You run a small or medium sized business. Your company provides high quality services or products to its customers. Business is good and everything is going well. Then it happens: You are sued by a customer that claims you made a mistake. That's right, a simple mistake. You did not intend to do anything wrong. You made every effort to do the right thing. Unfortunately for you, your customer has found a hard-nosed, beady-eyed lawyer to sue you based on an alleged violation of California's Unfair Competition Law ("UCL") which imposes liability against businesses that make simple and even unintentional mistakes. Even worse, the lawyer wants a refund not just of the money his client spent but of all the money paid by your other customers who have been "victimized" by your mistake.
The California UCL is unique in the nation. It is intended to encourage business owners' compliance with ethical business practices. It does this by giving potential litigants an incentive to sue without their having to jump through many of the technical hoops most lawsuits entail. Unfortunately for business owners, this has spawned widespread litigation and has encouraged many lawyers to graft UCL claims onto simple contract actions or other business disputes. Lawyers do this in order to gain leverage: the scope of pre-trial discovery in UCL cases is broader than in most lawsuits and the potential remedies can be draconian. As a result, most defendants would rather settle than fight.
Obviously, no one wants to be sued. In this blog post, we shall discuss the preventive measures you can take to avoid UCL litigation. The simple methods outlined below cannot guaranty that you will not be sued but their consistent application will certainly reduce the possibility that you will fall into a litigation trap.
The UCL (California Business and Professions Code section 17200, et seq.) prohibits unfair competition which is defined as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." The UCL permits "any person" to sue based on a single violation of section 17200 and allows such person to seek an injunction and restitution on behalf of all others who may have been injured by such a violation. In 2004, California voters enacted Proposition 64 which limited UCL standing (i.e., the right to sue) to individuals who suffered losses because of an unfair business practice.
Despite the limitations imposed by Proposition 64, the scope of the potential violations of the UCL is breathtaking. They include inadvertently using another business’s trade name, selling a product that does not perform as advertised, including an illegal term in your sales contracts, failing to post labor code notices in your office, violating a statute or regulation governing the operation of your business, sending out inaccurate billing statements or even failing to properly maintain your automobile fleet. It seems there is no end to the creativity of lawyers in developing the legal basis for a lawsuit
A number of relatively simple steps can be taken to prevent so-called acts of unfair competition. Most of these steps are common sense. The key, of course, is to make sure that you consistently follow these procedures:
Prior to starting your business, determine if any other entity is using a similar trade name in your area. This can be done by an internet search, including a search of your local county recorder's office and the Secretary of State's office. Depending on the type of product or service you are providing, it may also be a good idea to examine the U.S. Patent Office's secondary register for similar trade names.
Make sure you comply with the formalities for starting your business and determine the best business form for you. Sole proprietorship, corporation, partnership and limited liability company are some of the more common forms and each has unique advantages and disadvantages with respect to liability issues. Consult your lawyer in order to choose the proper legal vehicle.
Consult with your accountant to make sure you properly handle your clients’ funds, deposits, billing, invoicing and employee withholding.
Carefully review your advertising and compare it to the products and services you are providing. Keep in mind that sales "puffing" is allowed; misleading and false statements are not.
Periodically have your attorney check your form contracts to make sure they are consistent with legal requirements.
Determine if your employment notices are up to date. Keep current on work rules, anti-discrimination laws, sexual harassment regulations, etc.
Periodically, review the requirements for maintaining your professional or business licensing. New standards are frequently imposed that can unexpectedly cause a significant problem should you fail to comply.
Finally, respond promptly to any complaint and attempt to resolve any problem. It is far better to solve the issue by dealing directly with the individual who claims to have been harmed than to let the matter escalate to the point that a lawyer is called in to sue you.
The foregoing suggestions are just a start. They are generalized preventative measures, however, each business is unique and will have its own set of problems and issues that can cause liability under the UCL. As a consequence, you should consult frequently with your attorney and other professionals to assist you in preventing an accidental violation of the UCL.