Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES: Jewelry Purchasers’ Unfair Competition and False Advertising Claims Proceed Against J.C. Penney over Rhodium-Coated Jewelry, (May 9, 2013)

By Tobias J. Gillett, J.D., LL.M.

A putative class of purchasers of jewelry has adequately stated claims under California’s Consumers Legal Remedies Act (CLRA), Unfair Competition Law (UCL), and Fair Advertising Law (FAL) against J.C. Penney over alleged misrepresentations regarding the quality of its "white gold" and "sterling silver" jewelry and its alleged failure to disclose that the jewelry was coated with rhodium, the federal district court in San Francisco has ruled (Torres v. J.C. Penney Corporation, Inc., May 8, 2013, Tigar, J.).

The plaintiffs alleged that they purchased jewelry advertised by J.C. Penney as "white gold and "sterling silver," but later discovered that it was coated with rhodium that wore off to reveal the "undesired yellow, off-white or dingy grey color" of the underlying metal. The plaintiffs filed a putative class action lawsuit, asserting claims for violations of the CLRA, the UCL, and the FAL. J.C. Penney filed a motion to dismiss."

Safe harbors. The court first rejected J.C. Penney’s contention that various safe harbors permitted its conduct, and would therefore bar the plaintiffs’ action. The FTC’s Guides for the Jewelry, Precious Metals, and Pewter Industries did not provide a safe harbor because J.C. Penney did not establish that they were "legislative provisions that were the result of a formal, notice-and-comment rulemaking process or an adjudicative enforcement action."

Moreover, the Guides did not clearly permit J.C. Penney’s failure to disclose the rhodium coating; instead, they merely stated that it was "unfair or deceptive to misrepresent the presence of gold or silver in an industry product if the product does not meet the permissible tolerances for gold or silver in the National Stamping Act [(NSA)]." The court noted that the California Supreme Court had determined that "only acts that the legislature has determined to be lawful may not form the basis for an action under the unfair competition laws." Similarly, provisions in the NSA stating that the fineness of certain gold or silver articles "shall not be less" than specified amounts, and a California statute stating that "the variation between the actual fineness of the gold or its alloy contained in any article and that indicated by the quality mark applied to such article shall not exceed the tolerances for fineness prescribed" by the NSA, also did not "clearly permit" the failure to disclose the rhodium coating.

California Legal Remedies Act. Since J.C. Penney did not establish that a safe harbor applied, and since in any case the question of whether a failure to disclose fell within the scope of a safe harbor was a question of fact that could not be resolved on a motion to dismiss, the court proceeded to consider whether the plaintiffs had stated a claim under the CLRA. The court explained that a CLRA plaintiff asserting a claim for failure to disclose a material fact must show that the defendant had a duty to disclose because "(1) the defendant was in a fiduciary relationship with the plaintiff; (2) the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) the defendant actively concealed a material fact from the plaintiff; or (4) the defendant made partial representations but also suppressed some material fact."

Here, the court found that no fiduciary relationship existed between J.C. Penney and the plaintiffs, but that all of the remaining circumstances applied. The plaintiffs plausibly alleged that J.C. Penney had "exclusive knowledge" of the rhodium coating because it was not visually apparent and because J.C. Penney had sole access to the specification sheets revealing the content of the jewelry, that J.C. Penney "actively concealed" the coating because its advertisements and sales staff did not provide any information about it, and that J.C. Penney "made partial representations" about the jewelry by stating that it was "14kt white gold" or "sterling silver," but "suppressed the material fact" that it had a rhodium coating.

Moreover, the plaintiffs satisfied Federal Rule of Civil Procedure 9(b) by alleging (1) that J.C. Penney misrepresented the quality of the jewelry and failed to disclose the coating, (2) that the representations and omissions would likely deceive a reasonable consumer, (3) that they relied on the representations and omissions, and (4) that they suffered damages from having to re-coat the jewelry.

Unfair Competition Law

The court then proceeded to address the plaintiffs’ claims under the UCL, initially explaining that the UCL prohibited "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising."

Unlawful prong. The court found that the plaintiffs had stated a claim under the "unlawful" prong because they had stated a claim under the CLRA and because they could use the FTC Act as a predicate statute, even though it did not contain a private right of action. The court observed that a violation of a statute could be the basis for a UCL claim whether or not the statute provided a private right of action, that J.C. Penney had not cited any FTC Act provisions explicitly precluding private actions, and that other Ninth Circuit courts had permitted UCL claims based on alleged FTC Act violations.

Unfair prong. The plaintiffs also stated a claim under the "unfair" prong, according to the court. The court noted that J.C. Penney had not shown that its conduct was protected by a safe harbor. The plaintiffs sufficiently alleged "(1) that they would not have purchased jewelry from Defendants or they would have paid less for it if they had they had known that it was coated with rhodium; (2) that no benefit to either consumers or competitors can be achieved through Defendants’ allegedly unfair conduct; and (3) that they could not have avoided this injury because Defendants had exclusive control of information pertaining to the rhodium coating," in the court’s view.

Fraudulent prong. The court also found that the plaintiffs stated a claim under the "fraudulent" prong. The court noted that it had previously determined that the plaintiffs had adequately alleged that J.C. Penney had a duty to disclose the rhodium coating. Moreover, the plaintiffs satisfied Rule 9(b) by alleging (1) that J.C. Penney misrepresented the quality of the jewelry and failed to disclose the coating, (2) that the representations and omissions would likely deceive a reasonable consumer, (3) that they relied on the representations and omissions, and (4) that they suffered damages from having to re-coat the jewelry.

False Advertising Law. Finally, the court determined that the plaintiffs had stated a claim under the FAL. The court observed that J.C. Penney had not shown that it was protected by a safe harbor, and that the plaintiffs had adequately pled that J.C. Penney had a duty to disclose. Moreover, the plaintiffs had sufficiently alleged under Rule 9(b) that J.C. Penney’s advertisements would have deceived a reasonable consumer by alleging (1) that J.C. Penney misrepresented the quality of the jewelry and failed to disclose the coating, (2) that J.C. Penny should have known that the advertisements would likely deceive consumers from the complaints of prior customers and from its participation in industry trade associations, (3) that J.C. Penney had exclusive knowledge of the coating because it was not visually apparent to consumers when purchasing the jewelry and because consumers would not have access to J.C. Penney’s specification sheets, (4) that the plaintiffs relied on the representations and omissions, and (5) that they suffered damages from having to re-coat the jewelry.

The case is No. 12-cv-01105-JST.

Attorneys: George Richard Baker (Baker Law PC) for Maria Torres. Gregory Alan Long (Sheppard Mullin Richter & Hampton LLP) for J.C. Penney Corporation, Inc.

Companies: J.C. Penney Corporation, Inc.

Cases: StateUnfairTradePractices Advertising CaliforniaNews