A Star is Torn

In the Energy Star Program, the Energy Department rates energy-efficient and otherwise green appliances. The New York Times has reported that government officials in charge of Energy Star did not do a good job of monitoring compliance with the program’s standards and valorized a host of products that fall far short of the proclaimed criteria. In addition, some of the companies actively misled government officials.

Trial lawyers are now in the wings, ready to sue companies that  they allege were serpentine rather than stellar.  According to the Times, a congressman who represents a district where a company that used the Energy Star program has a large factory has introduced legislation to prevent class action lawsuits from being brought in connection with the Energy Star program.

In general, I believe that class actions for failure of a product to meet its quality claims are a mistake.  Class actions have their own problems, such as the agency costs of lawyers who obtain settlements that benefit no one much but themselves. Another is the danger that a small chance of a large recovery with the potential to bankrupt the company may induce unfair settlements.

Moreover, the market has come up with better ways of policing quality than relying on litigation. Companies advertise to promote their wares and establish and maintain their reputation. If a company fails to live up to its own claims of quality, its reputation with consumers will suffer. This informal method of monitoring is the all the more effective in our world of fast and seamless communication. Note here that a market failure—the inability of an individual consumer to contract for a specific level of quality—has an effective market solution—advertising.  This function of advertising also provides a riposte to those who think such marketing is wasteful puffery.

But here the reputation at issue is not the company’s. It is the government’s. And Energy Star’s loss of reputation does not directly hurt the companies that engaged in fraud. Thus, the argument for class actions is much better here than in the case where a consumer is vindicating the failure of a product to meet a private warrant of quality.

Of course, one well might wonder why the government awards the Energy Star label in the first place. The monitoring failures that beset the Energy Star program are predictable because tenured government employees have only weak incentives to be vigilant.  Rather than getting rid of class actions for this incident, we would do much better to eliminate the Energy Star program altogether. If we want to certify products for their green friendliness, concerned green organizations could do so with more accuracy than an indifferent bureaucracy. Non-profit organizations can complement the market in establishing  beneficial norms.  There can be much social order without government intervention.