KWIKSET CORPORATION v. SUPERIOR COURT OF ORANGE
COUNTY









Filed 1/27/11



IN THE SUPREME COURT OF CALIFORNIA



KWIKSET CORPORATION et al., )
)
Petitioners, )
) S171845
v. )
) Ct.App. 4/3 G040675
THE SUPERIOR COURT OF ORANGE )
COUNTY, ) Orange County
) Super. Ct. No. 00CC01275
Respondent; )
)
JAMES BENSON et al., )
)
Real Parties in Interest. )
__________________________________ )

STORY CONTINUE FROM PART I….


III. Application of Section 17204 to Plaintiffs
We apply these principles to plaintiffs’ pleadings. “[E]ach element [of standing] must be supported in the same way as any other matter on which the plaintiff bears the burden of proof, i.e., with the manner and degree of evidence required at the successive stages of the litigation. [Citations.] At the pleading stage, general factual allegations of injury resulting from the defendant’s conduct may suffice, for on a motion to dismiss we ‘presum[e] that general allegations embrace those specific facts that are necessary to support the claim.’ ” (Lujan v. Defenders of Wildlife, supra, 504 U.S. at p. 561; see also Troyk v. Farmers Group, Inc., supra, 171 Cal.App.4th at p. 1345.) At this stage, these plaintiffs need only allege economic injury arising from reliance on Kwikset’s misrepresentations. According to the second amended complaint, (1) Kwikset labeled certain locksets with “Made in U.S.A.” or a similar designation, (2) these representations were false, (3) plaintiffs saw and relied on the labels for their truth in purchasing Kwikset’s locksets, and (4) plaintiffs would not have bought the locksets otherwise. On their face, these allegations satisfy all parts of the section 17204 standing requirement, as we shall explain.^[1]
Simply stated: labels matter. The marketing industry is based on the premise that labels matter, that consumers will choose one product over another similar product based on its label and various tangible and intangible qualities they may come to associate with a particular source. (E.g., FTC v. Proctor & Gamble Co. (1967) 386 U.S. 568, 572 [noting the central role of advertising and sales promotion in generating market share, where the competing products are functionally identical].) An entire body of law, trademark law (see, e.g., 15 U.S.C. § 1051 et seq. [Lanham Act]), exists to protect commercial and consumer interests in accurate label representations as to source, because consumers rely on the accuracy of those representations in making their buying decisions.
To some consumers, processes and places of origin matter. (See Kysar, Preferences for Processes: The Process/Product Distinction and the Regulation of Consumer Choice (2004) 118 Harv. L.Rev. 525, 529 [“[C]onsumer preferences may be heavily influenced by information regarding the manner in which goods are produced.”]; ibid. [Although the circumstances of production “generally do not bear on the functioning, performance, or safety of the product, they nevertheless can, and often do, influence the willingness of consumers to purchase the product.”].)^[2] Whether a particular food is kosher or halal may be of enormous consequence to an observant Jew or Muslim. Whether a wine is from a particular locale may matter to the oenophile who values subtle regional differences. Whether a diamond is conflict free^[3] may matter to the fiancée who wishes not to think of supporting bloodshed and human rights violations each time she looks at the ring on her finger. And whether food was harvested or a product manufactured by union workers may matter to still others. (See Kasky v. Nike, Inc., supra, 27 Cal.4th at p. 969 [“For a significant segment of the buying public, labor practices do matter in making consumer choices.”].)
In particular, to some consumers, the “Made in U.S.A.” label matters. A range of motivations may fuel this preference, from the desire to support domestic jobs, to beliefs about quality, to concerns about overseas environmental or labor conditions, to simple patriotism. The Legislature has recognized the materiality of this representation by specifically outlawing deceptive and fraudulent “Made in America” representations. (§ 17533.7; see also Civ. Code, § 1770, subd. (a)(4) [prohibiting deceptive representations of geographic origin].) The object of section 17533.7 “is to protect consumers from being misled when they purchase products in the belief that they are advancing the interests of the United States and its industries and workers. (Sen. Holmdahl, sponsor of [Sen. Bill No. 1004 (1961 Reg. Sess.)] [which became § 17533.7] . . . , letter to Governor Brown, May 23, 1961) [‘There are many Americans who feel that American-made articles are of higher quality, and who rely on the “Made in U.S.A.” label’].)” (Colgan v. Leatherman Tool Group, Inc. (2006) 135 Cal.App.4th 663, 689.) The Legislature evidently recognized some companies were using or might be tempted to use inaccurate “Made in America” labeling, that some consumers might be deceived by and rely on it, and that consumers and competitors who honestly made their wares in the United States and marketed them as such were being or would be harmed.
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. This economic harm—the loss of real dollars from a consumer’s pocket—is the same whether or not a court might objectively view the products as functionally equivalent. A counterfeit Rolex might be proven to tell the time as accurately as a genuine Rolex and in other ways be functionally equivalent, but we do not doubt the consumer (as well as the company that was deprived of a sale) has been economically harmed by the substitution in a manner sufficient to create standing to sue. Two wines might to almost any palate taste indistinguishable—but to serious oenophiles, the difference between one year and the next, between grapes from one valley and another nearby, might be sufficient to carry with it real economic differences in how much they would pay. Nonkosher meat might taste and in every respect be nutritionally identical to kosher meat, but to an observant Jew who keeps kosher, the former would be worthless.
A consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirement of section 17204 by alleging, as plaintiffs have here, that he or she would not have bought the product but for the misrepresentation.^[4] 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. From the original purchasing decision we know the consumer valued the product as labeled more than the money he or she parted with; from the complaint’s allegations we know the consumer valued the money he or she parted with more than the product as it actually is; and from the combination we know that because of the misrepresentation the consumer (allegedly) was made to part with more money than he or she otherwise would have been willing to expend, i.e., that the consumer paid more than he or she actually valued the product. That increment, the extra money paid, is economic injury and affords the consumer standing to sue.^[5]
Were we to conclude otherwise, we would bring to an end private consumer enforcement of bans on many label misrepresentations, contrary to the apparent intent of Proposition 64. (See Prop. 64, § 1, subd. (d) [preserving in part the right of private individuals to sue].) That public prosecutors can still sue is of limited solace, given the significant role we have recognized private consumer enforcement plays for many categories of unfair business practices. (In re Tobacco II Cases, supra, 46 Cal.4th at p. 313; Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, 126.)^[6] The UCL and false advertising law are both intended to preserve fair competition and protect consumers from market distortions. (Kasky v. Nike, Inc., supra, 27 Cal.4th at p. 949; Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., supra, 20 Cal.4th at p. 180; Committee on Children’s Television, Inc. v. General Foods Corp., supra, 35 Cal.3d at pp. 209-210; Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 110.) Contrary to that general purpose, if we were to deny standing to consumers who have been deceived by label misrepresentations in making purchases, we would impair the ability of consumers to rely on labels, place those businesses that do not engage in misrepresentations at a competitive disadvantage, and encourage the marketplace to dispense with accuracy in favor of deceit.
The Court of Appeal offered three interrelated reasons for concluding plaintiffs had not lost money or property within the meaning of section 17204: they failed to allege any overcharge or functional defects in the locksets; they received the benefit of their bargain; and they were ineligible for restitution. Kwikset echoes these arguments in its briefs, and the dissenting opinion takes them up as well. We consider each in turn.
The Court of Appeal reasoned that plaintiffs could not show economic injury because, while they had spent money, they “received locksets in return.” (See also dis. opn., post, at p. 4.) Plaintiffs did not allege the locksets were defective, overpriced, or of inferior quality. In the Court of Appeal’s and dissent’s eyes, cognizable economic harm is confined to these sorts of objective “functional” differences.
We discern two textual difficulties with this view. First, while the alternate allegations of loss the Court of Appeal posited and the dissent demands might well satisfy the economic injury requirement, nothing in the open-ended phrase “lost money or property” supports limiting the types of qualifying losses to functional defects of these sorts and excluding the real economic harm that arises from purchasing mislabeled products in reliance on the truth and accuracy of their labels. Second, the economic injuries the Court of Appeal would require in order to allow one to sue for misrepresentation are in many instances wholly unrelated to any alleged misrepresentation. An allegation that Kwikset’s products are of inferior quality, for example, even if it might demonstrate lost money or property, would not demonstrate lost money or property “as a result of” unfair competition or false advertising about the product’s origins. (§§ 17204, 17535.) The Court of Appeal’s take on standing, underinclusive as to the economic injuries that might qualify, is overinclusive as to the injuries that might be considered causally related to false advertising.
Next, at the core of both the Court of Appeal’s ruling and Kwikset’s and the dissent’s position is that plaintiffs should not be accorded standing because they received the benefit of their bargain. Kwikset argues, and the Court of Appeal agreed, that consumers who receive a fully functioning product have received the benefit of their bargain, even if the product label contains misrepresentations that may have been relied upon by a particular class of consumers. (See also Peterson v. Cellco Partnership, supra, 164 Cal.App.4th at p. 1591 [plaintiffs lacked standing because “they received the benefit of their bargain, having obtained the bargained for insurance at the bargained for price.”].)
Whether or not a party who actually received the benefit of his or her bargain may lack standing, in this case, under the allegations of the complaint, plaintiffs did not. (Cf. Troyk v. Farmers Group, Inc., supra, 171 Cal.App.4th at p. 1348, fn. 30 [declining to apply the benefit of the bargain rationale where the record showed the plaintiff in fact had not received the benefit of his bargain].) Plaintiffs selected Kwikset’s locksets to purchase in part because they were “Made in U.S.A.”; they would not have purchased them otherwise; and, it may be inferred, they value what they actually received less than either the money they parted with or working locksets that actually were made in the United States. They bargained for locksets that were made in the United States; they got ones that were not. The same points may be made generally with regard to consumers who purchase products in reliance on misrepresentations. The observant Jew who purchases food represented to be, but not in fact, kosher; the Muslim who purchases food represented to be, but not in fact, halal; the parent who purchases food for his or her child represented to be, but not in fact, organic, has in each instance not received the benefit of his or her bargain.
The argument that a consumer in plaintiffs’ position has received the benefit of the bargain notwithstanding any misrepresentation may rest on one of two unstated predicates: that either (1) the misrepresentation at issue should be deemed not a material part of the bargain, or (2) even if the consumer does not value what he or she received as much as what he or she paid, the marketplace would, and its valuation should be dispositive.
“A misrepresentation is judged to be ‘material’ if ‘a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question’ . . . .” (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 977, quoting Rest.2d Torts, § 538, subd. (2)(a).) In the alternative, it may also be material if “the maker of the representation knows or has reason to know that its recipient regards or is likely to regard the matter as important in determining his choice of action, although a reasonable man would not so regard it.” (Rest.2d Torts, § 538, subd. (2)(b).) Here, the Legislature has by statute made clear that whether a product is manufactured in the United States or elsewhere is precisely the sort of consideration reasonable people can and do attach importance to in their purchasing decisions. (See § 17533.7.)^[7] Indeed, Kwikset packaged its products with labels like “All American Made & Proud Of It” and “Made in U.S.A.” because it determined such marketing might sway reasonable people in their purchasing decisions. In any event, as materiality is generally a question of fact (Engalla, at p. 977), it is not a basis on which to decide this case on demurrer.
Under the second implicit line of reasoning, a consumer who has acquired a mislabeled product has lost no money or property if the marketplace would continue to value the product as highly as the amount the consumer paid for it, whether or not he or she would do so.^[8] The argument that plaintiffs got the benefit of their bargain because they received locksets is shorthand for the idea that they could as easily turn around and sell the locksets to someone else for the same price. There are four difficulties with this way of concluding no money or property has been lost in the original transaction.
First, it assumes there is a functioning aftermarket for resale that would allow a plaintiff to liquidate the good in question by reselling it to those for whom the misrepresentation is immaterial. This plainly is not so in many instances. While there are certainly consumers for whom the kosher or halal or organic quality of food is immaterial, there is no functioning aftermarket that would permit easy resale of, for example, perishable foodstuffs and small-ticket consumer goods. A gallon of nonorganic “organic” milk cannot be resold. A consumer who has purchased products mislabeled in this fashion cannot recoup his or her purchase price.
Second, it assumes a consumer has no qualms—religious, ethical, or otherwise—that would preclude his or her partaking in resale of the mislabeled product, or at least none that the law should respect.
Third, it assumes that resale will not involve transaction costs and that an individual consumer will be able to resell the mislabeled product at the same price. But even for goods where there is a functioning aftermarket, resale will generally require the deceived buyer to sell at a reduced price to account for the facts the good is being resold and the source (an individual consumer) is less reliable than the original seller (a commercial establishment). In such instances, there still has been a loss of money.
Fourth, it ignores that the law generally disregards such “pass-on” sales. (See Clayworth v. Pfizer, Inc., supra, 49 Cal.4th at pp. 768-769.) Kwikset’s argument, that a deceived buyer has lost nothing because he or she has the value of the item still possessed, can be viewed as a pass-on defense in disguise: the buyer has an item that, through a presumed functioning aftermarket, he or she could convert back into an equivalent amount of money, recouping through the subsequent sale any perceived loss. But in the eyes of the law, a buyer forced to pay more than he or she would have is harmed at the moment of purchase, and further inquiry into such subsequent transactions, actual or hypothesized,^[9] ordinarily is unnecessary. (Id. at pp. 768-769, 788-789.)^[10]
In its benefit of the bargain argument, Kwikset relies as well on two real property fraud cases, each of which recites the rule that damages for fraud in the sale of property are measured principally by the difference in the actual value of what was parted with and what was received (the “out-of-pocket loss” rule). (See Gagne v. Bertran (1954) 43 Cal.2d 481, 490-492; Jacobs v. Levin (1943) 58 Cal.App.2d Supp. 913, 915-918; Civ. Code, § 3343 [codifying rule].) In the context of a common law deceit action, the rule’s only purpose is to provide the measure of damages; it limits neither standing nor the availability of equitable remedies. (See Jacobs, at p. 918 [deceived party can seek rescission]; Civ. Code, § 3343, subd. (b)(2) [damages rule shall not be used to “[d]eny to any person having a cause of action for fraud or deceit any legal or equitable remedies to which such person may be entitled.”].)
Nothing in the text or history of Proposition 64 suggests the electorate intended to borrow this rule, developed in the context of a remedy (damages) unavailable under the UCL and false advertising law, and deploy it for a wholly unrelated purpose, as a restriction on standing. Indeed, doing so would render standing under the UCL and false advertising law substantially more difficult to establish than standing to assert common law deceit: As Kwikset’s counsel properly acknowledged at oral argument, a consumer who purchased a product in reliance on an alleged misrepresentation would under the common law have standing to sue for fraud, misrepresentation, and rescission without having first to prove, as Kwikset argues the UCL and false advertising law now require, that the product received was worth less than the money paid for it. While Proposition 64 clearly was intended to abolish the portions of the UCL and false advertising law that made suing under them easier than under other comparable statutory and common law torts, it was not intended to make their standing requirements comparatively more onerous.^[11] We thus decline to write the out-of-pocket loss damages rule into section 17204’s standing definition.
Finally, the Court of Appeal rested its holding in part on a line of cases that have read the “lost money or property” requirement as confining standing under section 17204 “ ‘to individuals who suffer losses . . . that are eligible for restitution.’ ” (Quoting Buckland v. Threshold Enterprises, Ltd., supra, 155 Cal.App.4th at p. 817; see also Silvaco Data Systems v. Intel Corp. (2010) 184 Cal.App.4th 210, 245; Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal.App.4th 1, 22; Walker v. GEICO General Ins. Co. (9th Cir. 2009) 558 F.3d 1025, 1027 [following Buckland].) Because plaintiffs were not entitled to restitution, the Court of Appeal reasoned, they necessarily lacked standing.
As we recently have noted, however, the standards for establishing standing under section 17204 and eligibility for restitution under section 17203 are wholly distinct. (See Clayworth v. Pfizer, Inc., supra, 49 Cal.4th at p. 789.) For the drafters of Proposition 64, which amended both sections 17203 and 17204, to make standing under section 17204 expressly dependent on eligibility for restitution under section 17203 would have been easy enough,^[12] but nothing in the text or history of Proposition 64 suggests this was intended. (Clayworth, at pp. 788-789.) We thus rejected in Clayworth the argument that if the plaintiffs could demonstrate no compensable losses or entitlement to restitution under section 17203, they would lack standing under section 17204. As we explained, “this argument conflates the issue of standing with the issue of the remedies to which a party may be entitled. That a party may ultimately be unable to prove a right to damages (or, here, restitution) does not demonstrate that it lacks standing to argue for its entitlement to them.” (Clayworth, at p. 789.)







TO BE CONTINUED AS PART III….


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