Back in May, we wrote about a package of “extreme pro-plaintiff changes” that legislators had proposed to New York’s main consumer-protection statute, Gen. Bus. Law § 349.  There have been some significant developments on this front, so we figured an update was in order.

For starters, the end of the legislative session came and went on June 19, and the amendments (known in the Senate as S2407 and in the Assembly as A679) didn’t come up for a floor vote.  But businesses should not assume that the pressure is off.  The bill passed out of the relevant committees in both chambers by lopsided margins, and the Senate version reached its third reading – meaning that a floor vote could have occurred at any time.  This appears to be the furthest that any proposed amendment to § 349 has progressed in many years.  And there’s every reason to assume that the bill will return in the next session.

Notably, some positive changes have been made to S2407/A679 since our initial post:

• The original bill would have made a § 349 violation out of any act that “violates any law[,] be it civil or criminal, federal, state, municipal, statutory, administrative or [otherwise].”  In effect, this would have created a private right of action for the violation of any law or regulation under the sun.  Evidently, the drafters had second thoughts about the inevitable deluge of litigation and removed this language.

• The original bill would have stricken § 349’s longstanding “regulatory compliance” defense, which protects a business from liability where “the [challenged] act or practice is … subject to and complies with the rules and regulations of … [any] agency of the United States.”  This sensible defense has now been spared.

• The original bill would have permitted any person or legal entity – including law firms and for-profit corporations – to bring a § 349 claim purporting to act and seek damages “on behalf of … the general public.”  That’s right – plaintiffs’ lawyers wouldn’t even have needed to find plaintiffs anymore.  They could have simply brought the same suits themselves.  This was apparently a bridge too far: in the latest version, only natural persons and “non-profit organizations” may bring representative actions.  (As discussed below, however, that’s still plenty problematic.)

• The original bill would have increased the minimum damage award under the statute forty-fold, from $50 to $2,000.  The current version settles for a mere twenty-fold increase, i.e., to $1,000.

• The bill would now impose a 10-business-day pre-suit notice requirement for any claim seeking injunctive relief.

One revision to S2407/A679 deserves special discussion.  That’s because, instead of just making the bill less bad, it would actually significantly improve the status quo for businesses in New York. 

This past May, your author published an editorial in the New York Law Journal calling for reform of § 349’s broken statutory-damages system.  As that piece explained, when the Legislature made § 349 privately enforceable three decades ago, the legislative history was replete with statements that statutory damages shouldn’t be available in class actions – only in individual actions.  The Legislature recognized that, if every member of a large class were entitled to a minimum damage award, with no relation to the actual harm suffered, the total class-wide damages would quickly spiral out of control.  The Legislature didn’t make this intent clear in the text of § 349 itself, however, because a provision of New York’s civil procedure code – CPLR 901(b) – already prohibited statutory damages in class actions as a general matter.  This became a real issue in 2010, when the Supreme Court held that CPLR 901(b) does not apply in federal-court actions.  Justice Stevens’s decisive concurrence suggested that, if the class-action prohibition had appeared in the relevant substantive statute, rather than in New York’s general procedural code, the result would have been different.

Your author’s editorial urged the Legislature to fix the Shady Grove problem by amending the text of § 349.  Apparently, someone was listening.  In June, S2407/A679 was amended – not to bar statutory damages in class actions, as the Legislature originally intended, but to impose a class-wide statutory damages cap.  Namely: “the lesser of one million dollars or two per centum of the net worth of the [defendant] business.”  While not an optimal solution, such a cap would greatly mitigate the threat of enormous, disproportionate statutory-damage awards created by Shady Grove.  (Notably, however, for this change to be effective, a similar cap would have to be added to § 349’s companion statute, Gen. Bus. Law § 350; otherwise, plaintiffs would just sue under the latter statute and ignore the former.)

Now for the bad news.  Even in its latest incarnation, S2407/A679 contains a number of provisions that, if passed, would greatly increase the volume of § 349 litigation and invite abusive lawsuits.  For example:

• The bill still expands liability under § 349 to include not just “deceptive” practices, which the statute now prohibits, but also “unfair” and “abusive” practices.  The definitions of “unfair” and “abusive” remain extremely vague, leaving it impossible for businesses to know what acts will subject them to liability and guaranteeing extensive litigation over the meaning of these prohibitions.  Notably, California’s consumer-protection statute has a similar prohibition on “unfair” conduct, and even after decades of litigation, the courts have not been able to agree on what it means.

• The bill still abrogates the well-settled rule that, to be actionable under § 349, conduct must be “consumer-oriented.”  Thus, it would permit the invocation of § 349 in strictly private disputes, business-to-business disputes, and other non-consumer contexts.  It’s unclear what problem this amendment is even attempting to solve.

• The bill still vastly expands the category of plaintiffs with standing to sue.  It provides that “standing to bring an action under [§ 349], including but not limited to organizational standing and third-party standing, shall be liberally construed and shall be available to the fullest extent otherwise permitted by law”—whatever that means.  It specifies that, in addition to natural persons, “any … legal entity … or group of individuals however organized” may bring suit on its own behalf.  It allows “non-profit organization[s]” to sue over goods or services as long as they claim to have “purchased or received” them “in order to test or evaluate [their] qualities.”  And, most troubling of all, it would permit any “non-profit organization” to anoint itself a representative of the “general public” and sue for damages on the public’s behalf. 

The problems with this public-interest standing provision, in particular, are myriad.  Just to name a few:

• It’s virtually guaranteed that members of the plaintiffs’ bar will establish “non-profit” front groups for the sole purpose of bringing suit under § 349.  Those front groups will (not coincidentally) retain the same lawyers who spearheaded their creation, signing lucrative retainer agreements with them.  You don’t have to take our word for it: this is exactly what happened in California before 2004, when that state’s voters grew tired of these front-group suits and tightened the standing requirements of California’s consumer-protection statute by referendum.

• When a non-profit organization purports to sue on behalf of the general public, but no actual members of the public are parties to the litigation, how will it be assured that the non-profit plaintiff is acting in the public’s best interest, rather than to advance its own agenda?  In class actions, the presence of a named plaintiff who belongs to the relevant class is supposed to ensure that counsel’s litigation strategy is aligned with the class’s best interests—and the court is supposed to verify that the named plaintiff will represent the class adequately.  What will ensure such alignment in one of these novel “public interest” suits?

• When a non-profit recovers a monetary award on behalf of the “general public,” what will be done with the money?  Will the organization be required to distribute the money to the consumers who actually suffered the relevant injury – and, if so, how will this be done, especially where the identity of those consumers is not readily ascertainable?  Will the money be given away as a cy pres award, with all the attendant concerns that cy pres awards entail?  Or will the “non-profit” organization just keep the money? If the latter, will there be any restrictions on how the money is used?  What if members of the public on behalf of whom the non-profit purports to sue don’t want to support its particular mission or agenda with their dollars? 

• Even if § 349 purported to grant standing to non-profit organizations to represent the interests of the “general public,” would that be constitutional?  In the federal courts, Article III generally prevents courts from hearing cases where an uninjured party (non-profit or otherwise) wishes to vindicate the interests of the “general public.”  And while Article III does not directly apply in New York’s state courts, a similar “injury-in-fact” principle is deeply embedded in New York law.  As the state’s high court said in 1991, that requirement “serves to define the proper role of the judiciary and is based on … the judicial experience of centuries.”  How are these “public interest” suits consistent with the injury-in-fact requirement?

With any luck, things won’t get to the point where these questions need to be answered.  Now is the time for companies that do business in New York to contact their legislators and advocate for further improvements to S2407/A679, while commending the bill’s sensible statutory-damages cap.  We at Misbranded will continue to track these developments and keep you posted.