Copyright 2003 Daily Journal Corp. Reprinted and/or posted with permission. This file cannot be downloaded from this page. The Daily Journal's definition of reprint and posting permission does not include the downloading, copying by third parties, or any other type of transmission of any posted articles.
The so-called "safe harbor" defense to claims brought under the state's unfair-competition law provides that a defendant may not be held liable under the "unfair" prong of the law for conduct that the Legislature expressly authorized or approved. See Cel-Tech Communications Inc. v. Los Angeles Cellular Tele. Co., 20 Cal.4th 163 (1999).
The state Supreme Court recently relied on concepts of due process in apparently broadening the scope of the safe-harbor defense by holding that it applies to shield actions taken in reliance on laws later declared unconstitutional. See Olszewski v. Scripps Health, 2003 DJDAR 5822 (Cal. June 3, 2003).
The unfair-competition law generally proscribes unfair, unlawful or fraudulent business practices as well as any unfair, deceptive, untrue or misleading advertising. Business & Professions Code Section 17200 et seq. A business practice is considered unlawful if it violates any law or regulation. However, even if it does not violate any particular law, a practice may be deemed "unfair."
Based on this dichotomy, the Cel-Tech court articulated the safe-harbor defense by holding that a practice that is expressly authorized by law cannot be deemed "unfair." The court took pains to distinguish between conduct that is expressly authorized and conduct about which the Legislature is silent: "[C]ourts may not use the unfair competition law to condemn actions the Legislature permits. Conversely, the Legislature's mere failure to prohibit an activity does not prevent a court from finding it unfair. Plaintiffs may not plead around a safe harbor, but the safety must be more than the absence of danger."
The safe-harbor defense reared its head again that year in Lazar v. Hertz Corp. 69 Cal.App.4th 1494 (1st Dist. 1999). There, the plaintiffs brought a class action alleging that the defendants' refusal to rent automobiles to people younger than 25 constituted an unfair business practice. Noting that Civil Code Section 1936 expressly authorizes car-rental companies to require rental drivers to have attained a minimum age, Lazar upheld the trial court's dismissal of the unfair-competition law claim on summary adjudication.
Then, in Schnall v. Hertz Corp., 78 Cal.App.4th 1144 (2000), the 1st District Court of Appeal considered a class-action complaint under the unfair-competition law based on allegations that a car-rental company's fuel charges were excessive and punitive.
The Schnall court concluded that the safe-harbor defense applied as a pure matter of law and that the claim was subject to dismissal on demurrer.
The issue rose again two years later, this time in the cotext of the California Hospital Lien Act. See Swanson v. St. John's Reg'l Med. Ctr., 97 Cal.App.4th 245 (2nd Dist. 2002). In Swanson, the plaintiff alleged that the defendant hospital's filing of liens constituted an unfair business practice because the liens were based improperly on a "double billing" calculation under which the amount of the purported lien was greater than the plaintiff's liability for medical services under the terms of the contracts between the insurance carriers and health care providers.
The 2nd District held that, inasmuch as Civil Code Section 3045.1 expressly permitted hospitals to assert liens against settlements or judgments recovered by patients from third-party tortfeasors, the safe-harbor defense barred the unfair-business-practices claim.
Against this backdrop, the Supreme Court decided Olszewski, which involved a class action challenging the constitutionality of the lien-filing provisions of the state's Medical Assistance Program (Medi-Cal). See Welfare and Institutions Code Sections 14124.791, 14124.74.
Cimarrron Olszewski also alleged that Scripps Health's assertion of medical liens against judgments or settlements received by Medi-Cal beneficiaries was an unfair business practice under the unfair-competition law. Olszewski sought restitution of money recovered by health care providers through previous liens and a judicial declaration that the "liens asserted by defendants against her and the other class members were 'unlawful, unenforceable and uncollectible.'"
After holding that the Medi-Cal lien statutes conflicted with the federal Medicaid program and were therefore unconstitutional and unenforceable, the court considered whether Olszewski had stated a viable cause of action under the unfair-competition law.
Writing for the majority, Justice Janice Rogers Brown rejected Olszewski's contention that the Medi-Cal lien-filing statutes did not insulate Scripps Health from liability because Scripps Health had violated the federal Medicaid program. The court reasoned that federal Medicaid statutes do not impose any obligation on Medicaid providers but merely create a duty that runs to the state alone. The court distinguished Brillantes v. Superior Court, 51 Cal.App.4th 323 (2nd Dist. 1996), reasoning that the court in that case merely considered a health care provider's obligations under the Medi-Cal statutes but not under federal Medicaid law.
Relying on general concepts of due process, Brown next decided that the safe-harbor defense applies to shield business practices that comply with laws that later are declared invalid: "Retroactive application of a decision disapproving prior authority on which a person may reasonably rely in determining what conduct will subject the person to penalties, denies due process."
In a sharp retort to this analysis, Justices Ronald M. George and Kathryn Mickle Werdegar wrote separate concurring opinions voicing strong disagreement with the majority's apparent broadening of the safe-harbor defense.
Werdegar reasoned that, while due-process guarantees may provide a safe harbor in an action to punish a defendant for conduct approved by a previously valid state law, "[a] business whose practices are found unlawful or unfair could hardly complain, on fairness grounds, of being enjoined from further such violations, even if the practices were based on what seemed an enforceable state law."
Similarly, Werdegar decided, even a grant of restitiutionary monetary relief is not necessarily unfair merely because the defendant believed in good faith that its practice was lawful.
Only time will tell whether Olszewski has opened the door to a broader due-process defense to unfair-competition claims. In proper perspective, the case merely stands for the proposition that businesses properly may rely on laws that are facially valid but may face liability for subsequent conduct once the law is declared unconstitutional. In this rapidly evolving area, however, Olszewski certainly provides fertile grounds for creative lawyering.
Related Attorneys
Partner
