Businesses operating in California have long faced a risk not found in any other state. Under California’s unfair competition laws (Business and Professions Code §§ 17200 and 17500), private attorneys could file lawsuits against businesses alleging any sort of arguably unfair business practice, without demonstrating that a single person had been injured by the practice. Worse, these “professional plaintiffs” have been allowed to sue on behalf of the general public, seeking what they characterize as almost limitless restitution and, more importantly, attorney’s fees. Typically, plaintiffs demanded a few thousand dollars to avoid the expense of litigation. Unfortunately, settlement was often futile, because it would not prevent another plaintiff (or even the same one) from filing another lawsuit alleging the same unfair business practice. For many businesses, large and small, this tactic has moved from being a risk to more of a regular expense—and, more often than not, does not even benefit consumers.
Things are changing. On November 2, 2004, the voters passed Proposition 64, which seeks to eliminate these frivolous claims and limit lawsuits to actual unfair practices that injure actual consumers. Specifically, Proposition 64 changes how lawsuits work under the unfair competition laws in two major ways:
Plaintiffs Must Actually Be Damaged
First, any private plaintiff (i.e., not an attorney general, district attorney, or other government enforcement agency) must demonstrate that he or she was actually damaged by the alleged unfair business practice. This new requirement is meant to eliminate lawsuits against practices that harm nobody. In order to sue a business under the unfair competition law, an attorney must actually find a client who has been injured by the business.
Plaintiffs Must Represent an Actual Class of Injured People
Second, to bring a lawsuit on behalf of the general public, a private plaintiff must satisfy the requirements for a class action. This means that the plaintiff must define a class of people with similar damages and similar claims. This also means that the plaintiff must be a member of the class he or she seeks to represent. Relatively early in the lawsuit, the plaintiff will have to present evidence to establish a proper class action. This requirement will make it more costly to file and prosecute a lawsuit and will therefore hopefully reduce the number of lawsuits brought on behalf of the general public. It may also reduce the size of potential classes reducing the amount of possible restitution.
This requirement will also hopefully make settlement more effective. Under the old law, settlement of an unfair competition lawsuit that had been brought on behalf of the general public did not prevent another plaintiff or member of the class from filing the same lawsuit again based on the same conduct. By contrast, settlement of a class action prevents any plaintiff from bringing the same lawsuit again. Courts should now give this preclusive effect to settlements of unfair competition class actions.
The General Public Has Spoken
Proposition 64 may provide other, ancillary benefits to businesses. Even under the old law, a plaintiff would have to demonstrate that his or her lawsuit benefited the general public in order to recover attorney’s fees. Now that the voters have passed Proposition 64 by a 17.8 percent margin, courts may start looking closer at whether these lawsuits actually provide any benefit to the public and may therefore start awarding attorney’s fees to plaintiffs less often.
Unanswered Questions
Of course, the actual effects of Proposition 64 are still unknown. The Proposition came into effect on November 3, 2004, and it will take time for the courts to start applying it to actual cases. One immediate question that is yet unanswered is whether Proposition 64 will apply retroactively. That is, whether it will apply to lawsuits that were filed prior to its passing. The default rule in California is that propositions do not apply retroactively unless there is some clear indication the voters intended retroactivity. The language of Proposition 64 is silent on this issue. But, defendants are likely to argue that the intent of the Proposition is to eliminate all frivolous lawsuits under the unfair competition law, including those lawsuits that have already been filed.
While this question remains unanswered, the future is somewhat clearer. Proposition 64 should put those doing business in California on a more level playing field with those in other states, and help reduce frivolous lawsuits. It will also provide those faced with unfair competition lawsuits brought on behalf of the general public with an important new tool to defend themselves.
If you have any questions or would like more information concerning Proposition 64 specifically, or California’s unfair competition laws generally, please contact either of the authors of this article in the Southern California office at (949) 932-3600.