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Kowalski v. YellowPages.com

March 31, 2012

AL KOWALSKI D/B/A KOWALSKI PLUMBING, MICHELLE WINICK D/B/A MICHELLE WINICK DESIGN AND MICHAEL GIDRO, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
YELLOWPAGES.COM, LLC, DEFENDANT.



The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.

MEMORANDUM OPINION & ORDER

In this action, Plaintiffs Al Kowalski, Michelle Winick, and Michael Gidro seek damages and equitable relief on behalf of themselves and a putative class against Defendant YellowPages.com, LLC, for violations of the New Jersey Consumer Fraud Act, N.J. Stat. § 56:8-1, et seq., ("NJCFA") and for breach of contract. Plaintiffs, owners of New Jersey businesses, allege that they were induced to enter into contracts with Yellowpages.com for online advertising services on the basis of fraudulent misrepresentations and omissions concerning (1) the nature and quality of Defendant's services; and (2) the terms and conditions of the service agreement. (See First Amended Complaint ("FAC") at ¶¶ 126-129)

Plaintiffs now move under Fed. R. Civ. P. 23 for certification of a class consisting of "[a]ll persons or entities in the State of New Jersey that allegedly contracted with YellowPages.com for advertising services from and after May 1, 2005." (Notice of Motion, Dkt. No. 93)

Defendant opposes class certification, arguing, inter alia, that the named plaintiffs are not representative of the putative class, and that Plaintiffs have failed to show systematic dissemination of the alleged misrepresentations and omissions.

Also pending before the Court are two motions to strike. Plaintiffs have moved to strike an expert report, expert testimony, and an expert disclosure notice that Defendant submitted in support of its opposition to Plaintiffs' class certification motion. (Dkt. No. 106) Defendant has moved to strike certain declarations and exhibits presented for the first time in connection with Plaintiffs' reply brief in support of their class certification motion. (Dkt. No. 111).

For the reasons stated below, Plaintiffs' motion to strike will be granted in part and denied in part, Defendant's motion to strike will be denied, and Plaintiffs' motion for class certification will be denied.

BACKGROUND

The three named plaintiffs operate small businesses in New Jersey. Plaintiff Kowalski has a plumbing business -- Kowalski Plumbing -- in Rochelle Park, New Jersey; Plaintiff Winick operates Michelle Winick Design in Little Falls, New Jersey; and Plaintiff Gidro has a law practice in Teaneck, New Jersey. (See FAC at 1) The FAC alleges that, since 2005, Plaintiffs and putative class members have purchased certain online advertising services from Defendant YellowPages.com on the basis of fraudulent misrepresentations and omissions.

The FAC describes Defendant's business as follows: Defendant is in the business of soliciting advertising from individual and business consumers and displaying that advertising on the internet for the general public to search and providing services to customers, including the Class Members[,] by driving internet traffic to their Yellowpages.com ad and/or website. Among other things, Yellowpages.com follows the same format as the Yellow Pages telephone directories that are distributed throughout the United States, except that the advertising appears on the internet. Yellowpages.com can be searched by a member of the general public on a nationwide or geographic specific basis. (FAC, ¶ 3)

The services at issue here are an online search engine product and a number of programs allegedly designed to increase traffic to the advertiser's website or calls to the advertiser's business. The FAC alleges:

Defendant's Salespeople offer two types of services:

i. Defendant represents that it provides the number one online yellow pages search engine and thus, any Class Member who purchases a listing within the Yellowpages.com site automatically receives a high amount of exposure. Moreover, the Salespeople represent that Yellowpages.com has developed "partnerships" with major online search engines like Google.com, Yahoo.com, MSN.com, and others and, as a result, Class Members will be featured prominently in the results of searches run on those search engines. Defendant's Salespeople represent further that because of the "partnerships," it is cheaper to advertise with Yellowpages.com than directly with those major search engines.

ii. Yellowpages.com also features several types of advertising products in which the Class Members can also enroll, including, but not limited to:

a. The YPClicks! Program or Yellowpages.com Guaranteed Clicks Program. This is a program wherein Class Members are guaranteed to receive a certain number of Clicks on their Yellowpages.com ad or website during a specific period of time. For example, a Class Member might sign up for 1200 Clicks over the period of a year.

b. The Click to Call Program. This is a program wherein the Class Member is charged a fee only when someone calls . . . a special phone number listed on the Class Member's ad. Like the YPClicks! Program, the Class Member is guaranteed a certain number of calls within a specific time period.

c. The Purchase of a Tile Position. This program assures the Class Member his or her ad will be featured in a box advertisement (a "Tile") at the top of [a] list of results displayed when a member of the public searches the Yellowpages.com site only for goods and services in the Class Members' designated geographic area. (Id. ¶ 6) (footnote omitted).*fn1

Defendant solicits customers by telephone and by in-person sales calls on businesses and residences ("premise sales"). (FAC, ¶ 4)

I.SALES TRAINING

The central theme of the FAC and Plaintiffs' class certification motion is that Defendant uniformly trains its sales representatives to sell its products using a "scripted sales pitch" rife with fraudulent misrepresentations and omissions.*fn2 (FAC, ¶¶ 5, 8, 18-25, 29-63; Pltf. Class Cert. Br. at 2-3, 7)

Defendant's salespeople begin their employment with an intensive two to three week training program. (Janecek Decl., ¶ 14) Instructors use a PowerPoint presentation referred to as the "sales training deck." (Janecek Decl., ¶ 20; Bogan Decl., Ex. 13 (Quinlan Dep.) at 284-85) Although the presentation is periodically updated, the "sales pitch" portion of the decks has remained unchanged since 2006. (Bogan Decl., Ex. 13 (Quinlan Dep.) at 29)

During training, salespeople are instructed that every sales pitch must contain certain "core concepts," and new hires are required to memorize a sales script. (Janecek Decl., ¶¶ 14, 16, Ex. 19) Those who do not memorize the sales script at the beginning of training are fired. (Janecek Decl., ¶ 15; Bogan Decl., Ex. 13 (Quinlan Dep.) at 81-82)

Plaintiffs have offered three sales scripts that, while not identical, contain five core steps: (1) the approach; (2) fact-finding; (3) the needs assessment; (4) the pitch; and (5) the close. (Janecek Decl., Exs. 8-10; Bogan Decl., Ex. 13 (Quinlan Dep.) at 108) The "approach" initiates the sales pitch, and the "fact-finding" component involves obtaining information from the customer about his or her business. (Janecek Decl., ¶¶ 25-26) During "fact-finding," salespeople are trained to ask about the potential advertiser's "conversion" rate -- i.e., "[i]f 10 people were to search for a local [service or business] online, and they found your website, how many would end up doing business with you?" (Id., ¶ 26, Ex. 8)

The "needs assessment" component of the sales script focuses on how much business growth a customer could manage, in an effort to determine the appropriate product(s) for the customer. (Id., ¶ 27, Exs. 8-9) During "the pitch," salespeople are to tell advertisers, inter alia, that YellowPages.com will drive traffic to their business. (Id., ¶¶ 28-29, Exs. 8-9) The script directs the salesperson to tell the customer the number of searches on the YellowPages.com online directory that were made in the prior month in the relevant geographic market for the services offered by the customer. (Id., ¶ 29, Exs. 8-9) The script then moves on to a discussion of Defendant's products, including YPClicks! -- the "guaranteed clicks" product, which salespeople are taught to say will result in "local[,] targeted, qualified traffic to your website" -- and the "tile" program. (Id., ¶¶ 29-30, Exs. 8-9)

The final step in the sales process -- as reflected in the sales script -- is the "close," which involves obtaining the customer's consent to purchase the product, and obtaining the customer's signature and credit card information. (Id., ¶ 31, Exs. 8-9)

Although not reflected in the sales scripts submitted by Plaintiffs, they contend that trainees are taught -- when a customer hesitates or refuses to purchase a service, or questions the cost of the service -- to perform a scripted "Return on Investment" ("ROI") analysis. (Janecek Decl., ¶ 32) The ROI analysis purports to reflect the return a customer can expect to receive if he or she advertises on YellowPages.com. (Id.) Plaintiffs contend that Defendant's salespeople are instructed to (1) repeat the number of relevant internet searches conducted the prior month; (2) tell the customer that "research indicates that 74% of searches on [YellowPages.com] result in a contact [to a listed merchant]"; and (3) tell the customer that "conservatively" the customer can expect to be contacted by 1% of those individuals. The ROI is then calculated, based on the customer's estimate of what percentage of inquiries result in a sale and the average dollar amount associated with each sale. (Id., ¶ 33, Ex. 29)

Plaintiffs also contend that Defendant's salespeople are trained not to provide the "Terms and Conditions for Internet Advertising" ("Terms and Conditions") for YellowPages.com's products until a customer has committed to purchase the product:

For Premises Sales, salespeople were trained to not provide the "Terms and Conditions" -- to which the class members would purportedly be bound -- until after the customer signed the "Order Form." For Telephone Sales, the sales people are trained to tell the customer that Terms and Conditions exist that can be found on line, only after the customer has agreed to purchase one or more products and provided their credit card number. (Id., ¶ 22) (emphasis in original).

Plaintiffs also assert that salespeople are required to attend weekly training sessions throughout their employment to reinforce the lessons learned from the initial training. (Janecek Decl., ¶ 23)

Defendant states that its purpose in having trainees memorize a sales script during training is to test new employees' commitment to the training program and company. (Bogan Decl. ¶ 100) As to the ROI analysis issue and the use of the 74% contact figure, Defendant's executives -- including its sales director, former director of sales training, and "team leader" for the development of sales aids -- deny that this ROI analysis was ever a company-approved sales tool. (See Bogan Decl., ¶¶ 78, 84, Ex. 13 (Quinlan Dep.) at 14, 185 (sales director and former director of sales training; "I've never seen this document before" in response to being shown Ex. 29 to Janecek Decl.); Ex. 29 (Thornburg Dep.) at 6, 29-32, 114-15, 118, 122-24 (former "team leader" responsible for developing sales aids; stating that ROI calculator sheet containing 74% success figure was "not approved" and "was not allowed to be used"; "we did not roll that out in any sense to a sales channel or introduce it").

Defendant has largely not disputed Plaintiffs' assertions concerning its sales training program, however. As discussed below, Defendant does vigorously dispute whether there is evidence that the sales practices criticized by Plaintiffs were utilized with respect to the named plaintiffs and other members of the putative class.

II.SALES PRACTICES

A.Plaintiffs' Contentions

Plaintiffs claim that several elements of the presentation Defendant's sales representatives are trained to deliver -- and allegedly repeat in the field -- misrepresent the amount of additional business YellowPages.com's products will generate for an advertiser. In particular, Plaintiffs contend that the "sales pitch" (1) "vastly overstates the conversion rate class members could expect by advertising with Yellowpages.com"*fn3 ; (2) "overstates the class members' expected return on investment"; and (3) "misrepresents that the clicks received will be local, targeted and qualified." (Janecek Decl., ¶ 34)

As to the conversion rate, Plaintiffs assert that, "[i]n asking the question about how many people out of 10 would do business with you, the scripted pitch leads the class members to believe that the conversion rates they can expect are 10%, 20%, 30% or greater." (Id., ¶ 35) Plaintiffs have offered an expert report indicating that "online conversion rates are tiny, more often than not under 1%." (Id.; Ex. 16 (Kent Rpt.) at 11)

With respect to the ROI analysis, Plaintiffs contend that, in allegedly telling customers that 74% of the searches conducted on YellowPages.com result in an individual contacting a listed merchant (Janecek Decl., Ex. 29), Defendant are misrepresenting the results of the study on which that statistic is based. The Morpace Study, which was commissioned by Defendant, concluded that 74% of the people who had found a merchant on YellowPages.com contacted or visited that merchant; that study did not conclude that 74% of the searches conducted on YellowPages.com resulted in an individual contacting a listed merchant.*fn4 (Pltf. Class Cert. Br. at 7-8; Janecek Decl., Ex. 35 at 000055; Ex. 16 (Kent Rpt.) at 32-33)

With respect to the "quality" of the "clicks" a YellowPages.com ad will produce, Plaintiffs claim that Defendant's description of the clicks as "local" and "targeted" is misleading, because YellowPages.com uses a "Designated Market Area" ("DMA") approach when defining the relevant market, instead of using a set radius from a customer's business. (Janecek Decl., ¶ 42) Because New Jersey advertisers fall into the "extremely large" New York DMA (Janecek Decl., ¶ 42, Ex. 34 (McMahon Dep.) at 57-63), they "end up getting a lot of clicks that are highly unlikely to turn into business."*fn5 (Janecek Decl., ¶ 42, Ex. 16 (Kent Rpt.) at 18) In addition, Plaintiffs argue that YPClicks! relies mainly on "content clicks," that this kind of click product is much less likely to convert clicks into sales, and that Defendant does not disclose this fact to potential customers. (Janecek Decl., ¶ 43, Ex. 16 (Kent Rpt.) at 41-42)

Plaintiffs contend that YellowPages.com's salespeople do not provide or discuss the terms and conditions of the service agreement until after a customer has signed an "insertion order" or recorded their oral consent to a purchase over the telephone. (Janecek Decl., ¶ 46; Bogan Decl., Ex. 13 (Quinlan Dep.) at 249-50, 260) During an in-person sales presentation, once a customer consents to purchase a product, a salesperson gives the customer a laptop with a form to electronically sign the "insertion order."*fn6 The customer has not typically seen a copy of the terms and conditions at this point. The entire contract -- including the Terms and Conditions-- is thereafter emailed or mailed to the customer. (Janecek Decl., ¶ 47) In the case of telephone sales, it is not until the conclusion of the voice script -- after the customer has agreed to purchase one or more products -- that the customer is told that additional terms and conditions may be found online. (Id., ¶ 48)

Plaintiffs further claim that all of these allegedly misleading misrepresentations and omissions "were uniformly presented to plaintiffs and the class members through a scripted sales pitch." (Id., ΒΆ 24) In support of this assertion, Plaintiffs rely on declarations submitted by the former sales representatives referenced above stating that they used Defendant's sales script, or made a "script-like presentation when pitching products to potential customers." (Id., Ex. 22 (Gillaspy Decl.) at ...


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