CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2000 No.27 December 9, 2004

Vol 2004 No.27 December 9, 2004

Full Effect of Prop 64 Frivolous Law Suit Initiative Yet to be Determined

This article was prepared for CBA by Will Stern of the San Francisco law firm, Severson & Werson, which was counsel to the Yes on Proposition 64 Committee.

On November 2, 2004, this state's electorate approved Proposition 64 by a resounding 59% to 41% margin. The proposition, supported by business groups including CBA, eliminates two features of California's unfair competition law (Bus. & Prof. Code §17200, hereafter "Section 17200") that constituted a de facto private "litigation tax" on companies that do business in California.

Unaffected-Plaintiff Standing Eliminated

Proposition 64 eliminates "unaffected plaintiff" standing, or the ability for any person to sue a California business entity without having suffered any injury caused by that entity. Before Proposition 64, a Section 17200 suit could be brought, literally, "by any person." Courts had construed that phrase to mean that a plaintiff did not even have to be affected by the business practice.

As a result of Proposition 64, in order to sue, the plaintiff must have suffered "injury in fact." "Actions for any relief [under Section 17200] shall be prosecuted by . . . any person who has suffered injury in fact and has lost money or property as a result of such unfair competition."1

1) Prop. 64, §§2, 5.

This requirement is far from new. Every other claim in California is subject to the prevailing "real party in interest" standing rule2 and for good reason: "To protect a defendant from a multiplicity of suits and from further annoyance and vexation, and to fix and determine the real liability which is alleged in the complaint. Bank of Orient v. Superior Court, 67 Cal.App.3d 588, 594 (1977). "Real party in interest" standing has been a cornerstone of Anglo-American jurisprudence for centuries. Jettison that rule, as Section 17200 did, and the outcome is predictable.

2) See Code of Civil Procedure §367.

The prediction was realized in Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal.4th 553 (1998). There, the plaintiff was a for-profit corporation whose sole shareholder was the mother of the plaintiff's attorney. He set up private sting operations by paying minors to enter convenience stores and asking to buy cigarettes. If the retailer obliged, it would draw a summons and an extravagant settlement demand, not necessarily in that order. But the proceeds of settlement, in these cases, would not be paid to the "victims." Rather, it would be used to re-seed new for-profit operations. And so it went, a perfect perpetual motion device, with no client to get in the way.

Stop Youth Addiction became the blueprint for lawyers wanting to build their own perpetual motion devices. Thousands did. And because no state in the country had such a rule, consumer litigation migrated to the Golden State. We were even taking litigation "business" away from Alabama, one of the more class-action friendly states.

Proposition 64 ends that. The purpose of Proposition 64 is to prevent Section 17200 from "being misused by some private attorneys who . . . file lawsuits on behalf of the general public without any accountability to the public and without adequate court supervision."3

3) Prop. 64, §1(2)(d).

"Nonclass Class" Eliminated

The second change created by Proposition 64 is the elimination of the "nonclass class." This is another "only-in-California" feature that lets someone sue on behalf of others-and recover money on their behalves-without having to plead or certify the case as a true class action. Thus, prior to Proposition 64, you could "recover" money for absent parties under Section 17200, but you were not required to turn it over to them. This provided powerful leverage to plaintiffs.

This feature also meant that a defendant who settled or won a judgment in a "nonclass class" could not bar other absent "claimants." There was no finality, only the risk of serial litigation, with the possibility of someone else suing over the same practice on behalf of the same "general public" again and again. Of course, in most cases none of this mattered, because there were no harmed "claimants," only armies of lawyers looking to sue over the slightest infraction.

Finally, Proposition 64 allows for finality. It eliminates the ability of private litigants to bring Section 17200 actions on behalf of the "general public." And by amending Section 17203 (and the parallel provision, section 17535), it makes clear that relief on behalf of non-parties can only be had through traditional class action procedure.

While eliminating this feature in private suits, Proposition 64 leaves law enforcement unscathed. The proposition declares it to be California voters' intent "that only the California Attorney General and local public officials be authorized to file and prosecute actions on behalf of the general public."4

4) Prop. 64, § 1(6).

A significant question remains whether Proposition 64 applies to pending litigation. Numerous motions have been filed in the trial courts, and several courts have already held that Proposition 64 applies to pending cases. Two cases in the Fourth District Court of Appeal, and one in the Fifth District, may result in an appellate court decision in the next several months.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.