California Supreme Court Makes UCL Class Actions Easier

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The Unfair Competition Law has long been controversial in California. Originally, the law did not require plaintiffs in a class action lawsuit to have suffered any monetary loss. The resulting proliferation of shakedown lawsuits proved problematic and was addressed by voters in 2004 as Proposition 64. The proposition passed, requiring claimants to have suffered a monetary loss as the result of unfair competition. Yet one important question remained: In an UCL class action suit, must all members have suffered monetary loss, or just the named class representative? Last week's California Supreme Court decision answered the question and resolved competing views of Prop. 64.

On May 18, 2009, in a long-anticipated ruling, the California Supreme Court held in In Re Tobacco II Cases, 2009 DAR 7059, that only class action representatives need standing to sue under the Unfair Competition Law (UCL). Other members of the class need not have suffered an actual monetary loss that was caused by the defendant's allegedly improper conduct. Thus, an UCL class action can proceed as long as the class representative (the named plaintiff) has standing – even though the other members of the class could not sue in their own name. Plaintiffs' class action lawyers hail the ruling as a big victory, while defense counsel decry the decision as encouraging more frivolous lawsuits that California voters had tried to eliminate.

California's Unfair Competition Law (Bus. & Prof. Code §§ 17200, et seq.) permits suits by the government or a private plaintiff for "unlawful, unfair and fraudulent" business practices or "unfair, deceptive, untrue or misleading advertising." Before 2004, a plaintiff could obtain an injunction and restitution as an individual on his own behalf, or as a "representative" on behalf of others – even if neither the plaintiff nor others were harmed by the defendant's conduct. Critics claimed that the UCL's broad terms led to abusive shakedown suits by "consumer watchdog" attorneys who sued businesses under the UCL for technical violations of some regulation. Often the plaintiff had not purchased any goods or services from the defendant, relied on any representations, or been harmed by the claimed violation. Actual harm was not required by the UCL.

In 2004, California voters passed Proposition 64 in 2004 to curb these shakedown suits by: (1) requiring that a claimant have standing to sue by having "suffered injury in fact and has lost money or property as a result of the unfair competition;" and (2) confirming that "representative" actions under the UCL had to follow the rules that apply to class actions in California.

In In Re Tobacco II Cases, the Court had to determine whether Prop. 64 required the named plaintiff/class representative – or all class members – to have suffered monetary or property loss caused by the unfair competition. The Court was interpreting the fraud prong of the UCL in the context of a suit alleging "that the tobacco industry defendants violated the UCL by conducting a decades-long campaign of deceptive advertising and misleading statements about the addictive nature of nicotine and the relationship between tobacco use and disease." The Court held:

On review, we address two questions: First, who in a UCL class action must comply with Proposition 64's standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed? We conclude that standing requirements are applicable only to the class representatives, and not all absent class members. Second, what is the causation requirement for purposes of establishing standing under the UCL, and in particular what is the meaning of the phrase "as a result of" in section 17204? We conclude that a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions. Those same principles, however, do not require the class representative to plead or prove an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign.

The Court determined that the California voters had only intended to prevent class action lawsuits with no injured plaintiffs – but permit class actions with members who suffered no injury:

Accordingly, we conclude that a plaintiff must plead and prove actual reliance to satisfy the standing requirement of section 17204 but, consistent with the principles set forth above, is not required to necessarily plead and prove individualized reliance on specific misrepresentations or false statements where, as here, those misrepresentations and false statements were part of an extensive and long-term advertising campaign.

The Court therefore reversed a lower court ruling to decertify the class of smokers who may or may not have relied on the allegedly deceptive advertising.

Three justices dissented because the majority ruling contradicts the "clear directive" of the voters in 2004 to make general class action rules applicable to UCL class actions. They opined that UCL claims must follow the rules applicable to class action lawsuits, as set forth in Civil Code § 382. Such rules require that: (1) the class claim have a "predominant common question of law or fact," (2) the class representative have claims typical of the class, and (3) the class representative can adequately represent the class. If the class members have no actual losses, the class representative's claims are not typical and he would not be a suitable class representative. The dissent noted that the majority ruling contradicts many prior decisions holding that a class cannot be so broadly defined to include people who would lack standing to sue in their own names.

What does this mean to defendants? It means that it is easier for Plaintiff's lawyers to sue defendants as a class action because they need not demonstrate that the defendant's conduct actually caused class members to lose money or property. However, defendants retain other important defenses to UCL claims not based on fraud. Moreover, the decision does not appear to affect the requirement of monetary loss that is still required under the Consumer Legal Remedies Act (a potent consumer remedy that is often brought as a companion claim), as recently articulated in the Court's January 31, 2009 decision in Meyer v. Sprint Spectrum, LP, 45 Cal.4th 634, 641 (2009).

Coming up: Look for litigation over whether class members must also have standing in UCL claims involving "unlawful" or "unfair" conduct. We may also see a reactionary ballot measure to clarify that class members must also have standing to sue.

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