Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

The Sixth Circuit recently affirmed dismissal of a putative class action against a car rental company based on the voluntary payment doctrine.  See Salling v. Budget Rent-A-Car Sys., Inc., No. 10-3998, Slip op. (6th Cir. Feb. 29, 2012).

In Salling, Plaintiff challenged Budget's EZ FUEL fee.  Under the rental contract, Budget will charge you the EZ FUEL fee (a flat, $!3.99 fee) for gas if you have driven the car less than 75 miles.  To avoid having the fee charged, you have to fill the tank with gas and provide a receipt.  The receipt requirement makes sense, since the amount of gas used on short trips may not be visible from looking at the gas gauge.  

Plaintiff objected to paying the fee when he returned his car.  But he apparently did not have his gas receipt with him.  Ultimately, he paid the fee, receiving a receipt that broke out the EZ FUEL fee that he disputed.  He then filed a class action against Budget.  Budget removed it to federal court and moved to dismiss based on the voluntary payment doctrine.  The trial court granted the motion, and Plaintiff appealed.

The Sixth Circuit first examined its jurisdiction, It observed that Budget bore the burden of proof on the jurisdiction question, but held that it met its burden with a spreadsheet that listed more than 1 million renters who drove less than 75 miles, were charged the EZ FUEL fee, and had a fuel gauge reading of "full" upon return of the car.  The spreadsheet indicated that Budget collected $11.2 million from those drivers.  This was enough to satisfy CAFA's pre-requisites. 

The court then turned to the voluntary payment doctrine, finding that it is recognized by Ohio law.  The doctrine is best described in this way:  "money voluntarily paid by one person to another on a claim of right to such payment, cannot be recovered merely because the person who made the payment mistook the law as to his ability to pay."  Slip op. at 5.  The court noted that the Plaintiff had paid the fee in anticipation of filing suit, and held that the payment was voluntary.  It explained that a payment that is made on a disputed construction of a contract term is not made under a mistake of fact, but rather under a mistake of law.  Although a payment made under a mistake of fact might be recoverable, a payment made under a mistake of law is still voluntary and cannot be reversed.  Slip op. at 6.

A little over a year ago I had written about an opinion from the Seventh Circuit written by none other than Justice Sandra Day O'Connor, which applied the "voluntary payment doctrine" with even more discussion.  That opinion, along with the Sixth Circuit's opinion in Salling, reiterate that the voluntary payment doctrine is alive and well as a defense in consumer class action litigation.

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Today we have two cases that illustrate the maxim that if you have a beef with an airline, you're screwed, plain and simple, thanks to federal preemption.

In Hickcox-Huffman v. US Airways, Inc., 2011 WL 1585560 (N.D. Cal. Apr. 27, 2011), a passenger who had paid a $15 baggage fee sued the airline for the return of the fee because it lost her bag.  Naturally, this was a putative class action on behalf of all passengers who were charged such fees and their bags were lost or delayed.  Her theory was that by charging the $15, the airline assumed a duty to deliver the baggage in a timely manner.  She asserted a variety of causes of action, including breach of contract, unjust enrichment, and misrepresentation.

The airline moved to dismiss the claims as preempted by the Airline Deregulation Act of 1978, which provides that "no State . . . shall enact or enforce any law . . . relating to rates, routes, or services of any carrier."

What, then, is a service?  And does the timely conveyance of baggage fit within the definition?

The Ninth Circuit has held that although service involves the prices, schedules and other things associated with getting people and "cargo" from point A to point B, it does not include the "provision of in-flight beverages, personal assistance to passengers, the handling of luggage, and similar amenities."  Id. at *2 (quoting Duncan v. Northwest Airlines, Inc., 208 F.3d 1112, 1114-15 (9th Cir. 2000)).  Naturally, the airline said the plaintiff's bag was "cargo," while the plaintiff said it was "luggage," the handling of which is not a preempted "service."

The court looked to whether the underlying claims frustrate the goal of economic deregulation by interfering with the forces of competition:

Using this approach, this Court believes that Plaintiff's state law claims would do just that.  It is obvious that baggage fees are just one of the many fronts on which airlines are doing competitive battle.  Indeed, the baggage fees imposed (or not imposed) by each airline has become an important consideration for consumers. . . .  In these circumstances, Plaintiff's claims would impermissibly "frustrate the goal of economic deregulation by interfering with the forces of competition."

Id. at *4 (citation omitted).  Accordingly, it held that the plaintiff's claims were preempted, and US Airways could keep the $15 it charged to deliver her baggage late.

The passengers were similarly unlucky in National Federation of the Blind v. United Airlines, Inc., 2011 WL 1544524 (N.D. Cal. Apr.25, 2011).  There, blind plaintiffs brought a class action because the airline used ticketing kiosks that -- unlike Automatic Teller Machines -- use only visual prompts and fail to include an option for audio prompts for the blind.  The plaintiffs sought equitable and declaratory relief under various statutes.

Once again, the court held that the claims were preempted, this time by the Air Carrier Access Act, which prohibits discrimination against disabled people in air travel.  The Department of Transportation has specifically addressed the issue of automated kiosks, concluding that if they cannot be used by passengers with a disability, "you must provide equivalent service to the passenger (e.g., by assistance from your personnel in using the kiosk or allowing the passenger to come to the front of the line at the check-in counter)."  Id. at *3 (citation omitted).  DOT expressed its intent that the regulations have preemptive effect.

The court concluded that "[b]ecause the DOT has pervasively regulated airport kiosk accessibility, plaintiffs' claims are field preempted by the ACCA."  Id. at *4.

The court found an additional source for federal preemption in the Airline Deregulation Act that was at issue in Hickcox-Huffman.  The court concluded that the airport kiosks -- because they facilitate checking in, printing tickets, selecting seats, and other tasks related to air travel, they are a "service" that falls within the express preemption provision of the ADA.

The plaintiff argued for the "presumption against preemption" and suggested that the Federal Airline Act's savings clause -- "a remedy under this part is in addition to any other remedies provided by state law" -- augured against federal preemption.  The court disagreed:

The Airline Deregulation Act unequivocally declared that no state may enact a law related to airline service.  Congress could have drawn the preemption provision more narrowly; it did not.  The provision does not except discrimination claims from its scope.  Thus, this argument must fail.

. . .

. . . This area [of airline travel] has . . . "long been reserved for federal regulation."  The presumption against preemption, therefore, does not apply in the instant action.  Thus, neither the FAA savings clause nor the presumption against preemption undermine this order's holdings.

Id. at *7 (citations omitted).

As these two decisions -- rendered two days apart -- demonstrate, airlines have powerful preemption arguments against consumer class actions.  It remains to be seen whether the reasoning from these decisions -- especially the field preemption conclusion from National Federation of the Blind -- can be easily translated other federal regulatory schemes.

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Illinois' Fifth District Court of Appeal recently reversed the certification of a Madison County class action against an insurance company, holding that the litigation should have been dismissed on the merits.  See Coy Chiropractic Health Center, Inc. v. Travelers Casualty & Surety Co., No. 5-08-0578, Slip op. (Ill. App. -- 5th Dist. Mar. 14, 2011).

In Coy Chiropractic, plaintiff sought to represent a class of all licensed Illinois healthcare providers whose reimbursement for medical services covered by a workers' compensation policy was reduced by Travelers pursuant to a Preferred Provider Organization ("PPO") discount since February 2005.  Plaintiff alleged that when it joined a PPO network, it did so based on the understanding that the insurer would provide financial incentives to its members to stay within network.  Illinois's workers' compensation laws prohibit such incentives, so insurers do not pay them.  According to plaintiff, the insurer thus is not entitled to deduct the PPO discount when paying for workers' compensation medical services.  Plaintiff sued on theories of breach of contract, breach of Illinois's Consumer Fraud Act, and unjust enrichment.

Although the trial court had certified a class action on the claims, the Court of Appeal held that this was one of those cases where there was "no need to determine whether the prerequisites of the class action are satisfied" because "as a threshold matter, the record establishes that the plaintiffs have not stated an actionable claim."  Slip op. at 6 (citation omitted).

The court noted that the plaintiff and other service providers had not entered into a contract with Travelers directly.  Rather, they had signed PPO contracts with First Health, which then entered into a contract with Travelers to act as the payor on all workers' compensation claims.  Neither the PPO's contracts nor Travelers' "payor contract" required the insurer to offer financial incentives to workers' compensation payments.  Accordingly, the court held that the PPOs had no actionable claim for breach of contract.

The court then looked to Travelers' rights under its contract with First Health to conclude that plaintiffs had not alleged any breach of the Consumer Fraud Act.  First, it noted that the ICFA cannot be used to merely re-package deficient breach of contract claims; there must be an independent fraud.  There was no fraudulent statement actually identified here, and from the structure and terms of the contracts, it was plain that Travelers was entitled to take the PPO discount, even for workers' compensation medical services.

The court engaged in a similar analysis for the unjust enrichment count:  plaintiffs contractually agreed to accept discounted payments for in-plan treatment, even for workers compensation.  Moreover, there was a lack of privity between the PPO providers and Travelers.  The PPO providers treated their patients.  To the extent any quasi-contract arose for the reasonable payment for such services, it was between the treater and the patient.  Slip op. at 9.  To the extent the PPO providers are seeking to step into their patients' shoes and assert their claims against the workers' compensation payor, Travelers, they are bound by the exclusive remedy provisions of the Workers Compensation Law.  Id.

Coy Chiropractic is an excellent example of a court refusing to allow a party to turn a basic breach of contract suit into something more -- namely, a suit for fraud or so-called "unjust enrichment."  Where the contract clearly sets forth the rights between the parties, it is not enough for plaintiff to merely testify that he expected something different.

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One of the basic principles of product liability law is that where a defective product injures itself (requiring repair or replacement) or creates only economic loss and the sales transaction was governed by a contract, there is no cause of action in tort.  Instead, the remedy lies, if at all, in contract.  The reason is because where the issue is not personal injury or property damage, but merely financial loss, the parties had the ability to allocate the risk of loss between themselves in contract, and allowing recovery under a tort theory would undermine the parties' agreed-upon risk allocation.

But apparently not in the state of Washington.  See Eastwood v. Horse Harbor Foundation, Inc., 2010 WL 4351986 (Wash. Nov. 4, 2010).  

Eastwood was not a product liability case; instead, it involved a lessor's attempt to recover from the lessee for the common law tort of waste outside of the lease's provisions requiring the lessee to repair and maintain the property and return it in the same condition it was tendered at the beginning of the lease.  The intermediate appellate court, on its own, had invoked the economic loss doctrine to reverse the judgment on the common law waste theory.  So the Washington Supreme Court took review of the case.  It could have simply held that the economic loss doctrine does not apply outside of the product liability context.  But it did not.  Instead, it chose to rewrite Washington law on the economic loss doctrine.

The court explained its rejection of the term "economic loss doctrine" this way:

The term 'economic loss rule' has proved to be a misnomer.  It gives the impression that this is a rule of general application and any time there is an economic loss, there can never be recovery in tort.  This impression is too broad for two reasons.  First, it pulls too many types of injuries into its orbit.  When a contractual relationship exists between the parties, any harm arising from that relationship can be deemed an economic loss for which the law of tort never provides a remedy. . . .

Second, and most importantly, the broad application of the economic loss rule does not accord with our cases.  Economic losses are sometimes recoverable in tort, even if they arise from contractual relationships.  For instance, we recognize the torts of intentional and wrongful interference with another's contractual relations or business expectancies, wrongful discharge in violation of public policy, failure of an insurer to act in good faith, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of an agent's fiduciary duty to act in good faith, and negligent real estate appraisal.  Thus, the fact that an injury is an economic loss or the parties also have a contractual relationship is not an adequate ground, by itself, for holding that a plaintiff is limited to contract remedies.

Id. at *3-*4 (citations omitted).

The court then reasoned that the real question was whether there should be a tort duty or a party should be limited to his remedy in contract, and engaged in revisionist history to recharacterize its prior economic loss doctrine jurisprudence:

Where this court has stated that the economic loss rule applies, what we have meant is that considerations of common sense, justice, policy, and precedent in a particular set of circumstances led us to the legal conclusion that the defendant did not owe a duty.  When no independent tort duty exists, tort does not provide a remedy. 

Id. at *4.  The court proceeded to explain a number of its cases -- and the U.S. Supreme Court's decision in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) -- as cases examining whether tort law imposed a legal duty independent of contract, concluding that "the economic loss rule does not bar recovery in tort where the defendant's alleged misconduct implicates a tort duty that arises independently of the contract."  Id. at *8.  The court then abandoned the term "economic loss rule" altogether, in favor of the "independent duty rule."  Id.  

Of course, the problem with the rule, as explained by the court, is that one can never know until after the fact whether a cause of action in tort exists and whether the parties' contractual risk allocation will, in fact, be honored.  This is complicated even further by the court's suggestion that in nearly every case, this is going to be a jury question:

Although we find clarity in thinking of the problem in terms of an independent duty, we see potential difficulty, when a defendant has obligations under both the contract terms and an independent tort duty, in distinguishing between a harm that implicates only the contract and a harm that implicates the independent duty as well.  It is a factual question of proximate causation.  As a matter of law, the court defines the duty of care and the risks of harm falling within the duty's scope.  As a matter of fact, the jury decides whether the plaintiff's injury was withing the scope of the risks of harm, which the court has held the defendant owed a duty of care to avoid.

Id. at *8 (citations omitted).

The irony of all of this is that, by deferring to the parties' contractual risk allocation, the economic loss doctrine is supposed to create more -- not less -- predictability.  The Washington Supreme Court's new rule fosters anything but predictability.

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It's not every day a Supreme Court Justice chastises you for not reading your credit card statement.  But that's effectively what Justice Sandra Day O'Connor did in affirming the dismissal of a consumer's breach of warranty and unjust enrichment claims based on the voluntary payment doctrine.  See Spivey v. Adaptive Marketing LLC, 09-3619, Slip op. (7th Cir. Sept. 20, 2010).

(Please note that Adaptive Marketing is a client of mine.  Neither I nor my firm had involvement in this case, however.)

In Spivey, plaintiff had called a toll-free telephone number to order an Atkins diet product.  At the end of the transaction, the telemarketer offered to enroll plaintiff in a 30-day free trial of a membership program, "HomeWorks," that provides discounts to various home goods stores.  Afterward, if plaintiff did not cancel the membership, the telemarketer explained, he would be enrolled in the program annually and incur an annual fee that would be charged to his credit card.  Plaintiff accepted the trial membership and did not cancel his membership, so he was enrolled in the program and incurred membership charges in 2003 through 2007.  In 2007, plaintiff challenged the charge and subsequently filed his lawsuit.

The trial court -- relying on plaintiff's deposition testimony and the membership materials that the defendant testified it sent to plaintiff -- granted the defendant's motion for summary judgment, relying on the voluntary payment doctrine.

The Seventh Circuit affirmed.  In an opinion written by Justice O'Connor, who was sitting by designation, the court explained that the voluntary payment doctrine "has long been recognized in common law" and means that "'[a]bsent fraud, coercion, or mistake of fact, monies paid under a claim of right to payment but under a mistake of law are not recoverable.'"  Slip op. at 13.  Put differently, if you voluntarily pay someone who was not legally entitled to payment, you cannot sue to recover the money absent fraud, coercion, or mistake.

As Justice O'Connor explained, the reason for the doctrine is clear:  the payor is the one with the incentive to challenge the payee's legal right to receive payment, and the law wants to encourage the payor to do that at the earliest opportunity so that the parties can be aware of each other's position and tailor their conduct accordingly.  Litigation should precede payment, not the other way around.  The common law does not want to encourage people to pay "in silence" and then later file a lawsuit.  See slip op. at 14 (citations omitted).

The plaintiff did not dispute that the charges for the HomeWorks Plus program appeared on his credit card statements in 2003, 2004, 2005, 2006, and 2007.  They even included a telephone number to call about that particular charge.  But plaintiff nevertheless argued that the "mistake" exception to the voluntary payment doctrine should apply here because he mistakenly believed, when looking at the statements, that the "HomeWorks Plus" charges were for products that his wife -- a school teacher -- had bought.

Justice O'Connor made short work of this argument, effectively holding that plaintiff had a duty to read and investigate the charges on his credit card statement:

Spivey cannot overcome the voluntary payment defense because he made an erroneous assumption for four years that could have been easily clarified, as it ultimately was, by discussing the charge with his wife and making a call to the phone number provided on his bill.

The relevant facts regarding the basis for and means to challenge the HomeWorks charge were neither obscured, nor inaccessible. . . .

In the five years during which HomeWorks charges appeared on Spivey's credit card bills, "he made no effort to discover the nature of the charge to his credit card and paid it 'in silence.'  To the extent that Spivey was ignorant of the charges on his credit card statement, it was because he failed or refused to apprise himself of that knowledge and he must bear the consequences."  [Quoting the district court.] . . .  Where, as here, "the plaintiff's lack of knowledge could be attributed to its lack of investigation into the defendant's claim of liability and the basis upon which the defendant was seeking the [payment]," the Illinois courts have rejected a mistake of fact claim.  We agree.  

Slip op. at 15-16 (citations omitted).

Spivey is a strong reminder that consumers have a responsibility to read their bank and credit card statements and cannot sue to reverse payments made to a business where they could have discovered the basis for the business's claimed entitlement to the money, but simply chose not to do so.  Laziness or willfully sitting on one's rights is not the sort of "mistake" that can defeat the voluntary payment doctrine.

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Judge Garrett E. Brown, Jr. recently issued an opinion in a consumer product class action that illustrates the typical problems with the types of claims that are presently brought as consumer class actions.  In Payne v. Fujifilm U.S.A., Inc., Civ. A. No. 07-385 (GEB), Slip op. (D.N.J. May 28, 2010), plaintiffs sought to bring a nationwide class action against Fujifilm, alleging that its FinePix 3800 camera had a soldering defect on the power board that could cause the camera to lose function intermittently or totally.  Plaintiffs brought various breach of contract and breach of warranty theories, as well as a claim under New Jersey's Consumer Fraud Act.

The court didn't even bother analyzing the Rule 23(a) factors, as it was able to conclude that the class was not certifiable under Rule 23(b)(2) or Rule 23(b)(3).

In analyzing whether an equitable relief class was proper under Rule 23(b)(2), the court quickly concluded that "Plaintiffs' main goal is to obtain monetary damages," and thus the monetary damages were not merely incidental to the claim for injunctive relief.  Indeed, plaintiffs sought "compensatory damages, statutory damages, punitive damages, and a refund of monies spent purchasing, repairing, and/or disposing of their cameras."  Slip op. at 5.  The court refused to certify the class under Rule 23(b)(2).

The court just as easily concluded that the proposed class could not meet the predominance standard of Rule 23(b)(3).  To begin with, this was not a product with a high failure rate.  Rather, the vast majority of putative class members had not experienced a product malfunction.  As the court noted, out of the nearly 300,000 cameras sold in a two-year period, the total return rate for any reason whatsoever was only 4%.  The number of cameras returned for any kind of power problem was only between 1% and 2%.  Thus, the vast majority of the class members had not experienced any product malfunction.  Moreover, there are a variety of potential causes for power problems with cameras, including:  "impact damage, water, a short circuit, extreme temperatures, blown fuses, tamper damage, normal wear and tear, or simply improper batteries."  Slip op. at 9-10.  Thus, even the small return rate was not per se evidence of a solder problem.

The court concluded that common factual issues did not predominate because the cases would devolve into individual determinations of whether the class member had experienced a "manifested" defect, since the law generally does not give consumers relief from so-called "unmanifested defects."  See id. at 6-8 (citing Chin v. Chrysler Corp., 182 F.R.D. 448 (D.N.J. 1998); In re Ford Motor Co. Ignition Switch Prods. Liab. Litig., 174 F.R.D. 332 (D.N.J. 1997); In re Cannon Cameras Litig., 237 F.R.D. 357 (S.D.N.Y. 2006)).

Plaintiffs had relied on an expert who examined the named plaintiffs' cameras.  He testified that the cameras had a joint solder defect that would cause power loss.  The court was unpersuaded that this was evidence of a defect in all cameras.  To begin with, the expert only examined the named plaintiffs' cameras, not any others.  He admitted that he could not determine how the solder fractures occurred or whether they even occurred in joints that were necessary for the camera's functionality.  He further admitted that he could not causally connect the fractures to any difficulties the named plaintiffs had experienced with their cameras.  And he admitted that "normal wear and tear" can contribute to "accumulating creep fatigue" in all solder joints in any soldered product over time.  This was not enough to prove a common defect among all cameras.  Slip op. at 10.

Plaintiffs also sought to rely on the fact that the defendant, in its troubleshooting guide, had indicated that a soldering problem might be a cause of power problems experienced with the camera.  But the inclusion of that potential cause was based on only one instance, and it was only one of many potential causes listed for power problems.  The troubleshooting guide was not enough to establish a common defect -- particularly where most customers used the product for the life of the warranty without experiencing any problem.

The court also concluded that common issues of law did not predominate.  Plaintiffs argued that because Fujifilm had its principal place of business in New Jersey, New Jersey law should apply to all plaintiffs' claims.  The court -- applying sections 6, 148, and 188 of the Restatement (Second) of Conflict of Laws -- held that the law of the plaintiffs' residences governed each transaction.  The court faulted the plaintiffs for not preparing an extensive choice of law analysis, which was their burden once it was clear that multiple states' laws might apply to the claims. 

The court held that state consumer fraud laws are too different to have common issues of law predominate:

For example, only thirty-three states have authorized injunctive relief under their consumer fraud statutes, thirty-four states required that a plaintiff plead an "ascertainable loss" with regard to consumer fraud claims, and many states have varying statute of limitations periods applicable to such claims.  Plaintiffs have not provided the Court with any method for managing such individualized issues of state law . . .

Slip op. at 16.

Similarly, the court held that the breach of contract/breach of warranty causes of action were too different to be tried together:

State laws regarding breach of express and implied warranty also differ greatly with regard to "(1) whether plaintiffs must demonstrate reliance, (2) whether plaintiffs must provide notice of breach, (3) whether there must be privity of contract, (4) whether plaintiffs may recover for unmanifested . . . defects, (5) whether merchantability may be presumed and (6) whether warranty protections extend to used [goods]."

Slip op. at 17 (citation omitted).

Judge Brown's analysis is spot on.  Where, as here, there is no widespread failure of a product, there simply is no reason for a class action.  As a practical -- as well as a legal -- matter, people whose product performs as expected throughout the warranty period are not entitled to damages or other relief for so-called breach of warranty or consumer fraud. 

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Loyal reader Fred Burnside at Davis Wright Tremaine has sent along news of two wins his firm received for T-Mobile from the Ninth Circuit.  Both cases involve class action challenges to the defendant passing along charges to customers, specifically charges for the Universal Service Fund and the Regulatory Programs Fee.

In Lowden v. T-Mobile USA Inc., No. 09-35201, Slip op. (9th Cir. May 10, 2010), the court explained that the USF subsidizes telecommunications service for low-income and rural consumers.  The FCC expressly permits companies to recover their mandatory contributions from consumers as line-item charges.

The RPF is charged to carriers to cover government mandates like wireless number pooling, local number portability, and enhanced 911. 

In Lowden, plaintiffs argued that passing along these charges to consumers on the bill was a breach of contract and a violation of the State of Washington's Consumer Protection Act.  The district court had held that plaintiffs lacked standing to bring these claims.  The Ninth Circuit declined to address the standing issue, instead holding that plaintiffs had failed to state a claim under Rule 12(b)(6).  It reasoned that the carrier's contracts "adequately disclosed that it would pass along regulatory fees such as the USF fee and the RPF to its customers.  Moreover, until 2005 the FCC expressly excluded wireless providers from the requirement that 'charges contained on telephone bills must be accompanied by a brief, clear, non-misleading, plain language description of the service or services rendered.'"  Slip op. at 4.

In Janda v. T-Mobile USA, Inc., No. 09-15770, Slip op. (9th Cir. May 10, 2010), two California residents brought the same claim, asserting violations of California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, as well as breach of contract.  The Ninth Circuit was not buying plaintiffs' claim here, either. 

The court held that the complaint failed to allege above a speculative level that any advertising was likely to deceive members of the public.  Moreover, the service agreements and terms and conditions of sale were clear:  regulatory charges could be recovered.  The court considered each of the three prongs of the UCL, ultimately concluding that no UCL violation was adequately alleged.  The court also noted that plaintiffs failed to give proper pre-suit notice under the CLRA, and held that plaintiffs had not alleged a representation "likely to deceive a reasonable consumer."  Slip op. at 7.

The Ninth Circuit also dismissed the breach of contract for failing to meet the one-year statute of limitations contained in the agreement.  The court explained that "[e]ven if a contract is one of adhesion, a provision shortening the applicable statute of limitations is enforceable so long as the limitations period is substantively reasonable."  Slip op. at 8.

Congrats, Fred, on two opinions that use the clarity of contractual disclosures to dismiss putative consumer fraud class actions.

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This is the kind of decision that causes lawyers to write paragraphs like those hideous releases in settlement agreements that go on for pages and have more commas, semicolons and parentheses than a Costco-sized Barrel of Monkeys.

By this point, everybody who has an Internet browser already knows what click fraud is.  Internet advertising often is priced by how many people "click" on an ad's link and travel to the advertiser's website.  Competitors, hooligans, and other cyber-rapscallions have developed programs to generate numerous clicks on such ads, thereby driving up the cost of the ads.  Many sites that host advertising have gone to extraordinary lengths to develop software to detect click fraud and thereby protect advertisers on their sites.  There have been many class action lawsuits regarding "click fraud," including settlements.

Along comes a website that is sort of popular -- Facebook.  It's not locked in the Stone Ages; it has heard of click fraud.  And so it decides to eliminate the possibility of future "click fraud" class actions by its advertisers by including within it's terms and conditions the following disclaimer:

I . . . UNDERSTAND THAT THIRD PARTIES MAY GENERATE IMPRESSIONS, CLICKS, OR OTHER ACTIONS AFFECTING THE COST OF THE ADVERTISING FOR FRAUDULENT OR IMPROPER PURPOSES, AND I ACCEPT THE RISK OF ANY SUCH IMPRESSIONS, CLICKS, OR OTHER ACTIONS.  FACEBOOK SHALL HAVE NO RESPONSIBILITY OR LIABILITY TO ME IN CONNECTION WITH ANY THIRD PARTY CLICK FRAUD OR OTHER IMPROPER ACTIONS THAT MAY OCCUR.

Seems straightforward, right?  And if some numskull were to actually sue Facebook for click fraud with this HUGE disclaimer in his contract, you would expect a court to immediately throw him out on his tuchus, right?

Not in California.

See In re Facebook PPC Advertising Litigation, Case Nos. 5:09-cv-03043-JF, 5:09-cv-03519-JF, 5:09-cv--03430-JF, Slip op. (N.D. Cal. Apr. 22, 2010).

Three plaintiffs who agreed to Facebook's terms and conditions and became advertisers on Facebook's website brought a class action against Facebook alleging that they had been charged for "invalid clicks" and "fraudulent clicks."  The complaint attributed these clicks to:  "'(a) technical problems; (b) system implementation errors; (c) various types of unintentional clicks; (d) incomplete clicks that fail to open the advertiser's web page; and (e) improperly recorded or unreadable clicks originating in some cases from an invalid proxy server or unknown browser types.'  The complaint describes 'click fraud' as the 'result of a competitor clicking on an advertiser's ad in order to drive up the cost of an ad or deplete the competitor's budget for placing ads.'"  Slip op. at 3 (quoting complaint).

Not surprisingly, Facebook moved to dismiss the complaint for failure to state a claim, pointing to its GIGANTIC DISCLAIMER.

In analyzing the breach of contract count, the court analyzed whether the contract language was ambiguous and susceptible to the plaintiffs' interpretation.  The court held that the agreement was unambiguous in disclaiming liability for third party click fraud.  Slip op. at 6.

BUT . . . the court held the disclaimer:

may be ambiguous with respect to whether it covers only "click fraud and other improper actions" by "third parties".  Plaintiffs claim that they have been charged for "invalid clicks" that are the result of Defendant's own conduct. . . . [The invalid clicks described in the complaint] arguably need not be fraudulent, improper, or the result of actions of third parties.

Slip op. at 6-7.

Thus, the court dismissed the breach of contract count to the extent it related to "click fraud" performed by third parties, but it refused to dismiss the breach of contract count to the extent it relied on Facebook's failure to prevent so-called "invalid clicks."  The court dismissed the claim for breach of the implied covenant of good faith and fair dealing because the statements in the complaint did not go beyond a mere breach of contract, and thus the implied covenant may be "disregarded as superfluous."  And it dismissed the unjust enrichment claim because there was an adequate remedy at law.

As for the Unfair Competition Law count, the court once again split the baby, allowing the claim to proceed for so-called "direct injury" claims against Facebook, but holding that the third party click fraud allegations failed to state a claim.  California's UCL has three prongs:  fraud, unlawfulness, and unfairness.  The court held that plaintiffs could not allege reliance sufficiently to maintain the fraud prong of the UCL.  But it determined that -- with respect to "direct injury" claims -- plaintiffs' allegation of systematic breach of contract met the unlawful conduct prong of the UCL.  Moreover, it held that the "unfairness" prong was met, borrowing the FTC's standard for unfairness in 15 U.S.C. sec. 45(n).  (This, of course, is inconsistent with other California precedent requiring a violation of a legislatively-announced policy in order for conduct to be "unfair.")

The bottom line is this:  despite a disclaimer that very clearly absolved Facebook of responsibility for clicks driving up the cost of advertising, a finding of some "ambiguity" in the provision will allow the claim  to proceed to costly class action discovery.  The lesson to lawyers is that in drafting disclaimers, one must make it doubly and even triply clear that under no conceivable set of circumstances is the client to be responsible for what is disclaimed.  The challenge -- particularly in light of opinions like this one -- is to do that with simple, crisp language, and resist the urge that such opinions create to add every conceivable synonym and scenario to the disclaimer.  Ironically, doing the latter may increase the likelihood of a court finding ambiguity.

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The Fourth District of California's Court of Appeal recently issued an important opinion affirming a demurrer on a UCL claim, holding that the "actual reliance" requirement of In re Tobacco II applies to claims brought under the "unlawful" prong of the UCL where they are grounded in deception or misrepresentation.

In Durrell v. Sharp Healthcare, No. D054261, Slip op. (Cal. App. -- 4th Dist. Apr. 19, 2010), the plaintiff had been admitted to the defendant's hospital five times for treatment.  Plaintiff alleged that Sharp billed uninsured patients wildly inflated rates called "Chargemaster rates" for services, while it billed patients covered by Medicare and private insurance substantially less.  For example, plaintiff alleged, Sharp allegedly charged uninsured patients 412% of the Medicare reimbursement rates for typical reimbursements.  Slip op. at 4.  Plaintiff alleged that this violated the Agreement for Services, which only obligates a patient to pay Sharp's "usual and customary charges for . . . services."  Slip op. at 2-3.  Plaintiff asserted causes of action under the UCL, the Consumer Legal Remedies Act, breach of contract, breach of the duty of good faith and fair dealing, and unjust enrichment.  The trial court had granted the defendant's demurrer, finding primarily that the Second Amended Complaint ("SAC") failed to adequately allege causation.

The court in Durrell traced the history of Proposition 64, which limited standing to sue to those who suffered an injury in fact as a result of the defendant's challenged conduct.  The purpose of this restriction "'was unequivocally to narrow the category of persons who could sue businesses under the UCL."  Slip op. at 8.  This was done to eliminate incentives that encouraged the filing of frivolous lawsuits that clog California courts and threaten the very survival of small businesses. 

The question, of course, is what does the phrase "as a result of" mean in the context of each of the three prongs of the UCL.  (The UCL precludes fraud, "unlawful" conduct, and "unfair" conduct.  Plaintiff had dropped his claim under the fraud prong of the UCL on appeal, leaving only "unlawful" and "unfair" conduct.)

Last summer, in a seminal opinion, the California Supreme Court determined that -- within the context of the UCL's "fraud" prong -- the requirement that injury be "as a result of" the fraudulent conduct actually meant that the plaintiff must have actually relied on the misstatement; no lesser standard would satisfy the purpose of Prop. 64.  See Slip op. at 12-13 (discussing In re Tobacco II).

But what did "as a result of" mean here, where the plaintiff alleged that the defendant violated the "unlawful" prong of the UCL by making false promises to provide affordable health care and instead charging unreasonable and inflated prices"?  Slip op. at 12.

The Court of Appeal held that it meant "actual reliance," just as in In re Tobacco II:

[W]e conclude the reasoning of Tobacco II applies equally to the "unlawful" prong of the UCL when, as here, the predicate unlawfulness is misrepresentation and deception.  A consumer's burden of pleading causation in a UCL action should hinge on the nature of the alleged wrongdoing rather than the specific prong of the UCL the consumer invokes.  This is a case in which the "concept of reliance" unequivocally applies, and omitting an actual reliance requirement when the defendant's alleged misrepresentation has not deceived the plaintiff "would blunt Proposition 64's intended reforms."

Id. at 14 (citations omitted).

Because the complaint did not allege that the plaintiff relied on Sharp's website or the language in the Agreement for Services, there simply was no causation credibly pled, making the trial court's demurrer proper.

The court proceeded to analyze the "unfair" prong of the UCL.  Plaintiffs said that his allegation that Sharp's conduct was "unfair, immoral, unethical, oppressive and unscrupulous" satisfied the UCL.  The Court of Appeal disagreed, holding that this was a "vague test of unfairness" that must be rejected.  The court outlined the debate in California law regarding whether Cel-Tech applies in consumer cases or not, and ultimately concluded that a complaint that is not "tethered to any underlying constitutional, statutory or regulatory provision, or . . . threatens an incipient violation of antitrust law" cannot satisfy the "unfairness" prong of the UCL in a consumer fraud case.

The court sustained the demurrer on the CLRA count for lack of causation:  the complaint "does not allege Durell relied on any representation by Sharp in seeking or accepting treatment at its facility."  Slip op. at 20.

The breach of contract and breach of implied covenant counts failed because plaintiff failed to plead that he performed his allegations under the contract.  Rather, he was trying to escape paying even the reasonable value for the services he received.  Id. at 20-24.  And the unjust enrichment count was dismissed because the complaint pleads the existence of express contracts, which must govern here. 

Durell is an important opinion demonstrating the restrictive standard by which California courts will judge standing in UCL claims brought under the "unlawful" and "unfair" prongs of the UCL in the wake of Proposition 64.

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Last week the Ninth Circuit issued an opinion that highlights the fact that no matter how broadly you draft the release in a class action settlement, you can't necessarily count on a subsequent court enforcing it.

In Hesse v. Sprint Corp., No. 08-35235, Slip op. (9th Cir. Mar. 2010), plaintiffs brought a class action against Sprint, alleging that it improperly charged Washington State's business and operations tax as a line item to its customers when the law disallows such a pass-through and instead requires it to be part of the company's "operating overhead."  Plaintiffs assert causes of action under Washington's Consumer Protection Act, breach of contract, and unjust enrichment.

Sprint moved for summary judgment in the trial court, holding that the action was barred by the release and judgment in a nationwide class action settlement entered by a Kansas state court (the "Benney Settlement") in 2006.  The Benney Settlement involved a class of Sprint customers who were charged various federal regulatory fees between 2000 and 2006.  The class in the Benney Settlement released:

any and all claims  . . . that have been, could have been, or in the future might be asserted in the [Benney] Action[] or in any other court or proceeding which relate in any way to the allegations that . . . Sprint failed to properly disclose or otherwise improperly charged for surcharges, regulatory fees, or excise taxes, including but not limited to the [federal] Regulatory Fees; and all other causes of action . . . whether based on federal, state, or local statute . . . that have been, could have been, may be, or could be alleged or asserted by any Class member . . . against [Sprint] relating to . . . the subject matter of any of the claims alleged in the Benney Action.  

Slip op. at 3852.

The plaintiffs in Hesse admittedly were members of the Benney class.  The question, then, was whether the release in the Benney Settlement precluded plaintiffs' claims premised on Sprint's charging of a state-law tax (Washington's B&O tax) when the underlying claim in the Benney action had been the charging of federal regulatory taxes.

The Ninth Circuit held that "the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement."  Id. at 3854.

The Ninth Circuit cited Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) to conclude that although the subsequent class could not mount an all-out collateral attack on the prior state court judgment, it could seek limited review of whether the procedures in the prior litigation afforded them due process.  Slip op. at 3855.  The Ninth Circuit found that the Kansas court had not made an explicit finding that the class representative in the Benney Settlement adequately represented class members who also had claims based on state taxes.  Accordingly, the Ninth Circuit undertook its own analysis of the adequacy of representation in the Benney Settlement.

The Ninth Circuit held that because the named plaintiff in the Benney Settlement -- who, like me, hails from Missouri -- did not have claims based on Washington's B&O tax, he did not adequately represent the plaintiffs in the Hesse class.  This was not only because he did not "vigorously prosecute the claims relevant to this case," but also because he "had an insurmountable conflict of interest with those members of the class."  Id. at 3857-58.

The Ninth Circuit took care to indicate that it was not invalidating the Benney Settlement -- at least as to the release of all claims pertaining to the federal regulatory fees at issue in Benney.  Instead, it held "only that any release of the B&O Tax Surcharge claims at issue in this case by the judgment approving the Benney Settlement would violate due process."  Id. at n.5.

So are class action settlements only able to release the claims that the plaintiffs brought in the case?  The Ninth Circuit said no, a release may be broader than the claims stated, but only to a point:

A settlement agreement may preclude a party from bringing a related claim in the future "even though the claim was not presented and might not have been presentable in the class action," but only where the released claim is "based on the identical factual predicate as that underlying the claims in the settled class action."

Id. at 3860 (quoting Williams v. Boeing Co., 517 F.3d 1120 (9th Cir. 2008)).  The Ninth Circuit concluded that because "the Washington Plaintiffs' claims do not share an identical factual predicate with the claims resolved in the Benney Settlement," they were not derived from the same transaction or occurrence and thus could not be precuded by the Benney Settlement.

The Hesse opinion is an important read for all counsel who draft class action settlements.

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On deck for this morning is another case that brings home the message:  read those service contracts, folks, because they really can cut off your legal options.

In Minnick v. Clearwire US, LLC, 2010 WL 431879 (W.D. Wash. Feb. 05, 2010), customers sued the provider of wireless Internet and telephone service over the early termination fee ("ETF") contained in its contract.  The wireless service, plaintiffs alleged, was unreliable, slow and often non-existent.  But when they went to terminate service, the defendant pointed to the contract, which included an ETF of $220 less $5 per month of service the customer had since the beginning of the two year service contract.  

US District Judge Marsha Pechman -- who has previously ruled on Microsoft matters discussed in this blog -- granted the defendant's motion to dismiss the complaint.

She began her analysis by looking at what law would apply.  The contract provided that Washington or Delaware law would control.  Plaintiffs identified no difference in the laws, so the court did not ultimately make a choice of law determination.

The gist of plaintiffs' causes of action was that the ETF was an unconscionable penalty and should be disregarded.  The defendant convinced the court, however, that it was more analogous to an "alternative performance provision" that gave customers choices at the outset for how they would perform their obligations under the contract.

The court also analyzed UCC 2-302 -- even though this was a contract for services, not goods -- and observed that "unconscionability" is a defense to enforcement of a cause of action, but is not in itself a basis for restitutionary relief.

In analyzing the claim under Washington's Consumer Protection Act, the court noted that plaintiffs had two options:  either the actions had to have the capacity to deceive a substantial portion of the public, or they had to constitute a per se unfair trade practice.  The plaintiffs disclaimed a deception-based approach -- presumably since all of the contract terms were disclosed to customers before establishing service -- and instead relied on the "per se unlawful" prong of the CPA.  But all they could point to were common law precedents about "unlawful penalties" in contracts.  The Washington Supreme Court has held that the "per se unlawful" prong of the statute only applies to practices that the Legislature has declared unlawful.  Thus, common law precedents did not cut it and the CPA count was dismissed.

Plaintiffs also asserted an unjust enrichment count.  But "[u]nder Washington law, a plaintiff who is a party to a 'valid express contract is bound by the provisions of that contract' and may not bring a claim for unjust enrichment for issues arising under the contract's subject matter.  Id. at *5 (citation omitted).  Plaintiffs argued that they were merely engaging in "alternative pleading," but the court noted that the contract also had a severability provision, so even if the ETF provision were unenforceable, the remainder of the contract would survive and govern plaintiffs' payment obligations. 

The court also rejected plaintiffs' breach of contract count based on the allegedly lousy service they received from the defendant.  The contract provided that customer must notify the defendant in writing within 20 days if they disputed charges, and it limited damages to a credit for the customers' prorated monthly charges.  Even these were not available absent a written request.  Because the plaintiffs had not alleged compliance with these provisions, the court granted dismissal of the breach of contract count.

Finally, the court rejected the plaintiffs' count for false advertising under the CPA.  The court noted that no plaintiff identified statements that they relied upon, and therefore "they have not alleged a plausible basis to identify CPA causation."  Moreover, the court pointed to the FAQ section of the defendant's website, which "state[d] that the quality of service may vary depending on geography and modem placement."

Minnick is an important reminder that service contracts matter, and that they can be important tools to prevent class action litigation.

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A recent decision of the Southern District of New York reminds us that even where the subject of the suit is a standardized contract, there can still be individual issues that preclude class certification.

In Spagnola v. Chubb Corp., 2010 WL 46017 (S.D.N.Y. Jan. 7, 2010), some insureds sued their insurer, Great Northern Insurance Company, along with two related insurers over policies that allegedly were supposed to increase coverage daily to reflect the current effect of inflation. Plaintiffs claimed that the insurers left them underinsured and sued under a variety of theories.  The district court previously had dismissed all of the causes of action, and the Second Circuit had affirmed dismissal of all but the breach of contract count -- to the extent that it was based on the increase in coverage and premiums in a way that did not reflect current property costs and values.  Id. at *2. The Second Circuit also had instructed that the voluntary payment doctrine -- which precludes a plaintiff from recovering for payments made with full knowledge of the facts -- was not ripe to support dismissal as pled here at the motion to dismiss stage.

On remand, Judge Harold Baer, Jr. considered two basic questions:  (1) could plaintiffs maintain suit against the "related" companies, and (2) should it grant the defendant's motion to deny class certification.  

Plaintiffs' policies were written by a subsidiary of the Chubb Corporation.  In addition to their insurer, Plaintiffs sued Chubb and its largest subsidiary, Federal Insurance Company, which allegedly manages the other Chubb subsidiaries.  Of course, plaintiffs were asserting a breach of contract theory only at this point, and they had a contract only with Great Northern; neither Chubb nor FIC were signatories to the policies.  Judge Baer thus considered whether plaintiffs had adequately alleged alter ego liability or an agency theory to keep the two non-signatory defendants in the case.  

Although plaintiffs pled a credit agreement that considered Chubb and its subsidiaries as a whole, as well as the overlap of senior management, officers and directors, and advertising that refers to the "Chubb Group," the court held that it was insufficient to pierce the corporate veil:

Although Plaintiffs have alleged facts to suggest some overlap between the operations between Chubb and its subsidiaries, this overlap is not unusual and Plaintiffs' allegations do not rise to the level that indicates the kind of complete domination and control that is required under the first prong of the alter-ego analysis.  Indeed, courts routinely refuse to pierce the corporate veil based on allegations limited to the existence of shared office space or overlapping management, allegations that one company is the wholly-owned subsidiary of another, or that companies are to be "considered as a whole."

Id. at *7 (citation omitted).

In considering the agency theory, the court held that plaintiffs had pled no facts establishing that Chubb or FIC had actual authority to act as Great Northern's agent.  However, the court held that plaintiffs had pled enough facts to keep Chubb in the case at the motion to dismiss stage on the issue of apparent authority: 

Specifically, Plaintiffs have alleged that the cover letter enclosing the policies bore the Chubb trademarked logo; that an integrated advertising and marketing campaign relating to the Policies referred only generally to "Chubb"; that insureds under the Policies were directed to make all inquiries to Chubb and to make payments "payable to Chubb."  The Court agrees with Plaintiffs that they have thus sufficiently alleged that insureds could have reasonably believed that they had contracted with Chubb and not Great Northern, notwithstanding the express terms of the policies.

Id. at *10.  The court, however, dismissed the complaint against FIC because no such evidence was pled against it.

In considering the defendant's motion to deny class certification, the court held that the plaintiffs had satisfied the elements of commonality and typicality, but they failed the elements of adequacy of representation, predominance and superiority.  For some of the policies, the insurer bore the risk of underinsurance, but for others, that risk was borne by the insured.  Plaintiffs, who held policies where the insurer bore the risk, could not be expected to adequately represent the interests of those with policies where they bear the risk of loss.  Moreover, one of the plaintiffs had purchased his policies outside the defined class period and was a close personal friend of class counsel.  Accordingly, the adequacy of representation element was not satisfied.

In analyzing predominance, the court concluded that the class members' claims were not capable of classwide proof, but would require an analysis of individual issues, including:

the unique characteristics of each class member's home, whether each policyholder's coverage was actually increased using CPI or some other guideline, the amount of the increase, whether the policy requested that the increase be waived or revalued, and actual replacement cost of each policyholder's home.  Compounded with these individual questions is the lingering concern relating to the potential unique defense of voluntary payment, among others.  Ultimately, the Court or the jury will be tasked with the determination, for each individual class member, whether they knew or should have known of the circumstances surrounding the increases in their respective coverages but continued to pay, or whether such payment was the result of a mistake of fact or law relating to their obligation to pay.

Id. at *19.  Accordingly, the predominance requirement of Rule 23(b)(3) was not met.  Similarly, the need for individual mini-trials to resolve class members' claims and the affirmative defense of the voluntary payment doctrine made the class action fail the superiority requirement as well.

The decision in Spagnola is a clear-eyed analysis of how claims relating to standardized contracts can nevertheless involve individual issues that make classwide adjudication impossible.

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That Fred Burnside gets TWO gold stars today!  First, he informed me that the Ninth Circuit refused to hear the appeal of the decision denying class certification in the Xbox litigation.  Now he shares with us a well-written opinion from the Washington Supreme Court holding that a trial court in wireless telephone litigation correctly refused to certify a nationwide class action.

The decision in Schnall v. AT&T Wireless Servs., Inc., No. 80572-5 (Wash. Jan. 21, 2010) (en banc) is particularly timely because its reasoning on the Washington Consumer Protection Act stands in stark contrast to the decision I highlighted on Tuesday, which had effectively read the causation requirement out of Florida's Deceptive and Unfair Trade Practices Act.  But I've gotten ahead of myself.

In Schnall, plaintiffs had brought a putative nationwide class action against AT&T Wireless, claiming that its collection of a "universal connectivity charge" violated the customers' contracts and violated Washington's Consumer Protection Act.  The trial court had refused to certify the class, but the intermediate appellate court had reversed, reasoning that the challenge to a standardized contract was capable of class adjudication.

The Washington Supreme Court reversed the class certification, making four important points.  First, the court held that the trial court had not abused its discretion in holding that the need to apply the law of 50 states made the putative nationwide class fail the predominance requirement.  The Washington Supremes observed that the trial court was correct in honoring the choice of law provision in the contracts, which required the application of the law of the place where the customer signed the contract.  Further, it cited at length the federal precedents recognizing that the need to apply the law of 50 states generally makes class certification untenable, because the variations in state laws may swamp common issues and defeat predominance.  Slip op. at 11.  For example, in the context of the Schnall complaint, the court observed that, for those states that recognize it, "[t]he availability of the voluntary payment doctrine alone could abrogate AT&T's liability for all customers who voluntarily paid the [fee] after receiving the informational flyer."  Id. at 12.

Second, the Washington Supremes noted in their analysis of the superiority factor that:

Washington has no interest in seeing contracts executed by AT&T representatives in other states with citizens of those states examined and adjudicated in Washington courts.  Certified as a nationwide class action, this case would present an unwarranted and unnecessary burden on the state judicial system, all at a large cost to taxpayers.  There is no sound reason in this case for this court to force Washington trial courts to entertain the contract claims of citizens from around the nation.  Their state courts are equally as prepared, if not better situated to apply the contract laws of their states.  The trial court did not abuse its discretion by denying nationwide certification of the plaintiffs' contract claims.

Id. at 15 (citation omitted).

Third, the Washington Supremes recognized that the state's Consumer Protection Act ("CPA") does not apply extraterritorially to provide a cause of action to nonresidents whose claims arose in other states.  Id. at 16.  This geographic restriction is inherent in the language of the statute, but as the court recognized, it also emanates from the CPA's "history as a tool used by the State attorney general to protect the citizens of Washington."  Id.  The AG, the court noted, has no power beyond the state's borders and is charged with protecting only Washington residents.  Thus, regardless of whether it is the official Attorney General or a "private attorney general" suing to enforce the statute, the jurisdictional limitation applies and a "private claimant cannot state a CPA claim by proving the defendant's practices affect the public interest or the citizens of another state."  Id. at 17 (emphasis in original).

Fourth -- and this is where the decision stands in stark contrast to the one I discussed on Tuesday -- the Washington Supremes reiterated that even for Washington plaintiffs, proof of causation is an essential element of a CPA claim.  Id. at 18.  Indeed, "proximate cause in a class action cannot be established by 'mere payment' of an allegedly injurious charge."  Id.  Rather, "in the context of private CPA actions where plaintiffs seek damages, more than a mere capacity to deceive must be shown to establish 'some causal link between defendant's unfair act and [consumer's] injury," and, "[i]n the context of private misrepresentation cases, a plaintiff can satisfy the 'but for' causation requirement by showing she relied on the misrepresentation."  Id. at 20 (citation omitted).  In the context of the Schnall case, that meant that where the plaintiff actually knew that the charge was being levied, the alleged "misrepresentation" had been eliminated as the "but for" cause of the injury.  Id. at 21.  Accordingly, even for Washington residents to whom the CPA applied, the issue of causation could be an individual issue that would defeat predominance.  But because the trial court had not analyzed that question sufficiently, the Washington Supremes remanded the case with instruction to consider the question in the context of a statewide class.

The court's conclusion forcefully shuts Washington's doors to putative nationwide class actions:

In sum, we agree with the trial court that this action should not be certified as a nationwide class action.  Washington need not apply its Consumer Protection Act, or its contract laws, to the citizens of other states in order to protect the interests of the citizens of Washington.  A nationwide class would be unmanageable and unduly burdensome on the trial court and the state judicial system and serve no real benefit to plaintiffs who are free to bring statewide class actions in their home states. 

Id. at 22.

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Well, this is a little awkward.  I mean, it's the New Year . . . Christmas is over . . . and I didn't get you anything.  I got a Nano and a couple of gift cards for iTunes.  But what to get you . . .

I know!  A boxed set of three decisions involving Apple, circa December 2009!

In Hovespian v. Apple, Inc., 2009 WL 5069144 (N.D. Cal. Dec. 17, 2009), the court granted Apple's motion to dismiss and its motion to strike class allegations.  (It was a good holiday for Apple, too, apparently.)  Plaintiff -- a Florida resident -- had brought a class action in California federal court, purporting to represent all people who bought iMAC G5 personal computers.  Plaintiff alleged that the display screen was prone to developing vertical lines that ultimately rendered the screen unusable, that Apple knew of this fact and concealed it, refusing to repair the machines because the lines developed after the one year express warranty had run on the machine.  (Plaintiff bought his Mac in October 2006, but the lines did not appear until March 2008.)  Plaintiff's Second Amended Complaint ("SAC") pled causes of action under California's Consumer Legal Remedies Act, the Unfair Competition Law, for fraudulent omission, for unjust enrichment, and for a declaration that the one-year warranty limitation was unenforceable.

The court dismissed plaintiff's CLRA claim without leave to amend because it failed to state with particularity -- as required by Rule 9(b) -- "when and where Apple made an affirmative misrepresentation, if any, that contradicts its alleged omissions."  Id. at *3.  The complaint contained only generalized allegations that Apple had exclusive knowledge of the problem and concealed it.  This was insufficient -- without affirmative statements that contradict the omitted information -- to state a CLRA claim.

The court also granted dismissal of the UCL claim without leave to amend.  Citing to Clemens v. DaimlerChrysler Corp., 534 F.3d 1017 (9th Cir. 2008), the court held that an alleged defect that may shorten the life span of a product that performs as warranted throughout the express warranty term does not cause a substantial injury to consumers and cannot serve as the basis for a UCL claim.

The court granted dismissal of the common law fraudulent omission claim for the same reason it dismissed the CLRA claim, but it made the dismissal without prejudice to give plaintiff leave to re-plead to elaborate on what duty to speak Apple had that it allegedly had violated.

The court also dismissed the unjust enrichment claim with prejudice, holding that an unjust enrichment claim that is premised on the same course of conduct that underlies the statutory and common law tort claims cannot stand alone as an independent claim for relief.  Id. at *5.  It fails for the same reason the other claims fail.

The court also granted Apple's motion to strike the class allegations, citing its authority under Federal Rules of Civil Procedure 23(c)(1)(A), 23(d)(1)(D), and 12(f).  Plaintiff defined the class as all persons who purchased iMAC G5 personal computers from Defendant Apple, Inc.  The court held that the complaint failed to state a valid class action claim against Apple:

First, the class is not ascertainable because it includes members who have not experienced any problems with their iMAC display screens.  Such members have no injury and no standing to sue.  Second, the class is not maintainable under Rule 23(b)(3) because it includes members who can have no claim against Apple.  For example, the putative class includes members who (a) did not purchase the particular iMac model or the type of iMac screen that Hovespian alleges is defective and (b) experienced the alleged defect after their warranty expired.  Finally, the class is not maintainable under Rule 23(b)(1) or Rule 23(b)(2).  These types of class actions are not suitable for actions where recovery of money damages is the primary relief sought by the plaintiff.

Id. at *6.  The court struck the class allegations without prejudice, thus allowing amendment after plaintiff amended his fraudulent concealment claim.

The second case in our Apple boxed set was well reported on:  Birdsong v. Apple, Inc., 2009 WL 5125776 (9th Cir. Dec. 30, 2009).  Birdsong involved a class action challenge to Apple's iPod based on the potential for hearing loss.  Plaintiffs alleged that the iPod was defective in that it could achieve sounds of 115 decibels, the long battery life allows those sounds to be played over long periods of time, the ear buds are designed to be placed deep in the ears (rather than over the ears), the ear buds lack noise cancelling properties, and the iPod lacks a volume meter that tells users they are listening at dangerous levels. 

Apple includes this warning with each iPod:

Warning:  Permanent hearing loss may occur if earphones or headphones are used at high volume.  You can adapt over time to a higher volume of sound, which may sound normal but can be damaging to your hearing.  Set your iPod's volume to a safe level before that happens.  If you experience ringing in your ears, reduce the volume or discontinue use of your iPod.

Id. at *1.

The Ninth Circuit affirmed dismissal of the implied warranty of merchantability count, observing that nothing in the complaint says the iPod is defective for its ordinary purpose of listening to music.  Rather, the statements in the complaint merely suggest that users have the option of using the iPod in a risky manner, but it does not suggest the product lacks any minimum level of quality.  Where, as here, the complaint merely seeks additional features to make the product safer, it fails to allege the sort of lack of baseline utility that would support a breach of the implied warranty of merchantability claim.  Id. at *2-*3.

Plaintiffs abandoned the breach of express warranty and breach of the implied warranty of fitness for a particular purpose claims on appeal. 

The Ninth Circuit also affirmed dismissal of the Unfair Competition Law claim because they failed to allege the requisite injury to have standing to bring the claim.  To begin with, the complaints did not allege that the plaintiffs themselves ever suffered hearing loss or were at risk of imminent hearing loss.  Nor did they allege that plaintiffs themselves ever used their iPods in a way that exposed them to a risk of hearing loss.  Rather, they cast their allegations as potential impacts on unidentified users.  This was insufficient to meet the injury requirement for Article III standing.  Id. at *4.

The court also held that plaintiffs failed to allege an economic harm (lost money or property) that would confer standing to sue under the UCL because "the alleged loss in value does not constitute a distinct and palpable injury that is actual or imminent because it rests on a hypothetical risk of hearing loss to other consumers who may or may not choose to use their iPods in a risky manner."  Id. at *5.  And the court rejected plaintiffs' "benefit of the bargain" theory, holding that the "plaintiffs' alleged injury in fact is premised on the loss of a 'safety' benefit that was not part of the bargain to begin with."  Id.

The third case in our boxed set is a lump of coal:  Owens v. Apple, Inc., 2009 WL 5126940 (S.D. Ill. Dec. 21, 2009).  Plaintiffs brought a putative nationwide class action, alleging that Apple breached a contract and violated various consumer fraud statutes when it sold gift cards to people with the representation that songs cost $.99 a song, and then on April 7, 2009 raised the price of certain songs to $1.29.

Apple moved to dismiss, asserting a privity defense to the breach of contract claims.  The court rejected it outright, where the gift card at issue was marketed by Apple and could be used only on Apple's website. 

The court also held that there was nothing vague about the representation:  "Songs are 99 cents, and videos start at $1.99."  The complaint alleged plaintiffs relied on the price guarantee as part of the basis of the bargain, and that plaintiffs were damaged as a result of the price increase.  The court refused to dismiss the breach of contract counts.

The court also refused to dismiss the consumer fraud counts.  Apple had argued that the statement "Songs are 99 cents," did not mean that the price of all songs was 99 cents, but rather that some songs were 99 cents.  Plaintiffs argued that this interpretation was a "slippery slope" that would allow Apple to market its gift cards in the same way so long as one song was 99 cents.  The court refused to find that the phrase was not deceptive as a matter of law.

So that's it.  A boxed set of Apple decisions for you.  If they don't fit and you want to exchange them for a sweater vest I received this Christmas, just let me know.

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It often seems that courts addressing consumer claims seem to absolve consumers of any personal responsibility to manage their finances.  Judge Michael J. Reagan of the Southern District of Illinois -- a former president of the Illinois Trial Lawyers Association -- recently issued a refreshing opinion in a telemarketing case that squarely places responsibility on the consumer to monitor what his money is being spent on and to read his mail.  See Spivey v. Adaptive Marketing LLC, No. 07-cv-0779-MJR (S.D. Ill. Sept. 23, 2009).

In Spivey, a putative class action, the plaintiff alleged that the defendant used telemarketing transactions to "cram" consumers' debit and credit cards with unauthorized transactions without the cardholder's knowledge.  The complaint asserted two counts:  (1) breach of contract, and (2) unjust enrichment.  Defendant moved for summary judgment, and the court granted it.

Plaintiff had called a telemarketing number to order an Atkins diet product.  The conversation was recorded, revealing that plaintiff was also offered a free 30-day membership to HomeWorks, a membership program offering discounts at numerous chain stores.  The salesperson explained that after 30 days, if Plaintiff did not cancel, the membership would be automatically extended and Plaintiff's card would be charged a $96 annual fee once each year.  He could cancel at any time, and the full details of the program would be contained in a welcome kit that would arrive in the mail.

Plaintiff claimed not to remember receiving the "welcome kit," alleging that if he did receive it, the kit was designed to look like junk mail and he threw it away without opening it.  But the court employed the "mailbox rule" to impose the written terms of the welcome kit to Plaintiff's transaction.  The mailbox rule says that where a letter is properly addressed and mailed, there is a presumption that it reached its destination in the usual time and was read by the recipient.  The defendant testified that it was its practice to send the welcome kit to each new member in a membership program.  Plaintiff's testimony that he did not recall receiving the welcome kit was not enough to rebut the presumption of the mailbox rule.

The court also rejected the Plaintiff's argument that written terms sent after the creation of an oral contract cannot govern the relationship.  The court noted that the written terms often follow in the mail after a consumer transaction, and those terms are held to govern the transactions.  The court observed: 

In sum, Adaptive invited acceptance by conduct, i.e., by sending the kit to Spivey and allowing him the opportunity to call within 30 days to cancel the agreement or to call within the first year to receive a full refund.  By not calling the toll-free number in the first 30 days (or even in the first year) -- as advised by the telemarketer and set forth in the agreement -- Spivey accepted the offered services and the terms and conditions under which they were offered.  He had a clear mechanism and reasonable opportunity to reject them.  Spivey is bound by the written terms provided after the transaction. 

Slip op. at 13.  The court also noted that the written agreement had an integration clause and that the terms of plaintiff's posited oral contract did not contradict the written contract.

Analyzing plaintiff's claim of "cramming" -- i.e., placing unauthorized charges on credit cards with the hope the consumer will pay the balance without noticing them -- the court began by observing that the charges were not unauthorized.  Rather, both the oral and written contracts authorized them.

The court also held that the "voluntary payment doctrine" is an independent alternative ground for dismissing Plaintiff's claims.  The doctrine holds that "'a plaintiff who voluntarily pays money in reply to an incorrect or illegal claim of right cannot recover that payment unless he can show fraud, coercion, or mistake of fact.'"  Slip op. at 16 (citation omitted).

The court noted that plaintiff paid the annual charges for four years without ever questioning the payments.  The charges were clearly labeled "HomeWorks Plus," and the statement provided a toll-free number to inquire about any charge.  The court concluded that "[t]o the extent that Spivey was ignorant of the charges on his credit card statement, it was because he failed or refused to apprise himself of that knowledge, and he must bear the consequences."  Slip op. at 17.

Accordingly, the court granted judgment to defendant on the breach of contract count.  The court also granted judgment for the defendant on the unjust enrichment count because unjust enrichment -- doctrine that implies a contract in law where none exists -- is not available where a contract controls the relationship between the parties.  Also, the voluntary payment doctrine applies to the unjust enrichment count as well.  Slip op. at 19.

Judge Reagan's opinion in Spivey is an important reminder that we as consumers have responsibilities -- including to read our mail and monthly manage our finances and credit card charges.  Where we fail to do that, caveat emptor applies.

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As someone who has drafted his fair share of class action settlements, I can tell you that I always get a little nervous when I start reading a case in which a court is required to construe the language and effect of a prior class action settlement.  I had that same trepidation when I picked up Lester Building Systems v. Louisiana-Pacific Corp., 2009 WL 537501 (Minn. March 5, 2009).

The plaintiff, Lester Building Systems ("Lester"), makes hog barns, which it sells directly to farmers and indirectly through a network of independent builder-dealers.  In the early 1990s, Lester stopped using plywood in favor of an external siding product called "Inner-Seal," which was made by Louisiana-Pacific.  Around that same time, Louisiana-Pacific started receiving complaints from around the country about its Inner-Seal product swelling and deteriorating.  Eventually, Louisiana-Pacific ended up settling a nationwide class action in federal court that resolved all potential Inner-Seal claims.  The opt-out settlement did not require Louisiana-Pacific to fund the settlement all at once; rather, it was to make annual payments.  The claims ended up far out-pacing Louisiana-Pacific's contributions, and many class members were forced to either accept immediately-reduced payouts on their claims, or wait until such time as Louisiana Pacific could make a full payment.

Lester had bought around $3.4 million of Inner-Seal and used it to make some 2,600 hog barns.  Many of its customers were not happy.  Lester estimated that to repair its customers' barns would cost $13.2 million.  Many of Lester's customers, however, chose an early payout from the settlement fund of only $640,000.

In negotiating the settlement, Louisiana-Pacific -- like many product manufacturers -- had tried to protect not only itself, but also the intermediate sellers of its products by including within the settlement a complete release of liability for them:  "To the extent claims may be asserted against persons or entities in the chain of distribution, installation or finishing of the Exterior Inner-Seal siding, the Releasing Party shall be deemed to and does hereby release and forever discharge those persons or entities from claims based solely on distribution, handling, installation, specification, or use of the Exterior Inner-Seal Siding."  2009 WL 537501 at *5 (quoting the settlement).

Lester was far from grateful for such protection, however.  In fact, it sued Louisiana Pacific in Minnesota state court, asserting theories of breach of contract, breach of implied and express warranties, and fraud.  Lester won at trial handily:  the jury awarded Lester $3.4 million for Lester's purchase price for the Inner-Seal products, $10.2 million for lost profits up through 2002, $2.8 million for the cost of restoring goodwill, and $13.2 million for the estimated cost of repairing its customers' barns.

Louisiana Pacific argued that the cost of repairing Lester's customer's barns was not a proper element of damages because Lester had no legal obligation to conduct such repairs, since it had received a full and complete release from the federal settlement.  Lester countered that even if it did not have a legal obligation to make such repairs, it had a practical business obligation to do so, and Louisiana-Pacific should pay for it. 

The Minnesota Supreme Court examined the language of the federal settlement and held that it clearly and unambiguously released all entities in the chain of distribution -- including Lester -- from liability to repair the farmers' barns.  Moreover, the court held, Lester already had received from the jury awards for lost profits and loss of goodwill, and thus no "practical business obligation" could exist to support the so-called consequential repair costs.  Without Lester having a legal obligation to repair its customers' barns, Lester could not force Louisiana-Pacific to pay for it.

Lester Building Systems is another good decision for my class action settlements file that squarely considers the language of an intermediary release provision and gives it full force and effect.  The irony, of course, is that the release ultimately operated to the detriment of the intermediate seller, who instead wanted to extract money from the manufacturer to pay for repairs to its customers' barns. 

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