LEGAL NEWSLINE

SAN FRANCISCO (Legal Newsline) - The U.S. Court of Appeals for the Ninth Circuit has ruled that Redbox did not break California's Song-Beverly Credit Card Act of 1971 in a class action against the DVD rental company that was first filed in 2011.

John Sinibaldi and Nicolle Disimone claimed Redbox violated the Song-Beverly Credit Card Act of 1971 by imposing the requirement of providing their ZIP codes when renting DVDs, blu-rays or video games from its self-service kiosks.

However, the appeals court ruled that Redbox did not break the consumer data protection law when it required its customers to provide their ZIP codes, according to the June 6 opinion.

Circuit judges Alex Kozinski and Richard R. Clifton voted in the majority, with Clifton authoring the opinion.

Circuit Judge Stephen Reinhardt authored a dissenting opinion.

"We hold that Redbox's collection of personal information in connection with a kiosk rental transaction falls outside the reach of... California's Song-Beverly Credit Card Act because the customer's credit card is used as a deposit to secure payment in the event of loss or late return," the opinion states. "Because the transaction is exempted... we affirm the dismissal of the action."

The California Supreme Court has not addressed the scope of that exception, the opinion says.

The lawsuit was first filed in 2011. It was dismissed in 2012 by District Judge Jacqueline H. Nguyen.

Sinibaldi and Disimone claimed Redbox violated the 1971 act because it was requesting customers' personal identification information prior to completion of the rental transaction.

The district court held that the act did not apply to Redbox's unmanned kiosk transactions because, in light of the potential for fraud in such transactions, "the legislature could not have meant for them to fall within the statutory privacy protection scheme," according to the opinion.

The plaintiffs appealed and challenged the district court's holding, contending that the law applies to Redbox kiosk transactions because they are in-person, card-present transactions that present less risk of fraud than online purchases.

"We decline to decide that question," the opinion states. "Instead, we affirm on an alternative ground: the statute's rental deposit exception."

"When a Redbox customer swipes a credit card at the time of rental, the customer promises to be responsible for additional charges that might be owed if the disc is returned late or not at all," the opinion states. "That promise is secured with the credit card. Redbox will use the credit card information already provided by the customer to charge the customer's credit card account for the balance owed."

In both literal and practical terms, the credit card serves as security, according to the opinion

"We conclude that Redbox's alleged conduct does not violate the Act," the opinion states. "The statute exempts certain transactions, including those where 'the credit card is being used as a deposit to secure payment in the event of default, loss, damage, or similar occurrence...' The Redbox transaction fits within that exception. We affirm the dismissal of the action."

In his dissenting opinion, Reinhardt wrote that this law was meant to protect consumer privacy by stopping retailers from collecting information they did not need for the rental transaction but could use to build mailing and phone lists.

Redbox was not using the credit card as a security deposit against loss or damage, but simply renting videos for a dollar a day and charging the customer whenever they were returned, according to the dissenting opinion.

"The California Legislature deemed that unless such information, which includes addresses, phone numbers and ZIP codes, was necessary to complete the transaction, there was no legitimate purpose to its acquisition," the dissenting opinion states.

A ZIP code is protected personal information because it is "both unnecessary to the transaction and can be used, together with the cardholder's name, to locate his or her full address," according to the dissenting opinion.

"Plaintiffs have pleaded that Redbox uses the ZIP codes it collects not for fraud prevention, but for marketing purposes, precisely the type of conduct the Act was intended to prevent," the dissenting opinion states.

The majority's error stems from its mischaracterization of the Redbox transaction as a one-day rental followed by a series of penalties imposed if the customer fails to return the DVD after a single day, according to the dissenting opinion.

"Instead, the Redbox customer is agreeing to rent the DVD at a fixed daily fee with a maximum total charge of $25.00 for 25 days of rental," the dissenting opinion states. "The maximum charge also constitutes the purchase price, and when the customer has paid that amount he has acquired ownership of the DVD. The customer thus authorizes Redbox to use his credit card for future payments that are wholly different from 'default, loss, [or] damage.'"

To say, as the majority does, that after the initial charge to the credit card, every additional charge, no matter its nature, is a charge for "default, loss, damage, or similar occurrence" is to stretch the exception well beyond its plain language and legislative intent, according to the dissenting opinion.

"This exception cannot be the basis for dismissing the action because plaintiffs pleaded that Redbox's sole purpose in obtaining the ZIP code is marketing, rendering the purpose unrelated to the credit card transaction," the dissenting opinion states. "I would reverse. Accordingly, I dissent."

U.S. Court of Appeals for the Ninth Circuit case number: 12-55234

From Legal Newsline: Kyla Asbury can be reached at classactions@legalnewsline.com.