Advisories & Insights

California Supreme Court Decision Raises Specter of Return of "Shakedown" Suits

June, 2009
By Richard G. Matson

On May 18, 2009, the California Supreme Court issued an important new ruling which could impact all companies doing business in California. The Court's decision in the In re Tobacco II Cases, 09 Cal. Daily Op. Serv. 5993, 2009 WL 1362556 (Cal.) reverses a 2006 appellate court decision interpreting Proposition 64, a 2004 voter-approved initiative aimed at curbing "frivolous" "shakedown" suits brought under the state's broad Unfair Competition Law ("UCL"). The Court's 4-3 decision, authored by Justice Carlos Moreno, limits the impact of Proposition 64, restoring the ability of plaintiffs to bring class action lawsuits under the UCL without demonstrating that the class suffered any actual injury and, in at least some cases, without even showing that the class representative was harmed by a particular unlawful practice.

As many California business owners will recall, prior to the 2004 enactment of Proposition 64 California's notoriously permissive Unfair Competition Law (Business & Professions Code § 17200 et seq.) was often used by enterprising plaintiffs' attorneys to bring claims of dubious social value based upon amorphous claims of unfairness, or technical violations of law, often extracting substantial settlements from defendants on nuisance value alone. As enacted, the UCL created a broad private right of action for consumers to address business practices deemed to be "unlawful, unfair or fraudulent," allowing plaintiffs to "borrow" violations of other laws and sue to redress the alleged violations. What made the UCL particularly prone to abuse, however, was its remarkably generous standing provisions, which allowed any person to file a lawsuit "on behalf of the general public" – whether or not that person had actually suffered any injury from the allegedly unlawful business practice, or was impacted in any way. The UCL thus provided fertile ground for plaintiffs' attorneys to bring lawsuits seeking millions of dollars in restitution, installing "consumer advocacy" organizations formed for the purpose of the lawsuit or, in some cases, a family member, as the plaintiff.[1]

In reaction to a series of widely publicized examples of abusive UCL actions, a broad coalition of business interests convinced the California electorate to pass Proposition 64 in a bid to end what were termed "frivolous" "shakedown" suits that "cost taxpayers" and "threaten small businesses."[2] Among the most highly publicized cases were those brought by a Los Angeles law firm against scores of Asian-owned salons to redress the "unlawful" reuse of a bottle of nail polish.[3] Or the thousands of lawsuits brought by the now-defunct Trevor Law Group against auto repair shops based on technical regulatory violations culled from the website of the Bureau of Auto Repair.[4] And, in a particularly high-profile case, a UCL claim was asserted by an individual acting as a "private attorney general" against Nike Corporation claiming that its comments to the New York Times in defense of its manufacturing practices were false and misleading and therefore violated the UCL and the related False Advertising Law (Bus & Prof. §17500 et seq.).[5]

Proposition 64 sought to curb abusive UCL claims in two ways. First, it amended the UCL's broad standing provision (Bus & Prof. §17204), replacing the language that allowed suit by any person "acting for the interests of itself, its members or the general public," with the more stringent requirement that suit could be brought only by one "who has suffered injury in fact and has lost money or property as a result of such unfair competition." See In re Tobacco Cases, 2009 WL 1362556, at *13. Secondly, Proposition 64 amended §17203 to require that anyone who seeks relief on behalf of others must, in addition to meeting the more stringent standing requirements of Section 17204, comply "with Section 382 of the Code of Civil Procedure," concerning class action lawsuits.[6] Id. Thus, after Proposition 64, no longer could a plaintiff who had not suffered any injury bring suit on behalf of the general public. Moreover, in order to seek restitution on behalf of other individuals (the only type of monetary relief available under the UCL), a plaintiff had to comply with the requirements for bringing a class action lawsuit, including numerosity, commonality, typicality, adequacy of representation, and superiority of the class action vehicle for resolving the dispute. See Fireside Bank v. Superior Court, 40 Cal. 4th 1069, 1089 (2007).

As one would expect, the enactment of Proposition 64 was a cause for celebration in the California business community. This optimism was promptly reinforced by the courts, which confirmed that plaintiffs wishing to bring suit under the UCL had to prove that they had actually been injured by the allegedly unlawful practice, even applying this requirement to cases pending when Proposition 64 was enacted. See, e.g., Californians for Disability Rights v. Mervyn's, LLC, 39 Cal. 4th 223, 229 (2006).

In 2006, the business community again found cause to rejoice when the Fourth District Court of Appeal upheld the trial court's ruling in the In re Tobacco II Cases, dismissing the plaintiffs' UCL claim on the ground that plaintiffs could not demonstrate that each of the putative class members had suffered an injury in fact. In re Tobacco II Cases, 142 Cal.App.4th 891, review granted and decision superseded by 09 Cal. Daily Op. Serv. 5993, 2009 WL 1362556, (2006). In that case, plaintiffs brought suit claiming that the defendant's statements implying that light cigarettes were healthier than regular cigarettes constituted fraud and violated the UCL. Plaintiffs sought class certification. The trial court dismissed the fraud claims, finding that individual issues of injury and reliance predominated, but certified a class under the UCL, finding that the UCL claim did not require proof of reliance or damages. After Proposition 64 was passed in 2004, defendants moved to decertify the class and dismiss the claims. The trial court granted defendants' motion, holding that to "establish standing the individual plaintiffs and all class members were now required to show injury in fact consisting of lost money or property caused by the unfair competition." The Fourth District affirmed.

The effect of this ruling was to essentially eliminate the UCL as a vehicle for bringing false advertising claims, as it was difficult for even the representative plaintiff to show actual reliance on a particular false statement or advertisement and essentially impossible to make such a showing as to the class a whole.

The celebration looks to be short-lived, however, in view of the Supreme Court's decision in this case. Although the Court confirmed that UCL plaintiffs seeking relief on behalf of others must now meet the requirements for class certification. And further confirmed that the revised language of the UCL "imposes an actual reliance requirement on plaintiffs prosecuting a private enforcement action under the UCL's fraud prong." 2009 WL 1362556, at *16. The critical question before the Court was whether the actual injury requirement, which boiled down to a question of reliance in the case before the Court, applied to the representative plaintiff alone, or extended to the class as a whole. The latter would effectively spell the death of UCL class actions for fraud, while the former would breathe new life into such claims.

Addressing that question, a sharply divided Court held that the heightened standing requirements of Proposition 64 did not extend to absent class members; only the representative plaintiff must prove actual injury, and thus reliance. The Court found no intent in the initiative or the related ballot materials to apply the heightened requirement to the class as a whole. To the contrary, the Court concluded that the proponents of the measure had assured the electorate that the initiative was intended to curb only frivolous lawsuits and would not "undermine the efficacy of the UCL as a means of protecting consumer rights." 2009 WL 1362556, at *12. In so holding, the Court rejected claims by defendants, and a vigorous dissent crafted by Justice Baxter, that by applying the standing requirement only to the representative plaintiff the Court was allowing the class – who may or may not have suffered injury in fact -- to recover for claims they did not have.

But the Court did not stop there. Acknowledging the difficulty of summoning proof that even the class representative relied on a particular false statement or advertisement, the Court went on to hold that, at least in cases involving an "extensive and long-term advertising campaign," the plaintiff must plead and prove that the defendant's misrepresentations were an "immediate cause of the injury-causing conduct," but she is "not required to necessarily plead and prove individualized reliance on specific misrepresentations." 2009 WL 1362556 at *17. In so holding, the Court relied on both its prior decisions finding that "relief under the UCL is available without individualized proof of deception, reliance and injury,"[7] and cases in the area of tobacco liability which have similarly imposed a relaxed requirement of reliance.

Thus, following the Court's decision in the In re Tobacco II Cases, plaintiffs' counsel may once again pursue UCL claims on behalf of a class of individuals without showing that the class as a whole suffered any actual injury from the allegedly wrongful conduct. Furthermore, in at least some cases involving alleged misrepresentations or misleading advertising, class plaintiffs apparently need not prove reliance on any particular misrepresentation or advertisement in order to recover on behalf of the class. On the other hand, the decision is not a total loss for businesses operating in California. The requirements that the named plaintiff prove standing, and that representative actions comply with the requirements for bringing a class action, impose significant safeguards against the return of abusive UCL suits and provide additional opportunities for capable defense lawyers to repel unfounded claims.

It remains to be seen how broadly this decision will be applied in other cases, and in particular, whether it will be extended to apply to cases brought under the "unlawful" and unfair" prongs of the UCL (in addition to the "fraudulent" prong at issue here). It is clear, however, that a new day has dawned in California, both for the business community and the attorneys practicing in this area. All would do well to keep a close eye on developments in this area.

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