BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2003-2004 Regular Session
SB 122 S
Senator Escutia B
As Amended May 12, 2003
Hearing Date: May 13, 2003 1
Business & Professions Code 2
CJW:cjt 2
SUBJECT
Unfair Competition: Private Enforcement Actions
DESCRIPTION
This bill would provide that, in any private action brought
in the public interest to enforce the Unfair Competition
Law (UCL) (Bus. & Profs. Code Sec. 17200 et seq .), a court
shall review the attorney's fees to be paid in a settlement
or other pre-trial disposition of the action.
The bill also would provide that disgorgement is an
available remedy in private UCL actions, and that any
disgorgement in excess of restitution shall be distributed
in a manner to further the purposes of the action or to
promote justice for all Californians.
Finally, the bill would clarify that defendants cannot be
joined in a UCL action just because they are engaged in the
same or similar businesses and are alleged to have violated
the same or similar laws.
BACKGROUND
SB 122 is one of four bills before the Committee today that
respond to a recent rash of UCL lawsuits brought by a few
law firms against thousands of small businesses (auto
repair shops, restaurants, and nail salons) in Southern
California. These lawsuits typically have consisted of
boilerplate complaints filed against hundreds of defendants
at a time, based solely on public notices of minor or
(more)
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technical violations already addressed by the responsible
regulatory agencies. The lawsuits usually have been
followed by immediate demands for financial settlements for
nuisance value from the defendants, many of whom are recent
immigrants unfamiliar with the American legal system and
particularly vulnerable to such pressures, or who simply
cannot afford the time or expense of litigating on the
merits.
On January 14, the Senate and Assembly Judiciary Committees
held a joint legislative hearing on these allegedly abusive
UCL suits. Witnesses included the Attorney General and
other public prosecutors who bring civil enforcement
actions under the UCL; a representative of the State Bar,
which had begun an investigation of the law firms bringing
the suits; lawyers from the Trevor Law Group, one of those
law firms; defendants' representatives; consumer groups;
tort reform advocates; and experts on the UCL.
The purpose of the hearing was to determine whether the UCL
was being abused by the mass-defendant suits, and if so,
whether existing judicial authority and State Bar sanctions
were adequate to deal with the problem, or whether the UCL
itself required amendment. Although most witnesses (except
the Trevor Group lawyers) agreed that abuses were evident,
there was strong disagreement between those who favor the
consumer gains achieved by legitimate UCL actions, and
therefore oppose any significant amendments to the law, and
those who object to the breadth of the UCL, and seek
amendments limiting its scope.
Since the hearing, the State Bar has instituted
disciplinary proceedings against the Trevor Group lawyers,
and the Attorney General, with acknowledged irony, has
filed a UCL action against them alleging unfair business
practices. (The State Bar and the Attorney General
continue to investigate other law firms alleged to be
engaging in similar practices.)
In addition, a Los Angeles judge has dismissed the Trevor
Group's UCL cases against thousands of auto shop
defendants, and judges hearing similar actions by Trevor
and other firms are considering similar dismissals.
Perhaps in anticipation of further losses, the Trevor Group
has dismissed its own action against all of the restaurant
defendants, and another firm has dismissed at least one of
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its three actions against hundreds of nail salon
defendants.
Although the Trevor Group's alleged abuses of the UCL have
been actively addressed by existing disciplinary and
judicial processes, concerns remain that the UCL remains
uniquely subject to abuse by private plaintiffs, and that
unless reforms are instituted, future abuses will occur and
will inflict considerable harm before disciplinary measures
can be enforced. SB 122 proposes to reform the UCL by
narrowly targeting specific abuses, as specified below.
CHANGES TO EXISTING LAW
1. Existing law , the Unfair Competition Law (UCL),
prohibits any person from engaging in "unfair
competition," which is defined as "any unlawful, unfair,
or fraudulent business act or practice and unfair,
deceptive, untrue or misleading advertising." [Bus. &
Profs. Code Sec. 17200 et seq . All code references are
to the Business & Professions Code unless otherwise
stated.]
Existing law provides that the UCL may be enforced by the
Attorney General, district attorneys, and other public
prosecutors, who may seek injunctive relief, restitution,
and civil penalties from violators. [Sec. 17203 et
seq .]
Existing law further provides that the UCL also may be
enforced by "any person acting for the interests of
itself, its members, or the general public," and that
private plaintiffs acting in the public interest may seek
injunctive relief and restitution, but may not seek
damages or civil penalties. [ Id .]
Existing law provides that a court may award attorney's
fees to a successful party against one or more opposing
parties in any action that has resulted in the
enforcement of an important right affecting the public
interest, if specified qualifications are met. [CCP Sec.
1021.5.]
This bill would provide that in a private action for
relief brought on behalf of the general public, a court
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must review attorney's fees in any proposed settlement,
compromise, dismissal, or disposition on the merits
brought pursuant to this chapter.
This bill further would provide that an attorney who
fails to submit the attorney's fees for review by the
court is subject to disciplinary action by the State Bar
of California.
This bill would exempt from this provision lawsuits
brought by labor organizations or their representatives,
joint labor-management committees, or employment or civil
rights organizations in existence for at least five years
that have as one of their purposes the vindication of
labor, civil, constitutional or human rights.
2. Existing law provides that a court in a UCL action may
impose equitable remedies "as may be necessary to restore
to any person in interest any money or property . . .
which may have been acquired by means of such unfair
competition." [Sec. 17203.]
Existing law further provides that disgorgement of
illegally obtained assets is an equitable remedy
available in class actions, but not in UCL actions
brought in the public interest. [Kraus v. Trinity
Management Services, Inc. (2000) 23 Cal. 4th 116; Korea
Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal. 4th
1134.]
This bill would provide that disgorgement relief is an
available remedy under Section 17203.
This bill further would provide that a court shall assure
that any disgorgement in excess of restitution shall be
distributed as a fluid recovery or cy pres award, to the
extent possible, in a manner designed either to further
the purposes of the underlying causes of action or to
promote justice for all Californians.
3. Existing law provides that a plaintiff may join
multiple defendants in a single action if the plaintiff
asserts any right to joint and several relief against
them, or alleges that the defendants participated in the
same transaction or series of events giving rise to the
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complaint. [CCP Sec. 379.]
This bill would set forth the provisions of CCP Section
379 in their entirety in a specific joinder provision
within the UCL.
This bill would add to those provisions the following
additional provision:
The fact that individual defendants who are not
associates or affiliates of each other are engaged in
the same or similar businesses and are alleged to have
violated the same or similar laws or regulations shall
not, in itself, constitute a basis for joinder under
this chapter.
This bill further would provide that this additional
provision is declaratory of existing law.
This bill is double-jointed to Assembly Bill 95
(Corbett), and would take effect only if AB 95 is enacted
and takes effect by January 1, 2004.
COMMENT
1. Stated need for legislation
The author asserts that, although the Attorney General,
the State Bar and the courts are dealing appropriately
with the alleged UCL abuses by the Trevor Group and other
practitioners, sanctions administered after the fact are
never as effective as measures that will discourage
abuses before they occur, or stop them before they get
too far. SB 122 would supplement existing punitive
measures (such as State Bar discipline, civil and
criminal prosecution, and court sanctions) by adding
measures designed to prevent abuse of the UCL in the
first place.
(a) Joinder: Front-end prevention of mass-defendant
filings
According to the author, the recent alleged UCL abuses
appear to have occurred because a few clever people
discovered a way to sue hundreds of defendants at a
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time for very little cost, and then seek individual
settlements that would add up to a huge and unjustified
recovery (see Comment 1 (c)). For example, the Trevor
Group sued over one thousand restaurants for various
health code violations discovered simply by reviewing
published lists of health code notices.
Since California law allows plaintiffs to "join" more
than one defendant in a single action when the
defendants bear some common relationship to the
underlying facts or to the relief sought in the
complaint, Trevor was able to keep its costs low by
filing a single complaint against all of the
restaurants for a single filing fee of about $300,
instead of having to pay $300 per defendant in separate
actions - a total of over $300,000 in filing fees that
probably would have discouraged these suits in the
first place. (The defendants, meanwhile, had to pay
separate filing fees to defend themselves against these
actions.)
California's joinder statute, on its face, should have
been enough to prevent mass defendant filings when the
defendants had nothing more in common than being in the
same business and being charged with the same sort of
violations. However, courts have become accustomed to
interpreting the joinder laws liberally in order to
encourage judicial efficiency and economy. Defense
lawyers seeking to defeat the Trevor actions have
reported their surprise and frustration with how
difficult it has been to convince judges that these
cases were improperly joined, and have agreed that more
clarity on joinder is the first tool they would seek to
successfully defend against these cases.
Accordingly, SB 122 clarifies joinder for UCL actions.
First, it restates CCP Section 379, to make clear that
existing joinder law applies, then clarifies that law
by adding a provision stating that the fact that
defendants are in the same business and are accused of
violating the same or similar provisions does not, in
itself, constitute a basis for joinder. At best, this
should discourage future mass-defendant suits
calculated to make a quick profit; at the very least,
it should stop such suits early in the process by
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making it easier to demur on the basis of improper
joinder.
(b) Disgorgement and fluid recovery
SB 122 also would make clear that legitimate private
UCL suits may seek disgorgement of illegally obtained
profits, in addition to restitution for identifiable
plaintiffs, and would make sure those profits are
distributed in a manner consistent with the public
interest instead of being retained by "shell"
plaintiffs created only to make money from UCL cases.
Disgorgement of profits is an equitable remedy designed
to prevent wrongdoers from retaining profits from
illegal practices even when there is no identifiable
plaintiff to be awarded restitution. For example, in
an action to stop a landlord from illegally retaining
tenants' security deposits, a successful plaintiff
would be able to seek return of all the illegally
retained deposits even if all of the individual tenants
owed those deposits could not be located. Under the
"cy pres" doctrine of fluid recovery, the profits not
awarded as restitution would be distributed in a manner
to promote the cause underlying the successful lawsuit
- for example, to tenants' rights organizations for
tenant education purposes.
Illegal retention of security deposits was the
violation alleged in Kraus v. Trinity Management
Services, Inc. (2000) 23 Cal. 4th 116. In that case,
however, the California Supreme Court, overturning a
unanimous appellate court decision to the contrary,
determined that disgorgement was not available in
private UCL actions since the UCL's general language
allowing equitable recovery was not as specific as
other statutes allowing disgorgement remedies in class
actions. (Id. at pp.128, 137; see also Korea Supply
Co. v. Lockheed Martin Corp. (2003) 29 Cal. 4th 1134.)
This bill would abrogate these decisions and
specifically provide that disgorgement is an available
remedy in UCL actions. To guard against abuse, it
would provide that the court must assure that any
disgorgement that exceeds restitution owed to
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identifiable individuals shall be distributed "to
further the purposes of the underlying action or to
promote justice for all Californians." This would
require court supervision of the distribution of the
excess and prevent it from being retained by "shell"
plaintiffs for their private enrichment.
(c) Court review of attorney's fees: Back-end
protection against unfair settlements, as well as a
deterrent to frivolous claims
The author states that the Trevor group profited from
its mass-defendant filings by pressuring each defendant
to settle for an apparently "reasonable" amount that,
when multiplied by the number of defendants, clearly
was vastly unreasonable in light of the costs expended.
In its case against over 1,000 restaurants, for
example, Trevor sought settlements from individual
defendants for $1,000 in attorney's fees, which
ostensibly reflected the costs of initial investigation
and preparation of the complaint, and which was low
enough to encourage a defendant to settle in order to
avoid future, higher demands.
But when multiplied by the number of defendants named
in the complaint, Trevor's potential recovery was over
$1 million -- even though its only expenses consisted
of copying names of restaurants from published health
code notices onto a complaint, filing the complaint,
and then mailing 1,000 copies of a settlement demand
letter. Such an outrageous disparity between
settlement demand and actual expenses would not have
been apparent to an individual defendant receiving a
demand letter, but would have been immediately obvious
to any court reviewing the proposed settlement and
noting that the complaint named multiple defendants.
Accordingly, SB 122 would require court review of any
pre-trial disposition of a private UCL action. To
minimize the impact on court workload, the bill would
limit the required review to the attorney's fees
proposed to be paid as part of the settlement
agreement, so that courts would not have to engage in
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mini-trials on the merits of each case.
The purpose of the provision is to deter unscrupulous
plaintiffs from bringing frivolous cases in order to
profit from early out-of-court settlements, and to make
sure the attorney's fees sought in a settlement are
reasonable. Proponents assert that this provision not
only operates at the back end of the case to prevent
the collection of unwarranted attorney's fees, but also
acts as a deterrent to discourage the filing of
frivolous suits on the front end.
The bill exempts established labor and civil rights
organizations from the attorney fee review requirement.
Those organizations typically bring UCL actions for
illegal withholding of wages or to correct unsafe
working conditions, and are not associated with the
abusive and frivolous suits the bill attempts to
target. Any additional procedural requirement such as
court review would impose an unnecessary strain on
their already-minimal resources and make it harder for
them to pursue legitimate UCL actions.
2. Bill is double-jointed with AB 95
SB 122 is double-jointed with AB 95 (Corbett), which
carries some identical provisions and also includes a
provision that would require private UCL plaintiffs to
provide a specified notice, along with service of a
complaint or demand letter, informing defendants of their
rights and directing them to sources where they may
obtain additional information. The required notice would
include the advisement that any attorney's fees to be
paid in a proposed settlement or other disposition must
be reviewed by a court.
3. Supporters approve bill's narrow aim at abusive
practices
Consumers Union, the nonprofit publisher of Consumer
Reports, observes that the current abuses of the UCL have
been aimed at eliciting monetary gains for a small group
of lawyers and their for-profit clients, not at stopping
unfair practices for the benefit of consumers. Consumers
Union supports SB 122 as striking an appropriate balance
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between targeting abusive practices and protecting the
UCL from burdensome restrictions that would place it out
of reach of legitimate plaintiffs.
Other consumer groups also support the bill, noting that
its disgorgement provision would ensure that any
ill-gotten gains recovered from a defendant must be
devoted to the public benefit instead of being funneled
to for-profit entities formed by attorneys (like the
for-profit plaintiff that fronted the Trevor Group cases
and received a portion of recoveries for its own private
enrichment). The Sierra Club notes that fluid recovery
of disgorged profits "would prohibit unethical firms from
ignoring the policy basis for the award or settlement,
and would help assure that the public interest, not the
lawyer's interest, is served."
Consumer Attorneys of California (CAOC) also supports the
bill, noting that court review of attorney's fees and
clarification of joinder are welcome procedural reforms
that should deter Trevor-type abuses without unduly
burdening an important consumer protection law.
4. Opponents say disgorgement will undercut SB 122's
other reforms
The Automotive Repair Coalition (ARC) and the California
Service Station and Automotive Repair Association
(CSSARA) oppose SB 122, asserting that the addition of
disgorgement as an available remedy increases the
economic threat plaintiffs' attorneys can hold over
defendants, and that the bill's proposed court review of
attorney's fees in settlements is insufficient to offset
this increased threat.
The Civil Justice Association of California (CJAC) and
the California Motor Car Dealers Association also oppose
the bill, asserting that its court review provision is
inadequate and that allowing disgorgement as a remedy
will only increase frivolous UCL actions instead of
discouraging them.
In response, the author states that disgorgement is a
"threat" only to defendants who know they have reaped
illegal profits from substantive violations of the UCL.
The vast majority of the defendants sued in the Trevor
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Group cases didn't give in to "threats" or other
pressures to settle their cases because they knew they
hadn't done anything wrong; those who did settle paid the
$1,000 demands because it was less expensive than
defending themselves in court. SB 122 is designed to
deter frivolous UCL suits from being filed in the first
place, to protect innocent businesses from having to
choose between paying a "nuisance settlement" or
defending itself in court. It is not designed to deter
legitimate relief in legitimate cases.
Support: California Labor Federation; California Rural
Legal Assistance
Foundation (CRLA); Congress of California Seniors;
Consumer
Attorneys of California (CAOC); Consumers for Auto
Reliability and
Safety (CARS); Consumers Union; Sierra Club
California; Congress of
California Seniors
Opposition: Automotive Repair Coalition (ARC); California
Chamber of Commerce; California Dental
Association; California Motor Car Dealers
Association; California Service Station and
Automotive Repair Association; Civil Justice
Association of California (CJAC); National
Federation of Independent Businesses (NFIB);
California Motor Car Dealers Association
HISTORY
Source: Author
Related Pending Legislation:
(Pending before the Senate Judiciary Committee
today):
SB 889 (Johnson) (would prohibit private UCL suits
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against businesses
with fewer than 50 employees);
SB 890 (Johnson) (would require 85% of any judgment in
a private UCL action to be deposited in the State
Restitution Fund); and
SB 912 (Ackerman) (would prohibit private UCL actions
brought in the public interest if a regulatory agency
already has identified the violation, or if it is the
subject of a civil, criminal, or administrative
proceeding)
(Pending before Assembly):
AB 95 (Corbett) (would require private UCL plaintiffs
to give defendants specified notice of their rights,
and would clarify that joinder rules do not permit
mass-defendant actions based solely on similar
violations alleged against similar businesses)
(double-jointed to SB 122);
Prior Legislation: SB 143 (Kopp), 1997-1998 (would have
instituted recommendations of the Law
Revision Commission to reform private UCL
actions brought in the public interest,
including (1) specified qualifying
requirements for plaintiffs; (2) notice to
the AG of all such UCL filings; (3) court
review of all settlements; and (4) finality
of judgments as to acts alleged in complaint)
(failed passage in Senate Judiciary
Committee)
SB 109 (Ackerman), 2000-2001 (would have
applied class action requirements to private
UCL plaintiffs) (failed passage in Senate
Judiciary Committee);
SB 593 (Morrow), 1999-2000 (would have
applied class action requirements to private
UCL plaintiffs) (failed passage in Senate
Judiciary Committee)
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