This article is dated March, 2000 and does not take into account subsequent
legal developments.
The Newest Breed of Unfair Competition Cases: Consumer Fraud Class Actions
Penelope A. Preovolos
Evan L. Land
© Morrison & Foerster LLP
March 2000
TABLE OF CONTENTS
I.OVERVIEW1
A.In General1
B.Statutory Authority1
C.Judicial Sentiment1
D.Settlement2
II.APPLICABLE STATE STATUTES AND THEIR PECULIARITIES -- CALIFORNIA AS A MODEL 2
A.California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq. 2
1.Standing under § 172002
a.Actions by Public Prosecutors3
b.Private Right of Action3
i.“Private Attorney General” Standing 4
ii.The “Non-class” Class Action 4
iii.Traditional Class Actions5
iv.Res Judicata5
2.Section 17200 Protects Consumers6
a.The Term “Practice”6
b.“Unfair” & “Fraudulent” Defined 7
i.The Definitions are Broad7
ii.Prior Findings of Unfairness 7
iii.“Lawful” May Be “Unfair”8
iv.“Truthful” May Be “Unfair” 8
v.Public Deception8
vi.Puffing9
c.Scienter Not Required9
d.Injury Not Required10
i.Fraud in False Advertising Cases 10
e.Industry Custom is No Defense10
f.Business Justifications11
g.Buyers and Sellers Both Covered 11
3.The Potential for Bootstrapping11
a.Violations of Other Laws11
b.Limitations on “Borrowing”12
i.Predicate Statute Precludes Private Right of Action 12
ii.Securities Transactions13
c.Effects of “Borrowing”13
4.Remedies Available for § 17200 Violations 14
a.Restitution14
i.Disgorgement of Profits14
ii.Restitution and Class Actions 15
iii.Reliance and Damages15
b.Injunctive Relief15
c.Civil Monetary Penalties16
i.Civil Penalties and Advertisements 16
ii.Civil Penalties and Direct Mailings 17
d.Attorneys’ Fees17
i.Fees Authorized by Statute 17
ii.Fees Based Upon Public Benefit 17
B.California False Advertising Law, Cal. Bus. & Prof. Code § 17500 et seq. 18
1.Standing19
2.The Elements of a § 17500 Claim19
a.Advertisement Defined19
b.Dissemination Defined20
c.“False or Misleading” Defined20
d.Scienter Defined20
3.Relief Available under § 1750021
a.Criminal Penalties21
b.Civil Remedies for False Advertising 21
i.Restitution22
ii.Injunctions22
iii.Civil Penalties22
C.California Consumers Legal Remedies Act, Cal. Civ. Code § 1750 et seq. 23
1.Standing under the CLRA23
a.Standing Limited to “Consumers” 24
2.Prohibited Activities24
3.Bringing a Class Action Under the CLRA 25
4.Notice and Cure under the CLRA25
5.Shifting the Cost of Notice25
6.Remedies Under the CLRA26
D.Song-Beverly Consumer Warranty Act, Cal. Civ. Code § 1790 et seq. 26
1.Song-Beverly in Practice26
III.DISCOVERY IN FALSE ADVERTISING CASES27
A.Special Problems in Dealing with Discovery in Consumer False Advertising Class Actions 27
1.Plaintiff May Seek to Discover Defendant’s Dealings with Third Parties 27
2.Problems in Limiting Discovery to Class Issues 28
B.Discovery Strategies For Dealing with Nationwide Consumer Classes And Multiple Lawsuits In State Court 28
1.Obtain a Single Assignment Judge and Case Management Order 28
2.Move for Coordination29
3.Move to Stay or Abate29
4.Seek Informal or Formal Discovery Coordination 29
5.Pre-Certification Discovery Is Important 30
IV.CURRENT FALSE ADVERTISING LITIGATION31
A.Press Releases Relating to California Cases: Something for Everyone 31
B.Other (Non-California) Cases34
V.RECENT DECISIONS RESPECTING NATIONWIDE VERSUS STATEWIDE CLASSES 36
A.Nationwide Class Actions in Federal Courts 36
1.Claims Involving Separate Incidents 36
2.Consumer Statutes of Multiple States 36
B.Nationwide Class Actions in State Courts 37
1.Constitutional Aspects37
2.State and Federal Class Action Law Compared 37
3.Application of a Single State’s Law to Nationwide Claims 38
4.The Problem of Rival Class Actions38
VI.SETTLEMENT39
A.General Considerations39
B.Settlement and the “Non-Class Class”39
1.Settlement in Conventional Class Actions 40
2.“Non-class” Classes and Settlement40
3.Special Settlement Problems In “Private Attorney General” Actions 40
C.Recent Decisions/Criticisms Regarding Class Action Settlements 41
1.Amchem41
2.Post-Amchem Developments42
3.Matsushita: Reinforcing the Class Action Migration to State Court 43
D.Approaches to Settlement: The Non-Cash Settlement 43
1.The Problem43
2.Possible Solutions44
E.Settlements with Government Authorities 44
I.OVERVIEW
A.In General
An ever-increasing number of consumer class actions alleging false and deceptive advertising are being filed against companies that sell to consumer markets. Many of the plaintiffs’ firms that formerly specialized in securities class actions are now devoting some or all of their time to filing these cases. Because the law of many states, and in particular California, is favorable to plaintiffs’ class actions, these cases pose a significant problem for defendants.
B.Statutory Authority
Consumer fraud class actions are typically brought under very plaintiff-friendly and class-friendly state consumer protection statutes. For instance, in California, the three statutes that are most frequently relied upon are the California Unfair Competition Act, Cal. Bus. & Prof. Code § 17200 et seq. and § 17500 et seq., and the California Consumer Legal Remedies Act, Cal. Bus. & Prof. Code § 1750 et seq. Other favorable venues include New Jersey, Texas, Georgia, and Alabama. See N.J.S.A. § 56:8-1 et seq.; Tex. Bus. & Com. Code § 17.41 et seq.; O.C.G.A. § 10-1-370 et seq.; Ala. Code § 8-1-1 et seq. (even though the Alabama Code § 8-19-10(f) expressly prohibits class action remedies).
C.Judicial Sentiment
The federal courts have become increasingly reluctant to certify nationwide consumer classes. Consequently, defense attorneys may have some success attacking, or at least limiting, consumer class actions to single state classes. The net effect, however, may be costly multi-state litigation and ultimate difficulty in settling these actions.
D.Settlement
Class settlements, especially nationwide settlements, are being viewed with increasing skepticism, particularly by the federal courts. Coupon settlements have been particularly subject to criticism. This creates a serious problem for defendants facing a plaintiff class with relatively weak claims, but where (1) the plaintiff-friendly statutes in question make prevailing on a motion to dismiss or summary judgment unlikely, and (2) the costs of litigation are high.
II.APPLICABLE STATE STATUTES AND THEIR PECULIARITIES -- CALIFORNIA AS A MODEL
A.California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq.
Cal. Bus. & Prof. Code § 17200 prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” Moreover, it proscribes any act which violates of Cal. Bus. & Prof. Code § 17500 et seq.
1.Standing under § 17200
A plaintiff suing under § 17200 need not prove that he or she has suffered harm of injury from defendant’s business practices. An action may be brought by any “person, corporation or association or by any person acting for the interests of itself, its members or the general public.” Cal. Bus. & Prof. Code § 17204 (§ 17535) (emphasis added). See also Freeman v. Time, 68 F.3d 285, 288 (9th Cir. 1995) (California’s statutory law of unfair competition authorizes actions for injunctive relief by individual plaintiffs on behalf of themselves and others); Rubin v. Green, 4 Cal. 4th 1187, 1200-04 (1993) (persons not involved in an adversarial relationship with defendants have standing to pursue claims of unfair competition).
a.Actions by Public Prosecutors
Section 17204 provides the Attorney General, County District Attorneys and City Attorneys for cities with populations of more than 750,000 people with authority to act on behalf of the general public in enforcing these statutes. Smaller cities may prosecute unfair competition actions if they employ a full-time prosecutor and obtain the consent of the County District Attorney.
b.Private Right of Action
Under California law, private plaintiffs may also bring actions under § 17200 to correct unlawful business practices, including actions alleging violation of other federal or state statutes that do not themselves permit a private right of action. See, e.g., Committee to Stop Youth Addiction v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998); Haskell v. Time, 965 F, Supp. 1398, 1402-03 (E.D. Cal. 1997); Reese v. Payless Drug Stores Northwest, Inc., 43 Cal. App. 4th 1317, 1323 (1995).
i.“Private Attorney General” Standing
A plaintiff suing as a “private attorney general” need neither have bought the product nor had business dealings with the defendant in order to sue. Anyone can sue as a “private attorney general” to defend the interests of the “general public” under § 17204. See, e.g., Quelimane Co., Inc. v. Stewart Title Guar. Co, 1998 Cal. LEXIS 5419, *20 (Cal. August 27, 1998); Committee on Children’s Television, Inc. v. General Foods Corp., 35 Cal. 3d 197, 210-11 (1985); Hernandez v. Atlantic Fin. Co., 105 Cal. App. 3d 65, 81 (1980). The same standing rule applies under § 17500. See infra.
ii.The “Non-class” Class Action
In addition to these unconventional standing provisions, California courts also permit “private attorneys general” to pursue classwide relief without satisfying traditional requirements for representing a class, and without following class certification procedures. Fletcher v. Security Pac. Nat’l Bank, 23 Cal. 3d 442, 453-54 (1979); Dean Whitter Reynolds, Inc., v. Superior Court, 211 Cal. App. 3d 758, 772-74 (1989). But see Bronco Wine Co. v. Frank A. Logolusu Farms, 214 Cal. App. 3d 699, 715-21 (1989)(questioning whether “private attorney general” action may proceed without class certification where individual claims are substantial); Mirkin v. Wasserman, 5 Cal. 4th 1082 (1993) (casting some doubt on whether a claim lacking a sufficient nexus can proceed as a “non-class” class action).
iii.Traditional Class Actions
Of course, § 17200/17500 plaintiffs counsel may choose to prosecute the claims as a traditional class action, assuming they are able to satisfy the procedural requirements to do so. See, e.g., Barquis v. Merchants Collection Ass’n, 7 Cal. 3d 94, 100 n.3 (1972). Doing so avoids the constitutional objections that defendants often seek to raise against “non-class class” private attorney general actions. Moreover, traditional class actions may prove easier to settle as the plaintiff can deliver a settlement that will have preclusive effect. See Robert C. Fellmeth, Representation of the General Public Under California’s Unfair Competition Act, 5 Competition 1, 11-12 (1995) (noting that the use of “non-class class” procedures creates confusion and may impede settlement); People v. Pacific Land Research Co., 20 Cal. 3d 10, 17-20 (1977).
iv.Res Judicata
Where a plaintiff prosecutes unfair competition claims exclusively on his or her own behalf, or on behalf of a certified class, both claim and issue preclusion apply. Any judgment adverse to the plaintiff or the class will bar further litigation on that claim/issue. However, where the plaintiff purports to represent the interests of the general public, but fails to certify a class, a judgment will not be preclusive as to nonparties. See Bronco Wine Co. v. Frank A. Logolusu Farms, 214 Cal. App. 3d at 715-21; Pacific Land Research Co., 20 Cal. 3d at 24-25. Additionally, when a plaintiff represents a “non-class class,” a losing defendant may be subjected to repetitive litigation from other plaintiffs who will assert that findings of fact as to liability are subject to issue preclusion (see infra for a detailed discussion of settlement issues). This “one-way opt-in” phenomenon has been the subject of due process criticisms by defendants and by the court in Bronco Wine, but these objections to date have not significantly impeded prosecution of these “private attorney general” actions.
2.Section 17200 Protects Consumers
Because a major policy behind § 17200 is consumer protection, the statute is not limited only to practices that threaten competition and business competitors. Barquis v. Merchants Collection Ass’n, 7 Cal. 3d 94, 111 (1972). Cf. People ex rel. Mosk v. National Research Co., 201 Cal. App. 2d 765, 770 (1962) (unfair competition also harms consumers). Furthermore, in proving an unfair business practice violation, claimants are entitled to introduce evidence not only of practices that affect them individually, but also analogous practices involving third parties who are not parties to the action. Perdue v. Crocker Nat’l Bank, 38 Cal. 3d 913, 929 (1985); Cisneros v. U.D. Registry, Inc., 39 Cal. App. 4th 548, 563 (1995).
a.The Term “Practice”
The prohibition on unlawful, unfair or deceptive business practices is amorphous and broadly construed. Courts have held that a practice may be unfair even if it is both truthful and lawful. See Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 59 Cal. App. 4th 436, 460 (1997)(presently pending before the California Supreme Court for review); Committee on Children’s Television, Inc., 35 Cal. 3d at 210. Fairness is a question of fact. Id.
b.“Unfair” & “Fraudulent” Defined
“Unfair” has been defined in a variety of ways, which are summarized in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 59 Cal. App. 4th at 460. Several courts have suggested that “unfair” can include any practice in which the harm to the victim outweighs the benefits. Saunders v. Superior Court, 27 Cal. App. 4th 832, 839 (1993); Motors, Inc. v. Times Mirror Co., 102 Cal. App. 3d 735, 740 (1980). Deception as used in the statute “does not refer to the common law tort of fraud; rather, it only requires a showing [that] members of the public ‘are likely to be deceived.’” Saunders, 27 Cal. App. 4th at 839 (citing Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1267 (1992)). It need not be shown that anyone has actually been deceived.
i.The Definitions are Broad
The California Supreme Court has noted that the Legislature intended the “sweeping language” of § 17200 to include “anything that can properly be characterized as a business practice and that at the same time is forbidden by law.” Bank of the West, 2 Cal. 4th at 1266-67. This gives courts vast discretion to attack practices that are arguably fraudulent. Motors, Inc., 102 Cal. App. 3d at 740.
ii.Prior Findings of Unfairness
“Unfair” practices can be attacked under § 17200 even though they fit no pattern previously condemned by statute or judicial opinion. Allied Grape Growers v. Bronco Wine Co., 203 Cal. App. 3d 432, 450 (1988); People v. James, 122 Cal. App. 3d 25, 35-36 (1981).
iii.“Lawful” May Be “Unfair”
At least to date, the prohibition against unfairness found in § 17200 may be used to reach practices that are neither unlawful nor deceptive. Cel-Tech Communications, Inc., 59 Cal. App. 4th at 460 (review pending before the California Supreme Court). See also, Hernandez v. Atlantic Fin. Co., 105 Cal. App. 3d at 81 (defendant’s failure to comply with a statute that did not expressly apply may still be enjoined under § 17200); Motors, Inc., 102 Cal. App. 3d at 740-41 (holding that while the law did not prohibit charging local retailers more than national accounts for identical advertising space, the practice still might be “unfair” under § 17200). Cf. Heastie v. Community Bank of Greater Peoria, 727 F. Supp. 1133, 1138-39 (N.D. Ill. 1989) (applying Illinois law and finding that even though the transaction in question facially complied with the Federal Trade Commission’s “Holder Rule,” it still violated Illinois’ Consumer Fraud Act).
iv.“Truthful” May Be “Unfair”
It is also not a defense that the representation made was technically accurate if it was nevertheless likely to mislead. People ex rel. Mosk v. Lyman, 253 Cal. App. 2d 959, 966 (1967).
v.Public Deception
An advertisement’s deceptive potential is measured according to the intended audience. For instance, children’s advertising will violate § 17200 if it is likely to mislead children (though adults would not be deceived). Committee on Children’s Television, Inc., 35 Cal 3d at 214. Nevertheless, unlike federal courts, California courts have not instituted a presumption against the defendant advertiser. See, e.g., Simeon Management Corp. v. FTC, 579 F.2d 1137, 1146 (9th Cir. 1978) (advertising capable of being misleading should be construed against the advertiser). “Advertising” is broadly construed for § 17200 and § 17500 purposes. Any statement made in connection with the sale of goods or services amounts to “advertising.” Chern, 15 Cal. 3d at 875-76.
vi.Puffing
One possible defense against false advertising claims is that the alleged deceptive advertisements are “puffery” and unlikely to mislead. See Haskell v. Time, Inc., 857 F. Supp. 1392, 1399-1405 (E.D. Ca. 1994) (alleged misrepresentations in a “non-class” class action brought under § 17200 and § 17500 and dismissed under Fed. R. Civ. P. 12(b)(6) were unlikely to deceive a reasonable consumer). Mere general assertions of superiority that are not quantifiable and objective are not actionable under either § 17200 or § 17500. Atari Corp. v. The 3DO Co., 31 U.S.P.Q.2d 1636, 1638 (N.D. Ca. 1994). It is not entirely clear that the California courts will follow these federal court interpretations of California law, however.
c.Scienter Not Required
It is not required that the plaintiff in a § 17200 case show intent or even negligence. See, e.g., Committee on Children’s Television, Inc., 35 Cal. 3d at 211. Courts have held that § 17500 requires a species of intent similar to negligence: a defendant may only be held liable if it knew or should have known that the conduct was fraudulent or likely to mislead. People v. Forest E. Olson, Inc., 137 Cal. App. 3d 137, 139-140 (1982).
d.Injury Not Required
Actual harm to competitors or the general public is not required to violate § 17200. People v. Cappuccio, Inc., 201 Cal. App. 3d 750, 758-60 (1988). There is no requirement that plaintiff show injury or harm to anyone; the mere existence of a misleading statement or unfair or unlawful practice is sufficient. Bank of the West, 2 Cal. 4th at 1267; Committee on Children’s Television, Inc., 35 Cal. 3d at 211.
i.Fraud in False Advertising Cases
The issue in false advertising cases is whether the representation is likely to misled consumers. It need not be shown that anyone was actually mislead or relied on the misrepresentation. See Fletcher v. Security Pac. Nat’l Bank, 23 Cal. 3d 442, 450-52 (1979); Chern v. Bank of America, 15 Cal. 3d 866, 875-76 (1976). Cf. Bank of the West, 2 Cal. 4th at 1266-67 (“In drafting the Act, the Legislature deliberately traded the attributes of tort law for speed and administrative simplicity. As a result, to state a claim under the Act one need not plead and prove the elements of a tort.”) Nor is there a “reasonable consumer” requirement in the statute (one court of appeals decision adopting such a standard was depublished by the California Supreme Court).
e.Industry Custom is No Defense
That a business practice is industry standard is not a defense in a § 17200 or § 17500 case. See Chern, 15 Cal. 3d at 876; People v. Casa Blanca Convalescent Homes, Inc., 159 Cal. App. 3d 509, 527 (1984).
f.Business Justifications
While industry custom is irrelevant, a defendant may show that a practice is not unfair by validating the reasons, justifications, and motivation behind it. See Motors, Inc., 102 Cal. App. 3d at 740.
g.Buyers and Sellers Both Covered
For purposes of § 17200 liability, it is irrelevant whether the unfair or deceptive practices are engaged in by a seller or a buyer. Allied Grape Growers, 203 Cal. App. 3d at 449-50; People v. Toomey, 157 Cal. App. 3d 1, 19-20 (1985).
3.The Potential for Bootstrapping
Plaintiffs’ counsel with increasing frequency bring class or “non-class class” § 17200 actions based upon alleged violations of statutes that do not themselves provide a private right of action. See, e.g., Committee to Stop Youth Addiction v. Lucky Stores, Inc., 17 Cal. 4th 553 (statute making the sale of tobacco to minors a criminal misdemeanor); Reese v. Payless Drug Stores, Inc., 43 Cal. App. 4th 1317 (1995) (FDA regulations; review initially granted and then dismissed).
a.Violations of Other Laws
California’s unfair competition law is somewhat unusual in that it permits a cause of action to be brought under § 17200 if a practice violates some other law. Id.; and see Farmers Ins. Exchange v. Superior Court, 2 Cal. 4th 377, 383 (1992) (§ 17200 “borrows” violations of other laws and treats them as independently actionable unlawful practices); People v. McKale, 25 Cal. 3d 626, 632 (1979) (§ 17200 forbids practices forbidden by any other law, be it civil or criminal, federal, state, or municipal, statutory, or regulatory). The net effect is to make such a violation into a per se violation of § 17200. See Saunders v. Superior Court, 27 Cal. App. 4th at 838-39; Samura v. Kaiser Found. Health Plan, Inc., 14 Cal. App. 4th 1284, 1299 (1993). The predicate law need not even provide for private civil enforcement. Committee on Children’s Television, Inc., 35 Cal. 3d at 210-211; Saunders, 27 Cal. App. 4th at 839; Samura, 14 Cal. App. 4th at 1299.