In 2006, when California voters passed Proposition 64 as a measure designed to prevent sham lawsuits brought California’s Unfair Competition Law (UCL) and False Advertising Law (FAL), corporate defendants quickly capitalized on the ambiguity of the new standing requirements in an attempt to further limit the scope of the statutes’ protective schemes. However, since Proposition 64’s passage, the California Supreme Court has narrowed its effect on standing requirements, first in its decision in In re Tobacco II Cases, 46 Cal.4th 298 (2009), and now in its recent decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), such that a UCL or FAL action may now proceed on a class-wide basis merely on a class representative’s allegations of economic injury and reliance.

In its landmark decision, In re Tobacco II Cases, 46 Cal.4th 298 (2009), the California Supreme Court scored a victory for consumer law attorneys when it held that in a misrepresentation class action brought under the UCL, Proposition 64’s passage meant that only the class representative was still required to prove injury in fact and demonstrate actual reliance on the alleged deceptive or misleading statements which the underlying cause of action was based. Tobacco II, 46 Cal. 4th at 306. However, in deciding to grant review in Kwikset Corp., the Court seemingly realized that its decision had not gone far enough in clarifying Proposition 64’s limited effect on UCL and FAL standing. As discussed in detail below, the Court’s decision that followed was another major victory for consumer advocates.

In Kwikset Corp. the plaintiffs sought to represent a class of purchasers of a lock that was falsely labeled “Made in the USA”, alleging that the false designation of origin constituted false advertising and unfair competition in violation of the UCL, Cal. Bus, & Prof. Code §17200, and FAL, Cal. Bus. & Prof. Code §17500. At issue on review was whether Plaintiffs had adequately alleged the standing requirements set forth in the UCL as amended by Proposition 64, which extend standing to “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition” . §17204.

In rendering its decision the Court made several important points. First, the Court notes that Proposition 64’s injury in fact requirement is generally met if a plaintiff alleges an economic injury since an economic injury is merely a type of an injury in fact, plainly stating, “[i]f a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact.” Therefore, at the outset the Court sets forth the standing requirements as twofold: “(1) … a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) … the economic injury was a result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.” Kwisket Corp., 51 Cal. 4th 310 (2011), at 321.

Setting forth these requirements, the Court turned its analysis to the main contention at issue – whether Plaintiffs had adequately alleged they suffered an economic injury. On appeal, the Court of Appeal struggled to come up with a reason how the plaintiffs were worse off because of the wrong designation of origin. The way they saw it, the plaintiffs received their benefit of the bargain, or in other words, they wanted a functioning lock and got exactly that. It failed to conceive, as the Supreme Court would go on to prosthelytize, some consumers are willing to pay more for a product that is “Made in the USA”, stating, “[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.” Id. at 329. The Court continued, hammering the point home:

“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.” Id. at 330.

Having satisfied the injury in fact requirement the court turned to more straight forward issue of causation, noting that the same assertion is all that is needed to satisfy both standing requirements, “[a] consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirements of §17204 by alleging, as plaintiffs have here, that he or she would not have bought the product but for the misrepresentation.” Id.

Since the Court’s decision in Kwikset Corp. several district court decisions have demonstrated the decision’s squashing effect on standing challenges to UCL claims. See Smit v. Charles Schwab & Co., 2011 U.S. Dist. LEXIS 25589 (N.D. Cal. Mar. 8, 2011) (rejecting defendant’s claim that plaintiff lacked standing in an investor action brought under the UCL because the Plaintiff still gained money through her investments); Shaw v. BAC Home Loans Servicing, LP, 2011 U.S. Dist. LEXIS 19875 (S.D. Cal. Feb. 28, 2011) (rejecting defendant’s claim that plaintiff lacked standing in a deceptive home modification action brought under the UCL because payments made pursuant to the terms of the loan modification were due under the original mortgage note anyway); Bottoni v. Sallie Mae, Inc., 2011 U.S. Dist. LEXIS 18874 (N.D. Cal. Feb. 11, 2011); and Hamana v. Kholi, 2011 U.S. Dist. LEXIS 26944 (S.D. Cal. Mar. 15, 2011). Therefore, it seems precedent has been set—in California, deceptive marketers will no longer be able to skate by on standing challenges to avoid the full extent of liability for unfair and deceptive practices.

2. For all intents and purposes the standing requirements under the FAL are identical with only a slight change in wording, extending standing to “any person who has suffered injury in fact and has lost money or property as a result of a violation of this chapter”. (§17535)

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In a recent decision, the California Court of Appeal, Second Appellate District, clarified that California Labor Code Section 226.7 allows Plaintiffs to recover two premium payments when both a meal and rest period are missed on the same day. In United Parcel Service, Inc. v. Superior Court, 192 Cal.App.4th 1043 (2011), the Court analyzed the language of Labor Code Section 226.7, which provides:

(a) No employer shall require an employee to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commission.

(b) If an employer fails to provide an employee a meal period or rest period in accordance with an applicable order of the Industrial Welfare Commission, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each work day that the meal and rest period is not provided.

Labor Code § 226.7

This case arises out of 32 coordinated actions in which plaintiffs allege various causes of action, most notably meal and rest period violations. Plaintiff, on one hand, argued that section 226.7 allows for the recovery of two hours of premium wages if a meal and rest break were not provided. Defendant, on the other hand, asserted that Plaintiff was only entitled to recover one premium payment per work day regardless of the number or type of break periods that were not provided. The Trial Court held that Plaintiff was entitled to two hours of premium pay for a missed meal and rest break, and UPS petitioned for a writ of mandate challenging the Trial Court’s ruling.

The Appellate Court admitted that the language of Section 226.7 cited above apparently leaves the standard open for debate, and recognized that this Labor Code provision is amenable to the varying interpretations offered by Plaintiff and Defendant. In formulating its opinion, the Appellate Court relied on the legislative history of Section 226.7 in conjunction with the Industrial Welfare Commission (“IWC”) wage order’s administrative history and the public policy behind the statute and wage orders.

The IWC’s wage orders treat meal and rest periods in separate sections, each providing the additional hour of pay per work day for the designated type of violation (employees are entitled to an unpaid 30-minute meal period after working for five hours and a 10-minute rest period per four hours of work). See Cal. Code Regs., tit. 8, § 11090, subds. 11(a) & 12(b). The Court notes that the wording used in the IWC wage orders is virtually identical to the wording used in subdivision (b) of section 226.7.

Further, relying on the federal district court decision in Marlo v. United Parcel Service, Inc., (CD Cal. May 5, 2009), the Court concluded that construing Section 226.7 as Plaintiff posits furthers the public policy behind the meal and rest break mandates in the IWC wage orders. The purpose of enacting these regulations was to provide an incentive to employers to comply with labor standards and compensate employees when those standards are violated. Allowing an employer to get away with providing only one premium payment for two missed breaks directly contradicts this policy, and as the Court in Marlo concludes, “by providing no additional premium wage when the second type of violation occurs, the alternative approach would encourage an employer to require an employee who has missed a ten-minute rest break to also miss his or her lunch period.” Marlo, 2009 U.S. Dist. LEXIS 41948, 21-22.

This decision is far-reaching insofar as it serves to clarify the requirements of Labor Code section 226.7 and for its rejection of another attempt of employers to limit California’ meal and rest break laws. . However, UPS may argue that this decision conflicts with the California Supreme Court’s decision in Murphy v. Kenneth Cole Productions, Inc., 40 Cal. 4th 1094 (2007). Although Kenneth Cole is most widely known for its interpretation of premium pay as a wage rather than a penalty, it is important in the context of United Parcel Service because the Court repeatedly references the “additional hour of pay,” and never makes mention of the possibility for compensation beyond a single hour. Whether or not this decision will be appealed on these grounds remains to be seen.

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Almost exactly two years after the decision in Wyeth v. Levine the Supreme Court was left to make another decision on preemption. On March 30, 2011 the United States Supreme Court heard oral arguments for Pliva, Incorporated v. Mensing and the consolidated cases. The question presented before the Court was whether state law products liability claims brought by injured patients against manufacturers of generic drugs was preempted by the Federal Food Drug and Cosmetic Act (“FFDCA”). Although not exactly the same issue addressed in Wyeth , it still deals with the responsibility of manufacturers with regard to the labeling of their products.

The injured parties in this case were prescribed Reglan which is available in both branded and generic form. Because of the laws of the injured parties’ states, the pharmacists filled their prescriptions with the generic form of the drug which they took for approximately four years. The long term use resulted in a diagnosis of Tardive Dyskinesia, which is a severe and irreversible neurological disorder. Both injured parties filed a lawsuit asserting state law products liability claim for failure to warn and in both cases the generic drug company defendants moved to dismiss based on federal preemption. Their cases were dismissed in the district court; however, both the Fifth and Eighth Circuits, guided by the Supreme Court’s decision in Wyeth, rejected the preemption defense.

That brings us to where we are now. The generic manufacturer defendants argue that 1) pursuant to FFDCA and FDA regulations, which require that a generic drug be an exact copy of the brand drug including labeling, a generic manufacturer may not unilaterally add safety information to the labels of their generic drugs 2) generic manufacturers may not unilaterally send “Dear Healthcare Professional” letters that contain warnings about their drugs that are different from those of the branded drug since those letters are considered labeling, and 3) requiring generic manufacturers to take steps or imposing a duty on them to gather safety data and perform studies would be contrary to the goals of the Hatch Waxman Act .

The generic manufacturers base their argument on the fact that two comments proposed to the Hatch Waxman that would have allowed generic manufacturers to deviate from the labeling in order to add contraindications, warnings, precautions, adverse reactions and other safety related information was dismissed by the FDA. The generic manufacturers argue that they run into the same problem when it comes to “Dear Health Care Professional” letters because labeling under the FFDCA includes such letters. They argued that this means that sending a letter with information not on the brand drug label would be in violation of statutory and regulatory requirements which require the labels to be identical.

During oral arguments, the generic manufacturers argued that it was impossible for them to comply with both state and federal law because there is no mechanism for them to change the warnings. Additionally, although though they could have gone to the FDA to ask for revisions, it was not clear what the FDA would have done. Basically, the argument was that they were not obligated to do anything more than forward adverse event reports to the FDA and let the FDA go through and determine whether or not a labeling change was required.

The injured parties argue that 1) Wyeth has already provided an answer to this issue when it held that the manufacturer bears the primary responsibility for ensuring that labeling for its drug is adequate to warn of the products risks and 2) there should be no special immunity for generic drug manufacturers as it creates an arbitrary and irrational distinction between classes of patients where one class of patients whose prescriptions were filled with the brand name drug retain their right to sue whereas those whose prescriptions were filled with the generic would lose that right. This type of result would create a disincentive for consumers to take generic drugs which is the exact opposite of what Congress intended when it passed the Hatch Waxman Act.

At the core of the Wyeth decision was the Court’s conclusion that the responsibility for adequate labeling is on the drug manufacturers. The injured parties explain that as part of their responsibility to provide adequate safety information, the generic manufacturers can do one of a number of things.

1) The FDA advised generic manufacturers that after approval, if the generic manufacturer believes that new safety information should be added then it should provide adequate supporting information to the FDA and the FDA will determine whether the labeling should be revised. 57 Fed. Reg. at 17961 cmt. 40.

2) The generic manufacturer could file a prior approval supplement (PAS) which would require FDA approval before proposed changes were made. 21 C.F.R. §314.70(b)

3) The generic manufacturer could file a “Changes Being Effected” supplement where a manufacturer may implement the proposed change at the same time as the supplement is submitted. 21 C.F.R. §314.70 (c).

4) The generic manufacturer could file a Citizen Petition to request a labeling change. 21 C.F.R. §10.30 (App. 2a) This process allows anyone to request that the FDA take formal action with regards to the safety of a prescription drug.

5) The generic manufacturers could communicate with healthcare providers directly through “Dear Health Care Professional” letters (21 C.F.R. §200.5 (App. 5a)) as these letters are not considered labeling. 21 U.S.C. §321 (m). Even if they were, they are classified as “promotional labeling” which is not the same thing as the “approved labeling” that the generic manufacturer has to mirror.

The injured parties argue that the bottom line is that manufacturers are the ones responsible for maintaining a label that is consistent with the safe and effective use of their products. If information is known to the manufacturer that would require a label change, they forward it to the FDA and the FDA makes a decision on whether to make the change. Who brings forward that information to the FDA is not important.

During oral arguments the injured parties, with the support of the Government, argued that it was not impossible for the generic manufacturers to comply with both state and federal law. The injured parties argued that the only way generic manufacturers can claim impossibility is if they could show that the FDA would have rejected their requests. The government supported the injured party’s position that there was an obligation on the generic manufacturers and argued that if the generic manufacturer could go to the FDA and propose a labeling change, which it can, there is no impossibility. Even if the FDA rejected their proposal, they still did whatever they could.

Every state has enacted a drug substitution law that permits or even requires pharmacies to fill a prescription written for the brand name drug with its generic equivalent. Insurance companies encourage substitution of the generics because of price incentives. More than 70% of the prescriptions filled are with generic drugs. The ruling in this case would have a huge impact on not only patients’ rights to bring claims against generic manufacturers but also increase public health risks. If state law claims against generic manufacturers are preempted then there will be absolutely no incentives for them to request stronger warnings or do anything more than make an equivalent product and collect the profits. It seems very unlikely that is the outcome that was intended by the Hatch Waxman Act.

Although I agree that the Act does not allow generic manufacturers to change the labels unilaterally on their products, some sign of concern or request for a label change by the generic manufacturers is not prohibited. It would seem that the at the very least they would be obligated to alert the FDA or request a label change from the FDA, but complete inaction by the generic manufacturers does not seem to be what was intended. But only time will tell if the Supreme Court agrees.

1- In Wyeth v. Levine the question that was presented was whether Food and Drug Administration approval of a prescription drug’s labeling preempts state-law failure to warn claims. 2- Passed in 1984, the Hatch Waxman Act established an abbreviated new drug application process that only requires generic drug manufacturers to show that the generic is bioequivalent to an approved brand drug, on other words, the more costly clinical studies are no longer required for generics to be approved.

If you have questions or comments about this article, we would value the opportunity to hear from you. For information on other topics in consumer advocacy and to learn more about Khorrami Pollard & Abir, please visit our website or subscribe to our Consumer Advocate Legal Update blog.