Consumer Class Actions and Mass Torts

What Recent Decisions Can Tell Us About Drafting Class Action Settlements

Russell Jackson — Fri, 26 Oct 2012 14:03:36 -0500

Yes, I admit that I took a far-too-extended break from this blog without getting your permission. I've missed you. In some other posts, I will report on what I did on my summer vacation.

But I'm back, baby!

I look forward to posting some more fulsome materials later. But today I'm in lovely New Orleans at the Annual Meeting of the Defense Research Institute. There have been some fantastic presentations here at this conference. I am getting ready to experience my 15 minutes (literally) of fame delivering a short speech on class action settlements at 4:30 p.m. You can view my PowerPoint -- because really, who could possibly consider giving a speech without having a bunch of slides to preoccupy one's bored listeners? -- by clicking here.

I had written an article on the same subject just a few weeks ago in the National Law Journal.

More later.

Muscle Milk's MTD Powers Through Most of Class Action Complaint

Russell Jackson — Tue, 17 Apr 2012 07:22:36 -0500

As I have noted repeatedly in prior posts, statements about the nutritional value or health effects of food and beverage products often serve as the basis for putative consumer fraud class actions. Increasingly, however, courts are taking a critical view of these theories, dismissing claims based on puffery or representations that no reasonable consumer would rely upon.

For example, in Carrea v. Dreyer's Grand Ice Cream, Inc., No. 11-15263, Slip op. (9th Cir. Apr. 5, 2012), the plaintiffs had alleged that the defendant had violated California's Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Law, and New York's GBL section 349 by putting various statements on the packaging for its delicious Drumsticks product. Plaintiffs alleged that putting "0g Trans Fat" on the front label was deceptive because there were trace amounts (less than 0.5 grams per serving) of trans fat in a serving. Plaintiffs argued that although the FDA allows such a statement to be made in the Nutrition Facts label, it was fraud to put this statement on the front label unqualified by the statement "per serving."

The Ninth Circuit affirmed the trial court's dismissal of the claim as preempted by the Nutrition and Labeling Act. Similarly, the court affirmed the trial court's holding that it would be implausible for a reasonable consumer to interpret the following statements to mean that Drumsticks are more nutritious or "wholesome" than competing products: "Original Sundae Cone," "Original Vanilla," and "Classic." The court noted that "it strains credulity to claim that a reasonable consumer would be misled to think that an ice cream dessert, with 'chocolate coating topped with nuts,' is healthier than its competitors simply by virtue of these 'Original' and 'Classic' descriptors." Id. at 3.

Last week the maker of Muscle Milk was largely successful in having a number of allegations dismissed from a putative consumer fraud class action alleging that statements about its nutritional value were deceptive. In Delacruz v. Cytosport, Inc., No. 11-3532 CW, Slip op. (N.D. Cal. Apr. 11, 2012), the plaintiffs claimed that Muscle Milk's beverage "Ready to Drink" and its snack bars ("Muscle Milk Bars") were deceptively marketed because they contained so many calories, saturated fat, and total fat, but still claimed to be healthy and nutritious.

The court looked to each set of representations allegedly made on the product, in advertising, and on the web. With respect to representations on the product itself, the only ones that the court found to be potentially actionable were the use of the terms "healthy fats" and "nutritional shake." The former suggests that the product has more unsaturated fats than it does, the court said. The latter gave rise to an overall allegation of nutritiousness that could be actionable, the court explained.

The defendant argued that because the fats and other components were specifically listed in the Nutrition Facts panel, there could be no deception as a matter of law. But the court rejected this argument, reasoning that where the package has an affirmative misrepresentation, the defendant should not be allowed to rely on the small print of the Nutrition Facts panel to contradict it. Slip op. at 13 (citing Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th cir. 2008); Yumul v. Smart Balance, Inc., 733 F. Supp. 2d 1117 (C.D. Cal. 2010)).

But the court rejected plaintiff's claim that the statement "Healthy, Sustained Energy" on the product labels was misleading, reasoning that "the term 'healthy' is difficult to define and Plaintiff has not alleged that the drink contains unhealthy amounts of fat, saturated fat, or calories from fat, compared to its protein content, based on any objective criteria." Slip op. at 13-14. Plaintiffs had compared the fat content of defendants' products to Krispy Kreme donuts. But the court held that this was unhelpful because plaintiff did not "explain how much protein, vitamins and minerals are in such a doughnut or posit an objectively healthy ratio of protein to fat. Slip op. at 14. With respect to the snack bars, plaintiff had also alleged that "healthy" was deceptive because it did not disclose that the bars contain saturated fats, fractionated palm kernel oil, and partially hydrogenated palm oil. The court rejected this, stating that plaintiff did not allege that these fats were trans fats.

Looking at the advertising, the court rejected plaintiffs' claim based on the following statements, which it concluded were non-actionable puffery:

Go from cover it up to take it off.

From invisible to OMG!

From frumpy to fabulous.

Slip op. at 14.

And in analyzing the website, the court considered this statement: "Ready-to-Drink is an ideal nutritional choice [if] you are . . . on a diet." The court concluded that this, too, is puffery: "The word 'ideal' is vague, highly subjective, and non-actionable, like 'superb, uncompromising quality,' addressed in Oesteicher v. Alienware Corp., 544 F. Supp. 2d 964, 973 (N.D. Cal. 2008), and 'high performance' and 'top of the line,' addressed in Brothers v. Hewlett-Packard Co., 2006 WL 3093685, at *4-*5 (N.D. Cal. 2006)." Slip op. at 15.

Thus, after all of the statements challenged by plaintiffs, the court concluded:

the sole cognizable misrepresentation that Plaintiff has plead is the 'healthy fats' statement on the fourteen ounce Muscle Milk RTD container, buttressed by the 'nutritious snack' statement.

Id.

These decisions -- particularly coming, as they do, from the People's Republic of California -- provide some encouragement that courts are becoming increasingly comfortable with excluding challenged representations as non-actionable as a matter of law where they are puffery or could not be reasonably relied upon by a reasonable consumer to produce an injury.

The Global Warming Blame Game: District Court Thwarts Comer's Second Coming

Russell Jackson — Wed, 21 Mar 2012 06:31:54 -0500

I've previously opined on this blog and elsewhere that global warming litigation -- at least cases in which individuals seek damages from companies that emit greenhouse gasses -- has no leg to stand on because causation is so attenuated and the issue is tied up with important political questions that are committed to the expertise of federal agencies like the EPA, as well as Congress.

My viewpoint was confirmed a few years ago in a case called Comer, in which a Mississippi federal court dismissed a class action filed by Hurricane Katrina victims who sought to blame their loss on various energy and mining companies. The trial court had held that the chain of causation was too attenuated to confer constitutional standing on the plaintiffs, and it further held that the case should be dismissed under the political question doctrine because it required the federal court to decide policy questions about greenhouse gas emissions that were committed to the province of the political branches.

Comer had a curious subsequent history. Plaintiffs appealed to the Fifth Circuit, where they won a partial victory, with the appellate court reversing the judgment on the state law claims of public and private nuisance, trespass, and negligence. The defendants, however, petitioned for rehearing en banc, and the Fifth Circuit granted the petition and vacated the three-judge panel's decision. Then, a Fifth Circuit judge was recused, resulting in the loss of a quorum for an en banc panel to act. The Fifth Circuit thus dismissed the appeal and reinstated the District Court's opinion. Plaintiffs did not petition the U.S. Supreme Court for certiorari, but instead petitioned for a writ of mandamus to require the Fifth Circuit to reinstate the appeal. The Supreme Court denied plaintiffs' petition, and thus the District Court's opinion dismissing the lawsuit remained the law of the case.

In May 2011, Ned Comer and the other plaintiffs filed a virtually identical lawsuit in the same District Court asserting the causes of action the three-judge panel had said should have been remanded: public and private nuisance, trespass, and negligence. Plaintiffs sued the same defendants, and added a few more. Feeling as if it was Groundhog's Day, the defendants once again moved to dismiss.

Yesterday the court issued an opinion unsurprisingly granting the defendants' motion to dismiss. See Comer v. Murphy Oil USA, Inc., No. 1:11CV220-LG-RHW, Slip op. (S.D. Miss. Mar. 20, 2012). The court's primary holding is that the suit is barred by the doctrines of res judicata and collateral estoppel. The 11 plaintiffs in Comer I are the same plaintiffs who have brought Comer II. The district court's order in Comer I was a final order dismissing the case for lack of jurisdiction, which is a decision on the merits for the purposes of res judicata. Plaintiffs had a full and fair opportunity to argue the issue in the first suit. The two suits involve the same "transaction," namely damages arising out of the occurrence of Hurricane Katrina. Moreover, the admitted purpose of the second lawsuit is to convince the court that it was wrong in the first lawsuit.

The district court's res judicata holding should have ended the issue. However the court, "out of an abundance of caution," went on to address the defendants' additional arguments.

The court held that plaintiffs lacked Article III standing to assert their state law claims. The court focused on the causation element of the standing inquiry. It noted that the U.S. Supreme Court found that a state had standing to bring a lawsuit to force the EPA to issue greenhouse gas regulations in Massachusetts v. EPA, 549 U.S. 497 (2007). However, the Supreme Court gave special deference to a state suing in its capacity as a quasi-sovereign, and expressly reserved the question of whether an individual would have standing to bring a global warming claim. Moreover, the Supreme Court had acknowledged that causation regarding greenhouse gases emissions was a difficult global problem, and that any domestic reductions in emissions likely would be offset by increases in developing countries.

The district court also observed that in American Electric Power Co. v. Connecticut, 131 S. Ct. 2527 (2011), the Supreme Court was equally divided on the question whether states had standing to file lawsuits against corporations to reduce greenhouse gas emissions, and it expressly reserved the question whether individuals could assert such standing.

The plaintiffs in Comer II relied on authorities under the Clean Water Act finding standing where the defendants were merely alleged to have contributed to plaintiffs' injuries. The district court distinguished their authorities, relying in part on Native Village of Kivalina v. Exxonmobil Corp., 663 F. Supp. 2d 863 (N.D. Cal. 2009), which had explained that CWA cases only find "contribution" standing where a presumption of standing arises as a result of a defendant's violation of federally-mandated pollution limits. Where, as here, there is no such federally-mandated limit on greenhouse gases (and thus no such violation), no presumption can arise. Moreover, even the CWA cases recognized that a point of discharge can be too remote from the plaintiff's injury to be legally recognized as a contributing cause. See slip op. at 21-22 (citing Friends of the Earth, Inc. v. Crown Cent. Petrol. Corp., 95 F.3d 358 (5th Cir. 1996) (plaintiffs whose injury was 18 miles from discharge did not have standing to sue over the discharge)).

Ultimately, the Comer II court recognized, even plaintiffs admit that global warming is attributable to numerous natural and man-made causes that interact cumulatively over the period of centuries to create climate effects:

The plaintiffs cannot allege that the defendants' particular emissions led to their property damage. At most, the plaintiffs can argue that the types of emissions released by the defendants, when combined with similar emissions released over an extended period of time by innumerable manmade and naturally-occurring sources encompassing the entire planet, may have contributed to global warming, which caused sea temperatures to rise, which in turn caused glaciers and icebergs to melt, which caused sea levels to rise, which may have strengthened Hurricane Katrina, which damaged the plaintiffs' property.

It is insufficient for the plaintiffs to allege that the defendants' emissions contributed to the kinds of injuries that they suffered.

Slip op. at 20-21. The court concluded that such tenuous causation should not allow plaintiffs to send the defendants on a discovery odyssey "that will likely cost millions of dollars."

The district court in Comer II also held that plaintiffs' claims were non-justiciable under the political question doctrine as established in Baker v. Carr. Plaintiffs argued that Massachusetts v. EPA had rejected that argument. But the district court held that Massachusetts v. EPA was fundamentally different because it involved the proper construction of a congressional statute. Here, the policy judgments regarding greenhouse gas emission levels were expressly committed to the EPA. Indeed, the district court noted, the Supreme Court had stated "that it possessed neither the expertise nor the authority to evaluate the policy judgments that EPA offered as justification for refusing to regulate motor vehicle emissions, such as issues involving foreign relations." Slip op. at 26. The Comer II court concluded:

[T]he plaintiffs are asking the Court, or more specifically a jury, to determine without the benefit of legislative or administrative regulation, whether the defendants' emissions are "unreasonable." Simply looking to the standards established by the Mississippi courts for analyzing nuisance, trespass, and negligence claims would not provide sufficient guidance to the Court or a jury. . . .

. . . The Supreme Court held that judgments concerning the reasonableness of greenhouse gas emissions are properly committed to the EPA, and if district courts were to make such judgments, those judgments would interfere and potentially conflict with the EPA's actions.

. . . The Court finds that the claims presented by the plaintiffs constitute non-justiciable political questions, because there are no judicially discoverable and manageable standards for resolving the issues presented, and because the case would require the Court to make initial policy determinations that have been entrusted to the EPA by Congress.

Slip op. at 28-29.

The district court in Comer II also concluded that plaintiffs' state law causes of action are preempted by the Clean Air Act and the EPA actions that it authorizes, relying primarily on American Electric Power Company v. Connecticut. That case had held that the CAA preempted a federal common law right to seek abatement of carbon dioxide emissions from power plants. The Comer II court reasoned that plaintiffs' state law claims here required the court to do the same thing the federal common law claim would have in Connecticut: determine the reasonableness of the defendants' greenhouse gas emissions. Accordingly, it held that the state law claims were similarly preempted.

The district court in Comer II also held that plaintiffs' claims were barred by Mississippi's three-year statute of limitations. Katrina had hit in 2005, but the lawsuit was filed in 2011. Plaintiffs argued that Mississippi's savings statute operated to toll the statute of limitations. The savings statute gives a plaintiff a year to commence a new suit where the prior suit has been dismissed or abated because of a defect or other matter not affecting the merits.

The district court held the savings statute did not apply because there was a judgment of dismissal with prejudice entered in Comer I. Plaintiffs could have asked the U.S. Supreme Court for a writ of certiorari, but they did not. Accordingly, the judgment was final.

There is, however, a slim reed of hope for plaintiffs to file a Comer III. In ruling on the statute of limitations, the court concluded that plaintiffs' allegations about their future risk for more severe storms and loss of property are not yet actionable, in part because plaintiffs did not seek injunctive relief. "As a result, the Court finds that the only actionable claims filed by the plaintiffs are the claims concerning Hurricane Katrina, and those claims are barred by the statute of limitations." Slip op. at 33. Could another storm or another theory of injury produce a Comer III? It shouldn't. But with these Plaintiffs, who knows?

Finally, the district court granted the defendants' motion to dismiss regarding proximate cause, which is a required element of each of plaintiffs' state law claims. Mississippi defines proximate cause as a cause "'which in natural and continuous sequence unbroken by any efficient intervening cause produces the injury and without which the result would not have occurred.'" Slip op. at 34 (citation omitted). The court held that plaintiffs' theory couldn't meet this standard as a matter of law:

The assertion that the defendants' emissions combined over a period of decades or centuries with other natural and man-made gases to cause or strengthen a hurricane and damage personal property is precisely the type of remote, improbable, and extraordinary occurrence that is excluded from liability.

Slip op. at 35.

Judge Louis Guirola's opinion in Comer II is a strong reminder of the many difficulties that private plaintiffs would have trying to impose legal liability on companies for the purported effects of global warming. Although I do not expect plaintiffs' counsel to simply vacate the field in the wake of this opinion, the strength of the arguments against liability suggest why there has been no great rush of firms to file suits asserting these theories of liability.

Once Again the Louisiana Supremes Reverse Class Certification, Citing Causation as a Problem

Russell Jackson — Tue, 13 Mar 2012 07:08:38 -0500

In December I posted about Price v. Martin, in which the Louisiana Supreme Court expressly adopted the U.S. Supreme Court's analysis in Wal-Mart v. Dukes to reverse certification of a class of property owners who alleged that they were exposed to certain chemicals by a neighboring wood treatment facility. In Price, the court recognized that there was no real commonality because establishing damages and causation would require individualized analysis.

Just last week, the Louisiana Supreme Court issued a per curiam opinion demonstrating that Price was not an anomaly. In Alexander v. Norfolk Southern Corp., No. 11-C-2793, Slip op. (La. Mar. 9, 2012), the putative class action arose out of a chemical spill from a train in New Orleans in 2001. The Fire Department investigation had established that ethyl acrylic fumes leaked from valves in two cars that were parked for less than an hour waiting for another train. The firefighters tightened the valves, which solved the problem, and sent the trains on their way. No evacuation was called. Twenty people were treated at the scene for exposure and released. Hundreds of other people complained of eye/nose/throat irritation and a noxious smell. Naturally this spawned a class action, which was certified by the trial court and affirmed by the intermediate court of appeal.

The Louisiana Supreme Court, citing Price, reiterated that class certification requires a rigorous analysis and that there must be significant proof of a common question, the determination of which will "'resolve an issue that central to the validity of each one of the claims in one stroke.'" Slip op. (quoting Price quoting Dukes).

The court ultimately premised its reversal on the lack of predominance of common issues, and the need for individual trials:

[T]he district court failed to take into account undisputed evidence in the record demonstrating that any determination of damages will be dependent upon proof of facts individual to each putative class member. In particular, . . . plaintiffs' toxicologist testified that only those individuals with a unique susceptibility to ethyl acrylate would exhibit physical symptoms at the extremely low concentrations involved in the release, that this susceptibility would manifest itself in less than .1 percent of any given population, and determining whether any particular person was within this microcosm of the population would require an entirely individualized understanding of each person's health, medical history, records, and other variables impacting exposure. In addition, [he] testified that the dose of exposure would be impacted by important individual variables, such as the specific location of the plaintiff at the time of exposure, and whether the plaintiff moved from location to location during the exposure. Similarly, the defense toxicologist, . . . testified the symptoms complained of by the plaintiffs, such as irritation of the eyes and nose, respiratory irritation, coughing, nausea, and vomiting, are not specific or unique to ethyl acrylate exposure, but are common symptoms with a myriad of causes.

Given this testimony, it is clear that each member of the proposed class will necessarily have to offer different facts to establish liability and damages. . . . [T]he class would degenerate into a series of individual trials.

Slip op.

The decision in Alexander is a strong reminder that even in state court class actions, expert proof at the class certification stage is important because it can frame how the issues must be tried at trial.

Virginia Supremes Flatly Reject American Pipe Tolling

Russell Jackson — Mon, 05 Mar 2012 09:18:50 -0500

Previously I have discussed the federal doctrine of so-called American Pipe tolling, in which a legal fiction is employed to toll the running of the statute of limitations on absent class members' federal causes of action during the pendency of the class action -- at least until certification is denied or something else occurs (such as dismissal) that would make it unreasonable for an absent class member to think that her interests are continuing to be protected by the class action lawsuit. The whole doctrine is based on the legal fiction that absent class members actually are aware of the pending class action suit and would seek to intervene in it unless class action tolling of the statute of limitations applied to their claims.

American Pipe tolling is a judicially-created exception to federal statutes of limitations in federal courts. Whether a previously-filed class action has any effect on the running of the statute of limitations on a state law cause of action is for each state to decide. Most states have not directly considered the question. Of those that have, many do not give any tolling effect to class actions filed outside of the state, i.e., they reject cross-jurisdictional class action tolling. This makes sense, of course, when you remember that the whole tolling doctrine is premised on the fiction that absent class members are actually aware of the putative class action. That is much less likely where the class action was filed in another state far away.

Recently, the MDL transferee in the Fosamax litigation certified two tolling questions to the Virginia Supreme Court. The MDL transferee was faced with a motion for summary judgment on four individual claims brought by Virginia residents. Each was clearly outside the statute of limitations unless tolling was applied. Plaintiffs argued that the prior pendency of a putative nationwide class action filed in the Middle District of Tennessee operated to toll the running of the statute of limitations on their Virginia law claims for strict liability, negligence, and medical monitoring.

Virginia law doesn't even allow class actions in state court. So the MDL transferee asked two questions of the Virginia Supreme Court: (1) does equitable tolling apply to extend the statute of limitations during the pendency of a putative class action, and (2) does the statute of limitations itself allow for tolling during the pendency of a putative class action. The Virginia Supreme Court answered with a resounding "no." See Casey v. Merck & Co., No. 111438, Slip op. (Va. Mar. 2, 2012).

It first held that Virginia law is clear that there are no equitable exceptions to the statute of limitations. It then looked at the text of the statute of limitations itself. The statute does allow for credit to be given to a previously-filed action, but that previously-filed action must have been the same party as the party to the later suit. Here, different named plaintiffs had filed the Tennessee action -- albeit as putative representatives of all people who took Fosamax. The Virginia Supreme Court noted that Virginia law does not allow class actions and thus does not recognize such "representative" status. Accordingly, it held that there was no statutory authority for tolling the statute of limitations here because the parties to the two actions were different.

Casey thus squarely places Virginia in the camp of states that have rejected not only cross-jurisdictional class action tolling, but any form of class action tolling whatsoever.

Sixth Circuit Affirms Dismissal Based on the Voluntary Payment Doctrine

Russell Jackson — Mon, 05 Mar 2012 08:40:45 -0500

The Sixth Circuit recently affirmed dismissal of a putative class action against a car rental company based on the voluntary payment doctrine. See Salling v. Budget Rent-A-Car Sys., Inc., No. 10-3998, Slip op. (6th Cir. Feb. 29, 2012).

In Salling, Plaintiff challenged Budget's EZ FUEL fee. Under the rental contract, Budget will charge you the EZ FUEL fee (a flat, $!3.99 fee) for gas if you have driven the car less than 75 miles. To avoid having the fee charged, you have to fill the tank with gas and provide a receipt. The receipt requirement makes sense, since the amount of gas used on short trips may not be visible from looking at the gas gauge.

Plaintiff objected to paying the fee when he returned his car. But he apparently did not have his gas receipt with him. Ultimately, he paid the fee, receiving a receipt that broke out the EZ FUEL fee that he disputed. He then filed a class action against Budget. Budget removed it to federal court and moved to dismiss based on the voluntary payment doctrine. The trial court granted the motion, and Plaintiff appealed.

The Sixth Circuit first examined its jurisdiction, It observed that Budget bore the burden of proof on the jurisdiction question, but held that it met its burden with a spreadsheet that listed more than 1 million renters who drove less than 75 miles, were charged the EZ FUEL fee, and had a fuel gauge reading of "full" upon return of the car. The spreadsheet indicated that Budget collected $11.2 million from those drivers. This was enough to satisfy CAFA's pre-requisites.

The court then turned to the voluntary payment doctrine, finding that it is recognized by Ohio law. The doctrine is best described in this way: "money voluntarily paid by one person to another on a claim of right to such payment, cannot be recovered merely because the person who made the payment mistook the law as to his ability to pay." Slip op. at 5. The court noted that the Plaintiff had paid the fee in anticipation of filing suit, and held that the payment was voluntary. It explained that a payment that is made on a disputed construction of a contract term is not made under a mistake of fact, but rather under a mistake of law. Although a payment made under a mistake of fact might be recoverable, a payment made under a mistake of law is still voluntary and cannot be reversed. Slip op. at 6.

A little over a year ago I had written about an opinion from the Seventh Circuit written by none other than Justice Sandra Day O'Connor, which applied the "voluntary payment doctrine" with even more discussion. That opinion, along with the Sixth Circuit's opinion in Salling, reiterate that the voluntary payment doctrine is alive and well as a defense in consumer class action litigation.

DC Federal Court Grants Summary Judgment Striking Down Compelled Speech Regulations as Violative of the First Amendment

Russell Jackson — Thu, 01 Mar 2012 09:16:23 -0500

February 29, 2012 will go down as a red-letter day in First Amendment history. It was the day that U.S. District Judge Richard J. Leon struck down regulations in which the federal government tried to force product manufacturers to publish the government's opinions about their products. See R.J. Reynolds Tobacco Co. v. United States Food and Drug Administration, Civ. Case No. 11-1482 (RJL) (D.D.C. Feb. 29, 2012).

Last November, Judge Leon had granted a preliminary injunction against the regulations. R.J. Reynolds Tobacco Co. v. FDA, 2011 WL 5307391 (D.D.C. Nov. 7, 2011). Subsequently both sides had moved for summary judgment. Yesterday, Judge Leon granted summary judgment for the tobacco industry and denied the government's summary judgment motion.

In response to Congress's mandate in the Family Smoking Prevention and Tobacco Control Act of 2009, the FDA issued a final rule requiring certain "warnings" on cigarette packs. These "warnings" included 9 textual warnings, and ten graphic images. The graphic images include: a man blowing smoke through his tracheotomy hole, a cloud of smoke enveloping a baby being kissed by his mother, a pair of diseased lungs next to healthy lungs, a mouth with lesions, a man with an oxygen mask, a post-autopsy cadaver with chest staples, a weeping woman, a man wearing a t-shirt with the no-smoking symbol and the words "I QUIT," and a cartoon baby in an incubator. Each graphic displays "1-800-QUIT-NOW." These graphics are to take up 50% of the front and back panels of cigarette packages, and 20% of all printed advertising.

In publishing the final rule, FDA acknowledged that the graphic "warnings" are estimated to reduce smoking rates by 0.088%. Slip op. at n.7. Yes, that 88 thousandths of a percent. And that's the estimate of the anti-smoking zealots who are imposing the new rule. FDA conceded that such a reduction is "in general not statistically distinguishable from zero." Slip op. at 5-6.

Let's be absolutely clear about what the government was trying to do here. It hijacked 50% of the manufacturers' packages (and 20% of their print advertising) to force the manufacturers -- against their will -- to convey messages explicitly designed by the government's experts to manipulate people's emotions into preventing them from buying the manufacturers' lawful products. This was forced speech, plain and simple. Somebody call the ACLU!

The First Amendment, of course, does not allow the government to put opinions in your mouth and force you to repeat them. Such rules typically merit strict scrutiny. There was a fight in this case over whether strict scrutiny should apply. The government argued that it shouldn't because it was "commercial speech" that deserved less constitutional protection, and purportedly involved merely government-mandated informational disclosures designed to prevent consumer confusion or deception. See Zauderer v. Office of Disciplinary Counsel of Sup. Ct. of Ohio, 471 U.S. 626, 651 (1985).

Horsefeathers! These graphic images are not "purely factual" or "uncontroversial disclosures." As the court recognized, "the graphic images here were neither designed to protect the consumer from confusion or deception, nor to increase consumer awareness of smoking risks; rather, they were crafted to evoke a strong emotional response calculated to provoke the viewer to quit or never start smoking." Slip op. at 11. Indeed, the court cited the Institute of Medicine report, which clearly stated:

It is time to state unequivocally that the primary objective of tobacco regulation is not to promote informed choice but rather to discourage consumption of tobacco products, especially by children and youths, as a means of reducing tobacco-related death and disease.

Slip op. at 11. Because the FDA's mandated "warnings" were not factual statements designed to inform or educate, but instead were opinions that smoking is bad and people should quit smoking, the regulations were subject to strict scrutiny.

To withstand strict scrutiny, a regulation must be narrowly tailored to achieve a compelling government interest.

Judge Leon concluded that the government had not introduced proof of a compelling government interest: "Although an interest in informing or educating the public about the dangers of smoking might be compelling, an interest in simply advocating that the public not purchase a legal product is not." Slip op. at 16. Indeed, the court even noted that a study showed people already know and overestimate the health risks of smoking, which is why the use of even the graphic images proposed by the FDA was not going to appreciably change actual behavior. Id. at n.15.

Moreover, Judge Leon held that the restrictions were far from narrowly tailored. Notably, the court said, "there is no evidence that Congress even considered the First Amendment implications when drafting the Act." Slip op. at 17. And there were plenty of less speech-restrictive and burdensome alternatives than hijacking 50% of the manufacturers' packaging to achieve any legitimate government objective. For example, "the Government could disseminate its anti-smoking message itself" through a media campaign. It could have changed the display requirements to be less burdensome, such as reducing the "warnings" to 20% of only the front or the back of the package. It also could have selected graphics that conveyed only factual information, rather than playing on viewers' emotions. And it could improve law enforcement efforts to prevent unlawful sales to minors. As the court observed, "because Congress did not consider the First Amendment implications of this legislation, it did not concern itself with how the regulations could be narrowly tailored to avoid unintentionally compelling commercial speech." Slip op. at 19.

Villanizing tobacco companies is in vogue these days. But their products are lawful and are enjoyed by millions of Americans. Judge Leon understood that if the government is allowed to force these product manufacturers, however unpopular, to trumpet government opinions critical of their products, then before long it will do the same thing with other lawful products, like medicines or mobile phones. Government is a behemoth that already has in its arsenal many, many ways to make its opinions known and discourage the use of products that it opposes. It should not be allowed to conscript into its service manufacturers of lawful products and dictate that they speak against their own products. Thankfully, the First Amendment requires much more before the government can compel speech from its citizens.

Some Thoughts on McReynolds and Issues Classes

Russell Jackson — Tue, 28 Feb 2012 08:25:11 -0500

Once again, my friend Andrew Trask has beaten me to the punch with a post -- this time about Judge Richard Posner's decision in McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 2012 WL 592745 (7th Cir. 2012). In McReynolds, the court held that, in a class of 700 people, an issues class could have been certified on the question whether two facially-benign company-wide policies nevertheless had a discriminatory effect in practice.

You've gotta get up early in the morning to put up a post before Andrew. Given that he has described the opinion already, I won't say much here, other than offer a few thoughts.

First, the Seventh Circuit is one of the few circuits to hold that an issues class may be certified under Rule 23(c)(4) without a prior determination that certification is appropriate under some subdivision of Rule 23(b).

Second, the McReynolds court was not deciding that a class could be certified that would provide monetary relief to the plaintiffs. Rather, the court expressly recognized that "the only issue of relief at present is whether to allow the plaintiffs to seek class-wide injunctive relief." Id. at *9. That is why the court reversed the denial of certification under Rule 23(c)(4) and 23(b)(2).

Third, the court understood that the claims for monetary damages could not be tried as a class action:

Obviously a single proceeding, while it might result in an injunction, could not resolve class members' claims. Each class member would have to prove that his compensation had been adversely affected by the corporate policies, and by how much. So should the claim of disparate impact prevail in the class-wide proceeding, hundreds of separate trials may be necessary to determine which class members were actually adversely affected by one or both of the practices and if so what loss he sustained--and remember that the class has 700 members.

Id. at *8.

Fourth, and what I view as particularly important, the court invoked the decisions in Rhone Poulenc and Bridgestone/Firestone outside of a negligence -- or even a tort -- context to recognize that using a class action to achieve "consistency" of judgments on a particular issue may be unfair, and that -- particularly in the context of multiple claims for monetary damages -- it may be better for a series of trials to occur before different triers of fact so that some sort of pattern or consensus of judgments may emerge. As the court explained:

The Mejdrech decision, and Bridgestone/Firestone and Rhone-Poulenc more fully, discuss the danger that resolving an issue common to hundreds of different claimants in a single proceeding may make too much turn on the decision of a single fallible judge or jury. The alternative is multiple proceedings before different triers of fact, from which a consensus might emerge; a larger sample provides a more robust basis for an inference. But that is an argument for separate trials on pecuniary relief . . .

Id. at *9. In the mass tort context, we have the concept of what Francis McGovern has labeled "immature" and "mature" mass torts. "Immature" mass torts are those where few, if any, trials have occurred. "Mature" mass torts are those where scores of trials have played out in different geographic locations over enough time that plaintiffs and defendants have had the opportunity to adjust their claims and defenses, such that patterns have emerged and some predictability is inherent in the trial process.

McReynolds does not abandon the notion that, in cases for monetary damages -- which can bankrupt a company in an all-or-nothing class action trial -- a "larger sample" of smaller judgments (even those that conflict) is necessary to build a "more robust basis" for a conclusion.

Hump Day Grab Bag #1: Personal Jurisdiction

Russell Jackson — Wed, 22 Feb 2012 08:50:01 -0500

Wednesday. Woden's day. The day between Tyr's day and Thor's day. The middle of the week. Humpday. It's all downhill from here, baby.

I've awakened this Humpday with a grab bag of cases, each of moderate interest, but none with enough meat to fully satisfy. So today, readers, it's tapas. Small plates for you. Mangia.

First plate: Personal Jurisdiction. The Utah Court of Appeals recently issued an interesting opinion that applied the U.S. Supreme Court's recent gallimaufry of opinions in J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011).

In Gardner v. SPX Corp., 2012 WL 503722 (Utah. Ct. App. Feb. 16, 2012), the plaintiff's husband, a truck driver, was killed on his employer's loading dock when a vertical dock leveler fell on him. Plaintiff alleged that the control box was defective. It had been designed and made by a Canadian company. A Delaware corporation had an ownership interest in the Canadian company, but they were separate companies and all of the corporate formalities had been been observed, so no veil piercing could occur.

The control box manufacturer made its boxes based on the specifications of another Canadian company to which it sold the boxes. That company, in turn, sold the boxes to another Canadian company, which then sold the boxes to a US company that incorporated the boxes into dock levelers. Plaintiff argued that the Canadian control box manufacturer knew that the majority of dock levelers incorporating its component ultimately were sold in the United States to US users, particularly in the West.

The court held that this was not enough to meet the minimum requirements inherent in the due process concept of "fair play and substantial justice." The court analyzed the various opinions in Nicastro, observing that the "Court splintered on the question whether, in products liability cases, and especially products liability cases involving foreign defendants, the United States is more properly regarded as a 'single market' or fifty separate markets, each subject to a different authority." 2012 WL 503722 at *5. Focusing on the lack of "purposeful availment" of the forum's laws, the Utah court held that the Canadian control box manufacturer ("Schneider Canada") had not purposefully availed itself of the benefits of Utah law:

We conclude that, under the foregoing authorities, Schneider Canada lacks the requisite minimum contacts with the State of Utah. Schneider Canada is located and operates in Canada; it maintains no offices, owns no property, and has no employees in Utah. Schneider Canada manufactured the control box in question in Canada and sold it to a Canadian distributor. . . . Schneider Canada did not purposefully avail itself of the Utah market. It did not take active steps to sell its products in Utah. Although it was aware of potential sales in the United States, it neither advertised in Utah nor sent sales representatives to Utah. In short . . . the record does not show "special designing for Utah's market, advertising in Utah, establishing channels for providing regular advice to customers in Utah, or marketing the product through a distributor who has agreed to act as a sales agent in Utah." And although this was not as isolated a sale as occurred in [Nicastro], the record here does not show "special state-related design, advertising, advice, marketing or . . . special effort by the [Canadian] Manufacturer to sell in [Utah]."

Id. at *6 (citations omitted).

The court also focused on two other facts, which are interesting: regional sales, and the nature of the product as a component:

In addition, Schneider Canada's "knowledge of the mere possibility that its product might be taken into a region of the country in which Utah is located is not sufficient" to subject it to Utah's jurisdiction. Finally, unlike [the manufacturer in Nicastro], Schneider Canada "was a component-part manufacturer with 'little control over the final destination of its products once they were delivered into the stream of commerce.'"

Id. at *7 (citations omitted). The Utah court affirmed the dismissal of the Canadian control box manufacturer.

Hump Day Grab Bag #2: Fraudulent Joinder

Russell Jackson — Wed, 22 Feb 2012 08:47:22 -0500

Your second small plate: Fraudulent Joinder.

In Demarcet v. General Nutrition Corp., 2012 WL 525479 (W.D. La. Feb. 15, 2012), the plaintiff claimed to have suffered personal injuries after ingesting "Mega Men Sport," which he had bought at a GNC store. Plaintiff wanted to avoid federal court, so in order to destroy diversity, plaintiff needed to sue a Louisiana resident like himself. GNC, however, was a resident of another state. So what to do?

I know! Let's also sue the poor GNC store clerk who sold plaintiff the product!

Yes, that's what plaintiff's counsel did. And you can only imagine the trauma that poor hourly store clerk endured thinking that he might be held personally liable simply for selling a product for his employer.

As you can imagine, GNC removed the case to federal court, arguing that plaintiff's joinder of the employee was improper because there could be no cause of action against the employee under Louisiana law. In Louisiana, an employee cannot be held individually liable to a customer unless he has a personal duty to the customer that he breaches. The Louisiana Supreme Court has articulated a four-part test: (1) the employer must owe a duty of care to the customer, (2) the employer must have delegated this duty of care to the particular employee, (3) the employee must have breached that duty of care through his own personal fault, and (4) the duty must be personal to him and not delegated to another employee; personal liability cannot be imposed simply because of his "general administrative responsibility for performance of some function of the employment." Id. at *3 (citation omitted).

The plaintiff moved to remand the case to state court, and the federal court allowed limited discovery to be taken on the issue of the employee's duty. Analyzing the parties' evidentiary presentations, the court held that the employee had been improperly joined and that diversity jurisdiction thus was proper in the federal court:

The record establishes that defendant Lejeune was a GNC sales associate who was neither trained nor expected to extend warnings to customers regarding the potential risks posed by a product. As with all GNC sales associates, Lejeune was merely provided GNC information along with the Mega Man Sport label to answer questions or explain products to customers. GNC never advised Lejeune that he had a duty to inform customers as to how to properly take a supplement and never told him that consumers of Mega Man Sport should drink a lot of liquids when taking the product. The Mega Man Sport label does not contain any warning regarding the amount of liquids a person should consume when taking the product. . . . [T]he Court finds that Chase Lejeune was improperly joined.

Id. at *4.

Hump Day Grab Bag #3: Extended Warranty Service Contract

Russell Jackson — Wed, 22 Feb 2012 08:46:42 -0500

Small plate #3: Retailer's Extended Warranty/Service Agreements

I'm tickled pink (pun intended) to report a decision out of the People's Republic of Minnesota that actually enforces the terms of a contract and uses them as a defense to an unfair competition claim. Really. See Baker v. Best Buy Stores, LP, 2012 WL 539196 (Minn. Ct. App. Feb. 21, 2012).

In Baker, plaintiff bought a TV that had a one-year manufacturer's warranty. In addition, she bought Best Buy's four-year service contract. The service contract provided that if the TV failed during the duration of the contract, Best Buy would either repair or, at its discretion, replace the TV. In the next paragraph, it provided that "[o]ur obligations under this Plan will be fulfilled in their entirety if we replace your product." Again, in the "Limits of Liability" paragraph, the contract provided that "[i]n the event . . . we replace the product, we shall have satisfied all obligations under the Plan."

Plaintiff's TV stopped working nearly two years after purchase. Best Buy took the return and determined that it could not or should not be repaired, so Best Buy replaced the TV with a comparable model. It also told plaintiff that the service contract did not cover this new TV, and encouraged her to buy a new four-year service contract, which she did. Then, she sued, claiming that she originally had bought a TV with four years of service, and thus she should not be robbed of two years of service just because she returned the TV because it failed to work properly.

The court failed to credit plaintiff's argument and affirmed the trial court's decision in favor of Best Buy:

[A]ppellants purchased a television set and a service contract from Best Buy. The set subsequently malfunctioned after the expiration of the manufacturer's warranty, and Best Buy replaced it pursuant to the terms of the contract. Although the service contract was purchased for a four-year term, the plain language of the contract contains specific language limiting the length of the contract if certain events occur. This unambiguous language provided that the service contract is fulfilled if the television is replaced. The district court correctly concluded that appellants received the benefit of the bargain with Best Buy.

Slip op. at 3. The court rejected plaintiff's argument that the contract was really one for insurance, rather than a service contract. And it rejected the notion that the contract was unfair because it gave Best Buy sole discretion to terminate the contract by providing a new TV. As the court observed, that was the exact bargain spelled out in the contract, and the plaintiff agreed to its terms by signing the contract.

Plaintiffs then argued that the service contract was fraudulent and deceptive under Minnesota's Consumer Fraud Act and its False Statements in Advertising Act. The court rejected these claims as well, primarily for the reasons stated in its "breach of contract" section of the opinion, and because of plaintiff's failure to identify with particularity a single advertisement that she claimed was false and misleading. Slip op. at 4-5.

Ninth Circuit Affirms Dismissal of Unmanifested Defect Class Action for Lack of a Duty to Disclose

Russell Jackson — Mon, 20 Feb 2012 08:23:27 -0500

The Ninth Circuit issued an important opinion last Thursday, holding that an Unfair Competition Law class action cannot be premised on a so-called "duty" to disclose that a product might cease to perform after the expiration of the limited warranty. See Wilson v. Hewlett-Packard Co., No. 10-16249 (9th Cir. Feb. 16, 2012).

In Wilson the plaintiff alleged that certain of the defendant's notebook computers have a "defect" in the design of the powerjack that causes them to fail after the expiration of the two-year limited warranty. Plaintiff argued that the "useful life" of the computer is much longer than two years, and that the manufacturer had a duty to disclose the fact that the powerjack had an increased tendency to fail within this "useful life," and that the manufacturer violated the UCL and the Consumer Legal Remedies Act ("CLRA") by "concealing" that fact.

Plaintiff alleged that HP violated the CLRA by "representing that goods or services have . . . characteristics . . . which they do not have," and "representing that goods or services are of a particular standard, quality, or grade" that they are not. Slip op. at 1827.

The Ninth Circuit's opinion is a strong affirmation of the basic principle that if you are warranting a product for a period of time, you have no duty to disclose -- and thus cannot be liable for "concealing" -- information about product difficulties that may arise after the warranty period has expired (unless they present significant health or safety concerns). As the court explained:

California courts have generally rejected a broad obligation to disclose, adopting instead the standard enumerated by the California Court of Appeal in Daugherty v. American Honda Motor Co., 144 Cal. App. 4th 824 (Ct. App. 2006). Daugherty held that a manufacturer is not liable for a fraudulent omission concerning a latent defect under the CLRA, unless the omission is "contrary to a representation actually made by the defendant, or an omission of a fact the defendant was obliged to disclose." The Daugherty court found the plaintiff alleged no facts that the manufacturer was "bound to disclose," as the complaint did not allege "any instance of physical injury or any safety concerns posed by the defect." The court noted that the plaintiff merely alleged that the risk posed by the alleged defect was the cost to repair the product, which did not give rise to a duty to disclose. Consequently, the court also rejected plaintiff's UCL claim, since absent a duty to disclose, the failure to disclose a defect "that might, or might not" shorten the useful life of a car that "functions precisely as warranted throughout the term of its express warranty" is not an unfair or fraudulent business practice under the UCL.

California federal courts have generally interpreted Daugherty as holding that "[a] manufacturer's duty to consumers is limited to its warranty obligations absent either an affirmative misrepresentation or a safety issue."

Courts have also cited policy considerations to limit the duty to disclose, noting that to broaden the duty to disclose beyond safety concerns "would eliminate term limits on warranties, effectively making them perpetual or at least for the 'useful life' of the product." Under a contrary rule, as the Court of Appeal noted in Daugherty, the "[f]ailure of a product to last forever would become a 'defect,' a manufacturer would no longer be able to issue limited warranties, and product defect litigation would become as widespread as manufacturing itself."

Slip op. at 1827-29 (citations omitted).

The Ninth Circuit went on to analyze whether plaintiffs had pled the existence of an unreasonable safety defect, holding that they had not. Plaintiffs' second amended complaint had considerable detail about the alleged defect: that the powerjack, over time, would lose the solder on the pins connecting it to the motherboard, causing it to stop delivering power to the motherboard. The complaint also pled that some users had experienced severe overheating and fires with the computers. What the complaint did not do, however, was connect the alleged design defect to the fires in any way. Slip op. at 1834 ("As Plaintiffs do not plead any facts indicating how the alleged design defect, i.e., the loss of the connection between the power jack and the motherboard, causes the Laptops to burst into flames, the District Court did not err in finding that Plaintiffs failed to plausibly allege the existence of an unreasonable safety defect.").

The Ninth Circuit also noted that knowledge and intent were elements of plaintiffs' causes of action, and it held that plaintiffs had failed to adequately allege that HP had knowledge of the alleged safety condition. Slip op. at 1835. The mere fact alone that HP had access to aggregate information about product performance did not, according to the Ninth Circuit, establish the knowledge element. Of itself, it was far too speculative. Similarly, the fact that some customers had registered complaints about overheating was not enough to establish knowledge of a defect. The complaints merely established that some customers were complaining, and "[b]y themselves they are insufficient to show that [the manufacturer] had knowledge [of the defect]." Slip op. at 1839 (citation omitted).

Wilson is a strong decision that defendants should have in their armamentarium when faced with class actions alleging unmanifested defects.

Engle Progeny Case Is Instructive on Arguments About the Size of Awards for Punitive Damages and Non-Economic Damages

Russell Jackson — Thu, 16 Feb 2012 09:12:02 -0500

On Tuesday, Law360 reported that a Florida state appellate court had reversed a $41 million punitive damages award in a case brought against a tobacco company by the widow of a lifelong smoker. See R.J. Reynolds Tobacco Co. v. Townsend, Case No. 1D10-4585, Slip op. (Fla. App. -- 1st Dist. Feb. 14, 2012). The case is an "Engle progeny" case, in that it is a follow-on individual action arising out of the failed class action in Engle v. Liggett Group, Inc., 945 So.2d 1246 (Fla. 2006). The Townsend case is particularly interesting because the court was confronted with a very high non-economic damages award, as well as a high punitive damages award.

Plaintiff and her husband had married young in 1956 and were married for 39 years. Her husband was a lifelong smoker, and died of cancer at the age of 59. The jury awarded Mrs. Townsend $10.8 million for her emotional distress caused by the death of her husband. (The jury also determined that the husband shared 49% of the fault, and thus the defendant was only liable for roughly half of the award.)

The jury also awarded punitive damages in the amount of $80 million. Given the jury's fault allocations, the trial court entered a judgment that included a $40.8 million punitive damages award against the defendant.

The defendant's appeal was heard before a three-judge panel of Florida's intermediate appellate court. A majority of the panel refused to remit the compensatory award or order a new trial, even though they as much as acknowledged that the award was likely the result of the jury's inflamed passions. But the court did intervene with respect to the punitive damages award, sending the case back to the trial court to either remit the award or order a new trial on punitive damages.

THE COMPENSATORY AWARD

The majority freely acknowledged that the types of non-economic damages at issue in this case -- mental pain and suffering and loss of consortium -- are inherently difficult to measure. But, the majority instructed, Florida's jurisprudence puts the job of measuring such damages in the hands of the jury. Slip op. at 4. The majority did acknowledge that by statute, courts are required to give close scrutiny to damage awards to see whether they exceed a reasonable range of damages. The statute even includes criteria that include whether the award appears to be "indicative of prejudice, passion, or corruption on the part of the jury."

The majority concluded that "[a]lthough the $10.8 million compensatory damage award in this case is higher than the non-economic damage awards affirmed by this Court in the other Engle progeny cases that we have reviewed to date, we cannot say that the award obviously exceeds the 'reasonable range within which the jury may properly operate.'" Slip op. at 6 (citation and footnote omitted). It noted that there was a $5 million award in one post-Engle appeal, and a $7.8 million award in the other. The majority acknowledged that $10.8 million "is certainly at the outer limit of reasonableness for a case such as this," but said it did not shock the judicial conscience.

In his dissent, Judge T. Kent Wetherell II said that $5 million non-economic damage awards previously had "raised my judicial eyebrow, but the $10.8 million award in this case shocks my judicial conscience." Slip op. at 16-17. "[J]uries do not have free reign to turn widows of lifelong smokers into decamillionaires simply because [the defendant] is 'a deep-pocket defendant and "a present-day popular villain" and non-economic damages are difficult to measure," he cautioned.

Judge Wetherell observed that the cases the plaintiff had relied on to justify the compensatory award were cases that involved awards to parents for the death of a child, "which is a far more traumatic loss than the loss of a spouse to lung cancer after a lifetime of smoking." Slip op. at 18-19. He further noted that another case relied on by the majority -- which had let stand a $4.4 million non-economic damages award to a 7-year-old who had lost his mother in a horrific car crash -- had held that $4.4 million was "on the outer limit in size" of award that could be upheld. This award in Townsend was more than double that, and in Judge Wetherell's "view the sheer size of the award is a clear indication that the jury was acting on passion and prejudice."

Looking to the record, Judge Wetherell said the only conceivable explanation for the amount of the award was plaintiff's counsel's request, in closing argument, that the jury look to the salary of one of the defendant's experts and one of its executives as "reasonable gauges or measuring sticks" to value the time Mrs. Townsend lost with her husband because of his death from cancer. Judge Wetherell concluded:

[I]t appears that this false comparison was merely intended to shift the jury's focus in assessing damages onto the wealth of the defendant who caused the damages, and to that end, counsel's argument was nothing more than a thinly-veiled invitation for the jury to lavishly compensate Appellee for the death of her husband simply because [the defendant] could afford to do so. This argument was improper because compensatory damages should be based on the loss suffered by the plaintiff, not the defendant's ability to pay; however, it clearly worked, as reflected by the eight-figure compensatory damage award assessed by the jury.

Slip op. at 20. The only evidence of Mrs. Townsend's non-economic damages, according to Judge Wetherell, "consisted of little more than her testimony describing her long and happy marriage and testimony that her husband's death has been 'very hard' on Appellee. Surely the law requires more than a sympathetic plaintiff testifying that she is saddened by the death of a loved one to justify such a large non-economic damage award." Slip op. at 22.

THE PUNITIVE DAMAGES AWARD

In beginning its analysis of the punitive damages award, the court recited the purposes of punitive damages and cited the line of U.S. Supreme Court precedents establishing that due process imposes a limit on the amount of such awards.

The real issue in Townsend was the relationship between the amount of the compensatory award and the amount of the punitive damages award. The majority noted that the precedents indicated that the ratio of punitive damages to compensatory damages ordinarily cannot exceed the single digits, and it recognized that the U.S. Supreme Court had indicated in one case that a ratio of 4 to 1 "might be close to the line of constitutional impropriety." Slip op. at 12 (citation omitted). The court calculated the ratio here as being 3.7 to 1. Nevertheless, it held that the punitive damage award in this case was constitutionally excessive. Why?

There are two reasons. First, the court measured the $40.8 million punitive award against other reported punitive awards in tobacco litigation. It noted that the award here was much more than the $25 million award that had been approved on appeal in another case that involved "essentially the same conduct."

Second -- and perhaps even more important -- the court observed that the compensatory award itself was huge and at the outer limits of acceptability. The court looked to the U.S. Supreme Court's analysis in State Farm v. Campbell, where the high court instructed that "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee." Slip op. at 13 (citation omitted). The Townsend court then looked to the reasoning of the Eighth Circuit in Boerner v. Brown & Williamson Tobacco Co., 394 F.3d 594 (8th Cir. 2005). In Boerner, the jury had awarded roughly $4 million in compensatories, and $15 million in punitive damages. The Eighth Circuit, looking at the size of the compenatory award, said that a rough 1:1 ratiio was warranted, finding the punitive award excessive under state and federal due process guarantees. It thus reduced the punitive award to $5 million.

The Townsend majority was unwilling to pick a ratio or a number for the punitive award in its case. It said the evidence of reprehensibility did not make a one-to-one ratio the outer limit of a constitutional punitive damages award. And it returned the case to the trial court, either for a new trial on punitive damages or a remittitur that the plaintiff could agree to. Although he agreed with the majority that the punitive damages award was excessive, Judge Wetherell, in his opinion, disagreed with the majority's statement that "a 1 to 1 ratio is unwarranted," and also disagreed with the majority's conclusion that the punitive damages in Townsend should not be capped at the $5 million that had been awarded in another Engle progeny case, "particularly in light of the majority's observation (with which I agree) that there is 'nothing in the record to suggest that [the defendant's] conduct toward [Appellee] was any more wanton or reprehensible than it was toward [the plaintiff in the other case]." Slip op. at 16 n.11.

The Townsend decision is instructive because it demonstrates the types of evidence and arguments that both sides use in arguing about the size of damage awards. Evidence of awards from other cases, as well as record evidence of what was argued in the particular case, is extremely important in crafting an argument for or against the size of a particular damage award.

How Did Some Class Action Lawyers Become Humorless Prigs?

Russell Jackson — Wed, 15 Feb 2012 09:12:39 -0500

We all know about pheromones, right? They are chemicals that one animal secretes to attract members of the opposite sex. There's apparently a lot of research about the role of pheromones in the lives of insects. There's less research demonstrating any real role in the human species.

But pheromones are part of our popular culture. As a nod to my friends at Abnormal Use, I'll note that many comic-book heroes have powers based on pheromones. Stand-up comics joke about pheromones. Part of the joke is that we all know they don't have any huge impact on men or women. It's not like you can rub some magic elixir on your neck and instantly become an irresistable Cassanova. Or George Clooney. It's too bad, really. Some of us need the help. Which is part of what makes it fun to fantasize about such a possibility.

Dial has capitalized on this in a humorous advertising campaign for a Men's Body Wash called "Magnetic," which it describes as "Pheromone-Infused, Attraction Enhancing Body Wash.". Even the packaging is part of the joke. Its instructions for use include this tongue-in-cheek fourth step: "Stand back and watch the magic happen." Dial promotes this product with advertising, a website, and a Facebook page, all of which uses the same wink-and-a-nod type of humor.

Of course, some lawyer had to bring a class action lawsuit about this product, claiming that its marketing creates the false perception that it's going to help consumers attract women. But what's really surprising to me is that more than one humorless prig has filed such a suit, so now there can be a contest for control of the "litigation." Who knows? Perhaps someday there may even be a "Pheromone MDL"!

Ronald A. Marron of San Diego appears to be the first attorney to file suit, on February 3, 2012. His masterpiece of a complaint is available here. He even found a "representative" plaintiff, Mr. Robert A. Margolis, who actually was willing to plead under oath that he was "deceived by Defendants' representations about the quality and attributes of the Products, including but not limited to the purported ability of the Products to attract women because of pheromones in the Products, whereas ordinary soap does not contain pheromones." He even pleads that he would not have bought the products if he had known that the claims about attracting women were untrue. Mr. Margolis purports to represent a class of "[a]ll persons within the United States who purchased . . . [the Products] from the Products' release date in 2009 to the present . . ."

Apparently this suit seemed like such a brilliant idea that attorneys Craig Sean Mellon of San Diego -- along with Jeffrey M. Salas and John C. Wang of Chicago -- decided to copy it. (Imitation is the highest form of flattery.) They, too, filed suit in San Diego, on February 9. Incredibly, they, too, found a "representative" plaintiff, Mr. Frank Ortega, to plead under oath that he relied on the statements about pheromones and wouldn't have bought the soap if he had known it would not attract women. Mr. Ortega also purports to represent a nationwide class of frustrated men who bought the products from 2009 to the present.

This is the state of American class action practice, ladies and gentlemen. Really.

How did we ever sink this low? Well, I can tell you this much: it's no mistake that this suit was filed in California. California's Unfair Competition Law is often misinterpreted by its courts as removing fundamental elements of legal claims (such as reliance and causation) in the name of promoting the efficiency of class actions. This has led to the UCL being used for purposes far, far removed from righting actual wrongs. Instead, it's a hook that greedy attorneys use to play a game of "gotcha" with defendants. In these suits, clients don't search for lawyers; lawyers come up with the idea for a suit and then search for clients. They count on the fact that it will be costly enough and risky enough for a defendant to extricate itself -- even from ridiculous cases -- that the defendant will be willing to pay nuisance value to make the suit go away. And the result often is settlements that provide next to nothing to the class, but real dollars to plaintiffs' lawyers.

I, for one, hope Dial doesn't have to spend a single dollar on this incredibly stupid, wasteful litigation. But I know it will. So instead I hope every dollar will be spent fighting these suits, with not a dime in tribute.

Until the law is changed, or such suits otherwise become no longer economically viable for plaintiffs' lawyers, wasteful, "gotcha" class actions like these will continue to plague our courts, crowding out suits based on real grievances.

What's a Court's Responsibility on Class Certification Where the Defendant Defaults?

Russell Jackson — Tue, 14 Feb 2012 08:55:44 -0500

Last week I read a short article in Law 360 that piqued my curiosity. A state trial court in San Bernadino, California had certified a class of all purchasers in California of Lichi Super Fruit Weight Management Products. The attached order was all of a page-and-a-half. It merely parroted the language of the class action requirements. And, strikingly, it foisted onto the defendant all of the notice costs: "Defendant . . . is hereby ordered to pay costs that will be incurred by the Class administrator in giving notice to the Class and administration of any settlement." Settlement? Surely that was a bit cheeky, no?

I then looked at the date of the order: February 7, 2012. I scratched my head, reaching for the complaint, which was dated roughly two months before: December 9, 2011. I checked to make sure it wasn't merely an "amended" complaint. But no, it was the initial filing. So the suit had gone from filed to certified in less than 2 months. How?

I remember the pre-CAFA days of drive-by certifications, when Southern courts would certify classes ex parte on the day the complaint was filed. But this is 2012. We employ "rigorous scrutiny" of the class certification requirements now. Plaintiffs not only must plead a class action properly, they actually bear the burden of proving -- with evidence -- that the class certification prerequisites are met.

So I asked myself, was the Lichi defendant a victim of a run-by fruiting as Pierce Brosnan had been in the movie "Mrs. Doubtfire"?

Well, yes and no. A docket search reflects that service of process was made on the defendant right before the holidays, on December 19. Plaintiff filed her motion for class certification on January 9, 2012. Plaintiff moved for a default judgment on January 23, which was entered that day. The motion for class certification was heard on February 7 at 8:30 a.m., and no one showed up for the defendant. Hence, the class certification motion was unopposed, and granted that same day.

Now here's the question for you, dear readers. Where a defendant has defaulted and the plaintiff seeks class certification, what are the court's responsibilities? Remember that this is an "all purchasers" class alleging the product does not work. Does the "rigorous analysis" requirement still apply? Should the order reflect the fact that it was entered without the defendant posing an opposition? Do the court's obligations to absent class members become more or less important where the defendant is absent from the class certification process?

Discuss.

Post Script: My only time through San Bernadino County was during a 1993 drive of Route 66 from Chicago to Santa Monica. In Victorville, I was honored to meet a Route 66 legend: Miles Mahan. Mr. Mahan, who was in his 90's at the time, had created "Hulaville," a wonderful "half acre" of kitsch carved out of the desert, the crowning glory of which was a hula girl that had been on the sign of a Hawaiian restaurant. He had spirit trees covered with colored bottles, books of his own poetry, and a million stories of his life as a carney. He's gone now, of course. But I think of him every time I hear "Kingman, Barstow, San Bernadino . . ."

Kentucky Appeals Court Reverses Diminished Value Class, Rejects Fraud-on-the-Market Theory

Russell Jackson — Fri, 10 Feb 2012 11:42:48 -0500

My colleague, John Beisner, is involved in this case, so I'll merely report the decision here.

This morning the Kentucky Court of Appeals reversed a trial court's certification of a class of Vioxx users who asserted a diminished value theory of recovery under various consumer fraud causes of action. See Merck & Co. v. Ratliff, No. 2011-CA-000234-MR, Slip op. (Ky. App. Feb. 10, 2012).

The court embraced the "rigorous analysis" standard and cited Dukes.

The court held that the fraudulent misrepresentation and negligent misrepresentation causes of action presented too many individual issues that predominated over any common issues, making class certification reversible error.

Plaintiffs also had asserted a fraud-on-the-market theory. The court observed that such a theory has been employed by other courts in the securities context to create a presumption that class members relied on the defendant's alleged misrepresentations. But the court refused to import such a concept into Kentucky law, particularly in a consumer products case:

In the present case we have a corporate defendant that has allegedly disseminated false, fraudulent, or misrepresentative information into the marketplace. However, while we have sympathy for the users of Vioxx whose physicians may have relied upon such false or incomplete information, the "fraud-on-the-market" approach has never been recognized in this jurisdiction for a fraud or misrepresentation case. Further, every other jurisdiction we found which has been confronted with the theory has rejected it outside the securities litigation context. . . .

For this reason, we decline to recognize a similar theory here. Causation, reliance, and damages are required to be shown on an individual basis. Thus, if the action were tried as a class, after the common questions of Merck's representations in its marketing campaign were decided, the case would essentially fragment into a series of amalgamated "mini-trials" on each of these individualized questions. . . .

Thus, we find that common questions do not predominate. Further, because these individualized questions would substantially overtake the litigation, and would override any common questions of law or fact concerning Merck's conduct, we find that a class action is not the superior mechanism by which to try these cases. . . .

Slip op. at 15-16 (citations omitted).

MDL Court Denies Certification of Consumer Class Action Based on "Omissions"

Russell Jackson — Fri, 10 Feb 2012 08:26:54 -0500

On Monday, Law 360 reported that the judge in the Ford E-350 Van MDL denied class certification. The opinion -- although it is designated "not for publication" -- is a strong and important reminder of why consumer fraud and warranty suits present individual issues that often preclude any ability to certify a class. In re Ford Motor Co. E-350 Van Prods. Liab. Litig., MDL No. 1687, Civ. A. No. 03-4558, Slip op. (D.N.J. Feb. 6, 2012).

Plaintiffs alleged that Ford's "15-passenger" vans had a high center of gravity that leads to an unusually high risk of rollover, particularly where the van is full of passengers. Of course, they brought a "diminished value" class action that excluded anyone who ever actually experienced a rollover. Instead, the class sought recovery of the "diminished value" of the vans, as measured either in a decrease in the resale value or by the cost of a retrofit package that would add an additional axle and wheels to the vehicle.

The case had a tortured history of motions to dismiss and motions for summary judgment, such that the chart of remaining claims for plaintiffs from various states looked like a target shot full of birdshot. Plaintiffs ultimately moved for certification of: (1) a breach of implied warranty class for residents of NY, NJ, PA, GA, and MI, (2) a consumer protection statute class for residents of NY, FL, and TX, and (3) an unjust enrichment class for residents of CA, GA, and PA. In the alternative, they moved for certification of 8 statewide classes of "all purchasers" or others who acquired the vans within the class period. The class period was defined as 1991 to 2005 for all proposed classes. Slip op. at 5.

The court, citing Hydrogen Peroxide, recognized that it must give rigorous scrutiny to whether the plaintiffs had actually proven that the class action prerequisites were met. It ultimately concluded that plaintiffs had not proven that the predominance requirement was met, and thus refused to certify the class action. In doing so, it looked at each element of proof of each state law cause of action. Although that led to a bit of repetition in the 86-page opinion, the court's decision can be boiled down to the following basic points.

1. There was no uniform misrepresentation that every class member saw. Sales brochures changed over time, some class members saw no representations, others received oral representations from salesmen, and the safety disclaimers changed over time. And advertising changed over time for the product. Ultimately, proof of the representation would have to be an individual issue.

2. Class members were going to have to prove that they were actually deceived and acted to their detriment because of it. Plaintiffs who never received a misrepresentation were not deceived. Similarly, plaintiffs who read or heard the many media articles about the problem, or who -- incredibly -- had experienced rollover previously in other vans were not actually deceived. Indeed, one plaintiff, in negotiating the price, warned the salesman that the vans could only be driven by experienced, trained drivers like himself. These presented individual issues. See Slip op. at 33 ("Considering that Plaintiff's primary theory of damages at the class certification stage is a common benefit-of-the-bargain injury, it stands to reason that the consumers who saw these reports and understood the E-350 van to have significant handling problems will have a difficult time proving causation, and in doing so, they would not rely on common proof."). The court noted that --particularly in light of the published media reports about rollover and handling issues -- "Ford would be entitled to examine which class members had knowledge of the E-350's handling characteristics at the time of purchase, the extent of such knowledge, [and] whether the knowledge was derived from personal use or published reports." Id. at 43; see also id. at 51.

3. Plaintiffs would have to prove either that the product actually failed (e.g., exhibited a defect), or that they actually incurred repair costs or diminished value as a result of the defect. Sliip op. at 35. That is an individual injury. The court noted that a so-called "reputational injury" that somehow inhibits resale value does not injure those plaintiffs who have no intention of selling their vans, and there was no evidence that the proposed retrofit would cure the speculated reputational injury. Slip op. at 39. Citing New York law, the court noted that a prior judge in this case had "properly recognized that [New York law] stopped short of requiring manifestation of the defect; yet, in the absence of such manifestation, [it] still required the plaintiff to present evidence of an actual injury, in the form of out-of-pocket repair costs or a sale at a loss." Slip op. at 39-40. The court also noted that "'[a] plaintiff who purchases a [product] that never malfunctions over its ordinary period of use cannot be said to have received less than what he bargained for when he made the purchase.'" Id. at 41 (citation omitted).

These basic problems permeated the various causes of action: implied warranty, consumer protection acts, and unjust enrichment. Moreover, the court noted that in order to prove reliance on an "omission" under Texas's Deceptive Trade Practices Act, the plaintiffs would have to establish that they would not have bought the product if the information had been disclosed. The record in this case clearly indicated that some plaintiffs bought the vans with full knowledge of handling problems and rollover risks -- primarily because they believed themselves qualified to drive the vehicle with the requisite skill. As such, the reliance element of the DTPA presented individual issues that precluded class certification. Slip op. at 56.

The court also noted at the end of the opinion that statute of limitations issues -- particularly on the warranty claims -- presented individual issues that also would be incapable of being proved on a classwide basis.

The court's opinion is another strong reminder that even in cases of so-called "omissions," the individual issues can preclude class certification. The court explained that its "ruling reflects the unique and highly individualistic experiences of consumers, many of whom were not actually deceived and many of whom have suffered no actual injury as a result of Ford's conduct." Slip op. at 79.

Some Thoughts on Trask's "Cause Lawyer" Post

Russell Jackson — Thu, 09 Feb 2012 07:48:55 -0500

Readers of this blog know that I'm a big fan of Andrew Trask and his blog Class Action Countermeasures. He has an interesting post today about what he calls "Cause Lawyers" (and what I generally call "true believers"): plaintiff lawyers who bring class actions to advance a social agenda rather than getting rich. They often work for non-profit organizations for low wages. Their job satisfaction comes from changing the behaviors of their target defendants in ways that legislators or regulators either cannot or will not.

Andrew is absolutely right that these lawyers are distinctly different personality types from what he calls "entrepreneurial class counsel," i.e., those who bring class actions to get rich. He cites an article that paints the true believers as having a binary world view (us/them, right/wrong) and offers some advice for negotiating with them.

I think it's far too easy to ascribe such character traits to "Cause Lawyers," and I wanted to offer some nuance based on my experience with them. I actually like and respect most of the "Cause Lawyers" I've dealt with over the years, and have been able to forge some beneficial relationships with them.

To begin with, Cause Lawyers are usually very bright. Because they operate in a particular field that interests them, they usually are experts in that field. They likely know the cases, regulations, and history of regulation in that field better than you do. And believe me, they know the players. They likely have met with the relevant government officials repeatedly, urging them to action. Do not underestimate a Cause Lawyer adversary.

Although Cause Lawyers have an idealistic streak, for sure, they seldom get to indulge it in practice. They work for organizations that have limited budgets and often very broad agendas. They will fight hard to achieve a favorable result, but they also understand that if they can achieve something less than complete victory through a deal with your client, they should take that and move on to the other cases in their "quasi-legislative" agenda.

Cause Lawyers are just that: lawyers. They know the strengths and weaknesses of their case. They often are pushing at the very edge of the law -- they're very creative -- and they understand that lawyers in that position have a substantial risk of losing, at either the trial or appellate level.

Cause Lawyers are also people. They respect adversaries who treat them as equals, speak frankly, and live up to their commitments.

In short, Cause Lawyers can be very practical in negotiations, but you have to understand where they are coming from.

Here are some of my thoughts on litigating against and negotiating with Cause Lawyers:

1. Understand your client's motivations and objectives. The Cause Lawyer has sued your client for a reason: she wants at least a change of your client's behavior, maybe more. You first need to understand your client, why it conducts its business as it does, what it might be willing and/or able to change within its overall business objectives, and what changes it would be unwilling to make and why such changes are unreasonable.

2. Get to know the Cause Lawyer. I find that it's important to sit down early with the Cause Lawyer. I want her to get to know me as an honorable adversary whom she can trust to do what I say I'll do. I want to listen very carefully to what she wants to achieve with the litigation (always thinking in the back of my mind of possible mutually-acceptable compromises). I want her to understand that there is a rational business reason for my client's behavior and that it is a good corporate citizen. And I want her to understand the strength of our factual and legal defenses, as well as that continued litigation is going to require a significant commitment of the plaintiff's limited resources.

3. Be Creative and look for a way for both sides to shine. Cause Lawyers may be idealists at heart, but they understand that change comes incrementally. If they can have an industry player cooperate with them on a policy, they understand that its easier to get the rest of the industry to follow. Often there is a win-win compromise to be reached with Cause Lawyers where your client can receive kudos for being the first to tackle a thorny public policy issue.

4. If it becomes apparent early on that a reasonable compromise that makes business sense is simply not possible, make good on your promise of take-no-prisoners litigation. This is in keeping with the maxim that the Cause Lawyer should be able to trust you to do precisely what you say you'll do.

The Cause Lawyers I have dealt with, for the most part, have been practical lawyers with a policy agenda who understand that businesses have legitimate interests and that litigation is a costly and unpredictable way to legislate policy change. Often, they tell me, corporate defendants respond to Cause Lawyers' suits by digging in their heels early on, without taking time to understand that in many respects, the suit or demand letter is really the organization's attempt to get the company's attention and obtain a seat at the decisionmaking table.

I worry that painting a picture of Cause Lawyers as "hyper loyal" or "bipolar" (us/them) -- as does the article Andrew cites -- will feed into some defense lawyers' inclinations to dismiss the importance of engaging with Cause Lawyers early in the process, when real progress can be made and catastrophe can be avoided.

A Few Thoughts on AmEx 3

Russell Jackson — Tue, 07 Feb 2012 08:08:58 -0500

In AT&T Mobility v. Concepcion, the U.S. Supreme Court last term held that the Federal Arbitration Act preempted California common law deeming class action arbitration waivers in consumer contracts unconscionable. Since that time, a number of courts -- many of them in California -- have sought to distinguish Concepcion and otherwise wriggle free from its holding.

Last week a two-judge panel of the Second Circuit issued a third decision in In re American Express Merchants' Litigation, 2012 WL 284518 (2d Cir. Feb. 1, 2012), an antitrust tying case challenging the defendant's pricing for members' use of charge cards, credit cards, and debit cards with affiliated merchants. Some will consider the opinion in AmEx 3 a roadmap for avoiding what some have described as the "harsh effect" of Concepcion in consumer fraud litigation. But AmEx 3 has important limitations. It also is instructive for product sellers who may be reevaluating their consumer contracts.

The key fact to note about AmEx 3 is that it involved an underlying federal statute: the antitrust statute. Thus, the "preemptive" effect of the FAA had to be balanced against the legislative objectives of the other federal statute at issue, the antitrust statute.

This is a very important fact. Even the two-judge panel in AmEx 3 recognized that this was a very different situation from what was at issue in Concepcion: namely, state common law that was conflicting with the Federal Arbitration Act. See AmEx 3, 2012 WL 284518 at *8 ("Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA. Here, however, our holding rests squarely on a 'vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.'") (citation omitted). The panel in AmEx 3 clearly understood that its analysis (applying the FAA to a federal statute) could not be applied to invalidate a federally-recognized arbitration provision where the underlying right being enforced was one of state law.

The AmEx 3 court's analysis of the applicable federal principles was relatively straightforward. The antitrust statute creates statutory rights that should be enforced. Sometimes, "the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action." Id.

The court recognized that "[a]rbitration is also recognized as an effective vehicle for vindicating statutory rights, but only 'so long as the prospective litigant may effectively vindicate its statutory cause of action in the arbitral forum." Id. at *9 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) and its dicta that where the agreement precludes the right to pursue statutory antitrust remedies, the court would condemn it as against public policy). See also id. at *10-*11 (citing Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), for the proposition that large arbitration costs could prevent a litigant from vindicating her federal statutory rights in an arbitral forum).

Here was the crux of the matter for the court in AmEx 3: plaintiffs' expert testified that although the average four-year loss suffered by a plaintiff was $1,751 (or $5,252 when trebled), and the largest four year loss might be expected to be $12,850 (or $38,549 when trebled), the cost of an expert to help a plaintiff prove its claim would fall between $300,000 and $2 million. In effect, no individual plaintiff could be expected to assert its claims because to do so simply was not cost-effective. The court concluded that the class action waiver in the arbitration agreement thus made it unlikely that the statutory rights granted under the federal antitrust act would be asserted at all:

Thus, as the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision to be unenforceable. We again emphasize our holding comes with caveats. Our decision in no way relies upon the status of plaintiffs as "small" merchants. We rely instead on the need for plaintiffs to have the opportunity to vindicate their statutory rights.

We do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions. Rather, as demonstrated by the different outcomes in our sister Circuits, we hold that each waiver must be considered on its own merits, based on its own record, and governed with a healthy regard for the fact that the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements."

Id. at *13-*14 (citations omitted). The court was clear that the party opposing arbitration bears a heavy burden of proving that enforcement of the arbitration clause will make it impossible to enforce the statutory rights granted by the underlying federal statute. See id. at *8, *11.

The court concluded that under Concepcion and Stolt-Nielsen, it had no power to order the defendant to engage in class action arbitration where it had not agreed to do so. Therefore, the court remanded the case to the district court with the instruction to deny the defendant's motion to compel arbitration, leaving the plaintiffs the avenue of attempting to pursue a class action in a judicial forum.

As is demonstrated above, the fact that there was a federal statute at issue in this case makes it fundamentally different from a state-law consumer fraud case like Concepcion. And yet, for those companies taking a second look at their arbitration provisions, AmEx 3 certainly provides some encouragement for including in such agreements some cost-sharing or cost-shifting mechanisms, evidentiary presumptions, or other rules that make it less expensive for potential claimants to litigate an individual claim in arbitration. Indeed, many of those decisions that are refusing to apply Concepcion in the consumer context appear to do so because of a belief that individual claims cannot be affordably prosecuted in arbitration. The more that the arbitration agreement can minimize transaction costs and guarantee some reasonable settlement offer or other form of recovery, the more effectively such "negative value class action" arguments can be addressed.

NJ Appeals Court Affirms Class Certification on Consumer Forms

Russell Jackson — Thu, 02 Feb 2012 09:12:36 -0500

Have you ever tried to pound a square peg into a round hole? See Wenger v. Cardo Windows, Inc., 2012 WL 280254 (N.J. Super. -- App. Div. Jan. 31, 2012).

In Wenger, plaintiffs received a postcard advertising the sale of replacement windows for their home. They called and set up an appointment. A salesman visited and, at the conclusion of his presentation, plaintiffs signed a Purchase agreement for 20 windows at $10,700. They also signed a financing document to finance the cost over 60 months. They also received a Notice of Cancellation, which would allow them to cancel the order.

Plaintiffs reflected on the deal and signed and submitted the Notice of Cancellation. The seller wouldn't take "no" for an answer. It reduced the price and had plaintiffs sign some more forms. Plaintiffs then spoke to their roofing contractor, who said they needed single-unit bay windows that would be secured from the sides, not the top and bottom. The defendant wouldn't do that. So once again plaintiffs canceled the order.

The defendants sued plaintiffs in small claims court for $3,000. Plaintiffs brought a class action in New Jersey state court. Initially, the trial court dismissed claims under New Jersey's Consumer Fraud Act, Contractor's Registration Act, and Home Improvement Practices regulations, and the appellate division affirmed. But the appellate division had instructed the trial court to reconsider its dismissal of the claims under New Jersey's Door-to-Door Home Repairs Sales Act, Home Repair Financing Act, and Truth-in-Consumer Contract Warranty and Notice Act, as well as the FTC's "Cooling Off Rule." On remand, the trial court granted class certification on those causes of action. The appellate division refused to take the appeal, but the New Jersey Supremes instructed the court to do so. And so the appellate division came to consider whether class certification was proper.

The defendant had numerous arguments for why there was no commonality or predominance, and why plaintiffs failed the typicality and adequacy of representation tests. Simply put, plaintiffs were unlike most class members because they never paid any money or received any windows. There were numerous oral interactions, in addition to the paperwork. And there was the dispute on the type of windows plaintiffs needed.

The appellate division didn't care. It kept claiming that the case was about the forms that were signed and whether or not those complied with the statutes. The forms were the same, it reasoned, and thus the class could be certified. The court never discussed the commonality standard of Wal-Mart v. Dukes.

The defendant argued that the class action was not superior, since there was no Consumer Fraud Act claim and no class member could recover any actual damages; rather, the most they could recover would be $100 statutory damages. As such, the binding effect of the class judgment could harm class members with actual damages. The appellate division swatted this concern away with the observation that class members with actual damages could opt out and the maxim that class actions provide a useful mechanism for the recovery of low-dollar claims.

Interestingly, no one appeared to challenge the class definition itself, which was: "All person who . . . received a transaction document from Defendants the same or similar to the transaction documents given to Plaintiffs."

It will be interesting to see what, if anything, the New Jersey Supreme Court does with this case.