Are state consumer protection laws working?

A comprehensive new study of state consumer protection statutes was just published. The background for the study is described as follows:

 

During the 1960s there appeared to be increasing demand from the American public and elected officials for consumer protection laws. State legislatures responded by enacting 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) role in protecting consumers from “unfair or deceptive acts or practices.” Yet there is growing concern that CPA enforcement and litigation are qualitatively different than FTC enforcement and potentially counterproductive for consumers. Critics argue that CPAs generate a set of incentives that encourages plaintiffs and their attorneys to file claims of dubious merit. Proponents counter that CPAs are necessary to supplement FTC enforcement and provide incentives for individuals to bring suit to deter harmful conduct. While both critics and proponents of CPA enforcement make claims about the nature and quality of state consumer protection litigation, the academic and policy debates surrounding CPAs suffer from a remarkable void of empirical data.

 

The Searle Civil Justice Institute study attempts to provide this empirical data, but also makes several conclusions based on the data, which it asserts suggest that state consumer protection statutes are not working as they should. In my opinion, the data may also be viewed as supporting the conclusion that the Federal Trade Commission is not charged with protecting individual consumers, and state statutes are successfully meeting their goal of providing protection for individual consumers.

 

Here are the Key Findings of the study:

 

1.      Litigation under CPAs has increased dramatically since 2000. Between 2000 and 2007 the number of CPA decisions reported in federal district and state appellate courts increased by 119%. This large increase in CPA litigation far exceeds increases in tort litigation as well as overall litigation during the same period.

2.      Vague statutory definitions of prohibited conduct are a major driver of CPA litigation. Whether a CPA statute has vague language prohibiting some general type of conduct rather than a specific list of illegal actions is an important potential contributor to the level of CPA litigation in the state. States with vague definitions of prohibited conduct have more CPA litigation.

3.      CPAs are becoming more favorable and generous to consumer litigants. Between 1995 and 2007, the expected value of recovery for potential plaintiffs increased dramatically as measured by CPA requirements to bring a cause of action and available remedies. In 2004, the state CPAs that were the most favorable to plaintiffs were New Hampshire, Massachusetts, and Connecticut. The states with CPAs that were the least favorable to plaintiffs were Colorado, Maryland, and Georgia.

4.      States with CPAs that are more favorable to consumers have more CPA litigation. The expected value of recovery under a given state’s CPA appears to contribute to the amount of litigation that makes use of the act. States that allow more generous remedies and make it easier for consumers to win in court see more CPA litigation.

5.      Most CPA claims would not constitute illegal conduct under FTC consumer protection standards. The Searle 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.

6.      Almost 40% of CPA claims where the consumer plaintiff prevailed at trial would not constitute illegal conduct under FTC consumer protection standards.

7.      In a sample of CPA claims where the consumer plaintiff prevailed in court, the Searle 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, only 23% would likely be enforced by the FTC.

Comments

[application control57]

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[Limo Hire]

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[Jonas]

...and yet, there is still plenty of consumer abuse going on. Is it that unfair acts are profitable? I don't know. But I do think the litigation is a net "good" for society (and not just because I am a consumer lawyer).

If you consider the cost cutting moves that subject consumers to bad treatment, litigation (or at least a letter from an attorney) is really the only option. It's one of the few areas where it would be easy to avoid liability: treat your customers well, and you won't have any problems.

[Alan White]

If the FTC were indeed a consumer protection agency, and FTC standards were acknowledged as the benchmark for adequate consumer protection, the authors' conclusions might follow. In the view of some, there has recently been a failure in consumer protection, particularly in the financial services area, leading to significant harm to consumer welfare, and indeed the economy generally. The increase in state consumer law litigation may have been a function of the increase in abusive practices encouraged by regulatory abdication at the federal level, FTC and banking agencies included.

[James Torres]

Their conclusions are nonsense. Here are the limitations they acknowledge:

First, reported CPA decisions do not allow for observation of complaints that were filed but subsequently settled without a reported decision. Second, the litigation selection bias inherent in using reported CPA decisions warrants caution for making strong conclusions about the quality of the underlying CPA claims. Third, the observed increase in reported CPA decisions could be affected by several factors including an increase in CPA litigation, a decrease in settlements, an increase in the number of written decisions due to uncertainty in interpreting CPAs, and an increase in the number of unpublished decisions reported to Lexis over time. However, it is not possible to fully separate the effects given the available data. Finally, for the Searle Shadow FTC, 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.

With those limitations, no meaningful conclusion can be made. "Second, the litigation selection bias inherent in using reported CPA decisions warrants caution for making strong conclusions about the quality of the underlying CPA claims" Actually it prevents any conclusion at all about CPA claims in general. They clearly don't have any idea of the numbers of cases that are brought and settled without litigation or without appeal. In every other civil court that is the vast majority of cases. They are trying to extrapolate from the exceptions to the rule, not from the vast majority of cases. Pretty charts and complicated math don't change that simple fact. If CPA claims are like every other kind of tort action, something less than 1% of cases result in appeals which are reported and/or collected by Lexis. No generalization can be made because of the litigation and appeal bias inherent in studying that goup of cases. In addition, reading the appellate decisions and second guessing the trier's of fact is not analysis.

Let me give you an example. I am a medical malpractice lawyer. The majority of medical malpractice cases that are tried before a jury return a defense verdict. If we just looked at that component, trial verdicts, we would say that the majority of medical malpractice cases are not meritorious. However, we would be dead wrong. Since the majority of cases are settled, they are completely left out of the trial bias and are not reflected in the analysis. Again, a small percentage of cases are tried and they are not random. They are selected because of their unique features that make for a trial. The same is true of consumer protection suits and every other kind of civil case. Most clear violations of the law, contracts, standards of care, etc., get resolved by the parties long before they reach an appellate court.

The only conclusions that can be reached are that on this set of data are that the reviewers felt that the FTC wouldn't have done anything about the deceptive and unfair trade practices in most of the cases. No surprise there.

It is studies like this that imply much more than their data supports that are the basis for junk science and bad policy. Even the title, STATE CONSUMER PROTECTION ACTS, An Empirical Investigation of Private Litigation is completely misleading. It is an analysis of reported decisions, not private litigation as a whole.

I would love to hear how the authors think they can make conclusions based upon a random sample of a biased sample about the entire CPA litigation world. As in the medical malpractice example, if you take away all the clear violations and egregious conduct that is settled, you are left with tough cases that were tried for lots of reasons. So the study included no cases that were so clear that the defendant paid up either before litigation or before an appeal was necessary. That study should never have passed basic peer review because it has NO data to support its conclusions regarding the character and quality of CPA claims as a whole.