California Courts Bar Disgorgement of Profits Remedy In Unfair Competion Actions By Private Parties
California’s unfair competition law ("UCL") generally prohibits any "unlawful, unfair or fraudulent" conduct. Bus. & Prof. Code 17200, et seq. While its liability coverage is quite broad, damages are not available in private actions and remedies in such actions are limited injunctive relief and restitution. For many years, however, some believed that the restitution remedy included disgorgement of profits, whether by reason of the fluid recovery1 available in California class actions or otherwise. In Kraus v. Trinity Management Services, Inc., 23 Cal. 4th 116 (2000), however, the California Supreme Court held that fluid recovery was not available to obtain disgorgement in the now defunct UCL nonclass representative actions.2 Three years later, the same court held that disgorgement was not an available remedy in UCL individual actions and the only monetary relief available to a private plaintiff was restitution of funds in which the plaintiff had a prior ownership interest. Korea Supply v. Lockheed Martin, 29 Cal. 4th 1134 (2003).
The Korea Supply decision, however, expressly left open the issue of whether nonrestitutionary disgorgement of profits would be permitted in UCL class actions. 29 Cal. 4th at 1152, n. 6. Three recent decisions by three different California Courts of Appeal have now held that disgorgement is not available in UCL class actions, and given a narrow interpretation of what constitutes restitution for purposes of the UCL.
The first is Madrid v. Perot Systems, 130 Cal. App. 4th 440 (2005) where plaintiffs sought to pursue a class action on behalf of California electricity customers against defendants who managed the electricity grid and provided a computer system to operate it. There was no money that passed directly from plaintiffs or the class to defendants, but plaintiffs argued that the restitution remedy in the UCL should focus on defendant’s gain rather than plaintiff’s loss. The Court rejected this argument holding that, under Korea Supply, restitution means "the return of money to persons from whom it was taken or who had an ownership interest in it." 130 Cal. App. 4th at 455.
The Madrid court then took up the issue of whether "nonrestitutionary disgorgement" is available in a class action, recognizing this was an "open question" under Korea Supply. The Court noted that one reason the Kraus court disallowed disgorgement in nonclass representative actions was due process concerns not present in class action. This point, however, was mentioned in Korea Supply only after the Court first noted the UCL statutory remedy says "restore" and concluded that nonrestitutionary disgorgement resembles damages which are clearly not recoverable under the UCL. The Madrid court then rejected the fluid recovery argument noting that it could not be used to expand the substantive remedies but only as a method of paying out monetary relief after it has been awarded.
Feitelberg v. Credit Suisse First Boston, LLC, 134 Cal. App. 4th 997 (2005) and Wayne v. BP Oil Company, 2006 Cal. App. Unpub. LEXIS 2556 (March 27, 2006) followed the Madrid decision in both respects. Feitelberg involved alleged biased stock research reports to gain favor with investment banks, and Wayne an alleged price manipulation scheme which raised prices to California gasoline consumers. In neither case did defendants take money directly from plaintiffs, although in Wayne plaintiffs did allege that they had to pay retail gasoline outlets more money because defendant improperly increased the price of crude oil to refiners. The Court concluded, however, this fell short of the "ownership interest" required for UCL restitution stating that "plaintiff has not alleged that he seeks to recover for some benefit he conferred on defendant and for which he has a legal right of recovery. . . ." Slip Op. at p. 8. The Court then went on to agree with Madrid that disgorgement into a fluid recovery fund is not available in UCL class actions.
The Feitelberg court, by contrast, extensively reviewed the history of the UCL, and the nature of the restitution and disgorgement remedies, before concluding that disgorgement was not an available remedy in a UCL class action. It emphasized the "to restore" language of the statute (Bus. & Prof. Code § 17203), and that a class action is a procedural vehicle that "does not alter the parties’ underlying substantive rights." Slip. Op. at 19. It also noted that fluid recovery is just an application of the equitable cy pres doctrine, and only deals with the distribution of the residue of a class action judgment. While the California Supreme Court is yet to be heard from on the issue of whether disgorgement is permitted in a UCL class action, the clear trend in the Courts of Appeals is disallow such recoveries. Moreover, Madrid, Feitelberg, and Wayne were all decided on demurrer, the California equivalent to a motion to dismiss for failure to state a claim. Each decision also clearly required that plaintiff have an "ownership" or "vested" interest in the money taken by defendant for the restitution remedy to apply. Although public prosecutor actions under the UCL are not affected by these decisions, the combination of these decisions and the Proposition 64 reforms is to reduce the utility of the UCL as a private enforcement tool.
- Fluid recovery, which is authorized by statute in California in class actions, means that any "residue" remaining from defendant’s payment of damages after class members have collected their individual shares is paid to the "next best use" rather than returned to defendant.
- Nonclass representative actions by private parties were abolished by Proposition 64 passed by California voters in November, 2004.
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