New Ninth Circuit Decision Holds that Consumers Suffer Economic Injury and Have Standing to Sue Under the Unfair Competition Law and False Advertising Law in 'Sale Price' Advertising Cases
In 2004, California voters passed Proposition 64, which restricted standing for individuals alleging claims under the state’s Unfair Competition Law (UCL) and False Advertising Law (FAL). Specifically, Prop 64 required plaintiffs to plead and prove that they have “suffered injury in fact and … lost money or property as a result of the unfair competition” (or false advertising). Cal. Bus. & Prof. Code §§ 17204 (UCL), 17535 (FAL).
In Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), the California Supreme Court held that purchasers of locksets falsely labeled “made in U.S.A.” had standing under the UCL and FAL because the purchasers alleged that the false labeling induced them to purchase goods they would not have purchased otherwise, even if the locksets were not defective and functioned as expected. In Hinojos v. Kohl’s Corp., __ F.3d __, 2013 WL 2159502 (9th Cir. May 21, 2013), the Ninth Circuit applied Kwikset in the context of a putative consumer class action alleging that defendant Kohl’s Department Stores violated the UCL and FAL by advertising certain apparel and luggage at “sale” prices discounted from listed “retail prices,” when in fact defendant had not sold those products at the purported “retail” price in the recent past or in the prevailing market. Plaintiff alleged that “he would not have purchased the goods in question absent this misrepresentation.” 2013 WL 2159502, at *4.
The District Court dismissed plaintiffs’ claims, finding that he did not have standing to sue because he had acquired the merchandise at the price advertised and thus received the benefit of his bargain. Shortly thereafter, the Kwikset decision was published. Citing Kwikset, the Ninth Circuit reversed the District Court’s decision, agreeing that a consumer can allege facts necessary for standing to sue under the UCL and FAL “by alleging … that he or she would not have bought the product but for the misrepresentation,” which is what the plaintiff did in Hinojos. 2013 WL 2159502, at *3, citing Kwikset, 120 Cal.Rptr.3d at 885. The court noted that Kwikset explained that such allegations are sufficient because “[f]rom 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 that 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.” 2013 WL 2159502, at *3, citing Kwikset, 120 Cal.Rptr.3d at 890.
Notably, the Ninth Circuit rejected defendant’s attempts to distinguish Kwikset on the ground that plaintiff’s complaint did “not allege at what price (if any) he would have purchased the merchandise in question had its ‘original’ or ‘regular’ price not been misrepresented.” 2013 WL 2159502, at *4. The court held that “[t]here is no requirement, however, that Hinojos separately plead how much he would have paid for the merchandise had he known its true market value. Kwikset explicitly rejected that argument.” Id., citing Kwikset, 120 Cal.Rptr.3d at 891 n. 15.
Following Kwikset, the Ninth Circuit rejected the District Court’s finding that plaintiff “got the ‘benefit of the bargain’ because he kept the goods that he purchased and they were not defective.” 2013 WL 2159502, at *6. The Ninth Circuit held that the “‘benefit of the bargain’ defense is permissible only if the misrepresentation that a consumer alleges was not ‘material.” Id., citing Kwikset, 246 P.3d at 892-93. The court held that “[a] representation is ‘material,’ however, if a reasonable consumer would attach importance to it or if ‘the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action.’” 2013 WL 2159502, at *6 (emphasis in original, citation omitted). The court also noted that the California legislature’s “decision to prohibit a particular misleading advertising practice is evidence that the legislature has deemed that the practice constitutes a ‘material’ representation, and courts must defer to that determination.” Id. The court then found that “both state and federal law specifically prohibit retailers from advertising false ‘sales.’” Id., citing Cal. Bus. & Proc. Code § 17501 (FAL), Cal. Civil Code § 1770(a)(13) (CLRA), and 16 C.F.R. § 233.1(a). Thus, the court held that “the district court’s determination that Hinojos has suffered no economic injury because he received the ‘benefit of his bargain’ is contrary to Kwikset because Hinojos alleges that Kohl’s made material misrepresentations that induced him to buy products he would not otherwise have purchased.” Id.
The Ninth also rejected the District Court’s finding that Kwikset was limited to cases involving “factual misrepresentations about the composition, effects, origin, and substance of advertised products.” 2013 WL 2159502, at *4. And the court rejected defendant’s additional argument that “when a merchant misrepresents the ‘regular’ price of his wares, it does not misrepresent the innate value of those wares so the misled consumer has suffered no economic injury; he gets the product at the price he expected.” Id. Noting that “Kwikset cannot be so easily limited,” the Ninth Circuit held that the examples of misrepresentations concerning a product’s origin or composition that Kwikset described as actionable (meat falsely labeled as kosher or halal, wine labeled with the wrong origin or year, blood diamonds mislabeled as conflict-free, goods falsely suggesting they were produced by union labor) was not an exhaustive list. Id. The Court concluded that “a product’s ‘regular’ or ‘original’ price matters; it provides important information about the product’s worth and the prestige that ownership of the product conveys.” Id. (citations omitted).
Like the California Supreme Court in Kwikset, the Ninth Circuit then felt compelled to provide its own list of other marketing practices that have little or nothing to do with a product’s composition, effects, origin or substance, but which the court concluded “represent effective marketing techniques that, if false, can be used to deceive consumers into making purchases they would not otherwise make,” even though none of these hypothetical statements were at issue in the case. Specifically, the court listed the following examples (1) “not available in stores,” (2) “available for a limited time only,” (3) “the same model of shoe worn by a professional athlete,” (4) “50% of customers who purchased product X also purchased our product,” and (5) “more doctors recommend our product than any other brand.” Echoing similar language in Kwikset, the court then concluded that “price advertisements matter,” and also found that plaintiff stated claims under California’s Consumer Legal Remedies Act for similar reasons. 2013 WL 2159502, at 5.
In sum, this case reflects an unfortunate trend in the appellate courts after Proposition 64 to broadly construe the types of things that can constitute “actual injury” sufficient to confer standing. While one can argue the decision is limited to cases involving false sales that are expressly prohibited by statute (and that therefore involve arguably presumptively material misrepresentations), we predict a flurry of new putative class actions filed based on the laundry list of misrepresentations the Ninth Circuit effectively sanctioned as actionable, even though in dicta. Clients would be well advised to read this opinion carefully and to make sure they are not advertising discounts that are not based on actual price reductions or engaging in any of the practices the Ninth Circuit proclaimed would also be misleading if proven.