Monday, November 24, 2014

FYI: Cal App Ct Affirms Decertification of Class in Alleged Unlawful Eavesdropping Action

The California Court of Appeal, Fourth District, recently affirmed the decertification of a class action lawsuit where a lender allegedly monitored telecommunications with its borrowers, finding individual issues regarding putative class members’ objectively reasonable expectations of privacy predominated.

A copy of this opinion is available at: 

In 2006, several borrowers sued their lender (Lender) alleging that Lender monitored their telephone conversations without their knowledge or consent, in supposed violation of California law.  The borrowers alleged they each borrowed money from Lender and, in making the loans and collecting delinquent payments on those loans, Lender “secretly” monitored and eavesdropped on telephone conversations between Lender’s employees and borrowers, including conversations pertaining to “sensitive financial information.”

Over Lender’s objections, the trial court certified a class on one of the borrower’s claims, an alleged violation of California Penal Code section 632, which imposes liability on a “person” who intentionally “eavesdrops upon or records [a] confidential communication” and engages in this conduct “without the consent of all parties.”

After class certification, Lender successfully moved for summary adjudication on the section 632 claim.  The trial court found as a matter of law a company does not violate the statute when one of its supervisory employees secretly monitors a conversation between a customer and another company employee, reasoning that two employees are a single “person” within the meaning of the statute.

In a prior appeal, the Fourth District reversed the trial court’s order granting summary judgment, and held that the statute applies even if the unannounced listener is employed by the same company as the known recipient of the conversation, concluding the trial court's statutory interpretation was inconsistent with section 632's language and purpose.

In the prior appellate decision, the Fourth District found that the confidential-communication statutory element requires borrowers to show they had an “objectively reasonable expectation” that their conversations would not be secretly monitored.  The Fourth District explained, “The issue whether there exists a reasonable expectation that no one is secretly listening to a phone conversation is generally a question of fact that may depend on numerous specific factors, such as whether the call was initiated by the consumer or whether a corporate employee telephoned a customer, the length of the customer-business relationship, the customer's prior experiences with business communications, and the nature and timing of any recorded disclosures.”

Based upon the Fourth District’s prior appellate decision, Lender moved to decertify the class, arguing that the issue of whether any particular class member can satisfy this reasonable-expectation test requires an assessment of numerous individual factors, and these individual issues predominate over any remaining common issues, making a continued class action unmanageable.

Lender’s decertification motion focused on the circumstances surrounding each of the named borrower’s telephone conversations with Lender’s employees.  This evidence showed that each borrower had different experiences regarding the timing, extent, and nature of the monitored calls and of the Call Monitoring Disclosure, and had different prior experiences with business communications.

The trial court granted the decertification motion.  The trial court found that the appellate decision reversing summary adjudication constituted changed circumstances and “individual issues regarding the individual putative class members’ ‘objectively reasonable expectation of privacy’ predominate over [Lender’s] alleged uniform policies.”

On appeal, the Fourth District noted that class certification requires a “well-defined community of interest,” including that common questions of law or fact will predominate in the litigation.  Citing Duran v. U.S. Bank National Assn. (2014) 59 Cal.4th 1, 28.  On the predominance issue, “the ‘ultimate question’ . . . is whether ‘the issues which may be jointly tried, when compared with those requiring separate adjudication, are so numerous or substantial that the maintenance of a class action would be advantageous to the judicial process and to the litigants.’”

The Fourth District explained that after certification, a trial court retains flexibility to manage the class action, including to decertify a class if “the court subsequently discovers that a class action is not appropriate.”  Citing Weinstat v. Dentsply Internat., Inc. (2010) 180 Cal.App.4th 1213, 1226.  To prevail on a decertification motion, a party must generally show “new law or newly discovered evidence showing changed circumstances.”

The Fourth District affirmed the trial court’s decertification order, and held that whether its prior ruling constituted “new” law or a clarification of existing law as applied to the facts of this case, it constituted a reasonable and sufficient ground for the trial court to conclude that reevaluation of class certification was necessary.

In opposition to decertification, the borrowers argued that as a matter of law the trial court could not consider the decertification motion because of the problem of “one-way intervention.” 

As you may recall, the “one-way intervention” issue arises when a trial court rules on the substantive merits before reaching a final conclusion on class certification.  Fireside Bank v. Superior Court (2007) 40 Cal.4th 1069, 1078-1084. 

Generally, in a merits-first procedure, a defendant may be prejudiced because “not-yet-bound absent plaintiffs may elect to stay in a class after favorable merits rulings but opt out after unfavorable ones.”  And, plaintiffs may also be prejudiced: “[A] defendant should not be allowed to sandbag a plaintiff, withholding its best case against certification and then seeking decertification if it suffered an unfavorable merits ruling.”  A rule requiring a court to decide on class certification before the merits promotes fairness by “ensuring that parties bear equally the benefits and burdens of favorable and unfavorable merits rulings.”

In rejecting the borrowers’ argument, the Fourth District noted that the certification-before-merits rule is not an “iron-clad standard.”  The Fourth District found that “[i]t would be both unduly rigid and unjust to force the maintenance of [a class] action [after a ruling on the merits] even when there is a proper reason for decertification . . . .”  citing Fireside Bank, 40 Cal.4th at p. 1081.  The Fourth District explained that decertification generally requires changed circumstances, but courts retain inherent authority (and in fact have the affirmative duty) to decertify a class if a merits ruling makes clear that individual issues will engulf the litigation such that the class litigation becomes unmanageable and/or will substantially interfere with one or both of the parties' due process rights.

Based upon these principles, the Fourth District held that the trial court’s decertification order was not precluded by the certification-before-merits rule. 

The borrowers also argued that decertification was improper because the trial court erred in concluding that the existence of individual issues regarding the existence of “confidential communication[s]” precluded the case from going forward as a class action.

The Fourth District rejected borrowers’ arguments, and relied upon the recent decision in Hataishi v. First American Home Buyers Protection Corp. (2014) 223 Cal.App.4th 1454.  The Hataishi court held a trial court properly refused to certify a class of “outbound” callers who alleged a violation of section 632.  The Hataishi court held:  “[T]he determination whether an individual plaintiff had an objectively reasonable belief that his or her conversation with [the defendant] would not be recorded will require individualized proof of, among other things, 'the length of the customer-business relationship [and] the [plaintiff's] prior experiences with business communications …”

The Hataishi court concluded that “due process requires that [the defendant] be permitted to cross-examine an individual plaintiff regarding those experiences that may impact the reasonableness of his or her alleged confidentiality expectation.”

The Fourth District agreed with the Hataishi court, and affirmed the trial court’s decertification order because “the trier of fact would have to determine whether a person under the particular circumstances and given the background and experience of each plaintiff would have understood that the particular call was not being monitored.”

Finally, the borrowers argued that decertifying the class because of the existence of individual issues on the “confidential communication” issue is inconsistent with the strong public policy underlying section 632 that seeks to protect individual privacy rights.  The borrowers maintained that without a class action, it will not be economically feasible for borrowers to enforce their right to telephone privacy under section 632.

The Fourth District rejected the borrowers’ public policy argument:  “To the extent [borrowers] believe the "confidential communication" statutory element makes the enforcement of the statute too cumbersome or too expensive for an individual to recover on the claim, their remedy lies with the Legislature and not with the courts.”

Eric Tsai
McGinnis Wutscher Beiramee LLP
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