Despite recent efforts, UCL still does not cover securities transactions

California's Unfair Competition Law, aka the UCL or Section 17200, broadly prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Although the UCL is often considered a robust consumer protection statute, it has never covered securities transactions, as the California Court of Appeal first held in Bowen v. Ziasun Technologies Inc., 116 Cal. App. 4th 777 (2004). The UCL still does not cover securities transactions, despite recent efforts by the plaintiffs' bar to convince California's courts otherwise.

The UCL gives a plaintiff who has lost money or property as a result of a prohibited business practice a right to sue for restitution and obtain an injunction, among other remedies. The statute is a staple of civil litigation in California. Complaint drafters find the UCL's purportedly broad reach - i.e., "any" unlawful, unfair, or fraudulent business practice - irresistible. Similarly alluring is the UCL's arguably relaxed burden of proof, which plaintiffs assert omits the traditional requirements that plaintiffs prove intent and that they reasonably relied on the defendant's alleged misdeed, both of which are significant departures from common law fraud causes of action. In addition, plaintiffs say the UCL's prohibition of "unlawful" business practices transforms other allegedly illegal acts into a separate UCL cause of action, in some cases even when the underlying law provides no such remedy.

Thus, even in cases where consumer fraud is not alleged, plaintiffs often include a UCL cause of action in the complaint. This is true of recent cases alleging fraud in the sale of investments, despite over 10 years of case law holding that the UCL does not apply to transactions in securities.

In Bowen, the plaintiff claimed to be the victim of a Ponzi scheme that induced him to buy over $360,000 in stock after the seller allegedly misstated the use of investment proceeds and failed to disclose that the stock had little or no market value. The complaint alleged that the fraudulent sale of investment securities amounted to an unfair, fraudulent and unlawful business practice on the part of the seller (which also was the issuing corporation). The Court of Appeal rejected the claim, holding that the UCL "does not apply to securities transactions."

The Bowen court's reasoning is solid. As the court's opinion explains, "Section 17200 is known as California's 'little FTC Act,' which mirrors ... the Federal Trade Commission (FTC) Act." Indeed, the California Supreme Court has directed lower courts applying the UCL to consult FTC Act cases for guidance in interpreting the UCL, precisely because of the two statutes' "parallel" provisions. Because the Federal Trade Commission has never viewed the FTC Act as reaching securities transactions - in part because that is the domain of the Securities and Exchange Commission - neither does the UCL.

In addition, the Bowen court counted at least 15 other jurisdictions with similar consumer protection laws that had each held securities to be outside the reach of those laws. Nor could the Bowen court find any indication in the UCL itself that California's law, unlike the others, was intended to reach transactions in stock or other investment securities. Even setting aside the statutory comparisons, Bowen's holding is firmly grounded in the common-sense notion that consumer protection laws like the UCL are meant to help consumers, not investors. Since Bowen, state and federal courts have applied its teaching to dismiss UCL claims that target securities transactions.

Even cases that purport to distinguish Bowen, or that plaintiffs claim are otherwise critical of its reasoning (always in dicta), have acknowledged that the case "bars lawsuits based on deceptive conduct in the sale and purchase of securities." Overstock.com Inc. v. Gradient Analytics Inc., 151 Cal. App. 4th 688 (2007). Moreover, those cases typically do not involve claims that "target" a securities transaction; rather, the claims in those cases are just tangentially related to a securities transaction. That was true in Overstock, where a UCL claim based on alleged trade libel survived although the libelous statements were found in reports that analyzed publicly traded stock. But, as the Northern District of California has observed, "[n]o court ... has allowed Section 17200 claims to proceed where ... the predicate acts are securities transactions." Betz v. Trainer Wortham & Co., 829 F. Supp. 2d 860 (N.D. Cal. 2011).

Undaunted, plaintiffs alleging fraud in connection with a securities transaction still tend to tack on a UCL claim. Lately, a new argument has emerged that relies - incorrectly - on a single footnote in the California Supreme Court case Rose v. Bank of America, N.A., 57 Cal. 4th 390 (2013).

In Rose, the state's high court decided whether a business practice could be "unlawful" under the UCL if it violated a federal law, such as the Truth in Savings Act (TISA), which lacks a private right of action. Rose holds that it can, but only if Congress has made clear that state laws inconsistent with the federal statute are not superseded. Discussing the interplay of state and federal law, a footnote cites Bowen and attributes part of Bowen's holding to the "comprehensive regulatory umbrella of the Securities and Exchange Commission" over securities transactions, but distinguishes claims brought under TISA because, "whatever the scope and merits of [Bowen] may be," Congress expressly contemplated enforcement of state law consistent with TISA.

Plaintiffs' novel, tortured reading of Rose posits that this footnote chips away at Bowen by undermining its reference to the SEC and implicitly questioning its "merits." That reading is wrong. Bowen turns on a direct comparison of the UCL to the FTC Act and the common-sense notion that consumer protection laws do not arm investors with a new cause of action - not just the observation that the SEC generally regulates securities. Rose does nothing to undermine the core of Bowen, which is as sound now as it was in 2004. Moreover, Rose cites Bowen without overruling it, thereby leaving in place the 10 years of cases that have enforced its holding.

The UCL has remained attractive to securities plaintiffs despite over a decade of law foreclosing claims that target a transaction in securities. Those facing a misplaced UCL claim would do well to arm themselves with Bowen and remain vigilant against new distortions of its common-sense and correct holding.

Peter B. Morrison is a partner and Kevin J. Minnick is an associate with Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates.