Damage Methodology Trends Within False Advertising and Product Defect Class Actions

• Publication year: 2021
• Author: By Dan Werner, Ph.D., CPA and Garrett Glasgow, Ph.D.

DAMAGE METHODOLOGY TRENDS WITHIN FALSE ADVERTISING AND PRODUCT DEFECT CLASS ACTIONS

By Dan Werner, Ph.D., CPA and Garrett Glasgow, Ph.D.¹

I. INTRODUCTION

Over the past decade, courts have increasingly focused on issues related to the calculation of damages during the class certification stage.² At the class certification stage, Rule 23(b)(3) requires the court to find that common issues predominate, including with respect to the alleged injury.³ Cases such as Comcast highlight the need for a damages model to be tied to the theory of liability and for damages to be measurable on a classwide basis.⁴ The increased rigor with respect to issues of predominance and damages can also be seen through the evolution of damage approaches within false advertising and product defect litigation. As a result, engaging a damages expert at the class certification stage is now a de facto requirement in many cases.

This article reviews several different approaches to calculating damages in false advertising and product defect class action litigation in recent years. Specifically, we review the full refund approach, the promised discount approach, and several different applications of a price premium approach, including a simple price comparison, regression analysis, conjoint surveys, and economic market simulations. Although one or more damages methodologies may be available in theory, practitioners must be careful to design and implement their damages model in a manner that fits the facts of the case. Whether a damages model is sufficient for class certification often hinges on the details of implementation and the facts of the case, as we show in several examples.

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II. FULL REFUND APPROACH

The simplest damages model proposed by plaintiffs in false advertising and product defect class actions is the "full refund" approach. Under this approach, plaintiffs argue that consumers purchased the product solely due to some falsely advertised benefit, and the product is worthless without that benefit.⁵ Thus, under this scenario, class members are entitled to a full refund of the purchase price. Damage calculations under the full refund approach are appealingly simple. In fact, the full refund approach can be regarded as a special case of the "price premium" approach discussed below, in which the price premium resulting from the alleged misconduct is equal to the entire purchase price.⁶ However, demonstrating that this model is appropriate for a given case may pose significant challenges. For instance, defendants may argue that the product received by each class member had at least some value, and thus the full refund approach to damages does not apply.

Recent court decisions involving alleged misrepresentations on product labels have helped clarify when the full refund approach to damages is appropriate. For example, In re Tobacco Cases II, the California Court of Appeal wrote, "A full refund may be available in a UCL case when the plaintiffs prove the product had no value to them."⁷

When consumers received at least some value from their purchase, however, courts tend to reject the full refund approach for failure to satisfy Comcast's requirement that classwide damages must be tied to the liability theory to satisfy Rule 23(b)(3)'s predominance requirement. For example, in Werdebaugh v. Blue Diamond Growers, a case involving allegations that various almond milk products were falsely advertised as "all natural," the court ruled against plaintiffs' full refund model during the class certification stage, "because it is based on the assumption that consumers receive[d] no benefit whatsoever from purchasing the accused products [, which] cannot be the case, as consumers received benefits in the form of calories, nutrition, vitamins, and minerals."⁸ Another example is In Re: Pom Wonderful LLC Marketing and Sales Practices Litigation, a case involving allegations that certain Pom juice products falsely claimed to provide various health benefits. There, the court rejected the full refund methodology because it did not account for any value received by consumers independent of the contested labeling claims.⁹ Without accounting for the value received, the damages model did not isolate damages that resulted from the alleged misconduct and failed Comcast. More recently, the court denied class certification for the same reasons in Bruton v. Gerber Products, a case involving allegations that certain Gerber food products are deceptively labeled with various claims.¹⁰

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Courts apply similar logic outside the context of food labeling claims. For example, in Chowning v. Kohls, a case involving allegations of a deceptive reference price for apparel (e.g., comparing a selling price alongside a significantly higher fictitious "original" price), the plaintiff put forth a full refund approach to damages, among others.¹¹ However, the court rejected the full refund model because it "fail[ed] to account for the value Plaintiff received" and "neither party dispute[d] that the [contested products] each provided some value."¹² The court also suggested that a "viable measure of restitution" could include "a 'price premium' model in which an expert isolates the amount of the price attributable to the false representation."¹³ On appeal, the Ninth Circuit confirmed that the proper calculation of restitution in this case is the difference between the price paid and the value received.¹⁴

Even in situations where the full refund approach may apply, the implementation of the approach may come under scrutiny. For example, in Lambert v. Nutraceutical Corp., which involved a nutritional supplement that was alleged to be falsely advertised, the court initially certified a class that had proposed using the full refund approach, but later decertified the class because the plaintiff's damages model was based on the suggested retail price, rather than the actual retail price paid by class members.¹⁵ As a result, common issues did not predominate since the plaintiff had not provided the evidence required to apply the full refund model for classwide damages.¹⁶ However, on appeal, the Ninth Circuit reversed the order decertifying the class, noting that "uncertainty regarding class members' damages does not prevent certification of a class as long as a valid method has been proposed for calculating those damages."¹⁷ Since the plaintiff had presented evidence that the product was worthless, the court suggested that the full refund model was a workable method with only the suggested retail price and unit sales information, sufficient for the class to be certified.¹⁸

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III. PROMISED DISCOUNT APPROACH

Within allegations of a falsely advertised discount or reference price, plaintiffs have also proposed a "promised discount" approach, sometimes called an "actual discount" or a "false transaction value" model. Damages under this approach are based on the advertised discount that consumers did not receive. For example, suppose a product was listed for sale at $20 and this price was advertised as being "50% off," even though $20 was the normal selling price. If the promised discount of 50% had been applied to the normal selling price of $20, consumers would have paid $10 (instead of $20). Under this hypothetical example, a promised discount approach would calculate damages of $10 based on the difference between the price paid ($20) and the price consumers would have paid if the advertised discount was applied to the normal selling price of the product ($10).

Courts have had mixed reactions to the promised discount approach. This approach was sufficient to certify the class in Spann v. J.C. Penney Corporation, a case involving allegations of a deceptive "original" price advertised next to a "sale" price.¹⁹ In that case the court concluded that "[t]he amount plaintiff thought she was saving was a factor in her purchase decisions" and that "[p]laintiff is entitled to argue that payment of the 'transaction value' [the difference between expected and received value], if measurable and supported by evidence, would restore sums acquired by defendant's allegedly unfair pricing practices."²⁰ However, the same approach was rejected in Chowning v. Kohls, in which the court noted that, "[t]o determine Plaintiff's loss for purposes of restitution, the focus should be on what Plaintiff actually received given the price she paid, not on the bargain Plaintiff thought she was receiving."²¹ The Ninth Circuit upheld this decision on appeal, noting that the correct approach was "price paid versus value received," and pointing out that the promised discount approach was not available as a method for calculating restitution in a UCL action, because it "would effectively seek damages sounding in contract, not equity."²²

IV. PRICE PREMIUM APPROACH

The economic logic for damages under a price premium theory is straightforward: plaintiffs allege that the misconduct (e.g., false advertising or concealing a product defect) leads to higher consumer demand for the product, which in turn leads to higher market prices for the product. Thus, under this theory of injury, all class members paid a higher price for the product relative to what they would have paid if class members had not been misled when purchasing the product. Damages are calculated as the difference between what class members actually paid in the real-world (the "as-is" world) and the estimated market price for the product under a scenario in which the defendant did not engage in the alleged misconduct (the "but-for" world). As suggested by the prior cases, the price premium approach is economically appropriate when consumers received a product with some value. The challenge for any damages expert is to isolate the harm caused by the alleged misconduct (i.e., properly identify the price premium tied to the alleged misconduct). Below we discuss four recent approaches to calculating a price premium: (i) a simple price comparison, (ii) regression...