Bmg Direct Marketing, Inc. v. Peake

• Decision Date: 18 November 2005
• Docket Number: No. 03-0547.,03-0547.
• Citation: 178 S.W.3d 763
• Parties: BMG DIRECT MARKETING, INC., Petitioner, v. Patrick PEAKE, Individually and as Representative of Others Similarly Situated, Respondent.
• Court: Texas Supreme Court

178 S.W.3d 763

BMG DIRECT MARKETING, INC., Petitioner, v. Patrick PEAKE, Individually and as Representative of Others Similarly Situated, Respondent.

No. 03-0547.

Supreme Court of Texas.

Argued February 18, 2004.

Decided November 18, 2005.

COPYRIGHT MATERIAL OMITTED

Lynne Liberato, Patricia L. Casey, Alene Ross Levy, Mark Ryan Trachtenberg, Haynes and Boone, L.L.P., Houston, Steven M. Hayes, and Gregory A. Clarick, Parcher Hayes & Snyder, P.C., New York, NY, for Petitioner.

Christopher A. Kesler, and Bruce B. Kemp, Kemp & Kesler, L.L.P., Houston, Timothy W. Ferguson, Ferguson Firm, Beaumont, for Respondent.

Justice O'NEILL delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice HECHT, Justice BRISTER, Justice MEDINA, Justice GREEN, Justice JOHNSON, and Justice WILLETT joined.

In this class-action case, the trial court certified a class of music club members who paid allegedly illegal late fees for failing to timely pay for compact discs in accordance with the terms of a membership agreement. The parties dispute whether the customers' claims are subject to the voluntary-payment rule, which has sometimes been successfully invoked to bar restitution of money that has been voluntarily paid with full knowledge of all the facts and without fraud, deception, duress, or coercion. Although the voluntary-payment rule's application has been largely supplanted by the creation of legal and statutory remedies, we conclude that the rule applies to the customers' claims for restitution of late fees in this case. Because the trial court failed to analyze the rule's effect on the requirements for class certification and how the claims in this case would be tried, we decertify the class and remand the case to the trial court for proceedings consistent with this opinion.

I. Background

BMG Direct Marketing operates music clubs that sell compact discs to club members, principally through direct mail and online services. Membership in a BMG club begins with one of a variety of special promotions, typically "11 CDs for the price of one" or "12 CDs for the price of one." BMG assesses a late fee of $1.50 if club members do not pay for the compact discs within thirty days. All BMG promotions include a statement that late fees will apply to past-due BMG invoices. Each customer's initial shipment of compact discs includes a Membership Guide which provides: "Payment is due when you receive your shipment. Late charges will be added to your account for amounts unpaid after 30 days." In addition, each BMG shipment, including the initial one, contains an invoice which specifies: "If payment is not made within 30 days, a late charge of $1.50 will be added to your account (not a finance charge)."¹ Customers are given ten days to decline membership for any reason and may return the compact discs at BMG's expense with no further obligation.

Named plaintiff Patrick Peake was a BMG club member who bought dozens of compact discs from the company from 1999 to 2002. During this period he incurred and paid to BMG late fees totaling $7.35. In 2002, Peake sued BMG to recover the late fees he had paid, claiming they constituted an illegal penalty because the fee charged did not reasonably forecast BMG's actual damages resulting from customers' late payments.

Peake moved to certify a class consisting of all present and former BMG club members in Texas who had paid BMG late fees since May 16, 1998. BMG opposed the motion, arguing that the voluntary-payment rule applied to each potential class member's claims and precluded a finding that common issues would predominate. The trial court certified the class, noting that it was "unlikely" the voluntary-payment rule would apply in this case because the rule is equitable and "need not be applied where the rationale for its existence does not exist." The trial court further held that, even if the voluntary-payment rule did apply, the "issue is not individual and may be determined as another common issue on a class wide basis." A divided court of appeals affirmed without deciding whether or not the rule applied, holding that in either event the class members' lack of full knowledge based upon BMG's failure to disclose all material facts in the agreement would be a question common to the entire class. 175 S.W.3d 267, 269. We granted BMG's petition to consider the voluntary-payment rule's application to this case.

II. Liquidated Damages

Peake claims that BMG's late fees constitute an unlawful penalty. In Texas, we distinguish a permissible liquidated damages clause from an unenforceable penalty. Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex.1991). For such a clause to be enforceable, the fee charged must be a reasonable estimate of damages, and those damages must be incapable of precise calculation. Id. Companies enter into late-fee agreements with their customers because the precise damages that will result from their customers' untimely payments is generally difficult if not impossible to ascertain. See 24 Samuel Williston & Richard A. Lord, Williston on Contracts § 65:1, at 229 (4th ed.2002) (observing that a "liquidated damages clause is designed to substitute a sum agreed upon by the parties for any actual damages suffered as a result of a breach"); see also Phillips, 820 S.W.2d at 788 ("[T]o be enforceable as liquidated damages the damages must be uncertain...."). In this way, parties allocate the risk of uncertainty over the actual loss that will be realized if a customer's payment is not timely. By entering into these contractual arrangements, "the need for the nonbreaching party to prove actual damages" is obviated. Williston & Lord, supra, § 65:1, at 230 (quoting Bair v. Axiom Design, L.L.C., 20 P.3d 388 (Utah 2001)). The agreed upon late fee thus quantifies a level of uncertainty — that both parties recognize — and allocates the risk of that uncertainty between the contracting parties.

The uncertainty inherent in calculating damages attributable to customers' untimely payments is aptly demonstrated in the case law through the varied testimony of battling experts.² Allowing parties to contractually allocate this risk of uncertainty carries out Texas's public policy strongly favoring the freedom of parties to contract. See, e.g., In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129 (Tex.2004) ("As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy."); Wood Motor Co. v. Nebel, 150 Tex. 86, 238 S.W.2d 181, 185 (1951). As we have said:

[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider — that you are not lightly to interfere with this freedom of contract.

Wood Motor Co., 238 S.W.2d at 185 (quoting Printing & Numerical Registering Co. v. Sampson, 19 L.R.Eq. 462, 465 (1875)).

Although parties may contractually allocate the risk of uncertainty over the amount of damages that will be incurred in the event of untimely payment, liquidated damages still must be a reasonable estimate of damages in order to be enforceable. In this case, Peake paid BMG's late fees without protest and only later asserted that they were unenforceable; under these circumstances, BMG contends, Peake's claims (and those of the class) are subject to the voluntary-payment defense. Before addressing this argument, we examine the voluntary-payment doctrine's underpinnings and its development in our jurisprudence.

III. History of the Voluntary-Payment Rule

More than fifty years ago, we stated the common-law voluntary-payment rule as follows: "`[M]oney voluntarily paid on a claim of right, with full knowledge of all the facts, in the absence of fraud, deception, duress, or compulsion, cannot be recovered back merely because the party at the time of payment was ignorant of or mistook the law as to his liability.'" Pennell v. United Ins. Co., 150 Tex. 541, 243 S.W.2d 572, 576 (1951) (quoting 40 Am.Jur. § 205 (1942)). The rule is a defense to claims asserting unjust enrichment; that is, when a plaintiff sues for restitution claiming a payment constitutes unjust enrichment, a defendant may respond with the voluntary-payment rule as a defense. See Randazzo v. Harris Bank Palatine, N.A., 262 F.3d 663, 670 (7th Cir.2001) (noting that exceptions to the voluntary-payment rule are designed "to foster the restitutionary principles that have long stood in tension with the voluntary payment rule"); Restatement (Third) of Restitution & Unjust Enrichment § 6 cmt. e (Tentative Draft No. 1, 2001) ("The restitution claim to recover a payment in excess of an underlying liability ... meets an important limitation in the so-called voluntary-payment rule."); see, e.g., Brown v. Oaklawn Bank, 718 S.W.2d 678, 681 (Tex.1986) (affirming restitution and rejecting voluntary-payment defense as payee had not detrimentally relied on payment).

This Court recognized the rule as early as 1880 in Ladd v. Southern Cotton Press and Manufacturing Co., 53 Tex. 172 (1880). In that case, Ladd, a cotton buyer, sued to recover money he paid to Southern Cotton Press, claiming that the payments were made involuntarily, under duress, and without consideration. Ladd, 53 Tex. at 173-74. Ladd alleged duress arising from the defendant's unlawful combination with others to charge an amount greater than the services rendered were reasonably worth or that, in some instances, were not even performed. We rejected Ladd's assertion of duress, noting that the defendant's business was "open to all who wished to engage in it" and that "any one engaging in it may prescribe the terms upon which he will transact it. All parties employing his services, knowing his terms, would be...