Roundtable Featuring Barry Landsberg Discusses Whether Business & Professions Code Section 17200 Provides Needed Protections for Consumers

Daily Journal

June 2001 - Does Business & Professions Code Section 17200 provide needed protections for consumers? Or does it limit consumer choices by suppressing the California market for businesses?

In a roundtable discussion held at Los Angeles' Fullbright & Jaworski, attorneys on all sides of the debate gathered for a robust discussion of the finer points. Participants included defense counsel Nicole Krasny of the host law firm, defense counsel Barry Landsberg of Los Angeles' Manatt, Phelps & Phillips, San Francisco plaintiff counsel William B. Hirsch, and former Counsel to the California Department of Corporations, Peter Kezirian.

Prima Facie Case

LANDSBERG: The law is extraordinarily broad. The courts say that anything that can be characterized as a business practice allows a plaintiff creatively to allege that it's unfair, or if a predicate statute has been violated then plaintiffs can allege the unlawfulness prong of the statute. And the law does not require multiple acts. The statute was amended in 1992 to allow for a single act to be adjudicated and remedied as unfair, unlawful or fraudulent -- in the latter case, when a business act or practice is likely to deceive the public. All three of theses prongs -- unfairness, unlawfulness and fraudulent -- are disjunctive and thus each can be the basis for a 17200 claim..

HIRSCH: It's a statute in equity, designed to ensure that a court can ensure that certain types of deceptive unfair or fraudulent or illegal practices can be addressed in whatever manner the court deems necessary. It's a tremendously flexible statute. Unlike many other types of claims, you don't have to show misrepresentations or some type of deceptive conduct. You don't have to show the reliance. You don't have to show intent. You may not have to show damages.

LANDSBERG: In Cortez v. Purolator Air Filtration Products, 23 Cal. 4^th 163 (2000), the Supreme Court expanded the scope of restitutionary awards, to include unpaid wages, on the theory that this was the property of the plaintiffs and did not have to be actual money or ill-gotten gain received by the defendant in the form of cash.

The Cortez Court said, however, that equitable defenses would apply in future 17200 cases. By authorizing equitable defenses in 17200 cases, the Court opened the door for defendants to argue their good faith or motives or other equitable considerations that would not otherwise apply in 17200 cases, which courts previously had characterized as strict liability-type cases.

KEZIRIAN: I've seen this used on both ends. And basically, it's affectionately known as a "do you still beat your wife" kind of statute. There is no good answer. You can't defend yourself. You can't make out a prima facie case because what is fraud or deceptive to one person may be standard industry practice. To non-accredited or unsophisticated investors, something to look deceptive. And you opened yourself up to a range of plaintiffs or actions that may not really be there. And even though there may not be, you have the disgorgement.

The attorney's fees provision of it make it impossible for a company, once they're hit with this, to actually fight. They can't get their good name back. It seems that under other statutes you can get out in summary judgment or get out on demurrers. This one, I don't think you can get out of.

KRASNY: The difference in 17200 is that when you have fraudulent activity pursuant to 17200, it is not like common law fraud, where there are certain elements that a plaintiff must show. Conversely, with fraudulent activity under the Unfair Competition statute, a plaintiff need not to show individualized proof of deception, actual reliance or damages.

HIRSCH: I take issue with the notion that the defendants don't have the opportunity to defend themselves in these cases. I certainly have litigated against talented and aggressive and imaginative defense lawyers who have come up with a wide range of defenses under each of the different branches of the statute. The supreme court has been involved with judicial legislative interpretation or law making. They're reinterpreting the statute and in many ways narrowing it. Even if you lost on some of these things, the cost of defense is probably greater than the error involved. I think this statute has been used not to resolve disputes. There are other statutes that [actions] can be brought under, which would probably be more constructive to resolving the dispute, but the 17200 risk is so great that it is always brought because it immediately ups the stakes to the company and alters the type of resolution efforts or dispute resolution issues between them.

LANDSBERG: I think that plaintiffs have had a playground with 17200. It is so amorphous that you can really condemn anything. You start with a virtually unlimited universe of claims where you don't require plaintiffs with standing. Try explaining that to somebody in law school and his or her head would blow up. You don't need standing or injury. You can smoke five packs of cigarettes and under 17200 be the main or named plaintiff in an action on behalf of an anti-smoking organization suing retailers for selling cigarettes to minors. This seemingly extreme example is not an exaggeration. You can have nothing in common with the people who you're purportedly representing as the private attorney general and you also do not need to have a private right of action to sue directly under the predicate law.

A classic case is Stop Youth Addiction, Inc. v Lucky Stores Inc., 17 Cal 4^th 553 (1998), where the predicate statute for the 17200 claim was a penal code provision, precluding Lucky Stores and other retailers from selling cigarettes to minors. We all know there is no private right to action to enforce the criminal laws. That is the D.A.’s job. But that case stood for the proposition , and it is the law of California, until the Legislature states otherwise, that you can borrow state statutes that provide no private right of action because the right of action lies under 17200, not under the predicate statute that the 17200 claim is borrowing.

Defining 'Unfair'

KRASNY: Cel-Tech has made some headway in defining what is unfair. I do not think that Cel-Tech went as far as it could or perhaps should have. Before Cel-Tech, there were at least two different lines of cases defining what was unfair under 17200. There was one line of cases defining unfair competition as a practice which offends public policy, or is immoral, unscrupulous, oppressive. This is somewhat ambiguous. Then there was a second line of cases defining unfair as balancing the utility of the defendant's conduct against the gravity of harm to the plaintiff. Cel-Tech was decided in 1999. The California Supreme Court stated that these definitions were too amorphous and that there needed to be a more strict definition of unfair. And the court defined unfair as being some sort of conduct that threatens an incipient violation of anti-trust or some other law. I don't think that definition sufficiently clears up the ambiguity or goes as far as we need to go. Furthermore, we must keep in mind that Cel-Tech is very limited because it involved a direct competitor claim. The court was clear that the decision did not involve a consumer-type claim or injury.

LANDSBERG: It remains to be seen whether the antitrust or competitive business model and the new definition of unfairness will apply to consumer cases. The most relevant thing that came out of Cel-Tech Communiciations v. LA Cellular Telephone Company, 20 Cal.4^th 163 (1999), for defense counsel is the safe harbor concept, which in effect says that if the underlying law that you are borrowing affirmatively encourages or permits the alleged conduct, then you cannot make an unlawfulness argument under 17200.

HIRSCH: If the law isn't to the liking of the defendants, it is nice to address that at the legislature. You have to interpret what the legislature intended. The legislature, through a series of amendments, starting in 1933 and going to the 1992 amendments, has at every opportunity attempted to broaden the statute. They broadened it by ensuring that past acts, as well as continuing acts, can be actionable. A single act or a single practice is sufficient. I certainly am not going to sit here and claim that all cases are valid. Actually they're not. That's why we have courts. The law is pro consumer. I think that's a good thing. I think it protects us. I think it gives you remedies where they otherwise wouldn't exist. I think the legislature thinks that's a good thing.

KRASNY: The overbreadth of 17200 involves notice to defendants, whether they are individuals, companies or similar entities. Companies typically try to make informed decisions about what types of conduct or activity they should and can engage in. When you do not have well-defined rules as to what is and what is not permissible conduct, and this happens a lot in the anti-trust context, that can create a serious problem for certain companies trying to make those decisions and risk assessments. This may implicate constitutional and due process issues as well. The Kraus court was recently faced with a due process argument and the court did not address those issues head-on. I think it is time that the courts and legislature begin to address these issues and start facing the problems that are inherent in 17200.

HIRSCH: But the problem is that companies do have sufficient notice. If they are violating a statute, they certainly have notice that that activity is actionable under 17200. With respect to unfairness, there have been different definitions. The test I use when analyzing one of these cases in determining whether to bring it is really the smell test. The reason that the statute doesn't more precisely define unfairness is because unfairness takes many types of forms. It appears in all sorts of different costumes and dress. There is no limit to imagination of those who are trying to somehow defraud or obtain money or cheat or otherwise act in a way that is unfair to consumers. And, yes, you'd like to say these precise acts are illegal but the point of this statute is to give it a broader scope. It's an equitable law and the point is to try to stop untoward or improper action.

KEZIRIAN: I agree with you that you should not reward bad behavior. The problem with 17200 is it's stacking. There are other laws besides 17200 that they should be sued under. 17200 is used because it is [like] Jell-O. You can't get your hands on it. HMO carriers get sued for false advertising on healthcare benefits when there is a whole body of Knox-Keen law that the suits can be brought under. People don't like the Knox Keen law as it is harder to sue under than 17200. That's the error of 17200. In the 30's when we wrote this law, this was the general catch-all, because we didn't have this developed body of enforcement of regulatory laws. We have never taken away the catch-all. You have the choice between what law are you going to dicker under. There are particular laws that apply when you are dealing with an industry. They balance the interest of that industry and the difficulties of that industry. This statute throws out all that balancing. It treats all cases the same way.

The Standing Requirement

LANDSBERG: Bill, your comments would be well-taken if there were a standing limitation under the law. Because you do not have a standing requirement, it invites abuses. It makes it tougher on legitimate plaintiffs and counsel to bring in cases because they have clients that are victims in some concrete way. When you are in this extraordinarily amorphous realm of cases where no one in particular can sue about anything in particular, you do invite mischief that actually compromises legitimate cases.

Let me give you an example of how broad the statute is and how one court sensibly dealt with it. In 1992 the statute was amended to say a"single act" can be the basis for a 17200 claim. In Klein vs. Earth Elements, Inc., 59 Cal. App. 4^th 965 (1997), the defendant sold contaminated dog food, following which it was named in a 17200 law suit -- as sure as the sun rises in the east. Before the case ever started, the defendant put out a massive recall notice and made sure the contaminated food was pulled off the shelf. And basically, the court said, in rejecting the 17200 claim: "No, this isn't a sharp or deceptive business practice. It happened only once." Why should a defendant, who isn't likely to repeat the offending conduct, have to answer in protracted litigation, along with all the harm and expense associated with pending litigation, when, in fact, they're not an appropriate, ripe subject for a going-forward injunction or for an award of restitution.?

In addition, under the law of injunctions, one of the two core remedies under 17200, there is case law that says that courts should not enjoin completed acts unless they are likely to re-occur. It is, in effect, a case or controversy limitation and a court can use that common law to decline injunctive relief. But under the "single act" language of the statute, the defendant has no certainty that this is going to occur.

HIRSCH: You are confusing a number of issues. You are confusing standing, whether or not a particular act or practice is unfair, and whether or not one act in and of itself is sufficient. Taking your example, you started out talking about standing and whether someone is not injured should be permitted to bring these claims. I think to a large extent that was the issue that that was being addressed by the Kraus court. I think they misinterpreted 17203 in order to get to the result, but nonetheless, the result provides in many cases the kinds of protections that have been of concern to so many companies and that is what happens when you have a non-class class. The court said that if you don't bring it as a class action, your restitution remedy is going to be limited to those individuals that actually stepped up and claimed an injury. We generally bring 17200 as a class claim. I think that's generally the proper way to do it. That way we have a plaintiff that actually has been injured and we have all the procedural remedies and protections that are important both for the defendants and for absent class members and also provides us a vehicle for settling the case. Kraus said that if you don't actually have a class, you are only entitled to restitution of what's been taken to those who actually come forward and make a claim. But in terms of whether or not a case is good or not, the standing issue isn't what's at stake. A court on some demurrer or summary judgment can make a determination that the practice at issue or the act was not unfair and can dismiss the case at the pleading stage.

LANDSBERG: The courts likely will impose the burden on the defendant to, in effect, search through discovery for any victims that would actually be a proper recipients of a restitution award, since a non-class restitution remedy is still appropriate after Kraus. The Kraus Court didn't at all address injunctive relief claims and thus did not discourage all kinds of cases that can be filed on a whim

Defenses

KRASNY: Cel-Tech was very clear that the underlying statute has to be expressly clear that it allows for or permits such activity. If a statute doesn't really address an issue the "safe harbor" defense may not necessarily be applicable.

KEZIRIAN: I have two very extreme defenses. One is leave the state. And the other is try to insure, so is doesn't disrupt your current operations. Just being different, you are "unfair," you are deceitful. It is a risk factor when you enter the California market. I don't think the statute is pro consumer. It maybe won't be the tip factor whether a company comes into California or not, but it creates a flavor for what the California market is about.

LANDSBERG: I litigate and defend regulated businesses, and a defense I have had some success with is federal preemption. We were counsel on a case that addresses a unique borrowing aspect of 17200. It is true that a 17200 plaintiff can freely borrow a state or federal statute. If it is a state statute, the preemption issue doesn't come up.

Every once in awhile, however, a regulated business defendant is confronted with a 17200 claim that borrows a federal regulatory statute for an unlawfulness claim. In my case, the plaintiff unions borrowed the Medicare cost-reporting laws and alleged that our client hospitals violated 17200 because they were fraudulently billing the federal Medicare Program for costs associated with alleged anti-union organizing efforts at the various hospitals.

We won on demurrer and then convinced the Second Appellate District that the 17200 claim was preempted and trumped by Federal law that fully occupied the field, leaving no room for any state regulation. Congress of California Seniors v. Catholic Healthcare West, 87 Cal. App. 4^th 491 (2001).

Another defense, and one that is very closely related to preemption, comes out of the Diaz v. Kay-Dix Ranch, 9 Cal.App.3d 588 (1970). In Diaz the court applied the abstention doctrine, on demurrer, in affirming the dismissal of a 17200 claim alleging that the defedant ranchers were violating federal immigration law prohibitions on hiring illegal aliens as farmworkers. In Diaz, the court basically said that, regardless of preemption (an issue the court did not reach) if you are asking a state trial judge to adjudicate in an area that is the subject of intense federal regulation, with national policy implications, the court can and should take a judicial "hands-off" approach and use its discretion to decline to entertain a 17200 case, even at the demurrer stage. In our Congress of California Seniors case, the court of appeal agreed with this and applied Diaz even though the court there also had ruled that the 17200 claims were preempted..

A form of judicial abstention or primary jurisdiction also can be applied in cases where the borrowed statutory claim is one for which plenary enforcement is entrusted to a state regulatory agency. In one case, Samura. v. Kaiser Health Plans, 17 Cal.App.4^th 1284 (1993) the plaintiff borrowed claims under the Health and Safety Code and attacked the manner in which Kaiser was enforcing its third-party liability provisions in the patient subscriber agreements. The court basically said that 17200 claims improperly usurped the exclusive authority of the Department of Corporations to regulate and enforce the borrowed laws at issue.

Similarly, in Wolfe vs. State Farm Fire & Casualty Ins. Co., 46 Cal. App. 4^th 554 (1996) the court refused to entertain a 17200 claim brought against State Farm for failing to write earthquake insurance after the Northridge earthquake. The court said this actually involves a unique sort of legislative choice and we're not going to force courts to go there under 17200. I think these and other cases involving legislative or other policy considerations provide for an emerging defense in 17200 cases.

Another emerging defense may be the "no harm, no foul" defense. In People v. Duz Mor Diagnostic Laboratory, Inc., 68 Cal. App. 4^th 654 (1998), which was a combination 17200 and False Claims Act case,, the plaintiff alleged that the defendant laboratories were unfairly and unlawfully engaging in multiple billings to Medi-Cal for laboratory tests that should have billed only once. In affirming the dismissal of the 17200 claim, the court noted that Medi-Cal had reimbursed the laboratory on a flat rate basis that actually brought about no financial consequence or harm to anyone, such that the 17200 claim was properly dismissed. The court also rejected a companion 17200 unfairness claim, because the regulators had made conflicting pronouncements about the proper way to bill Medi-Cal, and because the borrowed scheme was "complex".

Duz-Mor makes it possible for future defendants to argue that no 17200 claim should lie unless the defendant has harmed someone in a material way. And courts might well deploy their broad discretion in equity, and conclude that absent some allegation or proof of real sharp and deceptive practices, we are simply not going to entertain this case. In Kraus, the Court entreated trial courts to manage 17200 cases to assure that presence of proper plaintiffs and the absence of "harm" to wrongly named defendants.

HIRSCH: I recently saw defendants make the argument [that] since the attorney general had brought a similar case, the primary jurisdiction doctrine applied because the state was involved, and the court rejected that. There is some kind of objective test, whether a reasonable consumer would have been fooled by those practices. I think defendants are entitled to defend themselves. Early resolution of those kinds of issues makes a lot of sense. Plaintiffs should be forced to demonstrate that they have a valid claim. And that happens in every stage of a litigation.

KEZIRIAN: Sometimes policy makers are caught off guard when they thought they had narrowed or balanced the equities in an area, [for example,] securities laws. The technology industry ended up going to Washington to get federal preemption in certain areas of security regulations to avoid litigation in California, which 17200 was part of it.

HIRSCH: I don't think that is correct. I don't think security claims have been permitted under 17200 for a very long time.

KEZIRIAN: At the Department of Corporations, we saw 17200 claims come in where people were suing under 17200 on broker/dealer elements. People didn't want to arbitrate it. They would rather do it under 17200. It opened the universe ofwhat could be recovered. What's the point of having all the other regimes to resolve broker/dealer issues? One thing that popped up was the pricing of products. The cost of defending these things and the cost of insuring those kinds of defenses are carried over in the price of the products. 17200 has a benefit but is there any waste generated by obtaining that benefit? And what is the cost of that waste? Not that there aren't upsides and things that need to be achieved by it. Let's make sure we draw this properly and carefully so you make sure that you just take out the tumor and nothing extra.

Remedies

KRASNY: Calculation of the risks is complicated. This involves restitution and/or disgorgement. Disgorgement can mean a variety of things. The courts discuss disgorgement and restitution in the context of preventing the retention of "ill-gotten gains." The court in Kraus described disgorgement as surrendering all money obtained by the defendant through an unfair business practice. The decision subsequently talks about disgorgement as surrendering the profits earned by the defendant. These concepts are vague and inconsistent.

LANDSBERG: In a 17200 claim in a nonclass action, Kraus makes it clear that fluid recovery restitution is no longer proper -- not because of the unresolved due process issue relating to the nonbinding aspects of a 17200 judgment on absentee plaintiffs, as the defense bar had hoped -- but because the Court said it was not authorized by the Legislature. That remedy is now limited to true class action 17200 cases, which defendants also do not want to see, because they are prohibitively expensive from the notice and case management standpoint. But with class actions at least you have the certainty of being sued once over the allegedly offending practice.

HIRSCH: Fluid recovery is particularly useful in cases where it's difficult to locate the plaintiffs or the recovery would be small and it ensures in those cases where you can't return the funds or compensate the individuals that have been injured that the money does not revert to the defendant, but is used in some other way that benefits the interest of those who were harmed

by the practices. What Kraus does is ensure that it's only available when a class action is brought and when all the procedural mechanisms to protect the individuals who were affected by notice and by the other requirements for class certification. Only in those circumstances is fluid recovery permitted. It takes the next step and says in a nonclass situation, you are entitled to restitution. And restitution is not broadly defined by Cortez to include both money that was taken from someone and monies they were legally entitled to receive.

Kraus says in those situations the remedy of restitution is possible in a 17200 action even when there is no class and the defendant has an obligation to try to locate and inform the individuals who are affected. Their claims cannot be settled without notice and without some opportunity to object or participate in a class.

LANDSBERG: If a plaintiff were to elicit through discovery in a nonclass 17200 case that the magnitude of the financial consequences of the offending business practice, let's say was $10 million, but after diligent search there was only one victim with only one dollar of damage, in the absence of class certification, this means that $9,999,999, cannot be taken from the defendant and put into some fluid fund established to police or end those types of practices. Of course, the plaintiff will seek attorney fees as the prevailing party and argue that the winning 17200 claim, even with one dollar of restitutable harm, means that the plaintiff and counsel have conferred some significant public benefit in bringing the action, especially if the judgment also provides for injunctive relief. The plaintiff will say he or she brought about the end of the offending practice and is entitled to recover fees under CCP 1021.5.

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