California 17200: Its Nature, Function, and Limits – Remarks by Jeremy Rosen

Summer 2010

By Jeremy Rosen

California 17200: Its Nature, Function, and Limits

In the last couple of years I have had many clients who have told me that they have either moved significant parts of their operations out of California or have made conscious decisions not to have any further expansion in California, but instead expand in other states. These decisions are made for a number of reasons, but primarily because of (1) California’s very pro-employee employment laws, (2) because the impact of section 17200, and (3) California’s fiscal crisis. Obviously the fiscal crisis and employment laws of California could be the subject of weeks of depressing discussion, but today we are focusing on Section 17200.

Notwithstanding the fact that Section 17200 class actions are potentially a relatively small percentage of the total litigation in California, I would posit it makes up for its small numbers in its impact. A regular garden variety tort or contract claim is not going to be a make or break for most companies or for most businesses. But, when you can have a potentially nation-wide class action, or at least an all-California-citizen class action against a company on behalf of people who haven’t really been injured or affected and the plaintiff s can seek injunctive relief and restitution, plaintiff s can do a lot of damage to the businesses. This is why California businesses have taken notice and why they are concerned, and why I posit why we should all be concerned. As Will Stern pointed out, prior to Prop 64’s passage, any person could sue on behalf of the public as a self-appointed Attorney General. They didn’t need to show that they were harmed by the act they were challenging and, needless to say, I think this was fraught with peril. Generally our system is set up so that someone who is injured seeks redress while people who have not been injured cannot become gadflies and go out to sue just for the heck of it. Allowing uninjured people to sue distorts our system and doesn’t lead to the proper outcome.

In 2004, there was an attempt with Prop 64 to reign in the UCL by requiring people who file a UCL action to show that they have personally lost money or property as a result of that unfair business practice. Many thought that this would reign in the UCL significantly and limit UCL actions to those who had actually been injured. Unfortunately, the California Supreme Court in the Tobacco II decision in a 4-3 opinion held that Prop 64’s standing requirements only apply to the class representative and not to class members. Th us, only the named plaintiff has to show that they were actually injured by the act they are challenging, and they can get a class certified of thousands or millions of potential class members who have not at all been injured. I think the dissent made a valiant effort to point out that this distorted the whole purpose of passing Prop 64.

But the question has now been presented in the lower appellate courts about what does the Tobacco II decision mean in terms of traditional class certification requirements, such as the predominance of common issues of causation and injury among individual class members. Whether or not those traditional class certification factors are relevant or irrelevant in UCL actions so far have split the intermediate appellate courts. Th ere have been quite a number of appellate opinions coming out on different sides of this question, and I am going to highlight two of them as sort of representative examples. To this point, the Supreme Court has ducked or allowed the issue to percolate, depending on how you want to look at it. I think at some point the Supreme Court is going to have to weigh in on this again because the intermediate appellate courts on this are sending conflicting signals. Th e fi rst of the two cases I wanted to mention is Weinstadt v. Dentsply, which I should give a caveat, was handled by two of my partners. It was a class action of dentists suing over a dental device called a cavitron, which is a device that expels water at a very high pressure that is used when you go to the dentist to get your teeth cleaned. California has a regulation that says for dental surgery only sterile water can be used but since teeth-cleaning is not surgery, you do not need to use sterile water. The class action that was fi led against this manufacturer was based on an allegation that there was some intimation in the marketing materials for this device that it could be used in surgery, which it could be in 49 other states that do not have the sterile water requirement that California does. There was no indication or evidence that any dentist didn’t realize that this device did not use sterile water because the dentist had to hook it up to their own water system. Th ere was no indication that any dentist in California did not realize that they were required under state regulation to use sterile water for surgery. Yet, the Court of Appeals said you could have a class certifi ed of dentists who had not shown any reliance, or any injury, or any improper use of the device, saying that the Tobacco II opinion found that those type of requirements did not exist other than the main plaintiff. So this joined a number of other cases holding that a recovery in an unfair competition law action is available in the absence of any individual proof of deception, reliance, or injury. Other cases, including the recent Cohen v. Direct TV case, have held that traditional class action rule still apply in UCL cases and that the Tobacco II case only discuss the standing to bring a class action. It didn’t discuss the other class action requirements. And the Cohen court held that the unfair competition law does not authorize an award of injunctive relief and/or restitution on behalf of a consumer who is never exposed to a wrongful business practice. Cohen is a class action of satellite TV subscribers claiming alleged misrepresentations about the quality of Direct TV’s high definition transmissions. The Court of Appeals reasoned that the individual class members may not have seen or relied on any of these specific representations challenged in the complaint, so that there was no factual commonality among the class members.

So, what we can take after these cases? There have been about eight or nine cases since Tobacco II, and there is now real confusion. What does Tobacco II mean? Does it really allow “no holds bars”—anyone can sue even if they have not been injured—or is there still some limitation based on at least traditional notions of class action limitations? That answer is still unknown. At some point I think the California Supreme Court will have to step in.

And just a final point I would like to make before closing and we can talk about more during the discussion is that I want to say a little bit about business-to-business uses of Section 17200. I have noticed, in my practice, that there has been an increased number of these cases filed where generally one competitor will sue another competitor basically in an effort to get a competitive advantage or to try to get their competitor to not be able to do something that is helping them compete. And these types of claims I think are disturbing on another level: now companies have a research and development budget, a marketing budget, and a litigation budget. I want to give two examples. One is a case I am handling now that’s on appeal involving a plaintiff who is one of the largest LSAT test preparation companies and my client who is a much smaller LSAT test company. The plaintiff sued my client for a number of claims, including Section 17200, and this is part of a trend that they have done nationwide where they have tried to go after their smaller competitors and try to basically litigate them to death. Now in our case we actually prevailed in the trial court after a lengthy, lengthy and expensive litigation, and it is now on the other side’s appeal. But 17200 allows this type of abuse, which promotes anti-competition. Another example is a single beverage company Hansen. Just since 2008 Hansen has filed eleven 17200 actions against competitors in other companies in federal courts in California. One example is a lawsuit involving a competitor who makes another energy drink. I guess Hansen makes its own Monster energy drink and this Vital Pharmaceuticals makes another energy beverage, and Hansen is suing claiming that their competitor’s advertisements about the benefits of their energy drink are not supported by the scientific evidence based upon the ingredients. Now this may or may not be true, and maybe Hansen is just unlucky that so many of its competitors are doing so many bad things to it, but it seems to me that this is something we should be concerned about where we have companies instead of trying to compete on the merits looking to take their competition into the courts that I think is another issue that may be worth discussion.

I would be slightly hopeful if the Direct TV line of cases takes hold that while the standing requirement for bringing a 17200 claim may not require showing actual injury that you might be able to have standing under some traditional class action requirements. Th is might limit the collateral damage somewhat. I think that the best thing to do would be the California Supreme Court to revisit Tobacco II. And I would posit that that is not something implausible. California has sort of a weird system compared to the U.S. Supreme Court and other state supreme courts in which when a justice on the California Supreme Court is recused, instead of having the remaining members of the California Supreme Court decide the case, they will actually appoint at random a sitting Court of Appeals Justice to replace a Supreme Court Justice for that case. Now Tobacco II was a 4-3 opinion where the fourth and deciding vote was cast not by a sitting member of the California Supreme Court, but by a Court of Appeals Justice sitting by designation because Chief Justice George was recused. Now, whether Chief Justice George would have signed the majority or the dissent I can’t speculate, but it is certainly not implausible that the California Supreme Court could revisit this and potentially not give it the same stare decisis benefit that you might give to another holding of the Supreme Court because it was such a closely decided case that was actually decided by a nonmember of the court. So maybe I am being over optimistic—I probably am—but I still view Tobacco II as not necessarily the final word on the standing requirements under Prop 64.

I think Shaun has an interesting point on whether at another level, relaxing standing or strengthening requirements is the better way to go. The only observation I would make here with respect to Prop 64 is that the voters passed an initiative that made a pretty clear statement that standing was going to be changed in section 17200, giving standing only to those who had been injured and in the Tobacco II case. Th e majority in the Supreme Court seemed to give the voter initiative a very short drift and pretty much read the limitation that the voter should pass essentially out of the statute and rendered it pretty meaningless because, if you are going to say, “Well you can still have a class action where millions of people had not been injured,” then the whole task of amending Section 17200 to require only those who had been injured to sue seems pretty meaningless. I guess we could have another discussion about the validity of voter initiatives and the Supreme Court’s deference to them, but here, if you read the majority opinion, they had to go through a lot of hoops and gymnastics to get around the pretty clear language of the statute to get to the result that they seem to want to get to.

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