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.
Many in the business community complained that lawyers could use Sections 17200 and 17500’s lack of traditional standing requirements and malleable definitions to target a business, even though no consumer ever complained about its practice and no client ever sought out the lawyer for help. Section 17200 also frequently was an "add on" claim in otherwise traditional product liability or other tort lawsuits.
California’s voters responded to these concerns 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 added language that 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.
California's Supreme Court Applies Prop. 64 to Pending Cases, Leaves Open Possibility Plaintiff With Standing May Substitute Into Existing Lawsuits
Since Proposition 64 was passed, California courts have grappled with whether Proposition 64's new requirements apply to UCL cases that were already pending in the courts when the initiative passed. The California Supreme Court issued two opinions on July 24, 2006, Californians For Disability Rights 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 as of November 2004, but not yet final, when the initiative took effect. However, the plaintiffs' lawyers may have the opportunity to substitute in a new named plaintiff, if someone meeting Proposition 64's standing requirements can be found. The California Supreme Court denied plaintiffs' petition for in Californians For Disability Rights on August 30, 2006.
In Californians for Disability Rights, the plaintiff group contended that Mervyns violated Section 17200 by arranging clothing racks too close together in its stores, restricting access for those with limited mobility. Mervyns prevailed in a bench trial, and while the case was on appeal, California's voters passed Proposition 64. Mervyns then moved to dismiss the appeal, arguing that the plaintiff group did not meet Proposition 64’s new standing requirements, but the court of appeal rejected that argument and refused to dismiss the appeal.
The California Supreme Court reversed. It found the initiative did not impermissibly change the legal consequences of past conduct, as it left the substantive rules governing business and competitive conduct as they were, and did not eliminate any right to recover. Instead, the initiative merely prevents uninjured private citizens from suing for restitution on behalf of others, a change that had immediate effect on all Section 17200 and 17500 cases pending when Proposition 64 passed, and those filed afterwards.
On remand, plaintiff sought permission to substitute in a new plaintiff, but on November 13, 2006, the court of appeals summarily denied that request and dismissed the appeal for lack of standing.
In Branick, the plaintiffs sued a savings and loan, contending it violated Sections 17200 and 17500 by how it informed and charged mortgage borrowers for recording fees. As with many such pre-Proposition 64 lawsuits, the plaintiffs were not customers of the defendant, nor had they paid the allegedly improper fees—they simply filed suit on behalf of the general public, and Proposition 64 passed while their lawsuit was pending. The Branick Court of Appeals found that Proposition 64 did apply, and that the complaint had to be dismissed because the plaintiffs did not have standing. The court, however, also concluded that California law might permit someone with standing to be substituted in as a named plaintiff, and remanded to allow the trial court to make that determination.
Before the trial court could evaluate the issue, however, the California Supreme Court granted review—and then ultimately agreed that the trial court should evaluate the matter first. In doing so, the court declined to provide much guidance, "[t]o avoid prejudicing the superior court’s decision." But California prohibits substituting in a new plaintiff when doing so would give rise to a distinct and different legal obligation than the one originally alleged, and this may limit the ability of plaintiffs’ counsel to substitute in new named plaintiffs. In addition, because many pre-Proposition 64 lawsuits were lawyer-driven, as a practical matter plaintiffs’ counsel appears to have had difficulty locating people who meet the new standing requirements, as the case was dismissed when it returned to the trial court.
Supreme Court To Address Prop. 64's New Restrictions on UCL and False Advertising Claims
The California Supreme Court's resolution of Californians for Disability Rights and Branick answers important questions about Proposition 64's application, but other cases have continued to address Proposition 64's new limits on what UCL and false advertising cases will look like going forward. Even though Proposition 64 pretty clearly imposed standing requirements on all plaintiffs, whether individual litigants or members of a representative class, and eliminated the old "likely to deceive" standard for fraud, plaintiffs continue to struggle to regain the advantages they used to enjoy.
On November 1, 2006, the California Supreme Court granted review to address some of these issues in the lead case, In re Tobacco II Cases with briefing in a companion case, Pfizer v. Los Angeles Superior Court on hold until In re Tobacco II is decided. After more than two years, the Court finally heard argument for In re Tobacco II on Tuesday, March 3, 2009, at 9:00 a.m., in San Francisco.
The court of appeal's opinion in In re Tobacco II involved the decertification of a class of Californians who asserted a UCL claim based on the premise that tobacco company advertising between 1993 and 2001 involving terms like "lights" and "low tar" was misleading about health hazards and addictiveness.
As the Fourth District explained, after Proposition 64, "[a]n individual bringing a class action UCL lawsuit must meet the standing requirements. . . that is, an individual must have 'suffered injury in fact and [have] lost money or property as a result of such unfair competition.'" Moreover, since representative UCL actions also must meet the requirements of California’s class action statute, California Code of Civil Procedure § 382, each class member also must meet the standing requirement. Since such a class inherently involves differences as to what members understood about smoking and whether they were mislead into purchasing cigarettes, individual differences predominated, making decertification of the class appropriate.
At the Supreme Court’s March 3 hearing on Tobacco II, Plaintiffs argued that Proposition 64 did not change the substance of the UCL and, if the Court did not reverse, it would reduce the UCL to “nothing more than a fraud cause of action that does not allow damages.” Defendants countered that allowing absent class members to recover for claims they could not have maintained individually would render the UCL’s reference to C.C.P. 382 a nullity. As both parties await a ruling, one thing is certain: this case will dramatically change how Californians litigate mass torts. Additional information on the argument is available here.
The court of appeals opinion in Pfizer v. Los Angeles Superior Court addressed a similar question. Itapplied Proposition 64’s standing requirements to overturn the certification of a class action under sections 17200 and 17500.
In Pfizer, the plaintiff alleged that Listerine® ads misleadingly implied that the mouthwash could replace dental floss in reducing plaque and gingivitis. The issues the court faced were "whether each member of the putative class asserting a claim under [§17200 or § 17500] must, in the language of Proposition 64, have suffered injury in fact and lost money or property as a result of such violation, or whether this standing requirement is only applicable to the class representative or named plaintiff." In rejecting class certification, the Court concluded that:
- Under Prop. 64, the class representative and each member of the putative class must have suffered an injury in fact and lost money or property as a result of a UCL or false advertising violation; otherwise, the putative class representative’s claims will not be typical of the class;
- While allegations of actual deception, reasonable reliance and damage still are unnecessary under Sections 17200 and 17500, mere likelihood of harm to the public is no longer sufficient for standing to sue. Unless a person has suffered an injury and lost money or property, plaintiffs cannot rely on the "'likelihood' that members of the public will be deceived." The Court was unpersuaded by post-Prop 64 cases cited for proposition that the “likely to be deceived” standard was unchanged because none had directly addressed the effect of Prop. 64 on this standard; and
- A plaintiff must actually rely on the false or misleading misrepresentation or advertisement, because reliance is an element inherent in the "injury in fact" requirement that Proposition 64 added. Although plaintiffs could act as private attorneys general before Prop. 64 passed, the new reliance requirement means that either the plaintiff must have read and relied on an advertisement, or the enforcement of such claims must be left to government officials.
Because Proposition 64’s new restrictions are plain, hopefully they will be understood and applied by the California Supreme Court in In re Tobacco II as the voters intended.
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 new CLRA decision, Meyer v. Sprint Spectrum L.P., 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 palpabale 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 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.