Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_17-cv-02335/USCOURTS-cand-3_17-cv-02335-20/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

PAULA BLAIR, ANDREA ROBINSON, and

FALECHIA HARRIS, individually and on

behalf of all others similarly situated,

Plaintiffs,

 v.

RENT-A-CENTER, INC., a Delaware

corporation, RENT-A-CENTER WEST, INC.,

a Delaware corporation, and DOES 1–50,

inclusive,

Defendants. /

No. C 17-02335 WHA

ORDER RE CROSS-MOTIONS 

FOR SUMMARY JUDGMENT

INTRODUCTION

In this action brought under California’s Karnette Rental-Purchase Act, the parties

cross-move for summary judgment on certain of plaintiffs’ claims. For the reasons herein, the

parties’ respective motions for summary judgment are GRANTED IN PART AND DENIED IN

PART.

STATEMENT

Defendants Rent-A-Center, Inc. and Rent-A-Center West, Inc. (collectively “RAC”)

maintained rent-to-own stores throughout California. These stores rented and sold both new

and used household merchandise (e.g., appliances, electronics, and furniture) to consumers for

periodic payments. Customers could either rent the merchandise for a period of time or, if all

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 1 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

payments had been made after a specified period, the consumer would own the merchandise

(Dkt. No. 120-45).

In calculating the merchandise’s statutory-maximum price, RAC could take into account

the merchandise’s “actual cost, including actual freight charges,” so it becomes necessary to

understand how merchandise arrived at RAC’s stores. RAC used three methods to deliver

merchandise to its approximately 131 California stores during the putative class period. First,

under the “direct-to-store” model, vendors shipped merchandise directly to an RAC store. 

Those vendors invoiced RAC for both the cost of the merchandise and the associated freight

expense. Under the direct-to-store model, RAC took title to an item upon delivery to RAC’s

store. Second, vendors shipped merchandise to RAC’s authorized service center, RAC National

Produce Service, LLC (“NPS”). NPS — a wholly-owned subsidiary of RAC — stored the

merchandise, then transported it to RAC’s stores. Under this model, RAC took title to an item

when it arrived at an NPS facility. Third, vendors shipped merchandise to a third-party logistics

provider, NFI Industries (“NFI”). NFI then warehoused the merchandise at one of its five

distribution centers before transporting the merchandise to an RAC store. Under the NFI

model, RAC took title to an item when it arrived at an NFI facility. 

To set the rental price for a particular item, RAC’s merchandising team negotiated

prices with vendors, then provided pricing information to RAC’s pricing team. The pricing

team input the price of the merchandise — including charges associated with the cost of

transporting the merchandise to RAC’s stores — into RAC’s system. RAC then used a

software program to calculate maximum permissible rental pricing terms based on the item’s

cost. For merchandise shipped direct-to-store, the item’s freight cost was included in the

vendor’s invoice. For merchandise transported to stores by NFI or NPS, the vendor charged for

freight to get the item to NFI or NPS’s warehouse, then RAC added a corresponding up-charge

(i.e., “cost per unit” or CPU) to the item’s cost for its transportation to RAC’s store. 

RAC calculated the corresponding up-charge differently depending on whether the

merchandise was transported by NFI or by NPS. For each item stored and transported by NPS,

RAC included a flat up-charge of $23.49, regardless of the item’s size, weight, or distance

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 2 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

shipped. For items stored and transported by NFI, RAC allocated an up-charge by dividing

NFI’s projected annual fees by the number of units RAC anticipated shipping through NFI, then

adjusting that amount to take into account the item’s weight, volume, and other factors that

could affect shipping costs (Dkt. Nos. 120-5, 120-6, 120-7, 120-8, 120-9, 120-42).

Another issue concerns arbitration clauses. RAC customers entered into rental-purchase

agreements either at RAC stores or over the phone. If a customer ordered a product over the

phone, the customer signed the rental-purchase agreement upon the item’s delivery. Customers

chose the term in which payments would be made (weekly, bi-weekly, semi-monthly, or

monthly) and the number of payments. Once a customer and RAC agreed to the terms of a

rental, an RAC employee generated a written rental-purchase agreement through RAC’s

software (Dkt. No. 120-45). The form rental-purchase agreement offered to RAC customers

referenced arbitration twice. The first page of the rental-purchase agreement stated, in bold

type (Dkt. No. 120-46):

ARBITRATION: An Arbitration Agreement comes with and is

incorporated into this rental purchase agreement. You should

read the Arbitration Agreement before signing this agreement.

That same page of the rental-purchase agreement contained the following notice:

NOTICE TO LESSEE: Do not sign this Rental-Purchase Agreement

before you read it, including the Arbitration Agreement, or if it

contains any blank spaces. You are entitled to an exact copy of the

Rental-Purchase Agreement you sign. Keep it to protect your legal

rights.

In addition to presenting customers with the rental-purchase agreement, RAC presented

customers with a separate five-page arbitration agreement. RAC also presented customers with

various other documents depending on the transaction, such as a “90 Day Same as Cash

Notice,” “Rental Order Form,” “Delivery Checklist,” or “Early Purchase Option Chart” (Dkt.

Nos. 120-12, 120-13, 120-15, 120-45). 

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 3 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

In March 2017, plaintiff Paula Blair initiated this putative class action in state court. 

RAC removed the action to this district court under the Class Action Fairness Act of 2005 and

moved to partially compel Blair’s suit to arbitration. While the motion to compel arbitration

was pending, an amended complaint added plaintiffs Andrea Robinson and Falechia Harris. 

The amended complaint sought relief for violations of (1) California’s Karnette Rental-Purchase

Act, (2) California’s Consumers Legal Remedies Act, (3) usury, and (4) Section 17200 of the

California Business and Professions Code. RAC renewed its motion to compel arbitration as to

Blair, but could not locate signed arbitration agreements for Robinson or Harris, so it did not

seek to compel arbitration of their claims. Because Blair had opted out of the arbitration

agreement contained in her 2016 rental-purchase agreement, RAC only sought to compel

arbitration of Blair’s claims relating to the 2015 agreement (Dkt. Nos. 1, 13, 16, 22, 43, 54).

An order dated October 3, 2017, denied most of RAC’s motion to compel arbitration,

granted RAC’s motion to strike Blair’s class action claims arising out of the 2015 agreement,

and denied RAC’s motion to stay pending arbitration. An October 25 order amended the

October 3 order to remove the language striking Blair’s class action claims. RAC appealed

both orders and that appeal is still pending. Now both sides move for partial summary

judgment on plaintiffs’ Karnette Act claim (Dkt. Nos. 62, 82–84, 118, 128). This order follows

full briefing and oral argument.

ANALYSIS

 Summary judgment is proper where the pleadings, discovery, and affidavits show that

there is “no genuine dispute as to any material fact and the movant is entitled to judgment as a

matter of law.” FRCP 56(a). Material facts are those which may affect the outcome of the case. 

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Here, the relevant facts are not in

dispute. The parties’ summary judgment motions instead raise two purely legal questions of

statutory interpretation, as now discussed. 

1. “SINGLE DOCUMENT” REQUIREMENT.

The parties first dispute whether or not RAC violated Section 1812.623(a) of the

Karnette Act by presenting customers with both a rental-purchase agreement and a separate

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 4 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

arbitration agreement. The Karnette Act requires rental-purchase agreements to contain certain

disclosures and information (such as pricing information and the duration of the rental) and

requires that pricing terms be grouped together “in a box formed by a heavy line” immediately

above the consumer’s signature. Cal. Civ. Code § 1812.623(b). Section 1812.623(a) further

provides (emphasis added):

Every rental-purchase agreement shall be contained in a single

document which shall set forth all of the agreements of the lessor and

the consumer with respect to the rights and obligations of each party.

Here, RAC’s rental-purchase agreement incorporated the arbitration agreement by

reference. Accordingly, RAC’s practice of presenting customers with both a rental-purchase

agreement and a separate arbitration agreement did not violate Section 1812.623(a). Under

California law, a document incorporates another document by reference if the following

conditions are met. First, “[t]he reference to the incorporated document must be clear and

unequivocal.” Second, “the terms of the incorporated document must be known or easily

available to the contracting parties.” Cariaga v. Local No. 1184 Laborers Int’l Union of N.

Am., 154 F.3d 1072, 1074 (9th Cir. 1998) (citation omitted). Both requirements were met here. 

The rental-purchase agreement clearly and unequivocally incorporated the arbitration

agreement by stating, in bold type, that the arbitration agreement came with and was

“incorporated into” the rental-purchase agreement. Moreover, the rental-purchase agreement

instructed consumers not to sign the rental-purchase agreement before reading it, “including the

Arbitration Agreement.” RAC’s arbitration agreement was also “easily available,” since RAC

presented it to customers at the same time as it presented the rental-purchase agreement.

Importantly, under California law “a contract and a document incorporated by reference

into the contract are read together as a single document.” Poublon v. C.H. Robinson Co., 846

F.3d 1251, 1269 (9th Cir. 2017) (citation omitted). Plaintiffs argue, without citation to any

authority, that the incorporation-by-reference rule is a matter of contract interpretation and

accordingly cannot be applied to determine compliance with the Karnette Act’s “single

document” requirement. This order disagrees. “[T]he Legislature is presumed to know about

existing case law when it enacts or amends a statute.” In re W.B., 55 Cal. 4th 30, 57 (2012), as

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 5 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

modified on denial of reh’g (Sept. 26, 2012). The California Legislature also codified the

incorporation-by-reference rule in Section 1642 of the Civil Code. That section provides that

“[s]everal contracts relating to the same matters, between the same parties, and made as parts of

substantially one transaction, are to be taken together.” The incorporation-by-reference rule

may therefore be applied in determining RAC’s compliance with the Karnette Act. 

Contrary to plaintiffs’ contentions, allowing RAC to incorporate the arbitration

agreement by reference does not defeat the Karnette Act’s goal of “ensur[ing] that consumers

are protected from misrepresentations and unfair dealings by ensuring that consumers are

adequately informed of all relevant terms . . . before they enter into rental-purchase contracts.” 

Cal. Civ. Code § 1812.621. Rather, by incorporating the arbitration agreement by reference,

RAC more easily brings the consumer’s attention to the existence of the arbitration agreement. 

If RAC were instead required to include the entirety of their arbitration agreement within the

same document, reference to arbitration could be buried in the middle of very long contracts. 

(In other cases, the Court has seen such practices.) This would hinder, rather than promote, the

Karnette Act’s goals. 

Similarly unconvincing is plaintiffs’ argument that presenting customers with a separate

arbitration agreement may cause customers to feel that they have come too far not to proceed, or

that customers may sign the arbitration agreement with little attention given to it. The rentalpurchase agreement’s clear disclosures caution against such conduct by directing the customer

to read the accompanying arbitration agreement prior to signing the rental-purchase agreement. 

RAC’s motion for summary judgment on this issue is accordingly GRANTED. Plaintiffs’ motion

for summary judgment on this issue is DENIED. 

2. “LESSOR’S COST” REQUIREMENT.

The parties also move for summary judgment on the their respective interpretations of

the term “lessor’s cost” as defined in the Karnette Act. The maximum price a rent-to-own

company may charge for a particular item of merchandise is determined by applying a set

multiplier to the “lessor’s cost.” Cal. Civ. Code § 1812.644(b). Section 1812.622(k), in turn,

defines the “lessor’s cost” as (emphasis added):

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 6 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

[T]he documented actual cost, including actual freight charges, of the

rental property to the lessor from a wholesaler, distributor, supplier, or

manufacturer and net of any discounts, rebates, and incentives.

In interpreting the definition of “lessor’s cost,” this order “first looks to the language of

the statute, giving effect to the words’ plain meaning; ‘[i]f the language is unambiguous, the

plain meaning controls.’” Gonzales v. CarMax Auto Superstores, LLC, 840 F.3d 644, 650 (9th

Cir. 2016) (quoting Voices of the Wetlands v. State Water Res. Control Bd., 52 Cal. 4th 499,

519 (2011)). “If the language is clear, courts must generally follow its plain meaning unless a

literal interpretation would result in absurd consequences the Legislature did not intend. If the

statutory language permits more than one reasonable interpretation, courts may consider other

aids, such as the statute’s purpose, legislative history, and public policy.” Coalition of

Concerned Communities, Inc. v. City of Los Angeles, 34 Cal. 4th 733, 737 (2004).

Plaintiffs argue that RAC’s calculation of “lessor’s cost” violated the Karnette Act in

two ways. First, RAC included in its “lessor’s cost” charges for so-called “intra-company”

storage and transportation of merchandise, i.e., freight charges RAC incurred after RAC took

title to the merchandise but prior to the merchandise’s arrival at an RAC store. Second, even

assuming such freight expenses may be included in RAC’s “lessor’s cost,” plaintiffs argue that

RAC impermissibly calculated those expenses using estimated, projected, or averaged costs

rather than an item’s “actual cost.” This order addresses each argument in turn. 

Under plaintiffs’ reading of the Act, Section 1812.622(k) limits “actual freight charges”

to those incurred in shipping an item “to” the rent-to-own company “from a wholesaler,

distributor, supplier, or manufacturer.” Moreover, plaintiffs argue, an item is no longer in

transport “to” the lessor “from” the vendor once the lessor takes legal title to the item. Such a

construction, however, would lead to absurd results. A rent-to-own company incurs “actual

freight charges” in transporting merchandise to its stores regardless of where in the supply chain

it takes legal title. Plaintiffs agree that freight charged by a vendor to transport merchandise

directly to a lessor’s store may be included within the “lessor’s cost.” Yet under plaintiffs’

interpretation of the statute, if a lessor pays a manufacturer for merchandise prior to the item’s

shipment and thereby gains legal title, any freight charges incurred in shipping via a common

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 7 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

carrier such as Fed-Ex or UPS could not be included, despite such charges being a clear part of

the item’s “actual cost.” 

Plaintiffs fail to adequately explain why the California Legislature would have intended

to include freight in “lessor’s cost” when charged by a manufacturer but not when charged by a

third party. Nothing in the Karnette Act or its legislative history supports such an arbitrary

distinction. Although plaintiffs describe NPS and NFI as providing “intra-company storage and

transportation expenses,” the record doesn’t challenge NFI and NPS as distinct corporate

entities from RAC. While NPS is a wholly-owned subsidiary of RAC, plaintiffs have made no

showing that would justify disregarding NPS’s separate corporate form. As a result, for

purposes of the Karnette Act, NPS (and NFI) must be treated like a third-party common carrier.

A more reasonable interpretation is that rent-to-own companies may set pricing terms

based on the “actual cost” of merchandise, including the actual cost of getting the merchandise

to the stores where it can be available to consumers. This encompasses freight charged directly

by a manufacturer or other vendor and freight charged by a delivery service to transport the

item to the lessor’s store. 

This interpretation comports with the California Legislature’s purpose in enacting

Section 1812.622(k). In amending the Karnette Act in 2006, the California Legislature

explained that the revised statute sought to address problems the California Attorney General

and others had encountered with the Act in practice. The amendments sought to remedy these

challenges by “creating reasonable bright-line pricing caps” and “bring[ing] certainty” to these

caps by tying them to the lessor’s cost. This would “help law enforcement by making it easier

to obtain documentation supporting the cash price and payments disclosed in the [rentalpurchase agreement]” and avoid a “fact intensive inquiry” in determining an item’s price cap

(Dkt. No. 120-1). Distinguishing amongst freight costs based on when a lessor gains title to an

item would create more, not fewer, avenues for manipulation (and litigation). 

This order accordingly holds that a rent-to-own company may include within its

“lessor’s cost” the “actual freight costs,” if documented, incurred in having merchandise

shipped to its stores, whether shipped directly by a manufacturer or other vendor, through a

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 8 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

logistics provider such as NFI or NPS, or through a third-party common carrier such as FedEx

or UPS.

This order now turns to plaintiffs’ second argument that — even assuming freight

charged by NFI and NPS may be included in RAC’s “lessor’s cost” — RAC impermissibly

calculated its “lessor’s cost” based on estimated, projected, or averaged costs rather than “actual

costs.” The Karnette Act is clear on this point. “Lessor’s cost” is a function of “documented

actual cost, including actual freight charges.” Thus, the Act’s statutory price-caps must be

calculated using “actual” costs, not budgeted, estimated, or forecasted costs. 

The legislative history of the Karnette Act’s 2006 amendments supports this

construction of Section 1812.622(k). In a letter dated June 16, 2006, the Consumer Attorneys

of California wrote a letter to Assembly Member Betty Karnette with concerns regarding the

proposed amendments to the Karnette Act. As is relevant here, the letter suggested (Dkt. No.

128-3):

“Lessor’s cost” definition should add language to qualify freight

charges as “actual freight charges” as discovery in some cases

suggested a lack of accounting for ‘actual’ freight costs vs. some

approximated or collective value that was not truly representative of

the RTOs actual freight costs. 

 A short time later, the California Legislature amended the bill to insert “actual” before

“freight charges” in the definition of “lessor’s cost” (Dkt. No. 128-4 at 20). 

Thus, a rent-to-own company like RAC could contract in advance with a carrier like

NPS to pay a flat fee for each item delivered to one of its stores via the carrier. Then, for each

item, the rent-to-own company would incur an actual charge (equal to the flat fee) for each item

so delivered. The carrier would then provide documentation identifying that delivery (and, for

convenience, perhaps all other deliveries in a given time period). It should not matter that the

flat fee would apply to both light items as well as heavy items, for the contract would specify

that fee as the actual freight charge. Of course, the parties could also contract for a graduated

fee based on size or weight or class of product but that would be a matter of negotiation. The

key is that a contract would obligate the rent-to-own company to pay and thus that would

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 9 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10

become the actual charge. Put differently, if a shipper pays UPS $50 to ship something that

FedEx would have shipped for $40, the $50 is the actual freight cost. 

Applying this to our record, RAC has a serious problem, for RAC didn’t use

documented actual freight costs, as laid out above, but instead imposed an up-charge based on

projected future costs. Specifically, under the NFI/RAC contract, RAC paid NFI fixed annual

and monthly fees plus variable fees depending on the types of products shipped and the

frequency of shipments. In arriving at an item’s particular up-charge, RAC started with an

annual forecast of the amount it would pay NFI under their contract, divided that estimate by

the number of units it anticipated shipping, then adjusted that average to take into account

weight, volume, and other factors that could affect shipping costs. RAC revised this allocation

every few months and, accordingly, the same type of merchandise could have a different upcharge depending on when in the year it was shipped. The record is silent as to whether or not

RAC ever revised its up-charges where the actual results differed from RAC’s projections.

With respect to items shipped through NPS, RAC “allocated” the company-wide cost of

having NPS ship new merchandise to its stores. RAC arrived at this per-item allocation after

NPS calculated the aggregate expenses incurred by NPS in transporting the goods, such as

“labor, . . . trucks, leasing fees, insurance, registration, fuel costs, . . . [and] material-handling

equipment” (Dkt. No. 128-5 at 82:14–17). RAC then paid these company-wide expenses by

uniformly applying the $23.49 up-charge to each product shipped through NPS. 

Plaintiffs make much of the fact that RAC applied the NPS up-charge uniformly without

regard to an item’s size, weight, time stored, or distance shipped. But this alone would not

violate the Karnette Act. As stated, it would be possible for a lessor to incur such a uniform

cost in transporting products while at the same time having that uniform cost be directly

attributable to each item shipped. For example, as stated, it would be permissible for RAC to

negotiate a deal with a common carrier (such as UPS) in which RAC would pay $23.49 per item

shipped regardless of the actual cost to the common carrier in shipping the item. So long as

RAC had documentation which allowed the fact-finder to trace the per-item charge to

merchandise, the manner of payment (such as a year-end invoice) would be irrelevant. In such

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 10 of 11
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 1

 Following the hearing on the parties’ motions, RAC filed an administrative motion for leave to

submit a post-hearing declaration to address certain questions raised by the undersigned during the hearing (Dkt.

No. 141). RAC’s motion is GRANTED.

11

a case, the actual cost to RAC in obtaining the item would be the flat $23.49 charged by the

carrier, regardless of whether the item was a gift card or an air conditioner. 

RAC would violate the Act, by contrast, by negotiating a deal with a common carrier

where RAC paid a flat annual or monthly fee for the common carrier’s shipments, then RAC

evenly allocated that annual or monthly sum amongst all products shipped. In such a case, the

charge by the common carrier would not be tied directly to an individual item. 

In sum, RAC’s practices with respect to NFI and NPS did not amount to an allocation of

documented actual freight costs. Rather, the amount RAC used to calculate an item’s “lessor’s

cost” was either an average of the company’s nationwide logistics expenses (NPS), or an

allocation of a future projection of expenses (NFI). Such practices may be “normal and

consistent with industry standards,” as RAC argues, but that does not mean they are compliant

with the Karnette Act. Plaintiffs’ motion for summary judgment on this issue is accordingly

GRANTED. RAC’s motion for summary judgment is DENIED.

1

 

CONCLUSION

For the reasons stated, the parties’ respective motions for summary judgment are

GRANTED IN PART AND DENIED IN PART. 

IT IS SO ORDERED.

Dated: November 1, 2018. 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

Case 3:17-cv-02335-WHA Document 154 Filed 11/01/18 Page 11 of 11