Thursday November 30, 2023

How Purging of Classes Could Cost Peloton Big

  • A lawsuit that seeks class action status has progressed through one federal court.
  • If the plaintiffs prevail, Peloton could face several million dollars in damages.
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A lawsuit filed against Peloton that could cost the company hundreds of millions of dollars has progressed in federal court.

The complaint that seeks class-action status claims the fitness brand’s mass deletion of its music library in 2019 without warning led to “false and misleading advertising.” Classes were taken offline as a result of allegations that Peloton used copyrighted music without authorization.

“If a jury finds them liable, Peloton is looking at a very substantial judgement,” plaintiff attorney Adam J. Levitt told Front Office Sports.

Peloton has been both the plaintiff and defendant in several lawsuits centered around intellectual property with current and former competitors like ICON Health & Fitness and Flywheel.

But this lawsuit cleared one major hurdle in November 2020. Judge Lewis J. Liman of the U.S. District Court for the Southern District of New York denied Peloton’s request to outright dismiss the lawsuit filed on behalf of New York resident Eric Fishon. 

Peloton’s lawyers were able to get a co-plaintiff’s claim dismissed, although that still leaves the possibility for damages for alleged violations of New York’s Consumer Protection Act.

“The injury is alleged to have been suffered equally and across-the-board,” Liman wrote in his opinion. “Thus, while it may be that at the proof stage Plaintiffs will face challenges establishing either of their theories of injuries, they have alleged enough at this stage to ‘raise a reasonable expectation that discovery will reveal evidence’ supporting their claim.”

Messages left by Front Office Sports with Peloton and the company’s attorneys were not returned. Peloton disclosed in its most recent quarterly report in November that it “does not believe that the outcome of any existing legal or regulatory proceeding to which it is a party, either individually or in the aggregate, will have a material adverse effect on its results of operations, financial condition or cash flows.”

In an amended complaint filed on Jan. 21, Levitt and other plaintiff lawyers hammered down on why the case should be held to standards set in New York’s Consumer Protection Act. Factors include:

— Peloton is headquartered in New York, where its executive, accounting, finance and marketing departments are located along with their studios.

—  The decision to more than halve Peloton’s class library was made in New York.

—  Peloton’s CEO John Foley “emailed subscribers and notified them that Peloton was removing classes featuring the allegedly infringing songs” from New York.

— All transactions from members go through Peloton’s bank accounts in New York.

“New York is so central to Peloton’s identity that, in its uniform contract with members from around the world, it requires that New York law applies to all aspects of those contractual relationships, to the exclusion of other states’ laws,” the complaint reads.

The lawsuit alleges that Peloton violated two statutes: New York General Business Law Sections 349 and 350, which address “deceptive acts or practices in the conduct of any business,” and “false advertising” that occur or originate in the state.

The lawsuit argues the roughly 500,000 Peloton subscribers at the time who were promised an “ever-growing” on-demand library in advertisements and marketing materials before Peloton gutted it when faced with copyright infringement. Peloton, under New York law, could be liable for each violation, which in this case would be each time subscribers were charged before the class library surpassed March 2019’s inventory of classes (12,000). 

It took, by one estimate, seven months for the library to be replenished. That means, theoretically, Peloton could face as much as $1.75 billion in damages.

There’s still a long way to go before Peloton has to worry about such a payout. Discovery in the case won’t begin until later this year; then the judge would have to certify the lawsuit as a class action.

“Before they even get there, they have to prove that there are common damages for all members of the class,” said Daniel J. Herling, a San Francisco-based attorney at Mintz who has defended companies over alleged New York consumer law violations. “Before they have the class certified, they are going to have to show that all the class members were injured in the same way. To me, that’s going to be a difficult issue.”

Herling used himself as a rhetorical example on why the class won’t include all Peloton members at the time. If, for example, he wouldn’t typically pick rides with Ariana Grande, Selena Gomez, Drake, Nicki Minaj and Lady Gaga — some of the music used in Peloton classes that were yanked — he wouldn’t be as affected. “I’d never pick a class with this type of artist in it,” Herling said. “How was I injured? They are going to have to have experts evaluate several different issues to determine if the damages can be calculated on a class-wide basis. I think it is going to be difficult to get a class certified.”

One wrinkle in these claims is that this all should have been handled in arbitration — something spelled out in Peloton’s terms of service. According to the lawsuit, 2,700 Peloton users did file claims over the class reduction. Faced with massive arbitration fees, Peloton decided not to abide by its agreement with the American Arbitration Association, leaving the courts as the only option for users who felt they were wronged.

“It’s an interesting twist in this case,” Herling said. “I don’t think they ever anticipated that type of a claim. The types of claims they were probably anticipating was somebody getting injured if a pedal falls off a bike.”

Peloton had made several moves over the last month to ensure music rights disputes won’t become a factor again. In addition to multiple “artist series” partnerships, it struck a multiyear deal with Beyoncé and announced it would begin producing some of its own music, including three remixes of Elvis songs.

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