Developments in California s Unfair Competition Law and Consumer Legal Remedies Act 2006

Transcription

1 m o r r i s o n & foerster llp The Consumer Class Actions Group prepares reports on developments in the law in order to keep clients and friends of the firm abreast of these changes. This paper discusses the significant developments in California s unfair competition law and Consumer Legal Remedies Act in calendar year Contents 1 Update on Proposition 64 3 The Three Prongs 5 Defenses to UCL claims 6 What is Restitution? 7 Procedural issues Developments in the Consumer Legal Remedies Act Developments in California s Unfair Competition Law and Consumer Legal Remedies Act 2006 Update on Proposition 64 Application of Proposition 64 to Pending Cases The new Proposition 64 requirements apply to all cases pending before the courts, even those filed prior to the effective date of the measure. (Californians for Disability Rights v. Mervyn s, LLC (2006) 39 Cal.4th 223, 232; accord, California Consumer Health Care Council v. Kaiser Found. Hosp. (2006) 142 Cal.App.4th 21, 34; State ex rel. Grayson v. Pac. Bell Tel. Co. (2006) 142 Cal.App.4th 741(plaintiff lacked standing to pursue claim against telephone company for failure to escheat balances owing on prepaid telephone cards).) Amendment to Substitute an Affected Plaintiff In a companion case to Mervyn s, the Supreme Court addressed whether a pre-proposition 64 plaintiff who would not meet the new standing requirements should be allowed to amend to substitute an affected plaintiff and, if so, whether that amendment would relate back for purposes of the statute of limitations to the date when the original complaint was filed. The Supreme Court held that there are no special rules governing Proposition 64 cases; rather, whether an amendment should be allowed and whether the amended complaint should relate back should be decided by individual trial courts applying the usual principles governing leave to amend generally, i.e., Code Civ. Proc (Branick v. Downey Sav. & Loan Ass n (2006) 39 Cal.4th 235, 243; Foundation for Taxpayer and Consumer Rights v. Nextel Communications, Inc. (2006) 143 Cal. App.4th 131, (applying Branick and holding it was abuse of discretion for the trial court to deny leave to amend to substitute a plaintiff with standing).) Practice Tip: Plaintiffs may conduct precertification discovery in a class action for the purpose of identifying potential substitute class action plaintiffs. (Best Buy Stores, L.P. v. Superior Court (2006) 137 Cal.App.4th 772, 778.) However, on December 5, 2006, the California Supreme Court heard argument in Pioneer Electronics v. Superior Court, No. S We can expect a ruling by March 4, The issue in Pioneer Electronics: In a putative class action, would the privacy rights of potential class members be violated by a pre-

2 m o r r i s o n & foerster llp certification letter to be sent to those potential class members who had complained to defendant regarding the alleged defect upon which the action is based, when the letter states that failure to respond to the letter will be treated as consent to disclose the identity of the potential class member to plaintiffs counsel for the purpose of this action? Associational Standing The rule conferring standing on associations no longer applies to claims brought under the UCL or the False Advertising Law, Bus. & Prof. Code et seq. Proposition 64 removed the section (of former Section 17203) giving standing to any person acting for the interests of its members and replaced it with language requiring a plaintiff personally to have suffered injury in fact and lost money or property. (Coalition for ICANN Transparency, Inc. v. Verisign, Inc. (N.D. Cal. 2006) 452 F.Supp.2d 924, 939 (dismissing UCL claim brought on behalf of association without leave to amend).) Does Proposition 64 Require Causation or Reliance? 1. Tobacco II Cases and Pfizer v. Superior Court (Galfano). On November 1, 2006, the Supreme Court granted review of In re Tobacco II Cases, No. S The order granting review identifies two questions for review: This case includes the following issues: (1) In order to bring a class action under Unfair Competition Law (Bus. & Prof. Code, et seq.), 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? Facts: Plaintiffs sought to certify a class composed of smokers who were residents of California between June 10, 1993, and April 23, 2001, and were exposed to defendants marketing and advertising activities in California promoting lite cigarettes. The trial court issued an order decertifying the putative class based upon the standing requirements of Proposition 64. The Court of Appeal affirmed, holding that individual issues of causation and injury required by Proposition 64 predominate over common issues. (citation below In re Tobacco II Cases (2006) 142 Cal.App.4th 891) The appellate court held that there were differing representations associated with a multitude of products, which were altered over the course of the many years at issue. The same day, the California Supreme Court granted review in Pfizer, Inc. v. Superior Court (Galfano), No. S At issue in Pfizer was its advertisements and package labels for Listerine mouthwash. Like Tobacco II Cases, the Court of Appeal held that Proposition 64 s as a result of language requires reliance, and that reliance must be shown by each putative class member. Practice Tip: The California Supreme Court has expedited briefing. 2. Federal cases holding that Proposition 64 requires proof of reliance or causation: Brown v. Bank of America (D. Mass. Oct. 17, 2006) F.Supp.2d, 2006 WL (UCL class action challenging bank s ATM disclosures ( (E)ven if Plaintiffs can establish that the on-machine notice is defective under state law, they cannot establish loss causation because the clickthrough screen breaks the causal connection between the defective notice and the payment of the fee. In other words, the second notice obviates any harm ).) Laster v. T-Mobile USA (S.D. Cal. 2005) 407 F. Supp. 2d 1181, 1194 (court dismissed UCL claims for lack of standing given that plaintiffs failed to allege they relied on Defendants

3 employment law commentary advertisements in entering into the transactions ).) Doe v. Texaco, Inc. (N.D. Cal. July 21, 2006) F.Supp.2d, 2006 WL (UCL class action brought by Ecuadorian plaintiffs dismissed due to inability to allege they lost money or property as a result of Chevron s alleged false statements about the environmental and health impacts of Chevron s conduct in Ecuador).) 3. Federal cases holding that Proposition 64 requires no showing of reliance or causation: Anunziato v. emachines, Inc. (C.D. Cal. 2005) 402 F.Supp.2d 1133, 1138 (UCL class action alleging that a brand of defendant s laptop computers contained a defect causing some of them to overheat. District court declined to read into Proposition 64 a reliance element, finding that none of the ballot materials mentioned reliance, and that the remedial purposes of Proposition 64 are fully met without imposing requirements which go beyond actual injury ).) Brothers v. Hewlett-Packard Co., F. Supp. 2d, 2006 WL (N.D. Cal. 2006) (citing Anunziato and concluding that it is not clear that reliance is a required element under Proposition 64 (even though plaintiffs have not alleged reliance on HP s allegedly false statements, about the transferability of plaintiffs have alleged injury-infact arising from other conduct).) University, Inc. (C.D. Cal. 2006) credits. (Daghlian v. DeVry F.Supp.2d, (plaintiff What is Injury in Fact? can sue even though he received A number of cases have construed some, albeit not all, of the value of what injury in fact means and have the product or service advertised.) found that requirement satisfied: The Three Prongs Plaintiff who allegedly suffered What is Unlawful? economic loss by being required to purchase excess fuel adequately Several courts this year have held alleged injury in fact and had that if a borrowed law imposes standing under Proposition 64. obligations on a defendant but (Aron v. U-Haul Co. of Cal. (2006) expressly denies a private right of 143 Cal.App.4th 796, ) action, then the UCL claim fails too. (See e.g. Farmers Ins. Exch. v. Superior Student at for-profit higher Court (2006) 137 Cal.App.4th 842, education institution suffered 858 (where Proposition 103 s Good injury in fact and could sue Driver Discount provisions (Ins. Several courts this year have held that if a borrowed law imposes obligations on a defendant but expressly denies a private right of action, then the UCL claim fails too. over allegedly false representation Code (a)) provides only that credits earned at defendant for administrative enforcement, no could be transferred to other private cause of action can be brought institutions even though plaintiff under the UCL); Farm Raised Salmon himself never sought to transfer Cases (2006) 142 Cal.App.4th 805, his credits. It is sufficient that 814 (where Federal Food, Drug and plaintiff assert(s) that he enrolled Cosmetic Act (21 U.S.C. 301) at DeVry and incurred $40,000 in allows no private right of action, debt in reliance on defendants UCL claim is preempted).) misrepresentations and omissions

4 m o r r i s o n & foerster llp Two courts have held that an omission is not likely to deceive someone unless the defendant had an affirmative duty to disclose. What is Unfair? 1. Which Test Applies in Consumer Cases? The California Attorney General has argued that the three-part FTC test of unfairness should apply in consumer cases. (Camacho v. Automobile Club of Southern Cal. (2006) 142 Cal.App.4th 1394, ) In Camacho, the appellate court agreed, at least in part. It held that the Cel-Tech test does not apply in consumer cases, specifically rejecting the tethering test espoused in Gregory v. Albertson s, supra. (Camacho, supra, 142 Cal.App.4th at ) And it applied an edited version of the FTC s unfairness test, but left out the balancing test. (Id.) And at least one court has felt obliged to apply both approaches to the test of unfair in consumer cases, at least until the California Supreme Court clarifies the issue, which it implored the Supreme Court to do. (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, ) 2. Examples of Unfair Practices. It is not an unfair practice for a manufacturer to fail to disclose a potential product defect that might, or might not, shorten the effective life span of an automobile part that functions precisely as warranted throughout the term of its express warranty. (Daugherty v. American Honda Motor Co., Inc. (2006) CA4th.) Not an unfair practice for Freddie Mac to place mortgage broker on Exclusionary List, which consists of entities who are prohibited from entering into transactions with Freddie Mac. (Family Home & Finance Center, Inc. v. Federal Home Loan Mortgage Corp. (C.D. Cal. 2006) F.Supp.2d.) It is not an unfair business practice for a manufacturer to use less expensive and less durable materials in the manufacture of a product. (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1273.) Not unfair for a car rental company to unbundle the airport concession fee as a separate charge so as to lower the daily base rate so long as the total rental charge for the entire rental period is disclosed before customers make their reservations. (Speyer v. Avis Rent A Car System, Inc. (S.D. Cal. 2005) 415 F.Supp.2d 1090, 1100.) What is Fraudulent? 1. What is Likely to Deceive? Elaborating on the likely to deceive test, one appellate court held that (i)n order to be deceived, members of the public must have had an expectation or an assumption about the subject addressed by defendant s allegedly misleading statements. (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1276.) As one district court said, (w)here a consumer can readily and accurate determine the nutritional value and ingredients of a product, and the product packaging does not affirmatively mislead the consumer by means of specific representations, no reasonable consumer would be misled by the words Fruit Juice Snack or deceived by depictions of fruit and fruit-like substances on the primary packaging label. (Williams v. Gerber Prods. Co. (S.D. Cal. 2006) 439 F.Supp.2d 1112, 1116 (dismissing claim against product manufacturer that depictions of fruit on contents of package label misleadingly suggests that the contents contain fruit, as opposed to a beverage naturallyflavored with corn syrup and other ingredients).)

5 employment law commentary 2. Omissions as Deception. Two courts have held that an omission is not likely to deceive someone unless the defendant had an affirmative duty to disclose. We cannot agree that a failure to disclose a fact one has no affirmative duty to disclose is likely to deceive anyone within the meaning of the UCL. (Daugherty v. American Honda Motor Co., Inc. (2006) Cal.App.4th (not a fraudulent practice for a manufacturer to fail to disclose a potential product defect that might, or might not, shorten the effective life span of an automobile part that functions precisely as warranted throughout the term of its express warranty ); Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255.) 1035, 1038, the district court declined to equitably abstain from entertaining a UCL claim against a restaurant for unlawful tip pooling in violation of Lab. C The court conceded that there is also administrative enforcement, but defendant had not demonstrated a complex administrative scheme governing distribution of tips or indicated how it might be upset by an order of restitution. A UCL claim challenging state agency s enforcement of beverage container recycling laws is subject to abstention as it would interfere with the department s administration of the act and potentially risk throwing the entire complex equitable abstention is appropriate. In such cases, it is primarily a legislative and not a judicial function to determine the best economic policy. ) Preemption On July 25, 2006, the California Supreme Court granted review in WFS Financial, Inc. v. Sup.Ct., No. S The issue for review: Are the provisions of the Rees- Levering Automobile Sales Finance Act (CC 2981 et seq.) that require a creditor to include certain disclosures in a notice of intent to dispose of a vehicle after it has been repossessed and that condition the creditor s right 3. Pleading fraudulent practices. One appellate court found insufficient the pleading of a fraudulent business practice where the complaint failed to allege that members of the public had an expectation or an assumption about the defendant s product that was different from the defendant s allegedly misleading statements. (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1275 (complaint s vague reference to plaintiff s assumption is not sufficient).) Defenses to ucl claims Equitable Abstention In Matoff v. Brinker Restaurant Corp. (C.D. Cal. 2006) 439 F.Supp.2d A UCL claim challenging state agency s enforcement of beverage container recycling laws is subject to abstention as it would interfere with the department s administration of the act and potentially risk throwing the entire complex economic arrangement out of balance. economic arrangement out of to seek a deficiency judgment balance. (Shamsian v. Dept. of on compliance with these Conservation (2006) 136 Cal.App.4th requirements (CC ), 621, ( Where [an unfair preempted by the federal Home competition law] action would drag Owners Loan Act (12 USC a court of equity into an area of 1461 et seq.) when the creditor complex economic (or similar) policy,

6 m o r r i s o n & foerster llp is a federally chartered savings Silvas v. E*Trade Mortgage Corp. institution? (S.D. Cal. 2006) 421 F.Supp.2d 1315, 1319 ( a state s provision The California Supreme Court of remedies for a violation of granted review on March 1, 2006, federal law amounts to a form of in Viva! International Voice For state regulation of the affected Animals v. Adidas Promotional area.... ). In that case, a Retailer, No. S140064, which UCL cause of action based on a presents the following issue: borrowed violation of federal Does the doctrine of conflict Truth in Lending Act violations preemption preclude California was preempted where the UCL s from prohibiting importation remedies and statute of limitations and trade of wildlife that have were more expansive than allowed been delisted under the federal under federal law. Membership in a shopper s club is a good or service covered by the CLRA, but the automatic enrollment of a consumer in such a club, without the consumer s agreement, is not a transaction covered by the CLRA. Farm Raised Salmon Cases (2006) Endangered Species Act and thus 142 Cal.App.4th 805, 814 are not currently regulated by (Federal Food, Drug and Cosmetic federal law? Act (21 U.S.C. 301) preempts Hood v. Santa Barbara Bank & UCL claim that defendants sold Trust (2006) 143 Cal.App.4th farmed salmon without disclosing 526, 547 (UCL class action to consumers that it contains complaint against national bank artificial coloring.) alleging violations of California s Harris v. Investor s Business Daily debt collection statute and other (2006) 138 Cal.App.4th 28, 36 laws not preempted by the (UCL wage/hour class action National Bank Act.) (Petition for claim alleging violations of the Fair rev. pending.) Labor Standards Act (29 U.S.C. 207(a)(1)) was not preempted even though the FLSA requires absent class members opt-in whereas UCL class action requires merely opt out ).) Convolve, Inc. v. Compaq Computer Corp. (S.D. N.Y. 2006) F.Supp.2d (California s Uniform Trade Secrets Act (Civ. Code ) preempts UCL claim for alleged misappropriation of proprietary technology and patent infringement).) Takacs v. A.G. Edwards & Sons (S.D. Cal. 2006) 444 F.Supp.2d 1100, 1116 (UCL claim for unpaid overtime is not preempted by the Fair Labor Standards Act).) Safe harbor Defense of Cel-Tech. Where statute on its face authorizes only passenger vehicle rental companies to impose a refueling charge, safe harbor defense was not available to a motor truck rental company. (Aron v. U-Haul Co. of Cal. (2006) 143 Cal.App.4th 796, 804.) What is restitution? In Matoff v. Brinker Restaurant Corp. (C.D. Cal. 2006) 439 F.Supp.2d 1035, the defendant argued that a UCL claim against a restaurant for unlawful tip pooling in violation of Lab. Code 351 failed to state a proper claim of restitution since the tips (plaintiff) seeks to recover are in the possession of the bartenders, not

7 employment law commentary the (restaurant owner). The district court rejected that, finding plaintiff has an ownership interest in the tips at issue because section 351 expressly provides: Every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for. (439 F.Supp.2d at 1038) Procedural issues Arbitration The California Supreme Court has taken review of a case raising the following issue: This case presents issues regarding the enforceability of an arbitration provision that prohibits employee class actions in litigation concerning alleged violations of California s wage and hour laws. In particular, the question is whether an arbitration provision that contains a class action waiver is unenforceable and unconscionable when it is not mandatory and the employer offers the employee a choice as to whether to sign. (Gentry v. Sup.Ct., No. S (review granted April 26, 2006).) Recovery of Attorneys Fees The court in Lyons v. Chinese Hospital Ass n. (2006) 136 Cal.App.4th 1331, 1356 held it to be reversible error for the trial court to deny an award of fees to an otherwise successful plaintiff just because the injunction was part of a stipulated resolution and resulted in large part from the efforts of a parallel government prosecution. developments in the consumer legal remedies act Coverage of the CLRA Membership in a shopper s club is a good or service covered by the CLRA, but the automatic enrollment of a consumer in such a club, without the consumer s agreement, is not a transaction covered by the CLRA. (Nordberg v. Trilegiant Corp. (N.D. Cal. 2006) 445 F.Supp.2d 1082, ) Annuities are neither goods nor services within the meaning of the CLRA. (Bacon v. American International Group (N.D. Cal. 2006) 415 F.Supp.2d 1027, 1036; accord, Estate of Migliaccio v. Midland National Life Ins. Co. (C.D. Cal. 2006) 436 F.Supp.2d 1095, 1109 ( to the extent plaintiffs CLRA claim is predicated on defendants sale of annuities, as distinct from their providing estate or financial planning, such a claim cannot lie ).) Omissions Cases If the CLRA claim rests upon an omission, rather than an affirmative misrepresentation, the complaint must allege facts showing that the defendant either had a duty to make the disclosure or made other factual statements which could have had the likely effect of misleading the public for want of communication of the undisclosed fact. (Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1276; accord, Daugherty v. American Honda Motor Co., Inc. (2006) Cal.App.4th (to be actionable, a CLRA claim based on a fraudulent omission must be contrary to a representation actually made by the defendant, or an omission of a fact the defendant was obliged to disclose ).) Nordberg v. Trilegiant Corp. (N.D. Cal. 2006) 445 F.Supp.2d 1082, 1097 (CLRA is not a fraud statute, hence, the particularity pleading rules of FRCP 9(b) do not apply).)

8 Consumer Class Action Group The firm s lawyers have extensive experience in the defense of consumer class actions that allege a wide range of claims, including false advertising, unfair business practices, warranty product and defects, Proposition 65 and labor law violations. While we are prepared to fully litigate any case, our first priority is always the business objectives of our clients. In many cases we have employed strategies eliminating the need for litigation and successfully negotiating settlements that are cost effective and consistent with our client s goals. Will Stern s practice specializes in the defense of consumer class actions with a focus on financial institutions. He is the recognized authority on California s Unfair Competition Law, Bus. & Prof. Code et seq., having authored The Rutter Group s treatise and numerous articles on the subject. He argued one of the seminal UCL cases, Kraus v. Trinity Management Services, Inc., to the California Supreme Court and was the principal author of the recently passed amendment to 17200, known as Proposition 64. Davie McDowell is Co-Chair of the firm s Consumer and Class Action practice group. He maintains a complex commercial litigation practice, with a particular focus on unfair business practice issues. He has successfully defended numerous businesses under California Bus. & Prof. Code and arising from, among other things, methods of competition, advertising and other promotions, labeling of goods, sales tax collection, and credit card terms and conditions. Angela L. Padilla is Co-Chair of the firm s Consumer and Class Action practice group. She is engaged in a general litigation practice in federal and state court, with current emphasis on complex civil litigation and criminal defense work. She conducts litigation involving unfair business practices, fraud, commercial real estate disputes, ERISA, breach of contract, probate, federal and state constitutional issues, and Title VII class actions. For more information, contact: William L. Stern, Partner 425 Market Street San Francisco, California wstern@mofo.com David F. McDowell, Partner 555 West Fifth Street, Suite 3500 Los Angeles, California dmcdowell@mofo.com Angela L. Padilla, Partner 425 Market Street San Francisco, California apadilla@mofo.com Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations Morrison & Foerster LLP. All Rights Reserved.