Think back to elementary school. Some of you will remember teachers who thought it was a good idea – sound discipline, even – to punish the entire class when a few kids misbehaved. Class actions, when improperly certified, are kind of like that, only in reverse: an entire class of individuals, including people who suffered no harm and were subjected to no misconduct, can obtain a windfall because a handful of people within the class arguably suffered harm. And the consequences to the legal system and defendants alike can be dire. Mind you, class actions are not supposed to work like that. In general, a class should be certified only when the claims of everyone in the class can be fairly and efficiently resolved by adjudicating the claims of a single class representative. As one court put it, “As goes the claim of the named plaintiff, so go the claims of the class.” See Sprague v. General Motors Corp., 133 F.3d 388, 399 (6th Cir. 1998) (describing “typicality” requirement of Rule 23(a)(3)). In other words, if everyone in the class is truly “in the same boat” vis-à-vis the defendant, then the legal outcome for one can fairly stand as the binding legal outcome for many. “If everyone in the proposed class is, in some sense, the victim of the same wrong (though, perhaps, to varying degrees), then it would seem straightforward for the court to recognize that cohesiveness by way of class certification.” Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 102 (2009).1 Why is this principle so important? One reason is that the class certification device, a procedural tool, cannot be used to change the substantive law. Elements of claims do not magically disappear in class actions, and defendants do not lose their right to assert affirmative defenses just because a class is certified. Indeed, the Rules Enabling Act, 28 U.S.C. § 2072 – the statute that authorizes the Supreme Court to promulgate rules (including Rule 23, the foundation of class action practice in federal courts) – comes with a critical limitation: The rules “shall not abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b). Of late, courts around the country have been taking these principles more seriously than in years past. Gone are the days when courts would routinely assume the truth of the allegations in a complaint when deciding whether to certify a class. In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551-52 (2011), and again in Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013), the Supreme Court emphasized that a class action plaintiff “must affirmatively demonstrate his compliance” with the requirements of Rule 23. In Wal-Mart, the Court tightened the requirements for demonstrating the existence of “questions of law or fact common to the class” under Rule 23(a)(2); in Comcast, it tightened the Rule 23(b)(3) requirement for showing that common questions “predominate over any questions affecting only individual members” of the putative class. 

Understandably, the legal commentariat has closely scrutinized Wal-Mart and Comcast, which, taken together, have tilted the playing field in favor of class action defendants. But the vast majority of class actions never reach the Supreme Court, and despite the enactment of the Class Action Fairness Act of 2005, 28 U.S.C. § 1332(d), and its expansion of federal jurisdiction over class actions, many class actions are still adjudicated in state courts. Out in the trenches – in state courts, in federal district courts and in federal appellate courts – the results have not been as one-sided as they have been in Washington, D.C. This article discusses two starkly different approaches to class certification taken this past year by two different state supreme courts. Both cases were brought against insurance companies over claims-handling practices, but the similarities end there. The cases illustrate the fact that, while the balance of power in class actions has shifted in favor of defendants, cases that should not be certified as class actions still can be. Class Actions Against Insurance Companies Insurance companies have been regular targets of class actions for nearly two decades. The subjects of these lawsuits have been many and varied, ranging from “vanishing premium” policies to senior citizen annuity sales; from the use of the Ingenix database to the use of “retained asset accounts”; and from the use of “aftermarket” auto parts to the receipt of “revenue sharing.” It would be a mistake to underestimate the creativity of the plaintiffs’ class action bar when it comes to crafting legal theories to pursue against the insurance industry. With some notable exceptions (such as claims under the Telephone Consumer Protection Act, 47 U.S.C. § 227), class actions against insurance companies tend to fall into one of two categories. The first involves how the product was sold. Was the purchaser misled in some material way when buying a policy? The second involves whether promised benefits were actually provided. Is the company somehow short-changing policyholders? The two cases discussed in this article fall into the latter category; that is, they involve claims that insurance companies somehow short-changed their policyholders in the claims-handling process. In one case, we will see, the court took the teachings of recent Supreme Court jurisprudence seriously; in the other, the court purported to follow Wal-Mart, but in reality did not. Ohio Our first case involved a claim that State Farm did not tell policyholders with damaged windshields about all of the benefits they could receive. Rather than paying to replace the windshields, State Farm paid to repair some of them with a chemical compound that was supposedly an inferior fix. Cullen v. State Farm Mut. Auto. Ins. Co., 999 N.E.2d 614, 618 (Ohio 2013). According to the plaintiff, State Farm’s claim representatives relied on a company-prepared script to persuade policyholders to choose the repair option rather than the replacement cost of the windshield (minus any deductible). Id. at 618-19.

Ohio’s class action rule is “virtually identical” to Rule 23, so Ohio courts, like many other state courts, look to federal authorities for guidance on whether a class should be certified. Id. at 622. The Ohio Supreme Court relied on Wal- Mart and Comcast to set the stage for its holding that myriad contested issues were individualized, and that these issues precluded certification. This ruling was unquestionably faithful to those Supreme Court cases and the “all in the same boat” principles underlying them. State Farm pointed out, and the court agreed, that it could not be liable “if an individual class member knowingly chose windshield repair – but individual consent and knowledge cannot be proven with common evidence.” Id. at 626. Similarly, “if a windshield repair could return a vehicle to preloss condition . . . State Farm’s liability would be subject to individual examinations of each vehicle, not common questions.” Id. As for the claim that State Farm systematically failed to inform policyholders of their options, the court found that “policyholders had various individual, unscripted conversations” with claim representatives and others, “and there is no common proof of what any individual policyholder knew when consenting to windshield repair.” Id. As a result, “[d]etermining whether State Farm breached any obligations to insureds necessarily entails an individualized inquiry into each of these communications.” Id. The court went on to find other fatal dissimilarities in the claims of class members. Id. at 626-28. In so doing, it adhered to the principle that class certification is a procedural device. It is not supposed to be used to turn losing claims into winners, or vice versa. For example, in the State Farm case, if a class member had a losing claim because he consented, with full knowledge, to a repair rather than a replacement, then his claim could not succeed merely because someone else (the class representative, perhaps) did not consent. It is no answer to this to say, as some plaintiffs’ lawyers do, that class actions facilitate the prosecution of small claims that would never be prosecuted unless they could be aggregated into class actions. It’s true that one of the justifications for class actions is that they make small claims marketable through the device of aggregation. But this cannot change substantive law. “[T]he class action was never designed to serve as a freestanding legal device for the purpose of ‘doing justice,’ nor is it a mechanism intended to serve as a roving policeman of corporate misdeeds or as a mechanism by which to redistribute wealth.” Martin H. Redish, Wholesale Justice: Constitutional Democracy and the Problem of the Class Action Lawsuit 22 (Stanford University Press 2009). Instead, it is “an elaborate procedural device designed to facilitate the enforcement of preexisting substantive law.” Id. The State Farm opinion provides a good example of a court following these principles.

Montana We now move west to Montana. In contrast to Ohio’s approach, Montana’s supreme court has issued an opinion that turned a blind eye to individualized issues and, despite purporting to follow Wal-Mart, certified a class that cannot be squared with that precedent. The case is Jacobsen v. Allstate Insurance Co., 310 P.3d 452 (Mont. 2013). Like the Ohio case, Jacobsen involved the theory that an insurance company systematically short-changed its policyholders in the claims process. The theory was based on Allstate’s use of claims guidelines that, according to the court, was designed to “fast track settlements and reduce the amount paid out on claims.” Id. at 455. The guidelines accomplished this goal, the court said, by encouraging claims adjusters to establish contact with claimants quickly and to work with them in an empathetic manner to resolve their claims. Id. at 458. What seemed most bothersome to the court was the alleged use of an “attorney economics” script that was allegedly intended to dissuade claimants from hiring lawyers. Id. at 458-59. This was done, according to the court, because “represented claimants generally received higher settlements.” Id. The court acknowledged in passing that the plaintiff’s “requested relief and alleged bases for damages are not entirely clear.” Id. at 464. Let’s pause and consider that statement for a moment. If the requested relief and basis for damages are unclear, how can a class be certified? One of the fundamental questions of class certification is whether the claims can be fairly and efficiently resolved on a classwide basis. If it is not clear what claims and theories are actually at issue, then it is hard to see how a class can be certified. Yet in Jacobsen, it was. The court glossed over this problem and allowed plaintiff to proceed based on the idea that class members may have suffered “actual harm” because Allstate engaged in “an alleged zero-sum economic plan systematically reducing claims payments to increase profits.” Id.; see also id. at 467. But even if this is so, it begs the question of whether a class can be certified. Even if “the allegedly unlawful conduct caused harm to the class as a whole,” as the court suggested (id. at 468-69; emphasis added), that is a different issue than whether the claims of every individual in the class can fairly be resolved in a single proceeding. It assumes, without proof, that everyone in the class is in the same boat. For instance, if Allstate gave a class member a fair and speedy resolution of his claim, what injury has that claimant suffered? The court never answers this question, but the answer seems obvious: no injury at all. Yet because a class was certified, that same claimant, having already received a fair, speedy resolution of his claim, could obtain an additional payment – a windfall – if the claims adjustment program is ultimately determined to be unfair at some “macro” level. The Montana court stated that “[t]he individual context of any one [claim resolution] is not relevant” to its ruling, nor is the fact that “not all class members have suffered actual harm or an unfair adjustment.” Id. at 472. This is impossible to square with Wal-Mart’s statement that “[c]ommonality requires the plaintiff to demonstrate that the class members ‘have suffered the same injury.’” 131 S.

Ct. at 2551 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 157 (1982)). And it confirms that the Montana court was open to changing the substantive law via the procedural tool of class certification, so that individuals with losing claims may nevertheless recover merely because they are members of a certified class. Regrettably, the Montana opinion proves the truth of this observation from one class action scholar: “[T]he modern class action may give rise to as much harm as good; if not properly controlled it may wreak havoc on the legal system and the values that underlie it.” Redish, supra, at 1-2. Conclusion Class certification is a critical issue, sometimes bordering on outcome-determinative, in any putative class action. If a class is certified, the exposure to the defendant can grow exponentially and may create pressure to settle, even if the claims are weak. The Supreme Court has tightened the way the rules governing class certification are applied, and to some extent, that guidance has been followed around the country, in both federal and state courts. The Ohio opinion well illustrates the effect of those Supreme Court opinions. The Montana opinion shows that the battle is far from over.