California’s “Safety Requirement” Takes Another Hit

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Here is a noteworthy excerpt from Judge Whyte’s motion to dismiss and class certification ruling in the pending MDL class action involving Lenovo computers that came pre-installed with adware.  The excerpt below pertains to the California safety requirement in duty to disclose cases – a topic about which we have written several times.  (The excerpt is otherwise offered without commentary since Girard Gibbs LLP is court-appointed class counsel in the litigation.)

Lenovo argues that plaintiffs cannot allege a duty to disclose because a “manufacturer’s duty to consumers is limited to its warranty obligations absent either an affirmative misrepresentation or a safety issue.” Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1141 (9th Cir. 2012).
This court must apply California law. In Wilson, cited by Lenovo, the Ninth Circuit noted that California federal courts have generally interpreted Daugherty, a California Court of Appeal decision, as limiting a manufacturer’s duty to disclose “to its warranty obligations absent either an affirmative misrepresentation or a safety issue.” 668 F.3d at 1141 (citing Daugherty v. Am. Honda Motor Co., 144 Cal. App. 4th 824 (2006), as modified (Nov. 8, 2006)). In Norcia, cited by plaintiffs, the district court noted that “the California Court of Appeal itself has very recently clarified that this is a misreading of California law.
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GM Ignition and the “Benefit of the Bargain” Theory

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Last week, Judge Jesse M. Furman issued a 103-page ruling disposing of New GM’s partial motion to dismiss.  At the crux of the opinion were plaintiffs’ two damages theories.

First, as the court put it, plaintiffs “pursue an unprecedented theory of damages, one that turns not on whether the vehicles at issue were sold with known, latent defects … but rather on the alleged reduction in resale value of the vehicles due to damage to New GM’s reputation and brand.”  Not surprisingly, given the court’s tone in characterizing the theory, the court ruled the first theory was “unsound.”

Second, plaintiffs also seek damages based on a much more well-established methodology: the benefit of the bargain theory.  As the court described that theory:

The gravamen of the benefit-of-the-bargain defect theory is that Plaintiffs who purchased defective cars were injured when they purchased for x dollars a New GM car that contained a latent defect; had they known about the defect, they would have paid fewer than x dollars for the car (or not bought the car at all), because a car with a safety defect is worth less than a car without a safety defect.

Although New GM argued that this theory too failed “across the board” and that it “always requires a plaintiff to prove manifestation of the alleged defect,” the court held that while different jurisdictions have reached different conclusions, in many jurisdictions the damages theory is viable:

New GM is wrong in arguing that the benefit-of-the-bargain defect theory must fail because New GM did not warrant that its cars would have a particular resale value in the future.  

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Defects Manifesting Outside Warranty Can Still Be Material

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In class actions alleging a failure to disclose a product defect, defendants often argue that consumers’ reasonable expectations should be defined by the product’s warranty. In other words, if a defect causes out-of-warranty failures only, the defect can’t possibly matter to consumers and defendants have no legal duty to disclose the defect in advance.

This argument drew considerable traction in California in recent years, often requiring plaintiffs to plead the defect posed a safety hazard in order to state a claim. See, e.g., Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1142-43 (9th Cir. 2012). That pendulum now appears to be swinging back in California, however, with courts recognizing a broader duty to disclose under California law. Rutledge v. Hewlett Packard, 238 Cal.App.4th 1164 (July 2015); see also Norcia v. Samsung Telecommunications Am., 2015 WL 4967247 (N.D. Cal. Aug. 20, 2015).

In Chiarelli v. Nissan N. Am., 2015 WL 5686507 (E.D.N.Y. Sept. 25, 2015), Judge Nicholas Garaufis recently had occasion to consider the argument in the context of New York, Florida, and Maryland law, and he rejected the argument nearly in full:

Nissan next argues that the terms of the express warranty set the consumer’s expectations as a matter of law, and therefore there can be no claim that Nissan’s omissions could be viewed as a practice likely to mislead a reasonable consumer acting reasonably under the circumstances. … Read more