The California Supreme Court has issued its long awaited decisions in two cases brought under California's broad consumer protection statute, Business & Professions Code section 17200: Kraus v. Trinity Management Service, Inc. and Cortez v. Purolator Air Filtration Products Co. (In this report, the statute is referred to as the UCL, consistent with the nomenclature used by the Supreme Court.) The Kraus and Cortez decisions clarify one of the most controverted UCL issues-the scope of restitutionary relief permissible under the statute.
Although the UCL does not authorize recovery of damages, in a "representative" action under section 17200, the plaintiff -- who need not have been harmed by the challenged conduct -- may seek injunctive and restitutionary relief, including the disgorgement of profits, on behalf of all those injured. Both Kraus and Cortez are representative actions, but not class action, and both raised questions about the permissible scope of restitutionary recovery in such cases.
The Kraus Decision
In Kraus v. Trinity Management Services, Inc. the issue before the Court was whether section 17200 authorizes a "fluid recovery fund" in a representative action. The trial court had held that certain fees charged tenants were unlawful and ordered that where the tenants could not be located, the amount of the unlawful fees be disgorged into a fluid recovery fund to benefit tenants' rights activities. The Supreme Court, in a decision authored by Justice Baxter, held that disgorgment of profits into a fluid recovery fund is authorized only in class actions. (Slip Op. at 22-23.) Justice Werdegar dissented. (The Court in Kraus did not discuss whether disgorgement of profits to identifiable individuals, rather than a fluid fund, is permissible relief under section 17200 and in the Cortez decision, the Court specifically declined to consider the question as unnecessary to its decision there. (Cortez Slip Op. at 14.)
Of considerable interest to defendants in UCL representative actions, the Court indicated that where there was a possibility of future lawsuits regarding the same conduct, the trial court could condition payment of restitution in a representative action on the execution of a release by beneficiaries of claims against the defendant. (Slip Op. at 25.) (The concurring option by Justice Kennard argued that this pronouncement was dicta, since there was no realistic probability of repetitive suits by non-parties in this case. Justice Kennard also argued that it was unnecessary to condition recovery of restitution under section 17200 on the relinquishment of other potential causes of action by the non-party.)
Also of interest to potential defendants, the Supreme Court in Kraus commented that the equitable nature of a UCL action implies that "in any case in which a defendant can demonstrate a potential for harm or show that the action is not one brought by a competent plaintiff for the benefit of injured parties, the court may decline to entertain the action as a representative suit." (Slip Op. at 24.) This dicta may offer defendants a handle for disposing of section 17200 representative actions where the injunctive relief sought may be detrimental to the non-party consumers or where the only material result if plaintiff prevails will by the payment of attorney's fees.
The Cortez Decision
In Cortez v. Purolator Air Filtration Products Co. the issue was whether unpaid overtime (arising because a predecessor company failed to comply with certain California Industrial Welfare Commission Wage Orders when it shifted from an 5 day/8 hour work week to a 4 day/10 hour work week) could be recovered under the UCL. The Cortez action raised three significant issues on the construction of the UCL:
- whether due process required the suit, which sought disgorgement of all benefit the defendant received from failing to pay overtime, to be brought as a class action;
- whether the unpaid overtime is restitution available under the UCL or damages that are not available under the UCL; and
- whether the trial court should consider equitable defenses where the UCL claim is based on a statutory violation.
On the first issue, the Supreme Court, in a decision again authored by Justice Baxter, provided the flip side of its holding in Kraus. Where Kraus holds that disgorgement is not available in a representative action; Cortez holds that a class action is not required where the only available restitutionary remedy is the return of money or property to identified persons. (Slip Op. at 8.)
Cortez then held that unlawfully withheld wages may be recovered as restitution in a UCL action. The Cortez decision states that "restitution" is not limited to funds that were once in the possession of an injured person, but also encompasses earned wages that are due and payable on the grounds that earned wages "are as a much the property of the employee who has given his or her labor to the employer in exchange for that property as is property a person surrenders through an unfair business practice." (Slip Op. at 16.) This holding, while on its face limited to unpaid wages, suggests that where a claim to property or monies can be characterized in equitable terms, restitution may be available under the UCL, whether or not the claim also could be characterized in terms of damages. Indeed, the Court in Cortez noted that damages may include a restitutionary element. (Slip Op. at 10.) It appears that under Cortez, the restitutionary component of what otherwise would be a traditional damages claim is available in a representative section 17200 action.
The third significant issue addressed in Cortez is whether a defendant may invoke equitable defenses in UCL actions predicated on statutory violations. The Court rejected the argument that equitable defenses could defeat a section 17200 claim arising from unlawful conduct, but ruled that "equitable defenses may be considered by the court when the court exercises its discretion over which, if any, remedies…should be awarded." (Slip Op. at 18.) Unlike the other holdings in Cortez, this ruling applies to both injunctive and restitutionary relief. Justice Wedegar, concurring, expressed concern that this holding would tilt the balance in favor of defendants.
Conclusions
While the UCL is still an extraordinary vehicle for challenging business practices, since it has no standing requirement, prohibits "unfair" practices and allows for representative actions without class certification requirements, the Kraus decision limits the relief available in a representative action. The Kraus and Cortez decisions also provide additional tools for defendants facing section 17200 challenges, including:
- The requirement that courts consider equitable defenses in determining the relief in actions under the "unlawful" prong of the UCL set forth in Cortez.
- The recognition of the need for provisions to prevent duplicative recoveries (and, perhaps, inconsistent injunctions) in Kraus.
- The statement in Kraus that trial courts can bar representative suits where the relief sought would be harmful to the non-parties (or some non-parties) on whose behalf the UCL action is brought or where the plaintiff is not competent to represent the injured consumers.