TCPA Connect -- Dec 16, 2013

by Manatt, Phelps & Phillips, LLP
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In This Issue:

TCPA Fax Settlement Found Reasonable Despite Court’s Dismissal of Claims

A $6 million settlement in a Telephone Consumer Protection Act suit was reasonable, an Illinois federal court found, ordering two insurers to indemnify the marketing company that sent five illegal faxes to more than 4,000 recipients.

The president of M&M Rental Center purchased a list of thousands of names and fax numbers from a marketing company in 1997. Between June 2002 and June 2006 M&M sent five fax blasts to the numbers on the list.

Eclipse Manufacturing Company, one of the recipients, filed a putative class action alleging violations of the TCPA. One problem: neither side could locate the copies of faxes #1 through #3 for the litigation.

The federal court judge overseeing the case therefore granted partial summary judgment for both parties. She ruled that the plaintiffs could not recover for faxes #1 through #3 because without the fax itself there was no genuine issue of material fact as to whether the faxes were advertisements within the meaning of the statute. However, she granted summary judgment for the plaintiffs as to faxes #4 and #5, and entered a judgment in the amount of $3,862,500 ($500 per 7,725 faxes total).

Postjudgment motions followed, including a motion by the class seeking reconsideration of the court’s ruling on faxes #1 through #3. The parties also began settlement talks, with M&M revealing that it could not pay the judgment and would have to rely upon insurance assets.

The first round of settlement talks, which included M&M’s two insurance carriers, Maxum Indemnity Company and Security Insurance Company, did not reach a deal. A second conference – which the insurers declined to attend – reached an agreement of $5,817,150. The total included the court’s $3.8 million judgment as well as an additional $1,954,650 for faxes #1 through #3 (discounted to $150 per fax).

The court approved the settlement. M&M transferred its rights to the class, which then sought recovery from the insurers. But both Maxum and Security objected, asserting, in part, that the settlement was a collusive deal aimed at them, and that M&M agreed to it despite having inadequate finances.

Under Illinois law, the insured had to demonstrate that the settlement was entered into in “reasonable anticipation of liability” to rebut an allegation of collusion. The court noted that anticipation of liability was certainly reasonable with regard to the $3.9 million judgment for faxes #4 and #5. But what about for the first three faxes?

Despite summary judgment having been entered in M&M’s favor, a chance still existed that a reversal could occur, the court held.

“Certainly, prevailing on the plaintiffs’ postjudgment motion was unlikely,” U.S. District Court Judge Joan Humphrey Lefkow wrote. “That unlikelihood aside, the court of appeals does from time to time disagree with a district judge’s conclusion that no genuine issue of material fact exists, meriting a trial.”

Even with the unlikelihood of reversal, the “totality of the evidence” pointed “to the conclusion that the settlement as to faxes #1 – #3 was reached in reasonable anticipation of liability for those faxes,” the court held. A “seasoned magistrate judge” oversaw the settlement negotiations, “a strong indication” that potential liability was fully and fairly assessed. The insurers were invited to participate but declined, showing that the negotiations were conducted in good faith, and the deeply discounted value of the first three faxes reflected that the weakness of the claim was considered, Judge Lefkow said.

“Even though the odds of victory were strongly in M&M’s favor as to faxes #1 – #3, there was potential for the district judge to change her mind about summary judgment or for the court of appeals to reverse, causing at least delay, uncertainty, and further litigation expense, factors typically favoring settlement.”

Judge Lefkow also found that the TCPA claims, albeit made by corporate plaintiffs, invaded their privacy within the scope of the policy’s advertising injury provision. The insurers contended that because the plaintiffs were corporate entities, the settlement did not resolve privacy violations but only involved property damage, which was not covered by the policy.

“Since the TCPA makes no distinction among individuals, corporations, and other business entities, it follows that the TCPA created by statute a right of privacy for all three: a right not to be intruded upon by unwanted faxes,” she wrote.

To read the opinion in Maxum Indemnity Company v. Eclipse Manufacturing Co., click here.

Why it matters: As TCPA cases continue to proliferate, advertisers should be cognizant of the extent of their insurance coverage and the scope of the relevant policy. The policyholder managed to score two significant victories in the Maxum case: First, the court recognized that a “reasonable anticipation of liability” existed despite the judge’s granting of summary judgment for three of the faxes on which the TCPA claims were based, and thereby held that the insurers must indemnify the insured for the settlement agreement. Secondly, the claims at issue fell under the advertising injury provisions of the policy, the court determined, even though the plaintiffs were corporate entities and not individuals. The decision also illustrated the result of a May decision from the Illinois Supreme Court, holding that statutory damages under the TCPA are remedial in nature, and are not uninsurable punitive damages.

Company Owner Can Be Liable for TCPA Claims for Fax Campaign He Orchestrated

An owner with “direct, personal participation” in the company’s decision to send illegal faxes could be liable under the TCPA, a federal court judge in Michigan has ruled.

John R. Beason, the owner of Tax Connection, was contacted by marketing company Business to Business Solutions about a possible ad campaign. Beason agreed to pay $268 for Business Solutions to prepare an advertisement and transmit it to 5,000 fax numbers. On January 5, 2006, the ad was sent to 3,159 different telephone numbers.

Recipients filed a class-action lawsuit alleging that the faxes were sent without prior express consent in violation of the TCPA. Beason filed a motion for summary judgment, arguing that the complaint against him in his individual capacity should be dismissed. He could be found liable only if the class were able to pierce the corporate veil, he told the court.

But U.S. District Court Judge Julian Abele Cook, Jr., disagreed. “Although the Sixth Circuit has not ruled on this issue, many courts have held that corporate actors can be individually liable for violating the TCPA "where they 'had direct, personal participation in or personally authorized the conduct found to have violated the statute.'"" He cited decisions from another Michigan federal court and from courts in Maryland and Texas.

The court adopted the standard announced by a Florida court: “Where courts have declined to find personal liability, there has been little evidence of the corporate officer’s direct participation in the wrongdoing.”

In applying the test to evaluate Beason’s actions, Judge Cook found that “he is the only person who has the authority to issue a check for the company.” The evidence included a $268 check made out to Business Solutions from his own account that contained a memo line stating “5,000 fax ads.”

“The defendants do not dispute that Beason personally participated in the payment of and authorization for the fax ads,” the court concluded. “As a result, he is personally liable for the violation of the TCPA.” In addition, Judge Cook ruled that a state law corollary to the federal TCPA did not preclude the lawsuit. Michigan’s more limited statute requires that a plaintiff first notify the fax sender in writing that he or she does not consent to receive faxes, before bringing a lawsuit. Beason and Tax Connection contended that since the plaintiff was not permitted to file suit under state law, the claim was similarly barred under the TCPA.

But the court rejected the defendants’ argument, as the Michigan law “does not mention the TCPA or purport to preclude a federal cause of action in any way.” In fact, the law “provides a cause of action that is entirely separate from the federal cause of action authorized by the TCPA,” the court said, citing to last year’s U.S. Supreme Court decision in Mims v. Arrow Financial Services, LLC.

In a victory for the defendants, however, Judge Cook declined to award treble damages under the statute. Tax Connection is a small business and Beason did not seek out a marketing company to send faxes on its behalf; instead, Business Solutions contacted the defendants and offered to conduct the fax campaign – despite the prohibitions of the TCPA. Therefore, “an award of treble damages is not appropriate,” he held.

To read the order in Jackson Five Star Catering v. Beason, click here.

Why it matters: The Michigan court found that corporate actors could be individually liable under the TCPA where there is direct, personal participation or personal authorization by a corporate officer. Beason, as sole owner of Tax Connection, gave his personal authorization to Business Solutions by agreeing to the fax campaign and signing the check. That $268 for 5,000 fax advertisements could now cost Beason and his company more than $1.5 million in damages under the TCPA.

Insufficient Opt-Out Language on Fax Advertisements Could Cost Company Up to $3.3M

For one company the cost of faxed advertisements with an incomplete opt-out notice could reach $3.3 million, based on a recently approved settlement in a TCPA class action.

A class of plaintiffs filed suit under the TCPA after receiving fax ads from California-based Balboa Capital Corp. that lacked a sufficient opt-out notice. According to the class, the roughly 973,879 faxes sent by the equipment leasing company did not include a fax number in order to send an opt-out request and failed to inform recipients that they needed to include their own fax number in the request. This class, in seeking $500 in statutory damages per facsimile, would thus be seeking in excess of $485 million in statutory damages.

After the trial court certified a partial class and the parties filed dueling summary judgment motions, the court said it would withhold a ruling until a settlement conference was held. The parties then reached an agreement.

Balboa promised to fund a settlement of at least $2.3 million and up to $3.3 million for a nationwide class of recipients who were sent faxes over a four-year period. The fund will also pay for $10,000 class representative incentive payments and attorneys’ fees and costs.

The final dollar amount will depend on the number of class members. If the class claims, incentive awards, and attorneys’ fees and costs are greater than or equal to $2.3 million but less than or equal to $3.3 million, class members will receive a payment between $175 and $275, depending on the number of faxes they received. Claimants who can actually present a copy of the fax they received will be eligible for a $500 payment. However, if the total amount goes over the $3.3 million cap, the payment to each class member will be reduced on a pro rata basis.

Alternatively, if the total payment does not reach $2.3 million, the remaining settlement fund will be distributed in pro rata shares to the class up to a maximum of $1,500 per fax. If money still remains, the parties will agree upon a charity to receive a cy pres distribution. The deal also includes a permanent injunction prohibiting Balboa from fax advertising in violation of the TCPA.

U.S. District Court Judge Josephine L. Staton granted preliminary approval of the deal, with one caveat. Balboa agreed not to object to counsel fees up to $1.1 million. But even if the settlement fund maximizes the agreed-upon $3.3 million, attorneys’ fees and costs would constitute one-third of the total, Judge Staton noted. If the fund doesn’t go above $2.3 million, then the attorneys’ fees and costs would be almost half of the common fund.

While writing that it would be “premature to make any definitive ruling on the reasonableness of class counsel’s fees and costs request at this stage,” the benchmark for reasonable class fees in the Ninth U.S. Circuit Court of Appeals is 25 percent of the common fund, the court said. “Class counsel will have to justify an upward departure from the Ninth Circuit’s fees benchmark,” Judge Staton warned.

To read the order in Vandervort v. Balboa Capital Corp., click here.

Why it matters: As part of the court’s consideration regarding whether the settlement was “fair, adequate, and reasonable under the circumstances,” Judge Staton analyzed the strength of the plaintiffs’ case. Noting that the Ninth Circuit has “yet to address the issue of whether an opt-out notice that substantially complies with the requirements of the TCPA is sufficient under the TCPA even where the notice does not comply with all the specific requirements of the law,” coupled with Balboa’s “vigorous defense,” the class’s decision to settle for $2.3 million to $3.3 million (a tiny fraction of the claimed statutory damages) was reasonable, she concluded.

Noted and Quoted . . . The Wall Street Journal Turns to Becca Wahlquist to Discuss the Rise of TCPA Litigation

On November 17 The Wall Street Journal published commentary from Manatt partner Becca Wahlquist on the TCPA’s lucrative new life as a tool for plaintiffs’ lawyers in an article titled “Curbs on Cellphone Calls Pay Off for Lawyers.”

Since 2012, more than a dozen companies have agreed to more than $200 million in settlements in TCPA suits. Becca told the newspaper that the litigation is getting out of hand. Many firms are being sued for contacting their own customers via cell phone.

To read the full article, 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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