Changes to its loyalty program will cost AutoZone almost $50 million in a class action settlement, which comes more than three years after a California couple first accused the automotive maintenance retailer of breach of contract and fraud, as well as violations of California’s False Advertising Act, its Unfair Competition Law and its Consumer Legal Remedies Act in connection with changes AutoZone made to its 5/20/20 plan.
The Allegations
The couple, who led the class action lawsuit, alleged that when they enrolled in the plan, they were told they would receive one reward credit for each purchase they made over $20, and for every five reward credits earned, they would receive $20 in store credit. The couple further alleged that, at that time, neither the reward credits nor the store credits had an expiration date.
However, sometime in 2014 or 2015, AutoZone reportedly changed the plan to make reward credits expire after 12 months and to make store credits expire after three months. The new expiration dates applied retroactively to purchases made and credits earned before the change.
According to AutoZone, (1) the terms and conditions governing the plan plainly stated that (a) AutoZone could cancel, modify or restrict any aspect of the plan at any time with or without notice to members, and (b) the credits could be subject to an expiration period; and (2) it provided ample notice of the change via direct mailers, signage at AutoZone stores, communications from store employees and language printed on members’ receipts.
Nonetheless, the couple claimed AutoZone failed to adequately notify members of the change, and that they’d learned that their credits could or would expire only when an AutoZone employee refused to honor their reward credits in March 2016.
Even if members had been adequately notified, the couple alleged, that would not have been enough. According to the complaint, AutoZone breached its original contractual obligations when it unilaterally changed the program so that members' earned credits expired or were set to expire.. The change allegedly also constituted a breach of AutoZone’s implied covenant of good faith and fair dealing, as it interfered with members’ rights to the contemplated benefits of the plan by effectively making the plan “illusory,” given the frequency (or lack thereof) at which automobiles typically need service. Accordingly, most members would not ordinarily make five purchases of over $20 within any 12-month period, and would therefore never receive the promised $20 reward.
Further, the couple alleged that AutoZone continued to misrepresent the nature of the plan after the change in their promotional materials. According to the complaint, the front page of AutoZone’s then-current rewards website read, “Earn a $20 Reward when you make 5 purchases of $20 or more!” without any mention of the expiration dates. Accordingly, AutoZone’s “misrepresentations and omissions” led members to believe that they would earn a $20 store credit after five purchases of over $20 at any time, even after AutoZone had changed the plan to make both reward credits and store credits expire.
The Settlement Agreement
AutoZone has maintained that it did, in fact, notify its customers of the change and that it had a right to unilaterally change the terms of the plan, in accordance with the plain language of the plan’s terms and conditions. Nevertheless, AutoZone has—without admitting the truth of any of the allegations—agreed to a $48.9 million settlement sum that will reinstate all of the class members’ expired $20 rewards, which AutoZone estimates will result in reinstatement of approximately 918,788 $20 rewards, or $18,375,760.
In addition to reinstatement of the $20 rewards, the settlement agreement provides that all the expired credits of the class members will be converted to reward credits in an amount ranging from $5 to $15 depending on the number of expired credits the member has. AutoZone will also pay—separately from the settlement fund—all costs of notice and settlement administration, an estimated $85,000 for the plaintiffs’ litigation costs prior to mediation, and attorneys’ fees and an incentive award to the couple for serving as class representatives.
The reinstated $20 rewards and credits will automatically be assigned the class members’ accounts and will be valid for one year following reinstatement/issuance.
The class action settlement agreement covers two groups of class members:
- Those who were enrolled in the 5/20/20 plan through an AutoZone store (and not online) in California; those who made purchases of over $20 from an AutoZone store in California using their rewards account on or before July 31, 2014; and those whose rewards or credits earned during that time period were deemed expired and never reinstated.
- Those who were enrolled in the 5/20/20 plan through an AutoZone store (and not online) in California; those who made purchases of over $20 from an AutoZone store in California using their rewards account after July 31, 2014; and those whose rewards or credits earned during that time period were deemed expired and never reinstated.
Why it matters: Immensely popular, yet increasingly complex, loyalty programs are an expected part of the consumer experience with potentially great payoffs for brands. A successful program can increase brand loyalty, revenue and sales; provide valuable data to the brand; attract new customers; and otherwise provide brands a competitive advantage. But with great power comes great responsibility. Brands must be thoughtful about how, when and why they make changes to an existing program, especially where the change impacts the value of members’ earned rewards, modifies members’ ability to earn or use rewards, converts earned points to a different program, or terminates the program altogether. AutoZone’s effort to change the terms of its loyalty program provide a costly lesson, with several years of litigation, a $48.9 million settlement, and additional payments for associated fees and costs. Unexpected (or simply undesirable) changes can incite mass consumer backlash, weaken brand loyalty, diminish the brand, and even result in legal recourse if not implemented in accordance with both applicable laws and evolving industry best practices—even in the face of plan terms that purportedly provide the brand with the unfettered right to make such changes.
Historically, brands have reserved their right to unilaterally cancel, modify or restrict any aspect of their loyalty programs with little to no notice to consumers (as did AutoZone). And, historically, courts examining loyalty program claims have generally been deferential to even the vaguest of program terms. As this case demonstrates, however, notice and consumer protection have become key issues in recent litigation (and in the court of public opinion)—especially where the effect of the change is to eliminate or devalue earned rewards—and limited or vague notice terms may give rise to hefty financial penalties.
As loyalty programs implicate multiple areas of law, and running a successful, compliant program requires deep knowledge of the myriad business and legal considerations involved, it is helpful to involve an attorney who has experience advising companies and brands on such compliance and risk management—as do members of your business-friendly team at Manatt.