UNFAIR COMPETITION CLAIMS AND BUSINESS AND PROFESSIONS CODE SECTION 17200

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1 UNFAIR COMPETITION CLAIMS AND BUSINESS AND PROFESSIONS CODE SECTION Marc M. Seltzer Partner Susman Godfrey L.L.P. Los Angeles, CA USC Law School and L.A. County Bar Corporate Law Departments Section 2003 Institute for Corporate Counsel Marriott Downtown March 20, 2003

2 UNFAIR COMPETITION CLAIMS AND BUSINESS AND PROFESSIONS CODE SECTION by Marc M. Seltzer I. OVERVIEW OF THE CONDUCT THAT IS ACTIONABLE UNDER THE UNFAIR COMPETITION LAW AND THE REMEDIES PROVIDED BY THE LAW Sections to of the California Business & Professions Code, known as California s Unfair Competition Law (the UCL ), provide statutory remedies against any person who engages in any unlawful, unfair or fraudulent business act or practice or unfair, deceptive, untrue or misleading advertising, as well as any act prohibited by Chapter 1 (commencing with section 17500) of Part 3 of Division 7 of the Business & Professions Code. 1 The UCL extends to any person who engages, has engaged, or proposes to engage in unfair competition. 2 Thus, the UCL extends to conduct which may be a single act, as opposed to an ongoing pattern of conduct. As explained below, the conduct made actionable under the UCL action is quite broad. Further, the UCL is written in the disjunctive. Virtually any act or practice that may be found to be illegal under some other federal or state law can satisfy the unlawful business act or practice prong of The scope of what may be found to be an unfair business act or practice is similarly extensive. And to be found to be a fraudulent business act or practice, it 1 Cal. Bus. & Prof. Code Cal. Bus. & Prof. Code

3 is not necessary for a plaintiff to prove that he or she relied on the false or misleading statement, nor must the statement have been made with the intent to deceive or defraud. Indeed, a UCL plaintiff need not show that he or she was actually injured by the conduct in question. California courts may look to decisions of the FTC interpreting section 5 of the Federal Trade Commission Act as more than ordinarily persuasive in matters involving section 17200, [i]n view of the similarity of language and obvious identity of purpose of the two statutes. 3 There is, however, a critical difference between the UCL and the FTC Act: While the UCL provides for an express private right of action for violation of the UCL, no such private right of action exists under the FTC Act. Under the UCL, a private party may bring an action for equitable relief, including restitution, acting for the interests of itself, its members or the general public. 4 The UCL also provides for enforcement by public officials. The Attorney General, or any district attorney or county counsel authorized by agreement with the district attorney or any qualifying city attorney may bring an action for equitable relief and for civil penalties, including civil penalties for violating an injunction. 5 A. Unlawful Business Practices The UCL makes actionable anything that can properly be called a business practice and 3 See People ex rel. Mosk v. National Research Co. of California (1962) 201 Cal.App.2d 765, ; Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal.4th 163, Cal. Bus. & Prof. Code Id. 3

4 that at the same time is forbidden by law. 6 Under the unlawful business act or practice prong, any business act or practice which is unlawful under any state or federal antitrust laws, state or federal civil or criminal laws, or almost any other law or regulation, including decisional law, can trigger liability under the UCL. 7 In effect, the UCL borrows violations of other laws and treats these violations as unlawful acts or practices independently actionable under the UCL. 8 However, a UCL action cannot be brought if the Legislature has either expressly declared the challenged act or practice to be lawful or has created a safe harbor which clearly permits the conduct or limits actions to specified proceedings. 9 B. Unfair Business Practices Even if an activity is not unlawful, it may still be unfair within the meaning of section In a non-competitor case, the test of whether an act or practice is unfair involves an examination of [that practice s] impact on its alleged victim, balanced against the reasons, 6 Barquis v. Merchants Collection Ass n of Oakland, Inc. (1972) 7 Cal.3d 94, 113; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1266; Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, Saunders v. Superior Court (1994) 27 Cal.App.4th 832, , citing People v. McKale (1979) 25 Cal.3d 626, Farmers Ins. Exch. v. Superior Court (1992) 2 Cal.4th 377, 383; Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal.4th 163, Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal.4th 163, 182; Schnall v. The Hertz Corp. (2000) 78 Cal.App.4th 1144 (a car rental company s practice of charging refueling fees for cars returned with less than full gas tanks could not be an unlawful or unfair business practice because the charges were authorized by statute, but the failure adequately to disclose the amount of the charges could nonetheless be actionable as an unfair or deceptive act or practice). 10 Cel-Tech, 20 Cal.4th at

5 justifications and motives of the alleged wrongdoer. 11 In such case, the court must weigh the utility of the defendant s conduct against the gravity of the harm to the alleged victim In People v. Casa Blanca Convalescent Homes, Inc. (1984) 159 Cal.App.3d 509, 530, the court applied guidelines for establishing unfairness adopted by the FTC which had been cited with approval by the United States Supreme Court in FTC v. Sperry & Hutchinson Co. (1972) 405 U.S. 233, 244, n.5. In Sperry & Hutchinson, the Supreme Court concluded that an unfair business practice is one which offends an established public policy or when the practice is immoral, unethical, oppressive, or unscrupulous or injurious to consumers. While California appellate courts have subsequently applied this test in a number of contexts, in Cel-Tech Communications, Inc. the California Supreme Court held that in private actions brought by a business against its competitors, the word unfair... means conduct that threatens an incipient violation of an antitrust law, or violate the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition. 13 C. Fraudulent Business Practices The UCL also prohibits fraudulent business acts or practices. For conduct to be a violation of the fraudulent business act or practice prong of the UCL, it is necessary only [to] show that members of the public are likely to be deceived by the challenged business 11 Motors, Inc. v. Times Mirror Co. (1980) 102 Cal.App.3d 735, 740; see also Saunders v. Superior Court (1994) 27 Cal.App.4th 832, Id Cal.4th at

6 practice. 14 Allegations that the plaintiff or members of the public were actually deceived, relied upon the fraudulent practice, or sustained any damage are not necessary to maintain a claim for a violation under the UCL. 15 A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable under [the UCL]. 16 D. Unfair, Deceptive, Untrue or Misleading Advertising The UCL also proscribes deceptive, untrue or misleading advertising, and incorporates violations of Bus. & Prof. Code 17500, et seq., which prohibit false or misleading advertising. In 2002, the California Supreme Court held in Kasky v. Nike, Inc., (2002) 27 Cal.4th 939, , that when a corporation, to increase sales and profits, makes public statements defending labor practices and working conditions, those public statements are commercial speech that may be regulated to prevent consumer deception. The court did not reach the issue of whether that speech was false or misleading under the UCL. The United States Supreme Court has agreed to review this decision Bank of West v. Superior Court (1992) 2 Cal.4th 1254, 1267, quoting Chern v. Bank of America (1976) 15 Cal.3d 866, 876; Comm. on Children s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 211; see also Massachusetts Mutual Life Ins. Co. (2002) 97 Cal.App.4th 1282, Comm. on Children s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 211; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, ; Day v. AT&T Corp. (1998) 63 Cal.App.4th 325, 332; State Farm Fire & Cas. Co. v. Superior Court (1996) 45 Cal.App.4th 1093, Day v. AT&T Corp. (1998) 63 Cal.App.4th 325, See Nike, Inc. v. Kasky, 154 L.Ed.2d 767 (January 10, 2003). 6

7 E. Remedies The remedial provisions of the UCL are set forth in sections and Section provides, in pertinent part, that [t]he court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition. 18 Section provides that a public prosecutor may sue for civil penalties. Restitution may be ordered compelling a defendant to return money or property acquired through unfair business conduct to the individuals from whom the money or property was obtained. 19 Under section 17203, a court s order may encompass broader restitutionary relief, including disgorgement of all money so obtained even when it may not be possible to restore all of that money to direct victims of the practice. 20 In Cortez v. Purolator Air Filtration Prods. Co., the California Supreme Court held that unpaid wages ordinarily recoverable as damages under the Labor Code may also be a proper subject for restitution, thus making them recoverable under the UCL See also Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., supra, 20 Cal.4th at 179; see 17203, 17206; ABC Int l Traders, Inc. v. Matsushita Elec. Corp. of America (1997) 14 Cal.4th 1247, Kraus v. Trinity Management Services, Inc., (2000) 23 Cal.4th 116, Id. at (2000) 23 Cal.4th

8 F. The Fluid Recovery in UCL Class Actions Fluid recovery allows distribution of recoveries to their next best use typically when it is either impossible or impractical to return restitutionary or disgorged funds to direct victims. The California Supreme Court held in Kraus v. Trinity Mgmt. Servs. that fluid recovery is specifically disallowed in a UCL representative action not certified as a class action. 22 Where a class has properly been certified, however, a plaintiff in a UCL action may seek disgorgement of unlawful profits into a fluid recovery fund. 23 II. CIVIL PENALTIES UNDER THE UNFAIR COMPETITION LAW Section of the Business and Professions Code provides for a civil penalty not to exceed $2,500 for each violation of the UCL. Section provides for an additional penalty for each violation of the UCL perpetrated against senior citizens or disabled persons. Civil penalties are not available to private plaintiffs. Recovery is paid to the State General Fund or to the county or city treasuries. The California courts have adopted a per victim test for determining the number of violations and consequently the penalty to be imposed in a given case. 24 For example, in People v. Morse, misrepresentations to at least 4,000,000 persons through mailings sent by an attorney soliciting clients were held to constitute 4,000,000 separate violations of the UCL. 25 Section 22 Kraus v. Trinity Mgmt. Servs., Inc. (2000) 23 Cal.4th 116, Corbett v. Superior Court (2002) 101 Cal.App.4th See, e.g., People v. Morse (1993) 21 Cal.App.4th 259, Cal.App.4th 259, (review denied, May 17, 1994, cert. denied, Oct. 3, 1994). 8

9 17207 of the UCL provides for additional penalties of up to $6,000 for each intentional violation of an injunction issued under section Bus. & Prof. Code 17207(a). 9