Seyfarth Synopsis: The New York state legislature recently introduced a standalone biometric information privacy bill, AB 27, that mirrors Illinois’ Biometric Information Privacy Act (740 ILCS § 14/1 et seq., “BIPA”), which has spawned thousands of class actions in the Land of Lincoln. If enacted, The New York bill would become only the second biometric privacy act in the United States to provide a private right of action and plaintiffs’ attorneys’ fees for successful litigants. This represents a significant development for companies and employers operating in New York in light of the explosion of class action litigation over workplace privacy issues.

Details Of New York’s Proposed Legislation

What can otherwise be characterized as BIPA 2.0, New York proposed and introduced its own “Biometric Privacy Act” on January 6, 2021. New York’s proposed “Biometric Privacy Act” is a carbon copy of the Illinois BIPA, including identical definitions of both biometric identifiers and biometric information. The proposed law prohibits private entities from capturing, collecting, or storing a person’s biometrics without first implementing a policy and obtaining written consent. Most notably, the proposed bill provides for identical remedies to BIPA, whereas an aggrieved person under the proposed bill will be afforded a private right of action with the ability to recover $1,000 for each negligent violation, $5,000 for each intentional or reckless violation, and reasonable attorneys’ fees and costs.

Implications For Companies

Companies that are already familiar with the Illinois BIPA are undoubtedly aware of the risks that the proposed New York biometric privacy bill poses. While the BIPA was enacted in 2010, Illinois has seen an explosion in class action litigation over the past few years brought by employees and consumers alleging that their biometric data was improperly collected for timekeeping, security, and consumer transactions. In fact, between 2015 and 2020 alone, there were over 1,000 Illinois BIPA class action complaints filed across the United States, with additional new filings continuing to be initiated every day.

It remains to be seen if New York’s biometric privacy bill will pass as drafted. However, if enacted as it is currently drafted, companies in New York can also expect to face an onslaught of biometric privacy litigation. Compliance is key, and there no better time to think about your company’s biometric privacy compliance than right now. Companies with New York operations that are utilizing anything that could be considered biometrics, for any reason, should consider audit their practices, policies, and procedures to avoid potentially costly exposure in the event that the bill ultimately passed. Businesses with compliance questions should contact a member of Seyfarth Shaw’s Biometric Privacy Compliance & Litigation Practice Group.

While this proposed bill is only days old, we will provide immediate updates on its progress when available.

The Telephone Consumer Protection Act (TCPA) generally restricts making certain non-emergency calls to cellular phones and landlines, among other things, without the called party’s consent.  However, the Federal Communications Commission (FCC) has created a number of exemptions on which business have come to rely.  A new FCC Order significantly limits those exemptions.

Background

The TCPA places different restrictions on making calls without the called-party’s consent, depending on the type of telephone line used. For instance, with respect to residential landlines, the TCPA prohibits initiating non-emergency calls “using an artificial or prerecorded voice” but permits calls to residential landlines using an automatic telephone dialing system (ATDS).[1] With respect to cellular telephone numbers, the TCPA prohibits non-emergency calls using an ATDS or an artificial or prerecorded voice.[2]

Through section 8 of the Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (TRACED Act), enacted in 2019, Congress required the FCC to ensure that its TCPA exemptions had parameters regarding “(i) the classes of parties that may make such calls; (ii) the classes of parties that may be called; and (iii) the number of such calls that a calling party may make to a particular called party.”[3] The FCC released a notice initiating this process in October 2020 and solicited comments.[4]

Following the notice and comment period, the FCC issued an Order on December 30, 2020 which places significant limits on the exemptions with respect to residential landlines, as outlined below.  These changes will come into force six months from the date of publication of the Office of Management and Budget’s approval of the rules in the Federal Register.[5]

Changes to Residential Landline Exemptions

  1. Non-commercial, Non-Telemarketing and Tax-Exempt Nonprofit Calls

(a) Before:  A caller, including any tax-exempt, nonprofit organization, could make  (or cause its vendor(s) to make) any amount of prerecorded or artificial voice calls to a residential landline for non-commercial or non-telemarketing purposes (including for political purposes) under this exemption.

(b) After:  A caller, including any tax-exempt, nonprofit organization, may make (or cause its vendor(s) to make) only three (3) prerecorded or artificial voice calls in a consecutive thirty (30) day period to residential landlines for non-commercial or non-telemarketing purposes.[6]

Further, an opt-out mechanism is now required for those calls, meaning that the caller must provide a phone number which takes opt-out requests or a key-press tool that can be prompted during prerecorded or artificial calls.[7]

  1. Healthcare / HIPAA Calls

(a) Before: A caller could make (or cause its vendor(s) to make) any amount of   HIPAA-related calls delivering a healthcare message to residential landlines under this exemption.

(b) After: A caller may make (or cause its vendor(s) to make) only one (1) HIPAA-related call conveying a healthcare message per day, up to a maximum of three (3) artificial or prerecorded voice calls per week under this exemption.[8]

Further, the same type of opt-out mechanism described above is required.[9]

No Changes to Wireless Number Exemptions

As our readers may be aware, the FCC has carved-out exemptions for package delivery calls, financial institution calls, healthcare provider calls, and inmate-calling service calls made to wireless numbers using an ATDS or artificial / prerecorded voice.  These exemptions stand.

The FCC determined that “no further restrictions [were] necessary” to harmonize these exemptions with the TRACED Act.[10] As to calls made by financial institutions, for example, the FCC found existing conditions on the exemption sufficient, as the exemption only applies to calls made by financial institutions to their customers and is limited to no more than “three calls per event over a three-day period for each affected account.”[11]

Takeaway

These new restrictions have significant implications for businesses in a wide-variety of industries, from tax-exempt nonprofits to political organizations to healthcare companies, as well as vendors making calls on their behalf.  Although these new restrictions are not enforceable for six months, businesses should begin to think seriously about compliance now, particularly if they engage multiple outside vendors as part of their communications strategy. The reason for this is that the new limitations apply per “calling party” (i.e. caller) and “called party” (i.e. per person), meaning that a caller cannot call the same person (or cause the same person to be called) more than 3 times in 30 days or, in the case of HIPAA-related calls, more than 3 times per week.  In other words, a business will likely run afoul of the limits if it has multiple agents who collectively call a person in excess of these limits.  Accordingly, the best practice for businesses and their vendors is to make sure that they have sufficient internal and external controls to stay within the new limits.

As always, please reach out to use if you have any question regarding compliance with these new rules.

[1] 47 U.S.C. § 227(b)(1)(B).

[2] Id. § 227(b)(1)(A)(iii).

[3] Id. § 227(b)(2)(I).

[4] Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, CG Docket No. 02-278, Report & Order, FCC 20-186 (2020), ¶ 8.

[5] Id. ¶ 42.

[6] Id. ¶¶ 15, 28, 33.

[7] Id. ¶¶ 21, 23, 28, 29, 33, 34 & n. 77.

[8] Id. ¶ 38.

[9] Id. ¶ 40.

[10] Id. ¶ 43.

[11] Id. ¶ 45.

The United States Supreme Court has again granted a petition to examine standing in the context of class actions, specifically whether Article III of the Constitution permits members of a certified class to recover money damages when members of the certified class suffered no actual injury. This issue was presented to the Supreme Court after the Ninth Circuit issued an opinion and order in Ramirez v. TransUnion LLC, 951 F.3d 1008 (9th Cir. 2020), finding absent class members in a class action brought under the Fair Credit Reporting Act (“FCRA”) had Article III standing where it was undisputed that, in the case of the majority of the certified class members, allegedly inaccurate credit information was not disclosed to any third party. The Supreme Court’s consideration of the issues presented in Ramirez will allow the Court to provide more defined boundaries on what type of “intangible” harm suffered by absent class members can constitute a “concrete” injury sufficient to confer Article III standing, an issue largely left open after the Supreme Court’s prior landmark decision in Spokeo, Inc. v. Robins, No. 13-1339 (U.S. 2016).

I. Case Background.

The Ramirez case arose when the named plaintiff, Sergio Ramirez, brought a putative class action against a consumer reporting agency (“CRA”) alleging violations under the FCRA. The credit files of Ramirez and other class members included an alert indicating that they potentially matched the name of a person on the United States government’s list of Specially Designated Nationals (“SDN”), which if true, would prohibit companies from doing business with those individuals. Ramirez alleged that he suffered difficulty in obtaining credit and embarrassment in front of family members when an automobile dealer received a credit report allegedly indicating that it could not do business with Ramirez. Ramirez testified that he was embarrassed, shocked, and scared when he learned of this alert and his potential inclusion on the SDN List. Ramirez requested a copy of his credit report, which once received did not indicate that he was on the SDN List. However, the next day, Ramirez received a separate letter from the CRA (the “OFAC Letter”) making him aware that he was considered a potential match on the SDN List. The OFAC Letter was not accompanied by a summary of rights form.

As a result, Ramirez ultimately initiated a class action alleging three violations of the FCRA, seeking to represent a class that included “all natural persons in the United States and its Territories to whom [the CRA] sent a letter similar in form to the [OFAC Letter] [that the CRA] sent to [Ramirez] … from January 1, 2011-July 26, 2011.” In other words, everyone in the class: (1) was labeled by the CRA as a potential SDN List match; (2) requested a copy of his or her credit file from the CRA; and (3) in response, received a mailing with the SDN List alert redacted and a separate OFAC Letter mailing with no summary of rights form.

The district court rejected the CRA’s arguments that the injury suffered by Ramirez was atypical to that of the class, and certified a class action under Rule 23 of the Federal Rules of Civil Procedure. Notably, the parties stipulated that this class included 8,185 consumers, and that, out of those 8,185 consumers, only 1,853 consumers actually had their credit reports requested by a potential credit grantor during the relevant class period, meaning that the CRA did not furnish credit reports to third parties during the class period for the remaining 6,332 class members. The case went to trial, and the jury heard primarily about the experiences and injury suffered by Ramirez, and awarded every member of the 8,185-member class near the maximum in statutory damages and thousands more in punitive damages, for a total award of over $60 million. Ramirez did not provide evidence that any other class member actually read the OFAC Letter from the CRA or was even aware that such a letter had been sent, and did not prove that any other class member ever suffered injury (or even embarrassment) on account of the claimed deficiencies in how the CRA provided the “potential match” information.

II. Ninth Circuit Analysis.

The CRA appealed the jury verdict to the Ninth Circuit, arguing (1) the verdict could not stand because none of the class members other than Ramirez had standing under Article III of the U.S. Constitution; (2) the class should not have been certified because Ramirez’s claims were not typical of the class’s claims; and (3) additional arguments regarding the statutory and punitive damage awards.

In a 2-1 decision, the Ninth Circuit affirmed the lower court’s rulings regarding Article III and Federal Rule of Civil Procedure 23, and also reduced the punitive damages award. The Ninth Circuit first considered the challenge to the absent class members’ Article III standing. The Ninth Circuit first held that when a class is certified for money damages, each individual class member must establish standing at the final (damages) phase of the litigation. However, the Ninth Circuit went on to conclude that each absent class member had suffered an injury sufficient to satisfy Article III where the CRA had allegedly incorrectly placed SDN List alerts on the front page of consumers’ credit files and later sent the consumers “confusing and incomplete disclosures” in the form of the OFAC Letters about the alerts and how to remove them. The Ninth Circuit determined that the CRA’s alleged violation of the consumers’ notification rights under the FCRA, by itself, constituted a concrete injury even if a class members credit file had not been disclosed to a third party.

In doing so, the Ninth Circuit interpreted the U.S. Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins, No. 13-1339 (U.S. 2016) (“Spokeo II”) and applied a “risk-of-harm” theory in analyzing whether absent class members suffered concrete harm sufficient to confer Article III standing even if their credit reports were not furnished to third parties. The Ninth Circuit relied upon language in Spokeo II that states that concrete harm sufficient to confer Article III standing can be intangible, and there is sufficient injury in fact when a defendant’s statutory violation creates a “risk of real harm” to a plaintiff’s concrete interest. The Ninth Circuit reasoned that the fact that the CRA would have provided a class member’s report to numerous potential creditors and employers if they had requested it was sufficient to show a material risk of harm to the concrete interests of all class members.

The Ninth Circuit also rejected the CRA’s challenge under Federal Rule of Civil Procedure 23 that, even if the absent class members had Article III standing, they could not be properly represented by an atypical named plaintiff who suffered far greater and different injuries. The Ninth Circuit reasoned that all class members’ claims arose from the same event or practice and were based upon the same legal theory.

Judge M. Margaret McKeown penned a dissent concluding that only the 1,853 consumers whose credit reports were requested by a potential credit grantor had Article III standing to assert a claim. Judge McKeown argued that the majority’s conclusion that every class member suffered Article III injury-in-fact simply because the CRA’s credit files contained allegedly inaccurate information about them could not be reconciled with prior Supreme Court precedent such as Spokeo II. She also pointed to several decisions from other U.S. Courts of Appeals that found no Article III standing where there was a mere existence of inaccurate information in a credit file without dissemination to any third party. Judge McKeown observed that Congress’s main concern in enacting the FCRA was the “dissemination of inaccurate information, not its mere existence in the . . . database.” See, e.g., Owner-Operator Independent Drivers Ass’n, Inc., et al., v. United States Department of Transportation et al., 879 F.3d 339, 345 (D.C. Cir. 2018).

III. U.S. Supreme Court Grants Petition, Possible Repercussions.

The U.S. Supreme Court granted the CRA’s petition for certiorari in order to review whether either Article III of the Constitution or Federal Rule of Civil Procedure 23 permits class members to recover money damages when members of the certified class suffered no actual injury, let alone an injury similar to what the class representative suffered.

The Supreme Court has long held that Article III standing requires a plaintiff to establish that she suffered an “injury in fact” that is “concrete and particularized” and “actual or imminent.” See, e.g., Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992). Spokeo II explains that mere statutory violations on their own are insufficient to confer Article III standing absent sufficient concrete injury. Spokeo II, 136 S. Ct. at 1547–49. Importantly, the Court in Spokeo II explicitly recognized that a violation of one of the FCRA’s procedural requirements may result in no harm, while also instructing that an alleged procedural violation can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents a risk of real harm to that concrete interest. Id. at 1550.

The Supreme Court’s decision will resolve an apparent Circuit split created by the decision in Ramirez, and recognized by the dissent. The D.C. Circuit and other circuits have held that individuals who never had their information disseminated to third parties cannot claim Article III injury in an FCRA claim based on the bare fact that inaccurate information sat inchoate in a database. See, e.g., Owner-Operator Indep. Drivers Ass’n, Inc. v. U.S. Dep’t of Transp., 879 F.3d 339 (D.C. Cir. 2018). Nor do other circuits allow individuals to claim injury in-fact merely because they were sent a purportedly incomplete disclosure that they may not have read, let alone found confusing. See, e.g., Flecha v. Medicredit, Inc., 946 F.3d 762, 768 (5th Cir. 2020).

The Supreme Court’s ruling is sure to affect future class action litigation and issues of standing, especially for claims under the FCRA.  Will we have another Spokeo II on our hands, raising the bar further on Article III standing for absent class members?  Will the reasoning of the Ninth Circuit majority’s position or Judge McKeown’s dissent win the day?  We’ll be sure to let you know.

 

Greg Markel and Gina Ferrari wrote “Settling Securities Class Actions,” the cover article for the December issue of Practical Law magazine. You can view the article here.

We hope you find this article helpful and insightful.

In this article, Greg and Gina discuss the various tactical and strategic questions and concerns that can affect the success of reaching a good settlement in a securities class action case. The article includes details that are important to the foundation of understanding and evaluating settlement options from the outset of a case throughout achieving a settlement.

Seyfarth attorneys Renée Appel, Tracee Davis, Tonya Esposito, Joe Orzano, Jeremy Schachter, John Tomaszewski, and  Ken Wilton will present at the Association of National Advertisers’ Brand Activation Legal Committee meeting on December 17, 2020.

The team will present on the following topics:

  1. Updates in false advertising litigation, including, consumer class actions, Lanham Act litigation, and cases at the National Advertising Division
  2. Updates to the regulatory landscape, including the latest from the FTC and State AGs
  3. Updates in the world of Privacy, including the latest out of California

On September 11, 2020, the California Court of Appeal issued a decision with two crucial holdings limiting the scope of California’s Automatic Renewal Law (ARL), Business and Professions Code sections 17600, et seq.

In Mayron v. Google LLC, No. H044592, 2020 WL 5494245 (Cal. Ct. App. Sept. 11, 2020), one of the first cases to put the State’s infamous ARL to the test, the Court of Appeal clarified that:

(1) there is no private right of action for a violation of the ARL’s provisions, and

(2) a plaintiff seeking to use an alleged ARL violation as the basis for a claim under the Unfair Competition Law (UCL), Business and Professions Code sections 17200, et seq. is subject to the requirements for standing under the UCL.

More specifically, a plaintiff seeking to repackage an alleged ARL violation under the “unlawful” prong of the UCL must allege an economic injury sufficient to establish standing.

The Lawsuit

Eric Mayron filed his action in Santa Clara Superior Court, seeking to assert claims against Google LLC for violations of the ARL and unfair competition on behalf of a putative class. Mayron alleged that Google failed to provide “clear and conspicuous disclosures,” obtain his affirmative consent to recurring charges, or adequately explain how to cancel with respect to the subscription data plan available through Google Drive (which provides up to 15 GB of data for free and charges $1.99 per month for additional storage up to 100 GB). According to Mayron, each of these alleged failures constitutes a violation of the ARL.

The trial court sustained Google’s demurrer without leave to amend, dismissing Mayron’s ARL claims on the ground that the statute does not create a private right of action, and dismissing the UCL claims for lack of standing, as Mayron had failed to sufficiently allege an “injury.”

On appeal, the Court reviewed and affirmed both of the foregoing determinations.

The ARL Does Not Create A Private Right Of Action

The ARL was enacted in 2009 to “end the practice of ongoing charging of consumer credit or debit cards . . . without the consumers’ explicit consent for ongoing shipments of a product or ongoing deliveries of service.” In furtherance of this purpose, the ARL imposes notice and consent requirements on companies that utilize a subscription model or recurring charges for their business, and provides remedies for violations of these requirements. The ARL does not, however, arm plaintiffs with an independent cause of action to tack onto any lawsuit.

The Court rejected Mayron’s argument that the Legislature intended to create a private right of action by providing for remedies in Section 17604; although such a provision does imply an action to recover the remedies provided for, an intent by the Legislature to create a private right of action must be “clear, understandable, [and] unmistakable,” not merely implied by or consistent with the text of the statute in question. See Lu v. Hawaiian Gardens Casino, Inc., 50 Cal. 4th 592, 596 (2010).

By providing for remedies but declining to explicitly create a right of action, the Legislature meant to require plaintiffs to use existing means, e.g., the UCL, to seek relief. The Court found support for this conclusion in other statutes, where the Legislature had clearly and unmistakably created a right of action. See, e.g., Cal. Lab. Code § 218; Cal. Bus. & Prof. Code § 17070, Cal. Civ. Code § 1748.7. The Court also took judicial notice of the ARL’s legislative history, and observed that the bill’s author had suggested enforcement through the UCL. See also Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1143 (2003) (“Section 17200 ‘borrows’ violations from other laws by making them independently actionable as unfair competitive practices.”).

For a more detailed overview of the ARL’s provisions, click here.

“Standing to sue for unfair competition requires actual injury and causation”

Citing Section 17204, the Court reiterated that the UCL provisions contain an express standing requirement; an action may be brought only “by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” See Hall v. Time, Inc., 158 Cal. App. 4th 847, 849 (2008) (“We hold the phrase ‘as a result of’ in the [UCL] imposes a causation requirement; that is, the alleged unfair competition must have caused the plaintiff to lose money or property.”) (Emphasis added).

The Court then walked through a roadmap for future plaintiffs to meet the UCL threshold. For example, Mayron needed to allege that he had ordered increased Google Drive storage (subscribing to the plan) but would not have done so if proper disclosures had been provided, or that he would have cancelled the subscription had it been clearly explained or easier to do so. Without such allegations there was no “causal link” between any payments by Mayron and the alleged violations by Google, even assuming the violations had, in fact, occurred.

“[T]he unconditional gift provision . . . does not confer standing for a section 17200 cause of action”

Mayron then argued that because Google had violated its obligations under the ARL, the storage he received was a “gift” under Section 17603, meaning he had paid for something he didn’t need to and therefore “lost money” due to the violation. While a handful of federal courts appear to have been persuaded by this reasoning, the Court was quick to dismiss it, following simple chronology instead. The right to retain a product (treatment as an unconditional gift) is a consequence of violating the statute, i.e., follows the violation in time, and therefore cannot be a loss caused by the violation. Furthermore, as pointed out by the Court, an “injury” for purposes of Article III standing is much broader than the economic loss required for standing under the UCL. Compare Kwikset Corp. v. Super. Ct., 51 Cal. 4th 310, 317 (2011) with Johnson v. Pluralsight, LLC, 728 F. App’x 674, 676-77 (9th Cir. 2018). The inquiry for UCL standing must relate a plaintiff’s purchase to the defendant’s conduct.

Takeaways

In a previous article, we outlined the possibilities for plaintiffs seeking to exploit California’s numerous consumer protection statutes as fodder for class litigation, especially in the wake of COVID-19. Although the Mayron Court has reaffirmed critical limitations on the use of the ARL for this purpose, membership- and subscription-based businesses must remain vigilant to ensure compliance measures are in place and effective.

In addition, Mayron raises serious questions concerning the scope of the ARL’s provisions, such as the gift provision. See Cal. Bus. & Prof. Code § 17603. The Court declined to reach the issue of whether the ARL’s “gift” provision applies to intangible goods or mixed goods/services like the data storage plan offered by Google, but this is likely to be another issue at the forefront of future ARL cases.

*Link to case: https://www.courts.ca.gov/opinions/documents/H044592.PDF

It is not atypical for class actions to be brought seeking damages that can be characterized as nominal in nature. An oftentimes powerful incentive for potential class representatives to put their names on a putative class action is the promise of an incentive payment or award, paid to the class representative out of a class settlement fund purportedly to compensate the named plaintiff for work done on behalf of a class and assumption of those risks that come along with naming yourself in a lawsuit. However, the Eleventh Circuit Court of Appeals in Johnson v. NPAS Sols., LLC, No. 18-12344 (11th Cir. Sept. 17, 2020) has effectively nixed this practice, applying Supreme Court precedent from the 1880s to reverse what has become a routine practice in the class action settlement context, as well as increasing the scrutiny applied to attorneys’ fees awards.

This case arose when class representative Charles Johnson (“Johnson”) brought suit against NPAS Solutions, LLC (“NPAS”) on behalf of both himself and a putative class alleging violations of the Telephone Consumer Protection Act (the “TCPA”) in a federal district court in Florida. Less than eight months after the suit was filed, the parties reached a $1,432,000 million settlement, which the district court preliminarily approved, certifying the class for settlement purposes, appointing Johnson as the class representative, appointing Johnson’s lawyers as class counsel, and stating that Johnson could “petition the Court to receive an amount not to exceed $6,000 as acknowledgment of his role in prosecuting this case on behalf of the class members.”

Only one class member, Jenna Dickenson (“Dickenson”) objected to the settlement, objecting to the amount of the settlement, the method of calculating attorneys’ fees, and contended that Johnson’s $6,000 incentive award both contravened the Supreme Court’s decisions in Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885), and created a conflict of interest between Johnson and other class members. The district court overruled Dickenson’s objections after holding a hearing on the matter, but did not provide a detailed explanation as to its reasoning in overruling those objections, and approved the settlement. Dickenson appealed the ruling to the Eleventh Circuit.

The Eleventh Circuit found three errors with the district court’s ruling. First, it found error in the timing of deadlines set by the trial court, as it required class members to file a settlement objection prior to the deadline for class counsel to file their fee petition. Second, it found the court’s boilerplate pronouncements on class members’ objections insufficient to explain its class-related decisions under the federal rules. Third, and most notably, the Eleventh Circuit disagreed with the district court’s decision to  award the class representative a $6,000 incentive payment as “acknowledgment of his role in prosecuting th[e] case on behalf of the [c]lass [m]embers.”

Regarding the incentive payments, the Eleventh Circuit agreed with Dickenson that Supreme Court precedent in Greenough and Pettus in fact prohibits incentive awards like the one earmarked for Johnson. The Court explained that Greenough and Pettus established the rule that attorneys’ fees can be paid from a “common fund,” but also established limits on the types of awards that attorneys and litigants may recover from the fund. Specifically, the Eleventh Circuit recognized that in Greenbough, the Supreme Court upheld the class representative’s award of attorneys’ fees and litigation expenses but rejected as without legal basis the award for his “personal services and private expenses”—in particular, the yearly salary and reimbursement for the money he spent during the case. Similarly, in Pettus, the Supreme Court explained that a class representative’s claim for “the expenses incurred in carrying on the suit and reclaiming the property subject to the trust” was proper, while his “claim to be compensated, out of the fund or property recovered, for his personal services and private expenses” was “unsupported by reason or authority.”

The Eleventh Circuit applied these holdings in Greenbough and Pettus to hold that “[a] plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses,” and stated that the incentive award is analogous to a salary. The Eleventh Circuit observed that such incentive awards “are intended not only to compensate class representatives for their time (i.e., as a salary), but also to promote litigation by providing a prize to be won (i.e., as a bounty),” and as such, were improper for this additional reason. In so holding, the Eleventh Circuit recognized that “[t]he class-action settlement that underlies this appeal is just like so many others that have come before it. And in a way, that’s exactly the problem.” Unsurprisingly, Johnson argued that such incentive payments are routine, but the Court rejected such argument, stating that “familiarity breeds inattention, and it falls to us to correct the errors in the case before us.”

This is not the first time incentive awards have garnered scrutiny by the courts. Certain other federal appeals court have cast doubt upon the availability of incentive awards for lead plaintiff when that incentive is provided prior to settlement on the grounds that it  may create adequacy issues where the named plaintiff’s interests are no longer aligned with the class directly, or where incentive agreements created a conflict of interest between class counsel and the class representatives who entered into the agreements, on one hand, and the remaining members of the class, on the other hand.  See, e.g.,  Espenscheid, et al. v. DirectSat, LLC et al., Case No. 12-1943 (7th Cir., August 6, 2012); Rodriguez v. Disner, 688 F.3d 645, 656 (9th Cir. 2012). However, these same courts recognized their acceptance of incentive awards paid to named plaintiffs in the settlement context, recognizing that  “a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant’s costs or even, if the suit is held to have been frivolous, for the defendant’s attorneys’ fees . . . as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do.” Espenscheid, Case No. 12-1943 (7th Cir., August 6, 2012).

However, now that the Eleventh Circuit has resurfaced the decisions from Greenbough and Pettus, it is all but certain that the class action defense bar will seek to advance these arguments accepted in Johnson in other federal courts, as taking away incentive payments for named class representatives offers an effective tool to stem the proliferation of class actions.

When a class action settlement is proposed for approval, the class members have three options, (1) they can remain in the settlement class, (2) opt-out of the settlement to preserve their individual claims, or (3) they can object to the settlement if they believe it to be in some way unfair or inequitable. The latter option has been abused in the recent past, seeing class members filing frivolous objections to a class settlement, appealing decisions approving those settlements over their objections, and then soliciting the payment of individual settlements for dismissal of the appeal. This phenomenon, coined as “objector blackmail,” has possibly been brought to an end in the Seventh Circuit after the appellate court issued its ruling in Pearson v. Target Corp., No. 19-3095 on  Aug. 6, 2020.

In Pearson, consumers brought a class action against the sellers of a dietary supplement for violations of consumer protection laws based on alleged false claims about the supplement’s efficacy.  Three class members objected to a proposed class settlement submitted to the district court for approval. The district court, however, approved the settlement over their objections pursuant to Federal Rule of Civil Procedure 23. The objectors, however, appealed the denial of their objections to the class action settlement and then dismissed their appeals prior to any briefing in exchange for side settlement payments. Following dismissal of their appeals, a fellow class member sought to reopen the case in the district court by filing a motion for disgorgement of any payments made to the objectors in exchange for dismissing their appeal. After obtaining discovery, the record demonstrated that the three objectors had in fact received side payments in exchange for dismissal of their appeals while the class had received nothing. However, the district court did not provide the relief requested because there was no basis to conclude that the side settlements harmed the class by taking money that had been earmarked for it.

This ruling was thereafter appealed, and the Seventh Circuit considered whether a district court has the equitable power to order settling objectors to disgorge the proceeds of their private settlements for the benefit of the class. The Seventh Circuit reversed the district court’s ruling. The Court explained that the objectors had a duty to object only in “good faith, and imposed a limited representative or fiduciary duty on a class-based objector who, by appealing the denial of his objection on behalf of the class, temporarily takes “control of the common rights of all” the class members and thereby assumes “a duty fairly to represent those common rights.”

The Court stated:

These objectors made sweeping claims of general defects in the [settlement]. Either those objections had enough merit to stand a genuine chance of improving the entire class’s recovery, or they did not. If they did, the objectors sold off that genuine chance, which was the property of the entire class, for their own, strictly private, advantage. If they did not, the objectors’ settlements of meritless claims traded only on the strength of the underlying litigation, also the property of the entire class, to leverage defendants’ and class counsel’s desire to bring it to a close. Either way, the money the objectors received in excess of their interests as class members “was not paid for anything they owned,” and thus belongs in equity to the class.

Thus, the Court determined that disgorgement was the most appropriate remedy to right the objectors’ inequitable conduct.

This ruling is important when defending class cases because prior to the Court’s ruling in Pearson, a class member could file frivolous objections to a class action settlement, appeal the court orders overruling those objections in the hope of “extorting” or “blackmailing” class counsel to obtain side settlements to resolve the appeals, and dismiss the appeal prior to any briefing or ruling. The Seventh Circuit’s ruling in Pearson, however, provides the framework to reverse these settlements and disincentive this practice of “objector blackmail” moving forward.  As a result of this ruling, it will be less likely these serial objectors will be able to interfere with class settlements and extort money from defendant or run up the litigation costs associated with having to defend against a meritless appeal of a diligently negotiated settlement.

Seyfarth Synopsis: In the first ruling in response to the slew of room and board refund class actions filed in the wake of COVID-19, on July 29, 2020, in Rosenkrantz v. Arizona Board of Regents, No. 2:20-CV-01203 (D. Ariz.), Judge John Tuchi of the U.S. District Court for the District of Arizona granted the Universities’ Rule 12(b)(6) motion to dismiss for failure to state a claim. Judge Tuchi held that Plaintiffs failed to comply with an Arizona statute that required them to file a notice of claim with a public entity prior to filing suit. The Court’s ruling may prove useful for other colleges and universities sued in states with similar prerequisites. Because the ruling depends on a state-specific technicality, however, it is unlikely to quell the tide of similar class actions filed across the country.

Factual Background

Plaintiffs, parents of students enrolled at one of three public universities – the University of Arizona, Arizona State University, and Northern Arizona (the “Universities”) – during Spring 2020, filed a putative class action on behalf of all persons who paid the cost of room and board or fees for the Spring 2020 semester at the Universities. Id. at 2.

Plaintiffs claimed that, in response to the COVID-19 pandemic, the Universities forced students to move out of on-campus housing, moved all classes online, cancelled campus events, and ceased providing various services. Plaintiffs asserted that, despite these actions, the Universities failed to return or refund the cost of room and board or the fees for services. Id. at 1-2.

Plaintiffs alleged claims for breach of contract, unjust enrichment, and conversion seeking the return of pro-rated, unused funds, a declaration that the Universities wrongfully kept the monies paid for room and board and fees, and injunctive relief enjoining the Universities from retaining the pro-rated, unused portion of monies paid. Id. at 2.

The Universities moved to dismiss on the grounds that Plaintiffs failed to file a pre-suit notice of claim as required by A.R.S. 12-821.01(A). The Court granted the motion.

The Court’s Opinion

At the outset, the Court recognized that Arizona law requires a plaintiff to file a notice of claim with a public entity before suing it for damages. In the notice of claim, the claimant must set forth “facts sufficient to permit the public entity . . . to understand the basis on which liability is claimed” and “a specific amount for which the claim can be settled and the facts supporting that amount.” Id. at 3.

The Court noted that, because the statute functions to allow public entities to investigate and assess liability and to “assist in financial planning and budgeting,” which are fiscal considerations, the statute applies only to claims for money damages and does not apply when declaratory or injunctive relief is the “primary purpose of the litigation.” Id. A plaintiff, however, cannot circumvent the notice requirement by maintaining claims for monetary damages “under the guise of seeking declaratory relief.” Id.

Here, although Plaintiffs sought “disgorgement” of the pro-rated unused monies already paid, a “declaration” that the Universities are unlawfully withholding the funds, and an “injunction” enjoining the Universities from retaining them, the Court held that an equitable remedy is inappropriate where, as here, “an adequate legal remedy exists in the form of money damages.” Id. at 4. The Court concluded that all six of Plaintiffs’ claims, regardless of the label that Plaintiffs used, directly involved government funds and, therefore, were subject to the notice of claim requirement. Id. at 5.

The Court concluded that, although Plaintiffs alleged that they demanded the return of money through multiple channels, they did not allege that they had filed a notice of claim. The Court, therefore, found their action barred. Id. at 6-7.

Implications

Members of the plaintiffs’ class action bar have filed nearly 200 lawsuits seeking corona-virus related refunds to date, many against colleges and universities for failing to refund tuition, room and board, or other fees. Although Defendants scored the first win, in the form of a dismissal of one of the largest reimbursement class actions filed to date, the ruling’s usefulness may be limited for defense purposes. The Court relied upon a state-specific prerequisite to suit and did not reject the claims on their merits. Thus, it remains to be seen whether the Universities’ strategy of invoking the notice requirement at the motion to dismiss stage will impact the ultimate outcome of similar claims asserted on behalf of these or other putative class members. As a result, it is unlikely that this bellwether ruling will slow the fervor with which the plaintiffs’ class action bar continues to pursue similar cases.

Don’t Forget About the TCPA and the CAN-SPAM Act When Designing Your Marketing Communications Strategy

Seyfarth attorneys Jordan Vick, Robert Milligan, and Bart Lazar provided a back-to-basics primer on TCPA and CAN-SPAM rules and penalties regarding text, calls, and emails, plus helpful best practices with respect to using third-party vendors and externally sourced marketing lists.

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

  • The TCPA’s cell phone ban is here to stay given the Supreme Court’s decision to sever the problematic government debt exemption, rather than to invalidate the entire statute on First Amendment grounds.
  • Companies hungry for sales that interact with customers and prospective customers for business through text messages and faxes should obtain express written consent and provide appropriate opt out notices.
  • We can expect the Supreme Court to resolve the circuit split and provide definitive guidance on what constitutes an automatic telephone dialing system (aka autodialer) next year, as the Court has granted a petition for certiorari on that issue.
  • Recent FCC orders have emphasized that the key for determining whether mass text messaging platforms are automatic telephone dialing systems is whether human intervention is needed, not the volume of messages sent, which will be helpful for campaigns to interact with potential voters as election season heats up.
  • The FCC has not provided a free pass with respect to health care communications and communications regarding COVID, so those in the health care industry should continue to seek consent whenever possible and, when making COVID-related communications under the emergency purposes exemption, make sure the content is purely informational, not about billing or marketing.
  • It is important that communications with customers and potential customers be sent correctly to the right people to protect the company’s goodwill and comply with applicable law like the TCPA and CAN-SPAM.
  • Make sure that your company understands how it manages and processes personal data, particularly whether and how it obtains consents/opt-ins and how it  processes opt outs.
  • Companies are liable for both money and, in the court of consumer opinion, the actions of its service providers. Make sure they are reliant and compliant

View the recording and download the presentation materials on the Seyfarth website.