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California Court of Appeals Approves Government’s Use of Private Continge Fee Attorneys to Seek Civil Sanctions in Unfair Competition Cases – Class Actions

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California Unfair Competition Act, Cal. Bus. & Section 17200 of the Professional Code. and following. (“UCL”), already gives government officials broad power to seek civil penalties from any company that engages in illegal, deceptive or even “unfair” activity. A recent California Court of Appeal decision encourages corporate lawsuits against UCL penalties by expressly allowing government officials to hire contingency-fee private attorneys to pursue such claims. ex rel. City of San Diego v Experian Data Corp., No. G060360, 2022 WL 1222870 (Cal. Ct. App. 4th Dist., Div. 3, April 26, 2022). And because the California Supreme Court decision in Abbott Laboratories v. Superior Court, 9 Cal. 5th 642 (2020), allows even small government agencies to seek relief based on statewide activity, there is a risk of increased litigation in the most unexpected corners of the state .

Experian involved a claim by the San Diego City Attorney that the defendant, a credit bureau, granted a hacker access to data belonging to approximately 400,000 California residents. According to the government, Experian was liable under the UCL to penalties of up to $2,500 per resident (plus enhanced penalties for the elderly and disabled) for failing to provide adequate notice of the data breach to affected residents. To pursue the claim, the city attorney hired a private class action company that was concurrently pursuing private claims against Experian in a class action case, and agreed to pay the private company a percentage of the penalties actually recovered.

Experian filed a motion to disqualify the private lawyers on the grounds that the government lacked the power to hire a private lawyer to pursue UCL’s penalty claims. Among other things, Experian also argued that a private lawyer could not be trusted to exercise governmental power in a neutral and impartial manner. Experian also argued that because UCL itself stipulates that penalties “will be paid to the treasurer” of the government body pursuing the claim (to see Cal. Bus. & Teacher. Code § 17206), a contract awarding a portion of the penalties to a contingency-fee private attorney violated the express order of the statute.

The Court of Appeal rejected both arguments. According to the court, as long as the elected municipal prosecutor (or government appointees reporting to him) supervised the work of an outside private lawyer, the principle of neutrality was not violated. The gist of the court’s decision was that the fee agreement reserved exclusive authority for the city attorney to decide whether to settle and for what amount. In addition, the agreement expressly preserved the defendant’s right to communicate directly with the city attorney or other government officials without the presence of outside counsel, in order to protect the defendant’s rights under the first amendment petition. The argument about paying penalties to the treasurer was also rejected, on the grounds that the agreement provided that the funds would first be collected by the treasurer and then paid to private lawyers. Thus, from a technical point of view, the penalties would always be paid to the treasurer; their subsequent distribution to outside counsel did not violate the law, the court said. The court favorably cited the federal authority saying the due process clause of the federal Constitution was not violated when Trinity County, California, hired a private contingency-fee attorney to pursue fine claims from UCL.
Management of American bankers. Co. v. Heryford885 F.3d 629 (9th Cir. 2018).

Unfortunately, the Experian The court did not address the negative incentives created by allowing small government agencies to rely on private counsel to pursue statewide claims. Allowing this gives less populated counties (and their unelected outside attorneys) potentially outsized authority to set statewide policy as to what constitutes “unfair” business conduct through the prosecution. proceedings against UCL.

The California Supreme Court dismissed similar concerns as speculative in its 2020 ruling in Abbott Laboratories, which ruled that any city or county authorized to pursue UCL’s claims can seek penalties based on statewide conduct. 9 Cal. 5th at 658. In this case, the Attorney General participated as amicus curiae and argued:

First, the attorney general suggests that the district attorney’s position would present “conflicts of interest” between local prosecutors’ accountability to statewide victims, to whom they are not politically accountable, and their own incentives to secure a greater share of remedies available to local constituencies. . “The result”, according to the Attorney General, “could be a deterioration in the application of UCL, as local prosecutors compete to be the first to settle a case and obtain sanctions for local use”. Second, “granting statewide enforcement power to local prosecutors would jeopardize California’s ability to credibly lead the way in cases of national or international significance” by compromising the primary role of the Attorney General in enforcing consumer laws. Third, the Attorney General argues that “the widely recognized geographic limits of UCL’s authority of district and city attorneys have formed the basis for decades of interagency cooperation” between state and local attorneys, and that cooperation , which is crucial for intensive investigations and litigation. necessary to pursue UCL’s claims, would be undermined by a rule allowing any district attorney to pursue statewide remedies.

Identifier. at 660 (quoting Attorney General friend brief).

The California Supreme Court dismissed these concerns as merely “abstract.” Identifier. More importantly, the Abbott Laboratories The ruling noted that because the Legislature “chose to create a decentralized enforcement model in which a district attorney has the power to obtain statewide relief,” it would be up to the Legislature. to respond to any abuse that occurs in the future.
Identifier. at 661. Additionally, the California Supreme Court has stated that the Attorney General retains the authority to intervene in a particular case if it appears that a local government is pursuing the case abusively or otherwise in a manner that undermines public policy objectives, and the Attorney General could even seek the reversal of a wrongfully obtained judgment.
Identifier. at 662-63.

Now, with clear appellate authority in California approving the use of contingency-fee private attorneys, concerns are seen as merely “abstract” in Abbott Laboratories could soon become more concrete. Businesses should therefore be aware of a statewide UCL claim occurring anywhere in the State of California from Los Angeles (population 10,000,000) to Alpine County (population 1 120). This issue clearly merits further consideration by the California Supreme Court or legislative reform.

We would be happy to discuss these developments with you at any time.

Leveraging the strength and national reputation of our litigation and regulatory team, Stroock has decades of experience responding to investigations, as well as monitoring and resolving issues raised by state attorneys general, district attorneys and regulators. Additionally, we have developed strong relationships with the most active attorneys general and other law enforcement authorities in the country, including those in California, New York, Massachusetts, Illinois, from Pennsylvania and Washington. We have successfully resolved hundreds of cases before judges, juries, and appellate courts across the country and before the Department of Justice (DOJ), Consumer Financial Protection Bureau (CFPB), Federal Communications Commission ( FCC), the Financial Industry Regulatory Authority (FINRA) and the Public Company Accounting Oversight Board (PCAOB).

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