FYI: 9th Cir Holds No NBA Preemption for State Law on Escrow Accounts, TILA Escrow Account Rules Not Retroactive

The U.S. Court of Appeals for the Ninth Circuit recently held that that the National Bank Act did not preempt California's state escrow interest law, which requires financial institutions to pay at least 2 percent simple interest per annum on escrow account funds.

In so ruling, the Court also held that the federal Truth In Lending Act provisions for escrow accounts, at 15 U.S.C. § 1639d, did not apply to loans originated before the 2013 effective date of the provisions.

A copy of the opinion is available at:  Link to Opinion

In July 2008, the plaintiff purchased a home in California with a mortgage loan from a lender.  As a condition for obtaining a mortgage, the plaintiff was required to open a mortgage escrow account into which he paid $250 per month.  A bank purchased the lender and assumed control over the plaintiff's mortgage loan and escrow account. 

The plaintiff's mortgage loan provided that it "shall be governed by federal law and the law of the jurisdiction in which the Property is located."  The parties agreed that the terms of the mortgage loan documents required the bank to pay interest on escrow funds if required by federal law or state law that was not preempted.

The plaintiff sued the bank on behalf of himself and a putative class of similarly situated customers, alleging that the bank violated the "unlawful" prong of the California Unfair Competition Law ("UCL"), because the bank supposedly violated both California state law, Cal. Civ. Code § 2954.8(a), and federal law, 15 U.S.C. § 1639d(g)(3), by failing to pay interest on his escrow account funds.  The plaintiff also brought a breach of contract claim, alleging that the bank's failure to pay interest violated his mortgage agreement. 

The bank filed a motion to dismiss on the ground that California Civil Code § 2954.8(a) was preempted by the National Bank Act ("NBA").  The trial court granted the bank's motion to dismiss, concluding that California's escrow interest law "prevent[ed] or significantly interfere[d] with" banking powers and was preempted by the NBA.  This appeal followed.

The central issue for the Ninth Circuit Panel was whether the NBA preempted California Civil Code 2954.8(a).  As you may recall, section 2954.8(a) provides:

Every financial institution that makes loans upon the security of real property containing only a one- to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower's account annually or upon termination of such account, whichever is earlier.

California Civil Code § 2954.8(a).

Section 1639d(g)(3) of the federal Truth in Lending Act, 15 U.S.C. 1601, et seq., ("TILA"), states:

(3) Applicability of payments of interest

If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any compound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.

15 U.S.C. § 1639d(g)(3).

The plaintiff borrower argued that TILA's plain language -- which requires creditors to pay interest on escrow fund accounts like his if "prescribed by applicable" state law -- made clear that Congress perceived no conflict between state laws like California Civil Code § 2954.8(a) and the powers of national banks, and therefore Congress did not intend for these state laws to be preempted by the NBA.

The bank countered that such state laws were preempted because they prevent or significantly interfere with the exercise of its banking powers, and a preempted law cannot be an "applicable" law under section 1639d(g)(3).

The Ninth Circuit Panel began its analysis by examining Dodd-Frank's amendments to the NBA preemption framework.  As you may recall, Dodd-Frank addressed the preemptive effect of the NBA in several ways.

First, it emphasized that the legal standard for preemption set forth in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), applied to questions of whether state consumer financial laws were preempted by the NBA.  12 U.S.C. § 25b(1)(B).

Second, it required the Office of Comptroller of the Currency ("OCC"), which regulates national banks, to follow specific procedures in making any preemption determination.  12 U.S.C. § 25b(1)(B), 25b(b)(3)(B).

Third, it clarified that the OCC's preemption determinations were entitled only to Skidmore deference.  12 U.S.C. § 25b(b)(5)(A); Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (explaining that an agency 's views were "entitled to respect" only to the extent that they had the "power to persuade").

Before Dodd-Frank, as the Ninth Circuit explained, the Supreme Court of the United States held in Barnett Bank that states were not "deprive[d] " of the power to regulate national banks, where "doing so does not prevent or significantly interfere with the national bank's exercise of its powers" under the NBA.  Barnett Bank of Marion County, N.A., 517 U.S. at 33.

Following Barnett Bank, the OCC issued in 2004 its interpretation of the NBA preemption standard:  "Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank's ability to fully exercise its Federally authorized real estate lending powers to not apply to national banks."  12 C.F.R. § 34.4(a) (effective Jan. 13, 2004).

Thus, according to the Ninth Circuit, only the Dodd Frank Act amendment that required the OCC to follow specific procedures in making preemption determinations was a change in the law.  The Court further notes that the other amendments merely codified existing law as set forth by the Supreme Court.

Although the Panel had never addressed whether the OCC's interpretation was inconsistent with Barnett Bank, or whether the regulation was owned deference while it was in effect, the Panel acknowledged that the Supreme Court has ruled that the regulations of this kind should receive, at most, Skidmore deference -- and even then, only as to a conflict analysis, and not as to the legal conclusion on preemption.  See, e.g., Wyeth v. Levine, 555 U.S. 555, 576-77 (2009).

The Panel determined that under Skidmore, the OCC's regulation was entitled to little, if any, deference in light of Barnett Bank, even before the enactment of Dodd-Frank.  In other words, the OCC simply adopted the Supreme Court's articulation of the applicable preemption standard in prior cases, but did so inaccurately according to the Panel, because it did not conduct its own review of the specific potential conflicts on the ground. 

The Ninth Circuit explained that in Dodd-Frank, Congress underscored that Barnett Bank continued to provide the preemption standard; that is, state consumer financial law is preempted only if it "prevents or significantly interferes with the exercise by the national bank of its powers" under the NBA. 12 U.S.C. § 25b(b)(1)(B).  Thus, the Panel determined that the bank must demonstrate that the state law prevented or significantly interfered with its national banking powers.

The Court then turned to the issue of whether section 2954.8(a) prevented the bank from exercising its national bank powers or significantly interfered with the bank's ability to do so.

The Ninth Circuit noted that TILA requires banks to pay interest on escrow account balances "[i]f prescribed by applicable State [] law."  15 U.S.C. § 1639d(g)(3).  The Supreme Court recently explained that "applicable" meant "capable of being applied: having relevance" or "fit, suitable, or right to be applied: appropriate."  Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011). 

This language, according to the Ninth Circuit, expressed Congress's view that such laws would not necessarily prevent or significantly interfere with a national bank's operations.  

The bank relied on the OCC's pre-Dodd-Frank preemption rule, 12 C.F.R. § 34.4(a) (2004).  The bank argued that state escrow interest law necessarily prevented or significantly impaired its real estate lending authority. 

However, the Ninth Circuit noted that the OCC's rule specifically altered the language of section 34.4(b) to clarify that state laws "that [were] made applicable by Federal law" (which would include Dodd-Frank's TILA amendments) "are not inconsistent with the real estate lending powers of national banks -- to the extent consistent with [Barnett Bank]."  12 C.F.R. § 34.4(b)(9)(2011).

Thus, the Court rejected the bank's argument based on the pre-Dodd-Frank preemption rule.

Additionally, the Ninth Circuit was not persuaded by the bank's cited cases. 

Flagg v. Yonkers Savings & Loan Association, 396 F.3d 178, 182 (2d Cir. 2005), concerned the Office of Thrift Supervision's ("OTS") authority to regulate federal savings associations, and the Second Circuit based its ruling on the OTS's field preemption over the regulation of such associations.  Unlike the OTS, as the Panel noted, the OCC did not enjoy field preemption over the regulation of national banks.

First Federal Savings and Loan Association of Boston v. Greenwald, 591F.3d 417, 425 (1st Cir. 1979), concerned a direct conflict between a state regulation requiring payment of interest on certain escrow accounts and a federal regulation expressly stating that no such obligation was to be imposed on federal savings associations "apart from the duties imposed by this paragraph" or "as provided by contract."  The Panel explained that unlike the regulation in First Federal, there was no federal regulation in this case that directly conflicted with section 2954.8(a).

Because the Court held that the bank did not demonstrate that state escrow interest laws prevented or significantly interfered with its exercise of national bank powers, and because Congress in enacting Dodd-Frank indicated that they do not, the Ninth Circuit Panel concluded that the NBA did not preempt California Civil Code § 2954.8(a).

Next, the Ninth Circuit examined the plaintiff's two claims for relief. 

The bank argued that the plaintiff's UCL claim cannot proceed because his escrow account was created before section 1639d's effective date of January 21, 2013. 

As you may recall, section 1639d(a) states that "a creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer … shall establish, before the consummation of such transaction, an escrow or impound account … as provided in, and in accordance with, this section."  15 U.S.C. § 1639d(a).

The Ninth Circuit held that the use of the language "shall establish, before the consummation of such transaction" indicated that Congress intended section 1639d to apply to accounts established pursuant to that section after it took effect in 2013. 

Because the plaintiff obtained the subject mortgage loan in 2008, the Ninth Circuit Panel concluded that the plaintiff cannot rely on section 1639d to prosecute his UCL claim.

However, the Panel found that the plaintiff could still obtain relief under the UCL because California Civil Code § 2954.8(a) was not preempted by the NBA.  Because the bank was required to follow the state law, the Ninth Circuit held that the plaintiff borrower could proceed on his UCL claim based on the theory that the bank violated the UCL by failing to comply with section 2954.8(a).

Additionally, the Court also held that the plaintiff may proceed on his breach of contract claim because his mortgage required the bank to pay escrow interest if "Applicable Law requires interest to be paid on the Funds." 

Accordingly, the Ninth Circuit Panel reversed the trial court's dismissal of the putative class action.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: 9th Cir Affirms Dismissal of FCRA Putative Class Action for Lack of Standing

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a consumer's putative class action alleging willful violations of the federal Fair Credit Reporting Act (FCRA) for lack of standing under Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

In so ruling, the Court held that merely printing a credit card receipt without redacting the card's full expiration date did not allege the concrete injury required, where no second receipt existed, the consumer did not lose the receipt, nobody stole the receipt, and nobody stole the consumer's identity. 

A copy of the opinion is available at:  Link to Opinion

A consumer used his credit card at a parking garage and received a receipt displaying the credit card's full expiration date.  The consumer filed a putative class action lawsuit against the garage alleging willful violation of the FCRA.  Specifically, the consumer alleged that failing to redact the card's full expiration date violated 15 U.S.C. § 1681c(g).

The consumer only alleged a statutory violation and the potential for actual injury.  The consumer alleged that his injury was "exposure . . . to identity theft and credit/debit fraud," because he was at "imminent risk" that his "property would be stolen and/or misused by identity thieves."  However, he did not allege that a second receipt existed, that someone stole his receipt, that he lost his receipt, or that anyone stole his identity. Instead, he claimed that "the risk of harm created in printing the expiration date on the receipt" was a "sufficiently concrete" injury.

The garage moved to dismiss the complaint arguing that the consumer lacked Article III standing. The trial court concluded that the consumer only alleged "possible risk of [identity] theft." Following Spokeo, the trial court noted that "[s]omething more is necessary" to allege a concrete injury as not every procedural violation gives rise to standing.  Thus, the trial court granted the motion and dismissed the case with prejudice finding that the consumer did not allege a sufficiently concrete injury to establish standing.

This appeal followed.

The Ninth Circuit first examined the history of the relevant statutory framework because "the doctrine of standing derives from the case-or-controversy requirement, and because that requirement in turn is grounded in historical practice." Spokeo, 136 S. Ct. at 1549.

As you may recall, the Fair and Accurate Credit Transactions Act of 2003 (FACTA) amended the FCRA by limiting printed information on receipts:

[N]o person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.

115 U.S.C. § 1681c(g). The Ninth Circuit observed that the FCRA provides that "[a]ny person who willfully fails to comply with [that requirement] with respect to any consumer is liable to that consumer" for statutory damages of between $100 and $1,000 per violation or "any actual damages sustained by the consumer," costs and attorney's fees, and potential punitive damages.  See 15 U.S.C. § 1681n.

Additionally, since FACTA, Congress enacted the Credit and Debit Card Receipt Clarification Act (Clarification Act), which reiterated that the FCRA prohibits printing "receipts bearing a card's expiration date." Id. However, the Ninth Circuit noted that Congressional findings found "hundreds of lawsuits were filed alleging that the failure to remove the expiration date was a willful violation of the [FCRA] even where the account number was properly truncated," and "[n]one of these lawsuits contained an allegation of harm to any consumer's identity." Congress also found that "[e]xperts in the field agree that proper truncation of the card number, by itself as required by the [FCRA], regardless of the inclusion of the expiration date, prevents a potential fraudster from perpetrating identity theft or credit card fraud."

Thus, the Court noted, the Clarification Act ensures "that consumers suffering from any actual harm to their credit or identity are protected while simultaneously limiting abusive lawsuit." The Clarification Act also provided merchants with a temporary reprieve:  "[A]ny person who printed an expiration date on any receipt . . . between December 4, 2004, and [June 3, 2008]," but otherwise complied with the statute, did not willfully violate the FCRA.

The Ninth Circuit next turned to whether the consumer had standing in this case.  As you may recall, standing is "an essential and unchanging part of the case-or-controversy requirement of Article III."  Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).  The Ninth Circuit recognized that the appeal turned on whether the consumer alleged a concrete injury in fact.

To establish standing, the consumer must allege he (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision. Spokeo. 136 S. Ct. at 1547. Further a consumer suffers an injury where there is "an invasion of a legally protected interest" that is "concrete and particularized" and "actual or imminent, not conjectural or hypothetical."  Id. at 1548 (quoting Lujan, 504 U.S. at 560).

The Ninth Circuit observed that both Spokeo and this case involved a putative consumer class action alleging willful violations of the FCRA.  In Spokeo, the Supreme Court made clear that "Article III standing requires a concrete injury even in the context of a statutory violation." Id. at 1549. The plaintiff must establish that a concrete injury "actually exist[s]", and that it is "real, and not abstract." Id. at 1548. Intangible harms and a "risk of real harm" can demonstrate a concrete injury. Id. at 1549-50. However, "a bare procedural violation, divorced from any concrete harm," does not "satisfy the injury-in-fact requirement of Article III." Id. at 1549.

Thus, "[a] violation of one of the FCRA's procedural requirements may result in no harm" -- for example, "[i]t is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm." Id. at 1550. The Supreme Court therefore remanded to resolve "whether the particular procedural violations alleged . . . entail a degree of risk sufficient to meet the concreteness requirement." Id.

The Ninth Circuit noted that after Spokeo, two of its sister circuits dismissed identical consumer class actions that alleged violations of the FCRA's credit card expiration date redaction requirement for lack of standing. See Meyers v. Nicolet Restaurant of De Pere, 843 F.3d 724 (7th Cir. 2016) (consumer's allegations did satisfy the injury-in-fact requirement for Article III standing because printing the receipt did not harm the consumer and the violation did not create any appreciable risk of harm); Crupar-Weinmann v. Paris Baguette America, Inc., 861 F.3d 76 (2d Cir. 2017) (the alleged bare procedural violation did not create a material risk of harm to the underlying concrete interest Congress sought to protect in passing FACTA -- i.e., preventing identity theft and credit card fraud).

The Ninth Circuit agreed with its sister courts and found that the consumer failed to allege a concrete injury here. Specifically, the historical practice does not support the consumer's theory of injury because his alleged exposure to identity theft does not have "a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts."

The Consumer argued that a close historical relationship exists between his claimed injury and privacy torts involving a wrongful disclosure of information.  The Ninth Circuit rejected this argument because the Garage did not disclose the consumer's information to anyone besides the consumer.  Thus, it doesn't matter that "[a]ctions to remedy . . . invasions of privacy . . . have long been heard by American courts, and the right of privacy is recognized by most state" because this case does not involve any such privacy-based injury.  Van Patten, 847 F.3d at 1043.

The Ninth Circuit declared that in adopting the FCRA's credit card expiration date requirement, Congress did not "elevat[e] to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law."  Lujan, 504 U.S. at 578. Congress's creating a prohibition "does not mean that a plaintiff automatically satisfies the injury-in-fact requirement" just because "a statute grants [him] a statutory right and purports to authorize [him] to sue to vindicate that right." Id. Thus, the consumer cannot merely allege a FCRA violation "divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III." Id. 

The Ninth Circuit also discerned that Spokeo made it clear that simply because the FCRA authorizes citizen suits and statutory damages, does not mean that allegations of a statutory violation meet the standing requirement. Although, "Congress did not eliminate the FCRA's card expiration date requirement in the Clarification Act," that does not confer standing here because "the Clarification Act's finding that a disclosed expiration date by itself poses minimal risk and the law's temporary elimination of liability for such violations counsel that [the consumer] did not allege a concrete injury."  The Ninth Circuit therefore concluded that "[o]n balance, congressional judgment weighs against" finding standing here.

The Ninth Circuit next examined the consumer's claims that his statutory violation by itself establishes concrete harm.  First, the consumer argued that the FCRA creates a "substantive right," and invading this right "is an injury that confers standing." See Eichenberger v. ESPN, Inc., 876 F.3d 979, 982-84 (9th Cir. 2017). Second, the consumer argued that the law at least "establishes a procedural right, the violation of which creates a material risk of harm sufficient to confer standing." The Ninth Circuit rejected both claims.

The Court held that the consumer's argument that Congress "created a substantive right that is invaded by a statutory violation" fails because even assuming the substantive right exists, it depends on disclosing a consumer's private financial information to third-parties.  Here, the garage only disclosed the consumer's private information to the consumer, not to any third-party. Thus, the Ninth Circuit held, printing the receipt did not invade any substantive right.

The consumer's FCRA procedural violations claim also fails to confer standing, the Court continued, because it does not "entail a degree of risk sufficient to meet the concreteness requirement."  Spokeo, 136 S. Ct. at 1550. Here, Ninth Circuit noted, the consumer did not adequately allege actual harm or a material risk of harm because no other copy of the receipt existed, he did not lose the receipt, nobody stole the receipt, and no thief stole his identity.  The consumer also failed to allege any real risk of harm that was "not conjectural or hypothetical," because he could shred the receipt and eliminate any remaining risk of disclosure. Lujan, 504 U.S. at 560.

The Ninth Circuit also held that providing a credit card receipt to the card owner with the expiration date, without more, did not create "any concrete harm." Spokeo, 136 S. Ct. at 1550. Congress found that receipts like the consumers with the expiration date and a truncated credit card number "prevent a potential fraudster from perpetrating identity theft or credit card fraud." 122 Stat. at 1565. The consumer's potential identity theft exposure theory is therefore "too speculative for Article III purposes." See Missouri ex rel. Koster v. Harris, 847 F.3d 646, 654 (9th Cir. 2017) (quoting Lujan, 504 U.S. at 564 n.2).

The Ninth Circuit therefore affirmed the trial court's dismissal of the consumer's putative class action for lack of Article III standing.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: Cal App Ct (4th Dist) Holds "Always On" Call Recorder May Violate Calif Invasion of Privacy Act

The California Court of Appeals, Fourth District, recently reversed summary judgment awarded in favor of the defendant based on violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"), which prohibits the recording of confidential communications without the knowledge or consent of the other party, and the intentional recording of communications using a cellular or cordless telephone.

In so ruling, the Appellate Court held that the defendant could not establish that it lacked the requisite intent to violate the Privacy Act, because the defendant's full-time "always on" recording system recorded all calls on the company phones regardless of whether the calls were made for personal or business purpose.

A copy of the opinion is available at:  Link to Opinion

From March 2009 through May 2012, the defendant employed a full-time "always on" telephone call recording system that was activated when an employee placed a telephone call. 

The defendant recorded 317 of the plaintiff's telephone conversations in calls made to the plaintiff on the defendant's company telephone.  The plaintiff's daughter, who was employed by the defendant, placed 316 of the calls, and the plaintiff's friend, who was also an employee of the defendant, placed one of the calls.  None of these calls involved defendant's business.

  

In defendant's "Electronic Monitoring and Device Use" written policy in effect at the time, the defendant authorized its employees to use company telephones for personal calls, expressly advising them in writing that their "personal calls may be recorded." 

The plaintiff sued the defendant for alleged violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"). 

Specifically, the plaintiff alleged that defendant intentionally recorded her confidential telephone conversations in violation of: (1) § 632(a), which prohibits one party to a telephone call from intentionally recording a confidential communication without the knowledge or consent of the other party, and (2) § 632.7(a), which prohibits the intentional recording of a communication using a cellular or cordless telephone.

The defendant filed a motion for summary judgment, arguing that both causes of action fail, because the defendant did not intentionally record any of the plaintiff's telephone calls.  The defendant argued that it did not intend to record each specific conversation at issue, and the plaintiff cannot establish that the defendant had the requisite intent for purposes of violating section 632(a) or section 632.7(a).

The plaintiff argued that the defendant did not meet its initial burden on establish its lack of intent, and even if it did, there were triable issues of material fact that precluded summary judgment in its favor. 

The trial court granted the defendant's motion for summary judgment.  This appeal followed.

The issue on appeal was, for purposes of determining a potential violation of section 632(a) or section 632.7(a), whether the defendant intentionally recorded the plaintiff's conversations with the defendant's employees.

The defendant argued that it did not "intentionally" record the 317 challenged calls, as required for purposes of §§ 632(a) and 632.7(a), because the mere act of installing a recording device on company phones did not satisfy the requirements for intent under the eavesdrop statutes.  The defendant argued that these recordings were made "by chance."

However, in the Appellate Court's view, the defendant did not record the 317 confidential conversations by chance.  Instead, these recordings were made by a full-time "always on" telephone call recording system that was always in operation, and the defendant recorded all calls made from the designed company telephone.  Additionally, the Appellate Court found that the defendant authorized its employees to use company telephones for personal calls and advised them that their "personal calls may be recorded."

Thus, the Appellate Court held that the defendant failed to meet its initial burden on summary judgment, because its call recording system recorded all calls during the period of time when the defendant recorded the 317 conversations at issue.  Because the defendant recorded the calls that contained the plaintiff's confidential communication, the Appellate Court concluded that the defendant may have violated both sections 632(a) and section 632.7(a).

Notwithstanding the automatic recording of all calls on company phones, the defendant argued that these eavesdrop statutes were designed to protect individuals against eavesdroppers without penalizing the innocent use of recording equipment. 

As support for this argument, the defendant cited People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123 ("Smith"), and People v. Buchanan (1972) 26 Cal.App.3d 274 ("Buchanan").

In Smith, a criminal case, the issue was whether certain tape recorded conversations were obtained in violation of former section 653j, the predecessor to section 632 under consideration in this case.  People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123, 125.  The defendant business owner in Smith hired a private investigator to install and test a voice-activated tape recorder that would record all conversations, including telephone conversations in its offices, both automatically (noise-activated) and manually.  Id., at 126.  The defendant in Smith was charged with a crime, the tapes were potential evidence, and it was defendant who argued that the tape recordings were made in violation of the applicable statute.  Id., at 126-27.

The court in Smith rejected the criminal defendant's statutory interpretation that "intent to record" meant merely putting the recording equipment in operation.  Id., at 132.  Rather, the court in Smith held that "the mere intent to activate a tape recorder which subsequently 'by chance' records a confidential communication" was insufficient to constitute an offense.

However, as the Appellate Court explained, the California Supreme Court later summarized its conclusion in Smith as follows: 

Former section 653j, subdivision (a) "required an intent to record a confidential communication, rather than simply an intent to turn on a recording system apparatus which happened to record a confidential communication." 

Estate of Kramme (1978) 20 Cal.3d 567, 572, fn. 5.

Applying this standard, the Appellate Court determined that the defendant's recordings were unlike the recording in Smith.  The defendant in this case did not merely record confidential communications while testing its recording equipment.  Rather, the defendant knew that it was recording all calls on company phones and told its employees that that were authorized to use company phones for personal use and that their personal calls might be recorded. 

Thus, based on the different timing, frequency, and purpose for using the equipment that recorded the challenged calls, the Appellate Court distinguished Smith.

In Buchanan, a switchboard operator "inadvertently" overheard a telephone conversation during the moment in time that she was required to stay on the line to ensure a proper connection.  People v. Buchanan (1972) 26 Cal.App.3d 274, 281.  The court in Buchanan held that the operator did not intentionally eavesdrop on a telephone call in violation of the Privacy Act.  Id., at 288.

The Appellate Court easily distinguished Buchanan because in the Court's view there was nothing inadvertent or momentary about the defendant's recording of the 317 challenged calls.  The Court found that the defendant was purposefully recording all calls on the company telephone lines from which the 317 challenged calls were recorded.  Moreover, the defendant's disclosures regarding the practice of recording calls, and the plaintiff's knowledge of the company policy of recording calls, weighed against a lack of intent for purposes of section 632(a) or section 632.7(a). 

In sum, the Appellate Court concluded that the defendant did not meet its burden of establishing as a matter of law that it did not have "knowledge to a substantial certainty that [its] use of the equipment w[ould] result in the recording of a confidential conversation" of an employee and a third party like the plaintiff.  Smith, 70 Cal.2d at 134.

Accordingly, the Appellate Court reversed the judgment, and instructed the trial court on remand to enter an order denying the defendant's motion for summary judgment.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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