In an opinion that could make certification of nationwide class action settlements considerably more difficult, a divided panel of the Ninth Circuit has ruled that when deciding whether to certify a multistate settlement class, the district court must consider whether differences in state laws cause individual questions of law to predominate over common questions of law and fact. In re Hyundai and Kia Fuel Economy Litig., No. 15-56014, 2018 WL 505343 (9th Cir. Jan. 23, 2018). The Ninth Circuit reaffirmed that the burden of proving common legal questions predominate is, like all of the Rule 23(b)(3) requirements, on the plaintiff, and the relaxation of Rule 23(b)(3) for settlements that the Supreme Court recognized in Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997), extends only to those questions of trial manageability that will not arise once a case settles. The court ruled that state-law variation is not merely a question of manageability, but also implicates the substantive rights of class members. Therefore, before a nationwide class can be certified, the plaintiffs must establish—even in a settlement—that the substantive state-law variations do not predominate over common questions. Because the district court in Hyundai failed to consider variation in state substantive consumer-protection laws, the Ninth Circuit vacated certification of the settlement class and remanded for further proceedings. In addition, the Ninth Circuit ruled that the record did not support including used car owners in the settlement class, because there was no evidence used car owners were subject to a massive advertising campaign justifying a presumption of reliance on that that advertising, or that they were uniformly exposed to mileage stickers on the windows of the cars they bought; unlike for new cars, there is no requirement that used cars have mileage stickers.

Judge Ikuta’s opinion for the court drew a sharply worded dissent on grounds that the majority opinion could prevent class members from realizing substantial recoveries, and that assignment of the multistate-law issues to the plaintiffs was contrary to California’s choice-of-law rules. As Judge Nguyen’s dissent saw it, the proponents of applying non-California law to class members outside California—here, objectors to the settlement—had the burden of establishing that individual state-law questions predominated. Because, in the dissent’s view, the objectors did not meet that challenge, the panel should not have reached the choice-of-law issues at all, and instead should have affirmed the district court’s order certifying a nationwide class.

Hyundai involved allegations originally made by a large group of plaintiffs (the “Espinosa” plaintiffs) that Hyundai and Kia inflated the mileage performance posted on the windows of certain 2011-13 vehicles. As often happens, the defense argued that the state-by-state variation in consumer-protection statutes precluded certification of a nationwide class, because individual issues in the law applicable to the members of a nationwide class would predominate over common questions at a trial. Accepting this argument, the district court issued a tentative ruling denying the plaintiffs’ class certification motion.

Following the tentative ruling, plaintiffs in another nationwide class action in the Central District of California, Krauth v. Hyundai Motor Am., moved the Judicial Panel on Multidistrict Litigation to consolidate twelve nationwide class actions asserting substantially the same claims. The MDL panel granted the motion and transferred the cases to the judge presiding over the Espinosa case and who had issued the tentative ruling denying class certification. Ultimately 56 cases were consolidated in that court as “tag-along” cases.

A week after the MDL panel’s transfer order, the Espinosa plaintiffs, along with plaintiffs in two of the other nationwide class actions, announced that they had agreed to settle with Hyundai and Kia on a nationwide basis, with several options for relief to be provided to the members of the settlement class. The district court certified the nationwide class for settlement purposes, with the parties predicting that the value of the relief would be $353 for class members who owned or leased a new Hyundai and $667 for those who owned or leased a new Kia. Those with used cards would receive about half those amounts. Upon final approval of the settlement, all of the other cases in the MDL proceeding would be dismissed.

During an eight-month period of “confirmatory” discovery after the settlement, a set of plaintiffs commenced a separate class action against Hyundai¸ Gentry v. Hyundai Motor Am., in the Western District of Virginia. The Gentry plaintiffs claimed relief under Virginia’s consumer-protection, false advertising, and vehicle warranty laws. Notably, their false advertising claims sought the greater of $1,000 or treble damages, which would substantially exceed the value of the settlement as described by the Espinosa plaintiffs. The MDL panel transferred the Gentry action to the Central District of California as a “tag-along” case.

After confirmatory discovery closed, the settling plaintiffs moved for preliminary approval of their nationwide settlement. The Gentry plaintiffs, however, opposed certification of the nationwide class and sought remand of their case to Virginia. They argued that under the California’s choice-of-law rules, Virginia law applied to their claims, on grounds that there was a Virginia choice-of-law clause in their vehicle-purchase contracts, and Virginia had a strong governmental interest in having Virginia law apply to the claims of Virginia citizens.

The district court disagreed and preliminarily certified the nationwide settlement class. The district court declined to undertake a choice-of-law analysis, stating that this was unnecessary because the case was not going to trial. The district court regarded the substantive differences between state laws as of lesser importance in a settlement and something that could be addressed at the final approval hearing. After a period for notice to the class and submission of claims, the district court granted final approval of the settlement in June 2015. Hyundai, 2018 WL 505343, at *11.

After the district court granted final approval, objectors—including plaintiffs in Gentry—appealed, principally on grounds that in certifying the nationwide settlement class, the district court abused its discretion by failing to perform a choice-of-law analysis or consider the variations in state consumer-protection laws. The Ninth Circuit observed—and this was undisputed by the parties—that “the district court did not conduct a choice of law analysis, and did not apply California law or the law of any particular state in deciding to certify the class for settlement.” Id. at *12. The Ninth Circuit then held that this led to three legal errors, requiring certification to be vacated and the case remanded to the district court for further consideration of the certification question.

First, “[i]n failing to apply California choice of law rules, the district court committed a legal error.” Id. This followed directly from the Ninth Circuit’s prior opinion in Mazza v. Am. Honda Motor. Co., 666 F.3d 581 (9th Cir. 2012), which stated the familiar principle that “[a] federal court sitting in diversity must look to the forum state’s choice of law rules to determine the controlling substantive law.” Hyundai, 2018 WL 505343, at *12 (quoting Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1187 (9th Cir. 2001)). Second, the Ninth Circuit ruled that the district court erred “by failing to acknowledge, as it had in its tentative ruling, that Hyundai and the Gentry plaintiffs submitted evidence that the laws in various states were materially different than those in California, and that these variations prevented the court from applying only California law.” Id. This led to the third error that the Ninth Circuit identified, that the district court failed “to make a final ruling as to whether the material variations in state law defeated predominance under Rule 23(b)(3).” Noting the Fifth Circuit’s opinion in Castano v. Am. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996), that “variations in state law may swamp any common issues and defeat predominance,” the Ninth Circuit ruled that the district court was required to “analyze whether ‘the consumer-protection law of the affected States vary in material ways.’” Hyundai, 2018 WL 505343, at *12 (quoting Pilgrim v. Universal Health Card, LLC, 660 F.3d 943, 947 (6th Cir. 2011)).

The Ninth Circuit made clear that settling does not dilute the need to assess whether state-law variations will cause individual questions to predominate before granting class certification. “While the district court was correct that it need not consider litigation management issues in determining whether to certify a class, the Rule 23(b)(3) predominance inquiry focuses on whether common questions outweigh individual questions, an issue that preexists any settlement.” Id. (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623 (1997)). Notably, the Ninth Circuit stated that unsatisfied class members’ right to opt-out was “irrelevant” to the certification question. Id.

Although the Ninth Circuit did not explain in detail why state-law variations, which traditionally have acted as a barrier to class certification because of difficulties in trial manageability—for example different evidence for different state-law violations, and proliferation of jury instructions tailored to each statute—the court did provide some policy reasons why “undiluted, even heightened, attention in the settlement context,” Amchem, 521 U.S. at 620, was needed where individual state-law variations were present. Noting that “the district court made clear that it would be unlikely to certify the same class for litigation purposes,” the Ninth Circuit observed that this opened the possibility that the nationwide class settlement would sell the class members short: again quoting the Supreme Court’s opinion in Amchem, the court noted that

the class representatives were well aware that they would be unlikely to succeed in any efforts to certify a nationwide litigation class. Thus, by “permitting class designation despite the impossibility of litigation, both class counsel and court [were] disarmed.” Hyundai and Kia knew that there was little risk that they would face a nationwide litigation class action if they did not reach a settlement agreement. Accordingly, “[c]lass counsel confined to settlement negotiations could not use the threat of litigation to press for a better offer, and the court [faced] a bargain proffered for its approval without benefit of adversarial investigation.

Hyundai, 2018 WL 505343, at *13 (quoting Amchem, 521 U.S. at 621).

Finally, the Ninth Circuit observed that a fairness hearing, as would occur at proceedings on final approval, was “no substitute for rigorous adherence to those provisions of [Rule 23] designed to protect absentees.” Id. (quoting Ortiz v. Fibreboard Corp., 527 U.S. 815, 849 (1999)). The Ninth Circuit accordingly vacated the district court and remanded the case for further proceedings on certification. In doing so, the court stated that “[w]e make no ruling on this issue, and merely note that Mazza determined that no such class was possible in a closely analogous case.” Id.

The Ninth Circuit also reiterated important guidance about when a district court may presume reliance on advertising or other messaging when certifying a class. The Hyundai class included persons who owned or leased new as well as used cars. With regard to new cars, the court appeared satisfied that reliance on the defendants’ mileage numbers could be presumed because new cars all bore federally required mileage stickers on their windows, even if the record did not show that the advertising campaigns for the vehicles rose to the level of pervasiveness that would permit an inference of uniform exposure under Mazza and the California Supreme Court’s opinion in In re Tobacco II Cases, 207 P.3d 29 (Cal. 2009). Hyundai, 2018 WL 505343, at *13. In contrast, there was no requirement of mileage stickers for used cars, leading the Ninth Circuit to conclude that the record failed to support any inference of reliance based on uniform exposure to false statements. The Ninth Circuit accordingly concluded that persons owning or leasing used cars should not have been included in the class. Id. Hyundai underscores the importance that proponents of class certification based on uniform representations point to actual representations that were provided to all class members, such as the mileage stickers on new cars, or an advertising campaign whose pervasiveness can justify an inference of uniform exposure and reliance by the class members.

Dissenting, Judge Nguyen strongly disagreed, stating that the majority opinion “deprives thousands of consumers of any chance to recover what is, conservatively speaking, a more than $159 million settlement.” As the dissent saw it, the majority departed sharply from case law in the Ninth and other circuits, by shifting “the burden of proving whether foreign law governs class claims from the foreign law proponent—here, the objectors—to the district court or class counsel. This newly invented standard significantly burdens our overloaded district courts, creates a circuit split, and runs afoul of the doctrine established long ago in Erie R.R. v. Tompkins, 304 U.S. 65 (1938).” Id. at *16. The dissent therefore regarded the majority as improperly demanding that the plaintiffs, who proposed the settlement (as well as the district court), unrealistically take on the task of proving that state-law variations do not predominate, when the party actually advocating that foreign law applies, here the objectors, did not in her view demonstrate that the variations do predominate. Id. at 17-18. Whereas the majority saw the issue requiring the plaintiff—as advocate of certification—to establish that common questions of law predominated despite the variations in the applicable state substantive laws, the dissent would strictly relegate discussion of those differences to the objectors, who failed to carry their burden.

The majority opinion in Hyundai may significantly raise the bar for certification of multistate class action settlements in the Ninth Circuit. By narrowing the range of manageability issues that the district court, under Amchem, may disregard—and by specifically requiring that state-law variations must be considered when deciding a motion to certify a settlement class—the Ninth Circuit has at least complicated, if not made impossible, the possibility of certifying a nationwide consumer-protection class action for settlement.