On Dec. 5, 2018, a putative class action lawsuit was filed in federal court in the U.S. District Court for the Southern District of New York known as Jeffrey B. Reifman et al. v. Canary Connect Inc., Case No. 1:18-cv-11365-PGG. The central allegation against Canary is that it wrongfully duped customers into purchasing its products and services without disclosing additional charges for select features, for which Canary now charges customers $9.99 per month.
Specifically, the six plaintiffs allege that, around Oct. 3, 2017, Canary unilaterally removed or altered the following key features from what was initially included in the purchase price of their home security systems:
- Removed the ability to view full-length videos of motion detected activities captured by the system;
- Removed the ability to receive alerts of motion-detected activities when users are at home during the day-time with the system disarmed;
- Changed video retention of intrusions from unlimited to 10 seconds and finally to 30 seconds;
- Removed the ability to download recordings;
- Removed access to any videos older than 24 hours;
- Removed the ability to receive alerts of motion-detected activities when users are at home and asleep, based on their customized sleep; and
- Removed the ability to access previously stored content.
The plaintiffs claim that the removal of these features “drastically altered the efficacy of the [system] as a home security device.” Further, the plaintiffs allege that, if Canary had fully disclosed the cost of its service and not engaged in purportedly deceptive advertising, these customers, and others similarly situated to them, would not have purchased the products marketed by Canary or would not have paid as much for them.
The lawsuit is characterized as a “consumer protection class action” intended to seek redress on their behalf (and for consumers at large) under the common law and a series of state consumer protection statutes. Among the 12 claims cited in the lawsuit are: Breach of implied contract; breach of implied warranty of merchantability; along with violations of consumer protection-type laws in Washington, Oregon, California, Pennsylvania, Ohio and Illinois.
Why This May Never See a Courtroom
A 40-page, 12-count complaint may seem imposing, and it is. The lawsuit should be taken seriously; at the same time, Canary may have a perfectly reasonable defense. This case is in its early stages, and Canary has not yet answered the complaint. If and when it does, more will be known about its defense strategy.
In litigation, sometimes the merits are secondary – meaning the other factors, such as cost, risk inconvenience, adverse publicity, etc. – motivate the resolution of the case. Here, the merits may never be adjudicated – for the following reasons:
1. Class actions are feared by corporate America. Defending class actions can be costly, and the risk of an adverse judgment can be even more costly. Some companies choose to settle these types of claims as quickly as possible – even where the company has no liability. I offer no insight into whether Canary will or should do so here.
2. A class of six plaintiffs is not significant; however, the six plaintiffs here are merely the lead plaintiffs if class certification is achieved (which is not assured because it must be approved by the court). The class could grow to include all the customers who purchased security systems from Canary within the claim period. While each plaintiff may have a relatively low-value claim, the prospect of a cumulative claim – through a certified class – presents great risk to Canary. Here, the number of similarly situated customers could be quite large. Accordingly, the possible damages could also be large.
3. A successful class action can sometimes lead to the payment of attorneys’ fees; in fact, in some cases, the attorneys’ fees can far exceed the actual recovery to the class. That may be true here – depending on the size of the class and the length of the litigation.
4. Another potentially problematic aspect of this case for Canary is the plaintiffs’ assertion of claims under state consumer protection laws. It is very common in the security industry and other industries to see such claims. Indeed, I have defended these claims in over a dozen states. These statutes are highly favored by plaintiffs’ lawyers because they typically allow for the recovery of attorneys’ fees and the possibility of treble damages – while allow a judge to triple the amount of the actual/compensatory damages to be awarded to a prevailing plaintiff. The risk of an adverse judgment under such a statute makes a corporate defendant far more pliable for settlement – especially as the case proceeds to trial.
5. The state consumer protection claims are potentially concerning for another reason. Genuine violations of such laws can sometime catch the attention of state regulators, such as a state Attorney General. If a state Attorney General takes note of these claims, and pursues an independent civil or criminal complaint against the company, that enhances the leverage of the private plaintiffs and adds to the pressure on the company. Again, I know of no basis for state regulators to take action here – as Canary’s business practices may be perfectly legitimate.
6. Finally, a company like Canary has to worry about the impact that this lawsuit will have on its sales and business. A long and public dispute with customers is not a welcome experience for any company – particularly when deceptive business practices are alleged.
Unfortunately, deceptive sales tactics and consumer fraud are not new issues for security service providers. Case in point: In January of 2018, Vivint paid ADT $10 million to settle a lawsuit which accused the company of engaging in deceptive sales practices to mislead ADT customers into signing long-term contracts (Read the details at www.securityinfowatch.com/12389421).
As you run your company and reflect on your risk, it is wise to confer carefully with legal counsel ahead of time – to protect against, or at least reduce the risk that any of your sales or business practices could be alleged to be fraudulent or deceptive in any way.
Regular attention to these issues – in close coordination with a capable attorney – could save you from the time, expense and aggravation now being imposed on Canary.
Timothy J. Pastore, Esq., is a Partner in the New York office of Montgomery McCracken Walker & Rhoads LLP (www.mmwr.com), where he is Vice-Chair of the Litigation Department. Before entering private practice, Mr. Pastore was an officer and Judge Advocate General (JAG) in the U.S. Air Force and a Special Assistant U.S. Attorney with the U.S. Department of Justice. Reach him at (212) 551-7707 or by e-mail at [email protected].