David M. Axelrad

Partner
Horvitz & Levy LLP

Email: daxelrad@horvitzlevy.com

UC Hastings COL; San Francisco CA

In Capito v. San Jose Healthcare System, LP, the California Supreme Court addressed a perennial problem - the definition of an "unfair" business practice under Business and Professions Code section 17200 (section 17200). Capito v. San Jose Healthcare System, LP (2024) 17 Cal.5th 273, 277-278 (Capito).

Section 17200 is California's analog to the Federal Trade Commission Act (FTCA), 15 U.S.C. § 41 et seq., which declares "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce" to be unlawful. Id., § 45(a)(1). Many states adopted such "Little FTC Acts" in the wake of the FTCA, and, like section 17200, authorized private individuals to bring enforcement actions. See Milner, From Rancid to Reasonable: Unfair Methods of Competition Under State Little FTC Acts (2024) 73 Am. U. L.Rev. 857, 879, 882 (hereafter Little FTC Acts). Ironically, Congress was so concerned about the unbridled enforcement of a potentially limitless "unfairness" standard that it refused to permit a private right of action under the FTCA and limited the right of enforcement to the Federal Trade Commission. See Holloway v. Bristol-Myers Corp. (D.C. Cir. 1973) 485 F.2d 986, 990 (Holloway) ["[T]his breadth of prohibition carried with it a danger that the statute might become a source of vexatious litigation. Expertise was called for, both to identify trade practices that posed the threat of monopoly and to avoid using the statute as a vehicle for trivial or frivolous claims. There was, furthermore, a need to develop a central and coherent body of precedent, construing and applying the statute in a wide range of factual contexts, so as to define its operative reach."]; see also Little FTC Acts, supra, 73 Am. U. L.Rev. at p. 867.

Like the FTCA, section 17200 defines "unfair competition" to mean "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." For many years, there was virtually no limit to this wide-ranging statute, and plaintiffs could seek relief for virtually any business practice regardless of normal rules governing equitable remedies. See Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 112 [interpreting Civil Code section 3369, the predecessor to Business and Professions Code section 17200: "[T]he section was intentionally framed in its broad, sweeping language, precisely to enable judicial tribunals to deal with the innumerable 'new schemes which the fertility of man's invention would contrive' "]. Individual citizens could bring representative actions on behalf of the general public based on a single transaction without regard to the requirements for a class action and without showing that they themselves had been harmed by the allegedly unfair practice. See, e.g., Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 949-951; Stop Youth Addiction, Inc. v. Lucky Stores, Inc. (1998) 17 Cal.4th 553, 570; Committee On Children's Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 209-211; State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1102-1103; Hernandez v. Atlantic Finance Co. (1980) 105 Cal.App.3d 65, 71-73.

In response to concerns over the breadth of section 17200, the voters and the courts tightened the requirements for a section 17200 action.

Through a ballot initiative, the voters placed restrictions on section 17200 actions. Proposition 64 required individuals (other than public prosecutors) to (a) satisfy the requirements for a class action in order to bring a representative action on behalf of the general public, Bus. & Prof. Code, § 17203, and (b) demonstrate that they have "suffered injury in fact and ha[ve] lost money or property as a result of the unfair competition." Bus. & Prof. Code, § 17204. See Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 320-322.

In Kraus v. Trinity Management Services, Inc., Kraus v. Trinity Management Services, Inc. (2000) 23 Cal.4th 116, 126-127. the California Supreme Court restricted the remedy of restitution in private section 17200 enforcement actions to the "return [of] money obtained through an unfair business practice to those persons ... from whom the property was taken, that is, to persons who had an ownership interest in the property." Ibid. Kraus rejected the application in section 17200 actions of a "fluid [fund] recovery" whereby a defendant disgorges into a fund money that is not to be returned to the persons from whom it was obtained, untethered to the ownership of the property to be restored. Id. at p. 127.

Most significantly for purposes of this article, the California Supreme Court, in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., restricted the definition of unfairness to competitors by adopting a safe harbor rule: "When a plaintiff who claims to have suffered injury from a direct competitor's 'unfair' act or practice invokes 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." Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 187 (Cel-Tech). Where the Cel-Tech safe harbor applies, the legislative authorization of or public policy favoring a business practice "insulates" that business practice from section 17200 liability. E.g., McCann v. Lucky Money, Inc. (2005) 129 Cal.App.4th 1382, 1387; Bernardo v. Planned Parenthood Federation of America (2004) 115 Cal.App.4th 322, 354; Schnall v. Hertz Corp. (2000) 78 Cal.App.4th 1144, 1154, 1160-1161, 1166 (Schnall).

The enduring issue after Cel-Tech is whether the safe harbor rule also applies in consumer unfairness cases. Cel-Tech, supra, 20 Cal.4th at p. 187, fn. 12 ["This case involves an action by a competitor alleging anticompetitive practices. Our discussion and this [safe harbor] test are limited to that context. Nothing we say relates to actions by consumers or by competitors alleging other kinds of violations of the unfair competition law such as 'fraudulent' or 'unlawful' business practices or 'unfair, deceptive, untrue or misleading advertising.' "]; see Capito, supra, 17 Cal.5th at p. 284 ["The UCL does not define 'unfair,' and the 'standard for determining what business acts or practices are "unfair" in consumer actions under the UCL is currently unsettled' "]; accord, Nationwide Biweekly Administrators, Inc. v. Superior Court of Alameda County (2020) 9 Cal.5th 279, 303; Zhang v. Superior Court (2013) 57 Cal.4th 364, 380, fn. 9.

The courts have divided on this issue. A number of consumer cases apply the pre-Cel-Tech definition of unfairness that looks to whether the defendant's business practice "is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers, and requires the court to weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim." Drum v. San Fernando Valley Bar Assn. (2010) 182 Cal.App.4th 247, 257 (Drum); see Ticconi v. Blue Shield of California Life & Health Ins. Co. (2008) 160 Cal.App.4th 528, 539. 82; Bardin v. DaimlerChrysler Corp. (2006) 136 Cal.App.4th 1255, 1268-1270; Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 286; Walker v. Countrywide Home Loans, Inc. (2002) 98 Cal.App.4th 1158, 1170; Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 718-719; Community Assisting Recovery, Inc. v. Aegis Security Ins. Co. (2001) 92 Cal.App.4th 886, 894. But other consumer cases apply the Cel-Tech "safe harbor" rule. See Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 613; Aleksick v. 7-Eleven, Inc. (2012) 205 Cal.App.4th 1176, 1192; Lopez v. Nissan North America, Inc. (2011) 201 Cal.App.4th 572, 591-594; Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1364-1366; In re Firearm Cases (2005) 126 Cal.App.4th 959, 979-983; Schnall, supra, 78 Cal.App.4th at pp. 1157-1170. And yet a third group of cases have adopted a definition of unfairness taken from FTC jurisprudence that looks to whether: "(1) the consumer injury [is] substantial; (2) the injury [is] not ... outweighed by any countervailing benefits to consumers or competition; and (3) it [is] an injury that consumers themselves could not reasonably have avoided." Davis v. Ford Motor Credit Co. LLC (2009) 179 Cal.App.4th 581, 597-598, citing Camacho v. Automobile Club of Southern California (2006) 142 Cal.App.4th 1394, 1403.

Against this backdrop, the California Supreme Court in Capito took up the "question ... whether hospitals have a duty, beyond what is required by the relevant statutory and regulatory scheme, to notify emergency room patients that they will be charged [evaluation and management services (EMS)] fees." Capito, supra, 17 Cal.5th at p. 277.

The plaintiff filed a class action suit against a hospital challenging EMS fees for two emergency room visits. She did not claim that the defendant had violated its existing disclosure obligations or that the EMS fees were excessive or improper. She claimed only that the defendant had a duty to provide additional disclosures of the fees before the emergency room services were provided, and that the defendant's failure to do so was an unfair business practice in violation of section 17200. Id. at p. 277.

The court rejected plaintiff's claim, finding that "[h]ospitals do not have a duty under [section 17200 or the state's Consumer Legal Remedies Act], beyond their obligations under the relevant statutory and regulatory scheme, to disclose EMS fees prior to treating emergency room patients. Requiring such disclosure would alter the careful balance of competing interests, including price transparency and provision of emergency care without regard to cost, reflected in the multifaceted scheme developed by state and federal authorities." Id. at p. 278.

To reach this conclusion, the court had to navigate the still unsettled waters of "unfairness" in consumer cases. Id. pp. 284-288. But the court decided it had "no need to decide either the Unfair Competition Law (UCL) standard for 'unfair' business conduct" or "whether the statutes governing hospital price disclosure create a safe harbor within the meaning of Cel-Tech" because the plaintiff alleged only that defendant's " 'practices offend established public policies, and are immoral, unethical, oppressive, and unscrupulous.' " Id. at pp. 284, 288. The court then went on to hold that because plaintiff did not satisfy any of these stated criteria within the context of the regulatory scheme at issue, she "has not demonstrated unfairness under the UCL." Id. at p. 288.

As noted, the court in Capito purported not to define section 17200 "unfairness" in the consumer context. Id. at p. 284. However, Capito's alleged unfairness standard - whether the defendant's " 'practices offend established public policies, and are immoral, unethical, oppressive, and unscrupulous,' " Ibid, - is much like the broadest pre-Cel-Tech definition of unfairness. See ante, endnote 18. Since the ultimate definition of unfairness in consumer cases is unlikely to be more expansive than the pre-Cel-Tech formula, it is reasonable to conclude that under Capito, an applicable statutory or regulatory scheme will be relevant in consumer cases to determine whether a particular business practice is unfair. Capito, supra, 17 Cal.5th at p. 284 ["whether or not the statutory scheme here creates a safe harbor [under Cel-Tech], we find the scheme relevant to discerning whether [defendant's] conduct 'offends an established public policy' or is 'immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers' . . . that is, whether Regional's conduct is 'unfair' under the UCL, applying the standard stated by Capito"].

In short, Capito can be seen as a step by the California Supreme Court toward reining in the definition of unfairness in consumer cases by establishing the relevance of applicable statutes and regulations to the unfairness analysis.