The U.S. Court of Appeals for the Ninth Circuit recently ruled against a consumer who complained that an advertisement for a credit card did not disclose the annual fee for that card.
In so ruling, the Ninth Circuit held that the consumer's objection that he was not allowed to review certain extrinsic documents did not amount to a challenge to the authenticity of those documents, and thus that the lower court's decision to incorporate those documents by reference in a motion to dismiss was proper. The Ninth Circuit also held that the consumer's allegations that the failure to disclose the annual fee violated various California laws were without merit, because the borrower admitted in his complaint that he failed to read the terms and conditions of the credit card offer.
A copy of the opinion is available at http://www.ca9.uscourts.gov/datastore/opinions/2012/08/31/10-56488.pdf.
A consumer read a newspaper advertisement for a credit card offered by a bank (the "bank") in conjunction with a consumer electronics retailer ("retailer"). The advertisement stated that applicants would receive $25 worth of reward certificates, but did not indicate that the card included an annual fee. The consumer signed up for the credit card on the retailer's website, and indicated that he had read the applicable terms and conditions. Those terms and conditions disclosed the existence of an annual fee.
After paying the annual fee for five years, the consumer initiated a class action lawsuit against the bank and the retailer, alleging that they failed to adequately disclose the existence of the annual fee. The consumer also stated that he did not in fact read the terms and conditions of the credit card offer. The bank and retailer filed a motion to dismiss, which the lower court granted on federal preemption grounds.
The consumer then filed an amended complaint, alleging false advertising, fraudulent concealment, and various violations of California's Unfair Competition Law ("UCL"). The bank and retailer filed a Fed. Rules of Civ. Proc. Rule 12(b)(6) motion to dismiss, requesting that the court take judicial notice of various documents reflecting the terms and conditions of their agreement with the consumer (the "disclosure documents"). The disclosure documents were referenced by, but not attached to, the consumer's amended complaint. The lower court again granted the motion to dismiss, finding that the consumer failed to state claims entitling him to relief. The consumer appealed.
On appeal, the consumer argued that lower court erred in considering documents that were not part of the record, and in addition argued the merits of each of his claims. As you may recall, the Ninth Circuit has held that courts have discretion to consider extrinsic materials offered in connection with a Rule 12(b)(6) motion to dismiss, and that a lower court's decision to do so will be reviewed for abuse of discretion. See, e.g., Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1016 (9th Circuit, 2012).
The Ninth Circuit began its analysis by examining the applicable case law, noting that courts may consider documents whose contents are alleged in, but not attached to, a complaint, where no party questions the contents of those pleadings. Knievel v. ESPN, 393 F.3d 1068, 1077 (9th Cir. 2005). In that circumstance, courts may "treat such a document as part of the complaint, and thus may assume that its contends are true for purposes of a motion to dismiss under Rule 12(b)(6)." United States v. Ritchie, 342 F.3d 908, 908 (9th Cir. 2003).
The consumer argued that he did dispute the contents of the pleadings, in that he objected that the disclosure documents were not made available to him. The Ninth Circuit disagreed, noting that the consumer's objection did not "address, much less cast doubt on" the authenticity of those documents. Accordingly, the Court held that "where the party opposing incorporation by reference argues only that he did not review or have access to the proffered copies, this does not amount to a challenge to those documents' authenticity."
Having determined that the lower court did not err in considering the disclosure documents, the Ninth Circuit turned to the merits of the consumer's claims.
The consumer's false advertising claim against the retailer relied on California's False Advertising Law, which makes it unlawful for a person to "induce the public to enter into an obligation" based on a statement that is "untrue or misleading." Cal. Bus. & Prof. Code Sec. 17500. The consumer alleged that the retailer's advertisement was "untrue or misleading" because it did not disclose the existence of an annual fee.
The Ninth Circuit disagreed, noting that because the advertisement indicated that other restrictions may apply, no reasonable consumer could have "believed that if an annual fee was not mentioned, it must not exist."
The Ninth Circuit also rejected the consumer's fraudulent concealment claim. The Court observed that justifiable reliance was a required element of such a claim, and that the consumer could not establish justifiable reliance where he failed to read the relevant contract. Accordingly, the Ninth Circuit held that "[t]he only conclusion that reasonable minds may draw is that [consumer's] reliance on the purported representation was manifestly unreasonable."
Finally, the Ninth Circuit examined the consumer's argument that the bank and retailer inadequately disclosed the annual fee in violation of the UCL. The bank and retailer argued that because their annual fee disclosures complied with the Truth in Lending Act ("TILA") and Regulation Z, those disclosures qualified for a "safe harbor" and were not subject to the UCL.
The Ninth Circuit drew a distinction between the advertisement and the disclosure documents, noting that "we have no trouble concluding that TILA and Regulation Z create a safe harbor" for the latter, because such disclosures are explicitly required by TILA.
However, the Ninth Circuit applied a different standard to the advertisement. Because that advertisement did not disclose the existence of an annual fee, the Court indicated that "no authority provides a safe harbor" to the retailer and bank. Accordingly, the Ninth Circuit addressed the merits of the consumer's claims.
As you may recall, the UCL prohibits "unfair competition," which is defined to include three varieties: acts or practices which are "unlawful, or unfair, or fraudulent." Cel-Tech Comms. Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527, 540 (Cal. 1999). The consumer alleged that the bank was guilty of "unlawful" business practices and that the retailer was guilty of "fraudulent" and "unfair" business practices. The Ninth Circuit considered each in turn.
The Ninth Circuit explained that "[t]o be unlawful under the UCL, the advertisements must violate another 'borrowed' law." Here, the consumer alleged a violation of an OCC regulation that prohibited national banks from engaging in "unfair or deceptive practices within the meaning of the Federal Trade Commision Act, 15 U.S.C. Sec. 45(a)(1)." 15 U.S.C. Sec. 45(a)(1) provides that a practice is deceptive if it is likely to mislead consumers who are acting reasonably under the circumstances, in a way that is material.
For the same reasons described above - that is, that the advertisements referenced "other restrictions," and that the consumer failed to read the terms and conditions of the credit card offer - the Ninth Circuit held that the advertisements were not unlawful under the UCL.
Finally, the Court considered the consumer's allegations of "fraudulent" and "Unfair" business practices. It quickly disposed of the "fraudulent" allegations, finding that a reasonable member of the public was not likely to be deceived by the bank's actions, for the same reasons as described above.
The allegations of "unfair" business practices required more scrutiny. The Ninth Circuit began by noting that the UCL does not define "unfair," and that its definition was currently "in flux" among California courts. However, determining an appropriate definition proved unnecessary, as the Ninth Circuit held that the consumer failed to state a claim regardless of the definition used. The Ninth Circuit's conclusion was again based on the consumer's failure to read the terms and conditions of the credit card offer, and on his failure to cancel the credit card as soon as he learned of the annual fee.
Accordingly, the Ninth Circuit affirmed the judgment of the lower court.
Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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