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Allan Favish is a Los Angeles-based attorney whose focus is on General Insurance Defense and Litigation Insurance Coverage/Reinsurance & Bad Faith Litigation.  A UCLA graduate, he received his J.D. at Hastings College of Law in 1981.

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Erroneous Holding of Appellate Court in Consumer Fraud Law

When I filed my lawsuit against the Regents of the University of California alleging fraudulent advertising, I believed I could lose only if the courts distorted the facts or the law. That distortion has occurred and I'm not the only one who thinks so. The California attorney general believes the recently published appellate opinion in my case could jeopardize civil enforcement of the unfair competition and false advertising statutes.

My lawsuit, Allan J. Favish v. Regents of the University of California, Los Angeles No. BC129082, alleges that UC's law and medical schools tell prospective applicants that UC does not discriminate on the basis of race in admissions. I allege this statement is misleading and violates California Business and Professions Code Sec. 17200 et seq. (the Unfair Competition Act).

The UCA allows "any" "natural persons, corporations, firms, partnerships, joint stock companies, associations and other organizations of persons" to be enjoined from engaging in misleading advertising in suits brought by government prosecutors and private individuals on behalf of the general public.

Although there was no published appellate case where the UCA was used against UC or any governmental agency, there was precedent for holding UC accountable under similar consumer protection laws.

In The Regents of the University of California v. Superior Court (Phil Regan), 17 Cal.3d 533 (1976), the Supreme Court ruled that the state's usury laws, which cover "any person, company, association, or corporation" or "copartnership," were applicable to UC. The Supreme Court ruled that governmental agencies are excluded "from the operation of general statutory provisions only if their inclusion would result in an infringement upon sovereign governmental powers. Where no impairment of sovereign powers would result ... the Legislature may properly be held to have intended that the statute apply to governmental bodies even though it used general statutory language only." Id. at 536.

Recognizing that under article IX, sec. 9 of the California Constitution, the Regents have a certain degree of independence from the Legislature regarding control over UC (id. at 535 n.1.), the Supreme Court nevertheless found the usury laws were applicable to the Regents because no "infringement or impairment" of UC's educational function would result.

The Supreme Court expressly relied upon Regents (Phil Regan), in San Francisco Labor Council v. The Regents of the University of California, 26 Cal.3d 785, 789 (1980), when it said, "[i]t is true the university is not completely free from legislative regulation," and that "it is well settled that general police power regulations governing private persons and corporations may be applied to the university."

These two cases clearly establish a rule of accountability for UC. A law that purports to be generally applicable to private entities, and does not exclude application to UC, applies to UC provided UC's educational function is not impaired or infringed.

Last August, Judge Dion Morrow, since retired, sustained the Regents' demurrer, reasoning that the UCA was not intended to apply to the Regents. In Favish v. Regents, 46 Cal.App.4th 49, 53 Cal.Rptr.2d 757 (1996), Division 7 of the 2d Appellate District (Justices Fred Woods, Mildred Lillie, P.J., and Earl Johnson) affirmed the judgment, but implicitly rejected Morrow's reasoning. Instead, the Court of Appeal reasoned that the legislature lacks the constitutional authority to control the Regents' advertising.

Additionally, the Court of Appeal erroneously identified the UCA as being in the Government Code, rather than being in the Business and Professions Code.

I discussed Regents (Phil Regan) in my briefs and at oral argument, yet the Court of Appeal failed to mention the case. The court also failed to assert that application of the UCA to the Regents would cause any "infringement or impairment" to UC's educational function.

Instead, the court asserted a new standard for UC accountability, stating that "[a] provision prohibiting 'untrue or misleading advertising' ... does involve internal university affairs" and that "[i]f every university communication was subject to an 'untrue or misleading' challenge -- judicially cognizable -- then the power of the Regents to govern would suffer 'a very significant intrusion.'"

The Court of Appeal did two important things here. First, the appropriate concern for whether application of a state law would "infringe or impair" UC's educational function, as expressed in Regents (Phil Regan), was ignored while the Court substituted its own standard.

Second, the Court created a standard so nebulous that it effectively eliminates UC accountability under most state laws since application of those laws to the Regents will "involve internal university affairs" and would constitute "a very significant intrusion" into the Regents' power to govern. Therefore, under the Court's new standard, even the usury laws could not be applied to the Regents.

While ignoring Regents (Phil Regan), the Court of Appeal used a different ploy for confronting Labor Council. The court did cite Labor Council and quoted its recognition that "it is well settled that general police power regulations governing private persons and corporations may be applied to the university."

This would seem to ensure application of the UCA to the Regents, provided such application does not "infringe or impair" UC's educational function. Therefore, the only way for the Court of Appeal to evade Labor Council would be to rule that the UCA was not a "general police power regulation governing private persons and corporations."

However, in addition to being nonsense, such a ruling also would contradict established authority. According to the California Supreme Court, "prevention of misleading advertising ... has long been deemed a proper subject for the exercise of the police power." Serve Yourself Gas, etc. Assn. v. Brock, 39 Cal.2d 813, 818 (1952). "[T]he historic police powers of the States extend to consumer protection," said the court in Smiley v. Citibank, 11 Cal.4th 138, 148 (1995).

Nevertheless, the Court of Appeal ruled that "[a] provision prohibiting 'untrue or misleading advertising' ... is not a general police power regulation ..."

I was pleased to learn that, like me, the attorney general objects to this portion of the ruling. On July 2, 1996, Deputy Attorney General Ronald A. Reiter wrote to the appellate panel that "we are very concerned that some of the published language will adversely affect civil law enforcement actions brought by the Attorney General, the district attorneys, and other agencies against perpetrators of deceptive advertising and unlawful business practices.

"[W]e believe that serious consequences to civil law enforcement actions under the false advertising and unfair competition statutes in other contexts will flow from the general holding that these statutes are not exercises of the State's police power," said Reiter.

He explained that characterization of the UCA as a general police power regulation is significant because that characterization often is necessary to prevent preemption of state consumer protection laws by federal laws. The characterization is also necessary for avoiding the automatic stay under bankruptcy law, Reiter said. Moreover, he added, Congress prevented the removal of state police power actions from state court to the federal courts. "Obviously, law enforcement activity could be effectively stymied and cases would be mired in the bankruptcy court by the application of the automatic stay and removal provisions of federal law if the false advertising statutes were held not to be police power regulations," according to Reiter.

On July 5, the court denied the attorney general's request for modification.

My attempt to hold UC accountable under the UCA to force truth in advertising about its racial admissions practices has resulted in a perversion of the law that threatens to undermine law enforcement's ability to protect all California consumers. I invite the attorney general to formally support my petition for review to the California Supreme Court.

[The major documents in this case are available at http://www.acusd.edu/~e_cook/ on the World Wide Web.]

Los Angeles Daily Journal, July 24, 1996, p.6 [shortened version].  The Los Angeles Daily Journal is the city's primary newspaper for the legal community.

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