A customer filed a class action lawsuit this past year against the owner of several well-known restaurants in Manhattan based on two novel theories. First, he alleged that any restaurant that added an “automatic” gratuity to the bill ‒ even when that gratuity was plainly disclosed on the menu ‒ was engaging in a deceptive and unlawful practice under New York law. Second, he alleged that the failure of a restaurant to post drink prices for all beverages it offered for sale was ‒ standing alone ‒ a deceptive and unlawful practice that is actionable under New York law. His pleadings sought “billions” of dollars for consumers throughout the United States, and asserted that the food service industry systematically deceived customers through these allegedly deceptive practices.

The defense brought a motion to dismiss, and in ruling on plaintiff’s claims, Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York rejected each of these theories, and dismissed the plaintiff’s claims in their entirety as a matter of law this past week in Dimond, et al. v. Darden Restaurants, Inc.,Case No. 13-CV-5244 (S.D.N.Y. July 10, 2014). [Full disclosure: Seyfarth Shaw LLP, and in particular the authors of this blog post, represented the defendant in this litigation.]

The decision in Dimond is important for the food service industry in particular, and all corporations in general, that face class action litigation and seek to avoid the costs and exposures associated with “bet-the-company” litigation.

Background  

The Dimond case had a complicated procedural history despite never making it past the motion to dismiss phase of litigation. In June 2013, plaintiff filed a purported class action lawsuit claiming that the automatic gratuities charged at numerous prominent restaurants in Manhattan were unlawful. Over the next six months, plaintiff amended the complaint four times, variously adding and dropping defendants, other named plaintiffs, and causes of action. The dust finally settled with the filing of a fourth amended complaint in November 2013, which named as defendant Darden Restaurants, Inc., the owner of Red Lobster and Olive Garden restaurants located in Times Square and Chelsea.

The complaint alleged violations of New York General Business Law § 349 (“Section 349”), the state consumer protection statute, based on two billing practices. The first was that the restaurants charged an automatic gratuity of 18 percent on all parties, a practice which plaintiff contended was improper despite the fact that the menus disclosed that “[a]n 18% gratuity will be added to all guest checks.” Plaintiff also complained that not all of the beverage prices were listed on the menu and alleged that this too constituted an unfair trade practice under New York law.

The defense moved to dismiss the complaint for failure to state claim arguing, in essence, that neither practice worked to deceive consumers and that plaintiff did not identify any injury suffered as a result of the conduct.

The Court’s Opinion

The Court issued a 34-page opinion dismissing the complaint in its entirety. Judge Failla held that while Section 349 is a broad statute intended to “cope with the numerous, ever-changing types of false and deceptive practices which plague consumers,” id. at 9, plaintiff had failed to identify any deceptive conduct.

As an initial matter, the Court rejected plaintiff’s attempt to predicate the Section 349 claims on purported violations of New York City rules and regulations, namely RCNY § 5-59 and NYCAC §20-700.  RCNY §5-59 prohibits surcharges in restaurants, while NYCAC § 20-700 is New York City’s local consumer protection statute. The Court noted that even plaintiff had conceded that these regulations did not allow a private right of action, and Second Circuit precedent clearly foreclosed using Section 349 as an end run around another statute’s lack of private right of action. The Court therefore held that the local regulations were irrelevant to the Section 349 claims.  (Nevertheless, the court expressed skepticism that the record established any violation of RCNY §5-59.)

The Court held that the pertinent question is whether the conduct alleged ‒ charging an automatic gratuity and listing prices for some but not all beverages ‒ was in itself deceptive under the statute. Applying a common sense approach, the Court held that it was not.

First, the Court addressed the automatic gratuity, explaining that there is no Section 349 violation where defendants fully disclosed the terms and conditions of a transaction. Applying this rule, the Court held that the 18% automatic gratuity did not deceive consumers because the fact of the gratuity was plainly disclosed on the menu, which stated: “An 18% gratuity will be added to all guest checks.” The court held that “the terms and conditions were completely and conspicuously indicated on the menu so that each patron was expressly informed as to the cost of dining at the Restaurants prior to voluntarily placing his or her order. Plaintiff, as well as any other customer, had the option of leaving the restaurant upon seeing this disclosure.” Id. at 17. Judge Failla also commented that gratuities between 18% and 20% are common in New York City, undermining plaintiff’s claim that patrons had been “tricked” into paying the gratuity. Id.

Next, the Court addressed the omission of drink prices from the menu, and held that plaintiff had failed to plead materially misleading conduct in that respect as well. Judge Failla noted that it is not enough that the drink prices were not listed ‒ rather, plaintiff must demonstrate that he could not “reasonably obtain” the prices.Id. at 31. In other words, the plaintiff or any other patron could simply have asked the price of the drink, and there were no allegations suggesting that the restaurant would not provide that information or had misrepresented the beverage prices.

In addition to finding no materially misleading conduct, the Court also held that plaintiff had not established any injury as a result of the gratuity or omission of drink prices. New York law forecloses Section 349 claims based on allegations that the consumer purchased an item that they otherwise would not have. The Court found that, at best, this was all that plaintiff had alleged, and it was insufficient as a matter of law.

Providing further ammunition to dismiss the beverage claim, the court also found that the plaintiff lacked standing to bring suit because the complaint did not allege any injury in connection with the conduct.

Finally, the Court refused to grant leave to amend given that plaintiff had enjoyed numerous prior opportunities to perfect the pleading and had not provided a proposed pleading or any indication as to how he might cure the deficiencies in the Fourth Amended Complaint.

Implications For Corporations

Judge Failla’s practical approach to a novel question has likely stemmed the tide of copycat litigation that would surely have plagued restaurant owners in New York if the suit had been allowed to proceed. The opinion should also provide good, persuasive law for defendants in other jurisdictions facing similar consumer claims.