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

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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Who knew that not everyone loved Zipcar?  Since the company burst onto the scene about a decade ago, it has spawned a group of almost cult-like devotees who seemingly can't shut up about the company.

For those of you who don't live in urban areas and have no idea what I'm talking about, here's the deal.  Lots of city dwellers spend years -- even decades -- of their lives not owning a car.  (Even I did.  Although now I have 2.  Go figure.)  Generally, these carless city folk get around just fine on subways, buses, taxis and bicycles.  But there are some errands -- like going to Costco to stock up for the party you are throwing, or picking up that sofa you bought on Craig's list, or a trip to Ikea -- that just cry out for a car.  But renting a car in the city can be a real pain in the tucchus.  First of all, it's expensive.  Car rental can be $200 or more in Manhattan.  And you have to rent the car for an entire day.  And then there's the fact that the car rental places are not conveniently located.

Enter Zipcar.  By paying an annual fee to join Zipcar, you "co-own" cars that are sprinkled in parking garages throughout the city.  You can schedule use of a Zipcar in increments as small as an hour, which makes taking a car on an errand very affordable.  Zipcar relies on its members to keep the cars clean and gassed for subsequent users.  And, as you can imagine for a company that schedules car use by the hour, it is very concerned about the timely return of a Zipcar.

People who use Zipcars tend to speak glowingly about them.  They throw around terms like "convenient," "affordable," and "environmentally responsible."  Try not to get trapped by one of them at a cocktail party.

Imagine my surprise to find a class action opinion in a case against Zip Car!  See Blay v. ZipCar, Inc., 2010 WL 2292467 (D. Mass. June 7, 2010).  It seems that for at least one two-year member of Zipcar, the luster is off the pearl.  He alleged that under Zipcar's membership contract, there were five types of charges added onto the hourly charges that were unfair and unlawful.  Those five charges were:

1.  If members make or alter reservations by speaking to a live operator rather than using the Internet or an automated phone system, they are charged $3.50.

2.  If Zipcar must process a parking or traffic ticket, it charges the member an automatic fee.

3.  If a Zipcar is returned late, there are escalating fees (starting at $50) that are charged regardless of whether someone else is waiting for the vehicle.

4.  If a member forgets property in the car, he must retrieve it within 3 hours, attempt recovery through an online lost and found, or reserve the car for an hour to retrieve it.

5.  If a member's account is inactive, he is charged $20 per month if he has money on account; if he has no money on account, his membership may be terminated.

The plaintiff alleged that these fees were penalties not associated to any actual costs to Zipcar, and he sought to recover them for a nationwide class on causes of action for unjust enrichment, money had and received, and declaratory judgment.

Not surprisingly, Zipcar moved to dismiss.  The district court -- applying Twombly and Iqbal -- granted the motion without prejudice.

First, the court held that it could properly consider the membership agreement and terms on the website, both of which were referenced in plaintiff's complaint.  It also allowed into evidence on the motion to dismiss an e-mail from plaintiff and Zipcar's standard operating procedures.

The defendant argued that these charges were not in the nature of liquidated damages at all, but were instead alternative ways in which plaintiffs could perform their obligations under the membership agreement.  The court generally seemed somewhat dubious of the alternative performance argument, observing that "[t]he concept of an alternative performance contract has been largely absent from Massachusetts case law for over the past century and Zipcar's memorandum contains numerous citations to other jurisdictions and to Massachusetts cases from the 1920s or earlier."  Id. at *3.

Nevertheless, when the court looked at the $3.50 fee to speak to a live operator, it held that "it represents a clear alternative performance term" that is based in the cost to Zipcar of providing a live representative to speak to.  The court thus dismissed the challenge to this fee without prejudice.

As for the late fees, the court reasoned that plaintiff had not met his burden of pleading that they were unenforceable penalties grossly disproportionate to Zipcar's costs.  Id. at 5.  It observed that Zipcar had a legitimate reason for encouraging members to return cars on time, and it noted that members could avoid the penalties simply by extending their reservation by a half hour  or more at the normal hourly rates.  The court thus dismissed the challenge to this fee without prejudice.

The court next analyzed the fee for Zipcar to process traffic tickets.  The court noted that plaintiff failed to provide any evidence -- other than threadbare allegations -- that the fee is grossly disproportionate to Zipcar's cost.  Moreover, Zipcar established that it must pay people to process the traffic tickets.  Accordingly, the court dismissed the challenge to this fee without prejudice.

Similarly, the court held that plaintiff failed to plead how the fee for lost items was unfair and disproportionate.  Moreover, Zipcar allowed less costly means of obtaining the goods.  The court thus dismissed the challenge to this fee, too, without prejudice.

The court refused, however, to dismiss the challenge to the "inactivity fee," at least initially, reasoning:

With respect to these fees, Blay's argument is colorable.  In particular, the Court is unpersuaded that an inactive member costs Zipcar anything at all, let alone $20 per month, and Blay is correct that the clear motive seems to be to induce customers to maintain active memberships.  Although it is still unclear whether the charges might prove to be enforceable penalties and plaintiff's pleading is again cursory, the Court finds that the allegations related to inactivity fees are sufficient to state a cause of action and survive a motion to dismiss.

 Id. at *7.

But not so fast!  The defendant argued that plaintiff did not actually pay an inactivity fee, and thus did not have standing to bring such a claim.  The court agreed:  "Because he does not explicitly allege that he incurred such a fee, he cannot represent a putative class based only upon that claim.  His claim based upon the inactivity fee will, therefore, be dismissed as well."  Id. at *8.

The defendant had raised other strong arguments against plaintiff's causes of action.  For example, it argued that plaintiff could not seek recovery in "quasi contract" for unjust enrichment where the claims were governed by written, explicit contracts.  Similarly, the defendant asserted the voluntary payment doctrine as a bar to recovery.  (Regular readers remember the voluntary payment doctrine holds that a consumer's voluntary payment of a disclosed fee that was made without fraud, concealment or compulsion cannot form the basis of a subsequent claim to recover those payments.  Because the court could decide the case without reaching these arguments, it did not rule on them.  But they provide additional support for the result in this case, and they should tend to discourage plaintiff from attempting to amend his complaint to re-assert the causes of action that he had pled.

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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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