Rebuttable Presumption of Reliance in Class Actions
The Maryland Bar Journal
By David J. Federbush
Maryland’s Consumer Protection Act (“CPA”), Commercial Law Article § 13-101 et seq., prohibits unfair or deceptive trade practices, and enumerates included categories of misrepresentations and failures to disclose. Its purpose is to “take strong protective and preventive steps… to assist the public in obtaining relief from these practices, and to prevent these practices from occurring… and thereby maintain the health and welfare of the citizens of the State.” Sections 13-102(a)(3), 13-303.
The CPA’s original passage in 1973 was based on the General Assembly’s finding that “there has been mounting concern over the increase of deceptive practices in connection with sales of merchandise, real property, and services and the extension of credit” (section 13-102(a)(1), (b)(2)); “its recognition that the doctrine of caveat emptor had outlived its social utility…”; its intent “to equalize the balance of power between consumers and providers of consumer goods and services,” Hallowell v. Citaramanis, 88 Md. App. 160, 165, 594 A.2d 591, 593 (1991), aff’d, Citaramanis v. Hallowell, 328 Md. 142, 613 A.2d 964 (1992); and its intent to create a more effective remedy for consumers inasmuch as it found existing consumer protection laws to be “inadequate, [and] poorly coordinated…”. Section 13-102(a)(2); Citaramanis, 328 Md. at 150, 613 A.2d at 970; Forrest v. P&L Real Estate Investment Co., 134 Md. App. 371, 386, 759 A.2d 1187, 1195 (2000).
CPA claims, unlike common law fraud claims, do not require proof of intent to deceive or defraud. Golt v. Phillips, 308 Md. 1, 10, 517 A.2d 328, 332 (1986); accord, Legg v. Castruccio, 100 Md. App. 748, 761, 642 A.2d 906, 912 (1994). See also Citaramanis, 328 Md. at 154, 613 A.2d at 970 (“a remedy to the consumer for many forms of misrepresentations not covered by the traditional theories of tort liability for deceit…”). The CPA is to be “construed and applied liberally to promote its purpose.” Section 13-105.
The CPA provides for State conciliation, arbitration, and administrative and court enforcement actions by the Attorney General’s Office to enjoin violations, obtain restitutionary relief for consumers and secure civil and criminal penalties. Public enforcement resources are necessarily limited, and the remainder of enforcement efforts is left to consumer actions to recover for injury or loss sustained as the result of a violation. Section 13-408(a). While consumer class actions would appear to be the most powerful and deterrent manner to obtain relief for broad scale violations, there is a relative dearth of reported cases in which class certification was approved for CPA claims. This article’s premise is that applying a rebuttable presumption of reliance in CPA class actions is warranted and equitable under the statutory purposes and relevant precedent, and should be applied to promote private enforcement of the Act. See Coburn v. Coburn, 342 Md. 244, 257, 674 A.2d 951, 957 (1996) (remedial statutes construed liberally to suppress the evil and advance the remedy).
The Court of Appeals long ago held, in Consumer Protection Division v. Consumer Publishing Co., 304 Md. 731, 501 A.2d 48 (Md. 1985), that in seeking monetary restitution on behalf of consumers in administrative actions under §§ 13-402(b)(1) and 13-403(b)(1), the Attorney General need not submit proof of consumer reliance. All that is required is that the final restitution order provide a mechanism for processing individual claims; i.e., the consumer’s statement that he/she relied on the targeted misrepresentations. The court reasoned that one of the law’s purposes was facilitating consumer redress, and “[t]o require proof of reliance, beyond the purchaser’s statement, would make recovery difficult and complicated.” 304 Md. At 781, 501 A.2d at 74. Accord, Consumer Protection Division v. Outdoor World, 91 Md. App. 275, 290, 603 A.2d 1376, 1383 (1992). See also Consumer Protection Division v. Luskin’s, 120 Md. App. 1, 45, 706 A.2d 102, 124 (1998), aff’d, 353 Md. 335, 726 A.2d 702 (Md. 1999). That holding has been applied to State actions in circuit court for restitution under § 13-406. State v. Andrews, 73 Md. App. 80, 85 n.3, 533 A.2d 282, 285 n.3 (1987); State v. Cottman Transmissions, 86 Md. App. 714, 736, 587 A.2d 1190, 1197 (1991).
Phillip Morris v. Angeletti
In contrast, there is no precedent shifting the burden of proof on the reliance issue in private class actions under the CPA. A recent decision by the Court of Appeals, Philip Morris v. Angeletti, 358 Md. 689, 752 A.2d 200 (2000), contains some language appearing to suggest that class members retain that burden. On closer examination, however, the opinion is less than clear on that point.
That case was brought on behalf of all Maryland cigarette and smokeless tobacco users who had suffered physical injury or disease or nicotine addiction. The court cited figures yielding an estimated class size of over 700,000. 358 Md. at 716 n.11, 752 A.2d at 214 n.11. In affirming denial of class certification the court reasoned that individual issues, first and foremost reliance, predominated over common ones with respect to the complaint’s fraud, negligent misrepresentation, and CPA claims (the complaint also asserted product liability and other claims). The Court opined that “[t]he unsuitability of such claims for class action treatment arises from the burden placed on Respondents of proving individual reliance upon Petitioners’ alleged misrepresentations and material omissions….”. 358 Md. at 750, 752 A.2d at 234.
The court based that conclusion on the facts that “…[s]uch individual discrepancies… must be allowed to be delved into by Petitioners [defendants], class member by class member,” and litigation of such individual issues “would necessitate potentially hundreds of thousands of somewhat extensive individual trials.” 358 Md. at 754, 752 A.2d at 236. Securities fraud decisions cited by class counsel in which individual reliance issues did not defeat class certification “…simply didn’t involve the exorbitant size of the possible class membership in this case…”. 358 Md. at 754 n.31, 752 A.2d at 236 n.31.
The Court of Appeals did not, however, undertake a thorough analysis with respect to the CPA claim, and did not refer to the CPA’s statutory purpose. The opinion discussed the long-established elements of proof for common law fraud (including reliance), and the recognized inappropriateness of class treatment for fraud claims when reliance varies among potential class members (citing the Advisory Committee’s 1966 note to Fed. R. Civ. P. 23). The court also noted reliance as an element of proof of negligent misrepresentation.
However, in addressing the CPA claim the court did not refer to reliance as an element of the cause of action. It rather characterized it as “a necessary precondition for restitution or damages,” citing the Consumer Publishing and Outer World decisions that actually held proof of consumer reliance not to be an element of the State’s case. 358 Md. at 753, 752 A.2d at 235. It seems likely the court was merely indicating that even as to post-liability determinations of entitlement to restitution under the CPA, the huge class size meant those individualized factual showings further contributed to the predominance of individual issues and unmanageability of the case as a whole. The court’s initially quoted observation as to “the burden placed on Respondents of proving individual reliance” can thus be viewed as inapplicable to, or at most dictum with respect to, the CPA claim.
Federal Investor and State Consumer Protection Precedent
A thorough analysis with respect to CPA claims alone must also consider precedent under the federal securities laws and some state consumer protection statutes that adjust evidentiary burdens in private suits to promote statutory enforcement. A rebuttable presumption of reliance is permitted in securities fraud actions based on a failure to disclose a material fact when defendant has a duty to disclose. Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S. Ct. 1456 (1972) (defendant was market maker in the security); Finkel v. Docutel/Olivetti Corp, 817 F. 2d 356, 361 (5th Cir. 1987); Lipton v. Documation, Inc., 734 F.2d 740, 742 (11th Cir. 1984), cert. den., 469 U.S. 1132 (1985).
The federal courts also apply a rebuttable presumption of reliance in the “fraud on the market” securities context. Blackie v. Barrack, 524 F.2d 891, 906-08 (9th Cir. 1975)(class action certified), citing Affiliated Ute and cited in Manual for Complex Litigation 3d (1999), § 30.15 n.693; accord, Finkel, supra. In the Blackie case, the Ninth Circuit reasoned that given the myriad factors that influence buying decisions, the purchasers’ burden of proving that they directly relied on misrepresentations in corporate financial statements, or that they indirectly relied on those misrepresentations in supposing that the stock price was not inflated by manipulation, was difficult to meet and thereby threatened enforcement of the securities laws.
The court also considered that the law was designed to foster an expectation that the securities markets are free from fraud, and observed that the common law fraud action “must be and has been flexibly adopted to the overriding purpose of” enforcement of federal securities fraud law. See also J.I. Case Co v. Borak, 377 U.S. 432, 433, 84 S. Ct. 1555, 1560 (1964)(securities laws; “it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose”); In re Medimmune, Inc. Securities Litigation, 873 F. Supp. 953, 968 (D. Md. 1995)(no presumption of reliance for Maryland common law fraud claims, in contrast with federal securities “fraud on the market” claims where presumption is applied).
Additionally, courts in several states have lightened the plaintiffs’ burden on the reliance issue in class actions under their respective consumer protection acts. In its Consumer Publishing decision, the Maryland Court of Appeals cited (304 Md. at 779, 501 A.2d at 73) the California Supreme Court’s 1983 decision in Committee on Children’s TV v. General Foods, 673 P.2d 660, 668, a class action under California’s false advertising statute. That decision held that consumers can obtain an order providing for restitution (in addition to injunctive relief) without submitting individualized proof of reliance if the court determines restitution necessary to prevent the use or employment of a targeted practice.
In reversing dismissal of a Consumer Protection Act count in Dix v. American Bankers Life Assurance Co., 415 N.W.2d 206, 209, the Michigan Supreme Court in 1987 specifically held, citing Affiliated Ute and other securities cases, that “members of a class proceeding under the … Act need not individually prove reliance on the alleged misrepresentations.” The court also relied on the Michigan statute’s provision specifically allowing class actions. Dix is cited in Latman, et al. v. Costa Cruise Lines, N.V., 758 So.2d 699 (Fla. App. 3 Dist. 2000) (reversing denial of class certification under Florida’s consumer protection statute) and Davis and Eddy, et al. v. Powertel, inc., et al., 776 So.2d 971 (Fla. App. 1 Dist. 2000).
Dix, Latman and Davis all go further, however, to indicate that it is sufficient if the class can establish that a reasonable person would have relied on the representations. In that regard those decisions appear flawed in entirely removing actual reliance as an issue, and thereby departing from the fundamental principle of causation of damages. As Blackie explained, “we think that the [federal statute’s] public purpose can be adequately served within the traditional compensatory suit framework by limiting recoveries to those who are in fact injured, and excluding those who… have not been injured.” 524 F.2d at 907. Furthermore, the Davis decision was mistakenly grounded on the principle that “deceptive” under the Federal Trade Commission Act, on which the Florida’s statute is based, requires only that the practice be “likely to mislead.” 776 So.2d at 974. The decision ignored that FTC court actions seeking restitution for consumers, in contrast with FTC administrative cease and desist actions, retain actual reliance as an issue. See discussion infra.
In Varacallo v. Massachusetts Mutual Life Insurance Co., 752 A.2d 807, 818-19 (N.J. Super. A.D. 2000), an omission of material fact class action under the state’s Consumer Fraud Act, the court reversed a denial of class certification by holding there was a rebuttable presumption of causation or reliance with respect to such omissions. It cited Affiliated Ute, and further based its decision on “an overarching principle of equity… the principle that class actions should be liberally allowed where consumers are attempting to redress a common grievance under circumstances that would make individual actions uneconomical to pursue.” 752 A.2d at 815. But see Debbs and Crawley v. Chrysler Corp.,810 A.2d 137, 156-59 and n.20 (Pa. Super. 2002) (reversing class certification; no presumption of reliance under Pennsylvania consumer protection statute, even for omissions of material fact, absent a fiduciary relationship).
FTC Act Precedent
The Federal Trade Commission Act prohibits “unfair or deceptive” acts or practices in or affecting [interstate] commerce (15 U.S.C. § 45(a)), and Maryland’s CPA provides that in construing the terms “unfair or deceptive” due consideration and weight be given to the FTC’s and federal courts’ interpretations of those terms as used in the federal act. Section 13-105; Golt v. Phillips, 308 Md. at 10, 517 A.2d at 333. In construing the CPA Maryland appellate courts have endeavored to identify and apply current FTC unfairness and deception precedent. Legg v. Castruccio, 100 Md. App. 748, 642 A.2d 906 (1994); Luskin’s, 353 Md. at 354, 726 A.2d at 708.
The Court of Appeals has also looked to FTC Act precedent for guidance in resolving issues of procedure and proof under the CPA. See Consumer Publishing (agency enforcement discretion; power to proceed by rulemaking; ability to pursue discontinued practices; issuance of press releases; not requiring consumer testimony to find practices deceptive); Luskin’s, 353 Md. at 381, 726 A.2d at 724 (appropriate breadth of injunction).
It is therefore instructive that the federal courts have held that when the FTC brings monetary restitution actions in federal court on behalf of large numbers of consumers pursuant to section 13(b) of the FTC Act, 15 U.S.C. § 53(b), it is entitled to a rebuttable presumption that those consumers relied on the targeted deceptive misrepresentations or omissions. FTC v. International Diamond Corp., et al., 1983-2 Trade Cas. (CCH) 65,725 at 69,704 (N.D. Cal. 1983); FTC v. Kitco of Nevada, Inc., 612 F. Supp. 1282, 1293 (D. Minn. 1985); FTC v. Figgie International, Inc., 994 F.2d 595, 606 (9th Cir. 1993), cert. den., 510 U.S. 1110 (1994). See also Federbush, D., “Obtaining Relief for Deceptive Practices Under FDUTPA,” 75 Fla. Bar Journal 22, 27 (Nov. 2001). The International Diamond court, relying on Blackie and Affiliated Ute, reasoned that “[i]t would be inconsistent with the statutory purpose for the court to stifle effective prosecution of large consumer redress actions by requiring proof of subjective reliance by each individual consumer.” 1983-2 Trade Cas. at 69,709.
FTC Act precedent thus lends further support to shifting the burden of proof on reliance in CPA class actions
The Public Purpose of Statute-Based Class Actions
The Maryland courts have looked to federal courts’ interpretations of Fed. R. Civ. P. 23 in construing and applying Maryland Rule 2-231. Snowden v. Baltimore Gas & Electric Co., 300 Md. 555, 562 n.5, 479 A.2d 1329, 1333 n.5 (1984)(Maryland’s class action rule derived from and based on federal class action rule); Philip Morris, 358 Md. at 724, 729, 752 A.2d at 219, 222 (also relying extensively on Newberg and Conte, Newberg on Class Actions (3d. ed. 1992), hereinafter “Newberg”). Federal precedent recognizes that class actions based on statutory claims are a quasi-public procedural vehicle for supplementing deterrent and restitution actions brought by public enforcement authorities. As the Supreme Court opined in Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 338, 100 S. Ct. 1166, 1174 (1980) (National Bank Act and state usury law), “[t]he aggregation of individual claims in the context of a classwide suit is an evolutionary response to the existence of injuries unremedied by the regulatory actions of government.” See also Polgow v. Anderson, 43 F.R.D. 472, 489 (E.D.N.Y. 1968)(securities laws; a class action “as a way of redressing group wrongs is a semi-public remedy administered by the lawyer in private litigation”), cited in Newberg § 1.06 n.72.
Such precedent also confirms class actions’ imbalance-rectifying function. Roper, 445 U.S. at 339 (class action enables redress when [multiplicity of] small individual suits are not economically feasible due to amount in controversy); Newberg § 5.07 (class actions may be only effective means of redress for class members who are ignorant of rights, incompetent, or reluctant to sue a party such as a creditor with legal authority over them). In dictum in another opinion, the Maryland Court of Appeals has similarly recognized that class actions can “overcom[e] procedural or economic impediments that might hinder a normal action…” Gilman v. Wheat, First Securities, Inc., 345 Md. 361, 381, 692 A.2d 454, 464 (1997).
This function of statutory class actions, as well as considerations of fairness and equity, argue for lowering barriers to their maintenance which derive from the widespread nature of defendants’ own practices.
Akparewa v. Amoco
In 2001, the Court of Special Appeals specifically applied a rebuttable presumption of reliance in private actions brought under another remedial statute designed to redress an imbalance of power between transacting parties, the Gasohol and Gasoline Products Marketing Act (“PMA”), Commercial Law Article § 11-301 et seq. The PMA requires, inter alia, that gasoline distributors disclose to prospective dealers, before concluding any marketing agreement, seven designated items of information (including, for example, the gallonage history over a designated time frame of the location under negotiation).
In Akparewa, et al. v. Amoco, 138 Md. App. 351, 360, 771 A.2d 508, 514, the court observed that the 1973 law “addressed what the General Assembly evidently saw as an imbalance of economic power between the oil companies and their dealers that it believed was detrimental to the State and in need of redress.” The court reasoned that
There is no express language in [the statute] that creates a presumption, either of reliance or of liability, arising out of a failure to comply with the disclosure provision…
Because one of the purposes behind this legislation was to help the potential franchisee, who is in a weaker position compared to the powerful oil company-franchisor, we conclude that the General Assembly intended that a prospective dealer have the benefit of this important information ‘before entering into marketing agreements,’ (citation omitted), and created a presumption of reliance by the prospective dealer on the information to be provided. This presumption may be rebutted, however, if it can be shown that the buyer did not rely upon the inadequate or inaccurate disclosure and, consequently, was caused no damages by the violation.
138 Md. App. at 363-65, 771 A.2d at 514-16. It is true that, unlike the PMA, the CPA does not mandate affirmative disclosures of specified information deemed highly material (except, in telephone solicitations, of solicitor’s name, trade name, call purpose and good, services, real property, or intangibles solicited (section 13-301(10)). At the same time, though, it must be noted that Akparewa was not even a class action. Its holding adds Maryland precedent to that of federal and other state courts for shifting the burden of proof on reliance to remedy an imbalance of economic power.
Retaining the traditional burden of proof in individual actions under the CPA does not pose an analogous threat to the very viability of such actions. This article does not advocate shifting the burden in those actions, with the possible exception of those omissions claims where something beyond the ordinary arm’s-length provider-consumer relationship is present and gives rise to a duty to disclose. Compare Affiliated Ute (and its progeny), where the presumption as to omissions was applied in individual as well as class actions, but defendant market maker had a substantially closer (facilitating) relationship with the buyers than a merchant has with consumers; and Blackie, whose holding the court explicitly applied to class and individual actions (524 F.2d at 908), but which implicated a broad issue of the integrity of securities market pricing that is not present in CPA claims. See also Federbush, D., “FDUTPA for Civil Antitrust: Additional Conduct, Party, and Geographic Coverage; State Actions for Consumer Restitution,” 76 Fla. Bar Journal 52, 61 n.4 (December 2002). It is not inconceivable, however, that for some types of misrepresentations or other omissions great difficulties of proof could warrant shifting the burden of proof on reliance in individual CPA actions.
Applying the presumption in class actions does not conflict with the Maryland courts’ recognition of the distinction between public and private actions under the CPA. See, e.g., Consumer Publishing, 304 Md. at 778, 501 A.2d at 72 (limitations on the relief available in actions brought by private parties are not necessarily applicable to public enforcement proceedings). In state enforcement actions the consumer’s statement as to reliance is required only in post-trial claims processing. In a private class action the defendant would be able to present rebuttal evidence on reliance as to any class member during trial itself, and the finder of fact would determine reliance based on an assessment of all the evidence presented by defendant and class member.
Applying a rebuttable presumption of reliance in CPA class action claims is justified, equitable, and called for by the CPA’s statutory purposes and relevant precedent from Maryland, the federal courts, and other states. Phillip Morris does not militate otherwise. The presumption will enhance CPA enforcement and consumer protection in the State. It will also enable class treatment for some deception-type claims that could not be so certified as common law fraud or negligent misrepresentation causes of action.
Of course, in ruling on class certification motions as to CPA claims the courts must always address all criteria under RCP 2-231 to determine whether class treatment is appropriate. A well-supported showing of defendants’ likely submission of substantial and varying rebuttal evidence on reliance, as to each of a very large number of individual class members, would still be a factor in the analysis under Maryland Rule 2-231(b)(3) criteria such as commonality and manageability.