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Appellate Division Rejects “Fraud on the Market” & “Artificial Price Inflation”
Theories of Recovery Under the New Jersey Consumer Fraud Act∗
Originally published in Spring 2004 in New Jersey Defense A successful claim under the New Jersey Consumer Fraud Act (“CFA”) yields an attractive recovery of treble damages for plaintiffs and fees for plaintiffs’ attorneys. So it is really not surprising that the plaintiffs’ bar have engaged in a tireless effort to expand the CFA’s reach. Critical to these efforts is plaintiffs’ argument (upheld by the courts) that they need not show traditional “reliance,” that is, that plaintiffs need not show that they directly relied on the fraudulent conduct at issue to recover CFA damages. Although the courts have upheld this argument, they still require plaintiffs to prove a causal nexus between the consumer fraud and an ascertainable loss. A relatively recent phenomenon involves the use of the CFA in purported class action lawsuits that are filed on behalf of all consumers who purchased a product based on a claim that the purchase price for that product was artificially inflated. Plaintiffs claim that, although they did not rely upon the fraudulent conduct, they paid more for the product as a result of the fraud. The argument borrows the “fraud on the market” theory used in securities litigation (in which investors claim that fraudulent conduct resulted in artificially inflated stock prices) and seeks to apply it to the purchase price for consumer goods and other products. A popular type of product to target in these types of lawsuits has been prescription drugs even though those products are only available when a physician authorizes their purchase. Plaintiffs’ claims in these cases develop as follows. Plaintiffs allege that defendants engaged in fraudulent conduct, such as disseminating allegedly fraudulent ads by failing to warn adequately about product risks. The lawsuit is filed as a purported class on behalf of all consumers who purchased the products. Because plaintiffs need not prove traditional “reliance,” plaintiffs argue that whether or not every plaintiff in the purported class saw the “fraudulent” ads is irrelevant. Instead, plaintiffs argue that as a result of dissemination of the ads, an increased demand for the product occurred, thereby inflating the product’s price. Plaintiffs’ claim for damages is to recover the artificially increased amount paid for the product, which plaintiffs allege could not have been charged if defendants had not engaged in fraudulent conduct. Because the lawsuit is filed on behalf of all product ∗ This article was originally published in the Spring 2004 edition of the New Jersey Defense newsletter, a publication of the New Jersey Defense Association. Reprinted with permission. purchasers and the CFA allows treble damages and attorneys fees, if damages are awarded under this theory, plaintiffs’ recovery could be substantial. In an opinion recently approved for publication, the Appellate Division rejected the “fraud on the market” theory of recovery under the CFA and affirmed the trial court’s dismissal of a purported nationwide class action on behalf of all consumers of the prescription drug Claritin. NJ Citizen Action v. Schering Plough, 2003 WL 22766152, 2003 N.J. Super. LEXIS 413 (App. Div. July 15, 2003), certif. denied, 178 N.J. 249 (2003). The Appellate Division held that plaintiffs failed to state a claim when they alleged that they were entitled to damages because fraudulent advertisements caused increased demand for Claritin that they then purchased at an artificially inflated price. Not only was the “fraud of the market” theory rejected as a basis for CFA recovery, but the opinion also distinguishes between statements of fact, which may be actionable under the CFA, and “puffery”, which is not actionable under the CFA. (The court ruled that the advertising claims at issue were puffery and this provided an alternative basis for the case’s dismissal.) Additionally, the opinion provides important guidance on evaluation of direct-to-consumer advertising for prescription drugs, which are subject to Food and Drug Administration oversight. By way of background, the NJ Citizen Action case involved the following allegations. Four non-profit consumer watch dog organizations and five individuals filed a purported class action lawsuit against a pharmaceutical company and its two advertising agencies claiming that fraudulent advertising had caused consumers (whether or not they had seen the advertising) to pay artificially inflated prices for a prescription drug. Defendants immediately moved to dismiss the complaint for failure to state a claim under the CFA. To state a claim under the CFA, a plaintiff must allege (1) unlawful conduct by the defendants; (2) an ascertainable loss on the part of the plaintiff; and (3) a causal relationship between the defendants’ unlawful conduct and the plaintiffs’ ascertainable loss. N.J. Citizen Action v. Schering Plough, 2002 WL 32344594 (Law Div. 2002) (unpublished trial court opinion), citing Cox v. Sears Roebuck & Co., 138 N.J. 2, 24 (1994). The Appellate Division (Judges Pressler, Axelrad & Hoens) observed that under Turf Lawnmower Repair, Inc. v. Bergen Record Corp., 139 N.J. 392, 416 (1995), cert. denied, 516 U.S. 1066, 116 S. Ct. 752, 133 L. Ed. 2d 700 (1996) for there to be consumer fraud, "the business practice in question must be `misleading' and stand outside the norm of reasonable business practice in that it will victimize the average consumer . . ." The direct-to-consumer advertising statements at issue were: “ . . . with allergy control that doesn’t make you drowsy, you and others in your family with allergies can lead a normal life again” “you . . . can lead a normal nearly symptom-free life again” Plaintiffs argued that the word “you” without a statement that “results may vary” was misleading because it suggested that all patients using Claritin were promised efficacy even though in clinical trials all patients did not experience clinical benefit. Plaintiffs argued that they suffered a loss as a result of that advertising (i.e. payment of an artificially inflated price that resulted from advertising because a subset of the plaintiffs had seen and relied on those ads) based on a “fraud on the market” theory of recovery. Plaintiffs argued that they need not prove causation or reliance in the traditional sense. Rather, plaintiffs need only show that defendants’ conduct caused a “fraud on the market” that resulted in an artificially inflated price for Claritin. In rejecting plaintiffs’ attempt to extend the “fraud on the market” securities law theory of recovery to CFA claims, the Appellate Division noted that the New Jersey Supreme Court had already rejected this theory in a common law fraud case. See Kaufman v. i-Stat Corp., 165 N.J. 94 (2000). Here, the Appellate Division concluded that adoption of a “fraud on the market” theory of recovery would “virtually eliminate” the “causal nexus” requirement of CFA claims. To state a claim, plaintiffs must prove that a causal relationship exists between defendants’ unlawful conduct and plaintiffs’ ascertainable loss. Were the court to accept plaintiffs’ argument, “the relationship between the alleged misstatement and the ascertainable loss suffered would become so attenuated that it would effectively disappear.” NJ Citizen Action, 2003 WL 22766152, 2003 N.J. Super. LEXIS 413. As a result, the CFA’s distinction between a private cause of action and the Attorney General’s CFA claims would cease to exist. This is an important development in the case law interpreting the CFA. Plaintiffs from across the country select New Jersey as their forum to file CFA claims and have offered up seemingly limitless legal arguments and theories to trigger the treble damages and attorneys fees afforded by that Act. The Appellate Division’s ruling is critical because it will help stem that tide. Significantly, the New Jersey Supreme Court denied plaintiffs’ petition for certification of the Appellate Division’s ruling. 178 N.J. 249 (2003). Ms. Reig is chairperson of the New Jersey Defense Association’s Product Liability Committee and Secretary/Treasurer of the Association. She is Counsel with Porzio, Bromberg & Newman in Morristown, New Jersey and New York, New York, where she defends pharmaceutical companies in product liability and consumer fraud cases and counsels pharmaceutical companies on, among other things, FDA promotional rules and liability risk prevention.

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