Class Action Archives - Page 4 of 5 - The National Law Forum

Halliburton II: Supreme Court Upholds Basic Presumption

On June 23, the U.S. Supreme Court issued its long-anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II).^[1]Chief Justice Roberts delivered the opinion of the Court, in which Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Justice Ginsburg filed a concurring opinion, in which Justices Breyer and Sotomayor joined. Justice Thomas filed an opinion concurring in the judgment, in which Justices Scalia and Alito joined.

The Halliburton II case generated significant publicity because it presented the Supreme Court with the opportunity to reexamine the fraud-on-the-market presumption created in Basic v. Levinson.^[2] The Court in Basic held that, in a securities fraud class action, the plaintiff is entitled to a rebuttable presumption of reliance and, therefore, does not have to prove that each investor in the class relied on any alleged material misrepresentation. The foundation for the fraud-on-the market theory is the efficient-market theory, which presumes that, in an efficient market, all material, public information about a company is absorbed by the marketplace and reflected in the price of the security. The efficient-market theory has been under increasing attack in recent years, leading many to believe that the time may have come to overturn Basic.

In Halliburton II, the Supreme Court addressed whether to continue the fraud-on-the-market presumption unchanged, to cease the applicability of the fraud-on-the-market presumption altogether, or to alter the presumption. In the Court’s opinion, the majority declined to overrule or modify Basic’s presumption of classwide reliance, but it did hold that defendants may rebut the presumption at the class certification stage by introducing evidence that the alleged misrepresentation did not impact the market price. The majority determined that Halliburton had not demonstrated the “special justification” necessary to overturn “a long-settled precedent.”^[3] The majority also rejected Halliburton’s request that the plaintiffs be required to show a price impact to invoke the presumption because “this proposal would radically alter the required showing for the reliance element.”^[4] The majority did hold that defendants can rebut the presumption by showing lack of price impact at the class certification stage because “[t]his restriction makes no sense, and can readily lead to bizarre results.”^[5] The majority therefore vacated the U.S. Court of Appeals for the Fifth Circuit’s judgment and remanded for further proceedings.

In a concurring opinion, Justice Ginsburg, joined by Justices Breyer and Sotomayor, noted that, although the decision would “broaden the scope of discovery available at certification,” the increased burden would be on defendants to show the absence of price impact, not on plaintiffs whose burden to raise the presumption of reliance had not changed.^[6]

In a separate opinion concurring only in the judgment, Justice Thomas, joined by Justices Scalia and Alito, argued that Basic should be overturned for three reasons. First, the fraud-on-the–market theory has “lost its luster”^[7] in light of recent developments in economic theory.^[8]Second, the presumption permits plaintiffs to bypass the requirement—as set forth in some of the Court’s most recent decisions on class certification—that plaintiffs affirmatively demonstrate compliance with Rule 23. Third, the Basic presumption of reliance is “largely irrebuttable” because “[a]fter class certification, courts have refused to allow defendants to challenge any plaintiff’s reliance on the integrity of the market price prior to a determination on classwide liability,”^[9] therefore effectively eliminating the reliance requirement.

The Supreme Court’s decision has significant implications for securities fraud litigation, particularly at the class certification stage. Although plaintiffs need not prove direct price impact and may instead still raise the presumption of reliance by showing an efficient market and that the information was material and public, defendants may now rebut this presumption before class certification by showing a lack of price impact. We believe that defendants’ ability to rebut the presumption by showing no price impact effectively swallows the rule that plaintiffs need not prove a price impact. This will undoubtedly lead to a battle of the experts at the class certification stage. Although the Court’s decision does not explicitly affect other proceedings, such as a motion to dismiss, the scope of the decision will certainly be tested in the coming months and years.

Article By:

John M. Vassos

Karen Pieslak Pohlmann

Laura E. Hughes

Of:

Morgan, Lewis & Bockius LLP

^[1]. No. 13-317 (U.S. June 23, 2014), available here.

^[2]. 485 U.S. 224 (1988).

^[3]. Halliburton II, No. 13-317, slip op. at 4; see generally id. at 4–16.

^[4]. Id. at 17.

^[5]. Id. at 19.

^[6]. Id. at 1 (Ginsburg, J., concurring).

^[7]. Id. at 7 (Thomas, J., concurring).

^[8]. Id. at 8–9.

^[9]. Id. at 13.

California Continues to Shape Privacy Standards: Song-Beverly Act Extended to Email Addresses

Executive Summary: California retailer restricted from requiring a customer email address as part of a credit card transaction. We knew that asking for zip codes is intrusive personal questioning, and now asking for email has been added to the list.

California’s Song-Beverly Credit Card Act (Cal. Civ. Code Sec. 1747 et seq.) (“Song-Beverly Act” or “Act”) restricts businesses from requesting, or requiring, as a condition to accepting credit card payments that the card holder provide “personal identification information” that is written or recorded on the credit card transaction form or otherwise. “Personal identification information” means “information concerning the cardholder,other than information set forth on the credit card, and including, but not limited to, the card holder’s address and telephone number.” The California Supreme Court has previously ruled that zip codes are also “personal identification information” under the Song-Beverly Act. See Pineda (Jessica) v. Williams-Sonoma Stores, Inc., 2011 Cal. LEXIS 1502 (Cal. Feb. 10, 2011).

Recently, a United States federal district court in California expanded “personal identification information” to include email addresses in a decision denying retailer Nordstrom’s motion to dismiss claims it violated the Song-Beverly Act. The plaintiff sued Nordstrom for collecting his email address as part of a credit card transaction at one of its California stores in order to email him a receipt, then subsequently using his email address to send him frequent, unsolicited marketing emails. See Capp v. Nordstrom, Inc., 2013 U.S. Dist. LEXIS 151867, 2013 WL 5739102 (E.D. Cal. Oct. 21, 2013).

Raising a case of first impression under California law, Nordstrom claimed that email addresses are not “personal identification information” under the Song-Beverly Act, so the Act did not apply. The court disagreed with Nordstrom and found the opposite based on the California Supreme Court’s earlier ruling in Pineda. Nordstrom’s argument that email addresses can readily be changed, unlike zip codes, and consumers can have multiple email addresses was not persuasive. The court held that an email address regards a card holder in a more personal and specific way than a zip code. Unlike a zip code that refers to the general area where a card holder works or lives, email permits direct contact with the consumer and implicates their privacy interests. The court concluded that the collection of email addresses is contrary to the Song-Beverly Act’s purpose to guard against misuse of personal information for marketing purposes. In particular, the plaintiff’s allegation that his email address was collected to send him a receipt and then used to send him promotional emails directly implicates the protective purposes of the Act as interpreted in Pineda.

Pineda held that zip codes are personal information for purposes of the Song-Beverly Act, and therefore a brick and mortar retailer violated the Act when it requested and recorded such data. In the Pineda decision, the California Supreme Court found that zip codes, like the card holder’s address expressly called out as “personal identification information” under the Act, were unnecessary to completing the credit card transaction and inconsistent with the protective purpose of the Act. This is especially true when a zip code is collected to be used with the card holder’s name in order to locate the card holder’s address, permitting a retailer to locate indirectly what it is prohibited from obtaining directly under the Act.

Nordstrom also argued that the plaintiff’s claims under the Song-Beverly Act were preempted by the federal “Controlling the Assault of Non-Solicited Pornography and Marketing Act” (better known as the CAN-SPAM Act), but the court disagreed. While the CAN-SPAM Act contains a preemption provision, it only preempts state laws that regulate the manner in which email messages are sent and their content, both of which are not regulated under the Song-Beverly Act.

Retailer tip: The federal court issuing this most recent decision recommends waiting to request an email address (or a zip code) until after the consumer has the receipt from their credit card transaction in hand, and then sending the consumer emails only in conformance with the CAN-SPAM Act.

In the wake of Pineda, retailers faced class action lawsuits for requesting consumer zip codes at check out. This new decision could have a similar effect.

Article by:

Theodore F. Claypoole

Nadia G. Aram

Of:

Womble Carlyle Sandridge & Rice, PLLC

Supreme Court Holds That State Attorney General Actions are Not “Mass Actions” Under Class Action Fairness Act (CAFA)

On January 14, the Supreme Court of the United States held that lawsuits that are filed in the name of a State Attorney General but seek relief on behalf of a State’s citizens cannot be removed to federal court as “mass actions” under the Class Action Fairness Act (CAFA). See Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036 (Jan. 14, 2014). Resolving a split between the Fifth Circuit on the one hand and the Fourth, Seventh and Ninth Circuits on the other, the ruling means that businesses will have to defend AG actions in state courts, and state courts will have to resolve whether such actions can proceed even though the consumers on whose behalf they are brought have agreed to settle their claims in a class action or, conversely, to pursue their own claims individually rather than collectively.

“Mass Actions”

CAFA gives federal courts original subject matter jurisdiction over certain “class actions” and “mass actions.” It defines a “class action” as “any civil action filed under rule 23 of the Federal Rules of Civil Procedure or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action” and defines a “mass action” as “any civil action . . . in which the monetary relief claims of 100 or more persons are proposed to be tried jointly on the ground that the plaintiffs’ claims involve common questions of law or fact, except that jurisdiction shall exist only over those plaintiffs whose claims in a mass action [exceed $75,000, exclusive of interest and costs].” 28 U.S.C. §§ 1332(d)(1)(B), (d)(11)(B)(i).^[1] Excluded from the definition of “mass action” are (among other things) actions in which “all of the claims are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to State statute specifically authorizing such action . . . .” Id.§ 1332(d)(11)(B)(ii)(III).

**The Hood Case**

Jim Hood, the Attorney General of Mississippi, filed a parens patriaeaction that alleged that the companies that manufacture and market liquid crystal display (LCD) panels had engaged in price-fixing that violated the Mississippi Consumer Protection Act and Mississippi Antitrust Act. Hood sought equitable and compensatory relief on behalf of both the State and its citizens. The defendants removed the action to federal court under CAFA and the Attorney General moved to remand. The district court remanded, finding that the suit was not a “mass action” because it fell within the definition’s “general public” exception. The Fifth Circuit reversed. Looking at each claim rather than the action as a whole, it reasoned that the real parties in interest were not only the State but also the individual citizens who had purchased LCD products, and as a result the “claims of 100 or more persons [we]re proposed to be tried jointly.” Id. § 1332(d)(11)(B)(i). Hood then petitioned for certiorari, which the Supreme Court granted.

The Supreme Court’s Decision

Yesterday, the Supreme Court unanimously reversed. Justice Sotomayor’s opinion is a primer on statutory construction:

Respondents argue that the [mass action] provision covers [AG actions] because “claims of 100 or more persons” refers to “thepersons to whom the claim belongs, i.e., the real parties in interest to the claims,” regardless of whether those persons are named or unnamed. We disagree.

To start, the statute says “100 or more persons,” not “100 or more named or unnamed real parties in interest.” Had Congress intended the latter, it easily could have drafted language to that effect. Indeed, when Congress wanted a numerosity requirement in CAFA to be satisfied by counting unnamed parties in interest in addition to named plaintiffs, it explicitly said so: CAFA provides that in order for a class action to be removable, “the number of members of all proposed plaintiff classes” must be 100 or greater, and it defines “class members” to mean “the persons (named or unnamed) who fall within the definition of the proposed or certified class.” Congress chose not to use the phrase “named or unnamed” in CAFA’s mass action provision, a decision we understand to be intentional.

More fundamentally, respondents’ interpretation cannot be reconciled with the fact that the “100 or more persons” referred to in the statute are not unspecified individuals who have no actual participation in the suit, but instead the very “plaintiffs” referred to later in the sentence—the parties who are proposing to join their claims in a single trial….^[2]

The Court then rejected the argument that “plaintiffs” should be read as including both named and unnamed parties, finding that such a reading “stretches the meaning of ‘plaintiff’ beyond recognition” and would impose an “administrative nightmare” on the lower courts:

The term “plaintiff” is among the most commonly understood of legal terms of art: It means a “party who brings a civil suit in a court of law.” It certainly does not mean “anyone, named or unnamed, whom a suit may benefit,” as respondents suggest.

…

Yet if the term “plaintiffs” is stretched to include all unnamed individuals with an interest in the suit, then §1332(d)(11)(B)(i)’s requirement that “jurisdiction shall exist only over those plaintiffs whose claims [exceed $75,000]” becomes an administrative nightmare that Congress could not possibly have intended. How is a district court to identify the unnamed parties whose claims in a given case are for less than $75,000? Would the court in this case, for instance, have to hold an evidentiary hearing to determine the identity of each of the hundreds of thousands of unnamed Mississippi citizens who purchased one of respondents’ LCD products between 1996 and 2006 (the period alleged in the complaint)? Even if it could identify every such person, how would it ascertain the amount in controversy for each individual claim?

…

We think it unlikely that Congress intended that federal district courts engage in these unwieldy inquiries. By contrast, interpreting “plaintiffs” in accordance with its usual meaning—to refer to the actual named parties who bring an action—leads to a straightforward, easy to administer rule under which a court would examine whether the plaintiffs have pleaded in good faith the requisite amount. Our decision thus comports with the commonsense observation that “when judges must decide jurisdictional matters, simplicity is a virtue.”^[3]

The decision means that the troubling trend of retaining private class action lawyers to file public AG actions in state courts can continue and could conceivably quicken. It also raises a number of interesting questions the Court did not address, for example whether AG actions are barred by agreements to settle class actions brought on behalf of the same consumers,^[4] or affected by agreements to resolve claims in individual arbitration rather than representative litigation.^[5]

_{[1] The defendants did not ask the Court to hold that the case qualified as a “class action,” although they had raised that point below. See Opinion at 4 & n.2.}

_{[2] Opinion at 5-6 (emphasis in original, citations omitted).}

_{[3] Id. at 7-10 (citations omitted).}

_{[4] Cf. New Mexico ex rel. King v. Capital One Bank (USA) N.A., 13-0513, 2013 WL 5944087, at *4-8 (D.N.M. Nov. 4, 2013) (finding that class action settlement barred AG action to the extent it sought compensatory relief).}

_{[5] Cf. Iskanian v. CLS Transp. Los Angeles, LLC, 206 Cal. App. 4th 949, 964 (2012) (finding that Concepcion requires enforcement of waiver of right to bring representative action under California’s Private Attorney General Act), review granted Sept. 19, 2012 (No. S204032).}

Article by:

Michael P. Daly

Jessica D. Khan

Of:

Drinker Biddle & Reath LLP

I Scream, You Scream, We All Scream For…Ascertainability? Re: How Ben & Jerry’s Defeated an “All Natural” Class Certification Motion

On January 7, 2014, the Northern District of California refused to certify a class of Ben & Jerry’s purchasers who allegedly had purchased ice cream that was falsely advertised as “all natural.” Astiana v. Ben & Jerry’s Homemade, Inc., No. C 10-4387 PJH, 2014 U.S. Dist. LEXIS 1640 (N.D. Cal. Jan. 7, 2014). This opinion shows the continuing viability of arguments based on ascertainability and the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) to defeat consumer class actions. Thus, for many defendants, this opinion will get 2014 off to a delicious start.

In Astiana, the plaintiff alleged that certain Ben & Jerry’s ice creams were not “all natural” because they contained “alkalized cocoa processed with a synthetic ingredient.” Astiana, p. 4. After asserting claims under the Unfair Competition Law, False Advertising Law, as well as common law fraud and unjust enrichment, the plaintiff sought to certify a class of all California purchasers of “Ben & Jerry’s ice cream products that were labeled ‘All Natural’ but contained alkalized cocoa processed with a synthetic ingredient.”

The court denied class certification. First, the court held that the class was not ascertainable so that it was “administratively feasible to determine whether a particular person is a class member.” Astiana, p. 5. The court found that the plaintiff provided no evidence as to how the plaintiff could tell which consumers purchased ice cream with the synthetic ingredients because the synthetic ingredient was not present in every ice cream labeled as “all natural.” Furthermore, because cocoa could be processed with a “natural” alkali, the ingredient list that only said “processed with alkali” was insufficient to identify the non-natural ice creams. Even though only one supplier provided Ben & Jerry’s with the alkalized cocoa, the evidence demonstrated that the supplier did not know whether a synthetic ingredient was used in every instance. Thus, even if every package was labeled “all natural,” it was impossible to tell which products actually contained the synthetic ingredients that would make the advertised claim false under California law.

Second, applying Comcast, the court held that the plaintiff was required to show “that there is a classwide method of awarding relief that is consistent with her theory of deceptive and fraudulent business practices.” Astiana, p. 21. The plaintiff offered no expert testimony on calculating damages, contending, instead, that it would be “simple math” to calculate Ben & Jerry’s profits and award “restitutionary disgorgement.” The court held that this was insufficient: there was no evidence that the price of Ben & Jerry’s “all natural” ice cream was higher than its ice cream without that label, thus there was no evidentiary model tying damages to plaintiff’s theory of the case. Since Ben & Jerry’s sold its products at wholesale (rather than to the public directly), these calculations would be extremely difficult, thereby debunking the plaintiff’s claim that the damages could be figured out with “simple math” and proving the need for expert testimony. In light of the plaintiff’s failure to present evidence of “a damages model that is capable of measurement across the entire class for purposes of Rule 23(b)(3),” class certification was denied.

Astiana demonstrates that plaintiffs seeking to certify class actions involving small consumables will continue to run into ascertainability problems. See e.g. Carrera v. Bayer, Corp., 727 F.3d 300 (3d Cir. 2013). Astiana also represents the application of the strong reading of Comcast, essentially telling plaintiffs “No damages expert, no certification.” If courts continued to adopt this reading of Comcast, plaintiffs will no longer be able to gloss over these significant (and oftentimes difficult) damages issues by simply asserting that the court can certify now and figure out the damages later.

Article by:

Paul Seeley

Of:

Sheppard, Mullin, Richter & Hampton LLP

The Sixth Circuit Steps Back in Time on Certification of Consumer Classes

Richard A. Wilhelm of Dickinson Wright PLLC recently had an article, The Sixth Circuit Steps Back in Time on Certification of Consumer Classes, published in The National Law Review:

The United States Court of Appeals for the Sixth Circuit recently upheld the certification of an Ohio consumer class action in In re: Whirlpool Corporation Front-Loading Washer Products Liability Litigation, 678 F.3d 409 (6th Cir. 2012) (“Glazer”). Glazer is the Sixth Circuit’s second opinion on class certification since the Supreme Court decided Wal-Mart Stores, Inc. v. Dukes, ___ US ___, 131 S.Ct. 2541, 180 L. Ed. 2d 374 (2011). The first opinion, Gooch v Life Investors Ins. Co. of America, 672 F.3d 402 (6th Cir. 2012), involved class certification under Fed. R. Civ. P. 23(b)(2). Glazer was the Sixth Circuit’s first post-Dukes opinion to address certification under Fed. R. Civ. P. 23(b)(3).

For a number of years, culminating in Dukes, federal courts have moved away from deciding class certification based on the allegations in the plaintiff’s complaint and have instead focused on critically analyzing and resolving factual disputes that bear on certification issues, even if those factual disputes involve the merits of the case. In Glazer, the Sixth Circuit returned to an earlier era of class action jurisprudence. The district court addressed only the plaintiffs’ allegations and theories when it certified a class, and the Sixth Circuit, straining to avoid remand, assumed without any real basis that the district court had conducted the “rigorous analysis” that Dukes requires. In doing so, the Sixth Circuit overlooked factual issues relevant to certification, resulting in an opinion upholding certification based simply on the plaintiffs’ allegations.

Underlying Facts

Glazer is one of several consumer product putative class actions pending against Whirlpool in Multi-District Litigation (“MDL”) in the Northern District of Ohio. The plaintiffs in those cases alleged that all of the high efficiency front-load washing machines Whirlpool sold since 2002 were defective because they were more likely to develop mold growth and resulting odors than regular top-load washing machines. The plaintiffs alleged that the machines fail to completely rinse residue from internal components and remove spent water from the machines after the completion of a wash cycle, which causes mold to grow. Although the district court and Sixth Circuit opinions refer to “various alleged design defects,” they did not identify any specific defect; they simply described what the machines failed to do. The mold growth phenomenon was well publicized by consumer groups, and, over time, Whirlpool undertook to reduce the likelihood of mold growth by redesigning the machines, revising use and care instructions, and selling new cleaning products. The plaintiffs alleged that those efforts were ineffective.

In Glazer, the plaintiffs sought certification of an Ohio class made up of people who purchased the washing machines for personal, family or household use, and not for resale. The district court certified a liability-only class with respect to claims for tortious breach of warranty, negligent design and negligent failure to warn.¹ The district court refused to certify the class as to claims under the Ohio Consumer Sales Practices Act.

The District Court Opinion

At the class certification hearing, the district court acknowledged that there were several factual issues relevant to class certification, mostly having to do with “commonality” under Rule 23. In fact, the parties presented the district court with a mountain of depositions, expert reports and exhibits on those and other issues. However, the district court resolved none of the certification-related factual issues. Instead, citing Eisen, it took the position that any evidence that was contrary to the plaintiffs’ allegations on class certification, no matter how strong, went to the merits and could not be considered.

The district court granted certification based solely on the plaintiffs’ allegations and theories, and relied upon no facts, let alone did the court resolve any factual disputes. The district court wrote:

“Plaintiffs Allison and Glazer allege…”

“The defect, the plaintiffs contend…”

“The plaintiffs further allege….”

“The mold problem allegedly persisted …”

“The plaintiffs’ theory is…”

“The first element is common to the class, because, on the plaintiffs’ theory, …”

The district court’s class certification analysis reverted back to what Professor Nagareda has referred to as the “first-generation” of class certification decisions, based on “overreadings of Eisen” where the common questions were essentially defined by the allegations in the plaintiff’s complaint and the court was prohibited from probing the facts behind them, even if those facts were relevant to certification issues. Nagareda, “Class Certification in the Age of Aggregate Proof,” 84 N.Y.U.L. 97, 110 (2009).

Similarly, the district court also refused to analyze the defendant’s argument that the proposed class was overly broad because it included a significant number of class members who had manifested no injuries. Although the district court asked questions during argument about how many class members’ machines actually manifested the malodor problem, the opinion characterized that question as a merits issue, citing Eisen and Daffin.²

The Sixth Circuit Supported the Plaintiffs’ Theories with “Facts” in the Record

In affirming class certification, the Sixth Circuit observed:

Whirlpool contends that the district court improperly relied on Eisen to avoid consideration of the merits of plaintiffs’ legal claims, failed to conduct the required “rigorous analysis” of the factual record, and failed to make specific findings to resolve factual disputes before certifying the liability class. We disagree. The district court [***11] closely examined the evidentiary record and conducted the necessary “rigorous analysis” to find that the prerequisites of Rule 23 were met. See Gooch, 672 F.3d at 418 (rejecting a similar argument and concluding that the district court “probed behind the pleadings, considering all of the relevant documents that were in evidence”).

Glazer, 678 F.3d at 418. In light of the argument in the district court and the express language of the district court’s opinion, the Sixth Circuit’s conclusory analysis comes up short.

The oral argument in the district court makes clear that it failed to conduct a rigorous analysis. During one exchange, the district court pounced on defendant’s counsel after he simply acknowledged the plaintiff’s allegations on commonality, indicating that the court treated that mere acknowledgement as defendant’s concession that there were common questions:

THE COURT: You seem to just have completely undercut your argument. You had earlier argued that all these changes [in the designs of the machines] were significant, and now you are saying that the Plaintiffs’ real claim is, irrespective of any changes made in the machines, that there is one common defect that continues to cause oder [sic] problems without regard to whether you changed it in ’05, ’06, ’07.

So you have characterized their claim as being a common one; that there is something inherent in this design that causes the oder [sic] irrespective of what the consumer uses and irrespective of what changes you have made in the machine.

Trans. at 36. In fact, defense counsel had merely identified some of the individualized questions that would have to be decided in response to Plaintiffs’ claim:

“They will have to prove at trial that each of the design changes Whirlpool made failed to bring the level of malodor down. They will have to prove that for each of the machines, each of the plaintiffs, each of the members of the class, that they complied with the instructions in the owners’ manual.”

Trans. at 35.

Moreover, the district court specifically stated in the hearing that the defendant’s arguments about the lack of common questions based on the numerous design changes went to the merits (Trans. at 51) and, in the court’s written opinion, reaffirmed that it could not make any preliminary inquiry into the merits. Glazer, 2010 U.S. Dist. LEXIS 69254 at *2. Finally, as described supra, in analyzing commonality the court referred only to the plaintiffs’ theories and allegations.

The district court quite clearly treated any factual rebuttal to the plaintiffs’ allegations relating to class certification issues as merits issues that it could not, and did not, analyze. Nonetheless, the Sixth Circuit concluded that it did so by referring to the Sixth Circuit’s prior decision in Gooch, suggesting that its treatment of the district court’s certification analysis reviewed there applied equally to the analysis being reviewed in Glazer.

However, comparison to or reliance on Gooch is not appropriate for characterizing the district court’s analysis in Glazer. In Gooch, the district court, in reciting generic class certification law, included the following statement:

Albeit in a different type of legal claim, in Coleman v. General Motors Acceptance Corp., 196 F.R.D. 315, 318 (M.D. Tenn. 2000),vacated on other grounds, 296 F.3d 443 (6th Cir. 2002), the Court stated that: “The Court takes the allegations of the plaintiff as true and any doubts as to certifying the class should be resolved in the plaintiff’s favor.”

Gooch v. Life Investors Insur. Co. of America, 246 F.R.D. 340, 347 (MD Tenn. 2009). However, the district court went on to say that although “sometimes the issues are plain enough from the pleadings to determine whether the interests of the absent parties are fairly encompassed within the named plaintiff’s claim…sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question.” Id. The court then said that “the parties had submitted affidavits and exhibits that the court deems sufficient for the limited factual analysis required.” Id. Thus, the district court in Gooch did not take plaintiff’s allegations as true. The judge conducted the “limited factual inquiry” where it was necessary. In fact, the district court described the plaintiff’s deposition testimony that it considered on the issue of the plaintiff’s credibility when evaluating adequacy of representation. As to the issue of commonality, the district court in Goochindicated that the central issue in the case was the interpretation of an insurance policy issued and administered by the defendant which, under Alabama law, was an issue of law for the judge to decide. Thus, no factual analysis was required on the issue of commonality.

The district court in Gooch recited a proposition of law that it did not follow, and the principle claim was largely legal and required no factual analysis. The Sixth Circuit in Gooch emphasized “that the issues at the core of the certification dispute are legal and not factual.” Gooch, 672 F.3d at 417.

In stark contrast, in Glazer the issues at the core of the certification dispute were not legal. There were many factual issues presented to the district court, along with a raft of related evidence and testimony. Given the statements and characterizations in the district court’s opinion, it did not rely on or critically evaluate any of that material. The district court did not conduct a rigorous analysis, and the Sixth Circuit took it upon itself to identify facts that it determined might support the allegations and theories referenced by the district court, as well as other positions the plaintiffs assert to support certification. The Sixth Circuit went well beyond identifying allegations and theories, like the district court did in a single “Background” paragraph. In comparison, the Background portion of the Sixth Circuit opinion is comprised of 15 paragraphs it distilled from the record on appeal.

The district court opinion in Glazer is also in stark contrast to the district court opinion discussed in Young v. Nationwide Mutual Insur. Co., 2012 U.S. App. LEXIS 18625, 2012 Fed. App. 0302P (6th Cir. 2012). In Young, the Sixth Circuit held for the third time that it is harmless error for a lower court to state that it must accept the substantive allegations in the complaint as true when evaluating class certification. However, the district court’s written opinion in Young showed that it conducted a rigorous analysis by analyzing fact issues, and it even conducted a Daubert hearing relating to the plaintiff’s experts’ opinions on class proofs. The lower court’s written opinion in Glazershowed just the opposite.

The Sixth Circuit’s de novo fleshing out of the district court’s less-than-rigorous analysis had two effects. First, it prevented the defendant from challenging the appellate court’s fact finding, except through its subsequent unsuccessful motion for rehearing. Second, the appellate court was able to side-step important factual issues that bore on certification.

Proof of Defect Through Common Evidence

The Sixth Circuit’s overly narrow focus on facts supporting the plaintiffs’ allegations and theories caused it to fail to appropriately address a key issue for class certification, which is “predominance.” The district court found that the plaintiffs satisfied the commonality requirement based solely on the plaintiffs’ allegations and by “Plaintiffs’ theor[ies].” The Sixth Circuit upheld those “findings” based on facts it identified from the record on appeal that supported the plaintiffs’ theories:

Based on the evidentiary record, the district court properly concluded that whether design defects in the [front loading washers] proximately caused mold or mildew to grow and whether Whirlpool adequately warned consumers about the propensity for mold growth are liability issues common to the class…[t]hey will generate common answers likely to drive the resolution of the lawsuit.

Glazer, 678 F.3d at 419. Neither the district court nor the Sixth Circuit meaningfully analyzed the predominance requirement. Both simply referred back to what they stated on the issue of commonality.

The Sixth Circuit failed to address whether defects in the washers that allegedly resulted in mold growth could be established through common evidence. Instead of identifying and then rigorously analyzing product specific and manifestation-related facts to determine whether defects could be established through common evidence, the court ignored them in favor of a conclusory opinion by plaintiff’s expert that in effect presupposed commonality, i.e., differences don’t matter. While this may be a step beyond simply relying on the allegations in the complaint, it is not a very big step.³

Whirlpool presented unrebutted testimony that it manufactured the front-load washers over a long period of time (9 years), and that it sold over 3,000,000 units nation-wide (more than 150,000 in Ohio) consisting of 21 different models whose designs changed over time, in some cases to specifically address the mold issue. Maintenance and care instructions also evolved during this period. The plaintiffs’ response to those facts, which the district court accepted at face value, was the conclusory statement that none of it mattered. Unrebutted testimony also established that all washing machines, regardless of whether they were top or front-load, and regardless of whether the machines were high efficiency, can and do develop mold. Finally, very strong evidence established that less than 5% of consumers experienced a mold issue across all Whirlpool front-load models and designs. The only conflicting evidence on manifestation rates was a single survey that the plaintiffs represented showed that 35-50% of users reported a problem, and two pieces of correspondence, one obvious hearsay, misinterpreting the survey’s results. In response, Whirlpool established that the survey included both top and front-load washers, without breaking the results down between the two, and included machines manufactured by all manufacturers again, without breaking the results down by manufacturer. The district court did not address those “facts,” and did not resolve any factual issue. The Sixth Circuit acknowledged some of the positions Whirlpool advanced based on those facts, but made no effort to quantify the manifestation rate and relied only on plaintiffs’ expert’s opinion that changes did not matter.

A real question existed whether the plaintiffs could establish, on a class wide basis, that all products, models, and designs over 9 years had the same “various alleged design defects,” Glazer, 678 F.3d at 417, when 95% of purchasers never experienced a mold issue and, for the 5% that experienced the problem, it was a problem that could occur in non-defective machines. How will proof that one purchaser’s particular model of washing machine developed a mold problem more readily than it otherwise should have, due to any particular set of circumstances and causes, answer the question whether purchasers of all the other different models with different designs and who have not experienced any mold issue have defective machines, or that those defects caused malodor, under different circumstances? The common questions the Sixth Circuit identified essentially assumed a common defect. Despite the facts Whirlpool presented regarding multiple models and designs and low manifestation rates, the court essentially ignored them in favor of the plaintiffs’ expert’s conclusory opinion that variation doesn’t matter, thus allowing it to treat the case like Daffin where there was a single defect claim in one specific model of a vehicle manufactured during two years based solely on plaintiffs’ allegations. Glazer and Daffin could not be more different from one another.

Following Dukes, courts have conducted thorough factual analyses of whether defects can be proven through common evidence. Those courts deny certification where the cases involve multiple models and product designs, multiple sources or root causes of the manifestation or occurrence that allegedly results, and/or there is an infrequent likelihood of the manifestation or occurrence.

In Cholakyan v. Mercedes-Benz USA, 2012 U.S. Dist. LEXIS 44073 (C.D. Cal. March 28, 2012), the plaintiff consumer complained of interior water damage caused by leaks. The plaintiff sought to certify a California class of current or former owners or lessees of all 2003-2009 E-Class vehicles. The plaintiff alleged that the vehicles had defective “water drainage systems,” and further alleged the defects were unreasonably dangerous because the leaks could cause electrical failures, and that the defendant concealed the water leak defect.

On the issue of common questions, the plaintiff’s “central point” was that the class vehicles have a unitary “water management system” that is uniformly defective. The court did not accept that allegation on its face, but instead it probed the facts behind the contention. As a result, the court rejected the plaintiff’s argument.

Assuming arguendo that class vehicles experience water leaks, and that the leaks have a propensity to cause electrical malfunctions, the crucial question that must be answered is why each class member’s vehicle experienced water leaks. Cholakyan’s attempt to demonstrate that this question has a common answer for all class vehicles fails for several reasons. First, despite his efforts to identify a “water management system” in the class vehicles, the evidence that has been adduced shows that this so-called “system” is in fact an amalgamation of many different vehicle parts. There is no evidence that these disparate parts are conceptually part of a single system or physically connected to one another in any material way.

Id. at *56. (emphasis added)

*****

Putting aside whether any of these “systems” clog to the extent that they cause electrical malfunctions in the vehicles, Cholakyan has failed to establish that they are connected with one another or that they are designed to work in concert. There is also no evidence that a single design flaw that is common across all of the drains in question is responsible for the alleged water leak defect.

Id. at *58.

The court concluded:

Beyond Cholakyan’s inability to identify a single system causing the water leaks, the parties adduce evidence that there is substantial design variation among the class vehicles. Cholakyan’s proposed class definition includes owners and lessees of Model 211 vehicles manufactured and sold over six years. As one example of this variation, Cholakyan relies on defects in the purported “sunroof drainage system.” Not all the class vehicles even have a sunroof, however, much less a drainage system connected to a sunroof. [footnote omitted] There is also variation in vehicles that have sunroofs, specifically in whether they have drain tubes [*65] that run down the A-pillars and exit through the areas identified in the DTBs. 98 Additionally, the design of the vehicles varied from year to year, further undercutting Cholakyan’s evidence of commonality. [footnote omitted] While it is not entirely clear that these variations are material to the functioning of the vehicles’ drains, it is Cholakyan’s burden to demonstrate commonality, and he has failed convincingly to rebut defendant’s evidence regarding the lack of an integrated water management system and regarding design variations among class vehicles.

Id. at *64-5. In addition, the court observed in a footnote that “[c]ausation problems also stand in the way of identifying common issues here because environmental circumstances, use factors, and a vehicle owner’s maintenance habits all contribute to whether or not the vehicle’s drains clog.”

Relying in part on Cholakyan, a similar result was reached in Edwards v. Ford Motor Company, 2012 U.S. Dist. LEXIS 81330 (S.D. Cal. June 12, 2012). In Edwards, the plaintiff sought certification of a putative class of current and former California residents who owned 2005 – 2007 Ford Freestyle vehicles with allegedly defective electronic throttle control (“ETC”) systems. The plaintiff claimed that this common defect caused sudden, unintended “surging.” She claimed that Ford knew about the defective ETC system but failed to disclose the defect to consumers.

Initially, the court noted that because all of the plaintiff’s claims depended on the a defect that causes surging, the fundamental question in the case was “whether the 2005 through 2007 Ford Freestyle models contain a defect that causes the cars to accelerate without corresponding driver input, and, if so, how to define the defect.” Id. at *12.

On that issue, Ford presented unrebutted expert testimony indicating that numerous systems and components in the vehicles besides the ETC system could cause the problem plaintiff described as surging. Although there may have been a common manifestation of a defect – surging — there was not a common cause of the manifestation. Because the cause of the surging would have to be analyzed for each individual plaintiff, common questions did not predominate.

In Johnson v. Harley-Davidson Motor Company Group LLC, 2012 U.S. Dist. LEXIS 72048 (E.D. Cal. May 23, 2012), the plaintiffs claimed that certain motor cycle engines generated too much heat which resulted in premature engine wear, alleging that all of the engines suffered from a common design defect. The plaintiffs identified the “defect” as a combination of the size of the engines and the fact they were designed to operate on lean fuel mixtures to satisfy emissions regulations. In addition, the plaintiffs alleged that the excessive heat could distract the rider, which raised safety concerns. The plaintiffs sought to certify a class of “[a]ll persons who between October 1, 2006 and the date the class may be certified, purchased in California a motorcycle manufactured by Defendants with an air-cooled 88 or 96 cubic inch V-Twin Cam engine.” Id. at *6.

On the issue of common proof of defect, the plaintiffs’ position was that both parties could simply measure the temperature of the skin of riders to prove or disprove whether the air-cooled V-Twin design causes riders to experience excessive and unsafe skin temperatures. However, the defendant produced evidence that the task would not be so easy.

The defendant noted that the motorcycles at issue were comprised of over 130 different configurations and designs, with varying engine sizes and output and various exhaust system designs, that could affect both engine temperature and the rider’s sensation of the heat. In addition, the defendant identified numerous other factors, such as the rider’s sitting position, posture and leg position that could affect the heat experienced by the rider. Based on those facts, the court held that proof of defect could not be established through common evidence.

Johnson relied on In re Hitachi Television Optical Block Cases, 2011 U.S. Dist. LEXIS 109995, 2011 W.L. 4499036 (S.D. Cal. Sept. 27, 2011). Johnson described In re Hitachi as follows:

In Hitachi, the Plaintiffs identified forty-three different model televisions alleged to have the same design defect. 2011 U.S. Dist. LEXIS 109995, 2011 WL 4499036, at *3. These models all used one of seven different Optical Blocks. Id. The Hitachi Plaintiffs’ expert stated, similar to Darnell’s testimony, that although there are minor differences in the Optical Blocks, there is no material difference amongst them in the common design scheme. 2011 U.S. Dist. LEXIS 109995, [WL] at *3-4. The Hitachi Defendants, like the Defendants here, pointed out that there were numerous and significant distinctions in specific parts of the product. 2011 U.S. Dist. LEXIS 109995, [WL] at *4. The Hitachi Plaintiffs, like the instant Plaintiffs, did not appear to dispute that these differences exist, instead they argued the differences were immaterial. 2011 U.S. Dist. LEXIS 109995, [WL] at *5. The Hitachi court held that:

There is no dispute that the Optical Block is made up of numerous component parts. It is not a single piece of equipment, nor was its design uniform across the different models at issue in this case. Under these circumstances, common issues do not predominate over individual issues on the issue of a design defect.

Id.

Johnson at *12-13. Based on the facts and the decision in In re Hitachi, the court in Johnson concluded that there was no common method of proof to show whether there is a design defect. The court also noted that it was telling that there were literally no customer complaints about allegedly excessive heat.

Other courts have made similar rulings in cases involving multiple models or alleged defects, emphasizing the low rates of manifestation of the injury resulting from the alleged defects. In Maloney v. Microsoft Corporation, 2012 U.S. Dist. LEXIS 28676 (D. N.J. March 5, 2012), the court denied certification of a class in a matter involving multiple alleged design defects and low manifestation rates. The plaintiff sought to represent a class of purchasers and owners of certain MP3 players whose LCD inner screens cracked without cracking of the outer skin. The cracks allegedly resulted from 5 alleged design defects, and the manifestation rate of cracking was 1.3% of the MP3 players the defendant sold. The court found that common questions did not predominate on either causation or defect. As to causation the court stated:

To begin, any factual dispute concerning whether causation is capable of proof at trial through common evidence must be determined by the Court. See In re Hydrogen Peroxide, 552 F.3d at 307. This requires the “weighing [of] conflicting expert testimony,” and the Court must “[r]esolve expert disputes in order to determine whether [the predominance] requirement has been met.” Id. at 323-24. The Court must engage in this analysis even if it overlaps with the merits. Id. at 317-18. However, “[t]he Court’s role is not to determine which side will prevail on the merits, but [only] to determine if the putative class could prevail on the merits using common proofs.” Marcus v. BMW of N.A., LLC, No. 08-5859, 2010 U.S. Dist. LEXIS 122908, at *30-31 (D.N.J. Nov. 19, 2010).

Id. at *7. The court also stated that:

Plaintiff then points to three pieces of evidence that are purportedly common proof that these alleged design defects caused each proposed class member’s injury: (1) proposed class members’ LCD screens fractured without external damage to the outer lens covering the LCD screen; (2) these LCD screen fractures were “disproportionately clustered around [*7] four identified internal design defects”; and (3) 30gb model Zunes “were 20 times more likely to crack without external damage than were LCD screens on the later-model 80GB Zune.” (Id. 2). These purported proofs, however, fail to establish that any of the five alleged design defects caused class members’ injuries because this evidence suffers from what the United States Supreme Court has termed a “failure of inference.” Wal-Mart Stores, Inc. v. Dukes, U.S. , 131 S. Ct. 2541, 2555, 180 L. Ed. 2d 374 (2011).

Id. at *6-7.

*****

….. As framed by the Plaintiff, the LCD cracks covered under the proposed class result from a muddled mix of causes and effects. There is no indication that each purported cause led to a uniform result (e.g., an origination point in the same location), which would permit the Court or a jury to draw an inference of a design defect. See Ford Ignition, 194 F.R.D. at 490, n.4 Thus, there is no way to determine which of these [*13] five purported causes or which grouping of these causes led to which individual LCD crack or group of LCD cracks.

Id. at *13-14.

With respect to proof of a defect by common evidence, the court similarly found that common questions would not predominate:

…..Plaintiff’ s claim, however, is premised on a design defect in all 30gb Zunes– the vast majority of which showed no signs of a defect. This “lack of evidence of a common defect amongst the majority of users [is] instructive as to the plaintiff’s failure to demonstrate that common factual issues predominate over individual ones.” Payne, 2010 U.S. Dist. LEXIS 52808, at *14 (citing Arabian v. Sony Elecs. Inc., No 05-1741, 2007 U.S. Dist. LEXIS 12715, at *39).

Id. at *22. See also, In re Canon Cameras Litigation, 237 F.R.D. 357 (S.D.N.Y. 2010) (Plaintiff could not establish predominance in its claims that purchasers of 13 specific Canon cameras were defective due to various defects. Canon pointed out that less than 0.2% of the cameras in issue malfunctioned for any reason and those few that did, malfunctioned so due to a variety of factors, including customer misuse.) Payne v. Fujifilm USA, 2010 U.S. Dist. LEXIS 52808 (D. N.J. May 28, 2010) (class not certified where manifestation rate for all problems was 4% and less than 2% for specific problem at issue).

Glazer has many of the same attributes that led to denial of certification in these decisions – multiple defects, multiple models and designs, changing use and care instructions, and low rates of manifestation. Thus, the issue of whether the plaintiffs could establish a defect and causation through common evidence, and whether common issues predominated, should have been more thoroughly evaluated in this case. Instead, the district court and Sixth Circuit effectively mischaracterized the facts and claims as “Daffin-like” and misdirected its attention elsewhere.

Certification of a Class of Ohio Purchasers of Front-Load Washers Where a Majority of the Class Has Not Sustained Any Injury

Instead of properly analyzing the fact issues, including lack of manifestation, presented to the court on whether defect and causation could be proven with common evidence, or whether like proof of damages, individual questions would predominate, both the district court and the Sixth Circuit in Glazer instead looked at the issue of manifestation only in the context of whether the class as defined was overly broad because it included class members whose washers had not developed mold or malodor. That focus resulted largely from Whirlpool’s briefing.

In the district court, Whirlpool argued that, as defined, the proposed class was overly broad because it included purchasers whose washers had not manifested any mold problems. The district court rejected that argument, stating that “whether any particular plaintiff has suffered harm is a merits issue not relevant to class certification.” The court cited Eisen and Daffin for the general proposition that the court should not make a merits inquiry in evaluating certification. The district court’s reliance on Daffin was misplaced because Daffin contains no such holding. Daffin simply held that whether the express warranty at issue required manifestation was a merits issue that could not decide in determining whether to certify. Because it could not address that predicate issue, the lack of manifestation could not be a factor in evaluating typicality. The court went on to say that if the district court subsequently determined that the warranty required manifestation, the class could be decertified.

On appeal in Glazer, Whirlpool made the same argument, albeit in a limited way. Its basic point was that “a class comprised primarily of uninjured persons who would not have standing to bring a claim on their own behalf cannot be certified.” Phrased differently, no class may be certified that contains members lacking standing. Several circuit courts have held this to be the law. Arvitt v. Reliastar Ins. Co., 615 F.3d 1023(8th Cir. 2010); Denny v. Deutsche Bank AG, 443 F.3d 253 (2nd Cir. 2006); Mazza. v. American Honda Motor Co., Inc., 666 F.3d 581 (9th Cir. 2011).

The Sixth Circuit rejected that argument referencing an eclectic collection of precedent. First, the court referenced (b)(2) class decisions:

“What is necessary is that the challenged conduct or lack of conduct be premised on a ground that is applicable to the entire class.” Gooch, 672 F.3d at 428 (internal quotation marks omitted). Class certification is appropriate “if class members complain of a pattern or practice that is generally applicable to the class as a whole. Even if some class members have not been injured by the challenged practice, a class may nevertheless be appropriate.” Id. (quoting Walters v. Reno, 145 F.3d 1032, 1047 (9th Cir. 1998)) (internal quotation marks omitted).

Glazer, 678 F.3d at 420. Walters was a civil rights case challenging, on procedural due process grounds, administrative procedures used by the INS. The class certified below was a Rule 23(b)(2) class. The language quoted in Glazer actually appears in a statement distinguishing a (b)(2) from a (b)(3) class action.

Although common issues must predominate for class certification under Rule 23(b)(3), no such requirement exists under 23(b)(2). It is sufficient if class members complain of a pattern or practice that is generally applicable to the class as a whole. Even if some class members have not been injured by the challenged practice, a class may nevertheless be appropriate.”

Walters, 145 F.3d at 1047. Thus, the applicability of this language to a (b)(3) class requiring that common questions predominate is questionable.

Next, the Sixth Circuit properly did not rely on Daffin for the proposition that “proof of manifestation is not a prerequisite to class certification.” Instead it cited a Ninth Circuit decision, Wolin v. Jaguar Land Rover North America, LLC 617 F.3d 1168 (9th Cir. 2010).⁴ Wolinindeed contains the quoted language, but it too cites to an earlier decision, Blackie v Barrack, 524 F.2d 891 (9th Cir. 1975), for the proposition.

Blackie was a securities fraud case, and was an appeal from a “conditional” grant of class certification. The defendants contended that the district court engaged in improper speculation when it determined whether common questions existed. The Ninth Circuit’s response was as follows:

Defendants misconceive the showing required to establish a class under Hotel Telephone Charges. We indicated there that the judge may not conditionally certify an improper class on the basis of a speculative possibility that it may later meet the requirements. 500 F.2d at 90. However, neither the possibility that a plaintiff will be unable to prove his allegations, nor the possibility that the later course of the suit might unforeseeably prove the original [**28] decision to certify the class wrong, is a basis for declining to certify a class which apparently satisfies the Rule. The district judge is required by Fed. R. Civ. P. 23 (c)(1) to determine “as soon as practicable after the commencement of an action brought as a class action . . . whether it is to be so maintained.” The Court made clear in Eisen IV that that determination does not permit or require a preliminary inquiry into the merits, 417 U.S. at 177-178; thus, the district judge is necessarily bound to some degree of speculation by the uncertain state of the record on which he must rule. An extensive evidentiary showing of the sort requested by defendants is not required. So long as he has sufficient material before him to determine the nature of the allegations, and rule on compliance with the Rule’s requirements, and he bases his ruling on that material, his approach cannot be faulted because plaintiffs’ proof may fail at trial…..

524 F.2d at 901.

It made some sense in the age of overreadings of Eisen and in the context of addressing class certification on a conditional basis very early in the case, when little discovery has been done, that speculative manifestation rates would not preclude class certification. The court would likely not know whether 90% or 2% of the putative class had actually suffered the complained of failure. However, it makes much less sense today when conditional certification is no longer allowed and where thorough discovery precedes consideration of class certification. Manifestation rates can be thoroughly tested and analyzed in this context, especially when the class period spans a decade or more during which manifestation rates can be more easily verified. Today, the blanket proposition upon which Wolinrelied is an anachronism. The proposition should not be used as a basis for excluding consideration of the lack of manifestation where it bears on certification requirements like predominance or typicality. It makes little sense to certify a huge class in which all but a few of the putative class have not been harmed through the manifestation of a defect.

Next, the court cited opinions from the Ninth Circuit for the proposition that Article III standing in California state Unfair Competition Law (UCL) claims can be established by alleging point-of-sale injury (i.e., that the plaintiff paid more for the product than it was worth). The court presents the proposition without discussion of the facts and Ohio tort law causes of action in Glazer.

Finally, Glazer cited Sullivan v. DB Investments, Inc., 667 F.3d 273 (3rd Cir. 2011), for the proposition that “’Rule 23(b)(3) does not…require individual class members to state a valid claim for relief’ and that the ‘question is not what valid claim can plaintiffs assert; rather, it is simply whether common questions of common fact or law predominate.’” Glazer 678 F3d at 421. Glazer’s citation to Sullivan is interesting and shows how far a court can go in glossing over certification requirements in certifying a settlement class, something Glazer suggested be done in this case.5

Setting aside Glazer’s reliance on a mixed collection of inapposite authority, there is a practical problem with the result. Certifying a broad class comprised of all owners or purchasers of many different models of a product where the manifestation rate for the alleged defect is very small creates a pretty big cudgel to brandish against a defendant. That problem has been recognized in the context of overly broad class definitions.

In Kohen v. Pacific Investment Management Company LLC, 571 F.3d 672 (7th Cir. 2009), the plaintiff accused the defendants of violating the Commodity Exchange Act by cornering a futures market. The defendant claimed that the class should not be certified because not all class members lost money while speculating in the futures market. Some made money. The court responded in part as follows:

A related point is that a class should not be certified if it is apparent that it contains a great many persons who have suffered no injury [**13] at the hands of the defendant, [citations omitted] if only because of the [*678] in terrorem character of a class action. [citations omitted] When the potential liability created by the lawsuit is very great, even though the probability that the plaintiff will succeed in establishing liability is slight, the defendant will be under pressure to settle rather than to bet the company, even if the betting odds are good. [citations omitted] For by aggregating a large number of claims, a class action can impose a huge contingent liability on a defendant…..This suit does not jeopardize [PIMCO’s] existence. But it has good reason not to want to be hit with a multi-hundred-million-dollar claim that will embroil it in protracted and costly litigation – the class has more than a thousand members, and determining the value of their claims, were liability established, might thus require more than a thousand separate hearings.

So if the class definition clearly were overbroad, this would be a compelling reason to require that it be narrowed. [citations omitted]

Id. at 677-8. The court concluded that PIMCO had not yet established the magnitude of the class members that had not been injured and hence the extent to which the class was overly broad.

The Sixth Circuit’s complete rejection of the argument that a class definition should be narrowed where it includes mostly uninjured members while at the same time avoiding the issue of lack of manifestation in the context of predominance does nothing to alleviate the impact certification can have on the defendant. Although Glazer only involved an Ohio class, at least 13 other cases involve other state-wide classes pending in the MDL. The impact of class certification on the defendant is not at all small. Given the evolution of class action law away from determining certification based on the plaintiff’s allegations and requiring a more meaningful and rigorous analysis of the underlying facts, factual disputes and expert testimony relating to certification after full discovery of class issues, courts should consider lack of manifestation in determining whether to certify the class and not simply reject it out of hand. Put another way, if the certified class, like the class in Glazer, contains mostly members whose machines have not and likely will not develop mold and odors, then the court should take a harder look at certification issues of predominance and typicality.6

Conclusion

Glazer is a step back in time to the days of the “first generation” class certification decisions. Its outcome was dictated by complete reliance on the plaintiffs’ allegations, theories and causes of action, with little attention given to analyzing underlying factual disputes bearing on certification. Although the Sixth Circuit acknowledged the admonitions in Dukes concerning the proper interpretation of Eisen, it did not follow those principles. Instead, the court back-tracked to the pre-Dukes era where the plaintiffs’ allegations guided the decision, while largely ignoring the underlying facts and issues bearing on certification. As a result, the Sixth Circuit upheld certification of a consumer product class without the necessary rigorous analysis of all of the class certification requirements.

1 Plaintiffs conceded that damages required individualized proofs. In re: Whirlpool Corporation Front-Loading Washer Products Liability Litigation, 2010 US Dist LEXIS 69254 (ND Ohio July 12, 2010)*9 (hereinafter also referred to as “Glazer”).

2 Daffin v. Ford Motor Company, 458 F.3d 549 (6th Cir. 2006). The Sixth Circuit in Daffin said that whether Ford’s express warranty requires that a defect manifest itself in order to make the warranty applicable is a question of contract interpretation, which is a merits issue the court could not decide in a class certification motion. Ford’s express warranty said it would “repair or replace…any parts on your vehicle that are defective in material or workmanship….” [as opposed to parts that fail due to a defect]. Ford argued the warranty required manifestation, but the warranty did not expressly say so. Therefore that the defect had not manifested itself in some class members’ vehicles was not a basis to deny certification at that stage of the litigation. A single defect was alleged in a single vehicle model, so whether there was a defect in that vehicle was a common question. If the district court later agreed with Ford’s interpretation of its warranty, the court could de-certify the class.

3 Professor Nagareda made a similar observation in the context of reliance on expert opinions of aggregate proof of sophisticated statistical or economic analysis “that presumes a view of the proposed class in the aggregate.”

“Certification based simply on the assertions in the complaint or an admissible expert submission exhibits a troubling circularity. The legitimacy of aggregation as a procedural matter would stem from the [strategic] shaping of proof [for purposes of class certification] that presupposes the very aggregate unit whose propriety the court is to assess.”

Nagareda, 84 N.Y.U.L. at 125-26.

4 The appellate court in Wolin reversed a lower court ruling that certification is not appropriate unless the plaintiffs proved that the defect manifested itself in a majority of the class’s vehicles.

5 In the “Background” section of its opinion, the Circuit Court in Glazer included reference to the fact that Whirlpool had settled an earlier class action involving different washing machines that allegedly experienced some degree of mold growth. Later, it also referenced the possibility of settlement is this action as well. One can’t help but wonder whether the direction of the Circuit Court’s opinion was influenced by a belief that settlement was the appropriate resolution for this case as well and it was, in effect, certifying a settlement class.

6 The Sixth Circuit implicitly acknowledged concern about including members in the class who had no manifest injury. It suggested that the district court consider certifying a Rule 23(b)(2) subclass of members who have not had any mold issues which could obtain declaratory and injunctive relief to protect their interests should they experience the problem in the future. Glazer, 678 F3d at 421. Effectively, the court would rewrite Whirlpool’s warranty for this subclass to waive time limits. This of course does not resolve the issue of whether, under a more thorough predominance analysis, the class of predominantly uninjured consumers should have been certified in the first place.

The Supreme Court Paves the Way to End Consumer Class Actions

Litigation Department of Barnes & Thornburg LLP‘s article regarding Consumer Class Actions was recently published in The National Law Review:

Last year, the Supreme Court removed state law prohibitions on contractual agreements to waive class action rights. Because disputes involving small dollar amounts (only $30.22 per plaintiff in a recent Supreme Court case and a $2.99-per-month service for plaintiffs in a recent 11th Circuit decision) provide little incentive for plaintiffs’ lawyers (or the plaintiffs themselves), these cases have often materialized as class actions resulting in massive class fees and statutory damages. As a result, many businesses include arbitration provisions in their consumer contracts that contain a class action waiver provision to require individual plaintiffs to bring their claims on their behalf alone.

Although most courts have enforced class action waivers in arbitration provisions considering the U.S. Supreme Court’s long-standing position that arbitration agreements must be enforced according to their terms, some state high courts have struck down contractual agreements not to bring class actions, including class arbitrations, as unconscionable and a violation of state public policy. At least California, New Jersey, and Massachusetts’ Supreme Courts had issued such decisions in the last seven years. See Discover Bank v. L.A. County Superior Court, 36 Cal. 4th 148 (Cal. 2005); Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006); Feeney v. Dell Inc., 908 N.E.2d 753 (Mass. 2009).

The California Supreme Court in Discover Bank held that class action waivers in consumer arbitration agreements were unconscionable if the agreement is an adhesion contract and involves small amounts of damage in dispute where the party with inferior bargaining power alleges a deliberate scheme to defraud. 36 Cal. 4th at 162-63. Similarly, in New Jersey, the Supreme Court held that the class-action waiver in the arbitration agreement was “clearly a contract of adhesion” and that the prohibition of class actions would prevent plaintiff from pursuing her statutory consumer protection rights and shield defendants from compliance with state laws. Muhammad, 912 A.2d at 100-01. The Massachusetts Supreme Court similarly held that “public policy sometimes outweighs the interest in freedom of contract” when it refused to enforce an arbitration provision prohibiting class actions. Feeney, 908 N.E.2d at 761-62.

In April of 2011, however, the United States Supreme Court held that agreements not to arbitrate through class actions should be enforced and overruled Discover Bank in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In Concepcion, the putative class complained that AT&T advertised free cellular phones with the purchase of AT&T service, yet the consumers were charged $30.22 in sales tax based on the phones’ retail value. Despite AT&T’s extensive arbitration provision that was described as “quick, easy to use” and would likely result in “promp[t] full or … even excess payment to the customer without the need to arbitrate or litigate” the Ninth Circuit, relying on Discover Bank, nonetheless found that the waiver of the ability to bring a class action was unconscionable. Laster v. AT&T Mobility LLC, 584 F.3d 849, 855 (9th Cir. 2009). On certiorari, the Supreme Court held that, because it is a fundamental principle that arbitration is a matter of contract and those contracts must be enforced according to their terms, and where, by contrast, state law prohibits outright the arbitration of a particular claim, the conflicting rule is displaced by the Federal Arbitration Act. The Supreme Court thus reversedDiscover Bank holding that the rule of Discover Bank stood “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”Concepcion, 131 S.Ct. at 1753.

In August of last year, the Eleventh Circuit followed the rule of law established byConcepcion. Cruz v. Cingular Wireless, LLC, 648 F.3d 1205 (11th Cir. 2011). The plaintiffs in Cruz were customers of Cingular Wireless (which was acquired by AT&T) and had signed the same binding arbitration agreement that was litigated inConcepcion. In Cruz, plaintiffs complained that Cingular Wireless had fraudulently included a $2.99 monthly “Roadside Assistance” charge to plaintiffs’ monthly bills in violation of Florida’s Deceptive and Unfair Trade Practices Act. Cruz v. Cingular Wireless, LLC, No. 2:07-cv-714-FtM-29DNF, 2008 WL 4279690 at *1 (M.D. Fla. Sept. 15, 2008). Plaintiffs alleged that they never ordered the service and the charges were hidden in their telephone bills. The Eleventh Circuit heard oral argument in Cruz before the Supreme Court rendered the decision in Concepcion; however, it was awaiting the Florida Supreme Court’s answers to a series of certified questions related to determining the substantive questions of unconscionability under Florida law and the time Concepcion was decided.

In its decision, the Eleventh Circuit echoed the Supreme Court: arbitration provisions will be enforced as written − including waivers of class action rights. The court acknowledged that, even if Florida law would be sympathetic to plaintiff’s arguments that absent class procedures numerous claims of small values where potential plaintiffs do not even know of their claims, defendants may violate Florida law, a state policy that stands as an obstacle to the Federal Arbitration Act’s objective of enforcing arbitration agreements according to their terms is preempted. Cruz, 648 F.3d at 1213.

The Third Circuit similarly held that the Federal Arbitration Act specifically preempted the rule established by the New Jersey Supreme Court in the Muhammad decision. In Litman v. Cellco Partnership, 655 F.3d 225 (3d Cir. 2011), the Third Circuit stated, “[w]e understand the holding of Concepcion to be both broad and clear: a state law that seeks to impose class arbitration despite a contractual agreement for individualized arbitration is inconsistent with, and therefore preempted by, the FAA, irrespective of whether class arbitration ‘is desirable for unrelated reasons.’” Id. at 231.

Although a waiver of the right to pursue a claim as a class action can be challenged under grounds of fraud or duress under the savings clause of section 2 of the Federal Arbitration Act, these arguments would likely require individualized arguments that could not apply in a class action context. As a result, it appears that future “unconscionability” attacks to contractual class action waivers will fail under the analysis of Concepcion, Cruz, and Litman. This is a big win for businesses who thoughtfully draft their consumer contracts to avoid class action plaintiffs’ attorneys’ fees and exponential damages.

Just as a waiver of the right to a jury trial or the limiting of consequential damages have become routine in many consumer contracts, the waiver of the ability to bring a class action should be considered in all consumer contracts. For example, the language contained in the contracts enforced in the Conception and Cruz cases provided for arbitration of all disputes between the parties and requires that those disputes be brought in the consumer’s “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding. Further, unless you and [business] agree otherwise, the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.” Similar language, less than fifty words, could save millions for a business involved in consumer contracts in the wake ofConception, Cruz, and Litman.

*Until March 2012, Monica Brownewell Smith was a partner in the Litigation Department. While she raises her young children, Monica is working for the Firm as a contract attorney.

Here We Go Again: Another Attempt at Recovery for Ratepayers Resulting from KeySpan-Morgan Stanley Swap

Found recently in the National Law Reviewwas an article by Daniel E. Hemli and Jacqueline R. Java of Bracewell & Giuliani LLP regarding KeySpan-Morgan Stanley:

Another class action lawsuit has been filed against KeySpan Corporation (KeySpan) and Morgan Stanley Capital Group Inc. (Morgan Stanley), claiming damages for antitrust violations resulting from an allegedly illegal swap agreement that allowed KeySpan to manipulate energy prices in the New York City electric generating capacity market (NYC Capacity Market), see Konefsky et al. v. KeySpan Corp., et al., Case No. 1:12-cv-00017. The complaint was filed on January 6, 2012 in the U.S. District Court for the Western District of New York on behalf of electric customers of National Grid, which purchased electric energy and capacity in the NYC Capacity Market from 2006 through 2009. The plaintiffs, two law professors, are seeking on behalf of the class millions in damages and disgorgement of unlawfully obtained profits for alleged violations of Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act, as well as analogous New York state laws.

As described in previous blog entries in February 2010 and February 2011, the underlying actions that led to this complaint involve a 2006 financial swap agreement between KeySpan and Morgan Stanley, which gave KeySpan an indirect financial interest in the sale of generating capacity by its largest competitor, Astoria Generating Company, in the NYC Capacity Market. At that time, approximately 1000 MW of new generation was poised to come online in that market. Previously, due to tight supply conditions, KeySpan, as the largest seller of installed capacity in the market, had been able to bid at or near the applicable bid cap without risking loss of sales. The anticipated addition of new generating capacity threatened to upset the status quo and put downward pressure on prices.

In February 2010, the Department of Justice (DOJ) brought an action against KeySpan alleging that the swap resulted in a violation of Section 1 of the Sherman Act. The DOJ claimed that KeySpan’s financial interest in Astoria’s capacity reduced KeySpan’s incentive to competitively bid its capacity, enabling KeySpan to profitably bid capacity at the price cap, despite the addition of significant new generating capacity that otherwise likely would have caused prices to drop. According to the DOJ, this arrangement led to higher capacity prices in New York City and, in turn, higher electricity prices for consumers than would have prevailed otherwise, thereby violating Section 1 of the Sherman Act. KeySpan agreed to pay $12 million in disgorgement of profits to the U.S. Treasury to settle the matter. The DOJ subsequently also took action against Morgan Stanley, simultaneously filing a complaint and proposed settlement on September 30, 2011 pursuant to which Morgan Stanley agreed to pay $4.8 million in disgorgement.

The latest class action complaint is similar to another class action brought against KeySpan and Morgan Stanley, in the U.S. District Court for the Southern District of New York, see Simon v. KeySpan Corp., et al., Case No. 1:10-cv-05437. That attempt to obtain a judgment on behalf of ratepayers was rejected by the district court in March 2011. In dismissing the Simon complaint, the court explained in its opinion that (i) because the class members were indirect purchasers of electric generation capacity, they had not suffered antitrust injury and therefore lacked antitrust standing to bring the case; (ii) the filed rate doctrine, which bars private actions where a rate has been previously approved by FERC, applied in that case; and (iii) plaintiff’s state law claims were barred by the doctrine of federal preemption. That case is currently being appealed to the Second Circuit.

Beware of Online Applications and Background Check Authorizations

Posted in the National Law Review on December 15, 2011 an article by Luis E. Avila, Nancy L. Farnam, Richard D. Fries, Jeffrey T. Gray, Jr., Richard A. Hooker and David E. Khorey of Varnum LLP regarding class actions against employers’ conducting background checks:

An increasing number of employers have been recipients of proposed class actions alleging that the way they conduct background checks on prospective employees violates the Fair Credit Reporting Act 15 U.S.C. §1681 (“FCRA”).

A recent example is a claim filed in Virginia, which focuses on the employer’s online job application. The process asks potential employees whether they are willing to allow the company to obtain a consumer report or criminal background check on them. Applicants must then click a button labeled either “Accept” or “Decline.” The claim alleges that for purposes of the FCRA, an electronic disclosure is not one made “in writing” and that an electronic signature (Accept/Decline) does not satisfy the requirements of the act.

As it relates to employers conducting background checks on prospective employees, the FCRA requires that a person may not procure a consumer report for employment purposes with respect to any consumer, unless (1) a clear and conspicuous disclosure has been made in writing to the applicant at any time before the report is procured, in a document that consists solely of the disclosure that a consumer report may be obtained for employment purposes; and (2) the consumer has authorized in writing the procurement of the report by that person.

Electronic disclosures of this sort have traditionally been viewed as falling under the Electronic Signatures in Global and National Commerce Act (“E-Sign”). However, this claim challenges this understanding of E-Sign by alleging that the law does not apply to job applicants, but instead only to consumers, which it defines as an individual who obtains products or services.

Under the FCRA, employers may be liable to each class member for up to $1,000.00 or actual damages, plus punitive damages and attorneys’ fees and costs. So far this year, two companies have agreed to multimillion-dollar settlements in similar cases.

We strongly recommend that employers review their online job application process to ensure that it does not run afoul of the FCRA and obtain competent labor counsel to address any concerns

U.S. Supreme Court Rejects Gender Discrimination Class Action Against Wal-Mart

Posted earlier this week at the National Law Review by the Labor and Employment Group of Sheppard, Mullin, Richter & Hampton LLP a good overview of the implications of the Wal-Mart Stores, Inc. v. Dukes case.

On June 20, 2011, the United States Supreme Court released its widely-anticipated decision in Wal-Mart Stores, Inc. v. Dukes, et al., 564 U.S. ___ (2011) (“Wal-Mart“). In Wal-Mart, the Supreme Court reversed the Ninth Circuit Court of Appeals and held that the proposed nationwide gender discrimination class action against the retail giant could not proceed. In a decision that will come as welcome news to large employers and other frequent targets of class action lawsuits, the Supreme Court (1) arguably increased the burden that plaintiffs must satisfy to demonstrate “common questions of law or fact” in support of class certification, making class certification more difficult, especially in “disparate impact” discrimination cases; (2) held that individual claims for monetary relief cannot be certified as a class action pursuant to Federal Rule of Civil Procedure 23(b)(2), which generally permits class certification in cases involving claims for injunctive and/or declaratory relief; and (3) held that Wal-Mart was entitled to individualized determinations of each proposed class member’s eligibility for backpay, rejecting the Ninth Circuit’s attempt to replace that process with a statistical formula.

The named plaintiffs in Wal-Mart were three current and former female Wal-Mart employees. They sued Wal-Mart under Title VII of the federal Civil Rights Act of 1964, alleging that Wal-Mart’s policy of giving local managers discretion over pay and promotion decisions negatively impacted women as a group, and that Wal-Mart’s refusal to cabin its managers’ authority amounted to disparate treatment on the basis of gender. The plaintiffs sought to certify a nationwide class of 1.5 million female employees. The plaintiffs sought injunctive and declaratory relief, punitive damages, and backpay.

The trial court and Ninth Circuit had agreed that the proposed class could be certified, reasoning that there were common questions of law or fact underFederal Rule of Civil Procedure 23(a), and that class certification pursuant to Rule 23(b)(2) – which permits certification in cases where “the party opposing the class has acted or refused to act 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” – was appropriate because the plaintiffs’ claims for backpay did not “predominate.” The Ninth Circuit had further held that the case could be manageably tried without depriving Wal-Mart of its due process rights by having the trial court select a random sample of claims, determine the validity of those claims and the average award of backpay in the valid claims, and then apply the percentage of valid claims and average backpay award across the entire class in order to determine the overall class recovery.

The Supreme Court reversed. A five-justice majority concluded that there were not common questions of law or fact across the proposed class, and hence Federal Rule of Civil Procedure 23(a)(2) was not satisfied. Clarifying earlier decisions, the majority made clear that in conducting this analysis, it was permitted to consider issues that were enmeshed with the merits of the plaintiffs’ claims. The majority then explained that merely reciting common questions is not enough to satisfy Rule 23(a). Rather, the class proceeding needs to be capable of generating “common answers” which are “apt to drive the resolution of the litigation.” The four-justice dissent criticized this holding as superimposing onto Rule 23(a) the requirement in Rule 23(b)(3) that “common issues predominate” over individualized issues. The dissent believed that the “commonality” requirement in Rule 23(a) could be established merely by identifying a single issue in dispute that applied commonly to the proposed class. Because the trial court had only considered certification under Rule 23(b)(2), the dissent would have remanded the case for the trial court to determine if a class could be certified under Rule 23(b)(3).

The majority held that the plaintiffs had not identified any common question that satisfied Rule 23(a), because they sought “to sue about literally millions of employment decisions at once.” The majority further explained that “[w]ithout some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored.”

Addressing the plaintiffs’ attempt to provide the required “glue”, the majority held that anecdotal affidavits from 120 class members were insufficient, because they represented only 1 out of every 12,500 class members, and only involved 235 out of Wal-Mart’s 3,400 stores nationwide. The majority also held that the plaintiffs’ statistical analysis of Wal-Mart’s workforce (which interpreted data on a regional and national level) was insufficient because it did not lead to a rational inference of discrimination at the store or district level (for example, a regional pay disparity could be explained by a very small subset of stores). Finally, the majority held that the “social framework” analysis presented by the plaintiffs’ expert was insufficient, because although the expert testified Wal-Mart had a “strong corporate culture” that made it “vulnerable” to gender discrimination, he could not determine how regularly gender stereotypes played a meaningful role in Wal-Mart’s employment decisions, e.g., he could not calculate whether 0.5 percent or 95 percent of the decisions resulted from discriminatory thinking. Importantly, the majority strongly suggested that the rigorous test for admission of expert testimony (the Daubert test) should be applied to use of expert testimony on motions for class certification.

The Court’s other holdings were unanimous. For one, the Court agreed that class certification of the backpay claim under Rule 23(b)(2) was improper because the request for backpay was “individualized” and not “incidental” to the requests for injunctive and declaratory relief. The Court declined to reach the broader question of whether a Rule 23(b)(2) class could ever recover monetary relief, nor did it specify what types of claims for monetary relief were and were not considered “individualized.” The Court made clear, however, that when plaintiffs seek to pursue class certification of individualized monetary claims (such as backpay), they cannot use Rule 23(b)(2), but must instead use Rule 23(b)(3), which requires showing that common questions predominate over individual questions, and includes procedural safeguards for class members, such as notice and an opportunity to opt-out.

Lastly, the unanimous Court agreed that Wal-Mart should be entitled to individualized determinations of each employee’s eligibility for backpay. In particular, Wal-Mart has the right to show that it took the adverse employment actions in question for reasons other than unlawful discrimination. The Court rejected the Ninth Circuit’s attempt to truncate this process by using what the Court called “Trial by Formula,” wherein a sample group would be used to determine how many claims were valid, and their average worth, for purposing of extrapolating those results onto the broader class. The Court disapproved of this “novel project” because it deprived Wal-Mart of its due process right to assert individualized defenses to each class member’s claim.

Looking forward, the Wal-Mart decision will strengthen the arguments of employers and other companies facing large class action lawsuits. In particular, the decision reaffirms that trial courts must closely scrutinize the evidence when deciding whether to certify a class action, especially in “disparate impact” discrimination cases. Statistical evidence that is based on too small a sample size, or is not well-tailored to the proposed class action, should be insufficient to support class certification. Likewise, expert testimony that is over-generalized and incapable of providing answers to the key inquiries in the case (here, whether a particular employment decision was motivated by gender discrimination) should also be insufficient to support class certification. Finally, the Court’s holding that defendants have the right to present individualized defenses as to each class member, and that this right cannot be short-circuited through statistical sampling, will provide defendants with a greater ability to defeat class certification where such individualized determinations would otherwise prove unmanageable.

U.S. Supreme Court: Federal Court Could Not Enjoin State Court from Addressing Class Certification Issue

Posted yesterday at the National Law Review by Scott T. Schutte of Morgan, Lewis & Bockius LLP a great overview of the U.S. Supreme Court’s recent ruling in Smith v. Bayer Corp.

In a decision with implications for companies facing class action litigation, the U.S. Supreme Court ruled unanimously that a federal district court, having rejected certification of a proposed class action, could not take the additional step of enjoining a state court from addressing a motion to certify the same class under state law. In an opinion authored by Justice Kagan, the Court inSmith v. Bayer Corp., No. 09-1205, 564 U.S. ____ (June 16, 2011), held that principles of stare decisis and comity should have governed whether the federal court’s ruling had a controlling or persuasive effect in the later case, and the state court should have had an opportunity to determine the precedential effect (if any) of the federal court ruling.

Facts of Bayer

In Bayer, a plaintiff sued in West Virginia state court alleging that Bayer’s pharmaceutical drug Baycol was defective. After removal to federal court, the plaintiff moved to certify the action as a class action on behalf of all West Virginia purchasers of Baycol. The federal court rejected class certification because proof of injury from Baycol would have required plaintiff-specific inquiries and therefore individual issues of fact predominated over common issues. It then dismissed the plaintiff’s claims on independent grounds.

A different plaintiff, who had been a putative class member in the first action and was represented by the same class counsel in the federal action, moved to certify the same class in West Virginia state court. Bayer sought an injunction from the federal court in the first case, arguing that the court’s rejection of the class bid should bar the plaintiff’s relitigation of the same class certification question in state court. The district court granted the injunction, and the Circuit Court affirmed.

The Supreme Court’s Decision

The issues before the Court were (i) the district court’s power to enjoin the later state-court class action to avoid relitigation of the previously decided classcertification determination; and (ii) whether the federal court’s injunction complied with the Anti-Injunction Act, 28 U.S.C. § 2283, which permits a federal court to enjoin a state court action when necessary to “protect or effectuate its judgment.” The Court granted certiorari to resolve a circuit split concerning the application of the Anti-Injunction Act’s relitigation exception.

The Supreme Court overturned the injunction. It determined that enjoining the state court proceedings under the circumstances of the case was improperly “resorting to heavy artillery.” The Court noted that “[d]eciding whether and how prior litigation has preclusive effect is usually the bailiwick of the second court.” It observed that a federal court may under the relitigation exception to the Anti-Injunction Act enjoin a state court from relitigating an already decided issue-including whether to certify a case as a class action-when two conditions are met: “First, the issue the federal court decided must be the same as the one presented in the state tribunal. And second, [the party in the later case] must have been a party to the federal suit, or else must fall within one of a few discrete exceptions to the general rule against binding nonparties.” Notably, the Court commented that, in conducting this analysis, “every benefit of the doubt goes to the state court” being allowed to determined what effect the federal court’s prior ruling should be given.

The Court held that neither condition was met in Bayer. The issue of class certification under West Virginia’s Rule 23 (the language of which mirrored Federal Rule of Civil Procedure 23) was not “the same as” the issue decided by the federal court because the West Virginia Supreme Court had expressly disapproved of the approach to the “predominance” analysis adopted by federal courts interpreting the federal class action rule. In addition, the Court also held that unnamed persons in a proposed class action do not become parties to the case if the court declines to certify a class. By contrast, the Court affirmed the established rule that “a judgment in a properly entertained class action is binding on class members in any subsequent litigation.”

According to the Court, Bayer’s “strongest argument” centered on a policy concern that, after a class action is disapproved, plaintiff after plaintiff may relitigate the class certification issue in state courts if not enjoined by the original court. The Court suggested that these concerns were ameliorated by the Class Action Fairness Act of 2005, through which Congress gave defendants a right to remove to federal court any sizable class action involving minimal diversity of citizenship. The Court noted the availability of consolidating certain federal class actions to avoid inconsistent results and offered that the Class Action Fairness Act’s expanded federal jurisdiction should result in greater uniformity among class action decisions and in turn reduce serial relitigation of class action issues.

Implications of Bayer

Bayer exposes defendants to the potential for repetitive class action litigation by plaintiffs in state courts. Bayer does not alter existing standards for class certification, however, and its holding is a limited one: a defendant who has defeated class certification may not invoke the “heavy artillery” of an injunction against future state-court bids for class certification in a case raising the same legal theories unless that future bid is advanced by the same named plaintiff(s) (or a person who falls within one of the few discrete exceptions to the general rule against binding nonparties) and the defendant can establish that state standards for class certification are similar to Federal Rule 23. In this regard, the Court held that “[m]inor variations in the application of what is in essence the same legal standard do not defeat preclusion,” but if the state courts would apply a “significantly different analysis” than the federal court, an injunction will not be upheld. The Anti-Injunction Act analysis from Bayer applies directly only where the enjoining court is a federal court and the second court is a state court.

The Bayer opinion also highlights avenues for companies facing serial class actions to mitigate risk. The Court all but acknowledged that “class actions raise special problems of relitigation.” These relitigation problems in the class action context and beyond will remain after Bayer. But a number of strategic steps can be taken to reduce the burdens, expenses, and risks associated with multiple lawsuits. For example, the enactment of the Class Action Fairness Act provides expanded federal jurisdiction over many class actions and therefore permits enhanced removal opportunities for state court class actions. If subsequent class actions are filed and removed, the Court noted that multidistrict litigation proceedings may be available for coordination of pretrial proceedings to avoid repetitive litigation. Even if transfer and consolidation cannot be effectuated, the Court observed that “we would expect federal courts to apply principles of comity to each other’s class certification decisions when addressing a common dispute.”

Finally, the Court’s treatment of absent class members as nonparties to the class certification question in the first action may have significance to other issues in class actions, including often hotly disputed issues relating to communications with putative class members by the defendant before class certification.

Tag: Class Action

Halliburton II: Supreme Court Upholds Basic Presumption

Like this:

California Continues to Shape Privacy Standards: Song-Beverly Act Extended to Email Addresses

Like this:

Supreme Court Holds That State Attorney General Actions are Not “Mass Actions” Under Class Action Fairness Act (CAFA)

“Mass Actions”

**The Hood Case**

The Supreme Court’s Decision

Like this:

I Scream, You Scream, We All Scream For…Ascertainability? Re: How Ben & Jerry’s Defeated an “All Natural” Class Certification Motion

Like this:

The Sixth Circuit Steps Back in Time on Certification of Consumer Classes

Underlying Facts

The District Court Opinion

The Sixth Circuit Supported the Plaintiffs’ Theories with “Facts” in the Record

Proof of Defect Through Common Evidence

Certification of a Class of Ohio Purchasers of Front-Load Washers Where a Majority of the Class Has Not Sustained Any Injury

Conclusion

Like this:

The Supreme Court Paves the Way to End Consumer Class Actions

Like this:

Here We Go Again: Another Attempt at Recovery for Ratepayers Resulting from KeySpan-Morgan Stanley Swap

Like this:

Beware of Online Applications and Background Check Authorizations

Like this:

U.S. Supreme Court Rejects Gender Discrimination Class Action Against Wal-Mart

Like this:

U.S. Supreme Court: Federal Court Could Not Enjoin State Court from Addressing Class Certification Issue

Facts of Bayer

The Supreme Court’s Decision

Implications of Bayer

Like this:

Share this:

Like this:

Share this:

Like this:

“Mass Actions”

The Hood Case

The Supreme Court’s Decision

Share this:

Like this:

Share this:

Like this:

Underlying Facts

The District Court Opinion

The Sixth Circuit Supported the Plaintiffs’ Theories with “Facts” in the Record

Proof of Defect Through Common Evidence

Certification of a Class of Ohio Purchasers of Front-Load Washers Where a Majority of the Class Has Not Sustained Any Injury

Conclusion

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Facts of Bayer

The Supreme Court’s Decision

Implications of Bayer

Share this:

Like this:

**The Hood Case**