United States: Passage Of Proposition 64 Provides Some Relief

Business & Professions Code Section 17200 ("Section 17200") has long served as a favored weapon in plaintiffs' arsenals and the health care industry has been one of the main targets of this statute. See Podolsky v. First Healthcare Corp.; Dowhal v. Smith- Kline Beecham Consumer Health- care; Cruz v. PacifiCare Health Systems, Inc.

Section 17200 previously permitted an individual to sue on behalf of an injury directly sustained by the individual, as well as on behalf of all other affected individuals, in essence, in an uncertified class action, also known as an action brought on behalf of the "general public". See Hernandez v. Atlantic Fin. Co. This was true even where the named plaintiff was not affected in any way by the alleged conduct, but the public, allegedly, was damaged.

However, the voters of California recently enacted Proposition 64 which has dramatically changed Section 17200's requirements. Now, uncertified class actions appear to have been eliminated. Proposition 64 explicitly states that its intent is to permit only injured plaintiffs to recover under 17200 and that actions "on behalf of the general public" should only be brought by state or local officials. To the extent that Proposition 64 still permits a plaintiff to bring such an action it now requires a plaintiff to show: (1) that he or she was actually injured; and (2) that the complaint complies with the class action requirements of California law. Thus, there does not appear to be any ability for plaintiffs or plaintiffs' attorneys to bring "uncertified". class actions as were previously permitted and raises California law to the Federal standard which does not permit an action seeking recovery under unfair competition law on behalf of the general public.

A notable impact of Proposition 64 is that it may also limit plaintiffs' attorney's ability to recover attorneys' fees. Under the previous law, attorneys' fees were recoverable in those uncertified class actions. While attorneys' fees may still be recoverable in certain class action settings, if the claim for relief on behalf of the general public is eliminated then it should follow that the basis for any award of attorneys' fees for such a claim will also be eliminated.

Another, perhaps unintended, consequence of Proposition 64 is that it appears to have retroactive effect. Generally laws do not have retroactive effect unless specifically stated. However, certain changes to the law do have immediate retroactive effect. For example, changes in statutes of limitations (the time in which an action may be commenced) are considered "procedural" and not "substantive" changes in the law, and procedural changes are retroactive. Normally, a defense based upon a lack of standing, which is now available under Proposition 64, are considered to be procedural. Consequently, Proposition 64 will likely be considered to be retroactive, thus impacting some cases that are already in the courts.

Despite the new limitations, Section 17200 still offers plaintiffs some advantages. Unlike comparable doctrines, the unfair competition law does not require a finding of intent. Instead, there is strict liability for a violation of the law. While this makes a defense of this type of claim challenging, there are defenses that can be successful, such as federal preemption, the existence of another adequate legal remedy and abstention. (See the following discussion.)

Moreover, while recent changes to Section 17200 have narrowed its scope, previous amendments that greatly expanded the law are still in effect. Before the 1992 amendments, a plaintiff was required to show that a defendant had engaged in ongoing conduct because Section 17200 actions were predicated upon business practices, interpreted to mean more than a single transaction.

However, Section 17203 was amended in 1992 to permit courts to grant relief against any defendant who "engages, has engaged, or proposes to engage in unfair competition," which dramatically increased the reach of the law. Previously, the law required that any acts of alleged unfair competition had to occur in California, but this phrase was deleted in 1992, and since then the law has been interpreted to permit alleged unfair competition both in and out of state (Stop Youth Addiction Inc. v. Lucky Stores Inc.), allowing a law suit against California businesses for their conduct out of state at least if it affects California residents.

Despite the enactment of Proposition 64, the substantive scope of Section 17200 is still the same. It prohibits any unlawful, unfair or fraudulent business act or practice, or unfair, deceptive, untrue or misleading advertising.

An unlawful act includes anything that properly can be called a business practice or act and also is "forbidden by law," whether the law is "civil or criminal, federal, state, or municipal, statutory, regulatory, or court made."

An unfair business practice is typically a business practice that is, or the equivalent of, a violation of federal or state antitrust law.

Because there was no requirement that a plaintiff in a Section 17200 case show that he or she was directly injured, allegations of actual deception, reliance and damages were not required. Instead, the plaintiff needed only to show that members of the general public were .likely to be deceived.

However, this line of authority may now be in question because there is a requirement of actual damage. It is, however, premature to predict how courts will interpret these new amendments, but the burdens of showing "fraud" in Section 17200 actions may have been increased to require at a minimum, a showing of actual damage, to necessitate a finding of reliance and actual fraud.

While the unfair competition law offers plaintiffs certain advantages, it also offers many defenses. One such defense is based on the theory of primary jurisdiction. While the defense previously had broader applicability, courts will dismiss claims when it is determined that administrative agencies, i.e., the Public Utilities Commission, not the courts, should address the issues raised in the litigation.

The doctrine of preemption also can limit a plaintiff's ability to state an unfair competition law claim based on state regulations. When a defendant can demonstrate that a state's attempted regulation of a particular area is precluded because of federal law a claim based on state regulation will fail.

A closely related defense is abstention. Even if a court determines that federal law has not preempted state law, a court still may abstain from hearing a matter in order to defer to an administrative agency's regulatory power. The purpose of abstention is to give "great deference to the interpretation given a statute by the officers or agency charged with its administration." Two primary issues have caused courts to abstain in Section 17200 actions - where a finding of liability would encroach on an administrative prerogative, or where fashioning a remedy would substitute the court's oversight for the administrative agency's.

While the contours of the unfair competition law will continue to change over time, the most recent amendment may have the most dramatic impact on this long time favorite of the plaintiffs' bar.

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