Under the California Court of Appeal's July 11, 2006 decision
in Pfizer Inc. v. Superior Court
, class action plaintiffs seeking
to bring unfair business practices or false advertising claims
against California businesses now face a greater preemptive
challenge. Both class representatives and proposed
class members must have sustained actual injury from the
alleged unfair practices – not just the "mere likelihood" of
such – and must have actually relied on the allegedly unfair
practices or false advertisements. Pfizer
thus imposes a
much higher standing requirement for plaintiffs seeking to
file class actions under California's unfair competition laws.
This presents a potentially significant benefit to businesses
seeking early dismissal of frivolous claims.
I. Proposition 64 Changed California's Unfair
Before its amendment in November 2004, California Business
& Professions Code sections 17200 (California's Unfair
Competition Law, or "UCL") and 17500 (California's False
Advertising Law, or "FAL") entitled private parties to bring
representative actions on behalf of the general public (the
so-called "private attorney general suits"). Under the the existing
statutes, any person could file suit on behalf of the
public without having personally sustained loss as a result
of the actions alleged. This set the stage for abuse of the
statutes by plaintiffs and their lawyers suing only to generate
and recoup windfall attorneys' fee awards. In response to
the growing number of frivolous suits and the threat of large
attorneys' fee awards, California voters passed Proposition 64
in November 2004. Proposition 64 amended the UCL and FAL
to, among other things, eliminate the right of private plaintiffs
to sue on behalf of others unless (1) they complied with the
procedural requirements applicable to class action lawsuits,
and (2) suffered "injury in fact." Cal. Bus. & Prof. Code §§
17203, 17204, 17535.
II. Interpreting the Effects of Proposition 64
Since Proposition 64's modification of the UCL and FAL,
California courts have been faced with construing how its
changes affect plaintiffs' standing requirements. In Pfizer Inc.
v. Superior Court, No. B188106, ___ Cal.App.4th ___ (Jul. 11,
2006), the 2nd District Court of Appeal interpreted Proposition
64's "injury in fact" and "actual reliance" standards. Pfizer
plaintiff Steve Galfano had obtained class certification to
bring false advertising claims against Pfizer (the manufacturer
of Listerine) in response to an advertisement claiming that
Listerine could replace dental floss in reducing plaque and
gingivitis. The certified class included "all persons who
purchased Listerine, in California, from June 2004 through
January 7, 2005." Slip. Op. at 2. Defendant Pfizer sought
a writ of mandate to overturn the superior court's order on
the ground that the class was overbroad. Id. The Second
District Court of Appeal agreed, finding that because the
class included plaintiffs who had not been actually injured
or had not actually relied on the false advertising, "the class
definition is plainly overbroad and must be set aside." Id.
In so holding, the Court determined that in order to have
standing to sue under Proposition 64, both representative
plaintiffs and all other proposed class members must have
suffered "injury in fact" and lost money or property as a result
of the fraudulent business practice or advertisement. Id.
at 5. That insures compliance with California Code of Civil
Procedure Section 382, which requires class representatives
to have claims typical of the class. As the Court explained, "If
Galfano alone, but not the class members, suffered injury in
fact and lost money or property as a result of Pfizer's alleged
unfair competition or false advertising, then by definition
his claim would not be typical of the class. Rather, Galfano's
claim would be demonstrably atypical." Id. at 14. This
"injury in fact" requirement has the effect of preventing
plaintiffs from lodging false advertising claims based on the
"likelihood of deception." Id. The Court expressly declined to
follow any decisions holding that a "likelihood of deception"
would have sufficed. Id. at 14-15.
In addition, the Court held that Proposition 64 requires
proposed class members to have actually relied on the
false advertisement at issue. Id. at 17. The Court found
the "actual reliance" element was inherent in Proposition
64's requirement that the injury in fact be "a result of" the
fraudulent business practices or false advertising. Id. To
that end, the Court followed Laster v. T-Mobile USA, Inc., 407
F.Supp.2d 1181 (S.D. Cal. 2005) in setting forth the proper
statutory interpretation, and declined to follow Anunziato v.
eMachines, Inc., 402 F.Supp.2d 1133 (C.D. Cal. 2005). Id. at
18. Under this "actual reliance" standard, Galfano and the
other class members "must have purchased the Listerine in
reliance on the allegedly false or misleading representations
or advertisements and as a result suffered injury." Id. at 19.
Because there was no showing that all class members had
such actual reliance, the certified class was overbroad.
III. Implications of Pfizer
As the Pfizer panel itself noted in its opinion, Proposition 64
"has had the effect of dramatically restricting these consumer
protection measures," making it far more challenging for
a private attorney general to sustain a UCL or FAL cause
of action, and placing the onus on state attorney generals
and/or local public prosecutors to police business practices.
Id. at 20. Such an outcome is in keeping with the purposes
of Proposition 64, itself, which aimed to halt UCL abuses by
deterring frivolous claims brought by plaintiffs who had not
suffered actual injury. Id. at 10.
The fate of the Court of Appeals' decision in Pfizer, however,
may soon be determined by two pending California
Supreme Court decisions on Proposition 64's retroactivity.
In Californians for Disability Rights v. Mervyn's LLC
("Mervyn's"), S131798, and Branick v. Downey Savings and
Loan Ass'n. ("Branick"), S132433, the California Supreme
Court is considering whether Proposition 64 applies
retroactively to UCL and FAL cases pending at the time of the
measure's enaction. The Court may base its decision on the
determination of whether Proposition 64 affected substantive
or procedural rights: If Proposition 64 affected mere
procedural rights, it could be deemed to apply retroactively,
whereas if it affected a plaintiff's substantive right to bring
suit, then it would apply only prospectively.
Pfizer may be read to suggest that Proposition 64 affected
a plaintiff's substantive rights to bring UCL claims, since it
holds that plaintiffs must show "injury in fact" and actual
reliance. Under such an interpretation, the California
Supreme Court may be less inclined to find Proposition 64
retroactive. Opinions in Mervyn's and Branick are expected
before the end of August 2006.
For further information, please contact:
Rachael G. Samberg, Litigation Associate
Jennifer Lloyd Kelly, Litigation Associate
This update is intended by Fenwick & West LLP to summarize
recent developments in the law. It is not intended, and should
not be regarded, as legal advice. Readers who have particular
questions about these issues should seek advice of counsel.
© 2006 Fenwick & West LLP. All Rights Reserved.