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Sept. 20, 2013

Private Lawsuits Are an Essential but Endangered Complement to Public Enforcement of Consumer Protection Laws

Clauses in Contracts Increasingly Block Access to Courts While State Attorneys General Lose Funding Needed to Protect Public

WASHINGTON, D.C. – Private litigation not only has a record of providing redress directly to consumers who have been harmed, but also of spurring public actions that result in penalties and deter future fraudulent activities, according to a new Public Citizen report released today. The report comes at a time in which attorneys general are increasingly relying on private litigation because budget cuts threaten their ability to defend consumers.

The report also warns that businesses’ increasing use of contract language prohibiting consumers from seeking redress in court threatens to reduce both consumers’ ability to hold wrongdoers accountable and the ancillary benefits that public enforcement agencies have traditionally drawn from private litigation.

“The importance of consumer access to the court in seeking compensation for deceptive and fraudulent business practices and holding companies accountable for how they treat people cannot be overstated,” said Adam Crowther, researcher for Public Citizen’s Congress Watch division.

Public Citizen’s report analyzes four episodes in which private litigation complemented or spurred critical enforcement actions by public officials. These examples are:

• Tobacco. Documents obtained by private attorneys formed the basis for state litigation brought against tobacco companies in the 1990s. Those lawsuits led to the 1998 Master Settlement Agreement, a landmark agreement in which the tobacco companies agreed to pay more than $200 billion to the states.

• Discriminatory insurance policies. In 1999, private lawsuits complemented state investigations into racially discriminatory insurance pricing by revealing information about more than 5 million policies that had been sold to more than 2 million customers. Both the private and public actions resulted in compensation for consumers.

• Deceptive marketing of insurance products. In the early 1990s, private lawsuits brought against Prudential Financial Inc. led to the creation of a multi-state task force composed of state insurance regulators. The task force’s work resulted in millions of dollars in fines being levied against Prudential.

• Predatory annuities. In 2003, class-action lawsuits were brought against Allianz Life Insurance Co., alleging it used deceptive marketing and sales practices against senior citizens. Shortly thereafter, the attorneys general of California and Minnesota brought their own suits against Allianz. Private and public litigation resulted in financial compensation and regulatory changes.

Businesses have employed a two-pronged strategy to deprive consumers from being able to seek redress in court, Public Citizen’s report explains. First, they have increasingly inserted clauses into contracts that stipulate that any potential disputes will be settled by a private arbitration firm of the business’s choosing.

In addition, arbitration clauses often contain class-action bans. Class-action bans functionally prohibit consumers from seeking damages for many types of consumer fraud because the damages to each individual consumer often are not large enough to justify the cost of litigation for each of them individually.

The challenge posed by class-action bans has increased in recent years amid U.S. Supreme Court decisions in AT&T Mobility v. Concepcion (2011) and American Express v. Italian Colors (2013) that have upheld the enforceability of class-action bans included in arbitration clauses.

The assault on consumers’ legal rights comes as declining state consumer protection and enforcement budgets have made private lawsuits ever more essential. In fiscal year 2013, 31 states reported a combined budget shortfall of $55 billion, leading to millions of dollars being cut from state attorney general offices.

Public Citizen’s report outlines reforms that regulators and lawmakers should undertake. The Securities and Exchange Commission (SEC) and Consumer Financial Protection Bureau (CFPB) should avail themselves of the option provided in the Dodd–Frank Wall Street Reform and Consumer Protection Act to ban forced arbitration clauses in consumer financial and investor contracts. Additionally, Congress should pass the Arbitration Fairness Act, which would prohibit the use of forced arbitration clauses in consumer contracts in general.

“It’s of paramount importance that the CFPB and the SEC ban forced arbitration clauses from consumer contracts under their jurisdiction,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division. “Congress also should pass the Arbitration Fairness Act, which will protect consumers from predatory and misleading business practices.”

The report is available here.

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