A California federal court recently relied on the so-called “pass-on defense” to deny class certification in a lawsuit asserting claims under California’s Unfair Competition Law (UCL). Elite Logistics Corp. v. MOL Am., Inc., No. CV1102952DDPPLAX, 2016 WL 409650, at *3 (C.D. Cal. Feb. 2, 2016). Consumer products companies will want to take note of this decision and determine whether it can help them in defending similar UCL claims.

What is the pass-on defense?

“Passing on” describes the action of an overcharged buyer who passes the extra expense on to those who buy from it. 54 Am. Jur. 2d Monopolies and Restraints of Trade § 396. In many cases, defendants have argued that the plaintiff does not have standing or any injury because it passed any unlawful charge on to others, thus eliminating any harm.

California Supreme Court limits pass-on defense

In Clayworth v. Pfizer, Inc., 49 Cal. 4th 758 (2010), the California Supreme Court limited the pass-on defense in a case asserting claims for violation of the Cartwright Act and for restitution and injunctive relief under the UCL. Defendant argued that the plaintiffs did not have standing under the UCL because they were able to pass-on any overcharges to their ultimate customers. The Court rejected this argument, concluding that it “conflates the issue of standing with the issue of the remedies to which a party may be entitled. “ Id. at 789.

In the Court’s view, plaintiffs had lost money or property, and therefore had standing under the UCL, based on the initial overcharge. It did not matter that they ultimately were able to pass that overcharge along to others. “The doctrine of mitigation,” the Court said, “is a limitation on liability for damages, not a basis for extinguishing standing.” Id. “This is so because mitigation, while it might diminish a party’s recovery, does not diminish the party’s interest in proving it is entitled to recovery.” Id.

In Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 334 (2011), the Court relied on Clayworth to reject a pass-on theory in the context of a consumer fraud claim asserted under the UCL. In that case, the primary issue was whether plaintiffs had standing to challenge defendant’s “Made in the USA” label. Defendant argued that plaintiffs did not have standing because they received the benefit of their bargain – in that case, working locksets – and had not alleged that the product was overpriced or defective.

The court rejected this argument and, in doing so, dismissed that idea that plaintiffs had no injury because they still possessed the lockset and theoretically could recoup and perceived damage by selling the item. The Court believed that, in many cases, a plaintiff would be unable to resell the item, because of a nonfunctioning or nonexistent aftermarket, and that there would be damage in any event in the form of transaction costs. Id. at 335. Citing Clayworth, the Court emphasized that plaintiffs had standing based on the initial transaction and that the possible unavailability of restitution did not eliminate standing. Id. at 310 (“we hold ineligibility for restitution is not a basis for denying standing under section 17204.”)

Recent federal decision indicates pass-on defense still viable

After Clayworth and Kwikset, many plaintiff’s counsel declared that the pass-on defense was dead and could not be used to avoid liability in a UCL case. But a recent decision underscores that those declarations were incorrect.

In Elite Logistics Corp. v. MOL Am., Inc., No. CV1102952DDPPLAX, 2016 WL 409650, at *1 (C.D. Cal. Feb. 2, 2016), the court denied class certification in a UCL case based principally on the pass-on defense. The case involved a dispute over an allegedly unlawful “detention charge.” Plaintiffs claimed the charge violated California law and sought restitution on behalf of a putative class under the UCL. Defendants argued that a class could not be certified because the plaintiff and, in many cases, putative class members had passed the detention charge on to their customers, sometimes at a profit. Plaintiffs responded by arguing that, under Clayworth and Kwikset, a pass-on defense was not available as a matter of law.

Rejecting plaintiffs’ position, the court reviewed the California Supreme Court’s rulings, noting that they were limited to the question of standing under the UCL. Elite Logistics, 2016 WL 409650, at *3 (“neither case addressed class certification issues, and both limited discussion of the pass-on defense to questions of standing.”) Although the court appears to have been most concerned that the plaintiff was profiting from the allegedly unlawful detention charge, it held that the pass-on defense was available under the facts of the case and rendered plaintiffs’ claims atypical, thus precluding class certification. Id. at *4.

Impact of the pass-on defense

In cases where there is evidence that the plaintiff or putative class members resold or otherwise benefited from a product or practice alleged to violate the UCL, consumer products companies should keep the pass-on defense in mind as a way to demonstrate that plaintiff’s claim is atypical or that individualized issues predominate. As Elite Logistics makes clear, the California Supreme Court did not eliminate the pass-on defense (except perhaps in the standing context), and it remains viable in UCL cases.