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New Analysis Highlights Six Consumer Transactions Made Cheaper By Class Action Lawsuits

Aug. 20, 2003

New Analysis Highlights Six Consumer Transactions Made Cheaper By Class Action Lawsuits


Federal Legislation Restricting Class Actions Would Mean More Overcharges, Public Citizen Says

WASHINGTON, D.C. – Home and auto purchases, long distance calls and wire transfers are among six common transactions that cost consumers less because of class action lawsuits, according to an analysis released today by the consumer group Public Citizen.

The U.S. Senate is expected to vote in September on legislation that would restrict class action lawsuits. If passed, the bill could result in higher prices for consumers, said Jackson Williams, legislative counsel at Public Citizen and author of the analysis.

“Businesses keep dreaming up new ways to overcharge, and it usually takes a class action lawsuit, or the threat of one, to stop them,” Williams said.

The analysis compared costs of six services before and after companies settled class actions:

  • Credit Cards. Cost of “no annual fee” credit card before class action: $35.
    After: $0.
  • Telephone Service. Cost of one-minute long distance call before class action: $2.87. After: $0.05.
  • Car Purchase. Cost of auto title and registration before class action: $154. After: $104.
  • Wire Transfers. Cost of wiring $300 to Mexico before class action lawsuit: $55. After: $20.80.
  • Health Insurance. Patient’s 20 percent co-payment for surgery before class action: $496.26. After: $222.
  • Home Purchase. Fee for preparing closing documents before class action: $750. After: $250.

Class actions reduce prices by combating the use of hidden costs, the analysis explains. Hidden costs are undisclosed fees, markups and kickbacks that add to the advertised price of a good. Often consumers will switch to a product whose price seems lower, not realizing that they will pay more than they bargained for.

Hidden costs prevent consumers from effectively comparison shopping and usually violate unfair competition laws. For example, a lender may advertise a lower mortgage rate than another lender but make up the difference in undisclosed fees and markups. Or a car dealer may inflate the state’s registration fees and pocket the difference.

The analysis compared costs before and after class actions relating to six transactions that are commonly the subject of consumer fraud litigation. Most of the cases helped consumers nationwide. In the credit card case, an Oregon woman sued FleetBoston Financial Corp. after being told she would be charged a $35 annual fee on a “no-annual-fee” credit card six months after she obtained the card. The court ruled in 2002 that consumers should not be charged any fee for at least a year after receiving the card. The phone call case arose when MCI, despiteadvertising “five-cent Sundays,” billed many customers as much as $2.87 for a one-minute call. MCI said the practice was legal under federal guidelines, but MCI stopped the practice after a small business owner from Illinois filed a class action suit. That case, too, helped consumers nationwide. Details of the other cases are available in the analysis.

The mere existence of class actions as a remedy usually keeps businesses from overcharging, Williams said.

“The deterrent effect of class actions is what makes businesses obey consumer protection laws,” he said. “You can bet that other businesses in these industries took note of what happened to these companies.”

The effectiveness of class actions in reducing prices is threatened by the pending legislation. The bill, S. 274, would move class actions from state court to federal court, where restrictive class certification rules make many consumer protection laws virtually unenforceable. The companies lobbying for the federal class action bill are hoping for greater leeway to circumvent those laws, and that means more overcharges, Williams said.