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Posts Tagged ‘consumer protection’

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Although the article is now several years outdated (so it would be prudent to shepardize), it at least provides a good starting point for any attorney researching state consumer protection or “little FTC” laws.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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Debate about legal reforms outside the U.S. can often provide a revealing look at the strengths and weaknesses of the U.S. legal system.  For policymakers in other countries, U.S. consumer protection laws can be the gold standard for access to justice and, at the same time, the epitome of litigiousness run amok.

As an example, check out today’s column from Globe and Mail law reporter Jeff Gray discussing Bill C-36, a proposed reform being considered by the Canada Senate that would permit the government to order mandatory product recalls.  Gray has quotes from several Canadian class action lawyers, both from the plaintiff’s and defense side, making predictions on the potential effects of the bill and commenting on the development of Canada’s consumer protection laws as compared to the United States.

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The California Supreme Court today issued its highly awaited decision in In re Tobacco II Cases, No. S147345 (Cal., May 18, 2009).  The 4-3 majority opinion addressed two issues relating to standing in class actions filed under the California Unfair Competition Law (“UCL”):

1) the UCL “standing requirements are applicable only to the class representatives, and not all absent class members;” and

2) “a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions.”

This may be the proverbial case where bad facts make bad law.  The majority’s decision appears to be motivated in no small way by a need not to let the tobacco industry get away with years of misleading advertising targeted toward minors.  To this end, the majority uses language that potentially opens the door to “bait and switch” litigation where litigants with legitimate individual claims file actions on behalf of overly broad classes of people who themselves were not injured monetarily by alleged wrongful conduct, only to demand verdicts or settlements in amounts based on the fallacious premise that these same classes were injured by the conduct.  The dissenting opinion offers an example of what many may fear could be the result of the majority’s decision:

Consider the following scenario: A local chain of family-owned supermarkets receives a large shipment of ground beef and puts it out for sale. The stores’ meat departments label and display the meat as “ground round,” the leanest grade. The stores’ regular price for ground round is $5.99 per pound, but the display labels offer the meat from this shipment at a “reduced price” of $4.99 per pound. The company has not intentionally misrepresented the product.

However, in the exercise of due care, it should have known the meat is ground sirloin, a wholesome but slightly fattier grade. The chain is actually selling other quantities of ground sirloin, correctly labeled, at its regular $4.99 per pound price.
Customer A visits one of the stores, seeking to buy ground beef. Concerned about his fat intake, he does not intend to purchase any grade other than ground round and would not knowingly do so. Relying upon the incorrect “ground round” label, he buys a pound of the meat, so labeled, at the $4.99 price, and consumes it. A substantial number of other customers also see the incorrect “ground round” labels. However, many do not care about the grade of ground beef they eat, do not realize the significance of the label, and are not influenced by it. Nonetheless, they also buy substantial quantities of the mislabeled meat and happily consume it.

Customer A later discovers the labeling mistake. He obtains counsel and brings a UCL action alleging false advertising that caused him actual injury or loss in the amount of $4.99. He claims restitution to himself in that amount. In the suit, he further seeks to certify a class of all other customers who saw the incorrect labels and purchased the mistakenly mislabeled meat. Regardless of whether these persons relied on the incorrect description when purchasing the mislabeled product, he prays for restitution, on their behalf, of all profits the stores received from such purchases.

Under the majority’s concept of no-injury class actions, the plaintiff, Customer A, may well succeed in this endeavor if the case proceeds in court. Realizing this, the company quickly settles. That cannot be what the voters intended when they adopted the substantial reforms set forth in Proposition 64.

Hopefully, later courts will recognize that there are limitations beyond the threshold issue of standing that should prevent this type of unjust and illogical outcome, but only time will tell.

Update, May 19, 2009: In related news, California grocery stores statewide reported a huge influx of patrons at their meat departments this morning.  Many of the new customers were wearing expensive suits and handing out business cards.

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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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I have previously commented on various class action reforms being considered or implemented in Europe.  These reforms and the debate surrounding them shed an interesting light on US class action law because proposed reforms are inevitably compared to the US class action procedure.  On one hand, US class action procedure provides the model for the basic structure for many of these proposed reforms.  On the other hand, perceived class action abuses in the US provide ammunition for those seeking to prevent or water down the unfettered right of private litigants to bring class or other collective actions. 

 

As a case in point, Finnish website YLE.fi has a report today on the impact of recent legislation in that country allowing certain class actions.  The article’s caption notes that there has not been “a single group lawsuit” filed under the law despite fears that it would “open a floodgate of litigation.”  The article quotes Outi Haunio-Rudanko, Assistant Director of the Consumer Agency as saying that the threat of enforcement under the law “has worked effectively” in providing leverage for settlements in some consumer cases.

 

US tort reform advocates would probably agree that the most effective class action law is one that never gets used.  And it shouldn’t come as a shock to tort reform advocates or opponents alike why the Finnish law hasn’t “open the floodgates of litigation.”  An unofficial English translation of the final 2007 law can be found hereThe law shares some parallels with FRCP 23 and U.S. state class action rules in terms of the basic requirements for bringing a case as a class action.  However, it differs from U.S. procedure in a couple of major ways.  First, only the “Consumer Ombudsman” has standing to bring a class action.  Second, only those class members who return a “letter of accession to the class”—in other words, only those who opt in—will become class members (not to mention that they get an additional chance to opt out later).

 

A 2003 article from Mondaq.com (free registration may be required to view the entire article) recounted previous efforts to pass class action legislation in Finland.  As outlined in the article, barriers to passage included concerns that 1) other EU countries had not adopted opt-out class action legislation and the potential forum-shopping that could result if Finland were to provide a mechanism for class actions, 2) providing an opt-out model where individual class members could be bound by a decision without ever being aware of the litigation would conflict with the Finish legal tradition of individual choice over legal rights, 3) conflicts of interest could exist between the attorney bringing the case and members of the class, and 4) class action legislation could create a “legal culture towards a ‘litigation-oriented’ society, as in the US”.

  

For a thorough critique of the Finnish law as passed and a comparison between the Finnish law and those adopted by other Noridic countries, see this scholarly article by Mikko Välimäki.  Mr. Välimäki points out that adopting a procedural model for class actions similar to that of the US (including a private right of action and an opt-out procedure) would not be equivalent of adopting US substantive law or US attitudes about litigation.  If Mr. Välimäki is correct, then adopting Rule 23 in Finland verbatim may not have opened the floodgates either.

 

Attorney Joseph K. Hetrick makes a similar point in an interview on the blog Law and More, where he argues that US-style class action litigation has not caught on in Europe due in part to the existence of a larger government safety net and a greater attitude of trust in government programs, making it unnecessary for individuals to seek compensation for injuries through civil litigation and relieving the need to find someone to blame for those injuries.

 

Viewed from this perspective, Americans’ litigious tendencies come not from flaws or inadequacies in our procedural statutes and rules of civil procedure but rather from our societal emphasis on individual economic freedom, small government, and free market economics.  In other words, don’t blame Dickie Scruggs, blame Milton Friedman.

 

Of course, it’s difficult to judge this hypothesis using Finland’s model because the societal attitudes that might prevent litigants from abusing a broader class action rule were the same attitudes that led policymakers to avoid a procedural model that would allow full-scale private opt-out class actions.  However, that may change as more EU countries begin to adopt laws that permit the types of consumer class actions now common in the US.

 

Click these links for additional commentary on the Finnish law and a link to the website for Finland’s Consumer Complaints Board. 

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