BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Adam B. Schiff, Chairman
1999-2000 Regular Session
SB 593 S
Senator Morrow B
As Introduced
Hearing Date: May 11, 1999 5
Business and Professions Code 9
DLM:jt 3
SUBJECT
Private Unfair Business Practices and False Advertising
Claims
Brought Under Business & Professions Code 17200 et seq.
DESCRIPTION
This bill would amend the definition of unfair competition
by requiring that an act be both unlawful and unfair. The
current definition includes either unlawful or unfair
business acts.
This bill would limit a private plaintiff's ability to
bring unfair trade and competition and false advertising
claims, by requiring that a plaintiff must have actually
been harmed, or threatened with actual harm, in order to
have standing to bring suit. In addition, persons acting
on behalf of interest groups would be required to prove
that some of its members have been harmed, or threatened
with harm, in order to have standing to sue. If
restitution is sought, then the group must meet the
requirements of a class action (the parties are numerous or
it is impractical to bring them all before the court; there
are common questions of fact and law; the class
representative asserts claims typical of class; the
representative will adequately represent the interests of
the class).
This bill would also demand closer court scrutiny of all
phases of private representative suit litigation (those
individuals who sue on behalf of the general public).
(more)
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First, in order to have standing, a person would have to
prove actual or threat of harm to themselves. Second, any
representative plaintiff would be required to meet the
class action requirements described above. Third, any
proposed resolution would have to be certified by the court
at a final hearing. Finally, any such certified outcome
would bar all subsequent private claims based upon similar
facts and/or theories of liability against the same
defendant.
BACKGROUND
Existing law, Business & Professions Code 17200, provides
that "any person" may bring suit under this Act. Public
prosecutors, private litigants who have been harmed by an
unfair business practice, and private litigants
representing the interests of the general public, all have
standing to sue. Only public prosecutors may recover civil
penalties. The statutory remedies for private actions
brought on behalf of the public are injunction and
restitution. There are no attorneys' fees provided in this
section.
Examples of recent 17200 litigation include the "Joe
Camel" case, which successfully challenged the practice of
advertising tobacco products to underage children; an
action enjoining false and misleading raw milk
advertisements which exaggerated the health benefits of raw
milk, but failed to disclose potential dangers; as well as
actions against vocational technical schools which failed
to provide students with adequate training, and a bank's
practice of unilaterally imposing alternative dispute
resolution on its customers.
Last session three bills were introduced which would have
altered the Unfair Competition Law (UCL) much as this bill
proposes, SB 143 (Kopp), SB 1309 (Mountjoy) and AB 1295
(Caldera). Each of those efforts failed. SB 593 is a
reintroduction of SB 1309 (Mountjoy). A fourth measure, AB
1394 (Figueroa), Ch. 711, Stats of 1997 represented a
compromise between consumers and businesses regarding
application of the UCL to the "slack-fill" law.
AB 1394 is discussed in more detail below.
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More recently, the California Supreme Court tailored the
application of section 17200, et seq., by providing a
definition of "unfair" for purposes of the Unfair
Competition Law: "When a plaintiff who claims to have
suffered injury from a direct competitor's 'unfair' act or
practice invokes section 17200, the word 'unfair' in that
section means conduct that threatens an incipient violation
of an antitrust law." Cel-Tech Communications v. Los
Angeles Cellular Telephone Company (1999) __ Cal. 4th __,
83 Cal. Rptr. 2d 548.
CHANGES TO EXISTING LAW
1. Existing law defines "unfair competition" as any
unlawful, unfair or fraudulent business practice?.
This bill would define "unfair competition" as any
unlawful and unfair or fraudulent business practice?.
2. Existing law does not require any plaintiff to prove
actual harm, or threat of harm, to themselves in order to
have standing to sue.
This bill would require all plaintiffs to prove actual
harm, or threat of harm, to themselves, or in the case of
groups, their members, to have standing.
3. Existing law does not require persons who act in the
interests of members in seeking restitution, to meet the
requirements of a class action suit, e.g., the parties
are numerous or it is impractical to bring them all
before the court; there are common questions of fact and
law; the class representative asserts claims typical of
class; the representative will adequately represent the
interests of the class.
This bill would require persons acting in the interests
of members in seeking restitution, to satisfy the
requirements of a class action.
4. Existing law does not require individuals who bring
representative claims on behalf of the general public to
meet the requirements of a class action, e.g., plaintiff
must be an adequate representative of general public's
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interests; their attorney must adequately represent the
general public's interests; and plaintiff's claims must
be typical of general public's claims.
This bill would require persons suing on behalf of the
general public, to satisfy the requirements of a class
action, as described above.
5. Existing law does not require a formal hearing or
certification of disposition in unfair business practices
or false advertising suits.
This bill would require a hearing and court certification
of final disposition of representative actions based upon
unfair business practices or false advertising claims.
6. Existing law does not bar subsequent suits against the
same defendant based upon substantially similar facts or
theories of liability. However, later claims based upon
facts and theories for which there has been a full and
fair opportunity to present before the court are barred
through the doctrine of collateral estoppel.
This bill would bar all subsequent suits against the same
defendant based upon substantially similar theories of
liability.
7. Existing law does not require a representative plaintiff
to give notice to any other party prior to settlement of
an unfair business practices or false advertising claim.
This bill would allow the court to direct notice be given
to persons as directed by the court, prior to settlement
of an unfair business practices or false
advertising claim brought on behalf of the general
public.
COMMENT
1. Sponsor's stated purpose and support
The sponsors of this bill, the Association for California
Tort Reform now known as "CJAC", write the committee to
say this change in law is needed to "address serious
abusive 'civil actions' which can now be filed under
California's Unfair Competition Law (UCL)?. Current
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abuse of the UCL stems primarily from its recently
exploding use by plaintiff's attorneys on behalf of the
general public or for individuals who have not been
harmed or misled and who may not even have had any
personal involvement with the product or service. The
law permits any private attorney to become a
quasi-prosecutor, selecting deep pockets at will." The
California Chamber of Commerce adds that "Business and
Professions Code 17200 et seq. serves a valuable
purpose for both businesses and consumers. However, it
has several provisions which have allowed it to be used
as a bludgeon, even against businesses which have
violated no law, regulation or statute."
The California Manufacturers Association offers examples
of section 17200 suits which they believe are abusive.
"A recent example of abuse of the UCL was in November of
1998, when a suit was filed against Nike, alleging that
they had fraudulently induced California residents to
purchase products that it had manufactured in Southeast
Asia, supposedly using exploited workers ( Nike v. Kasky ,
994446). The suit demanded that Nike disgorge its
profits, which were alleged to be the result of Nike's
alleged "unfair" or "misleading" public claims that they
did not exploit their overseas workers. Although the
suit was dismissed in February-most likely on First
Amendment grounds--a gang of plaintiff's firms filed a
similar suit this January, alleging that 18 clothing
retailers, including, The Gap, Inc. and J.Crew ( Union of
Needletrades Industrial and Textile Employees v. The Gap ,
300474), were also profiting at the expense of exploited
overseas workers. Once again, the suit is demanding that
the clothing retailers disgorge their ill-gained profits.
Although, arguably, these far-reaching suits are the
exception, not the rule, the UCL provides few, if any,
boundaries. SB 593 will provide some reasonable
boundaries."
2. Court interpretations of Business and Professions Code
17200 et seq .
a) Cel-Tech case provides new test for unfair
competition claims
The California Supreme Court recently issued an
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opinion wherein it explored the policy and scope of
the unfair competition law. In the
Cel-Tech Communications v. Los Angeles Cellular
Telephone Company (1999) 83 Cal. Rptr. 2d 548, the
court stated, "The statutory language referring to
'any unlawful, unfair or fraudulent' practice makes
clear that a practice may be deemed unfair even if not
specifically proscribed by some other law. Because
Business and Professions Code section 17200 is written
in the disjunctive, it establishes three varieties of
unfair competition--acts or
practices which are unlawful, or unfair, or
fraudulent. 'In other words, a
practice is prohibited as "unfair" or "deceptive" even
if not "unlawful" and
vice versa.'" (Citation omitted.)
"Although the Unfair Competition Law's scope is
sweeping, it is not
unlimited. Courts may not simply impose their own
notions of the day as to what is fair or unfair.
Specific legislation may limit the judiciary's power
to declare conduct unfair. If the Legislature has
permitted certain conduct or considered a situation
and concluded no action should lie, courts may not
override that determination. When specific
legislation provides a 'safe harbor,' plaintiffs may
not use the general unfair competition law to assault
that harbor?.
"To guide courts and the business community adequately
and to promote consumer protection, we must require
that any finding of unfairness to competitors under
section 17200 be tethered to some legislatively
declared policy or proof of some actual or threatened
impact on competition. We thus adopt the following
test: When a plaintiff who claims to have suffered
injury from a direct competitor's 'unfair' act or
practice invokes section 17200, the word 'unfair' in
that section means conduct that threatens an incipient
violation of an antitrust law, or violates the policy
or spirit of one of those laws because its effects are
comparable to, or the same as, a violation of the law,
or otherwise significantly threatens or harms
competition." Cel-Tech, Id.
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The court noted the limitations upon its decision,
specifically stating, "This case involves an action by
a competitor alleging anti-competitive practices. Our
discussion and this test are limited to that context.
Nothing we say relates to actions by consumers or by
competitors alleging other kinds of violations of the
unfair competition law such as 'fraudulent' or
'unlawful' business practices or 'unfair, deceptive,
untrue or misleading advertising.'"
b) Interpretations by various other courts of other
provisions
Regarding the scope of the act, the court in Bank
of the West v. Superior Court (1992) 2 Cal. 4th 1254,
1266, states "(T)he Unfair Business Practices Act
defines unfair competition as any unlawful, unfair, or
fraudulent business practice and unfair deceptive,
untrue or misleading advertising...The Legislature
intended this 'sweeping language' to include 'anything
that can properly be called a business practice and
that at the same time is forbidden by law. (Citations
omitted).' In drafting the act, the Legislature
deliberately traded the attributes of tort law for
speed and administrative simplicity. As a result, to
state a claim under the act, one need not plead and
prove the elements of a tort. Instead, one need only
show that 'members of the public are likely to be
deceived. '"
No actual harm need be pleaded or proven. In
referring to 17500, the Chern court pointed out that
the "intent of the disseminator and knowledge of the
customer are both irrelevant...The statute affords
protection against the probability or likelihood as
well as the actuality of deception or confusion."
Chern v. Bank of America (1976) 15 Cal. 3d 866.
In describing the purpose of the act, the courts have
found, "(T)he purpose... is to deter future violations
of the unfair trade practice statute and to foreclose
retention by the violator of its ill gotten gains.
The Legislature considered this purpose so important
that it authorized courts to order restitution without
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individualized proof of deception, reliance, and
injury, if necessary to prevent the use or employment
of an unfair practice." Bank of the West, supra. 126.
In Fletcher v. Security Pacific National Bank
(1979) 23 Cal. 3d 442, 451, the court declared, the
"protection of unwary consumers from being duped by
unscrupulous sellers is an exigency of the utmost
priority in contemporary society [citations omitted],
we must effectuate the full deterrent force of the
unfair trade statute. Indeed our concern with
thwarting unfair trade practices has been such that we
have consistently condemned not only those alleged
unfair practices which have in fact deceived the
victims, but also those which are likely to deceive
them." Id.
The Fletcher court also addressed the question of
whether the purposes of 17200 and 17500 were best
served by individual suits, or class actions. On that
point the court observed, "(A)lthough an individual
action may eliminate the potentially significant
expense of pretrial certification and notice, and thus
may frequently be a preferable procedure to a class
action, the trial court may conclude that the adequacy
of representation of all allegedly injured
(plaintiffs) would best be assured if the case
proceeded as a class action. Before exercising its
discretion, the trial court must carefully weigh both
the advantages and disadvantages of an individual
action against the burdens and benefits of a class
action proceeding for the underlying suit." Fletcher,
Id. at 454.
Finally, the courts have sustained the limitation on
remedies under the act. "Damages are not available
under 17203. (Citations omitted)..." The court
continues, "Section 17203, permits 'any court of
competent jurisdiction' to enjoin any person
performing or proposing to perform an act of unfair
competition....the act also authorizes the court to
make such orders as 'may be necessary to restore to
any person in interest any money or property, real or
personal, which may have been acquired by means of
such unfair competition." Bank of the West Id.
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1266-67. Attorney fees are not available under the
act either. See for instance, Pachmayr Gun Works,
Inc., v. Olin Mathieson Chemical Co., Winchester
Western Division (C.A. 1974) 502 F.2d 802; People of
State of Cal. v. Steelecase Inc., (C.D. Cal 1992) 792
F.Supp. 84.
3. Opposition
a) Narrowing application of UCL to unlawful and
unfair, or fraudulent acts
The Office of the Attorney General opposes to this
change in law saying, "Prosecutorial offices use Bus.
& Prof. Code 17200 actions as the primary means of
civil redress of consumer law violations. The statute
is also fundamental to many governmental antitrust and
environmental cases and is also used by the Attorney
General's office to deal with other unlawful conduct.
This bill would change and narrow the definition of
"unfair competition." Current law allows for actions
for "unlawful or unfair" business conduct. The
proposed change would hinder prosecutions in obtaining
equitable relief to redress illegal conduct. In
addition to proving the violation of law, prosecutors
would have to prove unfairness, a far more generalized
standard that likely includes establishing public harm
or injury." Additionally, a number of public advocacy
groups oppose this change for basically the same
reasons.
b) Requirement of actual or direct threat of harm
Consumer's Union states that this provision "would
drastically change the underlying theory behind UCL
and false advertising actions. Under existing law,
any act of unfair competition or false advertising is
treated as inherently harmful. In other words, the
statutes create an irrebuttable presumption of 'harm'
to the public, as well as competitors in the market.
This 'zero-tolerance' for any practice 'which on its
face violates fundamental rules of honesty and fair
dealing' (citation omitted) is entirely justified to
protect the public and integrity of the marketplace."
The Planning and Conservation League writes that
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"under current law a plaintiff may sue to preserve and
protect important public rights...by requiring either
a personal injury or a direct and personal financial
impact, SB 593 would act as a flat-out prohibition of
such public interest suits."
c) Class action requirements
SB 593 would impose class action requirements in two
instances: (1) for any person bringing an action on
behalf of its members, and (2) for private persons
bringing actions on behalf of the general public. "As
with the 'harm' requirement, class action standards
will make it much more difficult to bring UCL and
false advertising claims," writes Consumers Union.
Consumer Attorneys of California adds that meeting
class action standards is a much more cumbersome and
expensive proposition for potential plaintiffs,
quoting Lazar v. Hertz Co., (1983) 143 Cal. App. 3d
128, they write, "In contrast to the streamline
procedure expressly provided by the Legislature (for
the UCL), the management of a class action is a
difficult legal and administrative task." Id.
In addition, utilization of 17200 would be unlikely
if the class action standing requirement were to
become law. This is because those plaintiffs who
could clear class action certification hurdles would
choose the class action route in bringing unfair
competition or false advertising actions, as the
damages allowed under the Civil Code are substantially
greater than under the UCL.
4. No evidence that 17200, et seq. has been widely
abused
The Consumers Union writes the Committee on this point to
say that, "This bill is apparently intended to counter
allegedly large numbers of unmeritorious UCL and false
advertising actions. Yet there is little empirical
evidence of such a problem. Significantly, the
California Law Revision Commission studied UCL litigation
for two years, and it is not recommending the drastic
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changes contained in SB 593. The CLRC even issued a
widely distributed notice on November 8, 1995 to business
trade associations, and lawyers who represent business
defendants, asking for evidence of problems with UCL
litigation. After several months, the Commission
received little such evidence."
The Legal Services Section of the State Bar of
California, who wrote the Law Revision Commission last
year regarding then proposed legislation, SB 143 (Kopp),
and offered, "(T) o the extent there are abuses in unfair
competition litigation, individual courts have the power
to address them. The proposed legislation will not put
an end to so-called 'abuses' and will significantly
hamper those who sue under the unfair competition law for
the public good."
Similar criticism was raised by Public Counsel, and
Consumer Attorneys of California, who ask, "(W)hy are we
changing this law, where is the problem?" "The primary
concern is for the 'potential' for abuse of lawsuits
under 17200, and while that potential may have been
realized in a handful of cases in the twenty years that
the statutory scheme has been in existence, there is no
demonstrated proof of widespread problems."
5. Drafting concerns with the bill
a) Problems with notice requirement
While the bill purports to mandate notice "as the
court directs," the bill does not contain any specific
requirement that notice be given to all interested
parties and those involved in similar ongoing
litigation, or parties affected who have yet to
realize a claim, and/or file a claim. Another concern
is that there is no sanction for failing to provide
the "notice" contained in the bill.
Without adequate notice, it is doubtful the res
judicata protections this bill aspires to, will meet
due process standards. By way of comparison, notice
to the affected class is mandatory under federal and
state class action suit procedure. In that context,
notice is considered such an important component that
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it is ordered by the court immediately following
determination of the class.
b) Hearing provision
The concern here is that the protection afforded by
this new procedure may be illusory, and in practice
courts will rubber-stamp any settlement presented,
including collusive settlements. With court calendars
as crowded as they are, it would be unlikely that a
court would upset an uncontested settlement. Further,
it would be rare for a court to undo a deal, based
upon an eleventh hour concern raised by an outside
party.
6. Prior related legislation, AB 1394 (Figueroa); AB 1295
(Caldera); SB 143 (Kopp); SB 1309 (Mountjoy)
AB 1394, Ch. 711, Stats. of 1997 addressed issues raised
by a number of lawsuits against businesses such as
computer software, cosmetic, and toy companies. These
lawsuits, filed under the Unfair Competition Act, have
been based upon alleged violations of the "slack-fill"
laws. The bill defined "Slack-fill" as the difference
between the actual capacity of a container and the volume
of the product it contains, and "nonfunctional
slack-fill" as the empty space in a package filled to
less than capacity for reasons of deception or fraud. It
enumerated 15 specific provisions under which non-food
containers can contain slack-fill, including:
a) For unavoidable product settling during shipping
and handling;
b) Where mandatory labeling requirements necessitate
extra packaging;
c) To discourage pilfering or to accommodate
tamper-resistant devices;
d) Where extra space, such as head space, is needed
for the mixing or adding of liquids or powders prior
to use; and
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e) Where the contents are designed to serve a
particular function that is clearly disclosed on the
exterior packaging, such as computer hardware or
software.
AB 1394 reflected a compromise agreement between a range
of business interests (the sponsors), district attorneys,
consumer attorneys, and others. The author stated that
the issue arose in the context of AB 1295 (Caldera) of
1997, which proposed major changes to the Unfair
Competition Law (UCL). That bill was strongly opposed
by the non-business parties noted above, and failed
passage in the Assembly Judiciary Committee. However,
the author states, a number of committee members
expressed sympathy that the slack-fill law was used in
connection with the UCL. The author states that members
of the Committee suggested that the slack-fill laws
rather than the UCL, might be the problem, and urged the
parties to work on a resolution by amending the
slack-fill law. SB 1394 was the result of that process.
AB 1295 (Caldera), would have required private plaintiffs
bringing an unfair competition or false advertising
lawsuit to show that they suffered "actual or threatened
injury." Required private plaintiffs alleging an injury
based on a misrepresentation, to show all of the
following: that they were actually misled; that they
actually and reasonably relied on the representation; and
that the persons responsible for the misrepresentation
knew or should have known that the misrepresentation was
deceptive, untrue or misleading. Finally, the bill would
have required private plaintiffs bringing an unfair
competition or false advertising lawsuit on behalf of
other persons similarly situated to be subject to the
requirements applicable to class action lawsuits, and any
judgement entered would be a "final judgment of the
class." AB 1295 died in the Assembly Judiciary
Committee.
SB 143 (Kopp) of 1997, was sponsored by the California
Law Revision Commission. That bill as heard in this
Committee would have altered the UCL, through the
addition of procedural requirements. In particular, SB
143 would have required plaintiffs to be adequate
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representatives of the general public; would have given
public prosecutors priority over private litigants; would
have required court certification of any outcome of
private representative suits; and require exchange of
notice, including to interested parties, of the progress
of each representative action. Following defeat of the
proposed changes to the UCL, and granting of
reconsideration in this Committee, the author gutted the
bill. SB 143 was subsequently passed and chaptered as a
Public Records Act disclosure measure, SB 143 (Kopp) Ch.
620 Stats. of 1998.
SB 593 (Morrow) is a reintroduction of SB 1309 (Mountjoy)
of 1998. The only difference between the two measures is
that SB 593 would narrow the scope of the UCL in addition
to the standing requirements. SB 593 would do this by
adding the word "and" to the definition of unfair
competition, to prohibit "unfair and unlawful business
acts."
Support: California Chamber of Commerce; Association of
California Insurance Companies; California
Manufacturers Association; Personal Insurance
Federation; Farmers Insurance Group; Association of
California Life and Health Insurance Companies;
Insurance Agents and Brokers Legislative Council;
Semiconductor Equipment & Materials, Int.; Health
Net; California Association of Realtors; Countrywide
Home Loans
Opposition: California Attorney General; California
District Attorneys Association; Consumers Union;
Consumer Attorneys of California; California
Conference Board of the Amalgamated Transit
Union; Engineers and Scientists of California;
Region 8 States Council of the United Food and
Commercial Workers; Hotel Employees, Restaurant
Employees International Union; California
Conference of Machinists; Natural Resources
Defense Council; Environmental Law Foundation
Planning and Conservation League; California
Applicants' Attorneys Association; Public
Counsel; Consumers for Auto Reliability and
Safety; Los Angeles Housing Law Project; Western
Center on Law & Poverty, Inc.; San Fernando
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Valley Neighborhood Legal Services; Foundation
for Taxpayer and Consumer Rights; WORKSAFE
HISTORY
Source: Civil Justice Association of California
Related Pending Legislation: None Known
Prior Legislation: SB 143 (Kopp), died in Senate Judiciary
Committee, subsequently gutted and amended,
Ch. 620, Stats. of 1998
SB 1309 (Mountjoy) of 1998, died in Senate
Judiciary Committee
AB 1295 (Caldera) of 1997, died in Assembly
Judiciary Committee
AB 1394 (Figueroa) Ch. 711, Stats. of 1997
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