California Legislature Eliminates "Disgorgement Provisions" In Proposed Amendments to B&PC 17200

The California State Assembly has approved further amendments to Senate Bill 122 ("SB 122") to reform California Business and Professions Code section 17200, California's unfair competition law ("UCL"), which prohibits unlawful, unfair, or fraudulent business acts or practices, and is thus extremely wide in its scope. The UCL also allows a plaintiff to sue in a representative capacity on behalf of the general public, without any notice to these absent but "represented" parties, and without complying with the strict certification requirements of a class action. The UCL is a powerful tool for plaintiffs; virtually every complaint filed against a business in a California court today includes a claim under the UCL. The UCL, however, does have a limitation on the remedies one may seek. A plaintiff may not seek traditional damages under the UCL, but only restitution and injunctive relief. What exactly restitution means in this context has, not surprisingly, been the subject of much debate, litigation, and now jockeying in the drafting of these proposed amendments. Under the newest version of the proposed amendments to the UCL, controversial pro-plaintiff provisions expanding the definition of restitution to include "disgorgement of profits," which appeared in earlier drafts, have now been eliminated.

Under section 17200 as it currently stands, disgorgement of profits is not specifically authorized, and the entire disgorgement concept has been recently rejected by the California Supreme Court, holding that "non-restitutionary" disgorgement of profits is not available in a private unfair competition claim. Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1150-1151 (2003) ("The nonrestitutionary disgorgement remedy sought by plaintiff closely resembles a claim for damages, something that is not permitted under the UCL.") In recent months, there has been an ongoing battle in the California legislature regarding proposed amendments to section 17200 which would specifically authorize "disgorgement of profits" obtained as a result of unfair practices, thus expanding the apparently limited remedies available on the face of the UCL, and effectively overruling Korea Supply. Under the earlier proposed amendments, section 17200 would have specifically authorized the recovery of disgorgement of profits obtained as a result of "unfair business practices" and would have mandated that any recovery that did not go to victims because they could not be identified would have gone to a "court approved fund appropriate to the circumstances" or the state. Significantly, these proposed "disgorgement" provisions were stricken last week, ostensibly because the proponents of such provisions recognized that the bill stood little chance of passing as long as those provisions remained in the bill.

Aside from the deletion of the "disgorgement" provisions, other significant provisions remain in the proposed amendments to section 17200. In particular, remaining provisions include one allowing a court in a later action to offset claims by amounts paid in earlier cases, and another requiring court approval of an entire settlement under section 17200. For SB 122 to take effect, both SB 122 and a related bill pending in the Senate, Assembly Bill 95 (which, among other things, requires parties filing actions under section 17200 to serve a particularized notice on defendants delineating their rights) must be approved by January 1, 2004.

If you have questions as to how Section 17200 may apply to the business you transact in California, please contact one of our California-based Class Action Team members listed below (e-mailname@nixonpeabody.com).

Unfair Business Practices (Cal. Section 17200)