A recent opinion from a California federal court, Mier v. CVS Pharmacy, Inc. et al., No. 8:20-cv-01979-DOC-ADS, slip op. (C.D. Cal. May 9, 2022), touches on an aspect of econometric modeling that class action defense counsel should understand, particularly in consumer fraud cases under California’s Unfair Competition Law (UCL) and similar laws with restitution as a remedy. This key principle is that consumer value is subjective and individual, as represented by the downward slope of a demand curve. That shape poses what normally should be an insurmountable problem for UCL class actions. It represents the range of values consumers place on a product. As price rises, quantity falls, because each incrementally higher price exceeds the willingness to pay of one or more additional consumers. Courts are just beginning to recognize this, although savvy defense counsel have understood and advocated it for a long time.
The individuality of consumer value has especially powerful consequences in class actions with restitution as a remedy, as Mier shows, although its analysis stops short of exploring all of them. The plaintiffs in Mier alleged that labeling of hand sanitizer misleadingly advertised it as having “99.9%” germ-killing effectiveness. Id. at 2.Their economist conducted several surveys to measure consumer response to the label claim, concluding among other things that, while many consumers would prefer a sanitizer that kills 99.9 percent of bacteria to one that killed less, 80 percent still would have purchased the subject product in the absence of the label claim. Id. at 13.
The court made two key findings in denying certification of classes under the UCL and False Advertising Law (FAL) and under the Consumers Legal Remedies Act (CLRA). First, the CLRA allows recovery of tort damages, measured as the difference between the price paid and the price that would have been paid absent the alleged fraud (the so-called but-for price). Id. at 13. This is an alleged difference in “market” prices, which in an econometric model is a vertical distance between actual and but-for equilibrium prices. Plaintiffs’ economists often multiply that alleged price difference by quantity to compute alleged “aggregate” economic loss to a class.[1] In Mier, however, a CLRA class could not be certified, because the plaintiffs’ economist did not determine the supply curve and therefore could not opine as to the but-for market price. Id. at 13.
But the second finding is the primary focus of this post. The UCL and FAL provide for restitution rather than recovery of tort damages, measured by the difference between the price paid and the value received, or, as the court in Mier stated it, “the difference in what the consumer actually paid and what the consumer would have been willing to pay had the consumer known all the relevant information.” Id. at 13.In economic terms, the value to the consumer is measured by that consumer’s willingness to pay, and it is depicted across consumers by the demand curve, which typically slopes downward.
In Mier, the economist’s survey showed that 80 percent of consumers still would have purchased the product without the 99.9 percent label claim. Those consumers suffered no loss. If you are visualizing a model, this means that the left side of the but-for demand curve still rises above the price paid, meaning that all those consumers still received more value than the money they paid, regardless of the allegedly misleading label, and are owed no restitution. Accordingly, the court concluded, “[I]ndividualized questions of whether class members suffered any damage whatsoever predominate any common questions, thus failing Rule 23(b)(3).” Id. at 14.
While this analysis and result in Mier should be welcomed by defendants, the court could have taken the analysis a step further to find that the amount of loss suffered by any class member (those among the 20 percent who would not have purchased without the label claim) would also require individual determination. This loss would be measured by the difference between the price a consumer paid and the price the consumer would have been willing to pay in the absence of the alleged fraud.[2] As a downward-sloping demand curve illustrates, it is a different amount for each consumer – the difference between a horizontal line and a downward-sloping curve. That curve can be thought of as a distribution of consumers, and the question is where a consumer falls on it.
How could that be determined? It’s not clear that it could be reliably determined; but in theory, at least, the consumer could be questioned about willingness to pay. Whether or not the inquiry is feasible, it is an individual question and cannot be glossed over with statistical aggregation. See Comcast Corp. v. Behrend, 569 U.S. 27, 34 (2013) (“And it is clear that, under the proper standard for evaluating certification, respondents’ model falls far short of establishing that damages are capable of measurement on a classwide basis.”). The key takeaway is to develop a precise understanding of measures of loss and recovery under the relevant law and how econometric analysis attempts to model them. In a consumer class action under statutes like the UCL and FAL, which provide for restitution, the measure of loss and recovery incorporates a subjective, individual value shown by a sloping demand curve – a shape that defies class treatment.
[1] This is the attempt to apply the theory of fraud on the market to consumer products. Many economists and some courts are critical of such analyses because they assume that markets for consumer products are efficient. Consumer products generally do not trade in efficient markets and therefore do not exhibit equilibrium prices observable in efficient markets.
[2] Under both measures of recovery discussed in Mier, the notion of a single “actual” price paid is also a fiction. In most cases, different consumers will have paid different prices.
