State Attorney General Consumer And Antitrust Leadership Conference March 1, 2007
Consumer Protection Law Overview
Each state has a UDAP (Unfair and Deceptive Acts and Practices) statute. The statues vary from state to state in important ways, both substantively and procedurally. Unlike the antitrust laws enforced by the states, there is no general federal consumer protection statute that all the states share in common.
Despite their individually unique features, there are some fundamental principles of consumer protection law that are common to all the statutes. These statutes are firmly rooted in the public interest and are generally liberally construed by the courts.
Deception:
All state consumer protection statutes prohibit deceptive practices. These statutes are generally patterned after Sec. 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices.
1. Defined: In general, an act or practice is deceptive if it has a tendency or capacity to mislead consumers. The AG does not have to prove actual deception. Some UDAP statutes outlaw fraudulent acts or practices. This language does not refer to common law fraud but rather to misleading or deceptive acts or practices.
2. Common law fraud distinguished: Deception is a broader (and easier to prove) concept than common law fraud. Most common law fraud actions require:
In contrast, under state UDAP statutes,
3. Examples of deception:
4. Deceptive advertising: Claims in advertising may be made expressly (express claims) or by implication (implied claims). A claim about a product or service is made by implication where consumers would interpret the advertising as containing that message. False or misleading advertising is clearly actionable. Advertisements can be deceptive even if literally true, if their overall net impression is false. If an advertising representation can be interpreted in a lawful or in a misleading way, the representation will be construed against the person making it.
5. Failure to disclose material facts: Deception includes not only misrepresentations (falsity), but also may result from a seller’s failure to disclose material facts. Facts are generally held to be material if they would influence a consumer’s purchasing decision.
7. Unavailability of certain defenses in consumer protection cases:
8. Relationship to the Federal Trade Commission Act (“FTCA”): Many state UDAP statutes are called “Little FTC Acts” because the inspiration, and certainly the language for their creation, came from the FTCA. In recognition of this lineage, and to allay concerns of potential inconsistent state/federal enforcement of these broad concepts of deception (and unfairness, discussed below), some state statutes tie the legal standards in their UDAP statutes to the Federal Trade Commission’s enforcement under the FTCA. Other state statutes provide cpmpliance with FTC case law as an affirmative defense in some kinds of matters, and still other states may use the FTC standards as relevant but not dispositive.
Unfair Acts or Practices (“Unfairness”) Many states also prohibit unfair acts or practices. This language is also largely patterned after the Federal Trade Commission Act. As is the case with deception standards, in some states FTC enforcement policy dictates state interpretation and enforcement.
1. Defined: The states’ “unfairness jurisdiction” recognizes that certain business practices may not involve deception but are nevertheless injurious to consumers. Again, there is great variation among the states. Some core concepts include whether the practice a) offends public policy; b) is immoral, unethical, oppressive, or unscrupulous; c) causes substantial injury to consumers (some states require that the injury be unavoidable). Some states determine unfairness by weighing the impact of the practice on consumers compared with its business justification.
2. Concepts and examples:
Unfair acts or practices resulting from disproportionate bargaining power, including, e.g.
Unfairness based on unequal knowledge between consumers and merchants.
Examples of unfair acts or practices:
Remedies
Most state statutes give the attorney general broad remedial authority to protect the public against further deceptive or unfair conduct.
Administrative Rule-Making More than half of the state attorneys general have the authority to interpret their consumer protection statutes by way of rule making. The requirements for rule making generally follow the dictates of each state’s administrative procedures act. Some state statutes provide that the attorney general’s regulations have the force of law. In other states a violation of a regulation is prima facie evidence of a violation of the consumer protection statute.
GENERAL LAWS OF MASSACHUSETTS
PART I. ADMINISTRATION OF THE GOVERNMENT.
TITLE XV. REGULATION OF TRADE.
CHAPTER 93A. REGULATION OF BUSINESS PRACTICES FOR CONSUMERS PROTECTION.
Chapter 93A: Section 1. Definitions.
Section 1. The following words, as used in this chapter unless the text otherwise requires or a different meaning is specifically required, shall mean:-
(a) ""Person'' shall include, where applicable, natural persons, corporations, trusts, partnerships, incorporated or unincorporated associations, and any other legal entity.
(b) ""Trade'' and ""commerce'' shall include the advertising, the offering for sale, rent or lease, the sale, rent, lease or distribution of any services and any property, tangible or intangible, real, personal or mixed, any security as defined in subparagraph (k) of section four hundred and one of chapter one hundred and ten A and any contract of sale of a commodity for future delivery, and any other article, commodity, or thing of value wherever situate, and shall include any trade or commerce directly or indirectly affecting the people of this commonwealth.
(c ) ""Documentary material'' shall include the original or a copy of any book, record, report, memorandum, paper, communication, tabulation, map, chart, photograph, mechanical transcription, or other tangible document or recording, wherever situate.
(d) ""Examination of documentary material'', the inspection, study, or copying of any such material, and the taking of testimony under oath or acknowledgment in respect of any such documentary material.
Chapter 93A: Section 2. Unfair practices; legislative intent; rules and regulations.
Section 2. (a) Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.
(b) It is the intent of the legislature that in construing paragraph (a) of this section in actions brought under sections four, nine and eleven, the courts will be guided by the interpretations given by the Federal Trade Commission and the Federal Courts to section 5(a)(1) of the Federal Trade Commission Act (15 U.S.C. 45(a)(1)), as from time to time amended.
(c ) The attorney general may make rules and regulations interpreting the provisions of subsection 2(a) of this chapter. Such rules and regulations shall not be inconsistent with the rules, regulations and decisions of the Federal Trade Commission and the Federal Courts interpreting the provisions of 15 U.S.C. 45(a)(1) (The Federal Trade Commission Act), as from time to time amended.
Chapter 93A: Section 3. Exempted transactions.
Section 3. Nothing in this chapter shall apply to transactions or actions otherwise permitted under laws as administered by any regulatory board or officer acting under statutory authority of the commonwealth or of the United States.
vFor the purpose of this section, the burden of proving exemptions from the provisions of this chapter shall be upon the person claiming the exemptions.
Chapter 93A: Section 4. Actions by attorney general; notice; venue; injunctions.
Section 4. Whenever the attorney general has reason to believe that any person is using or is about to use any method, act, or practice declared by section two to be unlawful, and that proceedings would be in the public interest, he may bring an action in the name of the commonwealth against such person to restrain by temporary restraining order or preliminary or permanent injunction the use of such method, act or practice. The action may be brought in the superior court of the county in which such person resides or has his principal place of business, or the action may be brought in the superior court of Suffolk county with the consent of the parties or if the person has no place of business within the commonwealth. If more than one person is joined as a defendant, such action may be brought in the superior court of the county where any one defendant resides or has his principal place of business, or in Suffolk county. Said court may issue temporary restraining orders or preliminary or permanent injunctions and make such other orders or judgments as may be necessary to restore to any person who has suffered any ascertainable loss by reason of the use or employment of such unlawful method, act or practice any moneys or property, real or personal, which may have been acquired by means of such method, act, or practice. If the court finds that a person has employed any method, act or practice which he knew or should have known to be in violation of said section two, the court may require such person to pay to the commonwealth a civil penalty of not more than five thousand dollars for each such violation and also may require the said person to pay the reasonable costs of investigation and litigation of such violation, including reasonable attorneys' fees. If the court finds any method, act, or practice unlawful with regard to any security or any contract of sale of a commodity for future delivery as defined in section two, the court may issue such orders or judgments as may be necessary to restore any person who has suffered any ascertainable loss of any moneys or property, real or personal, or up to three but not less than two times that amount if the court finds that the use of the act or practice was a willful violation of said section two, a civil penalty to be paid to the commonwealth of not more than five thousand dollars for each such violation, and also may require said person to pay the reasonable costs of investigation and litigation of such violation, including reasonable attorneys fees.
At least five days prior to the commencement of any action brought under this section, except when a temporary restraining order is sought, the attorney general shall notify the person of his intended action, and give the person an opportunity to confer with the attorney general in person or by counsel or other representative as to the proposed action. Such notice shall be given the person by mail, postage prepaid, to his usual place of business, or if he has no usual place of business, to his last known address.
Any district attorney or law enforcement officer receiving notice of any alleged violation of this chapter or of any violation of an injunction or order issued in an action brought under this section shall immediately forward written notice of the same together with any information that he may have to the office of the attorney general.
Any person who violates the terms of an injunction or other order issued under this section shall forfeit and pay to the commonwealth a civil penalty of not more than ten thousand dollars for each violation. For the purposes of this section, the court issuing such an injunction or order shall retain jurisdiction, and the cause shall be continued, and in such case the attorney general acting in the name of the commonwealth may petition for recovery of such civil penalty.
Chapter 93A: Section 5. Assurance of discontinuance of unlawful method or practice.
Section 5. In any case where the attorney general has authority to institute an action or proceeding under section four, in lieu thereof he may accept an assurance of discontinuance of any method, act or practice in violation of this chapter from any person alleged to be engaged or to have been engaged in such method, act or practice. Such assurance may, among other terms, include a stipulation for the voluntary payment by such person of the costs of investigation, or of an amount to be held in escrow pending the outcome of an action or as restitution to aggrieved buyers, or both. Any such assurance of discontinuance shall be in writing and be filed with the superior court of Suffolk county. Matters thus closed may at any time be reopened by the attorney general for further proceedings in the public interest. Evidence of a violation of such assurance shall be prima facie evidence of a violation of section two in any subsequent proceeding brought by the attorney general.
Chapter 93A: Section 6. Examination of books and records; attendance of persons; notice.
Section 6. (1) The attorney general, whenever he believes a person has engaged in or is engaging in any method, act or practice declared to be unlawful by this chapter, may conduct an investigation to ascertain whether in fact such person has engaged in or is engaging in such method, act or practice. In conducting such investigation he may (a) take testimony under oath concerning such alleged unlawful method, act or practice; (b) examine or cause to be examined any documentary material of whatever nature relevant to such alleged unlawful method, act or practice; and (c) require attendance during such examination of documentary material of any person having knowledge of the documentary material and take testimony under oath or acknowledgment in respect of any such documentary material. Such testimony and examination shall take place in the county where such person resides or has a place of business or, if the parties consent or such person is a nonresident or has no place of business within the commonwealth, in Suffolk county.
(2) Notice of the time, place and cause of such taking of testimony, examination or attendance shall be given by the attorney general at least ten days prior to the date of such taking of testimony or examination.
(3) Service of any such notice may be made by (a) delivering a duly executed copy thereof to the person to be served or to a partner or to any officer or agent authorized by appointment or by law to receive service of process on behalf of such person; (b) delivering a duly executed copy thereof to the principal place of business in the commonwealth of the person to be served; or (c) mailing by registered or certified mail a duly executed copy thereof addressed to the person to be served at the principal place of business in the commonwealth or, if said person has no place of business in the commonwealth, to his principal office or place of business. (4) Each such notice shall (a) state the time and place for the taking of testimony or the examination and the name and address of each person to be examined, if known, and, if the name is not known, a general description sufficient to identify him or the particular class or group to which he belongs; (b) state the statute and section thereof, the alleged violation of which is under investigation and the general subject matter of the investigation; (c) describe the class of classes of documentary material to be produced thereunder with reasonable specificity, so as fairly to indicate the material demanded; (d) prescribe a return date within which the documentary material is to be produced; and (e) identify the members of the attorney general's staff to whom such documentary material is to be made available for inspection and copying.
(5) No such notice shall contain any requirement which would be unreasonable or improper if contained in a subpoena duces tecum issued by a court of the commonwealth; or require the disclosure of any documentary material which would be privileged, or which for any other reason would not be required by a subpoena duces tecum issued by a court of the commonwealth.
(6) Any documentary material or other information produced by any person pursuant to this section shall not, unless otherwise ordered by a court of the commonwealth for good cause shown, be disclosed to any person other than the authorized agent or representative of the attorney general, unless with the consent of the person producing the same; provided, however, that such material or information may be disclosed by the attorney general in court pleadings or other papers filed in court.
(7) At any time prior to the date specified in the notice, or within twenty-one days after the notice has been served, whichever period is shorter, the court may, upon motion for good cause shown, extend such reporting date or modify or set aside such demand or grant a protective order in accordance with the standards set forth in Rule 26(c) of the Massachusetts Rules of Civil Procedure. The motion may be filed in the superior court of the county in which the person served resides or has his usual place of business, or in Suffolk county. This section shall not be applicable to any criminal proceeding nor shall information obtained under the authority of this section be admissible in evidence in any criminal prosecution for substantially identical transactions.
Chapter 93A: Section 7. Failure to appear or to comply with notice.
Section 7. A person upon whom a notice is served pursuant to the provisions of section six shall comply with the terms thereof unless otherwise provided by the order of a court of the commonwealth. Any person who fails to appear, or with intent to avoid, evade, or prevent compliance, in whole or in part, with any civil investigation under this chapter, removes from any place, conceals, withholds, or destroys, mutilates, alters, or by any other means falsifies any documentary material in the possession, custody or control of any person subject to any such notice, or knowingly conceals any relevant information, shall be assessed a civil penalty of not more than five thousand dollars.
The attorney general may file in the superior court of the county in which such person resides or has his principal place of business, or of Suffolk county if such person is a nonresident or has no principal place of business in the commonwealth, and serve upon such person, in the same manner as provided in section six, a petition for an order of such court for the enforcement of this section and section six. Any disobedience of any final order entered under this section by any court shall be punished as a contempt thereof.
Chapter 93A: Section 8. Habitual violation of injunctions.
Section 8. Upon petition by the attorney general, the court may for habitual violation of injunctions issued pursuant to section four order the dissolution, or suspension or forfeiture of franchise of any corporation or the right of any individual or foreign corporation to do business in the commonwealth.
Chapter 93A: Section 9. Civil actions and remedies; class action; demand for relief; damages; costs; exhausting administrative remedies.
Section 9. (1) Any person, other than a person entitled to bring action under section eleven of this chapter, who has been injured by another person's use or employment of any method, act or practice declared to be unlawful by section two or any rule or regulation issued thereunder or any person whose rights are affected by another person violating the provisions of clause (9) of section three of chapter one hundred and seventy-six D may bring an action in the superior court, or in the housing court as provided in section three of chapter one hundred and eighty-five C whether by way of original complaint, counterclaim, cross-claim or third party action, for damages and such equitable relief, including an injunction, as the court deems to be necessary and proper.
(2) Any persons entitled to bring such action may, if the use or employment of the unfair or deceptive act or practice has caused similar injury to numerous other persons similarly situated and if the court finds in a preliminary hearing that he adequately and fairly represents such other persons, bring the action on behalf of himself and such other similarly injured and situated persons; the court shall require that notice of such action be given to unnamed petitioners in the most effective practicable manner. Such action shall not be dismissed, settled or compromised without the approval of the court, and notice of any proposed dismissal, settlement or compromise shall be given to all members of the class of petitioners in such manner as the court directs.
(3) At least thirty days prior to the filing of any such action, a written demand for relief, identifying the claimant and reasonably describing the unfair or deceptive act or practice relied upon and the injury suffered, shall be mailed or delivered to any prospective respondent. Any person receiving such a demand for relief who, within thirty days of the mailing or delivery of the demand for relief, makes a written tender of settlement which is rejected by the claimant may, in any subsequent action, file the written tender and an affidavit concerning its rejection and thereby limit any recovery to the relief tendered if the court finds that the relief tendered was reasonable in relation to the injury actually suffered by the petitioner. In all other cases, if the court finds for the petitioner, recovery shall be in the amount of actual damages or twenty-five dollars, whichever is greater; or up to three but not less than two times such amount if the court finds that the use or employment of the act or practice was a willful or knowing violation of said section two or that the refusal to grant relief upon demand was made in bad faith with knowledge or reason to know that the act or practice complained of violated said section two. For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim. In addition, the court shall award such other equitable relief, including an injunction, as it deems to be necessary and proper. The demand requirements of this paragraph shall not apply if the claim is asserted by way of counterclaim or cross-claim, or if the prospective respondent does not maintain a place of business or does not keep assets within the commonwealth, but such respondent may otherwise employ the provisions of this section by making a written offer of relief and paying the rejected tender into court as soon as practicable after receiving notice of an action commenced under this section. Notwithstanding any other provision to the contrary, if the court finds any method, act or practice unlawful with regard to any security or any contract of sale of a commodity for future delivery as defined in section two, and if the court finds for the petitioner, recovery shall be in the amount of actual damages.
(3A) A person may assert a claim under this section in a district court, whether by way of original complaint, counterclaim, cross-claim or third-party action, for money damages only. Said damages may include double or treble damages, attorneys' fees and costs, as herein provided. The demand requirements and provision for tender of offer of settlement provided in paragraph (3) shall also be applicable under this paragraph, except that no rights to equitable relief shall be created under this paragraph, nor shall a person asserting a claim hereunder be able to assert any claim on behalf of other similarly insured and situated persons as provided in paragraph (2). The provisions of sections ninety-five to one hundred and ten, inclusive, of chapter two hundred and thirty-one, where applicable, shall apply to a claim under this section, except that the provisions for remand, removal and transfer shall be controlled by the amount of single damages claimed hereunder.
(4) If the court finds in any action commenced hereunder that there has been a violation of section two, the petitioner shall, in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorney's fees and costs incurred in connection with said action; provided, however, the court shall deny recovery of attorney's fees and costs which are incurred after the rejection of a reasonable written offer of settlement made within thirty days of the mailing or delivery of the written demand for relief required by this section.
[There is no paragraph (5).]
(6) Any person entitled to bring an action under this section shall not be required to initiate, pursue or exhaust any remedy established by any regulation, administrative procedure, local, state or federal law or statute or the common law in order to bring an action under this section or to obtain injunctive relief or recover damages or attorney's fees or costs or other relief as provided in this section. Failure to exhaust administrative remedies shall not be a defense to any proceeding under this section, except as provided in paragraph seven.
(7) The court may upon motion by the respondent before the time for answering and after a hearing suspend proceedings brought under this section to permit the respondent to initiate action in which the petitioner shall be named a party before any appropriate regulatory board or officer providing adjudicatory hearings to complainants if the respondent's evidence indicates that:
(a) there is a substantial likelihood that final action by the court favorable to the petitioner would require of the respondent conduct or practices that would disrupt or be inconsistent with a regulatory scheme that regulates or covers the actions or transactions complained of by the petitioner established and administered under law by any state or federal regulatory board or officer acting under statutory authority of the commonwealth or of the United States; or
(b) that said regulatory board or officer has a substantial interest in reviewing said transactions or actions prior to judicial action under this chapter and that the said regulatory board or officer has the power to provide substantially the relief sought by the petitioner and the class, if any, which the petitioner represents, under this section.Upon suspending proceedings under this section the court may enter any interlocutory or temporary orders it deems necessary and proper pending final action by the regulatory board or officer and trial, if any, in the court, including issuance of injunctions, certification of a class, and orders concerning the presentation of the matter to the regulatory board or officer. The court shall issue appropriate interlocutory orders, decrees and injunctions to preserve the status quo between the parties pending final action by the regulatory board or officer and trial and shall stay all proceedings in any court or before any regulatory board or officer in which petitioner and respondent are necessarily involved. The court may issue further orders, injunctions or other relief while the matter is before the regulatory board or officer and shall terminate the suspension and bring the matter forward for trial if it finds (a) that proceedings before the regulatory board or officer are unreasonably delayed or otherwise unreasonably prejudicial to the interests of a party before the court, or (b) that the regulatory board or officer has not taken final action within six months of the beginning of the order suspending proceedings under this chapter.
(8) Except as provided in section ten, recovering or failing to recover an award of damages or other relief in any administrative or judicial proceeding, except proceedings authorized by this section, by any person entitled to bring an action under this section, shall not constitute a bar to, or limitation upon relief authorized by this section.
Chapter 93A: Section 10. Notice to attorney general; injunction, prima facie evidence.
Section 10. Upon commencement of any action brought under section nine or section eleven, the clerk of the court shall mail a copy of the bill in equity to the attorney general and, upon entry of any judgment or decree in the action, the clerk of the court shall mail a copy of such judgment or decree to the attorney general.
Any permanent injunction or order of the court made under section four shall be prima facie evidence in an action brought under section nine or section eleven that the respondent used or employed an unfair or deceptive act or practice declared unlawful by section two.
Chapter 93A: Section 11. Persons engaged in business; actions for unfair trade practices; class actions; damages; injunction; costs.
Section 11. Any person who engages in the conduct of any trade or commerce and who suffers any loss of money or property, real or personal, as a result of the use or employment by another person who engages in any trade or commerce of an unfair method of competition or an unfair or deceptive act or practice declared unlawful by section two or by any rule or regulation issued under paragraph (c) of section two may, as hereinafter provided, bring an action in the superior court, or in the housing court as provided in section three of chapter one hundred and eighty-five C, whether by way of original complaint, counterclaim, cross-claim or third-party action for damages and such equitable relief, including an injunction, as the court deems to be necessary and proper.
Such person, if he has not suffered any loss of money or property, may obtain such an injunction if it can be shown that the aforementioned unfair method of competition, act or practice may have the effect of causing such loss of money or property.
Any persons entitled to bring such action may, if the use or employment of the unfair method of competition or the unfair or deceptive act or practice has caused similar injury to numerous other persons similarly situated and if the court finds in a preliminary hearing that he adequately and fairly represents such other persons, bring the action on behalf of himself and such other similarly injured and situated persons; the court shall require that notice of such action be given to unnamed petitioners in the most effective, practicable manner. Such action shall not be dismissed, settled or compromised without the approval of the court, and notice of any proposed dismissal, settlement or compromise shall be given to all members of the class of petitioners in such a manner as the court directs.
A person may assert a claim under this section in a district court, whether by way of original complaint, counterclaim, cross-claim or third-party action, for money damages only. Said damages may include double or treble damages, attorneys' fees and costs, as hereinafter provided, with provision for tendering by the person against whom the claim is asserted of a written offer of settlement for single damages, also as hereinafter provided. No rights to equitable relief shall be created under this paragraph, nor shall a person asserting such claim be able to assert any claim on behalf of other similarly injured and situated persons as provided in the preceding paragraph. The provisions of sections ninety-five to one hundred and ten, inclusive, of chapter two hundred and thirty-one, where applicable, shall apply to a claim under this section, except that the provisions for remand, removal and transfer shall be controlled by the amount of single damages claimed hereunder.
If the court finds for the petitioner, recovery shall be in the amount of actual damages; or up to three, but not less than two, times such amount if the court finds that the use or employment of the method of competition or the act or practice was a willful or knowing violation of said section two. For the purposes of this chapter, the amount of actual damages to be multiplied by the court shall be the amount of the judgment on all claims arising out of the same and underlying transaction or occurrence regardless of the existence or nonexistence of insurance coverage available in payment of the claim. In addition, the court shall award such other equitable relief, including an injunction, as it deems to be necessary and proper. The respondent may tender with his answer in any such action a written offer of settlement for single damages. If such tender or settlement is rejected by the petitioner, and if the court finds that the relief tendered was reasonable in relation to the injury actually suffered by the petitioner, then the court shall not award more than single damages.
If the court finds in any action commenced hereunder, that there has been a violation of section two, the petitioner shall, in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorneys' fees and costs incurred in said action.
In any action brought under this section, in addition to the provisions of paragraph (b) of section two, the court shall also be guided in its interpretation of unfair methods of competition by those provisions of chapter ninety-three known as the Massachusetts Antitrust Act.
No action shall be brought or maintained under this section unless the actions and transactions constituting the alleged unfair method of competition or the unfair or deceptive act or practice occurred primarily and substantially within the commonwealth. For the purposes of this paragraph, the burden of proof shall be upon the person claiming that such transactions and actions did not occur primarily and substantially within the commonwealth.
The actual operations of consumer divisions within offices of attorney general are not well documented. Anecdotally, it appears that smaller cases are handled through mediation and larger cases are pursued through the multistate process and are not actually litigated.
State mediators recovered $4.7M for consumers through voluntary mediation services
Staff Reports
Somerville — Mediators from Attorney General Martha Coakley’s Office recovered more than $4.7 million dollars on behalf of individual consumers in 2010.
These recoveries are the result of mediation services and assistance facilitated by the Attorney General’s Office, responding to over 68,000 calls to the office’s hotline and 13,588 consumer complaints relevant to health care, consumer, and elderly issues.
“It’s important for people to know that these free consumer services are available to get help,” Coakley said. “In these difficult times when every dollar counts for families, our office has been very effective in helping people resolve complaints and achieve restitution that they rightfully deserve.”
The Attorney General’s Public Inquiry & Assistance Center Hotlineanswers thousands of calls each year from consumers concerning a wide range of consumer protection issues. The office also staffs an Elder Hotline, dedicated to problems facing seniors, and an Insurance & Health Care Helpline to assist consumers with questions pertaining to insurance and health care in the Commonwealth. Each hotline is staffed with trained specialists who assist consumers by answering their questions, and providing information about the complaint and mediation process, and offering referrals to organizations or government agencies that may also help. This past year, the Elder and Health Care mediation programs recovered over $684,000 on behalf of consumers.
All complaints received by the Attorney General’s Office (AGO) are reviewed, and if deemed appropriate for mediation services, assigned to a mediator. In addition to the mediation service offered directly by the AGO, the office also works with certain community-based Local Consumer Programsand Face-to-Face mediation programs that are situated around the state and partner with the AGO to mediate consumer complaints. Consumers wishing to file a complaint online may do so via the Attorney General’s Office website.
Additionally, thousands of consumers contact the AGO each year, not necessarily seeking mediation, but to make the Attorney General aware of their experience with a particular business or merchant. The office monitors these complaints to identify trends or patterns of unfair and deceptive trade practices. Based on this information, the Attorney General’s Office may elect to take legal action on behalf of Massachusetts consumers who are victims.
The Attorney General’s Office encourages aggrieved consumers to contact the following Hotlines for assistance if they encounter problems. Hotlines are staffed during regular business hours unless otherwise noted:
Single state consumer cases are pursued in some states with national impact.
A Case Study of Mandatory Consumer Credit-Card Arbitration
Nicholas Houpt
I. Introduction
On July 14, 2009 the Minnesota State Attorney General (MN AG) filed suit against the National Arbitration Forum (NAF), alleging that NAF misled consumers with its representations of neutral arbitration practices because NAF had financial ties to the credit card companies for whom it was arbitrating.[1] Three days later, NAF signed a Consent Judgment with a proclaimed purpose of “the complete divestiture by the NAF entities of any business related to the arbitration of consumer disputes.” [2] That is, the state of Minnesota secured injunctive relief on a national scale by filing a lawsuit in state court. NAF’s quick agreement to stop accepting consumer arbitrations caused a domino effect. The MN AG sent a letter to the American Arbitration Association (AAA), the world’s largest arbitration service company, asking it to suspend its national debt collection operations voluntarily.[3] Although AAA had just finished a high-volume debt collection program in June of 2009, it decided to “place[] a moratorium on the administration of any consumer debt collection arbitration programs.”[4] Bank of America and JPMorgan Chase, creditors who employed arbitration clauses, soon followed suit by ceasing to file debt collection arbitration actions.[5] Congress is now considering regulation of consumer arbitration, perhaps as part of the planned federal consumer protection agency.[6]
In one fell swoop, a single state Attorney General was able to bring the highly profitable world of credit card arbitration to its knees. The MN AG was not only able to secure reformed practices for its home state, but across the entire nation. This single action effectively put a halt to the national practice of collecting credit card debts through mandatory arbitrations. This result seems disproportionate to the MN AG’s responsibility to protect her own state’s citizens. With this case, the critics of state Attorneys General (AGs) have the perfect test case for a critique of AGs’ policymaking aggrandizement, with all of its democratic accountability and federalism components. I will discuss three separate critiques:
These criticisms apply to AGs involved in multistate litigation generally,[7] but this case magnifies these concerns. Single states have fewer frictions on decision-making. There are no other states in the litigation to provide contrary interests or more information based on the experiences of another state’s citizens. If a single state does consider national interests and make national policy, then the chain of accountability and principles of federalism might be destroyed. This type of state action seems to present a dilemma: a state either imprudently makes policy or violates constitutional principles.
In this paper, I will describe the systemic problems of mandatory credit-card arbitration and the specific facts and alleged state law violations of the NAF case. This background will lay out the facts for subsequent argument and will demonstrate the strength and independent validity of Minnesota’s case against NAF. I will then compare two empirical studies of consumer arbitration, which will demonstrate the practical difficulties of regulating in the face of uncertainty and will frame the debate about proper policymaking.
I will argue that the actions taken by the MN AG do not violate principles of federalism or democratic accountability, and, in fact, contribute to policymaking by creating an atmosphere of regulatory competition and cooperation. First, in terms of federalism, actions by a single state are more easily justified than in multistate litigation, because the state is pursuing a perfectly valid course of action by enforcing its own laws. No procedural, structural, or textual restrictions prevent this action. Second, practical frictions on policymaking and the corporation’s voluntary suspension of national activities dissolve the democratic accountability problems. Third, states serve an essential function in policymaking by acting on anecdotal evidence: gathering initial information and bringing problems to the attention of federal policymakers.
II. Background
A. Systemic Practices in Mandatory Credit-Card Arbitration
In describing the systemic problems with mandatory credit-card arbitration, I will be using the example of NAF’s practices and procedures.[8] Although NAF appears to be a worst-case offender and hence potentially misleading as a representative example, AAA’s suggested national reforms and procedures and AAA’s concerns about fairness support the claim that these practices are widespread.[9] The systemic problems fall into three general categories: 1) bias, e.g. repeat-player bias and arbitrators’ favoring industry, 2) notice procedures, e.g. ignoring service requirements, and 3) failure to comply with state reporting requirements.[10]
Several practices and procedures point to anti-consumer bias in the arbitration system. First, the arbitration organization assigns cases to arbitrators, allowing that organization, which has a financial stake in continued business with creditors, to choose the distribution of cases.[11] The data show that arbitrators who favor industry typically receive more cases than those who favor consumers.[12] Second, different arbitrators decided identical cases differently, providing a strong appearance of bias and reinforcing the potential for bias with assignment of cases.[13] Third, creditors can remove cases from consumer-friendly arbitrators by using peremptory challenges. [14] Fourth, the lack of respect for these procedures results in the exclusion of some legitimate defenses to a default judgment, such as identity theft. [15] Fifth, creditors need not provide proof of the debt amount when collecting a default judgment; the arbitrator is required to award the full amount requested by the creditor.[16] Sixth, NAF does not even require proof of an arbitration agreement before entering an award, nor does it require the statute of limitations to be satisfied.[17]
Service of process and notice of proceedings present a microcosm of the systemic problems with mandatory credit-card arbitration. First, the creditor serves and verifies process, i.e. NAF often failed to independently verify delivery receipts and signatures before sending the case to the arbitrator.[18] The Staff Report found several troublesome instances of sending service to the wrong address, receiving signatures of “x” or “John Doe,” or delivering notices in English when the customer received bills in Spanish. [19] Second, even when deficiencies in service were found, NAF pushed the cases on to the arbitrators when procedures required dismissal. [20] If those arbitrators then dismissed the cases for insufficient service, they received fewer cases.[21] Third, these failures in service allow the creditor to obtain easy default judgments, giving the creditor a strong incentive to be lax in service procedure.[22]
NAF has also failed to comply with California’s legally-mandated reporting requirements. NAF did not publish the results of thousands of arbitrations, which results in an incomplete set of data.[23] This failure to publish also aided creditors in “seeking and obtaining awards of attorney’s fees that violate Delaware Law.”[24] By having closed proceedings and no way to review the results, NAF has created an arbitration system rife with opportunity for arbitrariness and fraud.
B. Minnesota’s Case Against NAF
The MN AG’s complaint and Congressional testimony paint a sordid picture of NAF’s role in the business of consumer credit-card arbitration. The core of the problem with NAF’s alleged practices is that NAF deceptively promotes itself as an independent and neutral party in the arbitration process.[25] For example, NAF’s advertisements and websites typically include a claim such as:
“Q: Is the FORUM affiliated with credit card companies or other businesses that use pre-dispute arbitration agreements?
A: No. The FORUM is an independent administrator of alternative dispute resolution services… We are not beholden to any company or individual that utilizes our services.”[26]
NAF also claims that it does not receive any funds from other sources, except for the arbitration fees it collects.[27[Perhaps the greatest example of NAF’s proclamations of neutrality is its comparison with court procedures: “These arbitral procedures provide truly excellent due process protections, and meet or exceed the rights parties would have in any court or before an administrative law judge.”[28]
NAF, however, is far from neutral. Through a tangled corporate web, NAF is affiliated with debt collection parties.[29] Essentially, a hedge fund owns both NAF and debt collection agencies, creating a conflict of interest which NAF and its ownership allegedly actively worked to conceal.[30]
Beyond this structural affiliation, NAF also allegedly actively markets itself to businesses as an anti-consumer forum that will improve the bottom line for credit-card and debt collection companies. First, some NAF employees allegedly work on a commission basis for convincing companies to use pre-dispute mandatory arbitration clauses in their contracts.[31] Second, NAF markets itself as a cost-effective alternative to litigation.[32] Third, these marketing strategies also include statements of the coercive power of this method of arbitration:
“The customer does not know what to expect from Arbitration and is more willing to pay”
“They [customers] ask you to explain what Arbitration is then basically hand you the money”
“You have all the leverage and the customer really has little choice but to take care of this account.”[33]
Fourth, NAF assists in drafting the mandatory arbitration clauses, and promotes these clauses as a method of taking control of the risk associated with debt collection.[34] Fifth, NAF assists companies in preparing arbitration claims through, e.g., draft forms, advice on legal trends, and referrals to an affiliated debt collection law firm, Mann Bracken.[35]
The MN AG argues that these allegations add up to multiple violations of three Minnesota statutes. First, NAF allegedly violated Minnesota’s Prevention of Consumer Fraud Act, which prohibits “The act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise…”[36] Second, NAF allegedly violated Minnesota’s Uniform Deceptive Trade Practices Act, which provides that “A person engages in a deceptive trade practice when, in the course of business, vocation, or occupation, the person: (5) represents that good or services have…characteristics…benefits…that they do not have…”[37 Third, NAF allegedly violated Minnesota’s False Statements in Advertising Act, which provides that “Any person, firm, corporation or association who with intent to sell or in anywise dispose of merchandise securities, service, or anything offered… to the public, … which advertisement contains any material assertion, representation, or statement of fact which is untrue, deceptive, or misleading, shall, … be guilty of a misdemeanor.”[38]
Although NAF admits to no wrongdoing,[39] the MN AG obviously had a very strong case. NAF decided to settle mere days after the complaint was filed and did not even file an answer, which suggests an acknowledgement that a defense would likely be unsuccessful.[40] The plain language of the statute, as applied to the facts, also seems to be a clear-cut case: NAF represented itself as neutral when it, in fact, was not. This case is a clear example of a fraudulent action in violation of state law, and, when coupled with the magnitude of harm to consumers here, is sufficient reason for an AG to bring a case. Whatever theoretical interpretations of setting “national policy” one might proffer, this reasoning remains the practical reality. The MN AG had a strong case and an obligation to the people of Minnesota, she acted appropriately in bringing a lawsuit under state law, and the only “national” policy to come out of it is the consequence of a voluntary corporate action.
C. Empirical Data: The Searle Study and the Center for Responsible Lending
[Omitted]
III. Critiques and Defenses of Single State AG’s Setting National Policy
This section will flesh out the four critiques, apply them to the case of Minnesota v. NAF, and refute those critiques. The critiques, as described above, are: 1) the state violates principles of federalism, 2) the state is not democratically accountable to the nation or to other states, and 3) the state lacks the institutional competency to make national policy rationally. The corresponding refutations are: 1) there are no specific structural or textual violations of federalism, 2) the practical reality of the office of the AG and the voluntary action on the part of the corporation absolve the single state AG from democratic accountability problems, and 3) state policymaking based on anecdotes is an essential part of the nation’s system of policymaking, as this state action brings priorities to the fore and helps create the empirical data on which national policy is properly based.
A. Federalism
In the wake of the large multistate settlement involving tobacco, many critics have spoken out against AG multistate litigation as a state interference with federal power and a threat to the constitutional structure grounding our society.[41] Essentially, the argument is that the states, by setting national policy, usurp the proper role of Congress. In Minnesota v. NAF, the problem is magnified: a single state creates national policy instead of a group of 40 or even 50 states. Although rhetorically powerful, this critique lacks constitutional substance, as there is no specific federalism violation.
Federalism consists of express constitutional restrictions on state action and implied or conditional structural restrictions.[42] Express restrictions are those restrictions listed in Article 1, Section 10, such as the prohibition on states engaging in foreign affairs and making treaties.[43] Implied structural or conditional restrictions include doctrines like the dormant commerce clause, preemption and the supremacy clause, and other rarities like state power over federal bodies, e.g. taxing a federal bank in McCulloch v. Maryland.[44]
David Lynch, in his note on this topic, handily dismissed the applicability of each federalism restriction to multistate litigation.[45] None of the textual or implied limitations apply. The states are enforcing their own laws, pursuant to proper constitutional authority.[46] That is, each state is bringing an individual state lawsuit against a private party, which is clearly not a violation of federalism, assuming that no federal restrictions on enforcement are present, such as federal preemption. The “national policy” promulgated by these states is nothing more than the aggregation of these individually justified cases. In this sense, Minnesota v. NAF is an easier federalism case than multistate litigation, because there is no aggregation problem.[47]
Furthermore, in Minnesota v. NAF, the “national policy” of striking down mandatory credit-card arbitration agreements stems not from some attempt by the state to legislate nationally, but from the voluntary action of the private party. When sued, NAF settled with Minnesota and voluntarily suspended its national arbitration practices.[48] Other arbitration organizations and creditors voluntarily followed suit.[49] In light of this practical reality, the critique disappears: there is no government-made national policy. In other words, Minnesota set the policy for its state by having and enforcing laws against fraud, but the private entity set the national policy for its own private activities, which in no way implicates federal government or federalism concerns. This voluntary change also defuses the problems with the national remedies in the consent judgment. As discussed above, the timing of the voluntary settlement and subsequent actions by AAA and other creditors suggests that the national consequences of the state action were the result of corporate decisions, not government actors.[50]
B. National and State-to-State Democratic Accountability
While structural federalism arguments did not pose much of an obstacle to justifying the national consequences of a state AG’s actions, democratic accountability arguments derived from federalism principles pose a much muddier and more difficult set of challenges. Democratic accountability, in the context of federalism, requires that an individual citizen be able to hold the right public official accountable, e.g. the federal government has violated this principle by blurring political accountability to the point where a state official would appear responsible for a federal policy.[51] To my knowledge, only cases involving a federal imposition on state authority have been decided under this rationale. Also, those cases have relied upon the text of the 10th Amendment as a constitutional hook, and it is not clear whether states could violate federalism principles without violating one of the structural or express restrictions discussed above. Nevertheless, it is possible to imagine that the courts could create a new principle from structural arguments in the Constitution, akin to the genesis of the dormant commerce clause, which could prevent states from interfering with democratic accountability at the federal level and from interfering with the responsibilities of other states.[52]
Upon first glance, it appears that there is no accountability problem here. Minnesota has its own state laws, and the AG enforced those laws against a private entity.[53] Furthermore, NAF is a Minnesota corporation, and should fall squarely within the MN AG’s jurisdiction.[54] The citizens of Minnesota have a clear line of accountability to the state legislature for the statute and to the AG for its enforcement. Only when NAF decided to suspend its national arbitration operations did an issue of national accountability arise.[55] The claim that other states would see NAF change its practice and attribute that to the federal government is inapposite; NAF’s decision was not a political one, i.e. it has no political accountability. Essentially, the necessary intermediate step from state to national policy requires private action, which removes the political accountability problem.
The rise of multistate litigation in the national consciousness, however, might alter that analysis. A full exploration of this argument is beyond the scope of this paper, but I will provide a rough sketch. First, in multistate litigations, one or two AGs often take the lead on negotiating for the rest of the states involved.[56] Second, this practical reality could pose an ethical issue, in that these AGs must now consider the welfare of states other than their own.[57] Third, multistate litigation has become so commonplace for certain types of cases that a single state AG has the responsibility to consider other states’ welfare, even when filing alone.[58] Fourth, this situation could create a democratic accountability problem, because the single AG could be seen as acting on a national level, thus blurring accountability. Or, similarly, there could be a horizontal democratic accountability problem, i.e. state to state, since citizens of other states do not have a political link to that single AG.[59]
Whatever theoretical difficulties remain with the above argument, it seems to impugn Minnesota’s actions given the scope of the Consent Judgment and the MN AG’s subsequent request to AAA for complete cessation of arbitration activities.[60] That is, whether a single state has an ethical duty to consider the interests of other states is irrelevant here; the MN AG asked for national remedies, which could suggest that the MN AG had national interests in mind. It is possible, however, that the interests of Minnesota citizens alone could explain the request for national remedies meaning that adequate protection of Minnesota citizens would require a remedy beyond the borders of Minnesota.[61]
Even without the theoretical possibility of a national remedy being necessary, the practical reality of the AG’s office eliminates the democratic accountability problem.[62] AGs start with the facts on the ground, and only move to multistate considerations if the case requires the help of other states, e.g. insufficient resources to handle a large case.[63] Minnesota’s sole focus on state law violations in this case absolves it of accountability problems; any national consequences following Minnesota’s lawsuit are the result of corporate action. There is no horizontal accountability problem, because Minnesota, like every other state, has the parens patriae power to bring public interest litigation, i.e. Minnesota is not stepping on other state’s toes. To find a horizontal accountability problem here would be to imperil all AG litigation that happens to affect something beyond the borders of the state. Similarly, there is no usurpation of federal power here, since Minnesota is acting only within its reserved powers and is not taking on a federal role. The only nationwide policy set here is the policy chosen by the corporation.
This defense against the federalism and democratic accountability problems relies to some extent on the voluntary agreement to a settlement. Had this case been fully litigated, perhaps the critiques would still apply. The nationwide policy would not be set by the corporation, but by the AG and by the state court.
Even if the case had gone to trial, any national consequences that flowed from the court’s decision would valid under theories of democratic accountability and federalism. The state court only has power to enforce remedies within the state’s borders,[64] so NAF could continue its actions outside of Minnesota (at its own peril, of course). This boundary of the court’s and AG’s power solves the democratic accountability and federalism issues: any national policy is set not by the single state court or AG, but by the corporation itself or by the courts and AGs of other states. That is, either NAF would voluntarily suspend its national operations, or other AGs would bring cases in their respective states and set policy for themselves.
C. Institutional Competence for Policymaking
The institutional competence critique does not stem from constitutional theory, but from a theory of prudent policymaking. A competent policymaking institution should not rely on anecdotal evidence, but should base its decisions on the available empirical data and rigorous analysis.[65] State AGs make policy through litigation, as opposed to holding hearings like a legislature or doing rigorous empirical analysis like an administrative agency. Even if AGs could adopt these methodologies, they likely would not have the resources to do them properly. It seems then, that AGs are constrained to making policy based on anecdotal evidence: citizens complain or the local news investigates a problem, and the AG responds by litigating (or using some extralegal means, such as the press, which I will not consider for the purposes of this argument).[66] By relying on anecdotal evidence, AGs lose several essential tools for national policymaking: picking the right priorities, predicting consequences, and understanding root causes of problems.
With the big picture of the policymaking process in place, the rebuttal of this critique is simple: policymaking begins with anecdotes and moves to empirical data. Minnesota v. NAF is a perfect example of this phenomenon. The federal government did not regulate the presence of mandatory forced arbitration clauses in credit card contracts. A consumer protection problem concerning these clauses developed. The Minnesota AG, seeing the state’s citizens suffering, filled that regulatory void by bringing an action under state law.[67] This action resulted in a temporary stop to credit-card arbitration and caught the attention of federal policymakers.[68] Congress held hearings on this topic in July of 2009,[69] and could regulate this area soon. The genesis of policymaking from anecdotes is an essential component in the regulatory competition and cooperation between state and federal governments.[70]
IV. Conclusion
Much like the state AGs’ role in antitrust enforcement, the MN AG acted first, in an area unregulated by the federal government, and got it right.[71] It is precisely the AG’s different institutional competency – being on the ground with local problems and being able to respond quickly – that enables our nation’s policymaking process. This strong local concern also functions as a rebuff to critiques of federalism and democratic accountability. Minnesota v. NAF is not an example of a state AG eviscerating the dual-sovereign structure of our government, but rather an example of a state AG doing what’s best for her client, the people of Minnesota, within the parameters of power allocated to the state of Minnesota and the Office of the Attorney General.
1 Complaint at ¶¶ 1-4, State of Minnesota by its Attorney General, Lori Swanson, v. Nat’l Arbitration Forum, Inc. [hereinafter Complaint] (Hennepin County Dist. Ct. Minn., July 14, 2009), available at http://www.ag.state.mn.us/PDF/PressReleases/SignedFiledComplaintArbitrationCompany.pdf.
2 Consent Judgment at ¶ 1 State of Minnesota by its Attorney General, Lori Swanson, v. Nat’l Arbitration Forum, Inc. [hereinafter Consent Judgment] (Hennepin County Dist. Ct. Minn., July 19, 2009) (No. 27-CV-09-18550), available at http://pubcit.typepad.com/files/nafconsentdecree.pdf.
3 Press Release, Office of Minnesota Attorney General Lori Swanson, National Arbitration Forum Barred From Credit Card And Consumer Arbitrations Under Agreement With Attorney General Swanson:
Swanson Also Wants Congress to Ban “Fine Print” Forced Arbitration Clauses [hereinafter Press Release] (July 20, 2009), available at http://www.ag.state.mn.us/Consumer/PressRelease/090720NationalArbitrationAgremnt.asp; “Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 11th Cong. 1 (2009) (statement of Richard W. Naimark, on behalf of the American Arbitration Association).
fn4.Naimark, supra note 3, at. 1-2.
5 Carrick Mollenkamp, Dionne Searcey, and Nathan Koppel, Turmoil in Arbitration Empire Upends Credit-Card Disputes, WALL ST. J., Oct. 15, 2009, at A14. Available at http://online.wsj.com/article/SB125548128115183913.html.
6 The House of Representatives Domestic policy Subcommittee of the Oversight and Government Reform Committee held a hearing on this issue on July 22, 2009. See supra note 3.
7 For a discussion of structural and textual federalism-based critiques, see Jason Lynch, Note: Federalism, Separation of Powers, and the Role of State Attorneys General in Multistate Litigation, 101 COLUM. L. REV. 1998 (2001) (discussing textual and structural federalism critiques of state AGs engaged in multistate litigation). For a democratic accountability critique of multistate litigation by AGs, see Timothy Meyer, Federalism and Accountability: State Attorneys General, Regulatory Litigation, and the New Federalism, 95 CAL. L. REV. 885 (2007).
8 NAF’s problematic procedures were discovered well before the MN AG’s suit. Harvard Law Professor Elizabeth Bartholet worked as an arbitrator for NAF and experienced the bias against arbitrators who sometimes decided cases in favor of consumers. She blew the whistle on NAF after having cases taken from her and experiencing NAF’s efforts to prevent her from testifying in a related case. She brought national attention to the problems with this form of arbitration. See Courting Big Business: The Supreme Court’s Recent Decisions On Corporate Misconduct and Laws Regulating Corporations: Hearing Before the S. Comm. on the Judiciary, 110th Cong. (2008) (statement of Elizabeth Bartholet), available at http://judiciary.senate.gov/hearings/testimony.cfm?id=3485&wit_id=7313.
9 Naimark, supra note 3.
10 “Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 111th Cong. 1 (2009) (Staff Report: “Arbitration Abuse: an Examination of Claims Files of the National Arbitration Forum”, Domestic Policy Subcomm. Majority Staff, H. Oversight and Government Reform Comm..) [hereinafter Staff Report].
11 Staff Report at 7.
12 Id. at 7. See also Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 11th Cong. 8-9 (2009) (statement of F. Paul Bland, Jr., Staff Attorney, Public Justice).
13 Staff Report at 9. “There is no procedure to correct a decision that is against the law or a decision that totally different [sic] from another decision issued by that arbitrator or another arbitrator. Our review disclosed decisions that were totally opposite, depending on whether or not the arbitrator was concerned with deficiencies in the claim documents or ignored them entirely (citation omitted).”
14 Id. at 8. “When a case is assigned to an arbitrator whom the creditor considers unfavorable, the creditor can remove the arbitrator with a simple form letter, without any need to recite a justification. …In Maine, one arbitrator who was actually following NAF’s rules, and dismissing cases that were deficient, found himself without any subsequent case assignments.” See also Bland at 7-8.
15 Staff Report at 10; Bland, supra note 11, at 16.
16 Bland, supra note 11, at 7, 14-15.
17 Id. at 20-21.
18 Staff Report at 7.
19 Id. at 7.
20 Id. at 9.
21 Id. at 9.
22 Id. at 7.
23 Id. at 8.
24 Id. at 8 (citing DEL. CODE ANN, tit. 10, § 3912).
25 Complaint at ¶ 19.
26 Id. at ¶ 21.
27 Id. at ¶ 24.
28 Id. at ¶ 25.
29 Complaint at ¶¶ 26-85. See also Appendix A to this paper, which contains the corporate organizational charts used in the complaint.
30 Id. at ¶ 87.
31 Id. at ¶ 92.
32 Id. at ¶ 94.
33 Id. at ¶ 96.
34 Id. at ¶¶ 99-106.
35 Id. at ¶¶ 107-111.
36 Minn. Stat. § 325F.69, subd. 1.
37 Minn. Stat. § 325D.44, subd. 1.
38 Minn. Stat. § 325F.67 (2008).
39 Consent Judgment.
40 Press Release, supra note 3. Other explanations for this decision are also possible, e.g. the corporation wanted to head off any further lawsuits and had to act quickly, or perhaps acting quickly and nationally would be a showing of good faith that could minimize reputational damage. Nevertheless, these alternate explanations still suggest the strong underlying merit of Minnesota’s case.
41 Lynch, supra note 7, at 1998-99; Thomas C. O’Brien, Constitutional and Antitrust Violations of the Multistate Tobacco Settlement, Policy Analysis (Cato Institute, Washington, D.C.) May 18, 2000, at 1, 8-10, available at http://www.cato.org/pubs/pas/pa-371es.html; Alabama Attorney General William H. Pryor, Jr., The Law is at Risk in Tobacco Suits, N.Y. TIMES, Apr. 27, 1997, 4, at 15.
42 Lynch, supra note 7, at 2010-2018. I have excluded the argument about the Compact Clause from this discussion, since only one state is involved here.
43 U.S. Const. art. I, 10, cl. 1.
44 Lynch, supra note 7, at 2012-15; McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819).
45 Id.
46 Id. at 2032.
47 The aggregation equivocation, i.e. the argument that individually justified actions remain justified when aggregated, might fail constitutional scrutiny. In commerce clause jurisprudence, it is permissible to regulate activities that are individually beyond Congress’ reach if those individual activities would substantially affect commerce in the aggregate. Wickard v. Filburn, 317 U.S. 111 (1942) (holding that regulation of purely intrastate homegrown wheat permissible because, when aggregated, has a substantial effect on interstate commerce); Gonzales v. Raich, 545 U.S. 1 (2005) (holding that homegrown marijuana is regulable by Congress under the commerce clause where regulation of that substance is essential to a comprehensive regulatory regime). Analogously, the character of the individual action in this case is no guarantee that aggregated action shares the same character.
48 Press Release, supra note 3.
49 Mollenkamp, supra note 5.
50 See supra notes 3, 37 and accompanying text.
51 Printz v. U.S., 521 U.S. 898, 920 (1997) (democratic accountability blurred where state executive official responsible for enforcing federal policy); New York v. U.S., 505 U.S. 144, 168-69 (1992) (democratic accountability blurred where state legislature required to take title to nuclear waste); U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779, 838 (1995) (Kennedy, J., concurring) (generally expositing theory of dual federalism in U.S. government and importance of democratic accountability); see generally JOHN HART ELY, DEMOCRACY AND DISTRUST: A THEORY OF JUDICIAL REVIEW (1980) (arguing that reinforcement of political representation is the cornerstone of judicial review).
52 For an argument proposing constitutional restraints on state-state action, see Scott Fruehwald, The Rehnquist Court and Horizontal Federalism: An Evaluation and a Proposal for Moderate Constitutional Constraints on Horizontal Federalism, 81 DENV. U. L. REV. 289 (2003).
53 See supra notes 33 and 34 and accompanying text.
54 Complaint at ¶ 7. The fact that NAF is a Minnesota corporation might seem to undermine the democratic accountability critique completely, since AGs should protect citizens from threats within the borders of their states. This argument, however, fails to account for the company’s national operations, which would give every AG jurisdiction. Thus, the MN AG is still setting policy for those other states by achieving a national remedy.
55 Press Release, supra note 3.
56 Jane Dattilo, Representing the Public’s Interest: Ethical Issues Confronting State Attorneys General Generally, and Multistate Litigators Specifically, 25 (unpublished seminar paper) (April 25, 2008), available at http://www.law.columbia.edu/null?&exclusive=filemgr.download&file_id=161468&rtcontentdisposition=filename%3DDatillo%20-%20Ethics%20Paper.pdf.
fn57.Id.
58 This claim contains two controversial premises: 1) that multistate litigation is practically inevitable for certain cases and 2) that states would then take on an ethical responsibility for other states before they enter the fray. As to 1), I offer two disjointed pieces of evidence: the recent boom of multistate litigation related to the economic crisis, see e.g. Ruth Simon, Countrywide’s Pressures Mount, WALL ST. J., June 26, 2008, at A3 (describing the beginning of multistate litigation against subprime lender, Countrywide), and the presence of counsel in private law firms for AG issues, e.g. former New York Attorney General Robert Abrams at Stroock & Stroock,& Lavan. http://www.stroock.com/sitecontent.cfm?contentID=49&itemID=334 (“Mr. Abrams has been of particular value to corporations that have been the subject of an investigation by a state attorney general or by multi-state investigations by numerous state attorneys general.”) As to 2), this premise seems unlikely, but, if a multistate litigation is likely to ensue, it would be prudent for the AG to consider the likely actions of other states. Still, the single AG is not yet an appointed agent for the other AGs, as in an active multistate litigation.
59 For a theoretical exposition of horizontal accountability problems and an applied analysis concerning state tort law, see Samuel Issacharoff and Catherine M. Sharkey, Backdoor Federalization, 53 UCLA L. REV. 1353 (2006).
60 Press Release, supra note 3; Consent Judgment at ¶¶ 1, 3.
61 The national remedy might be justified because the MN AG is striking the corporation’s nerve center. That is, the fraudulent actions started at headquarters and should end there. Alternatively, creditors might be able to choose the forum for arbitration and avoid implicating Minnesota law.
62 For a tax law example of practical realities explaining away theoretical confusion, see David Schizer, Frictions as a Constraint on Tax Planning, 101 COLUM. L. REV.1312 (2001)
63 See generally Lynch, supra note 7; Rachel Rosenberg, A Model Multistate: Ford, Firestone, and the Attorneys General (unpublished student seminar paper) (January 6, 2002) (describing the practical nature of multistate litigation as fundamentally concerned with violations of state law, which is squarely within the AGs’ parens patriae power). Of course, multistate considerations could also come into play if other states independently join an ongoing litigation.
64 See, e.g., 3-26 Minnesota Civil Practice § 26.24 (describing geographical limits on state court authority to execute a judgment).
65 Rounds, supra note 40, at 1.
66 Consumer Credit and Debt: The Role of the Federal Trade Commission, before the H. Comm. On Energy and Commerce, Subcomm. on Commerce, Trade and Consumer Protection, 110th Cong. 6 (2009) (statement of James Tierney, Director of the National State Attorney General Program, Columbia Law School).
67 See generally Complaint.
68 See supra note 5.
69 See supra note 6.
70 For another example where regulatory competition and cooperation have fostered better policymaking, see Stephen Calkins, Perspectives on State and Federal Antitrust Enforcement, 53 DUKE L.J. 673 (2003).
71 See Tierney, supra note 86, at 6 (“State attorneys general saw the need for consumer protection in the area of credit. They got it first. And they got it right.”).
The Road Less Travelled: Alternatives to Multi-State Litigation in Response to the American Mortgage Crisis
John Schwab
Introduction
The mortgage crisis that began in late 2005 debilitated both the American and global economies. It also had major ramifications for large numbers of American homeowners who quickly found themselves owning homes that were worth significantly less than the mortgages used to purchase them. Due to the contemporaneous decline in overall economic conditions and the fact that many homeowners had secured mortgages they were unable to afford, foreclosures rose at an astronomical rate.
Officials at all levels of American government have instituted various measures to “solve” this resulting foreclosure crisis. Some of the most high-profile attempts at forestalling the foreclosure of American homeowners came from the offices of State Attorney Generals. These high-profile actions took the form of multi-state investigations, backed up by the threat of multi-state litigation, of large mortgage brokers and servicers with a national real-estate presence. The investigations made headlines in newspapers around the country and resulted in foreclosure concessions as well as financial windfalls for the States involved. However, high-profile multi-state investigations are not the only, or even perhaps the optimal, response to the foreclosure crisis from a State’s Attorney General.
This paper will explore the approach taken by the Massachusetts’ Attorney General’s Office under the leadership of AG Martha Coakley. Ms. Coakley’s actions against Fremont Investment & Loan were not national news, nor did they result in a headline-grabbing financial settlement. On the other hand, the Fremont lawsuit and a subsequent suit against H&R Block and its subsidiary, Option One Mortgage, accomplished something unique: they prevented foreclosures on the mortgages at issue in the suit while also setting a baseline template for what constituted a “presumptively unfair” mortgage in violation of the Commonwealth’s Unfair and Deceptive Practices Act. Thus, without the fanfare of a national investigation, the Massachusetts Attorney General’s Office obtained relief against particular mortgage brokers while establishing a legal precedent that individuals could use in negotiations or lawsuits with other lenders not party to the AG’s lawsuits. Part I of this paper will outline the mortgage crisis and the resulting tide of foreclosures and then briefly examine the prominent multi-state investigations and negotiations led by State Attorneys General in order to contrast those actions with the lawsuits in Massachusetts. Part II will explore the background of Fremont Investment & Loan and its presence in Massachusetts, before discussing the unique aspects of the Attorney General’s lawsuit and the resulting trial court and Massachusetts Supreme Judicial Court decisions. Part II will then detail the Attorney General’s lawsuit against H&R Block, which seeks to a establish a similar “baseline” of unfair mortgage lending but with respect to racial discrimination rather than financial practices. Part III will then discuss the various advantages and disadvantages of the Massachusetts Attorney General’s approach when compared with multi-state investigations.
Part I— The Foreclosure Crisis and Multi-State Litigation
The United States mortgage crisis has devastated home values across the country. Moreover, it has left numerous Americans unable to meet their mortgage payments. The hardest hit have been those with the types of risky loans that were major contributors to the mortgage crisis: adjustable rate mortgages (ARMs), interest only mortgages and payment option mortgages. Owners of these risk-laden loans are significantly more likely to become delinquent in their mortgage payments and face foreclosure. Moreover, the rising number of foreclosures has created a vicious cycle: mass foreclosures drive investors out of the real estate market, the withdrawal of capital makes it increasingly difficult for distressed mortgage holders to refinance and, thus, more individuals are forced into foreclosure.
State Attorney Generals have sought to break this cycle in a variety of ways, most prominently through well-publicized multi-state investigations. The pursuit of multi-state actions is, perhaps, not surprising: multi-state lawsuits have been a popular “tool” of Attorneys General since the success of the massive tobacco litigation in the 1990s. Moreover, multi-state suits have produced large settlements in a number of predatory lending cases. However, multi-state litigation opens the door for criticism of Attorneys General on a number of levels. Multi-state actions in relation to the mortgage crisis are particularly vulnerable to charges that such settlements usurp legislative power and, perhaps more significantly, that they fail to provide proper levels of relief for individual homeowners.
The most recent and, in some ways, most wide ranging multi-state investigation, is a fifty-state effort to stop mortgage lenders from foreclosing on homes using flawed, or potentially flawed, documentation. The massive investigation made headlines and put the States Attorney Generals at the forefront of “combating” foreclosures.
On the other hand, it isn’t at all clear that the AG’s actions in investigating “robo-signing” and other potentially illegal foreclosure procedures are actually getting to the heart of the foreclosure problem. Before initiating a foreclosure, mortgage brokers are required to produce a sworn affidavit that they own the mortgage in question and that payments are at least six months delinquent. When mortgages are “robo-signed,” brokers never even look at the documents in question—-instead, they pay large numbers of “walk-in hires so inexperienced they barely [know] what a mortgage is” to sign off on the documentation. While such a practice is clearly unethical and perhaps illegal, there is no causal link between mortgage holders whose brokers have “robo-signed” their documentation and mortgage holders who are delinquent on their payments because they were originally sold an unfair and deceptive loan. In other words, it’s not clear that the individuals who were victimized by predatory lending are those who would obtain relief from an injunction against “robo-signed” mortgages. While it is likely that the Attorneys General are simply using the “robo-signing” violations as leverage with which to negotiate wider-ranging concessions from mortgage holders, this is not necessarily a good thing. Such an approach is a clear example of the usurpation of legislative power that leads to criticism of the multi-state investigation: Attorney Generals are not enforcing the law so much as using the law to negotiate procedures and policy for the mortgage industry that might normally be dictated by legislative law-making.
The approach of the Massachusetts Attorney General’s Office stands in stark contrast to this latest multi-state investigation, both in terms of the actions undertaken and the desired results. In particular, Attorney General Coakley took two distinctive steps: 1) she filed a lawsuit and then actually litigated it and 2) she sought, and won, a judicial ruling that would provide relief not just for victims of Fremont Investment & Loan, but for all Massachusetts citizens who had been victimized by predatory mortgage lending.
Part II—- Litigation in Massachusetts
The Commonwealth of Massachusetts was hit hard by the mortgage crisis and subsequent wave of foreclosures. In 2008, the Commonwealth saw 12, 430 foreclosures, the largest number in its history and rate of foreclosures did not decrease significantly from there. Massachusetts’ Attorney General, Martha Coakley, employed a number of approaches to help distressed borrowers in the Commonwealth. Perhaps the most unique of the Attorney General’s efforts was the investigation and subsequent lawsuit against major subprime lender Fremont Investment & Loan.
A. Fremont Investment & Loan
Fremont Investment & Loan was a national mortgage lender based in Brea, California. Fremont maintained a large presence in Massachusetts: they were the second largest subprime lender in the state. Fremont’s mortgage business was heavily reliant on subprime lending: somewhere between fifty and sixty percent of its residential loans were considered subprime. The company specialized in “pulse products,” meaning, as elucidated by a former Fremont employee, that “[i]f a borrower had a pulse, he or she could qualify for one of Fremont’s products.” Nearly forty percent of Fremont’s loans in Massachusetts were stated income loans, in which the borrower was allowed to state his or her income without any form of verification. Once the borrower had stated an occupation and income, Fremont checked the stated income against the average income for the claimed occupation in that geographic area, using the website salary.com.
The result of these lax underwriting practices was predictable: numerous individuals were given loans that they could in no way afford based on falsified occupation and income information. Mortgage brokers such as Fremont, as well as some politicians and journalists, claimed that the true fault in the mortgage morass lay with the borrowers who knowingly falsified their loan applications. Regardless, it is very clear that Fremont encouraged its brokers to sell the riskiest, highest yield mortgages they could by tying brokers’ bonuses directly to the mortgage rates of products they sold. Brokers were paid an additional fee for selling a buyer a mortgage at a rate higher than that buyer qualified for. Fremont also offered its brokers “bounties” for selling mortgages with large pre-payment penalties.
Fremont Investment & Loan was not simply a Massachusetts problem. Before it filed for bankruptcy in 2008, Fremont was one of the five largest subprime mortgage lenders in the country. While Fremont did not, perhaps, have the same level of public visibility as Countrywide, there is no reason Fremont could not have been the target of a similar multi-state investigation. However, the Massachusetts Attorney General’s Office decided to take a very different tack in confronting the issues created by Fremont: they filed a lawsuit and then actually litigated it.
B. The Lawsuit: Commonwealth v. Fremont Investment & Loan
The Attorney General’s lawsuit against Fremont Investment & Loan did not materialize out of thin air. It was an outgrowth of a number of factors, including the mounting rate of foreclosures in Massachusetts, the particular behaviors of Fremont Investment, and the ineffectiveness of negotiated agreements between the company and the Commonwealth.
1. The Lead-Up To the Lawsuit
In early 2007, the Federal Deposit Insurance Corporation (FDIC) alleged that Fremont had engaged in unsound lending practices. The FDIC found that Fremont had been operating “without effective risk management policies and procedures . . . in relation to its subprime mortgage and commercial real estate lending operations.” The FDIC demanded Fremont undertake a number of “corrective actions” including altering its subprime lending policies and devising a plan for restructuring distressed mortgages. Without admitting any sort of wrongdoing, Fremont agreed to comply with the FDIC’s order.
This agreement with the FDIC did not necessarily guarantee immediate relief from foreclosure for borrowers, and this was a significant concern in Massachusetts. By 2007, fully twenty percent of Fremont loans in Massachusetts were in default; the company was responsible for more foreclosures in Boston than any other lender. In response, the Massachusetts Attorney General’s Office negotiated a Term Sheet Agreement with Fremont. Under the Agreement, Fremont would provide the AG’s Office ninety days notice prior to instituting foreclosure proceedings on any residential real estate holding in Massachusetts. During those ninety days, the AG’s Office would review the loans in question and raise any pertinent objections. If the Attorney General did object to a specific loan or loans, Fremont agreed to attempt to negotiate reformation of the objectionable loans. If no reformation or other solution could be reached, Fremont would be allowed to proceed with foreclosure, unless the Attorney General sought to enjoin such an action.
After the Term Sheet Agreement was in place, Fremont submitted one hundred ninety three loans to the Attorney General’s Office. The Attorney General objected to all one hundred and nineteen loans in which the residence in question was owner occupied. Fremont claimed that the Attorney General’s Office was not acting in good faith and terminated the agreement. In response, the Attorney General filed suit against Fremont, seeking to enjoin the lender from foreclosing on any Massachusetts residences without the AG’s consent.
The Attorney General brought suit in Massachusetts Superior Court under the Commonwealth’s Unfair and Deceptive Practices Act, Section 93A. Section 93A is a standard Unfair Practices Act, similar to those found in most states. As in most states, lawsuits brought by the Massachusetts Attorney General under 93A are not uncommon. What made the Attorney General’s lawsuit in Fremont unique was the form of relief requested. The Attorney General actually requested two forms of relief. First, she asked Fremont Investment be enjoined from foreclosing any residential properties in the Commonwealth without the written consent of the AG’s Office. Second, she proposed a “limited preliminary injunction” that would enjoin Fremont from foreclosing on any mortgages that were “Presumptively Unfair.” This alternative proposal for relief, and its implicit creation of “Presumptively Unfair Loans,” is what makes Commonwealth v. Fremont Investment & Loan a unique and interesting legal response to the mortgage crisis.
The Attorney General proposed that a loan should be considered “Presumptively Unfair” if it met certain criteria. Under the proposal, a loan would be presumed unfair if it were an adjustable rate mortgage with “a low introductory rate of three years or less in which either (a) the combined loan-to-value ratio was 90 percent or higher, (b) the loan was approved on a ‘stated income’ basis . . . or© the loan had a prepayment penalty.” If the borrower consented to foreclosure or the property in question was vacant, foreclosure against a presumptively unfair property could proceed.
This argument was unique in a number of respects. First, it sought to enjoin Fremont from foreclosing on mortgages because those mortgages contained certain features, each of which was “expressly permitted by federal and Massachusetts law.” The Attorney General acknowledged this, but termed the legality of the various loan features “irrelevant.” Instead, the Attorney General asked the court to consider Fremont’s “wholesale failure to meaningfully disclose the material terms including, most significantly, the cumulative risk” created by compiling a multitude of high-risk features in a single mortgage. In other words, she claimed that practices that were not barred by law could still violate Section 93A because they were unfair and deceptive in combination.
In support of her position, the Attorney General laid out, in her Complaint and supporting motions, a detailed list of the types of high-risk features common to Fremont loans, including loans of one hundred percent of the value of homes, “piggyback” loans and teaser-based qualifying loans. Of the ninety-eight loans examined by the Attorney General’s Office, every one would produce “payment shock”: once the teaser-rate period ended, interest rates on the loans rose as much as three percent, “with the potential for another 1.5 percent increase hike every six months.”
The trial court adopted the Attorney General’s proposal that certain loans be considered presumptively structurally unfair. After examining the various high-risk features attached to many Fremont loans and detailed in the AG’s complaint, the trial court elucidated its own definition of what constituted a presumptively unfair mortgage. The court held that a loan would be presumed unfair if it met four criteria: 1) the loan was an adjustable rate mortgage with an introductory period of three years or less, 2) the loan had a teaser rate for the introductory period that was at least three percent less than the fully indexed rate (the rate over the lifetime of the loan), 3) the borrower had a debt-to-income ratio of more than fifty percent when calculated against the total value of the loan and 4) the “loan to value ratio [was] 100 percent” or the loan had a significant prepayment penalty. The court then provided the requested injunction, which required Fremont to give advance notice to the AG’s office of any potential foreclosure and, for any mortgage that met the four criteria for unfairness, to make good faith efforts to reform or restructure the loan. If reformation proved impossible, Fremont was required to obtain the AG’s permission to proceed with the foreclosure. Subsequently, the court modified the injunction to prevent Fremont from selling any of its residential loans unless the purchaser agreed to the terms imposed by the injunction.
Fremont immediately appealed the Superior Court’s ruling. After the Court of Appeal declined to reverse, the Massachusetts Supreme Judicial Court granted Fremont’s request for direct review. On appeal, Fremont’s “basic contention” was that the trial court improperly applied unfairness standards in a retroactive manner: in other words, Fremont’s loans were not unfair at the time they were made; they only appeared unfair in retrospect. The Supreme Judicial Court rejected this argument, primarily because it found that, in creating loans with all four criteria singled out by the trial court, Fremont knew that they had created a situation that virtually “guarantee[d] that the borrower would be unable to pay and default would follow. . . .” The Court found that the injunction properly served the public interest and affirmed.
In 2009, the Attorney General reached a settlement agreement with Fremont Investment. Fremont agreed that the terms of the preliminary injunction, including the definition of what constituted unfair loans, would become permanent.
4. The Aftermath— New Regulations & Lawsuits
The Attorney General subsequently issued a series of regulations that, inter alia, codified the Fremont criteria for defining a presumptively unfair loan. The Fremont decision then provided the basis for a lawsuit against H&R Block and its subsidiary, Option One Mortgage, that sought to build on the foundation established in Fremont. H&R Block contains many of the same allegations as those leveled against Fremont Investment & Loan. Under the precedent of Fremont, the defendants had little recourse other than to make Constitutional claims: the defendants argued that the Attorney General’s interpretation of Mass. Gen. Laws c. 93A, as applied in Fremont, was so broad as to be unconstitutionally vague. The trial court rejected this contention in denying the defendants’ motion to dismiss and granting the Attorney General a preliminary injunction.
H&R Block is particularly noteworthy for the inclusion of a new charge: violation of the Massachusetts Anti-Discrimination Act. The Attorney General’s Office claimed that the defendants had violated Section 4(3B) of the Act, which prohibits racial discrimination in the granting of mortgage loans. In her Complaint, the Attorney General outlined the defendant’s discriminatory marketing and mortgage practices. The marketing practices included distributing to its brokers materials urging sales of subprime mortgages to racial minorities because those individuals had limited financing opportunities and encouraging mortgage brokers to partner with real estate brokers of the same race as the targeted minority borrowers. The discriminatory mortgage practices resulted in a “substantial disparity” in fees charged to minority borrowers when compared to Caucasian borrowers. For example, a minority borrower paid roughly $3,500 more in fees than did a white borrower with a lower credit score on similar mortgages.
The Attorney General did not, however, simply allege individual instances of discrimination. Instead, she charged the defendants with systemic discrimination, defined as “the maintenance of a general practice or policy aimed at members of a protected class.” The argument provided two benefits: 1) it could be applied to any minority borrowers who had done business with the defendants and 2) it allowed 151B—4(3B) discrimination claims to be brought after the statute of limitations had expired. The second benefit is particularly significant: Massachusetts law provides that housing-related lawsuits must be brought within a year of the occurrence of the alleged unlawful act unless there is a showing of systemic discrimination. While the H&R Block litigation is still ongoing, the trial court looked favorably on this systemic discrimination argument in granting the Attorney General’s requested preliminary injunction and denying the defendants’ motion to dismiss.
Part III — Evaluating the Massachusetts Approach
The Massachusetts Attorney General’s approach to helping distressed homeowners in the Commonwealth was unique both in its execution and in the result achieved. While it is impossible to say whether the AG’s litigation-based approach is superior to other techniques, such as the multi-state investigation and negotiation, it seems clear that Fremont and H&R Block create both benefits and drawbacks distinct from those achieved in multi-state actions.
1. Benefits of Litigation-Based Approach to the Foreclosure Crisis
The Massachusetts Attorney General’s litigation in Fremont and H&R Block provided both “primary” benefits—those felt directly by homeowners in the Commonwealth-and “secondary” benefits—those that indirectly assisted homeowners or improved the Commonwealth generally. The “primary” benefits secured by AG Coakley are similar to those secured in a number of the multi-state negotiations: a slowdown of the foreclosure process and financial remuneration for the states. Obviously, both factors are significant for the Commonwealth and for individual homeowners.
However, the most important part of the Attorney General’s lawsuit and the subsequent decision in Fremont was a “secondary” benefit: the creation of a baseline for what constituted an unfair loan in violation of Massachusetts law. The Fremont holding extends beyond Fremont Investment & Loan itself—it is potentially applicable to all loans made in the Commonwealth, regardless of the lender. On the other hand, a multi-state settlement such as that made with Countrywide is applicable only to loans made or held by Countrywide. Thus, while some Attorney Generals might hope that Countrywide could provide a “template” for future negotiations, the Fremont case established actual judicial precedent that would control all Massachusetts residential real estate actions from that point forward. Fremont provided individuals saddled with unfair loans a starting point from which to renegotiate their mortgages in a manner that suited their individual needs. The Fremont decision also incentivized private attorneys to take on clients with “presumptively unfair” mortgages—because the burden of proving unfairness was shifted to the defendants, attorneys with limited resources had the ability to take on large corporations on behalf of individual clients. Further, by enhancing individuals’ bargaining position, Fremont may allow homeowners to secure relief that meets their particular needs. This is not always the case with wide-ranging multi-state settlements.
The “secondary” benefits of the H&R Block case could prove similarly effective. In particular, the Attorney General accomplished two things: 1) she used her office’s resources to investigate the racially discriminatory practices of certain mortgage lenders, thereby providing a factual template for individuals to use in the future and 2) she used the compiled data on race and lending to make an effective charge of systematic discrimination. As with the Fremont case, these benefits are important in the manner in which they incentivize individual action and, thus, offer the potential for more personalized and effective mortgage reformations. In particular, the Attorney General’s convincing argument that mortgage lenders engaged in systemic racial discrimination opened the door for individuals to bring discrimination suits that would have otherwise been barred by the statute of limitations. While each of these benefits is significant, a litigation-based approach to confronting the mortgage crisis has certain drawbacks when compared with multi-state negotiation.
2. Drawbacks to Litigation Based Approach to the Foreclosure Crisis
The major drawbacks to a Fremont-style approach are issues related to the nature of litigation itself. Perhaps the clearest problem is that litigation entails risk. In a negotiation, an Attorney General knows exactly what deal she is receiving. By actually litigating, the AG runs the risk of securing an unfavorable decision, which would potentially hamper both future litigation and future negotiations. On the other hand, this risk is mitigated by the very nature of the mortgage crisis. Companies like Fremont Investment & Loan were clearly “bad actors”—-they made reckless loans with little regard for even basic underwriting practices. An Attorney General bringing an action against companies such as these in a state trial court is likely in an advantageous position before the trial even begins.
A second potential drawback is the feasibility of litigation. Not every Attorney General’s Office will have sufficient resources or trial experience to successfully litigate against large corporate entities. For states lacking in resources, joining a multi-state investigation may be the only reasonable option. But for states like Massachusetts, it is important to recognize that litigation does not foreclose other options such as regulation and negotiation—-in fact, successful litigation may improve a state’s position in future negotiations.
Conclusion
The Fremont and H&R Block are unique in that they represent an uncommon approach to the foreclosure crisis and they achieved uncommon, and highly beneficial, results. The lawsuits provided direct relief against particular lenders while establishing a standard for unfairness and racial discrimination in lending that applied to all lenders. They created an opportunity for individual action against large corporations as well as improving the Attorney General’s position in future negotiations with other lenders. They did so not through negotiation and quasi-legislative action, but through the most traditional approach an Attorney General can take in combating unfairness: actual litigation.
It is impossible to state whether one approach to America’s foreclosure crisis is clearly superior to another—-each action has its own set of benefits and drawbacks and there is no obvious solution for the millions of American homeowners “underwater” on their mortgages. However, the Fremont and H&R Block lawsuits are strong reminders that the option of actual litigation is one that State Attorneys General should consider as a part of their response to the crisis. While actual litigation is, perhaps, “the road less travelled” for the modern Attorney General facing down the foreclosure crisis, it is a road that more Attorneys General should consider exploring.
Seller of Buying-Club Memberships Ordered to Repay Iowans $29.8 Million
By Lee Rood
A Polk County judge this week ordered a Connecticut company with a long history of consumer fraud complaints to pay Iowans $29.8 million in restitution and stop soliciting new buying-club members in the state.
Judge Robert Hutchison awarded the amount Monday after Iowa’s attorney general won a civil lawsuit last year against Vertrue Inc. and two subsidiaries.
The lawsuit alleged the company used illegal sales tactics to enroll 497,683 Iowans in “discount buying programs” without their knowledge, then charged them monthly fees that grew over time. The company sold 863,970 club memberships over two decades, lawyers in the case said.
Vertrue and Adaptive and Idaptive Marketing, co-defendants in the suit, have generated complaints to attorneys general across the country as well as to the U.S. Senate. But Iowa is the only state to sue for consumer fraud violations.
George W.M. Thomas, the company’s general counsel, said in a statement that Vertrue planned to appeal the ruling.
“It is important to note that this ruling from an Iowa state court is based almost entirely upon the unique – and never before interpreted – pre-Internet, Iowa buying club law,” he wrote. “Significantly, five federal courts, including two Courts of Appeals, have uniformly and forcefully declared that Adaptive’s Internet and telephone marketing materials are indisputably clear, unambiguous, and are not deceptive under federal and state law.”
Hutchison ruled that Vertrue charged Iowans yearly or monthly membership fees for savings programs without their knowledge. The memberships offered purported savings for home improvement items, entertainment, dining out, fitness products, clothing, jewelry and other items.
State attorneys said the company also used telemarketing calls to lure customers into memberships without their knowledge. The calls usually began with pitches for products advertised on television, or other solicitations.
Hutchison found the company’s sales pitch violated a state law that requires written agreements to join a buying club, and notification about the right to cancel. Vertrue “memberships” typically cost $9.95 to $19.95 per month and are usually charged to consumers’ credit card or bank accounts.
Thomas said Adaptive’s membership programs “provided consumers with access to significant and realizable benefits, including savings and services across a wide range of consumer interests.”
Jeffrey Thompson, the state’s deputy attorney general for litigation, said the state has a database of past Vertrue customers and will begin figuring out how to distribute refunds. Customers would likely receive different amounts, since some were duped only briefly and others lost thousands of dollars, he said.
The appeal could take a couple of years. But the company is required by law to post a bond worth 110 percent of the award while it is pending.
If the state wins the appeal, it will also recoup at least $725,000 in attorneys’ fees and $2.8 million in penalties to use for consumer fraud programs and education.
Consumer protection efforts by state attorneys general are often met with fierce criticism
ARE STATE CONSUMER PROTECTION ACTS REALLY LITTLE-FTC ACTS?
Henry N. Butler, George Mason University School of Law
Joshua D. Wright, George Mason University School of Law
INTRODUCTION
During the 1960s there was a perceived increase in demand from the American public and elected officials for consumer protection legislation.[1] In post World War II America, a perception emerged that markets had become impersonal[2] and that the balance of power between consumers and merchants in the marketplace had shifted in favor of merchants.[3] Regulators viewed increased legal protection for consumers as necessary to restore the former balance.[4] Traditional common law protection was deemed inadequate.[5] State Attorneys General attempted to respond to the apparent need for greater consumer protection by using existing statutory laws, such as lottery laws and printer’s ink laws, to protect consumer interests. They also advocated broader statutory powers to combat consumer fraud and other deceptive practices.[6] The state legislatures’ responses came in the form of a diverse collection of legislation commonly called Consumer Protection Acts (CPAs).
Most CPAs were originally designed to supplement the Federal Trade Commission’s (FTC’s) mission of protecting consumers from “unfair or deceptive acts or practices”[7] and are referred to as “little-FTC Acts.” The FTC Act does not itself provide for private actions, but a primary means of achieving the CPAs’ consumer protection goal is the private action that empowered consumer attorneys to act as private attorneys general. In contrast to the FTC, which is guided by a public interest mandate,[8] private litigants under CPAs are not limited by political pressure, public duty, or even financial constraints as many CPAs mandate the award of multiplied damages and attorneys’ fees to successful plaintiffs.[9] As such, there may be support for the theory that CPAs do, in fact, fill a gap in existing consumer protection institutions by allowing private litigants to bring smaller scale cases where the consumer harm is felt locally or otherwise escapes the attention of the Federal Trade Commission. These cases may approximate FTC enforcement actions, but due to their size may not warrant allocation of FTC resources or meet the FTC requirement that consumer protection actions be in the public interest.[10] The consumer is free, even incentivized, to pursue any case on which they might expect to prevail.
State CPAs have become controversial.[11] There is growing concern that CPA enforcement and litigation are not only qualitatively different than FTC enforcement, but may be counterproductive for consumers. Critics argue that the combination of private rights of action, generous remedies, expansive and elusive definitions of illegal conduct, lack of administrative expertise, and relaxation of common law limitations have generated a set of incentives that encourages plaintiffs and their attorneys to file claims of dubious merit. Critics suggest that CPAs’ broader enforcement options place significant strains on the civil justice system without providing offsetting gains in consumer protection.[12] Proponents of CPAs counter that private rights of action and meaningful remedies are necessary to supplement FTC enforcement and provide sufficient incentives for individual plaintiffs to bring suit to deter conduct harmful to a larger class of consumers.[13] While both critics and proponents of CPA enforcement make claims about the nature and quality of state consumer protection litigation, it is difficult to compare litigation under state CPAs to FTC enforcement.
This article closely examines a sample of CPA claims and compares them to the FTC Act standard for unfair and deceptive acts or practices. It identifies qualitative differences between CPA and FTC claims by creating a “Shadow Federal Trade Commission” of consumer protection experts. These experts evaluate a sample of CPA claims under the FTC standard. These two studies generate data that is critical to informing policy debates on the appropriate role of CPAs in the civil justice system.
Section I of this Article provides the background and history of CPAs. Section II describes the data and research methodology for the “Shadow FTC” study. Section III presents the Shadow FTC results. The basic result is that the little-FTC Acts appear to have taken on a much broader consumer protection function than the FTC. Section IV considers the policy implications of these results.
I. BACKGROUND AND HISTORY OF CONSUMER PROTECTION ACTS
A. Criticism of Existing Methods of Consumer Protection and the Call for CPAs
The push for states to adopt CPAs appears to have come from the confluence of three related forces in the late 1960s: criticism of FTC consumer protection efforts, popular demand for consumer protection and business regulation, and frustration with common law causes of action. These three forces touch on each of the existing institutions of consumer protection: federal regulation, market forces, and state common law.[14] It was the perceived inadequacies of each of these institutions that lead states to enact CPAs.
The FTC was the target of criticism of federal consumer protection. By 1969 denouncement of the FTC had reached its zenith with publication of critical reports from “Nader’s Raiders,”[15] the American Bar Association,[16] and Professor Richard Posner.[17] This criticism addressed a range of perceived problems at the FTC,[18] including those offered by prior critics:[19] poor leadership,[20] insufficient and misallocated resources, [21] political favoritism and regulatory capture,[22] and protection of producers in the name of consumer protection.[23]
Proponents of stronger regulation argued that federal regulation and market forces no longer adequately protected consumers. The increasingly impersonal nature of transactions in the post-World War II economy had undercut consumers’ power to protect themselves through market-based and reputation-based mechanisms.[24] Consumer protection advocates also pointed to the increasing complexity of credit arrangements, marketing schemes,[25] and warranty disclaimers as evidence of the breakdown of the traditional, “arm’s-length bargain” approach to consumer transactions.[26] The general perception was that the balance of power between consumers and merchants in the marketplace had shifted towards merchants, who now enjoyed disproportionate influence in consumer transactions. It appears that there was widespread support for greater legal protection for consumers in order to restore the former balance.[27] The final factor leading to the push for states to enact CPAs was the view that common law causes of action were insufficient to protect the consumer—particularly because they imposed impractically high evidentiary burdens in exchange for meager remedies.[28] The common law actions for fraudulent misrepresentation and deceit serve as examples of the common law’s impracticality in consumer protection cases. These causes of action required actual injury to mature; this requirement precluded prospective injunctions against merchants engaging in potentially deceptive acts. An additional barrier to consumer protection suits was the requirement that an injured party had the difficult burden of proving that there was intent to deceive.[29] Actions for breach of contract or warranty were seldom more effective than actions in tort as merchants could make false claims without entering into contracts.[30] Even where there was a contract, contractual defenses such as reliance and privity requirements could impede consumer recovery.[31] Further, even if the consumer had a valid claim and could meet the burden of proof, she might still have chosen to forego pursuit of the claim if it involved a pecuniary loss that was small relative to the cost of bringing suit.
In the face of criticism of the FTC, popular demand for increased regulation of business, and frustration with the limits of common law causes of action, many states adopted consumer protection legislation in the late 1960s and early 1970s. By 1981, every state had adopted some consumer protection legislation. Most states have frequently amended their consumer protection legislation, resulting in great variation between states—even where the same model act was initially adopted.[32]
B. Consumer Fraud Acts and Early Model Acts
By 1962, six states had responded to the call for consumer protection and passed some act aimed at protecting consumers.[33] These early CPAs generally armed state Attorneys General with the power to seek and receive injunctions against specific practices. One early adopter, New Jersey, passed a “consumer fraud statute” in 1960 which became the model for several states’ initial CPAs.[34] The act gave the Attorney General broad powers to investigate alleged unlawful practices, to obtain an injunction against persons engaging or about to engage in the unlawful practices, and to seek restitution for those harmed by the prohibited practices.[35] While several states passed similar acts, others, such as Washington, enacted legislation modeled on the FTC Act and the Clayton Act.[36] Several uniform and model statutes appeared in the late 1960s.[37] Many modern CPA attributes can be traced back to these early model and uniform statutes. The first of the uniform consumer protection statutes to appear was the Uniform Deceptive Trade Practices Act (UDTPA), which was drafted by the National Conference of Commissioners on Uniform State Laws in 1964[38] and rewritten in 1966.[39] The UDTPA lists twelve deceptive trade practices, the first eleven of which can be roughly divided into three categories of prohibited conduct: misleading trade identification, false advertising, and deceptive advertising.[40] The final listed practice was a general prohibition of “any other conduct which similarly creates a likelihood of confusion or misunderstanding.”[41] The twelve deceptive trade practices prohibited by the UDTPA, including the final, more general prohibition of other unfair conduct, were intended primarily to prevent unfair business competition, not to protect consumers.[42] The UDTPA granted a private right of action, but limited the remedy to injunctive relief. The UDTPA did not contain the restrictions of common law causes of action—neither proof of damages nor intent to deceive were required to obtain an injunction. As amended in 1966, the UDTPA authorized reasonable attorneys’ fees to be granted to the plaintiff if the defendant willfully and knowingly engaged in the deceptive practice and to the defendant if the plaintiff knew his complaint was groundless.[43] Most of the states that initially adopted the UDTPA in some form later amended their consumer protection law to allow monetary relief to consumers.[44] The Model Unfair Trade Practices and Consumer Protection Law (UTPCPL) is the model statute most commonly associated with modern CPA laws. Developed by the FTC and adopted by the Committee on Suggested State Legislation of the Council of State Governments, the UTPCPL was originally published in 1967, only to be amended in 1969 and again in 1970.[45] The UTPCPL was less innovative than comprehensive. It brought together many elements of prior pieces of consumer protection legislation and, in doing so, created an attractive private cause of action.
The 1970 version of the UTPCPL offered a choice of three forms of unlawful practices.[46] The first alternative form of unlawful practices used essentially the same language as Section 5 of the FTC Act: “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”[47] This language has led many commentators to refer to CPAs in this vein as “Little FTC Acts.”[48] Twenty states initially adopted such acts.[49] The second alternative form of unlawful action prohibited by the UTPCPL resembled the language of the consumer fraud acts adopted in the early and mid-1960s by states such as New Jersey.[50] This alternative defined as unlawful “[f]alse, misleading, or deceptive acts or practices in the conduct of any trade or commerce.”[51] This definition does not prohibit the broad category of “unfair practices.”[52] Although a number of states had adopted similar consumer fraud acts earlier in the 1960s, no state adopted this language based upon the UTPCPL.[53] The third alternative offered by the UTPCPL, known as the “laundry list approach,” included the twelve competition-focused prohibitions enumerated in the UDTPA.[54] It added an additional thirteenth provision focused more directly on consumers.[55] This thirteenth provision prohibited any act or practice that was “unfair or deceptive to the consumer.”[56] Twenty-six jurisdictions adopted this language.[57] Today, most of the states that had originally adopted the third form no longer rely exclusively on the laundry list approach; however, five jurisdictions still prohibit only specific acts without a “catch-all” provision prohibiting unfair and deceptive practices.[58]
The UTPCPL gave state Attorneys General the same basic powers as did the UDTPA.[59] Section 5 authorized the Attorney General to act to enforce the prohibition of acts and practices defined in § 2:
bq. Whenever the [A]ttorney [G]eneral has reason to believe that any person is using, has used, or is about to use any method, act or practice declared by Section 2 of this Act to be unlawful, and that proceedings would be in the public interest, he may bring an action in the name of the State against such person to restrain by temporary or permanent injunction the use of such method, act or practice. . . .[60] The Attorney General was also entitled to seek relief by restitution or disgorgement of money or property acquired as a result of any act declared unlawful by the UTPCPL[61] and civil penalties for a knowing violation of the UTPCPL.[62] In addition to attorney-general enforcement, the UTPCPL authorized private actions for monetary damages. Section 8 of the UTPCPL authorized private suits and class actions for monetary damages as well as injunctive relief.[63] Private individuals could recover the greater of “actual damages or $200,” with punitive damages and equitable relief available at the court’s discretion.[64] Section 8(b) authorized “persons similarly situated” to bring a class action. Section 8(d) stated that the court “may award, in addition to the relief provided in this Section, reasonable attorney’s fees and costs.”[65] The UTPCPL consciously attempted not to stray too far from relevant FTC enforcement standards. Section 3 stated that “due consideration and great weight shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to Section 5(a)(1) of the Federal Trade Commission Act.”[66] Further, it empowered the Attorney General to “make rules and regulations interpreting” the prohibited actions, but that:
bq.[s]uch rules and regulations shall not be inconsistent with the rules, regulations and decisions of the Federal Trade Commission and the federal courts in interpreting the provisions of Section 5(a)(1) of the Federal Trade Commission Act.[67] Twenty-eight states currently reference the FTC in their CPA.[68]
C. Comparing Federal and State Consumer Protection
Having been enacted in the face of criticism of the FTC, it is not surprising that state and federal consumer protection legislation have noticeable differences. The key differences are that states provide a private right of action, different remedies, and relaxed common law limitations on consumer protection actions when compared to FTC policy standards.
The FTC Act does not include a private enforcement mechanism, yet every CPA grants consumers a private right of action.[69] This difference is driven by the “balance of power” argument that in interactions between businesses and consumers, more power must be shifted towards consumers. This argument suggests that a private remedy for wronged consumers is necessary for the effective prosecution of consumer complaints.[70] These private rights of action were envisioned as a complement to public agency administrative enforcement under the FTC Act. Although public enforcement under the FTC Act requires the Commission to consider the public interest in deciding whether to challenge a practice, only a few states include a public interest requirement for private actions.[71] A second difference between CPAs and FTC consumer protection is that the statutes confer different remedies.[72] Remedies available under the FTC Act include injunctions, cease and desist orders, consent decrees, and the disgorgement of profits. While at least a dozen CPAs limit plaintiffs to actual damages, restitution, or equitable relief,[73] the majority of statutes provide additional remedies, including statutory damages, treble damages,[74] and punitive damages. Nearly all states authorize the discretionary award of attorney’s fees.[75] A third dimension upon which CPAs differ from the FTC Act, and also from one another, is the degree to which state legislation and judicial interpretation have relaxed the common law limitations on consumer protection claims. The common law requirement of reliance is a useful example. The majority of statutes do not require a CPA plaintiff to show that he or she relied on the defendant’s allegedly deceptive act or statement,[76] while the FTC requires reasonable reliance in its definitions of both unfair and deceptive practices.[77] Other state courts have held that a misrepresentation, absent evidence of other harm to the consumer or that the plaintiff relied on the misrepresentation, is sufficient to demonstrate consumer injury.[78] Some state courts have held that defenses such as the statute of frauds,[79] warranty disclaimers,[80] the doctrine of substantial performance,[81] the parol evidence rule,[82] the common law merger doctrine,[83] contractual limitations on liability or remedies,[84] and privity of contract requirements[85] are not available to defendants in consumer protection cases.
The CPAs’ attractive private right of action, unlike the FTC standard, is often divorced from a public interest requirement and from common-law limitations. These differences have caused some to suggest that CPAs may be subject to abuse by litigants who have suffered no actual harm, and that this abuse will ultimately harm, rather than protect, consumers.[86]
D. Expanding and Amending CPAs
Amendments and judicial interpretation of CPAs have tended to expand rather than contract the rights of consumers.[87] Massachusetts’ experience is representative of the early expansion of CPAs. Massachusetts’ original CPA gave the Commonwealth’s Attorney General the authority to investigate and subpoena[88] and, in the interest of the public, bring an action seeking injunctive relief and civil penalties up to $10,000.[89] The law originally did not provide for any type of private action, and aggrieved consumers could seek recourse only through common law alternatives in tort or contract.[90] In 1969, the CPA was amended to give a private right of action by adopting language similar to Section 8 of the UTPCPL.[91] The amendment allowed consumers to receive the greater of treble damages or $25 upon proof of injury by an unfair or deceptive practice.[92]
Amendments to CPAs have often sought to provide adequate incentives for consumers to act as private enforcers. Proponents of CPAs argued that if consumers were not willing to litigate and pursue complaints, CPAs could not fulfill their intended purpose of deterring deceptive and unfair trade practices. Suits involving common law actions were often uneconomical for the aggrieved consumer because of high burdens of proof and difficulty of establishing damages. CPAs circumvent these issues by providing causes of action which require less rigorous burdens of proof than their common law counterparts. For example, the UDTPA stated that “[p]roof of monetary damage, loss of profits, or intent to deceive is not required [to receive relief].”[93] CPA expansion has also often involved a reduction in the burden of proof required of consumers.[94] These reductions in the burden of proof have been controversial. Some commentators argued that the presence of a credible threat in the form of a private right of action with treble damages would be enough to restore the equilibrium between consumers and merchants, and reductions in the burden of proof are not necessary.[95] Others recognize that CPAs give rise to the potential for harassment of legitimate business conduct[96] and that vague consumer fraud statues invite the possibility of abuse.[97]
Amendments to CPAs have also tended to include provisions allowing for class actions. States were slower to adopt class action provisions than private rights of action in large part because of concerns of abuse. In 1971, the National Association of Attorneys General recommended that states empower Attorneys General to bring class action suits,[98] but warned that allowing private class action suits would “provide too great an opportunity for frivolous suits.”[99] Balancing these concerns, some states adopted the provision of private class action suits along with provisions intended to make it harder to bring a frivolous class action suit. For example, Massachusetts attempted to avoid frivolous class actions by requiring a 30 day opportunity for the respondent to the potential class action to make restitution.[100] Alaska’s class action provision required approval by the Attorney General and a bond before a class action suit could be certified.[101] The Uniform Consumer Sales Practice Act provided fee-shifting in favor of defendants if a class action suit was found to be groundless.[102]
E. Modern Concerns Emerge
By the early 1990s, the increasing use of CPAs generated criticism that CPAs were being used in ways that the legislatures never intended, leading to substantial abuse and frivolous lawsuits.[103] Commentators and experts began to question whether CPAs were fulfilling their original promise to supplement public enforcement and enhance consumer outcomes, and whether the courts were interpreting the statutes correctly, especially in the private litigation context.[104] Others argued that the low threshold for “unfair and deceptive acts” had gone too far in aiding plaintiffs, encouraging claims that ultimately were not in the public interest[105] and that the low level of proof required in a CPA claim made it too easy for an unharmed consumer to succeed and receive substantial damages.[106] In addition, some commentators have argued that claims were increasingly brought under the auspices of consumer protection that would have traditionally been brought as environmental, product liability, or contract claims.[107] Recent commentators have argued that modern CPA liability, characterized by supra-compensatory remedies and minimal injury requirements, may have harmful consequences for consumers by taxing socially desirable business conduct such as communications between merchants and consumers.[108] What follows is the first attempt to bring a large-scale, empirical analysis to bear on these modern concerns.
II. SHADOW FEDERAL TRADE COMMISSION
Many of the key policy questions involving CPAs require some comparison of CPA claims to other possible standards for consumer protection. This section focuses on whether there are important qualitative differences in claims between those brought in courts and enforcement actions brought under FTC Section 5 standards by creating an expert panel to review and apply the FTC standard to a sample of cases litigated under CPAs. CPA claims are compared to the benchmark established by the FTC consumer protection standard. Recognizing the differences in claims brought under federal and state consumer protection authority is an important first step to understanding the consumer protection litigation landscape. These possible differences, read in conjunction with the evidence that litigation activity is highly correlated with CPA statutes that make lawsuits more attractive to plaintiffs, raise the possibility that claims brought under CPAs are of a different nature than those enforced by the FTC.
In order to test whether qualitative differences exist between CPA cases and those falling under the FTC’s standards for unfair and deceptive practices, an expert review panel (“Shadow FTC”) consisting of five Shadow Commissioners with substantial consumer protection experience at or with the FTC, reviewed sets of one page case scenarios of representative CPA cases. The Shadow FTC answered questions on whether they believed these cases would likely contain illegal conduct and, if so, would they likely be enforced under the FTC standard. The Shadow FTC’s responses allow identification of important differences between the actual outcomes of the CPA cases used in the review and likely outcomes under the FTC standard.
A. Shadow FTC Selection
Five individuals with substantial experience at or with the FTC Bureau of Consumer Protection were hired to serve as Shadow Commissioners. The Shadow Commissioners include four former Directors or Deputy Directors of the Bureau of Consumer Protection who are practitioners and academics with significant expertise on consumer protection issues. The fifth Shadow Commissioner did not serve at the FTC but has substantial experience as a practitioner. The Shadow FTC was selected to ensure a balance in political orientation with two Shadow Commissioners who served in the FTC during Democratic administrations and two who served in the FTC during Republican administrations. The fifth Shadow Commissioner did not serve at the FTC under an administration of either party and, therefore, is considered to be unaffiliated.
B. Sample Selection of Cases
A key feature of the Shadow FTC study is the inclusion of litigated cases that generated substantive decisions under CPAs. The cases were obtained from a database of approximately 17,000 CPA decisions.[109]
Three distinct samples of cases were constructed.
The first sample began with a randomly generated sample of 500 reported CPA decisions from the original population database. From these 500 reported CPA decisions, 86 contained case facts sufficient to develop one-page scenarios, and 50 of these 86 were randomly chosen.
The second sample was drawn from reported CPA decisions in state appellate courts but not federal district courts because the former were more likely to have reached final disposition as a “clear win” and less likely to have remaining appeals. To be clear, this sample is intentionally biased toward including the strongest CPA claims. For each state, a specific search string was created that contained that state’s CPA title, abbreviation, or citation as well as variations on the term “damage award.”[110] These search strings were then applied to each state’s “State Cases, Combined” database in Lexis from 2000 through 2007. This search resulted in 3,637 reported CPA decisions. We removed CPA claimant losses, wins that were subsequently overturned on appeal, and false positives generated by the search string. We then randomly selected and created the 50 “clear win” cases.
The third sample consisted of FTC cases to provide a control group. Eight decisions were randomly selected, each representing a case the FTC brought in court containing sufficient case facts.[111] Two cases which the FTC investigated but ultimately dismissed the complaint were separately chosen and added to the second sample.[112] The third sample involves "clear wins" for CPA claimants at the state trial court level on the CPA claim where the result was either unchallenged or upheld on appeal.
C. Case Summaries and Questionnaires
After selecting the three samples of cases, we developed one-page summaries of the cases and a questionnaire for completion by the Shadow Commissioners. Party names and identifying case characteristics were removed so that Shadow Commissioners could not directly identify the cases. Before distributing the questionnaires to the Shadow Commissioners, an additional expert in FTC consumer protection actions who is not a member of the Shadow FTC reviewed the questions and case scenarios. Based on the reviewer’s feedback, adjustments were made to the questions and scenarios to ensure that the Shadow Commissioners could complete the review of all 60 scenarios – from each of the three samples – in three hours or less. After testing the questionnaire, the questions in Figure 1 were used for each scenario.[113]
The survey process took place in two rounds during which the Shadow Commissioners reviewed 110 one-page case scenarios. After reading the scenarios, each Shadow Commissioner determined whether he or she believed the practice was unfair or deceptive according to FTC standards and whether he or she believed the FTC would initiate an enforcement action. The Shadow Commissioners were asked to base their answers only on the information presented in the scenario, their understanding of current federal consumer protection law, their expertise, and the assumptions that (1) the FTC has jurisdiction over the entity or entities and (2) the practice is in or affects interstate or foreign commerce.
Shadow Commissioners were not told prior to completing each round that the case scenarios were derived from litigated consumer protection cases. Further, the Shadow Commissioners did not know the identity of the other Shadow Commissioners, did not collaborate in answering the questions, and could not consult any outside sources. The Shadow Commissioners were not allowed to return to previous scenarios once they had answered a question. Shadow Commissioners were compensated for their participation. See Appendix A and B for examples from the two rounds of scenarios.
Round 1 included the 50 cases from the random sample and the 10 cases from the FTC control sample. The random sample allows inferences to be drawn concerning the nature of CPA claims distributed throughout the civil justice system.
Round 2 focused on the “clear wins” discussed above and examined how a sample of successful CPA claims would fare under the FTC standard. Each decision in the population database of reported CPA decisions represents a unique case and was not previously presented to the Shadow Commissioners in Round 1. The Shadow Commissioners answered the same questions in three hours or less under the same parameters as Round 1, with the exception that during Round 2 the Shadow Commissioners were aware that the case scenarios were derived from litigated consumer protection cases. The Shadow Commissioners did not know the cases all represented CPA claimant wins.[114] The Shadow FTC review of litigated cases provides the opportunity to evaluate the distribution of CPA claims currently moving through the civil justice system. While we do not observe all litigated cases, this study presents an important first step in collecting and analyzing data relevant to resolving important policy debates surrounding CPAs and civil justice reform more generally. Questions 1a and 2a in Figure 1 focus on whether the Shadow Commissioner believes the available excerpted facts constitute illegal conduct under the FTC Policy Statements for deception or unfairness.[115] Question 3a goes a step further to ask Shadow Commissioners whether, relying on their own expertise and experience with FTC consumer protection enforcement, they believe the FTC would initiate an enforcement action in the particular case.
III. EMPIRICAL RESULTS
We first consider the Shadow Commission’s view of the illegality of state CPA claims under the FTC standard. We then consider whether, if the Shadow Commission considered an activity to be illegal, the Shadow Commission would pursue an enforcement action against the illegal activity. Finally, we test the quality of the Shadow FTC’s decision making against decisions by the actual FTC.
Since the goal of the Shadow FTC was to simulate the hypothetical actions of the FTC, only aggregate results appear below rather than individual Shadow Commissioner votes. The results focus on the answers given by the majority (3 or more) of the Shadow Commissioners. Unanimous votes were common, making up between 24.0% and 62.0% of responses depending on question and round.
Votes where more than one commissioner disagreed with the majority were rare. There were few 3-2 split votes where three commissioners voted one way and two the other. The large majority of votes were either 5-0 or 4-1. In Round 1, out of the 50 non-FTC cases, the Shadow Commissioners were split 30 times in 17 case scenarios: 8 times over deceptive conduct, 13 times over unfair conduct, and 9 times over the likelihood of enforcement. Similarly in the 50 Round 2 scenarios, out of 50 non-FTC cases, the Shadow Commissioners were split 30 times in 19 case scenarios: 16 times over deceptive conduct, 9 times over unfair conduct, and 5 times over the likelihood of enforcement. We then examined instances of split voting to identify a possible bias by political affiliation. It is unlikely that political affiliation drove split decisions. Of the 30 votes that were split, only 17 split in such a way that both Republicans voted in one way, and both Democrats voted the other.
A. Illegality
A critical empirical challenge in the CPA policy debate is to identify the quality of CPA claims currently working through the civil justice system. For Round 1, the Shadow Commission found that most cases did not meet FTC illegality standards. A majority of Shadow Commissioners believed that the alleged practice was illegal, either deceptive or unfair under the relevant FTC Policy Statement in only 11 out of 50 (22.0%) of case scenarios.
This result suggests at the very least that the CPA claims litigated in state and federal courts differ from those involving illegal conduct under the FTC standard. In other words, a substantial majority of CPA litigation involves claims consistent with behavior that is likely legal under the FTC standard. This result is consistent with the concern that CPAs apply more lenient and plaintiff friendly standards which lower the quality of claim required to justify filing on an expected value basis.
Our Round 1 results should nonetheless be interpreted with caution. Other possible explanations exist for the Shadow FTC's determination that the CPA claims in our random sample of case scenarios do not violate federal consumer protection law under FTC standards. One possible explanation is that the case fact descriptions forming the basis of the excerpts given to Shadow Commissioners may not have included all of the facts ultimately relevant to the determination of liability. A second reason could be that in Round 1, while the Shadow Commission found that 3 cases presented illegal actions that the FTC would likely enforce, only 2 cases had a clear CPA claimant win at trial.[116]
In Round 2, the sample of case scenarios involve "clear wins" for CPA claimants at the state trial court level on the CPA claim where the result was either unchallenged or upheld on appeal. Again, this is a sample biased intentionally toward the most successful CPA claims. Our key finding from Round 2 is that the Shadow Commission believed that there was either unfair or deceptive conduct under the FTC standards in 31 cases (or 62.0% of the time). Although all Shadow Commissioners answered the questions on illegal acts for every scenario, in seven cases the Shadow Commission had tied answers to the question on enforcement due to non-responses. Removing those cases, a majority of Shadow Commissioners believed that there was an unfair or deceptive act pursuant to the FTC standards in 24 out of 43 cases (55.8%).
The Round 1 and 2 questionnaires were constructed in the same manner and taken by the same set of Shadow Commissioners at different times. The differences between the Shadow Commission determinations in Round 1 and Round 2, when evaluating a random sample of CPA cases and clear CPA wins respectively, are striking.[117] Not surprisingly, the Shadow FTC was more likely to believe that the scenarios for clear CPA wins (Round 2) involved illegal conduct than the general CPA cases (Round 1) as can be seen in Table 1. The difference is significant at the 1% level.[118] Not surprisingly, for successful CPA claims in Round 2, the Shadow FTC was more likely to find possible illegal conduct than in the representative sample of cases from Round 1. However, even for Round 2’s successful CPA claims, the Shadow FTC only found possible illegal conduct in just over one-half of the cases.[119] It is striking that 19 of the 50 clear win cases involved activity that the Shadow FTC would not consider to be illegal under the FTC standard. These Type 1 errors – finding innocent parties guilty of wrongdoing – could represent an important problem with CPAs. More specifically, under the plausible assumption that the FTC standard with its public interest requirement is less likely to condemn efficient and pro-competitive business conduct than the CPA standards, the Round 2 results suggest that CPA liability may condemn efficient, procompetitive conduct. Further, liability for efficient business conduct under CPAs could further harm consumers through deterring efficient conduct more broadly. These Type 1 errors (“false positives”) in the consumer protection context are likely to be greater than the social costs associated with Type 2 errors (“false negatives”) because the market provides a self-correcting mechanism for the latter.[120] While direct empirical evidence on the social costs of errors is difficult to obtain, these results raise significant concerns about whether the unintended consequences of CPA liability outweighs its consumer protection value, and there is evidence from other settings that liability prone to significant Type 1 errors can lead to significant consumer losses.[121]
B. Enforcement
In both rounds the Shadow Commission supported enforcement in less than a quarter of the total scenarios. Of the 11 cases containing illegal conduct in Round 1, only 6 would result in FTC enforcement. In Round 2, there were 31 cases of possible illegal activity, but only 10 cases would trigger FTC enforcement. Although the Shadow Commission found possible illegal conduct in 31 Round 2 cases, the Shadow Commission would recommend enforcement in only 10 of those cases.
When we dropped the 7 cases with the tied Shadow FTC from the Round 2, but including all non-FTC cases from Round 1, the Shadow FTC believed that the FTC would initiate an enforcement action in 6 of the 50 general CPA cases (or 12.0%) and in 10 of the 43 clear CPA wins (or 23.3%), which can be seen in Table 1. This difference is statistically significant only at slightly above the 15% level.[122] Thus, focusing exclusively on the clear CPA wins, the Shadow Commission identified deceptive or unfair conduct under the FTC standards in over half of the cases. Even in these cases, however, the Shadow Commission believed that the FTC would only bring enforcement actions less than a quarter of the time. While for every scenario in which the Shadow Commission believed the FTC would initiate an enforcement action the Shadow Commission also believed that either deceptive or unfair conduct occurred, the reverse is not true. Of the 24 cases where the Shadow Commission thought the scenario indicated some illegal conduct under the FTC standards, in 10 of these cases the Shadow Commission also thought that the FTC would initiate an enforcement action. Specifically, the difference in proportions between scenarios believed to have illegal conduct and those believed would be enforced by the FTC based on the available case facts is significant at the 1% level.[123] These findings could suggest that clear CPA wins may have been brought under similar standards to the FTC’s but are less likely to be the type of case enforced by the FTC. As such, there is some support for the theory that CPAs allow private litigants to bring smaller scale cases that approximate FTC enforcement actions but might not warrant allocation of FTC resources.
C. Control Results—FTC Cases
As discussed, 10 FTC cases were included in Round 1 but were not otherwise designated as FTC cases in any way. The FTC litigated 8 of these cases and issued complaints for the remaining two that it ultimately dismissed. The Shadow Commission agreed in each of the 10 cases that the scenario described unfair or deceptive conduct. This result suggests that the Shadow FTC was able to reach the same conclusion as the FTC in practice. In contrast to these FTC control cases, the Shadow Commission believed there was possible illegal conduct in only 15.9% or 22.0% of the general CPA cases depending on whether ongoing cases are included. The differences are statistically significant regardless of whether we count ongoing cases.[124] Likewise, in all 10 of the FTC cases a majority of Shadow Commissioners thought the FTC might initiate an enforcement action in contrast to the 6.8% or 12.0% of Round 1 general CPA cases the Shadow Commissioners agreed might have been enforced (depending on whether the ongoing cases are dropped). Again, these differences are statistically significant.[125]
The Shadow Commission identified similar characteristics in the FTC and state-court scenarios, and reached accurate conclusions regarding FTC action. This gives credence to the Shadow Commission's findings in non-FTC case scenarios. Further, the results may suggest that while the clear CPA wins are more similar to FTC cases than general CPA claims, even winning CPA cases are at least somewhat unlike FTC cases. In other words, the clear CPA wins may have a higher probability of involving illegal conduct under the FTC standards in the majority of instances, but nonetheless may not necessarily be cases the FTC is likely to enforce.
IV. CONCLUSIONS
This Article set out to study whether state little-FTC Acts do, in fact, pursue the same mission as the FTC. This Article has produced a number of findings that will inform policy debates on CPAs. The Shadow Commission study demonstrates that there are qualitative differences between CPAs decisions and actions that would likely be found to be illegal and enforced under relevant FTC standards. Most CPA claims would not constitute illegal conduct under FTC consumer protection standards. The Shadow FTC found that 78% of a sample of CPA claims would not constitute legally unfair or deceptive conduct under FTC policy statements. While relatively few CPA claims would constitute illegal conduct under the FTC standard (22%), even fewer (12%) would result in FTC enforcement action. Almost 40% of CPA claims where the consumer plaintiff prevailed at trial would not constitute illegal conduct under FTC consumer protection standards. In a sample of CPA claims where the consumer plaintiff prevailed in court, the Shadow FTC found that 38% of these successful claims would not constitute illegal conduct under the FTC standard. Although most of these successful cases would meet the FTC illegality standards, the Shadow Survey results suggest that only 23% would likely be enforced by the FTC. These findings have important implications for those interested in discussing and formulating public policy regarding CPAs:
The results presented in this Article may usefully inform policy discussions on CPAs, but the analysis has limitations. The case fact descriptions forming the basis of the excerpts given to Shadow Commissioners may not have included all of the facts ultimately relevant to the determination of liability. Nevertheless, the results clearly suggest that private litigation under little-FTC Acts tends to pursue a different consumer protection mission than the Bureau of Consumer Protection at the Federal Trade Commission.
1 For example, President John F. Kennedy promoted the consumer protection movement by defining the consumers’ “bill of rights” in a message to Congress in 1962. PRESIDENT JOHN F. KENNEDY, H.R. DOC. NO. 364, 87TH Congress, 2d Sess. (March 15, 1962).
2 William A. Lovett, Louisiana Civil Code of 1808: State Deceptive Trade Practice Legislation, 46 TUL. L. REV. 724, 725 (1972); James R. Withrow, Jr., The Inadequacies of Consumer Protection by Administrative Action, 1967 N.Y. STATE BAR ASS’N ANTITRUST LAW SYMPOSIUMS 58, 64 (“The difficulties being faced by the consumer today are best understood in terms of the new ‘impersonality’ of the market place.”); see also NATIONAL ASSOCIATION OF ATTORNEYS GENERAL COMMITTEE ON THE OFFICE OF ATTORNEY GENERAL, REPORT ON THE OFFICE OF ATTORNEY GENERAL 395 (1971).
3 H. Peter Norstrand, Treble Damage Actions for Victims of Unfair and Deceptive Trade Practices: A New Approach, 4 NEW ENG. LAW REV. 171, 175 (1969) (“[T]he consumer has lost the leverage he once had in the marketplace. The disgruntled buyer can no longer hash out differences with his shopkeeper-neighbor; he is now confronted by impersonal bigness where responsibility and liability forever lie just one department away.”).
4 Brian J. Linn & Gretchen Newman, Part III: Implementing the Washington Consumer Protection Act, 10 GONZ. L. REV. 593, 597 (1975) (“[T}he goal is to reestablish equilibrium in the market place by recognizing that traditional remedies for fraud have proved ineffective in providing the aggrieved consumer adequate relief.”).
5 Common law causes of action—including deceit, misrepresentation, and breach of warranty—had relatively difficult burdens of proof and limited remedies. As a consequence, they were thought to be insufficient to protect the consumer. For example, to succeed in a tort action for false misrepresentation or deceit, the plaintiff must prove that there was intent to deceive, which is particularly difficult to do. Victor E. Schwartz & Cary Silverman, Common-Sense Construction of Consumer Protection Acts, 54 KAN. L. REV. 1, 7 (2005). Actions in contract for breach of contract or breach of warranty are seldom more effective than actions in tort as merchants can make false claims without entering into contracts. Id.
6 NATIONAL ASSOCIATION OF ATTORNEYS GENERAL COMMITTEE ON THE OFFICE OF ATTORNEY GENERAL, supra note 2, at 396.
7 42 U.S.C. § 45(a)(1) (2006).
8 The FTC and private litigants face different incentives and constraints that affect the nature of actions pursued. Jeff Sovern, Private Actions Under the Deceptive Trade Practices Act: Reconsidering the FTC as Rule Model, 52 OHIO ST. L.J. 437, 437 (1991). For example, the FTC may decline to pursue an enforcement action that would be pursued by an individual consumer, or class of consumers, under a CPA. The FTC faces three primary limitations in selecting enforcement actions that do not constrain the private plaintiff. First, as political appointees, some FTC Commissioners are bound to be subject to political pressure to pursue or not pursue certain types of actions. Id. at 441. Second, the FTC has limited resources which must be rationed to enforcement actions against only the most serious improprieties. Id. at 442. Third, the FTC Act itself restricts the FTC to bring proceedings only when it would be in the public interest. Id.
9 Schwartz & Silverman, supra note 5, at 3.
10 Marshall A. Leaffer & Michael H. Lipson, Consumer Actions Against Unfair or Deceptive Acts or Practices: The Private Use of Federal Trade Commission Jurisprudence 48 GEO. WASH. L. REV. 521, 554 (1980).
11 Compare Schwartz & Silverman, supra note 5, and Michael S. Greve, Consumer Law, Class Actions, and the Common Law, 7 CHAP. L. REV. 155 (2004) with Jean Braucher, Deception, Economic Loss and Mass-Market Customers: Consumer Protection Statues as Persuasive Authority in the Common Law of Fraud, 48 Ariz. L. Rev. 829 (2006).
12 See, e.g., Henry N. Butler & Jason S. Johnston, Reforming State Consumer Protection Liability: An Economic Approach, 2010 COLUM. BUS. L. REV. (forthcoming 2010), available at http://ssrn.com/abstract=1125305; Greve, supra note 11; Schwarz & Silverman, supra note 5.
13 See, e.g., Braucher, supra note 11, at 832.4
14 See Timothy J. Muris, The Federal Trade Commission and the Future Development of U.S. Consumer Protection Policy (George Mason University School of Law, Law and Economics Working Paper Series, 2004) available at http://ssrn.com/abstract_id=545182 (describing the institutions of consumer protection, yet neglecting the role of state consumer protection laws).
15 EDWARD R. COX, ROBERT C. FELLMETH & JOHN E. SCHULZ, “THE NADER REPORT” ON THE FEDERAL TRADE COMMISSION (1969).
16 AM. BAR ASS’N COMM’N TO STUDY THE FED. TRADE COMM’N, REPORT OF THE COMMISSION TO STUDY THE FEDERAL TRADE COMMISSION (1969).
17 Richard A. Posner, The Federal Trade Commission, 37 U. CHI. L. REV. 48, 48 (1969) (listing publications between 1924 and 1969 criticizing the Federal Trade Commission). Posner was also a member of the ABA Commission that authored the 1969 report. See AM. BAR ASS’N COMM’N TO STUDY THE FED. TRADE COMM’N, supra note 16.
18 Posner, supra note 17, at 48 (“The Commission is rudderless; poorly managed and poorly staffed; obsessed with trivia; politicized; all in all, inefficient and incompetent.”); AM. BAR ASS’N COMM’N TO STUDY THE FED. TRADE COMM’N, supra note 16, at 1 (“Through lack of effective direction, the FTC has failed to establish goals and priorities, to provide necessary guidance to its staff, and to manage the flow of its work in an efficient and expeditious manner. . . . Through an inadequate system of recruitment and promotion, it has acquired and elevated to important positions a number of staff members of insufficient competence. The failure of the FTC to establish and adhere to a system of priorities has caused a misallocation of funds and personnel to trivial matters rather than to matters of pressing public concern. . . . The primary responsibility for these failures must rest with the leadership of the Commission.”); COX ET AL., supra note 15, at 39 (“1. The FTC has failed to detect violations systematically. 2. The FTC has failed to establish efficient priorities for its enforcement energy. 3. The FTC has failed to enforce the powers it has with energy and speed. 4. The FTC has failed to seek sufficient statutory authority to make its work effective.”).
19 Posner, supra note 17, at 47 (“What is remarkable about these studies, which span a period of 45 years, is the sameness of their conclusions.”).
20 Id. at 87 (“[T]he Commission today is probably more poorly managed than other federal agencies.”); AM. BAR ASS’N COMM’N TO STUDY THE FED. TRADE COMM’N, supra note 16, at 35-36; COX ET AL., supra note 15, at 169-171.
21 AM. BAR ASS’N COMM’N TO STUDY THE FED. TRADE COMM’N, supra note 16, at 26-28.
22 COX ET AL., supra note 15, at 130-140.
23 Posner, supra note 17, at 71 (“A perusal of FTC rules and decisions reveals hundreds of cases in which prohibitory orders have been entered against practices, not involving serious deception, by which sellers have attempted to market a new, often cheaper, substitute for an existing product.”).
24 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., REPORT ON THE OFFICE OF ATTORNEY GENERAL, supra note 2, at 395; Lovett, supra note 2, at 725); Withrow, supra note 2, at 64 (“The difficulties being faced by the consumer today are best understood in terms of the new ‘impersonality’ of the market place.”).
25 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 395.
26 Lovett, supra note 2, at 725.
27 Linn & Newman, supra note 4, at 597 (“[T]he goal is to reestablish equilibrium in the market place by recognizing that traditional remedies for fraud have proved ineffective in providing the aggrieved consumer adequate relief.”); Norstrand supra note 3, at 175 (“[T]he consumer has lost the leverage he once had in the marketplace. The disgruntled buyer can no longer hash out differences with his shopkeeper-neighbor; he is now confronted by impersonal bigness where responsibility and liability forever lie just one department away.”).
fn28. Robert Quinn, Consumer Protection Comes of Age in Massachusetts, 4 NEW ENG. REV. 72 (1969)(“It was, after all, primarily the failure of the legal system to provide adequate remedies which led to the great consumer movement of the past decade with the resultant deluge of new laws.”).
29 Schwartz & Silverman, supra note 5, at 7.
30 Id.
31 Sovern, supra note 8, at 439-40.
32 MARY DEE PRIDGEN, CONSUMER PROTECTION AND THE LAW, §2:10 (2008).
33 Id. at App 3A.
34 1960 NJ. LAWS ch. 39, §§1-12.
35 Id. §5.
36 Consumer Protection-Unfair Competition and Acts, 1961 Wash. Sess. Law, ch. 216. Section 2 of the Washington legislation paralleled the FTC Act and read: “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade of commerce are hereby declared unlawful.”
37 See NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 400.
38 UNIF. DECEPTIVE TRADE PRACTICES ACT (1964).
39 Mark D. Bauer, The Licensed Professional Exemption in Consumer Protection: At Odds with Antitrust History and Precedent, 73 TENN. L. REV. 131, 145 (2006); NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 400 .
40 COMM’RS ON UNIF. STATE LAWS, HANDBOOK OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS AND PROCEEDINGS OF THE ANNUAL CONFERENCE MEETING IN ITS SEVENTY THIRD YEAR, 253 (1964).
41 Id. at 253.
42 Bauer, supra note 39, at 145; PRIDGEN, supra note 32, §2:10.
43 COMM’RS ON UNIF. STATE LAWS, supra note 40, at 299,
44 PRIDGEN, supra note 32, §2:10.
45 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 399.
46 COUNCIL OF STATE GOV’TS, 1970 Suggested State Legislation, 142 (1970).
47 UNFAIR TRADE PRACTICES AND CONSUMER PROTECTION LAW (Council of State Gov’ts 1970). The first version of the UTPCPL in 1967 used only this language to define the prohibited acts. COUNCIL OF STATE GOV’TS, supra note 46, at 142.
48 PRIDGEN, supra note 32, §2:10.
49 Id. §2:10.
50 COUNCIL OF STATE GOV’TS, supra note 46, at 142.
51 Id.
52 PRIDGEN, supra note 32, §2:10.
53 Id.
54 COUNCIL OF STATE GOV’TS, supra note 46, at 142.
55 UNFAIR TRADE PRACTICES AND CONSUMER PROTECTION LAW §2 (Council of State Gov’ts 1970) (“The following unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared to be unlawful: (1) passing off goods or services as those of another; (2) causing likelihood of confusion or of misunderstanding as to the source, sponsorship, approval, or certification of goods or services; (3) causing likelihood of confusion or of misunderstanding as to affiliation, connection, or association with, or certification by, another; (4) using deceptive representations or designations of geographic origin in connection with goods or services; (5) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or qualities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection that he does not have; (6) representing that goods are original or new if that are deteriorated, altered, reconditioned, reclaimed, used, or secondhand; (7) representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another; (8) disparaging the goods, services, or business of another by false or misleading representation of fact; (9) advertising goods or services with intent not to sell than as advertised; (10) advertising goods or services with intent not to supply reasonably expectable public demand, unless the advertisement discloses a limitation of quantity; (11) making false or misleading statements of fact concerning the reasons for, existence of, or amounts of price reductions; (12) engaging in any other conduct which similarly creates a likelihood of confusion or of misunderstanding; or (13) engaging in any act or practice which is unfair or deceptive to the consumer.”)
56 Id.
57 PRIDGEN, supra note 32, §2:10 (Alabama, Arkansas, Arizona, California, Georgia, Guam, Hawaii, Idaho, Indiana, Kansas, Maryland, Michigan, Nebraska, Nevada, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Virgin Islands, and West Virginia).
58 Id. (Colorado, District of Columbia, Indiana, Mississippi, and New York have pure laundry lists approaches. The twenty-one other jurisdictions that use a laundry list approach also have some general prohibition of unfair and deceptive acts.).
59 The UTPCPL gave the Attorney General powers similar to those granted in the earlier consumer fraud acts. Sections 11 through 14 granted the Attorney General broad investigatory powers, the power to issue subpoenas, and the power to enforce the investigatory demands.
60 UNFAIR TRADE PRACTICES AND CONSUMER PROTECTION LAW § 2 (Council of State Gov’ts 1970).
61 Id. § 6.
62 Id. §15.
63 Id. § 8 (Section 8(a) read in part “Any person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by another person of a method, act or practice declared unlawful by Section 2 of this Act, may bring an action. . . .”).
64 Id.
65 Id.
66 Id. § 3.
67 Id.
68 PRIDGEN, supra note 32, app. 3B (Most states’ statutes provide that the courts should be guided by FTC interpretations, but that such interpretations are not dispositive.).
69 Iowa was the last state without a private right of action, but recently enacted one with the Private Right of action for Consumer Fraud Act. See Iowa Ann. Code §714H (West 2009).
70 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 408.
71 See, e.g., Hall v. Walter, 969 P.2d 224, 234, (Colo. 1998) (the practice challenged by an individual under COLO. REV.STAT. § 6-1-113 (1998) must significantly impact the public as actual or potential consumers); Zeeman v. Black, 156 Ga. App. 82, 84, 273 S.E.2d 910, 915 (1980) (stating that unless the defendant’s actions had or has potential harm for the consumer public they are not directly regulated by the FBPA, O.C.G.A. § 10-1-3-0 et. seq.); Ly v. Nystrom, 615 N.W.2d 314 (Minn. 2000) (public interest must be demonstrated to state a claim under the private A.G. statute – relating to the CFA, MINN. STAT. § 325F.68 et. seq.); Nelson v. Lusterstone Surfacing Co., 258 Neb. 678, 605 N.W.2d 136 (2000) (to be actionable under the CPA the unfair/deception act must have impact on the public interest); Jefferies v. Phillips, 316 S.C. 523, 451 S.E.2d 21, 1994 S.C. App. 11 Lexis 139 (S.C. Ct. App. 1994) (to be actionable under SCUPTA, S.C. CODE § 39-5-20, unfair or deceptive practices must adversely affect the public interest); Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 719 P.2d
531 (1986) (private litigant must establish a public interest impact to establish a prima facie case under the CPA, REV. CODE WASH. § 19.86.010 et. seq.).
72 See Butler & Johnston, supra note 12.
73 See, e.g., ARK. CODE ANN. § 4-88-113 (2001); FLA. STAT. § 501.211(2) (2002); IND. CODE ANN. § 24-5-0.5-4(b) (1996); ME. REV. STAT. ANN. tit. 10, § 1213 (1997); MD. CODE ANN., COM. LAW § 13-408 2000); MISS. CODE ANN. § 75-24-15(1) (1999); NEB. REV. STAT. ANN. § 59-1609 (2004); S.D. CODIFIED LAWS § 37-24-31 (2004); TEX. BUS. & COM. CODE § 17.50(b)(1) (2002); WIS. STAT. ANN. § 100.18(11)(b)(2) (2004); WYO. STAT. ANN. § 40-12-108(b) (2005).
74 See, Schwartz & Silverman, supra note 5. In some cases, damages are doubled or trebled regardless of the egregiousness of the defendant’s conduct. E.g., ALASKA STAT. § 45.50.531(a) (2004); D.C. CODE ANN. § 28-3905(k) (2001); HAW. REV. STAT. ANN. § 480-13 (2004); N.J. STAT. ANN. § 56:8-19 (2001); N.C. GEN. STAT. § 75-16 (2003); WIS. STAT. § 100.20(5) (2004). Nine states treble damages if the defendant acted intentionally, willfully, knowingly, or in bad faith. See COLO. REV. STAT. § 6-1-113(2)(a)(III); GA. CODE ANN. § 10-1-399© (2000); MASS. GEN. LAWS, ch. 93A, § 9(3); N.H. REV. STAT. ANN. § 358-A:10 (1995); N.M. STAT. ANN. § 57-12-10(B); N.Y. GEN. BUS. LAW § 349(h); S.C. CODE ANN. § 39-5-140(a) (1985); TENN. CODE ANN. § 47-18-109(a)(3) (2001); VA. CODE ANN. § 59.1-204(A); TEX. BUS. & COM. CODE ANN. § 17.50(b)(1) (2002).
75 Schwartz & Silverman, supra note 5, at 25.
76 For detailed analysis and citations, see Schwartz & Silverman, supra note 5.
77 Letter from James C. Miller III, Chairman, Federal Trade Commission, to John Dingell, Chairman, Committee on Energy and Commerce (Oct. 14, 1983), available at www.ftc.gov/bcp/policystmt/ad-decpet.htm; Letter from Michael Pertschuk, Chairman, Federal Trade Commission, and Paul Rand Dixon, David A. Clanton, Robert Pitofsky, and Patricia P. Bailey, Commissioners, Federal Trade Commission, to Wendell H. Ford, Chairman, Committee on Commerce, Science, and Transportation, and John C. Danforth, Ranking Minority Member, Committee on Commerce, Science, and Transportation (Dec. 17, 1980), available at www.ftc.gov/bcp/policystmt/ad-unfair.htm.
78 Aspinall v. Philip Morris, 813 N.E.2d 476, 486 (Mass. 2005).
79 See, e.g., McClure v. Duggan, 674 F. Supp. 211, 224 (N.D. Tex. 1987) (holding the statute of frauds was not applicable
under Texas deceptive trade practices act).
80 See, e.g., Attaway v. Tom’s Auto Sales, Inc., 144 Ga. App. 813, 242 S.E.2d 740 (1978).
81 See, e.g., Smith v. Baldwin, 611 S.W.2d 611, 614 (Tex. 1980). The court explained that “[a] primary purpose of the enactment of the DTPA was to provide consumers a cause of action for deceptive trade practices without the burden of proof and numerous defenses encountered in a common law fraud or breach of warranty suit.” Id. at 616.
82 See, e.g., Teague Motor Co. v. Rowton, 84 Or. App. 72, 733 P.2d 93 (1987) (holding that parol evidence may be used in Oregon consumer protection cases); Weitzel v. Barnes, 691 S.W.2d 598, 600 (Tex. 1985) (holding that parol evidence may be used in Texas consumer protection cases); Capp Homes v. Duarto, 617 F.2d 900, 902 n.1 (1st Cir. 1980) (holding that parol evidence may be used in Massachusetts consumer protection cases).
83 See generally Raren S. Guerra, DTPA Precludes Use of Merger Doctrine and Parol Evidence Rule in Breach of Warranty Suit: Alvarado v. Bolton, 41 BAYLOR L. REV. 373 (1989). [Maybe cite directly to the case then have a parenthetical for the see generally to the article]
84 See, e.g., International Nickel Co. v. Trammel Crow Distrib., 803 F.2d 150, 155-56 (5th Cir. 1986) (holding that contractual limitations inapplicable in suit under Texas “Little FTC Act”); Corral v. Rolling Protective Serv. Co., 240 Kan. 678, 732 P.2d 1260 (1987) (holding similarly under Kansas law); Reliance Universal, Inc. v. Sparks Indus., 688 S.W.2d 890 (Tex. Ct.
App. 1985) (holding similarly under Texas law).
85 See generally Note, The DTPA and Privity: Let the Buyer Beware Becomes Let the Buyer Recover, 39 BAYLOR L. REV. 787 (1987).
86 See, e.g., Butler and Johnston, supra note 12.
87 However, this is not true for all state statutes. For example the Illinois Supreme Court has contracted the geographic scope of its CPA. See Avery v. State Farm Mutual Auto. Ins. Co., N.E.2d 801, 881 (Ill. 2005) at 863-64 (limiting class actions brought under the Illinois Consumer Fraud Act to fraudulent transactions that occur within Illinois borders).
88 MASS GEN. LAWS ANN., ch. 93A, §6 (1967).
89 Id. §4.
90 Norstrand, supra note 3, at 173.
91 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 408.
92 Id.
93 UNIF. DECEPTIVE TRADE PRACTICES ACT §3 (1964).
94 David A. Rice, Exemplary Damages in Private Consumer Actions, 55 IOWA L. REV. 307, 307 (1969).
95 Norstrand, supra note 3, at 175 (“Even if rarely invoked, awareness by the consumer that he need not be helpless when victimized by fraud can only improve the commercial climate. If this means ‘caveat vendor’, then so be it.”).
96 Lovett, supra note 2, at 744.
97 E.g., Rice, supra note 94, at 340.
98 NAT’L ASS’N OF ATT’YS GEN. COMM. ON THE OFFICE OF ATT’Y GEN., supra note 2, at 409.
99 Id.
100 Id.
101 Id. at 409-10.
102 Id. at 409.
103 Wayne E. Green, Lawyers Give Deceptive-Trade Statutes New Day in Court, Wider Interpretations, WALL ST. J., Jan. 2, 1990, at B1..
104 Perry A. Craft, State Consumer Protection Enforcement: Recent Trends and Developments, 59 ANTITRUST L.J. 991, 997 (1991) (Throughout the 1980s states’ Attorneys General were active in enforcement of their states CPAs, without substantial criticism.).
105 Sovern, supra note 8, at 437.
106 Schwartz & Silverman, supra note 5, at 3; Jon Mize, Fencing Off the Path of Least Resistance: Re-Examining the Role of Little FTC Act Actions in the Law of False Advertising, 72 TENN. L. REV. 653, 653-54 (2005).
107 Schwartz & Silverman, supra note 5, at 3-4.
108 See Butler and Johnston, supra note 12. Actual and potential defendant merchants may pass the costs of CPA litigation
on to consumers through higher prices. Id.
109 For a description of the database, see SEARLE CIVIL JUSTICE INSTITUTE, STATE CONSUMER PROTECTION ACTS, AN EMPIRICAL INVESTIGATION OF PRIVATE LITIGATION (2009), available at http://www.law.northwestern.edu/searlecenter/issues/index.cfm?ID=86.
110 The search string used for the term “damage awards” was “damage! w/s award!”.
111 The set of FTC cases from which we drew the 8 was a set of FTC cases captured by the original over-inclusive search string used to identify cases for the population database. These cases had been removed from the final population database because they did not include CPA claims brought by either party in the suit at issue.
112 These two cases were not included in the population database nor randomly chosen as we had only limited available information on FTC investigations where the Commission ultimately withdrew the complaint.
113 To limit potential ordering effects, we changed the order of the scenarios three times with different versions issued randomly to the Shadow Commissioners. We randomized the ordering by drawing the 60 numbers three separate times. After the Shadow Commissioners completed the questionnaires, we collected the responses and informed the Shadow Commissioners of the origin of the scenarios. We then coded the results of the questionnaire, identifying the Shadow Commissioners only by a study code number.
114 To limit ordering effects, we changed the order of the scenarios three times with different versions issued randomly to the Shadow Commissioners. We randomized the ordering by drawing the 50 numbers three separate times. We then coded the results with the Shadow Commissioners identified only by a new study code number.
115 Letter from James C. Miller III, supra note 77; Letter from Michael Pertschuk, supra note 77.
116 The 2 cases do not include the ongoing cases of Round 1, and make up only 4.5% of the 44 closed cases.
117 Note that the underlying population of cases in Round 2 is a complete subset of the underlying population of cases in Round 1. As such, there is some overlap that the z-statistics in this section do not take into account. However, given the positive relationship between CPA cases that survive to trial and the likelihood that the Shadow Commission believes the conduct was illegal under the FTC standards and/or that the FTC would initiate an enforcement action, it is likely that this overlap functionally understates the true difference between clear CPA wins and all other CPA cases.
118 A two-group test of proportions allows us to reject the null hypothesis that the proportion of cases where the majority of Shadow Commissioners believed the scenario contained some illegal conduct under the FTC standards is the same between the two rounds at the 1% level (z = -4.052, p = 0.000). We get similar results for the non-parametric Spearman rank correlation.
119 One possible concern is that the composition of cases across the rounds differed on some dimension other than the disposition of the claim. For example, Round 2 cases did not include federal district court cases whereas Round 1 included both federal and state court decisions. However, if only the state appellate court cases in both rounds are analyzed, there is still a statistically significant difference at the 5% level. A two-group test of proportions allows us to reject the null hypothesis that the proportion of cases where the majority of Shadow Commissioners believed the scenario contained some illegal conduct under the FTC standards is the same between the two rounds at the 5% level (z = -2.536, p = 0.011). We get similar results for the nonparametric Spearman rank correlation.
120 For a similar analysis of asymmetrical error costs in the related antitrust context, see Frank H. Easterbrook, The Limits of Antitrust, 63 Texas L. Rev. 1 (1984).
121 Even though the average price effect of liability costs may be small across industries, in some sectors it can be quite large. See Tomas J. Philipson & Eric Sun, Is the Food and Drug Administration Safe and Effective?, 22 J. ECON. PERSP. 85, 94–95 (2008) (suggesting that the deadweight losses to consumers and producers from the price increase due to product liability
litigation in the pharmaceutical industry is in the tens of billions of dollars); Paul Rubin & Joanna Shepherd, Tort Reform and Accidental Deaths, 50 J.L. & ECON. 221 (2007) (estimating that product liability has increased accidental deaths by raising the prices of safety-enhancing goods and services); Richard L. Manning, Changing Rules in Tort Law and the Market for Childhood Vaccines, 37 J. L. & ECON. 247, 273 (1994) (suggesting that the price of vaccines went up twentyfold after product liability imposed). For a discussion of these costs in the consumer protection context related to financial services, see David S. Evans and Joshua D. Wright, The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit, 22 Loyola Consumer Law Review 277 (2010).
122 A two-group test of proportions only allows us to reject the null hypothesis that the proportion of cases where the majority of Shadow Commissioners believed the FTC would initiate an enforcement action based on the available case facts between the two rounds at above the 15% level (z = -1.434, p = 0.152). We get similar results for the non-parametric Spearman rank correlation.
123 For the 43 cases that did not have a tied Shadow Commission, a two-sample test of proportions allowed us to reject the null hypothesis that the proportions of cases where the majority of Shadow Commissioners believe there was illegal conduct and where the majority of Shadow Commissioners believed the FTC would initiate an enforcement action were equal at the 1% level (z = 3.088, p = 0.002).
124 A two-group test of proportions allows us to reject the null hypothesis that the proportion of cases where the majority of Shadow Commissioners believed the scenarios contained some illegal conduct is the same between FTC cases and general CPA cases in Round 1 at the 1% level (z = -4.721, p = 0.000 for all cases and z = -5.168, p = 0.000 for completed cases only). We get similar results for the non-parametric Spearman rank correlation.
125 A two-group test of proportions allows us to reject the null hypothesis that the proportion of cases where the majority of Shadow Commissioners believed the FTC would initiate an enforcement action based on available case facts is the same between FTC cases and general CPA cases in Round 1 at the 1% level (z = -5.745, p = 0.000 for all cases and z = -6.221, p = 0.000 for completed cases only). We get similar results for the non-parametric Spearman rank correlation.
Recent decisions by federal courts limiting private consumer class actions will lead for more pressure on attorneys general to either bring cases or retain private counsel on a fee or contingent basis.
In 5–4 Decision, Supreme Court Vindicates Use of Class Action Waivers in Arbitration
By Jessie Kokrda Kamens and Tom P. Taylor
In a big win for corporations seeking to resolve consumer and employee disputes by way of bilateral arbitration, the U.S. Supreme Court held 5-4 that a state law requiring the availability of classwide arbitration interferes with the “fundamental attributes of arbitration” and creates a scheme inconsistent with the Federal Arbitration Act (AT&T Mobility LLC v. Concepcion, U.S., No. 09-893, 4/27/11).
One attorney who has used pre-dispute arbitration agreements in consumer contracts extensively predicted the decision will spur more companies to use class action waivers, while another leading class action expert told BNA the opinion reflects an apparent extreme distaste by the majority of the court for class actions and hints at the eventual outcome in another high-profile case this term, Wal-Mart v. Dukes.
The Supreme Court’s opinion fractured along familiar lines, with Justice Antonin Scalia writing for the majority. The opinion held that the FAA preempted a California rule, articulated in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which prohibits class action waivers in adhesion contracts when the damages are predictably small and the waiver exempts the party from fraud.
The critical fifth vote came from Justice Clarence Thomas, who said in a concurrence to the opinion that he “reluctantly joined” the majority. Thomas has expressed reservations about theories of obstacle preemption in cases like Wyeth v. Levine, 555 U.S. 555 (2009), but he said he could reach the same result as the majority based on a textual interpretation of the FAA. Chief Justice John G. Roberts Jr., and Justices Samuel A. Alito Jr. and Anthony M. Kennedy also joined in the majority opinion.
The majority piggy-backed on its opinion last year in Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 78 U.S.L.W. 4328 (U.S. 2010), where it held that a contract silent on the issue of class arbitration could not be interpreted to allow it because the “changes brought about by the shift from bilateral to class-action arbitration” are “fundamental.”
Classwide arbitration, Scalia said, includes absent parties, which necessitates additional and different procedures and involves higher stakes. “[T]he switch from bilateral to class arbitration sacrifices the principal advantage to arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”
The fact, raised in the dissent, that most small dollar claims will be abandoned if they can not be adjudicated on a class basis, did not convince the majority. “States cannot require a procedure that is inconsistent with the FAA, even if it is undesirable for unrelated reasons.”
In dissent, Justice Stephen G. Breyer said that California’s Discover Bank rule is consistent with the FAA’s objective to place agreements to litigate and to arbitrate on the same footing. The California law, he said, applies to class action waivers in any type of contract. Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan joined in the dissent.
Breyer suggested that the concept of federalism also supported upholding the California law. “Here, recognition of the federalist ideal, embodied in the specific language in this particular statute, should lead us to uphold California’s law, not to strike it down.”
Coffee, Other Experts Weigh In.
Professor John C. Coffee Jr., who teaches at Columbia Law School in New York and who has written extensively on class actions, told BNA April 27, “The irony here is that the majority and the minority have reversed their usual roles and their usual rhetoric. The dissent written by Breyer is saluting federalism and saying federalism requires that you defer to the state rule. That is usually the position of the conservative majority that is usually very suspicious of preemption and which generally believes that the state rule should be respected because we are a federal nation of co-equal sovereigns, federal and state.”
Coffee added, “Given that this is a majority that is normally extremely respectful of federalism and its values, animating this decision is probably the majority’s extreme distaste for class actions. I think that does not auger well for those that are predicting the eventual result in Wal-Mart [v. Dukes].”
Alan S. Kaplinsky, a partner at Ballard Spahr LLP in Philadelphia who told BNA April 27 he pioneered the use of pre-dispute arbitration provisions in consumer contracts, said that until this opinion, “there was a cloud hanging over” the use of class action waivers in arbitration agreements. Until today, courts across the country were split about whether class action bans could be enforced, Kaplinsky said. “The court has brought an end to that debate.”
Kaplinsky predicted that more companies may start using class action waivers, and that consumers will be benefited because bilateral arbitration is a better alternative for resolving disputes.
Deepak Gupta, a staff attorney at Public Citizen Litigation Group in Washington, D.C., who argued the case for the Concepcions, said in a statement that the decision was a crushing blow to American consumers and employees.
“The court’s decision today turns the [FAA]—a law that was intended to facilitate private arbitration between sophisticated companies—into a shield against corporate accountability. The decision will make it harder for people with civil rights, labor, consumer and other kinds of claims that stem from corporate wrongdoing to join together to obtain their rightful compensation,” Gupta said.
AT&T said in a statement, “This is a victory for consumers. The court recognized that arbitration often benefits consumers. And as noted in the opinion, ‘[T]he District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.’ ”
Coffee said that many may be surprised by the decision. “At oral argument there was suggestion on several justices’ part that they were concerned with whether this was an overly sweeping interpretation that the appellants were seeking, but when it got to be written it came down and broke along the usual 5–4 standard fracture lines. And I would categorize it as one of the more ideological 5–4 decisions that the court has had in the last year or two.”
The Discover Bank Rule.
The class action was filed in federal court by AT&T Mobility customers Vincent and Liza Concepcion, who sought to recoup $30 in sales taxes they say they were unfairly charged for phones advertised as free. The Concepcions’ service agreement with AT&T included an arbitration provision waiving the right to proceed with dispute resolution through class arbitration.
The district court denied defendant AT&T’s motion to compel arbitration, finding that the class waiver provision of the parties’ arbitration clause was unenforceable under California law, and that California law was not preempted by the FAA.
On appeal, the Ninth Circuit affirmed that the class action waiver was unenforceable under California law.
The Ninth Circuit applied the California Supreme Court’s three-part test articulated in the Discover Bank case for determining whether a class action waiver in a consumer contract is unconscionable.
The Discover Bank test says that class action waivers act as exculpatory clauses and should not be enforceable when (1) the waiver is found in a consumer contract of adhesion; (2) in a setting in which disputes between the contracting parties predictably involve small amounts of damages; and (3) when it is alleged that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of small amounts of money.
The Ninth Circuit concluded that all three prongs applied to the arbitration agreement between AT&T and the Concepcions.
FAA’s ‘Saving Clause.’
The Ninth Circuit also held that the FAA does not preempt the Discover Bank rule.
Section 2 of the FAA provides that arbitration clauses “shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract.” This saving clause permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.
The Ninth Circuit said that the Discover Bank rule is “simply a refinement of the unconscionability analysis applicable to contracts generally in California.”
‘Disproportionate Impact.’
The majority disagreed with the Concepcions’ argument that the Discover Bank rule is a ground that “exist[s] at law or in equity for the revocation of any contract” under Section 2. The Concepcions said that the rule is an application of unconscionability doctrine and applies to contracts generally.
But Scalia said that although the Section 2 saving clause preserves generally applicable contract defenses, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”
Although a doctrine such as unconscionability may appear to be generally applicable, it may be applied in a fashion that disfavors arbitration. For example, a case might find that a consumer agreement that fails to provide for judicially monitored discovery is unconscionable because it is exculpatory or because no consumer would agree to allow a corporation to hide their wrongdoing.
A rule like this, the court said, would have a “disproportionate impact” on arbitration agreements even though it applied to contracts purporting to restrict discovery in litigation.
The Concepcions suggest that “all this is just a parade of horribles, and no genuine worry” because demanding procedures incompatible with arbitration would be preempted by the FAA because they cannot sensibly be reconciled with §2, the court said.
But Scalia disagreed that the judicially monitored discovery hypothetical was a “far cry” from this case. “Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”
Although the rule is limited to small damages cases alleging a scheme to cheat consumers, Scalia said that the damages requirement is “toothless and malleable” and the latter requirement has no limiting effect as it only requires an allegation.
Class Arbitration Inconsistent With FAA.
Scalia said that “class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.” The decision in Stolt-Nielsen is instructive, the court said. In that case, the court said that the changes brought about by the shift from bilateral to class arbitration were “fundamental.”
First, class arbitration sacrifices the advantage of informality, slows down the process, and makes it more costly, the court said. Before addressing the merits of a claim, an arbitrator must decide whether the class should be certified, whether the named plaintiffs are typical, and how discovery should be conducted for the class, the court said.
Second, class arbitration requires procedural formality, the court said. If the procedures are too informal, absent class members would not be bound by the result. For a class action money judgment to bind the class members, they must be given notice, a right to opt out of the class, and an opportunity to be heard. This level of process would presumably be required for absent parties to a class arbitration, the court said.
Third, the court said that class arbitration greatly increases the risks for defendants. “Informal procedures do of course have a cost: The absence of multilayered review makes it more likely that errors will go uncorrected.”
In bilateral arbitration, this risk is limited to the amount of an individual claim, but when claims are aggregated to the thousands, “the risk of an error will often become unacceptable,” he said.
Breyer’s Dissent.
Breyer wrote in his dissent that the California law did not stand as an obstacle to executing the FAA because it applied to class action waivers in any contract, as §2 requires.
The rule is also consistent with the basic purpose behind the Act, Breyer said. The FAA’s primary objective is to secure the enforcement of agreements to arbitrate, not to guarantee procedural and cost advantages.
The majority’s finding that the Discover Bank rule stands as an obstacle to the accomplishment of the FAA’s objectives is based on its claims that the rule increases the complexity of arbitration procedures and discourages parties from entering into arbitration agreements, Breyer said. But, class arbitration is well-known in California and elsewhere, Breyer said. And, according to American Arbitration Association statistics, class arbitration takes less time than class actions in court, he said.
Breyer said that federal arbitration law generally leaves matters of contract defenses to the states. “California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.”
Gupta argued for the Concepcions. Andrew J. Pincus, Mayer Brown, Washington, D.C., argued for AT&T Mobility.