Friday, December 05, 2014

No free lift: ad-as-contract claim survives

Kearney v. Equilon Enterprises, LLC, No. 3:14–cv–00254, 2014 WL 6769697 (D. Or. Dec. 1, 2014)

Plaintiffs sued on behalf of a proposed nationwide class for breach of contract and violations of various state consumer protection statutes.  The court denied the motion to dismiss the breach of contract claims, but found that the consumer protection claims had to be pled with particularity and weren’t.

Shell service stations displayed this ad as part of Equilon’s Ski Free promotion:  

After buying ten gallons of fuel, a customer got a voucher with the receipt.  But the voucher couldn’t be exchanged for a free lift ticket. Instead it was a two for one coupon; you could only get a free ticket by buying another at full price, and there were various other restrictions.  (Note that, regardless of the fate of this lawsuit, this promotion would appear to violate FTC and similar state rules about “free” offers; consumer plaintiffs aren’t the only worries I’d have about this promotion.)

Equilon argued that its ad lacked sufficient specificity to be an offer, and therefore there could be no acceptance or meeting of the minds. The general rule is that an ad isn’t an offer, Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116 (S.D.N.Y.1999), aff’d, 210 F.3d 88 (2d Cir. 2000), but rather requests to negotiate with incomplete terms.  But if an advertisement is “clear, definite, and explicit, and leaves nothing open for negotiation,” then the advertisement “constitutes an offer, acceptance of which will complete the contract.” Lefkowitz v. Great Minneapolis Surplus Store, 86 N.W.2d 689, 691 (1957).

Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777 (9th Cir. 2012), considered a tobacco rewards program that offered “C-Notes” along with cigarettes; these could be redeemed for merchandise after customers enrolled in the rewards program.  After years, RJR announced that it would end the program, giving customers 6 months to redeem their C-Notes.  Then, RJR didn’t allow redemption before the program’s termination, and customers sued.  On appeal, the court found that, while the plaintiffs had not adequately alleged the existence of an offer to enter into a bilateral contract, they had adequately alleged the existence of an offer to enter into a unilateral contract. “A bilateral contract consists of mutual promises made in exchange for each other by each of the two contracting parties,” while “a unilateral contract involves the exchange of a promise for a performance.”

In light of the totality of the circumstances, the court ruled, plaintiffs accepted RJR’s unilateral offer by saving their C–Notes and attempting to redeem them in accordance with the C–Notes catalogue’s terms. The totality of the circumstances included “the repeated use of the word ‘offer’ in the C–Notes; the absence of any language disclaiming the intent to be bound; the inclusion of specific restrictions in the C–Notes; the formal enrolment process ...; and the substantial reliance expected from consumers.” Consumers’ substantial reliance was important because “a member of the public is unlikely to undertake substantial reliance in the absence of a binding commitment from the offeror—i.e., on the mere chance that the offeror will perform.”

There’s an exception to the general rule that an ad isn’t an offer for rewards, including offers of a reward for the redemption of coupons. That’s because the rule arose to address the problem of over-acceptance.  The issues were whether the advertiser clearly promised to perform in exchange for something requested by the advertiser, and whether the recipient “reasonably might have concluded that by acting in accordance with the request a contract would be formed.”

Construed favorably to plaintiffs, the ad here was the sign “buy 10 gallons of fuel, get a voucher for a free lift ticket!”  Equilon “in clear and positive terms, promised to render performance in exchange for the purchase of ten gallons of fuel.”  And a recipient reasonably might have concluded that by acting in accordance with the request a contract would be formed.

Nor did the contract fail for lack of consideration.  Equilon argued that the initial purchase of fuel was a separate contract from the purchase of ten or more gallons in return for a voucher, and past consideration can’t support a contract, nor did the price of the transaction overall vary whether or not the customer got a voucher.  But that assumed a bilateral contract, not a unilateral one.  A unilateral contract can be created by performing the act requested as acceptance and consideration.  Plaintiffs sufficiently alleged consideration when they stated that they purchased ten gallons of fuel at a participating Shell station with the intention of participating in the “Ski Free” promotion.

Then the court turned to the state law consumer protection claims: were they fraud-like? Fraud can be averred by specifically alleging fraud, or by alleging facts that necessarily constitute fraud even if the word “fraud’ is not used.”  Rule 9(b) is intended to protect reputation, and to provide adequate notice.  The relevant allegations were essentially that Equilon controlled the Ski Free promotion and that it didn’t provide the promised “free” ticket.  You might wonder why the absence of any intent allegation isn’t important, especially since one of the main reasons that consumer protection laws were enacted was to avoid the stringent scienter requirements of common-law fraud.  Anyway, I do.

But not this court!  “Although Plaintiffs do not allege that Defendant had knowledge of the advertisement’s falsity or ignorance of its truth directly, Plaintiffs do allege that Defendant conducted the advertisement program and approved all the marketing activities and plans.” And we can infer that Equilon intended the ad to be relied on, as the purpose of advertising is to induce reliance.  Thus, the claims sounded in fraud and had to be pled with particularity.

Note: this goes way further than most cases applying 9(b) to state consumer protection claims. In every other case of which I am aware, the plaintiff pled deliberate falsehood, not just falsehood, at least triggering the 9th Circuit’s standard.  Liability doesn’t depend on any scienter on the defendant’s part, and screwing this offer up could be negligence, at least.  I don’t get this result at all.

Because plaintiffs alleged a unified course of fraudulent conduct and relied entirely on that course of conduct as the basis for their claim, they had to satisfy Rule 9(b), and didn’t.  The “who” was “a Shell station located within the [relevant state].” The “what” was the Ski Free ad. The “when” was “within the class period.” The “where” was also “a Shell station located within the [relevant state].” The “how” is that the class representative purchased fuel at the Shell station with the intent of receiving a free lift ticket, but was instead provided a “buy one, get one free offer” with other various restrictions.

The court found the “who” and “where” insufficient, since there might be over a hundred Shell stations within each relevant state.  Even if Equilon reviewed its advertising, it might not know with specificity which station displayed the ad.  “Overall, simply alleging a generic Shell station within the relevant state does not state with particularity who engaged in fraudulent behavior.”

In addition, the “what” was disputed.  There was the alleged ad, and if that were all that “likely” would be enough to put Equilon on notice.  But plaintiffs also alleged that there were “various other signs or indications on or about the store property indicating in large bolded lettering that free products or services were being offered by the station under the Ski Free promotion,” and that “signage was consistent with signage contained on the website for various seasons during the class period.”  That might be enough under Rule 8, but it was shaky for 9(b); the court let it skate by.  The “how” was also sufficiently alleged.

The “when” was also insufficiently specified; plaintiffs never alleged the specific dates for the class period, which might be the 2012 ski season or might not, and anyway the ski season varies in length.  The one-year statute of limitations under Oregon law might kick in, depending on the facts.

Plaintiffs did, however, adequately plead reliance and causation.

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