Posted on

9th Cir. Says No to Class Settlement that Provides No Benefits to the Absent Class Members

Kolby v. ARS National Services, 1/25/17, 9C

Plaintiffs filed a class action against ARS for debt collection abuse under the FDCPA, and purported to represent a class of four million people nationwide.  In class actions under FDCPA, the named plaintiff can recover $1000 in statutory damages, but the total recovery for absent class members is subject to a cap, the lesser of $500,000 or 1% of defendant’s net worth.  ARS said that its net worth was $3.5 million, but that wasn’t verified by plaintiffs’ counsel. The parties stipulated to refer the matter for all purposes to the magistrate judge, who helped the parties reach a settlement.  Under the settlement, plaintiffs would each get $1000, the attorneys would get fees of $67,500 (a modest amount in class litigation), and ARS agreed to a cy pres award of $35,000 (1% of $3.5M) to a local veteran’s charity in San Diego.  ARS also agreed to an injunction regarding the abusive practice in question, although it adopted a corrected practice shortly after the lawsuit was filed. The parties agreed to conditional certification under FRCP 23(b)(2), meaning class members wouldn’t get notice or be permitted to opt out.  An objector appeared and challenged the settlement as not being fair, adequate and reasonable.  The magistrate approved the settlement, and objector appealed.  Held: Reversed.

First, 9C disagreed with the objector’s argument that a magistrate judge does not have the authority to approve a class settlement unless absent class members have all stipulated to the magistrate judge.  This conclusion was based on a common sense and practical reading of 28 U.S.C. 636(c).  An amicus curiae filed a brief arguing that 636(c) is unconstitutional as applied to class actions because in federal court each party as an personal right to an Article III judge. The Court refused to reach the due process challenge because a due process violation in this context would impact the preclusive effect of the judgment, and the court was reversing the judgment for other reasons. 

Second, the court held that the settlement was not adequate, fair and reasonable.  The injunctive relief was worthless because the company had already changed its practice, the injunction was limited in time, and there was no showing that class members would still be contacted by defendant and therefore no showing that that they would benefit from the injunction.  Moreover, the class would not receive notice of the settlement or receive damages.  Nonetheless, their damage claims were being waived, including their claims under state law and without a showing that state law had a similar cap on damages.  Finally, the cy pres award was to go to a local veteran’s organization, with no showing of a geographic nexus to the nationwide class or a nexus between the charity’s activities and protecting consumers from bad debt collection practices.    

Posted on

Ugly Day for Perfect 10 When the 9th Cir. Finds Copyright Claims against Giganews Unappealing


Perfect 10 v. Giganews, 1/23/17, 9C
For a fee, Giganews helps people access Usenet, where people can share and access copyrighted information through servers that are owned by Giganews and other providers. When you subscribe, Giganews provides a browser to access Usenet and its content, and it hosts servers where users “post” material that can be accessed by other users.  Perfect 10 owns a vast amount of adult images that users illegally share over Giganews Servers.  Perfect 10 sued Giganews for copyright infringement.  The trial court dismissed most of Perfect 10’s copyright claims on a 12(b)(6) motion, and granted summary judgment on its last claim. Perfect 10 appealed those rulings and the trial court’s award of over $5M in attorney’s fees. Held: Affirmed.

Usenet users (who are organized around topics of interests called “newsgroups) can post articles (text files that each have a unique Message-Id) to a bulletin board; copyrighted material like video, images, and music (called binary files) can be encoded into the “article.” Usenet servers will automatically propagate articles to surrounding servers that furnish access to that newsgroup, as long as the providers have entered into a “peering” agreement.  The Giganews browser, Mimo, is used by its customers to find and access articles and to decode and display content, which includes an enormous amount of copyrighted material.  Users control what is posted and shared, and the control exercised by Giganews is minimal (like preventing duplicate posts, or deleting newsgroups related to child-porn).

When Perfect 10 identified Message-Ids that were infringing its copyrighted material, it sent DMCA (take-down) notices to Giganews. Giganews complied when the Message-Ids were readable; when not readable, Giganews asked Perfect 10 to send readable Message-Ids, but Perfect 10 did not respond.  Giganews does not scour the millions of messages that are posted each month for infringing material because that would take an enormous amount of time.  
Perfect 10 could show ownership, it could show there had been a violation of rights that copyright law protects (display, distribution and reproduction), but 9C said it could not show causation, what many of these cases call “volitional” conduct.  The court noted prior precedent that “infringement of the reproduction right requires copying by the defendant, which comprises a requirement that the defendant cause the copying.”  
9C says its holding is consistent with the Supreme Court’s holding in American Broadcasting Cos., Inc. v. Aereo, Inc.  In Aereo, the company streamed TV content to subscribers, rebroadcasting TV signals over the internet without the copyright holder’s consent.  The Court concluded that infringed broadcasters’ copyrights, and that Aereo was not just an equipment provider.  The Supreme Court in Aereo did not discuss the volitional conduct rule, and the Court distinguished between an entity that “engages in activities like Aereo’s,” and one that “merely supplies equipment that allows others” to perform or transmit.
Giganews’s browser displayed thumbnails of Perfect 10’s content.  9C said that the Mimo browser is just software and is passive; the infringing conduct is done by users.  The distribution claim failed for essentially the same reason — “because this distribution happens automatically,” meaning that “Giganews has not engaged in volitional conduct by which it ‘causes’ the distribution.” Perfect 10’s reproduction claim failed because “automatic copying, storage, and transmission of copyrighted materials, when instigated by others, does not render an [Internet service provider] strictly liable for copyright infringement[.]”
Its secondary liability claims also failed.  One contributory theory depends on proving that the alleged contributory infringer “has actual knowledge that specific infringing material is available using its system, and can take simple measures to prevent further damage to copyrighted works, yet continues to provide access to infringing works.”  While Giganews could easily take down content when it was provided a Message-Id, to find all the infringing content would have taken over 300,000 hours of time for every 10 million messages, the number of messages ids that Giganews receives every month.
Perfect 10 also failed to show that Giganews induced copyright violations. The Supreme Court has held that “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” MetroGoldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 936–37 (2005).  9C found that Giganews’s evidence that Giganews had as the object of promoting its use to infringe copyright was inconclusive.  Perfect 10 argued that Giganews advertises that its browser can find has built-in MP3 and File Locators that search all Giganews newsgroups for music, pictures, and movies without having to download millions of messages; that Giganews “offers 25,000 terabytes of copyrighted materials . . . without permission”; that Giganews “continues to commercially exploit the content of known repeat infringers”; and that it “advertises that it does not keep track of subscriber downloads, effectively encouraging infringement.”  9C said that was not enough.
To the uninitiated of Usenet (like me) this whole thing sounds like owning and operating warehouses that, for a fee, can be used by traffickers to house and exchange in goods that are stolen, counterfeit, or being transferred and shared in violation of contracts, licenses, and/or law.  Let’s hope copyright owners can find a way to effectively protect their rights given what is happening on Usenet.

Posted on

Samsung’s In-the-Box Arbitration Agreement Not Enforceable Because Customer Didn’t have Notice


Norcia v. Samsung, 1/19/17, 9C
Norcia bought a calling plan and a Samsung Galaxy phone from Verizon.  The Verizon customer agreement included an arbitration clause, but it didn’t mention Samsung.  The Samsung Galaxy box said that warranty information was inside, and the box contained a warranty brochure over 100 pages long. The brochure included an arbitration agreement with a 30-day opt out period, although Norcia didn’t opt out.  He later filed a putative class action against Samsung alleging the phone had performance issues. Samsung filed a motion to compel arbitration arguing that the in-the-box agreement was enforceable, and the trial court denied the motion.  Held: Affirmed.

Arbitration is a matter of contract, and Samsung had the burden to prove the parties agreed to arbitration.  Applying California law, 9C held that Samsung could not meet this burden.  A party is bound by all the terms of the contract, whether aware of the terms and even if he or she didn’t read it before signing.  While conduct can be sufficient to show agreement, silence generally does not constitute acceptance.  (That’s reasonable — Until there is an agreement, one side can’t bind the other to act in a particular way.)  

Silence can operates as consent if the party has a duty to respond  (e.g., by signing an agreement that silence/inaction will be deemed assent to certain things), or where the party retains the benefit offered.  A limit to the exception: An “offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he was unaware, contained in a document whose contractual nature is not obvious.”  

Norcia did not have a duty to respond, and the court concluded that “accepting the benefit” exception didn’t apply either, because according to the brochure the warranties were effective whether or not Norcia opted out.  (Query: Why is the “accepting the benefit” reference point the warranty and not the fact that Norcia kept the phone?)

9C rejected Samsung’s analogy to shrink wrap licenses (notice on outside of box that opening box constitutes agreement to license), which  9CA had previously said is enforceable.  In its analysis, 9CA seemed to rely on distinctions between a license and a contract (isn’t a license a contract), as well as between warranty and contract law (warranties are contractual in nature, but are affirmations that impose duties on the seller not buyer), but where those distinctions led wasn’t 100% clear.  The real issue is based on what Samsung’s box says — Samsung’s box notified the user of warranty information and said nothing about arbitration, making Samsung’s reliance on shrink wrap cases tenuous.

Even if in-the-box contracts are enforceable under California law (which is apparently not established), that does “not nullify the requirement that a consumer be on notice of the existence of a term before he or she can be legally held to have assented to it.”

Posted on

Karaoke Tracks Lead to Imitation Lanham Act Claims

Slep-Tone v. Wired for Sound Karaoke, 1/18/17, 9C
Slep-Tone produces karaoke tracks that include both audio and visual elements.  The tracks are sold on CDs under the trademark “Sound Choice.” Karaoke operators purchase the CDs, and then transfer the tracks to computer for ease of use during karaoke events. Slep previously opposed these transfers but now allows them under a strict set of contractual requirements to prevent illegal file sharing (e.g., agreeing to make only one copy and submitting to auditing by Slep).  Slep sued Wired for unauthorized copying, and Wired settled by agreeing to the stricter transfer protocol. When Wired allegedly breached the protocol, Slep sued again claiming that Wired violated the Lanham Act.  The trial court granted Wired’s 12(b)(6) motion with respect to the Lanham Act claims.  Held: Affirmed.

Generally, the Lanham Act provides two separate causes of action: 1) claims for infringing a registered mark (called a section 32 claim); and, 2) broadly speaking, claims for unfair competition, like misstating the origin of goods, whether a mark is registered or unregistered (called a section 43 claim).  Both claims turn on whether there is a likelihood of consumer confusion.

Slep argued that consumers listening to the karaoke tracks played by Wired were likely to be misled about the origin of the karaoke track, since their marks are displayed when the tracks are played.  According to 9C, Slep’s theory fails at a fundamental level: Section 43 unfair competition claims require confusion of the source of tangible goods that are offered for sale, not confusion about the source of content.  

Moreover, Slep’s argument is factually lame.  Consumers of karaoke don’t see the digital file and nothing is offered for sale; they also don’t attend an event to purchase a product and will have the same sensory experience when the tracks are played from a hard drive. This case is about unauthorized copying, not trademark.
Posted on

iPhone Owners Have Antitrust Standing to Sue Apple for Allegedly Monopolizing Market for iPhone Apps

In re Apple iPhone Antitrust Litigation,  1/12/17, 9C

Apple controls what apps can run on iPhone software.  Apple sells apps to owners of iPhones through its App Store, at a price set by the developers, and transfers 70% of the sale proceeds to the developer.  App developers must sell their apps through the App Store; iPhone owners are discouraged from buying apps except through the App Store under threat of losing their warranties.  Plaintiffs filed a putative class action against Apple under the Clayton Act.  The trial court granted Apple’s motion to dismiss based on lack of antitrust injury under the Illinois Brick direct/indirect purchaser paradigm. Held: Reversed.

On its face, the Clayton Act broadly grants standing to “any person” injured by anything forbidden by antitrust laws. The Supreme Court has rewritten the statute to limit antitrust standing. In the classic antitrust hypothetical, a monopolist sells a product to an intermediary at a supracompetitive price; and the intermediary passes the higher cost onto consumers when it sells the product, which has possibly been transformed by manufacturing work done by the intermediary. 

In 1968, in a case called Hanover Shoe, an intermediary sued a monopolist for an illegal overcharge.  The Supreme Court rejected the manufacturer’s defense that the intermediary “passed on” the higher prices to consumers.  This is the defensive use of the “pass-on” theory.  Whether the intermediary avoided antitrust injury by passing on the additional costs would be virtually unascertainable; and allowing the monopolist to use this defense would tend to insulate monopolists from lawsuits for antitrust violations.  

The Court has also held that the pass-on theory can’t be used offensively.  Illinois Brick v. Illinois, 431 U.S. 720 (1977).  In other words, consumers who purchase from the intermediary can’t sue the monopolist manufacturer on the theory that the illegal overcharges were “passed on” to the consumer.  The reasoning is similar to that in Hanover Shoe:  The challenges of tracing the effects of an overcharge at each stage can be insurmountable – consider the variables where there is additional manufacturing at the intermediate level, or multiple intermediate levels.  Still, regardless of the complexity or simplicity of a particular manufacturer-intermediary-consumer scenario, Illinois Brick provides a bright line test.

9C had no trouble finding that customers were direct purchasers from Apple, and therefore had antitrust standing.  The court did not rest its holding on the fact that consumer paid the App Store, the nature of payment received by Apple (i.e., mark-up versus commission), or on who determined the price that was paid (viz., the developer).  The court relied on a bright line test between manufacturer and distributor — Apple is a distributor who sold apps directly to its customer, and it can therefore be sued by those customers for antitrust injury. 

Procedural footnote: Apple filed four 12(b)(6) motions.  Its later motions raised arguments that had been omitted from its earlier motions, to which the plaintiffs objected. Acknowledging a Circuit split, 9C sided with those Circuits who say the trial court has the discretion to consider successive 12(b)(6) motions for the sake of judicial economy.  

Posted on

When One Hunter is armed with Penal Code 632 and the other with anti-SLAPP, Who Wins?

Safari Club v. Dr. Lawrence Rudolph, 1/18/17, 9C

For 25 years Rudolph had been a member, and sometime president, of Safari Club, a hunting organization with 50,000 members.  In 2012, Safari expelled him based on accusations of ethical violations.  Rudolph sued Safari and its president, Whipple.  Later, he lured Whipple to lunch and secretly recorded the conversation, which was later published on YouTube for the benefit of Safari’s members.  Relying in part on Penal Code 632 (consent required by all participants to a confidential communication), Whipple sued Rudolph for claims related to invasion of privacy.  Rudolph filed an anti-SLAPP motion, and the trial court granted his motion to four of Whipple’s seven claims.  Rudolph appealed the denial of his motion to the remaining claims.  Held: Affirmed.

California’s anti-SLAPP statute (CCP 425.16) requires an early dismissal of cases where defendant can demonstrate that the conduct giving rise to the lawsuit is protected by the statute (e.g., free speech, right to petition etc.), unless plaintiff can then show he has a reasonable probability of prevailing.  That burden equates to a showing of minimal merit sufficient to overcome a non-suit or directed verdict motion.

Here, the conduct in question is the secret recording of a lunch conversation. PC 632 forbids recording a confidential communication without the other’s consent.  The court held that Rudolph’s conduct was protected by 425.16(e)(4), which protects conduct in furtherance of free speech in connection with a public issue.  The court analogized Rudolph’s conduct to undercover newsgathering.  The court rejected Whipple’s argument that violating PC 632 cannot be protected conduct – That issue presents a question of fact because Rudolph claimed that the conversation was not  a confidential because it occurred in a public place.    

Moreover, the public issue test was also met because the issue pertained to an organization with a large membership, and included various claims of governance abuse and the waste of resources.

At the same time, Whipple met his burden under the merits prong.  Rudolph said the conversation took place in a public place, nixing any claim to confidential communication or privacy.  But such communications can still be confidential, depending on the facts.  Whipple had testified that they kept their voices down and stopped talking when anyone approached their table.  So, another question of fact for the jury.
Footnote: Whipple has died and a family member is now pursuing these claims as his successor.  But claims for wrongs to the person aren’t assignable, emotional distress damages are no longer recoverable, and, as the court noted, there are questions about whether his widow has standing to pursue these claims in federal court.  And Whipple won’t be there as a witness.  This case could be a train wreck, and it looks like a good time to end the case.
Posted on

FCRA Violation Held to be Willful, Despite Being an Issue of First Impression

Sayed v M-I, LLC, 1/20/17, 9C

Under the Fair Credit Reporting Act (FCRA), an employer may not procure a prospective employee’s consumer report unless a “clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured . . . in a document that consists solely of the disclosure . .  .” 15 U.S.C. § 1681b(b)(2)(A).  Employer’s disclosure form also contained a release of liability.  Employee filed a putative class action against employer for statutory and punitive damages under the FCRA.  The district court dismissed the case with prejudice for employee’s inability to plead willfulness  Held: Reversed

The FCRA provides for actual damages for negligent violations; it provides for statutory damages for willful violations only.  While no appellate case or administrative regulation had spoken on the validity of including a liability waiver in the disclosure, the court found that defendant’s conduct comported with no reasonable interpretation of 15 U.S.C. § 1681b(b)(2)(A), and was objectively unreasonable.  

The Supreme Court has specifically distinguished recklessness from negligence in the FCRA context, noting that a violation is only reckless (and therefore willful) where an employer adopts a reading of the statute that runs a risk of error “substantially greater than the risk associated with a reading that was merely careless.”  Because the statute barred defendant’s reading, whether it actually believed that its interpretation was correct was immaterial.  The court concluded that defendant ran an “unjustifiably high risk of violating the statute,” and that its conduct was willful as a matter of law.
Posted on

Trial Court’s Ruling On Choice Of Law Is Equivalent To An In Limine Ruling, And Can Be Revisited As A Case Develops

Chen v. L.A. Truck Centers, 1/18/17, 2DCA/8

Indiana company manufacturers tour bus, sells bus to California dealer, who in turn sells it to a California tour bus company.  The tour bus is being driven in Arizona by a California resident, carrying Chinese nationals, when there is an accident.  (Deep breath suggested here.) After a lawsuit is filed, California tour bus company and driver settle.  Indiana manufacturer and its California dealer make a choice of law motion, arguing that (the more defendant friendly) Indiana law should apply.  The trial court agrees.  The Indiana manufacturer settles and, before trial, Plaintiff asks the trial court to reconsider the earlier ruling and apply California law instead.  The trial court denies motion.  Plaintiffs then lose jury trial and appeal. Held: Reversed.

The trial court said that choice of law motion was not a proper motion in limine; that the requirements to make a motion for reconsideration had not been met; and that the choice of law analysis still favored applying Indiana law.  The 2DCA disagreed.  A choice of law motion is in the nature of a in limine motion, which can be revisited by the trial court any time and as the record develops, without regard to the stricter requirements of CCP 1008. Second, the choice of law analysis has to be done with respect to each conflicting legal issues (called the doctrine of dépeçage).  For example, in a personal injury case, that would include issues related to liability, damages and comparative fault.  Finally, in terms of the choice of law analysis, 2DCA had no problem concluding that California had an interest in applying its strict liability rules against a California business, and that Indiana had no such interest on the facts as they stood at trial.

California choice of law rules encompass a three step process, applied to each law at issue: To over simplify, the test exploures whether the states’ laws are different, the interest of each state in applying its own law to the facts of the case at bar, and then weighs those interests to determine whose interest would be more impaired if their law was not applied.  Ultimately, the trial court must apply the law of the state whose interests would otherwise be most impaired.  Further, if the interests of the foreign state will not be furthered by the application of its law to the case, then the “conflict” is a false conflict.  

The court examined California’s interests in its strict liability standard, like insuring that the costs of injury are borne by the manufacturer and improving product safety.  The court said: California’s interest in imposing its rules of strict products liability in this case, in which a California dealership ordered an allegedly defective product, imported it into the state, and sold it to a California tour company, for use on California roads, is strong.  While Indiana’s interest in a more difficult liability standard for defective products tips in favor of manufacturers, an Indiana company was no longer part of the case.  The court rejected dealer’s argument that it effectively did business in Indiana, or that Indiana had an interest in applying its law in favor of dealer simply because dealer bought products from an Indiana manufacturer.            

Finally, the court disagreed with some DCAs who have suggested that Hurtado v. Superior Court (1974) 11 Cal.3d 574 stands for the proposition that California has an interest in limiting the damages California defendants must pay.
Posted on

Trial “Begins” When Jury Trial Panel (the venire) are Impaneled and Sworn for Purposes of Voir Dire


Stueve v. Buchalter Nemer, 1/19/17, 4DCA

Certain members of the Stueve family, heirs to the Alta Dena fortune, sued various attorneys and law firms for claims like fraud.  A panel of 75 prospective jurors were impaneled and sworn a few days before the five year anniversary of the filing the case.  The voir dire process extended past the five year anniversary.  Defendants filed a motion to dismiss under CCP section 583.310 (an “action shall be brought to trial within five years after the action is commenced against the defendant.”). The trial court granted the motion.  Held: Reversed.

In an action tried to a jury, the action is brought to trial when the jury is impaneled and sworn.  The word “impaneled” is not defined by statute.  Relying on Black’s Law Dict., the court said it generally means: “The act of the clerk of the court in making up the list of jurors who have been selected for the trial of a particular cause.  All the steps of ascertaining who shall be the proper jurors to sit in the trial of a particular case up to the final formation.” Moreover, the statutes dealing with voir dire refer to prospective jurors as being in a panel (a word that is not used to refer to the jurors who are chosen to try to the case); and prospective jurors must be “sworn,” albeit for purpose of answering voir dire. 

The court’s conclusion had a lot of support.  For example, a Supreme Court decision from the 1800s held that impaneling the jury was part of the trial.  A DCA case from 1958 and one from 1983 held that the impaneling of the venire constitutes bringing the matter to trial for purposes of the five year rule.  In fact, in the 1958 DCA case, in very similar circumstances, the court reversed a trial court’s dismissal based on the five year rule, holding that “brought to trial” includes when the parties commence the examination of prospective jurors and the impanelment of the jury.  

In dismissing the Stueve case, the trial court relied on a 1982 Supreme Court case of Hartman v. Santamarina. In Hartman, there was no voir dire; 12 jurors were simply impaneled and sworn to try the case as part of a charade to beat the five year rule (one of the trial counsel was engaged elsewhere). The SC held that when the actual jurors are impaneled and sworn to try the case, the trial begins.  Here, 4DCA here held that the ruling in Hartman did not exclude the finding, based on more than 100 years of precedent, that trial also begins where the venire are impaneled and sworn for purpose of answering voir dire.  


Posted on

Filing Late Affidavits Does Not Deprive Trial Court of Jurisdiction to Hear and Grant Motion for New Trial


Kabran v. Sharp Memorial Hospital, 1/19/17, CA Supreme Court

Plaintiff sued hospital for medical malpractice and lost.  He died almost immediately after the jury verdict.  His widow filed a timely notice of intent to move for new trial, she met one of the statutory grounds authorizing a new trial (here, new evidence uncovered through an autopsy), and her motion was heard and granted within the statutorily prescribed period (not later than 60 days after the mailing of the notice of entry of judgment).  One major problem: The affidavits in support of her new trial motion were filed late, something the hospital raised for the first time on appeal. The trial court granted a new trial; on appeal the DCA affirmed. The Supreme Court granted review.  Held: Affirmed.

When seeking a new trial on a ground like newly discovered evidence , Code of Civil Procedure section 657 requires the moving party to timely file supporting affidavits.  California DCAs were split on whether the late filing of affidavits deprived trial courts of jurisdiction to grant a new trial motion.  Some courts focused on the mandatory nature of the statutory language concerning when affidavits must be filed.  But “mandatory” and “jurisdictional” are not the same thing — A court can lack fundamental jurisdiction, where it doesn’t have the power to act; or, a court can act in excess of jurisdiction, where its act can be valid unless challenged.  

As the court explained, it is presumed that courts have jurisdiction unless specifically curtailed by the Legislature.  The court also noted contrasting language in other sections of the new trial statutory scheme, which are in fact jurisdictional.  Section 659 expressly says that the time period to file notice of intent to move for new trial cannot be extended.  Section 660 says that the power of the trial court to rule on the motion expires 60 days after the mailing of the notice of entry of judgment.  The section setting forth the filing deadline of supporting affidavits does not have such language. 

So, the matter heads back to the trial court for a new trial.