                  FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


FREEMAN INVESTMENTS, L.P.;                 No. 09-55513
DARREL FREEMAN IRREVOCABLE
TRUST ; FREEMAN JOINT                         D.C. No.
IRREVOCABLE TRUST , individually           8:08-cv-01134-
and on behalf of a class of others            DOC-AN
similarly situated; DAVID KEMP ,
Trustee of the Darrel L. Freeman
Irrevocable Trust, individually and          OPINION
on behalf of a class of others
similarly situated; DAVID KEMP ,
Trustee of the Freeman Irrevocable
Trust, individually and on behalf of a
class of others similarly situated,
                Plaintiffs - Appellants,

                  v.

PACIFIC LIFE INSURANCE COMPANY ,
               Defendant - Appellee.


       Appeal from the United States District Court
          for the Central District of California
        David O. Carter, District Judge, Presiding

                  Argued and Submitted
            June 5, 2012–Pasadena, California

                   Filed January 2, 2013
2          FREEMAN INVESTMENTS V . PACIFIC LIFE

    Before: Alex Kozinski, Chief Judge, Stephen S. Trott,
           and Sidney R. Thomas, Circuit Judges.

               Opinion by Chief Judge Kozinski


                           SUMMARY*


    Securities Litigation Uniform Standards Act of 1998

   The panel affirmed in part and reversed in part the district
court’s dismissal of a class action as precluded by the
Securities Litigation Uniform Standards Act.

    SLUSA precludes state law class actions that allege
misrepresentations or fraudulent omission in connection with
the purchase or sale of covered securities. In this case,
appellants purchased variable universal life insurance policies
(under which the policy holder bears risks associated with the
investment of premiums), and alleged various state law
claims against their insurer.

    The panel held that the class claims for breach of contract
and breach of the duty of good faith and fair dealing were not
precluded by SLUSA, even if such claims related to the
purchase or sale of a covered security, because these contract
claims did not rest on misrepresentation or fraudulent
omission. The panel reversed the district court’s dismissal of
these two contract claims, on the condition that plaintiffs
amend their complaint to remove any reference to deliberate

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
          FREEMAN INVESTMENTS V . PACIFIC LIFE                3

concealment or fraudulent omission. The panel affirmed the
dismissal of the class claim for unfair competition in violation
of California law. The panel remanded with instructions that
the district court grant leave for appellants to file an amended
complaint.


                         COUNSEL

Lee A. Sherman, Callahan Thompson Sherman & Caudill
LLP, Tustin, California; Stephen R. Miller and John J.
Schirger, Miller Schirger LLC, Kansas City, Missouri; and
Patrick J. Stueve and Richard M. Paul III (argued), Stueve
Siegel Hanson LLP, Kansas City, Missouri, for Plaintiffs-
Appellants.

James C. Martin (argued), Robert D. Phillips Jr., Thomas A.
Evans and David J. Bird, Reed Smith LLP, San Francisco,
California, for Defendant-Appellee.


                          OPINION

KOZINSKI, Chief Judge:

     The Securities Litigation Uniform Standards Act of 1998
(SLUSA) precludes state law class actions that allege
misrepresentation or fraudulent omission in connection with
the purchase or sale of covered securities. In this case we
answer the question on everyone’s lips: Does SLUSA
displace class actions alleging breach of a variable universal
life insurance contract?
4          FREEMAN INVESTMENTS V . PACIFIC LIFE

I. BACKGROUND

    Plaintiffs purchased variable universal life insurance
policies from defendant Pacific Life Insurance Company.
Variable universal insurance differs in important ways from
term life insurance, which protects against risk of death for a
finite period and provides no continuing benefit once that
time expires. See American Council of Life Insurers, Life
Insurance Fact Book 64 (2011). Variable universal insurance
lasts for the duration of the policyholder’s life and allows him
to share in the gains (or losses) generated by the investment
of premiums. A policyholder may borrow against the
accumulated value of his variable universal policy, or cash
out the accumulated value by surrendering the policy while
he’s alive.

    Pacific guarantees its customers a minimum insurance
benefit, and policyholders also allocate a portion of their
premiums to a separate account whose value fluctuates over
time.1 Policyholders choose from various investment options
within the separate account, and Pacific invests the assets into
corresponding portfolios of the Pacific Select Fund. The
death benefit payable to survivors varies with the
performance of the funds each customer selects. Because the
policyholder bears the risk associated with the investments,
our sister circuits have held that the variable universal policy
qualifies as a security regulated by federal law. See Herndon

    1
     Pacific must shield funds in the separate account from its general
liabilities and expenses, and use it only to fund the variable universal
insurance contracts.     See 15 U.S.C. § 80a–2(a)(37); 17 C.F.R.
§ 270.0–1(e). The separate account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment
Company Act of 1940. See Prudential Ins. Co. of Am. v. SEC, 326 F.2d
383, 388 (3d Cir. 1964).
           FREEMAN INVESTMENTS V . PACIFIC LIFE                        5

v. Equitable Variable Life Ins. Co., 325 F.3d 1252, 1253
(11th Cir. 2003) (per curiam); see also Lincoln Nat’l Life Ins.
Co. v. Bezich, 610 F.3d 448, 451 (7th Cir. 2010).2

    Each month, Pacific assesses a “cost of insurance” charge,
which it collects by redeeming units of the separate account.
Plaintiffs accuse Pacific of levying excessive cost of
insurance charges. They allege that “cost of insurance” is an
industry term of art and that they understood the fee would be
calculated according to industry standards. Second Am.
Class Action Compl. ¶¶ 15–17. They brought a class action
in federal district court alleging breach of contract, breach of
the duty of good faith and fair dealing and unfair competition
under California Business and Professions Code § 17200. Id.
¶¶ 33–45. They also claim that the statute of limitations
should toll because Pacific concealed the magnitude of its
charges in its quarterly statements. Id. ¶¶ 32, 43. Tolling
would permit plaintiffs to seek restitution of charges assessed
during the entire period they held the policy, some of which
seems to go back beyond the limitations period.

    Pacific moved to dismiss the complaint, arguing that the
class action was precluded by SLUSA. The statute bars class
actions brought under state law, whether styled in tort,
contract or breach of fiduciary duty, that in essence claim
misrepresentation or omission in connection with certain
securities transactions. See 15 U.S.C. § 78bb(f)(1); Segal v.

  2
    Plaintiffs don’t dispute that variable universal policies are covered
securities. W e therefore have no cause to consider whether or not we
agree with our sister circuits, though our precedent suggests we would.
See Patenaude v. Equitable Life Assurance Soc’y of the United States,
290 F.3d 1020, 1022 (9th Cir. 2002) (holding a variable annuity issued by
an insurance company to be a covered security), abrogated on other
grounds by Kircher v. Putnam Funds Trust, 547 U.S. 633, 636 n.1 (2006).
6         FREEMAN INVESTMENTS V . PACIFIC LIFE

Fifth Third Bank, N.A., 581 F.3d 305, 310 (6th Cir. 2009).
The district court granted the motion, but only after twice
giving plaintiffs leave to amend. Plaintiffs scrubbed their
complaint of many (but not all) references to systematic
concealment and deceitful conduct, but the district court
concluded that the substance remained the same: “Such
allegations of excessive charges, hidden loads and
concealment clearly amount, at the least, to an allegation that
Defendant omitted facts in connection with the purchase of
securities, if not allegations of outright misrepresentations
made by Defendant.” We review de novo. Proctor v. Vishay
Intertechnology Inc., 584 F.3d 1208, 1218 (9th Cir. 2009).

II. DISCUSSION

    SLUSA is part of a series of reforms targeted at costly
securities litigation. Congress first passed the Private
Securities Litigation Reform Act of 1995 (PSLRA) to deter
the filing of so-called strike suits—frivolous securities class
actions that put defendants to the unappealing choice of
settling claims, however meritless, or risking extravagant
discovery and trial costs. See H.R. Conf. Rep. 104–369
(1995); Michael A. Perino, Fraud and Federalism:
Preempting Private State Securities Fraud Causes of Action,
50 Stan. L. Rev. 273, 290–91 (1998). The statute imposed a
number of procedural hurdles on federal securities class
actions, including a heightened pleading requirement. See
15 U.S.C. § 78u–4(b); Proctor, 584 F.3d at 1217. But
inventive lawyers found detours around these obstacles. By
bringing state law class actions in state courts, they avoided
the procedural steeplechase erected by the PSLRA. See
Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
547 U.S. 71, 81–82 (2006).
           FREEMAN INVESTMENTS V . PACIFIC LIFE                      7

    Equal to the challenge, Congress persisted by adopting
SLUSA, which seeks to prevent state class actions alleging
fraud “from being used to frustrate the objectives” of the
PSLRA. See H.R. Conf. Rep. 105–803 (1998). SLUSA bars
private plaintiffs from bringing (1) a covered class action (2)
based on state law claims (3) alleging that defendant made a
misrepresentation or omission or employed any manipulative
or deceptive device (4) in connection with the purchase or
sale of (5) a covered security. See 15 U.S.C. § 78bb(f)(1).
Plaintiffs and Pacific agree that this case involves (1) a
covered class action, (2) state law claims and (5) a covered
security.3 They hotly dispute the two remaining elements:
Do the state law claims, no matter how labeled, in substance
allege (3) misrepresentation or omission (4) in connection
with the purchase or sale of securities?

     A. Misrepresentation or omission

    In arguing that plaintiffs “allege numerous
misrepresentations and omissions in furtherance of an
inherently deceptive scheme,” Pacific quotes extensively
from the initial complaint, which accuses the company of
“systematic concealment” and “deceitful conduct” designed
“to generate undeserved revenues.” As our sister circuits
have recognized, the statute operates wherever deceptive
statements or conduct form the gravamen or essence of the
claim. See Rowinski v. Salomon Smith Barney Inc., 398 F.3d
294, 299–300 (3rd Cir. 2005). Because we look to the


 3
   A covered class action is one in which “damages are sought on behalf
of more than 50 persons or prospective class members.” 15 U.S.C.
§ 78bb(f)(5)(B). A covered security is one issued by an investment
company registered under the Investment Company Act of 1940. Id.
§ 77r(b)(2).
8           FREEMAN INVESTMENTS V . PACIFIC LIFE

substance of the allegations, plaintiffs cannot avoid
preclusion “through artful pleading that removes the covered
words . . . but leaves in the covered concepts.” Segal,
581 F.3d at 311. Were it otherwise, “SLUSA enforcement
would reduce to a formalistic search through the pages of the
complaint for magic words—‘untrue statement,’ ‘material
omission,’ ‘manipulative or deceptive device’—and nothing
more.” Id. at 310.

    Stripped to its essence, plaintiffs’ latest complaint alleges
that Pacific charged them too much for life insurance and, as
a result, reduced the value of their investments. Specifically,
they claim that “cost of insurance” is a term of art that refers
to “the portion of premiums from each policyholder set aside
to pay claims.” Second Am. Class Action Compl. ¶ 15
(internal quotation marks and emphasis omitted). They allege
that they expected Pacific to calculate the cost of insurance
charge “based on industry accepted actuarial determinations,”
but the company deviated from industry norms and debited an
amount “in excess of true mortality charges.” Id. ¶¶ 16–17.
Plaintiffs thus raise a dispute about the meaning of a key
contract term, and the success of their claim will turn on
whether they can convince the court or jury that theirs is the
accepted meaning in the industry.4 See Restatement (Second)
of Contracts § 202(3)(b); Cal. Civ. Code § 1645. This is just
like the “what is chicken?” case with which every first-year
law student is familiar. See Frigaliment Importing Co. v.



    4
   In California, interpretation of contract terms is a question of law for
the court “unless the interpretation turns upon the credibility of extrinsic
evidence,” such as expert testimony. Parsons v. Bristol Dev. Co.,
402 P.2d 839, 842 (Cal. 1965) (Traynor, C.J.), cited in United Commercial
Ins. Serv., Inc. v. Paymaster Corp., 962 F.2d 853, 856 (9th Cir. 1992).
          FREEMAN INVESTMENTS V . PACIFIC LIFE                9

B.N.S. Int’l Sales Corp., 190 F. Supp. 116, 117, 119
(S.D.N.Y. 1960) (Friendly, J.).

     To succeed on this claim, plaintiffs need not show that
Pacific misrepresented the cost of insurance or omitted
critical details. They need only persuade the court that theirs
is the better reading of the contract term. See Yount v. Acuff
Rose–Opryland, 103 F.3d 830, 836 (9th Cir. 1996). “[W]hile
a contract dispute commonly involves a ‘disputed truth’ about
the proper interpretation of the terms of a contract, that does
not mean one party omitted a material fact by failing to
anticipate, discover and disabuse the other of its contrary
interpretation of a term in the contract.” Webster v. N.Y. Life
Ins. and Annuity Corp., 386 F. Supp. 2d 438, 441 (S.D.N.Y.
2005). Just as plaintiffs cannot avoid SLUSA through crafty
pleading, defendants may not recast contract claims as fraud
claims by arguing that they “really” involve deception or
misrepresentation. Id.; see also Walling v. Beverly Enters.,
476 F.2d 393, 397 (9th Cir. 1973) (“Not every breach of a
stock sale agreement adds up to a violation of the securities
law.”).

    Nor do plaintiffs make a stealth allegation of fraudulent
omission with their tolling argument. Plaintiffs seek
restitution for cost of insurance charges made during the
entire period they held their insurance policies, even that part
foreclosed by the statute of limitations. To reach those older
charges, they argue that the statute should toll because Pacific
“knowingly and actively concealed” the excessive charges
and kept its customers “ignorant of information essential to
the pursuit of these claims.” Second Am. Class Action
Compl. ¶ 32. The complaint makes two distinct allegations,
that Pacific (1) breached the contract and then (2) hid the
breach. The latter doesn’t corrupt the former, turning it into
10        FREEMAN INVESTMENTS V . PACIFIC LIFE

a claim of fraudulent omission. The breach and tolling
arguments are perfectly consistent: If the parties disagreed
about the meaning of “cost of insurance,” as plaintiffs allege,
Pacific may well have believed there was no breach to
disclose.

    All the same, plaintiffs would be wise to rid their
complaint of the allegations of active concealment. In
California, the statute of limitations period does not
commence until plaintiffs have a reasonable way of detecting
the breach. See El Pollo Loco, Inc. v. Hashim, 316 F.3d
1032, 1039 (9th Cir. 2003). This “discovery rule” applies
even if the defendant didn’t engage in fraud or concealment.
See Gryczman v. 4550 Pico Partners, Ltd., 131 Cal. Rptr. 2d
680, 682 (Cal. Ct. App. 2003). On remand, the district court
shall give plaintiffs leave to amend their complaint for a third
time to eliminate references to hidden loads, knowing
concealment and wrongful conduct. These concepts are
irrelevant to both the breach and the tolling claims, so there’s
no reason to risk tainting any eventual verdict by including
references to fraud or misrepresentation.

     In sum, the breach of contract claim survives SLUSA, as
does the class claim for breach of the duty of good faith and
fair dealing, itself a species of contract claim. But California
Business & Professions Code § 17200, on which plaintiffs
base a separate claim, defines unfair competition as “any
unlawful, unfair or fraudulent business act or practice.” This
claim doesn’t survive SLUSA unless the charged conduct
didn’t occur “in connection with” the purchase or sale of a
covered security.
          FREEMAN INVESTMENTS V . PACIFIC LIFE               11

   B. In connection with the purchase or sale of a
      covered security

     Misrepresentation occurs “in connection with” the
purchase or sale of a covered security if “the fraud and the
stock sale coincide or are more than tangentially related.”
Madden v. Cowen & Co., 576 F.3d 957, 966 (9th Cir. 2009)
(internal quotation marks omitted). While this language is
capacious, it doesn’t reach all transactions in which securities
play a role, however incidental. See SEC v. Zandford,
535 U.S. 813, 820 (2002). “The fraud in question must relate
to the nature of the securities, the risks associated with their
purchase or sale, or some other factor with similar connection
to the securities themselves. While the fraud in question need
not relate to the investment value of the securities themselves,
it must have more than some tangential relation to the
securities transaction.” Falkowski v. Imation Corp., 309 F.3d
1123, 1130–31 (9th Cir. 2002) (internal quotation marks and
brackets omitted), abrogated on other grounds by Kircher v.
Putnam Funds Trust, 547 U.S. 633, 636 n.1 (2006).

    A variable universal life insurance policy is a “hybrid”
creature that has “characteristics of both insurance products
and investment securities.” Patenaude v. Equitable Life
Assurance Soc’y of the United States, 290 F.3d 1020, 1027
(9th Cir. 2002) (internal quotation marks omitted) (addressing
variable annuities), abrogated on other grounds by Kircher,
547 U.S. at 636 n.1. In some cases, plaintiffs may raise
claims that survive SLUSA because they target only the
insurance features of the policy. Cf. Ring v. AXA Financial,
Inc., 483 F.3d 95, 99–101 (2d Cir. 2007). But not here.
Pacific collects the cost of insurance charge by redeeming
units of the separate account, which itself holds investments
in the Pacific Select Fund. According to the policy’s
12        FREEMAN INVESTMENTS V . PACIFIC LIFE

prospectus, “Unless you tell us otherwise, we deduct the
monthly charge from the investment options that make up
your policy’s accumulated value, in proportion to the
accumulated value you have in each option.” Each inflated
charge not only “coincides” with the sale of securities; it also
depletes the value of the investment. A fund subject to higher
fees and charges will, over time, have a lower value than a
fund subject to more modest charges. Cf. Behlen v. Merrill
Lynch, 311 F.3d 1087, 1094 (11th Cir. 2002). To the extent
plaintiffs allege that Pacific engaged in fraud or
misrepresentation that drained their investments, SLUSA
stands in the way.

    Plaintiffs in fact allege that the “wrongfully diverted
funds . . . reduced Policy values” and thereby worked to their
“financial detriment.” Second Am. Class Action Compl.
¶¶ 21–22. Essentially, they claim that Pacific harmed them
by fraudulently debiting funds that would otherwise have
been invested in securities. The Supreme Court instructs us
to construe SLUSA’s “in connection with” language broadly,
“not technically and restrictively.” Zandford, 535 U.S. at 819
(internal quotation marks omitted). We conclude that the
conduct charged in the complaint satisfies this standard.

    Plaintiffs argue that the “in connection with” requirement
is satisfied only if they “bought or sold a security in reliance
on misrepresentations as to its value.” Appellants’ Br. 18
(emphasis omitted) (quoting Araujo v. John Hancock Life Ins.
Co., 206 F. Supp. 2d 377, 383 (E.D.N.Y. 2002)). They claim
that on the day they purchased the variable universal policy,
they “initially received the policy as represented” and were
defrauded only later when Pacific started deducting excessive
fees. Id. Most likely they derive this argument from Blue
Chip Stamps, where the Supreme Court held that only
          FREEMAN INVESTMENTS V . PACIFIC LIFE               13

purchasers and sellers of securities have standing to bring a
private securities fraud action. See Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 731–32, 749 (1975). But
the Court has also said that SLUSA may bar state law class
actions even if plaintiffs can’t satisfy that standing
requirement, and thus wouldn’t have a federal securities
claim. See Dabit, 547 U.S. at 88–89.

    In Dabit, the defendant circulated misleading research
that distorted stock prices and lulled plaintiffs into holding
overvalued investments they would have been wise to unload.
Id. at 75. The Court held the “in connection with”
requirement satisfied even though the plaintiffs engaged in no
active trading. “Under our precedents,” the Court said, “it is
enough that the fraud alleged ‘coincide’ with a securities
transaction—whether by the plaintiff or someone else.” Id.
at 85; see also Carpenter v. United States, 484 U.S. 19, 24
(1987) (plurality).

    Every time Pacific collected the allegedly inflated cost of
insurance charge, it sold securities to generate the funds.
Because the insurer’s alleged fraud “coincided” with the sale
of securities, it doesn’t matter that the policyholders didn’t
themselves redeem the securities. The “in connection with”
requirement is satisfied.

   C. Individual claims

    Plaintiffs argue that the district court erred in dismissing
their complaint with prejudice because, even if SLUSA
prevents them from proceeding as a class, they should be free
to pursue their claims as individuals. As they correctly note,
SLUSA isn’t a complete bar to state law claims that sound in
fraud. The statute only “denies plaintiffs the right to use the
14        FREEMAN INVESTMENTS V . PACIFIC LIFE

class-action device to vindicate” those claims. Dabit,
547 U.S. at 87. If plaintiffs presented viable individual
claims, the district court should have dismissed them without
prejudice so that plaintiffs might bring them in state court.
See Segal, 581 F.3d at 312.

    But Pacific tells us that plaintiffs never asserted
individual claims, and instead brought their complaint solely
as a class action. The complaint is ambiguous on that score.
In the very first line, plaintiffs declare that they’re proceeding
“individually and on behalf of all others similarly situated.”
The Eighth Circuit recently held that similar language,
coupled with factual allegations specific to the named
plaintiffs, “distinctly makes out individual claims” separate
from the class claims. McCrary v. Stifel, Nicolaus & Co.,
687 F.3d 1052, 1057–58 (8th Cir. 2012). But in our case
plaintiffs twice identify their case as a class action without
referencing any individual claims. Second Am. Class Action
Compl. ¶¶ 1, 6. They also fail to allege that their individual
claims, standing alone, would satisfy the amount in
controversy requirement for federal diversity jurisdiction,
asserting only that they meet the $5 million threshold for
class actions. Id. ¶ 6.

    We need not decide whether plaintiffs pleaded individual
claims; we’ll assume they did not. But if that’s the case, we
see no merit to the insurer’s argument that plaintiffs forfeited
those claims by failing to seek leave to amend their complaint
and plead such claims while the motion to dismiss was
pending. Because we’re remanding for plaintiffs to amend
their complaint on other grounds, there’s no reason they can’t
also amend to pursue their claims as individuals, if they so
choose. See Smith v. Pacific Props. and Dev. Corp., 358 F.3d
1097, 1101 (9th Cir. 2004) (noting that leave to amend should
           FREEMAN INVESTMENTS V . PACIFIC LIFE            15

be freely given, except in cases of bad faith, undue delay or
prejudice to the opposing party).

III.     CONCLUSION

    The class claims for breach of contract and breach of the
duty of good faith and fair dealing are not precluded by
SLUSA, even if such claims relate to the purchase or sale of
a covered security. Plaintiffs allege that their insurer
promised one thing and delivered another. That’s a
straightforward contract claim that doesn’t rest on
misrepresentation or fraudulent omission. We therefore
reverse the district court’s dismissal of the two contract
claims, on the condition that plaintiffs amend their complaint
to remove any reference to deliberate concealment or
fraudulent omission. We affirm the dismissal of the class
claim for unfair competition in violation of California law.

    We remand with instructions that the district court grant
leave for plaintiffs to file an amended complaint consistent
with our opinion.

  AFFIRMED IN PART, REVERSED IN PART AND
REMANDED.

       NO COSTS.
