The named plaintiffs in the case are the owners of a diverse range of copyrighted works, including recorded soccer and tennis matches, performances of Rogers and Hammerstein classics and rap videos. The plaintiffs alleged that the defendants “have pursued and continue to pursue a deliberate strategy of engaging in, permitting, encouraging, and facilitating massive copyright infringement on the YouTube website….” Second Amended Class Action Complaint, ¶ 6. They further alleged that the Defendants are able to identify and remove copyrighted material, and that they “steadfastly refuse to respect the rights of members of the Class….” Id. at ¶ 7.

The putative class, which consists of every person and entity worldwide that owns infringed copyrighted works, fell into two categories. Works belonging to the “Repeat Infringement” class were blocked by YouTube after notice, but subsequently were again uploaded to the site. Works owned by the “Music Publisher” class were posted without proper authorization. Plaintiff estimated that there are “at least thousands” of members in the Repeat Infringement class and “hundreds” in the Music Publisher class.

At the outset, Judge Stanton noted that in spite of “superficial similarities,” copyright claims generally are “poor candidates for class-action treatment.” Opinion and Order at 3. Although each plaintiff would be required to prove ownership of a copyright, that the clip was posted without authorization, that it doesn’t constitute fair use, and that YouTube had knowledge of the infringement and refused to remove it, each infringement would have to be resolved on its own facts. “[A]ccumulation of all the copyright claims, and claimants, into one action will not simplify or unify the process of their resolution, but multiply its difficulties over the normal one-by-one adjudication of copyright cases.” Id. at 4. Issues relevant to each copyrighted work “arise from facts peculiar to each protected work and each claimed infringement of it, in a compartmented case differing from every other one.” Id.at 6. “These ‘dissimilarities within the proposed class’ prevent the adjudication of claims en masse.” Id. Further, since by their very nature copyrighted works are unique, the court ruled that no plaintiff’s claim could be typical of claims of the class, as required by FRCP 23. Id. at 7. In addition, “the availability of statutory damages is designed to give litigation value to each individual case,” diminishing any “economic need to combine cases whose costs would prevent individual litigation.” Id. at 4.

The court also ruled that membership in the putative worldwide class would be so numerous as to render impracticable both joinder of the individual members and administration of the claims. Id. Judge Stanton noted that as of March 2010, YouTube has more than one billion daily views, and that 24 hours of new videos are uploaded to the site every minute. Against that backdrop, he stated, “The suggestion that a class action of these dimensions can be managed with judicial resourcefulness is flattering, but unrealistic.” Id. at 3.

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Although the Supreme Court continues to set the bar for class certification higher and higher, plaintiffs’ attorneys continue to file class action lawsuits of questionable merit.  The litigation costs required to gain dismissal of even groundless lawsuits are not insubstantial, and a defendant’s inability to fund a vigorous defense can make it susceptible to agreeing to a quick settlement, thereby perpetuating the cycle of filing baseless lawsuits.

 Under these circumstances, the value of available liability insurance for class action defendants cannot be over emphasized.  In fact, from a practical standpoint, coverage for defense costs is likely to be the most critical function of liability insurance for most class action defendants.  For this reason, liability policies may well be considered “litigation insurance.” See, e.g., Illinois Tool Works, Inc. v. Travelers Cas. & Sur. Co., No. 04 CH 21325 (Ill. Cir. Ct. Cook Co. April 12, 2013) (Kennedy, J.),  (“The duty to defend has been described as a form of ‘litigation insurance’ for the insured”); Perdue Farms, Inc. v. Travelers Cas. Ins.  Sur. Co. of Am., 448 F.3d 252, 258 (4th Cir. 2006) (“although the type of policy here considered is most often referred to as liability insurance, it is litigation insurance as well, protecting the insured from the expense of defending suits brought against him”); NL Indus. v. Commercial Union Ins. Co., 926 F. Supp. 446, 454 (D.N.J. 1996) (“Where the insurer has promised to defend, coverage includes litigation insurance as well”). 

As soon as a company learns that it is being sued in a class action, it should review all of its insurance policies to determine whether any of them potentially provide coverage.  The duty to defend typically is much broader than the duty to indemnify and is determined by reviewing the allegations of the complaint against the insurance policy. Even if just one of the claims in the complaint is potentially covered, the duty to defend the entire lawsuit generally is triggered. If there is any possibility of coverage, an insured should always err on the side of tendering the claim to its insurers.  Vague or meritless allegations and the absence of class certification may not preclude an insurer’s immediate defense obligation.

The breadth of an insured’s duty to defend is well illustrated in Hartford Accident and Cas. Co. v. Beaver, 466 F.3d 1289 (11th Cir. 2006), where the court held that a class action defendant was entitled to a defense even though the named plaintiff’s claim, in isolation, clearly was not covered.  In that case, the Eleventh Circuit, interpreting Florida law, ruled that if an insurer’s liability turns on whether a class is certified, the duty to defend is triggered as long as the underlying class action complaint alleges facts that fairly and potentially bring the suit within coverage.  The underlying lawsuit was originally brought by two named plaintiffs who alleged that Beaver failed to provide necessary care to nursing home residents.  Beaver settled with one named plaintiff, and the remaining named plaintiff’s stay at the nursing home post-dated the issuance of the Hartford policy.  Not surprisingly, Hartford moved for summary judgment on the ground that there was no occurrence during its policy period.   The District Court agreed, holding that prior to class certification, the complaint includes only the claims of the named plaintiff(s). 

The Eleventh Circuit reversed, noting that the district court’s analysis was applicable only to procedural and jurisdictional matters, and not to the question of whether an insurer has a duty to defend.  Nevertheless, Hartford argued that claims by putative class members are too remote and speculative to trigger the duty to defend.  The court disagreed because that the duty to defend is based solely on the allegations in the complaint.   Because “[t]he factual averments bearing on class certification [were] detailed and extensive,” the court was “satisfied that the Underlying Complaint ‘alleges facts that fairly and potentially bring the suit within policy coverage.’” Id. at 1293.  The court also addressed the pragmatic realities of class action litigation, observing that “the fight over class certification is often the whole ball game….The overwhelming importance of class certification to the ultimate resolution of the case militates strongly against leaving the insured without a defense until after a decision on class certification.”  Id. at 1294-1295.  Finally, the court dismissed Hartford’s argument that the duty to defend should not be triggered because the class may never be certified.  The court stated, “If the duty to defend arises in spite of the uncertainty and impracticality of defending wholly meritless individual claims, we think it equally clear that the duty to defend is not defeated by some uncertainty as to the merits of class certification.”  Id.   See also Zurich Am. Ins. Co. v. Nokia, Inc.,  268 S.W.3d 487, 496 (Tex. 2008) (despite the fact that personal injury claims are rarely appropriate for class certification, “the appropriateness of class certification is not at issue here and is not relevant to the duty to defend”).

 In Omega Flex, Inc. v. Pacific Employers Ins. Co., the Appeals Court of Massachusetts followed suit.  937 N.E.2d 52 (App. Ct. Mass. 2010).  The plaintiffs in the underlying class action alleged that Omega’s corrugated stainless steel tubing installed in their property lacked sufficient thickness to protect against combustion after a lightning strike.  Omega’s policy with Pacific provided coverage for product liability claims when the insured’s product accidentally damaged the property of a third party.  Because no actual property damage occurred to the name plaintiff’s premises, Pacific denied it had a duty to defend.  A year after the denial, the court certified the class for settlement purposes only, approved the settlement, and dismissed the action with prejudice.  Pacific agreed to pay its share of the damages and class counsel attorneys’ fees, but again refused to reimburse Omega Flex for its legal fees.  Omega Flex filed suit, and the court ruled in its favor, holding, “we do not believe that an insured must demonstrate that the plaintiffs will satisfy Rule 23 in order to receive a defense from its insurer….The fact that some of the claims may ultimately be deemed unsuitable for class treatment should not deprive the insured of the benefit of a defense, provided the complaint fairly can be read to assert one or more claims that fall within the scope of the policy.”  Id. at 268. 

 And just last week, in Illinois Tool Works, Inc. v. Travelers Cas. & Sur. Co., supra, an Illinois trial court held that an insurer must defend its insured even if facts discovered in the underlying cases prove that the allegations against the insured were baseless and that its insurers had no duty to indemnify.  The insured in that case, Illinois Tool Works (ITW), was sued in multiple toxic tort suits, alleging that ITW manufactured, sold, or distributed toxic welding products that caused injury during a certain exposure period.  ITW demonstrated in those cases that it did not sell any welding products until 1993, which was after the alleged exposure, but also after all of the insurance policies’ periods.  Based on that evidence, the insurers claimed they could not possibly have to indemnify ITW, so they also should have no duty to defend.  The court stated that the insurers “ignore the process and focus on the results [ITW] obtained in the underlying litigation.  [ITW] defended underlying, groundless, false, and/or fraudulent allegations that they “designed, manufactured, sold or distributed’ certain products with evidence that they did not do so before 1993.”  Id. at 25-26.  Because the evidence concerning the timing of ITW’s sale of welding products was outside the policies and the underlying complaints, that evidence had no bearing on the duty to defend.  Since ITW purchased “litigation insurance” in order to enable it to defend against baseless claims, the insurers were required to pay for its defense.  Id. at 25.

 As these cases demonstrate, allegations contained in class action lawsuits will be read broadly in order to determine if an insurer has a duty to defend.  Ultimate issues of liability, the insurer’s duty to indemnify and the appropriateness of class certification are not relevant to that determination.  Defendants are urged to immediately examine their insurance policies upon receipt of a class action complaint and to provide notice under all potentially implicated policies as soon as possible.

In Connaught, the debtor, the Connaught Group, Ltd. (“Connaught”) designed and sold women’s apparel.  Martina Schuman (“Schuman”) worked in one of Connaught’s facilities in New York City.  In January 2012, Connaught terminated approximately 100 employees, including Schuman.  In February 2012, Connaught and related entities commenced chapter 11 cases.  A few days later, Schuman filed a class adversary proceeding in the cases, alleging that the putative class members did not receive sufficient written notice of their termination and were owed back pay.  In September 2012, Schuman filed a class proof of claim in the case and moved to certify the class.  Meanwhile, in October 2012, Connaught confirmed a liquidating plan.  Connaught’s liquidating trust opposed the certification motion on, among other grounds, that (1) certification would increase costs and delay the case administration, and (2) in general, class actions are inconsistent with and detrimental to the administration of the bankruptcy claims process and the debtors’ estate.

The bankruptcy court rejected these arguments.  After determining that the plaintiffs met the requirements for certification under Rule 23(a), the court turned to Rule 23(b)(3).The court recognized that, in the context of a bankruptcy proceeding, the “superiority inquiry under Rule 23(b)(3) essentially comes down to whether the class action is superior to the bankruptcy claims resolution process.”  Slip. Op. at 10.  To make this determination, the court considered whether the class was certified pre-petition, whether the members of the class received notice of the bar date, and whether certification adversely affected the administration of the estate.  Id. (citing In re Musicland Holding Corp., 362 B.R. 644 (Bankr. S.D.N.Y. 2007) and the Fifth Circuit’s recent decision in In re Teta v. Chow (TWL Corp.), No. 12-40271, 2013 WL 1285294, at *8 (5th Cir. Mar. 29, 2013)).

The court found insignificant that the class was not certified pre-petition given that the debtor’s financial distress triggered the termination of the putative class plaintiffs’ employment.  Slip Op. at 13.  The Court reasoned that giving this factor any weight would be improper because it would prevent certification of WARN Act classes in “virtually all” bankruptcy cases.  Id.  The court concluded that the “principal consideration” should be the effect of the class certification on the administration of the estate.  Id.  The Court found significant that there were sufficient funds to satisfy the class claim if it were allowed, so that allowance would not imperil Connaught’s liquidation.  Id. at 15.  The court also found that denying class certification would create potentially greater delay than granting the motion, given that all putative class members would then have to file claims that the liquidating trust would have to examine separately.  Id. at 16

The bankruptcy court’s decision in Connaught provides guidance on the relationship between class adversary proceedings and the bankruptcy claims resolution process in the context of WARN Act claims, an area of law on which caselaw authority is limited.  In particular, the Connaught court recognized that a class adversary proceeding may be a useful vehicle for administering WARN Act claims connected to a debtor’s chapter 11 bankruptcy case.  This ruling could potentially encourage WARN Act plaintiffs to bring their claims in an adversary proceeding rather than to seek relief from the automatic stay to prosecute a parallel civil action.  As a result, this decision is of interest to companies in financial distress that are contemplating a reduction in workforce in connection with a potential bankruptcy filing.

United, a health insurance company, had been sued by multiple parties, including the American Medical Association and individual health insurance subscribers, for understating the usual, customary and reasonable charges for out-of-network providers and for insufficient reimbursement for such treatment to its insureds.  United sought coverage from a number of insurance companies for the defense and settlement costs it incurred in connection with those lawsuits, including a $350 million settlement with certain plaintiffs.  

One insurer, National Union Fire Insurance Company of Pittsburgh, PA (National Union), denied liability for its share of the $350 million settlement — estimated to be approximately $20 million — and moved for summary judgment on the ground that United failed to report the claim in the manner prescribed in its “claims made and reported” policy.  The policy contained a “Claims Handling Endorsement,” which required United to provide written notice of a claim to National Union’s claims department in New York.  United acknowledged that it did not send written notice in literal compliance with the Endorsement, but argued that it substantially complied by providing loss runs reflecting the claim to a National Union underwriter.

In response, the US District Court for the District of Minnesota said it “can conceive of no reason why an insurer such as National Union should not be able to protect itself by requiring that notice be given to a particular person or department.”  The court rejected United’s argument that National Union had a duty to inform United that its notice was insufficient, noting that “the insurer has no reason to suspect that the insured has made a claim, as the person or department whose job it is to receive, recognize, and process claims has not received any notice” of the claim.  “Imposing an obligation to investigate on the insurer in this context would mean that every agent of the insurer would have to be charged with the responsibility of receiving, recognizing, and processing claims, which is precisely what National Union sought to avoid by specifying to whom notice must be sent.”  The court noted that even if National Union had that duty, it fulfilled it by “clearly informing United of that fact in its policy.”

Despite giving force to the literal terms of the Claims Handling Endorsement in this case, the court agreed with United that substantial compliance would be acceptable if there was proof that notice somehow was received by National Union’s claims department during the policy period.  Because United could not present sufficient evidence to that effect, the court granted National Union’s motion for summary judgment.

Again, the need for a careful evaluation of all applicable insurance policies upon receipt of a class action complaint cannot be overstated.  As demonstrated in this case, the failure to comply with a simple policy requirement can prove to be quite costly.

Last week, in Johns v. Bayer Corporation, No. 09cv1935, 2013 U.S. Dist. LEXIS 51823 (S.D. Cal. Apr. 10, 2013), the Southern District of California issued another significant decision in this area.  In Johns, the plaintiffs alleged that Bayer’s advertising for two of its One-A-Day vitamin products (Men’s Health Formula and Men’s 50+ Advantage) was false and misleading because the claims that the products supported prostate health and that the selenium in one of the products may reduce the risk of prostate cancer were not adequately substantiated with scientific evidence.  As in the Stanley and Scheuerman cases, the court found that there is no private right of action for unsubstantiated advertising, and that the plaintiffs bear the burden of proving the falsity of the advertising claims.  In a lengthy and detailed opinion, the court concluded that the plaintiffs did not meet this burden since they did not offer any affirmative scientific evidence that  “disproved” Bayer’s advertising claims concerning prostate health.  In reaching this conclusion, the court found that the “strength of Bayer’s evidence is irrelevant” because plaintiffs have the burden of proving through scientific evidence that the ingredients in the products did not provide the advertised benefits.

In addition to these decisions, other courts have, in varying contexts, dismissed claims in consumer products false advertising  cases where the plaintiffs allege a “lack of substantiation” for the advertising claims:  Gaul v. Bayer Healthcare, LLC, No. 12-5110, 2013 U.S. Dist. LEXIS 22637 (D.N.J. Feb. 11, 2013); Chavez v. Nestle, USA, Inc., No. 09-9192, 2011 U.S. Dist. LEXIS 58733 (C.D. Cal. May 22, 2011); Pelkey v. McNeill Consumer Healthcare, No. 10-61853, 2011 U.S. Dist. LEXIS 21372 (S.D. Fla. Feb. 15, 2011); Franulovic v. Coca Cola Co., 390 Fed. Appx. 125, 128 (3d Cir. 2010); Fraker v. Bayer Corp., No. 08-1564, 2009 U.S. Dist. LEXIS 125633 (E.D. Cal. Oct. 2, 2009).

These decisions, and the reasoning behind them, provide a strong defense in consumer class actions that allege a “lack of substantiation” for advertising claims.  It is not sufficient for plaintiffs in such cases to attack or poke holes in the studies that a manufacturer relies on to support its advertising claims; instead, plaintiffs must present scientific evidence that affirmatively disproves the advertising claims, which is an extremely high and difficult bar for plaintiffs to meet.

Even with the continued prevalence of class filings, receipt of a class action complaint can be a startling event for any company, particularly one that is not accustomed to litigation.  But one of the most important things any class action defendant should do immediately is examine whether the lawsuit potentially triggers any of the policies in the company’s insurance portfolio.  Insurance coverage can mean the difference between bankruptcy and survival for a business confronted with possible “bet the company” litigation.  Defense against even meritless class action claims can be hugely expensive, even if the case eventually is dismissed or class certification is denied.

General Insurance Coverage Considerations Upon Receipt of a Class Action Complaint

Class actions claims can raise some unique insurance coverage challenges, but generally, issues of whether an insurer has a duty to defend and indemnity a class action claim are analyzed no differently from any other claim.  The four corners of the complaint must be examined against the terms of the insurance policy.  The mere possibility that any of the claims alleged in the complaint could be covered usually is enough to trigger an insurer’s defense obligation for the entire case.  From the standpoint of a class action defendant, an immediate defense, sometimes called “litigation insurance,” is often the most crucial feature of a liability policy’s coverage.

All liability policies, regardless of whether they are occurrence-based or claims-made, have time-sensitive notice provisions that cannot be ignored.  Providing notice of a class action lawsuit under all potentially implicated policies must be a priority when an entity is confronted with a class action lawsuit.  Insureds should not wait to see if a class is certified before providing notice.

Deciding what policies are potentially triggered by a class action lawsuit can be tricky because the complaint may not contain complete information about important details impacting the insurer’s coverage obligations.  For example, even if there are comprehensive allegations concerning injury to the named plaintiff, the complaint may not set forth similarly precise allegations about the insured’s alleged wrongful conduct as to other putative class members.  But because the duty to defend is generally very broad, insureds should protect themselves by erring on the side of providing notice under all potentially impacted policies.  Failure to do so can bar coverage in certain circumstances.

An insurer whose coverage is only potentially implicated likely will agree to provide a defense under a reservation of rights.  But if it later becomes clear that the claim is not covered, the insurer may be able to terminate its defense of the class action.  Whether an insurer is entitled to reimbursement of defense costs in such a circumstance is a matter of individual state law.  Insureds should seek the advice of counsel if an insurer requests that the insured agree to such reimbursement in exchange for the insurer agreeing to defend at the outset of the class action lawsuit.

Privacy Violation/Data Breach Class Actions

Entities that experience a breach are instantly thrust into a crisis situation.  They must identify and remediate the breach, notify affected individuals and possibly government authorities, pay regulatory and/or credit card industry fines, and deal with a public relations fall out — all while trying to keep the business going.  And if that’s not enough, more and more often, the breach culminates in the filing of a class action lawsuit.Coverage for privacy violation class actions might be found under certain provisions of traditional liability policies, such as commonly used commercial general liability (CGL) forms, but that can be an uphill battle.  For example, electronic data may not be considered “tangible property” that would be covered under such policies, and many CGL policies now specifically state that it is not.  But most policies provide some coverage for invasion of privacy claims, which could come into play when a data breach results in the disclosure of confidential personal information.  And in a recent Sixth Circuit case, Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co., 691 F.3d 821 (6th Cir. 2012), the court held that a computer fraud rider to a “Blanket Crime Policy” provided coverage for a hacker’s theft of customer credit cards and checking account data.  

Unlike traditional policies, cyber insurance was specially designed to apply to data breaches.  Most policies provide first party coverage for business interruption, breach remediation, notification to affected parties, including credit monitoring, public relations assistance, and damage to digital assets.  Third party coverage is provided for third party lawsuits and regulatory actions arising out of a breach and media liability.  Many policies also cover regulatory and payment card industry fines.  Cyber insurers often have panels of specialized professionals who immediately spring to action in the event of a breach so that its effects can be mitigated.  Because time is of the essence for legal, regulatory and reputational reasons, the special benefits of cyber insurance can be invaluable to an entity suffering a data breach.

Wage and Hour Claims

A number of exclusions in CGL policies, particularly the Employment Related Practices and Intentional Acts exclusions, are likely to apply to many employment-related claims.  In addition, because the plaintiffs in such cases often claim to have suffered emotional distress and similar damages, the alleged harm may not constitute an occurrence under a CGL policy, unless the governing state law considers such claims to be “bodily injury” within the meaning of the policy.

Employment Practices Liability (EPL) policies are specifically designed to respond to employment-related claims.  EPL policies provide coverage for a variety of claims, including wrongful dismissal, harassment, discrimination and failure to adopt adequate workplace or employment policies and procedures. But likely as a result of the proliferation of wage and hour and Fair Labor Standards Act (FLSA) class actions, many EPL policies now expressly exclude such claims.  But just several months ago, at least one insurer (Marsh Inc.) introduced a new policy that will reimburse companies for defense costs, settlements and judgments for claimsfor violations of FLSA or similar state and local laws.

Securities Claims

Although securities filings were down in 2012 compared with 2011, they still dominate the litigation landscape.  They include claims based on breach of fiduciary duty, including merger objections, shareholder derivative suits, securities fraud and violation of the Foreign Corrupt Practices Act (FCPA).  Suits against financial institutions continue to be most prevalent in the wake of the recent credit and subprime crises.  Unfortunately for the defendants in these cases, lower trends in case filings are not resulting in lower defense costs, in part because additional claims, such as shareholder derivative and ERISA claims often are now included in securities class actions.  Broadly speaking, class action lawsuits resulting from these events are based on claims that the defendant corporation’s directors and officers had knowledge of various risks and failed to make adequate disclosures, breaching their fiduciary obligations and causing loss to investors.

Directors and Officers (D&O) insurance is designed to provide coverage for board members and officers of the insured company against losses that may result from alleged errors in judgment, breaches of duty, or wrongful acts in the course of their work for the insured entity.  Errors and Omissions (E&O) insurance covers liability for acts and omissions in the performance of professional services.  D&O and E&O policies, as well as any Personal Director’s Liability policies, should be closely reviewed immediately upon receipt of any securities-related class action complaint.  Importantly, because such policies are written on a claims-made basis, insureds must be particularly conscious of providing notice under any potentially implicated policies on a timely basis.

Conclusion

Insurance coverage can provide a lifeline to companies that have been targeted by a class action lawsuit.  Even unfounded class actions can be costly to defend and resolve.  The crucial take-away message is that all existing insurance policies should be examined for potential coverage immediately upon receipt of any class action complaint, and notice to all possibly impacted insurers should be provided without delay

Sighs of relief by class actions defendants following the denial of class certification in Hannaford may give way to renewed uncertainty now that a massive class, estimated by the plaintiffs’ lawyer to be more than a million people, was certified by an Illinois federal district court last week in the case of Harris v. comScore. 

According to its website, “comScore measures what people do as they navigate the digital world – and turns that information into insights and actions for our clients to maximize the value of their digital investments.”   comScore has more than 2,100 clients worldwide, ranging from private corporations, major media outlets, to governments.  comScore gathers data through a software program called OSSProxy, which, when installed on a computer, constantly collects data about activities on the computer. comScore works with so-called “bundlers,” who provide free digital products to internet users.  While downloading the bundlers’ free software, consumers are given the opportunity to download OSSProxy.  The named plaintiffs in Harris v. comScore both downloaded and installed OSSProxy after downloading a free digital program from one of comScore’s bundlers.

In their Complaint, the plaintiffs alleged that “comScore has developed highly intrusive and robust data collection software … to surreptitiously siphon exorbitant amounts of sensitive and personal data from consumers’ computers [and] uses deceitful tactics to disseminate its software and thereby gain constant monitoring access to millions of hapless consumers’ computers and networks.”  They further alleged that “comScore’s sophisticated computer applications monitor every action conducted by users [and that the collected] data is sent to comScore’s servers, and then organized and sold to  [comScore’s] clients.”  comScore allegedly collects a “terrifying” amount of data from “unsuspecting customers,” including usernames and passwords, search engine queries, and credit card numbers.

The plaintiffs asserted claims for (1) violation of the federal Stored Communications Act (SCA), which, among other things, makes it unlawful to obtain access to stored communications on another person’s computer system without authorization; (2) violation of the federal Electronic Communications Privacy Act (ECPA), which prohibits unauthorized wiretapping and electronic eavesdropping; (3) violation of the federal Computer Fraud and Abuse Act (CFAA), which prohibits accessing computers in excess of authorization; and (4) common law unjust enrichment.

Two certifications were sought — Class certification of “All individuals who have had, at any time since 2005, downloaded and installed comScore’s tracking and software onto their computers via one of comScore’s third party bundling partners,” and Subclass certification of “All Class members not presented with a functional hyperlink to an end user license agreement before installing comScore’s software onto their computers.”

Unjust Enrichment Claim

The court first addressed the unjust enrichment claim, ruling that it could not be resolved on a class basis because of “insurmountable choice-of-law problems.”  The court noted that the proposed Class and Subclass likely would include plaintiffs from all 50 states as well as some foreign countries, and that the plaintiffs “propose no solution to allow the court to manage the variety of laws that may be applicable to the Class, other than to suggest that the court certify two subclasses under California and Illinois law.” That proposal was rejected as being “plainly inadequate in light of the geographical diversity of the plaintiffs and the variations in applicable law.”

Statutory Claims

comScore did not fare as well with regard to class certification of the plaintiffs’ remaining claims.  After confirming that each of the federal statutes at issue provides a private right of action, the court ruled that the plaintiffs satisfied the requirements for class certification under FRCP 23 for each statute. 

            Numerosity

comScore did not dispute that the numerosity requirement was met, noting that comScore’s program was installed on millions of computers between 2008 and 2011. 

            Commonality

The court found that the plaintiffs raised a variety of common questions that could be resolved on a classwide basis.  Most significant was the fact that each Class and Subclass member agreed to a form contract, and that “claims arising from interpretations of a form contract appear to present the classic case for treatment as a class action.”  The court rejected comScore’s argument that each plaintiff’s subjective understanding of the agreement and his or her scope of consent rendered class treatment inappropriate, finding that “[t]hat rule has no place where a party manifested consent through the adoption of a form contract.” 

            Typicality

The court held that this requirement was satisfied because both the Class and the Subclass representative plaintiffs “used a substantively identical process to download OSSProxy,” following which the Subclass representative was not presented with a functioning hyperlink to the end user agreement.  The court dismissed what it called comScore’s “speculative” arguments that the named plaintiffs were atypical because of issues concerning whether they actually downloaded OSSProxy.  comStar had presented no “actual evidence” that the named plaintiffs did not download the software, and therefore, the plaintiffs’ “unrefuted” testimony that they downloaded the software provided “ample evidence that their claims are typical.” 

            Adequacy

comScore did not dispute that the adequacy requirement was met.  Further, there was no evidence of conflicting interests on the part of the named plaintiffs.  They vigorously participated in the case thus far, and plaintiffs’ counsel were deemed to be qualified to represent the class. 

            Ascertainability

Because comScore possesses contact information for some of the proposed Class and Subclass members, the court ruled that those portions of the proposed classes were identifiable in satisfaction of the ascertainability requirement.  The court ruled that any remaining class members could claim membership by affidavit.  Although rejecting comScore’s argument that the affidavit process would be unwieldy, the court acknowledged that the issue could be reconsidered if the portion of the class asserting membership by affidavit proved to be excessively large, in which case the class could be limited to members who downloaded OSSProxy as reflected in conScore’s records. 

            Predominance and Superiority

comScore argued that statutes of limitations raised individual issues that are not suited to class treatment.  Because the limitation periods for SCA, ECPA and CFAA begin to run two years after a plaintiff discovers a potential violation, comScore asserted that a case-by-case determination would be required to determine when each plaintiff discovered the alleged violation.  The court disagreed on the grounds that the issue arises only for class members who downloaded OSSProxy two years before the lawsuit was filed, some of those class members still have OSSProxy installed on their computers, and it is unlikely that any remaining class members had the requisite knowledge of OSSProxy’s operations to trigger the statute of limitations.

In addition, since SCA and ECPA provide for statutory damages, the court rejected comScore’s contention that there were issues concerning whether each individual plaintiff suffered damage or loss. And even though CFAA grants a civil action only to persons “who suffer damage or loss,” and further requires that each offense lead to a “loss to 1 or more persons during any 1-year period … aggregating at least $5,000 in value,” the court held that it would be more efficient to resolve all of the common issues in a single proceeding than to hold individual damages hearings.

If the estimate of the plaintiffs’ lawyer concerning class membership proves to be correct, Harris v. comScore is likely to be the largest privacy case ever certified on an adversarial basis.

In an order surely to reverberate with both the plaintiffs’ and defense bar, on March 20, 2013, Judge D. Brock Hornby of the United States District Court for the District of Maine denied the plaintiffs’ motion to certify a class in In re Hannaford Brothers Company Data Security Breach Litigation. 

Hannaford was filed as a putative class action in 2008 and arises out of a cybersecurity incident wherein criminals infiltrated Hannaford’s network and stole customer debit and credit card information.  The District Court, after certifying questions to the Supreme Court of Maine, dismissed all seven claims alleged in the consolidated class action complaint either for failure to state a claim or for failure to allege injury sufficient to confer Article III standing.  The First Circuit reversed on two claims, however, finding that the plaintiffs had alleged sufficient injury to support their state law negligence and implied breach of contract claims because they had alleged damages in the form of foreseeable costs to mitigate any harm arising from the data breach, specifically fees for replacing cards and the cost of data theft protection products.

On remand, the plaintiffs filed their motion for class certification and tailored their putative class to fall within the scope of the First Circuit decision by limiting the proposed class to “Hannaford customers who incurred out-of-pocket costs in mitigation efforts that they undertook in response to learning of the data intrusion.” 

The Court acknowledged the force in Hannaford’s argument that individual questions surrounding reliance and causation prevented a typicality finding under Rule 23(a) and further noted that the differing economic impact of the intrusion on various class members could create typicality issues.  However, extensively quoting the opinion, the Court stated that it would be “unfaithful to the First Circuit’s decision” to accept Hannaford’s arguments on a typicality analysis.  Ultimately, the Court found that each requirement of Rules 23(a) and (b) of the Federal Rules of Civil Procedure was satisfied except for Rule 23(b)’s predominance requirement. 

The Court focused its predominance analysis on damages.  The plaintiffs argued that individual issues as to damages did not create a predominance issue because they would be able to present statistical proof of the total damages to the class based on records that show cards replaced, fees charged, and the instances of purchase of insurance of credit monitoring services by class members.  Then, according to the plaintiffs, because of the nature of the records and the data, they would be able to show by statistical probability what portions of those alleged damages were attributable to the Hannaford intrusion.  With this evidence, plaintiffs intended to ask the jury for a lump sum damage award that would distributed in the class administration process.

The Court rejected the plaintiffs’ arguments that they could prove damages on a class-wide basis and distinguished the cases that support such a procedure by noting that generally in those cases actual expert testimony was presented at the certification stage that supported the expert’s ability to testify as to total damages.  The Court found that without an expert, the plaintiffs cannot prove total damages and declined “to take judicial notice that there will be such an expert.”

From the defense perspective, the order clearly supports the arguments that individual issues of reliance and damages present a barrier to class certification in data breach cases, while the plaintiffs’ bar may read Hannaford as providing a roadmap for overcoming at least the issue of individualized damages.  What is clear, however, is that courts are starting to require plaintiffs to nail down proof that their claims can be manageably tried on a class basis, particularly as it relates to damages issues, a conclusion supported by the U.S. Supreme Court’s recent decision in Comcast Corp. v. Behrend.  But it would not be wise to read Hannaford as providing a simple way to provide that proof.  As discussed here, Comcast left unanswered whether the Daubert standard for expert witnesses applies to expert testimony at the class certification stage, leaving significant room for doubt about the appropriate standards.

Editor’s Note: This Executive Alert was published by members of BakerHostetler’s Securities Litigation and Regulatory Enforcement Team, Employment Team, and BakerHostetler’s Class Action Team.

On March 27, 2013, the U.S. Supreme Court decided Comcast Corp. v. Behrend, Case No. 11-864, which provides a valuable tool for the defense in combatting class certification in antitrust cases and other types of class actions. Whether Comcast breaks new jurisprudential ground or simply clarifies what the law has been all along will be the subject of debate over the coming months and years, but there can be little doubt that the decision solidifies the trend established in the court’s 2011 decision in Wal-Mart Stores, Inc. v. Dukes that plaintiffs must be able to demonstrate that the case is susceptible to resolution by common proof.

In particular, Comcast provides guidance on several important questions: a) the level of scrutiny that federal courts must give to the factual basis behind expert opinions and other purported common evidence offered by the plaintiff; b) whether the more exacting standards for evaluating class certification that the Court announced in Wal-Mart apply to the resolution of questions of predominance under Rule 23(b) in addition to the question of commonality under Rule 23(a); and c) whether courts must evaluate the impact of individualized damages issues in determining whether class certification is appropriate. In addition, the majority’s opinion raises serious doubts about whether class certification is ever appropriate when there is no common method of calculating damages.

The opinion prompted an aggressive dissent from Justices Ginsburg and Breyer who attempted to minimize the impact of Justice Scalia’s opinion, arguing it was limited to merely the underlying antitrust case. Thus, while Comcast will affect class action jurisprudence across the board, just how far its defendant-friendly predominance and damages directives reach beyond the antitrust context will have to be played out in lower courts in the future.

The Comcast decision does leave key questions unanswered, however, including the question that many commentators hoped would be addressed: whether the Daubert standard for expert witnesses applied to expert testimony at the class certification stage.

THE COMMON DAMAGE ALLEGATIONS

The facts of Comcast illustrate how each case can alter the contours of class certification. Here, plaintiffs were a class of cable subscribers who brought a monopolization claim under Section 2 of the Sherman Act, claiming the defendant cable company used an anticompetitive “clustering strategy” that drove up prices in the Philadelphia media market. Plaintiffs sought to certify a Rule 23(b)(3) class and, to satisfy the predominance element, had to prove both that (1) the existence of individual injury resulting from the antitrust violation (antitrust impact) could be proven with evidence common to the class, and (2) damages to the class were measurable on a class-wide basis using a “common methodology.”

Plaintiffs argued that the challenged “clustering strategy” raised cable subscription rates via four theories of antitrust impact. To show that damages could be measured on a class-wide basis, plaintiffs relied upon a statistical regression model that measured the effect of the four antitrust impacts on cable prices. Ultimately, the District Court only accepted one of the four theories.

The defendant argued that plaintiffs failed to prove that damages resulting from one antitrust impact could be calculated on a class-wide basis. The defendant reasoned that plaintiffs’ model was designed to measure damages from all four antitrust impact theories and did not isolate damages resulting from the single allowed theory. The District Court certified the class anyway, and the Third Circuit affirmed, finding that inquiring into the merits of plaintiffs’ damages calculation methodology was inappropriate at the certification stage and that plaintiffs were not required to “tie each theory of antitrust impact to an exact calculation of damages.”

THE MAJORITY OPINION

The Court reversed. Justice Scalia began the opinion by reaffirming Dukes’ requirement that plaintiffs must “affirmatively demonstrate,” with evidentiary proof, that they have satisfied the Rule 23 requirements for class certification. While Dukes only addressed the four elements of Rule 23(a), the Comcast court specifically extended that rule to Rule 23(b), reasoning that a trial court’s duty to undertake a “rigorous analysis” of whether plaintiffs have satisfied Rule 23(a) certification requirements applies with equal force to Rule 23(b) requirements, uniquely Rule 23(b)’s predominance requirement. The majority found that the lower courts ran afoul of those requirements and sent a strong message to class action plaintiffs: an action cannot be certified under Rule 23(b)(3) for class treatment when it is evident that “individual damage calculations will inevitably overwhelm questions common to the class.”

Justice Scalia wrote, plaintiffs fell “far short of establishing that damages are capable of measurement on a classwide basis,” because plaintiffs statistical model could not separately measure the pricing injury caused by the one antitrust theory that was allowed. Thus, “in light of the model’s inability to bridge the differences between supra-competitive prices in general and supracompetitive 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.”

The majority also held that a district court may consider as much of the merits of a claim as necessary to determine whether a putative class of plaintiff’s meets the certification requirements of Rule 23. “Repeatedly,” Justice Scalia wrote, “we have emphasized that it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question.”

THE DISSENTING OPINION

The dissent took great effort in trying to minimize the impact of Comcast on all class action litigation. It seized on the majority’s factual interpretations regarding the specific damages model in the case, accusing it of “[i]ncautiously entering the fray” and, thereby, articulating “a profoundly mistaken view of antitrust law.” To the contrary, Justice Scalia wrote that analysis of the facts supporting the damages model was necessary, even at the class certification stage, because plaintiffs had to show that the model could be applied to measure damages on a class-wide basis. In response, Justices Ginsburg and Breyer made arguments to limit the Comcast majority’s influence by writing “the decision should not be read to require, as a prerequisite to certification, that damages attributable to a classwide injury be measurable on a class-wide basis.”

Yet, the dissent’s attempt to restrain the opinion’s influence is difficult to square with what the majority opinion actually says. In applying what Justice Scalia termed “the proper standard for evaluating certification,” he reversed a Third Circuit decision certifying an antitrust class where damages were “not capable of measurement on a class-wide basis.”

THE ABSENCE OF A RULING ON STANDARDS FOR EXPERTS AT CERTIFICATION

Notably, the majority did not explicitly address whether a district court must conduct a Daubert evidentiary analysis when considering a motion to certify a class. Both sides had briefed and presented oral arguments on whether a Daubert analysis, which examines whether expert evidence is admissible, should be required for certification. In addition, BakerHostetler attorneys filed an amicus brief on behalf of the Cato Institute, arguing that Daubert analyses are necessary prior to certification. The brief also asserted that the Court should enforce the basic commonality requirement of Rule 23.

It appears that Comcast’s lack of guidance on this issue may have been caused by an unforeseen procedural defect in the case. After oral argument in the case, the Court determined that it could not decide that precise question because the defendant did not object to the admissibility of the plaintiffs’ expert’s testimony, thereby failing to preserve the issue for appellate review. Resolution of that critical issue will therefore have to wait for another case.

THE IMPACT FOR ANTITRUST AND ALL CLASS ACTIONS

Although Justice Scalia labeled his opinion as a “straightforward application of class-certification principles” to the antitrust case before the court, it nevertheless works to raise the bar for certification of all other class actions. Before Comcast, several court decisions, including Wal-Mart v. Dukes, held that class certification could only occur if common questions of fact or law were applicable to the class from a liability standpoint. Whereas Dukes is widely viewed as a business-friendly decision for its strict common “question of law or fact” requirement with respect to class liability, Comcast takes Dukes a step further by applying that same commonality test to assess whether class-wide antitrust damages predominate over any individual issues.

Going forward, defense counsel can use Comcast as an example of just how important it is for a putative class to show that both liability and damages can be measured on a class-wide basis and that common questions are not overwhelmed by individualized determinations. This is true for all class actions, regardless of context.

The holding also provides defense counsel with another tool to emphasize the district court’s broad authority to analyze the merits of underlying claims in determining class certification, particularly when analyzing whether a proposed measure of damages is applicable class-wide based on common evidence.

While Comcast offers more tools to defense counsel in general, it remains unclear, however, just how much impact it will have on antitrust class actions. Comcast’s review standard for Rule 23(b)(3) appears to be no more rigorous than the standard federal courts presently apply to antitrust class actions. And, Daubert analyses of class certification experts, which Comcast stopped short of requiring, already is routine for antitrust cases.

It also remains unclear how much impact Comcast will have on the broader class action landscape, especially given the intensity of the dissent. While Comcast clarified the standard of proof for all Rule 23(b)(3) class actions, specifically in relation to predominating damages issues, the Court gives fairly little guidance to lower courts as to how plaintiffs must satisfy that burden with respect to damages — an important question, given that, as the dissent points out, courts have in the past certified classes that raise individualized damages issues.

However, Comcast has already affected one certified class action. On April 1, the Supreme Court summarily vacated and remanded for reconsideration, in light of Comcast the Sixth Circuit’s decision in Whirlpool Corp. v. Glazer, case No. 12-322, in which the Sixth Circuit had affirmed certification of design defect claims alleging Whirlpool’s front-loading washing machines had a “propensity” for mold-growth. Discounting Whirlpool’s evidence that approximately 97 percent of the putative class members never experienced mold growth in their washing machines, i.e., injury necessary for a liability determination, the Sixth Circuit opined that the plaintiffs “may” be able to show that each class member was injured at the point of sale by paying a “premium” for the machine as designed, even if some class members’ machines never developed mold problems. Reading between the lines, the Sixth Circuit’s standard for proof of common class-wide predominating injury may not suffice under Comcast.