The hostility of some California courts to arbitration—and their resistance to preemption under the Federal Arbitration Act (FAA)—has produced nearly three decades of U.S. Supreme Court reversals. The most recent is AT&T Mobility LLC v. Concepcion, which held that the FAA preempted the Discover Bank rule, under which the California Supreme Court had blocked enforcement of consumer arbitration agreements that required individual rather than class arbitration. Last week’s decision in Imburgia v. DirecTV, Inc. (pdf) demonstrates that resistance to Concepcion lives on in the California courts, even at the cost of creating a split with the Ninth Circuit on the same issue in the same contract used by the same company.

Specifically, DirecTV’s arbitration agreement—like many others—provides that the arbitration agreement shall not be enforced if a court invalidates the ban on class arbitration. Taking advantage of the specific wording of the agreement, a panel of the California Court of Appeal in Los Angeles held that the preemptive effect of Concepcion did not apply and the agreement could be invalidated on the basis of the very Discover Bank rule that Concepcion held was preempted.

The arbitration clause at issue in Imburgia appeared in Section 9 of DirecTV’s customer agreement; the arbitration clause expressly precluded class actions and class arbitration. Section 10 provided that “Section 9 shall be governed by the Federal Arbitration Act.” Section 9 also stated, after the sentence that waived class procedures: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

The Imburgia court held that the reference to “the law of your state” should be read to invalidate the arbitration agreement if the class waiver would be unenforceable under state law without regard to the preemptive effect of the FAA. That is, the court held, the agreement was subject to state-law rules that are invalid under the FAA even though the arbitration agreement explicitly provided that the FAA would govern. That holding takes an idiosyncratic view of the Supremacy Clause, which mandates that federal law—including the FAA—trumps contrary state law. Under the Supremacy Clause, once state law has been displaced by federal law, the state law cannot survive in some shadow universe. Rather, state law is not “law” when it has been declared unconstitutional, whether because it violates the First Amendment or the Supremacy Clause because it is preempted by a federal statute.

Imburgia also expressly conflicts with the Ninth Circuit’s decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which enforced the same clause and rejected the same argument. The Ninth Circuit explained that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state.” DirecTV may well seek further review in light of this conflict.

In the meantime, Imburgia offers businesses a pair of cautionary lessons. First, businesses that use arbitration clauses should not underestimate the pockets of resistance to Concepcion and other recent Supreme Court precedents—especially in some California state courts.

Second, the decision underscores the importance of careful drafting of arbitration clauses that waive class actions. Even though the Supreme Court has made clear that any doubts concerning the scope of arbitral agreements should be resolved in favor of arbitration, the court here—like other courts hostile to arbitration—chose to construe the language of the arbitration clause against the drafter. And viewed in that (improper) light, it is easy to see why the wording of DirecTV’s clause, and in particular the use of the phrase—“[i]f … the law of your state would find …”—unnecessarily appeared to give state law special stature. Choice-of-law issues have bedeviled companies in the past—as detailed in an article (pdf) one of us has published, it is important for companies to address the governing law carefully in their agreements and thus minimize the risk that hostile courts will apply the wrong law to defeat arbitration.

It is no secret that many private class actions are filed as follow-on lawsuits to news reports, government investigations, regulatory developments, and identical earlier-filed class actions. But a recent gambit by the plaintiffs’ bar is among the more creative efforts we have seen. Earlier this week, a well-known plaintiffs’ firm filed Dang v. Samsung Electronics Co., in the Northern District of California. The complaint alleges that Apple’s victory over Samsung (at least in part) in certain highly publicized patent infringement actions establishes that Samsung has violated California’s consumer protection law as well as warranty statutes in 49 states and the District of Columbia.

The background of the patent battle between Apple and Samsung is well known, so we mention only a few highlights. In fall 2013, the federal court for the Northern District of California found Samsung liable for infringing several patents relating to Apple’s iPhone. The International Trade Commission also found that certain devices were infringing and precluded Samsung from importing or selling those devices. The same court already has granted partial summary judgment to Apple in a second patent lawsuit targeting additional Samsung devices, with a jury trial set for the end of March. (The battles are not over, to be sure.)

The Dang lawsuit alleges that Samsung induced consumers to purchase its devices by concealing its infringing activities, and that once those activities became known, the resale prices of Samsung smartphones and tablets “dropped dramatically,” injuring consumers and unjustly enriching Samsung. Mr. Dang alleges that “[h]ad [he] known the Product he purchased infringed on the patents held by [Samsung’s] competitor, Apple, he would not have purchased the Product.” He seeks to represent everyone in the U.S. who has purchased one of the allegedly infringing devices since 2008—a proposed class that undoubtedly totals in the millions.

Will Dang become a model for other plaintiffs’ lawyers to follow? The short answer: It depends on whether courts will accept the notion that the alleged infringement harms consumers (as opposed to competitors). Color us skeptical—to put it mildly, we have a number of questions:

  • How plausible is it that the interpretation of complex technology patents matters to consumers when they purchase a product?
  • How many Samsung purchasers even know that there is litigation involving Apple patents, much less the determination of the claims?
  • In light of the Ninth Circuit’s decision in Mazza v. American Honda Motor Co.—a case we have discussed before—what are the chances that a nationwide class could be certified given the variations among state warranty and consumer protection laws?
  • Is it realistic to believe that injury and damages can be proven on a classwide basis?

Nevertheless, it is easy to see why plaintiffs’ lawyers might find these kinds of cases attractive. If the result of a battle between competitors is that a product has been determined to be infringing by a court or agency, that may substantially reduce the work a plaintiffs’ lawyer needs to do to pursue the case. And that lawyer will likely argue that key aspects of liability have already been established before the class action even gets started.

The theory espoused in Dang parallels the strategies used by plaintiffs’ firms in the recent wave of false advertising class actions against food and beverage manufacturers. As we have discussed, many of these lawsuits rely on California’s wholesale incorporation of the federal Food Drug and Cosmetic Act (“FDCA”). Plaintiffs attempt to convert alleged technical violations of FDCA labeling requirements into consumer claims alleging that the mere sale of such products is illegal—without the need to show that class members actually were deceived by or relied on the alleged mislabeling. And most of those lawsuits have landed in the Northern District of California—now known as the nation’s “Food Court.”

It’s no coincidence that the Dang lawsuit was filed in the Northern District of California by two plaintiffs’ firms that are highly active in the Food Court wars. Will plaintiffs’ lawyers next flock to copycat class actions seeking to leverage findings of patent infringement? Stay tuned. We’ll be monitoring the situation.

 

Since 2006, companies based outside California have been alert to the potential burdens of class actions under California’s Invasion of Privacy Act (“CIPA”), Cal. Penal Code § 630 et seq. The laws of most states, as well as federal law, allow telephone calls to be recorded with the consent of one party to the call. Accordingly, companies in those states usually can record customer service calls for quality-assurance purposes without the need to procure the customer’s consent because the call-center employee, as a party to the call, can consent to the recording. California, however, is one of 12 states that allow recording only if all parties to the call consent. (The other so-called “two-party consent” states are Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania, and Washington.) The plaintiffs’ bar has been trying to use California’s extremely pro-plaintiff privacy laws, such as the CIPA, to turn this innocuous business practice into an opportunity to extract class-action settlements from companies.

In 2006, the California Supreme Court held that CIPA applies even when one party to the conversation is outside California in a state that authorizes recording with the consent of a single party to the call. Kearney v. Salomon Smith Barney, Inc., 39 Cal. 4th 95 (2006). The court explained that, under California’s choice-of-law rules, California had the overriding interest in applying its privacy laws, such as CIPA, whenever “national or international firms” headquartered outside of California record “conversations with their California clients or customers.” And, like Flanagan v. Flanagan, 27 Cal. 4th 766 (2002), Kearney applied CIPA regardless of the content of the conversations, though that likely was because Kearney involved calls to a financial institution and Flanagan involved calls between family members—i.e., situations where callers arguably have an expectation of privacy. Nonetheless, an onslaught of consumer class actions followed and continue to this day.

Companies facing CIPA suits have been making progress. More and more courts are recognizing that CIPA was not intended to apply to calls to customer-service centers. See Shin v. Digi-Key Corp., 2012 WL 5503847 (C.D. Cal. Sept. 17, 2012); Sajfr v. BBG Commc’ns, Inc., 2012 WL 398991 (S.D. Cal. Jan. 10, 2012). They’ve also recognized that customer-service calls usually do not involve private information. See Faulkner v. ADT Sec. Servs., Inc., 706 F.3d 1017, 1020 (9th Cir. 2013); Shin; Safjr. And they’ve found that individualized issues of privacy and consent under CIPA preclude class certification. See Torres v. Nutrisystem, Inc., 289 F.R.D. 587 (C.D. Cal. 2013).

The recent decision in Jonczyk v. First National Capital Corp., No. 13-cv-959-JLS (C.D. Cal. Jan. 14, 2014), provides another arrow in companies’ quivers—and a large one at that. In that case, First National and its employee were located in California and the plaintiff called in from her home in Missouri. The district court applied a conflict-of-law analysis and concluded that the law of Missouri (a one-party consent state) should apply, not California’s CIPA. The court distinguished Kearney, which involved Salomon Smith Barney’s California clients, and held that California had little interest in a Missouri resident’s claims, while Missouri had valid interests in limiting the reach of its wiretapping statute. In so holding, the court cited our victory in Mazza v. American Honda Motor Co., 666 F.3d 581 (9th Cir. 2012) for the proposition that “maximizing consumer and business welfare … does not inexorably favor greater consumer protection.” The district court’s extension of Mazza to the privacy context, and CIPA specifically, represents a significant step forward for companies doing business in California. The decision should be particularly helpful to companies in California who receive out-of-state customer calls that are recorded.

The Ninth Circuit’s decision last year in Mazza v. American Honda Motor Co. [666 F.3d 581] (a case I argued) made it more difficult to sustain a nationwide class action under California consumer protection laws. Applying California “governmental interest” choice-of-law principles, the Mazza court held that the jurisdiction having the greatest interest in supplying the rule of decision was the one in which a consumer received misleading communications, made her purchase, and sustained any injury—not the location of the company headquarters from which the communications “emanated.”

In Maniscalco v. Brother International (USA) Corp., the Third Circuit reached a similar conclusion applying New Jersey’s (and the Restatement’s) “most significant relationship” choice-of-law test. The court of appeals granted summary judgment against a South Carolina resident seeking to sue (and represent a nationwide class) under the New Jersey Consumer Fraud Act. In doing so, the court rejected In re Mercedes-Benz Tele Aid Contract Litigation, 257 F.R.D. 46 (D.N.J. 2009), a much-cited district court decision that had permitted a nationwide class action to proceed under New Jersey law. 

In Maniscalco, the plaintiffs had claimed that Brother had misled consumers by concealing two purported defects in its printers. The plaintiffs asserted a claim under New Jersey law on the theory that the various alleged acts of concealment had emanated from Brother’s New Jersey headquarters. The district court dismissed the case, and the Third Circuit affirmed on the ground that South Carolina law governed the plaintiff’s claim.

The Third Circuit found that three of the six factors in Section 148(2) of the Restatement weighed strongly in favor of applying the law of South Carolina. Specifically, (1) the plaintiffs had received and (2) relied on the alleged representations, and where (3) the tangible object of the parties’ transaction was located. Weighing less heavily was the Restatement’s preference for the domicile of the plaintiff over that of the defendant. Finding a fifth factor irrelevant because the parties were not litigating over a contract, the court examined the final factor—the place of the “alleged omissions.” Assuming that the plaintiff was correct that the omissions took place in New Jersey rather than South Carolina, the court of appeals held that single factor insufficient to overcome the others, especially because nothing else having to do with the parties’ relationship took place in New Jersey.

The Third Circuit also held (in terms echoing Mazza) that general choice-of-law policies and “the interests of interstate comity” favored application of South Carolina law because “[a]pplying New Jersey law to every potential out-of-state claimant would frustrate the policies of each claimant’s state,” and the “interest of South Carolina in having its law apply to its own consumers outweighs the interests of New Jersey in protecting out-of-state consumers from consumer fraud.”

In declining to “open[] the floodgates to nation-wide consumer fraud class actions brought by out-of-state plaintiffs involving transactions with no connection to New Jersey other than the location of the defendant’s headquarters,” the Third Circuit put up another impediment to plaintiffs’ lawyers seeking to certify nationwide classes under one state’s consumer protection laws. Between them, Maniscalco and Mazza suggest that nationwide class certification under state law will be an uphill battle in forums applying either of two prominent modern choice-of-law analyses

Plaintiff Christopher Rapczynski testified that he purchased Skinnygirl Margarita mix “because I love my wife,” she “said she liked it,” and she “has my three children and works very hard.” Those all may be good reasons for a nice Valentine’s Day present, but not for bringing a class action. As the Southern District of New York recently held, Rapczynski was an inadequate class representative—not for lack of love—but because he hadn’t relied on the allegedly false claim on the product’s label about which he was suing. For that and other reasons, the court denied certification of a putative class of Skinnygirl purchasers. See Rapczinsky v. Skinnygirl Cocktails LLC (pdf), 2013 WL 93636 (S.D.N.Y. Jan. 9, 2013).

Rapczynski had filed a putative false advertising class action against the makers and distributors of Skinnygirl Margaritas, alleging that the “All Natural” statement on the product label was misleading because the product contains sodium benzoate (a preservative) and mixto (a tequila byproduct). (The Skinnygirl brand was created by reality TV star Bethenny Frankel, but as fans of her show know (and non-fans can learn from Wikipedia), she sold the brand for an obscene amount.)

The court found that Rapczynski was not an adequate representative of the class and that his claims were not typical of those of the putative class members because his deposition testimony confirmed that he hadn’t relied on the allegedly false statement, a necessary element of claims for breach of express warranty and promissory estoppel under New York law. Rapczynski admitted that he had bought the product to thank his wife and because he knew that she enjoyed it, rather than because of anything on the label. His statements further established that “he would have bought that product regardless of price” and that “his belief with respect to its naturalness was irrelevant to his purchasing decision.”

The court also held that Rapczynski’s claims were not typical of those of a putative class of New York purchasers because he had bought the product outside of New York state and thus was attempting “to assert the class’s rights under at least two statutes that do not guard against the [out-of-state] transactions which allegedly caused him injury.”

The court’s denial of class certification serves as a reminder that the deposition of a class representative can be the key to defeating class certification. It is also a reminder that consumers buy products for all sorts of reasons—including ones that have absolutely nothing to do with the representations alleged in a false-advertising or breach-of-warranty complaint. Although not every class representative may be as candid as Rapczynski, the cases serves as a good illustration of the kinds of arguments that defendants in false advertising class actions can develop to show either that the proposed class representative is atypical and inadequate or that the reliance or causation elements of the plaintiffs’ claims turn on an endless series of individualized determinations, thus precluding class certification.

Plaintiffs who wish to bring product-liability and consumer-fraud class actions against businesses often overreach when defining the proposed class in order to raise the stakes—and hence the settlement pressure—on the defendant.  A recent unpublished decision by the Eleventh Circuit, Walewski v. Zenimax Media, Inc. (pdf), No. 12-11843, is yet another example of the growing consensus rejecting these overly broad putative classes.

In Walewski, a Florida purchaser of a fantasy video game (Elder Scrolls IV: Oblivion) alleged that after he had played the game for 450 hours, a software defect prevented him from “cast[ing] spells,” “open[ing] doors and gates,” or taking other in-game actions.  In response, the disappointed wizard conjured a class-action lawsuit in federal court, in which he purported to sue on behalf of all purchasers nationwide.  In an attempt to cloak the individualized nature of the claims and defenses implicated by his allegations, he argued that the company’s failure to disclose the alleged glitch gives every purchaser a fraud claim for having overpaid for the game, even if the glitch never manifested in that customer’s game.  And by suing only under the law of Maryland—the state in which the game manufacturer is located—he sought to sidestep the numerous individualized issues that would be raised by the varying consumer-protection laws of the other 49 states.

Members of the plaintiffs’ bar often try these tactics when bringing consumer class actions against manufacturers.  But an increasing number of courts are rejecting them—with last year’s landmark Ninth Circuit decision in Mazza v. American Honda Motor Co.(pdf), which was briefed and argued by my colleague Don Falk, being a prime example.  (Here is our report on Mazza.)  The Eleventh Circuit is now part of that chorus.

In Walewski, the Eleventh Circuit affirmed the district court’s denial of class certification, pointing out several defects in the class action.  For example, the attempt to apply Maryland law nationwide failed as to the named plaintiff himself:  Because the plaintiff was a Florida resident who purchased and played the game in Florida (and thus would have been exposed to the alleged misrepresentations and injury there), the court held that Florida law governs his claims.  Similarly, the court determined, the varying laws of all 50 states would govern the laws of the putative class members from those states, which precludes the plaintiff from showing (as he must under Rule 23(b)(3)) that common issues predominate over individualized ones.  In addition, the class definition was overbroad because it included purchasers who (for a number of different reasons) had not experienced the claimed defect or been exposed to the alleged misrepresentations.

Together with Mazza, Walewski is a powerful antidote to the curse of nationwide class actions seeking application of the law of the state of the defendant’s place of business.  And it likewise should help in defending against the dark art of recharacterizing inherently individualized product-liability and warranty claims as false-advertising claims for loss in the economic value of the product.

A New Jersey district judge has certified a nationwide class to pursue claims under the New Jersey Consumer Fraud Act (NJCFA) (pdf), in conflict with the decisions of other courts that have refused to permit nationwide classes to proceed under the law of a single state. The plaintiffs in Kalow & Springut, LLP v. Commence Corp.2012 WL 6093876 (D.N.J. Dec. 7, 2012), contend that Commence, a New Jersey software company, intentionally inserted a “time bomb” that caused its software to stop working in 2006 in order to force users to buy a software fix or upgrade.

Most of the plaintiffs bought the software and were allegedly injured in states other than New Jersey, and it was in those states that they would have received and relied on any misrepresentations by omission. And the district court recognized that the consumer laws of the 51 jurisdictions differed in material respects. Nonetheless, based on its application of New Jersey choice-of-law principles (which follow the Restatement’s most-significant-relationship test), the court concluded that New Jersey’s interests in preserving the reputations of its local merchants outweighed the interests of other states in regulating business transactions that occurred within their borders and were claimed to injure their citizens. Because the NJCFA is one of the strictest consumer laws in the nation, the court found that other states’ interests in applying their own laws to in-state transactions would not be impaired. In effect, the court held (as I see it) that the most plaintiff-friendly rule is always acceptable everywhere else. Continue Reading New Jersey Federal Court OKs Nationwide Class Under NJ Consumer Law