Contract Suit:Trans Union v. One2One

David A. Szwak

Contract Suit:Trans Union v. One2One

Postby David A. Szwak » Sun Nov 06, 2005 7:07 pm

Not Reported in Cal.Rptr.3d, 2005 WL 2845552 (Cal.App. 4 Dist.)
(Cal. Rules of Court, Rules 976, 977)
Only the Westlaw citation is currently available.

Court of Appeal, Fourth District, Division 3, California.
TRANS UNION, Plaintiff and Respondent,
ONE2ONE, INC., Defendant and Appellant.
No. G034485.
(Super.Ct.No. 03CC06701).
Oct. 31, 2005.

Appeal from a judgment of the Superior Court of Orange County, Richard O. Frazee, Judge. Affirmed.
Daniel H. McLinden for Defendant and Appellant.
Crowell & Moring, Donald E. Bradley and Jeremy A. Rhyne for Plaintiff and Respondent.


*1 This appeal arises out of a dispute between plaintiff, a major consumer credit reporting agency, and defendant, which contracted to purchase millions of prescreened consumer names to offer pre-approved credit via direct mail. Defendant appeals from a judgment following a bench trial for more than $1.2 million in contract damages and fees.
Defendant promised to pay for a guaranteed minimum of 25 million names, at varying rates, depending upon whether or not the names were used. Plaintiff promised to refresh the database "as requested by [defendant], a maximum of four times from October 1, 2000 through September 30, 2001."
The appeal hinges upon the interpretation of this "as requested by" language. Defendant argues it requires plaintiff to supply databases four times a year, regardless of any request, and that defendant is excused from payment because plaintiff did not automatically supply quarterly feeds. Plaintiff responds that the provision instead obligates database feeds upon defendant's request, up to a maximum of four times during the year in question. Plaintiff says that it complied with each of defendant's requests.
The substantial evidence rule requires us to agree with plaintiff. The evidence supports the trial court's determination that plaintiff did what the contract required it to do (to process databases when requested), and should have been paid. We decline to reweigh the evidence simply because defendant, in hindsight, does not think it got a good deal.
Equally unavailing are defendant's other grounds for appeal. Defendant runs afoul of the substantial evidence rule in contending that plaintiff materially breached the contract as a matter of law by failing to give one-day access to freshly updated names. There was conflicting evidence on plaintiff's compliance with the contractual requirement for online batches. And defendant provides us no basis in the record to conclude that the one-year contractual limitation in the contract is unenforceable under applicable state law (here Illinois) in a negotiated contract between two represented entities.

We view the evidence in the light most favorable to the judgment, giving plaintiff, as the prevailing party, every reasonable inference and resolving all conflicts in support of the court's finding. (Orange County Employees Assn. v. County of Orange (1988) 205 Cal.App.3d 1289, 1293.) "Where the court issues a statement of decision, it need only recite ultimate facts supporting the judgment being entered. [Citation.] If the judgment is supported by factual findings based on substantial evidence, the reviewing court affirms. [Citation.] Conflict in the evidence is of no consequence." (People v. Orange County Charitable Services (1999) 73 Cal.App.4th 1054, 1071; see also Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874.)

Plaintiff (TransUnion) is one of the country's three leading credit reporting agencies, with updated consumer information on some 200 million Americans. It provides credit reports to potential lenders, insurers, car dealers and others to evaluate creditworthiness.
*2 To avoid fraud, protect privacy and prevent identity theft, the Fair Credit Reporting Act (F.C.R.A.), (15 USC § 1681 et seq.) limits who can access consumer credit reports. (Cisneros v. U.D. Registry, Inc. (1995) 39 Cal.App.4th 548, 559.) Unless authorized by a consumer, for example, credit reporting agencies can only deliver prescreened lists of consumer names to credit grantors who are committed to make firm offers of credit. (15 U.S.C. § 1681b(c)(1).) "You can't get a prescreen report unless you commit to use it; to make a pre-approved offer." Other forms of mass marketing are not permitted. [FN1]

FN1. The Federal Trade Commission (FTC) has allowed the limited sale
of prescreened consumer reports for guaranteed credit offers because "being singled out for a firm offer of credit is exactly the sort of thing the Act seeks to promote...." (Trans Union Corp. v. F .T.C. (D.C.Cir.1996) 81 F.3d 228, 234.) Denise Norgle, TransUnion's vice president, explained this rationale: "[A]n extension of a firm offer of credit was a real valid benefit to consumers, whereas some kind of mail piece that said, 'Come in and shop at our store and maybe apply for our card if you want to,' was not a sufficient benefit to balance the privacy invasion of having consumers' credit information looked at."

Pursuant to a 1993 consent decree with the FTC, TransUnion is required to take reasonable steps to ensure that prescreen customers comply with the permissible purpose provisions. "We must have a contract certifying a firm offer of credit and take another step to verify a credit offer is being made." [FN2]

FN2. The 1993 consent decree arose out of an FTC investigation against all three main credit reporting agencies: TransUnion, Equifax and TRW (now Experian). "[T]he main obligation making sure there is a pre-approved credit offer is the same in all three."

To ensure compliance with the FCRA, TransUnion used processing agents, as middlemen, the theory being that TransUnion maintained control over such agents, and maintained control over what they did with the data. TransUnion would supply its prospect database to the processing agent, who would hold it while the end-users supplied objective criteria upon which to base the pre-approved credit decisions. The data would not be supplied directly to credit grantors unless and until TransUnion verified that it would be used for permissible purposes like pre-approved credit offers.

Defendant (Offers Direct) developed the idea of using prescreened consumer credit data to make "co-marketing" offers on behalf of businesses like car dealers using preapproved credit offers for satellite dish TV service as teasers. "Offers Direct was a way of which you could redeem your satellite dish offer and also put in application information.... We knew it was a different type of offer compared to their traditional offers that were out there...."
On February 23, 2000, Offers Direct and Trans Union entered into the subject contract (the so-called "Prescreen Agreement") for the sale of prescreened consumer credit data. TransUnion agreed, "[u]pon Customer's request," to extract names from its central computer files according to criteria supplied by Offers Direct. Offers Direct warranted that it would use the prescreened list in compliance with the FCRA and other applicable federal or state regulations. This included extending "a firm offer of credit or insurance to each and every individual named on the Prescreened List," which credit offers would not be withheld or withdrawn, except as permitted by the FCRA.
The Prescreen Agreement anticipated that the parties would mutually agree upon a fee structure, which would be incorporated into the contract by reference. A choice-of-law provision specified Illinois law.
Heavy bargaining and "hard" negotiations ensued about pricing. Each side, represented by counsel, made concessions. TransUnion, for example, initially wanted to recoup its substantial costs for developing prospect databases by requiring upfront payments of $250,000. It relented when Offers Direct promised to purchase a minimum of 25 million names during the first year. [FN3]

FN3. This was a bit of a stretch for Offers Direct, but it was confident nonetheless; the prior year, it had done 15 million names, and "we knew the market was going to grow by leaps and bounds."

*3 After many revisions, a two-page pricing exhibit was finalized, reviewed by counsel, and signed in late 2000. It was effective for a one-year period, from October 1, 2000 to September 30, 2001. Offers Direct promised to make a minimum purchase of 25 million names, at a cost of 6 cents per name for names that it used, and 4.3 cents per name to cover any shortfall to the 25-million name minimum. There was no charge for database builds, and no upfront payments. The pricing exhibit did leave Offers Direct with an escape clause: it did not have to pay for any shortfall below the 25 million minimum "in the event that Trans[ ]Union fails to fulfill its obligations hereunder and pursuant to the Prescreen Agreement."
For purposes of this appeal, the critical language in the pricing exhibit is contained in the second (unnumbered) bullet point. TransUnion agreed to reprocess the database through the processing agent "as requested by Offers Direct, a maximum of four times" during this period. Offers Direct could "periodically request" online batch refreshes between the database feeds for specific customers who wanted fresher credit. [FN4]

FN4. The second bullet point specifically provided: "Trans[ ]Union agrees to process (or 'refresh') the Prospect Database as requested by Offers Direct, a maximum of 4 times from October 1, 2000 through September 30, 2001. Additionally, between Prospect Database updates, Offers Direct may periodically request a 'refresh' for a single mailing. Trans[ ]Union acknowledges that time is of the essence to Offers Direct and agrees to respond accordingly to all Offers Direct requests." (Italics added.)

TransUnion delivered a prospect database feed shortly after the effective date of the pricing exhibit, in December 2000. Offers Direct used names from this database feed through the spring of 2001.
On March 29, 2001, Offers Direct instructed TransUnion to run a new prospect database. This was its first request since the December 2000 delivery. TransUnion began the job in April, and delivered it to the processing agent in June 2001.
The job was delayed because of TransUnion's serious concerns with Offers Direct's newly selected processing agent, Datateck. Although Offers Direct characterized this as a minor change ("same employees, just a different name"), TransUnion learned that the two companies were virtually the same. David Bailey, the president and sole shareholder of Offers Direct, was Datateck's sole owner. The companies shared offices, computer servers and passwords, thereby muddying a legally-required "separation of control and access over the TransUnion data...." As the trial court commented, Bailey "scared the hell" out of TransUnion "when they heard about it. They have to deal with the FTC. They could have been shut down...." [FN5]

FN5. Bailey explained that he "did not understand that ownership needed to be separated at that time. I did later."

Offers Direct was slow to correct the situation. While it was warned in early 2001 about the seriousness of the situation, it still remained entangled with Datateck in March 2001, when TransUnion conducted several site audits.
In April 2001, TransUnion instructed Datateck to immediately suspend the delivery of any TransUnion credit information to Offers Direct. As TransUnion explained, "Our concern throughout the process was that if 180 million consumer records were housed on hardware and processed by software that was under the ownership or control of Offers Direct that it could be argued that Offers Direct was in possession of 180 million consumer records." [FN6]

FN6. TransUnion's fears were not unfounded. Even after the 1993 consent decree, TransUnion remained in litigation with the FTC about TransUnion's sale practices to target marketers. An exhaustive discussion of the procedural history is contained in Trans Union Corp. v. F.T.C. (D.C.Cir.2001) 245 F.3d 809. These enforcement efforts were finally resolved in 2003. TransUnion thereafter became the subject of what a federal district judge called a "rash of consumer class actions," many of which were consolidated in one multi-district action in a Chicago federal court. The Chicago class action suit heated up just as TransUnion began conducting its audits over Datateck. (See discussion in In re Trans Union Corp. Privacy Litigation (N.D.Ill.2002) 211 F.R.D. 328, 334.)

*4 TransUnion's efforts ultimately hit their mark. On May 29, 2001, TransUnion conducted a follow-up audit, and determined that the data delivery could be restored. The next feed was delivered on June 4, 2001.
Offers Direct never asked for any additional prospect databases after June 2001. It continued to mail names from the preexisting database feeds through the calendar year 2001. Bailey, its owner, however, soured on TransUnion, viewing its compliance efforts as pretextual, "designed to put the brakes on Offers Direct...." He "had suspicions they were going to use every means possible to either slow us down or control us." He began to look for other suppliers because "in the long term I was going to have to move on."
After paying TransUnion about $300,000 for names used between December 2000 and August 2001, Offers Direct stopped making payments in December 2001. Bailey did so because "[I]t was my belief that we did not get services that we contracted for." At the time, Offers Direct owed $221,195 for unpaid invoices for the 3.6 million names that it actually used. In addition, because Offers Direct used only 8.6 million names instead of the contractual minimum of 25 million names, TransUnion invoiced Offers Direct an additional $703,224 for the shortfall.
In December 2001, Offers Direct sent a termination letter to TransUnion "based on the needs of our clients. At this time, we are not seeking to renew services for the completion of the prior services agreement or in structuring a new agreement." Shortly thereafter, Offers Direct established a new business relationship with TransUnion's competitor, Equifax.

TransUnion sued Offers Direct for breach of contract in May 2003 arising from the unpaid invoices. Offers Direct cross-complained in July 2003, claiming that TransUnion caused it "to lose customers, income and profits."
A five-day bench trial was held in May 2004. The court issued its judgment and statement of decision in July 2004. The court found that Offers Direct breached its contract with TransUnion and was responsible for $1.2 million in damages on the unpaid invoices, including prejudgment interest. In December 2004, the court awarded TransUnion an additional $255,580 in attorney fees. [FN7]

FN7. Offers Direct initially challenged on appeal the trial court's alleged failure to consider its objections to TransUnion's proposed statement of decision. Since Offers Direct has withdrawn the issue in its reply brief, we consider it waived.

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