Some Thoughts on KOREA SUPPLY — Monetary Remedies Under Section 17200

4.15.2003

On March 3, 2003, the Supreme Court of California issued its opinion in a closely watched case involving California's Unfair Competition Law ("UCL"), California Business & Professions Code section 17200, et seq. The case is Korea Supply Company v. Lockheed Martin Corporation, 29 Cal. 4th 1134 (2003). In Korea Supply, the Court held that the UCL does not authorize disgorgement of profits in an action brought by an individual plaintiff where the profits "are neither money taken from a plaintiff nor funds in which the plaintiff has an ownership interest." This summary provides a preliminary analysis of the Korea Supply opinion and suggests some ways in which the decision may impact UCL litigation.

The UCL consists of Business & Professions Code sections 17200-17209. As defined by section 17200, unfair competition includes "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Section 17203 empowers courts to enjoin unfair competition and to "make such orders . . . as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition." Section 17203 authorizes equitable relief, including injunctive relief and restitution, but not damages. See., e.g., Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1255 (1992) ("damages are not available under Section 17203"). Pinpointing the dividing line between restitution (authorized under the UCL) and damages not authorized under the UCL) has been a contentious and challenging issue in UCL litigation.

Specifying the parameters of who may enforce the UCL on behalf of "the general public" has also engendered significant debate. Under section 17204, UCL actions may be brought by certain public officials, including the Attorney General and any district attorney, or by "any person acting for the interest of itself, its members or the general public." The latter form of UCL actions are commonly known as "private attorney general" or "representative" actions. These private attorney general UCL actions brought on behalf of the general public need not satisfy all the requirements for certifying class actions, including typicality, commonality and adequacy of representation. Indeed, courts have held that a private attorney general plaintiff need not demonstrate any injury to itself (or even any contact with the defendant) in order to prosecute a UCL action "in the interest of the general public." This absence of any required connection between a UCL plaintiff and the alleged UCL wrong has made private attorney general actions a convenient vehicle for the plaintiff bar. In Kraus v. Trinity Management Services, Inc., et al., 23 Cal. 4th 116 (2000), the Supreme Court of California noted that a court could decline to allow a UCL case to proceed as a representative action if the action "is not one brought by a competent plaintiff for the benefit of injured parties." Id. at 138. However, California courts have not yet explained the meaning of "competent plaintiff" or "injured parties" in this context.

In a pair of opinions issued June 5, 2002, the Supreme Court provided guidance regarding the contours of restitution under the UCL. Those cases are Kraus and Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000). In Kraus, the Court defined restitution as the return of money or property "obtained through an unfair business practice to those persons in interest who had an ownership interest in the property or those claiming through that person." Kraus, 23 Cal. 4th at 126-27. The Court in Kraus held that disgorgement of unfairly obtained profits into a fluid recovery fund (i.e., a fund of money which can be distributed to people or causes that are not necessarily those who were harmed by the practice) is not an available remedy in a representative action under the UCL. Id. at 137. In Cortez, the Court reiterated that fluid recovery is not authorized in a UCL action that is not certified as a class action, Cortez, 23 Cal. 4th at 172, and held that unpaid overtime wages may be subject to restitution under the UCL because "earned wages that are due and payable . . . are as much the property of the employee as is property a person surrenders through an unfair business practice," id. at 178.

Defendants have asserted that representative actions under the UCL raise due process concerns, both for defendants and absent putative plaintiffs (i.e., non-litigating members of the public). Such plaintiffs may be deprived of their due process rights because there is no assurance that the representative plaintiff will adequately prosecute their claims. Accordingly, these plaintiffs cannot be bound by a judgment in which they took no part. Courts have said that representative actions under the UCL do not provide defendants with protection against successive suits brought by other members of the public—regardless of whether the defendants prevail in the initial action.

Many UCL litigation observers hoped that the Supreme Court's decision in Korea Supply would provide clarification on at least some of these issues—who can obtain restitution under the UCL; and the meaning of restitution and its relationship to disgorgement.

The Supreme Court's Opinion in Korea Supply
The plaintiff in Korea Supply, Korea Supply Company ("KSC"), represented a supplier of military equipment in negotiations with the Republic of Korea for a contract to sell synthetic aperture radar systems to the Korean military. The contract was awarded to a competitor (Lockheed), and KSC lost the opportunity to earn a commission of more than $30 million. KSC claimed that although its client's bid was lower and its equipment superior, it was not awarded the contract because the competitor's agent had offered bribes and sexual favors to Korean officials. KSC brought suit against the competitor (and the agent), asserting claims for violation of the UCL and interference with prospective economic advantage.

The trial court sustained Lockheed's demurrer to the complaint, dismissing the case without leave to amend. The Court of Appeal reversed the trial court's judgment in full, finding that KSC had sufficiently stated causes of action under the UCL and for intentional interference. The Supreme Court granted review on both issues, although this paper addresses only the UCL. (The Court found that the plaintiffs had sufficiently stated a claim for intentional interference, and affirmed the Court of Appeal on that issue.)

The main issue before the Court regarding the UCL claim was whether the UCL authorizes disgorgement of profits earned as a result of an unfair business practice, "regardless of whether those profits represent money taken directly from persons who were victims of the unfair practice." Korea Supply, 29 Cal. 4th at 1145 (quoting Kraus, 23 Cal. 4th at 127). The Court noted that in Kraus it had held "that disgorgement of unfairly obtained profits into a fluid recovery fund is not an available remedy in a representative action brought under the UCL." Korea Supply, 29 Cal. 4th at 1144.

The Court in Korea Supply reiterated its statement in Kraus that disgorgement is a broader remedy than restitution, which "may include a restitutionary element, but is not so limited." Id. at 1145 (quoting Kraus, 23 Cal. 4th at 127). Thus, as the Court had explained in Kraus, "disgorgement may compel a defendant to surrender all money obtained through an unfair business practice even though not all is to be restored to the persons from whom it was obtained," and "regardless of whether those profits represent money taken directly from persons who were victims of the unfair practice." Korea Supply, 29 Cal. 4th at 1145 (quoting Kraus, 23 Cal. 4th at 127). However, as the Court held in Kraus, "although restitution was an available remedy in UCL actions, a plaintiff in a representative action under the UCL could not recover disgorgement in the broader, nonrestitutionary sense, into a fluid recovery fund." Korea Supply, 29 Cal. 4th at 1145 (citing Kraus, 23 Cal. 4th at 137).

This is where the Court of Appeal in Korea Supply had gotten it wrong—by confusing the Supreme Court's definition of disgorgement in Kraus with approval of disgorgement beyond restitution as a remedy under the UCL. As the Supreme Court explained in Korea Supply:

[T]his court was not approving of disgorgement as a remedy under the UCL. To the contrary, we held in Kraus that while restitution was an available remedy under the UCL, disgorgement of money obtained through an unfair business practice is an available remedy in a representative action only to the extent that it constitutes restitution. We reaffirm this holding here in the context of an individual action.

Id. at 1145 (emphasis added). Thus, the Court applied its holding in Kraus that nonrestitutionary disgorgement is not authorized in representative actions to Korea Supply's individual action. The Court in Korea Supply also clarified that its holding in Kraus—that the UCL precludes disgorgement into a fluid recovery fund—was meant to apply more generally to preclude nonrestitutionary disgorgement in all representative actions under the UCL.

According to the Court in Korea Supply, an individual suing under the UCL "may recover profits unfairly obtained to the extent that these profits represent monies given to the defendant or benefits in which the plaintiff has an ownership interest." Korea Supply, 29 Cal. 4th at 1148. Conversely, an award that does not "replace any money or property that defendants took directly from plaintiff" would not be authorized—because it would not be restitutionary. See id. at 1149. The Court's use of the qualifying adverb "directly" also suggests that the Court might not permit restitution in cases where the plaintiff does not deal directly with the defendant, e.g., where the plaintiff is an indirect purchaser. See also id. at 1152 ("Actual direct victims of unfair competition may obtain restitution as well.").

The Court in Korea Supply further explained why the restitution of earned but unpaid wages approved in Cortez is consistent with this holding. The UCL authorizes a court to restore to the plaintiff "funds in which he or she has an ownership interest." Id. at 1149. This includes money or property in which the plaintiff has a "vested interest," id., and in Cortez, the plaintiffs were held to have a vested interest in their earned but unpaid wages. The Court contrasted that vested interest with the mere "expectancy" that KSC had in receiving a commission. Id. The Court likened its "vested interest" standard to the test for a constructive trust, and stated that "a constructive trust requires ‘money or property identified as belonging in good conscience to the plaintiff [which can] clearly be traced to particular funds or property in the defendant's possession.'" Id. at 1150 (quoting Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204, 213 (2002) (brackets in Korea Supply). Thus, it appears that only property that belonged to the plaintiff, and which can be traced to particular funds in the defendant's possession, can be the subject of restitution under the "vested interest" theory.

The Court also reaffirmed its statement in Cortez that an action under the UCL "is not an all-purpose substitute for a tort or contract action." Korea Supply, 29 Cal. 4th at 1150 (quoting Cortez, 23 Cal. 4th at 173). Rather, the UCL provides "a streamlined procedure for the prevention of ongoing or threatened acts of unfair competition," but it provides only limited remedies. Id. "A court cannot, under the equitable powers of section 17203, award whatever form of monetary relief it believes might deter unfair practices." Id. at 1148. Accordingly, a court cannot use nonrestitutionary disgorgement as a means of deterrence and, as noted above, it may not award damages. Any member of the public may seek to bring suit under the UCL, and such plaintiff need not plead and prove the elements of a tort or breach of contract to state a claim. "Given the UCL's liberal standing requirements and relaxed liability standards," allowing a plaintiff to recover nonrestitutionary disgorgement under the UCL would provide an incentive for plaintiffs to recast claims under traditional tort or contract theories as violations of the UCL— "something the Legislature never intended." Id. at 1151.

In addition, the Court noted, due process concerns could arise if an individual business competitor could recover disgorgement of profits under the UCL:

While restitution is limited to restoring money or property to direct victims of an unfair practice, a potentially unlimited number of individual plaintiffs could recover nonrestitutionary disgorgement. Allowing such a remedy would expose defendants to multiple suits and the risk of duplicative liability without the traditional limitations on standing.

Id. at 1151. Such a scenario would risk unfairness to defendants and to direct victims of an unfair practice. See id. However, as in prior UCL decisions, the Court in Korea Supply declined to express a clear vision, much less a legal rule, on the preclusive effect of prior representative actions.

Looking Ahead
Korea Supply establishes that the UCL does not authorize nonrestitutionary disgorgement in an individual action, and it limits restitution of profits to identifiable victims. The Court in Korea Supply also explained its holding in Kraus that the UCL does not authorize nonrestitutionary disgorgement in representative actions, including disgorgement into a fluid recovery fund. Korea Supply clarifies too that a victim of an unfair business practice must be able to identify money or property taken from it or in which it has a "vested interest" to obtain restitution under the UCL. And the Court indicated that it would not tolerate attempts to use the UCL as a way to obtain what amounts to damages without meeting the normal requirements for pleading and proof in tort and contract actions. Finally, the Court made clear that subjecting defendants to multiple lawsuits for the same alleged unfair conduct raises due process concerns.

Overall, the tone and holdings of the Court's opinion signal the continuation of a shift—begun in Kraus and Cortez—toward a more textually constrained reading of the scope of monetary remedies available under the UCL. The full implications of Korea Supply, and the proper scope of monetary relief under the UCL, will likely remain in controversy, and will almost certainly be the subject of future litigation.

Consumer Litigation Practice
Heller Ehrman has an extensive and successful record representing clients in consumer litigation. During the last twenty years, changes in the legal environment have led to a sustained increase in the number and variety of legal challenges to business practices of our clients. Whether the challenges have related to pricing, fees, advertising, customer disclosures, sales or marketing practices, warranties, product or service definitions, or competitive, contractual or other business practices, Heller Ehrman has successfully resolved issues for its clients in all of these areas.

Heller Ehrman has attorneys who are expert in the rapidly developing law that forms the basis for, and establishes the limits of and defenses to, business practice and consumer claims of all types. For example, the firm has a broad and deep understanding of California's so-called Unfair Competition Law, section 17200 et seq. of the California Business & Professions Code, and has been involved at the trial and appellate levels in interpreting and applying that law. The same can be said for the firm's knowledge of and experience with other areas of consumer and unfair competition law, including the Lanham Act and various state law consumer, warranty and unfair competition statutory schemes.