E. Recovery of Legal Fees.

The success of a program of consumer protection through private enforcement of the law will depend on the consumer's ability to encourage, by offering fair and adequate compensation, the participation of the private bar. Both proposed statutes allow for attorney participation on a contingent fee basis. However, in those cases where the attorney and client negotiate a non-contingent fee contract before the litigation, the Administration Bill allows the court the unprecedented power to upset the contract provisions after the case has been decided. Faced with the possibility that he will work a certain number of hours and incur certain expenses only to have his contracted-for-fee lowered after his work is completed, many an attorney will refuse to take the case. On the other hand, the provisions can be interpreted so as to empower the court to allow the attorney to charge his client a sum greater than that for which they had previously contracted. Either way, this provision will discourage the type of joint participation of consumer and private bar that is essential to a program of private enforcement of the consumer laws.

F. Parties Subject to the Proposed Federal Trade Commission Injunctive Power.

Section 102 of the Nixon bill gives the Federal Trade Commission the much needed power to seek either a temporary restraining order or a preliminary injunction. However, the scope of this power is severely limited by Section 101 (a) (1) whereby the Federal Trade Commission Act is amended so that it reads: "Whenever the Commission has reason to believe (1) that any person, is engaged in (Emphasis added), rather than "that any person, partnership or corporation is engaged in . . ." 15 (Emphasis added)

99 14

The express deletion of the corporation and partnership as possible parties defendant creates a serious loophole through which many disreputable merchants can escape the protective efforts of the Federal Trade Commission.

SUMMARY AND CONCLUSIONS

The need for consumer class action legislation is clear. The Tydings-Eckhardt class action proposal will bring the benefits of this procedure to the Federal courts. It offers the class of consumers a forum, regardless of the size of an individual class members' claim. By expressly incorporating the Federal and State law that the honest businessman is already following, the proposal gives the business community clear and certain standards by which to plan its conduct. The Tydings-Eckhardt proposal will not require the creation of new and cumbersome government machinery or a further expenditure of Federal funds; the aggrieved consumer, with the aid of the private bar, is given a means of protecting himself through the present judicial system. The proposal allows for and encourages state regulation and control of local business. Because of its more comprehensive coverage, its greater specificity, and its provisions which encourage the private enforcement of the consumer laws, the National Consumer Law Center calls for the enactment of the Eckhardt-Tydings class action proposal.

Senator Moss. The committee will be adjourned until Thursday at 9:30 a.m.

(Whereupon, at 12:15 p.m., the subcommittee was recessed, to reconvene at 9:30a.m., Thursday, February 5, 1970.)

14 H.R. 14931, § 101 (a) (1), 91st Congress, 1st Session.

15 Federal Trade Commission Act, 52 Stat. 114, 15 U.S.C. 53(a).

CONSUMER PROTECTION

THURSDAY, FEBRUARY 5, 1970

U.S. SENATE, CONSUMER SUBCOMMITTEE, Washington, D.C.

The subcommittee met at 9:55 a.m. in room 5110, New Senate Office Building, Hon. Frank E. Moss (chairman of the subcommittee) presiding.

Present: Senators Pastore, Moss, and Pearson.

Senator Moss. The subcommittee will come to order.

I apologize for being tardy in starting, and I apologize to my colleague Senator Pearson who was here, ready to start on time. It was I who was late.

I am very pleased this morning in the continuation of our hearing on the three bills that are before the subcommittee, S. 2246, S. 3092, and S. 3201, to have several very excellent witnesses. We are going to begin with Mrs. Bess Myerson Grant, who is the Commissioner of Consumer Affairs for the city of New York, a leader certainly in this consumer field and whose testimony we look forward to receiving and know that it will be most helpful, as it always is.

I understand she will be accompanied by Mr. Philip Schrag, who will come to the table with her.

We are pleased to have you, Mrs. Grant, and certainly look forward to hearing from you. I apologize to you for being late in the beginning. STATEMENT OF BESS MYERSON GRANT, COMMISSIONER OF CONSUMER AFFAIRS OF THE CITY OF NEW YORK; ACCOMPANIED BY HARRIET V. RABB, FORMER SPECIAL COUNSEL TO THE NEW YORK CITY DEPARTMENT OF CONSUMER AFFAIRS

Mrs. GRANT. Thank you very much, Senator Moss. I must apologize for Mr. Schrag's absence. He is, I believe, right now at the House. Senator Moss. He certainly is excused. We would like to have had him.

Mrs. GRANT. He is testifying on behalf of the bill before the House. Senator Moss. I see, he is over on the House side.

Mrs. GRANT. We are working both sides, you see.

Senator Moss. I must say that we have the more beautiful half of the team.

Senator Moss, members of the subcommittee, I want to thank you for this opportunity to speak to you today about consumer class actions. May I say that it is an honor to be one of the members of this

committee's Advisory Council. By establishing the Advisory Council, Senator Moss has created an important avenue of communication between the Congress and those of us concerned with the problems of consumers. I would like again to congratulate you.

Senator Moss. Thank you.

Mrs. GRANT. This is the second time I have come to Washington to testify on consumer class actions. Last year I addressed the Senate Subcommittee on Improvements in Judicial Machinery on this subject. At that time, I said that S. 1980, the predecessor of the Tydings-Moss class action bill before you today, was one of the most powerful instruments of economic justice which the Senate has ever considered. I did not mean that as hyperbole. The idea of consumer class actions is, indeed, one of the most important proposals for economic reform which has appeared on the Nation's legislative agenda since the New Deal. A meaningful Federal class action law will promote fairness to consumers, and deter dishonesty by manufacturers and merchants, as or more effectively than the landmark consumer protection laws of past eras-the Pure Food and Drug Act, the Federal Trade Commission Act, or the Interstate Commerce Act, to name just a few examples.

A Federal class action law will have more impact on the marketplaces of the Nation than all the myriads of laws and ordinances against fraud and deception which are hidden away in the statute books of the 50 States and their various subdivisions, put together. All these laws make fraud illegal. But they have not made fraud unprofitable. Many of these laws can only be invoked by administrative agencies, which long ago lost their concern for the consumer and their appetite for action.

A Federal class action law-at least one which is not hamstrung by needless procedural roadblocks to consumer justice-will put the power to seek justice in court where it belongs-beyond the reach of campaign contributors, industry lobbyists, or Washington lawyersit will put power in the hands of the consumers themselves and in the hands of their own lawyers, retained by them to represent their interests alone. But all of us here know this.

We know that a class action law is needed this year. Consumers know it, this committee knows it, the Senate knows it, and the administration knows it.

I appear before this committee with a much more specific objective: to help you shop comparatively for the best such law. Brand A is S. 3092-the Tydings-Moss bill, which would allow consumers to initiate Federal class actions, whenever their rights were violated. Brand B is S. 3201, the administration bill which would enable consumers to start such lawsuits only in 11 narrow categories of circumstances, and only after the Federal Government had successfully sued the violater. The administration bill-Brand B-is a consumer fraud.

Two weeks ago, I told the Consumer Federation of America that "we face a critical danger-the danger that we will be fooled by fake reform. Deceptive packaging and mislabeling are as insidious on the congressional calendar as they are on the supermarket shelf." The administration's so-called class action bill is like balloon bread: Substantial at first glance but short on weight.

I think that we should bear closely in mind that this administration bill is not the product of the President's valiant special assistant for

consumer affairs, Mrs. Virginia Knauer. The administration bill is the product of White House assistants-and by the look of the legislation they have drafted, these are assistants whose primary concern is not the interests of the consumers. I have two complaints about the administration bill: Its substance and its implementation procedures.

It waters down the substance of the Tydings-Moss bill in two ways. First it contains an inadequate list of types of misrepresentations which are to be labeled unlawful. I have no objection to the concept of a list of wrongs, so that businesses can know with specificity what their obligations are, but the list in S. 3201 requires proof that the accused merchant knew he was making false statements.

In the typical case, proof of such knowledge is impossible. For that reason, civil consumer protection laws such as the Federal Trade Commission Act, the Uniform Deceptive Trade Practices Act, and the New York City consumer protection law do not require it; rather it is sufficient to show that the merchant did not tell the truth.

Even centuries-old equity doctrine allows restitution to consumers who have been deceived by innocent misrepresentations. By imposing a willfulness requirement for class actions-a standard heretofore applicable only in criminal proceedings against merchants-the administration is rolling back 200 years of consumer protection law.

Let me give you an example. If Consolidated Carbohydrates sells a pill which the company says will "cure all of your ills," when in fact. it can only give temporary partial relief in a few kinds of cases, the consumer should not have to bear the burden of searching through Consolidated's organizational chart, to find some individual officer who covered up the product's inadequacies. This is not the point. The point is that the company lied. Its lies induced consumers to pay, and they enabled the company to profit. What a class action law has got to insure is that those ill-gotten profits are turned back to the consumer's pocket, where they belong.

I have a second bone to pick with the administration bill. The 11 categories of wrongs to which the administration bill is addressed boil down in reality to only two categories-misrepresentation, and failure to return deposits for goods not delivered. Omitted are some of the major problems about which consumers complain and which are already violations of State law, although class actions are not presently available to remedy them.

One such problem is the ordinary breach of warranty, especially the warranty of merchantability. Take a thousand consumers, each of whom buys a camera which was defectively manufactured and does not take pictures. Under section 2-314 of the Uniform Commercial Code, those consumers are entitled to a functioning camera or damages. But they cannot afford to bring a thousand individual lawsuits to enforce this right. Under the Tydings-Moss bill, they could bring a class action. Under the administration bill, they cannot.

Another common situation is unconscionable contracts, under section 2-302 of the UCC. In New York, the courts have deemed referral selling to be unconscionable; that it, promising a buyer a small discount for each friend or neighbor he refers who also makes the purchase. But one of the many victims of this practice cannot economically sue for restitution in a single case. Under the Tydings-Moss bill, he could start a class action. Under the administration bill, he could not.

39-278-70-pt. 1- -12

Consider also the myriad of State installation sales acts, which govern in detail the granting of consumer credit. Suppose that a particular State limits the interest rate to 18 percent per annum. Suppose further that a creditor charges customers 20 percent, being careful to disclose this fact so that he does not violate the Federal Truth-inLending Act. Under the State law, consumers would be entitled to recover the excess charge, in some States they would be entitled to recoup the entire interest charge. But this right is only illusory unless a class action can be brought to exercise it. One could be brought under the Tydings-Moss bill, but not the administration proposal.

But the single most disingenuous provision in the administration bill is its prerequisite of a Justice Department or FTC action before a class suit may be brought. What assurance would consumers have that these agencies would have sufficient funding or personnel to prosecute the many thousands of instances of systematic consumer abuse which occur every year?

Senator PASTORE. May I interrupt here?

Senator Moss. Yes.

Senator PASTORE. I think you emphatically bring out a neglect that has existed for some time. I brought this point out only the other day. I come from a jewelry manufacturing State, complaints were being made that certain jewelry was being sold as gold, as 14-karat gold and in fact it was brass.

So, in order to overcome this, because you find that the individual consumer sometimes doesn't have the potentiality, financially and otherwise, to recover in a case of deception and he has to look to class enforcement, and that is the reason for class enforcement; so, I introduced a bill providing that a lawfully organized and chartered nonprofit organization in the industry could bring suit and even obtain a judgment of cease and desist in case of this kind of deception. When you buy yourself a pair of earrings, you have to take the prestige and reputation of the seller, you have no way of knowingyou can't bite it to find out whether it is gold or brass, all you know if you wear it and your ear begins to stain or you get an infection, you didn't buy a gold matter.

This bill was resisted by the Justice Department. They said there were sufficient laws on the books in order to give adequate protection. The fact still remains that not one case was ever brought, and our market is loaded with these deceptive pieces of jewelry, and I think you bring out a very good point here.

Mrs. GRANT. Sir, I am pleased that we are in accord.

I do want to tell the Senator, too, that the FTC in 1969 issued only 65 complaints of deceptive practices in the Nation, while my office alone gets 65 complaints a day. Even if they had the funding, can consumers know that they will have the will to use this authority fully? What is to stop the Attorney General from opting for an ar rangement with the target company, whereby the company agrees to mind its manners in the future in return for Government's promise to immunize the company from liability for past misconduct?

Such practices would subvert the entire purpose of a class action law. One has only to look at the antitrust suits filed by the Justice Department in the last week of every presidential administration to know that political considerations strongly influence the Government's decisions to sue major American corporations.