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.
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.
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.
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.
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).
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.