Not long removed from the wake of its decision in In re Tobacco II Cases, the California Supreme Court recently handed down another decision concerning California’s Unfair Competition Law (“UCL”) and False Advertising Law (“FAL”) that has the potential to impact all companies selling products in California. In Kwikset Corp. v. Superior Court, No. S171845 (Jan. 27, 2011), the Court held that plaintiffs who allege they were deceived by a product’s label into purchasing a product that they would not have otherwise purchased have sufficiently alleged that they suffered an “injury in fact” and “lost money or property” as a result of the mislabeling—and therefore have standing to pursue claims for violation of the UCL and FAL—even in the absence of allegations that the product was defective or inferior. The potential ramifications of this decision are far-reaching.

In Kwikset, plaintiffs alleged that Kwikset had falsely labeled certain locksets as “Made in U.S.A.” when, in fact, some components of the locksets purportedly were made or assembled outside the United States. Plaintiffs further alleged that they relied upon the “Made in U.S.A.” label when making their purchasing decisions, and would not have purchased Kwikset’s products absent the false statement of origin. Kwikset demurred to plaintiffs’ UCL and FAL claims. Finding that plaintiffs had adequately alleged injury in fact and a loss of money or property as a result of Kwikset’s false labels, the trial court overruled Kwikset’s demurrer. The Court of Appeal reversed, finding that although plaintiffs had sufficiently alleged an “injury in fact,” they had not adequately alleged that they “lost money or property.” The Court of Appeal reasoned that while plaintiffs had parted with their money, in return they received locksets that were not alleged to be defective or overpriced. Accordingly, there was no alleged loss of money or property and, therefore, no standing to sue under the UCL or FAL. The California Supreme Court disagreed.

The Court first addressed the meaning of the UCL’s1 standing requirements, concluding that “If a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount [i.e., any quantum of economic injury], he or she has also alleged or proven injury in fact.” Turning to plaintiffs’ specific allegations, the Court went on to describe the many ways in which labels matter to consumers, pointing out that many consumers choose to purchase one product over another based on information contained on the label. For example, to some consumers the fact that a food product is labeled kosher may be of paramount importance. To others, such as plaintiffs, the “Made in U.S.A.” label may be equally important. Explaining the economic harm that befalls a plaintiff who purchases a mislabeled product, the Court stated, “For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same: the consumer has purchased a product that he or she paid more for than he or she otherwise might have been willing to pay if the product had been labeled accurately.” And regarding UCL standing, the Court held that “A consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the [UCL’s] standing requirement…by alleging…that he or she would not have bought the product but for the misrepresentation. That assertion is sufficient to allege causation—the purchase would not have been made but for the misrepresentation. It is also sufficient to allege economic injury.” As discussed above, if economic injury is established, so too is “injury and fact.”

Notably, the California Supreme Court rejected the argument that plaintiffs could not show economic injury because they had not alleged that the locksets they purchased were defective, overpriced or of inferior quality. According to the Court, the phrase “lost money or property” was not limited to solely these types of qualifying losses. The loss of money or property caused by purchasing a product one otherwise would not have also qualifies. The Court also disapproved of a line of California appellate court cases that have read the “lost money or property” requirement as confining UCL standing to individuals who have suffered losses that are eligible for restitution. The Court pointed out that in some circumstances a plaintiff suffers an economic injury due to a defendant’s unfair business practice, but the defendant does not see any corresponding gain (for example, the diminishment of plaintiff’s asset on account of defendant’s conduct). Such injuries satisfy the UCL’s standing requirement, yet there is no basis for restitution. Noting that injunctive relief is the primary form of relief available under the UCL, the Court found that ineligibility for restitution is not a basis for denying standing under the UCL and overruled the decisions of the California appellate courts that had found otherwise.

Kwikset establishes that a plaintiff who alleges that he or she would not have purchased a product but for a false statement on the product label has standing to sue under the UCL and FAL. This apparently is true even if the plaintiff does not further allege that the product was overpriced or of inferior quality. The impact of Kwikset is yet to be seen. However, when coupled with the Tobacco II decision—which established that only the class representative, and not all absent class members, are required to meet the standing requirements of the UCL and FAL—we expect the aftermath of Kwikset to be an increase in the number of class action lawsuits for violation of the UCL and FAL. For example, although Kwikset specifically dealt with an allegedly false statement on the product label, we expect the plaintiffs’ bar will attempt to extend the reasoning of Kwikset to situations where a product label omitted information that allegedly was known to the defendant and material to the plaintiff’s purchasing decision. It remains to be seen if courts interpreting Kwikset apply its holding to omissions-based UCL and FAL claims.

Finally, it bears mentioning that Kwikset involves the pleading stage only. The decision makes clear that a plaintiff is obligated during succeeding stages of litigation to produce evidence to support, and eventually to prove, the allegation that he or she would not have purchased the product in the absence of the false representation. Along these lines, plaintiffs should be questioned thoroughly and vigorously about such allegations at deposition. If it can be established that the alleged false representation (or omission) was not, in fact, the basis of plaintiff’s decision to purchase the product, the plaintiff then has no standing to assert UCL and FAL claims on his or her own behalf and cannot be found to be an adequate class representative. In addition, class actions purportedly brought on behalf of a class of individuals who “would not have otherwise purchased a product” may be difficult to certify for class treatment due to individual issues that surround the decision to purchase the product.