Damages by any other name: UCL ‘restitution’ models

Every California litigator knows that you can only recover restitution or injunctive relief, not damages, under California's Unfair Competition Law, commonly known as the UCL. Business and Professions Code Section 17200 et seq.; Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1148 (2003). But what does this mean?

While California courts have generally defined restitution as the difference between what was paid and the value received by a plaintiff, recently two district courts reexamined what types of recovery models are permissible under the UCL and reached diametrically opposite conclusions.

In Spann v. J.C. Penney Corp., 12-0215 (C.D. Cal. Mar. 23, 2015), the Central District held that recovery models providing for a full refund, payment of a promised discount, or disgorgement of defendants' profits are all permissible forms of restitution under the UCL. A year later, the Central District, in Chowning v. Kohl's Dep't Stores, Inc., 15-08673 (C.D. Cal. Mar. 15, 2016), expressly rejected the reasoning of Spann, finding that such models seek damages, not restitution, and are not permitted.

Spann was not appealed, but Chowning is currently pending before the 9th U.S. Circuit Court of Appeals, and in the coming months is likely to resolve whether the models approved in Spann are viable in federal actions brought under California's UCL. Three alternatives to the traditional price-to-value model are likely to be addressed by the Chowning panel: the "full-refund model," the "benefit-of-the-bargain model" and the "disgorgement-of-profits model."

Price-to-Value Model

Under the price-to-value model -- aka the Vioxx standard -- restitution is the difference between what the plaintiff paid to the defendant and the value received by the plaintiff. See In re Vioxx Class Cases, 180 Cal. App. 4th 116, 130-31 (2009). This model is the most common method of calculating restitution. See Russell v. Kohl's Dep't Stores, Inc., 15-1143 (C.D. Cal. Oct. 6, 2015).

Because restitution is not available under the price-to-value model where the value received was equal to the price paid (even if the value was not what was bargained for), plaintiffs have increasingly advocated for different models.

Full-Refund Model

The full-refund model seeks a return of all amounts paid to the defendant for the product or service purchased by the plaintiff. This model has been consistently rejected by the California Courts of Appeal where the plaintiff received a product or service that, at least arguably, had some value. See, e.g., In re Tobacco Cases II, 240 Cal. App. 4th 779, 791-802 (2015).

Consistent with California appellate authority, most federal cases have rejected the full-refund model out of hand, often at the class certification stage. See, e.g., In re POM Wonderful LLC, 10-02199 (C.D. Cal. Mar. 25, 2014); Werdebaugh v. Blue Diamond Growers, 12-02724 (N.D. Cal. Dec. 15, 2014).

Spann, which approved a full-refund model despite the fact that plaintiff obtained clothing of value in exchange for her payment, is an outlier against this weight of authority. Potentially adding to the confusion, this fall the 9th Circuit recertified a class under a full-refund model where the plaintiff put forward unspecified "evidence" that the dietary supplement at issue was "valueless." Lambert v. Nutraceutical Corp., 870 F.3d 1170, 1183 (9th Cir. 2017); see also Makaeff v. Trump Univ., LLC, 309 F.R.D. 631, 637-38 (S.D. Cal. 2015) (district court certified a UCL class action based on a full-refund model where plaintiff alleged she obtained no value from the services).

In Lambert, the 9th Circuit relied on only a single Federal Trade Commission case (where damages are available) that did not involve UCL claims, FTC v. Figgie Int'l, Inc., 994 F.2d 595, 606 (9th Cir. 1993). It did not address the many district court decisions holding that full-refund models are inappropriate in UCL consumable product cases, and did not distinguish or otherwise address Tobacco II, where the California Court of Appeal rejected the full-refund model because it was not "plausible" that purchasers of cigarettes -- a product that literally kills its users -- received no benefit from their purchase. The court also did not address its own (albeit unpublished) recent decision in Brazil v. Dole Packaged Foods, LLC, 660 F. App'x 531, 534 (9th Cir. 2016), where it confirmed that the "district court correctly limited [recovery under the UCL] to the difference between the prices customers paid and the value of [what they] bought -- in other words, the 'price premium' attributable [to the deceptive label]."

It is possible that the Lambert court simply could not envision any consumer value in the type of product at issue there -- a purported aphrodisiac dietary supplement which the Food and Drug Administration had not approved -- or it may signal that a full-refund model may sometimes be accepted at the class certification stage. In any case, the Chowning appeal presents an opportunity for the 9th Circuit to reconcile Spann and Lambert with California authorities which hold that a full-refund is unavailable where a plaintiff received some value, even if that value was not what was bargained for.

Benefit-of-the-Bargain Model

In Spann, the court approved this model, where restitution was defined as the difference between the amounts that the plaintiff actually paid to the defendant and the amount the plaintiff would have paid had the defendant "advertised a truthful discount from the real 'regular' price." This theory was rejected by the district court in Chowning as "more akin to expectation damages than restitution," but the Chowning appellants now rely on Spann, and to a lesser extent two 9th Circuit standing cases, Pulaski & Middleman, LLC v. Google, Inc., 802 F.3d 979 (9th Cir. 2015), and Hinojos v. Kohl's Corp., 718 F.3d 1098 (9th Cir. 2013), arguing that this is an appropriate UCL remedies model.

Subsequent to Spann, the California Court of Appeal rejected an analogous benefit-of-the-bargain model in Tobacco II. There, the court explained that since a UCL plaintiff is only entitled to the "excess" paid, evidence of what a plaintiff would have done if presented with a hypothetical alternative cannot establish that the plaintiff did not (in the real world) get what they paid for.

Disgorgement-of-Profits Model

With the exception of Spann, a model that requires a defendant to simply "disgorge" all profits has been nearly universally rejected as a measure of UCL restitution. This makes sense. In Korea Supply, the California Supreme Court expressly rejected the disgorgement of profits as a remedy under the UCL: "We hold that nonrestitutionary disgorgement of profits is not an available remedy in an individual action under the UCL." In reaching this ruling, among other things, the court noted an absence of statutory authority to award profits under the UCL, and also explained that the disgorgement of profits "resembles a claim for damages, something that is not permitted under the UCL."

Despite this authority, the Chowning appellants continue to argue for a disgorgement-of-profits model, citing to Spann and a handful of other unpublished district court opinions.

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The models approved in Spann and now regularly advocated (and sometimes adopted) in federal courts, have been considered, and rejected, by California courts and most district courts. Chowning provides an opportunity for the 9th Circuit to end the confusion and speak clearly on this issue. Without such direction, it is likely that district courts will continue to grapple with the line between where UCL restitution ends and damages begin.