CAFA Mass Actions

The Third Circuit, in Ramirez v. Vintage Pharmaceuticals, LLC, Nos. 17-1221 et al. (3d Cir. Mar. 28, 2017), placed the "burden of clarity" on plaintiffs seeking to avoid the Class Action Fairness Act’s (CAFA) classification of joint-tried cases as mass-actions removable to federal court, holding that “[w]here … more than 100 plaintiffs file a single complaint containing claims involving common questions of law and fact, a proposal for a joint trial will be presumed unless an explicit and unambiguous disclaimer is included.” Slip op. at 5, 13 (emphasis added).

As the Third Circuit emphasized, “[a]s masters of their Complaint, Plaintiffs may structure their action in such a way that intentionally avoids removal under CAFA … Plaintiffs are provided with a great deal of power in the CAFA removal context,” and the burden of proof remains on the party seeking removal. Id. at 10, 12-13. “[A] clear and express statement in the Complaint evincing an intent to limit coordination of claims to some subset of pretrial proceedings would effectively shield this action from removal under CAFA.” Id. at 11. But precisely because of this, the court read language in the complaint that was ambiguous – such as references to a jury trial in the singular – as arguably demands for a joint trial, which may be demanded explicitly or implicitly. Id. at 7, 8-9, 12. Thus, the “burden of clarity” was placed on the party with the power to control the pleading. Id. at 13. The court also rejected the plaintiffs’ argument that a Pennsylvania Mass Tort Program would not have permitted a joint trial: “the face of the Complaint and the structure of the action are the best indicators of whether a joint trial is being sought.” Id. at 13-16.

Corporate Personal Jurisdiction

The Ninth Circuit, in Williams v. Yamaha Motor Corp., No. 15-55924 (9th Cir. Mar. 24, 2017), held that the Supreme Court had overruled the Ninth Circuit’s prior test for finding personal jurisdiction over a parent corporation on the theory that its subsidiary acted as its agent. It also disposed of other jurisdiction and consumer fraud issues.

Jurisdiction Over Corporate Parent

Williams involved a consumer fraud claim by purchasers of outboard motors against the Japanese manufacturer and its U.S. importer subsidiary, asserting a design defect in the motors. The court dismissed the claim against the Japanese manufacturer for lack of personal jurisdiction, first finding no general jurisdiction over the manufacturer itself (on grounds that California was not the company’s “home” under the Supreme Court’s 2014 decision in Daimler AG v. Bauman), then moved on to the issue the Court dodged in Daimler: when a foreign corporation can be subject to jurisdiction based on the contacts of its subsidiary. The Ninth Circuit found that to survive a motion to dismiss, the plaintiffs needed to plead or otherwise present some basis for attributing the subsidiary’s contacts to the parent for general jurisdiction purposes: “[Plaintiffs] fail … to plead facts sufficient to make out a prima facie case that [the parent] and [the sub] are “alter egos.” Plaintiffs’ complaint makes almost no factual allegations regarding the nature of the parent-subsidiary relationship, and the evidence submitted in opposition to [the parent]’s motion to dismiss did not provide any additional clarity.” Slip op. at 10-11.

With regard to specific jurisdiction, the court concluded that Daimler had overruled its prior test:

Notwithstanding Daimler’s express reservation on the question of agency theory’s application to specific jurisdiction, more than one district court within our circuit has expressed some uncertainty on that point post-Daimler ...

[O]ur agency analysis asks whether the subsidiary “performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services.” [citing 2001 Ninth Circuit decision in Doe v. Unocal]…The Supreme Court found in Daimler that, “[f]ormulated this way, the inquiry into importance stacks the deck, for it will always yield a pro-jurisdiction answer: Anything a corporation does through an independent contractor, subsidiary, or distributor is presumably something that the corporation would do ‘by other means’ if the independent contractor, subsidiary, or distributor did not exist.”…This criticism applies no less in the context of specific jurisdiction than in that of general jurisdiction. Accordingly, Daimler’s reasoning is clearly irreconcilable with the agency test set forth in Unocal…The Daimler Court’s express recognition of the potential viability of agency relationships for establishing specific jurisdiction does not alter our holding. While the Court reserved judgment on the viability of agency theory as a general concept, it did not suggest that our particular formulation for finding an agency relationship should survive in the context of specific jurisdiction. To the contrary, the Daimler Court’s criticism of the Unocal standard found fault with the standard’s own internal logic, and therefore applies with equal force regardless of whether the standard is used to establish general or specific jurisdiction.

Id. at 14-15 (emphasis added; citations omitted). Instead, the court held, “Fundamental tenets of agency theory require that an agent ‘act on the principal’s behalf and subject to the principal’s control.’ Restatement (Third) Of Agency § 1.01 (2006) … Agency requires that the principal maintain control over the agent’s actions. Accordingly, under any standard for finding an agency relationship, the parent company must have the right to substantially control its subsidiary’s activities.” Id. at 15-16 (quotations and citations omitted). Finding only conclusory allegations of the right to control the subsidiary, the court found no specific jurisdiction. Id. at 15.

Consumer Fraud Pleading

Turning to the claims against the subsidiary, the court found that the complaint adequately pleaded its knowledge of the alleged design defect in the motor, based on allegations of the company’s internal complaint-tracking system, id. at 21, but failed to plead – as required for an omission claim under the consumer fraud laws of California and multiple other states – that the defect “constituted an unreasonable safety hazard,” given that the defect “merely accelerates the normal and expected process of corrosion in outboard motors … Were we to conclude that [plaintiffs’] allegations of premature but otherwise normal wear and tear plausibly establish an unreasonable safety hazard, we would effectively open the door to claims that all of [defendant’s] outboard motors eventually pose an unreasonable safety hazard.” Id. at 23 (emphasis in original).

Class Certification Appeals

Two recent decisions limited appeals of certain class certification issues:

  • In Bates v. Bankers Life & Cas. Co., No. 14-35397 (9th Cir. Feb. 24, 2017), the Ninth Circuit held that an order granting a motion to strike class allegations from a complaint is not a final, appealable order, although it left open other avenues for appeal: There are only two procedural avenues for appealing an order striking class allegations made under Federal Rule of Civil Procedure 23: (1) asking the district court to certify an order for interlocutory review pursuant to 28 U.S.C. § 1292(b); or (2) filing a petition for permission to appeal pursuant to Federal Rule of Civil Procedure 23(f) ... Plaintiffs did not use either of these procedural avenues, and we therefore lack jurisdiction to hear their challenge to the order striking their class allegations.

Slip op. at 6-7 (emphasis added).

  • In In re Wholesale Grocery Prods. Antitrust Litig., No. 15-3089 (8th Cir. Mar. 1, 2017), the Eighth Circuit held that an order refusing to consider any new proposed class was not appealable under Rule 23(f) where certification had been previously denied, because the order did not constitute a new denial of certification: [R]ight or wrong, the district court emphatically left the status quo - no class certification for the [proposed class of] plaintiffs - untouched (and untouchable) … By its clear terms Rule 23(f) has no application in the absence of “an order granting or denying class-action certification,” and the only such order here was the district court’s original rejection of the [proposed] class, which was entered many more than 14 days before [the new proposed class representative] filed its petition … What matters is not what [the new proposed class representative] wanted, but what the district court actually did in the order at issue. Otherwise, if a dissatisfied party could reset the clock simply by coming up with a new way of defining a class and having the district court reject it, Rule 23(f)’s strict time limit for seeking interlocutory review of a class-certification decision would be so easily circumvented as to be practically meaningless.

Slip op. at 7-9 (emphasis added). As the court noted, this was the same conclusion reached previously by the Second, Third, Fourth, Fifth, Seventh, Tenth, Eleventh and DC Circuits.

Materiality: Insider Trading

The Third Circuit, in an unpublished opinion in SEC v. Huang, No. 16-2390 (3d Cir. Apr. 10, 2017), upheld SEC sanctions under Section 10(b) against a data analyst for a credit card issuer who used aggregate data on the use of the cards at retailers to trade in the stocks of the retailers. The court did not address any issues of what duties the analyst violated to shareholders of the retailers, but rejected the analyst’s argument that the data was immaterial. The court concluded that the analyst’s behavior – repeatedly using the data to out-predict public analysts – showed that the small size of the retail transactions (even in the aggregate) did not undermine a finding of materiality, and allowed a conclusion of materiality even in the absence of expert analysis of the total mix of information available at any particular time (the SEC’s expert simply assumed that public analyst reports projecting quarterly revenue reflected the consensus view of the total mix available). Slip op. at 10-11 and n. 6.

Discovery Sanctions

The Delaware Supreme Court, in Shawe v. Elting, No. 487, 2016 (Del. Feb. 13, 2017), affirmed extraordinary sanctions including $7 million in attorneys fees resulting from what it characterized as “a clear record of egregious misconduct and repeated falsehoods during the litigation” of a particularly bitter company dissolution. Slip op. at 20. While the facts in Shawe (involving unsuccessful attempts to delete emails, the destruction of a cell phone, the concealment of spying on a business partner’s privileged emails to counsel, and false responses regarding all of these topics) are extreme, they provide a good illustration of the potential hazards of inaccurate responses regarding document preservation efforts and what it takes to get courts to impose fee-shifting sanctions.

Sidley previously discussed the Chancery Court’s opinion in more depth in an article in the Delaware Business Court Insider:

Spokeo Standing

The Second Circuit, in an unpublished opinion in Ross v. AXA Equitable Life Ins. Co., No. 15-2665-cv et al. (2d Cir. Feb. 23, 2017), found that insurance policyholders had no standing under Spokeo to sue insurers for alleged violations of insurance laws regarding their financial reserves, and its reasoning suggests that Spokeo may be a particular obstacle to class actions that seek to avoid any allegation of individual reliance:

Appellants first argue they have Article III standing because they have alleged a violation of New York Insurance Law Section 4226 and the injury inherent in the statutory violation is sufficient, by itself, to constitute injury in fact. We disagree … Appellants cannot rely solely on a violation of New York Insurance Law Sections 4226(a)(4) and (d) in order to satisfy Article III’s injury-in-fact requirement. Section 4226(a)(4) provides that an insurer shall not “make any misleading representation, or any misrepresentation of the financial condition of any such insurer or of the legal reserve system upon which it operates[.]” N.Y. Ins. Law § 4226(a)(4) … [A] violation of Section 4226(a)(4) alone does not inherently present any material risk of harm … The mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm. Further, Appellants here … fail to allege that they would not have purchased the life insurance and annuity riders provided by [the insurers] had they known of [the insurers’] alleged shadow insurance practices. Appellants also fail to allege, or even suggest, that consumers generally would not have purchased [the insurers’] life insurance and annuity riders had they known about the alleged shadow insurance practices 

In order to suffice for Article III standing, an injury in fact must not only be concrete and particularized, it must also be actual or imminent, not conjectural or hypothetical … A speculative chain of possibilities does not establish that the injury alleged is certainly impending … Appellants argue that they have suffered an injury in fact because there is an increased risk that [the insurers] will be unable to pay Appellants’ claims in the event of an economic downturn. This allegation travels too far down the speculative chain of possibilities to be clearly impending … An economic downturn would have negative effects on all financial contracts, even those that do not contain the hidden risks that Appellants allege here. Such an economic downturn is not only speculative itself, but also simply the first of many necessary conditions that must be fulfilled (including a bank lender of a letter of credit (“LOC”) refusing to renew its outstanding LOCs to the reinsurer or, alternatively, the parent company or the New York Department of Financial Services pressuring [the insurers] not to draw down the available LOC) in order for the risk Appellants posit to cause them harm. Accordingly, Appellants have failed to allege injury in fact on the basis of an increased risk of nonpayment because the speculative chain of possibilities alleged by Appellants does not establish that the injury alleged is certainly impending.

Appellants also argue they have suffered an injury because they purchased life insurance policies and annuity riders that were inferior, due to the shadow insurance transactions, to life insurance policies and annuity riders that Appellants would have been able to buy for the same price that do not have such shadow transactions. Appellants, however, do not allege that the amount to be paid out by the life insurance policies or by the annuity riders they bought has decreased … Appellants therefore cannot allege a current injury, as the value of the life insurance policies and annuity riders has not changed. Instead, Appellants only allege that the amount that will be paid out, i.e., the value of the insurance policy and annuity rider, might decrease in the future. Like Appellants’ “increased risk” claim, any injury for a possible inability of [the insurers] to fully pay out the life insurance and annuity rider claims in the future is speculative and hypothetical.

Slip op. at 4-6 (emphasis added; quotations and citations omitted).

False Claims Act

The Fourth Circuit, in United States ex rel. Michaels v. Agape Senior Community, Inc., No. 15-2145 (4th Cir. Feb. 14, 2017), sided with the Fifth and Sixth Circuits against the Ninth Circuit in holding that the Attorney General has an unreviewable absolute veto over settlements of False Claims Act qui tam actions even when the government has chosen not to intervene. While the FCA grants the relator the right to conduct the action if the DOJ does not intervene, “the right to conduct the action does not necessarily include the right to settle the claim, although, absent the Attorney General’s objection, the relator may yet settle the claim … the Attorney General’s absolute veto authority is entirely consistent with the statutory scheme of the FCA.” Slip op. at 22-23. The court also ruled that an interlocutory appeal was not proper to review whether FCA liability could be proven by statistical sampling, noting that the question was not a pure issue of law because there could be some circumstances where sampling would be appropriate. Id. at 24-27.