Suit Highlights Data Collection Issues

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A California Court of Appeals recently allowed a consumer to proceed with a class-action lawsuit against a national retailer for the seemingly routine act of requesting a telephone number when the customer paid for merchandise by credit card. The lawsuit, premised on a violation of the California consumer protection law, highlights the unique pitfalls national marketers face in various states, particularly when conducting business in California.


Asking for a phone number always entails risk. Like many businesses, the national retailer Linens 'n Things requested the number of its customers, including those who paid by credit card. The number was requested under the store's "telephone capture policy" whereby cashiers asked customers for the number, which was recorded in the electronic cash register, when the customer was paying with a credit card.


Importantly, the number was not required to complete the credit card transaction under the store's credit card merchant agreement. Rather, it was acquired to create a customer profile using a reverse telephone search to match an address with the number, which was then used for direct marketing purposes.


According to the recent court of appeals decision, the retailer's collection of the phone number as part of a credit card transaction violated a little-known provision of the California consumer protection law.


The provision, known as the Song-Beverly Credit Card Act, prohibits either requiring or even requesting a consumer's personal identifying information, such as the cardholder's address or telephone number, as part of a credit card sales transaction. The law exempts the collection of information required to complete the credit card transaction, such as a merchant agreement or from otherwise obtaining the information in order to process the transaction, such as fulfillment details.


The case began when a consumer who gave her phone number as part of a credit card transaction with the store filed a suit on behalf of all California consumers against Linens 'n Things based on its violation of the consumer protection law. The trial court dismissed the case; however, the appellate court reinstated the case, finding that the plaintiff presented a cognizable claim.


Under the appellate decision, a retailer is permitted to separately solicit a consumer's address and telephone number for the store's mailing list, on an opt-in basis. The merchant, however, cannot even ask for personal information to complete the credit card transaction if such information is not necessary. The collection and use of such data are prohibited unless the merchant first advises the customer that this information is not required to complete the purchase.


California Unfair Competition Act. The Song-Beverly Credit Card Act has a penalty of $250 maximum for the first offense and $1,000 maximum for each offense thereafter. Though these amounts may not seem extraordinary, another unique aspect of California law is the availability of representative action, which lets plaintiffs file suits against companies essentially on a class-wide basis, but with even fewer restrictions than the traditional class action.


Unlike class actions, which require that the suit be filed on behalf of an injured person whose injury is typical to the class that he or she seeks to represent, the California Unfair Competition Act lets a plaintiff file suit on behalf of all California consumers against a marketer without ever having bought a product, been injured or even participated in the transaction at all.


This unique law essentially lets a California consumer carry out the enforcement duties of the California attorney general's office. In practice, however, plaintiff law firms have taken advantage of the law's unique enforcement provision to file suit against businesses for technical violations of one or more aspects of the state consumer protection statute.


Law firm files thousands of cases to coerce settlements. In a sign that perhaps some semblance of reality is setting in regarding private enforcement of the Unfair Competition Act, the California State Bar recently suspended all members of a Beverly Hills law firm from the practice of law.


According to published reports, the firm filed thousands of suits under the Unfair Competition Act against businesses for technical violations such as licensing requirements. The firm would sue these companies and send a letter offering to settle the cases. The firm itself was accused of abusing the Unfair Competition Act for filing cases with insufficient probable cause and charging excessive contingency fees.


Businesses need to be vigilant. Direct marketers that conduct business nationwide are particularly vulnerable to California's representative action provision. Because their business is conducted on a nationwide scale, they may not be intimately familiar with the nuances of each state's consumer protection laws, until it is too late.


Given that California lets plaintiff's attorneys file suit against companies on a representative basis, without even representing an injured consumer, direct marketers must be diligent in ensuring compliance with the laws of each state in which they conduct business, particularly in California.


In the case of the Song-Beverly Credit Card Act, direct marketers, particularly telemarketers and Internet marketers, should confirm that their data collection practices do not request personal identifying information from California consumers in connection with credit card sales other than what is absolutely necessary to process the transaction. In addition, if a marketer is sued under the California Unfair Competition Act, the marketer should try to determine whether the law firm that filed suit is itself abusing the law.


That one law firm was responsible for so much vexatious litigation may not be typical. But it also may be the tip of the iceberg for claims against businesses that market in California.


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