DEFENDING AGAINST CALIFORNIA BUSINESS AND PROFESSIONS CODE SECTION 17200 CLAIMS: A Discussion Of Defenses And Procedural Challenges
Laura K. Christa
Holly O. Whatley
Christa & Jackson
©2004
All Rights Reserved
Defending against UCL[1] claims centers, of course, primarily on an analysis of the specific facts and circumstances surrounding the challenged acts or practices and whether they warrant the imposition of liability. But to maximize the chances of defeating a claim, defendants should also consider the value of challenging claims early on, using bases other than the case-specific factual defenses. Because a UCL claim can be sprawling in its scope, one goal should be to take control of the litigation and begin to narrow, and ultimately eliminate, any potential exposure. This article is designed to provide an overview of some of the methods by which that may be accomplished. It will address typical issues generally applicable to most UCL claims including: 1) challenges to the forum, either from state court to federal court or to an arbitral tribunal; 2) bringing anti-SLAPP motions to strike the UCL claims; 3) challenging the complaint via demurrer, Rule 12(b)(6) and/or motion for summary adjudication based on the safe harbor defense, preemption and the existence of an incompetent plaintiff and 4) challenging standing, superiority and scope of relief in UCL class actions.
The majority of UCL claims are filed in state courts. But a defendant need not be bound by the plaintiff’s choice of forum if the complaint is either subject to arbitration or removal to federal court. Some defendants believe the absence of a jury and the expedited process of an arbitrable tribunal are beneficial, they believe arbitration is a better choice for resolution of their claims. Other defendants prefer the courts because they provide broader appeal rights and pose other benefits.
A. Would You Be Better Off In An Arbitral Tribunal?
If the underlying claim in involves a contract with an enforceable arbitration provision, a defendant can petition the court to compel arbitration. Note, however, that claims for injunctive relief in UCL actions brought on behalf of the general public are not arbitrable, only the claims for restitution and/or disgorgement are. Cruz v. PacifiCare Health Systems, Inc. (2003), 30 Cal. 4th 303, 316-17. The California Supreme Court in Cruz based its distinction between injunctive and restitutionary relief on the fact that an inherent conflict exists between arbitration and the statutory injunctive relief remedy designed for the protection of the general public. Id. at 313. The court found that “the judicial forum has significant institutional advantages over arbitration in administering its public injunctive remedy . . . .” Id. at 312, quoting Broughton v. Cigna Health Plans (1999) 21 Cal. 4th 1066. The court reasoned that the arbitrator lacked the authority and “institutional continuity” to enforce a public injunction. (Significantly, however, it left open the question of whether UCL injunctive relief could be subject to arbitration in cases between business competitors. Id. at 315.)
However, because an arbitrator’s ability to monitor and enforce an award of restitution and/or disgorgement, in either a case brought by a competitor or a member of the general public, does not require the need for institutional continuity, UCL claims for restitution and/or disgorgement remain arbitrable. Id. at 317. Even class action UCL claims for restitution and/or disgorgement, with their potential for cy pres relief, are arbitrable. Id. at 318.[2]
This distinction will result in most UCL actions being split. The Supreme Court recognized that proceeding in two different forums on the same claims raises case management and efficiency issues in proceeding with the litigation. It suggested in dicta, that a court has the power to stay proceedings of the inarbitrable claims under California Code of Civil Procedure Section 1281.4. Id. at 320. In endorsing that method of case management, the court noted that a stay would generally be in order because proceeding with the traditional injunctive action could disrupt the arbitration and render it ineffective. Id., citing Coast Plaza Doctor’s Hosp. v. Blue Cross of Cal. (2000) 83 Cal. App. 4th 677, 693, n. 8. Therefore, in UCL claims otherwise subject to arbitration, a defendant should file a motion to compel arbitration and stay the injunctive relief proceedings pending resolution of the arbitrable claims. On the other hand, because historically the restitution component has been ancillary to the injunctive relief remedy, a plaintiff could argue it is more important to have the injunctive relief heard first.
Although UCL restitutionary claims are generally subject to arbitration, courts may refuse to enforce arbitration if the arbitration agreement applicable to a consumer’s claim is an adhesive contract,[3] and it does not provide a mechanism whereby the consumer can seek a fee waiver. Gutierrez v. Autowest, Inc. (2003) 114 Cal. App. 4th 77, 89. The Court of Appeal in Gutierrez held that an arbitration agreement preprinted on the reverse side of consumer’s automobile lease was one of adhesion. It further found the agreement “substantively” unconscionable because it provided no method for the consumer to seek a waiver of the required arbitration fees. It reversed the trial court, however, on the issue of severance. It reasoned the cost provision of the arbitration provision could simply be severed and the arbitration clause otherwise enforced.
In Gutierrez, the arbitration agreement provided that the American Arbitration Association (“AAA”) rules would apply. However, because the plaintiffs asserted a class claim, their aggregate claim exceeded $10,000, so the AAA commercial rules applied. Id. at 85. Under those rules, at the trial court level, plaintiff estimated its arbitration fees would be in excess of $10,000, an amount they could not afford. Id. at 85. Based on that cost estimate, the court found the arbitration agreement substantively unconscionable noting, “[w]hile arbitration may be within the reasonable expectations of consumers, a process that builds prohibitively expensive fees into the arbitration process is not.” Id. at 90. The Court of Appeal left open for the trial court to decide on remand whether the provision requiring the payment of such high fees should be severed and the rest of the arbitration agreement enforced. Id. at 93.
On a separate ground, the court ruled that in cases asserting a consumer’s unwaivable statutory rights, the law implies in every arbitration agreement that unaffordable fees will not be allocated to the consumer at any point in the arbitration process. Id. at 271-72. The court declined to follow the arbitration rule applicable in employment cases that any fees above those a claimant would pay in court are unreasonable. Instead, determination of what would be affordable for any particular plaintiff should be decided on a case-by-case basis. Id. at 97. This case-by-case analysis prevailed over the default cost allocation set forth in Code of Civil Procedure Section 1284.2, which requires a pro rata share of arbitration costs. In justifying this holding, the court stated, “when parties agree to arbitrate a claim under the CLRA, they impliedly agree to the rules necessary to permit a vindication of those statutory claims.” Id. Those “rules” include requiring the arbitrator to provide a written determination that the consumer has the ability to pay the fees and costs allocated by the arbitrator.
Because many consumer UCL actions are based on nonwaivable statutory rights, in cases subject to arbitration defendants should evaluate whether the applicable arbitration rules provide a mechanism whereby a plaintiff can seek relief from any arbitration fees that he claims he cannot afford. If the rules have such a mechanism, then the arbitration agreement is enforceable. If not, then the issue of severability of the fee provision from the rest of the agreement will have to be addressed.
Another issue which often arises in the arbitration of consumer UCL claims, is whether class action waivers in arbitration agreements are valid. The answer to the question is unsettled in California. In Szetela v. Discover Bank (2002) 97 Cal. App. 4th 1094, the Court of Appeal struck down a provision in an otherwise valid arbitration agreement in which both parties waived the right to pursue a claim in a representative or class action capacity. In that case, Discover had amended its cardmember agreement by inserting an amendment inside a regular monthly billing statement. That amendment included a waiver of the parties’ right to bring a representative or class action claim. The court found the waiver unconscionable under California law because it contradicted the “California Legislature’s stated policy of discouraging unfair and unlawful business practices, and of creating a mechanism for representative to seek relief on behalf of the general public as a private attorney general.” Id. at 1101.
However, in a case decided less than one year later, since depublished and now on appeal to the California Supreme Court, the Second Appellate District declined to follow Szetela. Discover Bank v. Superior Court (2003) 105 Cal. App. 4th 326, review granted, depublished by Discover Bank v. Superior Court, 2003 Daily Journal DAR 3936. Interpreting the identical cardholder agreement and class action waiver, the court applied Delaware law to find the arbitration agreement was valid. The appellate court in Discover Bank found that the Federal Arbitration Act preempted the state court from applying state substantive law to strike the class action waiver. Id. at 331. The court found that the FAA preempted any state judicial policy precluding class-wide arbitration waivers. Id. at 343.
“While a state may prohibit the contractual waiver of statutory consumer remedies, including the right to seek relief in a class action, such protections fall by the wayside when the waiver is contained in a validly formed arbitration agreement governed by the FAA.”
Id. at 346.
There has been speculation that the Supreme Court accepted the Discover Bank appeal because it wants to uphold its reasoning – or it would have simply depublished it, leaving on Szetela on the books. Others believe the justices are working out a compromise with procedural safeguards for the consumer. As of the writing of this article, no date for oral argument date has been set.
B. Challenging The State Court Forum By Attempting To Remove The Action To Federal Court
UCL claims are subject to removal to federal court under the same standards as other claims. If the complaint could have been brought in federal court in the first instance, it may properly be removed. 28 U.S.C. § 1441(b). Federal courts have original jurisdiction to hear claims that arise under the laws of the United States, 28 U.S.C. § 1331, and in diversity cases when the amount in controversy exceeds $75,000. 28 U.S.C. § 1332(a).
1. Standing Considerations In Removing UCL Claims To Federal Court
In addition to the standard analysis applied when evaluating the option to remove the case, UCL claims raise an issue regarding standing under Article III, Section 2 of the United States Constitution. State law permits a plaintiff to bring a UCL action on behalf of the general public even when the plaintiff has not personally suffered any harm. But federal law requires that every plaintiff meet standing requirements to pursue a case in the federal courts. See Casey v. Louis (9th Cir. 1993) 4 F.3d 1516, 1519; Herman v. Salomon Smith Barney, Inc. (S.D. Cal. 2003) 266 F. Supp. 2d 1208. “At an irreducible minimum, Art. III requires the party who invokes the court’s authority to ‘show that he personally has suffered some actual or threatening injury as a result of the punitive illegal conduct of the defendant’ . . . .” Casey at 1519 quoting Valley Forge Christian College v. Americans United for Separation of Church and State, Inc. (1982) 454 U.S. 464, 472.
If the plaintiff in a UCL action claims he suffered harm based on the alleged conduct, he has standing under Article III and removal, if otherwise appropriate, is possible. See O’Connor v. Boeing N. Am., Inc. (C.D. Cal. 2000) 197 F.R.D. 404, 420. But actions in which the plaintiff has not suffered harm, would not properly be subject to removal because no proper “case or controversy” would be before the court. In those instances, defendants should expect the case to be remanded back to state court where the plaintiff is permitted to pursue the UCL claim absent personal harm. E.g., Mortera v. North Am. Mort. Co. (N. D. Cal. 2001) 172 F. Supp. 2d 1240, 1244.
In certain instances, however, if a case is subject to removal, and the plaintiff does not have standing, it may present a defense opportunity to get the case dismissed. For example, if the complaint arises out of a federal statute or regulation, over which the defendant can argue the federal courts have exclusive jurisdiction, a defendant may remove the case to federal court based on such jurisdiction, then immediately move to dismiss the case based on the plaintiff’s lack of standing under Article III. See Herman, 266 F. Supp. 2d at 1210, 1213.
In Herman, the plaintiff brought a UCL claim in state court alleging that the defendant had charged excessive fees in the sale of certain municipal bonds and failed to disclose those fees to consumers. The court decided the plaintiff’s right to relief depended on the resolution of a substantial federal question, in a statutory area where the federal courts had exclusive jurisdiction--the sale of municipal securities. Remand of the matter, the court ruled, would be futile given the federal court’s exclusive jurisdiction over the rights that plaintiff sought to vindicate. Dismissal based on the plaintiff’s lack of standing in federal court, therefore, was the only option. Id. at 1213.
2. Removal Of UCL Claims Based On Federal Question Jurisdiction
A defendant can properly remove a case if the “borrowed” law supporting the UCL claim arises under federal statute or regulation. The existence of federal question jurisdiction is determined by the “well pleaded complaint rule.” See, e.g., T&E Pastorino Nursery v. Duke Energy Trading and Marketing, LLC (S.D. Cal. 2003) 268 F. Supp. 2d 1240, 1245. Federal jurisdiction extends only over those cases in which, on its face, a well-pleaded complaint establishes a federal question. A defendant cannot predicate removal on anticipated defenses to the complaint, except in the rare case involving complete preemption.[4] See, e.g. Littel v. Bridgestone/Firestone, Inc. (C.D. Cal. 2003) 259 F. Supp. 2d 1016, 1022.[5]
On the other hand, a plaintiff may not defeat removal by failing to plead necessary federal questions in the complaint. Franchise Tax Bd. v. Construction Laborers Vacation Trust (1983) 463 U.S. 1, 22. Under the “artful pleading doctrine,” a state law claim can be deemed to arise under federal law in three instances: 1) Where federal law completely preempts state law; 2) where the claim is necessarily federal in character; or 3) where the right to relief depends on the resolution of a substantial, disputed federal question. ARCO Environmental Remediation, LLC v. Dept. of Health & Environmental Quality of the State of Montana (9th Cir. 2000) 213 F.3d 1108, 1114; Herman v. Salomon Smith Barney, Inc. (C. D. Cal. 2003) 266 F. Supp. 2d 1208, 1211. In instances where a plaintiff attempts to “plead around” an inherently federal claim, the court can recast the pleading under the “artful pleading” doctrine to evaluate the federal question jurisdiction issue. Brennan v. Southwest Airlines Co. (9th Cir. 1998) 134 F.3d 1405, 1409; Feitelberg v. Merrill Lynch & Co., Inc. (N.D. Cal. 2002) 234 F. Supp. 2d 1043, 1051.
In Feitelberg, for example, the court applied the “artful pleading doctrine” and determined the complaint was actually a state securities fraud claim that was expressly prohibited by federal law. The plaintiff sought disgorgement of profits under the UCL based on allegations that the defendant broker had issued deceptive advice in the form of stock ratings and analyst research reports for a group of stocks. The defendant removed the case, arguing that federal jurisdiction existed because the claim was expressly preempted by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. § 77bb(f)(1). The court agreed. It rejected the plaintiff’s argument that the complaint had no claims subject to SLUSA because he had not sought recovery of “damages” as required by the SLUSA, the pleading had no allegations of scienter as normally required in securities fraud claims, and because the alleged wrongdoing did not involve the purchase or sale of stock, also required by SLUSA. “[I]f it looks like a securities fraud claim, sounds like a securities fraud claim and acts like a securities fraud claim, it is a securities fraud claim no matter how you dress it up.” The court found the removal was proper and denied plaintiff’s motion for remand. Id. at 1053. A very similar trial court ruling was upheld by the Ninth Circuit in Patenaude v. The Equitable Life Assurance Society of the United States (9th Cir. 2002) 290 F.3d 1020.
In Herman, supra, the court similarly recast the plaintiff’s complaint to find it turned on the resolution of a disputed federal question, over which the federal courts had exclusive jurisdiction under the 1934 Securities Exchange Act, 15 U.S.C. § 78aa. The plaintiff asserted a UCL claim in state court alleging that the defendant had charged excessive fees on certain municipal bonds and failed to disclose the fees to consumers. The court found that “despite Plaintiff’s best efforts to frame this issue as one exclusively within the purview of his state UCL claim,” each duty he claimed that defendant breached was based on rules promulgated by the Municipal Securities Rulemaking Board (“MSRB”), violations of which are within the exclusive jurisdiction of the federal courts. Id. 1212-13.
In most cases, a plaintiff in state court will plead the claim in such a way as to avoid the removals attempted in Feitelberg and Herman. And plaintiffs often put language in their complaints to expressly disclaim the existence of federal claims. But under the “artful pleading” doctrine, neither the defendant nor the court need accept such a complaint at face value.
3. Removal Based On Diversity
Removal of a UCL claim may also be based on diversity of citizenship under 28 U.S.C. Section 1332. Section 1332 requires complete diversity between the plaintiff and defendant, as well as an amount in controversy over $75,000. For the defendant who wants to remove an action based on diversity, one challenge is to establish that the requisite amount in controversy exists. In class actions, the amount in controversy is determined based on the unaggregated value of the individual member’s claims,[6] unless the claims are derived from rights the class holds in group status. Potrero Hill Community Action Comm. v. Housing Authority (9th Cir. 1969) 410 F.2d 974, 978. This principle applies to UCL class actions as well. Rothschild Trust v. Morgan Stanley Dean Witter (C.D. Cal. 2002) 199 F. Supp. 2d 993, 1001-02. Similarly, if the equitable relief claimed in a class action, such as an injunction, is the means through which the rights of the individual class members will be protected, the defendant’s cost to comply with such relief cannot be aggregated to determine the amount in controversy. Id.
In the nonclass UCL claim, the amount in controversy for diversity jurisdiction purposes is also determined based on the amount of the individual claims at issue and the claims cannot be aggregated.[7] Surber v. Reliance Nat’l Indem. Co. (N.D. Cal. 2000) 110 F. Supp. 2d 1227, 1233, disapproving Mangini v. R.J. Reynolds Tobacco Co. (N.D. Cal. 1992) 793 F. Supp. 925 (holding that in nonclass action cases the amount in controversy may be measured either by the value of the relief sought by the plaintiff or the cost to the defendant if the relief is granted). Often a plaintiff drafts the complaint to specifically state that no individual’s claim exceeds $75,000. Of course, if the plaintiff also pleads non-UCL claims with a value in excess of $75,000, the amount in controversy would be satisfied regardless of the limits on valuing the UCL cause of action.
Anti-SLAPP motions offer a procedural device that permits defendants to challenge complaints filed against them, on the ground that the actions are without merit and arise from acts of defendants taken in furtherance of their right of petition or free speech, and that the exercise of these rights concerns a significant issue of public importance. The challenge is made early, within 60 days of the filing of the complaint, and generally stays discovery until the anti-SLAPP challenge is completed.
In light of recent legislative enactments, however, a defense attorney will need to differentiate between commercial and non-commercial speech. Although the courts had typically been receptive to challenges based on the former, since January 1, 2004, the legislature has effectively limited anti-SLAPP protections to the latter.
1. Basic Anti-SLAPP Procedures
If the complaint is amenable to an anti-SLAPP motion, it must be filed within 60 days of service of the complaint. Cal. Code Civ. Proc. § 425.16(f). After the motion is filed, discovery is stayed until notice of entry of the order on the motion. Cal. Code Civ. Proc. § 425.16(g). Although a defendant may bring an anti-SLAPP motion in federal court against claims based on state law, because the discovery cut-off provision of Section 425.16 conflicts with Federal Rule of Civil Procedure 56, Section 425.16 does not apply to actions in federal court. Rogers v. Home Shopping Network, Inc. (C.D. Cal. 1999) 57 F. Supp. 2d 973, 982-83; Vess v. Ciba-Geigy Corp. USA (9th Cir. 2003) 317 F.3d 1097, 1109. Federal claims in federal court are not subject to an anti-SLAPP motion, even when the claims are asserted in the same action as state claims subject to the statute. Globetrotter Software, Inc. v. Elan Comp. Group (N.D. Cal. 1999) 63 F. Supp. 2d 1127, 1130.
The anti-SLAPP motion involves a two-step process. First, the defendant must make a threshold showing that the challenged cause of action arose from protected activity. If the court finds the defendant has met this threshold, then the burden shifts to the plaintiff to establish that it has a probability of prevailing on the claim. Cal. Code Civ. Proc. § 425.16(b)(1).
The California Supreme Court articulated the standard for meeting the threshold requirement in City of Cotati v. Cashman (2002) 29 Cal. 4th 69, 78. There, the court held that “the statutory phrase, ‘cause of action . . . arising from,’ means simply that the defendant’s act underlying the plaintiff’s cause of action must itself have been an act in furtherance of the right of petition or free speech.” Id. The focus is not on the form of the plaintiff’s cause of action, but rather on the defendant’s activity that gives rise to the claimed liability and whether that activity constitutes protected speech or petitioning. See Navellier v. Sletten (2002) 29 Cal. 4th 82, 92.
2. The California Legislature Substantially Eroded The Effectiveness Of Anti-SLAPP Motions In The Commercial Speech Context, Following Its January 1, 2004 Amendment To Section 425.17<
Although defendants historically have been able to challenge complaints arising from commercial speech via an anti-SLAPP motion, the California legislature, as of January 1, 2004, exempted virtually all UCL claims involving commercial speech from anti-SLAPP motions to strike. Cal. Code Civ. Proc. § 425.17. Section 425.17(c) provides that an anti-SLAPP motion will not lie when the defendant is engaged in the business of selling or leasing goods or services if both of the following conditions exist:
1. “The statement or conduct consists of representations of fact about that person’s or a business competitor’s business operations, goods, or services, that is made for the purpose of obtaining approval for, promoting, or securing sales or leases . . . in the person’s goods or services, or the statement or conduct was made in the course of delivering the person’s goods or services.”
2. “The intended audience is an actual or potential buyer or customer, or a person likely to repeat the statement to, or otherwise influence, an actual or potential buyer or customer, or the statement or conduct arose out of or within the context of a regulatory approval process . . . .”
This change effectively reversed the Court of Appeal holding in DuPont Merck Pharm. Co. v. Superior Court (2000) 78 Cal. App. 4th 562. In that case, DuPont was charged with artificially inflating the price of a drug by “disseminating false information” about the alternative generic product via public advertising and lobbying. The court found that the lobbying activity was squarely protected under subsections (1) and (2) of Section 425.16(e), and subject to a motion to strike. (Presumably, this activity is still protected, to the extent the defendant can argue the statement or conduct did not arise with the context of the regulatory approval process.) The advertising, on the other hand, had to be analyzed to determine if it was in the “public interest.” If in the public interest, then an action based on the advertising would be subject to a motion to strike under Section 425.16(e)(4), as conduct in furtherance of the exercise of the right of free speech “in connection with a public issue or an issue of public interest.” The court in DuPont determined the advertising was on a matter of public interest because the drug involved -- an anti-coagulant for the treatment of blood clots -- treated a serious medical condition suffered by millions of people. Id. at 567. Under the amended Section 425.17, however, such a motion to strike would not be permitted. And, indeed, in cases where such motions were granted in commercial speech cases, those decisions are subject to reversal on appeal, even if decided before the effective date of the amendment. See Physicians Committee for Responsible Medicine v. Tyson Foods, Inc. (2004) DJDAR 6501.
The amendment has recently withstood several challenges to its constitutionality. Brenton v. Metabolif Int’l, Inc. (2004) 116 Cal. App. 4th 679; Metcaff v. U-Haul Int’l, Inc. (2004) Cal. App. LEXIS 790; Physicians Committee for Responsible Medicine v. Tyson Foods, Inc. (2004) DJDAR 6501. In Brenton, the plaintiff claimed she suffered personal injury when she consumed the defendant’s product. She also asserted violations of the UCL for false advertising and “misbranding” of the product. Id. at 683. Metabolife filed an anti-SLAPP motion to strike. The court ruled that the personal injury claims did not “arise from” defendant’s speech and were not subject to a motion to strike. It went on to find that the newly enacted Section 425.17 applied to the false advertising and misbranding claim, which removed the plaintiff’s UCL claims from the operation of Section 425.16. The court rejected Metabolife’s argument that Section 425.17 was an unconstitutional restriction on commercial speech. Id. at 692. In so doing, the court noted that Section 425.16 was a procedural device for the early dismissal of suits, and in no way regulated, restricted or penalized defendant’s ability “to freely engage in commercial speech.” The court in Metcalf found that eliminating the protections of the anti-SLAPP statute in the context of speech did not violate the guarantees of equal protection under either the state or federal constitutions. 2004 Cal. App. LEXIS 790, 9-10. Quite clearly, the amendment has substantially eroded a business’ ability to quickly dispose of meritless claims before extensive and costly discovery begins. Nevertheless, defendants should consider filing an anti-SLAPP motion in any UCL action based on noncommercial speech, because the UCL applies only to commercial speech. Noncommercial speech is beyond its reach inasmuch as an injunction prohibiting the speech would constitute an unconstitutional prior restraint. See Kasky v. Nike, Inc. (2002) 27 Cal. 4th 939, 959, writ of cert. dismissed as improvidently granted, Nike, Inc. v. Kasky, 2003 U.S. LEXIS 5015. If a defendant can establish therefore, that the speech involved, if any, in a UCL action is noncommercial, then it has a complete defense to the UCL cause of action (though perhaps not to other causes of actions, such as defamation).
Certain defenses to UCL claims are evident on the face of the complaint and subject the complaint to challenge by demurrer or, in federal court, a Rule 12(b)(6) motion, or later as challenges via a motion for summary judgment or adjudication. Three topical defenses include the safe harbor defense, certain preemption claims and challenges to the competency of the representative plaintiff. Each of these are addressed below.
A. Safe Harbor
When a given practice has been expressly held to be permissible and/or not unlawful, the defendant can assert the “safe harbor” defense. Lazar v. Hertz Corp. (1999) 69 Cal. App. 4th 1494. This prevents a plaintiff from attempting to bootstrap a UCL claim of unfairness to otherwise permissible behavior. As the California Supreme Court stated in Cel-Tech Communications, Inc. v. Los Angles Cellular Telephone Co. (1999) 20 Cal. 4th 163, 182, “courts may not simply impose their own notions of the day as to what is fair or unfair.” It reasoned that a defendant should not lose the ability to defend itself because a plaintiff, “discovers” a conveniently different label for pleading what is in substance an identical grievance arising from identical conduct. Cel-Tech Id. at 184.
So, for example, in the Lazar case, the Court of Appeal held that a practice could not be “unfair” under the UCL if the challenged practice had been expressly held to be not unlawful. The plaintiff in Lazar challenged a Hertz Corporation practice of not renting vehicles to persons under age 25. The court found that the practice had been found not to be unlawful and noted that “a business practice cannot be unfair if it is permitted by law.” Id. A similar holding was reached in Schnall v. Hertz Corp. (2000) 78 Cal. App. 4th 1144, 1160, where a statute expressly authorized avoidable fuel service charges. For that reason, such charges were held to be immune from judicial scrutiny as to their reasonableness
In Goldman v. Standard Ins. Co. (9th Cir. 2003) 341 F.3d 1023, 1036, the court noted that Cal. Ins. Code § 10144 permitted insurance companies to refuse coverage based on mental impairment if “based on sound actuarial principles,” which provided a safe harbor to a UCL claim alleging violations of California’s Civil Rights Act and to a UCL claim based on a insurance company’s declination of plaintiff’s application for disability insurance); Ochs v. PacifiCare of California (2004) 115 Cal. App. 4th 782, 793 (Cal. Health & Safety Code § 1371.4(e) provides statutory safe harbor for health care plans that delegate the obligation to pay for emergency services to contracting medical providers in UCL claim based on hospital’s delegation of payment responsibilities under that very statute); Swanson v. St. John’s Reg’l. Med. Center (2002) 97 Cal. App. 4th 245 (Cal. Civ. Code §§ 3045.1 and 3040(g)(3) provide safe harbor for UCL claim regarding hospital’s practice of filing liens on recoveries from third-party tortfeasors for value of services provided the patient).
The determination that conduct alleged to be unfair is, nevertheless, not “unlawful,” need not rely on “open and shut” declarations of the law. For example, in Kunert v. Mission Financial Services Corp. (2003) 110 Cal. 4th 242, a number of financial institutions were sued under the UCL by a plaintiff claiming that the practice of accepting assignments of automobile financing transactions from dealerships, at interest rates lower than those the consumers were charged by the dealerships themselves was not illegal. Defendants did not point to a particular statute which stated such assignments were permissible. Rather they argued that the disclosure of the lower rates to consumers was not required by law, disclosures in consumer finance transactions are heavily regulated, and further noted that the Federal Reserve Board had expressly determined that the disclosure would not be useful to consumers. This permitted the court to conclude the conduct was not illegal.
A similar argument was made in a motion for summary judgment brought by an automobile dealership when a plaintiff asserted that the dealership had a duty to disclose that it sometimes was assigned installment sales contracts to lenders at rates lower than that it charged the consumer. Summary judgment was granted because the failure to disclose was found to be not “unlawful.” As in Kunert, because state and federal law did not require the disclosure, disclosures to consumers in financing transactions are heavily regulated, and because the Federal Reserve Board specifically declined to require the disclosure, the failure to disclose could not be deemed “unlawful.” See Corbett v. Hayward Dodge, Inc, Superior Court of California, County of Alameda Case No. CH212741-9, March 11, 2003 order granting motion for summary judgment; a copy is attached.
B. Preemption
Federal preemption can also be a powerful defense to UCL claims that touch on federal law or regulation. The supremacy clause of the United States Constitution provides that state laws that “interfere with, or are contrary to the laws of Congress” are preempted. There are three types of federal preemption. First, express preemption exists where the federal statute explicitly contains preemptive language. Second, field preemption, where the scheme of federal enforcement is sufficiently pervasive to make reasonable the inference that Congress left no room for the states to supplement it. Third, conflict preemption, where it is impossible for a defendant to comply both with federal and state regulations or where the state law is an obstacle to the accomplishment of the purposes and objectives of Congress. Industrial Truck Ass’n. v. Henry (9th Cir. 1997) 125 F.3d 1305, 1309; Cf. Congress of Cal. Seniors v. Catholic Healthcare West (2001) 87 Cal. App. 4th 491, 495.
Certainly, claims against defendants who are involved in areas subject to federal regulations (e.g. banking, telecommunications, securities) merit an analysis of the possible preemptive effects of the applicable statutes and regulations. If a defendant establishes preemption, it disposes entirely of plaintiff’s individual and representative UCL claims. (This section should also be read in connection with the removal section hereinabove.)
Because of the numerous areas in which Congress has promulgated statutes and regulations, it is impractical to set forth a complete listing of cases in which preemption has been asserted, either successfully or unsuccessfully, as a defense to a UCL action. Preemption analysis can be highly fact-intensive. However, below are examples of UCL cases in which the preemption defense was successful.
By contrast, the courts in the following cases found that the UCL claim was not preempted:
Establishing a defense based on federal preemption will depend on the interplay of the specific statutes and regulations involved with the rights the plaintiff seeks to vindicate and the specific relief sought. If those rights and the type of relief sought overlap with areas already regulated by Congress or the applicable federal agency, the plaintiff’s claim may be preempted.
C. Under The Kraus Standard, Is The Plaintiff “Competent” To Represent The General Public?
A less established basis for defendants to consider in challenging a UCL claim is whether the action was filed by a proper representative, for a proper purpose. Even given the lax standing requirements under the UCL, California courts have held that not all persons are “competent” to represent the general public in a UCL representative action. Most notably, in Kraus v. Trinity Mngt. Servs., Inc. (2000) 23 Cal. 4th 116, 138, the California Supreme Court noted:
[B]ecause a UCL action is one in equity, in any case in which a defendant can demonstrate a potential for harm or show that the action is not one brought by a competent plaintiff for the benefit of injured parties, the court may decline to entertain the action as a representative suit.
This presents an additional opportunity for defendants to consider, when faced with a representative it deems not actually acting in the interests of the general public, with a tool for dismissal. Dismissal of the representative portion of a plaintiff’s claim, even if the plaintiff’s own claim remains, substantially reduces the exposure of the action.
One consideration when evaluating the adequacy of a representative, is who the representative actually purports to represent. A plaintiff in a UCL action may not be competent if the parties actually harmed by the conduct at issue are not even members of the general public. For example, in Rosenbluth Int’l, Inc. v. Superior Court (2002) 101 Cal. App. 4th 1073, the plaintiff brought a representative UCL action against a travel agency serving large corporate clients. The plaintiff claimed that the travel agency used fraudulent accounting methods to understate the amount of rebates due its customers. Plaintiff alleged that he was making the claim on behalf of the general public, including the corporate clients of the defendant. The Court concluded that the plaintiff lacked standing as a “competent plaintiff” to bring the action, “because he failed to demonstrate that he filed the action on behalf of ‘the general public.’” Id. at 1076.
The Court of Appeal found that, “those on behalf of whom [the plaintiff] purports to bring the action are not members of the ‘general public’.” The Court determined that the travel agency clients who were allegedly harmed by the conduct were sophisticated corporate clients with contracts that would have to be examined individually. Those corporate clients would be better served by bringing individual actions and determining what claims, in addition to or instead of UCL claims, they might want to pursue. The Court noted:
By purporting to act as their self-appointed representative and asserting claims on their behalf in a UCL action, Serrano could in fact deprive Rosenbluth’s alleged victims of the individual opportunity to seek remedies far more extensive than those available under the UCL, which limits the plaintiffs to injunctive relief and restitution. If Rosenbluth’s actions are as serious Serrano alleged, its alleged victims would derive more benefit from individual lawsuits.
Id. at 1078.
A more garden-variety challenge to the competency of a plaintiff was rejected in an unpublished court of appeal opinion. In Good v. Broyhill Furniture, Inc. (2003) Cal. App. Unpub. LEXIS 7465, the trial court rejected the defendant’s argument that the plaintiff was not competent, even though he had agreed to serve as plaintiff only as a favor to plaintiff’s counsel and had never viewed the advertising at issue. The court distinguished Rosenbluth, noting that the practice before it had affected substantial numbers of the public, unlike the challenged practice in Rosenbluth. It further noted that the court in Kraus was not suggesting that a trial court in a UCL action brought solely for injunctive relief, should dismiss the entire action based on the conclusion that the plaintiff was not competent.
In Lazar v. Trans Union (C.D. Cal. 2000) 195 FRD 665, 673-674, the court found the experience of the representative of the general public was unlikely to be typical of others he chose to represent in an action against a credit reporting agency. His “identity theft” circumstances were unusually protracted. For that reason, the court refused to let the action proceed as a representative action.
A strong argument could be made, that Kraus, Rosenbluth and Lazar support a requirement that a plaintiff seeking restitution should be assessed as “competent” for similar reasons that a class action representative must be determined to be “adequate.” The trial of the representative’s individual claim often, though not always, will serve as the proof of the general public’s claim as well. And if the representative’s claim is subject to unique defenses, for example, that cannot be asserted against other affected members of the general public, then another representative would better serve the general public. The potential for harm in relying on a representative with unique vulnerabilities is that affected members of the general public are not adequately represented and may lose on what could have been a stronger claim.
Although Rosenbluth clearly held the individual plaintiff could not properly represent the corporate entities in the UCL action, at least one trial court nevertheless refused to declare a plaintiff incompetent to pursue such actions, holding instead that the term “general public” in the UCL statute means the general public as a whole, notwithstanding the distinction raised in Rosenbluth. See Pascual v. Exxon Mobile Corp., Superior Court of California, County of Alameda Case No. RG03096045, 11/07/2003 Order denying demurrer to complaint (copy attached); Mitchell v. Hayward Dodge, Superior Court of California, County of Alameda Case No. 02-038365, 11/06/03 Order regarding motion for summary adjudication (copy attached). Both of the cases were decided by Judge Ronald M. Sabraw, who presides over the complex case department for Alameda County. He wrote that the term “general public” in Section 17200, meant the general public as a whole, without distinction between injured consumers and injured business competitors, and included all persons as that term is defined in Evidence Code Section 175.
Challenges to the “competence” of a representative remain a fertile ground for challenges, however. This is especially true where deposition testimony or other evidence exposes areas where they may be impeached through inconsistencies, for example, as their case is the “exemplar,” as noted above. It is also fair to challenge a representative whose fact scenario differs significantly from the fact scenario of other members of the general public.
A court may certify a UCL claim as a class action. Corbett v. Superior Court (2002) 101 Cal. App. 4th 649, 663. Determining whether this is advantageous to the proposed class, however, will depend on a number of factors, some of which are still unresolved. For example, the majority opinion in the Corbett case implied, but did not resolve, whether the lax standing requirements of a UCL action would have to defer to the more stringent standing requirements of Code of Civil Procedure Section 382, which governs procedures for class actions in California. Also left open was the scope of the fluid recovery fund. The Corbett opinion does not squarely resolve whether or not disgorgement into a fluid recovery fund would be limited to restitutionary funds. It implied that future decisions would determine whether or not “damages” could be disgorged as well.
In Frieman v. San Rafael Rock Quarry, Inc. (2004) 116 Cal. App. 4th 29, the Court of Appeal decided that, before it would certify a UCL class action, a UCL plaintiff must demonstrate that a UCL class action is superior to a UCL representative action for resolving the underlying claims. In Frieman, the plaintiffs sought class certification in their action against defendant San Rafael Rock Quarry alleging nuisance and violations of 17200, asserting, inter alia, substantial expansion of the quarry’s activities in violation of various state and local laws and regulations. In the case, the plaintiffs conceded that they did not have claims for restitution. The court noted that “[a]t the hearing on the motion to certify the class in this case, counsel for one plaintiff candidly admitted the only benefit of a class action over a representative UCL action was ‘the opportunity to obtain fluid fund recovery’ based on Kraus . . . . Counsel admitted: “[d]isgorgement of profits is our only remedy other than injunctive relief. Plaintiffs made no showing of any other benefit from treating this action as a class action.” Frieman at 37. Without reaching the issue of whether non-restitutionary damages would even be recoverable in the context of a UCL class action, the court discussed the “overarching legislative concern” in establishing the UCL to provide a streamlined procedure to prevent unfair competition. It concluded that a UCL plaintiff may not establish that a class action is a superior method of adjudicating by asserting the sole benefit that the purported availability of the remedy of disgorgement of profits, is better than the standard remedies available in a representative action. Id. at 37-38. “The trial court must weigh the advantages of the cumbersome and potentially expensive class action mechanism against the streamlined procedure available in a representative suit under the UCL.” Id. Because the plaintiffs failed to show any substantial benefit to the proposed class beyond their mere hope of obtaining non-restitutionary disgorgement, the motion for class certification was denied.
The court in Kavruck v. Blue Cross of California (2003) 108 Cal. App. 4th 773, 787, also addressed the purported advantage of a fluid recovery fund, holding the existence of a fluid recovery remedy, by virtue of a class being certified, is not necessary or advantageous where all proposed recipients of restitution can be identified. The restitutionary remedy in the nonclass representative claim is therefore adequate. In fact, as far back as 1989, the court in Dean Witter, Inc. v. Superior Court (1989) 211 Cal. App. 3d 758, 773, opined whether class action was ever “superior,” given the unavailability of damages under 17200.
B. Challenging The Standing Of The Representative In A UCL Class Action
Even though the plaintiff in a nonclass representative UCL claim is not required to have “standing,” i.e., have been harmed by the alleged misconduct, a class representative must be “truly representative of the absent, unnamed class members.” Bartlett v. Hawaiian Village, Inc. (1978) 87 Cal. App. 3d 435, 438. There has been no case that has actually held that a putative class representative in a UCL claim need not satisfy the typicality requirement. In fact, the Corbett court noted the “reality” that certain UCL claims could not be brought on behalf of a class because class action standards for the class representative would have to be met. Corbett, at 671, n. 10. (But see also dissent of Haerle, at p. 682-3, suggesting the majority might not enforce the stricter Code of Civil Procedure Section 382 standing requirement.)
C. Challenging Attempts To Expand The Scope Of A UCL Fluid Recovery Beyond Restitutionary Relief
The scope of a fluid recovery fund after Corbett is unsettled. One critical question is whether a fluid recovery fund will include only restitutionary amounts, creating only an advantage that restitution owed to “unavailable” members of the class will nevertheless be disgorged. While a flurry of recent cases assume that disgorgement of “profits” into a fluid recovery fund is proper in a UCL class action, without regard to linkage to restitution, the California Supreme Court’s decision in Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal. 4th 1134, explicitly stated that “this court has never approved of non-restitutionary disgorgement of profits as a remedy under the UCL.” The court clarified its use of the term “disgorgement” in earlier opinions, noting that “we were referring to the restitutionary form of disgorgement and not the non-restitutionary type.” Id. at 148. The court did not decide whether disgorgement of something broader, into a fluid recovery fund in class actions, would be permissible in UCL class action claims. Id. at n. 6.
In the Frieman case, the Court of Appeal, as noted above, recognized that the scope of a disgorgement remedy is an open question. “The issue of the availability of non-restitutionary disgorgement in a properly certified UCL class action” has not be resolved. Frieman, 116 Cal. App. 4th at 37.
The analysis in Korea Supply, however, at least provides support to argue that such disgorgement is improper. While limiting its holding to individual private actions under the UCL, the Court in Korea Supply analyzed the legislative history of the UCL and concluded that the legislature intended to limit the available monetary remedies. (This argument was rejected by the majority in Corbett, however, as a reason not to expand the UCL to class actions.) Another reason stated by the Korea Supply Court for not allowing recovery of non-restitutionary disgorgement was that permitting such damages would enable the plaintiff to obtain tort damages, “by bypassing the burden of proving the elements of liability under its traditional tort claims.” Id. at 1151. That reasoning is equally valid in the class context where presumably the weaker proof burdens of a UCL action would still exist. Until the question is squarely addressed on the merits by the appellate courts, defendants should continue to argue that a fluid recovery fund must be limited to restitutionary amounts.
[1] California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, prohibits “any unlawful, unfair or fraudulent business act or practice and any unfair, deceptive, untrue or misleading advertising and any act prohibited by” Section 17500. A defendant may be liable under the UCL if an act or practice is either unlawful, unfair or fraudulent. Cel-Tech Com. Inc. v. Los Angeles Cellular Tel. Co. (1999) 20 Cal. 4th 163, 180.
[2] “It may be the case under the UCL, a class action would allow for disgorgement into a fluid recovery fund and the distribution by various means. [Citations omitted.] But the establishment of such a fund and the distribution of its proceeds does not present the same order of institutional difficulty as does the maintenance of a permanent statewide injunction requiring judicial supervision.” Cruz at 318.
[3] An adhesive contract is a standardized contract that is drafted by the party with superior bargaining power, which does not permit negotiation of its terms, but rather only permits the weaker party to either adhere to the contract or reject it. Gutierrez v. Autowest, Inc. (2003) 114 Cal. App. 4th 77, 88 quoting Armendariz v. Foundation Health Psychiatric Services, Inc. (2000) 24 Cal. 4th 83, 98.
[4] Note, the discussion on preemption, at Section IV.B., below, should also be considered in connection with grounds for removal.
[5] Where complete preemption exists, a state claim in the subject area cannot be stated. “The Supreme Court has recognized complete preemption only with respect to the Labor Management Relations Act and the Employment Retirement Income Security Act of 1974.” Hendricks v. Dynegy Power Marketing, Inc.(S.D. Cal. 2001) 160 F. Supp. 2d 1155, 1158.
[6] However, the Class Action Fairness Act of 2004 ("Act"), if passed, would reverse the current prohibition on aggregating individual class claims to reach the amount in controversy. Under that Act, such aggregation would be permitted, but to meet the amount in controversy requirement the aggregate claims would need to exceed $5,000,000, exclusive of interest and costs. See S. 2062, 108th Cong., 2d Sess. Sec. 4 (2004). A similar version of the Act failed to win full Congressional approval last year. As of the writing of this paper, the Senate has yet to vote on the Act.
[7] If the Class Action Fairness Act of 2004 passes, however, an argument exists that the policy reasons for permitting the aggregation of individual class members claims should also apply to Section 17200 representative claims, even if uncertified, and if the claims so aggregated exceed $5,000,000, the district court should exercise jurisdiction.