A recent decision in California highlights that retailers’ practice of collecting zip codes continues to be challenged. California’s Second District Court of Appeals affirmed summary judgment in a case brought as a class action against Chevron and other motor fuel retailers alleging violation of California’s Song-Beverly Credit Card Act for the collection of customers’ zip codes in conjunction with credit card transactions at gasoline stations.

The California appellate court affirmed summary judgment for Chevron because the zip codes were collected at locations where there is a high risk of fraud, for the purpose of preventing fraud, and Chevron would purge the zip code information shortly after reconciling the credit card transactions. 

The court found that, under the California statute, Chevron’s zip code collection qualified as a special purpose under the statute – ensuring the credit card transaction was not fraudulent – and was, therefore, not a violation.

A previous California Supreme Court decision held that zip codes are personal identification information under California’s Song-Beverly Credit Card Act. And, in 2011, California amended the statute to permit collection of zip code information for fraud prevention.

Many retailers collect zip codes with their customers’ credit card transactions, sometimes for fraud prevention, sometimes because it is required by a credit card company, and sometimes for marketing purposes. Many recent lawsuits have challenged this practice, with claims being brought against Michaels Stores, Guitar Center, Williams-Sonoma, Bed Bath and Beyond, and others. For example, click here to read about the case recently filed against Urban Outfitters in the District of Columbia. Many times these lawsuits focus on a retailer’s use of the zip code information beyond fraud prevention – to market to that customer (e.g., sending marketing mail) or the retailer’s sale of the information to a third party.

The California case is just one recent court decision on this issue. Earlier this year, the Massachusetts Supreme Judicial Court held that a zip code is personal identification information, and held that identity theft was not required under the state’s consumer privacy laws for a lawsuit to be brought for collection of zip codes with credit card transactions where a retailer uses the information for its own business purposes. As this issue continues to develop, some states may, like California, respond with amendments that expressly allow for the collection of zip codes to prevent fraud. For many industries, including open loop gift card retailers, verification of the credit transaction to prevent fraud is essential.

Lawsuits related to retailers’ collection of zip codes will likely continue and may serve as a caution to some retailers. For counsel on collecting zip codes as part of credit card transactions and related issues, including consumer protection laws, contact our Franchise & Distribution Group. The California case is Flores v. Chevron U.S.A. Inc. (Cal. Ct. App. 2d Dist. 2013).

Last month, the Fourth Circuit affirmed a ruling that North Carolina’s Ethanol Blending Statute is not preempted by the Petroleum Marketing Practices Act (“PMPA”) or federal renewable fuel program. The case was remanded for findings on whether the statute is preempted by the Lanham Act.

The plaintiffs in the case, the American Petroleum Institute and American Fuels and Petrochemical Manufacturers Association, sought to enjoin enforcement of North Carolina’s Ethanol Blending Statute claiming that it is preempted by (1) the PMPA; (2) the federal renewable fuel program; and (3) the Lanham Act.

The challenge to the statute focused on the two methods of blending ethanol with conventional gasoline: (1) inline blending, where a supplier blends at the terminal and (2) splash blending, where a retailer adds the ethanol, after the rack, in the transport vehicle. Because suppliers are concerned that splash blending is subject to greater error, they asserted that it is more likely to result in an incorrect ethanol ratio.

The North Carolina statute prohibits suppliers from restricting retailers from splash blending.

First, the Fourth Circuit affirmed the district court’s ruling that the PMPA does not preempt the statute. Looking to the 1999 PMPA amendments, the court held the provision giving states authority to make certain provisions illegal or unenforceable rendered the statute immune for the preemption claim, and held that splash blending is not a “willful adulteration” allowing termination under the PMPA.

Second, the court affirmed the district court’s ruling that the federal renewable fuel program does not preempt the statute.

Finally, the court reversed in part the district court’s ruling on the Lanham Act. The Fourth Circuit held that there were genuine issues of material fact as to whether splash blending could be conducted in a way to maintain the quality reasonably required by the trademark owner. The court remanded the issue for further findings of fact to determine whether quality controls, imposed at the insistence of suppliers, are sufficient to actually protect the quality of the trademarked gasoline and whether the quality of motor fuel that is splash blended meets a supplier’s quality standards to be blended in the manner specified by the owner of the mark.

The case is American Petroleum Institute v. Cooper/State of North Carolina (4^th Cir. June 6, 2013).

This month, Delaware passed a law to clarify that the franchisor/franchisee relationship is not an employment relationship. The law applies to relationships that are defined as a franchise under the Federal Trade Commission franchise rule.

As we previously discussed, some states – including Delaware now – are adopting legislation to clarify that franchises are independent contractors. These laws come in the wake of cases that find franchisees to have an employment relationship.

A former McDonald’s employee has brought a class action lawsuit against the franchisees of 16 McDonald’s locations in Pennsylvania (the franchisor is not named in the suit), claiming their practice of paying employees via mandatory payroll debit cards is unfair and illegal.

A payroll debit card is a plastic card that works like a debit card, except that it does not require the employee to have his or her own bank account linked to the card. In practice then, it is essentially an open-loop gift card (such as a Visa or American express gift card), but the employee can also use the card to access cash like he or she could do with a traditional, bank-issued debit card. Payroll debit cards have become a popular paperless payment alternative to direct deposit over the past few years, with numerous companies including Walmart, Home Depot, Lowes, UPS, and FedEx making at least some use of similar programs.

In the lawsuit, the employee alleges that as a practical matter, the payroll debit card program reduces an employee’s pay because there are numerous, often unavoidable fees preventing an employee from obtaining cash off the cards for free. For example, the employee alleges that there was a $1.50 minimum charge for an ATM withdrawal, a $5 fee for an over-the-counter cash withdrawal, $1 fee to check the balance, a 75-cent fee per online bill payment, and $15 fee to replace a lost or stolen card.

The Pennsylvania Department of Labor and Industry is also currently investigating the matter. If the lawsuit gains any traction, franchises that use or are considering moving to a payroll debit card program may need to consider (re)structuring their payroll debit card programs to reduce or eliminate fees to obtain cash from the card.

Read more about the suit online on the following websites: USA Today, Citizens Voice, or New York Daily News.

The bill that would have modified liquor franchise law in Missouri never made it out of the legislature. The bill, which we have followed in a number of blog posts, was passed in the House in the form of Senate Bill 114, but was never voted on in the Senate before the Missouri legislative session ended this month.

The Second Circuit held that two trial franchisees properly asserted an action under the PMPA when their franchisor failed to comply with the notice provisions under the Petroleum Marketing Practices Act (“PMPA”) prior to terminating their franchises.

The two franchisees operated five motor fuel stations in New York. Their franchisor, an ExxonMobil distributor, terminated their trial franchises without any notice. Plaintiff obtained summary judgment in their favor, and after an evidentiary hearing, was awarded damages.

Rejecting the franchisor’s claim that the notice provisions in the PMPA did not permit a right of action, the Second Circuit affirmed and concluded that the PMPA provides a right of action when a franchisor fails to provide the required notice for termination of a trial franchise because the termination provisions of the PMPA, including the notice requirements, apply to trial franchises. The Second Circuit noted that this protects a trial franchisee from arbitrary or sudden termination during its trial period.

The Second Circuit also upheld the award of compensatory damages, punitive damages, attorneys’ fees and costs, and interest to the franchisees. The case is Jimico Enterprises, Inc. v. Lehigh Gas Corporation (Feb. 20, 2013).

For assistance with issues related to the Petroleum Marketing Practices Act, contact the Franchising & Distribution Group.

This week the Missouri House passed the proposed legislation that would modify the definition of a liquor franchise under Missouri law. Click here to read our previous posts on this potential modification to Missouri franchise law.

The bill that was passed this week by the House was not the existing bill pending (HB 759), but instead provisions were incorporated into another bill pertaining to home brewed liquors (SB 114). The amended SB 114 that was passed by the House would modify current Missouri franchise law to remove the trademark and community of interest in the marketing of goods or services requirements as to liquor wholesalers and suppliers, and expressly reject the holding in Missouri Beverage Co., Inc. v. Shelton Brothers, Inc. by the United States District Court for the Western District and the Eighth Circuit Court of Appeals and note that the law “was not correctly interpreted” in that case.

Last year, a related bill was passed to make these changes, but was vetoed by the Governor.

SB 114 (with amendments) is now pending in the Missouri Senate.

The Missouri legislature is again considering modifying the definition of a “franchise” under Missouri law. Specifically, with regard to alcohol wholesalers and suppliers, the modification would eliminate the requirement of a trade name, trademark, or service mark and a community of interest to be a franchise under Missouri law. The current bills follow the same attempt to amend Missouri law in 2012. The bills are Missouri Senate Bill 365 and Missouri House Bill 759.

For more information about the proposed bills, contact a member of Greensfelder’s Franchise & Distribution Group.