United States: Curbing Food And Cosmetic Class Actions Through Arbitration, Dispute Resolution And Class-Action Waivers

The volume of food and cosmetic class actions has exploded. Despite manufacturers tamping down their marketing programs, plaintiffs always seem to be one step ahead of label designers and marketers — dreaming up new theories of labeling deception or of undisclosed trace ingredients in products.

By the time litigation has commenced, the plaintiffs have consumed the food or cosmetic and resort to complaining that they never would have purchased the product had they only known that it was inaccurately described or contained the undisclosed trace ingredients.

Against this landscape, retailers and manufacturers should consider alternative methods of curtailing class actions. The contractual nature of customer loyalty programs presents one option for consideration. Unsurprisingly, courts have looked closely at the details in deciding whether they should enforce arbitration agreements and class waivers in customer loyalty programs.[1]

Fairness, transparency and an efficient dispute resolution process are key factors in determining whether such terms are enforceable.

Customer Loyalty Programs

Customer loyalty programs established by retailers and manufacturers have existed for years. Their primary purpose is to enhance customer or brand loyalty by offering benefits to frequent purchasers, such as discounts, rebates or other promotions.

Yet in food and cosmetic class actions, plaintiffs have attempted to use these programs affirmatively in support of motions for class certification — however imperfectly — ostensibly to prove ascertainability or the composition of the plaintiff class.

For a time, in federal circuits requiring a heightened showing of ascertainability, plaintiff-side lawyers argued that customer loyalty programs could confirm the date of product purchase and provide identifying information about the purchasers.

Even so, customer loyalty programs did not catch on as a means of identifying the parameters of the class, in part because retail programs were under-inclusive,[2] particularly in lawsuits leveled against the manufacturer.

At best, a loyalty program could capture recorded purchases at a given retail chain. It certainly could not identify entire classes who might have claims against manufacturers.

Moreover, some customers opt not to "swipe" loyalty cards for all purchases, especially for smaller sales. And not all purchasers are enrolled in loyalty programs. Therefore, although bandied about as a potential method of proving ascertainability, courts have not embraced customer loyalty programs as a panacea for this purpose.

If properly designed, however, these programs could provide fodder for opposing class certification, or at least limiting class size, through contractual language requiring dispute resolution, arbitration and class waivers.

To be sure, a retail customer loyalty program with arbitration and class waiver terms may not defeat class certification entirely in litigation against the manufacturer. Provided the contractual provisions are enforceable by a manufacturer, however, the terms could raise commonality issues and reduce class size, thereby limiting exposure.

Non-litigious customers should welcome an equitable mandatory arbitration process that allows for the prompt, low-cost resolution of customer disputes. Courts also should be receptive to such programs for the same policy reasons underlying the Federal Arbitration Act — they offer an efficient method of resolving disputes and reducing the volume of litigation.

Concepcion, Arbitration Clauses and Class Waivers

The U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion[3] offers guidance both for the propriety of and contractual structure for consumer arbitration and class waiver provisions in customer loyalty programs.

In fact, since the dispute resolution process in Concepcion did not require arbitration (filing a claim in small claims court was a non-arbitration alternative), the decision also may inform mandatory dispute resolution clauses.

The dispute arose from Vincent and Liza Concepcions' purchase of cellphones that AT&T Mobility LLC had advertised as "free." When AT&T later charged sales tax for the phones, the Concepcions filed suit in the U.S. District Court for the Southern District of California.[4] The suit was later consolidated into a putative class action, alleging, among other things, false advertising and fraud for advertising the phones as free.

When they purchased the phones, the Concepcions entered into an agreement governing the resolution of disputes pertaining to the sale. Notably, the agreement contained a class waiver, requiring that claims be arbitrated in an "individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding."[5]

Under the contract terms, customers had several avenues through which to pursue a dispute:

  • The customer could initiate a dispute through a one-page notice of dispute form, available on AT&T's website.
  • AT&T could then offer to settle the claim within 30 days.
  • If AT&T did not offer to settle, or if the claim was unresolved within 30 days, the customer could demand arbitration through a form also available on the website.

If the parties proceeded to arbitration, the following provisions were triggered:

  • AT&T was to pay all costs for non-frivolous claims.
  • Arbitration was to take place in the county in which the customer was billed.
  • For claims valued at $10,000 or less, the customer elected whether the arbitration hearing took place in person, by phone or based only on paper submissions.
  • Either party could bring a claim in small claims court in lieu of arbitration.
  • The arbitrator was authorized to award any form of individual relief (including injunctive relief and punitive damages).
  • AT&T could not seek reimbursement of its attorney fees.
  • If the award against AT&T was larger than its last written settlement offer, then AT&T was obligated to pay a $7,500 recovery plus double the amount of the customer's attorney fees.

The court denied AT&T's motion to compel arbitration[6] based on the so-called "Discover Bank rule" established in Discover Bank v. Superior Court.[7] Under the rule, courts in California held that, in some circumstances, class-action waivers in consumer arbitration agreements were unconscionable.[8]

The 9th U.S. Circuit Court of Appeals affirmed.[9]

The issue went up to the Supreme Court on writ of certiorari.

The Supreme Court held that the FAA preempted California state law regarding the unconscionability of class arbitration waivers in consumer contracts — essentially abrogating the Discover Bank rule.

The Concepcions argued that Discover Bank precluded the class waiver under the FAA's savings clause as a "ground [] [existing] at law or in equity for the revocation of any contract,"[10] and that, therefore, the arbitration agreement and class waiver were unenforceable.

The Supreme Court disagreed, reasoning that while Discover Bank was not an outright prohibition of arbitration, its preclusion of class-action waivers disfavored arbitration. In other words, the FAA preempted Discover Bank because it stood "as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."[11]

Responding to concerns that — absent class actions — small-dollar claims might otherwise slip through the cracks, the high court pointed to the District Court's characterization of the dispute resolution program as "quick and easy." The lower court also said claims were unlikely to go unresolved due to the program's consumer-friendly terms.

Indeed, the high court opined that the Concepcions "were better off under their arbitration agreement with AT&T than they would have been as participants in a class action."[12]

Under Concepcion, if a loyalty program contains an arbitration agreement and class waiver as part of its consumer-friendly dispute resolution process, it is likely that the FAA will preempt claims that a class-action waiver is unconscionable.

California, however, has introduced another wrinkle into the issue of FAA preemption.

The 9th Circuit in Blair v. Rent-a-Center Inc.[13] recently affirmed a district court decision denying the defendant's motion to compel arbitration because the arbitration agreement at issue waived the plaintiff's right to obtain public injunctive relief in arbitration and required that the parties arbitrate all claims — i.e., the waiver resulted in barring the plaintiff from seeking a public injunction in any forum.

Relying on McGill v. Citibank NA,14 the 9th Circuit held that the arbitration agreement was unconscionable.

Concepcion counsels that the McGill public injunctive relief rule also may be preempted by the FAA. Blair anticipated this argument and provided rebuttal. It reasoned that the California rule is not hostile to arbitration because it does not prevent the arbitrability of public injunctive relief. Instead, it merely prevents the blanket waiver of the right to seek a public injunction.

Blair also attempted to distinguish Concepcion by explaining that, unlike class arbitration, public injunctive relief does not require the same type of complex procedural process that would impede arbitration's informal process.

Relying on McGill v. Citibank NA,[14] the 9th Circuit held that the arbitration agreement was unconscionable.

Concepcion counsels that the McGill public injunctive relief rule also may be preempted by the FAA. Blair anticipated this argument and provided rebuttal. It reasoned that the California rule is not hostile to arbitration because it does not prevent the arbitrability of public injunctive relief. Instead, it merely prevents the blanket waiver of the right to seek a public injunction.

Blair also attempted to distinguish Concepcion by explaining that, unlike class arbitration, public injunctive relief does not require the same type of complex procedural process that would impede arbitration's informal process.

It is possible that Blair will be modified after en banc review by the 9th Circuit or reversed by the Supreme Court. Until then — to ensure that arbitration agreements remain enforceable in California, where many consumer class actions are brought — it may be wise to include a carve-out that allows plaintiffs to seek public injunctive relief in arbitration.

To discourage class-action plaintiffs from using this carveout to end-run the class-action waiver, consider adding provisions limiting the recovery of attorney fees relating to claims seeking public injunctions.

Designing a Loyalty Program That Will Curtain Class Certification

Designing a customer loyalty program that can be used against class certification, or to curtail the size of a class, starts with the basics. The general proposition is that enrollment and participation in the customer loyalty program is contractual. Therefore, the parties may agree to arbitrate claims and to resolve claims only on an individual basis, waiving resolution of the dispute via class action.

But the essential purpose of customer loyalty programs — enhancing customer loyalty through excellent customer service — cannot be ignored.

In the final analysis, arbitration and class waiver provisions in customer loyalty programs must be fair, their terms open and obvious and, because enrollment and participation in the program is contractual, they should comply with basic contract principles. Mandatory arbitration and dispute resolution terms are not new, particularly in commercial settings. Little negative can be said about requiring parties to try to resolve a dispute before embarking on arbitration or litigation. A few criticisms typically directed to contractually mandated arbitration — such as expense and the inability to manage claims arising out of low cost products — can be addressed by the program terms, just as AT&T accomplished in Concepcion.

Creating the Contract Through a Customer Loyalty Application

Some customer loyalty accounts — particularly those established by manufacturers — are created online. On the other hand, many retailers offer a one-page enrollment application that can be completed while standing in line at the checkout counter.

Either way, enrollment applications provide an opportunity to create a contractual relationship and to establish the consumer's assent to the program terms — an essential component of any loyalty program.[15]

Consider both presenting the contractual terms at the time of the application and subsequently mailing them to the customer so that the customer can review the terms and conditions outside of the time pressures of the checkout line. A 30-day opt-out period after initial enrollment gives the consumer time to review program terms and thereby supports the customer's assent to the terms of the program.

Because loyalty discounts constitute the consideration for the program, discounts should be available only to customers who signed up for the loyalty program and when the loyalty account is identified at the time of purchase, either via swiping the card or otherwise identifying the account.

Open and Obvious Terms

All contractual terms, including the dispute resolution, arbitration and class waiver provisions should be open and obvious.[16] The best method for ensuring assent in online enrollments is a so-called "clickwrap" agreement, which, after presenting terms and conditions, requires a customer to click an "I agree" box.[17] Browsewrap agreements, to which a party assents to contractual terms merely by virtue of the use of a website, are less likely to be enforceable.[18]

A third option is the hybridwrap agreement, which prompts the user to manifest assent after "present[ing] the user with a hyperlink to their terms and conditions, rather than displaying the terms themselves."[19]

Under any of these online scenarios, it always is possible that a consumer will not read their terms and conditions. In designing online enrollment, however, efforts should be made to encourage enrollees to read and understand the customer loyalty program terms. Efforts to ensure that program terms are open and obvious may be less problematic for retail loyalty programs, for which consumers "apply" for the loyalty program in person at the store.

In these settings, management should be sure that the customer agrees to the contractual terms, including the dispute resolution portion of the contract, before providing a customer loyalty card. It goes without saying that the signed application should be retained in accordance with the company's document retention policy.

Recording the Dates, Products and Purchase Prices of All Transactions

Even today, some customer loyalty programs do not have the capacity to record the dates and prices of all purchase transactions. These programs should, however, be designed to record all transactions for several reasons beyond those relating to class certification. Having transactional information available could provide information useful to a statute of limitations defense.

More importantly, the transaction history could provide relevant information about purchasing inclinations.

For example, transactional history could show that a consumer only purchased a given brand of toothpaste, and continued to buy that same brand after the commencement of litigation or arbitration, thereby raising an issue of causation or reliance. Tracking purchases also may show general consumer purchasing trends, such as that the ebb and flow of demand was caused by pricing rather than by labeling representations.

The Scope of the Agreement to Arbitrate

As with any contractual dispute resolution clause, it is important to define the scope of the agreement.

The phrase "all disputes arising out of or relating to the program," for example, could be ambiguous in the context of a customer loyalty program. The dispute resolution clause also should expressly include all disputes relating to customer purchases — whether or not the customer uses or swipes the loyalty card — including claims relating to marketing, product representations, discounts, labeling, product names and compliance with federal and state regulations regarding the product.

It is possible that a dispute resolution clause could encompass personal injury claims, but such claims should be included only if appropriate after consultation with risk managers and insurers, as there may be valid business reasons for excluding claims alleging personal injury from the clause.[20]

Identifying Who Can Enforce the Arbitration Clause

Equally important in designing the dispute resolution mechanism is identifying the parties that will be subject to, and that can enforce, the dispute resolution process, arbitration and class waiver terms. Certainly, the clause should include all corporate affiliates.

Indeed, many large retail chains have parent or holding corporations, multiple affiliates and corporate directors or officers that could be implicated in litigation for the purpose of avoiding arbitration or a class waiver. Retail customer loyalty programs should include language that clarifies the intent that the terms are enforceable by product manufacturers and distributors, as well as by retailers.

Additionally, "intertwined claims estoppel" or the "intertwined claims doctrine" allows non-parties to an agreement to enforce an agreement to arbitrate when the signatory alleges substantially interdependent and concerted misconduct by the non-signatory and the signatories.[21]

Labeling claims arguably could fall within this rule. Moreover, an arbitration agreement can apply to non-signatories, such as manufacturers and distributors of food and cosmetic products, if it is shown that they are third-party beneficiaries of the agreement.[22]

If desired, the arbitration clause should state that the parties are intended to be direct beneficiaries of the terms of the program.

Dispute Resolution Procedures

The specific manner in which disputes are resolved depends on the type of retail establishment or manufacturer and their respective sizes and structures. Certainly, a large retail chain or a manufacturer will have access to various levels of employees that can be accessed for dispute resolution. By way of example, a grocery chain dispute resolution program might require complaint submission to the store manager in the first instance.

In all likelihood, the dispute will be resolved simply by providing a full refund of the purchase price.

A full refund would certainly raise questions of a customer's Article III standing and entitlement to seek restitution if that customer sought further recovery in a class action. Many stores may even offer this type of dispute resolution through customer service without a formal system of dispute resolution.

However, many store managers may require some proof of purchase prior to offering a refund. If the purchase is made through a customer loyalty program that tracks purchases, a receipt would not be required because account identification would suffice.

The terms of the mandatory dispute resolution may include an option for further managerial level review or appeal. An appeal of store-level dispute resolution could thereafter take place through a corporate review board.

In all likelihood, two levels of review will be enough to resolve the customer's complaints in a timely and efficient manner. In other words, the program is designed equitably to resolve the dispute with an intended result of a satisfied customer. The dispute resolution clause also should contain a provision triggering arbitration within 30 days, in case the internal dispute resolution process is unsuccessful.

Following Concepcion's lead, retailers and manufacturers should consider paying all costs for non-frivolous claims. Arbitration could be submitted on the papers, a provision that may be useful for low-cost claims. Retailers and manufacturers should consider allowing claims to proceed in small claims court, as was the case in Concepcion, and a provision relating to whether or not attorney fees can be recovered by the retailer or manufacturer.

Ultimately, the program should be prompt, fair and efficient, and it should address the concerns of each consumer.

Class-Action Waivers

Given Concepcion, any dispute resolution clause structured in a customer loyalty program should contain a class-action waiver that — again — applies to both retailer and intertwined parties, such as manufacturers and distributors. Thus, the customer agrees to resolve disputes outlined in the dispute resolution provisions on an individual basis and agrees not to participate in a class action in any forum.

As noted, a potential problem in class waivers is inclusion of claims for public injunctive relief in the class-action waiver. Some jurisdictions may view such waivers as unconscionable,[23] which could void the entire arbitration and dispute resolution agreement.[24]

Therefore, consideration should be given to the option of carving out from the waiver claims for public injunctive relief, provided that no monetary relief or incentive award can be awarded to the class representative.

Venue and Choice-of-Law Provisions

The dispute resolution terms also should contain a choice-of-law provision and venue selection clause for arbitration. The choice-of-law provision should have some relationship to the company administering the customer loyalty program. Often, it is the law of the state in which the entity was formed or the law of the state where the entity's principal place of business is located.

The venue for any arbitration proceeding is less important if the arbitration is decided on the papers, without live witnesses.

Nevertheless, in designing the dispute resolution process, the location of any arbitration should be convenient for the customer. Again, these terms should be consistent with both supporting the dispute resolution process and ending the process with a satisfied customer.

The Right to Modify Contractual Terms

Any customer loyalty program must be carefully designed, particularly if it permits the retailer or manufacturer (unilaterally) to modify or cancel contractual terms, as this may create the defense of an illusory contract.[25]

If such a clause is included, at a minimum, written notice of any change should be given to the consumer by email and/or first-class mail. The modifications should not take effect until 30 days after notice to the consumer, thus allowing a customer an opportunity to opt out of the program within the 30 days.

Conclusion

Customer loyalty programs can be beneficial to all sides of the sales transaction for low-cost food and cosmetics. Not only do they garner customer loyalty through discounts available only to enrolled customers; they can offer other terms of sale including the manner by which disputes are resolved.

Inexpensive and efficient extrajudicial dispute resolution processes should benefit consumers, retailers, manufacturers and distributors alike. Such terms also can reduce or curtail exposure to the defense of expensive class-action litigation. The contract terms, however, must be completely fair to customers.

This means that consumers must know they have entered into a contract whose terms, including arbitration and class waiver provisions, are open and obvious.

This article first appeared in the September 17, 2019, edition of Westlaw Journal Class Action.

Footnotes

[1] Compare Olivas v. Hertz Corp., No. 17-cv-1083, 2018 WL 1306422 (S.D. Cal. Mar. 12, 2018) (ordering claim to arbitration) with Nat'l Fed'n of the Blind v. The Container Store Inc., 904 F.3d 70 (1st Cir. 2018) (affirming denial of motion to compel arbitration).

[2] See In re Simply Orange Orange Juice Mktg. & Sales Practices Litig., No. 12-md-2361, 2017 WL 3142095 at *3 n.5 (W.D. Mo. July 24, 2017), vacated, 2018 WL 3589456 (W.D. Mo. Apr. 26, 2018).

[3] 563 U.S. 333 (2011).

[4] The consolidated class action filed in the District Court was titled Laster v. T-Mobile USA Inc., No. 05-cv-1167, 2008 WL 5216255 (S.D. Cal. Aug. 11, 2008), aff'd, 584 F.3d 849 (9th Cir. 2009).

[5] 363 U.S. at 336.

[6] Id. at 338.

[7] 113 P.3d 1100 (Cal. 2005).

[8] See, e.g., ILJ Dominicana SA v. It's Just Lunch Int'l LLC, No. 08-cv-5417, 2009 WL 305187 (C.D. Cal. Feb. 6, 2009).

[9] Laster, 584 F.3d 849.

[10] 9 U.S.C.A. § 2.

[11] 563 U.S. at 352.

[12] Id.

[13] 928 F.3d 819 (9th Cir. 2019).

[14] 393 P.3d 85 (Cal. 2017).

[15] Compare Norcia v. Samsung Telecommunications America LLC, 845 F.3d 1279 (9th Cir. 2017) (denying arbitration where defendant was unable to establish contract formation), with Anderson v. Walmart Stores Inc., No. 16-cv-6488, 2017 WL 661188 (W.D.N.Y. Feb. 17, 2017) (notice on packaging and on-screen notice established assent).

[16] Nat'l Fed'n of the Blind., 904 F.3d 70.

[17] See Nguyen v. Barnes & Noble Inc., 763 F.3d 1171, 1175-76 (9th Cir. 2014).

[18]Anand v. Heath, No. 19-cv-16, 2019 WL 2716213 at *3 (N.D. Ill. June 28, 2019).

[19] Nicosia v. Amazon.com Inc., No. 14-cv-4513, 2019 WL 2482674 at *8 (E.D.N.Y. June 14, 2019).

[20] Marmet Health Care Ctr. Inc. v. Brown, 565 U.S. 530 (2012) (ruling that West Virginia prohibition of agreements to arbitrate personal injury claims is preempted by FAA.)

[21] Hays v. HCA Holdings Inc., 838 F.3d 605, 610 (5th Cir. 2016).

[22] Compare LaSalle Inc. v. Int'l Bhd. of Elec. Workers Local No. 665, 336 F. Supp. 2d 727, 729-30 (W.D. Mich. 2004), with Murphy v. DirecTV Inc., 724 F.3d 1218, 1233-34 (9th Cir. 2013).

[23] McGill v. Citibank NA, 393 P.3d 85 (2017).

[24] Delisle v. Speedy Cash, No. 18-cv-2042, 2019 WL 2423090 (S.D. Cal. June 10, 2019).

[25] Nat'l Fed'n of the Blind, 904 F.3d at 86.

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