challenge to Sirius XM's (huge) junk fees survives

Carovillano v. Sirius XM Radio Inc., 2024 WL 450040, No. 23 Civ. 4723 (PAE) (S.D.N.Y. Feb. 6, 2024)

Among other things, this opinion features very effective use of images from this case and others!

Plaintiffs alleged that Sirius XM promises its telephonic subscribers a particular monthly price, only to charge them an undisclosed 21.4% fee (the “U.S. Royalty Fee”) on top, in violation of NY GBL §§ 349 and 350 (along with breach of the implied covenant of good faith and fair dealing and unjust enrichment). Sirius responded that it clearly disclosed the fee and that no reasonable consumer would be confused. The court declined to grant the motion to dismiss except as to unjust enrichment (duplicative) and the request for injunctive relief (lack of standing).

As alleged:

Sirius XM satellite radios are pre-installed in 84% of all new automobiles, with each buyer automatically provided a free trial. These free trials are critical to Sirius XM’s business model, which “relies on converting these millions of vehicle buyers from free trial users into paid subscribers of automatically renewing music plans.”

Once the car-buyer’s free trial ends, Sirius offers a lot of plans, often at a promotional price (for instance, “3 mos. for $1 then $23.99/mo.”). However, the advertised rates don’t include the “U.S. Music Royalty Fee,” a flat-rate charge imposed at Sirius XM’s sole discretion that has increased over time. Right now, it’s a “uniform additional 21.4% charge.” So, a customer promised “3 mos. for $1” will, in fact, pay $1.21 per month, and then $29.12 per month.) The Fee is a key profit center for Sirius XM, responsible for $1.36 billion in revenue—122% of Sirius XM’s net profits for the year.

The complaint alleged that Sirius XM didn’t adequately disclose the Fee in its ads, such as this one:

 

mailer

The promotional rate is prominently displayed, but there’s no express reference to the Fee. At the end of the mailer, the paragraph beginning “OFFER DETAILS” says “[f]ees and taxes apply.” That paragraph also says in bold: “Please see our Customer Agreement at www.siriusxm.com for complete terms.”

The customer agreement then says, in relevant part “We may charge you one or more of the following fees, all of which are subject to change without notice: … Packages which include music channels may be charged a U.S. Music Royalty Fee. See www.siriusxm.com/usmusicroyalty.” That page says “The current U.S. Music Royalty Fee is 21.4% of the price of satellite plans* that include music channels. … based on the entire subscription price of the plan you purchase that includes musical performances.”

Like its mailers, Sirius XM’s promotional materials also don’t expressly refer to the Fee. The email shown in the complaint doesn’t mention fees at all; “See Offer Details” (rendered in white text against a pink backdrop [ed. note: bad practice!]) is a hyperlink that goes to a webpage that also doesn’t expressly refer to the fee, though it does state that “Fees & taxes apply,” and it directs customers to “our Customer Agreement,” as quoted above.

email

webpage to which email links

For subscribers who sign up by phone, the complaint alleges, Sirius XM never “disclose[s] ..., at any time before or when they signed up, that it [will] charge them a U.S. Music Royalty Fee in addition to the advertised and promised price.” “At most, agents may say the cost is the advertised or quoted price plus unspecified ‘fees and taxes.’ ”

New subscribers receive a confirmation email, which is allegedly the sole billing document that mentions the Fee. Because Sirius XM does not send any “periodic billing notices or invoices to its subscribers,” plaintiffs alleged that its subscribers often learn of Sirius XM’s hidden fees by inspecting their bank or credit card billing statement. Sirius XM customer-service agents are allegedly instructed to tell those subscribers who do find out about the Fee “that the Fee is a government-related fee and/or that [it] is outside of Sirius XM’s control.”

Whether an act is “materially misleading” under New York law is an objective inquiry, and “generally a question of fact not suited for resolution at the motion to dismiss stage.” The court was not persuaded by Sirius XM’s (terrible) argument that it “fully disclosed” the Fee. “New York courts have rejected the argument that a generalized disclaimer as to ‘additional fees’ bars claims asserting the non-disclosure of fees that a reasonable consumer would not expect” (collecting cases).  Its “shorthand and inconspicuous disclosure” that “fees and taxes apply” couldn’t suffice on a motion to dismiss.

Some cases dismiss claims where defendants gave plaintiffs the tools “necessary to understand” a challenged fee, but those cases involved fees “so commonplace or small that the reviewing court held that a reasonable consumer would not have been surprised to first learn of them by reviewing the final receipt,” such as sales tax or other government-imposed fees.

The court also pointed to Second Circuit decisions addressing, in contract law, when a party can be found to have been on inquiry notice of claimed terms during contract formation. That court has found that reasonable consumers would not be on notice of terms where the “small-print disclaimer” was “dwarfed by the surrounding colorful text and imagery.”

E.g., the ad in Soliman v. Subway Franchisee Advertising Fund Trust, Ltd., 999 F.3d 828 (2d Cir. 2021):  

Subway ad

One reason the Second Circuit found Subway’s disclaimer inconspicuous was its “mixed-media incorporation of contractual terms” requiring a consumer to go from a print advertisement to a website. “[W]hen a consumer must type in a thirty-seven-character URL to their cellphone or computer, it is more difficult to navigate to the terms of use in order to confirm” just what she has been asked to agree to. Id

Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016), involved an order page like this:

 

Amazon ad

Whether Amazon provided sufficient notice, the Second Circuit held, could not be resolved as a matter of law. The key “message itself—‘By placing your order, you agree to Amazon.com’s ... conditions of use’—is not bold, capitalized, or conspicuous in light of the whole webpage.” The webpage’s many links, in “different colors, fonts, and locations,” “generally obscure” the notification that Amazon’s terms and conditions apply to the transaction. “Given the breadth of the range of technological savvy of online purchasers,” the Circuit stated, “consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.”

On the pleadings, it was plausible that Sirius XM’s “mixed-media incorporation of contractual terms” in its mailer—requiring a prospective customer to “type in” a “URL to their cellphone or computer” and then navigate through at least three webpages to determine the amount of the additional fee—“obscure[d] th[at] message” so as not to give a reasonably prudent consumer notice of it, and that the disclaimer about other “[f]ees & taxes” was “not bold, capitalized, or conspicuous in light of the whole” mailer, and was “generally obscure[d]” by other “distracting” elements such as the prominently touted sticker price of “$5/month.” The “duty to read” terms properly “called to [a consumer’s] attention” does not imply a “duty to ferret out contract provisions ... contained in inconspicuous hyperlinks.” And, under Mantikas v. Kellogg Co., 910 F.3d 633, 637 (2d Cir. 2018), a reasonable consumer is not “expected to look beyond misleading representations” in one part of an advertisement “to discover the truth ... in small print” online.

It was also plausible that, had they known of the Fee, plaintiffs “would not have been willing to pay as much for their music plans” or “would not have purchased music plans at all.” A price premium-like theory was plausible given the allegations that, had Sirius XM revealed the all-in price of its subscriptions, it would have faced downward price pressure from competitors, such as “Apple Music, Spotify, Amazon Music, [and] Google Play Music,” all of which offer similar music-streaming services but do not “charge any separate music royalty fee.”

The claim for breach of the implied covenant of good faith and fair dealing also survived, because Sirius XM’s argument that the contract allowed it to charge the Fee “assumes a disputed conclusion: that there is a binding enforceable contract between Sirius XM and the plaintiffs that encompasses a customer obligation to pay the U.S. Royalty Fee.”