State v. Minnesota School of Business, Inc., --- N.W.2d
----, 2019 WL 5778078, No. A17-1740 (Minn. Nov. 6, 2019)
How do you decide whether nontestifying members of a class
have been harmed? A majority here, over two dissenting Justices, finds that it
was appropriate to conclude that nontestifying victims of a fraudulent
educational scheme were
harmed. If there are to be fraud class
actions at all, this is a necessary rule, and changing the common law rules
that prevented such inferences was the basic reason that states enacted
consumer protection laws in the first place. I have to admit, I find it depressing
that even AG-led efforts against frauds that left students with thousands of
dollars in debt for worthless credentials, diverting their life plans, couldn’t
convince an appellate court and a full slate of state supreme court justices to
infer that the natural consequence of the fraud occurred for each victim. The dissenters also try to turn the recent
FTC losses on the scope of section 13 relief into reasons not to award relief under
state law; expect more of this, too.
Minnesota’s AG sued two for-profit universities, the
Minnesota School of Business, Inc. and Globe University, Inc., alleging that
they misled prospective students about the value of criminal justice degrees
offered by the schools in violation of the Minnesota Consumer Fraud Act (MCFA) and
the Uniform Deceptive Trade Practices Act (DTPA). Most prospective students who
signed up for such degrees wanted to be a probation or police officer. The schools targeted people interested in
policing careers. As advertised, the curriculum focused on police work like
crime scene investigations and many classes were taught by former or current
police officers. “In marketing materials and through admissions practices, the
Schools made statements to prospective students that graduates of their
criminal justice program were qualified to become a police officer, or at least
qualified to enter programs providing the additional training required to
become a police officer.… The Schools also advertised that an associate’s
degree from their criminal justice program qualified a student for a career as
a probation or parole officer.” E.g., “.... And you can be sure, as a graduate
of a Globe University/Minnesota School of Business criminal justice program,
you will have those qualifications.” But that wasn’t true. The schools didn’t
provide the credentials necessary for police jobs in Minnesota, and their
credits didn’t transfer to any school that offered the relevant certification;
similarly, the associates’ degree in criminal justice didn’t provide the bachelor’s
degree required for probation officers.
To prevail, the AG had to establish a “causal nexus” between
the uncontested violations of the MCFA and the harm suffered by students.
Fifteen students testified, out of about 1200 affected. The trial court and the
Supreme Court majority agreed that was enough. “For example, one student
testified that he transferred into the criminal justice program because the
school ‘assured him that the program would allow him to become a Minnesota
police officer’ and that he would not have pursued that program had he known
the school was not [relevantly] certified.”
The district court found a knowing violation of the MCFA
both in affirmative misrepresentations and in failure to disclose material
facts. The economic harm inflicted on students “is an inevitable and
foreseeable consequence of the misrepresentations and obfuscations in [the
Schools’] marketing of the program.” Thus, the AG proved a causal nexus between
the Schools’ misrepresentations and the harm suffered by the criminal justice
program students, as required under the MCFA. “There can be no question that
[the Schools’] fraudulent practices caused significant public injury to any
students ... who enrolled in the criminal justice program with the goal of
becoming a Minnesota police or probation officer.” The court rejected the schools’ argument that
it could not consider the nontestifying students to be similarly situated to
the testifying students.
The court issued an injunction, imposed civil penalties, and
ordered equitable restitution requiring the schools to disgorge the tuition
collected from the criminal justice program students. Claimants who represented that they enrolled in
the program based on an understanding they could become a police officer in
Minnesota or a parole or probation officer in Minnesota with an associate’s
degree would be entitled to a rebuttable presumption of injury and causal
nexus. The restitution would cover tuition; payments to the schools for books,
enrollment or student expenses or fees; and any interest or finance charges
incurred by the claimant for student loans taken out to pay for tuition, expenses, or fees.
The court of appeals upheld the restitution order for the
students who testified at trial but reversed as to nontestifying students for
failure to prove a causal nexus to their harm.
When the AG sought review, the schools argued that even the testifying
students didn’t deserve restitution.
The parties agreed that the schools made false claims, and
that “enrolling in, and paying tuition for, a degree that does not provide what
is promised is harm.” So was there a causal nexus between the falsity and the
harm? This is a factual question that a district court is best positioned to
assess. Causal nexus/reliance can be established by direct or circumstantial
evidence.
Consumer protection statutes “are remedial in nature and are
to be liberally construed in favor of protecting consumers.” E.g., State by
Humphrey v. Alpine Air Prods., Inc., 500 N.W.2d at 788, 790 (Minn. 1993) (“In
passing consumer fraud statutes, the legislature clearly intended to make it
easier to sue for consumer fraud than it had been to sue for fraud at common
law. The legislature’s intent is evidenced by the elimination of elements of
common law fraud, such as proof of damages or reliance on
misrepresentations.”). The MCFA “ ‘reflects a clear legislative policy
encouraging aggressive prosecution of statutory violations’ and thus should be
‘generally very broadly construed to enhance consumer protection.’ ” It allows
the AG to seek restitution.
Past precedent established that “proof of individual
reliance” is not needed to prevail under the MCFA “where a defendant’s
misrepresentations were directed at and affected a broad group of consumers.” The nexus requirement “is a more relaxed
requirement than the strict showing of direct causation required at common law….
[T]here are times when the materiality and pervasiveness of consumer fraud is
relevant to support a court’s finding that a causal nexus exists between the
fraud and the consumer’s decision to purchase the product.” (This isn’t a fraud
on the market theory, the court said; fraud on the market is just another
example of where individual proof requirements are relaxed.) Likewise, the seller’s own intent can be “decisive”
in substituting for proof of direct reliance by each individual purchaser. If the defendant intends potential consumers
to rely on the representations, that is itself “important and relevant evidence
to establish a causal nexus.” This is
especially true for AG-brought cases.
Similarly, the FTCA (a broad statute, even if it doesn’t
explicitly authorize restitution in section 13(b)), doesn’t require proof of
individual reliance by each consumer. The
FTC presumes reliance “where the FTC has demonstrated that the defendant made
material misrepresentations, that they were widely disseminated, and that
consumers purchased the defendant’s product.” “The reason is plain: ‘requir[ing]
proof of each individual consumer’s reliance on a defendant’s
misrepresentations would be an onerous task with the potential to frustrate the
purpose of the FTC’s statutory mandate.’” So too here.
Instead of directly proving reliance for each individual, “all
the facts surrounding the consumer fraud should be taken into account: Was the
fraud longstanding, pervasive, and widespread in communications directed to
consumers of the product? Did the seller intend and understand that consumers
would rely on the misrepresentations? Was the information of a kind on which
consumers would typically rely?” This
wasn’t a matter of “judicial notice,” as the dissent accused. Instead, “a
district court sitting in equity and as a factfinder may broadly consider
several common-sense factors when assessing whether a causal nexus exists under
the MCFA.”
There was thus sufficient evidence of a causal nexus both
for the testifying students and for the non-testifying students. The false advertising was widespread and
pervasive; the schools intended for students to rely on it and targeted prospective
students who wanted to be a police officer or a probation officer. “The Schools
would not have spent a total of $120 million in advertising and made law
enforcement marketing materials available where they did if they did not
believe that prospective students would rely on them.” The false advertising
was “precisely the type of information a reasonable prospective student would
rely on in deciding whether to pursue a criminal justice degree at the Schools.
And the evidence at trial showed that prospective students did so rely.”
Choosing a school is a serious decision:
We reasonably expect a person to
look at materials provided by a potential school to assess whether the
education program is consistent with his or her career objectives. It is
reasonable to conclude that a person who wants to become a police officer or a
probation officer will make such an investment of money and time only if the
person believes that the classes will provide the requisite qualifications for
that career. Moreover, the record shows that the Schools took advantage of the
“unwary”—nontraditional, first-generation college students who usually attend
for-profit schools.
The evidence established a causal nexus between the misleading
statements and the harm suffered by the nontestifying students. “The Schools
should not profit from fraudulently providing a useless degree to their
students.”
The majority also rejected challenges to the restitution
process established by the district court. There was no need for a “rebuttable
presumption” of reliance—the AG satisfied the causal nexus requirement without
the need for any presumption. And the
district court had broad discretion to order equitable restitution and to
fashion the appropriate restitutionary remedy. The goal of such remedies is “to
force a wrongdoer to divest money improperly gained at the expense of another
party. It is aimed as much (or more) at preventing the wrongdoer from profiting
from its misdeeds as it is to make the injured party whole.”
Nor did the process violate due process. A special master
would oversee the determination of the overall amount of restitution, which
would be a product of the number of students who sought a criminal justice
degree and the total tuition, fees, and other costs they paid to the schools. There
were procedural safeguards, including requiring students to declare under
penalty of perjury “that they were enrolled in the Schools’ criminal justice
program based on an understanding that they could become (a) a police officer
in Minnesota or (b) a parole or probation officer in Minnesota with an
associate’s degree.” The schools could contest that. Disputes not resolved by
the parties would go to the special master and thence to the district court for
final decision. That satisfied due process.
Justice Anderson dissented in relevant part (and the Chief
Justice agreed): It wasn’t right to conclude that the nontestifying students
had been harmed, despite the “appalling” conduct of the schools (at least as to
the testifying students):
The court implicitly adopts a
rebuttable presumption based on assumptions about intent, i.e., the existence
of pervasive fraud or an intent that consumers would rely on the
misrepresentations. Alternatively, the court appears to deploy a form of
judicial notice based on assumptions about what information consumers typically
rely on or the importance and cost of the purchase decision. Then, the court
endorses the use of “mini trials” to determine the amount of restitution, if
any, owed by the Schools to the nontestifying students. I cannot join this
decision because even defendants who engage in appalling behavior are entitled
to require the Attorney General to prove his claims. The Attorney General did
not do.
Note: rebuttable presumptions aren’t proof-less; they’re ways
of using probabilities to determine what is likely true in an individual
case. That might be accurate or not, depending
on your other beliefs, but it’s not a wild innovation.
The dissent said that there wasn’t evidence that all
program participants saw the ads offered as evidence or that, even if they did
see them, the ads affected their decisions. “There is simply no basis to
presume that just because 15 individuals relied on deceptive practices, 1,200
other individuals also relied on the same practices and suffered injury
accordingly.” (Other than the content of
the ads, the knowledge of the advertiser that the claims mattered to potential
students, and the usual reasons that people seek the relevant degrees.)
The FTCA also wasn’t helpful because the consumer protection
laws in Minnesota are different. Also, the FTCA comparison favors a reversal
because the Seventh Circuit has held that the FTC doesn’t allow restitutionary
relief under section 13(b). The Lanham
Act is also different and anyway there was no evidence in the form of “actual
consumer testimony,” “other than for 15 former students” (!) [what does the
dissent think “actual consumer testimony” means?], and no consumer surveys, tests,
or market research. [Given that the claims here were literally false, if you
did apply the Lanham Act, no evidence of consumer reaction would be required.]
The majority wrongly assumed that no student would enroll in
the criminal justice program unless they wanted to become a Minnesota police or
probation officer. This was essentially
to take judicial notice of the defendant’s liability. [Query how this standard
for what counts as factfinding would work in a standard trademark case. I do
think courts do a lot of ad hoc factfinding in Lanham Act cases, but here it
doesn’t seem like an assumption; it seems like a conclusion based on the evidence
of how the programs were marketed and how the students who did testify reasoned—if
they weren’t aberrations, then their experiences can be generalized, and I
think it is possible to determine that a witness isn’t aberrant.]
The dissent didn’t want to do “mini restitution trials” at
the restitution stage. There were legitimate due process concerns about the restitution
process. But other courts routinely hold
that disputes about the amount of damages can be resolved individually after
class treatment on liability.
