In this webinar, Seyfarth attorneys Robert Milligan, Jonathan Braunstein, Daniel Joshua Salinas, and Darren Dummit covered the recent developments in consumer class actions related to COVID-19 in California, explaining the claims and expected defenses, and proactive attempts that companies can employ now to attempt to avoid these suits.

As a conclusion to this webinar, we compiled a summary of takeaways:

  • With all sporting events, concerts, conferences and festivals either “postponed” or cancelled by the pandemic, and with uncertainty as to what future events may look like, class action refund litigation have proven to be somewhat inevitable for those who were not capable or willing to provide full refunds immediately. Going forward, while best efforts are made to provide “full value” with different options for future events, traditional uses of cash flow from paid-in-advance revenue may need to be revisited, along with terms and conditions of the contract provisions, including arbitration provisions, class actions waivers, updated force majeure provisions, and limitation of remedies. Looking ahead, the restrictions imposed on the events in a post-pandemic world will result in additional refund cases, including arguments around diminishment in value.
  • For businesses and activities which involve annual or monthly membership or subscription fees, such as  gyms, co-working spaces, theme parks, ski mountains, and golf/social clubs, class action litigation has also been an inevitability absent an immediate refund or cessation of all payments, and absent an enforceable arbitration agreement and/or class action waiver. Going forward, these organizations would be wise offer and track multiple alternatives, so as to best mitigate damages and defeat class certification issues, while also revising future terms and conditions to account for the possibility of pandemic shutdowns, rollovers, and suspensions of payment. Looking ahead, these organizations will face tough choices (and potential class action risks) as some customers claim diminishment in value as a result of social distancing, while others claim a health-related inability or unwillingness to engage in the same activity.
  • Class actions suits against colleges, universities, and other education providers arising from the closure of facilities during the COVID-19 pandemic have exploded across the nation, including over 15 such actions brought in California. Opportunistic plaintiffs’ counsel are filing suits demanding partial refunds on tuition, campus fees, room and board, and of course attorneys’ fees. Plaintiffs allege that on-line instruction does not provide the benefit of the bargain that they contracted for. Likely defenses that will be explored by the education providers include: 1) no breach (e.g. no requirement to provide in-person instruction and providers have sole discretion to make academic judgments); 2) substantial performance; 3) force majeure and related contractual defenses; 4) limitation of damages provisions; and 5) sovereign immunity for public institutions. Additionally, providers with arbitration and class action waiver provisions may be better positioned to avoid class suits. Lastly, plaintiffs will face substantial class certification challenges as providers attempt to demonstrate that individual issues predominate.
  • Price gouging occurs when, during abnormal market conditions, a seller increases the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair. Unconscionable or exorbitant pricing can occur after a demand spike or supply disruption during a public emergency. COVID-19’s unprecedented size, scope and duration presents extraordinary opportunities for price gouging. On March 4, 2020, California Governor Gavin Newsom declared a state of emergency in response to the COVID-19 public health emergency. Executive Order N-44-20 makes it unlawful to increase the price of food items, consumer goods, or medical and emergency supplies by more than 10 percent of what a seller charged for that item on February 4, 2020, subject to certain exceptions. In California, price gouging during a declared state of public emergency is a crime. See Cal. Penal Code Section 396.  Whether criminal or not, price gouging is generally discouraged and may be considered exploitative and unethical. Numerous other states and jurisdictions have their own similar but distinct and somewhat varying price gouging laws. Price gouging can have a profound impact across commercial business and supply chains. Actual or perceived price gouging presents tremendous challenges, class action litigation risks, and potential exposures for commercial businesses and employers. As businesses reopen, employees return to work, and courts resume operations, there is likely to be a spike in price gouging claims, disputes, and lawsuits—including class actions—filed by consumers or businesses under state and federal consumer protection, antitrust, and unfair competition laws.
  • California remains an attractive forum for consumers alleging privacy violations. The reopening of brick-and-mortar stores, offices, and other physical locations may increase in the need to screen and collect physiological data of customers or employees entering the space. Companies collecting or using such data should ensure they have compliant collection, storage, and notice policies and practices. Notably, the California Attorney General has made it clear at this point that he will not be giving companies extra time to make sense of, and comply with, the new California Consumers Privacy Act in light of the COVID-19 pandemic.

A recording of the webinar is available on the Seyfarth website: https://www.seyfarth.com/news-insights/covid-19-related-consumer-class-action-developments-and-trends-in-california.html

 

One of the immediate legal trends arising from the shut down of all non-essential activities has been disputes concerning consumer refunds, with many class action suits against professional sports leagues, ticket brokers, festivals, and schools dominating the headlines.[1] But there are other businesses and activities which involve membership or subscription fees that are also dealing with these unique issues—ranging from shared work spaces and fitness gyms, to our favorite family theme parks and ski mountains, to the ubiquitous semi-private social clubs and country clubs.

How each of these businesses have responded to their consumers’ need and demand for refunds has varied, with some issuing full refunds, some issuing partial refunds, some freezing payment obligations, some issuing future credits, and some issuing nothing other than an apology and a pledge to try its best to stay in business. What has not varied has been the reaction from the plaintiffs’ bar, which has filed numerous class action suits based on breach of contract, unjust enrichment, and unlawful or unfair business practices (with California seeing much of the litigation due to the wider availability of attorneys’ fees).

This article breaks down the various responses within each industry (along with the plaintiffs’ bar corresponding legal actions), and how these responses may play a role in helping businesses defend the wave of class action litigation. While many of these refund decisions are often based on financial realities and public relations considerations, there is the potential for certain refund policies to not only provide more options for the consumer, but also to indirectly make it more difficult for plaintiffs to obtain class certification and establish other necessary elements of these suits.

Everyday life: shared work spaces and gyms

Two of the most identifiable and important touch points in everyone’s life are where they work and where they work out—so it is not a surprise to see litigation in these sectors arise immediately in the wake of this pandemic.

While A-Rod and J-Lo may have been able to have their gym open for their use only during the shut down, the vast majority of other consumers have been shut out of their gym or fitness institution since mid-March, when all such businesses were essentially forced closed. With most of the businesses using the system of automatic withdrawal from their customers’ credit card or debit accounts, some fitness institutions in the country initially continued with the automatic withdrawals, while offering extended terms for memberships to cover the time the clubs are closed.

Subsequent to this initial response, and some public backlash, some fitness institutions amended their refund policies, and have since suspended all billings until one or more gyms in a member’s market are open. Nevertheless, those policies did not stop class action suits from being filed across the country, from California to New York. Wrongful conduct and damages are of course alleged for the past 1–2 months of payments during closure, but the door remains open for ongoing refund requests as gyms remain closed. Additionally, the social distancing measures potentially create a perceived diminishment in value to some consumers, but other consumers may argue that their health risks and health concerns warrant a termination of the contract, which would put the companies in a position of deciding whether or not to stop the automatic withdrawals.

Just as the personal fitness industry had ballooned prior to the pandemic, so had the shared working space trend. But, for many (if not most) over the past few weeks, government mandates have forbidden individuals and companies from using these office spaces. Nevertheless, many co-working companies have continued to charge full membership fees of its clients/tenants.

During this time, some members have continued to pay fees, and some haven’t. But interestingly, none of them have filed a class action suit yet. Why? Potentially because of the presence of arbitration agreements and class action waivers found within the underlying contract—highlighting not only the importance of determining whether these two elements should be a part of contracts going forward, but also the target this may place on the back of California due to how the law treats enforceability of these provisions.

Everyday leisure: theme parks, ski mountains and semi-private golf/tennis/social clubs

While not at work or puttin’ in work, the same membership/subscription refund issues are at the feet of theme parks, ski mountains, and semi-private clubs—with each reacting differently.

Some of the largest and most recognizable theme parks in the world have provided a bevy of choices to the consumer, including a choice for annual passholders to extend their membership, or be issued a partial refund, while quickly stopping and waiving all monthly payments for annual passholders on a monthly plan (with a retroactive refund for payments made during days of park closure).

One other familiar theme park operator has not been able to avoid the class action bug. This operator initially continued to charge and automatically withdraw its membership fees during park closures, but subsequently announced that it would be pausing membership payments for members on monthly plans. But, even with that, four days after this announcement, a class action lawsuit was nevertheless filed in California, demanding full refunds of all monies charged or withdrawn for the alleged nonperformance of the contracts.

Similar issues have faced the owners of ski mountains in the United States. Some have offered only an additional discount on early renewal fees for next year’s ski season, and others offering a discount (on a sliding scale) to be applied to next year’s pass for the unused portions of this year’s passes. Any refund option is contingent on entering into a new contract for the following year’s pass. Predictably given the environment, class actions have been filed.

This issue also extends to companies and semi-private clubs centered around golf, tennis, yachting, supper, or other social clubs. One large owner and operator of golf clubs and social clubs in the country is already facing a class action suit after it continued to charge and automatically deduct payment from its members, despite all of its social clubs, and many or most of the golf clubs and other venues for which the membership allowed access, being closed due to the pandemic.

That this lawsuit surfaced amid reports that the company was considering bankruptcy, whether true or not, underscores the other factors at play aside from customer satisfaction. Also among these factors are the competitions within each different city or market. While many fully private golf clubs have continued to charge and withdraw full payments from their members during the closures, others (including some semi-private golf clubs) are charging members half (or reduced) dues during the closure. We expect to see class actions filed in this area in the coming months as well.

What next?

It is clear that those who have the ability to suspend payments/withdrawals or provide a full (or pro-rated) refund of membership fees are best positioned to avoid class action litigation—though no one will be immune, and no actor can act too fast.

That being said, the majority of companies in this space do not have the financial ability to provide immediate refunds, or even to suspend all monthly payments going forward. This was true before the pandemic, so the chances of that happening during and after business are closed for an extended period of time are quite long. Thus, in so many of these instances, companies will have no choice but to consider suspension of payments, rollover policies, or other future renumeration to the consumer. It is often a matter of necessity and survival.

In an ideal world, companies and organizations could continue to charge membership fees, and hope their customers accept it without complaint, so as to not disrupt the ability for the businesses to financially survive. This may be possible for some businesses that have some long-standing loyalty or some barriers to membership (such as exclusivity or other qualification prerequisites), but not all companies can bank on customer silence.

When survival dictates a suspension or rollover of payments, we’ve already seen that class action litigation can be almost inevitable. From this point, we live in a terms and conditions world. If the pre-existing terms and conditions contemplated a suspension or rollover and the customer agreed in advance, the underlying breach of contract and unfair business practices claims will be tougher for plaintiffs to maintain. If, on the other hand, the terms and conditions did not previously speak to any such possibility, then courts will likely treat this as a changed term, and the chances of litigation go from “strong to quite strong” (in the words of Owen Wilson in Meet The Parents).

So, setting aside for another time the legal arguments on all sides related to force majeure, impossibility, commercial impracticability, and all that goes into the court’s eventual determination[2], what can a company do now with its refund and associated policies so as to best help its defense of the case?

To begin with, companies can try to resolve customer issues on a case-by-case basis, giving customer relations representatives wider latitude to offer multiple alternatives or additional products or services based upon a customer complaint roadmap. Aside from the obvious benefit of providing the consumer with more “things”, keeping the connectivity with the customer, and the appearance of greater effort in accommodation, this may also be helpful in defeating class claims and class certification. If/when each customer reacts differently to the option menu, it can be argued that there has been no breach but rather a modification of the parties’ contract, each member’s considerations are unique, individual issues pre-dominate, and each member of the class was dealt with individually.

Along these lines, companies may be wise to invest in additional technology to track customer utilization of those products and services offered and accepted, thereby undercutting class claims that benefits weren’t taken advantage of, or full value under the contract was not received. For instance, if alternative services or accessibility to different venues are offered by a company and accepted by their consumers, knowing if and when a particular plaintiff actually availed themselves of the alternative benefit can be helpful in countering damages claims made by plaintiffs and/or countering class certification efforts. Customer usage data can be used to identify these differences, and allow a defendant to argue that individualized issues regarding customers’ actions and perceived value predominate over any common issues presented by the class, or that named plaintiffs are atypical and cannot adequately represent the class.

But, customer usage supporting acceptance of a company’s modified policy data will not necessarily prevent litigation, it will just help defend it. As discussed above, companies will also face potential liability for how they and their customers respond to re-opening from the pandemic—especially with the concept of diminished value or health concerns. Not only may the social distancing measures potentially create a perceived diminishment in value to some consumers (e.g., the unavailability of group workouts), but other consumer’s may argue that their health risks and health concerns warrant a termination of the contract (e.g., an elderly person with pre-existing conditions belonging to a public gym). Both of these arguments would again put such companies in similar positions they are now, where they must decide quickly whether or not to stop the automatic withdrawals—or else face the same litigation fate.

For these reasons, and others, future terms and conditions need to include the potential for pandemic shut downs, the potential for suspensions or rollovers, the potential for terms and conditions to change based on such events, and spell out what occurs specifically should such incidents occur (e.g. automatic withdrawals will continue or not, etc.). Additionally, as indicated above, litigation may become less inevitable when there is the presence of a conspicuous binding arbitration agreement and class action waiver within the contract. Companies looking to avoid this litigation risk and cost in a post-pandemic world (where another shut down in the future at some point is foreseeable, if not expected) can look to add these provisions to their agreements—which in turn make choice of law and the location of services important inquiries in determining enforceability.

But as with many legal issues arising in direct response to COVID-19-shut downs, there is no magic bullet, there is no right decision that will make everyone happy, and there is not a chance for clarity on how these cases will ultimately be resolved for years. Trying to do right by the customer will go a long way, but in the meantime, the cases will continue to be filed even after the phased re-openings, as the modified socially-distanced experiences may not allow for the full value of the benefit to ever received. And the sharks will be circling the waters, waiting to file.

For further information, view our on-demand webinar on COVID-19-Related Consumer Class Action Developments and Trends in California.

 

[1] The heart of the claims will focus on the companies’ alleged failure to perform their contractual obligations to provide the agreed-upon products or services, and to provide the full value for which the consumers allegedly bargained. Further information can be found on the Seyfarth’s Consumer Class Action Blog on the sports and festival refund litigation (https://www.consumerclassdefense.com/2020/05/covid-19-refund-policies-for-season-tickets-season-passes-and-annual-festivals/), school-based refund litigation (https://www.consumerclassdefense.com/2020/05/never-let-a-crisis-go-to-waste-plaintiffs-lawyers-target-colleges-and-universities-for-covid-19-responses/), auto renewal litigation (https://www.seyfarth.com/news-insights/no-rest-for-the-plaintiffs-bar-companies-using-automatic-renewal-business-model-with-california-consumers-face-increased-risk-of-class-actions-during-the-pandemic.html), and California consumer litigation (https://www.seyfarth.com/news-insights/avoiding-californias-consumer-law-pitfalls-amidst-the-covid-19-pandemic.html).

[2] Further information on force majeure principles under California law can be found on the Seyfarth COVID-19 Response page at: https://www.seyfarth.com/news-insights/covid-19-update-force-majeure-under-california-law-in-business-and-commercial-disputes.html.

Further information on force majeure principles under NY law can be found on the Seyfarth COVID-19 Response page at: https://www.seyfarth.com/news-insights/applicability-of-force-majeure-and-impossibility-in-the-wake-of-covid-19-under-new-york-law.html.

Event Details

Wednesday, May 27, 2020
3:00 p.m. to 4:00 p.m. Eastern
2:00 p.m. to 3:00 p.m. Central
1:00 p.m. to 2:00 p.m. Mountain
12:00 p.m. to 1:00 p.m. Pacific

Already an attractive forum for expensive consumer class action suits, the COVID-19 pandemic has created unprecedented disruption and challenges for businesses navigating California’s consumer protection laws. The ongoing pandemic has created even more costly traps and pitfalls for businesses struggling to pilot these uncharted waters. This webinar discusses some of California’s most common consumer protection related issues being litigated as a result of the pandemic, and further discusses what businesses should be aware of to reduce potential exposure and litigation during this crisis. Experienced counsel will discuss the latest developments and trends that impact California businesses and companies conducting business with California consumers.

Specifically, attendees will gain further insight into the following aspects of recent class action litigation:

  • Tuition and fee refund actions against universities and other educational institutions
  • Membership and subscription refund actions against gyms, theme parks, ski mountains, and semi-private clubs
  • Refund actions against sports teams, conferences, festivals, and ticket brokers
  • Price gouging actions involving high impact products and services
  • Privacy actions in the context of data collection necessity or mandated because of COVID-19
  • Auto renewal and deceptive pricing actions

Particular areas of focus of this webinar will be on describing the recent developments, explaining the claims and expected defenses, and proactive attempts that companies can employ now to attempt to avoid these suits. We hope you will join us and share your views on the issues raised.

Speakers

Robert B. Milligan, Partner, Seyfarth Shaw LLP
Jonathan A. Braunstein, Partner, Seyfarth Shaw LLP
Daniel Joshua Salinas, Associate, Seyfarth Shaw LLP
Darren W. Dummit, Counsel, Seyfarth Shaw LLP

Register Here

https://connect.seyfarth.com/21/294/landing-pages/rsvp-blank-webinar.asp?sid=blankform

If you have any questions, please contact Colleen Vest at cvest@seyfarth.com and reference this event.

*CLE Credit for this webinar is approved in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Credit will be applied for, but cannot be guaranteed, in all other eligible jurisdictions. Please note that in order to receive full credit for attending each webinar, the registrant must be present for the entire session.

Seyfarth Synopsis: On May 6, 2020, the Supreme Court heard oral arguments on a First Amendment challenge to a 2015 amendment to the TCPA, which exempted calls regarding debts owed to the government from certain of its prohibitions.  While most Justices seemed to agree that the exemption was a content based restriction on speech, the Justices struggled with whether severance was the appropriate remedy.

Background

The Telephone Consumer Protection Act (“TCPA”) prohibits the use of automated, artificial or prerecorded calls to any cell phone unless made for emergency purposes or without prior express consent (“cell phone ban”).  In 2015, Congress amended the TCPA to create an additional exemption for calls related solely to the collection of debts owed to the U.S. government (“government debt exemption”).

In Barr v. American Association of Political Consultants et al., Case No. 19-631 (2020), an association of political and polling organizations (“Political Consultants”) challenged the constitutionality of the TCPA, arguing that the government debt exemption was a content-based restriction on speech in violation of the First Amendment.

The Fourth Circuit ruled that the government debt exemption was a content-based restriction on speech but chose to remedy that defect by severing the exemption, leaving the cell phone ban in place.  The Attorney General petitioned the Supreme Court for review, arguing that the government debt exemption was not a content-based restriction on speech.  On January 10, 2020, the Supreme Court granted the petition for certiorari to determine whether the exemption was a content-based restriction on speech subject to strict scrutiny and, if so, whether the appropriate remedy was to sever the exemption or invalidate the cell phone ban in its entirety.  The Court held oral arguments on May 6, 2020, which were live streamed on C-SPAN.  We were listening.

Oral Argument Observations

The Justices were largely in agreement that the government debt exemption was a content-based restriction on speech that could not survive scrutiny.  The most notable exception was Justice Kagan, who suggested that Congress had intended to create a content-neutral exemption but failed to do so because of sloppy drafting.  On the whole, however, the Justices focused on the issue of the appropriate remedy: severance or invalidation of the cell phone ban.

Many of the Justices appeared sympathetic to the Government’s argument that severance would be appropriate given that the TCPA (1) is very popular with consumers; (2) has been in place since 1991; and (3) survived all constitutional challenges prior to the addition of the government debt exemption in 2015.

Nevertheless, the Justices appeared uncomfortable with the ramifications of severance, which would have a perverse result: making the restriction on speech even broader (by eliminating an exemption to the ban on speech) and failing to give the prevailing party (the Political Consultants) any relief.  The Justices pondered whether such a ruling would provide a disincentive to bringing First Amendment challenges in the future.  The Justices also expressed due process concerns with eliminating the rights of individuals who were not parties to this case (e.g., private debt collectors who the government can engage to collect government debts).

The Political Consultants further argued that severing the government debt exemption from the cell phone ban was not sufficient to remedy the First Amendment violation because the cell phone ban itself was an improper restriction on speech.  Although the Political Consultants conceded that, without the government debt exemption, the cell phone ban would be content neutral and subject only to intermediate scrutiny, they argued that the cell phone ban could not even survive that level of review because it was not supported by an important government interest.  Specifically, the Political Consultants argued that Congress’s act of passing the government debt exemption in 2015—which permits the Government or its agents to make debt-collection calls, widely regarded as the most annoying and intrusive type of autodialed or prerecorded calls—was itself evidence that the Government does not value consumer privacy as highly as the Attorney General contended on appeal.

In response to this argument, however, Chief Justice Roberts pointed out that Congress may be taking steps one at a time (such as it did in passing the 2015 amendment creating the government debt exemption) to remedy the cell phone ban’s broad restriction on speech.  The Chief Justice questioned whether it would be appropriate for the Court to intervene in this Congressional process.

Lastly, two other intriguing options were proposed by the Justices but did not receive extensive consideration: (1) remanding to the Fourth Circuit (presumably for further consideration of the appropriate remedy or due process issues); or (2) crafting the Court’s opinion in such a way to carve out political speech from the cell phone ban.

Takeaways

A majority of the Justices are likely to find that the government debt exemption is a content-based restriction on speech, but how they will choose to remedy that infirmity (or whether they will even reach agreement on a remedy) is unclear.  Indeed, as Justice Kavanaugh noted, the Court has no precedent for ruling on severability when the First Amendment violation is created by an exception to the restriction on speech.  The Court’s decision is expected by June 2020.  We will update you here when it issues.

Companies responding to the pandemic are faced with the challenges of not only complying with federal, state, and local emergency orders and guidelines for each location in which they operate, but also ensuring that any measures taken to address the foregoing do not affect compliance with other laws.  In the wake of business closures and event cancellations brought on by the pandemic, plaintiffs’ attorneys have continued to look to California’s various consumer protection statutes as fodder for class litigation, bringing an influx of COVID-19-related lawsuits against companies still dealing with unprecedented restrictions on their businesses.

With in-person purchasing opportunities limited or prohibited during the pandemic, companies have looked to expand their online offerings to consumers, particularly companies providing subscription-based products or services such as entertainment and streaming content providers, data storage and security providers, and recurring “box” and food delivery services.  Companies using such business models to conduct business with consumers in California should ensure that they are in compliance with California’s various consumer protection statutes to avoid costly class actions.

Many of these actions are aimed at membership- and subscription-based businesses, such as gyms and sports clubs, ski resorts, and theme parks.  Consumers have filed actions in California and several other states, seeking injunctive and declaratory relief, restitution, and damages for claims under the California’s Consumer Legal Remedies Act (“CLRA”), Cal. Civ. Code §§ 1750, et seq., Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200, et seq., and False Advertising Law (“FAL”), Cal. Bus. & Prof. Code §§ 17500, et seq.  In the case of one class action complaint brought against a fitness center, the plaintiffs have also asserted claims for breach of warranty, breach of contract, misrepresentation, fraud, conversion, and violation of California’s Health Studio Services Contract Law, Cal. Civ. Code §§ 1812.80, et seq., based on the company’s alleged collection of membership fees after the imposition of stay-at-home and similar orders due to COVID-19.

The reach of these laws is not limited to businesses – a former union member has brought a similar action against his union, alleging violations of the Electronic Funds Transfer Act and various provisions of California’s Business and Professions Code for automatic withdrawals of fees following the termination of the plaintiff’s membership in the union.

Given such an extensive body of consumer protection laws, compliance for companies doing business in California can be fraught with the potential for class action lawsuits.  Membership- and subscription-based businesses must also adhere to specific requirements for accepting and collecting payments on a recurring basis, which may raise issues under the CLRA, UCL, FAL, and common law, in addition to California’s Automatic Renewal Law (“ARL”), Cal. Bus. & Prof. Code §§ 17600, et seq.

The ARL

The ARL was enacted in 2009 with the express purpose of “end[ing] the practice of ongoing charging of consumer credit or debit cards . . . without the consumers’ explicit consent.”  Cal. Bus. & Prof. Code § 17600.  A popular tool for plaintiffs and regulators alike, the ARL applies to almost any arrangement in which a paid subscription or purchase agreement is automatically renewed unless and until it is canceled by the consumer.  As business models increasingly rely on automatic renewals, perpetual subscriptions, and electronic billing, the ARL can increasingly become a trap that businesses must navigate if they are to construct a California-compliant subscription plan.  Under the ARL, any subject arrangement must conform to the following requirements,* which can be grouped into five (5) main categories:

  1. Clear and conspicuous disclosures. The offer to enroll and key terms of the subscription agreement must be disclosed in a manner that clearly calls attention to the auto-renewal language and must be in visual proximity (or temporal proximity for audio offers) to the request for consent.  The following terms must be disclosed in type or font that is larger than or otherwise in contrast with surrounding text (or, for audio disclosures, in a volume and cadence sufficient to be readily audible and understandable):
    • a. The nature of the subscription or purchasing agreement as one that will continue until the consumer cancels;
    • b. How to cancel the offer;
    • c. The recurring amounts that will be charged to the consumer’s payment account;
    • d. That the amount of the charge may change and the post-change amount, if known;
    • e. The length of the automatic renewal term; and
    • f. Any minimum purchasing obligation(s).
  2. Retainable acknowledgment. The business must provide to the consumer an acknowledgment that provides the terms of the automatic renewal of continuous service, the cancellation policy, and how to cancel.  The acknowledgment must be provided in a manner that is capable of being retained by the consumer (e.g., in writing).
  3. Affirmative consent. The business must obtain affirmative consent from the consumer before charging the consumer’s debit or credit card on a recurring basis.  The consent may be given orally or in writing.
  4. Mechanisms for cancellation. The business must provide a cost-effective, timely, and easy-to-use mechanism for cancellation (e.g., a toll-free number, email address).
  5. Notice of material change(s). The business must provide to the consumer clear and conspicuous notice of any “material” change in the terms of the subscription, as well as written information about how to cancel the offer if already accepted.

*The ARL was amended in 2018 to extend the above requirements to promotional offers, e.g., special pricing that will be followed by automatic charges, and to allow for the termination or cancellation of online services via sufficiently uncomplicated online means.  [See our previous article covering the 2018 amendments here.]

Remedies And Takeaways For Businesses

Any products sold without the above disclosures are considered an unconditional gift under the ARL, meaning consumers will likely be entitled to refunds without returning their purchases. However, the ARL does not limit the remedies available for violations of its provisions, permitting consumers to pursue virtually any civil remedy.  In addition, alleged violations of the ARL can be repackaged into claims under the UCL, CLRA, and FAL, offering the remedies available under those statutes as well (e.g., injunctive relief, restitution, and statutory and punitive damages).

The current trend in COVID-19-related consumer class litigation is a powerful reminder to diligently assess consumer disclosures and business protocols.  Membership- and subscription-based businesses should always be mindful of the ARL’s requirements, but especially of the notices they provide to consumers during this time, and should make sure the notices include all necessary information.  In the action described above, brought against the union, the plaintiff alleges in his complaint that the union “never provided advanced clear and conspicuous notice to plaintiff of this auto-renewal,” and failed to provide any notice or otherwise inform the plaintiff “of its intent to renew the twenty (20) dollar auto withdrawal.”

Businesses should also carefully consider the issues that will likely arise where collections are concerned to avoid claims stemming from unauthorized withdrawal or retention of funds, especially since the ARL and other laws discussed do not state a minimum amount required for injury.  Membership- and subscription-based businesses and organizations in particular should seek the advice of competent counsel in revisiting their compliance measures.

On March 4, 2020, California Governor Gavin Newsom declared a state of emergency in response to the COVID-19 public health emergency. Price gouging is illegal in all California communities during the declared state of emergency.

Executive Order N-44-20 makes it unlawful to increase the price of food items, consumer goods, or medical and emergency supplies by more than 10 percent of what a seller charged for that item on February 4, 2020. Exceptions exist if the seller has experienced increased costs in labor, goods, or materials, or if the seller sold the item at a discount on February 4, 2020, in which case they may sell the item for no more than 10 percent greater than the price at which they ordinarily sold the item. If the seller did not offer the item for sale on February 4, 2020, the seller may not sell the item at a price that is 50 percent greater than what they paid for it, or, if the seller produced the item, they may not sell it for a price that is 50 percent greater than the cost to produce and sell the item.

In addition to Executive Order N-44-20, Penal Code section 396 generally prohibits charging a price that exceeds, by more than 10 percent, the price of an item before a state or local declaration of emergency. This law applies to those who sell food, emergency supplies, medical supplies, building materials, and gasoline. The law also applies to repair or reconstruction services, emergency cleanup services, transportation, freight and storage services, hotel accommodations, and rental housing. Exceptions to this prohibition exist if, for example, the price of labor, goods, or materials has increased for the business. California’s price gouging law also applies to transactions between manufacturers, wholesalers, distributors, and retailers as it does between retailers and consumers.

The statute’s effective period lasts 30 days after a declaration of emergency, and it can be extended by state or local officials. The state, and most local agencies, have extended this period in connection with the COVID-19 public health emergency. Local governments can also pass their own laws that prohibit price gouging, and a number of California cities and counties have done so.

Violators of the price gouging statute are subject to criminal prosecution that can result in a one-year imprisonment in county jail and/or a fine of up to $10,000. Violators are also subject to civil enforcement actions including civil penalties of up to $2,500 per violation, injunctive relief, and mandatory restitution. The Attorney General and local district attorneys can enforce the statute. Persons or entities that have been the victim of price gouging, or have information regarding potential price gouging, in California can file a complaint at oag.ca.gov/report.

Although this post focuses most specifically on California law, numerous other states and jurisdictions have their own similar but distinct and somewhat varying price gouging laws. In California and in jurisdictions across the country and across the world, price gouging can have a profound impact across commercial business and supply chains. Affected and potentially affected industries include, but are certainly not limited to, healthcare, insurance, employee benefits, labor and employment, retail, hospitality, real estate, construction, manufacturing and distribution, transportation and logistics, and government contracts.

As businesses resume operations and employees return to work, and as judicial courthouses resume operations, there is likely to be a spike in price gouging claims, disputes, and lawsuits filed by consumers or businesses under state and federal consumer protection and unfair competition laws. Additionally, alleged actual or perceived anti-competitive practices, collusion or price fixing among market competitors, participants, or employers could lead to an uptick in state and federal antitrust claims and litigation. Likewise, there may be an increase in state and federal qui tam false claim actions initiated against employers by employee whistleblowers, accompanied by claims personal to the employee against his or her employer for retaliation and wrongful termination. And of course, businesses and employers are not immune from impacts of criminal prosecutions and convictions. These are just a few of the many possibilities.

Actual or perceived price gouging presents tremendous challenges, litigation risks, and potential exposures for commercial businesses and employers. Stay tuned.

The COVID-19 pandemic has created unprecedented disruption and challenges for businesses navigating California’s consumer protection laws. California was already an attractive forum for expensive consumer class action lawsuits, where it can be easier to obtain class certification, conduct onerous discovery, obtain lucrative class action settlement approval, and recover higher attorneys’ fee awards compared to other jurisdictions. The ongoing pandemic has created even more costly traps and pitfalls for businesses struggling to pilot these uncharted waters.

This alert highlights some of California’s most common consumer protection related issues and statutes that businesses should be aware of to reduce potential exposure and litigation during this crisis. Plaintiffs’ attorneys have wasted no time filing high-profile consumer class action lawsuits in a wide array of industries (e.g., sports and entertainment, retail, hospitality, manufacturing, social media, travel, e-commerce, and education), even as these businesses struggle to reopen and resume full operations. Unfortunately this is likely only the first wave of many expensive consumer class actions with several more waves on the horizon as the pandemic rages on. Prudent businesses will ensure their compliance with California’s consumer protection laws to weather the class action storm.

Auto-renewals and subscriptions

As the pandemic continues to drive life online, consumers have increasingly signed up for a wide array of subscription and membership based goods and services (e.g., food and meal delivery, video and other streaming services, and clothing and beauty boxes). These subscriptions and memberships may fall under California’s Auto-Renewal Law (Cal. Business & Professions Code § 17600), which applies with certain exceptions to any arrangement where a paid subscription or purchasing agreement is automatically renewed until the consumer cancels. The statute requires businesses to disclose subscription terms in a clear and conspicuous manner, including cancellation information, and obtain affirmative consent before charging consumers debit or credit cards on a recurring basis. Any products sold without the requisite disclosures are considered an unconditional gift under the statute, meaning consumers will likely be entitled to refunds without returning their purchases.

The Auto-Renewal Law was amended in 2018 to extend its disclosure requirements to promotional offers, e.g., special pricing that will be followed by automatic charges, and to allow for the termination or cancellation of online services via sufficiently uncomplicated online means.

In the wake of business closures and event cancellations brought on by the pandemic, we have seen plaintiffs increasingly targeting membership- and subscription-based businesses that have been frozen or otherwise inaccessible during the pandemic, such as gyms and sports clubs, ski resorts, and theme parks. In the case of one class action complaint brought against a fitness chain, the plaintiffs have also asserted claims based on the chain’s collection of membership fees after the imposition of stay-at-home and similar orders due to COVID-19. These class action lawsuits are a powerful reminder to diligently assess consumer disclosures and business protocols particularly for those businesses that use auto-renewal or subscriptions.

Refund and return policies

Reports of consumer panic buying and overly excessive purchasing has caused some retailers to more strictly enforce or modify their refund and return policies. Additional issues may arise with consumers who are reportedly delaying returns to when the brick-and-mortar stores reopen, even when the retailer offers a mail-in return method, and are exceeding return deadlines.

One developing trend we are seeing is the onslaught of class actions demanding refunds for postponed or cancelled events, such as sporting events, concerts, and educational classes. For example, class action lawsuits have already been filed against the likes of professional sports leagues, major ticket brokers, and universities and other educational institutions, demanding refunds instead of deferred, future credits. (See COVID-19 Refund Policies for Season Tickets, Season Passes, and Annual Festivals and Never Let a Crisis Go to Waste: Plaintiffs’ Lawyers Target Colleges and Universities for COVID-19 Responses.) The financial crisis arising from the pandemic has encouraged plaintiffs to pursue immediate repayment of money instead of future credit.

As organizations look to avoid these class action suits, they will first look to any class action waiver in the contract with the consumer and then look to any arbitration provisions that may be found within the contract. Moreover, disputes will likely center on the terms and conditions of any applicable agreements or policies, limitation of remedies provisions, and force majeure and other contractual defenses.

California law does not require retailers to have any particular refund or return policy. But if a retailer has a policy of not providing a cash refund, credit, or exchange when a customer seeks to return an item after seven or more days following purchase, the retailer must inform consumers about its refund policies by conspicuously placing a written notice in language that consumers can understand. Cal. Civ. Code § 1723. Thus, a business may limit exchanges or returns for credit or refunds on all or some products, and may not allow exchanges or returns for credit or refunds at all. But whatever the policy, it must be conspicuously disclosed. There are some common exceptions to the rule, such as for perishable goods; items marked “as is,” “no returns accepted,” “all sales final,” or something similar; for items that are used or damaged after purchase; for items customized for the consumer and received as ordered; for items that cannot be resold for health reasons; or for items not returned in their original packaging.

Gift cards and gift certificates

Consumers have been encouraged to support businesses during the pandemic by purchasing gift cards. The reopening of brick-and-mortar stores may lead to an increase in the use of gift cards and gift certificates, with some consumers preferring them over cash. Some merchants have reported that they will not accept cash payments upon reopening to reduce the spread of the novel coronavirus. The reopened stores may also see an influx of consumers seeking to redeem gift cards that they were unable to or elected not to redeem online during any closures. Further, cash-strapped consumers may start using gift cards that may have been collecting dust over the years.

The temporary closure of certain retail stores generally should not affect the deadline for consumers to redeem gift cards. Gift cards and gift certificates generally cannot have expiration dates or service fees, including a fee for dormancy. The gift cards or gift certificates must be redeemable for cash or replaceable at no charge to the customer. (For example, if a customer has a $50 gift certificate and uses it to purchase only $30 worth of merchandise, the merchant can return to the customer $20 cash for the balance or give the customer a new gift certificate worth $20, at no cost to him or her.) Merchants should also remind their staff that if the balance remaining on a gift card or gift certificate is less than $10, the merchant must redeem it for cash if the customer so requests. Also, the merchant must be sure that any “terms and conditions” or other language used on the certificate, card, or elsewhere does not mislead the customer on the law, i.e., the language should not lead the customer to believe the certificate or card has an expiration date, service fee, is not replaceable, or is not redeemable for cash if the balance is less than $10. Cal. Civ. Code § 1749.5.

Call recording and eavesdropping

The closure of many brick-and-mortar stores has inherently driven more customers to interact with retailers primarily through telephonic or electronic means. Potential exposure arises when businesses record customer phone calls for training purposes or otherwise. A surprising large number of businesses record in-bound and outbound calls with customers. Specifically, recording or eavesdropping on a phone call involving a California resident (even if the business is not physically located in or recording the call in California) can be illegal under California’s Invasion of Privacy Act (Cal. Penal Code § 630 et seq.) without the consent of all parties to the call.

Financial exposure is significant under this statute because each violation carries a penalty of $5,000. Considering many businesses place or receive hundreds, if not thousands, of calls each day, it is not surprising to see why most CIPA claims are brought as class actions. Indeed, Plaintiffs’ lawyers have used, and, arguably, abused, this statute (and similar state and federal statutes), bringing harrowing class cases against businesses, then demanding large settlements for quick resolution. CIPA claims have likely become even more attractive to plaintiff’s lawyers during the pandemic with more customer services interactions conducted over the telephone instead of in-store. Businesses that record calls with California residents can likely protect themselves against violations of this statute by adequately advising all parties to a telephone call, at the outset of the conversation, that it intends to record the call.

Advertising via text messages

The various pandemic related orders requiring consumers to stay home and certain retailers to close brick-and-mortar stores have accelerated the shift of sales from in-store to online. Within this trend is a rise in the percentage of ecommerce sales from mobile devices. Armed with knowledge that mobile messaging is the most common smartphone usage and can be a highly effective revenue source, many retailers have dramatically increased their marketing and consumer engagement efforts to personalized and automated mobile messaging.

Businesses must be careful, however, when advertising by means of text messaging, telemarketing, or facsimile. Federal and state laws impose restrictions on such communications and advertisements. Among other restrictions, it is unlawful to send automated text messages or make automated phone calls to a recipient’s cell phone by means of an automated dialing system or “autodialer” (i.e., an electronic device or software that automatically dials telephone numbers) unless the recipient has expressly given prior consent. It is also generally unlawful to send unsolicited advertisements to a person’s or entity’s fax machine. A business cannot avoid liability by having someone else send messages or make calls on its behalf. Telephone Consumer Protection Act, 47 U.S.C. § 227. The consequences for violating the TCPA can be significant, with penalties ranging from $500 per each violation and up to $1,500 per willful violation.

TCPA class action lawsuits arising from this pandemic are filed daily.  For example, one lawsuit was filed against a golf course company that allegedly sent text messages stating, “Stay safe in these crazy times by golfing at top 100 golf course.” Another lawsuit was brought against a telemarketing company that allegedly made calls promoting health plans containing coronavirus testing and treatment.

Price gouging and predatory pricing

Consumers have reported that some companies have engaged in price gouging during the pandemic. California Governor Gavin Newsom declared a state of emergency in response to the COVID-19 public health emergency on March 4, 2020. Price gouging is illegal in all California communities during the declared state of emergency. (For a more detailed discussion on price gouging issues, please see Price Gouging in California (and Elsewhere) During COVID-19 … And the Claims That Are Likely to Follow.)

On the other side, businesses should be careful when reducing prices too low and face suits from injured competitors. A business’s use of below-cost or predatory pricing can be unlawful under California law. California’s Unfair Practices Act (“UDPA”) prohibits certain unfair, dishonest, deceptive, destructive, fraudulent, and discriminatory business practices, for the purpose of preserving and fostering fair and honest competition and protecting the public against the creation or perpetuation of monopolies.  Bus. & Prof. Code § 17001. The UDPA includes restrictions against below cost sales (§ 17043), loss leader sales (§ 17044), and secret rebates (§ 17045). Although a business may be desperate to increase sales and bounce-back after the pandemic, it should not engage in any predatory pricing that may violate the UDPA or other applicable laws.

Consumer privacy

California is also an attractive forum for consumers alleging privacy violations. We have seen several privacy class actions filed in California during the pandemic. Apart from other privacy claims, the relatively new California Consumers Privacy Act (“CCPA”) provides consumers with an express private right of action for unauthorized access and disclosure of their data. The law applies to companies who do business in California, though the scope of that definition leads to inclusion of companies around the world (whether they know it or not). Despite existing and ongoing uncertainty around how to comply and interpret the law, California courts had already began seeing private class actions brought under the CCPA early this year. For example, Zoom became the part of the national lexicon in mid-March, a Vice article on March 20, 2020 revealed how Zoom’s customers’ information was allegedly shared with Facebook. Though the company quickly released a new version of the app within seven days, a class action suit was swiftly filed in the Northern District of California on March 31, 2020. Social media company TikTok was also recently hit with a biometric privacy suit regarding its facial recognition technology.

Other issues, though maybe not so obvious, are nevertheless on the horizon. For instance, as offices, large retail outlets, restaurants, and stadiums are phased back into our lives, there may be an increase in the need to screen and collect physiological data of customers (as well as employees) entering the space, for things like body temperature, prior testing results (including antibody confirmation), and personal movement tracking based on cell phone information. In fact, there have been reports that certain California grocery stores are already taking customers temperature upon entry. And as more companies interact with their customers online (as opposed to in person) during this crisis, many companies are collecting and using customer information, which necessitates that they have compliant collection and storage policies and practices.

Notably, the California Attorney General has made it clear at this point that he will not be giving companies extra time to make sense of, and comply with, the new law in light of the COVID-19 pandemic. As a result, companies around the world (not just in California) need be on high alert as they employ new methods of mitigating the impact of the virus on their business to avoid expensive class actions and attorney general enforcement actions. (For a more detailed discussion of this issue please see The Impact of COVID-19 on the California Consumer Privacy Act.)

Unlawful advertisements and unfair business practices

An ongoing trend is litigation challenging the accuracy of packaging and labels. These claims are often brought under California’s Consumer Legal Remedies Act (Cal. Civ. Code §§ 1750, et seq.), Unfair Competition Law (Cal. Business & Professions Code §§ 17200, et seq.), and False Advertising Law (Cal. Bus. & Prof. Code §§ 17500, et seq.), in addition to any applicable federal statutes.

Multiple class action lawsuits have been recently brought against various hand sanitizer manufacturers for alleged deceptive marketing and misleading representations about the products’ abilities to fight the novel coronavirus. We expect to see class actions continue to target pandemic-related advertisements, such as unfounded claims that products or services are “safe” or “reliable” against the novel coronavirus.

California’s Unfair Competition Law (Cal. Business & Professions Code § 17200) establishes three varieties of unfair competition—acts or practices that are unlawful, or unfair, or fraudulent. The “unlawful” prong borrows violations of other laws and treats them as independently actionable. The “fraudulent” prong involves the  actual reliance on purportedly misleading or fraudulent statements. The “unfair” prong can mean practices that are contrary to established public policy, immoral, unethical, oppressive or unscrupulous, and causes injury to consumers which outweighs its benefits. This more expansive prong is already being used as a catch-all by plaintiffs to bring pandemic-related claims that do not otherwise fall under any other consumer protection statute.

Defense considerations

Enforceable mandatory arbitration provisions with class action waivers (such as in Terms and Conditions or Terms of Use policies) may provide an effective strategy to attempt to minimize exposure to class claims brought under consumer protection laws. Indeed, plaintiffs’ attorneys have reported being discouraged from bringing such putative class actions when an applicable and enforceable arbitration provision exists. Businesses can strengthen the likelihood that any arbitration or class action waiver provisions will be enforced by clearly and conspicuously disclosing the applicable provisions and obtaining affirmative consent, such use through the use of click boxes for online disclosures.

The pandemic is also leading to questions from both sides of contractual disputes around force majeure, the doctrines of impossibility and frustration of purpose, and how California business owners can most effectively deal with current contractual obligations that may be substantially impacted by the pandemic’s fallout. (For a more detailed discussion of these issues, please see (COVID-19 Update: Force Majeure Under California Law in Business and Commercial Disputes.)

Lastly, other defense considerations including challenging class certification, challenging nationwide classes brought under California consumer protection statutes, attacking standing (e.g. plaintiffs must prove they suffered injury in fact and lost money or property as a result of the defendant’s alleged wrongful conduct), and limitations on remedies (e.g. Unfair Competition Law and False Advertising Law provide restitution rather than damages).

Conclusion

This unprecedented pandemic has created new traps and areas of uncertainty for businesses navigating California’s consumer protection laws. Many of these statutes carry high penalties with no caps on damages. Companies that conduct business in California or otherwise engage with California consumers should be aware of the potential issues discussed above to avoid expensive class action lawsuits or government enforcement, especially as we continue to see pandemic-related class actions filed on a daily basis.

Long before COVID-19 affected retail companies had already started shifting to e-commerce platforms, marked by retail giants exclusively in the e-commerce space.  Even banks acknowledged this trend, by no longer offering cash-back credit rewards for just gas and grocery purchases, but for online purchases too.  Now, as COVID-19 affects a growing number of retail stores, with some being forced into bankruptcy, many will likely close brick-and-mortar storefronts, in favor of e-commerce platforms.  While e-commerce may allow retailers to shed dollars on rent, store associates, and other costs, they must take prudent measures to ensure the dollars saved are not lost to defending against future enforcement actions or class action litigation.  This update highlights a number of the issues e-commerce retailers should consider to maintain regulatory compliance and to minimize the risks of potential litigation.

Marketing and Advertising

The Federal Trade Commission (“FTC”) and Food and Drug Administration (“FDA”) have routinely reminded retailers, even in the wake of COVID-19, of marketing and advertising requirements.  Even though a product label itself may not contain any marketing or advertising claims, language on websites, social media accounts, videos and other mediums must also comport with the FTC Act and, if a product qualifies, with FDA regulations too.  As a general matter, claims must be truthful, cannot be deceptive or unfair, and must be evidence-based.  Should a retailer utilize influencers or endorsements, the FTC has set forth additional requirements for adequate disclosures about these promotional relationships.  If a retailer makes representations about the source of the product or its components, the FTC has strict guidelines on when it is appropriate to make “Made in the USA” claims.  The type of product also dictates further compliance.  For example, dietary supplements and drugs may contain health related claims that must be substantiated by “competent and reliable scientific evidence.”  The same is true for products with environmental claims as governed by the FTC’s Green Guides.  In short, marketing language is subject to significant scrutiny in consumer sales so retailers have to be careful what they say, whether express or implied.

Promotions and Pricing

The FTC Act prohibits unfair and deceptive advertising, which extends to product pricing.  The FTC’s Guides Against Deceptive Pricing generally require that a retailer offer an item at a price for a reasonable, substantial period of time in good faith, and in the regular course of business, before advertising that price as the former or regular price (16 C.F.R. § 233.1).  Companies cannot artificially inflate a product’s price for short period of time in order to support a claim that an item is discounted when the price is thereafter reduced.  Additionally, companies cannot distort price comparisons: retailers cannot advertise their product as less than another merchant or manufacturer unless principal retail outlets are selling the product at a higher price. Also, a retailer who advertises a manufacturer’s or distributor’s suggested retail price should be careful to avoid creating a false impression that it is offering a reduction from the price at which the product is generally sold in its trade area.  When retailers utilize sales, sweepstakes, contents and other promotions, additional legal requirements may be implicated.  Finally, a popular phrase provoked by COVID-19 is “price gouging.”  This illegal activity is exhibited by the use of “excessive” or “unconscionable” pricing, which may be measured by the average prices in an affected area over a given look-back period prior to the emergency or event that triggered the escalated pricing.  While there is no federal law governing price gouging, President Trump issued an executive order instructing the Department of Justice to investigate and prosecute price gouging of medical resources pursuant to the broad executive authority under the Defense Production Act.  Many states also have laws on the books that prohibit price gouging, several of which come with steep fines.  See, e.g., D.C.’s Natural Disaster Consumer Protection Act.  Retailers therefore need to be sensitive to the pricing advertised for products to avoid it be construed as deceptive.

Privacy and Payment Processing

A retailer maintains the ultimate responsibility for the protection of consumers’ personal information.  This includes the collection of email addresses for the distribution of marketing materials.  Businesses cannot freely transmit or sell such data.  To the extent a website is directed at children under the age of 13, retailers may have additional obligations under the Children’s Online Privacy Protection Act (COPPA).  A website should have a conspicuous privacy policy conveying how the website processes and uses consumer information.

As for payments, businesses should partner with reliable payment processing companies to help with the safe transfer of payment and consumer information as well (i.e. credit card information, consumer address).  Businesses should also establish merchant accounts with a financial institution with requisite safeguards in place.  Financial institutions are required to adhere to the Financial Services Modernization Act, which includes protecting consumers’ “nonpublic” personal information.  Under the Fair Credit Reporting Act, the FTC’s “Red Flag Rules” also require financial institutions to institute identify theft protections.  Some of these obligations, i.e. fraud protection, are borne in part by the financial institution of the consumers.

Shipping

Without consumers’ ability to pick up their products comes the obvious issue of shipping.  Under the FTC’s “Mail Order Rule” when retailers advertise merchandise, they must have a reasonable basis for stating or implying that they can ship within a certain time advertised.  “Reasonable basis” means that the merchant has, at the time of making the representation, such information as would under the circumstances satisfy a reasonable and prudent businessperson, acting in good faith, that the representation is true.  When there is no shipment statement, retailers must have a reasonable basis for believing that the products can be shipped within 30 days.  Because of the 30-day default, this requirement is sometimes referred to as the “30-day Rule.”  Importantly, if a retailer cannot meet the prescribed shipment date or default, 30-day period, it must seek the customer’s consent to the delay.  There is specific language that must be included in a notice to a customer about a shipping delay, including offering the customer the option to cancel the order.  In addition to timing, retailers should be cognizant of U.S. restrictions on shipping certain products.  Last, companies need to have conspicuous return and refund policies so that customers understand how to ship back unwanted or damaged merchandise.  Careful consideration should be afforded to state laws as return and refund requirements vary by state.  For example, under Virginia’s Consumer Protection Act, retail merchants must maintain a conspicuous policy of providing, for a period of not less than 20 days after date of purchase, a cash refund or credit to the purchaser’s credit card account for returned merchandise.

Protections

Beyond following the law, there are some proactive measures retailers can adopt to improve compliance.  Almost all retail web sites currently have their own “Terms and Conditions.”  These disclosures generally outline the nature of the relationship between the retailer and consumer, the jurisdiction (i.e. state) governing the sale activity, procedure for disputes (i.e. arbitration or court), limitations of liability, policies for returns or order issues, privacy considerations, and other matters governing the use of the website.  Such terms and conditions establish the rights and responsibilities of the retailer and consumer.  Retailers should also consider commercial insurance coverage necessary to cover e-commerce activity, including but not limited to product liability, professional liability, privacy and cyber risks, and intellectual property infringement.  While insurance does not insulate a retailer from liability, it ensures that a retailer will have the financial means to address covered claims.

Final Thoughts

The foregoing provides an overview of some of the essential issues related to e-commerce for retailers expanding their internet presence.  Other legal considerations, albeit not exhaustive, include consumer reviews, intellectual property (i.e., copyright, trademark), accessibility (i.e., ADA requirements), marketing activity stemming from website interaction (i.e. promotional emails or texts), and assessing sales tax.  Retailers should be thoughtful and prudent in their e-commerce activities, mindful that regulators and class action attorneys are overseeing the same with a critical eye.  Seyfarth is available to address these or other pressing issues affecting your online business.

 

Seyfarth Synopsis: In an April 8, 2020 post on the Federal Trade Commission (“FTC”)’s Business Blog, the Director of the FTC Bureau of Consumer Protection, Andrew Smith, provided helpful guidance on the use of artificial intelligence technology in businesses’ decision-making. In particular, Smith emphasized (i) transparency, both in informing consumers about how automated tools are used and how sensitive data is collected, (ii) the importance of explaining the reasoning behind algorithmic decision-making to consumers, (iii) ensuring that decisions are fair and do not discriminate against protected classes, (iv) ensuring accuracy of data used in algorithmic decision-making, and (v) for businesses to hold themselves accountable.

As more and more businesses turn to artificial intelligence and algorithms to make decisions that impact consumers—such as deciding whom to insure or to extend credit—they face the serious risk that such decision-making will be challenged as being biased, unfair, or otherwise violating consumer protection laws. Last month the Director of the FTC Bureau of Consumer Protection, Andrew Smith, published a blog post[1] that provides helpful tips and guidance that businesses should keep in mind when implementing artificial intelligence in any decision-making that can impact consumers.

As Smith explains, “while the sophistication of AI and machine learning technology is new, automated decision-making is not, and we at the FTC have long experience dealing with the challenges presented by the use of data and algorithms to make decisions about consumers.”[2]  In light of that experience, Smith discusses how “the use of AI tools should be transparent, explainable, fair, and empirically sound, while fostering accountability.”[3] In particular, businesses should consider:

  • Transparency. As Smith explains, though artificial intelligence often “operates in the background,” it can also be used to interact with consumers, such as when companies use “chatbots,” and businesses should be transparent about the nature of that interaction. In addition, businesses that make algorithmic decisions based on data collected from consumers should be transparent as to how that data is collected—secretly collecting sensitive data could give rise to an FTC action. Finally, there are some notices that must be given to consumers under the Fair Credit Reporting Act in connection with use of consumer information to automate decision-making on a number of subjects (e.g. credit eligibility, employment, insurance, and housing) and businesses should ensure they comply with any applicable requirements.[4]
  • Explaining Decisions. Businesses should also be transparent about their decision-making process. If a business denies consumers something of value based on algorithmic decision-making, it should be able to explain that decision to consumers. As Smith explains, “[t]his means that you must know what data is used in your model and how that data is used to arrive at a decision. And you must be able to explain that to the consumer.”[5] If an algorithm is used to assign “risk scores” to consumers, businesses may be required to disclose the key factors that affect that score (for example, there are a number of required disclosures in connection with credit scores). And if the terms of a deal might change based on automated tools, that fact should be disclosed to consumers as well.[6]
  • Ensuring Fairness. Businesses should be careful to ensure that their use of artificial intelligence does not discriminate against any protected class. That means that businesses should look both at the data inputted into an algorithm, such as whether a model looks at protected characteristics “or proxies for such factors, such as census tract[,]” and also whether the outcome of an algorithmic decision has a disparate impact on protected classes.[7] In addition, in the interest of fairness, businesses should give consumers an opportunity to correct or dispute any information used to make decisions about them.[8]
  • Accuracy of data. Data used in algorithmic decision-making should be accurate and up-to-date. Businesses that provide data about their customers to others for use in automated decision-making (i.e. “furnishers” of data) should ensure that such data is accurate. Furthermore, any artificial intelligence models used by businesses should not only be developed and validated using accepted statistical principles and methodology, but should also be “periodically revalidated . . . and adjusted as necessary to maintain predictive ability.”[9]
  • Holding Oneself Accountable. Smith identifies four key questions that businesses should ask themselves to hold themselves accountable when using algorithmic decision-making: (1) “How representative is your data set?” (2) “Does your data model account for biases?” (3) “How accurate are your predictions based on big data?” and (4) “Does your reliance on big data raise ethical or fairness concerns?” In addition, businesses should protect their algorithms from any unauthorized use or abuse, and should consider using outside, objective observers to test the fairness and accuracy of their algorithms.

Key Takeaways

While using artificial intelligence and algorithmic decision-making can help businesses operate efficiently and reduce costs, businesses should keep in mind the above guidance by taking a proactive approach in protecting themselves from litigation risk, whether in the form of consumer class actions or FTC enforcement actions, and also as part of good corporate governance in a data-driven age.

[1] “Using Artificial Intelligence and Algorithms,” Business Blog, Federal Trade Commission (April 8, 2020), https://www.ftc.gov/news-events/blogs/business-blog/2020/04/using-artificial-intelligence-algorithms?utm_source=govdelivery.

[2] Id.

[3] Id.

[4] Id.

[5] Id. (emphasis in original).

[6] Id.

[7] Id.

[8] Id.

[9] Id.

With all sports and live entertainment “postponed” or canceled since Rudy Gobert’s March 13th trip to that Oklahoma City hospital, and every concert and festival suffering the same fate by government order, refunds have become top of mind for consumers who have paid for tickets and passes in advance. Not surprisingly, consumer plaintiff attorneys have wasted no time in filing class action suits nationwide, with California being a hot bed for obvious (Business and Professions Code Section 17200) reasons.[1]

The onslaught of class actions already filed—even as each organization grapples with if/how/when it will even be able to hold future events in a safe and commercially practical way—provides yet another variable for these organizations to consider when adhering to, abdicating, or modifying their refund policies in light of COVID-19. And due to the financial crisis resulting from the pandemic, the consumer’s need for immediate re-payment of money rather than future credit complicates things.

Below the surface though, what also complicates things for organizations are issues like the typical use of paid-in-advance revenue, and the over-arching desire to maintain some form of connectivity to the consumer. And this is before getting into the different contractual relationships between the ticket purchasing platforms and the organizations—some of which can differ even for the same event, and some of which can direct the revenue solely to one party, resulting in the need for the other party to be refunded itself before it can then provide a refund to the consumer.

This article will provide an overview of how sports teams, entertainment festivals, and ticket brokers have been dealing with refund policies before and during the pandemic, and in turn how plaintiff attorneys have been responding with suits filed against the likes of Major League Baseball, South by Southwest, and most every major ticket broker that works with these established organizations. The different environmental and business factors outlined above will also be discussed, perhaps painting a more nuanced picture for the consumer about the predicaments facing their favorite past time.

Pre-COVID-19: The business behind advanced payments and ticket refunds

At some point in most everyone’s life, we’ve all paid in advance for a form of sport or entertainment—whether it be season (or individual game) tickets for a sporting event or passes for an annual festival. Of course, many consumers (perhaps unconsciously) imagine this money to all be placed in a “lock box,” where it is only used by the organization after the event or specified time period has taken place.

In reality, this is not how cash flow typically works for these types of organizations, who must put this revenue to immediate use in some form or fashion so it doesn’t just collect dust in a virtual lock box. Whether it be a professional sports team using the advanced season ticket revenue to pay off debt or perform arena improvements or it be a music festival using the advanced revenue for necessary nonrefundable deposits, materials and staff prior to the event, the end result is the same—the advanced revenues are most always being used right away. As such, any refunds will necessarily come from other areas of an organization’s balance sheet—with some organizations in a better financial better position to provide refunds than others.

But aside from this practical reality, all such organizations also value advance payment for the simple reason that it provides some connectivity between the customer and the organization—which is perhaps the most important goal in many internal ticket offices. Whether that is a club or gym member that stays connected despite not accessing the facility for many months, or it’s a season ticket holder who stays connected because his playoff deposit for a non-playoff team is credited to the following season’s tickets, some connectivity to the customer is always preferable to no connectivity—and if the organization has the consumer’s money, there will always be a connection.

For these reasons, under normal non-pandemic circumstances, most sports and entertainment organizations have a policy (either written or internally suggested) that if an event is postponed or canceled, the consumer has the option to pick another event to attend that same season, and if that option is unavailed, the consumer will then be given the right to pick an event the following season. Only if that option is not availed, will some organizations then provide a full refund.

That being said, while connectivity is preferred, customer satisfaction that fosters brand loyalty is the ultimate goal. More established brands can therefore sometimes afford to be more restrictive in their refund policies, while less established (or newer) brands are usually more flexible with full refund policies so as to foster and grow brand loyalty. But in every situation, financial realities often end up dictating the decisions—and never has that been more true than now, in light of COVID-19.

Thus, many (if not most) organizations have found it necessary to modify or suspend their refund policies in light of cancellations or postponements. Some may have the financial luxury to modify the policy for immediate refunded payment to the consumer, while others may have more difficult financial realities that necessitate future credits (or even bankruptcy) as the only viable option.

Adding a variable to the equation are the ticket brokers and other ticket selling platforms, some of whom are the official ticketing platforms of various leagues and events, and some of whom have individual agreements with each team or each event. Given that these platforms essentially act as “middle men” between the consumer and various organizations, it stands to reason that most ticket brokers pre-pandemic policies were to provide a full refund for any event that was canceled, but retain the money when the event is postponed to a later date.

However, just because a ticket broker wants to provide a full refund in light of the pandemic, doesn’t mean it can or will be able to. Due to the nature of many of the individualized contracts with teams and events, some contracts provide for the team or event to collect all of the revenue directly, such that the ticket broker would need to be provided with the “advanced funds” so as to then provide the refund to the consumer. Of course, this is not always the case, but it highlights the fact that the issuance of refunds are not cut-and-dried decisions for these organizations, who also now face legal consequences along with the business considerations outlined above.

Class actions and other litigation against sports leagues, teams, and ticket brokers

Perhaps the most-high profile example of class action litigation in light of the pandemic in the sports context has come in the suit filed against Major League Baseball and its major ticketing broker partners. The suit, which was filed on April 20th in California despite both named Plaintiffs being New York residents, alleges in its most basic form that the failure to provide refunds violated California’s consumer protection and unlawful business practice statutes, along with the usual breach of contract and unjust enrichment counts, since the sporting events paid-for will not be taking place.

Plaintiffs allege that MLB and its ticket broker partners had refused refunds to-date because the games have continued to be classified as “postponed”, when in fact each party knows (or should know) that the games will not be played in front of fans for the foreseeable future, thus the games should in effect be deemed “canceled.” As a result, Plaintiff alleged that the failure to issue a refund while knowing the games are effectively canceled constituted a civil conspiracy among all defendants, and served to provide the Defendants with an interest-free loan to sit on and use the consumers’ money that should be refunded.

At the time of the filing of the lawsuit, MLB had informed the teams that it should hold off on providing any refunds at the current time while all options were being evaluated. But, this past week, as further discussions among MLB and all major professional sports continued regarding various proposals to play in various cities with or without fans, MLB provided some additional guidance to each of its teams, allowing each team to decide individually if/when refunds should be provided to their ticket holders.

However, even in light of this recent edict, class counsel for Plaintiffs in the underlying law suit reiterated its intent to keep the action alive until all of the teams provide full monetary refunds and all ancillary costs. And as alluded to above, the presence of California’s Business and Professions Code section 17200 (unlawful and unfair business practices) provides a vehicle for consumer plaintiff attorneys to attempt to recover attorneys’ fees for violations that would not be available in most other states.

As such, this MLB case highlights how organizations can expect class action litigation even in the face of measured evaluation and/or corrective action—and most organizations can expect this litigation to be filed in California whenever possible, since the requested relief may include attorneys’ fees.

This is all similarly concerning for the NBA, who is still grappling to this day about if/how/when it can resume the rest of its current season, with CNBC reporting last Thursday players, agents and teams are pushing for the current season to be canceled outright, while LeBron James and other team management personnel refuted those reports and continued to discuss options for a quarantined playoff tournament in Las Vegas or Florida. The NFL, meanwhile, has the “luxury” of waiting a few more months before confronting these difficult refunding decisions, since the start of the season does not begin until the fall, with the league set to release its schedule full steam ahead on May 7th.

Unfortunately, that luxury was not afforded to the upstart spring professional football league recently launched, which was forced to cease all of its operations and declare bankruptcy in light of the COVID-19 pandemic. Prior to the pandemic, new leagues such as this employed fan-friendly and flexible refund policies, quicker to provide a full refund to new fans so as to help foster and create the aforementioned brand loyalty. When the pandemic initially canceled only the remainder of the 2020 season, fans were offered the option of a full refund, or a credit for the games in the 2021 season. But, two days before declaring bankruptcy, the league asked its league owned-teams to change that policy to a full monetary refund for all ticket holders, without the option for a future credit.

There have been various media reports surmising the reason behind this move, with some pointing out that the league’s owner may not have wanted to damage the goodwill and the brand loyalty of the customers for his other (larger) sports and entertainment enterprise. Perhaps for that reason, counsel for the debtor in bankruptcy court immediately requested to pay $3.5 million of the $5 million available funds to refund the ticket holders who opted to roll over their payments—with the bankruptcy judge initially denying the request, but calling it a “laudable goal.”

With the other business interests, and the availability of substantial funds, those ticket holders seem to have their interests at least represented—but that won’t always be the case. Without such a compelling interest to keep customers content, the efforts to provide full refunds to everybody (even through the bankruptcy proceedings) may not be as full throated as they are now. This situation underscores how the financial fragility of other organizations may require future credits, or even result in bankruptcy, where the control is taken out of the organization’s hands, and put into the hands of a court or a bankruptcy trustee.

Class actions and other litigation against festivals, concerts, and conferences

These financial and business considerations are also playing out in different ways in the festival and concert space, where different organizations have responded to the cancellation of their events and refunds in a variety of ways, largely depending on their situations.

On one end of the spectrum is Coachella, the well-established and hugely popular Palm Springs festival, who has provided ticketholders with the opportunity to obtain a full refund redeemable until June 1, 2020. Another approach has been taken by South by Southwest (SXSW), the annual Austin-based event which features film, interactive media, live music, and conferences, who has offered to allow ticket holders to use their festival credentials to gain admission to one of the next three festivals, plus a discount on another future year’s event—this despite there being a “no refund” policy in the contract with each passholder, and despite SXSW being in “dire financial condition” as a result of the pandemic, according to their organizers.

For the organizers of the annual electronic dance music festival Lightning in a Bottle, they informed all of their passholders that they were “a small family business”, and further that all of the money brought in for the festival was already paid out on nonrefundable deposits, building materials, and staff. As such, the organizers stated that no refunds would be given, but provided a “promise” to make the 2020 ticketholders “whole” in the coming years for future festivals, without any further specificity.

Somewhat predictably, of the three examples provided, only Coachella (who has offered a full refund for a limited time) has thus far avoided a class action lawsuit being filed against it—though that story may have another chapter once the time limit for the full refund expires.

In the case of both SXSW and Lightning in a Bottle, consumer plaintiff attorneys have brought class action suits for breach of contract and unjust enrichment, arguing that in the time of financial crisis, consumers need their money back instead of future credits.[2] In fact, class counsel for Plaintiff in the Lightning in a Bottle case told Law360 that she believes the organizers “are laying the groundwork to dissolve and/or reinvent … as a separate entity so as to avoid all obligations … abscond with monies belonging to the class.”

With bankruptcy a seemingly legitimate threat for many similar organizers, arguments such as this highlight yet another area of potential concern for organizations weighing these decisions, and for consumers looking to put themselves in the best position to negotiate for consideration, or adequately set their expectations.

As organizations look to avoid these class action suits, they will first look to any class action waivers in the ticketing or season ticketing contract with the consumer, and then look to any arbitration agreements that may be found within the contract. Of course, this is not the end of the discussion, since class action waivers and arbitration provisions in the State of California are often challenged on various grounds. In attempting to invalidate these agreements, Plaintiffs will typically argue that such a provision cannot be enforceable if it waives an unwaivable public or statutory right, or whether it deals with a waiveable private right. Going further, Plaintiffs typically argue unconscionability, with the argument for consumers being “procedural unconscionability” based on the ticketing contract being a one-sided contract of adhesion made by one party with superior bargaining power. In response, organizations can sometimes point to the variety of different platforms and avenues to obtain tickets and passes, along with the variety of different types of ticketing passes offered to show that the consumer had many different options when making its decision to enter into the contract and the clear and conspicuous language of the terms.

Assuming a class action waiver or arbitration agreement does not carry the day, as organizations look to defend these class action suits, one can expect force majeure (or its common law principles of impossibility and/or frustration of purpose) to be one of the defenses du jour. While it may be more difficult for larger market teams and sports leagues to argue that it is impossible or commercially impractical for them to provide full monetary refunds (due to the large revenues and television contracts known to all), the impossibility argument may have more legs when being made by smaller market teams, or entertainment events that have legitimately expended all of the advanced revenue on non-refundable preparations for the event.

However, in this political and legal climate, with lawmakers calling for businesses to bear the losses stemming from COVID-19 rather than consumers, these legal principles of equity may have a tough time winning the day for organizations looking to force majeure to excuse a potential repayment obligation. In this respect, however, the California forum shopping from plaintiffs could work the other way, as California law allows for a more expansive reading of force majeure provisions than most other jurisdictions—and has also shown in the past to provide for common law relief based on force majeure principles.

Further analysis and information on force majeure amid the COVID-19 pandemic can be found in the various Legal Updates from Seyfarth in the footnote below.[3]

Looking ahead post-COVID-19

The merits and chances of ultimate success for these COVID-19-related class action lawsuits are somewhat unknown, much like the entire sports and entertainment landscape, and much of the legal landscape when it comes to many of these equitable and contractual principles which will be applied this novel pandemic.

But going forward, while teams and events deal with balancing business interests with the threat of active (and often times inevitable) litigation, the traditional uses of cash flow may need to be revisited in light of pandemics like this now being reasonably foreseeable. These organizations may be wise to think about retaining more of the revenue taken in advance, almost as self-insurance against the effects of massive industry-wide shut downs and limitations on social gatherings. Further, businesses need to shore up their contract provisions including arbitration provisions, class actions waivers, updated force majeure provisions, limitation of remedies, and other contractual defense provisions.

Meanwhile, from the consumer side, a recognition that certain organizations may not have the ability to provide full refunds while other organizations may be super-incentivized to provide significant future credit, may not only help deal with the emotional frustration of it all, but may also provide opportunities to “negotiate” for extra consideration for future events or at the very least carefully looking at the fine print before selecting “purchase.”

What those future events will look like, and when, is still a subject of great debate and speculation. But as most reasonable people can agree … some entertainment is better than none.

 

[1] The class action activity has not been limited to sports and entertainment either, with suits against many ski mountains, theme parks and gyms that have monthly or annual membership access that has been halted. See Radford v. Town Sports International Holdings, Inc. (S.D. N.Y. 4/9/20) (alleging breach of contract under NY law related to gym memberships despite closures); Ruiz v. Magic Mountain LLC (C.D. Cal. 4/13/20) (alleging violation of California law for closing an amusement park but collecting membership fees despite closures). Look for further information to come on this on the Seyfarth Class Action Defense blog.

[2] See Nesis et al. v. Do Lab, Inc., (C.D. Cal, 4/14/20); see also Bromley et al. v. SXSW LLC et al., (W.D. Tex, 4/27/20).

[3] COVID-19 Update: Force Majeure Under California Law in Business and Commercial Disputes
Coronavirus Pandemic: My Construction Agreement Has a Force Majeure Clause, So Now What?
Managing Project Risk Associated with the Coronavirus Outbreak Through Force Majeure Provisions
Reemergence of Doctrine of Temporary Impracticality or Frustration Under Section 269 of the Restatement of Contracts in the Wake of COVID-19