United States: Litigation Advisory: Software Download Is Not "Goods or Services" under CLRA, but Third Party Payments Constitute "Restitution" under the UCL: Ferrington v. McAfee

Software now joins insurance and credit services on the list of intangible "goods or services" that fall outside the scope of California's Consumer Legal Remedies Act (CLRA). The recent news from the Northern District, however, is not all good. Ferrington also involved a claim under the Unfair Competition Law (UCL)1 and held that "restitution" for purposes of a UCL claim encompasses monies paid to third parties so long as it is "reasonable to infer that the defendant indirectly received that money from the third party." This decision marks a departure from the California Supreme Court's decision in Korea Supply Co. v. Lockheed Martin, which essentially defined "restitution" under the UCL as the return of a direct, out-of-pocket loss. While a handful of courts have found room in Korea Supply for the recovery of indirect losses where the lost funds can be fairly traced back to the plaintiff, none have gone as far as Ferrington.

The Download

In Ferrington v. McAfee, 2010 WL 3910169 (N. D. Cal. Oct. 5, 2010), the Northern District confirmed some settled points and made some new ones:

  • Pleading Requirements: The pleading requirements of Rule 9(b) apply to UCL/CLRA claims brought in federal court when the allegations either expressly or implicitly constitute the elements of fraud;
  • UCL Standing: A plaintiff who pays money to a third party has standing under the UCL to recover that money from a defendant whose unlawful business practice caused the plaintiff to pay the money;
  • Picking Off: Refunding the plaintiff's money will not moot a claim unless the money is repaid with interest;
  • "Unfair" Test: Because the California Supreme Court has not yet decided which test is appropriately applied to consumer actions, federal courts may use either the Cel-Tech tethering test or the traditional balancing test, but may not use the Federal Trade Commission (FTC) test.

The Facts

Plaintiffs purchased McAfee anti-virus software on-line. After plaintiffs had completed their purchase, but before they downloaded the McAfee software, a pop-up ad sponsored by Arpu appeared inviting plaintiffs to click a "Try it Now" button. Because of its position in the purchase flow and the text in the box, plaintiffs believed that clicking on the "Try it Now" button was necessary to download the McAfee software, so they did. Subsequently (i.e., when the charge appeared on their credit card statement), they discovered that by clicking the "Try it Now" button, plaintiffs had enrolled in a 30-day free trial of Arpu's software, and that a monthly fee of $4.95 would be charged to the credit card that they had used to purchase the McAfee software if they did not cancel the subscription at the expiration of the free 30-day trial. Behind the scenes, McAfee allegedly had an agreement with Arpu through which it automatically transferred its customers' credit card numbers to Arpu when a customer clicked on the "Try it Now" button. Plaintiffs alleged violations of the UCL and the CLRA, as well as common law claims for unjust enrichment, declaratory judgment, and the violation of several New York laws.

The Holdings

Ferrington is significant in several respects: it confirms established pleading standards in federal court, clarifies the test for "unfair" in federal courts, removes software from the CLRA, and interprets UCL standing requirements and the definition of "restitution" for purposes of the UCL.

Rule 9(b)

The Court confirmed that Rule 9(b) applies to allegations grounded in fraud regardless of whether the plaintiff asserted a claim for fraud. Rejecting plaintiffs' argument that the elements of common law fraud need not be pleaded to state a UCL claim, the Court found that Rule 9(b) is appropriately applied not only when fraud is alleged expressly, but also when the allegations, taken as a whole, necessarily constitute the elements of fraud.2

CLRA "Goods or Services"

Software, or a software license, is not a "good or service" covered by the CLRA. Recognizing that it was a close call, the Court found that software, like insurance and credit, is considered an "intangible" chattel under California law.3 The Court, however, sustained the demurrer with leave to amend, inviting plaintiffs to allege facts about the specific software that may affect the Court's analysis.4

UCL Standing

Probably the most important aspect of Ferrington is its interpretation of the UCL standing requirement. Plaintiffs did not pay McAfee money as a result of the pop-up ad. Instead, they unwittingly paid a small sum to Arpu when their credit cards were automatically charged after clicking the "Download Now" button. The Court found that this payment was sufficient to confer standing on plaintiffs to seek restitution from McAfee.

Relief under section 17200 is limited to injunctive relief and restitution. The California Supreme Court defined "restitution" for purposes of the UCL in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003). There, the Court explained that restitution for purposes of the UCL is an out-of-pocket loss or the loss of money in which a plaintiff had an ownership interest.5 Korea Supply drew a distinction between restitution and the broader remedy of "disgorgement," defining the latter as the return of all money obtained from any source through an unfair business practice, such as profits earned through an unfair business practice. Korea Supply confirmed that "disgorgement" is available under the UCL only to the extent that it is also "restitutionary," i.e., that it represents the return of money that the plaintiff lost directly. Korea Supply thus concluded that only money that a defendant takes directly from a plaintiff can be ordered returned as "restitution" under the UCL.6

Korea Supply has been largely interpreted as requiring the return of funds from the person to whom the funds were paid. Ferrington arrives at a different conclusion, holding that the plaintiffs could recover from McAFee the money they paid to Arpu. The Court's conclusion was based on a curious interpretation of a recent appellate court decision: Troyk v. Farmers Group, Inc., 171 Cal. App. 4th 1305 (2009). Ferrington recognized Korea Supply's holding that "an award is not 'restitutionary' if it would not replace money that defendants took directly from Plaintiffs."7 However, the Ferrington Court found that statement to be limited to the particular facts at issue in Korea Supply, those facts being that plaintiffs were seeking to disgorge profits earned from a third party transaction and thus profits in which plaintiffs never had an ownership interest.8 Relying on Troyk, Ferrington found that Korea Supply left room for a plaintiff to seek restitution under the UCL from a defendant whose unlawful business practice caused the plaintiff to pay money to the third party.9

While Ferrington's definition of "restitution" was inconsistent with the black letter of Korea Supply, particularly in light of the facts alleged there, it was not necessarily inconsistent with general jurisprudence surrounding "restitution." It is not unusual for terms to have different meanings in different contexts, and because Korea Supply represents the Supreme Court's word on 'restitution" for purposes of the UCL, Ferrington erred in failing to adhere to it. In Ferrington's defense, however, the existing case law has not been clear about distinguishing between restitution under the UCL and restitution for other purposes. Ferrington, relying almost entirely on Troyk, concluded that "the UCL permits restitution from a defendant whose unfair business practices caused plaintiff to pay money to a third party, as long as it is reasonable to infer that the defendant indirectly received that money from the third party."10 This conclusion is not wholly incorrect because case law does allow restitution of "indirect" funds under the UCL so long as those funds can be directly traced back to the plaintiff. It cannot, however, be money that plaintiff never paid, as that would be the disgorgement that Korea Supply denounced.

The Ferrington Court's error was its failure to recognize a critical fact present in Troyk that was not present in the case before it: Troyk did not involve an arm's length business relationship like the alleged revenue-sharing agreement between McAfee and Arpu. Rather, Troyk involved a series of interrelated companies intertwined sufficiently to constitute alter egos as a matter of law. In Troyk, plaintiff purchased a monthly automobile insurance policy from Farmers Insurance Exchange ("Farmers"). Through his suit, plaintiff sought return of a $5 service charge that was not disclosed in his policy. Farmers Underwriters Association ("FGI") was Farmers' attorney-in-fact and performed all policy administration services, including drafting and issuing policies and collecting premium. The Court found that it was acting as Farmers' agent. Prematic Service Corporation was a wholly owned subsidiary of FGI and collected the premiums for Farmers' monthly policies, including plaintiff's. The Court found that because of the relationship between Prematic, FGI, and Farmers, Prematic was the alter ego of FGI. Accordingly, plaintiff could recover his $5 from Farmers or FGI even though he paid it to Prematic because the three companies were in effect operating as a single enterprise under established California law to collectively transact the business of insurance.11

Notwithstanding that the facts of Troyk were a far cry from those in Ferrington, there is language in Troyk and other California cases indicating that both parties to a revenue-sharing agreement may be liable under the UCL or an unjust enrichment theory regardless of to whom the plaintiff actually paid the money. While Ferrington's third party theory was certainly wrong as it was applied to its facts, a tracing theory, such as that used in the context of constructive trust, finds some support in the case law. While California law has kept relatively tight reigns on the restitution of money paid initially to a third party post-Korea Supply, there are a handful of cases that have allowed "indirect" restitution. Courts have allowed indirect purchaser type recovery, for example against a manufacturer, even though the plaintiff purchased the product from a retailer.12 Courts have also allowed recovery against a restaurant corporation that allegedly misappropriated plaintiffs' tips and paid those tips to the bartenders.13 Two factors are consistently present in all of these decisions: (1) plaintiff paid money to someone and thus was out-of-pocket; and (2) the specific out-of-pocket funds were directly traceable to the defendant, akin to a constructive trust situation.

Hirsch, one of the cases upon which Ferrington relied, is instructive because it involved recoverable "indirect" charges to the plaintiff as well as non-recoverable third-party payments, and thus highlights the distinction. Hirsh involved an alleged kick-back scheme between the defendant banks and title insurance and escrow companies. In exchange for the deposit of escrow funds into demand deposit accounts, the banks paid the title companies disguised interest payments that the title companies then converted to their own use. Federal law prohibited interest on demand deposit accounts. California law, in turn, required that interest be paid to the depositing party.14 Plaintiffs' theory was that they were entitled to recover the kick-back payments because they were really interest payments to which they were entitled under the California statute. Plaintiffs also sought recovery of allegedly excessive "management services" fees that were passed on to them through the escrow process.

The Court sustained the banks' demurrers to the interest claim, finding that because federal law prohibited interest on the deposit accounts, plaintiffs never had any interest in that money and thus could not recover it through the UCL.15 In other words, the funds were not traceable back to the plaintiffs, either directly or indirectly—it simply was not their money. With respect to the excessive charges passed through to plaintiffs, however, plaintiffs survived demurrer—that was their money. Importantly, however, the Court did not find that the overcharges were recoverable under the UCL. Instead, the Court found that plaintiffs were entitled to restitution under the independent legal theory of unjust enrichment, noting that under that theory, "to confer a benefit, it is not essential that money be paid directly to the recipient by the party seeking restitution."16

Ferrington was decided on a pleading motion, so its ultimate outcome remains to be seen. It may be that the plaintiffs will be unable to show that they had a direct ownership interest in any funds that Arpu paid to McAfee. The take-away is that the question will turn on the specific terms of the payment provisions in the agreement between McAfee and Arpu. And, even though restitution under the UCL does not fit, restitution under another legal theory may.


1 (Business & Professions Code §§ 17200 et seq.)

2 Id. at *5.

3 Id. at *18, citing, Fairbanks v. Sup. Ct., 46 Cal. 4th 56 (2009); Cal. Commercial Code § 9102(a).

4 Id., n. 6.

5 Id. at 1149.

6 Korea Supply at 1149.

7 Ferrington at *7, citing, Korea Supply at 1149.

8 Id.

9 Id., citing, Troyk at 1305.

10 Id., emphasis added.

11 Troyk, 171 Cal. App. 4th at 1319.

12 Shersher v. Sup. Ct., 154 Cal. App. 4th 1500 (2007)(holding plaintiff entitled to restitution from Microsoft based on misrepresenting data transmission rates on various wireless products even though plaintiff purchased the products from a retailer rather than from Microsoft directly).

13 Matoff v. Brinker Restaurant Corp., 439 F. Supp. 2d 1035, 1038 (C. D. Cal. 2006); see also, Hirsch v. Bank of America, 107 Cal. App. 4th 708 (2003) (allowing recovery of excessive fees ultimately paid by plaintiffs through unjust enrichment theory).

14 Hirsch at 711-12.

15 Id. at 718 (holding that in order to recover under the UCL, "appellants must have been deprived of something to which they had an interest...").

16 Id. at 722.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions