- The UCL Does Not Apply to Securities Transactions, Holds California's Court of Appeal
- March 15, 2004 | Authors: Joanna S. McCallum; Barry S. Landsberg
- Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
While California's Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. (the "UCL"), broadly allows plaintiffs to bring a claim based on a "borrowed" violation of virtually any other law or a charge that a practice is "unfair" or "fraudulent," California's Fourth Appellate District has clamped down on one entire category of such claims. In Bowen v. Ziasun Technologies, Inc., decided on March 8, 2004, the court held squarely that the UCL does not apply to securities transactions.
In Bowen, two plaintiffs (in consolidated actions) alleged that they had been the targets of a Ponzi scheme in which agents and brokers for various companies, including defendant Ziasun, made misrepresentations to induce them to purchase valueless stock, and to conceal the fact that the companies were engaged in illicit activities and were recycling new investor funds to pay returns to other investors. The plaintiffs asserted claims for fraud, securities fraud and violations of the UCL, among other claims. The trial court granted Ziasun's motion for summary judgment on all claims.
The Fourth Appellate District affirmed on all counts. Recognizing that the application of the UCL to securities transactions was a question of first impression in California, the court turned to federal and state decisions of many other jurisdictions. The court observed that the UCL is a "little FTC Act," which "mirrors its federal counterpart." As the court noted, the federal FTC Act historically has not applied to securities transactions, and 15 other states had held their own similar consumer protection statutes inapplicable to securities transactions (three states take a contrary position). The court also acknowledged several federal decisions, published and unpublished, that declined to apply the UCL to securities transactions.
In joining the majority view, the Bowen court adopted the reasoning of a Ninth Circuit decision, Spinner Corporation v. Princeville Development Corporation, 849 F.2d 388 (9th Cir. 1988). Spinner evaluated Hawaii's little FTC Act, which the Bowen court said was "almost identical to California's." The Spinner court had reviewed and relied upon other states' interpretations of their own consumer protection acts, and had concluded that regulation of securities transactions fell under the separate comprehensive regulatory scheme of the Securities and Exchange Commission. As the Spinner court observed: the "primary intent of the [Hawaii] legislature was to protect consumers from unethical business practices resulting in relatively small commercial injuries. . . . Actions involving securities, such as the ones alleged in this case, are not typically on the agenda of consumer advocates." The Bowen court agreed with Spinner, and observed that nothing suggested that the California Legislature intended otherwise in enacting the UCL. The court bolstered its conclusion by recognizing that the California Supreme Court had expressly directed courts to federal FTC Act decisions for guidance on the UCL.
The Bowen court distinguished the First Appellate District's 2000 decision in Roskind v. Morgan Stanley Dean Witter & Co., 80 Cal. App. 4th 345, which held that UCL claims were not preempted by federal securities laws, because a UCL claim would be "consistent with the purposes and aims of federal law." The Bowen court reasoned that it was "not presented here with the question of whether federal securities law preempts section 17200, but rather whether that section and its federal counterpart apply to securities transactions at all." (It is interesting to note that Roskind contains explicit language -- albeit in dictum, in a footnote -- that rejects Spinner because the UCL has a more "broad and sweeping ambit" than Hawaii's law, and observes that the UCL contains no exclusion for securities claims. Therefore, arguably Roskind could have supported a decision exactly opposite to that reached in Bowen.)
Bowen thus brings to California a black-line limitation on consumer protection claims, one that is well-recognized in federal and many state jurisdictions. Although the decision is nominally confined to the securities context, it may presage a further tightening of the reins in other UCL cases, where defendants can show that other laws are equally unsuitable candidates for consumer protection litigation under the UCL.