California's Business & Professions Code § 17200 (Unfair Competition) and § 17500 (False Advertising)

California's Proposition 64 Imposed Important Reforms to Rein In Section 17200 and Section 17500 Claims

California's Unfair Competition Law ("UCL"), Business & Professions Code Sec. 17200, was designed to protect competitors and consumers from illegal, fraudulent, and "unfair" business practices, and Business & Professions Code Sec. 17500 prohibits false advertising.

Until 2004, however, individuals or groups that never suffered any loss or harm could sue on behalf of the "general public" without satisfying traditional class action requirements. Additionally, the statute's pleading requirements and standards of proof were very liberal and allowed recovery, sometimes on representative basis, upon a determination that the challenged conduct was "unfair" or "likely to deceive a reasonable consumer," without any proof of actual injury. The lack of formal class action requirements also meant that UCL judgments bound only the named plaintiff and not the "general public" they purported to represent, raising the very real prospect of repeat liability for the same conduct.

California's voters responded to these problems by passing Proposition 64 in November 2004, implementing important procedural changes to Section 17200 and Section 17500, benefiting large and small businesses that do business in California. Proposition 64 now requires that plaintiff show he or she has suffered an actual injury and has lost money or property as a result of such unfair competition. Proposition 64 also cross-references California's class action statute, which means that all representative actions under Section 17200 or Section 17500 must meet regular class action requirements.

The first major issue confronted by California courts after Proposition 64 passed was whether its new requirements applied to UCL cases already pending when the initiative passed. The California Supreme Court issued two opinions on July 24, 2006, Californians for Disability Rights, 39 Cal. 4th 223 (2006), and Branick v. Downey Savings & Loan Assoc., 39 Cal. 4th 235 (2006), resolving this issue in favor of applying Proposition 64 to all cases already on file when the initiative took effect (on November 2004).

Next, the California Supreme Court issued In re Tobacco II, 41 Cal. 4th 1257 (2007) regarding the impact of Proposition 64 on UCL claims filed on behalf of a putative class in a case involving the propriety of certifying a UCL class action for Californians who claimed tobacco company advertising regarding terms like "lights" and "low tar" was misleading about health hazards and addictiveness. The decision has received a fair amount of criticism as subverting Proposition 64's goal of limiting the UCL, as the Supreme Court in In re Tobacco II confined Proposition 64's standing requirements to named class representatives only.

At the same time, the case affirmed the broad discretion trial courts have to deny class certification, and it did not purport to alter or change the substantive elements required to prove a UCL claim. The In re Tobacco II majority also recognized that the right to restitution under section 17200 depends on whether any money or property "may have been acquired" as a result of the alleged misrepresentation, and other cases confirm that even under the UCL, restitution can only return to a person those measurable amounts which are wrongfully taken by means of an unfair business practice.

Although providing some guidance, In re Tobacco II did not resolve all questions about Proposition 64 and the new UCL requirements, and UCL cases continue to present novel issues that are heavily litigated.

Use Of The CLRA As An Alternative To UCL and False Advertising Claims

Because Proposition 64 was a significant step toward leveling the UCL playing field, some plaintiffs' attorneys have turned to another California statute, the Consumer Legal Remedies Act ("CLRA"), California Civil Code Section 1750 et. seq. This statute raises problems of its own.

The self-declared purpose of the CLRA, enacted in 1970, is to "protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection." Cal. Civ. Code § 1760.

Unlike the UCL, the CLRA contains no general broad proscription against "unfair" or "deceptive" practices. Instead, the CLRA lists 23 activities as "unlawful" - from "advertising goods or services with intent not to sell them as advertised" to "inserting an unconscionable provision in [a] contract" to "representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have." When a prohibited activity takes place during a "transaction" involving the sale or lease of goods or services to a "consumer," CLRA liability may result. Cal. Civ. Code § 1770(a).

Only individual consumers can sue under the CLRA, although they may bring a class action "if the unlawful method, act, or practice has caused damage to other consumers similarly situated." Cal. Civ. Code § 1781(a). Unfortunately, at least one court has interpreted this provision as requiring "mandatory" class certification if a plaintiff can establish the requisite conditions, such as the impracticability of bringing all members of the class before the court, commonality, typicality, and adequacy of representation. Hogya v. Super. Ct., 75 Cal. App. 3d 122, 140 (1977).

In addition, the CLRA contains some unique procedural devices. First, the plaintiff must notify a defendant of the alleged Section 1770 violations thirty or more days before the filing of a CLRA complaint. See Cal. Civ. Code § 1782. The 30-day letter is required as a condition precedent to maintaining an action for damages under the CLRA. Cal. Civ. Code § 1782(b).
Second, the CLRA prohibits courts from granting a motion for summary judgment, although it does provide a process by which a defendant can make a motion that the given action has no merit. Cal. Civ. Code § 1781(c)(3).

The remedies available under the CLRA also differ from those allowed under the UCL. The CLRA allows for actual damages, punitive damages, injunctive relief, restitution, ancillary relief ("any other relief that the court deems proper") -- and attorney's fees. Cal. Civ. Code §1780(a)(1)-(5). In order to obtain actual damages, however, a CLRA plaintiff must prove loss causation. See Wilens v. TD Waterhouse Group, Inc., 120 Cal. App. 4th 746, 754 (2003) ("Relief under the CLRA is specifically limited to those who suffer damages, making causation a necessary element of proof").

Before Prop. 64 was enacted, few plaintiffs asserted CLRA claims because the UCL provided so much flexibility and so many advantages. Since Prop. 64 helped level the UCL playing field, it appears there has been an increase in the number of CLRA claims asserted.

But the CLRA remains more limited than the pre-Proposition 64 version of the UCL. In January 2009, the California Supreme Court issued an important CLRA decision, Meyer v. Sprint Spectrum L.P., 45 Cal. 4th 634 (2009) unanimously affirming judgment for Sprint and concluding that a CLRA plaintiff lacks standing "without some allegation that he or she has been damaged by an alleged unlawful practice." Sprint was represented in the California Supreme Court by Reed Smith's own Ray Cardozo and Dennis Maio.

Meyer began in early 2004 with allegations, on behalf of the general public, that Sprint violated the UCL by including mandatory binding arbitration and other provisions in its customer service agreements. After Proposition 64, the original plaintiff (who was not a Sprint customer) was replaced by new named plaintiffs, and CLRA and declaratory relief causes of action were added. Sprint challenged the amended complaint because even the new plaintiffs had not alleged that the contract provisions had been enforced against them, and they also did not allege that they were personally damaged by the provisions. Although plaintiffs argued that the CLRA imposed no damage requirement whatsoever, the court concluded that California's Legislature had "set a low but nonetheless palpable threshold of damage." It also noted that with statutes like the UCL and CLRA, "any rule that would expand the ability of individuals to bring lawsuits has costs as well as benefits." There is little to say other than that Meyer is a sound and well-reasoned decision that provides important and clear guidance for future CLRA claims.

Reed Smith attorneys are actively involved in litigating the effect of Proposition 64 on a variety of issues under Section 17200 and 17500 as well as UCL, False Advertising and CLRA claims. We will continue to monitor and report on case law as it develops through future significant court decisions.

For further information about California's Proposition 64, or section 17200 and 17500, contact Robert D. "Bo" Phillips or the Reed Smith attorney with whom you work.