Shakedown, California-style

In The Shakedown State in the WSJ, Walter Olson gives one more reason why California is going down the tubes.

Shakedown suits are nothing new in the Golden State, but Damian Trevor and two colleagues effectively mechanized the process. They combed through state regulatory records for businesses that had been issued some kind of reprimand, often over trivial paperwork omissions or missed deadlines. They sent letters in the name of Consumer Enforcement Watch, a newly organized group whose mailing address was the same as theirs, offering not to sue the businesses if they came across with checks in the thousands of dollars. The firm's "red letter," named after the color of the paper on which it was printed, put matters bluntly: "Either pay even more money to fight in court or settle out of court and get on with business." Many did pay.

In part because of press sympathy for mom-and-pop immigrant defendants, a furor began to build. And while trial-lawyer spokesmen took a "few bad apples" line, business groups saw Mr. Trevor's treasure hunt as merely the latest logical extension of section 17200, a law so bizarrely pro-plaintiff as to be a major disincentive for many companies to do business in the state. Indeed, the chairman and CEO of mortgage giant Countrywide pointedly cited 17200 in a recent letter to Gov. Gray Davis explaining the company's decision to halt expansion in California.

How pro-plaintiff is section 17200? As in the case of Nike v. Kasky, recently looked at (but then passed over) by the Supreme Court, it lets lawyers run to court without any injured client at all to sue against business practices that are either "unfair" -- a peerlessly amorphous term -- or "illegal," a category that takes in countless technical violations that actual regulators and prosecutors have already settled or view as too trivial to pursue. Lawyers can file valid 17200 suits that piggyback on a business's claimed violation of entirely unrelated laws, even if those unrelated laws make clear that private parties can't sue to enforce their provisions. If the law were a prop in Alice in Wonderland, it would carry a little tag saying, "Abuse Me."

So what is the leftist Democratically-controlled California legislature doing about it?

On July 8 the respective Judiciary chairs stunned business observers by pulling from a hat and passing substitute bills devised by the state's trial lawyer group, which styles itself Consumer Attorneys of California. Section 122, sponsored by Sen. Martha Escutia (D., Whittier), with its companion Assembly bill, would impose essentially superficial curbs on abuse. Most significant, judges would for the first time review fees (as opposed to settlements in general) but would be instructed to approve any and all fees if "consistent with applicable law." Lawyers would have to send a copy of each lawsuit to the state bar, and would have to include new boilerplate in their demand letters advising defendants of their right to consult their own attorney and so forth.

After that begins a trial-lawyer wish list, starting with liberal rules for "joinder" of defendants, along with explicit authority for lawyers to sue multiple businesses without knowing which ones have actually committed a violation. Most ominous of all, the bill would overturn a March decision in which the state supreme court barred lawyers from demanding the "disgorgement" under 17200 of any and all revenue a business had earned while an infraction was in progress, as opposed to restitution for customers affected by a practice, which they are still free to seek. The difference between the two is dramatic: If you're a pizzeria owner and get sued for unfairly claiming that your pie is the best in town, restitution might consist of giving away consolatory baskets of garlic bread, but disgorgement could mean paying out all the revenue you've taken in while the slogan was printed on your boxes. It's a remedy so drastic that courts seldom impose it; its real function is usually to give lawyers the leverage to terrify defendants into settlement. To top it all, the Escutia bill would allow lawyers to steer settlement funds not paid to actual consumers to organizations that "promote justice," code for the consumer and pro-litigation groups with which the lawyers are allied.

Sickening...