California Class Issues

On Monday, the U.S. Supreme Court issued its highly-anticipated opinion in  DirecTV, Inc. v. Imburgia et al., 577 U.S. ___ (2015), which reaffirmed its ruling in AT&T Mobility LLC v. Concepcion, 56 U.S. 333 (2011), dealing yet another blow to California Courts’ attempts to invalidate class action waivers.

Background

The plaintiffs in Imburgia filed their lawsuit in 2008, arguing that class action arbitration waivers were per se unenforceable in California under Discover Bank v. Super. Ct., 36 Cal. 4th 148, 162-163 (2005).  Under the Discover Bank rule, California courts were free to find such provisions, when contained consumer contracts of adhesion, unconscionable and to rule that they should not be enforced. Id.

The DirecTV service agreement at issue in Imburgia provided for arbitration of customer disputes and included a class action waiver but also stated that “[i]f . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration waiver] is unenforceable.”  While the Imburgia case was pending, the Supreme Court issued its decision in Concepcion, which ruled that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”).  Despite Concepcion, the California Court of Appeals still found the class action waiver provision in the DirecTV service agreement unenforceable under the theory that the parties had chosen the law of California to govern at the time of drafting and, absent federal preemption, California law would not enforce such provisions.

Opinion

Justice Breyer delivered the opinion of the Court, which began with this “elementary” lesson:  “The Federal Arbitration Act is the law of the United States, and Concepcion is an authoritative interpretation of that Act.  Consequently, the judges of every State must follow it.”  (Slip Op. at 5). Unsurprisingly, the Supreme Court went on to rule that the California Court’s failure to do so indicated that it was not placing arbitration contracts “on equal footing with other contracts” and had therefore run afoul of the FAA.  (Id. at 10-11).

Justice Ginsburg and Justice Sotomayor dissented, opining that, given the specific language of the service agreement and the fact that it was drafted before Concepcion, the state court was free to interpret the contract as it had, and to find the class action arbitration waiver unenforceable.  (See Ginsburg Dissent at 3).  They also lamented that the Court’s recent decisions in Concepcion and Italian Colors had effectively deprived “consumers’ rights to seek redress for losses” and “insulated powerful economic interests.”  (Id. at 10-11).

Implications

Imburgia eliminates any doubt as to the enforceability of class action arbitration waivers.  Retailers and service providers wishing to avoid class action claims are encouraged to include them in their contracts and to be aggressive in enforcing them in litigation, even in the face of arguably ambiguous language.

By:  Robert Milligan and D. Joshua Salinas

California’s Auto-Renewal Law (Cal. Bus. & Prof. Code § 17600 et seq.) has given rise to a recent torrent of new lawsuits in California, many brought on a putative class action basis, targeting businesses that offer subscription based goods or services to California consumers. With few published decisions analyzing and interpreting the statute since its enactment in 2010, businesses often face a high degree of uncertainty and potential legal exposure when addressing demand letters threatening legal action or lawsuits seeking class certification.
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Scope and Application

California’s Auto-Renewal Law applies, with certain exceptions, to any arrangement where a paid subscription or purchasing agreement is automatically renewed until the consumer cancels. Simply put, the purpose of the statute is to require businesses to disclose their subscription terms in a clear and conspicuous manner, including cancellation information, and obtain affirmative consent before charging consumers debit or credit cards on a recurring basis. It is important to note that it applies to not only online subscriptions, but also those procured through hard copy (e.g. paper) and audio (e.g., telephone) methods. The statute arose from an effort to end the practice of charging consumers, without their explicit consent, for continuing products or services (e.g., magazine and music subscriptions).

A wide array of companies providing subscription-based services have already been hit with such lawsuits, including media and entertainment providers (e.g., SiriusXM, Hulu, Spotify), data storage providers (e.g., DropBox), monthly “box” and food delivery services (e.g., BirchBox, Blue Apron), theme parks (e.g., SeaWorld), and dating service providers (e.g., Tinder).

Several cases brought under this statute are currently being challenged at the pleading stage, some cases have been settled on a class-wide basis, and at least one case was granted class certification.

Compliance

The following terms must be disclosed in a clear and conspicuous manner before the subscription or purchasing agreement is fulfilled and in visual proximity (or temporal proximity for voice/audio offers) to the request for consent to the offer:

  1. That the subscription or purchasing agreement will continue until the consumer cancels;
  2. The description of the cancellation policy that applies to the offer;
  3. The recurring charges that will be charged to the consumer’s credit or debit card or payment account with a third party as part of the automatic renewal plan or arrangement, and that the amount of the charge may change, if that is the case, the amount to which the charge will change, if known;
  4. The length of the automatic renewal term or that the service is continuous, unless the length of the term is chosen by the consumer; and
  5. The minimum purchase obligation, if any.

The business must also provide to the consumer an acknowledgement (which can be provided after the initial order is completed) that is capable of being retained and provides the following:

  1. The automatic renewal of continuous service offer terms;
  2. The cancellation policy; and
  3. A cost-effective, timely, and easy-to-use mechanism for cancellation (e.g., toll free phone number, email address) and information regarding how to cancel.

The Meaning of Clear and Conspicuous

The statute details what constitutes clear and conspicuous written disclosures. Specifically, written disclosures must be “in a manner that clearly calls attention to the language” as follows:

  • in larger type than the surrounding text, or
  • in contrasting type, font, or color to the surrounding text of the same size, or
  • set off from the surrounding text of the same size by symbols or other marks.

In the case of an audio disclosure, clear and conspicuous means “in a volume and cadence sufficient to be readily audible and understandable.”

Affirmative Consent

The statute requires businesses to obtain affirmative consent before charging consumers debit or credit cards on a recurring basis. The statute does not, however, define or address what constitutes affirmative consent.

Free Trials and Material Changes to the Terms of the Auto-Renewal Offer

If the auto-renewal offer provided to the consumer contains a free trial, the business must disclose to the consumer how to cancel before he or she pays for the goods or services.

In the case of a material change to the auto-renewal or continuous service that has been accepted by a consumer, the business must provide the consumer with clear and conspicuous notice of the material change and provide information regarding how to cancel in a manner that is capable of being retained by the consumer.

Remedies

The Auto-Renewal Law’s available remedies have made it attractive for the plaintiffs bar. The statute provides that all civil remedies that apply to a violation of the statute are available. Further, any goods or other products sold without the requisite disclosures are considered an unconditional gift. In other words, consumers may be entitled to refunds (including shipping and handling costs) without having to return their purchases. Many recent lawsuits have been brought as putative class actions under California’s Unfair Competition Laws (Cal. Bus. & Prof. Code § 17200 et seq.), thus increasing the potential amount of exposure especially for businesses that have millions of California subscribers. Some litigants have challenged whether there is a stand-alone cause of action under California’s Auto-Renewal Law. This issue is presently the subject of a demurrer in one closely watched case filed in Santa Clara County state court.

Defenses and Defense Strategies:

  • Good Faith Exception: The statute expressly provides in Section 17604 that a business will not be subject to civil remedies if it “complies with the provisions of this article in good faith.” Unfortunately, there is currently no case law addressing what constitutes “good faith” under the statute. Nonetheless, businesses should seek the advice of competent counsel and take reasonable efforts to ensure compliance with the statute.
  • Enforceable Mandatory Arbitration Provisions and Class Action Waivers: Enforceable mandatory arbitration provisions with class action waivers (such as in Terms of Conditions or Terms of Use policies) may provide an effective strategy to attempt to minimize exposure to class claims brought under the Auto-Renewal Law. See AT&T Mobility v. Concepcion, 563 U.S. 333 (2011). Indeed, some notable auto-renewal cases have been compelled to arbitration. Plaintiffs’ attorneys have also reported being discouraged from bringing such putative class actions when an applicable and enforceable arbitration provision exists.
  • Exemptions: The statute identifies a limited set of businesses exempt from its requirements: (1) businesses with authorization issued by the California Public Utilities Commission (“CPUC”), (2) businesses regulated by the CPUC, Federal Communications Commission, or Federal Energy Regulatory Commission, (3) entities regulated by the Dept. of Insurance, (4) certain alarm company operators, (5) banks, bank holding companies, credit unions, and other financial institutions licensed under state or federal law, (6) service contractor sellers and service contract administrators regulated by the Bureau of Electronic and Appliance Repair.
  • California Resident: At least two federal district courts have dismissed at the pleading stage claims brought by non-California residents under the Auto-Renewal Law. These courts have expressly held that the statute limits recovery to only California citizens.
  • No Actual Damages: In Robins v. Spokeo, No. 13-1339, the United States Supreme Court is presently considering whether a plaintiff can maintain a class action suit seeking damages for technical legal violations in which there was no actual injury to the plaintiff, only statutory damages available. Similarly, suits alleging violations of Section 17600 are also susceptible to this argument asserting that plaintiffs lack standing to maintain such suits.

Implications

Companies that utilize auto-renewal services for sales of goods or services in California should scrutinize their disclosures provided both before and after transactions. The disclosure requirements are intricate, but good faith compliance and enforceable arbitration provisions may nonetheless minimize potential liability.

On September 1, 2015, California enacted Senate Bill 633 (“SB 633”), loosening the state’s restrictions on “Made in USA” labeling.  Under existing law, codified at Cal. Bus. & Prof. Code § 17533.7, a product may not be sold or offered for sale in California as “Made in U.S.A” if the product, or any article, unit, or part of the product, has been entirely or substantially made, manufactured, or produced outside of the United States.  In other words, Section 17533.7 requires that a product—including each of its individual components (no matter how small)—be entirely or substantially made, manufactured, or produced domestically to qualify for use of a “Made in U.S.A.” or similar label.ca_capitol_modernrelics_creativecommons

SB 633, which goes into effect on January 1, 2016, amends Section 17533.7 to provide exemptions to the “Made in U.S.A.” labeling prohibitions if: (1) all the foreign components of the product constitute no more than 5% of the final wholesale value of the manufactured product; or (2) all the foreign components of the product constitute no more than 10% of the final wholesale value of the manufactured product, and the manufacturer of the product shows that it can neither produce the components in the United States, nor obtain the components from a domestic source.

SB 633 should come as a welcome relief to many companies doing business in California.  The bill more closely aligns California law with the less restrictive domestic content standards for use of the “Made in U.S.A.” designation in all other states and under federal law.  The amendment, therefore, should reduce the complications and costs faced by businesses selling products in California that are lawfully labeled as “Made in U.S.A.” in the rest of the country.

Similarly, because SB 633 effectively repeals California’s stricter—and unique—100% domestic sourcing requirements, companies may also be able to rely on the new law to dispose of pending lawsuits.  Under the “statutory repeal” rule, when a pending action rests solely on a statutory basis, and a final judgment has not been entered, the amendment or repeal of that statute without a savings clause will terminate all pending actions based on that statute.  Younger v. Superior Court, 21 Cal. 3d 102, 109 (1978); Callet v. Alioto, 210 Cal. 65, 67–68 (1930).  Because a claim alleging violations of Section 17533.7 is wholly dependent on that statute, companies litigating “Made in U.S.A.” claims may be able to argue that the enactment of SB 633 terminates those actions in which a final judgment has not been entered.

Regardless, the enactment of SB 633 should reduce the number of lawsuits brought in California against manufacturers or retailers over their “Made in U.S.A.” labeling of products containing negligible foreign content.  And for many companies doing business in California, such a prospect should elicit a sigh of relief.

Recently, a California federal court denied Nordstrom, Inc.’s and designer jean manufacturer, AG Adriano Goldschmeid’s request for an interlocutory review of the district court’s denial of their motion to dismiss the Plaintiff’s class action complaint alleging consumer fraud related to their use of “Made in USA” labels.25-jeans

Background

Plaintiff’s class action complaint alleged that defendants misleadingly marked their product with a Made in the USA label, when several component parts of the jeans, such as the fabric, thread, buttons, and rivets were manufactured outside the United States.  Plaintiff contend that defendants’ conduct violates various California statutes, including, California’s Consumer Legal Remedies Act, California Civil Code § 1750, and California’s Unfair Business Practices Act, California Business Professional Code § 17200 and § 17533.7.

Defendants moved to dismiss on the ground that plaintiff’s claims were preempted by the Federal Trade Commission Act (“FTCA”) and Textile Fiber products Identification Act (“TFPIA”), both of which contain provisions concerning Made in USA labels on products.  Defendants argue that the California statutes are preempted because they contain stricter standards than the federal acts.

The California Business Professional Code states that “it is unlawful for any person, firm, corporation or association to sell or offer for sale in this State any merchandise or on its container there appears the words Made in USA Made in America, USA or similar words when the merchandise or any article, unit or part thereof, has been entirely or substantially made, manufactured, or produced outside the United States.”  (emphasis added).  However, the  FTCA guidelines state that a product may be labeled “Made in USA” if “all or virtually all of a specific product is made domestically.”  “All or virtually all” means that the product is one in which all significant parts and processing that go into the product are of U.S. origin, i.e., where there is only a de minimus, or negligible, amount of foreign content.  Accordingly, the FTCA allows for use of a Made in the USA label even if a product includes or contains material from a foreign country, whereas the California statutes do not allow use of the label unless all parts of the product were either entirely or substantial manufactured in the United States.

Decision

The Court agreed that the type of products at issue in the litigation were prohibited by the California statute but not the federal acts.  However, it found that the California statutes were not preempted because “although the laws set out different standards for the use of ‘Made in USA” labels, it would not be impossible for the defendants to comply with both laws.”  Consequently, the court denied defendants’ motion to dismiss.

Nordstrom is not the first, and likely not the last, retailer to be hauled into court on such allegations of mislabeling.  See, e.g., Clark v. Citizens of Humanity, Macy’s et al., case no. 3:14-cv-01404 (S.D. Cal.) (allege that the foreign components include fabric, thread, buttons, rivets and other subcomponents of the zipper assembly); Colgan v. Leatherman Tool Group, case no. B176953 (Cal. Ct. App.) (alleging that tool products with significant working parts that were “investment cast, fineblanked, formed, hardened, cut, forged, polished, or machined in various foreign countries” constituted a violation of California statutes when they had representations on the products, packaging and advertising that they were made in the USA); Oxina v. Lands’ End, 3:14-cv-02577 (S.D. Cal.) (alleging neckties labeled made in USA that contained parts made in other countries violated of California statutes).

Implications

As is evident from the court’s preemption decision in the Nordstrom case, retailers should take great care to ensure that their labels comply not only with federal laws but also any relevant state statutes.  Retailers may also consider making qualifying statements when products are not entirely made in the USA, such as “Made in US with foreign parts”  or “Produced in USA with imported raw materials,” to avoid allegations of misrepresentation.

By Scott M. Pearson, Jeffrey A. Berman, Eric M. Lloyd and Kiran Aftab Seldon

On May 29, 2014, the California Supreme Court issued its much-anticipated opinion in Duran v. U.S. Bank, vacating a $15 million judgment in a wage-hour class action where the court found liability based on a flawed statistical sampling.  Although the Court did not completely reject the use of statistical sampling to establish class-wide liability, it significantly limited the circumstances in which sampling is available.  Most importantly, the Court held that sampling may not be used when it deprives a defendant of its due process right to present affirmative defenses as to all class members.  It also reaffirmed plaintiffs’ burden of establishing manageability in order to certify a class, as well as the obligation of courts to decertify classes that prove to be unmanageable.

The plaintiffs in Duran alleged that U.S. Bank had misclassified certain employees as “outside salespersons” who are exempt from overtime and other requirements because they spend more than 50% of their working time making sales outside the office.  Although declarations from putative class members showed that some class members met the 50% requirement and others did not, the trial court certified a class.  It then adopted a trial plan in which a purportedly random sample of 20 class members plus two of the named plaintiffs would testify at trial, and both liability and damages would be extrapolated to the entire class from findings based on the sample group.  At trial, the court excluded all evidence that class members outside the sample group were in fact exempt, and concluded based only on the sample evidence that all class members had been misclassified.  It also set damages by extrapolating from the sample despite a 43% margin of error, awarding approximately $15 million to the class.

Affirming the Court of Appeal, which had reversed the trial court, the California Supreme Court agreed that the class should have been decertified and ordered a new trial.  The Court confirmed that a defendant has a due process right to “litigate its statutory defenses to individual claims.”  Thus, “any trial must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues.”  If statistical sampling is to be used at all for proving liability in a class action, the Court held, it must comport with due process and use sound methodologies.  In particular, among other things: (a) the sample size must be “sufficiently large to provide reliable information about the larger group,” (b) the sample must be random and free of selection bias, and (c) the approach must yield results within a reasonable margin of error.  Furthermore, trial courts should evaluate any proposals for statistical sampling before certifying a class, and they must decertify classes that prove unmanageable.

Although Duran unfortunately did not completely reject the use of statistical sampling to establish classwide liability, it does make it significantly more difficult for plaintiffs to use that approach.  It also will help defendants opposing class certification, as it reaffirms the requirement that class litigation be manageable, which too often is ignored in lower courts.

By Scott M. Pearson and Daniel Joshua Salinas

California’s Consumers Legal Remedies Act and Unfair Competition Law (Business and Professions Code Section 17200) both are notorious for allowing plaintiffs’ class action lawyers to bring extortionate lawsuits based on technical statutory violations or conduct that arguably is “unfair.”  On May 1, 2014, the California Supreme Court weakened those statutes, holding that neither may be used by consumers to challenge sales tax reimbursement charges.  Loeffler v. Target Corp.,No. S173972, 2014 WL 1714947 (Cal. May 1, 2014).

In Loeffler, plaintiffs brought a class action against the defendant retailer seeking to recover sales tax reimbursements they paid for “to go” hot coffee, which they contend is not taxable.  Affirming the lower courts’ dismissal of the action without leave to amend, the Supreme Court held that consumers have no standing to challenge sales tax reimbursement charges, as it is the retailer, not the consumer, who is the taxpayer; and the Board of Equalization has primary jurisdiction over tax matters.  An action by consumers under the CLRA and UCL, the court held, would undermine both the Board’s primary jurisdiction and the tax code’s safe harbor for reimbursements for sales tax that has been remitted to the state.  Consumers may, however, seek injunctive relief ordering retailers to seek reimbursement from the Board of Equalization under Javor v. State Board of Equalization, 12 Cal. 3d 790 (1974).

In addition to undermining the increasingly frequent lawsuits premised on erroneous sales tax charges, Loeffler may have broader impact because it applied two existing defenses to UCL claims — primary jurisdiction and abstention in matters of complex economic policy — to the CLRA.  See, e.g., Farmers Ins. Exch. v. Superior Court, 2 Cal. 4th 377, 394 (1992) (primary jurisdiction); Beasley v. Wells Fargo Bank, 235 Cal. App. 3d 1383, 1391 (1991) (abstention).  In the wake of Proposition 64, the CLRA has effectively replaced the UCL as the California class action plaintiff’s weapon of choice.  The application of these defenses to CLRA claims therefore is a welcome development for defendants in consumer class actions.

 

On Thursday, May 29, 2014 at 12:00 p.m. Central, Robert Milligan, Joseph Marra and Joshua Salinas will present the first installment of Seyfarth’s 2014 Class Action Webinar series, our class action attorneys will discuss how plaintiffs’ attorneys are increasingly filing class actions in California seeking to apply the state’s privacy laws to routine telephone communications between businesses and their customers.

Companies located outside of California are not immune: These privacy laws arguably encompass any call made to or received by someone located in California. If your company records or monitors inbound or outbound telephone calls with customers or employees, you need to attend this webinar.

California privacy laws seemingly couple stringent compliance requirements with staggering liability damages. Aggregating damages in a class action context can quickly place exposure figures in the millions of dollars for even innocent but alleged technical violations of the statutes. Recent case law has influenced the attractiveness of these claims, and companies should take proactive measures to protect themselves against these suits now. The Seyfarth panel will specifically address the following topics:

  • Understanding the California Invasion of Privacy Act (“CIPA”) and why these claims are so enticing for plaintiffs’ attorneys, including Penal Code Section 632 and 632.7 claims; • Recent case law that has strengthened plaintiff’s abilities to bring CIPA claims as well as a discussion of typical defenses to such claims;
  • Recent case law that has strengthened companies’ abilities to defend against CIPA class actions;
  • Specific steps a company should take to protect itself against such suits; and
  • Additional mechanisms for limiting exposure and avoid liability under CIPA.

There is no cost to attend this webinar, however, registration is required.

 

Summary

California Penal Code Section 632 has provided a springboard to litigation related to the recording of telephone calls in the State of California.  Last week, in Hatisihi v. First American, Case No. B244769 (Cal. Ct. App. 2d Dist.), the California Court of Appeal affirmed the recent trend of class certification denials in cases brought under Section 632, based upon the individualized inquires into a determination of whether the communication recorded was “confidential.”

Background Facts

First American issues one-year home warranty plans for major home systems and appliances to customers in 46 states, including California.  Customers may make warranty claims by calling an “800” number (“inbound” calls).  In addition, First American makes calls to existing customers as part of marketing and warranty renewal campaigns (“outbound” calls).  All calls between First American — whether inbound or outbound  — are recorded.  Inbound calls include an automated disclosure that the call may be monitored or recorded.  Outbound calls, however, do not include any such automated disclosure, and, prior to 2009, First American did not have a policy of requiring sales representatives to advise customers that the call may be monitored or recorded.  Id. at *2-4.

Plaintiff purchased a one-year First American Warranty in 2005 and renewed it annually for the next three years until it expired in May 2009.  Between 2005 and May 2008, Plaintiff admitted to making approximately 12 inbound calls to First American during which she received the automated disclosure that her call may be monitored or recorded.  Plaintiff also admitted that she participated in “dozens” of telephone calls with other companies where she understood her call would be recorded or monitored for quality assurance.  Plaintiff did not object to any of the inbound calls with First American or the other companies being recorded.  Id.

In May 2008 and May 2009, Plaintiff received outbound calls from First American’s sales group.  Both calls were recorded and Plaintiff was not given the disclosure that the calls would be recorded or monitored.  Id.

The Lower Court’s Opinion

Thereafter, Plaintiff filed a class action complaint entitled Hataishi v. First American (Los Angeles County Super. Ct. Case No. B244769) against First American for statutory invasion of privacy under California Penal Code Section 632, which prohibits the intentional recording of a “confidential communication” without the consent of all parties to the communication.  Plaintiff filed a class certification motion seeking to certify a class of California consumers who received telephone calls from First American between 2006 and 2009.  Plaintiff asserted that there were common issues of law and fact because: (1) First American was the only defendant; (2) First American’s policy was to record all outbound calls; (3) the outbound calls were not proceeded by an automated warning that the call would be recorded; and (4) prior to 2009, First American did not have a policy requiring its sales persons to give a verbal warning that the call would be recorded.  The trial court denied the motion finding, among other things, that individual issues predominated.  The trial court also rejected Plaintiff’s contention that the objective reasonableness of each plaintiff’s expectations could be assessed by First American’s uniform call recording procedures.  Id. at *6.

The Court of Appeal Affirms Denial of Class Certification

On February 21, 2014, the California Court of Appeal Second Appellate District, addressing only the community of interest issue, affirmed.  The Court of Appeal explained that a communication is “confidential” for purposes of Section 632 if the party has an objectively reasonable expectation that the conversation is not being overheard or recorded.  Accordingly, in order to establish that an outbound First American call was subject to Section 632, Plaintiff would need to prove the objective reasonableness of her expectation that the call would not be recorded and the objective reasonableness of each putative class members’ expectations of the same.  This required individualized proof of (1) the length of the customer relationship, (2) the plaintiffs’ prior experiences with calls to or from the defendant including the number of calls and whether or not those calls included a recording/monitoring disclaimer, and (3) the plaintiffs’ prior experiences with other companies wherein they were provided the recording/monitoring disclaimer.  Such individualized inquiry precluded the certification of Plaintiff’s class claims especially considering her admissions regarding inbound calls to First American and calls from other businesses wherein the recording/monitoring disclaimer was provided.    Id. at *14-15.

Significance

In recent years, plaintiffs’ lawyers have used, and, arguably, abused, section 632 (and similar state and federal statutes), bringing harrowing class cases against corporations, then demanding large settlements for quick resolution.  The First American decision should hopefully limit the number of Section 632 class action claims filed in the future, and provides strong support for the denial of pending cases seeking class certification.  First American also provides a strong framework for mounting early dispositive challenges to cases brought under Section 632, and similar call recording statutes.

Summary

Following the trial of a tobacco false advertising case dating back to 1997, a California court found that, although the defendant misrepresented to consumers the health benefits of its Marlboro Lights cigarettes, the Plaintiffs were entitled to no relief as they failed to prove entitlement to any of the limited remedies available under California’s Unfair Competition Law.

The court in Brown v. The American Tobacco Co., Inc., et al., Case No. 711400 (San Diego Superior Court Sept. 24, 2013) emphasized and underscored that restitution under California  law does not allow plaintiffs to recover “benefit of the bargain damages.”  Brown, at 11.  Instead, restitution reimburses consumers only for the difference between the value paid and the actual value of the product received.  Id.  Plaintiffs failed to show their entitlement to restitution under California law because, among other reasons, their proffered evidence improperly focused on consumers’ perceived value of the misrepresented health attributes without considering the actual market value of the entire product absent the misrepresented attribute, i.e., the product plaintiffs received.   Id.

The court held that the evidence showed the price paid for Marlboro Lights cigarettes was not in excess of the actual market value of the product plaintiffs received (without any health benefit).  Id. at 16-17.  Thus, the restitution value was zero.  Id. at 17.  The court emphasized that:  (1) consumer purchases of Marlboro Lights did not substantially change relative to Marlboro Reds despite significant corrective actions taken by the defendant to communicate to consumers that Marlboro Lights offered no health benefits compared to Marlboro Reds; and (2) Marlboro Lights and Marlboro Reds sold for the same price during the time period of the defendant’s corrective actions.  Id. at 16-17. 

The court also found that plaintiffs were not entitled to injunctive relief.  Id. at 18-21.  Specfically, the court held that: (1) plaintiffs presented no specific evidence concerning injunctive relief; (2) it is unlikely that the misrepresentations will recur due to defendant’s marketing changes, a federal statute, and an injunction in a different case; (3) injunctive relief would be redundant because information plaintiffs desire to provide consumers has already been disseminated; (4) tobacco advertising and packaging is preempted; and (5) plaintiffs waived injunctive relief in the Master Settlement Agreement reached with numerous state attorneys general.  Id

Significance

The Brown decision illustrates and reinforces the structure of California’s UCL.  While the UCL broadly proscribes a wide swath of conduct, the remedies available are limited.  The decision also serves as a reminder to businesses that defense of UCL actions should focus on both liability and the plaintiffs’ entitlement to available remedies, or the lack thereof.

Even assuming a product’s attributes have been misrepresented to consumers, to obtain monetary relief in the form of restitution plaintiffs must still show that they paid more than the actual market value of the product they received without the misrepresented attribute.  As shown in Brown, this will undoubtedly be difficult if not impossible for plaintiffs where the defendant can show that:  (1) the challenged product sells for the same price as other products without the misrepresented attribute; and (2) consumers did not alter their behavior following any change in advertising as to the allegedly misrepresented attribute.

Businesses should also consider the applicable law governing a particular case.  State consumer protection laws and the law of restitution often vary state to state.  The court in fact noted that plaintiffs’ expert improperly relied on the same form of analysis in a case governed by Missouri law where, the court stated, unlike California, “benefit of the bargain” damages applied.  Id. at 11. 

“Shakedown Suits”

Although California’s passage of Proposition 64 made it more difficult for the plaintiffs’ bar to bring “shakedown suits” against the business community, we are witnessing a flood of false advertising class actions brought (or, more often, threatened) against consumer product manufacturers and retailers, who typically have no arbitration rights.  While some lawsuits are immediately filed, many plaintiffs’ firms serve demand letters under the California Consumers Legal Remedies Act (“CLRA”) threatening class actions that, historically, have been difficult to resolve expeditiously given their fact-intensive nature.  Facing the cost of defending such claims, many companies accept pre-filing offers to settle on an individual basis for purely economic reasons.  On September 25, 2013, however, the California Court of Appeal threw a lifeline to companies that refuse to pay such protection money.

The Court’s Opinion

In Simpson v. Kroger Corp., No. B242405, 2013 Cal. App. LEXIS 769, the complaint alleged that a “spreadable butter” product, which consists of butter mixed with canola or olive oil, was mislabeled and falsely marketed as “butter.”  On behalf of a putative class, the plaintiff alleged purported claims for unfair competition in violation of California Business and Professions Code Section 17200, false advertising in violation of California Business and Professions Code Section 17500, and violation of the CLRA.  After reviewing the packaging, which listed the product’s ingredients and otherwise disclosed what the product was, the trial court sustained a demurrer without leave to amend, finding that a reasonable consumer was not likely to be deceived.  Citing Day v. AT&T Corp., 63 Cal. App. 4th 325, 333, 74 Cal. Rptr. 2d 55 (1998), the Court of Appeal affirmed, confirming that courts “may be able to say as matter of law that contrary to the complaint’s allegations, members of the public were not likely to be deceived or misled . . . by packaging material.”

Implications

Although Simpson certainly does not guarantee the dismissal of every false advertising claim, it provides a potential early exit strategy at the pleading stage where it is clear from the factual circumstances that no reasonable consumer could have been misled.  It also reiterates the importance for companies to consider class action risk with respect to all decisions related to product labeling and advertising.