Re: 3/25/04 - [Ziasun] Thelen Reid & Priest LLP: Recent Decision Casts Doubt on Scope of Section 17200 in Cases Involving Securities Transactions
Thelen Reid Report No. 92
Recent Decision Casts Doubt on Scope of Section 17200 in Cases Involving Securities Transactions
March 25, 2004
By Karl Belgum and Adam Brezine
California’s unfair competition law – Business and Professions Code §17200 – imposes civil liability for “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.”1 A recent California appeals court decision purports to impose a significant new limitation on the scope of §17200, holding that the statute does not encompass actions arising out of “securities transactions.” The opinion, Bowen v. Ziasun Technologies, Inc., 2 creates uncertainty about the scope of §17200 in cases involving many business torts in which a purchase or exchange of securities is part of the fact pattern.
The Bowen Decision
The plaintiffs in Bowen filed complaints in Superior Court alleging that they were defrauded in a Ponzi investment scheme. They alleged that defendant Ziasun Technologies, Inc. (“Ziasun”), a publicly traded Nevada corporation, made material misstatements and omissions of fact that induced the plaintiffs to purchase stock in Ziasun and other publicly traded companies, and that Ziasun stock “had little or no market value.” The complaints asserted claims for fraud, violations of federal securities laws, conversion, injunctive relief and conspiracy, as well as Business & Professions Code §17200. The trial court granted summary judgment on the §17200 claims, holding that the statute may not be used to remedy frauds arising out of securities transactions.
The appellate court affirmed in an opinion handed down March 8, 2004. The only portion of the decision certified for publication addresses the application of §17200 to securities claims. The Bowen opinion relied heavily on the reasoning contained in a 1988 Ninth Circuit opinion interpreting Hawaii’s unfair competition statute, Spinner Corp. v. Princeville Dev. Corp. 3 The Spinner court held that Hawaii’s unfair competition statute did not apply to securities transactions.
Like Spinner, the Bowen court noted that §17200 has been referred to as California’s “little FTC Act,” by virtue of the fact that it “mirrors its federal counterpart,” the FTC Act. 4 The FTC, in turn, has historically not viewed securities transactions as within the scope of the FTC Act. In addition, the Bowen court noted that several federal cases (largely unpublished) have held that §17200 does not apply to securities transactions, 5 and that at least fifteen other jurisdictions have reached similar conclusions with respect to their own unfair competition laws. 6
Stating that “[n]o published decision in California has yet reached the issue,” the Bowen court held that “based on persuasive federal and out-of-state authority… section 17200 does not apply to securities transactions.” 7
Bowen and the Mainstream of California §17200 Authorities
The Bowen opinion is unlikely to be the last word on the subject in California, for several reasons. First, the logic of the Bowen opinion is far from unassailable. While it is true that California courts have looked to federal authorities interpreting the FTC Act as persuasive authority in the past, that has not prevented them from interpreting the California statute in dramatically different fashion where the wording or history of §17200 reflects an intentional difference in the two schemes. The most noteworthy example is the expansive citizen standing provision of the California statute, which allow individuals to bring §17200 claims as private attorneys general, without any showing of harm to themselves 8 – this is true even if the conduct alleged is a violation of a statute that does not itself allow a private right of action.9
Another example is the California statute’s three-prong definition of “unfair competition,” which includes “unlawful” conduct, a definition not included in the FTC Act. 10 This additional language has prompted the California Supreme Court to note that the scope of California’s unfair competition law is “broad,” in that it allows “violations of other laws to be treated as unfair competition that is independently actionable.” 11 A business practice in California can be deemed unfair competition if it is forbidden by “any law, ‘be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made.’” 12 This is in addition to covering claims of “unfair or deceptive” conduct, which are also actionable under §17200 even if no specific statutory violation is alleged. 13
Nor is it clear that a federal opinion interpreting Hawaii’s unfair competition statute should be dispositive with respect to the California statute. As with the distinction between the FTC Act and §17200, California law differs from the Hawaiian statute construed in Spinner in that the term “unlawful” is not part of Hawaii’s definition of “unfair competition.” 14 In fact, the California statute differs from unfair competition statutes in other states for the same reason. 15
This distinction has supported California courts in allowing claims of “unfair competition” to be based on the violation of a variety of other statutes, both federal and state – including penal code provisions governing the sale of cigarettes 16 and obscene material, 17 the Welfare and Institutions Code governing Medi-Cal, 18 the Cartwright Act, 19 the Clean Water Act, 20 the state Forest Practice Act 21 and statutes protecting endangered species. 22 They have even allowed such claims to be premised on violations of regulatory schemes analogous in some ways to the federal securities laws, i.e., statutory schemes that provide pervasive regulatory enforcement and civil liability for injured parties. 23
In light of these authorities, it is hard to see how the securities laws necessarily require a different analysis under §17200. In noting that federal courts have apparently never applied the FTC Act to securities claims because the FTC has historically declined to adopt jurisdiction over such claims, courts have opined that the move was probably based on the presence and obvious jurisdiction of a companion federal agency, the Securities and Exchange Commission. 24 Those concerns may not apply to §17200 with equal vigor. Particularly in light of the expansive citizen-standing provisions of California’s law, the question of the scope of §17200 cannot fairly be read as a matter of the division of responsibility between companion agencies.
Bowen’s Discussion of Prior Roskind v. Morgan Stanley Dean Witter & Co.
Finally, Bowen’s analysis of the authorities that do exist under §17200 – specifically the case of Roskind v. Morgan Stanley Dean Witter & Co. 25 – is somewhat problematic. In Roskind the court was confronted with the question of whether federal law preempts the application of §17200 to claims based on the practice of securities brokers “trading ahead.” 26 The Roskind court determined that §17200 is not preempted by federal law, 27 further reasoning that “since trading ahead constitutes the crime of mail fraud under federal law, it is actionable under [§17200], which borrows other law, including federal law, to define the ‘unlawful’ practices that are [§17200] violations.” 28 This language in the Roskind decision led at least one treatise on §17200 to treat the case as authority for the proposition that the “unlawful” prong of California’s statute could be triggered by a violation of federal securities laws. 29
Bowen declined to accept this broader treatment of Roskind, but rather distinguished the case on the basis that it dealt only with preemption of §17200 by the securities law – not with the separate question of “whether that section and its federal counterpart apply to securities transactions at all.” 30 This distinction is questionable for several reasons. First, the court in Roskind could hardly have been as oblivious to the issue of the scope of §17200 as the Bowen opinion would indicate. 31 Indeed, Roskind explicitly addressed the “legislative intent” argument, reading Spinner as holding that Hawaii’s unfair competition law was “inapplicable to securities law violations, because the Hawaii legislature in passing the law had so indicated.” 32 In contrast, Roskind found that California’s statute “has always been given a broad and sweeping ambit by our Legislature and our Supreme Court. [§17200] contains no language supporting an exclusion 33 for securities, and under the plain language of §17200, we cannot create such an exclusion.” In short, the Roskind opinion, fairly read, reflects an understanding that violations of federal laws can constitute “unlawful” acts sufficient to support a §17200 claim in the context of a securities case.
Finally, while relying heavily on Spinner, the Bowen decision does not address more recent Ninth Circuit opinions that neglect to mention that §17200 is inapplicable to securities transactions, even where the issue would appear to have been plainly relevant. At least four times, just since 1997, the Ninth Circuit has addressed claims regarding the purchase and sale of securities brought under §17200 and failed to mention that the statute doesn’t apply at all. In Burnstein v. Graves, 34 the court affirmed the dismissal of claims under Section 10(b) of the Securities Exchange Act and §17200 – the §17200 claims were dismissed because the plaintiff had sued the wrong party. In Myers v. Merrill Lynch & Co., Inc., 35 Lippitt v. Raymond James Fin. Serv., Inc., 36 and United Investors Life Ins. Co. v. Waddell & Reed Inc., 37 the court was confronted with claims of preemption of §17200 in the securities context, but made no reference to the argument that §17200 does not apply to securities claims.
Bowen’s Impact
Despite the above weaknesses in the Bowen opinion, there is no doubt that it arrives at a time when the scope of §17200 and its potential for “abuse” are high on the public agenda. The California Supreme Court pared back §17200 in the Korea Supply Co. v. Lockheed Martin Corp. case in 2003, eliminating the ability of plaintiffs to seek a pure “disgorgement” remedy, i.e., a recovery of defendants profits by a plaintiff from whom defendants never obtained any consideration or assets as a result of the fraud. 38 In 2003, the Attorney General and State Bar pursued certain plaintiffs counsel for using multi-defendant §17200 cases to shake down small businesses based on technical violations of various statutes. In addition, during 2003 several bills were introduced in the legislature to 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 to act as representative plaintiffs, among other issues. 39 By far the biggest issue in last year’s reform legislation was whether the legislature would add back into §17200 the disgorgement remedy removed by the Supreme Court in Korea Supply. Interestingly, however, none of those reform efforts focused on the overlap between §17200 claims and the federal or state securities laws. New reform legislation and a ballot initiative to eliminate the citizen standing provision of §17200 have been proposed in 2004, as well. 40
The Bowen case clearly reflects an instinct, strongly felt in certain quarters, to limit the scope of §17200. Whether the specific limitation proposed by the opinion will survive remains to be seen.
Endnotes
1. Cal. Bus. & Prof. Code §17200.
2. 2004 Cal. App. Lexis 291 (Cal. Ct. App. 2004) (certified for partial publication).
3. 849 F.2d 388 (9th Cir. 1988).
4. 2004 Cal. App. Lexis 291 at *20.
5. Id. at *21.
6. Id. at *22 and n.7.
7. Id. at *23.
8. See Barquis v. Merchants Collection Ass’n of Oakland, Inc., 7 Cal. 3d 94, 110 (Cal. 1972).
9. Bus. & Prof. Code §17204; see also Kasky v. Nike, Inc., 27 Cal. 4th 939, 949-50 (Cal. 2002) (citation omitted); Quelimane Co., Inc. v. Stewart Title Guar. Co., 19 Cal. 4th 26, 42 (Cal. 1998) (complaint under California’s unfair competition law states a claim even if plaintiff has not “personally suffered damages”).
10. 15 U.S.C. §45(a)(1) (2003) (“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful”); see also Barquis, 7 Cal. 3d at 109-10 (discussing FTC Act and California statute).
11. Kasky, 27 Cal. 4th at 949 (citation omitted).
12. People v. Duz-Mor Diagnostic Lab., Inc., 68 Cal. App. 4th 654, 658 (Cal. Ct. App. 1998) (citation omitted).
13. Kasky, 27 Cal. 4th at 949 (California’s unfair competition law “sweeps within its scope acts and practices not specifically proscribed by any other law”), citing Cel-Tech Communications, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163 (Cal. 1999) (violation of §17200 could exist even if defendant’s actions did not violate the Unfair Practices Act – Bus. & Prof. Code §17000 et seq.).
14. Haw. Rev. Stat. §480-2 (2003).
15. See William L. Stern, Bus. & Prof. Code §17200 Practice, 3:53 (“California’s §17200 is unique among the various state ‘Little FTC Acts’ in prohibiting ‘unlawful’ conduct”).
16. Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553 (Cal. 1998).
17. People v. E.W.A.P., Inc., 106 Cal. App. 3d 315, 318-19 (Cal. Ct. App. 1980).
18. Duz-Mor Diagnostic Lab., Inc., 68 Cal. App. 4th 654.
19. Quelimane Co., Inc., 19 Cal. 4th 26.
20. Southwest Marine, Inc. v. Triple A Machine Shop, Inc., 720 F. Supp. 805 (N.D. Cal. 1989) and Citizens for a Better Env. v. Union Oil of California, 996 F. Supp. 934 (N.D. Cal. 1997).
21. Hewlett v. Squaw Valley Ski Corp., 54 Cal. App. 4th 499 (Cal. Ct. App. 1997) (superseded by statute on other grounds, see United Farm Workers of Am. v. Dutra Farms, 83 Cal. App. 4th 1146, 1163-64 (Cal. Ct. App. 2000)).
22. People v. K. Sakai Co., 56 Cal. App. 3d 531 (Cal. Ct. App. 1976).
23. See, e.g., Farmers Ins. Exch. v. Superior Court, 2 Cal. 4th 377, 384 and 401 (Cal. 1992) (§17200 violation predicated on asserted violations of California’s insurance regulatory act, which provides for administrative hearings and review, but holding that such action could be stayed pending action by the Insurance Commissioner).
24. See Nichols v. Merrill Lynch, Pierce, Fenner & Smith, 706 F. Supp. 1309, 1337 (M.D. Tenn. 1989) (“no federal court has applied Section 5(a)(1) of the FTC Act to securities transactions … because, since its inception, the Securities and Exchange Commission, rather than the FTC, has been responsible for regulating securities transactions”).
25. 80 Cal. App. 4th 345 (Cal. Ct. App. 2000), as modified by 80 Cal. App. 4th 1225E (Cal. Ct. App. 2000).
26. Id. at 347.
27. Id.
28. Id.at 354.
29. See Stern, Bus. & Prof. Code §17200 Practice, 3:58.
30. 2004 Cal. App. Lexis 291 at *27.
31. See Roskind, 80 Cal. App. 4th at 356, n.8. It makes some sense that Roskind would at least mention whether §17200 is entirely inapplicable to the securities-related claims at issue – after all, if §17200 is not applicable to securities transactions it seems the preemption analysis would be irrelevant.
32. Id.
33. Id., citing Cel-Tech Communications, 20 Cal. 4th 163; and Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036 (Cal. 1999).
34. 1997 U.S. App. Lexis 5819 (9th Cir. 1997).
35. 249 F.3d 1087 (9th Cir. 2001).
36. 340 F.3d 1033 (9th Cir. 2003).
37. 2004 U.S. App. Lexis 3227 (9th Cir. 2004).
38. 29 Cal. 4th 1134 (Cal. 2003).
39. The three reform bills in the 2003 legislative that received the most attention were AB 69, introduced by Lou Correa (D – Santa Ana), AB 95 introduced by Ellen Corbett (D – San Leandro), and SB 122 introduced by Martha Escutia (D – Montebello). The Corbett and Escutia bills, which were introduced as a package and which were the only two to make it out of committee, would also have restored the disgorgement remedy taken away the the Supreme Court in Korea Supply, supra. They failed to pass in the final days of the legislative session. “Legislature Okays Workers Compensation Reform,” Los Angeles Times, Sep. 13, 2003, at 1 (discussing legislative record for 2003).
40. Assembly Bill 2369, proposed by Lou Correa (D – Santa Ana); see also “Trial Lawyers, Car Dealers Rev Up Talks; Meetings on 17200 Legislation Aimed at Preventing Costly Ballot Box Battle,” The Recorder, March 18, 2004, at 1 (discussing status of ballot initiative and proposed legislation).
For more information, contact:
Karl Belgum
Corporate and Securities Litigation Group
415.369.7310
kbelgum@thelenreId.com
Adam Brezine
Commercial Litigation Department
415.369.7542
abrezine@thelenreId.com
© 2004 By Thelen Reid & Priest LLP. This Thelen Reid Report is published as an information service to clients and friends. Please recognize that the information is general in nature and must not be relied upon as legal advice. The authors, listed above, or your Thelen Reid attorney contact, would be happy to discuss the information in this article in greater detail and its application to your specific situation. We welcome your comments and suggestions.
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