Key Decisions

August 2012 – All Articles

(filed under: Key Decisions Archive | August 16, 2012)

Allegations That Implicitly Disparaged The Claimant’s Goods Created The Potential For Coverage

Travelers Property Casualty Company of America v. Charlotte Russe Holdings, Inc.
(Cal. Ct. of App., 2d Dist.), filed July 13, 2012

KEY FACTS

Versatile Entertainment, Inc. and its parent People’s Liberation, Inc. manufactured apparel, which included jeans and knits.  Versatile identified the People’s Liberation brand as a “premium,” “high end” brand, claiming that it had invested millions of dollars developing the brand so that it became associated in the marketplace with high-end casual apparel, which was distributed exclusively through fine department stores and boutiques.  Versatile contracted with Charlotte Russe Holdings to become the exclusive outlet for People’s Liberation clothing.

After Charlotte Russe sued Versatile, Versatile filed its own claims against Charlotte Russe.  Versatile alleged that Charlotte Russe had promised to provide the investment and support necessary to promote the sale of People’s Liberation clothing at an appropriately high price point, but failed to do so.  It also alleged that Charlotte Russe had actually advertised the clothing as being “on sale,” thereby inferring that it was not worthy of a high price point. Versatile sought declaratory relief and damages for its losses it claimed as a result of Charlotte Russe’s breaches, including damage to and diminution of the People’s Liberation Brand and trademark resulting from the “‘fire sale’ of People’s Liberation Branded goods at ‘close-out’ prices.”

Charlotte Russe was insured under two consecutive Travelers liability insurance policies.  The policies included “personal injury” and “advertising injury” liability coverage and called for Travelers to defend Charlotte Russe against any suit seeking damages for “personal injury” and “advertising injury” claims.

The policies’ personal injury coverage applied to “‘[p]ersonal injury’ caused by an offense arising out of your business, excluding advertising . . . .”  The advertising injury coverage applied to “‘[a]dvertising injury’ caused by an offense committed in the course of advertising your goods, products or services; . . .”   The policies provided coverage for claims alleging injury arising out of “[o]ral, written, or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services, provided that claim is made or ‘suit’ is brought by the person or organization that claims to have been slandered or libeled, or whose goods, products or services have allegedly been disparaged; . . .”   The policies excluded “‘advertising injury’ arising out of a breach of contract.”  There was no similar exclusion for a personal injury arising out of a breach of contract.

Charlotte Russe tendered the defense of Versatile’s claims to Travelers. Travelers denied coverage based on its assertion that there was no potential for an award of covered damages.  Although Charlotte Russe took the position that Versatile’s claims involved disparagement within the policies’ terms, Travelers asserted that “coverage was not available under its Policies because ‘the reduction of a product’s price is not . . . a disparagement of that product.’”

In the ensuing coverage litigation, Travelers moved for summary judgment based on its assertion that there was no potential for an award of covered damages.  It argued that Versatile’s claims did not amount to disparagement or trade libel because such claims required an allegation of the publication of a false statement and resulting loss of business, which Versatile did not claim.

The trial court agreed and granted Travelers’ motion.

HOLDING & REASONING

The Court of Appeal reversed.  It framed the critical question as “whether Versatile’s claims against the Charlotte Russe parties constitute allegations that the Charlotte Russe parties disparaged its goods, within the meaning of the Charlotte Russe parties’ coverage under the Travelers’ policies.”  In answer to this, it determined that “the allegations of the Versatile pleadings could be reasonably interpreted to allege that the Charlotte Russe parties disparaged the People’s Liberation brand and led potential purchasers to believe that it was not a “premium,” “high end” brand.

The court reiterated well-established rules as to an insurer’s duty to defend its insured.  It specifically reminded that “[t]he duty does not depend on the labels given to the causes of action in the underlying claims against the insured; ‘instead it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy.’”

Turning to Versatile’s claims, the court explained:

The Versatile pleadings charged in the underlying litigation that the Charlotte Russe parties had offered the People’s Liberation products for sale at severely discounted prices, resulting in “significant and irreparable damage to and diminution of the People’s Liberation Brand and trademark,” damaging its “marketability and saleability.”  Travelers contends that these allegations of price discounts do not accuse the Charlotte Russe parties of either product disparagement or false statements, and therefore that they do not trigger the policies’ personal injury or advertising injury coverage.

The court rejected this contention saying:  “In order to trigger personal injury coverage it is not essential that the underlying claims must be expressly phrased in terms of ‘disparagement’ or trade libel.”  The question was not whether the underlying claims expressly alleged that Charlotte Russe disparaged Versatile’s products, but whether the allegations could be understood to do so.

Versatile’s allegations that by putting its clothing “on sale,” Charlotte Russe implied that its clothing was not premium, high-end goods was sufficient to constitute a claim for disparagement.

After finding that Versatile’s allegations were sufficient to constitute a claim for disparagement, the court noted:

Even if it were true that Versatile’s claim against the Charlotte Russe parties could not be viable without alleging all the elements of a trade libel cause of action, as Travelers argues and the trial court apparently concluded, the result here would be no different.  The insurer’s duty to defend is not conditioned on the sufficiency of the underlying pleading’s allegations of a cause of action; that is an issue for which the policy entitled the Charlotte Russe parties to an insurer-funded defense.

And, it observed:

We find no suggestion in the language of the policy’s personal injury coverage that a prerequisite to establishing a potential for personal injury coverage for disparagement is that the accusations against its insured must include all the essential elements of the trade libel tort (whatever those requirements may be).

ANALYSIS

Travelers’ position that “personal injury” coverage requires allegations of all elements for trade libel has been accepted by other courts, at least to some extent.  See, e.g., Liberty Bank of Montana v. The Travelers Indemnity Co., 870 F.2d 1504 (9th Cir. 1989).

 

*****

 

Insurance Claims Adjusters Are Not Administrative Employees And Are Not Exempt From Wage And Hours Regulations

Harris v. Superior Court
(Cal. Ct. of App., 2d Dist.), filed July 23, 2012

KEY FACTS

Frances Harris worked as a claims adjuster for an insurer.  Harris and other claims adjusters were primarily involved in day-to-day tasks involved in adjusting individual claims made under insurance policies their employer issued.  They investigated and estimated claims, made coverage determinations, set reserves, negotiated settlements, made settlement recommendations for claims beyond their settlement authority, identified potential fraud, and the like.  However, they were not involved in the formulation of management practices or policies or in general business operations.

Harris brought a class action lawsuit for wage-and-hours violations based on the assertion that claims adjusters were not compensated for time spent in excess of regular work days and regular work weeks.  As an affirmative defense, the insurer asserted that claims adjusters were administrative employees and thus exempt from the overtime compensation requirements.

Whether claims adjusters were exempt administrative employees was addressed via summary adjudication motion.

After a convoluted procedural history, the California Supreme Court remanded the matter to the Court of Appeal for consideration in light of various of its rulings.

HOLDING & REASONING

The Court of Appeal held that Harris was entitled to an adjudication that claims adjusters were not exempt administrative employees.

The court laid out the history of California and Federal wage and hour regulations and the exceptions to the minimum wages and maximum hours standards.  In doing so, it looked at the exception for administrative employees.  It noted that to qualify for the administrative exemption under the relevant wage orders, an employee must be primarily engaged in work that qualitatively is “directly related to management policies or general business operations.”

The court recognized that “In one sense, every type of work directly relates to management policy, because every employee does work that carries out, or is governed by, management policy.”  That led it to conclude that any interpretation that would mean that all types of work meet the qualitative component of the “directly related” requirement is untenable.  A proper interpretation would be that only duties performed at the level of policy or general operations can satisfy the qualitative component of the “directly related” requirement.

Looking at what it is the insurance claims adjusters do for an insurance company, the court said:  “None of that work, or the similar work of the other class members, is carried on at the level of management policy or general operations.  Rather, it is all part of the day-to-day operation of Employers’ business.”

Based on this, the court held that Harris and the class of claims adjusters were not exempt employees and that they were entitled to an adjudication to that effect.

ANALYSIS

The issue of whether insurance adjusters are exempt from overtime laws has been frequently litigated in recent years.  Some courts have held that they are exempt.  See, e.g.,In re: Farmers Ins. Exchange Claim Representatives Overtime Pay Litigation, 481 F.2d 1119 (9th Cir. 2008).

 

*****

 

An Internal Memorandum Suggesting That Information Be Disclosed Did Not Create A Duty To Do So

SCC Acquisitions v. Central Pacific Bank
(Cal. Ct. of App., 4th Dist.), filed June 25, 2012

KEY FACTS

Central Pacific Bank loaned over $7.3 million to Fillmore Sun for costs involved in purchasing certain property and for “paying the predevelopment costs related to the development of the Property.” SCC Acquisitions, Inc. and Bruce Elieff were guarantors on the loan.

Under the terms of the one-year loan, Fillmore Sun would pay only the interest on the loan until the maturity date of the loan, August 24, 2006, at which time the entire principal would be due. The loan also contained a provision that if there were no uncured default outstanding at the time of the maturity date, in the bank’s sole and absolute opinion and judgment, the maturity date would be extended. The clause also provided “[t]he granting of such extension, however, is not intended to imply any agreement for any other or further extension of the Maturity Date.”

The loan maturity date was extended five times. It was not extended a sixth time. When Filmore Sun then defaulted, Gray 1 CPB, LLC, which had bought the loan as part of a loan pool sale, sued Filmore Sun, SCC Acquisitions and Elieff.

Filmore Sun, SCC Acquisitions and Elieff filed a cross-complaint for rescission based on sham guaranties, breach of contract and the implied covenant of good faith and fair dealing, promissory estoppel, and intentional fraud based on suppression of facts. They asserted that because an internal bank memorandum existed, that suggested that if the bank had decided not to extend the loan again, it should give Filmore Sun advance warning, then that memorandum created a duty to give such notice. They also asserted that a term sheet that was provided by the bank in conjunction with a possible sixth extension constituted a misrepresentation.

A jury found against Filmore Sun, SCC Acquisitions and Elieff.

HOLDING & REASONING

The Court of Appeal affirmed.

The court discussed the elements of a claim for fraud and how a duty to disclose material facts might arise. It held that the internal memorandum did not create a duty to disclose. It said: “That the bank thought it appropriate to notify the borrower of a decision not to renew the loan did not, under any theory, ‘create’ a duty to notify the borrower.”

The court also held that the term sheet that was provided to Filmore Sun did not constitute a representation that the loan would be extended. It noted: “Here, the face of the term sheet plainly states it was not a commitment, representation, or promise to renew the loan on the terms set forth therein.”

ANALYSIS

The court refused to allow internal documentation to create legal duties that would not otherwise have existed. It is likely that the result would differ if the borrowers had detrimentally relied on a representation.

 

*****

 

Other Cases Of Interest

The Space Where A Mobilehome Was Kept Was Subjected To Rent Control Even Though It Was Not The Owner’s Principal Residence

Freeman v. Vista De Santa Barbara Associates LP
(Cal. Ct. of App., 2d Dist.), filed July 10, 2012

Vista de Santa Barbara Associates, LP operates a mobilehome park. The park is subject to the city’s rent control ordinance.

Jessica Freeman leased a space in the park for her mobilehome. The mobilehome was not her principal residence. She entered into her lease on November 10, 2003. Her lease and the park rules expressly prohibited subletting her space.

Vista amended the park rules to allow subletting spaces. It did not, however, give notice of this to Freeman.

Vista sent a letter to Freeman advising her that because her mobilehome was not her principal residence, it was exempt from rent control. The letter further advised her the rent would be raised from $610 to $910 per month.

Freeman put her mobilehome up for sale and, through her attorney, gave Vista written notice of this.

Freeman continued to pay $604.82 per month as the rent controlled rate. Vista served Freeman with a three-notice to pay rent or quit. The notice demanded rent at the non-controlled rate of $910. Freeman paid the $910 per month under protest.

Freeman sued Vista for declaratory relief, injunction and damages. The court found that the rent control ordinance applied to Freeman’s lease and ordered Vista to pay damages measured by the difference between the controlled rent and the amount Freeman paid.

The Court of Appeal affirmed.

The Mobilehome Residency Law found in Civil Code section 798 et seq. Section 798.21(a) states that a mobilehome space is exempt from a local rent control ordinance if the space is not the principal residence of the homeowner. Subdivision (f) of the section provides several exceptions. One is if the park prohibits subletting. The other is if the homeowner is actively marketing her mobilehome for sale.

The court ruled that even though Vista had changed its rules to allow subletting, it had not given Freeman proper notice of the change. As a result, the change was inapplicable to her. Further, she was within the exception in subdivision (f) and her space continued to be controlled.

The court also ruled that because Freeman was actively trying to sell her mobilehome, she was within the exception in subdivision (f). It rejected Vista’s argument that the exception only applied if the mobilehome was being sold before the rent increase.

 

******

 

A Defendant’s Acceptance Of A Statutory Offer To Compromise Could Create Statutory Attorney Fee Liability

Wohlgemuth v. Caterpillar Inc.
(Cal. Ct. of App., 5th Dist.), filed July 23, 2012

Richard L. Wohlgemuth and Gloria M. Wohlgemuth purchased a new motor home that had an engine manufactured and warranted by Caterpillar Inc. The Wohlgemuths subsequently claimed the engine was defective and sued Caterpillar under the Song-Beverly Consumer Warranty Act embodied in Civil Code section 1790, et seq. They alleged that Caterpillar failed to repair the defects after a reasonable number of attempts.

Shortly before trial, Caterpillar made an offer to compromise under the terms of Code of Civil Procedure section 998. The offer provided that the Wohlgemuths would be paid $50,000, in exchange for which they would dismiss the action with prejudice and sign a release of all claims. The offer was silent as to attorney fees and costs.

The Wohlgemuths filed a notice of acceptance of the offer, dismissed the action with prejudice and then moved to recover their attorney fees and costs under Civil Code section 1794(d). Caterpillar opposed the motion, arguing that there was no formal judgment in the Wohlgemuths favor as a predicate for an attorney fee or cost award and that, in any event, it, Caterpillar, was the true prevailing party, not the Wohlgemuths, since a dismissal had been entered.

The trial court rejected Caterpillar’s arguments, found that the Wohlgemuths prevailed, and awarded attorney fees and costs to the Wohlgemuths.

The Court of Appeal affirmed.

Before addressing Caterpillar’s arguments, the court noted that where a Code of Civil Procedure section 998 offer is silent on costs and fees, the prevailing party is entitled to costs and, if authorized by statute or contract, attorney fees.

The court then rejected Caterpillar’s arguments that for the Wohlgemuths to be considered prevailing parties, there must be an actual judgment in their favor and that since they dismissed their action, there was no judgment. It ruled that a compromise agreement contemplating payment by defendant and dismissal of the action by plaintiff can be the legal equivalent of a judgment in plaintiff’s favor.

The court then turned to the question of whether the particular compromise was such that the Wohlgemuths could be considered to have prevailed. It held that the fact that the Wohlgemuths dismissed the action does not mean that they were necessarily precluded from being deemed the prevailing parties.

Given the amount of the settlement ($50,000) in comparison to the cost of replacing the defective engine ($21,000) and the cost of the entire motor home, the trial court did not abuse its discretion in ruling that the Wohlgemuths were the prevailing parties.

 

*****

 

Expert Testimony Is Not Always Necessary In A Police “Use Of Force” Case

Allgoewer v. City of Tracy
(Cal. Ct. of App., 3d Dist.), filed July 5, 2012

Steven Allgoewer sued the City of Tracy and two of its police officers for, among other things, using excessive force in arresting him. Before Allgoewer finished putting on his evidence at trial, the trial court granted the City and officers’ motion for a nonsuit. It did so on the ground that Allgoewer could not prevail without offering expert testimony on “what force a reasonable law enforcement officer would have used under the same or similar circumstances.”

In the ensuing appeal, the Court of Appeal concluded the trial court prejudicially erred in concluding that expert testimony on the issue of reasonable force was required in the particular case. It reversed and remanded.

The court discussed the need for expert testimony, saying:

“Generally, the opinion of an expert is admissible when it is ‘[r]elated to a subject that is sufficiently beyond common experience that the opinion of an expert would assist the trier of fact . . . .’” (PM Group, Inc. v. Stewart (2007) 154 Cal.App.4th 55, 63, quoting Evid. Code, § 801, subd. (a).) “If the matter in issue is one within the knowledge of experts only and not within the common knowledge of laymen, it is necessary for the plaintiff to introduce expert opinion evidence in order to establish a prima facie case.” (Miller v. Los Angeles County Flood Control Dist. (1973) 8 Cal.3d 689, 702.) That is usually the case, for example, in medical malpractice actions. “Because the standard of care in a medical malpractice case is [generally] a matter ‘peculiarly within the knowledge of experts’ [citation], expert testimony is required to ‘prove or disprove that the defendant performed in accordance with the standard prevailing of care’ . . . .” (Johnson v. Superior Court (2006) 143 Cal.App.4th 297, 305.) This rule does not apply, however, when “the negligence is obvious to a layperson.” (Ibid.) “Where the jury is just as competent as the expert to consider and weigh the evidence and draw the necessary conclusions, then the need for expert testimony evaporates.” (People v. Torres (1995) 33 Cal.App.4th 37, 47.)

The court concluded that there was nothing about the particular use of force in the particular case that was so far removed from the comprehension of a lay jury as to necessitate expert opinion testimony on the applicable standard of conduct or on what amount of force was reasonable under the circumstances that confronted the officers who arrested Allgoewer.

 

*****

 

When An Employee’s Appeal Of The Labor Commissioner’s Decision Is Dismissed On Jurisdictional Grounds, That Does Not Entitle The Employer To Attorney’s Fees

Arias v. Kardoulias
(Cal. Ct. of App., 2d Dist.), filed July 26, 2012

Rebecca Arias filed a wage claim with the California Labor Commissioner against Lupe Kardoulias, her sister and employer, seeking to recover unpaid wages earned while caring for their elderly father. The commissioner awarded Arias $6,319.69. Arias sought more than that and appealed to the Superior Court. The Superior Court dismissed her appeal as being untimely. As the prevailing party in the appeal, Kardoulias sought attorney’s fees under Labor Code section 98.2(a). The trial court awarded her $6,395 in attorney fees and costs.

The Court of Appeal reversed. It held that when an employee loses an appeal because the Superior Court lacks jurisdiction, it is not equivalent to a finding that no further wages are owed. Section 98.2(a) does not entitle an employer to attorney’s fees. The court reasoned that Section 98.2(a) exists to deter frivolous appeals and that losing on jurisdictional grounds does not equate with a frivolous appeal.

 

*****

 

Commissions That Are Paid As Advances And Are Contingent Are Not Wages And An Employer May Make Chargebacks If The Contingencies Are Not Met

Deleon v. Verizon Wireless, LLC
(Cal. Ct. of App., 2d Dist.), filed July 10, 2012

Saul Deleon, worked as a retail sales representative for Verizon Wireless. He and other retail sales representatives received an hourly wage plus monthly commissions. Under their compensation plan, commissions on the sale of cell phone service plans were paid in advance, but not earned until the expiration of a chargeback period during which the customer might cancel the service. If the customer cancelled the service during the chargeback period, the amount of the commission attributed to it was deducted from later commission payments.

Deleon sued on behalf of himself and other retail sales representatives whose commissions were subject to chargebacks. He alleged that Verizon violated Labor Code section 223, which prohibits the secret underpayment of wages by charging back against future commissions sums that were paid as commissions on sales that were cancelled during the chargeback period.

The trial court granted a motion for summary judgment in favor of Verizon.

The Court of Appeal affirmed. It framed the issue as whether the chargeback provision violates Section 223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statute or by contract.”

Based upon the undisputed facts, the court concluded the commission payments were advances, not wages, and as a result the chargeback provision did not violate the Labor Code. It reasoned that because the payments were advances, Verizon could legally advance commission payments to its retail sales representatives before completion of all conditions for payment, and charge back any excess advance over commissions earned against future advances should the conditions not be satisfied.