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In Archon Construction Co. v. U.S. Shelter, L.L.C., 2017 IL App (1st) 153409, the Illinois Appellate Court held that a contractor could not recover on a quantum meruit claim for extra work even though the contractor did not recover for the extras in a breach of contract action. The court’s ruling rejects the common contractor argument that a claim for quantum meruitexists where the defendant requested the services rendered but cannot recover payment for those services under the terms of an existing contract.

In so ruling, the court in Archon announced a clear test for determining whether a contractor is entitled to recover under quantum meruit: “[A] claim for quantum meruit lies when the work that the plaintiff performed was wholly beyond the subject matter of the contract that existed between the parties.” Stated differently, Archon reaffirms that quantum meruit is not available in Illinois where the extra work involved the same “general subject matter” as a construction contract.

The case arose from the installation of a sanitary-sewer system in connection with the development of a new subdivision in the City of Elgin, Illinois. The subdivision was developed by U.S. Shelter, LLC, U.S. Shelter Group Inc., and Oak Ridge of Elgin, LLC (collectively, the developer). Archon Construction, the contractor, submitted a proposal to build the sewer system and other underground utilities not at issue in the case based on existing plans and the applicable specifications of both the city and the state of Illinois. The plans and specifications generally required the contractor to install a sewer system that was acceptable to the city. The developer accepted the contractor’s final proposal, and the proposal became the governing contract between the parties.

The plans and specifications permitted the contractor to install a sewer system made of either ductile iron or PVC, provided that the PVC had at least a specific wall thickness relative to the pipe’s diameter (a Minimum Wall Thickness). The contractor’s proposal was based entirely on the installation of PVC pipe and did not provide for the installation of ductile iron for any of the sewer lines. Under the proposal, “[a]ny additional work items not listed will be completed on negotiated price or [time and materials].” On three separate occasions during construction, the contractor excavated and repaired various portions of the sewer system that were constructed with PVC pipe that did not meet the requirements for Minimum Wall Thickness. The contractor did not seek additional payment for this work. Following final completion, the developer’s civil engineer confirmed that the contractor’s work complied with the plans and specifications.

Approximately two years after the contractor completed its work, and as a condition to final acceptance by the city, both the developer and the city inspected the sewer system for defects. The city claimed that a portion of the sewer system was cracked, with fill material entering the lines. The city refused to accept the sewer system unless the developer dug up the impacted portion and replaced the contractor’s PVC pipe with ductile iron in that section. The contractor completed the necessary repairs and sent the developer a bill for approximately $250,000 determined on a time-and-material basis. When the developer refused to pay, the contractor filed a lien claim. This lawsuit followed.

The contractor initially pursued claims for breach of contract. Under Illinois law, however, the contractor cannot collect contract damages for extra work unless it can prove by clear and convincing evidence that, in pertinent part, “the extra work was not made necessary through the fault of the contractor.” After discovery, the trial court granted summary judgment against the contractor on the grounds that the contractor could not present evidence to prove this essential fact. The appellate court reversed, with one justice dissenting on the grounds raised by the trial court. After remand, the contractor abandoned its contract claims and proceeded with a trial limited to its quantum meruitclaim. Following a bench trial, the trial court ruled that the contractor could not pursue claims for quantum meruit as a matter of law because the repair work was covered under the terms of the express contract between the developer and the contractor.

On review, the appellate court reiterated that “[i]t is long settled in Illinois that an action in quasi-contract, such as quantum meruit, is precluded by the existence of an express contract between the parties regarding the work that was performed.” However, the court noted the potential for confusion in the construction context:

Where do we draw the line between work being ‘outside the scope of a contract’ [a contractual claim for extras] versus there being no express contract governing the work [a quasi-contractual claim]? They would seem to cover a lot of the same territory, but as a matter of law, they cannot…. [T]he answer is that a claim for quantum meruit lies when the work that the plaintiff performed was wholly beyond the subject matter of the contract that existed between the parties.
***
If the work for which a plaintiff seeks remuneration under a quantum meruit theory concerned the same subject matter of the express contract, then the quantum meruit claim is barred as a matter of law.

In so holding, Archon foreclosed the common contractor argument that quantum meruit is available when the contractor cannot recover payment on a breach-of-contract claim. The court held: “[W]hether [the contractor] ultimately could have prevailed on that contractual claim or not, the fact remains that a contractual remedy was the only claim available to [the contractor] as a matter of law.”

Applying the law to the facts of the case, the contractor’s quantum meruit claim sought to recover the cost to repair the same sewer system that it contracted to install. The repairs “unquestionably involved the same ‘general subject matter’ as the contract” and, therefore, the contractor could not recover in quantum meruit even though it had little chance of success on proving its contract claim for the extra work.

Archon makes clear that a contractor assumes the risk that it will be paid for extra work that falls within the same general subject matter as its contract if it carries out that work without either a signed change order or a construction change directive. If the resulting contract claim for extra work fails for any reason, then Illinois law may not permit the contractor to recover for that extra work under the theory of quantum meruit.

This article was written by Gregory S. Gistenson of Barnes & Thornburg LLP

On April 2, 2018, the Internal Revenue Service (“IRS”) released Notice 2018-29^[1] (the “Notice”), announcing the intention of the IRS and the Department of the Treasury to issue regulations regarding the withholding requirements under Section 1446(f),^[2] which was promulgated pursuant to recently enacted U.S. tax legislation, commonly referred to as the “Tax Cuts and Jobs Act”.^[3] The Notice also provided interim guidance that taxpayers may rely on until further guidance is issued.

The Notice does not affect the suspension of withholding pursuant to Section 1446(f) for publicly traded partnerships under Notice 2018-08, issued in December of 2017, nor does the guidance related to Section 1446(f) affect a transferor’s tax liability under Section 864(c)(8).

General Rules

For dispositions of partnership interests occurring after December 31, 2017, Section 1446(f) generally requires the transferee to withhold and remit 10 percent of the “amount realized” by the transferor, if any portion of the gain (if any) realized by the transferor would be treated as effectively connected with the conduct of a trade or business in the United States under Section 864(c)(8). The “amount realized” generally includes proceeds (whether cash or other property) as well as any liabilities deemed assumed by the transferee for tax purposes. Though Section 1446(f) generally requires a transferee to effect the withholding, Section 1446(f)(4) imposes a secondary obligation on the transferred partnership: in the event the transferee fails to withhold and remit the appropriate amount, the partnership is required to withhold and remit the amount of the shortfall (together with interest) from its subsequent distributions to the transferee.

Reporting and Paying Over Withheld Amounts

In the Notice, the IRS has indicated that the procedural regime that exists under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) and Section 1445 generally will also apply to Section 1446(f). Generally, this will mean reporting and paying over any withheld amounts within 20 days of the relevant transfer. The IRS has asserted that withholding agents will not be subject to interest and penalties on account of late payment if any withholding that, per the Notice, is due prior to May 31, 2018, is paid in full on or prior to May 31, 2018.

The IRS is not currently issuing new forms for Section 1446, and taxpayers are generally instructed to continue to use the forms required under Section 1445 (with “Section 1446(f)(1) withholding” noted on the relevant form).

Where withholding is required under both Section 1445 and Section 1446(f), the transferee need only withhold pursuant to Section 1445 (unless the transferor has obtained a withholding certificate pursuant to Treasury Regulations Section 1.1445-11T(d)(1), in which case the transferee must withhold the greater of the amount required to be withheld pursuant to Section 1445 and the amount required to be withheld pursuant to Section 1446(f)).

Suspension of Secondary Partnership Withholding Obligation

Until further guidance is provided, the IRS has suspended the secondary withholding obligation imposed on partnerships in the event a transferee fails to appropriately withhold in accordance with Section 1446(f).

Exceptions to Withholding Requirements

Pursuant to the statutory exception provided in Section 1446(f)(2), the IRS has provided that withholding will not be required where a transferor certifies its non-foreign status in an affidavit, signed under penalties of perjury, containing the transferor’s U.S. taxpayer identification number (if applicable). Generally, a correct and complete Form W-9 will satisfy these requirements. Until the IRS issues further guidance, such certifications should not be remitted to the IRS. As with FIRPTA, where a transferee has actual knowledge, or receives notice from its agent or the transferor’s agent, that a certification is false, the certification may not be relied upon.

In addition to the statutory exception, the Notice provides that withholding is generally not required where (i) a transferor certifies that no gain will be realized in the disposition, (ii) a transferor certifies, no more than 30 days prior to the date of transfer, that, for the “immediately prior taxable year”^[4] and the two taxable years that precede it, it has been a partner in the partnership for the entirety of each such taxable year and its share of effectively connected taxable income (as determined under Treasury Regulations Section 1.1446-2) for each such taxable year was less than 25% of its total distributive share for such year,^[5] or (iii) the transferred partnership certifies, no more than 30 days prior to the date of transfer, that the amount of gain that would be treated as effectively connected with the conduct of a trade or business within the United States if the partnership were to sell all of its assets as of the date of the certification would be less than 25% of the total gain.^[6] As with the certification of non-foreign status, these certificates must be signed under penalties of perjury, and the certifications provided by the transferor must also contain the transferor’s U.S. taxpayer identification number (if applicable).

Lastly, the IRS has provided that no withholding is required in nonrecognition transactions where the transferor provides the transferee a notice that satisfies the requirements of Treasury Regulations Section 1.1445-2(d)(2) (which also requires that the relevant statement be made under penalties of perjury), treating references therein to “1445(a)” and “U.S. real property interest” as references to “1446(f)” and “partnership interest”, respectively (though until further guidance is issued, transferees should not remit such notices to the IRS). The IRS specifically noted that future regulations regarding the treatment of nonrecognition transactions under Section 864(c)(8) may impact this.

Determining Partnership Liabilities included in Amount Realized

For purposes of determining the amount of liabilities included in a transferor’s amount realized, the IRS has generally provided for certificates that may be issued (under penalties of perjury) in certain circumstances by certain transferors or transferred partnerships. These certificates will generally allow a transferee to rely on the amount of partnership liabilities reported as apportioned to the transferor on the most-recent Schedule K-1 (Form 1065) of the transferred partnership, and will need to state that the certifier has no actual knowledge of events that would alter such amount by 25 percent or more.

No Withholding in Excess of Proceeds Paid

The Notice generally provides that in no event shall a transferee be required to withhold an amount in excess of the amount realized less the liabilities deemed assumed by the transferee in the transfer. This means there is no “dry withholding” requirement – as a transferee’s obligation to withhold is capped by the cash or other property paid in the transaction.

Application to Distributions

In clarifying that Section 1446(f) also applied to certain partnership distributions, the IRS has provided that a partnership may rely on either its own books and records or a certification from the distributee partner when determining whether the distribution exceeds the partner’s basis in its partnership interest, and thus whether the distribution will be, at least in part, treated as a transfer subject to Section 1446(f).

Application to Tiered Partnerships

A look-through rule will be used to determine the amount of effectively connected taxable income realized pursuant to Section 864(c)(8) by a transferor that disposes of an ‘upper-tier’ partnership that also owns ‘lower-tier’ partnerships. The IRS has indicated that future regulations will require lower-tier partnerships to furnish information to upper-tier partnerships in order to effectuate this look-through rule and related withholding obligations.

Request for Comments

The IRS has also requested comments on the rules to be issued under Section 1446(f). Of specific interest, the IRS has asked for comments regarding (i) rules for determining the amount realized, including when the required withholding exceeds the proceeds of a sale and (ii) procedures that reduce the amount to be withheld, including in connection with “identifiable historically compliant taxpayers”.

Former summer associate Christine Sherman provided invaluable assistance in preparation of this update

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[1] “Guidance Regarding the Implementation of New Section 1446(f) for Partnership Interests That Are Not Publicly Traded.”

[2] Unless otherwise noted, all references to ‘Sections’ herein are references to sections of the Internal Revenue Code of 1986, as amended.

[3] Public Law No: 115-97, enacted December 22, 2017. The legislation does not have a short title; the official title is “H.R.1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”

[4] A transferor’s “immediately prior taxable year” is the most recent taxable year of the transferor that includes the partnership taxable year that ends with or within the transferor’s taxable year and for which both a Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax, and a Schedule K-1 (Form 1065) were due (including extensions) or filed (if earlier) by the time of the transfer. This appears to mean that, for a transferor that files on a calendar-year basis and transfers as of, say, January 1, 2018, the “immediately prior taxable year” would actually be 2016 – but further guidance from the IRS will be necessary to confirm that.

[5] Transferees may not rely on such certificates prior to the transferor’s receipt of the relevant Schedule K-1s (Forms 1065) and Forms 8805.

[6] For the 25% tests described in (ii) and (iii), the IRS is considering lowering the withholding threshold. This would have the impact of subjecting more transfers to withholding.

This article was written by Mary B Kuusisto, Martin T Hamilton, and Stephen Severo of Proskauer Rose LLP

On May 8, 2018, President Trump announced that the United States would no longer be participating in the Joint Comprehensive Plan of Action (JCPOA), under which Iran agreed to curb its nuclear program in exchange for sanctions relief. Therefore, sanctions on non-U.S. companies doing business with Iran will “snap-back” and be re-imposed. In essence, and as explained below, the U.S. sanctions will return to the pre-January 2016 status quo.

The president directed that all sanctions be re-imposed as soon as possible, but no later than 180 days from the date of the May 8 announcement. In accordance with this directive, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), which administers and enforces U.S. sanctions against Iran, has published a detailed statement and Frequently Asked Questions (FAQs). OFAC has provided a 90-day and a 180-day “wind-down period” before certain sanctions will become effective.

Specifically, after the 90-day wind-down period ends on August 6, 2018, the U.S. will re-impose sanctions related to the following activities:

• The purchase or acquisition of U.S. dollar banknotes by the Government of Iran.
• Iran’s trade in gold or precious metals.
• The direct or indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes.
• Significant transactions related to the purchase or sale of Iranian rials or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial.
• The purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt.
• Sanctions on Iran’s automotive sector.
• Activities undertaken pursuant to specific licensing issued in connection with the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services, including those undertaken pursuant to OFAC’s General License I.

An additional group of secondary sanctions will snap back after a 180-day wind-down period ends on November 4, 2018. Specifically, effective November 5, 2018, the U.S. will re-impose sanctions related to the following activities and related services:

• Sanctions on Iran’s port operators and shipping and shipbuilding sectors.
• Sanctions on petroleum-related transactions with, among others, the National Iranian Oil Company, including the purchase of petroleum, petroleum products, or petrochemical products from Iran.
• Sanctions on foreign financial institutions doing business with the Central Bank of Iran and designated Iranian financial institutions under Section 1245 of the National Defense Authorization Act for Fiscal Year 2012.
• Sanctions on the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions described in Section 103(c)(2)(E)(ii) of the Comprehensive Iran Sanctions and Divestment Act of 2010.
• Sanctions on the provision of underwriting services, insurance, or re-insurance.
• Sanctions on Iran’s energy sector.

Significantly, for any U.S. companies whose foreign subsidiaries were engaging in transactions with Iran pursuant to OFAC’s General License H, that general license will be revoked effective November 5, 2018. Also on November 5, 2018, the United States will re-impose sanctions on certain Iranian financial institutions and other persons who had been removed from OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) pursuant to the JCPOA and Executive Order 13599.

After the applicable wind-down period has completed, OFAC will allow payment for goods or services provided during the wind-down period so long as there was a written contract or agreement covering the activities that was entered into prior to May 8, 2018. This includes loans or credits if memorialized in writing prior to May 8, 2018. To qualify, the activities must have been consistent with U.S. sanctions at the time of delivery or provision of goods or services. Additionally, the payment must be consistent with U.S. sanctions (i.e., no involvement by U.S. persons or U.S. financial institutions, unless the transactions were exempt from regulation or authorized by OFAC).

Companies, financial institutions, and others who engage in prohibited transactions after the wind-down periods expire, or who perform activities outside the scope of permissible wind-down activities, can face sanctions and penalties. When considering enforcement actions, OFAC will evaluate the efforts and steps taken to comply with the wind-down requirements.

In the coming days, OFAC will publish additional information on its website and in the Federal Register concerning the re-imposition of sanctions. For now, all persons doing business with Iran, or considering entering into new business with Iran (even if previously authorized by the JCPOA), should carefully consider their positions.

This article was written by Nate Bolin and Mollie D. Sitkowski of Drinker Biddle & Reath LLP

Arbitration provisions in insurance or reinsurance contracts periodically are challenged based on state anti-arbitration statutes.  Often, when non-US insurers or reinsurers are involved, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“) is raised as a basis to enforce the arbitration provisions in federal court.  The counterpoint to that argument is reverse preemption under the McCarran-Ferguson Act.  This is a heady academic subject that has real world consequences when a party is trying to enforce an arbitration provision in an insurance or reinsurance contract.

In a recent case, a Missouri federal court was faced with the question of whether it had subject matter jurisdiction underchapter 2 of the Federal Arbitration Act (“FAA”) to hear a dispute over whether arbitration could be compelled on a series of insurance policies. Foresight Energy, LLC. v. Certain London Market Ins. Cos., No. 17-CV-2266 CAS, 2018 U.S. Dist. LEXIS 69423 (E.D. Mo. Apr. 25, 2018).  The insurance policies required disputes to be arbitrated in London.  The policies, however, were governed by Missouri law and Missouri has an anti-arbitration statute that precludes arbitrations between insurers and policyholders. Mo. Rev. Stat. sec. 435.350 (2010).

The case was originally brought in state court, but one of the carriers removed it to federal court claiming federal subject matter jurisdiction under Chapter 2 of the FAA given the presence of non-US insurers.  The policyholder moved to remand the matter back to state court and the court granted the motion.

The gist of the argument came down to whether the New York Convention is self-executing, and therefore not an act of Congress, or whether its implementing legislation in chapter 2 of the FAA is an act of Congress that interferes with state law regulating the business of insurance. In granting the remand motion, the court found that the plain language of McCarran-Ferguson, stating that no act of Congress can supersede state law regulating the business of insurance, was applicable to Missouri’s anti-arbitration provision when faced with chapter 2 of the FAA, an act of Congress.

The court adopted the analysis of the Second and Eighth Circuits in Stephens v. American International Ins. Co., 66 F.3d 41 (2d Cir. 1995) and Transit Casualty Co. v. Certain Underwriters at Lloyd’s of London, 119 F.3d 619 (8th Cir. 1997) and rejected the reasoning of the Fourth Circuit, in EAB Group, Inc. v. Zurich Ins. PLC., 685 F.3d 376 (4th Cir. 2012), which limited McCarran-Ferguson to domestic legislation. The court agreed with the notion that the New York Convention was not self-executing and that the Missouri anti-arbitration statute was a state law regulating the business of insurance.  The court concluded that because chapter 2 of the FAA was an act of Congress and the New York Convention was not self-executing, McCarran-Ferguson reverse preempted the FAA and, accordingly, removed the basis for federal subject matter jurisdiction.  The case was remanded to state court for lack of subject matter jurisdiction.

At some point, the US Supreme Court will weigh in on this controversy, or perhaps the McCarran-Ferguson Act will be amended or, as some in Congress have promised, repealed.  In the interim, these arguments continue to play out differently depending on the federal circuit where the case is brought.

This article was written by Larry P. Schiffer of Squire Patton Boggs (US) LLP

The U.S. District Court for the District of Columbia recently granted the Office of the Comptroller of the Currency’s (“OCC”) motion to dismiss a lawsuit brought by the Conference of State Bank Supervisors (“CSBS”) challenging the OCC’s authority to issue special purpose charters to FinTech companies.  According to the court, the CSBS currently lacks standing to bring the action because the OCC has not to-date issued such a charter.

In a press release about the decision, John Ryan, President and CEO of CSBS, emphasized that the court did not rule on the merits of the case.  Consequently, the CSBS may renew its challenge if and when the OCC issues such a charter. In December 2017, another federal district court dismissed a similar lawsuit brought by the New York Department of Financial Services on the same grounds.  Because the OCC is set to provide additional details about its views concerning the charter by the end of June or July, these legal disputes could restart sometime this summer.  Comptroller of the Currency Joseph Otting has reportedly stated that the OCC has not “concluded” its position and welcomes “people’s feedback.”  In the past, he has appeared to support the concept of a FinTech charter, recognizing the value it might add to the small dollar lending market.

Many FinTech firms have advocated for a federal charter from the OCC to avoid the need to obtain licenses on a state-by-state basis.  Some industry participants believe that such a charter would reduce the burden of regulatory compliance, increase access to capital for underserved consumers, and make the U.S. more competitive with countries that have adopted a more uniform approach to FinTech regulation.  The CSBS and others have argued that FinTech companies are currently subject to the 50-state licensing regime because the National Bank Act does not authorize the OCC to grant such non-depository institutions a national bank charter.  Moreover, they argue that state regulators are working to modernize regulations and to move toward a more integrated system of licensing and oversight.

This article was written by Daniel S. Cohen and Eric A. Love of K&L Gates

When the Third Circuit Court of Appeals issued its decision in City Select Auto Sales Inc. v. BMW Bank of North America, Inc., in the middle of last year, many interpreted the decision as significantly lowering the bar to certification of class actions. By recognizing, for the first time, the use of affidavits as a legitimate method of identifying class members, some wondered whether City Select was a shift away from the “administrative feasibility” requirement for ascertainability consistently upheld by the Third, Fourth, and Eleventh Circuits. Two recent district court decisions in In re Tropicana Orange Juice Mktg. & Sales Practices Litig.^[1] and Hargrove v. Sleepy’s, LLC,^[2] demonstrate that the “administrative feasibility” requirement—a requirement that to certify a class its members must be capable of being readily identified through an administratively feasible process—remains alive and well in the Third Circuit.

In City Select, the Third Circuit reversed the district court’s denial of class certification of a claim under the Telephone Consumer Protection Act (TCPA) on lack of ascertainability grounds.^[3] The plaintiff, a car dealership, filed a class action case against BMW’s financing arm, BMW Bank of North America (BMW), alleging that BMW, along with one of its vendors (Creditsmarts), had violated the TCPA by repeatedly sending unsolicited fax advertisements to several thousand dealerships across the country. The plaintiff sought certification of a nationwide class described as “auto dealerships included in the Creditsmarts database on or before December 27, 2012,” ^[4]and moved to compel production of the same database. The district court in New Jersey denied the dealership’s motion to compel, and further denied class certification, explaining that the plaintiff had failed to demonstrate that class members could be identified using administratively feasible means.^[5]

On appeal, the Third Circuit vacated and remanded for two reasons:

First, our ascertainability precedents do not categorically preclude affidavits from potential class members, in combination with the Creditsmarts database, from satisfying the ascertainability standard. Second, because the Creditsmarts database was not produced during discovery, plaintiff was denied the opportunity to demonstrate whether a reliable, administratively feasible method of ascertaining the class exists based, in whole or in part, on that database.^[6]

Put another way, the Third Circuit determined that the plaintiff had been unfairly disadvantaged by Creditsmarts’ refusal to produce the very database that could potentially have been used, in combination with class member affidavits, to demonstrate an administratively feasible method of identifying class members.

Some observed that by allowing class representatives to rely upon affidavits to identify class members, City Select marked a notable departure from prior Third Circuit decisions where the court expressed class member identification concerns with the use of affidavits.^[7] While not entirely ruling out the use of affidavits to identify class members, the Third Circuit’s decision in City Select acknowledged that “[a]ffidavits from potential class members, standing alone, without ‘records to identify class members or a method to weed out unreliable affidavits,’ will not constitute a reliable and administratively feasible means of determining class membership.”^[8]City Select therefore clarified that the same standards previously applied by the court in assessing ascertainability for class certification remained in effect in the Third Circuit.

Two recent New Jersey District Court decisions demonstrate that City Select did not alter the “heightened” ascertainability requirement in the Third Circuit. On January 22, 2018, the U.S. District Court for the District of New Jersey issued its decision in In re Tropicana, denying class certification for lack of ascertainability, among other grounds.^[9] In that case, the plaintiffs alleged that Tropicana had violated common law and state consumer protection laws in connection with the sale of orange juice. Specifically, the plaintiffs alleged that “[d]espite Tropicana’s ‘100% pure and natural’ claim, Tropicana’s [not from concentrate] juice is heavily processed, colored, and flavored—it is neither 100% pure nor 100% natural orange juice.”^[10] In support of their class certification motion, the plaintiffs proposed a methodology for identifying class members whereby their expert would create a computer program to reconcile bulk retailer loyalty card data against the identifying information submitted by putative class members.^[11] The same expert would then create a second computer program to “cross-check” the results and ensure that putative class members had been properly identified.^[12]

The district court in Tropicana engaged in a lengthy ascertainability analysis, ultimately concluding plaintiffs had failed to show that their proposed methodology for identifying class members employed a “reliable and administratively feasible mechanism,” as required under the Third Circuit’s decision in Byrd v. Aaron’s, Inc.^[13] To the contrary, the court opined, “Dr. Narayanan’s methodology assumes that the retailer data exists and contains the necessary information required to properly ‘cross-check’ against putative class members’ claim forms. It further assumes that all retailers will produce their consumer data to him in a useable electronic format.”_^[14] The court further found that the plaintiffs’ proposed methodology would necessarily exclude persons for whom retailer data was unavailable, explaining, “class member will still be bound by any judgment on the merits emanating from this Court. That defies one of the principal rationales of ascertainability—identifying persons bound by the final judgment—and simply cannot be permitted.”^[15]

The Third Circuit, in City Select, had recognized that “[t]he determination whether there is a reliable and administratively feasible mechanism for determining whether putative members fall within the class definition must be tailored to the facts of the particular case.”^[16] Adopting that rationale and distinguishing the case against Tropicana from City Select, the district court instead drew a parallel to the Third Circuit’s 2013 decision in Carrera v. Bayer Corp., which similarly involved products distributed to consumers through a broad variety of retail stores unaffiliated with the defendant.^[17] In Carrera, the Third Circuit vacated the district court’s order granting class certification and remanded for further consideration on the grounds that the plaintiff’s exclusive reliance on affidavits from potential class members was not a sufficiently reliable means of identification.^[18] Likewise, in In re Tropicana, the district court concluded that the plaintiffs’ proposed method for identifying class members would run afoul of the two critical rationales underlying the ascertainability requirement: “facilitating opt-outs and identifying persons bound by the final judgment.”^[19]

More recently, on February 28, 2018, the New Jersey district court issued its decision in Hargrove v. Sleepy’s, LLC, another case involving the denial of class certification on ascertainability grounds.^[20] In Hargrove, a group of former delivery drivers for Sleepy’s, LLC, a New York-based mattress retailer, filed a complaint under the Employee Retirement and Income Security Act (ERISA), alleging that Sleepy’s had misclassified them as independent contractors, rather than employees, and thereby denied them base and overtime wages due under New Jersey state law.^[21]

In its opinion and order denying class certification, the district court concluded that the plaintiffs were unable to offer a methodology by which individuals falling within the class definition could be identified in a reliable and administrative feasible manner.^[22] The court found instead that, even following the deposition of the paralegal at the plaintiff’s firm who was primarily responsible for reconciling driver rosters, gate logs, and pay statements to identify class members, the several “gaps” in the record “would make assessing the size, as proposed by the [p]laintiff, tenuous or speculative.”^[23] In other words, because the records available to the parties did not enable an administratively feasible identification of class members, the plaintiffs had run afoul of the prohibition on “specific fact-finding as to each individual” previously set forth in the Third Circuit’s decision in Marcus v. BMW of North America.^[24]

Taken together, In re Tropicana and Hargrove demonstrate that the administrative feasibility requirement remains a prime consideration in class certification proceedings within the Third Circuit. While City Select clarified that in certain limited circumstances, class member affidavits might find their place in ascertaining class membership, the overarching requirement is that class members be identified accurately and without the need for individualized fact-finding.

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_{[1] 2018 U.S. Dist. LEXIS 9797 (D.N.J. Jan. 22, 2018, Civ. No. 2:11-cv-07382).}

_{[2] 2018 U.S. Dist. LEXIS 32323 (D.N.J. Feb. 28, 2018, Civ. No. 3:10-cv-01138).}

_{[3] 867 F.3d 434 (3d Cir. 2017).}

_{[4] City Select, 867 F.3d at 441.}

_{[5] Id. at 436, 438.}

_{[6] Id. at 440-41.}

_{[7] See Marcus v. BMW of North America, LLC, 687 F.3d 583 (3d Cir. 2012); Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013); Hayes v. Wal-Mart Stores, Inc., 725 F.3d 349 (3d Cir. 2013).}

_{[8] City Select, 867 F.3d at 441 (quoting Byrd v. Aaron’s Inc., 784 F.3d 154, 163 (3d Cir. 2015)).}

_{[9] See 2018 U.S. Dist. LEXIS 9797, *36-38.}

_{[10] Consolidated Amended Complaint at ¶ 1, In re Tropicana (Dkt. No. 32).}

_{[11] Id. at *29.}

_{[12] Id. at *29-30.}

_{[13] Id. at 29 (quoting Byrd v. Aaron’s, Inc., 784 F.3d 154, 163 (3d Cir. 2015)).}

_{[14] Id. (internal citations omitted).}

_{[15] Id. at 37-38 (citing City Select, 867 F.3d at 441).}

_{[16] Id. at 34 (quoting City Select, 867 F.3d at 442).}

_{[17] Id. at 35.}

_{[18] Carrera, 727 F.3d at 303-04.}

_{[19] In re Tropicana, 2018 U.S. Dist. LEXIS at *36 (citing City Select, 867 F.3d at 441; Carrera, 727 F.3d at 307-09).}

_{[20] See Hargrove, 2018 U.S. Dist. LEXIS 32323.}

_{[21] Id. at *1-3.}

_{[22] Id. at *17-21.}

_{[23] Id. at *21.}

_{[24] Id. at *17 (citing Marcus v. BMW of N. Am., LLC, 687, F.3d 583, 593 (3d Cir. 2012)), *21}

This article was written by John J. Atallah of Foley & Lardner LLP