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Len Watkins
Joshua Genser
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Offices
in Point Richmond and Emeryville
125 Park Place, Suite 210
Point Richmond, CA 94801
Phone: 510-237-6916
Fax: 510-236-9851
2200 Powell Street, Suite 890
The Watergate Office Towers
Emeryville, CA 94608
Phone: 510-237-6916
Fax: 510-236-9851
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Effective
Use of Economics in Consumer Fraud Litigation
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Economists
play an increasing role in litigation. Obviously present
in antitrust and securities cases, economic issues
arise more and more often in consumer fraud, business
tort and even civil rights cases. In this era of judicial
activism, where decisions are often driven by considerations
of public policy, economists may be called upon to
testify to the economic consequences of alternative
rules of law and interpretations of statutes.
Economists may also be used in novel ways. Many legislative actions
and judicial decisions are driven by assumptions about human behavior,
assumptions which can be explicit or implicit. Sometimes, issues
which appear to be questions of law can be addressed as factual ones
by using economists to defend or attack the empirical truth of their
underlying assumptions.
No area of law, at least in California, is more rife with public
policy questions and assumptions about human behavior than consumer
fraud litigation. California has equipped consumers with powerful
weapons to use against actual and perceived abuses by businesses,
the Consumers Legal Remedies Act (Civil Code §1750, et seq.) and
the Unfair Business Practices Act (Business & Professions
Code §17200, et seq.). Both Acts permit individuals to bring actions
on behalf of other consumers, complaining of often vaguely defined
unfair or unlawful business practices. Both Acts equip the Court
with broad equitable powers to fashion appropriate remedies. The
result is, often, substantial uncertainty over whether the subject
business practice is actionable, and what remedies might be imposed
if it is. Whenever there is such uncertainty, the expert testimony
of an economist can be invaluable to either side.
One example of a consumer fraud case in which economic testimony
might have been important is Truta v. Avis Rent-A-Car System, Inc.,
193 Cal.App.3d 802 (1987). In that case, plaintiffs, invoking both
the Consumers Legal Remedies Act and the Unfair Business Practices
Act, sued every major rental car company over Collision Damage Waivers
(CDWs), the optional extra payment sometimes collected from renters
in return for waiver by the rental car company of any liability on
the part of the renter for damage to the car. Plaintiffs alleged,
inter alia, that the CDWs were unconscionable. Demurrers were sustained
by the trial court, and plaintiffs declined to amend. The Court of
Appeal affirmed on all causes of action except the one alleging the
unconscionability of the CDWs.
The Complaint alleged that, "the
price for the CDW is far in excess of a price that would be determined
in a competitive business environment," and, "no competition exists with respect to the insurance provided by each defendant
since each is the sole supplier of the CDW for its own rentals." The Court of Appeal, thus, found that plaintiffs had sufficiently alleged substantive
unconscionability of the contract.
Whether the plaintiffs did, indeed, allege sufficient facts to support
a finding of substantive unconscionability is a potentially important
public policy issue. The Consumers Legal Remedy Act codifies and
relaxes somewhat the traditional requirements for maintaining a class
action (Civil Code §1781), and prohibits a host of "unfair
methods of competition and unfair or deceptive acts or practices." (Civil Code §1770.) Most of the prohibited acts involve misleading advertising,
but also prohibited is "Inserting an unconscionable provision in the contract." (Civil Code §1770(s).) Remedies available include actual damages, restitution,
injunction, punitive damages, and "any other relief which the court deems proper." (Civil Code §1780(a).)
A finding of unconscionability requires that the contract be both
procedurally unconscionable and substantively unconscionable. That
the contract is one of adhesion is usually sufficient for a finding
of procedural unconscionability. Thus, the interesting issue in most
cases involving large businesses, such as the national rental car
companies, is whether the contract is substantively unconscionable.
The Court of Appeal's ruling in Truta could be interpreted to mean
that any price in excess of the competitive price is substantively
unconscionable. If true, then any firm with market power is at risk
of liability under the Consumers Legal Remedy Act, regardless of
whether that market power would be sufficient to expose it to antitrust
liability.
The Court of Appeal made its ruling as a matter of law, based solely
on the pleadings. The parties, facing the potential application of
such a rule to their case, should retain economists to address these
issues.
The Court of Appeal made its ruling as a matter of law, based solely
on the pleadings. The parties, facing the potential application of
such a rule to their case, should retain economists to address these
issues.
The defendants' economist would almost certainly testify that the
very uncertainty created by the rule would be highly detrimental
to economic activity in the State. Innovation would be stifled, because
the reward of innovation is a period of market power and high prices
until competitors match the innovation and bring prices down. In
any market in which there was less than perfect competition, firms
would be constantly at risk of being sued and found to be charging
an unconscionable price. The inability to determine in the abstract
what would be the competitive price would expose firms to what might
be an unacceptable level of risk, discouraging it from doing business
in California.
These risks and costs can be quantified using economists' tools of
econometrics and decision and risk analysis. Econometrics is simply
the name economists give to statistical analysis. Decision and risk
analysis is the application of probabilities to subjective and unquantifiable
outcomes. Quantification of these arguments can transform the debate
from the abstract to the concrete, from a legal issue to a factual
one. This might have been very important to the defendants in Truta,
for the Court of Appeal's ruling had already apparently determined
as a matter of law that the CDWs were unconscionable if priced in
excess of the competitive price. By transforming the issue into a
factual one, the defendants might have been able to re-litigate it
in the trial court.
Even if the trial court refused to re-visit the issue of whether
a super-competitive price, alone, was sufficient to make a contract
unconscionable, the parties certainly needed to litigate whether
the price of the CDW was, indeed, super-competitive. The plaintiffs'
theory was, presumably, that consumers, lured by low advertised rental
rates but ignorant of CDW rates, made reservations and stood in line,
only to discover too late to do anything about it that the CDW prices
were unreasonably high. Under this theory, a firm in an otherwise
competitive market, such as the rental car market, can give itself
market power in an aftermarket, something the consumer must purchase
from the firm once a commitment has been made to begin transacting
with the firm.
There is controversy over whether a competitive firm can exact super-competitive
prices in an aftermarket. Case law in the antitrust context examining
the impact of market power in aftermarket goods (e.g. Eastman Kodak
Co. v. Image Technical Services, Inc., 112 S. Ct. 2072 (1992)) supports
the plaintiffs' position, that sellers of aftermarket goods who can
monopolize that aftermarket can charge super-competitive prices.
However, a very cogent economic case has been made that competition
in the primary market also restrains aftermarket prices (Klein, Market
Power in Aftermarkets, Managerial and Decision Economics, Vol.17,
143-164 (1996)), in which case plaintiffs' theory of the case would
be, simply, untrue.
The defendants' economist might argue that, if a firm is able to
monopolize the aftermarket and charge super-competitive prices, it
would reduce the price in the primary, competitive market, in order
to attract consumers to its aftermarket. Thus, the firm sacrifices
profit from the primary market in order to increase the size of the
aftermarket. Competitive pressure in the primary market forces those
prices down to the point where profits from the aftermarket are offset
by losses in the primary market. The plaintiffs' economist might
reply by pointing to other restraints on competition in the primary
market keeping prices high despite the profit potential from increasing
the aftermarket.
Both economists' positions can be tested empirically, transforming
the debate into more than an academic exercise. For example, if there
are other states which have regulated CDW prices, car rental rates
can be compared from before and after such regulations went into
effect, or with states that have not regulated CDW prices. Such data
is very often available, but must be analyzed carefully in order
to control for extraneous factors, such as differences in overall
price levels between states, the impact of natural disasters on the
data, and inflation.
Because of the extremely broad scope of California's consumer fraud
statutes, issues of Federal preemption seem to crop up frequently.
Where the Federal statute does not expressly preempt state regulation
of the business practice at issue, the question becomes one of public
policy: whether the application of the Federal statute to the business
practice at issue is necessary to further Congress' intent in establishing
the uniform Federal regulation. For example, in Smiley v. Citibank,
116 S.Ct. 1730 (1996), plaintiffs alleged that credit card late fees
were unconscionably high liquidated damages. Defendant's motion for
judgment on the pleadings was granted on the grounds that Federal
law permitted a bank to charge interest at rates permitted either
by the state in which it was doing business or by the state in which
the bank was headquartered. The late charges were expressly legal
under South Dakota law, and late charges were found to be interest
as that term is used in the Federal law. The
dismissal was appealed all the way to the U.S. Supreme Court. Before
the high court could rule, however, the Comptroller of the Currency
issued a regulation which expressly stated that late fees were interest.
The Supreme Court found the statute to be ambiguous, and deferred
to the reasonable judgment of the Comptroller of the statute's interpretation.
Had Smiley not been decided as a matter of law, however, defendant
might have litigated the preemption issue as a matter of fact by
using an economist. That is, an economist could have been employed
to opine that deregulation of late fees is necessary to further Congressional
intent in deregulating interest rates. The economist might have been
able to study banks and bank customers under different regulatory
regimes to prove that late fees are similar to or identical to interest
in terms of how changes in such rates affect behavior. If consumers
respond to changes in late fees in the same manner as they respond
to changes in interest rates, at least with regard to the issues which led Congress to pass the statute in the first place,
then the case for preemption is much stronger than arguing the public
policy issue in a factual vacuum.
Truta and Smiley are but two examples of California consumer fraud
cases in which economic testimony might have played an important
role. Generally, an economist can be valuable in almost any sizable
consumer fraud case. The trick, however, is making the economic theory
accessible to the trier of fact, and elevating the economic evidence
above the level of the academic so that it appears to have relevance
to the real world questions at issue in the case. Presented properly,
it can transform public policy issues into questions of fact, and
provide armor against reversal by higher courts. |
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