1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 12 PET FOOD EXPRESS, LTD., No. 2:16-CV-01211 WBS AC 13 Plaintiff, 14 v. 15 APPLIED UNDERWRITERS, INC., MEMORANDUM AND ORDER RE:

APPLIED UNDERWRITERS CAPTIVE CROSS MOTIONS FOR SUMMARY

16 RISK ASSURANCE COMPANY, INC., JUDGMENT

CALIFORNIA INSURANCE COMPANY,

17 and APPLIED RISK SERVICES, 18 Defendant. 19 20 ----oo0oo---- 21 Plaintiff Pet Food Express, Ltd. (“Pet Food”) filed 22 this lawsuit against defendant Applied Underwriters, Inc. 23 (“Applied Underwriters”), Applied Underwriters Captive Risk 24 Assurance Company, Inc. (“Captive Risk Assurance”), and 25 California Insurance Company (“California Insurance”) 26 (collectively, “Applied”), alleging that defendants unlawfully 27 marketed and sold workers’ compensation insurance to California 28 employers in violation of California’s Unfair Competition Law. 1 Before the court is Defendants’ Motion for Summary Judgment, 2 (Defs.’ Mot. for Summ. J. (“DMSJ”) (Docket No. 139)), and 3 plaintiff’s Motion for Partial Summary Judgment, (Pl.’s Mot. for 4 Partial Summ. J. (“PMSJ”) (Docket No. 138-1)). 5 I. Factual and Procedural Background 6 California requires that all employers purchase 7 workers’ compensation insurance to cover employees’ work-related 8 injuries. Cal. Lab. Code § 3700. The state also requires that 9 all workers’ compensation insurance policy forms, rates, and 10 rating plans be filed for approval with the California Workers 11 Compensation Insurance Rating Bureau (“the Bureau”) and approved 12 by the California Department of Insurance (“CDI”). (Pl.’s First 13 Am. Compl. (“PFAC”) ¶ 3 (Docket No. 54); see also Cal. Ins. Code 14 §§ 11658, 11735.) 15 Defendants filed a workers’ compensation insurance 16 program known as EquityComp (“Program”) with the Bureau and 17 received approval from the Department of Insurance. (PFAC ¶ 31.) 18 Defendants thereafter marketed and sold the Program to plaintiff. 19 (PFAC ¶ 30.) After the Program’s policies took effect for the 20 plaintiff, defendants required the plaintiff to enter a 21 Reinsurance Participation Agreement (“RPA”). (PFAC ¶¶ 29, 44; 22 DMSJ at 4.) Importantly, the parties agree that the RPA is “not a 23 filed retrospective rating plan.” (Pl.’s Reply in Opp. to Defs.’ 24 Mot. for Summ. J. (“PRSJ”) at 4, ¶ 17.) 25 Captive Risk Assurance is structured as a segregated 26 cell reinsurance facility. (PRSJ at 3, ¶7.) Under this 27 structure, instead of pooling its risk, each Program participant 28 has a separate underwriting account (or “cell”). (PRSJ at 3, ¶ 1 7.) Under the RPA, the employer agrees to maintain a capital 2 account in its segregated cell. (PRSJ at 3, ¶8.) Each Program 3 participant also agrees to maintain reserves in its cell after 4 the RPA’s three-year active term expires. (PRSJ at 4, ¶11.) The 5 reserve amount is adjusted periodically as claims develop. (DMSJ 6 at 4.) Because the ultimate claims costs cannot be known in 7 advance, “loss development factors” or “LDF’s” (i.e., 8 multipliers) are applied to claims to estimate their final cost. 9 (PRSJ at 3, ¶ 9.) LDFs reduce over time until their effect on 10 the cost (and therefore the amount in the cell) reaches zero and 11 the cell is closed. (DMSJ at 4.) When the segregated cell is 12 closed, the employer’s ultimate cost is calculated using the 13 RPA’s formulas and, depending on the claims experience, the 14 employer could receive a profit sharing distribution under the 15 RPA, also called a “rebate.” (PRSJ at 4, ¶ 14.) Under the RPA, 16 Applied may, “in its sole discretion,” hold the money in the cell 17 account up to “7 years after the expiration of the policies.” 18 (PMSJ at 14.) 19 On June 20, 2016, in an administrative action 20 challenging Applied’s RPA, the California Insurance Commissioner 21 (“Commissioner”) issued a Decision and Order, holding that the 22 RPA must be filed and approved by the Commissioner pursuant to 23 Insurance Code § 11735. See Shasta Linen Supply, Inc. v. Applied 24 Underwriters, Inc., 2:16-158 WBS AC, 2016 WL 6094446, at *5 (E.D. 25 Cal. Oct. 17, 2016). Because defendants did not file the RPA 26 before it took effect, the Commissioner found that the “RPA is 27 void as a matter of law.” Id. at *2. 28 In the wake of that administrative proceeding, 1 defendants developed an agreement that could be sold and marketed 2 with the CDI’s approval. (DMSJ at 5.) While there are 3 differences between the unfiled and the filed RPAs, “none of them 4 changes the structure, material terms, or financial results to 5 the participant.” (Fein Decl., Defs.’ Mot. for Summ. J., Medlong 6 Decl. Ex. 5 (Docket No. 139-6).) 7 Pet Food filed a class action complaint against 8 defendants asserting claims for unfair competition, rescission, 9 declaratory relief, and fraud. On June 21, 2017, plaintiff filed 10 an amended complaint asserting additional claims under the 11 federal Racketeer Influenced and Corrupt Organizations (“RICO”) 12 Act, 18 U.S.C. § 1962; under the California Unfair Competition 13 Law (“UCL”), Cal. Bus. & Prof. Code § 17200, and for quasi- 14 contract. Defendants in turn filed a counterclaim to plaintiff’s 15 amended complaint alleging breach of contract. (Defs.’ Answer, 16 Countercl., at 30, ¶ 24 (Docket No. 76).) 17 Defendants subsequently moved to dismiss the amended 18 complaint. (Docket No. 61.) The court dismissed the RICO claims 19 and denied the motion to dismiss in all other respects. (Mem. 20 and Order Re: Defs.’ Mot. to Dismiss at 24 (Docket No. 65).) 21 With respect to plaintiff’s UCL claim based on Insurance Code § 22 11735, the court found that an unfiled rate is not unlawful per 23 se and determined that the Commissioner did not conduct the 24 requisite formal rate disapproval hearing. (Id. at 20-22.) 25 Plaintiff then moved to certify the class. (Docket No. 116.) 26 This court subsequently denied the motion to certify on 27 superiority grounds. (Id.) 28 The claims remaining are Pet Food’s UCL claims for 1 unfair competition and unjust enrichment, and defendant’s 2 counterclaim for breach of contract. Plaintiff relies on the 3 Commissioner’s administrative decision and two subsequent 4 California Courts of Appeal cases to argue that the RPA is an 5 illegal program. (PMSJ at 5.) According to plaintiff, 6 defendant’s sale of this allegedly illegal program violates UCL 7 Section 17200. (PMSJ at 3.) Pet Food seeks restitution in “the 8 amount of money left in its segregated cell” account. (Mem. in 9 Supp. of Mot. Partial Summ. J. at 2 (Docket No. 138-1).) This 10 money consists of funds that Pet Food “has paid Defendants for 11 the EquityComp plans.” (Witriol Decl., Decl. of Terri Witriol 12 Lim in Opp. to Defs.’ Mot. for Summ. J., at 2 (Docket No. 141- 13 1).) Plaintiff also seeks a return on investment of these funds. 14 Id. In contrast, defendants seek to enforce California 15 Insurance’s contract with Pet Food and allege that Pet Food 16 remains liable for premiums, taxes, and assessments under the 17 purchased policies. (Defs.’ Answer, Countercl., at 30, ¶ 24 18 (Docket No. 76).) 19 Defendants now seek summary judgment under Federal Rule 20 of Civil Procedure 56, on the grounds that plaintiff lacks 21 standing to sue under the UCL. (DMSJ at 16.) Plaintiff seeks 22 partial summary judgment on the grounds that (1) the unfair 23 competition claim is valid as a matter of law because the RPA is 24 illegal; (2) defendants are collaterally estopped from litigating 25 that illegality; (3) plaintiff is entitled to restitution as a 26 matter of law; (4) the restitution must include a return on 27 investment on those funds; and (5) no contract exists between 28 California Insurance and Pet Food. (PMSJ at 1-2.) 1 II. Legal Standard 2 Summary judgment is proper “if the movant shows that 3 there is no genuine dispute as to any material fact and the 4 movant is entitled to judgment as a matter of law.” Fed. R. Civ. 5 P. 56(a). A material fact is one that could affect the outcome 6 of the suit, and a genuine issue is one that could permit a 7 reasonable jury to enter a verdict in the non-moving party’s 8 favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 9 (1986). 10 The party moving for summary judgment bears the initial 11 burden of establishing the absence of a genuine issue of material 12 fact and can satisfy this burden by presenting evidence that 13 negates an essential element of the non-moving party’s case. 14 Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). 15 Alternatively, the movant can demonstrate that the non-moving 16 party cannot provide evidence to support an essential element 17 upon which it will bear the burden of proof at trial. Id. Any 18 inferences drawn from the underlying facts must, however, be 19 viewed in the light most favorable to the party opposing the 20 motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 21 U.S. 574, 587 (1986). 22 III. Defendants’ Motion for Summary Judgment 23 A. Standing to Sue Under the UCL 24 California’s Unfair Competition Law (“UCL”) protects 25 consumers and competitors from unfair competition, defined 26 broadly to include “any unlawful, unfair or fraudulent business 27 act or practice.” (Cal. Bus. & Prof. Code § 17200.) Pet Food 28 proceeds in this case under only the “unlawful” prong of the 1 statute. (Pl.’s Mem. in Opp. to Summ. J. at 3 (Docket No 141).) 2 “By proscribing ‘any unlawful’ business practice, ‘[Business and 3 Professions Code] section 17200 “borrows” violations of other 4 laws and treats them as unlawful practices’ that the [UCL] makes 5 independently actionable.” Hale v. Sharp Healthcare, 183 Cal. 6 App. 4th 1373, 1382–83 (4th Dist. 2010) (citing Cel–Tech 7 Commc’ns, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 8 163, 180 (1999)). The UCL initially permitted “any person acting 9 for the interests of itself, its members or the general public” 10 to bring a private suit. Kwikset Corp. v. Superior Court, 51 11 Cal. 4th 310, 321 (2011). In 2004, voters approved Proposition 12 64 (Gen. Elec. (Nov. 2, 2004)), which amended the UCL to grant 13 standing to assert a claim only to certain public officials and 14 to private plaintiffs who can demonstrate that he or she “has 15 suffered injury in fact” and “has lost money or property as a 16 result of” the unfair competition alleged. Hall v. Time Inc., 17 158 Cal. App. 4th 847, 852 (4th Dist. 2008). 18 1. Injury in Fact 19 The “injury in fact” language in Proposition 64 20 incorporates the federal meaning of the phrase. Kwikset, 51 Cal. 21 4th at 322; Prop.64, §1, subd. (e) (requiring injury in fact 22 “under the standing requirements of the United States 23 Constitution”). Under federal law, a plaintiff satisfies the 24 injury-in-fact requirement where he or she has suffered a 25 “distinct and palpable injury” or “[a]n actual or imminent 26 invasion of a legally protected interest, in contrast to an 27 invasion that is conjectural or hypothetical.” Hall, 158 Cal 28 App. 4th at 853 (citing Black’s Law Dict. 801 (8th ed. 2004)). 1 Loss of money or property, as required under Proposition 64, is 2 one of many injuries that can satisfy the injury-in-fact 3 requirement. Kwikset, 51 Cal 4th at 324. Courts therefore 4 consider the “substantially narrower” Proposition 64 loss 5 requirement in conjunction with the injury-in-fact requirement. 6 Id. at 324. To establish standing to sue under the UCL, a 7 plaintiff must: “(1) establish a loss or deprivation of money or 8 property sufficient to qualify as injury in fact, i.e., economic 9 injury, and (2) show that the economic injury was the result of, 10 i.e., caused by, the unfair business practice alleged.” Id. at 11 323. 12 2. Loss of Money or Property 13 To establish standing, Proposition 64 requires a 14 plaintiff to show that it “lost money or property.” Hall, 158 15 Cal. App. 4th at 852. “The plain import of this is that a 16 plaintiff now must demonstrate some form of economic injury.” 17 Kwikset, 51 Cal 4th at 323. For purposes of UCL standing, a loss 18 is “[a]n undesirable outcome of a risk; the disappearance or 19 diminution of value, [usually] in an unexpected or relatively 20 unpredictable way.” Hall, 158 Cal. App. 4th at 853 (citing 21 Black’s Law Dict. 963 (8th ed. 2004)). A purchase or transaction 22 where the person paid with money, without more, does not 23 constitute a loss. Peterson v. Cellco P’ship, 164 Cal. App. 4th 24 1583, 1592 (4th Dist. 2008). 25 The undisputed facts here are insufficient to find an 26 economic loss because Pet Food has failed to show that the price 27 or quality of the insurance coverage differed from the 28 expectations Pet Food held when entering the contract. In this 1 line of cases, courts consistently refuse to find economic loss 2 where plaintiffs did not allege that “they could have bought the 3 same insurance for a lower price” or that “they were dissatisfied 4 with the insurance or were uninformed of its price.” See 5 Peterson, 164 Cal. App. 4th at 1591-92; see, e.g., Hall, 158 Cal. 6 App. 4th at 855 (finding no injury where plaintiffs did not 7 allege that they “did not want the [product], the [product] was 8 unsatisfactory, or the [product] was worth less than what the 9 plaintiff paid for it.”); Medina v. Safe-Guard Prods., Int’l., 10 Inc., 164 Cal. App. 4th 105, 114 (4th Dist. 2008) (finding no 11 injury where plaintiff “has not alleged that he didn’t want 12 [insurance] coverage in the first place, or that he was given 13 unsatisfactory service or has had a claim denied, or that he paid 14 more for coverage than it was worth”); Demeter v. Taxi Comp. 15 Servs., Inc., 21 Cal. App. 5th 903, 916-17 (2d Dist. 2018) 16 (finding no injury where plaintiff did not show “that the service 17 he purchased . . . was somehow not up to par” or that “the amount 18 he paid for his . . . membership was more than it was worth”); 19 Gaines v. Home Loan Ctr., Inc., No. SACV08667JSTRNBX, 2011 WL 20 13182970, at *5 (C.D. Cal. Dec. 22, 2011) (finding no injury 21 where plaintiff could not “explain what Plaintiff expected to 22 receive but did not from the . . . transaction”). 23 Here, Pet Food does not allege, nor do the undisputed 24 facts suggest, that Pet Food was dissatisfied with either the 25 price or the coverage. With respect to the price, Pet Food has 26 not shown that it could have obtained the same insurance at a 27 lower price. To the contrary, Pet Food admitted that it could 28 not be part of a proposed revised class of allegedly injured 1 Program participants because it did not pay more than the 2 guaranteed cost policy premiums (i.e., the premiums that do not 3 vary as claims come in). (Pl’s. Positions Re Renewed Mot. for 4 Cl. Cert. at 3:13-15 (Docket No. 126-1) (“[O]nly those employers 5 who paid more than the [guaranteed cost] policy premiums would be 6 putative class members. As a result, Alpha would be a class 7 member . . ., while . . . [Pet Food] would not.”).) Indeed, Pet 8 Food’s initial concern about the Program was that the Program 9 should be cheaper “despite the fact that it was saving money” 10 compared to other programs. (Decl. Terrance Lim, Ex. 3 at 249:9- 11 10 (Docket No. 139-6)). Because Pet Food has not disputed this 12 allegation, this court can infer that Pet Food could not have 13 paid less for the same insurance elsewhere. 14 Pet Food also cannot establish a loss with respect to 15 Applied’s policy because Pet Food received “the bargained for 16 insurance at the bargained for price.” Cf. Peterson, 164 Cal. 17 App. 4th at 1591. Pet Food does not allege that the coverage was 18 subpar. Pet Food also has not alleged that the price of the 19 policy –- Pet Food’s total payment minus the amount Applied is 20 eventually required to return to Pet Food (i.e., the “rebate”) -- 21 was not what Pet Food anticipated. Indeed, by the time Pet Food 22 renewed the policy, plaintiff had “a clear understanding” of the 23 parameters and the maximum cost under the policy (Decl. Terrance 24 Lim, Ex. 3 at 249:9-10 (Docket No. 139-6)). Pet Food therefore 25 had enough information to dispute the price but did not. Cf. 26 Peterson, 164 Cal. App. 4th at 1591-92 (considering lack of 27 pricing information as a source of loss). 28 Pet Food’s only allegation of loss is the money 1 currently sitting in the segregated cell account. This amount, 2 however, is not a loss because Pet Food fully expected not to 3 possess this money today. The mere parting with the possession 4 of money for a period of time does not constitute a loss. 5 Peterson, 164 Cal. App. 4th at 1592 (rejecting the view that a 6 person has lost money merely because the money is “no longer in 7 their possession”) (citing Hall, 158 Cal. App. 4th at 853). 8 Further, under the UCL, the diminution of value must be 9 unexpected or unpredictable to constitute a loss. Id. (citing 10 Hall, 158 Cal. App. 4th at 853). Under the terms of the 11 agreement, Applied’s retention of the money in the account was 12 not unexpected. The parties agree that, under the Program, Pet 13 Food was to maintain a capital account in its segregated cell. 14 (Pl.’s Reply to Separate Statement in Opp. to Defs.’ Mot. for 15 Summ. J. at 3, ¶8 (Docket No. 141-2).) Pet Food also does not 16 dispute that the RPA permits Applied, “in its sole discretion,” 17 to hold the money “3 years after all claims have closed or 7 18 years after the expiration of the policies.” (Pl’s Mot. for 19 Partial Summ. J. at 14 (Docket No. 138-1).) Based on the express 20 terms of the contract, Pet Food should have expected not to see 21 the money in the segregated cell account until 2023 at the latest 22 -- seven years after the policy was to expire.1 23 The parties’ understanding of the agreement confirms 24 this expectation. According to Ms. Terri Witriol, Pet Food’s 25 Chief Financial Officer, “money overpaid” by Pet Food had to 26 remain in the account “according to the agreement.” (Decl. of 27 1 The 2012-2015 policy expired on October 1, 2016. (Pl’s 28 Mot. for Partial Summ. J. at 14 (Docket No. 138-1).) 1 Terri Witriol Lim in Opp. to Defs.’ Mot. For Summ. J., at 2 2 (Docket No. 141-1).) Indeed, Mr. Terrance Lim, Pet Food’s Chief 3 Executive Officer, knew by 2014 that the Program would take long 4 to grant the rebate. (Decl. Terrance Lim, Ex. 3 at 270 (Docket 5 No. 139-6)). But in 2015, Pet Food chose to renew the agreement 6 regardless because it was Pet Food’s “best option at the time.” 7 (Id. at 309.) 8 Pet Food has not established “what Plaintiff expected 9 to receive but did not from the . . . transaction.” Cf. Gaines 10 v. Home Loan Ctr., Inc., No. SACV08667JSTRNBX, 2011 WL 13182970, 11 at *5 (C.D. Cal. Dec. 22, 2011). The transaction conformed to 12 Pet Food’s expectations from the beginning because Pet Food could 13 not have obtained the policy for a lower price elsewhere, did not 14 have issues with the coverage, and did not make payments it did 15 not expect to make when Pet Food entered into the contract. Cf. 16 Peterson, 164 Cal. App. 4th at 1591-92. Plaintiff therefore “got 17 exactly what he bargained for” and did not incur an economic 18 loss. Cf. Baggett v. Hewlett-Packard Co., No. SACV070667AGRNBX, 19 2009 WL 3178066, at *3 (C.D. Cal. Sept. 29, 2009). 20 3. Illegality as an Injury Per Se 21 Proposition 64 imposed “additional requirements on 22 plaintiffs beyond merely having suffered an ‘unlawful, unfair or 23 fraudulent business act or practice.’” Medina, 164 Cal. App. 4th 24 at 115. Plaintiffs must show that they also “lost money or 25 property as a result of the act or practice.” Id. 26 The Ninth Circuit, albeit in an unpublished memorandum 27 decision, has held that the purchase of goods that a defendant 28 “is legally not allowed to sell in the form being offered” alone 1 may constitute both an unlawful practice and a loss for purposes 2 of UCL standing. Franz v. Beiersdorf, Inc., 745 F. App’x 47, 48- 3 49 (9th Cir. 2018) (e.g., unapproved drugs). By contrast, cases 4 involving “voidable service contracts” do not give rise to the 5 same inference of loss. Id. 6 Although the Franz court did not say much more, the 7 court’s distinction between the cases that merit an inference of 8 loss, and those that do not, still relies on the plaintiff’s 9 expectations, and the plaintiff’s allegations regarding the value 10 and the price of the product. In Franz, the court found that the 11 unlawful purchase of a drug lacking FDA approval constituted a 12 loss under the UCL. The court relied only on Medrazo v. Honda of 13 North Hollywood. 205 Cal. App. 4th 1 (2d Dist. 2012). In 14 Medrazo, defendant sold plaintiffs a motorcycle without a legally 15 required label that disclosed the amount charged above the 16 suggested retail price, the cost for the assembly, and the cost 17 of optional accessories included in the price, among other costs. 18 Id. at 23. Because plaintiffs did not have the pricing 19 information label, they overpaid for the motorcycle. Id. The 20 court thus found economic loss because the plaintiffs paid more 21 than they would have paid had defendant complied with the law. 22 Similarly, because the illegal product in Franz “should not have 23 been in the market” in any form, 745 F. App’x at 48, any payment 24 is more than plaintiff would have paid had defendant complied 25 with the law. This is true for all illegal products. So it 26 follows that any payment for such a product constitutes an 27 economic loss. 28 In contrast, when the product or service sold is legal, 1 but the contract is flawed, the purchaser does not automatically 2 satisfy the economic loss requirement because the court cannot 3 infer that the plaintiff would have paid less had the defendant 4 complied with the law. Because the product can legally exist in 5 the market, enforcing the contract may still convey the value the 6 parties intended it to convey at a legally fair price. Cf. 7 Medina, 164 Cal. App. 4th at 114 (placing the burden on plaintiff 8 to allege a lower value where insurance seller was unlicensed); 9 Peterson, 164 Cal. App. 4th at 1591 (same). In such a case, the 10 burden to prove a loss falls on the plaintiff. Id. 11 The Franz court’s inference that the purchase of an 12 illegal product constitutes a loss therefore applies only when 13 the underlying product sold is illegal. For its proposition that 14 voidable service contracts do not necessarily result in an 15 economic loss, the court cited Medina v. Safe-Guard Products, 164 16 Cal. App. 4th 105 (4th Dist. 2008), and Demeter v. Taxi Computer 17 Services, 21 Cal. App. 5th 903 (2d Dist. 2018). Both of these 18 cases are instructive here. In Medina, the defendant, an 19 insurer, was not licensed to sell insurance, did not file its 20 contracts with the Insurance Commissioner, and did not insure its 21 contracts obligations. “In short, [defendant] was not a licensed 22 insurer.” Medina, 164 Cal. App. 4th at 113. The court first 23 found that the object of the “illegal contract” –- the provision 24 of insurance coverage –- was lawful. Id. at 110-112. The court 25 then found that plaintiff did not incur an economic loss because 26 plaintiff did not allege dissatisfaction with the coverage or the 27 price of the policy. Id. at 114. Because the product sold was 28 not illegal, plaintiff bore the burden of establishing loss. 1 The court in Demeter arrived at the same result. In 2 Demeter, defendant provided talent listing services without 3 procuring the bond California's talent services law requires. As 4 in Medina, the court first found that the defendant’s services 5 were not an “illegal operation” despite the defendant’s 6 noncompliance with the law. Demeter, 21 Cal. App. 5th at 913. 7 The court subsequently found no economic loss because plaintiff 8 did not show “that the service he purchased . . . was somehow not 9 up to par” or that “the amount he paid for his . . . membership 10 was more than it was worth.” Id. at 916-917. Again, because the 11 services sold could exist in the market legally, the plaintiff 12 was required to allege dissatisfaction with the service or the 13 price. 14 Here, Pet Food argues that because the RPA was an 15 allegedly illegal contract, any payment of the RPA ought to 16 constitute an economic loss. But whether a contract is illegal 17 or voidable is a different question from whether the subject 18 matter of the agreement is illegal. See Medina, 164 Cal. App. 19 4th at 110-112 (distinguishing the “object” of the contract from 20 the legality of the contract). 21 Pet Food’s participation in the RPA alone does not 22 establish a loss because the subject matter of the agreement -- 23 insurance coverage through a captive reinsurance cell -- is not 24 illegal. Applied has provided undisputed expert testimony to 25 show that the differences between the unfiled RPA and the 26 approved RPA are immaterial, as they do not “change[] the 27 structure, material terms, or financial results to the 28 participant.” (Fein Decl., Defs.’ Mot. for Summ. J., Medlong 1 Decl. Ex. 5 (Docket No. 139-6).) Pet Food has not provided any 2 evidence to the contrary. The undisputed facts thus establish 3 that, even if the sale of the RPA was illegal, the contents of 4 the agreement were not. 5 Moreover, the unfiled status of the RPA does not make 6 the rate unlawful per se. The Commissioner’s order in the 7 administrative appeal found that the RPA between the parties was 8 void and unenforceable because it was not filed with the Bureau. 9 In the Matter of the Appeal of Shasta Linen Supply, Inc., 10 Decision of the California Department of Insurance, File AHB-WCA- 11 14-31 (hereinafter “Order”). This court thereafter ruled that 12 the Order “does not control this court” and declared its 13 disagreement with the Commissioner, holding instead that “an 14 unfiled rate is not unlawful per se.” Shasta Linen, 2016 WL 15 6094446, at *5 (citing Dyna-Med, Inc. v. Fair Emp’t & Hous. Com., 16 43 Cal. 3d 1379, 1388 (1987)). 17 Plaintiffs now offer two California Courts of Appeal 18 cases to prove the illegality of the arrangement, Luxor Cabs, 19 Inc. v. Applied Underwriters Captive Risk Assurance Co., 30 Cal. 20 App. 5th 970 (1st Dist. 2018), and Nielsen Contracting, Inc. v. 21 Applied Underwriters, Inc., 22 Cal. App. 5th 1096 (4th Dist. 22 2018). Neither case is applicable here. The Luxor court decided 23 only that the delegation clause and the arbitration provision in 24 the RPA are void. The Nielsen court likewise analyzed only the 25 dispute resolution provisions of the RPA. Neither court 26 determined that the rate was unlawful as a result of it not being 27 filed. More importantly, neither court foreclosed the 28 possibility of Applied selling the RPA legally (i.e., a filed and 1 approved version of the RPA). 2 Even if the cases did stand for the proposition that 3 the RPA is illegal in its totality, the contract is not 4 necessarily void because “the effect of the illegality depends on 5 the facts and equities of the particular case.” See Johnson v. 6 Johnson, 192 Cal. App. 3d 551, 558 (2d Dist. 1987). In Medina, 7 the court opined that “holding an insurance contract void because 8 the insurer was not licensed is about the worst possible remedy 9 for the illegality of the insurer’s unlicensed status,” 164 Cal. 10 App. 4th at 111, and the same logic applies here. “[I]nsurance 11 contracts are legally unique.” Id. After risks have 12 materialized and claims have been filed, “[a] policyholder . . . 13 cannot, by definition, obtain a substitute [policy] in the 14 marketplace.” Id. Finding an insurance policy to be void would 15 result in the consumer bearing the entirety of the loss, so “in 16 the insurance context, not to enforce the contract would be to 17 reward the violation of the law.” Id. at 112. 18 Absent allegations that the object of the contract -- 19 insurance coverage through a captive reinsurance cell –- is 20 illegal, the court can “preserve[] and enforce[] any lawful 21 portion of a parties’ contract that feasibly may be severed.” 22 Medina, 164 Cal. App. 4th at 112. In Medina, “where the only 23 taint of illegality was the unlicensed status of the insurer 24 itself,” the court found the contract valid as to the lawful 25 object of the contract: insurance coverage. Id. Just as in 26 Medina, the only basis for the allegations of the illegality of 27 the RPA is Applied’s failure to file the agreement with the 28 Bureau. The alleged illegality of the contract does not taint 1 the lawful object of the contract, so even if the RPA is void and 2 unlawful, the service it provides is not. 3 Because the underlying service of the RPA is not 4 illegal, Pet Food’s transaction under the RPA is not an economic 5 loss per se. Pet Food therefore bears the burden of showing 6 economic loss through dissatisfaction with the service or the 7 price. As discussed above, Pet Food has done neither. Pet Food 8 has not offered any other theory of loss and therefore lacks 9 standing to sue under the UCL.2 Accordingly, the court will 10 grant summary judgment to defendants. 11 VI. Plaintiff’s Motion for Partial Summary Judgment 12 Having determined that the RPA is not illegal as a 13 matter of law, the issues remaining under Plaintiff’s Motion for 14 Partial Summary judgment are (1) whether plaintiff is entitled to 15 restitution, (2) whether plaintiff is entitled to a return on 16 investment of the funds in the segregated cell account, and (3) 17 whether a contract exists between Pet Food and California 18 Insurance. Because Pet Food does not have standing to sue under 19 the UCL, the court need not determine at this time whether 20 restitution and a return on investment are the appropriate 21 remedies for the alleged UCL violation. Further, Applied pleaded 22 the breach of contract claim in the alternative, should the RPA 23 be deemed void or unenforceable. (Defs.’ Answer, Countercl., at 24 30, ¶ 23 (Docket No. 76).) Because the RPA is not void, the 25 court also need not decide whether a contract exists between Pet 26

27 2 Because, as a matter of law, Pet Food did not lose money or property under the UCL, the court need not decide the 28 causation prong of the standing test. 1 Food and California Insurance. 2 IT IS THEREFORE ORDERED that defendants’ Motion for 3 Summary Judgment (Docket No. 139) be, and the same hereby is, 4 GRANTED. 5 IT IS FURTHER ORDERED that plaintiff’s Motion for 6 Partial Summary Judgment (Docket No. 138) be, and the same hereby 7 | is, DENIED. 8 Dated: September 11, 2019 oftte a ak beg! □□□ 9 WILLIAM B. SHUBB

UNITED STATES DISTRICT JUDGE

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