Consumer Class Actions and Mass Torts

The Economic Loss Doctrine Is Alive and Well in Michigan

Russell Jackson — Fri, 19 Mar 2010 04:44:23 -0500

Recently U.S. District Judge John Feikens affirmed the report and recommendation of U.S. Magistrate Judge R. Steven Whalen, holding that Michigan's economic loss doctrine barred common law fraud claims in consumer fraud litigation. See Murphy v. The Proctor & Gamble Co., 2010 WL 889796 (E.D. Mich. Mar. 9, 2010).

The case clearly presented one of the most pressing consumer fraud issues of the day. (Not.) The defendant makes Fusion and Fusion Power handles for disposable razor heads. Fusion Power -- as you might guess -- houses a little battery and vibrates. Plain ole Fusion does not. The defendants also make Fusion and Fusion Power disposable razor heads that plaintiffs say are identical, except that Fusion Power razor heads cost a dollar more than plain ole Fusion razor heads.

(Can't you just picture a federal judge getting up in the morning and saying to himself "It's cases like this Murphy case that are why I went to law school. They're simply fascinating!")

The defendants moved to dismiss the common law "fraud" and "silent fraud" counts. Judge Feikens held that Magistrate Judge Whalen correctly analyzed Michigan law, concluding that the economic loss doctrine bars torts claims for purely economic losses arising out of the quality of the goods because such claims arise out of contract -- not tort -- and are governed by the Uniform Commercial Code, not common law fraud. Although Michigan recognizes an exception for fraud in the inducement, that exception does not apply if the alleged misrepresentation concerns the quality of the goods sold. Accordingly, plaintiffs' claims were nothing more than contract claims repackaged as fraud claims, and thus were barred by the economic loss doctrine.

Although it was a close shave, the defendant got out of the common law fraud counts without so much as a nick.

Federal Court Refuses to Apply Cross-Jurisdictional Tolling to Virginia Claims

Russell Jackson — Thu, 18 Mar 2010 01:00:26 -0500

Recently the federal multidistrict transferee addressing Fosamax litigation, Judge John F. Keenan, adopted the majority rule and refused to apply cross-jurisdictional tolling of a state's statute of limitations in a products liability action. See In re Fosamax Prods. Liab. Litig., 2010 WL 908926 (S.D.N.Y. Mar. 15, 2010).

In Fosamax, a number of Virginia plaintiffs had brought personal injury actions for jaw injuries allegedly caused by the osteoporosis medicine Fosamax. Each of the plaintiffs' causes of action was untimely under Virginia's two-year statute of limitations. Plaintiffs argued that this was okay because, prior to the running of the statute of limitations, some Tennessee plaintiffs had brought a nearly identical action under Tennessee law as a class action, and it had been transferred to the federal MDL. Accordingly, they argue, they were entitled to toll the statute of limitations during the pendency of state law claims in the Tennessee class action. See id. at *2 (citing American Pipe & Constr. Co. v. Utah, 515 U.S. 538 (1974)).

The Fosamax court correctly recognized that very few states have adopted the rule of "cross-jurisdictional" tolling; although they might allow a prior class action in their own state to toll the statute of limitations for subsequent individual claims filed in that state, they generally have not allowed prior pending class actions in other states or in the federal system to toll the statute of limitations on individuals' claims in their state. See id. at *3. Class action tolling, you see, is a based on a complete fiction: namely, that absent class members actually know about the prior class action and are holding off filing new claims because they are relying on the class action to protect their rights. This is, of course, for the most part totally bogus. No absent class member is actually aware of the previously-filed class action. And although it may be one thing to follow this legal fiction for classes previously-filed in your own state of residence, it is something quite different to give tolling effect to class actions that were previously filed many states away or in the federal system. Are we really supposed to buy the fiction that some group of litigants actually knew about such foreign class actions and delayed taking action to enforce their rights because they were relying upon the previously-filed foreign class action to do so?

The Fosamax court said no, recognizing that courts that reject cross-jurisdictional tolling do so, in part, because to recognize such tolling would encourage forum shopping in the jurisdiction. Moreover, for a state like Virginia -- which does not recognize class actions generally -- giving a foreign class action such tolling effect would run contrary to the state's fundamental policy choices.

Federal Court Refuses to Certify Medical Monitoring and Property Damage Classes

Russell Jackson — Wed, 17 Mar 2010 06:38:55 -0500

Recently another federal court refused to certify a medical monitoring class because it presented too many individual issues. In Gates v. Rohm and Haas Co., 2010 WL 774327 (E.D. Pa. Mar. 5, 2010), the residents of McCollum Lake Village in Illinois sued the defendant, alleging that its specialty chemicals manufacturing facility contaminated their Village with vinyl chloride, causing a significantly increased risk of developing brain cancer and a drop in property values. They asserted the following claims: medical monitoring, public and private nuisance, negligent and intentional trespass, strict liability, negligence, negligence per se, CERCLA, and conspiracy. They sought class certification under Rules 23(b)(2) and 23(b)(3). After a three-day hearing, the court denied certification, holding that individual issues predominated.

Although the court found that the numerosity, typicality, and commonality requirements of Rule 23(a) were met, it expressed concern about the adequacy of representation requirement because the class, as defined, ran the risk of precluding people who later developed physical injuries from bringing claims for such injuries under the general rule against claim-splitting. The court ultimately assumed, without deciding, that the adequacy of representation requirement was met.

In analyzing the medical monitoring claim under Rule 23(b)(3), the court took issue with the failure of plaintiffs' experts to establish a minimum exposure level that applied to the entire class and represented a significant increase in the risk of developing disease. Plaintiffs experts had earlier admitted that such figures were necessary to establish the need for medical monitoring, but all that they ultimately could deliver were average exposure levels. They acknowledged that the putative class members' actual exposure levels varied significantly based on how long they spent outside, whether they also worked in the village, etc. Relying on Rowe v. E.I. DuPont de Nemours & Co., 2008 U.S. Dist. LEXIS 103528 (D.N.J. Dec. 23, 2008), the court rejected the use of exposure levels from risk assessments and concluded that individualized issues predominated and precluded certification of the medical monitoring class.

The court also held that the medical monitoring requested -- annual MRIs in asymptomatic individuals -- were problematic from a class certification perspective; the risks for various individuals (children, people with kidney disease, claustrophobic patients) made it unlikely that "'informed physicians, unaffected by litigation considerations, would recommend routine monitoring' with MRIs in asymptomatic patients such as the proposed class members." Gates, 2010 WL 774327 at *19 (citation omitted).

The court also rejected class certification under Rule 23(b)(2), holding that for the same reasons the class failed the predominance requirements, it also failed the "cohesiveness" requirement inherent in Rule 23(b)(2).

Finally, the court also rejected the property damage class proposed for certification under Rule 23(b)(3). For that class, the court concluded that plaintiffs could not prove that each property was exposed to vinyl chloride, and certainly not in the same amounts. Moreover, the fact of damages and the extent of damages were considerations weighing against a finding of predominance and superiority.

Gates is an example of a court that took its responsibilities seriously, holding three days of class certification hearings and receiving copious amounts of expert testimony on the key issues. It did not lightly come to the conclusion that the prerequisites of Rule 23 were not met.

Federal Court Refuses to Give Judge Gladys Kessler's Tobacco RICO Decision Issue Preclusive Effect in Light Cigarettes Litigation

Russell Jackson — Tue, 16 Mar 2010 01:00:27 -0500

It's the question a defense lawyer seldom actually confronts head-on, but one that is always at the front of his or her mind: how can the judgment against my client in one case be used to bind it in other cases?

Or, for you law review types: will the findings of fact and conclusions of law in this case subject the client to non-mutual collateral estoppel in a subsequent case?

Where there are multiple lawsuits, there is always a risk that someone may take the defendant's loss in one case and try to bar the defendant from presenting evidence on the issue in the next case, arguing that what was already found by a court once should hold true in the later action. That is called "collateral estoppel" or, more simply, "issue preclusion." The fact that the plaintiff in the second action is different from the plaintiff in the first action means that it is "non-mutual." The plaintiffs are different, but the defendant remains the same.

Some people can make it sound awfully efficient and useful to have one court's judgment bind a defendant on certain issues in subsequent trials. But the fact remains that -- particularly in mass tort litigation, where there are hundreds or thousands of such claims -- prematurely binding a defendant to one particular outcome deprives us of the benefit of a robust number of trials to see how patterns of liability or non-liability may develop. It's the American way to allow juries in different states to hear evidence and apply their own law to the facts and reach a conclusion, rather than having one trial decide everything. And it can seem downright un-American to prematurely cut-off a defendant's right to present a defense and hold it to a single jury's determination of an issue.

Recently, the question of issue preclusion was presented to a federal court in Maine that was presiding over a multidistrict litigation involving cases alleging fraud and unjust enrichment against Philip Morris and Altria for their allegedly fraudulent promotion of "light" cigarettes as being safer than ordinary cigarettes. See In re: Light Cigarettes Marketing Sales Practices Litigation, MDL Docket No. 1-09-MD-2068 (D. Me. Mar. 5, 2010).

In 2006, a federal judge in the District of Columbia -- the Honorable Gladys Kessler -- had issued a mammoth final judgment in a civil RICO case that had been brought by the Department of Justice against the entire tobacco industry. See United States v. Philip Morris USA, Inc., 449 F. Supp. 2d 1 (D.D.C. 2006), aff'd in part and vacated in part, 566 F.3d 1095 (D.C. Cir. 2009), petition for cert. filed (Feb. 19, 2010). That landmark case had proceeded for more than 7 years. It was tried to the judge; there was no jury. Judge Kessler had issued some 4,088 separate factual findings, and found the industry liable for a variety of alleged schemes to defraud.

The plaintiffs in the MDL pending in Maine wanted to use more than a thousand of Judge Kessler's findings of fact to bind Philip Morris and its parent, Altria, in the subsequent civil class action cases brought by individual smokers under state consumer protection laws and for unjust enrichment. Chief Judge John A. Woodcock, Jr., who is presiding over the Light Cigarettes MDL, thus was confronted with whether to impose non-mutual collateral estoppel on the defendants.

There are four basic requirements for issue preclusion generally: (1) the issues in the earlier and later cases must be identical, (2) the issues must have been actually litigated in the prior action, (3) the prior judgment must be final, and (4) the issue must have been essential to the final judgment, not merely incidental or collateral to it.

Chief Judge Woodcock determined that there was no doubt that the issues plaintiffs sought preclusion on were actually litigated before Judge Kessler, so requirement 2 was definitely met. And her judgment was properly considered final, even though a certiorari petition is pending before the United States Supreme Court, so requirement 4 was met, too.

But Chief Judge Woodcock had many doubts about whether the identity of issues requirement was met. Many of Judge Kessler's findings referred to the "Defendants" and were not specific to Philip Morris or Altria. He reasoned that it would be unfair to hold those two companies liable for the collective wrongful acts of all tobacco companies. Moreover, the "light cigarette" scheme was only one of six that Judge Kessler had held the industry liable for in her opinion, and it was unclear how heavily if at all, her judgment relied on the specific actions of Philip Morris and Altria regarding light cigarettes.

In addition, the period of time relevant to Judge Kessler had been fifty years. In contrast, many of the suits pending in Maine had much shorter proposed class periods that began near the time of Judge Kessler's opinion. Thus, the overlap of time may not be identical.

Chief Judge Woodcock acknowledged that there were some findings -- particularly relating to Philip Morris's knowledge about the health risks of light cigarettes -- that might be identical. But Chief Judge Woodcock was concerned that "because of the small number of findings related to light cigarettes, the Court is not convinced that they were central to [Judge Kessler's] conclusion of light cigarette fraud on the part of the enterprise." Slip op. at 15.

Indeed, the court concluded that the sheer volume of the findings plaintiffs wanted to use -- 1,083 -- proved that they could not possibly have been central to Judge Kessler's holding. As the court explained: "Judge Kessler included the lengthy findings so that readers could 'fully appreciate how massive the case is against the Defendants,' not necessarily because the facts were critical to her conclusion." Slip op. at 14 (citation omitted).

Ultimately, Chief Judge Woodcock applied the Supreme Court's decision in Parklane Hosiery Co. v. Shore, 439 U.S. 329 (1979) to decide against giving Judge Kessler's findings issue-preclusive effect in the cases before him. In Parklane Hosiery, the Supreme Court had counseled that where issue preclusion is being used by someone who was not a party to the prior suit, certain public policy and fairness factors also must be considered. Slip op. at 3.

Weighing those factors, Chief Judge Woodcock noted that the defendants had been deprived of a jury trial before Judge Kessler, whereas they would be entitled to one in the actions pending before him. He also expressed the very practical concern about "the possibility for jury confusion and the lack of efficiency." Id. at 15. Indeed, given the sheer number of factual conclusions that plaintiffs wanted to use (more than 1,000), the court noted that they would likely confuse the jury without presenting some background and clarifying testimony -- but that would defeat the whole efficiency purpose being used to justify issue preclusion. Id. at n.17. Moreover, the Supreme Court recently has admonished that punitive damages may not be used to punish a defendant for injuries it inflicted on people other than the plaintiffs; but using findings of fact from a prior trial necessarily would run afoul of that rule and would require potentially confusing corrective instructions. Id. at 15-16. In addition, the court concluded, little efficiency would be achieved because individual plaintiffs still would need to prove that they relied on the defendants' alleged misrepresentations and that they were actually deceived. Id. at 16.

Interestingly, Chief Judge Woodcock did not seem to take a position on one of the defendants' arguments that I found most logical and compelling: namely, that applying issue preclusion would be unfair under Parklane Hosiery because the defendants routinely had won jury verdicts in cases involving light cigarettes, and thus Judge Kessler's findings did not stand uncontradicted and could not be given preclusive effect without arbitrarily favoring one judgment over another. Id. at 7-8.

Ultimately, Chief Judge Woodcock's order is the third one that has refused to give issue-preclusive effect to Judge Kessler's behemoth 2006 order. Its careful reasoning is instructive and should give any court faced with mass tort litigation pause before artificially depriving a defendant of its right to present evidence to contest a claim.

Federal Court Rejects Nationwide Class Action Settlement

Russell Jackson — Mon, 15 Mar 2010 07:43:32 -0500

Continuing with our settlement theme, this post discusses True v. American Honda Motor Co., 2010 WL 707338 (C.D. Cal. Feb. 26, 2010), in which U.S. District Judge Virginia A. Phillip ultimately rejected as unfair a class action settlement that she had preliminarily approved last August. What changed in 6 months' time? And can the settlement be salvaged?

Plaintiffs in True had sued Honda under California's Unfair Competition Law, the False Advertising Act, and unjust enrichment, alleging that Honda had falsely advertised the fuel economy of its Honda Civic Hybrid vehicles between 2003 and 2008 and claiming that the class had relied on these misrepresentations in paying a premium price for the vehicles.

It would appear that this is yet another one of those lawsuits that claims that the federal fuel efficiency standards that are required to be posted on new vehicles require certain kinds of driving for hybrid vehicles that some people may not understand actually promotes fuel efficiency, so that when they buy the car and drive it as they would other non-hybrid vehicles, they do not achieve the same fuel efficiency as the advertised performance using the federal standard.

After 11 months of discovery, the parties engaged in mediation and negotiated a nationwide class action settlement that the District Court preliminarily approved. Notice went out to the class. Ultimately, there were a number of objectors and a coalition of 25 state Attorneys General that filed oppositions to the initial proposed settlement. The parties modified the settlement to meet many of the objections, and then moved for final approval by the District Court.

The proposed settlement did not create a settlement fund, but instead created certain categories of relief for class members. Every class member would receive a DVD that Honda would produce that would demonstrate how to maximize the fuel efficiency of their hybrid vehicles. Class members also could receive one of two rebates. Option A gave a $1,000 cash rebate to those who sell their Civic Hybrid and trade it in on an eligible Honda vehicle. Option B gave a $500 cash rebate to those who kept their Civic Hybrid and bought another eligible Honda vehicle. In addition, a small subset of class members could receive a $100 cash payment, but only if they complained to their dealer or Honda and the dealer or Honda kept a written record of it. Finally, there was "injunctive" relief requiring Honda to change the advertising phrase "actual mileage may vary" to "actual mileage will vary."

The proposed settlement provided a full release to Honda of all claims relating to the fuel economy of the Civic Hybrid, and it allowed for incentive payments of $10,000 and $12,500 to the named plaintiffs, respectively. Plaintiffs' counsel sought an award of $2,950,000, which Honda did not oppose.

Judge Phillip held that the class met the numerosity, commonality, and typicality requirements of Rule 23, but it failed the adequacy of representation requirement because the two named plaintiffs were part of the small subset of class members who would receive an actual $100 cash payment. This presented an inherent conflict with the other class members, the court explained. The court also held that the predominance and superiority requirements of Rule 23(b)(3) were met.

In assessing the fairness and adequacy of the settlement, the court challenged whether the sub-class of people who received a cash payment was fair at all. They had no stronger or weaker legal claims than anyone else in the class. And whether the defendants kept a record of their complaints was not in their control. The court concluded that "the settlement here draws an arbitrary distinction among class members with identical claims and injuries, and allows some to receive a cash award, and others only a DVD and a limited rebate. This is patently unfair, and counsels against approval of the proposed settlement." Id. at *11.

The court also assessed the value of the rebates, noting that this is a coupon settlement that is generally disfavored. The court analyzed whether the value of the settlement was reasonable in relation to the value of the class claims.

The court determined that the plaintiffs had reasonably strong claims. It rejected the defendant's preemption defense, discounted the issue of whether California law could apply to a nationwide class, and then proceeded to discuss how strong the California Supreme Court's decision in In re Tobacco II, 46 Cal. 4th 298 (2009) was for the class. The court did acknowledge, however, that a number of class members had objected to the settlement, indicating that they were pleased with their Honda Civic Hybrids and had achieved the mileage that Honda had advertised. Id. at *15. Indeed, the "majority of class members who opted-out . . . cited their satisfaction with the gas mileage they were receiving from their HCHs, or otherwise opposed the merits of the suit." Id. at *23.

The court rejected the conclusions of plaintiffs' expert, which had assigned monetary values to the rebates and the DVD.

The court also expressed great concern about class counsel's requested fee, noting that a "lodestar amount is particularly inappropriate where, as here, the benefit achieved for the class is small and the lodestar award is large." Id. at 20. The court also expressed concern about the procedures used to negotiate the fee:

The size of the fee request also raises concerns in light of the fact that it was negotiated at the same time as the substantive relief to the class. "Ordinarily, 'a defendant is interested only in disposing of the total claim asserted against it . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense.'" . . .

Here, of all of the components of the settlement, the only components with any determinative value are the attorneys' fees and incentive payments. Under the terms of the settlement, there is no certainty that class members will receive any cash payments or rebates at all, but class counsel will receive a three million dollar payment regardless of whether one or 10,000 class members file valid claims. Since there is no guarantee that [Honda] will pay any money out of the settlement to either class members or a cy pres beneficiary, to award three million dollars to class counsel who may have achieved no financial recovery for the class would be unconscionable.

Id. at *21 (citations omitted).

As a result of its analysis, the court concluded that the value of the settlement weighed against approval.

The decision in True demonstrates the continuing difficulty of obtaining approval of coupon settlements, even for weak claims that have little, if any, merit.

Ninth Circuit Refuses To Enforce Release in State Court Class Action Settlement

Russell Jackson — Sun, 14 Mar 2010 16:38:09 -0500

Last week the Ninth Circuit issued an opinion that highlights the fact that no matter how broadly you draft the release in a class action settlement, you can't necessarily count on a subsequent court enforcing it.

In Hesse v. Sprint Corp., No. 08-35235, Slip op. (9th Cir. Mar. 2010), plaintiffs brought a class action against Sprint, alleging that it improperly charged Washington State's business and operations tax as a line item to its customers when the law disallows such a pass-through and instead requires it to be part of the company's "operating overhead." Plaintiffs assert causes of action under Washington's Consumer Protection Act, breach of contract, and unjust enrichment.

Sprint moved for summary judgment in the trial court, holding that the action was barred by the release and judgment in a nationwide class action settlement entered by a Kansas state court (the "Benney Settlement") in 2006. The Benney Settlement involved a class of Sprint customers who were charged various federal regulatory fees between 2000 and 2006. The class in the Benney Settlement released:

any and all claims . . . that have been, could have been, or in the future might be asserted in the [Benney] Action[] or in any other court or proceeding which relate in any way to the allegations that . . . Sprint failed to properly disclose or otherwise improperly charged for surcharges, regulatory fees, or excise taxes, including but not limited to the [federal] Regulatory Fees; and all other causes of action . . . whether based on federal, state, or local statute . . . that have been, could have been, may be, or could be alleged or asserted by any Class member . . . against [Sprint] relating to . . . the subject matter of any of the claims alleged in the Benney Action.

Slip op. at 3852.

The plaintiffs in Hesse admittedly were members of the Benney class. The question, then, was whether the release in the Benney Settlement precluded plaintiffs' claims premised on Sprint's charging of a state-law tax (Washington's B&O tax) when the underlying claim in the Benney action had been the charging of federal regulatory taxes.

The Ninth Circuit held that "the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement." Id. at 3854.

The Ninth Circuit cited Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) to conclude that although the subsequent class could not mount an all-out collateral attack on the prior state court judgment, it could seek limited review of whether the procedures in the prior litigation afforded them due process. Slip op. at 3855. The Ninth Circuit found that the Kansas court had not made an explicit finding that the class representative in the Benney Settlement adequately represented class members who also had claims based on state taxes. Accordingly, the Ninth Circuit undertook its own analysis of the adequacy of representation in the Benney Settlement.

The Ninth Circuit held that because the named plaintiff in the Benney Settlement -- who, like me, hails from Missouri -- did not have claims based on Washington's B&O tax, he did not adequately represent the plaintiffs in the Hesse class. This was not only because he did not "vigorously prosecute the claims relevant to this case," but also because he "had an insurmountable conflict of interest with those members of the class." Id. at 3857-58.

The Ninth Circuit took care to indicate that it was not invalidating the Benney Settlement -- at least as to the release of all claims pertaining to the federal regulatory fees at issue in Benney. Instead, it held "only that any release of the B&O Tax Surcharge claims at issue in this case by the judgment approving the Benney Settlement would violate due process." Id. at n.5.

So are class action settlements only able to release the claims that the plaintiffs brought in the case? The Ninth Circuit said no, a release may be broader than the claims stated, but only to a point:

A settlement agreement may preclude a party from bringing a related claim in the future "even though the claim was not presented and might not have been presentable in the class action," but only where the released claim is "based on the identical factual predicate as that underlying the claims in the settled class action."

Id. at 3860 (quoting Williams v. Boeing Co., 517 F.3d 1120 (9th Cir. 2008)). The Ninth Circuit concluded that because "the Washington Plaintiffs' claims do not share an identical factual predicate with the claims resolved in the Benney Settlement," they were not derived from the same transaction or occurrence and thus could not be precuded by the Benney Settlement.

The Hesse opinion is an important read for all counsel who draft class action settlements.

Federal Court Holds State Product Liability Act Trumps other Causes of Action, Including the State's Consumer Fraud Act

Russell Jackson — Fri, 12 Mar 2010 04:00:00 -0500

We defense lawyers have grown so accustomed to plaintiffs trying to repackage a products liability claim as one for consumer fraud that we sometimes forget to check a state's products liability statute for potential defenses when the complaint fails to mention it and instead cites the state's consumer fraud act. But by failing to look at the product liability statute, we may be passing up an important defense, as was demonstrated in Mitchell v. Proctor & Gamble, 2010 WL 728222 (S.D. Ohio Mar. 1, 2010).

The plaintiff in Mitchell brought a putative class action against the maker of an over-the-counter heartburn medicine, Prilosec OTC. The plaintiff, who said he was the only one who became ill after a buffet-style dinner party, claimed that taking Prilosec OTC predisposed consumers to contracting food-borne illnesses. His class was defined as all consumers of Prilosec OTC from 2004 to the present. He asserted causes of action for strict liability failure to warn, negligent failure to warn, violations of Ohio's Consumer Sales Practices Act, breach of express warranty, and breach of implied warranty.

The court first analyzed the defendants' argument that the entire action was preempted by Ohio's Products Liability Act. The OPLA defined a "products liability claim" as a civil claim seeking recovery for compensatory damages from a manufacturer for death, personal injury, emotional distress, or property damage arising from the product's design, any warning or instruction, or the product's failure to conform to a warranty. Id. at *2-*3. The OPLA had eliminated all common-law product liability causes of action.

The plaintiff sought recovery for "treatments for food-borne illnesses," "the purchase price of the product," and the difference between the market value of the product and its actual value. But the court held that "[plaintiff] cannot separate out his claims from the purview of the OPLA simply by claiming only economic losses. His claims . . . are products liability claims. And the injury he is alleged to have suffered relates directly to that product." Id. at *4.

The court also noted that there was a long line of authority holding that where a plaintiff used the consumer fraud statute (the OCSPA) to assert claims that were primarily rooted in products liability claims, the OPLA preempted those claims, too. Id. Accordingly, the court dismissed all of plaintiff's claims without prejudice for him to plead a proper claim under the OPLA, which he had not previously cited. Thus, an unpled product liability statute proved to be the Defendant's best weapon to defeat a host of consumer fraud claims.

In dicta, the court also commented on the inadequacy of the factual pleadings under the Rule 8 standard of Twombly/Iqbal. Plaintiff alleged that he attended a dinner, that he had been taking Prilosec, and that he was the only one who became sick. That, the court held was not enough:

Nowhere in [plaintiff's] factual allegations does he connect his assertion that Prilosec OTC increase the risk of foodborne illness with the circumstances surrounding his illness. Thus, his Amended Complaint is full of "naked assertions" that are lacking "further factual enhancement." This Court cannot make inference upon inferences to provide the factual enhancement to [plaintiff's] claims.

Id. at *5 (citations omitted).

Ultimately, the court held that plaintiff should have another chance to plead an OPLA claim with sufficient factual particularity. But it was clear from Mitchell that both the common law and OCSPA claims were preempted -- proving once again that it pays to check statutes that are not cited in the complaint when making decisions about motions to dismiss and affirmative defenses.

Torts Twits of the Month: NY Assembly Members Ortiz, Markey, and Perry

Russell Jackson — Wed, 10 Mar 2010 18:17:04 -0500

I'm instituting a new feature on the blog this month: "Torts Twit of the Month." Each month I'll name someone who has done something exceptionally ridiculous in the field of torts be our Twit of the Month. Who knows, if it catches on, perhaps we can vote for our favorite Torts Twit of the Year!

The idea came to me as I read about the legislation featured below. To be candid, I'm not at all sure that I'll be able to keep up a Torts Twit of the Month feature. Most folks who do things that I disagree with in the field of torts are motivated by a legitimate reason. I may not agree with it, but I wouldn't go so far as to call them a twit. Biased, maybe. Wrong even. But not a twit.

But every once in a while you come across some bozo who is just soooo far out there that he just cries out for recognition of some kind. Here are their stories.

Three members of the New York Assembly make up our first recipients of the Torts Twit of the Month honors. This great triumvirate sponsors legislation to ban New York restaurants from cooking with salt.

Yes, you read that right: BAN New York restaurants from COOKING with ANY salt WHATSOEVER!

This salty troika's bill would empower the Attorney General -- who surely has better things to do -- to go to court to enjoin restaurants that violate the salt ban "without requiring proof that any person has, in fact, been injured or damaged thereby." The bill also would allow civil penalties of up to $1,000 for each instance of a restaurant's use of salt in meal preparation.

Salt, of course, is the oldest known food additive. It enhances other tastes, so that sweets taste sweeter and bitters less bitter. Salt is used in everything from eggs to soups to baked goods. It even acts as a preservative in my favorite Easter ham.

Which is what makes it so darn ridiculous that our March Torts Twits want to ban it entirely from restaurants. These elected officials are no doubt motivated by a desire to improve public health by lowering our salt intake. They may even have compelling personal stories about family experiences with health issues caused by the overconsumption of salt.

But that does not excuse the sheer hubris of this trio of local politicos in deciding for the rest of New Yorkers that they shall never have salt in a restaurant meal again. That's no way to approach a public health problem. Education? Sure. Public information campaigns? You bet. Targeted interventions by medical professionals? Absolutely.

But for the arrogance to assume the power to tell New Yorkers what we can and can't eat in our increasingly expensive restaurants, these three Assembly members have jointly earned the title of Torts Twits of the Month:

Assemblyman Felix Ortiz

District 51 (Brooklyn)

Salt Ban Sponsor

Assemblywoman Margaret M. Markey

District 30 (Queens)

Salt Ban Co-Sponsor

Assemblyman N. Nick Perry

District 58 (Brooklyn)

Salt Ban Multi-Sponsor

Another Federal Court Denies Class Certification Where Class Is Overbroad

Russell Jackson — Wed, 10 Mar 2010 17:09:40 -0500

A recent tobacco decision out of the Northern District of Illinois highlights the importance of challenging the class definition in the defense of consumer fraud cases. in Cleary v. Philip Morris USA, Inc., 2010 WL 680957 (N.D. Ill. Feb. 22, 2010), plaintiffs had brought three different class actions against the tobacco industry. One was for illegal underage smoking, one was for nicotene addiction, and one was for allegedly deceptively marketing "low tar," "light," and "ultra light" cigarettes as safer than other cigarettes.

Because of summary judgments that previously had been granted, the first two classes failed for lack of a representative plaintiff. But the court considered the class certification motion for the "light" cigarettes case.

The class was defined expansively: "persons who purchased and consumed Marlboro Lights in Illinois 'from the time such cigarettes were placed into the stream of commerce until the date that the defendant publicly and adequately disclosed to consumers the true nature and effect of these cigarettes." Id. at *1.

The court found that the complaint met the numerosity and commonality requirements of Rule 23(a), but it failed to meet the typicality requirement for two reasons. First, the plaintiff did not explain how he intended to demonstrate that he suffered an injury from defendant's alleged fraud and how that was typical of the class members. Second -- and more important -- the court focused on the overbreadth of plaintiff's class definition.

As the court explained:

Class C is defined so broadly that it is likely to include persons who suffered no detriment at all due to Philip Morris's conduct. Some class members may have purchased Marlboro Lights for reasons wholly unrelated to its purportedly less-unhealthy qualities--for example, because they preferred the flavor of other brands. And other class members may have purchased Marlboro Lights despite being completely unaware of claimed differences between the adverse effects of "light" cigarettes and other, non-"light" brands. It is not entirely clear where Cleary fits in along this spectrum. Though it is true, as Cleary points out, that factual differences among the claims of class members do not necessarily defeat typicality, the likelihood that some significant proportion of class members experienced no injury at all does, at least in a case like this one in which proof of detriment is a necessary element of the claim.

Id. at *4 (citation omitted).

Whether the court treats it as part of the element of typicality, as the Cleary court did here, or whether it treats it as a fundamental problem with the class definition, "overbreadth" (i.e., including within the class people who were uninjured by the product) presents serious problems that go to the core of who is going to be bound by the verdict and how the proof is going to establish classwide truths. That is why courts increasingly are denying class certification to overbroad classes.

Microsoft Wins Another CPA Claim in Washington

Russell Jackson — Tue, 09 Mar 2010 15:18:46 -0500

Right around Christmas I gave you a boxed set of decisions involving Apple as a defendant. Today I thought I would even the score a bit and report on a short decision by U.S. District Judge Marsha J. Pechman regarding claims against Microsoft.

In Alvarado v. Microsoft Corp., 2010 WL 715455 (W.D. Wash. Feb. 22, 2010), the plaintiff had brought a putative class action under Washington's Consumer Protection Act, as well as a common law claim of unjust enrichment and a request for declaratory judgment. Plaintiff complained that customers who buy new computers and only want to run Windows XP must first buy a computer with Vista or Windows 7 and then "downgrade" their computer to XP.

Plaintiff alleged that she bought a Lenovo laptop that included a license to use the Vista Business Operating System.

Judge Pechman analyzed the CPA claim first, holding that plaintiff failed to plead that she was a direct purchaser, thus running afoul of the CPA's direct purchaser requirement. Washington's intermediate appellate court had rendered a decision in a pharmacy case that patients who buy medicines from a pharmacy are indirect purchasers who do not have claims against the maufacturers. See Id. at *2 (citations omitted).

She also held that plaintiff failed to identify an unfair or deceptive act or practice. Unfairness, under Washington law, requires a legislative declaration that certain acts are per se unfair. There were no such declarations here. Second, there was nothing deceptive about Microsoft's conduct of selling new computers with the most advanced operating systems. Because the plaintiff had been given multiple opportunities to plead a CPA claim, the court dismissed this count with prejudice.

The court dismissed the unjust enrichment count without prejudice. The court rejected Microsoft's argument that an indirect purchaser cannot assert an unjust enrichment claim. Id. at *5. She did note, however, that plaintiff never pled that she had to pay for a downgrade; in fact, from the complaint it seemed that she received both XP and Vista for the price of one. Accordingly, there was no unjust enrichment. And since there was no unjust enrichment and no violation of the CPA, there could be no declaratory judgment.

Financier Worldwide Publishes Article of Mine on Third Party Payor Cases

Russell Jackson — Wed, 03 Mar 2010 12:44:40 -0500

Recently I contributed an article to the magazine Financier Worldwide on the subject of third party payor suits in the United States. You can find the article here, in their March issue.

California's Second District Court of Appeals Takes Narrow View of In re Tobacco II

Russell Jackson — Sun, 28 Feb 2010 14:13:59 -0500

When the California Supreme Court issued its opinion last summer in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), many commentators viewed it as a fundamental sea change in California's Unfair Competition Law jurisprudence, reading concepts of standing completely out of UCL class actions. Others, however, were mindful of the context in which it arose, observing that the rules developed in tobacco and asbestos cases often are not rules of general application.

The Second District Court of Appeal recently issued a decision that suggests the latter view may be right. In Pfizer v. Superior Ct., 2010 WL 660359 (Cal. App. Feb. 25, 2010), a consumer had sued the manufacturer of Listerine for a promotion it had run in 2004 to 2005 in which some TV ads and some product labels suggested Listerine was as effective as flossing in preventing plaque buildup. The trial court had certified the following broad class: "all persons who purchased Listerine, in California, from June 2004 through January 7, 2005."

The Court of Appeal had reversed, holding that the class definition was overbroad because it included numerous people who had no claim as a matter of law. After the California Supreme Court decided In re Tobacco II, holding that Proposition 64's injury requirements do not apply to absent class members, it directed the Second District to reconsider its decision in light of the new opinion.

The Second District did so, and once again reversed the class certification. In examining In re Tobacco II, the court noted that the tobacco case involved a decades-long campaign of allegedly deceptive and misleading advertising to which nearly everyone was exposed. Id. The Second District held that although Tobacco II allows a plaintiff who actually relied on the misleading advertising to represent others who may have lost money as a result of it, "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." Id.

The court held that the class was overbroad because it encompassed many people who have no cause of action. The court noted that "unlike the saturation advertising promulgated by the tobacco defendants, the Listerine 'as effective as floss' campaign was limited in its scope and lasted just over six months." This led the court to conclude:

[L]arge numbers of class members were never exposed to the 'as effective as floss' labels or television commercials. As to such consumers, there is absolutely no likelihood they were deceived by the alleged false or misleading advertising or promotional campaign. Such persons cannot meet the standard of section 17203 of having money restored to them because it 'may have been acquired by means of' the unfair practice. In the language of section 17203, with respect to perhaps a majority of class members, there is no doubt Pfizer did not obtain any money by means of the alleged UCL violation.

Id. See also id. ("one who was not exposed to the misrepresentations and therefore could not possibly have lost money or property as a result of the unfair competition is not entitled to restitution").

Consumer Has No "Ascertainable Loss" under Consumer Fraud Act Where His Product Performed Throughout Warranty Period

Russell Jackson — Fri, 26 Feb 2010 14:46:22 -0500

Cars -- like diamonds -- are forever. Or so we'd like to think. I used to have a vintage Mercedes that I bought for $4,000. I loved to sit in that car. Of course, that's all I could do with it. It never really ran. But I looked fantastic in it, sitting in my garage. My friends used to say it looked like a sedan a Latin American dictator would be assassinated in -- which was fitting, since it killed me to junk that car (which, it turns out, was held together with Bondo).

Gilbert Noble, no doubt, knows what I mean. He bought a 1999 Porsche 911 Carrera Coupe in 2005. It was already out of warranty (4 years/50,000 miles). The 1999 911 was the first year that Porsche began equipping their products with a water-cooled engine. Gilbert used his car for about a year, when he started noticing smoke billowing from the tailpipe. It turns out that antifreeze had leaked into the car's oil through a defective cylinder, irreparably damaging the engine.

Gilbert wrote Porsche. Porsche said, "Sorry, you didn't buy the car from us, and it was out of warranty when you bought it." So Gilbert sued Porsche, asserting two causes of action: (1) strict liability, and (2) violation of New Jersey's Consumer Fraud Act. The court dismissed his claim on the pleadings. Noble v. Porsche Cars North America, Inc., 2010 WL 606305 (D.N.J. Feb. 19, 2010).

The court made easy work of Gilbert's strict liability claim, holding that it was barred by the economic loss doctrine, which "bars tort claims for harm sustained to the product alone, as opposed to harm to persons or other property damage." Id. at *3.

The claim under New Jersey's Consumer Fraud Act ("CFA") was more difficult. There are three elements to a CFA claim: (1) unlawful conduct, (2) an ascertainable loss, and (3) a causal relationship between the two. The court held that, under New Jersey law, "a plaintiff cannot maintain an action under New Jersey's CFA when the only allegation is that the defendant 'provided a part -- alleged to be substandard -- that outperforms the warranty provided." Id. at *4. To hold that the CFA covers parts failures beyond the warranty period "'would be tantamount to rewriting that part of [the] contract which defined the length and scope of the warranty period . . . [which] would also have a tendency to extend those warranty programs for the entire life of the vehicle.'" Id. (citation omitted).

Gilbert (and I) learned a valuable lesson: nothing lasts forever, and when you buy a used product outside of the warranty period, you bear the risk that the product will no longer work. That's how you can buy a Mercedes for $4,000, or a Porsche 911 for whatever Gilbert paid for it.

Justice Souter Reverses Order Denying Class Certification, Reasoning that It Failed to Rigorously Analyze Rule 23 Prerequisites

Russell Jackson — Fri, 26 Feb 2010 08:18:44 -0500

It's not often that you find a Supreme Court Justice commenting on mass tort class actions. But on Tuesday, retired Justice David H. Souter sat by designation on the First Circuit and issued an opinion in Gintis v. Bouchard Transp. Co., 2010 WL 617395 (1st Cir. Feb. 23, 2010). Of course, if you read this blog, you remember Gintis: it was part of the competing class actions that arose out of an oil spill in Buzzards Bay that I posted about previously. The District Court ultimately denied class certification of a public nuisance class because the individualized issues of "special injury" and damages predominated over the common issues.

On appeal, Justice Souter reversed the decision below because the trial court did not engage in a rigorous analysis of whether the class certification requirements were met. As Justice Souter characterized the opinion below, it "listed the elements to be proven by evidence that ultimately must speak to individual claims, and cited one precedent example among cases going different ways." Id. at *2.

Although Justice Souter did not dictate what the outcome should be on remand, it was clear that he believed a class should be certififed. Noting the defendant's objection to the use of its records and its challenge to the plaintiffs' expert's appraisal methodology, he posited that the defendant's "arguments in this appeal appear to show that substantial and serious common issues would arise over and over in potential individual cases." Id. at *3. He opined that with likely recoveries being between $12,000 and $39,000, and the defense challenging injury, causation, and compensation, this may be one of those cases "that may well go to the very reason for Rule 23(b)(3), mentioned before (i.e., to make room for claims that plaintiffs could never afford to press one by one)." Id.

You may remember that the District Court's decision had raised an interesting question: what is the preclusive effect of the state court's refusal to certify a broad class of property owners all over Buzzard's Bay? (Instead, it certified a much smaller class of property owners from one small town.) Justice Souter relegated that question to a footnote: "that judgment has no prelusive effect against these plaintiffs, who were neither parties to the state action nor in privity with those who were." Id. at n.2.

Texas Supremes Hold that a Litigant with Assigned Claims Was an Inadequate Class Representative

Russell Jackson — Sat, 20 Feb 2010 12:16:03 -0500

Yesterday the Texas Supreme Court issued a class action opinion that raises the fundamental question of what are the responsibilities of class representatives? In some jurisdictions, courts refuse to entertain challenges to the adequacy of class representatives, reasoning that so long as class counsel are capable, the class will be adequately represented. Texas lies at the other end of the spectrum, viewing the class representative as a real client who actually makes the decisions in the litigation, not the class counsel. Whether the class representative is a mere figurehead witness or an actual litigant has a significant impact on the adequacy of representation analysis.

In Southwestern Bell Telephone Co. v. Marketing on Hold, Inc., No. 05-0748, slip op. (Tex. Feb. 19, 2010) (now reported at 2010 WL 572876), the plaintiff and putative class representative, Marketing on Hold, was a company that audits its customers' telephone bills and seeks adjustments on their behalf for improper charges in exchange for 50% of what it recovers. The company convinced five of its customers to assign to the company their causes of action against Southwestern Bell, lowering its fee to 30% of recovery.

The theory of class recovery was that Southwestern Bell charged its customers a municipal fee that it had not been authorized to charge from 1991 to 1998.

The defendant challenged the plaintiff's standing to sue, arguing that the assignments of claim were void as against public policy. The Texas Supreme Court rejected this argument, observing that the assignability of a cause of action is generally freely permitted. Slip op. at 5. The court noted that plaintiff "already had a substantial financial interest in the claims against Southwestern Bell prior to assignments" (id.), and thus was not a "stranger/entrepreneur" whose actions "disrupt the class suit vehicle and distort the judicial process." Id. at 6. Accordingly, the court held the assignment was not against public policy and thus the plaintiff had standing to sue.

In analyzing the prerequistes to class certification under Texas's class action rule, Rule 42, the court found for the plaintiff on typicality and predominance. But the court held that the company with assigned claims failed the adequacy of representation test:

We believe courts should scrutinize carefully the motivating interests and incentives of parties that agree at an apparent financial loss to obtain the right to serve as the class representative. . . .

. . . We agree that [plaintiff's] interests conflict with those of the absent class members. [Plaintiff] is not an injured claimant seeking relief to make itself whole, but voluntarily assume the classwide injury in order to serve as the class representative. Unlike the class, [plaintiff] has a materially lesser interest in making itself and the class whole because it was never personally aggrieved by Southwestern Bell's alleged overcharging, and its maximum recovery is less than half the value of any individual claim for damages. For example, because [plaintiff] never paid the alleged overcharges at issue and can retain at best only thirty-percent of any recovery, [plaintiff's] incentive in settling quickly in order to minimize litigation expenses differs from class members who have overpaid and may be willing to hold out for a settlement that approximates their actual damages. For the same reason, [plaintiff's] motivation may encourage pursuit of theories of relief that are more efficient for it, but yield less recovery for absentee class members.

Id. at 16-17 (citation and footnotes omitted). The court went on to explain that although the plaintiff appeared to take a loss (30% rather than its contractual 50%) on the assigned claims of five customers, it still had a number of other contracts with other customers through which it stood to benefit by gaining control of the class action.

This troubled the court because of its view of the responsibilities of a class representative:

Class representation vests a great deal of power in the class representative. The class representative decides, among other matters, which claims to pursue and which to forgo, and the remedies and strategies to pursue in supervising class counsel. . . .

[Plaintiff's] lack of any claim of its own makes it unique among the members of the class. Its only knowledge of the claims it holds must be obtained from its assignors. . . . Both [of plaintiff's officers] indicated that they would rely heavily on [plaintiff's] counsel to conduct the litigation. While we recognize that class counsel's control over class litigation is often greater than it is in non-class litigation, the class action rule contemplates that the class representative is "not simply lending [its] name [] to a suit controlled entirely by the class attorney." 7A Charles Alan Wright, Federal Practice and Procedure sec. 1766 (3d ed. 2005). In this case, [plaintiff's] interest in the litigation by assignment removes it and its counsel one step further from the class members, enhancing the risk of conflicts.

Id. at 17-18. The court thus concluded that plaintiff failed to meet the adequacy of representation requirement.

Where the class representative is expected to control the litigation, Marketing on Hold demonstrates how entrepreneurial speculators who invest in litigation can present special opportunities for mischeif that counsel against allowing them to participate as class representatives.

Another Federal Court Dismisses Third Party Payor Suit

Russell Jackson — Thu, 18 Feb 2010 12:11:33 -0500

Continuing that long line of cases rejecting claims by third party payors seeking to recover sums paid for medicines that allegedly were promoted for off-label uses is Southeast Laborers Health & Welfare Fund v. Bayer Corp., Case No. 08-1928-MD-Middlebrooks/Johnson, slip op. (S.D. Fla.) (registration with Law 360 required to access link). In Southeast Laborers, the trial court had given plaintiff two extra opportunities to plead a claim under RICO or the New Jersey Consumer Fraud Act.

Plaintiffs alleged that Bayer promoted the $1,000-per-dose drug Trasylol for off-label use in controlling surgical bleeding despite its knowledge that there were cheaper, more effective medicines that presented less risks of kidney damage and other harms. In the Second Amended Complaint, plaintiff alleged that it "paid enormous sums of money to Bayer that they would not have paid had they been aware that Trasylol was not safer, more efficacious or of greater value than available alternatives that were significantly cheaper," and it "would never have incurred this expense had Bayer been honest about the safety and efficacy of Trasylol." Slip op. at 10.

The court held that this failed to plead the necessary proximate causation under RICO because it was tantamount to a "fraud-on-the-market" theory that nearly every court to consider the question has rejected outside of the securities context. Slip op. at 12. As the court explained:

Although Plaintiff argues that it had an independent choice of whether or not to pay for Trasylol, it does not explain how/why it made the choice to pay for Trasylol and how/why Bayer's alleged concealment of the dangers of Trasylol led Plaintiff to pay for Trasylol. Ultimately, Plaintiff has not established a different premise of proximate causation and still has not met the Holmes requirement that it demonstrate a direct relation between its payment for Trasylol and Bayer's alleged fraudulent concealment.

Id. at 13. The court thus dismissed the RICO claim with prejudice.

For similar reasons, the court dismissed the New Jersey Consumer Fraud Act claim with prejudice, holding that plaintiff had failed to properly allege proximate causation. Id. at 16 ("Plaintiff has not alleged a premise of proximate causation that is distinguishable from one that relies on a fraud-on-the-market analysis."). Plaintiff argued that a fraud-on-the-market analysis applies only where a plaintiff argues that the price was inflated by the alleged misrepresentations. But the court rejected this argument, saying that even where plaintiff alleges that it would not have paid any amount for the medicine and seeks a complete rescission of all sales, this, too, is a fraud-on-the-market analysis that has been rejected repeatedly. Id.

Plaintiff had added to the Second Amended Complaint express and implied warranty theories. The court dismissed the express warranty theory without prejudice for plaintiff's failure to identify any affirmation of fact, promise, or description of Trasylol that it had received that had become part of the basis of the bargain. Id. at 18-19. The court dismissed the implied warranty claim without prejudice because the complaint did not allege that Trasylol was unfit for the intended purpose of preventing perioperative bleeding. Id. at 20.

The court dismissed plaintiff's common law fraud and negligent misrepresentation claims with prejudice for failure to identify any reasonable reliance and/or proximate causation. Id. at 22.

And the court dismissed the unjust enrichment count because such claims generally are "not allowed to proceed where all of the plaintiff's other tort claims have failed because of the remoteness of a plaintiff's injuries from a defendant's wrongdoing. Id. at 23.

Southeast Laborers joins a growing body of law that prevents remote parties from bringing suits for speculative harm allegedly arising out of hundreds or thousands of individual doctor-patient decisions.

Federal Court Uses Service Contract to Dismiss Class Action Against Wireless Provider

Russell Jackson — Wed, 17 Feb 2010 09:17:47 -0500

On deck for this morning is another case that brings home the message: read those service contracts, folks, because they really can cut off your legal options.

In Minnick v. Clearwire US, LLC, 2010 WL 431879 (W.D. Wash. Feb. 05, 2010), customers sued the provider of wireless Internet and telephone service over the early termination fee ("ETF") contained in its contract. The wireless service, plaintiffs alleged, was unreliable, slow and often non-existent. But when they went to terminate service, the defendant pointed to the contract, which included an ETF of $220 less $5 per month of service the customer had since the beginning of the two year service contract.

US District Judge Marsha Pechman -- who has previously ruled on Microsoft matters discussed in this blog -- granted the defendant's motion to dismiss the complaint.

She began her analysis by looking at what law would apply. The contract provided that Washington or Delaware law would control. Plaintiffs identified no difference in the laws, so the court did not ultimately make a choice of law determination.

The gist of plaintiffs' causes of action was that the ETF was an unconscionable penalty and should be disregarded. The defendant convinced the court, however, that it was more analogous to an "alternative performance provision" that gave customers choices at the outset for how they would perform their obligations under the contract.

The court also analyzed UCC 2-302 -- even though this was a contract for services, not goods -- and observed that "unconscionability" is a defense to enforcement of a cause of action, but is not in itself a basis for restitutionary relief.

In analyzing the claim under Washington's Consumer Protection Act, the court noted that plaintiffs had two options: either the actions had to have the capacity to deceive a substantial portion of the public, or they had to constitute a per se unfair trade practice. The plaintiffs disclaimed a deception-based approach -- presumably since all of the contract terms were disclosed to customers before establishing service -- and instead relied on the "per se unlawful" prong of the CPA. But all they could point to were common law precedents about "unlawful penalties" in contracts. The Washington Supreme Court has held that the "per se unlawful" prong of the statute only applies to practices that the Legislature has declared unlawful. Thus, common law precedents did not cut it and the CPA count was dismissed.

Plaintiffs also asserted an unjust enrichment count. But "[u]nder Washington law, a plaintiff who is a party to a 'valid express contract is bound by the provisions of that contract' and may not bring a claim for unjust enrichment for issues arising under the contract's subject matter. Id. at *5 (citation omitted). Plaintiffs argued that they were merely engaging in "alternative pleading," but the court noted that the contract also had a severability provision, so even if the ETF provision were unenforceable, the remainder of the contract would survive and govern plaintiffs' payment obligations.

The court also rejected plaintiffs' breach of contract count based on the allegedly lousy service they received from the defendant. The contract provided that customer must notify the defendant in writing within 20 days if they disputed charges, and it limited damages to a credit for the customers' prorated monthly charges. Even these were not available absent a written request. Because the plaintiffs had not alleged compliance with these provisions, the court granted dismissal of the breach of contract count.

Finally, the court rejected the plaintiffs' count for false advertising under the CPA. The court noted that no plaintiff identified statements that they relied upon, and therefore "they have not alleged a plausible basis to identify CPA causation." Moreover, the court pointed to the FAQ section of the defendant's website, which "state[d] that the quality of service may vary depending on geography and modem placement."

Minnick is an important reminder that service contracts matter, and that they can be important tools to prevent class action litigation.

Federal Court Narrows Class Using Standing and the NJ Products Liability Act

Russell Jackson — Wed, 10 Feb 2010 09:40:10 -0500

In Levinson v. Johnson & Johnson Consumer Cos., 2010 WL 421091 (D.N.J. Feb. 1, 2010), Judge Dennis Cavanaugh was confronted with yet another attempt to turn a product liability action into a consumer fraud class action by carefully pleading only economic harm and a failure to disclose the risk of harm. Faced with motion to dismiss, Judge Cavanaugh significantly narrowed the class, but he allowed certain limited claims to go forward.

In Levinson, some Missouri plaintiffs brought a putative nationwide class action against J&J and Wal-mart, alleging that J&J's Baby Shampoo and Wal-mart's Equate Tearless Baby Wash contained trace amounts of chemicals that increase the risk of cancer, cause skin irritation, and can lead to asthma and hypersensitivity. Plaintiffs allegedly had independent lab tests conducted that identified trace amounts of methylene chloride (which FDA has banned from use in cosmetics), 1,4-dioxane and formaldehyde. Plaintiffs alleged that the defendants' failure to disclose the presence of these chemicals -- as well as statements such as "Ultra Mild," "Hypoallergenic," and "gentle enough even for newborns" -- constituted a violation of state consumer fraud statutes, a breach of the implied warranty of merchantability and implied warranties of fitness for a particular purpose, and unjust enrichment.

The defendants moved to dismiss for lack of standing and for failure to state a claim as a matter of law. In analyzing their standing argument, the court relied heavily on Koronthaly v. L'Oreal, 2008 U.S. Dist. LEXIS 59024 (D.N.J. July 25, 2008), a case involving the purchase of lipstick containing lead. Judge Cavanaugh described the holding in Koronthaly as "[i]n the absence of an FDA regulation concerning lead content in lipstick, or other legal prohibition, the plaintiff could not 'seek a remedy for a harm that she had not actually or allegedly suffered.'" Levinson, 2010 WL 421091 at *4 (citation omitted). Accordingly, the court held that plaintiffs lacked standing to assert purely economic harm from the chemicals that were unregulated by the FDA in soap or cosmetics (formaldehyde and 1,4-dioxane), but they could assert a claim for purely economic harm involving the substance that had been banned by the FDA for use in cosmetics (methylene chloride). As the court explained:

While the Court agrees that the assertion of an economic injury is not an automatic bar to standing, Koronthaly demonstrates that an exception has been recognized in the context of claims concerning defective products, absent a specific legal prohibition precluding particular ingredients or usages. Insofar as Plaintiffs' claims pertain to allegedly toxic chemicals that have not been banned by the FDA for use in cosmetics . . . this Court concludes that any potential injury is too remote, hypothetical and/or conjectural to establish standing in this matter. However, insofar as Plaintiffs' claims pertain to methylene chloride, a chemical explicitly banned for use by the FDA in any cosmetic, this Court declines to dismiss Plaintiffs' claims pursuant to Fed.R.Civ.P. 12(b)(1) for lack of standing.

Id. at *4.

The court then proceeded to analyze whether the individual causes of action stated a claim under Rule 12(b)(6). The parties apparently had represented to the court that regardless of whether New Jersey law or Missouri law were applied, the result would be the same, and thus there was no conflict of laws issue. Id. at *5. The court disagreed, holding that New Jersey's Product Liability Act preempted plaintiffs' other claims. The court relied upon Sinclair v. Merck & Co., 948 A.2d 587 (N.J. 2008), in which the New Jersey Supreme Court held that consumer fraud claims for economic harm allegedly caused by prescriptions for Vioxx were preempted by the Product Liability Act. Judge Cavanaugh concluded:

Similarly, at the heart of this matter is the potential for harm caused by the defective products, J&J Baby Shampoo and Wal-Mart Equate Tearless Baby Wash, containing allegedly "toxic chemicals linked to increased cancer risk, adverse skin reactions, and other serious health problems." (See Pl. Compl. para. 2). . . . [C]onsistent with the Sinclair decision, this court concludes that the PLA subsumes all of Plaintiffs' claims, effectively precluding Plaintiffs' claims with respect to the CFA, and otherwise, in the absence of "harm" as defined by the PLA. The Court does not agree that articulating a claim in terms of pure economic harm where the core issue is the potential injury arising as a consequence of the products' allegedly harmful chemicals converts the underlying defective product claim into an independent and unrelated consumer fraud issue. Limiting a claim to economic injury and the remedy sought to economic loss cannot be used to obviate the PLA.

Id. at *6.

Accordingly, because New Jersey's Product Liability Act would preempt all claims, but Missouri's would not, the court concluded there was a conflict of laws requiring it to determine which law would apply. Because the plaintiffs were from Missouri and bought and used the product there, the court concluded that Missouri law would apply to these plaintiffs' claims.

Missouri's Consumer Fraud Act requires a causal connection between the allegedly unfair practice and the plaintiff's harm. Where the harm allegedly results from a failure to disclose, "'there must be a showing that the [product] in fact suffered that defect, or evidence from which the defect reasonably could be inferred, in order to demonstrate an ascertainable loss as a result of [defendant]'s failure to disclose the defect.'" Id. at *7 (citation omitted). The court concluded that as to methylene chloride, which the FDA had banned for use in cosmetics, plaintiffs had sufficiently pled a Consumer Fraud Act claim.

Similarly, the court concluded that, with respect to methylene chloride, plaintiffs had sufficiently pled claims for breach of implied warranties under Missouri law. Id. at *9.

However, the court held that plaintiffs had failed to plead a cause of action for unjust enrichment under Missouri law because they had not sufficiently pled that there was irreparable injury or the lack of an adequate remedy at law. Id. The loss was economic, and could be remedied by the payment of money, which could be recovered by an action at law. Thus, there could be no unjust enrichment.

For those keeping a tally, the court whittled the Missouri plaintiffs' claims down to the violation of Missouri's Consumer Fraud Act and breach of implied warranties solely for the inclusion of methylene chloride -- not the other substances. In concluding that New Jersey law would preclude all claims because of its Product Liability Act, the court also went a long way toward establishing why a nationwide class could not be certified. It remains to be seen where this action will go from here, but we will attempt to monitor it for you.

How Much Is That Doggy in the Window Worth if He Came from a Puppy Mill?

Russell Jackson — Sun, 07 Feb 2010 09:11:46 -0500

New Yorkers always warn: "Don't buy a dog at a pet store! They all come from puppy mills, are sick, and were raised in deplorable conditions."

But I bought my dog at a mall pet store. I wasn't shopping for a dog nearly two years ago when Ted came into my life. But decisions have consequences, and the decision to kill time at a pet store while waiting for friends to arrive for dinner at a nearby restaurant resulted in me sharing my apartment with Mr. Ted E. Bear.

I didn't know much about where he came from. His papers said a farm in Missouri, my home state.

And frankly, I didn't care. Although I sincerely hoped he had not come from a puppy mill, he had a very chill personality and I could tell we would get along well together. If he had the croup and I had to pay for a vet visit, so be it. (Thankfully, he didn't.)

Given this experience, I read Martinelli v. Petland, Inc., 2010 WL 376921 (D. Ariz. Jan. 26, 2010) with great interest. In Martinelli, 32 plaintiffs brought a class action against Petland, alleging that they defrauded consumers by selling sick dogs that were raised in puppy mills while representing to the public that the puppies were "healthy," "the finest available," bred by "professional and hobby breeders who have years of experience in raising quality family pets," and "bred under safe and humane conditions by a reputable breeder with proper canine husbandry practices." Plaintiffs plead causes of action under RICO, state consumer protection statutes, and unjust enrichment.

The court in Martinelli dismissed all but two plaintiffs' RICO and consumer protection claims for failure to adequately plead causation. The complaint was chock full of allegedly fraudulent statements made by Petland and the breeder, The Hunte Corporation, on websites and in written materials. Conspicuously absent from the complaint, however, were allegations saying that these statements caused them to make their purchase. The court noted that "not a single Plaintiff has alleged that he or she ever visited Defendants' websites, received Defendants' written brochures, or relied on a written health certificate or warranty." Id. at *3.

The court held that "absent some allegation of reliance, Plaintiffs have not pled a 'direct and proximate causal relationship' between Plaintiffs' injuries and [the] purported fraudulent scheme." Id. The plaintiffs argued that causation should be inferred as a matter of common sense, as no one would want to purchase defective goods. But the court noted that even if plaintiffs had received the alleged misrepresentations, the court could not presume that they were material to the plaintiffs' decisions to purchase the animals:

[T]here is no single, common-sense reason for a puppy purchase. A person might buy a puppy because he falls in love with it in the store window, he has heard it will make a good guard dog, he likes the price, he is referred to the store by a friend, or he finds the store convenient. It is not necessarily true that every purchaser would base his or her decision on the fact that the puppy was "the finest available" or was bred by professional, hobby, or USDA-approved breeders -- key misrepresentations identified in the amended complaint.

In making their common-sense causation argument, Plaintiffs focus exclusively on the health of the puppies, asserting that "it is illogical that Plaintiffs would purchase their sickly or dying puppy mill puppy absent a misrepresentation as to its health. . . . A person who falls in love with a puppy in the store window might well purchase the puppy in the absence of any representation concerning its health. However unwise, some people may even buy a sick puppy in order to provide it a good home and nurse it back to health. It simply cannot be said that a representation concerning the puppy's health is obviously relied on in the same way that a consumer looking for car wax relies on the product's label as "car wax" or in the same way that a person paying for a tax service relies on the assumption that the service will be available. Plaintiffs conspicuously have failed to allege that they relied on representations concerning the puppies' health, and the Court cannot assume that such representations were the reason Plaintiffs purchased the puppies.

Id. at *4 (citations omitted).

The court dismissed the RICO claims of all plaintiffs except two -- Plaintiffs Moskow and Galatis -- who alleged reliance upon oral representations made by Petland (but not the breeder, Hunte). Plaintiff Galatis allegedly was specifically reassured by a Petland employee that the puppy was healthy and "(1) it had never been sick, (2) was up to date on his shots, (3) was not hypoglycemic, and (4) was lethargic and quiet only because he was stuck in a cage all day long." Id. at *5. Plaintiff Moskow asked whether his puppy was from a puppy mill and he was assured that it was not. The court held that these oral representations were part of the scheme alleged in the complaint, and it inferred that plaintiffs had relied upon them in making their purchase. Thus, the RICO claim survived for Plaintiffs Moskow and Galatis.

The court applied the same analysis to the Rule 9(b) challenge to the complaint and to the state consumer protection act claims. The generic allegations of the vast majority of the plaintiffs failed to sufficiently plead causation:

Plaintiffs assert that reliance is not an element of many state consumer protection claims. But plaintiffs do not dispute that causation is an essential element. Indeed, "whether it be termed an issue of reliance or an issue of proximate cause, an appropriate rule is that where the defendant is alleged to have made material misrepresentations or misstatements, there must be a cause and effect relationship between the defendant's acts and the plaintiff's injuries. Thus, regardless of whether reliance is a required element under state consumer protection statutes, Plaintiffs "must at least allege that they were exposed to the offensive conduct." Plaintiffs other than Moskow and Galatis have made no such allegation.

Id. at *9 (citations omitted).

The court thus dismissed the state consumer protection claims except for Plaintiff Moskow's claim under the Maine consumer protection act. (Plaintiff Galatis was from Massachusetts, but the Massachusetts act had not been pled in the amended complaint.) It also dismissed the unjust enrichment claims for all plaintiffs except Moskow and Galatis; because the two had adequately pled a fraud-based claim, the unjust enrichment claim could stand, the court held.

Finally, the court rejected the defendant's assertion of the economic loss doctrine as a defense to the claims. Petland argued that because plaintiffs allegedly received damaged goods, they therefore were asserting typical warranty claims that give rise to purely economic loss. The court disagreed, observing that plaintiffs were seeking damages for being fraudulently induced into entering into the sales contract.

Martinelli is an interesting decision because it parses through the possible motivations underlying the purchase decision and holds that, after already having been given one chance to amend the complaint, a plaintiff cannot plead consumer fraud or RICO without pleading a causal connection between the allegedly fraudulent statements and the reason he made the purchase. Because this is an essential element of each class member's claim, it seems clear that individual issues would predominate a trial, making class certification unlikely.

West Virginia Jury Pool Too Opinionated to Seat a Jury in a Tobacco Trial

Russell Jackson — Fri, 05 Feb 2010 13:31:21 -0500

One of my news clipping services brought me this fascinating tidbit from The West Virginia Record: after 3 days of trying to empanel a jury in a massive liability trial over cigarettes, the court simply gave up. It had gone through 650 prospective jurors and only qualified 6 for potential service. According to the article, "Lawyers excused a woman who said people have no right to sue over diseases that are disclosed on the warning label of a package." Funny, I would have liked her on my jury.

The court will try again in June, this time with a panel of 2,000 prospective jurors.

The article's description of the trial raises some constitutional questions, too. Apparently one jury would participate in the liability trial, and if it finds the defendants liable, a second jury would be empaneled for a damages trial. Seventh Amendment, anyone? (Or at least, as my colleague Hayden Coleman correctly points out, its state constitutional equivalent?)