Class Actions after Tobacco II

California's unfair competition law (UCL) cuts a broad swath for a simple purpose: to foster honest business competition. To that end, the statutory scheme prohibits practices that are "unlawful, unfair or fraudulent" as well as "unfair, deceptive, untrue or misleading advertising." (See Cal. Bus. & Prof. Code § 17200-17210.)

Historically, a UCL class action could be maintained by any person acting on behalf of the general public, irrespective of whether he or she had personally been injured by the alleged misconduct. However, the ground shifted in 2004 with the passage of Proposition 64, which amended the UCL to restrict standing to bring a private lawsuit. Under the measure, the plaintiff must have "suffered injury in fact and ... lost money or property as a result of [the] unfair competition." (§ 17204.)

Tobacco II
Following this amendment, an underlying question remained: What impact did Prop. 64 have on absent class members in representative actions brought under the UCL? The California Supreme Court provided some answers with its highly anticipated decision in In re Tobacco II Cases (46 Cal. 4th 298 (2009)).

In that ruling, the justices held that only the named plaintiffs asserting a representative UCL claim--and not all absent class members--must meet Prop. 64's heightened standing requirement. The court further held that to establish standing in a private action brought under the UCL's fraud prong, class representatives must plead and prove actual reliance on the defendant's alleged misstatements (Tobacco II, 46 Cal. 4th 298, 306 (2009)).

But Tobacco II was not the last word with regard to absent class members. After that decision, a consensus emerged that the named plaintiff must demonstrate that absent class members were, at a minimum, exposed to the allegedly fraudulent conduct. In addition, several federal courts addressing constitutional standing principles have recently concluded that UCL classes must include only those absent persons who have Article III standing to assert a UCL claim.

Commonality Required
The first case in this line of decisions is Cohen v. DIRECTV Inc. (178 Cal. App. 4th 966 (2009)). The plaintiff in that case alleged that DirecTV advertised its high-definition satellite television service "without the intent to provide the customers" with the advertised levels of resolution, and also that the defendant "switched its HDTV channels to a lower 'resolution,' reducing the quality of the television images it transmits to its subscribers."

The court of appeal for the second district (division 8) affirmed the denial of class certification because the class would include subscribers who never saw DirecTV advertisements before purchasing HD services; or who only saw or relied upon DirecTV advertisements that contained no mention of technical terms regarding resolution; or who purchased DirecTV HD primarily based on word of mouth or because they saw it in a store or at another's home. The court explained: "[W]e do not understand the UCL to authorize an award for injunctive relief and/or restitution on behalf of a consumer who was never exposed in any way to an allegedly wrongful business practice." (178 Cal. App. 4th at 980.)

The Cohen court also concluded that common issues among class members would not predominate in the case because the fraud claims involved individual factual questions associated with reliance on DirecTV's alleged false representations (178 Cal. App. 4th at 979-982).

The court addressed the Tobacco II decision at length, explaining that the question of standing is different from the inquiry required when assessing whether common issues predominate over individual ones. Standing, said the court, "is a matter addressed to the trial court's jurisdiction because a plaintiff who lacks standing cannot state a valid cause of action. Commonality, on the other hand, and in the context of the class certification issue, is a matter addressed to the practicalities and utilities of litigating a class action in the trial court." (178 Cal. App. 4th at 981.)

But there is a conflict within the various divisions of the second district. In In re Steroid Hormone Product Cases (181 Cal. App. 4th 145 (2010)), the plaintiffs alleged that nutritional supplements marketed by the defendant contained a controlled substance that was illegal to sell or possess in California without a prescription. Contending that this fact was not disclosed to consumers, they filed a statewide class action alleging a violation of the UCL's unlawful prong. The trial court issued a ruling-prior to the Tobacco II decision--that each putati-ve class member must establish causation and injury under the UCL.

Division 4 of the second district, citing Tobacco II, rejected the trial court's reasoning, stating that "while a named plaintiff in a UCL action now must show that he or she suffered injury in fact and lost money or property as a result of the unfair competition, once the named plaintiff meets that burden, no further individualized proof of injury or causation is required to impose restitution liability against the defendant in favor of absent class members." (181 Cal. App. 4th at 154.)

The court discussed the Cohen decision, stating that "to the extent the [Cohen] court's opinion might be understood to hold that plaintiffs must show class members' reliance on the alleged misrepresentations under the UCL, we disagree." As Tobacco II made clear, the court noted, Prop. 64 did not change the substantive law governing UCL claims other than the standing requirements for the named plaintiffs.

Class Definitions
Two other appellate courts reconsidered UCL class certification issues after the California Supreme Court had sent the matters back for reconsideration in light of Tobacco II.

In McAdams v. Monier Inc. (182 Cal. App. 4th 174 (2010)), the third district court of appeal reversed a denial of class certification and remanded the matter to the trial court to determine whether the class representative could demonstrate UCL standing under the Tobacco II standard. The plaintiffs alleged that defendant Monier knew about and failed to disclose to purchasers of its roof tiles that the tiles' color composition would erode well before the end of the tiles' represented 50-year life. The justices offered a proviso regarding requirements for membership in the plaintiff class: "The members of these classes, prior to purchasing ... had to have been exposed to a statement along the lines that the roof tile would last 50 years, or would have permanent color, or would be maintenance free." The court of appeal explained that the defendant's failure to disclose that its roof tiles would lose their color before the end of their projected life span would be material only to those purchasers who had been exposed to an affirmative representation about the life span or colorfastness of the tiles (McAdams, 182 Cal. App. 4th at 179, 192-193).

The day after the McAdams decision, the second district issued its opinion in Pfizer Inc. v. Superior Court, finding a plaintiff class to be overbroad (182 Cal. App. 4th 622 (2010)). The plaintiff alleged that Pfizer misleadingly marketed its Listerine products by representing that using its mouthwash can replace using dental floss in reducing plaque and gingivitis. The trial court had certified a class consisting of "all persons who purchased Listerine, in California, from June 2004 through January 7, 2005."

The appellate panel found evidence that most of the various mouthwash bottles did not include a label with the alleged misrepresentation, and that, although the defendant ran four different television commercials with its "as effective as floss" campaign, the commercials had not run continuously and there was no evidence that a majority of Listerine consumers viewed the commercials. In addressing the plaintiffs' claims, the court stated that Tobacco II allows a class representative who actually relied on the defendant's misleading advertising campaign to represent other class members who may have relied on the unfair practice and lost money.

However, said the court, "Tobacco II does not stand for the proposition that a consumer who was never exposed to an alleged false or misleading advertising or promotional campaign is entitled to restitution." The court concluded that the class was overbroad because it included consumers who were never exposed to the alleged misrepresentations. In such a case, "there is absolutely no likelihood they were deceived by the alleged false or misleading advertising or promotional campaign." Such persons cannot meet the standard for a UCL restitution order (Pfizer, 182 Cal. App. 4th at 632-633).

In yet another recent decision, the fourth district court of appeal relied upon the reasoning in Pfizer to affirm an order denying class certification of UCL claims. In Sevidal v. Target (189 Cal. App. 4th 905 (2010)), the plaintiff had purchased items of clothing from the defendant retailer's website that were misidentified as made in the United States. The class definition included every person who purchased one of the imported items during the time they were described as "Made in the USA." The plaintiff argued that under Tobacco II, the class could be certified "even if most of the proposed class members never relied on the 'Made in USA' designation in deciding to make their online purchases." The trial court's ruling refusing class certification was based in part on the fact that most class members never saw the alleged misrepresentation. The court of appeal agreed, holding that, as in Pfizer, the class definition was overbroad because "a majority of the class members were 'never exposed' to the alleged misrepresentation." (189 Cal. App. 4th at 926.)

Taken together, these cases suggest that, at a minimum, the class definition in UCL claims based on fraud should exclude all absent class members who were not exposed to a defendant's affirmative representations that either (1) were false or misleading in and of themselves; or (2) when taken in context made the defendant's omission of information material.

In addition, as evidenced by the Cohen and Steroid Hormone cases discussed above, it remains unsettled whether individual reliance on the alleged misrepresentations may be considered when analyzing commonality in the context of class certification.

Federal Standing
The foregoing reasoning has been cited approvingly by federal courts grappling with UCL class certification issues. (See Campion v. Old Republic Home Protection Co., 272 F.R.D. 517 (S.D.N.Y. 2011); and Konik v. Time Warner Cable, No. 07-763 (C.D. Cal. order denying class certification issued Nov. 24, 2010).)

Notwithstanding that absent class members in state UCL class actions need not plead and prove injury in fact, a question lingers as to whether this rule comports with constitutional standing requirements embedded in Article III. In one case, the Eighth Circuit significantly limited the holding of Tobacco II with respect to standing in federal court. In Avritt v. Reliastar Life Insurance Co. (615 F.3d 1023, 8th Cir. 2010), California residents alleged that the defendant violated the UCL by engaging in a misleading rate-setting practice, which encouraged individuals to purchase certain annuities based on a false assumption that the initial, favorable interest rate would continue over time. The Eighth Circuit affirmed the district court's denial of the class certification and stated that "to the extent that Tobacco II holds that a single injured plaintiff may bring a class action on behalf of a group of individuals who may not have had a cause of action themselves, [the decision] is inconsistent with the doctrine of standing as applied by federal courts." (615 F.3d at 1034.)

The court in Avritt found that although individual class members are not required to submit evidence of personal standing, a class cannot be certified if it contains members who lack standing. "A class must therefore be defined in such a way that anyone within it would have standing. Or, to put it another way, a named plaintiff cannot represent a class of persons who lack the ability to bring the suit themselves." (615 F.3d at 1034.) According to the court, although the Tobacco II ruling may be the law of California, it "diverged from federal jurisdictional principles, which we are bound to follow." (615 F.3d at 1034.)

Other federal courts have reached the same conclusion. District court judges in both California and Maine have held that federal courts cannot certify a class that contains members who lack Article III standing. (See Burdick v. Union Security Ins. Co., 2009 WL 4798873 (C.D. Cal.); and In re Light Cigarettes Marketing Sales Practices Litigation, 271 F.R.D. 402 (D. Me. 2010).)

On the other hand, at least one federal court has declined to follow the Avritt decision, rejecting a decertification motion based on the standing issue (Greenwood v. Computcredit Corp., 2010 WL 4807095 (N.D. Cal.)). In that case, the court pointed out that the Ninth Circuit follows the well-settled law, acknowledged by Avritt, that federal courts "do not require that each member of a class submit evidence of personal standing." The court reasoned that once the named plaintiffs establish standing, the question of whether they may be allowed to present claims on behalf of others who have similar, but not identical, interests depends not on the standing of the absent class members, but rather "on an assessment of typicality and adequacy of representation." (Greenwood, 2010 WL 4807095 at *3.)

The court in Greenwood further found that a presumption of individualized reliance could be applied to all class members because, based on the class definition, they had necessarily received the materially deceptive solicitations. The application of this presumption, said the court, "buttresses the ruling that class members suffered Article III injury." (Greenwood, 2010 WL 4807095 at *5.)

Looking Ahead
Following Tobacco II, named plaintiffs pursuing a UCL representative action in state court need not demonstrate that absent class members have individual standing. However, if the case is filed in (or removed to) federal court, the plaintiffs may well need to establish that absent class members have standing under the U.S. Constitution.

In addition, when a UCL complaint involves a fraud claim, the named plaintiffs must show, at a minimum, that absent class members were actually exposed to the alleged misrepresentation. If they fail to do so, the court likely will hold either that the suit cannot continue as a class action, or that the class must be confined to individuals who were exposed to the alleged fraud.

Neal R. Marder and Stephen R. Smerek are partners and Christian E. Dodd and Nicole L. Herft are associates at Winston & Strawn in Los Angeles. They concentrate on complex business and commercial litigation, primarily defending against class actions and consumer claims.

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