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California's Unfair Competition Law After Proposition 64

April 1, 2005

By: Gina E. Och

California’s Unfair Competition Law (UCL), codified at Business and Professions Code section 17200, prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising....”1 Any person could sue under section 17200; thus, a plaintiff did not have to have “standing” to sue.2 Unfortunately, legislation originally meant to protect consumers and competitors began plaguing businesses, serving as a cash cow for some attorneys, and creating a surge in UCL litigation.

No case symbolized the fallout from UCL lawsuits more than the Trevor Law Group scandal in 2003.3 Specifically, the Trevor Law Group, a law firm, created and funded an alter ego, “consumer” organization called, Consumer Enforcement Watch Corp. (CEW).4 On behalf of CEW, it filed 24 lawsuits against thousands of mostly minority-owned and small businesses, namely automobile repair shops and restaurants, for violations already cited by regulatory agencies.5 The firm then sent letters to these businesses demanding settlement monies.6 The fee arrangement between the firm and CEW granted the firm up to 90 percent of any financial recovery.7 Because these businesses were small, most businesses decided to settle instead of going through the expense of litigation.8.

Eventually, the Trevor Law Group came to the attention of state authorities. The State Bar petitioned to disbar three attorneys in the Trevor Law Group.9 Faced with disbarment, in July, 2003, the three attorneys resigned with 36 counts of misconduct.10 In an ironic twist of fate, the State’s Attorney General’s Office filed a complaint against these attorneys pursuant to section 17200.11 The State seeks to recover a $1 million fine and restitution on behalf of the businesses that settled with the law firm.12.

Prompted by this scandal,13 on November 2, 2004, California voters passed Proposition 64.14 This initiative amended the UCL in two significant ways: (1) it prohibited plaintiffs from filing UCL lawsuits without demonstrating their standing to sue; and (2) it prohibited the filing of “representative actions” as a substitute for the class action process. Now, in order to meet the new standing requirement, a plaintiff must show he “has suffered injury in fact and has lost money or property as a result of such unfair competition.”15 Moreover, a plaintiff can only file a representative lawsuit as a “private attorney general” on behalf of the people of California if he meets the new standing requirement and complies with the procedures governing class actions.16.

Although Proposition 64 became effective on November 3, 2004, it is unclear whether Proposition 64 applies to cases filed before November 3, 2004. By the end of February, 2005, one appellate court held that Proposition 64 did not apply retroactively.17 Four other opinions found Proposition 64 applied retroactively.18 One case stated that the plaintiff should be able to substitute in the lawsuit an affected plaintiff with standing.19 Another case stated that if, after a hearing, no affected plaintiff could be found, a substitution could not be made.20 Still yet, another case, determined that the plaintiff should have leave to amend the complaint to meet the Proposition 64 requirements.21 The California Supreme Court has, thus far, accepted only one of these cases for review.

It is also unclear whether the standard of pleading and proof of the “false” business practice or act prong under section 17200 will need to be revised. Before Proposition 64, a business practice was “fraudulent” if “members of the public are likely to be deceived.”22 Thus, a plaintiff did not have to establish intent, scienter, actual reliance, or damage; even actual deception was not necessary. Yet, after Proposition 64, courts may have to decide whether the current “fraudulent” standard can be reconciled with the standing requirement.

In all, the defense attorney and client should evaluate any pending or new UCL cases, and determine whether a demurrer, motion for judgment, or motion to strike should be filed. In the appropriate cases, until the California Supreme Court concludes otherwise, one should argue that Proposition 64 applies retroactively. Moreover, one should attack the complaint where the plaintiff lacks the standing to sue; paying particular attention where the “fraudulent” business practice and act prong is alleged. Finally, where the plaintiff is suing in representative capacity and fails to meet section 17203, those private attorney general allegations should be stricken from the complaint.

Accordingly, gone are the days when a plaintiff could sue without having to see the advertisement, to purchase the product, or to be injured by the business act.