Complete fraud justifies class action certification

Lee v. Carter-Reed Company, L.L.C., --- A.3d ----, 2010 WL 3781595 (N.J.)

Plaintiff Melissa Lee spent about $120 on three bottles of a dietary supplement pill called Relacore, marketed primarily as a weight-reduction product that also lessens anxiety and elevates mood. She sued on behalf of a putative New Jersey class for false advertising under the New Jersey Consumer Fraud Act, breach of express and implied warranties, and unjust enrichment. She alleged that there is no scientific support that Relacore provides any of the benefits claimed by Carter Reed.

The trial court denied class certification as unmanageable, and the appellate division affirmed, finding that individual issues of fact and law predominated. The New Jersey Supreme Court reversed. Accepting the pleaded facts as true, “Carter Reed's advertising of Relacore was no more than a passel of lies,” and common issues of fact and law predominated. A class action was superior to thousands of individual small claims (that wouldn’t get brought).

Carter Reed advertised that Relacore would "shrink belly fat, improve users' mood, and combat the medical condition known as 'metabolic syndrome.'” It was also allegedly a "breakthrough anti-anxiety, mood elevating pill that helps cut stress-related cortisol production,” where cortisol was supposedly a "'nasty little stress hormone'" that causes "pound after pound to accumulate around your waist and tummy." Relacore was touted as a "'feel good pill' that will 'naturally shrink your belly fat,' leav[ing] its users 'feeling happier, [and] full of energy'"-- "short-circuiting the 'stress-to-belly-fat cycle.'" Relacore promised, e.g., that "Shedding Excess Belly Fat Can Be As Easy As 1.2.3.” The complaint alleges that every benefit described is false, with no reliable scientific evidence supporting any of the claims.

Carter Reed had a 30-day money-back guarantee, and its witness testified that company offiicals had authorized refunds beyond the 30-day period, giving hundreds of refunds. Carter Reed made approximately 15,000 sales to New Jersey consumers as of 2007, and had records for eighty to eighty-five percent of those sales.

The trial court, in finding unmanageability, identified at least 14 inquiries that would have to be made of each class member: why they bought the product (reduce belly fat, reduce stress or fight metabolic syndrome); whether they saw/read/etc. ads and which ones; whether they relied on the ads or on a recommendation from someone else; whether they experienced any benefit; whether their health affected the product’s efficacy; whether they followed directions; whether they were taking medication; whether there was a causal nexus between Carter Reed’s wrongful acts and an ascertainable loss; how much money they paid; whether their purchase was based on price or some other factor; whether they suffered ascertainable loss; and whether they requested and received a refund.

The appellate division, noting that the denial of class certification on the basis of manageability is "disfavored," analyzed whether common issues of fact and law predominated over individual ones. Though the plaintiff alleged that "she was induced by the false representations to purchase and use" Relacore, no one knew "whether putative class members even saw the print or Internet advertisements or whether they purchased the product due to a recommendation from a friend or family member." The court also emphasized that "the Relacore market campaign is multi-faceted," with some ads touting Relacore as "a belly fat retardant," others as "a mood elevator," and yet others as a "stress reducer," making it impossible to know why any putative class member bought Relacore. "[T]he multiple qualities attributed to [Relacore] and the variety of advertising campaigns and media outlets utilized by [Carter Reed]" defeated predominance.

Amici argued that this reasoning was mistaken because Relacore is a credence good, known to consumers only by the claims made for it by its producer. “Consumers cannot possibly know what Relacore does, let alone have any predilections for it, unless and until they are exposed to messages about its properties or benefits." So consumers would only buy Relacore if they were exposed to the ad campaign, and if every purported benefit is false, every class member must have been exposed in some way to the false advertising, especially since the misrepresentations appear on the packaging and labeling.

Carter Reed argued that Relacore’s marketing emphasized different benefits, and that the complaint claimed only that it doesn’t reduce belly fat; consumers may have received some of Relacore’s other benefits. It identified a 2005 Relacore ad making no mention of weight reduction, and argued that, given the complexity of its distribution scheme, third-party retailers such as pharmacies might have made misrepresentations at the time of sale.

A class action allows an otherwise vulnerable class of diverse plaintiffs with small claims access to the courts. It also furthers the goals of judicial economy, consistent treatment of class members, and protection of defendants from inconsistent results. The class action rule in New Jersey should be liberally construed.

Carter Reed didn’t contest that plaintiff satisfied the four initial requirements of the New Jersey rule, which follows the federal rule: numerosity, commonality, typicality, and adequacy of representation. Instead, the issue was New Jersey RCP 4:32-1(b)(3), which requires a finding that “the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” The core issues in this case were (1) whether common issues of law and fact predominate over individual ones, (2) whether the class action is superior to a myriad of individually litigated cases, and (3) whether a class action would be manageable, given the number of claims involved.

Predominance requires a pragmatic assessment, which includes inquiry into the qualitative significance of the common questions, comparison of the class action to individual actions, and identification of whether the class action presents a "common nucleus of operative facts." A plaintiff need not show an absence of individual issues; individual questions of law or fact may remain after common questions are resolved. One factor in assessing superiority is whether any one individual will have the financial wherewithal or incentive to sue on a claim that might cost more than it’s worth. Manageability is another issue, and will almost always be a difficult challenge in a statewide class action, but courts shouldn’t close their doors to plaintiffs just because the cases are novel and difficult.

The “centerpiece” of this case was the Consumer Fraud Act claim. Under the CFA, a consumer who proves (1) "any unconscionable commercial practice, deception, fraud, false pretense, false promise, [or] misrepresentation ... in connection with the sale or advertisement of any merchandise,” (2) an "ascertainable loss" such as an out-of-pocket loss, and (3) "a causal relationship between the unlawful conduct and the ascertainable loss," is entitled to legal and/or equitable relief, treble damages, and reasonable attorneys' fees. Consumers don’t have to demand refunds to show ascertainable loss. Moreover, causation is not the equivalent of reliance. It means that the unlawful practice resulted in ascertainable loss.

Initially, the court reviewed the complaint, which pled in detail that numerous Carter Reed statements were unsubstantiated, deceptive, and misleading, identifying far more than weight loss/belly fat claims. Although Carter Reed primarily markets Relacore as a weight-loss product, but plaintiff alleged that all of Relacore's purported benefits are illusory. Thus, the 2005 ad that doesn’t talk about weight loss didn’t change matters. The core dispute, whether Relacore delivers the promised benefits, will depend for its resolution on expert testimony.

Because the lower courts failed to accept plaintiff’s detailed allegations as true, they misapplied the relevant legal principles. The trial court’s 14 individual questions assumed that Carter Reed could show that Relacore provides at least some of the claimed benefits, which would make causation a “perplexing problem” of determining whether class members bought the product based on a fictional benefit or a real one. But proving a causal relation to an ascertainable loss would not be so troublesome if the allegations of the complaint are true. Pills are, in fact, credence goods, known only through the benefits promised by the seller. “A rational consumer does not randomly take a bottle of pills off a shelf and then purchase it without reading the packaging and labeling or without knowing something about the product.” Offering a multiplicity of deceptions shouldn’t make it easier for a marketer to get off the hook.

If all the claims were false, then it wouldn’t matter which benefit the class member was seeking, which ads she saw, or even whether Carter Reed communicated its deceptions “through third persons who themselves were deceived by the overall marketing scheme.” Likewise, the class member’s individual health and medication situation “would hardly matter.” Furthermore, a trier of fact could fairly infer that a class member was influenced in some way or other by the false marketing scheme. “When all the representations about the product are baseless, a trier of fact may infer the causal relationship between the unlawful practice--the multiple deceptions--and the ascertainable losses, the purchases of the worthless product.” That is, the ascertainable loss was the purchase price “of a bottle of broken promises.” Each bottle represented out-of-pocket loss if not refunded.

Viewing the record in a light favorable to the plaintiff, common issues of law and fact predominated. Individual issues such as the number of bottles purchased by each class member, the price paid, and whether a refund was issued would remain, but Carter Reed possessed many of the relevant records. In any event, the individual questions were not onerous.

The court also emphasized that a class action was superior, and perhaps the only practical vehicle, for deceived consumers. It was unlikely that the thousands of class members would file in small claims court, given the discovery and litigation costs that “make a lawsuit against a determined corporate adversary a costly undertaking. The whole point of a class action is … to balance the scales of power between the putative class members and a corporate entity.”

Carter Reed’s refund policy was not a superior alternative. First, not every ad contained a money-back guarantee, and it wasn’t on the package or the label, so not all purchasers would have known about it. Second, users waiting for the beneficial effects to appear after the second or third bottle would fall outside the 30-day window; even if Carter Reed did provide some refunds outside that period, consumers could have believed that the 30-day window was absolute. But most importantly, binding precedent holds that a refund policy confers no immunity against a CFA claim. The CFA doesn’t provide for such a windfall to false advertisers; the legislature intended to protect all consumers, not just those alert enough to ask for a refund.

Finally, a class action would not be unmanageable. Given the equalizing purpose of class actions, the fact that they’re complicated by their very nature has little weight. Good case management could “shepherd this class action toward a just result without compromising the rights of any party.”

If some of Carter Reed’s claims for Relacore are scientifically sound, that will add complexity to the case. Interrogatories or questionnaires to class members should help determine the reasons why any one individual purchased Relacore, and subclassing or decertification remain available in the worst case scenario. At a minimum, the plaintiff would have to provide the necessary evidence to support the allegations that justified the grant of class certification. Likewise, damages would present an issue of the trier of fact found that Relacore provides some advertised benefits but not others; the burden would be on the plaintiff to establish a causal relationship between the unlawful practice and the ascertainable loss.

Ultimately, the trial court abused its discretion in refusing to certify the class under the CFA. The case was remanded for consideration of class certification on the warranty and unjust enrichment claims, which had not yet been fully analyzed.