Case Number: EC062201    Hearing Date: October 31, 2014    Dept: B

Case Management Conference

Demurrer and Motion to Strike

The Complaint alleges that the Plaintiff and Defendant are in the business of selling gold and silver coins as investments. DOES 1 to 200 have created online review sites that compare the Plaintiff and the Defendant. The DOES 1 to 200 fail to disclose that they are paid by the Defendant. The Plaintiff sent a cease and desist letter to the Defendant regarding the websites. The Defendant has refused to remove the websites. This is an unfair business practice.

This hearing concerns the Defendant’s demurrer and motion to strike.

1. Demurrer

The Defendants argue that the cause of action for unfair business practice lacks the particular facts needed to plead claims under Business and Professions Code section 17200.

The Plaintiff’s cause of action is brought for the violation of Business and Professions Section 17200, which defines unfair competition to be any unlawful, unfair, or fraudulent business practice. In order to plead a claim under Business and Professions Code section 17200, there must be allegations showing an unlawful, unfair, or fraudulent business act or practice. Paulus v. Bob Lynch Ford, Inc. (2006) 139 Cal. App. 4th 659, 676-677. To plead this statutory claim, the pleadings must state with reasonable particularity the facts supporting the statutory elements of the violation. Khoury v. Maly’s of California, Inc. (1993) 14 Cal. App. 4th 612, 619.

The fraudulent business practice prong of an Unfair Competition claim is distinct from common law fraud. In re Tobacco II Cases (2009) 46 Cal. 4th 298, 312. A common law fraudulent deception must be actually false, known to be false by the perpetrator and reasonably relied upon by a victim who incurs damages. Id. None of these elements are required to state a claim for Unfair Competition. Id. This distinction reflects the Unfair Competition’s focus on the defendant’s conduct, rather than the plaintiff’s damages, in service of the statute’s larger purpose of protecting the general public against unscrupulous business practices. Id.

Accordingly, to establish a fraudulent business practice, it is necessary only to show that members of the public are likely to be deceived by the business practice. Id.

A review of the Plaintiff’s First Amended Complaint reveals that it is pleading a claim that the Defendant engages in a fraudulent business practice by creating websites that purport to be objective third parties’ reviews of the Defendant, by inducing affiliated websites to make misleading comparisons of the Defendant’s products, and by deceiving consumers into sending personal information to the Defendant.

The Plaintiff alleges in paragraphs 8 to 10 that the Defendant induced DOES 1 to 200 to represent themselves to be third parties providing unbiased reviews when they are actually posting reviews created by the Defendant of its own products. The Defendant induces websites to become “affiliates” and then offers financial rewards for posting material created by the Defendant.

In paragraphs 11 and 12, the Plaintiff alleges that the Defendant induces these websites to post misleading comparisons of its products. The Plaintiff alleges in paragraph 12 that this includes references to a survey that ranked the Defendant on a list of financial service companies without explaining that the information in the survey was provided by the Defendant or that the Defendant’s information was misleading.

In paragraphs 13 to 15, the Plaintiff alleges that the affiliates request personal information from consumers without disclosing that the information is shared with the Defendant. In paragraph 16, the Plaintiff alleges that the Defendant then uses the personal information to solicit the consumers.

In paragraphs 17 to 20, the Plaintiff alleges that the websites do not disclose that they are owned or controlled by the Defendant. Further, in paragraph 20, the Plaintiff alleges that the websites do not clearly and conspicuously disclose that they receive compensation from the companies whose products they review and recommend.

These allegations plead that the Defendant creates information regarding and reviews of its own products and then pays other parties, DOES 1 to 200, to post the information on their websites in order to create the impression that independent parties are providing information about and reviewing the Defendant’s products. Since this will cause members of the public to believe that they are obtaining information about the Defendant’s products through independent reviews, the Defendant’s business practice is likely to deceive members of the public.

Accordingly, the Plaintiff has pleaded sufficient facts to state a claim under section 17200 for a fraudulent business practice.

2. Motion to Strike

The Defendant requests that the Court strike three portions from the First Amended Complaint. A motion to strike should be applied cautiously and sparingly because it is used to strike substantive defects. PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682-1683. A party cannot use a motion to strike as a “line item veto.” Id.

The Defendants request that the Court strike the following:

1) a portion of paragraph 29 that the Defendant is currently a defendant in at least four other lawsuits alleging that its affiliate program is unlawful;
2) a portion of paragraph 30 that the Courts in two cases held that the plaintiff had stated claims against the Defendant;
3) a portion of paragraph 35 that alleges that the websites are unlawful under Business and Professions Code section 17500 as false advertising because they include false and misleading statements about customers complaints, personal information provided to the Defendant, relationships with the Defendant, and about the Defendant.

The first and second items concern other lawsuits in federal court against the Defendant. The Defendant offers no basis to find that these portions are a substantive defect.

Further, the Plaintiff argues in its opposition that these portions are relevant to support its claim for attorney’s fees under CCP section 1021.5. Section 1021.5 permits the Court to award attorney fees to a successful party in any action that has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any.

The Plaintiff’s allegations that there are federal cases arising from the same allegedly fraudulent business practices of the Defendant indicates that the Plaintiff’s claim is seeking to enforce an important right affecting the public interest arising from the need to obtain accurate consumer information about financial businesses. The allegations regarding other claims indicate that the Plaintiff’s lawsuit will confer a significant benefit on the general public or a large class of persons because it will halt a fraudulent business practice that misleads the public about a company providing financial services. Further, these allegations go to the gravity of the alleged conduct.

Accordingly, the Court denies the request to strike the portions of paragraphs 29 and 30 regarding other cases against the Defendant.

The third item concerns allegations that the Defendant violated Business and Professions Code section 17500. The Defendant argues that this is an impermissible attempt to add a new cause of action without leave of Court and that the Plaintiff is limited solely to a claim under section 17200.

On August 8, 2014, the Court sustained the Defendant’s demurrer to the Plaintiff’s claim under Business and Professions Code section 17200. When a Court grants leave to amend after sustaining a demurrer, it is leave to amend only the cause of action to which the demurrer has been sustained. People ex rel. Department of Public Works v. Clausen (1967) 248 Cal. App. 2d 770, 785. Accordingly, the Plaintiff had leave to amend its unfair competition claim brought under section 17200.

Under Business and Professions Code section 17200:

“As used in this chapter, unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500) of Part 3 of Division 7 of the Business and Professions Code.
(italics added for emphasis).

This language in section 17200 indicates that a claim may be brought for three categories of acts:

1) unlawful, unfair, or fraudulent business acts;
2) unfair deceptive, untrue, or misleading advertising; and
3) any act prohibited by Chapter 1 of Part 3 of Division 7 of the Business and Professions Code, which includes sections 17500 et seq.

This indicates that a section 17200 claim may be based on the violation of section 17500. Since a section 17200 claim may be based on the violation of section 17500, the leave to amend granted to the Plaintiff included leave to add allegations that the Defendant violated section 17200 by engaging in an act prohibited under section 17500.

Accordingly, there are no grounds to strike the allegations in paragraph 35 regarding acts prohibited under Business and Professions Code section 17500 because these may be the basis of a claim for unfair competition under section 17200.