Articles Posted in Business Torts

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Most businesses must maintain an online presence these days in order to succeed. Even if a business does not provide any kind of online service, consumers are still likely to look for a website or social media profile. Many consumers will look at websites like Yelp, which allow consumers to rate businesses and write reviews describing their experience. A negative review can damage a business’ reputation, so businesses must be vigilant about their online profile. Some businesses, rather than responding to bad reviews, have tried to prevent bad reviews from ever occurring by placing “non-disparagement” or “gag” clauses in form contracts. These clauses prohibit customers from writing negative online reviews and penalize any who do so. Congress passed the Consumer Review Fairness Act (CRFA) of 2016 in December. This new law prohibits these types of clauses and allows enforcement by federal and state consumer protection agencies.

The CRFA only addresses contractual provisions that penalize consumers for writing negative reviews without regard to whether the negative review is accurate. A customer who writes a false review of a business could be liable to the business for defamation. This requires the business to prove that one or more statements made by the customer were false, that the customer knew they were false, and that the publication of the statement caused actual, measurable harm to the business. A clear-cut example might be a person who completely fabricates a set of facts in order to disparage a business in an online review, leading to a damaged reputation and loss of revenue.

The type of gag clause covered by the CRFA is not uncommon in certain situations, but it is a relatively new phenomenon for consumers and online review sites. These clauses often appear in settlement agreements resolving a lawsuit, in which a plaintiff accepts a settlement payment in exchange for dismissing the case and agreeing not to disparage the defendant with regard to the subject matter of the lawsuit. Both parties have an opportunity to negotiate terms and to review the final agreement before signing.

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Businesses that sell goods to the public must follow guidelines established by consumer protection laws, which prohibit deceptive advertising and other fraudulent or misleading acts. This can apply to the use of specific words in particular market sectors. If a word, term, or phrase has a distinct meaning for a particular good or service, it is known as a “term of art.” The misleading use of a term of art could entitle a consumer to damages under various California laws. The Ninth Circuit Court of Appeals recently ruled in favor of a consumer who brought statutory and common-law claims against a car dealership in connection with its use of the term “completed inspection report” in its marketing. Gonzales v. CarMax Auto Superstores, LLC, Nos. 14-56842, 14-56305, slip op. (9th Cir., Oct. 20, 2016).

The plaintiff in Gonzales asserted causes of action under three California statutes. First, the California Consumers Legal Remedies Act (CLRA), Cal. Civ. Code § 1750 et seq., prohibits a wide range of “deceptive practices.” This includes “[m]isrepresenting the…certification of goods;” “[r]epresenting that goods…have…characteristics…which they do not have;” and “[r]epresenting that goods…are of a particular standard, quality, or grade,…if they are of another.” Id. at §§ 1770(a)(2), (5), (7). Consumers may recover actual damages, injunctive relief, restitution, punitive damages, and other relief.

The Song-Beverly Consumer Warranty Act (CWA), also known as the California Lemon Law, covers retail goods sold in the state of California. Cal. Civ. Code § 1790 et seq. It requires sellers to include certain warranties with those goods:  the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. If a manufacturer provides express warranties, it must offer sufficient resources or contract with third-party service providers to fulfill its obligations under those warranties. Damages for consumers include “replacement or reimbursement,” rescission of a sales contract, or the cost of repair. Id. at § 1794. Willful violations may allow an award of double the amount of actual damages.

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Businesses that sell goods and services to the general public must take care regarding how they advertise their products and themselves in order to avoid possible claims under state and federal consumer laws prohibiting false or misleading statements and other “unfair business practices.” Consumers may be able to assert claims in court for both intentional and negligent violations of these laws, as demonstrated by a lawsuit filed recently in a California federal court, Rose v. Zara USA, Inc., No. 2:16-cv-06229, complaint (C.D. Cal., Aug. 19, 2016). The plaintiff alleges that the defendant, a clothing retailer organized in New York and based in Europe, deceived consumers by listing prices in euros but charging customers “arbitrarily inflated amounts” in dollars. Id. at 9.

Most business torts, much like tort law pertaining to personal injuries, can be broadly divided into two categories:  intentional torts and negligence. Intentional torts typically require proof that a defendant acted willfully or intentionally. In some cases, a plaintiff must also prove that the defendant intended the harm to occur. Consumer protection statutes do not necessarily require a plaintiff to prove intent, but they may permit additional damages if a plaintiff can prove that a defendant acted willfully.

A claim for negligence does not require proof that a defendant had any particular mental state. It focuses instead on duties of care owed by a defendant. A plaintiff must establish four elements in order to prevail on a negligence claim:  (1) the defendant owed a duty of care to the plaintiff, or to the general public; (2) the defendant breached this duty; (3) the breach proximately caused the plaintiff’s harm; and (4) the plaintiff suffered measurable damages as a result.

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“Business torts” typically involve claims for acts that cause economic harm to a business operation, as opposed to tort claims involving physical or emotional harm. Businesses and business owners should be aware, however, that they can also face liability for torts involving physical or various non-economic damages. This extends beyond negligence claims related to accidents involving business property or employees, as demonstrated by a massive jury verdict earlier this year against a media company for invasion of privacy and other claims. The plaintiff, a well-known media personality, sued the company over its publication of a recording of him engaging in sexual activities with another person, commonly known as a “sex tape,” which he claims was made without his knowledge or consent. Bollea v. Gawker Media, et al., No. 12012447-CI-011, 1st am. complaint (Fla. Cir. Ct., Pinellas Cty., Dec. 28, 2012). The verdict could have a significant impact on businesses involved in media or publication of any kind, including many in Silicon Valley.

Business tort claims like tortious interference with a contract or injurious falsehood typically include intent as a required element of the claim. A plaintiff must prove that the defendant acted intentionally or willfully in a way that caused harm. Some business torts, however, are based on a theory of negligence, which requires a plaintiff to prove that the defendant owed a duty of care to the plaintiff or the public, that it breached that duty, and that this breach caused a measurable injury to the plaintiff. Damages in business tort cases may include lost profits, lost business opportunities, and restitution.

“Personal torts” involve direct physical or emotional harm to an individual. Torts like battery require proof of physical contact and harm, while intentional infliction of emotional distress requires proof of outrageous conduct that causes substantial emotional distress and damage. Another category of tort claims, commonly known as “dignitary torts,” involve intentional offenses against a person’s dignity, such as defamation and invasion of privacy. The Bollea case involved both dignitary and personal torts.

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Employers in California must, at times, balance the needs of their business with their employees’ rights under local, state, and federal laws. The National Labor Relations Act (NLRA), 29 U.S.C. § 151 et seq., protects workers’ rights to engage in union-related activities, as well as the rights of workers who do not want to engage in such activities. The federal government has exclusive jurisdiction over disputes of this nature, meaning that the NLRA preempts state law claims. A California appellate court recently held, however, that preemption does not necessarily extend to business tort claims against a labor union, upholding an injunction in a trespass lawsuit. Wal-Mart Stores, Inc. v. United Food and Commercial Workers Int’l Union, 16 C.D.O.S. 7079 (Cal. App. 2d Dist., 2016).

Section 8 of the NLRA, codified at 29 U.S.C. § 158, prohibits “unfair labor practices” by both employers and labor organizations. Labor organizations may not, for example, “picket or cause to be picketed, or threaten to picket or cause to be picketed,” an employer when it is not the employees’ authorized representative, and the employer has either already recognized a different union as the authorized representative or is in the process of doing so. 29 U.S.C. § 158(b)(7).

Employers can bring a complaint against a union under § 8 to the National Labor Relations Board (NLRB), which is authorized by the NLRA to adjudicate disputes. The NLRB has exclusive jurisdiction over unfair labor practice claims, meaning that any dispute involving a practice addressed in § 8 of the NLRA must first go before the NLRB. This applies to both state and federal claims and is known as “preemption.” The U.S. Supreme Court has held that “state jurisdiction must yield” when a matter falls under the purview of the NLRA. Wal-Mart, slip op. at 6, quoting San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236, 244 (1959).

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A California federal judge has granted preliminary relief to the Federal Trade Commission (FTC) in its lawsuit against a company that markets weight-loss pills and other products. FTC v. Sale Slash, LLC, et al, No. 2:15-cv-03107 (C.D. Cal., Apr. 27, 2015). The court issued a preliminary injunction in May 2015, followed by a second injunction in November. A preliminary injunction is an extreme remedy, which restrains a defendant in some way before they have had a full opportunity to defend themselves in court. See Fed. R. Civ. P. 65. In granting the plaintiff’s request for the injunctions, the court found that the FTC established good cause to believe the defendants have violated federal consumer law, that they are likely to continue doing so unless restrained, and that an injunction is necessary to prevent further harm to consumers.

The lawsuit asserts claims under the FTC Act, 15 U.S.C. § 41 et seq.; and the Controlling the Assault of Non-Solicited Pornography And Marketing (CAN-SPAM) Act of 2003, 15 U.S.C. § 7701 et seq. The FTC Act is one of the nation’s oldest consumer protection laws, first enacted in 1913. It created the FTC, and empowered it to investigate and bring claims against individuals and businesses that “us[e] unfair methods of competition…and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2).

Congress passed the CAN-SPAM Act in order to address the much newer issue of unsolicited email communications for marketing purposes, commonly known as “spam.” In addition to causing annoyance, spam messages can be deceptive, thanks to efforts by “spammers” to conceal the source of the message. The law establishes a national policy that marketing emails “should not mislead recipients as to the source or content of such mail,” and that people should have the right to opt out of receiving messages. 15 U.S.C. § 7701.
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A putative class action lawsuit filed in a California federal court claims that the defendant, a fitness company, is in violation of multiple statutes governing the issuance of gift certificates and gift cards. Cody v. SoulCycle, Inc., No. 2:15-cv-06457, complaint (C.D. Cal., Aug. 25, 2015). By requiring customers to purchase “series certificates” with expiration dates in order to participate in exercise classes, the defendant allegedly violated the Credit Card Accountability and Disclosure (Credit CARD) Act and the Electronic Funds Transfer Act (EFTA), 15 U.S.C. § 1693 et seq. The plaintiff further alleges that the acts of the defendant violated the California Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et seq.; the Consumers Legal Remedies Act (CLRA), Cal. Civ. Code § 1750 et seq.; and gift card statutes in California and six other states.

The defendant operates a chain of locations in at least seven states, including California, where it offers indoor cycling classes, commonly known as spinning classes. According to the plaintiff, customers cannot “purchase specific exercise sessions,” despite the defendant’s claim that it offers a “pay-as-you-go system.” Cody, complaint at 3. Customers must purchase “series certificates” entitling them to participate in a specific number of classes.

Series certificates are “gift certificates” within the meaning of both federal and California law, according to the plaintiff. 15 U.S.C. § 1693l-1(a)(2)(B), Cal. Civ. Code § 1749.5. Both statutes restrict the ability of merchants to set expiration dates on gift certificates. The plaintiff alleges that the series certificates have expiration dates that are often as soon as 30 days after the date of purchase, meaning that the customer has a limited time to attend the number of classes on the series certificate. Because of the popularity of the classes, a customer may not be able to schedule all of the classes before the expiration date. Any remaining value is lost when the series certificate expires.
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The question of “corporate personhood,” the legal circumstances in which a business entity may be considered a “person,” is a controversial one. Supreme Court decisions like Burwell v. Hobby Lobby Stores, Inc., 573 U.S. ___ (2014), and Citizens United v. Federal Election Comm’n, 558 U.S. ___ (2010), have extended to corporations rights traditionally held by individuals. The default federal definition of “person,” however, actually includes corporations. The Dictionary Act defines “person” to include not only individuals, also known as “natural persons,” but also corporations and other business entities. 1 U.S.C. § 1. The Sixth Circuit Court of Appeals recently expanded the definition by ruling that business entities are “persons” under the Fair Debt Collection Practices Act (FDCPA). Anarion Investments, LLC v. Carrington Mortgage Services, LLC, et al., Nos. 14-5781/5993, slip op. (6th Cir., Jul. 23, 2015); 15 U.S.C. § 1692 et seq.

The dispute is based on a series of real estate transactions that began with an individual borrowing money from a bank to purchase a residence secured by a note and deed. The individual assigned his rights to a trust, which leased the property to another individual. That individual assigned the lease to the plaintiff, a limited liability company (LLC) organized in Delaware. At some point, the purchaser stopped paying the mortgage, and the property went into foreclosure.

The plaintiff filed suit against the mortgage company under the FDCPA, claiming that the mortgage company falsely identified a “substitute trustee” in published foreclosure notices. The defendant challenged the plaintiff’s standing to sue. The district court granted the defendant’s motion to dismiss, finding that the plaintiff was not a “person” within the meaning of the statute. 15 U.S.C. § 1692k, Fed. R. Civ. P. 12(b)(6).
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Several California privacy laws that took effect at the beginning of 2015 may affect a wide range of businesses in the state. One new law expands the duties a business owes to consumers affected by data breaches, including provision of identity theft protection services. Another new law gives minors a limited “right to be forgotten” online. Additional laws apply to breaches of medical information, the use of student records, and the use of student information gathered by school officials.

Assembly Bill 1710, signed by the governor on September 30, 2014, took effect on January 1, 2015. The law applies to individuals, businesses, and organizations that collect consumers’ personal information, generally defined to include names, addresses, dates of birth, Social Security numbers, and other information that could be used to personally identify someone. It requires a business to notify anyone whose unencrypted personal information was or might have been compromised in a data breach as soon as the business learns of the breach. If the business was “the source of the breach,” it must offer at least 12 months of “appropriate identity theft prevention and mitigation services” to affected individuals free of charge.

The law also expands the legal requirements for “reasonable security procedures and practices” for personal information. Under previous state law, this requirement applied to any business “that owns or licenses information about a California resident.” AB 1710 expands this to include “businesses that own, license, or maintain personal information about a California resident.” Finally, the law expands the current prohibition on the publication of any individual’s Social Security number to include prohibitions on advertising, offering to sell, or selling an individual’s Social Security number.
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A federal judge recently dismissed a putative class action lawsuit claiming that a multi-level marketing (MLM) company was, in reality, operating an illegal pyramid scheme. Awad, et al v. Herbalife Ltd., et al, No. 2:14-cv-02850, memorandum (C.D. Cal., Mar. 16, 2015). The plaintiffs alleged that the company misrepresented its activities in order to increase its stock price, in violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5. They sought to certify a class of shareholders who purchased common stock during a period of roughly three years. The court found that they failed to plead elements required by the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4, and Ninth Circuit precedent. It dismissed the complaint without prejudice, giving them about three weeks to amend.

The difference between an MLM and a pyramid scheme is subtle, but very important. Both involve selling a product or service for commissions and receiving compensation for recruiting additional participants. MLMs are considered lawful business and marketing models, while pyramid schemes are generally regarded as fraud. In a pyramid scheme, a participant usually must pay to join the company, and the income they receive is based largely on the fees paid by the people they recruit. Participants are often required to purchase large quantities of the inventory they sell, and to make additional purchases, or pay additional fees, to maintain “good standing” with the organization. A legitimate MLM might only require a minimal investment of time and money from participants, with the understanding that more investment brings the opportunity for greater returns.

The defendant, Herbalife, sells nutritional, skin-care, and weight-loss products using an MLM business model. The plaintiffs were owners of Herbalife common stock, and they asserted a class of people or entities who purchased stock between February 23, 2011 and July 29, 2014. They alleged that various disclosures by the company between May 2012 and July 2014 revealed that the company was a pyramid scheme, which caused the stock price to drop. They identified various “corrective disclosures” that they claimed revealed the fraudulent nature of the company and established “loss causation.” Awad, mem. at 3. These included statements or reports by several hedge funds concluding that the business was operating a pyramid scheme, and a U.S. Senator’s call for investigations by government regulators.
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