Judge Tosses Adobe Creative Cloud Class Action Lawsuit

Last week, the putative class action lawsuit alleging that Adobe Systems Inc. illegally charged a termination fee for use of Adobe’s cloud subscription service was dismissed by a federal judge who ruled the fee was not a penalty.

Led plaintiff Scotty Mahlum alleged in his initial class action lawsuit that the early termination fee (ETF) charged by Adobe for a year long subscription to use software available through an Internet connection via Adobe servers called the Creative Cloud violated stringent California laws prohibiting early termination fees.

According to the Adobe Creative Cloud class action lawsuit, Adobe requires users to pay 50 percent of the remaining payments they otherwise would have made. The Creative Cloud programs include Photoshop, Illustrator, InDesign, Premiere, After Effects, Audition, Dreamweaver and other programs.

On Thursday, U.S. District Judge Lucy Koh granted Adobe’s motion to dismiss the Creative Cloud class action lawsuit, finding that when a contract allows a party to terminate the agreement early in exchange for a lump payment, it is not considered a penalty. “[U]nder California law ‘[w]here a contract for a specified period of time permits a party to terminate the agreement before its expiration in exchange for a lump-sum monetary payment, the payment is considered merely an alternative to performance, and not a penalty,’” explained Judge Koh in her order. “Such a clause, therefore, falls outside the scope of [California law] and is not prohibited.”

Judge Koh pointed out that the early termination fee is an option for a subscriber who wants to cancel their subscription to the Adobe Creative Cloud, rather than a fee that is triggered by failure to pay or other breach.

“Because the [ETF] is not imposed as a result of breach, it is not a liquidated damages clause,” Judge Koh concluded. “Plaintiff only alleges that the ETF is imposed upon the customer’s affirmative and voluntary cancellation of the subscription agreement,” Judge Koh explained. The fee was an alternative means of performance, according to the judge, because it offers customers a choice including paying the remaining monthly installments, half the fees or refusing to pay and breach the agreement.

Judge Koh also disagreed with the plaintiff’s contention that the Adobe Creative Cloud class action lawsuit could not be dismissed because it concerns an issue of fact as well.

The dismissal is not necessarily the end of the Adobe Creative Cloud class action lawsuit. Judge Koh gave the plaintiff leave to amend the complaint, based on other provisions of the contract that show the fee is imposed as a result of a breach. “Here, although the Court has determined that Plaintiff fails to state a claim … it is possible Plaintiff can cure his allegation by alleging, inter alia, that other provisions in the Creative Cloud subscription agreement make it apparent that the ETF is imposed as a result of breach,” wrote Judge Koh.

“Accordingly,” she concluded, “because Plaintiff may salvage his claim by alleging additional facts, the Court finds amendment would not be futile. Plaintiff’s claims are therefore dismissed with leave to amend.”

The Adobe Creative Cloud Class Action Lawsuit is Scotty Mahlum v. Adobe Systems Incorporated, Case No. 14-cv-02988, in the U.S. District Court for the Northern District of California.