FACTS
Planetary News has been sued for raiding the staff of Saturn Business News, a competitor, and luring away four reporters. Planetary apparently solicited the first one, and the other three soon followed when they saw that the first was happy.
Saturn is seeking punitive damages under the California Unfair Business Practices Act (Bus. & Prof. Code §§17200 et seq., the "UBPA"). Planetary moved to strike the claim as failing to allege sufficiently culpable conduct (see Civil Code §3294). The court, sua sponte, continued the hearing on Planetary's motion and asked for briefs on whether private parties can obtain punitive damages under the UBPA.
ISSUES
1. Are punitive damages available to private litigants under the UBPA (Bus. & Prof. Code §§17200 et seq.)?2a. If so, what level of wrongful conduct must Saturn allege to state a claim for punitive damages?
2b. If not, could Saturn state a claim for punitive damages under a common-law theory?
SUMMARY
1. The UBPA does not authorize any money damages for private litigants, only equitable remedies (including restitution).2. Since UBPA remedies are cumulative of other remedies, Saturn could seek money damages under a common-law theory such as wrongful solicitation. Ordinary standards for punitive damages would apply.
DISCUSSION
1. Neither compensatory nor punitive damages are available under Business & Professions Code §17200 et seq. Past injuries are not remediable under the UBPA.
A. Money damages are not available in a UBPA action.
Section 17203 authorizes a private action for unfair competition within the meaning of §17200, and provides for injunctive and other equitable relief, including restitution. But it does not authorize an award of damages to a private plaintiff. Bank of the West v. Superior Court (Industrial Indemnity Co.) (1992) 2 Cal.4th 1254, 1266; Heller v. Norcal Mutual Ins. Co. (1994) 8 Cal.4th 30, 45.
Although lower courts once differed on this point, the supreme court settled it in Bank of the West, supra. The issue there was whether plaintiff's comprehensive general liability insurance policy, which promised to pay "damages" on the insured's behalf for "unfair competition" (among other "advertising injuries"), provided coverage for a third party's UBPA claim. Reversing the decision below, the court held that "the Unfair Business Practices Act does not authorize an award of damages, and a definition of 'unfair competition' that cannot support a claim for damages cannot reflect the objectively reasonable expectations of the insured." Id., 2 Cal.4th at 1272.
The court below had erred because it thought that case law was "in conflict as to whether damages are recoverable under section 17203." Ibid. But the supreme court "perceive[d] no conflict," explaining:
In Chern v. Bank of America [citation] we expressly held that damages were not available under section 17535, another section of the Unfair Business Practices Act that authorizes courts to order the restoration of money acquired through misleading advertising. (Id. at 875). The language of section 17535 is nearly identical to that of section 17203, which was based on the former. In addition, the history of section 17203 demonstrates that the Legislature expressly intended both sections to be "interpreted in the same way" [citation]. Chern effectively overruled the earlier, contrary holding in United Farm Workers of America v. Superior Court [citation.].Id., at 1272-1273.
To settle any lingering doubts about the lack of damages under §17203, the court added:
It is true that this court once expressly declined to decide a litigant's claim for compensatory damages under the Unfair Business Practices Act. [Citation.]. However, in view of Chern's express holding that damages are not available under the act, the Court of Appeal read far too much into Committee on Children's Television, Inc., supra. Today the point is too well settled to warrant extensive discussion. [fn. omitted.]Id., at 1273.
Accord, Heller v. Norcal, supra, 8 Cal.4th 30, 45 (affirming judgment after demurrer by citation to Bank of the West only). See also Industrial Indemnity Co. v. Superior Court (Booth) (1989) 209 Cal.App.3d 1093, 1096-1097 (relying on Chern); Dean Witter Reynolds, Inc. v. Superior Court (Abascal) (1989) 211 Cal.App.3d 758, 774 (excluding claims for compensatory damages is consistent with the "overarching legislative concern to provide a streamlined procedure for the prevention of ongoing or threatened acts of unfair competition. To permit individual claims for compensatory damages to be pursued as part of such a procedure would tend to thwart this objective by requiring the court to deal with a variety of damage issues of a higher order of complexity.").
"Damages" in the Civil Code means monetary compensation for harm to person or property. Civ. Code §§3281, 3282. "Exemplary [i.e., punitive] damages" are authorized "in addition to the actual damages . . . for the sake of example and by way of punishing the defendant." Id., §3294(a). Thus punitive damages are a kind of damages. That actual damages cannot be recovered in a UBPA action therefore implies that punitive damages are likewise not available. State Farm Fire & Cas. Co. v. Superior Court (Allegro) (1996) 45 Cal.App.4th 1093, 1110 ("Damages are not available under [the UBPA] [citing Bank of the West]. That means that no claim for compensatory or punitive damages can be recovered in a [UBPA] action."). The legislature has provided for civil penalties under the UBPA (see §17206), but only as a public and not as a private remedy.
B. Past injuries are not remediable in a UBPA
action.
The "practice" element of §17200 means that a UBPA cause of action requires an allegation of ongoing wrongdoing. Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1155-1156 (no relief under §17200 et seq. to remedy past conduct). Since private damages are not available under §17203, Saturn cannot plead a UBPA claim for unfair solicitation of employees unless it alleges that Planetary is still raiding it for employees or will do so again unless restrained.(1)
Unfair solicitation of customers, a separate potential UBPA claim that Saturn could combine with a tort claim, is discussed in the next section of this memo.
2. Saturn could seek punitive damages on a common-law tort theory such as unfair solicitation,(2) although its chances look poor.
Unfair solicitation cases apply similar principles whether the target is the competitor's employees or its customers. Frequently the primary goal in recruiting another company's employees (at least in the services sector) is to get their accounts--the customers they have cultivated--who may be more loyal to or dependent on them than on their employer; the employees' general professional skills may be deemed more or less fungible. That seems to be what really concerns Saturn here. Your case may thus turn on the rules that govern an ex-employee's use of relationships with customers and knowledge about their special needs that were developed on the job.
A. Elements of unfair solicitation
A claim for unfair solicitation of employees to leave one employer and join another requires proof that (1) defendant's conduct amounted to solicitation; (2) some other aspect of defendant's conduct caused the solicitation to be unfair; and (3) injury to plaintiff resulted. Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327; Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 255. If the solicited party was under contract with the employer, the latter may also have a cause of action for intentional interference with a contractual relationship or inducing breach of contract. Ibid.
(1) Solicitation, in this context, means a personal petition to do some particular thing. Aetna Bldg. & Maintenance Co. v. West (1952) 39 Cal.2d 198, 203. A prospective employer does not solicit another's employees by receiving and considering their employment applications. Loral Corp. v. Moyes (1985) 174 Cal.App.3d 268, 279, 219 Cal.Rptr. 836. Neither, presumably, does Planetary's employee solicit a former colleague merely by suggesting he or she consider applying for a job with Planetary, as happened here. The case might be different if Planetary's employee acted with Planetary's knowledge or at Planetary's request. But even if there were evidence of that, recruiting a competitor's employee is not in itself wrongful.
(2) Because of the public's interest in free competition and an employee's substantial interest in job mobility, solicitation is not actionable unless it is somehow unfair. Hollingsworth Solderless Terminal Co. v. Turley (9th Cir. 1980) 622 F.2d 1324, 1337; Diodes, Inc. v. Franzen, supra, 260 Cal.App.2d 244, 255; Metro Traffic Control, Inc., v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859. Such factors might include misuse of confidential information, breach of a fiduciary duty, intent to injure the former employer's business, deception, or violation of a contractual agreement between Planetary and P. Ibid.
Metro Traffic Control illustrated these principles. The parties were competitors in the traffic reporting business. Los Angeles radio station KWFB had a one-year contract with Metro that included acknowledgment of a noncompete clause in Metro's employee contracts. KWFB gave Metro notice that it might not renew and began soliciting proposals from Metro's competitors. Shadow was chosen. Shadow immediately began recruiting new employees, including three from Metro. Metro sued Shadow for inducing breach of the noncompete clause in these three employees' contracts and for unfair competition. Relying on Diodes, Inc. v. Franzen, supra, the court of appeal held that the noncompete clause was unenforceable. Id., 22 Cal.App.4th at 859-860. The court further held that Shadow had done nothing wrong in soliciting Metro's employees because it did not interfere unfairly with Metro's relationship with KWFB:
The record does not reveal that Shadow had anything to do with KFWB's decision not to renew its relationship with Metro. In fact, the evidence shows that KFWB awarded Shadow the 1991 contract without any requirement or assurance regarding the personnel that would be engaged to service its account. Shadow did not begin to contact or interview Metro's employees until after it had a commitment from KFWB. Shadow does not occupy a fiduciary relationship with Metro and, in any event, there is no showing that Shadow laid plans or took steps to hire away Metro's key employees for the purpose of stealing KFWB as a customer. . . . As a competitor of plaintiff, absent a showing of unlawful purpose or means, Shadow is privileged and not liable for inducing Metro's employees to leave and move to Shadow. [Citation.]Id., 22 Cal.App.4th at 860.
The foregoing case involved key employees as well as a key account. A recent case that focuses more on accounts, Hilb, Rogal & Hamilton Insurance Services of Orange County, Inc. v. Robb (1995) 33 Cal.App.4th 1812, came up as a trade secrets case. After Robb resigned his position with Hilb, four of the 120 clients he had serviced there moved their accounts to his new employer, Pettit-Morry. Contending that its customer list and other client information constituted protectable trade secrets, Hilb obtained a preliminary injunction against soliciting other customers under the Uniform Trade Secrets Act (the "UTSA") (Civ. Code §§ 3426-3426.10).(3)
Relying on the distinction between announcing a job change and active solicitation that was drawn in Aetna Bldg. Maintenance Co., supra, 39 Cal.2d 198, 204, the court of appeal reversed.(4)
"The right to announce a new affiliation, even to trade secret clients of a former employer, is basic to an individual's right to engage in fair competition. Therefore, the acquisition of trade secrets under circumstances giving rise to a duty to limit their use . . . clearly allows for such an announcement. To hold otherwise would contravene widely accepted and well established business practices."Id., 33 Cal.App.4th at 1821, quoting American Credit Indemnity Co. v. Sacks (1989) 213 Cal.App.3d 622, 636.
Robb was free to use information he had obtained from clients about their own needs and desires: "In other words, assuming that the information Hilb possessed about its clients (e.g., amount and types of insurance) is a trade secret, nothing in the UTSA prohibits the client itself from providing that information to Robb." Hilb, 33 Cal.App.4th at 1821. Nor did it matter whether the client provided that information to Robb before or after Robb left Hilb. Id., n. 6. What mattered was apparently whether the information was provided before or after Robb's announcement that he was changing employers. If before, and if the information qualified as a trade secret, it could be regarded as Hilb's property.
More facts would be needed to assess Planetary's vulnerability to a trade secrets claim or a claim for conspiracy with an employee (i.e., a former employee of Saturn) to breach a fiduciary or other duty the former employee owed to Saturn.
B. Availability of punitive damages
Some form of intentional wrongdoing ("oppression, fraud or malice") is essential to a claim for punitive damages. See Civil Code §3294, subds. (a) (authorizing "exemplary" damages), (b) (employer not vicariously liable for punitive damages based on employee's wrongdoing) , and (c) (defining "malice" as specific intent to injure plaintiff or general intent--willful and conscious disregard of others' rights or safety-- coupled with despicable conduct; "oppression" as despicable conduct that subjects another to cruel and unjust hardship in conscious disregard of his or her rights; and "fraud" as intentional misrepresentation, deceit or concealment intended to cause injury to plaintiff's rights, property or person).
In general, punitive damages may be available in many business tort situations, including inducing breach of contract (Duff v. Engelberg (1965) 237 Cal.App.2d 505, 508), intentional interference with prospective economic advantage (Ramona Manor Convalescent Hosp. v. Care Enterprises (1986) 177 Cal.App.3d 1120, 1141), and breach of fiduciary duty (Southern California Disinfecting Co. v. Lomkin (1960) 183 Cal.App.2d 431 (solicitation of customers by plaintiff's employee, a route salesman, on another employer's behalf); Bancroft-Whitney v. Glen, supra, 64 Cal.2d 327 (solicitation of fellow employees, Glen's subordinates, while Glen was still employed by plaintiff as a senior executive)).
There is no formula for proving entitlement to punitive damages in such cases. The elaborate language of §3294 seems to come down to this: plaintiff must persuade the jury that defendant knew the facts of the matter and consciously ignored them. Thus if Planetary committed unfair solicitation and knew the facts that made the solicitation unfair, it could be liable for punitive damages. This seems unlikely, however.
CONCLUSIONS
1. The court did well to request briefing on remedies under §17200 et seq. but may have phrased its request too narrowly. The law is now settled that neither compensatory nor punitive damages are available to private litigants under the UBPA. Unless Saturn seeks restitution, injunctive relief, or other equitable remedy, its UBPA claim should be dismissed.
2. Punitive damages are available in a wide range of business torts. The gravamen of the claim is simply that defendant knowingly acted or failed to act in a way that it knew or should have known was wrongful.
Footnotes
1. Remedies under the UBPA are cumulative to all other remedies. Bus. & Prof. Code §17205. The parenthetical quote from Dean Witter Reynolds, Inc., supra, could be read to say that a claim under the UBPA should not be joined with a tort claim. Yet the two types of claim were successfully combined in Allied Grape Growers v. Bronco Wine Co. (1988) 203 Cal.App.3d 432. Thus it appears that Saturn need not make an election of remedies.
2. The phrase "common-law unfair competition" often refers to unfair business practices generally (see, e.g., American Cyanamid Co. v. American Home Assurance Co. (1994) 30 Cal.App.4th 969, 976-977) but it is sometimes limited to practices that deceive consumers, particularly wrongful exploitation of common-law trademarks or trade names--"passing off" goods or services as those of a competitor (see Bank of the West, supra, 2 Cal.4th at 1263). The more specific rubric "unfair solicitation" allegedly applies here and is clearer.
3. The UTSA defines a "trade secret" as information that "(1) [d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Civ. Code §3426.1.
(4)There was also evidence that Robb was
actively trying to move the accounts of two more Hilb
clients and that he had begun trying to move one of these while he was still employed at Hilb.
Whether this conduct violated Robb's fiduciary duty, as alleged in Hilb's complaint, or any other
duty, was not before the appellate court.