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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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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The Third Circuit in Mayer v. Belichick recently affirmed dismissal of a consumer class action filed by disappointed football fans and season ticket-holders in response to the now infamous “spygate” scandal. As you may recall, this scandal arose when it was discovered that the New England Patriots were surreptitiously videotaping the defensive signals of the New York Jets. The NFL found that the Patriots and Belichick improperly engaged in such conduct. The named plaintiff, a Jets fan and season ticket holder, pursued the claim on behalf of Jets’ season ticket holders against the Patriots as well as the team’s head coach, Bill Belichick, and the NFL.

Among other things, plaintiff alleged that in purchasing tickets to watch the Jets that, as a matter of contract, the tickets imply that each game will be played in accordance with NFL rules and regulations as well as all applicable federal and state laws. In addition, plaintiff alleged that the defendants tortiously interfered with their contractual relations with the Jets in purchasing the tickets, they violated the New Jersey Consumer Fraud Act and the New Jersey Deceptive Business Practices Act, and that they violated federal and state racketeering laws by using the NFL as an enterprise to carry out their illegal scheme. Because the Patriots and Belichick were found in other games to have illegally used video equipment, the action sought damages for Jets ticket-holders for all games played in Giants Stadium between the Jets and Patriots since Belichick became head coach in 2000. Plaintiff sought, among other things, declaratory and injunctive relief, over $61 million in actual damages, punitive and treble damages, and attorneys’ fees. The district court dismissed the action for failure to state a claim.

The issue addressed by the Third Circuit was whether plaintiff stated an actionable injury (i.e., a legally protected right or interest) arising out of the alleged dishonest videotaping program undertaken by the Patriots and Belichick. While the Court acknowledged the unique circumstances of the case, it also recognized that past cases provided the Court with certain legal principles that were relevant to this matter. In affirming the district court’s decision, the Third Circuit traced the history of how tickets to sporting and other entertainment events have been treated in the past, noting that in nearly all of them, the courts held that the ticket merely gave the fan a license to a seat from which to watch the event, but did not create a contract to present any particular kind of show or dictate the manner in which it was to presented. Because plaintiff was allowed to enter the stadium and witnessed the game between the Jets and Patriots, he suffered no cognizable injury to a legally protected right or interest.

A ruling by the Third Circuit in favor of the plaintiff could have had a dramatic impact on both courts and those in the sports and entertainment business. For example, disappointed fans potentially could have sued for a “blown call” or as a result of one team stealing a catcher’s signals that led to the loss of a game. The Third Circuit refused to countenance such a course of action that would have burdened the courts and forced these businesses to defend against such litigation.

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In a previous post, we noted that the California Supreme Court in Pineda v. Williams-Sonoma Stores, Inc., granted a petition to review the issue of whether a retailer violates California’s Song-Beverly Credit Card Act if, in connection with a credit card transaction, it records a customer’s zip code for the purpose of later using it and the customer’s name to obtain the customer’s address through a reverse search database. The appeal is now fully briefed. The following are some of the more significant arguments proffered by each side, and the potential impact of the ruling on retailers.

The trial court sustained Williams-Sonoma’s demurrer to Pineda’s Section 1747.08 claim on the grounds that under Party City Corp. v. Superior Court, 169 Cal. App. 4th 497 (2008) (discussed previously on this blog), zip codes can never constitute “personal identification information” for purposes of that section.  In its brief, Pineda asks the Supreme Court to disregard this well-reasoned precedent on the grounds that zip codes are expressly defined as “information concerning the cardholder, other than information set forth on the credit card, and including, but not limited to, the cardholder’s address and telephone number.” Pineda argues that the trial court and court of appeal erred by inserting an additional criteria into the definition and requiring that the information be “unique” to the cardholder, rather than merely “concerning” the cardholder as set forth in the statute. In addition, Pineda argues that Williams-Sonoma preys on its credit card customers who are accustomed to providing their zip codes for legitimate verification purposes at gas stations and mistakenly assume that Williams-Sonoma is requesting their zip codes to process their credit cards. Meanwhile, according to Pineda, their sole intent is to use its customers’ zip codes to “covertly” obtain their home addresses to build its customer database.

Williams-Sonoma, on the other hand, argues first that the question of whether a zip code is “personal identification information” was not certified for review by the California Supreme Court, thus, the court of appeal’s decision in Party City stands.  In addition, Williams-Sonoma argues that the Song Beverly Credit Card Act does not prohibit the use of information that is collected by a retailer at the point of sale. Instead, Song Beverly is silent as to any conduct other than the request and recording of “personal identification information” during a credit card transaction. Because a zip code has already been held to not fit within the definition of “personal identification information,” the inquiry ends there – it cannot be transformed into “personal identification information” based on how the zip code is used. Further, according to Williams-Sonoma, there is nothing improper about using zip codes to have third party vendors narrow down publicly available information about customers, such as their address.

How the California Supreme Court resolves this issue may have a substantial impact on retailers that collect customer zip codes. If the Supreme Court accepts Pineda’s interpretation of Song Beverly that zip codes are “personal identification information,” retailers could be left wondering what other conduct is prohibited, since neither “zip codes” nor “reverse data searches” are expressly mentioned in the language of the statute. In addition, after having relied on Party City, retailers could be left wondering whether they are now liable for this conduct under Song Beverly for up to $1,000 per transaction.

This appeal has not yet been set for oral argument.  We will keep you updated as to any developments.

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This week, the Supreme Court granted the certiorari petition of AT&T Mobility LLC (“ATTM”) in AT&T Mobility LLC v. Concepcion, No. 09-893. ATTM’s petition asked the Court to determine whether the Federal Arbitration Act (“FAA”) preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures – here, class-wide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. 

In this consumer class action, plaintiff alleged that ATTM’s offer of a “free” cellular phone with the purchase of a new service contract was fraudulent to the extent the company charged the new subscriber a substantial sales tax on the retail value of each free phone. ATTM moved to compel the consumers to participate in arbitration, as required by the service agreement. The district court denied ATTM’s motion, finding that the provision of the arbitration agreement barring class actions was unconscionable under California law and therefore was unenforceable. The district court further held that California unconscionability law was not preempted by the FAA, which provides that arbitration agreements are valid except where they can be revoked on grounds that could also apply to invalidate an entire contract. The Ninth Circuit affirmed.

In its cert petition, ATTM contended that the case presented an exceptionally important question, the resolution of which could lead to the invalidation of tens of millions of arbitration contracts under California law, if the Ninth Circuit’s opinion was upheld. ATTM argued that, even though its arbitration provision does not permit class arbitration, it gives consumers sufficient incentives to vindicate their claims on an individual basis and is therefore valid and not unconscionable. ATTM also argued that review was warranted because courts were divided on the issue and the decision below conflicted with the FAA and Supreme Court precedent. ATTM noted that the primary purpose of the FAA, as stated by the Supreme Court, is to ensure that private agreements to arbitrate are enforced according to their terms. ATTM also pointed to Supreme Court precedent holding that the FAA prohibits courts from imposing prerequisites to enforcement of arbitration agreements where those prerequisites are not applicable to contracts generally. Finally, ATTM argued that there is a liberal federal policy favoring arbitration agreements, notwithstanding state policies to the contrary.

How this issue is resolved could have a wide spread effect on companies sued in consumer class actions. For instance, a decision in favor of ATTM could be interpreted broadly to allow companies to limit their exposure to class actions simply by including a class action waiver in their arbitration agreements.  On the other hand, a ruling in favor of plaintiffs could result in many arbitral class action provisions being invalidated.

Stay tuned.

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Earlier this year, the Seventh Circuit in Cunningham Charter Corp. v. Learjet, Inc. held that denial of class certification does not eliminate subject matter jurisdiction in a case removed from state court under the Class Action Fairness Act (“CAFA”). You may remember that CAFA creates federal diversity jurisdiction over certain class actions in which at least one member of the class is a citizen of a different state from any defendant. The Seventh Circuit noted that jurisdiction attaches when a suit is filed as a class action, and that “invariably precedes certification.” This follows the general principle that jurisdiction once properly invoked is not lost by developments after a suit is filed, such as a change in the state of which a party is a citizen that destroys diversity. The Seventh Circuit held that remanding the case to state court would be contrary to the policy behind CAFA of relaxing the diversity requirements to allow parties to resolve interstate class action issues in federal courts.

Recently, the Ninth Circuit adopted this same approach in United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO, CLV v. Shell Oil Company. As in Cunningham, the district court concluded it no longer had jurisdiction after denying class certification, and remanded the case, which had been removed under CAFA, to state court. The Ninth Circuit reversed, holding that “[h]ad Congress intended that a properly removed class action be remanded if a class is not eventually certified, it could have said so.” The Ninth Circuit continued that it is more likely that Congress intended that the usual and long-standing principles apply – post-filing developments do not defeat jurisdiction if jurisdiction was properly invoked as of the time of filing.

The Eleventh Circuit in Vega v. T-Mobile USA, Inc. is the only other Circuit to have considered the issue.

This does not mean, however, that a class action can never be remanded to state court. According to the Seventh Circuit in Cunningham, if the plaintiff amends away jurisdiction in a subsequent pleading, the case can be dismissed. Similarly, if the plaintiff’s class allegations are completely frivolous, the district court can remand the case to state court.

These decisions allow corporate defendants to vigorously oppose class certification in interstate class actions without the fear that, if successful, the case may end up being resolved back in state court.
 

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On April 26, 2010 the Ninth Circuit in Dukes v. Wal-Mart Stores Inc. ruled in a divided 6-5 vote to affirm certification of a class of 500,000 current female employees of Wal-Mart Stores for alleged gender discrimination in their pay and promotion under Title VII of the 1964 Civil Rights Act. Wal-Mart had argued that the number of putative class members would be too large to defend. These female employees may now proceed in a nationwide class action.

In this decade old lawsuit, plaintiffs allege that Wal-Mart pays women less than men in comparable positions even when the women have higher performance ratings and greater seniority and that the company gives women fewer promotions to in-store management positions and makes them wait longer than men for such promotions. The plaintiffs allege that Wal-Mart has a strong, centralized corporate structure that fosters gender stereotyping and discrimination in Wal-Mart’s 3,400 stores, that policies and practices supporting discrimination are consistent throughout all the stores, and that gender discrimination is common to all women who work or have worked for the company.

In its opinion, the Ninth Circuit reiterated that a district court must rigorously analyze the requirements of Rule 23 of the Federal Rules of Civil Procedure, but warned district courts not to decide merits issues unnecessary to the Rule 23 requirements. Further, the Ninth Circuit rejected the argument that plaintiffs must adduce “significant proof” of commonality in order to satisfy Rule 23. Rather, plaintiffs need only put forth sufficient evidence to support a common question of law and fact. At first glance, the Ninth Circuit’s decision appears limited to putative class action cases involving discrimination under Title VII. However, it potentially may have much broader implications. The majority’s opinion may impact other employment and civil rights litigation, securities fraud litigation, product liability, and antitrust litigation. For example, a suit arising out of a small number of discrete incidents in a company with de-centralized management decision-making or de-centralized control but which also has centralized or common policies, may suffice for the “commonality” prerequisite under Rule 23(a)(2) because, under the Ninth Circuit’s ruling, “significant proof” is not required to bridge the gap between individual actions and class-wide actions.
 

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In a significant class action decision, Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., No. 08-1008, 559 U.S. -- (Mar. 31, 2010), the U.S. Supreme Court recently held that federal rules on class actions preempt state laws restricting a case from proceeding as a class action.

In the complaint, Shady Grove Orthopedic Associates, P.A. alleged that Allstate failed to pay or dispute claims within the time allotted, entitling it to statutory interest. Shady Grove filed a putative class action on behalf of all those who had not received the statutorily-mandated interest on late payments. Because New York CPLR § 901 prohibits class actions in suits seeking statutory damages, Shady Grove filed in federal court in the Eastern District of New York under diversity jurisdiction. The district court dismissed the action for lack of jurisdiction and the Second Circuit affirmed. The U.S. Supreme Court granted certiorari on the issue of whether a state statute restricting class actions can prohibit a case from proceeding under Rule 23 of the Federal Rules of Civil Procedure as a class in federal court under diversity jurisdiction. The Court held that it cannot. According to the plurality opinion written by Justice Scalia, Rule 23, which empowers a federal court to certify a class if certain conditions are met, cannot be limited by state laws. Because Rule 23 and New York CPLR § 901 are both “preconditions for maintaining a class action,” § 901 is validly pre-empted by Rule 23 where state law claims are brought in federal court.

The impact of Shady Grove is already being felt. This week, the Supreme Court applied Shady Grove in Holster v. Gatco, Inc., No. 08-1307, 559 U.S. -- (Apr. 19, 2010), another putative class action filed in the Eastern District of New York. There, the issue presented was whether New York CPLR § 901 divested federal courts of jurisdiction over a Telephone Consumer Protection Act class action brought under diversity jurisdiction. The Supreme Court vacated the judgment dismissing the suit for lack of jurisdiction, remanded the case to the Second Circuit, and instructed it to further consider its decision in light of Shady Grove.

Read expansively, this decision could be used as a way around other similar state laws that seek to limit class actions, potentially resulting in a wave of costly class actions being filed in federal court, rather than forcing individuals to sue for statutory damages one at a time.
 

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If your company is one of the many companies that participates in originating, guaranteeing or servicing student loans made under the Federal Family Education Loan Program (“FFELP”) you should be aware of a recent putative class action filed in the United States District Court for the Northern District of California. In Sharon Cheslow v. Wells Fargo Bank, N.A., 3:10-cv-593, defendant Wells Fargo Bank N.A. is alleged to have improperly capitalized interest on various types of FFELP loans in violation of numerous California consumer protection and false advertising laws. The putative class consists of residents and non-residents of California who borrowed FFELP loans from Wells Fargo. 

According to U.S. Department of Education, approximately 95 million FFELP loans, including the Stafford Loan, the unsubsidized Stafford Loan, the PLUS Loan and the Consolidation Loan, were made from 2001-2009 for about $436 billion. (Click here for a listing of the top 100 originators of FFELP loans for FY09 AND FY08). The federal government serves as the ultimate guarantor of payment on FFELP loans. See, e.g., 34 C.F.R. § 682.100. In certain instances, interest that accrues on FFELP loans can be capitalized. See, e.g., 34 C.F.R. § 682.202(b).

To date, the exposure of companies participating in FFELP to lawsuits by loan borrowers has been limited by repeated holdings that the federal Higher Education Act (“HEA”), as amended, 20 U.S.C. §§ 1001-1155, of which FFELP is a part, does not provide borrowers with a private right of action. See College Loan Corp. v. SLM Corp., 396 F.3d 588, 593 (4th Cir. 2005) (cataloging decisions). Second, it has recently been held that the HEA preempted a FFELP borrower’s state breach of contract and statutory claims. See Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010). It is expected that both propositions will be tested in Cheslow.

It is also anticipated that Wells Fargo, relying on Chae, will contend that the HEA preempts the plaintiff’s claims. The plaintiff may counter that Chae is inapplicable because her state law claims differ from those in Chae. The plaintiffs in Chae, FFELP borrowers, asserted California state law claims against their loan servicer for allegedly improperly calculating interest, assessing late fees and setting their loan repayment start-date. While the Ninth Circuit in Chae distinguished the Fourth Circuit’s decision in College Loan Corp., the plaintiff in Cheslow may attempt to argue that College Loan Corp. should steer the outcome on the preemption issue, not Chae. In College Loan Corp., 396 F.3d at 599, the Fourth Circuit held that the HEA and regulations promulgated thereunder regarding FFELP did not preempt the breach of contract and other state law claims brought by a FFELP loan originator against other FFELP loan originators and servicers and that the plaintiff could rely on violations of the HEA and related regulations to establish its state law claims against the defendants.

Wells Fargo may also try to limit the scope of the class by arguing that non-California residents cannot sue Wells Fargo on California state law claims in light of the restriction imposed by the Due Process Clause on the extraterritorially reach of a state’s laws.

Wells Fargo has not yet responded to the complaint; its response is due May 10th. We intend to monitor the docket and report on any developments. 

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The recent decision in Carter v. Welles-Bowen Realty, Inc., No. 3:09-cv-400 (N.D. Ohio Mar. 11, 2010), two consolidated cases involving alleged kickbacks to “sham” title insurance companies, in violation of the Real Estate Settlement Procedures Act (“RESPA”), is consistent with numerous other decisions of federal courts nationwide that have denied class certification of RESPA kickback claims on the grounds that a class action is not a superior method of adjudication.

In Carter, the lead plaintiffs made payments, in connection with the purchase of residential real estate, to the defendant companies, which merely referred all of the work to defendant Chicago Title Insurance Company. These purchases were funded in part by federally related mortgages, subjecting them to regulation under RESPA. The anti-kickback provisions of RESPA prohibit the payment or acceptance of fees or kickbacks in exchange for referrals of settlement service business involving a federally related mortgage. Almost all loans made for residential property qualify as federally related mortgages. The penalties for violating the anti-kickback provisions are severe, including the recovery of up to three times the amount paid for the services.

The plaintiffs sought certification of two classes consisting of hundreds of members. The district court denied the motion for class certification on the grounds that the named plaintiffs could not satisfy the superiority and predominance requirements of Federal Rule of Civil Procedure 23(b)(3). In doing so, the court found that a class action is not a superior method for litigating this case given RESPA’s provision of attorneys’ fees and costs, on top of treble damages, to prevailing plaintiffs, which the court found provided “adequate incentive for individual plaintiffs to bring these types of claims.” In addition, the court found that common questions did not predominate the proposed classes’ claims because there were “substantial individualized issues,” including whether each class member had a federally-related mortgage covered by RESPA.

Companies sued in putative class actions alleging violations of RESPA's anti-kickback provision may look to the holding in Carter, and similar decisions of numerous other federal courts nationwide, as support for an argument in their case that class certification should be denied for failure to satisfy the superiority and predominance requirements of Rule 23.

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A federal court in California recently sided with twenty-six state attorneys general and several objectors in rejecting a proposed class action settlement that called for Honda to provide over 175,000 Honda Civic Hybrid owners a coupon worth no more than $1,000 toward purchasing a new Honda vehicle. In True v. American Honda Motor Co., No. EDCV07-0287-VAP(OPX) (C.D. Cal. Feb. 26, 2010), the plaintiffs alleged that Honda used false and misleading advertisements regarding the fuel efficiency of its Honda Civic Hybrid to induce customers to pay $2,500 more for the Hybrid than for the comparably equipped standard-engine Honda Civic, even though the Hybrid gets only marginally better gas mileage. Under the proposed settlement, class members were to receive a DVD with tips on how to improve their gas mileage, an opportunity to receive a rebate on the future purchase of another Honda, and, for less than two percent of the class, an opportunity to make a claim for $100. The settlement also provided that Honda would not oppose class counsel’s motion for nearly $3 million in attorneys’ fees.

In an order entered on February 26, 2010, the court denied final approval of the settlement. Specifically, the court held that the proposed settlement’s award of a cash payment to only a select group of the class “creates the most significant obstacle to approval” of the settlement, and that the members of this sub-group were the only class members who would receive a true cash award in the settlement.

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In a unanimous decision Tuesday in Hertz v. Friend, -- U.S. --, No. 08-1107, 2010 WL 605601 (Feb. 23, 2010), the Supreme Court clarified the test federal courts should apply to determine a corporation’s citizenship for purposes of diversity jurisdiction, holding that corporations are citizens of the state of their “nerve center” – usually their corporate headquarters – not of any state where a plurality of their business activity occurs.

As explained in a recent Kelley Drye client advisory, the Hertz decision resolves years of uncertainty about how to determine a corporation’s “principal place of business” for purposes of diversity jurisdiction. Numerous circuits, including the Ninth Circuit, have applied the so-called “total activity” test, which assessed the amount of the corporation’s activity in each state and deemed the corporation a citizen of any state in which its activity was “significantly larger” or “substantially predominates” over its activity in other states. This test left many national companies, including Hertz, unable to remove state-court class actions to federal court in populous states such as California, where they are not headquartered but do a large amount of business. The Hertz decision rejects the “total activity” test and adopts a simpler test, applied in the Seventh Circuit, known as the “nerve center” test. Under this approach, a corporation’s “principal place of business” is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities… [which] should normally be the place where the corporation maintains its headquarters.”

The Court’s decision should be welcome news to corporate defendants, as it will provide greater certainty and predictability about where major litigation affecting multi-state businesses will be litigated, and is likely to limit the need for costly jurisdictional discovery in many cases going forward.
 

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Numerous class action suits have been brought over the past several years under the Telephone Consumer Protection Act (“TCPA”) against entities that fax unsolicited advertisements (so-called “blast faxes”) to individuals and businesses.  Companies facing such suits in turn have sought insurance coverage under their comprehensive general liability (“CGL”) policies for costs incurred defending TCPA suits, and for indemnification of any liability.

While coverage disputes in blast faxing cases have historically yielded mixed results, a series of recent rulings have tilted the scales in favor of policyholders.  For example, the Florida Supreme Court decided on January 28, 2010 in Penzer v. Transportation Ins. Co., No. SC08-2068, 2010 WL 308043, that a standard CGL policy provided coverage for a suit brought under TCPA for alleged blast fax activities.  While other recent decisions have yielded similar results, Penzer is significant because it held that the plain language of the insurance policy compels coverage.

Despite the holding in Penzer, insurers will likely use the lack of unanimity among courts, and the potential for inconsistent results in jurisdictions yet to address the issue, as a basis to deny claims going forward.  Policyholders would be well served to not take these denials at face value, but rather should demand the coverage to which they are entitled.

A client advisory prepared by Kelley Drye & Warren LLP’s Insurance Recovery Group summarizes recent coverage decisions regarding blast faxing, including the Penzer decision, and discusses the implications of those cases for policyholders.

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If your company collects customers’ personal data in the course of its business, be aware of the wave of class actions that have recently been filed arising out of data security breaches. Finkelstein Thompson, a DC-based law firm, over the past year has filed a series of class actions against businesses that have fallen victim to such data breaches.

One such suit, filed in the Northern District of Georgia, asserts claims against RBS WorldPay, Inc. for negligence, breach of implied contracts, and violation of state unfair trade law, after hackers allegedly gained access to the personal information of approximately 1.5 million RBS cardholders. In an incident apparently related to this security breach, Fox News reported -- citing FBI sources-- that thieves, using cloned ATM cards with the stolen data, withdrew $9 million from ATMs in a coordinated attack in 49 cities, including Atlanta, Chicago, New York, Montreal, Moscow, and Hong Kong. This incident has garnered considerable media attention and will likely result in similar suits being filed against RBS across the country as a result of the security breach.

While this sort of case is extremely difficult to sustain given the absence of actual harm, the litigation and reputational costs associated with them are significant for businesses targeted by this litigation, particularly given the resulting media attention. Therefore, be forewarned, and regularly evaluate your data collection, data use, and data maintenance procedures and infrastructure with both your IT personnel and legal counsel.

For further discussion of this case, see our recently published piece in the ABA “Secure Times” newsletter. And for a broader discussion of how other cases have addressed these types of claims, please see our article published in Andrews Litigation Reporter.

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A number of class action lawsuits recently have been filed in California state court in San Diego County against a wide range of merchants as well as gift card issuers alleging, among other things, that the defendants have violated the California Civil Code by issuing gift cards that bear either an obscured expiration date, or an expiration date that is not as prominently displayed as is required under California state law. Section 1749.5 of the California Civil Code makes it unlawful to sell gift certificates or gift cards that contain an expiration date unless the expiration date appears in capital letters in at least 10-point font on the front of the gift card. So far retailers such as Saks, Staples, Borders, Visa, and American Express, among others, have been sued in separate class actions alleging violations of Section 1749.5, as well as the Business and Professions Code and the California Consumer Legal Remedies Act.

For example, in Michaelson v. Staples, Inc., Case No. 37-2009-00083487 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that an expiration date on a Staples gift card, mailed to the plaintiff as part of a promotion, was in less than 10-point font. Plaintiff alleges the card expired before he noticed the expiration date. In Robert Loiseau v. Visa U.S.A. Inc., Case No. 37-2009-00085443 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that a gift card, purchased for its face value, improperly contained an obscured expiration date, charged a processing fee, and required other allegedly unreasonable terms and conditions.

Gift cards are a tricky business when it comes to complying with the patchwork quilt of state-by-state regulations (as well as FTC oversight) over them. The permissibility of expiration dates, redemption in cash once a minimum balance has been reached, disclosures of terms and conditions, and escheatment of remaining balances are just some of the issues that businesses must confront and address. This new wave of lawsuits serves as a reminder to merchants and gift card issuers of the need to monitor state and federal regulations, as well as to periodically evaluate their gift card programs with counsel.

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Several weeks ago, we discussed how most courts were rejecting lawsuits where the plaintiffs claimed “damages” in the form of an increased risk of identity theft, generally stemming from allegations of an accidental loss or theft of personal confidential information. Since we last blogged on this issue, two recent decisions highlight how that trend is continuing, and that courts increasingly require more than speculation about future harm to sustain a lawsuit over the loss of confidential information.

The first notable decision involved a court which was clearly aware of this growing body of case law. In Belle Chasse Automotive Care, Inc. v. Advanced Auto Parts, Inc., United States District Court Judge Kurt Engelhardt of the Eastern District of Louisiana dismissed a claim stemming from a security breach involving confidential information. The plaintiff in Belle Chasse alleged that this breach only had caused an increased risk of identity theft, not an actual identity theft. The court granted defendants’ Rule 12(b)(6) motion, and cited to the growing body of case law from around the nation supporting the position that these allegations amount only to “speculative damages for which [Louisiana] law provides no remedy.” Notably, the Court cited to the Pinero decision we referenced in our prior post and found United States District Court Judge Sarah Vance’s analysis in that case to be “directly on point.”

The second notable decision provides an example of a Court reversing course on this issue, citing this line of cases as authority. The Ruiz v. Gap, Inc. case already was notable in that United States District Court Judge Samuel Conti, in March 2008, had previously ruled  that allegations of a potentially increased risk of future identity theft were sufficient to make out a viable negligence claim under California law. At that time, Judge Conti denied the defendant’s motion to dismiss under Rule 12(b)(6) and held that the plaintiff had alleged an injury in fact, even though he noted that it was unclear what damages the plaintiff would be able to recover even if the plaintiff were to prevail on the merits. Compared to the many cases holding to the contrary, the Ruiz case was generally viewed as an outlier, as one of the few rulings to have held that an allegation of the mere increased risk of identity theft was sufficient to defeat a Rule 12(b)(6) motion.

But just this month, Judge Conti granted summary judgment to the defendants on this same issue. In doing so, 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.” The court expressly rejected parallels to medical monitoring claims in the toxic tort context, and expressly noted similar cases from other jurisdictions – namely Louisiana, Ohio, and Minnesota – none of which were referenced in the court’s 2008 opinion denying the defendants’ motion to dismiss. The decision appears to reflect a reconsideration of sorts by the court – the evidence obtained during depositions seemed to be no different from what the plaintiff alleged in his Complaint, so if those allegations were adequate to defeat a motion to dismiss, testimony to the same effect should have also been adequate to defeat summary judgment. This is merely our own speculation, but it could be that the court became aware, over the course of the past year, of the growing and substantial body of case law which has been rejecting these types of speculative claims.
 

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In order to avoid the substantial risks of class action litigation, many financial service providers – both traditional and non traditional – require that customer agreements contain an arbitration clause and a waiver of the customer’s right to bring a class action. However, recent court decisions and pending legislation suggest that certain types of these arbitration clauses may no longer be viable.

The overwhelming body of case law upholds the enforceability of such arbitration and class waiver provisions. See Adler v. Dell, Inc., No. 08-CV-13170, 2008 WL 5351042 (E.D. Mich. Dec. 18, 2008) (enforcing consumer arbitration provision with class waiver); Jenkins v. First Am. Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2005) (class waiver in borrowers’ payday loan agreements did not render arbitration agreements unconscionable or unenforceable); and Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4th Cir. 2002) (rejecting argument that arbitration agreement was unenforceable as unconscionable due to class waiver).

However, recently some courts have taken issue with these provisions and deemed them unconscionable. A recent example of such a case is Homa v. American Express Co., No. 06-02985, 2009 WL 440912 (3rd Cir. Feb. 24, 2009).

In Homa, plaintiff brought a putative class action suit against American Express and its Centurion unit, alleging that they misrepresented the actual terms of the Blue Cash card rewards program and that defendants failed to award him the promised amount of cash back in violation of the New Jersey Consumer Fraud Act. However, the credit card member agreement that accompanied the Blue Cash card contained an arbitration and class waiver provision. Further, the agreement contained a choice-of-law provision indicating that any disputes arising out of the agreement would be governed by Utah law. Defendants argued that the plaintiff should be required to arbitrate his claims on an individual basis, because Utah law expressly allows arbitration and class waiver provisions in consumer credit agreements. On the other hand, the plaintiff argued that New Jersey law applied, because, as the application of Utah law would violate New Jersey’s public policy against certain class-arbitration waivers, New Jersey choice-of-law principles dictated that the agreement’s choice of Utah law was invalid. The district court sided with the defendants and dismissed plaintiff’s complaint.

The Third Circuit Court of Appeals reversed the trial court’s decision. In the opinion, the Third Circuit held that that the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, did not preclude the district court from applying New Jersey unconscionability principles to void the arbitration and class waiver clause, and therefore, plaintiff was entitled to pursue a class action against defendants in federal court in New Jersey. In so doing, the Court relied on the holding in a New Jersey state court decision styled Muhammad v. County Bank of Rehoboth Beach, Delaware, 912 A.2d 88 (N.J. 2006), that “‘[t]he public interest at stake in . . . consumers[’] [ability to effectively] pursue their statutory rights under [New Jersey’s] consumer protection laws’ constituted the ‘most important’ reason for holding a similar class-arbitration waiver unconscionable.” Further, the Third Circuit held that this interest “overrides” a defendant’s right to seek enforcement of a class-arbitration waiver in an agreement, particularly where the claims at issue are of such a low value as effectively to preclude relief if pursued individually. The case is now back in the district court.

Furthermore, this issue may be resolved by pending federal legislation that seeks to ban certain types of arbitration provisions. The Arbitration Fairness Act of 2009 would ban provisions requiring arbitration of (1) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights. See H.R. 1020   The bill, which was referred to the House Judiciary Committtee on Feb. 12, 2009, currently has 43 co-sponsors, including that Committee Chairman Conyers (D-MI). A recent Legal Times report noted the plaintiffs bar's efforts to push the arbitration legislation on Capitol Hill. If enacted, the Act could start a wave of litigation in the consumer financial services sector.

The bottom line is that businesses should re-examine their customer agreement’s arbitration and class waiver provisions, paying particular attention to any choice of law provisions, and monitor these legal developments on a state-by-state basis. Homa tells us that the same arbitration and class waiver provision, while being upheld in one state, could be rejected in another.

Stay tuned for future posts analyzing cases decided in the wake of Homa and reporting on further developments with the Arbitration Fairness Act of 2009.
 

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The Class Action Fairness Act (“CAFA”) eliminated longstanding barriers to removal of cases from state to federal court. To remove a class action under CAFA, it is no longer necessary for all plaintiffs and defendants to be completely diverse; now, only one class member and one defendant must be citizens of different states. Certain exceptions, however, including the local controversy exception, limit this broad access to federal court and provide a means for parties to keep certain actions in state court. The local controversy exception provides that federal court must decline jurisdiction where “significant” relief is sought from at least one defendant in the case whose conduct forms a “significant basis” for the claims asserted by the putative class. The Third Circuit, in Kaufman v. Allstate New Jersey Insurance Co., 561 F.3d 144 (3d Cir. 2009), recently became the first Court of Appeals to hold that CAFA does not require every class member to assert a claim against that local defendant for the action to remain in state court.

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Over the last few years, incidents involving disclosures of personal information by consumer financial service providers have been big news, ranging from the theft of laptop computers containing social security numbers, to hacker attacks on computer networks containing confidential information, to the more "vanilla" theft of personal documents. Not surprisingly, the plaintiffs' bar has been attempting to turn all of this worry about identity theft into big money - even where no identity theft has occurred. However, courts around the nation have been considering such claims, and responding with a virtually uniform voice to state that, however the claim may be styled, a plaintiff's speculative fear of potential future identity theft does not constitute "actual damages" under the law, and accordingly reject such lawsuits.

In the latest court opinion to address this issue, Pinero v. Jackson Hewitt Tax Service, Inc., No. 08-3535, 2009 U.S. Dist. LEXIS 660, (E.D. La. January 7, 2009), Chief Judge Sarah S. Vance dismissed various statutory and tort claims, including negligence, breach of contract, violations of a Louisiana data breach notification statute, and claims under the Tax Reform Act of 1976, against a national franchisor of income tax preparation services and its local independent franchisee. In the Pinero case, the plaintiff contended that the independent franchisee had failed to dispose of certain documents properly, which allegedly contained personal information. However, the plaintiff neither contended that her documents fell into the hands of a wrong-doer, nor that she had suffered any actual identity theft. Her damages claims were largely based on alleged emotional injuries and mental anguish, and theoretical consequential damages about steps she might need to take to deal with potential identity theft.

The Court rejected this theory of damages, and dismissed 6 of 7 claims, including negligence, breach of contract, and violations of the Louisiana data breach notification statute, holding that this type of speculative “injury” does not meet the required damages element. Also, in a holding of first impression, Judge Vance dismissed the federal claim for statutory penalties under the Tax Reform Act of 1976, ruling that commercial tax preparers are simply not subject to the provisions of the law governing disclosure of tax return information by the I.R.S. or its agents. The Court further ruled that the Louisiana data breach notification statute did not apply to paper documents – notably, Louisiana is not alone in this regard. Judge Vance also dismissed claims for fraudulent inducement and the Louisiana unfair trade practice law for a failure to adequately allege an intent to defraud. The Court only let the invasion of privacy claim survive, albeit noting skepticism about whether such a claim could succeed on the merits.

For further discussion of this case, see our recently published piece in the ABA "Secure Times" newsletter. And for a broader discussion of how other cases have addressed these types of claims, please see our article published in Andrews Litigation Reporter.

(Andrew S. Wein and Veronica D. Gray represent Jackson Hewitt Tax Service in this case.)
 

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The latest class action complaints alleging improper subprime lending practices are due to be filed against two banks today. The NAACP plans to file separate class action lawsuits today against Wells Fargo and HSBC. According to news reports, the suits, which will be filed in district court in California, allege that those banks engaged in deliberate discriminatory practices that forced minority borrowers into loans with higher interest rates than non-minority borrowers with similar credit histories. These actions follow, and appear to be an extension of, an NAACP lawsuit filed against HSBC, Countrywide, and at least 17 other mortgage lenders in 2007. That suit, which is still under way and recently survived a motion to dismiss, alleges broad discriminatory lending practices by mortgage lenders. These NAACP actions are just a few in a growing number of cases filed by private individuals and state and local governments relating to subprime lending.

All of those suits presumably support Congress' aggressive financial system reform agenda, including legislation to address mortgage lending practices. Yesterday, the House Committee on Financial Services held a major hearing to review mortgage lending practices and legislation to reform those practices. The chairman of that committee, Barney Frank (D-MA), announced that he plans to move that legislation out of committee this month, with the goal of a full House vote some time in April.
 

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As of January 1, 2009, and in contrast to federal law, California Civil Code Section 1747.09 requires that no more than the last five digits of a credit or debit card number be printed on both the electronically-printed card receipt retained by the business as well as the receipt provided to customers. See CAL. CIVIL CODE § 1747.09(a)-(d). If you or your business accept credit cards or debit cards for payment you must ensure that all machines and registers are in compliance with these truncation requirements. Businesses that fail to comply with revised Section 1747.09 face potentially significant consequences, including enforcement actions by state agencies, and, perhaps more significantly, individual and class action lawsuits brought by cardholders.

A brief look at the recent history of class actions filed under the federal truncation statute – the Fair Credit Reporting Act (“FCRA”), which applies only to transaction receipts provided to customers – may offer guidance on how California courts may deal with actions brought under Section 1747.09.

Beginning in December 2006, plaintiffs’ attorneys began filing class action lawsuits against a broad spectrum of retailers and other businesses in California based largely on the failure to truncate expiration dates on electronically printed credit card receipts provided to consumers, and sought statutory penalties of between $100 and $1,000 per transaction for each “willful” violation alleged, plus attorneys’ fees, costs and punitive damages. See15 U.S.C. § 1681n. In order to prevent consumers, who had not suffered any actual damage, from recovering potentially annihilating statutory damages against retailers and other merchants, Congress passed the Credit and Debit Card Receipt Clarification Act, which added a provision to the Fair and Accurate Credit Transactions Act (“FACTA”) preventing consumers from obtaining statutory damages for willful expiration date violations taking place between December 4, 2004 and June 3, 2008. Further, several courts refused to certify a class on the theory that a class action is not superior to other methods for the fair and efficient adjudication of the controversy. However, no similar legislation has been enacted by the California legislature, and it remains to be seen whether courts will deny certification of a class action brought under Section 1747.09, as several courts have done in FACTA cases, to limit abusive lawsuits brought by consumers under California state law.

Accordingly, if you have not already done so, you should act swiftly to ensure that all machines and registers are in compliance with the truncation requirements. To accomplish this, consider auditing machines and registers by printing out receipts both retained by the company and issued to the customer. If any violation of Section 1747.09 or FACTA is detected, corrective action should be taken to limit potential liability and to decrease the risk of a potential lawsuit. 

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