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Marion C. Ingersoll
 Cel-Tech and Beyond: Unfair Competition RevisitedThe Supreme Court's much-anticipated decision in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Company, 20 Cal. 4th 163 (1999), purports to establish a "more precise test for determining what is unfair under the unfair competition law." Id. at 185. Unfortunately, the Cel-Tech opinion fails to live up to this promise, and instead sets forth a cumbersome definition of unfair competition that is likely to make suits brought pursuant to Business and Professions Code section 17200 less, rather than more, predictable. Additionally, by referring California courts and litigants to the "persuasive" authority of cases interpreting section 5 of the Federal Trade Commission Act (15 U.S.C. § 45(a)), the Supreme Court has linked two statutory schemes that have profound procedural and substantive differences. The Supreme Court will have ample opportunity to refine the reach and effects of section 17200 in the near future, however. The Court has granted review of at least two more 17200 cases, and, in the months since the Cel-Tech decision, the Court of Appeal has ordered the publication of a pair of opinions that place modest limits on the types of parties who can sue and be sued pursuant to this statute. Accordingly, whatever the current difficulties faced by businesses defending 17200 suits may be, there is cause for optimism that the high volume of cases brought under this statute, as well as continued pressure from the business community, will propel the courts and/or Legislature to clarify California's unfair competition law in the near future. The Cel-Tech Decision In Cel-Tech, four companies that sold cellular telephones charged that L.A. Cellular damaged or destroyed their businesses when L.A. Cellular and rival AirTouch began selling telephones below cost and recouping their losses with profits on their sales of cellular services. The Cel-Tech plaintiffs claimed that L.A. Cellular, which along with AirTouch had a government-protected "duopoly" for the provision of cellular telephone services in the Los Angeles area, violated California's Unfair Practices Act (Bus. & Prof. Code § 17000) and section 17200 of the Business and Professions Code, which the Court labeled the "unfair competition law." The Unfair Practices Act prohibits, among other things, sales of products below cost "for the purpose of injuring competitors or destroying competition" and sales of "loss leaders." Section 17200 proscribes unfair competition, which is defined to include "any unlawful, unfair or fraudulent business act or practice." At the end of plaintiffs' case-in-chief, the trial court granted L.A. Cellular's motion for judgment and held that (1) L.A. Cellular did not violate the Unfair Practices Act because it intended merely to compete with AirTouch, not to harm plaintiffs, and (2) plaintiffs' claim of unfair competition pursuant to section 17200 necessarily failed when plaintiffs' other claims were dismissed. The Court of Appeal affirmed with respect to plaintiffs' Unfair Practices Act claim but reversed as to the cause of action under the unfair competition law. The court held that, notwithstanding that L.A. Cellular did not have an "injurious intent" and thus was not subject to the treble damages provision of the Unfair Practices Act, L.A. Cellular might have independently violated section 17200. The Supreme Court affirmed the Court of Appeal opinion, remanded the case to the trial court and held that L.A. Cellular's price-cutting tactics might be deemed unfair even though L.A. Cellular had not violated the Unfair Practices Act. Specifically, the Court concluded that, although a plaintiff may not maintain an action under 17200 if some other provision bars the action or provides a "safe harbor" for the defendant, "the Legislature's mere failure to prohibit an activity does not prevent a court from finding it unfair." Id. at 184. The Court, by reference to section 5 of the Federal Trade Commission Act, set forth the following standard for determining whether a direct competitor's conduct violates section 17200: "the word unfair in that section means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition." Id. at 187. In her dissenting opinion, Justice Kennard referred to the majority's three-pronged standard as encompassing "penumbral antitrust threats" and as creating in California an overbroad doctrine of "antitrust lite" encompassing "such vague and dubious metaphysical entities as incipient violations, violations of policies and spirits, and anything that might be characterized as a significant threat or harm to competition." Id. at 196, 206 (Kennard, J., dissenting). Comparison With Federal Antitrust Law In the interest of bringing California law under the definitional umbrella of federal antitrust law, the majority opinion in Cel-Tech summarily dismisses the profound differences between the federal antitrust laws and the California statutory scheme. The Court admits that "the two statutes are enforced in significantly different ways. California has no administrative agency equivalent to theÉFTC, and private citizens have no right to seek personal enforcement of section 5 in lieu of FTC action." Id. at 185-186. Indeed, in addition to allowing individuals to sue on their own behalf, California's unfair competition law also provides that private parties can sue, and potentially recover money, on behalf of nonparties without satisfying the strict standards applicable to class actions. In contrast, as the Supreme Court recognized in Cel-Tech, there is no private right of action afforded under section 5 of the Federal Trade Commission Act, pursuant to which enforcement is limited solely to the FTC. Congress created a restricted enforcement mechanism for the FTC Act because of concerns pertaining to the breadth of the definition of unfairness in the Act and the danger that private actions might generate inconsistent and duplicative results. As the Court of Appeals for the District of Columbia Circuit observed in Holloway v. Bristol Myers Corporation, 485 F.2d 986 (D.C. Cir. 1973): Private litigants are not subject to the same constraints [as the FTC]. They may institute piecemeal lawsuits, reflect disparate concerns and not a coordinated enforcement program. The consequence would not only burden the defendants selected but also the judicial system. It was to avoid such possibilities as lack of coherence that Congress focused on the FTC as an exclusive enforcement authority. Id. at 997-998. The remedies provided under the California statutory scheme are also far broader and more punitive than the "cease-and-desist" order that the FTC can issue to instruct a business to modify its future conduct. In California, although plaintiffs are technically precluded from recovering traditional damages, large monetary awards in the form of restitution and/or disgorgement are permissible, as are civil penalties pursuant to section 17206 of the Business and Professions Code. As these differences make clear, application of federal antitrust standards to cases brought under California law poses substantial risks to the courts, to businesses named as defendants and to consumers, whose interests the consumer protection statutes are intended to protect. Post Cel-Tech Cases Lest it appear that there is no hope for businesses faced with a rising tide of unfair competition litigation in California, the Supreme Court is scheduled to decide at least two more cases involving section 17200 this year. Although neither case deals directly with the statutory definition of "unfair," both discuss important aspects of the law that have presented challenges to defense counsel and business interests. In Cortez v. Purolator Air Filter Products, Inc., 65 Cal. App. 4th 573A (1998), rev. granted, 78 Cal. Rptr. 2d 702 (1998), the Court of Appeal awarded restitution in the form of back wages to 175 former employees of Purolator, even though two prior decisions of the Court of Appeal had deemed back wages "damages" that were unavailable in section 17200 actions. The court in Cortez concluded that "[p]laintiff's unpaid wages [were] simply one method by which to measure the disgorgement of wrongful benefit." Id. at 897. The court also applied the four-year statute of limitations of section 17200 to the plaintiff's unfair competition claim, rather than the three-year statute of limitations contained in the Labor Code provision that formed the basis of the plaintiff's claim that Purolator had acted unlawfully. Id. at 898. Kraus v. Trinity Management, 57 Cal. App. 4th 709 (1997), rev. granted, 68 Cal. Rptr. 2d 475 (1997) deals directly with the remedies available to a plaintiff bringing a representative action pursuant to section 17204, which provides that enforcement actions may be brought by certain government officials or by "any person acting for the interests of itself, its members or the general public." In Kraus, six former tenants alleged that their San Francisco landlord had charged them and other tenants improper security deposits and assessed liquidated damages against them in violation of various provisions of the Civil Code and section 17200. Notwithstanding its concerns regarding the uncertain preclusive effect of judgments obtained in representative unfair competition actions, the Court of Appeal affirmed the portion of the trial court's ruling that awarded the named plaintiffs restitution and ordered defendants to disgorge into a "fluid recovery fund" the amounts they had obtained from other tenants while engaging in the unlawful practices that were the subject of the named plaintiffs' claims. The California Court of Appeal has also decided two cases in the months since the Supreme Court's decision in Cel-Tech. Both of these decisions limit, rather than expand, the reach of the state's unfair competition law. The court in Norwest Mortgage, Inc. v. Superior Court, 1999 Cal. App. LEXIS 487 (1999) issued a writ directing the trial court to vacate its order certifying a nationwide class asserting a claim pursuant to section 17200. The court held that, in keeping with broad jurisdictional principles, California's unfair competition law does not apply to non-California residents for whom a defendant's allegedly improper conduct occurred entirely outside California. In Trinkle v. California State Lottery, 1999 Cal. App. LEXIS 441 (1999), the court held that the California State Lottery was not a person that could be subject to suit under section 17200. Businesses and defense attorneys should not expect immediate relief from the current climate of regulation by hindsight in section 17200 actions. With increased judicial scrutiny of the law, however, further refinement and clarification seem inevitable. For now, companies should be counseled that they can be subject to multiple 17200 suits not only by acting in a manner that is or could be construed to be unlawful, but also by engaging in actions that might be considered deceptive or that threaten or harm competition. Ms. Ingersoll is an associate in the firm of Farella, Braun, & Martel, LLP |