The Supreme Court heard oral argument on November 3, 2010 in Kwikset Corp. v. Superior Court (Benson), no. S171845. Jonathan W. Cuneo of Cuneo Gilbert & DaLuca, LLP in Washington, D.C. argued for the plaintiffs. Fredrick A. Rafeedie of Jones, Bell, Abbott, Fleming & Fitzgerald LLP in Los Angeles argued for the defendant.
Mr. Cuneo began: This Court must reverse the Court of Appeal to confirm the power of Californians who every day vote with their wallets by choosing products in whole or in part based on how the products were made. Consumers care about process as well as the final result.
Justice Werdegar: Our concern is that after Proposition 64 it’s required that the consumer has lost money or property. If the consumer buys a product, and it works as it’s supposed to work, and it’s not defective, even if the consumer preferred a made in the USA product how would they have lost money?
Cuneo: People buy things for lots of reasons. Sometimes to support a social cause.
Justice Corrigan: I agree, but it seems a more tenuous argument when you’re talking about locksets. Cuneo: It applies across the board. There are many people who want to purchase products made in the US.
Justice Corrigan: What if there are two locksets, side by side, they both cost $50. They are the same except one is labeled made in the USA. How have I lost money or property?
Cuneo: Because you made a purchase decision based on a misrepresentation. You have lost $50. Justice Moreno: Is that the measure of restitution? Cuneo: No. Justice Moreno: How would you measure it? Cuneo: Restitution under the UCL is flexible. In this case we never sought rescission. Justice Moreno: You’re not seeking the full amount of out-of-pocket loss? Cuneo: Absolutely not. One of the beauties of the UCL is that it allows the judge to fashion an appropriate remedy. That is what happened here. [And he described the three forms of injunctive relief ordered by the trial court, described at 171 Cal.App.4th at 649.] This discretion is a significant limitation on the UCL’s reach. Restitution is necessarily a flexible remedy. Sometimes the defendant receives a benefit in circumstances in which the plaintiff is not harmed – did not pay extra. In that case, the court has the ability to fashion injunctive relief and grant limited restitution as in this case.
Justice Kennard: What Prop. 64 says is [and she quoted it]. As I listen to your argument in response to questions from the bench, you said your client lost money when your client paid for a particular lock. Cuneo: Yes. Justice Kennard: But so long as your client received a lock that’s working, where’s the harm? Cuneo: The harm is he did not get the benefit of the bargain—which is a lockset made in America.
Justice Kennard: So your argument is that this was fraud? Justice Chin (interjecting): But the locksets weren’t inferior? Cuneo: No. Justice Chin: They were not overpriced? Cuneo: We are prepared to amend our complaint to allege a price differential.
Justice Kennard: I’m trying to find an argument that is implicit in the rest of your argument. Is the implicit argument this: Is it your view that that would allow defendants to make misrepresentations with impunity? Cuneo: Yes.
Justice Baxter: How much was paid for the locksets? Let’s say $50, and the consumer relies on the representation made in the US and then discovers later that parts were not—a misrepresentation. And let’s assume that it’s clear that you could put it on eBay and it would sell for at least what the consumer paid. Is it your position that that’s irrelevant to your suit? Cuneo: I think the answer’s no. That’s almost a man bites dog story. Justice Baxter: Let’s say a watch represented to be a Rolex and it’s not. Cuneo: In that case you’d be very badly damaged. There is a category of products where you can’t tell by looking at something whether it’s been misrepresented. Justice Baxter: Knockoffs. But let’s say it’s worth more or equal in value to what you paid. Is that relevant?
Cuneo: In the ordinary case the answer is no. There are extreme examples, where you might have lost money or property but were not injured in fact. If you bought a piece of costume jewelry and found out later it’s the Hope diamond. You have lost money or property but were not injured in fact.
Justice Chin: So injury in fact is something different from lost money or property? Cuneo: Yes. In this case, both are met. Justice Corrigan: And that’s where the issue is joined. I don’t disagree that they suffered injury in fact. But if those two are different, where’s the lost money or property? Cuneo: No, by putting down your credit card or cash, you’ve lost money.
Justice Moreno: Is any part of our claim for ill-gotten gains vis-à-vis the defendant’s gaining a competitive advantage? Cuneo: Yes. What the defendant was able to save by shifting jobs to Mexico. The thing about this case is there’s a statute that makes it a per se offense. People cared enough about products made in the US that the legislature enacted a statute. Suppose your religion requires you to eat only kosher foods. You buy a hot dog mislabeled as kosher. You’ve lost money or property. If one examines the language of Prop. 64, its background and what the voters were told, it supports our position.
Justice Corrigan: With misrepresentation off the table, it’s your position that when I bought a lock, I lost money or property? Cuneo: In the context of Prop. 64, what lost money means is you had a business transaction with the defendant. In your hypothetical, there would be no violation because it doesn’t meet the “as a result of” requirement.
Justice Corrigan: In my opinion it doesn’t meet “lost money or property” either. Cuneo: Pre-Prop. 64 we had unusually broad standing. Prop. 64 meant to ensure that the plaintiff had a business dealing with the defendant. The standing requirements don’t say anything about having to prove damages. Lots of impractical things would result from defendant’s position. One is valuation and damages would have to be decided at the outset. Every UCL case would turn into a trial on market pricing. There’s nothing in the legislative history that said the consumer would be stripped of the right to sue unless they prove a defect or a price differential. [Then he turned to an example from the ballot materials involving bottled water that had not been properly tested, but was not necessarily bad water.] There was no indication that the water was dangerous or overpriced. But the proponents assured the voters that that case would survive.
Justice Corrigan: Well that case could survive if someone lost money or property because of the failure to test. Cuneo: But there was nothing about any additional proof. Justice Corrigan: No—the requirements are set out in the threefold test. Cuneo: In your hypothetical it doesn’t pass the “as a result of” test.
Justice Baxter: What if we didn’t have the UCL and the plaintiff sued for restitution under the common law. What would the result be? Cuneo: It’s hard to answer because we’ve had the UCL for so long. We should not throw out the baby with the bathwater. [At this point in the argument I felt that the question of standing was being conflated with the question of restitution and how it might be measured.] Justice Baxter: My question is whether rescission and restitution, in their common-law form, can be obtained if there’s a material misrepresentation that’s relied on. Cuneo: Under those circumstances you’re positing a situation in which the streamlined remedies of the UCL, which don’t require the same showing as fraud, would be gone and that would be a significant loss to the people of California.
That was the end of Mr. Cuneo’s opening argument. Before Mr. Rafeedie could say anything, Justice Baxter interjected:
Justice Baxter: In that hypothetical we were just discussing, why wouldn’t a consumer who discovered the misrepresentation about made in the USA, why couldn’t that person go into court and get rescission and restitution? Rafeedie: I’m not sure they couldn’t do that. That’s not a cause of action alleged in this case. Justice Baxter: Would it be conditioned on proof that that they paid more for the product than it was worth? Rafeedie: No. It would be conditioned on returning the product.
Chief Justice George: That’s a pretty heavy burden. Rafeedie: I’m not sure you would have to go to court to do that. You could go back to the store and say I found out this product was mislabeled and get your money back. Chief Justice George: In some cases a legal action might be required. Justice Corrigan: If you had to spend money to go to court then would you have lost money or property? Rafeedie: Yes, if you had to spend money to go to court.
Justice Werdegar: The purpose of the UCL is to protect consumers and competitors by promoting fair competition. The mislabeling in this case is unfair competition. Consumers are motivated to buy products made in the USA. Prop. 64 requires economic damage. If someone buys a lockset because it was labeled made in the USA, why have they not suffered economic injury if the implication is they would not have parted with their money for that lockset? Rafeedie: That would satisfy injury in fact but not money or property. Justice Werdegar: The money is gone and the consumer would not have purchased the product. Rafeedie: One does not necessarily lose money or property under those circumstances. Here, plaintiffs purchased locksets and they have had no problems with them.
Justice Kennard: What is your response to the argument that manufacturers could engage in deceit with impunity so long as the product does what it’s supposed to do? Rafeedie: To the extent it does involve monetary loss, consumers can bring UCL actions. If it does not, public prosecutors can bring the action. Justice Kennard: But here we’re dealing with Prop. 64 standing. Is your argument that under the language of Prop. 64, the consumer has not alleged injury in fact? Rafeedie: No. The Court of Appeal found injury in fact satisfied and we have not argued against that. We argue no lost money resulted from the misrepresentation.
Justice Werdegar: But if I allege I would not have bought this property except for the misrepresentation, why have I not suffered economic loss? Rafeedie: You were in the market for a lock and you got one. Justice Werdegar: I don’t think the UCL requires a defect. We’re looking at defective products. Rafeedie: The Court of Appeal’s use of the term defective, if the misrepresentations induced you to buy something.
Justice Werdegar: You might have paid more for the label. If kosher is important to me, even though the hot dog is delicious and has full nutritional value, have I not suffered injury because I would not have suffered the economic loss but for the label? Rafeedie: Not necessarily. It depends on the circumstances. Maybe the label allowed the manufacturer to command a premium price.
Justice Moreno: Is the plaintiff allowed a claim for ill-gotten gains due to the competitive advantage gained over other competitors? Does the consumer have a UCL claim for that profit? Rafeedie: No, the consumer does not. Justice Chin: But a competitor might? Rafeedie: Yes, a competitor might, but not a consumer.
Chief Justice George: Is your answer the same if the claim is a product was labeled organically grown? Is it inconsequential that it was falsely labeled? Rafeedie: Yes. Justice Chin: Unless a premium was paid. Rafeedie: Yes.
Justice Corrigan: If you lost money or property returning the item; because you had to consult with a spiritual adviser because you ate non-kosher food; if you got sick. There are lots of ways a consumer could lose money or property. Rafeedie: I agree. Not necessarily limited to paying a premium. That’s one type. There might be consequential damages, conceivably lost profits. These are the sorts of things fraud law allows recovery for.
Chief Justice George: There is a recent case that this Court decided called Bronco Wine. In that case wine was labeled as from Napa Valley when it should have been labeled Lodi. Assume the wine was just as good. How would you recover restitution? Rafeedie: If that’s the only allegation it depends on the circumstances whether a loss was suffered. If I wasn’t in the marketplace and wouldn’t have bought anything but for the misrepresentation.
Justice Werdegar: Whose burden is it to show that the plaintiff was really going to buy wine or a hot dog? That they would not have bought something exactly comparable? Rafeedie: The plaintiff’s. Justice Werdegar: But the plaintiff has already alleged he would not have bought the product. Does he have to show he never would have bought anything comparable? Rafeedie: Yes. That’s what the plaintiff has to prove. Here we have no allegations that the plaintiff would have paid less for a comparable lockset. Justice Werdegar: But they do allege they would not have given money for those locksets. Rafeedie: That is part of the greater allegation that if we had known, we would not have bought.
Justice Moreno: How is this case different from the Napa wine case? Would it be easy to measure restitution? Rafeedie: Because there are no allegations of any differential in price. Justice Moreno: Would you agree that in the Napa/Lodi example there is a difference? Rafeedie: If there’s a differential in price that would be the difference. Justice Moreno: You’re saying here because the locksets are equal in quality there is no loss. Rafeedie: Yes, no allegation the locks are any different than they would have been if they had been made in the US.
Justice Baxter: But we’re not talking about damages under the UCL; were talking about restitution and injunctive relief. If the purchaser can mitigate damages by selling on eBay, does that have any impact on the ability to proceed under the UCL? Rafeedie: Yes.
Justice Corrigan: If the plaintiff alleged that he had lost money because he had to pay a fee to sell the product on eBay, pay shipping costs, then that would be sufficient? Rafeedie: Consequential damages could be. Justice Corrigan: If they could prove they suffered those damages then the expenditure of those moneys could constitute lost money or property? Rafeedie: Yes it could. It’s not recoverable as restitution, however.
That was the end of Mr. Rafeedie’s argument. The rebuttal:
Cuneo: In response to Justice Baxter’s questions about eBay, and I think Justice Chin had the same question. If you can resell it for more on eBay, that is the same circumstance this Court just considered in Clayworth. The pharmacists passed on the overcharge. The holding of that case was they lost money or property when they paid for the price-fixed pharmaceuticals. Clayworth was also— Justice Chin (interrupting): This is not a question of passing on the value by selling on eBay. If you get the value of the property, where’s the loss?
Cuneo: The second you pay for it you’ve got the loss under Clayworth. The primary purpose of the UCL is injunctive relief, to enable people to stop misrepresentations in their tracks. On the less than meritorious cases, let’s bear in mind that the UCL gives courts tremendous discretionary power to limit the remedies. The court can find a violation and the judge can say it’s not substantial enough for any relief. Or the court can issue an injunction only, but nothing to the consumers. The courts have the tools to address the concerns raised in the Tobacco II dissent by Justice Baxter. What adoption of the Court of Appeal opinion would do is impose vast new burdens at the front end of UCL actions. On the public prosecutor point, public prosecutors have their hands full. That’s why the DAs filed an amicus brief on our side.
Justice Werdegar: What remedies did the trial court order in this case. Cuneo: [he described the three forms of injunctive relief]. Justice Werdegar: It denied restitution to consumers, correct? Cuneo: It did. Justice Werdegar: It engaged in the discretionary, nuanced remedies you referenced, didn’t it? Cuneo: It did.
And that was the end of the argument.
It's not hard to guess where Justice Corrigan will come down on this question, but I don't think any of the other justices feel as strongly as she does. Justices Werdegar and Kennard and even the Chief Justice appear to favor the plaintiff's position. The one thing that I think can be safely predicted is a split decision.
The opinion will be due in 90 days.