In Blair v. Rent-A-Center, Inc., No. C 17-02335 WHA, 2019 U.S. Dist. LEXIS 21988 (N.D. Cal. Feb. 11, 2019), Judge Alsup granted summary judgment to a merchandise lessor against a class action plaintiff’s claim that the contracts were disguised security agreements subject to usury.  The allegations were as follows:

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 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 payments had been made after a specified period, the consumer would own the merchandise. Consumers also had the right to acquire the merchandise prior to the end of the specified period by exercising an early-purchase option. The rental-purchase agreements governing these transactions defined plaintiffs as “lessee/renter/consumer” and defined RAC as “lessor/owner.” The agreements further provided that “[p]ayments [were] due at the [*3]  beginning of each term that you choose to rent the property.” The consumer had no obligation to renew the agreement beyond the initial term, but could elect to do so by making an advance payment for another successive term (Dkt. Nos. 118-39, 118-40).

Judge Alsup granted the defendant’s motion for summary adjudication as follows:

The California Constitution provides that “any loan or forbearance of any money, goods, or things in action, if the money, goods, or things in action are for use primarily for personal, family, or household purposes,” may accrue “at a rate not exceeding 10 percent per annum.” Cal. Const. Art. 15, § 1. California’s usury law therefore applies only to transactions which constitute a “loan or forbearance.” This order concludes that the rent-to-own transactions at issue in this litigation do not constitute a loan or forbearance and that California’s usury laws are therefore inapplicable. A “loan of money is a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed.” Cal. Civil Code § 1912. Rent-to-own transactions do not fall within this definition. Under the parties’ rental-purchase agreements, plaintiffs made rental [*6]  payments in advance to lease household goods on a weekly or monthly basis. Plaintiffs agree that this is a lease “in form” but argue that the transaction is nevertheless a loan “in substance.” To be sure, in determining whether a transaction is a usurious loan, one “must look to the substance of the transaction rather than to its form.” W. Pico Furniture Co. v. Pac. Fin. Loans, 2 Cal. 3d 594, 603, 86 Cal. Rptr. 793, 469 P.2d 665 (1970). According to plaintiffs’ characterization, if a consumer makes all rental payments delineated in a rental-purchase agreement and thereby gains ownership of an item, the consumer has in effect borrowed money to purchase the item and then repaid the purchase price with an additional sum. If the consumer chooses not to make all rental payments, plaintiffs argue, the consumer has effectively borrowed the item and paid a hefty price for the item’s use during the rental period. Contrary to plaintiffs’ characterizations, plaintiffs never incurred a debt or obligation to purchase the goods they rented. Rather, they paid in advance of each rental period with the choice to terminate the rental agreement at any time. While plaintiffs indisputably paid RAC significantly more to rent these items than they would have paid to purchase outright from a traditional [*7]  retailer, this does not transform the rental transaction into a loan. The Karnette Act itself — the very premise on which plaintiffs have anchored their case — defines a rental-purchase agreement as “an agreement between a lessor and a consumer pursuant to which the lessor rents or leases, for valuable consideration, personal property for use by a consumer for personal, family, or household purposes for an initial term not exceeding four months that may be renewed or otherwise extended, if under the terms of the agreement the consumer acquires an option or other legally enforceable right to become owner of the property.” Cal. Civ. Code § 1812.622 (emphasis added). The Act further provides that a rental-purchase agreement “shall not be construed to be, nor be governed by . . . [a] lease or agreement that constitutes a security interested, as defined in Section 1201 of the Commercial Code.” Ibid. Section 1201 provides that “[w]hether a transaction in the form of a lease creates a ‘security interest’ is determined pursuant to Section 1203,” which in turn states that “[a] transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation [*8]  for the term of the lease and is not subject to termination by the lessee.” Accordingly, under the text of the Karnette Act and California law, a rental-purchase agreement (which can be canceled by the consumer at any time without penalty) does not create a security interest. Plaintiffs concede that RAC is not liable under California usury law for rental-purchase transactions that fully comply with the Karnette Act’s pricing requirements. They instead argue that a transaction becomes subject to usury when it fails to adhere to the Act’s price caps. This order disagrees. That a violation of the Karnette Act’s price-caps may be remedied both through the Karnette Act’s remedial provisions and through other “remedies[] or penalties established under other laws,” Cal. Civ. Code § 1812.648, does not mean that the noncompliance of a rental-purchase agreement transforms the nature of the transaction into a loan or forbearance subject to usury laws. In sum, because the parties’ rental-purchase transactions do not constitute a “loan or forbearance” under California law, RAC’s motion for summary judgment on plaintiffs’ usury claim is Granted. Importantly, because RAC moved for summary judgment before notice regarding class [*9]  certification was sent to members of the class, this ruling binds only the named plaintiffs. Schwarzschild v. Tse, 69 F.3d 293, 297 (9th Cir. 1995).