Prop 64 Class Action Defense Cases–In re Tobacco II: California Supreme Court “Turns Class Action Law Upside Down” And Holds UCL Class Actions May Be Certified Even If Class Members Lack Standing To File Suit In Own Name

May 19, 2009 | By: Michael J. Hassen

Class Actions Alleging Violations of California’s Unfair Competition Law (UCL) may be Certified as a Class Action even if Putative Class Members Lack Standing to Prosecute UCL Claims in Their Own Name, but Class Representative Alleging Misrepresentation as Basis of UCL Class Action Claim must Demonstrate Actual Reliance on the Defendant’s Allegedly Deceptive or Misleading Statements California Supreme Court Holds

A class action lawsuit was filed in California state court against various tobacco industry defendants alleging violations of California’s Unfair Competition Law (UCL); specifically, the class action complaint asserted that defendants “conduct[ed] a decades-long campaign of deceptive advertising and misleading statements about the addictive nature of nicotine and the relationship between tobacco use and disease.” In re Tobacco II Cases, ___ Cal.4th ___, 93 Cal.Rptr.3d 559 (Cal. 2009) [Slip Opn., at 1-2]. The class action complaint was amended numerous times; the trial court granted plaintiffs’ motion to certify the litigation as a class action, filed in connection with the seventh amended class action complaint. Id., at 3. At the time the trial court granted class action status to the lawsuit, under California law an individual had standing to file suit alleging UCL violations even if the individual had not suffered any injury; following class certification, Californians passed Proposition 64, which amended the UCL so as to condition standing to file suit to a “person who has suffered injury in fact and has lost money or property as a result of [such] unfair competition.” Id., at 1-2 (quoting Cal. Bus. & Prof. Code, § 17204). Additionally, prior to Prop 64 UCL representative actions did not have to satisfy the requirements for class action treatment under California Code of Civil Procedure section 382, but Prop 64 explicitly requires such compliance, id., at 13. Based on the standing requirement imposed by Prop 64, the trial court granted defendants’ motion to decertify the class “on the grounds that each class member was now required to show an injury in fact, consisting of lost money or property, as a result of the alleged unfair competition.” Id., at 2. The appellate court affirmed, “agreeing with the trial court that, post Proposition 64, individual issues of exposure to the allegedly deceptive statements and reliance upon them, predominated over class issues.” Id., at 9. But the California Supreme Court – in a 4-3 decision – reversed.

The California Supreme Court’s decision is ground-breaking: it represents the first opinion known to this author that allows an individual to be a member of a class even if that person does not have standing to file suit in his or her own name. The Supreme Court addressed two issues: “First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed?” In re Tobacco II, at 2. This is the question on which we focus here. “Second, what is the causation requirement for purposes of establishing standing under the UCL, and in particular what is the meaning of the phrase ‘as a result of’ in section 17204?” Id. While we do not discuss this aspect of the Court’s opinion, we note its holding: “We conclude that a class representative proceeding on a claim of misrepresentation as a basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions.” Id.

The author confesses that he finds the Supreme Court’s reasoning both circular and confusing. Relying heavily upon ballot materials, the Court recognizes that the intent of Prop 64 was to prevent abusive lawsuit, protect businesses from frivolous lawsuits, and to protect the rights of Californians “to file a lawsuit if you’ve been damaged.” In re Tobacco II, at 17-18 (italics added). The Court also admits that the initiative did not “alter the way in which class actions operate in the context of the UCL,” id., at 18, but fails to identify any case law that previously authorized UCL class actions to include as class members any individuals who lacked standing to bring the action in their own name. Instead, the Supreme Court argued that an analysis of whether to grant class action treatment to a lawsuit turns on whether the class representatives have standing and “do not require that unnamed class members establish standing,” id., at 19. This is true so far as it goes, but it ignores the critical fact that class representative standing is but one factor considered by a trial court in ruling on a motion for class certification, and that ascertainability and manageability are other factors that also must be considered. The Court’s decision als ignores the fact that, as the opinion stresses, Prop 64 did not alter the procedural landscape of class action lawsuits, but a cornerstone of that landscape is that an individual cannot be a member of a putative class unless he or she could have filed suit in their own name. Indeed, the ballot materials stress that the right to pursue UCL claims is preserved only “if you’ve been damaged,” id., at 18 (italics added).

At heart, the Supreme Court appears to have been heavily influenced by two factors. First, the defendants are members of the tobacco industry. Second, that the primary relief afforded under the UCL is injunctive, so the public at large will benefit from the relief awarded to those individuals who suffered actual injury. See In re Tobacco II, at 21. The problem with this reasoning, however, is that encourages attorneys to file “class actions” on behalf of a class of one – the named plaintiff who can establish standing – even if all of the other factors traditionally considered in connection with class certification motions would counsel against certification. The Court’s opinion thus condones the filing of lawsuits that serve only the monetary interests of plaintiff lawyers – the very risk that Prop 64 sought to redress. It additionally runs afoul of the state and federal constitutional rights to due process, because it is well-settled that a class action defendant has the right to challenge the claims of each member of the class but the Supreme Court now holds that defendants may not establish during a UCL class action trial that individual class members did not suffer any injury.

The dissent’s position is concisely summarized in a single paragraph, “Code of Civil Procedure section 382 is the statute that authorizes class actions, and the ballot pamphlet materials for Proposition 64 leave no doubt the voters understood the reference to this statute as requiring all representative UCL suits by private persons to proceed under the rules and principles governing class actions. …[T]hose rules and principles prominently require that the representative, or named, plaintiff have a claim typical of the class, and that each class member be someone who could bring suit on his or her own behalf.” In re Tobacco II (Baxter, J., concurring and dissenting), at 2 (second italics added). The dissent flatly rejects the majority’s conclusion “that unnamed class members in a private UCL class action need not meet the injury-in-fact and causation requirements of Proposition 64.” Id., at 3. Put simply, the majority opinion “turns class action law upside down and contravenes the initiative measure’s plain intent.” Id.

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