In Freeman Investments, LP v. Pacific Life Insurance Co., No. 09-55513, 2013 WL 11884 (9th Cir. Jan 2, 2013), the United States Court of Appeals for the Ninth Circuit held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precluded plaintiffs’ class claims for violations of California Business & Professions Code § 17200, but did not preclude plaintiffs’ breach of contract claims. The Court held that the Section 17200 claims were predicated on alleged misrepresentations and omissions, whereas the contract claims were not. The Ninth Circuit’s holding reaffirms the courts’ broad application of SLUSA to class claims that are dependent upon allegations of misrepresentations or omissions.

Plaintiffs purchased variable universal life insurance policies from defendant Pacific Life Insurance Company (“Pacific Life”). Variable universal life insurance policies allow the policyholder to share in the gains, or losses, generated by the insurer’s investment of premiums. Plaintiffs alleged that Pacific Life’s levying of excessive “cost of insurance” charges in its administration of the insurance policies resulted in a decrease to the amount of money available for investments.

Plaintiffs filed a class action against Pacific Life on behalf of purchasers of Pacific Life’s variable universal life insurance policies. They asserted claims for breach of contract, breach of the duty of good faith and fair dealing and unfair competition under Section 17200, claiming that Pacific Life deviated from industry standards in calculating the “cost of insurance.” Plaintiffs alleged that “cost of insurance” was a term of art which they expected would be calculated “based on industry accepted actuarial determinations.” Instead, plaintiffs alleged, Pacific Life secretly debited an amount “in excess of true mortality charges.”

Pacific Life moved to dismiss under SLUSA. SLUSA generally precludes state law class actions that allege misrepresentations or misleading omissions in connection with the purchase or sale of covered securities. The parties here did not dispute that variable universal life insurance policies issued by Pacific Life constituted “covered securities” under SLUSA. At issue, however, was whether the plaintiffs’ Section 17200 claim and their claims for breach of contract and breach of the duty of good faith and fair dealing alleged misrepresentations or fraudulent omissions such that they would be precluded by SLUSA.

The United States District Court for the Central District of California dismissed. It agreed that the class action could not be maintained under state law because all of plaintiffs’ claims involved the omission of facts and possible misrepresentations in connection with the purchase of the insurance policies. Plaintiffs appealed.

The Ninth Circuit affirmed in part and reversed in part. The Court recognized that plaintiffs’ claim under Section 17200 was dependent upon allegations of misrepresentations and omissions in connection with the sale of the policies. Thus the Court held, consistent with the Supreme Court’s decision in in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) [blog article here], that the “in connection with” language of SLUSA should be construed broadly to cover plaintiffs’ allegation that Pacific violated Section 17200 by “engag[ing] in fraud or misrepresentation that drained their investments.” The Court thus affirmed the dismissal of the Section 17200 claim under SLUSA.

With respect to the contract claims, however, the Ninth Circuit reversed. The essence of plaintiffs’ contract claims was a “dispute about the meaning of a key contract term.” In order to succeed on their claim for breach of contract and breach of the duty of good faith and fair dealing, plaintiffs would need to “convince the court or jury that theirs is the accepted meaning in the industry,” not that “Pacific misrepresented the cost of insurance or omitted critical details.” Accordingly, the Court reversed the dismissal of the breach of contract claim and remanded it to the district court, requiring plaintiffs to amend their complaint to remove any allegations of fraud or active concealment.

Freeman Investments reaffirms that SLUSA should be applied broadly to class claims that are dependent upon proof of misrepresentations or omissions in connection with the purchase or sale of covered securities.