Opinion ID: 807798
Heading Depth: 3
Heading Rank: 4

Heading: UCL Claims Against HSBC and Best Buy

Text: Davis’s third and fourth causes of action each allege that Defendants made inadequate disclosure of the annual fee in their advertising and marketing in violation of the UCL. Defendants argue that because their annual fee disclosure complied with, and was required by, TILA and Regulation Z, their conduct falls within a “safe harbor” that is impervious to the UCL. We agree in part and conclude that while the disclosures in the online application fall within the safe harbor, the advertisements do not. [10] First, it is necessary to understand what constitutes a safe harbor, and whether TILA and Regulation Z can meet this test. The California Supreme Court has explained the “safe harbor” doctrine in this way: Although the unfair competition law’s scope is sweeping, it is not unlimited. . . . Specific legislation may limit the judiciary’s power to declare conduct unfair. If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination. When specific legislation provides a ‘safe DAVIS v. HSBC BANK NEVADA 10383 harbor,’ plaintiffs may not use the general unfair competition law to assault that harbor. Cel-Tech Comms. Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527, 541 (Cal. 1999). Under the safe harbor doctrine, “[t]o forestall an action under the unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.” Id. [11] We conclude that TILA and Regulation Z provide such a safe harbor with respect to Defendants’ disclosures in the online application. TILA requires that applications for an account under an open end consumer credit plan must include certain disclosures. 15 U.S.C. § 1637(c). Where, as here, the application is provided online and contains “specific information” about the terms and conditions, the application must disclose, among other things, “[a]ny annual fee, other periodic fee, or membership fee imposed for the issuance or availability of a credit card, including any account maintenance fee or other charge imposed based on activity or inactivity for the account during the billing cycle.” 15 U.S.C. §§ 1637(c)(1)(A)(ii)(I), (c)(3)(B)(i)(I). The disclosure must appear “clearly and conspicuously” in the tabular format commonly referred to as the Schumer Box. 15 U.S.C. §§ 1632(a), (c)(2). [12] TILA delegates to the Board of Governors of the Federal Reserve Bank (“Board”) the duty to implement these disclosure requirements and to prescribe regulations governing the “form and manner” of the disclosures. 15 U.S.C. § 1632(c)(1)(A). Accordingly, the Board has promulgated “Regulation Z,” 12 C.F.R. § 226.1 et seq., which imposes “even more precise” disclosure requirements. Virachack v. Univ. Ford, 410 F.3d 579, 581 (9th Cir. 2005). Regulation Z requires lenders to provide specific disclosures “on or with a solicitation or an application to open a credit or charge card account.” 12 C.F.R. §§ 226.5a(a), (b). In pertinent part, the lender must disclose “[a]ny annual or other periodic fee that 10384 DAVIS v. HSBC BANK NEVADA may be imposed for the issuance or availability of a credit or charge card, including any fee based on account activity or inactivity; how frequently it will be imposed; and the annualized amount of the fee.” 12 C.F.R. § 226.5a(b)(2)(i). Further, the disclosure “shall be in the form of a table with headings, content, and format substantially similar to any of the applicable tables found in G-10 in appendix G to this part.” 12 C.F.R. § 226.5a(a)(2)(i). [13] We have no trouble concluding that TILA and Regulation Z create a safe harbor for Defendants’ disclosure in the online application. Both the statute and the regulations clearly permit, and indeed require with equal force, the disclosure of any annual fee in an application for a credit card such as the RZMC. Our comparison of the online application’s disclosure with the sample Schumer table in Appendix G demonstrates that Defendants’ disclosure complied with these federal requirements. Indeed, Davis has not and cannot allege any violation under these provisions. Because the disclosure in the application clearly was permitted by federal law, it cannot serve as the basis for UCL liability. Davis relies on Krumme v. Mercury Ins. Co., 20 Cal. Rptr. 3d 485, 497 n.5 (Ct. App. 2004), for the contention that only statutes, not regulations, can create “safe harbors.” In Krumme, the state intermediate court rejected an insurance company’s argument that California insurance regulations provided a safe harbor against UCL liability. Id. It reasoned that such materials “are not germane to our analysis” because the California Supreme Court in Cel-Tech “held that only statutes can create a safe harbor.” Id. (citing Cel-Tech, 973 P.2d at 541-42). [14] We are not persuaded that Cel-Tech stands for this rule. See Kairy v. SuperShuttle Intern., 660 F.3d 1146, 1150 (9th Cir. 2011) (“In a case requiring a federal court to apply California law, the court must apply the law as it believes the California Supreme Court would apply it.”) (internal quotaDAVIS v. HSBC BANK NEVADA 10385 tion marks omitted). Cel-Tech involved whether the Unfair Practices Act provided a safe harbor to shield certain business conduct from liability under the UCL. The court explained that while an express statutory provision permitting specific conduct would be sufficient to create a safe harbor, “the Legislature’s mere failure to prohibit an activity does not prevent a court from finding it unfair.” Cel-Tech, 973 P.2d at 542. The court then stated that “[i]f no statute provides a safe harbor,” the court must decide whether the alleged misconduct violates the UCL. Id. We reject the notion that this last passing reference established a bright-line rule that only statutes can create safe harbors. Instead, we understand the court to be outlining its analysis in the context of the case before it, which concerned only a potential statutory safe harbor. Furthermore, even if “the Legislature’s mere failure to prohibit an activity” does not create a safe harbor, id. at 542, this does not preclude the possibility that one might arise where an implementing regulation clearly permits that activity. At bottom, the question of whether regulations can create safe harbors simply was not before the Cel-Tech Court, and therefore any intimation on this point was non-essential dicta.3 Rather, we follow our previous decision in Webb v. Smart Document Solutions, LLC, where we observed that if HIPAA regulations “intended to permit [the defendant’s] conduct, it cannot be ‘unfair’ under Section 17200.” 499 F.3d 1078, 1082 (9th Cir. 2007). We therefore recognize that Regulation Z does provide a safe harbor for Defendants’ disclosures in the online application. 3 California intermediate courts agree with our conclusion that regulations can create safe harbors. Most recently, in Lopez v. Nissan North America, Inc., 135 Cal. Rptr. 3d 116, 132 (Ct. App. 2011), the state appellate court discussed approvingly our decision in Alvarez v. Chevron Corp., 656 F.3d 925, 933 (9th Cir. 2011), where we held that California gasoline regulations created a safe harbor against the UCL. See also Byars v. SCME Mortgage Bankers, Inc., 135 Cal. Rptr. 2d 796, 805-806 (Ct. App. 2003) (noting that HUD policy statement created safe harbor for mortgage lender’s conduct). 10386 DAVIS v. HSBC BANK NEVADA We would add that even if regulations could not create safe harbors, Davis does not deny that federal statutes can. Indeed, we have held as much. See Hauk v. JP Morgan Chase Bank USA, 552 F.3d 1114, 1122 (9th Cir. 2009) (holding that a credit card issuer’s “compliance with TILA’s disclosure requirements provides a safe harbor with respect to [the plaintiff ’s] UCL claims based only on the sufficiency of [the issuer’s] disclosures”). In this case, to reiterate, TILA not only clearly permits the annual fee disclosure in the online application, it mandates it. See 15 U.S.C. §§ 1632(a), (c)(2); 15 U.S.C. §§ 1637(c)(1)(A)(ii)(I), (c)(3)(B)(i)(I). At a minimum, therefore, Defendants’ disclosure draws protection from a safe harbor under TILA. Davis next objects that any safe harbor under TILA could not protect Best Buy because TILA does not govern retailers such as Best Buy. Even if TILA does not govern Best Buy, which we need not decide, Davis’s argument misses the mark because the safe harbor doctrine immunizes conduct, not entities. In Cel-Tech, the California Supreme Court explained that when specific legislation affirmatively permits conduct, “[c]ourts may not simply impose their own notions of the day as to what is fair or unfair.” 973 P.2d at 541. In other words, the safe harbor doctrine protects specific conduct not because of its provenance, but because the content of the conduct itself is deemed “fair” as a matter of law.4 Here, TILA and Regulation Z expressly permit and require that online credit card applications disclose the annual fee in a prescribed manner. 4 Consistent with this view, Cel-Tech repeatedly explains that it is the conduct, not the actor, that the safe harbor embraces. See also 973 P.2d at 541 (“If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination.”); id. (“To forestall an action under the unfair competition law, another provision must actually ‘bar’ the action or clearly permit the conduct.”); id. at 541-42 (“Acts that the Legislature has determined to be lawful may not form the basis for an action under the unfair competition law . . . .”); id. at 542 (“[C]ourts may not use the unfair competition law to condemn actions the Legislature permits.”). DAVIS v. HSBC BANK NEVADA 10387 Best Buy operated the online application process in compliance with these rules, and therefore its conduct cannot give rise to UCL liability. [15] We are not convinced, however, that Defendants’ advertisements may be swept into the ambit of this safe harbor. Unlike the online application, it is undisputed that the advertisements lacked any disclosure of the annual fee. Thus, to qualify for a safe harbor, we must be satisfied that the omission of the annual fee is permitted by some statute or regulation. [16] Taking the contrary view, Davis contends that the advertisements were “solicitations” that violated TILA and Regulation Z because they failed to disclose the annual fee. However, this argument rests on a misunderstanding of the definition of “solicitation.” Under Regulation Z, a “solicitation” is defined as “an offer by the card issuer to open a credit or charge card account that does not require the consumer to complete an application.” 12 C.F.R. § 226.5a(a)(1). In other words, a solicitation is an offer made to a consumer who is pre-approved to be a cardholder and therefore need not undergo the credit approval process to acquire the card. [17] This reading comports with the agency’s official staff interpretation, which explains that where a card issuer merely “contact[s] a consumer who has not been preapproved for a card account about opening an account . . . and invite[s] the consumer to complete an application[, s]uch a contact does not meet the definition of solicitation, . . . unless the contact itself includes an application form in a direct mailing, electronic communication or ‘take-one’; an oral application in a telephone contact initiated by the card issuer; or an application in an in-person contact initiated by the card issuer.” Div. of Consumer and Cmty. Affairs of the Fed. Reserve Bd., Official Staff Comm., 12 C.F.R. Pt. 226, Supp. I, § 226.5a cmt. 5a(a)(1); see Johnson v. Wells Fargo Home Mortg., Inc., 635 F.3d 401, 417 (9th Cir. 2011) (“We have been directed to treat 10388 DAVIS v. HSBC BANK NEVADA these official staff interpretations of Regulation Z as controlling unless demonstrably irrational.”) (internal quotation marks and alteration omitted). Here, Davis does not allege that he viewed any advertisement offering to extend him credit without requiring an application. In fact, he concedes that he was required to and did submit an application before he was approved for the RZMC. Thus, the advertisements were not solicitations lacking the requisite disclosure. Nevertheless, to fall under a safe harbor, the omission of the annual disclosure from Defendants’ advertisements must be expressly permitted by some other provision. It is not enough if TILA and Regulation Z merely fail to prohibit such an omission. Cel-Tech, 973 P.2d at 542. However, the parties have not provided, and we have not located, any provision in TILA, Regulation Z, or elsewhere that clearly permits the omission of the annual fee disclosure from such advertisements. Instead, Regulation Z only specifies that if the advertisement sets forth a specific credit term that “triggers” additional disclosure, such as a finance charge, then the advertisement “shall also clearly and conspicuously set forth,” among other items, the annual membership fee. See 12 C.F.R. § 226.16(b); Official Staff Comm., 12 C.F.R. Pt. 226, Supp. I, § 226.16(b)(1) cmt. 6. Thus, we cannot conclude that some provision affirmatively permits the absence of the annual fee disclosure from the advertisements. Because no authority provides a safe harbor, we must decide whether Davis adequately has alleged that Defendants’ advertisements violate the UCL. Cel-Tech, 973 P.2d at 542-43. The UCL prohibits “unfair competition,” which is broadly defined to include “three varieties of unfair competition — acts or practices which are unlawful, or unfair, or fraudulent.” Id. at 540. Because the statute is written in the disjunctive, it is violated where a defendant’s act or practice violates any of the foregoing prongs. See Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007). Davis claims that HSBC violated the “unlawful” prong, and that DAVIS v. HSBC BANK NEVADA 10389 Best Buy violated the “fraudulent” and “unfair” prongs of the UCL. We address each contention in turn.
HSBC To be “unlawful” under the UCL, the advertisements must violate another “borrowed” law. Cel-Tech, 973 P.2d at 539-40 (“[S]ection 17200 borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable.”) (internal quotation marks omitted). “[V]irtually any state, federal or local law can serve as the predicate for an action under section 17200.” People ex rel. Bill Lockyer v. Fremont Life Ins. Co., 128 Cal. Rptr. 2d 463, 469 (Ct. App. 2002) (internal citation and quotation marks omitted). In this case, Davis alleges that the advertisements violated OCC regulation 12 C.F.R. § 7.4008(c), which states that “[a] national bank shall not engage in unfair or deceptive practices within the meaning of section 5 of the Federal Trade Commission Act, 15 U.S.C. [§ ] 45(a)(1), and regulations promulgated thereunder in connection with loans made under this § 7.4008.” Defendants admit that the RZMC credit card loan was made pursuant to 12 C.F.R. § 7.4008, so the question is whether their conduct was unfair or deceptive.5 [18] A practice is deceptive under section 5 “(1) if it is likely to mislead consumers acting reasonably under the circumstances (2) in a way that is material.” F.T.C. v. Cyberspace.com LLC, 453 F.3d 1196, 1199 (9th Cir. 2006). For the 5 Davis also argues that the disclosure of the annual fee in the online application was “unfair and deceptive” in violation of the OCC regulation and was therefore “unlawful” under the UCL. However, because the safe harbor protects the application, this basis for the UCL claim must fail. While we are sensitive that there may be some facial tension between the TILA safe harbor and the OCC regulation in this situation, we need not address it here because (1) the California Supreme Court has not indicated that such a tension thwarts the safe harbor, and (2) in any event, the parties have not raised this issue. 10390 DAVIS v. HSBC BANK NEVADA same reasons discussed above with respect to the FAL claim, we reject the argument that the advertisements were deceptive under section 5. No reasonable consumer would have been deceived by these advertisements into thinking that no annual fee would be imposed. Nor were the advertisements unfair. A practice is “unfair” under section 5 only if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n). “In determining whether consumers’ injuries were reasonably avoidable, courts look to whether the consumers had a free and informed choice.” F.T.C. v. Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 2010). An injury is reasonably avoidable if consumers “have reason to anticipate the impending harm and the means to avoid it,” or if consumers are aware of, and are reasonably capable of pursuing, potential avenues toward mitigating the injury after the fact. Orkin Exterminating Co., Inc. v. F.T.C., 849 F.2d 1354, 1365-66 (11th Cir. 1988) (cited approvingly in Neovi, 604 F.3d at 1158). Davis’s alleged injury was certainly avoidable before he completed the application for the RZMC. The advertisement contained the disclaimer, “other restrictions may apply,” which would have motivated a reasonable consumer to consult the terms and conditions. If that were not enough, the online application used boldface and oversized font to alert Davis to the Important Terms & Disclosure Statement, instructing him to “read the notice below carefully.” The disclaimer and the terms and conditions were enough to give a reasonable consumer “reason to anticipate” the possibility of fees. Additionally, the fact that Davis was required to check the box indicating his assent before completing the application meant that he could have aborted his application upon reading the terms and conditions. This provided “the means to avoid” the alleged harm. DAVIS v. HSBC BANK NEVADA 10391 [19] The annual fee was also avoidable after the account was opened. Pursuant to the Cardmember Agreement, which Davis admits he received after completing the application, the annual fee was completely refundable if Davis closed his account within 90 days without using the card. Davis refused to do so, citing the negative impact it would have on his credit score. The question, however, is not whether subsequent mitigation was convenient or costless, but whether it was “reasonably possible.” Orkin, 849 F.2d at 1365. Under these circumstances, we conclude that Davis reasonably could have avoided the annual fee, and therefore that the advertisements were not unfair under section 5. Accordingly, the advertisements were not “unlawful” under the UCL.
Claim Against Best Buy [20] A business practice is fraudulent under the UCL if members of the public are likely to be deceived. Puentes v. Wells Fargo Home Mortg., Inc., 72 Cal. Rptr. 3d 903, 909 (Ct. App. 2008). The challenged conduct “is judged by the effect it would have on a reasonable consumer.” Id. (internal citation and quotation marks omitted). For the same reasons that we rejected Davis’s FAL claim, we also conclude that the advertisements were not fraudulent under the UCL. Last, we turn to Davis’s contention that Best Buy’s advertisements were “unfair” under the UCL. The UCL does not define the term “unfair.” In fact, the proper definition of “unfair” conduct against consumers “is currently in flux” among California courts. Lozano, 504 F.3d at 735. Before Cel-Tech, courts held that “unfair” conduct occurs when that practice “offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” S. Bay Chevrolet v. Gen. Motors Acceptance Corp., 85 Cal. Rptr. 2d 301, 316 (Ct. App. 1999) (internal quotation marks omitted). Under this approach, courts must examine the practice’s “impact on its alleged vic10392 DAVIS v. HSBC BANK NEVADA tim, balanced against the reasons, justifications and motives of the alleged wrongdoer.” Id. (internal quotation marks omitted). In short, this balancing test must weigh “the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.” Id. (internal quotation marks omitted). Cel-Tech held that the balancing test was “too amorphous” and “provide[d] too little guidance to courts and businesses.” 973 P.2d at 543. Instead, the court held that “unfair” means “conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Id. at 544. It further required that “any finding of unfairness to competitors under section 17200 be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition.” Id. However, the court expressly limited its new test to actions by competitors alleging anti-competitive practices, emphasizing that “[n]othing we say relates to actions by consumers or by competitors alleging other kinds of violations of the unfair competition law such as ‘fraudulent’ or ‘unlawful’ business practices or ‘unfair, deceptive, untrue or misleading advertising.’ ” Id. at 544 n.12. “Following Cel-Tech, appellate court opinions have been divided over whether the definition of ‘unfair’ under the UCL as stated in Cel-Tech should apply to UCL actions brought by consumers.” Durell v. Sharp Healthcare, 108 Cal. Rptr. 3d 682, 695 (Ct. App. 2010) (internal citation and quotation marks omitted); see also Lozano, 504 F.3d at 736 (“The California courts have not yet determined how to define ‘unfair’ in the consumer action context after Cel-Tech.”). As we previously have summarized, some courts in California have extended the Cel-Tech definition to consumer actions, while others have applied the old balancing test, or borrowed the three-pronged test set forth in the FTC Act. Lozano, 504 F.3d DAVIS v. HSBC BANK NEVADA 10393 at 736; see also Durell, 108 Cal. Rptr. 3d at 695-96 (describing split of authority). The question then is whether we are to apply the new definition in Cel-Tech, or to follow the former balancing test under South Bay. 504 F.3d at 736. In this regard, the district court erred when it held that Davis could not invoke the unfairness prong at all. The proper inquiry is what definition of “unfair” must apply to Davis’s claim. We need not resolve that question here, however, because Davis fails to state a claim under either definition. With respect to Cel-Tech, Davis advances no factual allegations to support the claim that the omission of the annual fee in Best Buy’s advertisements threatens to violate the letter, policy, or spirit of the antitrust laws, or that it harms competition. As for the balancing test, we begin by noting that nothing in the FAC supports the conclusion that the advertisements were against public policy, immoral, unethical, oppressive, or unscrupulous. Quite the opposite, the advertisements warned that “other restrictions might apply,” and the subsequent application process clearly disclosed the annual fee. More than this, Davis had the opportunity to cancel the account for a full refund within 90 days. [21] Because Davis failed to read the terms and conditions before agreeing to them, and because he refused to cancel his card within 90 days, even when viewing the facts in Davis’s favor, we must conclude that any harm he suffered was the product of his own behavior, not the advertisements. As a result, we cannot say that the FAC alleges “above the speculative level” that the advertisements themselves caused any harm. Bell Atl. Corp., 550 U.S. at 555. Meanwhile, any harm is offset by Best Buy’s strong justification for publishing the advertisement. Specifically, although Regulation Z does not expressly permit the omission of the annual fee disclosure from advertisements, it surely does not require such disclosure where, as here, the advertisement does not include spe10394 DAVIS v. HSBC BANK NEVADA cific terms that trigger additional disclosure. 12 C.F.R. § 226.16(b). Therefore, Best Buy justifiably relied on this federal guidance in circulating the advertisements. While we are mindful that what is “unfair” is a question of fact, “which involves an equitable weighing of all the circumstances, . . . we will affirm a judgment of dismissal where the complaint fails to allege facts showing that a business practice is unfair.” Bardin v. Daimlerchrysler Corp., 39 Cal. Rptr. 3d 634, 644 (Ct. App. 2006). Davis fails to plead facts to show that Best Buy engaged in an unfair business practice as defined in South Bay. In sum, Defendants’ online application is protected by the safe harbor doctrine. As for Defendants’ advertisements, Davis fails to allege that they were “unlawful” as they were not deceptive and their alleged harm was reasonably avoidable. Davis also fails to allege that the advertisements were “fraudulent” or “unfair.” Therefore, the district court properly dismissed the UCL claims in their entirety.6