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

 

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

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.

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.