People ex rel. City of San Diego v. Experian Data Corp.

Filed 4/26/22
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
THE PEOPLE ex rel. CITY OF SAN
DIEGO,
G060360
Plaintiff and Respondent,
(Super. Ct. No. 30-2019-01047183)
v.
OPINION
EXPERIAN DATA CORP.,
Defendant and Appellant.
Appeal from an order of the Superior Court of Orange County, Linda S.
Marks, Judge. Affirmed.
Jones Day, Nathaniel P. Garrett, Richard J. Grabowski, John A. Vogt,
Edward S. Chang and Ryan D. Ball for Defendant and Appellant.
Mara W. Elliott, City Attorney, Mark Ankcorn and Kevin King, Deputy
City Attorneys; Blood Hurst & O’Reardon, Timothy G. Blood and Paula R. Brown for
Plaintiff and Respondent.
* * *
INTRODUCTION
The City of San Diego (the City) sued Experian Data Corp. (Experian) on
behalf of the People of the State of California for violating the Unfair Competition Law
(Bus. & Prof. Code, § 17200 et seq.) (UCL). The City hired three private law firms to
represent it in the litigation against Experian on a contingency fee basis. The trial court
denied Experian’s motion to disqualify the private law firms; we affirm.
The contingency fee arrangements between the City and the private law
firms in a UCL action filed by the City’s attorneys do not violate the prosecutor’s duty of
neutrality and therefore do not require disqualification. Further, the agreements to pay
the private law firms from any penalties recovered from Experian do not violate Business
and Professions Code section 17206’s requirement that all funds recovered in a UCL
action be paid to the City’s treasurer.
FACTUAL AND PROCEDURAL HISTORY
U.S. Infosearch.com (USI) is an Ohio-based company that sells data,
including social security numbers and other personal data, to licensed investigators,
government agencies, and legal industry professionals. Court Ventures, Inc. (CVI) was a
California-based corporation that aggregated consumer information from publicly
available databases and sold that data. In April 2010, USI and CVI entered into a data-
sharing agreement under which the consumer information they had each collected would
be aggregated and made available to customers through appcheckdata.com, a web portal
owned by CVI.
In March 2012, Experian purchased the business, assets, and liabilities of
CVI, including its data services, customer contracts, and the appcheckdata.com website.
SG Investigators, purportedly a private investigation firm based in
Singapore, was a customer of USI/CVI and then of Experian. Through
appcheckdata.com, SG Investigators and its customers conducted more than three million
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queries, obtaining personal information of more than 400,000 California residents. In
November 2012, Experian learned that SG Investigators was a front for a Vietnamese
hacker named Hieu Minh Ngo who was reselling the data to identity thieves and others
using it for nonlegal purposes. Ngo was later arrested, pleaded guilty, and was sentenced
to 13 years in prison.
In July 2015, a federal lawsuit was filed on behalf of those whose personal
data was sold to Ngo, Patton v. Experian Data Corp. (C.D.Cal., case No. 8:15-cv-01142-
JVS-PLA) (the Patton litigation). Three law firms—Blood Hurst & O’Reardon, LLP,
Barnow and Associates, P.C., and the Coffman Law Firm (collectively the Private
Firms)—represented the plaintiff class in the Patton litigation. The Patton litigation
plaintiffs asserted claims against Experian, CVI, and USI for intentional and negligent
violation of the Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.) and for violation of
the UCL. The complaint was later amended to add a claim for injunctive relief under the
Customer Records Act. (Civ. Code, § 1798.82.) The district court dismissed the
California plaintiffs from the Patton litigation for failure to state a claim, as they could
not allege they were customers of Experian.
The City then filed a UCL complaint in the California Superior Court
against Experian, CVI, and USI on behalf of the People of the State of California (the
UCL litigation). The UCL litigation alleges that Experian violated the UCL by failing to
provide notice to victims of the Ngo hack, in violation of the Customer Records Act. The
complaint demands civil penalties in the amount of up to $2,500 per violation (Bus. &
Prof. Code, § 17206, subd. (a)), with additional penalties for violations against senior
citizens and the disabled (id., § 17206.2, subd. (a)(1)). The complaint also seeks to force
Experian to provide notice of the data breach to all its victims.
The City hired the Private Firms on a contingency fee basis to provide legal
representation in the UCL litigation. According to the parties’ agreement, the Private
Firms report to and work under the direction and control of the City Attorney. If the
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Private Firms are successful in obtaining and collecting penalties from Experian in the
UCL litigation, they are entitled to receive 25 percent of the gross recovery; the other 75
percent remains in the City’s treasury to be used for enforcement of consumer protection
laws. Under no circumstance is the City obligated to pay the Private Firms out of any
monies other than those recovered and collected from Experian.
From the outset, the City Attorney actively litigated the case; drafted
pleadings, motions, and briefs; formulated written discovery requests and responses;
participated in hearings and depositions; participated in meet and confer discussions; and
oversaw all litigation strategy. The City Attorney has maintained complete control over
the prosecution of the UCL litigation and has had the final say in all material litigation
decisions.
In February 2021, almost three years after the UCL litigation was filed,
Experian moved to disqualify the Private Firms on two grounds. First, Experian argued
that the Private Firms’ contingency fee arrangement, in a case seeking civil penalties,
violated the public prosecutor’s duty of neutrality, and thus the fee agreement was per se
grounds for disqualification. Second, Experian argued the Private Firms’ contingency fee
agreement violated the UCL’s plain language, which provides that any civil penalties
collected “shall be paid to the treasurer of the City of San Diego” (Bus. & Prof. Code,
§ 17206, subd. (c)(3)(B)) and used exclusively “for the enforcement of consumer
protection laws” (id., § 17206, subd. (c)(4)).
The trial court denied Experian’s motion in May 2021. The court found
that the City was permitted to retain private counsel on a contingency fee basis to litigate
an action for civil penalties under the UCL without violating the duty of neutrality. The
court also found that while the Private Firms’ agreement “could violate [Business and
Professions Code] section 17206’s requirement of where the penalty funds recovered are
deposited,” this was not a basis to disqualify counsel.
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Experian filed a notice of appeal from the trial court’s disqualification order
on June 14, 2021.
DISCUSSION
I. Standard of Review
“‘“Generally, a trial court’s decision on a disqualification motion is
reviewed for abuse of discretion.”’ [Citation.] Under this standard, the trial court’s legal
conclusions are reviewed de novo, but its factual findings are reviewed only for the
existence of substantial evidence supporting them, and its ‘“application of the law to the
facts is reversible only if arbitrary and capricious.”’” (Doe v. Yim (2020) 55
Cal.App.5th 573, 581 [quoting In re Charlisse C. (2008) 45 Cal.4th 145, 159].)
II. The Contingency Agreement Does Not Violate the Duty of Neutrality.
A criminal prosecutor has a duty of neutrality because he or she must “act
with the impartiality required of those who govern,” and because “he or she must refrain
from abusing [the vast power of the government] by failing to act evenhandedly.”
(County of Santa Clara v. Superior Court (2010) 50 Cal.4th 35, 49 (Santa Clara).)
Therefore, compensation of government counsel by contingency fee is prohibited in most
if not all circumstances. (Id. at p. 51.) Whether contingency fee agreements with private
attorneys are also prohibited in public nuisance prosecutions depends on the type of
remedy sought and the types of interests implicated by the case. (Id. at p. 52.)
In Santa Clara, supra, 50 Cal.4th at page 43, the county was represented by
both its government counsel and private counsel in a public nuisance action brought
against lead paint manufacturers. The paint manufacturers sought to disqualify the
private counsel who had been retained on a contingency fee basis. (Ibid.) The
contingency fee agreements provided that private counsel would recover unreimbursed
costs and a percentage of the “net recovery” as their fees. (Id. at pp. 44-45.) The
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remedies might include civil penalties and the expenditure of funds to clean up the
nuisance the defendants had created, but would not involve an injunction shutting down
the defendants’ business. (Id. at pp. 55-56.) Further, no liberty interests were involved.
(Ibid.) The court therefore determined the contingency fee agreements between the
county and the private attorneys were permissible. “[I]n a case where the government’s
action poses no threat to fundamental constitutional interests and does not threaten the
continued operation of an ongoing business, concerns about neutrality are assuaged if the
litigation is controlled by neutral attorneys, even if some of the attorneys involved in the
case in a subsidiary role have a conflict of interest that might—if present in a public
attorney—mandate disqualification.” (Id. at p. 58.)
The court noted, however, that “a heightened standard of neutrality is
required for attorneys prosecuting public-nuisance cases on behalf of the government.”
(Santa Clara, supra, 50 Cal.4th at p. 57.) The court identified the following provisions
that must be included in a contingency fee agreement to ensure that this heightened
standard of neutrality is met: (1) “decisions regarding settlement of the case are reserved
exclusively to the discretion of the public entity’s own attorneys”; (2) “any defendant that
is the subject of such litigation may contact the lead government attorneys directly,
without having to confer with contingent-fee counsel”; (3) “the public-entity attorneys
will retain complete control over the course and conduct of the case”; (4) “government
attorneys retain a veto power over any decisions made by outside counsel”; and
(5) “a government attorney with supervisory authority must be personally involved in
overseeing the litigation.” (Id. at pp. 63-64.)
The contingency fee agreements between the City and the Private Firms
contain each of the specific provisions identified in Santa Clara.
Santa Clara, supra, reexamined and narrowed the holding of People ex rel.
Clancy v. Superior Court (1985) 39 Cal.3d 740 (Clancy), on which Experian relies. In
Clancy, the city of Corona hired a private attorney to pursue abatement proceedings
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against adult bookstores in the city as public nuisances. (Id. at p. 743.) The agreement
between the city and the private attorney provided for an hourly rate, which would be
decreased by half if the attorney lost the case or if the city did not recover attorney fees
from the bookstore owner. (Id. at p. 745.) The California Supreme Court held the
contingency fee agreement in that case was prohibited because it was “antithetical to the
standard of neutrality that an attorney representing the government must meet when
prosecuting a public nuisance abatement action.” (Id. at p. 750.) The court noted that
contingency fee arrangements between a city and a private attorney were not
categorically prohibited: “Nothing we say herein should be construed as preventing the
government, under appropriate circumstances, from engaging private counsel. Certainly
there are cases in which a government may hire an attorney on a contingent fee to try a
civil case. [Citation.] But just as certainly there is a class of civil actions that demands
the representative of the government to be absolutely neutral. This requirement precludes
the use in such cases of a contingent fee arrangement.” (Id. at p. 748.)
In Santa Clara, the California Supreme Court noted that the public
nuisance abatement action in Clancy was more like a criminal prosecution because the
intent of the abatement proceeding was to shut down the defendant’s business, the case
involved a heavy balancing of interests between the property owner’s right to use his land
and the public’s interest in eliminating an obnoxious or dangerous condition, and there
were free speech interests at issue in the regulation of a book store, albeit one specializing
in obscene material. (Santa Clara, supra, 50 Cal.4th at p. 53.) By contrast, the public
nuisance action in Santa Clara did not seek to put the defendant out of business, nor did
it implicate any First Amendment rights or other liberty interests, and there was no threat
of later criminal liability. (Id. at p. 55.) Further, the case posed no threat of “the misuse
of governmental resources against an outmatched individual defendant” because the
defendants were “large corporations with access to abundant monetary and legal
resources.” (Id. at p. 56.)
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Despite the fact the contingency fee agreements between the City and the
Private Firms meet the standards set forth in Santa Clara, Experian argues that the
contingency fee arrangement in the matter was categorically prohibited because the civil
penalties sought were the same as or substantially similar to criminal sanctions.
Experian’s focus on penalties is inapt, however. As in Santa Clara, supra, 50 Cal.4th at
page 58, the UCL litigation “poses no threat” to Experian’s constitutional interests or to
its ongoing business operations. For this reason, and because they predate Santa Clara,
the authorities Experian cites are distinguishable.
In State of California v. Altus Finance (2005) 36 Cal.4th 1284, 1308, the
California Supreme Court was asked by the Ninth Circuit to address two questions of law
concerning the ability of the Attorney General to pursue civil remedies under the
California False Claims Act and the UCL. For these purposes, the court held there was no
difference in a UCL action “between the Attorney General’s seeking criminal penalties or
civil penalties.” The use of private counsel was not at issue, nor was it addressed. (See
Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 680 [cases are not authority for
propositions not considered therein].)
In People of State of Cal. v. Steelcase Inc. (C.D.Cal. 1992) 792 F.Supp. 84,
86, the court noted that civil penalties in a UCL case “are not damages recovered for the
benefit of private parties; they are more akin to a criminal enforcement action and are
brought in the public interest.” The issue before the court was whether diversity
jurisdiction existed in a matter where the State was the real party in interest; the question
of who could represent the State was, again, not at issue.
Finally, Experian cites to an amicus curiae brief filed in Gamestop, Inc. v.
Superior Court (2018) 26 Cal.App.5th 502, in which the Attorney General argued that
UCL enforcement actions are closely related to and resemble criminal prosecutions. The
issue in that appeal was the applicability of Code of Civil Procedure section 394,
regarding the transfer of a case where a city or county is the plaintiff; the Attorney
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General argued that because a district attorney pursues a UCL action on behalf of the
People of the State of California, transfer was not permissible. (Gamestop, Inc. v.
Superior Court, supra, at p. 512.)
More apt to the issue before us is American Bankers Management
Company v. Heryford (9th Cir. 2018) 885 F.3d 629, 631, in which the Ninth Circuit held
that the Trinity County District Attorney’s retention of private counsel to pursue civil
penalties under the UCL did not violate due process. The contingency fee agreement
between the Trinity County District Attorney and private counsel was similar to the
agreement here, with private counsel receiving a percentage of the civil penalties they
recovered in the UCL action and no recovery if they were unsuccessful. (Id. at p. 632.)
In a case of first impression, the court compared the situation of a private firm retained by
a government attorney to pursue civil penalties under the UCL to that of private relators
bringing a qui tam action to recover civil penalties under the federal False Claims Act.
(American Bankers Management Company v. Heryford, supra, at p. 635, citing U. S. ex
rel. Kelly v. Boeing Co. (9th Cir. 1993) 9 F.3d 743, 759-760 [contingent monetary
rewards in qui tam case do not violate due process].)
Similarly, in People v. Superior Court (Kaufman) (1974) 12 Cal.3d 421, the
California Supreme Court held that the trial court may grant immunity to a real party in
interest to testify in a UCL case in which penalties were being sought. Although a
penalty in a UCL case “is unquestionably intended as a deterrent against future
misconduct and does constitute a severe punitive exaction by the state,” it is not a
criminal penalty, does not lead to the stigma of a criminal conviction, and is not imposed
as an alternative to the loss of personal liberty. (Id. at p. 431; see People v. E.W.A.P., Inc.
(1980) 106 Cal.App.3d 315, 321 [assessment of civil damages under Bus. & Prof. Code,
§ 17206 is not a penal sanction; due process does not require proof beyond a reasonable
doubt or trial by jury]; People v. Witzerman (1972) 29 Cal.App.3d 169, 177 [“It is true
that a civil penalty is identical in its purpose and monetary effect to a fine. Both are
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punitive exactions by the government from a person for misconduct imposed to deter
such misconduct in the future. But a fine ordinarily carries with its a criminal stigma and
much more frequently than not is an alternative punishment to involuntary confinement
of the person of the defendant. In other words, in the usual criminal proceeding a
defendant faces the peril of the loss of his liberty as well as that of his property”].)
We conclude that the contingency fee agreements between the City and the
Private Firms do not violate the duty of neutrality and do not require disqualification of
the Private Firms.
III. The Contingency Agreements Do Not Violate the UCL.
All funds collected as penalties for violation of the UCL “shall be paid to
the treasurer of the City of San Diego” (Bus. & Prof. Code, § 17206, subd. (c)(3)(B)) and
shall be used exclusively “for the enforcement of consumer protection laws” (id.,
§ 17206, subd. (c)(4)).
The contingency fee agreements between the City and the Private Firms
provide, in relevant part: “6.7 Reserve for Litigation Fees and Expenses. The City and
Law Firm both acknowledge that in the course of the Litigation, the adverse parties may
be obligated to pay an amount of the damages, interest, or penalties to the City. The City
agrees that, upon receipt of any such funds, the City shall reserve an amount necessary to
cover all fees and Costs as provided for in this Agreement (the ‘Reserve Amount’). The
City further agrees that the Reserve Amount shall be immediately deposited in a special
account (the ‘Fee & Cost Reserve Account’). At no time will the City be entitled to
withdraw or disburse funds from the Fee & Cost Reserve Account for any purpose other
than to pay Law Firm pursuant to this Agreement without the prior express written
consent of Law Firm.” (Boldface omitted.)
Experian argues that the contingency fee agreements violate Business and
Professions Code section 17206 because “[a]ny and all civil penalties recovered in this
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case will not be deposited in the City treasurer’s account.” To the contrary, the
agreements provide that after the penalties or other payments are received by the City, an
amount necessary to cover the payment to the Private Firms will be placed in a special
account. Thus, the penalties will be received by the City. Further, payment to the Private
Firms is for the purpose of enforcing the consumer protection laws, and therefore does
not violate section 17206. Experian cites no authority that the funds must be used only
for future enforcement of the consumer protection laws.
The trial court noted that even if the fee arrangement violated Business and
Professions Code section 17206, it would not necessarily mandate disqualification of the
Private Firms. “‘Since the purpose of a disqualification order must be prophylactic, not
punitive, the significant question is whether there exists a genuine likelihood that the
status or misconduct of the attorney in question will affect the outcome of the
proceedings before the court.’” (Hetos Investments, Ltd. v. Kurtin (2003) 110
Cal.App.4th 36, 48.)
Experian attempts to establish an effect on the outcome of the proceedings
due to the release of defendant USI for what Experian describes as a “pittance” of
$50,000. As noted ante, the terms of the contingency fee agreements retain in the City
the right to make all major litigation decisions, specifically including the right to settle
the case. Therefore, if USI was dismissed from the UCL litigation in exchange for a
small settlement fee, that decision was made by the City, not the Private Firms; Experian
fails to offer any evidence to the contrary.
The City explained its reasoning behind settling with USI in its opposition
to Experian’s motion to contest approval of the settlement, where it noted: (1) its claims
for civil penalties would not be subject to joint liability; (2) the case against USI was
weaker than the case against other defendants; (3) USI had dissolved and its owner had
died; and (4) USI’s insurance carrier had threatened to pull coverage.
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The City provided a reasonable explanation for its decision to settle with
USI for the stated sum, and the trial court denied Experian’s motion to contest the good
faith settlement. Experian cannot establish that the contingency fee agreements affected
the outcome of the case.
Experian also argues that the Private Firms have violated California Rules
of Professional Conduct, rule 1.5(a), by “mak[ing] an agreement for . . . [an] illegal fee.”
As explained ante, the contingency fee arrangement is permissible.
Experian has failed to establish the contingency fee agreements violate
Business and Professions Code section 17206. The trial court did not err in denying the
motion to disqualify the Private Firms.
DISPOSITION
The order is affirmed. Respondent to recover its costs on appeal.
ZELON, J.*
WE CONCUR:
MOORE, ACTING P. J.
GOETHALS, J.
*Retired Justice of the Court of Appeal, Second Appellate District, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
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