Retail and Consumer Products Law Roundup - November 2015 #2

Manatt, Phelps & Phillips, LLP
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In This Issue:

  • California Updates Data Security Laws
  • Class Action Over “Compare At” Price Claims Moves Forward
  • Another False Advertising Suit Over Outlet Prices
  • Employer’s Background Check Forms Check Out Fine, California Court Rules
  • FTC Removes the Gag, Takes Action Over Marketer's Confidentiality Clauses
  • Regulators, Employees Target On-Call Scheduling
  • NAD Considers Comparative, Performance Claims for Hair Supplements
  • Commercials Pulled After Endorser Admits 9/11 Lies
  • Volkswagen’s Legal Woes Mount as FTC Joins Probe
  • Seventh Circuit Decision Offers Lesson in USERRA Compliance
  • Supervisor's "Girl Power" Strong Enough for Sex Discrimination Lawsuit
  • NLRB Continues Crackdown on Employment Policies
  • Second Circuit Upholds New York Ban on Credit Card Surcharges

In this month's highlights, California continues its focus on privacy and data security issues with three new bills signed into law…more retailers operating outlet stores face consumer class action complaints…New York’s Attorney General focuses on employers’ on-call scheduling practices…and the FTC joins the probe into Volkswagen’s “clean diesel” advertising. Read on for more details.

California Updates Data Security Laws

Why it matters

The first state to enact data breach notification legislation, California has now updated Civil Code Section 1798.82 with three new bills signed into law by Governor Jerry Brown. Specifically, Senate Bill 570 added requirements to the existing data breach notification bill with rules about the format of a data breach notice, such as mandatory title and headings, a design to call attention to the "nature and significance" of the information contained, and text in at least 10-point type. The legislation included a model form that, if used, will be deemed compliant under the statute.

Two other bills made definitional changes impacting the scope of data covered by the notification bill. Under existing law, a breach occurs only if the compromised personal information was not encrypted. Assembly Bill 964 defined "encrypted" while Senate Bill 34 expanded the scope of "personal information" to include the use or operation of an automated license plate recognition system. Businesses should prepare themselves for the new laws, which take effect January 1, 2016.

Detailed discussion

In 2002, California became the first state to enact legislation requiring that a company provide notice to affected consumers in the event of a data breach. Since then, 46 other states and the District of Columbia have followed suit, while dozens of bills attempting to establish a national standard have flamed out in Congress.

Continuing its focus on privacy and data security issues, the state has amended its legislation with three new bills signed into law by Governor Jerry Brown on October 6.

Under current law, the state mandates that the "plain language" notice provided to affected consumers include the name and contact information of the notifying entity; a list of the types of personal information subject to the breach; the date of the breach; whether notification was delayed because of a law enforcement investigation; the phone numbers and addresses of the major credit reporting agencies if the breach involved Social Security, driver's license, or California identification card numbers; and in cases where identity theft and mitigation services are being offered by the notifying entity, all necessary information to take advantage of that offer.

Senate Bill 570 added new notice requirements with respect to formatting. The notice must be titled "Notice of Data Breach" and the required content for the notice must be set forth under specific headings: "What Happened," "What Information Was Involved," "What We Are Doing," "What You Can Do," and "For More Information." If an entity wants to provide additional information, it may do so with a supplement to the notice.

The notice must be designed to call attention to the "nature and significance" of the information contained, with title and headings "clearly and conspicuously" displayed, using at least 10-point text. Entities that use a model security breach notification form included in the legislation will be deemed compliant.

Certain entities are permitted to provide substitute notice under Civil Code Section 1798.82, where the notification cost would exceed $250,000, more than 500,000 individuals are affected, or the business lacks sufficient contact information. S.B. 570 also tweaked the notice requirements in these circumstances.

Notice via a conspicuous website posting must be visible for at least 30 days, with "conspicuous" defined as "providing a link to the notice on the home page or first significant page after entering the web site, in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks that call attention to the link."

If the breach affected usernames or e-mail addresses in combination with passwords or security questions and answers—with no other personal information impacted—an electronic notice directing consumers to change their password and security questions and answers will suffice. Notice via e-mail is not permitted, however, where the breach affected usernames or e-mail addresses for login credentials of an e-mail account provided by the entity. Instead, a different format such as written or "clear and conspicuous" notice when the consumer is connected to the online account from an IP address or online location recognized by the entity must be utilized.

A second measure, Assembly Bill 964, established a definition of the term "encrypted." A breach occurs under California law only if the compromised personal information was not encrypted, now defined as "rendered unusable, unreadable, or indecipherable to an unauthorized person through a security technology or methodology generally accepted in the field of information security."

Finally, Senate Bill 34 amended the statutory definition of "personal information" to incorporate "information or data collected through the use or operation of an automated license plate recognition system." Operators and end users of an automated license plate recognition (ALPR) system must maintain reasonable security procedures and practices (including operational, administrative, technical, and physical safeguards), per the new law, intended to protect ALPR information. In addition, a usage and privacy policy—addressing the collection, use, maintenance, sharing, and dissemination of information—must be established.

The new law also permits individuals to bring a civil action against ALPR operators and end users for violations of the statute, with actual damages up to $2,500, plus punitive damages, attorneys' fees and costs, and equitable relief.

To read S.B. 570 and view the model form, click here.

To read A.B. 964, click here.

To read S.B. 34, click here.

Class Action Over “Compare At” Price Claims Moves Forward

Why it matters

Nordstrom Rack’s motion to dismiss a putative class action challenging price advertising with “compare at” claims was rejected by a California federal court. Deceptive pricing suits are the latest trend in consumer class actions.

In addition to Nordstrom, retailers operating outlet stores have faced similar complaints, with Michael Kors agreeing to an almost $5 million settlement over the pricing at its outlet locations. The issue has also attracted attention from federal legislators, with a group of senators writing to the Federal Trade Commission to request an investigation into whether outlet stores are engaging in deceptive advertising and pricing.

Detailed discussion

Kevin Branca filed suit against Nordstrom Rack, alleging that the retailer used deceptive pricing claims to trick consumers into thinking they were saving money. Price tags featured the price for an item next to a higher price, with the statement “compare at.” For example, while shopping at a San Marcos, Calif. Nordstrom Rack, Branca purchased a pair of pants for $79.97 with a “compare at” price of $150 and a hooded sweatshirt for $29.97 with a “compare at” price of $65.

Branca claimed the defendant made up the “compare at” price in violation of multiple state laws because the retailer never sold or intended to sell the items at the mainline Nordstrom store. Accordingly, there could not be a legitimate former price or prevailing market price for the items.

Nordstrom countered with a motion to dismiss, contending that Branca lacked standing to represent a class of consumers that purchased different items with different “compare at” statements. While the court agreed that standing could not be based simply on the Nordstrom Rack name, website, and general advertising, the plaintiff’s allegations about the price tags were sufficient to establish standing.

Courts focus on whether the alleged misrepresentations are sufficiently similar across product lines in applying a “substantial similarity” test between the various products and alleged misrepresentations at issue, U.S. District Court Judge Michael M. Anello wrote.

“[T]he differences across the products are of little import to the alleged misrepresentations,” the court said. “Here, Plaintiff does not allege that his claims depend on what type of product a consumer purchased from Nordstrom Rack; it is immaterial for the purposes of his claims whether one purchased a pair of shoes versus a hat, so long as the item bore a ‘Compare At’ tag. His allegations do not relate to the exact prices, percentages of savings listed on the tags, or specific characteristics of the underlying products, which would vary by product. Rather, his claims relate to the consistent format of the tags, i.e., the juxtaposition of two prices, one higher than the other, the term ‘Compare At’ and a percentage, labeled ‘% Savings.’ Moreover, all of the products are marketed to the same consumers, Nordstrom Rack shoppers. Thus, product composition is of little importance and the similarity amongst the purported misrepresentations is most important.”

Nordstrom’s argument that the plaintiff failed to identify a false or misleading statement made by the company also failed to sway the court.

“The Court finds Plaintiff sufficiently alleges his claim that the tags are deceptive,” Judge Anello wrote. “Plaintiff pleads with particularity how and why he was personally deceived by the ‘Compare At’ tags.” His claims are subject to the reasonable consumer test, a standard the plaintiff was able to satisfy for purposes of the state’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, and Business and Professions Code.

“Plaintiff sufficiently alleges that reasonable consumers would be deceived by Nordstrom’s tags,” the court said. “He states reasonable consumers would be deceived in the same way and for the same reasons as he was,” and presented survey evidence that demonstrated 90 percent of 206 participants interpreted the “compare at” tag to mean that the associated item was previously sold for the “compare at” price.

Branca also alleged that the “compare at” prices were false because they were never intended for sale at a location other than a Nordstrom Rack store and that Nordstrom actually intended them to be misleading, the court said.

The court denied Nordstrom’s motion to dismiss, moving the suit forward. To read the order in Branca v. Nordstrom, Inc., click here.

Another False Advertising Suit Over Outlet Prices

Why it matters

Continuing the trend in false advertising consumer class actions, Columbia Sportswear Company was hit with a deceptive pricing suit in California federal court.

The complaint noted that the shift from using outlet stores as a means to sell-out-of season or damaged full-price inventory to a destination for goods manufactured solely for sale at the outlet has triggered both consumer class action suits and a letter from four members of Congress requesting that the FTC investigate misleading marketing practices by outlet stores in the country.

Detailed discussion

Jeanne and Nicolas Stathakos claimed that Columbia Sportswear Company overstated the “Former Price” listed on price tags at its outlet stores. The complaint stated that “Based on the represented price reduction, reasonable consumers would believe that Columbia is offering bona fide discounts off of true former prices.” “But the ‘Former Price’ represented by Columbia was a sham.” The goods sold at Columbia outlet stores are manufactured for exclusive sale at that location, the plaintiffs said, and were never sold—or even intended to be sold—at the “Former Price” advertised on the price tags and the tags were designed to falsely convince consumers that they are buying brand products at reduced prices and not “lower quality goods.”

“To put it simply, one may pay $30,000 for a Prius and $100,000 for a Tesla, but no reasonable consumer would understand himself to have ‘saved’ $70,000 by buying a Prius,” the suit claimed. “Rather, he has simply chosen to buy a different car.”

For example, during a July visit to the Vacaville, Calif. Columbia outlet, the Stathakos’s purchased six items, including a pair of women’s shorts with a “Former Price” of $30 and an actual price of $14.97, believing they saved approximately 50 percent on their purchase.

Such “phantom markdowns” violate Federal Trade Commission’s regulations as well as California state law, the suit said. Specifically, Section 17501 of the state’s Business & Professions Code states: “No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price … within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.”

The “Former Price” listed on price tags at Columbia outlet stores did not reflect a prevailing market retail price from the prior three months, the plaintiffs alleged.

Seeking to represent a class of California plaintiffs, the complaint requested injunctive relief and restitution for violations of California’s False Advertising Law, Consumers Legal Remedies Act, and the unfair, fraudulent, and unlawful prongs of the state’s Unfair Competition Law.

To read the complaint in Stathakos v. Columbia Sportswear Company, click here.

Employer’s Background Check Forms Check Out Fine, California Court Rules

Why it matters

A federal court judge in California ruled in favor of an employer, granting a motion to dismiss a suit challenging the forms used to conduct background checks on potential employees. A pair of former employees sued, arguing that the employer did not satisfy the requirements of either the federal Fair Credit Reporting Act (FCRA) or the state counterparts by providing an application form along with a consent and disclosure form permitting the company to perform a review of the applicants’ credit histories. The judge, however, threw out the claims, although with leave to amend the complaint. “The court is not aware of any authority supporting this contention that merely presenting these documents together violates the FCRA,” the court said.

Background check procedures remain a popular source of litigation from both employees and regulators (such as the Equal Employment Opportunity Commission, which has brought multiple lawsuits challenging the use of background checks), and employers should ensure that they are following both state and federal requirements when conducting preemployment background checks of applicants.

Detailed discussion

During the hiring process, Kohl’s Department Stores provided two forms to applicants. One document was an “Employment Application” and the second was titled “Consent and Disclosure for Acquisition of Consumer Report(s).”

The Employment Application consisted of two pages seeking identifying information on the first page, as well as information pertaining to availability, employment history, and the position sought. The second page requested that the applicant disclose his or her criminal history, with a statement above the signature line that released Kohl’s from liability associated with the preemployment check.

The one-page Consent and Disclosure Form requested the applicant’s identifying information and disclosed that Kohl’s would use a consumer reporting agency to obtain consumer reports on the applicant that would contain personal information such as criminal history, drug offenses and sex offender status. The form also provided the name and contact information for the consumer reporting agency, the method by which the applicant could dispute the report, and that Kohl’s might use the information gathered to make a hiring decision. Applicants were required to sign the form at the bottom.

Two former Kohl’s employees filed suit, challenging the national retailer’s background check procedures. The ex-employees alleged that, by providing the two forms to applicants simultaneously, Kohl’s ran afoul of the requirements of the federal Fair Credit Reporting Act (FCRA), the California Investigative Consumer Reporting Agencies Act (ICRAA), and the state’s Consumer Credit Reporting Agencies Act (CCRAA).

Kohl’s filed a motion to dismiss the suit. The U.S. District Court for the Northern District of California granted the motion, although it dismissed the FCRA and ICRAA claims with leave to amend.

Section 1681b(b)(2)(A)(i) of the FCRA requires that “a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.”

The plaintiffs advanced a theory that Kohl’s violated the stand-alone requirement because the Employment Application and Consent and Disclosure Form were part of the same employment packet and provided to applicants at the same time. They also alleged that the disclosure also failed the “clear and conspicuous” requirement because it appeared together with other information in the Employment Application.

Kohl’s countered that the documents were two separate forms that served two separate functions in the applicant screening process. The court agreed.

“Plaintiffs have not sufficiently alleged Kohl’s failure to comply with the statute,” the judge wrote. “Each form separately bears [the Plaintiffs’] signature. The Employment Application is formatted in landscape, bears a separate title, and contains a separate form code. More importantly, the Employment Application appears to serve a different and distinct function. It requests certain employment-related information about the applicant such as basic identifying information, criminal history, and authorization and release for the company to ‘contact … employment references and personal references, as well as education institutions.’ In contrast, the Consent and Disclosure Form is formatted in portrait, and bears a distinct title and form code.”

Based on the pleadings, “Kohl’s appears to have provided two separate documents to Plaintiffs, in compliance with the FCRA,” the court said.

The judge distinguished two cases cited by the plaintiffs where federal courts found possible FCRA liability when employers presented a release of liability with either a disclosure or authorization provision in the same document. “Here, in contrast, the disclosure and authorization provisions appear in one document (the Consent and Disclosure Form) while a release of liability appears in a separate document (the Employment Application),” the court explained.

The court granted Kohl’s motion to dismiss with leave to amend the FCRA and ICRAA claims. The plaintiffs conceded that the CCRAA claim was subject to dismissal and it was dismissed with prejudice.

To read the order in Coleman v. Kohl’s Department Stores, click here.

FTC Removes the Gag, Takes Action Over Marketer's Confidentiality Clauses

Why it matters

The Federal Trade Commission filed suit against Roca Labs and Roca Labs Nutraceutical, along with their principals, alleging that they violated Section 5 of the Federal Trade Commission Act by making deceptive claims about weight loss products and by threatening to sue consumers who shared their negative experiences online.

According to the FTC, the defendants managed to violate both the unfair and deceptive prongs of Section 5 of the FTC by making unsubstantiated weight loss claims and instituting gag clauses. Non-disparagement clauses in contract terms have received publicity lately as consumers fight back against such provisions. Now that the FTC has joined the fight, marketers using such clauses definitely want to reconsider using a similar provision.

Detailed discussion

Included in the terms and conditions of purchase of the defendants' Anti-Cravings powder, among other weight loss products, was a "gag clause" intended to keep consumers quiet, the agency said. The online terms stated: "You agree that regardless of your personal experience with RL, you will not disparage RL and/or any of its employees, products, or services. This means that you will not speak, publish, or cause to be published, print, review, blog, or otherwise write negatively about RL, or its products or employees in any way."

In addition, the defendants included a stand-alone insert in product packaging that stated: "You were given a discount off the unsubsidized price of $1,580 in exchange for your agreement to promote our product and when possible share your weight loss success with us (keep those YouTube videos coming). As part of this endorsement you also agree not to write any negative reviews about RLN or our products. In the event that you do not honor this agreement you may owe immediately the full price of $1,580."

The Florida-based marketers threatened to sue—and actually did sue—consumers who complained to the Better Business Bureau or shared a negative experience online, the FTC said, and consumers who did post negative reviews were told they owed the "full price" for their purchases, usually hundreds of dollars more than the product was advertised for.

"Roca Labs had an adversarial relationship with the truth," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in a statement. "Not only did they make false or unsubstantiated weight-loss claims, they also attempted to intimidate their own customers from sharing truthful—and truly negative—reviews of their products."

In online and social media advertising, the defendants claimed that their weight-loss products were a safe and effective alternative to gastric bypass surgery for individuals seeking to lose 50 pounds or more. Users were allowed to continue "to eat what you like" with "no menus, no diet restrictions," and lose up to 21 pounds per month, with a 90 percent success rate, according to the defendants' website. Testimonials and "third-party" reviews were used by the defendants to promote their products, but the FTC said the "Success Videos" were solicited from purchasers who received their products half-price for a positive review.

The FTC's complaint presented claims under both the unfairness and deceptive prongs of the FTC Act. Unfairness charges were based on the gag clauses, while the weight loss claims and the failure to disclose that the positive reviews were compensated constituted deceptive and misleading advertising, the agency alleged.

Requesting a permanent injunction as well as financial redress for consumers, the agency noted the defendants have sold at least $20 million of their products since 2010.

To read the complaint in FTC v. Roca Labs, click here.

Regulators, Employees Target On-Call Scheduling

Why it matters

On-call scheduling remains a target of regulators and workers alike, with new suits filed challenging the practice and a recent deal between the New York Attorney General and an employer agreeing to end its use. Forever 21 and BCBG Max Azria were both the targets of complaints in California state court recently, alleging that the retailers fail to compensate workers for the time spent on call when they do not end up working. The on-call shifts are no different from regular shifts and employees should be paid accordingly, the plaintiffs claim, calling the practice of on-call scheduling a “new form of wage theft.” New York’s Attorney General has focused on the practice as well. Earlier this year, AG Eric Schneiderman sent letters to several major retailers and launched an investigation into possible violations of labor law. A number of national retailers have since agreed to stop using the practice. Joining the list earlier this month, Urban Outfitters promised to start providing employees notice of their schedules at least one week before the start of the workweek. Given the scrutiny from regulators and employees alike, employers may want to think twice before making use of on-call scheduling.

Detailed discussion

Should workers who are required to be “on call” for a shift be paid for their time? According to two new lawsuits filed in California state court by workers in the retail industry, the answer is “yes.”

Raalon Kennedy and Robynette Robinson alleged that Forever 21 and BCBG Max Azria, respectively, owe employees for on-call shifts even if they don’t end up working. “On-call shifts, like regular shifts, also have a designated beginning time and quitting time,” Kennedy wrote in his complaint. “In reality, these on-call shifts are no different than regular shifts, and Forever 21 has misclassified them in order to avoid paying reporting time in accordance with applicable law.”

Under California law, employers must pay nonexempt employees “reporting time” pay when they are required to report to work but do not end up working or work less than half of the scheduled day. Both Kennedy and Robinson alleged that they were never paid for reporting time and argued that being on call limited their chance to work a second job or plan activities.

Characterizing missing payment for on-call shifts as “a new form of wage theft,” the suits claim that employees are also penalized for missing on-call shifts or being late. “Unpredictable work schedules take a toll on all employees, especially those in low-wage sectors,” Robinson alleged in her complaint.

On the other coast, the State of New York is pursuing an action against employers utilizing on-call schedules. New York Attorney General Eric T. Schneiderman launched an investigation into the practice earlier this year, sending letters to 13 major retailers to ask how they set workers’ schedules. Recipients were also cautioned that use of on-call scheduling could violate state law. Schneiderman said New York regulations require that employees who report for work on any day must be paid for at least four hours, or if the shift is less than four hours, at least minimum wage. The investigation was triggered by a rising number of calls to the AG’s office by employees complaining that they were not being paid accordingly, he said, particularly in the retail industry.

Some employers responded by agreeing to stop the practice. Urban Outfitters recently promised to halt the practice in its New York stores with a phase-in process starting in November. The company also stated that it would provide employees with their schedules at least one week prior to the start of the workweek.

“Workers deserve basic protections, including a reliable work schedule that allows them to budget living expenses, arrange for childcare needs and plan their days,” Schneiderman said in a statement announcing the latest agreement. “I commend Urban Outfitters for taking this important step to ensure that their employees have schedules that are more predictable.” In addition to California and New York, six other states—Connecticut, Massachusetts, New Hampshire, New Jersey, Oregon, and Rhode Island—as well as Washington, D.C., have laws on the books mandating reporting time pay.

NAD Considers Comparative, Performance Claims for Hair Supplements

Why it matters

In a challenge to a line of hair supplements, the National Advertising Division recommended that several claims be discontinued, but found that the product name was unlikely to mislead consumers. Lifes2Good, the maker of Viviscal hair supplements, challenged Lang Pharma Nutrition's claims for the Nourishing Hair Dietary Supplements product line. The products contain ingredients like biotin, zinc, keratin, and iron, and are intended to encourage hair growth.

This decision an important reminder for advertisers that substantiate product performance claims for health products with ingredient testing. Lang submitted studies and articles on the ingredients contained in its supplements. "[W]hen making claims based on the ingredients in a product, advertisers bear the burden of demonstrating that the advertised product has the same ingredient in the dosage, formulation and route of administration as the underlying studies submitted in support of its health claims," the self-regulatory body explained. Further, in order to be considered sufficiently reliable evidence, "the submitted evidence studies must constitute competent and reliable evidence," generally defined as at least one human clinical trial that is methodologically sound and statistically significant at the 95 percent confidence level.

Detailed discussion

Lifes2Good argued that the claims at issue—"Compare to Viviscal," "Supports existing hair growth from within," and "Scientifically formulated for beautiful hair," for example—were comparative or performance claims that require competent and reliable scientific evidence for support. Because Lang lacked such evidence, Lifes2Good argued the claims should be discontinued.

Lang countered that the "Compare to Viviscal" claim was simply an invitation to compare the products and "Scientifically formulated for beautiful hair" was puffery. The other claims were fully supported by clinical testing on the ingredients in the products, the advertiser said. Considering the "Compare to Viviscal" claim, the NAD agreed with the challenger that it should be discontinued. While separate from the product performance claims, the self-regulatory body expressed concern that consumers at the point of purchase would be unaware that Viviscal has been clinically tested while the Lang product has not. "NAD shared the challenger's concern that consumers were unlikely to have the necessary information to make an informed comparison," according to the decision. "A reasonable consumer could take away the message that the Lang product and Viviscal brands are similar in type, composition and efficacy, a message not supported by any evidence in the record."

The decision also advised Lang to discontinue several product performance claims, including "Scientifically formulated to support existing hair growth" and "drug-free nutrient formula for thinning hair." The advertiser did not submit a single ingredient study that provided a reasonable basis for the "thinning hair" claim, the NAD wrote, and the evidence in the record failed to support the "scientifically formulated" claim.

Lang provided ingredient testing to back its claims but the NAD found that "the advertiser had not demonstrated that the supplementation of these nutrients in the absence of a deficiency would promote hair growth beyond a person's natural capacity."

The product name survived the self-regulatory body's scrutiny, as the record lacked any evidence of consumer confusion and "the claim 'hair nourishing supplement' is literally true in that the product contains many nutrients that are associated with normal hair maintenance and growth." Finally, the NAD determined that the "Scientifically formulated for beautiful hair" claim met all the criteria for puffery: "'beautiful hair' is in the eye of the beholder, vague and not capable of objective measurement," the decision noted.

To read the NAD's press release about the case, click here.

Commercials Pulled After Endorser Admits 9/11 Lies

Why it matters

The revelation that an endorser lied about his whereabouts on September 11 led a national sports-themed restaurant chain to stop airing commercials where the actor uttered the line, “But don’t just take my word for it.”

The story is just the latest example of the risk brands take by associating themselves with a celebrity endorser. From Rannazzisi’s lies to Jared Fogle’s recent guilty plea on charges related to child pornography to one company’s run-in with the Food and Drug Administration over a Kim Kardashian tweet, companies must carefully consider the pros and cons of a relationship with celebrities.

Detailed discussion

Actor Steven Rannazzisi spoke on multiple occasions about how his experience on September 11, 2001, changed his life. In more than one interview, he said he was an account manager at Merrill Lynch working on the 54th floor of the South Tower when the first plane hit. He said “we were like jostled all over the place,” and that he still has “dreams of like, you know, those falling dreams” Because of his experience, Rannazzisi said he quit his job and took up his true love of comedy and acting.

But on the fourteenth anniversary of the attack, Rannazzisi admitted that his story was a lie after The New York Times confronted him with evidence that he was in Midtown when the attack occurred and had never worked for Merrill Lynch. “I was not at the Trade Center on that day,” he said in a statement. “I don’t know why I said this. This was inexcusable. I am truly, truly sorry.”

The fabrication not only impacted Rannazzisi, but also forced the sports-themed national chain, for which he appeared in an advertising campaign, to abandon his commercials just as the restaurant reached its busiest time of year—football season. In the commercials, Rannazzisi sings the praises of the restaurant (from the snacks to multiple TVs that display more than one game at a time) and concludes with, “But don’t just take my word for it, take someone else’s word for it,” before Hall of Fame running back Emmitt Smith appears.

The national chain pulled the ads, stating that “upon careful review, we have decided to discontinue airing our current television commercials featuring Steve Rannazzisi.”

Volkswagen’s Legal Woes Mount as FTC Joins Probe

Why it matters

The Federal Trade Commission announced it has opened an investigation into Volkswagen’s advertising claims for its “clean diesel” vehicles. In September, the Environmental Protection Agency and California’s Air Resources Board issued press releases which revealed that approximately 482,000 Volkswagen and Audi diesel cars contained software that was intentionally designed to cheat on emissions tests to circumvent environmental standards for air pollutants. The software could detect when a test was under way and reduce emissions, but return to normal operation in daily use (in some cases, with up to 40 times the standard emissions). Within days, Volkswagen’s CEO resigned, the EPA and Department of Justice announced civil and criminal investigations, a securities class action was filed in Virginia federal court, multiple state Attorneys General announced their own investigations, and dozens of class actions were filed by owners of the affected cars.

U.S. Senator Bill Nelson (D-Fla.) called on the FTC to take action. “Volkswagen’s transgressions demonstrate the importance of having multiple ‘cops on the beat’ when it comes to consumer protection,” Sen. Nelson wrote. “The EPA and the DOJ have very important law enforcement and remedial roles to play when faced with the kinds of behavior at issue here. In establishing the FTC Act, however, Congress did not contemplate a bystander role for the agency in the face of galling and unmitigated consumer deception. As an independent agency of Congress, the FTC has a key role to play—in cooperation with the EPA and DOJ—as one of the cops on the beat to make sure consumers are protected.”

Detailed discussion

Sen. Nelson acknowledged the efforts of the EPA and the DOJ, but told Chairwoman Edith Ramirez that the FTC “also has an appropriate role in investigating the company’s actions,” to enforce Section 5 of the Federal Trade Commission Act’s prohibition against unfair or deceptive acts or practices.

“Volkswagen advertised their diesel cars as ‘clean diesel’ and as otherwise environmentally friendly,” Sen. Nelson wrote. “Yet, contrary to these express claims, Volkswagen’s and Audi’s diesel vehicles, by design, were neither clean nor environmentally friendly, and they failed to comply with federal environmental laws.”

The FTC is “uniquely positioned” to represent the interests of consumers, the lawmaker added, and the agency should make use of its powers under Section 5 to explore possible remedies such as consumer redress as well as “a full panoply of equitable remedies,” including forcing VW “to launch a comprehensive corrective marketing campaign that would cure the deception and inform consumers about their remedial options.”

Declaring himself “outraged” that Volkswagen would “cheat its customers by deceiving them into buying a car that wasn’t what was advertised,” Sen. Nelson urged the Commission “to exercise all of its authority on behalf of the American public.”

To read Sen. Nelson’s letter to the FTC, click here.

Seventh Circuit Decision Offers Lesson in USERRA Compliance

Why it matters

Providing an important reminder regarding compliance with the Uniformed Services Employment and Reemployment Rights Act (USERRA), the Seventh Circuit Court of Appeals reversed summary judgment in favor of an employer and remanded an employee’s lawsuit that she was subjected to discrimination based on her military status back to the trial court for further proceedings. During her six and a half years of employment with Volvo, a worker was granted more than 900 days of military leave for training and for her deployment to Iraq and Kuwait. When she returned from her tours of duty, the employee experienced post-traumatic stress disorder (PTSD) and took more time off. After she was fired for tardiness, the employee sued, alleging discrimination under both USERRA and the Americans with Disabilities Act (ADA) based on her PTSD. A federal court judge granted summary judgment for Volvo, noting the employer’s patience over a period of six years. But the federal appellate panel reversed, ruling that a jury could find that the plaintiff’s discharge was motivated by the employer’s long-standing frustration with her frequent absences due to military service. The court focused on multiple e-mails from management complaining about her absences and her lack of communication during deployment, as well as the employee’s allegation that her supervisor told her she was an “undue hardship” to the company.

The decision provides an important lesson for employers about compliance with USERRA. Even though the employer provided all of the leave mandated by the statute, the court found that communications expressing frustration with the worker’s absences demonstrated a possible discriminatory motive for her termination.

Detailed discussion

LuzMaria Arroyo began working for Volvo Group North America in June 2005 as a material handler in a parts distribution center in Illinois. The company knew Arroyo was a member of the U.S. Army Reserve when she was hired.

During her six and a half years of employment, Arroyo deployed twice: to Iraq from April 2006 to May 2007 and to Kuwait from April 2009 to August 2010. She also took regular leave for weekend drills, training, and other military activities. Volvo granted her more than 900 days of military leave during her time at the company.

Arroyo pointed to evidence that her supervisors were frustrated about her schedule and absences from work from the beginning of her employment. In the fall of 2005, her supervisor e-mailed management to ask if the company was required to provide time off for her to drive to and from Georgia, where her unit was based, for military drills. She testified that the same supervisor said her military duties were becoming an “undue hardship” for the company and she should transfer to a local unit.

Another e-mail complained that Arroyo only contacted Volvo once during her deployment to Iraq. When she returned from Kuwait, the company offered her a voluntary severance package with the hope that she would accept. She declined.

The situation became more complicated upon Arroyo’s return from the second deployment when she was formally diagnosed with post-traumatic stress disorder (PTSD) and took three months of Family and Medical Leave Act (FMLA) leave. E-mails from management during this time noted that “[Arroyo] is really becoming a pain with all this,” while another message joked that “[s]he’s on vacation in Hawaii.”

When Arroyo returned to work, she requested several accommodations, many of which Volvo granted (such as a meditation room, a mentor, and time off for counseling).

Arroyo was terminated in 2011 for violation of the company’s attendance policy, under which employees received whole or fractional “occurrences” for unexcused absences or tardiness. After several occurrences of tardiness—although often of only a short duration between 1 and 10 minutes late—she was terminated.

Arroyo’s subsequent lawsuit alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA) and the Americans with Disabilities Act (ADA). A federal court judge granted summary judgment in favor of Volvo but Arroyo appealed. The federal appellate panel affirmed the dismissal of some of the claims but reversed with respect to plaintiff’s claims of discrimination under both federal statutes. The Seventh Circuit Court of Appeals concluded that Arroyo had sufficiently alleged that her service membership was “a motivating factor” in the adverse employment action taken against her and that Volvo had failed to prove that the termination would have occurred in the absence of her military status.

“Taking all the evidence as a whole, a reasonable jury could infer that Volvo was motivated, at least in part, by anti-military animus toward Arroyo,” the panel wrote. “There is evidence that from the beginning of her employment, her supervisors disliked the burden her frequent military leave placed on the company. They repeatedly discussed disciplining her and denied her rights, such as travel time, to which she was entitled. Some of the e-mails come close to a direct admission of management’s frustration. For example, [one supervisor] discussed his ‘dilemma’ of ‘disciplin[ing] a person for taking too much time off for military reserve duty.’ He later reportedly told Arroyo that accommodating her orders placed an undue hardship on Volvo; [a second supervisor] repeated the same sentiment. [Another manager] complained about Arroyo’s lack of communication while she was deployed in Iraq. A jury could understandably detect in these communications animus toward Arroyo’s military service.”

The court made the connection between the employer’s alleged animus and her termination because she was disciplined for instances of tardiness “often of a relatively minor nature,” when she was only a few minutes late. Further, the “e-mails expressing management’s frustration often transitioned directly into a discussion about disciplining Arroyo under the local attendance policy,” the court said.

“It is true that Volvo granted Arroyo a considerable amount of military leave during her tenure at the company and did not directly discipline her for those particular absences,” the panel acknowledged. “That fact will likely support Volvo’s arguments before a jury. But it does not negate an inference of discriminatory motive on summary judgment.”

Turning to the ADA claim, the court said it presented a “closer call” than the USERRA claim. Although less evidence existed of animus toward Arroyo’s PTSD than concerning her military service, the panel found it to be sufficient for her claim to move forward, again citing company e-mails.

“Internal emails indicate that Volvo management considered disciplining Arroyo for her absences while she was in the hospital [for her initial diagnosis of PTSD], even though she emailed [her supervisor] to tell him about her condition,” the court said. “Another one of her supervisors … joked about Arroyo’s absence, writing that she heard rumors Arroyo was actually vacationing in Hawaii. A few weeks earlier, [the same supervisor] complained … that Arroyo was ‘really becoming a pain with all this.’ This is enough for a jury to find discriminatory motive.”

The timing was also suspicious, the panel said, as the disciplinary steps that led to her termination coincided with the onset and diagnosis of Arroyo’s PTSD, supporting an inference of discrimination.

Reversing summary judgment on the USERRA and ADA discrimination claims, the panel affirmed the lower court’s dismissal of Arroyo’s failure to accommodate, retaliation, and intentional infliction of emotional distress claims.

To read the opinion in Arroyo v. Volvo Group North America, click here.

Supervisor's "Girl Power" Strong Enough for Sex Discrimination Lawsuit

Why it matters

A New York federal court judge ruled that "girl power" was strong enough to provide the basis for a sex discrimination suit brought by a male employee. Todd Lenart alleged that he experienced a hostile work environment and was discriminated against on the basis of his sex and gender by his female supervisor. Women were given preferential treatment during the hiring process and after they were employed, according to the plaintiff. The supervisor allegedly said she wanted to have a staff of all women and after Lenart was terminated—purportedly due to a reorganization of the department—said she had created a "girl power team based in New York."

The employer moved to dismiss the suit but a federal court judge denied the motion. The supervisor's possibly innocuous message of female empowerment, when coupled with the fact that a female took over most of Lenart's duties after his termination, were sufficient allegations to move the case forward on his Title VII and state law claims of sex discrimination. The court dismissed the hostile work environment counts, however.

Detailed discussion

A male tax lawyer, Todd Lenart was hired by Coach in February 2012 after being recruited by the Tax Department's vice president. In a lawsuit alleging discrimination on the basis of his sex and gender as well as a hostile work environment in violation of both Title VII and New York state law, Lenart claimed women were favored even before they were hired by the company.

According to Lenart, he had to interview with 14 people and undergo psychological testing before he was hired. Two women were hired after interviewing with just four individuals and were not required to take any psychological tests, he said.

Once employees began working for Coach, women were "given preferential treatment," Lenart alleged, with a female manager regularly invited to meetings with senior executives while male colleagues were not granted similar access and a female manager in the Tax Department given an office before more senior male members. Male employees complained about the "female gender bias" at the company, and expressed concern that it would prevent them from receiving promotions.

A male coworker reported to Lenart that his female supervisor reportedly said "on numerous occasions" that she would "like to have a staff of all women." Lenart was terminated in April 2013, ostensibly due to a reorganization of the company's Tax Department. But Lenart alleged that most of his responsibilities were taken over by a female employee and a former coworker informed him that his supervisor stated at a meeting after he was terminated that she had created "a girl power team based in New York."

Lenart sued. Coach filed a motion to dismiss the suit but U.S. District Court Judge Jesse M. Furman said the case could move forward on some of the claims.

The court first considered the hostile work environment claim. Under either New York state law or Title VII, a plaintiff must demonstrate that the workplace is "permeated with discriminatory intimidation, ridicule, and insult that is sufficiently severe or pervasive to alter the conditions of the victim's employment and create an abusive working environment."

Lenart failed to meet this standard, the court said. Some of his allegations were undermined in his own complaint, Judge Furman noted. For example, although Lenart claimed women were favored during the hiring process, he initially rejected the position offered to him because of certain duties he did not want to perform. Coach modified the position to suit his preferences and he took the job. "Needless to say, a company is unlikely to alter duties of a position in order to attract a particular candidate if it was not highly interested in hiring that candidate," the court said.

Lenart himself never heard his supervisor make the alleged comments that she wanted a staff of all women and even if the comments were made on numerous occasions as alleged, he failed to show they were more than isolated acts, the judge said.

The comments about a team of women and "girl power" "amount to nothing more than the workers' subjective beliefs that they were being discriminated against," the judge added. "And, because a hostile work environment claim has both objective and subjective prongs, 'even if [Lenart can] show [his and others'] subjective belief that [his] workplace was hostile,' he must still allege conduct making it plausible that 'a reasonable person would have concluded that the work environment was hostile.' Put simply, the subjective belief of Lenart and his co-workers that there was sex discrimination afoot—'however strongly felt—is insufficient to satisfy his burden at the pleading stage.'"

However, the New York City Human Rights Law has a lower threshold than its state and federal counterparts, Judge Furman said, and all that is generally required is that the plaintiff "proffer evidence of 'unwanted gender-based conduct.'" So Lenart's claims that he had to undergo extra interviews and psychological testing while his female colleagues did not, and the supervisor's expressed preference for working with women, albeit thin, were sufficient to survive a motion to dismiss.

Turning to Lenart's sex discrimination claims, the court judged it a "close call" but said the complaint satisfied the standard that he was a member of a protected class, was qualified, suffered an adverse employment action, and had "at least minimal support for the proposition that the employer was motivated by discriminatory intent."

The plaintiff alleged that the majority of his responsibilities were assumed by a woman—a claim that standing on its own was sufficient to meet his burden, the court said. In addition, Lenart leaned upon the supervisor's comments that she would prefer to work with women and the "girl power" statement.

"Those statements may well turn out to have been intended as innocuous 'comments of female empowerment,'" the court said. "And it is true that Lenart does not explicitly allege that [the supervisor] herself was involved in the decision to fire him. But given [the supervisor's] senior position as Senior Vice President of the Treasury Department, and the allegation that she had 'managerial or supervisory responsibility' over Lenart, an inference can be drawn that [the supervisor] played a role in the decision to terminate him. In any event, Lenart's allegations that a senior executive made several arguably discriminatory statements, combined with his allegations that a woman assumed most of his duties, are enough to clear the low hurdle" to survive dismissal of his sex discrimination claims in the Second Circuit Court of Appeals.

To read the opinion in Lenart v. Coach, Inc., click here.

NLRB Continues Crackdown on Employment Policies

Why it matters

Continuing the National Labor Relations Board's (NLRB) focus on employer handbook provisions, an Administrative Law Judge (ALJ) for the agency ordered Verizon Wireless to rescind multiple sections from its handbook related to employee communications. Provisions at issue included one section providing that the employer could discipline employees for causing Verizon Wireless "embarrassment," a clause on using internal e-mail for solicitation, and another on the disclosure of nonpublic company information. Three out of the five sections considered by the ALJ were found to be in violation of Section 8(a)(1) of the National Labor Relations Act (NLRA), as the embarrassment provision was "overly broad," and a ban on using e-mail for solicitation could impact the ability of employees to communicate about wages, hours, and other working conditions.

The judge ordered the employer to rescind all the unlawful handbook sections and post notice about the action at Verizon Wireless workplaces. In a statement, the employer said it was considering its options, as "[t]here is no claim that Verizon Wireless violated any employee rights," and the case "concerns technical claims about the wording of certain Verizon policies."

Detailed discussion

In 2014, Verizon Wireless promulgated a company-wide Code of Conduct that applied to all of its offices across the country. A slightly altered version was released in 2015, but the 2014 version of the Code of Conduct remains in place at some Verizon facilities.

Five provisions of the Code were challenged in an administrative proceeding with the National Labor Relations Board (NLRB). Administrative Law Judge (ALJ) Mary Miller Cracraft found three of the five to violate Section 8(a)(1) of the National Labor Relations Act (NLRA) by interfering with, restraining, or coercing employees in exercise of their rights guaranteed in Section 7 of the Act.

Section 1.6 of the Code addressed solicitation and fundraising and prohibited "the distribution of non-business literature in work areas at any time" as well as "the use of company resources at any time" including e-mails, fax machines, computers, and telephones, to distribute or solicit. This provision focused too much on employer property rights and too little on the importance of e-mail as a means of workplace communications, the ALJ said, citing a 2014 decision from the Board in Purple Communications, Inc. No special circumstances were presented to justify such a restriction in order to maintain production and discipline.

According to the decision, Verizon's "rule prohibits both solicitation and distribution." "In Purple Communications, the Board explained that e-mail 'is fundamentally a forum for communication.' The Board found it inappropriate to treat e-mail as 'solicitation' or 'distribution' per se, recognizing that as forum of communication it constituted solicitation, literature or information, distribution or merely communication that is none of those but nevertheless constitutes protected, concerted activity. Thus both the prohibition on solicitation as well as the prohibition of distribution contravene the holding of Purple Communications."

The next Code provision, Section 1.8, covered employee privacy. Verizon Wireless provided that appropriate steps must be taken to protect all personal employee information, including financial information, and workers "should never access, obtain or disclose another employee's personal information" absent legitimate business purposes.

Although employers have a substantial and legitimate interest in maintaining the privacy of certain business information, the "2014 Code of Conduct Employee Privacy rule is broadly worded and, in my view, would be reasonably read to prohibit employees from discussing wages, hours, and terms and conditions of employment or disclosing employee information to a labor organization or for other protected, concerted activity," ALJ Cracraft wrote.

The 2015 Code of Conduct slightly tweaked the employee privacy provision, the ALJ noted, eliminating the reference to financial information. Verizon Wireless argued that when read in context, employees would readily understand that the updated Section 1.8 was designed to protect legitimate employer interest in the confidentiality of private information.

The ALJ agreed, finding that the provision listed "social security numbers, identification numbers, passwords, bank account information and medical information" as examples of confidential employee information. "This information is legitimately protected confidential information," and a reasonable reading of the entire provision in context sends a message to employees not to access, obtain, or disclose the listed data.

Next up: Section 2.1.3 on activities outside of Verizon Wireless. The provision was part of Section 2.1's "Avoiding Conflicts of Interest" heading and dealt with insider trading, cautioning employees that participation in an individual capacity in outside organizations—such as homeowner's associations or a local school board—to disclose their association with the company and remove themselves from voting on a matter that involves the company's interests. "Read literally and in context, the rule does not tend to chill Section 7 activities," the ALJ wrote.

"[T]he language is clearly addressed to the ethics of a business decision," and "the context of the rule clearly indicates that the conflicts of interest it addresses are those created by or related to commercial competition. The rule is not linked to other rules prohibiting participation in outside activities that are detrimental to the employer's image or reputation."

The ALJ rejected the General Counsel's position that the provision violated the NLRA because it banned the disclosure of nonpublic company information. The ban "must be construed as a part of the business ethics policy," she wrote. "After all, the rule has nothing to do with membership in a labor organization and it strains logic to read the rule as requiring that an employee who joins a labor organization is constrained to reveal that he or she is employed with Verizon Wireless. The requirement that employment be revealed without disclosing nonpublic information is clearly linked to discussing or voting on a matter related to Verizon Wireless or its products."

Although Section 3.3's rule on the appropriate use of Verizon Wireless machinery could not be susceptible to mean e-mail systems, the decision found that Section 3.4.1's prohibition on the use of "company systems … to engage in activities that are unlawful, violate company policies or result in Verizon Wireless' liability or embarrassment," did violate the NLRA.

"A reasonable reading of Section 3.4.1 is that employees will be disciplined for using company e-mail to communicate with a group of employees inside the company on behalf of a labor organization or employees engaged in protected, concerted activity if such use will result in Verizon's 'embarrassment,'" ALJ Cracraft wrote. "Not only does such language contravene Purple Communications, it is also overly broad in the use of embarrassment as a cause of discipline in use of e-mail, instant messaging, intranet or internet."

The ALJ ordered Verizon Wireless to rescind the three provisions found to violate Section 8(a) of the NLRA and post appropriate notice for employees.

To read the ALJ's decision in Verizon Wireless, click here.

Second Circuit Upholds New York Ban on Credit Card Surcharges

Why it matters

New York’s ban on credit card sales transactions surcharges was upheld by the Second Circuit Court of Appeals, reversing a federal court judge’s 2013 ruling striking down the law and joining the majority of other courts to find similar bans constitutional. Enacted in 1984 as the federal ban on surcharges expired, the New York law prohibits sellers from imposing a surcharge on consumers who elect to use a credit card in lieu of other forms of payment, while still allowing merchants to offer a cash discount. A handful of businesses in the state challenged the constitutionality of the law on the grounds it violated their First Amendment free speech and Fourteenth Amendment due process rights. A federal court judge sided with the plaintiffs, striking down the law in 2013. But a unanimous three-judge appellate panel reversed, holding the law regulated conduct and not speech. The court rejected the retailers’ argument that the difference between a cash discount and a surcharge triggered free speech considerations because the terms were “labels” resulting in distinct consumer reactions. As for due process concerns, the panel found the law was not unconstitutionally vague and that retailers would be able to comply without a problem.

Eleven states have enacted similar surcharge bans but courts have reached differing conclusions about their constitutionality. Like the Second Circuit, federal courts in Florida and Texas held that the law only regulated economic activity and did not involve First Amendment rights; in March, a California judge reached the opposite conclusion—citing the New York district court decision for support—ruling that the state’s surcharge ban violated sellers’ First Amendment rights. Those decisions are currently on review to the Fifth, Eleventh, and Ninth Circuit Court of Appeals, respectively.

Detailed discussion

In 1984, the New York state legislature enacted Section 518 of the General Business Law, which states: “No 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. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.” Merchants are still permitted to offer cash discounts.

Section 518 was passed in reaction to the expiration of provisions of the Truth in Lending Act (TILA) that prohibited credit card surcharges. The provisions were based on a psychological phenomenon known as “loss aversion” meaning that losses loom larger for consumers than improvements or gains of an equivalent amount. In the context of surcharges, that means credit card surcharges are more effective than cash discounts at discouraging credit card use.

To encourage credit card use, Congress added the surcharge ban to TILA. Lawmakers also expressed concern that allowing sellers to add surcharges would result in rates higher than the amount necessary to recoup its swipe fees, with sellers able to extract windfall profits from credit card users.

When the federal law expired in 1984, eleven states enacted their own laws prohibiting credit card surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, New York, Oklahoma, and Texas. Enforcement of the New York law was limited over the years, in part due to the standard provisions in credit card issuers’ contracts that prohibited the use of surcharges.

Over the last decade, as sellers began challenging these provisions, issuers like Visa have dropped their contractual prohibitions on credit card surcharges. In response, five New York businesses and their owners and managers filed suit challenging Section 518 in 2013. The plaintiffs claimed the law violated both their First Amendment free speech rights as well as their due process rights under the Fourteenth Amendment, requesting the law be declared unconstitutional.

The plaintiffs told the court they would like to impose a credit card surcharge instead of offering a cash discount and display prominent signage to explain the dual pricing scheme without fear of state action. A federal court judge sided with the plaintiffs and struck down Section 518 as unconstitutional.

A panel of the Second Circuit Court of Appeals reversed.

Section 518 does not regulate speech, the court explained—it regulates conduct. Prices, although necessarily communicated through language, do not rank as “speech” within the meaning of the First Amendment.

Price control laws (such as those banning sale prices for cigarettes) have never been thought to implicate free speech rights, and 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,” the court said.

“By its terms, Section 518 does not prohibit sellers from referring to credit-cash price differentials as credit-card surcharges, or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges,” the panel wrote. “Whether a seller is imposing a credit-card surcharge—in other words, whether it is doing what the statute, by its plain terms, prohibits—can be determined wholly without reference to the words that the seller uses to describe its pricing scheme.”

The words and labels used by the sellers are merely prices, which are not speech within the meaning of the First Amendment, “nor are they transformed into ‘speech’ when considered in relation to one another,” the court added. “Because all that Section 518 prohibits is a specific relationship between two prices, it does not regulate speech.”

Consumers’ different reactions to the labels “discount” and “surcharge” did not change the court’s conclusion. “[C]onsumers react negatively to credit-card surcharges not because surcharges ‘communicate’ any particular ‘message,’ but because consumers dislike being charged extra,” the panel wrote. “Nothing about the consumer’s reaction in either situation turns on any words uttered by the seller. And although the difference in the consumer’s reaction to the two pricing schemes may be puzzling purely as an economic matter, we are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances.”

The court rejected the plaintiffs’ argument that the law illegally prevented a “dual price” display, where the retailer listed one price for customers paying with cash, check, or debit card and a higher price for customers paying with a credit card. Noting that “it is far from clear that Section 518 prohibits the relevant conduct in the first place,” the court said the plaintiffs were attempting to expand application of the law beyond its reach, a position the court would not adopt.

If a state statute is susceptible to multiple interpretations, one which would render it overbroad and one which would not, and the state courts have not weighed in on the issue, the panel said it needed to adopt the narrower, less problematic interpretation in favor of the law’s constitutionality. “[W]e cannot hold a duly enacted state law unconstitutional based entirely on speculation that the New York courts might give it an expansive and arguably problematic reading that its text does not require,” the court said, further declining to certify the question to the state’s highest court for consideration.

Turning to the sellers’ due process claims, the court said this count failed “for essentially the same reasons as Plaintiffs’ First Amendment challenges.”

Section 518 had a core meaning that could reasonably be understood, the Second Circuit said: “sellers who post single sticker prices for their goods and services may not charge credit-card customers an additional amount above the sticker price that is not also charged to cash customers.”

“We have complete confidence that sellers ‘of ordinary intelligence’ will—if they post single sticker prices—readily understand how to avoid imposing a credit-card surcharge, and that New York authorities will have sufficient guidance in determining whether such sellers have violated the law,” the court said.

The panel remanded the case for dismissal of the plaintiffs’ claims.

To read the decision in Expressions Hair Design v. Schneiderman, 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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