Articles Posted in Consumer Fraud/Consumer Protection

While this blog frequently discusses issues regarding consumer rights in the event the consumers purchase a faulty product, it is equally important for companies to provide their consumers with full disclosure regarding their return policies. This is the issue at hand in a class action lawsuit against Toys “R” Us for allegedly failing to provide customers with full refunds on items purchased with promotional gift cards or discounts.

Allegedly, Toys “R” Us customers who purchased items from the store that offered free gift cards, buy-one-get-one-50-percent-off discounts or other benefits received less money than the full purchase price when they went to return the items.

Laura Maybaum, the lead plaintiff in the case, purchased $75 worth of Toys “R” Us products and received a $10 gift card. When she later returned one of the toys, the toy company allegedly refused to pay the full purchase price.

Under California law, retailers must give no less than full cash or credit refunds unless a more restrictive policy has been announced.

A California judge has recently approved a $1.1 million settlement in the case. Under the settlement, Class Members will receive a voucher for $10 off a purchase of $50 or more. The toy company has also agreed to provide more disclosure of its return policy for merchandise bought as part of a promotion. One of the ways they intend to do this is by putting the disclosure on point-of-sale displays.

Class Members include all California consumers who purchased toys from Toys “R” Us since January 1, 2008 that qualified for a promotion and then returned one or more items.

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As consumers become increasingly health-conscious, we see more lawsuits against food manufacturers who label their products as “natural” when, in fact, they may have highly processed ingredients. Such is the case in a lawsuit currently facing the Northern District of California. Two consumers, Lauren Ries and Serena Algozer have filed a class action on behalf of all similarly situated consumers against AriZona iced tea. They argue that the “natural” label on the beverages is deceptive, because they allegedly contain high fructose corn syrup and citric acid.

Ms. Ries claims she purchased an “All Natural Green Tea” at a gas station because she was thirsty and was looking for an option which would be healthier than soda. Ms. Algozer says she purchased several AriZona iced teas over the years, but neither plaintiff remembers the prices, nor do they have receipts.

Ms. Ries and Ms. Algozer filed for a class action under the Federal Rule of Civil Procedure 23(b)(2). This Rule is a little more lenient than Rule 23(b)(3), under which the commonality hurdle would have been much higher. As it is, potential class members only need to satisfy “minimal commonality” in order to qualify.

While this works in favor of the plaintiffs towards attaining class certification, it prevents them from collecting any monetary damages. The lawsuit was filed seeking an injunction against using the word “natural” on the product’s packaging, as well as restitution for their purchases of the mislabeled iced tea. However, the same “minimal commonality” requirements which allow this class to gain certification also prevent the class from claiming any monetary damages. Therefore, Judge Seeborg of the Northern District of California has partially certified the class for an injunction, but refused to certify the class to seek restitution for their purchases.

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The Seventh Circuit Federal Court of appeals in a succinct and simply worded opinion by Judge Posner blew much needed fresh air into class action litigation by approving certification of class actions against Sears for front loading washing machines which are allegedly prone to mold or which had an allegedly defective controller. Judge Posner correctly concluded that machines with these type of uniform alleged defects are worth less than machines in correct working order and that consumers are therefore entitled to pursue refunds or other compensation for their alleged damages. Judge Posner correctly noted that class actions make sense to rectify consumer rights involving mass product defects which are essentially uniform but the damage recoveries to individual consumers would be too small to justify litigation. He made short shrift of the parade of claimed individual issues that defendants always claim exist to defeat class certification.

The class action suits which Posner considered involved alleged defects in Kenmore-brand Sears’ washing machines sold in periods beginning in 2001 and 2004. One asserted a defect that causes mold; the other asserted a defect that stops the machine inopportunely. The district court denied certification of the class complaining of mold and granted certification of the class complaining of sudden stoppage. The Seventh Circuit affirmed certification of the stoppage claims and reversed denial of certification for the mold claims. Rule 23(b)(3) conditions maintenance of a class action on a finding “that the questions of fact or law common to class members predominate over any questions affecting only individual members.” The basic question in the litigation is: were the machines defective in permitting mold to accumulate and generate noxious odors? The question is common to the entire mold class, although the answer may vary with the differences in design. The individual questions are the amount of damages owed particular class members. It is more efficient for the question whether the washing machines were defective to be resolved in a single proceeding than for it to be litigated separately in hundreds of different trials.

You can read the full opinion here.

This opinion should swing the pendulum towards the middle again and end trial courts from reflexively finding hypothetical individual issues to destroy the chances of cases that truly justify class action treatment from proceeding which has been occurring all too frequently in recent years. It should breathe new life into class actions which can help protect consumers from mass wrongdoing where the damages are too small to justify individual consumer lawsuits. Without the threat of class actions, business entities have far less incentive to correct mass product defects if a cost benefit analysis would make it easier for them to ignore resolving the issues in a fair manner. However, the Supreme Court’s recent decision to allow businesses, including disreputable ones, to force consumer to sign arbitration agreements eliminating consumer rights to bring class actions allows for an escape hatch from this decision which will continue to harm consumer rights unless Congress acts to prevent forced arbitration of consumer claims. Such congressional action is very unlikely.

Forced arbitration precludes class actions and also forces consumers to arbitrate their individual cases outside of court sometimes in front of rigged or biased arbitration outfits that retain unqualified arbitrators and favor their repeat business customers. While JAMS and American Arbitration Association (“AAA”) are extremely reputable arbitration organizations that provide forums, which in our opinion can be equal or superior to courts, our firm is now seeing sleazy businesses such as used car dealers forcing consumers to arbitrate claims in front of unfair business oriented arbitration organizations that provide kangaroo courts where consumers rights are trampled on and the business firms that pay these organizations are rewarded with unfair and favorable verdicts in cases where the evidence of misconduct is clear cut. Lawyers will avoid taking cases when these incompetent and pro-business arbitration organizations are selected in adhesion contracts created by used car dealers and other disreputable businesses. Without lawyers to represent them, consumers will not only have lost the protection of the court system but they will not be able to retain counsel to even bring their cases. Legislatures need to act to police these private court systems run by disreputable and biased organizations and to ensure that arbitration organizations that hear consumer claims are all legitimate outfits like the AAA and JAMS.

Since so many businesses are forcing consumers to opt out of class actions and to arbitrate claims on an individual basis, the full benefit of Judge Posner’s efficiency analysis for allowing class actions to proceed will unfortunately be lost. Our state and federal legislative bodies need to act to reopen the courthouse doors for vindicating consumer rights by ending mandatory arbitration in consumer contracts or at least to create government oversight bodies to drive out disreputable arbitration outfits that businesses are using to deny consumer rights. The government regulates lawyers and judges, but these disreputable and incompetent arbitration organizations lack the same regulation, which oftentimes means unjust results for consumers.

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“Location, location, location” isn’t just a mantra for real estate agents and house hunters. When it comes to litigation, venue is an important issue to consider for both plaintiffs and defendants alike. In Westwood Apex v. Contreras, the Court of Appeal for the Ninth Circuit explains an important federal law bearing on venue and, in particular, a class action defendant’s ability to change it.

Westwood Apex, a subsidiary of the for-profit higher-education institution Westwood College (Westwood) which operates campuses in 14 states including California, filed a breach of contract action against Jesus Contreras in state court, seeking to recover roughly $20,000 in unpaid student loan debt. In response, Contreras filed a class action counterclaim on behalf of all current and former Westwood students against the school as well as a number of affiliated entities alleging fraud as well as unfair and deceptive business practices in violation of various California consumer protection laws.

All of the counterclaim defendants except Westwood filed a notice of removal, transferring the action to a federal court, the District Court for the Central District of California. The Defendants asserted that removal was appropriate under a federal law called the Class Action Fairness Act (CAFA). The law grants federal courts jurisdiction over class action lawsuits where the amount in controversy exceeds $5 million and the opposing parties are minimally diverse (at least one plaintiff must live in a different state than one defendant).

After issuing an order to show cause as to why the case should not be removed, the District Court remanded the case back to the state court, ruling that CAFA does not permit a counterclaim defendant to remove an action to federal court. On appeal, the Ninth Circuit upheld this decision and the underlying reasoning.

Enacted in 2005, CAFA – codified at 28 U.S.C. § 1453 – was intended to fight perceived abuses (so-called “junk lawsuits”) in the class action litigation process. Although the statute allows “any defendant” to remove a qualifying class action, the Court held that it does not extend the removal power to counterclaim defendants. “[A] counterclaim defendant who is also a plaintiff to the original state action may not remove the case to federal court,” the Court ruled, citing the Supreme Court’s 1941 decision in Shamrock Oil & Gas Corporation v. Sheets as well as the Ninth Circuit’s more recent opinion in Progressive West v. Preciado (2007). As a result, the Court upheld the District Court’s ruling, leaving the action in state court.

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