LawFlash

California Appellate Court Opens the Door to Unfair Competition Claims by Business Competitors Lacking Direct Business Dealings

March 21, 2013

Paving the way for a potential surge in unfair competition litigation between business competitors, the California Court of Appeal held in Law Offices of Mathew Higbee v. Expungement Assistance Services, No. G046778, that the “lack of direct dealings between two business competitors is not necessarily fatal to [California’s Unfair Competition Law] UCL standing, provided the plaintiff competitor has suffered injury in fact and lost money or property as a result of the defendant competitor’s unfair competition.” With this March 14, 2013, decision, the court resolved the concern that, following the enactment of Proposition 64, the UCL had been so narrowed “in endeavoring to protect ‘mom and pop’ operators from the devastation wreaked by gold-digging plaintiffs,” that business competitors injured by the unfair business practices of another are no longer protected by the law if they lack direct business dealings with the offending competitor.

The Background Facts

The Law Offices of Mathew Higbee (“Higbee”), a firm offering expungement-related legal services, filed suit against Expungement Assistance Services (“EAS”), an online legal services provider, for unfair competition and other claims alleging that EAS engaged in the unauthorized practice of law. Higbee alleged “that EAS maintained a number of different Web sites, such as www.clearmyrecord.com, on which it purported to inform prospective customers about the legal remedies available to them, describe the rights and privileges afforded by those remedies, tell prospective customers what legal documents were necessary to achieve their goals, and represent that its lawyers would prepare or review a customer’s court filings and offer legal advice.” Higbee further alleged that EAS “undercut the competition by using unlicensed persons to perform legal work, thereby saving on attorney fees, and by employing unbonded and unregistered legal document assistants, thereby saving on the costs of posting statutorily mandated bonds and paying registration fees.” EAS’s allegedly unlawful business practices caused Higbee injury in the form of “lost revenue, lost market share, diminution in law firm value, and increased advertising costs.” Higbee operates a competitive website (www.RecordGone.com), which apparently represents clients in post-conviction cases, including expungements, record sealing, and appeals in 14 states.

EAS filed a demurrer to Higbee’s UCL cause of action. It was sustained without leave to amend. The trial court held that Higbee’s allegations that he was required to compete for market share as a result of EAS’s alleged misconduct “were insufficient to establish injury in fact for the purposes of UCL standing.” The Court of Appeal reversed. It noted that standing under the UCL does not depend on eligibility for restitution and held that “a business competitor who adequately alleges that he or she has suffered injury in fact and lost money or property as a result of the defendant’s unfair competition is not necessarily precluded from maintaining a UCL lawsuit against the defendant just because he or she has not engaged in direct business dealings with the defendant.”

The Court’s Analysis

In holding that Higbee had standing to bring his UCL claim, the Court of Appeal concluded that Higbee’s allegations that “he had been forced to pay increased advertising costs and to reduce his prices for services in order to compete, and that he had lost business and the value of his law practice had diminished” satisfied the pleading requirements set forth in Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 324-25 (2011) — that an allegation of “some specific ‘identifiable trifle’ of injury” was sufficient to establish “injury in fact” under the UCL. The Court of Appeal distinguished the present case from the cases cited by EAS where plaintiffs had pleaded only “conjectural” or “hypothetical” injury, rather than Higbee’s more concrete allegations of lost revenue, lost asset value, and increased advertising costs. It also reiterated that there are innumerable ways in which economic injury from unfair competition may be shown, as described in Kwikset: “A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary.”

The Court of Appeal stated that the language of the UCL “is clear on its face and contains no requirement that the plaintiff must have engaged in business dealings with the defendant” to show injury caused by defendant’s unfair business practices. Though EAS conceded under Kwikset that “‘[t]he courts have not yet defined the contours of the causation element under the ‘unlawful’ prong’” of the UCL, it argued that Higbee had not adequately alleged causation and could not do so “because he never engaged in any business dealings with EAS.”

EAS argued that direct business dealings are required to establish UCL standing based on the following sentence from Clayworth v. Pfizer, 49 Cal.4th 758, 788 (2010): “While the voters clearly intended to restrict UCL standing, they just as plainly preserved standing for those who had had business dealings with a defendant and had lost money or property as a result of the defendant’s unfair business practices.” The Court of Appeal concluded that EAS took this sentence out of context, as Clayworth did not actually decide the question of whether direct business dealings are required to establish UCL standing. Rather, the case only held that the plaintiff’s allegation of overcharges satisfied the requirement of injury in fact. Given this context, the court “[did] not believe the [Clayworth] court intended to engraft upon section 17204 a requirement that all plaintiffs must, in every event, have engaged in business dealings with a defendant in order to demonstrate UCL standing.” The Court of Appeal found there was no existing case law “engraft[ing] a business dealings requirement onto the UCL standing requirements.”

The Court of Appeal concluded it was not “impossible to allege facts sufficient to support causation in the absence of direct business dealings,” though “the alleged causation likely would have been plain” had those dealings existed. The court was “unwilling to say” Higbee’s allegation that he incurred losses “specifically because of the unlawful business practices of EAS” was “insufficient to withstand a demurrer.” Mindful of this decision’s potential to cause an explosion of UCL litigation, the court expressly limited its opinion “to the context of business competitors… Nothing in this opinion is meant to suggest that we approve of the revival of shakedown lawsuits or that a consumer who has never done business with a company has standing to maintain a UCL action against it.”

Implications of Higbee

Now that an appellate court has held that direct business dealings are not required for competitors to establish standing under California’s UCL, there may be an increase in the number of UCL claims litigated by business competitor plaintiffs who allege that they have suffered a loss in market share as a result of some unfair, unlawful, or fraudulent conduct by their competitors. Though the court warned against the revival of shakedown lawsuits, given that “[v]irtually any law — federal, state or local — can serve as a predicate” to allege a UCL action, this decision may nonetheless trigger a blunderbuss of lawsuits between business competitors seeking to police each other’s activities. While some companies may welcome the opportunity to seek injunctions to prevent competitors from engaging in perceived unfair, unlawful, or fraudulent conduct, a dramatic increase in the filing of UCL actions by business plaintiffs who have merely suffered a “trifle of injury” could prove detrimental to economic growth and further burden our underfunded courts.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Gerber-Seth
Pickett-Donn
Fischer-Debra
Smith-Jeffrey

This article was originally published by Bingham McCutchen LLP.