MI Conference Series
No. 9 October 24, 2002
Unfair Competition and Consumer Fraud Statutes:
Recipe for Consumer Fraud Prevention or Fraud on the Consumer, continued
MR. OLSON: We have asked Elizabeth Cabraser to add a few more comments, if she has any reaction to what Jeffrey was saying.
MS. CABRASER: I’m not about to waste anyone’s valuable time with State Farm bashing, because I don’t think that’s appropriate.
I think the Avery case—I can’t really comment on the other cases—is about a fundamental issue on which the two sides differ fundamentally, and about which they both feel very strongly.
State Farm says, “We’re regulated in every state. We have insurance commissioners. They tell us what our policies can say. No one told us that we couldn’t use non-original parts, and you’ve got a lawsuit telling us that we can’t.”
We agree. No one told State Farm that it couldn’t use non-original parts. Our case is about a contractual provision, a sentence that’s the same in all the policies across the country, which promises a particular level of quality. Our case is that quality was not delivered because the parts that State Farm selected, non-OEM parts, did not live up to that contractual promise. That’s something that was not regulated. That’s something for which the states had not preempted the field. That was a contractual beef between the policyholders and State Farm. It also fell under the consumer fraud statute because we alleged and demonstrated at the trial level that that quality differential was known and that we met the elements of the consumer—it wasn’t accidental. It wasn’t a strict liability situation.
Obviously, those are fighting words, and we fought over them and will continue to fight. But that illustrates a classic case in which you have a regulatory system in place that does not cover the conduct at issue in the lawsuit and in which a written contract between the plaintiffs and the defendants gives rise to a direct cause of action. That’s not always going to be true in a consumer case, even a case that could be brought under a breach of warranty theory.
Sometimes you don’t have a contract. Sometimes you don’t have a sentence that’s the same or means the same for all class members. So you can have some complicated and vexing issues in terms of the overlap of governmental regulation, statutes, the common law, and private enforcement. State Farm is probably not the correct poster child for that debate, at least not in our view.
I also want to make a marketplace comment. Francis McGovern mentioned the concept of using the marketplace to decide the value of a claim over time in many courts, to avoid the all-or-nothing situation.
The conundrum there is (and I think it’s been eloquently stated by Jeff): Does a company want to be exposed in many states at many times from many directions with the same or similar claims involving the same conduct, the same product, or the same contract, and watch the courts go back and forth over what that means and be faced with multiple defense and conflicting rulings? Or does the company want to face that claim in one place at one time? Or would the company prefer not to ever face it at all?
If you had the three choices, you’d prefer not to have to face it at all, but often that’s not a realistic choice.
If there were a way to construct a fair procedure to allow a marketplace of trials or adjudication that could play out before the company was bankrupt or all the plaintiffs died, we’d all love to see that. There’s a lot of debate and discussion about that and a lot of struggle toward that.
If you look at Judge Easterbrook’s ruling in Bridgestone/Firestone, which drives me bananas, at least what he was saying is, I may not like these claims very much, but they may be worth something; let’s let the marketplace decide what they’re worth.
The problem with that opinion in a consumer context is that there’s no marketplace. The cases aren’t worth enough individually to justify the expense of prosecution and individual defense. There aren’t enough courts in the country. That marketplace will never happen. The claims will go unprosecuted and, at least from the plaintiffs’ perspective, you have a failure of justice.
In other cases, such as asbestos, those claims are worth bringing individually, and there are lots of them. But you have a situation in which you can’t conduct an efficient marketplace because the court system is clogged and stalled, and company after company goes bankrupt.
So if we want to create a balance between accountability, predictability, efficiency, economy, and fairness, so that companies and consumers alike can live with a complementary system of government regulation (minimal, one would hope), private enforcement (fair, one would hope), and litigation whose costs don’t exceed its benefits, we’re going to have to come up with that mechanism. It’s a completely new mechanism.
We don’t have a model for that. We’ve got a framework for it in the federal rules, but no one has filled in the gap.
Say that someone came to me and said, “You may think this is a wonderful claim, but here is how you’re going to have to prove it. This is how many trials you’re going to have to go through, and here’s where the court is that’s going to decide that claim. This is the law that’s going to govern, and here are your choices. You’re going to have to convince the court which way, and this is how long it’s going to take.” That would enable me to figure out if it’s worthwhile. It also would enable any company to decide whether that is a risk or gamble that it wants to take and see played out, whether it wants to resist the claim, or whether it wants to settle the claim without betting the company.
There are “bet-the-company” cases out there, deservedly so. We’ll differ about which ones those are. But they’re rare. The usual case is not a bet-the-company case. The usual company makes lots of products, one of which may be defective. The usual company issues lots of insurance policies, one of which I may think is misleading.
That’s not a situation in which we ought to be betting the company. It’s not a situation on my side where I ought to be betting the lives or interests of my clients on a system that we’re all frustrated with and that none of us can predict.
So it’s a huge task. Maybe we’re better off leaving it to the next generation, saying that we can’t solve it, and we’ll just keep whining. But I don’t like to whine, and I don’t think anyone in this room does, either. I know that we’d all like to go ahead with the business of doing what we do, knowing what the risks are, what’s at stake, and what’s going to govern our conduct.
In this country, you can’t count on legislatures; you can spend a lot of money lobbying, and ATLA can spend a lot of money lobbying. We can go through election cycles. We can do all that. The existence of the consumer fraud statutes today shows that, at least to some of you, that is beyond our ultimate control.
But we, as lawyers, in-house counsel, litigators, academics, and judges, have a common law system of interpreting and enforcing statutes. We can create the framework to do this. We can experiment and come up with systems that are fair.
MR. OLSON: I wanted to pursue something that Elizabeth Cabraser mentioned, and it also came up at lunch. Namely, the statutes provide for statutory damages, say $500 each, and then you get an enormous aggregation effect. On paper, at least, there is an in terrorem threat of whether the defendant is going to have to pay billions of dollars.
I thought of one counterexample to the generalization that these are never actually used as stated, namely, the junk-fax cases that have been filed in several cities, where, say, a Mexican restaurant has been told to pay $25 million because the court did a simple mathematical calculation on the basis of the statute.
There is, of course, a widespread sense of unease, not just among defendants as to whether that is going to be a precedent for other cases, perhaps telecom companies with spam, and so forth; a different kind of unease comes up with the explanation that you offered, which is that judges find ways not to expose defendants to the harshness of that, so they find ways to get around it or find some intermediate sanction that wasn’t actually on paper as part of the law.
That should make us worry about different problem with arbitrariness and randomness, given that in a regime of judicial evasion it makes a huge difference as to which judge you draw and it becomes less predictable as to what the courts will do.
Is there a way out of this?
MS. CABRASER: One way out—and I’ll break my own rule about not trying to amend the statutes, but I’m not sure from a policy standpoint whether this is correct, is obviously to have caps on a particular course of conduct. For example, it’s X per violation, but in no event greater than Y. Some state statutes do this. So if you have a single course of conduct such as the mass fax that goes out at 3 a.m., you’re going to be stung for that if it violates a law. But there’s going to be a limit.
The Supreme Court may be showing us the way on this by coming at it from the punitive damages perspective in the Cooper Industries v. Leatherman Tool Group case, 121 S.Ct.1678 (2001), which came out last year. The Supreme Court for the first time—it had been working up to this—said flat out that there are constitutional limits on the punishment that can be imposed on any defendant for punitive damages arising from any course of conduct. That’s a matter of substantive due process. In fact, de novo review of a jury award of punitive damages is mandated. Many states do that already. But all states and federal courts must do it now to make sure that a court, which is a better judge than a jury of proportionality and whatever else the defendant might be facing in other places, can come into play.
If courts are going to be required to do that—and they are, in punitive damages cases, to avoid repetitious or disproportionate punitive damages—it makes sense for legislators to consider or courts to impose other limitations.
You can best do that, though, if you’ve aggregated the claims in one court. Or at least you should have a system so that the courts know where the claims are, how many of them there are, and what the level of exposure it is that the defendant faces versus the level of reprehensibility or the clearness of the violation, to make that proportional determination.
But I’m amazed that defense counsels haven’t made more of the Cooper case than they have.
AUDIENCE QUESTION: Regarding your point about letting the marketplace decide: my understanding of Judge Easterbrook’s statement—that the market should decide in a consumer product situation—is that people can decide whether to buy the product. It sounded as though you were referring to the marketplace as the courts. Could you clarify your understanding?
MS. CABRASER: Yes. I just finished filing a petition for a cert to the Supreme Court from the Easterbrook decision, so I’ve certainly got a bias in terms of how I view that decision. I think that he was talking specifically about a marketplace of different courts and different juries evaluating the consumer claim at issue in that case. He wasn’t talking about people making choices as consumers, because the claim in that case was that consumers weren’t told something that was material or would have been material either to their decision to buy the product or to pay a particular price for it. It’s the classic consumer claim in which something is concealed or misrepresented about the qualities or characteristics of a product and people are not exercising informed choice about it.
So it’s an after-the-fact-marketplace for the litigation, not a before-the-fact-marketplace for the product.
Our claim was that the marketplace would have decided if the consumers had been told what they should have been told about the product up front. Because the manufacturer decided not to make those disclosures and misrepresentations, consumers were misled.
So our marketplace concept in terms of our claim was that a marketplace would decide between competing products when the qualities and characteristics of the products are clearly and accurately disclosed. Then people can decide what they want to buy and how much they want to pay. The conduct disrupted that process.
Judge Easterbrook is saying that you have a consumer claim, so we’re now going to let the marketplace of the judicial system decide whether you have a valid claim and, if so, what that claim is worth. In the end, you can settle your case with the defendants for the right amount because you’ll have the information.
Our problem with that is that we’ll have spent much more time and money than the claims are worth by then. Judge Easterbrook would probably say, “Exactly. Don’t bother me.” The defendants, though they love the outcome, have the ironic situation in which they may be spending much more to defend a claim.
The Firestone cases, by the way, are now pending in 12 states. It’s become the Cooper Tire case. It all started out in one MDL as a federal case. We laughed at Cooper Tire because it was so diffuse and wasteful. The last laugh—or the intermediate laugh—goes to Cooper, because that case settled consensually for what both sides thought was the right price. And the Firestone case, which started out in a single court aggregation, is now a diffuse case in 12 states. So who knows who will have the last laugh? It’s a case study in something, although I’m not sure what.
MR. JACKSON: Elizabeth, you said that the old way was: if there was an issue on a coverage matter, declaratory judgments were often filed and then worked their way through courts. The new way seems not new any more. It’s gone on for too long. Now attorneys file a class action, look for the declaratory judgment action, layer on top of that a fraud claim, layer on top of that whatever else you want to lay.Panel Two
Successful Defense Litigation Strategies
MR. JOHN TURNER: The last panel for today is entitled “Successful Defense Litigation Strategies,” which suggests that there are indeed some strategies. We’ll find that out soon enough. We have two speakers who, if there were such creatures, would certainly know about those strategies and perhaps have used them in their own practices.
I want to say something in particular about the California experience and about some of the expansive use of class action, representative actions, and so on.
Most of you probably know what a representative action is. That has, at least in California, significantly reduced the odds that litigation be used as a tool for “enforcing” consumer protection statutes. Federal decisions hold that if an attorney representing a class is a member of the class, it’s generally impermissible, because the attorney’s interest in taking the fee from the litigation is different from that of the members of the class. But in California, at least, the state courts often take the position that if the attorney is a valid member of the class, the fact that he or she is appearing for the class doesn’t disqualify that attorney from being a class representative.
So you have situations in which you not only have that kind of phenomenon; you have broad interpretations of the phrase “unlawful, unfair, and fraudulent.” You have the possibility of treble or punitive damages. You may have a provision or stipulation in which there is no requirement of individual proof that the practice was unfair or fraudulent to each of the affected consumers in a class action. Courts may permit restitution of any money or property that “may have been” acquired by means of any impermissible practice.
So this all asks the question, what can be done, if anything, with regard to defense strategies, short of changes in the wording of the state statutes? We’ve already discussed the fact that that may be very difficult to accomplish.
We have two speakers today who are noted authorities in this kind of litigation and in defense litigation in general.
Joe Escher is a partner with the Howard Rice law firm in San Francisco. He has been director of that firm since 1982 and serves as chair of its litigation department. His business litigation practice focuses at both the trial and appellate levels. He has extensive experience with consumer class actions, breach of contract, unfair competition, antitrust, and intellectual-property claims.
He has served as law clerk to the Fifth Circuit Court of Appeals. He received his law degree from the University of Chicago and undergraduate degree from Stanford.
Jack Trigg is an attorney in Denver with the Wheeler, Trigg and Kennedy law firm, where he’s a director. He has a national litigation practice that focuses on complex business litigation, product liability, and class actions. He has represented major corporate defendants as national trial counsel and has tried cases to juries in many state and federal courts throughout the country.
He has also focused on risk management and design and analysis of document retention and control programs. He frequently handles large claims that arise out of recurrent design or manufacturing defects or recall problems.
He’s active in numerous bar organizations. I’m sure many of you know that he’s a past president of LCJ and past president of the Federation, as well as a former board member of the DRI.
He is a fellow of the American College of Trial Lawyers.
MR. JOSEPH ESCHER: I’m here to talk about a statute that’s been mentioned on a number of occasions today. It’s California’s Unfair Competition Law, also known as Business and Professions Code, Section 17200—or just 17200, for short.
This is an example of saving the worst for the last in subject presentation, because California’s statute is truly dangerous, truly unpredictable, and a serious threat to businesses in California.
It’s a statute that has been applied from situations as diverse as Cap’n Crunch and Lucky Charms Leprechaun advertisements to the bribery of Korean bureaucrats, to a political speech regarding working conditions in factories in East Asia. This is all in the context of a state that views itself as being almost a sovereign in many ways.
The text of the statute is not so extraordinary. People talk about how broad it is, but it actually says very little. Section 17200 says, “Unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice.”
That seems clear. Section 17203 talks about what sorts of remedies you can get. It says, “The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition as defined in this chapter, or 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 unfair competition.”
That doesn’t seem very clear. What we’ve got is a long series of common law decisions that have given contours to this statute, which in some way seems to threaten to swallow the common law almost entirely.
It’s not much of an exaggeration to say that the California Unfair Business Practice Act gives everyone standing to sue anyone for anything that no one could sue anyone for.
The statute is very broad, and the case authorities on it are still developing. There are a large number of unanswered questions about what Section 17200 really means. I can only give you a brief introduction on this, and I’m going to focus on the private enforcement litigation rather than government enforcement litigation.
You should know, if you don’t already, that this is a claim that is routinely included in most California commercial or consumer litigation. I would say that in my own practice, I don’t have a single case in which this claim isn’t included.
The first thing that’s notable about this statute is the part about the standing of all persons, the notion that anyone has standing to sue any business for any unfair business practice regardless of whether you’ve been hurt: that’s obviously a very dangerous thing in and of itself.
But even in that context, you’ve got to make distinctions. There’s a distinction between what you would think of as a purely private attorney general action in which someone who has no injury and no involvement with respect to a particular practice can nonetheless sue as a private attorney general. On the other hand, you may have someone who has an injury or has an interest in an unfair business practice or an alleged unfair business practice that can bring an action in his representative capacity. But both the private attorney general and the individual who actually has a claim for unfair competition can sue on behalf of everyone. That, in addition to this vague notion of how broad the statute is, is what makes it so dangerous.
For example, in a private attorney general action, the plaintiff’s attorney himself can be the plaintiff. Or the plaintiff’s attorney’s legal secretary could be the plaintiff. Or a shell corporation with an attractive name like Stop Youth Addiction could be the plaintiff. Anyone can be the plaintiff, including the plaintiff’s attorney himself or herself.
Essentially what this creates is an opportunity for something that’s quite similar to a class action without any of the due process limitations and without any of the limits—although obviously, in some jurisdictions those limits are more theoretical than real—about superiority, the predominance of common questions, or the like.
You can get attorneys’ fees in 17200 cases if you prove you’ve done something to aid the public weal. But there are no damages, no punitive damages, and no treble damages. So although the California statute is a Goliath of sorts, it’s a Goliath with vulnerabilities, and one of them is this business about there not being any possibility of getting damages.
What you can get is an injunction or an order for restitution or disgorgement, but the notions of restitution and disgorgement can be tricky. Restitution can either be more or less than damages. You can get restitution in the context in which you have no damages. Of course, you might be able to get restitution in the context in which the restitutionary remedy would be much less than damages because it wouldn’t include any consequential damages. You’d only get your money back.
So to turn again to the substance: the first prong is whether the business practice is “unfair” And you know as well as I do what “unfair” means. You can just hope that the judge feels the same way you do.
Unfairness can be established either by expert testimony, as it did in the context of the Committee on Children’s Television Inc. v. General Foods Corp. case, 35 Cal. 3d 197 (1983), which involved those fiends, Cap’n Crunch and the Lucky Charms Leprechaun. It can be established by the use of surveys. I think that it’s possible to allege that an act or a practice is unfair even if it’s solely a breach of contract. So if your client has breached a contract, it’s conceivable that that in itself could be considered unfair.
The second prong is “unlawful “ Well, you think, that’s easy. But there are lots of laws and regulations. In California, it is unlawful to ask someone for his telephone number when completing a credit-card transaction. The Song Beverly Act. Under Section 17200, you can bring an action against a company that asks for phone numbers when it does credit-card transactions and can sue on behalf of everyone in California to try to get a restitutionary remedy, an injunction, or disgorgement of profits unlawfully obtained on those transactions.
Another example would be the antitrust laws. There are situations in which Section 17200 can be used even if there is no antitrust injury. For example, there are reported decisions, even by the California Supreme Court, allowing someone to sue under Section 17200 on an allegation of a group boycott when, in a parallel federal action, there has already been a determination that there’s no antitrust injury and that the case needs to be dismissed.
So Section 17200 can be used in ways that are very dangerous, because the existing limitations that you have on unlawful and unfair allegations can be circumvented. For example, you could have a law where there’s no private right of action. Basically, 17200 gives you that private right of action because you can borrow the breach of a law or regulation as a basis for the 17200 action.
The third prong is “fraudulent,” and everyone knows exactly what that means—except that this is fraudulent without any actual deception. You don’t need to prove that anyone has actually been deceived, only that there’s a likelihood of deception. My guess is that that can be proved with expert testimony as well.
When you take those three prongs of Section 17200—unfair, unlawful, and fraudulent—you see how difficult it is to prevail on any kind of dispositive motion in a 17200 case. It’s very difficult to prevail on summary judgment or on a demurrer or any other kind of attack on the pleadings. Essentially, anyone has the ability to pile up quite a few chips by bringing a 17200 claim on behalf of the general public, and your ability to get rid of that case without a trial is quite limited.
We’ve talked about Lucky Charms. Another example would be the illegal sale of cigarettes to minors, the Stop Youth Addiction, Inc. v. Lucky Stores, Inc. case, 17 Cal. 41 553 (1998), in which they just went through the yellow pages and sued every mom-and-pop store in the San Francisco Bay Area on the basis that they had sold cigarettes unlawfully to minors. No kind of individualized proof. They can put all the chips on the table and create a huge amount of risk and transaction costs for all the defendants, many of whom really couldn’t afford to defend the case at all.
Other examples are insurance or other financial-product disclosures. That’s a very routine use of Section 17200. Once again, because of the vagueness of the standards, it’s difficult to get rid of one of those cases on a dispositive motion.
It’s been applied to foreign bribery. We’re talking about the Korea Supply v. Lockheed Martin Corp. case, 90 Cal. App. 4th 902 (2001), in which the complaint sought the disgorgement of all profits from a major defense contract based on the unlawful act of bribery of a Korean government official.
Another example would be labor conditions in certain locations in the Pacific Rim: people brought actions for the conditions of textile workers in Saipan under Section 17200. Or even public statements regarding overseas factory conditions: Nike’s statements about the working conditions in its subcontractors’ factories in east Asia were considered to be a violation or at least would have to go to trial on the issue of whether they were a violation of Section 17200. Even the nonpayment of overtime wages has been considered to be a proper subject of restitution and a subject of a 17200 claim on unlawful, unfair, or fraudulent.
The plaintiff’s ability to create risk for the defendant corresponds to the ability to impose discovery costs on the defendant, because you can bring an action on behalf of everyone as a private attorney general in a representative capacity. What that means is that the scope of discovery can be very broad, just as it would be in a class action, but, of course, without the protections of a class action and the procedures in place to get a determination up front, whether or not some sort of aggregated proceeding was appropriate.
We’re supposed to talk about possible defense strategies, and there are some. It isn’t as if there are no chances of success and that you have to settle every section 17200 claim that comes your way.
Of course, one strategy for defendants is removal. Getting yourself into federal court is generally considered a good idea for defendants. But in the 17200 context, that’s a problem because in a private attorney general’s Section 17200 case, the case law indicates that there is no case or controversy. Because the individual plaintiff has no injury, it doesn’t meet the cases or controversies requirements of Article 3 of the U.S. Constitution, which has no counterpart in California. So this really is a case of everyone being able to sue anyone for everything that no one could sue anyone for. In fact, it wouldn’t even be a case or controversy under federal law. Because of that, you can’t remove, even if there’s a federal question or if there is complete diversity.
There are exceptions. In a context in which the plaintiff is bringing not just a private attorney general action but rather has its own claims for relief, and without the 17200 claim, the case would be removable. There’s an argument that it’s an example of procedural misjoinder to add the private attorney general action on to the existing case or controversy that the plaintiff actually has, that the underlying injury would constitute a case or controversy, and the addition of the 17200 claim wouldn’t make it not a case or controversy.
But there are problems with removal of a straightforward private attorney general action. Lots of cases involve people who do have injuries or alleged injuries, so they’re bringing it in a representative capacity, not purely as private attorneys general.
Another thing to focus on is the lack of damages. Damages are not a remedy under Section 17200. The Bank of the West v. Superior Court case, 2 Cal. 4th 1254 (1992), and numerous other decisions, have established that absolutely. So you can’t get damages. But you can get disgorgement of profits if you are also a class action. The law on this has started to become tricky. I’ll explain that when I get to the subject of class actions.
Another argument is that the conduct itself isn’t prohibited. For example, if you’re bringing an unfair competition claim based on essentially borrowing some FTC regulation, and it turns out that you’re wrong and that the FTC allows the particular conduct in question, there’s a very good argument that under the Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. decision, 20 Cal. 4th 163 (1999), you can’t proceed on at least that prong of Section 17200. You would be able to win on the basis that essentially the government has told you that you can do that. If the government has told you that you can, 17200 can’t tell you that you can’t.
Although there are limits on that and although that seems like a reasonable proposition, it’s not at all clear that that’s the general rule. It’s possible that the Cel-Tech decision will be interpreted as applying only to competitor cases and not consumer cases.
Another issue is the extraterritorial effect of California law. You’d be amazed to know that California courts don’t seem that modest; they seem to think that extending California’s laws to companies that have their operations elsewhere is a perfectly reasonable thing to do.
There are some limits on the extraterritorial effect of Section 17200. If the plaintiff isn’t a California resident and the actions didn’t take place in California, they can’t use 17200. But if the plaintiff is a California resident, you’re in trouble in terms of avoiding the extraterritorial effect of Section 17200.
Another possible defense focused on what I would call primary or exclusive jurisdiction issues. This is particularly appropriate in the context of heavily regulated businesses such as insurance.
The Farmers Insurance Exchange v. Superior Court case, 2 Cal. 4th 377 (1992), establishes the proposition that there will be situations in which you can’t bring a 17200 claim, or at least that it needs to be stayed while the regulator deals with the particular issue in question, and that there are certain sorts of regulatory matters for which you can’t simply borrow 17200 and replace the single regulator with the 35 million regulators of the citizens of the state of California.
There’s also the filed rate doctrine in the context of insurance. That’s the Day v. AT&T Corp. case, 63 Cal. App. 4th 325 (1998), which gives insurers in particular and other businesses that have regulated rates the ability to argue that you at least can’t challenge the approved rate under Section 17200 as being unfair, unlawful, or fraudulent.
But there have been severe limits on the usefulness of these sorts of defenses. For example, the attorney general and law enforcement are tasked with enforcing the rules against the illegal sales of cigarettes to minors.
Of course, there are federalism concerns. There are still preemption defenses that are available as a matter of substantive law. And there are some constitutional limits, though those seem to be few and far between.
The California Supreme Court had a very negative ruling on the First Amendment protections in the context of the Kasky v. Nike, Inc. case, 27 Cal. 4th 939 (2002), where Nike was making public statements about its position vis-à-vis the labor practices in East Asia. But that case is currently the subject of a cert petition to the United States Supreme Court.
Another useful defense is the statute of limitations, which is generally four years. But the tricky part is that Section 17200 focuses on conduct, not on the injury to the plaintiff. Remember, you can’t get any damages. There’s a good argument that the accrual of the claim would be focused on when the conduct took place, rather than on when the plaintiff had an injury. So if you’re talking about something you did over four years ago, that the plaintiff has only recently discovered that they have some sort of injury about, there’s a very good argument that the four-year statute would be a bar to that. That’s a very useful defense in the context in which, under California law generally, it wouldn’t be nearly so useful because of our discovery rule for the accrual of claims.
Another good point is the issue of standing. You can raise the adequacy of representation issue; an area that I don’t think has been completely foreclosed yet. But it’s tough, and right now it seems as though anyone can bring an action for restitution for what would be a class if it were a class action, and that the burden will be on the defendant to identify these crypto-class members and provide some sort of restitutionary relief to them.
There are also arguments that you can make about manageability, but that’s an issue that is not yet well developed. Maybe we’ll get more clarity out of the California Supreme Court in coming years on that issue.
You’re probably asking yourself, if I’ve got 35 million potential plaintiffs and I want to settle the case, how do I get res judicata protection? The answer is, you probably can’t.
There was a case involving an approval of a settlement under Section 17200 by the attorney general, and the court of appeals found that that would constitute a res judicata as to anyone else who sued you. But that case was de-published and you can’t cite to it. It’s not at all clear that there’s any conceivable way to get res judicata protection. You are subject to being sued over and over. Of course, you’d have a setoff against anyone to whom you’d already paid money in some sort of restitutionary basis.
In terms of trying to limit the recovery, the Kraus v. Trinity Management Services decision, 23 Cal. 4th 116 (2000), by the California Supreme Court, recently has found that you can’t get fluid recovery in the context of a representative action without getting class certification. So that sort of remedy isn’t available unless you have a class action. But it looks as though you can get a restitutionary remedy on behalf of the entire group of individuals who are affected by the unfair practice.
As far as disgorgement, it looks as though you can only get that in the context of a class action, but that could be a draconian remedy to disgorge all profits that are related to an alleged unfair practice, especially in the context in which you may have done something that injured no one, and no one could prove any damages.
This whole issue of the interaction between Section 17200 and the class action rules is a live one. The Corbett v. Superior Court case, 101 Cal. App. 4th 649, to which Elizabeth Cabraser referred, is currently being sought to get a petition for review to the California Supreme Court to see whether you really can get class actions in a 17200 context. There are a number of reported cases that do allow class actions under 17200. For those of you who practice in the class action area, it’s a scary prospect, because under 17200 you don’t have to show actual deception, reliance, or causation. Which means that the central argument you have in class action fraud–type cases—the notion that it’s necessarily going to degenerate into a very large number of mini-trials—has been gravely compromised by the rule that says you don’t have to prove actual deception.
So this combination of Section 17200 and the class action procedure is extremely potent. It means that not only can anyone sue, including someone who doesn’t have an injury, but that you can get the remedy of disgorgement and restitution in a fluid recovery. So you have the worst of all worlds, and it’s in a context in which the central defense of no actual reliance and a need to make an individualized determination is gone.
They can’t get damages, but one shouldn’t think that the fertile minds of the plaintiffs’ attorneys couldn’t think of how to cast a restitutionary remedy or a disgorgement remedy in ways that might be even worse. There are a number of cases on this recently, in the vanishing premiums context for life insurance and in a number of other contexts.
You’re probably wondering: With all these difficulties, what actually happens to the 17200 cases? You guessed it: they get settled. The reason is that the plaintiff can put a lot of chips on the table, and there is no judge and no real plaintiff to say no.
The 17200 cases are often in practice, believe it or not, about the plaintiffs’ attorneys’ fees. Many of these cases are settled on the basis of paying the plaintiffs’ attorneys’ fees and entering into a relatively innocuous stipulated injunction, or less. Or just the plaintiffs’ attorneys’ fees. You’re not buying res judicata. There is no judge to approve the settlement.
You may think that that sounds like a shakedown. But there are times when, depending on the price, the shakedown is the best of all possible worlds.
So that’s the basic story. A very scary statute. There are lots of unanswered questions about it and lots of peculiar rules. We don’t know how the law is going to turn out for sure in many of these contexts. But I can tell you that just about anyone can sue you for anything in California, and your best hope is that that person will go away for not very much money.
MR. TURNER: Before we move on to Jack’s presentation, which is not so much about California, I want to ask Joseph a few questions about this very interesting statute.
One of its most interesting aspects is that it borrows violations of other statutes and treats them as violations whenever they are part of something that’s being conducted pursuant to business activity as unlawful practices independently actionable under 17200.
I remember one case that dealt with, I think, the Mobile Home Act or something to that effect, where you had a mobile-home-park owner who had dumped refuse or something on the park grounds, had not maintained some underwater or underground cable, and so on. The statute in question specifically said that violations were to be heard by the regulatory commission. But the court bootstrapped the “violation” of that act and heard it under 17200 and went ahead and ruled that it was actionable.
Are there any instances that you’re familiar with in which the court has dealt with a so-called controlling statute that specifically prohibits recovery for certain activity, but the court has, in bootstrapping that statute into 17200, nonetheless held that an actionable claim could be held under the statute?
MR. ESCHER: I certainly have dealt with that issue, and the answer is complicated.
The Manufacturers Life v. Superior Court case, 10 Cal. 4th 257 (1995), which was decided by the California Supreme Court, dealt with this issue in the context of an alleged group boycott that would have violated both the state antitrust statute and the state insurance code. Because there was no private right of action under that provision under the state insurance code, the court said that if it were simply a borrowing of the California insurance code, we would say that you couldn’t use 17200 to contravene the public policy against the private right of action. But because it would also be a violation of another statute that doesn’t have that public policy, you could proceed under Section 17200 because it would violate the state antitrust law, so you could use 17200 to remedy that.
MR. TURNER: You also mentioned the potential defense of the extraterritorial effect of application of a judgment. In your view, is this defense strictly looking at the wording of the statute and its applicability to consumers in California, for example? Or is there a constitutional defense that may be applicable?
MR. ESCHER: I think that it’s a constitutional defense. I don’t think there’s anything in the statute to put those sorts of limits on it.
MR. TURNER: You also mentioned preemption. I gather that those decisions are few and far between. Maybe a few with regard to the federal securities statute, maybe one or two with regard to the tobacco cases?
MR. ESCHER: That’s right. I think there was a recent one in which the state trial court determined that the federal Cigarette Labeling and Advertising Act would have preemptive effect with respect to 17200, although there was a California Supreme Court case going the opposite direction. But that was decided before a recent decision of the U.S. Supreme Court construing the labeling act’s preemption scope.
MR. TURNER: Have there been any serious efforts in the last few years to revise 17200 through the California legislature?
MR. ESCHER: I think there’s a person in the audience who’s better placed to answer that than I am. The answer is yes, and it hasn’t been successful. Believe it or not, the plaintiffs’ bar is politically powerful in California, and they kind of like the statute.
MR. TURNER: Well said.
AUDIENCE QUESTION: Has anyone ever challenged the constitutionality of 17200 for vagueness? Because you keep talking about it being vague.
MR. ESCHER: I don’t think that has happened at the appellate level. I have seen references to people making that argument, but there’s no reported decision that has dealt with that issue.
MR. JACK TRIGG: I’ve been listening to this debate all day, and frankly, when Sheila made her comments at noon, I was tempted to stand up and say there aren’t any defenses, and then sit down and save everyone a great deal of time. But that’s not true.
But, I have to respond to several questions that were asked earlier. Now that I have the pulpit, these points need further clarification.
One gentleman asked, and I’m sorry that he’s not here now, what is it that we hope to achieve. I have learned since I have been involved in defending these actions, including participating in a trial on the California Civil Legal Remedies Act and the Uniform Commercial Law, 17200, is that you cannot advise a client as to whether a particular practice is prohibited or not prohibited. You cannot answer a businessman’s question, “If I do this, am I staying within the law?”
A lawyer should be in a position to advise his client as to the appropriateness of the client’s activities. That seems to me to be a fundamental basis of law, that you should be able to tell your client that this is an acceptable and appropriate procedure.
One reason that businessmen dislike lawyers is because they never get a straight answer; they always get waffling. If there is anyone in this room who believes that under your individual state statute that you can tell your client that this activity is appropriate, you are a braver person than I am. Because you cannot do it.
The other reaction that I have is a historical one. We heard today that the majority of these statutes were passed in the late Fifties and early Sixties, when a wave of consumerism swept this country. Recently, I—as I’m sure many of you have—read the book by Tom Brokaw called The Greatest Generation. Brokaw discusses hundreds of interviews of World War II veterans who came back from that war with the horrible experience of knowing that many of their compatriots were killed. In one unit, only seven were left out of 250.
It didn’t matter whether they were of a particular race or what their religious background was, and it didn’t make any difference how they had been raised, whether economically oppressed or in a silver-spoon situation. The majority came back and shared three characteristics: they were deeply religious; they were deeply involved in the activities of their community and were committed to make things better; and, most relevant to us, they had a deep commitment to individual responsibility.
I have been sitting here all day, pondering how it can be that those individuals—who, after all, in the late Fifties and early Sixties were populating the legislatures of the individual states of this great country—passed so many of these consumer protection laws. And are the statutes really that bad, or have they now been taken to limits that were never envisioned at the time that they were initially passed?
Considering that background, I don’t think it was ever envisioned that the consumer protection laws could be coupled with class actions. I don’t think it was ever envisioned that plaintiffs would be entitled to bring actions in which the plaintiff or the consumer bringing the action, did not have the burden of proving actual confusion by the deceptive practice, of proving reliance on the particular activity, of proving that they were damaged, and of proving that there was intent by the company to deceive by the activity being challenged.
I don’t think it was ever envisioned that these claims would be stretched to the limits to which it is now been. Finally, I don’t think it was ever envisioned, such as in the State Farm case, that you would try a case with the perfect plaintiff. The aggregate plaintiff is a defense lawyer’s nightmare.
In many of the cases that each of us has historically won, we have an individual who we can challenge as to his individual proclivities, what he did, what he looked at, and how he reacted in a given commercial transaction.
If you remove all those factors so that you create the perfect plaintiff, mold him out of many plaintiffs, the thing that is created is a perfect plaintiff without any warts. The defense lawyer can’t question such a plaintiff about his individual reaction to the alleged deceptive practice, and the defendant will have lost many defense tactics.
I would like to mention one case, Broussard. See Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331 (4th Cir. 1998). The court there refused to permit the case to proceed with an aggregate plaintiff. But Midas is a very dim light in a sea of very bad decisions.
I am always amazed when reviewing decisions on this subject that people forget that these particular actions are statutory creations. First, I would advise you to read the statute—and not cursorily, to see whether your particular prohibited practice is listed. Read it with the consumers in mind. No one seems to challenge the fact that, under the statute, the plaintiff—whoever he is—was, in fact, a consumer. That is the absolute first line of defense that should be raised.
Second, what was the business practice, and is it in fact something covered by the statute?
There are two types of consumer fraud statutes. The first type consists of about 30 states that modeled their statutes after the Uniform Consumer Protection Act, Uniform Deceptive Trade Practices Act, and the Uniform Consumer Sales Practices Act. But the problem is that not one of those states passed the statute in a uniform manner. They all found it necessary to further define exactly what is prohibited. In particular states, such as Colorado, they have listed 43 potential consumer deceptive practices. Mississippi has 11. But every state then has a catchall provision such as, “If you don’t fall within any of the specific provisions of the statute then here is a catchall provision that may apply.” I believe that the next challenge, and the one that should always be there, is that these statutes are unconstitutional.
Somehow it doesn’t seem right, when your client is going to be subjected to punitive damages and multiple penalties. If you have $1,000 per violation, and you have 2 million consumers, soon you’re in some real money. I think you’re entitled to know what activities are prohibited ahead of time and not to have a court, after the fact say, “Well, we think it fell within the terms and provisions of the statute.” There should always be a void for vagueness challenge under the Constitution, unless you have a practice that is absolutely listed in one of these categories under the statute. I would submit that most of them are not.
Finally, I have to mention my favorite California case, even though I was supposed to do the other 49 states. You don’t have to do anything in California because in my favorite case, the Lucky Stores case, see 17 Cal.4th 553, the plaintiff had never been to the Lucky Stores. She was the plaintiff’s attorney’s mother, and admitted that she had no idea what the whole thing was about, but the court said that was good enough to give her standing to sue.
The other type of statutes is the baby FTC acts; there are about 11 states that have those. You have many more defenses in the baby FTC cases because there’s a significant body of law under those statutes that is much better developed. It is more business-oriented because the FTC is supposed to assist business and to regulate only truly deceptive practices. So don’t forget to look at whether you have a baby FTC act. In fact, even when under the other statutes, I would look at the FTC precedents, because there are some reasonable decisions as to what is and is not appropriate business practice.
MR. TURNER: Before we open up for questions, I’ve got a couple of follow-ups.
Joseph, we had talked about bootstrapping violations of other statutes onto the California legislation. If you have a situation that an attorney is attempting to bootstrap onto 17200, and the statute says that the claim is cognizable but first must be heard by an administrative agency, what about an exhaustion of administrative remedies defense before the 17200 claim can be adjudicated?
MR. ESCHER: That’s what I refer to as “primary jurisdiction.” So I think the answer would be yes. You’d have a good argument for that.
MR. TURNER: Let’s see if anyone has any thoughts on this due process void for vagueness and ambiguity claim with regard to the wording of these statutes.
AUDIENCE QUESTION: I believe that the little FTC acts have been litigated for a long time. Their constitutionality has been upheld. Isn’t that right, Jack?
MR. TRIGG: Yes. I still would put it in there.
MR. TURNER: I’ve never seen any scholarly analysis on this issue with regard to state consumer protection statutes. It seems to be an area that’s worth examining, at a minimum.