Judge: David S. Cunningham, Case: 23STCV14788, Date: 2024-01-18 Tentative Ruling
Case Number: 23STCV14788 Hearing Date: January 18, 2024 Dept: 11
Jacobson (23STCV14788)
Tentative
Ruling Re: Demurrer
Date: 1/18/24
Time: 10:00 am
Moving Party: Metropolitan
Life Insurance Co. (“Defendant” or “MLIC”)
Opposing Party: Carolyn Jacobson (“Plaintiff”)
Department: 11
Judge: David S. Cunningham III
________________________________________________________________________
TENTATIVE
RULING
Defendant’s demurrer is sustained
with leave to amend.
BACKGROUND
This is a putative class action.
Plaintiff is a public school
teacher. She invests in a supplemental
retirement plan pursuant to section 403(b) of the federal tax code. One of her investments is a variable annuity
purchased from MLIC. (See Complaint, ¶¶
14, 17.) She also purchased a Guaranteed
Minimum Income Benefit rider (“GMIB Rider”), “which guaranteed a minimum level of
payments once the contract is annuitized[.]”
(Id. at ¶ 17.)
According to the complaint,
California’s Education Code “requires 403(b) vendors to provide certain information
about their products on a publicly accessible website, 403bcompare.com (‘the
Website’), so that teachers can make informed decisions about what investments
to hold in their supplemental retirement plans.” (Id. at ¶ 7.)
For example, vendors must disclose all fees that they charge to
teachers. (See id. at ¶ 8.)
“Over
the past four years,” Plaintiff claims MLIC has charged “fees connected to” the
GMIB Rider that “were not disclosed” on the Website. (Id. at ¶ 17.) She contends the conduct violates the
Education Code, in particular, sections 25101 and 25107. (See ibid.)
The
complaint asserts a single cause of action for violation of Business and Professions Code section 17200, the Unfair
Competition Law (“UCL”), based on the purported violations of the Education
Code. (See id. at ¶¶ 96-114.)
Here, MLIC demurs to the complaint.
LAW
Demurrer
When
considering demurrers, courts read the allegations liberally and in context,
and “treat the demurrer as admitting all material facts properly pleaded, but
not contentions, deductions or conclusions of fact or law.” (Serrano v.
Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests the pleadings alone and not the evidence or
other extrinsic matters. Therefore, it lies only where the defects appear on
the face of the pleading or are judicially noticed.” (Hahn v. Mirda (2007) 147
Cal.App.4th 740, 747.) It is error “to
sustain a demurrer without leave to amend if the plaintiff shows there is a
reasonable possibility any defect identified by the defendant can be cured by amendment.”
(Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th
962, 967.)
UCL
“[T]he UCL permits a cause of action to be brought if a practice
violates some other law. In effect, the
‘unlawful’ prong of § 17200 makes a violation of the underlying law a per se
violation of § 17200.” (Stern, Bus. & Prof. Code § 17200 Practice (The
Rutter Group March 2023 Update) ¶ 3:53.)
“Virtually any law or regulation — federal or state, statutory or common
law — can serve as predicate for a § 17200 ‘unlawful’ violation. Thus, if a ‘business practice’ violates any
law — literally — it also violates § 17200 and may be redressed under that
section. [Citation.] As the California Supreme Court has said, § 17200 ‘borrows’
violations of other laws and treats them as unlawful practices independently
actionable under § 17200.” (Id. at ¶
3:56.)
“The second ‘wrong’ proscribed by § 17200 is ‘unfair’ business
practices. Because § 17200's definition
of the five proscribed ‘wrongs’ is set forth in the disjunctive, a business
practice can be ‘unfair’ — and violative of § 17200 — even if it is not
‘deceptive’ and even if it is ‘lawful.’”
(Id. at ¶ 3:112.) “The ‘unfair’
standard is intentionally broad, allowing courts maximum discretion to prohibit
new schemes to defraud.” (Id. at ¶
3:113.)
“The third type of conduct proscribed by § 17200 is ‘fraudulent’
business practices.” (Id. at ¶
3:153.) “A business practice is
‘fraudulent’ within the meaning of § 17200 if ‘members of the public are likely
to be deceived.’” (Id. at ¶ 3:154.) “An advertisement's potentially deceptive
effect is measured by the audience to which it is addressed. Under the UCL and False Advertising statute,
this will usually be the ‘reasonable person’ standard.” (Ibid.)
DISCUSSION
The UCL allegations state:
97. Plaintiff and
class members are “persons” within the meaning of Section 17201 of the UCL.
98. The UCL
defines “unfair competition” to include any unlawful, unfair, or fraudulent
business act or practice, and prohibits such acts or practices. Cal. Bus. &
Prof. Code § 17200.
99. Because the
UCL is written in the disjunctive, a business act or practice need only meet
one of the three criteria—unlawful, unfair, or fraudulent—to be considered
unfair competition.
100. Defendant has
engaged and continues to engage in unfair competition within the meaning of the
UCL because Defendant’s conduct alleged herein is both unlawful and unfair.
101. Defendant’s
conduct, as described herein, violates the UCL’s “unlawful” prong.
102. Defendant is
a “vendor” within the meaning of Cal. Educ. Code § 25100(c)(2).
103. As such,
Defendant is required to make a “disclosure of all expenses paid directly or
indirectly by retirement plan participants, including, but not limited to,
penalties for early withdrawals, declining or fixed withdrawal charges,
surrender or deposit charges, management fees, and annual fees,” which “shall
be included in the impartial investment information bank established pursuant
to Section 25104” (i.e., 403compare.com), and is prohibited from charging any
fees associated with its 403(b) products that are not so disclosed. Cal. Educ.
Code § 25107; Cal. Educ. Code § 25101.
104. However, in
violation of the Code, Defendant routinely charges rider fees on its 403(b)
products which were not disclosed on 403bcompare.com at the time the fees were
charged.
105. Defendant’s
violations of the Code serve as predicate unlawful actions under the UCL.
106. Separately,
Defendant’s conduct, as described herein, also violates the UCL’s “unfair”
prong as Defendant’s conduct is unfair to consumers, using any of the three
standards used by California courts in UCL consumer actions.
107. First,
Defendant’s practices of charging undisclosed and hefty rider fees in
connection with its 403(b) products are immoral, unethical, oppressive,
unscrupulous, or substantially injurious to consumers, and have caused harm to
Plaintiff and class members. The harm caused by these business practices—i.e.,
skimming millions of dollars from the retirement savings of unsuspecting public
servants—vastly outweighs any legitimate utility they possibly could have.
108. Second,
the undisclosed rider fees charged in connection with its 403(b) products (1)
have caused, and continue to cause, substantial injury to Plaintiff and class
members; (2) the injury is not outweighed by any countervailing benefits to
consumers or competition; and (3) the injury could not reasonably have been
avoided by Plaintiff and class members.
109. Third,
Defendant’s conduct is also unfair as it significantly threatens or harms
competition. By failing to disclose its rider fees, Defendant has made it
appear as though its 403(b) products cost less than those offered by
Defendant’s competitors, who comply with the Code and disclose the rider fees
investors will pay in connection with their 403(b) products.
110. By failing to
disclose the existence of its Guaranteed Minimum Income rider and hiding the
associated rider fees, Defendant has managed to lure California public school
teachers to invest in or retain its products, while increasing the likelihood
that teachers will fail to take the actions necessary to obtain the rider’s
benefits. The Legislature’s declared policy in the Code is that all
403(b) vendors must disclose all their fees. Given the Legislature’s
clear directive—which protects both educators and other vendors—Defendant’s
conduct violates the policy and spirit of the Code and is therefore unfair.
Defendant’s conduct provides Defendant an unfair advantage over its
competitors, which comply with applicable disclosure requirements under the
Code.
111. As a result
of Defendant’s unlawful and unfair practices, Plaintiff and class members have
suffered injury in fact because they paid undisclosed and unauthorized rider
fees on the 403(b) products that they purchased from Defendant.
112. Because
Plaintiff still has a 403(b) product with Defendant, and because of the
ubiquity of Defendant’s unlawful and unfair business practices, there is a real
and immediate threat that Plaintiff will suffer the same injury—being charged
unauthorized rider fees—in the future.
113. Plaintiff and
the Class are entitled to, and do seek, equitable restitution and the recovery
of attorneys’ fees and costs.
114. Plaintiff and
the Class are also entitled to, and do seek, an injunction prohibiting
Defendant from continuing its unlawful and unfair conduct and for an order
requiring Defendant to make full disclosures on 403bcompare.com of the fees
associated with its registered 403(b) products.
(Complaint,
¶¶ 97-114, underlining and italicizing in original.)
Plaintiff
purchased the variable annuity and GMIB Rider in 2010 (see id. at ¶ 17), but
the alleged class period started four years prior to the filing of the
complaint. (See id. at ¶ 83.) In other words, the alleged class period is
from June 26, 2019 to the present.
Defendant
contends Plaintiff fails to state a UCL claim because:
*
Defendant stopped offering the GMIB Rider for sale to new investors in 2018,
before the alleged class period commenced (see Demurrer, pp. 6-7, 12-17); and
*
the Education Code does not require vendors to disclose fees for products that
are no longer “actively offered for sale[.]”
(Id. at p. 7; see also id. at pp. 12-17.)
Plaintiff
disagrees. She claims “it is irrelevant
whether the GMIB Rider . . . is ‘actively offered for sale’ to new
investors.” (Opposition, p. 6.) Although it is unavailable to new purchasers,
the complaint alleges that the GMIB Rider continues to be sold to old investors
like Plaintiff who first bought it before it stopped being available. (See Complaint, p. 15 n.13.) Those investors are allowed to make new
investments in the GMIB Rider, and those new investments “are subject to the
rider fee[.]” (Ibid.) Plaintiff argues that the rider fees for the
new investments – as well as annual rider fees on the old investors’ entire
account balances, which encompass monies invested before and after Defendant
made the GMIB Rider unavailable to new purchasers – must be disclosed on the
Website. (See Opposition, pp. 6-13.)
The
Court turns to the statutory language.
First
up is section 25101. It provides:
A prospective
vendor of 403(b) products that offers those products, or the products of
other 403(b) vendors, to employers and their eligible employees, shall register
those products with the board pursuant to this chapter. Registered vendors
shall offer only registered 403(b) products as funding vehicles for 403(b)
plans.
(a) Prospective
vendors shall be registered with the board based upon a complete response to
the disclosures required by this subdivision. This information shall be
included in the impartial investment information bank established pursuant to
Section 25104. The prospective vendors shall provide the following information:
* *
*
(3)
A disclosure of all expenses paid directly or indirectly by retirement plan
participants, including, but not limited to, penalties for early withdrawals,
declining or fixed withdrawal charges, surrender or deposit charges, management
fees, and annual fees, supported by documentation as required for prospectus
disclosure by the Financial Industry Regulatory Authority and the Securities
and Exchange Commission. Vendors shall
be required to provide information regarding the impact of product fees upon a
hypothetical investment, as described in Section 25104.
(4)
The types of products, product features, including presence of two tier annuity
features, services offered to participants, and information about how to access
product prospectuses or other relevant product information.
(Cal.
Educ. Code § 25104, subd. (a)(3)-(4).)
Section
25104 is next. It states:
(a)
The board shall maintain an impartial investment information bank, via an
Internet Web site, containing the information required by Section 25101 about
the retirement investment products offered by each registered vendor and
objective comparisons of vendors and types of products.
(b)
The information bank shall include information on investment performance based
upon the investment's average annual total return, as measured by a nationally
recognized rating service selected by the board for standard periods of time of
not less than one year.
(c)
The Web site shall include a table showing, for each registered fund, the total
fee cost in dollars incurred by a shareholder who initially invested ten
thousand dollars ($10,000), earned a 5 percent rate of return for one, five,
10, 15, and 20 year time periods. This table shall be accompanied by a
disclaimer that the rate of return is for purposes of illustrating the
respective impacts of different fee amounts on each investment, and is not to
predict future investment returns.
(Id.
at § 25104, subds. (a)-(c).)
Section 25107 is last. It
states that “[a] vendor may not charge a fee associated with a registered
403(b) product that is not disclosed, pursuant to Section 25101.” (Id. at § 25107.)
Defendant contends the words “prospective,” “offers,” and
“offered” demonstrate that the Legislature intended sections 25101, 25104, and
25107 to govern currently offered products rather than “discontinued products
that are not offered for sale[.]”
(Demurrer, p. 13.)
“Prospective” appears in section 25101 to modify “vendors.” It means “relating to or effective in the
future[,]” “likely to come about[,]” or “likely to be or become[.]” (https://www.merriam-webster.com/dictionary/prospective.) The purpose is to require unregistered
vendors to register with the board if they want to sell their 403(b) products
to teachers in the future. Clearly,
section 25101 concerns the pre-registration context.
By contrast, sections 25104 and 25107 concern the
post-registration context. Section 25104
requires the board to “maintain” the Website to provide information about the
“registered” investments “offered by each registered vendor[.]” (Cal. Educ. Code § 25104, subds. (a),
(c).) Section 25107 prohibits registered
vendors from charging undisclosed fees “associated with [] registered”
investments. (Id. at § 25107, emphasis
added; see also id. at § 25101 [stating that “[r]egistered vendors shall offer
only registered 403(b) products” to investors].)
Defendant’s interpretation of these sections seems at odds with
the fact – alleged in the complaint – that the GMIB Rider remains
available. It “was an additional
[product] feature offered” to teachers who bought Defendant’s registered
variable annuity prior to 2018 (Demurrer, p. 8, emphasis added; see also Reply,
pp. 8-9 [conceding that the GMIB Rider was a product feature of the variable
annuity]), and it is still offered to them. (See Complaint, p. 15 n.13.) It is a product feature that Defendant offers
to old investors on an ongoing basis even today. (See ibid.; see also Opposition, p. 7.) In context, “offered” and “offers” appear to
cover the present and can be construed, reasonably, as present tense. At this stage, thus, the Court finds
Defendant’s interpretation unavailing.
Section 25102, the legislative history, and the Website itself do
not change the result.
Section 25102 addresses renewal registrations. It states that “[r]egistration shall be
offered to vendors once annually, and renewal of registration shall be required
at least once every five years thereafter for vendors that wish to continue to
participate.” (Cal. Educ. Code §
25102.) In part, section 25102 provides:
Registered vendors shall submit to the board within the time
required by the Securities and Exchange Commission an amendment to the
information required to be provided under Section 25101 to reflect
material changes to the products or services offered that occur between
registration or renewal periods. Registered vendors may register additional
403(b) products with the board between registration or renewal periods by
providing the board the information required under Section 25101 and fees
required under subdivision (c) of Section 25108. Upon receipt of information
reflecting material changes or additions to the products or services offered
by registered vendors that occur between registration or renewal periods, the
board shall reflect those changes in the impartial investment information bank
established pursuant to Section 25104 within the time required by the
Securities and Exchange Commission.
(Ibid., emphasis added.)
Defendant contends “offered” is present tense and connotes current
products. (See Demurrer, p. 14.) To repeat, though, the complaint alleges that
the GMIB Rider is a current product offered to old investors. (See Complaint, p. 15 n.13.)
The same analysis applies to the legislative history. Defendant highlights the following passage:
It is the intent
of the Legislature, in enacting this act, to do all of the following: . . . (c)
To provide employees of local school districts, community college districts,
and county offices of education and other interested parties, with access to an
impartial information bank to compare among registered vendors and investment
options available, including information related to participant cost . . .
. (e) To enable all local school districts, community college districts, and
county offices of education to provide employees notice of available
retirement investment products from registered vendors.
(Demurrer, p. 15, emphasis in original; see also Reply, p.
9.) Again, the GMIB Rider is alleged to
be available right now.
Defendant’s Website argument also fails. Defendant claims “the Website does not
[] allow comparisons between offered products and discontinued
products.” (Demurrer, p. 15, emphasis in
original; see also Reply, p. 10.) This
is a factual assertion outside the four corners of the complaint, so it should
not be considered. Regardless, it fails
to prove anything. Per section 25102,
during the renewal process, Defendant must submit amendment information to the
board to show material changes to offered products. (See Cal. Educ. Code § 25102.) The board is then supposed to take the
amendment information and add it to the Website. (See ibid.)
Discovery is needed to assess what Defendant told the board about the
GMIB Rider and how it impacted what appears on the Website.
Moving to the final issue, Defendant asserts:
* Plaintiff must allege lost money or property to have standing
to bring a UCL claim (see Demurrer, pp. 17-18); and
* the complaint fails to allege that “the removal of the GMIB
Rider fee from the Website” caused her to suffer an economic injury. (Id. at p. 17; see also Reply, pp. 4-7.)
Plaintiff claims payment of undisclosed fees constitutes
economic injury. She cites Medrazo v.
Honda of North Hollywood (2012) 205 Cal.App.4th 1 and three
federal district court decisions as support.
(See Opposition, pp. 14-15.)
Proposition 64 limits “private standing . . . to any ‘person who
has suffered injury in fact and has lost money or property’ as a result of
unfair competition [citations].” (Kwikset
Corp. v. Superior Court (2011) 51 Cal.4th 310 320-321.) “The intent of
this change was to confine standing to those actually injured by a defendant's
business practices and to curtail the prior practice of filing suits on behalf
of clients who have not used the defendant's product or service, viewed the
defendant's advertising, or had any other business dealing with the defendant.
. . .” (Id. at 321, internal quotation
marks omitted.)
Reliance is a requisite element “when a
consumer’s theory is that the defendant ‘engaged in misrepresentations and
deceived consumers[.]” (Veera v. Banana Republic, LLC (2016) 6 Cal.App.5th
907, 919 [applying the reliance element to the UCL’s unlawful prong].)
Given these rules, the Court agrees with
Defendant. Plaintiff alleges that
Defendant failed to disclose the rider fees on the Website. (See, e.g., Complaint, ¶¶ 104, 109-110.) Her theory is akin to a misrepresentation or
deceit claim, yet she fails to allege reliance.
(See id. at ¶¶ 100-112 [failing to state that she would have acted
differently if the Website had disclosed the rider fees].) The Court sustains the demurrer with leave to
amend to give Plaintiff a chance to add reliance allegations.
Medrazo is unhelpful. It was
decided post-judgment after a bench trial.
More important, it has since been criticized by the very panel that
issued the opinion. (See Veera,
supra, 6 Cal.App.5th at 919 [instructing that Medrazo “went
too far” in finding the reliance element inapplicable].)[1]
To the extent Plaintiff intends to argue that
the demurrer should be overruled because reliance is not an element under the
UCL’s unfair prong, the Court disagrees.
Plaintiff seeks to represent a putative class of investors. The putative class seeks to assert a UCL
class claim under the unlawful prong.
Plaintiff needs to allege reliance to show that she is typical and
adequate with respect to the unlawful-prong claim.