Class Action Lawsuit Alleging State Spam Claims Dismissed Again (With Leave to Amend)
I blogged a ways back
The court’s first order found that the state law claims were preempted by CAN-SPAM. The court granted plaintiffs leave to amend and allege claims which sounded in fraud or which were based on falsity or deception. As the court describes it, “[t]he Court afforded plaintiffs leave to amend to allege a common law fraud claim and/or § 17529.5(a) claims that occurred under circumstances involving falsity or deception.”
Plaintiffs amended their complaint to allege falsity underlying the emails and allege that plaintiffs had relied on such falsity in opening the emails. Despite Defendant’s arguments, the court found this time around that these claims sounded sufficiently alleged fraud to avoid CAN-SPAM’s broad preemption clause. Defendant argued that this was not sufficient to escape preemption – i.e., that in order to escape preemption, plaintiff had to have suffered actual damage. Surprisingly, the court bought this argument:
As defendant points out, however, plaintiffs fail to allege that either Blacksburg or Hall, the plaintiffs on whose behalf the claim is brought, incurred any damage as a result of having relied on such asserted false statement. Plaintiffs, essentially conceding the FAC fails to include any such allegation(s), argue the Court should reconsider its October 6, 2008 order to the extent the Court found therein that each of the plaintiffs, in order to state a claim, must allege that he or she suffered damage as a result of his or her having relied on a false or misleading statement made by defendant.I don’t have time to unpack this one, but to me the court’s preemption reading is way too broad here. The thrust of Mummagraphics and the preemption cases following it are that Congress intended CAN-SPAM to only regulate materially false emails, and state laws that purport to impose liability based on immaterial violations are preempted. The focus is on whether the falsilty or misleading statementis material, not whether the plaintiff suffered any actual damage or not. Federal law arguably imposes an actual damage requirement – see Virtumundo (and Art III). Then again, federal law also restricts the class of plaintiffs that can sue (only ISPs and state AGs can sue). State law doesn’t necessarily impose this requirement. State law (such as California law) allows pretty much everyone who receives an email to sue, and provides for statutory damages regardless of whether actual damages are suffered. To focus on whether the plaintiff suffered actual damage would pretty much raise the bar for spam lawsuits far beyond what is contained in state law. (On the other hand, maybe there's a state counterpart to Article III standing?) Instinctively, preemption should generally turn on the conduct in question, not the extent of plaintiff's damage.
Plaintiffs do not dispute that a common law claim for misrepresentation or fraud requires a plaintiff to establish he suffered some injury or incurred damage as a result of his having relied on a false or misleading statement. Rather, plaintiffs argue, § 7707(b)(1) exempts from preeemption state statutes prohibiting the making of false or misleading statements in a commercial email, irrespective of whether the plaintiff incurred damage as a result of his having relied on such a statement. 2 In support of such argument, plaintiffs point to the text of § 7707(b)(1), which does not explicitly refer to "misrepresentation" or "fraud" but, rather, to "falsity or deception." Courts that have considered the issue, however, have interpreted "falsity or deception," as used in § 7707(b)(1), to refer to the common law tort of misrepresentation or fraud. See, e.g., Omega World Travel, Inc. v. Mummagraphics, Inc., 469 F. 3d 348, 354 (4th Cir. 2006) (interpreting preemption clause in § 7707(b)(1) as referring to "torts involving misrepresentations"); Ferron v. Echostar Satellite, LLC, 2008 U.S. Dist. LEXIS 82841, 2008 WL 4377309, *6 (S.D. Ohio 2008) (finding, in action where plaintiff alleged violation of state statute regulating commercial email, defendant entitled to summary judgment where plaintiff failed to offer evidence "to support a fraud claim" and thus failed to avoid preemption under § 7707(b)(1)); ASIS Internet Services v. Optin Global, Inc., 2008 U.S. Dist. LEXIS 34959, 2008 WL 1902217, *19 (N.D. Cal. 2008) (holding § 7707(b)(1) "permits state law to regulate the use of electronic messages only to the extent those regulations are based on traditional principles of fraud"); Kleffman v. Vonage Holdings Corp., 2007 U.S. Dist. LEXIS 40487, 2007 WL 1518650, *3 (C.D. Cal. 2007) (holding Congress, in enacting § 7707(b)(1), "left states room only to extend their traditional fraud prohibitions to the realm of commercial emails"; finding claim for violation of § 17529.5(a) preempted, where claim not based on "traditional tort theory" of "fraud and deceit" and plaintiff failed to allege he was "at any point mislead").
(The court in passing notes that even assuming state law causes of action which are not supported by actual damage survive, these causes of action do not belong in federal court. This made me wonder what the basis was for the lawsuit being in federal court in the first place. CAFA? I didn’t have time to pull the complaint and confirm this. The court’s passing comment raises some interesting procedural questions in my mind.)
The court’s ruling is interesting and raises another twist to the whole preemption argument. Instinctively, the court's focus on whether there was actul damage makes absolute sense. This is a weakness underlying all of these types of lawsuits. I'm not sure the focus is appropriate as a matter of law. Again, there seem to be some complex procedural/jurisdictional rules at play. I welcome thoughts on this.
NB: two cases on appeal (Kleffman and Virtumundo) both have an opportunity to provide some preemption answers. (The US Supreme Court also recently decided a preemption case - I'm not sure what if anything it has to say about this type of a situation.) Kleffman was certified to the California Supreme Court. Virtumundo was argued in the Ninth Circuit several weeks back and we should see a decision sometime in 2009!