Retailers That Ask For Customers’ Zip Codes During Credit Card Transactions Do Not Violate Consumer Protection Statute

Case: Pineda v. Williams-Sonoma Stores, Inc., Cal. Court of Appeal, Fourth District, Division One, No. D054355 (Oct. 23, 2009)

The One Sentence Summary:
A retailer did not violate the Song-Beverly Credit Card Act of 1971 (Cal. Civ. Code § 1747 et. seq.), nor did it invade its customer’s privacy, when it asked a customer who used a credit card for her zip code, where the zip code was later used to conduct a reverse database search for her address.

What They Were Fighting About:
Plaintiff Jessica Pineda purchased an item with her credit card at a Williams-Sonoma Store in California. The cashier asked for her zip code without informing her what would happen if she declined. Thinking that the information was required, Pineda provided her zip code. The store used this information in a computer program to conduct reverse searches of databases and acquired her address, which it then maintained in its own database.

Pineda filed a putative class action alleging, among other things, a violation of the Song-Beverly Credit Card Act of 1971 (Cal. Civ. Code § 1747 et. seq.). This Act prohibits businesses that accept credit cards from requesting and recording “personal identification information” about the card holder, including the card holder’s address and telephone number. Pineda also claimed that her privacy was invaded when the store requested and recorded her zip code, used this information to obtain her address, and used her address for its own profit.

Court Holdings:
The Court of Appeal affirmed the trial court’s order sustaining Williams-Sonoma’s demurrer and held:

• Relying on Party City Corp. v. Superior Court, 169 Cal. App. 4th 497 (2008), the court held that the Song-Beverly Credit Card Act does not prohibit retailers from asking consumers for their zip codes. The Party City Court reasoned that an “address and telephone number” were specific to an individual, whereas a zip code was a group identifier not prohibited under the Act.
• Using a legally-obtained zip code to acquire and use an address that is public is not “a serious invasion of privacy,” which is a necessary element of a privacy claim. Pineda failed to allege facts showing that her home address was not otherwise publicly available or that she undertook efforts to keep it private.
  
  

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Tuna "Toxic Warning" Update: California Supreme Court Denies Companies' Request to Depublish Narrow Exemption Ruling

Case: People v. Tri-Union Seafoods, LLC et al., Supreme Court of California, No. S172898 (06/24/09)

Summary: The California Supreme Court on June 24, 2009, denied the requests made by industry trade groups, supported by the tuna canning companies, to "depublish" all or part of the March 2009 lower appeals court decision that narrowed their win at the trial court level (that canned tuna, while containing methyl mercury, is exempt from the state's toxic warning law, Proposition 65).


The Controversy:
Although the California Court of Appeal, in March 2009, upheld the decision by the trial judge that canned tuna was exempt from the toxic warning or labeling requirements of California's "Safe Drinking Water and Toxic Enforcement Act of 1986," commonly called Proposition 65, the ruling was limited to the narrow grounds that in the face of conflicting expert opinion, the trial judge had enough evidence on the question of whether the mercury was man-made or naturally occurring. The Court of Appeals declined to rule on the issue of federal preemption or the issue of the threshold toxicity level. The tuna companies supported the petitions of certain trade associations to the California Supreme Court to depublish the opinion (or at least part of it), and thereby eliminate the opinion as precedent, on grounds that part of the published opinion could encourage more litigation.

The parties who requested or supported depublication included Tri-Union Seafoods, Del Monte Corporation, Bumble Bee Seafoods, LLC, the California Retailers Association, the Grocery Manufacturers Association, the American Herbal Products Association, and the California Grocers Association. The request was opposed by the California Attorney General.

Another Proposition 65 case, dealing with whether warnings about mercury are required for fresh fish, is currently pending at the trial court level.

For more information about the March 2009 canned tuna decision, see the earlier Post [here].

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Tuna Exempt From "Toxic Warning" Labels Under California's Proposition 65

Court narrowly upholds trial court ruling favoring tuna canners, finding that mercury in ocean fish is naturally occurring, not from manmade sources.

Case: People v. Tri-Union Seafoods, LLC et al., Cal. Court of Appeal, First District No. A116792 (3/11/09)

The One Sentence Summary: Retailers need not monitor canned tuna for health warnings, at least for the time being, based on today’s court ruling that mercury in tuna is “naturally occurring,” and thus exempt from California’s Proposition 65.


What They Were Fighting About: Even though all canned tuna distributed in California has traces of methylmercury, a known toxic substance that can cause birth defects, the Court of Appeal affirmed the trial court’s judgment favoring the tuna canning companies in their litigation to block the State of California from requiring that health warnings be given to consumers. “We affirm the judgment on the narrow ground that substantial evidence supports the trial court’s finding that methylmercury in tuna is naturally occurring, thereby removing the Tuna Companies from the reach of Proposition 65.” (Slip Opinion at 2.)

California’s Proposition 65 law (Safe Drinking Water and Toxic Enforcement Act of 1986, CA Health & Saf. Code § 25249.5 et seq.) requires companies, including retailers and manufacturers of consumer goods, to give warnings if products expose consumers to cancer-causing substances or reproductive toxins. Methylmercury has been listed as one of the substances that can trigger such warnings. Commonly seen consumer warnings, on product labels or on signs retailers must post, typically read: “This product contains a chemical known to the State of California to cause cancer and birth defects.”

Court Holdings:

• The court discussed at length the evidence in the lower court on whether methylmercury in the oceans results from human activities. Noting that there were conflicting expert opinions, the court concluded that the lower court's ruling was based on substantial evidence that the methylmercury present in tuna is not from manmade sources. As such, the chemical, even if present in canned tuna, is exempt from the warning requirement.

• The appellate court specifically narrowed its holding to address only one of the arguments made by the tuna companies in support of their position that warnings are not required under Proposition 65. The court did not affirm on the other two grounds relied upon by the trial court. These were (1) that federal law preempted the application of state law to the tuna companies, and (2) that the amount of mercury in canned tuna did not meet the threshold level triggering the warning requirement. The decision accordingly does not provide guidance in other Proposition 65 situations where these defenses may be at issue.

• The court emphasized the narrowness of its decision. In addition to expressing the limitations on the grounds for upholding the lower court’s judgment, the court also stated that “there are potential scenarios that could possibly lead to a renewed Proposition 65 claim against the Tuna Companies or similar companies that would survive res judicata and collateral estoppel challenges.” Ongoing scientific research on sources of methylmercury might also result in a renewed basis for claims against the companies.

The prosecution was led by the Office of the California Attorney General, after an earlier case had been filed by a nonprofit environmental organization, the Public Media Center. The respondent companies were Tri-Union Seafoods, LLC; Del Monte Corporation; and Bumble Bee Seafoods, LLC.

Given the prominence of the litigation, and the State’s ongoing regulatory effort around applying health warning laws to food, the likelihood that the State will take an appeal is high.

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Toxics in Food: California Rulemaking Process Pushes for Warnings by Retailers

The Summary:
Who is mainly responsible for providing warnings - retailers or manufacturers – if food products expose consumers to chemicals listed as toxic under California’s Proposition 65? Grocers, members of the public, and California regulators will be discussing this topic and the proposal for new rules on the methods and content of warnings for food products in a conference call on March 14, 2009.


Under California’s Proposition 65 (Safe Drinking Water and Toxic Enforcement Act), state regulators have initiated a project to investigate amending the regulations that require warnings to be given to consumers when there are exposures from food to chemicals listed by the state as causing cancer or birth defects.

An informal conference call, set for March 14, 2009, is the latest step in a rulemaking process begun over a year ago by the Office of Environmental Health Hazard Assessment (OEHHA). The agency announcement is here.

In stakeholder meetings and public workshops, various groups have offered suggestions for improvements in the food warning rules. For consumer products, including food, existing regulations under Proposition 65 place the initial responsibility of labeling products on the manufacturer. The thinking goes: Manufacturers are in the better position to know the ingredients in their products, and it is efficient for them to put labels on products if needed. (“To the extent practicable, warning materials such as signs, notices, menu stickers, or labels shall be provided by the manufacturer, producer, or packager of the consumer product, rather than by the retail seller.”) However, other businesses in the supply chain besides manufacturers have not been immune from enforcement actions where the claim is failure to warn. Retailers in particular have been targeted by private enforcers.

Retailers, who directly interface with consumers, have noted that adopting regulations for a fair and flexible “safe harbor” warning method will provide an efficient way for retailers fulfill their legal obligations. However, an association of private party enforcement groups and law firms has objected to one such “safe harbor” regulation because they think it would go too far to insulate retailers from Prop. 65 liability.

Sorting out these various interests while coming up with food warnings consistent with Proposition 65, all within in the context of difficult times for the economy, is the challenge OEHHA faces. We will be monitoring developments.

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New California Plywood/Particle Board Rule Impacts Retailers

Furniture Banned to Curb Formaldehyde Emissions

The Summary: Starting in 2009, retailers in California face unannounced visits by inspectors from the California Air Resources Board (CARB) looking for banned and unlabeled merchandise made from composite wood. Retailers, fabricators, and manufacturers of new furniture (and other goods) made from certain composite wood products are prohibited from selling such goods in the state, unless they comply with a new CARB rule limiting formaldehyde emissions.

Retailers must comply with recordkeeping requirements immediately. Retailers have 18 months (to June 30, 2010) to sell through existing inventories of non-CARB-compliant goods. Under the new rule, unlabeled, noncompliant goods cannot be sold in California beginning on July 1, 2010.

According to CARB’s January 2009 Advisory, “Retailers do not have any additional labeling requirements under the ATCM. Existing labels should not be removed from a composite wood product or finished good.” http://www.arb.ca.gov/toxics/compwood/outreach/labelingadv.pdf
However, the Advisory goes on to clarify that retailers may replace an original label with a label listing their own company name, provided "all of the other original required label information is retained on the new label."

Background on the Regulation

CARB approved a new Air Toxics Control Measure (ATCM) to reduce formaldehyde emissions from composite wood products in April, 2007. The rule applies to panel manufacturers, distributors, importers, fabricators and retailers of certain composite wood panels, and finished goods containing those products, that are sold or supplied in California. The products subject to the rule are hardwood plywood, particle board, and medium density fiberboard. The text of the rule is available at 17 California Code of Regulation, sections 93120 – 93120.12 or here:
http://www.arb.ca.gov/regact/2007/compwood07/fro-final.pdf

(Formaldehyde is used in the production of wood binding adhesives and resins. It has been classified as a cancer-causing agent in humans. In 1992, formaldehyde was designated a toxic air contaminant with no safe level of exposure.)

The rule establishes two phases for reducing formaldehyde emissions. Phase 1 takes effect on January 1, 2009. Phase 2, with more stringent emission levels, begins in January 2010. CARB has estimated the cost to the affected industries of implementing the rule at $19 million for Phase 1, and $127 million for Phase 2. Industry groups have countered that these estimates are too low. The rule has been estimated to increase the per-panel retail price of composite wood products by $3.00 to $6.00 over current prices.

Retailers should know that CARB inspectors policing stores for compliance with the new rule will look for labeling on finished goods, such as tables, cabinets, bookcases and shelving, countertops, flooring, and moldings. Labels must show that any components that are hardwood plywood, particle board, or medium density fiber board have been certified by qualified third parties as compliant with the emissions standards. Labels may also be affixed to boxes, packaging, or other goods containers. The labels should be supplied by the manufacturer or fabricator, unless a retailer has made alternative arrangements for having its own labels.

Recordkeeping Requirements for Retailers

Retailers can be required to show records indicating the source of their stock, indicating the name of the manufacturer and the date of manufacture. Records must be maintained for a minimum of two years, in both hard copy and electronic form. Retailers are not, however, required to conduct product testing. Manufacturers of composite wood panels, and manufacturers of furniture and other products using composite wood covered by the new rule, have the burden of obtaining third-party certification. Online and catalog sellers of wood products delivered into California are also subject to the new rule. Civil penalties may be assessed for noncompliance. The fines can range from $1,000 to $10,000 per day for violations.

In informational workshops about the new rule, CARB has recommended that retailers insist that their suppliers provide CARB-compliant goods. Retailers can demonstrate their good faith efforts to comply with the new rule by having explicit written agreements with their suppliers.

According to CARB staff, the rule does not apply to antiques and used furniture.

Variance Procedure

CARB acknowledges that it has a procedure for issuing variances. Retailers who may want to explore obtaining a variance should contact their legal advisor. Some groups affected by the rule have sought to extend the compliance deadlines, expressing concerns about a number of problems they anticipate in implementing the rule. To date, CARB has expressed the view that delaying implementation is not warranted because progress is being made in qualifying the third-party compliance certifiers and because it has conducted outreach efforts with industry groups.

Other Regulatory and Enforcement Actions for Formaldehyde

Efforts have also been made to expand to the national level the California rule limiting formaldehyde emissions in composite wood products. For example, the U.S. Environmental Protection Agency in 2008 considered a petition to adopt the California ATCM under the federal Toxic Substances Control Act (TSCA) and to extend the scope of the regulation to manufactured housing. EPA rejected adopting the ATCM, but indicated that it would further study both cancer and non-cancer health risk concerns associated with formaldehyde in composite wood products. See http://www.epa.gov/fedrgstr/EPA-TOX/2008/June/Day-27/t14618.htm

Retailers have also been targeted with Notices of Violation under California’s Proposition 65 based on allegations that certain furniture, including baby cribs, release formaldehyde from composite wood components.

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Class Action for Deceptive Advertising Was Improper Where Individual Buying Decisions Would Need Proof

Case: Thorogood v. Sears, Roebuck & Co., Seventh Cir. No. 08-1590 (10/28/08)

The One Sentence Summary: Class action certification was reversed because allegations of deceptive advertising in the sale of Sears Kenmore washing machines with stainless steel drums would require individual determinations of whether buyers were deceived, and deception was unlikely where advertisements did not indicate that stainless steel drums prevented rust stains on clothes.


What They Were Fighting About: The district court had jurisdiction over the class action under the Class Action Fairness Act, 28 U.S.C. §§ 1332(d), 1453, 1711-1715. The district court granted the motion to certify the class, and defendant appealed.

Seventh Circuit Holdings:

• The panel explained that the advantage of class actions in enabling the litigation of small claims comes with many downsides.
  
• One downside of class action litigation is conflict between the class members who have small economic interests in the litigation, and class counsel who may receive large fees.
• Class actions also create huge risks for companies because many individual cases are consolidated before a single court that may err in the outcome. Thus, even claims of little merit may be settled to avoid risk.
• Judge Posner's opinion further opined that class actions tend to undermine federalism because a single jury must try to apply an amalgamated law from many states.
• This class should not have been certified by the district court because there was no evidence that anyone other than the named plaintiff was deceived into believing that a stainless steel washer drum would prevent rust stains on clothes.
  
  

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Compliance With State Regulations Provides Protection Against Consumer Claim

Case: Yabsley v. Cingular Wireless, LLC, Case No. B198827 (Cal. Ct. App. 8/18/2008)

The One Sentence Summary: California Court of Appeal holds that compliance with California Regulations relating to retailer’s tax obligations provides safe harbor against claims by consumer for unfair business practices and false advertising under Business and Professions Code sections 17200 and 17500.


What They Were Fighting About: Defendant Cingular Wireless provided a half price discount for the purchase of a cellular phone if the customer also enrolled in a calling plan package. California Regulation 1585 requires that the sales tax be computed based on the full price of the phone, and the seller can pass on the full tax to the customer if it chooses. Plaintiff alleged that when he purchased a phone and calling plan package from Cingular, Cingular calculated Plaintiff’s tax based on the full price of the phone without informing him that it was doing so. Plaintiff brought a putative class action against Cingular for unfair business practices in violation of California Business and Professions Code section 17200 and misleading advertising in violation of California Business and Professions Code section 17500 arising out Cingular’s failure to disclose the sales tax charged.

Court Holdings:

• Although California law prohibits “any unlawful, unfair or fraudulent business act or practice,” it does not apply where specific legislation provides a “safe harbor” for the conduct at issue.
• “California Regulation 1585 has the ‘force and effect’ and the ‘dignity’ of a statute. Therefore, it may, and does, provide a safe harbor to Cingular.”
• No law required Cingular to disclose the amount of the sales tax charged on a sale prior to the sale. Cingular’s disclosure of the amount of the sale tax in the sale invoice was in compliance with the law because Plaintiff had a right to refuse to enter into the contract after seeing the invoice.
  
  

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New Fast-Food Restaurants Blocked for a Year in Los Angeles Low-Income Neighborhoods

The One Sentence Summary: An ordinance banning new fast-food establishments for a one-year period has been approved unanimously by the Los Angeles City Council for certain areas in South Los Angeles.


Full Posting:

The moratorium on issuance of building permits for new stand-alone restaurant projects affects a 32-square-mile area in South Los Angeles, including Southeast Los Angeles, West Adams, Baldwin Hills and the Leimert Park community planning areas. The Director of City Planning has discretion to approve a project permit upon the demonstration of a number of factors including size of the project, parking availability, litter control, and absence of a “Drive-through Window”.

Proponents of the measure, Council members Jan Perry and Bernard Parks, hope to use the time to encourage new development, including grocery stores and sit-down restaurants, in their districts. They expressed the hope of encouraging more healthy food alternatives in the area. The measure can be extended for as much as an additional 12 months if the two 6-month extension options are triggered.

“Fast Food Restaurant” is defined in the draft “Interim Control Ordinance” submitted to the City Council as “Any establishment which dispenses food for consumption on or off the premises, and which has the following characteristics: a limited menu, items prepared in advance or prepared or heated quickly, no table orders, and food served in disposable wrapping or containers.” ICO 07-1658.

This updates the earlier blog entry
http://www.retaillawobserver.com/2007/12/proposed-ban-on-fast-food-restaurants.html

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Foil Balloons May Be Subject to Point-of-Sale Warnings in California

The One Sentence Summary: If legislation proposed by California Senator Jack Scott (D-Pasadena) is enacted, California retailers selling helium-filled foil balloons can no longer use toys or candy as balloon weights, and stores must post information (or use some other means) to warn customers about power outages that can be caused by errant mylar balloons coming in contact with electrical power lines.


Full Posting:

Before it was amended in mid-July, the latest California bill (SB 1499) to seek to regulate helium-filled metallic foil balloons would have completely banned the balloons, and would have subjected violators to increased criminal fines. Now the proposed legislation, if it is approved by both houses of the California Legislature and signed by Governor Schwarzenegger, no longer outlaws the balloons, but puts a greater burden on retailers to educate the public about the dangers runaway balloons can pose for electrical utility lines.

A copy of the legislation, in its current form, can be viewed here: http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_1451-1500/sb_1499_bill_20080715_amended_asm_v96.pdf

Under the proposed law, with the new amendments, retailers would have to notify customers by posting signs at cash registers, or giving a notice directly to buyers, informing them about the California Balloon Law. In addition, when retailers supply weights for helium-filled foil balloon, which is already required by current law (California Penal Code section 653.1(a)(1)), the proposed legislation would prohibit using a child’s toy or candy as the weight.

If enacted, the new balloon law would also impose requirements on distributors to educate retailers about the law, and to supply retailers with information about the law in shipments of balloons to California buyers. Manufacturers would be called on to increase the size of the warning on their goods, and the industry would be called on to pay for a study by the University of California to find alternative balloon materials that are less electrically conductive.

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California Seeks to Expand Regulation of Sale of Products With Toxics, Require Take-Back Programs

The One Sentence Summary: A bill now advancing through the California Legislature would significantly expand state regulation of consumer goods to cover all products with certain toxic chemicals, including lead, plasticizers, and “hex chrome,” and would require manufacturers to take back tainted goods for recycling or disposal.


Full Posting:

Proposed legislation (A.B. 1879) would delegate authority to the California Department of Toxic Substances Control (“DTSC”), a branch of CalEPA, to enforce consumer protection laws limiting the content of lead, mercury, cadmium, arsenic, PBDEs, phthalates, and hexavalent chromium. This legislation would expand the relatively new enforcement authority of DTSC to regulate toxic chemicals in children’s products and metallic jewelry.

In addition, the new law, if passed by the full Legislature and signed by Governor Schwarzenegger, would delegate authority to DTSC to require manufacturers to have programs to take back products for recycling or disposal. Such programs being tried by retailers of appliances and consumer electronics could be models. Warning labels on products could also be required by the law. Implementation of the law would have to conform with applicable federal laws and regulations. Violation of the law could be prosecuted criminally.

A.B. 1879 has passed the state Assembly, and was amended in mid-June by the state Senate. A copy of the current version of A.B. 1879 can be obtained here:
http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_1851-1900/ab_1879_bill_20080617_amended_sen_v96.pdf

As part of its “Green Chemistry” program, CalEPA is including consumer products in its regulatory efforts. Up until two years ago, DTSC focused its efforts on hazardous waste permitting and cleanup. With the adoption of laws in 2006 limiting lead in children’s jewelry and other metallic costume jewelry, and regulating certain toxics in packaging materials, including bags used by retailers, DTSC’s enforcement role has steadily expanded.

Other legislation to ban or limit chemicals in goods sold in the state is also pending. Such bills target bisphenol A and lead in children’s products (S.B. 1713), halogenated flame retardants in consumer products (A.B. 706), and PVC in packaging (A.B. 2502). Another proposed law would have manufacturers list the substances in their consumer products (S.B. 509).

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Statute Prohibiting Retailers from Requesting Personal Identification Information for Credit Card Purchases Does Not Apply to Merchandise Returns

Case: Absher v. AutoZone, Inc., Case No. B202773 (Cal. Ct. App. 6/26/08)

The One Sentence Summary: California Court of Appeal held that a consumer protection statute (Civil Code section 1747.08(a)) that prohibits retailers from requesting or requiring consumers to provide personal identification information as a condition to accepting a credit card as payment for a purchase does not apply to a refund transaction for the return of merchandise purchased with a credit card.


What They Were Fighting About: Plaintiff Absher purchased a locking gas cap from defendant AutoZone using his credit card. Within five minutes, he returned to the store and requested a credit card refund because the gas cap did not fit his vehicle. In connection with the refund process, AutoZone's clerk requested that he fill out a return voucher form that had lines for his name, telephone number, and signature, which Absher completed. The return voucher was separate from the return receipt showing the reversal of the credit card charge. Two weeks later, Absher filed a class action lawsuit against AutoZone alleging that the company's practice of requiring consumers to write their telephone number on return vouchers violates Civil Code section 1747.08. Each violation of the statute subjects the merchant to penalties not to exceed $250 for the first violation and $1,000 for each subsequent violation. AutoZone successfully moved for summary judgment on that grounds that the prohibitions of section 1747.08(a) on requesting "personal identification information" (defined in section 1747.08(b) as "information concerning the cardholder, other than information set forth on the credit card, and including, but not limited to, the cardholder's address and telephone number") do not apply to a refund of merchandise purchased by credit card. The court of appeal affirmed the trial court's judgment.

Court Holdings:

• The court of appeal rejected plaintiff's argument that the language of section 1747.08(a)(3) regarding "any credit card transaction" makes the statute's prohibitions on requesting personal identification information applicable to a refund during which the merchant reverses the original credit card purchase. Examining the language of section 1747.08(a) and other subdivisions of section 1747.08, the legislative history, and the purpose for the legislation, the court concluded that the statutory prohibitions were only intended to apply to purchase transactions.
• The court concluded that the legislature's purpose in enacting section 1747.08 was to address misuse of consumers' personal identification information by merchants, such as for marketing purposes. The legislature determined that such information should neither be requested nor required of consumers as a condition to accepting a credit card as payment for goods or services.
• However, retailers have a legitimate interest in collecting personal identification information in a return transaction to verify that the return was bona fide and to prevent employees from manipulating returns for their own benefit. Merchants may also need to contact the consumer who made the return if they discover that use or damage of the product occurred prior to its return. Thus, there is a legitimate justification for retailers to request and obtain personal identification information in return transactions relating to goods or services that were purchased with a credit card.
• It is significant that section 1747.08(a) contains no explicit reference to exchanges, refunds, or returns. In contrast, section 1747.09 (which prohibits retailers from printing more than the last five digits of a credit or debit card account number or the expiration date on receipts) is also part of the Song-Beverly Credit Card Act and specifically refers to "an exchange, refund, or return" in subdivisions (a)(2) and (a)(3), which will become effective on January 1, 2009.

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Grocery Retailers Are Invited to Join Stakeholder Workgroup on Warnings for Toxic Chemicals in Food

The One Sentence Summary: The California agency charged with developing regulations to enforce the state’s “Proposition 65” law that requires retailers and manufacturers, among others, to give warnings about exposure to chemicals that cause cancer and birth defects, has just announced the formation of a voluntary workgroup for stakeholders.

Full Posting:

April 18, 2008 is the deadline for membership applications for representatives of several interest groups, including Large Grocery Retailers, Small Grocery Retailers, Food Manufacturers, Environmental Groups, public prosecutors, and private enforcement groups. Meetings of the Food Warning Workgroup are expected to start in April. More information can be obtained by contacting fkammerer@oehha.ca.gov .

The Workgroup will advise the California Office of Environmental Health Hazard Assessment (“OEHHA”) about possible regulatory language on how to provide warnings about chemicals in foods. The Workgroup will also consider issues concerning the content of such warnings.

Among the issues for retailers and other stakeholders are: How best can retailers deliver warnings to customers? Can retailers use alternative methods of delivery, such as brochures and websites?

In addition to retail representatives, the Workgroup may also include staff from the U.S. Food and Drug Administration, the California Department of Public Health, and the California Department of Food and Agriculture.

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Food Warnings To Undergo Changes in Method, Content under California’s Proposition 65

The One Sentence Summary: Retailers selling food now have the opportunity to advise a California regulatory agency about making new rules on methods for giving consumers warnings, and the content of such warnings, regarding exposure to chemicals that cause cancer or birth defects, as provided under the state’s “Proposition 65”.


Full Posting:

On February 15, 2008 the California Office of Environmental Health Hazard Assessment (OEHHA), part of Cal/EPA, announced that it is seeking input concerning the content of warnings for exposures to listed chemicals in foods. In particular, OEHHA is looking for language that conveys the required warning message without undue confusion for consumers. Based on input, OEHHA will develop proposals for amending the existing, and rather limited, regulations that dictate options for both the method and the content of warnings for exposures to listed chemicals in foods.

Examples of such input would be ideas about on-product labels, off-product signage, centralized warnings for all affected food products in the store, in-store warning information kiosks, print media warnings or web-based information.

Proposition 65 is a California law requiring that businesses of ten or more employees provide warnings before exposing people to certain listed chemicals that cause cancer or birth defects. Detailed regulations have been enacted regarding specific “safe harbor” language that may be used in the warnings, as well as the methods for providing warnings, such as signs posted at point-of-sale. The law, titled the Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code section 25249.5, et. seq., has given rise to litigation around chocolate, certain cooked foods, and fish. The law applies to products offered for sale in California, regardless of origin.

The deadline for providing input on better ways to provide consumer warnings about chemicals in food sold by retailers is March 28, 2008. Stakeholders may also participate in a public workshop on March 14, 2008, from 10 a.m. to noon, at the Cal/EPA headquarters in downtown Sacramento, California.

More information is available in the OEHHA announcement at http://www.oehha.ca.gov/prop65/law/regproc021508.html

Retailers will have additional opportunities to comment formally on revised warning methods and language after OEHHA publishes draft proposed rules.

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For Standing, California's Unfair Competition Law Requires Injury in Fact and Causation

Case: Hall v. Time Inc., Case No. G038040 (Cal. Ct. App. 1/7/08)

The One Sentence Summary: Plaintiff could not establish injury in fact or causation required by California's Unfair Competition Law where merchant's alleged scheme to disregard 21-day free preview period did not induce him to pay for book immediately upon receipt or keep a book that he otherwise would have returned.


What They Were Fighting About:

Plaintiff Jeffrey Hall alleged that Time engaged in an unlawful, unfair, or fraudulent scheme in violation of California Business and Professions Code Section 17200 in offering consumers a free preview period for 21 days in which to review a book and return it to Time with no obligation to purchase. The complaint alleged that during the 21-day period, Time sent consumers invoices demanding payment and not referring to a free preview period, so as to deceive consumers into believing that they had an immediate obligation to pay. Hall ordered a book from Time but did not pay during the 21-day free preview period after receiving an invoice. He paid for the book 10 months later after a collection agency sent a demand for payment. The complaint alleged a single cause of action for class action relief under Section 17200. The trial court dismissed the complaint without leave to amend on the grounds that plaintiff received the book that he ordered, at the price and payment schedule that he requested.

Court Holdings: The court of appeal affirmed the dismissal of plaintiff's complaint because he could not meet the standing requirements under California's Unfair Competition Law ("UCL").

• As a result of Proposition 64 enacted in November 2004, a plaintiff suing for violation of Section 17200 must have "suffered an injury in fact" and "lost money or property as a result of such unfair competition" in order to have standing.
• Plaintiff could not allege an injury in fact because he did not expend money due to Time's alleged acts of unfair competition. Hall paid Time $29.51, but he received the book that he ordered in exchange. "He did not allege he did not want the book, the book was unsatisfactory, or the book was worth less than what he paid for it."
• Plaintiff also could not satisfy the second prong of the standing test - that he "lost money or property as a result of" Time's alleged unfair competition. The court held that this language imposes a causation requirement for UCL standing. In the context of a fraud claim, causation means justifiable reliance on the alleged misrepresentation.
• Hall could not allege causation because Time's conduct did not cause him to believe that he did not have a 21-day free preview period and was obligated to keep and pay for the book upon receipt. Moreover, "Hall did not allege he did not want the book or Time's alleged acts of unfair competition induced him to keep a book he otherwise would have returned during the free trial period."

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California Retailers Ordered to Pull Children’s Jewelry Containing Lead

The One Sentence Summary: New California laws addressing lead and other heavy metals in consumer products are the basis for stepped up enforcement by the state’s Department of Toxic Substances Control, following investigation and testing of children’s jewelry in several major retailers, including Macy’s, Dollar Tree, and Marshalls.

Summary of Enforcement Action:

On December 12, 2007, the Department of Toxic Substances Control (“DTSC”), part of California’s Environmental Protection Agency, briefed the public on its recent investigation of children’s jewelry items tested from a range of retail establishments. DTSC reported that it recently notified retailers of its testing results and urged them to remove from their shelves the items with lead-levels exceeding regulatory levels. Retailers are being cooperative to identify distributors.

The California Lead-Containing Jewelry Law went into effect on September 1, 2007, and applies to persons who manufacture, ship, sell or offer for retail sale children’s jewelry in California. The scope of the law covers not only stores, but also catalogs, vending machines, and online sites. The law specifies lead content in metallic material in children’s jewelry at 600 parts per million or less.

On March 1, 2008, the Lead-Containing Jewelry Law becomes applicable to all other jewelry, including body piercing jewelry.

The provisions of the new law are found in California Health and Safety Code sections 25214.1 to 25214.4.2.

DTSC Director Maureen Gorsen stressed that the majority of jewelry items tested by DTSC do not exceed the allowable lead levels.

A list of the items found to have lead levels over the allowable limits is posted at the agency’s website, http://www.dtsc.ca.gov/LeadInJewelry.cfm

Gorsen urged parents and caregivers to stay alert when children are wearing or playing with children’s jewelry. DTSC encouraged consumers who have purchased the listed items to return them to the retailers.

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California Attorney General Sues 20 Retailers and Toy Makers Over Lead Levels in Toys

Case: People of the State of California v. Mattel, Inc., et al.

The One Sentence Summary: Citing recent federal recalls of toys and other consumer goods containing lead at toxic levels, California Attorney General Jerry Brown has filed suit (seeking civil monetary penalties and injunctive relief) against 20 companies, including retailers Wal-Mart, Target, Toys R Us, and Sears, as well as toy makers Mattel, Fisher-Price, and Marvel Entertainment, alleging (1) violations of the state’s “Proposition 65” for exposing people to chemicals known to the state to cause cancer or reproductive toxicity, and (2) violation of the state’s unfair business practices act.


Full Posting:

On November 19, 2007, California State Attorney General Jerry Brown, together with Los Angeles City Attorney Rocky Delgadillo, filed a civil lawsuit based on the California Safe Drinking Water and Toxic Enforcement Act of 1986, otherwise known as Proposition 65, and the state’s unfair business practices act, alleging a claim under Section 17200 of the Business and Professions Code. The case was filed in Alameda Superior Court (Northern California) against 20 companies, including prominent national retailers and manufacturers. The lawsuit was preceded by 60-day notices alleging that the defendants, without giving warnings, were exposing people to listed toxic substances. Prop. 65, which permits private parties to enforce the law under certain circumstances, requires that notice be given to state and local prosecutors, as well as the businesses allegedly in violation of the law, for 60 days before suit can be filed. The notice period allows public prosecutors the opportunity to file suit themselves.

Upon filing suit, Brown’s office announced that “Companies must take every reasonable step to assure that the products they handle are safe for children and their families and fully comply with the law of California. Despite the lengthening global supply chain, every company that does business in this state must follow the law and protect consumers from lead and other toxic materials.”

The lawsuit has significance for retailers operating in California, and for manufacturers of toys or other consumer goods being sold in California. Previous lawsuits brought under Proposition 65 have frequently been settled through the adoption of detailed settlement agreements, which are entered as judgments. Such settlements can impact future testing of products to determine whether they contain threshold amounts of toxic substances. In one recent case, the terms of a 2006 judicially approved settlement involving lead in children’s jewelry became the basis for a new state law governing metallic content of jewelry for both children and others. Health and Safety Code Sec. 25214.1 et seq.

Named in the suit, People of the State of California v. Mattel, Inc., et al., are Mattel, Fisher-Price, Michaels Stores, Toys R Us, Wal-Mart, Target, Sears, KB Toys, Costco Wholesale, A&A Global Industries, RC2 Corporation, Eveready Battery Company, Kids II, Kmart, Marvel Entertainment, and Toy Investments.

Proposition 65 became state law through California’s initiative process when voters approved the measure in 1986. Although the law does not necessarily prohibit businesses from exposing consumers, employees, and members of the public to listed chemicals, provided appropriate warning are given, litigation has sometimes resulted in the reformulation of products to reduce or eliminate the target substances.

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Consumer Lacks Standing to Bring Claim Under California Consumer Protection Laws Where Product Was Purchased for Litigation Purpose Only

Case: Buckland v. Threshold Enterprises, Ltd., Case No. B192832 (Cal. Ct. App. 9/25/2007)

The One Sentence Summary:
A consumer who buys a product through her attorney for the sole purpose of litigation arising out of deceptive packaging or advertising lacks standing to bring a claim under the Consumers Legal Remedies Act, unfair competition law or false advertising law, and cannot state a claim for fraudulent concealment or negligent misrepresentation because the consumer did not rely on the statements or representations of the defendant and the consumer did not suffer an injury in fact or lose money or property.


What They Were Fighting About:
Katherine Lee Buckland, the Director of the California Women’s Center (the “Center”), and the Center filed a complaint against 30 defendants that market skin lotions and creams, including Threshold Enterprises, Ltd. (“Threshold”). In the Complaint, Buckland brought nine claims as an individual, including fraudulent concealment, negligent misrepresentation, and violation of unfair competition law (Cal. Bus. & Prof. Code § 17200 et seq.), false advertising law (Bus. & Prof. Code § 17500), and the Consumers Legal Remedies Act (Cal. Civil Code § 1750). Buckland alleged that defendants, including Threshold, had not complied with FDA regulations in marketing skin cream products and that the packaging and advertising for the products lacked adequate warnings about the chemicals in the skin creams. Buckland conceded that she had suspected Threshold’s packaging and marketing were false or misleading, and she had purchased Threshold’s skin product for $14.99 through her attorney for purposes of the litigation. The trial court dismissed Buckland’s claims against Threshold on the ground that Buckland lacked standing and failed to allege fraud with specificity, and denied Buckland’s motion for an injunction against Threshold. The claims of the Center were not at issue in the Opinion.


Court Holdings:
The Court of Appeal affirmed the trial court’s order dismissing Buckland’s claims against Threshold and denying injunctive relief, and held:

• Buckland failed to state a claim under the Consumers Legal Remedies Act for misrepresenting “characteristics, ingredients, uses, benefits, or quantities” or misrepresenting the products as “of a particular standard, quality, or grade” on the ground that she had not suffered actual damages caused by Threshold’s conduct. Since Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products solely to pursue litigation, she did not actually rely on the truth or completeness of Threshold’s representations.
• Buckland lacked standing to state a claim under unfair competition law or false advertising law because she did not suffer the requisite injury in fact or loss of money or property. The amount she paid to purchase Threshold’s product was incurred solely to facilitate the litigation, and thus did not constitute an “injury in fact” or “lost” money or property.
• Buckland failed to state a claim for fraudulent concealment or negligent misrepresentation because Buckland did not actually rely on any false statements or omissions of Threshold. Buckland conceded that she suspected Threshold’s packaging and marketing were false or misleading and she bought the products through her attorney solely to pursue litigation.

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Consumer May Seek Restitution Under California's Unfair Competition Law From Manufacturer Even Though Product Was Purchased From Retailer

Case: Shersher v. Superior Court (Microsoft Corp.), Case No. B195317 (Cal. Ct. App. 9/10/07)

The One Sentence Summary: To recover restitution under California's Unfair Competition Law, a consumer is not required to have made direct payments to the defendant who is alleged to have engaged in unfair competition or some other act prohibited by the statute or the false advertising law.


What They Were Fighting About: Plaintiff and members of the class he purported to represent purchased from retailers wireless routers, adapters, and other similar products manufactured by Microsoft. Plaintiff alleged that in marketing and promoting these wireless products, Microsoft made false representations on the packaging about the products' capabilities to deliver data transmission rates of up to a certain level of megabits per second. The complaint sought various relief including restitution. Microsoft filed a motion to strike the claim for restitution and any reference to "restitution" on the grounds that such recovery was precluded by the California Supreme Court's decision in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003). Microsoft argued, and the trial court agreed, that indirect purchasers - those who purchased from someone other than the defendant - could not obtain restitution under Korea Supply because they paid no money directly to the defendant.

Court Holdings: The Court of Appeal reversed and held that Microsoft's motion to strike should have been denied because:

• The only requirements for recovery of restitution imposed by Korea Supply are that (1) the plaintiff must have had an ownership interest in the money or property sought to be recovered; and (2) the defendant must have acquired the plaintiff's money or property by means of unfair competition or some other act prohibited by the Unfair Competition Law (California Business & Professions Code section 17200) or the false advertising law (section 17500).
• Nothing in Korea Supply requires that the plaintiff seeking restitution have made direct payments to the defendant who allegedly engaged in the acts of unfair competition or false advertising.
• In this case, the plaintiff and putative class members had an ownership interest in the restitutionary relief sought because they purchased Microsoft's products.

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California Courts Find That Class Action Waivers and Arbitration Clauses in Computer Sale Contracts Were Unenforceable

Two recent Northern California federal court decisions have held that arbitration, choice of law and class action waiver provisions in computer purchase contracts were not enforceable, and that the consumers could proceed with class action claims in federal court against the computer sellers.



In Brazil v. Dell, Inc., (N.D. Cal. No. 5:07-CV-01700 RMW, 8/3/07), the plaintiffs filed a class action claiming that Dell had misrepresented the price of its computers by artificially inflating prices before advertising discounts. Dell moved to stay the action and compel arbitration due to the following clause in the Dell contracts:

Binding Arbitration. ANY CLAIM, DISPUTE, OR CONTROVERSY . . . BETWEEN CUSTOMER AND DELL . . . SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF) . . . . NEITHER CUSTOMER NOR DELL SHALL BE ENTITLED TO JOIN OR CONSOLIDATED CLAIMS BY OR AGAINST OTHER CUSTOMERS, OR ARBITRATE ANY CLAIM AS A REPRESENTATIVE OR CLASS ACTION OR IN A PRIVATE ATTORNEY GENERAL CAPACITY.

Judge Ronald Whyte held in Brazil that:

• Although the purchase contract called for application of Texas law, California law should be applied because application of Texas law would violate a fundamental policy of California law.
• Despite a clause allowing the consumer to rescind the contract if the terms were unacceptable, the purchase contract was procedurally unconscionable because it was a contract of adhesion presented without an opportunity to meaningfully negotiate.
• Substantive unconscionability was also found because there was an allegation of a scheme to cheat large numbers of customers, and small damages would be suffered by many consumers.

In Oestreicher v. Alienware Corp. (N.D. Cal. No. 3:07-CV-00512 MHP, 8/10/07), the plaintiff had filed a class action claiming that Alienware had knowingly sold defective computers. Alienware moved to stay the case and compel arbitration. Judge Marilyn Patel refused to compel arbitration. Like Judge Whyte did in the Brazil decision, Judge Patel found that California law should be applied due to a conflict with the law provided in the contract (in this case, Florida law). Judge Patel concluded that the agreement was procedurally and substantively unconscionable, and that the class action and arbitration provisions should not be enforced.

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California Statutes Prohibiting Use of Misleading Country of Origin Labels on Retail Goods Upheld Against Manufacturer's Legal Challenges

Case: Benson v. Kwikset Corp., No. G030956 (Cal. Ct. App. 6/29/07)

The One Sentence Summary: Judgment for plaintiff enjoining manufacturer's use of "Made in U.S.A." labels pursuant to California statutes was affirmed, assuming plaintiff can amend the complaint to meet the "injury in fact" and class action requirements of California's Proposition 64.


What They Were Fighting About:

Plaintiff sued Kwikset and its parent company Black & Decker for restitution and injunctive relief under California's unfair competition law (Business & Professions Code section 17200) and false advertising law (section 17500). Plaintiff alleged violations of statutory prohibitions against marketing or sale of merchandise with "Made in U.S.A." or "All American Made" labels when the goods contained foreign-made parts or involved foreign manufacture. Some of defendants' locksets included screws and pins made in Taiwan, a latch assembly sub-assembled in a Mexico plant, or both foreign made parts and assembly. Trial court enjoined the use of misleading country of origin labels and ordered defendants to allow retailers to return mislabeled good for refund or replacement.

During pendency of the appeal, California Supreme Court issued its decision in Branick v. Downey Savings & Loan Assn., 39 Cal. 4th 235 (2006), interpreting Proposition 64 enacted by the state's electorate in November 2004. Proposition 64 requires a private plaintiff under sections 17204 and 17535 who sued for injunctive or restitutionary relief to establish that (1) he "has suffered an injury in fact and has lost money or property" and (2) he also meets the class action requirements of Code of Civil Procedure section 382, in order to maintain a representative action. Branick held that a trial court may consider a plaintiff's motion to amend a complaint to allege facts meeting these standing and representative claim requirements for unfair competition law and false advertising law actions. California Supreme Court directed the court of appeal to reconsider its earlier decision vacating trial court's judgment, in light of Branick.

Court Holdings:

• Court of appeal remanded the case to the trial court with directions to allow plaintiff an opportunity to amend the complaint to satisfy Proposition 64 requirements. If plaintiff succeeds in doing so, the remainder of the appellate court's opinion will provide the resolution of the other substantive issues raised by the parties' cross-appeals.


• On the merits of plaintiff's unfair competition and false advertising claims, the court of appeal upheld the trial court's rejection of defendants' constitutional challenges and its determinations that their conduct violated California statutes regarding misleading country of origin labels.


• Section 17200 proscribes any "unlawful, unfair or fraudulent business act or practice" and makes violations of other predicate statutes actionable. Here, defendants were found to have violated two predicate statutes: (1) Business & Professions Code section 17533.7 of the false advertising law, and (2) Civil Code section 1770(a)(4).


• Section 17533.7 makes it unlawful to sell or offer for sale merchandise that is labeled with "Made in U.S.A.," "Made in America," "U.S.A." or similar words when it "or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States." Court rejected defendants' freedom of speech and vagueness challenges.


• Court also held that section 17533.7 prohibits "Made in U.S.A." or similar labels on merchandise where (1) it is entirely made, manufactured, or produced outside the United States, or (2) it is substantially so, meaning "where the foreign operation, process, or activity employed to create the merchandise is found to be considerable in either amount, value, or worth." Mere use of foreign raw materials to make a product domestically does not violate section 17533.7.


• More controversial (and prompting dissenting opinion) is the court's holding that "when merchandise consists of two or more physical elements or pieces, section 17533.7 also applies to any distinct component of merchandise that is necessary for its proper use or operation." Thus, section 17533.7 would be violated if a product is labeled "Made in U.S.A." or similar where any distinct component was entirely or substantially made, manufactured, or produced outside United States.


• Applying these legal principles to the facts, court of appeal upheld the trial court's determination that defendants violated section 17533.7 because Kwikset's "Made in U.S.A." locksets used screws and pins made in Taiwan, and part of the lockset latch assembly occurred at its Mexico plant.


• Civil Code section 1770(a)(4), the other predicate statute cited by plaintiff, makes unlawful the use of "deceptive representations or designations of geographic origin in connection with goods or services." This statute is part of California's Consumer Legal Remedies Act.


• Court of appeal held that the trial court properly applied a "reasonable person" standard to section 1770(a)(4) and evaluated the defendants' labeling from the perspective of consumers for whom geographic designation is important. Trial court's application of that standard to find defendants' conduct violated section 1770(a)(4) was upheld.

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California Court Refuses to Enforce Cell Phone Provider's Contractual Arbitration Provision Waiving Class Action Relief

Case: Gatton v. T-Mobile USA, Inc., Nos. A112082, A112084 (Cal. Ct. App. 6/22/07)

The One Sentence Summary: Class action waiver in arbitration clause of T-Mobile's service agreement was both procedurally and substantively unconscionable and therefore unenforceable.


What They Were Fighting About: Plaintiffs filed class action claims challenging T-Mobile's practice of (1) imposing fee for termination of service agreement before its expiration date, and (2) installing a locking device in T-Mobile handsets that prevented subscribers from switching cell phone providers without purchasing a new handset. T-Mobile's service agreement contained an arbitration provision that included language waiving any right to seek classwide relief. T-Mobile moved to compel arbitration of the plaintiffs' claims pursuant to the service agreement provision. The trial court denied the motion on the grounds that the arbitration provision was unconscionable and therefore unenforceable.

Court Holdings:

• The court of appeal affirmed and held that the arbitration provision waiving class action relief was both procedurally and substantively unconscionable.


• Under the California Supreme Court's decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), a waiver of classwide relief found in a consumer contract of adhesion will be deemed unconscionable and unenforceable if it is alleged that the party with superior bargaining power cheated large numbers of consumers out of individually small amounts of money. The reason is that a classwide waiver in that situation will operate to exempt the responsible party from liability for its fraud or willful injury to the property of another, in violation of Civil Code section 1668, because individual consumers will not sue for such small amounts.


• Procedural unconscionability focuses on the manner in which the contract was negotiated. Substantive unconscionability focuses on overly harsh or one-sided results.


• The court found T-Mobile's arbitration provision waiving classwide relief to be at least minimally procedurally unconscionable as a contract of adhesion, notwithstanding the consumer's option to obtain mobile phone service from other providers whose service agreements did not contain class action waivers. T-Mobile prepared the service agreement and required its customers to accept it entirely or else forego T-Mobile's service. Despite being a contract of adhesion, if the challenged provision did not have a high degree of substantive unconscionability, it should be enforced.


• However, T-Mobile's class action waiver was substantively unconscionable enough to render the arbitration provision in its service agreement unenforceable. The California Supreme Court's decision in Discover Bank was directly on point in that regard. Trial court properly denied T-Mobile's motion to compel arbitration of plaintiffs' claims.

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Supreme Court Interprets Fair Credit Reporting Act's "Willful" Standard to Include Reckless Conduct

Case: Safeco Ins. Co. of America v. Burr, No. 06-84 (Sup. Ct. 6/4/07)

The One Sentence Summary: The Supreme Court's holding that "willful" violations of the Fair Credit Reporting Act include reckless conduct is relevant to pending lawsuits in California and elsewhere alleging that retailers violated 15 U.S.C. section 1681c(g), enabling consumers to seek statutory damages if electronic receipts for credit or debit card transactions disclose the card's expiration date or more than the last five digits of the card number.


What They Were Fighting About: In Safeco and companion case GEICO General Ins. Co. v. Edo, at issue were the Fair Credit Reporting Act's (FCRA) requirements of sending notification to a consumer when adverse action is taken based on information contained in a consumer credit report. The Supreme Court granted certiorari to resolve a conflict in the federal circuit courts of appeal on whether the FCRA provision, 15 U.S.C. section 1681n(a), permitting statutory damages ranging from $100 to $1,000 against anyone who "willfully fails to comply" with the FCRA reached reckless disregard of FCRA obligations.

Court Holdings:

• The Supreme Court held that reckless disregard of a requirement of FCRA would qualify as a willful violation within section 1681n(a), the statutory damages provision.
• Recklessness is defined as it is understood in the common law: conduct entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known. The Court stated: "It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law."
• The Court distinguished reckless disregard from mere negligence or carelessness, for which the FCRA requires proof of actual damage per 15 U.S.C. section 1681o(a): "Thus, a company subject to FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute's terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless."
• The Court's decision will impact cases pending against retailers for alleged violations of section 1681c(g) of FCRA, which is known as the Fair and Accurate Credit Transactions Act (FACTA) of 2003. FACTA went into effect on December 4, 2006 as to any cash registers already in use before January 1, 2005. FACTA provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." This prohibition only applies to electronically printed receipts, and "shall not apply to transactions in which the sole means of recording a credit card or debit card account number is by handwriting or by an imprint or copy of the card."
• Given that retailers had three years to prepare existing cash registers for compliance with FACTA, plaintiffs may be able to prove "reckless disregard" of the law against printing electronic receipts containing more than a credit or debit card number's last 5 digits or the card's expiration date.
• However, a recent decision by a federal district court in California suggests that retailers may be able to defeat class certification for FACTA claims, particularly when the alleged violation involves only the printing of a card's expiration date. In Soualian v. International Coffee & Tea LLC, Judge R. Gary Klausner of the Central District of California denied class certification on FACTA claims in a June 11, 2007 ruling. The court held that a class action was not "superior to other available methods for fair and efficient adjudication of the controversy" under Rule 23(b)(3) of the Federal Rules of Civil Procedure, reasoning that "massive damage awards would be disproportionate to any actual damage caused by the alleged violations."
• In Soualian and another recent decision by the Central District of California, Spikings v. Cost Plus, Inc., the retailers allegedly violated FACTA by including customer credit card or debit card expiration dates on electronically printed receipts. Both decisions found that disclosure of a card's expiration date by itself would be highly unlikely to result in identity theft. Given the availability of statutory damages of $100 to $1,000 for each violation, the courts deemed it inappropriate to certify class actions where damages would be potentially disastrous to the retailer's business and where no harm was actually suffered by the putative class of customers.
• Even if a retailer's violation of FACTA might be deemed "reckless" under Safeco and subject the retailer to statutory damages under FCRA, defeating class certification as in Soualian would seriously disable a lawsuit. Plaintiffs' attorneys will not want to litigate individual claims for statutory damages of $100 to $1,000 on a case-by-case basis.

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