On October 20, 2009, the Ninth Circuit issued an order denying the petition of 24 Hour Fitness to appeal the district court’s order granting class certification in Friedman v. 24 Hour Fitness USA, Inc., 2009 U.S. Dist. LEXIS 81975 (C.D. Cal., Aug. 25, 2009). (The district court's certification order may be found here). In Friedman, plaintiffs are alleging that 24 Hour Fitness violated RICO when it fraudulently represented to payment processors that it had member authorization to withdraw membership dues using Electronic Funds Transfer (EFT) in instances where members had previously cancelled their membership.
As reflected in the district court’s certification order, common issues were deemed to predominate on the RICO claim because “the predicate fraud for the RICO claim here turns on Defendant's warranties to the payment processors and the payment processors' reliance on those warranties, not on Defendant's representations to the individual consumers.” See Friedman, 2009 U.S. Dist. LEXIS 81975, at 25. As reasoned by the court, “[t]his situation falls within … ‘a narrow exception to the requirement that the plaintiff prove direct reliance on the defendant's fraudulent predicate act’ … that ‘comes into play when the plaintiff can demonstrate injury as a direct and contemporaneous result of fraud committed against a third party.’” See id. Based on this principle, the court concluded that “there is no need for each class member to prove his own direct reliance on these misrepresentations in order for his injury to have been directly caused by the alleged misrepresentation to the payment processors.” See id.
This principle is an important one to remember, as many modern fraudulent schemes are currently being predicated upon this very fact pattern. An example would include cellular phone cramming, a practice wherein a company submits fraudulent billing to third party cellular phone providers, who in turn impose charges on a consumer’s cellular phone bill to collect monthly fees for services (such as ringtones, games, and joke-lines) which the consumer has not provided authorization or consent. Some courts have deemed this fact pattern to reside outside the reach of state consumer protection statutes due to the fact the consumer lacks the requisit element of reliance on the fraudulent activity that caused the resulting damage.