Last week, in Kearns v. Ford Motor Co., __ F.3d __, 2009 WL 1578535 (9th Cir. June 8, 2009), the Ninth Circuit Court of Appeals issued a ruling that will restrict the ability of consumers to bring generalized claims for fraudulent business practices and perhaps limit the reach of the recent California Supreme Court decision, In re Tobacco II Cases, 207 P.3d 20, 93 Cal. Rptr. 3d 559 (Cal. 2009). In Kearns, the court held that the strict pleading requirements for fraud claims under Federal Rule of Civil Procedure 9(b) apply to claims brought in federal court under the California Consumer Legal Remedies Act (CLRA) and under the "fraud" prong of California's Unfair Competition Law (UCL). Thus, plaintiffs in California federal courts who allege such violations must include specific descriptions (who, what, when, where, and how) of the allegedly fraudulent statements. General references to advertisements and advertising campaigns are not sufficient. While the pleading requirements discussed in Kearns apply only to cases pending in federal court, many cases filed in state courts that allege such violations will be removable to federal court under the Class Action Fairness Act (CAFA). Consequently, the Ninth Circuit's decision could have a significant effect.
Summary of the Case
Plaintiff Kearns represented a class who purchased Certified Pre-Owned (CPO) vehicles from Ford Motor Company (Ford). According to the complaint, CPO vehicles are held to a higher standard than used vehicles and are of a later make than most used vehicles. Ford claimed to inspect CPO vehicles rigorously through safety, reliability, and road-worthiness tests. According to Kearns, the CPO program allowed Ford to sell used vehicles at a higher price. Ford charged each dealership an annual fee and a per-vehicle fee for each vehicle in the program. In return, each dealership received marketing materials and benefited from Ford's advertisements regarding the CPO program.
Kearns sued, alleging violations of the CLRA and the UCL's fraud prong. He claimed that Ford made false and misleading statements about the reliability and safety of CPO vehicles, including misrepresentations regarding "(1) the quality of the complete repair and accident-history report; (2) the level of training of CPO technicians; and (3) the rigorous certification inspection." Kearns argued that these misrepresentations give consumers "a sense of security that their CPO has passed a rigorous inspection, has an extended warranty, and therefore is more safe, more reliable, and more roadworthy than a regular used vehicle."
After the case was removed from California state court to federal court, Kearns filed the operative Third Amended Complaint (TAC). Ford moved to dismiss the TAC for failure to comply with the heightened pleading requirements that Rule 9(b) imposes on fraud claims. The district court granted the motion, from which Kearns appealed.
First, the Ninth Circuit rejected Kearns's argument that the pleading standards imposed by Rule 9(b) should not apply to his claims since the CLRA and the UCL are California statutes. The court reasoned that federal courts apply the heightened pleading standard of Rule 9(b) whether the case is in federal court based on federal question or on diversity.
Second, in rejecting Kearns's argument that Rule 9(b) did not apply because his claims were not grounded in fraud, the court rejected the argument that his claim was based on nondisclosure rather than on affirmative fraud. Thus, according to the court, Kearns's nondisclosure claim was the equivalent of allegations of fraud, which the court required Kearns to plead with particularity. While Kearns alleged that he was exposed to Ford's marketing and representations through a televised campaign, sales materials at the dealership, and sales personnel working at the dealership, he did not allege the particular circumstances of each representation with the "who, what, when, where, and how" that Rule 9(b) requires. The court held that Kearns's complaint was too general. Accordingly, the Ninth Circuit affirmed the dismissal.
Finally, the Ninth Circuit rejected Kearns's argument that the district court should have evaluated his complaint under the "unfairness" prong of the UCL. The court agreed that each prong of the UCL—unlawfulness, unfairness, or fraud—operates under a separate theory of liability. Nonetheless, because the TAC alleged a unified fraudulent course of conduct, the court held that the TAC as a whole was grounded in fraud.
Implications
Kearns will likely impose some limits on California consumer fraud cases in federal court. For example, the California Supreme Court in In re Tobacco II Cases held that a plaintiff need not allege that the allegedly false advertising was the sole or even the decisive cause of the injury-producing conduct and that a plaintiff need not plead reliance on particular false statements "with an unrealistic degree of specificity." Kearns can be read as demanding more exacting requirements. While the interplay of these two decisions remains to be decided, the heightened pleading standard that Kearns mandates could serve to require more precise allegations of a defendant's wrongful conduct, to prevent generalized allegations of fraud based upon pervasive advertising campaigns, and to require allegations of more precise causal links between the allegedly fraudulent statements and a plaintiff's alleged injury. A corporation sued in state court should consider grounds for removal under CAFA to take into account the ruling in this case.
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