Shay v. Apple, Inc.Shay v. Apple, Inc.
Case Information
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA RACHAEL SHAY, individuаlly and on Case No.: 20cv1629-GPC(BLM) behalf of all others similarly situated, ORDER GRANTING IN PART AND Plaintiff, DENYING IN PART DEFENDANTS’ v. MOTION TO DISMISS APPLE INC. and APPLE VALUE [DKT. NO. 6.] SERVICES, LLC,
Defendant.
Before the Court is Defendants’ motion to dismiss the first amended complaint.
(Dkt. No. 6.) Plaintiff filed an opposition and Defendants replied. (Dkt. Nos. 13, 14.) Based on the reasoning below, the Court GRANTS in part and DENIES in part Defendants’ motion to dismiss.
Background
This case was removed from state court on August 21, 2020. (Dkt. No. 1.) Plaintiff Rachael Shay (“Plaintiff”) filed a putative first amended class action complaint (“FAC”) against Defendants Apple, Inc. and Apple Value Services, LLC (“Defendants” or “Apple”) for claims under California consumer protection laws and related claims for marketing, selling and/or distributing defective, unsecure and valueless Apple gift cards that Defendants knew or should have known was subject to an “ongoing scam where the funds on the gift cards are fraudulently redeemed by third parties accessing the Personal Identification Number (“PIN”) prior to use by the consumer.” (Dkt. No. 1-2, FAC ¶ 2.)
According to the FAC, on April 3, 2020, Plaintiff purchased a $50 Apple gift card from Walmart in Encinitas, CA as a gift for her son. ( Id. ¶ 9.) When her son attempted to load the gift card, he received a message that the gift card had already been redeemed. ( Id. ) Plaintiff contacted Defendants and was informed that the gift card was redeemed by another account on April 3, 2020, the same day she bought the card, and the card no longer had any value. ( Id. ) Defendants would not provide any additional information about the owner account that redeemed the code, other than it was not related to Plaintiff or her son. ( Id. ) Defendants informed her that there was nothing they could do for her, that her case was closed, and any further contact would go unanswered. ( Id. ) If Plaintiff had known about the truth about the defect of Defendants’ gift card, she would not have purchased it. ( )
Plaintiff seeks to bring this class action on behalf of the following: Nationwide Class:
All consumers in the United States who purchased an Apple gift card wherein the funds on the Apple gift card was redeemed prior to use by the consumer. Excluded from this Class are Defendants and their officers, directors and employees, and those who purchased Apple gift cards for the purpose of resale. California Subclass: All consumers in the State of California who purchased an Apple gift card
wherein the funds on the Apple gift card was redeemed prior to use by the consumer. Excluded from this Class are Defendants and their officers, directors and employees, and those who purchased Apple gift cards for the purpose оf resale.
( ¶ 31.) Plaintiff alleges causes of action for 1) violations of California’s Consumer Legal Remedies Act (“CLRA”), California Civil Code section 1750 et seq.; 2) violations of California’s Unfair Competition Law (“UCL”), California Business & Professions Code section 17200 et seq .; 3) violations of California Consumer Privacy Act, (“CCPA”) California Civil Code section 1798.150 et seq.; 4) negligence; 5) negligent misrepresentation; and 6) breach of implied warranty of merchantability. ( ¶¶ 40-109.)
The gist of the Plaintiff’s claims is that Apple knows or should know that its gift cards are vulnerable to thieves electronically accessing Apple gift cards at the point of sale and redeeming the funds prior to the consumer taking possession оf the gift card, and has failed to take reasonable steps to secure the cards and has concealed material facts from customers regarding the vulnerabilities of its cards.
Defendants move to dismiss all causes of action in the FAC. (Dkt. No. 6.) In response, Plaintiff agrees to dismiss the CCPA and negligence claims without prejudice. (Dkt. No. 13 at 9. [1] ) Accordingly, the Court GRANTS Defendants’ motion to dismiss the CCPA and negligence claims as unopposed.
Discussion
A. Legal Standard on Federal Rule of Civil Procedure 12(b)(6)
Federal Rule of Civil Procedure (“Rule”) 12(b)(6) permits dismissal for “failure to
state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Dismissal
under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or
sufficient facts to support a cognizable legal theory.
See Balistreri v. Pacifica Police
Dep’t.,
A complaint may survive a motion to dismiss only if, taking all well-pleaded
factual allegations as true, it contains enough facts to “state a claim to relief that is
plausible on its face.”
Ashcroft v. Iqbal,
Where a motion to dismiss is granted, “leave to amend should be granted ‘unless
the court determines that the allegation of other facts consistent with the challenged
pleading could not possibly cure the deficiency.’”
DeSoto v. Yellow Freight Sys., Inc.,
B. Third-Party Conduct
Apple argues globally that Plaintiff cannot state a plausible claim against them on
any of the causes of action because they are not liable for the misconduct of third parties.
(Dkt. No. 6-1 at 13.) As a threshold issue, Plаintiff points out that Defendants have failed
to reference the specific causes of action associated with their third-party liability
argument. (Dkt. No. 13 at 11.) Defendants respond that their cited cases make clear that
a claim under the UCL or the CLRA cannot be based on third-party conduct and that
Plaintiff has cited no authority showing that the breach of implied warranty and negligent
misrepresentation claims can be based on third-party conduct. (Dkt. No. 14 at 7 fn. 1
.)
The Court agrees that Defendants have failed to address the allegations and
theories of liability relied upon by Plaintiff. On a motion to dismiss, it is the defendant’s
burden to demonstrate that plaintiff has failed to state a claim.
See Avalanche Funding,
LLC v. Five Dot Cattle Co
., No. 2:16-cv-02555-TLN-KJN,
Here, the first four arguments [2] presented in Defendants’ motion are arguments untethered to Plaintiff’s specific theories of liability. (Dkt. No. 6-1 at 13-21.) Defendants provide summary arguments and analyses seeking dismissal of all causes of action without addressing how they apply to each cause of action. As such, these four arguments fail to meet Defendants’ burden under Rule 12(b)(6) to prove that no claim has been presented for violations of the CLRA, UCL, negligent misrepresentation and breach of the implied warranty of merchantability.
Nonetheless, the Court will analyze whether the CLRA and UCL claims are properly alleged to state a claim under the cases cited by Defendants.
On their first argument, Defendants assert that they cannot be liable for the misсonduct of third parties. (Dkt. No. 6-1 at 13.) Plaintiff responds that she is not seeking to hold Defendants responsible for the misconduct of third-parties but rather on Apple’s conduct concerning its gift cards. (Dkt. No. 13 at 11.) Plaintiff’s theory of liability is that Apple produced and sold gift cards prone to rampant fraud yet failed to warn the public and/or correct the defect. ( ) Liability is premised upon Defendants’ actions, omissions and concealment and not the fraud of third-parties.
Under California law, a defendant's liability for unfair business practices must be
based on his personal “participation in the unlawful practices” and “unbridled сontrol”
over the practices.
Emery v. Visa Int'l Serv. Ass'n
,
Defendants rely on
Emery
and
Toomey
to support their position. In
Emery
, the
court of appeal affirmed a grant of summary judgment in favor of Visa, finding that Visa
did not exercise the requisite control over merchants marketing foreign lottery tickets to
impose liability under the state's unfair competition or false advertising laws.
Emery,
95
Cal. App. 4th at 960-64. The court held that an “unfair practices claim under section
17200 cannot be predicated on vicarious liability. . . . A defendant's liability must be
based on his personal ‘participation in the unlawful practices’ and ‘unbridled control’
over the рractices that are found to violate section 17200 or 17500.” at 960 (citing
Toomey
,
Meanwhile, in
Toomey
, the court of appeal found that Mr. Toomey was liable for
the acts of his employees.
Toomey,
The FAC alleges that Apple engaged in unfair business practices by selling its gift cards online and through retailers, instituting security measures with its Personal Identification Number (“PIN”) covered with a silver scratch off tape, and due to its defective design, manufacture and/or packaging, failed to maintain reasonable security procedures to secure the gift cards. (Dkt. No. 1-2, FAC ¶¶ 15-17.) Further, Plaintiff alleges that Apple concealed the security dеficiencies as to cause customers to believe that they would be able to use their gift cards as anticipated. Here, Defendants focus on the third-party conduct’s responsibility in the theft while Plaintiff’s allegations center on Apple’s affirmative acts and concealment involving its sale of gift cards. ( ¶¶ 14-30.) Taking the allegations in the FAC as true, Plaintiff has alleged direct conduct and alleged participation in the alleged unfair business practices by Apple in violation of the CLRA and UCL. Thus, the Court DENIES the motion to dismiss on this basis.
C. Reasonable Security Measures
Apple next argues that Plaintiff has not plausibly alleged that it failed to implement reasonable security measures concerning its gift cards. (Dkt. No. 6-1 at 15-17.) Plaintiff replies that the cases Apple relies on concern the California Consumer Records Act (“CCRA”), a claim not alleged in the FAC and are inapplicable. (Dkt. No. 13.)
The CCRA provides that any “business that owns, licenses, or maintains personal
information about a California resident shall implement and maintain reasonable security
procedures and practices appropriate to the nature of the information, to protect the
personal information from unauthorized access, destruction, use, modification, or
disclosure.” Cаl. Civ. Code § 1798.81.5(b). Stating a cause of action for violation of
section 1798.81.5(b) requires that the defendant implement and maintain reasonable
security procedures and practices.
See Razuki v. Caliber Home Loans, Inc
., 2018 WL
6018361, at *1 (S.D. Cal. November 15, 2018) (dismissing § 1798.81.5 claim where
plaintiff summarily alleged “[d]efendant knew of higher-quality security protocols
available to them but failed to implement them”);
Anderson v. Kimpton Hotel &
Restaurant Grp., LLC
, Case No. 19-cv-01860-MMC,
In the instant case, Plaintiff does not allege a violation of the CCRA on its own or as the basis for a UCL claim. Neither the UCL or CLRA claims are premised upon a failure to implement reasonable security measures. As such, the § 1798.81.5(b) cases relied upon by Apple have no application to these claims. [3] Apple has not shown that Plaintiff has failed to state a claim under the CLRA and UCL, and thus, the Court DENIES the motion to dismiss.
D. Failure to Disclose
Defendants move to dismiss Plaintiff’s allegation that Apple failed to disclose the possibility that her Apple gift card would be compromised by third-party thieves and that Apple would not refund the money she allegedly spent on the card because a manufacturer’s duty to disclose is limited to its warranty obligations unless there is an affirmative misrepresentation or a safety issue. (Dkt. No. 6-1 at 17-19.) In response, Plaintiff argues that Defendants’ cited cases in support are distinguishable because they involve product defect cases where the claims of failing to inform the consumers were for a product falling outside the warranty period. (Dkt. No. 13 at 14-16.) Plaintiff argues that these cases do not address the issue of failing to disclose material facts about gift cards that may render them useless at the point of sale. ( )
As discussed above, Apple has failed to meet its burden on a motion to dismiss by
failing to explain how Plaintiff’s allegation concerning failure to disclose renders the
CLRA, UCL, breach of implied warranty of merchantability and negligent
misrepresentation claims without merit under Rule 12(b)(6). Next, the cases Apple cites
in support are distinguishable as they involve product liability cases concerning notebook
computers and automobile defects and warranty periods.
See Daugherty v. American
Honda Motor Co
.,
On the other hand, courts have also held that a duty to disclose under the CLRA
and UCL can arise in four circumstances: “(1) when the defendant is in a fiduciary
relationship with the plaintiff; (2) when the defendant had exclusive knowledge of
material facts not known to the plaintiff; (3) when the defendant actively conceals a
material fact from the plaintiff; and (4) when the defendant makes partial representations
but also suppresses some material facts.”
LiMandri v. Judkins,
Neither party has addressed whether these factors would apply to the facts in this
case.
See Baba v. Hewlett-Packard Co
., No. C 09–05946 RS,
E. Disclaimer on the Apple Gift Card Packaging [4] Apple next claims that the disclaimer on the gift card packaging for any liability for third-party theft of its gift cards bars Plaintiff’s claims. (Dkt. No. 6-1 at 19-20.) Plaintiff responds that the disclaimer language is up for interpretation because no reasonable person would understand the disclaimer to apply to Plaintiff’s situation where the theft occurs at the point of sale and prior to the consumer’s use. (Dkt. No. 13 at 16- 17.) She explains that the disclaimer applies to the loss of a gift card of use without permission after the card has been properly loaded with funds where the gift cards have been physically misplaced. ( at 17.) In reply, Defendants disagree that the disclaimer is subject to different interpretations yet argue in support of their interpretation on how the disclaimer bars Plaintiff’s claims. (Dkt. No. 14 at 12.)
The disclaimer states that “[n]either the issuer nor Apple is resрonsible for any loss or damage resulting from lost or stolen gift cards or for use without permission.” (Dkt. No. 7, RJN, Ex. 1.)
Because the Court only takes judicial notice of the fact the disclaimer exists and
not as to the truth of the matter asserted in the disclaimer, (
see
n. 3), the Court declines to
consider the legal effect of the disclaimer.
See
Dkt. No. 15 at 3 (“Apple does not seek
judicial notice of the ‘truth’ or the legal effect of its disclaimer, but merely of the fact that
the disclaimer appears on the gift card packaging.”);
see also Ctr. for Envtl. Health v.
Vilsack
, No. 15-CV-01690-JSC,
F. Negligent Misrepresentation
Defendants argue that because Plaintiff has failed to allege that their security protocols are inadequate or that it was legally obligated to disclose any of the information it allegedly concealed from consumers, the negligent misrepresentation claim also fails. (Dkt. No. 6-1 at 25-26.) Moreover, they argue that the claim fails under California’s economic loss rule. ( ) Plaintiff responds that because her claims allege misrepresentations regarding the gift cards, the economic loss rule does not apply. (Dkt. No. 13 at 18-19.) In reply, Apple does not dispute Plaintiff’s response but argues that Plaintiff has not identified a single affirmative misrepresentation about Apple’s gift cards. (Dkt. No. 14 at 13.)
On Defendants’ first argument, as discussed above, because the Court denied dismissal of the FAC based on Defendants’ argument concerning the security protocols and failure to disclose arguments, the same argument for the negligent misrepresentation claim necessarily fails.
On the second argument, the economic loss rule holds that economic losses are
recoverable “in contract alone.”
Robinson Helicopter Co. v. Dana Corp
., 34 Cal. 4th
979, 988 (2004). Therefore, generally, in negligence actions, liability is limited to
damages for physical injuries and recovery of economic loss is not allowed.
Aas v.
Superior Ct.
,
Here, while Apple argues that the economic loss rule applies to the negligence and
negligent misrepresentation claims, it primarily cites to cases addressing negligence. In
fact, courts are divided as to whether the economic loss rule applies to negligent
misrepresentation claims.
See Bret Harte Union High School District v. FieldTurf, USA,
Inc.
, No. 1:16-cv-00371-DAD-SMS,
Nonetheless, contrary to Apple’s reply arguing that there is not a single affirmative misrepresentation alleged, the FAC alleges that “Defendants misrepresented to Plaintiff . . . that Defendants were selling Apple gift cards that were original, usable, secure, valuable, and free from fraud, tampering or compromise.” (Dkt. No. 1-2, FAC ¶ 90.) Because thе FAC alleges an affirmative misrepresentation, the Court DENIES Defendants’ motion to dismiss the negligent misrepresentation claim based on the economic loss rule.
G. Breach of Implied Warranty of Merchantability
The FAC alleges that Apple breached the implied warrant of merchantability that the Apple gift cards were in merchantable quality and condition under California Commercial Code section 2314. (Dkt. No. 1-2, FAC ¶ 102.)
Defendants move to dismiss the breach of implied warranty claim because Plaintiff has not alleged she was in privity with Apple and she has not alleged that “the product was unmerchantable or unfit for its ordinary use at the time the product left defendant’s possession.” (Dkt. No. 6-1 at 27.) Plaintiff responds that vertical privity is not required because she is a third-party beneficiary who purchased the gift card from a third party acting as an agent for Defendants. (Dkt. No. 13 at 20.)
“Under California Commercial Code section 2314, . . . a plaintiff asserting breach
of warranty claims must stand in vertical contractual privity with the defendant.”
Clemens v. DaimlerChrysler Corp
.,
Here, while Plaintiff argues that she was an intended third-party beneficiary because she purchased the gift card from a third party acting as an agent of Defendants, these allegations are not alleged in the FAC. Moreover, the FAC fails to allege a contract between Apple and Walmart where Plaintiff is the intended beneficiary to the contract. Accordingly, the Court GRANTS Defendants’ motion to dismiss the breach of implied warranty of merchantability.
Defendants also argue that Plaintiff has not alleged that the gift card was
unmerchantable at the time it left defendant’s possession citing to
Banh v. Am. Honda
Motor Co.
, No. 19-5984,
H. Restitution
Defendants move to dismiss the restitution claim under the UCL and CLRA
because she has not alleged that she lacks an adequate remedy at law citing to
Sonner v.
Premier Nutrition Corp
.,
In a recent Ninth Circuit case, the court held that “traditional principles governing
equitable remedies in federal courts, including the requisite inadequacy of legal remedies,
apply when a party requests restitution under the UCL and CLRA in a diversity action.”
Sonner v. Premier Nutrition Corp
.,
Plaintiff’s two arguments in opposition were raised, addressed and rejected in
Anderson v. Apple Inc
., Case No. 3:20-cv-02328-WHO,
Similarly, here, even though the complaint was dismissed at the eve of trial, Sonner holds that a complaint must allege that she lacks an adequate legal remedy. In this case, the FAC fails to allege that she “lacks an adequate legal remedy.” Second, Plaintiff may plead in the alternative but she must also allege she lacks an adequate legal remedy.
Plaintiff additionally cites to
In re Juul Labs, Inc., Mktg., Sales Practices & Prods.
Liab. Litig
., Case No. 19-md-02913-WHO,
I. Leave to Amend
Where a motion to dismiss is granted, leave to amend should be granted “unless
the court determines that the allegation of other facts consistent with the challenged
pleading could not possibly cure the deficiency.”
DeSoto v. Yellow Freight Sys., Inc.,
Conclusion
Accordingly, the Court GRANTS in part and DENIES in part Defendants’ motion to dismiss. Specifically, the Court DENIES Defendants’ motion to dismiss the CLRA, UCL and negligent misrepresentation causes of action and GRANTS Defendants’ motion to dismiss the breach of implied warranty of merchantability and restitution claims with leave to amend. The Court further GRANTS Defendants’ motion to dismiss the CCPA and negligence claims as unopposed. Plaintiff shall file a second amended complaint within 20 days of the filed date of this order.
IT IS SO ORDERED.
Dated: January 8, 2021
Notes
[1] Page numbers are based on the CM/ECF pagination.
[3]
[2] The first four arguments in Defendants’ motion concern third party conduct, fаilure to implement reasonable safety measures, failure to disclose and the disclaimer on the gift card packaging. (Dkt. No. 6-1 at 13-21.)
[5]
[3] While the FAC does allege that Apple “failed to take adequate and reasonable measures to ensure that third parties did not tamper with its gift cards” and “did not have adequate. . . measures in place to secure customers” (FAC ¶¶ 23, 29), the CLRA and UCL theories of liability focus on Apple’s representations regarding the benefits and qualities of the cards (FAC ¶¶ 43) and misleading statements and nondisclosures that were likely to deceive customers. (FAC ¶¶44, 59.)
[8]
[4] Defendants filed a request for judicial notice of a “set of photographs of a $50 Apple gift card, which was purchased and photographed by Apple’s counsel on August 18, 2020 from a Rite Aid drugstore in Los Angeles, California”, a November 24, 2010 press release from the Federal Trade Commission titled “FTC Has Gift Card Tips for Holiday Buying,” which is available on the FTC’s website, and a December 2019 press release from the Federal Deposit Insurance Corporation titled “FDIC Consumer News: What You Should Know About Gift Cards,” which is available on the FDIC’s website. (Dkt. No. 7.) Plaintiff opposes the request for judicial notice to the extent they are offered for the truth of the matters asserted. (Dkt. Nо. 12.) She also contends that judicial notice is not proper for exhibits 2 and 3 as they are not referenced in the complaint. (Id. at 3.) In reply, Defendants argue that they are seeking judicial notice as to the existence of the documents and not as to the truth of the facts asserted in the documents. (Dkt. No. 15.) Moreover, they argue that incorporation by reference and judicial notice are distinct concepts and the court may judicially notice documents on a motion to dismiss even if not referenced in the complaint. ( at 3-4.) “Judicial notice under Rule 201 permits a court to notice an adjudicative fact if it is ‘not subject to reasonable dispute.’”
[10]