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Assessing Customer Refund Claims, Class Actions After Closings

In addition to the human cost, the economic damage of Covid-19 is significant, with widespread business closings. Now, beyond just the costs of closing, some consumer businesses are facing class action litigation arising from their handling of refunds for disrupted services.

The risk has primarily arisen in consumer businesses with pay-in-advance or subscription business models. That is: a model where consumers pay all or a substantial portion in advance (such as airline or concert tickets); or a model with a subscription or pay-over-time arrangement (such as gym memberships, tuition and season passes).

A membership model benefits from stable and predictable cash flow due to periodic fee collection as well as lower marketing costs; those savings are passed on to consumers in the form of lower prices. The Covid-19 pandemic, however, unexpectedly disrupted many ongoing relationships, and businesses may lack the capital to provide full refunds to every consumer.

What We’ve Seen So Far

Thus far, targets include:

  • Airlines: Consumers brought suit against airlines for failure to provide prompt refunds for cancelled flights. E.g., Rudolph v. United Airlines Holdings, Inc., No. 1:20-cv-02142 (N.D. Ill.).
  • Event planners/managers: Ticket holders sued organizers of the canceled South by Southwest (SXSW) festival. Organizers offered free admission to one of the next three SXSW festivals, but not full refunds. E.g., Bromley v. SXSW, LLC, No. 1:20-cv-00439 (W.D. Tex.).
  • Ski resorts and amusement parks: Consumers filed suit against ski resorts and theme parks for failure to refund season-pass holders after pandemic-relating closings. E.g., Kramer v. Alterra Mountain Co., No. 1:20-cv-01057 (D. Colo.).
  • Professional sports: Major League Baseball and professional teams face class action litigation seeking full restitution plus disgorgement of profits for all tickets sold for the 2020 season. See Azjenman v. Office of the Commissioner of Baseball, No. 2:20-cv-03643 (C.D. Cal.).
  • Health and fitness clubs: Consumers sued clubs for continued collection of membership dues, failure to provide refunds and/or failure to honor cancellation requests. E.g., Namorato v. Town Sports International, No. 1:20-cv-02580 (S.D.N.Y.).
  • Universities: Major universities face class action litigation for failing to refund tuition, alleging that online instruction does not provide the same value as in-person instruction. See Student A v. Board of Trustees of Columbia University, No. 1:20-cv-03208 (S.D.N.Y.).
  • Plaintiffs typically allege violations of state deceptive trade practice statutes and common law claims, including unjust enrichment, conversion, negligent misrepresentation or fraud, breach of contract and/or breach of express or implied warranty.

Potential Defenses

Defendants may assert a variety of defenses to class certification and/or liability. These include:

Contractual Authorization

Some consumer agreements expressly allocate the risk in the event of temporary or permanent nonperformance. Where contract language is clear, a defendant may argue that authorized collection or retention of fees, or a remedy other than a full refund such as credits or an extension of membership the term, is not deceptive or otherwise unlawful.

Arbitration Clauses

Some agreements include arbitration provisions that provide a defense to class treatment. The Supreme Court has made clear (in AT&T Mobility v. Concepcion and American Express v. Italian Colors) that class action waivers are generally enforceable and (in Stolt-Nielsen v. AnimalFeeds International and Lamps Plus v. Varela) that parties must affirmatively consent to class arbitration, so neither silence nor ambiguity is sufficient to compel class arbitration.

Leveraging Substitute Performance

Many cases will involve equitable issues under unjust enrichment or state unfair trade practice statutes. To strengthen their overall position, it is important for businesses to adopt policies that are defensible as just and fair. For example, credits, extensions or substitutes may potentially be defended as fair and just, depending on the circumstances.

Lack of Commonality/Predominance

Businesses may wish to consider establishing robust processes for individualized exceptions to any general policy (for example, to provide full refunds when requested and warranted). That provides a tailored response for customers who are more demanding or have particular needs. And if the business has a robust process for making exceptions, it may be harder for class plaintiffs to establish commonality or predominance.

Personal Jurisdiction

Some class actions are brought in jurisdictions where the defendants are not headquartered or incorporated. If so, recent Supreme Court precedent on personal jurisdiction may provide a defense to certification of a nationwide class. Under Goodyear Dunlop Tires v. Brown, the defendant may not be “at home” for purposes of general jurisdiction. And under Bristol-Myers Squibb v. Superior Court of California, out-of-state plaintiffs may be unable to establish specific jurisdiction, because their injuries were not caused by the defendant’s forum-directed conduct. The Court’s upcoming ruling in Ford v. Bandemer may shed further light on these issues.

Given the number of Covid-19 consumer-refund class actions, we can expect courts will be developing pandemic-related precedent.


Reproduced with permission. Published June 18, 2020. Copyright 2020 The Bureau of National Affairs, Inc. (+1 800-372-1033)