First Coronavirus Consumer Class Action Filed on the Left Coast

About the only thing certain in these uncertain times is consumer class action litigators’ ability to cobble together a lawsuit based on the Coronavirus.  Just as with the Ebola crisis a  few years ago, it appears that the Left Coast also has the first Coronavirus consumer class action lawsuit. 

Filed just last week, the lawsuit alleges that a manufacturer of hand sanitizers is marketing its product in a deceptive manner, suggesting that it is effective in killing the coronavirus. Plaintiff points to the fact that the FDA issued a warning letter raising these types of concerns in January.  The lawsuit is a reminder that advertising statements that conceivably influence a consumer’s buying decision–such as a product’s efficacy–can be the basis of a consumer protection lawsuit. The lawsuit is styled David v. Vi-Jon, Inc. (S.D. Cal. Case No. 3:20-cv-99999)

Coronavirus and Contractual Performance Disputes—Does a Pandemic Excuse Performance of Contractual Obligations?

The daily headlines are reminders of the far-reaching economic ripple effects of the 2019 Novel Coronavirus (COVID-19) outbreak. The pandemic is forcing companies to abruptly alter strategies and business plans that seemed certain even at the beginning of the year. These types of changes prompt a question relating to whether this unprecedented health crisis alters existing contractual obligations. Can a company suspend performance of a contract or even terminate the agreement altogether because of the impacts of the coronavirus?

In many instances, the answer to this question is in the affirmative, and unequivocally so. A party to a contract may argue that, as a result of the outbreak, performance of its contractual duties is now impossible, impractical or at least economically infeasible. But applicable law, contractual provisions and the parties’ course of dealing before and since the outbreak will in some cases make the answer far from clear, in which case the dispute may escalate to litigation. With the possibility of litigating these sensitive issues on the horizon, it is useful to examine the legal principles that govern contract disputes stemming from the current health crisis.

Impossibility and Impracticability of Performance

American contract law has long recognized and accommodated situations in which one party’s contractual performance is made impossible or impractical by intervening and unforeseeable events such as the outbreak of a war or a similar catastrophic event.[1] The law recognizes that it would be unfair and inequitable to hold a contracting party to their contractual duties when the circumstances interfering with their performance are extraordinary and beyond their control.

Reflected in both the Uniform Commercial Code (governing sale of goods)[2] as well as the Restatement (Second) of Contracts, the rule is generally referred to as the doctrine of impossibility of performance.[3] Every state recognizes some form of the law of impossibility, either in the common law of contracts or by code. California has codified the law as follows: “The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate: (2) When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”[4]  Even if not entirely impossible to perform, if it is utterly impractical to perform, the same result obtains—performance of contractual duties may be excused.

Mere Delay in Performance

One of the threshold questions in these cases is whether the circumstances merit only a delay in performance rather than a complete termination of all contractual obligations. As is common in California jurisprudence, one of the seminal cases that addresses this issue involved a dispute between an actor and movie studio. In Autry v. Republic Productions, Inc.,[5] the court held that Gene Autry was released from his contractual obligation to a movie studio because of the outbreak of World War II and the actor’s enlistment in the military. The parties disputed whether a provision in the contract merely suspended Mr. Autry’s obligation during wartime or effectively terminated his performance obligations thereafter. The court agreed with the Singing Cowboy who had served his country well, concluding that time was of the essence in the contract. It held that, by the time the war was over, the economic conditions had changed to such a degree that he was excused from performance entirely.[6]

Lack of Foreseeability is Key

The bar for proving impossibility is high and requires that the condition purportedly interfering with performance be entirely unforeseeable. In Mitchell v. Ceazan Tires, Ltd.[7] (another case triggered by the outbreak of war), a tenant which had leased commercial space for an auto parts and tire store contended that the war triggered governmental regulations on the sale of new tires making performance impossible. The California Supreme Court rejected this argument, not only because the contract was entered into when the country was debating entry into the war, making this not entirely an unforeseeable or remote possibility, but also because the contract still retained value notwithstanding the limitation.[8]

Assuming that the contractual obligations were assumed before December 2019 (when the first cases were reported in mainland China), the foreseeability should not be a bar to this argument as the nature and spread of the epidemic is unprecedented. For contracts that have been negotiated in more recent weeks, the widespread reports of the outbreak will make the foreseeability argument a contested issue.

Contract Terms are Key

These principles of contract law operate as an exception to the principle that courts will enforce the parties’ expectations. Instead, of focusing on the contractual intent, these cases are resolved based on the equity or fairness of the situation. Notwithstanding this principal focus, it would be a mistake to conclude that the terms of the parties’ written contract are immaterial to the question.

Several types of contract provisions become paramount in these cases. First, where the parties’ written agreement manifests an intent to address these types of contingencies, those terms will control. One such provision is a force majeure clause.

A force majeure provision seeks to identify the types of circumstances which will suspend a performance obligation.[9] But such clauses may be a double-edged sword for the party seeking to avoid the contractual obligation. If the force majeure clause lists a variety of events excusing performance—e.g., war, terrorists attacks, labor disputes—but does not contain language suggesting that this list is non-exclusive, the party seeking to enforce the contract may point to its omission as a reason to enforce the parties’ obligations. Other contract provisions that are of paramount importance in these types of contract disputes are termination clauses, choice of law provisions and liquidated damages provisions.

Frustration of Purpose

A closely-related legal doctrine that may be invoked by a party whose business plans are impacted by the pandemic is frustration of purpose. “Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.”[10] This doctrine may be invoked where performance is not impossible but, due to the significant change in circumstances, a basic assumption in the parties’ agreement has not materialized.

Suppose, for example, a company has a contract obligating it to provide ancillary services at a major trade show that is now canceled due to the coronavirus outbreak. The vendor can still perform the services (hence, not impossible), but the entire point of the transaction was that there would be thousands of attendees at the event. In this instance, frustration of purpose, not impossibility of performance is a better argument.

How these Legal Issues Play Out in Litigation

Typically, the party seeking to avoid the contract will be a defendant in a claim for damages brought by the party seeking to enforce the contractual obligations. But it may be prudent or procedurally advantageous for the party seeking to be excused to be the plaintiff by affirmatively seeking an adjudication of the issue through a declaratory judgment action rather than waiting for a lawsuit to be filed.

Regardless of which party arrives first at the courthouse steps, the burden remains the same—the party seeking to avoid the contract through these legal principles and doctrines will bear the burden of proof.[11] It should also be understood that, under California law, impossibility of performance is a question of law for the court to decide, not a factual question that goes to the jury.[12]

Five Questions to Ask

Whether a party should be excused from a contractual obligation involves an intensely factual inquiry with the law offering relatively few guideposts. This leaves courts with a wide degree of latitude to achieve an equitable result. Every case will turn on its own unique contract provisions and the evidence of the parties’ course of dealings.

Notwithstanding these vagaries, those contemplating these issues and wishing to obtain an early assessment of how the matter might be sorted out in litigation should consider five questions:

  1. What law controls? Although each U.S. jurisdiction has adopted some form of these doctrines, there are nuances in the law that may prove critical in the dispute. It is important to assess what law will control by considering a choice of law provision in the contract or determining where the contract was created. Choice of law is an even more important preliminary question for contracts involving international parties.
  2. Is there a force majeure clause in a contract? In many contractual relationships, a review of the terms and conditions will reveal that a force majeure clause is broad enough to cover the situation or may otherwise be dispositive of these issues. In addition, termination provisions may also control as well as liquidated damages clauses.
  3. How close is the nexus between the claimed performance and the pandemic? The more direct the impact, the stronger the argument will be that these principles apply to excuse non-performance. But even contracts that are impacted by intermediate causes that trace back to the pandemic may be subject to an excused performance.
  4. Does the pandemic merely make the contract more difficult to perform, rather than rising to the level of impossibility? Performance of a contract may be more challenging and the profits may be less than what was initially expected, but this does not necessarily render performance impossible or impracticable.
  5. Is a delay in performance rather than a suspension of the entire contract merited? From an objective standpoint, a delay in performance is far less drastic than a termination of all contractual rights. It may be more plausible to take that position, at least at the outset as events unfold, reserving the right to seek to be excused from the entire obligation.

We all hope that the pandemic will be a temporary crisis and that cures and preventive measures will be effective. But litigation relating to these contractual disputes will likely drag on long after the world has returned to business as usual.

Additional information related to the legal challenges companies are facing due to the coronavirus is available at Dorsey’s Coronavirus Resource Center.

My partners, Dan Brown and Shevon Rockett gave a webinar last week on these topics which is available here.

[1] The roots of this doctrine are in English common law and Taylor v. Caldwell, 3 B. & S. 826, 122 Eng. Rep. 309. One of the earliest cases to recognize the rule was Stewart v. Stone, 127 N.Y. 500, 28 N.E. 595 (1891).

[2] Uniform Commercial Contract § 2-615 provides in part: “Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

[3] Restatement (Second) Contracts § 261.  See also 2 Matthew Bender Practice Guide: California Contract Litigation § 22.65 (2020).

[4] Cal. Civ. Code § 1511.

[5] 30 Cal. 2d 144 (1947).

[6] Id. at 156.

[7] 25 Cal. 2d 45 (1944).

[8] Id. at 48.

[9] Horsemen’s Benevolent & Protective Ass’n v. Valley Racing Ass’n, 4 Cal. App. 4th 1538, 1564-65 (1992), citing Pacific Vegetable Oil Corp. v. C. S. T., Ltd. 29 Cal. 2d 228, 238 (1946).

[10] Restatement (Second) of Contract 265. See also Lloyd v. Murphy, 25 Cal. 2d 48, 54, 153 P.2d 47, 50 (1944).

[11] Oosten v. Hay Haulers Dairy Emps. & Helpers Union, 45 Cal. 2d 784, 788 (1955).

[12] Id. at 48.

Court’s $179 Million Award Underscores Importance of Confidentiality Agreements

Blogger’s Note: My colleagues, Aaron Goldstein and Jasmine Hui report on a key decision from the California Superior Court this past week relating to confidentiality agreements.

In an important lesson for both employers and employees, on Wednesday, March 4, 2020, a California superior court judge affirmed a $179 million arbitration award against a former Uber executive, Anthony Levandowski, for stealing Google’s trade secret information and soliciting its employees to benefit Uber. See Google LLC v. Levandowski et al., Case No. CPF-20-516982. Levandowski, who also faces criminal charges from the U.S. Attorney’s office for theft and attempted theft of trade secrets, filed for bankruptcy following the judge’s order.

The court’s ruling underscores the importance of well-crafted confidentiality, non-compete, and non-solicit agreements. Over the course of Levandowski’s employment with Google, he signed at least four separate agreements which included either non-compete, non-solicit, confidentiality, and nondisclosure provisions, or a combination thereof. The panel of arbitrators in the underlying case held, among other things, that Levandowski breached these employment contracts with Google by misusing Google’s confidential information and attempting to solicit Google employees.

Google hired Levandowski in 2007, where he co-founded the company’s autonomous vehicle project, which later became Waymo, LLC.1 In 2015, Levandowski left Google and formed a new self-driving company, Ottomotto, Inc. In 2016, Uber acquired Ottomotto, Inc. and hired Levandowski to head its autonomous vehicle department. Shortly thereafter, Google filed two arbitration demands against Levandowski and another former Google employee who moved to Uber.

According to the related criminal indictment by the U.S. Attorney’s Office, before he left Google, Levandowski downloaded more than 14,000 files containing Google’s autonomous-vehicle research. The indictment also states, among other actions, Levandowski made unauthorized transfers of files to his personal laptop, which included proprietary circuit boards, designs for light sensor technology on self-driving vehicles, and instructions on how to calibrate and tune Google’s custom light sensor system. While the criminal case is still ongoing, the panel of three arbitrators held in December 2019 that Levandowski’s actions violated his obligations to Google, issuing the $179 million award.

This judgment is a reminder for employers with confidential trade secret and proprietary information to take deliberate steps to protect their confidential information. This includes drafting strong, but narrowly tailored non-compete and non-solicit agreements. In Washington, while a new non-compete law limits the enforceability of non-compete provisions, non-solicitation and nondisclosure agreements do not face the same scrutiny. Employers should review their agreements and ensure appropriate practices are in place to secure employee signatures.

Companies can also take additional steps to ensure their confidential information is secured, including:

  • Monitoring computer access for unusual activity
  • Conducting exit interviews and equipment checks before an employee’s last day of work
  • Issuing reminders of continuing confidentiality obligations or certificates of termination
  • Immediately shutting off access to company equipment and systems on an employee’s last day of work

While non-compete agreements become increasingly more difficult to enforce across the U.S., employers who take meaningful steps to protect their confidential information will fare better should a dispute with a former employee ever arise.

1 Waymo, LLC also brought claims against Uber, which settled for $245 million in pre-IPO stock valuations.


The Risk of Consumer Class Actions for Recurring Credit Card Charges

Is Your Company Complying with California’s Automatic Purchase Renewal Law?

Have you ever reviewed your credit card statements and noticed a charge appearing each month that you do not recognize? An internal investigation of all members of the household is launched in an effort to figure out who, if anyone, authorized these charges. Likely suspects include a spouse or significant other, some tech savvy kids—or maybe even yourself, in a forgotten impulse purchase months ago! Regardless of the culprit, someone has signed up for yet another monthly service or other transaction with an authorization for recurring credit card charges. The charges needs to be canceled, which can be a frustrating task.

A trend in consumer businesses is an increase in all types of goods and services delivered through automatic subscriptions with authorizations for recurring charges. In my household, these services and monthly product deliveries include our online entertainment (Netflix and Amazon Prime), online publications (WSJ), premium smartphone apps (Spotify and Strava), monthly shipments of food or beverages (Butcher Box) and even clothes (Stitch Fix).

Companies are attracted to this business model because, once the relationship is established, the revenue-generating transaction is seamless. And for those not on top of their personal finances, the charges may continue without notice for months or years, even if the goods or services are not desired or used. As long as the delivery and recurring charge is not cancelled, a steady stream of charges for the consumer and profits for the company will continue indefinitely.

Recognizing the potential for consumer deception and abuse in the context of these transactions, the California Legislature enacted the Automatic Purchase Renewal (“APR”) statute (Cal. Bus. & Prof. Code § 17600). Unlike some of the other legislative initiatives that come out of Sacramento, this is a law that candidly makes a great deal of sense given the potential for unscrupulous business practices associated with recurring credit card charges.

The proposition and mandate of the law seems simple enough—require companies to obtain informed consumer consent for recurring credit card charges. But having advised and defended clients on APR claims, I can attest to the fact that the nuances of compliance can be challenging and the litigation issues complex. These claims are a lucrative profit center for consumer class action plaintiffs. For these reasons, compliance with the APR law and implementation of some loss prevention steps are advisable to avoid this liability and litigation risk.

The Requirements of the Statute

The APR statute contains several mandates for businesses offering “automatic purchase renewal” and “continuous service” programs. In general, businesses must “present the automatic renewal offer terms . . . in a clear and conspicuous manner before the subscription or purchasing agreement is fulfilled and in visual proximity.” Cal. Bus. & Prof. Code § 17602(a)(1).

The core analysis turns on three questions: what, when and how are the terms of the transaction conveyed?

  • What? Multiple pieces of content must be conveyed to customers. First, the consumer must be notified “[t]hat the subscription or purchasing agreement will continue until the consumer cancels.” Cal. Bus. & Prof. Code § 17601(b)(1). Second, the statute requires a “description of the cancellation policy that applies to the offer.” Cal. Bus. & Prof. Code § 17601(b)(2). Third, the statute requires notification of the amount of the recurring charges, whether they are subject to change, the length of the term and any minimum purchase obligations. Cal. Bus. & Prof. Code § 17601(b)(3)-(5).
  • When? Automatic renewal information must be provided “prior to the completion of the initial order for the automatic renewal or continuous service.” Cal. Bus. & Prof. Code § 17602(d). It is advisable to present notices prior to purchase, including at “check out” (the page where the customer submits an initial order).
  • How? The terms must be presented in a manner that is “clear and conspicuous[,]” which may be accomplished in either of two ways: “[a] in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or [b] set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.” Cal. Bus. & Prof. Code 17602(c) (brackets supplied).

Apart from these requirements, businesses must also obtain “affirmative consent to the agreement containing the automatic renewal offer terms.” Cal. Bus. & Prof. Code § 17602(a)(2). Precisely how this is done can be tricky. Is it sufficient to simply have a notice stating that, by submitting the order, all terms and conditions including the automatic renewal are accepted? Or is further action required for the affirmative consent, such as checking a box on a screen?

Businesses must also “provide an acknowledgment that includes the automatic renewal or continuous service offer terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer.” Cal. Bus. & Prof. Code 17602(a)(2). This is typically done in a confirming email or text. While that is easy enough to implement, there are a myriad of issues relating to ensuring that the cancellation practice actually matches what is described. If the business modifies their terms, consideration should be given to whether this constitutes a “material change” which the law requires to be communicated to the consumer in a “clear and conspicuous” manner. Cal. Bus. & Prof. Code § 17602(d).

The Remedy for Consumers

Consumers who believe they have incurred credit card charges in violation of the APR statute have many judicial remedies. Even though the APR statute does not provide for a private right of action, California’s Unfair Competition Law (“UCL”) (Cal. Bus. & Prof. Code § 17200) fits hand in glove with the statute. The UCL allows a consumer to bring a claim based on injury caused from a business’ practice that is unfair, fraudulent and unlawful. Id. The violation of the APR can be the predicate for a claim that the UCL was violated and opens the door to a claim for disgorgement of all profits from the offending conduct.

This claim is invariably for recovery of money paid—“disgorgement profits” to use the UCL parlance. One might intuitively think that, in situations involving the sale of goods rather than the mere passive receipt of a service (e.g., a software or web access), the claim under the APR statute would be difficult to make given the fact that it is unreasonable for a consumer to expect that the goods were being received each month for no cost. (In contrast, a consumer who is being charged for a service may not utilize the service or may do so not knowing there is an associated recurring charge.) As logical as this may seem, to date, those arguments have not barred claims for violations of the APR statute in connection with delivered products. In fact, the largest settlement that I have found involving an alleged violation of the APR statute involved delivery of products, not passive services. In Habelito v. Guthy-Renker LLC, Case Number: BC 499558 (Superior Court of California, Los Angeles County), the plaintiff alleged that the defendant offered Proactiv brand skincare products on its website, but enrolled customers in an automatically renewing subscription program without giving sufficient notice. The case reportedly settled for $15.2 million with class members permitted to make a claim-by-claim request worth $20-75.

The Recommendation for Businesses

Violations of the APR statute are low-hanging fruit for a plaintiff’s class action firm. And for that reason alone, this statutory scheme deserves special attention for any company utilizing this business model. Unlike some claims that may involve a technical violation of some obscure regulation, the scenario involving these claims has a ring of familiarity. One should expect that judges and juries will include individuals who readily identify with the alleged wrong, believing that they too have been a victim of an unauthorized recurring charge.

It is advisable to consider a top-to-bottom analysis of how the business: (a) interacts with consumers and advertises the product or service offered, (b) informs them of the opportunities associated with a recurring charge, (c) secures effective and informed consent for the recurring charges, (d) provides updates on changes to the policies and practices; and (e) processes cancellations for customers wishing to discontinue.