It’s a Saturday in December 2006. You and a few friends arrive at the multiplex, looking forward to catching the latest Hollywood blockbuster, “Night at the Museum.” At the door, you’re told what the tickets will cost. Because you don’t carry that kind of cash, you buy your tickets at an electronic kiosk with your credit card, as do each of your friends. You all enjoy the movie, but agree that a sequel would be entirely unnecessary. Emptying your pockets on the way out the door, you throw your crumpled-up receipts in the movie theater trash.
How much did your night out cost the movie theater? As much as $290 million, according to a recent Ninth Circuit Court of Appeals decision.
You see, those receipts that were tossed in the garbage had credit card information printed on them. A 2004 federal law meant to prevent identity theft known as the Fair and Accurate Credit Transactions Act – FACTA for short – says that only the last five digits of a credit card number may be printed on a receipt and not the expiration date. For each “willful” violation of FACTA – each and every receipt printed – courts are instructed to impose $100 to $1,000 of damages, in addition to possible punitive damages. (Under FACTA, “willful” has been interpreted more broadly than its common meaning to include reckless infractions.) Bring a class action in federal court, multiply $1,000 by all the people who went out to the movies at an American Multi-Cinema (AMC) theater between December 4, 2006, and January 29, 2007, and you get very large potential liability, $290 million to be precise.
These are the facts of Bateman v. American Multi-Cinema, Inc., 623 F.3d 708 (9th Cir. 2010). Michael Bateman received a receipt that was allegedly not compliant with FACTA from an AMC theater and brought a lawsuit seeking to represent a class of all people who used their credit cards at electronic kiosks in AMC theaters for a period of less than two months, during which time the kiosks apparently printed 290,000 non-compliant receipts.
Bateman is not remarkable for its groundbreaking treatment of substantive FACTA law. FACTA has been around since 2004 and its interpretation is fairly settled – though because it was ambiguous and widely misunderstood, the law was amended to provide retroactive immunity for many FACTA violations before December 4, 2006. Hence the Bateman class only encompassed receipts printed after that date. Rather, Bateman is significant because it rejected in the FACTA context the defense, based on Ratner v. Chemical Bank New York Trust Co., 54 F.R.D. 412 (S.D.N.Y. 1972), that large groups of plaintiffs should not be permitted to join in a single class action where the damages sought are enormous and out of proportion to any harm suffered by the plaintiffs.
The district court in Bateman, following Ratner, held that, because of the scope of the potential liability in relation to the actual harm suffered, a class action could not be said to be “superior to other available methods for the fair and efficient adjudication of the controversy” under Fed. R. Civ. P. 23(b)(3). The court reasoned that printing eight digits of a credit card on a receipt did not present a materially greater risk of identity theft than printing five digits, and that Congress’s goal in passing FACTA was to prevent actual harm. Following a long line of precedent beginning with Ratner, the court stated that subjecting a defendant to such extraordinary liability based on little chance of actual harm was simply not “fair and efficient.”
Numerous court decisions have applied the same reasoning to refuse class certification in cases of all kinds since the early 1970s. Moreover, one of the leading opinions following this reasoning, Kline v. Coldwell, Banker & Co., 508 F.2d 226 (9th Cir. 1974), was a Ninth Circuit decision. In Kline, the court refused to certify a class of all the home buyers in Los Angeles County suing 2,000 real estate brokers for an alleged price-fixing scheme for up to $750 million in damages. “Such an award against each of 2,000 real estate broker defendants would shock the conscience and lead to an ‘ad absurdum result,’” the court stated in Kline. Therefore, “a class action was not the superior method of adjudicating the controversy.”
The court of appeals in Bateman distinguished its own decision in Kline by examining the history of FACTA and the class action in general. Kline, the court wrote, was an antitrust case, brought based on laws passed prior to a Supreme Court decision that made class actions far more widely available. Thus, the Kline court refused class certification because Congress had not considered class actions when it wrote the antitrust laws. FACTA, on the other hand, was created by Congress with class-action-friendly features specifically because it was meant to be a deterrent against activities that facilitated identity theft. For example, FACTA contains strict statutory damages that do not require any proof of actual harm. Even more crucially, the Bateman court wrote, Congress amended FACTA two years after its passage to provide a safe harbor for many innocent violators. Congress was aware of FACTA class actions and chose to do nothing to stop those arising from conduct after December 4, 2006, while severely limiting those arising before then. On that basis, the court of appeals in Bateman reversed the district court and remanded, while allowing that class certification could still be denied for reasons other than the Ratner defense.
The court in Bateman did leave potential defendants with two glimmers of hope. First, it hinted that it might rule differently in a case in which the defendant proved that class action damages would cause its bankruptcy. In addition, it limited its reasoning to statutes like FACTA, in which Congress had considered class action enforcement.
The overwhelming majority of businesses that accept credit or debit cards are well aware of and in compliance with FACTA, as you can see by checking your credit card receipts. Nevertheless, given the potential for large – even crippling – liability under FACTA, all businesses that do business with consumers would be well advised to make FACTA compliance a priority for all ongoing and new consumer sales operations.