Fall term preview

The spring 2011 term of the Supreme Court included several major rulings that limited consumer rights. The grants and denials of certiorari indicate that consumer rights will continue to be impacted when the Court begins oral arguments in October.

Likely building on the Court's recent decision in Brown v. Entertainment Merchants Assn., in which the Court struck down a California law that outlawed sale of violent video games directly to minors, the Court will review in Federal Communications Commission v. Fox Television Stations whether the current indecency enforcement regime that limits profanity and nudity on television during times when children are most likely to watch violates the First or Fifth Amendment to the Constitution.

In Mims v. Arrow Financial Services the Court will decided whether federal courts have jurisdiction over private causes of action under the Telephone Consumer Protection Act. The statute, which created the national "do not call list," contains an unusual provision that states such cases should generally be brought in state court.

Another case will impact consumer rights by not being heard. The Court has denied to review Philip Morris USA, et al., v. Jackson, a class action case against tobacco companies by smokers. In September, Justice Scalia had entered an order issued blocking enforcement of the judgement, a $241 million anti-smoking program funded by cigarrette producers. The case had been on hold pending the Court's ruling in Dukes v. Wal-Mart. After the decision, the tobacco companies made a new plea to the Court to resolve the Constitutional issues common to both cases. By denying cert, however, the Court seems to have at least declined to do further damage to the class action process in the upcoming term.

CA Supreme Court Limits Collateral Source Rule

Last August, the Supreme Court of California limited the ability of Californian's to recover economic damages in certain instances where their insurance company has negotiated down their medical expenses. Since the 19th century, California courts have allowed plaintiffs to recover the full value of their injuries even if part of their economic costs were offset by insurance or other such contributions. At the trial level, this principle is implemented by an evidentiary standard called the collateral source rule, that makes inadmissible any evidence about receipt of insurance and other compensation.

On August 18, 2011, the California Supreme Court dealt a serious blow to the collateral source rule in its ruling in Howell v. Hamilton Meats & Provisions, a ruling the effect of which will likely be measured in the billions of dollars. In 2005 Rebecca Howell was seriously injured in an automobile accident negligently caused by a driver for Hamilton Meats & Provisions, Inc. At trial, Hamilton admitted liability, but only contested the amount of Howell's damages. After two surgeries on her spine, Howell medical bill was close to $200,000. PacifiCare, Howell's health insurance provider, negotiated that amount down to $60,000. The trial court reduced the amount of Howell's economic damages to the lower amount. Howell appealed and, citing the collateral source rule, California's Fourth District Court of Appeal restored the original amount. In August, however, the California Supreme Court reversed the appellate court, holding that the full amount of the medical bill would never have been collectable from Howell and therefore it cannot be recovered by her as economic damages.

Consumer Attorneys of California President John Montevideo called the decision a victory for big businesses and insurance over consumers and ordinary people. For more than a hundred years, Rebecca Howell would have been able to recover the full cost of her medical expenses, if awarded by a jury, despite the fact that she was thoughtful enough to carry insurance against the risk. As a matter of policy, it's not clear that the ability of an insurance company to use its size and power to settle medical bills at a lower amount should reduce the damages awarded to a victim of negligence. It's also not clear that creating an incentive for them to do so benefits society at large because medical care providers are less likely to receive full payment. Instead, the Court's ruling favors negligent parties and insurance companies at the expense of the injured and their doctors. Most importantly, this ruling is not limited to victims of automobile accidents, but would likely affect the recovery of any consumer injured by a defective product.

"Fraudclosure" takes on new dimensions

Two Assistant Attorneys General for the state of Florida have been forced to resign after conducting more than a year-long investigation into fraud associated with bank foreclosures on mortgaged homes. No explanation has been given for the termination of lawyers Theresa Edwards and June Clarkson, and the two say they were told to quit or be fired. The two had spent more than a year investigating foreclosure fraud by banks and loan servicers on behalf of the Florida Attorney General's office, but during that time Republican Rick Scott was elected governor and he replaced the Attorney General who had commissioned the investigations.

The re-selling of mortgages that nearly triggered a collapse of the entire world financial system in 2008 also suffered from a fundamental weakness based on the way real estate records are kept. The Mortgage Electronic Registration System, or MERS, was created by the banking industry to streamline the transfer of mortages as debt instruments. As part of this process, MERS is listed as the owner of mortgages, no matter who actually buys or sells the asset. This creates a problem, however, when mortgages are bundled and sold in parts: when the owner of those assets tries to foreclose on the property they might not have an adequate paper trail to show that they're entitled to foreclose.

In the face of this obstacle, a wide variety of banks and other businesses have attempted to intimidate homeowners into surrendering their property and, in some case, have actually falsified documents. The practice has been so widespread that it lead to the creation of the term "fraudclosure." It was these practices that Edwards and Clarkson had been investigating for over a year when they were told by their supervisor that they should leave voluntarily or be fired, and their investigations lead them to focus on so-called "foreclosure mills," law firms that forced through foreclosures in record time and banks that took ownership of properties without proper documention.

In the absence of support from governments and courts, some families have been forced to stand up against fraudclosure on their own. Shortly before being forced out, Edwards and Clarkson were recognized by a supervisor as being "instrumental in triggering a nationwide review of such practices." Now their termination is likely to have a chilling effect on other investigations and may lead to more fraudulent foreclosures.

SCOTUS textualists read consumer protection out of drug regulation

By Joseph Nicholson

Continuing the string of victories for massive corporations in the Supreme Court this summer, Justice Thomas published a majority opinion on June 23 that restricts the ability of sick people to sue manufacturers of the generic drugs that made them ill. The Court's majority opinion in Pliva, Inc. v. Mensing admits that it "makes little sense," and yet the conservative textualists of the court value a literal reading of statutes over protecting access to the courts for injured consumers.

Gladys Mensing and Julie Demahy were prescribed Reglan in 2001 and 2002, and their pharmacists filled the prescriptions with generic versions. Both developed a neurological condition called tardive dyskinesia -- now a known side effect of Reglan that was not listed on the warning label for the drug. Unfortunately for Mensing and Demahy, however, they could not sue the manufacturer of Reglan because neither ever actually took that drug. Instead, they were forced to sue the manufacturers of the generics, alleging that they negligently failed to warn them and their doctors of the known side effects of their products. They did so under a Minnesota law that requires drug manufacturers to update warning labels to include newly discovered side effects and health risks. Now the U.S. Supreme Court has said the two cannot even sue the generic drug manufacturers either.

The basis for the Court's decision lies in the regulation of drugs by the FDA, and in particular a rule that requires generic drug makers to place warnings on their products that are identical to those on the name-brand drugs they imitate. Under the new ruling, generic drug manufacturers cannot be sued for failure to warn under state laws even if they knew before they started marketing their product that it had a serious side effect that was not on the warning label . According to Justice Thomas, it would be impossible for a manufacturer of generic drugs to comply with the federal regulation requiring a label identical to the name-brand and also comply with stricter state laws that require updated labeling.

In 2009, the Supreme Court ruled in Wyeth v. Levine that name-brand drug manufacturers could be sued for failure to warn even though the FDA approved their product label. While that decision was viewed as a major victory for consumers, the Supreme Court has now stripped away most of the benefit of that ruling because 75 percent of all prescriptions nationwide are filled with generic pharmaceuticals.

In a dissenting opinion joined by the other four members of the Court, Justice Sotomayor wrote that she could not believe the intent of Congress was to base a person's ability to sue a drug manufacturer on the accident of whether or not their pharmacist filled their prescription with a brand name or generic pharmaceutical. Sotomayor's solution, and one supported by the current administration, would be for the generic manufacturer to notify the FDA and convince it include the new warnings on the brand name label so they could also be included on the generic label.

The opinion reflects a fundamental difference of opinion among members of the court. The majority in Mensing are textualists, meaning that they read the law literally as it is written and rely on Congress or executive agencies to correct mistakes and bad outcomes. Unfortunately, this approach means that the injured parties in the case that inspires the change never receive the compensation or justice they deserve. The dissent, on the other hand, looks to the likely intent of the drafters and renders a decision consistent with that intent. With the change of the Court's composition over time the textualist point of view has more often gained the majority, making it even more important that legislators vigilantly amend laws to restore access to the courts and other important consumer protections.

SCOTUS strikes again

By Joseph Nicholson

For the second time this summer, the Supreme Court of the United States has handed down a decision that weakens consumer protection. Justice Scalia, who also wrote the opinion in Concepcion spoke for the Court in Dukes v. Wal-Mart, the high-profile sex discrimination suit against one of the world's largest retailers. Class actions like the one in Dukes are an important tool for protecting the rights of individual consumers against wealthy and powerful corporations. The case, which may change the rules for certifying class actions in federal court and may represent the outer limit for the court system as a means for social justice, was decided along ideological lines with Justice Kennedy joining the Court's other conservatives to form a 5-4 majority.

The suit began more than ten years ago when Betty Dukes, pictured at left, joined forces with several other female Wal-Mart employees to bring a class action against the company for what they perceived to be a company-wide culture of discrimination. The culture fostered among Wal-Mart managers promotes discriminatory decision-making by store managers when it comes to pay and promotions, the women alleged in their suit. The women argued they should receive backpay to bring them in line with male employees, injunctive relief to change Wal-Mart's discriminatory practices and punitive damages to send a message to other large corporate employers. With more than a million women believed to be affected by Wal-Mart's policies, the case was heralded as the largest class action in U.S. history.

All of that changed on June 20, 2011 when the Supreme Court overturned both the district court and the Ninth Circuit Court of Appeals and ruled that the class decertified. Class actions in federal court are goverened by Rule 23, which imposes four prerequisites to certification. One of these, commonality, became the focus of the Court and the reason the class was decertified. To satisfy commonality, the class as a whole must share an essential issue of fact or law in common. Though the class alleged a single culture of discrimination at Wal-Mart, and provided evidence that sexual discrimination was the most likely cause of the disparate impact amongst Wal-Mart employees, the case should have to proceed with each woman showing how she was discriminated against individually, according to Justice Scalia.

"Title VII, for example, can be violated in many ways—by intentional discrimination, or by hiring and promotion criteria that result in disparate impact, and by the use of these practices on the part of many different superiors in a single company," he wrote. "[T]he mere claim by employees of the same company that they have suffered a Title VII injury, or even a disparateimpact Title VII injury, gives no cause to believe that all their claims can productively be litigated at once."

In a rare display of sloppy language, Scalia converted the "substantial" evidence needed to show a common issue of fact or law from a qualitative showing about the substance of the issue to a quantitative rule imposing a significant burden. Under Scalia's, and now the federal courts' approach, the Dukes class would basically have to prove its claims before it could proceed as a class action.

The ruling left civil rights organizations "deeply disappointed," but determined to continue the struggle for justice. "Equal treatment in the workplace is a civil rights issue," said Arcelia Hurtado, Executive Director of Equal Rights Advocates, an organization devoted to women's equality for nearly 30 years. "Today we may have taken one step back in the court system, but we are confident that we have taken several steps forward in raising awareness about pay inequity and in galvanizing a generation of women who are standing up and saying, Enough is enough! Pay us what we are worth!" Though the class has lost certification, individual claims of discrimination can still go forward according to the Impact Fund, an organization representing the women in the case.

SCOTUS overturns California protection for consumers

By Joseph Nicholson

On April 27 the U.S. Supreme Court issued its decision in AT&T Mobility v. Concepcion, overturning the Ninth Circuit and holding that a rule articulated in a Supreme Court of California case is preempted by the Federal Arbitration Act (FAA). The decision "cuts the heart out of class actions," which are an important mens of enforcing consumer rights, said John Montevideo, President of Consumer Attorneys of California.

“Folks with small claims against big corporations won’t be able to have their grievance heard anywhere," said Montevideo in a press release reacting to the decision on the CAOC website. "And corporations will be able to get away with wrongdoing that is wide in scope, but not individually severe enough to warrant a lawsuit by a single consumer.”

In Concepcion, a group of consumers sued AT&T for for charging them sales tax on cell phones that were advertised as "free." While each individual claim was only about $30, the aggregations of thousands of similar claims made the case worth millions. AT&T sought to compel the Concepcions to arbitration under the provisions of the agreement they'd signed with the cell phone company. A federal district court judge, who was later affirmed by the Ninth Circuit, interpreted California law to render the arbitration clause unenforceable because did not allow for class action arbitration proceedings. A majority of the high court's conservative justices have now ruled the California law is preempted by federal statutes.

An earlier California case, Discover Bank v. Superior Court, had ruled that arbitration clauses are unconscionable when they exempts a responsibility for its fraud or willful injury of another. This decision was frequently cited in California to strike down arbitration clauses that limited consumers' access to courts. The U.S. Supreme Court has now said in Concepcion that state laws, including decisions by state courts, cannot maintain a policy against arbitration and use this as the basis for striking down an arbitration clause.

Importantly, however, the Court left open the possibility that arbitration clauses could be struck down as unconscionable. There is still some uncertainty as to what effect this case will have on the ability of consumers to use the class action device. Whatever its effect, Montevideo views the decision as an example of the federal government overstepping its bounds. "The U.S. Supreme Court is telling us that our way of justice, which favors the rights of the individual over the wrongdoing of corporations, is the wrong way," he said. "They’re forcing upon us a creed that favors business over people, and puts ill-gotten profits ahead of justice." Organizations like the National Association of Consumer Advocates argue that the FAA should be amended to require arbitration agreements be signed after a dispute has arisen.

Shopping Anyone? The Online Sales Tax Debate

By Amanda Stein

If you’ve ever shopped online, you have probably noticed that you can often avoid paying sales tax. So, why should one pay sales tax when purchasing a book in a store, but not when that same purchase is made online? The United States Supreme Court says this result is required to protect interstate commerce.

In Quill v. North Dakota, 504 U.S. 298 (1992), the US Supreme Court struck down North Dakota’s attempt to collect use tax from out-of-state retailers as violation of the “dormant” Commerce Clause. A use tax is a corollary to a sales tax: the sales tax is levied on in-state sales of goods while the use tax is levied on out-of-state sales. The Quill court held that a retailer must be physically present in the taxing state in order for that state to require the retailer to collect use taxes from in-state consumers. Consequently, when consumers’ only contact with online retailers is over the Internet and the online retailer has no physical presence in the taxing state, the state cannot require the online retailer to collect use tax.

The result is that states must rely on individual taxpayers to self-report their use tax liability for goods purchased out of state. Unsurprisingly, compliance is low and it is practically difficult for states to enforce against individuals. Given the significant (and growing) volume of online retail sales, this constitutes a large portion of consumer spending that states’ sales and use taxes are unable to reach.

Despite the seeming clarity of the bright line rule laid down in Quill, courts (including the US Supreme Court) have done a fair job of muddying these waters. In the Quill opinion itself, the Court noted that physical presence means more than a “slight presence” and therefore the presence of “a few floppy diskettes” would not constitute physical presence. Quill, 504 U.S. at 315, fn. 8.

State courts have come to varying conclusions over the degree of physical presence required, especially with regard to in-state visits by the employees of out-of-state companies. In Florida, for example, the temporary presence of an out-of-state company’s executives at various seminars was not sufficient to establish a physical presence of that company in Florida. Florida Dep’t of Revenue v. Share Int’l, 676 So.2d 1362 (Fla. 1996), cert. denied, 519 U.S. 1056 (1997). In contrast, 30 in-state deliveries to Illinois customers over about 2 years was sufficient presence to give Illinois power to tax an out-of-state furniture merchant. Town Crier, Inc. v. Department of Revenue, 315 Ill.App.3d 286, 248 Ill.Dec. 105, 733 N.E.2d 780, 782 (1st Dist. 2000).

Many states have turned to their legislatures to deal with these issues. There is an ongoing legislative battle across the country as states consider bills, which attempt to statutorily define physical presence. The following is a (non-exhaustive) list of states with recently passed or currently pending bills that target online retailers:

• Arizona (HB 2551)

• Arkansas (SB 738) – passed April 1, 2011

• California (SB 234)

• Connecticut (HB 6624)

• Hawaii (SB 1355)

• Illinois (HB 3659) – passed March 10, 2011

• Massachusetts (H01731)

• Minnesota (SF0458)

• Missouri (HB 970)

• New Mexico (HB 102)

• Rhode Island (HB 5115)

• Tennessee (SB 1489)

• Texas (SB 1798)

• Vermont (HB 143)
One common approach is to target out-of-state retailers that use in-state affiliates to generate sales. Several bills would require retailers with in-state affiliates that refer at least $10,000 in sales from in-state purchasers to collect and remit sales tax. Other bills take a more aggressive approach. For example, the California legislature is currently considering Senate Bill 234, which would expand the coverage of California’s sales and use tax statute to the maximum allowable under the federal constitution.

The Stakes

Some argue that these bills are simply a money grab by states. To some extent that is true: every time a government seeks to increase the reach of a tax, the result will be more revenues. However, if the purpose of the sales and use tax is to tax consumption, then there is no theoretical reason why internet sales should be excluded. Whether one buys the book online or in the store, it is still consumption of a book. The current system is unfair because it forces in-state retailers to bear all the burden of sales and use taxes and allows online retailers to escape them completely.

Moreover, it is unclear that this inconsistency is truly protective of our national economy. Quill’s physical presence test is rooted in the dormant commerce clause rationale that states should not burden interstate commerce by protectionist measures. However, the physical presence rule goes beyond protection from local favoritism and gives a huge competitive advantage to online retailers at the expense of in-state retailers. This is the kind of policy decision that Congress should make in its affirmative power to regulate commerce, rather than as an unintended consequence of outdated judicial doctrine.

Some argue that if the online retailer does not have a physical presence in the taxing state, then the state is not providing any services to the retailer, and therefore the state has done nothing to “earn” those sales taxes. This argument misses the mark. The sales and use tax is not a tax on the online retailer; rather, it is a tax on the consumer resident that is located in the taxing jurisdiction. Consumers should not be able to escape paying sales taxes, simply by making their purchases online. The law needs to change in order to accommodate the reality of online commerce. Online retailers should be treated like all other retailers and should not benefit from tax evasion.

Both sides of this debate argue that their preferred rule would better protect business. Clearly, this depends on the type of business and where it is “located.” On the one hand, businesses with physical stores compete with online retailers. Forcing online retailers to collect taxes would level the playing field between them. In this instance then, forcing online retailers to collect use taxes would seem to help some businesses.

On the other hand, forcing online retailers to collect sales and use taxes might be a barrier for some companies to expand their businesses online. Since there are literally thousands of state and local government entities that levy sales taxes across the nation, many argue that it would be prohibitively expensive for small businesses to track the tax rates of these governments and to link them to the proper consumers. However, there are already companies that offer tax compliance services. Many online businesses already use the services like PayPal to complete online transactions. While the cost of sales tax compliance services might be high now, one could fairly expect the price of such services to decrease if the law changed. Moreover, many of the proposed state laws protect small businesses from these administrative burdens by setting thresholds that do not trigger use tax collection obligations until the retailer has sold a certain amount of goods in the state.

Regardless of whether one is in favor of the so-called “internet sales tax” or not, it is clear that Congress should end this bickering in our state courts and legislatures. A clear and cohesive policy would certainly be more beneficial for our national economy.