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3 February 2011

California Supreme Court Holds That Diminished Subjective Value Satisfies Proposition 64 Standing Limitations For Unfair Competition and False Advertising Actions

The California Supreme Court has held that consumers who allege that their subjective motivation for purchasing a product or service was affected by a deceptive label or advertising — whether or not the alleged misrepresentation affected the market value of the product — have standing to sue under California’s Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et seq., and the closely related False Advertising Law (FAL), id. § 17500 et seq. The decision in Kwikset Corp. v. Superior Court of Orange County (Benson), No. S171845, 2011 WL 240278 (Cal. Jan. 27, 2011), further dilutes the standing limitations imposed by Proposition 64, which requires private plaintiffs to have “lost money or property” in order to sue under the UCL and FAL.

Although (for unique procedural reasons) Kwikset is not a class action, the decision is likely to deepen the disarray in the lower courts over UCL and FAL class certification in the wake of the Tobacco II Cases, 46 Cal.4th 298 (2009), which held that the Proposition 64 standing requirements apply only to named plaintiffs, not absent class members. (For more information about Tobacco II, please see this article by Mayer Brown lawyers.)

Plaintiff James Benson filed an action on behalf of the “general public” under now-repealed provisions of the UCL and FAL, alleging that the “Made in USA” labels on Kwikset Corporation’s locksets were deceptive because the locksets contained foreign-made parts. Benson won at trial. While the appeal from that judgment was pending, California voters enacted Proposition 64, which restricted standing under the UCL and FAL to private individuals who “ha[ve] suffered injury in fact and ha[ve] lost money or property as a result of” a challenged practice.

The court of appeal vacated the judgment but affirmed the determination on the merits, ordering that the judgment be reinstated on remand if Benson could demonstrate standing under the new standards. Benson amended his complaint to allege that he (and some newly added individual plaintiffs) would not have bought Kwikset locksets but for the “Made in the USA” label.

In response to the amended complaint, Kwikset argued that, because the plaintiffs did not allege that the locksets they purchased were overpriced or defective, they lacked standing under Proposition 64. That is, the frustration of the plaintiffs’ asserted patriotic desire to buy fully American-made products was insufficient in itself to demonstrate a loss of money or property. The trial court rejected Kwikset’s arguments, but the Court of Appeal reversed.

The California Supreme Court granted review and, by a 5-2 margin, reinstated the claim. The court held that the plaintiffs had sufficiently pled injury-in-fact and loss of money or property by alleging that (i) they relied on the products’ labels, (ii) the labels contained a misrepresentation, and (iii) they would not have bought the product but for the misrepresentation.

Relying principally on ballot arguments rather than the text of the statute, the court interpreted Proposition 64 to require only that plaintiffs establish an “economic injury” that was caused by the challenged practice. The court held that the burden to allege an economic injury is minimal. Noting that the plaintiffs paid more for the locksets than they would have been willing to pay had they known the locksets contained foreign-made parts, the court determined that the plaintiffs had standing to sue. That is, plaintiffs do not need to allege that they purchased a product with diminished market value — that the product as represented could be sold at a higher price — so long as they allege that the alleged misrepresentation increased the product’s subjective value to them.

Rejecting three criteria identified in the Court of Appeal’s opinion, the California Supreme Court first excused plaintiffs from alleging any overcharge or functional defect. The court analogized the locksets to counterfeit Rolex watches, which might be the functional equivalent of a genuine Rolex, but are less valuable. Second, the court held that plaintiffs had not received the benefit of their bargain, because they alleged that they had bargained for locksets made in the USA but received locksets that were not. Third, the court held that plaintiffs could show standing to sue without showing that they were eligible for restitution, holding that the two inquiries are distinct.

In a dissenting opinion, Justice Chin observed that the majority had blurred the distinction between an “economic injury,” which is sufficient to state an injury-in-fact, with Proposition 64’s separate standing requirement of “lost money or property.” Justice Chin would have required plaintiffs to allege that their subjective preferences coincided with an objective price differential between mislabeled and correctly-labeled products. Finally, Justice Chin noted that, even if consumers who got what they paid for could not sue over the alleged deception, competitors who had lost sales as a result of the misrepresentation would have standing.

In light of Kwikset, businesses that are amenable to suit in California may have reason to be concerned about the revival of the “shakedown” lawsuits that Proposition 64 was intended to curb. Private plaintiffs will now argue that they can avoid dismissal under the UCL or FAL simply by alleging individual subjective reliance on an immaterial representation. Although a theory of diminished subjective value should make class certification difficult, plaintiffs’ class-action attorneys are certain to test the limits of Tobacco II and Kwikset together — both in federal and state court, though outcomes may vary depending upon the forum. Moreover, by separating the standing and restitution inquiries, the Kwikset decision appears to ease the path for UCL and FAL plaintiffs to seek only injunctive relief — and an award of attorneys fees.

For more information about Kwikset or other issues raised in this Legal Update, please contact Donald M. Falk at +1 650 331 2030, John Nadolenco at +1 213 229 5173, or Archis A. Parasharami at +1 202 263 3328.

Learn more about our Consumer Litigation & Class Actions and Supreme Court & Appellate practices.


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