Consumer Protection Act, 2019: Ushers In More Criminal Penalties For Corporates

The Consumer Protection Act, 2019 is a long-awaited overhaul of the Consumer Protection Act 1986. Notified on Aug. 9, the new law has been well-received for introducing many consumer-friendly provisions such as e-filing of disputes and raising the pecuniary jurisdiction of District Consumer Courts to
Rs 1 crore.

The new Act also covers a lot of new ground and revises the consumer protection framework to keep pace with the dramatic changes that have taken place in the last three decades.

Key reforms introduced in the 2019 Act include:

• a new codified product liability framework (which hitherto existed in different sectoral regulations),
• extending the scope of the law to include online platforms and direct sellers,
• and the establishment of a new consumer protection regulation - the Central Consumer Protection Authority.

These consumer-friendly provisions will go a long way in making the dispute resolution process more accessible.

As we argue below, the CCPA is uniquely placed to resolve this challenge by imposing large punitive fines and negotiating settlements on behalf of affected consumers. This will not only safeguard consumer interests, but also alter corporate behaviour through shareholder pressure.

Criminal Liability In The 2019 Act

Criminal sanctions have been imposed on a number of offences under the 2019 Act. This includes offences such as manufacturing/selling/importing or distributing spurious goods and products with adulterated content. Imprisonment is reserved for cases where a consumer has suffered injury, grievous hurt or where the spurious/adulterated good results in death. Notably, these provisions have been incorporated in the Act despite the existence of IPC provisions that provide for criminal sanctions in case of sale of adulterated products, negligence etc. Sectoral laws such as the Drugs and Cosmetics Act, 1940, Food Safety and Standards Act, 1940 also contain criminal liability provisions.

In addition to the above, Section 89 of the Act provides for imprisonment for false and misleading advertisements. This is a significant departure from the 1986 Act. Section 89 in effect reclassifies a civil offence as a criminal one. The inclusion of criminal liability provisions within the Act could exacerbate an existing practice of relying on criminal laws to enforce consumer protection laws.

As the Economic Survey of India (2019) notes, criminal prosecutions take much longer than civil cases and account for over 64 percent of the cases pending in Indian courts. Given our poor track record in enforcing the rights of a large class of consumers, we can ill afford such delays by relying on criminal sanctions.

Poor Track Record On Enforcement

The aim of consumer protection legislation is to provide consumers an avenue for efficient and timely grievance redressal. However, the legal framework in India has fallen short, especially in cases where a large class of consumers have been affected. To date, compensation/settlements in India have been arrived at through ad hoc means.

The recent case of faulty hip implants serves as a stark illustration of this trend. The fact that the case was initiated through a public interest litigation at the Supreme Court highlights the inadequacy of the existing consumer protection framework to deal with class action suits. The total compensation of around $2 million (authors’ estimate) to a class of consumers was rightly lauded as a landmark decision. However, the compensation awarded was a small fraction of the $120 million settlement reached in the U.S. by the same company in a similar case of faulty implants.

U.S. regulators such as the FDA and the Federal Trade Commission are held as examples of tough regulators who are able to consistently sue for large fines in the consumer interest. Such large fines are not intended to be limited to restitution but are aimed at materially impacting the bottom lines of companies. This in turn stirs shareholder interest which forces companies to alter their behaviour. This form of enforced corporate governance is possible as the FDA and FTC have the ability to initiate class actions on behalf of a large groups of consumers who may not have the capacity to initiate such cases or take on large companies on their own. They are also empowered to negotiate on behalf of consumers and arrive at settlements. Such fines/settlements are not merely compensatory but also punitive in nature. Punitive fines/settlements would also have the effect of acting as a deterrence against future negligence on part of the companies.

Empowering CCPA To Negotiate Punitive Settlements

Seeking to emulate the U.S. model, Section 18 of the Act gives the CCPA the authority to enforce the rights of consumers as a class. This allows the CCPA to file class action suits on behalf of a large group of affected consumers.

However, Section 18 in its current form is not sufficient to replicate the U.S. FDA/FTC model. An amendment to Section 18 should explicitly authorise the CCPA to negotiate punitive settlements on behalf of a class of consumers. The effect of such settlement/fines would not merely be compensatory.

There exists sufficient legal precedent to confer such powers on the CCPA under the parens patriae doctrine. Arguably, Section 18 itself is grounded in the parens patriae doctrine.

The parens patriae power must come with sufficient safeguards to protect regulators negotiating on behalf of the affected class of consumers from liability. Guidelines must also be framed on the manner in which punitive funds may be spent. With a view to ensure transparency, consumer protection NGOs and affected consumers must be given the option of participating/observing the negotiations.

Many of the changes proposed above could be enacted through an amendment to the Act.

Encouragingly, the Minister of Consumer Affairs indicated a three-month timeline to introduce rules that would enforce the Act. As the debate over criminal sanctions for errant corporate conduct rages around the country, such changes to the Act could lead the way in creating a punitive settlement framework that could serve as a model to compel behavioural change in companies operating in India.

Vaibhav Kakkar is a regulatory practice partner and Puneeth Nagaraj is an associate (Policy & Advisory) at L&L Partners.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.