Last May, in our post criticizing a decision in the Gadolinium litigation, we coined the term “spherical error” to describe an opinion that we thought was wrong in so many ways that it was erroneous no matter how one viewed it. To borrow another phrase from the realm of science (Wolfgang Pauli, this time), some opinions are so far off the mark, not only are they not right, they’re not even wrong.
We’ve found another one, or part of one, anyway – specifically the Pennsylvania consumer fraud aspects of Sheet Metal Workers Local 441 Health & Welfare Plan v. GlaxoSmithKline, PLC, 2010 U.S. Dist. Lexis 93520 (E.D. Pa. Sept. 8, 2010). It’s only one piece of a much larger opinion (also dealing with antitrust, unjust enrichment, and the laws of dozens of other states), but the Pennsylvania law part we know well enough to invoke the concept of spherical error.
Before we go further, our customary full disclosure: Dechert is a big Philadelphia law firm. GSK is pharma company with a large local presence (for more about that, see this post). We do some work for GSK (the Colacicco case for one), but we’re not involved in this Sheet Metal litigation. So we have no dog in that hunt. Our criticism of the recent Sheet Metal decision is not motivated by a losing lawyer’s sour grapes.
Anyway, the section of the Sheet Metal opinion that’s got us worked starts at Lexis page *102 (we told you this was part of a much larger opinion) and goes through page *105. In the course of only about 800 words, the opinion: (1) violates fundamental federalism by interpreting the Pennsylvania Unfair Trade Practices and Consumer Fraud Law (“UTPCPL”) far more broadly than any state court has ever done; (2) ignores both precedent and legislative history to hold that UTPCPL plaintiffs don’t have to allege elements of “common-law fraud,” 2010 U.S. Dist. Lexis 93520, at *102-03; and (3) stretches “consumer” standing under the UTPCPL beyond the breaking point, without even citing the most relevant Third Circuit precedent. Id. at *104-05.
A little background: The Sheet Metal decision involves allegations that the defendant artificially increased the market price of a drug (Wellbutrin) through certain allegedly anti-competitive acts (purported “sham patent litigation against companies seeking to manufacture and market generic versions,” 2010 U.S. Dist. Lexis 93520, at *5). The plaintiffs are the now common-place third party payers (mostly union pension funds) (“TPPs”) who claim they paid too much for the drug in reimbursing prescriptions that doctors made for members of TPP plans.
In addition to the consumer fraud claims we’ve mentioned, there are state antitrust claims (the issue mostly being whether indirect purchasers barred from recovering under federal antitrust law by Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), can nevertheless sue under state antitrust laws), and unjust enrichment claims (the issue mostly being whether there’s a legitimate separate cause of action). We’re not dealing with those claims here.
It’s well established that federal courts making predictions about state law are supposed to act conservatively and not make predictions that go beyond what state law already is. We discussed this in one of our earliest posts, “Federal Courts Should Remember Federalism,” back in 2006. But we guess it bears repeating.
The Supreme Court held in Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3 (1975), that when a federal court is making a prediction of state law under Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), it’s not supposed to make adventurous predictions Federal courts are “not free to engraft onto those state rules exceptions or modifications which may commend themselves to the federal court, but which have not commended themselves to the State in which the federal court sits.” Id. at 4.
That’s the basic principle.
The Third Circuit, at least as much as any circuit in the country, has repeatedly admonished the courts it supervises (including Pennsylvania federal courts) to follow this rule. Thus, in City of Philadelphia v. Lead Industries Ass’n, 994 F.2d 112 (3d Cir. 1993), the court declined to predict that Pennsylvania would adopt market share liability. A federal court is not “free to shape” state law “as it sees fit.” Id. at 123. Rather:
A federal court may act as a judicial pioneer when interpreting the United States Constitution and federal law. . . . [H]owever, federal courts may not engage in judicial activism. Federalism concerns require that we permit state courts to decide whether and to what extent they will expand state common law. Our role is to apply the current law of the appropriate jurisdiction, and leave it undisturbed. . . . Absent some authoritative signal from the legislature or the state courts, we see no basis for even considering the pros and cons of innovative theories. We must apply the law of the forum as we infer it presently to be, not as it might come to be.
Id. (various citations, including to Challoner, omitted).
In Leo v. Kerr-McGee Chemical Corp., 37 F.3d 96 (3d Cir. 1994), the court refused to expand New Jersey’s “product line” exception to corporate transactions not involving the specific product line. Reversing the district court, the Third Circuit admonished:
Federal courts may not engage in judicial activism. Federalism concerns require that we permit state courts to decide whether and to what extent they will expand state common law. . . . Our role is to apply the current law of the jurisdiction, and leave it undisturbed.
Id. at 101. The court of appeals applied the Challoner rule even though the defendants, through removal, were responsible for the case being in federal court.
In Camden County Board of Chosen Freeholders v. Beretta, 273 F.3d 536 (3d Cir. 2001) and City of Philadelphia v. Beretta U.S.A. Corp., 277 F.3d 415 (3d Cir. 2002), the Third Circuit twice refused to recognize public nuisance in product liability actions, first under New Jersey and then under Pennsylvania law. In Camden:
Public nuisance is a matter of state law, and the role of a federal court ruling on a matter of state law . . . is to follow the precedents of the state’s highest court and predict how that court would decide the issue presented. It is not the role of a federal court to expand or narrow state law in ways not foreshadowed by state precedent.
273 F.2d at 541. Then in Philadelphia:
[P]ublic nuisance is a matter of state law, and it is not the role of a federal court to expand state law in ways not foreshadowed by state precedent. Instead, a federal court follows the precedents of the state’s highest court and predicts how that court would decide the issue presented. Pennsylvania precedent does not support the public nuisance claim plaintiffs advance here, and we cannot predict that the Pennsylvania Supreme Court will choose to expand state public nuisance law in the manner plaintiffs urge.
Id. at 421 (citations to Lead Industries, Leo, and Camden omitted)
In Sheridan v. NGK Metals Corp., 609 F.3d 239 (3d Cir. 2010), the court followed Lead Industries in refusing to extend medical monitoring to a situation precluded by a Pennsylvania appellate court. “A federal court under Erie is bound to follow state law as announced by the highest state court.” Id. at 253. “Unlike our role in interpreting federal law, we may not act as a judicial pioneer” because “[f]ederalism concerns require that we permit state courts to decide whether and to what extent they will expand state common law.” Id.
Next, in Travelers Indemnity Co. v. Dammann & Co., 594 F.3d 238 (3d Cir. 2010), addressing the scope of the New Jersey economic loss rule, the court reiterated that, “in reaching our conclusion we have exercised restraint in accordance with the well-established principle that where two competing yet sensible interpretations of state law exist, we should opt for the interpretation that restricts liability, rather than expands it, until the Supreme Court of that state decides differently.” Id. at 253.
Most recently, in a case we blogged about, M.G. v. A.I. duPont Hospital For Children, ___ Fed. Appx. ___, 2010 WL 3310720 (3d Cir. Aug. 24, 2010), the court reversed a district court prediction that Delaware would adopt a medical monitoring cause of action. “Federal courts,” the Third Circuit admonished, “when called upon to make a prediction of state law, should act conservatively.” Id. at *7 n.7 (citing Challoner and Travelers Indemnity).
Hmmm…. That’s no fewer than seven cases, and three in 2010 alone. Think that the Third Circuit might just mean what it says? It’s repeatedly reminded district courts that, when dealing with state law, they must adopt “conservative” positions and reject “expansive” ones not firmly grounded in existing state law. How many more times must the Third Circuit going to have to make this point?
At least one more time, unfortunately.
We can hear the counter-argument now – Sheet Metal is a case of statutory interpretation, and the Pennsylvania Supreme Court instructed courts to interpret the UTPCPL “broadly.” 2010 U.S. Dist. Lexis 93520, at *104 (citing another district court case and a Superior Court case from 1984).
We don’t know of any cases excepting state statutory schemes from fundamental Erie/federalism principles, and allowing more adventuresome rulings just because something other than the common law is involved. But we’ll put that aside. Even assuming there’s a difference, has the Pennsylvania Supreme Court or the Third Circuit held anything about how to interpret the UTPCPL specifically with respect to the elements of common-law fraud?
That brings us to the next item of business.
As it turns out, the Pennsylvania Supreme Court has specifically addressed the significance of fraud in the UTPCPL context several times. The first was in Commonwealth v. Monumental Properties, Inc., 329 A.2d 812 (Pa. 1974), when the court stated that the “underlying foundation” of the UTPCPL “is fraud prevention.” Id. at 816. That purpose extended to the “catch-all” provision:
The Legislature realized, as has often been stated, that no sooner is one fraud specifically defined and outlawed than another variant of it appears. Rather than restricting courts and the enforcing authorities solely to narrowly specified types of unfair and deceptive practices, the Legislature wisely declared unlawful “any other fraudulent conduct.” This is a common and well-accepted legislative response to the mischief caused by unfair and deceptive market practices.
Id. at 826-27 (footnotes omitted).
Strike one for anything less than fraud.
In Weinberg v. Sun Co., 565 Pa. 612, 777 A.2d 442 (2001), the court was asked whether UTPCPL liability under the statute’s “catch-all” provision could extend beyond the elements traditionally comprising fraud under common law. The court said no – unanimously.
The important language, the court held, wasn’t the UTPCPL’s “catch-all” provision itself, but rather the section that allowed private plaintiffs to sue. That section (§9.2 involving “private actions”) required private litigants to prove individual “ascertainable loss” and reliance:
It readily appears that Commonwealth actions and private actions are distinguishable. . . . There is no authority which would permit a private plaintiff to pursue an advertiser because an advertisement might deceive members of the audience and might influence a purchasing decision when the plaintiff himself was neither deceived nor influenced.
777 A.2d at 445-46 (citations omitted). Because “[t]he UTPCPL’s underlying foundation is fraud prevention,” the court found “nothing in the statute which suggests such a private right” going beyond fraud. Id. at 446 (quoting Monumental Properties). Reviewing the act’s legislative history, the Weinberg court concluded:
Nothing in the legislative history suggests that the legislature ever intended statutory language directed against consumer fraud to do away with the traditional common law elements of reliance and causation.
Id. (footnote citing legislative history omitted).
Fast forward another few years to Toy v. Metropolitan Life Insurance Co., 928 A.2d 186 (Pa. 2007), where once again the court addressed the application of the elements of fraud to a UTPCPL action – specifically the class action killer, “justifiable reliance.” Once again unanimously, the court reaffirmed that private UTPCPL actions require proof of reliance as an element of common-law fraud. “Our decision in Weinberg did indeed settle that justifiable reliance is an element of the claims . . . under the [UTPCPL].” 928 A.2d at 201. The plaintiff’s position was erroneous because “because it was premised on the considerations that guide the Attorney General when he is pursuing an enforcement action.” Id. at 202. For private plaintiffs:
[W]e reiterated [in Weinberg] that the [UTPCPL]’s underlying foundation is fraud prevention, and held that nothing in the legislative history of the [UTPCPL] suggests that the legislature ever intended statutory language directed against consumer fraud to do away with the traditional common law elements of reliance and causation. Accordingly, we concluded that all of the plaintiffs’ claims incorporated the traditional elements of common law fraud of reliance and causation.
928 A.2d at 202 (numerous cites to Weinberg omitted).
Toy specifically held that the common-law elements of fraud are part and parcel of private UTPCPL actions (like those in Sheet Metal):
As the type of reliance that a plaintiff alleging common law fraud must prove is justifiable reliance, Weinberg necessarily states that a plaintiff alleging violations of the [UTPCPL] must prove justifiable reliance. Therefore, under Weinberg we hold that justifiable reliance is an element of [plaintiff’s UTPCPL] claims.
928 A.2d at 202-03.
For reasons we can’t fathom, Sheet Metal doesn’t cite Weinberg or Toy at all and doesn’t cite Monumental Properties for anything having to do with fraud. Instead, it relies solely upon a couple of other federal district court cases. That’s simply wrong – error any way you look at it – since, whether it’s considered a “broad,” “narrow” or whatever, interpretation of the statute, the requirement that UTPCPL plaintiffs prove the elements of common-law fraud is what the Pennsylvania Supreme Court has adopted, repeatedly and unanimously. Under Erie that’s the interpretation that Sheet Metal should have applied, but didn’t.
What about the next point in Sheet Metal – that “the version of the catchall provision of the PUTPCPL in place prior to 1996 prohibited only ‘fraudulent’ conduct,” and therefore the post-1996 rule is more liberal? 2010 U.S. Dist. Lexis 93520, at *102.
What about it? It’s more spherical error. Once again, that’s a demonstrably wrong proposition. The 1996 amendment only amended the catch-all provision. It didn’t touch the private right of action section of the statute, that two unanimous courts, in Weinberg and Toy, found dispositive.
Let’s look at some other decisions that aren’t cited in Sheet Metal.
It’s entirely true that both Weinberg and Toy involved pre-1996 transactions. However, the activity in Yocca v. Pittsburgh Steelers Sports, Inc., 854 A.2d 425 (2004), entirely post-dated the 1996 amendments to the UTPCPL. Confirming – again unanimously – that the 1996 amendments did not materially alter the general standards of the UTPCPL, the court decided that the act’s pre-1996 reliance requirements remained in place and in force:
To bring a private cause of action under the UTPCPL, a plaintiff must show that he justifiably relied on the defendant’s wrongful conduct or representation and that he suffered harm as a result of that reliance.
Id. at 438 (citing, inter alia, Weinberg).
The Third Circuit has looked at this question, too, and expressly (and at length) rejected the same argument that the 1996 amendment somehow altered the applicability of the elements of fraud – again with a focus on reliance. In Hunt v. United States Tobacco Co., 538 F.3d 217 (3d Cir. 2008), the court held that common-law justifiable reliance is mandatory in both pre- and post-1996 UPTCPL actions:
[T]he Pennsylvania Supreme Court . . . has categorically and repeatedly stated that, due to the causation requirement in the [UTPCPL]’s standing provision, a private plaintiff pursuing a claim under the statute must prove justifiable reliance. It has not recognized any exceptions, and has applied this rule in a variety of situations. These include, in Yocca, a claim-like [plaintiff’s] claim here – under the post-1996 catch-all provision. The Pennsylvania Superior Court has applied the Supreme Court’s standing rule to the post-1996 catch-all provision, and our Court has interpreted the rule to apply to all UTPCPL subsections. Given this significant authority on statutory standing, we think the Pennsylvania Supreme Court would require justifiable reliance where a private plaintiff alleges deceptive conduct under the post-1996 catch-all provision.
538 F.3d 221-22 (citing, in addition to cases already mentioned in this post, Schwartz v. Rockey, 932 A.2d 885, 897 n. 16 (Pa. 2007); Debbs v. Chrysler Corp., 810 A.2d 137, 156-58 (Pa. Super. 2002); Sexton v. PNC Bank, 792 A.2d 602, 607-08 (Pa. Super. 2002); and Santana Products, Inc. v. Bobrick Washroom Equipment, Inc., 401 F.3d 123, 136 (3d Cir. 2005)).
Thus, in Hunt the Third Circuit explicitly held that plaintiffs must establish the elements of common law fraud “under the ‘deception” prong of the post-1996 catchall provision”:
Given the Pennsylvania courts’ repeated holdings that to bring a private cause of action under the [UTPCPL], a plaintiff must show that he justifiably relied on the defendant’s wrongful conduct or representation and that he suffered harm as a result of that reliance, we conclude that private plaintiffs alleging deceptive conduct under the statute’s post-1996 catchall provision must allege justifiable reliance.* * * *
[W]e find [plaintiff’s] arguments relating to the 1996 amendment to the catch-all provision unpersuasive. . . . [T]he justifiable-reliance requirement on which we base our decision emanates not from the catch-all provision that the legislature amended in 1996, but rather from the private-plaintiff standing provision. A private-plaintiff standing provision, by its nature, applies to all private plaintiffs, whatever substantive subsection of [the UTPCPL] they invoke, for its purpose is to separate private plaintiffs (who may only sue for harm they actually suffered as a result of the defendant’s deception) from the Attorney General (who may sue to protect the public from conduct that is likely to mislead). It is thus unsurprising that in Yocca, where the plaintiffs sued under the amended version of the catch-all provision, the Pennsylvania Supreme Court continued to hold that justifiable reliance is a requirement for private plaintiffs.
538 F.3d at 224-25 (lots more citations omitted).
To these cases we’ll add, for the sake of completeness, Drelles v. Manufacturers Life Insurance Co., 881 A.2d 822, 840 (Pa. Super. 2005); Commonwealth v. TAP Pharmaceuticals Products, Inc., 868 A.2d 624, 637 n.9 (Pa. Cmwlth. 2005); Feeney v. Disston Manor Personal Care Home, Inc., 849 A.2d 590, 597-98 (Pa. Super. 2004); Booze v. Allstate Insurance Co., 750 A.2d 877, 880 (Pa. Super. 2000); Basile v. H & R Block, 729 A.2d 574, 585 (Pa. Super. 1999), rev’d on other grounds, 761 A.2d 1115 (Pa. 2000); Tran v. Metropolitan Life Insurance Co., 408 F.3d 130, 139-41 (3d Cir. 2005); DeFebo v. Andersen Windows, Inc., 654 F. Supp.2d 285, 291 (E.D. Pa. 2009); Rock v. Voshell, 397 F. Supp.2d 616, 622 (E.D. Pa. 2005), Fass v. State Farm Fire & Casualty Co., 2006 WL 2129098, at *2 (E.D. Pa. July 26, 2006); and Silverstein v. Percudani, 2005 WL 1252199, at *7 (M.D. Pa. May 26, 2005) – all of which hold, or discuss, that private UTPCPL claims require proof of the elements of fraud generally, and/or the element of reliance specifically.
It’s a little late, in 2010, to rely upon the 1996 amendment to the UTPCPL as supposedly making any difference in a private plaintiff case such as Sheet Metal, since both the Pennsylvania Supreme Court in Yocca and the Third Circuit in Hunt have explicitly issued diametrically opposed opinions. These aren’t just persuasive precedents; these are binding precedents.
That’s why we’re describing this aspect of Sheet Metal as “spherical error.” We don’t throw around this kind of designation lightly.
And there’s even more. The Sheet Metal opinion also professes to find support for its conclusions in “the legislative history of the PUTPCPL.” 2010 U.S. Dist. Lexis 93520, at *104. Okay, that could be a valid point, but what legislative history?
Trouble is, Sheet Metal doesn’t cite anything for us to look at.
So we’ll look at all of it. Why? Because we can; we just happen to have that legislative history handy (Bexis files an amicus brief in Toy). This history exposes yet another facet of the spherical error in Sheet Metal.
First, the UTPCPL as originally enacted in 1968 defined an “unfair or deceptive act or practice” to include, “Engaging in any other fraudulent conduct which creates a likelihood of confusion or misunderstanding.” P.L. 1224, No. 387 §2(4)(xiii) (Dec. 17, 1968) (codified at 73 Pa. Stat. Ann. §201-2(4)(xiii); since recodified as §201-2(4)(xxi)). Section three of the UTPCPL “declared unlawful” all of the practices enumerated in §2, including the “catch-all” provision. 73 Pa. Stat. Ann. §201-3.
The 1968 legislative debate demonstrates that the General Assembly was going after fraudulent commercial practices. The pending bill was characterized as: (1) “not limited to any specific category of business; it is to include all types of. . .establishments who use any fraudulent means of obtaining business,” Legislative Journal – House, at 1159 (June 27, 1968); (2) a statute “which certainly does get at the root of fraudulent acts,” id. at 1161; and (3) “a very good package that is going to protect the consumers against fraudulent practices.” Id. at 1162. Fraud, fraud, and more fraud.
On final passage the bill’s prime sponsor stated:
I state, in my opinion, this bill . . . is the most meaningful bill in this package because it defines unfair methods of competition and deceptive trade practices. . . . [I]t protects both the unsuspecting and innocent consumer and the legitimate businessman, both of whom are subject to fraudulent schemes by the unscrupulous profiteer.
Legislative Journal – House, at 1231 (July 8, 1968) (Remarks of Rep. Daniel Beren). See Id. at 1648 (“We spelled out 13 sections, as I mentioned before, relating to consumer fraud”) (July 17, 1968).
There’s even more. The original UTPCPL, including its catch-all provision, was modeled on a uniform act. The catch-all provision in the uniform act read:
(12) engaging in any other conduct which similarly creates a likelihood of confusion or of misunderstanding.
Vol. XXVI, “Suggested State Legislation,” at A-73 §1(d)(12) (Council of State Governments 1967). The catch-all provision as passed by the Pennsylvania legislature was critically different:
(xiii) engaging in any other FRAUDULENT conduct which creates a likelihood of confusion or of misunderstanding.
Vol. II, Laws of the General Assembly of the Commonwealth of Pennsylvania Passed at the Session of 1968, No. 387, at 1225 §2(4) (xiii) (Sec’y of Cmwlth. 1968) (emphasis added).
Thus, the legislature specifically amended the suggested uniform language to insert the word “fraudulent.” The Pennsylvania Legislature made a conscious choice to align the UTPCPL closely with common-law fraud.
That’s the legislative history of the original bill.
Second, as for the 1996 amendments, they altered the private right of action provision that the Pennsylvania Supreme Court found critical in Weinberg and Toy in only one respect, to authorize recovery of costs and attorney fees. The language upon which Weinberg and Toy rested – “ascertainable loss” and as “a result of” – stayed the same. As the Third Circuit pointed out in Hunt, UTPCPL §9.2 remains in all relevant respects identical to what it was in Weinberg and Toy.
The 1996 amendments added the words “or deceptive” to the “catch-all” provision of the UTPCPL, so that this provision now reads: “Engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or misunderstanding.” 73 Pa. Stat. Ann. §201-2(4)(xxi).
The history of the 1996 amendments, as before, establishes that the legislative focus of the UTPCPL remains on “fraud.” Senator (later Attorney General, and now Judge) Michael Fisher, the primary sponsor of the 1996 bill, spoke for it – and his remarks mentioned “fraud,” “fraudulent,” and “defraud” over and over again – no fewer than fourteen times in eight paragraphs. Sen. Fisher explained:
Both of those bills would seek to increase both the civil and criminal penalties presently in Pennsylvania’s law . . . to combat consumer fraud of all types, and particularly telemarketing fraud. The bills in front of us, Mr. President, increase the penalties for fraud and in fact . . . amend the deceptive business practices law by creating an increased penalty anytime the victim is over 60 years of age.
Pa. Legislative Journal, Senate, at p. 2427 (Sep. 25, 1996). Sen. Fisher concluded:
[W]e are going to have penalties in place . . . that are going to say to the fraudulent telemarketers of this world, if you want to conduct this kind of despicable scheme, do not come to Pennsylvania . . . because we are going to come after you.
Id. at 2428; see Id. (“We think it is very important to do the things that were just stated by the previous speaker”) (remarks of Minority Leader Sen. Robert Mellow (D-Lackawanna)). Nothing anywhere else in the legislative history of the 1996 amendments suggests any intent to disturb the UTPCPL’s longstanding fraud-based foundation.
Third, the same focus on fraud is found in the committee testimony concerning the 1996 amendments. The Attorney General discussed the need to combat “fraudulent telemarketing.” Testimony of the Office of Attorney General on S.B. 1315, 1316, and 1317 before the Senate Consumer Protection Committee, at 1 (Jan. 3, 1996) (copy here). This testimony emphasized that the amendments were directed against “fraud.” See Id. at 1 (five uses of “fraud,” “fraudulent,” or “defraud”), 2 (three uses), 3 (three uses), 5 (three uses). Nothing in that testimony suggests that the UTPCPL as a whole was being broadened beyond fraud.
Senator Fisher’s testimony concerned “Telemarketing Fraud.” Testimony for Senator Mike Fisher Public Hearing on Telemarketing Fraud, at 1 (Jan. 3, 1995[sic]) (copy here). Thus the 1996 amendments’ sponsor characterized them as being directed against “fraud and other scams.” Id.; see Id. at 2 (four uses of “fraud” or “fraudulent”), 3 (five uses), 4 (two uses). In addition Sen. Fisher’s testimony contained 23 uses of other terms synonymous with intentional fraud, such as “scam,” “steal,” “con,” and “rip-off.” His testimony was limited to telemarketing, and nothing in it suggests that the UTPCPL generally was being relaxed in any way.
A representative of the American Association of Retired Persons (“AARP”), testified at length about “the impact of [telemarketing] fraud upon consumers.” Testimony of Barton A. Fields before Senate Consumer Protection & Professional Licensure Committee, at 1 (Jan. 3, 1996) (copy here). That testimony was also all about “telemarketing fraud,” “unscrupulous frauds,” and “deceptive frauds.” See Id. at 1 (five uses of “fraud,” “fraudulent,” or “defraud”), 2 (five uses), 3 (one use), 4 (three uses), 5 (one use), 7 (three uses). Because “[f]raudulent telemarketers must be stopped,” AARP demanded “STRONG legislation. . .that accurately defines and severely punishes fraudulent telemarketers.” Id. at 7.
Thus, in 1996 nobody advocated to the relevant legislative committees that the General Assembly should broadly expand the UTPCPL in the manner suggested by the Sheet Metal decision. So much for legislative history.
We now turn to the final aspect of Sheet Metal’s spherical error concerning the UTPCPL.
The UTPCPL is a consumer protection statute. Thus, the private cause of action it authorized is limited to consumers – specifically, only a “person who purchases or leases goods or services primarily for personal, family or household purposes” may bring suit. 73 Pa. Stat. Ann. §201-9.2.
The plaintiffs in the Sheet Metal opinion aren’t consumers – rather they’re third party payers who are in business to pay their members’ claims for drugs (and presumably medical devices) prescribed by the TPP members’ doctors.
Sheet Metal pays no mind to the statute’s limitation on standing. See 2010 U.S. Dist. Lexis 93520, at *102 (“the PUTPCPL has a wider scope than its language might suggest”). Instead of following the conservative federalist principle discussed above, the opinion chooses to interpret this provision of the UTPCPL “broadly.” Id. at *104. It analogizes to S. Kane & Son Profit Sharing Trust v. Marine Midland Bank, 1996 WL 200603 (E.D. Pa. March 8, 1996), which held that a trust set up by a corporation had standing to sue under the UTPCPL for a fraud allegedly perpetrated upon the corporation:
[A]lthough the Pennsylvania Supreme Court has never addressed the issue, other courts in this state have held that the UTPCPL applies to the purchase of securities. Finally, since [the corporation’s] profit-sharing trust was formed to provide benefits for the employees upon their retirement, the securities purchased are for the employees’ personal use.
Id. at *3.
Trouble is, S. Kane – decided in 1996 – isn’t the last word. Only one year later, the Third Circuit overruled S. Kane. In Algrant v. Evergreen Valley Nurseries Ltd. Partnership, 126 F.3d 178 (3d Cir. 1997), the court specifically held that the UTPCPL does not extend to the sale of securities:
The court [in a case cited by plaintiffs], without analysis, held that the UTP/CPL applied to the purchase of securities, simply citing S. Kane & Son [and some other cases]. Thus, this case offers little support for the proposition that the UTP/CPL covers investment securities. . . .
The difficulty arises because the term “goods” is not expressly defined in the UTP/CPL. . . . [W]ords can be construed by reference to other statutes. The district court did just that, comparing the term “goods” under the UTP/CPL with the term “goods” under the Uniform Commercial Code.
As the district court noted, the Pennsylvania legislature used the same language in §201-9.2 of the UTP/CPL as it did in defining “consumer goods” in Pennsylvania’s Uniform Commercial Code. . . . Under the UCC provision dealing with sales, “goods” is defined as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than . . . investment securities.” 13 Pa. Cons. Stat. §2105(a). In fact, the Pennsylvania UCC contains a separate provision dealing solely with investment securities. See 13 Pa. Cons.Stat. § 8101, et seq. Thus, by comparing this statute to the UCC, the district court determined that the definition of goods under the UTP/CPL does not include investment securities. Accordingly, the district court committed no error in its order dismissing the plaintiffs’ complaint.
126 F.3d at 188 (citations omitted). That was the end of S. Kane and its “broad” reading of the UTPCPL as embracing securities transactions. Or at least it should have been.
Perhaps even more importantly, the Third Circuit decided another consumer standing case on facts much closer to Sheet Metal. In Balderston v. Medtronic Sofamor Danek, Inc., 285 F.3d 238 (3d Cir. 2002), a surgeon filed a UTPCPL claim over alleged misrepresentations concerning – here it comes – bone screws. Because of the alleged misrepresentations, the unfortunate doctor became embroiled in the Bone Screw litigation, and he was none to happy about it. He sued Herrmann’s and Bexis’ clients under the UTPCPL because “he was exposed to lawsuits by patients claiming they did not give informed consent” and had to “to provide uncompensated deposition and trial testimony.” 285 F.3d at 239.
Like the TPPs in Sheet Metal, the surgeon in Balderston claimed standing under the UTPCPL because he had prescribed bone screws to his patients for their “personal, family or household” use. The Third Circuit said no dice. Treating patients was the doctor’s business. He had no right to assert the “consumer” status of his patients – he wasn’t suing on their behalf and wasn’t planning to turn over any damages to them:
In construing claims under the [UTP]CPL, Pennsylvania courts have distinguished purchases made for business reasons, which are not actionable, from those made for “personal, family or household use.” [Plaintiff surgeon] suggests his purchase qualifies, because he “purchased” the screws for his patients’ “personal use.” But we have uncovered no Pennsylvania decision finding actionable a non-representative plaintiff’s claim based on others’ “personal uses.” [Plaintiff surgeon] employed the screws only in his medical practice. His alleged losses were not “personal,” but affected only his medical practice. Therefore, he lacks standing under the [UTP]CPL.
285 F.3d at 242 (citations omitted).
Thus under Balderston – another binding Third Circuit precedent – a physician who prescribes a medical device (or a drug, there’s no relevant difference) has no standing under the UTPCPL to assert the physician’s patients’ “personal, family, or household use” of the drug.
And the physicians personally see the patients and write the prescriptions.
Third-party payers – the plaintiffs in Sheet Metal – are even further removed from the “consumer” patients than the physician who failed to state a UTPCPL claim in Balderston. Unlike doctors TPPs have no personal contact with patients and simply pay claims submitted to them by surgeons, pharmacists or others who provided a covered product or service. If prescribers aren’t “consumers” under the UTPCPL, and that’s precisely what the Third Circuit held in Balderston, then a fortiori mere TPPs can’t be considered consumers either. Like Balderston, TPP losses affect only their business of paying claims, nor are these TPPs planning on returning any funds to the patient-consumers whose standing they purport to invoke.
We would like to see how Sheet Metal would distinguish Balderston on the UTPCPL standing issue. But there is no cite to Balderston in the opinion. That’s still another reason we call it spherical error.
To sum up:
- The United States Supreme Court and the Third Circuit require federal courts making Erie predictions to do so conservatively. Sheet Metal did quite the opposite, interpreting the UTPCPL “broadly” in ways that Pennsylvania courts have not done.
- On multiple occasions the Pennsylvania Supreme Court has unanimously concluded that UTPCPL plaintiffs must plead and prove the elements of common-law fraud, and in particular reliance. Sheet Metal does not cite these decisions, and holds the opposite.
- Both the Pennsylvania Supreme Court and the Third Circuit have held the 1996 amendment to the UTPCPL’s “catch-all” provision does not change the incorporation of common-law fraud elements into the UTPCPL because that incorporation is effectuated by a different section of the statute. Sheet Metal does not cite these decisions, and holds the opposite.
- Sheet Metal claims to find support for its conclusions in the UTPCPL’s “legislative history,” but cites nothing to support that statement. In fact, the legislative history of both the original act and the 1996 UTPCPL amendments confirms the statute’s purpose as an anti-fraud act.
- Relying upon an overruled district court case, Sheet Metal asserts that a third-party payer of a prescription for a drug can be considered a consumer under the UTPCPL. Sheet Metal does not cite a much more analogous Third Circuit decision holding that a prescribing doctor, far closer to consumer-patients than a TPP, has no standing as a consumer under the Act.