Seyfarth Synopsis: On June 5, 2019, the Ninth Circuit issued an opinion in NEI Contr. & Eng’g, Inc. v. Hanson Aggregates Pac. Sw., Inc., 2019 U.S. App. LEXIS 16885 (9th Cir. June 5, 2019), upholding the district court’s decertification of a class whose class representative lacked standing on its individual claims.
NEI Contracting and Engineering, Inc. (“NEI”) sought to bring a class action based on allegations that Hanson Aggregates, Inc. (“Hanson”) violated California Civil Code section 632.7 for recording phone calls without the consent of the individuals placing the calls. The district court, after initial certification, decertified the class, observing that the individualized inquiries required to determine if each class member consented to the recording would predominate over questions of fact common to all class members. The court also found that NEI did not have standing to bring its individual claims.
When NEI appealed the class decertification decision, the Ninth Circuit affirmed the lower court, holding that decertification is proper if the class representative did not have standing to bring its individual claims. Moving forward, though certifying a class based on section 632.7 claims poses difficulties, companies still must be wary of violating the statute to avoid significant exposure to costly statutory damages.
California Civil Code Section 632.7
California Civil Code section 632.7 provides for punishment for anyone who, without the consent of all parties, records communications transmitted between cellular phones. Under section 632.7(a), any violation of this section will result in a fine of up to $2,500, imprisonment of up to a year in county jail or state prison, or a combination of the two. Under section 637.2, any person injured by the violation may bring an action for the greater of the following amounts: $5,000 per violation or three times the amount of actual damages plaintiff sustained. This particular California class action has been quite popular with the plaintiffs’ bar over the past decade.
NEI was a longtime customer of Hanson and would place orders for Hanson’s products by calling into a telephone order line. In July 2009, Hanson began using a phone system which included the automated message: “calls may be monitored for quality assurance.” The system did not, however, include a warning that the calls were also being recorded.
During a billing dispute with NEI, Hanson introduced several of the recorded calls that NEI had placed, which resulted in the dispute settling in Hanson’s favor. As a result, in July 2012, NEI initiated this suit against Hanson under California’s Invasion of Privacy Act, alleging that Hanson recorded NEI’s phone calls without NEI’s consent in violation of California Penal Code section 632.7. NEI sought $5,000 in statutory damages for each violation of section 632.7, injunctive relief, and class certification.
In December 2012, Hanson changed the automated message to warn callers that their calls would be recorded. The new message cautioned, “Calls may be monitored or recorded for quality assurance purposes.” Following this, NEI specified the proposed class as: “All persons who called Defendant with a cellular telephone and selected the Aggregate or Ready Mix Dispatch lines through Defendant’s telephone system, whose calls were recorded by Defendant, during the time period beginning July 15, 2009, and continuing through December 23, 2013.”
Initially, the district court denied certification, concluding that the predominance requirement under Federal Rule of Civil Procedure 23 was not met. Rule 23(b)(3) states that a class may be maintained if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members.” Here, the predominance requirement was not met, as there would need to be individualized determinations as to whether each class member had consented to the recording. Despite this, after NEI produced new information regarding the timing of certain recorded conversations, the court granted certification. Ultimately, however, the court decertified the class for failing to meet Rule 23’s commonality and predominance requirements based on evidence that nine customers had actual knowledge of Hanson’s recording practice yet continued to use the service.
Following decertification, a bench trial was set to hear NEI’s individual claim with respect to 44 cell phone calls. However, NEI only pursued its claim as to a single call after the district court granted Hanson’s motion in limine to prevent NEI’s corporate representative from testifying about its employees’ knowledge of the recordings, deeming the testimony inadmissible hearsay. The district court ruled against NEI on its statutory damages claim, and concluded that NEI lacked standing to seek both damages on its individual claim and injunctive relief. The court observed, “NEI has not suffered a concrete or particularized injury by the violation.”
NEI appealed the class decertification order, but did not appeal the standing issue.
The Ninth Circuit’s Opinion
The Ninth Circuit noted that while the appeal’s primary focus was on whether the district court’s predominance analysis constituted an abuse of discretion, the threshold question was “whether a class must be decertified when the class representative is found to lack standing as to its individual claims.” The court answered this question in the affirmative.
The court relied on its own precedent to reach its holding. In Lierboe v. State Farm Mutual Auto Insurance Co., 350 F.3d 1018, 1022 (9th Cir. 2003), the court vacated a class certification order, finding that the named plaintiff had no claim under state law, and therefore lacked standing. Similarly, in Williams v. Boeing Co., 517 F.3d 1120, 1125 (9th Cir. 2008), the court found that the district court did not abuse its discretion in decertifying the class because the class representatives lacked standing.
NEI asserted that it still had standing to appeal the decertification order, relying on two exceptions to the mootness doctrine that would allow it to appeal the decertification decision despite its individual claims having been mooted. First, NEI argued that a class representative can appeal a certification if it retains a “personal stake” in the class certification, despite its own claims being moot. The Ninth Circuit responded that this reasoning would only apply if NEI first had a viable claim that had later become moot. However, because NEI never had standing, it never had a viable claim and therefore could not invoke this exception. Second, NEI argued that it could appeal the certification despite its loss of a personal stake in the litigation because the claim on the merits was “capable of repetition, yet evading review.” The Ninth circuit dismissed this argument, responding that even if a claim was capable of repetition, yet evading review, a plaintiff would not be able to bring the claim if standing was lacking at the outset of the litigation.
Accordingly, the Ninth Circuit held that the district court did not abuse its discretion in decertifying the class, because certification is improper when the class representative lacks standing on its individual claims. Because of this ruling, the court did not reach any of the other issues the parties presented.
While it may be more difficult for classes to gain certification because of the inflexible standing requirement for the class representative and challenges in meeting Rule 23’s predominance requirement, companies still need to be wary of recording communications without the consent of all parties or they could be liable for significant statutory damages under section 632.7. Because of this, companies should include in their non-bypassable automated warnings that calls may be monitored and recorded, as opposed to just monitored, so as to ensure that callers who stay on the line have consented to the recording.