Retail and Consumer Products Law Roundup

In Case You Missed It: D.C. Circuit TCPA Decision Webinar

On March 16, 2018, the U.S. Court of Appeals for the D.C. Circuit released its hotly anticipated decision in ACA Int’l v. FCC. The decision—which impacts a wide range of industries including retail —limited the FCC’s overly expansive definition of “automatic telephone dialing system” (ATDS) and vacated its ruling on reassigned telephone numbers, but declined to set aside other rulings governing calls and texts to consumers.

If you missed Manatt’s webinar dissecting this ruling and the most crucial takeaways for your company, please click here to access the audio recording and presentation materials. Click here to read Manatt’s client alert on this topic.

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New Guidance From SEC, New York’s DFS

By Craig D. Miller, Partner, Financial Services Transactions | Anita L. Boomstein, Partner, Global Payments

Hoping to help covered entities, the Securities and Exchange Commission (SEC) released an update on cybersecurity while New York’s Department of Financial Services (DFS) published guidance for licensed virtual currency businesses in the state.

What happened

In an effort to provide assistance to public companies when preparing disclosures about cybersecurity risks and incidents, the commissioners of the SEC unanimously voted to publish new guidance.

The document updates and reinforces guidance issued by the agency in October 2011, noting that cybersecurity poses a “grave threat” that has increased in both risk and frequency. Incidents can result from unintentional events or deliberate attacks by insiders or third parties, the SEC said.

“Given the frequency, magnitude and cost of cybersecurity incidents, the Commission believes that it is critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyberattack,” according to the guidance.

Of critical importance are disclosure controls and procedures that provide an appropriate method of discerning the impact such matters may have on the company and its business, financial condition and results of operations, as well as a protocol to determine the potential materiality of such risks and incidents, the SEC said. Public companies also need policies and procedures in place to guard against directors, officers and other insiders trading securities while in possession of material nonpublic information.

In addition to considering the materiality of cybersecurity risks and incidents when preparing the disclosures for statements required by the Securities Act, the Securities Exchange Act, as well as periodic and current reports, the SEC reminded companies that they are also required to disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”

What makes a cybersecurity issue material? Companies should “generally weigh, among other things, the potential materiality of any identified risk and, in the case of incidents, the importance of any compromised information and of the impact of the incident on the company’s operations,” according to the guidance. “The materiality of cybersecurity risks or incidents depends upon their nature, extent, and potential magnitude, particularly as they relate to any compromised information or the business and scope of company operations. The materiality of cybersecurity risks and incidents also depends on the range of harm that such incidents could cause.”

Companies should not make detailed disclosures that could compromise their cybersecurity efforts, but the SEC expects disclosures of risks and incidents that are material to investors, including financial, legal or reputational consequences. The agency also recognized that time may be required to discern the implications of an incident and that cooperation with law enforcement may affect the scope of disclosure. However, an ongoing or internal investigation does not on its own provide a basis for avoiding disclosures of a material cybersecurity incident, the SEC made clear.

“Where a company has become aware of a cybersecurity incident or risk that would be material to its investors, we would expect it to make appropriate disclosure timely and sufficiently prior to the offer and sale of securities and to take steps to prevent directors and officers (and other corporate insiders who were aware of these matters) from trading its securities until investors have been appropriately informed about the incident or risk,” the agency wrote.

Covered entities may also have a duty to correct prior disclosures that it determines were untrue at the time they were made as well as a duty to update disclosures that become materially inaccurate after being made. Disclosures should be tailored to the particular risk and incident of the public company, the SEC said, in a “company-by-company approach.”

Companies may need to disclose previous or ongoing cybersecurity incidents in order to place a discussion of these risks in the appropriate context, the guidance explained. For example, if a company previously experienced a denial-of-service attack, “it likely would not be sufficient for the company to disclose that there is a risk that a denial-of-service incident may occur,” the SEC said. “Instead, the company may need to discuss the occurrence of that cybersecurity incident and its consequences as part of a broader discussion of the types of potential cybersecurity incidents that pose particular risks to the company’s business and operations.”

To effectuate the necessary disclosures, the guidance emphasized the importance of cybersecurity risk management policies and procedures. “Companies should assess whether they have sufficient disclosure controls and procedures in place to ensure that relevant information about cybersecurity risks and incidents is processed and reported to the appropriate personnel, including up the corporate ladder, to enable senior management to make disclosure decisions and certifications and to facilitate policies and procedures designed to prohibit directors, officers, and other corporate insiders from trading on the basis of material nonpublic information about cybersecurity risks and incidents,” the SEC advised.

Policies and procedures should not be limited to specifically required disclosures, but be broad enough to encompass the timely collection and evaluation of information potentially subject to required disclosure, the guidance noted. In addition, the SEC cautioned companies that they, as well as their corporate insiders, must be mindful of insider trading concerns that may arise in connection with a cybersecurity incident. In particular, the SEC noted that insiders may violate applicable law if they trade on a company’s securities while in possession of material nonpublic information regarding a cybersecurity risk or incident.

The DFS also took the time to provide guidance to covered entities, specifically the virtual currency (VC) companies licensed in New York and concerns about fraud, particularly market manipulation.

“VC Entities are required to implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing,” DFS wrote. “[M]arket manipulation is a form of wrongdoing about which VC Entities must be especially vigilant, given that such manipulation presents serious risks both to consumers and to the safety and soundness of financial services institutions.”

Fraud can take many forms, may come from a variety of sources, and may or may not involve criminal activity, the regulator said. A customer might misuse a virtual currency exchange service in an attempt to wrongfully manipulate the price of a virtual currency, or an employee might wrongfully act on insider information regarding that entity’s plans to expand or curtail its services.

“Because fraud and similar wrongdoing can take many forms, effective measures to detect, prevent and respond to such activity will also vary,” the DFS said. “The range of measures implemented by a particular VC Entity to combat fraud and similar wrongdoing must be determined through diligent evaluation of the particular risks faced by that VC Entity.”

At a minimum, such measures must include a written policy that identifies and assesses the full range of fraud-related and similar risk areas (including market manipulation, if applicable); provides effective procedures and controls to protect against identified risks; allocates responsibility for monitoring risks; and provides for periodic evaluation and revision of the procedures, controls and monitoring mechanisms in order to ensure continuing effectiveness, including continuing compliance with all applicable laws and regulations.

As part of these policies and procedures, covered entities must provide for the effective investigation of fraud and other wrongdoing—whether suspected or actual, the DFS said.

“In addition, immediately upon the discovery of any wrongdoing, a VC Entity must submit to the Department a report stating all pertinent details known at the time of the report,” the DFS wrote. Further reports of any material developments must also be provided, in some instances within 48 hours, the regulator said, with records maintained of each incident of wrongdoing.

To read the SEC guidance, click here.

To read the DFS guidance, click here.

Why it matters

The SEC’s cybersecurity guidance confirms the SEC’s focus on this important disclosure area and general concerns from the agency about the risks posed to investors arising from cybersecurity incidents. It also serves as a warning to covered entities that the agency is keeping a close eye on cybersecurity, with the guidance cautioning that the SEC “continues to monitor cybersecurity disclosures carefully.” The DFS directed virtual currency companies to take the necessary steps to guard against fraud and be extra vigilant about market manipulation. “By these actions, the market can evolve with strong regulatory supervision,” explained DFS Superintendent Maria T. Vullo.

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FTC Nominees Make Progress

By Richard P. Lawson, Partner, Consumer Protection

The confirmation of four new members of the Federal Trade Commission (FTC)—including a chairperson—inched closer to reality after the Senate Commerce Committee approved the nominations.

In February, President Donald J. Trump officially submitted his picks for the agency: Joseph Simons (selected as the new chair), Noah Phillips, Christine Wilson and Rohit Chopra, the lone Democrat among the bunch.

Antitrust attorney Simons, the former director of the FTC’s Bureau of Competition, has been in private practice in Washington, D.C., since leaving the FTC in 2003. Phillips currently acts as chief counsel to Sen. John Cornyn (R-Texas), while Wilson previously served as chief of staff to former FTC Chair Tim Muris and has most recently been vice president for regulatory and international affairs at Delta Air Lines. Chopra’s experience includes time at the Consumer Financial Protection Bureau (as assistant director and student loan ombudsman) and the Consumer Federation of America.

At a hearing, Simons discussed issues ranging from cybersecurity (one of his choices for the top three challenges facing the FTC) to net neutrality to enforcement against big technology companies, such as Google. “Sometimes big is good, sometimes big is bad,” he told the Senate Commerce Committee. “Sometimes it’s both at the same time.”

The committee approved the nominations on a unanimous voice vote. No date has been set for a vote by the full Senate.

Why it matters: The White House has taken its time filling the FTC, which has been down to two members since the beginning of the Trump administration. Once the Senate votes in favor, the four nominees can take their positions with one open spot remaining. Sen. Charles Schumer (D-N.Y.) has recommended one of his aides, Rebecca Slaughter, for that position.

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California Court Tosses New York Claims

By Richard P. Lawson, Partner, Consumer Protection

New York’s consumer protection law does not protect out-of-state consumers, a California judge has ruled when dismissing claims from the Empire State in a multidistrict litigation (MDL) against Lenovo Inc.

According to the California federal court complaint, Lenovo preinstalled Superfish Inc.’s software on its laptops, which created performance, privacy and security issues. The plaintiffs asserted claims under California and New York state law, as well as the federal Wiretap Act.

After the litigation was consolidated as an MDL and the plaintiffs filed an amended complaint, the defendants moved to dismiss the claims under New York law, pointing out that the suit no longer included a named plaintiff who resided in New York. As the four named plaintiffs were residents of Arizona, California, Illinois and Missouri, they were without standing to bring a claim under New York’s Deceptive Acts and Practices law Section 349, the defendants told the court.

U.S. District Judge Haywood S. Gilliam Jr. agreed. “Section 349 does not protect consumers from out-of-state deceptive business practices,” he said, as the statute prohibits “[d]eceptive acts or practices … in this state.”

New York’s highest court has held that the “transaction in which the consumer is deceived must occur in New York,” the court said, while the U.S. Court of Appeals, Second Circuit has clarified that “the analysis under Section 349 is based on ‘the location of the transaction, and in particular the strength of New York’s connection to the allegedly deceptive transaction, rather than on the residency of the parties.’”

The plaintiffs did not allege that they were New York residents, nor did they allege that any conduct or deceptive transaction occurred within New York. Instead, they tried to convince the court that because the defendants agreed that New York substantive law applied to the case, they waived any argument to the contrary.

“Plaintiffs’ argument improperly conflates choice-of-law with statutory standing,” the court wrote. “Even if the parties agree that New York law should apply to this litigation, Plaintiffs still must adequately allege a claim under that law.”

The parties’ stipulation to proceed initially under federal, New York and California law did not resolve the plaintiffs’ standing deficiency, Judge Gilliam said.

Even if the plaintiffs had statutory standing, the court additionally found they failed to plead sufficient facts to sustain their Section 349 claim, which requires a showing of “actual, though not necessarily pecuniary, harm.” The plaintiffs alleged that the software “significantly degraded the performance” of the laptops on which it was installed. As a result, they overpaid for their laptops and did not receive the full value of their purchase.

Although New York law does not categorically prohibit such a “price premium” theory, the plaintiffs neglected to allege that they personally experienced any performance or security issues with their computers, the court said.

“Nor do they allege what their expectations were about the computers’ performance or specifications before they purchased them,” the court wrote. “Consequently, Plaintiffs have failed to allege sufficient facts to establish that they received less than what they paid for when they purchased Lenovo computers preloaded with [the] software.”

Judge Gilliam granted the defendants’ motion to dismiss the Section 349 claim, albeit without prejudice.

To read the order in In re: Lenovo Adware Litigation, click here.

Why it matters: The court was clear: New York’s Deceptive Acts and Practices Statute requires a connection to the state, whether a resident is a plaintiff or an allegation that the deceptive conduct or transaction occurred within New York. For class action defendants in California federal court, the order provides a potential road map to dismissal of New York claims.

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ADA Suit Against 1-800-Flowers.com Blooms

By Richard P. Lawson, Partner, Consumer Protection

Demonstrating the minefield facing online retailers, the U.S. District Court, District of Massachusetts refused to dismiss an Americans with Disabilities Act (ADA) accessibility suit filed against 1-800-Flowers.com.

The plaintiffs—three individuals and national disability rights organization Access Now—alleged that the 16 sites operated by the defendant were not sufficiently accessible to blind and visually impaired consumers. They requested a permanent injunction compelling the defendant to bring the sites into compliance with the ADA, specifically Version 2.0 of the Web Content Accessibility Guidelines.

1-800-Flowers.com responded that it could not be liable for the failure to follow voluntary standards for web accessibility.

But the court denied the defendant’s motion to dismiss, holding that the plaintiffs alleged violations of the ADA and only requested a remedy based on the Guidelines.

“Plaintiffs’ Complaint does not allege that Defendant is liable for failing to comply with the Web Content Accessibility Guidelines,” U.S. District Judge Indira Talwani wrote. “Instead, Plaintiffs allege that Defendant violates the ADA by ‘depriv[ing] blind … individuals the benefits … it affords non-disabled individuals.’ Plaintiffs request compliance with the Web Content Accessibility Guidelines only as a remedy, and do not contend that the failure to comply is a basis for liability in the first instance. Thus, the Complaint seeks to enforce the ADA’s statutory requirements, rather than the Web Content Accessibility Guidelines.”

The court was careful not to state that it was deciding whether the ADA requires Title III entities to satisfy the Web Content Accessibility Guidelines.

Considering the defendant’s fallback argument, Judge Talwani was similarly not persuaded that the issues highlighted by the plaintiffs were isolated incidents of mechanical failure.

“For example, Plaintiffs assert that Defendant’s websites do not have text equivalents for every non-text element; that the websites do not present audio-only or video-only presentations in a way that sight impaired individuals can access, such as an audio or text description of video content; and that its web pages lack titles that describe their topic and purpose,” the court said. “Such allegations are sufficient to support the reasonable inference that the websites themselves—not the screen reader equipment—prevent blind and visually impaired individuals from equal access to the websites, and that Defendant is therefore in violation of Title III.”

The court denied the defendant’s motion to dismiss.

To view the memorandum and order in Gathers v. 1-800-Flowers.com, Inc., click here.

Why it matters: The defendant also attempted to push the suit out of court by pointing to the possibility of official guidance from the Department of Justice (DOJ). In light of the DOJ’s recent decision to pass on rule-making with regard to online accessibility pursuant to the ADA, the court made its own decision instead of waiting. The opinion demonstrates the challenges facing online retailers due to the lack of official guidance.

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California Supreme Court Provides Clarification When Calculating Overtime Rate

Why it matters

In an employee-friendly opinion, the California Supreme Court set forth the calculation of a worker’s overtime pay rate when he or she has earned a flat-sum bonus during a single pay period. Hector Alvarado claimed that Dart Container Corp. of California improperly computed his overtime pay. He argued that the employer should have used the actual number of nonovertime hours the employee worked during the relevant pay period as the divisor for purposes of calculating the per-hour value of the one-time “attendance bonus.” Dart moved for summary judgment, countering that the divisor should be the number of hours the employee worked during the entire pay period, including overtime hours. A trial court granted the motion in favor of the employer, and an appellate panel affirmed.

The state’s highest court reversed, holding that the divisor should be the number of nonovertime hours actually worked by the employee during the pay period, a formula advocated by the state labor department. The California Supreme Court also indicated the decision would apply retroactively, presenting the need for employers to review their calculations both historically and prospectively.

Detailed discussion

A warehouse associate for Dart Container Corp. of California from September 2010 to January 2012, Hector Alvarado was one of many employees who received a weekend “attendance bonus.” Hourly workers were paid a flat sum of $15 per day of weekend work in addition to their normal hourly wages, regardless of whether the employee worked in excess of the normal work shift on the day in question.

To calculate an employee’s overtime compensation, Dart multiplied the number of overtime hours the employee worked during the relevant pay period by the normal hourly wage rate to obtain a base hourly pay for the overtime work. Dart then added the total hourly pay for nonovertime work during the pay period, any nonhourly compensation earned (such as the attendance bonus) and the base hourly pay. The employer divided that total by the number of hours the employee worked during the pay period, including overtime hours, to obtain an hourly rate. Dart then multiplied that hourly rate by the total number of overtime hours in the pay period, divided it in half and added the base hourly pay to the overtime to get the total overtime compensation for the pay period.

Alvarado advocated for a different formula. He would first calculate the overtime compensation attributable only to the employee’s hourly wages, multiplying the normal hourly wage rate by 1.5 and by the number of overtime hours. Next he would calculate the overtime compensation attributable only to the employee’s bonus by calculating the bonus’s per-hour value (based on the number of nonovertime hours worked) and then multiplying that per-hour value by 1.5 and by the number of overtime hours worked. Finally, Alvarado suggested combining these amounts to obtain the total overtime compensation for the pay period.

The key distinction: whether the flat-sum attendance bonus is allocated to all hours worked or only to the nonovertime hours worked. Using the latter as the divisor results in a more favorable calculation for employees.

After Alvarado filed a putative class action against Dart alleging the company’s calculations violated California labor law, the employer moved for summary judgment. In support of its formula, Dart advised the trial court to rely on a federal regulation explaining how to factor a flat-sum bonus into an employee’s regular rate of pay. The only California regulation on point came from the Division of Labor Standards Enforcement (DLSE), and that policy is void for failure to comply with the Administrative Procedure Act (APA), Dart argued.

The trial court granted the employer’s motion for summary judgment, and an appellate panel affirmed. In a unanimous opinion, the California Supreme Court reversed. The court began with the question of whether the DLSE’s enforcement policy controlled its analysis of Dart’s calculations. If it did, then the case was decided in favor of Alvarado. If it did not control, the court could nevertheless follow it.

In 1996, the California Supreme Court decided Tidewater Marine Western, Inc. v. Bradshaw, where the court found that DLSE’s manual contained void underground regulations in violation of the APA. Dart pointed to this decision as support for its reliance on federal regulations, but the court made a careful distinction.

“But ‘void,’ in this context, does not necessarily mean wrong,” the court said. “If the policy in question is interpretive of some governing statute or regulation, a court should not necessarily reject the agency’s interpretation just because the agency failed to follow the APA in adopting that interpretation; rather, the court must consider independently how the governing statute or regulation should be interpreted.”

In other words, an agency’s underground interpretive regulation should not be afforded any special weight or deference, but it is nonetheless something a court may consider, the court explained, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own. “Moreover, the persuasiveness of the agency’s interpretation increases in proportion to the expertise and special competence that are reflected therein, including any evidence that the interpretation was carefully considered at the highest policymaking level of the agency.”

The DLSE manual addresses the precise calculation at issue. Section 49.2.2.2 states: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies. This is so because the bonus is not designed to be an incentive for increased production for each hour of work; but, instead is designed to insure that the employee remains in the employ of the employer.”

Although the court determined the DLSE policy is a void underground regulation, it also decided it was correct and could be followed.

The court then turned to Dart’s formula, with the recognition that California has a long-standing policy of discouraging employers from imposing overtime work and liberally construes labor laws in favor of worker protection.

Under the Labor Code and the Industrial Wage Commission orders, an employee’s overtime pay rate is a multiple of his or her “regular rate of pay.” The plain meaning of the phrase “regular rate of pay” does not mean “constant,” the court added, as an employee’s regular rate of pay changes from pay period to pay period depending on whether the employee has earned shift differential premiums or nonhourly compensation.

“[T]he weekend attendance bonus at issue here is payable even if the employee works no overtime at all during the relevant pay period,” the court said. “It follows, then, that the bonus is properly treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.”

Returning to the DLSE policy, the court said the agency recognized an important distinction. “If a bonus is a reward ‘for each hour of work,’ and its amount therefore increases in rough proportion to the number of hours worked (as might be true of a production or piecework bonus or a commission), then it might be said that the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added,” the court said.

But the attendance bonus at issue does not reward the employee “for each hour of work,” and its amount did not increase in rough proportion to the number of hours worked; instead, it is a flat-sum bonus that rewards the employee for completing a full weekend shift. “Accordingly, we conclude—consistent with the DLSE’s policy on point—that the divisor for purposes of calculating the per-hour value of defendant’s attendance bonus should be the number of nonovertime hours actually worked in the relevant pay period, not the number of nonovertime hours that exist in the pay period,” the court said.

Dart’s formula “must be rejected because it results in a progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime work,” the court wrote.

Having sided with the plaintiff, the court then ruled its decision should have retroactive effect. Given the DLSE policy, the defendant “had every reason” to predict the outcome, the court said, not persuaded by the potential for costly civil penalties facing Dart and other employers.

“[I]f we were to restrict our holding to prospective application, we would, in effect, negate the civil penalties, if any, that the Legislature has determined to be appropriate in this context, giving employers a free pass as regards their past conduct,” the court wrote.

“We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

To read the opinion in Alvarado v. Dart Container Corp. of California, click here.

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