New Jersey District Court Cleans Up Complaint in Washing Machine Class Action Litigation

Washing machine class actions have been so active recently that some firms may be scrambling to form their own appliance-law practice groups.  And who knows?  That might not be a bad idea.  Some of our greatest legal minds, like Judge Posner, have been weighing in on this litigation.  In two of his opinions, the Seventh Circuit certified a washing-machine purchaser class (see our comments on that decision here) and later reinstated it after the Supreme Court vacated and remanded the certification decision for reconsideration consistent with its decision in Comcast v. Behrend

We’re not sure what all the excitement is about.  Washing machines seem fine to us.  Great, really.  You put the clothes in, turn it on, and they come out clean.  You move the clothes to the dryer, turn it on, and they come out dry and clean.  No washboard, no scrubbing, no clothes line.  That’s tremendous.  Where’s the problem? 

Well, the class action complaints say the problem is mold.  And, admittedly, that doesn’t sound good.  But does it sound like a class action?  Judge Posner thought so.  And the Supreme Court (recently) decided not to disturb his decision.

So, regardless of whether we believe that these cases are properly treated as class actions, it is clear that opposing class certification has gotten harder.  Fortunately for defendants, however, much can happen to the claims before the class certification stage.  In particular, a Rule 12(b)(6) challenge to the legal viability of the claims can be very helpful.  That’s what Samsung America tried, to great success, in Spera v. Samsung Electronics America, another washing-machine class action in which plaintiffs from New Jersey, Missouri and Colorado asserted warranty claims, unjust enrichment claims, and claims under the New Jersey Consumer Fraud Act (“NJ CFA”) as well as the Missouri and Colorado consumer protection statutes.

Some of the claims against Samsung America simply weren’t viable.  The implied warranty of merchantability claim never stood a chance.  The user manual disclaims – in all capital letters – “any implied warranties of merchantability”:


That reads like a winner.  And, as the court recognized in a string cite, New Jersey law honors such clear and conspicuous disclaimers.  The claim was dismissed. 

The Missouri and Colorado plaintiffs’ claims under the NJ CFA weren’t viable either.  While these out-of-state plaintiffs no doubt found attractive the availability of treble damages under the NJ CFA, the court cited a long line of Third Circuit case law “holding that a consumer’s home state law should apply to transactions that bear no relationship to New Jersey other than the location of the defendant’s headquarters.”  So, as much as these particular plaintiffs may have wanted to sue under the NJ CFA, they couldn’t. 

One claim – the unjust enrichment claim – just couldn’t work.  The plaintiffs didn’t purchase directly from Samsung America.  The court noted:  “Under New Jersey law, an indirect purchaser cannot succeed on a claim for unjust enrichment.  When an individual purchases a consumer product from a third-party store and not the manufacturer, the purchaser has not conferred a benefit directly to the manufacturer such that the manufacturer could be found to have been unjustly enriched.”

Other claims went away because of pleading deficiencies that could present lasting difficulties for plaintiffs.  For their express warranty claims, the plaintiffs didn’t allege that they gave Samsung America the required notice during the warranty period.  While the plaintiffs may turn around and simply add the notice element to their amended pleadings, it may not be so simple.  The notice element adds complexity and individuality to the plaintiffs’ claims, which is never good for plaintiffs in a class action.  It will also reduce the number of potential class members, which is never good for plaintiffs’ attorneys in a class action. 

The plaintiffs also failed to plead sufficient facts to suggest an ascertainable loss under what remained of their New Jersey, Missouri and Colorado consumer fraud act claims.  They alleged no more than that the washing machines were worth less than what they paid for them.  Under TwIqbal (that’s Twombly and Iqbal for the uninitiated), however, plaintiffs must plead facts that make their claim plausible.  These types of conclusory allegations don’t work:

Here Plaintiffs have not alleged how much they paid to purchase, repair or replace their washers.  Instead, Plaintiffs claim broadly that they “have suffered an ascertainable loss in the form of…monies spent to repair and replace the Washing Machines and diminution in value of the Washing Machines.”  For Plaintiffs to adequately plead ascertainable loss, they must set forth more specific facts as to their out-of-pocket loss and/or the alleged diminution in value of the Washing Machines they purchased.  Ultimately, Plaintiffs must make a more detailed attempt to quantify the difference in value between the promised product and the actual product received.

In fact, since each of these consumer fraud act claims are based in fraud, the plaintiffs’ allegations must satisfy the heightened pleading requirement for fraud under Rule 9(b).  Plaintiffs’ allegations that Samsung America knew of the alleged defect in the washing machines didn’t meet this standard either:

The Complaints do not pinpoint a specific time at which Samsung allegedly became aware of the purported defect.  Plaintiffs’ Complaints allege that Samsung received an “avalanche of consumer complaints.”  However, Plaintiffs fail to identify a particular complaint, who it was made by, who it was received by, or when it would have put Samsung on notice of the alleged defect.  Overall, the Complaints do not provide sufficient factual allegations to establish that Samsung knew of the alleged defects prior to the sale at issue in this litigation.

This was an additional reason to dismiss the consumer fraud act claims.

Now, it is true that the plaintiffs will have an opportunity to amend their complaint.  And they may or may not fix some of these problems.  But they’ve been hobbled a bit.  The purchasers outside of New Jersey will not have treble damages available to them.  Those who failed to give notice to Samsung America during the warranty period cannot be members of the potential class or may become members of a much smaller class, all of which may tempt the plaintiffs to drop that claim altogether.  And stating a proper complaint, particularly as to the consumer fraud act claim elements, has now become more costly and difficult for the plaintiffs.

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Posted in Articles, Consumer Class Actions

No Silver Lining for Plaintiffs as J.P. Morgan Defeats Silver Market Manipulation Suit

History has shown that large class action cases often follow government investigations the way that the lamb followed Mary to school that day.  Sometimes, however, those investigations die and Mary gets lost and brings her little lamb to the slaughterhouse. 

The Second Circuit recently affirmed the dismissal of a class action in which investors claimed that J.P. Morgan manipulated the price of silver in violation of the Commodity Exchange Act (“CEA”) and the Sherman Antitrust Act.  In In re Commodity Exchange, Inc. Silver Futures & Options Trading Litigation, the putative class of investors in COMEX silver futures and options contracts had alleged that  J.P. Morgan artificially deflated silver prices in order to profit from the massive short position it held in the market.  The plaintiffs also accused JP Morgan of improper “late day trading.”

More than a year ago, on March 15, 2013, the district court dismissed the suit because the plaintiffs didn’t support their claims with sufficient factual allegations.  The district court also denied the plaintiffs’ request to file an amended complaint.  So the plaintiffs were off to the Second Circuit! 

But the Second Circuit summarily affirmed.  The plaintiffs had simply failed to plead the facts needed to state a CEA market manipulation claim:  1) the defendant had the ability to influence prices; 2) the defendant had the intent to do so; 3) the manipulation resulted in an artificial price; and 4) the defendant, in fact, caused the artificial price.  The Second Circuit also affirmed the district court’s denial of the plaintiffs’ request to file an amended complaint.

The court rejected the plaintiffs’ argument that an intent to defraud could be inferred simply from J.P. Morgan’s market power, noting that “this ‘incentive’ could be imputed to any company with a large market presence in any commodity market.”  We agree.  Such reasoning would, in essence, eliminate this pleading requirement and allow a plaintiff to satisfy it by simply suing companies with a large presence in a market.   

The court also nixed the plaintiffs’ “vague allegations” of “uneconomic conduct, ” finding that the plaintiffs offered no specific factual allegations to support their argument that J.P. Morgan’s trading behavior was “inconsistent with trying to obtain the best sales price execution, but consistent with trying to move prices down by aggressively selling in a compressed period to receive less on the sales transactions.”  Once again, the court refused to infer intent from the, shall we say, less-than-compelling supporting allegations.

Finally, the Second Circuit scrapped the plaintiffs’ Sherman Act conspiracy claims, noting that “Plaintiffs failed to plausibly allege even a tacit agreement to manipulate prices,” offering only conclusory allegations of the type that Twombly and Iqbal have (supposedly) eradiated. 

In a wonderful  coincidence (if you happen to be J.P. Morgan), the day that Sullivan & Cromwell (Daryl Libow and Amanda Davidoff) filed its responsive brief in the Second Circuit on behalf of J.P. Morgan, the Commodity Futures Trading Commission announced that it was closing its five-year investigation into the alleged improper manipulation of the silver market.  This allowed J.P. Morgan to end the first paragraph of its preliminary statement with this nugget: “Indeed, the CFTC today closed the investigation that prompted this lawsuit, determining that there was “not a viable basis” to support any claims of manipulation.”  That’s a litigator’s dream.  Though, to be fair, it’s a nightmare if you happen to be on the other side.

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Posted in Securities Class Actions

Back to Basic? Big Changes Could Be Coming to a Securities Class Action Near You

Earlier this month, the Supreme Court heard the highly-anticipated oral argument in Hallburton Co. v. Erica P. John Fund, Inc.  Prior to the argument, there was a growing consensus that the Court was likely going to overturn Basic Inc. v. Levinson (1988), the groundbreaking case that adopted the “fraud-on-the-market” doctrine and allowed plaintiffs to proceed without a showing that they had actually relied on any particular alleged misrepresentation (reliance having been a bedrock requirement in fraud cases, dating back to the Garden of Eden).  But the tea leaves left over after the oral argument point to a different result—a compromise that would create additional significant hurdles for class plaintiffs but not eviscerate securities class actions.

Halliburton is the rare case where one of the parties has explicitly asked the Supreme Court to overrule one of its prior cases.  (This is the second time in the case that an issue has made its way to the Court; the Court in 2011 reversed the Fifth Circuit’s holding that proof of loss causation was required at the class certification stage.)  The argument was notable because of the prominent role that an amicus brief (written on behalf of a group of law professors) played and because of a key concession made by Deputy Solicitor General Malcolm Stewart, who argued on behalf of the SEC, ostensibly on the Respondent’s side.  

Basic’s fraud-on-the-market doctrine has been a critical aspect of securities class actions for the past 25 years.  In a nutshell, the fraud-on-the-market doctrine acts as a substitute for the reliance element of a securities fraud claim, and allows plaintiffs to get past the critical class certification stage without showing that any member of the class actually relied on any allegedly false statements.  The fraud-on-the-market doctrine was considered an adequate proxy for reliance, in large part, because of the “efficient market hypothesis,” which was in vogue at the time that Basic was decided.  The efficient market hypothesis, posits that financial markets rapidly take all publicly-available information into account, and the price of a security, therefore, has all material information baked into it.  So, according to the fraud-on-the-market doctrine, the buyer of a security is presumed to have relied on a particular public misrepresentation because the import of that misrepresentation was already reflected in the stock price at the time of the purchase.

In the years since Basic was decided, a class could avail itself of the presumption of reliance by demonstrating that (1) the alleged misstatement was made publicly; and (2) the market in which the security traded was “efficient.”  The key hurdle to invoking the fraud-on-the-market doctrine is the demonstration of market efficiency.  This is critical at the class certification stage because the presumption of reliance takes an issue that traditionally was a quintessentially individual issue (did Jane Doe rely on the misrepresentation?) and turns it into a common issue for the entire class (does Doe, Inc.’s stock trade in an efficient market?).  And, as it has turned out over the past quarter century, it is has not been particularly difficult for plaintiffs to demonstrate in most instances that the markets in which the subject securities traded (such as the New York Stock Exchange) were “efficient.”  At the same time, it has been difficult for defendants to rebut the reliance presumption.

The petitioner in Halliburton seeks to have the Court do away completely with the presumption of reliance, which would then require plaintiffs to demonstrate reliance in some other fashion.  Without the presumption, plaintiffs would, presumably, need to demonstrate reliance on an individual basis, which would then make it nearly impossible to certify a class.   In the alternative, the petitioner asks the Court to require plaintiffs to show that a particular “misrepresentation actually distorted the market price” in order to invoke the presumption of reliance. 

The oral argument offered significant insight into how the case may ultimately be decided.  On several occasions, the more conservative justices, in particular Justice Kennedy, asked about the “middle ground” suggested by the Petitioner and more forcefully (and persuasively) argued in the amicus curiae brief submitted on behalf of the group of law professors who specialize in corporate and federal securities law. 

The law professors argue that the fraud-on-the-market doctrine need not rely on the efficient market hypotheses, which has been both misunderstood and, to a large extent, discredited in the years since Basic was decided.  And, since the fraud-on-the-market doctrine and the efficient market hypothesis are independent of each other, one can jettison the efficient market hypothesis without killing the fraud-on-the-market doctrine—keeping the baby but not the bathwater. 

The alternative to the efficient market hypothesis that the law professors suggest is requiring a plaintiff at the class certification stage to show, with regard to each alleged misrepresentation, that the particular alleged misrepresentation in fact had an impact on the price of the security.  Price impact can be demonstrated by using event studies, which are commonly-used analyses often used in the later stages of securities litigation by parties trying to prove or disprove materiality or loss causation.  So, instead of requiring a plaintiff to show that a market is generally an efficient one, the professors argue that plaintiffs should be required to establish that the market was efficient in their particular case

During the argument, Petitioner’s counsel, Aaron Streett, quickly recognized that none of the justices (at least the eight who asked questions) seemed particularly inclined to overrule Basic in its entirety and spent most of his time supporting the law professors’ position that the fraud-on-the-market doctrine was still viable, but that the presumption should arise only if an event study demonstrates price impact.  And David Boies, who argued on behalf of the Respondent, also primarily answered questions about the law professors’ position. 

The justices seemed interested in how great a burden these event studies would be, and, while both Streett and Boies acknowledged that event studies would be sufficient to invoke the presumption and that the same event studies would, in any event, be required later in the case to prove loss causation, they differed on the alleged burden that the event study would impose on plaintiffs at the class certification stage.  Boies argued that requiring plaintiffs to demonstrate price impact can be a significant burden—especially in situations where there are multiple events and significant confounding effects affecting the security in question.  Streett, on the other hand, argued that there was little, if any, added burden since plaintiffs would need event studies later in the litigation.

Perhaps the most significant moment of the oral argument was when Justice Kennedy asked Deputy Solicitor General Malcolm Stewart about the law professors’ position.  Stewart, who argued on behalf of the SEC as amicus curiae on behalf of the respondent, said the following:

“I understand the professors … basically advocated a shift away from analyzing the general efficiency of the market and focusing only on the effect or lack of effect on the … particular stock.  I don’t think that the consequences would be nearly so dramatic.  In fact if anything that would be a net gain to plaintiffs because plaintiffs already have to prove price impact at the end of the day.”

With amici like that, who needs inimici?

At the end of the day, it appears likely that securities class actions will not go the way of the dodo bird.  At the same time, the burdens on plaintiffs seeking class certification will likely rise.  We will certainly get to see soon enough whether we have read these tea leaves correctly.  And we will report on what happens when the decision comes down.  

Posted in Uncategorized

A Settlement That Gave Plaintiffs a Second Bite at the Apple

A class action settlement that allows the compensated plaintiffs to sue the defendant a second time for the same loss.  A settlement fund from which the defendant is permitted to compensate itself for settling such “second lawsuits.”  Hard to imagine?  Think again.

The Seventh Circuit recently gave its final blessing to a complicated settlement scheme that contained precisely such elements.  Though clearly a product of creative lawyering, the court refused to hold such a settlement unenforceable merely because some parties were able to exploit a loophole.

The unusual settlement, initially approved by an Illinois federal judge  in In re: Trans Union Privacy Corp., resolved a series of class actions alleging Trans Union’s unlawful sale of lists of consumer credit reports.  Trans Union agreed to compensate class members through a combination of basic credit monitoring services and one of the following:  (i) cash from a $75 million settlement fund, (ii) additional credit monitoring services, or (iii) the right to bring their claims a second time, provided they did so on an individual basis and not as part of another aggregate action.  For those who elected option (iii), Trans Union agreed to waive the statute of limitations defense for any individual action commenced within two years.

Yet another twist:  Should any of those individual lawsuits brought by class action members result in a settlement or judgment against Trans Union, the settlement agreement permitted Trans Union to reimburse itself out of the $75 million settlement fund.  Trans Union was not permitted to reimburse itself for defense costs, but could dip into the fund only to satisfy a settlement or judgment.  No restrictions were placed on Trans Union’s authority to settle the claims, thus giving Trans Union a powerful incentive to settle all claims rather than bear the cost of defending them.

Following the settlement, more than 70,000 individual lawsuits were filed on behalf of class members who had elected option (iii).  Most were filed in Nueces County, Texas, which the Seventh Circuit characterized as “presumably the jurisdiction with the lowest filing fee the lawyers could find.”  Trans Union settled the cases and sought to reimburse itself to the tune of $35 million from the settlement fund.  The district court approved the settlement and permitted the reimbursement.

One of the class counsel attempted to block the reimbursement to Trans Union, arguing that the individual lawsuits were really, in substance, class actions that were prohibited under the settlement.  Counsel also argued that Trans Union should not be reimbursed for settling claims it could easily have defeated, some of which were asserted after the two-year statute of limitations of waiver had expired.

The Seventh Circuit, in essence, held the class to its agreement.  Because each of the post-settlement lawsuits was filed on behalf of a single plaintiff, the lawsuits did not meet the contractual definition of a “class action”—even though, the court acknowledged, the analysis might be different under CAFA.  As to the merits of the settlements, the court pointed to the unfettered authority given Trans Union to settle even the weak cases:  “The Settlement Agreement gave Trans Union complete discretion to fold even a winning hand.”

Perhaps the moral of the story is twofold.  First, “outside the box” settlements are entirely permissible, if otherwise deemed fair and reasonable.  Second, such settlements must be crafted with particular care, as they are especially vulnerable to unintended consequences.

Posted in Settlement Approval, Uncategorized

Second Circuit: TCPA Class Actions Permitted in New York Federal Courts

A recent shift in 2nd Circuit law may lead to a rise in class actions under the Telephone Consumer Protection Act (TCPA). See Bank v. Independence Energy Grp. LLC, 736 F.3d 660 (2d Cir. 2013). After a 2012 Supreme Court case shed light on the proper interpretation of a section of the TCPA, the U.S. Court of Appeals for the 2nd Circuit took up the question on December 3, 2013 and paved the way for TCPA class actions in New York federal courts.

The TCPA is a federal statute, prompted by consumer complaints of abusive telephone practices, that prohibits certain telemarketing calls, faxes and text messages without prior consent. The statute provides a private cause of action to recipients of unauthorized messages and affords damages between $500 and $1,500 per violation. See 47 U.S.C. § 227. Because these statutory damages may become extensive when aggregated, they have frequently been the basis of class actions in other states.

Until recently, federal courts in New York have barred TCPA class actions pursuant to New York’s Civil Practice Law and Rules (CPLR) 901(b), which prohibits class actions for statutory damages. Because the TCPA had been interpreted to create a private cause of action only if otherwise allowed by state law, CPLR 901(b) had been applied to bar TCPA class actions in both state and federal courts in New York. Allowing the state to set the boundaries of statutory damage class actions significantly limited the number of class actions brought in New York.

The Supreme Court’s decision in Mims v. Arrow Fin. Servs., LLC largely emancipated TCPA claims asserted in federal courts from state law constraints. In Mims, the Supreme Court considered whether a state statute of limitations applied to a TCPA private cause of action pending in federal court. The Court interpreted section 227(b)(3) of the TCPA, which states that “[a] person or entity may, if otherwise permitted by the laws or rules of court of a State, bring [an action] in an appropriate court of that State.” The defendant argued that section 227(b)(3) precluded federal subject matter jurisdiction over TCPA actions. The Supreme Court disagreed, noting that there was “no convincing reason to read into the TCPA’s permissive grant of jurisdiction to state courts any barrier to the U.S. district courts’ exercise of the general federal question jurisdiction they have possessed since 1875.”  The Supreme Court, recognizing that Congress has a strong interest in uniform standards for TCPA actions in federal courts, held that federal courts have subject matter jurisdiction over TCPA claims.

In Bank, the 2nd Circuit applied the Supreme Court’s interpretation of TCPA section 227(b)(3) to CPLR 901(b), and reversed its previous decisions applying the bar to TCPA class actions in New York federal court. The 2nd Circuit noted that Mims triggered a fundamental shift in the way that the court views section 227(b)(3)’s “if otherwise permitted” language, and “uprooted much of our TCPA jurisprudence.” Ultimately, the 2nd Circuit found that Federal Rule of Civil Procedure 23 now governs TCPA class actions in federal courts, and New York’s CPLR 901(b) can no longer be used to bar those actions.

The effects of the 2nd Circuit’s decision have yet to be fully realized, but the implications are clear. The New York federal courts can expect to see TCPA class actions in the near future.

Posted in Uncategorized

Supreme Court: CAFA’s “Mass Action” Provision Does Not Apply to Lawsuits By States

The Supreme Court today unanimously held that a state’s lawsuit on behalf of its injured citizens cannot be removed to federal court under the “mass action” provision of the Class Action Fairness Act.

In Mississippi v. AU Optronics Corp., the Court overturned a Fifth Circuit decision that permitted an LCD manufacturer to remove an antitrust and consumer protection lawsuit brought by the Mississippi attorney general on behalf of LCD purchasers.  The Fifth Circuit held that the case was removable under CAFA’s mass action provision, which permits removal of a lawsuit that proposes the joint trial, based on common issues, of monetary relief claims of at least 100 persons with an amount in controversy of at least $75,000.  The court interpreted the mass action provision as requiring it to “pierce the pleadings” and identify the “real parties in interest”—which in the case, said the court, were the injured citizens.

            The Supreme Court, however, dismissed the “real parties in interest” concept as inapplicable to CAFA.  Congress, the Court held, did not require a real party in interest inquiry in adopting CAFA, and federal courts have generally conducted such an inquiry only in the context of ascertaining diversity jurisdiction.  The mass action provision, therefore, applies only where there are 100 plaintiffs—not 100 real parties in interest.

            The Court had taken the case largely to resolve a circuit split, as the Seventh and Ninth circuits had previously required the remand of cases brought by states and removed to federal court under CAFA’s mass action provision.  Like the Fifth Circuit, however, those courts had embraced the real party in interest inquiry, but had merely determined that the citizens on whose behalf the state sued were not the real parties in interest.  The Court, by squelching the real party in interest inquiry under CAFA, has effectively rejected the approaches of all three lower courts.

Posted in Jurisdictional Issues

“Picking Off” the Named Plaintiff Can Stop a Class Action–in Some Circuits

An occasionally effective strategy among class action defense counsel is to try to settle with the named plaintiff(s) before the class can be certified.  While plaintiffs’ counsel will ordinarily be unreceptive to such an attempt—and can usually find a substitute plaintiff to keep the class action alive—sometimes the named plaintiff is sufficiently important to the case that a “pick off” settlement can deal a mortal blow to the litigation.

But what if the named plaintiff doesn’t want to settle?  Some defense counsel have attempted to pick off the named plaintiff through a Rule 68 offer of judgment that offers full relief, which often—particularly in consumer cases—is a minimal cost to the defendant.  If the offer is unaccepted, the plaintiff is liable for any costs the defendant incurs after the offer was made.  But does the fact that the named plaintiff was offered full relief moot the case and require its dismissal?

A circuit split has been percolating on this question for several years.  In the Seventh Circuit, the pick-off strategy works just fine:  the court of appeals there has held that an unaccepted offer of full relief to the named plaintiff does indeed moot the case, and since there is no longer a live controversy, the action must be dismissed.  The Fourth Circuit has held similarly, though not in the specific context of a pre-certification offer of judgment.  The Second and Sixth Circuits have also taken a similar position, but have required entry of judgment for the plaintiff in accordance with the Rule 68 offer, so that the plaintiff obtains full relief despite having declined the offer.

            In the Third, Fifth, and Tenth Circuits, the unaccepted offer of judgment moots the individual claim but not the class action, provided the offer is made so early that the named plaintiff could not have filed a class certification motion.  There, a pick-off Rule 68 offer cannot stop the litigation, but it can force an early motion for class certification.

            The reasoning in those cases has been taken a step further in two recent cases.  In Diaz v. First American Home Buyers Protection Corp., the Ninth Circuit held last summer that an unaccepted Rule 68 offer becomes “a legal nullity,” and even the named plaintiff’s claim remains unsatisfied.  And at the end of 2013, in Bais Yaakov of Spring Valley v. ACT, Inc.,  a federal district court in Massachusetts—noting the absence of controlling First Circuit authority—followed Diaz.

            Both courts were inspired by Supreme Court Justice Kagan’s memorable dissent last April in Genesis Healthcare Corp. v. Symczyk, in which the Court declined to resolve the circuit split on the ground that the Third Circuit’s mootness determination had not been challenged.  Justice Kagan excoriated the majority for failing to address and reverse the determination, insisting that an unaccepted settlement offer has no legal effect and offering “a friendly suggestion to the Third Circuit:  Rethink your mootness-by-unaccepted-offer theory.  And a note to all other courts of appeals:  Don’t try this at home.”

            The Ninth Circuit and the Massachusetts court have taken Justice Kagan’s advice to heart.  For now, however, the viability of the pick-off strategy is entirely dependent on where the defendant has been sued.

Posted in Jurisdictional Issues

When Do Multiple State Court Actions Become a Removable “Mass Action”?

Under the Class Action Fairness Action of 2005, defendants may remove certain class actions to federal court if they meet the definition of “mass actions.” To qualify as a “mass action,” a lawsuit must involve “monetary relief claims of 100 or more persons [that] are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact.” But consolidation or coordination of multiple claims “solely for pretrial proceedings” doesn’t count.

So may a group of more than 100 plaintiffs circumvent removal by divvying up their common claim into several smaller lawsuits? Yes, so long as they are not “proposed to be tried jointly.” But to what extent can the groups attempt to coordinate their cases without crossing the line into become a single “mass action” for CAFA purposes?

Three appellate decisions have addressed the issue over the last two years. While the three opinions are difficult to reconcile, the common thread seems to be that a trial court considering remand to state court is required to examine the plaintiffs’ consolidation proposal carefully to determine not only the plaintiffs’ intent, but the likely practical consequences of their proposal.

The first of the three cases, In re Abbott Laboratories, involved ten separate personal injury actions filed on behalf of several hundred plaintiffs against the same defendant in Illinois state court. The plaintiffs moved the Illinois Supreme Court to exercise its discretion under a court rule allowing for “consolidated pretrial, trial, or post-trial proceedings.” The plaintiffs stated that they were requesting consolidation “through trial” and “not solely for pretrial proceedings.” After the defendant removed, the federal district court remanded the cases to state court, concluding that the plaintiffs did not seek a joint trial of hundreds of claims, but merely a trial of “bellwether” claims that would be tried individually to address issues common to all claims.

The Seventh Circuit reversed the remand order and held that the separate lawsuits constituted a mass action. In addition to the plaintiffs’ acknowledgment that their request was not limited to pretrial consolidation, the court relied on the plaintiffs’ assertion that consolidation “would facilitate the efficient disposition” of the actions “without the risk of inconsistent adjudication.” The panel found it “difficult to see how a trial court could consolidate the cases as requested by plaintiffs and not hold a joint trial or an exemplar trial with the legal issues applied to the remaining cases. In either situation, plaintiffs’ claims would be tried jointly.” Thus, the Seventh Circuit rejected the district court’s notion that a “bellwether” or “exemplar” trial would not create a mass action.

Then, in Romo v. Teva Pharmaceuticals USA, attorneys for plaintiffs in more than 40 California state court product liability actions sought to invoke a state procedural rule allowing coordination of common actions “for all purposes.” In this case, the Ninth Circuit affirmed the district court’s remand order in a split decision. The court relied heavily on the plaintiffs’ argument that coordination would avoid “duplicative discovery, waste of judicial resources and possible inconsistent judicial rulings on legal issues.” Although the plaintiffs’ petition did refer to the advantages of “[o]ne judge hearing all of the actions for all purposes,” the panel concluded that this statement should be interpreted in the context of the petition’s repeated mentions of discovery. Any ambiguity, the court held, should be resolved in favor of remand, given the accepted premise that removal statutes should be strictly construed.

The most recent decision, Atwell v. Boston Scientific Corp., involved product liability actions filed in Missouri state court against four manufacturers of transvaginal mesh medical devices. Three of the groups included claims against Boston Scientific Corporation, with each group containing fewer than 100 plaintiffs. The three groups filed similar motions proposing that each group be assigned “a single Judge for purposes of discovery and trial.” After Boston Scientific removed the cases, two federal district judges remanded the cases to state court on the ground that there was no proposal for a joint trial.

The Eighth Circuit reversed. The court noted that two of the three groups, while disavowing any desire to consolidate the cases for trial, sought assignment to a single judge who could “handle these cases for consistency of rulings, judicial economy, [and] administration of justice.” The third group, at oral argument, said the motion was intended “to have it assigned to the judge that’s going to try the case because of the complexity that’s going to occur all the way through . . . There’s going to be a process in which to select the bellwether case to try.”

While one district court had found that the “bellwether case” reference was merely “a prediction of what might happen if the judge decided to hold a mass trial,” the Eighth Circuit held that “counsel’s statements revealed the purpose of their motions—a joint assignment in which the ‘inevitable result’ will be that their cases are ‘tried jointly.’”

What to glean from these three opinions? First, whether claims are “proposed to be tried jointly” is a fact-intensive inquiry. District courts are not be permitted to look merely to titles of pleadings or to accept plaintiffs’ requests at face value, but instead are expected to parse the language in plaintiffs’ consolidation motions and at oral argument. Second, even if plaintiffs’ request is clearly limited to pretrial consolidation, a case should not be remanded if a joint trial is the inevitable result. Lastly, a proposal to try one of the consolidated case as a “bellwether” is a proposal for a joint trial for CAFA purposes.

Posted in Jurisdictional Issues

Extending the Reach of Comcast v. Behrend

This past March, the Supreme Court held that a class may not be certified if its proposed damages model does not adequately limit damages to the alleged wrongful conduct that will be adjudicated before the trial court. In Comcast Corp. v. Behrend, the Court reversed class certification where the trial court had certified the class as to only one of several proposed theories of harm, but the class’ damages model failed to filter out damages attributable to the theories the court had rejected.

Although the circumstances that led to the decision in Comcast seem unusual, the principle articulated by the Court may have widespread application. One example is a recent federal court decision from California denying class certification, in part on Comcast grounds.

In In re Citimortgage, Inc. Home Affordable Modification Program (“HAMP”) Litigation, the plaintiffs sought to certify statewide classes of mortgage holders who had sought to modify their mortgages pursuant to the federal HAMP program. The putative class members were those who had made all of their “trial” payments to Citimortgage under a HAMP Trial Payment Plan Agreement, but had not been either offered a permanent HAMP agreement or given a timely written denial of eligibility for such an agreement. The court determined that the Rule 23(a) threshold requirements for class certification were satisfied, but that the class could not meet any of the Rule 23(b) prerequisites.

The class relied primarily on Rule 23(b)(3), which requires a finding that common questions predominate over individual questions and that a class action is the superior method for fairly and efficiently adjudicating the controversy. The court held that common questions did not predominate.

The common question identified by the class was whether Citi breached the Trial Payment Plan Agreement by failing to provide a permanent modification or a written denial by the deadline set forth in the agreement. The court agreed that this was a common question, but held that it did not predominate over individual issues. For example, the court held, the applicable deadline could not be determined with respect to a given agreement simply by identifying the deadline set forth in the agreement, because the deadline might have been affected by such other considerations as the parties’ course of conduct, changes in income, inaccurately reported income, or various representations regarding outstanding documentation. Moreover, the court found that individual representations made by Citi to individual plaintiffs would be critical in evaluating such issues as reliance and likelihood of deception.

The most significant aspect of the opinion, however, was the court’s determination that measuring damages would also involve a wide range of individual issues. The court stated, for example, that some borrowers might default even on a modified payment, thereby affecting the calculation of damages. Citing Comcast, the court concluded that the plaintiffs had “failed to propose a measurement that can be applied classwide and ties breach of contract and other legal theories to liability and a reliable measure of damages.”

The court’s determination that individual issues predominated is not particularly remarkable, given the factors potentially distinguishing the various class members. The same cannot be said, however, for the court’s reliance on Comcast. In Comcast, the Court refused to consider a damages model that was overbroad in that it measured damages for all unlawful conduct, not merely the unlawful conduct deemed appropriate for classwide adjudication. The flaw articulated by the Court would have undermined even a customer-by-customer damages inquiry, because even with respect to a single customer, the plaintiffs could offer no way to separate the damages attributable to one theory of harm from those attributable to the other theories. The plaintiffs’ expert in Comcast acknowledged that such a distinction could not be made.

The Court in Comcast, quoting the Third Circuit majority that it reversed, did not quarrel with the majority’s proposition that plaintiffs at the certification stage need only “assure” the court that damages are “capable of measurement and will not require labyrinthine calculations.” Rather, the Court’s concern was that “such assurance is not provided by a methodology that identifies damages that are not the result of the wrong.”

This was not the case in Citimortgage. There was no suggestion that any damages to class members in Citimortgage could not be measured pursuant to a model or formula that would take individual circumstances into account. Neither did the court provide any basis for the conclusion that differences in, for example, a customer’s likelihood of defaulting on a modified payment could not be incorporated into a damages model. Instead, the court appeared to require at the class certification stage what Comcast did not: a fully developed, Daubert-proof damage model.

Will other courts similarly interpret Comcast as imposing such a stringent requirement at the class certification stage? If so, then Comcast may have even broader implications than initially suspected.

Posted in Rule 23 Compliance Issues

The Consequences of Not Invoking a Right to Arbitrate

A class action is brought against a company notwithstanding an arbitration provision in the company’s standard contract. The company does not move to compel arbitration, but begins litigating the matter in federal court. A second plaintiff brings an identical class action against the same company, which is consolidated with the first class action. May the company move to compel arbitration of the second action, or has it waived its right to arbitration?

The Ninth Circuit recently faced this question. Although the court ruled for the company on the facts, the broader answer remains unclear.

In Richards v. Ernst & Young, LLP, a former employee brought a wage and hour action against Ernst & Young. Ernst & Young moved to compel arbitration. The district court denied the motion, holding that Ernst & Young had waived its right to arbitration by failing to assert that right as a defense in an earlier action that had been consolidated with Richards.

 In reversing, the Ninth Circuit reiterated that a party seeking to prove waiver of a right to compel arbitration must show (i) knowledge of the right, (ii) acts inconsistent with that existing right, and (iii) prejudice resulting from such inconsistent acts. The plaintiff focused solely on the third prong, claiming she had been prejudiced by the court’s dismissal of some of her claims on the merits and by costs she had incurred as a result of discovery taken by Ernst & Young. The court disagreed, holding that the dismissed claims—one was dismissed without prejudice, the other for lack of standing—were not decisions on the merits. As to the discovery costs, the court noted that there was no suggestion the plaintiff would not have been required to produce the same discovery in arbitration. The court also noted that any such costs would have been “self-inflicted” as a result of the plaintiff’s decision, notwithstanding a mandatory arbitration provision, to bring her claim in an “improper forum.”

Because the basis of the court’s reversal was the absence of prejudice, the opinion did not address the other elements required to prove waiver. But what if there had been prejudice? Did Ernst & Young, in declining to move to compel arbitration in the first action, act inconsistently with its right to arbitrate? Waiver of a right to arbitration usually results from the waiving party’s conduct in the current lawsuit, such as engaging in substantial litigation or a protracted delay before seeking to arbitrate. But here, the district court found that Ernst & Young waived its arbitration rights by failing to exercise them in a separate, though consolidated, action—and the Ninth Circuit left this aspect of the district court’s ruling undisturbed.

Does an arbitration clause really require a defendant to choose arbitration every time it is sued, or risk waiving its rights forevermore? The question is not an academic one, but one that could arise repeatedly in the coming years. While a company with an arbitration clause might be expected to routinely invoke that clause as a matter of course, it appears that Ernst & Young had a good reason for not seeking arbitration in the first case: a California Supreme Court holding that certain class action waivers were invalid. Ernst & Young’s motion in Richards came only after the U.S. Supreme Court reversed that holding in AT&T Mobility v. Concepcion. Given the frequency with which the Supreme Court, and the lower federal appeals courts, are ruling on the validity of class action waivers in arbitration clauses, the possibility that companies will find themselves in a similar position to Ernst & Young is very real. Accordingly, class action defendants that have a contractual right to arbitrate should proceed with caution before deciding not to invoke that right—even if they believe their motion to compel arbitration is likely to be denied.

Posted in Arbitration Issues
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