On May 9, 2017, the Fifth Circuit, in Slade v. Progressive Security Insurance Company, affirmed a lower court’s decision finding that a class-wide damages model did not preclude class certification. However, the Fifth Circuit warned that the plaintiffs’ waiver of the class members’ ability to contest a factor utilized in the damages model could ultimately preclude certification.

In Slade, plaintiffs alleged that their insurance company paid inadequate amounts on their claims for automobile damages. In particular, plaintiffs contended that, in determining how much to pay on an automobile claim, the company improperly relied on a WorkCenter Total Loss tool to calculate the base value for total loss vehicles. The company would then adjust that value using its own internal system based upon the car’s condition. Plaintiffs alleged that the company should have used base amounts provided in more commonly-used sources, such as the National Automobile Dealers Associate Guidebook or the Kelly Blue Book. Notably, at the appellate level, plaintiffs agreed that they would not challenge defendants’ condition adjustments.

In support of class certification, plaintiffs presented a simple damages model. The alleged improper automobile base value would be replaced by a lawful base value, and then the company’s current system for condition adjustment would be applied. The difference between the original number and the newly-derived number would equate to the amount of damages. This analysis would be utilized for each class member. The Fifth Circuit found the plaintiffs’ damages model to be sound and held that it did not preclude class certification. However, this was not the end of the Court’s analysis.

On appeal, plaintiffs stated that they would not contest the company’s system for determining adjustments for the condition of a car. Importantly, had plaintiffs not conceded this issue, as the Fifth Circuit noted, class certification may well have been inappropriate because the adjustments are highly individualized – an issue that likely creates insurmountable predominance problems.

However, by waiving unnamed class members’ ability to contest the condition adjustments, as the company argued on appeal, plaintiffs may well have stepped into a highly-problematic adequacy issue. The Court noted that the risk of conflicts of interest between named plaintiffs and the class they seek to represent may result in plaintiffs being unable to adequately represent the class, thereby precluding certification: “A class representative’s decision to waive unnamed class members’ claims will defeat adequacy where the lost value of the waived claims . . . is greater than the strategic value of the decision to waive.”

Because the lower court had not had an opportunity to consider the adequacy issue, the Fifth Circuit remanded the case back to that court with several options: (1) decline to certify the class; (2) certify the class as is, but tailor the notice and opt-out procedure to alert the class of the risks accompanying the waiver of claims; (3) certify the class as is; or (4) define the class in a way to exclude unnamed plaintiffs who wish to claim that the condition adjustments were improper.

This decision is consistent with prior Supreme Court and Fifth Circuit precedents holding that a class-wide damages model must only measure damages attributable to the theory of liability on which the class action is based. Importantly, however, because plaintiffs could only present such a model by waiving certain claims, plaintiffs may well have created an additional obstacle to certification.