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

The Supreme Court’s 5-4 decision last week to overturn the certification of a class of cable television subscribers is extraordinary—not because it continues the Court’s exhortations to lower courts to make merits determinations at the class certification stage, but because of the level of merits-related scrutiny the Court is now requiring.

In Comcast Corp. v. Behrend, the plaintiffs alleged that Comcast violated the federal antitrust laws through a “clustering scheme” that systematically increased Comcast’s share of subscribers in the Philadelphia-area through the targeted acquisition of cable systems within the area. The scheme allegedly eliminated competition among cable service providers in the Philadelphia area and resulted in artificially high prices.

The plaintiffs articulated four different methods in which the clustering alleged increased subscription rates to consumers. The district court, however, held that only one of these four theories was capable of classwide proof, and limited its certification order accordingly: the argument that Comcast’s clustering reduced competition from “overbuilders,” companies that build competing cable networks in areas where an incumbent cable company already operates. The district court further found that damages resulting from decreased overbuilder competition could be calculated on a classwide basis, relying on a regression model that established hypothetical prices that would have existed in a competitive market.

Although the Third Circuit affirmed the district court’s certification order, the Supreme Court found a fatal flaw in the regression model: it did not allow a court to distinguish between damages resulting from overbuilder deterrence and damages resulting from the three other forms of antitrust impact that the district court found incapable of classwide proof. Justice Scalia, writing for the majority, reasoned that because only one theory of damages was accepted for class action treatement, “a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory.” Otherwise, the Court held, the plaintiffs “cannot show Rule 23(b)(3) predominance: Questions of individual damage calculations will inevitably overwhelm questions common to the class.”

The Court’s opinion was largely a rebuke to the Third Circuit for what the Court perceived as a disregard for the Court’s opinions requiring review of merits issues relevant to class certification. The Court characterized the Third Circuit as setting too low a bar for the evaluation of an expert damages model in assessing predominance, criticizing the Third Circuit for failing to require the plaintiffs to tie their damage model to a particular theory of antitrust impact. Justice Scalia wrote that the Third Circuit’s reasoning “flatly contradicts our cases requiring a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim.”

What makes the majority opinion extraordinary, however, is the import of its holding in light of the underlying allegations and theories. Remember that the plaintiffs’ regression model established the prices that allegedly should have prevailed in a competitive market. Such a model, if admissible, is therefore evidence that the difference between its hypothetical prices and the actual prices is due entirely to Comcast’s anticompetitive behavior. Yet the Court held, in essence, that unless the plaintiffs can devise a damage model at the class certification stage that distinguishes one type of anticompetitive behavior from another, they cannot proceed as a class to challenge any of Comcast’s anticompetitive behavior.

The Court’s opinion acknowledged as much: “For all we know, cable subscribers in Gloucester County may have been overcharged because of [Comcast’s] elimination of satellite competition . . . ; while subscribers in Camden County may have paid elevated prices because of [Comcast’s] increased bargaining power vis-à-vis content providers . . . .” Although all such subscribers arguably would have paid higher prices as a result of antitrust violations by Comcast, the Court has placed the burden on plaintiffs at the class certification stage not only to articulate a theory of damages, but to come forward with a damage model that discounts all other potential lawful and unlawful causes of those damages. One is left to wonder whether the result would have been different if the plaintiffs had alleged only that Comcast’s clustering deterred overbuilders, and had not even raised the other three theories.

Justices Ginsburg and Breyer’s dissent, in addition to criticizing the majority for reaching factual conclusions about the significance of an expert report, made another point: In the district court, Comcast argued that the three “rejected” theories of injury had no impact on prices. “If Comcast was right,” argued the dissenters, then the damages identified in the regression model “must have stemmed exclusively” from conduct that deterred overbuilders.

The lesson to class counsel may be that in class actions, pleading or arguing in the alternative can have serious adverse consequences, as the Supreme Court has essentially instructed lower courts to flyspeck class certification evidence for inconsistencies with discarded liability theories. The lesson to defense counsel, conversely, is that any suggestion that an expert report—or any other piece of evidence—should be given anything less than full scrutiny is subject to attack.

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While the Supreme Court’s recent jurisprudence has increasingly favored merits inquiries at the class certification stage, there is one area in which the Court has been reluctant to blur the distinction between certification and merits: the “fraud on the market” presumption in securities class actions. This reluctance is manifest in the Court’s recent opinion in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds.

The fraud-on-the-market presumption was articulated by the Court in 1988 in Basic Inc. v. Levinson. In Basic, the Court held that securities fraud plaintiffs may invoke a rebuttable presumption of reliance based on the theory that the market price reflects all information, including the defendant’s alleged misrepresentations, and that an investor who buys stock at the market price therefore relies on the misrepresentations in doing so. This presumption is a step toward resolving the element of reliance on a classwide basis; by successfully invoking the presumption, class counsel avoids the need for individual adjudications of each class member’s knowledge and state of mind at the time of the transaction.

In 2011, the Court reinforced the validity of the fraud-on-the-market presumption by unanimously rejecting the notion that plaintiffs seeking to invoke the presumption at the class certification stage must prove a causal connection between the misrepresentation and the economic loss suffered by investors. The Court’s ruling effectively drew a line between commonality—a critical issue at the class certification stage—and the merits.

That line was reinforced in Amgen, a 6-3 decision in which the Court held that securities fraud plaintiffs need not prove materiality at the class certification stage in order to invoke the fraud-on-the-market presumption. At issue was whether a court could make a Rule 23(b)(3) finding that common questions predominate absent proof that the alleged misrepresentation had a material effect on stock price. Justice Ginsburg, writing for the Court, responded that “Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.” (Emphasis in original.)

Because materiality is judged according to an objective standard--i.e., the significance of the misrepresented or omitted fact to a reasonable investor—the Court held that materiality is a question common to all class members. The materiality of the alleged misrepresentations or omissions, or lack thereof, would be the same for all investors. Therefore, the Court reasoned, even if the class fails to prove materiality on the merits, the result would not be the predominace of individual questions, but rather the end of the case.

For the same reason, the Court held that it is unnecessary, at the class certification stage, to consider a defendant’s “rebuttal” evidence that the alleged misrepresentations or omissions did not affect the market price of the securities. The Court reasoned that such evidence goes to the materiality of the misrepresentation or omission, and thus is not relevant at the class certification stage.

In dissent, Justice Thomas accused the majority of “all but eliminating materiality as one of the predicates of the fraud-on-the-market theory.” According to Justice Thomas, while materiality may be a common question, reliance is not a common question—unless the fraud-on-the-market presumption, which requires a showing of materiality, is established. “Plaintiffs cannot be excused of their Rule 23 burden to show at certification that questions of reliance are common,” Justice Thomas wrote, “merely because they might lose later on the merits element of materiality.”

At first blush, Justice Thomas’ quibble appears at times to exalt form over substance. After all, why would it matter if a class is certified based on the fraud-on-the-market theory even if materiality is later found to be lacking? Either way, won’t the lawsuit stand or fall on the common, objective question of whether a misrepresentation or omission was material?

The answer, more practical than legal, lies in a footnote to Justice Thomas’ dissent: “Of course, the Court’s assertion that materiality will be resolved on the merits presumes that certification will not bring in terrorem settlement pressures to bear, foreclosing any materiality inquiry at all.” (Justice Scalia made a similar argument in a separate dissent.) While the timing of a materiality ruling may have little impact on the merits of a securities class action, it can nonetheless have a significant impact on the outcome. Nevertheless, the Court has again limited the scope of inquiry at the certification stage prior to acceptance of the fraud-on-the-market presumption. 

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The 2012-13 Supreme Court term has been a hotbed of class action activity, with the justices set to decide at least half a dozen cases that will directly affect class action litigation. Although none of this term’s decisions is likely to have the impact of the Court’s recent decisions in Wal-Mart Stores v. Dukes or AT&T Mobility v. Concepcion, the sheer number of opinions expected this spring promises significant clarifications of some murky areas. These include:
 

  • Whether a plaintiff may defeat removal under CAFA by stipulating that he or she will not seek more than the $5 million jurisdictional threshold on behalf of the class. In Standard Fire Insurance v. Knowles, the Eighth Circuit denied permission to appeal a district court’s determination that such a stipulation was sufficient, after affirming the validity of a jurisdictional stipulation in a similar case. Is the Eighth Circuit correct, or does such a stipulation improperly bind members of a class that the named plaintiff does not yet represent?

• The extent to which the Supreme Court’s 2011 decision in Wal-Mart requires courts to delve into the merits of a lawsuit when considering class certification motions. In Comcast v. Behrend, the Third Circuit affirmed the grant of class certification in an antitrust action, despite the district court’s decision not to resolve disputes about the relevant market and the existence of classwide impact at the class certification stage. Instead, the Third Circuit held that it was sufficient for the court to determine that the class could establish the relevant market through common proof, that the element of antitrust impact was capable of proof through evidence common to the class, and that the plaintiffs had presented a common methodology to determine damages on a classwide basis. Does Wal-Mart, which included a footnote implying that merits inquiries are appropriate in applying Rule 23(b), require more?

• The extent to which the plaintiff in a securities fraud class action must establish that the alleged misrepresentation was material in order to obtain class certification based on a “fraud on the market” presumption. In Amgen v. Connecticut Retirement Plans and Trust Funds, the Ninth Circuit held that a plaintiff need only plausibly allege materiality at the class certification stage. Did the Ninth Circuit get it right, or does failure to establish materiality at the class certification stage preclude a finding that classwide issues predominate?

• Whether a defendant renders a class action moot by offering full relief to the named plaintiff prior to class certification. In Genesis HealthCare v. Symczyk, the Third Circuit held that in a collective action brought under the Fair Labor Standards Act—which, unlike a Rule 23 class action, requires “class” members to affirmatively consent to participation in the class—an offer of judgment to the named plaintiff, though made before any other plaintiffs had “opted in,” did not moot the lawsuit as to the “class.” Can a defendant thwart a class action pre-certification by settling with the putative class representative, or must the Article III “case or controversy” requirement be read more broadly in class actions? And is the answer different for FLSA actions than for Rule 23 class actions?

• Whether a class arbitration waiver can be held invalid if it prevents plaintiffs from enforcing their federal statutory rights. In In re American Express Merchants’ Litigation, the Second Circuit struck down a class arbitration waiver on the ground that the waiver had the practical effect of precluding potential class members from enforcing their Sherman Act claims. Does the Supreme Court’s 2011 opinion in AT&T Mobility, which held that the Federal Arbitration Act’s general protection of arbitration clauses preempted a state common law unconscionability doctrine, apply more broadly, or is there an exception where the waiver might interfere with enforcement of another federal statute?

• How specific an arbitration clause must be in order to support a finding that the parties consented to class arbitration. In Oxford Health Plans v. Sutter, the Third Circuit affirmed an arbitrator’s finding that the parties had agreed to class arbitration based on a contractual provision mandating simply that “all” disputes be submitted to arbitration. Is such language sufficient for an arbitrator to find consent, or must an arbitrator infer that the parties did not contemplate class proceedings absent an explicit reference to class arbitration?

With all of these cases pending before the Court, as well as several controversial issues percolating in the lower federal courts, the first half of 2013 could be a high-water mark for class action developments. Stay tuned.

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The question of Rule 23(b)(3) predominance has become an increasingly thorny one for courts ruling on class certification motions, in no small part due to the Supreme Court’s landmark 2011 opinion in Wal-Mart Stores, Inc. v. Dukes. It was thus a refreshing development when a recent Seventh Circuit opinion undertook to address predominance in strikingly simple terms.

“Predominance is a question of efficiency,” wrote Judge Richard Posner in Butler v. Sears, Roebuck and Co. “Is it more efficient, in terms both of economy of judicial resources and of the expense of litigation to the parties, to decide some issues on a class basis or all issues in separate trials?”

The underlying lawsuit involved a class action involving a pair of defects in Sears washing machines. With respect to one defect, which allegedly caused mold buildup in the machines, the district court denied class certification on the ground that the manufacturer made several design modifications, as a result of which different models were differently defective—and some might not be defective at all. With respect to the other defect, a control unit malfunction that allegedly caused the machines to shut down in mid-cycle, the district court granted class certification.

The Seventh Circuit held that both classes should have been certified. The fundamental question in the mold litigation, the panel held, was “were the machines defective in permitting mold to accumulate and generate noxious odors?” This question, the court said, was “common to the entire mold class, although the answer may vary with differences in design.” To the extent that, as Sears claimed, many class members did not experience a mold problem, the panel held, “that is an argument not for refusing to certify the class but for certifying it and then entering a judgment that will largely exonerate Sears.” For similar reasons, the court upheld class certification in the control unit litigation, holding that “[t]he principal issue is whether the control unit was indeed defective.”

Notably, the Seventh Circuit determined that the issue of whether the product was defective predominated not only over individual questions of damages, but also over differences in state laws that might govern the class’ claims. In particular, the panel noted that in some of the affected states, a defective product can be the subject of a successful suit for breach of warranty even if the defect has not yet caused harm—thus permitting plaintiffs in those states to recover for breach of warranty even if they have not yet encountered an odor or a control unit malfunction. Judge Posner noted only that the district court may want to consider whether the states’ differing laws warrant the creation of subclasses—as might the difference in designs in the various models involved in the mold litigation.

Much ink has been expended over the last couple of years in efforts to weigh common and individual questions for Rule 23(b)(3) purposes. The Butler opinion, short and to the point, is a welcome reminder that identifying the predominant issue in a lawsuit need not always be so difficult.

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A recent New Hampshire case provides yet another example of the difficulty of establishing predominance for class certification purposes in advertising/consumer deception cases. This time, the industry is one that is amply familiar with class action jurisprudence: the tobacco industry.

In Lawrence v. Philip Morris USA, the plaintiff alleged Philip Morris falsely represented that its “Marlboro Lights” cigarettes would deliver less tar and nicotine that other cigarettes. In reality, the plaintiff alleged, the “Lights” merely had filters with ventilation holes that would dilute the tar and nicotine per puff, allowing the cigarettes to “pass” smoking machine tests without delivering any less tar or nicotine to human smokers. The plaintiff did not claim personal injury as a result of the alleged deception; rather, she sought compensation for the difference in value between the cigarettes she purchased and the lower-tar cigarettes she was promised.

The trial court certified a class of “Lights” purchasers in New Hampshire. On appeal to the New Hampshire Supreme Court, however, the class ran into a roadblock that has become increasingly insurmountable in advertising class actions: the individual nature of each consumer’s purchasing decision, and the knowledge that went into that decision.

Here, Philip Morris submitted expert testimony documenting decades of various studies, news reports, and other publicly disseminated material about low-tar cigarettes. Much of this information reported that such cigarettes did not actually contain less tar or nicotine, and that many smokers of low-tar cigarettes “compensate” for the ventilation holes by smoking more cigarettes, inhaling more deeply, or covering the holes with their fingertips. As a result of “the volume of information available to consumers,” the court concluded that “the number of class members exposed to this information was not de minimis.” Accordingly, “determining the information about Lights to which individual class members were exposed and what they believed are individual issues that will predominate over common ones.”

Given the recent consistency with which courts have been rejecting class certification motions in advertising cases, one wonders whether the studies and reports proferred by Philip Morris were even necessary. Arguably, even if little public information existed about the perils of “light” cigarettes, wouldn’t each purchaser’s state of mind remain an individual question? Presumably some consumers placed a greater value than others on the “light” nature of the cigarettes; would a court be required to determine on an individual basis the extent to which the desire to consume less tar and nicotine drove each consumer’s purchases? Moroever, wouldn’t a court be obligated to consider, individually, the extent to which each purchaser actually did “compensate” for the ventilation holes, in order to determine whether that consumer received the benefits promised?

The reality is that few courts are willing to find predominance in advertising cases. Where there is significant information in the product about the public domain, thereby diluting the potential impact of the advertising on the decision to purchase the product, courts point to this information to show the varying amounts of information available to purchasers in support of a denial of class certification. When there is no such information, courts can nonetheless rely on the complicated decision-making process that goes into each consumer’s purchase of a product, and on the differing values to each consumer of the product “promised” and the product received. Given this trend, successful advertising class actions are likely to be few and far between.

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The Pennsylvania Supreme Court last week upheld the decertification of a class of H&R Block customers challenging the tax preparer’s “Rapid Refund” program as deceptive, holding that the existence of a confidential relationship between H&R Block and each class member—a prerequisite to the plaintiff’s claim for breach of fiduciary duty—cannot be determined on a classwide basis.

In Basile v. H & R Block, Inc., the complaint—originally filed 19 years ago—claims that Block, which loans customers the amount of their anticipated tax refund through a short-term bank loan, deliberately confused customers about the nature of the loan. According to the plaintiff, customers did not know that the payment was actually a loan, nor did they understand the high rate of interest involved.

In 2001, after certifying a class of 600,000 customers, the trial court granted summary judgment in Block’s favor on the ground that Block was not the plaintiffs’ agent, no confidential relationship existed between Block and its customers, and therefore Block owed no fiduciary duty. An intermediate court, however, reversed the summary judgment ruling, determining that the class had proferred sufficient evidence for a factfinder to find a confidential relationship.

The common pleas court, based on this ruling, decertified the class, finding that it would be necessary to consider “the unique qualities of each class member” in order for a factfinder to determine whether each class member placed “complete trust in the defendant’s expertise.” The intermediate court overturned this ruling as well, noting that the class would be relying primarily on Block’s internal documents, which showed that Block understood its customers to enter the relationship “in a position of pronounced economic and intellectual weakness” and intentionally provided only minimal information about the refund loans.

The Supreme Court reversed, holding that the common pleas court correctly decertified the class. The court faulted the intermediate court for relying on factual assertions accepted as true in the summary judgment context, given the differing evidentiary standards governing summary judgment and class certification. The court further held that notwithstanding the common reliance on Block’s own documents, “it is not appropriate to presume that Block’s marketing and customer relations strategies had the same impact on each and every putative class member.”

On the one hand, the Basile decision is yet another example of the difficulty of certifying a class where the complaint alleges false or deceptive advertising. Class certification is frequently denied in such cases on the ground that each consumer’s decision-making process requires an individualized inquiry to determine the extent to which the consumer was affected by the alleged deception.

On the other hand, Basile is not a deceptive advertising case, but a breach of fiduciary duty case. It seems counterintuitive that the existence of a fiduciary duty flowing from Block to its customers would be an individualized issue. Did Block have a confidential relationship, or owe a fiduciary duty, only to those individuals who assumed Block was not being deceptive about the character of the loan?

Presumably, the court would have reached a different result if the defendant had been a law firm, a financial advisor, or a similar professional whose relationships with clients fall more clearly into “confidential relationship” territory. A court presumably would not look at the personal circumstances of each of an attorney’s clients to determine whether the attorney and the client had a confidential relationship. For this reason, and because a class action is an unusual avenue for a breach of fiduciary duty claim, Basile may not have a significant impact on class certification jurisprudence. But it is a victory for companies, like Block, whose business falls closer to the line, wherever it may be, that separates the confidential from the non-confidential.
 

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A recent New York federal court opinion illustrates the difficulty in establishing predominance where the primary injury alleged is overpayment for a defective product based on misrepresentation or concealment of the defect.

In Oscar v. BMW of North America, the plaintiff attempted to sue BMW on behalf of a class of New York purchasers of MINI vehicles with Goodyear run-flat-tires whose tires had “gone flat and been replaced.” The plaintiffs alleged that BMW had violated New York state law by making defective disclosures regarding the reliability and replacement cost of the RFTs. Specifically, the lawsuit alleged that BMW had improperly failed to disclose RFTs’ increased risk of failure; the lack of a spare tire; that RFTs cannot be repaired; that RFTs cost more than normal tires to replace; and that replacing RFTs is more inconvenient and time-consuming than replacing normal tires.

In support of his argument that classwide issues predominated, the plaintiff asserted a classwide injury in the form of a portion of the MINI purchase price paid by class members that could be attributed to the RFTs. To illustrate this claim, the plaintiff noted that the suggested retail price of a 2006 MINI S with RFTs was $20,600, while the price of a 2006 MINI Cooper without RFTs was $18,000. The plaintiff argued that the $2,600 price difference could be attributed to the presence of RFTs. The court rejected this theory, in part because the MINI S included many pieces of equipment not on the standard MINI. Thus, it would be impossible to determine on a classwide basis whether the presence of RFTs “caused” consumers to pay a higher sum for the MINI S: “For some consumers, the RFTs may have been an important factor; for others, not at all; for others, somewhere in between; and others, perhaps most others, may never have thought to isolate the relative contribution of each of the differences between these models. . . .”

Moreover, the court found it would be “impossible” to determine, on a classwide basis, the extent to which class members’ decisions to purchase the vehicles would have been different if the RFT disclosures had been made. The court cited both “the inherently independent nature of the purchase decision” and “the conjectural nature of the post hoc injury into how a consumer’s purchase decision might have been affected.” While some consumers might have found the undisclosed defects relevant, “there are simply too many other variables in play to permit that conclusion as to the entire class of consumers . . . .” The court also noted potential other variables adversely impacting a classwide determination of injury, such as the extent to which some class members might have overvalued some other feature of the vehicle (and thus been willing to pay the higher purchase price even had they known of the RFT flaws) and individualized factors affecting each class member’s negotiation of the purchase price with the dealer.

Demonstrating that common questions predominate over individual questions is always difficult where nondisclosure of a product’s features will be alleged, because such lawsuits typically require an examination of each consumer’s knowledge and decision-making process in purchasing the product. Where the product is an automobile, which usually is not even sold to consumers at a uniform price, the predominance hurdle will be nearly insurmountable.

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A defendant defeats a motion for class certification in federal district court. Another plaintiff files an identical lawsuit, on behalf of the same putative class, in the same court, but the case is assigned to a different judge. Is the second judge bound by the first judge’s denial of class certification?

No, according to a recent decision from the Seventh Circuit. While a 2011 Supreme Court decision referred vaguely to “comity” with respect to federal courts’ class certification decisions in addressing a common dispute, the Seventh Circuit held that the Supreme Court’s language cannot be construed to preclude Judge #2 from granting class certification merely because Judge #1 denied it in a different case.

The Seventh Circuit case, Smentek v. Dart, actually involved two prior denials of class certification. All three cases were brought by former Cook County Jail inmates complaining about an insufficient number of dentists available to treat inmates in a timely manner. All three cases were filed in federal district court in Chicago, and were assigned to three different judges. (The Seventh Circuit questioned “why all three cases were not assigned to the same judge.”)

The judges in the first two cases denied class certification. The Smentek judge initially denied certification as well, on the basis of collateral estoppel, but reversed herself and granted certification in the wake of the Supreme Court’s 2011 opinion in Smith v. Bayer Corp. In Smith, a federal district court, having denied class certification, enjoined a state court from considering a class certification motion in a “copycat” class action filed by a different plaintiff. The Court reversed the injunction, holding that “neither a proposed class action nor a rejected class action may bind nonparties,” and thus a class certification ruling adverse to one plaintiff may not bind similarly situated persons whom that plaintiff was denied leave to represent.

The Court also said, however, that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.” The defendants in Smentek seized on this language to argue that the district court should have deferred, based on “comity,” to the first two courts’ denials of class certification.

The Seventh Circuit rejected this argument, concluding that the Supreme Court could not have intended its dictum in Smith to preclude the granting of class certification in copycat class action suits; otherwise, the Court would have affirmed, rather than reversed, the injunction against the state court proceeding. Instead, the panel held, comity is a doctrine that merely permits, and does not require, preclusion. To hold otherwise “would give comity greater force between two judges of the same court than between two nations each jealous of its sovereign authority and demanding respect from other nations.”

The court concluded that it was “left with a weak notion of ‘comity’ as requiring a court to pay respectful attention to the decision of another judge in a materially identical case, but no more than that even if it is a judge of the same court.” The panel noted that this “requirement” is limited not only by the phrase “pay respectful attention,” but also by the phrase “materially identical case.” Two class actions involving the same class are not necessarily “materially identical,” according to the Seventh Circuit, as to such issues as the adequacy of the class representative or the suitability of class counsel. While Stemken, according to the court, was “materially identical” to the two prior class actions, the judge “gave plausible reasons for her disagreement with the [first two] judges. . . . Can more be required?”

The most significant question raised by Stemken, however, is one in which the Seventh Circuit echoed the practical arguments of the defendants: “Without a rule of preclusion, class action lawyers can . . . keep bringing class actions until they draw a judge who is willing to certify the class. . . . How are courts or legislatures to prevent class action litigation from metastasizing?” The opinion offers no answer to this question.

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The Supreme Court will delve further next term into the interplay between class certification and rulings on the merits, reviewing the Third Circuit’s affirmance of class certification in an antitrust suit against Comcast.

The Court today granted certiorari in Comcast v. Behrend, in which consumers allege that the cable provider engaged in an anticompetitive “clustering” scheme designed to concentrate its market power in and around Philadelphia. The alleged “clustering” scheme involved swapping various Comcast cable systems and subscribers scattered across the country to competing cable providers in exchange for cable systems and subscribers in the Philadelphia area. In addition, the plaintiffs allege that Comcast engaged in conduct designed to exclude a potential competitor from the Philadelphia market by denying it access to Comcast-owned programming, requiring contractors to enter non-compete agreements, and inducing potential customers to sign up for long-term contracts with special discounts and penalty provisions in the area the potential competitor sought to penetrate. As a result, the complaint alleges, Philadelphia-area consumers paid artifically high prices for cable services as a result of diminished competition.

An Eastern District of Pennsylvania court granted class certification, and a divided Third Circuit panel affirmed. At issue is whether the action qualifies for certification under Rule 23(b)(3), which requires a finding that common legal or factual questions predominate over individual questions. In particular, the dispute involves whether the plaintiffs have properly defined the relevant geographic market as the Philadelphia area and whether they can prove antitrust impact and damages on a classwide basis.

The Third Circuit repeatedly defended the district court’s refusal to resolve these issues, on the grounds that inquiring into the merits beyond the extent necessary to determine whether Rule 23(b)(3) is met would contravene the Supreme Court’s 1974 opinion in Eisen v. Carlisle & Jacquelin. The Third Circuit thus held that (i) it was sufficient for the district court to determine that the class could establish the Philadelphia area as the relevant market through common proof, (ii) the element of antitrust impact is capable of proof through evidence common to the class, and (iii) plaintiffs’ expert provided a common methodology to measure and quantify damages on a classwide basis.

Comcast contends that the Supreme Court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes requires more. Comcast argues that Wal-Mart effectively disavowed any limitations on merits inquiries articulated in Eisen, and that the district court has an obligation to affirmatively resolve any merits issues that impact class certification. Thus, according to Comcast, the district court was required to affirmatively define the relevant market and determine whether the plaintiffs had actually proven classwide antitrust impact, as well as resolve various disputes regarding the methodology used by the plaintiffs’ damages expert.

Regardless of how the Supreme Court decides the issue, this case will not have the impact of either Wal-Mart or the Court’s other major 2011 class action decision, AT&T Mobility v. Concepcion. It does not have the far-reaching consequences for any particular group of class actions, or for the future of class actions generally, that the 2011 decisions potentially had, and its application to future class certification decisions will be highly fact-intensive. But Comcast v. Behrend will provide clarification as to how far Rule 23 requires a district court to go in addressing issues whose ultimate resolution is for a jury.
 

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A recent federal case in Texas illustrates the importance of discovery in a class certification motion—and how a defendant can exploit the failure to obtain discovery on even the most fundamental class allegations.

In Pfeffer v. HSA Retail, Inc., a Western District of Texas judge denied a motion to certify a class of ATM users who were charged a transaction fee despite the absence of a physical notice of the fee on the ATM. The complaint alleged that the bank’s failure to post a physical notice on an ATM constituted a violation of the Electronic Funds Transfer Act (EFTA).

The court denied the motion, holding that the plaintiff had not satisfied Rule 23's numerosity requirement and had not provided a sufficiently definite time period for the class definition. In arguing that the numerosity requirement was met, the plaintiff made the bald allegation that joinder would be impracticable and offered to provide evidence of the class size following written discovery, which the plaintiff said he was serving contemporaneously with the class certification motion, “by way of a Reply Brief and supporting materials or otherwise.” The plaintiff, however, never provided such evidence. The plaintiff’s reply brief did not even mention the numerosity requirement. Given the failure of the plaintiff to provide even an estimate of the class size, the court found that there was insufficient evidence to comply with the numerosity requirement.

As for the time period in the class definition, the plaintiff sought to include in the class all non-customers who withdrew funds “between October 31, 2011 through the date on which Defendant came into compliance with the ATM Fee posting requirements of the EFTA. . . .” The court held that without an exact date to cut off class membership, it had no way to properly identify which users should be included in the class and which users should be excluded from the class: “Without an exact date on which to cut off class membership, the Court has no way of properly identifying those customers who should be included in the class and those who should be excluded.”

Furthermore, the court noted that even if the plaintiff successfully established numerosity and a sufficiently definite time period, the court would still be concerned with the administrative feasibility of identifying individual class members. The EFTA applies only to accounts established primarily for personal, family, or household purposes. Therefore, to administer the class the court would need a practical method for discerning the nature of each user’s account based on the information available to it. Without such an approach the court had serious concerns regarding certifying the class.

It appears from the opinion that class counsel did not complete class discovery prior to the court’s ruling. Discovery should have easily provided class counsel information about the size of the class and the date when the bank brought its ATM into compliance with the EFTA. Instead, class counsel apparently assumed it would be enough that these facts were readily ascertainable, even though they had not actually been ascertained. Although it may seem obvious to a plaintiff that the numerosity requirement will be satisfied or that the class definition can later be limited to an exact time period, a defendant is entitled to demand that such allegations be proven prior to class certification.

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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.
 

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 In applying Rule 23(a)’s commonality requirement for class certification, at what point in the analysis of the class members’ claims must the common issue arise? A recent decision by a Massachusetts federal court denying certification to a putative class of foreclosure victims turned on this very question.

In Manson v. GMAC Mortgage, LLC, the plaintiffs sought to certify a class of Massachusetts residents whose homes were foreclosed, or against whom an invalid foreclosure process was initiated. The plaintiffs allege that the defendants, various foreclosing entities and their law firms, repeatedly violated state law by foreclosing on properties without first obtaining valid assignments of the underlying mortgages. Their argument was buoyed by a 2011 decision from the Supreme Judicial Court of Massachusetts, U.S. Bank Nat’l Ass’n v. Ibanez, which held that foreclosures not in strict compliance with state law are void, not merely voidable.

The putative class was defined as Massachusetts foreclosure victims for whose property a mortgage assignment had been recorded after the notice of sale. The court, however, denied class certification on commonality and typicality grounds. While the plaintiffs contended that the common violations of Massachusetts’ statutory foreclosure scheme constituted a common question, the court held that a fact-specific inquiry would be required as to whether the statute was violated in each case—more specifically, as to whether a pre-sale assignment in each case had occurred, or whether the post-dated assignment was the operative assignment. “In other words,” the court said, “the glue [binding the proposed class] would only adhere after the merits of each case had been fully investigated and only in those instances in which an Ibanez violation in fact was uncovered.” (Emphasis in original.) At that point, however, no common question would remain, as the only remaining issue would be the calculation of each plaintiff’s damages.

As to typicality, the court noted that “the primary relief sought for all class members” was an injunction requiring the defendants to notify class members that they may have a latent interest in their properties. The representative plaintiffs, however, were “already well-aware of this latent property interest.” Accordingly, the court held, the interests of the representative plaintiffs were insufficiently aligned with those of the class to permit certification.

In essence, the court’s application of the commonality requirement holds that it is insufficient to allege a systematic violation of law that affected all class members where the facts do not demonstrate that each class member has been injured. Presumably, if the “glue” had been a policy—rather than a just a frequent occurrence—of post-dating assignments, commonality would have been easier to establish.

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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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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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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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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 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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A recurring theme here has been the importance in class certification motions of the underlying substantive law. Yet another recent example comes from a securities fraud action in a Nevada federal court.

In Goodman v. Platinum Condominium Development, the court denied class certification based on a Rule 23(b)(3) predominance/superiority analysis. The plaintiffs were purchasers of condominium-hotel units in a Las Vegas resort. After their units experienced a steep drop in value, the purchasers sued the developers, alleging that the sale of the units violated state securities laws. The court found that the proposed class satisfied the class certification requirements of Rule 23(a), but nonetheless held that class certification was inappropriate under Rule 23(b). Specifically, the court rejected the plaintiffs’ Rule 23(b)(3) arguments that the common questions of law or fact predominated over individual questions, and that the class action was a superior mechanism for resolving the dispute. In doing so, the court identified three factors that weighed against certification.

First, each purchaser’s claim would hinge on whether the offering of the unit was, for purposes of Nevada law, a security. This, in turn, would depend on whether a purchased unit was an “investment contract.” Since the plaintiffs maintained legal control over the units, they would have to show “an inability to exercise meaningful powers of control or find others to manage [the] investment.” This approach would require the court to examine the economic reality of the investor/manager relationship and to determine that “each class member was so inexperienced or unknowledgeable as to be incapable of exercising his or her venture powers or that he or she was dependent on some unique entrepreneurial or managerial ability of Defendants.” As a result, the court would have to examine the relationship between each individual class member and the property manager in order to establish each plaintiff’s right to recovery. The court weighed this need to litigate individual issues as a factor against class certification.

Second, the court found that there would need to be individualized showings to determine which members of the putative class were barred from recovery by the statute of limitations. The statute of limitations barred claims not filed within two years after discovery of the violation should have been made through the exercise of reasonable care, and the units were purchased during a period between two and four years prior to the filing of the lawsuit. The court noted that “[t]here are undoubtedly differences between class members: some have previously been litigants in lawsuits about Las Vegas condominiums, some are experienced property owners, and others are lawyers.” As a result of these differences, as well as differences in the date of purchase, some class members would be within the statute of limitations while others would not be. The court observed that a statute of limitations issue alone would not be enough to deny class certification, but was a factor weighing against certification here.

Finally, the court found that each proposed class member had an incentive to litigate individually, and some had actually chosen to do so. All of the named plaintiffs were seeking damages in excess of $200,000, indicating that the proposed class was not a group that lacked motivation to litigate individually. Out of 195 possible class members, 50 were already involved in separate litigation. Consequently, more than 25 percent of the potential class members showed an interest in controlling their own action.

While it cannot be determined from the opinion how much weight the court placed on each of its three bases for denying class certification, it is hard to imagine that the plaintiffs’ motion could have survived the first issue—the individual threshold question of whether the purchase involved a security at all—even if the last two considerations did not come into play. If this is indeed the case, then the legal definition of an “investment contract” may have been the dispositive issue on class certification.

Contributing author:  Brian Kint

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How broad must a class be in a class action suit? Just broad enough to satisfy the requirements of Rule 23, according to an Alabama federal judge. The district court recently refused an attempt by two debt collectors to compel the expansion of a class in a lawsuit against them over a collection letter privacy notice, holding that the law does not require certification of the broadest possible class of plaintiffs.

In Lewis v. ARS Nat’l Servs. Inc., the plaintiff sued a debt collector that had acquired defaulted debts from JC Penney and the collection agency to which the collector had assigned the debt for collection. The complaint alleged that the collection letters contained a privacy notice that violated the Fair Debt Collection Practices Act (FDCPA). The class as defined was fairly narrow, consisting only of Alabama residents to whom the defendants sent the challenged privacy notice during a one-year period in an attempt to collect a consumer debt originally owed to JC Penney. The defendants argued that the proposed definition was artificially restrictive and would subject the defendants to serial lawsuits based on the same privacy notice mailed to other debtors.

The court found, and there was no dispute. that the class met the Rule 23 certification requirements. The defendants argued, however, that the plaintiffs’ class definition was “designed to allow for the maintenance of separate class action complaints based on the exact same alleged conduct.” For purposes of the lawsuit, the defendants argued, the identity of both the original creditor and the agency used to collect the debt was immaterial, .because the debt collector sought to collect debts owed to creditors other than JC Penney and sent the same privacy notice at issue here to every debtor, regardless of which collection agency it used. Thus, according to the defendants, any certified class should include all Alabama residents who received the privacy disclosure at issue to avoid multiple suits with the possibility of multiple outcomes and payment of the same statutory damages multiple times.

The court refused to force the plaintiffs to broaden the proposed class. According to the court, the defendants had not proved that they would be subject to serial lawsuits based on the privacy notice at issue, and the court refused to broaden the proposed class based on such “unsupported fear.” The court concluded: “The class, as currently defined, fulfills all of the requirements of Rule 23. That is all that the law demands, and this court will not require more based on the mere possibility that it would advance efficiency.”

It is interesting that on the one hand, the court said there was “no authority for the proposition that the court should use its discretion to require a broader class,” yet on the other, the court appeared to rely in part on the speculative nature of the defendants’ argument. This reliance raises the question whether the court might have been willing to expand the class if the defendants had come forward with evidence that additional lawsuits were in the works, and, if so, whether such an expansion would be legally permissible.

While it did not faze the court, the possibility of multiple class actions arising out of the same act is a potential concern for many class action defendants.. Seeking relief through an expanded class definition is one creative way to address this concern, but one that has yet to find traction in the courts. 

Contributing author:  Diana Lin

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The protracted copyright infringement class action by freelance writers seeking compensation for pieces published without authorization in various online databases has hit another roadblock.

In re Literary Works in Electronic Databases Copyright Litigation involves claims for infringement of works as to some of which the copyrights are registered and the vast majority are unregistered. This detail – the registered/non-registered distinction – keeps stymieing resolution of the case. In 2007, after the parties had spent years negotiating a settlement and gaining district court approval, the Second Circuit threw out the settlement, holding that the district court lacked subject matter jurisdiction to approve the settlement because many of the claims to be resolved were based on unregistered works, and registration is a jurisdictional predicate to a copyright infringement suit. The Supreme Court finally reversed in 2010, and the parties went back to the district court and again gained approval of the settlement.

Last month, the Second Circuit tossed the settlement once again. This time, the Second Circuit’s rejection is based on Rule 23(a)(4)’s requirement of fair and adequate representation of the class. Because some class members’ claims are based only on works with unregistered copyrights, and none of the plaintiff class representatives are in that category (i.e., each named plaintiff is suing on at least one work with a registered copyright), the court held that the class failed the adequacy prong of Rule 23(a). Interestingly, the court ignored the fact that the organizational plaintiffs all have members with both registered and unregistered copyright claims. The panel – over Judge Chester J. Straub’s dissent – held that the only way to cure the defect was to create a separate subclass containing class members whose claims are based only on unregistered works.

The proposed settlement calls for different compensation for each of three categories of claims: Category A, works registered in time to be eligible for statutory damages and attorney’s fees; Category B, works registered, but not eligible for statutory damages and attorney’s fees; and Category C, unregistered works. Category C makes up 99% of the total claims, as most freelance authors do not register their works. Although it recognized that the plaintiff class representatives all hold some Category C claims, the Second Circuit held that the fact that none of the plaintiffs held only Category C claims meant that class members holding only Category C claims were inadequately represented. The court noted what it considered a “fundamental conflict” between plaintiff class representatives holding claims in two or more categories and class members who hold just Category C claims, in that those holding both can choose to compromise on one to get more on another, but those holding only Category C claims have no such option.

The defendants and the plaintiffs have both petitioned for rehearing, with both sides making many of the same arguments. The defendants point out that the decision requires an impossibility: a subclass of members with only unregistered works cannot be represented by a plaintiff class representative also suing on only unregistered works, as Section 411(a) of the Copyright Act bars a copyright infringement claim on an unregistered work. That is why none of the class representatives have only Category C claims.

The parties also argue that the adequacy requirement is met here because all class members, and all plaintiff class representatives, have the same claim for copyright infringement. The decision thus contradicts established precedent holding that variations only in the amount of damages class members stand to recover is not a valid basis for a finding of inadequate representation, where all have the same interest and the same type of injury. The proposed settlement, of course, provides for payment on all categories of claims, whether registered or unregistered. Indeed, the parties point out, class members suing on many unregistered works stand to receive more than class members suing on fewer registered works. And, of course, the plaintiff class representatives all have some Category C claims. In contrast, in the cases relied upon in the decision to support a subclassing requirement, the representative plaintiffs settled claims they did not have.

Another attack on the decision is that the class and the settlement should stand because of the presence of strong structural assurances of adequacy. The parties contend that subclassing is only one way of ensuring adequacy of representation. The presence of structural assurances of adequacy may make subclassing unnecessary. Here, the parties argue, given that all plaintiffs have Category C claims, the plaintiff representatives were incentivized to negotiate the best settlement possible for those claims. In fact, the awards for unregistered works were higher than those for registered works. Also, as emphasized by Justice Straub in his dissent, the institutional plaintiffs, who were very active in the settlement, have members with all three categories of claims. Thus, the parties argue, the fact that there is no plaintiff with only Category C claims is far from a disabling conflict requiring subclassing.

The decision implicates policy issues, too. It appears that under the majority’s reasoning, subclassing – and even sub-subclassing – would be required in nearly every class action, and certainly in every case with a damage cap where class members will be receiving different amounts. Thus, the decision could hamper future class action settlements. Interestingly, in this case, only 10 out of thousands of class members objected – and none of them would be members of the subclass proposed by the court. Now, payment to the thousands of non-objectors will be further delayed as the case makes its way through additional appellate practice.

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A recent Ninth Circuit opinion on class certification demonstrates both the potentially fact-intensive nature of typicality issues and the importance of substantive law in determining whether common issues predominate over individual issues.

In Stearns v. Ticketmaster Corp., the Ninth Circuit reviewed several decisions denying class certification to various plaintiffs challenging an allegedly deceptive internet scheme involving Ticketmaster and its one-time affiliate, Entertainment Publications, Inc. (“EPI”). At issue is a link on Ticketmaster’s website to EPI’s Entertainment Rewards program, which allows members paying a monthly fee to download printable coupons.

After customers purchase tickets from Ticketmaster’s website, the Entertainment Rewards “ad unit” is displayed on the purchase confirmation page, inviting customers to click another button to learn how to obtain benefits from Entertainment Rewards, such as “cash back” on their next Ticketmaster purchase. Customers who click on the ad unit are taken to a landing page on the EPI website. If they enter their email address twice and click on a “Sign Me Up” or “Yes” button, they are enrolled in the program, the credit or debit card information given to Ticketmaster is transferred to EPI automatically, and after a thirty-day trial period, the customers’ credit cards or bank accounts are charged on a monthly basis. The customer does not receive a confirmation page or communication from Ticketmaster or EPI to the effect that this transaction has occurred and they will be charged.

The plaintiffs, in various lawsuits brought by the same attorney, alleged that these practices violated federal and California law. The plaintiffs sought to certify a class of all persons in the United States who (i) made a purchase at Ticketmaster’s website during the class period, (ii) were enrolled in Entertainment Rewards through Ticketmaster’s passing of their information to EPI; (iii) were charged for Entertainment Rewards, and (iv) did not print any coupon or apply for any cashback award from Entertainment Rewards.

Two of the plaintiffs appealed a determination by the district court that they failed Rule 23(a)’s typicality requirement. One of the plaintiffs “insisted” that he was not deceived into joining the Entertainment Rewards program, but had decided not to do so and must have accidentally clicked “Yes.” The other plaintiff alleged that he never saw the site and did not know how his son had signed up for the program. In both cases, the Ninth Circuit affirmed, holding that these plaintiffs’ claims were not typical of those of the class, which was alleged to have been falsely induced into signing up for the program.

The panel’s analysis of Rule 23(b)(3)’s predominance requirement, which the plaintiffs invoked, was more complicated. The district court determined that for purposes of the plaintiffs’ claim under California’s unfair competition law, individual issues predominated, because individualized proof of reliance and causation would be required. The Ninth Circuit, however, relied on an intervening California Supreme Court decision holding that unfair competition plaintiffs need show only that members of the public are likely to be deceived. Because the district court had relied on what proved to be an inaccurate reading of California law, the Ninth Circuit reversed the district court’s Rule 23(b)(3) determination.

The district court also denied class certification with respect to the plaintiffs’ claims for injunctive relief under the California Consumers Legal Remedies Act, on the ground that there was no showing of material misrepresentations or omissions to the whole class. The Ninth Circuit upheld this ruling with respect to one plaintiff because of the breadth of the proposed class. The court noted, for example, that the class definition would include consumers who intentionally signed up for the program but never took advantage of it, whether due to illness or emergency, lack of interest in any of the coupons available, or a decision “after a few months that the premiums were not worth the price of admission.”

Another plaintiff, however, had proposed an amended complaint that narrowed the class by adding a limitation to those who “reported in the course of cancellation or seeking a refund that they were unaware that they would be enrolled in or charged for Entertainment Rewards.” The district court dismissed this case at the pleading stage on the basis that it was simply duplicative of the earlier case and suffered from the same defects. The Ninth Circuit disagreed, rejecting the district court’s finding that the limitation in the class definition made no difference. The change, according to the panel, limited the class to people for whom the websites were presumptively materially deficient, “because they told EPI they had been signed up for Entertainment Rewards without realizing it.” Therefore, this case was “significantly different” from the earlier case, and the panel remanded the case to the district court for a determination as to whether the narrower class could be certified.

Finally, the district court denied one plaintiff’s request for class certification for an actual damages claim under the federal Electronic Funds Transfer Act, which prohibits electronic fund transfers from a consumer’s account without the consumer’s written authorization. The district court denied class certification on the ground that common issues did not predominate over individual issues. The Ninth Circuit upheld the denial, based again on the overbreadth of the proposed class. The panel held that because the class was defined to include consumers who had knowingly signed up for the program, and had intended to have the membership fee deducted from their account via their debit card, the funds deducted from their account could not constitute actual damages incurred by reason of EPI’s failure to obtain the proper authorization.

The Ninth Circuit opinion on these various issues is lengthy and detailed, and illustrates the extent to which class certification can turn on nuances in fact patterns, class definitions, and substantive law.

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Counsel seeking to certify a class must demonstrate to the court, among other things, counsel’s own adequacy as a representative of the class. As a recent Seventh Circuit opinion instructs, counsel seeking such a finding would do well to avoid alienating the court even before the certification stage.

In Gomez v. St. Vincent Health, the Seventh Circuit affirmed the denial of class certification on the sole ground that proposed class counsel was inadequate. The underlying action involved a healthcare system’s failure to provide employees who left their jobs with timely COBRA notices regarding their right to extend their health insurance coverage at their own cost.

The plaintiffs’ counsel had previously filed a similar lawsuit, on behalf of different named plaintiffs, in the Southern District of Indiana. The district court in the previous case declined to certify the class for multiple reasons, including the inadequacy of class counsel. Rather than pursue an appeal, the same counsel used the list of beneficiaries provided by the defendant during discovery, recruited new named plaintiffs, and brought the Gomez action, alleging similar facts and seeking to certify a similar class. The Gomez case also was filed in the Southern District of Indiana, but was assigned to a different judge.

In Gomez, the district court based its determination that counsel was inadequate on his conduct in both lawsuits. In the first lawsuit, the judge had found that counsel was not diligent in prosecuting the case, had engaged in faulty discovery efforts, had been subjected to orders to compel and awards of cost, and had failed to develop a full record for summary judgment consideration. In Gomez, the district court found that counsel had brought a nearly identical case with no new arguments and had been ordered to pay expenses in conjunction with the defendant’s motions to compel. The court added that the attorney’s “questionable work” in the first lawsuit and his decision to re-litigate the same issues in a second lawsuit showed “a lack of regard for scarce judicial resources.”

On appeal, in addition to arguing his competence generally, class counsel contended that the district court’s consideration of his conduct in the first lawsuit was improper. The Seventh Circuit said that because counsel had moved the district court to allow his use of discovery materials from the first lawsuit, his argument was “absurd,” adding that counsel himself had asked the court to consider his certification as class counsel in another case as evidence of his competence.
The court concluded with a stinging criticism of the attorney’s performance on appeal: “If counsel wished to convince us that the district court abused its discretion by finding him inadequate to represent the proposed class, his demeanor on appeal has not helped his cause.” The panel faulted counsel for “misrepresent[ing] fundamental facts,” using “hyperbole in the place of persuasive argument,” and “failing to refute the district court’s reasoning.”

While it is rarely wise to inflame the presiding judge, Gomez is an object lesson about the particularly severe consequences of doing so when class certification is at stake.

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A recent federal court decision from Missouri in litigation involving Bisphenol-A (“BPA”) reads like a law school “issue-spotter” exam on class certification. In denying motions to certify various classes in multidistrict litigation, the court’s comprehensive opinion is instructive as to many of the key issues posed by Rule 23—as well as the often problematic nature of class certification in the MDL context.

In In re Bisphenol-A (BPA) Polycarbonate Plastic Products Liability Litigation, the court addressed certification motions that would affect 24 cases consolidated in the Western District of Missouri. The cases involve the six defendants’ use of BPA in baby bottles and sippy cups. The court rejected the plaintiffs’ alternative proposals to certify separate statewide classes against each defendant and to certify three multi-state classes.

With respect to the proposed statewide classes, the court said that the request “misapprehends the transferee court’s role in an MDL.” Because MDL cases are consolidated only for pretrial proceedings, and are remanded to the originating court for trial, “[m]atters related to the administration of individual trials—or matters that relate to only a few cases—should be decided by the court that will actually conduct the trial.” Yet certification of each of the proposed statewide classes would affect only a few cases. As the court put it, the plaintiffs’ motion “essentially ask[s] the undersigned to decide, for instance, that a class of Washington consumers should be certified for trial in the Western District of Washington.” Because this issue, and similar issues for other statewide classes, would each affect only a handful of cases, and would relate to the manner in which the cases should be tried, the court held that they should be decided by the transferee courts.

As to the proposed multi-state classes, the plaintiffs elaborately attempted to circumvent Rule 23’s commonality requirement by grouping together those states whose laws they deemed similar to each other. The plaintiffs proposed three separate multi-state classes, one for each of their claims of unjust enrichment, state consumer protection laws, and breaches of the implied warranty of merchantability. In designing each of the three classes, the plaintiffs eliminated states whose applicable law differed in some material respect from the states included in the group, arguing to the court that the states left in each class were sufficiently similar that they could be lumped together as presenting common issues of law. Moreover, the plaintiffs proposed that their unjust enrichment class, which would encompass 45 jurisdictions, be divided into two subclasses, one consisting of states that followed the Restatement (First) of Restitution, and one consisting of states with the additional requirement that the defendant know about the benefit conferred by the plaintiff.

The court found this approach inadequate, noting at the outset that the process of validating the plaintiffs’ legal survey of 50 states and the District of Columbia would be excessively complicated. The difficulties involved were illustrated by the defendants’ challenges to some of the state classifications, which resulted in concessions by the plaintiffs that they had indeed made some mistakes in their initial analysis. Other challenges from the defendants remained in what the court deemed “legitimate”dispute, both precluding a finding that the proposed groupings satisfied Rule 23’s commonality requirement and presenting “significant manageability concerns.” The court also observed that even if the state laws had been correctly grouped, the application of those laws might be different even across those states that used similar language.

The court further took issue with many of the plaintiffs’ suggested common issues of fact, drawing on the recent Supreme Court decision in Wal-Mart Stores, Inc. v. Dukes. For example, while the plaintiffs characterized “testimony regarding the purchase of their Baby Products” as common, the court responded that “[o]ne Plaintiff’s actions, decisions, knowledge, and thought processes are unique to that Plaintiff.” The court also rejected the notion that damages for unjust enrichment “can be measured simply by calculating the benefit retained by Defendants,” on the ground that whether a defendant’s retention of the purchase price is “unjust” requires considering “what a particular plaintiff received in exchange,” such that a plaintiff who “completely used a product without encountering ill-effects or other difficulties and can only declare after the fact that s/he would not have purchased the goods had the truth been known” may not have unjustly enriched the seller. The measure of damages would be an individualized inquiry, and different states use varying measures of damages.

The court also held that each plaintiff’s knowledge about the BPA controversy, another individual issue, would be relevant because “[a] consumer who knew about the controversy and also knew that the bottle s/he purchased contained BPA would have all the knowledge Plaintiffs allege should have been disclosed.” While the plaintiffs contended that a consumer’s knowledge would be relevant only to damages, the court not only disagreed, but also noted that even a damages issue “is still an individual issue that must be considered in evaluating predominance.”

The court thus held that common issues did not predominate over individual issues, concluding that “[t]he time and other resources necessary to resolve the individual [legal and factual] issues in a single forum, in the context of a single case, in front of a single jury, is staggering.” By contrast, the court concluded, “the common factual issues are relatively easy to prove.”

For similar reasons, the court held that the plaintiffs also could not establish superiority of the class action mechanism. In addition to the manageability issues posed by the proposal to group together different states’ laws, the court noted “the need to elicit testimony from every single class member,” particularly in light of the demand such a lengthy case would impose on the jury and the low likelihood, given the amount of damages at stake, that class members would travel far to testify.

Lastly, the court held that the two class representatives were inadequate. The plaintiffs omitted one of the defendants from their consumer protection claims and two of the defendants from their warranty claims, apparently, at least in part, because the class representatives were from states whose laws did not support these claims. Absent an alternative explanation, the court declined to conclude that the representatives were adequate, holding that “[t]here is no reason, for instance, that a Missouri consumer should be deprived of his/her opportunity to pursue a warranty claim just because the class representative cannot assert such a claim on his/her own.”

The court’s opinion demonstrates the myriad obstacles to certifying certain class actions in the MDL context, particularly where the claims are based on the laws of different states. While some courts might be willing to tackle ascertaining the similarity or dissimilarity among the applicable laws of different states, particularly where a smaller universe of states is involved, many courts can be expected to take a similar approach to that of the BPA court and simply refuse to certify a class. Where the importance of differences in state laws is magnified by their impact on individualized issues, MDL transferee courts can justifiably be expected to simply throw up their hands and leave certification to the originating courts—which, given the low likelihood of trial, will have the effect of denying certification with prejudice.

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The U.S. Supreme Court this week reversed class certification in the Wal-Mart Stores, Inc. v. Dukes case by a 5-4 split decision. The justices unanimously held that Rule 23(b)(2) cannot be used to certify a class seeking an award of individualized monetary damages. The Court, however, splintered into a 5-4 majority in holding that the plaintiffs had not proven common questions of law or fact under Rule 23(a)(2). Since the lower court decision was reversed without a remand, the net result is to terminate the largest putative class action ever filed, involving 1.5 million employees of 3,400 Wal-Mart stores.

The justices unanimously concluded that Rule 23(b)(2) may not be used to certify a class in which the plaintiffs seek individualized monetary awards. Such individualized monetary claims should be certified, if at all, under Rule 23(b)(3), accompanied by the more demanding procedural protections of notice to class members and an opportunity to “opt out” of the class. Class claims amenable to Rule 23(b)(2) certification are only those claims where a single injunction or declaratory judgment will provide relief to each class member. In reaching this result, the Court briefly considered, but rejected, the plaintiffs’ argument that Rule 23(b)(2) certification was appropriate because the relief sought was predominantly injunctive in nature. Justice Scalia, who wrote the majority opinion, observed that certification in this context would nullify the due process protections normally afforded to individual adjudications.

When individual monetary claims are brought under Rule 23(b)(3), the rule requires a finding that the class action is a superior method of adjudicating the claims. Further, Rule 23(b)(3) mandates that notice be given to class members who are, in turn, afforded the opportunity to “opt out” of the class. These protections, however, are not required under Rule 23(b)(2). Even if the relief sought was predominantly injunctive, the class action would still involve an individual adjudication of monetary damages that, under the Constitution, could not be made in the absence of notice and “opt out” protections for the class members. Since the notice and opt-out provisionsare not mandatory for Rule 23(b)(2) class certifications, any individual adjudications of monetary damages under Rule 23(b)(2) would be constitutionally infirm regardless of how large or small the monetary relief was in comparison to the injunctive relief. In this sense, it was not enough that the plaintiffs’ damage theory was somewhat correct since, by definition, it remained somewhat wrong.

Although the opinion was unanimous on the interpretation of Rule 23(b)(2), the Justices could not agree whether the Wal-Mart plaintiffs had proven “common questions” of law or fact under Rule 23(a)(2). The Court held that because Wal-Mart gave discretion to its local stores to make pay and promotions decisions, and to craft the standards for such decisions, such decision-making necessarily varied from store and store, and the plaintiffs could not possibly establish that the alleged discrimination emanated from a common policy or practice. The dissent, led by Justice Ginsburg, believed the plaintiffs had proven the existence of a common question whether Wal-Mart’s policies gave rise to unlawful discrimination. The dissent argued that the majority went too far by rejecting the plaintiff’s expert testimony and by concluding that discretionary decision-making could never establish a uniform employment practice, e.g., a common question of law or fact. On this point, Justice Scalia used the sheer size of the class to the plaintiffs’ disadvantage. The anecdotal evidence submitted by way of affidavits, when compared to the size of the proposed class, was far too insignificant to prove the existence of a general policy or a common question of law or fact.

Other Important Language from the Opinion

The Wal-Mart v. Dukes opinion is important for reasons beyond its conclusion that Rule 23(b)(2) may not be used to certify a class seeking individualized monetary damages.

The opinion is also important for what it says about the standards applied to class certification. Read in context of the lower court’s opinion, it seems clear that the majority intended to reject the Ninth Circuit’s Rule 23 class certification standard. In its earlier, lower court opinion, the Ninth Circuit concluded that, for class certification purposes, it was enough for the plaintiffs to present evidence tending to show a common question of fact. Justice Scalia’s majority opinion appeared intent upon rejecting that standard. The majority observed that Rule 23 is not a mere pleading standard. Instead, plaintiffs seeking class certification must affirmatively prove there are in fact sufficient numerous parties and common questions that satisfy Rule 23’s requirements. As the dissent observed, the majority could have decided the Wal-Mart v. Dukes case solely on Rule 23(b)(2) grounds without addressing the other class certification issues. Since the majority opinion went out of its way to emphasize that Rule 23 is not a mere pleading standard, the opinion seems tailored to reject the Ninth Circuit view of what constitutes a “rigorous analysis.” As the Supreme Court has made clear, a “rigorous analysis” means proof that Rule 23 has been satisfied, not merely admissible evidence proffered on each point.

The opinion also contains fairly strong language signaling that Daubert standards should apply to opinion evidence offered during class certification. After noting that the district court found that Daubert did not apply to expert testimony offered at the certification stage, Justice Scalia expressed firm doubt about the correctness of that conclusion. While this comment was not necessary to the Court’s ultimate conclusion, Justice Scalia’s criticism will hardly go unnoticed. Equally important, the dissenters never challenged the majority view on the application of Daubert. Hence, the majority opinion seems noteworthy for the strong signal that it sends about Daubert standards in class certification. In light of these signals, district courts are more likely to apply Daubert to expert testimony presented during class certification. 

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Recent class action jurisprudence has been increasingly permissive toward courts considering the merits at the class certification stage. This week, however, the Supreme Court placed a firm limit on this practice, unanimously striking down a Fifth Circuit rule requiring securities class action plaintiffs to prove “loss causation” as a prerequisite for class certification.

In Erica P. John Fund, Inc. v. Halliburton Co., the sole obstacle to class certification was Fifth Circuit precedent that securities fraud plaintiffs must first prove a causal connection between the material misrepresentation and the economic loss suffered by investors, i.e., “loss causation.” As articulated by the Fifth Circuit in affirming the denial of class certification, proving loss causation meant showing “that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses.” The Fifth Circuit reasoned that this element was necessary to establish that reliance was capable of resolution on a classwide basis; otherwise, according to the Fifth Circuit, individual issues would predominate over common issues, and resolving the dispute as a class action would be inappropriate.

According to the Fifth Circuit, loss causation was necessary to invoke the “fraud on the market” presumption articulated by the Supreme Court in 1988 in Basic Inc. v. Levinson. In Basic, the Court held that securities fraud plaintiffs may invoke a rebuttable presumption of reliance based on the theory that the market price reflects all public information, including the alleged misstatements, and that an investor who buys stock at the market price therefore relies on the misstatements in doing so. While Basic requires plaintiffs seeking to invoke this presumption to prove such fundamental facts as the public availability of the misrepresentations, the efficiency of the market in which the stock traded, and the occurrence of a stock purchase between the making of the misrepresentation and the revelation of the truth, the Fifth Circuit added loss causation to the list of prerequisites.

This precedent was in conflict with decisions of the Second, Third, and Seventh circuits, which have not required proof of loss causation at the class certification stage. In resolving the split, the Court soundly rejected the Fifth Circuit rule, holding that “[l]oss causation addresses a matter different from whether an investor relied on misrepresentation, presumptively or otherwise, when buying or selling a stock.” While reliance relates to the facts surrounding the investor’s decision to buy or sell, loss causation requires a decline in the value of the stock subsequent to that decision, which may have occurred for reasons unrelated to the correction of the misrepresentation.

In essence, the Court’s decision draws a line between commonality—a critical issue at the class certification stage—and the merits. The presumption of a fraud on the market is a step toward resolving the element of reliance on a classwide basis; by successfully invoking the presumption, class counsel avoids the need for individual adjudications of each class member’s knowledge and state of mind at the time of the transaction. The loss causation requirement, however, effectively required plaintiffs who have established common reliance to show, in order to obtain class certification, that their reliance caused injury. As the Court recognized, while the absence of economic loss may ultimately doom the lawsuit on the merits, it has nothing to do with whether common issues predominate over individual ones. For this reason, it is not terribly surprising that even this Court, which is hardly known for a predisposition toward class action plaintiffs, unanimously struck down the Fifth Circuit rule.

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Can a disappointed purchaser of a male sexual enhancement product be an appropriate class representative in a lawsuit against the manufacturer if that purchaser happens to be female? Not according to a recent decision from the Southern District of California.

In Peviani v. Natural Balance Inc., the plaintiff claims the defendant’s “Cobra Sexual Energy” dietary supplement, which she purchased “for her husband’s use and their combined enjoyment,” does not provide the advertised benefits and poses unreasonable health risks to its users. The plaintiff sought to certify a class of persons who purchased the product in the United States during the relevant time period “for household use rather than resale or distribution.”

The court denied the plaintiff’s motion for class certification, holding that she failed the typicality and adequacy of representation prongs of Rule 23(a). While the plaintiff contended that her claim of economic injury was identical to the claims of the other putative class members, and that the manufacturer’s conduct was uniform for all class members, the court disagreed.

The court concluded that because the plaintiff’s injury is limited solely to the loss of money spent to purchase Cobra, her interests “are not aligned with claims of male consumers, specifically those males experiencing the serious health consequences alleged by Plaintiff.” Moreover, the plaintiff did not consume the product and thus has “no “firsthand knowledge of Cobra’s effects, or lack thereof.” The court held that the plaintiff’s economic loss alone was insufficient to certify a class, given that other class members would likely have additional causes of action unavailable to the plaintiff, rendering her claims atypical and her interests inadequate for her to represent the class.

One can only wonder why the action was not brought in the name of the plaintiff’s husband, who presumably could have asserted joint ownership of the funds used to purchase Cobra, rather than in the plaintiff’s own name. Perhaps the complaint will now be amended to add one or male class representatives—presumably at least one of whom will claim to have suffered one or more of the dangerous side effects, lest the defendant launch yet another adequacy/typicality attack.
 

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A recent decision from the Northern District of California highlights an uncodified but important prerequisite for class certification: ascertainability.

In Xavier v. Philip Morris USA, two healthy smokers seek an order requiring cigarette manufacturer Philip Morris to establish and fund a screening program using a relatively new technology designed to detected lung cancer in its early stages. The plaintiffs asked the court to certify a class of California residents who, at the time the complaint was filed, were at least 50 years old, had not been diagnosed with lung cancer, and had cigarette smoking histories of twenty “pack-years” or more using Marlboro cigarettes, among other requirements. “Twenty pack-years” was defined as smoking one pack of Marlboro cigarettes per day for 20 years or the equivalent (e.g., two packs per day for ten years). In essence, the court calculated, the “twenty pack-years” criterion would require class members to have smoked 146,000 Marlboro cigarettes.

The court denied class certification on the basis of this requirement. The court noted that in addition to the explicit requirements of Rule 23, “an implied prerequisite to class certification is that the class must be sufficiently definite; the party seeking certification must demonstrate that an identifiable and ascertainable class exists.” “If the definition is not clear in its applicability,” the court stated, “then satellite litigation will be invited over who was in the class in the first place.”

The court held that the ascertainability requirement cannot be met when membership in the class can be determined only from subjective criteria, i.e., from requirements that depend “upon each putative class member’s feelings and beliefs.” The twenty pack-year requirement fails this test, the court said, because “[t]here is no good way to identify such individuals.” The court noted that a smoker’s rate of consumption and brand of choice are likely to change over time, and smokers cannot state with certainty how many Marlboro cigarettes they have smoked.

The plaintiffs proposed various methods by which class membership could be ascertained, all of which the court rejected. Using broad demographic data regarding the smoking population, the court said, was “not helpful for determining which individual smokers are in the class and which are out.” Relying on Philip Morris’ own records of its “Marlboro Miles” loyalty program would be unavailing, because “not all Marlboro smokers may be presumed to have participated in these programs.” Inviting potential class members to submit affidavits attesting to their smoking histories not only would rely improperly on smokers’ subjective memories, but also would deny Philip Morris the right of cross-examination.

The court emphasized that the problem of identifying class members is not merely one of determining who will be able to claim a portion of a classwide recovery, as the plaintiffs’ arguments seemed to presuppose. A clear class definition is equally important, the court noted, in the event that the class is unsuccessful, so that it can be determined whose rights are adversely affected—i.e., whose potential claim is precluded—by a judgment against the class.

Class certification requirements are frequently described in terms of numerosity, commonality, typicality, and adequacy. Xavier reminds us that ascertainability, or definiteness, is perhaps more fundamental than any of these.
 

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A recent Fifth Circuit opinion reversing class certification in a suit alleging exposure to petroleum coke dust highlights the rigor with which courts are required to analyze claims of superiority and predominance under Rule 23(b)(3). In Madison v. Chalmette Refining, the panel held that while class treatment may well prove to be appropriate, the district court’s evaluation of the substantive issues was inadequate to support its decision to certify the class.

The dispute arose out of a release of petroleum coke dust by the Chalmette Refinery that allegedly migrated over the adjacent Chalmette National Battlefield in Louisiana while schoolchildren were participating in a historical reenactment at the battlefield. The plaintiffs, who seek a variety of damages as a result of the alleged exposure, sued on behalf of themselves and other students, parents, and teachers who were present.

The plaintiffs moved for class certification under Rule 23(b)(3), asserting that common “questions of law or fact” predominate over any individual questions, and that a class action is the superior method to adjudicate the dispute. The district court found that the predominance requirement was satisfied because liability would turn on a single “set of operative facts . . . . Plaintiffs were either on the battlefield and exposed to the coke dust or they were not.” While recognizing that class members might present a wide variety of damages issues, the court determined that the “common liability issues can be tried in a single class action trial with any individual issues of damages reserved for individual treatment.”

The Fifth Circuit rebuked the district court’s analysis, calling the district court’s consideration of trial administration “a figure-it-out-as-we-go-along approach.” The panel noted that district courts must consider “how a trial on the merits would be conducted” in a class setting, and concluded that the district court here did not “meaningfully” do so. In reaching its conclusion, the Fifth Circuit contrasted the district court approach with those in two other Fifth Circuit cases, in which the court had issued a detailed, multi-phase trial plan to adjudicate common class issues at the outset before addressing individual issues, including damages, in later phases.

Although the district court in Madison alluded to the feasibility of a similar construct, the appellate panel held that the court had failed to consider other methods of streamlining the case, such as narrowing the claims and/or plaintiffs through summary judgment or issuing prediscovery orders requiring the plaintiffs to produce some up-front evidence that would support their claims. The Fifth Circuit also stated that the district court’s “either/or” characterization of the refinery’s liability “oversimplifie[d] the issue,” because “even among class representatives, significant disparities exist, in terms of exposure, location, and whether mitigative steps were taken.” Accordingly, the court held, remaining individual issues would turn on such factors as location, exposure, dose, susceptibility to illness, and medical treatment.

Given the district court’s allusion to the likely need for an up-front adjudication of common issues and a subsequent adjudication of individual issues, the Fifth Circuit’s implied insistence on a multiphase “trial plan” may have placed form over substance. Nevertheless, the Fifth Circuit’s opinion voices a hostility to class treatment of “mass accident” cases that can be expected to manifest itself in maximum scrutiny of class certification orders, particularly when such orders are based on Rule 23(b)(3).

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A recent Seventh Circuit opinion vacated class certification in a “junk fax” lawsuit on adequacy grounds, based in part on concerns about the class representative’s credibility. At the same time, however, Judge Richard Posner, writing for the panel, warned against interpreting the opinion as an invitation to invoke “trivial credibility problems” in opposing class certification.

The complaint in CE Design Limited v. King Architecural Metals, Inc., as Judge Posner noted, is unusual in itself in that the plaintiff is not a consumer, but a civil engineering firm with a “business model [that] combines selling civil engineering services with filing class action junk-fax suits.” The firm, CE Design, claims to have filed more than 150 class actions under the Telephone Consumer Protection Act. Moreover, the defendant, a manufacturer of metal building components, sent the plaintiff only two single-page faxed advertisements.

At issue in the appeal, however, was whether CE arguably gave the defendant “express invitation or permission” to fax advertisements to it, in which case CE’s claim would fail. CE signed a form that authorized the publication of its fax number in a print and online directory aimed at firms in the building industry; the form also authorized the other subscribers to the directory, including the defendant, to “communicate” with it, including via fax. Moreover, CE posted its fax number on its website next to the phrase “Contact Us.”

CE’s president testified at his deposition that he was unaware that he had authorized publication of CE’s fax number in the directory or that he had authorized directory subscribers to contact CE by fax. The district court referred to this testimony as a “discrepancy” that was “immaterial” to class certification.

Judge Posner rebuked the district judge for her treatment of the testimony, saying she “missed its importance.” Judge Posner said that the testimony “is both difficult to credit, as the district judge acknowledged, and, if disbelieved, could be thought evidence of [the president’s] fearing that the publication of CE’s fax number could indeed be construed as permission to fax ads to that number.”

This testimony, reinforced by the appearance of the fax number on CE’s website, led the panel to order the district court to reconsider its ruling that CE would be an adequate class representative: “A named plaintiff who has serious credibility problems or who is likely to devote too much attention to rebutting an individual defense may not be an adequate class representative.” The panel concluded that “[t]he credibility problem and the consent defense are vital in assessing CE design’s adequacy as a class representative.”

Judge Posner’s opinion also warned, however, that “[w]e don’t want to be misunderstood . . . as extending an invitation to defendants to try to derail legitimate class actions by conjuring up trivial credibility problems or insubstantial defenses unique to the class representative.” Indeed, the opinion does little to disguise its disdain for CE’s “business model,” noting on several occasions that a business, unlike a consumer, “probably doesn’t care about the form in which potential suppliers communicate with it or the expense of receiving a fax.” Nevertheless, the opinion serves as a useful reminder that a class representative who is particularly vulnerable to one or more defenses, or whose credibility may be an issue, can endanger certification of the entire class.

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A yogurt manufacturer that appealed a Florida federal court’s order granting class certification may soon find itself wishing it had left well enough alone. The Eleventh Circuit reversed class certification but, in doing so, all but invited the district court to certify an even broader class.

Fitzpatrick v. General Mills, Inc. challenges Florida law advertising claims made by General Mills and its wholly owned subsidiary Yoplait USA about the digestive health benefits of YoPlus yogurt. A district judge in the Southern District of Florida certified a class of “all persons who purchased YoPlus in the State of Florida to obtain its claimed digestive health benefit.” General Mills appealed, arguing that such a definition would require individualized fact-finding, and therefore the district court abused its discretion in determining that common issues predominate over individualized issues pursuant to Rule 23(b)(3).

The Eleventh Circuit effusively praised the district court’s analysis, calling the opinion “a scholarly work reflecting careful attention to the requirements of [Rule 23], existing precedent and the factual background of this matter.” In particular, the Eleventh Circuit lauded the district court’s statement that recovery under the Florida unfair practices statute does not depend on whether a particular plaintiff actually relied on General Mills’ claims about YoPlus’ digestive health benefits, but on whether those claims “would deceive an objective reasonable consumer.” The district court held that this issue was common for all putative class members, and could therefore be resolved through classwide proof.

The reversal was based on the district court’s apparent divergence from its own analysis in defining the class. After emphasizing that a plaintiff need not prove reliance on the allegedly false YoPlus claims, the district court went on to define the class in a manner that would require individual reliance as a prerequisite for membership in the class. This definition, the Eleventh Circuit held, is at odds with the district court’s Rule 23(b)(3) finding.

However, in a footnote, the Eleventh Circuit essentially instructed the district court as to the proper class definition. The panel stated that the district court’s analysis, which the panel had given such glowing reviews, “would lead one to believe that the class would be defined as ‘all persons who purchased YoPlus in the State of Florida.’” The opinion leaves no doubt that if the district court redefines the class in this manner on remand, its order granting class certification will be affirmed.

Thus, by appealing a certification of a class limited to Florida YoPlus purchasers who sought to obtain the claimed digestive health benefit, General Mills has probably succeeded in expanding the class to encompass all Florida YoPlus purchasers, regardless of why they bought the product. One suspects this is not the result General Mills intended.

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A recent federal court decision from Missouri underscores the importance of a proper class definition to a court’s Rule 23 findings. In Mayo v. UBS Real Estate Securities, Inc., 2011 U.S. Dist. LEXIS 31390, the plaintiff was given a second chance to define the proposed class, but narrowing the definition as required by the court may threaten compliance with the Rule 23 numerosity requirement.

The lawsuit, filed in the Western District of Missouri, alleges that UBS and another mortgage lender collected certain closing costs in violation of Missouri’s statute governing second mortgages. The plaintiff proposed defining the class to encompass all persons who obtained a second mortgage loan secured by residential real estate located in Missouri that was purchased by UBS, where either the loan was obtained or interest was paid within the limitations period.

The court held that the definition was overbroad in two respects. First, the definition contained no reference to closing costs, the subject of the lawsuit. Second, the inclusion of loans obtained outside the limitations period, where only interest was paid during the limitations period, was improper, because the limitations period began to run at settlement.

The court acknowledged that an improper class definition can be a basis for denying certification, but in this case, the court agreed to permit the plaintiff to submit an amended class definition, largely on the basis of its finding that the other Rule 23 requirements had been met. To this end, the court specifically rejected the defendants’ contention that a determination of liability would require “a highly individualized inquiry into each borrower’s loan file,” and therefore common issues did not predominate over individual issues. The court held that the putative class members’ prima facie case required only a showing that (i) they obtained a secondary mortgage loan; (ii) an unlawful rate was charged; and (iii) the fees charged were not authorized by the Missouri statute. The court held that “[w]hile some amount of inquiry would be required, it would be routine and mechanical, and not highly individualized.”

The court, however, ordered the parties to submit additional briefing on the numerosity requirement. In its initial brief, the plaintiff suggested that 433 mortgage loans fell within the proposed class definition, while the defendants argued that the actual number was less than 20. Following the initial briefing, the court granted summary judgment as to two loan servicer defendants. This ruling, coupled with the revised class definition to be proposed, may narrow the size of the class. If the ultimate size of the class proves closer to the defendants’ estimate than to the plaintiff’s number, the lawsuit may well fail the numerosity requirement.

Moreover, the court limited its finding as to the plaintiff’s adequacy as a class representative to the class members’ damages claims, holding that the plaintiff would be an inadequate representative to seek injunctive or declaratory relief on behalf of the class. The court held that because the named plaintiff had repaid his loan, he would have no interest in obtaining relief from paying future interest, and therefore could not be an adequate class representative as to injunctive relief.

Class action plaintiffs must often navigate a narrow path in formulating a class definition, as they must define a class large enough to meet the numerosity requirement while also ensuring that the definition is not so broad as to either attenuate the connection to the alleged wrong or undermine the representative’s adequacy and typicality as a class representative. Whether that path can be navigated successfully in Mayo remains to be seen.

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When faced with a motion for class certification pursuant to Rule 23, a district court must conduct the proverbial “rigorous” analysis before certifying a class. Sometimes this analysis includes tackling the tough questions presented by dueling experts that might otherwise be reserved for the merits phase of the litigation. In Sher v. Raytheon Co., the Eleventh Circuit held that a district court sidestepped its obligation to resolve the conflicting factual and legal issues presented by the parties’ experts, and vacated the order of the district court granting class certification.

The defendant, Raytheon Company, owns a facility in St. Petersburg, Florida that allegedly leaked contaminants into the surrounding soil and groundwater. The plaintiffs are owners of property located near the Raytheon facility who sought to represent a class of persons who owned real property located over an underground plume surrounding the facility. The plume was estimated by the plaintiffs to span an area 1.0 mile long and 1.5 to 1.7 miles wide, thereby encompassing more than 1,000 property owners and 1,300 parcels of property.

At the class certification hearing, each side presented a groundwater expert and a property valuation expert. Their testimony diverged on almost every critical point. The plaintiffs’ groundwater expert opined on the extent of the contamination, including the size and location of the groundwater plume. He included in this “zone of impact” each property that had been affected, on any level, by the contaminants. In response, Raytheon’s expert testified to the “unique” characteristics of each property and the need to individually test each property due to the varying levels of contamination at each site.

Conflicting testimony was also presented on the property valuation issues. The plaintiffs’ expert opined that the alleged damages to the affected properties could be determined on a class-wide basis using a hedonic regression model, which would offer statistical reliability, consistency, and efficiency. Raytheon’s expert countered that the properties could not be evaluated on a class-wide basis due to their uniqueness, both in terms of location and property type. He also testified that a mass appraisal methodology was inappropriate given that the level of contamination at each property varied.

Faced with this conflicting expert testimony, the district court reasoned that it was “not necessary at this stage of the litigation to declare a proverbial winner in the parties’ war of the battling experts or dueling statistics and chemical concentrations.” The court held that it would be “inappropriate” to “weigh the evidence presented and engage in a Daubert-style critique of the proffered experts qualifications.” According to the district court, a Daubert-style inquiry “delves too far into the merits of Plaintiffs’ case.” Instead, the court concluded that individual issues “predominate” because there is only one defendant alleged to have contaminated the groundwater with the contaminants, and such contamination caused a diminution in property values. Accordingly, the district court certified the class.

The Eleventh Circuit panel disagreed. It began by noting that the district court is required to conduct a “rigorous” analysis to determine whether the requirements of Rule 23 are met prior to certifying a class. In doing so, the district court may take into account the merits of the plaintiffs’ claims to the extent it aids the Rule 23 analysis. The panel was guided by the Seventh Circuit’s decision in American Honda Motor Co. v. Allen, which held that a court deciding a class certification motion must perform a full Daubert analysis if necessary. Thus, a challenge to an expert’s qualifications and methodology, or to the reliability of the information provided by an expert, is subject to a full Daubert screening.

The Eleventh Circuit held that the district court erred by refusing to critique the experts’ qualifications. It concluded that class certification was granted “prematurely” in that the “district court has not determined facts, from the often conflicting evidence, sufficient to determine whether class certification is or is not appropriate.

This decision from the Eleventh Circuit reaffirms the courts’ duty, articulated by the Supreme Court in Gen. Tel. Co. of the Southwest v. Falcon, to “rigorously” analyze the prerequisites for class certification. Failure to resolve a battle of the experts at the class certification stage would allow plaintiffs’ counsel to ensure certification simply by putting a credible expert on the witness stand. When a district court punts such a decision to the merits phase, defendants will have a strong argument for reversal.

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When is an injunction class not really an injunction class, but merely an attempt to compensate for an improperly proposed damages class? When the requested injunction will do nothing more than lay an evidentiary foundation for a damage award, according to a recent opinion by the Seventh Circuit that sharply rebuked an Indiana judge’s class certification ruling.

In Kartman v. State Farm Mutual Automobile Insurance Company, several State Farm policyholders brought a proposed class action for alleged underpayment of property damage claims in connection with a hailstorm that damaged the roofs of thousands of homes. The lawsuit sought both damages and an injunction requiring State Farm to reinspect all class members’ roofs pursuant to a uniform, reasonable, and objective standard for evaluating hail damage.

The plaintiffs sought to certify a damages class under Rule 23(b)(3) and also, or alternatively, a class for injunctive relief under Rule 23(b)(2). The district court declined to certify a damages class, holding that each claim of underpayment required an individualized factual inquiry on the merits. However, the court did certify a class for injunctive relief to determine whether State Farm would be required to reinspect the policyholders’ roofs.

The Seventh Circuit reversed the certification of the injunction class. Rule 23(b)(2) certification requires that the class plaintiffs seek “final injunctive relief” and that the relief be “appropriate respecting the class as a whole.” Here, the court held, the injunctive relief would not be final, as it would only “lay an evidentiary foundation for subsequent individual determinations of liability and damages.” Moreover, the injunctive relief sought would not be “appropriate,” because, among other reasons, the remedy for underpayment of claims pursuant to an insurance contract is damages, not an injunction: “[T]here is no contract or tort-based duty requiring the insurer to use a particular standard for assessing hail damage.” Accordingly, State Farm’s alleged failure to use a uniform, reasonable, and objective standard did not create a cognizable wrong that was separate from its alleged underpayments.

In response to the plaintiffs’ arguments, the Seventh Circuit distinguished two other situations in which courts have certified injunction classes even though damages are inappropriate. A racial discrimination case in which the Seventh Circuit held that certification of an injunctive class was appropriate even though the related damage claims required subsequent individual adjudication, the court held, was distinguishable because in that case, damages were necessary to compensate the plaintiff for past discrimination, while the injunction was a remedy for ongoing and future discrimination. Here, State Farm’s underpayment constituted a single, past injury, for which a retrospective damages remedy would provide final relief.

Similarly, the court distinguished “medical monitoring” injunctions in tobacco class actions, in which the class seeks an injunction requiring the defendant to fund a medical-monitoring program for detecting the onset of latent disease in the plaintiff class. Such an injunction, the court said, is designed to relieve class plaintiffs of the prospective costs associated with medical supervision, and is thus a “final” remedy in that it defrays such future costs. The injunction sought against State Farm, however, would not perform any prospective function, but would serve only to assess past property damage. “In short,” the court said, “the plaintiffs are not really interested in final prospective relief at all; they are singularly focused on recovering a retrospective damages remedy, and Rule 23(b)(3), not (b)(2), governs certification of a damages class.”

The district court’s ruling may have been an attempt to “split the difference” between the parties’ two positions by identifying a form of relief that would not require individualized proof. But as the Seventh Circuit recognized, an injunction that merely provides a necessary step in the individual determination of retrospective damages does not create a valid basis for class certification.

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In a case closely watched by the nation’s mortgage lenders, a federal judge in Massachusetts recently denied class certification in a suit against JP Morgan Chase for claims arising out of Chase’s participation in the federal Home Affordable Modification Program (“HAMP”). The case, Durmic v. J.P. Morgan Chase Bank, NA, is one of a series of actions filed last year against mortgage servicers by the National Consumer Law Center (“NCLC”), a Boston based nonprofit advocacy organization.

The Durmic action arose from the plaintiffs’ unsuccessful applications to Chase for mortgage relief under HAMP—a Treasury Department program created pursuant to the larger Troubled Asset Relief Program (“TARP”). HAMP provides qualified homeowners with modifications that would temporarily lower their monthly mortgage payments to a set percentage of gross monthly income, typically modifying payments to 31% of the homeowner’s gross monthly income for a period of five years.

Though prompted by legislation, the HAMP program operates largely through contracts between servicers and the Treasury whereby the servicers agreed to participate pursuant to certain Treasury guidelines. These guidelines govern eligibility as well as the terms on which modifications are to be granted.

Across the country, homeowners dissatisfied with the results of the HAMP process have brought suit against servicers, and the large pool of potential claimants has attracted the attention of the class action bar. In the last year, nearly every major mortgage servicer has faced purported class actions arising from HAMP, and several such cases pending against one servicer, Bank of America, were recently assigned by the panel for multidistrict litigation to a single judge. So far, the servicers have been widely successful in defending such suits by arguing that homeowners lacked standing to enforce the servicers’ contracts with the Treasury. See, e.g., Pantoja v. Countrywide Home Loans, Inc.; Dugger v. Bank of America/Countrywide Loans.

Many subsequent plaintiffs, including those in the NCLC suits, have sought an end-run around this defense by focusing on a document known as the Trial Period Plan (“TPP”). Under HAMP, the TPP is a stop-gap providing the homeowner with immediate mortgage relief while the servicer conducts its formal HAMP eligibility review. Though the TPP contains numerous disclaimers, including language expressly stating that the TPP itself is not a loan modification, the NCLC suits allege that the TPP is an enforceable contract directly between the homeowners and the servicer, and that the servicers breached this contract through delays, repeated requests for information, and the lack of a formal and prompt eligibility determination.  The NCLC strategy withstood an initial challenge in November, when the Durmic court denied Chase’s Rule 12(b)(6) motion to dismiss, holding that issues concerning whether the TPP created a privately enforceable contract were best left to summary judgment.

Chase scored a victory in December when the court denied the plaintiffs’ pre-discovery request for class certification. The plaintiffs sought certification of a class of all Massachusetts borrowers who entered into written TPP agreements with Chase and who made the three required monthly payments but received neither an executed modification agreement nor a prompt formal denial of eligibility. The plaintiffs estimated their proposed class to include 1,875 members.
Chase successfully opposed certification by arguing that the named plaintiffs could not satisfy the typicality requirement of Rule 23(a)(3), because the class definition was overly broad. The court held that “[u]nder Chase’s (plausible) reading of plaintiffs’ class definition, the class would encompass at its boundaries persons who never submitted the documentation required by the TPP” or who made “misstatements about hardship, imminency of default, or whether the mortgaged property was truly their primary residence.” In addition, the court said, the class would include those who met the initial eligibility requirements but were ultimately rejected, either because they made “verbal misrepresentations” when applying for the modification agreements or because the value of the property or the source and amount of their income changed after the initial TPP evaluation.

In addition, the court accepted Chase’s argument that the named plaintiffs were “vulnerable to unique defenses,” as Chase had determined that each plaintiff had made significant misstatements regarding income or property value. Although the court acknowledged the plaintiffs’ contention that a plaintiff-specific defense defeats typicality only when it will consume the merits of the case, it determined that “the dispute over the eligibility of the named plaintiffs to participate in the class plausibly threatens to engulf the Complaint.”

The battle over class certification in Durmic will continue, however, as the plaintiffs sought certification prior to conducting any class discovery. The court determined only that “[t]he contested claims of typicality highlight the importance of developing a more robust factual record through discovery before the certification issue is joined.” The court’s ruling was without prejudice and may permit the plaintiffs to re-seek certification following such discovery. The decision also highlights potential deficiencies that plaintiffs in future HAMP cases can be expected to avoid, particularly in crafting class definitions and selecting named plaintiffs.

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Three recent cases demonstrate the difficulty with certifying class actions by third-party payors (TPPs) against drug companies.

In In Re: Yasmin and Yaz Marketing, Sales Practices and Products Liability Litigation, the U.S. District Court for the Southern District of Illinois dismissed a class action brought by TPPs against the manufacturers of Yaz, a contraceptive. Then, in UFCW Local 1776 and Participating Health and Welfare Fund v. Eli Lilly and Company, the Second Circuit reversed a class certification of TTPs who filed suit against the manufacturers of Zyprexa, a drug used to treat schizophrenia and bipolar disorder. In both cases, the TPPs alleged that they overpaid for the drugs as a result of the defendants’ misrepresentations about each drug’s safety and effectiveness. Further, both courts refused to certify the class because of the plaintiffs’ inability to prove causation; that is, the TPPs failed to show that the manufacturers of the drug were the cause of their alleged injury.

In a similar case, the U.S. District Court for the Eastern District of Pennsylvania refused to certify a class of individual consumers and TPPs against GlaxoSmithKline. The court dismissed the action on the basis of the plaintiffs’ failure to show common proof to establish their injuries and damages from the manufacturers’ sham patent litigation scheme to maintain a monopoly over sales of its drug, Wellbutrin.

The dismissal of these three recent class certifications is indicative of the trend that class actions brought by TPPs against drug companies will continue to fail because of the attenuated link between causation and injury. Specifically with reference to class actions against drug companies, the Rule 23(a) requirement that common issues of law or fact predominate over individual issues becomes a tough hurdle for the class to overcome, because there are numerous plaintiff-specific variations at the root of the injury.

In the Zyprexa case, the plaintiffs alleged that Eli Lilly engaged in misrepresentations about Zyprexa’s off-label use and effectiveness. The trial court certified a class of insurance companies and TPPs against Lilly and denied Lilly’s motion for summary judgment. The Second Circuit, however, in reversing the class certification, focused on the plaintiffs’ inability to prove that their reliance on the alleged misrepresentations caused their injury. The court emphasized that the plaintiffs must demonstrate through generalized, not individualized, proof that their injury was caused by physicians relying on Lilly’s misrepresentations about Zyprexa and then prescribing that drug for their patients. The plaintiffs were unable to satisfy that requirement because there were too many independent actions that occurred between the cause (alleged misinformation by Eli Lilly) and the injury (overpayment by the TPPs). The court held that the chain of causation “is interrupted by the independent actions of prescribing physicians, which thwarts any attempt to show proximate cause through generalized proof.” Because information from Lilly is not the only factor considered by physicians when making prescription decisions, the alleged causal link is too
attenuated to sustain a cause of action for misrepresentation.

In the Yaz case, a group of TPPs attempted to certify a class against the drug manufacturers and marketers claiming overpayment due to fraudulent misrepresentations. Again, the plaintiffs could not overcome the proximate cause hurdle. The court stated that multiple steps separate the alleged wrongful conduct (the fraudulent advertising campaign and/or the alleged bribery) and the alleged injuries (paying ‘too much’ for ‘too many’ Yaz prescriptions), including patient preference, the independent judgment of the prescribing physician, and the reimbursement decision rendered by the third-party payor and its benefits manager.” Therefore, the number of independent actions and other variables that occur between the alleged wrongful conduct and the claimed injury prohibits the plaintiffs from achieving a causal connection that implicates the defendants.
In the Wellbutrin case, hundreds of thousands of individual consumers and over 20,000 TPPs alleged that GlaxoSmithKline (GSK) entered into a scheme to maintain higher prices for its drug. The court found that the plaintiffs were unable to demonstrate that each member of the class suffered an injury when GSK allegedly delayed the market arrival of its generic form of Wellbutrin. Similar to the Zyprexa and Yaz cases, the court dismissed the class action because the plaintiffs failed to set forth common proof to establish their damages. Thus, this case reflects the problems with class certifications where plaintiffs cannot prove that each member suffered an injury caused by the defendant drug manufacturer.

Although each is slightly different, these three decisions indicate the difficulty of certifying class actions against defendant drug manufacturers because of the proof of reliance and injury, and the causation requirements demanded by the courts. With all the factors bearing on a physician’s decision to prescribe a certain drug for a patient, demonstrating that the drug company’s alleged misinformation proved to be the deciding factor seems nearly impossible. Further, the courts require every member of the class to suffer an injury caused by the defendant drug manufacturer that can be established through common proof. Plaintiffs can and will keep trying to file class actions against drug companies, but until they can demonstrate a direct causal link between the drug company’s actions and the injury suffered, courts will continue to dismiss the cases.

Contributing author:  Lindsey P. Rozek 

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This week, the U.S. Supreme Court granted Wal-Mart’s petition for certiorari challenging the certification of a class of 1.5 million female employees in a gender discrimination lawsuit. The Ninth Circuit affirmed the class certification in April.

The writ of certiorari limits the Court’s review to the first question presented in the petition for certiorari, but adds a second question defined by the Court. The full text of the Supreme Court’s order reads:

The petition for a writ of certiorari is granted limited to Question I presented by the petition. In addition to Question I, the parties are directed to brief and argue the following question: “Whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a).”

Referring the Question I from Wal-Mart’s petition for certiorari, the two questions before the Supreme Court will be:

1. Whether claims for monetary relief can be certified under Federal Rule of Civil Procedure 23(b)(2) – which by its terms is limited to injunctive or corresponding declaratory relief – and, if so, under what circumstances?
2. Whether the class certification ordered under Rule 23(b)(2) was consistent with Rule 23(a)?

The constitutional arguments argued in Wal-Mart’s petition for certiorari (whether class certification was consistent with due process or the Seventh Amendment) were not accepted for review. The question posed by the Court, however, has broader implications. It could transform the narrow question of whether a Rule 23(b)(2) certification may include cases seeking monetary damages into the broader question of whether the class certified below satisfied Rule 23’s general class action requirements (i.e., numerosity, commonality, typicality and adequacy).
 

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Ninth Circuit Certifies Class of 1.5 Million Female Employees to Pursue Title VII Discrimination Lawsuit Against Wal-Mart – Wal-Mart Responds with Cert. Petition.

Wal-Mart, reportedly the world’s largest, private employer, has a written policy barring discrimination based upon gender, but that did not prevent six putative class action plaintiffs from suing the world’s largest retailer. Plaintiffs alleged that Wal-Mart engaged in a company-wide policy discriminating against women by paying women less or promoting them less often than men. The alleged corporate policy was not created in the usual manner by dictating pay or hiring decisions from above. Instead, store managers were allegedly given “excessive discretion” to hire, fire or promote employees based upon subjective criteria with limited guidance or oversight. This culture, according to plaintiffs’ experts, created a social framework that sustained bias and gender stereotypes. Based upon declarations, statistical and other expert evidence, the District Court for the Northern District of California, located in San Francisco, certified a class under Rule 23(b)(2) consisting of women who worked at any of 3,400 Wal-Mart domestic retail stores at any time since December 1998. The class action complaint sought injunctive relief, back pay and punitive damages. On April 26, 2010, the Ninth Circuit Court of Appeals affirmed the class certification in a 6-5 opinion entitled Dukes v. Wal-Mart Stores, Inc., 603 F. 3d 571 (9th Cir. 2010).

With a name like Dukes, you expect something larger than life. You will not be disappointed. The class size in Dukes is breathtaking with an estimated 1.5 million present and former employees in the class. If you are not impressed by numbers alone, consider the observation in Wal-Mart’s subsequent Petition for a Writ of Certiorari: the Dukes class is greater in size than all the active duty personnel in the U.S. Army, Navy, Air Force, Marines and Coast Guard combined! That a single employer has this many present and former female employees is, by itself, difficult to grasp. That all of them would be joined into a single class action is beyond comprehension.

Acknowledging that individual class members worked at different Wal-Mart stores for different managers, received different levels of pay or were promoted (or denied promotion) at different rates, the Court of Appeals was not persuaded that these differences militated against class certification. Nor was the majority troubled that the proposed class included female managers who were allegedly responsible for the discriminatory decisions. As the dissent bluntly observed, the majority opinion created the disturbing situation where the “victims and their alleged victimizers” would sit at the same counsel table as members of the same class. 

The Dukes court theorizes that the several circuit court opinions announcing class certification standards are, in reality, just different words to express the same result. But having said so, the Dukes court goes on to disprove its own hypothesis. Theory and reality diverge on the important question of what it means to “find” that Rule 23 requirements are actually met. To appreciate the difference, the Third Circuit opinion in Hydrogen Peroxide Antitrust Litigation offers a good comparison. The Third Circuit held that it is not enough to merely support each Rule 23 element with some evidence. For instance, the fact that plaintiffs offer admissible expert opinion addressing a Rule 23 requirement is not enough. The judge must weigh that expert opinion against other conflicting evidence on the same point. Then, after considering all the evidence, the district judge must conclude that the Rule 23 criteria was established by a preponderance of the evidence. Under this approach, the district judge weighs conflicting expert opinions, resolves the dispute and chooses between them. In contrast, the Dukes court said that it was enough that [plaintiffs’ expert] presented scientifically reliable evidence tending to show a common question of fact. The Dukes opinion implies that the only finding necessary is whether the plaintiffs have presented admissible evidence tending to show the Rule 23 criteria without regard to whether that evidence constitutes a preponderance of the evidence, e.g., whether it is more or less persuasive than conflicting evidence on the same point. Under Dukes, a “finding” is something less than weighing all the evidence both pro and con and concluding that the totality of evidence demonstrates the Rule 23 criteria to have been met. 

The Dukes court also set a new standard for Rule 23(b)(2) class certifications- to decide if monetary relief predominates over injunctive relief, the district court should consider the “objective effect of the relief sought on the litigation.” Literally speaking, Rule 23(b)(2) authorizes class actions seeking declaratory and injunctive relief, but it says nothing about monetary damages. Actions seeking monetary damages are typically brought as Rule 23(b)(3) class actions, but the Dukes Plaintiffs did not allege (b)(3) certification; presumably because they could not show class questions would predominate given that monetary damage claims (and defenses) would vary from person to person. One of the principal questions raised in Wal-Mart’s certiorari petition is whether Rule 23(b)(2) is amenable to class actions seeking monetary damages. Another component of the Rule 23(b)(2) dispute is that a significant number of putative class members are former Wal-Mart employees. As former employees, they could not benefit from an award of injunctive relief and therefore lacked standing to seek the remedy authorized in Rule 23(b)(2). Though the Dukes majority conceded former employees were ineligible for the proposed class, the opinion purported to solve that conundrum by remanding to the district court to consider certification of a separate class under Rule 23(b)(3).

To no one’s surprise, given the 3-way circuit split on the Rule 23(b)(2) standard, on August 25, 2010, Wal-Mart filed a petition for writ of certiorari with the Supreme Court of the United States. (Case no. 10-277). A response to the petition for writ of certiorari is due on October 25, 2010.
 

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Allegedly, Albert Einstein once said, “If the facts don’t fit the theory, change the facts.” Plaintiffs counsel in the Mwantembe case could have benefitted from this sage piece of advice before attempting to certify a class with three completely unqualified class representatives. Mwantembe v. TD Bank, No. 09-0135, 2010 U.S. Dist. LEXIS 76644 (E.D.Pa. July 29, 2010). As you can see below, the chief weakness of Plaintiffs’ case was not the underlying legal theories, but the overbroad definition of the class and the tenuous connection between the proposed class representatives and the issues at hand.

Mwantembe involved three named Plaintiffs, Chawazi Mwantembe, Margaret Munthali, and Fern Rutberg (“Plaintiffs”), who purchased and/or received gift cards which were subject to dormancy fees from Commerce Bank or TD Bank. The dormancy fees allowed the banks to automatically deduct $2.50 from the gift cards (or less, if there was less than $2.50 remaining on the card) per month beginning thirteen months after the date of purchase.  These deductions would continue every month until there was no money left on the cards.  Plaintiffs’ primary allegations can be summarized as follows: 1) the banks never disclosed the dormancy fees to the purchasers; 2) the dormancy fees were not obvious to the recipients of the gift cards because the notification was either printed illegibly on the card itself or hidden in the terms and conditions accompanying the card; and 3) even if the recipients knew that dormancy fees applied, the lack of the issue date on the card made it difficult, if not impossible, for the recipient to calculate when the dormancy fees would begin to accrue.  Plaintiffs brought claims against the banks for violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“UTPCPL”), breach of contract and third party beneficiary.

Plaintiffs proposed to create a general class consisting of Pennsylvania residents who purchased or received the gift cards from 2004 to present. This general class would be divided into two subclasses: “one comprised of gift card recipients whose cards were assessed dormancy fees; and the other, gift card purchasers who never gifted the cards or whose recipients assigned their rights regarding the card back to them.” Ultimately, the court denied the Plaintiffs’ motion to certify the class action because Plaintiffs failed to meet the typicality and adequacy prongs of Rule 23(a) and because it found the predominance and superiority requirements of Rule 23(b)(3) were lacking.

The court focused strongly on the inadequacy of the proposed class representatives in its denial of Plaintiffs’ motion to certify the class. Plaintiffs were not typical, adequate or, for that matter, very sympathetic class representatives. Ms. Rutberg purchased four gift cards which she gave to various individuals. Only one of the gift cards incurred a dormancy fee. The fee was for 2 cents, and it was charged to the card over 6 months after the last purchase.  Ms. Mwantembe purchased approximately five to seven cards and gave them all as gifts. There is only evidence of one of the cards incurring any dormancy fees. That fee was for 29 cents. The 29 cents was charged to the card nearly a year after the last purchase. As purchasers of the gift cards, neither Ms. Mwantembe nor Ms. Rutberg’s claims fall within the “central” claim asserted by the putative class – that the banks violated the UTPCPL in failing to adequately notify recipients of gift cards of the dormancy fee and/or of the issue date of the gift card.  Furthermore, the de minimus amount of money remaining on these gift cards indicated that the money would not have been spent at all, even if not for the dormancy fees. The last Plaintiff, Ms. Munthali, received five gift cards. Only one of these cards incurred a dormancy fee – that of 93 cents. This particular card was given to Ms. Munthali three weeks after this lawsuit was filed, so she could not reasonably argue that she was unaware of the dormancy fee. Also, the dormancy fee was charged in January 2010, about four months after Ms. Munthali had lost the gift card. 

The Mwantembe court could not justify certifying a class action with these inherently flawed proposed class representatives. Plaintiffs certainly were not typical of putative class members, their atypical nature would have hindered their ability to protect the interests of the class members, and the unique circumstances surrounding Plaintiffs’ claims highlighted the fact that the court would have been forced to individually analyze each claimants’ case. Realistically, given the definition of the proposed classes, the court could have come to this same conclusion even if it had been faced with “perfect”, sympathetic class representatives. (Although the end result may not have been so blatantly obvious to the court.) Consequently, it appears as though the key to obtaining class certification in this case would have been to define the class more narrowly. A class that would have had a much better chance of being certified would have been Pennsylvania residents who were recipients of the gift cards, who were unaware of the dormancy fees, and who were charged dormancy fees. Of course, those weren’t the facts in Mwantembe and, just as in any good film noir movie, we’ve got to focus on “just the facts.”
 

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In Malack v. BDO Seidman, LLP, the Third Circuit affirmed the district court’s denial of class certification in a putative securities class action and rejected the so-called “fraud-created-the-market” theory. The unanimous panel concluded that “[t]he fraud-created-the-market theory lacks a basis in common sense, probability, or any of the other reasons commonly provided for the creation of a presumption.” (Id. at 35.) With its decision, the Third Circuit contributed to a circuit split on this issue, which may prompt the Supreme Court to address this issue sometime soon. Compare, e.g., Shores v. Sklar, 647 F.2d 462, 464 (5th Cir.1981) (en banc) (setting forth the fraudcreated-the-market theory), with, Eckstein v. Balcor Film Investors, Seventh Circuit, 1993 (rejecting the theory).

In affirming the district court, the Third Circuit concluded that the fraud-created-the-market theory is not an appropriate basis for creating a presumption of reliance and lacks any grounding in common sense or probability. The panel concluded there is nothing in the process of bringing a security to market that would “imbue the security with any guarantee against fraud.”  Those entities involved in the issuance of the security, such as the underwriter, auditor, and legal counsel, have an interest in marketing the security at the highest (possibly inflated) price possible. The panel concluded that it “runs counter to common sense” to rely on such interested parties to be a “bulwark against fraud.”  Likewise, because the SEC does not regulate the merit of disclosures in connection with a security, investors cannot reasonably rely upon it to prevent fraud.

This is an important decision in the Third Circuit. Reliance is an essential element of a securities fraud claim. It can be extremely difficult to establish reliance on a class-wide basis with respect to securities that are not traded in an efficient market. And that challenge can frequently lead to denial of class certification, as it did in Malack, because individual questions of reliance would likely predominate over other questions common to the class. As a result, the fraud-created-the-market theory is very important to would-be plaintiffs. Without that presumption of reliance, obtaining class certification becomes exceedingly difficult. And, as a practical matter, if class certification is denied in a securities fraud case, that almost always ends the case.
 

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General Mills is facing four class action suits filed against it in the district courts of California, Florida, New Jersey and Ohio. On June 8, 2010, the Judicial Panel on Multidistrict Litigation denied General Mills’ motion to centralize the litigation. In re General Mills, Inc. Yoplus Yogurt Products Marketing and Sales Practice Litigation, MDL No. 2169, __ F.Supp.2d __ (JPML Jun 8, 2010). Centralization of civil actions pending in different jurisdictions is appropriate pursuant to 28 U.S.C. § 1407 where (1) the cases to be transferred involve common questions of fact, (2) transfer will promote judicial efficiency and, less importantly (3) will promote convenience for the parties and witnesses. Despite the facial appeal of centralization where, as here, the four actions share factual questions regarding General Mills’ nationwide marketing of its yogurt, General Mills was unable to persuade the Panel that centralization would promote judicial efficiency.

First, the Panel was not convinced that the common factual questions were sufficiently complex and/or numerous to justify Section 1407 transfer. While having at least one common question of fact is a threshold requirement for centralization, the number of cases proposed for transfer and the complexity of the common questions and the cases all factor into whether a transfer will promote judicial efficiency and the convenience of the parties. There is no magic number of cases necessary to invoke Section 1407, but the fact that the four pending cases did not involve sufficiently complex factual questions weighed against centralization.
Second, the Panel noted that the Florida suit already had been certified as a statewide class of all persons who purchased Yo-Plus yogurt in Florida to obtain its claimed digestive benefits. That certification ruling is on interlocutory appeal to the Eleventh Circuit. The other three suits seek similar putative statewide classes encompassing consumers from different states. Based on the foregoing, the Panel concluded that “the certified and putative classes will likely not overlap significantly.” Both a lack of overlapping plaintiffs and the advanced procedural posture of the Florida action tipped the scales against centralization.

Lastly, the Panel lined up the players. With plaintiffs represented by common counsel and General Mills a sole defendant, the Panel concluded that the parties have “every ability” to cooperate and minimize the possibilities of duplicative discovery and inconsistent pretrial rulings.
Absent Section 1407 centralization, such cooperation can include joint hearings and conferences pursuant to Fed. R. Civ. P. 77(b), the coordinated appointment of joint experts pursuant to FRE 706 or special masters under Fed. R. Civ. P. 53 to avoid duplicative activity and inconsistencies in pretrial disputes, cross-filing discovery demands to make the product of discovery usable in all cases and establishing joint depositories.

But even assuming robust cooperation, General Mills faces the specter of increased costs from individualized briefing schedules and discovery programs while plaintiffs’ counsel looks to increase its payday through increased attorneys fees.

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