Many jurisdictions have enacted consumer protection statutes that were intended, at least originally, to protect consumers against sharp business practices. However, today some would posit these enactments have been turned on their heads, and now are used more as a sword than a shield by attorneys seeking to maximize fees rather than vindicate consumer rights. Often, a representative consumer acts as nothing more than a stalking horse for counsel pursuing a claim that by itself would appear to be of no worthwhile concern either because it is based on a de minimus infraction or mere customer dissatisfaction. Nevertheless, such allegations are the makings of statewide or nationwide class actions. Whatever one’s view concerning the propriety of such suits, because of relatively easy state court procedural hurdles to achieveclass certification, these lawsuits have teeth and are of concern to all businesses that sell or market merchandise to the general public. Such lawsuits raise two separate basic concerns for the practitioner representing a commercial entity: (1) how to advise a commercial entity to avoid such suits, and (2) how to best respond to the action if suit is filed. This article will address these two basic questions.
Clients that sell or market merchandise of any kind should be encouraged to familiarize themselves with the consumer protection statute(s) that govern the particular jurisdiction in which they do business and ensure compliance where appropriate. Often, even where a business complies with applicable state administrative codes and regulations, the consumer protection statute may place additional obligations upon a commercial entity with respect to selling or marketing goods to the general public. A commercial client who is unfamiliar with the applicable statutory requirements is in danger of running afoul of the statute, thereby inviting claims. Indeed, courts in certain states have held that even a de minimus violation of a consumer protection statute can form the basis for a consumer fraud action. In other contexts, such as a franchisor/franchisee relationship, some companies have sought to include exculpatory waivers in their agreements. However, exculpatory waivers are often held invalid, especially where they seek to take away statutory rights conferred upon the general public by a remedial statute, such as those statutes designed to protect against consumer fraud. Such waivers are often struck down as void against public policy – after all, a consumer protection statute cannot accomplish its remedial goals if it can simply be avoided by agreement. A practitioner advising a commercial client in this context must be familiar with the law regarding exculpatory waivers in the applicable jurisdiction to determine whether such a waiver is enforceable. Still, another option outside of an outright waiver is to relegate a consumer’s statutory claim to arbitration, by way of contractual arbitration clause. Generally speaking, agreementsto arbitrate do not violate public policy. On the contrary, public policy favors arbitration. The language of the arbitration clause must clearly mandate the waiver of a jury trial concerning any and all claims, including those that are statutory in nature, in favor of submitting any controversy to arbitration. In such instances, plaintiff’s statutory claims survive, but they will be resolved in an arbitration forum, rather than a court of law. Arbitration clauses are desirable because submitting a dispute to an arbitrator rather than a jury generally allows for a more predictable outcome and a smaller chance of a large damage award. A final option is to seek redress in the state legislature. In jurisdictions that have particularly consumer friendly statutes that might be subject to abuse, lobbying efforts to change the law are always a viable option. Indeed, in New Jersey for example, a bill was introduced in the state legislature (Assembly Bill No. A-3333) in October 2010 that seeks to significantly amend the New Jersey Consumer Fraud Act (“NJCFA”). See www.njleg.state.nj.us/bills/BillView.asp. This measure, if passed, will cap the amount of prevailing parties attorney’s fees available, make treble damages a iscretionary rather than a mandatory remedy, and further limit the applicability of the NJCFA to transactions otherwise permitted or regulated by any other state regulatory body. If passed, this amendment would significantly curtail consumer fraud suits, including class actions. Thus, petitioning the legislature for a change to the law is also an effective preventative measure.
Responding to the consumer class action
Ultimately, despite whatever preventative measures are taken, a commercial entity may someday be faced with a consumer fraud class action. It goes without saying that a well-reasoned litigation strategy must be developed to respond to the suit. Some of this will obviously be determined by the merit of the lawsuit on itsface. If the cause of action set forth in the complaints susceptible to a well-known and strong defense, a motion to dismiss in lieu of an answer may be in order. If, on the other hand, the suit appears meritorious on its face it may prove more productive to interpose an answer and proceed through preliminary iscovery. A commercial entity and its counsel can then determine whether the suit can be attacked on ther grounds after more is learned about the fact giving rise to the suit.
A. Removal to federal court
An important initial consideration is whether to remove the case to federal court. It is generally accepted that the Class Action Fairness Act of 2005, 28 U.S.C. 1332(d),(“CAFA”) has made it easier for defendants to remove putative class actions to federal court. Business groups and tort reform supporters had lobbied for the legislation, arguing that it was needed to prevent class action lawsuit abuse. The Act gives federal courts jurisdiction over certain class actions in which the amount in controversy exceeds $5 million, and in which any of the members of a class of plaintiffs is a citizen of a state different from any defendant, unless at least two-thirds or more of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the state in which the action as originally filed. The Act expands federal diversity jurisdiction under 28 U.S.C. 1332 and gives out-of-state defendants greater ability to remove matters out of more plain-tiff-friendly state venues. This is an option that should be explored with the client, assuming the amount in controversy requirement can be satisfied. Of note, it must be stressed that alleging the amount in controversy requirement of $5 million is satisfied for purposes of a removal petition is not an admission or acknowledgment that plaintiff’s suit has such a value nor that plaintiff’s suit is even legally viable. Removal is certainly a strategy to employ where plaintiff’s suit is vulnerable to dismissal on the pleadings because, generally speaking, an Article III Judge is more inclined to dismiss a suit on motion than the average state court judge. Usually, the district court judge, who is appointed for life, is less likely to be subject to local bias. Indeed, this is the underlying principle to diversity jurisdiction in the first place – to protect out-of-state defendants from local prejudices.
B. The motion to dismiss
Federal Rule of Civil Procedure 23 governs certification of putative class actions. Each state has its own procedural rule(s) regarding certification but generally speaking these rules mirror the federal model. Under subsection (a) of this rule, one or more members of a class may sue or be sued on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. These requirements are commonly referred to as numerosity, commonality, typicality and adequacy of representation. After establishing that the requirements of Rule 23 (a) have been met, plaintiffs seeking to certify a class most often look to satisfy one of the elements enumerated in Rule 23 (b), which provides that:
The questions of law or fact common to the members of the class predominate over other questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.
To predominate, common issues must constitute a significant part of individual class members’ cases. However, where individual rather than common fact issues predominate, this requirement cannot be satisfied.
1. Individual Fact Issues ConcerningReliance or Proximate Cause
Predominate Consumer fraud class actions are generally considered vulnerable on this issue. Most fraud claims, even those codified by statute, usually require proof of reliance. Reliance is an element of proof that depends on each individual plaintiff’s factual circumstance as well as their credibility. Therefore, where reliance is an element, it can be successfully argued that individual questions of fact, rather than common questions, predominate – such that a class action cannot be maintained. In states that do not require plaintiff to establish reliance as part of statutory fraud claim, similar predominance arguments can be made by attacking
the requisite element of causation.
2. Field Preemption
Another argument available to defendants is field preemption. Here, defendant seeks to infer a legislative intention to preempt a particular state’s consumer fraud statute because the regulatory scheme established by another statute is so pervasive as to “occupy the field” in that area of the law, so as to warrant an inference that he legislature did not intend the consumer fraud statute to apply. This argument is
most often made where the other applicable statute contains a provision making it the sole remedy for the harm claimed in the complaint. This is generally seen in the context of product liability suits that also allege consumer fraud statutory claims. Courts will often conclude that the product liability actgoverns, and excludes any claims under the consumer protection statute. In addition, other areas of business may be so heavily regulated by their respective enabling statues that there is no room for the consumer protection statute to govern. In this regard, one should look for a provision or regulation that directly conflicts with the consumer protection statute, as this will present the most compelling argument
3. Failure to Plead Fraud with Particularity
Another possible argument lies with Fed. R. Civ. P. 9(b), which requires that actions alleging fraud be pled with particularity. Statutory fraud claims, like their common law counterparts, must be so pled. Most states have a corollary to Fed. R. Civ. P. 9(b), which requires that a complaint alleging fraud be pled with specificity “in so far as practicable.” Any claim for statutory fraud that does not plead all elements of the statute backed up by specific facts is subject to attack.
Consumer fraud class actions are a concern for any commercial entity that sells or markets merchandise to the general public. Such suits may be warded off by knowledge of the particular consumer protection statute in a given jurisdiction, the use of exculpatory waivers or arbitration clauses where possible and petitioning the state legislature for reform. If forced to litigate, a definitive and comprehensive defense strategy should be developed and the lawsuit met aggressively, if warranted. Removal pursuant to CAFA should be considered. Predominance arguments, field preemption or failure to plead fraud with particularity are all viable avenues of defense and, if the facts of the particular case are right, present strong arguments for dismissal. Of course, the particular allegations contained
in the complaint and the facts revealed by any investigation will best inform counsel’s strategy when determining how to respond to the putative consumer fraud class action.
Matthew S. Schultz is a Senior Associate with the New Jersey office of Clyde & Co US LLP, where he has extensive experience in general liability, products liability, professional liability, consumer fraud actions, contract disputes and business litigation. He regularly represents businesses and individuals at the trial and appellate levels, in both state and federal court. Matthew also has significant experience representing franchisors in a variety of disputes.
Re-published courtesy of USLAW Magazine, Fall/Winter 2011