United States: A Fair Proposition

In 2003, the Wall Street Journal labelled California The Shakedown State' because of the state's infamous unfair competition' law (UCL). In November 2004, California voters overwhelmingly passed Proposition 64, implementing important procedural changes to that statute. As a result, the Wall Street Journal's moniker no longer fits the state quite so well, and companies that do business in California are pleased with the change in the law.

Although California's UCL always provided a remedy to businesses hurt by the unfair practices of their competitors, problems arose because the statute permitted consumer lawsuits without imposing any standing requirement. As a result, the UCL empowered a plaintiff's lawyers and reached conduct far removed from the original business competitor paradigm.

Given the absence of a standing requirement, UCL plaintiffs could be consumers, or even persons who had no contact with, let alone injury from, the very business practice their lawsuit criticised. In the latter circumstance, unaffected plaintiffs would simply file suit as a representative' of the general public, even though the UCL did not require such plaintiffs to satisfy the usual procedural protections associated with traditional representative class actions.

The type of unfair' or misleading' conduct potentially within the purview of the UCL is broad. The statute provides a remedy for illegal, fraudulent or unfair' business practices as well as deceptive advertising. But illegal' practices under the UCL may include even minor or technical violations of regulations, even where no consumer is actually harmed. Fraud' is proven under the UCL using a standard far more lenient than that for common law fraud, and some have complained that unfair' under the UCL is a term that has never been clearly defined. As for deceptive advertising, under the UCL a plaintiff could prevail if the advertisement was found to be likely to deceive', even if no consumer was ever actually deceived.

Attorneys' fees for prevailing plaintiffs have also driven use of the statute. Although the UCL itself has never directly authorised prevailing parties to recover their attorneys' fees, and such attorneys' fee awards are uncommon in the US, UCL plaintiffs often assert that they are owed substantial fees pursuant to California's complimentary private attorney general' statute, on the theory that such lawsuits provide a public benefit.

The UCL's lack of any standing requirement, combined with its malleable standard for the business practices that it covered and the prospect of an attorneys' fee recovery for successful plaintiffs, made the statute a potent weapon in the hands of California's plaintiff's bar and a source of irritation for many in the business community. Employees and friends of plaintiff's lawyers acted as plaintiffs in UCL cases, despite never having purchased the defendant business' products or services. Such aspects of UCL litigation led then-California's Supreme Court Justice Janice Brown to characterise UCL cases as "a means of generating attorneys' fees without any corresponding benefit."

By 2003, even some California laypersons took note of the UCL following publicity about the Trevor Law Group. According to media reports, the Trevor Law Group created an organisation to act as a plaintiff, and filed UCL cases against (or sent letters demanding pre-suit settlement of UCL claims to) numerous automobile repair shops and other small businesses. These UCL claims were premised on allegedly improper business practices, such as the failure to sign repair estimates, first listed on government agency websites as notices of possible violations that the agencies themselves had investigated or resolved.

In fact, according to state bar allegations, the cases were filed primarily to extort settlements from vulnerable small businesses.

Despite some public outcry over UCL lawsuit abuse, California's legislature failed to reform the statute. Since Californian voters can directly legislate through the state's voter initiative, amendments to the UCL's standing and representative action provisions were drafted and became known as Proposition 64.

In November 2004, California voters over-whelmingly passed Proposition 64, implementing significant procedural changes to the UCL. Proposition 64's amendments now require that UCL plaintiffs demonstrate that they have suffered an actual injury and lost money or property, and that the injury and loss is "a result of" the business practice criticised in their lawsuit. In addition, UCL plaintiffs must now either sue on their own behalf only, or demonstrate that they can meet traditional representative class action requirements.

The passage of Proposition 64 had an immediate impact on newly-filed lawsuits, and anecdotal reports in the business community suggest that far fewer UCL lawsuits have been filed since November 2004. However, one of the most significant legal questions currently facing California's courts is what to do with UCL lawsuits filed before Proposition 64 imposed its new standing and representative action requirements.

This dispute may turn on whether the court views Proposition 64's amendments essentially as the repeal of statutory rights - the right of unaffected plaintiffs to file suit without demonstrating standing - changes that take effect immediately and apply even to already-pending lawsuits. Alternatively, the dispute may turn on whether Proposition 64's amendments are at heart mere procedural changes - which take immediate effect and apply even to lawsuits already pending in the courts - or whether they alter the substantive rights of the parties and thus apply only to newly-filed lawsuits because of due process concerns. The California Supreme Court has agreed to hear these issues later this year.

The financial stakes in these pending UCL actions can be quite high. For example, in once case, Benson v Kwikset Corp, a UCL lawsuit brought on behalf of the general public, complained that the defendant manufacturer advertised its American-assembled locksets as "Made in USA" when some component pins and screws had actually been made elsewhere. The trial court issued an injunction against the defendant - and awarded the plaintiff $3m (£1.65m) for his attorney fees.

Although the plaintiff initially prevailed in the trial court and on appeal, Proposition 64 passed before the appellate judgment was final, and the intermediate appellate court took another look.

It decided that Proposition 64's new requirements applied to the lawsuit, that the plaintiff had not satisfied those requirements, and that the judgment for plaintiff had to be reversed as a result. The California Supreme Court has taken up these Proposition 64 issues in Californians for Disability Rights v Mervyns. The Court is expected to answer the question of whether Proposition 64 's new standing requirements apply to lawsuits pending when the initiative passed. If the court concludes that Proposition 64's amendments apply to lawsuits filed before the initiative passed, in Branick v Downey Savings and Loan Ass'n, the Court is expected to resolve the related question of whether new plaintiffs who do meet the standing requirements can replace existing plaintiffs who do not, or whether such cases must be dismissed.

Although those involved in UCL litigation hope for a quick resolution of these issues, there may be quite a wait - at least several more months and possibly more than a year before the Court hands down its final decision.

Regardless of whether Proposition 64's reforms are held to apply to pending lawsuits or not, however, the initiative has already stemmed the tide of UCL litigation in the state. The combination of federal class action reform, passed by Congress in February 2005, and the elimination of no injury' UCL lawsuits has levelled the playing field in consumer-based lawsuits in California.

This article is presented for informational purposes only and is not intended to constitute legal advice.