A business must notify its customers that telephone conversations with employees will be monitored, and can be penalized $5,000 per call for secret eavesdropping, a state appeals court ruled Monday.

California law "protects an individual's right to know who is listening to a telephone conversation," the Fourth District Court of Appeal in San Diego said in reinstating a class-action suit against a consumer finance company.

The company, CashCall, provided the standard tape-recorded message on most of its incoming calls from customers, advising them that the conversations "may be monitored or recorded for quality-control purposes." But plaintiffs in the lawsuit said there were no such messages on some incoming calls or on any outgoing debt-collection calls from employees to borrowers.

A San Diego judge dismissed the suit, saying state laws ban only undisclosed monitoring by an outsider and not by an employee of the same corporation. Eavesdropping requires a third person, Superior Court Judge William Nevitt reasoned, and a corporation and its employees are usually considered a single entity when someone sues them.

The appeals court disagreed.

"The violation of the privacy right is the same regardless of who employs the secret listener," said Justice Judith Haller in the 3-0 ruling.

CashCall also argued that customers would know that anything they said to an employee on the phone would be shared with supervisors. But Haller said the law protects Californians from having their conversations "secretly overheard," regardless of whether the information is passed along later.

Joshua Swigart, a lawyer for more than 500 CashCall customers, said they may disclose personal information to finance companies and collectors - such as a medical condition that has made it harder to pay a bill on time - and should at least be on notice that someone else is listening.

He said the ruling should encourage companies to tell employees who call customers that the conversations may be monitored.

CashCall's lawyer was unavailable for comment. The company could appeal to the state Supreme Court.

The ruling can be viewed at sfg.ly/tzcFYm.

E-mail Bob Egelko at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it.

This article appeared on page D - 3 of the San Francisco Chronicle