Consumer Lacks Standing to Bring Claim Under California Consumer Protection Laws Where Product Was Purchased for Litigation Purpose Only

Case: Buckland v. Threshold Enterprises, Ltd., Case No. B192832 (Cal. Ct. App. 9/25/2007)

The One Sentence Summary:
A consumer who buys a product through her attorney for the sole purpose of litigation arising out of deceptive packaging or advertising lacks standing to bring a claim under the Consumers Legal Remedies Act, unfair competition law or false advertising law, and cannot state a claim for fraudulent concealment or negligent misrepresentation because the consumer did not rely on the statements or representations of the defendant and the consumer did not suffer an injury in fact or lose money or property.


What They Were Fighting About:
Katherine Lee Buckland, the Director of the California Women’s Center (the “Center”), and the Center filed a complaint against 30 defendants that market skin lotions and creams, including Threshold Enterprises, Ltd. (“Threshold”). In the Complaint, Buckland brought nine claims as an individual, including fraudulent concealment, negligent misrepresentation, and violation of unfair competition law (Cal. Bus. & Prof. Code § 17200 et seq.), false advertising law (Bus. & Prof. Code § 17500), and the Consumers Legal Remedies Act (Cal. Civil Code § 1750). Buckland alleged that defendants, including Threshold, had not complied with FDA regulations in marketing skin cream products and that the packaging and advertising for the products lacked adequate warnings about the chemicals in the skin creams. Buckland conceded that she had suspected Threshold’s packaging and marketing were false or misleading, and she had purchased Threshold’s skin product for $14.99 through her attorney for purposes of the litigation. The trial court dismissed Buckland’s claims against Threshold on the ground that Buckland lacked standing and failed to allege fraud with specificity, and denied Buckland’s motion for an injunction against Threshold. The claims of the Center were not at issue in the Opinion.


Court Holdings:
The Court of Appeal affirmed the trial court’s order dismissing Buckland’s claims against Threshold and denying injunctive relief, and held:

• Buckland failed to state a claim under the Consumers Legal Remedies Act for misrepresenting “characteristics, ingredients, uses, benefits, or quantities” or misrepresenting the products as “of a particular standard, quality, or grade” on the ground that she had not suffered actual damages caused by Threshold’s conduct. Since Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products solely to pursue litigation, she did not actually rely on the truth or completeness of Threshold’s representations.
• Buckland lacked standing to state a claim under unfair competition law or false advertising law because she did not suffer the requisite injury in fact or loss of money or property. The amount she paid to purchase Threshold’s product was incurred solely to facilitate the litigation, and thus did not constitute an “injury in fact” or “lost” money or property.
• Buckland failed to state a claim for fraudulent concealment or negligent misrepresentation because Buckland did not actually rely on any false statements or omissions of Threshold. Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products through her attorney solely to pursue litigation.

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Ban on New Fast-Food Restaurants Proposed for Los Angeles

The One Sentence Summary: A member of the Los Angeles City Council has proposed an ordinance prohibiting all building permits for up to two years for “fast food establishments” in South Central Los Angeles, where worries about an obesity epidemic and an alleged “overproliferation” of fast-food chain eateries are spurring what amounts to “health zoning”.

Summary of Draft Ordinance:

• Councilwoman Jan Perry has proposed a draft ordinance to impose a moratorium on the issuance of permits for building, grading, foundation work, and use permits, for one year (with the possibility of two 6-month extensions) while the City of Los Angeles works to adopt regulatory controls that regulate the establishment of fast food outlets within a specified area of south Los Angeles. The draft ordinance includes an urgency clause, allowing the measure to take immediate effect.
• Hearings have been held at the level of the Planning and Land Use Management Committee of the City Council, to be followed by a hearing on September 27, 2007, before the City Planning Commission. Staff has recommended adoption of the measure, Interim Control Ordinance CPC.2007.3827.
• Objections from the restaurant industry and comments from affected neighborhoods and local businesses may result in modifications to the proposed ordinance, particularly with regard to the definition of “fast food establishment”. The California Restaurant Association is on record in opposition to the action.
• The definition of “fast food establishment” in the draft ordinance does not refer to chain establishments, but sweeps in “any establishment which dispenses food for consumption on or off the premises, and which has the following characteristics: a limited menu, items prepared in advance or prepared or heated quickly, no table orders, and food in disposable wrapping or containers.”
• Exceptions to the building ban listed in the draft ordinance include construction requiring a building permit (1) to comply with a public safety order to repair, remove, or demolish an unsafe building, (2) to rebuild following a natural disaster, fire, or earthquake, and (3) tenant improvements which do not increase the floor area or involve a change in use. A hardship exemption would also be allowed.
• Alternative ways to achieve a greater variety of restaurants could emerge during the legislative process, including the adoption of a conditional use permit system which other cities employ to vary the mix of businesses competing in commercial districts.

Implications for Other Cities and States:

• Land Use Controls regulating property uses in many jurisdictions already affect the number and type of businesses that may operate in particular commercial districts and zones. Examples include ordinances aimed at protecting smaller businesses and limiting “big box” stores, and regulations imposing restrictions on signage and other aesthetic features. Using land use controls as a means for regulating consumer health and for “social engineering” remains rare, but some see in the fast-food restaurant ban a growing trend in this type of governmental activity.
• We will continue to monitor this proposed ordinance.

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A Party Can Be Compelled to Create New Documents From Electronically Stored Information

"You don't need to create any documents to respond to this discovery request - just produce copies of what you have." This common instruction to clients is no longer necessarily true in light of new federal rules governing production of electronically stored information ("ESI").

Applying the new federal ESI discovery rules, a district court in South Carolina recently held that a party can be required to create new documents for a response to a discovery request absent a showing that the information is not reasonably accessible. KnifeSource, LLC v. Wachovia Bank, N.A., 2007 WL 2326892 (D.S.C. Aug. 10, 2007).



In a dispute about whether a defendant bank reasonably accepted misappropriated checks, the plaintiff sought copies of bank statements. The bank objected, claiming that it did not maintain paper copies of bank statements.

The district court granted plaintiff's motion to compel discovery of the electronic statements, noting that electronically stored information is discoverable under Rule 26(b)(2)(B) of the Federal Rules of Civil Procedure unless it was "not reasonably accessible because of undue burden or cost." The bank had not made this showing, so the court ordered it to produce the information that it maintained electronically.

This case illustrates how the new discovery rules for electronically stored information will change common discovery practices and could greatly expand the scope of information that is produced in litigation.

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Consumer May Seek Restitution Under California's Unfair Competition Law From Manufacturer Even Though Product Was Purchased From Retailer

Case: Shersher v. Superior Court (Microsoft Corp.), Case No. B195317 (Cal. Ct. App. 9/10/07)

The One Sentence Summary: To recover restitution under California's Unfair Competition Law, a consumer is not required to have made direct payments to the defendant who is alleged to have engaged in unfair competition or some other act prohibited by the statute or the false advertising law.


What They Were Fighting About: Plaintiff and members of the class he purported to represent purchased from retailers wireless routers, adapters, and other similar products manufactured by Microsoft. Plaintiff alleged that in marketing and promoting these wireless products, Microsoft made false representations on the packaging about the products' capabilities to deliver data transmission rates of up to a certain level of megabits per second. The complaint sought various relief including restitution. Microsoft filed a motion to strike the claim for restitution and any reference to "restitution" on the grounds that such recovery was precluded by the California Supreme Court's decision in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003). Microsoft argued, and the trial court agreed, that indirect purchasers - those who purchased from someone other than the defendant - could not obtain restitution under Korea Supply because they paid no money directly to the defendant.

Court Holdings: The Court of Appeal reversed and held that Microsoft's motion to strike should have been denied because:

• The only requirements for recovery of restitution imposed by Korea Supply are that (1) the plaintiff must have had an ownership interest in the money or property sought to be recovered; and (2) the defendant must have acquired the plaintiff's money or property by means of unfair competition or some other act prohibited by the Unfair Competition Law (California Business & Professions Code section 17200) or the false advertising law (section 17500).
• Nothing in Korea Supply requires that the plaintiff seeking restitution have made direct payments to the defendant who allegedly engaged in the acts of unfair competition or false advertising.
• In this case, the plaintiff and putative class members had an ownership interest in the restitutionary relief sought because they purchased Microsoft's products.

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What Makes For A Successful Tenant Overcharge Claim Against A Shopping Center Owner Or Operator

The One Sentence Summary: In successful claim after successful claim, it is the lease language that is most important.

Full Posting:

Every year there are thousands of disputes in which retail tenants claim they are overcharged by owners and operators of shopping centers for CAM expenses, utilities, taxes, marketing fund payments and other charges. The disputes can be for hundreds of dollars or millions of dollars depending on the magnitude of the overcharges, the period over which the overcharges can be collected and the number of leases involved. Some of these disputes are resolved quickly and favorably to tenants, others are dropped, and some result in lawsuits. From a retailer perspective, the overcharge claims that are the greatest success are those that are resolved quickly and for a substantial percentage of what the tenant seeks. The relief can come in the form of cash or other forms of compensation, such as agreements to reduce charges in the future or providing the tenant some other benefit such as closing an underperforming store or extending a lease on favorable terms.

So what are the characteristics of successful tenant claims? Twenty years of representing retailers has shown that the most important characteristic of a successful tenant claim is being able to convince the shopping center owner or operator that the claim has merit (meaning an objective fact finder has a high probability of finding the tenant was overcharged). Even if a tenant claim has merit, a tenant may still have some difficulty resolving a claim if a shopping center owner does not believe a tenant will take action. Under such circumstances action, namely a lawsuit, may be required. The question then becomes what will persuade a court or jury and the issue comes back to what claims have merit.

In evaluating the merits, there are three criteria that come into play. The first and most important is the language of the lease. Does the language support the claim being made by the tenant? The second criteria is whether so-called “extrinsic evidence” supports the position of the tenant regarding the meaning of the lease. Extrinsic evidence is nothing more than information other than the language of the lease itself. The third criteria, once the meaning of the lease is established, is whether there is evidence that the landlord breached the lease.

CRITERIA 1 – THE LANGUAGE OF THE LEASE.

There is no question that the single most important criteria in demonstrating a claim has merit is what the lease says. The ability of a tenant to convince an objective fact finder, or to convince a landlord that an objective fact finder might side with the tenant, will be determined primarily by the tenant’s ability to link its claim to language in the lease. A claim that a tenant is merely overcharged because it is paying more than its “fair share” is not likely to be successful. Rather, a tenant needs to point to lease language that has been violated leading to an overcharge.

In decided case after decided case, what has mattered most is tenant’s ability to link the claim of an overcharge to language in the lease. For example, in Sheplers, Inc. v. Kabuto International (Nevada) Corp., a 1999 decision by a federal district court in Kansas, the dispute focused on whether certain management fees and expenses were properly charged to the tenant as CAM costs. The court rejected the landlord’s argument that the lease permitted it to include in CAM charges any costs associated with managing the shopping center, because the lease specifically stated that common area expenses include “the operating, managing, equipping, lighting, repairing, replacing, and maintaining the common areas.” Therefore, only management costs specifically related to the common areas were properly included in the CAM expenses.

At times, consideration of the language in the lease will involve the application of lease interpretation rules to lease language. The rules of interpretation commonly applied by courts include:

• When the terms of a lease are clear and unambiguous, the intent of the parties should be found within the four corners of the agreement.
• Terms should be given their plain and ordinary meaning.
• Lease provisions should be construed in the context of the entire lease.
• All lease language should be given meaning and effect.
• A practical interpretation should be given to lease language so that the parties’ reasonable expectations are realized.
• And in some states a rule of last resort: Ambiguous language should be construed strictly against the drafter.

Thus, in addition to favorable lease language, the application of a rule of interpretation often makes for a strong claim by a tenant. For instance, the court in Sheplers v. Kabuto emphasized that its interpretation limiting CAM charges to only those expenses related to managing the common areas was supported by other language in the lease, thereby applying the rule of interpretation that lease language should be construed in the context of the entire lease. Other lease language stated that CAM “shall specifically exclude all costs associated with the leasing activity in the shopping center and all capital expenditures.” Therefore, the court concluded that all tenant-specific management activity, including problems with specific tenant spaces and capital expenditures for specific tenants, should not be included in CAM charges.

One of the most common rules of interpretation applied by courts is the principle that the words in a lease are to be given their plain and ordinary meaning. In Dinnerware Plus Holdings, Inc. v. Silverthorne Factory Stores, LLC, a 2004 decision by a state appellate court in Colorado, the court ruled that the lease language meant that the tenant was not obligated to pay any pass-through charges unless other tenants were obligated to do so. The court based this conclusion on the plain and ordinary meaning of the phrase “provided that all other tenants are similarly obligated” in the lease’s language regarding payment of pass-through charges.

CRITERIA 2 – EXTRINSIC EVIDENCE.

While the words of the lease are the most important criteria in determining the meaning of a lease, there are times that other evidence is considered. Other evidence considered in interpreting the meaning of a contract is referred to as “extrinsic evidence” or “parol evidence.” The consideration of such evidence will vary depending on the language of the lease, which may include provisions that state that the language is intended to constitute the intent of the parties and replace any prior statements, and specific state court rules regarding the consideration of such evidence. Some states, such as California, allow the consideration of extrinsic evidence to demonstrate that which would otherwise appear clear on its face is really ambiguous. Other states, such as New York, require that there be a determination first that the document is ambiguous on its face before the consideration of parol evidence is allowed. Regardless, it is almost a certainty that each side will bring up and seek to introduce to the court extrinsic evidence to support their interpretation of contract language.

Rarely is extrinsic evidence from tenant witnesses, actions or documents supporting tenant or extrinsic evidence from landlord witnesses, actions or documents supporting landlord highly persuasive. For example, in South Towne Centre, Inc. v. Burlington Coat Factory Warehouse of Dayton, Inc., a 1995 decision by an Ohio state appellate court, the court considered self-serving extrinsic evidence on whether the parties intended the expense of a new shopping center sign to be chargeable as a CAM cost. The court concluded that the extrinsic evidence – testimony by the landlord’s and tenant’s witnesses about what the parties intended – did not clarify the parties’ intentions, and therefore the extrinsic evidence did not resolve the issue. Ultimately, the court applied the rule of strict construction against the drafter based on the landlord’s failure to specifically include the signage expense in the lease’s list of chargeable CAM costs.

The extrinsic evidence that is most often persuasive is evidence created by one side and used against the other side. Such evidence can be in the form of documents, testimony or actions. An example of such evidence is course of dealing evidence. For example, in Johanneson’s, Inc. v. Kraus-Anderson, Inc., a 1999 decision by a state appellate court in Minnesota, the court in disallowing a 5% management fee relied on the fact that from 1986 through 1995 the landlord had charged the tenant only for its share of actual maintenance expenditures plus the salary and benefits of the shopping center’s manager. Later, starting in 1996 the landlord began charging 5% of the tenant’s gross revenues as a fee for the landlord’s related management company to manage and maintain the common areas. The court seemed persuaded by the prior dealings between the parties that the additional 5% management fee was impermissible and not intended to be a chargeable CAM expense.

CRITERIA 3 – EVIDENCE OF BREACH.

If the tenant has developed a persuasive argument as to the meaning of the lease based on the lease language and rules of interpretation, there still remains a critical step in the process of advancing a strong claim. The tenant must have factual evidence that the landlord has breached the lease provision. In other words, assuming the tenant has shown that the lease means “x,” the tenant must show that the landlord failed to do “x” and did “y” instead.

There are circumstances where there is no dispute as to the facts once the meaning of the lease is established. The strongest tenant claim is one where the undisputed evidence shows there was a breach. However, there are many circumstances where complete evidence is not available to tenant. In some cases, the reason is that landlord has not provided it and in others, it is that center owner and operator never collected the evidence and it will be difficult to reconstruct the relevant evidence.

When information is available but not provided, it is almost always the case it can be obtained through discovery, if a lawsuit is filed. In such circumstances a tenant can consider how likely the evidence will support the claim in making an evaluation and recognize that a shopping center owner would likely provide the evidence if it supported the shopping center owner’s position.

When relevant information was not collected and it is difficult to reconstruct the relevant evidence, tenant may still be able to make a persuasive claim. First, courts apply common sense in evaluating evidence whether or not the landlord has breached the lease. Evidence presented by the landlord of its alleged compliance with the CAM provision in Sheplers v. Kabuto was found to be unpersuasive by the court under a common sense review. The landlord’s property manager testified that 100% of the on-site management costs were related to CAM. The court found “it impossible to believe that 100% of the property manager and her assistant’s work is directly related to CAM” particularly in light of the property manager’s admission that she and her assistant spent time on tenant-specific matters including leasing activity. Second, courts recognize that the landlord often has exclusive control over information needed to establish a breach. The lease in Sheplers required the landlord to provide the tenant with reasonable detail and a breakdown regarding CAM expenses, so the court shifted the burden to the landlord to show that the challenged management costs were CAM-related. The court explained: “Giving the provision such an effect is sound policy because defendant has complete control over all the records related to CAM expenditures.”

The bottom line: In successful claim after successful claim, it is the lease language that is most important. While extrinsic evidence and factual support of breach are also important, the starting point is the language of the lease.

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California Supreme Court Finds That Class Arbitration Waivers in Employment Arbitration Agreements May Be Contrary to Public Policy

Case: Gentry v. Superior Court of Los Angeles Co. (Circuit City Stores, Inc.), No. S141502 (Cal. Aug. 30, 2007)

The One Sentence Summary: The California Supreme Court held that class arbitration waivers should not be enforced if a trial court determines that class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.

What They Were Fighting About: Plaintiff filed a class action lawsuit in superior court against Circuit City Stores, Inc. (“Defendant”), seeking damages for violations of the Labor Code. Plaintiff argued that Defendant had illegally misclassified salaried customer service managers as exempt managerial/executive employees not entitled to overtime pay, when in fact, they were non-exempt non-managerial employees entitled to be compensated for hours worked in excess of eight hours per day and 40 hours per week. When he was hired, however, Plaintiff executed an arbitration agreement with Defendant that precluded class actions. As such, Defendant moved to compel individual arbitration.

Court Holdings:

• The Court held that class arbitration waivers in overtime cases may be contrary to public policy. Specifically, the Court found that “the rights to the legal minimum wage and legal overtime compensation conferred by the statute are unwaivable,” “overtime wages are another example of a public policy fostering society’s interest in a stable job market,” and “overtime laws also serve the important public policy goal of protecting employees in a relatively weak bargaining position against ‘the evil of overwork.’”


• Accordingly, the Court set forth certain factors a trial court must consider when employees allege that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver.


• First, the trial court considers the modest size of the potential individual recovery. Second, the potential for retaliation against members of the class. Third, the fact that absent members of the class may be ill informed about their rights. And lastly, other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.


• “If [the trial] court concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver....”
  
  

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California Courts Find That Class Action Waivers and Arbitration Clauses in Computer Sale Contracts Were Unenforceable

Two recent Northern California federal court decisions have held that arbitration, choice of law and class action waiver provisions in computer purchase contracts were not enforceable, and that the consumers could proceed with class action claims in federal court against the computer sellers.



In Brazil v. Dell, Inc., (N.D. Cal. No. 5:07-CV-01700 RMW, 8/3/07), the plaintiffs filed a class action claiming that Dell had misrepresented the price of its computers by artificially inflating prices before advertising discounts. Dell moved to stay the action and compel arbitration due to the following clause in the Dell contracts:

Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY . . . BETWEEN CUSTOMER AND DELL . . . SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) . . . . NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATED CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY.

Judge Ronald Whyte held in Brazil that:

• Although the purchase contract called for application of Texas law, California law should be applied because application of Texas law would violate a fundamental policy of California law.
• Despite a clause allowing the consumer to rescind the contract if the terms were unacceptable, the purchase contract was procedurally unconscionable because it was a contract of adhesion presented without an opportunity to meaningfully negotiate.
• Substantive unconscionability was also found because there was an allegation of a scheme to cheat large numbers of customers, and small damages would be suffered by many consumers.

In Oestreicher v. Alienware Corp. (N.D. Cal. No. 3:07-CV-00512 MHP, 8/10/07), the plaintiff had filed a class action claiming that Alienware had knowingly sold defective computers. Alienware moved to stay the case and compel arbitration. Judge Marilyn Patel refused to compel arbitration. Like Judge Whyte did in the Brazil decision, Judge Patel found that California law should be applied due to a conflict with the law provided in the contract (in this case, Florida law). Judge Patel concluded that the agreement was procedurally and substantively unconscionable, and that the class action and arbitration provisions should not be enforced.

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Proposed Legislation Would Provide Copyright Protection for Fashion Designs

Proposed Legislation: Senate Bill 1957, Design Piracy Prohibition Act

The One Sentence Summary: The proposed Design Piracy Prohibition Act would provide copyright protection to fashion designs, whereas existing law only protects fashion labels from being copied by counterfeit merchandisers.

Summary of Legislation:

• Senate Bill 1957 would provide copyright protection to a "fashion design," which is defined as "the appearance as a whole of an article of apparel, including its ornamentation."
• The "apparel" entitled to fashion design protection includes clothing (undergarments, outerwear, gloves, footwear, and headgear), handbags, purses, tote bags, belts, and eyeglass frames.
• The period of copyright protection provided would be three years for fashion designs.
• Fashion designs not subject to protection under Senate Bill 1957 include those embodied in a useful article that was made public by the designer or owner more than three months before applying for copyright registration.
• Senate Bill 1957 would also make fully applicable to fashion designs the doctrines of secondary infringement and secondary liability.
• This proposed legislation has sparked considerable debate within the fashion industry. Opponents of the bill, such as the California Fashion Association, contend that it would stifle creativity in the fashion industry and result in more litigation because of difficulties identifying what constitutes a violation of the act. Supporters of the bill, such as the Council of Fashion Designers of America, argue that it would protect against l0w-end knock-offs profiting from fashion designers' creativity.

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