Broadening Actions Under State Consumer Fraud Statutes

Andrew S. Friedman, Esq.

Edward O. Comitz, Esq.

I. Introduction

1. Consumer Fraud Class Actions

A. Consumer fraud class actions usually involve claims by numerous individuals seeking modest damages and/or injunctive relief to redress deceptive business or advertising practices.

B. Consumer fraud class actions are typically based on misleading statements or omissions of material fact concerning the quality of a product or the performance of a service that affects a large number of consumers in a substantially similar manner.

2. The Benefits of Bringing Consumer Fraud Class Actions

A. The benefits of consumer fraud class actions are manifold. For example, such actions may provide the only available means of recourse for large numbers of similarly injured consumers whose damages are too small to justify individual lawsuits. As the California Supreme Court recognized in Vasquez v. Superior Court, 484 P.2d 946, 968-69 (Cal. 1971):

Protection of unwary consumers from being duped by unscrupulous sellers is an exigency of the utmost priority in contemporary society . . . . * * * Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus, an unscrupulous seller retains the benefits of its wrongful conduct.

B. Using class actions to remedy fraudulent or deceptive business practices also allows consumers to spread costs, including attorneys’ fees associated with complex and expensive litigation. See Zinberg v. Washington Bank Corp., Inc., 138 F.R.D. 397, 411 (D.N.J.1990)(individual security suits would not involve sufficient losses to justify cost of litigation); In re Badger Mountain Irrigation Dist. Sec. Litig., 143 F.R.D. 693, 701 (W.D.Wash. 1992)(average claims were too small to justify individual lawsuits); 1 Herbert Newberg and Alba Conte, Newberg on Class Actions § 4.27, at 4-107 to 4-109 (3d ed. 1992)(where the claims of class members are small, denial of class action would effectively exclude them from judicial redress).

C. The threat of inconsistent adjudications and the burden on the courts is also intolerable in most consumer fraud class actions. See Andrew S. Arena, Inc. v. Superior Court, 788 P.2d 1174, 1176 (Ariz. 1990)(“[I]n appropriate cases, class actions . . . serve as a practical tool for resolving multiple claims on a consistent basis, at the least cost and with the least disruption to an overloaded judicial system.”); Lerwill v. In Flight Motion Pictures, Inc., 482 F.2d 507, 512 (9th Cir. 1978)(“numerous individual actions would be expensive and time-consuming and would create a danger of conflicting decisions as to persons similarly situated.”); accord In re A.H. Robins, Co., 880 F.2d 709, 747 (4th Cir. 1989), abrogated on other grounds by Achem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997)(“[R]esolution of this issue, if required to be made in thousands of individual suits in different courts, would involve a risk of varying and contradictory legal decisions on what was precisely the same factual record. The result would be chaotic.”).

D. Consumer fraud class actions also have a deterrent effect. Although state Attorney Generals have utilized consumer protection laws in public enforcement actions, state offices often lack the financial resources to challenge all wrongful and fraudulent business practices. Moreover, public enforcement actions do not serve as an alternative to private litigation. The state does not act as the legal representative of the class of consumers and is not a fiduciary for them. Rather, the state seeks to protect the public and may choose to not litigate a cause of action based on its perception of the public interest as well as its limited public resources.

E. Because of the advantages of bringing consumer fraud class actions, state and federal courts encourage the use of this device by defrauded consumers. See, e.g., Arena, supra (emphasizing the value of class actions in compensating defrauded consumers); Hamilton v. Ohio Sav. Bank, 694 N.E.2d 442, 454 (Ohio 1998)(consumer action “present[ed] the classic case for treatment as a class action”); In re Cadillac V8-6-4, 461 A.2d 736, 747 (N.J. 1983)(“[T]he class action rule should be construed liberally in a case involving allegations of consumer fraud.”).

II. State Consumer Protection Laws

1. All 50 states and the District of Columbia have enacted consumer protection legislation. Private rights of action exist in all states except Arkansas, Iowa and North Dakota

2. State consumer protection laws are substantially similar; however, there are some significant differences in various statutes as follows:

A. Many states generally prohibit “unfair or deceptive acts or practices” and may include a non-exclusive list of such practices.

B. Some states provide an exclusive list of prohibited practices.

C. Some states require injury in fact

D. Some states require individual reliance.

E. Some states require scienter or knowing misrepresentation.

F. Some states require aggravating factors.

G. Some states allow for actual, treble or punitive damages.

H. Some states provide that only consumers, not business entities, have standing to sue.

I. Statutes of limitation vary from 1-10 years.

J. Some states have pre-filing notice requirements.

K. Some states prohibit class action remedies

3. Where multiple states' consumer protection statutes apply, class proponents may need to determine whether these variations pose “true conflicts” so as to decrease the likelihood of class certification. Many of the variances, however, may not require differing proof. For example, common factual and legal issues may predominate in cases applying consumer protection statutes from states that (1) prohibit deceptive practices generally; (2) prohibit the specific deceptive practice in question; and (3) require scienter or knowing misrepresentation, provided that this is also required to be proven in connection with another claim.

4. The variations that are most commonly seen as “in conflict” are reliance, aggravating factors and scienter; however, courts may employ subclasses or eliminate aberrational states where necessary to ensure the predominance of common issues, as explained below.

III. Extraterrestrial Application of State Consumer Protection Statutes

1. The Benefit of Utilizing a Single State’s Consumer Protection Statute in Multistate or National Class Actions.

A. A significant issue in multistate and national class action litigation is whether applicable state laws, including statutory consumer protection laws, will be “common” to all putative class members.

B. Rule 23(b)(3) requires that common questions of law or fact “predominate,” such that the class action is the “superior” method of adjudication. Where various state consumer protection laws apply, and when there are significant variances in these state laws, such variances could potentially swamp any common issues and defeat predominance.

2.The Use of Consumer Protection Laws in Multistate or National Class Actions

A. The starting point when determining whether a state’s consumer protection statute can be applied to out-of-state plaintiffs is the wording of the statute and its legislative history. Where a statute outlines its geographic parameters, decisions concerning choice of law principles are inapplicable. See Restatement (Second) of Conflict of Laws § 6 (1971)(“[A] court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.”).

i. If the consumer protection statute or its legislative intent reflect a policy of protecting the state’s residents only, the statute may not be applied extraterritorially.

ii. If the consumer protection statute or its legislative intent reflect that it should be applied to out-of-state plaintiffs, the court should do so unless constitutional considerations prohibit such application as discussed below.

iii. If the consumer protection statute is silent as to its territorial application, such statutes may be given an expansive geographic scope to promote their remedial purposes. See, e.g., Avery v. State Farm Mutual Automobile Ins. Co., 746 N.E.2d 1242, 1254 (Ill. App. Ct. 2001)(to deny out-of-state plaintiff remedy against resident of Illinois would violate legislative directive that CFA must be liberally construed to achieve its remedial purpose); Hart v. Moore, 587 S.2d 477, 478 (Sup. Ct. 1992)(“[R]emedial statutes are interpreted liberally to eliminate injustice on as broad a scale as possible.”). Again, in this event, a constitutional analysis will be required as discussed below.

B. Where extraterritorial application of the consumer protection statute is not forbidden, analysis of the Due Process and Full Faith and Credit Clauses of the Constitution is necessary to determine whether the forum state’s consumer protection statute can bind out-of-state plaintiffs.

i. The United States Supreme Court in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), confirmed that the law of the forum state may constitutionally be applied to the claims of absent class members where there are “true conflicts” of law between different states as long as there exists a sufficient aggregation of contacts between the state whose law is to be applied and the claims of the class such that application of that law to those claims is neither arbitrary nor unfair. Shutts, 472 U.S. at 818-19; see also, In re LILCO Sec. Litig., 111 F.R.D. 663, 670 (E.D.N.Y. 1986) (“Without doubt, Shutts does not require us to apply the law of each state in which the plaintiffs reside.”); see, e.g., In re American Continental Corp./Lincoln Sav. & Loan Sec. Litig., 140 F.R.D. 425, 434-35 (D. Ariz. 1992) (California law applied to claims of entire class where centrally orchestrated misrepresentations and omissions about the company’s strength and stability were handed down from management and communicated through its sales staff); Gordon v. Boden, 586 N.E.2d 461, 465-66 (Ill. App. Ct. 1991) (substantive law of state with most significant contact to the class claims may be applied to those claims).

ii. If the forum state has significant contact to the claims asserted by each class member, the court can apply the substantive law of the forum state to the non-resident class members.

iii. Both federal and state courts have recognized the propriety of applying the law of a defendant’s home state or principal place of businesses to a multistate or national class. See, e.g., In re Lutheran Brotherhood Variable Ins. Products Co. Sales Practices Litig., 201 F.R.D. 456 (D. Minn. 2001); Avery v. State Farm, supra at 1254; Renaissance Cruises, Inc. v. Glassman, 738 So.2d 436, 438 (Fla. Dist. Ct. App. 1999); In re Kirschner Med. Corp. Sec. Litig., 139 F.R.D. 74, 84 (D. Md. 1991); W. R. Grace & Co. v. Continental Cas. Co., 896 F.2d 865, 872 (5th Cir. 1990); Randle v. SpecTran, 129 F.R.D. 386, 393 (D. Mass. 1988); In re ORFA Sec. Litig., 654 F. Supp. 1449, 1455 (D.N.J. 1987); In re Seagate Techs. Sec. Litig., 115 F.R.D. 264, 268-72 (N.D. Cal. 1987); Martin v. Heinold Commodities, Inc., 510 N.E.2d 840, 847 (Ill. 1987); Clothesrigger, Inc. v. GTE Corp., 236 Cal. Rptr. 605, 608 (Cal. Ct. App. 1987); In re Benedictin Lit., 858 F.2d 290, 305 (6th Cir. 1986).

iv. In Lutheran Brotherhood, supra, a vanishing-premium life insurance sales case, plaintiffs asserted a claim under Minnesota’s Prevention of Consumer Fraud Act. The court rejected defendant’s argument that a class including out-of-state purchasers should not be certified, and specifically recognized that numerous contacts with Minnesota made application of the statute to non-Minnesota consumers permissible:

Here, Defendant is organized under the laws of the State of Minnesota, and the Defendant has headquartered in Minnesota. Additionally, according to Plaintiffs, much of the conduct relevant to the statutory consumer fraud claim occurred in or emanated from Minnesota. Finally, the insurance policies at issue in this case issued from and were ultimately accepted in Minnesota. Accordingly, Minnesota has a significant interest in this litigation, and the application of Minnesota law does not offend public policy. Lutheran Brotherhood at 461 n.1.

v. In Avery, supra, plaintiffs claimed that State Farm, an Illinois-based company, had a nationwide claims practice of specifying nonoriginal crash parts on damage estimates issued to its insureds. Avery at 1247. State Farm urged that the trial court had erred in certifying the nationwide consumer-fraud class because the claims of non-Illinois class members were governed by varying consumer protection laws. Id. at 1254. Disagreeing with State Farm, the appellate court held that the Illinois Consumer Fraud Statute is not limited to resident consumers, and specifically reviewed the contacts between Illinois and the claims of the non-residents when making its decision: This action was filed against a company chartered and headquartered in Illinois. There is substantial evidence that deceptive claims practices were designed, established, and initiated from State Farm’s corporate headquarters in Bloomington, Illinois, and dictated and disseminated to State Farm employees nationwide. Id. at 1255.

vi. In Martin v. Heinhold, supra, the trial court was directed to apply the Illinois Consumer Fraud Act to a nationwide class which had allegedly been defrauded by an Illinois-based corporation. As the Supreme Court of Illinois held: “There can be no doubt that the claims of each member of the plaintiff class implicate the legitimate interests of Illinois in applying its law to adjudicate a dispute involving a business principally situated in its jurisdiction.”

vii. Defendants typically urge that numerous jurisdictions have an interest in the underlying litigation and that the application of one state’s law is inappropriate under “choice of law” analysis and the constitutional standards outlined above. For example, Arizona’s choice of law rules utilize the “significant relationship” test outlined by the Restatement (Second) of Conflict of Laws (1971). This test calls for a qualitative, not quantitative, examination of several considerations when considering choice of law, including: Bates v. Superior Court, 749 P. 2d 1367, 1669-70 (Ariz. 1988). Applying this standard, defendants urge the application of multiple state’s laws in an effort to defeat certification on the basis that the class action will lack predominance of common issues and will be unmanageable. As discussed above, the counter-argument used by class proponents is to argue that a particular states’ choice-of-law rules can be applied because the defendant’s state of incorporation or principal place of business has sufficient interest so that its laws can be applied to a multistate or national class.

A. the place where the injury occurred;

B. the place where the conduct causing the injury occurred;

C. the domicile and place of business of the parties; and

D. the place where the relationship between the parties, if any, is centered.

viii. Courts should treat with healthy skepticism defendant’s purported concerns for a consumer’s right to litigate under the laws of his or her own state. What such defendants really seek, of course, is to defeat certification so that they need never face the merits of the class claims. See Egglelston v. Chicago Juryman Plumbers’ Local Union, 657 F.2d 890, 895 (7th Cir. 1981) (entertaining such expressions of concern by a defendant is “a bit like permitting a fox, although with a pious countenance, to take charge of the chicken house.”); Umbriac v. American Snacks, Inc., 388 F.Supp. 265, 275 (E.D.Pa. 1975)( “[T]he implicit, but nonetheless real, objective of [defendants’] vigorous legal assault is to ensure ‘no’ representation for the class.”).

ix. Courts have expressly recognized that consumer class actions may provide the only available means of redress for defrauded consumers, and this fact has weighed in favor of certification. See In re Seagate Techs Sec. Litig., supra at 269-70 (and authorities cited therein) (foreign states’ interest in allowing class action greater than interest in not allowing suits to proceed at all); In re Pizza Time Theater Sec. Litig, 112 F.R.D. 15, 20 (N.D.Cal. 1986) (finding no state’s interest is impaired by blanket application of foreign state’s law); Clothesrigger, Inc. v. GTE Corp., 236 Cal.Rptr. 605, 609-10 (Cal. Ct. App. 1987) (forum state’s more favorable law may properly apply to benefit non-resident plaintiffs where their home states have no identifiable interest in denying such persons full recovery); Randall v. SpecTran, 129 F.R.D. 386, 394 (D.Mass. 1988) (“the interest of each jurisdiction in having the injuries of its citizens litigated and compensated outweigh[s] any interest in applying its own law”).

C. The law of multiple jurisdictions may apply in the following situations: (1) where the consumer protection statute in question applies only to that state’s residents; (2) where “conflict of law” analysis requires the application of the laws of several jurisdictions; or (3) where application of the forum state’s law would be unconstitutional in that a “significant aggregation of contacts” and “state interests” cannot be established.

D.If a court chooses to apply the law of multiple states to a multistate or national class, the class proponent must demonstrate that the application of multiple state laws is nevertheless manageable and that common issues still predominate. A predominance of common questions of law or fact is possible even where the court must apply the different laws of various states, so long as factual commonality outweighs legal noncommonality. Walsh v. Ford Motor Co., 807 F.2d 100, 1017 & n.99 (D.C. Cir. 1986).

E. The class proponent’s focus when trying to certify a multistate or national class where the laws of various jurisdictions apply is to minimize or exclude state variations through the use of subclasses or by excluding aberrational states.

i. Identify which consumer protection laws apply at the earliest possible stage of litigation – preferably in the Complaint – and demonstrate which of those laws are not in conflict. The class proponent should emphasize that within the various consumer protection statutes, and the case in general, there is more commonality than diversity.

ii. To the extent that the laws of certain jurisdictions are in “true conflict,” the class proponent should exclude or subclass certain states. See, e.g., Rivera v. Wyeth-Ayerst, 197 F.R.D. 584, 591 (S.D. Tex. 2000). For example, where a statute allows only consumers – rather than business entities – to sue, a class definition may be utilized to include only “qualified” claimants. Similarly, subclasses can be utilized for those states that require proof of reliance, aggravating factors, or scienter, to the extent that these factors need not be proven on a class-wide basis in connection with other claims.

F. If the court refuses to certify a national or multistate class, the result is that numerous plaintiff classes will likely be developed on a state-by-state basis. The policy considerations that dictate against this approach include the following:

i. In the Information Age, where fraud often transgresses jurisdictional borders, it is essential that states and their citizens have the ability to prosecute violators located within their jurisdiction, even if the victims are located elsewhere.

ii. There is the risk that substantially similar consumer protection laws will be interpreted differently throughout the country, thus making it difficult or impossible for citizens to modify their behavior to conform to the law.

iii. The added costs and attorneys’ fees associated with bringing multiple, state class actions will result in smaller recoveries for consumers.

iv.Some states may not have a sufficient number of defrauded consumers to bring a class action, or may not allow for class litigation in the consumer context, and therefore the absence of a national class translates into the absence of legal redress for these individuals.

G. Certification of national and multistate consumer protection classes is appropriate and, where proper steps are taken to ensure manageability, such actions reflect the superior method of adjudication. Where constitutionally permissible, the law of the forum state should be applied unless compelling reasons exist for applying a different law or laws. Where the law of several states apply, the similarities in the state statutes should be emphasized while significant variations are dealt with through exclusion by way of class definition or through subclasses. As discussed above, the maintenance of separate consumer protection class actions in different states is not only time-consuming and expensive, but effectively forecloses certain individuals from redress afforded through multistate or national class actions.

IV. The Reliance Debate Under State Consumer Protection Statutes

1. Legislative Intent

A. During the past several years, many state legislatures have expanded the concept of fraud by enacting consumer protection legislation. The intent was to assist consumers in obtaining remedies against individuals and businesses for deceptive advertising and trade practices. This broad protective philosophy has compelled courts to construe consumer protection provisions liberally.

B. Several consumer protection statutes eliminate various requirements of common law fraud, such as scienter or actual reliance, in order to facilitate the remedial purpose of these statutes.

2. Transaction and Loss Causation

A. Common questions may not “predominate” in class actions where plaintiffs must prove individual reliance, either as an express element of their consumer protection statute claim, or where reliance is encompassed by transaction causation.

B. Where reliance is not an express element of a consumer protection law claim, defense counsel often urge that reliance must nevertheless be proven to establish “transaction causation.” 

C. “Transaction causation” (often referred to as “but for” causation) means that the consumer would not have engaged in the transaction had the other party made truthful statements at the time required. Practically speaking, proving “transaction causation” is almost identical to proving reliance because the consumer must show that he would not have purchased the goods or services had he known the true facts.

D. “Loss causation” (often referred to as “proximate” causation) means that the harm suffered by the consumer flowed from the misrepresentation or omission.

3. Dealing with Transaction Causation from the Plaintiff’s Perspective

A. The transaction causation requirement has been relaxed where the consumer protection statute does not specifically require proof of reliance. In Lutheran Brotherhood, supra, the District Court bifurcated the state consumer protection law claim from the breach of fiduciary duty claim for purposes of determining class certification. Because reliance was not a substantive element of the state consumer protection claim, the District Court held that common issues would predominate, and the class was certified as to the allegation that the defendant insurer violated the Minnesota Prevention of Consumer Fraud Act. The recent Minnesota Supreme Court decision, Group Health Plan, Inc. v. Philip Morris, Inc., 621 N.W.2d 2 (Minn. 2001) compelled the District Court to ignore issues of individual reliance and relax the causation requirement.

B. In cases involving centrally-orchestrated, uniform concealment of material facts, courts may presume reliance. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972)(“Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery.”); Cope v. Metro Life Ins. Co., 696 N.E.2d 1001, 1008 (1998)(certifying class of policyholders alleging consumer and common law fraud claims against insurer who sold them replacement policies omitting mandatory disclosure warning because “[w]here there is nondisclosure of a material fact, courts permit inferences or presumptions of inducement and reliance.”); Walco Inv., Inc. v. Thenen, 168 F.R.D. 313, 331-32 (S.D. Fla. 1996)(class certified upon Affiliated Ute presumption of reliance where the defendants “stood moot” regarding a Ponzi scheme).

C. Even if reliance is not presumed on a class-wide basis, it can be proven on a class-wide basis through the usual means of inference from direct and circumstantial evidence. See Cope v. Metro Life Ins. Co., supra at 1004 (“[i]f fraud was accomplished on a common basis, there is no valid reason why those affected should be foreclosed from proving it on that basis.”)(citations omitted); Vasquez v. Superior Court, 484 P.2d 964 (Cal. 1971)(where material misrepresentations are made to class members, an inference of reliance may be applied to the entire class). No reason exists to have every class member testify about reliance; if material facts are omitted or misrepresented, reliance can be inferred on a class-wide basis from the showing of materiality.

D. Finally, even if reliance or causation are not presumed, these issues may be reserved for subsequent litigation after an initial adjudication of the common issues presented in the case. See, e.g., Arthur Young & Company v. United States District Court, 549 F.2d 686, 693 (9th Cir. 1977)(finding “nothing prejudicial about the reservation of the reliance issue” for trial to a second jury); Green v. Wolf Corp., 406 F.2d 291, 301 (2d Cir. 1968)(“We see no reason why the trial court, if it determines individual reliance is an essential element of proof, cannot order separate trials on the particular issue, as on the question of damages, if necessary.”); In re Copley Pharmaceutical, Inc., 161 F.R.D. 456, 458 (D. Wyo. 1995)(certifying threshold issues and leaving causation and damages determinations for later resolution); see also Manual for Complex Litigation (3d) § 33.36, at 342 (2000)(recommending class-wide “trial on specific issues, such as defendants’ respective liabilities for alleged misrepresentations and omissions, while leaving for subsequent trials other issues, such as damages and individual defenses”).

E. As demonstrated above, manageability concerns about causation and reliance issues disappear (1) where the court relaxes the causation standard in consumer protection cases that do not otherwise require individualized proof of reliance; (2) where reliance and causation can be presumed or proven on a class-wide basis; or (3) where such issues can be reserved for subsequent litigation.


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