Standing Straight

A recent decision by the California Supreme Court has resolved an unsettled issue concerning the standing requirements for absent class members in lawsuits alleging violations of California's Unfair Competition Law, codified at California Business and Professions Code Section 17200 et seq. Prior to 2004, a representative action for relief under the Unfair Competition Law could be maintained by any person acting for the general public, irrespective of whether he or she had been personally injured by the alleged misconduct. This lenient standing requirement led to a rash of lawsuits brought by plaintiffs who had no prior business dealings with a defendant but nonetheless sought to represent a class of people who allegedly had been injured by the defendant's unfair business practices.

In November 2004, California voters passed Proposition 64, which amended the standing requirements to assert a private cause of action under the Unfair Competition Law. Specifically, Prop. 64 amended the Unfair Competition Law to provide that a person may pursue representative claims or relief on behalf of others only if the claimant both complies with Section 382 of the California Code of Civil Procedure (the authorizing statute for class suits in California) and "has suffered injury in fact and has lost money or property as a result of the unfair competition." California Business and Professions Code Section 17204 (as amended by Prop. 64). In other words, post-Prop. 64, a plaintiff seeking to represent a class of people asserting an Unfair Competition Law claim must plead and prove that he or she was personally injured by the defendants' alleged misconduct. While it is clear that this heightened standing requirement applies to a representative plaintiff, the question of whether the requirement also applies to each absent class member was raised and answered by the California Supreme Court in In re Tobacco II Cases, 2009 DJDAR 7059.

In Tobacco II, plaintiffs brought a statewide class action lawsuit against a number of tobacco industry defendants alleging that they had engaged in a decades-long public disinformation strategy concerning the health effects of cigarette smoking and had over the years misrepresented that they were dedicated to the pursuit and dissemination of scientific truth regarding smoking and health. Prior to the passage of Prop. 64, the trial court certified a class defined as "All people who at the time they were residents of California, smoked in California one or more cigarettes between June 10, 1993 and April 23, 2001, and who were exposed to the defendants' marketing and advertising activities in California." Following the passage of Prop. 64, the defendants moved to decertify the class, arguing that each class member was now required to show an injury in fact, consisting of lost money or property, as a result of the alleged unfair competition. The trial court granted the defendants' decertification motion, finding that individual issues would predominate because the language of Prop. 64 required, for standing purposes, a showing of causation as to each class member's injury in fact. The California Court of Appeal affirmed.

On review, the California Supreme Court reversed the trial court's order decertifying the class. The court found that neither the plain language nor ballot materials supported the trial court's conclusion that the measure's heightened standing requirements applied to absent class members. Looking to federal law for guidance, the court further noted that the rules governing class certification generally do not require unnamed class members to establish standing, but rather assess standing solely with respect to class representatives. In addition, the court noted that Prop. 64 did not amend the Unfair Competition Law's remedies provision, which provides for injunctive relief and restitution "as may be necessary to restore to any person in interest any money or property ... which may have been acquired by means of [the] unfair competition." California Business and Professions Code 17203 (emphasis added). The court reasoned that a finding that absent class members were required to show on an individualized basis that they have lost money or property as a result of unfair competition would conflict with the broader "may have been acquired" language left intact by Prop. 64 and implicitly overrule prior decisions that found relief available under the Unfair Competition Law without individualized proof of deception, reliance and injury.

While conceding that the text of Prop. 64, which refers to a "claimant," does not apply the standing requirements to unnamed class members, the defendants argued that class action principles under Section 382 of the California Code of Civil Procedure require each absent class member to have standing to bring an action individually in his or her own right and that the aggregation of individual claims into a class action cannot be used to transform an otherwise meritless underlying claim. The court rejected the defendants' argument, finding that the cases cited by them had decided whether a class was ascertainable in the first place, not whether unnamed members of a certified class must demonstrate standing. Noting that the trial court had initially found that the class as defined was ascertainable, the California Supreme Court concluded that Prop. 64 was not intended to, and does not, impose the heightened standing requirements on absent class members in a Unfair Competition Law class action where class requirements have otherwise been found to exist. As a result, the court found it was error for the trial court to decertify the class.

The court also interpreted the meaning of Prop. 64's requirement that a private enforcement action under the Unfair Competition Law may only be brought by a person who has suffered injury in fact and has lost money or property "as a result of" unfair competition. After first noting that the phrase "as a result of" indicates that there must be a causal connection between the injury and the defendant's conduct, the court discussed the type of causation that must be demonstrated. In doing so, it was careful to point out that while the Unfair Competition Law prohibits many types of unlawful or unfair business practices, its discussion of causation was limited to Unfair Competition Law actions based on a fraud theory involving false advertising and misrepresentations to consumers. In the context of plaintiffs prosecuting a private enforcement action under the Unfair Competition Law's fraud prong, the court concluded that Prop. 64 imposes an actual reliance requirement. This requires a plaintiff to allege that the defendant's misrepresentations were an immediate cause of the injury-sustaining conduct; the plaintiff is not required, however, to allege that those misrepresentations were the sole or even decisive cause of the injury-producing conduct. According to the court, it is sufficient if the false advertising or misrepresentation has played a substantial part, and so has been a substantial factor, in influencing the plaintiff's decision. In addition, a plaintiff who alleges exposure to a long-term, extensive advertising campaign is not required to plead and prove individualized reliance on specific misrepresentations or false statements.

In Tobacco II, the trial court had found that not even the named class representatives could satisfy Prop. 64's heightened standing requirement, but did not elaborate on the basis for this conclusion. Accordingly, in reversing the trial court's order decertifying the class, the California Supreme Court remanded the case with instructions to determine whether the named class representatives can establish standing as now defined by the court. Notably, the court further stated that if the named plaintiffs were found to not have standing, the proper procedure would not be to decertify the class but rather to grant leave to amend to redefine the class or add a new class representative.

Following the Tobacco II decision, it is now settled that only the named plaintiffs asserting a representative Unfair Competition Law claim, and not all absent class members, are required to meet Prop. 64's heightened standing requirement. It is now also clear that to meet this requirement in the context of a private action brought under the Unfair Competition Law's fraud prong, class representatives must plead and prove actual reliance on the alleged misstatements. But the decision in Tobacco II gives rise to a number of open questions. For example, to support its finding that a plaintiff is not required to plead and prove individualized reliance on specific representations in a case involving "an extensive and long-term advertising campaign," the California Supreme Court relied solely on the prior decisions of other cases involving decades-long advertising campaigns of tobacco companies. It remains an open question whether California courts will extend this principle from Tobacco II beyond the tobacco industry and, if so, what amount of advertising constitutes an "extensive and long-term advertising campaign."

Also, the California Supreme Court uncritically accepted the trial court's determination that the class as defined was ascertainable and relied on that determination to support its reasoning that the trial court erred by decertifying the class. This raises the question of what constitutes "exposure" to marketing and advertising activities. Is it sufficient that consumers who purchased the product in question (here, cigarettes) live in a market where the allegedly deceptive advertisements aired on television or radio? If the advertisements were print ads, can exposure be limited to subscribers of the newspaper or magazine, or does it encompass the entire target market? Will the determination of who was exposed to the advertisements turn on expert testimony and survey evidence? Since it now has been resolved that absent class members need not demonstrate individualized standing under California's Unfair Competition Law, these and similar questions concerning the ascertainability of a Unfair Competition Law class are likely to take on added importance and shape the litigation landscape in California in the coming years.