CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge¹

I. INTRODUCTION

This outline provides a selection of substantive appellate and litigation developments that may be of particular interest to members of the Antitrust, UCL and Privacy Section. These developments include cases brought under the Cartwright Act, the Unfair Practices Act, the Consumers Legal Remedies Act, the Unfair Competition Law and False Advertising Law, as well as related developments regarding covenants not to compete and public enforcement actions.

II. CARTWRIGHT ACT (BUSINESS AND PROFESSIONS CODE § 16720 ET SEQ.)

A. In Two Opinions, District Court Applies the Aspen Skiing Exception to an Aerospace Industry Refusal-to-Deal Case and Finds Tied Product Allegations Sufficient for a Tying Claim to Proceed

1. Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.²

2. Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.³

Plaintiff Packaging Systems, an aerospace products firm, alleged Cartwright Act restraints of trade and other state and federal antitrust violations arising from an asserted refusal-to-deal agreement among plaintiff’s suppliers and competitors in the aerospace sealant industry. Defendants PRC-Desoto and PPG Industries made an aerospace sealant for commercial and government uses. Plaintiff purchased the sealant from the two defendant companies at wholesale and repackaged it in special injection kits for retail sale to aircraft maintenance companies.

PPG announced that it would cease sales of the sealant to firms repackaging it for resale. Packaging Systems filed suit in the U.S. District Court, Central District, alleging, inter alia, unlawful monopolization and tying arising from defendants’ refusal to deal with plaintiff. Defendants responded that Packaging Systems could not properly allege that the defendants had an antitrust duty to deal with Packaging Systems or were unlawfully tying these products.

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(1) In its July 14, 2017 decision, the district court rejected defendants’ duty-to-deal analysis. Judge Otis Wright found these circumstances analogous to Aspen Skiing Co. v. Aspen Highland Skiing Corp.,⁴ defendants terminated a profitable relationship with the plaintiff for allegedly anticompetitive reasons. Plaintiff alleged PRC-Desoto and PPG refused to continue to sell the sealant to Packaging Systems even at profitable retail prices without a legitimate business justification, but continued to sell to other non-repackaging resellers. The court found unpersuasive PPG’s claims that safety considerations motivated the changed policy.

Judge Wright held the plaintiff’s allegations were sufficient to bring the case within the Aspen Skiing exception to the general rule that a monopolist has no duty to deal with its competitors. "Drawing all inferences in Plaintiff’s favor, the Court concludes that this case plausibly fits within the Aspen Skiing exception . . . PPG’s abrupt decision to end this course of dealing suggests that it was willing to sacrifice short-term profits for the possibility of charging inefficient monopoly prices in the long run."⁵ The court also found sufficient the plaintiff’s pleading of unlawful secret rebates in violation of the California Unfair Practices Act.⁶

(2) The district court had also ruled that Packaging Systems did not adequately plead its tying claim under the Cartwright and Sherman Acts, but granted leave to amend. Plaintiff filed an amended complaint with further details defining the alleged tying and tied markets.

On February 6, 2018, Judge Wright ruled on defendants’ subsequent motion to dismiss the amended tying claims for inadequate pleading of the relevant product markets and other defects. The court denied the motion, finding Packaging Systems’ allegations of the tied market and other aspects of its allegations sufficient. "’Both Section 1 and the Cartwright Act prohibit illegal tying arrangements,’ and the elements of § 1 tying claim for the most part mirror that of the Cartwright Act."⁷ Under the "commercial realities" test, the plaintiff’s tied product market of "end-user packaging consistent of kits, syringes and [small] cans" is "sufficient for the purposes of defining the relevant product market at the pleading stage."⁸

The court also found adequate allegations of coercion to buy the bundled package of products: "Consumers are forced to buy both the sealant and the kits/syringes/cans from PPG. These allegations are sufficient to plead coercion." Regarding the required pleading of distinct tying and tied products, plaintiff properly alleged "the seller has foreclosed competition on the merits in a product market distinct from the market for the tying item."⁹

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B. Ninth Circuit Concludes a Subsidiary Cannot Claim Intent Different From Its Parent Under the Copperweld Doctrine

Arandell Corp. v. Center Point Energy Services, Inc.¹⁰

Providing an important insight into the intracorporate conspiracy analysis of Copperweld Corp. v. Independence Tube Corp.,¹¹ the Ninth Circuit held that a wholly-owned subsidiary in a Section 1 and state antitrust law case cannot claim its actions were for purposes other than those of its parent: "[F]or antitrust purposes, it is legally impossible for firms within a single ‘economic unit’ to act together in furtherance of the same price-fixing scheme for independent and distinct purposes."¹²

Under this analysis, the subsidiary could not claim that it acted for a legitimate purpose while "disavowing the anticompetitive intent" of its parent.¹³ Thus, there was a triable issue of conspiracy liability under both the Sherman Act and the Wisconsin antitrust statute.¹⁴ (The Ninth Circuit’s opinion in Arandell may prove important in cases with disparate parent/subsidiary situations, such as situations where plaintiffs seek to establish antitrust liability in cases involving foreign parent companies and their U.S. subsidiaries.)

Other Cartwright Act and state antitrust law developments:

In re Lipitor Antitrust Litigation.¹⁵ The class action allegation of plaintiff pharmacists that an alleged reverse settlement agreement regarding Lipitor was a per se violation of the Cartwright Act was insufficient to state a cognizable claim under the Act. Since the California Supreme Court¹⁶ concluded that reverse settlement agreements must be judged under the rule of reason rather than the per se rule, the plaintiffs’ decision to proceed under a per se theory doomed its Cartwright Act conspiracy claim, which did not adequately allege required elements including the requisite value of the reverse payment.¹⁷

In re Korean Ramen Antitrust Litigation.¹⁸ In a nationwide Cartwright Act class action alleging collusion among California-based ramen makers, District Court Judge William H. Orrick rejected defendants’ challenge to certification, holding that California’s Cartwright Act was not materially different from other states’ laws such that decertification would be required. Previously Judge Orrick had ruled against defendants claims: (1) that the statute of limitations barred plaintiffs’ Sherman Act, Cartwright Act, and Unfair Competition Law claims; (2) that principles of international comity required deference to a ruling in defendants’ favor by the Korea Fair Trade Commission; and (3) there was inadequate evidence of a price-fixing conspiracy to proceed in a U.S. antitrust forum.

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UFCW & Employers Benefit Trust v. Sutter Health, S.F. Super Ct.¹⁹ State antitrust class actions are less common after CAFA but remain significant for California practitioners. Here, the Superior Court granted plaintiffs’ motion to certify a class of self-funded health plans and state agencies in a state antitrust/unfair competition case. Healthcare-benefits trustee UFCW claimed that defendants violated California’s Cartwright Act and Unfair Competition Law by illegally increasing hospital pricing and forcing competitors into anticompetitive provider agreements. The Superior Court granted UFCW’s motion for class certification, but also foreshadowed the challenges for plaintiffs here, given that the "landscape of this case, with its many services, prices, and discounts" presented a "complex economic picture."²⁰

III. UNFAIR PRACTICES ACT (BUSINESS AND PROFESSIONS CODE § 17000 ET SEQ.)

A. Secret Rebates Allegation Survives Demurrer in Aerospace Sealants Antitrust Case

Packaging Systems, Inc. v. PRC-Desoto International, Inc., et al.²¹

In Packaging Systems, discussed further above, District Court Judge Wright also concluded that plaintiff Packaging Systems adequately pleaded that defendant PRC-Desoto International and PPG unlawfully offered secret rebates or discounts to injure competition within the meaning of California’s Unfair Practices Act, Business and Professions Code section 17045. While rejecting certain of the claimed secret discounts, the district court found sufficient allegations for plaintiff to go forward on its core UPA theory.

The district court summarized the key competitive injury allegation as follows: "Offering discounts to Plaintiff’s competitors and customers not offered to Plaintiff has a tendency to substantially reduce Plaintiff’s customer base. Over the long run, this will put Plaintiff out of business. And once PPG loses its biggest competitor in the retail distribution market, PPG will be free . . . to charge supracompetitive prices for sealant to end-users. Plaintiff has therefore demonstrated that PPG’s price discrimination has a tendency to harm competition."²²

B. District Court Recognizes Standing for Third-Party Plaintiffs in UPA Actions

Arena Restaurant and Lounge LLC v. Southern Glazer’s Wine and Spirits, LLC²³

In an Unfair Practices Act action alleging both unlawful loss leaders (Bus. & Prof. Code § 17044) and sales below cost (Bus. & Prof. Code § 17043) in liquor wholesaling, the district court for the Northern District of California concluded that Business and Professions Code section 17070 authorizes standing for all injured parties, including parties that are not direct competitors of the defendants, to pursue Unfair Practice Act damage actions.

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Citing O’Shea v. Epson America, Inc.,²⁴ the district court concluded that section 17070 broadly provides standing for "'[a]ny person or trade association’ to recover damages for UPA violations" without limiting such standing to injured competitors. The court held: "Plaintiffs are not barred as a matter of [standing] law from bringing §§ 17043 and 17044 claims" and thus the plaintiffs here "have standing to sue." The court found plaintiffs’ initial factual allegations inadequate to sustain its loss leader and sales-below-costs claims but granted leave to amend to correct the pleading deficiencies.

IV. COVENANTS NOT TO COMPETE (BUSINESS AND PROFESSIONS CODE § 16600 ET SEQ.)

A. Plaintiff Fails to Qualify for Trade Secrets Exception to California’s Non-Competition Covenant Prohibition

Romo Productions, Inc., v. Paradise Sewing, Inc., et al.²⁵

Apparel manufacturer Romo sued its sewing subcontractor Paradise for breach of a contract containing an unenforceable covenant not to compete. Plaintiff argued it could enforce that portion of its contract addressing theft of trade secrets because provisions addressing such theft constitute an exception to California’s prohibition on noncompetition agreements.

The Fourth Appellate District held Romo failed to adequately plead and prove that the trade secret exception to California’s general prohibition should apply here. "There was no evidence that Paradise obtained business from [Romo’s competitor] Drifire by misappropriating Romo’s alleged trade secrets; to the contrary, the only evidence on this topic was that Romo suggested to Drifire that it contact Paradise directly. We conclude the trial court did not err in granting the nonsuit motion as to the breach of contract cause of action."²⁶

V. CONSUMERS LEGAL REMEDIES ACT (CIVIL CODE § 1750 ET SEQ.)

A. Car Buyer May Sue Under CLRA/UCL When Car Dealer Fails to Disclose Safety Recall

Gutierrez v. CarMax Auto Superstores California²⁷

Used-car buyer Gutierrez sued CarMax under the CLRA and UCL, claiming Car Max failed to disclose a known brake system recall involving safety issues. Reversing demurrer, the Fifth Appellate District concluded: "[T]hese allegations are sufficient to plead the existence of a duty to disclose information about the safety recall on the ground CarMax made partial representations about the vehicle’s braking and lighting systems and those representations were likely to mislead for want of communication of the facts about the recall."²⁸

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"Gutierrez’s allegations about the rigorous inspection of the vehicle’s braking and lighting systems, and its misleading character in the absence of a disclosure about the safety recall, are sufficient to plead . . . a duty to disclose."²⁹

B. Car Buyer Can Bring UCL Case Even If Dealer Offers Correction Sufficient Under CLRA

Flores v. Southeast Automotive Liquidators, Inc.³⁰

Car buyer Flores sued used-car dealer Southcoast Automotive for several deceptive practices in the sale of a faulty used car. Southcoast argued that its adequate corrective offer satisfied its obligations under the CLRA and barred any other action by Flores.

The Second District held an offer of correction may preclude a CLRA claim but does not bar a buyer from suing for damages based on the UCL and fraud. "Dealer’s reasonable correction offer prevented Flores from maintaining a cause of action for damages under the CLRA, but it did not prevent her from pursuing remedies based on other statutory violations or common law causes of action based on conduct under those laws. Even after defendant’s satisfactory CLRA offer to ameliorate, plaintiff can still pursue UCL action."³¹

VI. UNFAIR COMPETITION LAW (BUSINESS AND PROFESSIONS CODE § 17200 ET SEQ.)

A. Arbitration and Unconscionability Issues in Consumer and Employment Contracts After Concepcion, Sanchez, Iskanian, and McGill

Arbitration after AT&T Mobility, LLC v. Concepcion.³² The U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion³³ holding that the Federal Arbitration Act (FAA)³⁴ preempts conflicting state law, has created a formidable barrier for many UCL or FAL actions challenging the unfair trade practices or employment policies of defendants using contracts with mandatory arbitration clauses.

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Since Concepcion, the California Supreme Court has recognized in Iskanian, infra, and elsewhere the broad preemptive effect of the FAA and has abrogated several California doctrines limiting mandatory arbitration. However, the Court has also demonstrated a commitment to identifying limits to Concepcion. As a result, the relationship between arbitration provisions and contract law principles (such as unconscionability) remains the subject of extensive litigation.

Following Iskanian and Sanchez, California plaintiffs now often seek to use alternative legal mechanisms, including the Labor Code Private Attorney General Act and unconscionability principles, in an attempt to reach beyond arbitration clauses and bring disputes over consumer contracts and employment practices before courts instead of arbitrators.

Aftermath of Sanchez v. Valencia Holding Co.³⁵ In 2015, the California Supreme Court delivered its widely anticipated opinion in Sanchez v. Valencia Holding Co., upholding the arbitration clause in the industry-standard auto purchase/sale contract but emphasizing that unconscionability principles remain applicable to all California contracts and must be applied to each set of facts on a case-by-case basis. The Court held that Concepcion prohibits the use of unconscionability principles or other state doctrines to prohibit whole categories of arbitration (such as class-action arbitration provisions) or to otherwise interfere with the FAA’s policy promoting arbitration. But while avoiding such categorical prohibitions or interference, California courts must undertake case-by-case factual analysis of any allegations of unconscionability to determine whether unconscionable contract terms are present.

FAA principles and the California Supreme Court today. The California Supreme Court’s commitment to the continuing viability of contract principles such as unconscionability, and its mandate that such cases be reviewed on their specific facts, have permitted some latitude to plaintiffs challenging certain unfair arbitration terms, so long as those contract principles are not applied so as to discriminate against whole categories of arbitration or unduly interfere with the fundamental attributes of arbitration.³⁶

Many commentators see support within the California Supreme Court for carving out exceptions to the broad sweep of Concepcion.³⁷ While Concepcion has certainly changed arbitration doctrine in California, and while challenges to protected aspects of arbitration will often fail, it appears that the California Supreme Court will continue to seek limits on the scope of the FAA and Concepcion. Examples include:

PAGA actions: Iskanian v. CLS Transportation.³⁸ The Supreme Court held that Concepcion impliedly overruled Gentry v. Superior Court,³⁹ and thus mandatory arbitration provisions must be enforced even when they require arbitration of wage-and-hour issues protected by California’s labor laws. However, the Court further ruled that an arbitration agreement requiring the employee to give up the right to bring representative actions under the Labor Code Private Attorney General Act of 2004⁴⁰ is against public policy and unenforceable.

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By carving out PAGA representative actions from the realm of private arbitration governed by the FAA, the Iskanian opinion has prompted a wave of plaintiffs’ lawsuits and class actions utilizing this exception in employment and wage-and-hour disputes.⁴¹

Public injunctive relief: McGill v. Citibank, N.A.⁴² Analyzing an arbitration provision purporting to bar bank employees from seeking public injunctive relief, the California Supreme Court held that such relief remains available to private plaintiffs under the UCL, FAL and CLRA. The Court ruled: "[I]nsofar as the arbitration provision here purports to waive McGill’s right to request in any forum such public injunctive relief, it is invalid and unenforceable under California law."⁴³

The Court rejected Citibank’s claim that the FAA necessarily preempts California’s public injunctive remedy. By including the FAA’s "saving clause" preserving traditional contracts defenses, Congress intended "’to make arbitration agreements enforceable as other contracts, but not more so.’"⁴⁴ The Court thus held that "the FAA does not require enforcement of a provision in a predispute arbitration agreement that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, the CLRA, or the false advertising law."⁴⁵

The following lists some of the more prominent UCL appellate opinions applying these principles to recent factual situations in the post-Concepcion legal environment:

1. Arbitration Clauses Enforced

Sanchez v. Valencia.⁴⁶ (See discussion, supra.)

Iskanian v. CLS Transportation.⁴⁷ (See discussion, supra.)

Poublon v. C.H. Robinson Co.⁴⁸ A former employee sued defendant employer C.H. Robinson for wage misclassification. Plaintiff objected to arbitration, alleging her employment contract mandated unconscionable defendant-imposed arbitration. The Ninth Circuit reviewed the claimed unconscionable terms and held the arbitration requirement could be enforced once improper terms were severed. "[We conclude that the dispute resolution provision is valid and enforceable once the judicial carve-out clause is extirpated and the waiver of representative claims is limited to non-PAGA claims."⁴⁹

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OTO, LLC v. Koh.⁵⁰ The First Appellate District held "waiver of the various employee-friendly wage claim provisions of the Labor Code does not make an arbitration agreement unconscionable so long as the resulting arbitration procedure is ‘affordable and accessible,’" as it was here.⁵¹

2. Arbitration Clauses Rejected

McGill v. Citibank, N.A.⁵² (See discussion, supra.)

Baxter v. Genworth North America Corp.⁵³ Plaintiff Baxter alleged her employment termination was racially motivated and sought to void the arbitration term of her employment contract as unconscionable. The court summarized the procedural and substantive aspects of California unconscionability: "[t]he former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results."⁵⁴ Defendant’s arbitration provision was unconscionable under this standard. Plaintiff "had no opportunity to negotiate" and no "meaningful choice in the matter"⁵⁵and the substantive terms were so one-sided as to plaintiff’s rights and remedies that there were "ample grounds to support a conclusion" of unconscionability.⁵⁶

B. California Supreme Court Holds State Law Unconscionability Principles Apply to Payday Loans

De La Torre v. CashCall, Inc.⁵⁷

In an opinion of significance for UCL litigation generally and for the unconscionability principles discussed above, the California Supreme Court has held that, notwithstanding a Financial Code provision exempting consumer loans of $2,500 or more from interest-rate ceilings, the interest rates on these larger loans may still be determined to be unconscionable under the Unfair Competition Law⁵⁸ through the application of California’s general contract principles of unconscionability.

The Court emphasized that the interest rate is the price of a loan, and the price term, like any other term in a contract, may be unconscionable. The Court concluded that no California law, including the Financial Code provision at issue here, prohibits a court from making an inquiry into the nature of a consumer loan agreement of at least $2,500 and the interest rate provided there for possible unconscionability.

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"In short, California courts have the authority to decide whether contract provisions, including interest rates, are unconscionable. Our respect for the Legislature’s prerogative to shape economic policy through legislation is why we have kept the doctrine relatively narrow and are careful to observe its nuances. But this is no reason for courts to absent themselves from the picture entirely."⁵⁹

C. First Amendment Principles and State Regulation of Commercial Free Speech

Nationwide Biweekly Administration v. Owen.⁶⁰ Plaintiff, offeror of a biweekly loan payment program, sought to enjoin two California district attorneys from enforcing California’s false advertising laws. Addressing commercial free speech, the Ninth Circuit affirmed the trial court’s denial of a preliminary injunction against the district attorneys, holding that "the required disclosures are meant to protect against consumer confusion and are therefore permissible under Zauderer."⁶¹ "The First Amendment does not generally protect corporations from being required to tell prospective customers the truth."⁶²

First Resort, Inc. v. Herrera.⁶³ The Ninth Circuit upheld a San Francisco ordinance regulating pregnancy-counseling services against a wide-ranging constitutional challenge by an anti-abortion counseling clinic. The court held San Francisco’s ordinance regulated only unprotected commercial speech, and thus was not facially invalid under the First Amendment. Further, the ordinance was not unconstitutional as applied since it did not regulate protected speech. "Because the Ordinance regulates advertising designed to attract a patient base in a competitive marketplace for commercially valuable services, we hold that the Ordinance regulates ‘classic examples of commercial speech.’" Since "the Ordinance only regulates false or misleading commercial speech—a category of speech afforded no constitutional protection—First Resort’s . . . facial challenge fails."⁶⁴

National Institute of Family and Life Advocates v. Becerra.⁶⁵ In an opinion with potential impact on UCL enforcement of state-required affirmative disclosures to consumers, the U.S. Supreme Court examined California’s law requiring pro-life pregnancy centers to make specified disclosures about available reproductive services including abortion. The Court held that even under the Zauderer intermediate scrutiny standard, the disclosures required by California would violate the First Amendment as unjustified and unduly burdensome compelled speech. Exempting some clinics from the disclosure requirements fit poorly with the law’s objective of providing low-income women with information about state-sponsored services. As a result, California’s law was "underinclusive" and thus defective under the First Amendment.⁶⁶

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Interpipe Contracting, Inc. v. Becerra. ⁶⁷ Some observers have suggested that a broad reading of the Supreme Court’s opinion in National Institute would jeopardize the constitutionality of other state-mandated affirmative disclosures, perhaps including Proposition 65 notices and some other forms of required consumer disclosure.

However, the Ninth Circuit has recently distinguished National Institute, suggesting limits to its applicability. "First, National Institute expressly did not reach the issue of viewpoint discrimination.⁶⁸ Second, the law there was underinclusive because exempting some clinics from the information requirement fit poorly with its objective of "providing low-income women with information about state-sponsored services."⁶⁹

D. UCL Preemption/Bar Arising From Federal or State Regulatory Schemes

The California and federal courts continue to wrestle with the multi-faceted issue of the applicability of the Unfair Competition Law to specific business practices and contexts where other regulatory schemes are involved. Claims of federal preemption, or preclusion or bar by state regulatory schemes, continue to yield important results.

1. Holdings of No Preemption of or Bar to UCL Actions

a. UCL/FAL Not Preempted by Federal OSHA in Worker Deaths Case

Solus Industrial Innovations, LLC v. Superior Ct.⁷⁰

The California Supreme Court has unanimously held that the Orange County District Attorney’s Office UCL and FAL claims in a worker death case were not preempted by the federal Occupational Safety and Health Act of 1970.⁷¹ The Court, per ChiefJustice Cantil-Sakauye, held that the federal Occupational Safety and Health Act does not expressly or impliedly preempt the UCL/FAL action here, nor does this enforcement effort implicate obstacle preemption. "In the absence of a clear and manifest congressional purpose to preempt claims such as the UCL and FAL claims asserted in this action, such claims are encompassed in the presumption against preemption that arises upon a state’s assumption of responsibility under the federal OSH Act to regulate worker safety and health."⁷²

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This decision is important in the OSHA sphere and also as a sign of the willingness of the California Supreme Court to provide a counterweight to the U.S. Supreme Court in other arenas, particularly consumer and environmental protection, by upholding California’s authority to protect its own workers, consumers and environment with its state statutes and regulations.

b. California’s UCL Not Preempted in Lipitor Litigation

In re Lipitor Antitrust Litigation⁷³

In the massive class action challenging the marketing of the cholesterol drug Lipitor (above), the District Court for New Jersey held that California’s Unfair Competition Law was not preempted because reliance is not required for UCL "unlawful" or "unfair" business practice cases, although claims based on certain other states’ antitrust and consumer laws were preempted.⁷⁴

2. Holdings of Preemption of or Bar to UCL/FAL Actions

Nat’l Institute of Family and Life Advocates v. Becerra⁷⁵

E. UCL Standing After Proposition 64

1. Allegations of Reliance Unnecessary for Private Standing in Unlawfulness or Unfairness UCL Actions

In Re Effexor Antitrust Litigation⁷⁶

In the consolidated national class action involving the antidepressant drug Effexor, the New Jersey District Court concluded that the class plaintiffs (identified as "EPP") adequately pleaded sufficient facts to go forward on its claims based on the "unlawful" and "unfair" prongs of the UCL. Defendants sought dismissal of the UCL claims for plaintiffs’ failure to plead reliance. "[C]ontrary to Defendants’ assertion, reliance is only required ‘when a [UCL] claim is premised on allegations that the Defendants engaged in fraudulent business practices . . .’ Here, EPPs claims are predicated on unlawful and unfair business practices."⁷⁷

The EPPs challenged unlawful and unfair business conduct, including "sham litigation, fraudulent procurement of the PTO, and reverse settlement agreement." As such, "at the very least, [EPPs] allege a claim premised on the unfair prong . . . Therefore, because EPPs allege sufficient facts to sustain an Unfair Competition Law claim based on unfair business practices, Defendants’ motion for judgment on the pleadings with respect to this claim is denied."⁷⁸

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2. Private Plaintiffs Have Standing in Retail Discount Pricing Case

Hansen v. Newegg.com Americas, Inc.⁷⁹

3. UCL Standing/Jurisdiction for Actions Against Practices on Indian Tribal Lands

People v. Rose.⁸⁰ The Attorney General brought an action under the UCL and other statutes against a cigarette seller operating on Indian lands. The Shasta County Superior Court ordered injunctive relief and civil penalties of $765,000, and defendant appealed. The Third District held: (1) California has jurisdiction over cigarette sales on Indian land allotments; and (2) the findings of fact fully supported the trial court’s conclusion that defendant had notice of the illegality before the sales for which the penalties were imposed.

But note People v. Huher,⁸¹ where a panel of the First Appellate District distinguished between preemption analysis and subject matter jurisdiction in concluding that the trial court lacked subject matter jurisdiction for the Attorney General’s UCL action against allegedly unlawful business practices on tribal lands. (Rehearing was granted and the prior opinion is not citable.)

4. Alleged Misleading Yahoo! Security Claims Give Rise to UCL Standing

In re: Yahoo! Inc. Customer Data Security Breach Litigation.⁸² Class action plaintiffs’ allegations that they would not have signed up for the paid Yahoo! service if they had known that the service was not as secure as Yahoo! represented were sufficient to establish standing to bring an action under the UCL.

VII. FALSE ADVERTISING LAW (BUSINESS AND PROFESSIONS CODE § 17500 ET SEQ.)

A. Private Plaintiff Has FAL/UCL Standing to Challenge Misrepresentations of "Former" Prices and Discounts

Hansen v. Newegg.com Americas, Inc.⁸³

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Relying on Kwikset Corp. v. Superior Court⁸⁴ and Hinojos v. Kohl’s Corp.,⁸⁵ the Second Appellate District held a private plaintiff had standing under the Unfair Competition Law, False Advertising Law, and the Consumers Legal Remedies Act to sue retailer Newegg for misrepresenting "former" prices and discounts.

Hansen bought computers from Newegg, relying on representations that the advertised prices were less than "former prices" and were discounts. Hansen’s suit alleged these advertised savings were false and that he would not have bought the items had he known the statements were untrue. The trial court sustained Newegg’s demurrer on the theory that the plaintiff suffered no cognizable injury unless the computers were defective or worth less than he paid. The Second Appellate District, per Acting Presiding Judge Zelon, reversed, holding the complaint adequately alleged that plaintiff suffered an economic injury and thus the plaintiff had standing.

Reviewing statutory history and Proposition 64’s impact on private standing, the court concluded: "[Although the proposition’s ‘voters clearly intended to restrict UCL standing, they 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 defendant’s unfair business practices.’ Under Kwikset, ‘if a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact.’"⁸⁶

The court rejected Newegg’s theory that Kwikset applies to a product’s attributes, not to representations on matters such as former price. "We agree with the Ninth Circuit’s conclusion [in Hinojos] that under Kwikset, the UCL and FAL’s standing requirements are satisfied when a consumer has alleged that he or she relied on fictitious former price information in making a purchase, and would not have made the purchase but for the misrepresentation."⁸⁷

The Second District cited Kwikset for the underlying policy to be served here: "The UCL and false advertising law are both intended to preserve fair competition and protect consumers from market distortions. [Citations.] Contrary to that general purpose, if 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."⁸⁸

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B. Fourth Appellate District Holds False Advertising Challenge in "One A Day" Vitamins Case May Proceed

Brady v. Bayer Corporation⁸⁹

Plaintiff Brady alleged Bayer made untrue and misleading representations in marketing its One A Day gummy vitamins because the bottle’s front label states "One A Day" when, as noted only in fine print on the back label, the proper dosage its two gummies for consumers above age four. The Fourth Appellate District overruled the trial court’s grant of a demurrer to Brady’s UCL and Consumers Legal Remedies Act complaint.

The superior court, relying on an unpublished district court opinion on similar facts, had sustained the demurrer, holding as a matter of law that no reasonable consumer could be misled. Brady appealed and the Fourth Appellate District reversed: "[W]e conclude Bayer has failed to appreciate the degree to which their trade name One a Day has inspired reliance in consumers, and we hold an action alleging they violated California’s [CLRA and UCL] and express warranty law (Com. Code § 2313) should have survived demurrer."⁹⁰

The disclosure appeared on the bottle’s back label "in the smallest lettering on the bottle, an ocular challenge even when the bottle is full-sized and held in good light." The court determined "[t]he issue before us is whether that language is enough to overcome the prominent and arguably advisory brand name of the product. We think not."⁹¹

Bayer’s defense was that its consumers are sophisticated and do not rely on manufacturer statements but rather perform extensive research to determine their vitamin needs. "Bayer wants us to conclude that trust is not part of One A Day’s success. They argue that modern consumers carefully read and analyze the formulations of the vitamins on the market and make their choices based upon their own expertise . . . Bayer says consumers look at the label and decide just how much selenium, biotin, pantothenic acid and zinc they need and then make their purchase after comparing those values with the labels on the vitamin bottles. [¶] That’s a stretch."⁹²

The court rejected district court opinions that the labels were not misleading because reasonable consumers would carefully scrutinize the back label to determine the correct dosage. "We could hardly disagree more." Some buyers may be sophisticated "back-label scrutinizers," but most ordinary consumers are not. "Not every vitamin-buyer is a health-conscious consumer preoccupied with exact dosages." After all, this particular product is not one likely to appeal to sophisticated consumers. "They’re gummies, for crying out loud."⁹³

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While the law regarding misleading product labels is "varied" and is complicated by preemption issues, the court identified four "themes" to aid in its analysis:

1. Common sense. If a consumer claim defies common sense, sustaining a demurrer may be appropriate. The court cited various food-related cases as examples such as Hill v. Roll Internat. Corp.,⁹⁴ ("green drop" on Fiji Water label not deceptive).
2. Literal truth/literal falsity. The literal truth may often protect a manufacturer, but not always. "But there is no protection for literal falseness." The court cited the example of Benson v. Kwikset Corp., ⁹⁵ involving locksets claimed to be "Made in USA" but were not.
3. The front-back dichotomy. Disclosures on a package’s back may sometimes limit the tendency of a label to mislead. But the court noted "an especially perceptive decision" of the Ninth Circuit, Williams v. Gerher Prods. Co.,⁹⁶ where the list of ingredients on the back label did not overcome the misrepresentations on the front side (various fruits shown on the front, but the ingredients only included white grape juice). Statements on the back label should "confirm representations on the front, not contradict them."⁹⁷
4. Brand names misleading in themselves. The court saw this as the essential issue in this case, and cited numerous opinions holding that brand names can be misleading. The advantage of a descriptive brand name is that it requires of the consumer "’little thought, little explanation, little effort to build understanding of what the offering actually is.’" Indeed, as the Attorney General noted: "’Most of the time when people encounter your name, you won’t be there to explain it to them. And they won’t have the time or interest to read about it on your website or the hack of the box.’"⁹⁸

"[A]ll four themes that emerge from the case law uniformly point to the same result in this case: allowing Brady’s claim to proceed beyond the pleading stage." Most significant was front-back dichotomy, as the front of the package made it appear that only one gummy was required and the two-gummies disclosure on the back was "printed in nano-type."⁹⁹

The Fourth District summarized its analysis: "[T]hese laws prohibit ‘not only advertising which is false, but also advertising which, although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public.’ [Citation.] Thus, to state a claim . . . based on false advertising or promotional practices, ‘it is necessary only to show that "members of the public are likely to be deceived."’ (Kasky v. Nike, Inc., 27 Cal.4th 939, 951 (2002). We cannot say there was no ‘capacity, likelihood or tendency to deceive or confuse the public’ here."¹⁰⁰

[Page 16]

C. Child Labor Claims Not Affecting Candy Functionality Are Insufficient to Establish FAL Standing

Hodson v. Mars, Inc.¹⁰¹

Class action plaintiffs sued candy manufacturer Mars, Inc., for FAL misrepresentations and other violations, alleging Mars failed to disclose child labor in the manufacture of the candy. The Ninth Circuit held: "Plaintiff has not sufficiently alleged that the defect in question—the existence of child labor in the supply chain—affects the central functionality of the chocolate products. Therefore, without either relying on or overruling Wilson v. Hewlett-Packard Co, 668 F.2d 1136 (9th Cir.2012), we hold that plaintiff has not established that Mars had a duty to disclose the labor practices on its labels."¹⁰²

VIII. PUBLIC ENFORCEMENT OF UCL, FAL AND RELATED STATUTES

A. Code of Civil Procedure § 394 Venue Rule Is Inapplicable to Public Enforcement Actions

GameStop, Inc. v. Superior Court (People)¹⁰³

GameStop, a secondhand dealer of electronics and video games, sought transfer of venue to a neutral county of an UCL enforcement action brought by the Riverside and Shasta District Attorney’s Offices for violations of the Secondhand Dealers Law.¹⁰⁴ The Fourth Appellate District held the mandatory removal provisions of Code of Civil Procedure section 394 for cases brought by counties or local agencies were inapplicable to UCL actions brought by district attorneys in the name of the People to enforce the law.

The Fourth District concluded: "The People . . . constitute the party-plaintiff in this UCL action, the entity with the substantive right and standing to bring the action against GameStop . . . [A]n action brought in the name of the People of the State of California, as a party, is not brought by a county, or other local agency, and the district attorney, as the legal representative, is not a party thereto."¹⁰⁵

[Page 17]

B. Fourth Appellate District Affirms Limits on Statewide Jurisdiction for District Attorneys

Abbott Laboratories, Inc. v. Superior Court (Rackauckas)¹⁰⁶

A county district attorney (represented by private contingent-fee counsel) brought a UCL action against pharmaceutical manufacturers alleging a conspiracy to prevent generic versions of prescription drugs from reaching the market. On appeal after the trial court denied defendants’ motion to strike, the Fourth Appellate District held that a county district attorney does not have extraterritorial jurisdiction to recover statewide monetary relief under the UCL, a view supported by the California Attorney General and the California District Attorneys Association (CDAA).

The court concluded: "[W]ith respect to civil actions, a district attorney has no plenary power . . . Rather, it is settled that a ‘district attorney has no authority to prosecute civil actions absent specific legislative authorization . . .’"¹⁰⁷ Here, "[t]here is no indication the Legislature sought to write the UCL so broadly as to permit county district attorneys to collect penalties from violations occurring outside their county boundaries for their own county treasurers. To the contrary, it is reasonable to conclude the Legislature intended to prevent local prosecutors from "step[ping] outside [their] jurisdictional boundaries . . . in order to recover extraterritorial civil penalties," which would "raise . . . concerns that scarce government resources might be wasted on duplicative, overlapping, and competitive investigations of possible [violations]."¹⁰⁸

"[T]he District Attorney is free to enter into agreements with the Attorney General or sister district attorneys to obtain a delegation of authority, or engage in joint prosecutions, where the District Attorney believes there is public benefit to a multi-jurisdictional action."¹⁰⁹

The underlying issue in Abbott Laboratories is the concern over the recent phenomenon of private contingent-fee counsel approaching unwary district attorneys or city attorneys, seeking access to public UCL/FAL authority in order to bring actions the private attorneys cannot pursue today under Proposition 64. For example, in 2015 the district attorney for Trinity County (population 13,000) was convinced to hire private contingent-fee counsel—in disregard of AG and CDAA ethical norms—and then claimed sole authority to bring the Volkswagen diesel case for the entire state of California. The California Attorney General’s Office and CDAA have consistently held such contingent-fee compensation to be improper in public enforcement actions under longstanding ethical principles (see discussion, below).

[Page 18]

C. Contingent-Fee Arrangements in Public UCL/FAL Enforcement Actions

California District Attorneys Association and Attorney General policy on prosecutorial neutrality. The ethical norms of CDAA and the California Attorney General’s Office prohibit the use of outside private contingent-fee counsel in three types of public enforcement actions, including cases where ongoing business activity is challenged under statutes such as the UCL and FAL. This policy is not based on due process concerns but rather on the California legal and ethical principles adopted by the California Supreme Court in County of Santa Clara v. Superior Court¹¹⁰ and People ex rel. Clancy v. Superior Court,¹¹¹ CDAA’s ethical manual provides:

"IX. Prosecutorial neutrality. Prosecutorial neutrality is required in those civil law enforcement actions where important constitutional concerns are implicated, ongoing business activity is threatened, or there is a threat of criminal liability. Private contingent fee attorneys may not appropriately represent the People in such cases. One or more of these issues are commonly present in consumer and environmental civil law enforcement actions brought by prosecutors on behalf of the People. (County of Santa Clara v. Superior Court (2010) 50 Cal.4th 35.); see also People ex rel. Clancy v. Superior Court (1985) 3 Cal.3rd 740."¹¹²

In this regard, the California Supreme Court has cited with approval the ABA Standards for Criminal Justice, Prosecution Function [comment to former Std. 2.3(e)]: "’It is clear that [case-by-case] fee systems of remuneration for prosecuting attorneys raise serious ethical and perhaps constitutional problems, are totally unacceptable under modern conditions, and should be abolished promptly.’"¹¹³

American Bankers Management Co., Inc. v. Heryford.¹¹⁴ Private class-action law firms from Texas persuaded the District Attorney of Trinity County (population 13,000) to hire them on a contingent-fee basis to bring UCL actions in federal court against national credit-card firms. Defendants sought dismissal on federal due process grounds, but the Ninth Circuit rejected that due process challenge. Analogizing to False Claims Act principles, the court concluded: "[W]e hold that the contingency-fee arrangement at issue here does not offend [federal] due process" principles.¹¹⁵

However, the Ninth Circuit acknowledged the separate California ethical standards for such matters, and refused to merge the two sets of principles: "Similarly, the California Supreme Court’s decisions in People ex rel. Clancy v. Superior Court, 39 Cal.3d 740 (1985), and County of Santa Clara v. Superior Court, 50 Cal.4th 35 (2010), were based not on federal due process principles, but on ‘the courts’ general authority "to disqualify counsel when necessary in the furtherance of justice.’"¹¹⁶

[Page 19]

D. First Appellate District Opinion Creates Split of Authority on Jury Trial Right in UCL Actions

Nationwide Biweekly Administration, Inc. v. Superior Court (People)¹¹⁷

Creating a split among California courts, the First District held defendants in UCL public enforcement actions have a right to jury trial as to liability: "[T]he ‘gist’ of the statutory causes of action asserted against [defendants] are legal, thereby giving rise to a right to jury trial. However, following the approach taken by the United States Supreme Court in Tull v. United States (1987) 481 U.S. 412 . . . we also conclude the right to jury trial extends only to the issue of liability and that the amount of statutory penalties, as well as whether any equitable relief is appropriate, is properly determined by the trial court."¹¹⁸

Numerous appellate courts over the past forty years have held that UCL actions brought by the People are primarily equitable in nature and should be decided by a trial court, not a jury.¹¹⁹ Nationwide Biweekly thus creates a substantial split of authority on this important procedural issue, and the California Supreme Court, which granted review on September 19, 2018, will now address that split.

[Page 20]

——–

Notes:

^1. Thomas A. Papageorge is head of the Consumer Protection Unit of the San Diego District Attorney’s Office. The views expressed here are those of the authors and do not necessarily reflect those of the San Diego District Attorney’s Office. These are a selection of developments prepared for presentation at the Golden State Institute on November 8, 2018, reflecting developments as of that date.

^2. 268 F.Supp.3d 1071 (C.D. Cal. 2017).

^3. 2018 WL 735978 (C.D. Cal., February 6, 2018).

^4. 472 U.S. 585 (1985).

^5. Packaging Systems, Inc. v. PRC-DeSoto International, Inc., supra, at 1076.

^6. See discussion, infra.

^7. Id. at 4.

^8. Id. at 5.

^9. Id. at 6.

^10. 900 F.3d 623 (9th Cir. 2018).

^11. 467 U.S. 752 (1984).

^12. Id. at 637.

^13. Id. at 637-638.

^14. Id. at 645.

^15. 772 Fed.Appx. 132 (3rd Cir. 2018).

^16. In re Cipro Cases I & II, 61 Cal.4th 116 (2016).

^17. In re Lipitor Antitrust Litigation, supra, at 136-137.

^18. 2018 WL 1456619 (N.D. Cal., March 23, 2018).

^19. Case No. CGC-14-538451 (Aug. 14, 2017).

^20. Order at 9. Special thanks to Elizabeth C. Pritzker for her note on this development.

^21. 268 F.Supp.3d 1071 (C.D. Cal. 2017).

^22. Id. at 1080.

^23. 2018 WL 1805516 (N.D. Cal. 2018).

^24. 2010 WL 11459911 (C.D. Cal. 2010).

^25. 2018 WL 2307984 (May 22, 2018) (unpublished; not citable).

^26. Id. at 6.

^27. 19 Cal. App. 5th 1234 (2018).

^28. Id. at 1262-1263.

^29. Id.

^30. 17 Cal. App. 5th 841 (2018).

^31. Id. at 850.

^32. 563 U.S. 333 (2011).

^33. 563 U.S. 333 (2011).

^34. 9 U.S.C. § 1 et seq.

^35. 61 Cal. 4th 899 (2015).

^36. See, e.g., McGill v. Citibank, N.A., 2 Cal. 5th 945 (2017), infra (FAA does not bar action for public injunctive relief); Carlson v. Home Team Pest Defense, Inc., 239 Cal. App. 4th 619 (2015).

^37. See, e.g., R. Novotny, "Gauging the Future of Iskanian and FAA Preemption in California," Los Angeles Lawyer, March 2015, p.10.

^38. 59 Cal. 4th 348 (2014).

^39. 42 Cal. 4th 443 (2007).

^40. PAG A; Labor Code §§ 2698 et seq.

^41. See, e.g., Williams v. Superior Court (Pinkerton Governmental Services, Inc.), 237 Cal. App. 4th 642 (2015), and Franco v. Arakelian Enterprises, Inc., 234 Cal. App. 4th 937 (2015), and others.

^42. 2 Cal. 5th 945 (2017).

^43. Id. at 961; emphasis original.

^44. Id. at 962.

^45. Id. at 969; emphasis original.

^46. 61 Cal. 4th 899 (2015).

^47. 59 Cal. 4th 348 (2014).

^48. 846 F.3d 1251 (9th Cir. 2017).

^49. Id. at 1274.

^50. 14 Cal. App. 5th 691 (1st DCA, 2017).

^51. Id. at 710.

^52. 2 Cal. 5th 945 (2017).

^53. 16 Cal. App. 5th 713 (1st DCA, 2017).

^54. Id. at 721.

^55. Id. at 723.

^56. Id. at 737.

^57. 5 Cal. 5th 966 (2018)

^58. Bus. & Prof. Code § 17200 et seq.

^59. Id. at 1020.

^60. 873 F.3d 716 (9th Cir. 2017).

^61. Id. at 721.

^62. Id.

^63. 860 F.3d 1263 (9th Cir.2017).

^64. Id. at 1274.

^65. 138 S.Ct. 2361 (2018).

^66. Id. at 2375.

^67. 898 F.3d 879 (9th Cir.2018).

^68. Citing National Institute of Family and Life Advocates v. Becerra, supra, at 2370 n.2.

^69. Interpipe Contracting, Inc. v. Becerra, supra, at 902, n.17.

^70. 4 Cal. 5th 316 (2018), cert. denied sub. nom. Emerson Electric Co. v. Superior Ct., 139 S.Ct. 376 (Oct. 15, 2018).

^71. 29 U.S.C. § 651 et seq.

^72. Id. at 347.

^73. 2018 WL 4006752 (D. New Jersey, Aug. 21, 2018).

^74. See also First Resort, Inc. v. Herrera, 860 F.3d 1263 (9th Cir.2017) (supra).

^75. 138 S.Ct. 2361 (2018) (supra).

^76. 2018 WL 4466050 (D. New Jersey, Sept. 18, 2018).

^77. Id. at 18.

^78. Id. See also In re Lipitor Antitrust Litigation 2018 WL 4006752 (D. New Jersey, Aug. 21, 2018) (reliance not required for unlawfulness or unfairness UCL claims; see discussion, supra).

^79. 25 Cal. App. 5th 714 (2018) (see discussion in "False Advertising Law," infra).

^80. 16 Cal. App. 5th 317 (2017) (review denied, S245291, Jan. 17, 2018).

^81. 27 Cal. App. 5th 672 (2018) (rehearing granted/not citable).

^82. 313 F.Supp.3d 1113 (2018).

^83. 25 Cal. App. 5th 714 (2018).

^84. 51 Cal. 4th 310 (2011).

^85. 718 F.3d 1098 (9th Cir.2013).

^86. Id. at 723.

^87. Id. at 729.

^88. Id. at 726.

^89. 26 Cal. App. 5th 1156 (2018).

^90. Id. at 1159.

^91. Id. at 1162.

^92. Id. at 1163.

^93. Id. at 1174-1175, and n.20.

^94. 195 Cal. App. 4th 1295 (2011).

^95. 152 Cal. App. 4th 1254 (2007).

^96. 552 F.3d 934 (9th Cir. 2008).

^97. Id. at 1172.

^98. Id. at 1170; emphasis by the court.

^99. Id. at 1172.

^100. Id. at 1173. Special thanks to Merced DDA Richard Michaels for his contributions here.

^101. 891 F.3d 857 (9th Cir.2018).

^102. Id. at 862.

^103. 26 Cal. App. 5th 502 (4th DCA, 2018), rehearing denied (Sept. 17, 2018).

^104. Bus. & Prof. Code § 21625 et seq.

^105. Id. at 511.

^106. 24 Cal. App. 5th 1 (2018); review granted, order requesting depublication denied, 237 Cal.Rptr.3d 178 (2018).

^107. Id. at 20.

^108. Id. at 28; People v. Hy-Lond Enterprises, Inc., 93 Cal. App. 3d 734 (1979).

^109. Id. at 20.

^110. 50 Cal. 4th 35 (2010).

^111. 3 Cal. 3d 740 (1985).

^112. CDAA, Professionalism (2016), Ch.XI, Part IX; emphasis added.

^113. County of Santa Clara v. Superior Court, supra, 50 Cal.4th at 49.

^114. 885 F.3d 629 (9th Cir.2018).

^115. Id. at 637.

^116. Santa Clara, 50 Cal. 4th at 48 [quoting Clancy v. Superior Court] (American Bankers Management Co., Inc. v. Heryford, supra, at 638, n. 12.).

^117. 24 Cal. App. 5th 438 (2018), review granted, S250047, Sept. 19, 2018.

^118. Nationwide Biweekly Administration, Inc. v. Superior Court, supra, at 470-471.

^119. See, e.g., People v. First Federal Credit Corp., 104 Cal. App. 4th 721 (2002); People v. Bestline Products, Inc., 61 Cal. App. 3d 879 (1976); People v. Witzerman, 29 Cal. App .3d 169 (1972); see also, People v. Superior Court (Kaufman), 12 Cal. 3d 421, 431, n. 9 (1974).