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From Banking and Finance Law Daily, September 12, 2013

ATM users class certified for EFTA suit despite low damages and difficulty of notifying members

By J. Preston Carter, J.D., LL.M.

Reversing a lower court’s class decertification ruling, the U.S. Court of Appeals for the Seventh Circuit held that a class of ATM users may be certified to seek statutory damages under the Electronic Fund Transfer Act (EFTA) for a company’s failure to post stickers notifying users of ATM fees despite the low amount of damages that could be awarded and the difficulty of notifying class members (Hughes v. Kore of Indiana Enterprise, Inc., Sept. 10, 2013, Posner, Circuit Judge).

Background. The suit charged that Kore of Indiana Enterprise, which owned ATMs in two bars in Indianapolis and “said to be popular with college students,” failed to post a notice on the ATMs that Kore charges a fee for their use. This omission would violate a provision of the EFTA (15 U.S.C. §1693(d)(3) and Regulation E (12 C.F.R. §105,16(c)). At the time of the alleged violations, the EFTA required two fee notices: a sticker notice on the ATM and an onscreen notification during transactions. Kore was alleged to have failed to provide the sticker notice. The decision noted that the EFTA has since been amended to remove the requirement of the sticker notice.

The maximum amount of damages in a class action for violation of this law is $500,000 or 1 percent of the defendant’s net worth. The parties stipulated that the limit to damages would be $10,000—1 percent of Kore’s net worth. The stipulation further stated that there were more than 2,800 transactions involving the two ATMs during the period covered by the suit. The damage award for violation of this provision in an individual suit is a minimum of $100.

Lower court decertification. The federal district judge, who had first certified the class, decertified it on two grounds. First, the class members would do better bringing individual suits. An individual plaintiff would be entitled to at least $100 while a class member might receive $3.57 per transaction ($10,000 divided by 2,800 transactions). Second, the requirement of notice to class members could not be satisfied. Since the ATMs were in college bars, obtaining the identity of all the users might require subpoenaing hundreds of banks.

Individual suits. The appellate court stated that the alternative to a class action, in which individual lawsuits, “most or even all of which would be seeking damages of only $100,” would not be realistic. “There is no indication that many people, or indeed any people, have filed individual claims under the provision of the Electronic Funds Transfer Act that requires a sticker on an ATM warning that there is a fee for using it.”

The court said that, since distribution of damages to the class members would provide no meaningful relief, the best solution may be a “cy pres” decree, which would award to charity the money that would otherwise go to class members if distribution to the members is infeasible. “A foundation that receives $10,000 can use the money to do something to minimize violations of the Electronic Funds Transfer Act; as a practical matter, class members each given $3.57 cannot.” Notice to class members. According to the appellate court, notice by publication would be sufficient in this situation to satisfy the Rule 23 requirement that class actions require the “best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.” The court said that, when reasonable effort does not suffice, publication may be substituted and that the notice proposed by class counsel—sticker notices on the ATMs publication of a notice in the principal Indianapolis newspaper and on a website—is adequate.

Deterrent value of class actions. According to the court, “A deeper question is whether a class action should be permitted when the stakes, both individual and aggregate, in a class action are so small—so likely to be swamped by the expense of litigation—as they are in this case.” A class action, the opinion continued, has a deterrent as well as compensatory objective. Even though, in the current case, the compensation is insignificant, the damages and attorney’s fee awarded should the class prevail would, in the court’s opinion, make the suit a wake-up call for Kore and, therefore, have a deterrent effect on future EFTA violations by Kore and others.

The case is No. 13-8018.

Companies: Kore of Indiana Enterprise, Inc.

Attorneys: Eric G. Calhoun (Travis Calhoun & Conlon) for petitioner David Hughes. Thomas E. Rosta (Metzger Rosta) for respondent Kore of Indiana Enterprise, Inc.

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