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May 2009

By: Julia B. Strickland, Stephen J. Newman

On May 18, 2009, the California Supreme Court issued its long-awaited decision in the In re Tobacco II Cases, No. S147345, scaling back significantly on Proposition 64’s reform of California’s Unfair Competition Law, Business and Professions Code Section 17200, et seq. (the “UCL”). In a 4-3 decision, the Court: (1) held that only the named plaintiff, and not absent class members, must have relied on allegedly false representations in order to bring a UCL fraud claim; and (2) loosened pleading requirements in false advertising cases, although the new standard is ambiguous and likely will spawn further litigation over what the opinion means.

Before Proposition 64 became effective in November 2004, the UCL allowed plaintiffs to act as “private attorneys general” and seek relief on behalf of the general public without having suffered any injury and without satisfying traditional class certification requirements. Moreover, California courts repeatedly had held that the UCL allowed for relief without individualized proof of deception, reliance, causation or injury.

Proposition 64 reformed the UCL by allowing private litigants to sue only if they “suffered injury in fact and . . . lost money or property as a result of the unfair competition.” It further required private litigants to comply with class certification requirements in order to seek relief on behalf of others. After Proposition 64 made these changes to the UCL, several Courts of Appeal held that UCL classes could only be certified if all class members satisfied the new standing requirements and, in the advertising context, acted in reliance on the allegedly false advertisements.

In the In re Tobacco II Cases, plaintiffs based their UCL claim on the allegation that the defendant tobacco companies had engaged in 40 years of deceptive advertising regarding the health effects of cigarette smoking. After Proposition 64 was enacted, defendants successfully moved to decertify the class, arguing that plaintiffs could not establish that each class member spent money to purchase cigarettes as a result of particular cigarette advertisements. After the Court of Appeal affirmed, the California Supreme Court granted review in this and several other cases raising the same issues.

Concluding that only the named plaintiff must have standing to bring a UCL claim on behalf of a class, the majority opinion (written by Justice Moreno) relied principally on the plain language of Proposition 64. The Court also concluded that the ballot materials suggested that the initiative was intended only to prevent “shakedown” lawsuits against small businesses, not to “curb the broad remedial purpose of the UCL or the use of class actions to effect that purpose.” Perhaps most importantly, the majority rejected the argument that all class members must have the same injury as the named plaintiff in order for a UCL class to be certified, reasoning that Proposition 64 did not undermine prior cases holding that individualized proof of deception, reliance or injury is not required in UCL cases. In doing so, the Court emphasized that the UCL is designed to protect the public from fraud and other unlawful conduct, and that “the focus of the statute is on the defendant’s conduct” rather than injury to class members.

Addressing what named plaintiffs must plead and prove under the UCL in false advertising cases, the Court rejected the suggestion that Proposition 64’s “as a result of” language “introduced a tort causation element into UCL actions.” It held simply that the named plaintiff “must allege that the defendant’s misrepresentations were an immediate cause of the injury-causing conduct,” but not that “those representations were the sole or even the decisive cause of the injury-producing conduct.” Relying on prior decisions in tobacco cases, the Court stated that it is sufficient for the plaintiff to show that the alleged misrepresentations were a “substantial factor” in causing the injury. The Court also reaffirmed the principle that “a presumption, or at least an inference, of reliance arises wherever there is a showing that a misrepresentation was material.” Finally, the Court wrote that “an allegation of reliance is not defeated merely because there was alternative information available to the consumer-plaintiff, even regarding an issue as prominent as whether cigarette smoking causes cancer.”

In a strongly worded dissent, Justice Baxter complained that the decision “turns class action law upside down and contravene’s the initiative measure’s plain intent,” which was to allow only public prosecutors to enforce the UCL on behalf of the general public except where traditional class certification standards are met. The holding of the case, he wrote, means “that normal class action rules do not apply to UCL private representative actions governed by Proposition 64.”

While In re Tobacco II answers important questions about the scope of Proposition 64, it also raises significant issues about what will be sufficient to plead and prove UCL fraud claims, including what evidence is sufficient to avoid summary judgment. Furthermore, because the case involved a challenge to 40 years of tobacco advertising, it is not clear whether all of its holdings will extend to other factual contexts.

We welcome questions and comments regarding this decision or any other class action issues.

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