Friday, January 28, 2011

Kwikset reversed; misrepresentation about production can lead to lost money or property

Kwikset Corporation v. The Superior Court of Orange County, --- Cal.Rptr.3d ----, 2011 WL 240278 (Cal.)

Kwikset sold a number of locksets labeled “Made in U.S.A,” which a court found to be false. The question was how Proposition 64 affected the class action. The trial court enjoined Kwikset from labeling any lockset intended for sale in California “Made in USA” or the like if it contained any article, unit, or part that is made, manufactured, or produced outside of the United States. While it also ordered notification of California retailers and distributors that they could return or get replacements for improperly labeled locksets, the court denied Benson’s request for restitution on the grounds that it would be very expensive and that the equities weighed against it, given that the violations had ceased and that the misrepresentations were not “so deceptive or false as to warrant a return and/or refund program or other restitutionary relief to those who have been using their locksets without other complaint.” (Some parts came from and some assembly took place outside the US, but not a lot.)

As amended to meet Proposition 64’s new standing requirements (enacted while the case was on appeal), the complaint alleged that each class representative read and relied on Kwikset’s misrepresentations in deciding to purchase the locksets, thus causing each plaintiff to spend and lose the money paid for the locksets. The trial court held that plaintiffs adequately alleged standing when they pled that they were induced to buy products that they didn’t want and that were therefore unsatisfactory to them.

The court of appeal, reversing, reasoned that plaintiffs hadn’t alleged that their locksets were overpriced or defective, even if their desire to buy fully American-made products was frustrated. The allegation that plaintiffs would not have purchased the locksets but for the false labeling was insufficient to establish standing because it didn’t satisfy the requirement of “lost money or property.”

The California Supreme Court reversed. “Proposition 64 should be read in light of its apparent purposes, i.e., to eliminate standing for those who have not engaged in any business dealings with would-be defendants and thereby strip such unaffected parties of the ability to file ‘shakedown lawsuits,’ while preserving for actual victims of deception and other acts of unfair competition the ability to sue and enjoin such practices. Accordingly, plaintiffs who can truthfully allege they were deceived by a product's label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue.”

The California Supreme Court began with the broad consumer-protective purposes of the UCL and FAL. The stubstantive reach of the statutes remains expansive even though the electorate “materially curtailed the universe of those who may enforce their provisions.” To prevail post-Proposition 64, a party must “(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.”

The text of Proposition 64 established expressly that in selecting the phrase “injur[y] in fact” the drafters and voters intended to incorporate the established federal meaning. Under federal law, injury in fact is an invasion of a legally protected interest which is concrete and particularized, and actual or imminent, not conjectural or hypothetical. Particularized means simply that the injury must affect the plaintiff in a personal and individual way. Proof of injury in fact will in many instances overlap with proof of “lost money or property.”

This phrase clearly requires plaintiffs to show some form of economic injury. “There are innumerable ways in which economic injury from unfair competition may be shown. A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary,” and that’s not an exhaustive list. Economic injury is a “classic” form of injury in fact; though intangible injuries may also constitute injury in fact, Proposition 64 precludes reliance on purely non-economic injuries.

However, while Prop. 64 is qualitatively more restrictive, there was no justification in its text for considering it quantitatively more difficult to satisfy than federal injury in fact. “Rather, we may infer from the text of Proposition 64 that the quantum of lost money or property necessary to show standing is only so much as would suffice to establish injury in fact; if more were needed, the drafters could and would have so specified.” An “identifiable trifle” is enough.

And, of course, the plaintiff must show that his or her economic injury came as a result of the unfair competition or violation of the FAL. As to that:
Simply stated: labels matter. The marketing industry is based on the premise that labels matter, that consumers will choose one product over another similar product based on its label and various tangible and intangible qualities they may come to associate with a particular source. An entire body of law, trademark law, exists to protect commercial and consumer interests in accurate label representations as to source, because consumers rely on the accuracy of those representations in making their buying decisions.

To some consumers, processes and places of origin matter. (See Kysar, Preferences for Processes: The Process/Product Distinction and the Regulation of Consumer Choice (2004) 118 Harv. L.Rev. 525, 529["[C]onsumer preferences may be heavily influenced by information regarding the manner in which goods are produced."]; ibid. [Although the circumstances of production "generally do not bear on the functioning, performance, or safety of the product, they nevertheless can, and often do, influence the willingness of consumers to purchase the product."].) Whether a particular food is kosher or halal may be of enormous consequence to an observant Jew or Muslim. Whether a wine is from a particular locale may matter to the oenophile who values subtle regional differences. Whether a diamond is conflict free may matter to the fiancée who wishes not to think of supporting bloodshed and human rights violations each time she looks at the ring on her finger. And whether food was harvested or a product manufactured by union workers may matter to still others.
Specifically, “Made in U.S.A.” matters to some consumers. “A range of motivations may fuel this preference, from the desire to support domestic jobs, to beliefs about quality, to concerns about overseas environmental or labor conditions, to simple patriotism.” The legislature responded to the materiality of this representation by specifically outlawing deceptive “Made in U.S.A.” representations.

Comments: Compare this reasoning to that in Amestoy, where the court said that the legislature could not require disclosure of the use of rBST in producing milk just because consumers thought that it made a difference, where the legislature had not itself found that real differences existed (and of course such findings would be resisted by our trade partners in this case). Also, nice to see Doug Kysar’s excellent article recognized.

Moving on: how is this lost money or property? “For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same: the consumer has purchased a product that he or she paid more for than he or she otherwise might have been willing to pay if the product had been labeled accurately.” But what if the product works just as well?
This economic harm … is the same whether or not a court might objectively view the products as functionally equivalent. A counterfeit Rolex might be proven to tell the time as accurately as a genuine Rolex and in other ways be functionally equivalent, but we do not doubt the consumer (as well as the company that was deprived of a sale) has been economically harmed by the substitution in a manner sufficient to create standing to sue. Two wines might to almost any palate taste indistinguishable--but to serious oenophiles, the difference between one year and the next, between grapes from one valley and another nearby, might be sufficient to carry with it real economic differences in how much they would pay. Nonkosher meat might taste and in every respect be nutritionally identical to kosher meat, but to an observant Jew who keeps kosher, the former would be worthless.
As a result, consumers who rely on misrepresentations can have standing by alleging, as plaintiffs did here, that they wouldn’t have bought the product but for the misrepresentation. “From the original purchasing decision we know the consumer valued the product as labeled more than the money he or she parted with; from the complaint's allegations we know the consumer valued the money he or she parted with more than the product as it actually is; and from the combination we know that because of the misrepresentation the consumer (allegedly) was made to part with more money than he or she otherwise would have been willing to expend, i.e., that the consumer paid more than he or she actually valued the product. That increment, the extra money paid, is economic injury and affords the consumer standing to sue.”

The dissent didn’t like considering a plaintiff’s subjective motivations in this way. But such considerations are “a routine part of common law deceit actions: we will allow one party who subjectively relied on a particular deception in entering a transaction to sue, while simultaneously precluding another who subjectively did not so rely from suing.” Once the pleading threshold has been crossed, the plaintiff has the burden of proof in his or her case, and a court can exercise its discretion in determining which, if any, of the various equitable and injunctive remedies provided for by the law are warranted in a given case.

The alternative would be to end private consumer enforcement with respect to many label misrepresentations. “That public prosecutors can still sue is of limited solace, given the significant role we have recognized private consumer enforcement plays for many categories of unfair business practices. … [I]f we were to deny standing to consumers who have been deceived by label misrepresentations in making purchases, we would impair the ability of consumers to rely on labels, place those businesses that do not engage in misrepresentations at a competitive disadvantage, and encourage the marketplace to dispense with accuracy in favor of deceit.”

None of the court of appeal’s arguments to the contrary sufficed. First, plaintiffs didn’t allege any overcharge or functional defects in the locksets. But cognizable economic harm is not confined by the phrase “lost money or property” to objective functional differences. Also, “the economic injuries the Court of Appeal would require in order to allow one to sue for misrepresentation are in many instances wholly unrelated to any alleged misrepresentation. An allegation that Kwikset's products are of inferior quality, for example, even if it might demonstrate lost money or property, would not demonstrate lost money or property ‘as a result of’ unfair competition or false advertising about the product's origins.”

The core of the argument is that plaintiffs received the benefit of their bargain, even if they relied on misrepresentations in purchasing. But the problem with this argument is that plaintiffs didn’t. They bought Kwikset locksets at least in part because they were “Made in U.S.A.”; they wouldn’t have bought the locksets otherwise; and we can infer that they value what they actually received less than the money they spent or less than working locksets actually made in the U.S. “They bargained for locksets that were made in the United States; they got ones that were not.… The observant Jew who purchases food represented to be, but not in fact, kosher; the Muslim who purchases food represented to be, but not in fact, halal; the parent who purchases food for his or her child represented to be, but not in fact, organic, has in each instance not received the benefit of his or her bargain.” [Any bets on whether this decision will be cited to show “creeping sharia” in US law?]

The court went on to unpack the benefit-of-the-bargain argument as resting on one of two unstated assumptions—that the misrepresentation at issue should be deemed immaterial, or that, “even if the consumer does not value what he or she received as much as what he or she paid, the marketplace would, and its valuation should be dispositive.”

As to the first, a misrepresentation is material if a reasonable person would attach importance to its existence or nonexistence in determining a choice about the transaction at issue (or if the maker of the representation knows or has reason to know that the recipient thinks of the misrepresentation as important to his or her choice, even if a reasonable person wouldn’t). “Here, the Legislature has by statute made clear that whether a product is manufactured in the United States or elsewhere is precisely the sort of consideration reasonable people can and do attach importance to in their purchasing decisions,” and the U.S. government even requires its agencies to privilege U.S.-made goods. In fact, Kwikset itself used labels like "All American Made & Proud Of It" and "Made in U.S.A." because it concluded that such marketing might sway reasonable people in their purchasing decisions. Anyway, as materiality is generally a question of fact, it wasn’t a basis for dismissing the case on the pleadings.

The second theory is that a consumer hasn’t lost money or property if the marketplace would continue to value the product as highly as the amount the consumer paid for it, whether or not he or she would do so. In theory, the deceived consumer could turn around and sell the locksets to someone else for the same price.

The court identified four problems with this theory:
First, it assumes there is a functioning aftermarket for resale that would allow a plaintiff to liquidate the good in question by reselling it to those for whom the misrepresentation is immaterial. This plainly is not so in many instances. While there are certainly consumers for whom the kosher or halal or organic quality of food is immaterial, there is no functioning aftermarket that would permit easy resale of, for example, perishable foodstuffs and small-ticket consumer goods. A gallon of nonorganic "organic" milk cannot be resold. A consumer who has purchased products mislabeled in this fashion cannot recoup his or her purchase price.

Second, it assumes a consumer has no qualms--religious, ethical, or otherwise--that would preclude his or her partaking in resale of the mislabeled product, or at least none that the law should respect.

Third, it assumes that resale will not involve transaction costs and that an individual consumer will be able to resell the mislabeled product at the same price. But even for goods where there is a functioning aftermarket, resale will generally require the deceived buyer to sell at a reduced price to account for the facts the good is being resold and the source (an individual consumer) is less reliable than the original seller (a commercial establishment). In such instances, there still has been a loss of money.

Fourth, it ignores that the law generally disregards such "pass-on" sales. Kwikset's argument, that a deceived buyer has lost nothing because he or she has the value of the item still possessed, can be viewed as a pass-on defense in disguise: the buyer has an item that, through a presumed functioning aftermarket, he or she could convert back into an equivalent amount of money, recouping through the subsequent sale any perceived loss. But in the eyes of the law, a buyer forced to pay more than he or she would have is harmed at the moment of purchase, and further inquiry into such subsequent transactions, actual or hypothesized, ordinarily is unnecessary.

In a footnote, the court further characterized this second argument as one that “the materiality of a representation must be proven by reference to a market that charges more for products that carry a particular label.” As the court recognized, this would have significant effects on the scope of consumer protection law. “In any market with generally parallel pricing (whether through conscious parallelism or otherwise), where competitors use representations about features principally to increase market share rather than to charge a premium, any deception in such representations would no longer be privately enforceable by consumers. We do not see expressed in Proposition 64 any intent to deregulate the commercial speech marketplace of ideas to this extent.”

Kwikset argued by analogy to real property fraud cases measuring the damages for fraud by the difference in the actual value of what was parted with and what was received. But that rule provided the measure of damages, not a limit on standing or on the availability of equitable remedies, a conclusion actually made explicit in California’s Civil Code. Civ. Code, § 3343, subd. (b)(2) (damages rule shall not be used to "[d]eny to any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled"). Especially since a damages remedy is unavailable under the UCL, there was no reason to think that the electorate intended to borrow this rule for a wholly unrelated purpose, a restriction on standing:
Indeed, doing so would render standing under the UCL and false advertising law substantially more difficult to establish than standing to assert common law deceit: As Kwikset's counsel properly acknowledged at oral argument, a consumer who purchased a product in reliance on an alleged misrepresentation would under the common law have standing to sue for fraud, misrepresentation, and rescission without having first to prove, as Kwikset argues the UCL and false advertising law now require, that the product received was worth less than the money paid for it. While Proposition 64 clearly was intended to abolish the portions of the UCL and false advertising law that made suing under them easier than under other comparable statutory and common law torts, it was not intended to make their standing requirements comparatively more onerous.
The court pointed to Prop. 64’s findings and declarations of purposes in the voter information guide (as its precedent dictated in interpreting propositions, by analogy to legislative history). These expressed concerns that UCL suits were being brought by clients who hadn’t used the defendant’s product or service, viewed the targeted ads, or had any other business dealing with the defendants, as in the Kasky case. “In short, voters focused on curbing shakedown suits by parties who had never engaged in any transactions with would-be defendants. No corresponding concern was expressed about suits by those who had had business dealings with a given defendant, and nothing suggests the voters contemplated eliminating statutory standing for consumers actually deceived by a defendant's representations.”

Finally, the court of appeal relied on a line of cases reading “lost money or property” to confine standing under section 17204 to people who suffer losses eligible for restitution. Because plaintiffs weren’t entitled to restitution, they then necessarily lacked standing. However, the standards for standing and for eligibility for restitution under section 17203 are “wholly distinct.” Prop. 64 amended both sections; it would have been easy to make standing under section 17204 expressly dependent on eligibility for restitution, but that’s not what happened. (By comparison, the CLRA requires that a consumer be able to prove damages in order to have standing.) The court refused to conflate standing with the question of the remedies to which a party might be entitled.

Standing should not be dependent on eligibility for restitution for another reason: restitution is confined to restoration of money taken from the plaintiff by the defendant. But unfair business practices may cause economic injury without any corresponding gain to the defendant, such as diminished value of a plaintiff’s assets from defamation. Such injuries are lost money or property and permit injunctive relief even without any basis for restitution.

The larger point was that to make standing dependent on eligibility for restitution “would turn the remedial scheme of the UCL on its head.” Injunctions are the primary form of relief under the UCL, with restitution a form of ancillary relief. Tobacco II noted that Prop. 64 didn’t amend the remedies provision of the UCL, and so there was no reason to conclude that standing should depend on eligibility for restitution, making injunctive relief an appendage.

Judge Chin (also a dissenter in Kasky) dissented. The voters unequivocally intended to narrow the category of persons who could sue under the UCL. “By failing to expressly define ‘lost money or property’ and instead equating it with economic injury, the majority effectively collapses the two separate requirements of section 17204 into one.” The dissent argued that plaintiffs’ subjective purchase motivations shouldn’t count. “Whatever value the consumer may subjectively assign to the product …, plaintiffs have failed to allege that their personal preference is reflected in any cost differential between the mislabeled and correctly labeled products.” This objection is not directed at reliance, but at the fact that now a plaintiff must only allege “‘I would not have bought the product but for the misrepresentation,’ to establish not only causation but also an injury cognizable under section 17204. An allegation that merely identifies the party's subjective motivation clearly does not track the language of the section.”

The dissent found it unclear what constituted the “extra money paid” in this context. The counterfeit Rolex and mislabeled kosher, halal, or organic food examples were inapposite. “One can hardly dispute that these genuine products have greater value placed on them than on their mislabeled counterparts, and consumers who buy the latter may allege and prove they actually paid (and therefore, lost) extra money based on the mislabeling.” However, under the majority’s rule, plaintiffs need not allege any price differential, even though counterfeit Rolexes are “clearly overpriced” because a typical counterfeit is inferior in quality, just as kosher, halal, and organic foods are typically more expensive.

Comments: But what if the watch is not inferior? Also, I don’t think that Campbell’s halal soups cost more than its non-halal soups—this is the majority’s point about markets where the issue is market share, or consumers’ willingness to participate in the market at all. It’s a little disconcerting to see efficient markets theory, positing that prices are already exactly where they should be, creep into an area of the law that is entirely about how bad information distorts markets and prevents efficiency. I can in fact see a partial defense of the dissent that goes to the question of whether the material misrepresentation prevents the plaintiff from making any economically significant use of the product—with respect to the kosher/halal example, you really do have to give or throw the stuff away when you find out the truth, regardless of any price differential, whereas you probably don’t stop using the lockset. But even this seems like a weird description of the harm in the kosher/halal case, which generally involves food that’s already been consumed before the deception was discovered and in which the economic harm is really that you paid money for a product that you would not have purchased had you known the truth—not the price differential, but the resource misallocation. I think the proper rule is that the product need not be worthless to you; it need only be worth less.

Back to the dissent: An allegation that the consumer wouldn’t have bought the product but for the misrepresentation is too low a threshold to meet. The issue “is not that a plaintiff must show that he or she personally suffered harm, but that the harm alleged must be an actual measurable loss of money or property.” The majority conflated "injury in fact" with "lost money or property,” and focused too heavily on the genesis of Prop. 64, misuse of UCL lawsuits, instead of its actual language. Indeed, proponents of Prop. 64 “included the underlying action on their Web site as an example of a ‘shakedown’ lawsuit,” and newspapers mentioned it as well. “While these may not constitute official materials presented to voters, these materials, at the very least, undermine the majority's assertion that voters were concerned only about suits by parties who had no business dealings with a given defendant and, more importantly, they underscore the question we must answer here--what does ‘lost money or property’ mean in this context?”

The dissent also rejected the idea that its interpretation would sound the death knell for private enforcement against label misrepresentations. In other situations, plaintiffs could allege that a mislabeled product was overpriced and that they did lose money. Moreover, Kwikset’s competitors could sue: “A competitor who properly labeled its locksets ‘Made in U.S.A.’ and alleges it was forced to charge higher prices for such locksets, and another who manufactured its locksets outside the United States and alleges it lost customers to Kwikset, could both claim they were at a competitive and economic disadvantage to Kwikset. In each instance, these competitors could allege not only injury in fact, but also economic injury for lost sales and profits due to Kwikset's misrepresentation.” (Interestingly, as I recall, plaintiffs argued that they could replead to allege that competing foreign-made and properly labeled locksets were cheaper, but the court denied them leave to do so; as it turns out the defendants’ bar probably would have preferred that scenario!)

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