Reliance, Causation and Injury in Business and Professions Code Section 17200 and 17500 Cases after Proposition 64

Copyright ©2008.  Reprinted with permission from the Los Angeles County Bar Association.

The California Supreme Court's decision in Californians for Disability Rights v. Mervyn's, LLC,[i] is often quoted for its observation that Proposition 64:

[L]eft entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted. Nor does the measure eliminate any right to recover. Now, as before, no one may recover damages under the UCL...and now, as before, a private person may recover restitution only of those profits that the defendant has unfairly obtained from such person or in which such person has an ownership interest.

Despite this declaratory language, however, the quotation actually marks a line where the absence of change in the wake of Proposition 64 stops and post-Proposition 64 practice under the Unfair Competition Law begins. As the California Court of Appeal noted recently in Medina v. Safe-Guard Products, International, Inc., Proposition 64 most definitely created a standing requirement as well as required plaintiffs to prove injury and loss.[2]

Although the UCL's name and origins are rooted in antitrust law, a cause of action for a violation of the UCL (often referred to as 17200 or B&P 17200[3]) is commonly pled in claims that the UCL drafters could not likely have imagined. The explosion of UCL cases may owe, in part, to the notoriety the law received for the abuses that ultimately led to the passage of Proposition 64. Nevertheless, the ubiquity of UCL claims may also be due to the fear instilled in lawyers that if they do not plead a UCL violation they may fail to extend the statute of limitations on a variety of other claims.[4]

Proposition 64--approved by California's voters on November 2, 2004--requires private plaintiffs to prove they have suffered "an injury in fact and [have] lost money or property as a result of such unfair competition."[5] Proposition 64 also amended Business and Professions Code Section 17203 so that private plaintiffs who bring representative actions must comply with the requirements of Code of Civil Procedure Section 382, California's class action statute.[6] While Proposition 64 may have clarified the voters' intent with respect to the use (and abuse) of the UCL, the drafters of Proposition 64 (and the voters) left several questions unanswered:

• Must UCL plaintiffs present proof of their reliance on the unfair, fraudulent, or unlawful act or practice as well as proof of causation?
• How "substantial" must a plaintiff's injury and loss of money or property be in order to have standing to sue under the UCL?
• How do the answers to the preceding two questions affect a UCL plaintiff's ability to obtain certification of a class action?

Since the passage of Proposition 64, courts have addressed some of these questions. Answers are also evolving by analogy to other areas, particularly in the context of class actions. Given the omnipresence of Section 17200 in complex business litigation and class actions, these issues will undoubtedly receive increasing attention in the coming years.

The Reliance-Causation Continuum

[In In re Tobacco II Cases, (S147345) the California Supreme Court will determine whether every member of a proposed class is required to show injury in fact and reliance on the manufacturer's representations or whether it is enough to show only the class representative's injury and reliance. In a 2007 decision,[7] the supreme court did not decide the issue, ruling the claim was preempted in part.] Two other cases now pending before the California Supreme Court present very similar issues to those not resolved by Tobacco II: McAdams v. Monier[8] and Pfizer, Inc. v. Superior Court (Galfano).[9] Briefing was deferred in both cases pending the disposition of Tobacco II. The additional time allowed the issues of reliance and causation to develop in the lower appellate courts and in the federal district courts.

Several recent cases have held that the language "as a result of" in Section 17204 imposes a causation requirement before a plaintiff has standing to sue under the UCL. Laster v. T-Mobile USA, Inc.,[10] epitomizes the analysis given to the issue. The Laster court held that because the representative plaintiffs failed to allege in their complaint that any of them "saw, read, or in any way relied on" the defendant's advertisements in entering into the transactions at issue, the plaintiffs failed to establish that their injuries were caused by the allegedly false and misleading advertisements. According to the court:

The language of the UCL, as amended by Proposition 64, makes clear that a showing of causation is required as to each representative plaintiff....Because Plaintiffs fail to allege they actually relied on false or misleading advertisements, they fail to adequately allege causation as required by Proposition 64. Thus...Plaintiffs lack standing to bring their UCL and [false advertising] claims.[11]

Similarly, in Cattie v. Wal-Mart Stores, Inc.,[12] the district court concluded that omitting a reliance requirement for standing to bring a UCL claim would "undermine Proposition 64's reform purposes." The Cattie court looked at one of the purposes of Proposition 64--foreclosing the ability of an "‘unaffected plaintiff,' which was often the sham creation of attorneys," to bring frivolous lawsuits with no public benefit or accountability to the public. The court stated, "An attorney who became aware of false advertising but who had no client who was harmed by it could easily ‘create' a client with standing to sue by directing a willing party who was not deceived by the advertising to make a purchase. Thus, omitting a ‘reliance' requirement would blunt Proposition 64's intended reforms." The Cattie court dismissed the UCL claim at issue because the plaintiff could not allege reliance or causation.[13]

Although Cattie and Laster were both federal cases, recently the California Court of Appeal in Hall v. Time, Inc.,[14] agreed with and followed those cases. The Hall court held that because the plaintiff failed to allege that Time's allegedly unfair competition caused him to lose money or property, he lacked standing to pursue his UCL claim.[15] The plaintiff had alleged that although Time advertised a "free preview period," Time sent invoices before the free preview period expired in order to obtain immediate payment from consumers. The plaintiff kept and paid for a Time book long after the free trial period ended and did not complain of its quality or cost. As a result, the court held that the plaintiff did not suffer an injury in fact or lose money or property as a result of the alleged unfair practices.[16]

In reaching its decision, the Hall court distinguished the one oft-cited case that has held that Proposition 64 did not create a causation or reliance requirement: Anunziato v. eMachines, Inc.[17] The court in Anunziato held that a plaintiff does not have to show actual reliance on the alleged misrepresentation to have standing to pursue a fraud-based claim under the UCL.[18] Instead, the court envisioned several scenarios in which the imposition of a causation or reliance requirement would foreclose UCL actions to would-be plaintiffs who actually suffered an injury.[19] The decision in Anunziato has been under attack ever since its issuance.

Hall distinguishes Anunziato on other grounds, but the court of appeal in Pfizer took aim squarely at Anunziato's central premise. The Pfizer court held that to satisfy Proposition 64's injury-in-fact requirement in a false advertising case under the UCL or the False Advertising Law,[20] the representative plaintiff and each putative class member must plead and prove that he or she saw, read, and relied upon the advertising at issue in purchasing the defendant's product, Listerine.[21] The Pfizer court observed that the Anunziato court improperly "substituted its judgment for that of the voters and based its decision on the perceived ill effects a ‘reliance' requirement would have in hypothetical fact situations."[22]

By contrast, McAdams held that an inference of reliance can support class certification, although each class member would later need to show that they were exposed to the allegedly false or deceptive representation. The review by the supreme court of Pfizer and McAdams is being closely watched because the cases do not involve the preemption issue in Tobacco II.

The causation requirement has also been the death knell for UCL claims when the plaintiff attempted to manufacture standing, and, despite the plaintiff's ruse, a legally cognizable injury was absent. For example, in Buckland v. Threshold Enterprises, LTD, the plaintiff - the putative class representative--purchased a skin cream "solely to facilitate her litigation...."[23] Although couched in the language of injury, the court effectively concluded that the purchase was not caused by the defendant's deception. Instead, the plaintiff was forced to claim that the purchase was an injury because it constituted a litigation cost. Still, the court rejected the theory, holding that the litigation cost of her purchase "d[id] not constitute the requisite injury in fact; to hold otherwise would gut the ‘injury in fact' requirement [of Proposition 64]."[24]

The court of appeal in Medina confirmed the centrality of causation but did so nominally in the language of injury. Medina brought a UCL action seeking a return of the amount he paid for a vehicle service contract; he alleged that the contract was void because the contract was in reality an insurance contract, and the defendant was not licensed to sell insurance in California. However, Safe-Guard never denied any claim made by Medina under the contract or gave him inferior products or service.[25] Despite the plaintiff's desire to void the contract and obtain a return of the fees initially paid for it, the Medina court concluded that "there is no statutory basis, at least in terms of the Proposition 64 amendment, to differentiate UCL actions based on the subjective motivation of the plaintiff; the differentiation is between instances where there is actual loss of property versus no such loss."[26] The court concluded that because there was no allegation that Medina got less than he was entitled to under the contract, "[h]e hasn't suffered any loss because of Safe-Guard's unlicensed status."[27]

In addition to the reasons explained in Buckland and Medina, due care in identifying the injury and analyzing causation is also necessary because of the UCL's "safe harbor." If the specific conduct causing the identified injury is permitted by express law, it cannot be unlawful, deceptive, or unfair under the UCL as a matter of law; compliance with express law provides immunity, or a safe harbor, from UCL liability.[28]

Actual and Substantial Injury

The language of Section 17204 requires a person who brings a UCL action to identify an injury and a loss. In many instances, the loss of money or property may also constitute an injury; in others, it may not. But because both must be shown, and as the plaintiffs in Buckland and Medina learned, the nature of the claimed injury takes on increasing importance.

The California Supreme Court suggested in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Company that "we may turn for guidance to the jurisprudence"[29] arising under Section 5 of the Federal Trade Commission Act in determining what is unfair under the UCL. The court of appeal in Camacho v. Automobile Club of Southern California pointed to this language in Cel-Tech when it reiterated that for a practice to be unfair, the injury must be shown to be "substantial."[30] The substantial injury requirement is not necessarily grafted on to the injury requirement for purposes of standing under Section 17204.[31] However, a practice that is only "theoretically unfair" because it does not cause injury cannot provide the basis for a UCL action.[32]

The distinction between an actual injury and a theoretical one is always driven by the facts of the case at issue. In Daugherty v. American Honda Motor Company, Inc.,[33] for example, the court held that a "failure to disclose a defect that might, or might not, shorten the effective life span of an automobile part that functions precisely as warranted throughout the term of its express warranty cannot be characterized as causing a substantial injury to consumers," and so is not actionable under the UCL.[34]

Distinguishing between actual and theoretical injury most commonly arises in the context of class certification, when courts make their decisions regarding whether the commonality of class members' claimed injuries is sufficient. For example, in Feinstein v. Firestone Tire and Rubber Company, the court recognized that if a significant portion of "the putative class members have no legally recognizable claim, the action necessarily metastasizes into millions of individual claims. That metastasis is fatal to a showing of predominance of common questions."[35] The Feinstein court found that "[t]hose class members whose tires had performed as warranted would have to be identified and eliminated from the action. Myriad questions would confront the survivors, including the manner in which the alleged breach of warranty manifested itself, and other possible causes of the problem encountered. This situation simply does not lend itself to class treatment."[36] In another analogous case, class treatment was refused because individual determinations were needed to assess whether misrepresentations or omissions about the health benefits of a dog treat actually injured the class members' dogs.[37]

Unfortunately, but perhaps not surprisingly, the courts have not clearly defined "substantial injury" as it relates to claims brought under the UCL. Some glimpse into its meaning may be derived, however, by looking at the term in three other contexts: 1) substantial factor causation, 2) substantial evidence, and 3) in contrast to "nominal" damages.

The tried and true standard of "but for" causation is adequate for most situations, "but it fails where liability would be avoided because a defendant's act or omission concurred with another cause and either cause alone would have been sufficient to bring about the injurious event."[38] In those situations, causation will be adequately shown when the defendant's conduct is a material element and a substantial factor in bringing about the result.[39]

For example, in asbestos-related personal injury actions, the standard for substantial factor causation is relatively broad. A wide range of factors can be considered to assess whether the inhalation of fibers from a particular product should be deemed a substantial factor in causing cancer.[40] To be substantial in this context, the cause must be more than negligible or theoretical.

Applied to the UCL, as long as a plaintiff actually lost money or property, the injury is not theoretical. Depending on the amount of the alleged loss in relation to the cost or value of the product or service, the act or practice that caused the loss may nevertheless be negligible, or immaterial, and thus insubstantial. Reading the statute in this manner likely satisfies the purpose of Proposition 64 and fulfills the reformative intent of California's voters.

Similarly, when a judgment is challenged for lack of sufficient evidence supporting the verdict, an appellate court is charged with reviewing the record as a whole to determine if "substantial evidence" exists to support the judgment.[41] Substantial evidence is evidence that "is reasonable, credible, and of solid value...."[42] Applying the standard of substantial evidence to the UCL may be difficult to assess in terms of dollars or loss of property, but the process actually is easier than it may appear at first, because the UCL provides only equitable remedies. Thus, parties must ask several questions: Is equity served by engaging in the litigation to right the claimed injury? Is doing so reasonable? Is the remedy sought of solid value?

Damages are not available in a UCL action.[43] However, in some other types of cases, nominal damages may be awarded when "a cause of action is proved but no substantial damage is shown."[44] When nominal damages are awarded, the amount must be trivial, such as $.01 or $1.[45] If nominal is the opposite of substantial, presumably the amount that would have been recoverable as actual damages--for which nominal damages take the place--must be even less.

Guidance is also provided by considering the difference between an actual injury and its opposite. That is, a plaintiff must show that he or she has suffered an actual injury in order to show that it is a substantial one. The California Supreme Court has taken several opportunities to characterize the concept of an actual injury in legal malpractice cases, but it has not yet done so under Section 17200.

In Adams v. Paul,[46] the supreme court reiterated its statement from decades earlier in Budd v. Nixen[47] that the mere breach of a duty causing "only nominal damages, speculative harm, or the threat of future harm--not yet realized--does not suffice." The claimed injury must be "manifest and palpable" and result in an actual loss or substantial impairment of a right or remedy.[48] In reaching these conclusions, the Adams court cited Walker v. Pacific Indemnity Company,[49] an insurance case involving a broker who negligently procured a $15,000 policy (instead of one for $50,000) for an insured on the losing side of a $100,000 judgment arising from an automobile accident. On appeal, the court held that the statute of limitations did not begin to run when the policy was negligently procured nor when the accident occurred. At that point, the insured had "no recoverable loss," as he "merely suffered an exposure to liability beyond his insurance coverage" but no actual injury.[50] Rather, the injury occurred when the judgment issued in excess of the amount of the policy actually but negligently procured.[51]

Based upon the principle that damages cannot be speculative or uncertain, the district court in Impress Communications v. Unumprovident Corporation similarly held, in the insurance context, that injury did not occur until benefits had been denied.[52] This analysis replicates the conclusion of Medina, in which the court of appeal held that for the purposes of the UCL, no injury had been suffered because the plaintiff had never had a claim denied or received inferior products or services under his service contract.

The California Legislature also has defined an "actual injury" in several statutes--some more illuminating for UCL analysis than others. For example, in criminalizing air pollution under the Health and Safety Code, an actual injury is one that "in the opinion of a licensed physician and surgeon, requires medical treatment involving more than a physical examination."[53] The term is more commonly used when an actual injury need not be shown, such as to obtain injunctive relief.[54] When the term is used for this purpose in the Business and Professions Code, the legislature has consistently distinguished between injury and damage, and it has distinguished between actual injury and "the threat thereof."[55]

Under common principles of statutory construction, the term "actual injury" most assuredly must mean something more than a threat of future injury. This interpretation is also necessary in a UCL analysis because plaintiffs who refuse to subject themselves to the allegedly unfair act or practice (for example, refusing to pay improper charges) cannot recover them as restitution.[56] When claimants acquire all to which they are entitled, nothing is taken from them that the UCL might help to restore.[57]

Read together, a "substantial injury" under the Business and Professions Code appears to be an actual (as opposed to threatened) and substantial (as opposed to nominal) impairment or loss of a right or remedy distinct from or duplicative of damage (i.e., the loss of money or property).

Class Action Fairness and the UCL

Increasingly, although with much debate, class actions with aggregated claims exceeding $5 million are being removed to federal court under the Class Action Fairness Act of 2005.[58] Long before the passage of Proposition 64, considerations of standing and injury prompted federal courts to deny (or reverse) certification on grounds of superiority, predominance, and typicality.[59] These considerations, in light of the Proposition 64 injury and causation requirements, have taken on a new dimension.

In assessing the superiority and manageability of a class action, a plaintiff "bears the burden of demonstrating ‘a suitable and realistic plan for trial of the class claims.'"[60] Even if it constitutes the superior alternative, a class action cannot be used to alter substantive rights.[61] As a result, the burden of proof must be satisfied with regard to each class member's claim as to liability and damages on an individual basis.[62] While the class mechanism provides a means to do so through common proof, that procedure does not supplant the need to prove that each putative class member must also have suffered an injury. Nor do subclasses evade this issue. Because "[s]tanding is a threshold matter central to [the court's] subject matter jurisdiction," when subgroups of putative class members have suffered no injury and have no standing, courts have found class definitions impermissibly overbroad and denied certification.[63] This is so even when a class action is superior, common issues exist or predominate, or the named plaintiff is typical of the class. Thus, in many cases, common causation and injury can be easily shown; in others, they cannot.

Identification of the injury and the mechanism of causation is also important because individual issues will likely predominate when the fact of injury (as opposed to the individual amount of the injury) cannot be established for every class member through common proof.[64] Before reaching the issue of individual amounts, "the putative class must first demonstrate economic loss on a common basis."[65] This is because "[e]ach class member must have standing to bring the suit in his own right."[66] As the court in Windham v. American Brands, Inc., explained:

[I]n cases where the fact of injury and damage breaks down in what may be characterized as virtually a mechanical task, capable of mathematical or formula calculation, the existence of individualized claims for damages seems to offer no barrier to class certification on grounds of manageability. On the other hand, where the issue of damages and impact does not lend itself to such a mechanical calculation, but requires separate mini-trial[s] of an overwhelming[ly] large number of individual claims, courts have found that the staggering problems of logistics thus created make the damage aspect of [the] case predominate, and render the case unmanageable as a class action.[67]

The superiority and manageability of a class action under the UCL will also depend greatly upon whether reliance must be proven on an individual basis or whether it can be inferred.[68] If the California Supreme Court permits an inference of reliance and causation, greater scrutiny regarding the other hurdles to class certification is inevitable.[69] This is also true for resolving trial issues to avoid a violation of due process. Indeed, fundamental fairness prohibits a trial of the claims of thousands (or hundreds of thousands) based upon the facts of just one or several. As the U.S. Court of Appeals explained in Broussard v. Meineke Discount Muffler Shops, Inc., "It is axiomatic that the procedural device of Rule 23 cannot be allowed to expand the substance of claims of class members."[70]

California law prohibits that result under other circumstances as well. Civil Code Section 3343(a) does not permit windfalls, and Civil Code Section 3358 prohibits them.[71] Moreover, "the amount of restitution awarded under the False Advertising and Unfair Competition Laws...must be supported by substantial evidence. Although a trial court has broad discretion under those statutes to grant equitable relief, that discretion is not ‘unlimited' and does not extend beyond the boundaries of the parties' evidentiary showing."[72]

Thus federal "courts considering class certification must rigorously apply the requirements of Rule 23 to avoid the real risk...of a composite case being much stronger than any plaintiff's individual action would be."[73] Under federal law, the federal courts may nevertheless require individualized showings in accord with Pfizer, even if the supreme court ultimately permits an inference of reliance in accord with McAdams.

Inferred classwide reliance and causation also create an issue of superiority when the claimed injury is not substantial, or perhaps different in its substance among class members. In a growing line of cases brought under the Truth in Lending Act (TILA)[74] and the Fair and Accurate Credit Transactions Act (FACTA),[75] courts have increasingly found certification of class actions improper when the imposition of the civil penalties created by those statutes would be disproportionate to the harm suffered by the putative class members.

The Ninth Circuit, for example, in Kline v. Coldwell Banker and Company,[76] cited Ratner v. Chemical Bank New York Trust Company[77] with approval for the proposition that "the allowance of thousands of minimum recoveries like plaintiff's would carry to an absurd and stultifying extreme the specific and essentially inconsistent remedy Congress prescribed as the means of private enforcement" of TILA.[78] More recently, the district court in Soulian v. International Coffee and Tea LLC[79] held that "[w]here massive damage awards would be disproportionate to any actual damage caused by the alleged violations, class action is not the superior method of adjudicating class members' claims." Unlike TILA, which caps statutory penalties at the lesser of $500,000 or 1 percent of the defendant's net worth,[80] other consumer protection statutes do not cap damages.[81] These penalties violate due process if, in their total amount, they are "so severe and oppressive as to be wholly disproportionate to the offense and obviously unreasonable."[82] Without regard to due process, courts have similarly denied class certification when the defendant's liability "would be enormous and completely out of proportion to any harm suffered by the [p]laintiff," characterizing such a result as "ad absurdum."[83]

In the case of the UCL, neither damages nor penalties are available. However, the specter of recoveries by class members who have suffered no actual injuries, much less substantial ones, contravenes the purposes of Proposition 64. Thus, if the reasoning in the TILA and FACTA decisions continues and broadens, the injuries claimed in UCL class actions will have to increasingly be tethered to the acts and practices that caused them.

Despite the language in Mervyn's that the decision "left entirely unchanged the substantive rules governing business and competitive conduct," Proposition 64 has created a sea change regarding who can sue on behalf of the general public and what parties must show to succeed with their claims. The decisions applying the Proposition 64 amendments have increasingly required the proof offered by UCL plaintiffs to migrate toward the traditional elements of common law fraud to prevail. The impending decisions in cases before the California Supreme Court as well as upcoming decisions on motions for class certification in the federal courts will help determine whether, and when, that migration is complete.