Thursday, October 20, 2011

Court dismisses claims, dodges 230 false advertising issue

Wang v. OCZ Technology Group, Inc., 2011 WL 4903190 (N.D. Cal.)

Wang brought a putative class action representing purchasers of OCZ Agility 2 and Vertex 2 solid state drives (SSDs), alleging misrepresentations as to their storage capacity and performance in violation of California common law and the CLRA.

Allegations: Storage capacity and performance are important to consumers. Before 2011, OCZ marketed a predecessor line of Agility 2 and Vertex 2 SSDs that, like the current generation, use a controller that interacts with the flash memory in such a way that one or more modules of memory are rendered inaccessible to the user. In marketing the predecessor line, OCZ took this reduction into account, consistent with industry standards. Thus, it advertised 60GB for a device with 64GB of raw capacity, with 4GB reserved to the controller. But, before releasing the next generation, OCZ changed the number and type of flash memory chips, resulting in substantially decreased performance and increased memory reserved to the controller. Thus, the capacity of the drive marketed as 60GB allegedly dropped to 55GB with an average 25% drop in performance. Contrary to the industry standard and OCZ’s past practice, OCZ deliberately failed to disclose these material changes in capacity and performance, and instead used the same ads and packaging, along with the same model number and specifications. Wang relied on the misleading ads and marketing materials when he bought a 120GB Agility 2.

OCZ, following the current trend, challenged Wang’s constitutional standing, which requires (1) injury-in-fact, (2) causation, and (3) redressability. Wang didn’t allege that he overpaid or how much he paid for the drive, and thus OCZ argued that his allegations of injury were too conclusory and speculative. Moreover, OCZ contended that Wang failed to allege that he didn’t receive the benefit of the bargain, because the marketing materials show that OCZ disclaimed potential variations in speed and actual capacity, so Wang got what he paid for.

The court disagreed: Wang alleged that he bought the Agility 2 in reliance on OCZ’s performance and capacity representations, and that he didn’t get full value. He also alleged that he paid more for the product than he would have if he’d possessed the truth, and that he and other class members wouldn’t have bought their SSDs if they’d been marketed truthfully. This was enough for the pleading stage. The precise dollar value of losses is not required at pleading, so long as the plaintiff alleges a tangible loss that can be proved or disproved upon discovery.

OCZ’s website disclaimers alerting consumers to potential discrepancies in capacity and variations in rated speeds “may ultimately discredit Wang's claims that OCZ's marketing materials misled him and that he did not receive the benefit of the bargain.” But not for pleading injury and reliance.

OCZ also argued that Wang didn’t have standing to sue for injunctive relief because there was no likelihood that he’d suffer future injury. On this the court agreed; even though OCZ maintains the same marketing materials and therefore (as alleged) continues to violate the false advertising laws, the harm to Wang has already occurred. The possibility that Wang would be unable to buy competitive products (because of a market for lemons problem) was too speculative to warrant injunctive relief. Comment: other courts have, in my opinion rightly, rejected this reasoning in consumer class actions—it means that no consumer plaintiff can represent an injunctive class, because the representative plaintiff by definition knows she’s been fooled and won’t get fooled again. There’s a good article to be written on the use of standing to contract the protection conferred by substantive laws.

The court also agreed with OCZ that 5 of 6 of the causes of action sounded in fraud and were thus subject to Rule 9(b)’s heightened pleading standard: false advertising under the FAL; unfair competition under the UCL; violations of the CLRA; negligent misrepresentation, and unjust enrichment. Wang relied on his allegations identifying (1) who: OCZ as the source of the alleged misrepresentations, (2) when: an approximate time period during which the alleged misrepresentations began, (3) what/where: the location and content of deceptive and misleading statements, including on product packaging, in the model numbers, and on OCZ's product webpages, and (4) how: the substance of the misrepresentations. He also submitted web screenshots and product packaging images as a representative sample of the misrepresentation claimed and its location.

The court found that this wasn’t enough. Wang failed to allege when he saw or relied on OCZ’s representations, and he didn’t specify which of the marketing materials on which he relied. Moreover, he failed to specify how his drive fell short of its advertised qualities—what was its actual capacity and performance speed? Reliance on one of the Pom Wonderful cases, where it was enough to submit a beverage label and the URL of the defendant’s marketing website, was insufficient, because that was one company suing another for false advertising “based on the effect of the misrepresentation on consumers generally--a claim markedly different from that of an individual consumer who must plead his own exposure to and reliance upon the alleged misrepresentation.”

OCZ also argued that California law shouldn’t apply, because Wang is a Washington resident and the complaint didn’t allege where he bought his drive. The court agreed that it was reasonable to presume that the purchase, and thus the injury, occurred in Washington. But the place of injury isn’t solely determinative if OCZ’s alleged misrepresentations took place in California. For pleading purposes, Wang alleged enough to apply California law: he alleged that the misleading practices were "conceived, reviewed, approved or otherwise controlled from [OCZ's] headquarters in California." Moreover, he alleged that OCZ's executive offices are in California and that the company itself selects California law as its forum to address website-based complaints. “Taken as true for the purpose of a motion to dismiss, these allegations are more than sufficient to sustain Wang's California-based claims.”

OCZ also moved to strike two sets of allegations as immaterial. Such motions are generally disfavored. First, Wang alleged that OCZ’s website quoted third-party reviews and testimonials and linked directly to their sources. He alleged that these were based on the older versions of the drives and therefore false and misleading. OCZ urged the court to strike the allegations because any claims based on them would be barred by CDA §230. Wang responded that these allegations were material to his claims and that dismissal would be premature; in addition he contended precedent that the CDA is an affirmative defense, around which he was not required to plead.

The court found that whether OCZ was an interactive service and whether it reproduced content in a manner potentially subjecting it to liability raised factual questions that couldn’t be resolved on a motion to strike. “Material should not be stricken from the pleadings, particularly before discovery has afforded the parties the opportunity to determine the material's relevance to claims or defenses, if there is a possibility that it may have bearing on the litigation.” Seems to me that a motion to dismiss might have been more appropriate; too bad we didn’t get a ruling on this very interesting and important issue, which hasn’t been dealt with since the bad handling of the Subway v. Quiznos court.

Finally, OCZ moved to strike allegations about Vertex drives and all Agility models that Wang didn’t purchase, since he didn’t suffer any injury from them. Wang argued that his allegations added detail and context to his claim that OCZ uniformly designed, constructed, and advertised its SSD products in such as way as to mislead consumers. There is conflicting precedent about standing to proceed with claims about a product the class representative didn’t purchase (again, see the contraction of standing). A motion to strike is not the place to deal with class allegations; OCZ was relying on standing cases, not on whether the allegations were "redundant, immaterial, [or] impertinent." “Although Wang's inability to allege injury based on products that he did not purchase may ultimately subject those claims to proper dismissal pursuant to a Rule 12(b) motion or motion for summary judgment, inclusion of those products at the pleading stage and prior to a motion for class certification is not improper.”

Motion to dismiss granted with leave to amend.

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