In Kennedy v. Jackson National Life Ins. Company, 2010 WL 4123994 (N.D. Cal. Oct. 6, 2010), a California resident filed a class action against Jackson National Life Insurance Company, alleging unlawful practices in the solicitation, offering, and sale of fixed deferred annuity products to senior citizens. Id. at *1. Jackson National’s annuities credited interest on the premiums the annuity purchaser paid. Subject to a contractually guaranteed minimum, Jackson National had discretion to set the rate at which it credited interest. The annuity contracts at issue provided an initial interest rate “bonus” for the first year. The annuity contracts also imposed early withdrawal and “excess interest adjustments” if the owner withdrew more than 15% of the annuity’s accumulated value during the first nine years.

Plaintiff alleged Jackson National did not disclose its sales representatives’ commissions, the effects those commissions had on annuity performance and the purported “bias” against the annuity owners contained in the contract formula used to determine whether annuity owners would be charged excess interest adjustments for early withdrawals. Id. at *4. Plaintiff also alleged Jackson National made an affirmative misrepresentation or provided inadequate disclosure with respect to the interest rate “bonus” in her annuity. Id. Plaintiff’s complaint alleged claims for violation of the federal RICO statute and California statutory claims for financial elder abuse Cal. Welfare and Institutions Code §§ 15600 et seq., unfair competition Cal. Bus. & Prof. Code § 172000, false advertising Cal. Bus. Code § 17500; fraudulent concealment, California Civil Code § 1710. Plaintiff also asserted common law claims for fraudulent inducement, misrepresentation, and common law fraud. Id. at *5.

In June 2010, the district court certified two classes: a nation-wide RICO class and a California sub-class” to prosecute the California statutory claims. Id. at *5-6. Even though class members had not received uniform printed marketing materials or an identical sales pitch, the district court certified the classes because “there was evidence that Jackson National did not disclose, to class members, its commissions, their effects and the alleged bias contained in the [excess interest adjustment formula]” and “that Jackson National represented that some of its annuities, such as the one purchased by Plaintiff, had an interest rate bonus.” Id. The Ninth Circuit denied Jackson National’s petition for interlocutory review of the class certification order. Id.

In granting summary judgment for Jackson National, the court held the evidence did not suggest Jackson National had engaged in a scheme to defraud or had a specific intent to defraud. Id. at *7. The court reasoned that Jackson National could only be liable for non-disclosure of its commissions and their effects if Jackson National had an “explicit statutory duty to disclose such information or that the information presented by Jackson National constituted a half-truth.” Id. at *8. The court found no such statutory duty. Id. While insurers owe a duty of “honesty, good faith, and fair dealing,” Cal. Ins. Code § 785(a), that duty “does not mandate disclosure of commissions and their effects.” Id. Likewise, even if Cal. Ins. Code § 332 imposes a duty on Jackson National to disclose information that would be material to prospective purchasers’ estimation of the “disadvantages” of annuities, no evidence indicated that Jackson National violated such an obligation. Id. at *9. Plaintiff did not suggest the amount of the commission would have influenced her evaluation of the annuity, nor did she testify she would not have purchased the annuity had she known of the commission. Id.

Jackson National’s failure to disclose that paying commissions reduced its ability to pay interest did not violate a duty to disclose material information because “this could be said of any expense [Jackson National] incurs.” Id. While “Jackson National’s expenses likely had some effect on the rate of interest it decided to pay, the minimum guaranteed interest rate, the rate at which interest would be paid each year and the withdrawal charges were disclosed to prospective purchasers, including plaintiff.” Id. at *10

The court quickly rejected plaintiff’s allegations that Jackson National did not disclose bias in the formula used to calculate excess interest adjustments on early withdrawals. The annuity contract explicitly set out the formula used to calculate the adjustment. Even though the formula might be considered complex, the annuity owner could determine the adjustment to a withdrawal caused by the excess interest adjustment. Id. Thus, Jackson National “did not engage in a scheme to defraud.” Id.

In addition, the court rejected plaintiff’s claims that Jackson National misrepresented or provided an inadequate disclosure concerning the interest rate bonus. The front page of the annuity contracts explained the bonus interest rate in bold. Id. at *11. Plaintiff argued this statement was either false or a half-truth. According to the plaintiff, the bonus was “illusory” because any benefit obtained through the higher initial interest rate would be recouped through “internal product pricing.” Id. Reasoning that “bonus” means “something given or received that is over and above what is expected,” the court held that plaintiff’s annuity, which paid an initial interest rate bonus during the first year, did provide such a bonus. Id. This was not a “half-truth” because plaintiff’s contract disclosed the bonus would apply for only one year and that the interest rate in subsequent years would be lower than that credited on non-bonus contracts. Id.

This case is significant because the district court refused to find expansive discourse obligations in statutory language and granted summary judgment to Jackson National based on contract disclosure language that arguably have been difficult for some annuity owners to understand in all aspects. Further, given that classes were certified, the rulings on the certified claims will apply to all class members, not just the named plaintiff.