MCLE Self Study
Edited by Barbara Kate Repa
The New Unfair Competition Rules
By Robert J. Odson and Yen N. Nguyen
Although California's unfair competition law harkens back to 1933, the statute has become increasingly controversial. Since at least 1992, the reach of the unfair competition law has greatly expanded because of legislative amendments and evolving case law. As a result, the volume of cases brought under the statute and the stakes raised in them have increased significantly.
Though the law's expansion was at least partially motivated by consumer-protection concerns, critics asserted that the breadth of the statute, coupled with the possibility of recovering attorneys fees, resulted in frivolous lawsuits. These concerns were dramatically illustrated in widely publicized reports that a few law firms had exploited the unfair competition law by filing hundreds, perhaps thousands, of lawsuits against small businesses in particular industries, such as restaurants and auto-repair shops. The claims were for minor infractions on behalf of corporations that appeared to have had improper financial ties to the law firms that filed the lawsuits. As a result, a coalition of business interests, including the California Chamber of Commerce, sought to amend and restrict the unfair competition law by placing Proposition 64 on the ballot.
This article provides an overview of how the recent passage of Prop. 64 changes the unfair competition law and how these changes will affect claims brought under the statute.
AN OVERVIEW OF THE LAW
California's unfair competition law prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." (Cal. Bus. & Prof. Code § 17200.) And under this law, a practice can be prohibited as unfair or deceptive even if not unlawful, and vice versa. (Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163 (1999).) For example, a plaintiff's allegations that a defendant used incomplete and misleading illustrations to sell universal life insurance policies may be actionable under the unfair competition law absent any claim that such conduct violated any regulation or statute. (Wilner v. Sunset Life Ins. Co., 78 Cal. App. 4th 952 (2000).)
An unlawful business practice can be "anything that can properly be called a business practice and that at the same time is forbidden by law." (Summit Tech., Inc. v. High-Line Med. Instruments Co., 933 F. Supp. 918 (C.D. Cal. 1966) and Wilner, 78 Cal. App. 4th 952.)
This prong of the unfair competition law allows a plaintiff to enforce a broad array of state and federal statutes, including consumer-protection statutes (Walker v. Countrywide Home Loans, Inc., 98 Cal. App. 4th 1158 (2002) (Cal. Civ. Code § 2954.4); antidiscrimination statutes (Reese v. Wal-Mart Stores, Inc., 73 Cal. App. 4th 1225 (1999), (Unruh Civil Rights Act, Cal. Civ. Code §§ 51-51.4)); criminal statutes (Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998), (Cal. Penal Code § 308); and environmental statutes (Hewlett v. Squaw Valley Ski Corp., 54 Cal. App. 4th 499 (1997), (Cal. Pub. Res. Code § 4511).)
Unless preempted by federal law, any unlawful business practice, including violations for which there is no direct private right of action, may be redressed by a private action under section 17200. The underlying statute making the practice unlawful can be either civil or criminal and does not necessarily have to be related to unfair competition. (Stop Youth Addiction, 17 Cal. 4th 553 (1998).) The unfairness prong of the offense is broad and ambiguous, without a reliable or predictable standard. (See, Joshua D. Taylor, Why the Increasing Role of Public Policy in California's Unfair Competition Law Is a Slippery Step in the Wrong Direction, 52 Hastings L.J. 1131, 1134 (2000-2001).) In consumer cases, courts apply a balancing test to determine what constitutes an unfair business practice. The test involves examining the practice's impact on its alleged victim, balanced against the defendant's reasons, justifications, and motives. (Searle v. Wyndham Int'l, Inc., 102 Cal. App. 4th 1327 (2002); rehearing denied, 2002 Cal. App. LEXIS 4944 (2002).) Business practices that California courts have found to be "unfair" include charging excessive fees for bounced checks (Ballard v. Equifax Check Serv., Inc., 158 F. Supp. 2d 1163 (E.D. Cal. 2001)); targeting minors with cigarette advertising (Mangini v. R.J. Reynolds Tobacco Co., 7 Cal. 4th 1057 (1994); and bringing collection actions against debtors in distant and inappropriate forums (Yu v. Signet Bank/Virginia, 69 Cal. App. 4th 1377 (1999)).
Finally, under the fraudulent prong of the unfair competition law, "the burden of proof is modest." (Prata v. Superior Court, 91 Cal. App. 4th 1128 (2001).) Fraudulent business practices can be found merely upon a showing that "members of the public are likely to be deceived." For example, in one case, a court found that there was a substantial showing that the public would be deceived by a "Same-As-Cash" credit program suggesting that no interest would be charged for 90 days whereas consumers were actually required to pay interest if they missed any payments during the 90-day period. (Prata, 91 Cal. App. 4th at 1144.) In these cases, the common law elements of fraud-such as actual deception, reliance, and damages-are not necessary. (Bank of the West v. Superior Court, 833 P.2d 545, 553 (Cal. 1992).)
TEETH FOR CONSUMER PROTECTION
Because of its breadth, the unfair competition law is arguably the toughest consumer law in California. The language of the statute is intentionally broad so as to encompass all fraudulent or deceptive practices and to enable courts to deal with wrongful conduct, regardless of how inventive the scheme. (People ex rel. Mosk v. Nat'l Research Co., 201 Cal. App. 2d 765 (1962).)It was designed to enjoin ongoing wrongful business conduct in whatever context it might occur, and it protects both consumers and business competitors. (Stoiber v. Honeychuck, 101 Cal. App. 3d 903 (1980).) In 1992 the scope and use of the unfair competition law increased exponentially when the Legislature amended section 17200 to include single unlawful acts and eliminated the ongoing-conduct requirement. (See, Klein v. Earth Elements, Inc., 59 Cal. App. 4th 965 at 969, n. 3 (1997) (ruling that the new language added by the amendment expressly eliminated the ongoing-conduct requirement).
Before Prop. 64 was passed, the unfair competition law contained a unique standing provision that arguably left the statute open to abuse and was a hotly contested issue in the state. Under that provision, any private party could bring an action so long as it was acting "for the interests of itself, its members, or the general public." (Cal. Bus. & Prof. Code § 17204.) The reference to "the general public" was interpreted as authorizing private citizens to file actions on behalf of others without suffering any personal harm and without complying with the procedural requirements for class actions. (Kraus v. Trinity Mgmt. Serv., Inc., 23 Cal. 4th 116, 137-38 (2000).)
Additionally, while not explicitly provided for in the statute, courts have discretion to grant attorneys fees pursuant to the private attorney general's fee statute. (Cal. Code Civ. Proc. § 1021.5.) The breadth of the act, the ability of private parties to bring representative actions, and the ability to recover attorneys fees resulted in a proliferation of lawsuits alleging unfair competition, many of which were clearly frivolous.
Allowing private individuals to bring lawsuits on behalf of the general public without requiring a class certification also raised procedural problems concerning whether judicial decisions in section 17200 cases conferred finality. As Robert C. Fellmeth, a leading commentator on unfair competition law, points out, "The law is unclear as to when an action by a public or private litigant purporting to represent all consumers has res judicata effect." (Robert C. Fellmeth, Unfair Competition Act Enforcement by Agencies, Prosecutors, and Private Litigants: Who's on First?, 15 Cal. Reg. L. Rep. 1, 8 (1995)). As a result, a defendant in a section 17200 case brought by the plaintiff in a representative capacity was potentially subject to a multiplicity of lawsuits concerning the same underlying conduct.
THE CURE FOR SOME EVILS
Prop. 64 seeks to address some of the problems that have arisen under California's unfair competition law. Specifically, it restricts who can bring unfair competition lawsuits by limiting an individual's right to sue to situations in which that individual was actually injured by, and suffered financial or property loss because of, an unfair business practice. It also requires representative claims brought by private parties to comply with procedural requirements that apply to class actions and authorizes only the California attorney general or local government prosecutors to sue on behalf of the general public to enforce unfair business competition laws. And, finally, it limits the use of monetary penalties recovered to enforcement of consumer-protection laws.
A LOOK UNDER THE NEW HOOD
There are varying mechanisms by which Prop. 64 seeks to accomplish these changes to the unfair competition law. Specifically, Prop. 64 replaced the text in section 17204, which provided that "any person acting for the interest of itself, its members or the general public" can bring an action for relief, with the proviso that only a person "who has suffered injury in fact and has lost money or property as a result of such unfair competition" may bring an action for relief. Prop. 64 also adds a clause to sections 17206(c) and 17536, specifying that civil penalties for violating the unfair competition law "shall be for the exclusive use by the Attorney General, the district attorney, the county counsel, and the city attorney for the enforcement of the consumer protection laws."
In addition, Prop. 64 amends section 17535, which currently allows actions for injunctions by "any person acting for the interest of itself, its members or the general public," so as to only allow action for injunctions by "any person who has suffered injury in fact and has lost money or property as a result of a violation of this chapter. Any person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of this section and complies with section 382 of the Code of Civil Procedure, but these limitations do not apply to claims brought under this chapter by the Attorney General, or any district attorney, county counsel, city attorney, or city prosecutor in this state."
The amendments to the unfair competition law set forth in Prop. 64 took effect on November 3, 2004-the day after the election. (See, Cal. Const., art. II, § 10(a).) A significant issue yet to be resolved by the courts is whether Prop. 64 applies to actions under the unfair competition law filed before November 3, 2004. As a general rule, a new statute operates prospectively, unless the language of the proposition plainly indicates an intent that the statute have retroactive effect. (Evangelatos v. Superior Court, 44 Cal. 3d 1188 (1988).) Prop. 64 is silent on whether it applies retroactively.
Although the Prop. 64 amendments will certainly have an impact on the number and scope of actions filed under the unfair competition law, they will not affect claims brought by the attorney general or other government law enforcement agencies.
Moreover, under the unfair competition law as amended, private citizens and business competitors harmed by proscribed conduct will still be able to bring claims. However, litigants bringing such claims will be required to demonstrate that they "suffered injury in fact and lost money or property as a result of such unfair competition." Parties defending such claims will use the various tools of discovery in an effort to refute claims of "injury in fact" and will increasingly avail themselves of dispositive motions, such as summary-judgment and summary-adjudication motions, where the plaintiff cannot establish that he or she was actually injured.
The number, breadth, and exposure of claims under the unfair competition law will be reduced as claimants are required to comply with the requirements of a traditional class action. These class action requirements, set forth in section 382 of the Code of Civil Procedure, require elements such as number involved, commonality, and adequacy. This class action requirement should eliminate the practice of prosecuting a representative action under the unfair competition law as an alternative to a traditional class action.
As representative actions under the unfair competition law are curtailed, the scope of discovery in a typical case may be reduced. Although California law typically permits liberal discovery as to matters relevant to a cause of action, the scope of discovery is framed by the pleadings. The elimination of "general public" actions should limit the breadth and expense of discovery in an unfair competition law case.
The Prop. 64 amendments will not, however, eliminate all representative actions asserting claims under the unfair competition law. To the contrary, claimants who satisfy the requirements of a traditional class action will continue to allege claims. To this end, such class action claimants may continue to avail themselves of the wide range of activities proscribed by the statute as well as the remedies it provides, such as injunctive relief and restitution.
Robert J. Odson is a partner at Dewey Ballantine in Los Angeles, where he is a member of the firm's litigation department. Yen N. Nguyen is an associate in Dewey Ballantine's litigation department.