Doing Business in California: Potential Risks and Pitfalls

19 Mar 2019 , 4:21pm

Teresa Michaud and Anne Kelts of Baker McKenzie summarize a few key trends in consumer protection law that luxury retailers should consider when doing business in California.

Consumer class actions continue to present risks across the United States, with a high number of these suits being filed in California due to the state’s abundance of consumer protection laws. Many of these laws are well-known, however, such laws are continuously being applied and tested in new ways against a number of industries, including well known luxury goods and fashion brands.

The landscape for consumer protection laws

The popularity of consumer class actions in California results, in part, from broad California laws governing companies that conduct business with consumers in the state. These general statutes serve as a basis for consumers to allege numerous deceptive and unfair practices, and are attractive to potential plaintiffs because they provide for a broad range of statutory damages, civil penalties, injunctive relief, restitution, and attorneys’ fees, depending on the claim.

In particular, California’s Consumers Legal Remedies Act (CLRA) forbids a laundry list of practices in the context of any transaction that results in the sale of goods or services to a consumer, wherever a consumer alleges that the practice rose to the level of unfair competition or a deceptive act. Of relevance to luxury goods companies are provisions regarding alleged misrepresentations about the source or quality of the goods in question, such as a statement about a product’s country of origin or the materials used in the product.

Equally as broad is California’s Unfair Competition Law (UCL), which prohibits any unfair, unlawful, or fraudulent business practice. The “unlawful” prong of the statute allows consumers to “borrow” any violation of statute or common law, whether state or federal, and use it as the basis for a consumer class action in California. California’s False Advertising Law (FAL) similarly prohibits any deceptive or misleading advertising.

A Few Recent Trends

Some recent California class actions relevant to luxury goods companies have focused on consumers’ heightened interests in the privacy of their information and the quality of goods – with the latter category including natural and organic materials, and sustainability claims about a product’s supply chain and life cycle.

The Song-Beverly Credit Card Act

The Song-Beverly Credit Card Act prohibits retailers from requesting or requiring “personal identification information” (PII) in connection with consumer credit card transactions and then recording that information. While the Act does not apply to online credit card transactions, companies selling retail goods in California stores should be aware of its restrictions and ensure that employees do not request prohibited information from consumers while processing a transaction.

The California Consumer Privacy Act

The California Consumer Privacy Act (“CCPA”) will take effect in 2020, but is similar to the EU’s General Data Protection Regulation (“GDPR”) in that it will require any company collecting data from Californians to comply with a long list of strict and complex regulations. It also contains a clause allowing for steep statutory damages in the event a company experiences a data breach as a result of failing to maintain reasonable security measures. While the impact of the CCPA is beyond the scope of this article, it will become a significant source of class action litigation when it takes effect next year. Luxury goods and fashion companies may be among the first to be named in such suits since the brand names are well-known.

The California Organic Products Act

The California Organic Products Act (“COPA”) adopts a set of federal regulations referred to as the National Organic Program (“NOP”). COPA requires that products labeled as “100% organic,” “organic,” or “made with organic material,” (for instance, cotton) contain a minimum percentage of organic material. Additionally, any non-organic materials in a product labeled as “organic” or “made with organic material” product must fall within an approved list.

COPA applies broadly to “all products sold as organic within the state,” and has led consumers to target textile manufacturers claiming that their “organic” products are mislabeled and do not meet these specific requirements. COPA affords plaintiffs injunctive relief and attorneys’ fees and costs even where a consumer suffers no actual damage.

Sustainability, Greenwashing, and Recyclable claims

Consumers and plaintiffs’ counsel are increasingly targeting “greenwashing” claims, or the use of marketing to promote a misleading perception that a company’s products, policies, or practices are environmentally friendly, organic, natural, or non-toxic. Similarly, consumers have challenged product marketing and advertising relating to product lifecycle and sustainability. Consumers in these lawsuits often use California’s false advertising and unfair business practices statutes to tie a proposed class action to federal or state laws requiring substantiation for environmental claims. In particular, plaintiffs may rely on the Federal Trade Commission (FTC)’s “Green Guides,” which have been expressly adopted as binding authority under California law.

Made in the USA claims

Relatedly, consumer plaintiffs in California and nationally have focused on products targeted as “Made in the USA” or with similar claims. Again, the FTC has implemented a standard for these claims requiring that “all or virtually all” processing must take place in the United States. California law sets a similar standard in forbidding these claims where merchandise or any part of it was made, manufactured or produced outside of the United States, but provides an exception where non-U.S. material makes up less than five percent of the manufactured product.

Retailers doing business in California should be aware of all of these laws and seek legal advice to ensure that all products and sales comply with the laws where applicable.

Teresa Michaud is a partner in Baker McKenzie’s Los Angeles, California office, and Anne Kelts is a senior associate in Baker McKenzie’s San Francisco office. These statements are the opinions of the authors and not Baker McKenzie, and are intended for informational purposes only and not as legal advice.