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Class Action Bills H.R. 1875/S. 353: Protecting Companies that Defraud the American Consumer

In the following sampling of typical consumer fraud class action cases a substantial majority, if not all, of the plaintiffs are in-state residents but one or more of the primary defendants are out-of-state defendants. Under the diversity rules proposed in S. 353 and H.R. 1875, the defendant(s) would be permitted to remove these cases to federal court even though the plaintiffs are all, or nearly all from one state, the cases are tried in a single state and they are based on that state’s unique law. Fundamentally, there is no federal interest in these class action cases.

Removals to federal court are detrimental to consumers because:

  • Defendants such as tobacco companies, HMOs, and drug companies that injure the public should not have the power to choose the legal forum they believe will benefit them most.
  • Justice will be considerably delayed for injured consumers. The current high vacancy rate in the federal judiciary has already created a backlog of civil cases. Adding complex and resource-intensive class action cases that traditionally have been handled by the states will create further delays.
  • State judges are more familiar with interpreting the intricate interrelationships of state tort and consumer protection laws. Losing their experience by moving complex class action cases to federal courts is inherently inefficient.
  • State judges commonly are called upon to apply state law to new factual situations. Federal judges will be more reluctant to judicially extend state law; their reticence would have a negative impact on evolving areas of law such as tobacco, gun, HMO, and pharmaceutical litigation.

If S. 353 or H.R. 1875 had been law, the following claims based on state law could have been removed to federal court if the defendant determined that removal would be advantageous:

  • Jeanne C. Lemelledo v. Beneficial Management Corp. of America

In this class action, New Jersey customers of Beneficial Management were forced to pay for credit insurance included with their loans from Beneficial. The suit alleged that Beneficial’s practices violated New Jersey’s Consumer Fraud Act by pre-completing the loan forms to include unwanted and unrequested insurance, creating the impression that such insurance was required in order for the consumer to obtain the loan. The class also alleged that Beneficial violated New Jersey’s Consumer Loan Act by receiving undisclosed commissions from selling the insurance, but charging consumers amounts that did not reflect the actual amounts paid for the insurance. The suit also alleged fraudulent inducement, common-law fraud, criminal usury, conversion and breach of contract. This case would be removable to federal court under S. 353 and H.R. 1875 because the plaintiffs are New Jersey residents but Beneficial is an out of state corporation.

Beneficial contended that it was immune from the New Jersey Consumer Fraud Act claims because it was regulated by the state’s insurance and banking departments. The New Jersey Supreme Court did not agree and held that even highly regulated industries were liable under the Act. The decision reversed the trend in the lower state and federal courts in New Jersey that had exempted companies, particularly insurance companies and utilities, from many such consumer claims. Had S. 353 or H.R. 1875 been the law of the land when this case was filed, this case would likely have been removed to federal court and the federal judge would most likely have followed the previous trend and held that Beneficial could not be held liable. Because this case was allowed to proceed through the state court system, the supreme court of the state was allowed to decide the course of state law. Because of the small size of the individual claims in this suit, Beneficial’s violations of the state law would have gone unanswered.

  • Delay v. Hurd Millwork

Hurd Millwork Company, a Wisconsin corporation, manufactured gas-filled windows and doors and sold them at premium prices for their superior insulating properties. Because these products warp and leak the insulating gas when subjected to changes in pressure, other manufacturers with similar products stopped shipping them to western states because the trip over the mountains resulted in warping. Hurd modified their products with a “breather device,” which it falsely claimed prevented warping and loss of insulating qualities, and continued to market and ship their products to western states. Hurd advertised the products as being certified by the National Fenestration Rating Council (NFRC). However, the NFRC never tested, much less certified, the windows with the “breather device.” Moreover, the “breather device” did not prevent the warping and loss of insulation. Hurd continued to misrepresent the insulating properties of the products and sold them at premium prices, despite warnings from their own agents and distributors, until this class action suit was filed in 1998.

The suit, filed in Washington on behalf of consumers in western states who bought Hurd windows and doors, alleged Deceptive Business Practices, Misrepresentation, Breach of Express Warranty, and Negligence under the Washington Consumer Protection Act. Under S. 353 and H.R. 1875, this class action would have been removable to federal court because the defendant is diverse from the plaintiffs, all of whom reside in western states. The suit was settled for $5.3 million and Hurd agreed not to make further false claims about the insulating abilities of its windows and doors with “breather devices,” thereby protecting consumers. This suit would not have been brought individually because the damages suffered by each individual were too small to merit individual actions. The success of this suit not only serves to compensate the members of the class, it also protects other consumers in the market for windows and doors.

  • Marcia Spielholz et. al. v. Los Angeles Cellular Telephone Company, Bellsouth Cellular Corporation, AT&T Wireless Services, Inc.

This California class action is comprised of all people who subscribed to cellular telephone services from LA Cellular after June 25, 1990. The class alleges that LA Cellular’s representations about its calling area are inaccurate, misleading, and intentionally deceptive in violation of California’s consumer protection laws. The defendant had touted its “seamless” calling area in a widely distributed advertising campaign and specifically targeted consumers who wanted cell phones for use in emergencies. However, the company knowingly failed to provide coverage in some areas, investing instead in areas that would earn greater profit. In one highly publicized case, a woman who bought a cell phone and subscribed to the defendant’s services was unable to call 911 when she was carjacked because she was in one of the gaps where service was absent. She was shot in the face by her attacker. The class action is pending.

Most, if not all, of the plaintiffs are California residents, but many of the defendants are out-of-state corporations. Under S. 353 and H.R. 1875, the defendant would be able to remove this case to federal court and the state courts would be unable to decide whether the defendant’s conduct is reached by the state consumer protection laws.

  • Delilah Miller, et. al. v. Colortyme, Inc., et. al.

Class is comprised of individuals who entered rent-to-own contracts after April 7, 1986, that provide for ownership at the end of a predesignated term. The class alleges that DEF, Colortyme’s parent corporation, violated various Minnesota consumer protection statutes by charging an excessive amount of interest on rent-to-own purchases in their stores. The defendants argued that the statute did not apply to rent-to-own contracts, an issue of first impression. The Supreme Court of Minnesota found that the statute does apply to such contracts.

Because Colortyme is a Texas corporation, they could have removed this case to federal court even though most, if not all, of the plaintiffs are Minnesota residents. The federal court would have had to decide, with no guidance from the state courts, how to apply the state consumer protection law. Moreover, because claims based on such consumer protection laws are frequently too small to bring individually, under S. 353 and H.R. 1875, the vast majority of claims under this state statute would be decided not by the state courts but by federal courts.

  • Morgan, Sword, et al. v. Bell Atlantic

This class consisted of customers of Bell Atlantic-West Virginia, Inc. who paid for inside wire maintenance service. The class alleged that Bell Atlantic “bundled” inside wire maintenance service with their regular phone service and charged their customers a monthly service charge. The bundling practice and the defendant’s solicitation and billing practices were alleged to violate the West Virginia Consumer Protection Act provisions on fraud, fraudulent concealment, breach of duty of good faith and fair dealing, and monopolization. Most, if not all, of the plaintiffs are residents of West Virginia but Bell Atlantic is an out-of-state corporation. Despite it’s solicitation of large numbers of customers in West Virginia, and holding a virtual monopoly of the telephone market, under S. 353 and H.R. 1875 the defendant would be able to evade the state court and remove this case to federal court.