Posted June 1st, 2016 in Legal Insights with Tags Consumer Class Actions, Consumer Fraud, Products Liability
A Wolf In Sheep’s Clothing – Undressing the Consumer Fraud Class Action to Reveal the Hidden Product Liability Claim
Republished with permission. Originally published in FDCC Insights, June 2016.
Introduction
In 2015, our firm was hired to defend a manufacturer in a consumer fraud class action lawsuit filed in federal court in Minneapolis. As we analyzed the complaint, one thing became imminently clear: the case was a product liability case in disguise. The harm alleged all flowed from an allegedly defective component part of the product. In fact, the manufacturer had already undertaken a recall to replace the problematic component part. However, instead of participating in the recall, the named plaintiff and her counsel filed a class action lawsuit alleging that the manufacturer’s statements in selling the product were rendered untrue by the purportedly defective component and seeking damages under a number of consumer fraud theories. When push came to shove, the nub of the case centered on the component part. Consequently, we prevailed on a motion to dismiss, ending the case in its entirety. See Browe v. Evenflo Company, Inc., 2015 WL 3915868 (D. Minn. 2015).
The past several years have seen a significant increase in consumer- fraud class action cases. See Dr. Stephanie Plancich, Adam Augustson and Wendy Magoronga, Consumer Class Action Settlements: 2010-2013 (Settlements Increasing, With Focus on Privacy), NERA Economic Consulting, July 22, 2014. Frequently, consumer fraud claims may be paired with breach of warranty claims, including claims under the Magnuson-Moss Warranty Act. The increased use of class action theories may explain why individual consumer product defect cases are on the decline. In some instances, however, the consumer fraud cases are simply product liability cases in disguise.
Why have consumer fraud cases supplanted product defect cases, at least in name? The answer to this question and a discussion of the many tools available to defense counsel to use for defending against and defeating such cases follows.
Why are Consumer Class Action Claims in Product Liability Cases so Prevalent?
Consumer fraud class actions appeal to plaintiffs’ attorneys for many reasons. For one, many state consumer fraud statutes allow a prevailing plaintiff to recover attorneys’ fees, treble damages, or both. See, e.g., Texas’ Deceptive Trade Practices –Consumer Protection Act, Tex. Bus & Com. § 17.50 (b)(1) (Consumers who can show the company acted “knowingly” can recover up to three times the amount of their economic damages). Additionally, in the product liability context, consumer fraud class actions can provide a viable claim in cases where a plaintiff has not suffered much, if any, personal or property injury. In fact, if a plaintiff decides not to pursue recovery for personal injuries, a consumer fraud class action might be superior to a product defect case where the individual nature of injuries can otherwise make class certification more difficult.
Class actions have other advantages. By consolidating cases, plaintiffs can reduce litigation costs, which allows them to pursue claims that otherwise would not be financially viable. Moreover, in cases where the only property damage is to the product itself, plaintiffs may try to use statutory consumer fraud claims to avoid application of the economic loss doctrine to deny the claim. Increased access to public information makes it easier to find commonly situated plaintiffs or alleged defects that affect large groups of people. For example, the Consumer Product Safety Commission (CPSC) publishes recall information on the internet that is available to everyone. See www.cpsc.gov/en/recalls/. Federal regulatory bodies, such as the National Highway Traffic Safety Administration (NHTSA) and the Food and Drug Administration (FDA), have issued increasingly frequent warning letters that may form the basis for later lawsuits. See, e.g., James Muehlberger, Jennifer Stevenson and Madeleine McDonough, The Rise of Consumer Fraud Class Action Lawsuits Against Cosmetic Companies and Tips for Defending Them, Who’s Who Legal (June 2015) (discussing that warning letters issued by the FDA to cosmetics companies that targeted the labeling and marketing of certain products were partly responsible for the uptick in consumer fraud class action lawsuits).
Luckily, defense counsel can employ several methods to uncover the true nature of disguised product liability claims.
Ways to Defend Consumer Class Action Claims
When faced with a consumer fraud class action for that appears to be a traditional product liability claim, defense counsel should consider the following issues:
Are you in a state that has a product liability statute and, if so, is the claim cognizable under that statute?
As an initial step, defense counsel should see whether the law of the controlling jurisdiction has a product liability statute — and, if so, whether that statute calls for the dismissal of the claim. For example, in New Jersey, courts have attempted to curtail claims brought under the New Jersey Consumer Fraud Act that are premised on traditional product liability risks. The New Jersey legislature enacted the Product Liability Act (PLA) over twenty (20) years ago to provide a single statutory theory of recovery for any and all claims of harm caused by a product. N.J.S.A. 2A: 58C-1, et seq. As expected, since the passage of the PLA, New Jersey courts have dismissed product liability claims based on common law theories, including strict liability, negligence, fraud, and even conspiracy. See Brown v. Philip Morris, Inc., 228 F.Supp.2d 506, 516 (D.N.J 2002).
More challenging was the question of how courts would deal with claims alleging product defects under the New Jersey Consumer Fraud Act (CFA). N.J.S.A. 56:8-1 to -20. Of course, claimants prefer to sue for violations of the CFA because that statute, unlike the PLA, affords treble damages and the recovery of attorney fees. N.J.S.A. 56:8-19. Plaintiffs have repeatedly used the CFA to assert class claims by arguing that an entire class has suffered the diminution of value of a product based on a defect. In response, courts “tend to look at the essence of the claims and decide whether or not the plaintiff is disguising what would traditionally be considered a products liability claim as an alternative cause of action.” Specifically, “if the facts of a case suggest that the claim is about defective manufacture, flawed product design, or failure to give an adequate warning, then the PLA governs and the other claims are subsumed.” New Hope Pipe Liners, LLC v. Composites One, LLC, 2009 WL 4282644 at *2 (D.N.J. 2009).
The courts have remained consistent with this position even in cases where plaintiffs have specifically limited their claims to economic damages under the CFA. In O’Donnell v. Kraft Foods, Inc., 2010 WL 1050139 (D.N.J 2010), the United States District Court for the District of New Jersey dismissed a class action that alleged only a violation of the CFA predicated upon increased cancer risks caused by certain processed meat products. The Court held that plaintiff ’s claim fell squarely within the scope of the PLA, and thus could not be pursued under the CFA even where plaintiff limited her claims to solely economic losses. Id. The bottom line, even in cases where the class claims are based on the CFA, is that New Jersey courts will look beyond the pleadings to determine the “essential nature” of underlying claims.
These same arguments should be considered in other states with competing consumer fraud and product liability acts. For example, Connecticut’s product liability statute has been interpreted as providing the exclusive remedy for a party seeking damages for injuries caused by product defect. See, e.g., Hayes ex rel. Estate of Hayes v. Invigorate Int’l, Inc., 2004 WL 2203732 (E.D. Pa. 2004) (The Court recognized that plaintiff ’s unfair trade practices claim was “a product liability act claim dressed in the robes of [unfair trade practices]” and held that the UTPA claim was barred by the exclusivity provision of Connecticut’s Product Liability Act. Id. at *6).
Has a product recall already been issued that arguably prevents a plaintiff from satisfying the public benefit requirement?
Many consumer protection statutes limit and/or establish certain prerequisites for a private cause of action. For example, Minnesota’s Private Attorney General Statute permits a private cause of action based on state consumer fraud statutes. Minn. Stat. Ann. §8.31, Subd. (3a). However, in order to state a private cause of action, the action must confer a benefit upon the general public rather than solely upon the plaintiff. “[T]he Private AG Statute applies only to those claimants who demonstrate that their cause of action benefits the public.” Ly v. Nystrom, 615 N.W.2d 302, 314 (Minn. 2000); see also ADT Security Services, Inc. v. Swenson, 687 F.Supp.2d 884, 891-892 (D. Minn. 2009) (applying public benefits requirement of the Private Attorney General Statute to plaintiff’s consumer protection claims under Minnesota’s Unfair Trade Practices Act and Consumer Fraud Act); Select Comfort Corp. v. Tempur Sealy Intern., Inc., 11 F.Supp.3d 933, 937 (D. Minn. 2014).
Even when a complaint alleges a public benefit, the totality of the facts presented in the case can undermine such a claim. In addressing plain- tiff ’s claim for injunctive relief, one Court held that an action which addresses only past acts does not confer a public benefit. See Milavetz, Gallop & Milavetz, P.A. v. Wells Fargo Bank, N.A., 2012 WL 4058065 at *6 (D. Minn. 2012), report and recommendation adopted, 2012 WL 4056715 (D. Minn. 2012). Other Courts have held that, in cases where a recall has already been issued, a plaintiff cannot satisfy the public benefit requirement because the claim seeks only compensation for past acts.
Does plaintiff lack standing to assert a claim on either an individual or class basis on the grounds that no compensable injury has occurred?
Injury resulting from allegedly misleading conduct is a prerequisite to any statutory or consumer fraud claim. No claim is allowed where a plaintiff has not incurred any financial loss or suffered any injury. In a case where only economic damages are asserted, if a recall has already offered a repair or replacement of products free of charge, then the consumer has not suffered any damages.
The Minnesota Court of Appeals addressed this issue in Wilson v. Polaris Industries, Inc., 1998 WL 779033 (Minn.Ct.App. 1998). In Wilson, the plaintiff ’s alleged damages included certain economic damages arising out of the costs and expenses associated with the inspection, repair, and replacement of product defects. Although Polaris had not undertaken a formal recall, it had developed a retrofit kit to address the alleged defect, notified customers individually and through dealers about the availability of the kit, and installed the kit at no cost to the customer. The named plaintiff had not obtained the retrofit kit. Even so, the Court of Appeals held that the plaintiff had not demonstrated actual or economic damages and refused plaintiff ’s request for injunctive relief: “On this record, it appears respondent promptly attempted to remedy this design problem in a new product. That defect — now fixed — cannot be a basis for a legal action against the manufacturer by a plaintiff who simply seeks to act as a private attorney general or Consumer Products Safety Commission.” Id. at *3.
Is the plaintiff prohibited from making a claim for injunctive relief?
In cases where there is no financial or personal injury, a plaintiff may attempt to make a claim for injunctive relief. In a private cause of action for violation of a state’s consumer protection statutes, a plaintiff ’s entitlement to equitable injunctive relief typically requires a showing of irreparable injury or harm. Buetow v. A.L.S. Enterprises, Inc., 650 F.3d 1178 (8th Cir. 2011). Moreover, no injunction may issue under consumer protection statutes when the offending party represents that allegedly wrongful conduct will not be repeated. See LensCrafters, Inc. v. Vision World, Inc., 943 F.Supp. 1481, 1497 (D. Minn. 1996). In Wilson, supra., the Court addressed this precise issue and held that injunctive relief was not warranted when the defendant promptly undertook to remedy the design problem and notified consumers of its offer to install a retrofit. 1998 WL 779033 at *3. Defendants should be prepared to argue that the presence of a recall defeats the requirement of irreparable injury and obviates the need for equitable injunctive relief.
Finally, in claims involving purely economic damages, money spent to buy the product is not an injury sufficient to confer standing. See Grawitch v. Charter Communications, Inc., 750 F.3d 956, 960-61 (8th Cir. 2014) (applying Missouri law, the Eighth Circuit affirmed the lower court’s dismissal of class claims for failure to prove pecuniary loss); Mikhlin v. Johnson & Johnson, 2014 WL 6084004 at *3 (E.D. Mo. 2014) (granting motion to dismiss for failure to allege injury or ascertainable loss where the alleged loss was purchase price of allegedly defective product).
Has the fraud claim been pleaded with particularity?
Rule 9(b) of the Federal Rules of Civil Procedure requires that “[i] n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” State consumer fraud claims, whether based in statute or common law, create a cause of action that sounds in fraud, and Rule 9(b)’s heightened pleading standard therefore applies. Kinetic Co. v. Medtronic, Inc., 672 F.Supp.2d 933, 944-945 (D. Minn. 2009); Tuttle v. Lorillard Tobacco Co., 118 F.Supp.2d 954, 963 (D. Minn. 2000); Baker v. Best Buy Stores, LP, 812 N.W.2d 177, 183 (Minn.Ct.App. 2012). “Particularity” as applied to fraud requires that a plaintiff identify who, what, where, when, and how. U.S. ex. rel. Costner v. U.S., 317 F.3d 883, 888, reh’g and reh’g en banc denied (8th Cir. 2003). When defending a class action case based on consumer fraud, the complaint often can be attacked by identifying where the plaintiff ’s complaint fails to allege, with particularity, the “who, what, where, when and how.”
Are the allegedly misleading statements or claims merely puffery?
The first element of a statutory or common law consumer fraud claim is that a statement is false and made in a way that is misleading to the public. A commercial product seller is afforded some latitude to promote its goods to the public. Both the law and the reasonable consumer expect and understand that marketing can reasonably include laudatory and even hyperbolic claims about a product. Praising the product, especially in broad and vague language, is considered “puffery” and is not actionable under consumer protection statutes. LensCrafters, 943 F.Supp. at 1489. Also, a positive statement that does not reference any specific standard of comparison or make any specific promise is mere puffery and not actionable. Bernstein v. Extendicare Health Services, Inc., 607 F.Supp.2d 1027, 1032 (D. Minn. 2009).
Product claims violate consumer protection statutes only if the statements of fact about specific, absolute, and definitive characteristics of the product are demonstrably false. Id.; see also Semanko v. Minnesota Mut. Life Ins. Co., 168 F.Supp.2d 997, 1000 (D. Minn. 2011)(Plaintiff ’s consumer fraud claims failed because plaintiff did not present evidence of actual misrepresentation. Specifically, plaintiff could not recall the specific content of the alleged misrepresentations or the circumstances under which the alleged misrepresentations were made). Prohibited statements include, for instance, measurable claims of superiority to other products based on testing. United Industries. Corp. v. Clorox Co., 140 F.3d 1175, 1180 (8th Cir. 1998). Because the issue of whether a statement is false, misleading or mere “puffery” is an issue of law, it is an appropriate basis for a motion to dismiss. See Browe, 2015 WL 3915868 at *6; LensCrafters, 943 F.Supp. at 1489.
Statements that qualify as puffery are almost axiomatically incapable of being proved false. Therefore, they do not satisfy the first element of a consumer fraud claim. In Browe, the Court concluded that the statements about a car seat—“[e]asy to get your child in and out of the seat” and “makes getting your child in and out a breeze”—did not provide the requisite degree of specificity to make the statement actionable. 2015 WL 3915868 at *6. Similarly, in Buetow, supra., a case which involved allegedly false marketing of “odor eliminating” hunting clothing, the Court distinguished between “puffery” and actionable false statements about a product. The plaintiff asserted that defendant’s use of the word “elimination” in advertisements required complete blockage of all scent, which the clothing allegedly did not accomplish. The Eighth Circuit held, however, that it was doubtful that any buyer would be so scientifically unsophisticated as to believe that any product could eliminate every molecule of human odor. 650 F.3d at 1186-87 (discussing doctrine of literal falsity under Lanham Act).
Are warranty claims barred?
Frequently, plaintiffs include breach of warranty claims, including claims under the Magnuson-Moss Warranty Act. 15 U.S.C.A. § 2301 et seq. In defending breach of warranty claims, it is important to consider whether the product materials circumscribe or exclude particular warranties. See Browe, 2015 WL 3915868 at *2-3. Moreover, the Magnuson-Moss Warranty Act does not create new warranty obligations. Instead, it merely provides “a federal cause of action for state law express and implied warranty claims.” As a result, if state warranty claims fail, the federal warranty claims under Magnuson- Moss necessarily fail as well. Id. at *5; see also In re Toyota Motor Corp. Unintended Acceleration Marketing, Sales Practices and Products Liability Litigation, 754 F.Supp.2d 1145, 1188 (C.D. Cal. 2010) (claims pursuant to the Magnuson-Moss Warranty Act are dependent upon state law warranty claims); IWOI, LLC v. Monaco Coach Corp., 581 F.Supp.2d 994, 999 (N.D. Ill. 2008) (“The Act does not create implied warranties, but instead confers federal court jurisdiction for state law breach of implied warranty claims”).
Are the consumer fraud claims appropriate for class treatment?
Class action claims based on consumer protection statutes are immediately and inherently suspect. In order to have standing, a representative plaintiff in a consumer fraud class action must have purchased and/or used the same product as the rest of the class. See Lieberson v. Johnson & Johnson Consumer Co., Inc., 865 F.Supp.2d 529, 537 (D.N.J. 2011) (Court held that plaintiff did not establish standing to pursue claims about products she neither purchased nor used). A federal district court in Minnesota applied this principal to partially dismiss class action allegations in Chin v. General Mills, Inc., 2013 WL 2420455 (D. Minn. 2013), a case involving allegedly misleading marketing claims about granola and protein bars. The Chin complaint identified a purported class of purchasers of five specific products (Protein Chewy Bars, Chewy Trail Mix Granola Bars, Yogurt Chewy Granola Bars, Sweet & Salty Nut Granola Bars, and Granola Thins). However, the allegations also indicated that the two named plaintiffs had only purchased three of the five enumerated products. The Court determined that all of the claims based on the two products which the represented plaintiffs did not purchase must be dismissed as a matter of law. 2013 WL 2420455 at *3-4. A plaintiff may assert that the allegedly defective component of various models is the same or that the same or similar marketing representations were made for various models. For example, in Chin, all five types of the granola and protein bars at issue were Nature Valley products made and sold by the defendant, and the defendant allegedly marketed all of its Nature Valley line as “100% natural” (the allegedly false claim). Id. at *1. Nevertheless, the Court dismissed all claims based on “models” within the Nature Valley line that the named plaintiffs did not buy.
