Fraud's final frontier: Iowa's battle over becoming the final state to allow private consumer fraud actions.

• Author: Sand, Rob

1. Introduction II. Background A. Prior Iowa Consumer Fraud Law B. Prior Legislative Attempts C. The 2008 Legislative Session D. The 2009 Legislative Session III. Analysis A. Assessing Iowa's Need for a Private Consumer Fraud Action 1. National Fraud Climate: Incidence and Enforcement 2. Consumer Fraud in Iowa B. The History of Private Actions for Consumer Fraud C. Learning from 49 Examples--Characteristics of Private Consumer Fraud Actions 1. Ensuring Economic Feasibility: Attorney Fees Provisions a. Provisions Regarding Plaintiff's Fees b. Provisions Regarding Defendant's Fees 2. Measuring Causation: Reliance and Injury-in-Fact Provisions 3. Measuring Blame: Culpability Provisions 4. Exemptions D. Building the Best Bill--Amending Iowa's New Law IV. Recommendations A. Attorney Fee Provisions B. Causation Combination: Tendency to Mislead & Injury-in-Fact C. Ensuring Culpability D. Other Provisions 1. Eliminating Attorney General Supervision 2. Encouraging Out-of-Court Settlement 3. Professional & Industry Exemptions V. Conclusion I. INTRODUCTION

   June 2008 is a month most Iowans would prefer wash away. Persistent heavy rains brought the state's worst flooding in recorded history. The Cedar River rose 20 feet above flood stage, putting 1300 city blocks underwater and damaging or destroying more than 6000 homes and businesses in Cedar Rapids. (1) The University of Iowa, located in Iowa City, had twenty buildings flooded and estimated damages of $230 million. (2) Forty-five days after the waters receded, the Iowa Governor's Office estimated the floods had caused $12 billion in damages. (3) The damages from the Iowa floods are likely within the United States' top five costliest natural disasters since 1900. (4)

   As Iowans take part in the rebuilding process, many will depend upon help from out-of-town and out-of-state contractors. (5) Among well-intentioned and legitimate contractors (both from Iowa and elsewhere) helping victims are criminals and con artists who come to disaster areas to prey on desperate individuals. (6) For example, the Hurricane Katrina Fraud Task Force charged over nine hundred individuals with disaster-related fraud in the three years after Hurricane Katrina--nearly one every day, excluding Sundays, for three years. (7) Non-profits, attorneys general, and well-known insurance companies advise individuals on how to avoid disaster fraud via their websites. (8) To compound the injuries from the 2008 floods, Iowa was the only state that did not give its citizens the right to sue for consumer fraud, leaving its citizens in a uniquely vulnerable position. (9) Many states adopted such a right in the 1960s and 1970s.10 After a decade of strong pushing, Iowa finally created a private action for consumer fraud in the legislative session after the 2008 floods.

   Part II of this Note opens by providing a history of Iowa's recent attempts to create a private right of action for consumer fraud, with a more in-depth discussion of the 2008 and 2009 efforts. Part III analyzes other states' consumer fraud actions, Iowa's need for a private action for consumer fraud, and the provisions of the 2009 bill, which became law. Finally, Part IV takes lessons from 49 other states to judge the new law's provisions, and offer revisions that balance the needs of all stakeholders. Specifically, the legislature should make the attorney fees awards to prevailing plaintiffs mandatory, clarify that defendants can only win attorney fees for frivolous claims, and eliminate Attorney General oversight to prevent politicization and inconsistent enforcement.

2. Background

   1. Prior Iowa Consumer Fraud Law

      For nearly ten years, Iowa stood alone without a private right of action for consumer fraud. (11) This meant that defrauded consumers had to file complaints with the Attorney General's Consumer Protection Division instead of filing a private suit. (12) The Division's attorneys then had to investigate to determine what action, if any, was appropriate. (13) However, with only six attorneys to handle over 6000 complaints annually, the office's resources were greatly limited. (14) The office sought out-of-court refunds or judicial injunctions in strong cases involving multiple consumers and brought consumer fraud suits on behalf of the state only in class action settings with exemplary levels of evidence. (15) The Attorney General's office cannot represent individuals in court. (16)

      Iowa's consumers could sue for common-law fraud, but had to prove eight elements: the defendant made a representation to the plaintiff; the representation was false; the representation was material; the defendant knew the representation was false; the defendant intended to deceive the plaintiff; the plaintiff acted in reliance on the truth of the representation and was justified in relying on the representation; the representation was a proximate cause of plaintiff's damages; and the amount of damages. (17)

      In addition, the plaintiff had to prove each of the elements "by a preponderance of clear, satisfactory, and convincing evidence," a standard reflecting not only a preponderance of evidence, but also the evidence's nature and characteristics. (18) The subjective intent requirement and the standard of proof make common law fraud claims winnable only in rare cases. In addition, without the ability to recover attorneys' fees, common law fraud actions are often economically pointless even when successful.

      Proponents of a private action for consumer fraud in Iowa argued for ten years that the law would provide justice for consumers by lowering the high bar of common law fraud, allow a more efficient allocation of resources in the Consumer Protection Division of the Iowa Attorney General's office, (19) and generate more revenue for legitimate businesses by removing fraudulent competitors from the market, among other benefits. (20) on the other side, opponents of a private right of action argued that businesses would suffer from the costs of frivolous lawsuits and that other states restricted their actions because of such suits. (21) They also argued that the Attorney General's powers were broad enough already to prevent fraud, and that "federal and state agencies already regulate a number of industries targeted by these bills." (22)

   2. Prior Legislative Attempts

      Iowa's part-time legislature, which meets from January to May, regularly saw bills to create a private right of action for consumer fraud. (23) This section describes how persistent coverage and editorials from the Des Moines Register (the state's largest newspaper), lobbying by community groups, and more supportive majorities in the Iowa House and Senate finally led to the creation of a private right of action for consumer fraud in 2009. (24)

      In 2001, the Des Moines Register ran a three-day series that revealed "hidden costs, inflated prices and high-risk terms associated with some professional land contracts." (25) The series instigated a flood of phone calls to the newspaper and to the Attorney General's office from individuals who had fallen victim to such contracts. (26) The bill that was introduced that year, according to the Attorney General's office, died because retail, mobile home, and automotive associations feared frivolous lawsuits. (27) State Representative Chuck Larson, the Republican chair of the Judiciary Committee that dealt with the bill, said his staff would review current law to learn what changes were necessary. (28)

      At the beginning of the 2002 legislative session, Iowa Attorney General Tom Miller spoke up about his office's lack of sufficient resources to pursue consumer fraud cases, and an Iowa House study bill was introduced on the subject. (29) The issue made no progress, however, including no additional press coverage. Thus, attempts to create a consumer fraud action failed again.

      In March 2003, halfway through the legislative session, the Des Moines Register editorial board stated that the state should be "embarrassed" to be without a consumer fraud action. 30 By June, the Register had reported on 350 elderly Iowans who were scammed out of millions of dollars of savings, and the legislative session had again ended without a new law, leading the Register to claim that "the government in Iowa is failing the people of this state." (31) When a home-selling business that had victimized Iowans through high interest rates and prices was forced into bankruptcy in october, the Register added a third editorial for the year, calling a private action for consumer fraud "a nobrainer." (32)

      The 2004 legislative session found some action but no press coverage. House File 2534 required proof of consumer fraud by a preponderance of the evidence and provided for recovery of actual damages and the possibility, at the court's discretion, of temporary or permanent injunctive relief. (33) It made reasonable attorney fees available for prevailing plaintiffs, barred class actions, and required that the Attorney General's office be notified of all claims filed and allowed to intervene. (34) Just two lobbyists registered against the bill, while four registered in favor. (35) Lobbyists had lined up against the bill when it was under study, however, by a count of six to three. (36)

      In 2005 the Register made the unusual move of creating a list of six legislative priorities, and included the creation of a private action. (37) It updated the list in March, when bills for a private action were in both chambers without sponsors, and stated that "a lawmaker should pick up the ball on this bill." (38) None did, while ten lobbyists registered against the House bill and three in favor. (39)

      In November 2006, Iowa voters gave Democrats control of both Iowa legislative chambers and elected a new Democratic governor. 40 This gave Democrats full control of the legislature for the first time in 14 years as they prepared for the 2007 legislative session. 41 Although the 2007 private action bill did not...