Executive Summary and Takeaway. User agreements for websites and apps have become increasingly prevalent in recent years, and courts have had to adapt traditional rules of contract interpretation to the new digital frontier. On June 25, 2018, the First Circuit reversed a district court decision enforcing an arbitration clause contained in the terms of service for the defendant’s smartphone app, finding that those terms were not sufficiently “conspicuous” for a user to know that he or she had agreed to be bound by them. The First Circuit’s decision continues a trend of judicial hostility to arbitration clauses, and is notable for its scrutiny of the record below: the court studied in minute detail the design and content of the registration screen containing a hyperlink to the terms of service—including the size, shape, color, font, and location of the hyperlink—and concluded that the link to the terms of service failed “to grab the user’s attention.” Businesses with similar user agreements governed by Massachusetts law or that could potentially apply to Massachusetts consumers should review their websites and/or apps to ensure that their platforms disclose any terms of use in a clear and conspicuous manner in relation to the rest of the content on the screen.

Additional Background. To use the services provided by the defendant company (the “Company”) via its smartphone app, a customer must first register with the Company by creating an account. As part of the registration process, users are shown a screen that requests their payment information and notifies them that by creating an account they are agreeing to the Company’s Terms of Service and its Privacy Policy:

The words “Terms of Service & Privacy Policy” are in a clickable box that includes a hyperlink. Upon clicking on that hyperlink, the user is directed to a screen with two other links: one to the Terms of Service, and the other to the Privacy Policy. The user can view either document by clicking on the appropriate link.

Continue Reading First Circuit Invalidates Arbitration Clause in Mobil App User Agreement

On March 16, 2018, the D.C Circuit issued a decision invalidating portions of the FCC’s 2015 TCPA Omnibus Declaratory Ruling and Order. Notably, the decision overturns as “arbitrary and capricious” the FCC’s definition of an automated telephone dialing system (“ATDS”) and the one-call safe harbor for calling a phone number that has been reassigned to a non-consenting person. The decision was not a complete victory for businesses as the D.C. Circuit sustained the FCC’s order on both consumers’ ability to revoke consent and the scope of the “time-sensitive healthcare call” exemption.

The FCC’s Definition of ATDS is Arbitrary and Capricious

In the 2015 Order, the FCC defined an ATDS as equipment that contained the potential “capacity” to dial random or sequential numbers, even if that capacity could be added only through specific modifications or software updates, so long as the modifications were not too theoretical or too attenuated. In crafting this definition, the FCC noted that smartphones could be included within the definition and only categorically ruled out a rotary-dial telephones.

In striking down the 2015 Order, the court made it clear that under the current definition of an ATDS, anyone with a smartphone, which the court estimates to be 80% of the population, is at risk of violating the TCPA because “all smartphones, under the Commission’s approach, meet the statutory definition of an autodialer.” Under the FCC’s interpretation, if a person sent a group text message to ten acquaintances without obtaining their express consent, he or she would be liable for ten distinct violations of the TCPA, with a minimum damage recovery of $5,000. In sum, the court held that “[i]t cannot be the case that every uninvited communication from a smartphone infringes federal law, and that nearly every American is a TCPA-violator-in-waiting, if not a violator-in-fact.” The D.C. Circuit held that, if the 2015 Ruling does not encompass smartphones, then the FCC failed to “articulate a comprehensible standard.”

In striking down the FCC’s sweeping definition of an ATDS, the court ordered the FCC going forward to take into account whether a system actually used autodialer functionality or whether it was merely possible to download software to convert a telephone into an ATDS. Additionally, the court held that the FCC must determine whether the definition of an ATDS requires that a system “must itself have the ability to generate random or sequential telephone numbers,” or whether it is “enough if the device can call from a database of telephone numbers generated elsewhere.” Finally, the court left open the issue of human intervention. Based on the decision, if the FCC departs from the statutory requirement of using a random or sequential number generator, it must also tackle the issue of human intervention.

In light of Chairman Ajit Pai’s expression of support for business-friendly reforms to the TCPA, it is likely that the D.C. Circuit’s ruling may result in real change in this area of the law.

The FCC’s One-Call Safe Harbor and Definition of “Called Party” are Arbitrary and Capricious

The court then turned its attention to the distinct challenges raised by the reassignment of cell phone numbers. Under the 2015 Order, a caller could place only a single call to a reassigned number before running afoul of the TCPA. Per the 2015 Order, a “called party” was the current subscriber, i.e. the consumer assigned the number and billed for the call.

The D.C. Circuit rejected both the one-call safe harbor for calling reassigned numbers and the definition of “called party.” The court held that issues related to calls or texts to reassigned numbers where the prior owners had provided consent to be contacted, present a looming challenge because “there is no dispute that millions of wireless numbers are reassigned each year.”

The court set aside the FCC’s post-reassignment interpretation on the ground that a one-call safe harbor is “arbitrary and capricious.” In reaching this result, the court focused on the FCC’s own determination that callers must be able to reasonably rely on the consent provided by former subscribers when calling or texting. Based on the record before it, the court held that it was not reasonable to hold that placing a single call to a reassigned number was likely to afford a caller reasonable notice that the number was one of the millions of numbers reassigned each year. By striking down the one-call safe harbor and the definition of “called party,” the court provided defendants with a potential defense to avoid liability for calling reassigned numbers if a defendant can establish that its reliance on the former subscriber’s consent was reasonable at the time it placed calls to the new subscriber.

Critically, in addition to striking down the one-call safe harbor, the court set aside the definition of “called party” as the “current subscriber” on the grounds that it would impose strict liability for calls to reassigned numbers. Thus, it appears that defendants may once again argue that “called party” means “intended recipient” when defending against TCPA claims based on calls or texts to reassigned numbers.

Consumers May Still Revoke Consent in Any “Reasonable” Manner

In upholding consumers’ right to revocation of consent, the court set limits. As an initial matter, a consumer may only revoke consent using “reasonable” means. The reasonableness of the revocation is governed by a totality-of-the-circumstances test. Thus, if a consumer uses creative revocation techniques or declines to follow reasonable revocation procedures set forth by the caller, the revocation may not be reasonable or permissible. Moreover, the D.C. Circuit emphasized that the FCC’s ruling “does not address revocation rules mutually adopted by contracting parties,” meaning that callers and consumers may contractually agree to revocation mechanisms.

TCPA Consent Standards for Healthcare Calls Upheld

The D.C. Circuit declined to expand the scope of calls placed to wireless numbers without express consent “for which there is exigency and that have healthcare treatment purposes.” Under the 2015 Order, calls placed to consumers for certain purposes, including, appointment reminders, pre-operative instructions and lab results do not require consent. In upholding the contours of the 2015 Order, the court declined to except “advertisements, solicitations and post-treatment financial communications” from the consent requirements. The court held that billing communications are not made for “emergency purposes.”

Conclusion

As of now, the state of the TCPA is in flux. Under Chairman Pai, we are cautiously optimistic that the new FCC regime will likely advance more business-friendly rules. We will continue to monitor changes to the law and provide timely updates.

Since its enactment a decade ago, the Illinois Biometric Information Privacy Act (BIPA) has seen a recent spike in attention from employees and consumers alike. This is due, in large part, to the technological advancements that businesses use to service consumers and keep track of employee time.

What Is The BIPA?

Intending to protect consumers, Illinois was the first state to enact a statute to regulate use of biometric information. The BIPA regulates the collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information. The statute defines biometric identifiers to include a retina or iris scan, fingerprint, or scan of hand or face geometry. Furthermore, the statute defines biometric information as any information, regardless of how it is captured, converted, stored, or shared, based on an individual’s biometric identifier used to identify an individual. Any person aggrieved by a violation of the act may sue to recover actual or statutory damages or other appropriate relief. A prevailing party may also recover attorneys’ fees and costs.

Since September of 2017, there have been more than thirty-five class action BIPA lawsuits with no particular industry being targeted. More commonly sued industries include healthcare facilities, manufacturing and hospitality.

The drastic increase in litigation is largely contributable to employers’ attempt to prevent “buddy punching,” a term that references situations where employees punch in for a co-worker where biometric data is not required to clock in or out. For example, in Howe v. Speedway LLC, the class alleges that defendants violated the BIPA by implementing a finger-operated clock system without informing employees about the company’s policy of use, storage and ultimate destruction of the fingerprint data. Businesses engaging in technological innovation have also come under attack from consumers. In Morris v. Wow Bao LLC, the class alleges that Wow Bao unlawfully used customers’ facial biometrics to verify purchases at self-order kiosks.

Recent Precedent

In Rivera v. Google Inc.,the District Court for the Northern District of Illinois explained that a “biometric identifier” is a “set of biometric measurements” while “biometric information” is the “conversion of those measurements into a different, useable form.” The court reasoned that “[t]he affirmative definition of “biometric information” does important work for the Privacy Act; without it, private entities could evade (or at least arguably could evade) the Act’s restrictions by converting a person’s biometric identifier into some other piece of information, like mathematical representation or, even simpler, a unique number assigned to a person’s biometric identifier.” Thus, a company could be liable for the storage of biometric information, in any form, including an unreadable algorithm.

More recently, in Rosenbach v. Six Flagsthe Illinois Appellate Court, Second District, confirmed that the BIPA is not a strict liability statute that permits recovery for mere violation. Instead, consumers must prove actual harm to sue for a BIPA violation. The court reasoned that the BIPA provides a right of action to persons “aggrieved” by a statutory violation, and an aggrieved person is one who has suffered an actual injury, adverse action, or harm. Vague allegations of harm to privacy are insufficient. The court opined that, if the Illinois legislature intended to allow for a private cause of action for every technical violation of the BIPA, the legislature could have omitted the word “aggrieved” and stated that every violation was actionable. The court’s holding that actual harm is required is consistent with the holdings of federal district courts on this issue.

Damages and Uncertainty

Plaintiffs and their counsel are attracted to the BIPA because it provides for significant statutory damages as well as attorneys’ fees and costs. The BIPA allows plaintiffs to seek $1,000 for each negligent violation, and $5,000 for each intentional or reckless violation, plus attorneys’ fees and costs.

To date, all claims have been filed as negligence claims, and, thus, it is unclear what a plaintiff must show to establish an intentional violation. Similarly, the law is unsettled on whether the statutory damages are awarded per claim or per violation. A per violation rule would exponentially increase a defendant’s potential liability. For example, some plaintiffs are currently seeking $1,000 or $5,000 for each swipe of a fingerprint to clock in or out.

How To Protect Your Business

To avoid a costly mistake when retaining biometric data, businesses should:

  1. provide employees or consumers with a detailed written policy that includes why and how the data will be collected, stored, retained, used, and destroyed;
  2. require a signed consent before collecting the data;
  3. implement a security protocol to protect the data; and
  4. place an appropriate provision in vendor contracts (e.g., for data storage) to require vendors to adhere to the law and report any data breaches.

Consent can be obtained in different ways. For example, employers may condition employment upon an individual’s consent to a data retention policy, and companies can require consumers to accept a click-through consent before accessing a company’s website or application.

For questions or additional information, please contact Esther Slater McDonald at emcdonald@seyfarth.com or Paul Yovanic Jr. at pyovanic@seyfarth.com.

The Third Circuit recently ruled in Grandalski v. Quest Diagnostics, Inc., that the common law claims in a nationwide class action were not appropriate for class treatment because the court would be required to conduct an individual analysis and application of each state’s law and therefore common questions of law did not predominate.   767 F.3d 175 (3d Cir. 2014).

Background

Plaintiffs in Grandalski, a group of patients, filed a putative class action alleging that Quest Diagnostics, Inc. routinely overbilled patients.  Id. at 177.  Plaintiffs proposed two nationwide litigation classes and asserted multiple causes of action against both classes including a state law claim for consumer fraud.  Id. at 178.  Plaintiffs moved for class certification on all its claims for both its nationwide classes.  Id. 

The Third Circuit’s Decision

When faced with a nationwide class action alleging state law claims, courts must engage in a choice of law analysis to determine what state law should be used to substantively decide the legal issues.  Consistent with choice of law tenets, courts apply the choice of law rules of the forum state to determine the controlling law.  Applying New Jerseys conflicts of laws, the Grandalski court found that these factors weighed in favor of applying the laws of the putative class members’ home state law because the plaintiffs received and acted in reliance on the representation in their home state.  Id. at 182.  Accordingly, the consumer fraud laws of several states would have to be analyzed and applied to resolve the plaintiffs’ consumer fraud claim on a class wide basis.

After determining that the laws of several states would need to be applied, the Grandalski Court considered whether plaintiffs’ claim were appropriate for class treatment pursuant to Federal Rule of Civil Procedure 23.  The Grandalski court determined that “class litigation involving dozens of state consumer fraud laws was not viable and that common facts and common course of conduct did not predominate.”  Id. at 184.  Accordingly, the court affirmed the district court’s denial of certification as to the state law consumer fraud claims.  Id.

The plaintiffs in Grandalski proposed grouping together the laws of various states as an alternative to denying certification, however, the court found that the plaintiffs failed to demonstrate how the grouping it proposed would apply to the facts and issues presented in the case and failed to meet their burden of demonstrating that grouping was warranted and workable.  Id. at 183.  The court noted that this was a heavy burden and that in cases where a grouping proposal was accepted the plaintiff set for a comprehensive analysis of the various states’ laws potentially applicable and how the proposed grouping would work and no such analysis was provided by plaintiffs.  Id. (citations omitted).  Because plaintiffs “provided no indication as to how the jury could be charged in some coherent manner” relative to the proposed grouping and instead asserted only that the differences between the state laws within each group were “insignificant or non-existent,” the court rejected the proposed grouping.  Id. at 183-84.

Implications

Grandalski adds to the growing trend among federal courts which have ruled that the predominance and superiority requirements of Rule 23 cannot be met where the substantive law of several different states would need to be applied.  It also reaffirms that plaintiffs bear a heavy burden to articulate alternative frameworks, such as grouping, in order to stave off denial of class certification.  In this way, Grandalski and several other federal courts have raised the bar for plaintiffs seeking class certification as they have become increasingly more focused on the manageability of a class action where multiple state laws are at issue.

The Illinois Supreme Court recently granted a Petition for Leave to Appeal in Price v. Phillip Morris, Inc., after the Illinois Appellate Court for the Fifth District effectively reinstated a $10 Billion verdict against Philip Morris from 2003.  9 N.E.3d 599 (5th Dist. 2014).  The Illinois Supreme Court’s decision to once again weigh in on the case sets the stage for a substantive analysis of class actions and damages awards under the Illinois Consumer Fraud and Deceptive Business Practices Act, codified at 815 Ill. Comp. Stat. 505, et seq. (“Consumer Fraud Act”).

Background

In 2000, plaintiffs Sharon Price and Michael Fruth filed a class action in the Circuit Court of Madison County, Illinois against Philip Morris, Inc., alleging that it had violated the Consumer Fraud Act by fraudulently advertising its cigarettes as “light” or “low tar,” when in fact they were higher in tar and nicotine than represented and more toxic than regular cigarettes.  219 Ill. 2d. 182, 210 (Ill. 2005).  Plaintiffs did not seek damages for any alleged adverse health effects caused by Phillip Morris cigarettes but for economic damages resulting from their purchase of the product in reliance on statements which they contended were fraudulent, deceptive and unfair.  Id. at 209.

Philip Morris alleged several affirmative defenses, including one based on section 10(b) of the Consumer Fraud Act, which bars suits based on actions “specifically authorized by laws administered by any regulatory body.”   815 Ill. Comp. Stat. 505/10(b)(1).  According to Philip Morris, the Federal Trade Commission (FTC) had authorized the use of the terms “light” and “low tar” (“FTC Defense”).  219 Ill. 2d. at 215-16.

The trial court certified a class of over one million Illinois consumers who had purchased cigarettes over three decades, from 1971 to 2001.  Id. at 211-12.  The case proceeded to trial and in March 2003, the trial court awarded plaintiffs over $7 billion in actual damages and $3 billion in punitive damages.  Id. at 230-32.  In doing so, the trial court ruled that the FTC had never specifically authorized the use of the terms “light” and “low tar.”  Id. at 230-31.

On appeal, Philip Morris argued that the trial court erred by, among other things, rejecting its FTC Defense, in certifying the class and awarding damages under the model presented by Plaintiffs at trial.  Id. at 233.

In December 2005, the Illinois Supreme Court reversed the trial court’s decision, ruling that the FTC had in fact approved the use of the terms “light” and “low tar” by entering into various consent decrees in other lawsuits against cigarette manufacturers and, therefore, that the lawsuit was barred.  Id. at 265-66, 272.  The Court also expressed “grave reservations” regarding the trial court’s decision to certify the class, the proof offered by Plaintiffs at trial, and the Plaintiffs’ novel damages theory but did not actually rule on those issues.  Id. at 267-71.

In June 2008, the FTC filed an amicus brief in a case involving Philip Morris parent company, Altria Group, which was pending before the United States Supreme Court.  See Altria Grp., Inc. v. Good, 555 U.S. 70 (2008).  In its amicus brief, the FTC disavowed ever having adopted a policy authorizing the use of “light” and “low tar” descriptors.  Id. at  87.  Further, in December 2008, the FTC rescinded prior guidance it had issued regarding statements concerning the tar and nicotine yields of cigarettes, clarified that it had not defined or authorized the terms “light” or “low tar,” and stated that a manufacturer’s continued use of those terms would be subject to prohibitions against deceptive acts and practices.  9 N.E.3d at 603, 608.

Based on these new statements from the FTC, which contradicted the Illinois Supreme Court’s interpretation of FTC policy, Plaintiffs filed a petition for relief from judgment (“Petition”).  Id. at 603.  After extensive litigation concerning the timeliness of the Petition, the Plaintiffs were permitted to pursue relief from the judgment against them.    Id.   The trial court, however, ultimately denied the Petition.  It ruled that while Plaintiffs had a meritorious claim in the underlying litigation, and that the Illinois Supreme Court likely would have ruled differently in 2005 on the issue of the FTC Defense, the Supreme Court was “equally as likely” to have ruled against Plaintiffs on other issues raised on appeal, such as class certification and damages.  Id. at 604.

In April 2014, the Illinois Appellate Court reversed the trial court’s denial of the Petition, effectively reinstating the $10B verdict against Phillip Morris.  Id. at 614.  On September 24, 2014, the Illinois Supreme Court granted Philip Morris’s petition for leave to appeal.

Implications

There is no doubt that the Illinois Supreme Court’s decision to review this case once again will have a profound impact on Illinois consumers, Philip Morris and litigation against tobacco manufacturers.  But the reach of the Illinois Supreme Court’s ultimate decision in this case will likely extend beyond that.

Many states have consumer fraud statutes similar to that of Illinois and the Illinois Supreme Court’s decision could therefore provide a model for class action litigation brought under different states’ statutes.   It is very likely that the Court will now address the merits of issues it previously tabled, such as the propriety of certifying such a large and diverse class of people (which covered over one million individuals and spanned purchases made in three decades), the feasibility of using consumer fraud statutes in consumer class action litigation (a proposition which has been questioned by several courts), the proof required to sustain such an action, and how damages are to be determined if and when such cases are proved.

We will keep you posted on the developments in this landmark case.

By Gerald L. Maatman, Jr. and Gina R. Merrill

A customer filed a class action lawsuit this past year against the owner of several well-known restaurants in Manhattan based on two novel theories.  First, he alleged that any restaurant that added an “automatic” gratuity to the bill ‒ even when that gratuity was plainly disclosed on the menu ‒ was engaging in a deceptive and unlawful practice under New York law.  Second, he alleged that the failure of a restaurant to post drink prices for all beverages it offered for sale was ‒ standing alone ‒ a deceptive and unlawful practice that is actionable under New York law. His pleadings sought “billions” of dollars for consumers throughout the United States, and asserted that the food service industry systematically deceived customers through these allegedly deceptive practices.

The defense brought a motion to dismiss, and in ruling on plaintiff’s claims, Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York rejected each of these theories, and dismissed the plaintiff’s claims in their entirety as a matter of law this past week in Dimond, et al. v. Darden Restaurants, Inc., Case No. 13-CV-5244 (S.D.N.Y. July 10, 2014). [Full disclosure: Seyfarth Shaw LLP, and in particular the authors of this blog post, represented the defendant in this litigation.]

The decision in Dimond is important for the food service industry in particular, and all corporations in general, that face class action litigation and seek to avoid the costs and exposures associated with “bet-the-company” litigation.

Background  

The Dimond case had a complicated procedural history despite never making it past the motion to dismiss phase of litigation.  In June 2013, plaintiff filed a purported class action lawsuit claiming that the automatic gratuities charged at numerous prominent restaurants in Manhattan were unlawful.  Over the next six months, plaintiff amended the complaint four times, variously adding and dropping defendants, other named plaintiffs, and causes of action.  The dust finally settled with the filing of a fourth amended complaint in November 2013, which named as defendant Darden Restaurants, Inc., the owner of Red Lobster and Olive Garden restaurants located in Times Square and Chelsea.

The complaint alleged violations of New York General Business Law § 349 (“Section 349”), the state consumer protection statute, based on two billing practices.  The first was that the restaurants charged an automatic gratuity of 18 percent on all parties, a practice which plaintiff contended was improper despite the fact that the menus disclosed that “[a]n 18% gratuity will be added to all guest checks.”  Plaintiff also complained that not all of the beverage prices were listed on the menu and alleged that this too constituted an unfair trade practice under New York law.

The defense moved to dismiss the complaint for failure to state claim arguing, in essence, that neither practice worked to deceive consumers and that plaintiff did not identify any injury suffered as a result of the conduct.

The Court’s Opinion

The Court issued a 34-page opinion dismissing the complaint in its entirety.  Judge Failla held that while Section 349 is a broad statute intended to “cope with the numerous, ever-changing types of false and deceptive practices which plague consumers,” id. at 9, plaintiff had failed to identify any deceptive conduct.

As an initial matter, the Court rejected plaintiff’s attempt to predicate the Section 349 claims on purported violations of New York City rules and regulations, namely RCNY § 5-59 and NYCAC §20-700.  RCNY §5-59 prohibits surcharges in restaurants, while NYCAC § 20-700 is New York City’s local consumer protection statute.  The Court noted that even plaintiff had conceded that these regulations did not allow a private right of action, and Second Circuit precedent clearly foreclosed using Section 349 as an end run around another statute’s lack of private right of action.  The Court therefore held that the local regulations were irrelevant to the Section 349 claims.  (Nevertheless, the court expressed skepticism that the record established any violation of RCNY §5-59.)

The Court held that the pertinent question is whether the conduct alleged ‒ charging an automatic gratuity and listing prices for some but not all beverages ‒ was in itself deceptive under the statute.  Applying a common sense approach, the Court held that it was not.

First, the Court addressed the automatic gratuity, explaining that there is no Section 349 violation where defendants fully disclosed the terms and conditions of a transaction.  Applying this rule, the Court held that the 18% automatic gratuity did not deceive consumers because the fact of the gratuity was plainly disclosed on the menu, which stated:  “An 18% gratuity will be added to all guest checks.”  The court held that “the terms and conditions were completely and conspicuously indicated on the menu so that each patron was expressly informed as to the cost of dining at the Restaurants prior to voluntarily placing his or her order.  Plaintiff, as well as any other customer, had the option of leaving the restaurant upon seeing this disclosure.”  Id. at 17.  Judge Failla also commented that gratuities between 18% and 20% are common in New York City, undermining plaintiff’s claim that patrons had been “tricked” into paying the gratuity.  Id.

Next, the Court addressed the omission of drink prices from the menu, and held that plaintiff had failed to plead materially misleading conduct in that respect as well.  Judge Failla noted that it is not enough that the drink prices were not listed ‒ rather, plaintiff must demonstrate that he could not “reasonably obtain” the prices.  Id. at 31.  In other words, the plaintiff or any other patron could simply have asked the price of the drink, and there were no allegations suggesting that the restaurant would not provide that information or had misrepresented the beverage prices.

In addition to finding no materially misleading conduct, the Court also held that plaintiff had not established any injury as a result of the gratuity or omission of drink prices.  New York law forecloses Section 349 claims based on allegations that the consumer purchased an item that they otherwise would not have.  The Court found that, at best, this was all that plaintiff had alleged, and it was insufficient as a matter of law.
Providing further ammunition to dismiss the beverage claim, the court also found that the plaintiff lacked standing to bring suit because the complaint did not allege any injury in connection with the conduct.

Finally, the Court refused to grant leave to amend given that plaintiff had enjoyed numerous prior opportunities to perfect the pleading and had not provided a proposed pleading or any indication as to how he might cure the deficiencies in the Fourth Amended Complaint.

Implications For Corporations

Judge Failla’s practical approach to a novel question has likely stemmed the tide of copycat litigation that would surely have plagued restaurant owners in New York if the suit had been allowed to proceed.  The opinion should also provide good, persuasive law for defendants in other jurisdictions facing similar consumer claims.

First off, Happy New Year to our Blog Readers. Thank you for your patronage last year and we look forward to another year rolling over the legal class action landscape together.

As you may have recognized, either in reading our blog or simply reading the paper, a vast majority of the consumer class docket last year across the country was stuffed with cases brought under the Telephone Consumer Protection Act (“TCPA”).  The decisions ran the gamut, from insurance coverage disputes to class certification issues to cy pres conflicts.  The past year also found increased traffic on the administrative side, with nearly a dozen petitions filed with the Federal Communications Commission seeking clarification and assistance in restraining the proliferation of class action litigation under the TCPA.  These petitions seek guidance on the hottest topics being litigated, including: (1) what constitutes an autodialer; (2) whether informational cell phone calls require prior written consent; (3) whether the Act applies to documents transmitted via the Internet; and (4) whether opt-out notices are required on faxes sent with prior express consent.

While this statute created a boom for creative plaintiff’s lawyers, its uncontrolled expansion across the country (watch out New York) has become a drain upon not only the defendants to those suits, but small businesses and even the government.  We have unfortunately witnessed at our firm lawsuits targeting “mom and pop” businesses, apparently brought by plaintiffs with hopes of striking gold through an insurance policy without exclusions.  Further, the Wall Street Journal reported last November that the TCPA has hindered the federal government from efficiently recovering approximately $120 million in unpaid taxes.

Fresh off the New Year, two separate cases are postured to allow the United Supreme Court to address several of pressing issues under the TCPA, as well as to perhaps add some common sense to the interpretation of the statute, as Judge Benitez of the Southern District did late last year.   See Chyba v. First Financial Asset Management, 12-cv-1721 (S.D.N.Y. Nov. 20, 2013).

First, in Turza v. Holtzman, the defendant has petitioned the United States Supreme Court on several bubbling issues, one of which, the availability of cy pres, may be enough to pique the interest of the sitting justices.  Turza is an attorney who sent facsimiles to a purchased list of contacts.  The faxes took the form of a newsletter called the “Daily Plan-It”, which provided industry news and generic legal advice to the recipients.  The bottom portion of the fax provided contact information for Turza.  The lower court found that the faxes were unsolicited advertisements and entered judgement against Turza for $4.2 million, ordering that 1/3 of that amount, or $1.4 million, be paid to the plaintiff’s counsel, with the remaining money constituting a common fund.  Any moneys not claimed, the court held, would be then paid to a cy pres legal aid clinic.  On appeal, the Seventh Circuit upheld the judgment, but remanded to the lower court, taking issue with the designation of the judgment as a common fund, as well as the cy pres designation, but, nonetheless, ordering the solo practitioner to turn over the $4.2 million in a court-maintained account until resolution of the issue on remand.  Turza has now appealed the decision to the United States Supreme Court, challenging not only the issues of the common fund and cy pres, but also the underlying decision related to the designation of the facsimile as an advertisement.  The petition is pending on the United States Supreme Court docket as Case No. 13-760.

Second, in Uesco Industries Inc. et al. v. Poolman of Wisconsin Inc, the plaintiff is seeking a direct appeal to the United States Supreme Court on denial of its motion for class certification.  In Uesco, the defendant was solicited by a marketing agency to utilize the services of that company to send facsimiles.  Ultimately, the defendant acquiesced, but provided explicit instruction on the types of industries it wanted to target.  According to the defendant, against those wishes, the marketing agency sent facsimiles to a larger group of companies, including the plaintiff.  Before the lower court, the defendant argued that no vicarious liability could attach to it, as the marketing company exceeded the scope of its authority.  On appeal, the First District reversed, holding that the express language of the statute, and controlling precedent, required the agent to act within its scope before the defendant could be liable under the TCPA.  The petition is on the United States Supreme Court’s docket as Case No. 13-771.

The new year brings new hope that somewhere, someone will add a pound of sense to the Cerberus-like statute.  In the meantime, we will continue to assist our clients in avoiding the many pitfalls the statute presents, as well as identifying creative solutions to resolving pending litigation.

Summary

Following the trial of a tobacco false advertising case dating back to 1997, a California court found that, although the defendant misrepresented to consumers the health benefits of its Marlboro Lights cigarettes, the Plaintiffs were entitled to no relief as they failed to prove entitlement to any of the limited remedies available under California’s Unfair Competition Law.

The court in Brown v. The American Tobacco Co., Inc., et al., Case No. 711400 (San Diego Superior Court Sept. 24, 2013) emphasized and underscored that restitution under California  law does not allow plaintiffs to recover “benefit of the bargain damages.”  Brown, at 11.  Instead, restitution reimburses consumers only for the difference between the value paid and the actual value of the product received.  Id.  Plaintiffs failed to show their entitlement to restitution under California law because, among other reasons, their proffered evidence improperly focused on consumers’ perceived value of the misrepresented health attributes without considering the actual market value of the entire product absent the misrepresented attribute, i.e., the product plaintiffs received.   Id.

The court held that the evidence showed the price paid for Marlboro Lights cigarettes was not in excess of the actual market value of the product plaintiffs received (without any health benefit).  Id. at 16-17.  Thus, the restitution value was zero.  Id. at 17.  The court emphasized that:  (1) consumer purchases of Marlboro Lights did not substantially change relative to Marlboro Reds despite significant corrective actions taken by the defendant to communicate to consumers that Marlboro Lights offered no health benefits compared to Marlboro Reds; and (2) Marlboro Lights and Marlboro Reds sold for the same price during the time period of the defendant’s corrective actions.  Id. at 16-17. 

The court also found that plaintiffs were not entitled to injunctive relief.  Id. at 18-21.  Specfically, the court held that: (1) plaintiffs presented no specific evidence concerning injunctive relief; (2) it is unlikely that the misrepresentations will recur due to defendant’s marketing changes, a federal statute, and an injunction in a different case; (3) injunctive relief would be redundant because information plaintiffs desire to provide consumers has already been disseminated; (4) tobacco advertising and packaging is preempted; and (5) plaintiffs waived injunctive relief in the Master Settlement Agreement reached with numerous state attorneys general.  Id

Significance

The Brown decision illustrates and reinforces the structure of California’s UCL.  While the UCL broadly proscribes a wide swath of conduct, the remedies available are limited.  The decision also serves as a reminder to businesses that defense of UCL actions should focus on both liability and the plaintiffs’ entitlement to available remedies, or the lack thereof.

Even assuming a product’s attributes have been misrepresented to consumers, to obtain monetary relief in the form of restitution plaintiffs must still show that they paid more than the actual market value of the product they received without the misrepresented attribute.  As shown in Brown, this will undoubtedly be difficult if not impossible for plaintiffs where the defendant can show that:  (1) the challenged product sells for the same price as other products without the misrepresented attribute; and (2) consumers did not alter their behavior following any change in advertising as to the allegedly misrepresented attribute.

Businesses should also consider the applicable law governing a particular case.  State consumer protection laws and the law of restitution often vary state to state.  The court in fact noted that plaintiffs’ expert improperly relied on the same form of analysis in a case governed by Missouri law where, the court stated, unlike California, “benefit of the bargain” damages applied.  Id. at 11. 

“Shakedown Suits”

Although California’s passage of Proposition 64 made it more difficult for the plaintiffs’ bar to bring “shakedown suits” against the business community, we are witnessing a flood of false advertising class actions brought (or, more often, threatened) against consumer product manufacturers and retailers, who typically have no arbitration rights.  While some lawsuits are immediately filed, many plaintiffs’ firms serve demand letters under the California Consumers Legal Remedies Act (“CLRA”) threatening class actions that, historically, have been difficult to resolve expeditiously given their fact-intensive nature.  Facing the cost of defending such claims, many companies accept pre-filing offers to settle on an individual basis for purely economic reasons.  On September 25, 2013, however, the California Court of Appeal threw a lifeline to companies that refuse to pay such protection money.

The Court’s Opinion

In Simpson v. Kroger Corp., No. B242405, 2013 Cal. App. LEXIS 769, the complaint alleged that a “spreadable butter” product, which consists of butter mixed with canola or olive oil, was mislabeled and falsely marketed as “butter.”  On behalf of a putative class, the plaintiff alleged purported claims for unfair competition in violation of California Business and Professions Code Section 17200, false advertising in violation of California Business and Professions Code Section 17500, and violation of the CLRA.  After reviewing the packaging, which listed the product’s ingredients and otherwise disclosed what the product was, the trial court sustained a demurrer without leave to amend, finding that a reasonable consumer was not likely to be deceived.  Citing Day v. AT&T Corp., 63 Cal. App. 4th 325, 333, 74 Cal. Rptr. 2d 55 (1998), the Court of Appeal affirmed, confirming that courts “may be able to say as matter of law that contrary to the complaint’s allegations, members of the public were not likely to be deceived or misled . . . by packaging material.”

Implications

Although Simpson certainly does not guarantee the dismissal of every false advertising claim, it provides a potential early exit strategy at the pleading stage where it is clear from the factual circumstances that no reasonable consumer could have been misled.  It also reiterates the importance for companies to consider class action risk with respect to all decisions related to product labeling and advertising.

 

On June 26, 2013, in Brown v. DirecTV, LLC, et al., Case No. 2:12-cv-08382, Judge Gee, sitting in the Central District of California, granted DirecTV’s motion to compel arbitration, rejecting two efforts by the Plaintiff to keep the matter in federal court: (1) that TCPA claims did not “arise under or relate to” the agreement or service provided; and (2) an exception clause should be read to preclude claims under both the Communications Act of 1934 and a separate portion identified in that section, 47 U.S.C.  605.

Factual Background

Plaintiff ordered his DirecTV satellite service online, requiring him to review and accept the terms and conditions of service.  Id. at * 2.  One of the terms of the contract contained an arbitration provision stating that “You and DIRECTV agree that any dispute arising under or relating to your agreement or service with DIRECTV, which cannot be resolved informally, will be resolved through binding arbitration as fully set forth in the DIRECTV Customer Agreement (a copy is sent with your first bill but may also be viewed at DIRECTV.com).  Arbitration means you waive your right to a jury trial.”    Id. at * 3.  He also signed a form during installation related to the DIRECTV Equipment Lease containing a similar arbitration provision. Id. at *4.  Finally, the Customer Agreement also contained a clause that excluded certain statutory claims, stating: “Notwithstanding the foregoing… any dispute involving a violation of the Communications Act of 1934, 47 U.S.C. 605, the Digital Millennium Copyright Act, 17 U.S.C. 1201, the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521 or any other statement or law governing theft of service, may be decided only a court of competent jurisdiction.”  Id. at * 5.  After failing to make payments on the contract, DirecTV, through a third party, began making collection calls to Brown.  In turn, Brown brought suit under the Telephone Consumer Protection Act (“TCPA”) and the California UCL.

The Court’s Decision

In addition to other typical arguments raised related to arbitration clauses (lack of knowledge, unconscionability), Brown also argued that the TCPA claims should not be covered because they do not arise under or relate to the Agreement or services and/or the matter was excepted, as the clause should be read to exclude claims under both the Communications Act of 1934 and 47 U.S.C. 605.  In rejecting the first argument, the court noted that under Ninth Circuit law, a court should interpret “arising under” narrowly, while interpreting “relating to” more broadly.  The court held that the “relating to” language was narrowly tailored, and further observed that the contract specifically contemplated collection calls as part of the contract.  Id. at * 9-11.  In rejecting the second argument, the court opined that taking Plaintiff’s interpretation would render the exceptions “nonsensical,” as it would read as a highly broad exclusion, followed by an extremely narrow exclusion contained within the previously broad exclusion.  Id. at *11.

Implications

As the law continues to evolve related to arbitration clauses in consumer contracts, companies should take time to review the language of their agreements in light of decisions such as Brown.  Specifically, they should review whether their consumer contracts contain appropriate limiting language  and whether any exclusions noted could be read broadly enough, in a sensible way, to exclude TCPA claims.