Articles from October 2012

Enthusiasts of the popular “Madden NFL” video game, put out by industry leader Electronic Arts, have scored a legal victory, as the parties have reached a settlement in the class action lawsuit alleging that Electronic Arts violated antitrust and consumer-protection statutes. See Pecover v. Electronic Arts Inc., No. 08-2820 (N.D. Cal. filed June 5, 2008).

The plaintiffs had alleged that Electronic Arts foreclosed competition in a market for interactive football software by acquiring, in separate agreements, exclusive rights to publish video games using the trademarks and other intellectual property of “the only viable sports football associations and leagues in the United States.” Complaint at 3. Indeed, while the Sega-produced NFL 2K video game had made inroads into Madden’s dominant market share, Electronic Arts signed an exclusivity deal with the NFL that made Madden NFL the only video game allowed to use NFL team and player names. That exclusivity arrangement was the crux of the plaintiffs’ allegations of antitrust violations. See generally id.

Critical to providing the plaintiffs with settlement leverage was the 2009 defeat of Electronic Arts’ motion to dismiss, despite the court having applied the U.S. Supreme Court’s heightened standards for antitrust pleading under Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). See Pecover v. Electronic Arts, Inc., 633 F. Supp. 2d 976 (2009). The court ratified the essence of the plaintiffs’ allegations, holding that the “Plaintiffs allege that EA’s exclusive agreement with the NFL ‘killed off’ the only other allegedly competitive interactive software and allowed EA to raise its prices ‘dramatically.’ [Citation omitted.] For purposes of pleading the claims at bar, these allegations suffice to allege a product market.” Pecover, 633 F. Supp. 2d at 981.

Class members include all consumers who bought a new copy of an Electronic Arts Madden NFL, NCAA Football, or Arena Football video game for Xbox, Xbox 360, PlayStation 2, PlayStation 3, GameCube, PC, or Wii, with a release date of January 1, 2005 to June 21, 2012. Under the agreement, the $27 million settlement fund will be distributed according to class members’ eligible purchases, with one class of purchasers receiving a $6.79 reimbursement per game purchased, up to a maximum of $54.32, while a second class of purchasers could receive up to $15.60. Because the purchaser classes are not mutually exclusive, some class members could receive approximately $70 in compensation for Electronic Arts’ monopoly pricing advantage.

The settlement has been preliminarily approved, and notice sent to the class members. The opt-out and objection deadline is set for December 10, 2012, and the Final Approval Hearing is set for February 7, 2013.

E-books, viewed on devices like Amazon’s Kindle, arrived with the tacit promise that a competitive market would significantly drive down E-book prices, consistent with basic microeconomic theory, in stark contrast to labor-intensive conventional books. Early on, that promise was fulfilled, with E-books typically costing less than $5. However, in suspicious unison, E-book sellers found higher price points, first $9.99, more recently $12.99, and in some instances entirely closing the gap between E-books and conventional books.

The U.S. Justice Department and two state attorneys general took notice, and their investigation led to the allegation that consumers had paid “tens of millions” of dollars more than market-competitive prices, owing to a pricing conspiracy among E-book publishers. Five publishers were named as defendants in litigation prosecuted by the DOJ and state AGs: Hachette, HarperCollins, Simon & Schuster, Penguin Group and MacMillan.

Three of the publishers have agreed to a settlement that was granted preliminary approval in September; Penguin and MacMillan have not yet settled. Now, as the parties await final court approval, consumers are beginning to receive tangible indications of how they will benefit from the settlement. While the settlement announcement indicated that the defendants would pay substantial amounts under the terms of the agreement (Hachette: $31,711,425; HarperCollins: $19,575,246, and Simon & Schuster: $17,752,480), there was a paucity of detail concerning the settlement’s ground-level mechanics, in particular the remedies available to consumers who bought E-books and are within the settlement class definition.

Now, clearer indications of those details have emerged, as E-book retailers such as Amazon.com have begun sending emails informing customers that they may be entitled to credits in connection with purchases made between April 2010 and May 2012. Although defendants in the suit were publishers, the settlement’s ground-level administration will predominantly take place through retailers, with which customers have a close and regular nexus (unlike the publishers). Consumer refunds will appear in their online accounts on iTunes, Amazon and Barnes & Noble, except for consumers who purchased their E-books through Google or Sony’s storefronts, who will receive checks.

Along with consumers, retailing giant Amazon.com was also alleged to be a victim of the price-fixing scheme. The suit contended that publishers colluded with Apple to increase the price of E-books, thereby confounding Amazon’s discount pricing and allowing the Apple iPad to compete with the generally lower prices for E-books readable on the Amazon Kindle. Apple is also a defendant in the action, and is not part of the settlement. Accordingly, the litigation continues against Apple and the two non-participating publishers, Penguin and MacMillan. A final approval hearing on the settlements will be held on February 8, 2013.

A pattern seems to be emerging among courts tasked with adjudicating attempts by defendant companies to force class action plaintiffs into arbitration, and the results are far more hopeful than initially expected of the post-AT&T Wireless v. Concepcion era. Most recently, a Nevada district court has joined this apparent trend, denying a motion to compel arbitration by the online retailer Zappos.com. See In re Zappos.com, Inc. Customer Data Security Breach Litig., No. 12-00325 (D. Nev. Sept. 27, 2012) (order denying motion to compel arbitration) (available here).

In the underlying lawsuit, the plaintiffs allege that they gave Zappos.com personal information in connection with purchases, and that the shoe retailer insufficiently protected their information from computer hackers. See Order at 2. The MDL proceeding that is pending in the District of Nevada comprises nine actions that were filed across the country. Earlier this year, Zappos.com moved to compel the totality of the proceedings to arbitration. Id. at 2 n.2.

Applying Nevada contract law to its analysis as to whether the parties did in fact agree to arbitrate, the court noted that the much-referenced “‘liberal federal policy regarding the scope of arbitrable issues is inapposite.’” Id. at 5, citing Comer v. Micor, Inc., 436 F.3d 1098, 1104 n.11 (9th Cir. 2006). On multiple grounds, Chief Judge Robert C. Jones found that there was no binding agreement to arbitrate. Foremost, he determined that the plaintiffs did not agree to the Zappos.com’s “Terms of Use,” which contained the at-issue arbitration clause. See id. at 7-10. In reasoning likely to influence other online retailers, Zappos.com was assailed for burying its Terms of Use “in the middle to bottom of every Zappos.com webpage among many other links,” with the court concluding that “[n]o reasonable user would have reason to click on the Terms of Use.” Id. at 8.

Moreover, in analysis akin to California’s unconscionability jurisprudence, the court also found the Zappos.com Terms of Use to be an illusory, and thus unenforceable, contract. See id. at 10-12. The court adopted the plaintiffs’ contention that the contract was illusory “because Zappos can avoid the promise to arbitrate simply by amending the provision, while Zappos.com users are simultaneously bound to arbitration.” Id. at 10.

California courts have similarly found such asymmetric contract terms to be unenforceable under the unconscionability doctrine, in cases such as Sanchez v. Valencia Holding Co. and Mayers v. Volt Management.
 

A Los Angeles Superior Court judge has certified a class of insurance adjusters alleging that they were improperly classified as exempt from overtime pay and meal and rest breaks. See Wilson v. Farmers Ins. Exch., No. BC 371597 (L.A. Super. Ct. Oct. 5, 2012) (order granting motion for class certification) (available here).

The plaintiffs contend that Farmers misclassified more than 600 claims representatives, and consequently failed to comply with California’s meal and rest break laws and pay overtime. Farmers invoked the administrative exemption, which, it argued, gives rise to predominant individual questions, thereby precluding class treatment. However, Superior Court Judge John Shepard Wiley, Jr. rejected Farmers’ argument, citing relatively recent Court of Appeal authority that compelled certification, and holding that certification is appropriate because the proposed class worked under standardized policies and performed the same core set of duties company-wide.

Judge Wiley relied extensively on another insurance adjuster decision, the long-awaited Harris v. Liberty Mutual, in which California’s Second Appellate District (following California Supreme Court consideration and remand back to the Court of Appeal) made it more difficult for employers to avail themselves of the administrative exemption to block class treatment. See Harris v. Liberty Mut. Ins., 207 Cal. App. 4th 1225 (Cal. Ct. App. 2012) (available here).

In Harris, the defendant argued that the administrative exemption’s requirement that work must be “directly related” to administrative functions gave rise to a predominance problem, since it would require the court to ascertain the duties of many individual claims adjusters, working in different offices, under different managers, and with different skill sets. However, the majority concluded that “no evidence shows that any class members primarily engage in work that satisfies the qualitative component of the ‘directly related’ requirement. That conclusion disposes of Employers’ affirmative defense based on the administrative exemption, and it is a predominant issue that is common to the claims of all class members.” Harris at 1247-48.

While the Harris panel was careful to clarify that it was not holding that claims implicating the administrative exemption are per se amenable to class treatment, the ruling in Wilson makes clear that the position asserted by many employer/defendants — that raising an administrative exemption defense is a guaranteed bulwark against class treatment — is similarly without merit. The Wilson action will now proceed to the class notice and merits phases before Judge Wiley.