A recent Iowa federal court decision illustrates the importance of proper class definition—and, in particular, of ensuring that only injured parties are included in the class. Inclusion of uninjured class members can result not only in an overbroad class, but also in a successul numerosity challenge.
In Copp v. American Enterprise Services Company, a Southern District of Iowa judge denied a motion to certify a class of the defendants’ former insurance agents who were and are subject to two practices that allegedly constitute a breach of contract, breach of the duty of good faith and fair dealing, and various other violations of law. One practice involves the use of an “orphans list” of policyholders whose agents have left the company. According to the complaint, the orphans list is disseminated to sales managers, and if a policyholder on the list is sold a replacement policy, the defendants terminate the prior policy, depriving the former agent of renewal commissions from that policyholder. The plaintiffs allege that the orphans list was not disclosed to the agents prior to the beginning of their employment.
The other challenge is to the defendants’ alleged practice of “charging back” portions of commissions for policies that are terminated prematurely. According to the plaintiffs, the defendants typically give agents an advance of a portion of the first-year commission they can expect to earn on a policy. If the policy is terminated prematurely and the advance exceeds the earned commission, the difference is charged to the agent’s debit account. If the debit account exceeds $400, the defendants allegedly report this information to a provider of agent screening tools for the insurance industry, even if a former agent’s future renewal commissions may subsequently pay off the debit balance.
The flaw in the plaintiffs’ class definition, the court held, lay in the inclusion of all former agents who were “subject to” these practices. The plaintiffs also proposed a subclass of all former agents who were “subject to” a report to the screening company. The Court held that the proposed class was overbroad because it would include former agents who were subject to defendants’ practices, but did not actually incur any damages as a result of those practices.
This determination torpedoed the plaintiffs’ attempt to demonstrate numerosity under Rule 23(a)(1). The plaintiffs based all of their numerosity arguments, and evidence, on the class as proposed, with no showing that the number of agents who were actually injured was sufficiently numerous. As a result, the court denied the motion for class certification and did not attempt, as it acknowledged it could, to fashion a more appropriate definition.
The court’s finding of an overbroad class need not, and presumably did not, necessitate a denial on numerosity grounds. Here, the plaintiffs could have anticipated a finding that the class was overbroad and introduced evidence of the number of agents who were actually injured, or, in the alternative, produced evidence of the likely percentage of former agents who were injured. It appears that the plaintiffs did neither—illustrating that infirmities in a class definition can be fatal.