Cal Biz Lit

Just Say No! To Headless Class Actions

"What is a headless class action?" CBL hears you ask.  The usual scenario is this:  Plaintiff, or plaintiffs, file a class action.  It then turns out the plaintiffs have no standing to 
sue because they aren't class members, either because they never had causes of action against the defendant or, because, as a result of changed circumstances or law, they no longer do.  In such headless class action cases, the question presented is whether the plaintiffs can conduct discovery from the defendant to try to find better class representatives.  There was quite a bit of appellate activity on this issue several years ago, which CBL blogged about here, here and here, among other places.  But in general, the answer to the question often was "yes."

Well, here's a case where the answer isn't just "no."  The answer is "hell no!"  We're talking Starbucks Corporation v. Superior Court (Lords) (April 25, 2011) ___Cal.App.4th___ (Fourth Dist., G043650). 

Facts:  back in the day when Jerry Brown was the youngest governor in the history of the Golden State, and long before he became the oldest, California passed a law that required the "destruction" by "permanent obliteration" of all records of minor marijuana convictions that were more than two years old, and made it illegal for employers to ask about such convictions on their job applications.  Violation brought either actual damages or statutory penalties of $200 per applicant.  The statutes can be found at Health & Safety Code sections 11361.5, subd. (a), 11361.7 and Labor Code section 432.7, subd. (a).

Starbucks allegedly had a "have you ever been convicted" question on its job application that didn't exclude old, minor marijuana convictions.  So three applicants -- who had nary a conviction among them -- had the bright idea of suing Starbucks on behalf of 135,000 job applicants, seeking some $26 million in penalties.  In a previous published decision, Starbucks Corporation v. Superior Court (2008) 168 Cal.App.4th 1436 (Starbucks I), the Court of Appeal reached the rather sensible conclusion that applicants who had no marijuana convictions had no standing and that as such, the plaintiffs could not serve as class representatives. 

So, after Starbucks I, everybody hauled themselves back to the trial court, where the plaintiffs asked to conduct discovery so they could find some better class representatives.  The idea was this:  Starbucks should search through all their job applications to find applicants with marijuana convictions.  They should then send this information to a "neutral administrator" who would write the convicted applicants and ask, "hey, how would you like to disclose your marijuana conviction to the world and be class representatives in our great big fancy case against Starbucks?"  And amazingly, the trial court said "Sure, why not?"

To which the Court of Appeal said "We'll tell you why not:"

Nobody can misunderstand this clear legislative purpose. Records of minor marijuana convictions are to be accorded the highest degree of privacy; they must be treated as if they never existed. Despite these strongly worded prohibitions, the subject discovery order requires Starbucks to rummage through old job applications to locate offenders whose existence otherwise would be hidden from public exposure.
Considering the manifest harm and the minimal benefit (all of which are wrapped up in the same legislation), the discovery order cannot possibly pass the Parris balancing test. As Hooper holds, publicly disclosing marijuana-related offenses covered by the marijuana reform legislation violates the individual offender's right of privacy.

But there's additioanal language CBL likes even more. 

Plaintiffs' attorneys say the class remedy is necessary because the $200 statutory penalty is de minimis. They frankly desire to achieve a “more powerful litigation posture” because “[i]n numbers there is strength.”
We recognize class counsel's tactical motivations to increase their side‟s bargaining leverage, but the argument militates against a class action, rather than in its favor. The excessive penalties sought by class counsel bear little relationship to any true public interest for what, at most, appears to be a technical violation of Labor Code section 432.8 by Starbucks. The strength that may be gained in numbers also may produce the “absurd result of turning the statute into the veritable adding machine that has been decried by our Supreme Court.”

Wow.  Language that will appear forever after in briefs opposing class certification in California.

One side note:  years ago, a friend who is also a marketing consultant told CBL that his blog posts would be more compelling if he included images.  So CBL often does.  But who knew we'd get to include both the Starbucks logo and a marijuana leaf in the same post!

Arbitration: US Supremes Overrule California's Discover Bank Rule

In Discover Bank v. Superior Court (2005) 36 Cal. 4th 148,the Cal Supremes held that in a contract of adhesion (which virtually all consumer contracts are), arbitration provisions that waived class actions were void as against public policy.

Today, in a decision that shouldn't have been too surprising, the US Supremes said "oh no they aren't."  5-4 vote, opinion by Justice Scalia, Discover Bank held preempted by the Federal Arbitration Act, 9 USC §2.  Period.  No exceptions.  Thank you for playing.  No room for argument.  End of story.  A T & T Mobility LLC v. Concepcion ___ U.S. ___.

A Better Consumer Legal Remedies Act

As we rang in the new year, CBL committed to post some ideas about how to improve three problematic areas of California law, making them less business-unfriendly while maintaining California's position as a very pro-consumer, pro-green state.  On January 4, we solved a Proposition 65 problem.  So this time, let's look at the Consumer Legal Remedies Act, Civil Code section 1750 and following.

Here's what the CLRA does at its heart:  it outlaws some 22 deceptive business practices, including "[p]assing off goods or services as those of another," and "[r]epresenting that goods or services have . . . characteristics, ingredients, usies, benefits, or quantities which they do not have . . . " and "[r]epresentinig that goods or services are of a particular standard, quality or grade. . . if they are of another."

Fine.  It's the twenty-first century, and we can agree that sellers of goods and services shouldn't make false representations about them.  But where the CLRA runs off the rails is when it gets to remedies and the class action provisions.  The successful plaintiff can recover actual damages, an injunction, restitution, punitive damages, attorneys' fees and costs and "[a]ny other relief that the court deems proper."  Civil Code section 1780. And the CLRA has its own class action provisions, which allows certification of a class without a showing of substantial benefit to the litigants and to the court.  Civil Code section 1781, Corbett v. Superior Court (2002) 101 Cal.App.4th 649,669, fn 9.

So, as with Proposition 65 litigation, the odds are stacked against the company.  A company that thinks it has a meritorious defense risks a very large hit if it guesses wrong.   But there is supposed to be one potential safety valve for the company.  Thirty days before the consumer can seek damages, she must give notice of the violation and give the company an opportunity to "correct, repair, replace or otherwise rectify" the problem (Civil Code section 1782).  

Under section 1782(b), an individual action is barred if "an appropriate correction, repair, replacement or other remedy is given, or agreed to be given within a reasonable time, to the consuemer within 30 days of the notice."  And under section 1782(c), no class action for damages may be brought if the company shows it has identified, or made a reasonable effort to identify, all the class members, offered and given a remedy to all the class members, and stopped the unlawful practice.

So, what's wrong with that?  Well, for one thing, a consumer can seek equitable remedies -- including injunction, restitution and rescission -- without giving the thirty days notice, so the notice requirement is pretty much illusory.  Also, the notices never fully describe the legal consequences of failing to resolve the claim, so most non-California companies who get the pre-filing notice have no idea about the consequences of ignoring the requests.   Consumer attorneys don't want to provide this information;  they want the company to ignore the letter so they can file suit.  Furthermore, the statutory structure encourages plaintiffs' attorneys to make all kinds of class demands in every pre-filing notice, since compliance is almost always impossible within thirty days.

And finally, the statute is silent as to whether consumer attorneys may insist on receiving fees as part of their initial demands, and pre-filing notices almost always  demand attorneys' fees. CBL's best analysis is that there is no right to fees if the company offers a remedy within the statutory time.  But CBL acknowledges there is some ambiguity.

So why not make these changes?

• Provide that notice must be given before filing any action under the CLRA;
• Prescribe language that must be included in the notice advising the company of its rights and duties, and the potential consequences of failing to respond to the notice;
• Provide a longer notice -- say, 120 days -- prior to filing a class action suit, so that the company has a full and fair opportunity to conduct an investigation o the allegations;  and
• Make it clear in the statute that a company that acts in good faith during the statutory period to remedy the violation will not be liable for attorneys' fees.  And make it a requirement that this information be provided in the pre-filing notice.

The statute would still be very protective of consumer rights.  It would include all the protections of the existing statute.  And, unlike the existing statute, it would encourage early and immediate resolution.  What could possibly be wrong with that?

California Court of Appeal Issues Important New Decision For Auto Dealers

    As we often point out to our automobile dealership clients, the retail motor car sales industry in California is a highly regulated one;  in fact, it's mostly regulated by the 
 plaintiff's  bar.  The stereotype promoted by some legislators and trial lawyers that automobile dealers are crooks has resulted in a long series of highly technical legislative enactments directed, in particular, at sales, advertising and financing practices in this area.  And a small number of California lawyers specialize in bringing suit against dealers for what often seem like trivial and technical violations (for further discussion, see the Adams Nye Automobile Dealership White Paper).

    Last week, the Court of Appeal issued a 52-page decision that should be read and absorbed by every California dealer and every lawyer representing a dealer.  The case is Nelson v. Pearson Ford Co. (July 15, 2010) ___Cal.App.4th ___ (Fourth Dist., D054369).  Some of the highlights (or low-lights):

• The case involved a common, "spot-sale" scenario.  The customer purchased the car on October 2, 2004 and signed a retail installment sales contract.  The dealer couldn't get a lender to buy the deal as written, so it called the customer back on October 8, had him rescind the deal in writing and entered into a new contract, which the dealer was able to assign to a lender.  As dealers often do, the dealer back-dated the deal to the original October 2 date.  To which the Court of Appeal said:  this violates Regulation Z, and therefore violates the Automobile Sales Finance Act (":ASFA").  More significantly, by charging interest (less than $20) for six days before there was actually a contract, the dealer imposed and failed to disclose an unlawful interest charge.
• The customer did not have automobile insurance.  So the dealer contacted an insurance broker, who came to the dealership and sold him an auto policy.  This was not itemized in the contract;  instead, there was a separate "Due Bill," (also a common dealership practice) staring that the price of insurance was included in the total vehicle price.  This was also a violation of ASFA, which requires insurance premiums to be separately itemized.  And adding the premium to the cost of the car meant that the customer was charged $30 in additional sales tax and financing charges on the insurance premium. 
• The Court of Appeal ruled that, based on either the unlawful interest charge, or the failure to itemize the insurance premium, the customer was entitled to return the car to the dealer and receive back all of his payments, less an offset for the value of his actual use of the car.  Note that the customer had been driving the car for more than three years.
• The customer brought a class action against the dealership, and classes were certified by the court, meaning the potential disruption of hundreds of existing deals entered into over a five year period.
• In addition to AFSA, the dealership faced liability under California's Unfair Competition Law and Consumer Legal Remedies Act, as well as attorneys fees and costs exceeding $400,000 at the trial court level (with more to come, no doubt, for the appeal).

Moral of the story:  fill out the paperwork correctly.  Itemize everything.  Use the right date.

Clayworth v. Pfizer, Inc.: The Other [Hanover] Shoe Drops

    It’s been a long time since CBL has posted about California’s Unfair Competition Law, and even longer since we blogged about anti-trust law.  Here’s a two-fer.

    As CBL noted in this post, California has had its own anti-trust law, the Cartwright Act (Bus. & Prof. Code §§16700 and following), since 1907, and the California anti-trust jurisprudence is similar, but by no means identical to, that deriving from the Federal Sherman Anti-Trust Act (15 U.S.C. § 1, and following).  In July, 2008, the California Court of Appeal for the First District carved out one difference with respect to the “pass-on defense.”

    In Clayworth v. Pfizer, Inc., (A116798), plaintiffs, retail pharmacies, bought prescription drugs from  pharmaceutical manufacturer defendants.  The defendants allegedly conspired unlawfully to keep the prices artificially high.  Plaintiffs allegedly passed along every last nickel of the supra-market price to their customers.  Under the asserted “pass on” defense, the defendants alleged that the plaintiffs had no claim because they had “passed on” the alleged increased costs to their own customers, and hence had sustained no damages.  Although this defense had been rejected by the U.S. Supremes in Hanover Shoe v. United Shoe Mach. (1968)  392 U.S. 481, the Court of Appeal held that California law was different, and allowed for the pass-on defense.

    But the Cal Supremes have  reversed, and the law in this regard is now the same under both the Cartwright and Sherman Acts:  in most instances, there is no pass-on defense.  Clayworth v. Pfizer, Inc. (July 12, 2010) ___Cal.4th___ (S166435).  State and Federal law still differ, however, with respect to the “indirect purchaser” rule.  Under Federal anti-trust law, the customers of the plaintiffs – the ones who actually paid the net increased prices caused by the defendants’ price-fixing – are barred from suing the manufacturers.  Illinois Brick Co. v. Illinois (1977) 431 U.S. 720.  Under California’s “Illinois Brick repealer act (Bus. & Prof. Code § 16700), the opposite is true.  The ultimate purchasers can sue.

    In addition to their Cartwright Act causes of action, the plaintiffs here sued for injunctive relief and restitution under the Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.)  And the wrinkle in this decision has to do with the  UCL.

    Under Proposition 64, the voters’ 2004 initiative tightening the UCL’s standing requirement, a UCL plaintiff lacks standing unless he can show that he “suffered injury in fact and has lost money or property” as a result of unfair competition.  (Bus. & Prof. Code § 17204.)   So, said the defendants, since all the price increases were “passed on” to the ultimate consumers, the plaintiffs suffered no injury in fact and lost no money or property, so they lacked standing, right?

    Wrong.  That the price increases were passed on to the plaintiffs’ customers was a matter of mitigation.  “The [p]harmacies indisputably lost money when they paid an allegedly illegal overcharge.”  (Slip. Op. p. 40.)  The fact that they ultimately may have recouped some or all of this lost money from someone else doesn’t prevent them from having standing in the first place. 

    CBL thinks this holding is the real sleeper, and will likely ease the UCL’s standing requirement in a number of as yet unforeseen settings.

    More commentary on Clayworth:  UCL Practitioner here and here (UCLP's Kimberly Kralowec wrote one of the amicus briefs on the case);  California Appellate Report here.

Happy Meals -- Too Much Happiness?

CBL takes you now to the Center for Science In The Public Interest, a non-profit advocacy group whose described goal is the admirable one of "Transforming The American Diet."   More roughage, fewer fries, CBL can get behind that. 

But naturally, CSPI has, wait for it, a litigation department.  Well of course it does.  And its Litigation Director is taking on McDonald's Happy Meals.  Why?  Because:

McDonald’s is deliberately marketing directly to unsuspecting little children by offering appealing toys—usually ones related to popular movies or television shows. McDonald’s marketing has the effect of conscripting America’s children into an unpaid drone army of word-of-mouth marketers, causing them to nag their parents to bring them to McDonald’s.

And according to CSPI, marketing to children is inherently unfair and unlawful, because

. . . because young kids are not developmentally advanced enough to understand the persuasive intent of marketing; and (2) unfair to parents, because marketing to children undermines parental authority and interferes with their ability to raise healthy children.

CSPI is threatening McDonald's with suit under a variety of state statutes including, of course, our old friend the Unfair Competition Law, California Business & Professions Code Section 17200.

So, what would a case like that look like under the UCL?  Well, first of all, CSPI would have to prove that McDonald's engaged in a business practice.  Not a problem.  Then they'd have to show the practice was unlawful, unfair or fraudulent.  The "unlawful" prong, prohibits "any practices forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made."  South Bay Chevrolet v. General Motors Acceptance Corp. (1999) 72 Cal.App.4th 861.  But I'm hard pressed to come up with an applicable law that fills the bill.  On the other hand, Committee on Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197 strongly suggests that predatory advertising to children may fit either the unfair or fraudulent prongs.

But wait, there's more.  The 2004 voter initiative Proposition 64, sponsored by business to mitigate some well-documented abuses of the UCL, requires that a UCL action may be brought only  "by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition."

Has a six-year-old child who cajoles her parents into taking her to McDonald's to get a happy meal "suffered injury in fact," or has she just been fed?  And how has she lost money or property as a result of the "unfair competition."

Sounds like a very tough darned near impossible burden.

I Can't Believe It's Not A Lawsuit

Here's another reason defendants love federal court.

Plaintiff files a putative class action in the Northern District of California (or else it's removed there -- I'm not sure which) against Unilever involving the butter substitute "I Can't Believe It's Not Butter."  She alleges violations of the Consumers Legal Remedies Act (Civil Code § 1750 et seq.), our old friend the Unfair Competition Law (Bus. & Prof. Code §17200 et seq.) and the False Advertising Law (Bus. & Prof. Code  §17500 et seq.). And what's the terrible wrongdoing she's trying to challenge?

Well, it seems that Unilever advertises and labels "ICBINB" as being "nutritious, healthy to consume, and better than butter and similar products" when it contains partially hydrogenated oil, which "is an artificial, man-made substance that has no nutritional value and is known to cause a number of health problems."

But Plaintiff runs into the Twombly and Iqbal buzz saws.  Judge James Ware restates her allegations as a "categorical syllogism" to demonstrate their implausibility:

For the representation "blend of nutritious oils" to be true, all constituent oils must be nutritious.  One of the constituent oils in the product [partially hydrogenated oil' is not nutritious.  Therefore, the product representation is false.

And the Court finds both the major premise (that all constituent oils must be nutritious in order for the blend to be nutritious) and the minor premise (that partially hydrogenated oil is not nutritious) to be "mere conclusions" lacking factual support.  So under the first prong of Iqbal (conclusions are disregarded) the allegations are implausible.

But then, just to finish putting nails in the case's coffin, Judge Ware proceeds with an "even if" analysis, slamming the complaint under the second Iqbal prong (do the non-conclusory statements state a plausible claims?).  And he concludes that even if the allegations are not "mere conclusions," they fail because they commit these fallacies:

• "petitio principii," (begging the question);
• "fallacy of composition" (reasoning from the properties of a part to those of the whole);  and
• "fallacy of division" (reasoning from the properties of the whole to those of the part).

Wow.  That's what a Stanford Law education gets you.  The decision is in Rosen v. Unilever United States, Inc., ___ F. Supp. 2nd ___, 2010 U.S. Dist. Lexis 43797 (May 3, 2010).

Wal-Mart Class Certification Affirmed By Ninth Circuit En Banc

This just in:  class certification in Dukes v. Wal-mart, the wage discrimination class action filed in U.S. District Court for the Northern District of California, has been affirmed in part by the Ninth Circuit.  The slip opinion is here.  137 pages.  Knock your self out.

Bottom line:  class certification affirmed as to injunctive relief, and as to women employed by Wal-Mart when the case was filed.  Remanded for further consideration on punitive damages and on certification, or separate class status, for women who were ex-employees when case filed.

More later.

Lawsuit Charges FaceBook With Violating California Privacy Law

    Mark Lanier, one of the most successful plaintiff's toxic tort and drug lawyers in the country (and a really skilled trial lawyer who is generally despised by American business) is going after Facebook.  He's representing five plaintiffs, a diverse group including a photographer, a model and actress, two minors and a college student  in Orange County, California.  The case is basically a privacy case, based on Article 1, Section 1 of the California Constitution, The Consumer Legal Remedies Act, Civil Code sections 1750 et seq., Civil Code section 3344, and, of course, our old friend the Unfair Competition Law, Business & Professions Code section 17200 et seq.  Legal Newsline has the story here.  Wall Street Journal's Law Blog has it here, including the Complaint. 

    Still, I'm skeptical.  I can understand the deal with the photographer and model/actress.  But I didn't think minors and college students used FaceBook anymore.  I thought it had been taken over by my generation.

Update:  There's a great compilation of press quotes about this at Kashmir Hill's The Private Parts ("Facebook privacy lawsuit tried by the press. Found lacking.")  My favorite quote is from MSNBC.com's Technotica:

Frankly kids, suing Facebook for violating your privacy is like going to a kegger at the Devil’s house, then waking up on the front lawn the next day hung over, naked, missing your soul …and surprised.

Ford Explorer Rollover Coupon Settlement -- Coupons Gathering Dust

    More than a year ago, CalBizLIt blogged -- no, not just blogged, whined and ranted -- about the coupon settlement in the Ford Explorer Cases, JCCP Nos. 4266 and 4270.  Fundamentally, CalBizLit hates coupon settlements.  CBL, which generally believes in the civil justice system,  thinks these settlements provide no social benefit and that the y are a spectaculrly cynical method of throwing crumbs to class members while paying millions to class counsel.  My point is this:  if the class action has merit, then class members should get something real.  If the class action is worth nothing more than coupons, then it likely shouldn't have been filed in the first place and the attorneys shouldn't get anything.

    So to summarize, plaintiffs claimed that Ford had failed to disclose  that Explorers had a high center of gravity, making them prone to roll over and therefore unsuitable as family vehicles.  Every single owner was allegedly damaged by the difference between the value of the vehicle if it was as advertised, and its true value (an amount estimated at $1,000 per vehicle).  The case was based on our old statutory friend, California's Unfair Competiition Law.  UCL Practitioner had more details here.

    Their lawyers got a class certified.  Trial was under way.  The parties settled.  Each class member was to get a coupon worth $300 to $500 toward the purchase of a new car.  Plaintiff attorneys were to get $25 million in fees. According to the Sacramento Bee, Clarence Ditlow of the Center for Auto Safety weighed in as follows:  "They should pay the lawyers in coupons."

    So now the AP reports on how that whole coupon distribution thing worked out.  Total value of coupons distributed to date:  $37,500.  Yep, that's somewhere between 75 and 125 coupons for all of that.  And the attorneys' defense?

In a statement e-mailed to The Associated Press by the class action firm Lieff, Cabraser, Heimann, & Bernstein on behalf of the five firms who sued Ford, the lawyers noted that they also forced Ford to stop touting the Explorer's safety features and make a $950,000 donation to nonprofit auto-safety groups, which they said benefits their clients.

    Right.  That was sure worth $25 mil.  More coverage:  Wall Street Journal and  Paul Elias.