California 17200: Its Nature, Function, and Limits – Remarks by William L. Stern

The forces that in 2004 gave rise to Prop 64 are, in microcosm, the same forces that are driving a larger debate about class actions that is being played out on the national stage. Th at debate is worthy of Socrates. But instead of debating the nature of Truth or Beauty, this contest might be better entitled, “What is the Nature and Purpose of Class Actions?”

The two positions in the debate lie on a spectrum. On the plaintiff ’s and consumer’s end of the spectrum we find the “Deterrence” approach. The deterrence school teaches that deterring bad business conduct is so important to society, particularly in false advertising and defective product cases, that if in certifying a class we wind up over-compensating certain groups—say, by giving money to people who weren’t harmed—that is part of the collateral damage. The benefit of deterrence overrides any downside, they argue, and besides, the money that is getting redistributed is being taken from a wrongdoer anyway, so we should not shed any tears.

On the defense and the business end of the spectrum, we have the “Tort” approach. The tort approach says that a class action is really just an aggregation of individual claims. So that if one individual cannot sue BP or Enron individually, either because he hasn’t been harmed or he didn’t read or rely upon the advertising, or because the product he purchased didn’t fail, then he doesn’t get to recover money and cannot be part of the class. Further, just because there can be found a named plaintiff who was harmed and can prove the defendant’s liability, doesn’t give an absent class member who can’t prove these things a right to recover greater than if he had sued the defendant individually.

This is the debate that underlies every consumer class action, and is one that plays out again and again, every time, in every class action case.

How does it play out? On the defense side, we ask the courts to apply filters to limit eligible class members to just those people who would have had a claim had they sued individually. We use concepts like commonality, typicality, individual issues predominating, superiority, and all of the other “Rule 23” factors. But make no mistake about it. All of these are simply tools in the tool chest that plaintiffs and defendants deploy to move the dial on the spectrum—to the left or right—between the Deterrence and the Tort theories. That debate is what gets reenacted in every class action. Should recovery be limited to just those who were harmed by the conduct?

How then does this figure into Proposition 64 and California’s Section 17200 (California’s “Little FTC Act”)? Here’s how.

Prior to Prop 64, up until November 2004 that is, California had moved the “dial” farther to the left than any other state had with its analogous version of the Little FTC Act. Every state and the District of Columbia has enacted a version of a Little FTC Act—sometimes called Unfair and Deceptive Trade Practices Acts—but no state had done with theirs what California had done with Section 17200. What did California do? Two things.

First, California allowed a claimant to sue a defendant even if he had absolutely no dealings with the defendant. Lawyers would lure their mothers, relatives, and secretaries to become “class” representatives. Second, California allowed such a person to bring a claim on behalf of a “class” of harmed people, and recover money on their behalves, without having to plead or prove a class action. Those two features were ended by Prop 64. Thus, Proposition 64 was an attempt by business interests and adherents of the Tort Theory of class actions to move the “dial” a couple of notches to the right or, at least, closer to the middle.

The California Supreme Court’s 2009 decision in Tobacco II Cases was an instance of the California Supreme Court moving the dial back toward the “left” again, closer to—some might say exactly—where it was before Prop 64.

This debate in California over Section 17200 is really a microcosm of what is going on in the larger national stage, and indeed it is. At a national level, we have seen cases like the Second Circuit’s McLaughlin case, the Third Circuit’s Hydrogen Peroxide case, and a number of other class certification rulings that are using the Rule 23 elements of class actions to try to move the dial to the right, or to try to limit claims to people who have actually been harmed. In the Ninth Circuit, by contrast, we have cases like the recent Dukes v. Wal-Mart decision that moves the dial once again back to the left.

All of these cases are just a few illustrations of the push and tug of the Deterrence versus the Tort approach, and how from a policy standpoint class actions should be viewed. Prop 64 is part of that debate. Socrates would be proud.