Class action defense litigators, particularly those involved in putative product mislabeling or warranty class actions, should be aware of a recent federal district court decision that accepted a creative option for defeating class certification-the defendant's implementation of a voluntary product refund and replacement program providing a comparable remedy to what the putative class might recover in court. In re Aqua Dots Prods. Liab. Litig., 2010 WL 3927611 (N.D. Ill. Oct. 4, 2010). In so doing, the decision in Aqua Dots is in keeping with a trend in class action jurisprudence concerning the scope of Federal Rule of Civil Procedure 23(b)(3)'s requirement that class litigation be "superior to other available methods for fair and efficient adjudication of the controversy." Despite Rule 23(b)(3)'s express reference to other "methods . . . of adjudication" (emphasis added), the court in Aqua Dots adopted the majority "policy" approach to construing the superiority requirement and concluded that the existence of superior "non-judicial methods" for resolving disputes-such as voluntary refund and replacement programs-can defeat certification.

The 'Textual' And 'Policy' Approaches To Construing Rule 23's Superiority Requirement

The debate over the effect of a "non-judicial" resolution mechanism on Rule 23(b)(3)'s superiority requirement can be traced to Berley v. Dreyfus & Co., 43 F.R.D. 397 (S.D.N.Y. 1967), a putative securities fraud class action. The Berley court denied certification because it found that defendant's offer to refund investors the purchase price of the security at issue was superior to a class action. The court acknowledged that the refund was "not quite 'another method for . . . adjudication'" under Rule 23(b)(3). But the court rejected a literal interpretation of that provision because, "read as a whole [Rule 23] reflects a broad policy of economy in the use of society's difference-settling machinery[,]" a policy that would be negated if class litigation were permitted in the face of "readily available" refunds. A majority of courts have adopted Berley and its "policy" approach to interpreting and applying the superiority requirement. See In re Con-Agra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689, 699-700 (N.D. Ga. 2008) (denying certification where defendants offered refunds to purchasers of potentially salmonella-tainted peanut butter that likely would exceed any judicial disgorgement remedy); In re Phenylpropanolamine (PPA) Prods. Liab. Litig., 214 F.R.D. 614, 622 (W.D. Wash. 2003) (denying certification based on defendants' refund to purchasers of PPA-containing products); Chin v. Chrysler Corp., 182 F.R.D. 448, 463 (D.N.J. 1998) (denying certification based on defendant's offer to reimburse repair costs for defective anti-lock brake systems); see also 7AA Wright, Miller & Kane, Federal Practice & Procedure § 1779 ("The court need not confine itself to other available 'judicial' methods of handling the controversy in deciding the superiority of the class action" because a non-judicial alternative may obviate the need for court involvement at all).

A few courts have refused to follow the "policy" approach, favoring instead a literal construction of Rule 23(b)(3) that limits the superiority analysis to whether a class action would be superior to judicial methods of resolution. See Amalgamated Workers Union of Virgin Islands v. Hess Oil Virgin Islands, 478 F.2d 540, 543 (3d Cir. 1973) ("We find no suggestion in the language of Rule 23, or in the committee notes, that the value of a class suit as a superior form of action was to be weighed against the advantages of an administrative remedy"); Turner v. Murphy Oil USA, Inc., 234 F.R.D. 597, 610 (E.D. La. 2006) (rejecting argument that private settlement program for oil spill damages was "superior" because the "argument confuses the superiority standard under Rule 23[, which considers] whether the class action format is superior to other methods of adjudication, not whether a class action is superior to an out-of-court, private settlement program").

Aqua Dots

The district court in Aqua Dots expressly rejected the "textual" approach to interpreting Rule 23(b)(3)'s superiority requirement in favor of the "policy" approach. The distributor of Aqua Dots, a craft kit for children, issued recalls of the kits following reports that children had fallen comatose after swallowing beads in the kits tainted with the so-called "date rape" drug, GHB. The distributor offered widely publicized refund and replacement options for purchasers, and in fact provided hundreds of thousands of refunds to purchasers on request. Plaintiffs, who purchased Aqua Dots but declined to return them for the promised refund, sought to certify a putative non-personal injury class action. Defendants argued that class certification should be denied because a class action would not be superior to the distributor's refund and replacement program.

The district court agreed with defendants and denied certification. The court first identified the "threshold legal question": "whether a defendant-administered refund program may be found superior to a class action within the meaning of Rule 23(b)(3). . . ." The court acknowledged that as a textual matter, "it makes little sense to describe an out-of-court remedy as an 'adjudication' of a claim[,]" but it nonetheless adopted the "policy" approach because, in its view, that approach best served the "animating purpose of the superiority requirement"-"to ensure that the court's resources are put to efficient use. . . ." The "policy" approach fostered this purpose because "when a defendant is already offering an effective remedy for putative class members through out-of-court channels, a class action threatens to consume substantial judicial resources to no good end."

The court found that the "policy" approach also best protected the interests of class members, which often diverge from those of class counsel. "Where available refunds afford class members a comparable or even better remedy than they could hope to achieve in court, a class action would merely divert a substantial percentage of the refunds' aggregate value to the class lawyers." As a result, the court reasoned, "rational class members would not choose to litigate a multiyear class action just to procure refunds that are readily available here and now." Class counsel, however, have a conflicting view because they are interested in their fees. The "policy" approach protects class members because it "allows the court [to] ensure that a putative class action is grounded in the realistic prospect of a remedy that class members could not otherwise obtain." The "textual" approach, on the other hand, "permits (or even requires) the court to certify class actions that, at best, offer no advantage for the class members, and at worst, benefit class counsel at their expense."

The court rejected plaintiffs' contention that the voluntary refund program was not superior because plaintiffs had sought punitive damages and injunctive and declaratory relief, remedies not available through any out-of-court program, including defendants'. If a request for injunctive or declaratory relief "automatically render[ed] a class action superior to an out-of-court refund program[,]" the court concluded, "a plaintiff could easily fashion a request for an injunction that would accomplish nothing more than the out-of-court remedy already in place, thereby turning the superiority requirement into a trivial pleading hurdle." See also PPA, 214 F.R.D. at 615 (rejecting same argument where plaintiffs sought injunction in the form of a notice to consumers still in possession of the recalled products); Chin, 182 F.R.D. at 451 (rejecting same argument where plaintiffs sought injunction ordering defendant to offer rescission of vehicle sales contract or to recall all allegedly defective brake systems). Nor would the "theoretical availability of punitive damages-which at best offers a remote possibility of a marginally greater recovery per class member-[be] enough to support a finding of superiority when a putative class action has nothing else to recommend it."


Aqua Dots and the other courts that have adopted the "policy" approach signal that several features are important to designing a superiority-defeating voluntary refund program. First, the refund or replacement option presented to purchasers must be comparable, if not superior, to the remedy that could be recovered in court-illusory promises of private redress will not suffice. Second, the offered refund must be widely and readily available to purchasers-roadblocks to obtaining the refund will undermine its claim of superiority over a judicial remedy (though note that in PPA, the court was unmoved by plaintiffs' protest that a requirement that they produce proof of purchase was unduly burdensome because such a requirement was an "extraordinarily commonplace practice amongst retailers"). Third, the refund or replacement option must be widely publicized and clearly explained so that putative class member purchasers likely will become aware of the private remedy and easily understand how to obtain it (though note that the court in In re Con-Agra held that the standard for sufficient notice of a voluntary program was not that for notice of a class action suit.). And fourth, although not itself a feature of a refund program, proof that a significant number of refunds already have been paid out will increase the likelihood that a court will find the program superior to a class action because it will substantiate the effectiveness and publicity of the program.

One could envision, for example, a voluntary refund program including these features that might defeat certification of a putative product mislabeling class. If the mislabeled products retain value to their purchasers despite the mislabeling, the defendant manufacturer might design a voluntary refund and replacement program that offers purchasers the option either to (a) complete a short refund form in exchange for 50 percent of what they paid for the product or (b) return the mislabeled product in exchange for the same, properly labeled product, or, if possible, a comparable but different product. The manufacturer would want to take steps to ensure the program is widely publicized by, for example, informing the public of the program on its company website, mobilizing its public relations resources to issue press releases and to convey the existence of the program to national print publications and major news outlets, and otherwise broadly advertising the program. The manufacturer also would want to be sure that the program is clearly explained to purchasers, easy to access (perhaps by creating a web-based intake system for claimants), and provides the promised refund or replacement through a streamlined procedure that reduces delay and minimizes the possibility that purchasers rightfully entitled to the refund or replacement are turned away.

Indeed, it is possible to extend this reasoning and approach to any sort of product defect or consumer fraud lawsuit (including those related to financial, mortgage, or insurance products) where the class complaints generically relate to not having received fair value for what was purchased, or where a replacement product or service could provide a substitute for the consumer good, service or product that was purchased.