Even When Civil Penalties Are Sought, Unfair Competition and False Advertising Claims Remain Equitable and Will Not Be Tried by a Jury

Foley & Lardner LLP

Foley & Lardner LLPThe California Supreme Court recently held that claims brought by the government for civil penalties under California’s unfair competition law (B&PC § 17200, et seq.) and false advertising law (B&PC § 17500, et seq.) are to be tried by a court, not by a jury.  Under the California Constitution, litigants have the right to a jury trial in cases involving legal claims, but this right does not apply where the claims are solely equitable in nature.  In reaching its conclusion, the California Supreme Court explained that causes of action under these two statutes are equitable, rather than legal, in nature because even civil penalties are meant to prevent or discourage future conduct. 

Nationwide Biweekly Administration, Inc. v. Superior Court, 9 Cal. 5th 279 (2020)

In Nationwide Biweekly, the petitioners (“Nationwide”) operated a debt payment service in California and other states.  Under the debt payment service program, a debtor would make biweekly payments to Nationwide of half the debtor’s monthly loan payment, resulting in an extra month’s payment each year, and Nationwide would pay those amounts to the debtor’s lender, for a fee.  Nationwide advertised through direct mailers to consumers with residential mortgages, and through follow-up telephone conversations.

In 2015, the district attorneys of four California counties (on behalf of the People) filed a civil complaint alleging that Nationwide had violated California’s unfair competition law set forth at Business & Professions sections 17200, et seq. (the “UCL”) and its false advertising law set forth at Business & Professions sections 17500, et seq. (the “FAL”) by, among other things, (1) implying that Nationwide was affiliated with the consumer’s lender; (2) disguising the amount Nationwide’s services actually cost, and (3) overstating the amount of savings a consumer could reasonably expect to receive.  The complaint sought an injunction, restitution of all money wrongfully obtained by Nationwide from California consumers, and civil penalties of up to $2,500 for each violation of the UCL or FAL. 

Nationwide demanded a jury trial, and the district attorneys moved to strike the jury demand based on well-settled law that the action was brought in equity and therefore required a court trial.  The trial court granted the motion to strike the jury demand.  Nationwide filed a petition for writ of mandate in the Court of Appeal, which the Court of Appeal initially denied.  The California Supreme Court granted Nationwide’s petition for review, and directed the Court of Appeal to issue an order requiring the government to show cause why Nationwide did not have a right to a jury trial under the circumstances.

Following briefing and argument, the Court of Appeal held that Nationwide had a right to a jury trial under the jury trial provision of the California Constitution (article I, section 16).  In doing so, the Court of Appeal relied heavily on the U.S. Supreme Court decision in Tull v. United States (1987) 481 U.S. 412.  Tull addressed the application of the civil jury trial provision of the Seventh Amendment to the federal constitution.  Relying on Tull, the Court of Appeal concluded that because the government was seeking civil penalties (in addition to injunctive relief and restitution), the “gist” of the UCL and FAL causes of action should be considered legal rather than equitable, thus giving rise to the right to a jury trial under the California Constitution.

The California Supreme Court granted the government’s petition for review to determine whether there is a right to a jury trial in a UCL or FAL action that seeks civil penalties as well as injunctive relief and restitution.

There Is No Statutory Right to a Jury Trial Under Either the UCL or FAL

Turning first to whether there is a statutory right to a jury trial under either the UCL or the FAL when the government seeks civil penalties, the California Supreme Court reviewed both the legislative history and legislative purpose of each statute and concluded that the legislature intended for these causes of action to be tried by the court, “exercising the traditional flexible discretion and judicial expertise of a court of equity,” rather than by a jury.  The legislative history and jurisprudence for both statutes contain numerous broad standards designed to permit a court to conduct “a nuanced and qualitative determination” about whether a particular business or advertising practice is unfair or deceptive.  These broad, flexible standards permit the statutes to cover new and innovative business practices, yet would prove challenging for a jury of laypeople to apply.  

The court emphasized that “having a court, rather than a jury, decide the question [of] whether a business practice is properly considered unfair or deceptive for purposes of the UCL has the additional significant benefit – for both defendants and plaintiffs – of facilitating appellate review of that determination, because a trial court, unlike a jury, is required to provide, upon request of any party, a statement of decision explaining the factual and legal basis for its decision.  And having appellate courts in the position in which they can adequately review trial courts’ evaluations of the validity of business practices under the UCL, in turn, promotes the creation of a cumulative body of precedent that improves the consistency of future determinations under the UCL and provides needed guidance to companies in the formulation of their business practices.” 

There Is No Constitutional Right to a Jury Trial Under the California Constitution 

The California Supreme Court then analyzed the issue of the right to a jury trial under California constitutional principles.  In general, the California Constitution provides a right to a jury trial in common law actions at law that were triable by a jury in 1850, but not to suits in equity that were not.  When a cause of action involves equitable and legal issues that are not severable, California courts look to the “gist of the action” to determine whether the action should be considered legal or equitable.  The court concluded that the gist of a civil action under the UCL and FAL is equitable and not legal in nature, and thus that there is no right to a jury trial under the California Constitution.  

First, the court held that “the statutory causes of action established by the UCL and FAL are clearly not of like nature as any common law right of action” in existence in 1850.  Instead, both statutes “were enacted for the specific purpose of creating new rights and remedies that were not available at common law.” 

Second, looking at the statutory schemes of both causes of action, the court concluded that the gist of an action seeking both injunctive relief and civil penalties is equitable.  This is consistent with nearly half a century’s worth of Court of Appeal decisions that “have explicitly and uniformly held that actions under the UCL and FAL are equitable in nature and are to be tried by the court and not by a jury, including when the remedies sought are civil penalties as well as injunctive or other equitable relief.”  Noting that the bulk of the remedies available under both statutes are clearly equitable, and that civil penalties are noncompensatory in nature and are instead preventative, the court again concluded that there is no right to a jury trial under the California Constitution. 

Nationwide Biweekly Administration, Inc. v. Superior Court, No. 2020 WL 3969328 (Cal. Ct. App. July 14, 2020)

On remand, the Court of Appeal “address[ed] Nationwide’s claim that it has a federal constitutional right to jury trial,” as the “Supreme Court declined to consider whether Nationwide has a right to jury trial under the federal constitution.”  Nationwide argued “it has a right to jury trial under the Seventh Amendment of the United States Constitution, which it claims applies to the states through the Fourteenth Amendment.”  The Court of Appeal noted: “There is an unbroken line of cases holding the Seventh Amendment does not apply to state court proceedings.”  Referencing the U.S. Supreme Court case, McDonald v. City of Chicago, 561 U.S. 742 (2010), which “rejected the notion that the Seventh Amendment applies to the states,” and the California Supreme Court case, Shaw v. Superior Court, 2 Cal. 5th 983, 993, fn. 8 (2017), which “said the same thing,” the Court of Appeal concluded: “Contrary to Nationwide’s suggestion, we are bound by the decisions of the United States Supreme Court and California Supreme Court in this regard.” The Court of Appeal therefore denied the petition for writ of mandate and remanded the case to the superior court for further proceedings consistent with its opinion.

Potential Impact of This Decision

The Nationwide Biweekly decision clarifies that all UCL and FAL causes of action, including those brought by the government seeking civil penalties, in addition to injunctive relief and restitution, must be tried by the court and not by a jury.  As a result, companies facing lawsuits alleging these claims should be aware from the initial filing of the complaint that these causes of action will be heard by the court, making the assignment to a particular judge even more important.  Companies should research their assigned judge quickly, to permit for a timely peremptory challenge if appropriate.  Additionally, since the court will serve as the fact-finder rather than a jury, moving for summary judgment can be a wise choice, as both an opportunity to narrow the issues and to educate the court. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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