Monday, April 29, 2013

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.

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