California's unfair competition law: a statute in dire need of reform.

In a recent article, the Wall Street Journal labeled California "The Shakedown State" because of its infamous unfair competition law, Business & Professions Code Section 17200. This statute, while well-intentioned, allows plaintiffs to sue over any business practice that allegedly is "illegal"--a term encompassing even technical violations of regulations or statutes; "fraudulent"--although the plaintiffs need not plead or prove the traditional elements of fraud; or just plain "unfair"--a wide-open term that has eluded clear definition by the Courts in consumer cases.

Section 17200 suits generally provide few safeguards for defendants. In fact, plaintiffs bringing the action do not even need to claim that they have been injured or otherwise affected by the business practice, and they can bring the action not only on behalf of themselves, but as a "representative" of the general public. They can achieve "representative" status without having to meet the procedural safeguards usually required for class actions, requirements that most of us would want and expect in having someone prosecute an action on our behalf and behalf of every other Californian. Even settling or paying a judgment in a 17200 case provides no guarantee that the issue is resolved, because other plaintiffs may file identical copycat lawsuits involving those exact same issues. This aspect of the statute is the legal equivalent of "Groundhog Day," where the same case keeps re-appearing day after day.

While 17200 does not expressly provide for attorneys' fees, they are a driving force in all 17200 cases because the parties bringing these actions rely on "private attorney general" provisions to obtain fees for stopping allegedly "illegal" or "unfair" practices that in actuality have harmed no one. The attorneys' fees motivation behind these actions led California's Supreme Court Justice Janice Brown to characterize 17200 cases as "a means of generating attorneys' fees without any corresponding benefit." See, Stop Youth Addiction, Inc. v. Luck Stores, Inc., 17 Cal. 4th 553, 596 (Brown, J. dissenting).

At the beginning of California's 2003 Legislative session, 17200 abuses had grown so great that several reform bills were introduced. These bills were sparked in part by the intense publicity generated over several law firms, particularly the Trevor Law Group, that allegedly used the threat of Section 17200 litigation to force hundreds of small businesses to pay thousands of dollars for alleged regulatory violations.

Despite the public outcry, these reform bills went nowhere in the legislature. Why? Because plaintiffs' trial lawyers are among the state's most powerful special interest groups, and any bill they consider to be a threat to their practice has little chance of making it out of committee to get before the entire California Legislature. Thus, although there was early optimism that true 17200 reform would occur in 2003, that hope turned out to be just wishful thinking on the part of all those who recognize the need for true 17200 reform.

But the "just say no" approach to 17200 reform was not politically palatable either. Radio talk shows, newspapers, grass roots organizations and businesses, kept reporting new instances of 17200 abuse and kept the issue in the public eye. That led the respective chairs of the Senate and Assembly Judiciary Committees to introduce their own 17200 "reform" bills, AB 95 and SB 122. The main reform in these bills was that a judge would have to review and approve 17200 settlements, including any attorneys' fees. Proponents argued that 17200 did not need any other major reform, because only a handful of attorneys, like the Trevor Law Group, abused it.

At the same time, however, AB 95 and SB 122 also included a new 17200 remedy, "disgorgement of profits." With this new remedy, all profits from the business practice at issue would have to be "disgorged" by the defendant, even if neither the plaintiff nor the public were harmed.

For example, say a company advertises 15 inch computer screens that turn out to be only 14 1/2 inches. Even though those computer screens work perfectly well, and the harm of having 1/2 inch less of a screen than expected is at most minimal, under a disgorgement remedy, the company could be required to turn over its entire profits from every computer screen sale. And not only is this an overly harsh penalty, a plaintiff could win disgorgement even if he or she did not buy one of the computer screens. While no one would quarrel with a consumer being entitled to a refund if he or she wanted one because of the incorrectly advertised size, requiring disgorgement of profits encourages "gotcha" litigation and results in overkill judgments.

Everyone agrees that Section 17200 is one of the broadest liability statutes in the country. Adding a disgorgement remedy to it, without any rigorous pleading and proof requirements, further, threatens the constitutionality of the statute, which originally was designed to have only limited remedies (injunctive relief and restitution) to offset the statute's expansive liability provisions.

Because SB 122 and AB 95 included the proposed disgorgement remedy, businesses large and small closed ranks and relentlessly opposed the bills. At the eleventh hour, the proponents of the bills dropped the disgorgement provision when they realized even some of the more moderate Democrats in the Assembly opposed the bills for failing to correct the real problems with 17200. With the worst part of the bill gone, the authors pushed for passage of SB 122 and AB 95, trumpeting the judicial review provision as true 17200 reform, but opposition from the business community and in the Assembly remained strong because neither addressed the most significant problems with Section 17200: the fact that the statute allows lawsuits even when no one has been harmed, and allows repeat lawsuits over the same business practice. Despite two late night attempts to pass the bills, both were rejected.

The good news from the business community's perspective is that the legislature's defeat of the disgorgement remedy in SB122 and AB 95 averted disaster. The bad news is that in the 2003 legislative session, nothing changed. Despite the outcry for reform, Section 17200 is still abused, and as a result, doing business in California is unpredictable and, for many, unpalatable.

Granted, the law firm that was at the eye of the 17200 storm, the Trevor Law Group, has been publicly flogged and some of its members are no longer members of the California bar. But the problems with 17200 are not limited to a handful of lawyers in Los Angeles. The problems run much deeper.

That is not to say that the statute does serve an important consumer protection purpose. It does. And toward that end, the statute permits law enforcement agencies--such as the Attorney General, the District Attorneys of the 58 counties and certain City Attorneys--to bring lawsuits to protect the public. These agencies' mission is to serve the public and they do it well. Section 17200 should be reformed so these agencies are the only ones that can bring Section 17200 lawsuits on behalf of the public. Individuals actually harmed by a particular business practice will still have their day in Court if they so chose. The public, however, does not need lawyers, motivated by attorneys' fee awards, to "protect" them from business practices that may cause no harm or were already resolved in prior litigation.

Our Governor-elect has many challenges before him, not the least of which is getting agreement on a 2004 budget. However, issues affecting California's business climate, including Section 17200, are also among the challenges he must face. Governor-elect Schwarzenegger specifically mentioned 17200 during the recall campaign as one example of this state's anti-business climate caused by "California's runaway litigation system." A coalition of businesses recently announced the launch of an initiative to achieve real 17200 reform that the Legislature has been unable to accomplish to date. Perhaps the optimism that was present at the beginning of 2003 will come to fruition in 2004 so that true 17200 reform can be achieved and the legal playing field once again leveled.

Michael K. Brown is a litigation partner in the international law firm of Reed Smith Crosby Healey LLP. Lisa M. Baird is also a partner at Reed Smith Crosby Healey, specializing in appellate matters.