Thursday, November 03, 2011

Litigation calling: class action certified for calling cards

Galvan v. KDI Distribuation [sic] Inc., 2011 WL 5116585 (C.D. Cal.)

I assume the caption is a typo. Tackwood sought certification for a class, alleging California consumer protection violations, breach of contract, and unjust enrichment against Krossland, a wholesaler/distributor of prepaid telephone cards. Fewer than 10 of Krossland’s 9000 retail clients are located outside California.

Prepaid cards have a toll-free number and a PIN on them; Tackwood alleged that Krossland keeps records of the time remaining for each PIN. Tackwood alleged that Krossland’s advertising falsely "uniformly communicates to consumers that they will receive certain numbers of minutes to a given location for a certain cost." Krossland does not properly disclose "the substantial surcharges imposed on the use of such cards," resulting in materially fewer minutes delivered, causing loss of money or property. Moreover, Krossland allegedly falsely represented that it provides a "toll-free" access number, misrepresented and actively concealed that it charged consumers more for calls using wireless telephones than those on land line telephones, and imposed bi-weekly service charges without adequately informing consumers of the deduction or amount.

Tackwood, the named plaintiff, alleged that he relied on representations at the point of sale about the number of minutes available, but received substantially less than what was promised—only about half of the 500 minutes within the US for $5 he was promised.

Krossland argued that the class was not ascertainable because many Krossland-distributed calling cards identify only the service carrier and not the distributor of the card, and thus it is impossible to ascertain which customers purchased a Krossland-distributed calling card. If the customers don’t know what they bought, there’d be no way to tell if they were part of the putative class. Plus, customers mostly discard cards after use and are unlikely to recall the PINs or where they bought the cards. The class representatives were truly representative in that regard—though they testified that they bought a lot of cards over the years (over 100 for one plaintiff), they produced only six altogether.

The court nonetheless found the class sufficiently ascertainable. Krossland’s representative testified that Krossland had agreements with only 8 service providers, and the class definition covers only four; also, some of the cards did identify Krossland, so the ascertainability problem was overstated. Further, Krossland could track the cards because it maintains a list of cards sold by its sales representatives, as well as daily reports stating exactly which cards were distributed. Thus, while it couldn’t directly identify the class members, it could (and indeed has) identified the relevant retailers, and it’s possible that those retailers sold only Krossland cards. Class notice can further help find class members, by being distributed through the same channels Krossland uses to advertise. (The court also said that the notice plan in an earlier proposed settlement was the best practicable: it included a website; an English and Spanish notice in a press release and in the California editions of La Opinion; a notice voice prompt on all current calling cards; and a toll-free telephone number.) Difficulties of proof of class membership because the cards were discarded were “formidable” but premature at the certification stage. Concerns for additional sales to other wholesalers were also not dispositive, since those sales seemed not to be significant.

Numerosity wasn’t in dispute. Commonality: Plaintiff argued that a prevailing common issue is "whether the disclosures that were distributed by Krossland from a limited number of carriers ... comply with California law." In addition, there were common issues about whether Krossland made misleading misrepresentations in its advertisements and whether this violated the UCL and CLRA. These issues could largely be resolved by analyzing Krossland's conduct rather than looking at the conduct of the individual plaintiffs, and thus commonality was satisfied.

Typicality: Krossland argued that Tackwood wasn’t typical because he speaks English, is a U.S. born citizen, and used the cards to make domestic calls whereas the class action purports to protect non-English speaking immigrants who use phone cards to make international calls. The court found this obfuscatory of the real issue, which is whether the claims or defenses of the representative are typical, which they were: he alleged he relied on the representations on the front of the calling cards and the ads, and was injured thereby.

Adequacy: not a problem. Krossland argued that Tackwood couldn’t be an adequate representative because he didn’t read the disclosures on the cards, but the only claim hinging on the substance of the disclosures was the UCL claim based on a violation of the California calling card law, which is a strict liability offense; Krossland didn’t need to read the disclosures to bring the claim. Moreover, Tackwood could still show causation if he proved, as he alleged, that Krossland's failure to place the disclosure in a clear and conspicuous position, as required by law, caused his injury. If, as alleged, the disclosure is deficient because the front of the card states that calls are "toll-free" and the back of the card states that they are not "toll-free," he can win and thus is adequate to represent the class.

The court also found that certification was appropriate under Rule 23(b)(3).

Predominance: Plaintiff argued that the claims were all susceptible to common proof because they focused on Krossland’s marketing and didn’t require individualized showings from plaintiffs. The court first found that common issues predominated on the UCL and CLRA claims. First, the UCL borrows from other laws and treats violations of them as unlawful practices.

California regulates calling card sales. A company “shall print legibly on the card or packaging, so that it may be read without having to open any packaging … information, which shall be current at the time of printing and for as long as it is displayed,” including the card value; all ancillary charges including taxes, connection charges, periodic fees, per-call fees, or any other charges however denominated imposed in connection with use; and the highest charge applicable for international cards and any variation in prices or value applicable to international usage. The distributor is also required to supply this information to retailers in a way that can be displayed at the point of purchase. This was a common issue of fact. Moreover, a UCL violation like this one, which is not based on a fraud theory, doesn’t require a showing of reliance or causation.

Tackwood also alleged a UCL violation based on material misrepresentations on the calling cards and the point-of-sale ads. This requires actual reliance by the class representative, but a presumption of reliance arises when there’s a showing that the misrepresentation was material. Once actual reliance is established for the class representative, the UCL doesn’t require individualized proof of causation and injury for absent class members. The plaintiff properly alleged actual reliance; he identified where he bought the cards and claimed that he bought based in part on the representations about the number of minutes he’d get. Because he also alleged that he got half as much as advertised, he also properly alleged damages. The court independently noted that misrepresentations regarding price are material, so that if Krossland misrepresented the price by concealing toll charges, there’d be a presumption of reliance. The CLRA analysis proceeded similarly.

Likewise, Tackwood showed that common issues predominated on the breach of contract claim “because the putative class comprises customers who, in purchasing Krossland's calling cards, accepted Krossland's offer of a specific amount of calling time, within a specific area, for a specific price.” Express warranties can be created by ads, and the trial might show that Krossland made express warranties through a widespread misleading ad campaign. Again, if Tackwood proved that the advertisements were materially misleading, a presumption of reliance would arise, thus negating the need for an individualized inquiry into the state of mind of each plaintiff.

Superiority: a class action is superior if no realistic alternative exists, as was the case here. Since the cards are $5-$10 each, any individual recovery would be small, giving plaintiffs little incentive to litigate individually. Plus, given the predominance result, consolidating the claims would promote judicial economy; some individualized inquiries in assessing damages wouldn’t render the class action unmanageable or inferior. Tackwood also proposed a workable trial plan based around Krossland’s own documents and testimony along with expert testimony. Krossland's records on revenue collected and sales of the cards to retailers could assist in calculating damages.

Superiority also requires consideration of any other pending litigation. There have been three lawsuits settled or pending against carriers whose cards Krossland distributed, but those cases didn’t address the present claims and wouldn’t threaten double recovery, in part because Tackwood modified the class definition to exclude cards covered by the other cases.

The last issue was whether California law should apply to the claims of all putative class members, given that this was a nationwide class. This is ok if it comports with due process. The plaintiff had to show that California has a significant contact or aggregation of contacts to the claims of the class members to ensure that California law is not being applied arbitrarily. Krossland is based in California, and California is its largest market. Of the 9000 retail outlets it supplies with cards, fewer than ten are located outside California. The false advertising also emanated from California. “Because Krossland conducts the majority of its business in California and its largest client base is located here, Krossland's contacts with California satisfy the due process requirement.” Krossland had a substantial burden to show that the law of another state applied to it.

State laws governing prepaid calling services vary. Some have industry-specific laws but many others rely on the general consumer protection law, which offers “thin protection to victims of calling card fraud, as the general statutes are rarely applied to cards.” California’s more detailed laws are highly consumer protective, but not in apparent conflict with other state laws on the issues presented in this case, since all states ban false advertising. (Texas requires a voice prompt at least one minute before the balance of the card is depleted, while California does not, but that difference wasn’t relevant here.) “To the extent that California laws conflict with any other state's law implicated in this matter, there is no evidence that a non-forum state has any interest in applying their laws over California's with respect to a California-based company, where the California law will likely afford the out-of-state customers greater protection.” Moreover, it was equitable to hold a California-based company to the higher California standard.

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