Retail and Consumer Products Law Roundup - October 2016

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

In This Issue:

  • Supreme Court to Review Credit Card Surcharge Statutes
  • SPECIAL FOCUS: Responses to Retail Webinar Attendee Questions
  • 2 for 1—Private and Government Actions Regarding Price Comparisons
  • Judge Puts the Brakes on Uber's $100M Settlement
  • A Cold Day in Court for Plaintiff Suing Starbucks Over Iced Drinks
  • Zipping out of Court: D.C. Circuit Tosses Privacy Suit
  • California Employee Can Pursue Termination Claims Over Marijuana Use

Supreme Court to Review Credit Card Surcharge Statutes

By Richard Lawson, Partner, Consumer Protection

Why it matters: In an effort to resolve a conflict between Circuits, the Supreme Court has agreed to hear arguments in a challenge to New York’s credit card surcharge law, one of several similar pending lawsuits. For all players in the retail and electronic payments world, the New York challenge will be an important one to watch.

Detailed discussion: The New York law at issue states that “[n]o seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.” N.Y. Gen. Bus. Law § 518. Several businesses challenged this statute as a violation of the First Amendment. Specifically, they asserted that the statute allowed the use of the word “discount” while prohibiting the use of the word “surcharge” when pricing retail items. These retailers challenged the law in New York, and while they won in the trial court, that decision was reversed by the Second Circuit Court of Appeals, which upheld the validity of the statute. Expressions Hair Design v. Schneiderman, 808 F.3d 118 (2d Cir. 2015).

This New York challenge is one of several that are currently working their way through the court system. The four most populous states—California, Texas, Florida, and New York—each have a statute on this issue, and each statute has been challenged as constitutionally infirm. The Fifth Circuit has upheld the Texas statute, while the Eleventh Circuit has struck it down. In California, the trial court held the statute to be unconstitutional and the matter is before the Ninth Circuit.

The heart of the conflict between the Second and Eleventh Circuits rests in the significance, or lack thereof, of the nomenclature used. The New York analysis centered on established case law regarding prices; as it held, “If prohibiting certain prices does not implicate the First Amendment, it follows that prohibiting certain relationships between prices also does not implicate the First Amendment.” As the Second Circuit reasoned, if the seller charges something more than the list price because the consumer uses a credit card, that is a violation of the surcharge statute; that there might be a cash discount would not run afoul of the statute. The court held that prices are not speech within the meaning of the First Amendment, and that the statute relates only to conduct, i.e., the prohibited imposition of an additional credit card fee on top of the list price.

Conversely, the Eleventh Circuit directly held that the statute affects speech, not conduct. Applying a higher level of scrutiny, the Eleventh Circuit faulted the statute for not addressing any false or misleading speech, or otherwise addressing any significant government interest. The court stated that “holding out discounts as more equal than surcharge” (emphasis in original) was unconstitutionally beyond the scope of governmental authority.

With this conflict, the matter was ripe for Supreme Court review. The issue is far from academic, as these statutes are on the books in the four most populous states and in several others. Retailers should pay close attention to the developments in this case.

SPECIAL FOCUS: Responses to Retail Webinar Attendee Questions

By Marc Roth, Co-Chair, TCPA Compliance and Class Action Defense

Why it matters: During our hugely successful “Avoiding TCPA Pitfalls: Essential Guidance for Retailers” webinar this summer, we received dozens of questions from attendees, most of which we were not able to address during the closing minutes of the presentation. But, we held on to the questions and present below responses to those that we felt would be most relevant to readers. Please note that these are general responses and are not intended as, and should not be construed to be, specific legal advice. Should you have any specific follow-up questions on these responses, please reach out to the webinar speakers: Manatt partners Marc Roth and Christine Reilly.

Q: I thought mobile phones always trigger the TCPA even if manually dialed? Especially in certain states? Not exactly. The TCPA is only triggered when communicating with consumers on their mobile phone when using an autodialer. That said, the FCC’s July 2015 rulemaking declared that a dialing system that is used to manually dial numbers may be an autodialer if it has the current or future capacity to autodial. With regard to state laws, there are about half a dozen states that prohibit calling or texting a mobile device without the consumer’s consent, regardless of whether an autodialer is used. But this restriction only applies to commercial, and not informational or transactional, communications.

Q: If there is time, could you please address TCPA applicability to texts delivered to cell phones? The FCC has expressly stated that text messages delivered to cell phones are treated as calls under the TCPA.

Q: If you use a prerecorded message that is only informational in nature (e.g., fraud prevention), does prior express consent need to be obtained? It depends on where the call is terminated. If the call is to a landline and contains no marketing content, no consent is required. On the other hand, if the call is to a mobile phone, and is purely informational, the caller will still need the recipient’s express consent, which may generally be satisfied by the caller receiving the number from the call recipient.

Q: Do autodialed calls to mobile numbers assigned to a business fall under the TCPA? For calls to “residential” numbers, can we assume “residential” means a call to a consumer landline phone? Unless expressly exempted, all autodialed calls to a mobile phone require some level of consent, even if to a business. The TCPA and FCC rules do not distinguish between consumer and business lines when calling mobile numbers. This distinction is only relevant in regard to do-not-call regulations, since these rules only apply to consumer numbers. However, as some people use a single phone line for both personal and business purposes, a more detailed analysis of the source and use of the number is required in order to determine whether the DNC rules apply.

Q: Is the company required to determine whether the consumer’s phone number is a landline or cell phone? Or is this information provided by the consumer? A company must itself determine whether a number terminates with a landline or mobile phone. As the TCPA is a strict liability statute, even if a consumer provides her mobile phone number in response to a request for a home (landline) phone, a call to that number will still be treated as a call to a mobile device under the TCPA.

Q: Can voice recordings giving consent to be marketed (via inbound call) comply with the ESIGN Act? Yes, under FCC rules, a company may obtain a consumer’s express written consent for marketing calls via an inbound call if conducted in accordance with the requirements of the ESIGN Act.

Q: Does a check box work as a signature for prior express written consent (PEWC)? A check box may satisfy the FCC regulations for prior express written consent if the box is unchecked and is accompanied by the applicable FCC consent language in accordance with the ESIGN Act.

Q: Is it imperative to be able to store and produce (if need be) the check box that is used for the consumer to affirmatively agree to receive telephone calls? It is important to maintain some proof of a consumer opt-in in the event a call is ever challenged. While the best proof may be a copy or screenshot of the exact web page a consumer completed and submitted for this purpose, if this is impossible, it may be acceptable to maintain a file of the opt-in that includes the information that the consumer provided as well as a date and time stamp of and IP address associated with the opt-in.

Q: A retailer announces via the in-store intercom: text COUPON to 12345 to get 10% off your purchase today. Is this allowed? Can the response include an invitation to subscribe via web form, e.g., Your 10% off code is XYZ. Click to subscribe: bit.ly123? Under the FCC’s July 2015 ruling, a retail store may instruct consumers to text a word to a short code to obtain a discount code by reply text without including the required language for prior express written consent. Under the FCC rules, the reply text must only contain the requested information (i.e., the discount code) and may only be used once. Including any other information in the reply text (such as an invitation to subscribe to the retailer’s savings or loyalty program via a web link) may present some risk as such content may be viewed as exceeding the consumer’s specific request.

Q: What are your thoughts on placing express written consent language below a “submit” button? The FCC regulations require that express written consent language be presented clearly and conspicuously so that it is not missed by consumers. Placing this language below a submit button presents some risk of not satisfying this requirement if displayed in a way that may be missed by the consumer.

Q: Does consent override DNC? For example, customer gives PEWC on retailer website but that number is also listed on the national DNC. It depends. If the PEWC language makes clear that the consumer is agreeing to receive marketing communications to a telephone number that is on a DNC registry, then yes, the consent will override the registry listing.

Q: What about making service calls to numbers on an internal DNC list? Pure service calls are exempt from the internal DNC regulations. DNC applies only to marketing calls.

Q: If customers provide PEWC after their request to be added to the internal DNC registry, should they be removed from the internal DNC registry? The PEWC opt-in may, depending on its wording and the context in which it was given, trump the internal DNC request.

Q: Does affirmative agreement need to specifically state “I agree/consent” or does something like “reply YES to receive msgs” constitute an affirmative agreement for text messages? The TCPA and FCC regulations do not specifically dictate the precise language that must be used to obtain a consumer’s express opt-in. But the language must clearly and unambiguously reflect the consumer’s desire to opt in.

Q: Are text messaging platforms liable under the TCPA? They are just message conduits. A number of courts have held and the FCC has ruled that texting platforms will not be liable under the TCPA as the “maker of a call” in certain circumstances, particularly when users of the platform (and not the platform itself) control the content and transmission of the messages. Said otherwise, the more involvement a platform operator has in the message development and transmission process, the greater chance it may be found responsible under the TCPA.

Q: With text messages, can the consent be asked for in that first text for future texts or does that bump it out of the exception? If you are referring to the one-time exception to respond to a consumer’s specific request, the FCC was pretty clear in its rulemaking that the one-time response must only include content that responds specifically to the consumer’s request. That said, the ruling responded narrowly to a petition that sought the one-time exception for a single purpose, so it remains unclear whether seeking additional consent would be acceptable. On balance, given the risks associated with violating the TCPA, it would be prudent to only include responsive content.

Q: Do you need consent to make a marketing call without an autodialer? What if you don’t know if it is a mobile or landline phone? As noted above, the onus is on the caller to determine whether a number is associated with a mobile or landline phone. Relying on how a consumer identified her number is not a defense to liability under the TCPA. If a marketing call is made without an autodialer and does not introduce a prerecorded message, no consent is required for TCPA purposes, but certain states do still require a consumer’s consent.

2 for 1—Private and Government Actions Regarding Price Comparisons

By Richard Lawson, Partner, Consumer Protection

Why it matters: Amazon made news for pricing items without stating a list price or whether an article was on sale or was offered at a discounted cost. The policy was based on the idea that Amazon's numerous Prime members would buy with increasing frequency if they could rely on Amazon to provide the best price. The news comes amidst increasing activity in the retail pricing arena. Other retailers, especially in the outlet store area, have seen an increase in lawsuits alleging false discounts. We wrote about the dismissal of one such case, wherein the plaintiff failed to establish how a price claim had been misrepresented.

The growth in private actions provides a good opportunity to review the disclosure and consumer protection issues that can arise when retailers offer sales and discounted prices, and the role that government agencies have in enforcing specific retail pricing statutes—a position that can give them a stronger footing than private litigants.

Detailed discussion: Discounts and sales are time-tested retail practices precisely because they have proven to be effective. Problems arise, however, when the discounts are made from whole cloth. Sales that go on for 52 weeks, or discounts that are offered on items that were never sold at the list price, can all draw the scrutiny of consumer protection agencies.

Although the FTC has not brought a price comparison action in many years, its published guides regarding deceptive advertising still provide the touchpoint for many state attorneys general actions involving price comparisons. At the core of the FTC provisions are prohibitions against deceptive practices. For example, the former price from which a sale price is advertised cannot be fictitious. A retailer cannot merely double an item's retail price with the intent of offering it at half the cost so that it can be listed as being 50% off. Many states also have specific laws about how and when sales can be offered. Massachusetts permits discounted prices as long as 40% of sales in the preceding six months were offered at the list price. New Jersey and Missouri require proof of sales at the original listed price, while Ohio defines "average price" as a price at which the good or service was "openly and actively sold by the supplier to consumers for a substantial period of time in the past."

This patchwork of state regulations is a challenge to navigate and is philosophically suspect. For example, suppose a new item is priced at $100, but it is first sold at a special introductory price of $75. Sales take off wildly and a decision is made to reduce the price permanently to $75. Has there been a violation of the law? Is there a legal obligation to actually sell the product at $100 to comply with requirements that the price be one which was actively offered for some period of time? How can consumer or business interests be served by forcing the sale of goods at prices consumers do not want to pay and the retailer has no desire to charge?

In my prior position as Director of the Florida Attorney General's Consumer Protection Division, we confronted these issues of permanent sales and list prices at which the items had neither been offered nor sold. In attempting to balance our deceptive pricing concerns without unduly limiting consumer access to discounted goods, we set a standard that required companies to provide proper disclosure to consumers. In one matter, the company provided a hyperlink to a disclosure which stated that the list price may or may not have been the cost at which the item was originally offered—in other words, there might not be any real discount at all. To strike that balance between preserving consumer interest for reduced price goods, without creating arbitrary minimum standards as to percentages of sales or time at which an item must be offered for sale, we simply required the company to place a clear and conspicuous disclosure (which at a minimum meant not via hyperlink) stating that the list price savings may not be based on actual sales.

We recognized that to the degree consumers are deceived by these practices, the harm is usually caused by the deceptive illusion of a bargain. Bogus sales and discounts create a false sense of urgency. For example, the consumer may think that an item may be gone quickly or that the offer may be removed at short notice. Companies that provide adequate, clear, and conspicuous disclosure are far less likely to attract regulatory attention. Retailers should remember that deception is the principal harm government agencies are likely to police, and that proper consumer disclosures should be made so that no illusions are created regarding the nature of the bargain.

Judge Puts the Brakes on Uber's $100M Settlement

Why it matters: The parties in the putative class action alleging that Uber drivers are employees and not independent contractors are back to square one after the judge overseeing the litigation refused to sign off on the proposed $100 million settlement. Just prior to trial, the parties reached a deal that would allow Uber to continue to classify drivers in California and Massachusetts as independent contractors. In return, the estimated 385,000 class members would receive a payout of $84 million, plus an additional $16 million if an IPO for the ride-sharing company moves forward, as well as policy changes such as clarification about when a driver can be deactivated. But the court was not impressed. The $16 million add-on payment was illusory, the court said, finding the $84 million insufficient as it represented just 10 percent of the full value of the non-Private Attorneys General Act (PAGA) claims, which the court estimated at around $854.4 million.

In addition, the drivers agreed to waive their PAGA claims in the agreement, which posed a host of policy problems, the court explained, and the other nonmonetary relief was modest, at best. The rejection of the proposed settlement agreement leaves the parties facing trial, a risky proposition for both sides.

Detailed discussion: As ride-sharing companies like Lyft and Uber have skyrocketed in popularity in recent years, the companies have faced significant litigation across the country, particularly on the issue of whether drivers are employees or independent contractors.

Both companies tried to settle the lawsuits. Lyft agreed to make changes to its terms of service to provide drivers with greater protections and pay $12.25 million but refused to alter the classification of drivers to employees going forward.

Uber tried a similar approach, albeit on a larger scale. Earlier this year, the company reached a deal with drivers in California and Massachusetts just before trial was set to begin. The approximately 385,000 drivers in the two states were to receive portions of an $84 million settlement fund that could be bumped up to $100 million if the company holds an IPO and the average valuation of the company increases to one and a half times that of its last financing round, $62.5 million as of December 2015.

Awards would be based on the number of miles driven, with additional weight given to those drivers that opted out of arbitration agreements with the company. For example, if all of the 243,320 California drivers filed claims, the 122,297 drivers who drove between 0-750 miles would receive an average distribution of $24, with the 42,074 drivers who drove between 750-2,000 miles receiving an average of $89, and the 7,534 drivers who drove more than 25,000 miles would receive an average of $1,950.

The agreement also included changes to policy, including more details about how and why drivers are "deactivated" from the service and clarification on Uber's tipping policy. The company additionally promised to help drivers with the creation of a drivers' association in both states. Most significantly, Uber would not change its business model, and drivers would continue to be classified as independent contractors.

But U.S. District Court Judge Edward M. Chen declined to grant judicial approval. "While recognizing sizable settlement sum and policy changes proposed by the Settlement Agreement and the significant risk that drivers face in pursuing this litigation … the Court concludes that the Settlement as a whole is not fair, adequate, and reasonable," he wrote.

The court acknowledged the risks to both sides in denying his approval (such as the uncertain outcome of a jury trial and the issue of the validity of arbitration provisions pending before the Ninth Circuit Court of Appeals) but expressed concern about all aspects of the settlement, from the monetary recovery to the policy changes to the breadth of the claims released by the drivers.

Considering only the $84 million (because "there is no information on the likelihood that [the $16 million] contingency will be triggered"), the court said it constituted roughly 10 percent of the full verdict value of the non-Private Attorneys General Act (PAGA) claims, which he valued at $854.4 million—a "substantial discount" of 90 percent.

As for the policy changes, "much of this non-monetary relief is not as valuable as the parties suggest, limiting their worth in considering the amount being offered in settlement," Judge Chen wrote. Unconvinced that changes to the tipping policy would result in substantially increased income for drivers as suggested, he noted the deactivation policy still allowed Uber to log drivers out based on low star ratings.

He also expressed concern about the "eleventh hour" settlement that "fold[ed] in new claims and class members at the expense of litigation pending in other courts, while attributing almost no value to those claims, in order to induce Uber to settle the cases at bar," as well as numerous objections to the deal, even at the preliminary stage of the proceedings.

The final straw for the court: the inclusion of a waiver of PAGA claims as part of the settlement, a change that altered "the Court's assessment of the fairness and adequacy of the settlement as a whole." The plaintiffs proposed to formally add a PAGA claim to the suit and settle it for $1 million—despite having previously argued that the claim could result in penalties over $1 billion, an amount the state's Labor and Workforce Development Agency agreed with.

"This $1 billion amount makes up more than half of the total verdict value of the case," the court said. "Plaintiffs propose settling the PAGA claim for 0.1% of its estimated full worth." While noting that such a huge verdict would likely be reduced, the court said the parties provided no rationale for allocating $1 million to the PAGA claim that "justifies settling the PAGA claim for such a relatively meager value."

"It is important to note that where plaintiffs bring a PAGA representative claim, they take on a special responsibility to their fellow aggrieved workers who are effectively bound by any judgment," Judge Chen said. "[W]here, as here, the compensation to the class amounts is relatively modest when compared to the verdict value, the non-monetary relief is of limited benefit to the class, and the settlement does nothing to clarify the status of drivers as employees versus independent contractors, the settlement of the non-PAGA claims does not substantially vindicate PAGA. In these circumstances, the adequacy of the settlement as a whole turns in large part on whether the PAGA aspect of the settlement can stand on its own."

The 99.9 percent reduction did not adequately reflect the parties' risks, the court said, particularly considering the PAGA claim would not be subject to the arbitration risk that justified in part the 90 percent discount in the verdict value of the non-PAGA claims.

"Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber's benefit, even though the PAGA claim alone is worth more than half of the full verdict value of all claims being released," the court wrote. "Even if the PAGA claim were not separately scrutinized, viewing all the claims combined (PAGA and non-PAGA), the Settlement Agreement yields less than 5% of the total verdict value of all claims being released."

To read the order in O'Connor v. Uber Technologies, Inc., click here.

A Cold Day in Court for Plaintiff Suing Starbucks Over Iced Drinks

Why it matters: Starbucks won a dismissal of a putative class action over underfilled drinks when a California federal court judge poured the lawsuit out of federal court. The court had no patience with the plaintiff's interpretation of Starbucks' menu and held that no reasonable consumer would believe the size of the drink would consist solely of liquid. While the decision was a victory for the coffee chain, similar suits based on hot drinks remain pending as does another challenge to the store's use of ice in cold drinks.

Detailed discussion: Alexander Forouzesh alleged that the coffee giant tricked consumers by stating that Tall size cold drinks contain 12 ounces, Grande drinks contain 16 ounces, and Venti drinks have 24. Despite listing these sizes on the menu, Starbucks employees were instructed to make the drinks according to standard practices that included filling the clear cup with the selected beverage up to a fill line and then topping it off with ice.

The result for customers: less liquid than promised, Forouzesh told the court, and that Grande had just 12 ounces of beverage and Venti had only 14. He claimed that ice is not a beverage, and alleged that Starbucks was guilty of breach of warranty, negligent misrepresentation, and violations of California's Consumer Legal Remedies Act, Unfair Competition Law and the state's False Advertising Law.

Starbucks countered with a motion to dismiss, arguing that the iced beverages it sold met the expectations of reasonable consumers.

U.S. District Court Judge Percy Anderson agreed.

Reasonable consumers would not be misled by Starbucks beverages and neither would young children, he found. "[A]s young children learn, they can increase the amount of beverage they receive if they order 'no ice,' " the court wrote. "If children have figured out that including ice in a cold beverage decreases the amount of liquid they will receive, the Court has no difficulty concluding that a reasonable consumer would not be deceived into thinking that when they order an iced tea, that the drink they receive will include both ice and tea and that for a given size cup, some portion of the drink will be ice rather than whatever liquid beverage the consumer ordered."

This conclusion was supported by the fact Starbucks uses clear cups for its cold drinks, making "it easy to see that the drink consists of a combination of liquid and ice," the court said. "Moreover, [since] neither the menu nor signage Plaintiff has reproduced and incorporated into his Complaint explicitly state that the drinks consist of the identified ounces of liquid, Starbucks has [not] made a representation about the size of its 'beverages.' "

The plaintiff's interpretation of Starbucks' menu was "strained" and "inconsistent with the understanding of a reasonable consumer," the court noted.

"When a reasonable consumer walks into a Starbucks and orders a Grande iced tea, that consumer knows the size of the cup that drink will be served in and that a portion of the drink will consist of ice," Judge Anderson concluded. "Because no reasonable consumer could be confused by this," he dismissed the plaintiff's lawsuit with prejudice.

To read the order in Forouzesh v. Starbucks Corp., click here.

Zipping out of Court: D.C. Circuit Tosses Privacy Suit

Why it matters: In a victory for the defendants in a zip code class action, the D.C. Circuit Court of Appeals dismissed a case against Urban Outfitters and Anthropologie based on the retailers’ request that consumers provide zip codes at the time of purchase. Class actions based on a retailer’s request for a zip code took off after the California Supreme Court’s decision in Pineda v. Williams-Sonoma in 2011, where the state’s highest court ruled that zip codes are considered “personal identification information” under a state statute and that retailers could not request and record the data. The cases spread to other jurisdictions including Massachusetts and the District of Columbia.

With this decision, retailers in D.C. can breathe a sigh of relief as long as a plaintiff sticks simply to statutory violations and doesn’t allege additional injury such as invasion of privacy or emotional injury.

Detailed discussion: Whitney Hancock and Jamie White made purchases using a credit card at retail stores Urban Outfitters and Anthropologie. In both transactions, the cashier first swiped the card and then asked for the customer’s zip code, which was entered into the store’s point of sale register.

Hancock and White alleged the transactions violated D.C.’s Use of Consumer Identification Information Act, which provides that no party may “request or record” the address or telephone number of a credit card holder as a condition of accepting a credit card as payment for a sale.

A federal court judge granted the retailers’ motion to dismiss and the plaintiffs appealed. The D.C. Circuit Court took a step back to consider the jurisdictional question of whether the plaintiffs had standing, ruling that they did not.

Although the plaintiffs told the court that a statutory violation was sufficient to satisfy the requirements of Article III standing, the court disagreed.

“The complaint here does not get out of the starting gate,” the three-judge panel wrote. “It fails to allege that Hancock or White suffered any cognizable injury as a result of the zip code disclosures. Indeed, at oral argument, Hancock’s and White’s counsel candidly admitted that ‘the only injury … that the named plaintiffs suffered was they were asked for a zip code when … [under] the law they should not have been.’ In other words, they assert only a bare violation of the requirements of D.C. law in the course of their purchases.”

In the U.S. Supreme Court’s recent decision on standing, Spokeo v. Robins, the Justices explained that an asserted injury even to a statutorily conferred right “must actually exist,” and must have “affect[ed] the plaintiff in a personal and individual way.” Some statutory violations could result in no harm, the Court said.

“The Supreme Court’s decision in Spokeo thus closes the door on Hancock and White’s claim that the [defendants’] mere request for a zip code, standing alone, amounted to an Article III injury,” the D.C. Circuit wrote. “[A] plaintiff cannot ‘allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.’ ”

Hancock and White did not allege any invasion of privacy, increased risk of fraud or identity theft, or pecuniary or emotional injury, the panel noted. “And without any plausible allegation of Article III injury, the complaint fails to state a basis for federal court jurisdiction.”

Vacating the district court’s dismissal motion, the federal appellate panel remanded the case with instructions to dismiss the complaint for lack of jurisdiction.

To read the opinion in Hancock v. Urban Outfitters, click here.

California Employee Can Pursue Termination Claims Over Marijuana Use

Why it matters: An employee who was fired for his use of medical marijuana can move forward with his lawsuit against his former employer, a federal court judge in California determined. Justin Shepherd had worked at Kohl's Department Stores for five years when he was diagnosed with acute and chronic anxiety and provided with a recommendation for medical marijuana use. Although he did not inform his employer about his drug use, the company subsequently updated its policies to state that employees in California would not be discriminated against for valid medical use of marijuana. Shepherd was injured on the job and a drug test revealed his drug use. He was terminated, and he sued alleging breach of an implied contract and covenant of good faith and fair dealing as well as defamation.

The court denied Kohl's motion for summary judgment, finding that a reasonable jury could determine the employee would not be discriminated against for his medical marijuana use based on the employer's policy. The court did toss a number of claims under the state's Fair Employment and Housing Act, however. Employers attempting to walk the fine line between federal law (which continues to recognize marijuana as an illegal substance) and contrary state laws (permitting marijuana both for medical and recreational use) should take note of the decision.

Detailed discussion: Justin Shepherd was hired by Kohl's Department Stores as a material handler in June 2006. As part of his hiring, he signed a written agreement that included a provision stating he was an at-will employee. In 2011, Shepherd—who had since been promoted—was diagnosed with acute and chronic anxiety. His doctor recommended medical marijuana.

Shepherd did not disclose the recommendation or his use of medical marijuana to Kohl's. But in 2012, the company updated its personnel policies to include exceptions to its drug testing and substance abuse policies stating that employees in certain states (including California) would not be discriminated against with regard to hiring, termination, or other employment matters based on their drug use due to a valid medical marijuana recommendation. Shepherd said he relied on these policies when he elected to continue using the drug to treat his anxiety and not look for a new job.

In 2014, Shepherd was injured at work and sent to a healthcare provider that contracted with Kohl's. A drug test revealed trace amounts of marijuana metabolites. Shepherd showed management his recommendation for medical marijuana and explained that he only used it while off duty, but that metabolites can remain in the system for some time.

Shepherd was terminated for his drug use and told that he "should have chosen a different medication." He filed suit alleging three counts under the Fair Employment and Housing Act (FEHA), invasion of privacy, wrongful termination in violation of public policy, breach of implied contract and the covenant of good faith and fair dealing, and defamation.

Kohl's moved for summary judgment and U.S. District Court Judge Dale A. Drozd entered a mixed decision.

First, he dismissed the FEHA claims. Despite the passage of the Compassionate Use Act, which ostensibly legalized medical marijuana in California, employees were not granted new rights. "[I]t does not violate the FEHA to terminate an employee based on their use of marijuana, regardless of why they use it, and the Compassionate Use Act did not change that," the court said.

Neither was the employer required to accommodate Shepherd's medical marijuana use, the court added, and therefore could not be liable for a failure to accommodate or engage in the interactive process. Further, the plaintiff failed to provide any evidence of disability discrimination, instead offering evidence only as to how Kohl's acted with regard to how he chose to treat his condition. The invasion of privacy claim also failed, as the evidence established the plaintiff was aware he could be drug tested long before he was injured.

However, the court was persuaded that Shepherd's claims for breach of implied contract and the covenant of good faith and fair dealing should survive summary judgment. The plaintiff contended that the policies adopted by Kohl's in 2012 became terms of his employment agreement and part of an implied contract, binding the employer not to breach them.

The existence and content of employer agreements not to terminate based on certain assurances are particularly fact-driven inquiries, Judge Drozd noted, pointing out that Shepherd testified he abandoned his efforts to look elsewhere for a job because he understood the Kohl's policies "to very clearly say that as long as I used the [medical marijuana] at home and not close to a shift, I would be protected from getting fired even if I tested positive."

"Here, a reasonable jury could conclude from defendant's policies and plaintiff's testimony that the parties agreed, subsequent to his 2006 acknowledgement of the at-will nature of his employment, that plaintiff would not be discriminated against for his medical marijuana use, since he was a registered medical marijuana cardholder," the court wrote.

The court also allowed Shepherd's defamation claim to move forward. The parties did not dispute that the only evidence of the plaintiff's impairment at work was the positive test result for marijuana metabolites, which Shepherd countered remain in a user's system for up to 30 days after use. He also testified that he did not use marijuana within several days of working as a general rule and had not used it for days before he was injured in January 2014.

"Based on this evidence, a reasonable jury could find plaintiff was not in a condition unfit to perform his job, was not under the influence of alcohol or other drugs at work, and/or was not using, consuming, or selling alcohol or other drugs at work," the court said, referencing the reasons given by Kohl's for Shepherd's termination. "Further, given the dearth of evidence presented by the defendant of plaintiff's purported impairment, a reasonable jury could conclude these statements were made with a 'reckless or wanton disregard for the truth,' thus establishing malice."

To read the order in Shepherd v. Kohl's Department Stores, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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