Posts Tagged ‘statutory penalty’

My article for the University of Denver Law Review’s Online Edition entitled Statutory Penalties and Class Actions: Social Justice or Legalized Extortion?  was posted today.  The article discusses potential reforms to address the problem of class actions for statutory penalties giving rise to potentially annihilating liability in cases involving little or no actual harm.  Please check it out.  While you’re there, check out some of the other excellent content on a wide variety of legal topics that the DU Law Review has to offer in its online supplement to its regular print publication.

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One of the hottest substantive areas in consumer class actions these days is litigation under the Telephone Consumer Protection Act (TCPA), 47 U.S .C. § 227, sometimes called the “fax blast” statute, which prohibits unsolicited faxes and automated calls for the purpose of commercial solicitation.  The TCPA has a statutory penalty provision that allows consumers to recover $500 for each violation.  The ability to collect far more in statutory penalties than the actual damages caused by a given violation makes TCPA violations an appealing target for enterprising plaintiffs’ class action lawyers.  The aggregation of thousands of claims together can create huge monetary exposure for defendants and the potential for easy settlements and the large contingent fees that comes with it.  In this way, the TCPA is similar to other laws with statutory penalties, such as the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which provides for statutory penalties against a company that produces credit card receipts with too much information on them.

Although it is a federal statute, the TCPA does not provide for federal court jurisdiction in private actions to enforce it.  TCPA class actions may only be filed in or removed to the federal courts if there is diversity jurisdiction under CAFA

This has naturally given rise to the question of whether state laws limiting class actions, such as § 901(b) of New York’s Civil Practice Law and Rules, which prohibits class actions for claims seeking statutory penalties, are applicable in federal court exercising diversity jurisdiction over TCPA claims.   Before the Supreme Court’s decision in Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., the Second Circuit Court of Appeals said yes.  After the Supreme Court remanded for reconsideration in light of Shady Grove, the Second Circuit said yes again, reasoning that the TCPA’s language allowing private enforcement “if otherwise permitted by the laws or rules of court of a State” gave the states broad power to determine how TCPA actions may be prosecuted within their borders.  The Third Circuit has disagreed with this conclusion, holding that State limitations on class actions do not apply in TCPA class actions filed in the federal courts.  Given the Third Circuit’s view, defendants in at least some jurisdictions may have a strong incentive to oppose federal jurisdiction in TCPA cases.

Another question that arises from the peculiar federalist nature of the TCPA is whether a state or federal statute of limitations applies.  Earlier this week, in Giovanniello v. ALM Media LLC, the Second Circuit answered this question and held that a shorter state law limitations period applied rather than the 4-year federal catchall provision. 

Several recent decisions have highlighted a split among both the state and federal the courts about whether TCPA claims should be permitted to be brought as class actions at all.  Of particular note is the recent decision of the New Jersey Superior Court, Appellate Division in Local Baking Products, Inc. v. Kosher Bagel Munch, Inc., which provides an excellent survey of the various state and federal court decisions on both sides of the issue.  The court in Local Baking Products ultimately decided that class certification of TCPA claims was not appropriate. It reasoned that class actions are not a superior procedure for enforcing the TCPA because Congress had made statutory penalties available so that individuals would be incentivized to pursue vindication of their rights in individual actions in small claims or other state courts.  In addition to lack of superiority, a common reason offered by other courts for rejecting class certification is that the question of whether faxes or calls were authorized is too individualized for common questions to predominate.

Earlier this month, however, the Supreme Court of Kansas upheld a lower court’s decision granting class certification in a TCPA case.  In Critchfield Physical Therapy v. The Taranto Group, Inc., the court rejected both the argument that individual actions in small claims court would be superior to a class action and the argument that the question of consent was too individualized.  In addition, the court rejected the argument that class actions would not be superior in light of the threat that aggregating thousands of individual statutory penalties together could create an “annihilating” judgment against the defendant that would be disproportionate to any harm to the class.  A similar argument had been successful in a FACTA case in California federal court, but later reversed by the Ninth Circuit in Bateman v. American Multi Cinema, Inc.

Meanwhile, while a bill has been introduced in the U.S. house to “modernize” the TCPA by permitting certain informational robo-calls to be made to mobile phones, among other things, the bill would not modify the private enforcement provisions of the statute.

One quandary facing courts and counsel in TCPA class actions is how to give notice to consumers if a class is certified.  Last month, a Madison County, Illinois judge ordered that notice of a class action for unsolicited faxes under the TCPA should be disseminated by. . . 

. . . you guessed it . . .  


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Class Action Watch executive director Lawrence W. Schonbrun has an opinion piece in yesterday’s Huffington Post entitled The Class Action Mess in a Nutshell.  In the article, he questions whether the same “weapons of mass destruction” label that Warren Buffet gave to financial derivatives should apply equally to class action lawsuits.  As an example, he offers a recent lawsuit against a mortgage lender that had to settle a lawsuit for millions rather than face billions in potential liability for statutory penalties under the Fair Credit Reporting Act (FCRA).  The allegation against the company had been that it had sent out a mass solicitation that failed to give a sufficiently “conspicuous” statutorily-required notice about a consumer’s right to prevent certain uses of his or her credit information. 

As noted in this February 14 CAB entry, class actions seeking statutory penalties under FCRA and similar statutes have been a controversial issue over the past few years.  Some say that it is unfair to subject a company (and, by implication its employees and shareholders) to potentially “annihilating” liability for acts that have caused no material injury to the vast majoirty of a class of consumers.  Others say that if class actions are to be prohibited in cases seeking penalties under these statutes, it is up to Congress to say so.

I will leave it up to the reader to decide whether these types of class actions portend an economic nuclear holocaust.

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Over the weekend, John Papianou, class action defense lawyer and Partner at Montgomery, McCracken, Walker & Rhoads, sent me a copy of Long v. Tommy Hilfiger U.S.A. Inc., No. 09-1701 (W.D. Pa., February 11, 2011) (link courtesy of www.justia.com), an interesting decision involving the Fair and Accurate Transactions Act of 2003 (“FACTA”), 15 U.S.C. §§ 1681c(g), 1681n(a)(1)(A).

FACTA contains provisions requiring that account numbers on credit card receipts be truncated to no more than the last five digits and that receipts not display the card’s expiration date.  It is a popular subject of class actions because it provides for statutory penalties for willful violations of its truncation requirements, which potentially alleviates the need to prove individual injury.

FACTA class actions can pose an extreme risk to companies because, when they are aggregated, the per-violation statutory penalties of $100 to $1000 can far outweigh the potential harm caused by the disclosure of credit card information.  Moreover, in the case of smaller companies, the potential liability can dwarf the net worth of the company itself.  The potential for “annihilating” liability has led several courts to hold that class actions are not a superior method of adjudicating actions for statutory penalties under FACTA.  See, e.g., Leysoto v. Mama Mia I, Inc., 255 F.R.D. 693, 697-98 (S.D. Fla. 2009) (link courtesy of Class Action Defense Blog), see also Stillmock v. Weiss Markets, Inc., No. 09-1632 (4th Cir. July 1, 2010) (unpublished) (Wilkinson, J., concurring specially).  However, the Ninth Circuit Court of Appeals recently held that the prospect of liability that is vastly disproportionate to the actual harm suffered by a prospective class was not a sufficient basis to reject class certification on superiority grounds. Bateman v. American Multi-Cinema, Inc., — F.3d — (9th Cir. Sept. 27, 2010), reversing Bateman v. American Multi-Cinema, Inc., 252 F.R.D. 647 (C.D. Cal. 2008) (link courtesy of Class Action Defense Blog).

In Long, the defendant had complied with the five-digit truncation requirement.  It had printed the expiration month, but not the year, on the receipt.  The court interpreted the words “expiration date” as requiring both the month and the year of expiration, and found that the defendant had not been in violation of the prohibition against printing the expiration date on a credit card receipt.  Alternatively, the court held that even if printing the month had been a technical violation, it could not be a wilful violation sufficient to trigger statutory penalties.  In reaching this conclusion, the court followed the reasoning of the Seventh Circuit Court of appeals in Shlahtichman v. 1-800 Contacts, Inc., 615 F. 3d 794 (7th Cir. 2010) (link courtesy of www.findlaw.com) that the standard for assessing whether a wilful violation has occurred is an objective one, whether a reasonable person in the position of the defendant could have believed that it was a violation.  The decision to apply an objective rather than a subjective standard is important, as Papianou pointed out to me, because it renders unnecessary any factual analysis (and discovery) of what the defendant actually believed.

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