California Section 17200

Split Appellate Panel Finds
California’s Unfair Competition
Compatible With Class Actions

LOS ANGELES — Class actions are compatible with California’s Unfair Competition Law (UCL), a split California appellate panel ruled Aug. 27 (Thomas Corbett v. The Superior Court of Alameda County, Bank of America, N.A., et al., No. A097495, Calif. App., 1st Dist., Div. 2; 2002 Cal. App. LEXIS 4566).

(Opinion in Section A. Document #43-020919-015Z. Plaintiffs’ petition for writ of mandate in Section B. Document #43-020919-019B. Bank of America opposition to plaintiffs’ petition in Section C. Document #43-020919-022B. Hayward Dodge opposition to plaintiffs’ petition in Section D. Document #43-020919-023B. Consumer Attorneys of California amicus brief in support of plaintiff available. Document #43-020919-016B. Public Interest Law Project amicus brief in support of plaintiff available. Document #43-020919-017B. Other amicus briefs available. Document #43-020919-018B.)

A 2-1 majority of a panel of the First District California Court of Appeal held that California Supreme Court precedent, legislative history and public policy compelled the conclusion that a “liquid recovery” is appropriate for UCL cases. The majority remanded the case for further action and held no opinion on whether the class should be certified.

“Refusing to ever permit a liquid recovery in a UCL claim would thwart the purpose of the UCL because it would permit defendants to keep a portion of their illicit profits,” Justice James Lambden wrote for the majority.

Justice Lambden was joined by Justice J. Anthony Kline. Justice Paul Haerle dissented on both substantive and procedural grounds.

Class Claims

Thomas Corbett sued Hayward Dodge and Bank of America for allegedly misleading car buyers into entering into financial arrangements with an approved annual percentage rate (APR), while actually increasing the APR to include a dealer participation fee that the bank and the car dealer later split.

Corbett sued on behalf of himself and other allegedly deceived car buyers under the California Unfair Competition Law, which is also known as California Business and Professions Code Section 17200.

Alameda County Superior Court Judge Ronald M. Sabraw denied Corbett’s motion for class certification on the grounds that the putative class was overly broad, Corbett made an inadequate showing of the common questions of fact and Corbett was not typical because he said he never read the financing contract and did not remember the transaction. Judge Sabraw further denied class certification on the grounds that the plaintiff may not bring a class action under the UCL as a matter of law.

Defense Argument

The majority rejected the defense argument that the question of whether UCL and class actions are fundamentally incompatible had been decided by the California Supreme Court in Kraus v. Trinity Management Services ([2000] 23 Cal. 4th 116, 137).

“We do not agree that Krauss holds that class actions and UCL claims are mutually exclusive. The Supreme Court in Kraus made it clear that the question before it was whether a fluid recovery remedy, which it had ‘sanctioned’ only in class actions, was also authorized in the UCL. The court concluded that ‘the legislature has not expressly authorized disgorgement into a fluid recovery fund in class actions.’ Thus, its holding barred a liquid recovery method in nonclass UCL actions and did not address class UCL actions,” the majority said.

The majority held that despite numerous modifications to the UCL, the California State Legislature never added language barring class actions.

“Section 17205 expressly provides that the remedies under the UCL ‘are cumulative to each other and to the remedies or penalties available under all the laws of this state.’ Consequently a plaintiff in a class action is expressly entitled to an injunction and restitution, authorized under the UCL, and to disgorgement into a fluid recovery, as authorized under the class actions statutes,” the majority said.

Dissent

In dissent, Justice Haerle found that Judge Sabraw’s order denying class certification rendered the plaintiff’s petition moot.

“The most fundamental reason for denying writ relief is the case is still with the trial court and there is a good likelihood purported error will be either mooted or cured by the time of judgment,” Justice Haerle wrote.

Justice Haerle said the appellate court’s ruling will almost inevitably be mooted by the trial judge’s decision to deny class certification on ground that the putative class is overly broad and fails commonality and typicality requirements of class certification.

“Consideration of the issues addressed in the majority opinion should at least wait a case in which the record does not include — as this record does — an explicit factual finding by the trial court that the plaintiff seeking class representative status is not ‘typical,’” Justice Haerle wrote.

Sharon L. Kinsey of Soquel, Calif., and Brad Seligman of The Impact Fund in Berkeley, Calif., represent Corbett. Barry W. Lee of Steefel, Levitt & Weiss in San Francisco and Laura K. Christa of Christa & Jackson in Los Angeles represent the defendants.

Misrepresentation Suit
Not Preempted
By Federal Law

SAN DIEGO — A suit filed by a nonprofit consumer group alleging that a company misrepresented the safety and effectiveness of two herbal supplement products is not preempted by the Dietary Supplement Health and Education Act or other federal law, a state appeals court ruled last month (Consumer Justice Center v. Olympian Labs, Inc., No. G027973, Calif. App., 4th Dist.).

(Opinion available. Document #45-020710-107R.)

The Consumer Justice Center (CJC) was seeking an injunction under California Bus. & Prof. Code §17200 against Olympian Labs Inc. to either have two of its products removed from the market or have the advertising of the products changed and the profits made from the products disgorged.

The supplements in question are “Medi-Phen,” which contains a number of herbs, including green tea extract, ginseng and gotu kola, and “Herp-Eeze,” which contains chaparral bush. Medi-Phen is advertised as a weight loss aid, and Herp-Eeze is supposed to relieve herpes simplex viruses. The CJC says neither product is safe or effective for its advertised purposes.

A trial court ruled that the suit is preempted by federal law.

Decision Overturned

The Fourth District California Court of Appeal, Division Three, overturned the trial court’s decision on June 27.

The court noted that no express preemption of cases involving the false advertising of dietary supplements exists under the Federal Trade Commission Act, the Federal Food, Drug and Cosmetic Act or the Dietary Supplement Health and Education Act. It said, however, that implied preemption can be proven if “intent to occupy a given field” or “impossibility of relief in the state court without a conflict with federal law” is shown.

The appeals court said the absence of a private cause of action under the Federal Trade Commission Act suggests that “Congress did not intend the Federal Trade Commission to ‘occupy the field’ of redressing false advertising claims.”

It also said no conflict preemption exists under the act because it can exist only when it is impossible for compliance to both federal and state laws.

“Accordingly preemption cannot be based on a belief in phantoms, i.e. speculation,” the court held. “Since the Federal Trade Commission had not now made any regulations (or taken any action with which the present litigation might conflict) there is no conflict preemption.”

Food, Drug And Cosmetic Act

The court also held that no preemption exists for the case under the Federal Food, Drug and Cosmetic Act for “occupation of the field” of state court litigation.

“We should not forget the ‘food’ in the ‘Food, Drug and Cosmetic Act,’” it said. “In terms of FDA regulation, dietary supplements are now in a category that treats them as food, not drugs. And foods are regularly subject to state unfair competition litigation. The picture that thus emerges is not one of preemption with no room left for the state to do anything, but of complementary schemes: One which allows dietary supplements to reach the market, the other which allows claims made on the behalf of those supplements to be tested in court for veracity.”

The court also ruled that the outcome of the litigation would not pose “an outcome where the defendants could not possibly comply with the federal law.”

“One thing is unavoidably clear from 21 U.S.C. section 343-1(a)(5): States can enforce labeling rules which are identical to those found in 21 U.S.C. section 343 (r). And while it may be a difficult task for a state court to craft injunctive relief involving the labeling of a dietary supplement that is identical to the rules set forth in 21 U.S.C. section 343 (r), it is not an impossible task,” it ruled.

The court stipulated that its opinion is not meant to address anything other than the federal preemption issue presented by the complaint.

The Consumer Justice Center is represented by Mark Boling of Orange County. California Attorney General Bill Lockyer, Assistant Attorneys General Richard M. Frank and Herschel T. Elkins and Deputy Attorneys General Ronald Reiter and Ian K. Sweedler appeared as amici curiae on behalf of the plaintiff.

Mark G. Bonino, Allan E. Anderson and Rachel A. Campbell of Ropers, Majeski, Kohn & Bentley in Los Angeles represent Metabolife.

Calif. Appellate Court
Sides With Swami

LOS ANGELES — In an unpublished opinion, a California appellate court here upheld a trial court’s decision to dismiss an action brought
by a former director of a religious society who had been ousted after investigating sexual misconduct claims that focused on the Swami-In-Charge. (Theodore Chenoweth v. Vedanta Society, Berkley, et al., Calif. App., 1st Dist., Div. 3; 2002 Cal. App. UNPUB. LEXIS 8469).

(Opinion available. Document #58-020930-001Z.)

In addition to seeking restatement as a member of the Vedanta Society, plaintiff Theodore Chenoweth also sought injunctive relief under 17200. He asserted he had been strictly for the purpose of quashing an investigation into sexual misconduct charges on the part of the Swami-In-Charge.

However, in sustaining the defendant’s demurer, the trial court said that were it to delve into the matter, it would be impermissibly intruding upon a purely religious matter.

The appellate court agreed that the matter was outside its subject matter jurisdiction.

‘Notoriously Broad’ 17200
Preempted, 9th Circuit Holds

SAN FRANCISCO — The use of 17200 conflicts with federal law in an antitrust and unfair business practice suit against the U.S. Postal
Service by a mail sack manufacturer, the Ninth Circuit U.S. Court of Appeals held last month (Flamingo Industries v. U.S. Postal Service, 9th Cir., No. 01-15963, U.S. App. LEXIS 17524).

(Opinion available. Document #58-020930-002Z.)

Flamingo sued the postal service in the wake of its termination as a supplier of mail sacks. In addition to the five antitrust counts, Flamingo also asserted a 17200 cause of action.

However, the 9th Circuit agreed with the trial court’s dismissal of the 17200 cause of action because federal law preempted it. It is noteworthy that 9th Circuit, David R. Thompson, author of the opinion, took the opportunity to term 17200 a “notoriously broad statute.”

“Allowing the requirements of the California Business & Professions Code Section 17200 to control the Postal Office’s procurement decisions would impinge upon the Service’s right to control the character and necessity of its purchases free from state constraints and would negate the deferential standard Congress has created for federal review of such decision,” the 9th Circuit said, point to the law that created and governs the Postal Service.

George P. Eshoo of Redwood City, Calif. represents Flamingo. Patricia J. Kenny, Assistant U.S. Attorney from San Francisco represents the Postal Service.

Federal Judge Dismisses
Claims Stemming From
Auction Of Wireless Licenses

LOS ANGELES — A Section 17200 unfair business claim over the auction of wireless telecommunication spectrum licenses is both defective and preempted by the Federal Communications Act of 1934 (FCA), a federal judge ruled Aug. 19 (TPS Utilicom Services Inc. v. AT&T Corp., et al., No. 01-9237, C.D. Calif.; 2002 U.S. Dist. LEXIS 17042).

U.S. Judge Stephen V. Wilson of the Central District of California dismissed an action brought by TPS Utilicom Services Inc. against AT&T Corp. and related entities, including Alaska Native Wireless LLC.

(Opinion. Document #58-020930-003Z.)

TPS sued in state court, alleging that AT&T engaged in unfair business practices under Section 17200 and interfered with prospective economic advantage by improperly participating in an auction for 422 wireless telecommunication spectrum licenses. AT&T removed the action on the basis of diversity and federal question jurisdiction through preemption. TPS moved to remand; AT&T moved to dismiss.

Remand Denied

Judge Wilson denied the motion to remand, finding that although subject matter is not conferred by complete preemption under the FCA, the court has jurisdiction based on diversity.
Specifically, the judge said, there is no complete preemption of state law claims and no Congressional intent to confer removal jurisdiction under the FCA. Further, the judge said, TPS fraudulently joined two resident defendants in an effort to defeat diversity.

“TPS’ claims of unfair business practices and interference with prospective economic advantage against both AT&T Communications of California Inc. and AT&T Wireless Services of California, LLC are wholly deficient,” the judge said. “The complaint contains no factual allegation or factual basis for asserting either claim against these defendants. There is no allegation of conduct be these defendants that would satisfy the conduct element of either claim.”

Dismissal Granted

Granting the motion to dismiss, the judge held that the claim of interference with prospective economic advantage is defective because it does not allege interference with an ongoing economic relationship.

“The complaint alleges no more than interference with potential customers with which TPS has no existing relation,” the judge said.

Further, the judge said, the Section 17200 count “disguises a claim for damages, which are not recoverable under §17203, as a claim for equitable and restitutionary relief.”

Moreover, the judge said, even if the claims were not defective, the FCA expressly preempts them on the factual basis asserted in TPS’s complaint.

“The basis of TPS’ complaint is that it was injured by the Defendants’ participation in the license auction,” the judge said. “Whether or not the Defendants’ participation in the auction was legitimate is purely a question of federal law as administered by the FCC. Absent a determination that such participation was in some manner wrongful under federal law, the current claims under California law cannot proceed.”

The tortious interference claim “would interfere with Congress’s full purpose and objectives under the FCA,” the judge said. “Congress authorized the FCC to develop a competitive bidding process that included ‘safeguards to protect the public interest in the use of the spectrum’ and to promote the varied purposes of the FCA. The FCC complied with that mandate by publishing regulations governing spectrum actions. The regulations specify precise eligibility requirements for the action and bidding at issue here.”

The 17200 claim “seeks to test the FCC eligibility determinations by different criteria,” the judge said. “These state criteria have no place in the FCC auction scheme.”

TPS is represented by Brian S. Curry and Brian P. Brooks of O’Melveny & Myers in Los Angeles. AT&T is represented by Christopher B. Hockett and David H. Fallek of Bingham McCutchen in San Francisco. Alaska Native is represented by Kenneth D. Klein and Amy M. Gallegos of Hogan & Hartson in Los Angeles and Michele C. Farquhar of Hogan & Hartson in Washington, D.C.

Texas Judge Allows
17200 Claim To
Proceed In Patent Suit

DALLAS — A patent holder is not entitled to dismissal of a Section 17200 unfair competition counterclaim asserted by the defendant in a patent infringement action, a federal judge ruled Sept. 20 (Nortel Networks Limited, et al. v. Kyocera Wireless Corp., No. 3:02-CV-0032-D, N.D. Texas; 2002 U.S. Dist. LEXIS 17845).

U.S. Judge Sidney A. Fitzwater of the Northern District of Texas denied a motion by Nortel Networks Ltd. for judgment on the pleadings on a counterclaim filed by Kyocera Wireless Corp. in a suit alleging infringement of four patents owned by Nortel.

Judge Fitzwater did, however, direct Kyocera to replead its inequitable conduct affirmative defense with more particularity in conformity with Federal Rule of Civil Procedure 9(b).
(Opinion available. Document #58-020930-004Z.)

Nortel alleged that Kyocera infringed its four patents related to wireless communication systems. Kyocera responded with the unfair competition counterclaim and the inequitable conduct defense, contending that Nortel failed to disclose prior art to the U.S. Patent and Trademark Office (PTO), thereby misrepresenting the patentability of the inventions at issue.

Dismissal Motions

Nortel moved for partial judgment on the pleadings and to dismiss, arguing that the inequitable conduct claim is deficient under Rule 9(b) and that the Section 17200 claim fails to allege the required elements and should be dismissed under Federal Rule of Civil Procedure 12(c).

Partially granting the motion with respect to the inequitable conduct defense, Judge Fitzwater agreed with Nortel that Kyocera failed to specifically identify the particular prior art that should have been disclosed or how it would have been material to the issue of patentability. However, the judge declined to dismiss the defense and directed Kyocera to file an amended answer in conformity with Rule 9(b).

§ 17200 Counterclaim

Denying judgment on the pleadings with respect to the Section 17200 counterclaim, the judge held that Kyocera’s allegations meet “the highly deferential” standard of Rule 12(c).

“Kyocera’s unfair competition allegations include (1) breach of contract; (2) Nortel’s refusal to license the patents-in-suit to Kyocera on fair and reasonable terms after representing that it would do so; (3) misrepresenting the availability of licenses, the scope of the patents, and the relationship between the patents and certain industry standards; (5) withholding information from the PTO in order to mislead Kyocera; and (6) attempting to enforce the patents in bad faith,” the judge said. “Under the highly deferential Rule 12(c) standard, the court cannot say, based on the pleadings alone, that Kyocera would not be entitled to relief under any set of facts or any possible theory that it could prove consistent with the allegations in the unfair competition counterclaim.”

Nortel is represented by Kay Lynn Brumbaugh of Strasburger & Price in Dallas and Richard M. Lehrer, Marvin S. Gittes and Clyde A. Shuman of Gibbons DelDeo Dolan Griffinger & Vecchione in New York. Kyocera is represented by William G. Whitehill of Gardere Wynne Sewell in Dallas and Stephen P. Swinton, John T. Ryan, Bryan D. Richardson, Kevin J. Zimmer and Kent M. Walker of Cooley Godward in San Diego.

California Federal Judge Refuses Remand In
Wrongful Death Case

SAN FRANCISCO — A state defendant that allegedly manipulated the addictive effects of nicotine was fraudulently joined in a wrongful death suit, a California federal judge ruled on July 24 in refusing to remand the case (Marilyn McDonald, et al. v. Philip Morris Inc., et al., No. 02-2409, N.D. Calif.).

(Opinion available. Document #04-020812-003Z. Remand motion available. Document #04-020812-004M. DNAP’s opposition available. Document #04-020812-005M. Certain defendants’ opposition available. Document #04-020812-006M. Reply available. Document #04-020812-007M. Support letter available. Document #04-020812-008M.)

Marilyn McDonald’s deceased husband, Gerald, began smoking in 1950 and died of lung cancer in 2001. She sued tobacco companies, alleging that the defendants entered into a conspiracy in 1953.

Alleged Conspiracy

According to McDonald, the tobacco companies conspired to maintain favorable attitudes of people toward smoking despite the health hazards, maintain addiction, encourage existing smokers to rationalize their continued smoking and fraudulently avoid the Federal Drug Administration’s regulation of nicotine as a drug, among other things.

Brown & Williamson Tobacco Corp., Philip Morris Inc., Lorillard Tobacco Co. and R.J. Reynolds Tobacco Co. removed the case to the U.S. District Court for the Northern District of California.

While admitting that DNA Plant Technology Inc. (DNAP) is a citizen of California, the cigarette defendants asserted that DNAP is a sham defendant and should be ignored in determining diversity jurisdiction. Subsequently, McDonald moved to remand the case.

DNAP is accused of committing several overt acts in furtherance of the cigarette defendants’ conspiracy, including genetically modifying the high nicotine “Y-1” tobacco strain to make it commercially viable and concealing Y-1 tobacco production from the federal government by illegally exporting Y-1 tobacco seeds to Brazil. McDonald also alleges that DNAP joined the broader conspiracy of all defendants, knew of its purposes and supported them.

Y-1 Tobacco

U.S. Judge Vaughn R. Walker said that McDonald admits that she does not know if the decedent smoked any cigarettes that contained Y-1 tobacco. The judge said that the decedent has no relationship to DNAP’s product. Therefore, the judge ruled that DNAP has no duty to disclose information to the decedent and cannot be held liable for fraudulent concealment of information or a conspiracy claim based upon fraudulent concealment.

“This determination does not, however, end the matter, because the McDonalds premise their conspiracy claim on both fraudulent concealment and affirmative misstatements,” the judge said. “DNAP can be held liable for the affirmative misrepresentations of its coconspirators.”

First, the judge found that McDonald’s conspiracy claim is limited to manipulation of nicotine levels in cigarettes via Y-1 tobacco, concealment and misrepresentation of this manipulation and fraudulent avoidance of FDA regulation of this manipulation and of cigarettes.
“So limited, the McDonalds cannot state a conspiracy claim against DNAP. This is because Gerald McDonald was not injured by this narrow conspiracy. Gerald McDonald never smoked a cigarette containing Y-1 tobacco. Thus, the manipulation of nicotine levels in Y-1 tobacco is irrelevant to the McDonalds’ claim. For the same reason, the concealment and misrepresentation regarding nicotine manipulation did not injure Gerald McDonald. While the McDonalds assert that Gerald McDonald may have been exposed to second hand smoke from Y-1 cigarettes, this contention fails because the McDonalds do not allege any facts regarding this exposure linking it to Gerald McDonald’s injury. The McDonalds cannot support a damages claim based upon DNAP’s secret manipulation of nicotine levels in Y-1 tobacco,” the judge said.

Conspiracy Claim Fails

The judge ruled that McDonald’s conspiracy claim regarding the fraudulent avoidance of FDA regulation of cigarettes also fails. The judge reasoned that the FDA is not legally able to regulate cigarettes as nicotine delivery systems and, therefore, the defendants cannot conspire to avoid an illegal act.

Concerning the unfair competition claim asserted in California Business and Professions Code Section 17200, the judge agreed with the cigarette defendants that McDonald’s allegations of prior wrongful conduct cannot be the basis of a Section 17200 claim because that conduct is not illegal and occurred outside the statute of limitations period.

Additionally, the judge held that McDonald’s claim that DNAP violated foreign laws failed because there were no factual allegations to support it.

“Having found that the McDonalds cannot state claim against DNAP, the court determines that DNAP was fraudulently joined in this action. The court therefore denies the McDonalds’ motion to remand and dismisses the claims against DNAP without prejudice,” the judge held.

McDonald is represented by John C. Ladd of the Law offices of John C. Ladd in San Francisco. R.J. Reynolds is represented by H. Joseph Escher, Thomas G. Scarvie and Richard Schivley of Howard, Rice, Nemerovski, Canady, Falk & Rabkin in San Francisco. DNAP is represented by Bingham McCutchen, Raymond C. Marshall, Warren E. George, Natasha Sen and J. Keah Castella in San Francisco.

9th Circuit Weighs
Fraud, Pleading Rules
In Last Ritalin Action

SAN FRANCISCO — Hearing the appeal in the last active Ritalin class action, a panel of the Ninth Circuit U.S. Court of Appeals said it wanted to know why the California consumer fraud case did not have to comply with the pleading requirements of Federal Rule of Civil Procedure 9(b) (Todd D. Vess, et al. v. CIBA-GEIGY Corp., et al., No. 01-55834, 9th Cir.).

The complaint, filed in the U.S. District Court for the Central District of California, made claims under California Business and Professions Code Sections 17200 and 17500 that Novartis Pharmaceuticals Corp. sought to broaden the diagnostic criteria for attention deficit disorder and attention deficit/hyperactivity disorder (ADD and ADHD) by financially influencing the American Psychiatric Association (APA) to sell more Ritalin.

Expanded Definition

The complaint, filed in 2000, claims that as a result of expanding the definition of ADD and ADHD in the Diagnostic and Statistical Manual of Mental Disorders, more children are diagnosed and needlessly placed on Ritalin.

The complaint also says that an advocacy group, Children and Adults with Attention Deficit/Hyperactivity Disorder (CHADD), falsely portends to be a volunteer organization but has received hundreds of thousands of dollars in undisclosed financial support from Novartis and its predecessor, CIBA-GEIGY Corp.

The defendants alleged that the class action was a Strategic Lawsuit Against Public Participation (SLAPP) and moved to dismiss under Rule 9(b). The court granted leave to file an amended complaint, but it was dismissed on First Amendment grounds of free speech.

Plaintiff Todd Vess declined the court’s leave to further amend his complaint and asked for final judgment so he could appeal.

SLAPP Disputed

In his opening brief, Vess argued that the case was not about free speech but about conduct. He said Novartis and the APA broadened the manual criteria “to inflate the market for the drug Ritalin . . . without any regard for the science.”

(Vess opening brief available. Document #28-020620-027B.)

Claims under 17200 and 17500, Vess said, need not be pleaded with particularity under Rule 9(b) because the California Supreme Court determined that they are non-fraud causes of action.

CIBA-GEIGY Brief

Novartis/CIBA-GEIGY argued in its brief that Vess had not met Rule 9(b) or demonstrated a probability of success under California’s anti-SLAPP statute. It claimed that all of Vess’s allegations rest on fraud, requiring pleading with particularity.

(CIBA-GEIGY brief available. Document #28-020620-028B.)

“Plaintiff’s complaint . . . fails to state the time, place or manner of, the participants in, or even the substance of the misrepresentations he attributes to Novartis,” the brief said.

“These plaintiffs do not claim any putative class members (including plaintiffs themselves) have been physically injured,” the brief said. “They simply want courts to foreclose, through injunction and economic disincentive, a medical diagnosis and method of treatment they do not like.”

APA Brief

In its brief, the APA said the complaint seeks to hold it liable for scientific opinions expressed in the manual. It said the suit violates its First Amendment right of free speech about a mental disorder.

(APA brief available. Document #28-020620-030B.)

Contrary to Vess’s position, the APA said California recognized a safe harbor for the association’s activity by incorporating the manual into its regulatory programs. The manual is not the kind of consumer, business or advertising activity envisioned by the Legislature when it enacted 17200 and 17500, the brief said.

CHADD Brief

CHADD, in its brief, also said that Vess does not specially allege that the advocacy group participated in a conspiracy and cannot because it didn’t exist until after the manual criteria were developed. No civil conspiracy claims are alleged, it pointed out.

(CHADD brief available. Document #28-020620-029B.)

While Vess portrays his complaint as a consumer product action, CHADD said it does not sell or advertise Ritalin.

“Plaintiff has failed to identify even one false, misleading or deceptive statement on the part of CHADD concerning Ritalin, or for that matter, about anything at all,” the brief said.

Vess only belatedly recast his complaint as a consumer rights action, the group said.

“[A]n examination of the substantive allegations in his complaint demonstrate that his lawsuit is grounded in fraud. Indeed, Vess’s counsel filed two other lawsuits in Texas and New Jersey containing virtually the identical factual allegations, and both of these lawsuits asserted causes of action for fraud,” CHADD said, arguing Rule 9(b) applicability.

CHADD said it never represented that it does not accept contributions from drug companies and that it made no false or misleading statements about its mission.

The complaint “clearly attempts to regulate CHADD’s speech concerning AD/HD and to impose liability upon CHADD for its speech and government petitioning activities,” the group said.

9th Circuit Questions

Asked by the Ninth Circuit panel during a March 8 hearing if Vess’s allegations weren’t essentially the same facts pleaded under a different law, Richard Scruggs of Scruggs Legal in Pascagoula, Miss., speaking for Vess, maintained that the difference is Vess’s use of 17200 and 17500.

Scruggs said the complaint uses fraud as “a term of art under 17200 and 17500” and not in the sense of common law fraud.

Asked why Vess didn’t file a second amended complaint, Scruggs said it was because the “the district court prejudged so that whatever we pled was a SLAPP” action.

One panel member told Scruggs, “we can’t judge a complaint that you didn’t attempt to file.” Scruggs said he stood on his pleading.

Scruggs also argued that the District Court improperly “converted” the complaint into a fraud action instead of a consumer protection one.

“The judge bought into the defendants’ argument that this was really not a pony it was a horse and so he applied the rules for horses,” he said.

But the panel still asked whether the claim was for fraud and if Rule 9(b) applied.

“The basic concept of deceiving the public sounds like fraud to me,” one panel member remarked.

Manual Not For Consumers

Luther Zeigler of Crowell & Moring in Washington, D.C., arguing for the APA, said the manual is an “academic and scientific work” and “not for the consuming public” and thus entitled to First Amendment protection. He refuted Vess’s claim in a reply brief that the manual is commercial speech, saying it proposed no commercial transaction.

Likewise, Zeigler said the Business and Professions Code was intended to regulate business conduct, not academic or scientific speech. He cited Ninth Circuit case law that product liability laws can’t be applied to the contents of an encyclopedia.

The APA, Zeigler said, had no duty to disclose its donors and said nothing improper was alleged.

In answer to a question from the panel, Zeigler said the APA would like the Ninth Circuit to rule both on the 9(b) issue and on the anti-SLAPP issue.

No Discovery Issue

Speaking for Novartis/CIBA-GEIGY, James O’Neal of Faegre & Benson in Minneapolis said Vess was not prejudiced by inability to conduct discovery. He said that after a motion for discovery was rejected for a technical deficiency, Scruggs wrote a letter disclaiming discovery before the anti-SLAPP motion.

“The discovery bird doesn’t fly,” O’Neal said.

Chilling Effect

Gerald Zingone of Arent, Fox, Kintner, Plotkin & Kahn in Washington, D.C., arguing for CHADD, said that “if you can sue CHADD for description of itself without connecting it to a statement, then you can sue Time for an article on Ritalin.”

Enron Analogy

During rebuttal, Scruggs attacked the free speech argument.

“If this manual is implying an opinion on a medical or academic or scientific issue, then Arthur Andersen’s opinion about Enron’s finances are not actionable,” he said. “Just because they say it and just because it’s controversial and just because they lobby it in Congress or it’s addressed in some statute doesn’t mean it’s protected speech,” he said.

The APA “received at least one-third of its funding” from the pharmaceutical industry, Scruggs said, and the committee that liberalized ADD/ADHD was “paid for by CIBA-GEIGY.”

The panel asked if the complaint was filed in federal court to avoid the particularity required by state law. Scruggs denied that, saying a federal action would be “more predictable.”

One panel member pointed out that Vess could still file his complaint in California state court.

Counsel

Donald F. Hildre, Thomas D. Haklar and Peggy J. Reali of Dougherty, Hildre, Dudek & Haklar in San Francisco, Sidney A. Backstrom, Robin Reid Boswell and Scruggs of Scruggs Legal in Pascagoula, Miss., John P. Coale and Julia McInerny of Coale, Cooley, Lietz, McInerny in Washington, D.C., Marc C. Saperstein and Kevin Decie of David, Saperstein & Solomon in Teaneck, N.J., and C. Andrew Waters of Waters and Kraus in Dallas represent Vess.

Bruce Jones and O’Neal of Faegre & Benson in Minneapolis, Roxanne M. Wilson of Arter & Hadden in Los Angeles and Michael Drury of Arter & Hadden in San Diego represent Novartis/CIBA-GEIGY.

David B. Siegel, JoAnn E. Macbeth, Laurel Puke Malson, William L. Anderson and Zeigler of Crowell & Moring in Washington, D.C., and David Noonan of Post, Kirby, Noonan & Sweat in San Diego represent the APA.

Edward D. Chapin of Chapin, Shea, McNitt & Carter in San Diego and Zingone of Arent Fox represent CHADD.

Beverly Pleads No Contest
To Elder Abuse Charges,
Will Pay $2 Million In Civil Fines

SANTA BARBARA, Calif. — The nation’s largest nursing home chain on Aug. 1 pleaded no contest to felony elder abuse charges stemming from the deaths of two residents and agreed to improve the quality of care at its 60 California facilities.

Beverly Enterprises Inc. also agreed to pay $2 million in civil penalties to settle a related civil complaint filed July 31 in Santa Barbara County Superior Court by the state attorney general’s office and the Santa Barbara County district attorney. The penalties, and an accompanying permanent civil injunction, stem from more than 90 citations and deficiencies found at Beverly facilities statewide in the past 3-1/2 years, including bed sores, dehydration, malnutrition, poor personal hygiene and improper medication (People of the State of California v. Beverly Enterprises, Inc., et al., No. 01096941, Calif. Super., Santa Barbara Co.).

(Permanent Injunction and Final Judgment available. Document #02-020816-101X. Civil Complaint available. Document #02-020816-102C.)

The civil complaint noted that beginning within four years preceding the filing of the complaint, Beverly Enterprises Inc., Beverly Health and Rehabilitation Services Inc., Beverly Enterprises-California Inc. and Beverly Healthcare-California Inc. “engaged in and are still engaged in” one or more of a laundry list of violations of Business and Professions Code Section 17200, et seq.

Judgment

The plaintiffs sought civil penalties and a permanent injunction ordering the defendants not to engage in any of the acts or practices of unfair competition alleged or any other act or practice of unfair competition and filed an accompanying stipulation for entry of permanent injunction and final judgment.

Under the judgment, Beverly agreed to pay $1 million each to the Bureau of Medi-Cal Fraud and Elder Abuse and the Santa Barbara County District Attorney’s Office.

Injunction

Under the injunction, Beverly is subject to penalties of up to $6,000 per quality of care, staff training or oversight and compliance violation and could be barred from receiving funding from Medicare and Medi-Cal, the state Medicaid program.

It also agreed to a range of required improvements at its California nursing homes, including increased staff training, adequate staffing levels, increased attention to individual resident care, the development of quality review procedures at each facility and the establishment of a corporate level compliance committee to monitor and ensure that state and federal quality of care standards are being met.

Beverly also agreed to notify the attorney general’s office of any injury, death or accident that may have been caused by inadequate care.

In entering the civil settlement, Beverly did not admit to wrongdoing.

Criminal Action

In the criminal enforcement action, also filed July 31, Beverly-Enterprise-California Inc., a wholly owned California subsidiary of the Arkansas-based corporation, agreed to pay the statutory maximum $54,000 in fines and penalties, reimburse $532,927 in investigation costs and allow the victims to seek restitution from the court.

It pleaded no contest to the elder abuse of Laura Simmons, a 102-year-old resident of the Beverly La Cumbre Convalescent Hospital in Santa Barbara who died in August 2000 after suffering from severely infected bedsores, and William Marthai, a Beverly La Cumbre resident who died in July 2001 from complications from improper feeding tube procedures.

In a written statement, Beverly accepted responsibility for the two “unfortunate incidents.”

“But we firmly believe that those incidents did not constitute criminal behavior on the part of any of our operating units or our employees,” Chairman and Chief Executive Officer William Floyd said.

Investigation

The criminal and civil actions were the result of a two-year investigation into Beverly La Cumbre and Beverly Enterprises by the attorney general’s and district attorney’s offices.

The investigation began after Simmons’ death and was expanded to include citations for violations at more than two dozen Beverly facilities.
The state was represented by Attorney General Bill Lockyer, Senior Assistant Attorney General Thomas A. Temmerman, Supervising Deputy Attorney General Mark L. Zahner and Deputy Attorneys General Alan B. Robison and Claude W. Vanderwold in Sacramento, Calif., and Santa Barbara District Attorney Thomas W. Snedden Jr. and Deputy District Attorney Tracy Grossman in Santa Barbara.

Firestone Faces Product
Liability Class Action; Claims Tires Prone to Separation

RIVERSIDE, Calif. — A putative nationwide consumer class action claiming that Steeltex tires manufactured by Bridgestone/Firestone Inc. are defective and prone to tread separation was filed Aug. 12 in Riverside County Superior Court (Roger Littell, et al. v. Bridgestone/Firestone, Inc., et al., No. 030708, Calif. Super., Riverside Co.).

(Complaint available. Document #43-020815-018C.)

The plaintiffs ask that the tiremaker recall and replace Steeltex R4S, R4SII and A/T tire brands. They claim that Bridgestone knew that more than 27.5 million tires sold under the respective brands contained a lamination defect that could cause the entire tread to separate in a matter of seconds, leading to the tire’s disintegration.

The plaintiffs say that the company’s own tests showed that the tires were prone to failure because of an inherently defective design.

Earlier this year, the National Highway Traffic Safety Administration closed a 16-month investigation into the Steeltex tires after concluding that it could find no evidence of a design defect.

Putative Class

The plaintiffs seek to certify a class of anyone who currently owns one or more of the allegedly defective tire brands. All personal injury claims and anyone who has filed a non-class legal action are excluded from the proposed class.

They seek damages for fraudulent concealment, violation of the California Consumer Legal Remedies Act (California Civil Code § 1750), violation of the California Unfair Practices Act (California Business and Professions Code § 17200), strict liability and negligence.

In addition to a court order seeking the recall of the allegedly defective tires, the plaintiffs seek to freeze assets obtained through the company’s “unfair, unlawful, fraudulent and deceptive acts, practices, which, if allowed to be retained, would unjustly enrich Bridgestone and would be dissipated beyond the jurisdiction of this court.”

Joseph L. Lisoni and Gail M. Lisoni of Lisoni & Lisoni in Pasadena, Calif., and Steven E. Weinberger of Pasadena filed the complaint.

Discount Retailer Sues
Lorillard For Antitrust
In Calif. Federal Court
A discount retailer alleged in an Aug. 2 complaint that a tobacco company violated antitrust laws by favoring its competitors with promotional pricing programs (Cigarettes Cheaper! v. Lorillard Tobacco Co., No. 02-03646, N.D. Calif.).

(Complaint available. Document #04-020930-013C.)

Cigarettes Cheaper! owns and operates over 500 stores, which sell Lorillard Tobacco Co. cigarettes. Cigarettes Cheaper! says that it competes with other retailers in the sale of tobacco products, including discount stores, warehouse club stores, convenience stores, grocery stores, gas stations and other retail outlets.

Cigarettes Cheaper! alleges that Lorillard has discriminated in price between Cigarettes Cheaper and other retailer purchasers. Cigarettes Cheaper! maintains that the effect of such discrimination has been to lessen competition and to injure, destroy and prevent competition, including with favored retailers.

The complaint was filed in the U.S. District Court for the Northern District of California. Claims asserted include federal antitrust violations and violations of Sections 17405 and 17200 of the California Business and Professions Code.

Promotional Support

According to the complaint, Lorillard has engaged in extensive retail promotional support programs in connection with the sale of cigarettes. These promotional programs include promotional payments (called buydowns) made to retail outlets, which are passed down to consumers.

In addition to buydowns, coupons, free product and other similar promotions, Cigarettes Cheaper! says that Lorillard also pays certain retailers retail display allowances (RDAs), payments made by a manufacturer to a retail outlet in exchange for the right to display the manufacturer’s product.

Cigarettes Cheaper! maintains that if a cigarette manufacturer refuses to provide a retailer with the same RDAs, buydowns, coupons, free product and other similar promotional support it provides to others, the retailer loses sales, customers and profits to competing retail outlets that do not get such support.

“While engaged in the sale of cigarettes of like grade and quality in interstate commerce within the United States, Lorillard Tobacco Company has discriminated in price between Cigarettes Cheaper! and other retailer purchasers of such cigarettes. The effect of such discrimination has been substantially to lessen competition and to injure, destroy, and prevent competition, including with the favored retailers,” according to the complaint.

Cigarettes Cheaper! maintains that Lorillard’s conduct has violated Section 2(a) of the Robinson-Patman Act, 15 U.S.C. Section 13(a).

Cigarettes Cheaper! is represented by Richard A. Sipos and Tammy A. Brown of Aiken, Kramer & Cummings in Oakland, Calif.; James G. Hunter Jr., Nancy S. Hunter and Robin M. Hulshizer of Latham & Watkins in Chicago; and Keith E. Eastin of Cigarettes Cheaper! in Houston.

Fired Analyst Sues
Employer, Claims
He Was ‘Scapegoat’

SAN FRANCISCO — A former brokerage executive at Credit Suisse First Boston (CSFB) claims in a lawsuit filed July 11 in the San Francisco County Superior Court that he was made a “scapegoat” in a probe of how the firm handled initial public offerings (IPOs) (John Schmidt v. Credit Suisse First Boston Corp., et al., No. 410207, Calif. Super., San Francisco Co.).

(Complaint available. Document #57-020729-107C.)

Unlawful Termination

The former head of private client operations at the firm’s San Francisco office, John Schmidt says he was penalized by Credit Suisse for methods of allocating IPOs that were common throughout the firm. The brokerage fired Schmidt in June 2001.

Schmidt claims that Frank Quattrone, the head of Credit Suisse’s technology group, deflected blame to Schmidt and two other brokers, who were also fired.

In December 2001, Credit Suisse settled a lawsuit filed by the Securities and Exchange Commission for $100 million. In the government’s suit, Credit Suisse was accused of allotting sought-after shares of IPOs in exchange for investor kickbacks in the form of higher commissions.

Schmidt claims that firing him was part of the firm’s strategy to blame a “rogue operator” for any wrongdoing to “divert attention from the fact that the conduct under government investigation was developed an implemented by CSFB’s senior people and supervisors in New York as part of a culture and method of doing business of CSFB.”

Damage Claims

Schmidt seeks damages for defamation, breach of contract, wrongful termination, failure to indemnify and defend, violation of California Labor Code Section 201, violation of California Business and Professions Code Section 17200 and violation of the California Cartwright Act.

Schmidt further seeks a declaratory judgment that predispute arbitration clauses within his employment contract with Credit Suisse are unconscionable and unenforceable.

Howard B. Miller and Thomas V. Girardi of Girardi Keese in Los Angeles filed the complaint.

Former Residents File Class
Action Against Closed Facility,
Claim ‘Transfer Trauma’

VALLEJO, Calif. — Former residents of a California nursing home that closed last summer have filed a class action suit against the facility’s owners, alleging that they violated a state law designed to protect elderly and ill people from the trauma of sudden, involuntary transfer (Carol Seedal, et al. v. Horizon West Headquarters, Inc., et al., No. FCS 020151, Calif. Super., Solano Co.).

(Complaint available. Document #02-020719-126C.)

Carol Seedal and others filed the complaint July 10 in the Solano County Superior Court against Horizon West Headquarters Inc., Horizon West Inc., Vallejo Convalescent Hospital Inc. and others on behalf of themselves and others similarly situated and on behalf of the general public.

The proposed class, defined as all people who were residents of Sereno Care Center and were discharged from July 17, 2001, through Aug. 30, 2001, is estimated to include at least 75 people.

Transfer Trauma

The plaintiffs allege that the defendants “flagrantly and systematically” breached their obligations under California Health and Safety Code Section 1336.2, which establishes what facilities must do to prevent “transfer trauma” in the event of closure. The code defines transfer trauma as “death, depression, or regressive behavior, caused by the abrupt and involuntary transfer of an elderly resident from one home to another,” the plaintiffs say.

Between July 17 and Aug. 30, 2001, the Horizon defendants abruptly discharged all of the Sereno Care Center residents and failed to adopt a required relocation plan, provide required relocation services and provide the required notice, they say.

“The HORIZON DEFENDANTS involuntarily uprooted the FACILITY’s patients from their homes with complete indifference to their rights and the inevitable harm that would result from their abrupt discharge,” the plaintiffs say. “This unlawful conduct has caused, and is continuing to cause, trauma, anxiety, anger, depression, regressive behavior and/or death in the FACILITY’s former patients. The HORIZON DEFENDANTS are legally responsible for the grievous injuries inflicted on Plaintiffs, and all others similarly situated, and should be held accountable in this action for their egregious misconduct.”

Allegations

Health and Safety Code Section 1336.2 requires facilities planning to transfer a patient to medically assess the patient before transfer, provide any necessary counseling, evaluate the relocation needs of the patient and determine the most appropriate and available type of future care, inform the patient or his guardian at least 30 days before the transfer of the alternative facilities that are available and arrange for appropriate, future care, the plaintiffs say. Section 1336.2(f) requires a facility planning to transfer 10 or more patients to submit a proposed relocation plan the Department of Health Services at least 45 days before the transfer of any patient, they say.

On July 16, 2001, the defendants issued a 30-day notice of intent to discharge all the facility’s residents. Two days later, five residents were discharged, and on July 19, the initial relocation plan was submitted to the state, the plaintiffs say. They allege that the discharge notice and a July 20 letter promising that the defendants were going to help to minimize transfer trauma violated numerous rights of the residents, including Health and Safety Code Sections 1336.2 and 1430 and California Business and Professions Code Section 17200.

Specifically, the plaintiffs allege that the defendants failed to submit an adequate relocation plan in a timely manner, failed to evaluate and determine relocation needs in a timely manner, failed to provide timely medical assessments, counseling and other services to minimize the risk of transfer trauma, failed to provide adequate staffing in a timely manner and filed an illegal discharge notice that did not reference the relocation plan or notify residents of their rights.

Isolation, Lack Of Information

“Many of the residents were moved almost immediately after the notice of closure,” the plaintiffs say. And during the closure period, the remaining residents “became more and more isolated” as activities were canceled, food service was limited and some patients were forced to change rooms.

“No medical assessments were done to assess for transfer trauma. No family members were ever informed or consulted for preparation of assessments. No family members received a copy of any of the alleged assessments. Plaintiffs are unaware of any counseling that was provided to any of the residents at the facility despite the fact that residents were openly displaying the most obvious signs of trauma related to having to leave the facility. Plaintiffs are aware of no follow-up care by the Defendants of any of the residents once they were in new facilities,” they say.

State officials cited the facility for failing to ensure “that the medical director coordinated medical care in the facility” and issued 19 separate citations for violations of Section 1336.2, each accompanied by a $1,000 fine, the plaintiffs say.
Injuries, Damages

As a result of the defendants’ actions, the patients “have suffered death and will continue to suffer from trauma, anxiety, depression and other consequent harms, and/or have been relocated, or are being threatened with relocation into facilities which are not suitable to meet their needs, and/or are not being treated with respect and dignity,” the plaintiffs say.

Two residents died shortly after their transfers, they note.

The plaintiffs say they and all members of the proposed class sustained injuries and damages, including but not limited to statutory damages and penalties, loss of contract benefits, pain and suffering and mental and emotional distress, separation from family and friends and bodily injury. In addition, they say they are entitled to recover exemplary damages.

“The acts and omissions alleged herein constitute recklessness, fraud, oppression and malice within the meaning of Welf. & Inst. Code § 14657,” the plaintiffs say.

They say the defendants knew that the plaintiffs and all members of the proposed class were severely disabled and/or elderly and, therefore, vulnerable. They say Horizon acted with “willful and conscious disregard” for the rights of its patients and that its conduct constituted “a cruel and unjust hardship” on the plaintiffs.

“Therefore, each plaintiff and class member is entitled to substantial punitive damages to be proven at trial,” they say.

Relief

The plaintiffs allege violations of the Patient’s Bill of Rights, Health and Safety Code Section 1430(b), negligence, elder and dependant abuse, fraudulent misrepresentation, negligent inflection of emotional distress and violations of the Unfair Competition Law, Business and Professions Code Section 17200.

They seek an injunction enjoining the defendants from engaging in the unlawful acts and practices alleged in the complaint and an order requiring the defendants to disgorge all ill-gotten gains and to provide appropriate restitution, general damages, special damages, punitive damages, attorneys’ fees, costs and expenses.

The suit was filed by Kathryn A. Stebner of Lopez, Hodes, Restaino, Milman & Skikos in San Francisco.

Personal Digital Assistant
Manufacturer Sued Over
Faulty Product Claims

SAN JOSE, Calif. — Personal digital assistant manufacturer Palm Inc. is being sued for consumer fraud after a recent admission on its Web site that its new M130 handheld supports about 6,500 less color combinations that it had originally claimed in its advertisements (Jonathan Lipner and Yansu Ouyang, on behalf of themselves and all others similarly situated v. Palm, Inc., et al., No. CV810533, Calif. Super., Santa Clara Co.).

(Complaint available. Document #43-020830-014C.)

Jonathan Lipner and Yansu Ouyang filed a class action in the Santa Clara County Superior Court on Aug. 22, accusing Palm of deceiving customers by claiming that its product contained more than 65,000 color combinations when it actually contained only 58,621 combinations.

The company had been making the claims in advertisements that began running in March. The product’s packaging also makes the same claim, according to the plaintiffs.

The plaintiffs seek damages for breach of express warranty, violation of the California Consumer Legal Remedies Act and violations of California Business and Professions Code Sections 17200 and 17500.

Putative Class

The plaintiffs seek to certify a class of all U.S. people or entities who purchased a new Palm M130 Series Handheld Computer on or between the date the defendant placed the product into the stream of commerce to the date the class is certified. Putative class members must have purchased the product from an entity that regularly sells such devices or items and may not have made their purchase outside the United States.

Scott K. Johnson, David M. Arbogast and Jonathan Shub of Sheller, Ludwig & Badey in Philadelphia, Paul R. Kiesel of Kiesel, Boucher & Larson in Beverly Hills, Calif., and Michael J. Boni of Kohn, Swift & Graf in Philadelphia filed the complaint.