Unfair Competition: Big Business Succeeds in Gutting California's Landmark Consumer Protection Law

By Carmen Balber

California’s Unfair Competition Law was the strongest consumer protection law of its kind in the United States when Proposition 64 drastically scaled it back this past November.

The initiative, which passed by a 59-to-41 percent margin, eliminated the ability of any Californian to use the Unfair Competition Law to prevent unfair, deceptive or illegal acts by a business. The law now requires an individual to have personally lost “money or property” in order to bring a company to court and stop an unfair practice. Proposition 64 also did away with suits to prevent any harm that is not measured in dollars, like loss of health, environmental damage or consumer deception.

One key question about the measure has not been answered: How were California voters convinced to cede these protections at the ballot?

The Sides

California’s largest consumer, environmental, labor, attorney, senior and public health organizations united to oppose Prop 64. Seventy-five public interest groups formed the coalition opposing Proposition 64, including the American Civil Liberties Union, the Sierra Club, AARP, Consumers Union, the California Labor Federation — AFL-CIO, the California Nurses Association, Consumer Attorneys of California, the American Lung Association and the Foundation for Taxpayer and Consumer Rights.

The initiative’s proponents were a “Who’s Who” of Corporate America and included 43 companies and industry groups that have had, or now have, legal troubles under the Unfair Competition Law. These bad actors alone gave $5.2 million to Proposition 64, including:

• The Oil Industry — $465,000 donors to Prop. 64, was forced to clean up groundwater polluted with the gasoline additive MTBE, and stop air pollution from an oil refinery that was causing health hazards;
• Big Tobacco — $200,000 donor to Prop. 64, was held responsible for lying to the public about the health effects of cigarettes;
• Auto Manufacturers and Car Dealers — $2,116,100 donors to Prop. 64, have faced suits to stop dealers from charging illegal finance mark-ups, often to minority buyers;
• The Financial Industry — $365,000 donors to Prop. 64, has been charged with illegally seizing Social Security money from elderly and disabled clients, and predatory lending practices;
• Insurance Companies — $450,000 donors to Prop. 64, had to repay customers they fraudulently denied earthquake insurance benefits; and,
• Health Care Giants— $979,500 donors to Prop. 64, including pharmaceutical companies accused of illegally using consumers’ private medical information, and HMOs who denied approval of medically necessary care to delay or avoid payment.

Most of the suits forcing these corporations to make amends for mistreating consumers or despoiling the environment would never have gotten off the ground if Proposition 64 had been law when they were filed.

How Proposition 64 Passed

The lessons of the campaign should influence how future battles are fought. Money, messengers and popular misconceptions gave the Proposition 64 victory to its big industry backers.

Lesson No. 1: TV works: The Yes campaign branded Proposition 64 the “Shakedown Lawsuit” initiative.

Proposition 64’s big business backers had a critical advantage that only money can buy — advertising time. The No On 64 campaign was outspent five to one.

A $15 million war chest allowed Yes On 64 to begin airing statewide television ads early in September. The $3 million No campaign hit the airwaves with less than three weeks before Election Day. Trial attorneys were the primary funders of the No TV ads, in coalition with public interest groups, including the Consumer Federation of California, Sierra Club California and the California Nurses Association.

An extra month on television branded Proposition 64 the “Shakedown Lawsuit” initiative before voters ever saw an opposing view. By the time the No campaign was on TV, it could not overcome the din of 15 other initiatives, local races and the presidential contest all competing for the public’s attention.

One reason for the staggering imbalance of funds is that trial attorneys, who were the likeliest deep pockets to fight such an initiative, do not make their money on the kind of public protection lawsuits that were the target of Proposition 64. The initiative’s big industry backers chose the one issue that would limit their liability in court — weakening the Unfair Competition Law — but not financially threaten lawyers to goad them into fully financing the fight. The nonprofit groups opposing Proposition 64 did not have the millions of dollars it takes to finance a mass media campaign in California. Attorneys underestimated the fight, and refused to give it the attention it deserved.

Lesson No. 2: Small business owners were the face of Proposition 64.

Yes On 64 television ads made small business owners struggling under unjust lawsuits the face of the campaign, even though big business was driving it. Actors portraying an auto mechanic or the owner of an “innovative company” complained, “Businesses like mine pay a fortune to lawyers filing frivolous lawsuits,” and worried, “If these lawyers aren’t stopped, businesses like mine could be run out of the state.”

These claims stemmed from summer 2003, when three lawyers in Beverly Hills were caught sending extortion letters to small business owners, threatening to sue using the Unfair Competition Law unless the attorneys were paid to drop the case. The owners of small nail salons, restaurants and auto repair shops often paid these swindlers rather than face the higher cost and uncertainty of fighting them in court. When their activity was discovered, the Attorney General went after the offending at

torneys and an investigation by the state bar led to their disbarment. Nevertheless, initiative proponents seized upon the issue and made suffering small business owners the public face of the Yes campaign. Proposition 64 failed to do anything to protect businesses from unscrupulous attorneys because it went after the law, not lawyers who abuse it. Initiative proponents actually dismissed legislative solutions to the problem — including proposals that would have increased transparency and judicial review to expose and punish lawyers who sent illegal demand letters.

Lesson No. 3: The public did not see who was really behind Proposition 64.

California Attorney General Bill Lockyer asserted, “The proponents try to disguise Prop. 64 as a small-business protection measure needed to eliminate ‘shakedown’ lawsuits. But the initiative’s primary backers hardly qualify as a coalition of mom-and-pop enterprises. They rank among the largest companies in the world, with annual profits in the hundreds of billions of dollars.”

Public interest opponents to Proposition 64 ran a vigorous earned media campaign, launching a statewide press tour to expose Proposition 64’s corporate backers and the benefits they expected from its passage. A 15-foot-tall inflatable cigarette box with a “Public Health Warning: No On 64” message was the backdrop to the 15-city tour in the weeks before the election. Press conferences were held at the doorsteps of corporate donors who had been held accountable for unfair practices to highlight the public interest cases Proposition 64 would ban.

However, this message and the Surgeon General-style public health warning only reached viewers of nightly newscasts. The campaign’s paid advertisements did not include it, and most voters never heard about the initiative’s big industry contributors or what they would gain from Proposition 64. In the end, initiative battles boil down to finger-pointing: Proposition 64’s proponents pointed the finger at lawyers far better than opponents pointed out its big business backers.

Lesson No. 4: Big business efforts to obscure its role in gutting the Unfair Competition Law are part of a concerted strategy.

As Philip Morris, a $200,000 donor to Proposition 64, explained in a 1994 internal memo: “Our success in the tort battles in the past two years has resulted in part from our ability to find non-tobacco industry messengers to lead the fight. [Success] will come in part from our ability to complement the inside political skills of the tobacco lobbyists with the more acceptable public face of key business association or coalition leaders.”

Lesson No. 5: Polls don’t tell you everything.

Proposition 64 was behind in the polls throughout the campaign. The first Field Poll released in August showed the initiative 20 points behind, with 41 percent opposed and just 21 percent in favor. Proposition 64 remained 12 points behind in late September, even after Yes on 64 advertising began airing. Private tracking polls showed the same trend.

Fundraising against the measure was weak in part because polls predicting the initiative’s defeat lulled its opponents into complacency. The gap narrowed a few days before the election, when a late October Field Poll reported the measure just five points behind. By that time, it was too late to raise more money and increase the No campaign’s paid media presence.

Over-reliance on internal polling further hurt the No On 64 campaign by giving it the wrong message for its ad campaign. Clean air and water poll well with all Californians. So do groups associated with protecting public health. Adhering to conclusions drawn from these polls, No On 64’s paid media focused on an environmental message but did not identify the corporate backers of Proposition 64. Clarifying the sides may have been enough to dissuade the public from believing the measure would help small businesses. Instead, opponents produced advertisements warning that: “The American Lung Association of California, Sierra Club & California Nurses all oppose Prop. 64. Why? Because Prop. 64 will take your breath away. Prop. 64 suffocates their ability to enforce tobacco and public health laws. … No on Prop. 64. Our health depends on it.”

Any person concerned about childhood asthma, dirty drinking water or unsafe automobiles would have been a compelling No On 64 messenger, but no such person made it on the air. The public didn’t see the initiative’s backers, nor did they see the face of Proposition 64’s victims. No On 64 produced ads with no villain and no victim that failed to counter the Yes side’s small business disguise.

Lesson No. 6: Lawyers have a bad rep.

Public antagonism towards attorneys has grown over the last quarter century. Big businesses and their political allies have cultivated this attitude by blaming “frivolous lawsuits” and greedy attorneys for everything from the high cost of health care to a lagging economy. Business groups, including many of the backers of Proposition 64, even launched and funded fake grassroots groups named Citizens Against Lawsuit Abuse starting in 1991 to lend a veneer of public support to their attorney-bashing. The strategy gained a high-profile messenger in President George W. Bush, giving anti-lawyer sentiment legitimacy and a national stage.

The attempt by big business to vilify lawyers and frivolous lawsuits is unfounded: research reveals that the number of lawsuits filed by individuals over wrongful acts is actually falling, while lawsuits brought by businesses against businesses continue to increase. But, regardless of the veracity of the message, the public is buying it. Anti-lawyer themes have found increasing resonance across the country.

Yes On 64 successfully used this negative perception of trial lawyers to give voters an enemy they already disapproved of.

Lesson No. 7: Proposition 64 had a celebrity spokesperson.

Early in the election season, environmental organizations called on Governor Schwarzenegger to “meet your promise to Californians who care about the quality of our air and water … and oppose [Proposition 64’s] direct assault on environmental protection.” Meetings with the governor’s office led them to understand that he would stay out of the Proposition 64 debate.

The reversal of his position in mid-September shocked environmental leaders, including the legislative director of Sierra Club California, who said Schwarzenegger “double-crossed us” when the governor announced his endorsement of the initiative. The decision was no doubt influenced by the campaign supporters the governor shared with the Yes on 64 campaign. By Election Day, Schwarzenegger had received $4.8 million from donors that also gave $4.8 million to Proposition 64, among them Anheuser Busch, Pfizer, Blue Cross and ChevronTexaco.

Schwarzenegger’s support was highlighted in proponents’ television ads, mailed in the form of a voter guide to 5 million Californians, and added to a campaign-style bus tour the governor made during the weekend before the election.

Schwarzenegger carried the day with most of his initiative picks. Although Proposition 64 was not his most high-profile endorsement, his popularity in November had not suffered the dive that currently finds him with approval ratings below 50 percent. Schwarzenegger brought his celebrity spotlight to shine on Proposition 64’s “frivolous lawsuit” message, and undoubtedly turned heads toward the Yes campaign’s small business message.

Not Quite Déjà Vu

Since the passage of insurance reform initiative Proposition 103 in 1988, California voters have consistently voted no on initiatives that would secure legal immunity for corporations at the public’s expense. The 1988 voter revolt was inspired by a major loss to insurance companies at the ballot two years earlier, much like public interest groups’ Proposition 64 defeat. Voters asserted their right to fair and reliable auto insurance rates with Proposition 103 and defeated an $80 million dollar campaign for a series of anti-consumer counter-measures on the same ballot. Proposition 103’s backers made sure the public knew that the insurance industry was behind the No campaign and the counter-measures.

A trio of ballot measures meant to limit corporate accountability for auto accidents, investor scams and dangerous products similarly failed in 1996. Attorneys and lawsuits were maligned in the battle over Propositions 200, 201, and 202, just as they were last year by proponents of Proposition 64. But big industry lost in 1996 for the same reasons they did in 1988: opponents made sure voters knew who the initiative backers were and what they stood to gain from their attack.

The Proposition 64 victory is certain to embolden big industry in the initiative arena. Already this year, the pharmaceutical industry introduced a measure that would have capped attorneys’ contingency fees in California (a law that would effectively close the courtroom door to any person not wealthy enough to pay a lawyer by the hour). Though the measure was pulled for political reasons, it is likely to rear its head again in 2006.

Proponents’ actions immediately following the election quickly revealed that small business had been just a facade for the Yes on 64 campaign, and disproved their promises that legitimate public interest cases would not be affected.

Donors to the Proposition 64 campaign, charged in lawsuits filed before the November election with violating patients’ medical privacy, marketing alcohol to minors and overcharging cellular phone customers, are among the more than 100 corporate defendants now arguing in court that Proposition 64 should apply retroactively. If applied retroactively, Proposition 64 will give the initiative’s big industry backers immunity for unfair practices in lawsuits that were already in progress when the measure was approved. Because appeals courts have issued conflicting decisions, the California Supreme Court will ultimately decide the issue.

As Proposition 64’s final outcome is decided, there is a clear lesson to be had from the ballot campaign’s success. Big business has honed in on a strategy that works: Don’t show your face, find a brand-name spokesperson and exploit mounting anti-lawyer sentiment. Successful counter-campaigns have exposed big business initiative backers and the rights they are really after. Reformers who take these lessons to heart may figure out how to tip the scales in the next battle to protect the public interest.

Carmen Balber is a consumer advocate with the Foundation for Taxpayer and Consumer Rights in Santa Monica, California. She worked on the No on Prop. 64 campaign.