escalated materiality requirement precludes class certification

Oddo v. Arocaire Air Conditioning & Heating, 2020 WL
5267917, Nos. 15-cv-01985-CAS Ex, 18-cv-07030-CAS(Ex) (C.D. Cal. May 18, 2020)

These are consolidated putative class actions alleging that
defendants’ HVAC systems have faulty thermal expansion valves (TXVs). A TXV is
“a precision valve that controls the expansion of refrigerant central to the
cooling process[.]” Because it’s a bottleneck in the system, “[a]ny
contaminants or impurities that may be flowing through the system are likely to
collect around the TXV pin,” which can harm its function. “Ryconox,” a chemical
rust inhibitor, allegedly “reacts with the refrigerant and/or oil and causes a
tar or sludge to form when the systems are put into service.” As such, “within
just weeks or months of installation of a brand-new HVAC system, the tar can
cause the TXV to become stuck, rendering the system inoperable.” Also, “even a
partial clog can impact system performance and efficiency, … such that the
defective HVAC systems are not capable of performing to the efficiency
standards advertised ….”

Defendant Carrier allegedly took various unsuccessful steps
to remediate the problem.

Previously, the court dismissed warranty-based claims and
claims based on affirmative misrepresentations. Not previously dismissed: California
unjust enrichment, negligent misrepresentation, fraudulent concealment, UCL,
CLRA, and FAL claims; Missouri fraudulent concealment, negligent
misrepresentation, and Missouri Merchandising Practices Act (MMPA) claims to
proceed; and Massachusetts unjust enrichment and Massachusetts Consumer Protection
Act (MCPA) claims. The court also previously denied a motion for class
certification without prejudice. Because the gravamen of the fraudulent
omission claims is failure to disclose, those plaintiffs failed to show that
people who bought a home with a Carrier HVAC suffered the same injury as people
who just bought a Carrier HVAC. Homebuyers “may have never been exposed to any
Carrier materials during the homebuying process, much less attached the same
level of importance, if any, to a disclosure of the alleged defect as would a
purchaser of an HVAC unit.” The court rejected plaintiffs’ contention “that
virtually any class can be certified in an omissions-based case as long as the
defendant could have, in theory, ensured that a disclosure would reach its
consumers.”

Carrier moved to exclude the opinions of plaintiffs’ survey
expert, Dr. Maronick. Previously, the court had reasoned that “[p]laintiffs do
not explain how homebuyers could have suffered an injury in the form of paying
a premium price for their HVAC units when they purchased a home that already
had the Carrier HVAC system installed” and “it appears that homebuyers, if they
suffered any injury at all, suffered an injury of a different nature than
purchasers of new HVAC units.” Based on his consumer survey, Dr. Maronick
opines that: (1) “most consumers who purchased a new air conditioner saw the
air conditioner itself prior to payment … regardless of whether the air
conditioner was acquired in connection with [buying a home or just a unit]”; (2)
“the vast majority of consumers who purchased a new air conditioner obtained
information about the air condition from the seller prior to purchase …
regardless [etc.]”; (3) “aside from the brand name, the efficiency rating of
their air condition was the most common piece of information purchasers learned
from their seller or homebuilder prior to purchase”; (4) “most consumers would
have considered a disclosure about the alleged defect in this case to be an
important, if not decisive, factor in their purchasing decision, regardless of
whether they were purchasing an air conditioner alone or a new home”; and (5)
“if the alleged defect had been disclosed prior to sale, the vast majority of
consumers would have demanded a unit that did not contain the rust inhibitor,
or a price discount equal to the cost of removing the rust inhibitor.”

This was relevant to the issues of classwide exposure,
materiality, and injury, and addressed deficiencies that the court previously
identified. Carrier challenged the survey because it: (1) failed to survey “the
relevant target universe”; (2) asked the wrong questions “because the survey
did not ask whether purchasers reviewed any labels on the product itself prior
to deciding the unit”; (3) failed to approximate market conditions and asked
ambiguous, leading questions; and (4) “failed to provide a control to isolate
the effect of the disclosure of the alleged defect.” These criticisms didn’t
require exclusion; they all went to weight rather than admissibility. Maronick used
a nationwide universe of sample individuals who had purchased a central air
conditioning system for their residence in the previous three years (including
respondents who bought a new construction home with a new AC). Questions about “the
relevant target universe” generally go to weight, not admissibility, as do
attacks on the framing of questions and the absence of a control.  Even though the court had its doubts, it
denied the motion to exclude. (So too with plaintiffs’ damages expert.)

Carrier offered its own expert testimony, based on a
consumer survey, which Carrier believes “confirms that individual inquiry would
be necessary to determine both whether consumers would have reviewed
information from Carrier prior to purchase and the materiality of that information.”
Dr. Dhar’s contrary opinions that “exposure to and consideration of product
information from an HVAC manufacturer is highly variable across consumers,” were
relevant, proper rebuttal and plaintiffs’ criticism of his survey went to
weight, not admissibility.  (So too with
the other experts.)

On to certification: “Resolution of plaintiffs’ fraudulent
concealment claims and plaintiffs’ related consumer protection claims … turn,
in part, on factual questions such as, inter alia: (1) whether the presence of
Ryconox in Carrier’s HVAC systems caused a defect; (2) whether Carrier knew of
the defect; (3) and whether Carrier concealed the defect.” Thus, commonality
was satisfied.

Typicality: the California and Missouri named plaintiffs had
bought new HVAC units, not new houses with HVACs installed, and their claims
were thus only typical of the former subset. The Massachusetts named plaintiff
bought a new house, but testified during deposition that he “was not exposed to
any of Carrier’s materials until after he had already negotiated and agreed to
the purchase price of his new home” and that “he would have not tried to
renegotiate the price of his home based on anything he learned during the
course of this inspection.” Even if that was just a snippet of his
testimony—and he also testified that if there’d been a defect disclosed,
everything would have changed—his vulnerability to a unique defense made him
nontypical.

Predominance: all the theories require that Carrier had a
duty to disclose the alleged defect. Plaintiffs had three arguments for such a
duty: (1) Carrier had exclusive knowledge of material facts not known or
reasonably accessible to them; (2) Carrier actively concealed material facts;
and (3) Carrier made partial representations (i.e., the energy efficiency
labels) that were misleading because other material facts had not been
disclosed.

California: “Even assuming arguendo that California law
recognizes a duty to disclose where an alleged defect does not present a safety
hazard but instead relates to a product’s central function, plaintiffs fail to
establish the existence of such a duty to disclose in this case is capable of
class-wide proof.” [That seems weird. The central function of an HVAC unit
seems invariant across purchasers; why wouldn’t its centrality be capable of
classwide proof? The court cites Ahern v. Apple Inc., 411 F. Supp. 3d 541 (N.D.
Cal. 2019), in which Apple’s failure to install “fans and vents” in its
computers allegedly allowed the fans to “suck in dirt and debris” which
resulted in the dirt and debris “getting stuck behind the screen, causing
permanent dark smudging to appear in the comers of the screens.” But smudging
at the corners (and another case about security flaws in microprocessors) is
pretty different from “the HVAC system may choke and die.”] Since plaintiffs’
expert did not opine that all, or virtually all, of the affected HVAC units
would suffer acute failure as a result of the problem, or be rendered incapable
of use, the alleged defect didn’t go to their central function. The expert also
opined that “the evidence shows that consumers have experienced performance
loss and do not know it.” If many victims didn’t know that they were suffering,
then the units hadn’t been rendered “incapable of use” such as to trigger a
duty to disclose under California law.

And again with redactions on facts that determine the
outcome! Carrier’s internal documents disclosed a redacted failure rate on
certain smaller units. Assuming that was a rate sufficient to impose a duty to
disclose [sure would be nice to know what that was!], plaintiffs’ expert also
argued that the evidence showed problems with larger units, though he
acknowledged that [redacted]. Given that the failure rate may differ among the
range of units making up the proposed classes, there might be a duty to
disclose as to some, but not all, of the proposed class members’ HVAC systems. Plaintiffs
offered no method to determine which class members’ HVAC systems will suffer
acute failure. Thus, individualized inquiries would be necessary.

The court then doesn’t discuss plaintiffs’ theory (3), which
I think is a misreading of the governing law. If you make an affirmative
representation that is misleading because of failure to disclose important
related information, the statement as a whole is misleading and there’s no
“central function” requirement for that basis for a duty to disclose,
predicated as it is on the specific affirmative statements that were made and thus on the message that affirmatively reached consumers.

In Missouri, a “duty to disclose arises from a classical fiduciary
relationship, from a partial disclosure of information, or from particular
circumstances such as where one party to a contract has superior knowledge and
is relied upon to disclose this knowledge.” “Unlike California law, then,
Missouri law does not appear to necessarily limit a manufacturer’s duty to
disclose to circumstances where a defect presents a safety hazard or where the
defect fatally compromises a product’s central functionality.” [Again, this
appears to be an overly constrained reading of California law, which has never
been known for its plaintiff-unfriendliness.] The court assumed without
deciding that whether a duty to disclose existed, given evidence that Carrier
was aware of the problem, was susceptible to common proof.

Reliance/materiality: In California, “[a]n essential element
for a fraudulent omission claim is actual reliance.” “A plaintiff need not
prove that the omission was the only cause or even the predominant cause, only
that it was a substantial factor in his decision,” and this can be inferred if
the omission is material. “Missouri law follows a similar approach with respect
to MMPA claims,” since it too uses the reasonable consumer standard. “If a
statute uses a reasonable person standard, it is more likely to be subject to
common proof because the inquiry into materiality is objective.”

Thus, the relevant claims allowed for class-wide inferences
of reliance and causation. What about the specific omissions here? The court
previously rejected as insufficient (1) Carrier’s surveys showing that,
generally, ‘reliability’ and ‘quality’ are the two most important factors
considered by purchasers” and (2) Carrier’s own purported belief that the
defect was material. Plaintiffs added the Maronick survey, which asked, inter
alia, how consumers would have reacted to learning about a defect that would  “cause the air condition to fail in some cases
within either a few weeks or a few years, and, even if the unit doesn’t fail,
the chemical can cause loss of performance and efficiency of the system” and
which cost $1000 to fix at the time of installation. Results: “It would have
been a decisive factor in my decision to purchase or not purchase that central
air conditioner”: 72.2%. “It would have been important information to know but
not a decisive factor …”: 13.9%.  “It
would not have been an important factor …”: 8.3%. “Don’t know/Not sure …”: 5.6%.

Similarly, in response to a question regarding what, if any,
respondents likely would have done had they learned about the defect prior to
completing a purchase, “41.0% of the respondents would have ‘demanded a
replacement that didn’t have the chemical in it,” and 22.2% would have
‘demanded the chemical be removed before accepting the unit.’ Another 12.5%
would have demanded a price reduction of $1,000, which is described as ‘the
cost of removing the chemical.’ ”

Carrier argued that the survey didn’t actually test
materiality or causation, criticizing the questions and format, especially how
it focused on and described the alleged defect. The court agreed: the survey
didn’t “question respondents about which, if any, of these attributes [about
which respondents received or sought information] respondents found important
when making a purchasing decision.” To the extent that the questions above don’t address that (which they seem to do), I think the court conflates materiality and
deceptiveness—materiality is about the kinds of claims or omissions that matter. The
court found the survey insufficient to establish, on a class-wide basis,
“how the challenged statements, together or alone, were a factor in any
consumer’s purchasing decisions.”

Because the survey didn’t indicate how consumers “valued”
Carrier’s alleged omissions “compared to other attributes of the product and
the relevant market generally,” “the Court is not convinced that the question
of materiality”—whether reasonable consumers would view Carrier’s failure to
disclose the alleged defect in this case as material to the consumers’
purchasing decision—“is susceptible of classwide proof.”

Thus, no certification.

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