Lessons Learned from Class Actions Against Companies that Sell Memberships and Annual Passes
With thousands of businesses shuttered due to COVID-19, companies that sell memberships and annual passes are facing class action lawsuits from customers claiming that they were charged for a service they no longer can use. Colleges, amusement parks, golf courses, gyms, ski areas, and sports teams have all been sued under theories including breach of contract, unjust enrichment, conversion and consumer fraud.[i] Many of the cases are narrowly targeted in an effort to show that while the Plaintiffs acknowledge COVID-19 resulted in changed circumstances the Defendants have been unreasonable. For example, many colleges have been sued over their refusal to refund student fees used to pay for such services as gyms and health clinics that students who were ordered off campus can no longer use but the cases do not ask for tuition refunds. Because these cases often seek damages on behalf of hundreds of thousands of customers, the potential exposure can be an existential threat to many businesses.
Class actions related to such memberships are not new. We handled numerous similar lawsuits before the COVID-19 pandemic, including cases involving season passes, memberships, and season tickets. Often these businesses have monthly or yearly automatic renewal agreements which are regulated differently in different states. Such automatic renewals are typically charged to a customer’s credit or debit card on a rolling basis, creating complicated factual and regulatory issues. Based on our experience, the key to managing these cases is to have a seamless coordinated national strategy; be proactive and flexible; and keep the focus on the unique nature of class actions in which a seemingly minor issue with one disgruntled customer can become a major liability.
With respect to a national strategy, some defendants are facing multiple lawsuits in disparate jurisdictions. Defendants face complex decisions about which cases to litigate, which cases might be settled, whether cases can be consolidated, transferred or stayed, and whether multi-district litigation is available. These early decisions can have million dollar consequences. For example, settling an early-filed California- only state court class action before similar nationwide class can be certified can have a material impact on the nationwide class damages. Or removing a case from state to federal court under the Class Action Fairness Act can have consequences down the road at the liability stage if evidence used to justify. Simply put, a decision in one case can have ripple effects on other matters in the form of precedents, res judicata, and persuasion. Even the best laid strategy will require adjustment based on developments in related cases.
In light of government shut-down orders, there are a number of dispositive defenses that should be considered before responding to a membership complaint including force majeure, impossibility, illegality, impracticability, and substantial performance. Success on a motion to dismiss based on one of these theories will be binding against the named plaintiff, but not against the putative class members meaning that copy-cat litigation can be filed even after prevailing on a motion to dismiss.
As a result, while defendants should always consider an early exit from these cases through a dispositive motion, they must focus on class certification at all times. Defendants must proactively determine the difficulties that will face a court once a class has been certified. Does the law applicable to the claims vary from state-to-state? Are there different sorts of memberships that will prevent the case from being tried efficiently? Have some class members continued to use their passes through on-line services or waived a claim by agreeing to a future discount?