Pleading UCL Standing May Have Gotten Easier in Kwikset, But Certifying a Class for Restitution under the UCL Did Not
A number of commentators, including the UCL Practitioner and Bailey Class Action Dailey, were quick to report the California Supreme Court's recent decision holding that a plaintiff who pleads that he read a misrepresentation, relied on it in buying a product, and would not have bought the product but for the misrepresentation, has pled sufficient facts to establish standing to bring a claim under California's Unfair Competition Law. See Kwikset Corp. v. Superior Ct., No. S171845 (Cal. Jan. 27, 2011). A number of defense firms have issued client alerts, some of which sound like the sky is falling.
Although I obviously don't agree with the California Supreme Court's statutory analysis, I am a "glass-half-full" kind of guy, and there are some details of the opinion that give me some encouragement on the issue of UCL class actions for restitution.
In Kwikset, the plaintiff had bought a lock labelled "Made in the USA." Some of the screws or pins had been made in Taiwan. And for some of defendant's products, the latch subassembly had been performed in Mexico. But the lock itself had been assembled in the good ole US of A. This is the stuff of class actions, you ask? It is in California.
In 2004 the trial court had conducted a bench trial and entered judgment against the defendant. It found that the defendant violated California's Made in the USA statute (yes, there's a statute for that in California), it's "Geographic Origin" statute (ditto), the UCL, and the False Advertising Law. The trial court enjoined the defendant "from labeling any lockset intended for sale in the State of California 'All American Made,' or 'Made in the USA,' or similar unqualified language, if such lockset contains any article, unit, or part that is made, manufactured, or produced outside of the United States." Slip op. at 3. Using its equitable powers, the trial court also ordered the defendant to notify its retailers and distributors about the falsely labeled products and give them a chance to return them for refund or replacement.
Interestingly, the trial court denied the plaintiff's request for restitution to consumers/end purchasers. The trial court:
concluded restitution "would likely be very expensive to administer, and the balance of the equities weighs heavily against such a program" where the violations had ceased and "the misrepresentations, even to those for whom the 'Made in the USA' designation is an extremely important consideration, were not so deceptive or false as to warrant a return and/or refund program or other restitutionary relief to those who have been using their locksets without other complaint.
Slip op. at 4.
During the appeals process, California's voters passed Proposition 64, which requires a UCL claimant to have an "injury in fact" and have "lost money or property" as a result of the alleged unfair business practice. (My problem with the majority's opinion in Kwikset is that it equates the two separate requirements and does not give the phrase "lost money or property" its ordinary meaning. Instead, the majority assumes money or property is lost when a claimant buys a product that she otherwise would not have bought. But what if the product she bought performs perfectly and is cheaper than what she would have bought had she known about the Taiwanese screws? I would argue -- as Justice Chin did in the dissent -- that there is no loss of money or property, even though there may otherwise be an injury in fact that might meet the first element.)
Having passed Prop 64, there was lots of wrangling in California over whether it applied to pending cases. Ultimately, the Supreme Court held that it did, and that for such cases plaintiffs should be given leave to replead.
In Kwikset, the plaintiff was allowed on remand to add plaintiffs and replead the complaint to state that plaintiffs saw the misrepresentations, relied upon them in buying the products, and would not have bought the products but for the misrepresentations. The defendant demurred, arguing that plaintiffs had no standing under Prop. 64 because they did not adequately plead that they lost money or property. The trial court rejected that demurrer. But on appeal, the Court of Appeal reversed. Plaintiffs' "patriotic desire to buy fully-American-made products was frustrated," but they otherwise got what they paid for and thus did not experience a loss of money or property as the UCL now requires, the Court of Appeal held. This was the conclusion that the California Supremes reversed.
But in finding that the plaintiffs had pled standing, the California Supremes were clear that reliance and causation were factual issues that plaintiffs would still bear the burden of proving in order to recover under the UCL. Citing their earlier decision in In re Tobacco II Cases, the Kwikset Court reiterated that a UCL plaintiff relying on the fraud prong of the statute "must demonstrate actual reliance on the allegedly deceptive or misleading statements." Slip op. at 16; see also id. at n.11 ("At succeeding stages, it will be plaintiffs' obligation to produce evidence to support, and eventually to prove, their bare standing allegations. If they cannot, their action will be dismissed.").
Interestingly, the California Supremes never once in the Kwikset opinion criticize the trial court's refusal to grant a restitution remedy or its reasoning therefor. Indeed, much of what the Supreme Court says seems to indicate that the proof for restitution would need to be individual. For example: "For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same." Slip op. at 20. Of course, the inverse would be that consumers who do not rely on the label or who are not deceived by the representations do not suffer the economic harm, which the court describes as making a purchase they otherwise would not have made.
Put differently, by affirmatively stating that the harm must flow from actual deception that causes the consumer to enter a transaction she otherwise would not enter (slip op. at 21), the court makes it plain that any entitlement to restitution is going to be subject to individualized inquiries into whether any putative class member saw the alleged misrepresentation, actually relied on it, and wouldn't have entered the transaction without it. Otherwise, there is no economic harm, under the Kwikset Court's own reasoning.
Notably, the Court instructs in a footnote that once the threshold issue of standing is addressed,
it will remain the plaintiff's burden thereafter to prove the elements of standing and of each alleged act of unfair competition, and the trial court's role to exercise its considerable discretion to determine which, if any, of the various equitable and injunctive remedies provided for by sections 17203 and 17535 may actually be warranted in a given case.
Slip op. at 22 n.15.
In rejecting the standards for restitution as the standard for standing (slip op. at 29-31), the Court made it plain that "[r]estitution under section 17203 is confined to restoration of any interest in 'money or property, real or personal, which may have been acquired by means of such unfair competition.'" Slip op. at 30 (citation omitted). Without proof of loss of money or property caused by the alleged deception, a claimant is not entitled to restitution.
In sum, although the Kwikset decision may have held that "ineligibility for restitution is not a basis for denying standing" under the UCL, it certainly did not change California's restitution prerequisites or the UCL to make it easier to certify a class action for restitution under the UCL. In fact, if anything, Kwikset highlights that entitlement to restitution is still a highly fact-specific, individualized inquiry into what claimants saw, relied upon, and what they would have done absent the challenged conduct.
"Entitlement to restitution" is not an element of a UCL claim. Liability under the UCL's "fraudulent" prong requires proof of conduct likely to deceive a reasonable consumer -- a question that depends entirely on the defendant's conduct, not on consumers' reliance or lack thereof. The Supreme Court in Kwikset was addressing the class representative's standing only; it held in Tobacco II that the unnamed class members do not have to meet Prop. 64's standing requirements. What is more, under California law, variations in the amount of monetary recovery to which the class members might be entitled do not defeat a finding that common questions predominate. The Supreme Court did not address the trial court's decision not to award monetary relief because the plaintiffs did not appeal that part of the judgment. We may see other trial courts declining to award restitution, but they have always had that discretion. In Kwikset itself, the trial court made that decision several years before Prop. 64 passed.