Monthly Archives: January 2016

Supreme Court Alert

No standing street sign in New York.

** Supreme Court Holds in TCPA Case That a Rule 68 Offer or Relief Does Not Moot Class Claims Under Rule 23 ** . . .                                                                                                               

In the case of Campbell-Ewald Co. v. Gomez (No. 14-857), the Supreme Court issued a writ of certiorari to  the Ninth Circuit to resolve a circuit split on the issue of whether a Rule 68 offer of judgment for complete relief to a putative class representative moots his claim thereby preventing him from serving as a class representative under Rule 23See previous post.  The underlying case concerns unsolicited text messages from an advertising company prohibited by the Telephone Consumer Protection Act (TCPA) 47 U.S.C. § 227.  The defendant company offered Mr. Gomez the statutory TCPA remedy (trebled) and even agreed to a stipulated injunction prohibiting it from further violations the TCPA.   Gomez rejected the offer.  The defendant argued that its offer, which provided complete relief, mooted Gomez’s claim and he therefore did not have Article III standing.  The Supreme Court ruled on January 20, 2016 (in a 6-3 decision) that an unaccepted settlement offer does not moot a plaintiff’s case.  Campbell-Ewald Co. v. Gomez, 577 U. S. ____ (2016).  The conservative-leaning court in recent years has issued rulings that put restrictions on class action lawsuits but did not continue that trend in this case.  Justice Ginsburg delivered the opinion of the Court joined by Justices Kennedy, Breyer, Sotomayor, and Kagan with Justice Thomas concurring.  Chief Justice Roberts filed a dissenting opinion, in which Justices Scalia and Alito joined.  Notably, the ruling is limited in scope, with Justice Ginsburg  pointing out that the Court was not deciding how a case would be resolved if the settlement funds had been deposited into an account payable to the plaintiff and the trial court then entered judgment in that amount.  In reaching its determination that a rejected settlement offer does not moot a complaint, the majority pointed to Rule 68’s sanction – that the offeree must pay the offeror’s costs after the offer was made.  This may turn out to be a silver lining for defendants in certain types of class actions, such as consumer cases, where it is unlikely that the class representative will obtain the full amount of his claim if the case were to proceed to trial.  Costs in class action litigation are no small matter.

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Latest Salvo in the Arbitration Wars

** U.S. Supreme Court Grants Certiorari and Vacates Supreme Court of Hawaii’s Decision Voiding Pre-Dispute Arbitration Contract Provision ** 

The Supreme Court’s series of close decisions upholding agreements to arbitrate (including waivers of class arbitration) in private contracts in the face of unconscionability-type assertions —  AT&T Mobility v. Concepcion, 563 U.S. 333 (2011); American Express Co., et al. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) and DIRECTV, Inc. v. Imburgia, 577 U.S. ___ (2015) — has understandably quickened the pace of consumer companies deploying such provisions in their customer contracts and their on-line terms of use.  As those who have followed these cases would know, the rationale of this line of authority is that the Federal Arbitration Act (which provides for the enforceability of arbitration agreements) preempts state law to the contrary, i.e. that would prohibit contracts providing for mandatory arbitration (and class waivers).  But these important Supreme Court decisions are controversial and have been met with resistance by state courts around the country.  Perhaps the most “in your face” response to the Supreme Court’s arbitration decisions is the 2011 Genesis Healthcare case: where the West Virginia Supreme Court accused the Supreme Court of manufacturing “from whole cloth” its reasoning.  Brown ex. rel. Brown v. Genesis Healthcare Corp., 724 S.E.2d 250 (2011).  The Supreme Court was quick to “correct” the West Virginia Supreme Court. Marmet Health Care Center, Inc. v. Brown, 565 U.S. __ (2012).  Will this back-and-forth play out again in Hawaii? The Hawaii Supreme Court has entered the fray in Narayan, et al. v. The Ritz-Carlton Dev. Co., 350 P.3d 995 (2015).  The case involves an (undoubtedly tony) condominium complex at Kapalua Bay that went tragically south.  The purchase agreement included a jury trial waiver and other terms that suggested a right to a civil trial, but the agreement also referenced other documents including a condominium declaration recorded with the state that included a mandatory arbitration provision.  The Hawaii Supreme Court found the plethora of documents inconsistent and confusing and decided that no agreement to arbitrate existed.  It also determined that — even if an agreement to arbitrate existed — it was unconscionable because the fact that the purchasers were stuck with arbitration due to the recording of the declaration created an adhesion contract.  Further objectionable provisions (according to the court) were that the agreement precluded discovery, eliminated punitive and consequential damages, required secrecy, and imposed a one year statute of limitations.  On January 11, 2016, the U.S. Supreme Court granted writ of certiorari, vacated Hawaii’s decision, and remanded the matters “for further consideration in light of DIRECTTV, Inc. v. Imburgia,” (136 S. Ct. 800) signaling that it had made its decisions on this type of challenge to mandatory arbitration agreements (and perhaps signaling that it is done with the issue).  But with the recent passing of Justice Scalia – the author of Italian Colors and the primary architect of the Supreme Court’s arbitration jurisprudence – all eyes will be focused on 1 First Street NE to see if the minority’s strong dissents began to find their way into majority opinions.

 

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The Injunction Conundrum

** Courts Are Inconsistently Grappling With the Question of Whether a Plaintiff Has Standing for an Injunction Prohibiting Misleading Behavior if They are Aware of the Behavior ** . . .                                                                                                                               

An interesting catch-22 exists with respect to injunctive relief in purported consumer class actions in federal court.  If a plaintiff discovers misleading conduct (for example a mislabeled product), her basis for an injunction would be – relief from the company misleading her again!  But if the plaintiff is aware of the false advertising, is it plausible that she would be misled in future?  To quote the old chestnut – “fool me once, shame on you – fool me twice, shame on me.”  By affirmatively pleading the elements of the misleading conduct, doesn’t a plaintiff inherently disqualify  herself from the standing required to seek an injunction in federal court?  This is the argument that won the day in the recent Yakult case in the Central District of California.  Plaintiff in that case, Nicolas Torrent, sued on the allegation that Yakult’s probiotic beverages that claim to have beneficial cultures which “balance [the] digestive system” are misleading because (according to Plaintiff) there is no credible scientific evidence that the probiotics do what Yakult says they do.  Torrent v Yakult U.S.A. Inc., No 8:15-cv-00124-CJC-JCG (C.D. Cal Jan. 27, 2015) (“By definition, healthy people already have a stable digestive health balance of trillions of intestinal bacteria. Yakult, contrary to what defendant advertises, cannot make a healthy person more healthy in terms of digestive health or otherwise.”)  Plaintiff claimed that Yakult violated California’s Unfair Competition Law (UCL) (Cal. Bus. & Prof. Code § 17200 et seq.) and that he was entitled to restitution and injunctive relief.  Id. at ECF No. 32, Second Amended Compl. ¶¶ 14 – 16.  Curiously, though, by the time of the motion for class certification, Plaintiff dropped his demand for restitution or money damages and only asserted a claim for injunctive relief.  Id. at ECF No. 41, Pl.’s Mot. for Class Cert. ¶ 4.  With only the injunction at issue, the lawsuit became a test case of sorts.  In answering the question, the district court was clear that plaintiff did not have standing as there was “[in]sufficient likelihood that [he] will be wronged in a similar way.”  Id. at ECF No. 52, Order (January 5, 2016) citing Los Angeles v. Lyons, 461 U.S. 95, 111 (1983); O’Shea v. Littleton, 414 U.S. 488, 495-96 (1974) (“Past exposure to illegal conduct does not in itself show a present case or controversy regarding injunctive relief … if unaccompanied by any continuing, present adverse effects.”)  The court noted the split within the Central District of California on the standing issue (see In re ConAgra, 302 F.R.D. 537, 573 – 76 (C.D. Cal. Aug. 1, 2014) (collecting cases)) and acknowledged the counter-argument that to deny injunctive relief would upset the enforcement of the UCL – but ultimately decided that it was not the courts’ place to carve out Article III standing exceptions for consumers.  Order at 6 – 8.  On that basis, Rule 23 class certification was denied.  Highlighting the split on this standing issue, a district court in Illinois just a few days later held the opposite.  Leiner v. Johnson & Johnson Consumer Co., Inc., No. 15-c-5876, (N.D. Ill. Jan. 12, 2016).  In this case. plaintiff claimed that Johnson & Johnson violated the Illinois Consumer Fraud and Deceptive Business Practices Act by labeling and advertising two “Baby Bedtime Bath products” as “clinically proven” to help babies sleep better – when it  allegedly knew the products hadn’t been clinically proven to have that effect. Plaintiff sought to represent a class of Illinois purchasers.  The Illinois court aligned itself with courts that have held that consumers don’t forfeit standing by knowing the basis of their claims observing that, without an exception, consumers could never avail themselves of injunctive relief.

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Lumosity Tagged for $2 million by FTC

234** Maker of “Brain Training” Subscription Service Settles with FTC on Allegations that it did not Have the Science to Back Up its Claims of Cognitive Benefit ** . . .                                                                                                                                                                                                                                                                The Federal Trade Commission has agreed to a settlement with Lumosity Inc., with respect to the company’s well known and widely advertised “brain training” program – after the FTC filed a complaint alleging Lumosity’s ads touting the cognitive benefits associated with the products were scientifically unfounded.  Federal Trade Commission v. Lumos Labs, Inc., No 3:16-cv-00001-SK (N.D Cal. Jan. 4, 2016) at ECF No. 1 (Compl.).  The settlement terms include a payment by Lumosity of $ 2 million and a requirement to notify customers who signed up on an auto-renewal plan between January 1, 2009 and December 31, 2014 about their ability to cancel their subscription.  Id. at ECF No. 10 (Order).  The FTC has issued a public statement about the settlement stating, in part: “Lumosity preyed on consumers’ fears about age-related cognitive decline, suggesting their games could stave off memory loss, dementia, and even Alzheimer’s disease . . . [but]. . .  simply did not have the science to back up its ads.”  The FTC complaint also alleges that Lumosity’s consumer testimonials featured on its website had been, in some cases, pay-to-play – i.e., were solicited through contests that promised significant prizes, including a free iPad, a lifetime Lumosity subscription, and a round-trip to San Francisco.  Id. at ECF No. 1 (Compl.) ¶¶ 19 – 21.  The settlement order requires the company and its officers to have competent and reliable scientific evidence before making future claims about any benefits for real-world performance, age-related decline, or other health conditions.  Id. at ECF No. 10 (Order) at 7 – 9.  The order also imposes a $50 million judgment against Lumosity – suspended upon payment of $2 million to the FTC.  Id. at 10 – 12.

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Do Payment Providers Have to Accommodate Everyone?

** Discrimination Class Action filed in California Alleging That Payment Providers such as Square and PayPal Violated Unruh law for Refusing to Process Merchant Payments for Merchant’s Risky Transactions ** . . .                                                                        

Payment processors such as Square, Inc. and PayPal, Inc have opened up a new world for merchants who can now easily and inexpensively accept payments online and/or by credit card from anyone – anywhere.  The platform, however, is not open to all-comers: the companies have strict policies on what sort of merchants or transactions they will accept – and those that they will not.  For example, Square’s User Agreement prohibits merchants from using their accounts to accept payments for anything “illegal” – but it also prohibits a range of activities that may be legal but raise the risk profile for anyone involved (including the payment processor) such as transactions involving mail order drugs, gambling, firearms, adult material, hate products and drug paraphernalia.  PayPal, Inc’s Acceptable Use Policy is similar, it prohibits using an account for activities that violate any law – but also legal (but legally risky) transactions such as get- rich-quick-schemes, lotteries, sexually orientated material, firearms and offshore banking.  Plaintiff counsel in California have bought a purported class action alleging that such business regulations are “discrimination” under California’s civil rights statute (Cal. Civ. Code §§ 51 – 52) (aka “Unruh”).  Abu Maisa Inc., v Flint Mobile Inc., No. 3:15-cv-06338 (N.D. Cal. December 31, 2015) ECF No. 1.  In particular their named plaintiff is a convenience store owner, who, it is alleged, was dissuaded from using Square and PayPal (and other payment providers Flint Mobile, Google, Intuit and Stripe) because plaintiff’s store sells “banned” items such as adult magazines and lottery tickets.  The case is an unusual one, in so far as Unruh cases are typically bought by plaintiff’s who have been discriminated against on the basis of some sort of disability or recognized protected classification (not just on the basis that a plaintiff was denied the right to, in this case, sell adult magazines).  Plaintiff appear to have a hard road ahead of him.  Notwithstanding the broad sweep of Unruh, California courts recognize that businesses may discriminate amongst customers in order to comply with legal requirements or protect business reputation (Harris v. Capital Growth Inv’rs XIV, 805 P.2d 873, 884 (Cal. 1991)) – as long as those regulations are rationally related to the services performed and the facilities provided.  Marina Point, Ltd. v. Wolfson, 640 P.2d 115, 124 (Cal. 1982).  For example, a rental car company can “discriminate” on the basis of age because of the risks involved in renting cars to younger drivers.  Lazar v. Hertz Corp., 82 Cal. Rptr. 2d 368, 373 (Cal. Ct. App. 1999).  Similarly, financial companies can make risk-oriented decisions regarding what customers to deal with and on what terms.  Flower v. Wachovia Mortgage FSB, No. C 09-343 JF HRL, 2009 WL 975811, at *6 (N.D. Cal. Apr. 10, 2009).  Courts uniformly “decline to second-guess [the defendant’s] business judgment.” Desert Healthcare Dist. v. PacifiCare FHP, Inc., 114 Cal.Rptr.2d 623 (Cal. Ct. App. 2001); Semler v. Gen. Elec. Capital Corp., 127 Cal. Rptr. 3d 794, 798 (Cal. Ct. App. 2011).

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