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FOCUS & FORUM - Nov. 17, 2008

Cutting Class

By Mark Labaton

Appearances are deceiving when it comes to Proposition 64 — a seemingly straightforward ballot initiative whose colorful history has taken an unforeseen turn that threatens the rights of California consumers.

Approved in 2004 in the wake of public outrage at the infamous Trevor Law Group, Proposition 64 ended "private attorney general" lawsuits, which previously allowed citizens — including those who did not purchase the product at issue — to bring suit to enforce California's Unfair Competition Law and False Advertising Law.

The Trevor lawyers misused the private attorney general law along with these consumer laws to shake down small businesses, many of which were immigrant-owned. For example, they filed dozens of lawsuits against restaurants and automobile shops based on notices of trivial violations listed on government Web sites and then quickly settled most cases for several thousand dollars each.

Their extortionate conduct led to Proposition 64, which added a new standing requirement that only consumers who lost money or were otherwise injured by a deceptive, unfair or unlawful business practice could bring lawsuit under the Unfair Competition Law and False Advertising Law. And, facing disbarment, the three Trevor lawyers relinquished their bar licenses. But that is not the end of the Proposition 64 story.

Big business interests are now attempting to convert a shield, which protects against extortionate lawsuits, into a sword to eliminate valid ones. To do so, they seek to expand Proposition 64 to make it a tool to suppress valid consumer class actions brought under the Unfair Competition Law and False Advertising Law. They contend that Proposition 64 bars these class actions unless all potential class members show reliance on the deceptive act at issue. Consumer lawyers counter that only the named plaintiffs (the class representatives) need to do this.

The lower courts are divided, which has led to a high-stakes showdown soon to be decided by the state Supreme Court.

Pfizer v. Superior Court and McAdams v. Monier, two of four related cases before the Supreme Court, exemplify the contrasting views.

In Pfizer, the Court of Appeal (2nd Appellate District) held that a class of consumers who purchased Listerine (after Pfizer advertised that the mouthwash was as effective as flossing) had been erroneously certified by the trial court because the consumers did not establish that all potential class members relied on the advertisement. Although the appellate court acknowledged its decision could severely curtail consumer class actions, it still concluded that Proposition 64 imposed this burden.

In McAdams, the Court of Appeal (3rd Appellate District) held that Proposition 64 only required the named plaintiffs to establish that they relied on the defendants' deceptive statement if that statement concerned a "material" matter likely to be relied on by most reasonable consumers. Then, an "inference of common reliance" would be presumed.

McAdams (a case involving a manufacturer's false representation that its roof tiles lasted 50 years when they actually broke apart much earlier) is consistent with long-standing California law, including the Supreme Court's 1971 decision in Vasquez v. Superior Court. This rule protects consumers and discourages businesses from making false claims about their products — worthy goals advanced by consumer class actions.

Are there alternative ways to accomplish these objectives?

Some might suggest self-restraint, self-regulation and self-policing, a "trust us" solution that history teaches has not worked well, especially when it can be profitable to falsely promote one's wares. It would be naive to give businesses virtually free rein to do this.

A better alternative is greater governmental oversight and enforcement. But although more governmental involvement is beneficial, it is not sufficient to protect customers from many abuses, particularly during the current period of scarce public resources. Indeed, the Securities and Exchange Commission has consistently stated that private enforcement is a necessary supplement to its enforcement of securities laws. The same applies to consumer protection laws; public and private enforcement work best together.

Rather than reverse years of pro-consumer class action law, the court in McAdams held, correctly I think, that Proposition 64 merely ended a loophole exploited by the Trevor Law Group, but never intended to also make it far harder - and in many cases impossible — for consumers to pursue class action relief.

There are good reasons for this view. The Trevor lawyers exploited the private attorney general law to bring strike suits against vulnerable entrepreneurs at little cost, namely filing and serving a complaint and then settling. But this is not what happens in most consumer class actions, which are expensive to finance and tough to litigate.

Unlike small businesses, which apparently had little choice but to settle with the Trevor lawyers, corporate defendants in most consumer class actions possess far greater resources and are not loathe to litigate cases they perceive as weak — or even strong. And, judges are not hesitant, when they deem it is appropriate, to grant defendants the relief they seek, including early dismissals. The playing field is different. So, too, are public perceptions.

Another reason for requiring only the name plaintiffs to establish reliance in Unfair Competition Law and False Advertising Law consumer cases is that this is all that is required (based on case law) for Consumer Legal Remedies Act class actions. This act, not covered by Proposition 64, overlaps with the Unfair Competition Law and the False Advertising Law and addresses some of the same wrongs.

Because the Consumer Legal Remedies Act requires that the plaintiff suffer harm, it is similar to the Unfair Competition Law and the False Advertising Law in their current (post-Proposition 64) form. Given these similarities, the same standing requirements that apply for Consumer Legal Remedies Act class actions should apply for Unfair Competition Law and False Advertising Law class actions.

Moreover, Proposition 64 provides that the new requirement that a plaintiff be damaged applies when injunctive relief is requested but says nothing about damage claims. Thus, to the extent that Proposition 64 changes the standing rules for plaintiffs bringing Unfair Competition Law and False Advertising Law consumer class actions, those changes should at most apply only to injunctive claims, not to cases in which the consumer class seeks only damages or to damage claims.

In consumer class actions based on false advertising — a common type of consumer case — the inference of common reliance is logical and fair given the pervasive, often subtle, influence marketing has on consumer behavior. Indeed, companies advertise precisely to affect consumer behavior.

Some consumers might consciously deciding to buy a given product based on a specific advertisement. Other times, though, certain customers are influenced indirectly by an advertisement or a broader marketing campaign. For instance, a given consumer or group of customers might have relied on several advertisements or upon "word of mouth," which itself often is the result of marketing. The result is same: The consumer bought the product or paid a premium price because of the company's representations.

Securities law provides that investors bringing class actions against entities whose stock is traded on a public stock exchange need not prove that they individually relied on a false representation made by that company; instead, there is a legal presumption that the public market has absorbed material representations.

Much the same occurs when a company falsely advertises the quality of its products or services: The false representations permeate the marketplace. This is a good reason, though not a stated one, that California courts have long held that reliance is presumed in consumer class actions.

Where does that leave consumers? As Yogi Berra reportedly said, it is hard to make predictions especially about the future. Surely, it is hard, presumptuous, and perhaps foolhardy to predict what the Supreme Court will decide.

Yet, consumers and their advocates were mildly heartened when the California Supreme Court observed in Californians for Disability Rights v. Mervyns that Proposition 64 left "unchanged the substantive rules governing business and competitive conduct." Interestingly, the Supreme Court made this comment 13 days after the 2nd Appellate District issued its opinion in the Pfizer case.

This Supreme Court's comment, however, is dicta because in Mervyns, a case brought to obtain greater access to Mervyns stores, the Supreme Court decided that Proposition 64 did not apply retroactively and was not asked to address the reliance issue. When it does, though, consumer advocates hope it will not read Proposition 64 expansively to restrict consumer class actions.

The presumption of common reliance offers redress to consumers and deters the fraudulent promotion of goods and services; a contrary requirement would deny many victimized consumers their most effective, efficient and often only means of redress: the consumer class action.

Mark Labaton is a partner at Kreindler & Kreindler, in Los Angeles, where he represents plaintiffs in securities, corporate governance, consumer and whistle-blower actions. He can be reached at mlabaton@kreindler.com.