Recently-proposed law will erode Minnesotans’ ability to bring class actions for consumer fraud

A bill was recently introduced in the Minnesota Legislature that seeks to make it more difficult for consumers to bring class action lawsuits against companies that engage in deceptive practices and fraud. A class action, of course, is a way for individual consumers to join together to fight back against wrongdoing by large corporations. Most individual consumer fraud claims involve a very small amount of damages, often only hundreds of dollars, if that. Very few people will take the trouble to bring a lawsuit over such a small amount of money and even fewer lawyers would be willing to handle such a case. But in a class action lawsuit, all of the consumers affected by the corporation’s illegal conduct can band together as a class and sue the corporation collectively. So say there’s 1,000 people in the class, and each class member has damages of $100. Well, the potential damages in that case could be up to a million dollars. Because of the potential for significant damages, a class action lawsuit can serve as a important deterrent against widespread wrongdoing.

The proposed bill, as it’s currently worded, makes three significant changes to existing Minnesota law. First, each individual member of the class action must prove that she relied on the deceptive act in buying the product or service. Second, the bill limits damages only to “out-of-pocket” losses, which are defined as the difference between the amount the consumer paid for the product and the amount it’s actually worth. Finally, the bill allows the defendant to appeal a court’s decision to certify the class, which will stop the case indefinitely while the appeal plays out.

At first glance, these changes may seem insignificant, or even commonsensical. But consider this hypothetical: a local Minnesota clothing company introduces a new winter coat. Despite being the warmest and most stylish winter coat on the market, initial sales are sluggish. So the company comes up with a brilliant new marketing strategy: they’ll put a tag on each coat that says “Made in Minnesota.” They don’t make any other changes to the coat. The price is exactly the same, it’s carried in the exact sames stores and catalogs, it’s advertised the same way, etc. The only thing different is the “Made in Minnesota” tag. Since we Minnesotans tend to be pretty provincial, sales go through the roof. Hundreds of thousands of Minnesotans rush out to buy the coat, proud to support a Minnesota company that, in the age of globalization, makes its products here in Minnesota. But what the company doesn’t tell people is that the coat isn’t really made in Minnesota, it’s made in China. A few people find out about this and are justifiably pissed off. So they hire a lawyer and start a class action lawsuit against company for consumer fraud on behalf of all the Minnesotans who bought the coat because of company’s misrepresentation.

Under existing Minnesota law, the class members would have to prove that they relied on the coat company’s misrepresentation when they purchased the coat. How would they do this? They may be able to offer a market study of the sales of the coat before the “Made in Minnesota” tag was added and sales of it after. The study would show that the spike in sales occurred right after the tag was added to the coat and that, other than falsely representing that the coat was made in Minnesota, the product didn’t change in any way (obviously, I’m simplifying this a bit, but you get the point). A reasonable jury could very well find that this evidence showed that the consumers that purchased the coat after the tag was added only did so because of the false tag. In fact, this is how many consumer class actions work. The class proves reliance through some form of evidence other than requiring each individual class member to prove that they relied on the misrepresentation.

But the bill working its way through the Legislature seeks to change this standard. The bill would require that each individual class member has to prove that they relied on the misrepresentation or the suit couldn’t go forward. In a large class action, like the one in my hypothetical, it would be extremely unwieldy–and probably impossible–to prove each of the hundreds of thousands of individuals in the class relied on the misrepresentation.

And even if the suit could go forward, the defendant corporation would be able to stall the lawsuit for a long time by filing an appeal of the court’s decision to grant the consumers class status. Under the bill, an interlocutory appeal stops the litigation while the appeal process plays out, which could be several years. And even if the class stuck together during this potentially lengthy delay and won at trial, the consumers in my hypothetical wouldn’t be entitled to any damages. Remember, as the bill is worded, damages can only be recovered if the consumers prove that the they paid more for the product than it was actually worth. In my hypothetical, there probably isn’t any difference between what the coat is worth with the “Made in Minnesota” tag and without the tag. Other than the tag, it’s the exact same product. But the existence of the tag unjustly inflated the coat company’s profits because its blatantly false “Made in Minnesota” claim induced hundreds of thousands of Minnesotans to buy it. But instead of having to answer financially for their unethical marketing ploy, under the new bill the coat company would get off scot-free.

So while the proposed bill is seemingly innocuous, it basically neuters any ability to bring a class action for consumer fraud. First, it makes it extremely difficult to prove that the class relied on the misrepresentation. And even if the class can clear this first hurdle, the bill makes it very difficult to obtain meaningful damages. It’s the “heads I win, tails you lose” approach. Nothing is left to chance. It’s not enough that big businesses have unrivaled wealth and political power, they also have to rig one of the only things–consumer class actions–that holds them accountable for wrongdoing. It’s like the New York Yankees playing a Little League team. Only the Yankees also set up the rules so that they can’t lose.

In its current form, the bill essentially gives businesses a license to lie to and cheat Minnesota consumers. It’s possible (hey, anything’s possible) that the proposed bill is just poorly-considered and that the harmful consumer consequences are lost on its sponsors. But I suspect that the people behind this bill know exactly what they’re doing.

(Photo: http://www.flickr.com/photos/amishsteve/81545643/)