Cline v. Touchtunes Music Corp.

• Decision Date: 29 September 2016
• Docket Number: 14 Civ. 4744 (LAK)
• Citation: 211 F.Supp.3d 628
• Parties: Michelle CLINE and Kelly Engstrom, individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. TOUCHTUNES MUSIC CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

211 F.Supp.3d 628

Michelle CLINE and Kelly Engstrom, individually and on Behalf of All Others Similarly Situated, Plaintiffs,

v.TOUCHTUNES MUSIC CORPORATION, Defendant.

14 Civ. 4744 (LAK)

United States District Court, S.D. New York.

Signed September 29, 2016

Jeffrey Michael Norton, Newman Ferrara LLP, Attorney for Plaintiff.

Jamie A. Levitt, Cameron Andrew Tepfer, Morrison & Foerster, LLP, Attorneys for Defendant.

MEMORANDUM OPINION

Lewis A. Kaplan, District Judge.

This matter is before the Court on defendant TouchTunes' Motion to Dismiss the Second Amended Class Action Complaint.¹ The Court assumes familiarity with the allegations of the complaint, which are laid out in brief in the Memorandum and Order issued by this Court on January 7, 2015.²

Discussion

I. Claims Under New York General Business Law

A. Whether Out of State Transactions May Ground a Claim Under New York GBL.

New York General Business Law ("GBL") Section 349 makes unlawful "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state. " (emphasis added). GBL Section 350 makes unlawful "[f]alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state. " (emphasis added). TouchTunes contends that neither named plaintiff has stated a sufficient claim under Section 349 or 350, pointing out that neither resides in New York nor alleges that she accessed TouchTunes' services or used a TouchTunes jukebox in New York.

In Goshen v. Mutual Life Insurance Company of New York,³ the New York Court of Appeals faced the question of whether " ‘hatching a scheme’ or originating a marketing campaign in New York in and of itself [could] constitute an actionable deceptive act or practice under the statute, or [whether] the statute also require[d] that the consumer be deceived in New York."⁴ The court held that "the transaction in which the consumer is deceived must occur in New York" in order to make out a claim under the GBL.⁵ This, the court reasoned, followed directly from the fact that the phrase "in this state" in Section 349 could modify only "the conduct of any business, trade or commerce [or] the furnishing of any service."⁶ The court cautioned also that "[t]o apply the statute to out-of-state transactions in the case before us would lead to an unwarranted expansive reading of the statute ... and potentially leading to the nationwide, if not global application of ... § 349."⁷ But the court's analysis did "not turn on the residency of the parties" because the statute neither was intended to police out-of-state transactions by New York companies nor to bar out-of-state plaintiffs with claims based on New York transactions.⁸ Applying this logic, it held that Florida plaintiffs who bought through a Florida insurance agent and paid premiums in Florida on "vanishing premium" insurance policies could not sue under Section 349 because "any deception took place in Florida."⁹ On the other hand, however, the Court of Appeals sustained the sufficiency of similar Section 349 claims brought by plaintiffs who purchased their policies in New York.¹⁰

In Cruz v. FXDirectDealer, LLC,¹¹ the Second Circuit stated that "two divergent lines of decisions have developed since Goshen regarding the proper territorial analysis," one based on where the deceptive conduct took place and the other based on where the transaction took place.¹² These two tests, it said, flowed from different ways in which the New York Court of Appeals phrased its holding within the Goshen opinion.¹³ The circuit noted that the two tests are "not mutually exclusive," but opted for the transaction-based test, highlighting Goshen 's"admonition that Section 349 was not ‘intended to function as a per se bar to out-of-state plaintiffs' claims of deceptive acts leading to transactions within that state.’ "¹⁴ Cruz found further support for this approach in its analysis of several post-Goshen cases. It wound

up by stating that, "[a]lthough it is a somewhat close call, our reading of Goshen and the cases construing it leads us to conclude that a deceptive transaction in New York falls within the territorial reach of section 349 and suffices to give an out-of-state victim who engaged in the transaction statutory standing to sue under section 349."¹⁵

Given that analysis, the Cruz court reversed the district court's dismissal of the plaintiff's claims, holding the allegations sufficient to survive at the pleading stage where the defendant foreign exchange dealer ("FXDD") allegedly: (1) was paid in New York, (2) would not disburse any funds from customer accounts until customers mailed a form to FXDD in New York, (3) required all customer communications be sent to its New York office, and (4) included in its account agreement a governing law and forum selection clause specifying New York as the governing law and requiring that "all suits relating to the Agreement ... be adjudicated in state or federal courts located in New York."¹⁶ Inasmuch as Cruz took full account of the latest analysis by New York's highest court of the territorial reach of GBL Sections 349 and 350, this Court will not depart from the Circuit's conclusion because there is no persuasive post-Cruz evidence that the New York Court of Appeals would disagree.¹⁷ But there remain the questions whether and to what extent Cruz's holding is indistinguishable from this case.

TouchTunes users fall into three broad categories. Some used the TouchTunes App which, the Court infers in the absence of any allegation to the contrary, authorized TouchTunes to charge a credit card as authorized by the App user. Some entered credit card information into a TouchTunes jukebox wherever they happened to be. And still others deposited cash into such a jukebox. If the test focused only on where the deceptive conduct took place, TouchTunes would be correct that the alleged deceptive conduct all took place outside of New York State (at least as to the named plaintiffs and class members who used TouchTunes jukeboxes outside of New York). But Cruz instructs that the location of the transaction also may support a claim, so the inquiry does not end there. In the cases of App and credit card users TouchTunes apparently "processes customer payments"¹⁸ in New York where it is based, as did the defendant FXDD in Cruz. Second, analogous to FXDD's requirement that a form be sent to its New York office for disbursement of funds, plaintiffs here allege that TouchTunes' music servers are in New York. So "while the services are accessed nationally and internationally, the physical units are [allegedly] merely portholes to the location of the primary business operation."¹⁹ Similar to the governing law and forum selection provisions in Cruz, the TouchTunes Terms of Use Agreement provides that "any dispute between [the user] and TouchTunes will be governed by the law of the State of New York" and that those disputes must be brought in New York state or federal courts.²⁰ And while there does not appear to be an exact analog to FXDD's requirement that all customer communications be sent to New York, it is a fair inference that the users' music selections are transmitted electronically to TouchTunes' New York servers. Hence, the Court will apply Cruz to claims based on use of the TouchTunes App and the purchase of credits at jukeboxes by use of credit cards.

The analysis is different with respect to cash users of the jukeboxes, a category that includes plaintiff Kelly Engstrom.²¹ To be sure, plaintiffs allege that TouchTunes sends employees to collect money from the physical jukeboxes.²² But they do not allege how or where these funds subsequently are processed. In any case, the connection between the cash user and New York would be more attenuated even if the cash then were mailed to New York (a supposition that seems highly unlikely) because the payment for services and collection of the cash take place where the jukeboxes are located, many not in New York.²³ This would leave the only connections between the cash transactions and New York as the governing law and forum selection provision, the location of TouchTunes' servers, and the electronic transmission of the users' music choices. This case therefore is distinguishable from Cruz with respect to the place of payment. So the question is whether this Court thinks it likely that the New York Court of Appeals, were it faced with this case, would apply Sections 349 and 350 to purchases outside the State of New York by cash users. In this Court's view, that answer is no.

Cruz itself recognized that the extent of the connection between an allegedly deceptive transaction and the State of New York that is required to come within GBL Sections 349 and 350, even on the somewhat stronger facts of Cruz , was a "close call." Moreover, Cruz at least is arguably in significant tension with Goshen, which specifically warned against an overly broad reading of the statute's territorial reach. As the Goshen court said:

"To apply the statute to out-of-state transactions in the case before us would lead to an unwarranted expansive reading of the statute, contrary to legislative intent, and potentially leading to the nationwide, if not global application of General Business Law § 349. Furthermore, the interpretation out-of-state plaintiffs would have us adopt would tread on the ability of other states to regulate their own markets and enforce their own consumer protection laws."²⁴

Yet we have here named plaintiffs who used TouchTunes products in Montana and North Dakota and who allegedly were deceived by misrepresentations or omissions they encountered solely within those states. We are left further with a putative class of potentially nationwide, if not global, reach. And we have New York's consumer protection laws said to regulate these commercial transactions in far-flung states and nations where the connections between the alleged deception and New...