CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge¹

I. INTRODUCTION

This Article provides a selection of litigation developments that may be of particular importance to members of the Antitrust and Unfair Competition Section, presenting cases that reflect recent California substantive law developments related to the Cartwright Act, the Unfair Practices Act, covenants not to compete, the Consumer Legal Remedies Act, the Unfair Competition Law, and false advertising law. Please consult other references for all of the developments that may be important to your practice.

II. CARTWRIGHT ACT²

A. California Supreme Court: "Reverse Payment" Patent Settlements Are Not Immune From Traditional Cartwright Act Scrutiny

1. In re Cipro Cases I & II³

On May 7, 2015, the California Supreme Court delivered its much-anticipated opinion in the In re Cipro Cases I & II Cartwright Act antitrust litigation, an important part of the high-stakes national debate over "reverse payment" patent settlements that has raised fundamental questions about the interaction between patent rights and antitrust principles.

The lengthy coordinated class action matter in In re Cipro Cases I & II involved plaintiffs’ antitrust claims concerning ciprofloxafin (branded as "Cipro"), an antibiotic patented by Bayer Corporation. Plaintiffs alleged that Bayer and several generic drug manufacturers violated the Cartwright Act, the Unfair Competition Law, and common law monopolization principles by entering into a patent infringement settlement in which Bayer agreed to make payments (ultimately totaling $398 million) in exchange for the generic manufacturers’ agreement not to manufacture the generic version of Cipro until the patent expired—an arrangement characterized by the plaintiffs as "pay-for-delay" monopolization and by the defendants as legitimate "reverse payments" to settle bona fide patent litigation.

The trial court granted defendants’ summary judgment motion, ruling that the settlements were neither illegal per se under the Cartwright Act nor unreasonable under the rule of reason, and finding no triable issue as to whether the agreements produced "anticompetitive effects beyond the exclusionary scope of the patent itself."

[Page 20]

The Fourth District affirmed summary judgment for defendants, adopting defendants’ proposed legal standard derived from In re Tamoxifen Citrate Antitrust Litigation,⁴ where the Second Circuit held that "in the absence of any plausible allegation that a patent infringement lawsuit [is] baseless or that the Settlement Agreement otherwise restrained competition beyond the scope of the . . . patent," the plaintiff’s antitrust complaint fails to state a claim on which relief can be granted.⁵

The Fourth District rejected a per se analysis, and under the rule of reason found the agreements to be a "natural byproduct of patent litigation" that was consistent with federal and state policies favoring dispute resolution. The court summarized its version of the Tamoxifen rule: "Unless a patent was procured by fraud, or a suit for its enforcement was objectively baseless, a settlement of the enforcement suit does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent."⁶

The California Supreme Court granted plaintiffs’ petition for review on February 15, 2012,⁷ and extensive amici participation followed, both before and after the United States Supreme Court’s opinion in F.T.C. v. Actavis, Inc.,⁸ which held that the FTC’s Section 5 unfair competition allegations in the AndroGel reverse payment matter were not forestalled by federal patent law principles.

In November 2013, plaintiffs and defendant Bayer reached a settlement of Bayer’s portion of the matter, agreeing to a settlement pool of $74 million.⁹ The Supreme Court then dismissed the settling Bayer defendants from the pending review.¹⁰

On May 7, 2015, the California Supreme Court issued its unanimous opinion, authored by Justice Werdegar, clarifying the applicability of the Cartwright Act to such agreements and the legal standard to be applied in this analysis. The Court summarized its conclusion as follows:

Purchasing freedom from the possibility of competition, whether done by a patentee or anyone else, is illegal. An agreement to exchange consideration for elimination of any portion of the period of competition that would have been expected had a patent been litigated is a violation of the Cartwright Act.¹¹

The Court also provided an instructive review of the contemporary state of Cartwright Act analysis as a whole, including the interactions between federal and state antitrust laws and between per se, rule of reason, and "quick look" forms of antitrust analysis.

[Page 21]

Construction of the Cartwright Act and Preemption Issues:

1. Because the Sherman Act and the Cartwright Act have different origins, "[i]nterpretations of federal antitrust law are at most instructive, not conclusive, when construing the Cartwright Act."¹²
2. A presumption against federal preemption applies to the Cartwright Act because "[s]tate antitrust law ordinarily is fully compatible with federal law . . . and federal law is intended only ‘to supplement, not displace, state antitrust remedies.’" The "Cartwright Act is broader in range and deeper in reach than the Sherman Act," but "this greater domain has never been thought to pose supremacy clause problems. To the contrary, in light of the established state role, a presumption against preemption applies," and state law is not preempted here.¹³
3. Although patent law is federal, patent law and its presumptions do not preempt California’s Cartwright Act framework for analyzing the anticompetitive effects of reverse payment patent settlements: "[T]hat a settlement resolves a patent dispute does not immunize the agreement from antitrust attack" under the Cartwright Act.¹⁴

Forms of Cartwright Act Analysis:

1. Under the basic principle that "only unreasonable restraints of trade are prohibited," the United States and California Supreme Courts apply the rule of reason to antitrust allegations, which rule provides for an antitrust "inquiry limited to whether the challenged conduct promotes or suppresses competition" on balance.¹⁵
2. Both Supreme Courts also recognize "categories of agreements or practices that can be said to always lack redeeming value and thus qualify as per se illegal."¹⁶
3. The Court noted that modern federal and state antitrust analysis is better viewed as a "continuum" rather than a series of discrete tests. Thus, current antitrust analysis also employs a "quick look" approach with aspects of rule of reason and per se analyses. In the "quick look" process, when anticompetitive effects are readily apparent even to an untrained observer, then the "defendant may be asked to come forward with procompetitive justifications for a challenged restraint without the plaintiff having to introduce elaborate market analysis first."¹⁷
4. Further, as a proper function of contemporary rule of reason analysis, California courts "may devise rules for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints."¹⁸

[Page 22]

Agreements to Monopolize and to Divide Markets:

1. "[A]greements to establish or maintain a monopoly are restraints of trade made unlawful by the Cartwright Act."¹⁹
2. Under the Cartwright Act, "businesses may not engage in a horizontal allocation of markets with would-be competitors dividing up territories or customers."²⁰

Proper Cartwright Act Antitrust Analysis of "Reverse Payment" Patent Settlements:

1. "Reverse payment" settlements that agree to treat a patent as valid are not immune from federal or state antitrust scrutiny. The United States Supreme Court decision in Actavis makes clear that "for antitrust purposes patents are no longer to be treated as presumptively ironclad," thus it was error for the lower courts to apply the "scope of the patent" test that is based on that presumption.²¹
2. Instead, "[u]nder the Cartwright Act, the baseline for measuring the procompetitive or anticompetitive effects of a settlement enforcing a challenged patent is not the patent’s [ordinary] full life, but its expected life had enforcement been sought."²²
3. The Supreme Court also provided detailed instruction on the allocation of the burdens of proof and persuasion in such structured rule of reason inquiries.²³

Disposition:

Because "the rule of reason these courts applied is not the structured rule of reason for reverse payment patent settlements we articulate today to effectuate the purposes of the Cartwright Act," the trial and appellate court analyses were in error, necessitating reversal and remand for further proceedings consistent with this opinion.²⁴

B. Major League Baseball’s Antitrust Exemption Also Bars Cartwright Act and UCL Claims

1. City of San Jose v. Office of the Commissioner of Baseball²⁵

The Ninth Circuit has held that the City of San Jose’s claims under the Sherman Act, the Cartwright Act, and the Unfair Competition Law ("UCL") against Major League Baseball for blocking the Oakland A’s proposed relocation to San Jose were barred by baseball’s longstanding exemption from the antitrust laws under Flood v. Kuhn²⁶ and its predecessors.

After holding that professional baseball’s anomalous Sherman Act exemption continues to apply to franchise relocation disputes, the Ninth Circuit further held that "San Jose’s state antitrust claims necessarily fall with its federal claims," because "[b]aseball is an exception to the normal rule that ‘federal antitrust laws supplement, not displace, state antitrust remedies.’"²⁷ This issue had been addressed in Flood, where the Supreme Court affirmed dismissal of the plaintiff’s state law claims because "state antitrust regulation would conflict with federal policy and because national uniformity is required in any regulation of baseball."²⁸

[Page 23]

Citing Chavez v. Whirlpool Corp.,²⁹ the court further concluded that San Jose’s allegations under the UCL must also fail because "[i]f the same conduct is alleged to be both an antitrust violation and an ‘unfair’ business act or practice for the same reason . . . the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not ‘unfair’ toward consumers." An independent claim under California’s UCL is therefore barred so long as MLB’s activities are lawful under the antitrust laws."³⁰

C. Cartwright Act and UCL Claims Fail in Hospital Employment Termination Suit

1. Decambre v. Rady Children’s Hospital—San Diego³¹

Plaintiff physician Decambre, following her dismissal by defendant Children’s Hospital, sued the hospital alleging retaliation, racial discrimination, and wrongful termination, as well as violations of the Cartwright Act and the UCL. Defendant responded with a motion to strike under California’s anti-SLAPP statute and a demurrer to all causes of action, both of which were granted by the trial court. The court of appeal affirmed those portions of the motion to strike and demurrer relating to the trade regulation causes of action.³²

Where legal claims address activities protected by California’s anti-SLAPP statute, such as the hospital peer-review process here, plaintiffs must demonstrate their likelihood of prevailing on the merits of those claims in order to defeat an anti-SLAPP motion to strike. Plaintiff Decambre was unable to make such a showing for her Cartwright Act and UCL claims.

Plaintiff would have had to demonstrate not injury to herself as a competitor but injury to competition in the healthcare market at issue. In the context of hospital staffing decisions, successful allegations of the requisite injury to competition might include: "negative impacts upon overall prices, quantity or quality of medical services resulting from the plaintiff’s absence as an available provider at the facility."³³ Plaintiff presented no such evidence, and the court granted the motion to strike and the demurrer to the Cartwright Act and UCL claims.

[Page 24]

D. Other Cartwright Act Developments

1. In re Capacitors Antitrust Litigation³⁴

Indirect purchasers of capacitors sufficiently alleged the injury-in-fact required to establish Article III standing to bring an antitrust conspiracy suit against defendant capacitor manufacturers under the Sherman Act, the Cartwright Act, and the UCL.

2. Feitelson v. Google, Inc.³⁵

"Plaintiffs cannot state claims under the Clayton and Cartwright Acts because the subject [software applications] are not tangible commodities (nor do they cover tangible commodities) within the scope of the Clayton and Cartwright Acts."³⁶

III. UNFAIR PRACTICES ACT³⁷

A. Tort, UPA, and UCL Challenge by Second-Lowest Bidder for Public Works Contract Attracts Supreme Court Review

1. Roy Allan Slurry Seal, Inc., v. American Asphalt South, Inc.³⁸

Plaintiff, the unsuccessful second-lowest bidder on public works roadway contracts, sued the winning bidder for predatory pricing and unfair economic advantage under the Unfair Practices Act ("UPA"), the UCL, and the tort of intentional interference with prospective economic advantage. Plaintiff claimed that the winning bid was predicated on violations of California’s prevailing-wage laws for work on public contracts. Defendant’s demurrer to all three causes of action was granted.

The Second Appellate District restored the plaintiff’s cause of action for intentional interference with prospective economic advantage. However the court found claims of defendant’s lowered costs alone to be insufficient to establish the requisite elements of a UPA sales-below-cost case and also insufficient to demonstrate the irreparable injury needed to secure a UCL injunction. "The winning bidder’s lower wages lowered its cost, and lowering one’s cost [does not alone] constitute predatory pricing."³⁹ Thus the trial court properly granted the defendant’s demurrer to the UPA predatory pricing allegation.

Similarly, the plaintiff failed to submit sufficient evidence of irreparable harm it would suffer if the winning bidder were not enjoined, as is required for bidders to be awarded injunctive relief under the UCL, so the UCL injunction demurrer was also sustained. The Supreme Court granted review on June 10, vacating this opinion, and suggesting the Court’s interest in the tort theory (the subject of a vigorous dissent) and/or the UCL and UPA issues here.

[Page 25]

B. First District Rejects UPA and UCL Claims Alleging Below-Cost Gas Sales by Competitor

1. Dixon Gas Club, LLC v. Safeway, Inc⁴⁰

Plaintiff Dixon Gas Club, a retail gas station in Northern California, filed suit under the UPA and the UCL, claiming that its competitor Safeway had unlawfully and unfairly engaged in below-cost sales and "loss leader" tactics in the sale of fuel at Safeway’s gas station near to plaintiff’s station. In an unpublished opinion, the First Appellate District affirmed the trial court’s dismissal of those claims.

Plaintiff could not establish the requisite UPA sales-below-cost purpose, but argued that such purpose was not required to apply the UCL’s "unfairness" doctrine to these practices. However, the First District concluded: "The mere fact that a price is set below cost and thereby injures one or more competitors does not establish unfairness under the UCL. Rather, the plaintiff must prove that the pricing is set at predatory levels, such that the competition suffers antitrust injury, not just injury from robust, yet otherwise fair, competition" citing the tethering principles of Cel-Tech Communications v. Los Angeles Cellular Telephone Co.⁴¹ Since plaintiff had presented insufficient evidence of harm to competition rather than its own interests, the UCL unfairness claim must fail, as had the UPA sales-below-cost claim.

IV. COVENANTS NOT TO COMPETE⁴²

A. Ninth Circuit: California’s Rule on Non-Competition Covenants May Include Settlements

1. Golden v. Calfornia Emergency Physicians Medical Group⁴³

A California emergency room doctor appealed a United States District Court order enforcing a settlement agreement between the doctor and the defendant medical group, which agreement contained a provision barring the plaintiff doctor from employment by a consortium that manages a large number of medical facilities in California.

The Ninth Circuit concluded that while "[t]he courts of California have not clearly indicated the boundaries of section 16600’s stark prohibition" they have "nevertheless intimated that they extend to a considerable breadth. At the very least, we have no reason to believe that the State has drawn section 16600 simply to prohibit ‘covenants not to compete’ and not also other contractual restraints on professional practice."⁴⁴ The Ninth Circuit remanded for consideration of whether the agreement constituted "a restraint of substantial character to Dr. Golden’s practice" and a potential violation of California’s non-competition principle.⁴⁵

[Page 26]

V. CONSUMER LEGAL REMEDIES ACT⁴⁶

A. Sixth District Restores UCL and CLRA Claims for Laptop Computer Failures Occurring Post-Warranty; Nationwide Class Certified

1. Rutledge v. Hewlett-Packard Co.⁴⁷

Plaintiffs, various computer buyers suffering failures of their Hewlett-Packard ("HP") computer inverters and screens occurring outside the warranty term, sued defendant HP under the UCL and the Consumer Legal Remedies Act ("CLRA") and other theories, and sought to certify a nationwide class for these purposes. Two separate trial courts ultimately rejected certain plaintiffs’ UCL and CLRA claims and separately certified a class but denied nationwide certification. Appeals from both sides followed.

The Sixth Appellate District restored the previously-rejected UCL and CLRA claims: "We find [plaintiffs’] evidence creates a triable issue of fact as to whether the . . . inverters were defective and whether HP had knowledge of the defects."⁴⁸ Such knowledge would implicate the exception to the rule in Daugherty v. American Honda Motor Co.⁴⁹ that manufacturers are generally not liable, absent affirmative misrepresentations, for failures to disclose such post-warranty defects unless the defects involve safety issues.

Further, the appellate court found sufficient California contacts and operant facts to warrant a nationwide class: "We find the trial court’s order denying nationwide class certification must be reversed. The record shows that California had sufficient contacts with the claims such that California has an interest in applying its laws to nonresident plaintiffs satisfying constitutional principles."⁵⁰

B. UCL and CLRA Claims Regarding "Waterproof" High-SPF Sunscreen Are Preempted by Federal Food, Drug, and Cosmetic Act

1. Eckler v. Neutrogena Corp.⁵¹

Plaintiffs Eckler and Engel filed separate lawsuits (later coordinated) against sunscreen manufacturer Neutrogena based on events in 2003 to 2006. Both plaintiffs claimed Neutrogena falsely represented its sunscreen products as "waterproof" and "sweatproof," and plaintiff Eckler further alleged that product labels for SPF 50+ sunscreen omitted the material fact that sunscreens rated greater than SPF 50 offer no more protection than those rated at SPF 50. In 2012 the United States Food and Drug Administration ("FDA") at last promulgated its Final Rule banning use of "waterproof" and "sweatproof," but only after a three-decade regulatory process not finalized at the time of the events.

[Page 27]

Plaintiff Engel contended that "waterproof" and related terms were effectively banned by the FDA’s 1993 "tentative final monograph," but the Second Appellate District found that "he is mistaken" because "the tentative final monograph was not an ‘order,’ as Engel argues, nor was it in any sense final."⁵²

The appellate court concluded:

Engel seeks to declare that product descriptions on sunscreen labels that were, until the FDA’s Final Rule, in compliance with federal law, nevertheless violated California law. He therefore seeks enforcement of a state requirement "that is different from or in addition to, or that is otherwise not identical with" a requirement under the FDCA, and thus, his suit is subject to [the FDA’s] express preemption provision.⁵³

Under the same reasoning, the Second District held Eckler’s SPF 50+ claim to be preempted:

[W]e conclude that Eckler’s action is foreclosed under the doctrine of implied preemption. That the FDA has not issued a final determination on the issue of products with SPF values above 50 is not a reason to permit suits like Eckler’s. It is a reason to allow the federal agency to complete its Congressionally mandated objectives without states imposing a premature patchwork of disparate requirements.⁵⁴

That this process has occupied more than three decades evidently did not alter the court’s conclusion.

C. Misrepresentations of "Six-Month Warranty" Requires Reversal of Judgment for Defendant Car Dealer

1. Jones v. Credit Auto Center, Inc.⁵⁵

Car buyer Jones sued the defendant car dealership and its surety claiming breach of contract under the Song-Beverly Act and deceptive sales practices under the CLRA consisting of alleged misrepresentations that the purchased vehicle "came with a six-month warranty," when in fact the purchase of a $495 service contract was required to obtain the warranty.

The Appellate Division of the Los Angeles Superior Court reversed the trial court’s judgment for defendants as to the Song-Beverly Act and CLRA claims. The CLRA claim merited reversal because there was substantial evidence that the warranty misrepresentations and failure to disclose required preconditions constituted "[r]epresenting that goods or services . . . have characteristics [or] benefits . . . which they do not have," which is unlawful under the CLRA.⁵⁶

[Page 28]

D. Other CLRA Developments

1. Sarun v. Dignity Health⁵⁷

Plaintiff Sarun, an emergency-room patient at defendant’s hospital, sought a class action against the hospital in a suit under the UCL and CLRA alleging deceptive billing practices. The Second District overruled the trial court’s grant of defendant’s demurrer and restored the plaintiff’s complaint, finding that the partially-paid hospital bill was sufficient to establish loss of "money or property" under the UCL, and was also sufficient to establish "any damage" under the CLRA.

VI. UNFAIR COMPETITION LAW⁵⁸

A. Arbitration and Unconscionability Issues in Consumer and Employment Contracts after Concepcion, Sanchez, and Iskanian

The United States Supreme Court’s decision in AT&T Mobility LLC v. Conception⁵⁹ upholding the preemptive effect of the Federal Arbitration Act ("FAA")⁶⁰ on inconsistent state principles, erected a formidable barrier to UCL or False Advertising Law ("FAL") actions challenging the unfair business practices or employment policies of defendants using contracts with mandatory arbitration clauses.

Since Concepcion, the California Supreme Court has acknowledged, in cases such as Iskanian⁶¹ the broad preemptive scope of the FAA and has abrogated prior California doctrines limiting the reach of mandatory arbitration. But the relationship between arbitration provisions and unconscionability principles remains the subject of extensive litigation.

Significantly, in the wake of Iskanian and the Supreme Court’s new Sanchez⁶² opinion, plaintiffs are now adopting new legal theories and mechanisms—including the Labor Code Private Attorney General Act—to reach beyond arbitration clauses and bring disputes over consumer contracts and employment practices before trial courts instead of arbitration panels.

The following "scorecard" first presents the California Supreme Court’s two major statements on arbitration and unconscionability principles in the past eighteen months, and then surveys some of the more prominent UCL appellate opinions applying those principles to a variety of factual situations in the post-Concepcion legal environment.

[Page 29]

1. California Supreme Court Upholds Auto Contract Arbitration Provisions But Affirms Continuing Applicability of Unconscionability to California Contracts

Sanchez v. Valencia Holding Co.⁶³

On August 3, 2015, the California Supreme Court delivered its long-awaited opinion in Sanchez, upholding the arbitration clause in the industry-standard auto purchase/sale contract but emphasizing that unconscionability principles remain applicable to all California contracts and must be applied to each set of facts on a case-by-case basis.

In Sanchez, which became the lead case on this issue statewide, the Second District Court of Appeal had held that the class-action waiver and arbitration clause in the industry-standard auto contract were unconscionable under general California contract principles, notwithstanding the Federal Arbitration Act and Concepcion.⁶⁴

The California Supreme Court granted review in March 2012 and stayed at least ten Concepcion-related appellate cases pending its decision, many of which cases involved the claimed unconscionability of the arbitration and class-action waiver provisions in the auto purchase/sales contract used by most California car dealerships.

After three years of consideration, the Court reversed the Second District and upheld the enforceability of the class-action waiver and mandatory arbitration provisions in that contract, but not before reaffirming the general applicability of unconscionability principles to California contracts: "[W]e hold that Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provisions of the arbitration agreement. Applying those rules, we agree withValencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable. Accordingly, we reverse the judgment below."⁶⁵

However, applying the reasoning of its prior decision in Sonic-Calabasas A, Inc. v. Moreno,⁶⁶ the Supreme Court reaffirmed that general unconscionability principles continue to apply to all California contracts, including both arbitration and non-arbitration provisions. The Court had held in Sonic-Calabasas A, Inc. that California courts should continue to enforce unconscionability rules after Concepcion so long as those rules do not interfere with the "fundamental attributes of arbitration"⁶⁷

Thus, even after Concepcion, state principles of unconscionability apply to arbitration and non-arbitration contract terms, although such state unconscionability rules "must not facially discriminate against arbitration and must be enforced evenhandedly . . . and must not disfavor arbitration as applied by imposing procedural requirements that interfere with fundamental attributes of arbitration.’"⁶⁸

[Page 30]

The Court held that Concepcion prohibits the use of unconscionability principles or other state doctrines to prohibit whole categories of arbitration (such as class-action arbitration provisions) or to otherwise interfere, expressly or as applied, with the FAA’s policy promoting arbitration. But while avoiding such categorical prohibitions or interference, our courts still must employ case-by-case factual analysis of any allegations of unconscionability, including both its procedural and substantive elements, in order to determine whether unconscionable contract terms are present.

Applying these principles to each of the arbitration provisions in Sanchez, the Supreme Court reversed the Second District’s finding of unconscionability, concluding that the applicable sliding scale of unconscionability analysis weighed in the dealership’s favor. Notwithstanding the adhesion contract context, the various substantive terms of the arbitration provisions were not so unfair or one-sided as to render the agreement unconscionable.⁶⁹

Aftermath of Sanchez

The immediate outcome of the Sanchez opinion is a substantial setback for California car buyers, including those in several other pending appeals, and consumer advocates who believe the form-contract provisions imposed here are inherently one-sided and oppressive. The Court’s unwillingness to find the required substantive and procedural unconscionability on these facts was a clear victory for auto dealerships and others employing the types of mandatory waivers and arbitration terms found in the standard auto contract.

However, viewed more broadly, the Sanchez opinion may prove to be a split decision for business interests and consumer advocates. The Court’s apparent commitment to the continuing applicability of unconscionability principles, and its willingness to judge each case on its specific facts, together will permit plaintiffs a measure of latitude to challenge certain unfair arbitration terms, so long as the unconscionability principles applied do not discriminate against whole categories of arbitration or unduly interfere with the fundamental attributes of arbitration. The recent First District opinion in Carlson v. Home Team Pest Defense, Inc.,⁷⁰ discussed below, illustrates the opportunities that remain viable for plaintiffs under the principles in Sanchez.

It is unsurprising then that some commentators see signs in opinions such as Iskanian and Sanchez that there is "support within the California Supreme Court for carving out an exception" to the broad sweep of Conception⁷¹ While Concepcion has broadly changed the arbitration landscape in California and challenges to FAA-protected aspects of arbitration will generally fail, these opinions suggest the newly reconstituted California Supreme Court may be willing to push back and test the boundaries of Concepcion.

[Page 31]

2. California Supreme Court: Concepcion Abrogated Gentry But Does Not Bar Labor Code Private Attorney General Act Actions

Iskanian v. CLS Transportation Los Angeles, LLC⁷²

Significantly altering the landscape of labor law rights in California, the Supreme Court held that Concepcion impliedly overruled Gentry v. Superior Court,⁷³ and thus mandatory arbitration provisions must be enforced even when they require arbitration of wage and hour issues protected by California’s labor laws. However, the Court further ruled that an arbitration agreement requiring the employee to give up the right to bring representative actions under the Private Attorney General Act of 2004 ("PAGA")⁷⁴ is against public policy and unenforceable.

The Supreme Court concluded: "[A] state’s refusal to enforce [this arbitration] waiver on grounds of public policy or unconscionability is preempted by the FAA . . . and our holding to the contrary in Gentry . . . has been abrogated by recent United State Supreme Court precedent."⁷⁵ Further, "Concepcion held that the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The Gentry rule runs afoul of this latter principle. We thus conclude in light of Concepcion that the FAA preempts the Gentry rule."⁷⁶

Importantly, the Court distinguished between FAA-protected arbitration requirements in private disputes and attempts to force employees to waive public rights provided by the legislature in PAGA, which permits private plaintiffs to bring "private attorney general" cases enforcing state labor laws. "[T]he rule against PAGA waivers does not frustrate the FAA’s objectives because, as explained below, the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency."⁷⁷

"[T]he FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf [under PAGA]."⁷⁸ Thus, "[w]e conclude that California’s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution."⁷⁹

Aftermath of Iskanian

The holding in Iskanian, carving out PAGA representative actions from the realm of private arbitration governed by the FAA, has given rise to a new wave of plaintiffs’ lawsuits and class actions utilizing this exception in employment and wage-and-hour disputes. Examples, among many others, are Williams v. Superior Court⁸⁰ and Franco v. Arakelian Enterprises, Inc.,⁸¹ both discussed further infra.

[Page 32]

3. Arbitration Clauses Enforced:

Sanchez v. Valencia Holding Co., LLC⁸²

As discussed at VI.A.1. supra.

Iskanian v. CLS Transportation Los Angeles"⁸³

As discussed at VI.A.2. supra.

Khalatian v. Prime Time Shuttle, Inc."⁸⁴

The Second Appellate District held that all claims brought by an airport shuttle bus driver against his employer were subject to arbitration as required by the employment contract. The interstate commerce aspect of the airport services supported clear FAA preemption of any inconsistent California wage-and-hour laws to the contrary. "We find the Federal Arbitration Act . . . applies to the parties’ arbitration agreement, and all of plaintiff’s claims are arbitrable."⁸⁵

4. Arbitration Clauses Rejected:

Carlson v. Home Team Pest Defense, Inc.⁸⁶

Demonstrating that California courts will invalidate some unconscionable arbitration provisions even after Sanchez, the First Appellate District has held that an arbitration provision in a retailer’s employment contract was unconscionable and unenforceable notwithstanding the Federal Arbitration Act and Concepcion. The First District expressly relied on the Supreme Court’s opinion in Sanchez for the proposition that unconscionability principles remain applicable to California contracts and are not ousted entirely by the FAA and Concepcion, but rather must be adjudicated on a case-by-case basis.

Plaintiff Carlson, an office-manager employee at defendant’s Home Team Pest Defense store, filed suit against the defendant for wrongful termination and other causes of action.

The trial court denied the defendant’s motion to compel arbitration, holding that the employment agreement was both procedurally and substantively unconscionable. The court found oppression and surprise in the online process, requiring plaintiff to sign her contract without access to the firm’s dispute policy. The court also found substantive unconscionability because the contract exempted from arbitration those claims most likely to be brought only by the employer against its employees.

[Page 33]

The First District affirmed the trial court’s denial of arbitration: "We agree with the trial court’s conclusions and also reject Home’s contentions that (1) state law unconscionability principles are preempted by the [FAA]; and (2) the trial court abused its discretion by refusing to sever unconscionable provisions from the agreement in this case."⁸⁷

The appellate court agreed that the arbitration agreement was both procedurally and substantively unconscionable and was thus unenforceable, and noted that its conclusion was supported by the Supreme Court’s opinion in Sanchez, which endorsed continued appropriate application of unconscionability principles to California contracts.⁸⁸

The First District noted that under the FAA an agreement to arbitrate is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."⁸⁹ As the Supreme Court acknowledged in Concepcion, this FAA savings clause allows agreements to arbitrate to be invalidated by "generally applicable contract defenses, such as fraud, duress, or unconscionability."⁹⁰

The appellate opinion also cited Sonic-Calabasas A, Inc. v. Moreno⁹¹ for the proposition that California courts may continue to enforce unconscionability rules post-Concepcion as long as they do not interfere with the fundamental attributes of arbitration. And here "[o]ur conclusion that the Agreement is unconscionable and unenforceable against Carlson does not mandate any procedural rules that are inconsistent with the fundamental attributes of arbitration. In fact, our principal concern with the Agreement rests on its failure to hold Home to the same obligation to arbitrate that it holds Carlson."⁹²

5. Arbitration Clauses Limiting PAGA Rights Rejected

Williams v. Superior Court⁹³

Following the principles of Iskanian, supra, the Second Appellate District held that a labor contract term purporting to impose a waiver of the right to bring representative actions under the PAGA is unenforceable. Further, the appellate court held that the plaintiff may of right litigate his entire claim in superior court, rather than be forced to split the claim into an arbitrable individual element and a non-arbitrable representative claim under PAGA.⁹⁴

[Page 34]

Franco v. Arakelian Enterprises, Inc.”⁹⁵

In a case subsequently granted review, the Second District determined that the class-representative waiver in plaintiff’s employment contract was enforceable under the principles of Concepcion and Iskanian. However, the putative waiver of the right to bring representative claims under PAGA was unenforceable, as the latter claims are public representative actions, not private actions subject to FAA preemption. Because the rights asserted in an action under PAGA are those of the state rather than of the plaintiff-employee, the right to prosecute such an action cannot be waived by private agreement.

6. UCL Preemption/Bar Arising From Federal or State Regulatory Schemes

The California and federal courts continue to wrestle with the multi-faceted issue of the applicability of the Unfair Competition Law to specific business practices and contexts where other regulatory schemes are involved. Claims of federal preemption, or preclusion or bar by state regulatory schemes, have recently produced a number of important results.

Holdings of No Preemption of or Bar to UCL Action:

In Williams v. Superior Court,⁹⁶and Franco v. Arakelian Enterprises, Inc.,⁹⁷ the Second District found no Federal Arbitration Act preemption of employee actions brought under the California Private Attorney General Act.⁹⁸

In Pegastaff v. Pacific Gas & Electric Co.,⁹⁹ the First District held that the plaintiff subcontractor’s Superior Court lawsuit over his claims against PG&E and against private contractors would not hinder or interfere with the exercise of the regulatory authority of the California Public Utilities Commission.

In Godfrey v. Oakland Port Services Corp.,¹⁰⁰ port workers sued defendant motor carrier in a wage-and-hour action under the UCL. The trial court entered judgment for the employees after trial and the First District affirmed, holding that the Federal Aviation Administration Authorization Act did not preempt California law governing meal and rest breaks as applied to this employer.

Holdings of Preemption of or Bar to UCL Action:

In Fischer v.Time Warner Cable Inc.,¹⁰¹ cable customers brought a UCL case challenging defendant cable channel’s bundling of certain sports channels into a basic cable package, necessitating an additional $9 per month fee. The Second Appellate District held that the plaintiffs’ UCL challenge to these cable-service bundling practices was preempted by Federal Communications Commission regulations that speciically address and permit such bundling decisions by regulated cable providers.

[Page 35]

Eckler v. Neutrogena Corp.,¹⁰² as discussed at VB.1. supra.

Tamas v. Safeway, Inc.,¹⁰³ as discussed at VII.B infra.

VII. FALSE ADVERTISING LAW¹⁰⁴

A. In re Tobacco Cases II¹⁰⁵

In yet another appeal in the lengthy class-action battle over advertising for "Lights" and "Golds" cigarettes, after remand from the Supreme Court and a bench trial, the Fourth District held: (1) the correct measure of restitution under the UCL for misleadingly labeling cigarettes was the difference between the price paid and the actual value received; (2) UCL injunctive authority is discretionary and the trial court was not required to grant smokers’ requested injunction against labeling of cigarettes as "Lights" or "Golds," in particular since federal law now prohibits such language; and (3) defendant as the prevailing party was entitled to $765,000 in costs as a matter of right.

B. Tamas v. Safeway, Inc.¹⁰⁶

Plaintiff Tamas, a consumer purchaser of Greek yogurt products, sought a class action against the retailer Safeway and its yogurt manufacturer under the UCL and CLRA, alleging violations of the Sherman Food, Drug, and Cosmetic Law by misbranding food containing milk protein concentrate (MPC) as "yogurt" The trial court sustained defendants’ demurrer without leave to amend.

The Fourth District held that the federal FDA regulations in this ield barred a UCL and CLRA action based on a previously-stayed FDA regulatory announcement:

The regulation relied upon by Tamas to preclude the use of MPC in yogurt is one that she admits was stayed by the FDA shortly after it was enacted . . . The glacial pace at which the FDA has moved in attempting to resolve those concerns and redraft a new formal regulation did not . . . operate as a stealth reenactment of the stayed rule.

In sum, "assessing the relative beneits and detriments of allowing MPC to be used as an additive in yogurt is an issue that will have to be decided by the FDA," thus the demurrer was sustained.¹⁰⁷

[Page 36]

VIII. PUBLIC ENFORCEMENT OF UCL, FAL, AND RELATED STATUTES

A. People v. Superior Court (Cahuenga’s The Spot)¹⁰⁸

The Los Angeles City Attorney’s Office brought a UCL enforcement action against a number of Los Angeles-area marijuana dispensaries for violations of Los Angeles Municipal Code regulations. The Second District held that the UCL’s civil penalties are part of the equitable remedies a court may impose, and are not elements of a UCL cause of action. The Second District also rejected a broad litany of challenges to the People’s civil penalty and UCL authority, including claims that UCL penalties actions trigger a right to jury trial.

B. Loan Payment Administration LLC v. Hubanks¹⁰⁹

In a UCL civil law enforcement action brought by the Monterey and Marin District Attorneys’ Offices against loan modification solicitations, the district court affirmed that injunctions against law enforcement agencies performing their duties must meet stringent criteria, which defendant here failed to meet. "[A]n injunction would prohibit local officials from enforcing statutes designed to protect consumers from the risk of fraud," which constitutes a "strong public interest." Defendant "has not shown that the public interest weighs in favor of granting an injunction."¹¹⁰

[Page 37]

——–

Notes:

^1. Thomas A. Papageorge is the head of the Consumer Protection Unit, San Diego District Attorney’s Office. The views expressed in this Article are those of the author, and do not necessarily reflect those of the San Diego District Attorney’s Office. This Article is adapted from a presentation delivered at the Golden State Antitrust and Unfair Competition Law Institute on October 29, 2015, and reflects developments as of that date.

^2. Cal. Bus. & Prof. Code § 16720 et seq.

^3. 61 Cal. 4th 116 (2015).

^4. 466 F.3d 187 (2d Cir. 2006).

^5. In re Cipro Cases I & II, 200 Cal. App. 4th 442 (2011).

^6. Id. at 467.

^7. In re Cipro Cases I & II, 269 P.3d 653 (Cal. 2012).

^8. 133 S. Ct. 2223 (2013).

^9. Final Approval Order and Judgment, In re Cipro Cases I & II, Nos. 4154 & 4220 (Cal. Sup. Ct. San Diego Nov. 18, 2013).

^10. In re Cipro Cases I & II, 334 P.3d 687 (Cal. 2014).

^11. In re Cipro Cases I & II, 61 Cal. 4th 116, 150 (2015).

^12. Id. at 142.

^13. Id. at 161.

^14. Id.

^15. Id. at 145.

^16. Id. at 146.

^17. Id. at 147.

^18. Id. at 146.

^19. Id. at 148.

^20. Id.

^21. Id. at 149.

^22. Id.

^23. Id. at 151-55.

^24. Id. at 163.

^25. 776 F.3d 686 (9th Cir. 2015), cert. denied, 136 S. Ct. 36 (Oct. 5, 2015).

^26. 407 U.S. 258 (1972).

^27. City of San Jose v. Comm’r of Baseball, 776 F.3d at 691.

^28. See Flood, 407 U.S. at 284.

^29. 93 Cal. App. 4th 363, 113 (2001).

^30. City of San Jose v. Comm’r of Baseball, 776 F.3d at 691-92 (emphasis added).

^31. 235 Cal. App. 4th 1 (2015).

^32. Id. at 27.

^33. Id. at 25-26.

^34. 106 F. Supp. 3d 1051 (N.D. Cal. 2015).

^35. 80 F. Supp. 3d 1019 (N.D. Cal. 2015).

^36. Id. at 1032.

^37. Cal. Bus. & Prof. Code § 17000 et seq.

^38. 234 Cal. App. 4th 748 (2015), reviewed and superseded by 184 Cal. Rptr. 3d 279 (Cal. Ct. App. 2015). Previously published opinions superseded by grant of review and selected unpublished cases are presented here for their insights into relevant legal trends, but such opinions must not be cited or relied on by a court or a party in any action in California state courts. See generally, Cal. R. Ct. 8.1115; Dunbar v. Albertson’s, Inc., 141 Cal. App. 4th 1422 (2006); Faitz v. Ruegg, 114 Cal. App. 3d 967 (1981).

^39. Roy Allan Slurry Seal, Inc., 184 Cal. Rptr. 3d at 297.

^40. No. VG08387771, 2015 WL 4557388 (Cal. Ct. App. July 29, 2015).

^41. 20 Cal. 4th 163 (1999).

^42. Cal. Bus. & Prof. Code § 16600 et seq.

^43. 782 F.3d 1083 (9th Cir. 2015).

^44. Id. at 1093.

^45. Id.

^46. Cal. Civ. Code § 1750 et seq.

^47. 238 Cal. App. 4th 1164 (2015), review denied Nov. 10, 2015.

^48. Id. at 1179.

^49. 144 Cal. App. 4th 824 (2006).

^50. Rutledge, 238 Cal. App. 4th at 1189.

^51. 238 Cal. App. 4th 433 (2015), review denied Oct. 21, 2015.

^52. Id. at 455-56.

^53. Id. at 456.

^54. Id. at 459.

^55. 237 Cal. App. 4th Supp. 1 (2015).

^56. Id. at 13 (citing Cal. Civ. Code § 1770 (a)(5)).

^57. 232 Cal. App. 4th 1159 (2015).

^58. Cal. Bus. & Prof. Code § 17200 et seq.

^59. 563 U.S. 333 (2011).

^60. 9 U.S.C. § 1 et seq.

^61. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014).

^62. Sanchez v. Valencia Holding Co., 61 Cal. 4th 899 (2015).

^63. Id.

^64. Sanchez v. Valencia Holding Co., 201 Cal. App. 4th 74 (2011), review granted, 272 P.3d 976 (Cal. 2012).

^65. Sanchez, 61 Cal. 4th at 907.

^66. 57 Cal. 4th 1109 (2013).

^67. Id. at 1143.

^68. Sanchez, 61 Cal. 4th at 913.

^69. Id. at 914-24.

^70. 239 Cal. App. 4th 619 (2015).

^71. See, e.g., Ronald W. Novotny, Gauging the Future of Iskanian and FAA Preemption in California, L.A. Law., Mar. 2015, at 10.

^72. 59 Cal. 4th 348 (2014).

^73. 42 Cal. 4th 443 (2007).

^74. Cal. Lab. Code § 2698 et seq.

^75. Iskanian, 59 Cal. 4th at 360.

^76. Id. at 366.

^77. Id. at 384.

^78. Id. at 361.

^79. Id. at 388-89.

^80. 237 Cal. App. 4th 642 (2015).

^81. 234 Cal. App. 4th 947 (2015).

^82. 61 Cal. 4th 899 (2015).

^83. 59 Cal. 4th 348 (2014).

^84. 237 Cal. App. 4th 651 (2015).

^85. Id. at 654.

^86. 239 Cal. App. 4th 619 (2015).

^87. Id. at 624.

^88. Id. at 637.

^89. Id.

^90. Id.

^91. 57 Cal. 4th 1109 (2013).

^92. Carlson, 239 Cal. App. 4th at 638.

^93. 237 Cal. App. 4th 642 (2015).

^94. Id. at 648-49.

^95. 211 Cal. App. 4th 314 (2012), reviewed and superseded by 149 Cal. Rptr. 3d 530 (Cal. Ct. App. 2013).

^96. 237 Cal. App. 4th 642 (2015).

^97. 211 Cal. App. 4th 314 (2015).

^98. Cal. Lab. Code § 2698 et seq.

^99. 239 Cal. App. 4th 1303 (2015), reh’g denied Sept. 22, 2015.

^100. 230 Cal. App. 4th 1267 (2014), reh’g denied Dec. 1, 2014, review denied Feb. 11, 2015.

^101. 234 Cal. App. 4th 784 (2015), review denied June 10, 2015.

^102. 238 Cal. App. 4th 433 (2015).

^103. 235 Cal. App. 4th 294 (2015), reh’g denied Mar. 17, 2015.

^104. Cal. Bus. & Prof. Code § 17500 et seq.

^105. 240 Cal. App. 4th 779 (2015), review denied Dec. 9, 2015.

^106. 235 Cal. App. 4th 294 (2015), reh’g denied Mar. 17, 2015.

^107. Id. at 306.

^108. 234 Cal. App. 4th 1360 (2015).

^109. No. 14-CV-04420, 2015 WL 1245895 (N.D. Cal. 2015).

^110. Id. at *16.