Judge Reinhardt began with some scene-setting:
Most consumers have, at some point,
purchased merchandise that was marketed as being “on sale” because the
proffered discount seemed too good to pass up. Retailers, well aware of
consumers’ susceptibility to a bargain, therefore have an incentive to lie to
their customers by falsely claiming that their products have previously sold at
a far higher “original” price in order to induce customers to purchase
merchandise at a purportedly marked-down “sale” price. Because such practices
are misleading—and effective—the California legislature has prohibited them.
Hinojos alleged that he was the victim of such a practice at
Kohl’s and that he wouldn’t have paid what he did for what he bought had he not
been misled by advertised markdowns from fictitious “original” or “regular”
prices. The district court found that he
hadn’t “lost money or property” because he received the advertised price, and
the court of appeals reversed.
Under California law, a consumer loses money or property “so
long as false advertisements induced him to buy a product he would not have
purchased or to spend more than he otherwise would have spent.” This revived Hinojos’s UCL, FAL and CLRA
claims.
Hinojos alleged that he bought several items advertised as
substantially reduced in price, but in fact routinely sold by Kohl’s at the
advertised “sale” prices rather than the purported “original” or “regular”
prices. He alleged that the advertised “original/regular” prices didn’t reflect
prevailing prices in the three months immediately preceding the ads, and that
he wouldn’t have bought the products without the misrepresentations. The district court dismissed the claims, and
denied reconsideration based on Kwikset, holding that Kwikset applied only to false
advertisements regarding a product’s “composition, effects, origin, and
substance.”
The FAL provides that “No price shall be advertised as a
former price of any advertised thing, unless the alleged former price was the
prevailing market price . . . within three months next immediately preceding
the publication of the advertisement or unless the date when the alleged former
price did prevail is clearly, exactly and conspicuously stated in the
advertisement.”
However, Proposition 64 restricts standing to individuals
who suffered injury in fact and lost money or property as a result of unfair
competition. The California Supreme
Court held that the purpose of Proposition 64 was to “curtail the prior
practice of filing suits on behalf of clients who have not used the defendant’s
product or service, viewed the defendant’s advertising, or had any other
business dealings with the defendant,” but “just as plainly preserved standing
for those who had had business dealings with a defendant and had lost money or
property as a result of the defendant’s unfair business practices.”
The quantum of lost money or property is only so much as
would suffice to establish Article III injury in fact. Here, there was “no difficulty” regarding
Article III injury in fact: the contention that class members paid more than
they otherwise would have paid, or bought when they otherwise would not have
bought, constitutes an Article III injury in fact. The only issue was whether
this injury in fact was an economic injury sufficient to confer statutory
standing.
Kwikset explained
that:
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.
Thus, Hinojos properly alleged lost money or
property. Kohl argued that Hinojos
didn’t allege at what price (if any) he would have bought if the
original/regular price hadn’t been misrepresented. But that’s not a requirement, as Kwikset explicitly held, though the
difference between what he actually paid and what he would’ve paid had the ads
been truthful would be the appropriate measure of restitution. But under Kwikset,
he “need not be able to prove the quantum of damages he suffered in order to be
entitled to injunctive relief given that he alleges sufficient facts to prove
that he suffered some economic injury.” [Compare
the Article III analysis above, plus this statement, to the
decision I blogged about yesterday denying a plaintiff standing to seek
injunctive relief in this exact situation; were I plaintiff’s counsel I might
move for reconsideration.]
The district court also erred to limit Kwikset on the grounds that it was limited to “factual
misrepresentations about the composition, effects, origin, and substance of
advertised products.” Kohl reformulated this as an argument that there was no
difference in value between the product as labeled and the product as it
actually was. A misrepresentation of the
“regular” price, Kohl’s argued, didn’t misrepresent the innate value of the products, so a consumer gets the product he
expects at the price he expects. Kwikset is broader than that. True, Kwikset
was about conditions of production (allegedly false “Made in USA” claims), and
described other similar actionable misrepresentations, but they weren’t
intended to be exhaustive.
Indeed, Kwikset
based its reasoning on the fact that “[t]o some consumers, processes and places
of origin matter.” The court of appeals concluded, “[t]o other consumers, a
product’s ‘regular’ or ‘original’ price matters; it provides important information
about the product’s worth and the prestige that ownership of that product
conveys.” The court cited Dhruv Grewal
& Larry D. Compeau, Comparative
Price Advertising: Informative or Deceptive?, 11 J. of Pub. Pol’y &
Mktg. 52, 55 (Spring 1992) (“By creating an impression of savings, the presence
of a higher reference price enhances subjects’ perceived value and willingness
to buy the product.”); id. at 56 (“[E]mpirical studies indicate that as
discount size increases, consumers’ perceptions of value and their willingness
to buy the product increase, while their intention to search for a lower price
decreases.”). Thus, misinformation about
a “normal” price was significant to many consumers in the same way as other
falsities, just as falsely labeling a watch as a Rolex would be actionable even
if the watch was a functional equivalent of a Rolex. The court noted that it was not relying on the cited article to establish facts not
contained in the pleadings, but rather “in support of the conclusion that false
advertisements about a product’s true market price are significant to consumers.” (Iqbal/Twombly
aren’t mentioned, but plausibility probably plays a role here.)
Indeed, this significance is exactly why retailers like
Kohl’s have an incentive to falsely advertise sales, and exactly why the
California legislature barred the practice.
“In fact, the deceived bargain hunter suffers a more obvious economic
injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods,
because the bargain hunter’s expectations about the product he just purchased
is precisely that it has a higher perceived value and therefore has a higher
resale value.”
The district court’s test would preclude claims against “a
vast array of other misleading marketing practices that have little or nothing
to do with a product’s ‘composition, effects, origin, and substance.’” Examples: “not available in stores,”
“available for a limited time only,” “the same model of shoe worn by LeBron
James,” “50% of customers who purchased product X also purchased our product,”
and “more doctors recommend our product than any other brand.” All of these were “effective marketing
techniques” that could be used to deceive, if false, and generate purchases
that otherwise wouldn’t occur. There was
no reason to think that Proposition 64 “meant to silently close the door on
consumers’ ability to bring UCL and FAL claims based on such false
advertising,” and Kwikset emphasized
that Proposition 64 shifted the focus to actual deception by a misleading ad
instead of “fishing expeditions” by nonpurchasers.
The district court also held that Hinojos got the benefit of
his bargain because he kept the goods he bought, which weren’t defective. Kwikset
explicitly rejected this rationale. He
only got the benefit of the bargain if the misrepresentation wasn’t
material. This was an issue of fact, and
also “the legislature’s decision to prohibit a particular misleading
advertising practice is evidence that the legislature has deemed that the
practice constitutes a ‘material’ misrepresentation, and courts must defer to
that determination.” (So is it material
as a matter of law?) Hinojos
specifically and plausibly alleged that Kohl’s falsely marketed its products as
on sale because consumers reasonably regard price reductions as material
information. “In sum, price advertisements matter.”
The court also refused to certify the case to the California
Supreme Court because Kwikset
provided more than sufficient guidance.
The majority also expressed disapproval of Kohl’s strategies in this
regard: Kohl’s initially removed the lawsuit under CAFA, then discussed Kwikset extensively in the appellate
briefs, but never suggested certification there or at oral argument. At oral argument, “any objective witness”
would’ve concluded that Kohl’s had a “slim at best” chance of prevailing on the
merits, and only a month and a day after oral argument did Kohl’s file a motion
to certify. The court looks with
disfavor on motions to certify filed after prior opportunities to seek
certification. Also, the court didn’t
like manipulation of the appellate system by attempts to avoid unfavorable
panels—that’s why the Ninth Circuit doesn’t make panels public until shortly
before oral argument. Kohl’s sought
certification only after it knew the panel’s views of the case at
oral argument. This smacked of
manipulation.
Judge Wardlaw concurred, but only in the result on
certification; though Kohl’s motivations were suspicious, “on this record and
without providing an opportunity to Kohl’s to respond, it is somewhat unfair to
conclude that Kohl’s had only a nefarious motive. I would simply deny the
request as untimely.”
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