Caveat Proletarius: The ALEC Model Consumer Protection Law

by Ira Rheingold

It's recently been announced in the press that the American Legislative Exchange Council or ALEC, an organization of "conservative state lawmakers" has created a "model state consumer protection law" that will be introduced in statehouses across the nation in 2007.  (CL&P has previously mentioned this development here and here; the proposal's full text can be found in an appendix to this law review article.)

As an organization that claims to be interested in the "Jeffersonian principles of free market, limited government, federalism and individual liberty," one might expect that their model law would promote a marketplace that rewards honest behavior, promotes fair competition, and supports a private incentive-driven regulatory scheme that would offset the need for more heavy-handed government regulation.  Unfortunately, those expectations would be very wrong.

My initial suspicion that the bill wasn’t written and won’t be introduced to "protect consumers" or promote a "free marketplace" was aroused when I looked at the makeup of ALEC’s Board of Directors.  Call me cynical (and after years working to protect low and moderate income consumers, I’m not sure you can call me anything but), but when I see an organizational board that includes the Pharmaceutical Research and Manufacturers of America (big drug companies), Altria (think tobacco), BellSouth, Koch Industries (petrochemicals) and Coors (alcohol), I don’t think consumer protection.  My first thought is of Christopher Buckley’s satirical novel Thank You For Smoking and his unforgettable MOD, or Merchants of Death, squad.  My doubts were fully confirmed when I looked at the substance of this "Model" Act.

One of the sad truths of public policymaking in America today is that Orwellian titles are regularly used as a shield to hide the real intent of introduced legislation (like the classic "Responsible Lending Act" which was promoted by mortgage lenders to gut strong state predatory lending laws). Therefore, when an association, supported and funded by some of our nation’s most notorious industries, introduces a bill described as a model "Consumer Protection Act," we had better check the details (and our wallets) pretty closely.

In analyzing the Model Bill, I looked to see whether the law meets the intent and purposes of consumer protection statutes as defined by numerous courts and legislatures throughout the years. Basically, these statutes (which might in some ways, be better named "marketplace protection statutes") exist not merely to protect an individual consumer, but to offer broad protection to a state’s citizens from unfair or deceptive acts or practices and to foster fair and honest competition in the marketplace. In other words, to promote a healthy consumer market, legislation must sufficiently punish unfair or deceptive behavior, so that honest, law abiding businesses flourish and bad actors are put out of business. An examination of the Model Bill shows how the Act intentionally fails to meet this essential standard in every possible way.

The bill, while using terms common in consumer protection statutes, reads as one long attempt to limit the liability of corporations for their unlawful behavior. Here’s a few of the highlights.

• Limiting Relief:  Section 1(a) of the Act, by carefully defining damages in the most narrow of ways, makes sure that consumers get the most limited relief possible (ensuring that companies violating the law pay as little as possible).

• Raising the Standard of Proof: Section 1(c) of the Act not only makes it harder to prove a violation of the law by changing the typical standard of proof for consumers from "preponderance" to the much more burdensome "clear and convincing standard," but it also requires that a consumer prove willful behavior on the part of the bad actor (as opposed to good consumer protection statutes that recognize that practices that are inherently unfair and distort the marketplace, must be punished regardless of whether actual intent is proved).

• Eliminating Deterrence:  Section 1(d) of the Act so limits a judge’s discretion in awarding enhanced damages (i.e the type of damages that actually might act as a deterrent to bad behavior) that it in the real world, it will almost never be awarded.

• Scrapping Class Actions:  Section 1(e), is written in a way that pretty much makes certain that class actions (the single most effective private market tool to deter bad corporate behavior) under the statute, cannot possibly succeed.

The rest of the law goes on and on like this, identifying every conceivable way to either make it extremely burdensome for consumers to bring a case under this law (Section 2: making the award of the consumer’s attorneys fees near impossible, yet making it easier for a defendant to collect attorneys fees from a consumer; Section 3: greatly limiting the time a consumer can actually enforce this law) or further limit the liability of the corporation (Section 4 – my personal favorite – which allows a captive regulatory agency to provide a complete defense to its favorite corporation through as little as an informal letter).

You get the point.  For those thinking that this legislation is a serious attempt to provide real protection to consumers, you need to think again.  This bill is nothing more, nothing less, than a gift to corporations that will encourage bad behavior at the expense of honest businesses and vulnerable consumers.  For any state considering this bill, or anything like it, I leave you with the following warning: "Caveat Proletarius," let the citizens beware.

Related Links:

American Tort Reform Foundation report, Private Consumer Protection Lawsuit Abuse

Victor Schwartz, Common-Sense Construction of Consumer Protection Acts, Kansas L. Rev.

Comments

[Mahlon]

And . . . Simply saying that the proposed Model Act is bad should not be the end of the post. Is there merit to revision of consumer protection statutes? What can the pro-consumer lobby do to counter the proposals?

I don't doubt that the proposed Model Act is skewed heavily in favor of business interests. However, although I am strongly pro-consumer, I know that there are abuses by consumer attorneys (I am aware of some notorious examples in California) which have spurred this effort. I am also aware of recent court rulings which have hampered prosecution of legitimate claims. For example, a recent Ohio Supreme Court decision turned Ohio's Consumer Sales Practices Act on its ear. Both of these situations support the movement to amend current statutes.

Just because you do not like the proponents of a particular piece of legislation does not mean the the proposal is completely without merit and should be ignored. There are legitimate concerns about consumer protection lawyers run amok. If you do not offer a reasonable alternative, you may get stuck with the Model Act proposal.

Also, it is important to guard against the overly-broad statutory language (or court interpretations) of which the Model Act proponents object. Many judges, for good and obvious reasons, don't like to impose draconian remedies for what are obviously technical violations which do not cause real damage. Yes, we need those technical violations to be in these statutes. But we need to recognize that they are technical. If we limit the recovery for such violations, we can ensure that strong consumer protection statutes that have teeth are there for those truly injured.

I think that Ohio's statute has struck that balance by limiting damage for technical violations (where there is no resulting damage) to $200.00. Also, those damages are not available as class relief.

On the flip side, amendments are in order in some states (like Ohio) in order to provide more detailed guidance to courts as to the statute's applicability. This will reduce the judiciary's ability to interpose its policy judgment in these cases. This latter point should please both sides of the debate.

[Ira Rheingold]

You make some important points and it is absolutely essential that consumer advocates not merely "throw stones" but offer thoughtful, comprehensive solutions to legitimate concerns about consumer protection laws. In the coming weeks, and I'll make sure I post a link here, the consumer advocacy community will be creating a website that will host a number of Model state law proposals. While I don't believe a model UDAP statute will be included in our first set of proposals, developing one is certainly in our plans.

[John]

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[Payday Loan Advocate]

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