Retail and Consumer Products Law Roundup

Supreme Court Refuses to Hear Interchange Settlement Appeal

By Anita L. Boomstein, Partner, Global Payments

The U.S. Supreme Court denied a request to review the U.S. Court of Appeals for the Second Circuit's ruling overturning a $7.25 billion settlement agreement in a case brought by retailers against the card networks and banks, ending any question as to whether that agreement would survive court challenge in its current form.

What happened

In 2013, a New York federal court judge signed off on the deal in consolidated actions filed by merchants against the payment processors and various banks. The estimated 12 million plaintiffs alleged the network rules established by the defendants (such as the default interchange fee and honor-all-cards rule) allowed issuing banks to impose artificially inflated interchange fees that merchants had no choice but to accept.

Originally filed in 2006, the action spanned years of litigation, including 400 depositions, 17 expert reports, 32 days of expert deposition testimony, and the production of over 80 million pages of documents. After repeated mediation sessions and settlement negotiations, the parties reached a deal in 2012, which was finally approved by the district court in December 2013.

The settlement agreement divided the plaintiffs into two classes: one under Federal Rule of Civil Procedure 23(b)(3) covering merchants that accepted either payment processor from January 1, 2004 to November 28, 2012, and a second class under Rule 23(b)(2) for merchants that accepted or will accept payments from either payment processor from November 28, 2012 and onward.

Members of the (b)(3) class would be eligible for a portion of the $7.25 billion in monetary relief provided by the defendants, while the (b)(2) class would receive injunctive relief in the form of changes to the network rules. Under the federal rules, members of the first class (those that received money damages) could opt out of the settlement and bring their own actions for damages, but those in the second class could not. That essentially meant that all U.S. merchants were forced to accept the injunctive relief—whether it was meaningful or not—in exchange for a broad (and highly objectionable) general release of all past and future claims.

Despite substantial objections to the deal by merchants, the district court approved the settlement as fair and reasonable. Numerous objectors and opt-out plaintiffs appealed and the Second Circuit vacated the district court's certification of the class action and reversed the approval of the settlement.

The Second Circuit unanimously held in its decision that class members of the injunctive relief, or Rule 23(b)(2) class, were inadequately represented in violation of Rule 23(a)(4) and the Due Process Clause, because the same attorneys provided representation to both classes of plaintiffs despite the conflict of interest between the two.

"The conflict is clear between merchants of the (b)(3) class, which are pursuing solely monetary relief, and merchants in the (b)(2) class, defined as those seeking only injunctive relief," the court explained. "The former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future."

Such divergent interests, the appellate court held, require separate counsel when it impacts the "essential allocation decisions" of plaintiffs' compensation and defendants' liability. Class counsel and class representatives were in the position to trade diminution of (b)(2) relief for an increase of (b)(3) relief, the panel said.

"Unitary representation of separate classes that claim distinct, competing, and conflicting relief creates unacceptable incentives for counsel to trade benefits to one class for benefits to the other in order to reach a settlement," the court wrote. "Divided loyalties are rarely divided down the middle."

Supporters of the deal filed a writ of certiorari asking the Supreme Court to take the case for review, arguing there was no guarantee that the objectors could get a better deal and that the need for different representation of the injunctive relief and damages classes would require a lot of work for little benefit. The payment processors, in pushing for the Supreme Court to take the case, contended that the Second Circuit decision presented a new interpretation of the rules governing class action settlements. But the justices declined to hear the case, with Chief Justice John Roberts and Justice Samuel Alito taking no part in the decision.

To read the Supreme Court's order list, click here.

Why it matters: In denying to review the case, thereby affirming rejection of the deal, the Supreme Court has sent the parties back to the drawing board to create a new agreement or face the possibility of a trial on the merits of the case. The continuation of the case has significant implications for merchants, card networks and banks since it is unclear where the settlement of this highly contentious case is now headed. In a related action, it also has implications for retailer plaintiffs that brought actions in four states challenging the ban on charging a surcharge on credit card transactions at the point of sale. The U.S. Supreme Court recently held that the New York no-surcharge statute may violate the retailers' First Amendment rights.

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One Day of Rest Mandated by California Supreme Court

Resolving a contentious issue of California law, the state’s highest court ruled that one day of rest is guaranteed for each defined workweek, although an employer is not forbidden from allowing an employee, fully apprised of his or her entitlement to rest, to independently choose not to take a day off. The issue arose when two employees of Nordstrom claimed the employer required them to work for more than six consecutive days without a day off, in violation of the state’s “day of rest” statute. Following a bench trial, a federal court judge ruled in favor of Nordstrom.

The plaintiffs appealed, but uncertain about how to interpret the statute, the U.S. Court of Appeals for the Ninth Circuit certified three questions to the California Supreme Court. Answering the questions, the unanimous court held that a day of rest is guaranteed for each workweek, although periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited. The exemption for employees working shifts of six hours or less applies only to those who never exceed six hours of work on any day of the workweek, the court added, and if on any one day an employee works more than six hours, a day of rest must be provided during that workweek. Finally, the court ruled an employer “causes” its employees to go without a day of rest when it induces the worker to forgo rest to which he or she is entitled. However, employers may permit an employee to voluntarily choose not to take a day of rest, after being informed of his or her rights under the law.

Detailed discussion

In 2009, Christopher Mendoza filed suit against his former employer, Nordstrom. According to Mendoza, during his tenure as a barista at a Nordstrom espresso bar and as a sales representative in the cosmetics department, the national retailer violated Sections 551 and 552 of the California Labor Code, the so-called day of rest law.

Section 551 provides that “[e]very person employed in any occupation of labor is entitled to one day’s rest therefrom in seven,” while Section 552 states that “[n]o employer of labor shall cause his employees to work more than six days in seven.” California Labor Code Section 556 exempts an employer from the day of rest requirement “when the total hours [worked by an employee] do not exceed 30 hours in any week or six hours in any one day thereof.”

Mendoza claimed he worked more than six consecutive days on three occasions, one time working 11 days straight (although working fewer than six hours on two of those days), seven days straight another time (with fewer than six hours on three days) and eight consecutive days on a third occasion (with fewer than six hours on five days). On each of these occasions, Mendoza was not originally scheduled to work more than six consecutive days but did so after being asked by a coworker or supervisor to fill in for another employee.

A second employee, Megan Gordon, joined the suit in April 2011. She worked as a fitting room attendant at a Nordstrom Rack store for more than six consecutive days on one occasion, although on two of those days she worked fewer than six hours.

After a two-day bench trial, a California federal court judge sided with Nordstrom. Gordon and Mendoza appealed to the U.S. Court of Appeals for the Ninth Circuit. A panel of the federal appellate court considered the issue and, finding no controlling California precedent and an ambiguous statutory text, turned to the California Supreme Court for help.

The panel certified three questions to the state’s highest court:

  1. Is the day of rest required by Sections 551 and 552 calculated by the workweek, or does it apply on a rolling basis to any seven-consecutive-day period?
  2. Does the Section 556 exemption for workers employed six hours or less per day apply so long as an employee works six hours or less on at least one day of the applicable week, or does it apply only when an employee works no more than six hours on each and every day of the week?
  3. What does it mean for an employer to “cause” an employee to go without a day of rest: force, coerce, pressure, schedule, encourage, reward, permit or something else?

Answering the first question, the court began with the premise that the text of the statutory is “manifestly ambiguous” and the legislative history “sheds limited light.” The court turned to other interpretive sources, including the regulatory and statutory contexts of which the day of rest laws are a part.

For example, the court reviewed the history of the Industrial Welfare Commission Wage Orders, noting that the statutory day of rest protection was understood by the IWC to ensure a weekly day of rest, not a “rolling seven” guarantee, with each iteration of the wage order continuing to make clear that the day of rest guarantee applied on a weekly, rather than rolling, basis. Interpreting Sections 551 and 552 as applying on a weekly rather than rolling basis harmonizes the statutory guarantees with the history of the wage orders, the court wrote.

Further, this interpretation comports with the statutory context, particularly given that the legislature has expressly defined a “week” and a “workweek” as “any seven consecutive days, starting with the same calendar day of each week”—not a rolling period of any seven consecutive days, the court said. The exceptions to the day of rest back this up, as Section 510—which provides consideration in the form of premium pay when circumstances dictate forgoing a day of rest—applies to “the seventh day of work in any one workweek.”

“That is, premium pay is available not on a rolling basis, for any seventh consecutive day of work, but only for employees who must work every day of an employer’s established regularly recurring workweek,” the California Supreme Court said. “The logical inference is that the Legislature views only a seventh day of work during an established workweek as an exception to sections 551 and 552, and intends the day of rest guarantee to apply on a weekly basis.”

The court was not persuaded by the plaintiffs’ argument that this reading of the statute would permit employers to regularly impose schedules in which employees may rest no more than one day in 12. “If at one time an employee works every day of a given week, at another time shortly before or after she must be permitted multiple days of rest in a week to compensate, and on balance must average no less than one day’s rest for every seven, not one for every 12,” the court said.

As for the six-hour-day exception, the court said the elimination of the seventh-day-rest protection applies only to employees who work no more than six hours each and every day of the given week. This reading avoids absurdities that would result from alternative interpretations, the court found, such as if an employer permitted a single day of six hours or less to eliminate seventh-day-rest protection.

Finally, the court turned to the meaning of “cause” in Section 552. The court rejected Nordstrom’s proposal that the term should be understood as limited to a requirement or use of force. “Rather, an employer’s obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right,” the court explained. “An employer may not encourage its employees to forgo rest or conceal the entitlement to rest, but is not liable simply because an employee chooses to work a seventh day.”

To read the opinion in Mendoza v. Nordstrom, Inc., click here.

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Serial Plaintiff Files Two TCPA Class Actions Against Prominent Companies

By Christine M. Reilly, Chair, TCPA Compliance and Class Action Defense | Diana L. Eisner, Associate, Litigation

California federal courts saw a pair of new suits filed by the same plaintiff on the same day against Marriott International and Gallup Inc. Both suits claimed that the hotel chain and the polling company made unsolicited calls to Jason Hartley’s cellphone number despite the fact that it was registered on the National Do Not Call Registry since December 2004.

Marriott repeatedly called the number with marketing for vacations or rewards, in one case with a prerecorded message congratulating Hartley on being drawn as a winner in a contest. The plaintiff also asserted that although he answered one of the calls and selected the option to be placed on an internal do not call list, he received yet another phone call.

As for Gallup, Hartley claimed he was “frustrated and distressed” that the company “harassed” him with a call using an automatic telephone dialing system. Both suits seek to represent a nationwide class of plaintiffs estimated to number “in the several thousands,” requesting statutory damages for negligent as well as knowing and/or willful violations of the TCPA.

To read the complaint in Hartley v. Marriott International, Inc., click here.

To read the complaint in Hartley v. Gallup, Inc., click here.

Why it matters: TCPA class actions continue to be on the rise, underscoring the importance of good compliance to ward off such claims. Moreover, the complaint against Gallup shows that the need for compliance is not limited to companies which make marketing calls, but rather, all companies which utilize telephonic communications as part of their business.

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Second Circuit Affirms Dismissal of Data Breach Suit

The U.S. Court of Appeals for the Second Circuit found that the plaintiff failed to establish standing and affirmed the dismissal of a consumer class action filed based on data breach at Michaels Stores, Inc.

Mary Jane Whalen made purchases with her credit card at a Michaels store on December 13, 2013. About two weeks later, her credit card was presented for payment to a gym in Ecuador for a charge of $398.16; the next day, it was presented for payment to a concert ticket company in Ecuador for a charge of $1,320.

Whalen canceled her card on January 15 and was not liable for either of the Ecuador purchases. On January 25, Michaels issued a press release acknowledging that the retail chain may have suffered a data breach of its system involving the theft of customers’ credit and debit card data. In a subsequent press release, the company noted that there was no evidence that other information was at risk and offered 12 months of identity protection and credit monitoring services to affected customers.

In response, Whalen filed a putative class action in New York federal court asserting claims for breach of an implied contract and violation of the state’s General Business Law Section 349. A district court judge granted Michaels’ motion to dismiss the suit for lack of standing.

Whalen appealed, asserting three theories of injury to establish Article III standing to pursue her claims: her credit card information was stolen and used twice in attempted fraudulent purchases, she faces a risk of future identity fraud, and she has lost time and money resolving the attempted fraudulent charges and monitoring her credit.

None of her arguments persuaded the court, which unanimously affirmed dismissal in a summary order.

“Whalen does not allege a particularized and concrete injury suffered from the attempted fraudulent purchases … she never was either asked to pay, nor did pay, any fraudulent charge,” the Second Circuit wrote. “And she does not allege how she can plausibly face a threat of future fraud, because her stolen credit card was promptly canceled after the breach and no other personally identifying information—such as her birth date or Social Security number—is alleged to have been stolen.”

As for time and money spent resolving the fraudulent charges and monitoring her credit, “Whalen pleaded no specifics about any time or effort that she herself has spent,” the court said, alleging only that “consumers must expend considerable time” on credit monitoring and that she “and the Class suffered additional damages based on the opportunity cost and value of time that [she] and the Class have been forced to expend to monitor their financial and bank accounts.”

Since Whalen did not seek leave to amend her complaint to add anything more substantial, the panel dismissed the lawsuit.

To read the summary order in Whalen v. Michaels Stores, Inc., click here.

Why it matters: The panel distinguished the “shortcomings” in Whalen’s complaint from other cases that involve vendor data breaches, including class actions against Neiman Marcus and P.F. Chang’s. In both cases, the Seventh Circuit found that in reversing summary judgment in favor of the defendants, the plaintiff’s fear of future harm stemming from the breach was sufficient to establish standing.

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Boundaries of PAGA Discovery: California Supreme Court

What are the boundaries of discovery for plaintiffs in Private Attorneys General Act cases in California state court? The California Supreme Court heard oral argument on the issue recently, one that is of premium importance to employers and employees alike given the increasing popularity of PAGA claims in employment lawsuits. The case involves Michael Williams, a former employee of Marshalls Inc., who brought a representative action under PAGA accusing the retailer of various Labor Code violations. When the employer objected to answering special interrogatories, Williams moved to compel discovery, arguing that the information requested was vital to the prosecution of his PAGA claims. A trial court granted the motion in part and the plaintiff appealed.

An appellate panel affirmed and the plaintiff appealed again to the state’s highest court. While the court appeared sympathetic to the employer’s concerns that a PAGA lawsuit could require burdensome discovery in what could be a meritless case, the court also appeared skeptical about placing limits on what plaintiffs could ask for and about whether the information requested of Marshalls was as difficult to provide as the employer contended.

Detailed discussion

After a little over a year of employment, Michael Williams filed a representative action against Marshalls Inc. under the Private Attorneys General Act (PAGA) alleging his former employer failed to provide its employees with meal and rest breaks or premium pay in lieu thereof, among other violations of the state’s Labor Code.

The plaintiff served special interrogatories seeking production of the names and contact information of all nonexempt Marshalls employees in California who had worked for the company over a roughly two-year period. The employer objected to the discovery on the ground it was irrelevant, overbroad and unduly burdensome, and implicated the privacy rights of its employees.

Williams then moved to compel the discovery, arguing the contact information was routinely discoverable in representative employee actions and vital to the prosecution of his PAGA claims.

The trial court granted the motion in part, compelling Marshalls to produce contact information for the employees at the Costa Mesa store where Williams worked, but denying production of the contact information of employees at the other 128 Marshalls stores statewide. Williams could renew his motion to compel the remaining information after he had been deposed “for at least six productive hours,” the court added, although Marshalls could attempt to show the plaintiff’s substantive claims had no factual merit in its opposition to such a motion.

An appellate panel affirmed the order, ruling that discovery of Marshalls’ employees’ contact information statewide was premature.

“At this nascent stage of plaintiff’s PAGA action there has as yet been no discovery—plaintiff has not even sat for his own deposition,” the court wrote. “The litigation therefore consists solely of the allegations in his complaint. But plaintiff alleges therein only that at the Costa Mesa store, he and perhaps other employees at that store were subject to violations of the Labor Code. Nowhere does he evince any knowledge of the practices of Marshalls at other stores, nor any fact that would lead a reasonable person to believe he knows whether Marshalls has a uniform statewide policy. That being the case, it was eminently reasonable for the trial judge to proceed with discovery in an incremental fashion, first requiring that plaintiff provide some support for his own, local claims and then perhaps later broadening the inquiry to discovery whether some reason exists to suspect Marshalls’ local practices extend statewide.”

The procedure proposed by Williams—“which contemplates jumping into extensive statewide discovery based only on the bare allegations of one local individual having no knowledge of the defendant’s statewide practices”—would be a “classic” use of discovery tools to wage litigation rather than facilitate it, the appellate panel said.

Even standing in as proxy for the Division of Labor Standards Enforcement by filing a PAGA claim did not change the court’s opinion, as “nothing in the PAGA suggests a private plaintiff … is entitled to the same access” as the DLSE. “We think it prudent that absent any express direction from the Legislature to the contrary, discovery in a civil action brought under the PAGA be subject to the same rules as discovery in civil actions generally,” the court wrote.

Employee privacy interests also outweighed the plaintiff’s need for disclosure, the court found. The California Constitution provides that all individuals have a right of privacy, which limits what courts can compel through civil discovery. Applying a balancing test, “we conclude Marshalls’ employees’ privacy interests outweigh plaintiff’s need to discover their identity at this time,” the appellate panel wrote. “Those interests begin with the employees’ right to be free from unwanted attention and perhaps fear of retaliation from an employer. On the other hand, plaintiff’s need for the discovery at this time is practically nonexistent.”

Williams appealed again. At oral argument, the California Supreme Court appeared hesitant to adopt the employer’s position to set a “low bar” for plaintiffs’ attorneys before proceeding with PAGA discovery. While Chief Justice Tani Cantil-Sakauye found the argument “cogent and reasonable,” she did add, “I’m having a hard time finding [it] in the PAGA statute.”

Marshalls told the state’s highest court that it was not seeking a special rule for discovery in PAGA cases, but simply trying to avoid a situation where plaintiffs could file a meritless claim and then seek broad discovery to burden an employer.

Justice Leondra R. Kruger questioned the extent of the burden on Marshalls to provide the information requested by Williams, to which the employer responded, “days and days.”

To read the appellate court opinion in Williams v. Marshalls of CA, click here.

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Vacuum Makers Battle It Out in Lanham Act Case

Considering cross motions for summary judgment, an Illinois federal court found Dyson lacked sufficient evidence to move forward with its entire false advertising suit against competitor SharkNinja.

Dyson alleged that fellow vacuum maker SharkNinja used “false and aggressive advertising” as well as “inadequate and unreliable data” to make claims of superiority over Dyson’s products in print advertisements, short commercials and infomercials. SharkNinja countered that Dyson failed to present sufficient evidence that SharkNinja’s claims were false. Both sides provided independent testing under ASTM F608, which they recognized as the gold standard for testing the ability of vacuums to remove embedded dirt from carpet.

After both parties moved for summary judgment on various elements of their cases, U.S. District Court Judge Joan B. Gottschall attempted to navigate the waters of the dispute.

First, the court denied Dyson’s motion for summary judgment on the merits of its claims that SharkNinja’s advertising was false, rejecting the arguments that ads referencing “independent” tests were false because they were performed by an entity that was not independent of SharkNinja and that claims based on a statement that “tests show x” could be satisfied by showing those tests do prove the proposition.

The testing company used by SharkNinja was not beholden to or controlled by the advertiser simply because SharkNinja paid for its services, the court said. Nor was the court persuaded by Dyson’s reliance upon an email from a testing company employee to SharkNinja, calling the company’s attention to a Dyson ad.

“It is routine customer-relationship management and routine marketing for a service provider to inform a potential customer about a happening which might prompt that potential customer to hire the service provider,” Judge Gottschall wrote.

The court again sided with SharkNinja over Dyson’s challenge to a claim that SharkNinja ads were backed by independent testing, by arguing that another test of the product produced a different result. “The court cannot agree that a claim that ‘tests prove x’ could be literally false when the tests do, in fact, prove x,” the court wrote. “Here, it is undisputed as of December 2014, Shark had valid independent tests that showed its statements … were true. That Dyson conducted other tests that reached a different conclusion does not make Shark’s statements about its tests false.”

Concluding that Dyson had not put forth sufficient evidence from which a reasonable jury could find in its favor, the court granted SharkNinja’s motion for summary judgment as to a specific time period. The order wasn’t a total loss for Dyson, however, as the court also granted summary judgment for the plaintiff on SharkNinja’s affirmative defenses.

To read the memorandum opinion and order in Dyson, Inc. v. SharkNinja Operating LLC, click here.

Why it matters: After a deep dive into the world of vacuum testing, the court issued a mixed decision for the parties, which are currently embroiled in a related suit in Massachusetts federal court. In that case, SharkNinja claims Dyson falsely advertised that its vacuums have “Twice the suction” of other products on the market. The fierce competitors have also battled it out before the National Advertising Division, where the self-regulatory body recommended that SharkNinja discontinue a claim that “Americans now choose Shark 2-to-1 over Dyson.”

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