On August 28, 2009, the U.S. Ninth Circuit Court of Appeals reversed the denial of class certification in Yokoyama v. Midland Nat’l. Life Ins. Co., 07-16825 (9th Cir. 2009), an action challenging the sale of deferred annuities to senior citizens. Plaintiffs alleged three violations of Hawaii’s Deceptive Practices Act (the Act): (1) that the products were inherently unfair or deceptive; (2) that the products were marketed in such a way as to make them unfair or deceptive; and (3) that the products were inherently unsuitable when sold to seniors. The district court denied certification largely on the basis that the Act required showings of individual reliance; the court of appeals held that no such showings were required and directed that a class be certified. (Please click here for the opinion.)

Plaintiffs originally alleged that the annuity products were unsuitable for most seniors. The magistrate recommended class certification; the district court, however, rejected the magistrate’s recommendation, finding that common issues did not predominate as there would need to be an individualized inquiry into suitability, each purchaser’s situation and the sales pitch made. The district court noted that in the complaint, “the Plaintiffs do not argue that the deferred annuities are universally unsuitable for seniors; rather, their position is that the product is unsuitable for most seniors.” (emphasis original). The district court further noted that plaintiffs shifted their theory in their reply brief and argued that the annuities were inherently deceptive and unsuitable for any investor. As this was not alleged in the complaint or motion for class certification, the insurer did not have an opportunity to respond and the motion for class certification was dismissed without prejudice. The parties stipulated that plaintiffs could file a third amended complaint and a new motion for class certification. 239 F.R.D. 607 (D. Hawaii July 2006).

Plaintiffs amended their complaint to focus on the alleged inherent unsuitability of the products for any investor and the uniform sales material provided to the prospective insureds. The magistrate recommended class certification, but the district court again denied certification. The district court found that individual inquiries would be required into: (1) what information was conveyed to annuitants; (2) whether each class member relied on alleged misstatements; (3) individual damages; and (4) individual suitability. The district court explicitly rejected the inherent unsuitability argument. 243 F.R.D. 400 (D. Hawaii June 2007) (“The court previously ruled that suitability claims are inappropriate for class standing and Plaintiffs’ allegation of ‘inherent’ unsuitability does not change this analysis.”). The district court also found that a class action would not be a superior method of adjudicating Plaintiffs’ claims for four reasons:

  • Because individual inquiries would be required, a class action would not necessarily conserve judicial or litigant resources;
  • Individuals had incentives to pursue individual actions because treble damages and attorneys’ fees were allowed under the Hawaii statute;
  • There might be individual claims against independent brokers and these claims could not be adjudicated in a class action; and
  • Potential class members had other options for seeking redress if class certification were denied.

The Ninth Circuit accepted an appeal of the class certification denial under Rule 23(f). The court reversed the denial of class certification and directed that a class be certified. The dispositive issue was whether the Hawaii Deceptive Practices Act requires a showing of individual reliance. Because the issue underlying the denial of class certification was a purely legal one, the court applied a de novo standard of review. The court determined that the Act looks to the reasonable consumer to determine whether practices are deceptive, so that an objective test should be applied. Further, plaintiffs alleged that the deception was contained in the standardized materials used by the insurer, rather than in individual statements communicated to the consumers. Accordingly, the court concluded that “[t]he plaintiffs have thus crafted their lawsuit so as to avoid individual variance among the class members.” Finally, the court held that while individual damages calculations would have to be made if plaintiffs were successful, that inquiry did not preclude class certification. Without addressing the merits of the underlying claims, the court ruled that the class should be certified. (A concurring judge on the panel disagreed with the majority’s view of the applicable standard of review, but agreed that the district court’s error of law warranted reversal.)