Recent federal order on the UCL post-Prop. 64: Aureflam v. Pho Hoa Phat

On September 16, 2005, an interesting order was issued in Aureflam Corp. v. Pho Hoa Phat I, Inc., case no. 5:05-cv-00746-RS (N.D. Cal. Sept. 16, 2005). It addresses a number of questions of first impression relating to the interpretation of the UCL as amended by Prop. 64.

The case is a dispute between two owners of Vietnamese restaurant chains. The plaintiff's original suit alleged trademark infringement and unfair business practices under the UCL. The defendant counter-claimed, seeking cancellation of the trademark registration, damages for fraud on the patent office, and injunctive relief under the UCL. The district court (Magistrate Judge Seeborg) granted the plaintiff's motion to dismiss the UCL counterclaim, holding that the defendant had neither alleged "actual injury" nor satisfied the requirements of Code of Civil Procedure section 382. (The case was filed in 2005, after Prop. 64's efffective date, so retroactivity was not an issue.)

The only "actual damages" the defendant claimed were "the attorneys' fees incurred in responding to the principal claim filed by [the plaintiff]." Slip op. at 5. That was held to be insufficient:

The Court has not located, nor did [the defendant] cite, any authority which supports the proposition that attorneys' fees incurred in this action may constitute an actual injury for purposes of a Section 17200 counterclaim. .... Although it is perhaps conceivable that a definition of "actual damages" may emanate from the [California] Supreme Court ... that would include attorneys' fees, there is no current authority which provides that such fees constitute an actual injury for the purpose of Section 17200.

Id. That is an understatement, given that there is essentially no authority at all about what "injury in fact" means. But what's odd about it is the implicit assumption that a UCL claimant seeking injunctive relief only would have to establish an actual injury. That assumption makes little sense, even given the recent amendments to the UCL. One of the main functions of injunctive relief is to stop a threatened injury before it occurs, not after someone has been harmed. Moreover, as the Supreme Court recognized in California v. Altus Finance, S.A., ___ Cal.4th ___ (Aug. 17, 2005), a UCL claim for injunctive relief can be crafted so as to rectify individual wrongs, rather than widespread public ones.

Another interesting thing about this order is its assumption that California rules of class action procedure would apply to a UCL claim filed in federal court:

[E]ven if [the defendant] had alleged an actual injury, it would also have to meet the representate action requirements set forth in Cal. Civ. Code Proc. § 382. .... [The defendant's] general attempt to allege a class ... is too imprecise to constitute an ascertainable class which would afford proper notice to its members or allow [the plaintiff] to frame an appropriate defense.

Slip op. at 5-6. In other words, according to this court, the UCL's specific reference to the California class action statute trumps the ordinary rule that federal rules of procedure govern state-law claims in federal court.

At least one reader has suggested this idea to me before. It could have significant ramifications. For example, perhaps a UCL class action could not be removed to federal court because the Class Action Fairness Act would not apply to it. California class certification requirements are generally recognized to be somewhat more lenient than federal ones, so I think it is actually better for UCL plaintiffs if it turns out that, as this court holds, California class action rules will govern.

My final observation about this order is that it also seems to assume that a UCL claim can no longer be brought by an individual plaintiff seeking relief for itself alone. Otherwise, the order would not have cited the defendant's failure to plead a class action as a reason to dismiss the claim entirely. I believe several recent post-Prop. 64 decisions recognize that individual actions may proceed under the UCL (as amended), without regard to the class action requirements. See, e.g., Readylink Healthcare, Inc. v. Cotton, 124 Cal.App.4th 1006 (2005) (discussed in this post).

Comments

[mary]

Kimberly, Excuse me for only having read your summary, but do I understand that an individual plaintiff, not seeking class-wide relief, was also required to satisfy 382? If so, does this mean, UCL is only for class-actions; did I miss something?

[mary]

Kimberly, Excuse me for only having read your summary, but do I understand that an individual plaintiff, not seeking class-wide relief, was also required to satisfy 382? If so, does this mean, UCL is only for class-actions; did I miss something?

[mary]

oops, it looks like i failed to click through and read your last paragraph, which addresses my exact question. sorry

[amendment is good law]

Kimberly: Not odd, not an implicit assumption, § 17204 as amended states exactly what the court said.

Your opinion: "But what's odd about it is the implicit assumption that a UCL claimant seeking injunctive relief only would have to establish an actual injury."

Excerpt from Schwartz v. Visa Int'l Service Assn. filed Sept. 28 - Court's Discussion:

As amended by Proposition 64, the UCL now authorizes the filing of an injunctive or restitutionary relief action only by certain public prosecutors and by “any person who has suffered injury in fact and has lost money or property as a result of such unfair competition.” (§ 17204.) In addition, the UCL now authorizes a person to pursue a representative action only if he or she meets the class certification requirements of section 382 of the Code of Civil Procedure. (§ 17203.)
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Quite explicit since injunctive and/or restitutionary relief are the remedies authorized under § 17203 in actions brought by one other than certain public prosecutors.

[Kimberly A. Kralowec]

Yes, I say it's odd, and not an "implicit assumption." The stated purpose of Prop. 64 is to bring the UCL's standing requirements in line with Article III standing requirements. Never in hundreds of years of jurisprudence has "actual injury" been a prerequisite to an injunctive relief claim. As for Schwartz, its comments on this topic are dicta.

[amendment is good law]

Your comments overlook two critical points:

1. California's B & P 17200 action is purely a creature of statute, i.e., in jurisprudence an appropriate action for injunctive relief remains readily available to a real party(ies) in interest; and

2. The language of the law, B & P 17204, as amended, brings standing limitations to this creature of statute. Schwartz is merely a restatement of law enacted.