Plaintiffs filed a class action against Apple Inc. on behalf of parents who downloaded or permitted their minor children to download a supposedly free app from Apple and then incurred charges for game-related purchases made by their children without their parents’ knowledge or permission.  In re Apple In-App Purchase Litig., 5:11-cv-1758 (N.D. Cal.).  According to the complaint, the children were able to purchase game currencies, which are virtual objects that are used when playing certain games, without their parents’ authorization.  These apps were provided by Apple and advertised as free.  Until early 2011, Apple required users to authenticate their accounts by entering a password before purchasing or downloading an app or buying game currency.  However, once the password was entered, Apple allowed buyers to buy game currencies for up to 15 minutes without re-entering the password.  During this 15 minute window, the children were able to charge their parents’ accounts in amounts ranging from $99.99 to $338.72.

Plaintiffs alleged violations of the California Consumers Legal Remedies Act (“CLRA”), Cal. Civ. Code § 1750 et seq., California’s Unfair Competition Law (“UCL”), Cal. Bus. Prof. Code. § 17200 et seq., breach of implied covenant of good faith and fair dealing, restitution, unjust enrichment, money had and received, and plaintiffs also sought a declaratory judgment.  On March 31, 2012, the district court denied the motion to dismiss against all the claims, except for the claim for breach of implied covenant of good faith, but did provide plaintiffs with leave to amend their complaint.  Plaintiffs made the interesting argument that each app purchase was a separate and voidable contract between Apple and the plaintiffs’ children, which could be disaffirmed by a parent.  Apple countered that the contractual relationship was based on the original Terms & Conditions signed by the plaintiffs.  Therefore, the individual purchases were not voidable.  The district court rejected Apple’s argument and noted that on a motion to dismiss the court must construe the complaint in the light most favorable to the plaintiffs and resolve any ambiguity in their favor.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

In our July 2011 blog post, we reported about Judge William J. Hibbler’s decision to deny IndyMac Mortgage Servicers, FSB’s (a division of OneWest Bank, FSB) motion to dismiss a class action lawsuit related to its failure to comply with guidelines established by the Home Affordable Modification Program (“HAMP”).  See Fletcher v. OneWest Bank, FSB, 2011 U.S. Dist. LEXIS 72562 (N.D. Ill. June 30, 2011)(order denying OneWest’s motion to dismiss plaintiff’s class action claims for breach of contract, promissory estoppel and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”)).  Abbey Spanier is lead counsel in the Fletcher litigation.

On July 15, 2011, OneWest filed a motion to stay the Fletcher litigation pending the U.S. Court of Appeal for the Seventh Circuit’s decision in Wigod v. Wells Fargo Bank, N.A., Appeal No. 11-1423 (7th Cir. Feb. 22, 2011).  In Wigod, Judge Manning dismissed the plaintiff’s claims stemming from defendant Wells Fargo’s alleged non-compliance with HAMP.  Like the Fletcher litigation, plaintiff Wigod’s class action complaint alleged violations of Illinois law under common-law contract and tort theories and under the ICFA.  The district court’s reason for dismissing Wigod’s complaint was primarily that Wigod alleged Wells Fargo had violated HAMP, a federal statute which it determined did not allow for a private right of action. See Wigod v. Wells Fargo Bank, N.A., No. 10 CV 2348, 2011 WL 250501 (N.D. Ill. Jan. 25, 2011). After the Wigod appeal, OneWest argued that a stay was warranted in the Fletcher litigation because the issues raised were virtually identical to those pending before the Seventh Circuit Court of Appeals.  During a status hearing with the Court, plaintiff consented to OneWest’s motion for a stay so long as the status quo was to be maintained.

On March 7, 2012, the Seventh Circuit issued its opinion in Wigod v. Wells Fargo Bank, N.A., No. 11-1423, 2012 U.S. App. LEXIS 4714 (7th Cir. March 7, 2012), a copy of which is located here.  Relying in part on Judge Hibbler’s June 30, 2011 opinion denying OneWest’s motion to dismiss, the Seventh Circuit reversed the judgment of the Wigod district court on breach of contract, promissory estoppel, fraudulent misrepresentation and ICFA claims.  In its decision, the Seventh Circuit determined that plaintiff Wigod’s state law claims are not preempted or otherwise barred by federal law.

In light of the Seventh Circuit’s decision reversing the district court’s decision in Wigod, the Court has lifted the stay in the Fletcher litigation and the case will now proceed.  Abbey Spanier intends to aggressively litigate the Fletcher action and seek compensation for homeowners who have been harmed by OneWest’s deceptive practices.  If you have been harmed by OneWest’s improper practices, please tell us your story here.

In related news, on March 26, 2012, Judge Hibbler unexpectedly passed away at the age of 65.  Abbey Spanier passes along its sincere condolences to Judge Hibbler’s family, friends and colleagues at the Northern District.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Used with permission from Microsoft.

On February 3, 2012, another court distinguished the Supreme Court’s holding in Wal-Mart Stores, Inc. v Dukes, 131 S. Ct.2541 (2011).  In Johns  v. Bayer Corp. et al.,  2012 WL 368032 (S.D. Cal.) the District Court for the Southern District of California certified a class a class of consumers who purchased bottles of Bayer’s “Men’s 50+ Advantage” and “Men’s Health Formula” vitamins in California. The product’s packaging claimed that taking the vitamins each day would “support prostate help.” The plaintiffs alleged that the statement was not based on scientific evidence and that the statement violated the state’s Unfair Competition Law and Consumers Legal Remedies Act.

The Court considered class certification under Rule 23(a) and (b) of the Federal Rules of Civil Procedure. It took only a few short paragraphs for the Court to determine that plaintiffs had satisfied Rule 23(a)’s numerosity, commonality, typicality and adequacy requirements. As to the typicality and adequacy requirements, the Court held that  plaintiffs satisfied requirements of Rule 23(a) because the Men’s Vitamin packages purchased by plaintiffs and class members all prominently and repeatedly featured the
identical prostate health claims and thus plaintiffs and the class were all exposed to the
same misrepresentations on the packages and advertisements

The Court then turned its attention to the central issue in the case: whether the plaintiffs had met the requirements of Rule 23(b)(3), which requires that “questions of law or fact common to class members predominate over any questions affected only individual class members” and that a class action is the best method for adjudicating the dispute. Bayer argued that the class should not be certified because individual questions predominated over questions that were common to the class.  It argued that individual claims would differ according to plaintiffs’ actual reliance on the prostate-health statement, the statement’s materiality and timing, and the amount of damages suffered.

The Court noted that class-action suits play an important role in enforcing California’s consumer protection laws, and that the laws “take an objective approach of the reasonable consumer” rather than focusing on “the particular consumer.” Citing Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th Cir. 2008).  Since each member of the class had purchased the vitamins and had been exposed to the packaging, the common question in the case was whether a reasonable consumer would have been misled by Bayer’s packaging—not whether the particular individual plaintiffs had been misled.

As to the second prong of Rule 23(b)(3), the Court held that a class-action suit would be
the most efficient means to adjudicate the plaintiffs’ claims of false and misleading advertising, particularly where the damages suffered by each plaintiff were small. Finally, the Court rejected Bayer’s argument that the Supreme Court’s holding in Wal-Mart v. Dukes barred certification because Bayer would be deprived of the opportunity to raise defenses to individuals’ claims. See 131 S. Ct. 2541 (2011). Bayer had made the same argument in the Northern District of Ohio in Godec v. Bayer Corp. in a case involving similar claims. See 2011 WL 5513202 (2011). The California Court borrowed the Ohio court’s reasoning and stated that “to the extent Bayer has individualized defenses, it is free to try those defenses against individual claimants” and therefore held that Dukes did not bar class certification.  Quoting Godec, 2011 WL 5513202, at *7.

Nicholas Turner is a third year law student at New York Law School. He is a Notes & Comments editor of Law Review and a John Marshall Harlan Scholar. Mr. Turner came in second in the 2011 ABA Torts, Insurance, and Compensation Law Section Writing contest. He was a 2011 Review Editor of the school’s Global Human Rights Bulletin. Mr. Turner is proficient in French.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Used with permission from Microsoft.

In April 2011, several homeowners brought a class action lawsuit against Wells Fargo Bank and QBE Specialty Insurance Co. involving “force-placed insurance.” According to the complaint, all homeowners who have mortgages with defendant Wells Fargo are required to maintain insurance on their property.  If a homeowner fails to maintain his/her required insurance, Wells Fargo is entitled to forcibly place insurance on the property (i.e. purchase insurance for the home and then charge the borrower the full cost of the premium).  The complaint alleges that defendants Wells Fargo Bank and QBE colluded in a scheme to artificially inflate the premiums charged to homeowners for force-placed insurance on property, after the homeowners self-placed insurance policies had lapsed.  Specifically, plaintiffs assert that the premiums charged on the force-placed loans are not the actual amount that Wells Fargo pays, because a substantial portion of the premiums are refunded by defendant QBE to Wells Fargo through various kickbacks and/or unwarranted commissions.

On October 3, 2011, U.S. District Judge Cecilia M. Altonga denied defendant QBE’s motion to dismiss plaintiffs’ complaint.

Last week, U.S. District Judge Robert N. Scola, Jr. (Judge Altonga was replaced from the case in November) granted plaintiffs’ request for class certification.  See Williams et al. v. Wells Fargo Financial et al., 2012 U.S. Dist. LEXIS 20930 (S.D. Fla. Feb. 21, 2012).   Judge Scola issued an order certifying a class of:

All borrowers that had mortgages with and/or serviced by Wells Fargo Bank,  on property located within the State of Florida, that were charged, and who either paid or who still owe, premiums for a force-placed insurance policy within the applicable statute of limitations through April 7, 2011 (“the Class Period”), unless (1) the lender has obtained a foreclosure judgment against the borrower; (2) the borrower has entered into a short-sale agreement with the lender; (3) the borrower has granted a deed in lieu of foreclosure to the lender; (4) the borrower has entered into a loan modification agreement with the lender; (5) the borrower has filed a claim for damages which has been paid in full or part by the force-placed insurer; or, (6) the cost of force-placed insurance was canceled out in full.

Noteworthy, in addressing whether plaintiffs had sufficiently satisfied the commonality requirement of Federal Rule of Civil Procedure 23(a)(2), Judge Scola distinguished this case from Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011):

This case is distinguishable from the factual scenario that the Supreme Court addressed in Dukes where even if the plaintiffs were able to prove that Wal-Mart’s policy had a disparate impact on female employees, each individual plaintiff-employee would still need to establish that she suffered an adverse employment action as a result of that discriminatory policy. See Dukes, 131 S. Ct. at 2552. Here, the ultimate question of liability is whether the force-placed insurance premiums charged to homeowners were unlawfully inflated and excessive. If they were, that same answer will apply to every plaintiff in the class. There will not be a secondary factual inquiry required, as was the case in Dukes. Any distinctions between class-members with respect to theories of liability, as argued by Wells Fargo and QBE, could be adequately addressed through the use of discrete subclasses, if necessary at all. Accordingly, the Plaintiffs have established that there are questions of law or fact common to the class.

In his decision, Judge Scola also recognized the importance of brining this suit as a class action.  The Court observed that, “Since the damage amounts allegedly owed to each individual defendant are relatively low – especially as compared to the costs of prosecuting the types of claims in this case involving complex, multi-level business transactions between sophisticated Defendants – the economic reality is that many of the class members would never be able to prosecute their claims through individual lawsuits.”

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

The National Labor Relation Board’s (NLRB) recent ruling in D.R. Horton Inc. answered an important question presented by the U.S. Supreme Court’s ruling last Spring in AT&T Mobility LLC v. Concepcion: does federal policy favoring arbitration apply equally in the consumer and employment contexts?

The NLRB’s response was an emphatic “no,” largely agreeing with arguments advanced by dozens of organizations, including the National Employment Lawyers Association (NELA), dedicated to representing individuals who often cannot safeguard their fundamental labor protections in the workplace without class or collective actions.

Although Concepcion arose in the consumer context, some have construed the Supreme Court’s ruling broadly as stating the Court’s approval of forced arbitration provisions in other contexts, including the employment context. Indeed, the Arbitration Fairness Act, which was first proposed in 2009, was reintroduced in response to the Concepcion ruling and, if passed, will eliminate forced arbitration clauses in consumer, employment and civil rights contexts. As we wrote here last year, Abbey Spanier Rodd & Abrams, LLP supports this legislation.

The particular contractual provision at issue in D.R. Horton required plaintiff and other D.R. Horton Inc. employees to agree, as a condition of employment, that they would not pursue class or collective litigation of claims in any forum, arbitral or judicial. Although the general intent of the Federal Arbitration Act (FAA) manifests a liberal federal policy favoring arbitration agreements, the NLRB found that such a provision runs afoul of the National Labor Relations Act (NLRA).

The NLRA is a 1935 United States federal law that limits the means with which employers may react to workers in the private sector who create labor unions, engage in collective bargaining and take part in strikes and other forms of concerted activity in support of their demands. The NLRA does not apply to workers who are covered by the Railway Labor Act, agricultural employees, domestic employees, supervisors, federal, state or local government workers, independent contractors and some close relatives of individual employers.

In ruling against D.R. Horton Inc., the NLRB concluded that “employees who join together to bring employment-related claims on a class-wide or collective basis in court or before an arbitrator are exercising rights protected by Section 7 of the NLRA,” which provides employees with the right “to engage in… concerted activities for the purpose of collective bargaining or other mutual aid or protection” (29 U.S.C. § 157) and that such “forms of collective efforts to redress workplace wrongs or improve workplace conditions are at the core of what Congress intended to protect by adopting the broad language of Section 7.” Slip Op., p.3.

Likewise, the NLRB found that the prohibition of individual agreements imposed on employees as a means of requiring that they waive their right to engage in protected, concerted activity lies at the core of the prohibitions contained in Section 8, which makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise” of such right (29 U.S.C. § 158(a)(1)). Slip Op., p.5.

The NLRB decision provides a lengthy discussion of the FAA and the Supreme Court precedent, including Concepcion, which you can read in full here, but explains why D.R. Horton seems to diverge as follows: it “rests not on any conflict between an agreement to arbitrate and the NLRA, but rather solely on the conflict between the compelled waiver of the right to act collectively in any forum in an effort vindicate work-place rights and the NLRA.” Slip Op., p.13.

The NLRB got it right and, in our view, restored some order to a corner of jurisprudence cast into disarray Concepcion. To have reached any other result, as the U.S. Supreme Court has recognized, “could frustrate the policy of the [NLRA] to protect the right of workers to act together to better their working conditions.” Eastex, Inc. v. NLRB, 437 U.S. 556, 567 (1978).

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Used with permission from Microsoft.

Anyone who has shopped for concert tickets online knows the feeling. The convenience fees, order processing fees, and shipping fees added to the ticket price make going to concerts an expensive proposition these days, especially as more traditional box office services fall by the wayside. One show I looked at recently would have cost me $36 for a ticket and $10.70 in “convenience fees.” That’s nearly a 30% upcharge compared to going to the box office!

It is somewhat satisfying, then, that I received an email a week ago letting me know that I was a member of a class who had allegedly been charged “order processing fees” that exceeded Ticketmaster’s costs in processing those orders, and notifying me of an impending settlement in my favor. Being curious as to what actually happened, I decided to do some research and find out what really happened in Schlesinger v. Ticketmaster.

Looking at some of the deposition statements quoted in various motion documents, there are some interesting tidbits to be found here. When the suit began, Ticketmaster’s FAQ claimed that “the order processing fee covers the cost to fulfill your ticket request when you purchase the tickets online or by phone.” During depositions, however, Ticketmaster employees admitted that the fee was not related to the cost to process tickets. Furthermore, a Ticketmaster employee testified that senior management felt that Ticketmaster was “greatly overcharging the consumer” for high-speed UPS delivery service. Apparently, while Ticketmaster represented to consumers that they were merely passing through the costs of expedited UPS shipping, in fact they were making a profit on the “shipping charge.”

This is exactly the sort of widespread harm that consumer class actions are designed to protect against. These overcharges were small amounts individually, but aggregated over the 12-year class period would have provided Ticketmaster with a significant windfall.

Certainly, Ticketmaster is allowed to make a profit from selling tickets via convenience fees, and they are also allowed to charge for expedited shipping services. However, California consumer protection laws barred them from making misleading claims about what those convenience fees covered, and from representing shipping fees as a mere “pass-through” of costs when they were profiting from those fees. Thus, it was not the fees themselves that opened Ticketmaster to class action liability; it was how Ticketmaster portrayed those fees, misleading consumers as to where their money was actually going.

Ticketmaster fought from day one, vigorously denying all claims, attempting to prevent the plaintiffs from certifying a class, and then trying to keep that class limited to only California residents. However, in September 2010, the class was certified as a nationwide class action by a California appellate court, as Ticketmaster’s own choice-of-law and forum selection clauses included in their Terms of Use required that any and all disputes be settled in California under California law. The appellate court found that this was sufficient to provide a “significant contact or aggregation of contacts” that would support the court having jurisdiction over the out-of-state class members, thus allowing them to certify a national class action.

The Ticketmaster class action settlement includes all U.S. residents who purchased tickets on Ticketmaster.com between October 21, 1999 and October 19, 2011 and paid money to Ticketmaster for an Order Processing Fee that was not refunded. It also includes a subclass of all Class Members who paid a delivery price for expedited delivery for their tickets via UPS.

All Class Members will automatically receive these benefits from the Ticketmaster fee class action settlement via email at the addresses associated with their Ticketmaster account if the settlement is approved at the May 29, 2012 Final Approval Hearing.

Some argue that the settlement is good for Ticketmaster only. However without this case Ticketmaster would have continued to rip off customers by charging and misrepresenting convenience fees. Class actions are the only mechanism through which this kind of wrong can be dealt with. The plaintiffs’ lawyers spent 12 years litigating this case without getting paid. No lawyer would take on a case where the damage to the individual plaintiff is $4.00.

What does all this mean? Well, sadly, after this we’re still going to have to deal with online convenience fees. But, we’ll be better-informed as to exactly how much money is going where.

Joshua Druckerman is a music enthusiast and a second year student at New York Law School. He is also a member of the Law Review.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

In Feeney v. Dell, we spotted a ray of hope piercing the clouds of the Supreme Court’s holding in AT&T Mobility LLC v. Concepcion.

In Concepcion, the Supreme Court struck a significant blow against the rights of consumers by allowing a corporation to waive class action liability by merely inserting an arbitration clause with a class action waiver into any consumer contract. We have written extensively on this topic, the damage it does to your rights, and how it harms individual protections against widespread abuse.

In Feeney v. Dell, the Massachusetts Superior Court determined that Concepcion did not govern and ruled that the class action waiver was unenforceable because it would not have been feasible for the consumer to pursue his claim on an individual basis.

Now, in Feeney v. Dell, it appears that the Massachusetts Superior Court has found a chink in Concepcion‘s armor by:

1.) Limiting Concepcion‘s holding to cases in which an arbitration provision is so “consumer-friendly” that individual arbitration would give plaintiffs better results than if they sued as a class.

2.) Finding that arbitration clauses that serve only to waive class action liability are unconscionable in situations where a class action is necessary for a consumer to receive a fair and just disposition of their claims.

In Feeney, Dell had collected sales tax on computer service contracts in contravention of Massachusetts law, charging named plaintiffs Mr. Feeney and Dedham Health $13.65 and $215.55, respectively. These claims would be far too small to pursue individually. The arbitration provision in Dell’s contracts barred class actions.

In Concepcion, the Supreme Court found, among other things, that AT&T’s arbitration provision was very consumer-friendly, with clauses designed to keep the process simple and cover a plaintiff’s expenses.

On the other hand, Dell’s arbitration provision forced any and all claims to be arbitrated individually but provided no benefit to consumers for doing so. Because it served solely as a prohibition upon class actions and was not consumer-friendly, the Superior Court found that the Dell provision did not provide a “meaningful arbitration process” and was “infeasible as a matter of fact.” Thus, finding Dell’s provision to be unconscionable did not conflict with Concepcion, since any interest the Supreme Court might have had in promoting arbitration as an alternative to class action required that there be a “meaningful arbitration process in the first place.”

Additionally, the Superior Court noted that Concepcion focused solely on the issue of whether states should be able to allow class actions “when [class actions] are not necessary to ensure that the parties . . . are able to vindicate their claims.” In contrast, in Feeney, class procedures were necessary to vindicate the plaintiffs’ claims. Forcing them to litigate or arbitrate individually would be cost-prohibitive and effectively “kill” the lawsuit. This doctrinal distinction allowed the court to find Dell’s provision unconscionable while not contradicting Concepcion.

This narrow reading of Concepcion is very good for consumer’s rights, as Feeney allows consumer class actions to work as they were intended: to protect individuals who have been wronged against widespread corporate abuse or wrongdoing. Hopefully, this will become part of a trend!

This decision is already in the process of being appealed, so we will keep you posted as to any future developments.

Joshua Druckerman is a second year law student at New York Law School. He is a member of Law Review.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

When large class actions are settled, money often remains in the settlement fund even after one or more distributions to class members  because some class members either cannot be located or decline to file a claim. Courts and/or the parties agree to dispose of these unclaimed funds by making what are known as cy pres distributions. The purpose of cy pres distributions is to put the unclaimed fund to its next best compensation use, e.g., for the aggregate indirect, prospective benefit of the class. See Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007) (quoting 2 HERBERT B. NEWBERG & ALBA CONTE, NEWBERG ON CLASS ACTIONS § 10:17 (4th ed. 2002)).

Recently, in Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 2011 U.S App. LEXIS 19650, at *1-2 (5th Cir. 2011y, in Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 2011 U.S App. LEXIS 19650, at *1-2 (5th Cir. 2011),the Fifth Circuit reversed the district court’s cy pres distribution to three charities suggested by the defendants and one selected by the court.  The Klier settlement fund had been allocated among three subclasses, one of which received medical monitoring. Upon completion of the monitoring program, substantial sums remained unused. The Protocol for Distribution of Settlement Fund drafted by the parties provided for the reallocation of available funds among the subclasses if considerations of equity and fairneess required reallocation.The district court denied the settlement administrator’s request to distribute the unused funds to another subclass of persons who suffered serious injuries. Id. at *2.

Underlying the Court’s decision was the principle that each class member has a constitutionally recognized property right in her claims, and that the settlement fund proceeds (having been generated by the value of those claims)belonged solely to the class members. 2011 U.S. App. LEXIS 19650, at *12. Because the settlement funds were the property of the class, a cy pres distribution to a third party is permissible “only when it is not feasible to make further distributions to class members.” Id. at *12-13. Because the feasibility of distribution to other class members was undisputed, the Fifth Circuit found that the district court abused its discretion by ordering a cy pres distribution rather than a re-distribution of the unused settlement funds to members of another of the subclasses.

While there is nothing about this decision that is surprising, the concurring opinion by Chief Judge Edith H. Jones seems to diverges from the general practice.  Chief Judge Jones suggests that if the defendant had not waived its right to request a refund, it would have been entitled to the excess in the event the funds were not distributed to other class members. 2011 U.S. App. LEXIS 19650, at *30. Although she recognized that the constitutionality of cy pres distributions was not presented to the Court,  Chief Judge Jones said that in the “ordinary case, to the extent that something must be done with unclaimed funds, the superior approach is to return leftover settlement funds to the defendant because any other use of the funds would result in charging the defendant an amount greater than the harm it bargained to settle.” Id. at *35.  This is the first time we have seen this theory espoused by a court.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

 California’s Consumer Legal Remedies Act (“CLRA”) is often depended upon by plaintiffs’ counsel in consumer actions. But recently, Judge Anthony J. Battaglia of the Southern District of California, granted Apple’s motion to dismiss a claim brought pursuant to California’s Consumer Legal Remedies Act (“CLRA”) and several other statutes, relating to Apple’s iOS 4.0 software upgrade for the iphone 3G and 3GS.

In their class action complaint, the plaintiffs alleged that Apple “violated the CLRA by fraudulently inducing Plaintiffs into downloading and installing iOS4 on their Third Generation iPhone devices knowing that the free upgrade would impair the functionality of their iPhone applications reliant upon AT&T’s data network.” The Plaintiffs alleged that the “upgrade” turned their phones into “virtually useless iBricks.”

Judge Battaglia dismissed the Plaintiffs’ CLRA claim on three grounds. First, he held that, because the software upgrade was free, it was not a “sale or lease” within the meaning of the CLRA. The court also noted that, “Although the CLRA does not require an enforceable contract between the consumer and the defendant . . . the transaction must result or be intended to result in the ‘sale or lease’ of goods or services to a consumer.”

The court also held that the purchase of the iphone was a separate transaction from the free software “upgrade” because the upgrade occurred about a year later.

The court also noted that the CLRA limits the definition of covered “goods” to “tangible chattels,” thus excluding software from its purview.

Finally, Judge Battaglia also found that provision of software is not a “service” for purposes of the CLRA “because software does not fit into the narrow definition of ‘service’ provided in Civil Code § 1761(b), defining service as “work, labor, and services . . ., including services furnished in connection with the sale or repair of goods.”

The plaintiffs  also brought claims for violation of California’s unfair competition law (Bus & Prof. Code §17200 et seq), tortious interference with contract, breach of implied contract, and requested and injunction. The court dismissed each of these claims, as well as the CLRA claim, without leave to amend.

This case is interesting in the way it treats software under the CLRA. We will be watching out for subsequent cases on this subject.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Following Concepcion v. ATT, the enforceability of arbitration provisions containing class action waivers has continued to be a focus of attention. See our recent posts here and here.

 Last week, in Sanchez v. Valencia Holding Company, LLC (“Sanchez”), the California Court of Appeal let a car buyer’s class action proceed, despite the fact that the sales contract he signed contained an arbitration clause with a class action waiver. The trial court decided that the class action waiver was unenforceable because a consumer is statutorily entitled to bring a class action under California’s Consumer Legal Remedies Act (“CLRA”) which expressly provides that the right to a class action is unwaivable. The arbitration provision in the car buyer’s sales contract said that if the class action waiver was declared unenforceable, the whole arbitration provision was unenforceable(referred to by the appellate court as a “poison pill”). As a result, the trial court denied the car dealer’s motion to compel arbitration.

 The fact that the car dealer appealed was not much of a surprise. Sanchez affirmed the trial court’s decision to let the case proceed as a class action, but for a different reason. It deemed the arbitration clause “unconscionable” as a matter of law, labeling the clause procedurally “adhesive-involving oppression and surprise due to unequal bargaining power”, and said the contract  was substantively unconscionable because it contained “harsh one-sided terms that favor the car dealer to the detriment of the buyer.”  Under the California Civil Code, a court can refuse to enforce an unconscionable clause in a contract. As the California Supreme Court observed in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4^th 83, the U.S. Supreme Court has recognized that unconscionability can be the reason to invalidate arbitration agreements, too. Under Armendariz, both procedural and substantive unconscionability must be established to invalidate the offending provision, though they do not have to be present in the same degree.  Sanchez observed that Concepcion does not preclude the Armendariz principles from being applied to determine the unconscionability of an arbitration provision.

 In his papers opposing the dealer’s motion to compel, plaintiff Sanchez said, among other things, that when he signed his purchase documents, he was presented with a stack of papers with writing on both sides of the pre-printed forms but wasn’t given an opportunity to read or negotiate the terms. He was unaware of the existence of the arbitration clause (and no one explained what an arbitration clause was) which was on the back side of the purchase contract, rather than on a page he had to sign.

Sanchez found 4 clauses unconscionable because of the harsh burden placed on the car buyer: 1) that a party who loses before the arbitrator may appeal if the award exceeds $100,000; 2) that an appeal is permitted if the award includes injunctive relief; 3) that the appealing party must pay certain fees and costs in advance; and 4) repossession, perhaps the most significant remedy to the dealer, is exempted from the arbitration provision, whereas no buyer’s remedy is exempt.

 Sanchez determined that the offending language so permeated the arbitration provision, it could not be severed and that, regardless of the validity of the class action waiver, the lower court correctly declined to compel arbitration. The appellate court determined Concepcion to be inapplicable because Sanchez “did not concern a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purpose of the Federal Arbitration Act.”

 Based on the Sanchez reasoning, you’d think virtually every consumer contract would be deemed unconscionable. Aren’t all the arbitration clauses in consumer contracts by auto dealers, phone companies, etc. one-sided provisions that favor the sellers? Just show me one that’s even-handed. And since when is the bargaining power even?

 It will be interesting to see whether other courts follow Sanchez. We’ll continue to report on the development of post-Concepcion law.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Several weeks ago, Bank of America announced its plan to charge customers a $5 monthly fee for using their debit card.  This move has angered customers and the Consumers Union, the public policy and advocacy division of Consumer Reports.  The Consumers Union called on Congress and federal regulators to investigate the fee and noted that this new fee could cost customers on average an extra $60 per year at a time when families are hard pressed to pay additional charges.

Bank of America has tried to justify the fee by arguing that under the old rules, debit card fees typically amounted to 44 cents per transaction, but under the new rules (that went into effect on October 1st) fees are capped at 24 cents per transaction.  On average, a consumer has 25 debit card transactions per month and if you multiply the 20 cents by 25 you get $5. 

Many commentators are opposed to Bank of America’s monthly debit charge.  In a recent New York Times op-ed article “Charging For Debit Cards Is Robbery” the bank’s statements were described as “simplistic statements [that] are merely an attempt to rationalize and obfuscate one of the largest illegal transfers of wealth from consumers to banks in American history.”  The article pointed out that debit cards were developed by banks to replace paper checks and when a consumer uses a debit card, instead of a check, a bank saves money.  According to the article, in the 1980s, Visa calculated the savings at 55 cents – $1.60 per check and today the savings are much higher.  The Consumers Union wrote to Senators Johnson and Shelby that the “fee appears to be unreasonable and unrelated to the actual cost of processing debit card transactions.” 

Do you think Bank of America has made its case for charging this fee or will it lose many of its customers to other banks?

Abbey Spanier Rodd & Abrams, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.

There has been an abundance of coverage regarding the April 27, 2011 decision by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, et ux.  In a divided opinion, the Supreme Court held that class action waivers in consumer contracts are enforceable under the Federal Arbitration Act.  The decision was a major victory for corporations and a blow to the rights of consumers.  In essence, the Concepcion ruling allows companies to force consumers to sign contracts that require disputes to proceed in arbitration but prohibits them from banding together in court through a class action lawsuit or class-wide arbitration. 

Many lawyers and commentators have agued that Concepcion spelled the death-knell for consumer and employment class actions.   Despite this commentary, during the last six months numerous federal and state courts have wrestled with the applicability of the Concepcion decision.  See attached link to a “Concepcion Scorecard.”    

Back in May, we reported that in response to Concepcion, Senators Al Franken (D-Minn.), Richard Blumenthal (D-Conn.), and Rep. Hank Johnson (D-Ga.) got together and introduced the Arbitration Fairness Act of 2011 (S. 987 and H.R. 1873).  The proposed legislation would eliminate forced arbitration clauses in consumer, employment and civil rights cases and would permit consumers and employees to choose arbitration after a dispute has occurred.

Sens. Franken and Blumenthal must be working some serious overtime because we have more positive legislative news to report for consumers.  On October 4, 2011, Sens. Franken and Blumenthal introduced the Consumer Mobile Fairness Act, designed to ban mandatory arbitration clauses in cellphone and mobile data service contracts.  A copy of the text of the Bill can be found here.  Sens. Blumenthal and Franken explained in a press release that the purpose of the new legislation is “an effort to remedy the Supreme Court’s decision to uphold the use of mandatory arbitration clauses by allowing for litigation when mediation and arbitration offer inadequate protection. These clauses are particularly inappropriate in contracts for cellphone and mobile data service plans, as these contracts are often the source of numerous consumer disputes.”  

Sen. Franken also stated that, “Consumers should never be forced to give up their rights in order to purchase a cell phone or get a new data plan. This bill makes sure that Minnesotans have the ability to hold their mobile service providers accountable if they are cheated. It also ensures that any dispute resolved through arbitration is truly voluntary, and that consumers are not being forced into it.”  Sen. Blumenthal added, “Smartphone users deserve their day in court for legitimate complaints against abuses. Consumers should have rights to access to appropriate avenues  – enforceable in court – for recourse in order to hold cell phone companies accountable for poor service or excessive fees. For consumers relying on smartphones – growing in number – the shield to accountability enjoyed by companies can lead to unfair contracts and unacceptable costs.”

Here at Abbey Spanier, we support the implementation of the Arbitration Fairness Act and the Consumer Mobile Fairness Act which we hope will serve to protect the rights of employees and consumers throughout the country.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Image attributed to SOCIALisBETTER.

The recent ruling in AT&T Mobility LLC v. Concepcion, et ux. was feared by many as a death-knell of class action litigation and, in particular, of consumer protectionclass actions. The ruling upheld an arbitration provision with a class action waiver that beforehand was viewed as unconscionable and unenforceable.

In the months since Concepcion, commentators’ fears have shown themselves to be well-founded as courts have interpreted the ruling broadly, sweeping many plaintiffs’ claims for fraud, unfair business practices, wage and hour violations,  discrimination, and other matters in class actions out of court. However, a ruling handed down this week by the Ninth Circuit Court of Appeals in Kolev v. Porsche Cars North America offers a ray of hope, at least for class actions involving warranty claims.

Diana Kolev sued the dealership that sold her a car with serious mechanical defects because it refused to honor her warranty claims. She alleged, among other things, that the dealership’s refusal was a violation of the Magnuson-Moss Warranty Act, which provides her the right to a refund or replacement of the defective vehicle without charge. The dealership argued, and the lower court so held, that her purchase agreement included an arbitration provision and that she should be compelled to submit her warranty claim to an arbitrator. But Ms. Kolev appealed that ruling arguing that the MMWA, an important consumer protection statute, bars provisions limiting her access to the court system.

The Ninth Circuit agreed with Ms. Kolev and reversed the lower court’s order that she submit her warranty claims to arbitration. Relying on an interpretation of the MMWA by the Federal Trade Commission, the court held that “written warranty provisions that mandate pre-dispute binding arbitration are invalid under the MMWA.”

Some people believe that the streamlined procedures that arbitration affords makes justice more accessible for many. The reality is that you get what you pay for. The rules governing litigation in the court system are there for a reason and have been refined over the generations to represent a careful balance of the interests of all involved.

More importantly, when the stakes are small, say a five or ten dollars here and there, why would anyone bother to arbitrate on his or her own? It’s hardly worth the gas money. That’s assuming you even notice you’ve been victimized by or other misdeeds. In this busy and increasingly complex world, it’s not unusual for such wrongs to go unnoticed.

Those are reasons the class action mechanism is important. It permits just one knowledgeable plaintiff to vindicate the rights of many, even where his or her own individual injury is small where companies otherwise profit due to the reality that most individuals simply don’t have the time, energy, knowledge or resources to pursue their rights, even if they are aware of the injury inflicted on them.

Big business knows that without effective regulation and the availability of the class action, profits can be increased by the systematic imposition of unjustified costs and refusal to provide contracted services, and some exploit this. Thus, the expenditure of millions of dollars on lobbying against regulation and for laws directly or indirectly limiting class actions.

Concepcion made it easier for big business to avoid class action liability and, as a result, consumers are more vulnerable to corporate wrongdoing today than they have been in a long time. But Kolev has reaffirmed our rights as a consumer, at least with respect to warranty claims arising under the MMWA, and may be a sign that damage done by Concepcion will not be long-lived.

Have you been sold a defective product only to find that your contract had a class action waiver? If so, tell us your story. Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

We previously blogged about the high prices consumers pay for their medications and explained how the cost can drop significantly once a generic version is available.  The FTC’s August 31, 2011 final report on authorized generics, entitled “Authorized Generic Drugs—Short-Term Effects and Long-Term Impact”,  sheds new light on the high cost of drugs.  The FTC’s study of generic drugs was spurred by the requests  of Senators Grassley, Leahy, and Rockefeller, and Representative Waxman in 2005.

The FTC report has four main findings:

1. Competition from authorized generics (generic prescription drugs produced by the brand pharmaceutical company and marketed under a private label) during the 180-day marketing exclusivity period has led to lower retail and wholesale drug prices.
2. Authorized generics have a substantial negative effect on the revenues of competing generic firms.   
3. While authorized generics have a substantial effect on the competing generic companies’ revenues (as much as 52% during the 180 day exclusivity period),  that hasn’t dissuaded  the generic firms enough to significantly reduce the number of challenges they have made to  branded drug patents.  
4. There is strong evidence that branded firms use non-compete agreements with generic firms (where the branded firm agrees that it won’t launch an authorized generic in exchange for a commitment from the first-filed generic to defer entry into the market) as a means of compensating generic firms for delaying the introduction of their generic drugs.

In other words, the branded firm “buys” time to continue selling  its drug until the non-compete expires. During that time, consumers continue to pay the high cost for the branded drugs rather than the lower cost of generics.

After the report was released FTC chairman, Jon Leibowitz, said in an interview that it’s a “Win-win for the companies, but lose-lose for consumers.”  Mr. Leibowitz explained that “Instead of saying, ‘Here’s $200 million, go away,’ they’re saying they could penalize them $200 million, but they won’t so go away.” 

Abbey Spanier Rodd & Abrams, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.

In our June blog post , we reported that the U.S. Securities and Exchange Commission  proposed new regulations in its effort to ensure that credit rating agencies no longer have conflicts with the issuers they rate.  During the last several months, various lawmakers and consumer advocates have suggested that the proposals are inadequate. 

For example, last week The New York Times reported that Sen. A. Franken, Democrat of Minnesota, participated in a conference call held by Americans for Financial Reform and said that the SEC’s proposals fail to respond to the conflict of interest inherent in the credit rating system.  Franken is an advocate for eliminating the current rating model in which corporations and banks that issue debt pay the rating agencies to rate their products. Instead, Franken has proposed that the SEC create an independent, self-regulatory organization that would be responsible for assigning ratings to different credit agencies. 

In recent commentary on CNN, Sen. Franken explained that his proposal “directs the Securities and Exchange Commission to create an independent self-regulatory organization that would assign the initial credit ratings of securities to one agency. The assignments could be based on agencies’ capacity, expertise, and, after time, their track record.  Our approach would incentivize and reward excellence. The current pay-for-play model — with its inherent conflict of interest — would be replaced by a pay-for-performance model. This improved market would finally allow smaller ratings agencies to break the Big Three’s oligopoly.”

Barbara Roper, director of investor protection at the Consumer Federation of America  (“CFA”), has also urged the SEC to strengthen the proposed rules.  The CFA believes that the “recent proposals from the SEC to improve regulation in these areas fall well short of what is needed to deliver the sweeping reforms promised by the Dodd-Frank Wall Street Reform and Consumer Protection Act.”  A copy of the CFA’s August 8, 2011 comment letter to the SEC which provides recommendations to improve the proposed rules can be found here.  

A list of additional comments to the SEC’s proposed rules can be found here.

Abbey Spanier Rodd & Abrams, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.

Used with permission from Microsoft.

What comes to mind when you think of Tropicana “pure premium” orange juice? Groves of orange trees in the Florida sun, being picked and shipped fresh to you as juice, the image from past advertisements of a straw stuck right into an orange….

Chances are, you don’t think of flavor packs, deaeration, and million-gallon tanks that store orange juice just above freezing for a year before it’s packed and shipped.  But that’s exactly what you’re getting.

Here’s how it works, according our research and as partially confirmed by Tropicana’s website.  The oranges are picked and “fresh squeezed” as Tropicana says.  However, after this stage, the juice is not shipped directly to you.  Instead, it is pasteurized (heated to a high temperature to make it “safe”), then cooled, and then stored in giant tanks just above freezing.  In these tanks, the oxygen is removed from the juice (deaeration), which prevents the juice from going bad.  Once in this state (cold and with no oxygen) the juice will keep for up to a year.  Tropicana’s website doesn’t hide this part of the process.

However, no mention is made of the fact that storing the orange juice for a year, just above freezing and with no oxygen, takes the flavor out of the juice.  So, orange juice companies use “flavor packs.”  These flavor packs are made up in part of orange byproducts, so technically the product can be described as “natural” or “100% orange juice.”  Some, however, say that the flavor packs also have chemicals added to them.

Now, is that what you thought you were getting when you bought “100% Pure and Natural” orange juice?

These flavor packs are not just an urban myth, and it’s clear from the tacit non-denials made by the orange juice industry. Take, for instance, this letter written to the Huffington Post, in which the Florida Department of Citrus wrote to address the reasons why flavor packs are used, but did not deny their existence.

In partial defense of the industry, we have to note that consumers want orange juice 365 days a year, but oranges only have a limited growing season.  So, it is out of necessity that some juice must be stored.  With that said, we believe consumers have a right to know what they’re really getting. It’s just plain wrong for juice to be marketed as being “fresh squeezed” when that’s only a half truth.

This situation is reminiscent of a consumer class action brought on behalf of consumers who bought Citrus Hill Fresh Choice orange juice. The plaintiff alleged that the juice was represented to be fresh orange juice made from the heart of the orange, 100% pure, additive free and from oranges picked and squeezed on the same day when, in fact, the product wasn’t fresh, but instead was  reconstituted from frozen concentrate, contained additives including water and flavor enhancers, was made from the entire orange and was not made from oranges picked and squeezed the same day.  The California appellate court did not let the case, Caro v. Procter & Gamble, proceed as a class action, primarily because the company had already agreed to remove the word “fresh” from its label as a result of FDA proceedings brought against it.

Do you think that Tropicana should have to change its label?

If you think that you have been misled in connection with your purchase of a consumer product, please tell us your story.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Last year, more than 40 class actions were filed by homeowners against Bank of America, N.A. and its subsidiary, BAC Home Loans Servicing, LP (“BAC”), because these companies were improperly administering the federal Home Affordable Loan Modification Program (“HAMP”).  These homeowners tried to participate in HAMP to modify their home mortgage loans and avoid foreclosure on their homes.  BAC entered into an agreement with each plaintiff for a temporary trial modification of that plaintiff’s note and mortgage.  If the borrowers complied with the terms of the agreement, including making timely reduced mortgage payments, the servicer was required to offer the borrower a permanent modification at the end of the trial period.  The plaintiffs allege that although they fully complied with the terms of the agreements, the defendants failed to do what they were obliged to do; either  grant the borrowers a permanent modification or  provide the borrowers with a written response  to the borrowers’ applications. 

Last month, Judge Rya W. Zobel of the United States District Court for the District of Massachusetts provided some good news for these homeowners. The court refused to dismiss plaintiffs’ claims for breach of contract, breach of the duty of good faith and fair dealing, promissory estoppel, and violations of the California, Illinois, Arizona, Maryland, New Jersey, Pennsylvania, Wisconsin, and Oregon consumer protection laws.  As a result of this ruling, the plaintiffs have jumped a significant hurdle in their fight to obtain permanent loan modifications. 

Abbey Spanier is involved in this case and will provide updates as the case progresses. If you believe you have been improperly denied a home loan modification, please tell us your story.

Abbey Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.

Today, we have some good news to pass along to homeowners who may have been subject to wrongful conduct by mortgage servicer IndyMac Mortgage Servicers, FSB (a division of OneWest Bank, FSB), for its failure to comply with guidelines established by the Home Affordable Modification Program (“HAMP”).  (See our March blog post describing the wave of HAMP lawsuits by homeowners against U.S. mortgage lenders and our April post on consent orders that Federal Banking Regulators issued with 14 of the nation’s largest mortgage loan servicers.)

The good news is that in a June 30, 2011 decision, Judge William J. Hibbler of the United States District Court for the Northern District of Illinois denied OneWest’s motion to dismiss plaintiff’s class action claims for breach of contract, promissory estoppel and violations of the Illinois Consumer Fraud and Deceptive Business Practices Act.  Fletcher v. OneWest Bank, FSB, 2011 U.S. Dist. LEXIS 72562 (N.D. Ill. June 30, 2011).  A copy of the opinion is located here. 

In Fletcher, plaintiff brought a class action complaint against the servicer of her mortgage, OneWest Bank.  Plaintiff alleged that OneWest’s practices fell into an identifiable pattern of misconduct that is consistent across a wide range of homeowners: OneWest makes a written offer to a pre-qualified homeowner, in which it offers a permanent loan modification if the homeowner makes three monthly trial period payments and complies with OneWest’s requests for documentation. Homeowners execute and submit all of the required documents and make the trial period payments, but OneWest does not live up to its end of the bargain, failing even to respond to applicants, denying permanent modifications without justification, avoiding permanent modifications by losing paperwork, claiming ignorance of payments made and papers submitted, sending out late payment letters and engaging in other evasive conduct which makes it extraordinarily difficult, if not impossible, for homeowners to obtain loan modifications to which they are entitled.  OneWest also applied substantial late fees and other fees to plaintiff and other homeowner accounts and reported those loans as delinquent to credit bureaus, causing damage to their credit scores.  

Abbey Spanier is lead counsel in the Fletcher litigation.  We believe that the Court’s decision is a significant victory for homeowners who have been harmed by OneWest’s deceptive practices and will litigate this action aggressively.  One of the next steps is to ask the Court to grant class certification on behalf of plaintiff and all other similarly situated homeowners who have complied with their obligations under agreements with OneWest but have been denied permanent loan modifications.

If you have been harmed by OneWest’s improper practices, please tell us your story here.

In a prior post, I discussed the amendment to the Fair Credit Reporting Act which was re-introduced to the House of Representatives on January 19, 2011 and would prohibit use of consumer credit checks against prospective and current employees for purposes of making adverse employment decisions, except in certain specific circumstances, as HR 321.

Rather than waiting for the Federal government, in January 2011, the Maryland state legislature introduced the Job Applicant Fairness Act which Governor O’Malley approved on April 12, 2011. The Act, which takes effect on October 1, 2011, restricts the use of credit reports and credit history information unless certain specified conditions are satisfied. Although the term Applicant is used in the title, the law also applies to current employees and prohibits employers from using an applicant’s or any employee’s credit report or credit history in determining whether to deny employment, discharge an employee or in establishing compensation, the terms conditions or privileges of employment.

In trying to balance the interests of both employees and employers, the Job Applicant Fairness Act creates several exceptions which are much broader than those in the Federal bill. The Maryland exceptions include: (i) employers that are required to obtain an applicant’s or employee’s credit report under federal or state law; (ii) financial institutions that are federally insured or approved by the Maryland Commissioner of Financial Regulation; (iii) employers that are registered as investment advisors in the U.S. Securities and Exchange Commission; and (iv) substantial job-related bona fide purposes such as managerial, access to personal information, fiduciary responsibility and authority and access to expense account or corporate credit card.

During a time teeming with animosity for class actions, reports of the Supreme Court’s rejection of a challenge to a $270 million verdict on behalf of a class of smokers in Louisiana against several big tobacco companies comes as welcome news.

Not only does the Court’s refusal to hear the appeal represent a big win for plaintiffs in that case, but it should also give plaintiffs in all consumer class actions, securities class actions and employment class actions something to smile about.

As I wrote in December, through a rarely-used procedure, Justice Scalia unilaterally entered an order permitting Philip Morris and other cigarette companies liable for the multi-million dollar verdict in a state court action, Scott v. American Tobacco Co., 2004-2095 (La.App. 4 Cir. 02/07/2007); 949 So. 2D 1266, to put off paying plaintiffs until the Supreme Court had decided whether it would hear an appeal of the ruling.

In entering his order, Justice Scalia went out on a limb with the following prediction: “I think it reasonably probable that four Justices will vote to grant certiorari, and significantly possible that the judgment below will be reversed.”

As it turned out, Justice Scalia was wrong about that. Without explanation, six or more of the justices voted against granting the petition and the Supreme Court refused to grant certiorari.

In a term that brought us the AT&T Mobility LLC, v. Concepcion, 563 U.S. __ (2011), and Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __ (2011) rulings, that’s great news.

Those rulings are part of a trend limiting individuals’ access to the courts through procedural rulings. The Scott case presented similar procedural questions with potentially far-reaching effects. And, had the Supreme Court granted certiorari, it would have had yet another opportunity to make life tough for class action plaintiffs.

The U.S. Securities and Exchange Commission (the “SEC”) has been widely criticized for its credit rating agency oversight failures and, as we noted in a post several weeks ago (here), the SEC recently decided to propose new, tougher regulations to ensure that credit rating agencies don’t have conflicts with the issuers they rate. 

A June 17, 2011, The Wall Street Journal article indicates that that the SEC  may be going further than proposing new regulations. It is considering civil fraud charges against certain credit rating companies, including Standard & Poor’s and Moody’s, for their roles in providing undeserved positive credit grades on the mortgage-backed securities that triggered the financial crisis. 

According to the news article, the SEC is questioning whether the ratings companies committed fraud by failing to do enough research to be able to adequately rate the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals. This includes the rating agencies’ reliance on incomplete or out-of-date information  and ignoring clear signs of problems which resulted in unduly high ratings to slices of the deals that were sold to investors.

Abbey Spanier will continue to monitor the SEC’s investigation and report back with any relevant updates.

Since 2008, the big three credit rating agencies, Moody’s Corporation, Standard & Poor’s and Fitch Ratings have been under intense scrutiny by Congress, the Securities and Exchange Commission and the general investing public for their role in the global financial crisis. Credit rating agencies are responsible for providing investors with information about the creditworthiness of different financial products.  Prior to the bursting of the housing bubble, Moody’s, S&P and Fitch each consistently provided positive credit grades on mortgage-backed securities despite the fact that they were extremely risky products.  Much of the criticism of the credit rating agencies relates to the fact that these firms are paid by the issuers they rate and therefore have a conflict of interest.

On May 18, the SEC’s five commissioners voted unanimously to propose new, tougher regulations for credit rating agencies.  This was the culmination of an initiative that was approved by the commissioners three years ago, in June 2008. The new proposed rules, which are over 500 pages and are now open for public comment, would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC’s existing rules governing credit ratings that are registered with the SEC as Nationally Recognized Statistical Rating Organizations (“NRSROs”). Among other things, under the SEC’s proposals, NRSROs would be required to:

•  Report on internal controls;
• Protect against conflicts of interest;
• Establish professional standards for credit analysts;
• Publicly provide – along with the publication of the credit rating – disclosure about the credit rating and the methodology used to determine it;
• Enhance their public disclosures about the performance of their credit ratings; and
• Require disclosure concerning third-party due diligence reports for asset-backed securities.

 You can find the SEC’s press release here, which also contains a link to the proposed rules. Public comments on the SEC’s proposal are required to be submitted within 60 days after it is published in the Federal Register. The major rating agencies immediately issued press releases expressing general approval of the proposed rules, which rely primarily on internal self-assessment.  So far one comment received by the SEC suggests that the new proposals are not enough and that periodic external audit of some rating agency decisions should also be imposed.

That’s a question that five U.S. Senators are asking the Federal Trade Commission to answer.  On Tuesday, Senators Harry Reid, Charles Schumer, Patty Murray, Dick Durbin, and Claire McCaskill sent a letter to the FTC to look into the potential price fixing of gasoline by U.S. refiners.

The senators are concerned about recent reports suggesting that refiners are reducing U.S. gasoline stockpiles in order to artificially keep prices high as well as inflate their bottom line.  According to the Energy Information Administration, U.S. refiners are only using 81.7% of their capacity, which is a decline of 7% from last year.  The senators wrote that “while some have argued that this increase is due to potential impacts from recent flooding along the Mississippi River, this cannot justify the steady increases in their margins since January of this year.”

Unsurprisingly, President of the National Petrochemical & Refiners Association, Charles Drevna, issued a statement that was critical of the senators’ letter.  Drevna argued that the letter was “political theater” and that “dozens of investigations of gasoline price fixing over the years have generated plenty of headlines and political hyperbole, but have failed again and again to find any evidence of wrongdoing.”

Abbey Spanier will continue to monitor these developments and will let you know if the FTC beings an investigation into U.S. refiners.

Today, U.S. Sens. Al Franken (D-Minn.), Richard Blumenthal (D-Conn.) and U.S. Rep. Hank Johnson (D-Ga) are introducing the Arbitration Fairness Act, which will eliminate forced arbitration clauses in employment, consumer, and civil rights cases, and allow consumers and workers to choose arbitration after a dispute occurs. The text of the bill has not yet been released, but we look forward to seeing it soon.

The Arbitration Fairness Act, which was proposed in 2009 but did not become law, is being re-introduced in response to the Supreme Court’s decimation of consumer class actions in AT&T Mobility v. Concepcion.  We couldn’t better sum up the effects of Concepcion than Senator Franken did on his website:

“The majority of the Court held that the Federal Arbitration Act barred state courts from protecting consumers from [forced] arbitration clauses. The effect of this decision essentially insulates companies from liability when they defraud a large number of customers of a relatively small amount of money.”

These are not empty words. The effect of the Concepcion decision is real, although it may be hard to visualize until something goes wrong for you and you are left to fight a billion-dollar corporation, on your own, over a contested $50 charge on a phone bill. Some arbitration clauses have exceptions allowing consumers to bring cases in small claims court on an individual basis–but rest assured that the company will send its lawyers to defeat your claims (and the filing fee alone might not justify your time).  Go to arbitration, and you’ll appear before a paid dispute resolution professional who gets an awful lot of business from your adversary, and whose decisions are only minimally reviewable in court.  Talk to the press, and the big company will have its lawyers threaten you with a defamation suit. Does that sound far fetched? It’s not–it happened in one of our cases, and the threat was meritless and calculated to silence our client.

The only way consumers can fight for their rights are by banding together, and the Supreme Court has effectively taken that right away.  So, thank you Senators Franken, Blumenthal and Rep. Johnson for introducing this bill. It’s nice to see that someone has consumers’ interest in mind.

Concepcion is not the only recent Supreme Court decision that has come out on the side of corporate interests (see Citizens United, which allowed unlimited political donations by corporations).  So, although members of Congress can introduce a law overruling Concepcion, other elected representatives may choose to allow their biggest contributors the free reign that they have recently been handed.  We hope not.  In America, consumer spending amounts to about 70% of our economy.  In one slash of the pen, the Supreme Court disenfranchised this majority.  Maybe we should take a cue from the satire newspaper the Onion, which last October ran a story titled “American People Hire High-Powered Lobbyist to Push Interests in Congress.”

If you are a CVS Caremark customer, be on the lookout for anti-consumer practices identified by five respected consumer groups who recently asked the Federal Trade Commission to unwind the CVS Caremark Corp. merger.  In an April 14, 2011 letter, they say there is “strong evidence” of CVS Caremark’s harm to consumers. Examples include:

-Using confidential patient information collected by Caremark (a pharmacy manager) so CVS pharmacists can solicit non-CVS customers by mail and phone and direct them to fill their prescriptions at CVS stores;

-Switching Medicare beneficiaries to CVS stores with an increased co-pay and bringing them to the Part D “donut” hole” (when they must pay out of pocket) prematurely; and

-Using the “Maintenance Choice” program which forces consumers to fill their prescriptions at CVS stores or by mail, in order to avoid  paying an increased co-pay to fill their 90 day or maintenance prescriptions at non-CVS locations. 

The consumer groups highlighted the widespread impact these practices can have, given that CVS Caremark deals with over 40% of all consumers.

The FTC is reportedly investigating these practices and, according to CVS Caremark, attorneys general in 24 states are conducting similar investigations. 

Abbey Spanier will continue to monitor these investigations and will report any significant developments.

Well that’s what some people think and we want to hear what you think.

Apple Inc. has been sued for privacy invasion and computer fraud by two customers who claim the company is secretly recording and storing the location and movement of iPhone and iPad users.

According to a complaint filed in federal court in Florida, Apple is stalking its consumers by spying on them to sell their personal information at some future date.  The complaint further alleges that “Apple’s privacy policy contained deceptive misrepresentations that are material and are likely to and did deceive ordinary consumers … into believing that their every move would not be tracked by Apple.”

In fact, last year, Apple updated its privacy policy to say that it could “collect, use, and share precise location data, including real-time geographic location of your Apple computer or device.” That prompted a congressional inquiry, and Apple said in response that it collects data “anonymously in a form that does not personally identify you and is used by Apple and our partners and licensees to provide and improve location-based products and services.”

Apparently Illinois’ Attorney General Lisa Madigan is a little concerned and has asked to meet with Apple and Google Inc. executives to discuss reports that their products collect information about users’ locations. In addition, French, German, Italian, and South Korean regulators are also investigating this issue.

So what do you think?  Do you think that Apple is tracking you for marketing reasons?  If Apple is tracking your location and movement, do you think this is a problem?  Do you have EZPass?  If Apple is tracking you don’t you think EZPass can track you too?    Is there a difference between EZPass and Apple?  When you got your EZPass did you know you could be tracked?

Is big brother watching us just a little too much through our handheld devices?

Finally, there’s some good news for home mortgage borrowers who have been treated unfairly by their banks.   On April 13, 2010, federal banking regulators took formal action against 14 of the nation’s largest loan servicers (including the 10 banks that represent 65% of the loan servicing industry) as a result of their “misconduct and negligence” and “unsafe and unsound practices” in residential mortgage loan servicing and foreclosure processing.

Among other things, the banks will now be required to:

• Give borrowers the name of a specific contact person for their loan;
• Make sure they don’t foreclose on a borrower whose mortgage has been approved for modification unless the borrower has failed to make the required repayments; and
• Provide remediation to borrowers who suffer financial injury due to wrongful foreclosures.

The banks and loan servicers subject to the regulators’ action (including financial penalties that will be imposed in the future) are: Bank of America Corporation; Citigroup Inc.; Ally Financial Inc.; HSBC North America Holdings, Inc.; JPMorgan Chase & Co.; MetLife, Inc.; The PNC Financial Services Group, Inc.; SunTrust Banks, Inc.; U.S. Bancorp; Wells Fargo & Company; Aurora Bank; EverBank; OneWest Bank and Sovereign Bank.  You can find the consent orders here, here and here.

You can also read our March 3, 2011 post in which we discussed the wave of lawsuits brought by homeowners against U.S. mortgage lenders for failing to comply with the terms of the United States Treasury’s Home Affordable Modification Program (“HAMP”).

Do you think the federal regulators’ enforcement action will end the unfair practices?

Today, we write to highlight a New Mexico decision continuing the trend of striking arbitration clauses and class action waivers from consumer contracts.  This decision is not the first in New Mexico to strike down a class action waiver, but it does touch on a topic that we have not previously discussed in this blog: severability, or, to put it differently, viewing the “arbitration clause” and “class action waiver” separately from one another. In theory, a court can sever the class action waiver, but enforce the arbitration clause.  The effect of such an action would be to send the case to classwide arbitration.

In federal court, the Supreme Court’s decision in Stolt-Nielsen appears to have ended the severance of class action waivers.  However, the possibility of such a result still comes up in state court proceedings.

In Felts v. CLK Management, Inc., the plaintiff brought a class action against several “payday loan” companies who were charging the plaintiff well over 500% interest on several loans she took out and could not pay back.

The defendants asked the court to send the case to arbitration on an individual basis because the loan contracts had an arbitration clause and class action waiver.  The district court allowed the case to go forward in court as a class action. The defendants appealed and asked appeals court the court to sever the class action waiver and send the case to class arbitration.

The appeals court opined that the class action waiver was not severable because it was “central to the means by which the parties could resolve their disputes[.]”  The court said the arbitration clause placed so much emphasis on the waiver of rights to bring a class action, that, in order to remove only the class action waiver, the court would have to perform “judicial surgery” and rewrite the contract for the parties.  Courts, as a general matter, strongly disfavor meddling in the parties’ affairs in such a manner.

Recently, there has been a wave of class action lawsuits brought by homeowners against several of the nation’s largest mortgage lenders for failing to comply with the terms of the United States Treasury’s Home Affordable Modification Program (“HAMP”). HAMP was created by the federal government in August 2009 to combat the national foreclosure crisis. The program was specifically designed to allow eligible homeowners who are about to default on their mortgages to save their homes by modifying the terms of their loans. Despite the government’s noble intentions, HAMP has been largely unsuccessful.  Mortgage service providers have been accused of unjustifiably denying permanent modifications by losing paperwork, claiming ignorance of payments made and papers submitted, and engaging in other evasive conduct which makes it extraordinarily difficult, if not completely impossible, for eligible homeowners to obtain loan modifications.

In January 2011, Judge F. Dennis Saylor of the  Massachusetts federal court issued a decision that gives homeowners some hope for relief.   Bosque v. Wells Fargo Bank, N.A., C.A. No. 10-10311-FDS, 2011 U.S. Dist. LEXIS 8509 (D. Mass. Jan. 26, 2011).  In Bosque, even after the homeowners complied in all respects with Wells Fargo’s requirements during a three month trial mortgage modification period, they were never notified of their permanent loan modification status. The plaintiffs contended that they, like hundreds, if not thousands, of Massachusetts homeowners, were deprived of the opportunity to cure their delinquencies, pay their mortgage loans and save their homes.

Judge Saylor denied Well Fargo’s motion to dismiss plaintiff’s claims against it for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, and violation of the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A. and allowed expedited discovery regarding the bank’s HAMP eligibility determination and foreclosure procedures.

Abbey Spanier is following the Bosque litigation closely and will report any significant developments.

Several months ago, we wrote about a bill called the “Preserve Access to Affordable Generics Act.”  This bill was developed to end the drug industry practice of paying off manufacturers of generic drugs because it delays the public’s access to lower cost generic drugs.  The pay-for-delay practice is back in the spotlight because President Obama recently proposed, in the 2012 budget, to ban this practice.  This proposal would save the U.S. $540 million in 2012 and approximately $8.8 billion through 2021.  The budget also contains a proposal to limit the amount of time that brand name drug makers have marketing exclusivity.  Under the current law, brand name drug makers have 12 years of marketing exclusivity and the proposal would limit this time period to 7 years.  According to the Obama administration, this change would save the U.S. $80 million beginning in 2015 and could result in savings of $2.3 billion from 2012 to 2021. 

The White House argued in budget documents that these proposals are a way “to increase availability of generic drugs by providing the Federal Trade Commission authority to stop drug companies from entering into anticompetitive agreements intended to block consumer access to safe and effective generics, and hastening availability of generic biologics while retaining the appropriate incentives for research and development for the innovation of breakthrough products.” 

These proposals will face an uphill battle if they are to remain in the budget.  Because these proposals are aimed at providing consumers with cheaper generic medications, it is not surprising that they were  immediately met with criticism by the pharmaceutical industry.  For example, a Pharmaceutical Research and Manufactures of America press release stated that “the President’s proposed restrictions on certain types of patent settlements could reduce incentives for future medical innovation.” 

Abbey Spanier will continue to monitor these proposals and will report any significant developments.

“Simply stated: labels matter.” This recent statement by the California Supreme Court in Kwikset Corp. v. Superior Court (Benson), 51 Cal. 4th 310 (Jan. 27, 2011) reduces a notion so obviously true and consistent with our everyday experience that it should be hardly worth arguing over.

Yet the truth of that statement was at the heart of the Kwikset case, which arose out of Kwikset Corporation’s manufacturing of locksets labeled “Made in the U.S.A.” Plaintiff James Benson brought suit under California’s unfair competition (“UCL”) and false advertising laws (“FAL”), Cal. Code § 17200, et seq. and § 17500, et seq. respectively, to challenge the labels’ veracity, because those locksets either contained parts made in Taiwan or were assembled in Mexico.

The court below held that, while Benson’s “patriotic desire to buy fully American-made products was frustrated,” that injury was insufficient to confer standing.  In other words, the court below held that the label didn’t matter, at least for the purposes of the California consumer protection laws. The California Supreme Court disagreed and reversed the lower court’s ruling.

The California Supreme Court explained that “[t]he marketing industry is based on the premise that labels matter, that consumers will choose one product over another similar product based on its label and various tangible and intangible qualities they may come to associate with a particular source” and illustrated its point with several examples:

Whether a particular food is kosher or halal may be of enormous consequence to an observant Jew or Muslim. Whether a wine is from a particular locale may matter to the oenophile who values subtle regional differences. Whether a diamond is conflict free may matter to the fiancee who wishes not to think of supporting bloodshed and human rights violations each time she looks at the ring on her finger.  And whether food was harvested or a product manufactured by union workers may matter to still others.

This discussion arose in considering the standing requirements of the UCL and FAL, which are essentially the same.  Both require plaintiff to establish an economic injury and that the injury was caused by the unfair business practice or false advertising at the heart of the claim.

The court below found Benson and the class of purchasers he sought to represent could not show economic injury and therefore could not establish standing because, while they had spent money, they “received locksets in return”. Specifically, they received locksets that were not defective, overpriced or of inferior quality.  The California Supreme Court viewed it very differently: “For each consumer who relies on the truth and accuracy of a label and is deceived by misrepresentations into making a purchase, the economic harm is the same: the consumer has purchased a product that he or she paid more for than he or she otherwise might have been willing to pay if the product had been labeled accurately.” (emphasis in original).

However seemingly obvious the question may have been, it took the California Supreme Court to settle once and for all that a consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirements of the UCL and FAL by alleging, as Benson did in Kwikset, that he or she would not have bought the product but for the misrepresentation.

Our December 10, 2010 “There Oughtta Be a Law” post suggested that dollar amounts  should be rounded up or down to the nearest 10 cents to eliminate pennies and nickels. Never did we imagine that passage of such a law could have impacted a lawsuit.

Forced to dismiss a family’s lawsuit for bodily injury insurance proceeds following an accident in which two family members died,  the Sixth Circuit Court of Appeals observed  in Freeeland v. Liberty Mutual, decided on February 4, 2011,”The penny is the most easily neglected piece of U.S. currency… The amount in controversy in this declaratory judgment action is exactly one penny short of the jurisdictional minimum in the federal courts.”

The court recognized that dismissing the case was “painfully inefficient” but determined that it had no choice given the applicable statutory language.  Sometimes, the law just doesn’t make sense.

A recent Supreme Court of Kentucky decision made that state the tenth where courts have struck down as unconscionable a class action waiver imposed on customers in a merchant’s form consumer agreement .

In Schnuerle v. Insight Communications, L.P., several consumers brought a class action against an internet service provider for failure to provide internet access in accordance with the terms of their contracts.  The customer agreement contained an arbitration clause and class action waiver.  The arbitration clause also had provisions requiring customers to keep confidential any settlement reached through arbitration, and permitted consumers to file claims of less than $1,500 in small claims court.

In coming to its conclusion, the court engaged in a thorough exposition of the justification for class actions and the inherent unfairness in requiring consumers to give up their right to band together against large companies that can make millions by harming many people in amounts too small to justify individual actions.  For instance, the court explained:

“The potential that an absolute ban on class action litigation may produce an improper exculpatory result is demonstrated by way of a simple example. Suppose XYZ Company inadvertently or intentionally overbilled each of its one million customers by one dollar during a particular month. As a result, it gained possession of one million dollars to which it is not entitled, and which instead belongs to its customer base. Suppose, in addition, that the company acted unethically (or incorrectly believed it had a valid defense) and refused to return the overcharges. Economic realities dictate that none of the one million overbilled customers would bring an individual claim seeking the recovery of his dollar. The time, effort, and expense involved to recover a dollar simply would not be worthwhile. Thus, while the economic loss to each individual customer would be negligible, the lack of an economically viable means to bring the company into court would effectively exculpate the company from liability, allowing it to reap unjustly a substantial economic windfall.” Read More

Congress passed the Magnuson-Moss Warranty Act (the “MMWA”) in 1975 to combat perceived abuses in consumer automotive sales. Although the MMWA is not a model of clear drafting (in fact, many courts have noted just the opposite), the MMWA does make one very clear pronouncement: it expressly permits class actions.

However, the MMWA contains a jurisdictional requirement that renders its grant of class actions illusory: in order for a federal court to have jurisdiction over a class action under the MMWA, the plaintiff must name 100 class members in the complaint.[1] This requirement was interpreted strictly and literally by courts and, for 30 years, caused the death knell for otherwise viable class actions in federal court.

However, the Class Action Fairness Act of 2005 (“CAFA”) rendered the MMWA’s jurisdictional limitation moot.  CAFA gave federal courts jurisdiction over any class action in which the amount in controversy exceeds $5 million, and in which any of the members of a class are citizens of a state different from any defendant (subject to certain exceptions).  Courts began looking at this jurisdictional requirement as superseding MMWA’s requirement under the principle of statutory interpretation that holds that “Congress is knowledgeable about existing law pertinent to the legislation it enacts.” If Congress enacted CAFA and did not make a carve out for MMWA class actions, then Congress intended for CAFA’s jurisdictional requirements to trump the MMWA.

So, in the last few years, several courts have held that CAFA provides an alternative basis for jurisdiction over MMWA claims.  See McCalley v. Samsung Elecs. Am., Inc., No. 07-2141 (JAG), 2008 U.S. Dist. LEXIS 28076 (D.N.J. Mar. 31, 2008); Payne v. Fujifilm U.S.A., Inc., No. 07-385 (JAG), 2007 U.S. Dist. LEXIS 94765 (D.N.J. Dec. 28, 2007).  We are not aware of any court that has disagreed.

More recent cases have have bolstered this alternative basis for federal court jurisdiction over MMWA claims. In these cases, decided over the last twelve months–Marcus v. BMW of North America (December 18, 2009 opinion) and Oscar v. MINI USA–federal district courts have permitted MMWA claims to proceed under CAFA without requiring 100 class members to be listed on the complaint. Abbey Spanier represented the plaintiff class representatives in both of those cases.

A remarkable ruling was handed down several years ago by the Fourth Circuit Court of Appeal of Louisiana. In Scott v. American Tobacco Co., 2004-2095 (La.App. 4 Cir. 02/07/2007); 949 So. 2D 1266, the Court found that plaintiffs in a class action alleging fraud did not need to provide direct evidence that class members relied on defendants’ misrepresentations.

In the context of class action litigation, that ruling was a significant departure from the norm. Courts typically do not permit class cases to proceed if individual issues affecting particular plaintiffs and class members are likely to dominate the issues that can be decided in common for all class member, which would be the case if a judge had to evaluate whether every individual class member actually relied on defendants’ allegedly misleading statements. Easing the requirements to prove individual reliance in fraud cases would allow the courts to hear a broader range of class actions.

The ruling has not done that, because, in part, it so specific to tobacco litigation. The Circuit Court explained that the record showed defendants had engaged in a “five decade long public relations effort to create the impression in the public that there was a legitimate controversy about the health effects of smoking, even though defendants knew that such an impression was false” and that “defendants sought to create doubt about the connection between smoking and disease so that smokers would be able to justify beginning or continuing to smoke.” Scott, 949 So. 2D at 1277. The Circuit Court’s holding was premised on finding “defendants’ lengthy course of prohibited conduct affect[ed] a large number of consumers, like the class of Louisiana smokers, and the defendants use[d] indirect communications designed to distort the entire body of public knowledge.” Scott, 949 So. 2D at 1277-8.

And, until recently, it would have been a fair bet that the ruling would never have any effect outside the world of tobacco litigation. However, a recent and rare order of the Supreme Court issued by only a single Justice suggests that it may have a major impact on class action litigation.

On September 24, 2010, Supreme Court Justice Antonin Scalia found it “reasonably likely” that the Supreme Court would grant the tobacco companies’ petition for writ of certiorari to review the ruling, under which an entry of judgment was recently entered requiring defendants to create a $250 million smoking cessation program. Philip Morris USA Inc. et al. v. Gloria Scott et al., 561 U.S. __ (2010).

Justice Scalia pitched the issue broadly as “[t]he extent to which class treatment may constitutionally reduce the normal requirements of due process.” In finding that plaintiffs were not required to prove reliance, the Circuit Court, according to the tobacco companies, denied defendants their constitutional due-process right to present every possible defense. Plaintiffs’ response, which Justice Scalia noted “may ultimately prove persuasive”, was that defendants have no nonreliance defense. Whether and to what extent class treatment reduces the requirements of due process is, as Justice Scalia wrote, an “important question” with far-reaching implications.

Given that the Supreme Court has shown itself to be increasingly likely to issue rulings that reach far beyond the facts of the cases before it, as it did recently in Morrison, et al., v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010) in tossing aside forty years’ worth of securities fraud jurisprudence, the Scott case presents an opportunity for the Court to reshape yet another area of law.

Justice Scalia found it “significantly possible” that the judgment below would be reversed, but the nature of the issue and attitudes of the current Supreme Court make this case one worth watching.  Philip Morris USA Inc. filed the petition for writ of certiorari with the Supreme Court on behalf of the tobacco companies involved in the suit December 3, 2010 (Docket No. 10-735).  A response from respondents is due January 3, 2011.

In case you are wondering how it is that Justice Scalia is involved at this stage of the action, in such an apparently substantive way, prior to any formal action by the Supreme Court, the answer is 28 U.S.C. § 42, a part of the Judiciary and Judicial Procedure Act. This statute  deals with the organization of the U.S. courts and requires the Supreme Court to assign each of its justices as “circuit justice” for one or more of the nation’s thirteen circuit courts of appeal. Justice Scalia is the one and only circuit justice for the Fifth Circuit Court of Appeals, which covers Texas, Mississippi and Louisiana (where Scott was decided). The circuit justice, by himself or herself,  typically decides issues that might adversely affect the Supreme Court’s jurisdiction pending a likely petition to the full Supreme Court. In Scott, the losing tobacco companies, facing execution of a damages judgment in favor of the plaintiff class for over $240 million, went straight to Justice Scalia seeking a stay of that judgment, as permitted by 28 U.S.C. § 2101(f), pending their cert petition.

A few months ago, the Supreme Court granted certiorari in AT&T Mobility v. Concepcion, No. 09-893, which sent chills down the spines of consumer advocates who know the tremendous advantage that a class action waiver gives to a large corporation.  They had applauded the willingness of certain state courts to strike down these waivers in the arbitration clauses found in more and more of the “contracts” that average folks must swallow if they want to have cell phone service or establish a brokerage account or take a job with a large corporate employer, etc., etc.  Some state courts, including the California Supreme Court, have refused to accept that any consumer, unless powerless to avoid it, would ever give up the only practical legal recourse–a class action–available to obtain compensation for and/or stop illegal conduct by a corporation directed at that person and at hundreds or thousands or millions of others through the same, repeated systematic acts that injure each in an amount or in a manner that could never justify the expense of an individual lawsuit or arbitration. This kind of unreasonable condition imposed by the party with all of the bargaining power in a contract “negotiation” may be stricken under the doctrine of contract law known as “unconscionability.”

Immediately after certiorari was granted by the Supreme Court, the dire  predictions rolled in: the Supreme Court was going to kill class actions by preventing state courts from reviewing the terms that corporations impose on their customers, clients and employees under the guise of an arbitration agreement. These predictions were not without basis–it has been widely noted that the current Supreme Court is the most big-business friendly panel in recent memory.

However, at oral argument in Concepcion on November 9, 2010, the Justices did not seem inclined to further their assault on the rights of plaintiffs.  Instead, they addressed their most  difficult questions to counsel for the petitioner, AT&T Mobility.  AT&T had asked the court to declare that the California Supreme Court’s decision in Discover Bank v. Superior Court–a decision that held that arbitration clauses and class action waivers may be unconscionable in certain circumstances–is preempted by the Federal Arbitration Act.  

With the caveat that predicting the outcome by analyzing the justices’ questions and comments at the argument has a low success rate, here is a sampling:

Justice Scalia hinted that the Supreme Court may not step into the merits of a contractual dispute under state law, and asked “Are we going to tell the State of California what it has to consider unconscionable?”

Referencing the Federal Arbitration Act’s preemption of laws that single out arbitration agreements, Justice Ginsberg stated to counsel for AT&T: “You don’t have anything that says—the California court hasn’t said: We are applying a special definition of unconscionability to arbitration agreements.”

Justice Kagan indicated that the decision as to whether an arbitration clause is unconscionable should be left up to the states, asking counsel for AT&T:  ”Who are we to say the state is wrong about that?”

And, in a potentially telling indicator familiar to those with appellate court experience, the justices seemed a bit more deferential to counsel for the plaintiffs, who defended the Discover Bank decision.  This could indicate that the justices favored the plaintiffs’ position.

Now, we won’t have a decision on this case until sometime next year, and we don’t have any idea what the Justices were actually thinking, so what we are saying is entirely speculation.  But we’re not alone in our view that the questioning by the justices in this case did not show the type of hostility that would be expected if the Court was truly considering killing the class action. It seems that the New York Times, the Wall Street Journal, and Slate, among many others, share our view.

See our prior post on ATT v. Concepcion.

Is your mortgage banker’s execution of rapid, rubber-stamp foreclosures the makings of a criminal enterprise?  Some plaintiffs and legal commentators think so.

Recent headlines have revealed that many of the largest banking institutions in the US may have, perhaps illegally, cut procedural corners to quickly foreclose on homeowners struggling to make their mortgage payments.  As a result of these shortcuts, the banks may have violated the Racketeer Influenced and Corrupt Organizations Act, commonly known as RICO.  RICO is law mostly associated with the prosecution of mobsters, but the statute has been used to nab high profile white-collar criminals and even to challenge Bud Selig and Major League Baseball.

A RICO violation occurs when a person or entity engages in a pattern of racketeering activity while conducting the affairs of an enterprise.  Racketeering activity includes any act or threat involving murder, kidnapping, or bribery as well as obtaining money or property by means of false pretenses while using the postal service or any private or commercial interstate carrier, i.e. mail fraud.  Any person harmed by a defendant’s RICO violation can receive three times the damages that person sustained.

Turning back to the mortgage crisis, some bank employees have revealed that they were instructed to rubber-stamp shoddy affidavits that were used in foreclosure hearings, a process commonly referred to as “robo-signing”.  These employees often attested that they were familiar with the facts related to the foreclosure when in fact they did not have the time to read the affidavits due to the sheer volume of foreclosures.  As result, some are claiming that the banks instructed their employees to falsify affidavits in order to fraudulent repossess property that the banks may not even own.  If it can be established that the banks engaged in a pattern of these fraudulent practices to obtain property, a RICO violation may have occurred. 

Sometimes a shakedown occurs from the barrel of a pen.