On January 23, 2018, a panel of the Ninth Circuit Court of Appeals decertified a class of car owners in a nationwide class action settlement arising from misstatements by Hyundai and Kia regarding the fuel efficiency of their vehicles.[1]  Besides making it more difficult to bring nationwide class actions based in California moving forward, the Ninth Circuit’s opinion in Hyundai, if it stands, will add to a divergence of views among the circuit courts regarding whether and when differences in remedies available under state law may defeat commonality and predominance under Rule 23.[2]  The parties have jointly moved for a deadline of March 8, 2018 to file for review by the full Ninth Circuit.

The putative class action was initiated in California state court in January 2012 after a consumer advocacy group had alerted the EPA in 2011 to complaints that Hyundai and Kia had overstated the fuel efficiency of certain models of their vehicles.[3]  Hyundai later removed the California state action to federal court, where plaintiffs moved to certify a nationwide class for litigation.[4]

Other similar lawsuits were filed around the country; ultimately, a Multidistrict Litigation Panel transferred numerous related actions to the Central District of California.[5]  Shortly after this consolidation, the parties informed the court that they had reached a proposed settlement agreement.[6]  During confirmatory discovery to establish the facts underlying the proposed settlement and to allow the plaintiffs to evaluate its terms, a different group of plaintiffs filed suit in Virginia, alleging claims under Virginia law; these claims were also consolidated with the action in the Central District.[7]  Notably, the Virginia plaintiffs opposed class certification and sought remand to the Western District of Virginia, arguing that choice of law principles favored the application of Virginia law.[8]  In August 2014, the Central District certified the settlement class, and in June 2015, it approved the final settlement.[9] The settlement objectors appealed.

The objectors argued that the District Court abused its discretion in certifying a nationwide settlement class without analyzing the differences among state consumer protection laws or conducting a choice of law analysis.  The panel agreed, holding that the District Court committed a legal error when it did not apply California choice of law rules, analyze the differences between potentially applicable state laws, or make a ruling about whether such differences defeated the predominance inquiry required for class certification under Rule 23(b)(3).[10] 

In particular, the panel disagreed with “[t]he District Court’s reasoning that the settlement context relieved it of its obligation to undertake a choice of law analysis and to ensure that a class meets all of the prerequisites of Rule 23,” as the lower court had stated it would have been required to do in the litigation context.[11]  The judges held that, to the contrary, attention to certification must be heightened in the settlement context.[12]  The panel also rejected the District Court’s argument that because the settlement was fair, the choice of law analysis was not necessary.[13]

Moreover, even had the class been limited to California consumers alone, the court held, the District Court’s certification would have been incorrect as to purchasers of used cars.  The lower court was wrong in its conclusion that “it could presume that all class members relied on the misleading statements” made to consumers through Monroney stickers and nationwide advertising.[14]  The Ninth Circuit cited its earlier decision in Mazza that an individualized case for reliance had to be made for each member of a class for a claim that turned on scope of advertising.[15]  It further distinguished the case at bar from major litigation against tobacco manufacturers, which involved a pervasive, nationwide campaign of misinformation by 11 companies.  Here, it contended, “factual differences regarding used car owners’ exposure to the misleading statements translate into significant legal differences regarding the viability of these class members’ claims.”[16]  Failure to consider such differences impaired the validity of the district court’s predominance analysis.[17]  Accordingly, citing error in both the district court’s choice of law analysis and in its failure to properly weigh individual class issues, the Ninth Circuit vacated the class certification.

In dissent, Judge Nguyen sharply critiqued the majority position, lamenting the fact that the majority’s holding “deals a major blow to multistate class actions.”[18]  She argued that the majority opinion shifted the burden of proving the applicability of foreign law from the proponent to the court, violating California choice of law rules and in so doing running afoul of Erie doctrine.[19]  She also argued that the majority opinion created a circuit split regarding whether variations in state law defeat predominance for purposes of certifying a nationwide class.[20]  Judge Nguyen cited Ninth Circuit precedent, Hanlon v. Chrysler Corp., 150 F.3d 1011 (9th Cir. 1998), where a nationwide settlement class of car owners was certified despite state law variations because common questions regarding the defendant’s conduct predominated.[21]

Under Erie, a California federal court sitting in diversity must apply California’s choice of law rules.  Those rules in turn provide that California law applies to a class action unless a litigant timely carries the burden of showing that a foreign law applies.[22]  According to Judge Nguyen, “[t]he majority faults the district court for not sua sponte surveying all 50 states’ laws to prove that none other than California’s should apply.  But, to the extent anyone was obliged to analyze the laws of other states, that burden fell squarely on the objectors – and they failed to meet it.”[23]  The majority opinion violated the Erie doctrine because California choice of law rules do not require the district court to assess variations in state law in deciding which state’s law applies and whether common issues of law and fact predominate under Rule 23(b)(3).[24]  Specifically, because choice of law rules are substantive state law, reassigning the burden of a foreign law proponent to the district court, in Judge Nguyen’s opinion, violated Erie doctrine and skewed the majority’s predominance analysis.

The majority and the dissent also diverged notably in their interpretation of Mazza, in which the Ninth Circuit decertified a nationwide litigation class of consumers alleging that Honda had misrepresented characteristics of a vehicle braking system.[25]  The Mazza court found that differences between California and other state laws were material and that there were individual issues of fact regarding reliance on a national advertising campaign; accordingly, common issues of fact did not predominate.  The majority relied heavily on Mazza, holding that its facts were analogous and relying on its discussions of choice of law and scope of advertising issues.[26]  However, the dissent distinguished Mazza, characterizing it as “a rare exception to the general rule” and pointing out further that the foreign law proponents in that case did bear their burden of demonstrating the difference between California and other states’ laws, as the settlement objectors in Hyundai allegedly did not.[27]

If the Ninth Circuit’s opinion in Hyundai stands, certification of a nationwide class action based in California will be more challenging in the future.  Further, the decision adds to the important ongoing discussion among the circuit courts about the circumstances under which variations in state law should override commonality and predominance in the Rule 23 class certification analysis.[28]