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May 4, 2022

Stroock Client Alert

By: Stephen J. Newman, Julia B. Strickland, Arjun P. Rao, Brian C. Frontino, Allen H. Denson

California’s Unfair Competition Law, Cal. Bus. & Prof. Code section 17200 et seq. (“UCL”), already gives governmental officials great power to seek civil penalties from any business engaged in unlawful, deceptive or even “unfair” activity. A recent California Court of Appeal ruling encourages entrepreneurial UCL penalty litigation by expressly permitting government officials to hire private contingent fee attorneys to pursue these claims.  People ex rel. City of San Diego v. Experian Data Corp., No. G060360, 2022 WL 1222870 (Cal. Ct. App. 4th Dist., Div. 3, Apr. 26, 2022).  And because the California Supreme Court’s ruling in Abbott Laboratories v. Superior Court, 9 Cal. 5th 642 (2020), allows even small governmental bodies to seek relief based on statewide activity, there is a risk of increasing litigation from the most unexpected corners of the State.

Experian involved a claim by the San Diego City Attorney that the defendant, a credit bureau, allowed a hacker to gain access to data belonging to approximately 400,000 California residents.  According to the government, Experian was liable under the UCL for penalties of up to $2,500 per resident (plus enhanced penalties for senior citizens and the disabled) for failing to provide adequate notice of the data breach to affected residents.  To pursue the claim, the City Attorney hired a private class action firm that was simultaneously pursuing private claims against Experian in a class action case, and agreed to pay the private firm a percentage of the penalties actually recovered.

Experian filed a motion to disqualify the private lawyers on the grounds that the government lacked authority to hire private counsel to pursue UCL penalty claims.  Among other things, Experian argued also that, private counsel could not be trusted to exercise government power in a neutral and evenhanded manner.  Experian also argued that, because the UCL itself states that penalties “shall be paid to the treasurer” of the governmental body pursuing the claim (see Cal. Bus. & Prof. Code § 17206), a contract allocating a portion of the penalties to private contingent fee counsel violated the statute’s express command.

The Court of Appeal rejected both arguments.  According to the court, so long as the elected City Attorney (or government appointees reporting to him) supervised the work of outside private counsel, the neutrality principle was not violated.  Critical to the court’s decision was that the fee agreement reserved to the City Attorney sole power to decide whether to settle and for what amount.  Additionally, the agreement expressly preserved the defendant’s right to communicate directly with the City Attorney or other government officials without outside counsel present, to protect the defendant’s First Amendment Petition Clause rights.  The argument pertaining to payment of penalties to the treasurer also was rejected, on the grounds that the agreement provided for funds first to be collected by the treasurer and then paid out to the private attorneys.  Thus, as a technical matter, the penalties still would be paid to the treasurer; their later distribution to outside counsel did not violate the statute, the court ruled.  The court favorably cited federal authority holding that the federal Constitution’s Due Process Clause was not violated when Trinity County, California, hired private contingent-fee counsel to pursue UCL penalty claims.  American Bankers Mgmt. Co. v. Heryford, 885 F.3d 629 (9th Cir. 2018).

Unfortunately, the Experian court did not address the negative incentives created by allowing small governmental bodies to rely on private counsel to pursue statewide claims.  Allowing this gives the least populous counties (and their unelected outside lawyers) potentially outsized authority to set statewide policy as to what constitutes “unfair” business conduct through the pursuit of UCL penalty claims.  

The California Supreme Court rejected similar concerns as speculative in its 2020 decision in Abbott Labs, which held that any city or county authorized to pursue UCL claims may seek penalties based on statewide conduct.  9 Cal. 5th at 658.  In that case, the Attorney General participated as amicus curiae and argued:

First, the Attorney General suggests that the District Attorney's position would present “conflicts of interest” between local prosecutors’ responsibility to statewide victims, to whom they are not politically accountable, and their own incentives to secure a greater share of available remedies for local constituencies. “The result,” according to the Attorney General, “could be a degradation of UCL enforcement, as local prosecutors compete to be the first to settle a case and secure penalties for local use.” Second, “granting statewide enforcement authority to local prosecutors would endanger California's ability to credibly lead the way in matters of national or international prominence” by compromising the Attorney General's primary role in consumer enforcement. Third, the Attorney General contends, the “widely recognized geographic limitations on district and city attorneys’ UCL authority have formed the basis for decades of interoffice cooperation” between state and local prosecutors, and this cooperation, which is crucial to the intensive investigations and litigation necessary to pursue UCL claims, would be jeopardized by a rule allowing any district attorney to pursue statewide remedies.

Id. at 660 (quoting Attorney General amicus brief).

The California Supreme Court rejected these concerns as merely “abstract.”  Id.  More importantly, the Abbott Labs decision noted that, because the Legislature “chose to create a decentralized enforcement model in which a district attorney has authority to obtain statewide relief,” it would be up to the Legislature to respond to any abuses arising in the future.  Id. at 661.  Moreover, the California Supreme Court said that the Attorney General retains authority to intervene in any particular case if it appears that a local government is pursuing the case in an abusive fashion or otherwise in a manner that impairs public policy goals, and the Attorney General could even move to vacate a judgment that was obtained unfairly.  Id. at 662-63.  

Now, with clear California appellate authority endorsing the use of private contingent fee attorneys, the concerns brushed off as merely “abstract” in Abbott Labs may soon become more concrete.  Companies therefore must be mindful of a statewide UCL claim arising anywhere within the State of California, from Los Angeles (population 10,000,000) to Alpine County (population 1,120).  This issue is clearly worthy of further review in the California Supreme Court, or of legislative reform.

We would be happy to discuss these developments with you at any time.

Built on the strength and national reputation of our Litigation and Regulatory team, Stroock has decades of experience responding to investigations, as well as monitoring and resolving issues raised by state attorneys general, district attorneys and regulators. Additionally, we have developed strong relationships with the most active attorneys general and other enforcement authorities in the country, including those in California, New York, Massachusetts, Illinois, Pennsylvania and Washington. We have successfully resolved hundreds of cases before judges, juries and appellate courts across the country and before the Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB), the Federal Communications Commission (FCC), the Financial Industry Regulatory Authority (FINRA), and the Public Company Accounting Oversight Board (PCAOB).

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.

May 4, 2022

Stroock Client Alert

By: Stephen J. Newman, Julia B. Strickland, Arjun P. Rao, Brian C. Frontino, Allen H. Denson

California’s Unfair Competition Law, Cal. Bus. & Prof. Code section 17200 et seq. (“UCL”), already gives governmental officials great power to seek civil penalties from any business engaged in unlawful, deceptive or even “unfair” activity. A recent California Court of Appeal ruling encourages entrepreneurial UCL penalty litigation by expressly permitting government officials to hire private contingent fee attorneys to pursue these claims.  People ex rel. City of San Diego v. Experian Data Corp., No. G060360, 2022 WL 1222870 (Cal. Ct. App. 4th Dist., Div. 3, Apr. 26, 2022).  And because the California Supreme Court’s ruling in Abbott Laboratories v. Superior Court, 9 Cal. 5th 642 (2020), allows even small governmental bodies to seek relief based on statewide activity, there is a risk of increasing litigation from the most unexpected corners of the State.

Experian involved a claim by the San Diego City Attorney that the defendant, a credit bureau, allowed a hacker to gain access to data belonging to approximately 400,000 California residents.  According to the government, Experian was liable under the UCL for penalties of up to $2,500 per resident (plus enhanced penalties for senior citizens and the disabled) for failing to provide adequate notice of the data breach to affected residents.  To pursue the claim, the City Attorney hired a private class action firm that was simultaneously pursuing private claims against Experian in a class action case, and agreed to pay the private firm a percentage of the penalties actually recovered.

Experian filed a motion to disqualify the private lawyers on the grounds that the government lacked authority to hire private counsel to pursue UCL penalty claims.  Among other things, Experian argued also that, private counsel could not be trusted to exercise government power in a neutral and evenhanded manner.  Experian also argued that, because the UCL itself states that penalties “shall be paid to the treasurer” of the governmental body pursuing the claim (see Cal. Bus. & Prof. Code § 17206), a contract allocating a portion of the penalties to private contingent fee counsel violated the statute’s express command.

The Court of Appeal rejected both arguments.  According to the court, so long as the elected City Attorney (or government appointees reporting to him) supervised the work of outside private counsel, the neutrality principle was not violated.  Critical to the court’s decision was that the fee agreement reserved to the City Attorney sole power to decide whether to settle and for what amount.  Additionally, the agreement expressly preserved the defendant’s right to communicate directly with the City Attorney or other government officials without outside counsel present, to protect the defendant’s First Amendment Petition Clause rights.  The argument pertaining to payment of penalties to the treasurer also was rejected, on the grounds that the agreement provided for funds first to be collected by the treasurer and then paid out to the private attorneys.  Thus, as a technical matter, the penalties still would be paid to the treasurer; their later distribution to outside counsel did not violate the statute, the court ruled.  The court favorably cited federal authority holding that the federal Constitution’s Due Process Clause was not violated when Trinity County, California, hired private contingent-fee counsel to pursue UCL penalty claims.  American Bankers Mgmt. Co. v. Heryford, 885 F.3d 629 (9th Cir. 2018).

Unfortunately, the Experian court did not address the negative incentives created by allowing small governmental bodies to rely on private counsel to pursue statewide claims.  Allowing this gives the least populous counties (and their unelected outside lawyers) potentially outsized authority to set statewide policy as to what constitutes “unfair” business conduct through the pursuit of UCL penalty claims.  

The California Supreme Court rejected similar concerns as speculative in its 2020 decision in Abbott Labs, which held that any city or county authorized to pursue UCL claims may seek penalties based on statewide conduct.  9 Cal. 5th at 658.  In that case, the Attorney General participated as amicus curiae and argued:

First, the Attorney General suggests that the District Attorney's position would present “conflicts of interest” between local prosecutors’ responsibility to statewide victims, to whom they are not politically accountable, and their own incentives to secure a greater share of available remedies for local constituencies. “The result,” according to the Attorney General, “could be a degradation of UCL enforcement, as local prosecutors compete to be the first to settle a case and secure penalties for local use.” Second, “granting statewide enforcement authority to local prosecutors would endanger California's ability to credibly lead the way in matters of national or international prominence” by compromising the Attorney General's primary role in consumer enforcement. Third, the Attorney General contends, the “widely recognized geographic limitations on district and city attorneys’ UCL authority have formed the basis for decades of interoffice cooperation” between state and local prosecutors, and this cooperation, which is crucial to the intensive investigations and litigation necessary to pursue UCL claims, would be jeopardized by a rule allowing any district attorney to pursue statewide remedies.

Id. at 660 (quoting Attorney General amicus brief).

The California Supreme Court rejected these concerns as merely “abstract.”  Id.  More importantly, the Abbott Labs decision noted that, because the Legislature “chose to create a decentralized enforcement model in which a district attorney has authority to obtain statewide relief,” it would be up to the Legislature to respond to any abuses arising in the future.  Id. at 661.  Moreover, the California Supreme Court said that the Attorney General retains authority to intervene in any particular case if it appears that a local government is pursuing the case in an abusive fashion or otherwise in a manner that impairs public policy goals, and the Attorney General could even move to vacate a judgment that was obtained unfairly.  Id. at 662-63.  

Now, with clear California appellate authority endorsing the use of private contingent fee attorneys, the concerns brushed off as merely “abstract” in Abbott Labs may soon become more concrete.  Companies therefore must be mindful of a statewide UCL claim arising anywhere within the State of California, from Los Angeles (population 10,000,000) to Alpine County (population 1,120).  This issue is clearly worthy of further review in the California Supreme Court, or of legislative reform.

We would be happy to discuss these developments with you at any time.

Built on the strength and national reputation of our Litigation and Regulatory team, Stroock has decades of experience responding to investigations, as well as monitoring and resolving issues raised by state attorneys general, district attorneys and regulators. Additionally, we have developed strong relationships with the most active attorneys general and other enforcement authorities in the country, including those in California, New York, Massachusetts, Illinois, Pennsylvania and Washington. We have successfully resolved hundreds of cases before judges, juries and appellate courts across the country and before the Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB), the Federal Communications Commission (FCC), the Financial Industry Regulatory Authority (FINRA), and the Public Company Accounting Oversight Board (PCAOB).

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.