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State CPAs: Experiment or Risk to the Federal Scheme?

It was Supreme Court Justice Louis Brandeis who first introduced us to the idea that experimentation by individual States – “in things social and economic” – might be a good thing. In his 1932 dissent of the majority’s decision in New State Ice Co. v. Liebman, he wrote:

“To stay experimentation in things social and economic is a grave responsibility .. [I]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Thus began one of the more enduring metaphors in modern federalism – state and local governments as “laboratories of democracy,” legislating innovative approaches to address the social and economic problems that confront their citizens (according to Wikipedia, the phrase “defines” our unique system of federalism).   Of course, this formulation of federalism has an important limitation – an individual state’s approach to a problem, no matter how innovative, cannot pose risks to the larger, federal scheme.  But what happens if a majority of states engage in experiments with a similar approach that no longer mirrors the federal scheme?

This is the intellectual tension that dominates the discussion around the efficacy of state consumer protection laws – as evidenced in this groundbreaking report analyzing private litigation under state consumer protection acts or “CPAs.”  The report, by the Civil Justice Institute at Northwestern Law’s Searle Center for Law, Regulation & Economic Growth, examines the differences between state consumer protection law (as interpreted by state courts), and the federal consumer protection standard (as applied by the FTC).  And it arrives at a startling conclusion: nearly 40% of the claims brought under state consumer protection laws between 2000 and 2007 would not constitute illegal conduct under federal or FTC standards.

The Searle report aims to answer an important question: why are there differences between consumer protection enforcement under CPAs vs. the FTC standard?  To answer this question, the report engages in a particularly rigorous analysis. Since this was the first time a comprehensive look of CPAs was being undertaken, an initial step was to gather the data from which to conduct the research.  An enormous database of over 17,000 federal and state appellate decisions issued between 2000 and 2007 was assembled; then a random sample of cases was “coded” using general characteristics of state consumer protection acts.  The results were reviewed by a “Shadow FTC” of individuals with “substantial” consumer protection and FTC experience, as well as a Consumer Protection Task Force, led by Professor Joshua Wright of George Mason University.

The report’s conclusions are quite remarkable:

  • Between 2000 and 2007, CPA litigation increased by 119% – a rate of increase that was higher than that of tort litigation during the same period.  Litigation was most active in states with “vague statutory definitions” of prohibited conduct, and in states whose statutes provide for expanded recoveries by consumers.
  • CPAs allow consumers to bring actions in state courts alleging conduct that would not be considered illegal under the FTC standards for consumer protection.  So, to the extent that CPAs are intended to be complements to FTC action, they “appear to overshoot the mark.”
  • The Shadow FTC found illegal conduct in only 22% of the randomly generated cases, and about 62% of the successful cases.  This means that based on the report’s random sampling, nearly 40% of actions brought under state CPAs did not allege conduct that would have been considered illegal under the FTC standard.
  • The Shadow FTC also found that only 12% of the randomly generated CPA cases and 23% of successful CPA cases would result in FTC enforcement.  This finding gives some support to the theory that CPAs allow litigants to file cases that approximate FTC enforcement actions, but might not warrant FTC resources.

Surprisingly, the report does not separate out actions brought by state Attorneys General from those brought by private class counsel.  Many state statutes empower the Attorney General or other state agency to investigate and bring actions based on CPA violations on behalf of state consumers. Attorneys General also have primary responsibility for enforcement of their states’ consumer protection law, and AG actions can differ considerably from private litigation brought by class counsel.  For these reasons, the report’s methodology should separate cases brought by AGs from those brought by private counsel.

In fact, I would urge the report’s authors to go a step further and differentiate between private individual actions and private class actions under CPAs.  Perhaps this could be a collaborative project between the Searle Civil Justice Institute and its sister effort, the Searle AG Education Program.   The revised data will better reveal a snapshot of general trends, e.g. whether most States follow a unified approach to address certain consumer protection violations in AG, class and private individual actions.  The exercise will also provide valuable insight into how best to harmonize state and federal consumer protection enforcement – a move that Justice Brandeis, with his commitment to progressive causes, would probably appreciate. In this way, the Searle report will be better able to assess the impact of state legislative “experiments” and determine if they are really a risk to national consumer protection efforts.

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