—Will Bowen v. Ziasun Technologies Survive?
ByKarl D. Belgum1[Editor’s Note: Karl Belgum is a partner in the San Francisco office of Thelen Reid & Priest LLP. He isa member of the Corporate and Securities Litigation Group, and practices in the areas of securities litigationand business torts. Mr. Belgum can be reached at kbelgum@thelenreid.com. Copyright 2004 by the author.Responses to this commentary are welcome.]IntroductionThe California Court of Appeal decision in Bowen v. Ziasun Technologies, Inc.2imposed a signifi-cant new limitation on the scope of California Business and Professions Code §17200, holdingthat the statute does not apply to “securities transactions.” The Bowen opinion purported to be acase of first impression, however it was handed down in the wake of a large body of cases fromother states addressing whether their own unfair competition laws apply to securities claims, anda number of federal cases discussing the overlap between 17200 and the federal securities laws.Far from being the last word, Bowen reflects a split of authority on the application of 17200 tosecurities transactions. This article will briefly review the reasoning of the Bowen opinion andattempt to identify the arguments future courts and litigants may rely on to support or oppose theapplication of 17200 to securities transactions.The Bowen CaseThe plaintiffs in Bowen alleged that Ziasun Technologies, Inc., a publicly traded Nevada corpora-tion, fraudulently induced them to purchase stock in a Ponzi scheme. Their complaint includedclaims for common law fraud, violations of federal securities law, conversion, injunctive relief andconspiracy, as well as Business & Professions Code §17200. The trial court granted summaryjudgment on the 17200 claim. In an opinion handed down March 8, 2004 and amended on April7, 2004, the appellate court agreed, holding: “based on persuasive federal and out-of-state author-ity . . . section 17200 does not apply to securities transactions.”3There were three principal bases for the Bowen court’s holding. The Bowen court stressed theanalogy between the California Unfair Competition Law (“UCL”) and the Federal Trade Commis-sion Act,4referring to 17200 as California’s “little FTC Act” by virtue of the fact that it “mirrors itsfederal counterpart.”5Bowen cited well established California precedents stating that federal au-thorities construing the FTC Act are more than ordinarily persuasive in interpreting the Californiastatute.6Based on those authorities the court concluded that the Unfair Competition Law, like theFTC Act, should be read to exclude securities transactions. In following this analysis Bowen reliedheavily on the reasoning of a 1988 Ninth Circuit opinion, Spinner Corp. v. Princeville DevelopmentCorp,7which held that Hawaii’s unfair competition statute does not apply to securities transac-tions. Spinner stressed the analogy between Hawaii’s unfair competition law and the FederalTrade Commission Act, and the fact that the federal statute has been interpreted not to apply tosecurities transactions.8
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com2Second, Bowen cited 14 opinions from other states holding that their unfair competition laws donot apply to securities transactions, while noting that only three states appear to have arrived atthe opposite conclusion.9Finally, Bowen cited three federal cases specifically discussing the overlap between 17200 andfederal securities law. The earliest is Shearson Lehman Brothers, Inc. v. Greenberg,10an unpublishedNinth Circuit opinion from 1995 affirming summary judgment on a 17200 claim challenging thefairness of a brokerage firm’s internal account forms and other practices. The Shearson courtlargely adopted the “FTC analogy” of the Spinner case; it also found that 17200, like the Hawaiistatute in Spinner, was never intended by the legislature to apply to securities transactions butonly to “protect consumers from unethical practices resulting from relatively small commercialinjuries.”11Shearson concluded with the sweeping statement that “it seems likely that §17200 ispreempted entirely by federal securities laws.”12Perera v. Chiron Corp.,13an unpublished 1996district court opinion, followed Shearson holding that 17200 could not support a claim for viola-tion of Rule 14d-10, which requires all holders of any class of securities to be offered the sameterms in a tender offer.14In Dietrich v. Bauer15the Southern District of New York, citing onlySpinner, dismissed plaintiff’s 17200 claim in a securities class action alleging numerous othertheories of liability in connection with a stock manipulation scheme.Based on the above, the Bowen court believed not only that its holding was consistent with priorcase law under 17200 but also that it was bringing California into the national mainstream re-garding the interpretation of state unfair competition laws. The reality is somewhat more compli-cated, and indicates that the debate is not yet over regarding the scope of California’s unfaircompetition law.The FTC Act AnalogyThe analogy to the FTC Act stressed in Bowen may not be as strong as it appears at first glance,given the significant differences between 17200 and the FTC Act. Unlike the FTC Act, 17200specifically creates a private right of action for restitution and injunction for private persons,16and allows individuals to bring claims as private attorneys general without any showing of harmto themselves.17Those provisions are absent from the FTC Act. Moreover, the UCL’s definition of“unfair competition” includes “unlawful” conduct, which specifically allows “violations of otherlaws to be treated as unfair competition that is independently actionable.”18The reference tounlawful acts was added by amendment in 1963, reflecting an apparent intent to create a privateright of action for violation of other statutes which do not provide their own civil remedy.19TheFTC Act does not reflect any such intention.In addition, it appears that the Federal Trade Commission has interpreted its statue not to encom-pass securities transactions largely because of the existence of the Securities and Exchange Com-mission, a sister federal agency devoted entirely to that field.20That concern would not to applyequally to 17200, given that it does not define the jurisdiction of any competing regulatory agency.As a result, while Bowen is on traditional ground in relying on the FTC Act analogy, that analogymay be less persuasive when the issue is whether some other state or federal statute can beborrowed to satisfy the “unlawful” prong of 17200.Other State Unfair Competition LawsBowen was also influenced by the long list of states whose unfair competition laws have been heldnot to apply to securities transactions; it cited 14 such opinions discussing the statutes in 15 states.21While the other state statutes are not identical to 17200, those opinions vividly illustrate severalrelated concerns. One is that applying state unfair competition laws to securities transactions willinterfere with existing regulatory schemes specifically applicable to securities transactions and thesecurities industry. That concern is seen to arise when regulatory authority over securities transac-tions has been specifically delegated by statute to a state agency such as a department of corpora-
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com3tions, giving rise to a fear that allowing actions under a non-securities statute will trespass on thatagency’s “turf.”22Some opinions also note that jurisdiction to enforce the unfair competition law intheir state is vested in a competing agency, causing potential conflict between sister state agencies.23The circumstances of enactment of the securities and unfair competition statute may also lend sup-port to the inference that the two schemes were intended not to overlap.24Courts have also expressed a disinclination to allow securities claims to be brought under anunfair competition law where the result would be to give a plaintiff standing who would nototherwise have had it, or where pursuing a claim under the unfair competition law would allowa plaintiff to “end around” problematic elements of proof required to sustain a case under thesecurities statutes.25This concern clearly arises where the unfair competition statute allows fordamage measures inconsistent with, and generally more liberal than, those provided under theapplicable securities law, such as treble damages, punitive damages, or attorneys fees.26Favoring the applicable securities law over unfair competition law may be justified by reference tothe time-honored maxim that a more specific statute (i.e., securities law) should take precedenceover a more general consumer protection statute,27although that doctrine really only has applica-tion where there is some conflict between the two.28Confronted by an already complex body ofsecurities law, some courts simply express a disinclination to compound that complexity or, asone court stated, “enough is enough.”29Whatever the basis for their concern most cases try to find some textual hook on which to hangtheir holding that securities are excluded from the scope of an unfair competition statute. Forexample, a significant number of state statutes explicitly limit their scope to claims involving“goods and services”30or similar language31which can be construed not to apply to securities,however the inclusion of “services” has prompted courts in at least one state to allow claimsagainst securities brokers to proceed.32Other statutes refer in their text or legislative history to“consumer” transactions, language which can be seen as supporting the exclusion of securities.33Inclusion of a minimum damage measure (e.g. $50 per claim) may also bolster the court’s conclu-sion that the statute should be read to target only small consumer transactions.34Encouraged bythe number of courts making such holdings, other courts have read an intent to focus on smallconsumer transactions into the general spirit of their own state’s unfair competition statutes with-out any specific textual support.35Some courts have found textual support in statutory provisions excluding conduct “permitted” byother law or agency rule. Reading this language rather broadly, they have excluded any conduct(including securities transactions) subject to regulation by another agency, not just conduct spe-cifically authorized or condoned.36Plaintiffs may consider this somewhat of a stretch for theword “permitted” but it clearly reflects the concern about overlapping regulatory jurisdiction sharedby many state courts.Finally, many of the opinions from other states rely on the same “little FTC Act” analogy thatSpinner and Bowen found persuasive. There is a difference, however. In many of those states thestatute itself provides that it must be construed in parallel with the FTC Act,37placing those courtson somewhat firmer ground.Two lessons can be gleaned from reviewing these cases. On the one hand, the decisions in otherstates highlight important concerns regarding practicality, efficiency, and legislative intent thatmay arise if state unfair competition law is allowed to overlap with securities law; on the otherhand, the differing language found in other states’ unfair competition laws should give anyonepause before asserting that decisions from those states dictate how California’s Unfair Competi-tion Law should apply to securities transactions.
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com4Federal Cases On 17200 / Securities OverlapThe overlap of California’s Unfair Competition Law and federal securities law has been addressedin a number of relatively recent opinions, both state and federal. Those cases do not present aconsistent picture. At least two of them endorse the use of the statue for securities transactionswhile others are negative. Indeed, until Bowen was handed down the balance of authority ap-peared to lean in favor of applying 17200 to securities transactions. A brief review of those casesreveals some of the same concerns that inform the non-California cases cited above.In Lickhalter v. System Development Corp., a district court concluded in a single sentence, with noanalysis, that the Unfair Competition Law did not apply to securities transactions.38In Levine v.Diamanthuset,39a 1989 case, a district court confronted a securities class action complaint whichessentially claimed professional negligence by certain law firm defendants. The court dismissedthe 17200 claim (without prejudice) with the simple comment that the UCL “was not addressed toconduct such as Defendants’.” Ninth Circuit addressed the issue in somewhat more detail for thefirst time six years later in Shearson Lehman Brothers, Inc. v. Greenberg,40a representative actionchallenging a brokerage firm’s internal account forms, the format of its monthly statements, andother practices. The court largely adopted the FTC analogy of the Spinner case; it also found that17200, like the Hawaii statute, was never intended to apply to securities transactions but only to“protect consumers from unethical practices resulting from relatively small commercial injuries.”41As stated above, the court went so far as to conclude, “In fact, it seems likely that §17200 ispreempted entirely by federal securities laws.“42The court offered no analysis to back up thissweeping conclusion, and the decision remains unpublished.A more extended preemption analysis was performed four years later in Myers v. Merrill Lynch &Co., Inc.,43in which a district court held that a 17200 claim based on a broker’s practice of using“penalty bids” was preempted by the National Securities Markets Improvement Act of 199644andcertain SEC regulations which recognized the challenged practice as permissible. Prior to makingthe preemption holding the district court considered the scope of 17200 and stated: “[T]he Courtlacks firm precedential grounds for holding that [17200 and 17500] do not cover securities trans-actions. Nothing in §17200 and 17500 says so explicitly, and the Court would in effect need torewrite the statute in order to reach that conclusion.”45In short, Meyers recognized that 17200offers no ready textual “hook” on which to hang a judge-made limitation of the statute’s scope.One of the most extended discussions of 17200/securities overlap occurred a year later in Roskind v.Morgan Stanley Dean Witter & Co.,46in which a customer sued his brokerage firm for “trading ahead”, i.e.,delaying execution the customer’s sell order until the broker’s own shares were sold. A demurrer wassustained by the superior court based on federal law preemption. The court of appeal reversed, citingSection 28 of the Securities Exchange Act which specifically states that the “rights and remedies providedby this Act shall be in addition to any and all other rights and remedies that may exist at law or inequity. . . .”47The court also cited the “sweeping” scope of 17200 and its ability to borrow from otherstatutes to establish a predicate unlawful act, including the federal mail and wire fraud statutes.48Thecourt then stated, “It is clear that the UCL could potentially provide a remedy for the conduct at issue here,if the UCL is not preempted by federal law. . . .”49The Roskind court noted the Spinner court’s contentionthat the Hawaii statute was not intended to reach securities transactions, but noted that “the Californiastatute, by contrast, has always been given a broad and sweeping ambit by our Legislature and ourSupreme Court.”50It also noted, like Myers, that “The UCL contains no language supporting an exclusionfor securities, and under the plain language of the UCL, we cannot create such an exclusion.”51The Bowen court considered Roskind unpersuasive regarding the scope of 17200, reading the caseas dealing only with federal preemption, not with the scope of 17200 by its own terms.52In lightof the above comments, however, the Bowen court’s dismissal of Roskind is not terribly persuasive.Indeed, the Roskind case was explicit enough regarding the scope of 17200 to be cited as theprincipal authority supporting the statute’s application to securities transactions in a leadingreference work on 17200.53
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com5The Roskind case later gave rise to a second published opinion, this one in federal court. After theCalifornia Supreme Court denied defendants’ petition for review, defendants removed the case,arguing that plaintiffs revealed for the first time in their state appellate briefs that they wouldassert a violation of a federal law (actually an NASD rule) in support of the “unlawful” prong oftheir 17200 claim. Motion practice ensued over whether the 17200 claim would now supportremoval based on federal question jurisdiction. The district court noted that plaintiff’s claim waspremised on two general categories of unlawful or unfair conduct: breach of the broker’s fiduciaryduty to its customers and misrepresentation (defendant’s advertising materials promised to obtainthe “best price”).54Federal question jurisdiction was found not to exist, however, and the casewas remanded, because proving a violation of the NASD rule was not necessary to the success ofplaintiff’s 17200 claim; numerous alternate state law theories were available to support the breachof fiduciary duty and unlawfulness of defendants’ conduct.55The scope of 17200 was not explic-itly discussed. At no time, however, did the district court question the applicability of 17200 tosecurities transactions.The overlap of 17200 and federal securities law was considered again by the Ninth Circuit in2003 in Lippitt v. Raymond James Financial Services, Inc.56In that case defendant again removed a17200 case to federal court, arguing that the alleged unlawful act (misrepresenting the features ofa “callable CD”) was a violation of New York Stock Exchange rules adopted under the oversightof the SEC pursuant to the Exchange Act. The court had to determine whether the resulting claimfell within Section 27 of the Exchange Act, which establishes exclusive jurisdiction in federal courtfor suits to “enforce any liability . . . created by . . . [the] Act,”57or Section 28 of the Exchange Act,which provides that state law theories of recovery are not preempted.58The court held that aslong as a separate state law basis existed to support the unlawful prong of a 17200 claim such aclaim was not one to “enforce [a] liability” created by the Exchange Act. The court concluded,“We cannot say that there is ‘no such thing’ as a state law claim of false advertising againstsecurities firms.”59The parties and the court appear not to have questioned the application of17200 to what were essentially securities claims.In United Investors Life Ins. Co. v. Waddell & Reed, Inc.,60decided earlier this year, the Ninth Circuitallowed a 17200 securities case to proceed in state court without mentioning the statute’s “inap-plicability” to securities cases, although the issue of the scope of 17200 apparently was not raised.61Finally, two related district court cases have addressed the question of whether a 17200 represen-tative action premised on securities-related misconduct falls under the Securities Litigation Uni-form Standards Act of 1998 (“SLUSA”), which provides for removal to federal court of “coveredclass actions brought in any state court involving a covered security.”62SLUSA also provides thatsuch actions will be governed exclusively by federal law,63which means that any 17200 claimremoved to federal court will thereafter be dismissed. In Feitelberg v. Merrill Lynch64plaintiffbrought a class action against a broker seeking disgorgement of profits, alleging that its researchreports were tainted by influence from the broker’s investment banking operations. The court firstconsidered whether the 17200 case was a “covered class action,” which required determining if itwas a suit for “damages.”65The Court found that a 17200 restitution claim constitutes a suit for“damages” under SLUSA.66In addition, SLUSA only applies to claims alleging misrepresenta-tions “in connection with the purchase or sale of a security.”67The court held that the conduct atissue sufficiently touched the sale of securities to come within SLUSA, noting that the affectedpersons were all securities purchasers.68As a result, removal was upheld and plaintiff’s 17200claim was dismissed.A different result obtained in Feitelberg v. Credit Suisse First Boston LLC, a parallel case brought bythe same plaintiff against a different broker.69This time the plaintiff carefully avoided seekingany remedy predicated on purchaser/seller status, even though all the class members had obvi-ously purchased securities at some point in order to become customers of the broker. The casewas remanded as not falling within SLUSA because the misconduct was not “in connection withthe purchase or sale of a security.”70
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com6In light of the above conflicting authorities, Bowen looks less like a case of first impression andmore like an attempt by the court of appeal to redirect the law of 17200 into what that courtperceived to be the national mainstream. In so doing, Bowen gave short shrift to the court ofappeals opinion in Roskind, which clearly supports the use of 17200 to pursue securities claims,at least of the misrepresentation/false advertising variety. Nor did Bowen confront Myers, whichdirectly supports 17200 securities claims, or Lippitt, which supports such claims by implication.Rather than being a case of first impression, it would be more accurate to describe Bowen asreflecting a split among courts as to whether and how 17200 and the federal securities lawshould coexist.The Scope Of 17200 After BowenIn light of the above, one should not assume that Bowen is the last word on the subject of 17200/securities overlap. The following discussion highlights some factors counsel and courts mayemphasize in addressing that issue in future cases.First and foremost, counsel will need to grapple with whether a textual hook can be found in17200 which would justify excluding securities claims from the scope of the statute. At least twocourts — Myers and Roskind — concluded that they would have to “re-write the statute” to achievethat result.Counsel arguing for exclusion of securities from the statute will cite the state cases on whichBowen relied, while counsel on the opposite side will point out the differences between 17200 andthose statutes, which are significant. For example, 17200 does not define the jurisdiction of anystate regulatory entity, so the issue of inter-agency conflict does not arise. In addition, any argu-ment that application of 17200 to securities transactions will create conflict between the jurisdic-tion of the attorney general and the corporations commissioner is substantially undercut by theenactment in 2003 of SB 434, which amended the Corporations Code to confirm that the attorneygeneral has independent authority to investigate and seek civil penalties for violations of theCorporate Securities Law.71One might expect future debate to revolve around the extent of inconsistency between the elementsof a 17200 claim, or the remedies available under that statute, compared with the state and federalsecurities laws. As far as the “unlawful” prong of 17200 is concerned, it is not clear how signifi-cant those inconsistencies are. For example, to the extent a 17200 claim is based on conduct madeunlawful by another statute, all elements necessary to show a violation of the borrowed statutemust be proven,72a rule which would tend to limit the conflict between 17200 and any borrowedlaw. However, to the extent a 17200 complaint seeks to impose liability under the “unfair” prongof the statute for conduct not within the four corners of the otherwise applicable securities stat-utes, pulling an “end around” problematic elements of a securities claim, the objection based oninconsistency may take on additional weight.73As a result, the extent of any inconsistency mayvary from case by case.With respect to remedies, 17200 may be less problematic than some other state unfair competitionlaws. It does not provide for damages at all, let alone treble or punitive damages; instead it islimited to restitution.74Moreover, since the Korea Supply opinion in 2003 it has been clear thatsuch restitution orders can only be obtained on behalf of a party who actually gave up someconsideration; pure “disgorgement” to a disinterested party is no longer permitted.75As such, theremedy provided in 17200 does not appear more extensive than those already provided under thefederal securities laws. For example, both rescission76and restitution77are already available asremedies under Rule 10b-5.Probably of even less significance are the modest differences in the statutes of limitation for claimsunder 17200 (four years)78and the federal securities laws (earlier of two years from discovery orfour years from the date of violation).79
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com7Perhaps the most fruitful field for counsel to explore in identifying inconsistencies between 17200and the securities laws is the area of representative 17200 actions.80As already discussed, suchactions have been held to fall within the preemptive provisions of SLUSA,81however, SLUSAwould not apply to an individual 17200 action. Plaintiffs may attempt to use a 17200 representa-tive action to avoid the rule that federal securities law claims may only be asserted by “purchasersor sellers” of securities.82The significance of any inconsistency in this area may be undercut,however, by the recent California Supreme Court decision allowing mere “holders” of securities topursue common law misrepresentation claims under California law.83Moreover, differences instanding may not be the most likely candidate to cause California courts to question the scope of17200. The California statute already conflicts on a far more basic level with the U.S. Constitu-tion; federal courts routinely dismiss 17200 actions brought by plaintiffs who have not sufferedany injury themselves based on the “case or controversy” clause of Article 3.84However thisinconsistency between state and federal law has not yet caused California courts to revise theirviews on the scope of 17200.Moreover, any concern about overlap and inconsistency between 17200 and borrowed law wouldnot be unique to securities law. California courts have allowed plaintiffs to borrow from a widevariety of other statutes, both federal and state, to support claims under the unlawful prong of17200, including penal code provisions governing the sale of cigarettes85and obscene material,86theWelfare and Institutions Code governing Medi-Cal,87the Cartwright Act,88the Clean Water Act,89thestate Forest Practices Act90and statutes protecting endangered species,91to name just a few. All ofthose statutes set forth their own specific elements to establish illegality; some, like the securitieslaws, vest enforcement authority in a specialized regulatory agency.92In light of these prior au-thorities counsel will have to think hard about why the securities laws raise a unique concern.In addition, to the extent Bowen survives courts will be presented with line drawing issues regardingwhat constitutes a “securities case.” The cases discussed above already touch on such issues in aninconsistent manner. Cases regarding the scope of federal question jurisdiction have been relativelyforgiving, remanding cases alleging violations of federal securities law as long as a parallel statelaw basis for liability also exists.93On the other hand, the SLUSA cases sweep somewhat morebroadly, holding that any case that “touches on” the purchase or sale of a covered security is fairgame for removal and preemption.94Cases considering the scope of unfair competition laws inother states have drawn equally wavering lines, such as the cases which hold that an unfair compe-tition statute applies to claims of broker misconduct (a “service”) but not the sale of securities perse.95One can foresee additional litigation regarding line drawing issues after Bowen.If a frontal attack on 17200’s application to securities transactions fails, litigants can always fallback on established doctrines addressing the risk of overlap among inconsistent statutory schemes.“Abstention” may be justified under existing law if a 17200 case threatens to drag the court intocomplex policy matters better handled by a regulatory agency.96This doctrine will probably notapply to the garden variety securities fraud or broker misconduct case, but there may be casesinvolving issues of market or industry regulation to which it would be applicable. In addition, a17200 case may be dismissed under the doctrine of abstention if a specific regulatory schemealready provides the exclusive mechanism for enforcement.97The Supreme Court’s opinion in StopYouth Addiction, Inc. v. Lucky Stores98makes it clear, however, that in order for abstention to applythe legislature must really have intended the alternate enforcement scheme to be exclusive.99Therelated concept of “primary jurisdiction” has also been applied to bar 17200 cases where a dis-pute is already the subject of administrative action.100Counsel may argue that this doctrine ap-plies if a 17200 case threatens to disrupt an ongoing enforcement action or infringe on the subjectmatter of a rulemaking proceeding already underway before the SEC or state regulators. Again,while the average securities fraud or broker misconduct case would probably not raise such con-cerns, where it applies the doctrine could constitute an important defense. Courts and litigantsshould be encouraged to refer to these doctrines where they apply. Arguably they provide a morenuanced way of examining problems related to the overlap between 17200 and securities law thanan argument that the entire field of securities lies outside the statute’s scope.
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com8There is no doubt that the Bowen opinion arrived at a time when the scope of 17200 and itspotential for abuse are high on the public agenda. In 2003 the California Supreme Court paredback 17200 in Korea Supply, eliminating the ability of plaintiffs to seek a pure disgorgement rem-edy.101In 2003, the attorney general and California State Bar pursued certain plaintiffs counselfor using multi-defendant 17200 cases to shake down small businesses based on technical viola-tions of various statutes. In addition, during 2003 several bills were introduced in the legislatureto limit 17200 actions, providing protections against mass joinder of defendants in a single case,as well as court review of attorneys’ fees, settlements, and the adequacy of persons purporting toact as representative plaintiffs, among other issues.102Interestingly, however, none of those reformefforts focused on the overlap between 17200 claims and the federal or state securities laws. Newreform legislation and a ballot initiative to eliminate the citizen standing provision of 17200 havebeen proposed in 2004, as well.103The Bowen case clearly reflects an instinct, strongly felt in certain quarters, to limit the scope of17200. Whether that opinion’s holding excluding securities transactions from the scope of 17200will survive remains to be seen.ENDNOTES1.The author would like to acknowledge the assistance of Adam Brezine of Thelen Reid & Priest LLPin the preparation of this article.2.116 Cal.App. 4th 777, 11 Cal.Rptr.3d 522 (2004) (certified for partial publication).3.Id. at 786-87.4.15 U.S.C. §45 et seq.5.Id. at *20.6.116 Cal.App.4th at 789, citing Cel-Tech Communications, Inc. v. Los Cellular Telephone Co. 20 Cal.4th163, 185, 83 Cal.Rptr.2d 548, 973 P.2d 527 (1999); see also People ex rel Mark v. National Research Co.of California 201 Cal.App.2d 765, 772-773, 20 Cal.Rptr. 516, 552 (1962).7.849 F.2d 388 (9th Cir. 1988).8.Id. at 391.9.116 Cal.App.4th at 787-88 & n.7.10.1995 U.S. App. LEXIS 17313 (9th Cir., July 3, 1995).11.Id at *5.12.Id.13.1996 U.S. Dist LEXIS 22503, 1996 WL 251936 (N.D. Cal. 1996).14.17 C.F.R. §240.14d-10 (the “all-holder-best-price” rule, adopted pursuant to Section 14(d) the Securi-ties Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §78n).15.76 F.Supp. 2d. 314, 351 (S.D. NY 1999).16.Bus. & Prof. C. §17203.17.Id.; Stop Youth Addiction, Inc. v. Lucky Stores, Inc. 17 Cal.4th 553, 573, 71 Cal.Rptr. 2d 731 (1998).
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com918.Kasky v. Nike 27 Cal. 4th 939, 949-50 (2002); Diaz v. Kay-Dix Ranch 9 Cal.App.3d 588, 591, 88 Cal.Rptr.443-445 (1970).19.Stats. 1963, ch. 1606, §1 (amending Civil Code §3369(3), the precursor to Bus. & Proc. Code, §17200).20.See Nichols v. Merrill Lynch, Pierce, Fenner & Smith, 706 F. Supp. 1309, 1337 (M.D. Tenn. 1989) (“nofederal court has applied Section 5(a)(1) of the FTC Act to securities transactions . . . because, sinceits inception, the Securities and Exchange Commission, rather than the FTC, has been responsiblefor regulating securities transactions”).21.116 Cal.App.4th at 787 & n.7.22.E.g., Linder v. Durham Hosiery Mills, Inc., 761 F.2d 162, 168 (4th Cir. 1985) (Secretary of State); CabotCorporation v. Baddour, 394 Mass. 720, 723, 477 N.E.2d 399, 401 (Mass. 1985 (Secretary for the Com-monwealth.23.Smith v. Cooper/T. Smith Corp., 846 F.2d 325, 328 (5th Cir. 1988) (conflict between the ConsumerProtection Division and Banking Commissioner).24.Cabot, 394 Mass. at 723, 477 N.E. 2d at 407.25.In re Catanella and E.F. Hutton & Company, Inc. Securities Litigation, 535 F.Supp. 1388 (MDL 546, 1984)(“privity” requirement of New Jersey securities statute would be circumvented); c.f. Morris v.Gilbert, 649 F.Supp. 1491, 1497 (E.D.N.Y. 1986)(concern with modifying N.Y. commercial law).26.Nichols, 706 F.Supp. at 1387 (treble damages); Smith., 846 F.2d at 328 (treble damages); Linder, 761 F.2d at 167 (treble damages); Cabot, 394 Mass. at 721, 723, 477 N.E.2d at 399-400, 407 (treble dam-ages); Skinner v. E.F. Hutton & Company, Inc., 314 N.C. 267, 274, 333 S.E.2d 236 241 (1985)(existenceof treble damage remedy noted); Morris, 649 F.Supp. at 1497 (attorney’s fees); Taylor v. Bear Stearns& Company, 572 F.Supp. 667, 672 (N.D. Ga. 1983)(punitive damages).27.Cabot, 394 Mass. at 724-25, 477 N.E.2d at 401-02.28.Norman J. Singer, Statutes and Statutory Construction, §40:2, p. 228-29 (6th ed. 2001).29.Nichols, 706 F.Supp. at 1338.30.Swenson v. Engelstad, 626 F.2d 421, 428 (5th Cir. 1980) (Texas law; stock is not a “good or service”);see also Algrant v. Evergreen Valley Nurseries Limited Partnership, 126 F.3d 178, 186, 188 (3rd Cir.1997) (statute applies to “goods or services [purchased or leased] primarily for personal, householdor family purposes”; securities are not “goods” under the UCC).31.In re Catanella, 535 F.Supp. at 1441 (limited to “merchandise or real estate”).32.See Spinner, 849 F.2d at 393 n. 6 (discussing cases allowing suits against brokers under Texas unfaircompetition law).33.In re Catanella, 535 F.Supp. at 1442 legislative history shows deletion of “securities” deleted fromdefinition of “merchandise”); Taylor v. Bear Stearns, 572 F.2d at 673, 675 (applies to claims affectingthe “general consuming public”).34.Spinner, 849 F.2d at 391 (treble damage remedy and $1000 minimum damages); Morris, 649 F.Supp.at 1496 ($50 minimum damages).35.Robertson v. White, 633 F.Supp. 954, 978 (W.D.Ark. 1986) (only the “rare consumer protection statuteconcerns itself with sales of securities.”); Linder, 761 F.2d at 162 (“general scope of such acts” citedin interpreting the North Carolina statute).36.Taylor, 572 F.Supp. at 675 (exclusion of acts “authorized” by other law read to mean acts within thejurisdiction of another agency); State of Rhode Island v. Piedmont Funding, 382 A.2d 819, 119 R.I. 695(R.I. 1978)(same). The Washington courts initially reached the same holding, however the legisla-
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com10ture amended its statute to make clear that only conduct specifically authorized by other law isintended to be exempt. Kittilson v. Ford, 23 Wash. App. 402, 409-10, 595 P.2d 944, 947-48 (1979)(ex-clusion for conduct “otherwise regulated”).37.Spinner, 849 F.2d 388 (Hawaii’s “baby FTC act”); Russell, 510 A.2d at 979 (Connecticut statute);Robertson, 633 F. Supp. at 978 (Oklahoma and Arkansas); Cabot, 477 N.E.2d at 40, 394 Mass at 722(Massachusetts); State ex rel. McLeod v. Rhoades, 267 S.E.2d 539 (S.C. 1980) (South Carolina); Nichols,706 F.Supp. at 1337 (Tennessee); c.f. Skinner, 333 S.E.2d at 241, 314 N.C. at 274 (North Carolina actis “identical” to FTC Act and therefore must be construed consistent with it).38.[1984 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 91,459 at 98,301 (C.D. Cal. 1984).39.722 F.Supp. 579 (N.D.Cal. 1989)(Patel, J.), aff’d, 950 F.2d 1478 (9th Cir. 1991).40.1995 U.S. App. LEXIS 17313 (9th Cir., July 3, 1995).41.Id at *5.42.Id.43.1999 U.S. Dist. LEXIS 22642, at *29-30 (N.D. Cal., August 23, 1999)(Orrick, J.).44.110 Stat. 3416 (1996). The act amended Section 18 of the Securities Act of 1933 to provide that statelaw regulation of the registration or qualification of “covered securities” is explicitly preempted byfederal law.45.Id. at *25. The Myers court specifically considered the Spinner case, including its FTC analogy, butdid not find its reasoning persuasive. The Ninth Circuit affirmed the dismissal based on preemp-tion without commenting on the lower court’s conclusion that 17200 does apply to securities claims.Myers v. Merrill Lynch & Co., 249 F.3d 1087 (9th Cir. 2001).46.80 Cal.App. 4th 345, 95 Cal.Rptr.2d 258 (2000).47.Securities Exchange Act of 1934 §28, 15 U.S.C. § 78bb(a).48.By citing to the mail and wire fraud statutes as the basis for the alleged unlawful act, rather thanSection 10(b) or another provision of the Exchange Act, the court avoided Section 27 of the Ex-change Act which provides that the federal district courts have exclusive jurisdiction over all suitsto “enforce any liability or duty created by this Act.” 15 U.S.C. §78aa.49.Roskind, 80 Cal.App.4th at 350-51, 95 Cal.Rptr. at 261-62.50.Id at 35651.Id.52.116 Cal.App.4th at 789-90.53.William L. Stern, Bus. & Prof. C. §17200 Practice, § 3:30, p. 3-6 (Rutter Group, 2004).54.Roskind v. Morgan Stanley Dean Witter & Company, 165 F.Supp. 2d 1059 (N.D. Cal. 2001).55.Id. at 1067.56.340 F.3d 1033 (9th Cir. 2003).57.15 U.S.C. §78aa.58.15 U.S.C. §78bb.59.Lippitt, 340 F.3d at 1042.
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com1160.2004 U.S. App. Lexis 3227 (9th Cir. 2004).61.See also Burnstein v. Graves, 1997 U.S. App. Lexis 5819 (9th Cir. 1997), in which the Ninth Circuitaffirmed the dismissal of claims under Section 10(b) of the Securities Exchange Act and 17200; the17200 claims were dismissed because the plaintiff sued the wrong party. The court did not mentionany doubts about bringing securities claims under 17200.62.15 U.S.C. §78bb(f)(2).63.15 U.S.C. § 78bb(f)(1).64.2002 U.S. Dist. LEXIS 25714 (N.D. Cal., November 5, 2002)(Patel, J.).65.15 U.S.C. §78bb(f)(5)(b).66.Feitelberg v. Merrill Lynch, 2002 U.S. Dist. LEXIS 25714 at *16.67.15 U.S.C. §78bb(f)(1).68.Feitelberg v. Merrill Lynch, 2002 U.S. Dist. LEXIS 25714 at *26-27.69.2003 U.S. Dist. LEXIS 19116 (N.D. Cal., October 24, 2003)(Conti, J.).70.Id. at *15-16.71.Stats. 2003, c. 876 (SB 434), § 1, codified, inter alia, at Cal. Corp. Code §25533.72.See, e.g., People v. Duz-Mor Diagnostic Laboratory, Inc. 68 Cal.App.4th 654, 80 Cal.Rptr. 419 (1998) (if“intent” is element of borrowed law, it must also be established for 17200 claim.)73.See e.g. Hernandez v. Atlantic Finance Co., 105 Cal.App.3d 65, 81, 164 Cal.Rptr. 279, 290 (1980) (con-duct not clearly in violation of a statute but which is contrary to the “spirit” of the statute may stillsupport a claim under the “unfair” prong of 17200).74Bus. & Proc. C. §17203 )(“the court may make such orders or judgments . . . as may be necessaryto restore to any person in interest any money or property, real or personal, which may havebeen acquired by means of such unfair competition.”).75.Korea Supply Company v. Lockheed Martin Corporation 29 Cal.4th 1134, 63 P.3d 937, 131 Cal.Rptr.2d 29(2003).76.Chris Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 391 (2nd Cir. 1973); see also Mills v.Electric Auto-Light Co., 396 U.S. 375, 386 (1970)(proxy rules).77.Nelson v. Serwold, 687 F.2d 278, 281 (9th Cir. 1982)(injured plaintiff can recover restitution based onamount defendant as unjustly enriched).78.Bus. & Proc. C. §17208(four year statute); Cortez v. Purolator Air Filtration Products, 23 Cal.4th 163,178-79, 96 CalRptr.2d 518, 528-2529 (2000) (four year statute of 17200 applies, not the limitationsperiod of any borrowed statute.)79.28 U.S.C. 1658(b).80.Bus. & Proc. C. §17204 allows a claim to be brought by “any person acting for the interests ofitself, its members, or the general public,” making it the only California statute giving standing tonon-injured persons to pursue civil claims. William L. Stern, Bus. & Proc. C. §17200 Practice, p.7-1(2004 Rutter Group)81.See discussion of Feitelberg v. Merrill Lynch and Feitelberg v. Credit Levine at n. 66-68, supra.82.Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed. 2d 539 (1975).
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Vol. 2, #10June 2004MEALEY'S California Section 17200 Report© Copyright 2004 LexisNexis, Division of Reed Elsevier Inc., King of Prussia, PA • www.mealeys.com1283.Small v. Fritz Companies, Inc., 30 Cal.4th 167, 65 P.3d 1255, 132 Cal.Rptr.2d 490 (2003)(allowing claimby stockholder induced not to sell by misrepresentations.)84.See, e.g., Lee v American National Insurance Company, 260 F.2d 997, 1001 (9th Cir. 2001).85.Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 71 Cal. Rptr.2d 731 (1998).86.People v. E.W.A.P., Inc., 106 Cal. App. 3d 315, 318-19, 165 Cal. Rptr. 73 (1980).87.People v. Duz-Mor Diagnostic Lab., Inc., 68 Cal. App. 4th 654, 80 Cal. Rptr.2d 419 (1998).88.Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal. 4th 26, 77 Cal. Rptr.2d 709 (1998).89.Southwest Marine, Inc. v. Triple A Machine Shop, Inc., 720 F. Supp. 805 (N.D. Cal. 1989) and Citizensfor a Better Env. v. Union Oil of California, 996 F. Supp. 934 (N.D. Cal. 1997).90.Hewlett v. Squaw Valley Ski Corp., 54 Cal. App. 4th 499, 63 Cal. Rptr.2d 118 (1997).91.People v. K. Sakai Co., 56 Cal. App. 3d 531, 128 Cal. Rptr. 536 (1976).92.See, e.g., Farmers Ins. Exch. v. Superior Court, 2 Cal. 4th 377, 384, 401, 6 Cal. Rptr.2d 487 (1992)(17200 violation predicated on asserted violations of California’s insurance regulatory act, whichprovides for administrative hearings and review, but holding that such action could be stayedpending action by the Insurance Commissioner).93.See text at n. 54, 58, supra.94.See text at n. 64, 69, supra.95.See text at n 32, supra.96.Desert Healthcare Dist. v. PacificCare, FHP, 94 Cal.App.4th 781, 795, 114 Cal.Rptr.2d 623, 634 (2001).97.Samura v. Kaiser Foundation Health Plan, Inc., 17 Cal.App.4th 1284, 22 Cal.Rptr.2d 20 (1993) (exclusivepower to enforce health care statute placed with Dept. of Corporation.)98.17 Cal.4th 553, 573, 71 Cal.Rptr.2d 731, 744 (1998) (allowing 17200 case alleging violation of statuteprohibiting sale of tobacco products to minors despite existence of other enforcement mechanism).99.For a discussion of abstention in 17200 litigation see Stern, §5:89 et seq., n. 80, supra.100. Farmer’s Insurance Exchange, 2 Cal.4th at 401, 6 Cal.Rptr.2d at 487 (17200 action stayed pendingresolution of same issue in administrative action brought by the Department of Insurance).101. See Korea Supply, n. 71, supra.102. The three reform bills in the 2003 legislative that received the most attention were AB 69, intro-duced by Lou Correa (D - Santa Ana), AB 95 introduced by Ellen Corbett (D – San Leandro), andSB 122 introduced by Martha Escutia (D - Montebello). The Corbett and Escutia bills, which wereintroduced as a package and which were the only two to make it out of committee, would alsohave restored the disgorgement remedy taken away the Supreme Court in Korea Supply. Theyfailed to pass in the final days of the legislative session. See “Legislature Okays Workers Compen-sation Reform,” Los Angeles Times, Sept. 13, 2003, at 1 (discussing legislative record for 2003).103. Assembly Bill 2369, proposed by Lou Correa (D - Santa Ana); see also “Trial Lawyers, Car DealersRev Up Talks; Meetings on 17200 Legislation Aimed at Preventing Costly Ballot Box Battle,” TheRecorder, March 18, 2004, at 1 (discussing status of ballot initiative and proposed legislation). s |
