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Abbit v. ING USA Annuity and Life Insurance Co.

United States District Court, S.D. California

May 16, 2017

ERNEST O. ABBIT, on behalf of himself and on behalf of all persons similarly situated, Plaintiff,
v.
ING USA ANNUITY AND LIFE INSURANCE COMPANY, and ING U.S., INC., Defendants.

          ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT ON PLAINTIFF'S REMAINING CLAIMS [ECF NO. 130.]

          Hon. Gonzalo P. Curiel United States District Judge

         Before the Court is Defendants ING USA Annuity and Life Insurance Company and ING U.S., Inc.'s (collectively, “Defendants” or “ING”) Motion for Summary Judgment on the Remaining Claims. (Dkt. No. 130.)[1] Plaintiff Ernest O. Abbit (“Plaintiff” or “Abbit”) opposed the motion, (Dkt. No. 141), and Defendants filed a reply, (Dkt. No. 149).

         A motion hearing was conducted on April 6, 2017. (Dkt. No. 163.) Andrew Hutton and Timothy Tatro appeared on behalf of Plaintiff. (Id.) Clark Johnson, Michael Leigh, and David Noonan appeared on behalf of Defendants. (Id.)

         After the hearing, the Court granted Plaintiff leave to file supplemental evidence, consisting of the deposition testimony of William Bainbridge and an additional expert report by Dr. McCann, and a supplemental brief explaining the relevance of the evidence to the instant motion. (Dkt. No. 164.) The Court also granted Defendants leave to respond to Plaintiffs supplemental briefing. (Id.) Plaintiff filed the supplemental briefing and evidence, and Defendants responded. (Dkt. Nos. 171, 174, 176, 178.)

         Upon consideration of the moving papers, supplemental briefing, oral argument, and the applicable law, the Court GRANTS Defendants' motion for summary judgment on Plaintiffs individual claims.

         BACKGROUND

         Having previously recited the facts of this case at length, the Court declines to repeat them here. (See, e.g., Dkt. Nos. 59, 117.) While the operative facts are few, the parties' presentations of the facts are substantively enmeshed with their legal theories. A brief review of relevant background suffices.

         An annuity is a contract between an insured individual and an insurance company in which the insured pays premiums to the insurance company in exchange for the insurance company's promise to return the deposit via periodic payments. (Dkt. No. 59 at 2.) Annuity contracts typically undergo two primary periods: the “full accumulation period, ” during which the investor deposits funds with the insurance company, and the “annuitization period, ” during which the investor withdraws funds in the form of periodic payments. (Id.) Fixed index annuities (“FIAs”) are annuities that generally earn interest linked to or derivative of the price movements of an equity index or other index, such as the S&P 500® Index. (Id.) Indexed annuities can also guarantee interest. (Id.) The policy parameters (such as “caps, ” “participation rates, ” and “spreads”) are periodically declared by the insurance company. (Id.)

         Defendants designed the Secure Index Opportunities Plus FIA and submitted the annuity product, Form IU-IA-3050(CA) (“Form 3050”), to the California Department of Insurance (“CDI”) for review and approval in 2007. (Dkt. No. 144-1, Plaintiff's Separate Statement of Undisputed Facts (“Pl.'s SSUF”) ¶¶ 2-3.) In its submission to the CDI, Defendants represented that the FIA provides for equity-indexed benefits, and that “[t]he Cap, Participation Rate, and Spread will be set such that the annualized option cost for this strategy will be at least 100 bps.” (Declaration of Andrew W. Hutton in Support of Plaintiff's Opposition to Defendants' Motion for Summary Judgment (“Hutton Decl.”) Ex. B at Oppo. 0075, 0103, Dkt. No. 144-3 at 38, 66.) The CDI approved Defendants' application to sell Form 3050 to California consumers. (Pl.'s SSUF ¶ 9.)

         Plaintiff, a retired senior citizen, purchased an ING “Secure Index Opportunities Plus” FIA with a $1, 000, 000 premium payment on September 28, 2010. (Dkt. No. 117 at 2.) Defendants contributed a 5% bonus of $50, 000 to Plaintiff's contract. (Dkt. No. 144-1, Plaintiff's Response to Defendants' Statement of Undisputed Material Facts (“Pl.'s Resp. to Defs.' SSUF”) ¶ 1.) Plaintiff currently still holds his contract. (Dkt. No. 130-2, Defendants' Statement of Undisputed Material Facts in Support of Defendants' Motion for Summary Judgment on the Remaining Claims (“Defs.' SSUF”) ¶ 2; Pl.'s Resp. to Defs.' SSUF ¶ 2.) At the time of his purchase, and on each of his six contract anniversaries, Plaintiff has elected one or more of the interest-crediting strategies offered pursuant to his FIA. (Declaration of Michael T. Leigh (“Leigh Decl.”) Ex. 1 at § 6, Dkt. No. 130-4 at 16-20; Leigh Decl. Exs. 5-11, Dkt. Nos. 130-8-130-14.) Plaintiff's FIA has been credited with $84, 863.86 in interest. (Defs.' SSUF ¶ 6; Pl.'s Resp. to Defs.' SSUF ¶ 6.)

         Section 5.8 of Plaintiff's FIA contract guarantees that “[t]he reserves and guaranteed values will at no time be less than the minimum required by the laws of the state in which this Contract is issued.” (Leigh Decl. Ex. 1, Dkt. No. 130-4 at 16.) Section 6.5 provides definitions applicable to the Monthly Cap Index Strategy, specifies that the “Index Credit” amount “is based on the performance of the applicable Index as measured over the Contract Year, ” and provides the formula with which index credits under the Monthly Cap strategy are calculated. (Leigh Decl. Ex. 1, Dkt. No. 130-4 at 20.) The contract confers upon Defendants discretion to add interest-crediting strategies as approved by the CDI, and to change the terms and conditions governing the interest-crediting strategies within contract parameters and state law. (Leigh Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16.)

         In applying for his FIA, Plaintiff acknowledged that “[a]ny values shown, other than guaranteed minimum values, are not guarantees, promises or warranties.” (Hutton Decl. Ex. E at Oppo. 0210, Dkt. No. 144-6 at 9.) Hypothetical interest credit illustrations provided in Plaintiffs FIA application show the possibility of him earning 0% in index credits. (Hutton Decl. Ex. E at Oppo. 0215-18, Dkt. No. 144-6 at 14-17.) Plaintiff also acknowledged the following statement: “You should discuss your retirement planning objectives, anticipated financial needs and risk tolerance with your agent to make sure this annuity meets your current financial needs and objectives.” (Hutton Decl. Ex. E at Oppo. 0214, Dkt. No. 144-6 at 13.)

         The ING USA sales brochure stated: “Neither your premium, the 5% bonus, nor any previously credited interest can be diminished due to movements in the S&P 500 Index.” (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 4.) It also stated: “Since the interest credit is related, in part, to movements in the S&P 500 Index, the amount of interest your annuity will be credited at the end of the contract year cannot be known or predicted prior to the end of the contract year.” (Id.) It further stated that “[t]he contract does not directly participate in any stock or equity products.” (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 13.) Finally, the brochure provided illustrations showing that a contract holder might not earn any interest in a contract year, (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 5-10), and stated that ING USA promised no specific rate of return, that ING USA could change the pricing parameters of the strategies each contract year, and that the bonus might be recouped over time with, inter alia, lower credited interest rates, participation rates, index caps, and monthly caps, (Leigh Decl. Ex. 2, Dkt. No. 130-5 at 3, 13).

         Plaintiff did not communicate with Defendants before or after purchasing his contract. (Leigh Decl. Ex. 3, Abbit Depo. at 43:17-46:7, 65:21-22, Dkt. No. 130-6 at 13-14, 18.) Defendants used independent, third-party marketing organizations to distribute their insurance-based products and annuities; Defendants do not have “company-owned field wholesalers.” (Leigh Decl. Ex. 4, Tope Depo. 17:1-18, Dkt. No. 130-7 at 7.) Matthew Copley, who sold Plaintiff his FIA contract, was an “independent” agent. (Dkt. No. 152 at 5.) Copley testified that in the 2009 and 2010 time frame, he sold annuity products from “around ten” different companies. (Leigh Decl. Ex. 14, Copley Depo. 11:6-9, Dkt. No. 130-17 at 5.) While Defendants required Copley to adhere to ING's Business Guidelines and General Advertising Rules, (see, e.g., Hutton Decl. Ex. P at Oppo. 0929-34, Dkt. No. 144-15 at 50-55), Defendants were free to accept or reject Plaintiffs FIA application after Copley submitted it, (Dkt. No. 130-1 at 31 (citing Leigh Decl. Ex. 15, Dkt. No. 130-18)).

         Plaintiff filed a First Amended Complaint (“FAC”) on March 27, 2014. (Dkt. No. 20.) On November 16, 2015, the Court granted in part and denied in part Plaintiffs motion for class certification. (Dkt. No. 59 at 26.) Specifically, the Court certified the following five claims: (1) a breach of contract claim based on “ING setting the prices of the undisclosed derivatives structure so low that the true values of the contracts were below the minimum values guaranteed, ” (id. at 15); (2) a UCL claim, flowing from the breach of contract claim, based on “Plaintiffs theory under the Insurance Code . . . that ING failed to maintain guaranteed values of the Secure Index FIAs as required by Cal. Ins. Code § 10168.25, ” (id. at 20); (3) a financial elder abuse claim, also flowing from the breach of contract claim, based on “Plaintiffs theory regarding the failure to maintain guaranteed values of the Secure Index FIAs, ” (id. at 22); and (4) two securities law claims under California law, based on Plaintiffs “novel theory which would extend the reach of securities law to FIAs” on the basis that “FIAs are securities because ING's internal execution of the ‘derivatives' and ‘options' transfers market risks from ING to Plaintiff and the California Subclass, ” (id. at 23). The Court declined to certify Plaintiffs remaining claims, including, inter alia, claims for breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, fraud, false advertising under Cal. Bus. & Prof. Code §§ 17500, et seq., and failure to supervise. (Dkt. Nos. 20, 59.) The remaining claims are at issue in the instant motion.

         On February 1, 2016, Defendants filed a motion for summary judgment on the certified class claims. (Dkt. No. 70.) The Court directed dissemination of the class notice on April 26, 2016. (Dkt. No. 91.) On June 24, 2016, the Court held a hearing on Defendants' motion for summary judgment. (Dkt. No. 111.) The class opt-out period expired on July 20, 2016. (Dkt. No. 91 at 1.) On August 30, 2016, the Court granted Defendants' motion for summary judgment on all certified class claims. (Dkt. No. 117.)

         Plaintiff filed a motion for reconsideration of the Court's August 30, 2016 Order granting Defendants' motion for summary judgment on all certified class claims. (Dkt. No. 121.) The Court denied Plaintiffs motion for reconsideration on December 12, 2016. (Dkt. No. 129.) On December 23, 2016, Plaintiff filed a motion for certification of partial final judgment of the class claims under Federal Rule of Civil Procedure 54(b). (Dkt. No. 134.) The Court denied Plaintiffs motion for partial final judgment on February 2, 2017. (Dkt. No. 145.)

         On December 15, 2016, Defendants filed a motion for summary judgment on Plaintiffs remaining individual claims. (Dkt. No. 130.) The motion has been fully briefed, (Dkt. Nos. 141, 149), complete with supplemental briefing and evidence, (Dkt. Nos. 171, 174, 176, 178).

         LEGAL STANDARD

         Federal Rule of Civil Procedure 56 empowers the Court to enter summary judgment on factually unsupported claims or defenses, and thereby “secure the just, speedy and inexpensive determination of every action.” Celotex Corp. v. Catrett, 477 U.S. 317, 325, 327 (1986). Summary judgment is appropriate if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). A fact is material when it affects the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element of his or her claim on which that party will bear the burden of proof at trial. Id. at 322-23. If the moving party fails to bear the initial burden, summary judgment must be denied and the court need not consider the nonmoving party's evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159-60 (1970).

         Once the moving party has satisfied this burden, the nonmoving party cannot rest on the mere allegations or denials of his pleading, but must “go beyond the pleadings and by her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file' designate ‘specific facts showing that there is a genuine issue for trial.'” Celotex, 477 U.S. at 324. If the non-moving party fails to make a sufficient showing of an element of its case, the moving party is entitled to judgment as a matter of law. Id. at 325. “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 289 (1968)). In making this determination, the court must “view[] the evidence in the light most favorable to the nonmoving party.” Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir. 2001). The Court does not engage in credibility determinations, weighing of evidence, or drawing of legitimate inferences from the facts; these functions are for the trier of fact. Anderson, 477 U.S. at 255.

         DISCUSSION

         Defendants move for summary judgment on Plaintiffs remaining individual claims for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, fraud, violations of the California Unfair Competition Law (“UCL”) and False Advertising Law (“FAL”), and failure to supervise. (Dkt. No. 130-1 at 7.) The Court examines each of Plaintiff s remaining claims in turn.

         I. Breach of Contract

         The elements of a breach of contract claim are: (1) the existence of a valid contract, (2) plaintiffs performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff. Reichert v. Gen. Ins. Co. of Am., 68 Cal. 2d 822, 830 (Cal. 1968).

         Defendants first argue that Plaintiffs three breach of contract claims fail for lack of a breach and for lack of damages.[2] (Dkt. No. 130-1 at 12-14.) In his FAC, Plaintiff asserts three theories for his breach of contract claims: (1) Defendants failed to credit and compound interest daily; (2) Defendants charged expenses and/or reduced interest credits; and (3) Defendants issued false and misleading periodic statements to Plaintiff. (Dkt. No. 20, FAC ¶¶ 113-22.)

         Plaintiff did not respond directly to Defendants' motion for summary judgment on the remaining breach of contract claims, and he abandoned the “interest compounded daily” theory. (Dkt. No. 149 at 5; Dkt. No. 141 at 28 n.11.) Defendants are entitled to summary judgment on Plaintiffs remaining breach of contract claims on this basis alone. See Shakur v. Schriro, 514 F.3d 878, 892 (9th Cir. 2008) (holding that a plaintiff abandons claims by not raising them in opposition to a defendant's motion for summary judgment); Vasserman v. Henry Mayo New hall Mem 'l Hosp., 65 F.Supp.3d 932, 963 (CD. Cal. 2014) (citing Resolution Trust Corp. v. Dunmar Corp., 43 F.3d 587, 599 (11th Cir. 1995) (“There is no burden upon the district court to distill every potential argument that could be made based upon the materials before it on summary judgment. Rather, the onus is on the Parties to formulate arguments; grounds alleged in the complaint but not relied upon in summary judgment are deemed abandoned.”)); Ramirez v. City of Buena Park, 560 F.3d 1012, 1026 (9th Cir. 2009) (“It is a general rule that a party cannot revisit theories that it raises but abandons at summary judgment. A party abandons an issue when it has a full and fair opportunity to ventilate its views with respect to an issue and instead chooses a position that removes the issue from the case.” (internal citations and quotation marks omitted)).

         A. First Breach of Contract Claim

         In any event, Plaintiff fails to show that Defendants breached the contract under any of the three theories enumerated above. The contract belies Plaintiff's allegation that Defendants were required to credit and compound interest daily. (Leigh Decl. Ex. 1, Dkt. No. 130-4 at 10.) The contract specifies that the Minimum Guaranteed Strategy Value of each Strategy is the sum of: “(a) 87.5% of the portion of the Single Premium elected to the Strategy, less Premium Taxes; adjusted for (b) Any Re-elections or Surrenders of Accumulation Value; plus (c) Interest credited daily at the applicable Minimum Guaranteed Strategy Value Rate.” (Id. (emphasis added).) The contract does not require Defendants to credit and compound interest daily.

         B. Second Breach of Contract Claim

         Plaintiff has not identified any expenses that Defendants have charged him or any interest credits that have been reduced in violation of any express contract term. (See Leigh Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16-20.) Rather, Defendants have proffered evidence showing that Plaintiff's contract was credited with the interest credits prescribed under contract terms. (See Dkt. No. 130-1 (citing Leigh Decl. Exs. 5-11, Dkt. Nos. 130-8-130-14).)[3]

         While Plaintiff does not respond directly to Defendants' motion for summary judgment on his breach of contract claims, Plaintiff nonetheless maintains throughout his opposition brief that Defendants have imposed “extra-contractual charges” on Plaintiff's investment by failing to ensure “substantive participation” in the equity-indexed benefits. (See Dkt. No. 141-2 at 3-4, Pl.'s Resp. to Defs.' SSUF ¶ 3; see also Dkt. No. 141 at 8, 11, 13, 21, 25.) Plaintiff identifies two relevant contract terms: § 5.8 and § 6.5. (Dkt. No. 141 at 9.) Section 5.8 guarantees that “[t]he reserves and guaranteed values will at no time be less than the minimum required by the laws of the state in which this Contract is issued.” (Hutton Decl. Ex. G, Dkt. No. 141-11 at 17.) Section 6.5 provides definitions applicable to the Monthly Cap Index Strategy, and specifies that the “Index Credit” amount “is based on the performance of the applicable Index as measured over the Contract Year.” (Id. at 21.)

         Plaintiff has not shown a genuine dispute of material fact regarding whether Defendants have breached § 5.8. Plaintiff's “substantive participation” argument fails for the reasons articulated below, infra Part II.B. The Court determined in a prior Order that there was no genuine dispute of material fact as to whether Defendants ever breached the Minimum Guaranteed Strategy Value terms of the contract by failing to guarantee the minimum nonforfeiture amounts prescribed by California's nonforfeiture law. (Dkt. No. 117 at 5-9.) Nor has Plaintiff shown a breach of § 6.5. Plaintiff's “based on” argument fails for the reasons articulated below, infra Part II.C.

         C. Third Breach of Contract Claim

         Plaintiff has not identified any falsity in his periodic statements. The contract requires Defendants to provide an “Annual Statement of Values” showing “the following values as of the statement Dated: (a) the amount of Single Premium paid; (b) the amount and dates of any partial Surrenders; (c) the Accumulation Value; and (d) the Cash Surrender Value.” (Leigh Decl. Ex. 1 § 8.4, Dkt. No. 130-4 at 23.) Defendants provided Plaintiff with statements annually, as required by the contract. (See Leigh Decl. Exs. 5-11, Dkt. Nos. 130-8-130-14.) While Plaintiff does not respond directly to Defendants' motion for summary judgment on his breach of contract claims, Plaintiff reiterates his “substantive participation” argument. (Pl.'s Resp. to Defs.' SSUF ¶¶ 15-16.) Plaintiffs “substantive participation” argument fails for the reasons explained below, infra Part II.B. Plaintiff has not proffered any evidence showing a breach of the contract term governing Defendants' obligations to provide periodic statements.

         The Court GRANTS Defendants' motion for summary judgment on Plaintiffs three breach of contract claims.

         II. Breach of the Implied Covenant of Good Faith and Fair Dealing

         A breach of the implied covenant of good faith and fair dealing does not require a breach of a specific provision of a contract. See Carma Developers (Cal), Inc. v. Marathon Dev. California, Inc., 2 Cal.4th 342, 373 (Cal. 1992). Rather, “[t]he covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made.” Guz v. Bechtel Nat. Inc., 24 Cal.4th 317, 349-50 (Cal. 2000) (emphasis in original). The implied covenant of good faith and fair dealing “cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” Id. It does not exist “‘to protect some general public policy interest not directly tied to the contract's purposes.'” Carma Developers, 2 Cal. 4th at 373 (quoting Foley v. Interactive Data Corp., 47 Cal.3d 654, 690 (Cal. 1988)). To impose an implied covenant of good faith and fair dealing, the following requirements must be satisfied:

(1) The implication must arise from the language used or it must be indispensible to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.

Lippman v. Sears Roebuck & Co., 44 Cal. 2d 136, 142 (Cal. 1955) (internal citation and quotation marks omitted).

         “The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith.” Carma Developers, 2 Cal.4th at 372. Here, Section 6 of the FIA contract provides:

You select the Strategy(ies) to which any portion of the Single Premium and Re-elections are elected, subject to the terms of this Contract. We reserve the right to add Strategies as approved by the Insurance Department of the state in which the Contract is issued. We may cease to offer a specific Strategy or cease to accept Re-elections to a specific Strategy at any time. Any new Re-elections accepted are subject to the terms and conditions in existence for any Strategy(ies) available at that time, including the then existing rates, caps, spreads, and credits, which may differ from the rates, caps, spreads, and credits applicable to previous elections or Re-elections.

(Leigh Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16.) This is not an express grant of “unfettered discretion.” Wolf v. Walt Disney Pictures & Television, 162 Cal.App.4th 1107, 1121 (Cal.Ct.App. 2008), as modified on denial of reh 'g (June 4, 2008); see also Baymiller v. Guarantee Mut. Life Co., No. SA CV 99-1566 DOC AN, 2000 WL 1026565, at *2 (CD. Cal. May 3, 2000) (holding that the covenant of good faith and fair dealing did not apply to defendants' discretionary authority where “nothing in the express language of Defendants' life insurance policies requires the use of a specific formula to calculate interest rates and cost of insurance charges”). Rather, the contract affords Defendants discretion within bounds. Defendants reserve the right to add interest-crediting strategies, as approved by the CDI, and to change the terms and conditions governing the interest-crediting strategies, within contract parameters and state law. Defendants must accordingly exercise their discretionary authority in good faith.

         A. The Parties' Positions

         Defendants argue that Plaintiffs claim fails primarily on two grounds. (Dkt. No. 130-1 at 15-16.) First, Defendants argue that Plaintiff seeks to impose substantive duties beyond the express terms of the agreement he made with Defendants. (Id.) Second, Defendants argue that Plaintiff has not shown how Defendants have failed to exercise their discretion to adjust certain features of the interest-crediting strategies in good faith. (Id.)

         Plaintiffs response is threefold. First, Plaintiff cites Defendants' January 4, 2007 submission to the CDI, in which Defendants represented that the FIA provides for equity-indexed benefits, and that “[t]he Cap, Participation Rate, and Spread will be set such that the annualized option cost for this strategy will be at least 100 bps.” (Hutton Decl. Ex. B at Oppo. 0075, 0103, Dkt. No. 144-3 at 38, 66.) Plaintiff also cites an internal memorandum in which Defendants observed that “[w]hile it may be possible to credit less on FIA Products, there are [a] number of risks in doing so. The first may be a reputation risk, as we do not wish to be unfair to customers.” (Hutton Decl. Ex. I at Oppo. 0375, Dkt. No. 144-9 at 12.)

         Second, Plaintiff contends that Defendants deprived Plaintiff of equity-indexed benefits by setting caps and rates “so low that their values do not substantively participate in the S&P 500 Index, and are not based on the performance of the Index, ” in violation of Cal. Ins. Code § 10168.25(e). (Dkt. No. 141 at 24.) Plaintiff cites to Dr. Craig J. McCann's calculation of what Dr. McCann calls the “equivalent value of S&P 500 Index call options” for Plaintiffs Monthly Cap Index Strategy.[4] (Declaration of Craig J. McCann (“McCann Decl.”) Ex. 1 at Oppo. 0606; Dkt. No. 144-12 at 6.) According to Dr. McCann, the “equivalent bps value” for Plaintiffs Monthly Cap Strategy was less than 100 bps on the investment date and on each subsequent contract anniversary. (Id.)

         Finally, Plaintiff contends that the contract does not confer upon Defendants unfettered discretion, but rather requires Defendants to calculate equity-indexed benefits “based on” the performance of the S&P 500. (Dkt. No. 141 at 23-24.) Plaintiff maintains that “based on” can have but one meaning: “based only on.” (Id. at 24.)

         In response, Defendants proffer a table from their verified discovery responses showing that the annualized option cost associated with each strategy in which Plaintiff allocated funds exceeded 100 bps each year. (Leigh Decl. Ex. 16, Dkt. No. 149-2 at 5.) Defendants maintain that unlike Dr. McCann's numbers, their figures are not hypothetical measurements of “equivalent value, ” but rather are measurements of the annualized option cost associated with each interest-crediting strategy. (Dkt. No. 149 at 7.)

         B. Plaintiffs “Substantive Participation” Argument

         The implied covenant of good faith and fair dealing “exists merely to prevent one contracting party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made.” Guz, 24 Cal.4th at 349-50. Here, Plaintiffs “substantive participation” argument has a basis in the agreement actually made. In their 2007 submission to the CDI, Defendants represented that “[t]he Cap, Participation Rate, and Spread will be set such that the annualized option cost for this strategy will be at least 100 bps.” Section 6 of Plaintiff s contract provides a nexus between the contract and Defendants' 2007 submission to the CDI. (Leigh Decl. Ex. 1 § 6, Dkt. No. 130-4 at 16 (“We reserve the right to add Strategies as approved by the Insurance Department of the state in which the Contract is issued.”).) Furthermore, William Bainbridge, the Head of Annuity Product Development for Defendants, testified that “[o]ur contracts, through the actuarial memorandums file, indicated we would spend 100 basis points on an annualized basis” for contracts purchased before January 3, 2011, including Plaintiff's contract. (Dkt. No. 174-1 at 10, Bainbridge Depo. 151:18-152:08.) Given the above, the Court concludes that the implied covenant of good faith and fair dealing requires Defendants to maintain an annualized option cost of at least 100 bps for each of Plaintiff's interest- crediting strategies.

         1. The Statutory and Regulatory Framework Regarding “Substantive Participation”

         Contrary to Plaintiff's argument, Cal. Ins. Code § 10168.25(e) and its implementing regulations do not support Plaintiff's implied covenant of good faith and fair dealing claim. Defendants' 2007 submission to the CDI, rather than Cal. Ins. Code § 10168.25(e) or its implementing regulations, comprises the sole basis for Plaintiff's argument that Defendants were required to spend 100 bps on options on an annualized basis. Cal. Ins. Code § 10168.25(e) and 10 C.C.R. § 2523.5(b)(2) do not define “substantive participation” as requiring an annualized option cost exceeding 100 bps.

         At the hearing, the Court asked Plaintiff to point out specific language in the statute that requires the annualized option cost for the equity-indexed benefit to total or exceed 100 bps. Plaintiff did not and cannot do so, as nothing in Cal. Ins. Code § 10168.25(e) mandates 100 bps in annualized option cost as the minimum floor for “substantive participation.”

         California's nonforfeiture statute provides, in pertinent part, that “[d]uring the period or term that a contract provides substantive participation in an equity indexed benefit, it may increase the reduction described in paragraph (1) of subdivision (d) by up to an additional 100 basis points to reflect the value of the equity index benefit.” Cal. Ins. Code § 10168.25(e). Subparagraph (1) of subdivision (d) in turn specifies the calculation to determine “[t]he interest rate used in determining minimum nonforfeiture amounts.”[5] Cal. Ins. Code § 10168.25(d)(1). Defendants take the additional reduction permitted in Cal. Ins. Code § 10168.25(e) with respect to Plaintiff's FIA and accordingly have to provide “substantive participation.” (C.f. Dkt. No. 174-1 at 12, Bainbridge Depo. 157:01-05.) However, the statute does not define “substantive participation.” All Cal. Ins. Code § 10168.25(e) provides for is this: if the contract provides substantive participation in an equity-indexed benefit during a period or term, Defendants are permitted to increase the reduction described in Cal. Ins. Code § 10168.25(d)(1) by a maximum of an additional 100 bps to reflect the value of the equity-indexed benefit.

         10 C.C.R. § 2523.5, Cal. Ins. Code § 10168.25(e)'s implementing regulation, defines “substantive participation” as requiring an annualized option cost of at least 25 bps, not 100 bps. The regulation provides that “[i]f a company chooses to take the additional reduction for an equity-indexed benefit as provided under Subsection 10168.25(e) of the Insurance Code, the company shall prepare a demonstration showing compliance with the requirements in Subsection 10168.25(e).” Cal. Code Regs. tit. 10, § 2523.5(a). 10 C.C.R. § 2523.5(b)(2) then outlines one of the steps used to demonstrate compliance with Cal. Ins. Code § 10168.25(e):

If the annualized option cost for the equity-indexed benefit is twenty-five . . . basis points or more, then the equity-indexed benefit provides substantive participation under Subsection 10168.25(e) of the Insurance Code and the company may take a reduction equal to the lesser of 100 basis points and the annual cost basis value.

Cal. Code Regs. tit. 10, § 2523.5(b)(2) (emphasis added). California law uses an annualized option cost of 25 bps, not 100 bps, as the benchmark for substantive participation.

         As Plaintiff pointed out at the hearing, 10 C.C.R. § 2523.5 did not take effect until December 19, 2012, well after Plaintiff's contract was issued in 2010. It thus appears that when Plaintiff purchased his FIA contract, the statute and implementing regulations did not specify any minimum annualized option cost for substantive participation. Defendants' commitment to maintaining an annualized option cost of 100 bps for Plaintiff's contract was not based upon a statutory or regulatory minimum, but upon Defendants' statements in its 2007 submission to the CDI.

         Plaintiff also cites to Defendants' internal statements which reference the Indexed Standard Nonforfeiture Law (“SNFL”). (Hutton Decl. Ex. A at Oppo. 0005, Dkt. No. 144-2 at 5 (“SNFL allows for an additional reduction in the nonforfeiture rate of up to 1% . . . for strategies which provide for substantial participation in an equity index. Substantial participation is defined as providing for a market value of benefit (i.e. 1% option cost) to justify reduction.”); Hutton Decl. Ex. C at Oppo. 0124; Dkt. No. 144-3 at 12 (“The initial option budget is from stat pricing model. After the initial guaranteed period, the renewal option budget is set to the greater of the one year risk free rate less the pricing spread or a 1% option budget (required by the Indexed Standard Nonforfeiture Law).”).) The National Association of Insurance Commissioners (“NAIC”) SNFL is a model regulation. It appears that California has not adopted the SNFL's definition of substantive participation, as neither Cal. Ins. Code §10168.25(e) nor 10 C.C.R. § 2523.5(b)(2) requires the annualized option cost to exceed 100 bps. What these internal statements show is that Defendants designed Plaintiff's contract to contain a guaranteed annualized option cost of 100 bps for each interest-crediting strategy, even though state law did not specify a minimum threshold of 100 bps.

         Accordingly, Plaintiff's “100 bps” theory for his implied covenant of good faith and fair dealing claim rests upon Defendants' 2007 submission to the CDI, rather than Cal. ...


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