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A unanimous United Supreme Court ruled today that a corporation’s principal place of business is where the company’s executives work and direct the company’s business activities, not where the company’s products are sold. This is yet another reversal of an important Ninth Circuit Court of Appeals ruling.

In a victory for business entities, the ruling will make it harder to sue out-of-state corporations in state courts, which are considered friendlier to class-action lawsuits than are federal courts.

The circuit courts have been divided into a deep four-way split regarding the tests to be applied in locating a corporation’s principal (most important, consequential or influential) place of business for purposes of diversity jurisdiction in federal court. These tests ranged from the Seventh Circuit’s “nerve center test,” which focused on locating the corporation’s “brain,” and ignores all other business operations as irrelevant, to the Ninth Circuit’s “place of operations test,” which focused on the locations of the corporation’s business operations, while generally ignoring its nerve center. Unlike either of these tests, the Third Circuit’s “center of corporate activities test” focused on finding the center of day-to-day corporate-wide activity and management, with the locations of other business activities being relevant, but less important, factors. Finally, the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits’ “totality of the circumstances test” hinged on no particular facet of corporate activities, but rather on the company as a whole, including its character, business purpose, nerve center, management center and locations of operations. The Court today adopted the “nerve center” test.

In Hertz v. Friend, __ U.S. __ (2010), plaintiffs brought a class action suit against Hertz in a California state court seeking unpaid overtime and vacation wages. Hertz moved to remove the case to a California federal district court based on diversity jurisdiction. The plaintiffs argued that there was no diversity jurisdiction as Hertz’s principal place of business was California and not Florida. The federal district court agreed and remanded the case to the state court. On appeal, the Ninth Circuit affirmed the federal district court. It held that the district court correctly applied the “place of operations test” to determine Hertz’s principal place of business. Therefore, there was no diversity jurisdiction and the district court had no authority over the case.

The Supreme Court overturned that decision, sending the case back to federal court:

“We conclude that the phrase ‘principal place of business’ refers to the place where the corporation’s high level officers direct, control and coordinate the corporation’s activities,” Justice Stephen Breyer wrote. “Lower federal courts have often metaphorically called that place the corporation’s ‘nerve center.’ We believe that the ‘nerve center’ will typically be found at a corporation’s headquarters.”

Given an important recent pro-plaintiff ruling on class certification in a California UCL case and some recent unfavorable rulings in the California courts, the federal courts may not be so bad for class action plaintiffs after all.

Late last year the Fourth Appellate District of the California Court of Appeal issued its decision in Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009). In that case, the court identified the issue presented “as whether fraudulent conduct by an insurer, which is connected with conduct that would violate Insurance Code § 790.03 et seq., sometimes referred to as the ‘Unfair Insurance Practices Act’—can also give rise to a private civil cause of action under the Unfair Competition Law (UCL), Business and Professions Code § 17200 et seq.” The court held that it did. This case will thus address whether insurance companies enjoy any special exemption from UCL liability. The statement of issues on review reads:

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

This was a departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004), which was previously interpreted to bar UCL “unlawful” prong claims against insurers based on conduct prohibited by § 790.03. The court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.” The court explained that that where, however, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

On February 10, 2010, the California Supreme Court granted the Petition for Review of this case. It is therefore no longer citable.

On the same day the California Supreme Court denied a Petition for Review and Depublication in Cohen v. DIRECTV, Inc. (October 28, 2009). Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009).

In Cohen, the plaintiff alleged that DIRECTV violated the UCL and the Consumer Legal Remedies Act (“CLRA”) by inducing subscribers to purchase high definition television services through misrepresentations in DIRECTV’s advertising that DIRECTV’s broadcast of those channels would meet certain technical specifications. Id. at pp. 969-970. In opposing class certification, DIRECTV submitted evidence that many subscribers had never seen, or did not remember seeing, advertisements with the alleged misrepresentations about the technical specifications, and purchased the services at issue due to other factors. The trial court found that common issues of fact did not predominate because the allegedly fraudulent representations were not uniformly made to or considered by the class members.

The appellate court affirmed. In discussing the UCL claim, the appellate court noted that Tobacco II, 46 Cal. 4th 298 (2009) was irrelevant to class certification because it addressed only the issue of standing, and did not instruct the “state’s trial courts to dispatch with an examination of commonality when addressing a motion for class certification.” Id. at p. 981. The court then concluded that the trial court’s concern that the plaintiff’s UCL and CLRA claims would involve individual factual issues regarding class members’ reliance on the alleged misrepresentations “was a proper criterion for the court’s consideration when examining ‘commonality’ in the context of the subscribers’ motion for class certification, even after Tobacco II.” Id.

The Court may very well have viewed the issues as premature, given that Cohen has been heavily criticized by other decisions recently. Most recently, the modified opinion in Steroid Hormone Product Cases, __ Cal. App. 4th __ (February 8, 2010) rejected the Cohen analysis. The court stated:

“But to the extent the appellate court’s opinion might be understood to hold that plaintiffs must show class members’ reliance on the alleged misrepresentations under the UCL, we disagree. As Tobacco II made clear, Proposition 64 did not change the substantive law governing UCL claims, other than the standing requirements for the named plaintiffs, and “before Proposition 64, ‘California courts have repeatedly held that relief under the UCL is available without individualized proof of deception, reliance and injury.’ [Citation.]” (Tobacco II, supra, 46 Cal.4th at p. 326.) But in any event, the Cohen court’s discussion regarding the appropriateness of considering class members’ reliance when examining commonality is irrelevant here, where the UCL claim is based upon the unlawful prong of the UCL and thus presents no issue regarding reliance.”

Yokoyama v. Midland National Life Insurance Co., __ F.3d __ (9th Cir. February 8, 2010), also amounts to a rebuke of Cohen, although the court did not cite to Cohen and even though the court interpreted Hawaii law. It ruled that class members, relative to Hawaii’s version of California’s UCL, did not need to show reliance on misrepresentations because the Hawaii statute required an “objective” standard. Like California’s UCL, under Hawaii law, a deceptive act or practice is: (1) a representation, omission, or practice that (2) is likely to mislead consumers acting reasonably under the circumstances [where] (3) the representation, omission, or practice is material. Likewise, claims under California unfair business practices statutes are governed by the “reasonable consumer” test. Freeman v. Time, Inc., 68 F.3d 285, 289 (9th Cir.1995) (“[T]he false or misleading advertising and unfair business practices claim must be evaluated from the vantage of a reasonable consumer.” (citation omitted)); Lavie v. Procter & Gamble Co., 105 Cal. App. 4th 496, 506-07 (2003) (“[U]nless the advertisement targets a particular disadvantaged or vulnerable group, it is judged by the effect it would have on a reasonable consumer.”).

It will be interesting to when the California Supreme Court will resolve these conflicts.

In a press release from the California Department of Insurance (“CDI”) issued last week, Commissioner Steve Poizner issued the following statement regarding Anthem Blue Shield’s recently announced substantial rate increases:

I’m alarmed by the Anthem Blue Cross health insurance rate hikes, especially in a time when the recession has forced so many people into the individual health insurance market,” said Commissioner Poizner. “State law requires that insurers spend at least 70 cents of every dollar of premium on medical care. I have instructed my department to hire an outside actuary to examine their rates line by line to ensure they are complying with this state law. If we find that their rates are excessive, I will use the full power of my office to bring these rates down.

Commissioner Poizner also reminded Californians who have to purchase individual health insurance that there are dozens of insurance companies to choose from.

“Just like auto and homeowners insurance, consumers can choose from nearly 70 different companies who offer health insurance in the individual health insurance market,” Commissioner Poizner said. “As a consumer you need to shop around. A different provider may prove to be a better value for a particular individual or family’s needs, and all of them are looking for new customers. I encourage consumers who are not happy with their rates, co-pays, benefits or service to look at other options.”

It is noteworthy that the CDI launched last year the first ever PPO report card that gives consumers even more information about the quality of service each of the major health insurance company offers. Anthem Blue Cross has the lowest rating of any of the reviewed health insurers. The PPO report card can be found at http://interactive.web.insurance.ca.gov/ppo/front.

In a press release from the California Department of Insurance (“CDI”) issued last week, Commissioner Steve Poizner announced that the CDI has recovered $112.1 million for consumers through consumer complaint investigations and market conduct examinations of insurance companies. Here is what it said:

The $112 million is believed to be the most money recovered in California Department of Insurance (CDI) history. In comparison, the Department recovered $62 million in 2008, $63 million in 2007, $78 million in 2006 and $53 million in 2005.

“Our goal at the Department of Insurance is to be the best consumer protection agency in the nation,” Commissioner Poizner said. “I’m proud to announce that our hard work has led to us recovering more than $100 million for consumers – the most ever under any insurance commissioner. Through our consumer complaint services and our market conduct exams, we will continue to be responsive to the needs of consumers and proactive in looking for any and all activities that hurt policyholders.”

The CDI’s Consumer Services and Market Conduct Branch has two divisions – one focused on helping consumers directly and the other focused on examinations of insurance company’s actions through an examination/audit process. The consumer services division operates the Consumer Communications Bureau, which handles the (800) 927-HELP consumer hotline; the Claims Services and Rating and Underwriting Services bureaus, which investigates and resolves complaints filed with the Department by consumers and others. The consumer hotline annually receives approximately 250,000 calls. The Consumer Services Division recovered $89.1 million in 2009. Approximately 20 percent of that came from closing cases started in 2007 and 2008 after the devastating wildfires. Due to the complexity of the issues that must be investigated, it may take a year or more to resolve complaints resulting from wildfire disasters.

The Market Conduct Division consists of the Field Claims Bureau and a Field Rating and Underwriting Bureau. These bureaus are tasked with performing examinations of insurance company claims, underwriting, rating and marketing practices to ensure they are complying with the law and regulations.

Through the diligence of the Market Conduct Division, $23 million was recovered and 208 exams were adopted by Commissioner Poizner.

You can access the CDI’s Communications Office Web page by clicking here.

Life settlements, also known in the industry as “stranger-originated life insurance” (“STOLI”) transactions have existed for several years but most states have not regulated them, at least until recently. The life insurance industry has for years attempted to eliminate such transactions as they typically are not in the insurer’s best financial interest. However, in recent years the industry has increased their support for efforts to differentiate between legitimate life settlements and STOLI. Both sides agree to the following general definition: A life settlement is the legitimate liquidation of a life insurance policy by an owner who has outlived the insurable interest upon which the policy was originally purchased. On the other hand, a STOLI transaction is initiated by a third party who offers monetary inducements to entice someone to purchase a life insurance policy with no legitimate insurable interest. The intended recipient of the policy’s value is the third party actually paying the premiums.

Legislative activity in the various states has substantially increased over the years as states have passed laws designed to stop, or at least regulate, STOLI transactions. This occurred recently in California. In October 2009, the California legislature enacted, and the governor signed, Senate Bill 1543 that regulates life settlement and STOLI transactions. The new law is known as the Life Settlements Act (“Act”) and it becomes effective on July 1, 2010. It is noteworthy that this bill provides that, with certain exceptions, it does not apply to any life settlement contract entered into on or before July 1, 2010. This bill would provide that it would apply to any transaction involving any life insurance policy in effect, or entered into, on or after the operative date of the bill.

The Act defines STOLI transactions as “an act, practice, or arrangement to initiate the issuance of a life insurance policy in this state for the benefit of a third-party investor who, at the time of policy origination, has no insurable interest, under the laws of this state, in the life of the insured.” The new law proscribes STOLI transactions as fraudulent. However, certain life settlement transactions are legal under the Act. It also restricts most transactions within the first two years of a policy. Finally, the new law mandates specific disclosures to consumers, including alternatives to life settlements, and requires the licensing of professionals who transact life settlement contracts. The law – California’s first STOLI legislation – makes California one of 26 states to enact laws regulating STOLI.

The Act further provides that:

STOLI practices include, but are not limited to, cases in which life insurance is purchased with resources or guarantees from or through a person or entity, that, at the time of policy inception, could not lawfully initiate the policy himself, herself, or itself, and where, at the time of inception, there is an arrangement or agreement, to directly or indirectly transfer the ownership of the policy or the policy benefits to a third party. Trusts that are created to give the appearance of insurable interest and that are used to initiate policies for investors violate insurable interest laws and the prohibition against wagering on life.

The Act explains that STOLI arrangements do not include lawful life settlement contracts as permitted by the Act. The Act defines a “Life settlement contract” as:

(k) “Life settlement contract” means a written agreement solicited, negotiated, or entered into in this state between a provider and an owner, establishing the terms under which compensation or anything of value will be paid, which compensation or thing of value is less than the expected death benefit of the insurance policy or certificate, in return for the owner’s assignment, transfer, sale, devise, or bequest of the death benefit or any portion of an insurance policy or certificate of insurance for compensation, provided, however, that the minimum value for a life settlementcontract shall be greater than a cash surrender value or accelerated death benefit available at the time of an application for a life settlement contract. “Life settlement contract” also includes the transfer for compensation or value of ownership or beneficial interest in a trust or other entity that owns such policy if the trust or other entity was formed or availed of for the principal purpose of acquiring one or more life insurance contracts, which life insurance contract is owned by a person residing in this state.

As noted above, the Act precludes a life settlement transaction within the first two years of the policy. The Act states:

(m) No person at any time prior to, or at the time of, the application for, or issuance of, a policy, or during a two-year period commencing with the date of issuance of the policy, shall enter into a life settlement regardless of the date the compensation is to be provided and regardless of the date the assignment, transfer, sale, devise, bequest, or surrender of the policy is to occur.

There still may be time to enter into a life settlement transaction before this law goes into effect. Even as to those transactions that predate the effect date of the Act, it would be a good idea to read it carefully and follow the requirements of the Act.

When a liability insurer wishes to avoid all coverage obligations with respect to a claim against its insured, it will sometimes file a declaratory relief action requesting a ruling that it has no duty to defend or indemnify the insured. If the insurer files for such declaratory relief while the underlying litigation is still pending, California insureds will frequently move to stay the coverage action, pursuant to Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993). The purpose of such a Montrose stay is to avoid the risk of prejudice to the insured in the underlying action, if it is simultaneously forced to litigate an insurance coverage dispute.

In these situations, the insured faces a dilemma: should it immediately move to stay the coverage litigation, or wait until it has filed an answer and cross-complaint? A recent California Court of Appeal decision, Great American Insurance Company v. Superior Court, 178 Cal. App. 4th 221 (2009), suggests that the better practice may be to answer and cross-complain before moving to stay.

Erica Villanueva of Farella Braun & Martel LLP wrote a good article on this topic which I commend for your reading.