Class Action Defense Review : Antitrust, Employment Discrimination, Securities Fraud and Unfair Competition Lawyer & Attorneys: Cozen O'Conner Law Firm: Philadelphia

A recent California federal court decision denied certification to a putative class of Facebook “cost-per-click” advertisers who allegedly were charged by Facebook for fraudulent or invalid clicks on their advertisements. The decision, while illustrating the difficulty in obtaining class certification when litigating under a contract whose terms cannot be easily defined, arguably clouds the standards governing class certification in a uniform contract case.

In In re Facebook, Inc. PPC Advertising Litigation, the named plaintiffs entered into cost-per-click contracts with Facebook, in which the advertiser pays a fee to Facebook each time a user clicks on the advertisement. The plaintiffs claim that they were charged improperly for clicks in which the user attempted unsuccessfully to reach the advertisement, unintentional multiple clicks from a user in rapid succession, clicks made in a deliberate effort to drive up the cost of an advertisement, and various other types of “illegitimate” or “invalid” clicks. Plaintiffs allege that Facebook has an obligation under the “uniform contracts” it entered into with the advertisers to filter out invalid clicks and ensure that the advertisers were not charged for them.

The problem for the plaintiffs, the court found, lay in identifying precisely what constituted the “uniform contract’ they alleged. The plaintiffs argued that the contracts incorporate not only the “click-through agreement” that advertisers are required to click prior to placing an advertising order, but also information contained in the “Help Center” on Facebook’s website. There is an apparent conflict between the two documents: the “click-through agreement” incorporates the Facebook Statement of Rights and Responsibilities, in which Facebook disclaims responsibility for “click fraud or other improper actions that affect the cost of running ads,” while the “Help Center” states that Facebook has “a variety of measures in place to ensure” that advertisers are charged only for “legitimate clicks.”

The court held that the plaintiffs could not show the predominance of common questions for Rule 23(b)(3) certification. The court found that the “Help Center” was not part of the advertisers’ contract with Facebook, and since the proposed class included not only advertisers who contracted with Facebook through the website but also those who worked directly a Facebook representative, many class members would be unlikely to have ever reviewed the "Help Center” material. In addition, the named plaintiffs’ own experiences and understandings about what constituted the contract differed from each other as well as from their allegations. The court thus determined that “individual assessments will be required to determine the parties’ intent” and that “plaintiffs have not established that these additional terms [in the Help Center] were part of what the advertisers and Facebook agreed to. . . . ” Accordingly, common questions did not predominate.

The court also found that individualized questions predominated with respect to distinguishing among “valid,” “invalid,” and “fraudulent” clicks. While the plaintiffs argued that Facebook uses identical “algorithmic rules” in determining the legitimacy of a click, the court ruled that “there is no way to conduct this type of highly specialized and individualized analysis for each of the thousands of advertisers in the proposed class.” Additionally, the court noted the “individualized assessment required to determine damages.”

On its face, the court’s reliance on the differing experiences of the various potential class members is difficult to reconcile with its finding that the “Help Center” was not part of any advertiser’s contract. If the “Help Center” was not part of the contract at all, why did it matter whether all advertisers intended it to be? And if all advertisers clicked through the same agreement, why would it matter if different advertisers had different understandings of the contract they had executed?
The driving factor behind the court’s decision appears to have been its skepticism that the “Help Center” language was part of the Facebook advertiser contract. In other words, the court found the plaintiffs’ claim weak on the merits. In denying class certification on commonality grounds, however, the court may have inadvertently created confusion as to when classwide litigation is appropriate when a uniform contract, and particularly a multipart click-through agreement, is alleged.
 

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One of the pro-defense takeaways from the Supreme Court’s 2011 Wal-Mart Stores, Inc. v. Dukes decision was that the presence of a companywide policy delegating employment decisions to the discretion of local managers meant the absence of a common issue justifying class treatment under Rule 23(a)(2). Or so we thought.

The Seventh Circuit’s decision in McReynolds v. Merrill Lynch by Judge Posner upends such a facile conclusion. In McReynolds, the plaintiff Merrill Lynch brokers claimed that two companywide policies – both of which impacted broker compensation – exacerbated racial discrimination. The district court, following Wal-Mart, denied class certification, finding that Merrill Lynch, like Wal-Mart, delegated discretion over broker compensation decisions to local managers, and within each branch office, the brokers exercised autonomy within the framework established by the company: “The two policies in question…depend in their implementation on discretionary decisions that affect each of the class members…Consequently, even though plaintiffs might be able to raise a common question or questions, there is no capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation.”

Taking a hard look at the challenged policies and how they were implemented, the Seventh Circuit reversed the district court’s denial, holding instead that the two challenged companywide policies influence how the localized compensation discretion is exercised. Accordingly, the court held that these policies took the case outside of the rule set forth in Wal-Mart.

The first challenged policy, “teaming,” permits brokers in the same office to form teams. Notably, teaming is optional, and management does not select team members. However, the Seventh Circuit analogized teams to fraternities – wherein the brokers, like fraternity members, tend to choose team members who are most like themselves. And as with fraternities, the Court found that teaming may be beneficial: team members share clients with an eye toward increasing access to additional clients, securing client loyalty, and increasing client investment: “[T]here is no doubt that for many brokers team membership is a plus; certainly the plaintiffs think so.” Therefore, if the “teaming policy causes racial discrimination and is not justified by business necessity, then it violates Title VII as ‘disparate impact’ employment discrimination and whether it nonetheless is justified by business necessity are issues common to the entire class and therefore appropriate for class-wide determination.”

The second challenged policy, “account distribution,” involves the distribution of client accounts to other brokers when a broker leaves Merrill Lynch through a competition based on the generation of revenue and client base. But once a black broker is unable to join a profitable team, he will generate less revenue and have a smaller client base, and “a vicious cycle will set in.” The court held that this “spiral effect attributable to company-wide policy and arguably disadvantageous to black brokers presents another question common to the class.”

On the one hand, the Merrill Lynch supervisors can veto teams and can supply company criteria for distributions. Thus, “to the extent [supervisors] exercise discretion regarding the compensation of the brokers whom they supervise, the case is indeed like Wal-Mart.” But for the Seventh Circuit, the similarities between McReynolds and Wal-Mart ended there because, unlike in Wal-Mart, “the exercise of that discretion is influenced by the two company-wide policies at issue.” The companywide policies are practices of Merrill Lynch, not of local supervisors. Therefore, the Seventh Circuit concluded, challenging those policies is not “forbidden by the Wal-Mart decision.”

The question now becomes: After McReynolds, can an employer rely on its decentralization of employment decisions to defeat class certification where plaintiffs argue that a top-down policy of delegation in and of itself creates a disparate impact? After McReynolds, the answer may depend, in the words of the Seventh Circuit, on “which side of the line…separat[ing] a company-wide practice from an exercise of discretion by local managers” your case falls.

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This blog has previously discussed the importance of the amount-in-controversy requirement for jurisdictional purposes. Plaintiffs wishing to remain in state court need to provide a clear and definitive allegation that the amount in controversy falls below CAFA’s $5 million jurisdictional threshold. For some plaintiffs, this requirement can pose a dilemma. On the one hand, most plaintiffs would like to maximize the amount of recovery for any particular case, even if the amount of that recovery exceeds $5 million. On the other hand, definitively admitting that the amount in controversy exceeds $5 million increases the likelihood that the case will be removed to federal court if all other requirements for removal are satisfied.

A recent case from the Ninth Circuit illuminates the catch-22 associated with the $5 million amount-in-controversy requirement in class action cases. In Campbell v. Vitran Express, Inc., former employees alleged that the defendant trucking company violated California Labor Code provisions. The plaintiffs properly pled in their complaint that the amount in controversy was less than $5 million, forcing the defendant to prove “by a legal certainty” that the amount in controversy exceeded $5 million. In its removal petition, the defendant offered two separate damages calculations showing the amount in controversy to be greater than $5 million. The plaintiffs did not dispute either of the defendant’s damages calculations.

More compelling to the court than the defendant’s damages calculations, however, was the plaintiffs’ steadfast refusal to stipulate at oral argument that they would seek less than $5 million in damages. To the court, this refusal equaled a tacit admission that plaintiffs would in fact seek more than $5 million at trial. The court admonished, “[W]e see nothing in [precedent] that supports the proposition that a party may avoid federal court by pleading that he is seeking less than $5 million in the complaint, but refusing to support that pleading with any sort of judicially binding admission—which tells us he is actually seeking more than $5 million.” Because the plaintiffs were “unwilling” to stipulate to damages less than $5 million and because the defendants had produced undisputed damages calculations, the court held that the defendant had established “to a legal certainty” that the amount in controversy exceeded $5 million. All of the other jurisdictional requirements in CAFA being met, the Ninth Circuit reversed the district court’s order to remand the case to state court.

Campbell not only illustrates the importance of clearly pleading the amount in controversy in the complaint, but it also demonstrates the vulnerability of plaintiffs who are forced to choose between staying under the jurisdictional threshold and maximizing their potential for recovery. Campbell offers defendants a potential avenue to force plaintiffs to make this choice early in the litigation.

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Last month, the Second Circuit—for the third time, no less—struck down a class arbitration waiver in American Express’ card acceptance agreement with merchants. The latest decision, however, is particularly striking given that it follows, and vigorously distinguishes, the Supreme Court’s opinion last spring in AT&T Mobility v. Concepcion. Will the Supreme Court, whose previous opinions on the subject have twice caused the Second Circuit to revisit its original decision, take this opportunity to weigh in yet again on class arbitration? If not, how do businesses—and courts--navigate the two decisions?

Unlike Concepcion, which involved fraud and false advertising claims under California law, In re American Express Merchants’ Litigation is a federal antitrust case. The plaintiffs allege that American Express’ requirement that merchants honor all American Express cards—both charge cards and credit cards—constitutes a tying arrangement in violation of the Sherman Act. American Express’ card acceptance agreement with the merchants, however, both (i) permits either party to elect arbitration and (ii) prohibits classwide arbitration. Thus, by electing arbitration, American Express can force merchants to adjudicate their claims on an individual basis.
After the Second Circuit first held the arbitration waiver invalid (“Amex I”), the Supreme Court remanded the case for reconsideration in light of the Supreme Court decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. Stolt-Nielsen involved an arbitration clause that was silent on class arbitration, and the Court held that the Federal Arbitration Act prohibits compelling a party to submit to class arbitration unless there is contractual evidence that the party agreed to do so. On remand, the Second Circuit (“Amex II”) concluded that since the American Express contract was not silent, but expressly banned class arbitration, Stolt-Nielsen did not change the original Amex I analysis. So far, so good.

While the Amex II mandate was on hold, however, Concepcion was decided, and the Second Circuit requested further briefing. Earlier this month (“Amex III”), the Second Circuit held that Concepcion, like Stolt-Nielsen, was inapplicable. The court’s effort to distinguish Concepcion, however, is far more troubling—if not from a legal perspective, then at least from a practical perspective.

In Concepcion, the plaintiffs—consumers challenging a class arbitration waiver in their cellular telephone contract—sought to invoke a California common law rule holding that arbitration clauses containing class waivers are unconscionable in consumer contracts of adhesion, where individual damages are small. The Supreme Court held that this rule was preempted by the FAA’s general protection of arbitration clauses.

In light of this holding, doesn’t the FAA protect the American Express arbitration clause, class waiver or no class waiver? Not according to the Second Circuit. In AmEx III, the court held that the American Express class arbitration waiver could be unenforceable if “the practical effect of enforcement would be to preclude [plaintiffs’] ability to vindicate their federal statutory rights.” The panel went on to hold that the plaintiffs’ economic expert had demonstrated, as a matter of law, that the cost of the plaintiffs’ individually arbitrating their disputes with American Express would be prohibitive, such that the class arbitration waiver had the effect of precluding their rights under the federal antitrust laws. Accordingly, since enforcing the arbitration clause would impermissibly force the plaintiffs into individual arbitrations, the Second Circuit held the arbitration clause unenforceable.

At first glance, the Second Circuit’s opinion, in light of Concepcion, is a head-scratcher. The plaintiffs’ economist opined that the median volume merchant would sustain damages of approximately $5,300 after trebling. While such a small amount surely would render individual arbitration cost-prohibitive, individual arbitration would have been even less feasible in Concepcion, where the named plaintiffs’ damages were a mere $30.22. Moreover, the AmEx plaintiffs were businesses—albeit small ones—while the Concepcion plaintiffs were individual consumers. Why was the Second Circuit concerned with the practical preclusion of the American Express merchants’ ability to enforce their rights, when the Supreme Court in Concepcion allowed a class arbitration waiver to preclude AT&T Mobility customers from enforcing theirs?

The answer, apparently, is that AmEx, unlike Concepcion, was brought under a federal statute. “Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA,” wrote Judge Rosemary S. Pooler, who authored the Second Circuit opinion for a two-judge panel. (Sonia Sotomayor had been the third member prior to her elevation to the Supreme Court.) “Here, however, our holding rests squarely on a vindication of statutory rights analysis, which is part of the federal substantive law of arbitration.” (Emphases added; internal quotations omitted.) In this case, the court held that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”

Thus, under AmEx III, a class arbitration waiver will be invalid if it precludes plaintiffs from bringing a federal statutory claim, but not if it merely precludes them from bringing a state law claim. Will this distinction merit, and survive, Supreme Court review? Justice Scalia’s majority opinion in Concepcion had some choice words for class arbitration as a concept, calling arbitration “poorly suited to the higher stakes of class litigation.” Would the Concepcion majority uphold the invalidation of a company’s arbitration clause merely because it requires those who do business with the company to waive this “poorly suited” mechanism in a federal statutory suit?

Perhaps it will, given that the FAA’s preemption of state laws does not apply to other federal statutes. But reconciling Concepcion and AmEx III could lead to some strange results. Class counsel, who frequently find themselves fighting removal under CAFA on diversity grounds, would now have an incentive to invoke a federal question when litigating under contracts with class arbitration waivers. Meanwhile, dismissing federal claims prior to class certification could become critical for defendants. And if they are unable to do so, will courts, when asked to enforce class arbitration waivers on motions to compel arbitration, be required to evaluate the true federal nature of the claim in order to determine whether the waiver is valid?

Finally, the question remains as to how businesses can rely on class arbitration waivers with any certainty if the validity of the waiver will depend on the nature of the plaintiff’s claim. In AmEx III, the remedy imposed by the Second Circuit was not to order class arbitration, since to order American Express to submit to this procedure would have violated Stolt-Nielsen. Instead, the Second Circuit struck down the entire arbitration clause and permitted the plaintiffs to litigate the matter as a judicial class action. Thus, businesses who incorporate class arbitration waivers into their contracts may immunize themselves against class proceedings based in state law, but risk forfeiting arbitration altogether if the claim is brought under federal law.

Companies need not be in a hurry to amend their class arbitration waivers. If a class action is filed under state law, Concepcion will ensure the likely preemption of any state law limiting enforceability, and the waiver will be upheld. If a class action is filed under federal law, the defendant will be forced to litigate the class action, just as it would if there had been no class arbitration waiver. Nevertheless, the questionable enforceability of the waiver, and its potential impact on both sides’ litigation strategy, might lead some to wonder whether Concepcion and AmEx III, read together, create an optimal rule—let alone one that is likely to endure.

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The repercussions of the Supreme Court’s 2011 Wal-Mart Stores, Inc. v. Dukes decision continue to reverberate throughout federal courts in the United States. In Dukes, the plaintiffs sued on the theory that Wal-Mart’s use of subjective decision-making in its various branches created salary and promotion disparities between male and female employees. The Court held that the plaintiffs could not demonstrate a common question for class certification purposes under Rule 23(a)(2) because there was “no convincing proof of a company-wide discriminatory pay and promotion policy.” The only commonality that the plaintiffs could establish was the policy of allowing subjective discretion by local supervisors to dictate wage and employment matters for each store.

The Dukes legacy continued to grow in a recent case from the Western District of North Carolina. In Scott v. Family Dollar Stores, a group of female employees sought class certification for sex discrimination claims. The original complaint, filed in 2008 (pre-Dukes), alleged that the plaintiffs were discriminated against as a result of subjective decisions made at the local store levels. In 2011, after a venue transfer and several failed mediations, the defendant filed a Rule 12(b)(6) motion to dismiss the plaintiffs’ class claims, arguing that the claims were foreclosed by Dukes.

The district court determined that the instant case paralleled Dukes and that the class could not be certified. The court explained, “[F]or the same reasons [as in Dukes], plaintiffs also cannot satisfy the nearly identical commonality showing-of similarly ‘situated persons’–that is required to certify a collective action.” The court further determined that no class claims existed for individualized monetary relief, including back pay or punitive damages, because Dukes held that such relief is not available under Rule 23(b)(2). In dismissing the plaintiffs’ class allegations, the court reasoned that it would be “futile” to allow discovery to proceed because “plaintiff’s [sic] theory for class certification is simply foreclosed by Dukes.”

The court also refused to allow the plaintiffs to amend the complaint, ruling that amendment would prejudice the defendant. The court chided the plaintiffs for waiting until months after the Dukes decision to contemplate filing an amended complaint and refused to allow them to provide a “changed version of facts” to “avoid” Dukes. As in its explanation for refusing to allow the plaintiffs to proceed with discovery, the court said that amending the complaint would also be “futile” in light of Dukes, as the facts simply demonstrated no common discriminatory practice. Rather, the plaintiffs’ theory rested on discrimination arising from the subjective discretion of individual store managers around the country—which, under Dukes, does not a common discriminatory policy make.

Does Dukes signal the end of class-wide employment discrimination claims against sprawling, multi-location companies? To some extent, the plaintiffs in Scott were victims of poor timing. Having essentially pled a Dukes fact pattern before Dukes was decided, any attempt at refashioning the claims post-Dukes was destined to be tainted with a whiff of desperation. Going forward, counsel filing class complaints in employment discrimination cases, with the benefit of Dukes, presumably will not make their class theories quite so easy for defense counsel and trial courts to shoot down.  Nevertheless, as long as a defendant can show that its allegedly discriminatory policy was subjective and individualized by location, a potential class of plaintiffs will have a difficult time obtaining certification.

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Last year, in AT&T Mobility v. Concepcion, the Supreme Court upheld a class arbitration waiver in a consumer contract. Now, however, the National Labor Relations Board has struck down a similar waiver in the employment context, holding that requiring employees to submit all employment-related disputes to individual arbitration is an unfair labor practice.

In D.R. Horton, Inc. and Michael Cuda, an employer mandated that all employees sign a Mutual Arbitration Agreement (“MAA”). The MAA provided that employees would submit all employment-related disputes to final and binding arbitration, that the arbitrator could hear only individual claims, and that employees waived the right to resolve employment-related disputes in civil proceedings. In other words, the MAA prohibited employees from pursuing employment-related claims collectively.

Michael Cuda, a superintendent for homebuilder D.R. Horton, asserted that D.R. Horton had misclassified him as exempt under the Fair Labor Standards Act. He notified D.R. Horton that he intended to initiate arbitration on behalf of a nationwide class of similarly situated superintendents. D.R. Horton responded that the notice of intent to arbitrate was defective because the MAA prohibited collective arbitration. Cuda filed an unfair labor practice claim with the NLRB, alleging that prohibiting collective arbitration violated the employees’ right to engage in concerted activity under the National Labor Relations Act.

The NLRB agreed. The Board stated, “Section 7 of the NLRA vests employees with a substantive right to engage in specified forms of associational activity.” This protected activity includes joining together to address workplace grievances through collective arbitration or class action litigation. The MAA, the Board ruled, interfered with this substantive right by prohibiting employees from bringing collective claims in any forum, judicial or arbitral. As a result, requiring employees to sign the MAA as a condition of employment was a prohibited unfair labor practice.

The Board stated that its decision did not conflict with the Federal Arbitration Act. The Board reasoned that the FAA places private arbitration agreements only on the same footing as other contracts, and no private employment contract, including an arbitration agreement, can conflict with federal labor law. The Board pointed to the prohibition of “yellow dog” contracts – contracts forbidding employees from joining unions – as an example of this limitation on employment contracts. The analysis does not change simply because the contractual provision at issue deals with arbitration. As a result, an arbitration agreement – like any other contractual provision – must fail when it is contrary to federal labor law.

The Board stated that its decision is not inconsistent with the Supreme Court’s decision in Concepcion. In that case, the Supreme Court upheld a class action waiver in a consumer arbitration agreement, ruling that the FAA preempted state law that considered such waivers unconscionable. The Board distinguished Concepcion as involving a conflict between federal and state law, thereby invoking the Supremacy Clause. D.R. Horton, on the other hand, involved a possible conflict between two federal laws. Furthermore, the Board said, Concepcion involved consumer arbitration agreements, not federally protected employment and labor rights. Finally, the Board held that employers can restrict arbitration to individual claims as long as they do not similarly restrict civil litigation claims, easing the efficiency and fairness concerns raised in Concepcion.

The Board emphasized that its ruling applies only to NLRA-defined “employees” who are not already exempted from the FAA, and thus is not a sweeping invalidation of all arbitration agreements in employment contracts. Nevertheless, the NLRB decision will not be the last word on the issue, as D.R. Horton has filed a notice of appeal in the Fifth Circuit. Stay tuned to find out if the Fifth Circuit comes to a similar reconciliation between the FAA and federal labor law.

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Ordinarily, the need for an individualized calculation of damages is insufficient to “predominate” over common questions in a Rule 23(b)(3) analysis. But when the calculation is so complex as to thwart the use of common methodology, or when some class members may not be entitled to damages at all, Rule 23(b)(3) certification may be in danger. Such was the case in a California federal court’s recent denial of class certification in In Re Google AdWords Litigation.

In Google AdWords, the plaintiffs moved to certify a class of advertisers who were charged by Google for clicks on their advertisements that Google placed on “parked domains or error pages,” which the plaintiffs claim to be undesirable, if not completely worthless, advertising space. The plaintiffs allege that Google engaged in deceptive advertising and unfair and deceptive business practices by posting their ads in violation of the California Business and Profession Code.

“Parked domains” are webpages devoted almost exclusively to the listing of ads. “Error pages” are pages that come up when “a user enters terms into the address bar of the web browser that does not link to a registered URL.” The plaintiffs claim that Google failed to disclose that their ads would be placed on these types of pages. The plaintiffs further contend “that Google was aware of the negative reputation of parked domains and error pages, and took numerous steps to purposefully conceal its involvements with these sites throughout the Class Period.”

The plaintiffs sought certification of the class pursuant to Rule 23(b)(3), which provides for maintenance of a class action if the “court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” The district court found that the class met the four Rule 23(a) prerequisites, determining the plaintiffs presented a valid common question of whether “Google’s alleged omissions were misleading to a reasonable AdWords customer.”

The court, however, rejected the plaintiffs’ contention that their common question predominated over the individual issues facing individual class members. Of particular concern to the court was the individualized inquiry necessary to determine which AdWords customers were entitled to relief. Related to this concern was the fact that the calculation of damages for each customer would require an individualized determination because the amount that each customer paid differed.
AdWords customers engage in an “auction process that generates a separate cost for each advertiser, for each ad and for each click, with the specific amounts determined by the interplay of the bidding strategies of the participating advertisers in a given auction.” (Emphasis in original.) Thus, the Court would have a difficult time determining “what AdWords customers would have paid ‘but for’ the alleged misstatements or omissions.” Moreover, because there is no “set price” per click that is known to advertisers in advance, it would be unreasonable to assume “that a reduction in the demand for advertising on AdWords among some undefined group of advertisers would lead to a lower ‘but for’ price for all advertisers.” As a result, “any effort to determine what advertisers ‘would have paid’ under a different set of circumstances requires a complex and highly individualized analysis of advertiser behavior for each particular ad that was placed.”

Another factor weighing against predominance was that AdWords customers have different goals, and information concerning the value of advertising they did receive on the “parked domains” and “error pages” is limited. Since the purpose of restitution is “to return class members to the status quo,” restitution must account for value actually received for advertising on these pages. The court found that none of the methodologies proposed by the plaintiffs’ counsel was capable of determining such value on a class-wide basis.

In sum, the court found that damages allegedly sustained by each class member were impossible to determine using class-wide methodology. The court stated: “Where, as here, proof of restitution due each class member cannot be proved with relative ease, the court finds good reason to deny class certification.”

Google AdWords may be a rare case, given the unusual complexity of the pricing system involved. Nevertheless, as advanced technology continues to offer increasingly individualized transactions, Rule 23(b)(3) predominance may become more difficult to establish.
 

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Two recent decisions from the Ninth Circuit demonstrate how knowledgeable pleading by plaintiffs regarding the amount-in-controversy requirement of CAFA can determine whether a class action will be litigated in federal or state court.

For the district court to retain original jurisdiction over a civil action under CAFA, the amount in controversy must exceed $5 million, the aggregate number of proposed plaintiffs must total 100 or more, and any member of the plaintiff class must be diverse from any defendant. The latter two requirements are usually met without any dispute. Thus, more often than not, once a plaintiff files an action in state court, the burden shifts to the removing defendant to prove that the amount in controversy exceeds $5 million.

The precise extent of that burden, however, may depend on how well the plaintiffs have pleaded the amount in controversy. The removing defendant need only satisfy a “preponderance of the evidence” standard to show that the amount in controversy has been met “where it is unclear or ambiguous from the face of a state-court complaint whether the requisite amount in controversy is pled.” But “when a state-court complaint affirmatively alleges that the amount in controversy is less than the jurisdictional threshold,” a removing defendant must prove to a “legal certainty” that CAFA’s jurisdictional amount is satisfied.

Two recent Ninth Circuit decisions illustrate the duality of this legal framework. In Morey v. Louis Vuitton N. Am., Inc., the court determined that the defendants met their burden to show by a preponderance of the evidence that the amount in controversy exceeded $5 million. In that case, a plaintiff brought a class action against the high-end clothing company, alleging that the company violated California’s credit card act. The credit card act imposed penalties of up to $250 for the first violation and up to $1,000 for each subsequent violation, regardless of whether the subsequent violation aggrieved the same victim. The complaint sought the maximum penalties of “up to . . . $1,000 per violation.” Because the complaint was “unclear or ambiguous” regarding the amount in controversy, the Ninth Circuit determined that Louis Vuitton only had to show by a preponderance of the evidence that the $5 million amount had been met. The clothing company easily met its burden. The amount in controversy could be $1,000 for each violation (after the first), and there were more than 5,000 credit card transactions. With this information, Louis Vuitton successfully removed the class action to federal court under CAFA.

The defendants in Montalvo v. Swift Transp. Corp. did not fare as well. In that case, the Southern District of California remanded the suit, finding that the defendant failed to establish CAFA’s amount-in-controversy requirement. In this wages-and-hours class action, the plaintiffs affirmatively alleged that “the aggregate claims, including attorneys’ fees and all other requested relief, are under the five million dollar ($5,000,000.00) threshold of the Class Action Fairness Act of 2005.” Faced with the plaintiffs’ unambiguous declaration of the amount in controversy, the district court found that the “legal certainty” standard applied. Legal certainty refers to “something less than absolute certainty and more stringent than a preponderance of the evidence.” The court determined that the defendants estimated a class size that was too expansive and unsupported by facts and that defendants failed to show that every member of the class was entitled to penalties; indeed, the court seemed to agree with the plaintiffs’ argument that “[d]efendant’s calculations are based on conjecture, speculation, and assumptions,” falling far short of the legal certainty requirements. The district court, quoting the Ninth Circuit, explained the legal certainty rule: “CAFA’s removal provision and the ‘legal certainty’ rule strike a balance, leaving plaintiff as master of her case, but giving defendant an option of a federal forum at the point when they can prove its jurisdiction.”

One can argue, of course, that the reason for the differing results in Morey and Montalvo had less to do with pleading standards than with the facts of the cases themselves. In Morey, it was readily demonstrable that the number of transactions was sufficient, given the $1,000 penalty, to trigger federal jurisdiction; quite likely, Louis Vuitton would have been able to satisfy even a “legal certainty” standard. Presumably this is why the plaintiffs could not make an affirmative, unambiguous allegation, compliant with Rule 11, that their claims did not exceed $5 million. Conversely, in Montalvo, the defendants’ speculative calculations may well have failed even the lighter “preponderance of the evidence” burden.

Nevertheless, the contrasting approaches taken in Morey and Montalvo provide clear lessons to counsel on both sides of a state court class action complaint. Plaintiffs’ counsel who wish to remain in state court will do well to make a “below the threshold” allegation in as clear and definitive a manner as the facts will allow. Defendants’ counsel, meanwhile, can maximize their chances of successful removal by exploiting even the smallest equivocation in jurisdictional allegations.

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A recent Ninth Circuit decision imposed substantial commonality restraints on multijurisdictional class actions, restraints that the dissenting judge called “devastating to consumers.” The Ninth Circuit decertified a class of automobile buyers in a false advertising lawsuit, holding that (i) differences in state laws precluded certification of a nationwide class and (ii) individual factual issues regarding plaintiffs’ reliance on the challenged advertising predominated over common questions.

In Mazza v. American Honda Motor Co., filed in the Central District of California, the plaintiffs allege that Honda violated California law by disseminating advertisements that misrepresented the Collision Mitigating Braking System sold with certain Acura RL automobiles. Specifically, the plaintiffs claim that Honda’s advertisements concealed material information about the braking system.

The district court certified a nationwide class of consumers who purchased or leased new or used Acura RL vehicles equipped with the braking system. Although class members purchased or leased their vehicles in 44 different states, including California, Honda’s corporate headquarters are in California. The district court determined that California law could be applied to all class members, because Honda had failed to show how differences in the various states’ laws were material, how other states had an interest in applying their laws in this case, and how those interests were implicated. The district court also held that common issues predominated and that California, as the forum state, had sufficient contacts to the claims asserted to ensure that the choice of California law would not be arbitrary or unfair to nonresident class members.

The Ninth Circuit agreed that the putative class met the threshold requirements of Rule 23(a). The panel’s analysis focused on whether common issues of law and fact predominated for purposes of Rule 23(b)(3). The bulk of this analysis applied California’s choice of law rules, which provide that California law may be used on a classwide basis only if the interests of other states do not outweigh California’s interest in having its law applied.

The panel first rejected the district court’s conclusion that none of the differences in the various states’ laws were material. In particular, the court noted that the California laws at issue have no scienter requirement, while the consumer protection laws of some other states do, and that California, unlike some other states, requires named class plaintiffs to demonstrate reliance on the advertisements. The court held that “these are not trivial or wholly immaterial differences,” because where scienter or reliance is missing, the requirement “will spell the difference between the success and failure of the claim.”

The Ninth Circuit also faulted the district court for failing to recognize the interests of other states in having their consumer protection laws applied to claims brought on behalf of their residents. The district court concluded that no foreign state had an interest in denying its citizens recovery under California’s potentially more comprehensive consumer protection laws. The appellate panel, however, held that the district court “erred by discounting or not recognizing each state’s valid interest in shielding out-of-state businesses from what the state may consider to be excessive litigation.” States are entitled to enforce their own views, the court held, “on the extent to which they will tolerate a degree of lessened protection for consumers to create a more favorable business climate for the companies that the state seeks to attract to do business in the state.”

Moreover, according to the panel, the district court erroneously concluded that California’s interests in having its law applied outweighed the interests of states with different consumer protection laws. The district court, the panel held, “did not adequately recognize that each foreign state has an interest in applying its law to transactions within its borders and that, if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce.” While California’s choice of law rules recognize that the “place of the wrong” has the predominant interest, the “place of the wrong,” under California’s choice of law rules, is the place of the last event necessary to make the actor liable. Here, the Ninth Circuit held, this last necessary event was the “communication of the advertisements to the claimants and their reliance thereon in purchasing vehicles,” which took place in the state of purchase, not at Honda’s headquarters in California.

Finally, the Ninth Circuit held that common issues of fact did not predominate for Rule 23(b)(3) purposes, because in certifying a class that included all purchasers of the product during the relevant time period, the district court improperly presumed that all class members relied on the challenged advertisements. The Ninth Circuit noted that Honda’s advertising campaign for the braking system was “very limited,” and thus distinguishable from advertising in other cases, such as tobacco litigation, that was so “extensive and long-term” as to permit a presumption of reliance.
The dissent argued that the majority’s holding, particularly its refusal to apply California law to all class members’ claims, “will prove devastating to consumers” because the $4,000 price of the braking system is too small to motivate individual claims, and thus “Honda becomes free to avail itself of the benefits offered by California without having to answer to allegations by consumers nationwide that it has violated the consumer protection laws of its forum state.” The dissent did not explain, however, why only a nationwide class action is sufficient to render Honda accountable. Nothing in the majority’s opinion suggests that statewide classes could not be certified—or, for that matter, that the putative nationwide class could not simply be broken down into groupings of states with similar consumer protection laws.

Nevertheless, the panel’s holding is ironic, if not illogical. Its rationale is that states with more lenient consumer protection laws than California are entitled to the “business-friendly” atmosphere they have legislated, so that they will attract the business of corporations such as Honda. Yet Honda, while doing business nationwide, chose to house its headquarters under the “consumer-friendly” California regime. Mazza minimizes the impact of this decision—and, in turn, the ability of states to attract businesses through lenient consumer laws—by holding that a company’s home state is largely immaterial for choice of law purposes. Wouldn’t Honda be more likely to consider relocating to a “business-friendly” state if it knew that that state’s law could be applied to a nationwide consumer class?

Mazza does, however, strike yet another in a series of recent blows to consumer class actions. Although Mazza was interpreting California’s choice of law rules as much it was interpreting Rule 23, the notion that differing state consumer laws preclude certification of a nationwide class of consumers—at least where the alleged “wrong” occurs in different states, which (under Mazza's logic) will nearly always be the case in false adversiting claims—bodes a significant limitation on consumer class actions.

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The Seventh Circuit last week held that class certification in a class action alleging unlawful price increases does not require a showing that prices increased uniformly for all products at issue or for all members of the class. In doing so, the court reversed a denial of class certification arising out of a Chicago-area hospital merger.

In Messner v. Northshore University HealthSystem, the class seeks damages for a 2000 hospital merger that the Federal Trade Commission found to be in violation of Section 7 of the Clayton Act. Rather than unscramble the merger, however, the FTC ordered the component hospitals to use separate and independent negotiating teams to negotiate future contracts with the third-party payors. The class, alleging monopolization and attempted monopolization in violation of the Sherman Act, consists of Northshore patients and third-party payors who purchased or paid for hospital services at Northshore after the merger, claiming that the lessening of monopolization that resulted from the unlawful merger caused class members to pay higher prices for services.

At class certification, the district court found that the class met all four of the requirements of Rule 23(a). The court denied certification, however, on the ground that the class failed to demonstrate, under Rule 23(b)(3), that legal and factual questions common to the class predominated over individual questions regarding the antitrust impact of the merger.

In support of their argument that common questions predominated, class counsel relied on expert economic testimony to the effect that if Northshore overcharged an insurer a certain percentage, all or substantially all class members covered by that insurer would be overcharged by approximately the same percentage. The market for hospital services, however, complicated this testimony, given that hospital prices are typically determined through multi-year contracts with third-party payors, the length of which may have a significant impact on price. Moreover, contracts between hospitals and insurers typically involve a wide variety of services and products, and are not uniform in the manner in which they bundle those services and products into groups for pricing purposes. (For example, the Seventh Circuit noted, a comparison among different hospital-insurer contracts of the price of a “Caesarean section,” on its face, would be meaningless, because contracts vary as to whether “Caesarean section” includes charges for anesthesia, operating room use, surgeon’s fee, post-operative care for the mother, or newborn care for the baby.) In addition, external market factors specific to some of the component services at issue, such as an anesthesia technology that decreases the cost of anesthesia or a new and higher standard of care that requires new expensive machinery, might serve to mask a hospital’s exercise of market power.

The class’ expert proposed to account for these variables through a “difference-in-differences” (DID) analysis, which would compare Northshore’s prices to those at a “control group” of comparable area hospitals to determine which changes in Northshore’s prices were attributable to external market factors, and which were attributable to the merger. The difference would constitute the unlawful overcharge. The district court rejected this approach on the ground that it assumed Northshore increased its prices at a uniform rate across all services. This premise, the district court determined, could not be validated, and was indeed inconsistent with the variable manner in which Northshore prices increased.

The Seventh Circuit held, however, that price increase uniformity was not required. All that the class was required to show, the court said, was that its expert could establish “whether and to what extent Northshore’s post-merger price increases were the result of increased market power resulting from the merger.” In other words, it was sufficient that the class expert could demonstrate “that all or most of the insurers and individuals who received coverage through those insurers suffered some antitrust injury as a result of the merger.”

The panel noted that the class expert’s methodology did not require uniform price increases, as a lack of uniformity would merely require him to perform more DID analyses for each contract—one for each non-uniform price imposed in the contract. This additional requirement, the court said, “does not change the fact that those analyses all rely on common evidence—the contract setting out the non-uniform price increases—and a common methodology to show that impact,” which is what Rule 23(b)(3) requires. The district court’s opinion to the contrary, the panel held, “asked not for a showing of common questions, but for a showing of common answers to those questions. Rule 23(b)(3) does not impose such a heavy burden.”

The court also rejected Northshore’s argument that even despite the district court’s errors, the class could not be certified because a large number of members did not suffer any injury. Northshore relied on an affidavit from the largest putative class member, Blue Cross, which stated that it was not injured and did not pay any artificially inflated prices. The court held that this argument was “at best an argument that some class members’ claims will fail if and when damages are decided, a fact generally irrelevant to the district court’s decision on class certification.” Northshore also noted that the class contained a number of individuals who could not have been harmed, such as individuals who paid their out-of-pocket maximum or deductible. The court rejected this argument for similar reasons, saying that “if a proposed class consists largely (or entirely, for that matter) of members who are ultimately shown to have suffered no harm, that may not mean that the class was improperly certified but only that the class failed to meet its burden of proof on the merits.” The court distinguished such a class from a hypothetical overbroad class consisting largely of members who “could not” have been harmed, such as members who purchased services after the merger but under Northshore’s premerger contracts with insurers. As long as members “could” conceivably have been harmed, the court held, the fact that they possibly, or even probably, were not harmed is immaterial to class certification.

In addition, the court reversed the district court’s denial of the plaintiffs’ motion to exclude the defendants’ economic expert on Daubert grounds. The district court found that the defense expert report contained “some misleading information and analysis” but concluded that the plaintiffs had ample opportunity to respond in their reply brief and at oral argument, and the court thus gave the report “the weight it believes it is due.” The Seventh Circuit rejected this approach, stating that an explicit Daubert ruling is required whenever an expert’s report is critical to class certification—and that if the district court has any doubt about whether the report is critical, it should err on the side of making the Daubert ruling. Here, the testimony of the defendants’ economist was undoubtedly critical in that it “laid the foundation for Northshore’s entire argument in opposition to class certification,” and the district court relied heavily on the expert report in its decision. While Northshore suggested that a Daubert ruling is required only prior to granting class certification, but not prior to denying it, the panel criticized this approach as requiring a plaintiff seeking class certification to rely on expert testimony that satisfies Daubert, but allowing a defendant to rely on unreliable expert testimony in opposition.

In addition to helping clear a path for antitrust class actions in complex industries, the timing of the Messner opinion is interesting. In the wake of last year’s Supreme Court ruling in Wal-Mart v. Dukes, some lower courts have been quick to deny class certification where the common impact on class members is in doubt—even though Wal-Mart imposed no such requirement. Messner pushes back against this post-Wal-Mart backlash, reminding that while the evidence and methodology must have class-wide applicability in order to satisfy Rule 23(b)(3), the results of the analysis need not be uniform across the class.

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Class actions allow for the aggregation of numerous small claims into what can prove to be a very large payday for the lawyers representing the class. On the one hand, this mechanism allows plaintiffs with small-value claims to vindicate rights that otherwise likely would not be brought to court. On the other hand, the system creates a disparity between the incentives of individual class members and the lawyers who represent the class. A recent Seventh Circuit decision uses the “adequacy” prong of Rule 23 in an attempt to ensure that class counsel do not improperly exploit this conflict.

In Creative Montessori Learning Centers v. Ashford Gear LLC, the Seventh Circuit decertified a class based on attorney misconduct. The district court for the Northern District of Illinois had certified a class of recipients of unsolicited faxes, allegedly sent in violation of the Telephone Consumer Protection Act. The Act imposes damages of $500 for each “junk fax” and provides for treble damages for willful violations. The named plaintiff had received two junk faxes, entitling it to $3,000 in damages, at most. Potential damages for the entire class, however, ran in the tens of millions.

A law firm that specialized in Telephone Consumer Protection Act suits assembled the class. Instead of waiting for potential plaintiffs to come to it, the law firm contacted a fax broadcaster – a company that faxes advertisements as an agent of the advertiser – asking for fax transmission reports, promising not to disclose the information to any third party. The lawyers then contacted the businesses on the reports, telling them they were “likely to be a member of the class,” even though class certification – or the filing of a suit, for that matter – had not yet taken place.

The district court found attorney misconduct, both in obtaining the fax broadcaster’s files based on a promise of confidentiality that concealed the purpose of obtaining the material, and in making the misleading representation that a class had been certified. The court determined, however, that discipline by the bar was the appropriate remedy, ruling that only the most egregious misconduct could ever arguably justify denial of class status. The appeals court reversed this decision, holding that the district court’s “egregious misconduct” standard would condone and invite unethical conduct. Instead, courts should deny class certification if counsel’s conduct creates a “serious doubt” that they will represent the class loyally.

In formulating this standard, the court relied on the “adequacy” requirement of Rule 23(a)(4) and on Rule 23(g)(1)(B), which permits a court appointing class counsel to consider any matter “pertinent to counsel’s ability to fairly and adequately represent the interests of the class.” The panel focused on the highly coercive nature of class actions and the conflicts inherent in class representation. For one, there is a substantial incentive for the class action defendant to settle, regardless of the merits of the case, because the damages in these suits can be astronomical. Here, for example, the court observed that the case turned a $3,000 dispute into an $11.11 million dispute (before trebling), with a potential judgment that would have easily sent Ashford Gear, a home furnishings wholesaler with only three employees and $500,000 in annual sales, into bankruptcy. Furthermore, settlement can provide a lucrative reward for class counsel even if it means a paltry sum for individual class members. Therefore, there is an incentive for class counsel, with the defendant’s complicity, to “sell out the class” in the course of representation. For this reason, courts must be vigilant in ensuring that class members are represented fairly and adequately, especially when class members are consumers who lack the financial stake and legal knowledge to monitor class counsel effectively.

With this responsibility in mind, the court held that counsel’s loyalty to the interests of the class was sufficiently in question to warrant denial of class certification. The decision sends notice that, at least in the Seventh Circuit, attorneys who resort to underhanded means to solicit class action plaintiffs cannot expect to be rewarded with an opportunity to represent the class they have assembled.

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A class action brought pursuant to theFair Labor Standards Act (FLSA) requires a proactive class. Unlike Rule 23 class actions, in which class members must affirmatively opt out in order to be excluded from the class, FLSA class actions require that potential class members notify the court of their desire to opt into the action. Just how far can plaintiffs go in soliciting potential class members? A recent case explores the balance between honoring the First Amendment rights of plaintiffs in communicating with a pool of potential class members and ensuring that defendants do not suffer irreparable harm.

In Hathaway v. Shawn Jones Masonry, a Kentucky district court refused to interfere with the rights of a plaintiff to communicate with other potential plaintiffs in a putative FLSA class action. Michael Hathaway sued his former employer, Shawn Jones Masonry (SJM), alleging violations of the FLSA. To encourage other employees to join the class action suit, Hathaway disseminated a letter that “guarantee[d] success,” stating: “PLEASE BE ADVISED THAT YOU ARE ENTITLED TO MONEY WHICH HAS BEEN ILLEGALLY NOT PAID TO YOU BY SHAWN JONES MASONRY . . . A COLLECTIVE ACTION SUIT IS BEING STARTED BY MIKE HATHAWAY AND BEING FILED BY: D. WES SULLENGER, ATTORNEY AT LAW.” Each letter also contained a copy of the attorney Sullenger’s business card. Sullenger denied any knowledge of the letter and agreed that such communication was improper. Sullenger instructed Hathaway to cease disseminating the letter.

SJM argued that the letter Hathaway sent to current employees caused irreparable harm. SJM contended that current employees would believe that SJM was not treating them fairly and would quit, leaving the company short-staffed. SJM asked that the court enjoin Hathaway from soliciting additional plaintiffs to join the action, as the letter violated Kentucky ethics rule prohibiting a lawyer from soliciting professional employment. Alternatively, SJM requested that Hathaway be enjoined from soliciting additional plaintiffs until the court determined whether the action was appropriate for collective class action. Hathaway, however, asserted his First Amendment rights to communicate with potential plaintiffs and potential witnesses.

In upholding Hathaway’s First Amendment rights, the court referenced Gulf Oil Co. v. Bernard, a Supreme Court decision discussing the “heightened susceptibilities of nonparty class members to solicitation amounting to barratry as well as the increased opportunities of the parties and counsel to ‘drum up’ participation in the proceeding.” Gulf Oil granted district courts the broad authority to exercise control over a class action and to enter appropriate orders governing the conduct of parties and counsel. The Supreme Court, however, emphasized the importance of limiting speech as little as possible and “only to the extent consistent with the rights of the parties under the circumstances.”

Here, SJM did not offer any evidence that current employees would quit their jobs and leave the company short-staffed. Hathaway, however, demonstrated that he would be harmed by a delay in contacting “potential witnesses, whose memories will fade over time, and potential plaintiffs[,] whose claims against Defendant are diminished on a daily basis.” The letter was admittedly improper and in potential violation of the Kentucky ethics rule, but Hathaway had already ceased disseminating it, and no specific harm had befallen SJM. In refusing to dampen Hathaway’s rights, the court nevertheless cautioned Hathaway and Sullenger to navigate the ethics rules carefully regarding future contact with prospective clients.

This case demonstrates the importance of First Amendment rights in class action suits and the need for mindfulness in contacting prospective clients. While it might be worthwhile to leave no stone unturned in pursuing potential class members, the specter of being enjoined from soliciting class members altogether represents an effective deterrent for questionable practices. If Sullenger had known about the letter or had not instructed Hathaway to cease dissemination of the letter, the lawsuit might have died a quick death, regardless of the protections of the First Amendment.

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A recent Ninth Circuit decision arguably demonstrates the potential impact of Wal-Mart Stores, Inc. v. Dukes, reversing class certification in an employment discrimination lawsuit that largely parallels the fact pattern in Wal-Mart. Upon closer examination, however, Wal-Mart’s role in the outcome may not be great as the Ninth Circuit’s opinion suggests.

In Ellis v. Costco Wholesale Corp., three current and former employees sued Costco under Title VII on behalf of all women employed by Costco in the United States who were denied promotion to management positions because of gender. The plaintiffs seek class-wide injunctive relief, lost pay, and compensatory and punitive damages.

The district court determined, prior to the Supreme Court’s decision in Wal-Mart, that the plaintiffs had met all of the requirements of Rule 23(a) and had satisfied Rule 23(b)(2). The court certified a class of all current and former female Costco employees nationwide who had been denied promotion to certain management positions during the relevant time period.

Applying Wal-Mart, the Ninth Circuit reversed, holding that the plaintiffs had failed to establish commonality under Rule 23(a). The Ninth Circuit rebuked the district court for failing to conduct a “rigorous analysis” of the evidence and for establishing commonality through reliance on the plaintiffs’ experts. The parties produced competing expert testimony regarding gender disparities in Costco’s hiring practices. Defense experts argued that the gender disparities were confined to only two of Costco’s eight regions, for example, while the plaintiffs’ experts argued that female employees were promoted at a slower rate nationwide and that Costco had a pervasive culture of gender stereotyping and paternalism. Instead of merely determining whether the plaintiffs’ evidence was admissible, the Ninth Circuit held that the “rigorous analysis” mandated by Wal-Mart obligated the district court to consider whether the plaintiffs’ evidence was persuasive. If the weight of the evidence did not suggest that the entire class was subject to the same allegedly discriminatory practice, then there was no question common to the class.

The Ninth Circuit also vacated the district court’s finding of typicality. The district court had rejected Costco’s argument that each of the three named plaintiffs had individualized defenses, noting that individualized defenses do not generally defeat typicality. The Ninth Circuit, however, held that the district court was obligated to examine those defenses more closely. Costco claimed that one named plaintiff was denied a promotion because of her self-expressed desire to defer her pursuit of promotion for several years to balance her family life; a second named plaintiff allegedly misrepresented her way into Costco and had been disciplined for abusing subordinates; and a third purportedly was a poor performer. The panel remanded to the district court the question of whether defenses available against each of the named plaintiffs were so unique as to defeat plaintiffs’ showing of typicality.

The Ninth Circuit also relied on Wal-Mart to overturn the district court’s Rule 23(b)(2) certification. Class certification under Rule 23(b)(2) is appropriate only where the primary relief sought is declaratory or injunctive; the key to a Rule 23(b)(2) class is the indivisible nature of the injunctive or declaratory remedy sought. The district court examined the plaintiffs’ subjective intent and determined that injunctive relief was the predominant form of relief sought. In Wal-Mart, however, the Supreme Court rejected this “predominance” test for determining whether monetary damages may be included in a Rule 23(b)(2) certification, holding instead that the relevant inquiry is whether monetary relief can be granted absent individualized determinations of each plaintiff’s eligibility for damages. Accordingly, the Ninth Circuit vacated the district court’s Rule 23(b)(2) certification for evaluation under the Wal-Mart standard. The Ninth Circuit further instructed the district court to consider whether a class may be certified under Rule 23(b)(3) to address the plaintiffs’ compensatory damages and backpay claims.

The Ninth Circuit’s opinion reads at times as though the district court would have been on solid ground but for the intervening Wal-Mart opinion. Indeed, this may be true with respect to the Rule 23(b)(2) certification, as Wal-Mart announced for the first time that inclusion of individualized claims for monetary damages in a Rule 23(b)(2) class is inconsistent with due process considerations. With respect to commonality, however, the real impact of Wal-Mart may be minimal. While the factual similarities between this case and Wal-Mart seemingly made reversal inevitable--both cases involve putative nationwide classes of employment discrimination victims suing retailers that have no nationwide policy at issue—the primary basis for reversal was the district court’s reluctance to weigh conflicting evidence going to commonality.

A trial court’s obligation to consider such evidence, even when it might overlap with determinations on the merits, did not originate with Wal-Mart. Even admissible, probative evidence of commonality can be defeated if outweighed by competing evidence to the contrary. Trial courts that limit their inquiries to the plaintiff’s evidence, without looking to the defendant’s evidence, can expect to be reversed.

Contributing author: Diana Lin

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Earlier this year, the Fourth Circuit rejected a bid by a group of pharmacies to refashion an action brought by the West Virginia attorney general as a “disguised class action” filed on behalf of West Virginia citizens. A recent decision dealt a similar blow to the seller of the prescription pain medication OxyContin in a lawsuit brought by the Kentucky attorney general, though for different reasons.

In In re Oxycontin Antitrust Litigation, the Commonwealth of Kentucky brought a variety of state law claims alleging that Purdue—the company that designs, sells, and distributes OxyContin—misled and deceived consumers, medical providers, and government officials regarding the drug, particularly with respect to risks of addiction. The Commonwealth sought damages on its own behalf, in the form of restitution for Medicaid reimbursements it made to Kentucky residents for prescriptions the Commonwealth claims would never have been written but for Purdue’s deceptive marketing campaign. The Commonwealth also sought equitable and injunctive relief in its parens patriae capacity, i.e., to vindicate a “quasi-sovereign” interest on behalf of its citizens.

Purdue removed the case to federal court, in part on the ground that because Kentucky sought relief on behalf of consumers who purchased the drug, the purchasers were the real parties in interest, and the lawsuit was a class action subject to CAFA. The United States Judicial Panel on Multidistrict Litigation transferred the action to the Southern District of New York for inclusion in an existing MDL antitrust proceeding involving OxyContin. Kentucky then moved the federal court in New York to remand the case to Kentucky state court.

In granting the Commonwealth’s motion, the court described three capacities in which a state may bring a suit. First, a state may bring a suit in which it alleges a direct, tangible injury to the state itself. Second, a state may bring a parens patriae suit to protect the health and well-being of its residents generally. Third, the state may bring a claim to vindicate the interests of a distinct group of private parties. The court ruled that only in this final type of case is the state merely a nominal party and not the real party in interest.

In this case, Kentucky’s claim for equitable and injunctive relief was a parens patriae claim. Furthermore, the Commonwealth’s damages claim, the court held, was for direct, tangible injury it suffered in connection with Medicaid payouts. Therefore, the Commonwealth, with respect to both claims, was the real party in interest.

Purdue argued that only a distinct group of citizens, and not Kentucky itself, had standing to bring some of the claims involved. That fact, they argued, showed that those citizens were the real parties in interest. The court rejected this argument, however, saying that the Commonwealth’s standing was a separate issue from determining the real party in interest. While some of the Commonwealth’s actions might ultimately be dismissed for lack of standing, this possibility did not entitle Purdue to transform those claims into a class action.

In making its ruling, the court assumed, without deciding, that CAFA applies to suits brought by a state and that a real party in interest analysis is appropriate in such suits. The OxyContin decision, together with the Fourth Circuit pharmacy case, suggest that defendants seeking to use CAFA to bring such cases into federal court will face an uphill battle.

Contributing author:  Brian Kint
 

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