In California v. Intelligender, LLC[1], the Ninth Circuit ruled that final judgment in a CAFA-compliant class settlement barred the State of California from seeking restitution on behalf of members of the settlement class for losses caused by Intelligender’s allegedly false advertising of its gender predictive test.  The Ninth Circuit rejected Intelligender’s efforts to block other remedies sought by the State.

Background

Intelligender, LLC (Intelligender) manufactures and markets the Intelligender Prediction Test, which it touts as an accurate predictor of a fetus’s gender through an in-home analysis of the mother’s urine.  A disappointed purchaser filed a nationwide class action (Gram v. Intelligender, LLC) in federal district court, invoking CAFA jurisdiction under 28 U.S.C. §1332(D)(2)(A).  On April 23, 2012, the district court issued an order finally approving a settlement of that action covering a certified class composed of “all individuals who personally purchased [an Intelligender test] between November 1, 2006 and January 31, 2011, in the United States and personally used the Test.”[2]  Under the settlement, Intelligender agreed to pay $10.00 for each approved claim submitted by a class member, make a cy pres donation of $40,000 and change its website advertising, product insert and packaging.[3]  To obtain the $10.00 payment, a class member needed to submit a valid claim form, which required her to declare, under the penalty of perjury, that the purchased test inaccurately predicted her child’s gender.[4]  In approving the settlement, the district court found that Intelligender satisfied its obligation under 28 U.S.C. §1715 to provide notice of the settlement to the appropriate state and federal officials.[5]

On November 9, 2012, the People of the State of California, by and through the San Diego City Attorney, sued Intelligender for alleged violations of California’s Unfair Competition and False Advertising Laws (claims also asserted in the Gram class action).  Intelligender removed the State’s action, and the case was transferred to the court who presided over the Gram class action.  Intelligender then moved under the All Writs Act to enjoin the State’s enforcement action (which sought injunctive relief and civil penalties (up to $2,500 per violation)); the district court denied the motion.[6]  Intelligender then moved to enjoin the State’s effort to obtain restitution, arguing that to allow the State’s restitution claims to proceed would expose Intelligender to double recovery, which would be barred by the doctrine of res judicata.[7]  The district court denied this motion as well.

The Ninth Circuit Decision

The Ninth Circuit explained that the All Writs Act prohibits federal courts from enjoining state court actions except in three narrow circumstances, one of which being the “relitigation exception.”[8]  This exception allows a court to issue an injunction when necessary “to protect or effectuate the federal court’s judgments.”[9]  Under the relitigation exception, a district court is empowered to issue an injunction “to enforce judgments and reinforce the effects of the doctrines of res judicata and collateral estoppel.”[10]  The doctrine of res judicata applies when the earlier suit (1) reached a final judgment on the merits; (2) involved the same cause of action or claim; and (3) involved identical parties or privies.[11]  The Ninth Circuit noted that the third element – whether sufficient privity exists between the State and class members to warrant the application of res judicata – was the crux of this case.[12]  Noting that an injunction under the relitigation exception was akin to resorting to “heavy artillery”, the Ninth Circuit stressed that “every benefit of the doubt goes to the State court; an injunction can ensue only if preclusion is clear beyond peradventure.”[13]

The Ninth Circuit upheld the district court’s denial of Intelligender’s motion to enjoin the State’s enforcement action.  The Court explained that a private class action could not bind the State in its sovereign capacity where it asserted both public and private interests.[14]  It explained that both the Unfair Competition and False Advertising Laws contained broad remedial provisions unavailable to private plaintiffs, such as civil penalties and injunctive relief.[15]  That the State had not objected to the settlement after receiving the CAFA notice was irrelevant.  CAFA expressly provides that the notification requirement did not “impose any obligations, duties, or responsibilities upon, Federal or State officials.”[16]  Intelligender’s argument directly contradicted this provision.[17]

The Ninth Circuit reached the opposite conclusion with respect to Intelligender’s motion to enjoin the State’s claims for restitution, holding that the State’s action to seek restitution for the individual members of the Gram settlement class could be enjoined.  The Ninth Circuit noted that “[w]hen a government entity sues for the same relief that plaintiff [has] already pursued then the requisite closeness of interest for privity is present.”[18]  In seeking restitution on behalf of individual members of the certified Gram settlement class, the State sought to obtain double recovery, and may be enjoined from doing so.  Thus, the court found sufficient privity between the Gram class members and the State with respect to the claims for restitution.[19]

The Ninth Circuit rejected the premises that underpinned the district court’s finding that privity was lacking.  The Ninth Circuit explained that while the district court relied on the fact that the certified settlement class was narrower than the group on whose behalf the State sought restitution, this was incorrect.  Both the certified settlement class and the group for whom restitution was being sought by the State comprised substantially all individuals who purchased an Intelligender test between November 1, 2006 and January 31, 2011.[20]  Although compensation was available only to settlement class members who used the test and obtained incorrect results, all purchasers of the test were bound by the settlement.  The Ninth Circuit noted that if the State wished to secure compensation for this latter group, it could have intervened in the Gram action after it received notice of the proposed settlement required by CAFA.  It chose not to do so.

The Ninth Circuit also noted that the different amount of restitution sought by the State was irrelevant to the privity analysis, and confirmed that the State was merely seeking duplicative recovery.[21]  It noted that “the appropriate inquiry is not what relief was ultimately granted, but rather whether the government is suing for the same relief already pursued by the plaintiff.”[22]  Here, because the class and the government were seeking restitution, the requirements of res judicata were met.[23]

The Ninth Circuit concluded that to “[a]llow[] the State’s claim for restitution to advance would undermine those longstanding principles of preclusion which we . . . have recognized time and again under the basic rule that when the government seeks individual relief on behalf of an already defeated litigant, res judicata usually applies.[24]  Further, allowing such “post-negotiation collateral attacks on [a] settlement . . . would undeniably deter similar settlements in the future.”[25]  The Ninth Circuit enjoined the State’s claims seeking restitution.