Price Inflation Damages Under the FDUTPA
The purpose of any class action is to allow one plaintiff to prove the claims of the other putative class members simply by proving its own case. Issues of causation and damages, therefore, must be uniform amongst the class, otherwise the defendant will always have the defense that it would violate their due process rights to allow one person to adjudicate the rights of others without affording it the opportunity to present counter-evidence for each claimant. The issue on class certification then becomes, with the facts alleged by the class representative, does the defendant have the right to offer individualized counter-evidence? In most class action claims under the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) the answer is “yes” because the plaintiff is still faced with the burden in proving causation for each and every class member. But one way that consumer-plaintiffs are getting around this obstacle is by pleading “price inflation” damages. In essence, the plaintiff claims that because of the deceptive representation, the manufacturer-defendant is charging more for the product than its true value. As a result, the inflated cost is borne by every purchaser of the product, even if they never saw the representation. Inherent in every purchase is proof of causation. The challenge then becomes how to defend against the increasingly attractive claim?
Critical to bringing any FDUTPA class action in Florida is proving the required element of causation. The FDUPTA requires proving (1) a deceptive act or unfair practice; (2) causation; and (3)actual damages. Rollins, Inc. v. Butland, 951 So. 2d 860, 869 (Fla. 2d DCA 2006); see also § 501.211(2), Fla. Stat (“a person who has suffered a loss as a result of a violation of this part . . . may recover actual damages . . .”). And, when the action is class certified, the issues related to causation must predominate over the entire class, i.e. the alleged deceptive act must have caused all class members actual damages. This is so because due process requires that each member of the putative class establish that the defendants committed a deceptive act or unfair practice that caused their actual loss. Butland, 951 So. 2d at 874. Common schemes and practices are not enough to satisfy due process. Id.
The trend of claiming “price inflation” damages is a way that consumer-plaintiffs are attempting to homogenize the causation element amongst the class. Generally, only “actual damages” are recoverable FDUTPA. See Rollins, Inc. v. Butland, 951 So. 2d 860, 869 (Fla. 2d DCA 2006). “Actual damages” being defined as “the difference in the market value of the product or service in the condition in which it was delivered and its market value in the condition in which it should have been delivered according to the contract of the parties.” Id. at 869 (quoting Rollins, Inc. v. Heller, 454 So. 2d 580, 585 (Fla. 3d DCA 1984)). Some consumer-plaintiffs allege that because of the deceptive representation, the manufacturer was able to charge more for the product than it was actually worth. That “price inflation” constitutes their actual damages under the FDUTPA. This theory is essentially a claim of “fraud on the market,” a term that the courts adopting this theory scrupulously avoid.
Generally, Florida courts do not recognize a “fraud on the market” theory of damages outside of the federal securities law context. See Kahler v. E.F. Hutton Co., Inc., 558 So. 2d 144, 145 (Fla. 3d DCA 1990); Rogers v. Cisco Systems, Inc., 268 F. Supp. 2d 1305, 1312 (N.D. Fla. 2003). In that context, “fraud on the market” is based upon the idea that the securities market is “efficient” and properly prices all available material information for the prices of its securities. A material misrepresentation disseminated into the market translates into an artificially increased price for the securities. Phillips v. Scientific-Atlanta, Inc., 2012 WL 3854795, at *3 (11th Cir. 2012). In a private federal securities fraud action, this theory is used to prove a causal connection between the misrepresentation and the plaintiff’s loss. Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1631 (2005). However, even in the federal securities context, the Eleventh Circuit has narrowed the application of this doctrine requiring that in addition to proving that a corrective disclosure caused the stock price to drop, the plaintiff must also “eliminate other possible explanations for this price drop, so that the factfinder can infer that it is more probable than not that it was the corrective disclosure – as opposed to other possible depressive factors – that caused a least a ‘substantial’ amount of the price drop.” Phillips v. Scientific-Atlanta, Inc., 2012 WL 3854795, at *3 (11th Cir. 2012). Therefore, even in the federal securities context, the “fraud on the market” theory is not universally applied.
In a recent decision, the Eleventh Circuit found that a claim for price inflation damages was enough to sustain a cause of action under the FDUTPA. In Fitzpatrick v. General Mills, Inc., 635 F.3d 1279 (11th Cir. 2011) the plaintiff alleged that the defendant-manufacturer violated the FDUTPA by advertising and selling YoPlus which is an ordinary yogurt supplemented with probiotic bacteria, inulin, and vitamins A and D and claiming that the mixture supplements in YoPlus allegedly provided habitual consumers with health benefits by aiding in the promotion of digestive health. Id. at 1281. The plaintiff alleged that the defendant-manufacturer was able to sell its YoPlus product for an average of 44% more than Yoplait Original brand yogurt despite the fact that it provides no additional digestive health benefit. Id.
Class certification under Federal Rule of Civil Procedure 23(a) was granted for the plaintiff’s FDUTPA claim and the district court defined the class as “all person who purchased Yo-Plus in the State of Florida to obtain its claimed digestive health benefit.” Id. at 1282.
The Eleventh Circuit agreed with the district court’s analysis that a plaintiff need not prove reliance on the allegedly false statement to recover damages under FDUTPA. Id. at 1283. However, the Eleventh Circuit disagreed with the class definition and found that it should not have been limited to those who purchased YoPlus “to obtain its claimed digestive health benefit” because that takes into account individual reliance on the digestive health claims. Id. In essence, the Eleventh Circuit defined the class as those persons who bought YoPlus yogurt finding that the claimed damages would be the “price increase” for the allegedly deceptive representation. See also Smith v. W.M. Wrigley Jr. Co., 663 F. Supp. 2d 1336 (S.D. Fla. 2009) (allowing claim for price inflation damages for premium charged for chewing gum advertising that it contains a natural ingredient scientifically proven to help kill the germs that cause bad breath).
Fitzpatrick should not be read to hold that price inflation damages are automatically authorized under the FDUTPA. Rather Fitzpatrick should be confined to the narrow circumstances of action and the product at issue. In Fitzpatrick the court was faced with two identical products produced by the same manufacturer except one product advertised added benefits which the consumer-plaintiff claimed were non-existent. In that case, it was clear that the 44% price increase was solely based on the representations because the two products were otherwise identical. Both products were manufactured by the same manufacture and presumably sold by the same retailers. Therefore, if the representations were found to be deceptive – the yogurt did not contain the advertised benefit – then in effect everyone who paid for the yogurt overpaid by 44%. If the court was not faced with an identical yogurt but for the advertised benefit, it is unlikely that its decision would have come out the same as principles of due process required a finding that the alleged representation caused each yogurt purchaser damage.
This alternative outcome is illustrated by Prohias v. Pfizer, Inc., 485 F. Supp. 2d 1329 (S.D. Fla. 2007). In Prohias, the plaintiffs alleged that Pfizer’s print and television advertisements for Lipitor, which frequently show pictures of women or the elderly with their cholesterol numbers attached with text warming that “high cholesterol is a risk factor for heart disease” are meant to create the impression that Lipitor protects against heart disease when in fact there is no scientific support for the claim that Lipitor reduces the risk of heart disease in women or elderly patients who do not already have heart disease or diabetes. The plaintiffs claimed that such misleading advertising creates an artificial demand for Lipitor and an artificial increase in Lipitor’s price causing economic injury to Lipitor purchasers. Id.
The court found that the plaintiffs failed to state a claim under the FDUTPA because they could not show how they were aggrieved. Id. at 1335 (quoting Fla. Stat. § 501.211). The court found that the plaintiffs’ claim for “price inflation” damages were too speculative to constitute injury and stated: “Any proof of such ‘price inflation’ injury would depend on evidence that the pharmaceutical market is ‘efficient’ such that information about Lipitor’s efficacy results in changes in its price.” Id. at 1336. Further, such damages depend on the faulty premise that the price of Lipitor fluctuates based on the public’s knowledge of Lipitor’s benefits, even though drug prices (unlike stock prices which are necessarily set up by the price at which buyers are willing to buy, or sellers are willing to sell) are fixed by the product’s manufacturer. Id. at 1337. Thus, to show any damages under the “price inflation” theory (assuming the price did incorporate information about Lipitor’s benefits), would require evidence of the hypothetical price at which Lipitor would sell if not for the allegedly misleading advertisements. Determination of such hypothetical price, even with expert proof, was too speculative to constitute an “actual injury” under Article III. Id. at 1337.
The presence of an identical product except for the advertised benefit is key to success under this claim. When the representation can be isolated and monetized then the damages are no longer speculative and the causation element is built into the purchase. Why else would a consumer pay 44% more for a yogurt unless they were relying on the representation of added digestive benefits? The representation thus caused the purchase which caused the injury. However, in most instances, the consumer-plaintiff does not have a virtually identical product and cannot monetize the representation. In those instances, the price inflation theory would not apply to the FDUTPA action because of due process concerns. Take the example of a home builder selling a group of homes. Among the representations made is that the homes contain granite countertops. In fact, the countertops were not solid granite but rather covered with a granite sheeting. If the purchasers of those homes brought a class action and sued the builder under the FDUTPA claiming as damages the increased price they had to pay for the homes based on that representation, their claim would likely not succeed. In this case, because all the homes were sold with the representation, there is no comparable product to see what the false “representation” cost each consumer. Additionally, the pricing of a home is dependant upon various factors. Some purchasers may have bought the home, despite the quality of the countertops, because of the location to schools or work. Thus, the claim that the purchasers paid an inflated price based on the deceptive representation would simply be too speculative to support under the FDUTPA. Like in the federal securities context, “fraud on the market” cannot be used to prove causation and damages without “eliminat[ing] other possible explanations”, Phillips, 2012 WL 3854795 at *3, otherwise, causation and damages would be too speculative. In this case, because there is no similar product, other possible explanations for the pricing and reason to purchase prevail. Due process then mandates that those explanations be explored in order to state a cause of action against the defendant on behalf of each plaintiff.
This comparison is important to remember when defending against any claim for “price inflation” damages under the FDUTPA. If the product purchased by the class comes with a negotiable price, is bought for many different reasons aside from the alleged deceptive representation, or does not have a comparison product at which to monetize the deceptive statement, then causation cannot be presumed in the purchase. Without the presumption, the plaintiff cannot prove uniformity and the defendant will again have a due process argument against class certification.
 The “fraud on the market” theory does not apply to inefficient markets. See Freeman v. Laventhol & Horwath, 915 F.2d 193, 198 (6th Cir. 1990) (finding that “the fraud on the market theory cannot be applied logically to securities that are not traded in efficient markets”); Cammer v. Bloom, 711 F. Supp. 1264, 1280-87 (D.N.J. 1989) (rejecting fraud on the market presumptions in an over the counter market); Stinson v. Van Valley Dev. Corp., 714 F. Supp. 132, 137 (E.D.Pa. 1989) (stating that primary market for new issue does not warrant application of fraud on the market theory).