What insurers and their counsel need to know about California's unfair competition law.

• Author: Dunne, Kevin J.

Because of the state's commercial importance, California's UCL statute may catch national and international insurers in its complicated net

NATIONAL and international insurance companies are facing claims under state law unfair competition statutes in force around the United States. There are unfair and deceptive practices statutes in many states, including major commercial states such as Arizona, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York and Texas.(1)

It is particularly important that insurers and their counsel understand California's unfair competition statute, which is Section 17200 et seq. of the California Business and Professions Code for three reasons:

* It has been the subject of much litigation and judicial interpretation and thus promises to be a secondary source of precedent in interpreting the statutes of other states.

* Defense strategies that have been applied successfully in California may be used elsewhere.

* National insurance companies must presume that if they are to be sued anywhere under an unfair competition law (UCL), the most likely location is California. It should be recognized that California UCL exposures may exist for any carrier doing business in California regardless of whether it is domiciled in some other state or nation.

The broad scope of the California statute, which proscribes "any unlawful, unfair or fraudulent business act or practice," presents a significant challenge to the targeted insurance company and requires a well-planned defense.

CALIFORNIA UCL LAW

The most significant features of the California UCL statute include these.

1. Liability

   Liability may be based on any one of three types of business practices: unlawful conduct, unfair practice, or fraudulent activity, the California Supreme Court explained in Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co.(2)

   The showing of an intent to injure is not necessary to a finding of liability.(3)

   Liability may be imposed based on a single wrongful act.(4)

   The "unlawful" practice prong of the statute "borrows" the violation of other laws, "civil or criminal, federal, state, municipal, statutory, regulatory or courtmade,"(5) and provides a remedy or additional remedy for violation of those laws.(6) Consequently, an insurer found to have breached the covenant of good faith and fair dealing or to have violated California insurance regulations may also face UCL liability.

   One court stated, "In general, the `unfairness' prong `has been used to enjoin deceptive or sharp practices."(7) While one court declared that the UCL "does not give the courts a general license to review the fairness of contracts,"(8) another held that breach of the covenant of good faith and fair dealing implied in a contract may satisfy the "unfairness prong of the UCL."(9)

   At present, the precise standard for liability for an "unfair" practice is uncertain in the context of a consumer protection action against an insurer. The California Supreme Court in Cel-Tech rejected earlier criteria adopted by several of the state's intermediate appellate courts--that is, weighing the utility of the conduct against the gravity of the harm. The supreme court instead adopted a new standard expressly applicable to unfair competition claims: "unfair" means conduct that violates the spirit or policy of antitrust laws because its effects are comparable to a violation of such laws. The court specifically declined, however, to adopt a standard applicable to UCL claims brought by or on behalf of consumers rather than competitors. Nevertheless, the insurer defendant in a consumer protection case probably should argue, based on Cel-Tech, that its liability for "unfair conduct" requires a showing that it violated the spirit or policy, if not the letter, of a predicate law.

   The "fraudulent" practice prong of the statute refers to conduct likely to deceive the public.(10) Liability under this prong is not dependent on proof that someone "was actually deceived, relied upon the fraudulent practice or sustained any damage.(11) "Allegations of actual deception, reasonable reliance and damage are unnecessary."(12)

2. Remedies

   The remedies for violation of the UCL are limited to injunctive relief and restitution/disgorgement. Civil penalties are recoverable in an action by government representatives. Restitution may be awarded to non-parties, as well as to the named plaintiff from whom money or property has been unfairly or unlawfully obtained.(13) However, last year the California Supreme Court held in Kraus v. Trinity Management Services Inc.,(14) that "disgorgement into a fluid recovery fund is not a remedy available in such representative UCL actions." That remedy, which may result in distribution of disgorged funds other than to affected parties, is available only where a class action has been certified. The court did note that in order to maximize the efficacy of restitution, the trial court may order the defendant in a UCL action to "identify, locate and repay" affected parties the "full amounts of funds improperly acquired."

   Compensatory, punitive and treble damages are not recoverable on a UCL claim; neither are attorneys' fees.(15) Those damages may be recovered, however, based on a companion "bad faith" cause of action, and it also should be noted that attorneys' fees may be awarded in the UCL action pursuant to Section 1021.5 of the California Code of Civil Procedure (successful action in public interest).

   UCL remedies are cumulative to remedies available under other laws.(16) For example, in a class action grounded on alleged fraud, which includes but is not limited to a UCL claim, the defendant may be at risk for compensatory and punitive damages, as well as restitution, at least to the extent the restitution does not overlap with the compensatory damages.

3. Procedural Issues

   The trier of fact on the UCL claim is the trial court, and it is accorded broad discretion in the exercise of its equitable powers.(17)

   The UCL claim may be brought by "any person acting for the interests of itself, its members or the general public," as well as by government representatives.(18)

   The UCL claim may be brought as a class action if the requirements for such a suit are otherwise satisfied--that is, joinder of numerous class members is impractical, common questions of law and fact exist, the plaintiff's claims and defenses are typical of the class, and the plaintiff will fairly and adequately protect the class's interests. The plaintiff may be required to demonstrate that a class action is superior to a representative UCL action as a method for adjudicating the claim.(19)

   DEFENSES

1. Absolute Defenses

   There is a ray of hope in the California Supreme Court's statement in Cel-Tech: "Although the unfair competition law's scope is sweeping, it is not unlimited." There are some potential absolute defenses.

   1. Statute of Limitations

      The UCL contains a four-year statute of limitations commencing with accrual of the cause of action.(20) Of course, application of that limitation often will involve resolution of close factual questions as to the accrual date, especially in the case of a representative UCL action involving multiple members of the public impacted by the conduct. It also is uncertain as to what extent the statutory period will be extended by reason of continued violations.

   2. Standing

      While a plaintiff in state court may bring a UCL claim without having sustained injury, this is not true as respects UCL cases in federal court. There, a Ninth Circuit decision holds, the plaintiff must be able to show a "distinct and palpable injury" in order to establish standing.(21) In addition, one California intermediate appellate court has indicated that non-residents of California do not have standing to seek relief under the UCL for injuries "arising from conduct occurring entirely outside of California."(22) This decision may provide a basis for an insurer to challenge the use of the UCL as a vehicle for a nationwide class action.

   3. Res Judicata/Redundancy

      The California legislature did not address res judicata issues within the body of the UCL. The California Supreme Court, in its only statement on the issue, opined that concerns about the res judicata effects of UCL claims "are best addressed to the legislature."(23) Nevertheless, a defendant insurer may wish to assert res judicata as a bar to the UCL suit when it has prevailed by final judgment on the same claim in prior litigation against the present plaintiff or in prior litigation against a party having a community of interest with the present plaintiff.

      The res judicata doctrine also may bar a UCL suit presenting the same claim made in an earlier case brought by a party in privity with the current plaintiff and which resulted in a judgment against the insurer or a settlement by way of stipulated judgment. The latter circumstance...