Publications: Drug & Medical Device

Fairness Forgotten: California's Unfair Competition Law and Its Potential Impact on the Drug and Medical Device Industry

By Jack B. McCowan, Jr., Esq. and Andrew G. Davis, Esq.

I. INTRODUCTION

Plaintiffs' lawyers in California may have a secret weapon to use against the drug and medical device industry. Like all states, California has a consumer protection law that prohibits unfair competition and deceptive trade practices. However, California's law is unique in that it is unusually broad in scope and permits just about anyone to bring a claim against a company for being treated unfairly. "Unfair" can be essentially whatever a plaintiff says it is, and plaintiffs' lawyers have the added incentive of being awarded attorneys' fees.

California's Unfair Competition Law (UCL), codified at California Business and Professions Code § 17200, et seq, prohibits "any unlawful, unfair, or fraudulent business act." Complaints filed against companies under the UCL are often as ambiguous as the statute itself. If recent trends in California are any indication, the UCL has the potential to open the floodgates for plaintiffs' lawyers seeking targets for their claims of unfair business practices. It is imperative that drug and medical device companies be prepared to defend against such charges.

This article provides a general overview of the UCL, analyzes the potential threat to drug and medical device manufacturers, and suggests strategies for defendants to consider when defending against these claims.

II. BACKGROUND AND OVERVIEW

California's UCL was first enacted in 1933. It was modeled after the federal FTC Act, 15 U.S.C. § 45(a) which prohibits unfair trade practices. Originally codified at Civil Code § 3369, it became Business and Professions Code § 17200, et seq. in 1977. In 1992, the legislature amended section 17200 to expand the definition of unfair competition to include "any unlawful, unfair, or fraudulent business act or practice."

UNFAIR COMPETITION DEFINED

The term "unfair competition" has a broad definition in California. Historically, the tort of unfair business competition required a competitive injury. However, the language of section 17200 demonstrates a clear intent by the legislature to protect consumers as well as competitors by its final clause, permitting any member of the public to sue on his or her own behalf or on behalf of the public generally. In other words, section 17200 is not limited to anticompetitive business practice but is also directed toward "the right of the public to protection from fraud and deceit." Further, the UCL's prohibition of "unfair competition" is not restricted to deceptive or fraudulent conduct but extends to any unlawful business practice.

The UCL also includes a false advertising provision, which prohibits the dissemination of "false, misleading or deceptive advertising." Business & Professions Code section 17500, et seq., prohibits the dissemination in any advertising media of any "statement" concerning real or personal property offered for sale "which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading."

There is an overlap in these provisions and any violation of the false advertising law necessarily violates the unfair competition law. The primary purpose of these statutes is to protect the public from unscrupulous business practices. The UCL proscribes any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by § 17500. However, the broad scope and ambiguous definition of "unfair competition" has the potential to lead to frivolous litigation against companies that the legislature never intended.

Indeed, courts in California have struggled to clarify what precisely constitutes unfair competition for purposes of the UCL. "The test of whether a business practice is unfair 'involves an examination of [that practice's] impact on its alleged victim balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weight the utility of the defendant's conduct against the gravity of the harm to the alleged victim (citations)' . . . ." In People v. Casa Blanca Convalescent Homes, Inc. (1984) 159 Cal.App.3d 509, 530, the court applied guidelines adopted by the Federal Trade Commission and sanctioned by the United States Supreme Court in FTC v. Sperry & Hutchinson Co. (1972) 405 U.S. 233, 244-245, fn. 6. The California Supreme Court concluded that an "unfair" business practice occurs when that practice "offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers."

It should be emphasized that the fraudulent conduct addressed in the UCL bears little resemblance to common law fraud or deception. "The test is whether the public is likely to be deceived." "Misleading advertising" under the UCL is broadly defined to include virtually any statement made in connection with the sale of goods or services as opposed to business practices. A violation of the UCL, unlike common law fraud, can be shown even if no one was actually deceived or relied upon the fraudulent practice or sustained any damage. A violation requires only a showing that "members of the public are likely to be deceived."

The court must therefore determine what "likely to be deceived" means based upon the facts of each individual case. The court must also inquire as to whether a reasonable consumer would have been misled. "[B]y explicitly imposing a 'reasonable care' standard on advertisers, 17500 implicitly adopts such a standard for consumers as well: unless particularly gullible consumers are targeted, a reasonable person may expect others to behave reasonably as well."

III. THE DANGER OF THE UCL

REMEDIES

The most common remedies sought under the UCL are injunctive relief and restitution/disgorgement of illegal business profits. The UCL places a limit on some of the remedies available to plaintiffs - for example, there is no recovery for damages. However, section 17200 authorizes injunctive relief and restitution, which has been interpreted as including "disgorgement" of ill'gotten gains or unlawful profits." Courts have broad powers under the UCL to "enjoin on-going wrongful business conduct in whatever context such activity might occur."

The UCL authorizes orders that are necessary to prevent practices that constitute unfair competition and to make "orders or judgments…as may be necessary to restore" to persons in interest any money or property acquired by unfair competition. An order that a defendant disgorge money obtained through an unfair business practice may include a restitutionary element, but is not so limited. Such orders may compel a defendant to surrender all money obtained through an unfair business practice even though not all is to be restored to the persons from whom it was obtained or those claiming under those persons. It has also been used to refer to surrender of all profits earned as a result of an unfair business practice regardless of whether those profits represent money taken directly from persons who were victims of the unfair practice.

REQUIRED ELEMENTS OF A UCL CLAIM

To state a cause of action under the UCL for injunctive relief, it is necessary only to show that "members of the public are likely to be deceived." Allegations of actual deception, reasonable reliance, and damage are unnecessary.

Under the UCL, an order of restitution means an order compelling a defendant to return 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 or those claiming through that person. The court may order restitution without individualized proof of deception, reliance, and injury if it "determines that such a remedy is necessary 'to prevent the use or employment' of the unfair practice . . . ."

Therein lies the danger to companies and in particular to pharmaceutical companies. This is a remarkably easy standard for plaintiffs - merely presenting evidence that members of the public are likely to be deceived without having to establish actual deception, reliance or damage. When compared to the elements of a traditional negligent failure to warn claim, there is no doubt that plaintiffs will have an easier time establishing a UCL claim:

UCL CLAIM NEGLIGENT FAILURE TO WARN CLAIM

• public "likely to be deceived"· no actual deception required· no reliance required· no damages required · must show negligent conduct, i.e. that defendant failed to warn of a known or reasonably scientifically knowable risk· the failure to warn resulted in damage· causal connection between the negligent failure to warn and damage suffered by the plaintiff

WHO GETS SUED UNDER THE UCL

The UCL in California has been used for a broad range of issues in a number of different industries. Plaintiffs in California have asserted claims alleging unfair or fraudulent business practices in a variety of contexts, including:

business practices of pharmaceutical companies (Caro v. Proctor & Gamble Co. 18 Cal.App.4th 644; Lavie v. Proctor & Gamble Co., Case No. 974757, San Francisco County Superior Court; Intervention, Inc. v. Becton-Dickinson, Ansell Healthcare, et al. - pending in San Francisco Superior court )
• marketing practices (Stop Youth Addiction, Inc. v. Lucky Stores (1998) 17 Cal.4th 553)
• insurance practices (State Farm Fire & Casualty v. Superior Court (1996) 45 Cal.App.4th 1093)
• employment practices (Hudgins v. Neiman Marcus Group (1995) 34 Cal.App.4th 1109)
• health care (Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632)
• alleged criminal conduct (People v. E.W.A.P., Inc. (1980) 106 Cal.App.3d 315)
• environmental protection (Hewlett v. Squaw Valley Ski Corp. (1997) 54 Cal.App.4th 499)
• consumer transactions (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383)
• debt collection practices (Yu v. Signet Bank (1999) 82 Cal.Rptr.2d 302)

THE POTENTIAL THREAT

The Civil Justice Association of California, a defense-oriented advocacy group that has monitored the development and expansion of the UCL, summarized the potential danger of this statute as follows:

• This law has been protecting consumers and business by allowing district attorneys to go after companies that mislead consumers in order to gain an advantage in the marketplace.
• Unfortunately, in recent years, this law has been abused by private attorneys filing lawsuits where no consumer or competitor has been harmed, motivated by the prospect of court-ordered attorneys fees.
• "Unfair" under this law, can be whatever a lawyer says it is. A lawyer can file a suit without even having to identify a customer or competitor who was misled by the product or service.
• The law lets a private lawyer claim to represent the "injured public" without even trying to communicate with the people he claims to be representing.
• These lawsuits often force companies into costly litigation, ending up in settlements that produce a win for attorneys, but little or no benefit for consumers.
• There is no protection for a company once an initial unfair competition suit has been filed and settled - another lawsuit may be filed on exactly the same issue.
• The UCL must continue to protect consumers from unfair competition and deceptive advertising, but the law must also be altered to discourage its use by private fee-seeking attorneys without clients.

No Standing Requirement

One of the major advantages to plaintiffs under the UCL is that almost anyone can bring a claim. Section 17204 provides that any action seeking relief under 17200 may be brought by the Attorney General, any district attorney, any county or city attorney under certain circumstances, or by any person acting for the interest of itself, its members or the general public.

A person suing under 17200 does not have to prove that he or she was directly harmed by the defendant's business practices. "A private plaintiff who has himself suffered no injury at all may sue to obtain relief for others." In fact, actions under section 17200 may be brought by any corporation, association, non-profit organization, business, or private individual. This creates the potential for a plaintiff who has not been injured to bring a claim on behalf of the general public under the UCL whenever a plaintiff believes the public has been treated unfairly.

No Class Certification Requirement

Another advantage to plaintiffs is that they are allowed to bring an action on behalf of the general public without prosecuting a class action or obtaining class certification. A plaintiff can obtain injunctive relief and monetary restitution on behalf of other affected individuals without obtaining class certification. In fact, the California Supreme Court has stated that both consumer class actions and representative UCL actions serve "important roles in the enforcement of consumers' rights." According to the court, both class actions and representative UCL actions make it economically feasible to sue when individual claims are too small to justify the expense of litigation and thereby encourage attorneys to undertake private enforcement actions.

Discovery Problems for Defendants

A common practice for plaintiffs suing under the UCL is to create a sham corporation that purports to serve the public interest. The officers of this corporation may be someone who knows nothing about the corporation or the public interest claiming to be served. In one California case defended by Gordon & Rees, LLP, the president of one such company was a homeless man in Berkeley who knew nothing about the company or the case in which he was involved. Needless to say, this can make discovery difficult for defendants. This also creates one way discovery and the potential for discovery abuse - plaintiffs will often demand trade secrets and proprietary information while providing little information of their own. Defendants are often left with no choice but to obtain a protective order or demand that plaintiffs sign confidentiality agreements.

Recovery of Attorneys' Fees

Plaintiffs can recover attorneys' fees by establishing the required elements under Code of Civil Procedure § 1021.5, the private attorney general fee statute. This creates a strong incentive for plaintiffs to diligently prosecute UCL claims.

RECENT CALIFORNIA DECISIONS

The recent case of Kraus v. Trinity Management Services (2000) 23 Cal.4th 116, illustrates how plaintiffs can avoid the legal hurdles of class actions but can use the UCL to sue on behalf of others. In Kraus, four tenants sued a landlord for collecting illegal deposits. They named themselves and 4,500 current and former tenants in the suit. The lawsuit was never certified as a class action. The court found for the four plaintiffs and awarded almost one million dollars in restitution. Because no class was ever certified, the other 4,500 tenants can now potentially sue the same landlord over the same issue.

The court in Kraus did not decide how res judicata fits into this process. The court stated that "it may be appropriate for the court to condition payment of restitution to beneficiaries of a representative UCL action on execution of acknowledgment that the payment is in full settlement of claims against the defendant, thereby avoiding any potential for repetitive suits on behalf of the same persons or dual liability to them." This seems to leave the door open for a new claim and lawsuit by a person who, despite a defendant's reasonable effort to contact, does not learn of the restitution opportunity until after the court-supervised process has ended and before the statute of limitations has run.

In Cortez v. Purolator Air Filtration (2000) 23 Cal.4th 163, the court explained that a UCL action is an equitable action by means of which a plaintiff may recover money or property obtained from the plaintiff or persons represented by the plaintiff through unfair or unlawful business practices. It is not an all-purpose substitute for a tort or contract action. Damages are not available under section 17203. However, 17203 provides courts the authority to make a restitutionary order. That section provides:

Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.

As the court in Cortez explained, section 17203 authorizes the court to fashion remedies to prevent, deter, and compensate for unfair business practices. In addition to injunctions, it authorizes orders that are necessary to prevent practices that constitute unfair competition and to make "orders or judgments…as may be necessary to restore" to persons in interest any money or property acquired by unfair competition.

UNFAIR COMPETITION LAWS IN OTHER STATES

Other states have similar laws that prohibit "unfair" or "deceptive" business practices. It is unclear at this point whether unfair business practice statutes in other states will have the same breadth as the California UCL.

Texas, for example, has the Texas Deceptive Trade Practices-Consumer Protection Act that prohibits "false, misleading, or deceptive acts or practices in the conduct of any trade or business." Tex. Bus. & C. Code Ann § 17.46(a). Under this statute, a consumer who has suffered economic damages or mental anguish as a result of a false, misleading, or deceptive business practice or "any unconscionable action or course of action by any person" may recover damages. § 17.50(a)(1)-(3).

Alabama has an unfair competition statute that prohibits "deceptive acts or products in the conduct of any trade or commerce." Ala.Code § 8-19-5. This includes misrepresentation as well as "any other unconscionable, false, misleading, or deceptive act or practice in the conduct of trade or commerce." Ala.Code § 8-19-5 (23).

Illinois also has a Consumer Fraud and Deceptive Business Practices Act (815 Ill. Comp. Stat. Ann. § 505) and a Uniform Deceptive Trade Practices Act. Claims for unfair trade practices may be asserted under both statutes. The Uniform Deceptive Trade Practices Act defines a deceptive trade practice as one of 12 types of conduct including misrepresentation and creation of customer confusion. 815 Ill.Comp.St.Ann.505/2.

CASES FILED AGAINST THE DRUG AND MEDICAL DEVICE INDUSTRY

Two recent cases involving the pharmaceutical industry have been filed in California and should be watched carefully. Lavie v. Proctor & Gamble Co., Case Number 974757 in the San Francisco County Superior Court, involved the advertising and sale of Aleve -- an over-the-counter pain relief product manufactured by Proctor & Gamble. Plaintiff argued, in summary, that the defendants advertised that Aleve was gentler to the stomach lining than aspirin and therefore misled consumers and led them to believe that Aleve did not cause stomach upset or other gastrointestinal problems. Plaintiff alleged that this advertising constituted an unfair business practice in violation of the UCL. The defendant denied these allegations and argued that its product in fact had all of the qualities that it advertised.

In the Notice of Intended Decision, the court found no violation of the UCL and found that the advertising statements made by the manufacturer were not misleading or deceptive. There is a strong possibility of an appeal, and any Court of Appeal decision would be well worth watching.

In Nguyen & Farber v. Smithkline Beecham Corporation, Case number CV791998, Santa Clara County Superior Court, the plaintiffs allege that the defendant violated the UCL by failing to properly disclose the "serious habit forming characteristics" of the antidepressant drug Paxil. The plaintiffs are the attorneys prosecuting the action, and purport to be persons "with a professional and personal interest in reducing addiction to legal and illegal drugs." There is no indication that either plaintiff ever took Paxil. This complaint was filed in August 2000, and is also worth watching.

DEFENSE STRATEGIES

Federal Preemption

One possible argument for defendants is that claims under the UCL and other state deceptive trade practices statutes may be preempted by federal law. For example, the Medical Device Amendments ("MDA") to the Federal Food Drug and Cosmetic Act contain an express preemption provision, precluding any state laws governing a medical device to be different from or add to federal requirements. In Texas, for example, the court held that a plaintiff's claim under the Texas Deceptive Trade Practices Act involving a prescription drug was preempted by the FDA's pre-market approval of Zyderm. The plaintiff essentially claimed that Zyderm was unsafe as approved by the FDA -- an allegation that was inconsistent with the FDA's specific finding. Accordingly, plaintiff's state law claim was preempted.

It remains unclear whether this argument will work in California or other states.

Confidentiality Agreements

Because plaintiffs have frequently demanded trade secrets and proprietary information in California cases, it is a good idea to obtain confidentiality agreements before responding to any discovery requests. Otherwise, plaintiffs' lawyers will simply compile a database of B&P section 17200 information to use against defendants in any number of contexts. This will also help companies protect sensitive trade secret information.

Competitive Advantage Issues

In some California cases, there are multiple defendants who are often competitors in the same industry. Plaintiffs may target such defendants to force them into finger-pointing about which company has engaged in unfair business practices. Business decisions often determine whether companies are willing to settle and will dictate the terms of settlement. Obviously, no defendant wants to be in a position where they agree to refrain from business practices that will give their competitors an advantage in the industry.

Expert Witnesses

Expert witnesses are essential in defending against claims under the UCL. Defendants should consider retaining experts experienced in intellectual property, marketing and human behavior.

IV. CONCLUSION

It is difficult to determine at this early stage whether the UCL will lead to a litigation explosion. Defense lawyers should nevertheless be aware of the tactics used by plaintiffs' lawyers, and the defense strategies outlined above. With an ambiguous definition of "unfair business practice" and the incentive of being awarded attorneys' fees, the UCL may very well be the secret weapon plaintiffs' lawyers have been searching for to use against the drug and medical device industry.

For more information, please contact Miles Scully, Esq. at mscully@gordonrees.com or visit the Gordon & Rees, LLP, website at www.gordonrees.com.