Antitrust Law Daily Wrap Up, ADVERTISING—9thCir: Consumer Could Bring California Claims Based on Alleged False Price Advertising, (May 22, 2013)

By John W. Arden, J.D., LL.M.

A consumer who allegedly purchased merchandise from Kohl’s Department Stores on the basis of false price information had standing to bring an action for violation of the California Unfair Competition Law, Fair Advertising Law, and Consumer Legal Remedies Act, according to the U.S. Court of Appeals in San Francisco (Hinojos v. Kohl’s Corp., May 21, 2013, Reinhardt, S.). Dismissal of the consumer’s claims was reversed, and the case was remanded for further proceedings.

Antonio Hinojos alleged that he purchased merchandise from a Kohl’s Department Store that he would not have purchased had he not been misled by advertisements stating that the merchandise was marked down from a fictitious “original” or “regular” price. Rather than being substantially reduced from “regular” prices, the merchandise was routinely sold by Kohl’s at the advertised “sale” prices, he alleged.

Hinojos filed a putative class action complaint in California Superior Court, asserting causes of action under California’s Unfair Competition Law (UCL), Fair Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA). Kohl’s removed the action to the federal district court in Los Angeles pursuant to the federal Class Action Fairness Act. On December 1, 2010, the district court dismissed Hinojos’s UCL and FAL claims for lack of standing. The laws require a plaintiff to have “lost money or property” as a result of the false advertising and Hinojos had acquired the merchandise he wanted at the price advertised, the district court ruled.

Shortly thereafter, the California Supreme Court issued its opinion in Kwikset Corp. v. Superior Court, 246 P.3d 877 (Cal. 2011), which held that purchasers of goods falsely labeled “made in U.S.A.” had standing under the UCL and FAL when the purchasers alleged that the false labeling induced them to purchase goods they would not have purchased except for the false labeling. Hinojos filed a motion for reconsideration based on Kwikset, which the district court denied after concluding that the decision applied only to false advertisements regarding a product’s “composition, effects, origin, and substance.” The district court later concluded that Hinojos did not have standing under the CLRA because he failed to show he suffered “any damage” as a result of Kohl’s false advertising.

Hinojos timely appealed the dismissal of his claims.

According to the Ninth Circuit, the UCL prohibited business practices that constitute “unfair competition,” including any unlawful, unfair, deceptive, untrue, or misleading advertising and expressly incorporated the FAL’s prohibition on unfair advertising. The FAL prohibited the advertising of a former price unless the price was the prevailing market price within three months preceding publication.

Standing requirement. In 2004, the voters of California passed Proposition 64, which restricts standing for individuals alleging UCL and FAL claims to persons who have “suffered injury in fact” and have “lost money or property as a result of the unfair competition.” The California Supreme Court has held that the purpose of Proposition 64 was to “curtail the prior practice of filing suits on behalf of clients who have not used the defendant’s product or service, viewed the defendant’s advertising, or had any other business dealings with the defendant.” However, the court added that Proposition 64 “just as plainly preserved standing for those who had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices.”

To satisfy the “lost money or property” requirement, a plaintiff must demonstrate some form of economic injury as a result of transactions with the defendant. The Kwikset court explained that a consumer who relies on a product label and challenges a misrepresentation contained therein could satisfy the standing requirement by alleging that he or she would not have bought the product but for the misrepresentation.

“Hinojos has done everything Kwikset requires to allege an economic injury under the UCL and FAL,” the Ninth Circuit held. “He alleges that the advertised discounts conveyed false information about the goods he purchased, i.e., that the goods he purchased sold at a substantially higher price at Kohl’s in the recent past and/or in the prevailing market. He also alleges that he would not have purchased the goods in question absent this misrepresentation. This is sufficient under Kwikset.”

In denying Hinojos’s motion for reconsideration, the district court limited Kwikset on the grounds that it addresses UCL and FAL standing only in cases involving “factual misrepresentations about the composition, effects, origin, and substance of advertised products.” However, Kwikset cannot be so easily limited, the Ninth Circuit ruled. The California Supreme Court’s examples of misrepresentations that would be actionable under the UCL and FAL were not intended to be exhaustive rather than illustrative.

The district court’s “composition, effects, origin, and substance” test ignores the fact that a product’s “regular” or “original” price matters to consumers. “Misinformation about a product’s ‘normal’ price is, therefore, significant to many consumers in the same way as a false product label would be.” In fact, the deceived bargain hunter suffers a more obvious economic injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods because the bargain hunter’s expectations about the product he purchased is precisely that it has a higher perceived value and a higher resale value.

The district court’s test would eliminate consumers’ ability to bring UCL and FAL claims for a “vast array” of other misleading market practices that have little or nothing to do with the product’s “composition, effect, origin, and substance.” However, Kwikset emphasized that Proposition 64 was enacted not to eliminate individual suits when a consumer is actually deceived by a misleading advertisements, but to stop “fishing expeditions” by consumers and attorneys who may never have intended to purchase a product that was falsely advertised.

A district court finding that Hinojos received the “benefit of the bargain” because he kept the goods that he purchased and they were not defective was the type that was explicitly rejected in Kwikset. A “benefit of the bargain” defense is permissible only if the misrepresentation alleged by the consumer was not “material,” the appeals court found.

“Applying Kwikset in a straightforward manner, we hold that when a consumer purchases merchandise on the basis of false price information, and when the consumer alleges that he would not have made the purchase but for the misrepresentation, he has standing to sue under the UCL and FAL because he has suffered an economic injury,” the appeals court concluded.

The district court’s conclusion that Hinojos failed to establish standing under the CLRA because he did not suffer “any damage” was held erroneous for the same reasons that its determinations regarding UCL and FAL standing were wrong. The “any damage” standard includes even minor pecuniary damage. A plaintiff that has standing under the “lost money or property” requirement of the UCL or FAL has suffered “any damage” for purposes of establishing CLRA standing.

Motion to certify questions. The Ninth Circuit denied Kohl’s motion to certify the questions in this case to the California Supreme Court because Kwikset provided more than sufficient guidance with regard to the state-law statutory standing questions presented in this case.

Thus, the appeals court reversed the dismissal of the UCL, FAL, and CLRA claims and refused to certify questions to the California Supreme Court.

The case is No. 11-55793.

Attorneys: Matthew J. Zevin (Stanley Iola, LLP) for Antonio S. Hinojos. James F. Speyer (Arnold & Porter LLP) for Kohl’s Corp.

Companies: Kohl’s Corp.; Kohl’s Department Stores, Inc.

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