The United States Court of Appeals for the Third Circuit reversed the denial of class certification in a case brought against a bank and its payment processors that allegedly engaged in a fraudulent scheme to cause unauthorized debits from consumer bank accounts.  Reynaldo Reyes, as class representative, filed suit in the Eastern District of Pennsylvania under the Racketeer Influenced and Corrupt Organizations Act (RICO) against Zions First National Bank (“Zions Bank”) and its payment-processor subsidiaries Netdeposit, LLC and MP Technologies. Reyes alleged telemarketers obtained bank account information from consumers that was used to make unauthorized debits from consumers’ bank accounts. The telemarketers conveyed the bank account information to the payment processing entities. The payment processors then caused Zions Bank to initiate an Automated Clearing House (“ACH”) debit of the consumers’ bank accounts.

Reyes alleged that the defendants were operating a RICO enterprise that was a “complete sham.” A complete sham is an entirely illegal and illegitimate activity masquerading as a legitimate business undertaking. Under the complete sham theory, the reviewing court can focus on the defendant’s conduct as a whole to find proof of elements that normally require evidence about each plaintiff.  In particular, the class members’ participation or involvement with the defendant is sufficient evidence that each class member suffered damages, rendering analysis of individual transactions unnecessary.

Plaintiff’s proof at the class certification stage included the inordinately high “return rates” of the telemarketers who engaged in the alleged scheme. “Return rates” refer to how often an ACH debit could not be completed.  The record in this case demonstrated return rates in excess of 25 to 50 times the national average of 1.25 percent.   Plaintiff produced three experts who testified as to banking practices and fraudulent marketing practices. Plaintiff also relied on internal emails between Zions Bank and its payment processors in which the defendants discussed “staggering” return rates.  Two of plaintiff’s experts testified that return rates in excess of 10 percent are prima facie evidence of fraud. In this case, the return rates ranged from “30% to almost 90%.” A third expert opined that the bank had to know that it was engaged in a fraudulent activity based on standard banking practices.

The district court denied class certification because it found that there were no issues common to the class and plaintiff could not satisfy either the commonality requirement of Rule 23(a) or the predominance requirement of Rule 23(b)(3). Focusing only on the return rates, the district court found that the abnormally high return rates did not provide “absolute proof” of fraud. The district court also noted commonality and predominance were not satisfied because Zions Bank and the payment processors contracted with different marketing firms to obtain consumers’ bank account information.

The issues on appeal for the Third Circuit were whether the district court: (1) applied the proper standard for assessing commonality and predominance; (2) appropriately reviewed plaintiff’s expert opinions; and (3) properly determined that commonality and predominance were not established based on the record presented.  As to all three issues, the Third Circuit found that the district court erred in denying the motion to certify the class.

First, the district court held plaintiff to an incorrect burden of “absolute proof” at the class certification stage rather than the appropriate “preponderance of the evidence” standard. Next, the district court confused certain fact witnesses as experts and improperly ignored the testimony of plaintiff’s actual expert witnesses that the high return rates supported a finding of fraud. Finally, as to commonality and predominance, the Third Circuit found that both were satisfied on the “complete sham” record in this case and distinguished telemarketing cases relied on by the district court because those cases involved legitimate business activities.

The Third Circuit explained that in a RICO class action, commonality and predominance are satisfied if each element of the alleged RICO violation involves common questions of law and fact capable of proof by evidence common to the class.  The complete sham theory advanced by plaintiff relied on a common mode of behavior by defendants as to all members of the class and a general policy of fraud. While slight variations in the telemarketers’ and defendants’ conduct existed, none involved exercises of discretion that affected the class members’ damages. The Third Circuit distinguished the Supreme Court’s Wal-Mart decision, in which plaintiffs did not establish a national policy of employment discrimination and failed to demonstrate a common mode of exercising discretion that pervaded the entire company.

Finally, the Third Circuit observed that plaintiff’s complete sham theory, if supported by an appropriate record, can satisfy Rule 23(b)(3)’s predominance requirement by focusing on the overarching material and defining aspects of a defendant’s conduct. The Court explained that predominance does not require the absence of variations in a defendant’s conduct, but rather whether the defendant’s conduct was common to all of the class members.

The Third Circuit vacated the order denying class certification and remanded the matter for proceedings consistent with its opinion.

Reynaldo Reyes v. NetDeposit, LLC, et. al., Case No. 14-1228, United States Court of Appeals for the Third Circuit (Sept. 2, 2015).