FTC Beat
Posts Tagged ‘class action’
Mar 31
2016

Arbitration Under Fire: Brace Your Company for Less Contract Freedom and More Class Actions

Close-up Of Judge Reading Contract Paper At Desk In Courthouse

Since the Federal Arbitration Act (FAA) of 1925, the United States has had a policy preference for arbitration, even when an arbitration provision includes language barring class action litigation.  We saw this most recently in December 2015 when the Supreme Court reversed a decision by a California Court of Appeal to invalidate a class-arbitration waiver within a service agreement between DirecTV and its customers.[1]  But not everyone thinks arbitration is so great a thing.  Encouraged by consumer groups and trial lawyers, federal regulators are pushing for limits on arbitration provisions in consumer contracts.

At its core, the debate is about whether companies may compel consumers to arbitrate rather than litigate disputes and – perhaps more significantly – bar consumers from class action remedies as part of the arbitration requirement.  Critics of mandatory arbitration say that it restricts consumer redress and is tantamount to a deceptive trade practice because the arbitration provisions are usually contained in the “fine print” of a contract.  The new rules being proposed reportedly are designed to eliminate mandatory arbitration provisions and facilitate class action litigation.

Despite the criticisms of consumer groups, arbitration often is cheaper and more effective for both individual consumers and companies.  By interfering with Americans’ freedom of contract to prevent the use of mandatory arbitration, the government could severely damage U.S. business interests by exposing them to a marked increase in expensive class action litigation.  In turn, that would result in more limited choices and increased costs for consumers.

The government’s efforts to eliminate mandatory arbitration provisions in consumer-related contracts have been highlighted in several recent agency actions.  In its list of near-term goals, the Bureau of Consumer Financial Protections (CFPB) said that new rules to govern arbitration in consumer contracts would be a priority in 2016. The Department of Education announced that it, too, was reviewing mandatory arbitration provisions in college enrollment contracts.  And despite multiple appellate decisions to the contrary, the National Labor Relations Board (NLRB) again concluded that class action waivers in arbitration agreements infringe on an individual’s rights under Section 7 of the National Labor Relations Act.

All of this has happened in the space of three months, indicating a clear effort by the government to diminish businesses’ ability to require arbitration that shields them from often frivolous and costly class action litigation.  The acts of some Congressmen have made this agenda even more transparent.  In February 2016, Senator Patrick Leahy introduced a bill that would modify the scope of the FAA and curtail the use of mandatory arbitration.  The bill is unlikely to pass in the current Republican Congress, but Congress previously empowered federal agencies to curtail the use of mandatory arbitration provisions on a significant, but more limited, basis.

The CFPB’s current actions were authorized by the 2010 Dodd-Frank Act[2], which barred the use of arbitration clauses in certain mortgage contacts[3] and gave the SEC power to ban or restrict the use of arbitration in other disputes. Deepak Gupta, then the CFPB’s senior counsel for enforcement strategy, stated that prohibiting or restricting mandatory arbitration would be “the single most transformative thing the bureau can do” for consumers.[4]  In March 2015, the CFPB released a 728-page study of arbitration in consumer contracts, which was criticized by some academics and trade groups for misstating the impact of mandatory arbitration provisions on consumers.  Since then, members of Congress have engaged in deeply partisan squabbling over the need for additional rulemaking on consumer arbitration or to limit class action litigation in other ways.

Despite the criticism and opposition, CFPB director Richard Cordray reiterated the agency’s plans to release new rules aimed at banks and other financial firms. Earlier comments by the agency confirm that the new rules will be designed to prevent arbitration clauses from restricting class action remedies.  We think such changes would quickly spread to encompass telephone, Internet, and other commonplace consumer agreements.

American companies should be concerned with how executive agencies, e.g., the CFPB, the Department of Education, and the NLRB, will carry out their plans to introduce regulations that restrict the use of arbitration clauses in a broad range of consumer contracts.  We will not be surprised to see some companies restrict their consumer offerings or increase prices to account for these new rules.  If you work in American business, we urge you to take notice of these changes and review how to protect your company from undue litigation in future contracts. Among other options, you should analyze the inclusion of non-mandatory arbitration provisions, the separation of class-action waivers from arbitration provisions, and the option of raising prices to contend with increased litigation.

[1] DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015).

[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The Dodd-Frank Act was passed without a single Republican vote in the Senate.

[3] Id. § 1414.

[4] Carter Dougherty, CFPB Finds Arbitration Harms Consumers, Presaging New Rules, BLOOMBERG BUS., March 10, 2015, available at http://www.bloomberg.com/news/articles/2015-03-10/cfpb-finds-arbitration-harms-consumers-in-study-presaging-rules.

posted in:
Uncategorized
Mar 03
2015

Another Class Action Pops Up For Complaints About Pop-Ups

Confused businessman in front of computer

A class action lawsuit recently instituted in federal court in the Northern District of California, Hunter v. Lenovo et al., alleges that Lenovo Inc., a computer manufacturer, violated its customers’ rights by selling computers which came preinstalled with alleged spyware manufactured by Superfish Inc., another named defendant.  The purported class alleges that the Superfish software monitors user activity and displays pop-up ads, among other things, as part of an “image-based search” function which identifies images on the user’s screen and seeks out similar images on the web. The complaint states causes of action for violations of the Electronic Communications Privacy Act and the Stored Communications Act, as well as unjust enrichment.

The Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701-2712 provides criminal penalties for anyone who “intentionally accesses without authorization a facility through which an electronic communication service is provided” or “intentionally exceeds an authorization to access that facility.”  The SCA has been cited by plaintiffs in other class actions in which users allege that a technology company has overstepped its bounds.  For instance, in Perkins v. LinkedIn Corp., No. 13-CV-04303-LHK, 2014 WL 2751053 (N.D. Cal. June 12, 2014), a putative class of LinkedIn users alleged that the social networking company violated the SCA by collecting contacts from users’ external email accounts.  The court granted LinkedIn’s motion to dismiss the SCA claims, noting that the users consented to the collection of email addresses in a prominent disclosure, and therefore LinkedIn was “authorized” to collect the information, an exception to the SCA pursuant to 18 U.S.C. §2701(c).

The complaint in Hunter v. Lenovo attempts to preempt a consent defense, alleging that “Plaintiff never agreed to any terms or conditions regarding the Superfish Surveillance Software.  Accordingly, Plaintiff never consented to Defendants’ monitoring of, access to, and/or interception of his internet communications.”  However, according to a January 23, 2015 forum post by a Lenovo administrator (since edited to link to Lenovo advisory), users had the opportunity to decline the Superfish software Terms of Use, thus disabling the software.  If this proves to be true, then it would be consistent with the court’s determination in LinkedIn that a user’s consent may serve as a defense against an SCA claim.  Unlike LinkedIn, however, the Hunter SCA claim may not be appropriate for resolution at the motion to dismiss stage because it raises an issue of disputed fact which may require discovery.

Although the suit is still pending, Lenovo has reversed course on the Superfish software.  Lenovo has disabled Superfish on computers which came pre-installed with the software, its websites offer instructions for users to uninstall the software altogether, and Lenovo computers no longer come preinstalled with the program.  While these remedial actions may be an appropriate response to user concerns, they do not constitute an admission of legal liability in the class action suit.   The defendants may still argue that users consented to the software, even as they remove it from the computers.

Aug 18
2014

Recording Calls? Five Things You Can Do to Avoid the Litigation Frenzy

iStock_000029885236Small

Restaurant chain Applebee’s has joined other businesses such as Overstock.com, Hilton, Capitol One, and Bass Pro Shops as defendants in purported class action lawsuits alleging that they illegally recorded calls to or from California residents.  In fact, plaintiffs have filed hundreds of individual and class actions in California courts under California’s various eavesdropping/call recording laws. Potential damages can include an award of $ 5,000 per violation – thus the damages in class actions could lead to multi-million dollar judgments and settlements.  Capitol One recently settled a purported class action involving residents in California and several other states for $ 3 million dollars.  Bass Pro Shops settled for $ 6 million, and Shell Oil forked out $ 2 million to resolve recent claims.

California is one of 12 states that require “two party” or “all party” consent to call recording.  The majority of states (and the federal standard) only require that one party consent.  So, in other words, if the recording party consents, that generally constitutes sufficient consent in most states.  Further, in most states, if companies announce at the outset that the call is being monitored or recorded, that announcement has been sufficient to provide at least implicit consent where the parties continue with the call following the announcement.  In the Appleee’s case, however, the plaintiff contends that she (and others) never received a notification that her call was recorded.

Applebee’s Suit Alleges Recording on Wireless Phone

Plaintiff Joneeta Byrd contends that in November 2013, she called Applebee’s customer service number from a wireless telephone. She alleges she was not aware that Applebee’s recorded the call, and that the customer service representative did not inform her that the call was being recorded.  At some point after the call, Byrd claims she learned that Applebee’s records all incoming calls.  Byrd contends that Applebee’s does not always disclose the recording to every caller. According to the complaint, “Plaintiff believes that the total number of Class members is at least in the tens of thousands and members of the Class are numerous and geographically dispersed across California.”

Byrd’s lawsuit is based on California’s Penal Code, Section 632.7, which prohibits the intentional recording of any telephone communication without the consent of all parties where at least one party is using a cordless or cellular phone.  It also provides for criminal fines and imprisonment.  It differs from, and has arguably broader coverage than another section of California’s law, Section 632, which bars the eavesdropping or recording of confidential communications (i.e., where the caller had a reasonable expectation of privacy), without the consent of all parties to the confidential communication.  While some courts have dismissed claims under Section 632, they have allowed claims under Section 632.7 to go forward – often reasoning that the California legislature intended more stringent protections for mobile phone conversations.

Hilton Hotels Decision Holds the Law Not Intended to Cover Parties

A recent decision involving Hilton Hotels may provide some relief for companies in California Section 622.7 call recording suits.  The district court (on remand) held that Section 632.7 only applies to third party recording of a wireless telephone conversation – and does not include recording by a party to the call.  The order is available here.  Specifically, the district court concluded that “[t]he statutory scheme makes it clear that these sections refer to the actual interception or reception of these radio signals by third parties and do not restrict the parties to a call from recording those calls.”  The court further ruled that Hilton had consent and that California’s legislature “did not limit the service observing monitoring of calls that it is alleged in this case.”  The plaintiff has appealed this decision.

Top “5” Recommendations When Recording Customer Service Calls

Applebee’s case and the other call recording cases serve as useful reminders on call recording.  As counsel to many companies and call centers utilizing call recording for quality control and service monitoring, we generally recommend this top 5 list:

  1. Announce/Maintain —  At the outset of a call, announce the call is being monitored and/or recorded.  Maintain proof of the announcement in the event of litigation.
  2. Incoming & Outgoing Covered — Remember, both incoming and outgoing calls are covered, so make sure you inform all parties – whether they have called in or your company has called them – that the calls are recorded and/or monitored.
  3. Objections —  If there is an objection, consider offering a non-monitored line.  In any event, do not continue the call with the objecting party.
  4. Customer Service Rep Consent Form — Upon hire, consider having customer service representatives sign an acknowledgement and agreement that their calls may be monitored or recorded. Maintain copies of these consent forms in employee files.
  5. Train customer service representatives – Make sure customer service representatives can explain the call recording policy if asked.  A consistent organization-wide message that accurately states the standard procedure helps ameliorate consumer concerns, and in the event of litigation, can bolster a defense.
Connect with Us Share

About Ifrah Law

FTC Beat is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

Visit the Ifrah Law Firm website

Popular Posts