Class certification is a key step in consumer fraud and false advertising class actions. Historically, certification of a purchaser class has relied on a demonstration that class members were exposed to, relied on and were directly harmed by the alleged fraud or misrepresentation (e.g., by purchasing a product they would not have otherwise purchased or getting less value from a product than was implicitly promised). Over time, however, approaches to class certification have evolved. In the past few years, there have been several cases in which plaintiffs have argued that the court should accept a “shortcut” to this showing of direct harm through reliance and exposure.

In these cases, plaintiffs have claimed that all class members were harmed because the conduct at issue increased the prices all purchasers paid, including those who were not exposed to or did not rely on any allegedly misleading information and who would not have changed their purchasing decisions with different information. Plaintiffs have argued that the fraud or false advertising affected the perceptions and conduct of enough consumers to increase demand for the product, resulting in a price higher than it would have been absent the conduct at issue. In a world without the alleged fraud or misrepresentation, the plaintiffs claim, prices would be lower and the alleged difference between actual and but-for prices will harm all purchasers, whether or not each of them was exposed to and/or relied on the alleged misinformation. If a court were to accept the logic of this shortcut approach, there would be no need to assess either individual exposure or reliance, nor to determine whether individual purchase decisions and prices paid were impacted.

This “fraud on the market” type argument, however, relies on a number of assumptions about the economic features of the market that might not hold. First, the argument requires that an increase in demand will lead to an increase in price in the market at issue. Yet this is not always the case. In some industries, or for some products, prices remain flat or even decline when the total quantity sold increases. In some high-tech industries, for example, prices fall as a technology is more widely adopted because increasing returns to scale or “learning by doing” causes production costs to fall as quantities rise. An increase in demand could accelerate price reductions as firms are able to achieve quantity-related cost reductions more quickly. As a result, an increase in demand could benefit some consumers through lower prices. Another reason that prices may not rise with an increase in demand is that prices for some goods are “sticky” due to the costs associated with changing prices. As these two examples show, it is critical to assess the actual relationship between prices and demand in the relevant marketplace; one cannot simply assume the relationship.

Another market feature that is necessary for the shortcut class certification approach to apply is that there be a single price for the product or, if various customer groups are charged different prices, that these prices move together. Again, while some markets exhibit this type of pricing, others do not. It is not unusual for producers to charge different customer groups different prices based on differences in their sensitivity to price or their bargaining power. In these cases, changes in demand for one customer group will not necessarily affect the price the producer charges another customer group. For example, business purchasers may be both more price-sensitive and more knowledgeable about true product characteristics than consumers. If business customers are more price-sensitive, they may pay a lower price for the product than consumer purchasers. If they are more sophisticated purchasers, the alleged misrepresentation may also not affect their perception of, and demand for, the product. As a result, the prices businesses pay might not be affected even in a case in which the alleged misinformation inflated consumer demand. Similarly, individually negotiated prices can lead to instances in which some, but not all, customers pay higher prices as a result of an alleged misrepresentation.

A third economic assumption necessary to support the shortcut approach, and the last discussed here, is that the harm of paying a higher price is not offset by other benefits to the purchaser that the conduct also caused. The key impact question is whether in a but-for world without the alleged misrepresentation or fraud, an individual purchaser is better off. Depending on the allegation, some purchasers could be better off even if the alleged misrepresentation has caused them to pay a higher price than they would have paid absent the conduct. For example, plaintiffs may claim that the manufacturer of a consumer product should have disclosed a potential health risk associated with its use. Had the company made this disclosure, some purchasers might have chosen another product that was in fact less well-suited to their overall needs (taking into account effectiveness, price, actual health risks or other features). Those members of the proposed class could be better off paying an allegedly inflated price and purchasing the product at issue, than they would have been purchasing another product. This example demonstrates why one cannot generally skip the step of determining what each consumer would have purchased in the but-for world when assessing harm.

In summary, although the shortcut approach has some theoretical appeal, its applicability depends on the details of the marketplace. Although plaintiffs often ask the court to simply assume that higher demand leads to higher prices for all purchasers and higher prices inevitably mean overall harm, there are economic features present in many markets that mean these assumptions do not hold.  

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