Landlord & Tenant

(Margulies, J.; Stein, Acting P.J., Swager, J.)

Not Officially Published

The trial court erred in striking most of a complaining commercial tenant's allegations that its landlord engaged in unfair business practices because, as the opposing party was a landlord and not a competitor, the rule of Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.34 163 ' which holds that claims against competitors under Business and Professions Code section 17200 must contain an allegation of an anti-trust-like violation ' was inapplicable.

Pier 39 Limited Partnership (Pier 39) leased commercial space for a retail store to Flags & Things Enterprises Inc. (Flags) at its Pier 39 location in San Francisco. Pier 39 leases the structures constituting the Pier from the City and County of San Francisco (City), in turn leasing individual stores to business owners. Under the terms of the master lease with the City, Pier 39 pays both a fixed 'preferred' rent and a percentage of its 'gross revenues' from the Pier, which includes the rent paid by subtenants.

Pier 39 sued Flags for rent. Flags cross-complained, asserting, inter alia, a cause of action for unfair business practices under Business and Professions Code section 17200. The amended cross-complaint alleged that after Pier 39 began in 1981 to operate under the master lease, its management began to extract what Flags labeled as 'kick-backs' from certain of the tenants, in return for which the tenants were given preferred locations on the Pier. These 'kick-backs' took the form of partial ownership interests in the business of the tenant, granted to either the individual managers of Pier 39 or to Pier 39 itself (the pleading was unclear on this point). In addition, cooperating tenants were favored with selective enforcement of rules and lease provisions and the sharing of confidential information from 'non-participating tenants.'

Pier 39 filed a demurrer contending, in part, that Flags' allegation of unfair conduct was insufficient under the rule of Cel-Tech, which governs the pleading of unfair competition claims among competitors. In Cel-Tech, the California Supreme Court held that when the parties to the suit are competitors, the definition of an 'unfair' act under section 17200 is 'conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.' Cel-Tech, at p. 187. In ruling on Pier 39's motion, the trial court limited Flags' section 17200 claim to the complaint that Pier 39 shared its confidential information with other subtenants, concluding that the remaining allegation of unequal treatment of those who did not take part in the 'kick-back' scheme sounded loudly in antitrust and thus fell 'squarely within the limitations imposed by Cel-Tech.' Flags elected not to pursue the considerably narrowed section 17200 claim.

On appeal, finding the rule of Cel-Tech inapplicable because Flags and Pier 39 were not competitors, the court reinstated the section 17200-based claim that Pier 39 gave preferential treatment to certain leaseholders. '[T]he gravamen of the claim is not activity by Pier 39 in its role as a competitor of Flags but in its role as landlord, in which role it allegedly treats Flags unequally,' stated the court. Still, in the wake of Cel-Tech's disapproval of previously existing standards and absent a clear consensus in the State's Courts of Appeal as to the proper test for evaluating a non-competitor's claim of unfair business practices under section 17200, the court found itself without a clear standard to apply. It therefore proclaimed that, in the absence of better guidance from the Supreme Court, the trial court on remand should apply the traditional balancing test enunciated in Smith v. State Farm Mutual Automobile Ins. Co., (2001) 93 Cal.App.4^th 700 (the test of whether a business practice is unfair involves an examination of that practice's impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer); but, in addition, for Flags to prevail in a claim under section 17200 it would have to show, in accordance with Schnall v. Hertz Corp., (2000) 78 Cal.App.4^th 1144 (holding that an unfair business practice claim must be tethered to some legislatively declared policy), that Pier 39's conduct, in addition to failing the Smith test, contravened a legislatively declared policy. This Flags might be able to do if it could show that various provisions of the Civil Code enforcing compliance with contracts indicate a legislative intent to protect the sanctity of contractual commitments. If the benefits conferred on cooperating tenants were part of a covert scheme to deprive the City of income to which it was properly entitled under the master lease, Pier 39's activities might run afoul of such legislative intent, giving Flags a viable section 17200 cause of action against its landlord.

COMMENT

This unpublished decision represents an unusual intersection of the Unfair Competition Law (UCL) with Landlord/Tenant law in a relatively common breach of commercial lease situation.

California courts vary as to the proper test for evaluating a claim of unfair business practices between non-competitors such as a landlord and tenant. Prior to Cel-Tech, California courts engaged in a balancing test, examining the impact of the unfair practice on the victim and the reasons and motives of the alleged wrongdoer. The court weighs the utility of the conduct against the gravity of the harm. Progressive West Insurance Co. v. Superior Court (2005) 135 Cal.App.4^th 263. Other courts have asserted that an unfair business practice claim between non-competitors must violate a 'legislatively declared policy' (Schnall v. Hertz Corp. (2000) 78 Cal.App.4th 1144, 1166-1167). The Pier 39 court held that both tests must be satisfied, requiring application of the balancing test advanced by Smith v. State Farm, supra and violation of a legislatively declared policy as called for by Schnall, supra.

The Pier 39 case may give pause to commercial landlords in a shopping center environment. It would appear that a tenant can state a UCL claim by simply arguing the landlord treated certain tenants differently from others. It is not uncommon in commercial real estate that terms and treatment of tenancies vary widely. In practice, most landlords take for granted the wide leeway they have in determining location (or relocation) of individual lessees, pricing, and enforceability of lease provisions. The Pier 39 court appeared to recognize that a UCL claim might represent an 'unworkable judicial intrusion into shopping center management,' but at the same time allowed the tenant to assert a UCL claim. The court emphasized that enforcing lease provisions should not constitute an unfair business practice. The court's willingness to allow a UCL claim here resulted from the fact that the master lessor was a governmental entity, that the plaintiff alleged that the landlord had engaged in a scheme with other tenants to avoid payments to the governmental entity, and that the claim was being reviewed by the court at the pleading stage.

Rule 977 (a) California Rules of Court prohibits courts and parties from citing or relying on any unpublished opinion in any action or proceeding, except in limited circumstances specified by rule 977 (b). The upublished opinions profiled herein are offered for your information only and not as a citing reference.

Unfair Business Practices Rule Different When Landlord Not Competitor

Pier 39 Limited Partnership v. Flags & Things Enterprises Inc.

2006 WL 1614366 (California Court of Appeal, 1^st Dist.) (6/13/06)

(Margulies, J.; Stein, Acting P.J., Swager, J.)

Not Officially Published

The trial court erred in striking most of a complaining commercial tenant's allegations that its landlord engaged in unfair business practices because, as the opposing party was a landlord and not a competitor, the rule of Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.34 163 ' which holds that claims against competitors under Business and Professions Code section 17200 must contain an allegation of an anti-trust-like violation ' was inapplicable.

Pier 39 Limited Partnership (Pier 39) leased commercial space for a retail store to Flags & Things Enterprises Inc. (Flags) at its Pier 39 location in San Francisco. Pier 39 leases the structures constituting the Pier from the City and County of San Francisco (City), in turn leasing individual stores to business owners. Under the terms of the master lease with the City, Pier 39 pays both a fixed 'preferred' rent and a percentage of its 'gross revenues' from the Pier, which includes the rent paid by subtenants.

Pier 39 sued Flags for rent. Flags cross-complained, asserting, inter alia, a cause of action for unfair business practices under Business and Professions Code section 17200. The amended cross-complaint alleged that after Pier 39 began in 1981 to operate under the master lease, its management began to extract what Flags labeled as 'kick-backs' from certain of the tenants, in return for which the tenants were given preferred locations on the Pier. These 'kick-backs' took the form of partial ownership interests in the business of the tenant, granted to either the individual managers of Pier 39 or to Pier 39 itself (the pleading was unclear on this point). In addition, cooperating tenants were favored with selective enforcement of rules and lease provisions and the sharing of confidential information from 'non-participating tenants.'

Pier 39 filed a demurrer contending, in part, that Flags' allegation of unfair conduct was insufficient under the rule of Cel-Tech, which governs the pleading of unfair competition claims among competitors. In Cel-Tech, the California Supreme Court held that when the parties to the suit are competitors, the definition of an 'unfair' act under section 17200 is 'conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.' Cel-Tech, at p. 187. In ruling on Pier 39's motion, the trial court limited Flags' section 17200 claim to the complaint that Pier 39 shared its confidential information with other subtenants, concluding that the remaining allegation of unequal treatment of those who did not take part in the 'kick-back' scheme sounded loudly in antitrust and thus fell 'squarely within the limitations imposed by Cel-Tech.' Flags elected not to pursue the considerably narrowed section 17200 claim.

On appeal, finding the rule of Cel-Tech inapplicable because Flags and Pier 39 were not competitors, the court reinstated the section 17200-based claim that Pier 39 gave preferential treatment to certain leaseholders. '[T]he gravamen of the claim is not activity by Pier 39 in its role as a competitor of Flags but in its role as landlord, in which role it allegedly treats Flags unequally,' stated the court. Still, in the wake of Cel-Tech's disapproval of previously existing standards and absent a clear consensus in the State's Courts of Appeal as to the proper test for evaluating a non-competitor's claim of unfair business practices under section 17200, the court found itself without a clear standard to apply. It therefore proclaimed that, in the absence of better guidance from the Supreme Court, the trial court on remand should apply the traditional balancing test enunciated in Smith v. State Farm Mutual Automobile Ins. Co., (2001) 93 Cal.App.4^th 700 (the test of whether a business practice is unfair involves an examination of that practice's impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer); but, in addition, for Flags to prevail in a claim under section 17200 it would have to show, in accordance with Schnall v. Hertz Corp., (2000) 78 Cal.App.4^th 1144 (holding that an unfair business practice claim must be tethered to some legislatively declared policy), that Pier 39's conduct, in addition to failing the Smith test, contravened a legislatively declared policy. This Flags might be able to do if it could show that various provisions of the Civil Code enforcing compliance with contracts indicate a legislative intent to protect the sanctity of contractual commitments. If the benefits conferred on cooperating tenants were part of a covert scheme to deprive the City of income to which it was properly entitled under the master lease, Pier 39's activities might run afoul of such legislative intent, giving Flags a viable section 17200 cause of action against its landlord.

COMMENT

This unpublished decision represents an unusual intersection of the Unfair Competition Law (UCL) with Landlord/Tenant law in a relatively common breach of commercial lease situation.

California courts vary as to the proper test for evaluating a claim of unfair business practices between non-competitors such as a landlord and tenant. Prior to Cel-Tech, California courts engaged in a balancing test, examining the impact of the unfair practice on the victim and the reasons and motives of the alleged wrongdoer. The court weighs the utility of the conduct against the gravity of the harm. Progressive West Insurance Co. v. Superior Court (2005) 135 Cal.App.4^th 263. Other courts have asserted that an unfair business practice claim between non-competitors must violate a 'legislatively declared policy' (Schnall v. Hertz Corp. (2000) 78 Cal.App.4th 1144, 1166-1167). The Pier 39 court held that both tests must be satisfied, requiring application of the balancing test advanced by Smith v. State Farm, supra and violation of a legislatively declared policy as called for by Schnall, supra.

The Pier 39 case may give pause to commercial landlords in a shopping center environment. It would appear that a tenant can state a UCL claim by simply arguing the landlord treated certain tenants differently from others. It is not uncommon in commercial real estate that terms and treatment of tenancies vary widely. In practice, most landlords take for granted the wide leeway they have in determining location (or relocation) of individual lessees, pricing, and enforceability of lease provisions. The Pier 39 court appeared to recognize that a UCL claim might represent an 'unworkable judicial intrusion into shopping center management,' but at the same time allowed the tenant to assert a UCL claim. The court emphasized that enforcing lease provisions should not constitute an unfair business practice. The court's willingness to allow a UCL claim here resulted from the fact that the master lessor was a governmental entity, that the plaintiff alleged that the landlord had engaged in a scheme with other tenants to avoid payments to the governmental entity, and that the claim was being reviewed by the court at the pleading stage.

Rule 977 (a) California Rules of Court prohibits courts and parties from citing or relying on any unpublished opinion in any action or proceeding, except in limited circumstances specified by rule 977 (b). The upublished opinions profiled herein are offered for your information only and not as a citing reference.