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The California Supreme Court today issued its highly awaited decision in In re Tobacco II Cases, No. S147345 (Cal., May 18, 2009).  The 4-3 majority opinion addressed two issues relating to standing in class actions filed under the California Unfair Competition Law (“UCL”):

1) the UCL “standing requirements are applicable only to the class representatives, and not all absent class members;” and

2) “a class representative proceeding on a claim of misrepresentation as the 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.”

This may be the proverbial case where bad facts make bad law.  The majority’s decision appears to be motivated in no small way by a need not to let the tobacco industry get away with years of misleading advertising targeted toward minors.  To this end, the majority uses language that potentially opens the door to “bait and switch” litigation where litigants with legitimate individual claims file actions on behalf of overly broad classes of people who themselves were not injured monetarily by alleged wrongful conduct, only to demand verdicts or settlements in amounts based on the fallacious premise that these same classes were injured by the conduct.  The dissenting opinion offers an example of what many may fear could be the result of the majority’s decision:

Consider the following scenario: A local chain of family-owned supermarkets receives a large shipment of ground beef and puts it out for sale. The stores’ meat departments label and display the meat as “ground round,” the leanest grade. The stores’ regular price for ground round is $5.99 per pound, but the display labels offer the meat from this shipment at a “reduced price” of $4.99 per pound. The company has not intentionally misrepresented the product.

However, in the exercise of due care, it should have known the meat is ground sirloin, a wholesome but slightly fattier grade. The chain is actually selling other quantities of ground sirloin, correctly labeled, at its regular $4.99 per pound price.
Customer A visits one of the stores, seeking to buy ground beef. Concerned about his fat intake, he does not intend to purchase any grade other than ground round and would not knowingly do so. Relying upon the incorrect “ground round” label, he buys a pound of the meat, so labeled, at the $4.99 price, and consumes it. A substantial number of other customers also see the incorrect “ground round” labels. However, many do not care about the grade of ground beef they eat, do not realize the significance of the label, and are not influenced by it. Nonetheless, they also buy substantial quantities of the mislabeled meat and happily consume it.

Customer A later discovers the labeling mistake. He obtains counsel and brings a UCL action alleging false advertising that caused him actual injury or loss in the amount of $4.99. He claims restitution to himself in that amount. In the suit, he further seeks to certify a class of all other customers who saw the incorrect labels and purchased the mistakenly mislabeled meat. Regardless of whether these persons relied on the incorrect description when purchasing the mislabeled product, he prays for restitution, on their behalf, of all profits the stores received from such purchases.

Under the majority’s concept of no-injury class actions, the plaintiff, Customer A, may well succeed in this endeavor if the case proceeds in court. Realizing this, the company quickly settles. That cannot be what the voters intended when they adopted the substantial reforms set forth in Proposition 64.

Hopefully, later courts will recognize that there are limitations beyond the threshold issue of standing that should prevent this type of unjust and illogical outcome, but only time will tell.

Update, May 19, 2009: In related news, California grocery stores statewide reported a huge influx of patrons at their meat departments this morning.  Many of the new customers were wearing expensive suits and handing out business cards.

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