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Posts Tagged ‘consumer fraud’

According to Deborah Mao in this article published today on businessweek.com, regulators for the city of Hong Kong has proposed new legislation that would permit representative actions for certain consumer class actions.  The legislation is reportedly a response, at least in part, to concerns about the difficulty of shareholders to seek collective redress for alleged acts of securities fraud, although the new law would not initial apply to securities fraud claims. 

The legislation would likely provide for class actions to be financed through a public legal aid program rather than through contingency fees, as is typically the case in the United States.  The proposal is still in the early stages, and specific legislation remains to be “drafted and introduced,” according to an official quoted in the article.

We’ll keep an eye on future developments relating to the proposed legislation.  Stay tuned…

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The audio feeds for the arguments in three of the four class-action related cases heard today by the Colorado Supreme Court are now available on the court’s website.  Here are some links:

09SC1080 Garcia v. Medved
10SC214 BP America v. Patterson
10SC77 – State Farm v Reyher

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According to this February 8, 2011 article from Lee Ann Schultz of the Twin Cities Daily Planet, the Minnesota legislature is considering a bill that, according to its sponsors, would curtail consumer class action litigation in the state.  The bill, HF211, has three key provisions of interest, which would:

  1. limit private actions under three consumer protection statutes to actions filed by “natural persons who purchase or lease goods, services, or real estate for personal, family, or household purposes”;
  2. require proof of personal loss of money in order to support a cause of action for damages under the consumer protection statutes; and
  3. make class certification orders immediately appealable and imposes an automatic stay of proceedings at the trial court while the appeal is pending.

All three measures are similar to class action reform measures passed or at least considered by various states over the past decade or so.  However, there are at least three aspects of the proposed reforms that would make consumer protection actions in Minnesota more restrictive than in other states.

First, this bill appears to limit consumer protection actions to actual consumers.  Some state statutes broadly construe who is a “consumer” for the purposes of enforcing the consumer protection law, so that small businesses and other non-natural “persons” can sometimes qualify. 

Second, while most states have some sort of requirement that there be proof of causation of injury in a consumer protection case, HF211 would require a specific kind of injury:

No award of damages in an action covered by this subdivision may be made without proof that the person or persons seeking damages suffered an actual out-of-pocket loss. The term “out-of-pocket loss” means an amount of money equal to the difference between the amount paid by the consumer for the good or service and the actual market value of the good or service that the consumer actually received.

This language appears to restrict consumer protection claims to only those situations in which the named plaintiff and other would-be class members suffered a loss of value to the product or service purchased.  So, a claim that deceptive marketing or advertising practice caused consumers to suffer financial losses other than loss of value to the product itself would apparently be foreclosed.  The specific language may be intended to avoid the kinds of uncertainty that has plagued litigants in California following the passage of Proposition 64 in 2005, a voter-approved reform that requires proof that the named plaintiff “lost money or other property” in order to pursue a class action under the state’s Unfair Competition Law (UCL).

Curiously, the bill makes reference to a requirement that this injury be proved on an “individual” basis, even in a class action:

Each such person seeking to recover damages for violations of these sections, either in an individual action, a class action, or any other type of action, is required to plead and prove on an individual basis that the deceptive act or practice caused the person to enter into the transaction that resulted in the damages.

It is unclear whether this language, if adopted, would a) effectively prevent any consumer protection claim from being pursued on a class basis because all consumer protection claims would require individual proof of injury, b) be interpreted only as a threshold matter to insure that the class representative (but not absent class members) has standing before the case is allowed to proceed, or c) somehow introduce a new requirement of “individual” proof for all class actions, even while still allowing class actions to be pursued in some form.

Third, this bill would allow appeals of class certification decisions as of right and would create an automatic stay.  By contrast, federal rule 23(f), and the similar rules of many states allow interlocutory appeal of class certification orders only in the discretion of the appellate courts and do not mandate an automatic stay of proceedings at the trial court level while the appeal is pending.

The Bill was introduced in the state House on January 24.  It is not clear what the Bill’s chances of passage are.  Only one of the Bill’s 12 authors is a Democrat (or, for my Minnesota friends who want to be picky, DFL).

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While doing research for another article today, I came across a terrific resource that could come in handy to any lawyer who handles consumer class actions.   It is a 2005 article from Alan S. Brown and Larry E. Hepler entitled Comparison of Consumer Fraud Statutes Across the Fifty States, 55 Fed’n Def. & Corp. Couns. Q. 263 (2005).  A copy is available for download for free at the FDCC website.  In an appendix at pages 290-308, the authors included a chart comparing key aspects of each state’s consumer protection statute. 

Although the article is now several years outdated (so it would be prudent to shepardize), it at least provides a good starting point for any attorney researching state consumer protection or “little FTC” laws.  I only wish I had come across this little gem sooner.

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Two colleagues separately sent me a copy of the Seventh Circuit Court of Appeals’ decision yesterday in Greenberger v. GEICO General Insurance Co., slip op., No. 09-1603 (7th Cir., Jan. 10, 2011) (Sykes, J.), so I thought it was worthy of a summary. 

Greenberger involved would-be class action claims against an insurer for the alleged practice of not paying to have vehicles restored to their pre-loss condition, as required under its policies.  The district court had granted the defendant’s motion for summary judgment before reaching a decision on class certification.  The Seventh Circuit affirmed.  The panel’s decision ostensibly rests on the holdings of earlier cases and doesn’t pretend to make new law.  However, the number of different issues addressed may make the case a common citation in future class certification response briefs, especially in insurance class actions in Illinois and the Seventh Circuit, but potentially elsewhere as well.  The holdings included:

  • Jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”) attaches to a class action complaint even if a class is never certified.  Slip op. at 5-6 (relying on Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 806 (7th Cir. 2010)).
  • An insured cannot succeed on a breach of contract claim against his insurer for allegedly failing to bring a vehicle to a pre-loss condition if the vehicle is not available to be examined, because the insured cannot prove either a breach of the contract (by showing that the vehicle was not repaired to its pre-loss condition) or damages (by establishing the difference in value between the vehicle as repaired and the vehicle in its pre-loss condition).  Slip op. at 6-11 (relying on Avery v. State Farm Mutual Automobile Insurance Co., 835 N.E.2d 801 (Ill. 2005)).
  • A plaintiff cannot prevail on a consumer fraud or common law fraud claim if the fraud claim is based on the same predicate facts as a claim for breach of contract.  Slip op. at 11-16 (also relying on Avery).
  • In Illinois, no fiduciary duty exists between insurer and insured as a matter of law, unless the plaintiff can prove by clear and convincing evidence that special circumstances existed such that the insured placed trust or confidence in the insurer.  Slip op. at 16-17 (citing Fichtel v. Bd. of Dirs. of River Shore of Naperville Condo. Ass’n, 907 N.E.2d 903 (Ill. App. Ct. 2009); Martin v. State Farm Mut. Ins. Co., 808 N.E.2d 47 (Ill. App. Ct. 2004)).

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In April, the Colorado Supreme Court decided Farmers Ins. Exchange v. Benzing, 206 P.3d 812 (Colo. 2009), in which it rejected the “fraud on the market” theory of reliance in a consumer class action.  Now, Garcia v. Medved Chevrolet, Inc., No. 09CA1465 (Colo. Ct. App., Nov. 12, 2009), the Colorado Court of Appeals has rejected the alternative reliance theory that the Benzing court  declined to address: the presumed reliance theory first recognized in the securities class action context in Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) could apply to establish common proof of reliance in a consumer class action involving alleged fraud by omission.  A synopsis, along with a copy of the opinion, is available at Law Week: http://www.lawweekonline.com/?p=1914

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The Colorado Supreme Court held oral argument today in the case of Farmers Insurance Exchange v. Benzing, No. 07SC483.  Audio of the argument is now available at the Colorado Supreme Court’s website.  Among the issues in the case is whether the “fraud on the market” theory, and other presumptions of reliance recognized in securities cases, applied to permit the plaintiff in a consumer fraud case to attempt to prove causation of harm on a class-wide basis without having to prove that each class member suffered injury directly as a result of the alleged fraud. 

The appeal is from a trial court judge’s order decertifying an earlier class certification order authored by another judge.  The second judge had concluded that individualized issues of causation and reliance precluded certification of claims for fraud by omission, finding that whether a policyholder would have made the decision not to buy certain insurance coverage but for the alleged nondisclosures required a case-by-case determination.  The Court of Appeals had relied on the possibility that the plaintiffs might be able to prove liability on a “fraud on the market” theory in holding that the trial court had abused its discretion in decertifying the class.  Under the “fraud on the market” theory, a defendant can be held liable for securities fraud even if each individual shareholder did not rely on the misrepresentation or omission of fact if it can be proven that the fraud had the effect of depressing the overall value of the stock in an efficient market.

The issues for which the Petition for Certiorari was granted are summarized in this ClassActionBlawg entry.

Many of the questions focused on whether there were facts in the record to support the conclusion that proof of causation could be made by class-wide evidence without relying on the “fraud on the market” theory.  Other key questions focused on whether the trial court’s exercise of discretion to decertify the class could be upheld under an abuse of discretion standard even if other courts might have reached the opposite conclusion.  Two concepts not addressed in detail were the impact of the regulated nature of insurance premiums and the fact that premium rates are driven primarily by the actuarial risk assumed by insurers, not by pure market competition.  Both of these facts raise doubts about any assumption that more “fully informed” consumers might have been able to drive down the cost of premiums.

The “fraud on the market” and “price inflation” theories of loss causation appeared to be a growing trend in consumer class actions until earlier this year when the Second Circuit Court of Appeals in the light cigarettes marketing case, McLaughlin v. Philip Morris USA, Inc. et al., No. 06-4666-cv (April 3, 2008).  In McLaughlin, the court held that these types of theories could not be used to justify certification of a consumer class because they were too attenuated and speculative.

Coincidentally, Securities Docket reports today that a method suggested by Michigan law professor Adam Pritchard for companies to avoid or reduce exposure for certain “fraud on the market” securities claims by amending a company’s bylaws has now been proposed by a shareholder of Alaska Air, Inc. to its Chairman and CEO.  That entry also has a link to the proposal itself.

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