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April 21, 2014

California Court of Appeal Allows Injunction Under Unfair Competition Law To Prevent Horizontal Competitor From Diverting Business Through Unlawful Means

For many years, California’s Unfair Competition Law had no traditional standing requirements. But since the passage of Proposition 64 in 2004, standing has been required, and standing continues to be litigated regularly. In Law Offices of Higbee v. Expungement Assistance Services, __ Cal.App.4th ___, No. G046778 (4th Dist. March 14, 2013), the Court of Appeal decided that a plaintiff had standing to sue under the Unfair Competition Law (Bus. & Prof. Code Section 17200, et seq.) to enjoin a horizontal competitor’s diversion of business to itself through unlawful means. The Court held that a plaintiff need not be threatened with the type of injury that would be compensable through restitution under Cal. Business and Professions Section 17204 to have standing to pursue an injunction against unfair competition under Section 17203.

Only a specific type of restitution is allowed pursuant to Section 17204.Higbee, slip op. at 12, quoting Kwikset Corp. v. Superior Court, 51 Cal.4th 310, 323 (2011) (giving four examples of when restitution may be awarded under Section 17204); e.g., Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1152 (2003) (“nonrestituionary disgorgement of profits is not an available remedy . . . under the UCL”). No damages can be awarded. The plaintiff in Higbee did not allege the type of injuries that would entitle it to restitution. The trial court recognized this. Higbee, slip op. at 1 (“It is not alleged that plaintiff had a transaction with defendant in which it lost money or property or that it was deprived of money or property to which it had a cognizable claim”). Plaintiff had not transacted any business with the defendant.

Plaintiff and defendant were competitors. Plaintiff law firm asserted that defendant, an Internet company, had diverted business from plaintiff to itself through the unlawful means of practicing law without a license, causing plaintiff law firm to lose profits; lose going concern value; spend more on advertising; and lower prices to consumers. These types of alleged damages do not fit within the definition of Section 17204 restitution.

The trial court did not think that the loss of market share, which plaintiff alleged, constituted injury under the UCL, and sustained a demurrer (roughly the same as granting a Rule 12(b)(6) motion) without leave to amend, stating:

Plaintiff only alleges that defendant is getting some business that plaintiff might possibly obtain for itself. This is insufficient. One may not sue a competitor under [section] 17200 because the competitor is obtaining some market share.

Higbee, slip op. at 1.

The Court of Appeal reversed:

  • (1) The Court stated that it was already settled law that a plaintiff need not allege any entitlement to restitution under Section 17204 to have standing to pursue an injunction under Section 17203. Higbee, slip op. at 8-9, citing Allergan, Inc. v. Athena Cosmetics, Inc., 640 F.4th 1377, 1380 (Fed. Cir. 2011). It was enough that the plaintiff could point to some form of injury.
  • (2) The Court held that plaintiff had adequately alleged an injury, which the Court called a “market injury.” Higbee, slip op. at 9 (plaintiff injured where defendant diverted business to itself while competing without a professional license to do so, costing plaintiff “lost sales, revenue, market share, and asset value”), citingAllergan, 640 F.4th at 1382.
  • (3) The Court rejected the argument that an injunction under Section 17203 can only be granted when the plaintiff had entered into a transaction directly with the defendant. The court pointed out that unfair competition law originally was for suits between competitors where a defendant employed the “use of unfair means in drawing away customers from a competitor.” Id. at 12 (citation omitted). In the Court’s view, nothing about the UCL had eliminated that original purpose. The UCL “is to protect both consumers and competitors . . .” Id. Taking away business from plaintiff law firm by violating the law requiring a license to practice law could serve as a predicate for a UCL claim.
Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

About the Author

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Thomas Nevins is a partner in the Antitrust and Trade Regulation Practice Group in the firm's San Francisco office. 

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