IN RE: AQUA DOTS PRODUCTS LIABILITY LITIGATION (August 17, 2011)

Aqua Dots are small, colored beads that can be fused into different shapes when sprayed with water. Moose Enterprises contracted with a Chinese company to produce the beads. The Chinese company substituted a toxic chemical for a specified one. As a result, some children became sick. Spin Master, Aqua Dots’ distributor, recalled the product once it learned of the problem. The recall notice advised parents to keep the toy away from children and to contact either Spin Master or the retailer (stores like Wal-Mart and Target) for a replacement or exchange. Although the notice did not mention a refund, both Spin Master and the retailers generally honored refund requests. Over 3 million of the toys were removed from the distribution channel before sale and approximately 600,000 of the 1 million or so that were sold were returned. Notwithstanding the recall notice and the returns, a group of plaintiffs whose children were not harmed and who did not ask for a refund brought suits. The suit sought full refunds and punitive damages and were based on the Consumer Products Safety Act as well as express and implied warranties and state consumer protection statutes. The Judicial Panel on Multidistrict Litigation transferred a number of suits to the Northern District of Illinois for consolidated pre-trial proceedings. Judge Coar (N.D. Ill.) denied class certification. He concluded that the plaintiffs would be better off following the recall procedure than pursuing litigation. Therefore, the class action was not a superior method of "adjudicating the controversy" as required by Rule 23(b)(3). Plaintiffs appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Rovner and Sykes affirmed. The Court first rejected the defendants' argument that plaintiffs lacked standing because there were no injuries. Conceding that there were no physical injuries, the Court nonetheless pointed out that the plaintiffs suffered a financial injury because they paid more for the beads than they should have. On the merits, the Court did not take issue with the district court's conclusion that a class action would be an ineffective way to resolve this dispute. It did take issue, however, with the district court's flagrant departure from Rule 23 in order to achieve its desired result. Rule 23 requires that a class action be a superior method of "adjudication." The Advisory Committee's notes to the rule illustrate that the drafters used adjudication in the legal sense. A recall is not an adjudication and the district court was wrong in considering it so. The Court reached the same result as the district court, however, by relying on Rule 23(a)(4) and Rule 23(b)(3)(D). The former requires a class representative that will "fairly and adequately" look after the class' interests. The Court concluded that a class representative who is willing to incur significant legal fees and notice fees in order to obtain a result already available to the class is not an adequate representative. The latter requires a district court to consider the difficulties in managing the class action. Here, the punitive damages claim rests on state law, which may differ from state to state. In addition, with no purchaser records, notice costs might exceed the price of the beads. The district court did not err in denying class certification.