Jonathan Kanter nominated as AAG for US DOJ Antitrust Division
President Biden recently nominated Jonathan Kanter to lead the United States Department of Justice's Antitrust Division.
Two recently filed complaints portend the onset of a new wave of class actions in California courts that could affect all companies that sell consumer goods online or by mail order. In these complaints filed by the Pacific Trial Group, the consumers claim that merchants are overcharging them for shipping and delivery charges, and assert that this conduct violates California’s consumer protection laws. Reider v. Electrolux Home Care Prods., Inc., No. 8:17-cv-26 (C.D. Cal.); Reider v. Express, LLC, No. 2:17-cv-556 (C.D. Cal.).
While no law prohibits a merchant from charging a shipping or delivery fee that exceeds its costs, these complaints claim such practices violate California’s Unfair Competition Law (“UCL”) and Consumer Legal Remedy Act (“CLRA”) based on ethical guidelines promulgated by the Direct Marketing Association (“DMA”), which state, “[p]ostage, shipping or handling charges, if any, should bear a reasonable relationship to the actual costs incurred.” Direct Marketing Association Guidelines for Ethical Business Practice 8 (2016).
At a time when California courts are struggling to define the proper test for determining the definition of an “unfair” business practice under the UCL, such claims will test the courts’ broad discretion in adjudicating UCL and CLRA cases. Due to the varying definitions of “unfair” conduct utilized by the courts and the use of unenforceable industry guidelines as standards, the outcomes of these claims may vary significantly from court to court until a published appellate decision directly addresses these issues. Beyond the two complaints filed to date, we are aware of other companies having received pre-suit letters under the CLRA, and expect that there will be many more filings in the coming months, both from the Pacific Trial Group and from other law firms looking to hop on the bandwagon. As we saw over a number of years with Song-Beverly Act litigation addressing collection of ZIP codes and other personal information in connection with credit card transactions, it is likely that retailers will face increased exposure and uncertainty over these new claims for the foreseeable future.
In this briefing, we will look in detail at the basis of the legal claims asserted and identify the issues that are likely to be pivotal as these cases proceed.
The UCL prohibits practices which are unlawful, unfair, or fraudulent. Cal. Bus. & Prof. Code § 17200; Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999). The plaintiffs in these new cases allege that merchants’ excessive delivery charges are “unfair” because they are unethical and violate public policy as recognized by the DMA. Additionally, plaintiffs claim that such practices are fraudulent because they are likely to deceive consumers who expect delivery charges to bear a reasonable relationship to merchants’ costs. The complaints do not assert that the conduct violates the “unlawful” prong of the UCL.
Remedies available under the UCL are limited to injunctive relief and restitution. Cal. Bus. & Prof. Code § 17204; Cel-Tech, 20 Cal. 4th at 179 (“[p]revailing plaintiffs are generally limited to injunctive relief and restitution.”).
California opinions speak expansively of the power of courts under the UCL to “enjoin on-going wrongful business conduct in whatever context such activity might occur.” Barquis v. Merch. Collection Ass’n, 7 Cal. 3d 94, 111 (1972). The California Supreme Court has noted that the California Legislature intentionally made the UCL broad “to enable judicial tribunals to deal with the innumerable new schemes which the fertility of man's invention would contrive.” Cel-Tech, 20 Cal. 4th at 181 (“When a scheme is evolved which on its face violates the fundamental rules of honesty and fair dealing, a court of equity is not impotent to frustrate its consummation because the scheme is an original one”) (Internal quotation marks omitted).
While the scope of the unlawful and fraudulent prongs of the UCL are well known, the same is not true of the unfair prong. While holding that a claim of unfair business practice in competition cases must be “tethered to some legislatively declared policy or proof of some actual or threatened impact on competition,” (Cel-Tech, 20 Cal. 4th at 186-87), the California Supreme Court has not established a definitive test for determining whether a business practice is “unfair” in consumer actions. Into this breach the appellate courts have stepped with three markedly different approaches: (i) the Times Mirror balancing test; (ii) the Casa Blanca public policy test; and (iii) the Federal Trade Commission Act section 5 test.
In Motors, Inc. v. Times Mirror Co., the court weighed the gravity of the harm to the consumer against “the reasons, justifications and motives of the alleged wrongdoer” to determine whether a particular business practice was unfair. 102 Cal. App. 3d 735, 740 (1980); see also South Bay Chevrolet v. Gen. Motors Acceptance Corp., 72 Cal. App. 4th 861, 886 (1999); Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal. App. 4th 700, 718–21 (2001).
Plaintiffs allege that the harm to consumers from excessive shipping and delivery charges renders them unfair because there is no countervailing purpose or benefit to these charges. It seems unlikely that courts will accept these claims, largely because the shipping charges are disclosed to consumers before they make their purchase, and consumers are free to shop elsewhere to obtain lower shipping rates. Thus, where a defendant’s method of calculating interest conformed with industry practice and the plaintiff knew, understood, expected, and accepted this practice, the court found that the practice was not unfair under the UCL. South Bay Chevrolet, 72 Cal. App. 4th at 886.
The court in People v. Casa Blanca Convalescent Homes, Inc., defined an unfair business practice as one that “offends an established public policy or when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” 159 Cal. App. 3d 509, 530 (1984). The California Supreme Court explicitly rejected this test for competitor’s UCL claims in Cel-Tech, because it is “too amorphous and provides too little guidance to courts and businesses.” Cel-Tech, 20 Cal. 4th at 184–85. Based on Cel-Tech, some courts apply the holding to require all UCL claims based on public policy to be tethered to specific constitutional, statutory, or regulatory provisions, Scripps Clinic v. Superior Court, 108 Cal. App. 4th 917, 940 (2003), while other courts reject the notion that “such a restrictive definition of ‘unfair’ should be applied in the case of an alleged consumer injury.” Smith, 93 Cal. App. 4th at 721 n.23 (distinguishing Cel-Tech from consumer actions).
Whether a court will address the UCL unfair claims in the shipping charge cases will depend on the court’s view of the reach of Cel-Tech. Courts adopting the Scripps approach are likely to reject DMA’s Guidelines for determining unfairness because they are not “based on legislatively declared policy.” Id. Instead, the Guidelines merely “reflect DMA’s long-standing policy of high levels of ethics and the responsibility of the Association, its members, and all marketers.” DMA Guidelines at 2. Courts adopting the Smith approach will need to make a determination whether the DMA establishes a “public policy” that is an appropriate basis for imposing liability, and in essence creating legislation based on an ethical guideline by litigation.
Rejecting both the balancing and public policy tests approaches, some courts apply the three factors enumerated in section 5 of the Federal Trade Commission Act (“FTC Act”). Camacho v. Auto. Club of S. Cal., 142 Cal. App. 4th 1394, 1403 (2006). Under this test, “[a]n act or practice is unfair if the consumer injury is substantial, is not outweighed by any countervailing benefits to consumers or to competition, and is not an injury the consumers themselves could reasonably have avoided.” Daugherty v. Am. Honda Motor Co., Inc., 144 Cal. App. 4th 824, 839 (2007).
There are two interrelated issues that immediately come to mind: (i) whether there is any “injury” to consumers (i.e., are the shipping charges injurious where they are disclosed to consumers when they make their purchase), and (ii) whether consumers can easily avoid the injury by comparison shopping shipping goods at different retailers or by simply purchasing goods at a brick-and-mortar location. We would expect a strong argument could be made that shipping charges that are disclosed and agreed to before the transaction is consummated would not violate the Section 5 test.
UCL fraud claims can either be based on objectively “untrue” representations or technically truthful representations presented in ways that are likely to mislead or deceive consumers. Morgan v. AT&T Wireless Svcs., Inc., 177 Cal. App. 4th 1235, 1255 (2009). Courts evaluate the deceptiveness of a business practice “based on the likely effect such [a] practice would have on a reasonable consumer.” McKell, 142 Cal. App. 4th at 1471.
Plaintiffs allege merchants’ shipping and delivery charges are likely to deceive reasonable consumers expecting delivery charges to bear a reasonable relationship to a merchant’s costs of delivery. This reasoning seems strained in light of the fact that consumers view and agree to the charges when making a purchase and merchants charge consumers the exact amount identified. Courts have noted that alleged omissions are not actionable in the context of the CLRA (which is discussed below) unless they are “contrary to a representation actually made by the defendant, or an omission of a fact the defendant was obliged to disclose.” Daugherty, 144 Cal. App. 4th at 835. Since fraud claims under the CLRA are generally treated in the same manner under the UCL, merchants can argue that if they do not make any representations regarding their own shipping costs, the failure to disclose those costs does not render their conduct fraudulent under the UCL.
Unlike the UCL’s broad scope and its limited remedies, the CLRA prohibits several specific types of conduct and offers punitive damages and attorneys’ fees for particular kinds of practices. See Cal. Civ. Code §§1770(a); 1780(a), (e). To be successful, a plaintiff must “show not only was the defendant’s conduct deceptive, but that the deception caused them harm.” Mass. Mut. Life Ins. Co. v. Superior Court, 97 Cal. App. 4th 1282, 1292 (2002); Cal. Civ. Code § 1780(a) (allowing recovery when a consumer “suffers any damage as a result of” the unlawful practice).
Among the prohibited practices enumerated in the CLRA, the recent shipping and delivery complaints assert that merchants: (a) advertise goods with the intent not to sell them as advertised; (b) represent that a transaction confers or involves rights, remedies, or obligations that they do not have or that are prohibited by law; and (c) include an unconscionable provision in the contract.
The CLRA prohibits “[a]dvertising goods or services with intent not to sell them as advertised.” Cal. Civ. Code § 1770(a)(9). Courts construe “advertising” broadly to include product labels and websites. Nagel v. Twin Labs., Inc., 109 Cal. App. 4th 39, 52 (2003) (finding that a website’s product description could constitute misleading advertising).
Plaintiffs claim that merchants’ practices violate § 1770(a)(9) because the merchants “represent that [their] shipping/handling charges have the characteristics that consumers expect, namely, that they are reasonably related to [merchants’] actual costs of shipping.” But this seems to be a highly strained reading of that section. To be sure, if a merchant makes representations regarding the relation of the costs it charges consumers to its own shipping costs, it could be found liable under the CLRA for that representation. Courts may find that merchants charging shipping and delivery fees in excess of actual delivery costs misrepresent a characteristic of that charge. See Ehret v. Uber Techs., Inc.,68 F. Supp. 3d 1121, 1138–39 (N.D. Cal. 2014); Blessing v. Sirius XM Radio Inc., 756 F. Supp. 2d 445, 455 (S.D.N.Y. 2010) (holding that plaintiffs stated a valid claim where defendant represented it was charging a “pass through” royalty fee, but where the actual royalty fee was much less). But where merchants make no such representations it is difficult to see where liability lies under § 1770(a)(9).
To be actionable under subparagraph (14) of the CLRA, plaintiffs must show that the defendant made a false representation of any rights, remedies, or obligations. See Nelson v. Pearson Ford Co., 186 Cal. App. 4th 983, 1023 (2010)(finding that a dealer violated the CLRA by misrepresenting an obligation that was prohibited by law and was relied upon by a buyer).
Plaintiffs claim that merchants’ practices violate this provision of the CLRA because such practices violate “established ethical standards.” On their face, these claims have no merit because they fail to allege that merchants made any representation to uphold specific ethical standards. Even if a merchant made such representations, plaintiffs would still need to prove that they were false. Without more, these misrepresentation claims are likely to be unsuccessful.
The doctrine of unconscionability “is concerned not with ‘a simple old-fashioned bad bargain’ but with terms that are ‘unreasonably favorable to the more powerful party.’” Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109, 1145 (2013) (citations omitted).
In California, contractual terms may be found to be unconscionable when there is an absence of meaningful choice on the part of one of the parties together with contract terms that unreasonably favor the other party. A&M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982). “The procedural element focuses on two factors: ‘oppression’ and ‘surprise.’ ‘Oppression’ arises from an inequality of bargaining power which results in no real negotiations and ‘an absence of meaningful choice.’ ‘Surprise’ involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms.” Id. However, “the mere fact that a contract term is not read or understood by the non-drafting party or that the drafting party occupies a superior bargaining position will not authorize a court to refuse to enforce the contract.” Id. The un-bargained for terms will only be denied enforcement where they are also substantively unreasonable—which “turns not only on a ‘one-sided’ result, but also on an absence of ‘justification’ for it.” Id. at 487.
The complaints assert that proportionally high shipping and delivery charges are unconscionable because consumers cannot negotiate, and may only accept or reject the charge for the product, resulting in terms that are unreasonably favorable to merchants. Merchants will argue that the shipping charges are not procedurally unconscionable: consumers are not oppressed into agreeing to them, because they can purchase goods elsewhere (see Dean Witter Reynolds, Inc. v. Superior Court,211 Cal. App. 3d 758, 771–72 (1989) (finding no unconscionability because a competing financial institution was available)), and they are certainly not surprised by them, as they are disclosed during the transaction. Thus, regardless of whether the charges are substantively unreasonable in light of the costs to the merchants, the absence of oppression and surprise are likely to make these claims of unconscionability untenable.
Moreover, the bald assertion in the complaints that the charges are unconscionable because they exceed the merchants’ costs or some undefined consumer expectation is likely insufficient to establish substantive unconscionability. See Perdue v. Crocker Nat’l Bank, 38 Cal. 3d 913, 926 (1985) (a mere allegation that the price charged for a good or service exceeds the cost or fair value is insufficient to establish substantive unconscionability).
Virtually any merchant selling goods online or by mail order is vulnerable to a claim that its shipping and handling charges are excessive under the theories advanced in the Electrolux and Express complaints. Given the frenzy of class actions that were filed after the California Supreme Court’s holding in 2011 that ZIP codes were personal identification information under the Song-Beverly Act, we expect a similar reaction by the plaintiff’s bar to the issues identified in these complaints, at least unless and until courts issue rulings denying these claims. We expect some retailers to vigorously contest these claims through motions to dismiss in federal court and demurrers in state court, and it seems likely that a precedential opinion will be issued in the foreseeable future. Until that time, however, retailers should evaluate their practices and exposure to these types of cases.
President Biden recently nominated Jonathan Kanter to lead the United States Department of Justice's Antitrust Division.
The US Department of Labor reminded employees that employers cannot retaliate against them for lodging purported "whistleblower" complaints.
© Norton Rose Fulbright LLP 2021