Rule 23(a)(2)’s commonality requirement often falls prey to the fiction that consumer claims are always uniquely suited to class treatment, and that common legal issues are enough to satisfy the Rule. Yet a careful analysis of the underlying transaction often yields a different result.

Not all transactions are uniform, and not all consumers are alike. Indeed, “common” legal issues are often advanced as a basis for commonality precisely because the underlying transactions are not so common after all. This is exactly what happened in a recent case decided by Judge Jack B. Weinstein denying class certification captioned Haynes v. Planet Automall, Inc., __ F.R.D. ___. 2011 WL 3555613 (E.D.N.Y.) (August 12, 2011). The Haynes decision provides a thoughtful analysis of a consumer claim, and illustrates the benefits of a “rigorous analysis” of the underlying transaction to determine whether common questions really exist.

An uncommon story: A funny thing happened on the way from the dealership . . .

Sherry Haynes purchased a used 2006 Toyota Corolla from a Suzuki dealership. During the oral negotiations that led to her purchase, she agreed to pay both a “processing fee” and an extended warranty in order to obtain financing. This added a total of $4,301.80 to her $12,500 purchase price. Haynes at *2. For customers paying cash, these extra charges were most often not included. Id. at *3.

After a harrowing mechanical failure on the way home from the dealership, which the defendant refused to fix despite the extended warranty, id. at *4, the plaintiff responded by asserting violations of the federal Truth in Lending Act (“TILA”), 15 U.S.C. sec. 1601 et seq., and section 349 of New York’s General Business Law (“GBL sec. 349”). Id. at *1. Ms. Haynes claimed that the processing fee and the extended warranty should have been included in the finance charge on her retail installment contract, and not in the amount financed. Id. at *3. Had that been done, her APR would have been 22.95%, and not the 9.64% she thought she was getting. Id.

Following bifurcated discovery, the plaintiff offered statistical evidence that 63.9% of credit customers and 4.1% of cash customers were charged a processing fee or a related “dealer fee” during the class period. If only the processing fee was considered, the percentage of credit customers charged dropped to 43.7%. Id. at *3.

The defendant argued that the statistics were misleading because the processing fee was often incorporated into the price of the car, unlike the plaintiff’s transaction. Id. at *3. Many customers asked for all of the extra charges to be included in the final sales price so that they could obtain their own financing. Id The plaintiff sought to certify four subclasses under Rule 23(b)(2) and (b)(3) of the Federal Rules of Civil Procedure, two each under TILA and New York’s GBL, asserting claims relating to the processing fee, the dealer fee, and the extended warranty. Id. at *4.

Uncommon law: TILA is “extremely fact-intensive.”

Judge Weinstein began the Rule 23 analysis with a close reading of the law. Noting that TILA is a disclosure statute and not a remedy for consumer fraud, id. at 7, the court focused on the statutory requirement that “‘a charge must be incident to, or a condition of the extension of credit.’” Id. at *8 (citation omitted). Charges that are paid in both “‘cash and credit transactions are not finance charges.’” Id. (citation omitted). Accordingly, whether “charges are incidental to the extension of credit, and therefore included within the definition of the finance charge, is ‘extremely fact-intensive.’” Id.

When the purpose of the fee is in dispute, a plaintiff’s greatest hurdle under TILA is causation — “that the extension of credit caused plaintiff to pay a particular fee or charge.” Id. (emphasis in original). While there may be a number of ways to prove causation, class plaintiffs typically must show that a defendant has “systematically” charged a particular fee to credit but not to cash customers, and that “the defendants applied a uniform policy to its customers that distinguished credit from cash customers.” Id. at *9. Where statistical evidence is presented to prove this type of disparate treatment, the Second Circuit requires it to be “‘overwhelmingly convincing [in] nature.’” Id. (citation omitted). The only question before Judge Weinstein was whether the plaintiff could prove with statistical evidence alone that the defendants systematically charged processing fees, dealer fees, and extended warranties to credit customers. Id. at *12.

Uncommon claims: Legal questions and undisputed conduct do not constitute “common claims.”

The plaintiff’s proposed class failed the commonality requirement of Rule 23(a)(2).

First, the court rejected the plaintiff’s formulation of the common state law questions as sufficient to meet the requirements of Rule 23(b)(2). The plaintiff framed the “common questions” this way: Whether the alleged violations of TILA constituted deceptive practices under GBL § 349, unjust enrichment or as a constructive trust under New York law, or warranted other damages. Id. at *13. The court rejected these as “legal questions peripheral to the certification decision.” Id. (citing Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011)); see also Kurzi v. Eli Lilly & Co., 160 F.R.D. 667, 676 (N.D. Ohio 1995) (“purely legal question which does not turn on any fact in this case” was not common for purposes of Rule 23(a)(2)).

The significance of this holding is that it addresses and rejects a common plaintiffs’ tactic. Class action complaints often recite pure issues of law as “common questions” in an effort to support — or obfuscate — individualized factual inquiries. But generalized legal propositions do not help accomplish the more pragmatic goal of Rule 23: “Promotion of efficiency and economy of litigation.” Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 349 (1983).

A claim is only capable of class-wide resolution when the “determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” Dukes, 131 S. Ct. at 2551. Merely deciding a common legal issue does not mean that resolving the factual issues for the class representative will resolve them for the rest of the class. Indeed, where a plaintiff relies on common legal issues to satisfy the commonality requirement there may be an argument that the precedential effect of the ruling is a far more efficient use of judicial resources than class action litigation.

Second, as to the two TILA questions that the court found were in dispute — whether the defendants properly disclosed the processing fee and the retained portion of the extended warranty as finance charges — the plaintiff did “not show that they could be answered uniformly on a class-wide basis.” Id. at *13. Although there was no dispute that the defendants had disclosed neither item to the plaintiff, the relevant question was whether the statistical evidence supported a finding that the defendants’ conduct was systematic as to the rest of the class. According to the court, because just 43% of the credit customers were charged a processing fee, the evidence failed to show that the fee was “uniformly charged to all credit customers,” or that there was “any systematic overcharging utilized by defendants.” Id. at *13.

The GBL claims did not satisfy the commonality analysis since the plaintiff “failed to establish that defendants’ oral representations were materially uniform for the entire class.” Id. at *14. Nor could she prove reliance on allegedly fraudulent statements since such “cannot be the subject of generalized proof.” Id. at *14.

The significance of this aspect of the court’s holding is two-fold. First, it illustrates how the application of the substantive law can defeat commonality under Rule 23(a)(2). Indeed, the court’s recognition that TILA claims are ‘“extremely fact intensive’” and the peculiar difficulties of causation, id. At *8, derived from its grasp of the nuances of TILA itself. It is up to defense counsel to provide the analytical framework to support the fact-intensive nature of the underlying activity.

Just because a defendant may have used standard forms in a consumer transaction does not mean that a class is a foregone conclusion. Examples of analytical questions include:

  • Did the defendant or its agents exercise discretion?
  • Were sales conducted in a uniform manner?
  • Were there oral negotiations?
  • Were sales conducted by many different representatives?
  • Did the defendant ever deviate from standard terms?
  • Were there geographical or regional differences in the way presentations or negotiations were carried out?
  • Were there material differences in statements made to potential class members?
  • Is there is any evidence to support a “fraud-on-the-market” theory, i.e., evidence to prove that “the market at large internalized the misrepresentation to such an extent that all plaintiffs can be said to have relied on it.”? (Id. at *11 (quoting McLaughlin v. American Tobacco Co., 522 F.3d 215, 233-34 (2nd Cir. 2008))
  • Are the common questions really questions of law?

Second, merely because a defendant’s conduct toward a plaintiff is undisputed — or even wrongful — does not end the inquiry. The relevant question is whether the defendant’s conduct was the same toward the entire class, such that deciding the plaintiff’s claim decides it for the entire class.

Relying on Rule 23(b)(3)(D), Judge Weinstein found that the “[a]dministration of a case involving separate inquiries about the nuances of hundreds of sales is almost certain to inflate the costs — to the parties and the time and effort required by the court in supervising discovery and trial.” Id. at *15. In other words, class certification was not “superior” to other forms of adjudication, as required by Rule 23(b)(3). A single bad transaction does not provide a basis for a class-wide claim for relief.