RISKVUE ARCHIVE | RISK BITES

Unfair Competition—
The Fashionable Cause Of Action

By Donna Yamini, Esq.

These days, in California, the trend in business litigation is to include a cause of action for unfair competition in virtually any complaint filed against a business.

Some examples of recent unfair competition claims that have received media attention include the following: an attempt to enjoin a tobacco manufacturer’s use of the Joe Camel cartoon character, an injunction against Microsoft for using Java Software technology, and an attempt to enjoin Lucky stores from selling cigarettes to minors. In the latter case the plaintiff citizen group sent children into Lucky stores to buy cigarettes and then sued Lucky Stores, Inc. for making illegal sales.

The California Unfair Competition Statute (Business & Professions Code §17200, et seq.)

Under California’s Unfair Competition Act (the “Act”), a plaintiff can sue a business for any unlawful, unfair, or fraudulent business act or practice. Violations of the Act are strict liability offenses. This means that plaintiff does not need to prove that defendant had knowledge or intent to commit a violation of the Act. Furthermore, a single, isolated incident is sufficient to form the basis of an unfair competition cause of action.

Who Can Sue Under The Act

Both private parties and governmental entities can bring actions under the Act in an individual capacity, on behalf of an organization, or on behalf of the general public. When bringing an action on behalf of the public, plaintiffs can seek class-wide relief without having to satisfy the rigorous requirements of class certification.

Alarmingly, a plaintiff need not even have suffered injury as a result of defendants’ business practices to bring an action under the Act. Therefore, an individual who is not him or herself a consumer, or a business competitor, and who has not incurred any damages may bring an action against a business, claiming that its business practices or a business act was unlawful, unfair, or fraudulent.

We often see claims for unfair competition brought by competing businesses, where one business claims that its customers and/or employees have been unfairly or unlawfully solicited by their competitor.

Business Practices That Violate The Act

To obtain relief under the Act, all that a plaintiff needs to show is that the defendant business engaged in some type of unlawful, or unfair, or fraudulent business act or practice.

• Unlawful Business Practices: Under the Act, a business practice is unlawful if it violates any other law. Therefore, the Act provides plaintiffs with a separate and independent cause of action based on violations of any municipal, state, or federal statute, regulation, ordinance or law, even if the underlying statute or regulation does not allow for a private right of action.

For example, although no private right of civil enforcement exists with respect to criminal statutes, in the case of Stop Youth Addiction, Inc. v. Lucky Stores, Inc., plaintiffs based their unfair competition action against Lucky Stores, Inc. for sale of cigarettes to minors on a criminal statute.

A cause of action brought pursuant to the Act must be brought within four years after the cause of action accrued. “Borrowing” violations of other laws to form the basis of an independent cause of action for unfair competition can have the effect of extending the statute of limitations on a plaintiff’s underlying claim.

For example, the California Supreme Court has ruled that failure to pay wages constitutes unfair competition. Under the Act, employees can bring a cause of action to recover unpaid wages for up to four years after their wage claim arises, while under the labor code, they only have three years to bring a cause of action for unpaid wages.

• Unfair Business Practices: The Act also prohibits “unfair” business practices. A business practice can be held to be “unfair” under the Act, even if it is not unlawful or deceptive, or even if it does not fit a pattern of practice previously proscribed by statute or common law. The definition of “unfair” is left intentionally broad, granting courts enormous discretion to decide what business practices are unfair.

Courts have, however, come up with certain tests for unfairness. Some courts have suggested that the test for unfairness involves balancing the utility of defendant’s practices against the gravity of the alleged victim’s harm. Other courts have held that a business practice is “unfair” if it offends an established public policy or if it is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.

Two key factors considered by courts in determining unfairness is whether the challenged business practice was disclosed and whether the alleged unfair practice has caused any actual harm to consumers or competitors.

An example of a case in which plaintiff was held to sufficiently state a cause of action for “unfair” business practices is Schnall v. Hertz Corporation. In this case, plaintiff sued Hertz claiming that Hertz’s practice of charging a high rate for gasoline when a rental car was not returned with a full tank of gas violated the Act. The court found that the practice of charging a higher rate did not itself violate the Act, because such charges are authorized by statute. However, because Hertz allegedly did not adequately disclose the charges to which customers may be subject, the court found that plaintiff had sufficiently stated a cause of action for unfair business practices and permitted plaintiff to proceed with its claim under the Act.

• Fraudulent Business Practices: Under the Act, a business practice is fraudulent if “the members of the public are likely to be deceived.” “Fraud” under the Act is different and perhaps less difficult to prove than common law fraud, which requires a showing of intent, reliance and damages. The Act does not require the plaintiff to demonstrate that the defendant had an intent to deceive the plaintiff, that the plaintiff relied on the alleged deception, or that any one was actually deceived.

Most claims of fraudulent business practices involve alleged false advertising. In one case, a dog manufacturer unintentionally sold cans of contaminated dog food. The cans’ labels stated that the food was beneficial for the dog. Plaintiffs sued the manufacturer claiming that, given the label, the sale of the contaminated food was a fraudulent business practice. In this case, the court recognized that the manufacturer’s act was accidental and because the manufacturer had instituted a speedy and extensive recall effort, the court found that the company did what it could to inform the public of the problem and did not find the company liable for unfair competition.

Remedies

Under the Act, a plaintiff is precluded from obtaining damages, but is entitled to injunctive relief and restitution, or the return of what was wrongfully denied him or her. The plaintiff is also entitled to the disgorgement of profits gained by the defendant’s unlawful, unfair, or fraudulent business practice. The Act does not authorize recovery of attorneys’ fees.

Defenses

Businesses have some defenses to claims of unfair competition, which include:

• Defenses to Alleged Unlawful Practices: Businesses must show that they have complied with or are not subject to the law upon which the plaintiff has based its claim of unlawful business practice. Also, businesses can assert all defenses available to them pursuant to the underlying law. Furthermore, businesses can assert the “business judgment rule” defense — that their actions are not forbidden by law and are reasonable exercises of business judgment.
• Defenses to Alleged Unfair Practices: Businesses must show the benefits of their challenged business practice outweigh the harm it may cause to an alleged victim. Businesses may prove fairness of their practices by showing that their practices are disclosed in their policies, promotional manuals, or other documents. Business may also provide expert testimony showing that the businesses practices were not deceptive.
• Defenses to Alleged Fraudulent Practices: Businesses must show that the challenged practice is not likely to mislead or deceive anyone. This can be proven by consumer surveys, expert testimony, or testimony by consumers who attest to being satisfied with the business practices at issue.

Unfair competition actions have become exceptionally prevalent and worrisome. The Act’s provisions are so broad that they permit virtually any person to sue for virtually any reason. Unfair competition cases are most often extremely fact specific, which makes pretrial disposition of such cases very difficult. These cases are also generally quite costly to litigate and try because, among other reasons, they largely require the testimony of experts.

Almost all other states have a similar unfair competition statute or a body of common law prohibiting unfair or deceptive business practices. If bringing or defending a claim for unfair competition, make sure your attorneys are well versed in the case law that has recently developed in your state in this area of the law.

ABOUT THE AUTHOR

Donna Yamini, Esq. is an attorney with Silver & Freedman in Los Angeles, CA. She practices general business and commercial litigation, representing clients in state and federal trial and appellate courts.

riskVue | The webzine for risk management professionals
July 2004