Warning–This Decision May Be Hazardous to Your Health: The Supreme Court of California Clarifies the Scope of Proposition 64’s Standing Amendments to the Unfair Competition Law

May 26, 2009

California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq., the "UCL") is a notoriously popular consumer protection statute among plaintiffs’ lawyers.  Given its expansive reach, it is the claim of choice in many consumer product, employment, antitrust, and product liability class actions.  In the November 2004 election, voters adopted strict limitations on private enforcement of the UCL through Proposition 64, a statewide ballot initiative.  Among other changes, Proposition 64 required private plaintiffs to plead and prove that they suffered "injury in fact and … lost money or property as a result of" the alleged unfair competition.  On May 18, 2009, the Supreme Court of California issued its first decision construing the substantive impact of Proposition 64’s amendments to the UCL.  In re Tobacco II Cases, No. S147345, 2009 Cal. LEXIS 4365, 2009 WL 1362556 ("Tobacco II").

In a divided 4-3 opinion in Tobacco II, the Court issued two significant holdings relevant to any client or practitioner litigating these claims. 

First, in the unanimous portion of the opinion, the Court held that Proposition 64’s requirement that private claimants establish that they suffered "injury in fact and … lost money or property as a result of" the alleged unfair competition requires proof of "actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions."  As discussed below, the Court placed some limitations on this reliance requirement, but this ruling should serve an important screening function to dispose of unmeritorious cases, particularly at the pleadings stage.  The plaintiffs in Tobacco II and other UCL actions argued vigorously against a reliance requirement, and for good reason.  In the 70 years prior to passage of Proposition 64, private plaintiffs had not needed to establish reliance or a causal link between their claim and the challenged business practice.  This rendered the UCL a popular substitute for common law fraud claims. 

Second, in the portion of the opinion that garnered only four votes, the Court held that Proposition 64’s standing requirements, including actual reliance, "are applicable only to the class representatives, and not all absent class members."  As discussed below, this decision may have a broad impact on all class actions in California. 

Associate Justice Carlos R. Moreno wrote the majority opinion, joined by Associate Justices Joyce L. Kennard, Kathryn Mickle Werdegar, and Justice Eileen Moore of the Fourth Appellate District (who sat by designation because of Chief Justice Ronald M. George’s recusal).  Associate Justice Marvin R. Baxter, joined by Associate Justices Ming W. Chin and Carol A. Corrigan, joined the majority’s holding on the actual reliance requirement but dissented on the issue of absent class member standing.

This alert provides a brief overview of the history of Tobacco II, analyzes the Court’s two principal holdings, and offers some early predictions on the potential impact of this decision on future litigation.  Among other fertile areas, we expect the parties to continue to litigate the meaning of the other elements of Proposition 64 that the Court did not address in its opinion, including the meaning of the "injury in fact" and "lost money or property" requirements.  In addition, we conclude that Tobacco II may lead to a spike in removals of UCL class actions, as defendants seek an alternate forum potentially more hospitable to challenges to the standing of absent class members.

I.  Proposition 64 and Prior Litigation in the Court of Appeal

Voters approved Proposition 64, a statewide ballot initiative, in the November 2004 general election by a margin of 59.1% to 40.9%.  The initiative revised the UCL, and its sister statute (the False Advertising Law, Cal. Bus. & Prof. Code § 17500 et seq.), to bring these laws in line with the consumer protection laws of other states and require actual injury and class certification for representative actions.  Previously, any private person could bring claims for violations of these laws on behalf of the "general public," even if the plaintiff had no business dealings or other contacts with the defendant.  This led to numerous high profile abuses, which in turn created public support for reform.  Proposition 64 amended Section 17204 to mandate that private plaintiffs plead and prove "injury in fact and … lost money or property as a result of [the alleged] unfair competition."  The initiative also eliminated non-class, "private attorney general" actions on behalf of the "general public," and required compliance with the class certification requirements of Cal. Civ. Proc. Code § 382. 

Following the passage of Proposition 64, courts immediately grappled with whether these amendments applied to pending cases.  The Supreme Court answered this question in the affirmative in Californians for Disability Rights v. Mervyn’s, LLC, 39 Cal. 4th 223 (2006), spawning a new flood of litigation over the meaning and impact of Proposition 64’s requirements.  Pfizer Inc. v. Superior Court, 141 Cal. App. 4th 290 (2006), and In re Tobacco II Cases, 142 Cal. App. 4th 891 (2006), were among the first published appellate decisions to answer these questions.  Pfizer held that "[i]nherent in Proposition 64’s requirement that a plaintiff suffered ‘injury in fact … as a result of‘ the fraudulent business practice or false advertising … is that a plaintiff actually relied on the misrepresentation and as a result, was injured thereby."  Pfizer, 141 Cal. App. 4th at 305.

Proposition 64 required proof of actual reliance, and the court of appeal’s decision in Tobacco II held that all class members (and not just the class representatives) must satisfy the initiative’s tougher standing requirements. 

In Tobacco II, a class of California smokers challenged a series of allegedly deceptive statements over a half-century in various media by several different defendants.  Following Proposition 64, the trial court decertified the class based on its "significant questions" regarding commonality and predominance.  142 Cal. App. 4th at 897.  The court of appeal affirmed.  On November 1, 2006, nearly two years to the day after voters approved Proposition 64, the Supreme Court of California granted review in Tobacco II to consider the following questions: 

(1) In order to bring a class action under [the UCL], as amended by Proposition 64 (Gen. Elec. (Nov. 2, 2004)), must every member of the proposed class have suffered "injury in fact," or is it sufficient that the class representative comply with that requirement?

(2) In a class action based on a manufacturer’s alleged misrepresentation of a product, must every member of the class have actually relied on the manufacturer’s representations?

On the same day, the Court granted the petition for review in Pfizer, but it deferred briefing pending its resolution of Tobacco IISee Pfizer, Inc. v. Superior Court, Case No. S145775.  The Court has not yet disposed of the appeal in Pfizer.

II.  The Supreme Court’s Two Important Holdings in Tobacco II

1.  The Little Noticed Defense Win: Proposition 64 Requires Actual Reliance.  In Tobacco II, all seven justices agreed on the answer to the second question, ruling that the causal language in Section 17204 "imposes an actual reliance requirement on plaintiffs prosecuting a private enforcement action under the UCL’s fraud prong."  Although the Court had held in previous cases that the UCL did not require proof of reliance or injury, this changed with Proposition 64.  Writing for the majority, Associate Justice Carlos R. Moreno analyzed the plain meaning of Proposition 64 and voters’ declared intent to limit private enforcement of the UCL, and concluded that the initiative required private plaintiffs to prove actual reliance. 

This aspect of the Court’s decision is a significant victory for defendants that has been overshadowed in the press by the defense bar’s disappointment with the Court’s failure to extend reliance requirements to absent class members.  Plaintiffs fought hard for a contrary conclusion.  Citing ballot materials expressing legislative intent to align private standing under the UCL with federal requirements, plaintiffs argued that "Proposition 64 was intended to do no more than require federal Article III standing."  But the Court disagreed.  While proving "injury in fact" is a necessary component of UCL standing, it is not sufficient to establish reliance.  This ruling begins to align claims alleging "fraudulent" business practices under the UCL with the elements of common law fraud, and it effectively overrules prior precedent holding otherwise.  Consequently, we believe that Tobacco II should become a powerful tool for defendants to dispose of unmeritorious claims in which the named plaintiff cannot establish a link between the alleged injury and the challenged business practices. 

Nevertheless, the Court carefully limited the actual reliance requirement in at least six important respects: 

  • First, "[w]hile a plaintiff must show that the misrepresentation was an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause."  There was unanimous support among the justices for this limitation.

  • Second, the majority cited its prior holding in Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951 (1997), that "a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material."

  • Third, the entire Court agreed that "where, as here, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements."  As described in the opinion, Tobacco II presented an extreme set of facts, with multiple representations in various media by different defendants across several decades.

  • Fourth, the majority determined that "an allegation of reliance is not defeated merely because there was alternate information available to the consumer-plaintiff, even regarding an issue as prominent as whether cigarette smoking causes cancer."

  • Fifth, consistent with its normal practice of deciding UCL questions as narrowly as possible, the Court limited its holding to private UCL claims alleging fraudulent business practices.  The majority observed that an actual reliance requirement may have "no application" in cases involving "unlawful" or "unfair" business practices.

  • Sixth, the Court also limited its holding to specific types of fraud allegations–namely, "a fraud theory involving false advertising and misrepresentations to consumers."  One fertile area of litigation will be how lower courts apply this ruling to UCL claims based on other theories of fraud, such as concealment. 

We expect Tobacco II to ignite litigation in the lower courts over these issues.  All eyes may turn to the Court’s disposition of Pfizer, the case in which the court of appeal held that Proposition 64 requires actual reliance.  As noted above, the Supreme Court granted review but deferred briefing in Pfizer pending Tobacco II.  The Court disposed of several other petitions in the same way.  See, e.g., Meyer v. Sprint Spectrum L.P., 150 Cal. App. 4th 1136, 1144, rev. granted 166 P.3d 1 (2007); O’Brien v. Camisasca Auto. Mfg., Inc., 161 Cal. App. 4th 388, rev. granted, 187 P.3d 886 (2007). 

2.  Only Named Class Representatives, and Not Absent Class Members, Must Satisfy the UCL’s Standing Requirements.  The court of appeal in Tobacco II had ruled that "the simple language" of Proposition 64 required all class members, and not just the class representatives, to satisfy the new standing requirements.  Defendants’ counsel conceded at oral argument that its position was based on general class action law principles and not on any specific text in Proposition 64.  But the majority nonetheless analyzed the text of Proposition 64 and held that the initiative "was not intended to, and does not, impose section 17204’s standing requirements on absent class members in a UCL class action where class requirements have otherwise been found to exist."

Citing only one district court case in Illinois and a treatise on class actions, the majority ruled that "federal law is clear that the question of standing in class actions involves the standing of the class representative and not the class members."  Because Proposition 64 did not address this "general rule," the majority reasoned, this omission is dispositive.  In any event, Tobacco II adopted that "general rule" in California, and this decision may have a broader impact on all class actions than the majority anticipated.  

Disputing the premise of the majority’s holding, Associate Justice Marvin R. Baxter’s sharp dissent cited several federal appellate and district court opinions and intermediate appellate decisions in California that scrutinize the standing of absent class members as part of the ascertainability and typicality analysis required by Fed. R. Civ. P. 23(a).  "Even if the majority’s holding has some sympathetic appeal on the particular facts alleged here," he reasoned, "the rule the majority announces will apply equally to less egregious cases, where it invites the very kinds of mischief Proposition 64 was intended to curtail."  Justice Baxter explained that the majority’s ruling effectively sanctions irreconcilable conflicts between absent class members and the named plaintiffs purporting to represent them.

III.  Potential Future Litigation

One thing is certain–the Court’s opinion will spark more litigation as parties and lower courts continue to wrestle with the full import of the Proposition 64 amendments.  Many lower courts reserved judgment on potentially dispositive motions pending the Court’s decision in Tobacco II and Pfizer.  At the very least, the Tobacco II ruling will release a flurry of rulings in these cases, and prompt a new flood of motions in every private action in which the defendant has a colorable challenge to the named plaintiff’s inability to demonstrate actual reliance.  The majority’s holding may embolden plaintiffs’ lawyers who were reeling for years following the passage of Proposition 64 to bring more class actions in California state courts. 

Looking ahead, some of the battles may focus on the following areas:

1.  While Tobacco II answered the question of absent class member standing, and established a nuanced standard of "reliance," the opinion does not construe the other elements of Proposition 64, namely "injury in fact" and "lost money or property."  These requirements could be dispositive in a large number of consumer actions.  For example, even if the availability of alternate information that would have corrected the alleged misrepresentation is insufficient to defeat a claim of reliance, does the additional available information demonstrate that the named plaintiff did not suffer any injury in fact?  What is required to show "lost money or property" for purposes of Proposition 64?  Is it the same loss of "money or property" that is required to obtain restitution pursuant to Section 17203, as some courts have held?  See, e.g., Walker v. Geico Gen. Ins. Co., No. 06-1703, 2007 U.S. Dist. LEXIS 10652, at *8 (E.D. Cal. Feb. 12, 2007). 

2.  The majority reserved decision on whether a private plaintiff satisfying Proposition 64 "could pursue a broad-based UCL class action in which only injunctive relief was sought on behalf of a class that was likely to, but had not yet, suffered injury arising from the unfair business practice."  While the language of the UCL is clear, and the standing requirements apply to all private claims and irrespective of whether the claimant seeks injunctive relief and/or restitution, the Court’s statements ensure further litigation over this issue.

3.  Notably, the majority did not cite any federal decisions outside Illinois supporting its conclusion that only the class representatives and not absent class members must establish standing.  Conversely, the dissent cited several federal cases (including decisions from the Second and Seventh Circuits) holding that courts may assess the standing of absent class members at the class certification stage.  If California federal courts sitting in diversity reach the same conclusion as these courts (and contrary to Tobacco II) as a matter of federal procedural law, a federal forum becomes considerably more attractive, at least where the defendant has a compelling basis for suspecting that absent class members lack standing.  This strategy hinges on a favorable ruling by a California federal court, but if successful, it could motivate defendants to remove more state class actions to federal court to avoid the adverse impacts of Tobacco II.

4.  Defendants will want to assert and carefully preserve their due process defenses to each of Tobacco II‘s holdings for future federal review.  It is particularly problematic to infer reliance based on a self-serving allegation of materiality, and to allow that inference to supply the necessary proof not only for the named plaintiff, but for all of the absent class members as well.  The UCL’s authorization of restitution upon a showing that the defendant "may have … acquired" those funds from absent class members–without any proof that the defendant actually acquired these amounts–exacerbates these problems.  Motivated by a desire to prevent "wrongdoers" from "retain[ing] the benefits of their misconduct," Tobacco II endorses a monetary recovery by individuals who could not themselves demonstrate reliance and who could not establish their own standing in an individual lawsuit.  As the Supreme Court of the United States held in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 613 (1997), the class device cannot "abridge, enlarge or modify any substantive right."  See also 28 U.S.C. § 2072(b); Ortiz v. Fibreboard Corp., 527 U.S. 815, 845 (1999) (affirming and applying Amchem); In re Hotel Tel. Charges, 500 F.2d 86, 90 (9th Cir. 1974) ("[A]llowing gross damages by treating unsubstantiated claims of class members collectively significantly alters substantive rights … [and] is clearly prohibited by the [Rules] Enabling Act").  Although the majority acknowledged that longstanding principle of class action jurisprudence, its ruling effectively abrogates it and violates elementary due process principles.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Class Action and Complex Litigation Practice Group is available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work or Gail E. Lees (213-229-7163, [email protected]), Andrew S. Tulumello (202-955-8657, [email protected]), G. Charles Nierlich (415-393-8239, [email protected]), or Christopher Chorba (213-229-7396, [email protected]).

© 2009 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.