One outcome of the November 2004 election is good news for every company doing business in California: Voters there approved Proposition 64, an initiative statute that makes it harder to bring lawsuits under California’s notorious Unfair Competition Law ("UCL"), California Business & Professions Code Section 17200. Proposition 64 introduces a standing requirement for private plaintiffs, who must now allege and prove that they lost money or property as a result of the defendant’s actions. Proposition 64 took effect on the day after the election. Whether it applies to lawsuits pending on that date will have to be decided by the California appellate courts.
The Situation Before Proposition 64
The UCL is exceptionally broad, prohibiting any "business act or practice" that is "unlawful, unfair or fraudulent." It has been applied, for example, where the defendant’s conduct is alleged to violate an unrelated state or federal law that does not itself authorize suit. Since 1992, the UCL has applied by its terms to one-time "acts," as well as ongoing business "practices." Fortunately in light of its substantive breadth, the UCL has never provided for money damages. Private plaintiffs are limited to the equitable remedies such as injunctions, restitution and (in some cases) disgorgement. Public prosecutors (the California Attorney General and district and city attorneys) can also bring suit for violations of the UCL, and they can seek civil penalties as well as equitable relief.
The substantive scope of the UCL is not unique; many states have similar statutes, modeled on the Federal Trade Commission Act’s prohibitions of "unfair or deceptive trade practices" and "unfair methods of competition." But before Proposition 64, the truly unusual and abuse-prone feature of the California UCL was that it had no private standing requirement. Any person could sue under the UCL as a "private attorney general," even if he or she had not suffered any harm as a result of the allegedly unfair practice. For example, in one much-publicized case, an activist used the UCL to sue a manufacturer on the ground that its advertising and other public statements painted a misleadingly favorable picture of working conditions in its overseas factories. The plaintiff had neither worked in the company’s factories nor bought its products in reliance on the supposedly misleading statements, but he was still allowed to prosecute the action. In many cases, such plaintiffs are mere stalking horses for the attorneys who file the suits and then seek to negotiate settlements that include reimbursement for their fees.
The Effect of Proposition 64
Proposition64 adds a standing requirement to the UCL. A private plaintiff must have "suffered injury in fact" and, more specifically, must have "lost money or property" as a result of the alleged unfair practice. A private plaintiff can no longer sue, as formerly, in the name of "the general public." The plaintiff can attempt to maintain a class action, but the class would have to consist of persons injured in the same way as the plaintiff.
Proposition64 does not affect the right of public prosecutors to bring civil actions under the UCL. It does provide, however, that any civil penalties recovered shall be for the "exclusive use" of the prosecutor who brought the claim, "for the enforcement of consumer protection laws." Previously, such penalties had been paid over to the State General Fund or to city and county treasuries.
The Likely Impact of Proposition 64
The measure takes effect immediately. Whether it will be applied to pending cases, so that cases filed by plaintiffs who cannot show actual injury are now subject to dismissal, will depend on whether the California courts treat the measure as a "substantive" or "remedial" change in the law.
Proposition 64 is likely to reduce the number of private UCL actions filed in the future. In particular, it will be more difficult for the plaintiffs’ bar: (1) to find clients with standing; (2) to satisfy the generally applicable requirements for class certification, rather than merely claiming to act for the "general public"; and (3) to justify awards of attorneys’ fees on the theory that a UCL action achieved a public benefit.
Enforcement of the UCL by public prosecutors may increase. Proposition 64 gives such officials a direct financial incentive to bring such actions, and the California Legislature, as well as cash-strapped cities and counties, may now expect their prosecutors to support themselves financially by making aggressive use of the UCL’s civil penalty provisions. But insofar as Proposition 64 limits UCL claims by self-styled "private attorneys general," it is surely a welcome development for California business.
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