Consumer Finance Law Blog : Consumer Finance Lawyer & Attorney : Kelley Drye & Warren Law Firm : Financial Privacy & Security

In a decision that could render the Class Action Fairness Act (“CAFA”) virtually meaningless, the Eleventh Circuit recently held sua sponte that CAFA does not allow for federal court jurisdiction over class actions unless the amount in controversy for at least one plaintiff (or class member) exceeds $75,000. Should this decision hold up, courts in the Eleventh Circuit would lack jurisdiction over virtually all consumer class actions, most of which involve modest claims, whether they are originally filed in or subsequently removed to federal court.

As you may know from previous posts on this blog, Congress enacted CAFA in 2005 to curb “abuses of the class action device,” including state courts being overly friendly toward class certification, insufficient notice being provided to putative class members, and favoring some plaintiffs over others in making class awards. CAFA was supposed to situate more class actions in federal court and make it easier for defendants in a state court action to remove the action to federal court. CAFA provides federal courts with original jurisdiction over class actions in which the amount in controversy exceeds $5,000,000 (aggregating individual class member claims to meet this threshold) and there is minimal diversity (at least one plaintiff and one defendant are from different states).

In Cappuccitti v. DirecTV, Inc., No. 09-14107 (11th Cir. July 19, 2010), plaintiffs sued DirecTV seeking the recovery, on behalf of themselves and those similarly situated DirecTV subscribers in Georgia, of the fees DirecTV charges its subscribers for canceling their subscriptions prior to the subscriptions’ expiration. The fees ranged from $175 to $480 per subscriber. DirecTV moved to compel plaintiffs to submit to arbitration, per the arbitration and class action waiver provision in the DirecTV subscriber agreements, and to dismiss the complaint for failure to state a claim. Plaintiffs did not move to dismiss for lack of subject matter jurisdiction. The district court dismissed plaintiffs’ complaint for failure to state a claim, and plaintiffs appealed. On appeal, the Eleventh Circuit held that the district court lacked jurisdiction to entertain the complaint, it vacated the district court’s order, and remanded the case with instructions to dismiss the complaint.

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Last week the BNA Privacy & Security Law Report published an article discussing in detail California’s Song-Beverly Credit Card Act (the “Act”). The aim of the article is to provide those persons and businesses that regularly engage in credit card transactions in California, most notably retail merchants, with a meaningful primer on some critical current and developing aspects of the Act.  The article provides an overview of the Act’s provisions, and discusses the important legal issues surrounding the Act, including several that California courts have resolved, several that are currently pending before those courts, and one that may be resolved in the near future.

On a related note, the California Court of Appeals, Fourth Appellate Division, recently issued a decision in Carson v. Michaels Stores, Inc., which addressed several issues under the Act. See id. at No. 37-2008-00089773-CU-BT-CTL, 2010 WL 2862077 (Cal. App. Ct. July 22, 2010). Carson filed a complaint against Michaels Stores, Inc., alleging violations of the Act and her constitutional right to privacy by requesting and recording her zip code, and then using her zip code to obtain her address from a public database. First, the court, following Pineda v. Williams-Sonoma Stores, Inc., 100 Cal.Rptr.3d 458 (Cal. App. Ct. 2009), affirmed the trial court’s holding that zip codes are not personal identification information under the Act. Because zip codes are not personal identification information under the Act, Michael’s use of this information to obtain plaintiff’s address was also held not to be prohibited under the Act. Id. at 7. (See our prior posts discussing Pineda and issues under the Act.)

In addition, the court held that plaintiff had no reasonable expectation of privacy in her address – as it was obtained from public databases available on the Internet – and therefore plaintiff did not have a valid invasion of privacy claim under the California constitution. Id. at 9-10.

Notably, the court declined to decide a significant open issue under the Act – whether the Act prohibits a retailer from requesting personal information as a condition of accepting the customer’s credit card payment.  Id. at n.4. This open issue is discussed in detail in the above-referenced article.

Kelley Drye attorney Veronica Jackson contributed to this post.

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Recent posts on this blog have discussed questions as to the continued viability of arbitration clauses that require consumer agreements to contain an arbitration clause and a waiver of the customer’s right to bring a class action. Indeed, the United States Supreme Court is to decide in the upcoming term whether agreements barring class-wide arbitration can be invalidated under State law, and Congress may kill mandatory arbitration in consumer finance transactions. This judicial and legislative trend to limit, and even eliminate, the use of arbitrations has been continued by the U.S. Court of Appeals for the Second Circuit in its decision in Fensterstock v. Affiliated Computer Services, 09 CV 1562 (2d Cir. 7/12/10).

The Second Circuit struck down, under California law, the use of loan agreements that contain arbitration clauses and a waiver of the customer’s right to bring a class action. The Second Circuit held that a lawyer who sued a student loan company over alleged hidden fees in loan agreements cannot be forced into arbitration and can pursue a class action. The Second Circuit ruled that the loan agreement’s class action and class arbitration waiver clauses were unconscionable under California law because they are a “standard contract of adhesion drafted by a party that had superior bargaining power,” and, therefore, are unenforceable. “Such a clause presented to the weaker party on a take-it-or-leave-it basis without the opportunity for meaningful negotiation is, under California law, oppressive, and satisfied the requirement that there be at least a minimal showing of procedural unconscionability.” According to the Court, although the plaintiff was versed in complex financial transactions, there was nothing to suggest that he had any opportunity to negotiate that clause out of the contract. Further, applying the remainder of a three-part test under California law for determining whether a clause in a contract is unconscionable, the Court held that the disputes on the alleged damages “predictably involve small amounts of damages,” and the plaintiff alleged the two companies were “deliberately carrying out a scheme to cheat large numbers of borrowers out of individually small amounts of money.”

While the Second Circuit reiterated the Federal Arbitration Act’s and “Congress’ purpose in enacting the Federal Arbitration Act ‘to reverse the long standing judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts[,]’” judicial hostility, at least as applied under California law, appears to remain. The Second Circuit’s interpretation of contract principles under California law, leading to its determination that the contract clauses were procedurally and substantively unconscionable, trumped the Federal Arbitration Act’s purpose and principles, like many courts seemingly do today. 

Whether the Supreme Court or Congress will continue that trend remains to be seen. Thus, companies that have consumer or employment contracts that contain such clauses should continue to seek to enforce them in court; however, remember that their enforceability may be significantly limited. As noted previously in this blog, companies should continue to monitor developments at the federal and state level, and re-examine their consumer or employment agreement’s arbitration and class action clauses to seek the best choice of law and jurisdiction for enforcement of such clauses. Please also remember to check back here for further updates.

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The Southern District of New York, recently, in Hammond v. The Bank of New York Mellon Corp., No. 08-6060, 2010 WL 2643307 (S.D.N.Y. June 25, 2010) joined other courts from around the country in holding that plaintiffs who bring claims based on the risk of identity theft lack Article III standing. In each case, including the 26 cases cited in Hammond, the plaintiffs’ claims were dismissed, either on a motion to dismiss or summary judgment.

In Hammond, the plaintiffs, after being notified that their personal information, contained on unencrypted back up tapes, had been “lost” while being transported by a third party, brought a putative class action asserting claims for breach of implied contract, breach of fiduciary duty, negligence, and violation of state consumer protection laws. Three of the seven named plaintiffs alleged that they actually had suffered “unauthorized credit transactions” after the tapes were lost, although they ultimately conceded that the charges were either reimbursed or unrelated to the tape loss. Bank of New York’s original motion to dismiss was denied. It then moved for summary judgment based on a lack of Article III standing and argued that the alleged emotional distress or increased risk of harm did not constitute legally cognizable harm.

Discovery in the case, particularly plaintiffs’ deposition testimony, demonstrated that the plaintiffs did not suffer any damages.  The court, recognizing the apparent inconsistencies in its decisions on defendant’s motion to dismiss and plaintiffs’ motion for summary judgment, held that a finding that Article III standing exists at the motion to dismiss stage does not necessarily mean that it will be present at summary judgment.

Hammond is the latest in a long line of cases holding that the risk of identity theft is not a cognizable injury.  Thus, dismissal in these cases is not an issue of “if,” but of “when.” 

Click here to view previous posts on these and other related issues. 

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In Andrews v. Equifax Information Services LLC, No.: C-08-0817, 2010 U.S. Dist. Lexis 38020 (W.D. Wash. Mar. 30, 2010), plaintiff filed suit against Equifax after it allegedly “mixed up” her information with that of another individual of the same name and disseminated that information to third parties. Plaintiff alleges that this “mix up” was caused by Equifax’s failure to follow reasonable procedures to ensure maximum possible accuracy of the information it reported as well as its failure to re-investigate her disputes, both of which are required by FCRA.

FCRA requires claims to be brought within two years after the plaintiff discovers the violation or within five years after the date the violation occurs. Invoking the former provision, Equifax argued that it was entitled to dismissal because the plaintiff had discovered the alleged violations more than two-years before she filed suit in May 2008. Equifax cited record evidence that plaintiff had called in 2004 and 2005 to dispute information in her credit file that she believed was inaccurate. Equifax contended further that it sent plaintiff the results of its investigation into her disputes on three occasions, the last of which was in late November 2005. According to Equifax, because these results contained the inaccurate information forming the basis of her FCRA allegations, plaintiff had discovered the violation more than two years before filing suit.

The Western District of Washington denied the motion, rejecting the argument that plaintiff’s knowledge of inaccurate information in her credit report put her on notice of Equifax’s alleged FCRA violation. “FCRA is not a strict liability statute,” said the court. Indeed, a credit reporting agency can escape liability under FCRA for an inaccurate credit report as long as it shows it followed reasonable procedures in generating it. Therefore, inaccurate information in a credit report, standing alone, cannot violate FCRA. According to the court, to obtain dismissal, Equifax had to show something more. Specifically, it had to produce sufficient evidence tying the investigation reports it provided to the plaintiff with plaintiff’s discovery of the precise violations alleged in the lawsuit. This, according to the court, it failed to do.

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President Obama will soon sign the final Wall Street Reform and Consumer Protection Act, which the Senate passed last week. (Here is a comprehensive summary of the massive legislation.) However, in many ways, the battle over financial reform has just begun. While the law makes broad and comprehensive changes to the nation’s financial system regulatory structure, many more details will be added in the months and years ahead as the reorganized regulatory structure takes shape, the revamped regulatory processes established by the bill unfold, and the numerous studies mandated by the bill are conducted.

Many of the regulatory details expected will emanate from the newly created Consumer Financial Protection Bureau. The Bureau will have independent authority but will be housed within the Federal Reserve system. It will serve as the primary regulator of financial products that reach consumers. Time magazine lists six consumer financial issues the Bureau could address first, including student loans, credit scores, and certain mortgages. However, there will be strong differing opinions on how, when, and in what areas the Bureau should focus its attention.

But before the Bureau can even begin to act, it needs to be created, staffed, and organized. The individual chosen to lead the Bureau out of the gate will have the opportunity to vastly influence the organization, culture, direction, scope and strength of the new regulator. The Washington Post reported today, following similar earlier reports, that Elizabeth Warren has emerged as an early leading candidate for the position. Ms. Warren is a professor at Harvard Law School and chairs the oversight panel created by Congress to monitor the Troubled Asset Relief Program. Consumer protection groups already are strongly supporting her nomination. Others fear, however, that Ms. Warren does not have the organizational experience to lead the newly-created office. Among others with greater institutional experience purportedly being considered for the position are current Assistant Treasury Secretary Michael Barr, and Eugene Kimmelman, a deputy assistant attorney general in the Justice Department's Antitrust Division and former lobbyist for Consumers Union.

Appointment of any of these candidates would send a clear message from the Obama administration that it intends to fully pursue the goal of an active consumer protection regulator. Financial service providers will have an opportunity to voice their concerns and opposition through the Senate confirmation process.

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On June 29, a group of 49 individual airline ticket purchasers filed suit to enjoin the proposed merger between Continental Airlines, Inc. and United Air Lines Inc., alleging that the deal would harm competition in the airline industry. The suit claims that the companies’ CEOs held “secret and private meetings” at which they discussed potential increases in prices and fares, charging of fees for previously free services, eliminating or curtailing services, and reducing the frequency of flights and number of available seats. The complaint claims that the merger, which would combine the third and fourth largest domestic carriers, will create a monopoly in ten U.S. airports, leave just two competitors in 120 U.S. airports, and create more concentrated markets in Washington, D.C., San Diego, Seattle, and New Orleans.

The deal is currently under review by the U.S. Department of Justice Antitrust Division, which in May announced that “it would go over the merger with a fine-tooth comb to make sure it wouldn't hurt competition.” The deal has also drawn scrutiny from Congress. In June, the U.S. House of Representatives held hearings regarding the merger’s potential effect on competition. United States Representative James Oberstar (D. Minn.), chairman of the Transportation Committee, opined that the merger would harm competition, and noted that he would “explore legislation to stiffen regulation if the deal is approved.” The Consumer Travel Alliance testified that the merger would create a market with just three dominant airlines, which would be “a consumer nightmare.” In defense of the deal, the airlines’ CEOs expressed the view that the merger would not harm consumers because competition in the airline industry has heated up in recent years due in part to competition from new carriers such as Southwest Airlines, and since it has become easy for consumers to compare prices via online search portals like Expedia and Orbitz.

A case management conference has been set for October 14, 2010.

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Updating a prior post, the Ninth Circuit, in Ruiz v. Gap, Inc., recently upheld a dismissal on summary judgment on the grounds that the mere risk of identity theft is too speculative of an injury to substantiate a cause of action based on negligence. See Ruiz v. Gap, Inc., No. 09-15971, 2010 WL 2170993 (9th Cir. May 28, 2010)

As background, Plaintiff, Mr. Joel Ruiz, submitted an online job application to work in a Gap store. As part of the application, Ruiz provided his social security number. Gap later disclosed that laptops were stolen from Vangent, the vendor with whom Gap had contracted for recruiting purposes. The laptops contained Ruiz’s unencrypted personal information, along with the information of nearly 800,000 other Gap job applicants.

Ruiz filed a putative class action alleging, among other things, negligence and violation of California Civil Code § 1798.85. Ruiz later amended his complaint to bring a breach of contract claim against Vangent. As discussed in a prior post, the court previously denied a motion to dismiss on the negligence claim. However, defendants were granted summary judgment on the negligence claim after discovery had done little to cure its speculative nature. See Ruiz v. Gap, Inc., 622 F. Supp. 2d 908 (N.D. Cal. 2009). The court held that an increased risk of identity theft did not constitute “the level of appreciable harm necessary to assert a negligence claim under California law.” Id. at 913.

In the opinion, the Ninth Circuit held that while the increased risk of identity theft created sufficient concern to grant plaintiff Article III standing, the alleged injury was still too speculative to sustain a negligence claim under California law. See Ruiz v. Gap, Inc., No. 09-15971, 2010 WL 2170993, at *1 (9th Cir. May 28, 2010). “It is fundamental that a negligent act is not accountable unless it results in injury to another.” Id. Notably, the court refrained from answering whether money spent on credit monitoring, as the result of personal information theft, supported a negligence claim. Id. However, the court included a footnote citing authority in favor of awarding medical monitoring costs, thus suggesting that it might be inclined to draw a parallel between these issues in the future. Id. at n1.

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After working through the night, the Congressional conference committee tasked with negotiating a final financial reform bill voted 27-16 to approve the bill and send it back to each chamber for a final vote on the conference report.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

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