Jack Skip McCowan, Jr., is a partner in the San Francisco office of Gordon & Rees and is a member and former chair of the Advocacy, Practice and Procedure Committee. Andrew Davis is an associate in the same firm. The IADC September, 2001 No. 2 In This Issue The International Association of Defense Counsel is the oldest and most prestigious international organization of attorneys representing corporations and insurers. Advocacy, Practice & Procedure Committee California s Unfair Competition Law and Its Potential Impact on All Companies Doing Business in California 1 By Jack B. McCowan, Jr. & Andrew G. Davis Plaintiffs lawyers in California, and in a number of other states, have recently turned to broad unfair competition statutes to sue companies for alleged wrongs that were traditionally addressed by product liability suits. Like all states, California has a consumer protection law that prohibits unfair competition and deceptive trade practices. However, California s law is unique in that it is unusually broad in scope and permits just about anyone to bring a claim against a company for being treated unfairly. California s Unfair Competition Law (UCL), codified at California Business and Professions Code 17200, et seq, prohibits any unlawful, unfair, or fraudulent business act. Complaints filed against companies under the UCL are often as ambiguous as the statute itself. If recent trends in California are any indication, the UCL has the potential to open the floodgates for plaintiffs lawyers seeking targets for their claims of unfair business practices. It is imperative that all companies be prepared to defend against such charges. This newsletter provides a general overview of the UCL, and seeks to heighten the awareness of defense trial lawyers about the possibility that plaintiffs lawyers will continue to broaden the scope of the types of alleged wrongs subject to these problematic claims. Background and Overview California s UCL was first enacted in 1933. It was modeled after the federal FTC Act, 15 U.S.C. 45(a) which prohibits unfair trade practices. Originally codified at Civil Code 3369, it became International Association of Defense Counsel One North Franklin, Chicago, IL 60606 Phone: (312) 368-1494 Fax: (312) 368-1854 Email:nchase@iadclaw.org www.iadclaw.org
Business and Professions Code 17200, et seq. in 1977. In 1992, the legislature amended section 17200 to expand the definition of unfair competition to include any unlawful, unfair, or fraudulent business act or practice. 2 Unfair Competition Defined The term unfair competition has a broad definition in California. 3 Historically, the tort of unfair business competition required a competitive injury. However, the language of section 17200 demonstrates a clear intent by the legislature to protect consumers as well as competitors by its final clause, permitting any member of the public to sue on his or her own behalf or on behalf of the public generally. In other words, section 17200 is not limited to anticompetitive business practice but is also directed toward the right of the public to protection from fraud and deceit. Further, the UCL s prohibition of unfair competition is not restricted to deceptive or fraudulent conduct but extends to any unlawful business practice. The UCL also includes a false advertising provision, which prohibits the dissemination of false, misleading or deceptive advertising. Business & Professions Code section 17500, et seq., prohibits the dissemination in any advertising media of any statement concerning real or personal property offered for sale which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading. There is an overlap in these provisions and any violation of the false advertising law necessarily violates the unfair competition law. 4 The primary purpose of these statutes is to protect the public from unscrupulous business practices. The UCL proscribes any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by 17500. However, the broad scope and ambiguous definition of unfair competition has the 2 potential to lead to frivolous litigation against companies that the legislature never intended. Indeed, courts in California have struggled to clarify what constitutes unfair competition for purposes of the UCL. The test of whether a business practice is unfair involves an examination of [that practice s] impact on its alleged victim balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weigh the utility of the defendant s conduct against the gravity of the harm to the alleged victim (citations).... 5 It should be emphasized that the fraudulent conduct addressed in the UCL bears little resemblance to common law fraud or deception. The test is whether the public is likely to be deceived. Misleading advertising under the UCL is broadly defined to include virtually any statement made in connection with the sale of goods or services as opposed to business practices. A violation of the UCL, unlike common law fraud, can be shown even if no one was actually deceived or relied upon the fraudulent practice or sustained any damage. A violation requires only a showing that members of the public are likely to be deceived. Remedies The most common remedies sought under the UCL are injunctive relief and restitution/disgorgement of illegal business profits. The UCL places a limit on some of the remedies available to plaintiffs for example, there is no recovery for damages. 6 However, section 17200 authorizes injunctive relief and restitution, which has been interpreted as including disgorgement of ill gotten gains or unlawful profits. 7 The UCL authorizes orders that are necessary to prevent practices that constitute unfair competition and to make orders or judgments as may be necessary to restore to persons in interest any money or property
acquired by unfair competition. An order that a defendant disgorge money obtained through an unfair business practice may include a restitutionary element, but is not so limited. Such orders may compel a defendant to surrender all money obtained through an unfair business practice even though not all is to be restored to the persons from whom it was obtained or those claiming under those persons. Required Elements of a UCL Claim To state a cause of action under the UCL for injunctive relief, it is necessary only to show that members of the public are likely to be deceived. 8 Allegations of actual deception, reasonable reliance, and damage are unnecessary. 9 This is a remarkably easy standard for plaintiffs merely presenting evidence that members of the public are likely to be deceived without having to establish actual deception, reliance or damage. When compared to the elements of a traditional negligent failure to warn claim, there is no doubt that plaintiffs will have an easier time establishing a UCL claim. Who Gets Sued Under the UCL? The UCL in California has been used for a broad range of issues in a number of different industries. Plaintiffs in California have asserted claims alleging unfair or fraudulent business practices in a variety of contexts, including: business practices of pharmaceutical and medical device companies (Caro v. Proctor & Gamble Co. 18 Cal.App.4 th 644; Lavie v. Proctor & Gamble Co., Case No. 974757, San Francisco County Superior Court; Intervention, Inc. v. Becton- Dickinson, Ansell Healthcare, et al. pending in San Francisco Superior court) marketing practices (Stop Youth 3 Addiction, Inc. v. Lucky Stores (1998) 17 Cal.4 th 553) insurance practices (State Farm Fire & Casualty v. Superior Court (1996) 45 Cal.App.4 th 1093) employment practices (Hudgins v. Neiman Marcus Group (1995) 34 Cal.App.4 th 1109) health care (Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4 th 632) alleged criminal conduct (People v. E.W.A.P., Inc. (1980) 106 Cal.App.3d 315) environmental protection (Hewlett v. Squaw Valley Ski Corp. (1997) 54 Cal.App.4 th 499) consumer transactions (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383) debt collection practices (Yu v. Signet Bank (1999) 82 Cal.Rptr.2d 302) Recent California Decisions The recent case of Kraus v. Trinity Management Services (2000) 23 Cal.4 th 116, illustrates how plaintiffs can avoid the legal hurdles of class actions but can use the UCL to sue on behalf of others. In Kraus, four tenants sued a landlord for collecting illegal deposits. They named themselves and 4,500 current and former tenants in the suit. The lawsuit was never certified as a class action. The court found for the four plaintiffs and awarded almost one million dollars in restitution. Because no class was ever certified, the other 4,500 tenants can now potentially sue the same landlord over the same issue. The court in Kraus did not decide how res
judicata fits into this process. The court stated that it may be appropriate for the court to condition payment of restitution to beneficiaries of a representative UCL action on execution of acknowledgment that the payment is in full settlement of claims against the defendant, thereby avoiding any potential for repetitive suits on behalf of the same persons or dual liability to them. 10 This seems to leave the door open for a new claim and lawsuit by a person who, despite a defendant s reasonable effort to contact, does not learn of the restitution opportunity until after the court-supervised process has ended and before the statute of limitations has run. In Cortez v. Purolator Air Filtration (2000) 23 Cal.4 th 163, the court explained that a UCL action is an equitable action by means of which a plaintiff may recover money or property obtained from the plaintiff or persons represented by the plaintiff through unfair or unlawful business practices. It is not an allpurpose substitute for a tort or contract action. Damages are not available under section 17203. However, 17203 provides courts the authority to make a restitutionary order. That section provides: Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. The 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. As the court in Cortez explained, section 17203 authorizes the court to fashion remedies to prevent, deter, and compensate for unfair business practices. In addition to injunctions, it 4 authorizes orders that are necessary to prevent practices that constitute unfair competition and to make orders or judgments as may be necessary to restore to persons in interest any money or property acquired by unfair competition. Unfair Competition Laws in Other States Other states have similar laws that prohibit unfair or deceptive business practices. It is unclear at this point whether unfair business practice statutes in other states will have the same breadth as the California UCL. Texas, for example, has the Texas Deceptive Trade Practices-Consumer Protection Act that prohibits false, misleading, or deceptive acts or practices in the conduct of any trade or business. Tex. Bus. & C. Code Ann 17.46(a). Under this statute, a consumer who has suffered economic damages or mental anguish as a result of a false, misleading, or deceptive business practice or any unconscionable action or course of action by any person may recover damages. 17.50(a)(1)-(3). Alabama has an unfair competition statute that prohibits deceptive acts or products in the conduct of any trade or commerce. Ala.Code 8-19-5. This includes misrepresentation as well as any other unconscionable, false, misleading, or deceptive act or practice in the conduct of trade or commerce. Ala.Code 8-19-5 (23). Illinois also has a Consumer Fraud and Deceptive Business Practices Act (815 Ill. Comp. Stat. Ann. 505) and a Uniform Deceptive Trade Practices Act. Claims for unfair trade practices may be asserted under both statutes. The Uniform Deceptive Trade Practices Act defines a deceptive trade practice as one of twelve types of conduct including misrepresentation and creation of customer confusion. 815 Ill.Comp.St.Ann.505/2. There are about a dozen other states with similarly broad statutes.
Conclusion The UCL has been the law in California for many years. It has protected consumers and businesses by allowing district attorneys to go after companies that mislead consumers to gain an advantage in the marketplace. Unfortunately, in recent years this law has been abused by attorneys motivated by the prospect of courtordered fees who have filed suits where no consumer has been harmed. All defense counsel in states that have similar unfair competition laws should be vigilant since we can expect plaintiffs counsel to advance these claims whenever possible. ENDNOTES 1. This is an abridged and revised edition of an article presented at the December, 2000 American Conference Institute s Drug and Medical Device Seminar. Many of the footnotes have been removed from this edition. If you would like a copy of the full text you can contact Mr. McCowan by e-mail at jmccowan@gordonrees.com. 3. Committee on Children s Television, Inc. v. General Foods Corporation (1983) 35 Cal.3d 197, 209. 4. See, e.g., Lavie v. Proctor & Gamble Co., San Francisco Superior Court Case No. 974757 Notice of Intended Decision. 5. State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4 th 1093, 1103-1104, quoting People v. Casa Blanca Convalescent Homes, Inc. (1984) 159 Cal.App.3d 509, 530. 6. See Bank of the West v. Superior Court (1992) 2 Cal.4 th 1254, 1266. 7. Id. 8. Committee on Children s Television, supra, at 211. 9. Id. 10. Kraus at 138-139. 2. Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4 th 553, 570. 5
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