As it has developed over time, California’s unfair–competition law does not impose liability only when the practices of one business hurt another’s ability to compete. Instead, any unlawful, fraudulent or just plain "unfair" practice can give rise to a section 17200 claim, which can be brought by a competitor, a customer or a member of the general public.
As a result of the unfair–competition law’s broadly worded definition of actionable conduct, any business practice not expressly authorized by law carries some risk of being deemed unfair if later challenged in some section 17200 action. See Cel–Tech Communications Inc. v. Los Angeles Cellular Tele. Co., 20 Cal. 4th 163 (1999) (unfair–competition law cannot condemn an action that the Legislature otherwise permits, but, absent such a "safe harbor," an act may be "unfair" under section 17200 if it threatens an incipient violation of an antitrust law, or "the policy or spirit" of an antitrust law, or "otherwise significantly threatens of harms competition").
Justice Joyce Kennard has warned that this broad definition of unfair practices "provide[s] no certainty to businesses seeking to know what conduct the unfair competition law prohibits." Justice Marvin Baxter has warned that the law "no longer gives fair warning of conduct that may be deemed unlawful." Cel–Tech Communications (Kennard, J., concurring and dissenting, Baxter, J., concurring and dissenting).
From the perspective of business defendants, the problems with California’s unfair–competition law are many. Unlike the analogous Federal Trade Commission Act, which only the Federal Trade Commission may prosecute, any private party may bring a section 17200 claim. In fact, a section 17200 plaintiff does not need to satisfy traditional notions of standing — he or she is not required to have personally suffered injury from the practice giving rise to the suit.
Moreover, that same uninjured plaintiff can file suit on behalf of the public without satisfying the requirements for class certification and without incurring the time and expense of identifying and notifying all potential class members.
Although unfair–competition claims carry these significant advantages for the plaintiffs, plaintiffs’ counsel often notes that the law also has its limitations. Section 17200 claims are equitable in nature and, thus, do not result in a jury trial. They also do not carry the legal remedy of damages, whether compensatory or punitive.
Despite these limitations, the tort–like section 17200 has become increasingly popular both as the centerpiece of lawsuits and as a "value–added" claim appended to more traditional tort, contract and statutory causes of action.
The first of the Supreme Court’s decisions on this topic in June involved the remedies available for successful section 17200 claims. In Kraus, five tenants brought an unfair–competition action against their landlord on behalf of all current and former tenants, alleging that the landlord had collected improper security deposits and imposed improper liquidated damages for lease breaches.
The plaintiff tenants did not file the suit as a class action; instead, they sought to force the defendants to disgorge every improper fee collected from every current or past tenant into a "fluid recovery" fund. The intent was to distribute the money in the fund to any current or former tenant that could be found, with any remaining funds distributed to groups working for the advancement of tenants’ rights in San Francisco.
The Supreme Court began its analysis in Kraus by explaining that a monetary award can be recovered in an unfair–competition action only through the equitable remedy of restitution, whereby the court issues an order compelling a defendant to return money obtained through an unfair business practice to the person with an ownership interest in those funds.
Thus, because fluid recovery would do more than return wrongfully collected fees to the tenants that paid them, but would also require the defendants to disgorge additional money to groups advancing tenants’ rights, it did not fall within the scope of the restitution remedy allowed under the unfair–competition law.
Moreover, the court noted that the Legislature had not expressly authorized fluid recovery in unfair–competition suits, although it had done so in class actions. Although the court disapproved the use of a fluid–recovery remedy, it also cautioned that this did not mean that the defendants could simply retain all the improperly collected fees. Instead, the court directed the defendants to identify, locate and repay each improperly charged former tenant using "all reasonable means."
And in a footnote, the court suggested that the defendant could be required to give notice to all absent persons on whose behalf the claim was brought. It remains to be seen whether the costs that the defendants will incur in providing class–action–like notice in representative unfair–competition actions will exceed those costs that disgorgement into a fluid–recovery fund would entail.
The second unfair–competition case dealt with the statute of limitations for unfair–competition claims and other defenses available to refute them. In Cortez, the plaintiff was a worker who claimed, for herself and on behalf of her co–workers, that her employer failed to pay statutorily mandated overtime wages in violation of the Labor Code.
The court first returned to the touchstone principle that restitution only permits the restoration of money to a person with a property interest in it. The court analyzed the nature of earned–but–unpaid wages and concluded that even though the defendant employer was not being asked to return money wrongfully collected from its workers, the workers had acquired a property interest in their wages once they were earned. As a result, restitution could be used to require the employer to "restore" the unpaid wages to its workers.
Next, the court considered the defendant’s contention that an unfair–competition claim for failure to pay overtime wages should be controlled by the shorter limitations period provided in the Labor Code, rather than the longer, four–year limitations period for section 17200 claims. Because the language of the unfair–competition law is clear, the court agreed that any conduct that constitutes a violation of the law is governed by the four–year statute, even though the same conduct can give rise to other claims with shorter limitation periods.
Finally, the court also evaluated the defendant’s claim that it was entitled to assert equitable defenses to the plaintiff’s unfair–competition claim. The court concluded that the strict–liability nature of violations of the Labor Code made it impossible for equitable defenses to wholly defeat a section 17200 claim for unpaid wages.
Nevertheless, it did affirm that equitable defenses — such as laches, good faith, waiver and estoppel — may be considered when a trial court exercises its discretion in deciding which, if any, remedy is appropriate to accomplish the unfair–competition law’s purposes of deterrence and restitution.
Although many aspects of California’s unfair–competition law need further explication and refinement, perhaps the largest issue now remaining for the courts is whether the law adequately satisfies due–process concerns.
In Kraus, the defendants contended that being subject to a representative unfair–competition claim without requiring the plaintiff to comply with all class–action rules violates due process. At least a class action, the defendants argue, has res judicata effect against future litigation by members of the class who had notice of the action, while representative unfair–competition actions do not bar subsequent actions over the same business practices.
In Kraus, however, California’s Supreme Court elected not to consider the due–process issue, concluding that as a practical matter, the statutory period on unfair–competition claims had all but run, thus rendering the prospect of duplicative subsequent suits remote.
If a later case does squarely raise the issue of multiple, representative unfair–competition actions arising from the same business practice, this due–process issue almost certainly will be raised again.
Kraus and Cortez provide much–welcome guidance on California’s unfair–competition law and have answered some of the more pressing questions facing litigants and the courts. For the plaintiffs, Cortez may breathe new life into claims once thought time–barred if they can properly be reframed as a section 17200 claim.
In turn, the defendants can take some comfort in the curbs placed on the use of fluid recovery funds in nonclass–action unfair–competition suits and in the prospect that equitable defenses may be considered by trial courts evaluating the remedies in such actions.