(May 14, 2003) - California businesses face increased frivolous lawsuits and higher court awards, if trial lawyer-supported legislation moving through the state Senate becomes law.

Yesterday the Senate Judiciary Committee killed three California Chamber-supported reforms to Section 17200 of the Business Professions Code on party-line votes. Conversely, the committee passed a bill strongly opposed by the Chamber that would greatly increase the potential awards that lawyers can receive.

“Our small business owners are being drained of revenues by 17200 lawsuits, many of which amount to extortion,” said Chamber legislative advocate Valerie Nera, who testified to the committee. “These reforms would have been a good start to help stem the tide of frivolous lawsuits that our members have experienced.”

Section 17200 permits prosecutors and private attorneys to claim a business is acting “unfairly” and then sue. In many of the thousands of lawsuits that have been filed using this clause, the attorneys file questionable allegations, then offer to drop legal action in exchange for settlements that typically amount to several thousand dollars.

The committee killed Chamber-supported reform bills SB 889 and 890 (Johnson; R-Irvine), and SB 912 (Ackerman; R-Irvine). Instead of dealing with the underlying factors that enable fraud under California’s unfair competition law (UCL), a majority on the committee approved a controversial expansion of the law, passing Chamber-opposed SB 122 (Escutia; D-Whittier).

If SB 122 passes in its current form, it would institute the legal practice of disgorgement in UCL cases, allowing lawyers to go after a company’s profits regardless of whether any individual experienced actual harm. Currently, the practice of disgorgement has been reserved for class-action claims, which have to fulfill a different set of legal guidelines.

Michael Brown, a defense lawyer with extensive experience in disgorgement cases, testified before the committee that this provision will create a “bounty” for prospecting lawyers, and could lead to millions of dollars changing hands. “This wealth transfer is unprincipled, it’s uncalled for, and California businesses cannot afford it,” stated Brown.

The underlying policy behind disgorgement is that defendants shall not profit from “ill-gotten gain”. If applied to UCL cases, profits gained by a business that had committed even minor 17200 violations could be awarded to plaintiffs in court.

Opponents of SB 122 repeatedly stressed that implementing disgorgement in UCL cases would allow lawyers to go after businesses not only for injunctive relief, restitution and attorney’s fees, but also for disgorgement, which could be far more lucrative. This would increase the threat of fines, and give trial lawyers more leverage to extort businesses with 17200 suits, because of the potential for such substantial judgments.

Senator Ross Johnson testified that California’s 49 sister states do not grant private attorneys with the unbridled right to sue without any plaintiffs suffering direct harm. Senator Dick Ackerman concurred, testifying that California small businesses are under siege, and are being preyed on by attorneys from across the country because the state’s 17200 law is so ripe for abuse.

“Frivolous lawsuits are plaguing California’s business community, and bleeding scarce financial resources away,” continued Nera. “The actions taken on 17200 today do nothing to reform the system, but instead will further exacerbate the problem of lawsuit abuse and lead to further exploitation of the state’s small businesses.”

Staff Contact: Valerie Nera,