Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Cal. App.: Trial court erred by not allowing amendment of warranty holders’ UCL claims, (Dec 18, 2013)

By Jody Coultas, J.D.

A trial court erred in dismissing warranty holders’ California Unfair Competition Law (UCL) claims against Fidelity National Home Warranty Company because the trial court should have allowed the warranty holders to amend the complaint, a California appellate court has held (Kaplan v. Fidelity National Home Warranty Co., December 17, 2013, Haller, J.). The trial court properly dismissed the warranty holders’ California Consumers Legal Remedies Act (CLRA) claims.

Fidelity sells home warranty plans in California and several other western states that cover specified repairs and/or replacement of home systems and appliances. Two warranty holders filed separate complaints alleging they had entered into home warranty agreements with Fidelity and had made claims under the agreements, but Fidelity failed to properly adjust and/or improperly denied the claims. This amounted to unfair and unlawful business practices in violation of the UCL and CLRA, it was alleged.

The trial court dismissed the warranty holders’ fourth amended complaint in its entirety. Specifically, the court held that the home warranty plans were not goods or services, but more akin to insurance plans, which are not covered under the CLRA. The court dismissed the UCL claim on the grounds that UCL claims could not be predicated on Unfair Insurance Practices Act (UIPA).

CLRA. The CLRA prohibits unfair or deceptive acts that result in the sale or lease of goods or services. Services are defined as “work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods.”

Because the CLRA did not apply to home warranties, the court dismissed the CLRA claims. Courts have held that providing insurance does not fall within the purview of the CLRA. A contract is one of insurance if the principal object and purpose of the transaction involves the shifting of risk between the contracting parties and distributing the risk among similarly situated persons. Home warranty contracts have essentially the same attributes as insurance. Specifically, the warranty holders were required to pay for the warranty plan even though no claim was filed, and Fidelity promised to pay for repairs and/or replacements if there were any covered defects or product failures during the contract period. The warranty holder’s argument that Fidelity provided “services” because its warranty contracts repeatedly refer to repairs and service calls and represent that the contractors provide quality and efficient customer service was rejected because Fidelity actually used independent contractors to service the claims.

UCL. Procedural rules precluded the court from reversing the trial court’s judgment based on the merits of the UCL claim alleged in the second amended complaint because this claim was superseded by the claim alleged in the fourth amended complaint. The court’s ruling on the UCL claim in the second amended complaint involved the merits and led directly to the final judgment. Thus, the court had appellate jurisdiction. However, the warranty holders waived their right to challenge the sufficiency of the UCL claim in the second amended complaint as a basis for overturning the judgment. When a plaintiff chooses to amend a cause of action after a motion for judgment on the pleadings is sustained with leave to amend, the party waives to right to appeal any error therein.

Although the warranty holders waived this error, the court noted that the trial court erred in concluding these allegations are barred merely because they also encompass alleged violations of the UIPA. After the warranty holders’ appeal was fully briefed, the California Supreme Court decided Zhang v. Superior Court (2013) 57 Cal.4th 364, which clarified the relevant law governing the UCL, particularly regarding the viability of a UCL claim predicated on common law claims that also allege violations of the UIPA. Fidelity’s argument that Zhang did not apply in this case because the Zhang court held only that a false advertising claim can support a UCL cause of action and did not hold that a bad faith claim was a sufficient predicate act to state a UCL claim was rejected. Under Zhang, it was likely the proposed amendment would withstand Fidelity’s challenge to the pleadings on the UCL claim. However, that argument had been waived.

Striking complaint. The court acted within its discretion in striking the fourth amended complaint, according to the court. The amendments greatly expanded the class definition without permission and were inconsistent with the court’s order regarding the proper scope of the amendments.

However, the court erred in refusing to grant leave to file an amended or correct the complaint based on the erroneous view of the law governing UCL claims, according to the court. The trial court’s holder was based, in part, on a pre-Zhang understanding of UCL claims based on insurance issues. It was likely the proposed amendment would withstand Fidelity’s challenge to the pleadings on the UCL claim. Fidelity would suffer undue prejudice from the amendment.

The cases are Nos. D062531 and D062747.

Attorneys: Francis A. Bottini, Jr. (Bottini & Bottini) for Dan Kaplan. Michael J. Gleason (Hahn Loeser & Parks) for Fidelity National Home Warranty Co.

Companies: Fidelity National Home Warranty Co.

Cases: StateUnfairTradePractices CaliforniaNews