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Class Action Defense Cases–Menagerie Productions v. Citysearch: California Federal Court Grants Class Action Certification Of Nationwide Class Action Challenging Charges For Pay-Per-Click Advertising

Class Action Alleging Violations of California’s Unfair Competition Law and Breach of Contract for “Pay-Per-Click” Charges based on Click Fraud/Doubleclicks Warranted Nationwide Class Action Treatment California Federal Court Holds

Plaintiff filed a putative class action in California state court against IAC/Interactive Corp., Ticketmaster dba Citysearch.com, and Citysearch.com alleging violations of California’s Unfair Competition Law (UCL), as well as breach of contract and negligence; defense attorneys removed the class action to federal court. Menagerie Productions v. Citysearch, ___ F.Supp.2d ___ (C.D.Cal. November 9, 2009) [Slip Opn., at 1.] According to the allegations underlying the class action complaint, class members “entered into a contract with Citysearch to place ‘pay-per-click’ advertisements on the Citysearch website, and that Citysearch failed to detect and prevent ‘click fraud.’” Id., at 2. Following extensive law and motion practice and amendments to the class action complaint that added new party plaintiffs, see id., plaintiffs moved the district court to certify the litigation as a class action, id., at 3. The class action sought certification of a nationwide class defined as, “All persons or entities in the United States who paid money for pay-per-click advertising through Citysearch.com.” Id., at 7. Defense attorneys opposed class action treatment. The district court concluded that the complaint warranted class action treatment as to certain claims but denied class action certification as to other claims.

The federal court explained that the class action complaint was premised on two theories. First, that class members’ contracts with defendants for pay-per-click advertising “contained an implied covenant of good faith and fair dealing” which Citysearch violated “by collecting fees from plaintiffs and the Class for click fraud even though Citysearch knew, or should have reasonably known, that the clicks were not ‘actual clicks’ but rather purposeful clicks made for an improper purpose” and “by failing to implement effective oversight, investigating oversight and prevention of click fraud.” Menagerie Productions, at 6-7. Second, that Citysearch engaged in “unfair business practices” within the meaning of California’s UCL “because Citysearch ‘(a) fails to employ any method to track fraudulent clicks, including clicks originating from its own employees and/or agent and clicks originating from Citysearch’s “partner sites”; (b) fails to inform its customers that it does not employ a method to track fraudulent clicks, including clicks originating from its own; and (c) charges customers for invalid clicks.’” Id., at 7. The class action alleged that this conduct violated the UCL because Citysearch led customers to believe “that they will not be charged for ‘invalid’ clicks, when in fact, Citysearch routinely charges its customers for clicks that it knows, or by the exercise of reasonable care, should know are not clicks that originate from potential customers who actively and legitimately chose the advertiser’s link.” Id.

With respect to the requirements for class action certification, the district court began by summarizing the applicable standard. See Menagerie Productions, at 7-9. The court noted that defense attorneys did not contest numerosity, id., at 9-10, or commonality, id., at 10. But defendants vigorously contested whether the typicality test had been satisfied. Plaintiffs argued typicality existed because “as victims of Citysearch’s common course of conduct, plaintiffs’ and the class members’ injuries are identical, as are the claims that arise therefrom.” Id., at 11. Defense attorneys countered that the putative class representatives’ claims were not typical because “the substantive claims depend on individual permutations,” id., at 11. They argued further that “plaintiffs have not offered any evidence that they were charged for invalid clicks, but have ‘merely advanced a theory that they and other class members want to explore whether they have been charged for some as-yet-unidentified categories of “objectively invalid” clicks.’” Id., at 11-12. Accordingly, “plaintiffs have not identified any actionable injury they have suffered, much less a similar one by the rest of the class.” Id., at 11. Also, “plaintiffs’ depositions show that their real grievance is not that they were charged for invalid clicks, but that they received a poor return on their investment—a wholly different injury that defeats typicality.” Id., at 12 (citations omitted). And finally, “there is no evidence they read and relied upon a misrepresentation made to all class members.” Id. With respect to this last argument, plaintiffs responded that California’s UCL does not require “individualized proof of decision, reliance and injury” but simply that “members of the public are likely to be deceived,” id., at 13. The district court concluded that plaintiffs had adequately established typicality because (1) doubleclicks are, by defendants’ expert’s own statements, “invalid,” and (2) plaintiffs and members of the class were allegedly charged for such invalid clicks, so the claims of all class members “are based on an alleged common course of conduct…to (1) charge its advertisers for invalid clicks, and (2) make material omissions regarding the existence and quality of its click filters.” Id., at 14.

With respect to the final class action requirement of Rule 23(a) – adequacy of representation – defense attorneys argued that “plaintiffs are not adequate class representatives because they lack standing to pursue all of the claims for relief” in the class action complaint because plaintiffs failed to demonstrate that they paid for any invalid clicks. Menagerie Productions, at 14. Defense attorneys also argued that plaintiffs were no adequate class representatives because “[they] are no currently Citysearch advertisers, they cannot seek injunctive relief under the UCL.” Id. The federal court disagreed because plaintiffs had adequately established that they had paid for invalid clicks so “While plaintiffs do not have standing to request prospective injunctive relief under the UCL…, they have standing to pursue restitutionary relief under the UCL because they paid to advertise with Citysearch.” Id., at 15 (citations omitted). At bottom, the district court found that plaintiffs had the same incentive as absent class members to vigorously prosecute the class action’s claims on their behalf. Id., at 16.

We discuss the federal court’s analysis of Rule 23(b)(3)’s requirements for class action treatment only briefly. First, the district court found that common issues of fact and law predominated with respect to the class action’s breach of contract claim. See Menagerie Productions, at 17-21. And the court reached the same conclusion with respect to the breach of implied covenant claim, see id., at 21-22, and with the “fraudulent” prong of California’s UCL, see id., at 22-24. But with respect to the ”unfairness” prong of the UCL, the federal court reached a different conclusion. See id., at 24-26. As the court explained at page 26, “‘The test of whether a business practice is unfair involves an examination of that practice’s impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.’ [Citation.] Under this test, a plaintiff’s individual expectations about the business practice are relevant to determining the extent of its harm.” Surprisingly, the federal court also approved application of California law to the nationwide class, see id., at 26-28. And finally, the district court found that the superiority prong of Rule 23(b)(3) had been met. See id., at 28-35. Accordingly, except as to the class action’s claims premised on the unfairness prong of California’s UCL, the district court granted plaintiffs’ motion for class certification. Id., at 35-36.

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