Arizona Consumer Fraud Act and Private Causes of Action in Investment Fraud Cases

In 1967, Arizona adopted its Consumer Fraud Act (the “Act”) “to root out and eliminate ‘unlawful practices’ in merchant-consumer transactions.” People ex rel. Babbitt v. Green Acres Trust, 127 Ariz. 160, 164, 618 P.2d 1086, 1090 (Ct. App. 1980).

The Act defines an unlawful practice as:

A.R.S. § 44-1522(A).

The terms used in A.R.S. § 44-1522(A) are defined in a “broad” manner and are “not subject to restrictive interpretation because the Act is general to be considered remedial in nature.” Id. at 164, 618 P.2d at 1090. For example:

While not defined in the Act, “deceptive” is “interpreted to include representations that have a ‘tendency and capacity’ to convey misleading impressions to consumers even though interpretations that would not be misleading also are possible.” Madsen v. W. Am. Mortg. Co., 143 Ariz. 614, 618, 694 P.2d 1228, 1232 (Ct. App. 1985). “The meaning and impression are to be taken from all that is reasonably implied, not just from what is said, and in evaluating the representations, the test is whether the least sophisticated reader would be misled.” Id. at 618, 694 P.2d at 1232. “Technical correctness of the representations is irrelevant if the capacity to mislead is found” and “a deceptive representation or practice may be found where earlier representations are corrected before the consumer agrees to a contract.” Id. at 618, 694 P.2d at 1232.

However, mere puffing, i.e., subjective characterizations of value or degree of quality, is not deceptive and does not give rise to a claim for consumer fraud. See Larkey v. Health Net Life Ins. Co., 2012 Ariz. App. Unpub. LEXIS 753, at *8-9 (June 14, 2012).

In 1974, the Arizona Supreme Court held a private cause of action exists for an injured consumer against a person who violated the Act. See Sellinger v. Freeway Mobile Home Sales, Inc., 110 Ariz. 573, 575-76, 521 P.2d 1119, 1121-22 (1974).

To establish a consumer fraud claim, the plaintiff must prove by a preponderance of evidence that: (1) the defendant used deception, used a deceptive act or practice, used fraud, used false pretense, made a false promise, made a misrepresentation, or conceal, suppressed or omitted a material fact in connection with the sale or advertisement of merchandise; (2) the defendant intended that others rely upon the defendant’s unlawful practice; (3) the plaintiff suffered damages as a result of relying on the defendant’s unlawful practice; and (4) the plaintiff’s damages. See RAJI Commercial Torts 21 Consumer Fraud (Elements of Claim); Dunlap v. Jimmy GMC of Tucson, Inc., 136 Ariz. 338, 342, 344, 666 P.2d 83, 87, 89 (Ct. App. 1983).

The elements for consumer fraud are different from, and more easily shown than, the elements for common law fraud, which include intent to deceive, knowledge of the falsity, and the right to rely or reasonable reliance, and must be proven by clear and convincing evidence. See Flagstaff Med. Ctr., Inc. v. Sullivan, 773 F. Supp. 1325, 1362 (D. Ariz. 1991); Kuehn v. Stanley, 208 Ariz. 124, 219, 91 P.3d 346, 351 (Ct. App. 2004); Cearley v. Wieser, 151 Ariz. 293, 295, 727 P.2d 346, 348 (Ct. App. 1986); Dunlap, 136 Ariz. at 343-44, 666 P.2d at 88-89; Parks v. Macro-Dynamics, Inc., 121 Ariz. 517, 520, 591 P.2d 1005, 1008 (Ct. App. 1979); Perry v. Hansen, 120 Ariz. 266, 269-70, 585 P.2d 574, 577-78 (Ct. App. 1978). Consumer fraud has a lower standard than common law fraud because the purpose of the Act “is to provide a remedy for injured consumers who need such protection to counteract the disproportionate bargaining power which is typically present in consumer transactions.” Dunlap, 136 Ariz. at 344, 666 P.2d at 89.

For consumer fraud, the plaintiff may claim actual damages, including consideration paid in the contract and out-of-pocket expenses, as well as punitive damages. See RAJI Commercial Torts 22 Consumer Fraud (Measure of Damages); Holeman v. Neils, 803 F. Supp. 237, 242 (D. Ariz. 1992); Parks, 121 Ariz. at 521, 591 P.2d at 1009; Perry, 120 Ariz. at 270, 585 P.2d at 578. To recover punitive damages, the plaintiff must show the defendant’s wanton or reckless conduct, spite or ill-will, or a reckless indifference to the interests of others. See Holeman, 803 F. Supp. at 242; Sellinger, 110 Ariz. at 577, 521 P.2d at 1123; Dunlap, 136 Ariz. at 343-44, 666 P.2d at 88-89.

The plaintiff must bring a consumer fraud claim within one year after the cause of action accrues. See A.R.S. § 12-541(5); Murry v. W. Am. Mortg. Co., 124 Ariz. 387, 604 P.2d 651 (Ct. App. 1979). Accrual occurs when the plaintiff discovered, or in the exercise of reasonable care and diligence could have discovered, the fraud. See Alaface v. Nat’l Inv. Co., 181 Ariz. 586, 591, 892 P.2d 1375, 1380 (Ct. App. 1994); Richards v. Powercraft Homes, Inc., 139 Ariz. 264, 265-66, 678 P.2d 449, 450-51 (Ct. App. 1983).

The plaintiff must plead all of the elements of consumer fraud and do so with particularity. See Steinberger v. McVey, 318 P.3d 419, 435 (Ariz. Ct. App. 2014) (citing Ariz. R. Civ. P. 9(b)).

The economic loss rule — a judicially created limitation on common law remedies — does not apply to bar claims brought under the Act — a legislatively created remedy. See Shaw v. CTVT Motors, Inc., 232 Ariz. 30, 32-33, 300 P.3d 907, 909-10 (Ct. App. 2013); Peña v. Opic, 2010 Ariz. App. Unpub. LEXIS 5, at *17-20 (May 18, 2010).

In 1983, the Arizona Supreme Court held the Act “provide[s] an additional avenue of relief to those aggrieved by securities act violations.” State ex rel. Corbin v. Pickrell, 136 Ariz. 589, 592, 667 P.2d 1304, 1307 (1983). Therefore, securities violations may serve as the basis for consumer fraud claims. Id. at 593, 667 P.2d at 1308. Accord A.G. Edwards & Sons, Inc. v. McCullough, 764 F. Supp. 1365, 1371 (D. Ariz. 1991).

While the purpose of the Act was to redress wrongs in merchant-consumer transactions, there is no requirement that there be a merchant, only that merchandise is involved. See Holeman, 803 F. Supp. at 243. Merchandise is defined as including intangibles, which would include securities. See A.R.S. § 44-1521(5). Courts have also found merchandise and thus applied the Act in various investment transactions. See Holeman, 803 F. Supp. at 241-43 (partnership agreement for real estate investment); Cearley, 727 P.2d at 348 (assignment of rights to commercial liquor license); Parks, 591 P.2d at 1008-09 (agreement to provide venture capital); Flower World of Am., Inc. v. Wenzel, 594 P.2d 1015, 1017-19 (Ariz. Ct. App. 1979) (sale of commercial franchise). But see Waste Manf. & Leasing Corp. v. Hambicki, 183 Ariz. 84, 87, 900 P.2d 1220, 1223 (Ct. App. 1995) (sale of business entity does not constitute sale of merchandise).

In sum, a plaintiff may bring a consumer fraud claim against a defendant, including in securities-related cases, but must plead with particularity and prove by a preponderance of evidence that the defendant engaged in an unlawful practice in connection with the sale or advertisement of merchandise, the defendant intended for others to rely thereon, and the plaintiff did in fact rely thereon and suffered damages as a result.