Initiative Seeks Curbs on Consumer Lawsuits

It was a comforting message from California’s largest HMO: “When you see a Kaiser Permanente physician, no one but you and your doctor decides what’s right for you.”

Comforting perhaps, consumers groups said, but flat-out untrue. After a four-year legal battle, they won a court settlement last year requiring Kaiser to disclose how it pays doctors for controlling costs.

Now the health maintenance organization is joining an effort to weaken the 70-year-old consumer protection law under which it was sued. Dozens of companies have already collected $7 million to promote a measure making it more difficult to sue businesses, and political consultants say Proposition 64 could become the hottest ballot initiative of 2004.

At issue is California’s tough Unfair Competition Law, which lets consumers sue businesses to stop unfair and deceptive business practices even when those consumers have not been harmed personally. The initiative would sharply limit who can sue and under which circumstances.

Businesses say they do not want to gut the law; they just want to prevent frivolous and costly litigation.

They rattle off hundreds of cases of abuse. One complaint alleges that the Super Soaker squirt gun doesn’t shoot as far as promised. Another charges that the Universal Studios movie “In the Name of the Father” is not based on a “true story,” as advertised. And a law firm sent letters to 140 ethnic grocery stores, accusing them of offering pirated videotapes for rent and threatening to file a complaint against every store that did not immediately pay a $2,000 settlement.

Consumer groups, on the other hand, insist that the initiative’s backers really want to go beyond stopping such cases to strip valuable protections from Californians.

The state’s senior consumer attorney -- who acknowledges that the law has been abused -- is alarmed by the proposal to fix it. The initiative “goes unbelievably far,” said Senior Assistant Atty. Gen. Herschel Elkins. “Throwing the baby out with the bathwater is not the best thing. There are substantial problems with the proposal.”

Elkins says the law has been used successfully to protect the public from polluters, unscrupulous financing schemes and religious discrimination. Other public officials note that the law helped jump-start civil litigation against tobacco companies, which ultimately resulted in a multibillion-dollar settlement for taxpayers.

With hefty contributions pouring in, the measure is shaping up to be among the most costly ballot fights in recent memory.

After two years of failed efforts to overhaul the law in the Legislature -- including 14 unsuccessful bills -- business groups are urgently collecting cash to win. They say they are prepared to spend tens of million of dollars if necessary.

“Companies are budgeting to fix the problem, regardless of the cost,” said John Sullivan, a co-chairman of the campaign to pass the measure, Californians to Stop Shakedown Lawsuits.

Businesses say they get shaken down all the time under the current law.

“It’s extortion. It’s like Chicago in the 1920s,” said Peter K. Welch, president of the California Motor Car Dealers Assn. “The window breakers out there find any unlawful act, and they get you in a hammerlock.... It winds up being cheaper to settle than to defend.”

Car dealers, who often complain of being hounded by lawsuits saying that the fine print is too small in their newspaper ads or that those ads use too many abbreviations, have so far raised the most money: $4.5 million.

Large corporations such as Microsoft, Blue Cross of California, the State Farm Group, Bank of America Corp. and Southern California Edison Co. have contributed much of the rest.

Kaiser says the advertising case wasn’t what it had in mind when it wrote a campaign check. What really annoys the HMO is a case claiming that it broke the law by splitting pills and giving them to patients. Kaiser says patients still got the prescribed dosages, consumer groups endorsed the practice and plaintiffs acknowledged that nobody got hurt.

“We have spent over $1 million in enrollee premiums defending this,” said Michael Hawkins, a company attorney. “We do not think it is appropriate.”

Although 16 other states have similar consumer protection laws, only California’s allows people to sue companies that have not directly caused them damage. A California consumer group, for example, did not have to prove that anyone had been harmed when it successfully sued to stop a supermarket chain from pushing back expiration dates on meat.

Without the existing law, only government prosecutors would have been able to take legal action in that situation.

As proposed, the initiative would limit lawsuits to people who can show they have lost money or property. It also would make it more difficult for individuals to file lawsuits aimed at getting sweeping court orders to halt particular business practices statewide.

“What we are saying is, have a legitimate reason to sue,” said Michael Chee, spokesman for Blue Cross of California, which has donated $250,000 to fund the measure. The company has been sued under the consumer protection law at least four times in recent years. The charges have included deceptively increasing members’ premiums and underpaying doctors and hospitals.

Alan Zaremberg, president of the California Chamber of Commerce, said passage of the initiative wouldn’t keep cases with merit from going forward under other laws.

“If there is a problem, you can call the district attorney,” he said. “If they are selling meat that is out of date, he can go stop it.”

But several current and former prosecutors scoff at Zaremberg’s statement.

“The attorney general’s office and the district attorney do not have enough staff -- and never will -- to solve all the problems of deceptions in business practices,” Elkins said.

Public interest groups say the changes proposed by the initiative would be a disaster.

Environmentalists cite several cases in which they have used the law to stop polluters before they could cause harm. People should not have to wait until they are hurt to take action, they say.

The Environmental Law Foundation, an Oakland-based advocacy group, says there have been hundreds of pollution and natural-resource cases that could not have been filed under the initiative.

Among them is a lawsuit an environmental health activist group filed that resulted in the removal of tobacco billboard ads from within 1,000 feet of schools. Another case forced bottled-water companies to install filtration systems to remove illegal levels of arsenic.

And a case against major oil companies spurred the cleanup of leaking underground gas station tanks that were polluting groundwater.

So far, the oil giant BP has contributed $50,000 to the initiative.

Other advocacy groups have used the law to stop companies from marketing sugary children’s cereals as healthful. They have sued large insurance companies for reducing earthquake coverage without providing adequate notice to policyholders. And they say the law has shed light on car dealers and finance companies that scammed minority customers into paying excessive rates and illegally repossessed cars.

“Unless you have a law like this, those nightmares continue for thousands of people unabated,” said Andrew Ogilvie, a consumer attorney in San Francisco.

Los Angeles Mayor James K. Hahn, a former prosecutor, has warned that the initiative would lead to “the erosion of critical public safety and civil rights protections” and cost taxpayers more money because prosecutors would need to take on cases now being handled by private groups.

Hahn, in a recent letter to the California League of Cities, noted that if the measure had been in effect, lawsuits such as the one charging R.J. Reynolds with using its Joe Camel advertising campaign to attract children to smoking would not have been filed. Settlements from such cases resulted in a multibillion-dollar payout for cities and counties, he said.

Some legal experts say there is an easier way to end abuses of the law without keeping legitimate cases out of court. They say all it takes is a little more discipline from the courts, state officials and the bar association.

Indeed, three lawyers accused by Atty. Gen. Bill Lockyer of filing thousands of bogus cases against restaurants and auto repair shops gave up their law licenses.

Robert Fellmeth of the Center for Public Interest Law at the University of San Diego has been pushing lawmakers to pass a bill that would provide prosecutors with resources to more aggressively police use of the law and to crack down on abuses. His solution also would involve judges reviewing settlements to ensure that they are just.

“The problem is not that difficult to solve,” Fellmeth said.

But a negotiated solution has yet to gain traction in the Legislature. Analysts say neither side has been willing to give. Many business groups want nothing short of the initiative, and some groups that file suits under the law won’t accept any changes.

With the election season looming, both sides hope that Gov. Arnold Schwarzenegger will step in on their side.

The Republican governor, who ran in a recall election on a jobs and pro-business agenda, recently signaled sympathy for the initiative by telling a chamber of commerce audience that he opposes “shakedown lawsuits.” His office, however, stresses that the governor has not yet officially declared his position on the measure.

Schwarzenegger’s own Environmental Protection Agency secretary used the law in the mid-1990s to file a suit against an El Segundo oil refinery. Environmentalists hope Terry Tamminen will persuade his boss to broker a legislative agreement that will take the steam out of the initiative.

Michael Schmitz, director of CLEEN, an environmental law office in Oakland, says the issue gives the governor an opportunity to bolster his image as an effective pragmatist by negotiating a settlement.

The key is giving him a “way to be both green and pro-business,” Schmitz said.

In Chula Vista, meanwhile, the mother of a disabled child is watching it all unfold closely. Kathy Olsen was the lead plaintiff in the case that forced the Kaiser Permanente HMO to disclose a system of bonuses for medical groups that keeps costs down.

The case was about a company not being truthful with the public, she says, and not about shaking down a business. “Everything isn’t money or property,” Olsen said.

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(BEGIN TEXT OF INFOBOX)

What Proposition 64 would do

Proposition 64 would revise the state’s consumer protection laws to make it more difficult to sue businesses. Here are changes under the measure:

* Attorneys would need to have a client who had been harmed by a business before they could file a lawsuit under the California Business and Professions Code Section 17200.

* It would be more difficult for consumer and environmental groups to challenge in court what they contend are deceptive and dangerous corporate practices, including misleading advertising. Currently, lawyers do not have to prove that anyone was injured before filing a lawsuit.

Business groups say:

* The measure is needed because attorneys are filing too many frivolous suits in the hopes of quick settlements.

Consumer groups say:

* Proposition 64 would eliminate a valuable tool for keeping businesses honest and products safe.

Top contributors

More than $7 million has been raised to support Proposition 64, and proponents say they are prepared to raise millions more. (Opponents have raised $150,000, all from the Foundation for Taxpayer and Consumer Rights In Sacramento.) Here are top contributors to the coalition behind the measure:

1. California Motor Car Dealers Assn., Sacramento $500,000

2. Alliance of Automobile Manufacturers, Washington $250,000

3. Blue Cross of California, Thousand Oaks $250,000

4. California Assn. of Realtors, Los Angeles $200,000

5. Bank of America, Charlotte, N.C. $100,000

6. Citigroup, Washington $100,000

7. Countrywide Home Loans, Simi Valley $100,000

8. Kaiser Foundation Health Plan, Sacramento $100,000

9. Intel Corp., Hillsboro, Ore. $100,000

10. Oracle Corp., Redwood City $100,000

11. Microsoft, Redmond, Wash. $100,000

12. State Farm Mutual Automobile Insurance, Bloomington, Ill. $100,000

13. Southern California Edison, Rosemead $100,000

Source: California secretary of state

Graphics reporting by Evan Halper and Marc Lifsher