General Publications June 16, 2020

“Retailers Should Look Out for Refund Claims after COVID-19,” Law360, June 16, 2020.

Extracted from Law360

The COVID-19 pandemic, perhaps unsurprisingly, brought a spate of class actions along with it. Insurance companies have borne the brunt of the lawsuits, many of which focus on business interruption coverage and the forced closing of businesses during the pandemic.

Schools have also seen an uptick in class actions, with putative class members seeking tuition refunds after classes were canceled. And membership-based businesses like gyms and ski resorts have been sued for refunds for services not rendered.

Retailers have not been immune to COVID-19 cases. In recent weeks, businesses like Target Corp., Kroger Co. and Walgreens Co. have been hit with class actions arguing that the companies misrepresented the efficacy of their own branded hand sanitizers. The suit against Target was voluntarily dismissed and it remains to be seen whether these other cases will have legs.

For the most part, however, retail businesses have been spared from COVID-19 class actions, particularly from lawsuits concerning return policies and rewards programs like those that have grabbed legal headlines over the past few months. Why?

First, a lot of those claims have been slow to ripen. With various lockdowns across the country, the opportunity for in-store returns had not presented itself for many consumers. Moreover, there are some fundamental legal hurdles for plaintiffs to overcome in bringing these claims, both on the merits of the claims themselves and in meeting the Federal Rules of Civil Procedure, Rule 23 qualifications for a class action.

The primary litigation involving refund-related issues in the retail space before COVID-19 involved L.L. Bean Inc. In February 2018, L.L. Bean changed its return policy from a lifetime no-questions-asked satisfaction guarantee to a guarantee that was valid only for products returned with a receipt after one year.

Disgruntled purchasers of heavily worn slippers and flannel shirts flocked in droves to sue L.L. Bean across the country and brought a variety of claims centered around the idea that L.L. Bean's new policy denied consumers a promised benefit of their purchase.

Yet almost all the consumers' claims were denied at the outset, with courts finding that L.L. Bean provided adequate notice of the changed policy to its customers and that the new policy it sought to enforce was a valid one — an inability to return a product because of a consumer's excessive wear and tear does not constitute a breach of the retailer's duty of good faith and fair dealing.

Many consumers also could not prove that they had actually tried to return their products and been refused a refund before suing.

What might claims concerning product returns after COVID-19 look like? The most obvious claim is for breach of contract for failure to honor a return policy. If a company has changed its return policy since the purchase, either as a result of the COVID-19 crisis or for some other reason, a consumer may seek to enforce the old policy, claiming it to be a material term of the purchase.

The claim could have multiple goals: to force acceptance of the return or, if the return is denied, to recoup a portion of the purchase price that the consumer attributes to the value of the return option. The claim could also be focused on impossibility.

If the return policy contained a time limitation that fell during a lockdown period or while a store was closed, or if the policy required an in-store return, the consumer may seek to enforce the return option.

Similarly, a consumer may seek to assert a breach of warranty claim concerning the return policy. And if the return policy does not create a contract, but it is openly advertised, enterprising plaintiffs may allege that a failure to comply with the policy constitutes a deceptive trade practice.

Finally, the most direct parallel that can be drawn with the COVID-19 class actions that have already been filed are those seeking a refund for buy-in membership or rewards clubs. The theory behind these claims is that the consumers paid for a service or event that was canceled and are entitled to get their money back.

So what can retailers do to either head off these claims or defeat them after they have been brought? A lot of that depends on the legal status of the return policies. Does the return policy constitute a contract, warranty or part of the contract when the consumer purchased the product? Put another way, is the retailer legally required to provide refunds or honor a previous refund policy?

Assuming that the lawsuit is filed, what does a defense look like? One point in the retailer's favor is that the case law in returns lawsuits has been relatively defense friendly.

In the L.L. Bean litigation, the plaintiffs brought a variety of claims, almost all of which were rejected at the motion to dismiss stage. Courts have also found some return policies to be permissive policies that did not create any obligations on behalf of the retailers. So there is good law on the merits when these claims are asserted.

These sorts of disputes also lend themselves to good arguments for retailers under Rule 23 at the class certification stage. If a warranty claim is based on a written or spoken claim made by the retailer, there are individual questions of exposure and reliance, not to mention the different ways that the various states' laws treat these requirements.

If the theory of recovery is a benefit of the bargain theory — that the customer contributed a certain portion of the purchase price for a return policy that is arguably not being honored — conjoint analysis from a damages expert may defeat class certification. And retailers may be able to defeat class certification by arguing that class members who did not actually try to return their items lack standing to participate in the lawsuit.

Finally, there are ways to potentially avoid these suits in the first place. One option is to offer alternative methods for returns, such as allowing return by mail or extending the deadline in the policy for purchases before a certain date.

Another weapon at the disposal of retailers is an applicable arbitration provision and class action waiver. The law remains quite good for defendants seeking to enforce arbitration provisions, particularly concerning the scope of arbitrable disputes. The issue of arbitration and class action waivers may also eliminate a portion of a class or render the class uncertifiable.

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