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What is California’s
Unfair Competition Law?
In the early twentieth century, it was common practice for businesses to mislead
consumers through false and misleading advertising. Some consumers identified
the practice as “baiting and switching” as well as other names. In
1993, the California Legislature enacted California’s Competition Law to
protect consumer from businesses that churned profits through false and misleading
advertising. It allowed public prosecutors and private plaintiffs, acting for
themselves or on behalf of the general public, to file actions against businesses
to stop unfair competition or false advertising.
Over the years, the Unfair Competition Law was liberally modified, substantially
in 1977, to protect consumers from everything from fraudulent, unlawful, and
unfair business practices. It was also modified permitting courts to order businesses
to turn over all profits obtained through unfair, unlawful, and fraudulent business
practices.
What is the Definition of “Unfair Competition”?
California’s definition of unfair competition is very broad. It is defined
in Business and Professions Code §17200 and prohibits and “unlawful,
unfair or fraudulent business act or practice” and any “unfair, deceptive,
untrue or misleading advertising.” A single business act is actionable.
At one time, unfair competition related to business “practices,” but
not to single unfair acts. In 1992, the Legislature broadened § 17200 to
cover a single business “act” as well as business “practice.”
Business and Professions Code § 17200 is written is the disjunctive. It
applies to any unlawful or unfair or fraudulent business act or practice, and
each provides an independent basis of relief. Even out of state business practices
affecting California consumers are actionable.
An unlawful business activity includes anything that can properly be called a
business practice and, at the same time, is forbidden by law.
A fraudulent business activity contemplated by § 17200 bears little resemblance
to common law fraud or deception. The test is wether the public is likely to
be deceived. This means that an unfair competition lawsuit based on a fraudulent
business act can be shown even if no one was actually deceived, no one relied
upon the fraudulent practice, and no one sustained any damage.
An unfair business activity occurs when it offends an established public policy
or when the practice is immoral, unethical, oppressive, unscrupulous or substantially
injurious to consumers. Another test in determining whether a particular business
practice is “unfair” involves an examination of its impact on its
victim, balanced against the reasons, justifications and motives of the wrongdoer.
The court weighs the utility of the defendant’s conduct against the gravity
of the harm to the victim. New case law further restricts the definition of “unfair,” however,
the definition is still very broad.
How Are Lawyers Abusing Business & Professions Code § 17200,
the Unfair Competition Law, to Extort Businesses?
Lawyers have been creating shell companies for the sole purpose of acting as
the “front” for the law firm to sue businesses for unfair competition.
They commonly use descriptive names reflecting a consumer advocacy group such
as “Consumer Enforcement Watch Corporation.” The lawyers then sue
hundred, even thousands of businesses alleging the businesses are profiting from
acts of unfair competition. After serving the defendant company, the lawyers
then demand a settlement payment from the defendant or they force them to defend
themselves against frequently baseless allegations.
For example, according to The Press Enterprise, a motorcycle shop owner in Riverside
was sued by the Beverly Hills Trevor Law Group and California Watch Enforcement
Corp. for abbreviating the words “on approved credit” (O.A.C.) in
an advertisement. Malcolm Smith, the owner, told the Press Enterprise that he
received a letter from the Trevor lawyers demanding $5,000 to settle the matter.
Another example is when another firm sued hundreds of Vietnamese nail salon owners
in Southern California for allegedly “unlawfully” using the same
bottle of nail polish on multiple customers despite the fact that the State Board
of Barbering and Cosmetology regards re-using the same bottle of polish as standard
industry practice.
It is easy to argue that a business violated a statute or ordinance and the business
is profitable as a result. The laws typically cited by the plaintiff’s
attorneys are oftentimes arcane or hyper-technical violations of unenforced ordinances.
On the other hand, the business owner has the difficult task of arguing a negative,
i.e., that the business did not commit the acts complained of.
For example, recent newspaper headlines highlighted one group of Beverly Hills
lawyers, the Trevor Law Group, that created a shell corporation named “Consumer
Enforcement Watch Corporation,” which was purportedly run by the wife of
one of the lawyers. Consumer Enforcement Watch Corporation sued thousands of
auto repair shops and more than 1,000 restaurants and markets. Supposedly, the
allegations against the restaurants were based on Health Code violations that
typically resulted in lower ratings being posted on the restaurants. The allegations
against the automotive repair shops were allegedly based on “citations” issued
by the Bureau of Automotive Repairs, (a state consumer agency), for violations
of the Automotive Repair Act. It was reported that the Trevor Law Group began
systematically suing the automobile repair facilities that appeared on the Bureau
of Automotive Repair’s website for having received a “citation”.
The lawsuits were supposedly baseless and the businesses were being extorted
for profit as part of a shakedown strategy organized by the lawyers. In order
to recover, the shell corporation also had to show that the automobile repair
facilities also profited from whatever action led to the Bureau of Automotive
Repairs “citation.” However, it is doubtful any restaurant that received
a low rating for violating the Health Code profited from that fact. Similarly,
it is doubtful any automobile repair facility that received a Bureau of Automotive
Repair “citation” for allegedly violated the Automotive Repair Act
profited from that fact.
It was alleged that the most recent lawsuits filed by the Beverly Hills attorneys
targeted primarily non-English speaking owners of “mom-and-pop” businesses.
The reason is because they did not know their rights, could not afford to hire
an attorney, and were generally frightened by the threat of a lawsuit. Soon after
serving a business with a summons and complaint, the Beverly Hills lawyers sent
form demand letters to the business owners demanding a payment, usually between
$1000 to $25,000 to dismiss the business. This is just one example of unscrupulous
attorneys extorting business owners.
Why are so Many Business Being Sued for Unfair Competition?
There are several answers to the question, each answer separately contributing
to the enticement for attorneys to get rich quick by extorting business in California.
First, if one plaintiff sues a defendant business for unfair competition and
wins, the business must disgorge its profits obtained through unfair competition,
which may be turned over to the Plaintiff shell corporation.
Second, a defendant business sued for unfair competition may be ordered to pay
the plaintiff’s attorney fees as part of the award. Even if the case does
not go to trial, the fact that the business may be ordered to pay the shell corporation’s
attorney fees can be used as a bargaining chip against the defendant company.
Third, the shell corporation does not need a plaintiff that has been injured
by the business’ alleged unfair competition in order to sue the business.
Thus, the shell corporation may file an unfair competition lawsuit against a
business for “being informed and believing” that a business made
a profit by violating laws, regulations or ordinances, or by misleading the public.
Fourth, defending a business against an unfair competition claim can cripple
a company. Most businesses cannot afford ivory tower attorney fees. Thus, an
unprincipled attorney can easily manufacture an almost baseless lawsuit against
a business and later demand a monetary settlement or force the business to defend
itself in a court of law. The company is often faced with the choice of hiring
lawyers to defend it or paying the plaintiff to be dismissed.
This leads to the fifth factor which is a vicious cycle that further incentivizes
attorneys manufacturing unfair competition lawsuits. The business owners that
do not defend themselves against unfair competition lawsuits and pay nuisance
settlements may be labeled a Section 17200 target. A business may be attacked
a second, third, or more times by the same plaintiff and attorney for the same
or similar business practices. By paying too much or too early, a business may
identify itself as an easy target wherein multiple lawsuits ensue thereafter
by the same or different plaintiffs and attorneys. Attorneys suing businesses
for unfair competition are incentivized by business owners paying nuisance settlement
rather than paying an attorney to advise them as to the merits of the action
or fighting the action.
Sixth, many people view corporations and business entities as a kind of huge,
far away, powerful, nonhuman thing that somehow does all kinds of things by remote
control. It is easy for people to think of a corporation or business as having
an endlessly deep pocket that people can take any amount of money out of that
deep pocket and give it away for any reason. To a lesser degree, some people
are of the opinion that corporations and businesses can absorb losses better
than people. In their eyes, suing corporations and businesses is an impersonal
act that does not directly affect people.
Seventh and finally, attorneys are beginning to recognize the fact that California’s
Unfair Competition Law is a powerful tool in a plaintiff’s arsenal. Several
high profile unfair competition lawsuits have been decided in the last ten years.
• In 1994, the Consumers Union sued Alta-Dena Certified Dairy after the
dairy ran misleading advertisements promoting raw milk for its health benefits.
A judge blocked the advertisements and ordered the dairy to include disclosures
on raw milk containers warning consumers of the potential dangers of the product.
•
In 1996, the State of California sued several tobacco companies to recover health
care costs it expended due to tobacco-related illnesses. The cases were settled
for $25 billion for California taxpayers over the next 25 years.
•
In 1998, an individual sued Nike, Inc. After the company denied reports that
workers were mistreated at its Asian factories. The case is on appeal with the
United States Supreme Court.
•
In 2000, the Food and Drug Administration asked the maker of the diabetes medication
Rezulin to remove the drug from the market after a California group sued the
manufacturer. The drug was advertised as “virtually free of side effects” despite
research showing the drug nearly quadrupled the chances of liver injury.
The Wall Street Journal reported on January 3, 2000 that California’s Unfair
Competition Law has become such a hit in the plaintiffs bar that a recent triallawyers convention offered a seminar in Maui on “How Business and Professions
Code 17200 Can be a ‘Value Added’ Component of Your Litigation and
How Those Claims Can be Settled.” Avoid setting your company up as a target
for a plaintiff’s attorney.
How Can a Business Protect itself from an Unfair Competition Lawsuit?
Any business may be sued for unfair competition. A lawsuit may be filed even
if the alleged misconduct has already been investigated or remedied by the attorney
general, district attorney, or another governmental agency. In addition, separate
unfair competition lawsuits may be filed against the same company by a multitude
of law firms, all acting as “private attorney generals.” Once word
gets out that a company settled an unfair competition lawsuit, oftentimes others
will file duplicative lawsuits.
Therefore, it is extremely important for a business to familiarize itself with
the applicable rules and regulations of the industry the business operates in
and to be truthful and forthcoming with customers and clients. Many times a company
will find itself on the receiving end of an unfair competition lawsuit when it
ignores or tolerates small statutory or regulator violations in order to keep
operational costs down.
For example, a collection agency’s practice of regularly filing actions
in the wrong county, to increase the number of default judgments that it obtained,
was decided to constitute unfair competition. Rather than filing the complaint
in the county where the defendant lives, which is what the collection agency
was supposed to do, the collection agency filed its complaints in courts that
were convenient for it. Another example is where a car rental agency’s
collision damage waiver contracts were found to be ambiguous, misleading, and
deceptive where the language of the agreement was complex and the print size
minuscule and where rental agents gave customers erroneous explanations of the
contract, and thus, constituted unfair competition.
No statute, law, ordinance, or regulation should be ignored or overlooked when
doing business. The most hyper-technical violation could result in unfair competition
lawsuit being filed against the company. Because employees are liaisons between
the company and the customer/client, proper employee training is critical to
ensure that the employees are properly trained, knowledgeable, and not concealing
information or making any sort of misrepresentations.
The greatest safety measures a business can take to protect itself against unfair
competition lawsuits is through insurance. Although it may be expensive, it is
worth looking into and worth a telephone call to an insurance broker, especially
if the company has already litigated an unfair competition lawsuit.
What Should a Business Do If It Receives a Threatening Letter or Is Named as
a Defendant in an Unfair Competition Lawsuit?
Talk to an attorney that has experience in defending businesses in unfair competition
cases. Contact Patrick McCullogh or Keith Phillips at McCullogh & Associates
for a free consultation or referral. Attorneys often have free consultations
where a business can learn what rights it has and what its alternatives are.
Business & Professions Code § 17200 is a very special type of lawsuit
with many nuances requiring a trial attorney with experience in defending these
types of cases.
Consider defending the business rather than merely paying a quick settlement.
By settling too soon and for too much, in order to avoid attorney fees, the business
may be labeled an easy target. A new shell corporation and the same attorney
can immediately re-file the same or slightly different lawsuit against the company
in an effort to make even more money off the same company. However, if the company
puts up a fight, it is less likely to be sued again.
New case law has recently been decided making it easier to fight frivolous Section
17200 lawsuits. For example, new case law authorizes trial courts to dismiss
a private attorney general action if the court decides that the lawsuit “is
not brought by a competent plaintiff for the benefit of injured parties.” New
case law also puts some limits on the definition of “unfair.”
If in litigation, consider filing an early Motion for Summary Judgment, which
is a trial on paper. If the defendant company can win its motion for Summary
Judgment by proving to the Court that there are no triable issues of fact to
be decided in the case and Defendant is entitled to a judgment as a matter of
law, (very difficult motion to win), the Defendant company obtains a defense
judgment and can request that Plaintiff pay the company’s attorney fees.
Furthermore, it gives the Defendant company leverage to negotiate. For example,
if the plaintiff is suing more than one defendant for similar reasons and the
Defendant company’s motion is successful, it means the other defendants
will file their own duplicative motions for summary judgement. Then, plaintiff
risks losing every similar case. The plaintiff may want to settle before the
Motion for Summary Judgment can be heard to avoid losing all of its cases similar
to the case against the company that filed the Motion for Summary Judgment.
For further example, where the law firm sued hundreds of Vietnamese nail salons
for using the same bottle of nail polish on different customers, a motion for
summary judgment could be filed arguing that the practice is not “unlawful” as
alleged because the State Board of Barbering and Cosmetology regards re-using
the same bottle of polish as standard industry practice. The firm may want to
settle the case against the particular salon that filed the motion as quickly
and quietly as possible to avoid having a motion for summary judgement decided.
If the motion was decided, it could potentially go against the Plaintiff whereby
all the salons would then have a means of getting dismissed as well as reimbursement
of their attorney fees against Plaintiff.
If settlement is appropriate under the circumstances, demand a confidentiality
clause in the settlement agreement. It will help avoid duplicative suits and
the attorney creating a new corporation and re-suing. It will also help avoid
other plaintiffs and lawyers from “piling on” by filing similar lawsuits.
Furthermore, make the release as broad and all encompassing as possible. It is
unethical and against public policy for an attorney to enter into an agreement
wherein he will not sue a business entity in the future again. Therefore, keeping
it confidential and obtaining a broad release is important.
Reform:
As of 2004, the cost of doing business in California is approximately 32% higher
than the national average. California’s Unfair Competition Law, Business & Professions
Code § 17200, has evolved into a get rich quick scheme for some attorneys
and contributes to California’s choked economy.
California’s Unfair Competition Law is a good law that protects consumers
and the Legislature should not “throw the baby out with the bath water” by
repealing Business & Profession Code § 17200. However, it must be reformed.
Possible solutions are to require all unfair competition lawsuits to be filed
by a plaintiff that has actually suffered harm or requiring judicial approval
before filing an unfair competition lawsuit.
Contact Patrick McCullogh or Keith Phillips at McCullogh & Associates to
learn how you can assist in reforming California Business & Professions Code § 17200.
If you have been threatened with or have been sued for unfair competition under
Business & Professions Code § 17200 or are an attorney with a client
with an unfair competition claim and wish to discuss it, please feel free to
call Patrick McCullogh or Keith Phillips at McCullogh & Associates for a
free consultation or referral.
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