June 29, 2020 -

Cancellations and Refunds Under California’s Consumer Protection Statutes in an Evolving COVID-19 Landscape

Several months into the widespread business closures and event cancellations resulting from the COVID 19 pandemic, we have seen businesses adopt a range of strategies to respond. Those strategies, in addition to the closures and cancellations themselves, have sparked a surge in class action litigation, much of it under California’s consumer protection statutes, the Unfair Competition Law (UCL), Consumer Legal Remedies Act (CLRA), and False Advertising Law (FAL).

This blog post explores strategies (short of full refunds) that have been adopted by businesses to address cancellations and closures, as well as class actions that have been filed in response. We also examine potential defenses for this new breed of class action litigation.

COVID-19 Mitigation and Risk Reduction Strategies and Class Action Challenges

Transition to Online Services

The expansion of our online presence has become ubiquitous with our post-COVID-19 experience. Rather than simply closing up shop, many companies have transitioned their business models from in-person to online almost overnight. This transition, however, has not been without its own unique challenges, leading to numerous class action suits across the state. Notable examples include:

  • Christina Diaz v. University of Southern California (Central District of California, Judge Dolly Gee)

As universities have moved classes online, lawsuits have been filed seeking reimbursement for room and board and reimbursement for the lost benefits of an in-person education.[1] On May 4th, a putative class of students brought UCL claims against the University of Southern California for allegedly continuing to hold students liable for the full pre-shutdown tuition, despite not providing the services the students had bargained for.[2] In the wake of California Governor Gavin Newsom’s stay-at-home order, USC had transitioned its entire university from its physical location in Downtown Los Angeles to the videoconference platform Zoom. Despite USC offering the same degrees and accreditation it had offered prior to COVID-19, the putative student class argues that the loss of physical facilities and amenities dilutes the value of their education.

  • Erin Weiler v. CorePower Yoga, LLC (Central District of California, Judge George Wu)

Multiple cases throughout the state have also targeted gyms, which have struggled to adapt their business model to California’s stay-at-home orders and social distancing guidelines. On April 15th, a putative class brought UCL, CLRA, and FAL claims against CorePower Yoga, a yoga studio in Los Angeles, for allegedly continuing to charge monthly membership fees despite closing down their studio indefinitely.[3] In lieu of offering full refunds, CorePower Yoga offered its monthly members free access to a special collection of online classes that mimicked the classes offered at their physical studio. Despite the availability of these online classes, the putative class argues that this is not what they bargained for when they initially signed up for CorePower and that they can only be made whole by the receiving a full refund.

Credits for Future Events

Although we are unlikely to see live audiences at concerts, conventions, and sporting events anytime soon, many companies are looking to use the prospect of future events to their advantage. Crediting consumers for future events can be a helpful solution for entertainment businesses operating on thin margins, who may not have the capabilities to provide immediate full refunds. Such strategies have sparked class action challenges, however, including the following:

  • Tess Nesis v. Do Lab, Inc. et al. (Central District of California, Judge Dale Fischer)

On April 14th, a putative class brought UCL and CLRA claims against Do Lab, the operator of the 2020 Lightning in a Bottle Music Festival, for refusing to give refunds to those who purchased weekend passes, despite cancelling the event.[4] The COVID-19 pandemic put Do Lab in an extremely precarious position. Not only was Do Lab forced to cancel its festival just a few months before the festival was set to take place, but it had also already spent most of the money brought in through ticket sales on non-refundable deposits, building materials, and staff. Unable to offer immediate refunds, Do Lab offered ticket purchasers the option to either credit funds towards future iterations of the Lightning in a Bottle Music Festival, donate their 2020 ticket funds to Do Lab, or be placed in a pool for a potential refund at an undisclosed time. Despite these options, the putative class argues that Do Lab’s promises are illusory and an improper attempt to take money from its ticket purchasers.

Discounts/Coupons for Future Events

For companies with access to a larger array of events, another option is offering coupons that allow costumers greater flexibility than credits towards a specific event. After mass event cancellations in the wake of COVID-19, many ticket exchange and resale companies began offering coupons for their websites, sometimes offering coupons with even greater value than the original ticket. Class actions have challenged that strategy, however.

  • Alcaraz v. StubHub, Inc. (Northern District of California, Judge Haywood Gilliam Jr.)

On April 14th, a putative class brought UCL, CLRA, and FAL claims against Stubhub, Inc., one of the country’s largest ticket exchange and resale companies, for rescinding their promise to customers to provide full refunds if an event was cancelled.[5] Prior to COVID-19, Stubhub’s FanProtect Guarantee gave ticket purchasers the option of either a full refund or a coupon for 120% of their original purchase. However, due to the overwhelming number of refund requests after the COVID-19 pandemic, Stubhub removed the full refund option and began only processing coupons for event cancellations. Despite being offered coupons that would make them more than whole, plaintiffs argue that they would have never purchased tickets in the first place without the guarantee of a full refund for cancelled events.

Defenses and Strategic Considerations for COVID-19-Related Class Actions Under California’s Consumer Protection Laws

The UCL claims in these class actions have followed a fairly predictable pattern. Utilizing the three-pronged test of the UCL,[6] plaintiffs first allege that the defendants violated the “fraud” prong by falsely representing that consumers would only owe fees when they had access to the defendant’s physical facilities, or that by purchasing a ticket they were entitled to a full refund if the event were cancelled. Second, plaintiffs argue the defendants violate the “unlawful” prong by violating the CLRA or FAL or some other common law claim, such as breach of express warranty, fraud, unjust enrichment, conversion, or breach of contract. Finally, plaintiffs argue the defendants’ practices violate the “unfair” prong under the various “unfairness” tests applied by the courts.[7], [8]

Confronted by these claims, businesses should focus on the following defenses and considerations:

  • Utilizing Existing Contractual Rights and Force Majeure

The first step for any company should be to review the text of any applicable agreements, including but not limited to purchase and membership agreements. Look for clauses that allocate the risk to consumers or provide for delayed or different performance in case of an event like the COVID-19 pandemic. Reliance on the plain text of your contractual obligations may mitigate the perception of unfairness. Additionally, many contracts include force majeure clauses that relieve a party from its contractual duty when performance has been prevented by a force beyond its control or when the purpose of a contract has been frustrated. And, if your contract is silent on the matter of force majeure, California law implies such a clause under Cal. Civ. Code § 1511, where performance of an obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of the state or of the United States.”[9]

But bear in mind, as with any contractual dispute, the specific contract language, the governing law, and specific facts will drive the resolution of any dispute about performance. When reviewing your contract’s force majeure provisions, consider the following:

  • Is the COVID-19 pandemic a type of event that you or your counterparty identified as a force majeure event?
  • Was the COVID-19 pandemic foreseeable at the time the contract was signed?
  • Is performance impossible post-COVID-19 or merely expensive?
  • Does the force majeure provision require notice within a specific period of time?
  • Does the force majeure provision apply only to certain obligations of the contract?

Businesses also should review their underlying agreements for choice of law or choice of forum provisions. California consumer protection statutes are notably plaintiff-friendly, so a choice of law provision that avoids California law and/or permits transfer of the action may reduce exposure or even result in dismissal.

  • The Safe Harbor Defense

In 2000, the California Supreme Court established a UCL “safe harbor” in Cel-Tech Communications, essentially holding that a plaintiff cannot plead “unfairness” under the UCL where the legislature specifically permits the challenged conduct.[10] The underlying theory is that courts may not impose their own notions of what is fair or unfair where the legislature has spoken. While a general proclamation of a pandemic probably will not suffice as a statutory hook for a safe harbor claim, companies should determine whether there is a basis for a safe harbor defense by reviewing the statutes underlying plaintiff’s claims for permitted conduct during an event like the COVID-19 pandemic.

  • Underlying Defenses to “Borrowed” Law Under the Unlawful Prong of the UCL

A principal defense to a UCL “unlawful” claim is to establish a defense under the “borrowed” law. California courts consistently hold that a defense to the borrowed law also applies to a UCL claim based on that law.[11] In many of the COVID-19-related class actions, the borrowed law is the CLRA or FAL, but some cases have also been based on other common law claims such as breach of contract, fraud, or unjust enrichment. Defenses to these claims also apply to the UCL “unlawful” claim.

  • Defenses to Class Certification

Ninth Circuit law provides strong arguments against the application of California’s consumer protection statutes to non-resident Plaintiffs or a nationwide class. Mazza v. Honda.[12] In Mazza, the Ninth Circuit found that California’s consumer protection statutes differed so significantly from those of other states that the interests of the foreign states precluded the certification of a nationwide class. Although many courts defer this issue to the class certification stage, some courts have been prepared to grant motions to strike class allegations at the pleading stage, including in cases where there is no California plaintiff.[13] Nationwide classes may also raise predominance issues across states with drastically different stay-at-home orders and social distancing guidelines.

Other Considerations Moving Forward into the Post-COVID-19 Landscape

Although the law regarding strategies short of full refunds in the context of the COVID-19 pandemic is just starting to develop, businesses should also consider how consumers will respond and how to manage that response. Thus, businesses should carefully craft communications to their customers about a current decision to offer (or continue to offer) something other than a full refund. Going forward, companies should clearly disclose their cancellation policies to their customer base in a manner customers will be sure to see, in order to reduce exposure to future litigation. Finally, businesses should consider ways to address these issues while drafting future iterations of their membership and purchase agreements, particularly with regard to force majeure and the allocation of risk.

Morrison & Foerster’s Class Action + Mass Torts Group and Coronavirus Task Force have advised and represented many clients on emerging claims related to COVID-19. MoFo’s Litigation team routinely helps companies prepare for and respond to litigation risks, including matters involving the UCL, CLRA, FAL, and other consumer causes of actions that are being explored in this new pandemic environment. More time at home has not slowed down the pursuit of class action lawsuits or the need for thoughtful compliance practices.

[1]  See, e.g., Rosenkrantz, et al. v. Arizona Board of Regents, 2:20-cv-00613 (D. Ariz.); Rickenbaker, et al. v. Drexel University, 2:20-cv-01358 (D.S.C.); Student A, et al. v. Liberty University, 6:20-cv-00023 (W.D. Va.); Church, et al. v. Purdue University, et al., 4:20-cv-00025 (N.D. Ind.).

[2]  Diaz v. University of Southern California, No. 2:20-cv-04066 (C.D. Cal.).

[3]  Weiler v. CorePower Yoga LLC, No. 2:20-cv-03496 (C.D. Cal.).

[4]  Tess Nesis v. Do Lab, et al., No. 2:20-cv-03452 (C.D. Cal.).

[5]  Alcaraz v. Stubhub, Inc., No. 3:20-cv-02595 (N.D. Cal.).

[6]  See Cel-Tech Communications Inc. Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal. 4th 163; see also Cal. Bus. & Prof. Code § 17200.

[7]  See, e.g., Alcaraz v. Stubhub, Inc., No. 3:20-cv-02595 (N.D. Cal), Compl. ¶ 42–50.

[8]  The standard for determining what business acts or practices are “unfair” in consumer actions under the UCL is currently unsettled, with courts applying three separate tests.  Zhang v. Superior Court (2013) 57 Cal.4th 364, 380, fn. 9. First is the balancing test, which balances the impact of the practice on the alleged victim against the reasons, justifications, and motives of the defendant.” See Klien v. Earth Elements, Inc. (1977) 59 Cal.App.4th 965, 969. Second is the tethering test, where a cause of action for unfair business practices must “be tethered to some legislatively declared policy.” See Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 854. Finally, some courts have used a test based on Section 5 of the Federal Trade Commission Act, which applies the following factors: (1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not have reasonably avoided. See Camacho v. Automobile Club of Southern California (2006) 142 Cal.App.4th 1394, 1403.

[9]  See Pac. Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal.2d 238; see also Cal. Civ. Code § 1511.

[10]  See Cel-Tech Communications Inc. Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal. 4th 163.

[11]  See Scripps Clinic v. Sup. Ct. (2003) 108 Cal.4th 917.

[12]  Mazza v. American Honda Motor Co., Inc., 666 F.3d 581 (9th Cir. 2012).

[13]  See, e.g., Frenzel v. AliphCom, 76 F.Supp.3d 999 (N.D. Cal. Dec. 29, 014); see also Azimpour v. Sears, Roebuck & Co., 2017 WL 1496255, at *10-11 (S.D. Cal. Apr. 26, 2017).