California Supreme Court Will Decide Key Proposition 64 Case on Class Action Consumer Suits

SAN FRANCISCO, CA — If consumer attorneys are feeling beleaguered these days, they have good reason.

Last month, the California Supreme Court limited their ability to sue companies over objectionable fine print in service contracts a ruling that eight consumer groups recently asked the justices to reconsider.

This week they’ll try to persuade the high court to overturn two appellate court rulings they say would further stymie their ability to hold companies accountable for fleecing customers.

At the heart of the most significant case – a suit against tobacco companies – is Proposition 64, a measure passed by voters in 2005 that sought to limit frivolous class action suits. It required plaintiffs in private lawsuits to show they lost money or property due to a company’s practices in order to have standing.

In a decision that’s been under review at the high court for more than two years, the 4th District Court of Appeal ruled in 2006 that Proposition 64 went one step further than plaintiffs had presumed requiring them to show that each member of the proposed class has actually been harmed, not just the named plaintiff.

According to consumer lawyers, that’s a nearly impossible burden, and it’d be much easier to prove the named plaintiffs suffered a loss and then evaluate damages for the entire class.

The case before the California Supreme Court involves potentially millions of smokers, who claim the cigarette industry’s deceptive advertising practices downplayed their product’s health hazards. Although the lawsuit doesn’t seek to compensate sick smokers, it demands the industry pay restitution for false advertising. In re Tobacco II Cases, S147345.

The ruling is being closely watched because of its possible impact on all consumer class actions brought under the unfair competition law, said plaintiffs lawyer Mark P. Robinson Jr. of Robinson Calcagnie & Robinson in Newport Beach, who will represent the smokers at oral argument Tuesday.

"It’s the rights of consumers not just in this case, but for all consumers that are deceived by business fraud in California," Robinson said. "We don’t think the voters intended to throw out the baby with the bath water."

If the California Supreme Court sides with the lower court, it "would effectively annihilate the class action device in California," which is designed to let people come together to challenge a company’s policies or actions, said Jim Sturdevant, of the Sturdevant Law Firm in San Francisco and a board member of the National Association of Consumer Advocates.

Not surprisingly, tobacco companies and their trade associations backed by pro-business groups that filed friend-of-the-court briefs saw the issue differently and said allowing all class members to have standing has only produced frivolous lawsuits.

They argue that not applying Proposition 64’s new standing requirements to all class members would be absurd and would let someone who was not an eligible named plaintiff to win by instead becoming an absent class member.

"A class action, the courts have stressed, is not intended to permit the class representative to assert ‘claims’ that the absent class members do not have," Daniel P. Collins of Munger, Tolles & Olson wrote on behalf of the tobacco companies and their trade associations.

Fred J. Hiestand, general counsel of the Civil Justice Association of California, a Sacramento-based nonprofit that works to curb excessive litigation, said the issue comes down to who has the burden of proving that all class members belong in the lawsuit.

"If you’re going to bring the lawsuit, do a little bit of research," Hiestand said. "I don’t know why the plaintiffs bar should be exempt from doing the work in their case."

The complicated issues at the heart of the case could be bogging down the state Supreme Court as well, Hiestand said, saying that may be why it’s been under review for so long.

And while Chief Justice Ronald M. George is usually the swing vote in such close cases and a fair indicator of which way the decision will turn, he’ll be sitting out Tuesday’s oral argument and the decision because one of the defense firms in the case, Loeb & Loeb in Los Angeles, handles his estate planning.

His replacement, Justice Eileen C. Moore of the 4th District Court of Appeal, graduated from the conservative Pepperdine University School of Law and was honored a few years back by the Consumer Attorneys Association of Los Angeles.

Sturdevant said he’s hopeful the court will defend class actions, especially after the court recently came out strongly in favor of allowing employees to band together in lawsuits in Gentry v. Superior Court (Circuit City), (2007) 42 Cal.4th 443. The Gentry court said class action waivers in employment contracts "cannot be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees’ prosecution of those claims."

On Wednesday, the justices will hear another case involving the state’s other main consumer protection law, the Consumer Legal Remedies Act, and decide whether the law applies to insurance companies. Fairbanks v. Los Angeles County Superior Court (Farmers New World Life Insurance), S157001. In 2007, the 2nd District Court of Appeal ruled that the law doesn’t apply because insurance companies provide neither a good nor a service as called for in the law.

"It’s some kind of a twilight zone where insurance gets to live and no one can touch them," said Harvey Rosenfield, founder of the nonprofit advocacy group Consumer Watchdog and the author of the 1988 voter-approved Proposition 103, which cut insurance rates statewide. "It’s very disturbing to see what the courts are doing."

The appellate court said complaints against insurance companies should be handled by the Insurance Commissioner under a separate law.

Sturdevant criticized the opinion, saying it was comparable to blocking a general civil rights lawsuit because it didn’t meet the provisions of one specific civil rights law.

"California’s Consumer Legal Remedies Act is one of the broadest and most protective laws in the U.S. if not the world," Sturdevant said. "It was written so as to be expansive and protective of consumers."

That’s one reason Sturdevant and other consumer groups were stunned last month when the state Supreme Court ruled consumers can’t use the act to preemptively sue businesses to remove offensive fine print in service contracts. Meyer v. Sprint Spectrum, 2009 DJDAR 1452.

The court held that companies can only be sued if they try to enforce a questionable provision, such as a mandatory arbitration clause or a large cancellation fee. In effect, the court had applied Proposition 64’s standing requirements, which require all plaintiffs be able to show harm, to the consumer law.

"I call it Proposition 64 creep," Rosenfield said. "I see the courts applying Prop 64 to laws it doesn’t apply to and insurance companies getting special treatment."

Rosenfield joined Sturdevant and six other consumer groups on Feb. 19 to ask the justices to reconsider their unanimous ruling.

Such requests are rarely granted, but that doesn’t discourage Sturdevant, who has a separate case pending at the court to reinstate a $1 billion class action against Bank of America for dipping into customers’ directly-deposited Social Security funds to collect overdraft and late fees.

"I think the court’s decision in the Meyer case was an aberration and the court will now have an opportunity given the petition for rehearing to consider all the ramifications of the original opinion and hopefully to modify it substantially," Sturdevant said.

Hiestand pointed out that the court in Meyer required plaintiffs to show they had been harmed before they can sue.

"I think that’s a good sign that they may go our way," he said.

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