How to Defeat a Section 17200 Suit Before it Cripples Your Company

Aaron Morris, Esq.

Section 17200 sounded good on paper.  If a business was engaging in unfair business practices, it could be sued by Joe Citizen to force the business to get back in line. Under the "Private Attorney General" approach, the plaintiff does not even need to be an injured party.  In theory, instead of relying on the limited resources of the government to root out illicit business practices, this statute would make every citizen a watchdog.

But as is often the case, a good idea can be misused.  Some unscrupulous attorneys began using Business and Professions Code section 17200 as a source of revenue.  They would file dozens of suits against businesses, based on some questionable claim of unfair business practices, then suggest to the businesses that it would be cheaper to settle the case for a few thousand dollars then to try and mount a defense.  As leverage, the attorneys would point out that if the case moved forward, the business would likely be required to participate in extensive and revealing discovery about its business practices.

It took some time, but the courts are finally recognizing these abuses and permitting business to get out before the litigation becomes costly.  Three recent decisions provide new tools for defense counsel to obtain early dismissal of "private attorney general" lawsuits brought under state Business & Professions Code Section 17200 et seq., also known as the unfair-competition law.

In Rosenbluth International Inc. v. Superior Court, 101 Cal.App.4th 1073 (Cal. App. 2nd Dist. Sept. 2, 2002), the 2nd District Court of Appeal ordered the trial court to grant summary judgment to a defendant. The case otherwise would have settled or proceeded to a full-blown trial.

Even more exciting for Section 17200 defendants and their counsel, in the other two cases, Searle v. Wyndham International, 102 Cal.App.4th 1327 (Cal. App. 4th Dist. Oct. 15, 2002), and Gregory v. Albertson's Inc., 104 Cal.App.4th 845 (Cal. App. 1st Dist. Dec. 20, 2002), the 4th District and the 1st District, respectively, took the unusual step of dismissing the cases based on the pleadings, which avoided discovery and other expensive pretrial work.

Many businesses operating in the state are familiar with its unfair-competition law - and some are all too familiar.  That law allows a "private attorney general" to challenge actionable business acts or practices as "unlawful," "unfair" or "fraudulent."  A companion statute, Section 17500 et seq., allows private attorneys general to challenge false or fraudulent advertising.

A private attorney general may be any person, even one who has not experienced the alleged wrongful business practice.  A private attorney general may even be a for-profit corporation, formed by a plaintiffs' firm for the express purpose of bringing suits under the state's unfair-competition law.  The private attorney general has the ability to represent the "general public": potentially thousands, or even millions, of people.

The private attorney general may obtain an injunction, an order from the court directing a business to act or refrain from acting in a certain way, or may obtain an order that the defendant business must restore all property, usually money, that the court finds has been wrongfully obtained. A defendant business often must pay the private attorney general's attorney fees.

Private attorney general actions therefore have the potential to threaten a business with massive financial exposure, either through restoration of thousands or millions of dollars or through the cost of complying with an injunction.  Moreover, the cases themselves are expensive to defend, because private attorneys general often demand wide-ranging discovery as a means of proving their case and increasing settlement pressure on the defendant business.

The business not only must be concerned with state exposure but also must realize that a California court's finding that a business has engaged in "unlawful," "unfair" or "fraudulent" business practice could spawn copycat litigation nationwide.  For these reasons, defense counsel must defeat a private attorney general action as near to the beginning of the case as possible.  The Rosenbluth, Searle and Gregory decisions provide new tools to do just that.

In Rosenbluth, an individual private attorney general brought an action on behalf of the general public against a travel agency serving large corporate clients, alleging that the agency used fraudulent accounting methods to understate the amount of rebates due its customers.  The agency moved for summary judgment, arguing that the private attorney general could not bring the action because the individual was not a party to any contract with the travel agency. The trial court denied the motion. Despite the rule that a private attorney general need not assert that he or she has been injured by the challenged business practice, the 2nd District disagreed with the trial court and ordered that the travel agency was entitled to summary judgment.

The Rosenbluth court based its decision on language in an earlier case decided by the state Supreme Court, Kraus v. Trinity Management Services Inc., 23 Cal.4th 116 (June 5, 2000), allowing a court to dismiss a private attorney general action if the court decides that the lawsuit "is not brought by a competent plaintiff for the benefit of injured parties."  Rosenbluth is the first published decision to apply this language to dispose of a private attorney general claim without a full-blown trial.  The court ruled that the lawsuit was not "brought by a competent plaintiff for the benefit of injured parties" because the purported victims were Fortune 1000 companies who had negotiated individually written contracts with the travel agency.

Citing two earlier cases, Prata v. Superior Court, 91 Cal.App.4th 1128 (2001) (consumer claim challenging false "same as cash" advertising), and South Bay Chevrolet v. General Motors Acceptance Corp., 72 Cal.App.4th 861 (1999) (claim brought on behalf of sophisticated auto dealerships), the court essentially concluded that private attorney general actions were meant not for the protection of sophisticated business entities (who presumably can protect their own interests) but for protection of individual consumers.

In Searle, the 4th District took the unusual step of dismissing a lawsuit based simply on the allegations in the complaint, with no discovery or other pretrial work.  The private attorney general in Searle had challenged the hotel's practice of adding both a 17 percent service charge and a line where a customer could add a gratuity to bills for meals ordered from the room-service menu.  The plaintiff argued that this billing practice was both "unfair" because it compels guests to pay a gratuity and "fraudulent" because guests are not advised that the 17 percent service charge is a gratuity paid to the server.

In an unusual analysis, the 4th District relied not so much on prior cases as on such odd sources as an old Groucho Marx movie and an academic work on the history of tipping. The court rejected the plaintiff's lawsuit because the plaintiff's "fundamental assumption" was flawed: "that [plaintiff] had a right to know how the room service servers are paid by the hotel."

This is as close as a published Section 17200 decision has come to throwing out a case based simply on common sense.  In this case, the court decided that engaging in a complex and expensive fact-finding process was not necessary to determine that the challenged practice was neither "unfair" nor "fraudulent." The 4th District was willing to make that decision "as a matter of law."  The court even appeared to rely on the opinions of the individual judges: "In the final analysis we are not offended by the hotel's practice of treating the service charge as a means of providing reliable compensation to its employees and not as a substitute for the customary tip."

In Gregory, the 1st District refused to grant an injunction to a private attorney general who had asserted that Albertson's had colluded with the owner of a shopping center to withdraw certain retail space from the market in order to benefit another Albertson's location. The result of Albertson's actions, the plaintiff argued, was urban blight.  The only issue before the court in Gregory was whether the defendants' actions constituted an "unfair" business practice. In reaching its decision, the court decided that previous tests for determining the "unfairness" of a business practice were too vague and too broad to be useful.

The rejected tests originated in Motors Inc. v. Timers Mirror Co., 102 Cal.App.3d 735 (1980) (unfairness determined by "weighing the utility of the defendant's conduct against the gravity of the harm to the alleged victim"), and People v. Casa Blanca Convalescent Homes, 159 Cal.App.3d 509 (1984) (business practice unfair when it "offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers").

Instead, Gregory held, where a private attorney general argues that a practice is "unfair" because it violates a public policy of the state, the private attorney general must back up its claim by tying the alleged "public policy" to a particular constitutional provision, statute or regulation.

In other words, under Gregory, a private attorney general cannot invent a "public policy" out of whole cloth and allege that the defendant's business practice violates that policy. This case therefore narrows the range of potential "unfair" business practices and allows businesses to conform their actions more easily to the law.

These cases provide Section 17200 defense counsel with new tools to attack future private attorney general claims.  For example, Rosenbluth allows defense counsel to argue more easily that certain private attorney general actions should not proceed because they are not truly brought to benefit the general public. Rosenbluth also narrows potential Section 17200 liability by discouraging private attorneys general from bringing actions to benefit sophisticated business entities.

After Searle, Section 17200 defense counsel can attack cases at the outer limits of the unfair-competition law's bounds more easily by appealing to the trial court's common sense.  Moreover, Searle provides support for an argument that the issue of "unfairness" can be decided without the expense of pretrial discovery and other work.

The Gregory court narrowed the definition of "unfairness." Defense counsel can attack private attorney general claims allegedly based on public policy by arguing that the alleged public policy finds no support in the state's constitution, statutes or regulations.

In short, Rosenbluth, Searle and Gregory have the potential to help make the defense of private attorney general actions more successful and cost-effective, to the benefit of businesses operating in the state.

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Aaron Morris is a Partner with the law firm of Morris & Stone, LLP, located in Santa Ana, Orange County, California. He can be reached at (714) 954-0700, or by email.  The practice areas of Morris & Stone include employment law (wrongful termination, sexual harassment, wage/overtime claims), business litigation (breach of contract, trade secret, partnership dissolution, unfair business practices, etc.), real estate and construction disputes, first amendment law, Internet law, discrimination claims, defamation suits, and legal malpractice.