Like 2009, 2010 has witnessed frenetic activity in the class action bar. Continuing the trend of recent years, class action filings are up; the targets of class action lawsuits have expanded; and plaintiffs' firms that historically have focused on other areas are diversifying their portfolios by filing class suits in areas such as false advertising, consumer fraud, products liability, ERISA, and employment discrimination.
While some academic commentators have opined that "the long-term future of the class action is in doubt," the experience of defendants shows otherwise. According to a report published in the L.A. Daily Journal, 30% of United States companies had a class action filed against them in 2009, with California companies leading the way with a whopping 39% of surveyed companies facing new class litigation. Gibson Dunn has obtained data charting filings in several major state courts in California, and those statistics also show a significant spike in class action activity.
The past year also has witnessed significant decisions from the Supreme Court on class action issues, including the proper standard for determining a corporation's principal place of business under CAFA (Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010)); whether Rule 23 trumps state law rules that prohibit certain types of class actions (Shady Grove Orthopedic Assocs., P.A., v. Allstate Ins. Co., 130 S. Ct. 1431 (2010)); and the standards governing class arbitration where arbitration clauses are silent about class procedures (Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010)).
Meanwhile, the lower federal courts have pressed forward. The so-called Eisen debate increasingly is no longer a "debate" at all, as a chorus of federal circuits now expressly require a "rigorous analysis" of Rule 23 factors at the certification stage, even if such analysis overlaps with merits-related inquiries. In 2010, the courts of appeals by and large converged around this principle, recognizing that not only contested factual questions but also Daubert issues need to be resolved at the class stage if resolution is necessary to the certification decision. Set against these cases is the Ninth Circuit's 6-5 en banc decision in Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (2010), cert. petition pending, which exacerbated a conflict among the circuits on several core class action issues, including the nature of the factual showing necessary to satisfy Rule 23's requirements, and whether claims for monetary relief can be certified under Rule 23(b)(2). If the Supreme Court decides to hear the case, Dukes has the potential to clarify a range of unresolved issues at the heart of Rule 23 practice. (Gibson Dunn is counsel of record in Dukes. A copy of the petition for certiorari can be found here.)
On the state side, in the last year the Supreme Court of California interpreted Proposition 64's standing amendments to California's Unfair Competition Law (In re Tobacco II Cases, 46 Cal. 4th 298 (2009)), bringing some clarity to this area but raising a host of follow-up issues that the courts of appeal have begun to tackle.
The plaintiffs' bar has not remained silent or static. As the doctrinal loopholes facilitating easy certification are closed, plaintiffs' theories continue to evolve. In response to the near uniform federal appellate precedents denying certification of nationwide or multistate class actions that would require the application of the laws of many states, the plaintiffs' bar is testing new "headquarters" theories that attempt to apply a single state's law (the law of a defendant's headquarters) to an entire class dispute. This has led to notable and highly controversial decisions in California and New Jersey holding that, under "traditional" choice-of-law principles, a single state's law can apply extraterritorially to a nationwide class. The plaintiffs' bar also continues to press ahead with "fraud-on-the-market" theories in non-securities settings, generally challenging purported "omissions" by a company that are said to have caused "price inflation" that caused injury to consumers or others. These cases are efforts to bypass the bedrock elements in many common law causes of action such as reliance, causation, and injury—and are classic "no injury" suits brought under a different name. They have met with mixed success, but continue as a wave of the future.
This update provides an overview of developments and trends in class action practice. Part I of the update summarizes recent facts and figures related to recent class action activity. Part II discusses key developments and unresolved class action issues in the federal courts. Part III identifies key unresolved issues in the state courts.
I. Facts and Figures
Class actions continued to plague corporate America at a daunting rate over the last 18 months, with just under a third of United States companies defending new class action litigation in 2009 (and just over a third of California companies). Our analysis of available data from state and federal courts shows that class action filings are up across the board.
A. Federal Court Class Action Activity
Plaintiffs have taken particular advantage of new opportunities in the consumer protection/fraud and labor class action arenas. Between late 2001 and early 2007 (the most recent available federal data), consumer class actions rose 156% and accounted for more than 20% of all class action filings in the latter period. Over the same time frame, labor class actions increased 228%, constituting 46.9% of class action filings in late 2007.
Class Action Filings by Case Type, 2001-2007
To see table please click here.
The West Coast has led the way in class action growth, with the Ninth Circuit experiencing a 577% increase in filings between July-December 2001 and January-June 2007, as compared with the two circuits with the next greatest increases (the Third Circuit at 400% and the Tenth Circuit at 250%). Plaintiff-friendly consumer protection statutes in California and the willingness (however suspect) of some California state and federal courts to apply California law in multi-state class actions may partly explain this trend.
Percentage Increase in Consumer Class Action Filings, 2001-2007
To see table please click here.
Labor class actions also have exploded. The Eleventh Circuit's labor class action load, shown in the chart below, increased even more than the rise in the Ninth Circuit. The Eleventh Circuit's labor case load increased 493%, with the Second Circuit and the Ninth Circuit increasing 317% and 218%, respectively.
Percentage Increase in Labor Class Action Filings, 2001-2007
To see table please click here.
B. State Court Class Action Activity
The overall number of state class action filings also has increased substantially in recent years. A report released in March 2009 by the California Administrative Office of the Courts shows that class action activity was increasing in California even before 2005 (the last year for which the report had complete data). According to this study, class actions filed in twelve representative courts across the state increased from 460 in 2000 to a high of 833 in 2004, with a slight drop-off to 751 in 2005.
Gibson Dunn has determined that this trend continued at a steady pace after 2005:
California State Class Action Filings By County (2005-2008)
To see table please click here.
According to data that we have received from several of the largest county superior courts in California, state class action filings remain on the rise:
- The Los Angeles County Superior Court saw a 55.4% increase in class action filings from 2005 to 2008. The Los Angeles filings alone exceed the total number of filings the Administrative Office of the Courts reported for the twelve studied courts combined in 2005.
- Class action filings in Orange County increased 27.3% from 2005 to 2008.
- The San Diego Superior Court began collecting data on class action filings in July 2007, and these data show a 71% increase in class action filings between July 2007 and December 2009.
- Alameda County was one of the few jurisdictions to see a decrease in class action filings, from 60 in 2005 to 53 in 2008.
The fact that the increase is most pronounced in Los Angeles is not surprising to practitioners in that county. Like several other counties in California, Los Angeles has a designated panel of complex case judges who are very experienced in handling class action and other complex litigation, and this program has proved extremely popular among plaintiffs and defendants. Notably, removals occurred in only 12% of the class cases filed in Los Angeles County Superior Court in December 2008.
The overall statistics confirm what defendants already know. In both federal and state court, class action filings are up. Although it is difficult to explain with certainty the reasons for the steady increases, it does appear that the economic pressures of the last 18 months have driven new plaintiffs' firms into the class action arena, and that these firms are filing more suits, testing new theories, and selecting new defendants and industries as class action targets. Although lead counsel fights on the plaintiffs' side are nothing new, the sheer volume of suits and leadership struggles generated in connection with headline stories such as the gulf oil spill and automotive and pharmaceutical recalls demonstrate the fierce competition on the plaintiffs' bar side.
II. Key Developments (Federal Courts)
Class action issues continue to be fleshed out in the federal courts, with conflicts on several significant aspects of class action practice maturing and deepening. We start with CAFA, where the story is one chapter of clarity and many volumes of uncertainty.
A. The Class Action Fairness Act
1. Jurisdictional Clarity: The Principal Place of Business Under Hertz Corp. v. Friend
The U.S. Supreme Court waded into CAFA waters this year, holding on February 23, 2010, that the "principal place of business" of a corporation for purposes of the federal diversity jurisdiction statute (28 U.S.C. § 1332(c)(1)) refers to a corporation's "nerve center" or "the place where the corporation's high level officers direct, control, and coordinate the corporation's activities." Hertz Corp. v. Friend, 130 S. Ct. 1181, 1186 (2010). The decision reversed a Ninth Circuit ruling applying a "place of operations" test that would have accorded significant weight to the degree of business activity undertaken by the company in California. Under that test, almost any nationwide business present in California could be deemed a citizen of California simply because California is so large.
The underlying case was a wage and hour class action filed in California state court that Hertz removed under CAFA. Hertz submitted declarations showing that its "principal place of business"—its leadership team and corporate headquarters—was located in New Jersey. In remanding the case, the district court determined that a plurality of Hertz's operations were located in California. For example, Hertz operated 273 of its 1,606 car rental locations in California (which accounted for 3.8 million of its 21 million annual rental transactions), and approximately 2,300 of its 11,230 full-time employees were located in California. The Ninth Circuit affirmed. It applied the "place of operations" test for determining corporate citizenship, and it held that "Hertz's relevant business activities are 'significantly larger' in California than in the next largest state." 297 F. App'x. 690, 691 (9th Cir. 2008).
The Ninth Circuit's decision threatened to attract an even greater concentration of class action and other litigation to California state courts. Because California accounts for 12% of the entire population of the United States, most retailers and other businesses with widespread operations would be deemed California "citizens" simply because a "plurality" of their operations occurred there—and even though they were incorporated and headquartered elsewhere.
The Supreme Court reversed and unanimously adopted a "nerve center" test. The "nerve center" refers to "the place where a corporation's officers direct, control, and coordinate the corporation's activities." 130 S. Ct. at 1192. "[I]n practice," the Court said, this "should normally be the place where the corporation maintains its headquarters." Id. Although there are still close cases under the "nerve center" test, id. at 1195, the decision should allow corporations to better predict where they are subject to state court jurisdiction and when they can remove to federal court based on diversity jurisdiction. Perhaps the most significant impact will be on class actions removed under CAFA's "minimal diversity" provisions, because the opinion limits plaintiffs' ability to keep corporations in state court in large states like California. Finally, the decision should help non-California defendants resist attempts to apply California law to their activities. An aggressive interpretation of the Ninth Circuit's "place of operations" test may have encouraged attempts to apply California law to nonresident defendants on the theory that they were citizens of that state.
2. Jurisdictional Muddle: CAFA Purportedly Does Not Permit Aggregation to Satisfy the Amount-In-Controversy Requirement (Eleventh Circuit, Cappuccitti v. Direct TV)
The jurisdictional clarity provided by Hertz will be swamped by the jurisdictional confusion created by a recent federal appellate decision. In Cappuccitti v. DirecTV, Inc., 611 F.3d 1252 (11th Cir. 2010), the Eleventh Circuit held that in a class action originally filed in federal court under CAFA, at least one individual plaintiff must allege a claim worth more than $75,000 in order for a federal district court to have jurisdiction over the case. The immediate impact of this decision, if left intact, would be to deprive federal district courts in the Eleventh Circuit of subject matter jurisdiction over a substantial number of class actions initiated in federal court.
The primary purpose of CAFA was to channel state-law based class actions into federal court. Tanoh v. Dow Chem. Co., 561 F.3d 945, 952 (9th Cir. 2009). CAFA does this by conferring federal diversity jurisdiction over class actions in which the overall amount in controversy exceeds $5 million and the parties are minimally diverse (at least one plaintiff and one defendant from different states). 28 U.S.C. § 1332(d)(1)-(6). CAFA thus imposes an amount-in-controversy requirement much greater than the $75,000 required to invoke traditional diversity jurisdiction under Section 1332(a), but in doing so the Act "abrogates the rule against aggregating claims" to reach that threshold. Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 571 (2005); see also 14A Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 3704 (3d ed. 2010) ("[CAFA] … provides for aggregation even if no individual class member asserts a claim that exceeds $75,000.").
The Eleventh Circuit's recent decision breaks with this heretofore unchallenged interpretation of CAFA's language and purpose. In Cappuccitti, the plaintiff filed a putative class action in federal court under CAFA, seeking recovery of television subscriber fees that allegedly violated Georgia law. The plaintiff alleged minimal diversity and class-wide damages exceeding $5 million. Neither party disputed the court's jurisdiction under CAFA. But on review of the district court's denial of the defendant's motion to compel arbitration, the court of appeals raised sua sponte the issue of subject matter jurisdiction and concluded that "jurisdiction under CAFA was absent from the moment Cappuccitti brought this case." 611 F.3d at 1254. The jurisdictional defect was Cappuccitti's failure to allege that any one plaintiff individually met the $75,000 amount in controversy set forth in Section 1332(a). Id. at 1256.
The Eleventh Circuit reached this novel conclusion by treating CAFA's aggregate amount-in-controversy requirement (Section 1332(d)(2)) as a supplement to the traditional $75,000 requirement: "CAFA did not alter the general diversity statute's requirement that the district court have original jurisdiction 'of all civil actions where the matter in controversy exceeds the value of $75,000' and is between citizens of different States." Id. The court reasoned that although CAFA was intended to relax the requirement of complete diversity of citizenship, "there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)'s $75,000 requirement as to at least one plaintiff." Id. at 1257.
The court evidently did not view Congress's inclusion of a distinct amount-in-controversy requirement for CAFA class actions as evidence to the contrary. Instead, the court looked to a CAFA provision governing the removability of "mass actions"—which, unlike class actions, are not a representative device but rather an aggregation of individual claims by multiple named plaintiffs. Section 1332(d)(11)(B)(i) gives defendants the right to remove certain "mass actions" to federal court if they satisfy the requirements of Section 1332(d)(2)-(10) and "satisfy the jurisdictional amount requirements under [Section 1332(a)]." Id. at 1257 n.12. The court also relied extensively on circuit precedent concerning removal of a mass action under CAFA. Id. at 1255-56 (discussing Lowery v. Ala. Power Co., 483 F.3d 1184 (11 Cir. 2007)).
On August 9, both parties in Cappuccitti filed petitions for rehearing en banc. Each party contends that the panel misconstrued CAFA and confused the class action and mass action provisions of the Act. Meanwhile, some district courts hearing class actions in the Eleventh Circuit have called for briefing on the implications of Cappuccitti. Outside the circuit, however, it appears that no federal court has followed the decision, and at least one district court has noted and rejected its holding. See Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2010 WL 3155934, at *56 (N.D. Cal. Aug. 10, 2010).
If other circuits were to adopt the rule of Cappuccitti, it would close federal courts as forums for consumer class actions, in which any one plaintiff ordinarily does not have more than $75,000 in damages. Such a result would defeat the basic goal of CAFA, which the Eleventh Circuit acknowledged was "to situate more class actions in federal court ab initio and to make it easier for defendants in a state court class action to remove the action to federal court." 611 F.3d at 1254.
3. Standards for Determining the "Amount in Controversy" Under CAFA
The courts of appeals also continue to debate and develop the appropriate standards and burdens of proof for establishing that CAFA's $5 million amount-in-controversy requirement is met. In some cases, the plaintiff's complaint will be silent as to the amount in controversy; in other cases, the complaint will plead expressly that the amount in controversy is less than the $5 million jurisdictional minimum. The circuits have adopted different approaches to these issues. Some circuits generally require a removing defendant to show a "reasonable probability" that more than $5 million is at stake. Blockbuster, Inc. v. Galeno, 472 F.3d 53, 58 (2d Cir. 2006). Others have applied a "preponderance of the evidence" test. Lowery v. Ala. Power Co., 483 F.3d 1184, 1192 (11th Cir. 2007) (per curiam); Abrego v. Dow Chem. Co., 443 F.3d 676, 683 (9th Cir. 2006). And still others apply different standards depending on whether the complaint is silent or has pleaded an amount lower than $5 million. See, e.g., Lowdermilk v. U.S. Bank Nat'l Ass'n, 479 F.3d 994, 996 (9th Cir. 2007); Morgan v. Gay, 471 F.3d 469, 472-73 (3d Cir. 2006); Brill v. Countrywide Home Loans, Inc., 427 F.3d 446, 447 (7th Cir. 2005).
Since our last update, the First and Eighth Circuits have clarified the standards for determining the amount in controversy for purposes of CAFA removability. The First Circuit held that where a complaint does not allege the amount in controversy, a removing defendant must show by "a reasonable probability" that the amount exceeds $5 million—a test that is similar to the Ninth Circuit's "preponderance of the evidence" test. Amoche v. Guarantee Trust Life Ins. Co., 556 F.3d 41, 48, 50 (1st Cir. 2009). The First Circuit also noted that if a complaint expressly alleges less than $5 million in controversy, some courts required a removing defendant to demonstrate to a "legal certainty" that $5 million or more was in controversy. Id. at 49 n.2 (citing, e.g., Lowdermilk, 479 F.3d at 999-1000). Without deciding the issue, the court questioned "why the defendant should be put to a higher standard simply because the plaintiffs have pled an amount under $5 million." Id. This would appear to suggest a disagreement with the Ninth Circuit's approach.
In Bell v. Hershey Co., 557 F.3d 953 (8th Cir. 2009), the Eighth Circuit vacated a remand order in a case where the plaintiff artfully pled a total amount in controversy of $4.99 million and ruled that a defendant need only demonstrate by a preponderance of the evidence that the amount in controversy exceeds $5 million. Id. at 957. The court noted that requiring a legal certainty, like the Third and Ninth Circuits require when a plaintiff pleads less than $5 million in controversy, would "invert the legal certainty test" and could "have unintended consequences." Id. at 957-58 (quoting Guglielmino v. McKee Foods Corp., 506 F.3d 696, 702 (9th Cir. 2007) (O' Scannlain, J., specially concurring); see Lowdermilk, 479 F.3d at 1000; Morgan, 471 F.3d at 474. The court noted that Congress enacted CAFA to "expand federal diversity jurisdiction over class actions" and that such a removal standard would have an inconsistent tendency to limit federal jurisdiction. Bell, 557 F.3d at 957 (internal quotations and citations omitted). See also Pretka v. Kolter City Plaza II, Inc., 608 F.3d 744, 754 (11th Cir. 2010) ("The point is that a removing defendant is not required to prove the amount in controversy beyond all doubt or to banish all uncertainty about it. … The law does not demand perfect knowledge or depend any less on reasonable inferences and deductions than we all do in everyday life.").
4. Is There Federal Jurisdiction Under CAFA if Class Certification is Denied?
The federal appellate courts appear to have agreed that a federal district court retains jurisdiction over a case removed under CAFA after class certification is denied. A few federal district courts had remanded these actions after denying certification, holding that this deprived them of subject matter jurisdiction. The theory of these cases is that CAFA vests district courts with jurisdiction over "class actions" and that a case cannot be a "class action" once certification is denied. To date, every federal appellate court to address this issue (the Seventh, Ninth, and Eleventh Circuits) has rejected this argument and held that post-removal or post-filing events do not deprive the district court of jurisdiction. Therefore, a federal district court's jurisdiction cannot be ousted by a pro-defendant decision on class certification. This interpretation of CAFA is persuasive, consistent with long-standing Supreme Court precedent in other contexts, and avoids the peculiar circumstance in which a case can be dismissed on jurisdictional grounds after it has been aggressively litigated through the class certification stage.
B. The Supreme Court Holds That Rule 23 Trumps Certain State Rules Prohibiting Class Actions (Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co.)
The Supreme Court decided a second class action case this year, this one pitting a New York state rule hostile to class actions against Rule 23. In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 130 S. Ct. 1431 (2010), the Supreme Court held that Rule 23 trumps at least some state rules that prohibit class actions in state court. Some early commentary suggested that the Supreme Court had broadly invalidated any and all state anti-class action rules, but a close reading of the decision strongly suggests this is not the case. So long as a state rule looks like and operates as a damages limitation, it should be enforceable in federal court even after Shady Grove.
The Court in Shady Grove considered the effect of a New York statute that precludes class action suits to recover certain statutory minimum damages or penalties. The Court held that the New York law conflicts with, and is superseded by, Federal Rule of Civil Procedure 23, which provides the general criteria for class action suits in federal court. The Court's ruling allows class actions in federal court for violations of certain New York statutes even when those class actions could not be brought in state court and are expressly proscribed by New York law.
Under the Class Action Fairness Act of 2005, federal courts have jurisdiction over class actions raising state law claims when the amount in controversy exceeds $5 million and the parties are minimally diverse. 28 U.S.C. § 1332(d). In those cases—as in any federal case where subject-matter jurisdiction is based on the parties' diversity of citizenship—the federal court must apply state "substantive" law and federal "procedural" rules. See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Where both a federal procedural rule and a provision of state law would control a particular issue, federal courts sitting in diversity apply the federal rule so long as it does not violate the Rules Enabling Act, 28 U.S.C. § 2072, by abridging, enlarging or modifying any substantive right—including substantive rights guaranteed under state law.
In Shady Grove, the plaintiff sought relief on behalf of all parties who were allegedly owed statutory interest that had accrued on late payments from Allstate. Although Federal Rule of Civil Procedure 23 authorizes class actions if certain requirements are satisfied, a New York statute explicitly forbids class actions in cases asserting violations of statutes that impose a "penalty" such as statutory interest. N.Y. C.P.L.R. 901(b). The issue in Shady Grove was how courts should determine which of those rules should apply.
In a fractured decision, the Supreme Court held that Rule 23 trumps the New York anti-class action provision in federal court. Although five Justices arrived at the same result, they disagreed on most of the rationale behind the ruling. Justice Scalia's opinion, on behalf of himself and three other Justices, advocated a categorical approach under which any federal rule that regulates procedure "is valid in all jurisdictions, with respect to all claims, regardless of its incidental effect upon state-created rights." 130 S. Ct. at 1444. (Opinion of Scalia, J.). Such a framework would call into question numerous state law provisions, including those that limit class action remedies or prohibit class action treatment for certain types of claims.
Justice Stevens provided the fifth vote for the majority and filed a separate, narrower concurring opinion that ultimately controls the case. His opinion preserves important arguments for defendants that state law provisions limiting class actions can still survive in federal court. In Justice Stevens' view, determining whether a federal rule applies in a diversity action requires a case-by-case assessment of the state rule with which the federal provision conflicts. Under that approach, "federal rules must be interpreted with some degree of sensitivity to important state interests and regulatory policies," because some state laws, though nominally "procedural," are in fact "part of a State's framework of substantive rights or remedies." 130 S. Ct. at 1449. (Stevens, J., concurring) (internal quotation marks omitted). Justice Stevens concluded that a federal procedural rule, as applied, can violate the Rules Enabling Act by effectively abridging, enlarging, or modifying a state-created right or remedy. When a federal rule cannot be construed in a way to avoid such an outcome, "federal courts cannot apply the rule." Id. at 1452.
Justice Stevens ultimately determined that Section 901(b) is not the sort of procedural rule that is sufficiently interwoven with substantive rights to avoid the application of Rule 23. Importantly, however, he emphasized that each case must be addressed on its own merits:
In some instances, a state rule that appears procedural really is not. A rule about how damages are reviewed on appeal may really be a damages cap. A rule that a plaintiff can bring a claim for only three years may really be a limit on the existence of the right to seek redress. A rule that a claim must be proved beyond a reasonable doubt may really be a definition of the scope of the claim. These are the sorts of rules that one might describe as "procedural," but they nonetheless define substantive rights. Thus, if a federal rule displaced such a state rule, the federal rule would have altered the State's "substantive rights."
130 S. Ct. at 1453 n.8 (Stevens, J., concurring) (citation omitted).
Some early commentary has suggested that Shady Grove automatically renders state anti-class action rules unenforceable in federal court. A close reading of Justice Stevens' controlling concurring opinion suggests that this will not be the case, and that each state restriction needs to be judged on its own merits under the framework Justice Stevens announced. Time will tell how courts will respond to this apparent shift in the dynamic between state and federal rules. What is clear, however, is that the Court's decision will result in additional scrutiny of state efforts to restrict large damage awards and coercive litigation mechanisms. In addition, some state laws may benefit from revision to ensure that they remain effective in federal court as well as state court.
C. Plaintiffs Attempt to Circumvent Choice-of-Law Issues and Persuade Courts to Allow Nationwide Class Actions Predicated on One State's Law
In recent years, the federal courts of appeals have become increasingly reluctant to certify multistate or nationwide class actions. These courts have reasoned that the need to apply the law of more than one state creates individualized issues that defeat the "predominance" or manageability requirements of Rule 23(b)(3) or the "commonality" requirement of Rule 23(a). See, e.g., In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1015, 1018 (7th Cir. 2002); Castano v. Am. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996).
In the face of these unfriendly precedents, the plaintiffs' bar has been shopping a new theory that would impose a single state's law on an entire class action. Under this theory, plaintiffs purport to ask the court merely to apply "traditional" choice-of-law analysis to the claims of the entire class. And under that "traditional" analysis, they claim, the law of the defendant's home state should govern.
Recently, federal courts in California and New Jersey have certified multi-state or nationwide class actions on this basis. The district courts in the California cases noted that defendants—as the purported "proponents" of applying foreign (e.g., not California) law—failed to show that laws in other states conflict with California's Unfair Competition Law in "material" respects. See Menagerie Prods. v. Citysearch, No. 08-4263, 2009 WL 3770668, at *15 (C.D. Cal. Nov. 9, 2009); Mazza v. Am. Honda Motor Co., 254 F.R.D. 610, 621-24 (C.D. Cal. 2008). The Ninth Circuit may give the district courts some guidance on these issues in deciding Honda's Rule 23(f) petition in Mazza, 9th Cir. Case No. 09-80000 (oral argument held June 9, 2010).
In re Mercedes Benz Tele-Aid Contract Litigation, 257 F.R.D. 46 (D.N.J. 2009), also applied one state's law (New Jersey) to a nationwide class under "traditional" choice-of-law principles. The court stated that New Jersey's interests outweighed those of other states because the bulk of Mercedes-Benz's alleged misstatements and omissions occurred in New Jersey. Further, it concluded that the unjust enrichment laws of various states (such as New Jersey, New York, California, Missouri, Illinois, and Washington) do not conflict in any material respect.
These decisions are highly suspect on a number of grounds. First, to the extent they are predicated on assumptions that claims such as negligence, unjust enrichment, and consumer fraud or deception are the same across the states, they are plainly incorrect. Second, they also are doubtful applications of choice-of-law principles. Under any of the well-settled choice-0f-law tests, a state does not typically have the right to inject its law into transactions that occur entirely in other states. These decisions also are in significant tension with the Supreme Court's decision in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), which squarely held that the Due Process Clause and the Full Faith and Credit Clause preclude one state from applying its laws to the claims of out-of-state residents, unless the state has a "'significant contact or significant aggregation of contacts' to the claims asserted by each member of the plaintiff class … in order to ensure that the choice of [that particular state's] law is not arbitrary or unfair." Id. at 821-22 (quoting Allstate Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981)).
D. No Injury Suits and Statutes Return to the Limelight
In addition to deploying inventive choice-of-law theories, the plaintiffs' bar continues to push and experiment with "no injury" causes of action. The "no injury" cause of action appears to have originated in the products liability world. Stymied by the elements necessary to prove classic design defect claims, plaintiffs experimented with claims that certain "defects," while not leading to physical harm, created risk of "unmanifested injury" or "economic harm" by providing plaintiffs with "less than they paid for." In this way, plaintiffs tried to make manufacturers liable for alleged defects that caused no personal injury whatsoever, but were somehow not as "valuable" as what they claim they should have received.
Over time, the "no injury" class action has gravitated into other areas, most notably into challenges to marketing and labeling and into consumer products as varied as pet products, baby seats, and telephone cards based on the "economic injuries" stemming from their purchase of the respective products rather than any injury suffered from the product's use. See, e.g., Rule v. Fort Dodge Animal Hosp., Inc., 604 F. Supp. 2d 288 (D. Mass. 2009); Whitson v. Bumbo, No. 07-05597, 2009 WL 1515597 (N.D. Cal. Apr. 16, 2009); Grayson v. AT&T Corp., 980 A.2d 1137 (D.C. 2009). In this permutation of the "no injury" theory, an asserted "omission" by the defendant in marketing or labeling is said to have caused a plaintiff to purchase a product that otherwise would not have been purchased or to purchase the product at a higher price than what "should" have been charged. This simple formulation—omission leads to price inflation leads to injury—has been launched across a range of industries. While the "no injury" suit has received a fairly hostile reception in the products liability arena, it continues to received mixed reception in other settings, largely because it masquerades under a different name. In its most classic form, it is an attempt to impose a "fraud-on-the-market" theory outside of the securities context, where the efficient market hypothesis presumptively permits courts to excuse an affirmative showing of reliance. When applied outside of the securities arena, the no injury claim improperly bypasses elements (such as reliance, causation, and injury) that plaintiffs invariably need to establish under common state law claims. These types of no injury suits are likely to be the wave of the future.
In certain jurisdictions, the no injury suit might be a creature of statute. The D.C. Consumer Protections and Procedures Act prohibits unfair and deceptive trade practices and allows plaintiffs to bring suits "on behalf of the General Public." D.C. Code § 28-3905(k)(1). It forbids 32 unlawful trade practices, including false, deceptive or misleading advertising, and it declares these practices unlawful "whether or not any consumer is in fact misled, deceived or damaged thereby." D.C. Code § 28-3904. Remedies include treble damages or $1,500 per violation, whichever is greater; reasonable attorney's fees; punitive damages; an injunction against the use of the unlawful trade practice; and, in representative actions, additional relief as necessary. D.C. Code § 28-3905(k)(1). The D.C. Court of Appeals recently held that the D.C. Act does not require that a plaintiff suffered an injury-in-fact as a result of a defendant's trade practices and thus potentially authorizes any person to sue any company for engaging in an unlawful or deceptive trade practice—even if the consumer never purchased a company's product. Grayson, 980 A.2d at 1154. The D.C. Court of Appeals recently granted the defendants' request for en banc hearing. 989 A.2d 709 (D.C. 2010). If the D.C. Court of Appeals upholds the decision, D.C. would revert to pre-Proposition 64 law in California, and D.C. would likely become a class action magnet.
Another example is the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. Ann. § 501.201 et seq., ("FDUTPA") which is designed to "protect the consuming public and legitimate business enterprises from those who engage in unfair methods of competition, or unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce." Fla. Stat. Ann. § 501.202(2). A few Florida courts have held that this provision permits individuals to seek injunctive and declaratory relief without ever having purchased the product at issue. See, e.g., Gritzke v. M.R.A. Holding, LLC, 2002 WL 32107540, at *3-4 (N.D. Fla. Mar. 15, 2002). The Eleventh Circuit recently granted a 23(f) petition to review a district court order certifying a class action under FDUTPA, in which a key question is whether FDUTPA excuses traditional showings of causation and reliance. See Fitzpatrick v. Gen. Mills, Inc., 263 F.R.D. 687 (S.D. Fla. 2010).
E. Courts Weigh in on the Eisen Debate and on the Certification of Classes Seeking Monetary Relief Under Rule 23(b)(2)
The federal appellate courts continue to define the proper standard for evaluating whether the moving party has satisfied the requirements of Rule 23, particularly where this inquiry overlaps with the merits. The courts of appeals also exacerbated an already deep conflict over whether and to what extent claims for monetary relief can be certified under Rule 23(b)(2). In the last 18 months, the Third, Fifth, Seventh, Ninth, Tenth, and Eleventh Circuits have addressed these issues.
1. The Seventh Circuit Rules That Daubert Applies to Expert Evidence at the Class Certification Stage
On April 7, 2010, the Seventh Circuit also weighed in on the standard for evaluating expert testimony at the class certification stage in American Honda Motor Co. v. Allen, 600 F.3d 813 (7th Cir. 2010). In Allen, the district court had certified a Rule 23(b)(3) class of purchasers of a certain type of Honda vehicle who alleged a design defect. Id. at 814. To support their argument on predominance, plaintiffs "relied heavily on a report prepared by … a motorcycle engineering expert." Id. The district court "concluded that it was proper to decide whether the report was admissible prior to certification" and noted reservations about the reliability of the standards employed in the report, but it declined to exclude the report entirely because of the early stage of the proceedings. Id. at 814-15. Honda appealed the certification order, contending that the district court should have performed a full Daubert analysis. The Seventh Circuit agreed, reversed the certification grant, and remanded to the district court, holding that "when an expert's report or testimony is critical to class certification … a district court must conclusively rule on any challenge to the expert's qualifications or submissions prior to ruling on a class certification motion. That is, the district court must perform a full Daubert analysis before certifying the class if the situation warrants." Id. at 815-16.
2. The Fifth Circuit Demands Rigorous Analysis of Loss Causation at the Certification Stage, Including Weighing Conflicting Expert Testimony
In Fener v. Belo Corp., 579 F.3d 401 (5th Cir. 2009), the Fifth Circuit held that plaintiffs must present expert testimony in support of a motion for class certification as part of proving loss causation in a securities case. Plaintiffs' original certification motion did not meet Fifth Circuit standards for proving loss causation because they submitted only SEC reports, stock-price charts, analyst reports, and other similar information, but not the requisite expert testimony and supporting analytical research or event study necessary to show loss causation. Id. at 409. Although plaintiffs belatedly submitted an expert report and event study with their reply brief, the Fifth Circuit found this evidence fatally flawed and affirmed the district court's denial of certification. The court held that plaintiffs and their expert did not meet plaintiffs' burden to provide "'evidence linking the culpable disclosure to the stock-price movement.'" Id. at 410. In so holding, the Fifth Circuit reinforced the trend requiring rigorous analysis at the class certification stage, as the court demanded expert testimony and appropriate accompanying evidence at the class certification stage at least in connection with a loss causation inquiry and affirming the denial of certification where such evidence was either lacking altogether or could not hold up under the court's scrutiny.
3. The Third Circuit Reverses Certification of Largest Class Action in the History of the Americans with Disabilities Act
In Hohider v. United Parcel Service, Inc., 574 F.3d 169 (3d Cir. 2009), the Third Circuit reversed a district court order certifying the largest class in the history of the Americans with Disabilities Act. Gibson Dunn briefed and argued the case before the Third Circuit.
The appeal involved an order certifying a nationwide class of all current and former employees of United Parcel Service, Inc. who took medical leave and were allegedly deterred from returning to work. Plaintiffs alleged, among other things, that UPS had violated the Americans With Disabilities Act (ADA) by enacting a "100% healed policy" in which employees were not permitted to work following an injury without a full medical release. The United States District Court for the Western District of Pennsylvania certified the class. The Third Circuit reversed, holding that when inherently individualized claims, such as an ADA failure-to-accommodate claim, require sufficiently individual determinations at the liability stage that they lack cohesion and are not brought on "grounds generally applicable to the class," a class should not be certified under Rule 23(b)(2). The Third Circuit confirmed that in the Rule 23(b)(2) context, as in the Rule 23(b)(3) context, rigorous analysis of each of the Rule 23 elements is required at the class certification stage. Hohider is thus another important addition to the appellate decisions requiring district courts to conduct a rigorous analysis of the Rule 23 factors at the class certification stage, including by resolving disputed factual questions and competing expert testimony.
The Hohider decision also speaks to the limits of Rule 23(b)(2) certification. Rule 23(b)(2), by its terms, authorizes a class action if "the party opposing the class has acted on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." In addressing the monetary relief sought by the putative plaintiff class—including punitive and compensatory damages, and backpay—the Third Circuit joined other courts of appeals in barring Rule 23(b)(2) certification in cases in which substantial monetary relief is sought. Importantly, in questions not previously considered in that Circuit, the Hohider court confirmed that compensatory and punitive damages cannot be obtained on a classwide basis under Rule 23(b)(2). Similarly, with respect to backpay claims, the Court held that it is error to fail to treat such claims as monetary relief at the class certification stage in determining whether monetary relief predominates.
4. The En Banc Ninth Circuit Votes 6-5 to Affirm the Controversial Certification of Class Under Rule 23(b)(2) Against Wal-Mart
The Ninth Circuit's most significant class action decision since our last update is the controversial affirmance of the largest class action in history—the certification under Rule 23(b)(2) of a Title VII class purportedly seeking billions of dollars in backpay, among other forms of relief. Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (2010), cert. petition pending. Gibson Dunn is counsel of record in this case and has sought Supreme Court review of the decision. The Ninth Circuit's decision deepens conflicts across a range of Rule 23 issues, including whether and to what extent classes seeking monetary relief (such as backpay) can be certified under Rule 23(b)(2) and whether and to what extent Daubert and contested expert and evidentiary issues must be resolved at the class certification stage (even if they conflict with the merits). If the Supreme Court accepts the case, it will have an opportunity to address a host of core Rule 23 issues that have divided the circuits both in labor class actions and beyond.
5. The Tenth and Eleventh Circuits Require Rigorous Inquiry into Rule 23 Factors at Certification Stage Even If It Overlaps with a Merits Inquiry
The Tenth and Eleventh Circuits joined the trend requiring a district court to make the necessary Rule 23 findings at the class certification stage, even if those issues are intertwined with the merits. See Vallario v. Vandehey, 554 F.3d 1259, 1266 (10th Cir. 2009) (holding no "'impermeable wall' exists between the merits of a case and a district court's decision whether to certify a class"); Williams v. Mohawk Indus., Inc., 568 F.3d 1350, 1358 (11th Cir. 2009) ("Although a court should not determine the merits of a claim at the class certification stage, it is appropriate to consider the merits of the case to the degree necessary to determine whether the requirements of Rule 23 will be satisfied. A district court must consider, for example, how the class will prove causation and injury and whether those elements will be subject to class-wide proof.").
F. The Supreme Court Leaves the Door Open for Class Arbitration Agreements and Class Waivers in Consumer Agreements
The enforceability of class action waivers continues to be a hot topic, and federal and state courts continue to invalidate class action waivers under several different theories. The most common line of attack is that class action waivers are unconscionable and that they violate state public policy. Courts that invalidate waivers under these theories are generally concerned that enforcing the waivers would deter plaintiffs from redressing alleged violations of their rights because the cost of individual arbitration would exceed the expected damages that they would receive.
In Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), the Supreme Court held that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Id. at 1775. However, the Court left several important issues unresolved. For example, it did not decide "what contractual basis may support a finding that the parties agreed to authorize class-action arbitration." Id. at 1776 n.10. Because Stolt-Nielsen construed federal law, states purporting to recognize "a 'default rule' under which an arbitration clause is construed as allowing class arbitration in the absence of express consent," id. at 1769, may not feel bound to construe silence as precluding class arbitration. Nor did the Court address the question, left open by the lack of a majority in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), of whether an arbitrator or a court should decide if an arbitration clause contains an agreement allowing class arbitration.
In the wake of its decision in Stolt-Nielsen, the Court vacated and remanded a Second Circuit decision that had invalidated class action waivers in arbitration clauses under the Federal Arbitration Act. See In re Am. Express Merchants' Litig., 554 F.3d 300, 319-20 (2d Cir. 2009), vacated and remanded by 30 S. Ct. 2401 (2010). The Second Circuit had concluded that class action waivers are not per se unenforceable, but that a waiver would deprive the plaintiffs of substantive rights because the claims were of very low value and not worth pursuing through individual claims. Id. at 304. It is unclear what effect the Supreme Court's opinion in Stolt-Nielsen will have because the Second Circuit based its decision that the arbitration provision was unenforceable on contract law. Id. at 320 ("Section 2 of the FAA … provides that an agreement to arbitrate 'shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.' Given that we believe that a valid ground exists for the revocation of the class action waiver, it cannot be enforced under the FAA.").
Relatedly, the United States Supreme Court granted certiorari to the Ninth Circuit in AT&T Mobility LLC v. Concepcion, 130 S. Ct. 3322 (2010), which presents the question of "[w]hether the Federal Arbitration Act preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures—here, class-wide arbitration—when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims." The Ninth Circuit in Laster v. AT&T Mobility LLC, 584 F.3d 849, 856-59 (9th Cir. 2009), had answered this question in the negative.
G. The Rise of Ascertainability as an Independent Check on Class Certification
Rule 23 by its express terms authorizes suits by "one or more members of a class" to bring suit provided that the requirements of Rule 23(a) and (b) are met. To have a "class," its members must be ascertainable. Although "ascertainability" is not an enumerated element of Rule 23(a) and (b), many defendants have stated that it is either an antecedent requirement for a class action, an implied requirement of Rule 23, or a requirement that flows directly and necessarily from the enumerated Rule 23(a) and (b) factors. See, e.g., John v. Nat'l Sec. Fire & Cas. Co., 501 F.3d 443, 445 (5th Cir. 2007) ("The existence of an ascertainable class of persons to be represented by the proposed class representative is an implied prerequisite of Federal Rule of Civil Procedure 23."); Romberio v. Unumprovident Corp., 2009 WL 87510 at *7 (6th Cir. Jan. 12, 2009) (same); see also Weiner v. Snapple Bev. Corp., 2010 U.S. Dist. LEXIS 79647, at *39-40 (S.D.N.Y. Aug. 3, 2010) (noting the implied requirement of ascertainability "turns on the definition of the proposed class"); Grimes v. Rave Motion Pictures Birmingham, LLC, 264 F.R.D. 659, 663 (N.D. Ala. 2010) ("[C]ourts have universally recognized that the first essential ingredient to class treatment is the ascertainability of the class."). The ascertainability concept requires a plaintiff to demonstrate—at the time of certification-that the class can be defined in a sufficiently objective fashion as to ensure that class members can be identified.
Defendants have increasingly relied on the ascertainability requirement to attack class definitions that by their terms encompass both injured and uninjured persons in the class definition, or that ex ante could not permit the court to decide "who is in and who is out" without individualized proof. As discussed below, this is an increasingly common and promising basis for defendants opposing certification of state class actions under California's Unfair Competition Law.
H. The Courts Grapple With Preclusion Issues in Class Cases
Although the Supreme Court has stated that preclusion principles operate the same way in class actions as in individual actions, in practice this has proved a more complicated precept to state than to apply. See Cooper v. Fed. Reserve Bank of Richmond, 467 U.S. 867, 874 (1984) ("There is of course no dispute that under elementary principles of prior adjudication a judgment in a properly entertained class action is binding on class members in any subsequent litigation."). The preclusive effect of factual findings and/or judgments in class actions continues to gain prominence, as would-be plaintiffs try to escape the preclusive effect of earlier class action settlements, or try to invoke estoppel against defendants based on litigation victories in earlier class litigation. Defendants also have tested the preclusive effect of federal court orders denying class certification when would be-plaintiffs plead the same theory in a follow-on class action in state court.
Many of these issues remain in flux. In Brown v. R.J. Reynolds Tobacco Co., 611 F.3d 1324 (11th Cir. July 22, 2010), the Eleventh Circuit added the latest chapter to the confusion created by the Supreme Court of Florida's ruling in Engle v. Liggett Group., Inc., 945 So. 2d 1246 (Fla. 2006) that so-called Phase I findings in a class action suit by all smokers in Florida or their survivors who suffered from "medical conditions … caused by their addiction to cigarettes that contain nicotine" could have preclusive effect in follow-on litigation. The Phase I findings were general in scope and involved purportedly common issues concerning the general health effects of smoking. Brown, 611 F.3d at 1327. In Engle, the Supreme Court of Florida held that, although the plaintiffs could not prosecute their claims as a class, the general Phase I findings nonetheless could have "res judicata" effect in individual follow-on cases. The plaintiffs have sought to convert this statement into a federal court ruling estopping defendants from contesting various elements of the plaintiffs' damages claims. In Brown, the Eleventh Circuit held that the scope of the factual findings in Engle remained undetermined, and that "[u]ntil the scope of the factual issues decided in the Phase I approved findings is determined, it is premature to address whether those findings by themselves establish any elements of the plaintiffs' claims." Id. at 1336. The case has been remanded to the district court, where these issues will be vetted anew.
In Baycol Products Liability Litigation, 593 F.3d 716 (8th Cir. 2010), the court held that a federal court order denying the certification of a nationwide class seeking a refund on a cholesterol therapy had issue preclusive effect in a follow-on state court suit that sought to certify a class of West Virginia purchasers of the drug. Baycol relies on the Seventh Circuit's decision in In re Bridgestone/Firestone, 333 F.3d 763 (7th Cir. 2003), which likewise accorded preclusive effect to an order denying class certification in follow-on state litigation. Baycol and Bridgestone/Firestone should help defendants defeat second-bite-at-the-apple attempts to assert class claims that were defeated in federal court, but, as with many class issues, the circuits appear to take different views on these issues, with at least part of the disagreements stemming from views about a district court's power to enjoin later state court proceedings under the relitigation exception to the Anti-Injunction Act. See, e.g., J.R. Clearwater, Inc. v. Ashland Chem. Co., 93 F.3d 176, 179 (5th Cir. 1996) (holding that a federal district court that has denied class certification may not enjoin certification of a similar class in state court); In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 134 F.3d 133, 146 (3d Cir. 1998) (finding that denial of certification is not preclusive because it is discretionary, procedural decision).
I. Courts Require Further Guidance as to the Degree to Which Settlement Classes Should Be Treated Differently at the Certification Stage
In Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Supreme Court issued its most definitive statement to date concerning the degree to which a court should analyze the Rule 23 class certification factors differently when evaluating a settlement class as opposed to a litigation class. The Court acknowledged that "[s]ettlement is relevant to class certification." Id. at 619. In particular, when "[c]onfronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems [in connection with an inquiry under Rule 23(b)(3)(D)], for the proposal is that there be no trial." Id. at 620. However, the Court insisted that "other specifications of the Rule—those designed to protect absentees by blocking unwarranted or overbroad class definitions—demand undiluted, even heightened, attention in the settlement context." Id. The sprawling class of putative class members under the Court's review, each of whom "was, or some day may be, adversely affected by past exposure to asbestos products manufactured by one or more of 20 companies" id. at 597, could not meet these "other specifications." In particular, the named representatives could not adequately represent all of the many subgroups in the class, many of which had potentially conflicting interests.
Despite the Court's guidance in Amchem, lower courts have applied these principles differently. Some courts have not hesitated to view settlement classes as critically different from litigation classes, without appearing to confine their application of that distinction to issues of manageability. See, e.g., In re Mexico Money Transfer Litig., 267 F.3d 743, 747 (7th Cir. 2001); Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 440 (4th Cir. 2003); In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 529 (3d Cir. 2004). At least some of these courts have viewed Amchem as primarily addressing adequacy issues, suggesting that the difference between settlement and litigation classes is still relevant at the certification stage, as long as the named representatives adequately represent the class. See, e.g., In re Prudential Ins. Co. of Am. Sales Practice Litig. Agent Actions, 148 F.3d 283, 308 (3d Cir. 1998). Other courts have appeared to view Amchem as allowing considerably less flexibility in this regard. See, e.g., Hanlon v. Chrysler Corp., 150 F.3d 1011, 1023-24 (9th Cir. 1998). Recently, in Sullivan v. DB Investments, Inc., 2010 WL 2736947 (3d Cir. July 13, 2010), the Third Circuit made clear that parties could not use the certification of a settlement class to provide a cause of action to subgroups of plaintiffs who would have had no individual cause of action whatsoever under applicable laws and thus could not in effect "use class action procedures to create a bridge to recovery where otherwise none would exist." Id. at *14 n.16. The Third Circuit vacated this decision pending an en banc hearing. 2010 WL 3374167 (3d Cir. Aug. 27, 2010).
Resolution of these issues is particularly critical in that some courts have held defendants to have waived their Rule 23(a) and (b) defenses (other than manageability) to certification of a litigation class if they support the certification of a settlement class, but the settlement is not approved. For example, in Carnegie v. Household International, Inc., 376 F.3d 656 (7th Cir. 2004), cert. denied, 543 U.S. 1051 (2005), the court of appeals reversed the district court's approval of a class settlement. The district court to whom the case was reassigned then certified what was essentially the same class. The defendants appealed this certification ruling, but the Seventh Circuit held that they were precluded by the doctrine of judicial estoppel from challenging the adequacy of the class due to their endorsement of a settlement class. Id. at 659-61. The court reasoned that the policy underlying the doctrine "is fully engaged when a party obtains a judgment on a ground that it later repudiates," which was what the defendants had done here by first obtaining the district court judgment approving the settlement class, and then trying to dispute the propriety of a litigation class. Id. at 660. In light of these and other difficulties, the Supreme Court may well weigh in further on this issue in the near future.
III. Key Developments and Unresolved Issues (State Courts)
A. California's Proposition 64
California's Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq., the "UCL") is a popular statute among plaintiffs' counsel in class action litigation that authorizes plaintiffs to sue for conduct deemed "unlawful" (violations of virtually any law, even if the underlying statute provides no private right of action), "fraudulent" (conduct that is "likely to deceive" reasonable consumers), and "unfair" (defined vaguely and inconsistently by appellate courts). In 2004, following several high-profile abuses of the UCL, California voters approved Proposition 64, a statewide initiative that modified some of the most pernicious aspects of the UCL by requiring named plaintiffs to demonstrate (1) that they suffered "injury in fact," (2) and "lost money or property," (3) "as a result of the unfair competition," and to otherwise comply with the procedural requirements governing class actions in California.
B. Tobacco II and Subsequent Applications
In re Tobacco II Cases, 46 Cal. 4th 298 (2009), provided the Supreme Court of California's first opportunity to construe and apply the Proposition 64 standing amendments. Those cases involved putative UCL class actions claiming that the defendants engaged in a long-term advertising campaign that deceived consumers about the health risks of tobacco products. The trial court ruled that Proposition 64 required each class member to demonstrate that he or she purchased cigarettes from the defendants and did so because of the allegedly deceptive advertising. Because such a showing by each class member would mean that individual issues would predominate over any common questions, the trial court de-certified the class. The California Court of Appeal affirmed.
The California Supreme Court granted review to consider two questions concerning Proposition 64:
- Who, in a UCL class action, must comply with Proposition 64's standing requirements of establishing "injury in fact," the class representatives or all unnamed class members?
- What is the causation requirement for purposes of establishing standing under the UCL, and in particular what is the meaning of the phrase "as a result of"?
1. Standing of Absent Class Members
The Supreme Court issued a 4-3 opinion that was a mixed bag for defendants. In response to the first question, the Tobacco II majority held that only the named class representatives—and not absent class members—must satisfy the standing requirements of Proposition 64. 46 Cal. 4th at 324. The Court determined that the ballot materials that accompanied Proposition 64 did not reflect voter intent to alter "accepted principles" of class action procedure that analyze standing only in regards to class representatives. Id. at 321.
As the dissent in Tobacco II observed, however, this rule is not so "well-established" in the federal courts. Id. at 331-32 (Baxter, J., dissenting). In fact, both state and federal courts have "stressed that the definition of a class cannot be so broad as to include persons who would lack standing to bring suit in their own names." Id. at 331 (Baxter, J., dissenting). As more state law class actions are removed to federal court under the Class Actions Fairness Act (CAFA), defendants will have an opportunity to challenge Tobacco II's holding that only named class representatives must establish standing. Under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny, federal courts sitting in diversity must apply federal procedure, including federal standing rules. Defendants may argue that because the Supreme Court of California has twice stated that Proposition 64 modified only procedural aspects of the UCL, see Tobacco II, 46 Cal. 4th at 314; Californians for Disability Rights v. Mervyn's, LLC, 39 Cal. 4th 223, 227 (2006), it should have no application at all in federal UCL litigation under Erie. Despite the Tobacco II majority's insistence that established federal law requires that only named plaintiffs establish standing, there are a number of authorities to the contrary. In 2009, the Northern District of California dismissed a class action suit brought by a class including all purchasers of a certain Apple computer on the grounds that some class members lacked standing and "[n]o class may be certified that contains members lacking Article III standing…. The class must therefore be defined in such a way that anyone within it would have standing." Sanders v. Apple, Inc., 672 F. Supp. 2d 978, 991 (N.D. Cal. 2009) (citing Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006)).
Next, the Tobacco II majority concluded that the "as a result of" term demands proof of "actual reliance … in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions." 46 Cal. 4th at 306. However, the majority limited this reliance requirement in several major respects:
- First, although a plaintiff must show that the misrepresentation or omission was an "immediate" cause of the injury, the plaintiff need not establish that the misrepresentation was the only such cause. Id. at 326.
- Second, the court may presume reliance if the misrepresentation at issue is "material." Id. at 327. The majority explained that a misrepresentation is material "if 'a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question' …, and as such materiality is generally a question of fact unless the 'fact misrepresented is so obviously unimportant that the jury could not reasonably find that a reasonable man would have been influenced by it.'" Id. (citations omitted).
- Third, when a plaintiff "alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements." Id. at 328.
- Fourth, "an allegation of reliance is not defeated merely because there was alternate information available to the consumer-plaintiff, even regarding an issue as prominent as whether smoking causes cancer." Id.
- Fifth, consistent with its normal practice of deciding UCL questions as narrowly as possible, the Court limited its holding to private UCL claims alleging fraudulent business practices. The majority observed that an actual reliance requirement may have "no application" in cases involving "unlawful" or "unfair" business practices, id. at 325 n.17, or suits seeking only injunctive relief, id. at 320 n.13.
The Court also limited its holding to specific types of fraud allegations—namely, "a fraud theory involving false advertising and misrepresentations to consumers." Id. at 325 n.17. One fertile anticipated area of litigation will be how lower courts apply this ruling to UCL claims based on other theories of fraud, such as concealment.
Finally, and apart from the standing question, a UCL plaintiff in federal court must still satisfy Federal Rule of Civil Procedure 9(b) and plead the causation elements of a UCL fraud claim with specificity, even if such specificity is not required in California state court. See, e.g., In re Actimmune Mktg. Litig., No. 08-02376, 2009 WL 3740648, at *13 (N.D. Cal. Nov. 6, 2009).
3. Applications of Tobacco II
The federal and state courts have not applied the divided decision in Tobacco II in a consistent manner. Immediately after the decision, many defense counsel spilled a lot of ink lamenting the majority's evisceration of Proposition 64 and predicting a return to the pre-2004 days of boundless standing. But, while Tobacco II addressed the issue of who in a class must establish standing, it also made clear that even if named plaintiffs establish standing, a trial court must still determine if a proposed class meets California's other requirements for class certification, including an ascertainable class with a defined community of interest, a common set of legal and factual issues, and class claims that are typical of those of the named plaintiffs. Consequently, many of the same arguments and much of the same evidence that defendants would use to attack the standing of absent class members may be relevant to ascertainability, typicality, predominance, and the other Rule 23 factors. Indeed, since the Tobacco II decision, several courts have applied this analysis to deny certification.
For example, in Cohen v. DirecTV, Inc., 178 Cal. App. 4th 966 (2009), the California Court of Appeal affirmed the trial court's denial of a nationwide UCL false advertising class on the grounds that common factual issues did not predominate because, among other problems, each class member would need to prove that DirecTV's alleged false advertising induced the purchase of high-definition services. Id. at 979-80. The court held that Tobacco II did not alter this conclusion, because that decision did not assess the issue of commonality, which "is a matter addressed to the practicalities and utilities of litigating a class action in the trial court." Id. at 981. Even if only a named plaintiff would need to establish reliance for standing purposes, this did not eliminate the requirement that each class member show that he or she was actually induced by the alleged misrepresentations to purchase services from DirecTV. Id. The California Supreme Court denied the plaintiff's petition for review and de-publication of Cohen.
In Hodes v. Van's International Foods, No. 09-01530, 2009 WL 2424214 (C.D. Cal. July 23, 2009), the district court also denied certification in a UCL action because the proposed class failed to satisfy Rule 23(b)(3)'s predominance requirement. Id. at *4. Assuming that Tobacco II required only that a named plaintiff demonstrate reliance in a UCL class action, the court concluded that common questions did not predominate over a host of individual issues including who purchased the defendant's products, which type of product was purchased, how many products were purchased, and whether the purchased product was defective in a relevant way. Id.
C. The Meaning of "Injury In Fact" and "Lost Money Or Property"
Tobacco II addressed both who in a putative class must establish standing, and the meaning of the term "as a result of" under Proposition 64. However, that decision did not interpret Proposition 64's other requirements of "injury in fact" and "lost money or property."
In an opinion focused on questions of antitrust standing, the Court also addressed Proposition 64's "lost money or property" requirement in Clayworth v. Pfizer, Inc., 49 Cal. 4th 758 (2010). In that case, a group of pharmacies brought antitrust and unfair competition claims against a group of major pharmaceutical companies and their trade association. Id. at *2. The defendants argued that the pharmacies lacked standing to pursue their UCL claims because they "passed on" any price increases to their customers, and thus they did not lose any money or property as required by Section 17204. Id. at 766. Reversing a grant of summary judgment for the defendants, the Court rejected this argument, holding that the plaintiffs "lost money" in the form of "the overcharges they paid." Id. at 788. The Court also aligned itself with intermediate appellate decisions rejecting the argument that plaintiffs may not pursue restitution under the UCL if they did not purchase the product or service "directly" from the defendant. Id. ("Pharmacies have established standing [for UCL purposes] … Pharmacies acted as retailers for Manufacturers' drugs and thus indirect business dealings with Manufacturers.") (citing Shersher v. Super. Ct., 154 Cal. App. 4th 1491, 1499-1500 (2007)).
The Court also addressed an important question that had divided some lower courts in the wake of Proposition 64: can a plaintiff who is otherwise unable to establish an entitlement to restitution maintain a claim for injunctive relief after Proposition 64? Some defendants had argued that the "lost money or property" requirement of Section 17204 to establish private party standing entailed that plaintiffs could not seek injunctive relief unless they could also seek restitution. After all, Section 17203 specifically requires that private plaintiffs pursuing injunctive relief must satisfy the "standing requirements" of Section 17204. These issues usually arise in competitor cases, where a plaintiff competitor is unable to show an entitlement to restitution and is limited to pursuing injunctive relief through the UCL. But the unanimous Court ruled that private plaintiffs who establish standing under Section 17204 are also free to seek injunctive relief, because "the right to seek injunctive relief under section 17203 is not dependent on the right to seek restitution; the two are wholly independent remedies." Id. at 790.
In addition, the Court will address the meaning of "lost money or property" in the closely watched Kwikset Corp. v. Superior Court, which is one of several recent cases challenging lock sets (and related products) for allegedly misrepresenting their status as "Made in the U.S.A." The Court of Appeal held that the plaintiffs had suffered injury in fact insofar as the plaintiffs alleged that they would have not bought Kwikset's locks but for the alleged false labeling. 90 Cal. Rptr. 3d 123, 129 (Cal. Ct. App. 2009), review granted and opinion superseded, 97 Cal. Rptr. 3d 271 (Cal. 2009). But the court rejected plaintiffs' argument that they had "lost money or property" "as a result of" any fraudulent business practice because they received "the benefit of their bargain"—a fully functioning lock set for which they paid no premium—and therefore suffered no restorable economic loss. Id. at 129-30. The Supreme Court of California granted review to determine the meaning of the "injury in fact" and "lost money or property" requirements of Proposition 64.
Kwikset is fully briefed and awaiting argument.
D. Rise of Public-Private UCL Suits
In addition to imposing stricter standing requirements, Proposition 64 also imposed two other important changes in private UCL actions: first, private plaintiffs seeking relief on behalf of others must comply with California's class certification rules, and second, the initiative barred private recovery of civil penalties. Since the passage of Proposition 64, enterprising plaintiffs have begun to partner with public prosecutors to avoid these limitations altogether. We anticipate an increased growth in these alliances in the near term.
On July 26, 2010, the Supreme Court of California took an important step in facilitating these partnerships by expanding the authority of public entities to hire private counsel on a contingent fee basis. See County of Santa Clara v. Super. Ct., 50 Cal. 4th 35 (2010). While that particular case involved nuisance claims, the Court's ruling encourages private-public partnerships as long as "the government attorneys would maintain full control over the litigation." Id. at 47. Accordingly, "retention of private counsel on a contingent-fee basis is permissible in such cases if neutral, conflict-free government attorneys retain the power to control and supervise the litigation." Id. at 58. The Court also explained that governmental attorneys must directly supervise the litigation and make "discretionary decisions vital to an impartial prosecution." Id. at 59. In particular, contingent fee agreements "must provide: (1) that the public-entity attorneys will retain complete control over the course and conduct of the case; (2) that government attorneys retain a veto power over any decisions made by outside counsel; and (3) that a government attorney with supervisory authority must be personally involved in overseeing the litigation." Id. at 64.
E. Class Action Waivers
Just as federal courts have expressed concerns about class action waivers, so too have state courts found them problematic. For example, the Massachusetts Supreme Court, in Feeney v. Dell, Inc., held that class action waivers in consumer contracts are unconscionable and unenforceable because they are contrary to Massachusetts public policy, which "strongly favors [consumer protection law] class actions" and "the aggregation of small consumer protection claims." 908 N.E. 2d 753, 762 (Mass. 2009). On the other side of the country, California state courts continued the trend of invalidating class action waivers and struck down class action waivers in employment agreements, even when individual claims could approach $30,000. See Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277, 1282, 1295 (2009); Sanchez v. W. Pizza Enters., Inc., 172 Cal. App. 4th 154, 181 (2009).
Despite these cases, there were some encouraging developments for class action defendants. In Cronin v. CitiFinancial Services, Inc., a Third Circuit panel distinguished Homa (discussed above) and found that a class action waiver in a consumer loan agreement was enforceable under Pennsylvania law. 352 F. App'x. 630, 633 (3d Cir. 2009). The court interpreted Pennsylvania law as not deeming all class action waivers per se unconscionable, but only those where "the particular class action waiver effectively ensures that a defendant will never face liability for wrongdoing." Id. at 636. Federal district courts in Colorado, West Virginia, and Mississippi upheld class action waivers and rejected state law unconscionability arguments.
F. Eisen and Predominance Debates
State courts also continue to disagree on the extent to which trial courts may delve into the merits of a case when evaluating class certification criteria. As noted in last year's update, a number of state courts have adopted the federal approach of resolving factual issues at the certification stage, even if they overlap with the merits, so long as the analysis is limited to what is necessary to make requisite certification determinations. See, e.g., Cruz v. Unilock Chicago, Inc., 892 N.E.2d 78, 92 (Ill. App. Ct. 2008). However, some state courts have refused to adopt the federal approach. See, e.g., Gen. Motors Corp. v. Bryant, 374 285 S.W.3d 634, 642 (Ark. 2008); In re S.D. Microsoft Antitrust Litig., 657 N.W.2d 668, 675-77 (S.D. 2003); Howe v. Microsoft Corp., 656 N.W.2d 285, 291, 293-95 (N.D. 2003). The last year brought more division over the issue.
In Mattson v. Montana Power Co., the Montana Supreme Court adopted the IPO approach to class certification, explaining "that the approach of the federal courts [in determining class certifications] is sound." 215 P.3d 675, 694 (Mont. 2009). In Whitaker v. 3M Co., a Minnesota Court of Appeal also adopted the federal approach. 764 N.W.2d 631 (Minn. Ct. App. 2009). The court held that "parties moving for class certification under Minn. R. Civ. P. 23 must prove, by a preponderance of the evidence, that the certification requirements of the rule are met. This means that district courts must address and resolve factual disputes relevant to class-certification requirements, including disputes among expert witnesses." Id. at 640.
The Michigan Supreme Court, however, refused to adopt "the federal 'rigorous analysis' requirement" in Henry v. Dow Chemical Co., 772 N.W.2d 301, 311 (Mich. 2009). Instead, the court explained that "when it is necessary to look beyond a party's assertions to determine whether class certification is proper, the courts shall analyze any asserted facts, claims, defenses, and relevant law without questioning the actual merits of the case." Id. at 312. Similarly, in Wright v. Honeywell International, Inc., 989 A.2d 539, 552 (Vt. 2009), the Vermont Supreme Court explained that "[a]lthough trial courts must assure that questions common to the putative class predominate … they must not rigidly apply Rule 23 so as to prematurely determine the merits of the case and deny a class of indirect consumers … the opportunity to present their case to a jury." State courts are likely to continue to struggle with the issue in the coming year.
G. The Extraterritorial Application of the UCL and Other Consumer Protection Statutes
In 2008, the Ninth Circuit held that the UCL "does not apply to allegedly unlawful behavior occurring outside California causing injury to nonresidents of California." Sullivan v. Oracle Corp., 547 F.3d 1177, 1187 (9th Cir. 2008). The Ninth Circuit subsequently certified the case for review by the California Supreme Court. Sullivan v. Oracle Corp., 557 F.3d 979 (9th Cir. 2009). Among the issues before the California Supreme Court is whether an out-of-state plaintiff can assert a claim for a violation of the UCL predicated on a California employer's violation of the Federal Fair Labor Standards Act. No decision has been issued in the case, but a reversal of the Ninth Circuit's original decision in Sullivan could re-invigorate efforts by the plaintiffs' bar to file nationwide class actions predicated solely on UCL violations where there is no discernable connection to California.
Similarly, in January 2010, the Washington Supreme Court held that the Washington Consumer Protection Act could not be applied in extraterritorial fashion to a putative nationwide class of AT&T Wireless consumers. The named plaintiffs in Schnall v. AT&T Wireless Services, Inc., 225 P.3d 929 (Wash. 2010), alleged that the company misled consumers throughout the country when it billed them for a charge that was not included in the advertised monthly rates and was not described clearly in billing statements. The Washington Supreme Court upheld choice of law provisions in the applicable contracts that categorized consumers by area codes, and it reversed the Court of Appeals' decision approving certification of a nationwide class. Among other things, the Washington Supreme Court observed that "nothing in our law indicates that [Washington Consumer Protection Act] claims by nonresidents for acts occurring outside of Washington can be entertained under the statute. … This geographic and jurisdictional limitation originates in the [Act's] history as a tool used by the State attorney general to protect the citizens of Washington." Id. at 938. See also Morrissey v. Nextel Partners, Inc., 2009 WL 400030, at *12 (N.Y. Sup. Ct. Feb. 19, 2009) (declining to certify a putative multi-state class based on allegations concerning cell phone subscribership agreements, noting that the court would be "precluded from applying New York consumer protection laws to claims arising out-of-state" in the class action context, and declining to interpret at least thirty other states' consumer protection statutes).
Class action filings will undoubtedly continue full speed ahead. Plaintiffs may begin to concentrate these filings even more in particular jurisdictions with plaintiff-friendly laws, especially when those jurisdictions willingly apply those laws to residents of other states. In the consumer class action context, the Ninth Circuit—already surging ahead of all other circuits in relevant filings—may increase this lead if its courts apply California's newly interpreted Unfair Competition Law even beyond that state's borders. One way or the other, we expect the U.S. Supreme Court to weigh in soon to resolve some deepening variances between the circuits in the application of Rule 23 and in the proper approach towards other class action issues, such as settlement-only class certifications.