Rulings Leave Businesses Exposed to Liability Suits

The California Supreme Court has given businesses of all sizes ambiguous news in two little-noticed rulings this summer.

The court limited the reach of Section 17200 of the California Business and Professions Code, commonly known at the Unfair Business Practices Act, in one direction but extended it in two others.

The rulings, on largely technical grounds, leave the essential ambiguities of the UBPA intact. If your business deals directly with the public, you remain exposed to the threat of expensive litigation under the UBPA--losses that may or may not be covered under your liability insurance.

Enacted more than a century ago, the UBPA gives ordinary people the right to sue any business on behalf of the public to halt unlawful, fraudulent or unfair business practices--a good idea in and of itself and in practice often a powerful tool to keep the unscrupulous from preying on the innocent.

But because the act does not define “fraudulent” or “unfair,” it makes businesses liable for acts that don’t pass the smell test in court. It subjects businesses to substantial claims for acts perfectly legal but suspicious--maybe even just confusing--in the eyes of a jury.

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Liability insurers do or do not cover businesses sued for fraud under the UBPA depending on the nature of the claim and the exact wording of their coverages. They deny claims where they see intentional fraud on the grounds that insurance can’t cover you against intentional wrongdoing. They may, however, cover claims alleging unfair business practices, as distinct from fraud, for two reasons: First, if they deny such claims they run the risk that a policyholder will sue them for bad faith, and second, the general rule in insurance case law is that the policyholder gets the benefit of the doubt unless the insurance policy denies coverage for specific events.

In its rulings this summer the state Supreme Court did limit the reach of UBPA litigation by outlawing the “fluid recovery fund”--essentially a means by which the plaintiff’s bar in recent years turned the UBPA into a weapon as effective as a class-action lawsuit, and often just as costly to a business on the losing side of UBPA litigation.

In the past, losing businesses had to contribute any gains obtained by wrongful practices to a fund to benefit consumers who may not have been directly harmed by the action. No one, however, had any incentive to identify such consumers, so the money in many fluid recovery funds often went to advocacy groups friendly to the plaintiff’s bar.

As you may surmise, the fluid recovery funds greatly expanded the potential liability for any business sued under the UBPA--and the fact that the court overturned them, requiring that the errant business must pay restitution only to persons directly harmed by the action, was good news.

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At the same time, however, the court added two new wrinkles to the UBPA: It saddled the errant business with the task of identifying customers who may have been harmed by its practices, and it gave plaintiffs who feel themselves wronged by businesses up to four years to sue. In the past the courts had allowed plaintiffs as little as one year to sue, depending on technicalities involving other sections of California business law.

“There was good and bad in these rulings,” said Barbara Wheeler, vice president for legislation of the Civil Justice Assn. of California, a Sacramento advocacy and lobbying group. “The good is that plaintiffs can no longer use the fluid recovery funds. If I sue the ABC Manufacturing Corp. for unfair business practices, I can recover restitution only for myself and for anybody I can show to have been actually injured. I can’t get restitution if I can’t demonstrate injury.

“But as the plaintiff I can force the defense--namely the business--to identify all the people who might have been affected. In essence, this makes business responsible for digging up the injured parties, and it means that if you keep good records, you’re in trouble if you get sued under UBPA.”

The lesson is clear: Given the threat of UBPA litigation, any business dealing directly with the public should make doubly sure that its practices not even appear to be unfair. Everything must pass the smell test--and you should check with your insurance broker to see just what your liability insurance does and does not cover.

The cases in question were Kraus vs. Trinity Management Services and Cortez vs. Purolator.

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.