Meditations On the Consumer Class Action: Statutory Penalties

To know the consumer class action is to fear it. Any online marketer or other retailer that has gone through a class action lawsuit – even if it prevails in the end – no doubt has scars and legal bills to show for it. Because the stakes are so high, even winning a class action case at trial may leave retailers limping and still in great peril. Numerous class actions have settled after the appeal from a defendant’s successful summary judgment motion because, even if the odds of winning on appeal were good, the downside risk of losing was large enough to make the gamble unthinkable.  And the range of potential consumer class action lawsuits often seems overwhelmingly diverse. Is your “sale price” really a “sale price”? Is there enough fruit in your fruit roll-ups? Did you collect customer zip codes in credit card transactions?

While it is impossible for online and direct marketers to insulate themselves fully from an increasingly litigious world, there are rational steps you can take to help prevent your company from becoming "low hanging fruit" for class action lawyers. This is the first in a series of articles on just that subject, and it focuses on state consumer protection, marketing, and privacy laws that have per violation penalties.  The recent Michaels Stores case in Massachusetts involved just such a law.

Honey for Class Action Lawyers.  Among the main weapons for class action plaintiffs’ lawyers are statutes that impose monetary penalties on a per violation basis. A real vulnerability to maintenance of a class action is that, absent a penalty, a determination of damages may require an individual analysis of each plaintiff’s claim – which, as a general matter, is anathema to maintenance of a class action. A statutorily prescribed penalty makes the assessment of damages straightforward once a violation is shown. And so, if you are accused of illegally collecting zip codes on credit card transactions, you take the number of times zip codes were collected and multiply it by the per violation penalty.

Astronomical Numbers.  As an example, if you collected 1,000,000 zip codes from customers over a six year-period (which is often the length of the statute of limitations) you simply multiply 1,000,000 by the maximum potential per violation penalty to determine your worst-case risk. In California, the penalty can be as high as $1,000 per violation, and so the potential exposure is $1,000,000,000. That’s right. One billion dollars. And if you want to gauge accurately your maximum potential liability, add to the $1 billion a third of that number again for plaintiffs’ attorneys fees. And, resign yourself to the fact that absent extraordinary circumstances which almost never occur, there is no hope for a defendant, even an outrageously successful one, to recover its own attorneys’ fees.

Of course, the “maximum” potential exposure may not be realistic. Penalties are often imposed on a sliding scale – for example, in California, they can range from $250 to $1,000 in certain cases. Many, if not most, of these cases also settle, so we do not have compelling public data on how much money actually changes hands. And most settlements are engineered around providing coupons and checks to class members that may or may not be redeemed by the ultimate consumer, ensuring that the only payout certainty will be for the plaintiffs’ attorneys' fees.  Those fees, more likely than not, will be far higher than what you pay hourly-rate outside counsel to defend you.

Focused Compliance.  And, so, an essential element of a strategy to reduce your risk of becoming a class action defendant is to focus like a laser beam on complying with consumer protection/privacy laws with per violation penalty provisions.

How does this help?  While some states, like California, impose penalties in almost every consumer class action case, elsewhere, and at the federal level, the number of laws to be familiar with is more limited and manageable.  One area to be wary about, for example, is telemarketing, with federal laws imposing penalties that can easily exceed $1,000 per violation.  In this area, retailers should retain legal counsel to provide them with clear operating principles under which to engage in telemarketing.  These principles should address both state and federal telemarketing laws, and they should be adopted in internal policies and employee training.  The direct marketer should also make sure that risk is assigned to vendors that provide telemarketing services, with insurance policies to back them up. After all, indemnification from a vendor that goes belly up is obviously worthless. Since vendors often find themselves in hot water for a number of clients simultaneously, even a financially well-heeled vendor could be brought to its knees.

Careful focus and preparation to avoid violation of penalty-laden laws is a good first step in a process of prudently managing consumer class action risk.   But, there are other steps to take, as well, which will be addressed in future posts.

Beyond California and Massachusetts: Will Collecting Zip Codes Invite Class Actions Across the United States?

Although California and Massachusetts have stolen the spotlight with high profile cases banning zip code collection in connection with credit card purchases, thirteen other states and the District of Columbia have similar laws. With voracious class action attorneys circling, it is critical for retailers to know their legal obligations in these jurisdictions and, if necessary, adjust their privacy practices and policies.

Yet, because these statutes are to varying degrees vague, untested, and archaic, compliance can be difficult. At the same time, the risks could scarcely be higher. Hundreds of companies have already been ensnared in consumer class action lawsuits in California and Massachusetts, and the litigation floodgates may now open in other states as well.  And the math is simple. With penalties as high as $1,000 every single time a zip code, address, or telephone number is collected illegally--for periods going back as far as six years--even a relatively small company could face a liability in the millions or tens of millions of dollars.  You're also likely to be required to pay the plaintiffs' legal fees if you lose, which are often as much as one-third of the penalty calculation.

The State Law Landscape.  A general baseline for state statutes governing the collection of personal information during credit card transactions is a prohibition against retailers requiring customers to provide certain information in connection with a credit card transaction.  California and a few other states, including Wisconsin, go further, barring even the requesting of such information.  Other states, like Massachusetts, prohibit the "writing" of such information, usually on "a credit card transaction form" -- although, as the industry learned in Massachusetts, writing doesn't necessarily mean writing (it can mean inputting information electronically) and a "transaction form" might be interpreted to include a marketing database (the Massachusetts court dodged this issue for now).

Not Just Zip Codes.  Seven states appear to limit their prohibitions to customers' addresses and telephone numbers, and not the sweeping concept of "personal identification information" included in the California and Massachusetts statutes.  (In California, for example, "personal identification information" is defined as information not appearing on the face of a credit card, and so it could include not only zip codes, but also a state of residence, a birthday, an email address, or a person's gender.)

But, even in the states that expressly limit their bans to addresses and telephone numbers, the decisions in Massachusetts and California reveal a path by which these statutes might be interpreted to reach the collection of zip codes only.  For example, the Supreme Court of Massachusetts felt free to deem zip codes to be "personal identification information" because "a consumer's zip code, when combined with the consumer's name, provides the merchant with enough information to identify through publicly available databases the consumer's address or telephone number, the very information § 105 (a) expressly identifies as personal identification information."  As a result, the court found that not extending the prohibition to zip codes "would render hollow the statute's explicit prohibition on the collection of customer addresses and telephone numbers, and undermine the statutory purpose of consumer protection." In other words, even if you are not collecting addresses and telephone numbers in these states, you could still be at risk.

Exceptions.  Most of these statutes have exceptions that benefit direct marketers. California, for example, allows retailers to collect zip codes and other "personal identification information" if it "is required for a special purpose incidental but related to the individual credit card transaction, including, but not limited to, information relating to shipping, delivery, servicing, or installation of the purchased merchandise, or for special orders."  In other states, like Massachusetts, the exception is more narrowly drawn, and, in some states, there are no exceptions at all.  And even for those laws which allow address information to be collected for shipping, the exception does not extend to address collection in gift transactions where the billing address and the shipping address are different.

Enforcement.   Of course, one of the biggest issues for direct marketers is the risk of being the subject of a government investigation or a class action lawsuit.  The risk of government enforcement (by a state attorney general, for example) is likely low in all states except in the event of a data breach--which underscores the need for companies to have in place information privacy and security policies that reduce the risks of such a breach.  As importantly, states are unlikely to seek astronomical penalties from retailers, something that is the bread and butter of class action cases.

The risk of a federal or state class action lawsuit--on behalf thousands upon thousands of consumers--is much higher.  These privacy statutes are very attractive to class action lawyers because they often have a "per violation" penalty that can drive potential recoveries into the stratosphere. This, in addition to provisions that allow plaintiffs (but not defendants) to recover attorneys' fees, makes them a very attractive basis for filing a barrage of lawsuits in the hopes that some of them will succeed or, even in failing, provoke lucrative settlements.

In the past, privacy-related class actions have often foundered because the plaintiffs could not demonstrate any "injury."  Many state consumer protection laws, including the one in Massachusetts, require such an injury to allow a suit to go forward.  (Some, like California, Wisconsin, and the District of Columbia, do not require a showing of injury.)  But, we learned from the Michaels case in Massachusetts that courts can stretch the concept of "injury" beyond recognition.  The Supreme Court of Massachusetts found that the "invasion of privacy" caused by the receipt of a just one unwanted catalog was sufficient "injury" to maintain a class action lawsuit.  In Michaels, it was alleged that the retailer used the zip code to obtain customers' mailing addresses, and then sent unsolicited catalogs to those addresses.  That was the extent of the "harm."

The Perils of Zip Code Collection Reach Massachusetts

On March 11, 2013, the Supreme Court of Massachusetts joined California in prohibiting the collection and retention of customer zip codes by retailers in connection with credit card transactions. In Tyler v. Michaels Stores, Inc., the Court based its decision on Massachusetts General Law ch. 93, § 105(a), which provides that retailers cannot “write, cause to be written, or require that a credit card holder write personal identification information not required by the credit card issuer, on the credit card transaction form.”  Like California, the Massachusetts court interpreted "personal identification information" so broadly as to include mere zip codes.

Background.  In 2011, the Supreme Court of California sent shock waves through the retail industry when it ruled in Pineda v. Williams Sonoma Stores, Inc. that zip codes constituted “personal identification information” under California Civil Code § 1747.08 that could not be collected and retained in connection with credit card transactions except in very limited instances. The prohibition against collection of personal identification information applied even if zip codes were requested, but not required, to complete a purchase. As a result of the decision, retailers selling to California consumers have faced costly class action lawsuits (with claims for as much as $1,000 per violation) even if no actual damages or injury could be shown. And while the Supreme Court of California recently held in Apple, Inc. v. Superior Court, that this prohibition did not apply to online transactions involving digitally downloaded products, the Court was careful to state that it was reserving judgment as to whether it applied to “any other transactions that do not involve in-person, face-to-face interaction between the customer and retailer”—explaining that “we express no view on whether the statute governs mail order or telephone order transactions...”

It should be noted that the California prohibition does not apply where address information (including zip codes) is required for “a special purpose incidental but related to the individual credit card transaction, including, but not limited to, information relating to shipping, delivery, servicing, or installation of the purchased merchandise, or for special orders.” Cal. Civ. § 1747.08(c)(4). Thus, in most instances, direct marketers may be outside the scope of California’s prohibition when the address information is required, for example, for shipping. This exclusion, however, may not apply in gift transactions where a product is shipped to a third-party, or where the customer makes arrangements to pick up a product at an in-state location other than his or her home address.   Like California’s law, the statute in Massachusetts defines “personal identification information” broadly, and includes a narrower exception where the information is “necessary for shipping, delivery or installation of purchased merchandise or services or for a warranty when such information is provided voluntarily by a credit card holder.”

The Massachusetts Case.  In reaching its holding, the Supreme Court of Massachusetts concluded that zip codes were “personal identification information” because, when combined with a consumer’s name, they provide “the merchant with enough information to identify through publicly available databases the consumer’s address or telephone number…” And while the Court found that a consumer had to show injury in order to sue based upon a violation of § 105(a), such an injury was not limited to a “loss of money or property.” The court ruled that “actual receipt by a consumer of unwanted marketing materials” constituted an actionable injury, as did “the merchant’s sale of a customer’s personal identification information to a third party.” While the court was not presented with the question of whether the law applied to online or mail order transactions, its expansive interpretation could well reach direct marketers who fall outside § 105(a)’s limited safe harbor.  One question the Massachusetts court did not address: whether the law prohibits the entry of a zip code (or other personal information) into a company database, as opposed to its entry on an electronic credit card transaction form. That nuance may provide a ray of hope for retailers caught up in the class action frenzy this decision is likely to trigger.

Nationwide Risks.  Retailers face risks in other jurisdictions that have statutes similar to those in California and Massachusetts, including Delaware, the District of Columbia, Maryland, Minnesota, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, and Wisconsin. It would be wise to carefully review your information collection rules in these and other states as a first line of defense against class action lawsuits and state enforcement actions.  In combination, the California and Massachusetts decisions are so wide-sweeping as to provide tremendous encouragement to class action lawyers eager to test the reach of laws in other states.