Harvard Journal on Legislation Publishes Article on Why Reliance Should be an Essential Element of Consumer Fraud Class Action Suits

The Harvard Journal of Legislation has just published an article by Prof. Sheila B. Scheuerman entitled The Consumer Fraud Class Action: Reining in Abuse by Requiring Plaintiffs to Allege Reliance as an Essential Element, 43 Harv. J. on Legis. 1 (2006), which discusses the need for reliance as an element of consumer fraud class action suits to be considered at certification of the class. Here is an excerpt from the Introduction:

This Article argues that the recent rise in consumer fraud class action lawsuits is tied to the concomitant failure of many state courts to require reliance during class certification. In particular, it contends that the lack of a reliance requirement creates incentives for plaintiffs' attorneys to bring consumer fraud class action suits without ever alleging that the consumers relied on, and hence that they were damaged by, the alleged misrepresentation, all in the hopes of forcing a settlement. The Article also provides a detailed history of the FTC, the subsequent rise in state consumer fraud statutes, and the early failure of both federal and state government agencies to adequately pursue violations of these laws. It then asserts that this failure and the subsequent rise of public law tort theory led state courts to slowly chip away at the element of reliance in a misguided attempt to provide adequate deterrence. However, now that both the FTC and state attorneys general enforce these consumer protection laws with more vigor, the Article concludes that requiring reliance for the resolution of private suits, while not requiring it in cases of public enforcement, creates the correct balance of individual justice and deterrence.

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Recent attempts at reform, such as the Class Action Fairness Act of 2005, which principally addresses the appropriate forum for class litigation and imposes limits on types of settlements, will do little to stem the tide of such suits. Before the Class Action Fairness Act became law, for instance, Yale law professor George Priest explained to President Bush that the bill was "not going to solve the problem." Rather, the solution, according to Priest, required tighter application of the liability standards underlying a proposed class. This Article attempts to fill the gap identified by Professor Priest by offering substantive guidance on how to fix the underlying liability rules in misrepresentation class actions: courts should treat fraud like fraud and require plaintiffs to allege "reliance" as an essential element of a consumer misrepresentation case.

Part I of this Article describes the new "misrepresentation" action and explains why state consumer fraud statutes have become attractive class action vehicles. Part II examines the origins of the misrepresentation class action and describes how the forces that drove the creation of the consumer protection laws in the 1960s still serve as the backdrop for the current interpretation of the private damages action.

Part III examines modern consumer fraud suits brought by the government and contrasts the standards applicable to government suits with those applicable to private actions. It explains how courts have embraced the public purpose of a government suit--deterrence and punishment--in interpreting private consumer fraud statutes and have abandoned the traditional tort requirement of reliance-causation.

Part IV describes the "public tort law" theory that has contributed, in large part, to the abandonment of reliance-causation by state courts. It contrasts "public law" theory with the traditional understanding of the tort system as a means of providing redress and shows how public law theory provides an interpretative foundation for understanding the relaxation of reliance-causation requirements in misrepresentation class action suits.

Finally, Part V argues that the historical forces that led to the creation of the consumer class action--and the "public law" approach to these statutes-- should no longer provide the interpretative framework for misrepresentation cases. Requiring reliance for private suits achieves the proper balance of public and private resources: allowing government agencies to seek restitution and injunctive relief where there is no consumer reliance and letting private litigants seek damages where reliance provides a causal connection between the defendant's conduct and the injury. Part V concludes that reinstating the traditional reliance requirement is an appropriate and simple fix that would restore the balance between public enforcement and private litigation.