Class Action Countermeasures

Fail-Safe Classes and One-Way Intervention

Andrew Trask — Thu, 23 May 2013 05:49:59 -0500

The merits based (or "fail-safe") class (e.g., "everyone who was a victim of defendant's fraud") has long been considered one of the best examples of a poorly-defined class: because the class is defined in terms of the merits, the class size fluctuates based on the verdict. A verdict for the plaintiff creates a sizable class; a verdict for the defendant means there was never a class at all (if there was no fraud, no one could have been a victim). As a result, many courts have refused to certify fail-safe classes.

Last year, in a remarkable move, the Fifth Circuit declared that it saw no problem with fail-safe classes. The holding, in In re Rodriguez, relies more on an unusual reading of Fifth Circuit precedent than on any logical reason why fail-safe classes are not a problem:

Because our precedent rejects the fail-safe class prohibition, we conclude that the bankruptcy court did not abuse its discretion when it defined the class in the present case.

(Emphasis added.) Faced with a new split in appellate circuit authority, Fordham law student Erin L. Geller did exactly what any good law student should: she drafted a student note on the issue. The Note, The Fail-Safe Class as an Independent Bar to Class Certification, 81 FORDHAM L. REV. 2769 (2013), provides a useful taxonomy of various ascertainability problems (dividing classes into fail-safe, administratively difficult, and overbroad).

But the most useful portion of the Note is Geller's big insight: fail-safe classes look like one of the evils that the modern Rule 23 was supposed to prevent: one-way intervention.

The res judicata argument can be taken one step further. Fail-safe classes must be barred from class certification because allowing fail-safe classes to be certified reinstates the one-way intervention that the 1966 amendment to Rule 23 was designed to abrogate. Under the 1966 amendment, the court's judgment - whether or not favorable to the class - must include all individuals that the court finds to be class members. Fail-safe classes thus violate the amendment by allowing class members to benefit from a favorable judgment but to be defined out of the class in the case of an adverse judgment. Fail-safe classes can be analogized to the spurious class actions the amendment eliminated by removing the tripartite characterizations of class actions. Much like the spurious class action in which class members could intervene to receive the benefit of a favorable judgment but were not bound by an adverse judgment, fail-safe class members are only bound by a favorable judgment.

(Emphases added; internal footnotes omitted.) Ms. Geller's Note provides a powerful argument--even in the Fifth Circuit--for finding fail-safe classes invalid. It's well worth a read.

Coupon Settlements Revisited - Feder v Frank

Andrew Trask — Tue, 21 May 2013 05:45:19 -0500

Just about anyone who owns a printer has strong opinions on toner cartridges. An enterprising group of plaintiffs' lawyers sought to capitalize on consumer annoyance with printer cartridges by filing three class actions in the Northern District of California against toner manufacturer Hewlett Packard.

Their cases didn't go so well. Some of the complaints were dismissed on the pleadings. They lost a bid at class certification. And trial court called their evidence of causation and injury "weak." These setbacks must have been particularly difficult because these plaintiffs' counsel had spent a great deal of time and money imposing discovery costs on HP, making the case particularly hard fought. When it came time to talk settlement, both sides were ready to be done with the case. They just faced the classic dilemma: HP didn't want to pay much, but class counsel wanted their fees.

So the parties turned to a classic solution: injunctive relief and coupons. Coupons tend not to cost a defendant much (and may bring it new business), but can be used to justify larger fee awards for class counsel. It sounds like a win-win, until one remembers that many absent class members don't like coupons very much, which has led to coupon settlements falling into disapproval in the last decade.

So when it looked like the plaintiffs lawyers were going to walk away with more than $2 million in fees and costs, while the plaintiffs would receive "e-credits" (electronic coupons) for toner that could only be redeemed on the company website (where prices were higher than other retailers'), the settlement drew objections, most notably from the Center for Class Action Fairness. [Disclosure: I have, pro bono, written several amicus briefs for the Center.]

The Ninth Circuit agreed with the CCAF's objection, and, in Feder v. Frank, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013), it reversed the approval of the class settlement with orders to recalculate the attorneys' fees based on the actual redemption rate of the coupons.

In the course of doing so, the court provided a concise explanation of the costs and benefits of coupon settlements:

Typically, courts try to ensure faithful representation by tying together the interests of class members and class counsel. That is, courts aim to tether the value of an attorneys' fees award to the value of the class recovery. Where both the class and its attorneys are paid in cash, this task is fairly effortless. The district court can assess the relative value of the attorneys' fees and the class relief simply by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class. The more valuable the class recovery, the greater the fees award. And vice versa.

But where class counsel is paid in cash, and the class is paid in some other way, for example, with coupons, comparing the value of the fees with the value of the recovery is substantially more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions. For instance, a coupon settlement is likely to provide less value to class members if, like here, the coupons are non-transferable, expire soon after their issuance, and cannot be aggregated. Of course, consideration of these variables necessarily increases the complexity of the district court's task--comparing the ultimate "value" of the coupon relief with the value of a proposed fees award. And perhaps more importantly, the additional complexity also provides class counsel with the opportunity to puff the perceived value of the settlement so as to enhance their own compensation."

(Emphasis added, internal citations omitted.) And it engaged in a thorough analysis of the provisions of the Class Action Fairness Act (CAFA) that govern coupon settlements:

Indeed, if the legislative history of CAFA clarifies one thing, it is this: the attorneys' fees provisions of § 1712 are intended to put an end to the "inequities" that arise when class counsel receive attorneys' fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class. This point cannot be overemphasized ...

(Emphasis added.) So the 9th Circuit found that the trial court had erred in using a lodestar calculation (which relies on the effort the attorneys expended instead of the benefit the class received) to determine the attorneys' fees in this coupon settlement. It quickly stressed,

however, that the responsibility for this error lies principally with the parties. Because the settlement agreement specifies that no coupons may issue until after entry of a final judgment, it would have been impossible for the district court to calculate the redemption value of the coupons as required by § 1712(a). By structuring the settlement in this way, the parties essentially invited the error here.

So what's the takeaway here? An oldie but goodie: trying to settle on the cheap can get expensive very quickly. If the settling parties don't provide real benefits to absent class members, they run a high risk of drawing objections that could scuttle approval of any classwide settlement.

Class Action a la Francais? - The Approach of the French Group Action

Andrew Trask — Thu, 16 May 2013 05:19:30 -0500

The Economist is reporting that the French president Francois Hollande's government just presented a class action bill to the Council of Ministers on May 2. While the bill still must be debated and passed, it has already generated a fair amount of buzz in Europe about whether this means that the French Socialist government will be importing American-style class actions.

European businesses need not worry that much. The bill really is far more similar to England's "group action" law (although it appears to operate on an opt-out principle rather than an opt-in one). As Commercial Risk Europe reports, the bill only allows registered consumer associations to bring the group action, and only for "material losses." It's aimed primarily at consumers, and is likely to cover primarily products liability and competition cases. (It was apparently driven by several issues with medical products in the last few years.)

As a result, it's unlikely to result in the flood of litigation that companies face in America. Consumer associations tend to be non-profit, which means they will likely focus more on cases where real harm was done than on cases that can leverage the largest settlements (and therefore fees for their lawyers).
That said, it will be interesting to see how American plaintiffs' firms react. Firms like Hausfeld LLP have been trying to build a global presence for some time. If they wind up taking "advisory" roles on French group action cases, that may signal they sense the potential for profit. Someone might want to start monitoring the comings and goings in the 8th arrondissement.

(Thanks to Betting the Company co-author Andrew DeGuire for the tip about the article.)

Standing and Certification: Kennedy v. United Am. Ins. Co

Andrew Trask — Tue, 14 May 2013 08:29:36 -0500

Brenda Kennedy was hospitalized in 2009 for four days. She had an insurance policy from United American that paid benefits for each day that she spent in the hospital, and she assigned those benefits to the hospital. When she received her hospital bill, she discovered that it had only covered three days, not four. So she bought a class action on behalf of everyone who received benefits from the policy.

United American moved to dismiss the case because Ms. Kennedy had not received benefits herself; she had assigned them to the hospital. The court agreed with the argument, but stayed dismissal to give Ms. Kennedy a chance to either find a new class representative or to get the hospital to ratify her lawsuit. (She did the latter.)

Then she moved to certify a nationwide class. United American opposed certification on a number of grounds, all of which revolved around the fact that Ms. Kennedy had not been the real party in interest in the case. According to United American, that meant that the class she had defined was overbroad (it contained individual with standing and without), individualized issues would predominate over any common issues (particularly the question of who was a real party in interest, and who had assigned their interest elsewhere).

In Kennedy v. United Am. Ins. Co., 2013 U.S. Dist. LEXIS 48197 (E.D. Ark. Apr. 3, 2013), the court denied certification. Its primary reason was that:

Kennedy cannot bypass or ignore the important task of identifying putative class members that qualify as real parties in interest.

In particular, it held that determining who was a real party in interest (and therefore who would belong in the class) would require individualized inquiries, affecting both ascertainability and predominance. As it reasoned:

Under the circumstances, it is difficult to envision a method for identifying proper class members without conducting extensive, individualized inquiries. In determining whether Kennedy qualified as the real party in interest in this case it was necessary to resolve multiple questions--including which state's law governed the issue, whether the language of the assignment contract between Kennedy and NEA evidenced an intention to effect a transfer, and whether the contract language and circumstances evidenced only a partial transfer and an intent that Kennedy retain the right to sue. As demonstrated by the protracted proceedings regarding Kennedy's status, assignments of GSP2 benefits present a myriad of issues that require consideration of individual proof.

(Emphasis added.) But the court went further, pointing out that Ms. Kennedy's situation rendered her an inadequate class representative as well.

"Even if Kennedy were a benefit payee, the Court finds that she does not qualify as an adequate representative, which is perhaps the most important of all prerequisites to certification of a class action. See Bishop v. Committee on Professional Ethics and Conduct, 686 F.2d 1278, 1288 (8th Cir. 1982). Kennedy's entire claim rests on the supposition that the GPS2 Policy requires that United count the day of discharge as a day of confinement during a hospital stay. United notes that Kennedy's proposed interpretation conflicts with the standardized billing practices of hospital class members that she seeks to represent. United also points out that the putative class includes current GSP2 policyholders who have a financial incentive to consider how this litigation will affect the cost of a GSP2 Policy. Kennedy, who is not a policyholder and remains indebted for the hospital charges that underlie her claim for benefits, has no similar interest."

(Emphasis added.) In other words, Ms. Kennedy's class action not only conflicted with how most policyholders would understand their benefits, it also threatened to make current policyholders' policies more expensive, undermining their interests.

Kennedy the case began with a motion to dismiss that was arguably unsuccessful. (The court agreed with the defendant's arguments, but gave the plaintiff an opportunity to fix the complaint.) The defeat of class certification built directly off of the motion to dismiss. There are two lessons that defendants can draw from this case. First, stay consistent; consistent arguments across several motions can be very persuasive to a judge. Second, don't be afraid to educate the court. Sometimes it takes a loss in an early skirmish to set up the victory where it is needed.

A Brief Reminder about Rule 1

Andrew Trask — Tue, 07 May 2013 05:39:08 -0500

Plaintiffs filed a class action complaint against defendant Tournament One Corp. in Nevada state court. Tournament One removed the case to federal court, and immediately filed a Motion to Compel Arbitration and a Motion to Dismiss, or, in the alternative, to stay the case pending the arbitration motion.

In the resulting opinion, Kidneigh v. Tournament One Corp., 2013 U.S. Dist. LEXIS 62217 (D. Nev. May 1, 2013), The trial court stressed that the Rules of Civil Procedure do not allow for automatic stays of discovery just because a dispositive motion is pending. But, observing that "discovery is expensive," it granted the motion to stay. As it reasoned:

With Rule 1 as its prime directive, this court must decide whether it is more just to speed the parties along in discovery while a dispositive motion is pending or to delay discovery to accomplish the inexpensive determination of the case.
The Court finds that the Defendant has made the strong showing necessary to support the requested stay. The issues before the Court in the pending dispositive motion do not require further discovery and are potentially dispositive of the entire case.

Rule 1, of course, requires courts to interpret the Rules of Civil Procedure "to secure the just, speedy, and inexpensive determination of every action and proceeding."

There are two takeaways from this case: first, when moving to stay, make sure the underlying dispositive motion is as close to a slam dunk as possible. Second, in class actions, which involve huge expenditures of time and effort in discovery, never underestimate the power of invoking Rule 1.

Betting the Company: Complex Negotiation Strategies for Law & Business

Andrew Trask — Thu, 02 May 2013 05:38:38 -0500

Yesterday, I received my author's copy of Betting the Company: Complex Negotiation Strategies for Law & Business, which I wrote with old friend Andrew DeGuire of Johnson Controls, Inc. We've been informed that Amazon is now shipping orders (a month earlier than expected).

So today's post is a brief excerpt, to let you all know what we've been working on for the last eighteen months.

Throughout this book, we use “complex negotiations” to mean negotiations with (or among) organizations. Why? Because nego- tiations between organizations have a number of characteristics that may place them on the complex end of any spectrum. There are six characteristics of complex negotiations, each of which presents itself most visibly in negotiations between organizations.

* Complex negotiations amplify the effect of nonrational judgments. Individual negotiations involve nonrational components and strong personalities. For various reasons we will explain in greater depth, these nonrational judgments are more frequent (and more severe) in organizations than among individuals.
* Complex negotiations also involve multiple parties. Even if the negotiation is only one organization negotiating with another, the negotiation will likely be handled by teams, and those teams will represent constituents that must be mollified.
* Complex negotiations involve multiple issues. Negotiations over a single issue depend on the amount of bargaining power each party has. By contrast, negotiations over multiple issues provide greater opportunities for agreement (where concessions on one issue can be traded against gains on other issues) or deadlock (by providing additional areas for distrust or disagreement).
* Complex negotiations take place over an extended period of time. When negotiations take place over a course of months or years, the parties develop relationships that affect the nature of the exchange.
* Complex negotiations are heavily regulated. They occur against a background of complex rules and laws. They may also occur against a background of organizational rules.
* Complex negotiations are intercultural. Each organization has its own culture. And negotiations that cross international boundaries may involve different national cultures as well.

Of course, many of these characteristics occur even in “simple” negotiations. It is possible for negotiations between individuals to involve nonrational components, third parties, multiple issues, or culture clashes. However, as explained in greater detail later in this book, because of the ways in which members of groups interact with each other, these issues are more likely to arise in the context of negotiations between organizations.

One central irony we will discuss throughout this book is that organizations are extremely helpful with complex issues: they allow us to throw more resources at a problem; they check individual personality quirks that might lead us astray; and they allow us to add expertise on new issues when necessary. But at the same time as they solve some challenges, organizations intensify others: organizations multiply the number of people who must be satisfied with the outcome; they lengthen the time required to consummate a deal, allowing new events to intervene; they can even amplify undesirable personality traits and entrench them as corporate culture.
In short, complex negotiations mean lots of moving parts, which in turn means lots of distractions and lots of chances to knock a negotiating team off its original plan. So one of the things this book is about is how to maintain strategic focus when events are exploding around you.

While I hope the connection with class-action practice will be self-evident, this book represented a departure from the doctrinal analysis so many of us lawyers spend so much time on. I'm proud of the result, and hope some of you will find it useful.

When Incentive Awards Attack - Radcliffe v. Experian Info Solutions Inc.

Andrew Trask — Tue, 30 Apr 2013 05:32:20 -0500

Going through bankruptcy is traumatic enough; doing so and still having your credit report still list your discharged debts as "delinquent" is enough to drive some people to litigation. And that's how several credit agencies found themselves on the receiving end of a series of Fair Credit Reporting Act class actions.

In this case, the defendants settled, offering the plaintiffs injunctive relief and some pro-rated monetary relief, as well as paying attorneys fees and some incentive awards for the named plaintiffs.

The settlement drew objections, however. The trial court approved the settlement nonetheless, but on appeal, in Radcliffe v. Experian Info Solutions Inc., the Ninth Circuit Court of Appeals vacated the settlement. The problem, it held, was the incentive award agreement:

On or before October 19, 2009, Proposed 23(b)(3) Settlement Class Counsel shall file an application or applications to the Court for an incentive award, to each of the Named Plaintiffs serving as class representatives in support of the Settlement, and each such award not to exceed $5,000.00.

(Emphasis added.) Based on both the agreement and testimony at the fairness hearing, it was clear that the incentive provision was supposed to encourage the named plaintiffs to support the settlement. That, the court held, was a conflict of interest that rendered the named plaintiffs inadequate as class representatives.

But the court also expressed concern about the disparity in the size of the incentive awards, stating that this alone might be reason enough to disqualify the plaintiffs as inadequate:

There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards. Under the agreement, if the class representatives had concerns about the settlement's fairness, they could either remain silent and accept the $5,000 awards or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. The conditional incentive awards at issue here, like the disproportionately large awards in Staton, fatally alter the calculus for the class representatives, pushing them to be "more concerned with maximizing [their own gain] than with judging the adequacy of the settlement as it applies to class members at large."

(Emphasis added.)

Finally, the court also held that the provision meant that class counsel was not adequate to represent the class, because there were representing conflicting parties: the named plaintiffs who would receive the incentive award and the absent class members who would not.

Radcliffe appears to be part of a growing trend of courts of appeal watching out for the interests of absent class members. And that makes for an important takeaway: if the settling parties don't protect the absent class members, the courts will step in to do so.

NOTE - An earlier version of this post identified the Public Citizen Litigation Group as involved with the case. While they are listed in the opinion as counsel, I have been informed that the brief they filed was on a collateral issue, not one objecting to the settlement.

Are Uninjured Class Members Under-Compensated?

Andrew Trask — Thu, 25 Apr 2013 05:06:23 -0500

Despite the warnings, Wal-Mart Stores, Inc. v. Dukes did not herald the end of the class action, or even class action scholarship. Indeed, new debates have risen in its wake. One of the most interesting is what to do about classes where large numbers of class members might not have suffered any injury. Courts do certify these cases, for settlement purposes if nothing else. But should they?

One plaintiff attorney-scholar group (Joshua Davis, Eric Cramer, and Caitlin May) says "yes." In their paper The Puzzle of Class Actions with Uninjured Members, they argue that based on their analysis,

courts are free to continue to certify classes--even to award damages to classes--that contain members who suffered no legally cognizable harm.

How do they justify this? The authors make three arguments:

First, there is no valid standing objection to compensating uninjured class members. As the authors argue, several courts, including the Seventh Circuit in Kohen v. Pacific Investment Management LLC and the Second Circuit in Denney v. Deutsche Bank AG, have held that the Article III case or controversy requirement does not require each class member to independently prove her standing.

Second, there is no valid due process objection. According to the authors, the due process concerns (the class member's right to "autonomy" or "full compensation," the defendant's right to ) are "abstract," as opposed to the presumably concrete (or, as they put it, "practical") needs of the class member to some recovery.

Third, Shady Grove undermines any objections that class actions confer substantive rights in violation of the Rules Enabling Act. According to the authors, certifying a class that includes uninjured members and then awarding damages does not confer a new substantive right on the uninjured class members, it just changes the way in which the claims are processed.

Even if a class is certified with potentially uninjured members, a court will address the same claims and defenses. It will simply litigate common issues in a common--and therefore more expeditious--manner.

Unfortunately, none of these arguments really holds up to scrutiny.

Part of the problem here is that the plaintiffs cherry pick their cases, and ignore inconvenient details. For example, while the authors discuss Kohen, an opinion by Judge Posner that held that the defendants had not provided enough evidence to show that a proposed class definition was overbroad (thus pulling in uninjured class members), they completely ignore Judge Easterbrook's opinion in In re Bridgestone/Firestone, which specifically detailed the problem with certifying a class that included "millions of uninjured buyers." (Emphasis in original.) Similarly, the authors discuss Denny v. Deutsche Bank AG, an opinion by the Second Circuit that upheld a settlement with class members who received bad tax advice, without ever mentioning that the opinion reviewed a "conditional certification 'for settlement purposes only.'" (The court considered that posture very significant: it allowed it to consider solely "suffered injuries-in-fact, irrespective of whether their injuries are sufficient to sustain any cause of action.")

The biggest problem with the authors' analysis is that it does not mention Comcast Corp. v. Behrend (which was decided five days before they posted their paper). And it appears Behrend blows a big hole in their argument. The Supreme Court there expressed grave concerns about certifying a class in which some percentage of members might have been injured, just not by the wrong the plaintiffs challenged. As it put it:

In light of the [plaintiff's] model's inability to bridge the differences between supra-competitive prices in general and supra-competitive prices attributable to the deterrence of overbuilding, Rule 23(b)(3) cannot authorize treating subscribers within the Philadelphia cluster as members of a single class.

Granted, the Court did not discuss standing, due process, or Shady Grove. It relied on the a far more

unremarkable premise. If respondents prevail on their claims, they would be entitled only to damages resulting from reduced overbuilder competition, since that is the only theory of antitrust impact accepted for class-action treatment by the District Court.

(Emphasis added.) In other words, the damages the plaintiffs seek have to be related to their theory of the case. A class containing large numbers of uninjured members may or may not violate standing or due process. But it is definitely overbroad. And courts--long hesitant to compensate the uninjured--have long refused to certify overbroad classes simply on ascertainability grounds.

So what can defense lawyers pull from this paper? Two things. First, the paper provides a look into what some plaintiffs' attorneys see as one of their larger vulnerabilities: to make money they need large classes, but large classes are usually overbroad. How will they justify those classes? Second, and more prosaically, it always pays to read the underlying cases, and to be up on the state of the law.

Mootness Controversy Still Live - Genesis Healthcare Corp. v. Symczyk

Andrew Trask — Tue, 23 Apr 2013 05:17:27 -0500

Rule 68 offers of judgment have been controversial in class action practice for quite some time. Proponents of the tactic believe that it offers a valuable means of limiting frivolous lawsuits: where there are really only a few affected claimants, an offer of judgment can force them to face up to the costs of meritless class allegations. Opponents believe that corporate defendants would rather buy off potential claimants one by one than face a class-action lawsuit. Circuit courts of appeal had split on whether the tactic could actually moot a class action.

Genesis Healthcare Corp. v. Symczyk, in which a nurse appealed the dismissal of her FLSA collective action after the defendant made an offer of judgment and then moved to dismiss her case as moot, seemed to offer a solution to the longstanding question of whether the offer of judgment is a valid defense tactic in class actions. In the opinion that came out last week, Justice Thomas, writing for a 5-Justice majority, allowed the tactic in the case before the Court, but seemingly limited it for the time being. Specifically, he held that

In the absence of any claimant's opting in [to the proposed collective action], respondent's suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action.

If you believe that reasoning sounds like the Court did not intend its opinion to reach Rule 23 class actions, you are correct. The Court immediately rejected any attempt to use Rule 23 cases to support a wider ruling in Symczyk:

But these cases are inapposite, both because Rule 23 actions are fundamentally different from collective actions under the FLSA, see Hoffmann-La Roche Inc., 493 U. S., at 177-178, 110 S. Ct. 482, 107 L. Ed. 2d 480 (SCALIA, J., dissenting), and because these cases are, by their own terms, inapplicable to these facts.

(Emphasis added.) The Court did, however, include some language that suggests it might find Rule 68 offers of judgment appropriate when made to Rule 23 named plaintiffs. First, it pointed out that settling a collective action early does not deprive additional claimants of any rights to bring lawsuits:

While settlement may have the collateral effect of foreclosing unjoined claimants from having their rights vindicated in respondent's suit, such putative plaintiffs remain free to vindicate their rights in their own suits.

Second, Justice Thomas responded to Symczyk's argument that "picking off" a named plaintiff in a collective action would frustrate the efficiency justifications for a collective action, as they had been articulated for class actions in Depsoit Guaranty National Bank v. Roper. In general, he rejected the argument on its logic, but he also include a footnote that implied Roper may no longer be good law:

Because Roper is distinguishable on the facts, we need not consider its continuing validity in light of our subsequent decision in Lewis v. Continental Bank Corp., 494 U. S. 472, 110 S. Ct. 1249, 108 L. Ed. 2d 400 (1990).

That footnote sounds like an invitation to revisit the issue. Based on Justice Kagan's spirited dissent, it will likely be another contentious debate.

Karlsgodt on Statutory Class Actions

Andrew Trask — Thu, 18 Apr 2013 05:41:20 -0500

Paul Karlsgodt (of the longstanding and outstanding Class Action Blawg) has published an article with the University of Denver Law Review's Online Edition: Statutory Penalties and Class Actions: Social Justice or Legalized Extortion? Statutory Penalties is an excellent introduction to the problem of defending class actions based on statutory violations, and Karlsgodt's focus on privacy litigation is a welcome one.

Among the most useful parts of his article, Karlsgodt provides a handy summary of the "annihilation argument" and how it's currently received by the courts.

One argument raised in early class actions involving potentially annihilating statutory damages liability was that the potential of putting a defendant out of business defeated the superiority element required for class certification. Courts found that class actions were not the superior means of resolving claims because the potential liability in a class action would put the defendant out of business and because statutory penalties themselves facilitated individual lawsuits. More recently, as illustrated by the Ninth Circuit Court of Appeals’ decision in Bateman v. American Multi-Cinema, Inc., courts have rejected the idea that the potential for annihilating liability is a basis for finding a lack of superiority.

(Emphasis added.) Since he's writing for a university law review, Karlsgodt jumps quickly from diagnosing the problem to legislative solutions. And that's understandable: after all, the legislature caused the problem in the first place. But, despite what the leap to legislative recommendations implies, there are some tactics class action defense lawyers can use (short of the due process challenges he discusses) to fight statutory damage cases:

Focus on fairness. Judges are human: they often look at what's really at stake in a case, and many of them don't really like "gotcha" class actions. As a result, they are often willing to read causation or other requirements into statutory class actions that might otherwise result in billions of dollars of nominal damages.
Focus on the class definition. Overeager plaintiffs may botch the class definition, reaching for more than the statute will grant them. (This has proven particularly true in TCPA cases.) But, in addition, some statutory class actions (like those under EFTA) may not lend themselves to widespread class definitions.
Make an offer of judgment. ~~Depending on How the Supreme Court decides Symczyk, it may~~ ~~be that~~ Depending on the jurisdiction, a Rule 68 offer of judgment can stave off some of these cases by offering relief to the few plaintiffs who might actually care about the "gotcha" violation.

Go. Read. It's an interesting article about an important current issue.

[Disclosure: Paul and I correspond occasionally, and he has been very kind to the Class Action Playbook over the years. Also, I quite liked his book World Class Actions.]

[Correction: in the 72 hours between writing this post and its going live, the Supreme Court decided Symczyk. More on that on Tuesday. Thanks to Ted Frank for pointing out the error.]

Reverse Auctions, Motions to Stay, and Legal Realism: Branca v. Iovate Health Sciences USA, Inc.

Andrew Trask — Tue, 16 Apr 2013 05:37:01 -0500

Two plaintiffs' firms filed nearly identical class actions against a dietary supplement company, alleging that one of its weight loss supplement didn't work. The cases were filed within two weeks of each other, one in federal court (Branca v. Iovate Health Sciences USA, Inc.), and one in California state court (Garcia v. Iovate Health Sciences USA, Inc.). Shortly thereafter, the defendant filed a motion to stay in the federal case, because it had settled the case in state court.

So far, this was all just run-of-the-mill procedural maneuvering. So why make it the subject of a blog post? As the court explained:

Why not stay this case, if one that's virtually identical to it, and would resolve all of the claims, has reached a preliminary settlement that is now awaiting court approval? The real reason, according to Branca, is that the Garcia settlement is collusive, or at least looks really bad.

(Italics in original; bold emphasis added.) The part that "look[ed] really bad" was that the firm representing the defendant had been about to engage in mediation with opposing counsel when the Garcia case was filed. The opinion implies (but does not state outright) that the quick settlement in the Garcia case might be the result of a reverse auction.

The Court has read the parties' briefs and given considerable thought to them. Here's the basic problem: No matter how hard Iovate tries to argue that a stay is warranted under Landis v. North American Co., 299 U.S. 248, 254, 57 S. Ct. 163, 81 L. Ed. 153 (1936), and no matter how hard Branca tries to argue back that a stay isn't warranted under Colorado River Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976), the real fight here is for control of a class action between two warring plaintiffs' firms. That fight, moreover, is inseparable from the ostensibly disinterested legal arguments they make for the Court staying or not staying this case.

But, having identified the real stakes of the motion to stay, the court decided to grant it anyway.

The Court's view is that if there's something procedurally or substantively unsavory about the Garcia settlement, even though it appears to be the result of vigorous bargaining before an experienced mediator, Judge de Bellefeuille should be the judge to say so. Garcia is her case. But until Judge de Bellefeuille makes that call, and meaningfully stalls the progress of the Garcia settlement, the Court is inclined to exercise its discretionary power under Landis to stay this case in the interest of judicial economy.

The case is notable because it's not often that a court will pull back the curtain to expose the real interests behind a mundane procedural motion. That kind of realism is always worth a second look. And the takeaway for defense lawyers is one that always bears repeating: don't be afraid of telling the court what's really going on. Courts are often more willing to wave aside legal fictions than we might think.

The Cy Pres Incentive Problem

Andrew Trask — Thu, 11 Apr 2013 05:51:26 -0500

This week's article is a student comment: George Mason 3L Jennifer Johnston has published an interesting discussion of the problems that arise from cy pres distributions, Cy Pres Comme Possible to Anything is Possible: How Cy Pres Creates Improper Incentives in Class ActionSettlements, 9 J.L. Econ. & Pol'y 277 (2013). Her primary argument is that, since cy pres relief changes the incentives for key personnel in a class action settlement, it should only be used when there are assurances it will actually benefit absent class members.

Charitable cy pres distributions effectively add third parties to adversarial proceedings, in the form of charities and nonprofit organizations. Compared to the traditional incentives in the adjudicatory process, introducing another party into a traditionally bilateral proceeding generates significant changes in incentives structures. Judges are often given great discretion in approving a settlement. Typically, the judge is also given wide latitude to decide where to direct the cy pres award, thus giving the judge incentives to consider his own interests and those of a third party organization he views as worthy to receive the funds. Incentives that stem from the judge's discretion can create conflicts of interest, which in turn can create an appearance of impropriety on the part of the judge.

Other times, the plaintiffs' attorney or the defendant is left to decide where to direct the funds, pending approval from the opposing side and the judge. Since the plaintiffs' attorney's fee is often based on a percentage of the entire award, including the cy pres award, counsel for the class has a financial incentive to seek such an award. Cy pres has also created a "cy pres industry" where charities, nonprofits, and even law schools lobby the judiciary to direct funds to their organizations. In evaluating how cy pres has changed the incentives of parties involved, it is necessary to look at models of incentive structures for each party in a traditional adjudicatory class action proceeding and how these parties should ideally behave.

(Footnotes omitted, emphasis added.)

Johnston's solution is twofold: (1) keep more class actions in state court, where it may be easier to identify class members, and where unused funds may revert to the state, or (2) for federal class actions, require a second round of notice if there are significant unused funds. I'd question whether a second round of notice will accomplish much when many absent class members don't read the first notice in a class action, but that is an empirical debate worth having.

Johnston's comment is a cogent, well-researched, and clearly-organized discussion of the problems that arise from cy pres relief. It's well worth a read.

New signs of life for the predominance standard

Andrew Trask — Tue, 09 Apr 2013 05:13:19 -0500

It's a busy week for me, so here's just a brief rundown of two opinions vacated and remanded from the US Supreme Court:

RBS Citizens NA v. Ross (7th Cir. 2012). (More here.) The Seventh Circuit affirmed certification of a wage-and-hour case, despite what it conceded was a less-than-optimal order certifying the class. RBS appealed to the Supreme Court to ascertain how the certification fit in with the Dukes commonality standard. The Supreme Court vacated and remanded the case in light of its opinion in Comcast Corp. v. Behrend.

Whirlpool Inc. v. Glazer (6th Cir. 2012). The Sixth Circuit affirmed certification, holding that the district court did not have to investigate proximate cause of moldiness, and that “unharmed” class members might have a viable common overpayment theory. Whirlpool appealed to the Supreme Court seeking clarification on the role of the merits inquiry in certification. Like with Ross, the Supreme Court vacated and remanded in light of Behrend.

Now it's usually difficult to pin down the Court's exact position in cases like these, since it might think Behrend has a direct bearing on these cases, or it might just be clearing its docket. But at this point it is certainly safe to say that Behrend's reinforcement of the predominance standard is going to have an effect on the certification debate in 2013.

The Real Problem with Settlement-Only Class Actions

Andrew Trask — Thu, 04 Apr 2013 09:00:35 -0500

Fordham law professor Howard M. Erichson has a new paper up at SSRN on "The Problem of Settlement Class Actions." Based on dicta in the Supreme Court's opinion in Amchem Products, Inc. v. Windsor, courts have taken to certifying classes for settlement purposes only without worrying about "manageability," that is, whether the case could actually be tried as a class action.

As a result, settlement class actions have long posed strategic dilemmas for plaintiffs and defendants alike. Among them:

How much can the defendant concede without compromising its ability to defend the case if the settlement falls through? (Not as much as you think.)
Can a settlement-only class be too cheap? (Yes.)
How wide can the parties cast their net in releasing claims? (Not too wide.)

Professor Erichson shares many of these concerns, which is why he advocates abolishing the settlement-only class, and only allowing settlements to proceed if the class has been certified for litigation. As evidence of the need for this shift, he cites two recent--and highly controversial--settlements: In re AIG and Sullivan v. DB Investments. As he puts it

AIG and DeBeers show what happens when courts follow the Supreme Court’s dicta [in Amchem] to its logical conclusion, rather than following the concerns that animated the Court’s decision. Armed with the Supreme Court’s modest permission to treat settlement classes slightly differently than litigation classes, these courts approved settlement class actions notwithstanding issues that go to the heart of class certification – in one case, the fraud-on-the-market doctrine, and in the other, significant variations in state law.

(Emphasis added.) Erichson draws the wrong lesson, though. He thinks questionable settlements like these occur because the plaintiffs lack leverage in negotiations:

By permitting settlement class actions without plenary class certification, the Court invited defendants to use the settlement class tool to resolve widespread liability through negotiation with deleveraged would-be class counsel. Moreover, by modifying the approach endorsed by the Court of Appeals, the Supreme Court opened up the possibility of class resolutions negotiated without even the leverage of future litigation class certification.

(Emphases added.) That conclusion seems to ignore the facts of each case. In each of these cases, a class that could not have gotten certified for trial was certified for settlement. Think hard about that for a moment. In In re AIG, the plaintiffs brought a class that could not be certified because of individualized reliance issues. It settled for $72 million. In Sullivan, the plaintiffs settled a case on behalf of a class that included many unharmed class members for $295 million. Is the problem in either case that the plaintiffs lacked leverage?

GIven his misdiagnosis of the problem, Professor Erichson's solution misses the mark. Abolishing the settlement class action will not lead to better settlements. It may, in fact, lead to worse ones. The plaintiffs' leverage in settlement negotiations comes not so much from their promise of peace as from their threat of war. Litigating class actions has grown enormously expensive, and defendants will often settle claims that are less than meritorious because the settlement is cheaper than the costs of litigation. DB Investments did not pay $295 million for the preclusion of other cases--it did so because it was facing a default judgment. And AIG likely settled its case--in which it had a very strong argument against certification--because the costs of reaching that victory were simply too high.

The problem with these settlements was not that the plaintiffs lacked the leverage to cut a good deal; indeed, the indirect purchasers in Sullivan and the investors in In re AIG did just fine. The problem is that absent class members--who are not present for the negotiation--are too often sacrificed for these deals.

There is a solution to this particular problem, but it is one that plaintiffs, judges, and academics tend not to advocate. To protect absent class members, courts just need to vigorously enforce the adequacy requirement, and intervene in poor settlements sooner. Some courts are willing to do this. But for too many, this would interfere with many plaintiffs' current business model. That's a shame. Defendants will manage just fine, but absent class members may not.

Confidential Witness Confidential II - City of Livonia Employee Retirement Sys. v. Boeing Corp.

Andrew Trask — Tue, 02 Apr 2013 05:44:10 -0500

Two years ago, I wrote about the difficulties defendants face when securities plaintiffs invoke confidential witnesses in their complaints. The case that prompted that discussion, City of Livonia Employee Retirement System v. Boeing Corp., now has a sequel. As it turns out, both parties appealed the opinion below: the plaintiffs because the court below had dismissed their case with prejudice, and the defendants because the court had not imposed sanctions consistent with the PSLRA.

Judge Posner wrote the opinion for the three-judge panel. He began with a brief (and very informative) summary of the relevant provisions of the PSLRA. In relaying the background of the case, Judge Posner specifically addressed the credibility of confidential witnesses head-on:

Allegations concerning--in the first amended complaint merely implying--unnamed confidential sources of damaging information require a heavy discount. The sources may be ill-informed, may be acting from spite rather than knowledge, may be misrepresented, may even be nonexistent--a gimmick for obtaining discovery costly to the defendants and maybe forcing settlement or inducing more favorable settlement terms.

(Emphasis added.) In this case, since the plaintiffs acknowledged at oral argument that they would not be relying on their formerly confidential witness, he quickly affirmed the dismissal with prejudice.

Then he moved on to sanctions, where he had some more severe things to say about the various amended complaints:

The plaintiffs' lawyers had made confident assurances in their complaints about a confidential source--their only barrier to dismissal of their suit--even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn't verify what (according to her) he had told her. She had qualms: the names the source had given her of persons to whom he reported in the Boeing chain of command were inconsistent with what she was able to learn about the chain. This should have been a red flag to the plaintiffs' lawyers. Their failure to inquire further puts one in mind of ostrich tactics--of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing. Representations in a filing in a federal district court that are not grounded in an "inquiry reasonable under the circumstances" or that are unlikely to "have evidentiary support after a reasonable opportunity for further investigation or discovery" violate Rules 11(b) and 11(b)(3).

(Italics in original; bold added.) So the opinion affirmed the dismissal, and remanded the case the district court for a finding of whether sanctions were appropriate in this case, and, if so, how much.

There are two key takeaways here for defense lawyers. The first, as I wrote the last time I discussed Livonia, is that it is always worth probing deeply into the pleadings, especially in securities cases where there are heightened pleading standards. The second is a more general lesson for all lawyers: once you've been caught cutting corners, don't push your luck with an appeal.

Admin & Class Actions

Andrew Trask — Fri, 29 Mar 2013 05:56:41 -0500

I have a few smaller news items to announce. So, if you'd like to learn about some longer-form content similar to the kinds of things I write about here, read on. If not, feel free to come back next Tuesday for some more class-action oriented content.

New book. Betting the Company: Complex Negotiation Strategies for Law & Business (co-authored with Andrew DeGuire) now has both a cover and a release date from Oxford University Press. Brandeis business Professor Ben Gomes-Casseres says it's

"Invaluable! Full of ready-to-use advice, rooted in both theory and practice."

And Southwestern University Law professor Byron Stier says it

"provide[s] a comprehensive but accessible survey of the myriad issues and extensive academic commentary on negotiation, while offering practical advice for negotiators looking for immediately useful tips. "

Like with the Playbook, if you're a journalist or a blogger and would like a review copy, please feel free to get in touch with me.

Old book, new publisher. LexisNexis has bought the Class Action Playbook from OUP. In the short term, that means that the Playbook will soon be available in a variety of electronic formats. In the longer term, Lexis has some other, exciting plans. Stay tuned.

Strafford CLE. On April 16, I'll be participating in a webinar for Strafford CLE on the Amgen decision. The opinion has some interesting implications for both securities class actions and class actions more generally. I look forward to seeing you there.

Supreme Court reinforces predominance standard - Comcast Corp. v. Behrend

Andrew Trask — Thu, 28 Mar 2013 05:05:38 -0500

Yesterday, the Supreme Court issued its opinion in Comcast Corp. v. Behrend, the antitrust case which commentators (including me) had expected would finally resolve the question of whether a trial court must apply the Daubert evidentiary standard to expert testimony in a certification debate. It turns out we were wrong. Due to a procedural defect below (Comcast had not objected to the admissibility of the expert's testimony in the trial court), the Court ultimately did not decide the Daubert issue. But it did issue an opinion that, while limited, provides some help to defendants at certification.

Behrend in a nutshell: The plaintiffs filed a class action accusing Comcast of monopolizing the market for cable services in Philadelphia, driving up prices. (This was a violation of Section 2 of the Sherman Act.) During the certification debate, they offered expert testimony that showed the effects of four different practices on cable prices, although the report did not disaggregate those effects. The trial court certified a class based on only one of the four challenged practices, referred to as "overbuilding," in which the company provided more infrastructure than demand supported, driving prices down and keeping out competitors. When Comcast objected that plaintiffs had not provided classwide evidence that overbuilding had led to the price increases they challenged, the lower court held that the expert report was sufficient to serve as classwide proof, and delving any further would be an impermissible merits inquiry. The Third Circuit affirmed.

The majority, in a brief 5-4 opinion, began from the premise it articulated most recently in Dukes, that class actions require a rigorous inquiry that may overlap with the merits. While Dukes discussed the commonality standard of Rule 23(a),

[t]he same analytical principles govern Rule 23(b). If anything, Rule 23(b)(3)’s predominance criterion is even more demanding than Rule 23(a).

(Emphasis added.) It then held that a plaintiff's theory must remain consistent enough that the class certified will reflect the actual case tried, including the theory of damages:

at the class-certification stage (as at trial), any model supporting a plaintiff’s damages case must be consistent with its liability case, particularly with respect to the alleged anticompetitive effect of the violation.

(Internal quotation omitted.) This, held the Court, was where the lower courts had gone wrong. They had certified a class based on an expert opinion that did not actually match the theory of the case the class would be allowed to pursue. Moreover, the lower court had punted on the question of whether the expert's method made sense at all:

The Court of Appeals simply concluded that respondents “provided a method to measure and quantify damages on a classwide basis,” finding it unnecessary to decide “whether the methodology [was] a just and reasonable inference or speculative.” Under that logic, at the class-certification stage any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be. Such a proposition would reduce Rule 23(b)(3)’s predominance requirement to a nullity.

(Emphasis added, internal citation omitted.)

This is not the last we've heard of the Daubert debate. As the dissent points out, before it learned that the admissibility question had been waived, the Court had reformulated the question on appeal specifically to address the admissibility of expert testimony. I would guess that the Court will remain vigilant for an opportunity to further clarify what expert testimony can support certification. Meanwhile, defendants can use the Court's discussion here to good advantage when challenging classes where individualized issues predominate.

What Can Defense Lawyers Learn from Kentucky Bar Ass'n v. Chesley?

Andrew Trask — Tue, 26 Mar 2013 05:45:30 -0500

This week, the class action bar and legal blogs have been abuzz with the news that famed plaintiffs' lawyer Stanley Chesley has been disbarred by the Kentucky Supreme Court, a development that will likely lead to his disbarment in his home state of Ohio as well. (PDF of opinion here.)

In the course of laying out its background facts, the opinion confirms several plaintiff firm practices I've documented in the past. Among them:

Filing on top of other plaintiffs. Chesley's initial involvement with the case came when he was hired to consult on a national settlement. After he did that, he filed a companion fen-phen case and moved to have it consolidated with the larger lawsuit, a motion his eventual colleagues vigorously opposed. This is not an unusual tactic among plaintiffs' firms, but it's rare to see it confirmed in print.
Division of labor. The various plaintiffs lawyers engaged in a division of labor among firms. One firm prepared for trial; another rounded up the clients: Chesley served as lead negotiator.
Money undoes everything. According to the opinion, the whistleblowers in the fen-phen case were law-firm partners of several of the disbarred lawyers, who grew suspicious of the new income streams to firm. When the settlement gets too rich, there are usually people around who will scuttle it, either out of a sense of integrity, or because they aren't getting their cut.

But, in this case, far more important than confirming how plaintiffs lawyers litigate are the lessons defense lawyers can learn about how to negotiate class settlements. Lessons

Do due diligence on the lawyers one faces. It can be tempting to deal with class action lawyers who are inexperienced or have reputations that suggest they will agree to settlement offers quickly. Doing so may effect a settlement quickly, but it does not guarantee a settlement that will stand up to Rule 23(e) scrutiny.
Require confirmation that the client has received offer. The largest problem with fen-phen settlements was that the defendants made one offer, but the one communicated to the class members was different. To avoid prolonged litigation over a settlement, it makes sense for the defendant to require some assurance that its offers are communicated effectively. Among other ways to do this, one can ask to communicate the offer to the named plaintiff itself, or require the named plaintiff to be present at any mediation. Neither of these tactics interferes with the attorney-client privilege: the plaintiffs counsel can still confer with their client and provide their unvarnished opinion of the offer. It does, however, reduce the errors that might arise in translation.
Watch out for settlement red flags. When the fees are higher than the relief the class receives, or much of the relief is an intangible injunction, a defendant might infer that counsel is more focused on their own cut than on the interests of the absent class members. Those settlements are the ones most likely to be undone later.

What each of these lessons boils down to is negotiating a settlement with integrity. There are often financial and institutional pressures to settling quickly and cheaply (and fast, inexpensive settlements can be very good for class members, too). But the best way for a defendant to make sure that a settlement does not result in criminal investigations or huge objections is to make sure that--at the very least--its side of the street is clean.

Empirical Evidence of the Importance of the MTD in Securities Cases

Andrew Trask — Thu, 21 Mar 2013 05:51:00 -0500

Back in January, NERA Economic Consulting published yet another interesting paper, entitled Dynamic Litigation Analysis: Predicting Securities Class Action Settlements as a Case Evolves, by Dr. Ronald Miller.

Using the data NERA has collected on securities class actions over 20 years, Dr. Miller comes to some interesting conclusions about motions practice in securities cases. Most notably:

Few securities class actions are resolved at the summary judgment stage.
The filing of a motion to dismiss has little effect on settlement value of securities cases, but the granting of dismissal can reduce the value of a settlement by up to 40%. (Why not 100%? Presumably because class actions that settle after a successful motion to dismiss involved multiple lawsuits, or some other threat of recurrent litigation.)
The resolution of a motion for class certification (either pro or con) does not have a statistically significant effect on settlement value, but the mere filing of the certification motion drives up settlement value by about 33%.

These findings reinforce an intuition (backed by experience) that many securities class action lawyers share: unlike in other class actions where certification is the real battle, in securities class actions, the real fight is the motion to dismiss.

CAFA Jurisdiction and the Entity Theory - Standard Fire Ins Co v. Knowles

Andrew Trask — Wed, 20 Mar 2013 05:03:20 -0500

Yesterday, the Supreme Court issued its opinion in Standard Fire Insurance v. Knowles. The question the Court faced in this case was whether a plaintiff may avoid removal of a class action under CAFA by stipulating that the case is worth less than $5 million, the statutory amount-in-controversy requirement.

The Knowles opinion--which was unanimous--provides a straightforward answer. As Justice Breyer put it:

As applied here, the statute tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of Knowles’ proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case. The District Court in this case found that resulting sum would have exceeded $5 million but for the stipulation. And we must decide whether the stipulation makes a critical difference.

In our view, it does not. Our reason is a simple one: Stipulations must be binding. … The stipulation Knowles proffered to the District Court, however, does not speak for those he purports to represent.

That is because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.

(Emphasis added) In other words, until a class is certified, a named plaintiff is just an individual plaintiff, not the head of some mystical entity known as a class.

Knowles, combined with a few other cases, like Bayer and Shady Grove, shows that the Supreme Court is slowly coming to a coherent vision of what a class action is. That vision is helpful for defendants, less so for current plaintiffs. The Supreme Court is envisioning the class action as a procedural aggregation device, rather than a corporate deterrent or a trust-like entity. This is good news for defendants, who have traditionally argued that the class action is a rule-based joinder device that should not confer any special treatment onto the named plaintiff.

Disclosure: I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief in this case.