing consumer fraud law. Under current
law, a plaintiff may sue for an omission contrary to a
representation actually made by the defendant, or when the
defendant has exclusive knowledge of material facts not
known or reasonably accessible to the plaintiff, or when
the defendant actively conceals a material fact from the
plaintiff, or when the defendant makes partial
representations that are misleading because some other
material fact has not been disclosed.
By making manufacturers liable for any latent defect or
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other undisclosed condition for the life of any product
based on a claim that some future purchaser is willing to
say was "material" to his or her purchase, this bill has
the practical effect of making warranties irrelevant. As a
result, the bill would require businesses to warrant
products for every imaginable condition, known and unknown
that could be conceived of regarding the product, both
during the warranty period and thereafter, effectively for
the lifetime of the product. Lawsuits over safety concerns
outside the warranty period are permitted today because the
average consumer expects products to not pose unreasonable
safety risks irrespective of the passage of time.
The bill creates a new theory of liability that would
drastically alter the landscape of warranty and product
liability law in California. This bill would apply to
things far beyond product defects, such as working
conditions in a distant location where a component piece
was made or whether some ingredient of a food has a
genetically modified component. No other state has such an
expansive provision in law. Absent a health or safety
risk, latent defects are not actionable because a
manufacturer would in essence have to insure a product for
a lifetime. All defects would result in a "material"
omission because the failure of a product to last forever
would become a 'defect,' and product defect litigation
would become as widespread as manufacturing itself. Courts
have been unwilling to extend the law to the extent sought
by SB 1188. As a result, the bill's sponsors are seeking to
have the Legislature do what the courts have been unwilling
to do.
This bill will drive up costs to all consumers and
encourage meritless product litigation against businesses.
The only beneficiaries of this scheme are the attorneys who
will file lawsuits under this unwarranted expansion of
product liability law. California already consistently
ranks at the bottom of national lists for its business and
legal climate. Unfortunately, this bill would be another
step to reinforce those rankings and, in turn, cause
California to become a magnet for nationwide class action
litigation that cannot be brought in any other state.
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REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Attorneys of California (co-sponsor)
Consumer Federation of California (co-sponsor)
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
The Utility Reform Network
Unite Here, AFL-CIO
Utility Workers Union of America, Local 132
Opposition
Alliance of Automobile Manufacturers
American Insurance Association
American International Group
Association of California Egg Farmers
Association of California Insurance Companies
Biotechnology Industry Organization
California Automotive Business Coalition
California Chamber of Commerce
California Citizens Against Lawsuit Abuse
California Citrus Mutual
California Building Industry Association
California Cement Manufacturers Environmental Coalition
California Cotton Ginners Association
California Cotton Growers Association
California Farm Bureau Federation
California Grain and Feed Association
California Grape and Tree Fruit League
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California Grocers Association
California Manufacturers and Technology Association
California New Car Dealers Association
California Pool and Spa Association
California Precast Concrete Association
California Retailers Association
California Rice Industry Association
California Seed Association
California Warehouse Association
Civil Justice Association of California
Global Automakers
GMA
International Franchise Association
National Federation of Independent Businesses
Outdoor Power Equipment Institute
Personal Insurance Federation of California
Southwest California Legislative Council
TechAmerica
TechNet
Toy Industry Association, Inc.
Western Agricultural Processors Association
Western Plant Health Associations
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334