September 18, 2007
Pursuant to Elections Code Section 9005, we have
reviewed the proposed initiative, entitled the “California Class Action
Reform and Corporate Accountability Act”
(A.G. File No. 07‑0044).
Background
Class Action Lawsuits. Many
lawsuits in California’s courts involve the filing of cases by attorneys
on behalf of individuals against other parties. Other types of cases,
known as class action lawsuits, are generally filed by attorneys on
behalf of a group of plaintiffs to represent their common legal claims
against one or more other parties. For example, in one California case,
a class action lawsuit was filed on behalf of more than one million
California residents (the “class” of parties filing suit) against a
chain of gas stations alleging that customers who paid with a credit
card were illegally overcharged for gasoline. A class of defendants—for
example, all companies selling gasoline in the state—can also be
represented in class action cases. Class action cases frequently involve
legal issues relating to consumer protection, environmental protection,
civil rights, violations of contracts, and the enforcement of minimum
wage and overtime labor laws.
The standards and procedures for the conduct of
such cases are set forth in federal and state statutes, rules adopted by
the courts, and legal opinions issued by judges. Notably, two different
state statutes authorize class action lawsuits. One statute, known as
the Consumer Legal Remedies Act, applies only to cases brought to
protect consumers against unfair and deceptive business practices. The
other state statute authorizing class action lawsuits, Civil Code
Section 382, is more general and applies to a wider range of legal
cases. The legal standards used by judges for determining whether a case
can proceed as a class action can differ depending upon the provision of
state statute that is the basis for the lawsuit.
Punitive Damages. Under state law,
individuals who have been harmed or injured can file suit to
obtain damages from parties that have injured them. If a plaintiff can
show “clear and convincing evidence” that he or she suffered from
“oppression, fraud, or malice,” as defined by state law, the defendant
can be required to pay additional damages in excess of the actual damage
caused. These so-called “punitive damages” are meant to be a form of
additional punishment. Punitive damage awards, which are generally
shared by plaintiffs and their attorneys, are generally subject to state
(as well as federal) income taxes.
Unfair Competition Law.
California’s unfair competition law prohibits any person from engaging
in any unlawful or fraudulent business act. This law may be enforced
through lawsuits by the Attorney General or local public prosecutors.
Examples of this type of lawsuit include cases involving deceptive or
misleading advertising or violations of state law intended to protect
the public well-being, such as health and safety requirements.
Proposition 64, a statewide ballot initiative
that was approved by voters in November 2004, imposed new restrictions
on private parties bringing unfair competition lawsuits. Among other
changes, Proposition 64 provides that private parties cannot bring such
cases unless they have suffered injury and lost money or property.
Proposal
This measure changes state law relating to class
action lawsuits, punitive damage awards, and unfair competition
lawsuits. The measure states that its provisions apply
only to cases filed on or after its enactment.
Some of the most significant provisions of this
measure are summarized below.
Policy Favoring Class Action Cases Placed
in Statute. Current state law has been interpreted by the courts
as generally favoring class action lawsuits. This general state policy
in favor of such cases has sometimes been cited by the courts in rulings
on specific legal issues about whether such lawsuits should be allowed
to proceed. This initiative declares in statute that state law favors
having lawsuits proceed as class actions to resolve legal disputes. This
means that this policy could not change in the future unless it was
submitted to and approved by the voters in a statewide election. Also,
the measure allows judges to order multiple defendants to be joined in a
single class action case when there are common legal issues.
Easier Standards to Qualify Some Class
Action Cases. This measure could make it easier for some
lawsuits to qualify as class action cases. As noted earlier, class
action lawsuits are currently authorized under two separate statutes—the
Consumer Legal Remedies Act (for consumer cases only) and Civil Code
Section 382 (for various types of legal cases in general). This measure
places into statute legal standards for cases brought under Section 382
that are generally similar to those now in statute for consumer cases.
The initiative states that lawsuits filed under Section 382 may proceed
as a class action if the legal standards established in this measure are
met. For example, the measure specifies that, similar to consumer cases,
a lawsuit filed under Section 382 may proceed as a class action if it
would be impractical to bring all members of a class before the court.
These statutory changes mean that some lawsuits that currently do not
qualify as a class action might now do so.
The measure enacts various other additional
statutory changes that could make it easier to qualify certain types of
cases as class actions. This includes, for example, lawsuits that are
filed primarily to obtain court orders requiring certain actions to be
taken, rather than money (for example, a lawsuit to prohibit
discrimination against certain people). This measure also authorizes in
statute class action lawsuits for the purpose of requiring ongoing
monitoring of the medical condition of individuals who face a risk of
damage to their health in the future (for example, from taking a
prescription drug that was subsequently found to be defective).
Rules for Class Action Lawsuit Notices
Modified. In some class action cases, notices are sent to
members of the class informing them of a lawsuit affecting them, such as
through mailings or newspaper advertising. This measure,
among other statutory changes, directs state courts to consider
requiring the use of “the most effective and least costly” form of
notice, including use of the Internet, email, and putting up posters in
publicly visible locations.
Restrictions Imposed on Class Action Coupon
Settlements. Some class action cases are settled by awarding
individuals represented in a class action a coupon, certificate, or
other form of scrip that can be redeemed for a discount on a product or
service. In some instances, use of these various types of coupons may
require individuals to incur an out-of-pocket cost in order to use the
coupon. This measure imposes new restrictions in state statutes on
coupon settlements, including a requirement that state courts approve
such settlements only when it has been proven that such an approach is
reasonable under the circumstances and provides valuable benefits to
individuals receiving the coupons.
Punitive Damages. This measure
requires that 25 percent of punitive damage awards resulting from
lawsuits brought under these new class action statutes be paid directly
to the state. Any funds received by the state under this measure must be
used to enforce laws promoting consumer protection, shareholder and
pension protection, fire and police protection, and protection from
insurance companies and discrimination.
Lawsuits by Certain Nonprofit Agencies
Permitted. This measure permits certain nonprofit groups to
pursue class action lawsuits to enforce the state’s consumer protection,
environmental, civil rights, and other laws. Specifically, this measure
allows charitable nonprofit organizations who are exempt from federal
income taxation to bring such lawsuits under the state’s unfair
competition laws on behalf of other persons even if the organization
itself, or other persons, did not suffer injury or a loss of money or
property. In effect, this measure provides such nonprofit organizations
an exception from the provisions of Proposition 64, which otherwise
prohibits private parties from bringing lawsuits under the unfair
competition laws unless they had suffered injury or a loss of money or
property.
Fiscal Effects
Direct Fiscal Effects on State Court
Operations. The combined effect of the various changes made by
this measure could increase the number of class action and unfair
competition lawsuits in state courts. However, other changes made by
this measure could reduce court workload and costs. For example, some of
the cases that would have otherwise been pursued as individual court
cases may instead, under this measure, be litigated as class actions.
The net effect of these and other possible responses on state revenues
from court filing fees and court operating costs is unknown.
Effects of Punitive Damage Award Provisions
on Revenues and Spending. The provisions of this measure
providing the state a 25 percent share of punitive damage awards from
class action cases may not be significant initially. That is because
this provision, like the rest of the initiative, only affects cases
filed in the courts after its enactment that may take some years to
resolve. After these future cases have been resolved by the courts, the
revenues received by the state under this measure could become
significant. The actual amount of revenues could fluctuate from year to
year depending upon the claims made in the cases before the courts and
judicial decision-making in those cases. Eventually, in some years, the
state might receive up to the low tens of millions of dollars as its
share of punitive damages in class action cases.
These new state revenues would be partly offset
by a reduction in state income tax revenues. That is because, under this
measure, the share of punitive damage awards paid to attorneys and
plaintiffs would be reduced by the amount paid directly to the state,
thus reducing the amounts that might otherwise be subject to state
income taxes.
This measure could eventually result in an
increase in state and local expenditures of the new revenues from
punitive damage awards for the various public purposes, such as consumer
protection or fire and police protection, that are specified in the
measure. However, the measure does not prohibit the use of these new
funds to replace existing state or local government funding now being
provided for these programs. Therefore, the net fiscal effect of this
measure on state and local government expenditures is unknown.
Indirect Fiscal Effects. This
measure may have various indirect fiscal effects. For example, to the
extent that this measure increases business costs associated with class
action and unfair competition lawsuits, it could reduce firms’
profitability, the level of economic activity, and thus, state and local
revenues. On the other hand, state revenues could increase to the extent
that this measure increases payments to individuals represented in class
action lawsuits that are subject to taxation. Also, state and local
government costs for health care could be reduced in the future to the
extent that class action lawsuits and unfair competition lawsuits that
could now be brought by nonprofit organizations were effective in
correcting violations of health and safety requirements. The net
indirect fiscal effects of these and other possible responses to this
measure are unknown.
Summary of Fiscal Effects
·
Unknown fiscal impact on state revenues from court filing
fees and the cost of court operations.
·
Unknown net increase in state revenues, potentially up to
the low tens of millions of dollars in some years, from providing a
25 percent share of punitive damage awards from class action cases to
the state.
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