California Supreme Court’s Kagan analysis is clarified by Proposition 64 spill-over. Meyer v. Sprint Spectrum LP, ___ Cal. __, 2009 WL197560 (January 29, 2009).

In Meyer, the plaintiffs filed a class action alleging violations of the California Unfair Competition Law (“UCL”), the California Consumers Legal Remedies Act (“CLRA”), and for declaratory relief. Plaintiffs claimed that Sprint Spectrum (“Sprint”) improperly included certain illegal and unconscionable terms in its customer service agreement, including: (1) a requirement that the parties submit disputes under the customer service agreement to binding arbitration, (2) a waiver of the right to jury trial, (3) a waiver of class action rights in arbitration, (4) a failure to provide for discovery before arbitration, (5) unconscionable arbitration costs-splitting provisions, (6) a disclaimer of warranties and a limitation and liability, (7) the right of Sprint to unilaterally change the terms of the customer service agreement, and (8) a 60-day limitation period for initiating billing disputes. Plaintiffs did not allege, however, that Sprint had asserted or threatened to assert these terms against them. In the wake of the passage of Proposition 64 in November 2004, which changed the standing requirements for a UCL claim under California Business and Professions Code section 17204, Sprint demurred to plaintiffs’ fourth amended complaint, alleging lack of standing. The trial court sustained the demurrer without leave to amend. The Court of Appeal for the Fourth Appellate District affirmed. See Meyer v. Sprint Spectrum L.P., 150 Cal. App. 4th 1136 (2007).

The California Supreme Court granted a petition for review on the issue relating to standing under the CLRA, Civil Code sections 1750-1784. Plaintiffs did not allege that the provisions claimed to be unconscionable had ever been enforced against them, or caused damage. A primary issue was whether, under these circumstances, a plaintiff may obtain injunctive relief to compel the removal of the allegedly unconscionable provisions under the CLRA. An ancillary issue was whether a plaintiff may obtain declaratory relief pursuant to California Code of Civil Procedure section 1060, to declare the “unconscionable provisions” to be unlawful and unenforceable. In affirming, the California Supreme Court concluded that none of the alleged claims for relief were available.

A significant point made in the decision, and one that is likely to be further discussed in subsequent decisions, is the distinction between “any damage”, the standing requirement under Civil Code section 1780(a), and “actual damages” which is the post-Proposition 64 standing requirement of Section 17204 of the UCL. The California Supreme Court held that while the statutory language of the CLRA affords standing to plaintiffs who have suffered “any damage”, as opposed to “actual damages”, there must be some modicum of damage suffered. A plaintiff bringing a “preemptive lawsuit” to strike the terms claimed to be unconscionable, before any action has been taken by the defendant against consumers, lacks standing.

This perhaps, is the spill-over effect of Proposition 64. While it is not necessary for a plaintiff to allege that it has suffered “actual damages”, it must allege that it has nevertheless suffered “any damage” or at least some damage in order to proceed under any of the provisions of the CLRA.

How can this be so? What is the relationship between “any damage” and “actual damages”? The Court held that this was strictly a matter of statutory interpretation: “Any damage” may include transaction or opportunity costs that are necessarily incurred by a plaintiff where adverse action by a defendant would appear to be imminent to a reasonable, aggrieved consumer. Thus, a threshold of “any damage” will suffice. However, absent some sort of “any damage” suffered by a consumer, a plaintiff will lack standing.

The Court explained that this is what it really meant to say in its prior decision in Kagan v. Gibralter Sav. & Loan Assn., 35 Cal. 3d 582 (1984). In Kagan, the plaintiff individually and as a class representative sued Gibralter Sav. & Loan Assn. (“Gibralter”) for violations of the CLRA. Plaintiff alleged that Gibralter had advertised goods or services with the intent not to sell them as advertised, in violation of California Civil Code section 1770(i). Gibralter represented that a consumer would receive an economic benefit, when the ability to earn the benefit was contingent on an event occurring after the consummation of the transaction, an alleged violation of Section 1770(q). Kagan and her husband had opened individual retirement accounts (IRAs) with Gibralter. Before opening the accounts, Kagan had read newspaper advertisements stating Gibralter’s policy not to charge fees for the administration of the IRAs, and reviewed a promotional brochure in a Gibralter district office which represented “No commissions. No establishment fees. No management fees.”

Later, Kagan received a letter advising her that Gibralter would, in fact, deduct a $7.50 trustee’s fee from all IRAs. After Kagan and her husband sent a demand letter to Gibralter, Gibralter promised to remove from its branches the promotional brochures referencing the trustee’s fee, and advised her that the trustee’s fee had not been deducted from her IRA.

The trial court granted Gibralter’s motion to determine the action was without merit pursuant to Civil Code section 1781(a). It did so on the ground that Kagan had not suffered any injury or sustained any damage cognizable under the CLRA, because the trustee’s fee had never been deducted from her IRA. It argued further that Kagan was therefore not a member of the class she purported to represent. The trial court’s ruling that the action was “without merit” was affirmed by the Court of Appeal, but reversed by the California Supreme Court. The Court concluded that Gibralter’s demand letter to Kagan and her husband was a demand on behalf of a class of persons affected by Gibralter’s deceptive practices, within the meaning of Civil Code section 1782(a). See Kagan at 592. To avert a class action lawsuit, Gibralter was therefore required by statute, within 30-days after receiving the demand letter, to (1) identify all potential class members; (2) notify the potential class members that Gibralter would make recompense to them upon request; (3) provide the requested relief; and (4) cease engaging in the deceptive practices. As Gibralter satisfied none of these requirements, the California Supreme Court held that Gibralter could not disqualify plaintiff as a class representative by “picking off” a class representative with whom it had provided individual relief. Although Gibralter did not deduct the trustee’s fee from her account, she had sufficient standing as a class representative to proceed on behalf of the class.

However, in Meyer, the Supreme Court somewhat retreated, or at least more narrowly interpreted, the requirement of Section 1780 that a consumer who suffered “any damage” at least suffer “some” damage. It affirmed Kagan for the proposition that “any damage” included the infringement of any legal right as defined by Section 1770. However, this “infringement” does not dispense with the basic standing element that a plaintiff suffer “any damage”. The Court explained that what it really meant in Kagan was that there, Gibralter had made “evidently clear” its intent to deduct an allegedly fraudulent administrative fee from her account, as well as that of her husband. Kagan was only able to avoid the fee by expending time and money by threatening Gibralter with a lawsuit. Thus, the expenditure made by Kagan was in the nature of a “transaction cost” which was necessarily incurred to avoid the consequences of an imminently to be applied deceptive practice. This was within the broad meaning of suffering “any damage” as a result of the use or employment of an unlawful practice, whether or not these transaction costs were cognizable as “actual damages”. Necessarily incurred transaction or opportunity costs are “some” damage. The Supreme Court also noted that in Kagan, the plaintiff may also have incurred necessarily expended opportunity costs, because Gilbralter’s alleged misrepresentations may have diverted the plaintiff from finding a financial institution that did not charge unconscionable administrative fees.

In distinction, in Meyer, the Supreme Court held that in that case, the defendant had not sought to enforce any unconscionable term against the plaintiffs, and thus it had not actually imposed additional transaction or opportunity costs on plaintiff. In other words, “any” is okay, if it is “some”, even if not “actual.”

Authored By:

Don T. Hibner, Jr.

(213) 617-4115