Between approximately 1965 and 1975, a number of federal statutes were passed to provide additional protections for consumers, including the Truth-in-Lending Act, the Magnuson-Moss Warranty Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Motor Vehicle Information and Cost Savings Act (aka the Odometer Act). Recognizing the need for private enforcement mechanisms to supplement public enforcement, all of these statutes provided that prevailing consumers could recover their attorney’s fees. Many of these statutes provided new statutory causes of action not recognized under the common law or statutory causes of action with reduced burdens of proof. This legislation, in effect, recognized that the common law with its high burdens of proof, extensive defenses and preclusion of attorney’s fee awards was not protecting consumers from fraud and deception in the marketplace.
The spirit of reform also extended to the states, resulting in the passage of statutes prohibiting deceptive and unfair acts against consumers. In Texas, the Deceptive Trade Practices - Consumer Protection Act, commonly known as the DTPA, was passed in 1973 to lower the burdens for consumer plaintiffs with complaints of deceptive trade practices against merchants. Specifically, the new DTPA was intended as a replacement for the common law fraud cause of action, which was difficult to prove and only practical to raise in cases involving substantial damages. Like the new federal statutes, the DTPA provided the means for private enforcement through the award of attorney’s fees to prevailing consumer plaintiffs.
Fast forward to 2005. Where are we now in terms of private enforcement of consumer protection laws? Frankly, tort reform has taken a bite out of private enforcement. To evaluate how attorneys can represent consumer plaintiffs in the future, we must first review the history of tort reform’s impact. Once that is done, we can then consider how to cope with laws and courts that are far less sympathetic to consumer claims than 30 years ago.
A. Short legislative history of the DTPA
The DTPA, as originally enacted, was a plaintiff lawyer’s dream. The act required the courts to construe the statute liberally to promote consumer protection, provided a laundry list of specified deceptive practices which was not exclusive, awarded consumers their actual damages for violations of the act and automatically trebled those damages, provided a means of suing to enforce the act by class action and required the giving of presuit notice at least 30 days’ prior to suit. In addition, the act provided a panoply of public enforcement mechanisms (best left to John Owens’ paper). In terms of private enforcement, this new act was revolutionary.
Unlike common law fraud, there was no mens rea requirement of intent or recklessness, as the law effectively imposed strict liability on merchants found to have made affirmative misrepresentations, even if made unknowingly. See Robinson v. Preston Chrysler Pymouth, Inc., 633 S.W.2d 500 (Tex. 1982)(“when a seller makes representations to the buyer, he is under a duty to know if the statements are true”). Unlike common law fraud, it did not openly recognize many of the existing common law defenses, leading the courts to hold repeatedly that most common law defenses were unavailable. Smith v. Baldwin, 611 S.W.2d 611 (Tex. 1980)(defense of substantial performance unavailable); Weitzel v. Barnes, 691 S.W.2d 598 (Tex. 1985)(parole evidence defense unavailable to prevent proof of an oral misrepresentation); Kennemore v. Bennett, 755 S.W.2d 89 (Tex. 1988)(waiver and estoppel defenses unavailable).
To provide incentives for enforcement generally not recognized by common law, the new act automatically trebled all actual damages awards and provided for awards of attorney’s fees to prevailing consumers. In the interest of encouraging settlement prior to litigation, however, the act provided for pre-suit notice.
Early attempts at modifying the DTPA had only modest effect. In 1975, a bona fide error defense was made available in DTPA class actions, but it also required the giving of restitution to all members of the class. See Appendix B-1, Alderman, The Lawyer’s Guide to the Texas Deceptive Trade Practices Act (1996). In 1977, the act was amended to expand its scope by adding real estate to the definition of “goods,” to add causes of action for unconscionability and distant forum abuse, to permit reference to Federal Trade Commission Act precendent in determining whether an act was deceptive, to provide the bona fide error defense to all actions under the act, to afford two new defenses and a basis for seeking indemnification or contribution, to ease the elements for the appointment of a receiver when attempting to collect a DTPA judgment and to repeal the act’s class action provisions. Alderman, Appendix B-3.
The repeal of the DTPA’s class action provisions was not a significant change. Prior to the repeal, Tex.R.Civ.P. 42 had been amended to make it close to Fed.R.Civ.P. 23, so there was no longer a need for special class action provisions in the DTPA.
Not until 1979 did the Legislature roll back the DTPA in any appreciable way, but none of the changes prior to 1995 could be considered catastrophic.
In 1979, the DTPA was amended to limit private claims for deception to the laundry list, to permit the recovery of additional damages upon a showing of knowing conduct but retaining an automatic trebling of the first $1,000 in actual damages, and to provide a new defense based upon the defendant’s reliance on information from third parties. Alderman, Appendix B-4. Then in 1981, the act was amended to permit waivers of the act’s protections for entities with assets of more than $25 million. Alderman, Appendix B-5. In 1983, entities with assets of $25 million or more were excluded from the definition of consumer. Alderman, Appendix B-6. In 1987, a cause of action for misrepresenting corporate status was added to the laundry list. Alderman, Appendix B-8. In 1989, more substantial changes were made, including a significant expansion of the waiver exception, the imposition of proportionate responsibility in personal injury cases and the requirement that pre-suit notice be given 60 days before suit instead of 30. Alderman, Appendix B-9. In 1989, the Legislature also enacted the Residential Construction Liability Act (RCLA) which, in residential construction cases involving claims for damages, superimposed a different and more detailed pre-suit notice procedure that permitted builders to demand the right to inspect, that provided builders could make an offer of repairs instead of a monetary offer as provided by the DTPA, that provided builders new defenses related to contributory negligence and the failure to mitigate damages by the homeowner, limited damages to certain specific elements and eliminated the right to recover post-offer attorney’s fees if an offer was unreasonably rejected by the homeowner.
McQuality, in a paper entitled “R.C.L.A. - Home Warranties,” presented at the Advanced DTPA - Consumer Law Course in May of 1991. RCLA, as written, overrode the DTPA to the extent that there was any conflict. Id. In 1993, RCLA was amended to impose a damages cap tied to the purchase price of the home and to limit the recoverable damages when a builder complied in good faith with the settlement provisions of the act. McQuality, paper entitled “An Update on the Texas Residential Construction Commission Act: Is It Really the End of the World As We Know It? . . . What You Need to Know,” presented at the Consumer Law: Doing Well By Doing Good course in November of 2004.
In 1995, tort reform finally came into its own and huge changes were made to the DTPA. Specifically, the act was amended to permit more waivers of rights under the DTPA, to delete the substantive alternative prong of the unconscionability definition, to add a cause of action for taking advantage of a disaster to charge excessive prices, to afford a partial exemption for professional services, to eliminate the automatic trebling of the first $1000 in damages, to permit the recovery of mental anguish only upon a showing of knowing conduct and to permit additional damages based on mental anguish injuries only upon a showing of intent, to liberalize the award of attorney’s fees to defendants, to limit awards of prejudgment interest, to require a showing of detrimental reliance to recover any form of relief for misrepresentation, to add a right to inspect in response to the pre-suit notice requirement and to limit awards of attorney’s fees to the amount earned through the date of an offer if a reasonable offer was made prior to suit and rejected by the consumer. Alderman, Appendix B-12.
In 2003, tort reform made further inroads at the Legislature. First of all, the Residential Construction Commission Act (“RCCA”) was passed. The RCCA provided for the filing of all residential construction complaints with the commission as an administrative exhaustion requirement, required complaining consumers to marshal all of their evidence and expert opinions at the time of filing the administrative complaint, provided for state sponsored inspections and administrative adjudications, stated that a state inspector’s recommendation provided a rebuttable presumption that a construction defect does or does not exist and the reasonable manner of repair, and replaced the existing implied warranties of habitability and good and workmanlike construction with a new statutory warranty to be devised by the commission. In addition in response to cases limiting the reach of the RCLA,2 the Legislature also amended RCLA to provide that the failure to follow the settlement procedures would lead to dismissal and not merely abatement and the cap on damages and that the limit on the types of damages would apply even when the builder fails to make a reasonable offer.
O’Donnell v. Roger Bullivant of Texas, Inc., 940 S.W.2d 411 (Tex. App. – Fort Worth 1997, writ denied)(failure to make reasonable offer precludes builder from relying on RCLA cap on damages); Bruce v. Jim Walters, Homes, Inc., 943 S.W.2d 121 (Tex. App. - San Antonio 1997, writ denied)(fraud claim not covered by RCLA); Perry Homes v. Alwattari, 33 S.W.3d 376 (Tex. App. - Fort Worth 2000, pet. denied)(failure to make reasonable offer precludes builder from asserting RCLA limits on the type of damages recoverable); Sanders v. Construction Equity, Inc., 42 S.W.3d 364 (Tex. App. - Beaumont 2001, pet. denied)(RCLA no limit on exemplary damages).
Alderman, in a paper entitled “How 2003 Legislation Actions Impact the DTPA,” presented at the Comprehensive Consumer Law Seminar in August of 2003; McQuality, 2004 paper. Second, a major tort reform bill passed that had other significant effects upon consumers, including an opportunity for defendants to make an offer after suit is filed and to recover attorney’s fees and other litigation costs as a form of defensive recoupment if the trial recovery was at least 20% less than the amount of the offer. Alderman, 2003 paper.
B. Recent Judicial History of the DTPA
In the past ten years, consumers have lost virtually every case that made its way all of the way to the Texas Supreme Court. Slowly but surely, the Court on its own has construed the DTPA in such a way that it is a mere shadow of its former self with few advantages over common law fraud. What follows is a short description of the cases dating back to 1995.
1. Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995)
In this case, a limited partnership purchased a commercial building “as is” after an inspection and then discovered, after the purchase, that the building contained asbestos fireproofing which would be expensive to remediate. The buyer sued the seller for misrepresenting the quality of the building and for knowingly failing to disclose the material fact of asbestos contamination. Concentrating on the sophistication of the buyer, the Supreme Court held that the existence of the “as is” agreement precluded a finding of “producing cause,” because the buyer had disavowed any reliance upon the seller’s representations. While recognizing that this effect on causation could be avoided when there has been fraud in the inducement or concealment of information by the seller and when it would be unfair under the totality of circumstances, the Court has unleashed a genie with many unforeseen consequences.
Comment: To avoid the effect of an “as is” clause in an ordinary consumer case, the consumer is now required to show that any “as is” clause is part of a “boiler-plate” provision and entered into by parties with unequal bargaining positions. In short, you want to show that your client is an unsophisticated consumer with far less knowledge and resources than the seller. By so doing, the “as is” clause will not preclude a finding of causation.
2. Parkway Company v. Woodruff, 901 S.W.2d 434 (Tex. 1995)
In this case, some residents in a subdivision sued a developer that changed its master plan after they purchased their home and this change resulted in their home repeatedly flooding. The Supreme Court ruled that the law did not recognize any implied warranty relating to future development services and that events after sale cannot be considered in determining whether a seller has acted unconscionably in violation of the DTPA.
3. Abbott Laboratories v. Segura, 907 S.W.2d 503 (Tex. 1995)
The plaintiffs in this case argued that the defendant manufacturers were seeking to fix the wholesale price of infant formula and to monopolize those markets. To avoid the bar on such actions against indirect sellers under state antitrust law, the plaintiffs alleged that this conduct was unconscionable under the DTPA. The Supreme Court held that claims barred by state antitrust law are also barred if pled as DTPA claims.
In short, a purchaser of a product could only sue the immediate seller for antitrust violations and is prohibited from pursuing other parties up the chain of distribution such as manufacturers.
In this case, a business sued SWB when its SWYP advertisement did not run and after a sales representative had promised a substantial increase in business if the advertisement ran. Finding that SWB had only breached its contract to run the advertisement, the Supreme Court affirmed the dismissal of all DTPA claims. The Court further found that the only representation made to induce the contract was a promise to perform under the contract, and the breach of that duty only sounds in contract. It reiterated that to permit this to be treated as a DTPA claim would turn all breach of contract claims into DTPA claims.
5. Amstadt v. U.S. Brass, 919 S.W.2d 644 (Tex. 1996)
In this case, homebuyers sued a number of defendants over the practice of installing deficient plastic pipes in new homes. Specifically, the plaintiffs sued the manufacturers of the pipe and the plastic used to fashion the pipe for making misrepresentations to builders about the quality of the pipe. Finding that any such misrepresentations were not made in connection with the homeowners’ purchase of their homes, the Supreme Court found no DTPA liability on the part of the upstream suppliers.
Comment: This case, however, would not prevent a builder from bringing a third party claim for indemnification or contribution against a manufacturer that made misrepresentations about products incorporated by the builder into a new house.
6. Arthur Anderson & Co. v. Perry Equipment Corp., 945 S.W.2d 812 (Tex. 1997)
In this case, an accounting firm was sued for doing a faulty audit of a firm in the process of being purchased. Specifically, the accounting firm represented that a pipeline firm was profitable when it was not, and the plaintiff would not have purchased the pipeline firm had it known the firm was not profitable. While upholding the plaintiff’s consumer status and permitting the DTPA to apply, the court overturned the trial court’s award of damages and remanded the matter for trial. As a part of the remand, the Supreme Court also held that plaintiffs cannot recover attorney’s fee awards that were merely a percentage of the total recovery as authorized by the consumer’s retainer agreement, finding that the factors in Tex. Disciplinary R. Prof. Conduct 1.04 must be considered in any determination of fees. Thus, a contingent fee of 1/3 or 40% would not govern the issue.
7. American Tobacco Co. v. Grinnell, 951 S.W.2d 420 (Tex. 1997)
In this case, the survivors of a smoker sued a tobacco company under various theories, including strict liability, breach of express and implied warranty, and fraud associated with the failure to disclose the health and addiction risks of smoking before the deceased smoker began to smoke. While the Court remanded the implied warranty claim due to the failure of the defendant to establish common knowledge of the addictive nature of nicotine, the Court also dismissed the fraud and express warranty claims on the basis that both claims require some proof as to reliance.
Query: Since reliance is often used for denying class certification on the basis that individual issues will predominate over class issues, see Wall v. Parkway Chevrolet, 2004 Tex. App. LEXIS 9586 (Tex. App. – Houston [1st Dist.] 2004) and Peltier Enterprises, Inc. v. Hilton, 51 S.W.3d 616 (Tex. App. - Tyler 2001, pet. denied), does this ruling preclude DTPA class actions based on express warranty?
8. Rocky Mountain Helicopters v. Lubbock County Hospital District, 987 S.W.2d 50 (Tex. 1998)
Here, the hospital owned several helicopters to serve as ambulances and hired an outside firm to handle maintenance and refueling. When a fuel spill occurred which cost $300,000 to clean up, the hospital sued the outside firm for breach of an implied warranty to perform services in a good and workmanlike manner. The Court found that refueling was not the type of activity covered by the implied service warranty, thereby limiting the hospital to its negligence remedy and suggesting that a breach of contract claim might have been available.
7. In re Alford Chevrolet-Geo, 997 S.W.2d 173 (Tex. 1999)
In this case, after defendants filed a motion to abate based on the failure to provide pre-suit notice, the plaintiffs’ counsel sent notice on behalf of an entire class of car buyers. Defendants moved for abatement on the theory that the notice was inadequate unless it was done on behalf of only the named plaintiffs, presumably on the chance that they could moot out the entire class action by paying the demands made on behalf of individual consumers. Defendants cited to the repeal of the DTPA’s own class action provisions to suggest that either DTPA class actions were not permitted or that payment of individual claims to moot out potential class claims was permissible. The Court, however, noted that the DTPA class action provisions were repealed when they were no longer necessary, given an amendment to Tex.R.Civ.P. 42. In short, the Court stated that pre-suit notice could be given on behalf of a class.
Comment: The plaintiffs filed the suit without prior notice to avoid the risk that the individual claims of the named plaintiffs would be paid and possibly mooting out any opportunity to file a class action. While the Alford decision permits putative classes to give pre-suit notice and thereby avoid this risk of mooting the class claims through cherry picking of the named representative plaintiffs, other changes in the law render this decision largely pointless. Specifically, the requirement of reliance in all laundry list claims imposed by the 1995 amendments means that DTPA class actions based on misrepresentations are unlikely to be certified. Likewise, the imposition of a reliance element to express warranty claims makes it unlikely that such claims can be certified as classes.
8. Gunn Infiniti, Inc. v. O’Byrne, 996 S.W.2d 854 (Tex. 1999)
In this case, a buyer purchased an automobile on the representation that it was undamaged and later learned that it had been previously damaged. In response to a demand letter, the seller offered to replace the car. At trial, the seller submitted a mitigation of damages question based on the buyer’s failure to settle. The Supreme Court ruled the common law defense of mitigation applied to DTPA claims, finding the pre-suit settlement provisions of the act did not supplant this common law defense. On the other hand, the Court held that an offer that required the release of all claims did not impose any duty to mitigate by the plaintiff-buyer. Thus, if the seller had merely offered to replace the original car without seeking any release, the seller would have been entitled to raise the mitigation defense.
Comment: Smart defense counsel can effectively moot DTPA claims by offering substantial relief without seeking any release of claims, thereby potentially precluding any recovery of attorney’s fees.
9. Miller v. Keyser, 90 S.W.3d 712 (Tex. 2002)
In this case, the buyer of two lots in a subdivision sued a homebuilder and its agent over misrepresentations made by the sales agent. The homebuilder was dismissed as a defendant on limitations grounds, but a judgment was entered after a trial against the agent. The court of appeals reversed the trial court on the basis that an agent acting within the course and scope of his authority could not be held personally liable, relying upon Karl & Kelly Co. v. McLerran, 646 S.W.2d 174 (Tex. 1983). The Supreme Court, however, found that the agent was personally liable under the plain language of the DTPA, refusing to find that he had to have acted intentionally to be liable as an agent. Specifically, the Court found that the McLerran decision had been implicitly overruled years ago and concluded that a corporate agent is responsible for his own acts under the DTPA.
Comment: This is the most pro-consumer decision made by the Texas Supreme Court in the past 10 years. Unfortunately, it is a rare example of the Court’s recognition of the rights of consumers.
10. Centex Homes v. Buecher, 95 S.W.3d 266 (Tex. 2002).
In this case, a class of consumers filed a suit to declare void a new home builder’s disclaimer of the implied warranties of habitability and good and workmanlike construction. The San Antonio Court of Appeals ruled that the disclaimers were invalid, finding implied warranties would be superfluous if they could be easily disclaimed. The Supreme Court also ruled that the implied warranty of habitability could not be disclaimed generally, permitting such disclaimer only when the known defects are clearly disclosed. The Court also held that the more important implied warranty of good and workmanlike construction could be disclaimed if the construction contract “provides for the manner, performance or quality of the desired construction.” In other words, if the construction contract defines the level of performance, there is no need for a gap-filler such as the implied warranty of good and workmanlike performance to supply such a standard of performance.
Comment: My preference would have been for the Court to hold that implied warranties cannot be disclaimed, as otherwise they are superfluous. Nevertheless, it will be difficult under this ruling for a builder of a new home to disclaim the implied warranty of habitability, as it will be dicey to give full disclosure of defects. Likewise, if the construction contract provides guidance as to the standard of construction by stating, for example, that the plumbing and electrical systems will be built to the local code standard, there may be no need for an implied warranty of good and workmanlike performance, as a breach of contract claim exists in its stead.
The future effect of this ruling may be limited, however, with the passage of the RCCA, which provides that the Residential Construction Commission can issue new regulations defining implied warranties to supplant those provided by the common law.
11. PPG Industries, Inc. v. JMB/Houston Centers Partners LP, 146 S.W.3d 79 (Tex. 2004)
In this case, a company purchased an office building and the seller’s warranty claims. These subsequent owners of the office building then sued over the failure of windows, asserting breach of warranty. The Court found that, as a matter of law, DTPA claims could not be assigned, finding the law was only intended to protect the immediate purchasers.
Comment: The unfortunate effect of this ruling is that the survivability of DTPA claims will now be in doubt, because assignability and survivability tend to be connected.
C. Arbitration and its practical effect on private enforcement
Another recent change is the proliferation of arbitration clauses in credit card agreements, automobile and new home sales contracts and even attorney retainer agreements. The primary practical problem with arbitration is that the added cost is frequently so high that it discourages the making of any claims, and frankly that is my impression as to why such clauses are being used. While such clauses have been effectively challenged in a number of state and federal courts, Texas courts appear to be more pro-arbitration and less willing to consider challenges to arbitration than the courts of any other state.
See, e.g., In re American Homestar of Lancaster, Inc., 50 S.W.3d 480 (Tex. 2001)(arbitration compelled in mobile home contract, despite assertion that binding arbitration was barred by the Magnuson-Moss Act). Nevertheless, some Texas courts have been willing to refuse enforcement of arbitration clauses with particularly odious provisions. Pine Ridge Homes, Inc. v. Stone, 2004 Tex. App. LEXIS 6979 (Tex. App. - Dallas 2004)(court refuses to enforce arbitration agreement that imposes full cost of the arbitration on injured homebuyer with claim when AAA also refused to administer); In re Palm Harbor Homes, Inc., 129 S.W.3d 636 (Tex. App. - Houston [1st Dist.] 2003, orig. proc.)(provision in arbitration agreement unilaterally allowing the manufacturer to opt out of the agreement rendered it unenforceable).
D. Status of Private Enforcement
What does this history mean for private enforcement of consumer laws?
First, DTPA claims are much more difficult to prove than 15-20 years ago, because the Legislature and the courts have imposed a vast number of limitations, rendering the DTPA cause of action a shadow of its former self. With imposition of new defenses, the DTPA is not much better than common law fraud as a cause of action now. (Nevertheless, the DTPA still affords two advantages over common law fraud: (1) strict liability for affirmative misrepresentations without any required showing of mens rea, and (2) the provision of attorney’s fees to prevailing consumers.)
Second, DTPA claims relating to residential construction have become much more difficult with the RCLA notice obligations, the RCCA administrative exhaustion requirements (including the obligation to provide all expert opinions with the original administrative complaint) and the common existence of arbitration agreements in new home contracts. Given the procedural obstacles, only the wealthy will be in a position to pursue residential construction complaints in the future.
Third, the cost of arbitration may make it impossible to pursue many smaller claims, and it clearly will reduce the number of new precedential decisions.
Fourth, the chances of certifying any type of consumer class action in state court is effectively nil. See, e.g., Compaq Computer Corporation v. Lapray, 135 S.W.3d 657 (Tex. 2004); Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675 (Tex. 2002); General Motors Corporation v. Garza, 2005 Tex. App. - San Antonio 2005); Ford Motor Company v. Ocanas, 138 S.W.3d 447 (Tex. App. - Corpus Christi 2004). Given that virtually class certification to be appealed has been reversed in the past few years, Texas state courts are now generally hostile to the concept.
E. How to Cope?
While I limit my practice is limited to representing consumer-plaintiffs and debtorconsumer- defendants, I am not entirely clear on how to deal with the current environment. Nevertheless, I do have a few suggestions:
First, be careful. Only take consumer deception cases when the facts indicative of fraud are compelling. Now is not the time to take a case that requires a court or a jury to take a leap of faith. For example, consider pursuing car title claims, as the consumers frequently are entirely innocent and very sympathetic to judges and juries.
Second, think small and simple. Avoid large cases involving multiple plaintiffs, a class or multiple defendants. Classes will not be certified in state court; suing multiple defendants only leads to multiple defense counsel; and mass actions will probably be treated as second cousins of class actions.
Third, be flexible. Be willing to pursue the right kind of cases in arbitration, assuming that you can persuade your client to bear the full cost or you can limit the cost by utilizing consumer rules (unfortunately with no oral hearing under the AAA consumer rules) or by use of an expedited, less expensive arbitration procedure (such as the expedited arbitration procedure in the AAA commercial arbitration rules). Do not expect to persuade a state court to refuse enforcement of an arbitration agreement, even one that is, in your view, extremely one-sided.
Fourth, be subtle. Consider bringing warranty actions under the Magnuson-Moss Act to avoid DTPA complications, odometer claims under the Motor Vehicle Information and Cost Savings Act to obtain treble damages more easily, and disclosure claims under the Truth-in-Lending Act claim to obtain federal jurisdiction. Access to federal courts can provide an alternative to state courts that are reluctant to recognize the viability of consumer claims. Similarly, bring consumer claims as adversary proceeding complaints in bankruptcy courts, as there is often a higher likelihood of avoiding referral to arbitration inthose courts.
Until the pendulum returns, I can think of no more to add.
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