United States: California Prop. 64 Reins In Victimless Unfair Competition Consumer Lawsuits

Last Updated: December 13 2004
Article by Steven Atlee and Beth Hummer

Originally published November 18, 2004

On November 2, 2004, Californians voted overwhelmingly in favor of curbing abuses related to the state’s Unfair Competition Law (commonly referred to as the UCL or Section 17200). Proposition 64 adds standing requirements for private enforcement of consumer lawsuits, requiring the plaintiff to have suffered injury or lost property as a result of the challenged business practice. It also requires any plaintiff who purports to sue on behalf of others to follow California class action procedures, which require court approval of class representatives and settlements. These UCL amendments are likely to reduce the number of victimless, "shakedown" lawsuits associated with Section 17200 and solve the finality problem associated with settling representative Section 17200 suits.

This article summarizes the UCL, describes developments in 2002 and 2003 that culminated in the placement of Prop. 64 on the ballot, outlines the new provisions established by Prop. 64, and analyzes the applicability of Prop. 64 to currently pending cases.

Summary of the UCL

California’s UCL can be traced back more than 125 years.1 Starting in 1972, decisional law in California expanded the reach of Section 17200 actions.2 In 1988, People v. Cappuccio, Inc.,3 established that a Section 17200 plaintiff did not personally have to be injured in order to bring a Section 17200 action. Ten years later, the California Supreme Court ruled that any "unlawful conduct," as that term is used in the statute, could give rise to a Section 17200 claim, even if the statute identifying the unlawful conduct did not itself provide for a private right of action.4 Between 1992 and 1996, California courts decided a series of cases that established that the "unfair" conduct proscribed by Section 17200 included conduct likely to deceive, even when no one was actually deceived by or relied upon the fraudulent practice or sustained any damage.5 In the meantime, the statute was amended in 1992 to cover practices that originated in foreign jurisdictions but had effects in California, provide for injunctive relief for ongoing conduct, and clarify what constitutes a separate violation for purposes of civil penalties.6

In 2000, the California Supreme Court placed some limits on 17200 actions when it ruled that remedies available to plaintiffs representing the general public were limited to restitution and did not include damages in the form of disgorgement of profits.7 Nevertheless, Section 17200 remained a favorite vehicle for consumer attorneys to challenge business practices, particularly where the attorney did not represent a person or entity that had actually been harmed by the challenged practice. This was largely because the UCL offered the following plaintifffriendly features:

  • Any plaintiff could sue on behalf of themselves or the general public;
  • A plaintiff was not required to show actual injury or damage in order to sue;
  • Any conduct that violates any law could form the basis for a Section 17200 action;
  • A plaintiff suing in a representative capacity was not required to follow class action procedures; and
  • Resolution of one suit brought on behalf of the general public did not preclude another suit related to the same alleged unlawful or unfair conduct.

Developments in 2002 and 2003 Provided Impetus for Prop. 64

In 2002, several small law firms in Southern California exploited a business model whereby they identified hundreds of businesses of a particular type (such as restaurants, nail salons, and, perhaps most publicly noticed, auto repair facilities), and sued them for minor violations on behalf of newly formed corporations bearing names that seemed to indicate they represented consumers. In many cases, these organizations appear to have been formed by lawyers for the sole purpose of Section 17200 lawsuits. In one notable case, State Bar investigators determined that the plaintiff organization had no address or phone number, was not properly incorporated, failed to list any officers or directors, and had entered into sham agreements to pay as much as 90 percent of the recoveries to the law firm as contingency fees. In response to the controversy generated by these law suits, 14 bills were introduced in the 2003 and 2004 legislative sessions to amend various portions of the UCL. None of these bills passed. Prop. 64 was placed on the ballot by a coalition of business interests, led by the California Chamber of Commerce, that were frustrated by the lack of progress in the Legislature on amending the UCL.

Summary of Prop. 64

Prop. 64 requires plaintiffs suing in a representative capacity to have suffered injury in fact or lost money or property as a result of unfair competition. Plaintiffs also must comply with California class action requirements. Class action procedures require that there be an ascertainable class that shares a community of interest in the issues at stake in the litigation.8 "Ascertainable class" means there is a way to define the class, determine its size, and identify its members.9 Class members share a community of interest if:

  1. there are predominant common questions of law or fact;
  2. class representatives have claims typical of the class; and
  3. class representatives can adequately represent the class.10

If all of these requirements are met and

  1. there is a risk of substantial prejudice from separate lawsuits;
  2. separate actions would prejudice the opposing party;
  3. separate actions would prejudice the interests of other class members; or
  4. there are multiple claimants to a limited fund,

then a class action can be pursued. In addition, if injunctive relief is sought against a party who has acted on grounds generally applicable to a class of persons, a class action may be maintained. The benefit of the class action for plaintiffs is that it allows a collection of claimants with relatively small claims to band together for efficiency and sue. The benefit of the class action to the defendant is that it is not faced with multiple lawsuits regarding the same issue, and once a class action is resolved, then the issues litigated in that class action are resolved and cannot be re-opened by a subsequent plaintiff. The court system also benefits because it does not become burdened with thousands of small lawsuits that have to be tried separately.

By applying class action rules to Section 17200 claims, Prop. 64 has attempted to solve one of the most troubling aspects of the law to defendants sued under it – the inability to resolve matters with finality. Class action procedures offer due process protections to members of the class by allowing individuals to opt out of the class. Because the class action requires an adequate class representative and a determination that the representative’s claims are typical of the class, class members are protected from being represented by a party that does not have the class’ interests at heart.

Retroactivity of Prop. 64

Prop. 64, like any other initiative passed by the electorate, took effect the day after the election.11 A key issue is whether, and if so how, Prop. 64 will apply "retroactively" to cases that were pending on November 3, 2004.

A retroactive statute is one that affects acts, conditions, rights and duties that existed before the statute was adopted.12 Newly enacted statutes are presumed to operate only prospectively unless a contrary intent is clearly expressed, and Prop. 64 contains no express provision making it retroactive.13 But the next step of the analysis is to review the words of the statute, and accompanying ballot analysis and arguments for and against the proposition, to determine whether retroactive application of the statute can be inferred.14 Although the text of Prop. 64 itself does not state that it applies retroactively, litigants can be expected to use the language from the ballot analysis to support their arguments for retroactive application.

UCL defendants will also rely upon California Supreme Court cases to argue that where the right of action is entirely a statutory construct, as with Section 17200, a statutory amendment that abolishes the right of action affects all pending lawsuits in the absence of a savings clause.15 Thus, defendants will argue that Prop. 64 requirements apply immediately to all pending cases. In addition, UCL defendants can also be expected to argue that Prop. 64’s change to the standing requirements is a procedural rather than substantive rule which can be applied to pending cases. Armed with these arguments, many defendants will soon be filing motions to dismiss UCL claims that cannot meet Prop. 64 requirements.

What This Means for California Businesses

Prop. 64 provides welcome relief for California businesses that have been fending off victimless, shakedown lawsuits. The standing requirements will ensure that only real plaintiffs who suffered real harm can sue. Moreover, Section 17200 consumer lawsuits will be easier to resolve now that defendants can achieve the finality and preclusive effect provided by class action procedures. Litigants will soon be asking the courts to apply Prop. 64 limitations to pending cases.

Endnotes

1 Robert C. Fellmeth, California’s UCL: Conundrums and Confusions, 26 Cal. L. Rev. Comm’n 227, 331 (1995).

2 Barquis v. Merchants Collection Ass’n, 7 Cal. 3d 94 (1972).

3 204 Cal. App. 3d 750 (1988).

4 Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 565 (1998).

5 Bank of the West v. Superior Court, 2 Cal. 4th 1254 (1992); State Farm Fire & Cas. Co. v. Superior Court, 45 Cal. App. 4th 1093, 1105 (1996), disapproved on other grounds, Cel- Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 182 (1999).

6 Fellmeth, 26 Cal. Law. Rev. Comm’n at 232.

7 Kraus v. Trinity Management Services, Inc., 23 Cal. 4th 116 (2000); Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000).

8 Vasquez v. Superior Court, 4 Cal. 3d 800, 809 (1971).

9 Reyes v. San Diego County Board of Supervisors, 163 Cal. App. 3d 1263, 1271 (1987).

10 Richmond v. Dart Industries, Inc., 29 Cal. 3d 462, 470 (1981).

11 Cal. Const. Art. II § 10(a).

12 See, e.g., Russell v. Superior Court 185 Cal. App. 3d 810, 814 (1986).

13 Code Civ. Proc. § 3 (no part of the Code of Civil Procedure is retroactive unless expressly stated); Evangelatos v. Superior Court 44 Cal. 3d 1188, 1207 (1988)(California Supreme Court finding that Prop. 51 was not retroactive).

14 Evangelatos, 44 Cal. 3d at 1209, 1211 (finding that nothing in the statute or ballot materials demonstrated that retroactivity was "consciously considered").

15 Younger v. Superior Court, 21 Cal. 3d 102, 109 (1978) ("An action wholly dependent on statute abates if the statute is repealed without a saving clause before the judgment is final. . . . The justification for this rule is that all statutory remedies are pursued with full realization that the Legislature may abolish the right to recover at any time."); see also People v. Bank of San Luis Obispo, 159 Cal. 65, 67 (1910) ("[T]he repeal of a statute without any reservation takes away all remedies given by the repealed statute and defeats all actions pending under it at the time of its repeal.").

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Latham & Watkins is an international law firm of more than 1,500 attorneys in 21 offices worldwide, including Boston, Brussels, Chicago, Frankfurt, Hamburg, Hong Kong, London, Los Angeles, Milan, Moscow, New Jersey, New York, Northern Virginia, Orange County, Paris, San Diego, San Francisco, Silicon Valley, Singapore, Tokyo, and Washington, D.C.

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