• Appellate Court Urges Clarification of UCL's Definition of "Unfair" in Consumer Cases
  • March 31, 2006 | Authors: Andrew H. Struve; Eugene L. Hahm
  • Law Firms: Manatt, Phelps & Phillips, LLP - Los Angeles Office; Manatt, Phelps & Phillips, LLP - Palo Alto Office
  • Noting a widening split in authority since the California Supreme Court's seminal decision in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163 (1999), California's Fourth District Court of Appeal recently urged both the California Legislature and the California Supreme Court to clarify the definition of "unfair" conduct to be applied in consumer actions brought under California's Unfair Competition Law (Business and Professions Code Section 17200 et seq., the "UCL"). In Bardin v. DaimlerChrysler Corporation, 134 Cal.App.4th 1255 (4th Dist., February 23, 2006), the Court examined the two conflicting definitions of "unfair" recently adopted by courts in UCL consumer cases. Although it concluded that the defendant's alleged conduct was not unfair under either of the competing definitions and hence the case had properly been dismissed at the pleading stage, the Court nonetheless called for legislative and judicial clarification of the UCL's unfairness standard.

    The Bardin plaintiffs contended that DaimlerChrysler Corporation ("DCC") had concealed its use of tubular steel exhaust manifolds, as opposed to using more expensive and more durable cast iron manifolds. The plaintiffs claimed this was deceptive and "unfair" conduct within the meaning of both the UCL and California's Consumer Legal Remedies Act (Civil Code Section 1750 et seq., the "CLRA"). The plaintiffs complained that DCC also took unfair advantage of customers by profiting from the sale of replacement manifolds after the poorer-performing original manifolds wore out prematurely.

    The trial court sustained a demurrer and dismissed the complaint. The Court of Appeal affirmed, concluding that there was nothing unfair about DCC's business practices.

    The Court also analyzed the evolving definition of "unfair" within the meaning of the UCL. Prior to Cel-Tech, appellate courts had found a business practice to be unfair when it "offends an established public policy or when [the conduct] is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers." South Bay Chevrolet v. General Motors Acceptance Corp., 72 Cal.App.4th 861, 886-87 (1999). Moreover, courts were required to "weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim" in evaluating any UCL claim. Id. at 887.

    In Cel-Tech, the Supreme Court provided a more limited definition of "unfair" conduct, at least in cases involving competitors. Although it acknowledged that the scope of the UCL was intended to be broad, the Supreme Court stated that its reach was not unlimited and criticized prior appellate court definitions of unfair conduct as being "too amorphous" and providing "too little guidance to courts and businesses." 20 Cal.4th at 184-85. Thus, Cel-Tech limited unfair conduct under the UCL to "conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly harms or threatens competition." Id. at 186-87. In a footnote in the opinion, however, the Supreme Court noted that the case was in the context of a UCL claim brought by a competitor, that its holding was limited to that context, and that it was not addressing UCL actions brought by either consumers or competitors alleging other forms of violation of the UCL. Id. at p. 187, n.12.

    After Cel-Tech, two different judicial definitions of "unfair" conduct emerged in UCL cases brought by consumers, both of which found support in language from the Cel-Tech opinion. The first line of cases, led by Smith v. State Farm Mutual Automobile Insurance, 93 Cal.App.4th 700 (2001), continued to apply the pre-Cel-Tech definition of unfair conduct, namely, conduct that was "immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers." The State Farm court reasoned that the holding of Cel-Tech was limited only to UCL cases involving competitors, and that the previously used definitions of unfair were still applicable in consumer actions.

    The second line of cases, led by Scripps Clinic v. Superior Court, 108 Cal.App.4th 917, 940 (2003), held that unfair conduct in consumer UCL actions must be violative of a public policy "tethered to specific constitutional, statutory, or regulatory provisions." The Scripps court reasoned that Cel-Tech disapproved of the previous "amorphous" definitions of unfair conduct and required that any public policy that predicated any UCL claims must be based on legislative declarations reflected in statutes or administrative regulations.

    The Bardin court found DCC's conduct was not unfair under either the State Farm or Scripps line of cases. The court determined that DCC's use of less expensive and less durable materials was not immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. The court further noted that the plaintiffs had not alleged that DCC had made any representations about the composition of the manifolds, that the manifolds used did not violate any warranty or other agreement, and that there was no allegation that the manifolds caused any personal injuries or safety concerns. Applying the Scripps test, the court found that the plaintiffs' complaint made no allegations of a public policy tethered to any constitutional, statutory or regulatory provisions. Rather, plaintiffs' claim was based on DCC's departure from the purported industry standard of using cast iron exhaust manifolds, which was not a legislatively declared policy.

    The court noted that the widening divide among the appellate courts raised significant questions requiring clarification: "Did the Supreme Court limit its holding in Cel-Tech to UCL actions brought by competitors simply because the circumstance of a consumer UCL action was not before it, or because the definition of 'unfair' should be different depending on whether the action is brought by a consumer or a competitor? Was the Supreme Court expressing the view that regulation of competitive conduct is contained in existing legislation, but there is no analogous law pertaining to consumers? Should a broader definition of 'unfair' apply in consumer actions because consumers require more protection than competitors even though such a distinction between consumers and competitors is not reflected in the language of the statute? Is the Cel-Tech definition of 'unfair' too narrow to sufficiently protect consumers? Is the definition of 'unfair' applied in [State Farm] too amorphous in the consumer context, and does it provide 'too little guidance to courts and businesses'?" Bardin, 134 Cal.App.4th at 646-47.

    The Bardin court did not itself answer these questions, in part because the plaintiffs' claim failed both unfairness tests that have divided the courts in the wake of Cel-Tech. Rather, the Bardin court urged the Legislature and the Supreme Court to clarify the definition of "unfair" under the UCL, and to determine conclusively whether one or both tests will govern future UCL cases. Such clarity may well be outcome-determinative in other UCL consumer "unfairness" cases (unlike Bardin) in which the application of only the more rigorous unfairness test applied in Cel-Tech will defeat the claim as a matter of law.