Dan
Welcome to Sound Business Insights. I’m Dan Watkins. This episode is about unfair business practices. This podcast is not intended to provide legal advice.
Neil
Dan, can you help me understand what an unfair business practice might include?
Dan
A better question is what would not be an unfair business practice? Because it seems to be in every lawsuit that we defend, you sue someone for sexual harassment, you’re going to get sued for <laugh> unfair business practices. You sue them for any type of fraud in the business arena. You’re going to get sued for unfair business practices. You sue them for unfair competition. There you go. You’re going to get sued again, under Business and professions code section seventeen thousand two hundred and seventeen thousand five hundred. And there in between, there are many, many laws talking about what’s unfair and what you can sue for. And it seems to cover everything. It seems to be included in almost all lawsuits, and it has an attorney’s fees clause.
Neil
What are some of the basic examples of unfair business practice?
Dan
Look at it from two perspectives. If you are being sued by like someone you’re dealing directly with and they say, well, what you’re doing is gaining an unfair business practice over me, you’re violating my rights. That’s a direct unfair business practice. If the person across the street <laugh> is in business and it’s similar to yours and they’re doing things that are affecting your business to their advantage and your detriment, that could be an unfair business practice. So as broad as it is, and as big many large examples as it is, it’s important to see your lawyer <laugh>. When you’re in business and you have contracts, this is a big way people get in trouble. They put things in their contracts that are deemed to be an unfair business practice. And those can be anything from how they price, how they pay their employees, how they advertise, how they labeled their products. All those things can turn into unfair business practices and a cause of action. And you’re getting sued.
Neil
I would think one of the biggest buckets would be fraud and unethical contact. How extensive of a bucket is that fraud and unethical conduct?
Dan
It’s pretty widespread. I mean, those are strong words for describing it. I don’t think you have to use unethical or those are words we use for an actual fraud cause of action in unfair business practices. It’s more of a, what was the effect of your action? Were you accurate in your representations? Did someone detrimentally rely on something you did say or said to their detriment? And were there any other statutory violations that you committed in the context of whatever contractor agreement you have that would make it unfair to whoever you’re dealing with or to your competitors? And the way you do business, if you don’t pay your employees their legal employment taxes and you don’t take out withholdings and your competitor does, they’re going to say it’s not fair. Right? You don’t have to follow the law. And I do. So how do I compete? Unfair competition,
Neil
Good. Misuse of power is another example of I have power over you in one form or another and I’ve abused that privilege. How does that come into play in these types of actions?
Dan
It’s a great question. When you have superior negotiating position and you enter into an agreement or a relationship in business and it turns out that you’re getting an unfair advantage over it, in addition to the unconscionable, unfair fraud cause of action, you’re going to get this unfair business practice cause of action. And it’s going to say that the terms of the contract should not be held against me. And you’re going to get a list of about 12 causes of action and one will be this unfair business practices one. And if they can make that stick, then they get all their attorneys’ fees.
Neil
So when I think one of the things I think about a misuse of power would be you’ve talked about classes of shareholders or members and that they all have to be compensated the same, treated the same, right? And one example might be that someone didn’t get the same distribution as someone else got or isn’t being paid the same amount. Or those examples of
Dan
Yes it is <laugh>. I hate to say it because every example you’re giving me, I’m going to say yes, you’re going to find an unfair business practice cause of action. But like shareholders should be treated in a like fashion. So there’s a big difference between an LLC and a corporation. Mm-hmm. <affirmative> corporations can have shareholders agreements, but they’re limited on how much flexibility they have and how they treat different classes of shareholders. Whereas an operating agreement in your limited liability company can have people investing more and taking out less or investing less and taking out more. There’s more flexibility in how you treat a member than you treat a shareholder. Right. And in each case, <laugh>, if you do anything that seems unfair or fraudulent or anything that the lawyer can twist into a cause of action, you’re going to see this unfair business practices cause of action in a complaint against you if they’re going to sue you.
Neil
Dan, what are some other examples in your mind of what might be considered an unfair business practice?
Dan
Well, you covered a couple of them. Other ones would be theft and embezzlement. This actually happens a lot. I mean, multiple times a year we’re dealing with issues where actual theft and embezzlement of assets will occur. And so if you are an investor in a company and it’s not doing well, then all of a sudden it’s doing well. But you’re not getting any money and you’re not getting any access to the corporate records. And when you do get access, your forensic CPA quickly tells you that there’s been theft going on. You are going to be bringing an action for theft and embezzlement, but you’re also going to want to bring an action for unfair business practices because in addition to paying you back all the money they stole, you’re going to get the attorney’s fees too.
Neil
Mm-hmm. <affirmative>.
Dan
And so that would be a gross example of unfair business practices, someone stealing money from you.
Neil
Yeah. Self-dealing.
Dan
Self-dealing. This happens so much. You got your partner over there and your shareholders together and he is using the corporate account to just give himself money. And he’s having vendors give him money. He’s having customers pay him under the table for services. He’s having trade secrets given to him and just taking everything he can. And again, you have something like that happen. You have more rights than just I want an accounting and I want my money back. You have a right to fraud and the unfair business practices. So, you get the full menu of a hammer coming at you or going at them when you make sure that you have a law firm that understands these kind of laws.
Neil
So you mentioned trade secrets. It might surprise people that employees can actually commit an unfair business practice.
Dan
Correct. When we write up our employment agreements and we have a lot of employees for our clients.
Neil
Mm-hmm. <affirmative>,
Dan
we know that you can’t say that they can’t compete against the company in California. Great. Unless they’re an owner and then, and they’re selling the company, then these things are unfavorable and to include them could also be considered an unfair business practice.
Neil
Wow. <laugh>.
Dan
So, including a non-competition clause in your employment contracts. If they have a smart lawyer, they’re going to sue you for whatever they want to sue you for. And unfair business practices for having an illegal clause meant to intimidate them into not competing with you. On the flip side, you can include an agreement, which most intelligent businesses do that they don’t steal trade secrets or use your trade secrets. Now if you’re a company and you make sure you have your trade secrets identified and kept in a manner that’s clearly understood to be trade secrets and an employee does take a trade secret, that’s an unfair business practice on their part. And you can get your attorney’s fees, and you can stop them. You can get an injunction against them. Yes. And anyone using your trade secrets can be enjoined as well. And that we’ve used that a hundred times.
Neil
And that has power in California.
Dan
Well you’ve got this employee, he has your trade secrets, your customer list, the complete customer list with all the notes about the things that that customer likes. And he takes it and goes to one of your competitors and the competitor and him are just making money on you. You can get an injunction against him and an injunction against your competitor and take them all down.
Neil
Mm-hmm. <affirmative>
Dan
it’s got to be planning ahead and have that trade secret clause in your employment agreement.
Neil
I was surprised that it also includes unlawful actions.
Dan
Well these are all unlawful <laugh>. They don’t have to be, they don’t have to be criminal. But officers, shareholders and other members who take actions that are illegal and benefit themselves or hurt the company, they can all be subject to this law with a bunch of other causes of action. Of course.
Neil
Then you’ve often said beware of small disputes, especially in this area because small disputes can become huge financial disputes and consequences. I think this is an example of that. Can you tell us why?
Dan
Well, what we advise our clients to do is when you see something unusual but you’re not ready to go to court or you haven’t been sued yet, but you’re concerned about things you’re seeing and you want to know how best to approach it. We say, come see us. We know how to approach it. We approach it in such a way where, number one, if it’s coming at you, we know what you should do to get out of the way.
Neil
Mm-hmm. <affirmative>.
Dan
And to mitigate or to
Neil
Remediate.
Dan
Remediate. Exactly. And if something’s being done to you, we know how to capture information, capture evidence without setting off alarms so that you’re in a much more advantageous position to either stop it or if you have to take action against the guilty party.
Neil
Earlier in this conversation, you’ve dropped attorney’s fees into the conversation. I’d like to attack that head on. So tell me the difference in a dispute when something isn’t open to attorney’s fees versus when some action or lack of action opens the door to attorney’s fees.
Dan
Lots of reasons. One, these attorney’s fees clauses are invitations to lawyers to sue. Yes. Because if you have a dispute that involves attorney’s fees, then the lawyer can take on a contingency and know that there’s a pot of gold for him after he wins because he’s going to claim massive amounts of attorney’s fees. Um, and if you don’t have the attorney’s fees clause, then you’re, you get ripped off by 75,000 and you want to sue them and your lawyer says it’s a 150,000 to get to court, where are you? So planning these things ahead, that’s why I say, come see us first <laugh> and we’ll try to position this either to a situation where it’s, there is no unfair business practices clause or cause of action and they can sue you, but everybody’s got to pay their own attorney’s fees.
Neil
Mm-hmm. <affirmative>
Dan
makes it harder to sue you, but, and of course the opposite direction. You want to make sure that you’ve gathered enough information where not only will you be righted for the wrong, but you’ll be paid for your efforts to do so on their dime.
Neil
So Dan, in unfair business practice disputes, what are the other real potential hazards other than attorney’s fees?
Dan
Well, this is an unfair business practice law that can be enforced by the government too. And also you can be held liable for your attorney’s fees, for your damages. And there can be punitive damages up to treble damages.
Neil
Wow.
Dan
And so let’s say you’re a small business and you just can’t fight. You can go to the attorney general’s office; you can go to the state and you can go to the DA’s office and to ask for help. And when they bring the hammer down, they can back it up with punitive damages. Sometimes they’re paid to the state of California and sometimes they’re paid as damages to the parties. But yeah, there’s a lot of teeth. You have to have a real good case obviously, but if you can’t afford it and you want help, you can go get help from the state.
Neil
So you mentioned earlier if you even suspect that something’s going on to come talk to us, can you talk a little bit about our negotiation mediation or our unique approach that we take and how often we’re able to resolve these before they get out of hand?
Dan
There’s a psychological reason why it’s easier for a third party to negotiate for you than a first party. Think about trying to negotiate with your wife
Neil
<laugh>,
Dan
No matter how logical she is or you are, there’s an emotional content. Yes. And when it comes to people in business with each other, there’s an emotional content. So if you say, I’ll offer $20,000 to resolve this matter, then the other side will say, I want 200,000. But if an attorney tells your attorney who you have to pay, these are the reasons I think this is a good offer. And then that attorney tells the client, then the case is resolved. And if they can’t get that done because of this, the way people are, then if we go to a third party mediator who’s been doing this for a long time, and then we have the parties and then we have the, their attorneys and the mediator, it takes that many links of communication to get a deal done. And that mediator is very successful resolving many cases. We’re saying the same thing, but if we say it from me to you as parties, we’ll never settle it. But if we say the same thing from me to our attorney or me to our attorney to the mediator, there’s a 90% chance it’ll settle. And you’re saying the same thing. So even if you think you’re so smart and you know all the law, it’s coming from you, if it’s coming from an attorney or a mediator, the case will resolve if you, I, I rarely see it happen.
Neil
So what percentage of these types of cases are we usually able to resolve through negotiation or even mediation?
Dan
Well, I think I’ve said before, like, 96% of cases settle. A judge can only take on, a single judge can only take on maybe 40 trials a year, 45. They usually have about 1900 cases a year to resolve. So if you do the math and you know your case is headed towards settlement, then you want a law firm that realizes that and spends your money in such a way they set it up for settlement. We don’t spend too much money where it’s not worth it, but we spend the right amount of money doing the right things, discovering the right evidence and present it to opposing counsel and hopefully cooler heads will resolve the matter. And if not, we take it to mediation. We know some bad mediators in town and we know some excellent mediators in town, former judges and the like, that actually have great experience and can lend their experience to the parties, twist people’s arms or just simply negotiate with them in a good faith manner where you don’t feel like you’re getting ripped off. Nobody has control of the mediator, you feel safe and matters get settled,
Neil
Which is the whole point.
Dan
Yes, it is.
Neil
So Dan, without disclosing the names of the innocent or guilty, can you share a couple examples of real life stories where unfair business practices have come into play?
Dan
Well, all these cases we settle, I would say the majority have these non-disclosure agreements. <laugh>?
Neil
Yes, of course.
Dan
So nobody wants to settle and have it, you know, broadcast out there. So I’m going to change the product to protect the innocent. We had a case involving the beauty industry and they, these clients invented a product and then didn’t go anywhere with it. They thought it was a great product. Everybody put in, you know, 10, 20, 30,000 bucks and they tried to make it work and it didn’t work for four or five, six years. And then there’s like 10 people in the group. And then three of the people were seen driving really expensive cars. I don’t know if you’re going to steal from somebody, why would you drive an expensive car? <laugh>? Because,
Neil
Because you’re not.
Dan
So they took the company overseas to uh, you know,
Neil
Foreign land.
Dan
Foreign land, and started doing well and, and selling it and partnering with it. And they just formed another company with the same product, <laugh>. And so we finally got around to it and we had our lawsuit ready to go and we filed our lawsuit and then we negotiated with them. This is an example of settlement. Yes, we negotiated with them, but we said, look, here you are about to enter into an agreement with another investor and it’s going to be worth millions to you. And we want to be there <laugh> taking their depositions and asking them if they know all about what you did to us.
Neil
Mmm Hmm.
Dan
And we want to be filing actions against you out of their land and any jurisdiction we can find. So rather than that they agree to settle and they paid my clients, millions of dollars. We didn’t have to do anything else. And they paid all the other investors off and then they proceeded on with the venture. And now everything’s all good and nice. It’s amazing what several million dollars would do to resolve the dispute <laugh>.
Neil
So what’s another example of an actual situation we’ve been through or a hypothetical that reflects that type of unfair business practice?
Dan
Well, I got a good one. <laugh>. It’s hard to believe this happens, but it, it’s been a while. But this group of doctors, and I can’t say what kind because of course one might be able to lead to it, but group of doctors, there are about eight of them and they had their practice and they’re all happy as can be. And then our client, <laugh> went to work one Monday and unbeknownst to him, the company had moved, the practice had moved, everything had moved to a new location, new address. The mail had been changed, the phones had been changed, everything had been changed and he or she had been locked out. They just physically took the practice, moved it, took all of the contracts, took everything, website, everything, all the assets just took it. Yep. Dare you to sue me. Now, neither, needless to say it didn’t end well for them <laugh> because we were prepared for this.
Dan
We knew what to do. We immediately got injunctions, we got provisional remedies, grabbing the bank accounts, making them pay for our attorney’s fees while we went after them. It was quick, it was fast. And then we ended up splitting the company and getting our clients fair share out of it. That was a bummer for everybody. It was a stupid move. But we see a lot of crazy stupid moves in the healthcare industry when it comes to business. Sometimes some of these healthcare workers can be very aggressive in business as opposed to other people who are just in business and are not professionals. I see some of my disputes with professionals can be very personal and aggressive, whereas my non-professional, regular business people are more apt to just simply try to take advantage financially without any personal animosity. So with hundreds of lawsuits every year we deal with, that was an interesting one. We just couldn’t believe how bold they were to just take the bank accounts, take the mail, take the phones, take every communication, every contract, and just start billing it as their own. Even the work that our client did personally, not counting the share of profits they should have had. So it just happened overnight.
Neil
So if an investor or shareholder or business owner feels like something’s amiss, why should they reach out and call you?
Dan
I got another example. Okay, this is the last one, I promise.
Neil
That’s fine.
Dan
Another group of doctors, they belong to a chain of other doctors, you know, and I don’t want to say what kind of business, right? And so we had a CPA go do an audit and it was just like $5 off here, $50 off there. I mean, the difference in what they thought it should have been was off about maybe $2,000 a month or 1500 a month all spread out. And so they couldn’t understand it. And then I, I said to the CPA, you know, I heard this in litigation a long time ago, off a penny, off a million. Well, it turned out that the reason it was so scattered is because they were stealing from every one of the group of this group of this chain in similar fashion. So if you combined them all, they’re taking large amounts of money, millions by quadruple billing <laugh> billing the same invoice 15 times, and it was making headquarters much more profit and nobody caught it.
Dan
We caught it and we converted that into a way to grant our clients a major share in the company for much less than it would’ve had to pay just because of that unfair business practice. So you can use it as a tool if you find it, instead of just accusing them, you did this, you bring it to me <laugh>. And we’ll identify not only your damages in court, but your damages in equity, court of equity and fairness on what you can do. You don’t always have to go for dollar damages. If you’re in business with somebody and they’re doing something fraudulent or unfair, you may want to adjust it to the point where, well, we’ll dissolve a company. I’ll take half of it right now, or we’ll reset it to when I entered into the agreement and will unwind the whole thing back 15 years ago when you tricked me into doing business with you and I wanted the valuation from back then, that’s what we did and it was really, really advantageous.
Neil
Yeah, absolutely. So stealing a little bit by the big corporation costs them millions in the long run.
Dan
Yeah.
Neil
Would you talk a little bit about the concept of what a free consultation really is and why someone who thinks there’s something amiss should pick up the phone and give us a call?
Dan
Free consultation at our firm’s a little different than other firms. What we do is we have you give us a call on the phone and if there’s documents involved or facts involved and you’d like to email them to us, we’ll look them over first for free and then we’ll talk to you and you get a, an educated free consultation where we can actually tell you, uh, exactly what we’re seeing. And since we see this so much, we’re more likely to spot it than, and if we just talk casually about what hypothetically you think you’re going through, we may spot things you don’t even know you’re going through if we just send us some documents to look over or some emails or whatever you want to send and we’ll tell you, don’t worry about it.
Neil
Or I think you need to look at this and gather that.
Dan
Yes. You can learn more about the Watkins firm at https://watkinsfirm.com or call our office at (858) 535-1511.