Case against junk foreclosure fees survives for now

Bias v. Wells Fargo & Co., 2013 WL 1787158 (N.D. Cal.)

Wells Fargo charged a lot of people a lot of junk foreclosure-related fees, and would prefer not to fix its practices.  Though the US government identified at least a tiny fraction of the people who were harmed by such practices, it isn’t going to tell them.  That leaves the judicial system; these cases aren’t perhaps as sexy or groundbreaking as food lawsuits, the other wave of consumer protection suits that has built over the past year.  But they are out there.

Plaintiffs, on behalf of a putative nationwide class, alleged that Wells Fargo assessed fraudulent fees upon a homeowner’s default, using subsidiaries and affiliated companies to mark up fees beyond the third-party vendors’ actual costs.  Plaintiffs alleged that their Louisiana mortgage contracts disclosed that Wells Fargo would pay for default-related services when necessary, but never disclosed that the servicer could mark up the actual costs of those services to make a profit.  Wells Fargo identified the fees as “Other Charges” or “Other Fees” on mortgage statements, and allegedly concealed and misled borrowers about the charges when asked, claiming that the mortgages provided for the fees.

These fees included Broker's Price Opinion fees and appraisal fees.  BPOs were charged by an inter-company division, Premiere Asset Services, which advertised as if it were independent but acted as a phony third party vendor.  Premiere subcontracted BPOs to local real estate brokers; Wells Fargo allegedly never actually paid Premiere’s invoiced amounts, but rather paid lower amounts directly to the local prokers.

In addition, plaintiffs alleged that defendants used a sophisticated home loan management program that “automatically implement[ed] decisions about how to manage borrowers' accounts based on internal software logic” and imposed default-related fees when a loan was past due. The parameters and guidelines for the Program were “designed by the executives” at Wells Fargo.

Plaintiffs alleged that they had paid unlawful fees, and that they suffered additional harm based on being driven further into default or kept in default; damage to credit scores; inability to get better interest rates on future loans; and, in some cases, foreclosure. They sued for violations of the UCL, RICO and RICO conspiracy, unjust enrichment, and common-law fraud.  The court declined to dismiss the complaint.

Wells Fargo first argued that the UCL shouldn’t apply because the mortgages’ choice of law provisions required the application of Louisiana law.  The relevant test looks at whether the chosen state has a substantial relationship to the parties or their transaction, or whether there’s a reasonable basis for the choice of law.  If so, the court must determine whether there’s a fundamental conflict with California law and then whether California has a materially greater interest.

Wells Fargo argued that there was a substantial relationship to Louisiana because plaintiffs were residents of the state, owned property there, and executed the contracts there.  Plus, even if the court declined to enforce the choice of law provision, it shouldn’t apply California’s laws to out-of-state transactions not involving California residents, just because Wells Fargo is headquartered in California.  And Louisiana had an interest in having its ban on consumer protection class actions and one-year statute of limitations applied.

Plaintiffs rejoined that choice of law would be better addressed at the class certification stage. In any event, this wasn’t a contract case but a fraud case, and California had a substantial interest in regulating fraudulent practices in California, where the fraudulent conduct, concealment, and executive decisions allegedly occurred. 

The court found the contract relevant, since the fees were purportedly charged under the mortgage contract.  Still, the record with respect to balancing the states’ interests wasn’t sufficiently developed.  Louisiana did have a substantial relationship to the claims, but figuring out whether there was a fundamental conflict between the states’ laws and which state had a materially greater interest was premature.  Ultimately, plaintiffs would bear the burden of “establishing whether issues relating to choice of law can survive the test for class certification.”  But a full determination of where defendants’ conduct occurred wasn’t yet possible.  At this stage, the court accepted the allegations that the scheme was designed by executives in California.  Mazza v. American Honda Motor Co. was not dispositive because the court there expressed no view on whether it would be correct to certify a smaller class of California purchasers or different subclasses.

As for UCL standing: yes, plaintiffs had that.  Wells Fargo argued that, because the rates charged for BPOs were within the market rate of $30–$100, economic injury couldn’t exist, and anyway that plaintiffs didn’t plead actual reliance on the allegedly misleading documents.  Plaintiffs responded that the issue was whether Wells Fargo was entitled to recover far more than actual fees and conceal the nature of those fees.  Plaintiffs also alleged that, had the concealed information been disclosed, they would have behaved differently, which was enough for reliance. 

The court agreed with plaintiffs: if they would have paid less had they known the truth, they alleged injury in fact.  “The Court declines to hold as a matter of law that a consumer lacks UCL standing as long as he or she is only being overcharged within the market range.”  Further, plaintiffs alleged actual reliance: they alleged that the mortgage agreements gave Wells Fargo the right to be paid back for its costs/expenses but were silent on the right to mark up the costs for profit, and that they received mortgage statements that failed to truly itemize the fees, identifying them as “Other Charges” or “Other Fees” that they believed they were obligated to pay. “Put simply, Plaintiffs allege that they received their mortgage statements, believed based on the statements that they were obligated to pay these amounts to Wells Fargo, and paid them.” That was enough to plead causation.  Also, a presumption, or at least an inference, of reliance arises when a misrepresentation is material, and it was plausible that a reasonable person would have considered this information material.

The parties agreed that Rule 9(b) applied, and the court found the UCL claim pled with particularity.

Turning to UCL “unfairness,” there’s no definitive test for what’s unfair in consumer cases.  Here, the relevant tests looked at “whether the alleged business practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers and requires the court to weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim” or whether “(1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided.”

Wells Fargo advocated for the latter test, and argued that plaintiffs could have avoided being overcharged by staying current on their payments, and that there were countervailing benefits to conducting property inspections.  Plaintiffs responded that the undisclosed markups made it impossible for borrowers to become current, and that the lack of disclosure made it impossible to avoid the fees.  The court found that, applying the first relevant test the allegations plausibly pled that Wells Fargo’s conduct was immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers. Applying the second test, the Court couldn’t find as a matter of law that the supposed benefits outweighed plaintiffs' injuries.

Similarly, the “fraudulent” UCL claim survived.  Such a claim only requires that members of the public are likely to be deceived; actual deception, reasonable reliance, and damage are unnecessary.  Wells Fargo argued that the allegations that it told borrowers that the fees were in accordance with their mortgage terms were merely opinions about the law and thus not actionable as fraud.  Though the fraud was in part based on omissions, it still needed to be pled with particularity.  Still, plaintiffs provided enough allegations to give Wells Fargo notice of the particular misconduct at issue.  They described the content of the omission  and where it should or could have been revealed—in the mortgage agreements themselves, the mortgage statements, or communications with Wells Fargo about the fees.  Plaintiffs alleged specific dates they were charged the fees at issue, alleged they paid without knowing the truth, and (as allowed) generally alleged Wells Fargo’s knowledge and intent. The court disagreed that the statements were at most “misrepresentations of the law.”  Statements that are true may still be deceptive or misleading, and it was premature to characterize these misrepresentations as solely law-related.

Surprisingly to me, the RICO and RICO conspiracy claims also survived.  So did the unjust enrichment claim, though unjust enrichment is unavailable when a valid express contract covering the same subject matter exists.  It was premature for the court to decide whether the claims here covered the same subject matter as the mortgage agreements, and whether Wells Fargo’s conduct was “unjust” was also a factual issue.

Fraud too survived, for reasons noted above; the court didn’t need to resolve choice of law issues.  Even absent a special duty to disclose, “the omissions and misrepresentations are inextricably tied together such that the demands for reimbursement of fees in Wells Fargo's monthly mortgage statements are akin to misrepresentations:”

Wells Fargo sought reimbursement from Plaintiffs based on fictitious invoices prepared by Premiere at Wells Fargo's direction. However, Wells Fargo did not actually pay those invoices, and instead directly paid third parties for a lesser amount—all of which occurred by a plan of Defendants' design.

Plaintiffs explained why that was false and misleading, providing sufficient notice under Rule 9(b).

When fraudulent concealment is easier to plead than affirmative misrepresentation

Stanwood v. Mary Kay, Inc., --- F.Supp.2d ----, 2012 WL 7991231 (C.D. Cal.)

Plaintiffs sued Mary Kay alleging that it defrauded consumers by falsely advertising that it didn’t test its products on animals.  Had they known the truth, plaintiffs alleged, they wouldn’t have bought the products.  Mary Kay allegedly engaged in a long-term marketing and advertising campaign touting itself as a company that did not test its products on animals and telling PETA and the Coalition for Consumer Information of Cosmetics that it did not and would not test any of its products on animals, and secured placement on PETA’s “Do Not Test” list and the Coalition’s “Leaping Bunny” list of companies that don’t do animal testing. Mary Kay’s website said that “Mary Kay does not conduct animal testing for its products and is a PETA pledge member,” and allegedly told its sales force that it didn’t test any of its products on animals, knowing that the sales force would repeat these statements to consumers. Stanwood also alleged that in September 2011, a Mary Kay representative named Jacqueline represented to her, as part of a sale, that Mary Kay didn’t test any products on animals.

But Mary Kay decided to enter the Chinese market, where it was required by Chinese law to test certain products on animals. Stanwood alleged fraud/fraudulent concealment, and violations of the UCL, FAL, and CLRA.

Mary Kay made a standing argument that Stanwood didn’t buy the products sold in foreign countries and thus wasn’t harmed.  But Stanwood wasn’t seeking redress for a defect in those products; she alleged that she was injured by Mary Kay’s false claims and omissions, and she had standing to bring that claim because she alleged that she wouldn’t have bought the products at all had she known the truth. Thus, she suffered economic injury.

She also showed causation for standing with respect to Mary Kay’s advertising and Jacqueline’s statement, though not for claims related to the Mary Kay website or the PETA or Coalition lists, which she didn’t allege that she viewed, so those claims were dismissed.  (Sigh.  Shouldn’t this at least require some real analysis of whether the claims were similar enough to allow her to represent people who did see the website etc.?)

The court also didn’t see the relevance of the fact that the misrepresentations weren’t specific to the product she purchased, but instead concerned the company’s general operations:

As consumers have grown more aware of the social, environmental, and political impact of their purchasing decisions, they have tended to look to more factors, including company-wide operations, to inform their consumption choices. Consumers receive this information from a variety of sources, but one of the most direct and important remains the company itself. Companies, realizing this, have tailored their marketing to such consumers. It should not be unexpected then, that when companies make misrepresentations about their company-wide operations, they face potential liability in court to consumers who relied on those representations in purchasing their products.

This wasn’t a radical expansion of standing.  Mary Kay posed the following horrible: “[I]f a retailer guarantees that they have the lowest prices on every product they sell, but it turns out that a competitor actually sells one particular product for a lower price, under Stanwood's view anyone who purchased any product from that company would have standing to sue, even if she did not purchase the specific product in question.” But that hypothetical plaintiff would also have to allege that, but for the misrepresentations, she would not have purchased the product she purchased, even though it had the lowest price. This would be unlikely to pass the plausibility test, to say the least.

However, Stanwood didn’t plead fraud with particularity under Rule 9(b).  Even though Tobacco II says pleading exposure to a long-term ad campaign can be enough to plead standing, and that a plaintiff doesn’t need to plead an “unrealistic” degree of specificity in such cases, that doesn’t satisfy Rule 9(b).  (I thought Rule 9(b) also didn’t require an unrealistic degree of specificity, kind of by definition.)  Allegations that Stanwood was “exposed” to Mary Kay's “extensive and long term marketing and advertising campaign touting the company and its business operations as not testing any of its products on animals” failed to adequately plead the “who, what, when, where, and how” of the underlying misrepresentations.  Stanwood failed to plead what the ad materials specifically stated, to point to particular ads she personally encountered, or even specify their medium. 

What about Jacqueline’s September 2011 statements?  Alleging that Jacqueline was a Mary Kay representative was inadequate—it wasn’t clear “exactly what her position is, where she works, or her relationship with Mary Kay.”  Nor did Stanwood plead where the statements were made, even though she listed a phone number for Jacqueline; she didn’t specify whether the conversation was over the phone or in person.  (How can that be relevant to whether Mary Kay has adequate notice of the precise claims against it?)  She also needed to plead the “specific comments” on which she relied, and also the specific products she bought in reliance on the representations; listing Mary Kay products she’d bought in general wasn’t enough.

On the fraudulent concealment claim, Mary Kay argued that it had no duty to disclose non-safety-related matters.  To the contrary, a fact need only be material to trigger a duty to disclose outside the limited context of product defect cases (where warranty law covers what would otherwise be the terrain of the duty to disclose).  Stanwood adequately pleaded the elements of fraudulent concealment: that the information was material, that she was unaware of Mary Kay’s animal testing, that Mary Kay concealed the information to increase sales to consumers like her, and that she bought products as a result of Mary Kay's concealment.  However, as above, affirmative misrepresentations as part of Mary Kay’s general advertising campaign weren’t pled with sufficient particularity to be part of this claim.

Because the UCL, FAL, and CLRA claims were grounded in fraud, the same analysis applied; only UCL and CLRA claims based on fraudulent concealment survived, though the court gave Stanwood leave to amend.  Omissions must be material to be actionable under the CLRA; Stanwood sufficiently alleged materiality to a reasonable consumer by citing a 2011 survey conducted by the Physician's Committee for Responsible Medicine finding that 72 percent of respondents agreed that testing cosmetics on animals is inhumane or unethical and 61 percent believe that companies should not be allowed to test products on animals.  Actual effect on a reasonable consumer was a question of fact, but the study showed that the allegations weren’t completely without support.

Seems like a weird result to me, with the standard applied to the affirmative misrepresentations being mindlessly picky while the standard applied to the omissions being pretty loose.

NY rejects another law school consumer protection claim

Bevelacqua v. Brooklyn Law School, 2013 WL 1761504 (N.Y. Sup.), 2013 N.Y. Slip Op. 50634(U)

The complaint alleged that Brooklyn Law School published misleading post-graduate employment and salary information on its website, on which plaintiffs relied when choosing to enroll and stay at Brooklyn.  The school allegedly lumped graduates who got permanent, full-time JD preferred/required employment together with graduates who got JD-irrelevant, temporary, part-time, school-funded, or voluntary jobs (where the graduate works a regular nonlegal job and then volunteers with a government agency to get legal experience), or started their own nonremunerative solo practices out of desperation.  Plaintiffs speculated that if the reported employment numbers included only permanent legal jobs, the reported numbers would drop dramatically, and could be lower than 40–50 percent throughout the class period.  

In addition, plaintiffs alleged that the school reported misleading median salaries based on a small pre-selected group of well-compensated graduates that the school actively pursued to respond to its annual graduate survey.  They specifically alleged reliance on representations that, depending on the year, well over 90 percent of Brooklyn graduates secured employment within nine months of graduation.

As a result, plaintiffs alleged, they were prevented “from realizing the obvious—that attending [Brooklyn] and forking over nearly $150,000 in tuition payments is a terrible investment which makes little economic sense and, most likely, will never pay off.”  The plaintiffs had varying, low levels of success in finding law-related employment.  They alleged that they would have elected to either pay less or perhaps not attend the school at all had they been aware of the kinds of positions the reported placement rates included.  

Plaintiffs brought claims under NY GBL §§ 349 & 350, common-law fraud, and negligent misrepresentation.  They sought damages and equitable relief, including refund and reimbursement of a portion of their tuition. The court granted the motion to dismiss.

Plaintiffs also alleged that Brooklyn provided the same misleading statistics to US News and the ABA, the two primary sources of law school information.  Both count as employed those who secure employment in any capacity in any kind of job.  Plaintiffs further contended that Brooklyn violated the ABA's reporting standards, but conceded that the criteria by which the ABA measures compliance with those standards is “virtually meaningless and nonexistent.” Brooklyn also provided employment and salary information to the National Association for Law Placement (NALP), which requires a specific breakdown of types of employment.  But it doesn’t publish the data for specific schools, and Brooklyn didn’t present the disaggregated data to prospective and current students.

As evidence of the questionable nature of Brooklyn’s data, plaintiffs alleged various facts, including that reported placement rates remained “eerily steady” at about the 90% level despite the Great recession; that generally reporting on law jobs indicated that twice as many people passed the bar as there were job openings, and the ratio was worse in New York; that only 40% of Brooklyn’s 2010 class supplied salary information, suggesting that the true employment rate was below 50%, let alone 95%; and that other estimates are that under 40% of law school graduates nationally have obtained full-time permanent employment, a number likely even lower for Brooklyn given its “relatively lenient admissions standards, lackluster ranking by U.S. News and … location in a highly-saturated legal market.”

GBL §§ 349 and 350 are consumer protection statutes that bar materially misleading, consumer oriented conduct.  The standard for deceptive acts and practices is objective: representations or omissions must be limited to those likely to mislead a reasonable consumer acting reasonably.  The court found the challenged statements not objectively deceptive. 

They were nowhere alleged to be literally false, and the court found that the exhibits attached to the complaint gave more information than plaintiffs acknowledged. Brooklyn broke down employment data into 6 employer types, including Law Firm, Judicial Clerkship, Corporation, Government, Public Interest and Academia, and provided the percentage of responding graduates who were employed in each category. Except for Law Firm and Judicial Clerkship, the court couldn’t see why plaintiffs assumed that the remaining categories were JD-required.  “Indeed, it has long been conventional wisdom that a law degree affords its owner much greater flexibility than most other graduate degrees and that many people pursue a law degree without ever intending to practice law.”

Previous New York courts have ruled that plaintiffs’ interpretation of a generalized employment statistic, which didn’t differentiate among legal and nonlegal or fulltime and temporary positions, was unreasonable as a matter of law.  To the contrary, “basic deductive reasoning, informs a reasonable person that the employment statistic includes all employed graduates, not just those who obtained or started full-time legal positions.”

Relying on Gotlin v. Lederman, 483 Fed. App’x 583 (2d Cir. 2012), plaintiffs argued that the misleadingness of “employment” was a question of fact that couldn’t be resolved on a motion to dismiss.  But there, the defendants touted a successful cancer treatment and the problem wasn’t just their definition of “success,” but rather that there was expert testimony that the treatment had no potential to cure plaintiffs’ condition, and that defendants made many hyperbolic statements that suggested “broader successes than merely arresting the growth of cancer.”  Here, plaintiffs’ decision to enroll and remain in school solely on the strength of a “bare-bones” employment statistic was unreasonable under the circumstances. 

As a higher NY court held, “although there is no question that the type of employment information published by defendant (and other law schools) during the relevant period likely left some consumers with an incomplete, if not false, impression of the school's job placement success, … this statistical gamesmanship, which the ABA has since repudiated in its revised disclosure guidelines, does not give rise to a cognizable claim under [GBL] § 349.”

So too with claims based on published salary data.  While plaintiffs alleged that they couldn’t discern from the statistics whether attending Brooklyn made “economic sense,” the exhibits refuted their claims: a reasonable person would be able to determine that most graduates were earning modest incomes, because Brooklyn reported salary ranges (25^th-75^th percentile) for various categories of employment, and also reported the percentage of its graduates who reported being in those categories.  “From a cursory review of these figures and their accompanying pie charts, one can (if so inclined) easily calculate that for those graduates outside of private practice, which was 44.5% of the class of 2009 … , the median starting salary was less than $79,000.” Likewise, almost half of the class in private practice were in firms of less than 100 attorneys, for which the median starting salary was $75,000. It was therefore clear from the information Brooklyn provided that for over 2/3 of 2009 graduates, the starting salary was “significantly less than $138,000—the number that plaintiffs allege a graduate ‘needs to make ... to repay [the average debt of] $100,000 without enduring financial hardship.’”

Plus, the limitations of the salary data were clearly disclosed.  For 2009, Brooklyn disclosed that it received salary information from 71% of graduates in private practice, “implicitly acknowledging what plaintiffs accuse it of hiding—that it was not reporting ‘the overall percentage of graduates who reported salary information and exact percentage of graduates in each job category who reported salary information.’”  Brooklyn also stated that the figures varied from year to year based on market conditions and number of graduates reporting salary information. It warned readers that the salaries were just an approximate guideline.  “[T]hese disclaimers are sufficient to warn off a reasonable purchaser of a legal education from drawing any conclusions about the earning capacity of all graduates in any particular year or from using the information as a springboard from which to derive his or her own expected income.” In particular, no one could reasonably have relied on the data to expect a six-figure salary on graduation.  Claims based on the 2010 salary data were even less convincing, since Brooklyn disclosed that the 2010 information was based on “40% of employed graduates overall.”

A reasonable college graduate simply could not conclude that Brooklyn was making a representation about all its employed graduates’ salaries.  Reasonable college graduates would also recognize the impact that Brooklyn’s ranking and their own GPAs would have on their employment options and salary expectations.

Even assuming that plaintiffs’ interpretation of the employment rate was reasonable, they’d face insuperable difficulties in establishing damages.  Regardless of the allegations, the court couldn’t overlook the impact that the severe economic downturn had on plaintiffs’ employment prospects: they “graduated into what is universally recognized as one of worst job markets in recent memory.”  They simply would be unable to prove that their damages were a result of Brooklyn’s conduct.  Plus, the claimed measure of damages—the difference between the inflated tuition they paid because of Brooklyn’s material representations and the true value of a Brooklyn degree—added another layer of improper speculation.

For similar reasons, their fraud claims failed.  Plaintiffs argued that Brooklyn had an affirmative duty to disclose the disaggregated employment data.  But absent a fiduciary relationship between the parties, a duty to disclose arises only where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair.  Here, “had plaintiffs exercised reasonable diligence, they could have uncovered other sources of information” against which to evaluate Brooklyn’s claims.  The publicly available information identified in the complaint would have shown that Brooklyn was reporting an aggregate rate including nonlegal and part-time or temporary positions.  The NALP report would have alerted a college-educated reader to the fact that Brooklyn’s published rate was “likely” an overall figure “and that the rate for full-time legal employment might be markedly lower.”

Nor was the relationship between an institution of higher education and its students fiduciary, rather than contractual, though matters may differ with elementary school students.  The existence of Brooklyn’s financial aid office didn’t create a special relationship between it and its students, even if “lenders” may generally have a special relationship with borrowers.  Without a special or confidential relationship between them, Brooklyn had no affirmative duty of disclosure.

Furthermore, plaintiffs’ reliance on Brooklyn’s published statistics as the sole criterion on which they allegedly based their decision to enroll and remain in school was unreasonable as a matter of law, given the other sources of available information.

Similar problems defeated the negligent misrepresentation claim.

Some incisive commentary on Prince v. Cariou

From Robert Clarida, by way of Donn Zaretsky at the Art Law Blog.  Read it all, but here's an excerpt:

[B]y dwelling on the surface of the works the court may be turning back the clock a little. ... [I]f the standard is to compare the 'aesthetic' of two works, looking only at 'results,' the court has nothing to go on but the physical changes. So overall, I think the decision sort of de-conceptualizes the art and treats it as merely a bunch of marks on a surface -- very old-timey and reductionist.... [C]ertainly the purpose, context and intent of the five remanded pieces are not much different -- if at all -- from the pieces that qualified for fair use; the only difference is the way they look.

Sharp dealing isn't common law fraud, can violate consumer protection law

Circle Click Media LLC v. Regus Management Group LLC, 2013 WL 1739451 (N.D. Cal.)

Plaintiffs filed a putative class action against Regus, which leases commercial office space throughout California and New York.  They entered into identical office agreements with Regus, and alleged that Regus imposed unauthorized and unreasonable charges, using many unlawful policies and practices to collect unfair fees. For example, Regus allegedly routinely assessed Circle Click for charges relating to kitchen amenities, telecommunication services, “business continuity service,” taxes, and penalties, which bore no reasonable relationship to the services Regus purportedly rendered.

Plaintiffs alleged that the contract, aka the Office Agreement, doesn’t disclose a number of the charges Regus assessed.  It’s one page and just identifies the office location, the monthly fee, the term, and the parties.  It also states: “This Agreement incorporates our terms of business set out on attached Terms and Conditions which you confirm you have read and understood.” The Terms and Conditions were also only one page, “but are printed in small type that is no larger than five-point Tahoma. Due to its small font size and overall blurriness, the copy of the Terms and Conditions filed with the Court is almost illegible”:

The Terms of Conditions then provide that the agreement includes the first page, the T&C, and the House Rules.  Plaintiffs claimed never to have received the House Rules, which disclosed a number of fees, including a mandatory “Kitchen Amenities/Beverage Fee”; a “[s]tandard services” fee, including a fee “billed upon service activation for applicable telecom and internet services”; an “Office Set Up Fee”; and a “Business Continuity Fee.”

Plaintiffs allege that these billing practices render Regus’s ads false and misleading. Ads on its website from 2003-2012 represented that customers “could save up to 78 % [sic] compared to traditional office costs,” that the one-page contract “takes just 10 minutes to complete,” and that the services were “[s]imple, easy[,] and flexible.” An email sent to potential clients in 2011 represented that Defendants provide a one-page contract, “[a]fully equipped [o]ffice,” “[a]fully stocked kitchen,” “[p]hone lines with a local phone number,” and “A WELL EQUIPPED OFFICE,” “ALL ... for one low monthly price.”  A broadcast ad also had an actress state, “I don't have a lease so I don't have to budget for stuff like phones, IT guys, and artwork for the lobby. Instead, I pay one low monthly rate …”  Plaintiffs also mentioned Regus’s Craigslist ads but didn’t describe their content or the dates they were posted.

Plaintiffs brought UCL and FAL claims, along with claims for intentional misrepresentation and unjust enrichment.  Their RICO claims were dismissed and need not detain us.

The court rejected the intentional misrepresentation claims because the Office Agreement expressly provided that the stated fees excluded taxes and services.  Nondisclosure wasn’t actionable: there was no fiduciary relationship; no exclusive knowledge of material facts not known to the plaintiff; no active concealment of material fact; and no partial representations plus suppression of material fact.  Given the agreement, plaintiffs had “at least constructive knowledge” of the fees.  The House Rules expressly disclosed the mandatory “kitchen amenities/beverage fee” and indicated that the telecommunications services weren’t free. Further, the Service Price Guide, a fourth document expressly referenced in the House Rules, disclosed the amounts that Regus would charge for many of the services targeted by plaintiffs, including kitchen amenities and internet and phone services.  Given that these documents were incorporated by reference into the Office Agreement and Terms and Conditions, the court took judicial notice of them.

Plaintiffs’ allegations that they never received the House Rules or Service Price Guide, and that the Terms and Conditions were unreadable, were no help.  Signing the Office Agreement confirmed that they’d “read and understood” the T&C, and they couldn’t disavow that now (under the common law, which gives you a sense of why modern consumer protection law took the shape it did).

The statutory claims fared better.  The UCL claim for fraudulent practices survived, because a UCL plaintiff need not show explicit falsity or reasonable reliance. Rather, “it is necessary only to show that members of the public are likely to be deceived.”  Miniscule disclosures, combined with complex and misleading language, could be deceptive.  The court again noted that it could barely decipher the T&C, “even with the aid of a magnifying glass.” Plaintiffs alleged that, as a result, they were deceived into incurring fees.  This was sufficient to state a claim.

Likewise, plaintiffs stated a UCL claim for unfair practices: they successfully alleged that Regus’s practices were “immoral, unethical, oppressive, unscrupulous, or substantially injurious to customers,” even though Regus may not have engaged in monopolistic behavior.  “The test of whether a business practice is unfair involves an examination of [that practice's] impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.” Plaintiffs alleged that the failure to disclose could confuse consumers, and the impact could be severe, given that they could commit to one-year agreements without knowing the costs.  It was unclear whether there was any justification for the failure to conspicuously disclose the mandatory fees.

Plaintiffs’ UCL claim based on unlawful practices also survived in part (without the RICO predicate).  Plaintiffs successfully alleged that Regus violated a California statute governing how telephone service orders must be presented. Regus argued that the law only applied to phone companies; the law specifically excluded “[a]ny hospital, hotel, motel, or similar place of temporary accommodation....” Regus pointed to the T&C, which said that “This agreement is the commercial equivalent of an agreement for accommodation(s) in a hotel. … THE CLIENT ACCEPTS THAT THIS AGREEMENT CREATES NO TENANCY INTEREST, LEASEHOLD ESTATE, OR OTHER REAL PROPERTY INTEREST IN THE CLIENT'S FAVOUR WITH RESPECT TO THE ACCOMODATIONS.”  The court wasn’t convinced.  The lack of a tenancy interest didn’t mean that Regus provided only temporary accommodations: the agreements at issue had a minimum one-year term.  This distinguished Regus from a hospital, hotel, or motel, as did its provision of business accommodation rather than short-term housing.

Unsurprisingly, the false advertising claims also (largely) survived.  Plaintiffs generally alleged which ads they saw (including specific statements) and when they saw them, along with exposure to a long-term ad campaign.  However, the contract documents didn’t constitute false advertising because they weren’t used as part of Regus’s promotional activities or made available to anyone other than the contracting parties.

Regus challenged the specificity of plaintiffs’ pleading, since they didn’t always make clear what ads they saw. Under Tobacco II, however, unrealistic specificity isn’t required.  Plaintiffs alleged the existence of substantially similar misrepresentations on Regus’s website for the last decade, along with a specific email promising “[a] fully equipped Office ... for one low monthly price” and “one page” agreements.  However, the date and content of the Craigslist ads were unclear and insufficient under Iqbal and Twombly. 

Some of the statements challenged were mere puffery: “low” prices, that Regus’s services provide “flexibility for your business,” and that its agreements were “simple.” But the representations that the agreements were “one page,” the offices were fully equipped, and the bills were all-inclusive were specific and falsifiable.  The agreements weren’t actually one page; the Office Agreement incorporated the T&C by reference, and that wouldn’t be one page if it weren’t for the tiny font; anyway, the T&C incorporate the House Rules by reference, and they’re at least 5 pages.  When read in conjunction with the “fully-equipped” and “all inclusive billing” statements, the claim of a one page agreement “could possibly lead customers to ignore the Terms and Conditions and the House Rules altogether” or deceive consumers into believing that the monthly rent listed was all-inclusive. Defendants argued that their website had a disclaimer that the prices were exclusive of “IT, telecoms, services, and applicable taxes” at least through some period, but that’s a factual issue.

Plaintiffs also pled a violation of California law requiring any ad that solicits a purchase that requires the purchase or lease of a different product or service must conspicuously disclose in the ad the price of all those products or services.  They alleged that Regus violated this provision by advertising office space while failing to disclose that renters would also be required to purchase kitchen amenities, office restoration, and business continuity service in connection with that office space.  Regus argued that plaintiffs didn’t plead that they relied on any price representation, but nothing in the law required an ad to list the price of the main product or service to trigger the law.  The statutory language was unambiguous.

Defamatory statements justify Lanham Act fee award

Neuros Co., Ltd. v. KTurbo, Inc., 2013 WL 1706368 (N.D. Ill.)

After the 7th Circuit fixed its outlier “advertising and promotion” rule, it remanded to the district court to reconsider the issues here.  Neuros sued KTurbo, its competitor in the high-speed turbo blower market, for false advertising under the Lanham Act and the Illinois Uniform Deceptive Trade Practices Act as well as for other claims. The court found defamation per se and awarded $10,000 in compensatory damages and $50,000 in punitive damages.

On remand, Neuros sought an entry of judgment on the Lanham Act and DTPA claims, as well as attorneys’ fees and injunctive relief.  KTurbo opposed only the fees and injunctive relief.

Under the Lanham Act, an attorneys’ fees award is appropriate “if the opposing party's ‘claim or defense was objectively unreasonable—was a claim or defense that a rational litigant would pursue only because it would impose disproportionate costs on his opponent’” or where a party's violation of the Lanham Act is “especially egregious.”  The DTPA says a court “may” award reasonable attorneys’ fees and costs, and the court held that the standard was essentially the same as that under the Lanham Act.

The court found KTurbo’s defense objectively unreasonable.  KTurbo told customers that Neuro’s claims of wire power (ratio of electrical current to work, apparently quite important) were exaggerated, and continued to make those statements well after Neuros sued.  These statements were literally false. “KTurbo persisted in denying that the slide show and related marketing activities were deceptive long after it was evident that the denial was frivolous.” The evidence showed that KTurbo sought to drive Neuros out of business, stating its intent to “break” and “terminate” Neuros and continuing to accuse Neuros of cheating after its representatives advised it not to do so and after the C&D and subsequent lawsuit.  “For KTurbo to maintain its defense and continue to violate the Lanham Act in light of KTurbo knowing its claims regarding Neuros's efficiency were false was both objectively unreasonable and egregious,” justifying a fee award.  (Will all successful defamation claims, which have a much higher standard than the Lanham Act, justify an award of attorneys’ fees when a Lanham Act claim is also available?  I can see the argument for this.) 

For the same reasons, a DTPA fee award was justified; the standard was whether KTurbo willfully engaged in a deceptive trade practice, which requires “voluntary and intentional, but not necessarily malicious,” action.  KTurbo argued that its conduct wasn’t willful, but that ignored the record.

Turning to injunctive relief, it was apparent that no adequate remedy at law existed to make Neuros whole.  “The false statements made by KTurbo regarding Neuros's wire power and efficiency will have lingering effects on its business, because employees of potential customers could believe the false information KTurbo has disseminated.”  (Is this really true?  Surely winning the defamation lawsuit mattered.  But the court referred to the “somewhat unique method of advertising in the industry,” which is apparently individual presentations made by Powerpoint, which doesn’t strike me as terrifically unique.)  Anyway, there’s a well-established presumption that Lanham Act violations cause irreparable injuries, because it’s virtually impossible to ascertain the precise economic consequences of intangible harms such as damage to reputation and lost goodwill. Because Neuros couldn’t quantify its damages, no adequate legal remedy existed.

KTurbo would suffer no hardship from refraining from its false claims, especially since it hadn’t been in the turbo blower business for more than two years (then is injunctive relief necessary?).  And the court granted a “narrowly tailored” request for corrective advertising that didn’t place a significant burden on KTurbo. Injunctive relief would also serve the public interest in truthful advertising.  Similar analysis applied under the DTPA.

KTurbo was enjoined to refrain from distributing confidential or proprietary Neuros documents (interesting remedy not discussed in the opinion—how is it related to the violation of the law found?) and from making false/misleading statements about Neuros. It was also required to issue corrective advertising under its name advising every known recipient of the false email and any other similar written or oral statements of the falsity of those statements.

damages expert excluded for failing to discredit compelling alternative explanations

Thermal Design, Inc. v. Guardian Bldg. Products, Inc., 2013 WL 1647791 (E.D. Wis.)

Previously, the court held that Thermal couldn’t seek money damages on its false advertising claims because it didn’t produce evidence of damage from actual consumer reliance on the challenged statements, then reversed itself because it had failed to note an expert report by Robert Bero.  Now, it granted Guardian’s motion to strike Bero’s report as unreliable, reinstating the earlier holding that Thermal hadn’t shown evidence of damages and wasn’t entitled to a jury.

Guardian advertised that its building fabric liner system provided OSHA-compliant leading edge fall protection for workers, and there was a genuine issue of material fact on falsity.  Bero’s report said that Guardian’s sales increases during the period of the allegedly false advertising weren’t attributable to market growth, since the market was relatively depressed, but rather to the fall protection version of the system.  The fabric liner system market was a two-supplier market during the relevant period, meaning that increased Guardian sales would be lost Thermal Design sales.

The court agreed, however, that the opinion should be excluded for failing to account for obvious alternative explanations.  When Guardian introduced its system, it simultaneously stopped selling Thermal Design’s, and Bero didn’t explain why that wouldn’t account for Guardian's increase in market share. Plus, sales increased for both parties, indicating a growing market. Bero explained that the increase in the market wouldn’t necessarily account for Guardian's increase in market share, but he didn’t rule it out as a contributing factor.

Plus, Guardian’s system was significantly cheaper than Thermal Design’s, and Bero agreed that a number of sales were lost becaues of price, since the lowest bidder usually wins.  He conceded that sales were lost for reasons unrelated to fall protection; Thermal Design’s own employees noted a customer’s response that fall protection “isn't worth anything.” Thus, Bero's opinion didn’t provide a reliable basis for establishing that Thermal Design was damaged by Guardian's advertisements.

failure to adhere to government and industry label standards not literally false

North American Olive Oil Ass'n v. Kangadis Food Inc., 2013 WL 1777774 (S.D.N.Y.)

NAOOA sued Kangadis for false advertising under the Lanham Act and NY General Business Law §§ 349 and 350, alleging that Kangadis marketed a product as “100% Pure Olive Oil” when in fact it contains Pomace, an industrially processed oil produced from olive pits, skins, and pulp.  NAOOA moved for a preliminary injunction, and Kangadis represented that it had cleaned up its act: all of its “100% Pure Olive Oil” product packed after March 1, 2013 contained no Pomace.

The court preliminarily enjoined Kangadis from selling as “100% Pure Olive Oil” any product containing Pomace, and from selling any product containing Pomace without expressly labeling it as such.  However, the court declined to extend the injunction to cover “100% Pure Olive Oil” used for 100% refined (not virgin) olive oil.  It ordered Kangadis to take certain steps to inform potential customers about the pre-March Pomace content of its tins, but declined to order Kangadis to post notice of its past mislabeling on its website.

Kangadis’s Capatriti brand, labeled as “100% Pure Olive Oil,” has about 15% of the market. Three samples taken in August 2012 contained significant quantities of Pomace.  Olive oil comes from olives that are mechanically crushed and spun to separate out extraneous solids and excess water. This is “virgin olive oil.” If virgin olive oil undergoes refining to remove impurities, then it is no longer called “virgin,” but remains “olive oil.” Pomace, aka Olive-Pomace oil, is made from the residue materials left over after olive oil has been mechanically extracted from the flesh of the olives. Residual skins, pits, and pulp are dried, heated, and treated with industrial solvents to produce Pomace.

Kangadis admitted that at all relevant times before the suit, its product contained only Pomace, but now no longer uses any Pomace to fill its Capatriti tins. Instead, it uses only refined olive oil. A number of state, federal, and industry labeling standards distinguish between “olive oil” or “pure olive oil,” which must contain at least some virgin olive oil, and “refined olive oil,” which need not contain any virgin olive oil.  NAOOA argued that this made Kangadis’s labels false and misleading.

Despite Winter, the Second Circuit appears to use a more liberal standard for preliminary injunctions, allowing them when a plaintiff shows (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. But the court didn’t need to worry because NAOOA lost under either standard.

NAOOA showed irreparable harm: its member companies compete with Kangadis and thus Kangadis’s sales were likely to come at their expense.  Also, refined olive oil is generally cheaper than virgin olive oil, so false or misleading labels would provide an unfair competitive advantage. Further, Kangadis's labeling allegedly induced consumers to buy a product that is not what it seems, and thus might cause consumers to lose faith in olive oil products in general. These were “quintessentially” irreparable harms given the difficulty of proving exact lost sales.  And NAOOA had standing on behalf of its members.

On likely success on the merits, however, NAOOA faltered.  It showed that labeling standards distinguish between “olive oil” or “pure olive oil” and “refined olive oil.” New York defines olive oil as “a blend of refined olive oil [ ] and virgin olive oils,” while “refined olive oil” is defined as “the olive oil obtained from virgin olive oils by [certain] refining methods.” Federal and industry standards similarly distinguish “olive oil” from “refined olive oil.”  USDA’s voluntary standards require “olive oil” to have some virgin olive oil.  Kangadis’s own website in the past touted its “100% Pure Olive Oil” product as a “wonderful blend of virgin and refined oil made from hand picked olives,” and two of Kangadis's suppliers defined “pure olive oil” as a blend of virgin and refined olive oil on their websites.  Thus, it was “beyond reasonable dispute” that Kangadis was violating these various standards.

However, NAOOA wasn’t seeking direct enforcement of the standards, which were either legally nonbinding or unenforceable through a private right of action.  (Seems like a good case for falsity by necessary implication to me!  The regulation sets the baseline for consumer expectations; consumers may not know exactly what it means, but they have every reason to expect the term to mean the same thing no matter who’s using it.  When someone defies the regulations, consumers have no way to know about the private meaning used by that particular producer.)  There was no extrinsic evidence “that the perceptions of ordinary consumers align with these various labeling standards such that they would understand a product labeled ‘100% Pure Olive Oil’ to contain a blend of refined and virgin olive oil.”  Thus, there was no likely success on the merits on a misleadingness theory.

Nor could there be literal falsity, because only an unambiguous message can be literally false, and the label was ambiguous.  It was “entirely plausible that a reasonable ordinary consumer would interpret the phrase ‘100% Pure Olive Oil’ to refer simply to a product that contains olive oil-that is, oil derived from the flesh of the fruit of the olive tree--and nothing but olive oil.”  The consumer might well view the claim as silent as to whether the oil was virgin or refined, no matter what industry insiders and certain regulators would think.  “[I]n the absence of any evidence to the contrary, it is far from clear that an ordinary consumer, unfamiliar with industry lingo, would perceive those terms the same way.” 

The decision in Cashmere & Camel Hair Mfrs. Inst. v. Saks Fifth Ave., 284 F.3d 302 (1st Cir. 2002), was not to the contrary. There, a seller sold “cashmere” suits that in fact contained recycled fibers, when a federal statute required recycled cashmere to be labeled as such.  The First Circuit held that the ads might be literally false, because the federal statute “essentially tell[s] consumers that garments labeled ‘cashmere’ can be presumed to be virgin cashmere as if it had been explicitly stated.” But that was a different procedural posture (an appeal from a grant of summary judgment to the defendant), and the court couldn’t find likely success on a similar theory.  Plus, the First Circuit’s standard was arguably inconsistent with the Second Circuit’s rule that only an unambiguous claim can be literally false. The state law analysis was similar.

On the alternate standard, in light of the host of labeling standards that distinguish between “olive oil” or “pure olive oil” and “refined olive oil,” NAOOA might have raised “sufficiently serious questions going to the merits to make them a fair ground for litigation.” But it still didn’t show “a balance of hardships tipping decidedly” in its favor.  Sure, declining to enjoin false advertising would likely cause some competitive harm, but it wasn’t clear how severe that harm would be.  NAOOA’s primary concern was the mislabeled Pomace, which was now enjoined, and requiring Kangadis to change its labels (or its product) would “no doubt … involve considerable burdens, expenses, and risks to Kangadis's consumer relationships and goodwill.”

As to notice to consumers of the pre-March tins, the court found that NAOOA would be irreparably harmed without such notice. Kangadis sells about a million tins per year; the packaging says that the product remains edible for 2 years; and the average US consumer consumers about 1 liter of olive oil per year.  Thus, a large quantity of 3-liter tins of “100% Pure Olive Oil” containing Pomace likely remain on consumers' kitchen shelves.  

Kangadis argued that much of the “100% Pure Olive Oil” being offered for sale in the market was presently refined olive oil and not Pomace. As a result of the publicity surrounding the filing of the lawsuit in February 2013, a number of orders were cancelled, decreasing the supply of available Capatriti tins below their usual levels. Still, NAOOA showed that it was likely that a “not insignificant” number of mislabeled tins remained available for sale.  Cancelled orders showed only diminished volume, not insignificant sales volume—and the average was sales of tens of thousands of tins a week. And while Kangadis said that tins “filled” after March 1 contained only refined olive oil, it didn’t say anything about when it put its last tins containing Pomace into the distribution chain, or about how long it takes an average tin to reach the end consumers.  Thus, NAOOA showed irreparable harm.

The harm could be addressed by requiring Kangadis “to send appropriate stickers through its distribution chain to affix to unsold Capatriti tins that contain Pomace.” This would narrowly target potential consumers who might otherwise buy Pomace labeled as “100% Pure Olive Oil,” and rendered broader notice unnecessary. Website notice would go beyond the stickers to inform past purchasers about tins still on kitchen shelves, but NAOOA didn’t explain how such notice would avert any irreparable harm to its members, since those consumers had already decided to buy Capatriti instead of any other brand, so the harm couldn’t be undone.  (I suspect a court deciding a trademark case would think about this differently: to the extent that Kangadis built up goodwill through false advertising, that harm can be undone if the deception is disclosed so that consumers won’t reward it for past misconduct.  After all, a consumer with a mislabeled tin on the shelf might very well finish it months from now and go to the store, then see a Capatriti tin that doesn’t now contain Pomace and think it was the same thing she’d bought before.)

The court did reject Kangadis’s argument that NAOOA delayed too long to show irreparable harm.  In 2007, NAOOA sent a letter to Kangadis stating that NAOOA's quality control program had tested a sample of “Capatriti extra virgin olive oil,” which was determined to “contain[ ] a large proportion of olive pomace oil.”  NAOOA obtained the samples underlying the current action August 2012, but did not file suit until February 2013. But these delays weren’t unreasonable under the circumstances. First, the 2007 sample was of extra virgini olive oil, not “100% Pure Olive Oil.” Plus, NAOOA could reasonably have assumed that the adulterated sample was the result of a discrete quality control error “rather than an ongoing effort to pass off Pomace as olive oil.” Delays resulting from the careful preparation of NAOOA’s expert report, which were critical to the court’s understanding, were also not unreasonable.  In any event, Kangadis didn’t identify any material prejudice it has suffered as a result of NAOOA's delay.

Finally, the court found that NAOOA was likely to succeed on the literal falsity claim based on selling Pomace as “100% Pure Olive Oil.”  “While Pomace may in some sense be ‘olive oil’ in that it is an oil derived from olives, it is not remotely what the ordinary consumer understands ‘olive oil’ to be.”  (I don’t really understand how the court knows this to be true, but not refined v. pure.)  In its argument that NAOOA should be required to post a bond, Kangadis argued that if consumers were notified about the presence of Pomace in Capatriti, its sales would plummet—which was “telling,” since it wouldn’t happen if consumers already understood “olive oil” to include “an industrially processed substance like Pomace.”  By contrast, olive oil and refined olive oil were “not so fundamentally different,” since they both came from mechanically pressed olive flesh and “olive oil” actually contains refined olive oil under the cited labeling standards.

The injunction would impose on Kangadis the “modest” direct costs of creating and distributing the stickers, “as well as some diminished goodwill from any resulting negative publicity.”  But NAOOA assured the court that, “in contrast to its role in inviting an article in the New York Times the same day this action was filed, it had no intention of trumpeting this Court's preliminary relief to the press.”  (Why is this a relevant consideration?  Paging Paul Alan Levy on the propriety of limiting a litigant’s relief based on its promise not to publicize that relief.)  “Based on that representation,” any diminished goodwill Kangadis suffered would be of its own doing; it has no legitimate interest in perpetuating false advertising.  (“Kangadis will be harmed if its false advertising is publicized” also seems like Kangadis’s own doing, I must say.)

Kangadis sought a $10 million bond, approximating its gross profits from Capatriti over the next three years. This was “wildly unreasonable.”  A $10,000 bond would adequately address the risk the injunction issued in error.

Consumer Class Actions panel at the ABA

Buy This All-Natural Product and Become Stronger, Healthier, and Sexier: The Latest in False Advertising Consumer Class Actions

Moderator: Patricia E. Lowry, Squire Sanders US LLP

Aashish Desai, Desai Law Firm, P.C.

Dukes and Concepcion made plaintiffs’ lives much harder.  As long as companies don’t make you sign an arbitration agreement when you buy shoes or toothpaste, that will be a focus—people have migrated to the consumer class action.

Janine L. Pollack, Milberg LLP

Given the recession, advertisers are pushing the envelope.  The balance is strained now.  Plaintiffs’ lawyers have started to realize there are promises being made by ads that can’t be fulfilled.  FTC has stepped up to the plate and getting more active. Gov’t intervention spurs private attorneys. Securities cases are also getting harder, causing people to migrate to advertising. Lower barriers to entry.

Robert J. Herrington, Greenberg Traurig LLP

Explosion in past 2-3 years.  Defense perspective: attributing rise to (1) increased regulatory focus from a number of agencies, esp. FTC pushing companies more. More warning letters. Plaintiffs’ bar tracks those letters. Can draw a class action in days.  (2) P’s bar has become more sophisticated in looking at FDA regulations.  Some regs are difficult to comply with. California: P’s bar has been able to use the UCL to enforce the regs.  (3) Concepcion is a huge driver.  Some sophisticated companies are trying, but it’s difficult to get an enforceable class action waiver on a consumer product purchased at the retail level.  Because of the challenge, products at the retail level—not over the internet, because that’s easier—are easier pickings.

Desai: should we have a lawyer when we buy dental floss?

Herrington: ours have very clear language.

Pollack: easy to understand, but unenforceable!

Timothy G. Blood, Blood Hearst & O’Reardon LLP

Aging population, people trying to take care of themselves healthwise. Also track the bad economy. Marketing people will say anything to sell the product; that’s their job.  In house constraints are the downers.  In a soft economy, especially in a mature market like food where you’re grinding out every tenth of a point, marketing folks win more battles.  Other factors contribute, but these companies are victims because they made themselves so.

Desai: E.g., lose 30 pounds with diet or exercise by sprinkling powder on your food.  Toning shoes.  One case: lose 10 pounds in 48 hours!  Another promised 5 pounds in 24, if you were too lazy for two days.  One case: coconut water—life enhancing with mega-electrolytes.  “All natural” cosmetics. Pomegranates make you live forever. When companies make these claims, no one is watching over them. And once one starts, e.g. toning shoes, the others feel they have to fall in line. You’d think consumers would know better, but they don’t.

Q: are companies thinking they’ll make money and then settle a suit?

Blood: No, they’re not planning to stop—they’re just ignoring the lawyer. But eventually companies get more sophistitcated.

Pollack: once the message is out there, you can’t unring the bell. They figure: we got the message out for a year.  If we have to change the ad a bit, the math still works out!  Everyone now knows about toning shoes—she still sees people wearing them.

Lowry: are these actually being certified?

Blood: yes.  Prototypical class actions.  Consumer fraud was the type of case said to be readily certifiable when Rule 23 was promulgated. One singular uniform representation; then a question of science—is it true or not—a generalized question. Prone to certification even after Wal-Mart v. Dukes.  Supposed to be defense-side case, but he cites it all the time, because it reminds the Ps bar of what you’re supposed to focus on. In the past, the way to defeat class actions was the snowflake analogy: every snowflake/consumer is unique and different. Wal-Mart pulls back and says we look at big issues with answers to common questions. You don’t look at snowflakes to answer the big question: did it snow last night? Discovery is early; when you get to the certification stage, you’re just about ready to have a trial.

Kara L. McCall, Sidley Austin LLP

Views Dukes differently: forces meat behind allegations. Can’t ignore the merits.  Look at how named P will prove the case and whether evidence will apply to every single class member.  Look at merits to see how you’ll prove every element of every claim. Discovery is also huge.  Everyone is reviewing what kind of discovery has to take place. Ds have always argued it should be limited; only discovery necessary to decide certification. But case management conferences now feature Ps saying under Wal-Mart I need lots of discovery to prove my case!

Also, the issue of using experts: what kind of Daubert analysis a court is supposed to conduct.  SCt expressed doubt as to 9^th Cir.’s opinion that Daubert didn’t need to be done, and lots of courts have taken that to court.  Claiming that they can prove classwide damages shouldn’t be taken at face value—take a deposition; courts should decide whether expert has a methodology that will allow classwide damages.

Pollack: Comcast—obviously, she loves the dissent. Ginsburg says the case is limited to these facts; litigants didn’t have the chance to answer the Q the Court ultimately decided.  What’s happening is that all the costs are shifted a lot sooner, trial-ready at the certification stage. This may be bad for everyone; Ps no longer have bifurcated discovery because they have to do the deep dive early on.  There’s no longer a basis to resist that. Experts are now lined up at the certification stage. Spending a ton of money a lot earlier than they used to. That has goods and bads.  Great to get in charge of facts much earlier, but higher investment; trial-ready at cert. stage. Scalia is chipping away at the class mechanism when he can, but there’s still good out there.

McCall: damages is back into the class certification discussion.  Individualized damages doesn’t preclude certification—but that just means that the number at the end of the day may differ, and you still need a classwide methodology.  Does that help with product price?  Yes, because price can differ dramatically depending on place of purchase, methodology.  Ds job is to develop record—nobody ever has receipts.

Blood: Comcast—P had four theories of damage, and goes to SCt on one.  In an antitrust case, if not everybody suffered injury, that makes a classwide damage model difficult.  Reminds us that the issue is whether the issue can be tried classwide. For consumers, it’s different. Basically strict liability statutes in many states.  If reasonable person deceived, people get their money back. So you just need to show a methodology that works classwide.

Q: how do you find the class members?

Blood: technically not an ascertainability issue, which is whether there are objective criteria for being members of the class; you don’t have to actually locate them.  If they bought, there.

McCall: Standing issue—may include people who didn’t read the label.

Herrington: plenty of these plaintiffs lie about whether they bought the product, and we have the right to challenge that for each and every class member.  How do you cross-examine a claim form?

Desai: then you could never have a class action. [This was my immediate reaction!]

McCall: not in this context, no!

Blood: nationwide class actions are still possible.  Mazza is just a choice of law decision.  It changed the landscape because it’s a recent 9^th Circuit case. But the more you push Mazza, the less there is. They announce a rule, skip over the analysis, and reach a conclusion, but they don’t overturn existing Cal. choice of law rules. Ps have to be more careful than in the past.  Ps were terrible (and Ds too) in analyzing choice of law in the past because it was a lot of work and took lots of pages, but you have to do it and have to do it correctly. A lot of post-Mazza district court cases say they comply with Mazza and still allow possible nationwide class.

Defendants won’t be happy: now Ps bar is focusing more on multistate classes. Why fight so hard for Wyoming and Utah?  Who cares?  Take laws that are readily, easily on their face similar—California, NJ, maybe NY and Pa. and Florida—that’s effectively nationwide without the trouble of states that don’t add much to the mix and create tremendous issues.

Q: will you sue in companies’ home states?

Blood: it’s always been part of the mix.  Where a state has the old Restatement test, you will never get a nationwide class.

Pollack: if the D bar is so bent as keeping it as single-state class, aren’t you encouraging us to go file in multiple states? Isn’t that inefficient?  Maybe just 6 states.

Herrington: the bar for entry into consumer class actions is also going up.  Some firms have the wherewithal to do a case right, but there are plenty of garbage cases that you can make go away if you create enough problems.  In terms of the lesson for today: the Ps bar and the Ds bar are likely to see better lawyers and cases as the SCt ratchets up the bar for class action.

Q: how do you minimize risks? Voluntary refunds/recalls.

McCall: Best thing is to be proactive on substantiation and claims made. Give and take between marketing and R&D/nutrition. Can’t stress enough that there must be careful, thoughtful, constant review of claims and underlying science. Focus on one claim makes it easier for Ps so also think about diversifying message. Consumer research is a double edged sword. If you have research showing that people take away multiple messages or rely on their doctors instead of labels, that’s great, but if your research says “this is the biggest motivating claim” you have an issue. In house counsel should make sure to control market research, what kinds of questions are being asked, what’s being tested. Make sure it’s privileged (at least the discussion about whether it should be done).

Voluntary refunds: interesting body of case law discussing whether recall/refund affects Rule 23 in terms of superiority. Several courts have said that it does as another method for adjudicating the controversy. 7^th Cir. has said it’s not a method of adjudication, but said that Ps counsel bringing the case when a robust refund program is in place makes them question adequacy, since the transaction costs of litigation v. refund are so much higher.  Check your jurisdiction.

Q: offers of judgment, recent FLSA case?

Blood: Won’t have an impact. Justice Thomas goes out of his way to distinguish FLSA from class actions.  Pickoff situations: most judges don’t like it. Feels sleazy.

Desai: in California, that won’t insulate you from a state law claim. Anyway, when you buy off someone in a labor case, that tends to foment more litigation by other employees; that comes with the statutory atty’s fees in a FLSA case. So he thinks these cases are not broad as the media would have you believe.

McCall: Picking off just doesn’t work in the 7^th Circuit if you’ve already filed for certification.  Good lawyers immediately file for cert. with the complaint, so that won’t help if there’s a good lawyer on the P’s side. We think about it all the time because it doesn’t hurt when you have a multimillion-dollar class action.

Lowry: talk about settlements!

Pollack: cy pres. Whatever’s left over, to be given to a charitable cause. Some judges have taken a more active role in policing a link.

McCall: Kellogg: donation to food bank wasn’t enough; a consumer protection case should go to consumer protection groups. That makes Ds nervous because some consumer protection groups are connected to consumer protection lawyers.  No longer can you wait to determine the group later; has to be determined as part of settlement negotiations.

Blood: interesting how aggressive the 9^th Circuit has been; other circuits don’t care. Kellogg was a good settlement—a pool of cash, for a consumer protection organization to be named later, which makes sense because we didn’t know how much money would be left over. Makes no sense to give $1000 to each of 5 organizations, nor $5 million to one organization with a $500,000 budget. 9^th Circuit ignored the cash part of the settlement, oh well. We chose Feeding America (he was on the receiving end of the decision) because more than half of the indigent in the US are kids and the case was about kids’ nutrition. Other cases, like the Facebook case—goes the other way with a sensible, creative way of spending the cy pres money.

Parties used to work really hard on class notice and distribution.  Now most of the settlement time is spent on the cy pres recipient!  D won’t be willing to give $ to Center for Science in the Public Interest, which goes after food Ds all the time, even though it’s the best recipient.

Experian case from 9^th Circuit: weird and shocking. Had a settlement with a provision that says a class rep will get $5000 provided they don’t object to the settlement.  That’s a standard settlement agreement. D lawyers add a bunch of provisions requiring class reps to support the settlement. These are innocuous to practitioners; never create an issue. If some class rep didn’t like the settlement, no such provision has ever stopped a class rep from complaining.  It’s just miscellaneous garbage.

But the 9^th Cir. thought they were terrible. Look back at all your agreements & forms and get rid of such provisions! No upside and now a downside.

Q: talk about Skechers/Reebok/toning.

Pollack: We filed cases before the FTC acted, though the FTC was looking into them (we didn’t know that).  We worked with the FTC to bring injunctive and monetary relief to the class. Filed the complaints and entered into settlement talks. FTC wanted the private suits to be the mechanism of delivering relief, and were able to get very substantial refunds.  Reebok & Skechers, about $50, which was substantial. Skechers was the largest FTC settlement ever. Helpful because of FTC’s big splashy publicity—got 200 claims/minute, crashed the FTC website.

Blood: savvy defense lawyer informed Ps of FTC investigation.  Investigation is confidential; typically do sue and settle all together. FTC can’t talk about investigation w/out subject’s permission. Lawyer had developed a certain level of trust w/Blood and talked about it.  New for FTC to work with class—great for the class because of the free publicity getting participation; it is usually expensive to find class members.

Pollack: no professional objectors at all. 

Blood: one half-wit who stumbled into it, and he walked away without money.

Pollack: true—some tried but withdrew. Very clean hearing.

Q: substantiation?

Desai: Claim substantiation is a very powerful theory, based on FTC standards.  Standard isn’t just “we think it”; can require certain kinds of tests.  He had one case where someone paid for a 30-person test and market research and said that proved the product caused weight loss.  Our claim: we are not acting on behalf of the FTC, but litigating under the UCL. We aren’t saying we need the same level of proof, but rather saying that under California (as well as NY and some other states) law the standard isn’t deception but rather “likely to deceive,” a much lower standard, and that’s where we try to get in this idea of lack of substantiation.  (Ok, I think I see the conceptual disconnect here.  Ps really need to be making the Lanham Act move of identifying the necessarily implied claim of substantiation--which is a straight-up false message received by a consumer as a result of her receipt of the explicit scientific-sounding claim--rather than just saying the scientific-sounding claim is unsubstantiated.  This is an argument with a pedigree and a lot of caselaw behind it!)

Herrington: Hughes v. Ester-C: a product that provided vitamin C.  One of the best summaries of the law of substantiation and whether a consumer fraud claim can be stated and what the motion to dismiss standard is. Basically: substantiation isn’t a private cause of action. Also Bronson v. J&J. Court looked for a study that the P could cite in the complaint that contradicted D’s claim. If you have that, you can survive motion to dismiss.

Eckler v. Wal-Mart, Equate. Substantiation isn’t enough. Can state a claim using a specific scientific study contradicting D’s claim.  P there had 10-12 studies where one of the ingredients, glucosamine, was studied, and the court did a detailed analysis and rejected the complaint under Twiqbal because the studies didn’t study D’s product which had other ingredients—kind of amazing on a motion to dismiss. Great defense case.

Chavez v. Nestle, 9^th Cir.: Juicy Juice brain development: dct dismissed as lack of substantiation claim.  Court of appeals reversed, 2-1.  P is essentially alleging that there’s so little DHA in the product that, even if DHA works, a kid would have to drink too much to count, and that’s enough to state a claim. Dissent says, giving guidance to defense: this is a prior substantiation case on its face. Majority opinion is dishonest because there’s enough DHA in the Juicy Juice product to say it has DHA; does not claim that it’s all the DHA the kid needs, just that it helps with brain development.

Desai: old fashioned UCL claim.  P’s bar should start thinking about RICO. You don’t need direct evidence of reliance in a RICO case, so you don’t need that to certify and would also help with Mazza because no choice of law.