Membership Fee Refund Class Actions Hitting the Office, the Gym, the Club, and the Park

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One of the immediate legal trends arising from the shut down of all non-essential activities has been disputes concerning consumer refunds, with many class action suits against professional sports leagues, ticket brokers, festivals, and schools dominating the headlines.[1] But there are other businesses and activities which involve membership or subscription fees that are also dealing with these unique issues—ranging from shared work spaces and fitness gyms, to our favorite family theme parks and ski mountains, to the ubiquitous semi-private social clubs and country clubs.

How each of these businesses have responded to their consumers’ need and demand for refunds has varied, with some issuing full refunds, some issuing partial refunds, some freezing payment obligations, some issuing future credits, and some issuing nothing other than an apology and a pledge to try its best to stay in business. What has not varied has been the reaction from the plaintiffs’ bar, which has filed numerous class action suits based on breach of contract, unjust enrichment, and unlawful or unfair business practices (with California seeing much of the litigation due to the wider availability of attorneys’ fees).

This article breaks down the various responses within each industry (along with the plaintiffs’ bar corresponding legal actions), and how these responses may play a role in helping businesses defend the wave of class action litigation. While many of these refund decisions are often based on financial realities and public relations considerations, there is the potential for certain refund policies to not only provide more options for the consumer, but also to indirectly make it more difficult for plaintiffs to obtain class certification and establish other necessary elements of these suits.

Everyday life: shared work spaces and gyms

Two of the most identifiable and important touch points in everyone’s life are where they work and where they work out—so it is not a surprise to see litigation in these sectors arise immediately in the wake of this pandemic.

While A-Rod and J-Lo may have been able to have their gym open for their use only during the shut down, the vast majority of other consumers have been shut out of their gym or fitness institution since mid-March, when all such businesses were essentially forced closed. With most of the businesses using the system of automatic withdrawal from their customers’ credit card or debit accounts, some fitness institutions in the country initially continued with the automatic withdrawals, while offering extended terms for memberships to cover the time the clubs are closed.

Subsequent to this initial response, and some public backlash, some fitness institutions amended their refund policies, and have since suspended all billings until one or more gyms in a member’s market are open. Nevertheless, those policies did not stop class action suits from being filed across the country, from California to New York. Wrongful conduct and damages are of course alleged for the past 1–2 months of payments during closure, but the door remains open for ongoing refund requests as gyms remain closed. Additionally, the social distancing measures potentially create a perceived diminishment in value to some consumers, but other consumers may argue that their health risks and health concerns warrant a termination of the contract, which would put the companies in a position of deciding whether or not to stop the automatic withdrawals.

Just as the personal fitness industry had ballooned prior to the pandemic, so had the shared working space trend. But, for many (if not most) over the past few weeks, government mandates have forbidden individuals and companies from using these office spaces. Nevertheless, many co-working companies have continued to charge full membership fees of its clients/tenants.

During this time, some members have continued to pay fees, and some haven’t. But interestingly, none of them have filed a class action suit yet. Why? Potentially because of the presence of arbitration agreements and class action waivers found within the underlying contract—highlighting not only the importance of determining whether these two elements should be a part of contracts going forward, but also the target this may place on the back of California due to how the law treats enforceability of these provisions.

Everyday leisure: theme parks, ski mountains and semi-private golf/tennis/social clubs

While not at work or puttin’ in work, the same membership/subscription refund issues are at the feet of theme parks, ski mountains, and semi-private clubs—with each reacting differently.

Some of the largest and most recognizable theme parks in the world have provided a bevy of choices to the consumer, including a choice for annual passholders to extend their membership, or be issued a partial refund, while quickly stopping and waiving all monthly payments for annual passholders on a monthly plan (with a retroactive refund for payments made during days of park closure).

One other familiar theme park operator has not been able to avoid the class action bug. This operator initially continued to charge and automatically withdraw its membership fees during park closures, but subsequently announced that it would be pausing membership payments for members on monthly plans. But, even with that, four days after this announcement, a class action lawsuit was nevertheless filed in California, demanding full refunds of all monies charged or withdrawn for the alleged nonperformance of the contracts.

Similar issues have faced the owners of ski mountains in the United States. Some have offered only an additional discount on early renewal fees for next year’s ski season, and others offering a discount (on a sliding scale) to be applied to next year’s pass for the unused portions of this year’s passes. Any refund option is contingent on entering into a new contract for the following year’s pass. Predictably given the environment, class actions have been filed.

This issue also extends to companies and semi-private clubs centered around golf, tennis, yachting, supper, or other social clubs. One large owner and operator of golf clubs and social clubs in the country is already facing a class action suit after it continued to charge and automatically deduct payment from its members, despite all of its social clubs, and many or most of the golf clubs and other venues for which the membership allowed access, being closed due to the pandemic.

That this lawsuit surfaced amid reports that the company was considering bankruptcy, whether true or not, underscores the other factors at play aside from customer satisfaction. Also among these factors are the competitions within each different city or market. While many fully private golf clubs have continued to charge and withdraw full payments from their members during the closures, others (including some semi-private golf clubs) are charging members half (or reduced) dues during the closure. We expect to see class actions filed in this area in the coming months as well.

What next?

It is clear that those who have the ability to suspend payments/withdrawals or provide a full (or pro-rated) refund of membership fees are best positioned to avoid class action litigation—though no one will be immune, and no actor can act too fast.

That being said, the majority of companies in this space do not have the financial ability to provide immediate refunds, or even to suspend all monthly payments going forward. This was true before the pandemic, so the chances of that happening during and after business are closed for an extended period of time are quite long. Thus, in so many of these instances, companies will have no choice but to consider suspension of payments, rollover policies, or other future renumeration to the consumer. It is often a matter of necessity and survival.

In an ideal world, companies and organizations could continue to charge membership fees, and hope their customers accept it without complaint, so as to not disrupt the ability for the businesses to financially survive. This may be possible for some businesses that have some long-standing loyalty or some barriers to membership (such as exclusivity or other qualification prerequisites), but not all companies can bank on customer silence.

When survival dictates a suspension or rollover of payments, we’ve already seen that class action litigation can be almost inevitable. From this point, we live in a terms and conditions world. If the pre-existing terms and conditions contemplated a suspension or rollover and the customer agreed in advance, the underlying breach of contract and unfair business practices claims will be tougher for plaintiffs to maintain. If, on the other hand, the terms and conditions did not previously speak to any such possibility, then courts will likely treat this as a changed term, and the chances of litigation go from “strong to quite strong” (in the words of Owen Wilson in Meet The Parents).

So, setting aside for another time the legal arguments on all sides related to force majeure, impossibility, commercial impracticability, and all that goes into the court’s eventual determination[2], what can a company do now with its refund and associated policies so as to best help its defense of the case?

To begin with, companies can try to resolve customer issues on a case-by-case basis, giving customer relations representatives wider latitude to offer multiple alternatives or additional products or services based upon a customer complaint roadmap. Aside from the obvious benefit of providing the consumer with more “things”, keeping the connectivity with the customer, and the appearance of greater effort in accommodation, this may also be helpful in defeating class claims and class certification. If/when each customer reacts differently to the option menu, it can be argued that there has been no breach but rather a modification of the parties’ contract, each member’s considerations are unique, individual issues pre-dominate, and each member of the class was dealt with individually.

Along these lines, companies may be wise to invest in additional technology to track customer utilization of those products and services offered and accepted, thereby undercutting class claims that benefits weren’t taken advantage of, or full value under the contract was not received. For instance, if alternative services or accessibility to different venues are offered by a company and accepted by their consumers, knowing if and when a particular plaintiff actually availed themselves of the alternative benefit can be helpful in countering damages claims made by plaintiffs and/or countering class certification efforts. Customer usage data can be used to identify these differences, and allow a defendant to argue that individualized issues regarding customers' actions and perceived value predominate over any common issues presented by the class, or that named plaintiffs are atypical and cannot adequately represent the class.

But, customer usage supporting acceptance of a company’s modified policy data will not necessarily prevent litigation, it will just help defend it. As discussed above, companies will also face potential liability for how they and their customers respond to re-opening from the pandemic—especially with the concept of diminished value or health concerns. Not only may the social distancing measures potentially create a perceived diminishment in value to some consumers (e.g., the unavailability of group workouts), but other consumer’s may argue that their health risks and health concerns warrant a termination of the contract (e.g., an elderly person with pre-existing conditions belonging to a public gym). Both of these arguments would again put such companies in similar positions they are now, where they must decide quickly whether or not to stop the automatic withdrawals—or else face the same litigation fate.

For these reasons, and others, future terms and conditions need to include the potential for pandemic shut downs, the potential for suspensions or rollovers, the potential for terms and conditions to change based on such events, and spell out what occurs specifically should such incidents occur (e.g. automatic withdrawals will continue or not, etc.). Additionally, as indicated above, litigation may become less inevitable when there is the presence of a conspicuous binding arbitration agreement and class action waiver within the contract. Companies looking to avoid this litigation risk and cost in a post-pandemic world (where another shut down in the future at some point is foreseeable, if not expected) can look to add these provisions to their agreements—which in turn make choice of law and the location of services important inquiries in determining enforceability.

But as with many legal issues arising in direct response to COVID-19-shut downs, there is no magic bullet, there is no right decision that will make everyone happy, and there is not a chance for clarity on how these cases will ultimately be resolved for years. Trying to do right by the customer will go a long way, but in the meantime, the cases will continue to be filed even after the phased re-openings, as the modified socially-distanced experiences may not allow for the full value of the benefit to ever received. And the sharks will be circling the waters, waiting to file.

For further information, view our on-demand webinar on COVID-19-Related Consumer Class Action Developments and Trends in California.

 

[1] The heart of the claims will focus on the companies' alleged failure to perform their contractual obligations to provide the agreed-upon products or services, and to provide the full value for which the consumers allegedly bargained. Further information can be found on the Seyfarth’s Consumer Class Action Blog on the sports and festival refund litigation (https://www.consumerclassdefense.com/2020/05/covid-19-refund-policies-for-season-tickets-season-passes-and-annual-festivals/), school-based refund litigation (https://www.consumerclassdefense.com/2020/05/never-let-a-crisis-go-to-waste-plaintiffs-lawyers-target-colleges-and-universities-for-covid-19-responses/), auto renewal litigation (https://www.seyfarth.com/news-insights/no-rest-for-the-plaintiffs-bar-companies-using-automatic-renewal-business-model-with-california-consumers-face-increased-risk-of-class-actions-during-the-pandemic.html), and California consumer litigation (https://www.seyfarth.com/news-insights/avoiding-californias-consumer-law-pitfalls-amidst-the-covid-19-pandemic.html).

[2] Further information on force majeure principles under California law can be found on the Seyfarth COVID-19 Response page at: https://www.seyfarth.com/news-insights/covid-19-update-force-majeure-under-california-law-in-business-and-commercial-disputes.html.

Further information on force majeure principles under NY law can be found on the Seyfarth COVID-19 Response page at: https://www.seyfarth.com/news-insights/applicability-of-force-majeure-and-impossibility-in-the-wake-of-covid-19-under-new-york-law.html.