Alert: Proposition 64 Limits Unfair Competition Claims

November 04, 2004

Efforts to limit “unfair competition claims” – claims alleging that a defendant engaged in unlawful, unfair or fraudulent business practices – gained ground on Tuesday with the passage of California’s Proposition 64.   The reform is designed to reduce the number of unfair competition claims aimed at generating attorneys' fees rather than correcting a tangible harm.

Proposition 64 makes two basic changes to the unfair competition law.  First, Proposition 64 narrows the scope of who can bring a lawsuit for unfair competition.  Much of the debate over unfair competition claims has focused on claims brought by plaintiffs lacking direct injury but purporting to assert claims “on behalf of” the general public.  Proposition 64 limits the right of private individuals to bring unfair competition suits by requiring that such individuals have “suffered injury in fact and lost money or property” as a result of the alleged unfair competition.  Public officials charged with prosecuting violations, such as District Attorneys and City Attorneys, may still bring actions on behalf of the public without meeting the new, more stringent standing requirements. 

Proposition 64’s second significant change to the unfair competition law, however, limits the use that may be made of funds recovered by public officials under the statute.  Under Proposition 64, penalties collected by public officials for violations of the unfair competition law must be used for the “enforcement of consumer protection laws.”

How significant are these changes? 

The standing limit, requiring private individuals to show both injury in fact and lost money or property represents a significant hurdle.  Private plaintiffs will no longer be able to file unfair competition claims alleging only harm to the general public.  This new requirement should decrease the overall number of claims filed by private individuals and help prevent misuse of the statute by private attorneys without accountability to the general public.

The effect of the limit on the use of penalties collected by public officials under the statute is less clear.  Although Proposition 64 narrows the permissible use of the funds, there is little reason to believe either that past abuses occurred in the absence of such direction or that the language chosen will significantly alter the current uses of funds recovered by public officials under the statute.

Perhaps the most significant thing about Proposition 64 is what it does not do.  Proposition 64 does not purport to alter the current definition of an unfair competition violation.  Under Proposition 64, the breadth of the statute – allowing claims for relatively vague “unfair” conduct, as well as for more well-defined “unlawful” or “fraudulent” conduct – remains intact.  As a result, while fewer claims may be filed by private plaintiffs, companies facing unfair competition lawsuits may continue to have difficulty eliminating claims short of trial.