May/June 2001 

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"Fool me once, shame on you; fool me twice, shame on me."

The foregoing old maxim recognizes that nearly anyone can be tricked a single time, but when it happens repeatedly, the victim may not be blameless. The Minnesota consumer fraud laws traditionally have incorporated some of these themes. But a series of recent rulings by the Minnesota Supreme Court and Court of Appeals make these statutes more user-friendly for those who have been deceived by sharp practices.

The recent Supreme Court decision, Group Health Plan v. Phillip Morris, Inc., 2001 WL 25889 (Minn. Jan. 11, 2001), does not make Minnesota a paradise for those who are deceived. But the evolving case law creates an environment in which relief is more readily available to victims who are fooled.

The Minnesota consumer fraud laws consist of several measures. The principal ones are the False Advertising Act, Minn. Stat. ¤ 325.67, the Consumer Fraud Act, Minn. Stat. ¤ 325 F.69; and the Deceptive Trade Practices Act, Minn. Stat. ¤ 325D.13. While they codify some elements of the tort of fraud, the statutes are more extensive than the common law in several respects. For example, they dispense with the need to prove fraudulent intent under the Deceptive Trade Practices Act, ¤ 325D.45, subd.1, and make attorney's fees available to a successful claimant under the complementary "private attorney general" law, Minn. Stat. ¤ 8.31.

Three of the most formidable barriers to litigation of the consumer fraud laws by those who claim to have been duped are the requirements of establishing privity between the parties, proving reliance upon the misleading practices, and demonstrating damages flowing from the deception. All three of these elements were relaxed earlier this year by the Supreme Court in Group Health Plan v. Phillip Morris, Inc. ("Group Health Plan").

Answering a certified question posed by U.S. District Court Senior Judge Paul Magnuson, the Court ruled that a claimant under the statutes need not "be a purchaser of the defendant's product." In addition to discarding the privity requirement, it also held that reliance does not have to be proved under the statute. But the Court stated that recovery of money damages requires establishing "a causal nexus between the [wrongful] conduct … and the damages claimed."
The case consisted of a pair of consolidated federal court lawsuits by three health maintenance organizations (HMOs) against a number of cigarette companies and affiliates under the state consumer fraud statutes. The HMOs sought to recover damages for increased health care services provided to their members because of tobacco-related afflictions. Since none of the HMOs had purchased tobacco products nor relied upon any claimed misrepresentations by the industry about the safety of the products, Big Tobacco claimed the statutory claims should be extinguished.

But the Supreme Court refused to snuff out the case, ruling that a seller-purchaser relationship is not necessary to bring suit. While the substantive statutes describe the unlawful conduct, they do not address the issue of standing, i.e., "who may bring a private action for damages." The Court, thus, looked to ¤ 8.31, the "private attorney general" law, which provides standing "in the broadest term" for "any person injured" by a statutory violation without restricting "those who may sue to purchasers or consumers." The statutes were deemed applicable to nonconsumers because of the "plain and unambiguous" meaning of the terms "any person" in the "private attorney general" statute, which the Court deemed "consistent with the overall" legislative intent "to maximize the tools available" to stem or penalize fraudulent practices.

The "broad" goal of allowing private parties to "complement" the "limited" resources of the Attorney General's Office argues in favor of allowing enforcement of the measures by "nonpurchasers." Because the legislative will was expressed in "unequivocally broad terms," statutory claims can be brought by anyone who "alleges injury" resulting from conduct proscribed by the statute, regardless of priority. The Court regarded this expansive view to be consistent with case law in other jurisdictions under similar statutes, although it pointed out that the scope of the Minnesota measure is not "without limits" and some other claims may be "too attenuated to permit recovery."

Another way to curb the reach of the statutes is by showing a lack of causation. But that cannot be done by attacking the claimant's lack of reliance on the alleged duplicity. The Court held that allegations of reliance are not required under a plain reading of the statutes. The "elimination of reliance," said the Court, comports with the Legislature's desire to "broaden" relief to defrauded Minnesotans by making pursuit of their claims "less burdensome."

While a direct transaction and reliance are not necessary, "causation remains an element" for such claims. The causation argument may provide the backdoor for invoking a form of reliance-based defense. As the Court noted, when statutory claims are predicated on deceptive statements or conduct, causation of damages cannot be established without proof that the wrongful conduct had "some impact" on the use of tobacco by HMO members. But the causation element need not be satisfied by proof that "individual consumers" relied upon claimed tobacco misrepresentation. Rather, the standard of causation is relaxed under the statutes and does not "require a strict showing of direct causation," as would a common law fraud claim.

Furnishing "some guidance" to the federal courts that will adjudicate the litigation, the Supreme Court declared that "proof of individual reliances" is not necessary, and recovery can be had upon proof "by other direct or circumstantial evidence that … is relevant and probative … ," a broad statement that leaves wide evidentiary discretion to the tribunals in deciding the requisite linkage between the claimed deceit and the resulting harm. Shying away from specificity, the Court pointed to the "variety of approaches" to the causation nexus in litigation under the federal Lanham Act, 15 U.S.C. ¤ 1125(a), which proscribes false or deceptive marketing practices.

While the HMOs' tobacco cases proceed, the ruling in the case is likely to fuel additional statutory consumer litigation. Dispensing with privity makes the statutes amenable to claims by remote or indirect participants, provided they are not too "attenuated." This could include parents and other family members suing on behalf of their kin; employers asserting claims resulting from fraud on their employees or vice versa; insurers picking up the cudgel on behalf of deceived insurers, regardless of subrogation rights; and a number of similar indirect claims.

Claimants still must encounter the causation element and may falter over it. But the Court has provided a roadmap and a convenient kit for claimants to overcome the obstacles they may confront on their journeys to justice.

Eliminating the requirement of proving reliance damages may have additional significance in bolstering class action lawsuits. Previously, the reliance element formed a barrier to class actions under the consumer fraud statutes. In Thompson v. American Tobacco Company, Inc., 189 F.3d 544 (D. Minn 1999), the federal court in Minnesota refused to certify a class action brought by smokers against the tobacco industry on grounds, in part, of the reliance requirement.
The class sought to require the establishment of antismoking programs and medical monitoring of their conditions; the court denied class status because the named plaintiffs were not "adequate" class representatives since they sought to reserve personal injury claims for damages. But the court also noted that the request for a smoke cessation program constitutes a form of damages rather than injunctive relief. As proof of "actual reliance upon the fraudulent conduct" is required under the consumer protection statutes; the case could not be maintained as a class action. The obligation of each class member to prove "individual reliance" precluded class certification because "individualized proof" is not suitable to class litigation. Dispensing with the reliance requirement in Group Health Plan now would presumably negate this barrier to class certification.

Abrogation of the reliance requirement also could make rescission easier to achieve. The reliance hurdle barred a rescission claim in Garay v. Beers, 2000 WL 16324 (Minn. App. 2000), rev. denied (Minn. Mar. 28, 2000) (unpublished). The buyers sought to unravel the purchase of an undeveloped lot where they intended to build a home, claiming they were misled by the seller that the lot was suitable for building a residential structure, which they were unable to accomplish because they could not get approval from the Department of Natural Resources.

The buyers sued under the Consumer Fraud Act and were granted summary judgment by the trial court, which ruled that reliance was unnecessary. The appellate court reversed, requiring that reliance be proven. (1998 WL 373082 (Minn. App. 1998) (unpublished).) On remand, a jury found that the buyers did not unreasonably rely on the seller's misrepresentation. The appellate court affirmed, holding that reliance was necessary to establish any type of "pecuniary damages," which extends to rescission as well as money damages. That reasoning also is suspect in light of the Supreme Court's new reading of the consumer fraud laws in Group Health Plan.

Tobacco claimants also suffered a setback under the consumer fraud statutes in Tuttle v. Lorillard Tobacco Company, 118 F. Supp. 2d 954 (D. Minn. 2000). The court dismissed a statutory fraud claim brought by the estate of a former professional baseball player, who had a stint with the Minnesota Twins in the early 1960s. He died from diseases allegedly attributable to nearly 40 years of using chewing tobacco. The court ruled that the "sweeping allegations of fraudulent conduct" failed to satisfy the pleading requirement of Rule 9 that fraud be asserted with "particularity."

The court "strongly" rejected the argument that the heightened pleading requirement applies only to common law fraud claims, holding that statutory claims also must assert "who, what, when, where, and how" in order "to facilitate a defendant's ability to respond and to prepare a defense." (118 F. Supp. at 963.)

Marshall H. Tanick is an attorney with the law firm of Mansfield, Tanick & Cohen, P.A., in Minneapolis - St. Paul, Minnesota. He is certified as a Civil Trial Specialist by the Minnesota State Bar Association (MSBA) and has written extensively, lectured, and litigated concerning consumer protection and fraud issues.

The expansion of the breadth of the consumer protection laws can be traced back to the ruling by the Court of Appeals in Alsides v. Brown Institute, Ltd., 592 N.W.2d 468 (Minn. App. 1999), in which the consumer fraud laws were held applicable to a private educational institution. A group of former students sued a for-profit trade school, claiming that the education they received was inadequate and that the institution misrepresented its features and services. The court held that the segment of the lawsuit that challenged the educational services was, in essence, a claim for "educational malpractice" and not actionable (592 N.W. 2d at 471-473.) But the claims alleging that the school "failed to deliver on specific promises and representations" about its instructors, equipment, and amount of instruction was viable under the consumer fraud statute.

Because they paid tuition to attend the private school, the students had "purchased an educational service," which is covered under the "service" or "intangible" provisions of the statutes. (Minn. Stat. ¤ 325.68 subd. 2.) The court also upheld the former students' right to seek damages, even though the statute does not expressly provide for monetary relief. Damages are recoverable under ¤ 8.31 subd. 3, the "private attorney general" statute. This gives citizens the right to sue under the consumer fraud laws for "damages," which constitute a factual issue that must be resolved at trial.

The court also upheld the claim under the Deceptive Trade Practices Act, although damages are not recoverable under that measure. The "plain language" of that statute extends to educational services. Relying on prior dictum, the court differentiated the remedies under the two measures; while damages are recoverable under the fraud law, the remedy under the deceptive practices measure is limited to injunctive relief. Thus, the case was allowed to proceed under both statutes, seeking damages and equitable relief to the extent the claims turned on broken promises and unfulfilled representations, rather than "educational malpractice."

While private for-profit educational institutions may be subject to the statutes, another type of institution was deemed exempt from the measures in Rothenberg v. Milne, 2000 WL 1780326 (Minn. App. 2000) (unpublished). A married couple sued a nonprofit health care service plan and other parties after the wife had a sexual relationship with a psychologist employed by the plan.

The Court of Appeals held that consumer fraud claims under ¤ 325F.69 subd.1 were not attainable because of "the absence of an express statutory provision" making such plans subject to the law. It also noted the availability of "other consumer protection mechanisms" under the statute that authorizes creation of these entities. Additionally, recovery could not be legal under the statute because the organization made no "representation" as to the psychiatrist's "fitness" that could be deemed fraudulent.

The Alsides case foreshadowed a series of subsequent appellate court and Supreme Court rulings that generally have afforded greater rights for statutory fraud.

In State by Hatch v. American Family Mutual Ins. Co., 609 N.W.2d 1 (Minn. App. April 4, 2000), the issue was whether the attorney general has legal authority to sue an insurance company for alleged violation of state consumer protection laws. Affirming a ruling of the Hennepin County District Court, the Court of Appeals genuflected to the "broad authority" of the attorney general at common law and under statutes prohibiting "unfair business practices." It also rejected the arguments that the attorney general's authority over the insurance industry is limited and that the Commerce Department has "exclusive authority" to sue for consumer statutory violations.

In Sutton v. Viking Oldsmobile Nissan Inc., 2000 WL 719582 (Minn. App. June 7, 2000) (unpublished), the appellate court reversed the dismissal of a common law and statutory fraud lawsuit arising out of misrepresentation in a warranty contract accompanying the purchase of a truck from a motor vehicle dealer in Rochester. The agreement erroneously stated that a certain portion of the cost would be "paid to others," but the dealership actually kept 50 percent "as profit."

The Olmsted County District Court dismissed the lawsuit but the Court of Appeals reversed, construing the Consumer Fraud Act, "liberally ... in favor of protecting consumers." It held that the claim was actionable even if the customer "was not deceived." It noted that the statute proscribes misstatements "with the intent to induce reliance," even if there is no actual fraud. The customer also was entitled to pursue a common law fraud claim as well since it raised "a question of fact for the jury."

"Three of the most formidable barriers to litigation of the consumer fraud laws ... are the requirements of establishing privity between the parties, proving reliance upon the misleading practices, and demonstrating damages flowing from the deception."

"Dispensing with privity makes the statutes amenable to claims by remote or indirect participants, provided they are not too 'attenuated.'"

The scope of the consumer fraud measures was extended, but the relief narrowed, by the Supreme Court in Ly v. Nystrom, 615 N.W.2d 302 (Minn. Aug. 3, 2000). The buyer of a Vietnamese restaurant, who was a refugee from that country, claimed that she was deceived in the purchase due to inflated revenue and profit figures furnished by the sellers. The Court held that the consumer fraud statute applied to what it termed an individual "isolated one-on-one transaction." In reviewing the history of consumer fraud statutes throughout the country, the Court discerned a general legislative policy favoring "aggressive prosecution of statutory violations." It rejected the contention that the law should not apply to a commercial transaction that was not for "personal" use. Even though the buyer was not a consumer in a conventional sense, the law "was intended to protect a broad, though not limitless, range of individuals from fraudulent and deceptive trade practices."

But the Court limited the remedies available in these one-on-one commercial encounters. It held that the "private attorney general" provision of the law, Minn. Stat. ¤ 8.31 subd.3a, which provides recovery of attorneys' fees by a prevailing claimant, does not apply to purely individual transactions because such suits do not "protect public requests in the interest of the state." The absence of a "public interest," advanced by litigation of a statutory consumer fraud lawsuit, precludes a fee award.

But attorney's fees were awarded under the Consumer Fraud Act last year in Willette v. Smith, 2000 WL 687631 (Minn. App. May 30, 2000) (unpublished), a one-on-one private real estate transaction decided prior to the Ly case. The Ramsey County District Court originally found that the seller violated the Consumer Fraud Act, but did not award any damages to the buyer. The Court of Appeals remanded, directing that the trial court was "required to determine damages" since it found a violation of the statute. 1998 WL 171404 (Minn. App. April 14, 1998) (unpublished). On remand, the trial court found damages of nearly $7,500, and also awarded attorneys' fees of $52,000, which was challenged on appeal.

The appellate court affirmed, rejecting various arguments on the merits because the determination of damages and attorneys' fees on remand was "limited by the law of the case doctrine." Since the Court of Appeals already upheld the determination of fraud, the principle of the "law of the case" bars relitigation or appellate review of issues that were determined in the first appeal. The claim that the purchaser of the real estate did not suffer any damages was not cognizable because it had not been properly raised in the first appeal and could not be "re-examined in the second appeal."

The sole issue on appeal was whether there was a sufficient basis for the determination of damages and attorneys' fees. The court held that the evidence supported the damages because the purchaser of the real estate had spent nearly $7,500 fixing the property that had previously been used for commercial purposes and was converted to residential use. The large claim for attorneys' fees, nearly seven times the size of the damage award, was reasonable and "modest" in light of the work performed by the attorneys in the case. The fee award was fortified by the failure of the party challenging the decision to "submit their own calculations" to refute the purchaser's claimed legal expenses.

These recent cases reflect the evolutionary expansion of the Minnesota statutes prohibiting trickery in commercial transactions. While fraud has long been forbidden under the common law, the extension of these statutes provides additional, often stronger remedies for defrauded Minnesotans and less formidable barriers to obtaining such relief.