Vague State Code Could Open Your Business to Lawsuits
Risk management is the art of identifying hazard and finding ways to keep it from harming your business. And the more clearly you identify hazard, the better you can provide against it.
Sounds simple, right? It’s not. Insurers make a business out of the difficulties inherent in the process, wringing value and hence profit from the skill with which they weigh risk and translate it into the concrete dollars and cents of your insurance premiums.
Sometimes, however, you can only guess at the hazard you face, with the result that no matter what you do, you may not escape it. If you want a good example of the trouble this can create, consider the hazards presented by section 17200 of the California Business and Professional Code.
Passed more than a century ago and, in recent decades, used to attack the lending practices of banks and finance companies, the Unfair Business Practices Act has good news and bad news for businesses of all kinds in California. The good news is that the act allows ordinary citizens to police unscrupulous business operators who prey on the unwary. The bad news is that the act is so vaguely worded as to leave the upright business owner uncertain just what business practices are or are not OK under this act.
Worse, a single lawsuit can strip your business bare, and you often can’t know in advance whether your insurance will defend you against UBPA litigation. Last but not least, you can be sued repeatedly for the same alleged wrongdoing.
In essence, the UBPA allows anyone to sue any business on behalf of the general public to halt unlawful, fraudulent or unfair business practices--and the stinkers in that short list are the second and third items.
You can learn what’s lawful and what’s not by reading the state’s statute books--hard to do, to be sure, but not impossible. But the word fraudulent has a special meaning in the context of the UBPA, and the word unfair is left undefined altogether.
“Under common law, to commit a fraudulent act, you must intend to deceive,” says David Sturgeon-Garcia, a partner in the San Francisco office of the law firm Buchalter, Nemer, Fields & Younger who specializes in mortgage banking law. “Under UBPA, a fraudulent act can be anything likely to deceive, whether intended or not.
“So if one of your customers is confused by something you do, it can be fraudulent and you can be sued under UBPA.”
The act’s strictures against unfair business practices are even more hazardous, Sturgeon-Garcia says.
“Your business practice can be completely lawful and still be deemed unfair if it doesn’t pass the smell test in front of a jury,” he says. “And the fact that what you do is common practice in your industry doesn’t make it fair. It just means that whoever sues you has more defendants to go after.”
Insurers sometimes do cover businesses sued for fraud under the UBPA, depending on the wording of their general liability policies, Sturgeon-Garcia adds. They deny claims where they see common-law, or intentional, fraud on the grounds that insurance doesn’t cover intentional wrongdoing.
Conversely, Sturgeon-Garcia adds, they may cover businesses accused only of unfair practices under the UBPA, as distinct from fraud, for two reasons:
* Insurers run the risk of being accused of dealing in bad faith with their customers if they deny such claims, and
* The general rule in insurance case law is that you have coverage unless your policy specifically excludes it.
But even this is not certain, he adds. Many insurers offer a defense with the proviso that, should you be found guilty, you foot the bill after all. Some take the position that their coverage does not apply to UBPA litigation at all unless the policyholder specifically seeks the coverage and pays a premium reflecting the additional risk.
In the best of all possible worlds you might expect the Legislature to come to your rescue. In fact, however, the Legislature has turned aside repeated attempts to clarify the law on the grounds that it is the law’s very vagueness that gives it teeth, Sturgeon-Garcia says. After all, the unscrupulous are inventive and find ways to circumvent new strictures in the law just as rapidly as the Legislature specifies them. Better, therefore, to enlist ordinary citizens in policing the inventive business practices of the unscrupulous, even if in doing so they occasionally ensnare the upright, too.
The California Supreme Court has two cases under review attacking the vagaries of the act, but business owners can’t assume that the court will help, either, Sturgeon-Garcia says, given the law’s age and the good that it can do.
As a consequence the business owner operates in a great deal of uncertainty, and the best strategy is to steer clear of anything remotely questionable, he says, and then hope for the best.
“You have to keep your business practices clean and straightforward,” he says. “The courts leave it to juries as the ultimate finders of fact to decide whether a given business practice is unfair, and juries ask: Does this pass the smell test? Does it feel wrong?
“You have to step back and ask yourself the same questions when you examine your business practices or implement new ones,” Sturgeon-Garcia says. “If you’re in business, you take risks, and when you have to abide by a vague law, it gets even tougher.
“But you don’t want to get sued under the UBPA, because that gets very ugly.”
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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
