Antitrust Law Daily Wrap Up, TOP STORY—NDCal: Promotion of Facebook Credits Sales to Minors as “Final” Could Be Unfair Practice Under California Law, (Oct 29, 2012)

By William Zale, J.D.

Facebook could have engaged in unfair business practices in violation of the California Unfair Competition Law (UCL) by allegedly advertising, marketing, and promoting Facebook Credits with the statement that “all sales are final” when Facebook knew that minors were making such purchases and that minors had the right to void the contracts, the federal district court in Oakland has ruled (I.B. v. Facebook, Inc., October 25, 2012, Wilken, C.). Among other rulings, the court rejected a claim under the California Consumers Legal Remedies Act (CLRA) and denied Facebook’s motion to strike class allegations.

In October 2011, plaintiff I.B., a minor, allegedly asked his mother, plaintiff Glynnis Bohannon, for permission to spend twenty dollars on his Facebook account using Bohannon's Wells Fargo Master Card, in exchange for twenty dollars in cash. I.B. purchased Facebook Credits from Facebook for use in “Ninja Saga.” Later, allegedly without any notice that his mother's credit card information had been stored by Facebook and the Facebook Credits system, or that his mother's credit card information was being used again after the initial twenty dollar purchase, I.B. made in-game purchases for which he thought he was spending virtual, in-game currency. As a result, Bohannon's credit card was charged repeatedly and without her consent, and the charges totaled several hundred dollars, according to the complaint. Upon discovering the transactions, Bohannon allegedly tried to obtain a refund from Facebook by leaving a phone message at a phone number listed for Facebook but received no response.

In December 2011, plaintiff J.W., a minor, allegedly began to make a series of charges via Facebook Credits using the debit card of his parents, plaintiffs Julie Wright and Steven Wright, which J.W. had taken from his parents without their permission. The total charges exceeded one thousand dollars. On or about February 8, 2012, after learning of these charges, Steven Wright submitted a complaint to Facebook as to the “20 debits directly to my bank account,” noting that neither he nor his wife (the only authorized users of the debit card's account) had authorized any such charges, and requesting a refund. On February 10, 2012, a Facebook “Payment Operations” representative replied to Steven Wright to say he “refunded the charges to your [Wright's] funding instrument.” However, on April 13, 2012, Steven Wright noticed that only $59.90 had been refunded and contacted Facebook to request a refund of the full amount at issue. In further correspondence, Facebook responded that “we are not able to process your refund request at this time ... because it has been more than 90 days since you completed the stated transaction(s).” The Wrights have not been reimbursed $999.30 charged for transactions originating from their minor child's Facebook account, according to the complaint.

Consumers Legal Remedies Act

The CLRA prohibits unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction for the sale or lease of goods or services to any consumer. Facebook contended that the plaintiffs' CLRA claim fails because Facebook Credits are not “goods and services” covered by the statute.

The plaintiffs alleged that Facebook Credits are “certificates or coupons exchangeable for goods” and thereby constitute goods under the CLRA, which defines “goods” as “tangible chattels bought or leased for use primarily for personal, family, or household purposes, including certificates or coupons exchangeable for these goods.” The plaintiffs further alleged that they used Facebook Credits as services, which are defined as “work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods.”

Facebook maintained that Facebook Credits are not “tangible chattel” and exist “only as indicia” of digital currency that is available to the user, “separate and apart from a specific purchase or lease of a good or service.” The court found Facebook’s contention more persuasive and dismissed the CLRA claim without leave to amend.

Unfair Competition Law

The UCL prohibits any “unlawful, unfair or fraudulent business act or practice.” The UCL incorporates other laws and treats violations of those laws as unlawful business practices independently actionable under state law. Violation of almost any federal, state or local law may serve as the basis for a UCL claim, the court observed.

The court declined to dismiss claims that Facebook engaged in unfair business acts and practices in violation of public policy protecting minors set forth in California Family Code sections 6701(c) and 6710. In separate claim under section 6701(c), the plaintiffs stated a claim for declaratory relief by alleging that the transactions at issue are void contracts “relating to any personal property not in the immediate possession or control of [a] minor.” In separate claim under section 6710, the plaintiffs stated a claim for disaffirmance by alleging that the minor plaintiffs used their parents' funds to purchase Facebook Credits without the parents' knowledge or authorization.

UCL claims based on alleged violations of the CLRA and the California Money Transmission Act were denied without leave to amend. UCL claims based fraudulent conduct and violation of the Federal Electronic Funds Transfer Act were dismissed with leave to amend.

Class Claims

Facebook’s motion to strike class allegations was denied as premature. Facebook must present its challenges to class certification in opposition to the plaintiffs' motion for class certification, the court said.

The case is No. C-12-1894 CW.

John R. Parker , Jr. (Kershaw Cutter & Ratinoff, LLP) for I.B. Kristine Anne Van Hamersveld (Cooley LLP) for Facebook, Inc.

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