United States: Court Further Defines Unfair Competition Cases in California: Section 17200 Requires Actual Reliance (Pfizer, Inc. v. Superior Court)

A case decided on July 11, 2006, illustrates the Firm’s continuing commitment to Proposition 64 and the reform of California’s unfair competition law, Bus. & Prof. Code § 17200 (UCL). (Pfizer, Inc. v. Superior Court, No. B188106 (2d Div. July 11, 2006).) The Firm’s amicus brief figured in the appellate court’s holding, and the Pfizer decision sends a strong signal that the courts are getting the voters’ message.

Every state has enacted its own "Little FTC Act," but no state has done with theirs quite what California had done with its "Little FTC Act," better known as the UCL or Section 17200, and with its false advertising law, id., § 17500 (FAL). In November 2004, the voters decided that California had finally gone too far. They enacted Proposition 64 by a lopsided 59% majority. Firm partner Will Stern was one of the initiative’s principal authors.

Declaring the voters’ intent to end "shakedown lawsuits" and other prior abuses, Proposition 64 did two things expressly. First, it ended the "no-standing standing" rule. Now, to have standing a plaintiff must have "suffered injury in fact and lost money or property as a result of" the defendant’s unfair competition or false advertising. Second, Proposition 64 ended the practice of the "non-class class" or representative action. Now, private representative actions brought under the UCL have to satisfy the same procedural requirements applicable to other class actions.

Proposition 64 left three questions unanswered. First, is the law "retroactive," that is, do the new rules apply to UCL and FAL actions filed before the November 2004 election? This issue is currently under submission to the California Supreme Court in a case called Californians for Disability Rights v. Mervyn’s Inc., No. S1311798. Firm partner David McDowell argued Mervyn’s on May 31, 2006, and made a strong case for retroactivity. A decision is expected by September 2006.

A second unresolved question is whether Proposition 64’s new standing rule imposes a reliance requirement. The third and related question is whether Proposition 64 overrules the "likely to mislead" test for cases brought under the UCL’s "fraudulent" prong and brought under the FAL. Pfizer addresses these, and decides them in favor of business defendants.

Pfizer manufactures and sells Listerine® mouthwash. Its marketing campaign touted the product to be "as effective as floss" in reducing plaque and gingivitis, and that claim appeared both on bottle labels sold in California and in television advertising directed to California residents. Plaintiff Galfano claimed this falsely implied that Listerine® could be used in lieu of floss, and he sued on behalf of a class of persons who bought Listerine® in California. The trial court certified the class, and Pfizer filed a writ in the appellate court.

The appellate court granted the writ, and the matter was briefed and argued on an expedited basis. The Pfizer court reached three holdings.

First, Galfano (joined by the California Attorney General as amicus) argued that only the class representative must meet the new standing requirements of Proposition 64, i.e., have suffered injury in fact and lost money or property as a result of the unfair competition or false advertising, and that there is no requirement that any of the absent class members must meet this standing requirement. The Court of Appeal said no:

The argument is unpersuasive. It is a basic principle that "[e]ach class member must have standing to bring the suit in his own right." (Collins v. Safeway Stores, Inc. (1986) 187 Cal.App.3d 62, 73.) This is because a class action is "merely a procedural device for consolidating matters properly before the court." (Vernon v. Drexel Burnham & Co. (1975) 52 Cal.App.3d 706, 716.)

If Galfano alone, but not class members, suffered injury in fact and lost money or property as a result of Pfizer’s alleged unfair competition or false advertising, then by definition his claim would not be typical of the class. Rather, Galfano’s claim would be demonstrably atypical. (Slip opn., p. 14 (emphasis in original).)

Second, Pfizer holds that "inherent" in the "as a result of" language of Proposition 64 is a reliance requirement:

Galfano and Pfizer also differ as to whether Proposition 64 added a reliance element to the UCL and the FAL. Pfizer has the better argument.

Inherent in Proposition 64’s requirement that a plaintiff suffered "injury in fact . . . as a result of" the fraudulent business practice or false advertising (§§ 17204, 17535, italics added) is that a plaintiff actually relied on the misrepresentation and as a result, was injured thereby. (fn omitted.) Here, for example, to have suffered an injury in fact as a result of the alleged misrepresentation, a plaintiff would have had to read Pfizer’s label "as effective as floss against plaque and gingivitis" or some similar statement and relied thereon in buying Listerine. A consumer who was unaware of, or who did not rely upon, Pfizer’s claims comparing Listerine to floss did not suffer any "injury in fact" as a result of the alleged fraudulent business practice or false advertising. (Slip opn., p. 17 (emphasis in original).)

The Court concluded: "Accordingly, the requirement a plaintiff suffered ‘injury in fact . . . as a result of’ the fraudulent business practice or false advertising (§§ 17204, 17535, italics added) means that Galfano or others must have purchased the Listerine in reliance on the allegedly false or misleading representations or advertisements and as a result suffered injury." (Slip opn., p. 19.)

Third, Pfizer suggests that the former test of "fraudulent" business practices and false advertising—whether the public is "likely to be misled"—is overruled. As the Pfizer court noted:

[T]he mere likelihood of harm to members of the public is no longer sufficient for standing to sue. Persons who have not suffered any injury in fact and who have not lost money or property as a result of an alleged fraudulent business practice cannot state a cause of action merely based on the "likelihood" that members of the public will be deceived. (Slip opn., p. 5.)

This is a significant change. It means that Prop. 64 overruled cases like Chern v. Bank of America, 15 Cal. 3d 866 (1976).

The Firm co-authored an amicus brief on behalf of the California Chamber of Commerce, California Manufacturers and Technology Association, Civil Justice Association of California, and California Bankers Association.

The Pfizer decision shows that amicus briefs matter. Relying on the Firm’s brief, the Pfizer court distinguished the only other decision (by a federal district court) that had reached the opposite conclusion, Anunziato v. eMachines, Inc., 402 F. Supp. 2d 1133 (C.D. Cal. 2005): "it would appear the court 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." (Slip opn., p. 18.)

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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