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self-study / Corporate

Jul. 22, 2022

Contours of safe harbor defense continue to shift

David M. Axelrad

Partner, Horvitz & Levy LLP


UC Hastings COL; San Francisco CA

UCL Safe Harbor Article

California’s unfair business practices statute, Business and Professions Code section 17200 (section 17200), prohibits “unlawful,” “unfair,” or “fraudulent” acts or practices. (See Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) California’s statute, like many other state statutes, is similar to the Federal Trade Commission Act (FTC Act) which, since 1938, has broadly prohibited “ ‘unfair or deceptive acts or practices in commerce.’ ” (F.T.C. v. Colgate-Palmolive Co. (1965) 380 U.S. 374, 384; accord, Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; Bowen v. Ziasun Technologies, Inc. (2004) 116 Cal.App.4th 777, 786.)

In recent years, the application of section 17200 has been restricted by statutory enactment and court decisions. One of these restrictions, the “safe harbor” defense, deserves close attention as the contours of this defense are still developing.

Before discussing the safe harbor defense, it is important to understand a few basic concepts about section 17200. The operative terms of section 17200, such as “unlawful,” “unfair,” “fraudulent,” and “misleading advertising,” are very broadly defined. (See, e.g., Zhang v. Superior Court (2013) 57 Cal.4th 364, 370; Cel-Tech, supra, 20 Cal.4th at p. 180; Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 211; Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 112–113.) Remedies include restitution and injunction (no damages allowed) and, in an action brought by a state or local prosecutor, civil penalties may be assessed. (See Abbott Laboratories v. Superior Court of Orange County (2020) 9 Cal.5th 642, 652; Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144; Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950; Cel-Tech, at p. 179.) Both private litigants and state law enforcement officials may bring suit to enforce the UCL. (Bus. & Prof. Code, § 17204; see In re Tobacco II Cases (2009) 46 Cal.4th 298, 315.)

Until 2004, any private person could bring an action on behalf of the public without showing actual harm. (E.g., Tobacco II at pp. 305–306, 314; Californians For Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 228; General Foods, supra, 35 Cal.3d at p. 211.) In 2004, however, the voters enacted Proposition 64, restricting private enforcement of section 17200 by tightening standing requirements and requiring compliance with class action procedures. (Zhang, supra, 57 Cal.4th at p. 372; Tobacco II, supra, 46 Cal.4th at p. 305–306.)

The courts also acted to restrain enforcement of section 17200, narrowing the definition of “unfairness” to competitors (Cel-Tech, supra, 20 Cal.4th at pp. 186–187), restricting the remedy of restitution in private enforcement actions (Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, 126–127,), and announcing a “safe harbor” defense whereby a defendant may avoid liability if a challenged business practice is affirmatively permitted by a legislative enactment. (Cel-Tech, supra, 20 Cal.4th at p. 182.)

The courts continue to wrestle with the safe harbor defense. There is disagreement whether the safe harbor defense applies to executive, as well as legislative actions, and to claims of false or fraudulent, as well as unfair, business practices. (People v. Johnson & Johnson (2022) 77 Cal.App.5th 295, 345.) But, there appears to be no disagreement that a specific enactment or pronouncement is required to create a safe harbor. (See Cel-Tech, supra, 20 Cal.4th at p. 184 [“[A] plaintiff may not bring an action under the unfair competition law if some other provision bars it. That other provision must actually bar it, however, and not merely fail to allow it. In other words, courts may not use the unfair competition law to condemn actions the Legislature permits. Conversely, the Legislature’s mere failure to prohibit an activity does not prevent a court from finding it unfair.”]; accord, Rose v. Bank of America, N.A. (2013) 57 Cal.4th 390, 398.) Nonetheless, what constitutes the required specific enactment or pronouncement continues to be a subject of judicial scrutiny. The Court of Appeal’s decision in Johnson & Johnson is the most recent example.

In Johnson & Johnson, the California Attorney General sought civil penalties against a medical device manufacturer for circulating misleading medical device instructions and marketing communications. (Johnson & Johnson, supra, 77 Cal.App.5th at p. 305.) The manufacturer claimed the FDA authorized, or at least permitted the allegedly offending instructions and communications, thereby creating a safe harbor that barred the Attorney’s General’s action. (Id. at p. 344.)

The Court of Appeal rejected the safe harbor defense. (Johnson & Johnson, supra, 77 Cal.App.5th at p. 344.) The court noted that the medical device at issue went through only a limited (“section 510(k)”) regulatory approval process “which requires the manufacturer to show only that the device is ‘substantially equivalent’ to” an existing and more rigorously reviewed product, and that “the FDA informed [the manufacturer] it was unable to determine whether the devices were substantially equivalent to an existing legally marketed predicate device.” (Id. at p. 346.) The court held this was insufficient to create a safe harbor insulating the manufacturer from liability under section 17200. (Id. at p. 347.) “The FDA’s limited review . . . undertaken as part of the section 510(k) clearance process – did not create a safe harbor. ‘To forestall an action under the unfair competition law, another provision [or executive action, per our stated assumptions] must actually “bar” the action or clearly permit the conduct.’ . . . [¶] The FDA’s . . . clearance process did not clearly sanction or approve the [marketing communications] . . . . ‘ “[T]he 510(k) process” . . . . simply compare[d] a post-1976 device to a pre-1976 device to ascertain whether the later device is no more dangerous and no less effective than the earlier device.’ ” (Ibid., citations omitted.)

The court also considered the manufacturer’s safe harbor defense to claims regarding a second device that had been the subject of an FDA advisory committee inquiry. (Johnson & Johnson, supra, 77 Cal.App.5th at p. 348.) The manufacturer contended that, because the FDA did not order any labeling changes after the advisory committee issued its report, “the FDA’s inaction established a safe harbor for the . . . device labeling.” (Ibid.) The court disagreed. “At most, the FDA failed to declare [the manufacturer’s] conduct unlawful. But ‘[t]here is a difference between (1) not making an activity unlawful, and (2) making that activity lawful. . . Acts that the Legislature [or agency] has determined to be lawful may not form the basis for an action under the unfair competition law, but acts may, if otherwise unfair, be challenged under the unfair competition law even if the Legislature [or agency] failed to proscribe them in some other provision.’ . . . Because the FDA’s mere inaction did not clearly permit the [marketing communications] at issue, [the manufacturer] has failed to establish a safe harbor defense for those communications.” (Ibid., citations omitted.)

Since its debut in 1999, courts have continued to set limits on application of the safe harbor defense. The case law should be watched closely as the courts continue to make adjustments.


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