United States: California Supreme Court Rules New Standing Requirements Apply to Pending Cases (Mervyn’s and Branick); Court of Appeal Holds That Standing Requirements Apply to All Class Members and Reliance is Required (Pfizer)

In November 2004, California voters passed Proposition 64, an initiative that put a stop to "private attorney general" lawsuits brought by persons who had suffered no injury on behalf of the general public under California’s Unfair Competition Law ("UCL"), California Business & Professions Code Section 17200 and California’s False Advertising Law ("FAL"), California Business & Professions Code Section 17500. Proposition 64 raised the bar for private plaintiffs who now must meet standing requirements and can only pursue claims on behalf of others if the lawsuit is brought as a class action. Whether Proposition 64’s new standing requirements apply to cases pending when the voter initiative became law has been hotly contested in California courts. In the first of two recent companion decisions, the California Supreme Court essentially settled the debate by ruling that Proposition 64’s standing requirements apply to cases pending when the initiative was passed. In the second decision, the Court softened the blow by holding that plaintiffs prosecuting such cases, but who lack standing under Proposition 64, may seek to amend their complaints to substitute new plaintiffs who do have standing.

In the face of Proposition 64 limits on private UCL lawsuits, plaintiffs have asserted that the new standing requirements apply only to the class representative and not to all putative class members. Another subject of debate is whether Proposition 64 added a reliance element to fraudulent business practice or false advertising claims brought under the UCL or FAL. A California Court of Appeal recently addressed these issues and held that: (1) the new standing requirements apply to each class member, not just the class representative; (2) the former "likely to be deceived" standard is no longer valid after Proposition 64; and (3) Proposition 64 standing requirements add an element of actual reliance to fraudulent business practice and false advertising claims under the UCL and FAL. This decision may be reviewed by the California Supreme Court and certainly will not be the last to address the substantive impact of Proposition 64. However, so long as this decision remains good law, class certification will be far more difficult in misrepresentation UCL and FAL cases given the inherently individualized inquiry of whether class members relied on the challenged representation or advertisement. Indeed, the threshold standing requirements of showing injury and causation by proof common to the class appear to have significantly dampened private plaintiffs’ interest in pursuing claims on behalf of others.

California’s UCL is exceptionally broad, prohibiting any "business act or practice" that is "unlawful, unfair or fraudulent." Before November 2004, the UCL permitted uninjured plaintiffs acting as "private attorneys general" to sue on behalf of the general public. Many such cases were viewed as frivolous "shakedown" lawsuits in which no person had been injured yet could only be effectively settled with payments of substantial fees to the plaintiffs’ attorneys. On November 2, 2004, California voters passed Proposition 64, an initiative designed to bring an end to these abuses. Proposition 64 amended the UCL to require that a private plaintiff have "suffered injury in fact" and "lost money or property as a result of such unfair competition." See Cal. Civ. Proc. Code §§ 17204, 17535. The initiative also amended the UCL to require that representative claims be brought under California’s class action statute, Code of Civil Procedure section 382. Id. Only the California Attorney General and certain local public officials may now bring actions on behalf of the general public. Id.

Proposition 64 took effect on November 3, 2004, the day after the election. The Proposition left unanswered, however, the important question whether its new requirements applied to UCL cases pending on that date. Last week, after nearly two years of uncertainty and conflicting decisions from California Courts of Appeal, the California Supreme Court, in Californians for Disability Rights v. Mervyn’s, LLC, S131798 (Cal. July 24, 2006), ruled that Proposition 64’s new standing requirements apply to pending cases. Thus, Proposition 64 revoked the standing of all plaintiffs, including those who filed their UCL actions long before voters approved the new law, who cannot allege and prove they have suffered "injury in fact" and "lost money or property as a result of" the challenged business act or practice.

In Mervyn’s, the Court rejected the argument championed by plaintiffs that Proposition 64’s standing requirements could not be applied to pending cases because of the well-established presumption that statutes apply prospectively in the absence of clear contrary intent. The Court held that applying Proposition 64 to pending cases was not "retroactive" because "the measure does not change the legal consequences of past conduct by imposing new or different liabilities based on such conduct." The Court explained that "nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted." Rather, Proposition 64’s new standing requirements are jurisdictional and must exist at all times until judgment is entered. The Court thus concluded that Proposition 64’s standing requirements are applicable to UCL lawsuits pending on November 3, 2004.

In a companion case, Branick v. Downey Savings and Loan Association, S132433 (Cal. July 24, 2006), the Supreme Court held that the trial court has discretion to grant leave to plaintiffs whose right to sue have been revoked by Proposition 64 to amend their complaints to substitute new plaintiffs with standing. The Court reasoned that the policy objectives underlying Proposition 64 are not furthered by barring amendments to comply with the new law. The Court acknowledged, however, that the new plaintiff may not allege facts that give rise to a wholly distinct legal obligation on the part of the defendant and thus improperly change the nature of the action.

After Proposition 64 passed, plaintiffs attempted to limit its impact by contending that only the named class representative, rather than each class member, must satisfy Proposition 64’s new standing requirements. On a different front, defendants argued that inherent in Proposition 64 was a new element of reliance in fraudulent business practice and false advertising claims under the UCL and FAL. A California Court of Appeal embraced the defendants’ positions on both these issues in Pfizer Inc. v. Superior Court, 45 Cal. Rptr. 3d 840 (Cal. Ct. App. 2d Dist. July 11, 2006).

In Pfizer, plaintiff challenged as misleading statements appearing on Listerine labels and television advertisements that the mouthwash is "as effective as floss" in reducing plaque and gingivitis. In the class allegations, plaintiff alleged he represented all persons who purchased Listerine in California during a certain time period. The trial court certified the class, rejecting Pfizer’s arguments that individualized inquiries of each class member, including reliance, predominated over any common issues.

In the Court of Appeal, Plaintiff and the California Attorney General argued that only the class representative, and not the putative class members, must meet the standing requirements of Proposition 64. The Pfizer Court found that argument unpersuasive and held that each class member in a UCL or FAL class action must also have suffered injury in fact and lost money or property as a result of the unfair competition or false advertising. The Court reasoned that California Code of Civil Procedure section 382 requires the claims of class representatives to be typical of the class. The Court also relied on the basic principle that "[e]ach class member must have standing to bring the suit in his own right." See Collins v. Safeway Stores, Inc., 187 Cal. App. 3d 62, 73 (1986).

The Pzifer Court also held that inherent in Proposition 64’s requirement that a plaintiff have suffered "injury in fact . . . as a result of" the fraudulent business practice or false advertising is that a plaintiff actually relied on the misrepresentation in entering into the transaction. The Court explained that, to have suffered an injury in fact as a result of the alleged misrepresentation, the plaintiff would have had to read Pfizer’s label "as effective as floss against plaque and gingivitis" and relied on it in buying Listerine. A consumer who was unaware of, or indifferent to, Pfizer’s claims comparing Listerine to floss would not suffer any "injury in fact" "as a result of" the alleged fraudulent business practice or false advertising. A mere showing that consumers were "likely to be deceived," which was sufficient under the prior law, will not satisfy Proposition 64.

Mervyn’s is a significant victory for defendants in UCL actions pending on November 3, 2004 (including actions on appeal on that date, such as Mervyn’s itself). Although Branick softens that blow by permitting the substitution of plaintiffs who have standing, many of those pending actions do not involve actual injury to any significant number of persons. Further, the circumstances under which substitution will be permitted by trial courts remain to be seen. Pfizer is the first appellate decision holding that Proposition 64’s standing requirements apply to class members as well as class representatives and that Proposition 64 added a reliance element to fraudulent business practice and false advertising claims under the UCL and FAL. Like the new standing requirements of actual injury and causation, the element of reliance raises inherently individualized questions that make class certification of these UCL and FAL claims significantly more difficult. Indeed, plaintiffs in representative actions whose right to sue has been revoked by Proposition 64 may elect not to substitute in a plaintiff with standing given that, in many cases, class certification requirements would prove insurmountable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.