Unreasonable Reliance: Ninth Circuit Affirms Dismissal of FAL, Fraud and UCL Claims at the Pleading Stage

by Sheppard Mullin Richter & Hampton LLP

[author: Sarah Kagan]

In Davis v. HSBC Bank Nevada, N.A., No. 10-56488, 2012 WL 3804370 (9th Cir. Aug. 31, 2012), the Ninth Circuit affirmed the dismissal of claims for (1) false advertising in violation of the California Business and Professions Code § 17500, et seq. (“FAL”); (2) fraudulent concealment; (3) “unlawful” business practices in violations of California Business and Professions Code § 17200, et seq. (“UCL”); and (4) “unfair” and “fraudulent” business practices in violation of the UCL, at the pleading stage.

The plaintiff's putative class action suit against HSBC Bank Nevada, N.A. and Best Buy Stores, L.P., alleged that defendants defrauded California consumers by offering credit cards without adequately disclosing that cardholders would be subject to an annual fee. The defendants moved to dismiss the action and requested that the court take judicial notice of three annual fee disclosure documents referenced in, but not attached to, the first amended complaint. The district court dismissed all four claims with prejudice on the ground that they failed to state claims entitling the plaintiff to relief because, in part, the advertising was not likely to deceive the reasonable consumer. Plaintiff appealed arguing that: (1) the district court erred when considering the documents provided by defendants in their request for judicial notice; and (2) the district court’s conclusion that none of the four claims plausibly suggested a right to relief was error.

The Ninth Circuit held that the fee disclosure documents were properly incorporated because courts may take into account “documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff’s] pleading.” Id. at 10375, citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005). Because the plaintiff did not challenge the documents' authenticity, and the plaintiff “based his allegations on the contents and appearance of [the documents],” the court may treat the documents as part of the complaint. Id. at 10375 - 77.

The Ninth Circuit affirmed the dismissal of plaintiff’s FAL claim, holding that Best Buy's advertising was not likely to deceive a reasonable consumer. Id. at 10379. Because the advertisement contained a legible disclaimer that “‘[o]ther restrictions may apply,’ no reasonable consumer could have believed that if an annual fee was not mentioned it must not exist.” Id. at 10378. The plaintiff also contended that the omission of the annual fee was misleading because the promise of rewards certificates implied that no offsetting charges would “nullify” those rewards. Id. at 10379. The court was not persuaded, stating that plaintiff’s assumption “defied common sense” and that no rational consumer would conclude that any credit card rewards offers must not have any associated costs of ownership. Id.

As to the plaintiff’s fraudulent concealment claim, the district court did not err in dismissing the claim because plaintiff could not demonstrate reasonable reliance. Id. at 10382. The plaintiff conceded that he was able to discover the annual fee, but he decided not to read the fee disclosure and instead assumed the absence of a fee. Id. at 10381. The plaintiff’s reliance was manifestly unreasonable because the plaintiff put his faith in a purported representation that was “shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth.” Id. at 10381, citing Broberg v. Guardian Life Ins. Co. of Am., 90 Cal. Rptr. 3d 225, 232 (2009).

Finally, as to plaintiff’s UCL claim, the district court properly dismissed the claim because the disclosure in the online application was protected by the Truth in Lending Act and Regulation Z’s safe harbor and the advertisements were not deceptive. Id. at 10383. The advertisements by HSBC were not “unlawful” under OCC regulation 12 C.F.R. § 7.4008(c) - - which defined “unlawful” as “deceptive” or “unfair” conduct. HSBC’s advertisements were not “deceptive” because it was unreasonable for a consumer to be deceived by the advertisements. The advertisements were not “unfair” because plaintiff could have avoided his alleged injury by consulting the terms and conditions after viewing the disclaimer. Id. at 10390.

Best Buy’s advertisements were not “fraudulent” under the UCL for the same reasons the court rejected plaintiff’s FAL claim. Id. at 10391. Addressing whether the advertisements were “unfair” under the UCL, the court noted that the definition of “unfair” is in flux. Id. at 10392. Declining to decide the proper method for determining “unfair” conduct, the court applied both the balancing test from S. Bay Cheverolet v. Gen. Motors Acceptance Corp., 85 Cal. Rptr. 2d 301, 316 (1999), and the antitrust-centric standard from Cel-Tech Comms. Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527, 544 (Cal. 1999). Id. at 10392. Under both tests, the advertisements were not unfair in light of the legible disclaimer and plaintiff’s opportunity to cancel the card for a full refund within 90 days. Id. at 10393.


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