Following the California Supreme Court’s lead in Kwikset that “labels matter,” the Ninth Circuit Court of Appeals recently held that “price advertisements matter.” In Hinojos v. Kohl’s, the Ninth Circuit reversed the district court and found that a plaintiff can establish standing under California consumer protection laws when a plaintiff purchases merchandise on the basis of false price information and alleges that he would not have made the purchase but for the misrepresentation.
This opinion no doubt opens the door (if not the floodgates) for similar lawsuits. At a minimum, retailers should ensure that their advertised “sale” prices are legitimate reductions off of prices that items have been sold for in order to protect themselves from liability.
The District Court Dismissal
In Hinojos v. Kohl’s, __ F.3d __, 2013 Westlaw 2159502 (May 21, 2013), the plaintiff purchased luggage and shirts from a Kohl’s department store that were advertised as being substantially reduced from their “original” or “regular” prices. In fact, they were routinely sold by Kohl’s at the advertised “sale” prices, rather than the purported “original” or “regular” prices. The plaintiff alleged that he would not have purchased the products at Kohl’s in the absence of Kohl’s misrepresentations.
The plaintiff filed a class action complaint alleging violations of California’s Unfair Competition Law (UCL), Fair Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA). Kohl’s successfully moved to dismiss on the basis that the plaintiff did not have standing under the UCL or FAL, which require a plaintiff to have “lost money or property” as a result of the defendant’s false advertising. The district court found that the plaintiff did not lose money or property because he had acquired the merchandise he wanted at the price advertised.
Soon after the district court dismissed the plaintiff’s UCL and FAL claims, the California Supreme Court issued the Kwikset opinion, which held that a purchaser of merchandise falsely labeled “made in U.S.A.” had standing under the UCL and FAL when he claimed he would not have purchased the item from the seller but for the mislabeling. See Kwikset Corp. v. S.C. (Benson), 51 Cal. 4th 310 (Cal. 2011); see also our prior coverage of Kwikset’s implications. The plaintiff filed a motion for reconsideration based on Kwikset, but the district court concluded that Kwikset only applied to false advertisements regarding a product’s “composition, effects, origin, and substance” and declined to deem the value of a price discount as “lost money or property.” The district court also found that the plaintiff did not have standing under the CLRA, because the plaintiff could not show he had suffered “any damage” as a result of Kohl’s alleged false advertising.
The Ninth Circuit Appeal
The Ninth Circuit noted that California law prohibits the type of false price discount advertising that Kohl’s allegedly engaged in. See Business and Professions Code § 17501. The UCL provides the cause of action, so the critical question was whether the plaintiff had standing. The Ninth Circuit discussed how in 2004, California voters restricted standing for UCL and FAL claims by passing Proposition 64. Proposition 64 required that UCL and FAL plaintiffs suffer “lost money or property” as a result of the alleged unfair competition.
Unlike the district court, the Ninth Circuit found that the plaintiff had done everything Kwikset requires to allege an economic injury under the UCL and FAL. It was enough to allege that the advertised discounts conveyed false information about the goods he purchased, and that he would not have purchased the goods in question absent this misrepresentation. The Ninth Circuit ruled that the district court had applied Kwikset too narrowly by limiting it to the “composition, effects, origin, and substance” test. According to the Ninth Circuit, this test “ignores the fact that, to other consumers, a product’s ‘regular’ or ‘original’ price matters; it provides important information about the product’s worth and the prestige that ownership of that product conveys.” In short, “price advertisements matter.”
The Ninth Circuit also held that any plaintiff who has standing under the UCL’s and FAL’s “lost money or property” requirement has also suffered “any damage” for purposes of establishing CLRA standing.
Effects on Future Class Actions and Restitution Claims
The Hinojos opinion definitely hurts retailers who have engaged in the practice of advertising “original” prices that were never actually in place and makes them vulnerable to being hit with a class action lawsuit. The decision may also be used by plaintiffs to bring unfair competition claims based on other types of alleged retailer marketing practices. Plaintiffs’ attorneys will likely latch onto language from the opinion stating that the Hinojos district court’s “composition, effects, origin, and substance” test would “eliminate consumers’ ability to bring UCL and FAL claims for a vast array of other misleading marketing practices.” The Ninth Circuit listed several exemplar advertisements that, if false, could be used to deceive consumers into making purchases they would not otherwise make. The Ninth Circuit also ruled that the plaintiff did not need to separately plead how much he would have paid for the merchandise had he known its true market value.
In a troubling footnote, the Ninth Circuit stated that “the difference between what a plaintiff actually paid and what he would have paid had the product been truthfully advertised represents the appropriate measure of restitution to which [plaintiff] may be entitled under the UCL.” Plaintiffs in future class actions may rely on this footnote when arguing that their subjective valuation and subsequent UCL and FAL violation entitle them to restitution. If so, such reliance would be misplaced. The California Supreme Court in Cortez defined restitution as “the return of the excess of what the plaintiff gave the defendant over the value of what the plaintiff received.” Thus, the measure of recovery for restitution is not subjective. Rather, the difference between what the plaintiff paid and the value of what the plaintiff received is the proper measure of restitution. If a complaint survives a pleadings challenge, evaluating whether a plaintiff is entitled to restitution requires evidence, which might include expert testimony.
While Hinojos makes it easier for plaintiffs in the Ninth Circuit to survive a pleadings challenge, whether a class can be certified in subjective understanding claims is highly questionable. Class action plaintiffs’ attorneys will still have a difficult time establishing that every individual in the class had the same subjective valuation of the product, and that they would not have purchased the product in the absence of price discount misrepresentations. Thus, individualized issues for each class member will remain. However, the Ninth Circuit footnote hinting at recovering restitution based on subjective valuation will likely give potential plaintiffs’ attorneys an extra enticement to proceed with these claims. At a minimum, plaintiffs may seek injunctive relief (and the associated negative publicity), as a more easily achieved remedy.
We recommend consulting with attorneys who specialize in this area to confirm retailer advertising practices conform to California law requirements.