Consumer Fraud

Citizens in the United States are, unfortunately, awash in a sea of deceptive and unfair business practices defrauding them of hundreds of millions if not billions of dollars annually. A 2014 FTC publication put the total annual loss figure at 1.6 billion. Other sources estimate greater losses. The Financial Fraud Research Center of Stanford University published a report in 2013 entitled “The Scope of the Problem,” that begins as follows: “[w]ith billions of dollars in losses impacting an estimated tens of millions of victims, fraud is a major problem. . . .” The Federal Trade Commission or FTC characterizes the problem in similar terms in its “Consumer Fraud in the United States 2011, The Third FTC Survey.” This publication discusses the types of fraud or deceptive consumer tactics most frequently reported to the FTC, including fraudulent weight-loss products, fraudulent prize promotions, being billed for a buyer’s club members that one had not agreed to purchase, being billed for internet services that one had not agreed to purchase, and fraudulent work-at-home programs. These are only a small fraction of the types of fraud and deceptive practices targeting consumers, from securities and stock fraud, to business opportunity and franchise fraud, to home loan practices, to hidden credit card and bank charges, and more. It may be said, and has been said, that the type and variety of fraudulent, misleading, and unfair business and commercial practices are only limited by human ingenuity, which is to say they are without limit.

There are both common law claims and statutory claims which can be brought in response to fraudulent and deceptive practices. Common law claims include common law fraud and breach of contract. Common law fraud or misrepresentation typically requires a false statement of fact, made by a defendant knowing it to be false (or sometimes simply making it without a reasonable grounds for believing it to be true), with the intent that it be relied upon by a plaintiff, and reasonable reliance by the plaintiff causing harm or loss. False promises may also be the basis for consumer fraud claims.

In addition to such common law claims, there are numerous statutes which prohibit unlawful, deceptive, or unfair business practices. These include federal and state laws against stock fraud, franchise fraud, and deceptive and misleading representations in various businesses and professions. They also include laws to capture and outlaw new and creative schemes to defraud and mislead consumers. One such law is California Business Code sections 17200 and 17500.

Section 17200, which is sometimes called the “Little FTC Act,” outlaws three general types of conduct in the following terms: “[a]s used in this chapter, unfair competition shall mean and include any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 [starting with section 17500 of the Business and Professions Code].”

Section 17500 in turn outlaw a number of business practices, such as the failure of door to door salesmen to identify or conduct themselves in certain ways, misrepresentations about “former” prices, misrepresentations about products based on supposed “clinical evidence,” misrepresentations by merchants that they are “producers” or have a similar relationship to a product, and the failure of merchants to identify in advertisements that quantities are limited, to sell products advertised as available, to specify that certain goods are sold in multiple units, to specify that the purchase or lease of one product or service requires the purchase or lease of another, and numerous other practices concerning “consumer products” or services that the California State Legislature has determined to be deceptive or unfair per se.

A violation of section 17200 may be based on the violation of specific statutes outlawing behavior engaged by the defendant. Almost any state, federal, or local law can serve as a basis for an action under Section 17200. Alternately, 17200 is violated where the defendant has engaged in deceptive advertising or activities which are “likely to deceive the public.”

Section 17200 also prohibits “unfair” business practice. Put in others terms, section 17200 prohibits deceptive or unfair practices even if they are not unlawful per se. The independent “unfairness” prong of Section 17200 is intentionally broad, in order to empower courts to strike down new schemes to defraud. The test of “unfairness” here requires an examination of the practice’s impact on the alleged victim balanced against the reasons, justification and motive of the alleged wrongdoer. The court weights the utility of the defendant’s conduct against the gravity of the harm to the victim. An unfair business practice is found where the practice offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.

Class Actions

Class actions are procedural devices that allow persons whose claims are too small to be brought individually, to bring claims on behalf of themselves and other similarly situated persons who have been defrauded or harmed by the substantially similar conduct of a defendant. Section 382 of the California Code of Civil Procedure states in material part that “when the question is one of common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue for the benefit of all.”

Generally speaking, there is a numerosity requirement that must be met to proceed with a class action: that there are a sufficient number of individual claims to make the class action device the superior mode of adjudication of the claims. There must also be a common question of law or fact sufficiently pervasive to allow for a common resolution of claims. Similarly, the class plaintiff or representative most have a claim substantially similar to and representative of class members claims.

Class actions perform an important function in the American justice system. Unscrupulous corporations and businesses often defraud and cheat consumers out of small amounts of money. Consumers in such cases typically do not have a sufficient capacity or interest to bring suit or otherwise protect their rights. Class actions allow consumers to protect their rights in such instances, to recover the ill-gotten gains of unscrupulous corporations and businesses and, equally importantly, to stop the fraudulent, deceptive, and unfair practices of these entities in the future.