Class Action Defense Strategy Blog

Pfizer: The Court of Appeal Rinses Away the Tobacco II Aftertaste

Sheppard Mullin — Thu, 04 Mar 2010 05:01:43 -0800

By Paul Seeley and Fred Puglisi

In Pfizer, Inc. v. Superior Court, ___ Cal. App. 4th __ (March 2, 2010), the Court of Appeal, Second District, applied In re Tobacco II Cases, 46 Cal. 4th 298 (2009) ("Tobacco II") to overturn an order granting class certification. The Pfizer opinion resuscitates traditional class certification opposition strategies based on the unfair competition law (the "UCL") even in the wake of Tobacco II's holding.

Pfizer revolves around a six-month advertising campaign Pfizer used to promote Listerine mouthwash. During the six months between June 2004 and January 2005, some Listerine bottles bore a label that claimed Listerine was "as effective as floss" in reducing plaque and gingivitis. The plaintiff filed a class action lawsuit alleging violations of the UCL on the basis of the alleged fraudulent advertising and sought restitutionary disgorgement of the amounts the class members paid for Listerine.

The significance of the Pfizer opinion comes, in no small part, from its procedural history. The trial court certified a class of "all persons who purchased Listerine, in California, from June 2004 through January 7, 2005." Pfizer sought writ relief, which the Court of Appeal granted on the basis that Proposition 64 required that the representative plaintiff show that the putative class members must have "suffered injury in fact and lost money or property as a result of [the] violation." The case then went to the California Supreme Court, which ordered the Court of Appeal to vacate and reconsider the decision in light of Tobacco II, which held that class representatives did not need to show each class member had standing under the UCL. This Pfizer opinion represents the Court of Appeal's "reconsideration" of its previously vacated decision with a full analysis of Tobacco II's impact on the trial court's class certification order.

In reversing the certification order, the Court of Appeal focused on language from Tobacco II regarding the UCL's available remedies. As the court noted, even while individualized proof of lost money or property is not necessary for class certification, Tobacco II states that the restitutionary remedies will only return "money or property that 'may have been acquired' by means of the unfair practice." Tobacco II, 46 Cal. 4th at 320. Thus, the Pfizer court concluded that a person who was not exposed to the "alleged misrepresentations…could not possibly have lost money or property as a result of the unfair competition" and cannot, therefore, collect restitution. Pfizer, at *10.

As persons who were not exposed to the alleged violations cannot collect restitution, the Pfizer court held that the certified class of all Listerine consumers was "grossly overbroad." The court pointed to evidence that showed that there were 34 different Listerine bottles in existence during the relevant time period and 19 of those bottles never included the alleged false advertising. Furthermore, there were four different television commercials that contained the "effective as floss" statements but there was no evidence suggesting the majority of the class members saw those commercials. Thus, there was no evidence that even a majority of the putative class saw the alleged misrepresentation and even less evidence that they made their decision to purchase Listerine based on that misrepresentation.

The Pfizer court differentiated these facts from the Tobacco II scenario. In Tobacco II, the alleged misrepresentations were made during a decades-long, pervasive campaign to misrepresent the dangers of smoking. The class in Tobacco II, therefore, was composed of people who "may have lost money by means of the unfair practice" due to the pervasive campaign that all of the class members were exposed to. In Pfizer, however, the advertising campaign was limited to six-months and there was no evidence that the majority of class members saw the campaign before they purchased Listerine. As the Pfizer court writes: "Tobacco II does not stand for the proposition that a consumer who was never exposed to an alleged false or misleading advertising or promotional campaign is entitled to restitution." Pfizer at *11. As the certified class included class members who were never exposed to the "as effective as floss" campaign, the Court of Appeal reversed the certification order (again).

As a separate holding, the Pfizer court also applied Tobacco II to rule that the representative plaintiff was not "adequate" to represent the class. The plaintiff testified that he did not base his Listerine purchase on any of the four television advertisements. Instead, he claimed that he purchased Listerine because of the "as effective as floss" label on one (of a possible 34) bottles. He further testified he could not remember what else the label said, which was significant because some of the labels stated that the consumer should continue flossing in any event. Since the plaintiff did not have similar claims to those who saw the television commercials or saw any of the other labels, he could not adequately represent those class members in the litigation. Pfizer at *13.

Again, the Court of Appeal differentiated this case from Tobacco II. While the tobacco industry used a "decades-long campaign" that was pervasive, here the "effective as floss" campaign lasted only six-months. While the plaintiff in Tobacco II could represent a class because campaign likely influenced all of the class members in some fashion, the Pfizer plaintiff could not adequately represent all of the other consumers because his limited experience, with a limited campaign, was not "representative" of the other members of the class who may have been exposed to the television commercials or the other 33 different bottles of Listerine that the plaintiff did not rely upon when he purchased Listerine.

The Pfizer opinion serves as a reaffirmation of the class action principles that many commentators believed Tobacco II abandoned. As interpreted by the Pfizer opinion, Tobacco II does not allow the certification of a broad class absent proof that the class members actually were exposed to the alleged unfair practice. Instead, the plaintiff must still present actual evidence that class had a common set of experiences and then must prove that the plaintiff's own experience is similar to the class's. By showcasing the differences between and amongst the class members, a defendant may be able to defeat class certification on the basis that the class members were not all exposed to the same alleged misrepresentation and, therefore, should not be thrown together into an overbroad class definition which attempts to gloss over the varied experiences of the consumer class members.

Ninth Circuit Clarifies When Non-Tipped Employees May Participate In Tip Pools

Sheppard Mullin — Fri, 26 Feb 2010 07:46:01 -0800

By Jacqueline Binger

In case of first impression for it, the Ninth Circuit clarified the validity of tip pools under the Fair Labor Standards Act ("FLSA") where the tip pool includes employees who are not customarily and regularly tipped. In Cumbie v. Woody Woo, Inc., the Court of Appeals held that where workers make more than the minimum wage and the employer takes no tip credit, tip pools including non-tipped employees do not violate the FLSA.

Plaintiff Misty Cumbie was a server at the Vita Café in Portland, Oregon, which is owned and operated by Defendants Woody Woo, Inc., Woody Woo II, Inc., and Aaron Woo (collectively "Woo"). Woo's servers were paid a wage at or exceeding the Oregon minimum wage, which at the time was higher than the federal minimum wage, and also received a portion of their daily tips. The servers were required to contribute their tips to a "tip pool" that was redistributed to all restaurant employees, except managers. Between 55% and 70% of the tip pool went to the kitchen staff (e.g. dishwashers and cooks), who are not customarily tipped in the restaurant industry. The remainder of the tip pool (between 30% and 45%) was returned to the servers in proportion to their hours worked.

Cumbie alleged that Woo's tip pooling policy violated the FLSA's minimum wage provisions. She argued that the FLSA requires employers to allow employees to keep all of their tips, except where the employee participates in a tip pool with other customarily tipped employees. Because Woo's tip pooling policy included employees who are not customarily and regularly tipped, Cumbie argued it was invalid under the FLSA and Woo was required to pay her the minimum wage plus all of her tips.

The Court of Appeal held that Woo's tip pooling policy did not violate the FLSA because the FLSA only restricts tip pools to employees who are customarily tipped when the employer takes a tip credit. The Court began with the principle that tip pools are valid where there is an explicit arrangement to turn over or redistribute tips and there is no "statutory interference" that would invalidate the arrangement. In its analysis the Court found that the language of the statute limiting tip pools to customarily tipped employees imposes a condition on taking a tip credit and does not state a freestanding requirement. A "tip credit" is where an employer is allowed to take credit for a certain amount of tips earned by their employees toward the employer's payment of the minimum wage. Tip credits are not allowed under Oregon law, and so Woo was not allowed to, and did not, take one. Because Woo did not take a tip credit, its tip pooling requirement was not subject to this limitation. Therefore, the Court found that there was no "statutory interference" and Woo's tip pooling requirement was valid.

The Court also rejected Cumbie's arguments that Woo's tip pooling policy violated the FLSA's requirement that the minimum wage be paid "free and clear" and that allowing Woo's tip pooling policy would violate the purpose of the FLSA. The Court found that the "free and clear" regulation hinges on whether the tips belong to the servers to whom they are given. Because Woo had a valid tip pooling policy, only the tips redistributed to Cumbie out of the pool belonged to her. Because Woo's tip pooling policy did not take tips belonging to Cumbie away from her, the Court found that Woo did not violate the "free and clear" regulation. Finally, the Court found that its conclusion that the FLSA does not prohibit Woo's tip pooling policy did not thwart the purpose of the FLSA. The purpose of the FLSA is to protect workers from substandard wages and oppressive working hours. Under Woo's tip pooling policy, Cumbie did not experience such conditions because she received a wage that was greater than the federal minimum wage, plus a substantial portion of her tips.

Cumbie provides employers with greater clarity under federal law regarding which employees can be included in a tip pool when their employees make at least the minimum wage and the employer does not take a tip credit. However, employers are cautioned to ensure that any tip pooling policy complies with both the law in their respective state as well as federal law. Simply because a tip pooling policy may be valid under federal law does not necessarily mean that it is legal under state law.

In A Putative Class Action, The Third Circuit Holds That A Plaintiff Must Show Detrimental Reliance On Improper Loan Disclosure Statements To Obtain Actual Damages Under The Truth In Lending Act

Sheppard Mullin — Mon, 01 Feb 2010 07:18:06 -0800

By Shannon Petersen

On December 31, 2009, the Third Circuit held that a borrower must prove detrimental reliance to obtain actual damages for a violation of the federal Truth in Lending Act ("TILA"). See Vallies v. Sky Bank, ---F.3d---, 2009 WL 5154473 (3^rd Cir. 2009).

Under TILA, the federal government requires that lenders make certain disclosures to borrowers about the terms of their loans before lending them money. TILA claims are at the epicenter of the mortgage litigation crises. Over the past two years, TILA claims, including class action claims, have flooded the state and federal courts. Most of these claims involve allegations that some technical TILA disclosure violation has occurred.

Though not a mortgage case, the allegations of the borrower in Vallies v. Sky Bank are typical. The plaintiff alleged that the finance charge statement made by the bank for an auto loan was misleading in that it did not include $395 representing the amount of the debt cancellation insurance, which the plaintiff alleged should have been included in the finance charge statement under TILA. The district court granted summary judgment in favor of the bank because the borrower had failed to show that (1) he had read the TILA disclosure statement pertaining to finance charges, (2) he had understood the finance charges being disclosed, (3) had the disclosure been accurate by including an additional $395, he would have sought better terms or foregone the loan, and (4) if he had sought better terms, he would have obtained them.

The Third Circuit declined to state the specific facts or circumstances that constitute detrimental reliance under TILA, but affirmed the decision of the district court that detrimental reliance must be shown and had not been shown here. In so holding, the Third Circuit relied on the language of TILA itself, which provides for both actual damages and statutory damages. According to the Third Circuit, to obtain actual damages, a plaintiff must show causation by showing that he or she relied on a misleading or improper loan disclosure statement to his or her detriment. In contrast, to obtain statutory damages, a plaintiff must only show that a violation of TILA has occurred. (For class action suits, statutory damages under TILA are capped at the lesser of $500,000 or 1% of the defendant's net worth.).

In reaching its decision, the Third Circuit considered but rejected as irrelevant the concerns of some legal commentators, who have noted that under a detrimental reliance standard actual damages for TILA loan disclosure violations may be difficult to prove. The court also disregarded the fact that "detrimental reliance may create obstacles for class certification because of the individualized fact-specific nature of the reliance inquiry." The court distinguished other case law, holding that detrimental reliance under TILA is not necessary, on the grounds that those cases involved claims for statutory damages, not actual damages, under TILA.

Finally, the Third Circuit noted that it joined the holding of every other circuit court that has addressed the issue, including the First, Fifth, Sixth, Eighth, and Ninth Circuits. Citing United States v. Petroff-5 Kline, 557 F.3d 285, 297 (6^th Cir. 2009) (“[A]ctual damages require a showing of detrimental reliance.”); McDonald v. Checks-N-Advance, Inc. (In re Ferrell), 539 F.3d 1186, 1192 (9th Cir. 2008) (finding no valid basis to overturn the rule of In re Smith requiring a showing of detrimental reliance to establish actual damages); Gold Country Lenders v. Smith (In re Smith), 289 F.3d 1155, 1157 (9th Cir. 2002) (“Wejoin with other circuits and hold that in order to receive actual damages for a TILA violation . . . a borrower must establish detrimental reliance.”); Turner v. Beneficial Corp., 242 F.3d 1023, 1028 (11th Cir. 2001) (en banc) (“We hold that detrimental reliance is an element of a TILA claim for actual damages . . . .”); Perrone v. Gen. Motors Acceptance Corp., 232 F.3d 433, 434–40 (5th Cir. 2000) (holding that detrimental reliance is an element of a claim for actual damages); Peters v. Jim Lupient Oldsmobile Co., 220 F.3d 915, 917 (8th Cir. 2000)(requiring a showing of proximate causation and adopting a four-prong reliance test for establishing actual damages); Bizier v. Globe Fin. Servs., Inc., 654 F.2d 1, 4 (1st Cir. 1981) (noting in dicta the need to show causation for an award of actual damages “in addition to a threshold showing of a violation of a TILA requirement”).

Under this law, it is not enough, as plaintiffs in TILA cases often do, to allege that a TILA loan disclosure violation has occurred. Instead, a plaintiff must also allege and prove that he or she relied on the misleading or improper statement and as a result of this reliance suffered actual damage. This recent decision of the Third Circuit also emphasizes the difficulty of certifying a class action for actual damages under TILA. Even where the named plaintiff has detrimentally relied on an improper loan disclosure statement, such reliance can rarely be universally inferred for other, unnamed class members. Instead, to determining detrimental reliance usually requires an individual inquiry about whether the class member read the disclosure statement, understood it, and relied on it to his or her detriment. For this reason, such cases are very difficult to certify for class treatment. See, e.g., Stout v. J.D. Byrider, 228 F.3d 709, 718 (6th Cir. 2000) (affirming the denial of class certification based on the need for individualized assessment of whether “each putative class member relied upon false representations or failures to disclose” under TILA).

The Fourth Circuit Bounces Express Check Class Action Back to State Court Based on Lack of Diversity Jurisdiction

Sheppard Mullin — Fri, 15 Jan 2010 11:09:19 -0800

By Christopher Loveland

The United States Court of Appeals for the Fourth Circuit in Ferrell v. Express Check Advance of South Carolina, LLC (No. 09-2401) examined the citizenship of limited liability companies for purposes of diversity jurisdiction in a class action. The Plaintiff in Ferrell, a citizen of South Carolina, commenced a class action lawsuit on behalf of “other South Carolina citizens” against four “payday loan” businesses in South Carolina state court. The lawsuit alleged that defendants’ payday loans violated various South Carolina laws. One of the defendants, Express Check Advance of South Carolina, LLC (“Express Check”), removed the case to the United States District Court for the District of South Carolina on diversity grounds, contending that it was a citizen of Missouri and Kansas, and not a citizen of South Carolina.

The Plaintiff filed a motion to remand the case back to state court. In its motion, the plaintiff asserted that Express Check was a South Carolina citizen and there was thus no diversity jurisdiction. The District Court determined that Express Check was an “unincorporated association” whose citizenship should be determined by “the State where it has its principal place of business and the State under whose laws it is organized” pursuant to 28 U.S.C. § 1332(d)(10). Because Express Check had its principal place of business in South Carolina, the District Court concluded that it did not have jurisdiction over the matter and granted Plaintiff’s motion to remand.

Express Check appealed to the Fourth Circuit and argued that its citizenship should be determined “under traditional rules” and not 28 U.S.C. § 1332(d)(10) because a limited liability company is not an “unincorporated association.” Under traditional rules, Express Check’s citizenship should be based on the citizenship of its sole member, QC Financial Services. Because QC Financial Services is a Missouri corporation with a principal place of business in Kansas, Express Check claimed it is not a resident of South Carolina and that the District Court erred in granting the motion to remand.

The Plaintiff countered with the argument that the term “unincorporated association” in 28 U.S.C. § 1332(d)(10) is extremely “broad and encompasses all non-corporate entities, including limited liability companies.” Because Express Check makes payday loans solely from stores in South Carolina, and all employees but its top four officers are located in South Carolina, it should be considered a South Carolina company and the District Court correctly found that there was no diversity jurisdiction.

In considering the meaning of the term “unincorporated association,” the Fourth Circuit held that “the specific language of § 1332(d)(10) indicates that a limited liability company if not a corporation, is an unincorporated association, employing ‘unincorporated’ as the counterpart to ‘incorporated.’” (emphasis in original). The language of § 1332(d)(10) “suggest[s] two mutually exclusive classes of business enterprises – those that are incorporated, i.e., corporations, and those that are not.” Thus, the term “unincorporated association” refers to all non-corporate business entities, including limited liability companies such as Express Check.

The Fourth Circuit next examined whether it should apply the “nerve center” test or the “place of operations” test to determine where Express Check has its principal place of business. The nature of the business involved determines which test applies. The nerve center test applies when a company “is not really geographically bound,” while the place of operations test applies “when a company has multiple centers of manufacturing, purchasing, or sales.” Because Express Check operates to make payday loans from its locations in South Carolina, and all but four of its employees are located in that State, the Court applied the place of operations test and concluded that Express Check’s principal place of business is South Carolina. Notably, the Fourth Circuit admonished Express Check’s corporate parent for, in essence, complaining about its business decision to maintain Express Check as a legally separate entity; an arrangement by which it “undoubtedly benefited.”

The Fourth Circuit held that because Express Check is a citizen of South Carolina, it did not carry its burden of showing diversity jurisdiction, and affirmed the order remanding the case back to state court.

Tenth Circuit Reaffirms That a Case Terminates When the Class Representative's Claims Become Moot Before Class Certification

Sheppard Mullin — Thu, 31 Dec 2009 05:57:33 -0800

By Sascha Henry and Paul Seeley

In Clark v. State Farm Mutual Automobile Insurance Co., Nos. 07-1454, 07-1466, the Tenth Circuit affirmed a district court's order denying class certification because it lost jurisdiction when the representative plaintiff's claims became moot. Clark shows how a defendant's request for a merits determination before class certification was rewarded when the resulting decision mooted the named plaintiff's claim and defeated class certification.

The Clark litigation began in 2000 in Colorado state court. The plaintiff was a pedestrian hit by a driver insured by State Farm. State Farm's insurance policy only allowed the plaintiff to recover a statutory minimum and did not offer the insured any increased coverage beyond those limits. After the plaintiff accepted the statutory minimum in settlement, a Colorado court held insurance policies, like State Farm's, must allow insureds to purchase coverage in excess of the statutory minimum and any policy not offering the extended coverage must be reformed to include it. Brennan v. Farmers Alliance Mut. Ins. Co., 961 P.2d 550 (Colo. Ct. App. 1998). The plaintiff, on behalf of himself and all others similarly situated, filed suit against State Farm by asserting claims for breach of contract, breach of good faith, and reformation. The plaintiff argued State Farm's failure to include excess coverage constituted a breach of a contract previously reformed by the operation of law.

After State Farm successfully removed the case to federal court, numerous appeals followed. After the second appeal (Clark II), the Tenth Circuit ordered the trial court to determine whether Brennan applied retroactively. If Brennan did not apply retroactively, then the plaintiff's entire case could be resolved: the court would reform the contract as of the date of judgment, award damages, and dismiss the plaintiff's other claims because there could be no breach of previously unreformed contract. If Brennan applied retroactively, however, then the plaintiff's contract claims would survive since it would be possible that State Farm breached a contract previously reformed by Brennan as a matter of law.

On remand, State Farm moved the district court to determine the issue of reformation before class certification. The court agreed and signed State Farm's proposed order (the "Case Management Order"). After the district court held Brennan did not apply retroactively, it awarded damages and dismissed the plaintiff's remaining claims. Both parties appealed, but neither party appealed the Case Management Order. In Clark III, the Tenth Circuit affirmed the district court, but remanded to determine the class certification issues.

After Clark III, State Farm paid the judgment. When the plaintiff subsequently filed his class certification motion, the district court held that the case was mooted by State Farm's payment and, therefore, the plaintiff could not represent the class. The district court also denied, as untimely, motions to intervene brought by other potential class representatives. The plaintiff appealed the mootness determination. The interveners also appealed, but their appeal was immediately dismissed as untimely filed.

The Tenth Circuit recognized the general rule regarding class actions and mootness: If the named plaintiff's claims become moot prior to class certification, then the district court loses jurisdiction because the parties have no "personal stake" in an actual case or controversy. The Supreme Court created two exceptions, either of which would allow class certification despite the mooted claims: (1) If the plaintiff's claim is "capable of repetition, yet evading review" or (2) when the nature of the claim is too transitory to allow a determination of class status before the claim becomes moot. Another exception, adopted by some circuits, allows for class certification if the named plaintiff's claims are mooted before the plaintiff could be reasonably expected to file a class certification motion.

In Clark, the Tenth Circuit rejected the plaintiff's argument that his case fit within the third exception. The court pointed out that the plaintiff failed to appeal the Case Management Order, despite recognizing that it allowed the court to decide the merits before class certification, thereby potentially mooting his claim. As the Case Management Order was not appealed, it became the "law of the case" and, therefore, could not be challenged by the plaintiff on this appeal. In essence, the plaintiff had one opportunity to appeal the Case Management Order and failed to do so. Thus, a merits determination made under that Case Management Order that mooted the plaintiff's claims was binding and final. As none of the other recognized exceptions applied to the plaintiff's claims, the Tenth Circuit held that it, and the district court, lacked jurisdiction over class certification and the case had to be dismissed as moot.

Fourth District Court of Appeal Upholds Two Denials of Class Certification: Addresses In Re Tobacco Cases and Acknowledges Differences in Damages Can Defeat Certification

Sheppard Mullin — Wed, 23 Dec 2009 05:32:13 -0800

By Ruben Escalante

Two recent Fourth District Court of Appeal cases affirmed the denial of class certification. Kaldenbach v. Mutual of Omaha Life Insurance Co., 178 Cal.App.4^th 830 (2009), was one of the first cases to address the California Supreme Court's decision in the In re Tobacco II Cases, 46 Cal. 4^th 298 (2009). Evans v. Lasco Bathware, Inc., 178 Cal.App.4^th 1417 (2009), held that differences in damages could be a reason for denying class certification.

In Kaldenbach, the Fourth District Court of Appeal affirmed the trial court's denial of class certification. In this case, the plaintiff attempted to certify a class of consumers who purchased so-called “vanishing premium” life insurance policies, claiming that the defendant violated the UCL by misleading them into believing they would eventually not have to pay any premiums for their coverage. The court held that there were individualized inquiries as to whether there was an actual unfair business practice by the defendant. The defendant sold its policies through independent agents who were not required to attend training, utilize any given sales materials, or adhere to a scripted sales presentation. The plaintiff attempted to use the California Supreme Court's recent decision in In re Tobacco II Cases. The Court of Appeal held that the In re Tobacco II Cases could not be used to overcome such individual inquiries because the In re Tobacco II Cases involved “identical misrepresentations and/or nondisclosures by defendants made to the entire class.” Id. at 849.

In Evans, the Fourth District Court of Appeal affirmed the trial court's denial of class certification in a consumer class action. In this case, the plaintiffs owned homes in which shower pans manufactured by the defendant were installed. The plaintiffs claimed the pans were defective and caused damage to their property. The plaintiffs sought recovery on behalf of the class only for the costs of removing and replacing the shower pans and “expressly excluded” any consequential damages caused by the water leakage.

The court held that the class representative was inadequate because the complaint attempted to limit the potential damages sought so as to avoid individualized inquiries. The court also held that there was substantial evidence to support the finding that the common issue of whether the shower pan was defectively or negligently designed did not predominate “over individualized questions of damages . . . .” Id. at 363. The court specifically stated, "although a trial court has discretion to permit a class action to proceed where the damages recoverable by the class must necessarily be based on estimations, the trial court equally has discretion to deny certification when it concludes the fact and extent of each member's injury requires individualized inquiries that defeat predominance.” Id. at 366 (emphasis in original).

Fifth Circuit Denies Class Certification Of Kickback Claims Under RESPA

Sheppard Mullin — Tue, 22 Dec 2009 11:44:58 -0800

By John Stigi and Martin White

In Mims v. Stewart Title Guaranty Co., 2009 WL 4642631 (5th Cir. Dec. 9, 2009), the United States Court of Appeals for the Fifth Circuit considered whether plaintiffs can bring class claims under Section 8(b) of the Real Estate Settlement Procedures Act of 1974 (“RESPA”), codified in relevant part at 12 U.S.C. § 2607(c), where a service provider’s fee “bears no relationship” to the service provided. After careful consideration, the Fifth Circuit concluded that “class issues do not predominate” in such situations, because determining whether the fee charged was reasonable or unreasonable necessarily required a “transaction-by-transaction” analysis, and that a class action is not a “superior method” to trying such individualized claims.

The question before the court in Mims involved mandatory discounts on premiums for title insurance policies purchased when borrowers were refinancing their home mortgages. Generally speaking, lenders require borrowers who are refinancing their loans to purchase title insurance to protect the lender against potential defects in title and to ensure that the lender will a have first lien position.

Under Texas’s Department of Insurance Rate Rules, a borrower refinancing his or her loan is entitled to a mandatory discount. The mandatory discount starts at “40% on renewals occurring within 2 years of the time a prior policy was issued and decreases by 5% for each additional year after the prior policy up to seven years.” Borrowers qualify so long as the pre-existing mortgage had been fully taken up, renewed, extended or satisfied and they had previously insured with the same title insurer.

Class plaintiffs in Mims alleged that defendant title insurer, Stewart Title Guaranty Company (“Stewart”), had “consistently failed” to provide plaintiffs with the required discount on their title insurance renewals and that “Stewart and the agents split the illegal, unearned charges on the policies.” Plaintiffs sued under state law and under RESPA, claiming that Stewart had violated RESPA’s anti-kickback provision, which prohibits individuals and companies from giving or accepting “any portion, split or percentage of any charge made or received . . . other than for services actually performed.” 28 U.S.C. § 2607(c).

Stewart brought a motion to dismiss, which was denied. The district court then certified the class. Stewart appealed, arguing that the district court erred in certifying a class because (1) plaintiffs lacked standing, (2) class issues did not predominate with respect to plaintiffs’ RESPA claims and (3) the certified class was overbroad with respect to plaintiffs’ state law claims.

As an initial matter, the Fifth Circuit rejected Stewart’s first argument that plaintiffs lacked standing. Plaintiffs, the Court found, had alleged “an injury-in-fact (overpayment of premiums for the title insurance issued upon refinancing their mortgage), causation (the defendants overbilled for the premiums) and redressability (if plaintiffs are successful, they will be refunded the overpayment).” The court refused to delve into the question of whether plaintiffs had stated a claim under RESPA, because the question of class certification “does not permit a general inquiry into the merits of plaintiffs’ claims.”

The Court next turned to the question of whether a class action was “the superior method” by which to try plaintiffs’ RESPA claims. Plaintiffs argued that it was, alleging that in failing to provide the discount Stewart had charged an “excess amount” which represented a “charge for which no services were actually provided” under RESPA. The district court agreed, finding that “Stewart’s split with the title agents may not have been for services actually performed, and hence, in violation of section 8(b), if the title agent’s compensation was not reasonable in relation to the services they performed.” The district court’s finding was based in large part upon the Department of Housing and Urban Development’s (“HUD”) interpretation of RESPA’s prohibition against giving a split “other than for services actually performed.”

HUD’s interpretation of this provision required that service providers not charge “a fee that exceeds the reasonable value of . . . services provided.” If a payment bore “no relationship to the . . . service provided then the excess is not for services . . . actually provided.” In essence then, under HUD’s interpretation, whether a service provider violated RESPA’s anti-kickback provision, turned on whether there was a rational relationship between the payment and the service provided.

The Fifth Circuit concluded that the class action model was not superior in the instant case because “the district court’s liability model for violations of RESPA § 8(b) requires an inquiry into the facts of each individual class member’s title insurance transaction.” The Fifth Circuit found that its earlier decision in O’Sullivan v. Countrywide Home Loans, Inc., 319 F.3d 732, 740 (5th Cir. 2003), “bar[red] this outcome.”

In O’Sullivan, the Fifth Circuit “considered whether class certification was proper under a similar fact pattern.” Specifically, the O’Sullivan class plaintiffs alleged that they paid mortgage preparation fees to firms selected by the defendant loan provider, and that this qualified as a kickback under RESPA. The loan provider contended that it had given plaintiffs “some services in preparation of the mortgage transactions.” Therefore, defendant loan provider argued, “in individual cases a reasonable relationship existed between the value of the alleged services provided and the payments it received.” The O’Sullivan court agreed; to properly assess whether this was a RESPA violation would require a “transaction-by-transaction” examination “because a single finding of liability on an unreasonable relationship between goods and services does not necessitate the conclusion that such unreasonableness exists on a classwide basis.”

The Mims court concluded that the same result applied to the facts before it. The Court held: “if we accept the district court’s theory of liability, the HUD liability standard requires an inquiry into the reasonableness of the payments for goods and services.” Under O’Sullivan, that inquiry must be conducted under a “transaction-by-transaction basis.” Each plaintiff may have suffered a different harm, depending on whether Stewart’s split of the excess proceeds was reasonable in relation to the services actually performed. On this basis, it was clear that “class issues d[id] not predominate and class certification on the RESPA claim was improper.”

Finally, the Court turned to the question of whether the district court had abused its discretion in granting class certification on plaintiffs’ state law claims. Stewart argued that the class definition — which included all plaintiffs, who, under Stewart’s guidelines, would have been eligible for the mandatory discount — was too broad because these guidelines were not identical to Texas’s guidelines. The Fifth Circuit rejected this argument, finding that the district court had not abused its discretion. However, in light of its finding that plaintiffs were barred from bringing class claims on their RESPA cause of action, it remanded to the district court to determine if it still had jurisdiction over the case in light of the fact that only state law claims remained.

Mims may prove to be a significant decision for class plaintiffs seeking to bring kickback claims under RESPA. Under Mims, district courts in the Fifth Circuit have clear marching orders: if plaintiffs’ claims rely, in essence, on whether the defendant charged a reasonable fee for the service provided, class certification should not be granted. As such, plaintiffs in the Fifth Circuit now face what may be a significantly higher bar to obtaining class certification for kickback claims under RESPA.

California Court of Appeal Affirms Denial of Class Certification Based On Presence of Individual Issues While Rejecting Plaintiff's Argument Based on Tobacco II

Sheppard Mullin — Tue, 22 Dec 2009 05:36:49 -0800

By Sascha Henry and Paul Seeley

In In re Vioxx Class Cases, (2009) __ Cal. App. 4th __, the trial court denied class certification after the defendant, Merck & Co., Inc. effectively showed that the plaintiff's theory of the case was grossly simplified. By introducing copious evidence showing the numerous factors that may relate to each class member's reliance and damages, Merck avoided class certification even in the face of its allegedly pervasive and misleading advertising campaign. The plaintiffs appealed, arguing that the California Supreme Court's decision in In re Tobacco II Cases, (2009) 46 Cal. 4th 298, undermined the trial court's rationale. The Court of Appeal, Second District, affirmed the trial court's denial of class certification.

Before Merck removed it from the market, Merck advertised Vioxx as an effective pain reliever that did not cause any gastrointestinal complications. This differentiated it from the common (and cheaper) pain reliever, naproxen. After Vioxx was linked to increased cardiovascular risks, Merck pulled it from the market in 2004.

The plaintiffs in Vioxx were ordinary consumers, not patients who suffered harm from taking Vioxx. The plaintiffs filed suit, bringing causes of action for (1) unfair competition ("UCL"), (2) false advertising, (3) violations of the Consumers Legal Remedies Act ("CLRA") and (4) unjust enrichment. The plaintiffs contended that Vioxx, as a pain reliever, was no more effective (and possibly less safe due to the cardiovascular complications) than the generic pain reliever naproxen. The plaintiffs alleged that Merck misrepresented Vioxx's effectiveness and thus caused both consumers and third-party payors ("TPPs") to buy the more expensive Vioxx instead of the cheaper and equally effective naproxen. Thus, under their various causes of action, plaintiffs sought damages for the difference in price between Vioxx and naproxen.

As for the CLRA claim, the court held that individual issues predominated. The plaintiffs claimed that they could prove Merck's marketing campaign was a "common campaign of hiding cardiovascular risks" and that the "common campaign" would allow for a class-wide presumption of consumer reliance upon Merck's campaign and the materiality of the misrepresentations to induce the class to use the expensive Vioxx rather than the cheaper naproxen. The court disagreed, pointing to Merck's evidence that Vioxx was not necessarily less safe than naproxen, particularly for those patients who already suffered gastrointestinal issues. For those patients, the alleged risk of a heart attack was outweighed by the risk of death by gastrointestinal bleeding, rendering the alleged misrepresentation immaterial to the decision to use Vioxx. Furthermore, the court held that individualized determinations went into each doctor's decision to prescribe Vioxx, rendering it impossible to adjudicate, on a class-wide basis, whether the misrepresentations were "material" or whether each Vioxx patient relied on the marketing campaign when it purchased the drug.

As for the UCL claim, the court affirmed the trial court's holding that individual issues prevented the recovery of restitution under the UCL. The plaintiffs argued that each class member's restitution amount was the difference in price between Vioxx and naproxen. The plaintiffs claimed that, since Merck's misrepresentations caused class members to pay more for Vioxx than the equally effective naproxen, the price difference was an adequate measure of damages. The court disagreed, noting that Merck's evidence showed that Vioxx could not be compared to naproxen on a class-wide basis since many individual patients and/or TPPs used Vioxx only after naproxen was shown to be ineffective, thus rendering a comparison between Vioxx and naproxen impossible without evaluating each individual circumstance. Additionally, the court held that restitution under the UCL requires the "existence of a 'measurable amount' of restitution, supported by the evidence." As naproxen could not act as a class-wide comparison to Vioxx, the trial court correctly held a UCL cause of action could not be certified.

On appeal, the plaintiffs argued that this was a legal error under Tobacco II, which held that a UCL action exists even in the absence of individualized proof of deception, reliance and injury. Nevertheless, the court found that the individual issues regarding the damages was sufficient to defeat class certification of the UCL claim, regardless of Tobacco II.

Third Circuit Affirms District Court Order Granting Class Certification In Section 11 Securities Case

Sheppard Mullin — Tue, 01 Dec 2009 05:28:24 -0800

By Christina Costley and Aimee Kahn

In In re Constar Int’l, Inc. Securities Litigation, No. 08-2461, 2009 WL 3462032 (3d Cir. Oct. 29, 2009), the United States Court of Appeals for the Third Circuit affirmed an order by the United States District Court for the Eastern District of Pennsylvania certifying a class of plaintiffs who brought suit under Section 11 of the Securities Act of 1933. The Court held that the district court did not abuse its discretion by certifying the class, notwithstanding defendants’ argument that the district court erred in concluding that the “predominance” element of Rule 23(b)(3) had been met before deciding whether the stock traded in an efficient market. The district court held that a claim for fraudulent statements in a registration statement under Section 11 (as distinct from a claim for securities fraud brought under Section 10(b) of the Securities Exchange Act of 1934) does not require plaintiffs to establish reliance or loss causation.

Plaintiffs in Constar brought suit on behalf of a class of investors who purchased shares in the company through an initial public offering. The complaint alleged that Constar’s registration statement misrepresented Constar’s goodwill, assets, operational strength and capacity, equipment quality and customer base in order to give the appearance that the company was competitive when, in fact, the business was weak. Plaintiffs sought certification of a class under Rule 23, asserting that they had satisfied all requirements of Rule 23(a) (numerosity, typicality and adequacy) and the “predominance and superiority” element from Rule 23(b)(3). The district court, acting on the recommendation of a special master, agreed with plaintiffs but certified the issue for interlocutory appeal. Defendants sought review by the Third Circuit.

The Third Circuit affirmed certification of the class. In so holding, it rejected defendants’ argument that the district court had abused its discretion by applying a “liberal construction” standard that presumed class certification was appropriate. Quoting its 2008 decision in In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 312 (3d Cir. 2008) [see Antitrust Law Blog article here], which was issued after the district court’s decision, the Third Circuit agreed that class certification required rigorous scrutiny of all Rule 23(a) requirements and of the elements of Rule 23(b). The Court further noted that no presumption in favor of class certification existed. Still, despite general language to the contrary in the special master’s recommendation, the Third Circuit found that the district court had complied with Hydrogen Peroxide’s requirement of “rigorous” scrutiny when conducting its analysis. Thus, the Court found no error on this basis.

The Third Circuit also rejected defendants’ argument that plaintiffs had not established the predominance of common questions of law and fact, as required by Rule 23(b)(3), because the stock did not trade on an efficient market. Defendants argued that, absent an efficient market, the court could not presume that the class members would share the same legal and factual issues when establishing materiality, loss causation and reliance. The Court, however, found that the existence of an efficient market was not relevant to certification of a Section 11 class. The Court pointed out that because the case was brought under Section 11, and not Section 10(b), plaintiffs were required to establish only materiality, not loss causation (unless plaintiffs purchased stock more than twelve months before the effective date of the registration statement) or reliance. Further, the Court noted that “because a misrepresentation is material if a reasonable investor would have considered a fact important, the effect of a material misrepresentation is felt uniformly across the class of investors, regardless of whether the market is efficient.” As such, the Court concluded, an efficient market was not a predicate for class certification in a Section 11 case in the same way that it would be in a case brought under Section 10(b).

Constar underscores the “stark contrast” between claims brought under Section 11 and those brought under Section 10(b). As Constar illustrates, plaintiffs in the Third Circuit bring class actions under Section 11 face fewer hurdles at the class certification stage than those bringing class actions under Section 10(b).

Ninth Circuit Holds that District Courts May Reject, But May Not Select, Lead Plaintiffs' Counsel in Class Actions Brought Under the Private Securities Litigation Reform Act

Sheppard Mullin — Wed, 11 Nov 2009 05:27:58 -0800

By John Stigi and Christina Costley

In In re Cohen, No. 09-70378, 2009 WL 3681701 (9th Cir. Nov. 5, 2009), the United States Court of Appeals for the Ninth Circuit reversed an order by the United States District Court for the Northern District of California that rejected co-lead plaintiff’s selection of counsel and instead appointed a firm selected by the district court. Calling the district court’s selection of counsel “clearly erroneous,” the Ninth Circuit took the unusual step of issuing a writ of mandamus vacating the district court’s appointment of counsel and holding that, under the plain language of the Private Securities Litigation Reform Act of 1995 (“Reform Act”), the district court has the power to reject, but not to select, lead counsel in a securities fraud class action.

Cohen arose out of allegations by a putative class of investors that the defendant, NVIDIA Corporation, fraudulently concealed the use of flawed materials and processes in producing certain products. Several investors filed suits based upon these alleged omissions and the district court consolidated the complaints into a single putative securities fraud class action. The district court then appointed two of the investors as co-lead plaintiffs. One of these investors, Robert Cohen, already had selected Kahn Gauthier Swick, LLP (“KGS”) to represent him in the litigation. The district court declined to appoint KGS as co-lead counsel for the class and instead appointed as co-lead counsel Girard Gibbs LLP, a firm initially selected by another investor who also had filed suit but who was not appointed as co-lead plaintiff. Cohen requested leave to file a motion for reconsideration of the court’s order appointing lead plaintiff’s counsel or, in the alternative, an application for an order certifying interlocutory appeal. The district court denied Cohen’s motions. Cohen then filed a petition for writ of mandamus with the Ninth Circuit.

The Ninth Circuit granted Cohen’s petition and issued a writ of mandamus vacating the lower court’s decision. The Court cautioned that “the remedy of mandamus is a drastic one and only exceptional circumstances amounting to a judicial usurpation of power will justify invocation of this extraordinary remedy” (internal citations omitted). The Ninth Circuit then set forth a five-factor test used to determine whether mandamus is appropriate, though it noted that the primary question for the appellate court to resolve is whether the district court’s opinion constituted “clear error.” In this instance, the Court found, it did. The Ninth Circuit noted that the Reform Act specifically refers to lead plaintiff as the actor that “selects and retains class counsel” (internal citations omitted). Based upon this, the Ninth Circuit concluded, the power to select class counsel “plainly belongs to the lead plaintiff.” In so holding, the Ninth Circuit declined to give an expansive reading of the authority granted to the district court by the Reform Act to approve lead counsel. While the Ninth Circuit recognized the district court’s discretion to approve lead counsel, and consistent with it, remanded the case to the district court to approve KGS as lead counsel for the putative class in that case, it nonetheless emphasized that this discretion “in no way suggests that a district court shares in the lead plaintiff’s authority to select lead counsel or that disapproval of a lead plaintiff’s choice divests the lead plaintiff of this authority.” The Court further specified that a district court’s authority to reject counsel for the class should be used carefully, only in case’s where counsel selected by the lead plaintiff plainly is inadequate. The Ninth Circuit’s decision follows that of the Third Circuit in In re Cendant Corp. Securities Litigation, 264 F.3d 201 (3d Cir. 2001), which holds that the Reform Act provides “the power to ‘select and retain’ lead counsel belongs . . . to the lead plaintiff.”

The Ninth Circuit further observed, in a footnote, that the practice of appointing “co-lead plaintiffs” to represent a putative class of investors bringing suit under the Reform Act also may constitute error. While the Court did not reach this issue in Cohen because the parties did not raise it, the Court explained that the plain language of the Reform Act, which refers to “lead plaintiff” in the singular, suggests that “the district court should appoint only one lead plaintiff, whether an individual or a group.”

The Court’s opinion in Cohen serves as a reminder that, when bringing suit for securities fraud, the Ninth Circuit will strictly enforce the plain language of the Reform Act and will not tolerate deviation from, or expansion of, the Act’s plain language.

Third Circuit Holds That Plaintiffs Alleging Respa Violations Under Section 8 Need Not Show An Overcharge To Have Article III Standing To Sue

Sheppard Mullin — Mon, 02 Nov 2009 06:12:53 -0800

By John Stigi and Martin White

In Alston v. Countrywide Financial Corp., 2009 WL 3448264 (3d Cir. October 28, 2009), the United States Court of Appeal for the Third Circuit confronted the issue of whether consumer plaintiffs alleging a violation of section 8 of the Real Estate Settlement Procedures Act of 1974 (“RESPA”), codified in relevant part at 12 U.S.C. § 2607(d)(2), need to show a monetary injury “in the form of an overcharge” to have standing to bring a private right of action against a mortgage lender. The Third Circuit concluded that plaintiffs need not suffer an overcharge because the “plain language of RESPA section 8 indicate[s] that Congress created a private right of action without requiring an overcharge allegation.” Rather, plaintiffs must only allege that a defendant received a “kickback” or offered a “sham service” under RESPA section 8(a) and 8(b) –– regardless of whether plaintiffs have suffered a monetary harm –– to have Article III standing to sue in the Third Circuit. This decision paves the way for class action litigation against other lenders asserting claims under Section 8 of RESPA.

Alston involved class plaintiffs who obtained home mortgages from defendant Countrywide Home Loans (“Countrywide”) in 2005 and 2006 and who made down payments of less than 20% on their mortgage loan. Countrywide’s alleged policy was that consumers who made down payments of less than 20% were required to purchase private mortgage insurance (“PMI”). Plaintiffs alleged that, in purchasing PMI, Countrywide extracted kickbacks from the private mortgage insurers for referring business their way.

Plaintiffs contended that these private mortgage insurers –– at the time, there were a total of seven such insurers, each of whom were selected on a rotating basis –– reinsured their loans with defendant Balboa Reinsurance Co. (“Balboa”), a Countrywide affiliate. According to plaintiffs, the private mortgage insurers would pay a percentage of the premiums received from plaintiffs to Balboa, and Balboa would assume a percentage of the private insurers’ risk, specifically, the risk of default between a certain percentage (typically 4-14%).

The problem, as plaintiffs put it, was that Balboa was not, in actuality, taking on any risk. According to plaintiffs, Balboa “collected over $892 million in reinsurance premiums since 1999” but “paid nothing in claims.” Consequently, “the reinsurance premiums paid to Balboa . . . were kickbacks to Countrywide,” for Countrywide’s “referral of PMI business” to the private mortgage insurers in violation of section 8(a) of RESPA. Furthermore, plaintiffs contended that Countrywide was providing nothing more than “sham reinsurance coverage” in violation of section 8(b) of RESPA. Plaintiff contended that this resulted in an overcharge for their PMI. Critically, however, plaintiffs contended that even if they were not overcharged, they were “nonetheless entitled to kick-back free [real estate] settlements” and the statutory damages set forth under section 8(d)(2) of RESPA.

Countrywide moved to dismiss plaintiffs’ RESPA claims on the ground that plaintiffs lacked standing. Countrywide argued that the PMI rates charged were per se reasonable because the rates had been filed and approved by the Pennsylvania Insurance Department and that, as a consequence, plaintiffs could not have been overcharged for their PMI. Countrywide argued that, without an overcharge, plaintiffs lacked standing –– an injury-in-fact –– to proceed with their RESPA claims.

The district court granted Countrywide’s motion to dismiss. It held that the PMI rates paid by plaintiffs were per se reasonable. The district court then turned to the question of whether, in the absence of an overcharge, plaintiffs had standing to proceed under RESPA. It concluded they did not. Conceding that section 8(d)(2) “entitles persons who paid for any settlement service in violation of RESPA,” the court nonetheless concluded that plaintiffs lacked standing because “the purpose of RESPA is to protect individuals from unnecessarily high settlement charges.” In light of this guiding purpose, the district court “declined to construe RESPA’s damages provision as authorizing Plaintiffs to sue for damages where they have not been overcharged.” As a result, the district court dismissed plaintiffs’ RESPA claims for lack of jurisdiction.

Plaintiffs appealed, contending that “Congress bestowed upon the consumer the right to a real estate settlement free from unlawful kickbacks and unearned fees, and Countrywide’s invasion of that statutory right, even without an overcharge, was an injury-in-fact for the purposes of Article III standing.” The Third Circuit agreed, reversing the district court, and holding that plaintiffs had standing to sue under RESPA.

The issue before the Third Circuit turned on “a question of statutory interpretation”; namely, “does or does not the plain language of RESPA section 8 indicate that Congress created private right of action without requiring an overcharge allegation”? To answer this question, the Court turned to the language of the statute.

Section 8(a) of RESPA prohibits “any fee, kickback, or thing of value pursuant to any agreement . . . that business incident to or part of a real estate settlement service involving a federally mortgage loan shall be referred to any person.” Stated simply, section 8(a) prohibits kickbacks for referrals.

Section 8(b) of RESPA mandates that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of real estate settlement service . . . other than for services actually performed.” Stated simply, section 8(b) prohibits unearned fees.

Section 8(d)(2) –– the specific subsection of the statute before the Third Circuit –– provides that “any person” who violates section 8(a) or section 8(b), “shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.” The question before the Third Circuit was whether plaintiffs had to show an overpayment to be able to bring a private action.

In concluding that section 8(d)(2) did not require an overpayment, the Third Circuit turned to the “plain unambiguous language of section 8(d)(2).” The Court first noted that none of the provisions at issue –– sections 8(a), 8(b) and 8(d) –– “contain[] the word ‘overcharge’ or otherwise impl[y] that the plaintiff must allege that he or she paid more than he or she otherwise would have paid.” Quoting Carter v. Welles-Bowen Realty, Inc., 553 F.3d 979, 986 (6th Cir. 2009), the Alston Court noted that “the ordinary definition of ‘any’ indicates that charges are neither restricted to a particular type of charge (such as an overcharge) nor limited to a specific part.” Additionally, the Alston Court noted that “the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under section 8 of RESPA.” Though the Court noted a “split of district court authority” on this point, it nonetheless concluded that the “obvious meaning” of section 8(d)(2) was that Congress intended for plaintiffs to be entitled to treble damages on “the total payment for an infected service, not just any resultant overcharge.”

The Court further concluded that a successful plaintiff would be “entitled to three times any charges paid, but only for the service connected to the kickback or fee split” under section 8(d)(2). If Congress wished to limit damages to out-of-pocket compensatory damages, it knew how to do so; Congress had done as much with respect to RESPA section 6 (12 U.S.C. § 2605(f)(1)), in limiting plaintiffs suing under that section to “actual damages.”

In light of this, the Court concluded “the plain unambiguous language of section 8(d)(2) indicates that damages are based on the settlement service amount with no requirement that there have been an overcharge.” The district court's reliance on Congress’ purpose in passing RESPA was in error; because Congress’ intent was “clear”, the district court erred in looking beyond “the plain unambiguous language of section 8(d)(2) in resolving the overcharge question.”

The Alston Court concluded by finding that plaintiffs had standing to sue. The fact that plaintiffs' injury was non-monetary was “not dispositive” because, quoting Havens Realty Corp. v. Coleman, 455 U.S. 363, 373 (1982), “the actual or threatened injury required by Art. III may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing.”

Finally, the Court rejected Countrywide’s argument that “even if section 8(d)(2) is read to permit suits without an overcharge allegation” plaintiffs’ claims would still be “barred” by the filed rate doctrine –– the doctrine that provides that “a rate filed with and approved by a governing regulatory agency is unassailable in a judicial proceeding brought by ratepayers.” Because the PMI insurance rates were approved by the Pennsylvania Insurance Department, Countrywide argued, the rates were “unassailable” and plaintiffs’ claims were barred.

The Third Circuit rejected this argument as well. First, plaintiffs’ claim challenged “the payment of kickbacks” by private mortgage insurers to Countrywide, “not the rates [plaintiffs] paid for PMI.” Because the kickbacks were (naturally) not filed with the state, the filed rate doctrine did not apply.” So too, the Court concluded that plaintiffs' suit was targeted at Countrywide’s conduct, not the rates paid for PMI. Sections 8(a) and 8(b) prohibit violations of a fair business practice ––the use of illegal kickbacks or payment for non-existent “sham” services –– not unfair pricing. Hence, the Third Circuit concluded that “if we were to find that the filed rate doctrine bars plaintiffs’ claims, we would effectively be excluding PMI from the reach of RESPA, a result plainly unintended by Congress.”

Alston stands as a potentially significant development for class action suits brought under RESPA. Stated simply, in the wake of Alston, mortgage providers can anticipate a rash of new section 8(d)(2) claims. In finding that plaintiffs do not need to allege an overcharge to have Article III standing under section 8(d)(2), plaintiffs will argue that the Third Circuit eliminated a potentially effective defense. To have standing, plaintiffs will argue they now need only allege a kickback or “sham” service in order to have standing under RESPA. Plaintiffs will also use Alston to argue that the filed rate doctrine is not a defense to section 8(d)(2) claims. Finally, plaintiffs will argue that Alston’s conclusion that plaintiffs are entitled to treble damages on any charges paid for the service connected to the kickback or fee split (as opposed to compensatory damages for only that part which was linked to the kickback) gives rise to potentially greater damages. Taken together or alone, Alston has the potential of encouraging more class action litigation.

For further information, please contact John Stigi at (213) 617-5589 or Martin White at (415) 774-3233.

In Two Recent Class Actions, Retailers Get More Clarity On Key Privacy Issues In Song-Beverly Cases - Zip Code O.K., Reverse Lookup O.K., E-mail Address Not Preempted

Sheppard Mullin — Fri, 30 Oct 2009 05:24:23 -0800

By Craig Cardon and Elizabeth Berman

The California Court of Appeal has recently published two new decisions involving data privacy class actions. Both involve claims under the Song-Beverly Credit Card Act. The most recent, Jessica Pineda v. Williams-Sonoma Stores, Inc., 2009 DJDAR 15191, affirmed the judgment against the plaintiff on the grounds that it is not a violation of Song-Beverly to request a zip code during a credit card transaction, even if the zip code is matched with a name to acquire that individual's address, and that the same conduct is not a serious invasion of privacy where the home address information is publicly available and plaintiff has taken no special steps to protect it. Approximately one month earlier, the same panel held in Susan Powers v. Pottery Barn Inc., (2009) 177 Cal.App.4^th 1039, that the federal CAN-SPAM Act does not preempt a Song-Beverly claim based on a request for an email address, and sent the case back to the trial court for further proceedings.

In Jessica Pineda v. Williams-Sonoma Stores, Inc., the plaintiff had alleged that Williams-Sonoma violated Song-Beverly by requesting her zip code during a credit card transaction and then used that zip code in conjunction with her name to look up her address. Song-Beverly prohibits the requesting of an address, among other things, during a credit card transaction. She also alleged that this same conduct constituted an invasion of her right to privacy under the California Constitution. The trial court sustained Williams-Sonoma's demurrer to the class complaint. Shortly after the trial court's dismissal, the Court of Appeal issued its opinion in Party City v. Superior Court, (2008) 169 Cal.App.4^th 497, holding that a zip code is not Personal Identification Information as the term is defined under Song-Beverly. Pineda appealed, arguing that Party City was distinguishable because she specifically alleged that her zip code was used to obtain her home address, and that Party City did not involve an invasion of privacy claim. The Court of Appeal affirmed the trial court's dismissal of Pineda's claim. It found that regardless of whether a zip code is used to look up a home address, the zip code is not Personal Identification Information and is not covered by Song-Beverly. As to the invasion of privacy claim, the Court of Appeal held that the alleged invasion – the looking up of a home address – was not sufficiently serious to constitute an invasion of the California Constitution's right to privacy. The Court further explained that even if the address was sold after it was obtained, the invasion would not be sufficiently serious where the address was publicly available and where the plaintiff had not taken specific steps to keep it private.

In Powers v. Pottery Barn Inc., (2009) 177 Cal. App. 4^th 1039, the trial court dismissed the only claim brought by plaintiff Powers, a Song-Beverly claim based upon a request for her email address, on the basis that it was preempted by the federal CAN-SPAM Act. Pottery Barn argued on demurrer, and the trial court agreed, that if Song-Beverly regulated the collection of email, then it is preempted by CAN-SPAM. Powers appealed and the Court of Appeal reversed the judgment against her, on the basis that Song-Beverly did not expressly regulate the sending of commercial email. The Court of Appeal distinguished this case from Facebook Inc. v. ConnectU, LLC, (2007) 489 F.Supp. 2d 1087, by asserting that the statute at issue in Facebook expressly regulated the collection of email for the purpose of sending unwanted commercial messages, whereas Song-Beverly does not expressly reference email. The Court of Appeal declined to affirm on the alternative grounds that an email address is not Personal Identification Information under Song-Beverly because the factual record regarding how email operates and how email addresses are used had not been sufficiently developed to make such a determination. Accordingly, the case now returns to the trial court where the factual record will be developed and a determination then made as to whether email addresses are covered by Song Beverly.

Both Williams-Sonoma and Pottery Barn were represented by Craig Cardon and Elizabeth Berman of Sheppard Mullin.

Multimillion Dollar Class Action Settlements Approved In Insurance Brokerage Litigations

Sheppard Mullin — Mon, 05 Oct 2009 12:17:59 -0800

By Daniel Brown

On September 8, 2009, the Third Circuit Court of Appeals upheld the approval of two multimillion-dollar class action settlements in consolidated multi district cases arising from investigations and civil lawsuits alleging bid rigging and steering activities in the insurance industry. See In re Insurance Brokerage Antitrust Litigation, Nos. 07-1759 et al. (3d Cir. Sept. 8, 2009). Specifically, after rejecting objections to the settlements, the court approved two settlements valued at $150 million, and also approved an award of $29.9 million in legal fees and costs for the larger of the settlements.

The settlements arose from consolidated cases dating back to October 2004 when then New York State Attorney General, Eliot Spitzer, filed a civil complaint alleging antitrust and RICO claims against the insurance broker Marsh & McLennan in New York state court. The Attorney General alleged that Marsh & McLennan had violated antitrust and other laws by soliciting fixed bids from insurance companies and then receiving improper payments for directing customers to those companies. On the heels of that civil lawsuit, at least twelve attorneys general and several state insurance departments began investigations into alleged bid rigging and steering activities of brokers and insurers in the property and casualty insurance industry. In addition, private parties commenced numerous class action lawsuits in courts across the country.

In 2005, the civil actions from multiple jurisdictions were consolidated and transferred to the United Sates District Court for the District of New Jersey. In 2006, the district court approved the settlements of claims against Zurich Financial Services (“Zurich”) and Arthur J. Gallagher and Co. (“Gallagher”), for allegedly participating in illegal collusive activities from 1994 through 2005. Certain members of one or both of those settlement classes objected to various aspects of the settlement agreements, and appealed to the Third Circuit Court of Appeals.

Objecting class members argued that the settlements were improper because individual issues existed, making the case inappropriate for resolution by a class action which requires a predominance of common issues. The settlement objectors also argued that the court should have established at least three class action subclasses or required separate representation for claimants who inter alia bought excess policies and those who bought non-excess policies. The objectors also objected to the award of $29.9 million in legal fees and costs for the Zurich settlements.

In a 94-page opinion, the Third Circuit Court of Appeals rejected each objection to the settlements. The court determined that common questions of law and fact existed with respect to each of the elements of the antitrust claims, including whether Zurich conspired with any defending insurance brokers, the resulting anticompetitive effects of the alleged conspiracy, and whether class members were proximately injured by Zurich's conduct, even if the amount of damage that each plaintiff suffered could not be established by common proof. The court also determined that the objectors failed to articulate how the interests of the members diverge, even with the different allocations, and that the district court did not abuse its discretion in refusing to certify separate subclasses, despite the variety of policyholders. Among other things, the court held that the allocation plan ensured a fair distribution of the settlement fund and was allocated in such a way that policyholders who likely incurred the most damage would receive a larger proportion of the recovery.

Ultimately, the appeals court concluded that that the class certification requirements of the Federal Rules of Civil Procedure were satisfied with respect to both settlement classes and that both settlements were fair. As a result, the court approved the settlements in the amounts of of $121,800,000 for the Zurich claims and $28,000,000 for the Gallagher claims. The appeals court also affirmed the district court’s approval of an award of $29,500,000 for attorneys’ fees and expenses in conjunction with the Zurich settlement, noting that the district court had properly concluded that class counsel's efforts produced at least $100 million for the settlement class.

The Recent Assault on Consumer Arbitration Clauses

Sheppard Mullin — Fri, 02 Oct 2009 11:58:07 -0800

By Anna McLean and Molly Newland

After years of growth, the Federal Arbitration Act ("FAA"), and numerous court decisions emphasizing the strong public policy in favor of arbitration as a cost-effective means of resolving disputes, arbitration now appears to be under siege—particularly in the consumer context. Many consumer contracts, including those involving cellular phones, credit cards, and other consumer finance products, such as automobile retail installment contracts, contain mandatory arbitration provisions requiring consumers to resolve any disputes through arbitration rather than through the courts. In many cases, these contracts have attempted to establish arbitration an alternative to the high cost, slow pace, and uncertainty of class action litigation. Now consumer arbitration itself has become the focus of public entity investigations and class action lawsuits. Ultimately, consumer arbitration will likely survive, perhaps with new guidelines and consistent rules governing the process so companies know when their arbitration agreements will be enforced.

The recent publicity has related principally to the National Arbitration Forum ("NAF")—one of the three major arbitration providers in the United States. Established in 1986 by a small group of legal experts, including litigators, mediators and former judges, NAF was the United States' largest administrator of consumer arbitrations, employing a "panel of over 1,600 former judges and seasoned lawyers" to arbitrate disputes.[1]Until recently, the privately-held company handled around 200,000 cases a year, the majority of which concern consumer debt.[2] However, there has recently been a flood of criticism (and lawsuits) against NAF, alleging that it failed to disclose corporate ties to debt collectors that initiated arbitrations through NAF, thus, casting doubt on the impartiality of the arbitrations.

Minnesota Attorney General's Lawsuit Against NAF

The most publicized lawsuit against NAF was filed by the Minnesota Attorney General on July 14, 2009, alleging financial ties between the NAF and collection agencies. Shortly thereafter, NAF settled with Minnesota, without admitting any wrongdoing. NAF agreed to permanently cease arbitration of consumer disputes.[3] In a press release announcing the settlement, NAF stated that although it "remains committed to consumer arbitration as the best and most affordable option for consumers to resolve disputes quickly and efficiently," "[m]ounting legal costs, a challenging economic climate, and increased legislative uncertainty surrounding the future of arbitration have prompted [NAF] to exit the consumer arbitration arena. At this time, the costs of providing consumer arbitration services far exceed the revenue generated. Until Congress resolves the legal and legislative uncertainty, the cost is simply too high for users and providers of consumer arbitration.”[4]

San Francisco City Attorney's Lawsuit Against NAF

The Minnesota Attorney General's lawsuit was not the first brought against NAF by a public entity. On March 24, 2008, the San Francisco City Attorney filed suit in California state court, People of the State of California v. National Arbitration Forum, Inc. et al., San Francisco Superior Court No. 473-569, against NAF for "unfair and unlawful business practices that favor lenders over cardholders in arbitration proceedings."[5] The suit alleged that NAF, "made it too easy for companies to garnish wages or secure liens on properties without giving people enough of a chance to defend themselves."[6] Reports at the time of the Minnesota settlement suggested that NAF may have chosen to settle with the Attorney General in its home state because of adverse rulings in the San Francisco litigation.[7]

New Private Lawsuit Against NAF

The private class action bar is now piggybacking on the Minnesota and San Francisco public lawsuits against NAF. In Magnone v. Accretive LLC, Agora Fund I GP, LLC, National Arbitration Forum Inc., National Arbitration Forum, LLC., Dispute Management Services, LLC d/b/a Forthright Solutions, United States District Court, Central District of California, No. CV09-6375 GAF (CWx), filed September 1, 2009, plaintiffs seek to invalidate and obtain disgorgement of all amounts collected from persons against whom NAF issued an arbitration award, since June 1, 2006. Plaintiffs allege that "NAF, as a major beneficiary of these mandatory arbitration provisions, sought to quell consumers' (well founded) fears by offering false assurances of integrity and impartiality . . ." Magnone Class Action Complaint at ¶ 45. The claims relate to NAF's alleged improper assertions of independence, when in "reality, NAF and Mann Bracken [a collection law firm] worked in tandem for the collections industry, their interests strictly aligned with credit card companies against consumers by virtue of their common owner, Defendant Accretive, LLC." Id. ¶ 4. Plaintiffs allege that, had consumers known of the NAF's alleged conflict, they would not have entered into the arbitration agreements. Id. ¶ 74.

There are several key weaknesses in plaintiffs' theory, both with respect to class certification and the merits. As to the allegation that putative class members would not have entered into their contracts if they had known of the alleged financial ties between NAF and debt collectors, causation will be difficult to establish. Common sense dictates that few customers would reject a contract for a product or service they desire for such an abstract reason. And if the consumer's debt were nonetheless legitimate, it would seem unlikely that another arbitrator (or a court) would have reached a different result than the NAF, regardless of its supposed bias. At a minimum, these issues, among others, would necessarily require a class-member-by-class-member analysis, thus providing a substantial hurdle to class certification.

Where Do We Go From Here?

In light of the NAF problems, the American Arbitration Association ("AAA") also announced it would stop handling consumer debt-collection cases,[8] as did several financial institutions. Several financial institutions announced they were either suspending enforcement of their consumer arbitration clauses, or reassessing their use.[9] The Judicial Arbitration and Mediation Service ("JAMS"), on the other hand, has bucked the trend, recently reversing a 2004 policy to not enforce class action waivers in consumer contracts.[10]

To add to the confusion, the Obama administration and Congress have set forth various proposals for reform. Currently, the Senate and House are considering bills called the Arbitration Fairness Act of 2009 and the Fairness in Nursing Home Arbitration Act, and the House is considering legislation to create a Consumer Financial Protection Agency ("CFPA").[11] The CFPA would have the power to either restrict or eliminate consumer arbitration. The CFPA "should be directed to gather information and study mandatory arbitration clauses in consumer financial services and products contracts to determine to what extent, and in what contexts, they promote fair adjudication and effective redress. If the CFPA determines that mandatory arbitration fails to achieve these goals, it should be required to establish conditions for fair arbitration, or in necessary, to ban mandatory arbitration clauses in particular contexts, such as mortgage loans."[12]

Conclusion

The attacks on consumer arbitration should not be fatal. As plaintiffs in the Magnone lawsuit even concede, "[a]rbitration is a form of alternative dispute resolution that can offer substantial benefits in judicial access and efficiency." Magnone Complaint at ¶ 32 (emphasis added). Let's not forget that only a few years ago, Congress passed the Class Action Fairness Act, in part because of concerns about the fairness of class action settlements. Low-cost consumer arbitrations were seen as a fairer alternative. Any proposal for reform of consumer arbitration should not “throw out the baby with the bathwater” by banning arbitration clauses in consumer contracts, but rather seek to improve transparency and provide consistent guidelines for fairness and enforceability.

[1] National Arbitration Forum website, available here (last accessed 9/10/09); "National Arbitration Forum to Cease Administering All Consumer Arbitrations in Response to Mounting Legal and Legislative Challenges," Businesswire (July 19, 2009).

[2] "Banks v. Consumers (Guess Who Wins)," by Robert Berner and Brian Grown, BusinessWeek (June 5, 2008).

[3] Tom Abate, "Dispute firm is calling it quits; Debt collection,San Francisco Chronicle, Business; pg. C1 (July 22, 2009); "National Arbitration Forum to Cease Administering All Consumer Arbitrations in Response to Mounting Legal and Legislative Challenges," Businesswire (July 19, 2009).

[4] Id.

[5] "City Attorney Herrera Hails Federal Protections for Credit Cardholders, But Warns of More Problems," US State News (August 24, 2009).

[6] Tom Abate, "Dispute firm is calling it quits; Debt collection," San Francisco Chronicle, Business; pg. C1 (July 22, 2009).

[7] A Theory On Minnesota's Quickie (Settlement) With the National Arbitration Forum," Legal Pad, a Cal Law Blog, July 20, 2009, available here.

[8] Maria Aspan, "B of A Ends Mandatory Arbitration," American Banker (Aug. 14, 2009).

[9] Id.

[10] "JAMS reverses field, now says classwide arbitration waivers OK," Consumer Financial Services Law Report, v. 12, n. 21 (May 13, 2009); "Forthright Launches New Informational Website to Help Consumers Navigate the Arbitration Process; Consumer Resource to Answer Questions on the Basics of Arbitration, Arbitration in Contracts, and How to File and Respond to a Claim," PR Newswire (April 2, 2009).

[11] "National Arbitration Forum to Cease Administering All Consumer Arbitrations in Response to Mounting Legal and Legislative Challenges," Investment Business Weekly (Aug. 9, 2009).

[12] "Financial Regulatory Reform A New Foundation: Rebuilding Financial Supervision and Regulation," Department of the Treasury, available here.

Federal Circuits Grapple With Standard of Proof and the "Fraud-On-The-Market" Presumption At Class Certification Stage

Sheppard Mullin — Fri, 02 Oct 2009 11:53:02 -0800

By John Stigi and Jonathan Moss

In recent years, a split among the circuits has developed in federal securities class actions with regard to the procedure and standard of proof required to certify a class. At the class certification stage of the proceedings, district courts are instructed to conduct a “rigorous analysis” of the various requirements set forth in Federal Rule of Civil Procedure 23, while at the same time refrain from deciding issues that go to the substantive merits of the case. This tension, coupled with ambiguity in Circuit-level authority, has created uncertainty among many district courts. Most recently, the United States Court of Appeals for the Sixth Circuit granted interlocutory review in In re Abercrombie Fitch & Co., No. 09-0310 (6th Cir. Aug. 24, 2009), to consider this precise issue. The court, in its order granting review, noted that although the Sixth Circuit had yet to address the issue, its sister circuits, including the First, Second, Fourth and Fifth Circuits, have articulated various different standards to be applied.

One essential element of a federal securities fraud claim is the plaintiff’s reliance upon the alleged misleading statement or omission. Normally, whether a plaintiff relied upon the alleged misleading statement or omission is an individual question, specific to each plaintiff. To overcome this problem in securities fraud class actions, plaintiffs typically invoke the “fraud-on-the-market” presumption of class-wide reliance upon the alleged misleading statements or omissions at issue in the case. The fraud-on-the-market theory, recognized by the Supreme Court in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), is based upon the hypothesis that in an open and developed securities market (such as the New York Stock Exchange or NASDAQ), the price of a company’s stock will be determined by all material information about the company. Under the theory, because investors are presumed to rely upon the “integrity” of that market price in making their investment decisions, courts may presume for purposes of certifying a class that investors relied upon on public material misrepresentations or omissions.

The fraud-on-the-market presumption is rebuttable. As explained in Basic, the presumption can be rebutted by showing, among other things, that the market and investors actually knew the truth and could not have been deceived by the alleged misleading statements or omissions. The questions facing the district courts, then, are what showing must a plaintiff make at the class certification stage in order to trigger the fraud-on-the-market presumption of reliance and whether the defendant may present evidence to rebut that showing, even if that evidence also would address an issue that goes to the substantive merits of the case.

Some Circuits have provided guidance to their district courts regarding the standard of proof and appropriate level of merits inquiry at class certification — particularly in securities fraud class actions. For example, the Fourth Circuit held that a district court may not blindly accept a plaintiff’s allegations in a class certification complaint because doing so fails to satisfy the court’s requirement to take a “close look” into relevant matters and would “automatically lead to a class certification order.” Gariety v. Grant Thornton, LLP, 368 F.3d 356, 259 (4th Cir. 2004). The Second Circuit came to a similar conclusion but articulated a slightly different standard, holding that a district court errs when it applies a “some showing” standard of proof at the class certification level. The court concluded that a district court must receive enough evidence to be satisfied that each element of Rule 23 is satisfied. In re Initial Public Offering Sec. Litig., 471 F.3d 24 (2d Cir. 2006). The Fifth Circuit has gone the furthest. In Oscar Private Equity Inv. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007), the court held that a plaintiff must affirmatively establish loss causation — typically adjudicated at summary judgment or at trial — at the class certification stage. The issue remains uncertain in other circuits. The Ninth Circuit, for example, has yet to address these questions since the wave of recent decisions from other Circuits. District courts, therefore, apply older authority to bar rebuttal evidence at the class certification stage and defer the issue until after a class is certified.

This issue is of particular importance in large securities class actions. As the Sixth Circuit recognized when it granted petition for interlocutory review in Abercrombie & Fitch, “certification of a class will place significant pressure on [defendants] to settle the case rather than risk the potential of a huge damage award.” Looking forward, as the Circuits continue to weigh in with differing decisions, this issue may well merit review by the United States Supreme Court.