Consumer Law & Policy Blog

Should substantive due process stop courts from enforcing excessive penalties in consumer contracts?

For years now, some have argued that if substantive due process prohibits disproportionately large punitive damages awards against major corporations, it also should stop courts from enforcing excessive contract damages against consumers. See Seana Valentine Shiffrin, Are Credit Card Late Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).

Two Ninth Circuit judges -- Nelson and Reinhardt -- just endorsed that view. See In re Late Fee and Over-Limit Fee Litigation, 2014 WL 211729.

AARP, Center for Science in the Public Interest, and Consumer Attorneys of California file amicus briefs in Ninth Circuit Supple appeal

I recently discussed the Ninth Circuit appeal in Cabral v. Supple, a fascinating case about consumer fraud class actions, infomercials, snake oil, the placebo effect, and behavioral economics. Our opening brief was filed last week. Yesterday, three organizations filed amicus briefs supporting us: AARP focused on the effect of marketing techniques aimed at making false health-benefit claims to the elderly, Center for Science in the Public Interest focused on the underlying scientific evidence, and Consumer Attorneys of California focused on the importance of private enforcement and the objectivity of the "reasonable consumer" standard under California consumer-protection law.

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Snake oil, the placebo effect, and status quo bias: Should evidence of "satisfied customers" defeat a consumer fraud class action?

by Deepak Gupta

Should a defendant in a consumer fraud class action be able to defeat certification through evidence that its customers say they are "satisfied," even when the the allegation is that the product is snake oil?  Or would that transform the placebo effect into a defense to fraud? That's the question the Ninth Circuit will be asked to answer in Cabral v. Supple, an appeal in which I just filed the opening brief for the plaintiffs.

About 50 million Americans, many of them elderly, suffer from arthritis and joint disease. Joint pain can be very painful, and it has no known cure. Enter dietary supplement manufacturers, who claim that their largely unregulated products can succeed where standard medicine fails. Supple is one such company. Supple tells consumers—through websites, television infomercials, and telemarketing—that spending $114.90 per shipment of the company’s special fruit juice will “completely reverse[] and halt[] the disease process” for joint disease, including arthritis. 

Supple is facing a consumer class in California alleging that its claims are false and that the supplement has no real efficacy. A district court certified the class and Supple appealed to the Ninth Circuit, which agreed to hear its interlocutory appeal. The company's main argument is that the district court was wrong to ignore evidence that Supple's customers are "satisfied." That evidence takes two forms: customer testimonials and evidence that customers made repeat purchases by failing to cancel automatic subscriptions.

Our brief points out that this evidence, even if admissible, wouldn’t prove that Supple’s customers experienced anything beyond the placebo effect. In fact, testimonials may actually demonstrate that a fraud is succeeding -- that consumers are fooled by false advertising. And consumers' failure to cancel their automatically renewing subscriptions is just evidence of what behaviorial economists call "status quo bias" (or what we might call laziness or inertia). As Richard Thaler and Cass Sunstein point out in their book, Nudge, "[i]f renewal is automatic, many people will subscribe, for a long time, to magazines they don’t read.” They go on: 

Those who are in charge of circulation know that when renewal is automatic, and when people have to make a phone call to cancel, the likelihood of renewal is much higher than it is when people have to indicate that they actually want to continue to receive the [product.] 

That's why default choices are so powerful. Evidence of non-cancellation tells us nothing about whether a product works, especially when that product is what economists call a "credence good" -- a product (like a dietary supplement or pill) whose qualities are difficult or impossible for consumers to properly evaluate on their own. In any event, a product’s efficacy is a question for the merits, not class certification. On the merits, the veracity of the company's claims will be determined on the basis of common proof -- scientific evidence of its efficacy, or lack thereof. Because the veracity of the company's advertising is an objective question, answered from the perspective of a reasonable consumer rather than subjective testimonials, class treatment is particularly appropriate. It will be interesting to see what the Ninth Circuit says. 

A Class Action Notice Complaint

by Jeff Sovern

Some of my students tell me they have received the following class action notice:

IF YOU RECEIVED A CALL THROUGH THE USE OF AN AUTOMATIC TELEPHONE DIALING SYSTEM AND/OR A PRERECORDED VOICE FROM DISCOVER TO YOUR CELLULAR TELEPHONE BETWEEN NOVEMBER 30, 2007 AND SEPTEMBER 10, 2013, THIS NOTICE DESCRIBES YOUR RIGHTS IN CONNECTION WITH SETTLEMENT OF A LAWSUIT AND YOUR POTENTIAL RECOVERY.

You may be entitled to a payment under a proposed class action settlement. In the lawsuit entitled Andrew Steinfeld v. Discover Financial Services, et al., U.S.D.C., Northern District of California Case No. 3:12-cv-01118-JSW (the “Action”), Plaintiffs claim that Discover Financial Services or related parties (including Discover Bank, The Student Loan Corporation and Discover Home Loans) (“Discover”) violated the Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. (the “TCPA”), by placing calls on or after November 30, 2007 to cellular telephones through the use of an automatic telephone dialing system or an artificial or prerecorded voice without the prior express consent of Plaintiffs and the putative class members. Discover denies these claims and denies any claim of wrongdoing. The Court has not decided who is right. However, in settlement of the Action, Discover has agreed to implement practice changes and establish a settlement fund of $8.7 million. This notice is only a summary. Details of the settlement, including information on how to file a claim, are available at www.SteinfeldTCPASettlement.com or by writing to or calling the Claims Administrator at the address or toll-free number below.

Discover’s records indicate that you may be a member of the Settlement Class because Discover may have placed a call to your cellular telephone number using an automatic telephone dialing system or an artificial or prerecorded voice at some time between November 30, 2007 and September 10, 2013. Settlement Class Members may (1) submit Revocation Request Forms requesting that Discover cease making calls to their cellular telephone numbers using an automatic telephone dialing system or an artificial or prerecorded voice, (2) submit Claim Forms requesting money from the settlement in the form of a check or in the form of a one-time credit against the balance of their Discover credit card account, (3) exclude themselves from the settlement, (4) object to the settlement, and/or (5) do nothing. Class Counsel estimate that settlement payments or credits will be between $20 and $40, but could be more or less based on factors including the number of claims submitted.

You cannot receive a payment unless your claim is received by February 25, 2014. In addition to payments to the Settlement Class Members, the settlement provides for not more than $2,175,000 in attorneys’ fees and costs and $2,000 in service awards for the two representative plaintiffs to be sought from the Court by counsel for the Settlement Class. In the event that there are any remaining monies from uncashed checks totaling $50,000 or less, such monies will be paid to charity.

If you do not want to be legally bound by the settlement, you may opt out of the settlement by sending a request for exclusion to the Claims Administrator postmarked no later than January 13, 2014. If you exclude yourself from the settlement, you will not receive any money or other benefits from the settlement. If you stay in the settlement (i.e. do not exclude yourself from the settlement), you may object to the settlement by explaining in writing why you do not like the settlement postmarked no later than January 13, 2014. You will be bound by the settlement if your objection is rejected. If you do nothing (i.e. submit no claim or request for exclusion) you will not receive any benefits from the settlement but will nevertheless be bound by the settlement. All Settlement Class Members who do not exclude themselves will be bound by any judgment approving the settlement and will give up any right to sue Discover or related parties for any known or unknown claims relating to calls made to their cellular telephone numbers, including alleged violations of the TCPA.

TO OBTAIN FULL INSTRUCTIONS FOR EXCLUDING YOURSELF, FILING AN OBJECTION, SUBMITTING A REVOCATION REQUEST FORM, OR SUBMITTING A CLAIM FORM, GO TO WWW.STEINFELDTCPASETTLEMENT.COM, OR WRITE OR CALL THE CLAIMS ADMINISTRATOR AT STEINFELD TCPA CLAIMS ADMINISTRATOR, P.O. BOX 43209, PROVIDENCE, RI 02940-3209 OR 1-800-248-1796 (TOLL-FREE).

THIS IS ONLY A SUMMARY OF THE SETTLEMENT AND YOUR RIGHTS. DO NOT CALL OR WRITE TO THE COURT OR THE CLERK OF THE COURT. DO NOT CONTACT DISCOVER ABOUT THE SETTLEMENT. TELEPHONE REPRESENTATIVES ARE NOT AUTHORIZED TO CHANGE THE TERMS OF THE SETTLEMENT OR THIS NOTICE.

I find this kind of notice very troubling.  How likely is it that many consumers will actually wade through it?  Will consumers understand it (for example, do they know what it means to be "legally bound"?)? Will consumers bother to submit a claim when the disclosure is silent as to how much money they might get paid?   I think notices like this really let class members down and fuel claims by industry lawyers that consumers don't benefit very much from class action suits.  Such notices should be written in much easier to understand language and should be much shorter. Have you ever seen an ad that looks like this? If the experts in getting consumer attention don't use something like this when they are trying to get consumers' attention, why would anyone think that this would do the trick?  How about an opening line like: "You may be entitled to $X (or a range of the amounts) from a settlement of a case if you received Discover telemarketing calls on your cell phone." and then no more than three additional short sentences?

Fifth Circuit Decides D.R. Horton, Overturns NLRB's Ruling that Class-Action Bans are Unfair Labor Practices

by Deepak Gupta

In a much-anticipated decision, the Fifth Circuit held today that the National Labor Relations Board overstepped its authority when it ruled that an employer violated federal labor law by requiring its employees to sign an arbitration agreement containing a class-action ban. Judge Leslie Southwick, joined by Judge King, isssued the opinion for the court. Here's the court's summary:

The National Labor Relations Board held that D.R. Horton, Inc. had violated the National Labor Relations Act by requiring its employees to sign an arbitration agreement that, among other things, prohibited an employee from pursuing claims in a collective or class action. On petition for review, we disagree and conclude that the Board’s decision did not give proper weight to the Federal Arbitration Act. We uphold the Board, though, on requiring Horton to clarify with its employees that the arbitration agreement did not eliminate their rights to pursue claims of unfair labor practices with the Board. 

The court began its decision by deciding that it did not need to decide the validity of the recess appointments to the NLRB--the question now before the Supreme Court in Noel Canning. On a separate quesiton--whether one of the Board member's recess appointments had expired--the court relied to a limited extent on the "de facto officer" doctrine and concluded that no timely challenge to the appointment had been preserved.

As to the FAA question, the court analyzed the issue in terms of two exceptions to the FAA's general rule that arbitration agreements are enforced according to their terms: the Act's savings clause (which preserves generally applicable defenses to a contract) and the rule that other federal statutes may trump the FAA. "The Board clearly relied on the FAA’s saving clause," the court explained, "Less clear is whether the Board also asserted that a contrary congressional command is present." On the first point, the court held that the NLRB's ruling could not be reconciled with the Supreme Court's decision in AT&T Mobility v. Concepcion: "Like the statute in Concepcion, the Board’s interpretation prohibits class- action waivers." As to the second point, the court held that nothing in the text or legislative history of the NLRA "contains a congressional command to override the FAA."

Judge Grave dissented. He would have affirmed the NLRB's decision "in toto." Specifically, he disagreed with the majority's conclusion that the NLRB's ruling conflicts with the FAA. Tracking the NLRB's ruling, he would have reasoned as follows:

• The purpose of the FAA was to prevent courts from treating arbitration agreements less favorably than other private contracts. To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with federal labor law.

• The Supreme Court’s jurisprudence under the FAA makes clear that the agreement may not require a party to ‘forgo the substantive rights afforded by the statute. The right to engage in collective action – including collective legal action – is the core substantive right protected by the NLRA and is the foundation on which the Act and federal labor policy rest.

• Nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable. To the contrary, Section 2 of the FAA provides that arbitration agreements may be invalidated in whole or in part upon any ‘grounds as exist at law or in equity for the revocation of any contract.'

• Even if there were a direct conflict between the NLRA and the FAA, there are strong indications that the FAA would have to yield under the terms of the Norris-LaGuardia Act.

Judge Graves would also have agreed with the Board that D.R. Horton violated the NLRA. "The Board made it clear that it was not mandating class arbitration in order to protect employees’ rights under the NLRA," he explained, "but rather was holding that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, judicial and arbitral." 

California Supreme Court addresses impact of Concepcion and Italian Colors

by Deepak Gupta

In a 70-page opinion by Justice Goodwin Liu, the California Supreme Court on Thursday issued its eagerly anticipated decision in Sonic-Calabasas v. Moreno. Addressing the impact of both AT&T Mobility v. Concepcion and American Express v. Italian Colors for the first time, the court makes clear that unconscionability -- focused on whether a contract is unfairly one-sided -- remains a viable defense to individual arbitration agreements in California. Both the majority opinion and dissent are long and dense; what follows are just some initial impressions. (Moreno is not a putative class action and the decision has little to say about class-action waivers.)

In an earlier 4-3 ruling in this case, just two months before Concepcion, the California high court had held "as a categorical rule" that it was "contrary to public policy and unconscionable for an employer to require an employee, as a condition of employment, to waive the right to a Berman hearing, a dispute resolution forum established by the Legislature to assist employees in recovering wages owed." In short order, the U.S. Supreme Court granted, vacated, and remanded that decision following Concepcion. 

Justice Liu's new opinion carefully explains both the reach and the limits of Concepcion and Italian Colors, holding that the Federal Arbitration Act preempts the categorical state-law rule announced in the court's earlier opinion, but fully preserves defenses available under generally applicable state contract law, including unconscionability, so long as state law doesn't discriminate against arbitration or mandate procedures "inconsistent with the fundamental attributes of arbitration." The opinion emphasizes that the unconscionability defense turns on whether the contract is "unfairly one-sided" and that a trial court's assessment of the defense may require consideration of evidence about the specific arbitral scheme at issue -- evidence that, here, will have to be considered for the first time on remand.

The vote was 5-2 to remand for further proceedings on the plaintiff's unconscionability defense, with a concurring opinion by Justice Corrigan and a concurring and dissenting opinion by Justice Chin. Justice Chin's dissent takes issue with many aspects of the majority's decision. As a procedural matter, he says, the court shouldn't have even considered the unconscionability defense because the plaintiff forfeited it. But the central thrust of the dissent is to accuse the court of adopting a "vague" and "unworkable" test for unconscionability that, in his view, is prempted under both Concepcion and Italian Colors. Justices Corrigan, Chin, and Baxter would limit unconscionability to the 19th-century "shocks the conscience" test rather than the modern one-sidedness test. 

Interestingly, the concurrence and dissent characterize California's generally applicable one-sidedness inquiry as too vague and insufficiently deferential to arbitration. But the whole point of the FAA is that state court's aren't supposed to modify the state's common law of contracts to account for the fact that an arbitration agreement is at issue. Short of parroting the indeterminate "shocks the conscience" standard, it's quite unclear what an unsconsionability defense would look like under the dissenters' approach.

Predicatably, defense lawyers are already criticizing Justice Liu's opinion for preserving even the limited, generally applicable unconscionability defense outlined in the opinion. But they seem to acknowledge that the case would be a poor candidate for Supreme Court review at this stage: "It is unclear if there is a suitable federal basis for the U.S. Supreme Court to take up the case," one defense firm observes, "nor is it clear that the defendant will even seek review in advance of a ruling upon remand that the arbitration agreement is, in fact, unconscionable."

More From Linda Mullenix on the Supreme Court's Arbitration Decisions

Linda Mullenix of Texas has written The Court's 2012 Class Act:  A Little Bit of This, a Little Bit of That, 40 Preview of U. S. Supreme Court Cases 328 (2013). Here's the abstract:

Building on the Court’s heightened interest in class action litigation, the Court during the 2012-13 term issued an unprecedented six decisions dealing with class action issues. However, scholars searching for coherent class action jurisprudence will have to await another day (maybe another decade); consistent with its other recent decisions, the Court rendered class action opinions that favored both sides of the docket. Plaintiff and defense counsel both may claim some large and small victories in this term’s class action decisions.

Nonetheless, the Court continues its plodding case-by-case approach to class litigation that fails to illuminate any overarching abstract theory of aggregate litigation. Instead, the Court’s attitude towards class action litigation is chiefly characterized by pragmatism and not-so-veiled policy concerns. Moreover, the 2012-13 class action decisions highlight the Court’s liberal and conservative division, with the Court’s conservative wing prevailing generally in its antipathy toward class litigation. As the Court’s conservatives incrementally make it more difficult to pursue class litigation, the Court’s liberals have become more vociferous in expressing their dismay over shrinking access to justice for large groups of claimants.

The Court’s six class action cases embraced a grab bag of issues. The two most closely watched cases, Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (Docket No.11-1085) and Comcast v. Behrend (Docket No.11-864), dealt with class certification requirements. In another pair of appeals the Court again returned to its fascination with problems of class-wide arbitration clauses:  Oxford Health Plans LLC v. Sutter (Docket No.12-135) and American Express Co. v. Italian Colors Restaurant (Docket No.12-133).  Finally, two appeals addressed jurisdictional requirements for class actions:  in Standard Fire Ins. Co. v. Knowles (Docket No.11-1450), the Court considered pleading issues under the Class Action Fairness Act of 2005, and in Genesis HealthCare Corp. v. Symczyk (Docket No.11-1059) the Court focused on standing issues for collective actions under the Fair Labor Standards Act.

This article evaluates the significance and impact of the Court’s six class action decisions during the 2012-13 term, commenting on the Court’s incremental refinement of Rule 23 as well as the Court’s failure to address significant class action issues.

Column on amicus briefs supporting rehearing in Third Circuit class-action case

by Deepak Gupta

We've already blogged here quite a bit in the past few days about our rehearing petition in the Third Circuit class-action case of Carrerra v. Bayer -- including this post on a recent column by Alison Frankel of Reuters. 

Today, Frankel has a new story about the case. This time, she writes about the amicus briefs. Specifically, she focuses on the fact that a neutral class-action claims adminsitrator, Angeion Group, filed a brief supporting the petition. It's unusual for a claims administrators to file a brief in any case because they treasure their reputation for neutrality. Frankel interviewed Angeion VP Steve Weisbrot to find out why this case was important enough to make an exception:

[P]ublic interest groups and law profs are frequent filers of amicus briefs. Claims administrators are not. So why did Angeion feel the need to poke its head up? It was to defend the expertise and best practices of its industry, Weisbrot told me, from an appellate ruling that, in Angeion’s view, disregarded claims administrators’ hard-won ability to discern between valid and invalid claims. . . . 

Angeion’s amicus brief argued that the 3rd Circuit panel was too quick to discount those screening processes. “Class action administrators have a wealth of expertise about how to ensure fair participation and valid claims without fraud and have been refining that expertise for a half century,” the brief said. “The panel wholly dismisses the ‘programmatic audits’ that are routinely, successfully used to identify duplicate and fraudulent claims by claims administration companies…. We employ proven algorithms in a rules-based processing technology that has been derived from the other industries such as the health care claim processing space. This enables us to further identify fraudulent claims based on a range of data and behavioral patterns.”

Angeion was careful to note that it is a neutral third party, but it’s also true that it is in the business of administering class action settlements. If classes can’t be certified, Angeion and its rivals don’t have claims to administer. The amicus brief warns that the 3rd Circuit standard “would result in no claims – that is, no class action at all…. That decision is not only unprecedented, but ignores the way things actually work in the real world. Requiring the parties to create and submit a detailed screening model for each particular case prior to class certification – instead of relying on known and proven claims administration industry standards generally – would be a burdensomely expensive and time consuming effort.”

Reuters Column: "3rd Circuit is trying to kill consumer class actions"

by Deepak Gupta

Legal reporter Alison Frankel of Reuters has a new column highlighting the effort to seek full-court rehearing of the Third Circuit's troubling decision in Carrera v. Bayer, which holds that plaintiffs must show, before they can certify a class, how they will identify and prove the class membership of consumers who purchased the defendant's product.  The opinion further holds that the traditional methods -- requiring consumer affidavits and employing established screening procedures by class action adminsitrators, for example -- aren't good enough. The defendant, the court reasons, has a substantial property interest, protected by the Due Process Clause of the Fourteenth Amendment, in avoiding a collateral attack. Allison Zieve and Brian Wolfman have both recently blogged about the case here and here.

I wasn't involved in this appeal before the panel decision came down but was recently asked to prepare the plaintiffs' petition for rehearing en banc, which we filed last Friday. Amicus briefs in support of the petition are due by the end of this week.

Even before the rehearing petition, the panel's opinion in Carrera had attracted an unusual amount of commentary, including some specifically calling for en banc rehearing. Frankel's column situates the case within the context of a broader debate in the appellate courts over the future of class actions. She also points out why the panel's decision, if left standing, will be so dangerous for the fate of consumer class actions. Plaintiffs, she explains:

usually satisfy the ascertainability requirement for certification by defining the class in a way that sets appropriate limits on membership – not by setting forth a process of identifying individual claimants. That usually comes later, when class notices are being formulated and damages are being determined. Considering that consumers rarely save receipts or packages to prove their purchases and that there’s scant record-keeping on the purchase of low-cost, unregulated products, the 3rd Circuit decision could make consumer class actions involving these items uncertifiable.

Frankel also unpacks the panel's due-process logic:

It doesn’t matter, according to the appeals court, that under Florida law, Bayer’s potential damages don’t depend on who’s a member of the class. What if some Florida purchasers later asserted that fake claimants diluted their recovery so their interests weren’t adequately represented by the name plaintiff in the class? “They could then bring a new action against Bayer and, perhaps, apply the principles of issue preclusion to prevent Bayer from re-litigating whether it is liable,” the 3rd Circuit said. “Bayer has a substantial interest in ensuring this does not happen.”

The class brief also pointed out the utter unlikeliness of the chain of events the 3rd Circuit posited in its consideration of Bayer’s due process rights. There have been only a handful of collateral attacks on class action judgments in the history of the vehicle, the brief said (quoting my coverage of one of the extremely rare such attacks). 

The bottom line: "Should consumer class actions be gutted on the off chance that an absent class member with a claim for a few bucks might surface with allegations of inadequate representation?" 

Lahav Paper: Symmetry and Class Action Litigation

Alexandra D. Lahav of Connecticut has written Symmetry and Class Action Litigation, 60 U.C.L.A.L. Rev.(2013).  Here's the abstract:

In ordinary litigation, parties often have different resources to devote to their lawsuit. This is a problem because the adversarial system is predicated on two (or more) parties, equal and opposite one another, making their best arguments to a neutral judge.  The class action is a procedural device that aims to equalize resources between individual plaintiffs and organizational defendants by allowing plaintiffs to pool their claims.  Current developments of class action doctrine, however, reinforce in the courtroom the asymmetry that exists between individual plaintiffs and organizational defendants outside the court.  This Article explores these trends and the questions they raise.  Why is it that critics of class actions (and some judges) argue that class actions ought not to be certified for litigation purposes because they “blackmail” defendants into settling meritless suits, but approve of the practice of certifying class actions for settlement when defendants ask approval to settle clearly meritless claims?    Why is the blackmail argument so resilient in the class action context, and what insight does this lend to the context of binary litigation where litigants are more likely to have unequal resources to devote to litigation and, as a result, more likely to enter into settlements that do not reflect the true value of the lawsuit?  Should asymmetry of resources in litigation be considered a problem for our court system, or is it right for courts to take litigants as they find them, even if litigants have vastly unequal resources to devote to pursuing their lawsuits?