Will the Supreme Court invent a federal law to gut state consumer protection laws?

Posted on: September 14th, 2010 by Steve Larson
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As mentioned in an earlier post on this blog, the U.S. Supreme Court will soon consider whether companies can ban class action lawsuits in the fine print of their contracts with consumers when it hears argument in AT&T Mobility v. Concepcion.  In its briefs, AT&T Mobility (“AT&T”) asks the Supreme Court to, in effect, create a federal law to gut state consumer protection laws.

AT&T knows that there have been many times over the years where it, and other cell phone and long distance phone companies, have been caught overcharging or otherwise cheating large numbers of consumers in ways that only involve a small amount of money for the individual consumer but which add up to many millions of dollars for the consumers combined.  In lots of cases in the past, consumers have filed class actions against AT&T and other phone companies under state consumer protection acts that stopped the illegal behavior for all of the customers, and won refunds for all of the customers.

Many courts around the U.S. have struck down AT&T’s “class action ban” under a basic rule of contract law that corporations can’t stick terms into their standard form contracts that strip consumers or employees of their rights under consumer and civil rights statutes.  But AT&T now is arguing to the Supreme Court that a federal statute that says that courts should generally enforce arbitration agreements “preempts” (wipes away, overrides) the state laws that dozens of courts have used to strike down class action bans.

The rule of law that AT&T wants would undermine the purpose and effectiveness of important state consumer protection statutes.  Some background about state consumer protection statutes might assist the reader in understanding why this is so.

By the late 1960s, it had become clear that unscrupulous corporations could get away with ripping off large numbers of consumers – and get an unfair leg up on their more honest competitors.  In the early 1970s, with the support of the Nixon Administration, Congress passed legislation that created the Federal Trade Commission and created the first federal prohibition on unfair and deceptive practices.  In passing the FTC Act, though, Congress made one enormous compromise that sharply limited the effectiveness of the new statute – it did not create a private right of action. In other words, if a consumer is cheated by a company, the consumer cannot bring a case under federal law.

The only remedy available to such a consumer under federal law is to write a letter of complaint to the FTC.  The FTC is a fantastic agency, particularly under its current leadership.  Even with the strongest leadership that the agency has had in a generation, though, the FTC is a very small agency when measured against the amount of fraud that’s going on in America today.  The FTC does not have nearly enough people to investigate (much less effectively address) the vast majority of scams going on out there.

To fill these gaps, states began to pass their own “mini-FTC Acts.”  They go by various names: “Consumer Protection Acts”; “Deceptive Trade Practice Acts”; or, in Oregon, the Unlawful Trade Practices Act (“UTPA”).  These statutes have two things in common:

1.  They are aimed at preventing deceptive and unfair behavior.  If a corporation makes big promises in its advertising and its packaging and solicitations that a good or service has certain qualities and it really does not have those qualities, then the big statements are deceptive even if the truth is buried in the fine print. So these statutes generally make bait-and-switch practices illegal.

2.  These statutes create a private right of action for consumers who are targeted by deceptive or unfair practices and lose money or are injured as a result of them, in addition to permitting enforcement by state attorney generals. This private right of action enables one harmed consumer to bring a lawsuit on behalf of not just him or herself, but everyone else who was victimized in the same way.

Like the FTC and other federal agencies, state attorney generals face serious resource constraints.  Even in a state with a robust consumer protection department in its attorney general’s office, the normal situation is that a relative handful of hard-working superb lawyers must prioritize among literally thousands of consumer complaints.  Staff limitations make it impossible for state attorney generals’ offices to do much with the vast majority of scams in their states.

The upshot is that direct lawsuits by consumers themselves is central to the enforcement of consumer protection laws. There are lots of consumer cases – particularly involving larger amounts of money per person – that can be handled on an individual basis, with a single consumer bringing a case just for her or his own personal claims.  But there are many other scams where consumers will never have a remedy, and the illegal behavior will never be stopped, unless consumers can join together and bring a class action.

Put another way, class actions aren’t always necessary for consumer protection, but sometimes they are the only realistic way that consumer protection laws can be enforced.  As a result, if AT&T wins a ruling that lets it always ban consumer class actions, that will undermine consumer protection laws in a great many cases.  From AT&T’s standpoint, the class action ban is the whole game.  If AT&T can get the Supreme Court to re-write the Federal Arbitration Act to protect it from its customers, AT&T would be very happy.  This is NOT the way state consumer protection laws work, however.  The point of these statutes is two-fold:  (a) prevent, deter and stop deceptive practices in general;  and (b) get refunds or other compensation for ALL cheated consumers, not just a few squeaky wheels.

Put another way, if AT&T wins the ruling it seeks before the Supreme Court, in lots of cases (the cases where it’s either a class action or nothing), the Supreme Court will give corporations the complete power to undermine and gut the consumer protection laws.

The majority of state consumer protection laws were enacted not simply to enable individual consumers to obtain redress in isolation, but rather to protect the consuming public at large.  For example, the Oregon Supreme Court has held that the cause-of-action provided by the Oregon UTPA is  “designed to encourage private enforcement of the prescribed standards of trade and commerce in aid of the act’s public policies as much as to provide relief to the injured party.” Weigel v. Ron Tonkin Chevrolet Co., 690 P. 2d 488, 493 (Or. 1984).

AT&T wants the U.S. Supreme Court to invent law that would gut state consumer protection statutes for a lot of different types of deceptive and unfair practices.  This is not only bad law, but terrible policy.  These state laws are often the only thing standing between us as consumers and deceptive, dishonest, predatory scams by businesses.  In Concepcion, the corporate defense community is hoping that the Supreme Court will invent a new rule of federal law that will effectively guarantee that corporations can cheat 99% of consumers with impunity (and realistically, immunity towards those consumers).  I bet that a majority of the Supreme Court will reject this radical idea.

But no one knows, and I don’t know anyone who has gotten rich predicting what the Supreme Court will do in any case. If the corporate world gets its fondest wish, however, consumer law will be devastated.