Many businesses, for a variety of reasons, record telephone conversations between their employees and customers (both in and out of state). Whether such recordings are lawful, however, depends upon state and federal wiretapping and eavesdropping laws, which include different and sometimes conflicting statutory exemptions and requirements relating to consent and other issues. As a recent California Supreme Court decision underscores, it is not sufficient for a company to be familiar with its own state's eavesdropping and wiretapping laws. A company also must be cognizant of, and may need to comply with, the most restrictive provisions of the laws where its customers are located to avoid exposure to damages, which may include sizeable class action damages, and other sanctions.

In Kearney v. Salomon Smith Barney, Inc., --- Cal. Rptr. 3d ---, 2006 WL 1913135 (Cal. July 13, 2006), California clients of Salomon Smith Barney ("Salomon") filed a proposed class action against the company, seeking to enjoin Salomon's Georgia-based office from continuing to record telephone conversations made to and from California without the knowledge or consent of its California clients. In addition, the plaintiffs sought damages or restitution based upon Salomon's past recording activities. The case turned on an issue of choice of law. Under Georgia law, Salomon's practice of recording conversations with only one party's consent (i.e., the Salomon representative's) was legal, but California law requires both parties to consent to the recording of a conversation. The Court resolved this conflict by applying a "comparative impairment" test, under which the governing law would depend upon which state's interest would be more impaired if its policy were subordinated to the policy of the other state. The Court determined that, because California law is more protective of privacy interests, California's interest in preventing unlawful invasions of privacy by secret recordings would be more severely impaired if its policy were subordinated to the interests of the State of Georgia.

The Court declined to subject Salomon to damages liability because Salomon's conduct may have been undertaken in the reasonable belief that the issue would be governed by the law of Georgia, rather than the law of California. However, the court issued a stark warning that no further allowances would be made to companies that tape-record California residents: "[O]ut-of-state companies that do business in California now are on notice that, with regard to future conduct, they are subject to California law with regard to the recording of telephone conversations made to or received from California, and that the full range of civil sanctions afforded by California law may be imposed for future violations." Such civil damages include the greater of triple actual damages, if any, or $5000 per violation, damages that could become staggeringly large when aggregated in a class action setting.

The Kearney case raises several considerations for companies who record customer calls. First, the California Supreme Court made it clear that federal wiretapping and eavesdropping laws do not preempt state statutes covering similar conduct. The Court specifically rejected the argument that federal law required the conduct in question. Although NASD rules required that the calls be recorded, the Court pointed out that no federal regulation or exchange rule required that the recording be done without notice to the customer. Therefore, the Court concluded that state legislatures are free to adopt, and in many instances have adopted, more restrictive regulations governing wiretapping and eavesdropping.

The Kearney decision highlights a company's need to be aware of the most restrictive aspects of the various state laws that might apply to a recorded telephone call. Wiretapping and eavesdropping laws vary from state to state, and some states' rules are more restrictive than those of other states. Some states, such as California, require that all parties consent to a recording for it to be lawful, while states such as Georgia require only a single party's consent. In some states, such as California, implied consent may be sufficient, while in other states express consent may be required. States also differ on whether particular circumstances, such as whether there was no "reasonable expectation of privacy" causes a conversation to fall outside of the statutory prohibition, and on whether there are applicable exceptions to the consent requirement, such as for recording harassing calls. If a company intends to engage in the recording of calls with persons located in other states, conflict of law rules ultimately may require the company to comply with more restrictive provisions of the laws where its customers are located. To remain in compliance, companies may need to revise their recording policies so that they comply with the most restrictive provisions of the laws of the states in which they do business.

While the Kearney decision turns on the choice of law conflict between California and Georgia law, the reasoning behind the decision is applicable to calls between California residents and companies or persons in other states. Thus, the court puts out of state businesses on notice that such conduct in the future will expose them to liability for the full range of sanctions under California law. The Kearney decision also makes it more likely that, in the future, courts in other states with a two-party consent requirement will apply their more restrictive laws to the recording of calls between their residents and out of state businesses. According to the Kearney case, there may be a simple solution in California - a recorded notice at the outset of the telephone call that alerts the caller that the call is being recorded. In other states, that may not be sufficient. Given that civil damages (including damages resulting from class actions), criminal penalties, or the potential loss of evidence could result, companies who make interstate calls should evaluate their recording practices and ensure compliance with all applicable state and federal eavesdropping and wiretapping laws before engaging in recording telephone calls.

For more information on this matter, please contact one of the following attorneys from the Schiff Hardin Litigation Group:

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