find that the costs of litigating her claim are much greater than the $200.00 to $400.00 she might recover. Even if she can organize her neighbors so that they unite with her to share the costs of a court action, it is unlikely that her state permits a group to sue as a class under these circumstances. Since neither Mrs. Smith nor any of her neighbors have individually suffered a $10,000.00 loss, the suit cannot be brought in a Federal court. Therefore, 200 consumers with a combined loss of between $40,000.00 and $80,000.00 are denied a forum within which to litigate their claims.

As the law stands today, the dishonest merchant can calculate the dollar amount by which he can cheat a customer without fear of legal action. As pointed out by Ralph Nader, "The aggregate reward of minor cheats, deceptions and the like can now be planned with slide rule efficiency." This pollution of the market place affects both the honest businessman and the consumer.

1

President Nixon, in his consumer address to Congress, recognized the benefits of a class action statute to both the consumer and the businessman when he stated:

“... it would allow a number of citizens to divide among themselves the high cost of bringing a law suit. Although each person's individual damage might be small, the cumulative effect of a class complaint could be significant and in some circumstances could provide a significant deterrent to extensive fraud or deception." "

The possibility that he might have faced an $80,000.00 class action rather than the improbability that Mrs. Smith would bring an individual action for $400.00 would most likely have deterred Mr. Jones' deceptive behavior.

A proper class action procedure will allow Mrs. Smith and her neighbors a judicial hearing, while also spreading the costs of litigation and conserving judicial resources. Mrs. Smith can sue as a representative for both her neighbors and herself. All will share the costs and rewards of the action. One case, not two hundred, will be brought.

Fortunately, the current recognition that consumer abuse is a mammoth problem has spurred a drive for consumer protection legislation. However, too often this legislation is based on the erroneous belief that further government action and spending will give the consumer the necessary relief. The problem is much too large, and the government much too small; at best, the government can reach but a small percentage of the everyday consumer abuses. Therefore, it is the position of the National Consumer Law Center that the best means of protecting the honest businessman, the consumer, and the marketplace is a program which enlists the participation of the private bar. The Center favors a joint attack on consumer abuse similar to that waged against antitrust violators within the provisions of the Clayton Act. The class action is the best means of encouraging private enforcement of the existing consumer law.

To meet the need for federal consumer class action legislation, two bills, one from the Nixon administration (S. 3201, H.R. 14931) and the other authored by Congressman Eckhardt and Senator Tydings (S.3092, H.R. 14585) have been introduced. In this position paper, the relevant provisions of each Bill will be compared and contrasted, and the ability of each to protect both the consumer and the honest businessman will be evaluated.

COMPARISON OF MAJOR PROVISIONS

A. Direct Consumer Class Actions v. Requirement that Government Agency Bring Successful Action Before Consumer Class Can Sue in Own Behalf.

If the Nixon class action legislation were in effect, Mrs. Smith would have to await a successful termination of a government action before she and her neighbors would be allowed to bring a class action for their damages. There is no guaranty that the government will act in her case; if it chooses not to act, she will never be allowed to bring her class action; the validity of Mr. Jones' practices will never be determined in a court of law. Even if the government decides to act against Mr. Jones, there is no guaranty that it will reach a prompt successful termination. It may be many years before Mrs. Smith gets the chance to litigate to recover the money she has lost. During both the period in which the government decides whether it will act, and later, the period in which it acts, there is no procedure by which Mrs. Smith can attach Mr. Jones' as

1 Ralph Nader. testimony before Senate Subcommittee on Improvements in Judicial Machinery. July 28, 1969. 2 Address by President Nixon, October 29, 1969. H.R. 14931, § 204, 91st Congress, 1st Session.

sets. Mrs. Smith cannot file an action and take steps to guaranty that Mr. Jones does not make himself "judgment proof" until after the government has acted. It is quite likely that before this point Mr. Jones will have either dissipated his assets, gone out of business, or entered bankruptcy proceedings. By the time Mrs. Smith can sue under the administration proposal, there is a good chance there will be no money left for her to recover.

The Eckhardt-Tydings proposal will not make Mrs. Smith suffer because of the delays inherent within bureaucratic government machinery. Her right to litigate her claims is not depedent upon her ability to stimulate government action. Upon learning of Mrs. Jones' deception, Mrs. Smith and her neighbors can immediately file an action. They need not petition and await government action. They can take immediate steps to insure that Mr. Jones will not render himself judgment proof. The Eckhardt-Tydings Bill offers Mrs. Smith and her neighbors the best possible chance for meaningful litigation and recovery upon their claims.

Underlying the different approaches taken in the two bills is a conflict between the confidence Senator Tydings and Congressman Eckhardt have in private enforcement of consumer laws, and the distrust of the private sector manifested in the administration's claims that the requirement of prior government action is necessary to protect the honest businessman from harassment.

The fears that a direct consumer class action procedure will lead to the harassment of the honest business community are unfounded. Through the provisions of the Clayton Act, this country has had a long history of private enforcement of antitrust laws. Although the Clayton Act does not require prior government action as a "trigger" to private litigation, there is no evidence that the statute has been used to harass the honest businessman.

Similarly, there is no evidence that the new Federal Truth-in-Lending statute, which allows for class actions, has been used to harass lenders; to this date, less than one dozen actions have been filed under its provisions.

The provisions of the Administration Bill, which require that government action precede private litigation, seem to be rooted in an improper characterization of the members of the private bar as "ambulance chasers" ready to stir up harassing litigation in hope of forcing the honest merchant into an unfounded settlement, which is profitable only to the attorney. All attorneys are charged to obey American Bar Association Canon Number 30, which states:

"The lawyer must decline to conduct a civil cause or to make a defense when convinced that it is intended merely to harass or injure the opposite party or to work oppression or wrong."

The Nixon Bill manifests a distrust of the ability of the private bar to police itself through the enforcement of its regulations and canons. It is unfortunate that the Administration Bill does not reflect the position taken by Mrs. Virginia Knauer in a speech before the National Association of Manufacturers in which she said:

"Some businessmen have asked me whether this bill [referring to a bill similar to the Eckhardt-Tydings proposal which contained no requirement of prior government action] might not generate waves of ‘ambulance chaser' type suits which would necessarily harass business. Federal courts do not accept 'ambulance chaser' cases. The honest, ethical manufacturers who produce safe, quality products and honor their guarantees have nothing to fear."

Existing Judical Safeguards

However, assuming that Mrs. Knauer, Congressman Eckhardt and Senator Tydings are wrong and that harassment is a real byproduct of consumer class action legislation, there are safeguards, less severe and restrictive than government intervention, which offer the honest businessman protection from unjustified litigation. Many of these safeguards exist within current judicial procedure. The attorney representing the class can be required to file a verified complaint. Violation of this requirement, or the provision within Federal Rule of Civil Procedure 11 which states that no pleading can be signed and filed by an attorney unless". to the best of his knowledge, information, and belief there is good ground to support it; . . .", renders the attorney subject to disciplinary action.

Address by Mrs. Virginia Knauer to National Association of Manufacturers, 1969.

After the class action is filed, there are existing procedures such as the "motion to dismiss" and the "motion for summary judgment" which can be invoked by the defendant to stop spurious litigation before it reaches the trial stage. He can also stop harassing litigation by bringing an equitable "bill of peace".

Some opponents of class action legislation fear that class actions will be brought to "blackmail" defendants into out-of-court settlements. By requiring judicial approval of all settlements, the defendant can be assured that he will not have to "buy off" unfounded claims.

If it can be established that suits to harass the businessman are a real threat, then an additional safeguard, the requirement that the named parties plaintiff post bonds based on a statutory percentage of the amount they personally seek to recover, can be added to the legislation. The amount should be neither arbitrary nor based upon a percentage of the recovery sought for the entire class; in both of these cases the costs of posting the bond will make consumer litigation unprofitable for the plaintiff and render him financially unable to seek a judicial hearing on this claim.

Not only is the administration requirement of prior government action severely restrictive when viewed in the light of the other possible safeguards with which to protect the honest business community, but it also raises serious practical and political considerations.

Serious Delays Inherent Within Administration Proposal

Perhaps the provisions in the Administration Bill most damaging to the consumer are those which allow for the delay inherent within government action. Mrs. Knauer, in her testimony before the Senate Committee on Commerce, Subcommittee for Consumers, acknowledged that it is not uncommon for the Federal Trade Commission to take three years to reach a successful termination against a deceptive merchant." In the famous case of Holland Furnace Co. v. FTC, it took the government 29 years to reach a successful termination. Under the administration's class action proposal, the consumer cannot act to protect himself during this period.

The Nixon proposal places the initiative for consumer protection in the hands of the Justice Department and the Federal Trade Commission. In the past, both of these agencies have lacked either the initiative or the staff to protect the consumer. The staff of the Attorney General's office is already overburdened. The consumer can legitimately fear that criminal prosecution will once more take priority over consumer protection. The only way to insure a program of consumer protection is to encourage the private bar's participation in consumer problems.

Government Will Only Act On Significant or "Test" Cases

Consumer abuse is a mammoth problem. There are so many claims that even with expanded government machinery it will be impossible to investigate and take action on each of them. Therefore, a "selection process", that raises many political issues, will be necessary. As Richard W. McLaren, Assistant Attorney General in Charge of the Antitrust Division, Department of Justice, indicated in his testimony to the Subcommittee for Consumers, the government will establish a procedure for ". . . public selection of cases which are both sound and significant to consumers". (emphasis added) It is easily understood that with the vast number of claims that will flood the agencies they will have to limit their involvement to "significant" or "test" cases; however, in the context of the administration proposal, this selection process will leave the victim of the "everyday" consumer abuse without government protection; due to the requirement of prior government action, he will be unable to sue directly to protect himself. Senator Moss recognized the problem when he asked Mr. McLaren,

"What about the consumer, however, whose case is not taken by the FTC or the Justice Department and he still has a valid grievance and he wants to have it adjudicated?"

8

The only solution Mr. McLaren could offer was,

"Senator, I suspect that Mrs. Knauer would be on the necks of the Chairman of the Federal Trade Commission and the head of the Antitrust

5 Statement of Mrs. Virginia Knauer, hearings on S. 2246, S. 3092, S. 3201, before Subcommittee for Consumers. Senate Committee on Commerce, 91st Congress, 1st Session C8 (December 16 and 17, 1969) [hereinafter cited as 1969 Hearings]

* 341 F. 2d 548 (7th Cir. 1965), cert. den'd, 381 U.S. 924 (1965).

McLaren, 1969 Hearings 23.

Moss, 1969 Hearings 42.

Division; and if she did not get action, they would probably hear from the President." Surely, neither Mrs. Knauer nor the President can be expected to guaranty that every valid claim will be acted upon by the government agencies; such a commitment of resources is not physically possible.

The Selection Process and Political Favoritism

The Nixon proposal involves a selection process that can raise issues of political favoritism. Not all of the claims against businessmen can result in government action. The decision as to which merchants will face government action and which will escape is open to political influence. Even if the decision is made honestly, the mere appearance of favoritism may cause a lack of faith in the government's institutions in those consumers whose complaints will not be acted upon. A far better solution to this problem of selection is to take these difficult decisions out of the political arena and place them within the adversary system of the private bar and the judiciary. A selection process that gives the government complete control over which consumers can bring class actions and which cannot, will not result in maximum consumer protection. This can only be achieved when the consumer is allowed to protect himself through private litigation.

Conservation of Judicial Resources

Some argue that a selection process is necessary to guaranty that the already overcrowded federal court system will not be flooded with consumer class actions. Actually, the opposite may occur; since in one suit the rights of many parties may be ascertained, fewer actions need be filed. However, if more suits are filed within the federal courts it will be because those consumers who previously had been denied a forum will now be given a hearing. It is a false economy that reduces the caseload of the federal court system at the expense of the consumer. Congress must adjust and enlarge, if necessary, the judicial system so that it can meet the needs of all of the people.

Finally, the administration requirement of prior government action will require either the creation of new government agencies or the expansion of the old. Both will require substantial government expenditures. By placing the burden of consumer protection on the private bar, the Eckhardt-Tydings proposal will require no further government action or spending.

B. The Source of the Substantive Law Defining Those Unfair or Deceptive Practices Under Which the Consumer Can Bring a Class Action.

The substantive law to be applied must be both specific enough to provide concrete guidelines for the honest business community and broad enough to protect the consumer from many common deceptive and unfair practices. The law must reflect the fact that business practices vary with local needs and standards; the states should be encouraged to enact consumer protection legislation, and these statutes should be the basis for federal class actions.

Title II Section 201 of the Administration Bill specifies eleven categories of acts which are defined as unfair or deceptive practices. These categories are far too vague and ambiguous to protect the honest businessman. Years of judicial interpretation will be required before they can be of sufficient content and meaning to provide guidelines for commercial behavior. Mr. Paul Rand Dixon, Chairman of the Federal Trade Commission, stated before the Subcommittee for Consumers that he was against limiting the unlawful practices to specific categories. He testified that:

"A substantial amount of time would be spent attempting to fit a deceptive practice into the proper category, taking maybe another forty years to get out and to have the definition of what each one of those eleven things might mean...." 10 (Emphasis added)

In effect this process will create a federal "common law" where none is needed. The eleven categories do not provide for the use of substantive state consumer law in the federal class action. The Tydings-Eckhardt approach incorporates the existing state common law, the state statutes and the entire body of FTC rulings.

• McLaren, 1969 Hearings 42.

10 Dixon, 1969 Hearings 61.

Not only does the Nixon proposal fail to provide concrete business guidelines but it also leaves many practices, in the words of Mr. Dixon:

unfair and deceptive to consumer which would not fit into these categories." Section 201 (f) of the Administration Bill exempts the substantial number of consumer abuses which occur within the credit industry. Although in answering a question from Senator Moss, Mr. McLaren stated that the consumer could bring a class action for credit abuses by invoking the provisions of the Federal Truthin-Lending Law," the coverage of this statute is limited to those abuses stemming from the lender's failure to make the statutory disclosures. All abuses other than the failure to disclose, such as illegal, excessive or usurious charges that are disclosed, are not only outside the provisions of the Truth-in-Lending Law, but also specifically exempted from the administration class action proposal.

A second set of significant consumer abuses, the practices and techniques of harassment, intimidation, coercion and deception used by the disreputable collection agency, are not covered within the eleven categories.

In contrast, Section 4 of the Eckhardt-Tydings class action proposal defines an unlawful act in defraud of consumers as one which is either unlawful within the meaning of Section 5(a)(1) of the Federal Trade Commission Act, or one which gives rise to individual civil actions by consumers within state statutory or decisional law. In his testimony, Mr. Dixon favored a procedure by which unfair or deceptive practices are defined in terms of Section 5(a)(1) of the Federal Trade Commission Act. In support of his position, he stated:

"The unfair or deceptive acts or practices declared to be unlawful by the Federal Trade Commission Act are readily ascertainable. There is an existing body of law compiled over a 55 year period, consisting of thousands of Commission decisions, which defines these terms. There are also some 800 court opinions rendered during these 55 years interpreting the Act." 13 The Federal Trade Commission rulings offer a broad range of specific guidelines. The Tydings-Eckhardt Bill does not limit its provisions to practices found to be unfair or deceptive by the Federal Trade Commission. In addition, it incorporates the existing state consumer laws, thereby encouraging the enactment of local consumer protection programs.

In this way the Tydings-Eckhardt proposal not only provides the requisite specificity and concrete guidelines, but also includes the majority of abusive practices.

C. The Requirement that Plaintiff Prove that the Defendant Acted Intentionally or Recklessly.

Within Section 201 (a) of the Administration Bill, it is not sufficient that Mrs. Smith prove that the act in question was one of those specified in the eleven categories. She must go further and prove that Mr. Jones committed the deception intentionally or recklessly. She must show that he knew his acts were illegal, and that he knew that his representations were false, or that he acted with a reckless disregard for the truth. This is a heavy burden to place on the injured consumer. Mr. Jones will not be held to the practices of the ordinary and reasonable businessman. His actions can be unreasonable and he can still escape liability. Between the consumer and the merchant, in determining the truth of a seller's representation, it is more just and rational to place the burden of investigation on the businessman. He has the business background and experience with which to determine the validity of his representations. The consumer should be able to assume that the merchant has undertaken a proper investigation. He has access to the information about his product. The consumer should be able to assume that the representations are true. When they prove to be deceptive or unfair, the consumer should not have to prove that the merchant acted intentionally.

D. The Need for Punitive Damages for International or Reckless Violations of the Act.

Closely related to the element of knowledge is that of damages. In order to deter the type of intentional or reckless violation of the law that the consumer must prove under the Nixon Bill, the plaintiff must be able to recover punitive damages. As long as the merchant need only return the money he took by conscious deception, there is no effective deterrent against such behavior in the future. It is this deterence, the traditional basis for punitive damages, for which Section 204 of the Administration Bill makes no provision.

11 Ibid.

12 McLaren, 1969 Hearings 45.

13 Dixon, 1969 Hearings 62.