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Premium Refund Theory in Insurance Class Action Rejected By Michigan Federal District Court

Posted in Property Insurance

One theory that has been raised by plaintiffs’ lawyers in some insurance class actions is that policyholders should receive a partial refund of their premiums because they are not receiving the coverage they paid for, or coverage purchased is illusory. A recent Michigan federal district court opinion rejected this theory on the grounds that: (1) unless a valid claim for insurance coverage is made, no performance is due from the insurer, and thus there can be no breach of contract; and (2) where the insurer assumed the risk by accepting the premium, there is no basis for a partial refund of the premium. This decision will be useful to insurers in defending putative class actions raising this type of theory – given its novelty, there is not much law addressing it. (Another line of argument that it appears was not raised here is that setting premiums is typically a matter that is within the primary or exclusive jurisdiction of the department of insurance.)

In Monteleone v. Auto Club Group, Case No. 13-CV-12716, 2015 U.S. Dist. LEXIS 510 (E.D. Mich. Jan. 6, 2015), the plaintiffs claimed that the defendant insurer was improperly limiting coverage for what they described as “overflows” of water from plumbing systems. The insurer treated these events as “backups” through a sewer or drain, which were excluded from coverage, except where limited coverage for such a backup was provided by endorsement. The plaintiffs filed suit on behalf of a proposed “property damage” subclass of policyholders who made claims which were not fully paid, and a “premium” subclass of policyholders who did not suffer any losses. The “premium” subclass sought to recover “a uniform percentage of premiums associated with the promised-but-not-provided overflow coverage.” Id. at *7. In a prior decision (which I discussed in a May 2014 blog post), the court denied certification of the “property damage” subclass because individual issues would predominate over common issues.

In granting the defendants’ motion to dismiss the premium-related claims, the court explained that “[u]nless plaintiffs filed a claim with their insurer, performance was not due and plaintiffs cannot establish a breach under the policy. In the absence of a duty, there can be no breach.” Id. at *9-10. In other words, “Defendants duty to perform under the insurance contracts does not arise unless a homeowner submits a valid claim.” Id. at *11. The court noted that, if plaintiffs’ interpretation of the policy were correct and they had a loss, their avenue for relief would be to sue for breach of contract and have the court interpret the policy. Id. After the insurer had assumed the risk, “[w]hether the insurers had an internal policy of denying claims in contravention of the policy language is irrelevant, as in any coverage dispute, it is the court that will ultimately construe the policy language and determine its meaning.” Id. at *16. The court further explained that “[b]ecause defendant-insurers were at risk for any legitimate claims once the insurance contract was executed, there is no basis for the return of any premiums.” Id. at *17.

Another point left out of the court’s analysis (assuming it applies in Michigan) is that premiums for homeowners’ insurance generally must be approved by the department of insurance, and to the extent that the plaintiffs are challenging their premium, that may have to be pursued first in a regulatory proceeding in the department of insurance. Any challenge to the premium also may be barred by the filed rate doctrine.

Cy Pres Distributions in Class Action Settlements Addressed By Eighth Circuit

Posted in Class Action Settlements

Over the last several years, federal courts of appeals have been closely scrutinizing cy pres distributions to charitable organizations in class action settlements. This includes opinions by the First Circuit, Third Circuit and Ninth Circuit. The general thrust of these decisions is that cy pres should be used sparingly, and the charitable organization should be closely tied to the objective of the lawsuit. The Eighth Circuit recently weighed in and largely joined its sister circuits, with one judge dissenting.

In re BankAmerica Corporation Securities Litigation, No. 13-2620, 2015 U.S. App. LEXIS 306 (8th Cir. Jan. 8, 2015) involved a $490 million securities class action settlement . After two distributions to class members, $2.4 million remained. The district court ordered a cy pres distribution to the Legal Services of Eastern Missouri, Inc., and also awarded a supplemental attorneys’ fee of approximately $98,000 for work done after the initial distribution. An objecting class representative represented by Ted Frank of the Center for Class Action Fairness appealed, and the Eighth Circuit vacated the order and remanded.

 Key points made in the opinion include:

  • “Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible ‘only when it is not feasible to make further distributions to class members’ . . . . except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.” Id. at *7 (citation omitted).
  • Simply because class members submitting claims have received the amounts they are due under the terms of the settlement does not mean they have been “fully compensated,” and thus does not necessarily justify a cy pres award. Id. at *11.
  • A settlement agreement and settlement approval order providing for a cy pres distribution of unclaimed funds is not binding on the court with respect to disposing of unclaimed funds. Id. at *12-13.
  • “[U]nless the amount of funds to be distributed cy pres is de minimus, the district court should makea cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient.” Id. at *14.
  • A cy pres “distribution must be ‘for the next best use . . for indirect class benefit,’ and ‘for uses consistent with the nature of the underlying action and with the judicial function.” Id. at *15 (citation omitted). In this case, the Missouri nonprofit, which served victims of fraud, was likely not appropriate for a nationwide securities class action. The court suggested that perhaps the SEC Fair Funds would be appropriate.

Judge Murphy dissented, concluding that the district court did not abuse its discretion because the settlement agreement provided for the cy pres distribution, a further distribution was unlikely to be feasible (particularly where many shareholders held shares through a mutual fund and many would have sold those shares over the years), and the Missouri organization was sufficiently tied to the nature of the suit.

Based on the recent appellate decisions, cy pres distributions are likely to be used less frequently, but there is still a place for them. In some cases, for example, the transaction cost of making a supplemental distribution to class members will make such a distribution not practical. Where cy pres is used, giving some type of notice to the class (although individual notice might be cost prohibitive) and selecting an appropriate recipient are important. Another potential way to avoid this problem entirely is to do a “claims made” settlement where only those class members making claims receive payment, although that structure can raise other concerns.   


Thoughts on Trends in Insurance Class Actions in 2014

Posted in Defense Strategy

As 2014 comes to a close, here are a few observations on key trends I’ve seen in insurance class actions (and class actions more broadly) over the last year:

  • Changes in the law have frequently led to new class action filings. Most insurers are large organizations, and changing daily practice across a claim or underwriting department can be challenging, and take time. When a state supreme court changes the law, or makes new law in an area where there was none, or when an insurance department issues a new regulation, and the insurer does not conform to the new law quickly, or arguably makes the change incorrectly, or fails to make changes retroactively (if required), that has frequently led to new class action filings. These are difficult (in some cases impossible) events to anticipate (unless you are following other insurers’ key cases closely), and difficult to react to. But if I were running an insurance company’s law department, I’d make that a priority.
  • Class action settlements are becoming more difficult. Judges are scrutinizing them more carefully. Especially the attorneys’ fees. If you’re in the Seventh Circuit, Judge Posner seems to hardly ever find a fee award he likes. And plaintiffs’ lawyers may try to drive up the overall settlement cost to the defendant in order to garner more fees. The options going forward, as I see them, are two-fold. First, defendants can agree to a settlement that provides reasonable and fair relief to the class, and leave the fee award to the judge. If you trust the judge. Second, make a fair deal for the class and negotiate very aggressively on the fees. Good plaintiffs’ lawyers probably know that they will not get the same fee in a federal court they might have gotten ten years ago. And if their chances of class certification are not very strong, they probably do not want to invest all of the time and effort that will be required to get the chance to roll those dice.
  • Creativity matters. The old, “tried and true” method of defending these cases – throwing in the kitchen sink of potential individualized issues and variations — may not be the best strategy in 2014 or 2015. Not all variations necessarily make a difference. But don’t be afraid to make arguments that have not been made before. You need to know the case law inside and out and dig deeply into the facts to demonstrate how the case will be tried. It’s not quite as hard for courts to envision how these cases will be tried because more of them (although still a very small number) are actually being tried, including some prominent, high-stakes ones.

On another note, in case you are interested, I will be a panelist for a CLE webinar on “Defending Class Actions Using Absent Class Member Discovery,” on January 13, 2015 at 1pm Eastern. For clients and friends, I have a small number of free registrations, and when those run out I can offer a reduced cost registration, just e-mail me.

Supreme Court Opinion in Dart Cherokee Basin v. Owens

Posted in Class Action Fairness Act

Yesterday, the U.S. Supreme Court issued its opinion in Dart Cherokee Basin Operating Co., LLC v. Owens, No. 13-719 (slip opinion). Unsurprisingly, the Court held that a notice of removal under the Class Action Fairness Act does not need to attach evidence regarding the amount in controversy. Given that the removal statute requires a notice “containing a short and plain statement of the grounds for removal,” the Court held that the notice “need include only a plausible allegation that the amount in controversy exceeds the jurisdictional threshold.” (Slip op. at 7.) Evidence is required only if the plaintiffs file a motion to remand, or the Court requests an evidentiary showing. In reaching this result, the Court also noted that there is no presumption against removal—“no antiremoval presumption attends cases invoking CAFA, which Congress enacted to facilitate adjudication of certain class actions in federal court.” (Id.) This is all helpful to defendants in obtaining federal jurisdiction in class actions, although I think it is what most lawyers thought the law was before this decision. This will help ameliorate the “fire drill” that defendants sometimes experience when they are sued in a class action and need to develop an estimate of the amount in controversy.

I’m proud to say that I correctly predicted (see my blog post regarding the grant of certiorari in this case) that the Court would hold that a notice of removal does not require evidence. I was dead wrong, however, about the vote. I thought it would be 9-0 when it turned out to be 5-4. But not because there is any indication that any justice concluded that a notice of removal must attach evidence. Rather, as foreshadowed in the oral argument (see my blog post on the oral argument), the split occurred because of a debate over the scope of the Court’s jurisdiction to hear a CAFA case where the Tenth Circuit had denied leave to appeal, and the application of the appropriate standard of review.

The majority opinion was authored by Justice Ginsburg, and joined by Chief Justice Roberts, and Justices Breyer, Alito and Sotomayor. They concluded that the Court had jurisdiction to review the Tenth Circuit’s denial of leave to appeal, that the Tenth Circuit appeared to have denied review based on a conclusion that the district court’s decision was correct (i.e., that a notice of removal must attach evidence), and that the Tenth Circuit had abused its discretion by erring as a matter of law. The majority noted that the dissenters had joined the Court’s unanimous opinion in Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013), which involved the same procedural posture (the court of appeals had denied review), without suggesting any jurisdictional impediment.

Justice Scalia’s dissent, joined by Justices Kennedy and Kagan, and joined by Justice Thomas except for the conclusion, would have dismissed the case as improvidently granted. The dissent concluded that the Tenth Circuit might not have abused its discretion if, for example, it were simply too busy to decide the case within CAFA’s 60-day period for an appellate decision, or the case was a poor vehicle to decide the issue.  The dissenters felt they had an insufficient basis to determine whether there was an abuse of discretion by the court of appeals. As to Knowles, Justice Scalia concluded he made a mistake in overlooking the potential jurisdictional issue.

Justice Thomas concluded that the Court had no jurisdiction whatsoever because an application for permission to appeal in the court of appeals is not a “case” in the court of appeals, within the meaning of 28 U.S.C. § 1254.

As I noted before in discussing the oral argument in this case, it seems unlikely that Congress intended, when it allowed courts of appeals to accept these types of appeals under CAFA, in their discretion, to restrict the Supreme Court’s ability to hear such cases if the court of appeals declined review. Perhaps Congress will be motivated to settle this issue by amending 28 U.S.C. § 1453(c)(1) to make reference to the Supreme Court as well as the courts of appeals. Other interlocutory appeal statutes might also be worthy of similar amendments.

But in the meantime, what can a defendant do where it is faced with a CAFA appeal (or perhaps some other interlocutory appeal, if the same issue applies) in which leave to appeal might be denied by the court of appeals, perhaps without explanation or with little explanation, and four justices of the Supreme Court are likely to be concerned about whether they have proper jurisdiction? One approach might be to petition for certiorari before the court of appeals has rendered its judgment. 28 U.S.C. § 1254 provides that “Cases in the courts of appeals may be reviewed by the Supreme Court by the following methods: (1) By writ of certiorari granted upon the petition of any party to any civil or criminal case, before or after rendition of judgment or decree . . . .” (Emphasis added.) So if you petitioned the Court before the court of appeals rendered judgment, it would seem to clearly have the power to review the district court’s decision. Perhaps the Court could even hold that “early” petition until after the court of appeals has made its decision, and then still have the power to review the district court’s decision, if the Court chose to take that route.

Offer of Judgment to Named Plaintiff Did Not Moot Putative Class Action, According to Eleventh Circuit

Posted in Defense Strategy

Following the Supreme Court’s decision in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), lawyers have debated whether a defendant can defeat a class action by offering full relief to the named plaintiff(s), either before a class is certified, or before a motion for class certification is filed. Last week, the Eleventh Circuit addressed the issue, holding that the case before it was not moot. This case was decided in a particular context that will vary from other cases. But it is not a positive development for defendants seeking to use this approach in the Eleventh Circuit.

In Jeffrey Stein, D.D.S., M.S.D., P.A. v. Buccaneers Ltd. P’ship, No. 13-15417, 2014 U.S. App. LEXIS 22603 (11th Cir. Dec. 1, 2014) , a putative class action alleging violation of the Telephone Consumer Protection Act, the defendant made an offer of judgment to the named plaintiffs under Fed. R. Civ. P. 68 for what it intended to be full relief. The offer included the maximum statutory penalties, plus reasonable costs, entry of a stipulated injunction, and any other relief determined by the court to be necessary to fully satisfy the plaintiffs’ individual claims. The plaintiffs allowed the offer to expire without responding to it, and the defendant then moved to dismiss the case as moot. The district court granted the motion to dismiss, without entering a judgment in favor of the plaintiffs.

Here is a short summary:

  1. The court cited the text of Rule 68, which provides that “[a]n unaccepted offer is considered withdrawn” and “[e]vidence of an unaccepted offer is not admissible except in a proceeding to determine costs.” The court concluded that “dismissing a case based on an unaccepted offer as was done here – is flatly inconsistent with the rule.” Id. at *8. The court agreed with Justice Kagan’s dissent in Symczyk on this point. The court noted, however, that “[a] defendant who wishes to offer complete relief need not invoke Rule 68; the defendant can simply offer complete relief, including the entry of judgment,” but the defendant did not do so in Jeffrey Stein. Id.
  2. The court wrote that Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030 (5th Cir. 1981), a Fifth Circuit decision issued prior to the larger Fifth Circuit being split up and the Eleventh Circuit being formed, was the “law of the circuit,” and allowed the named plaintiffs in Jeffrey Stein to continue to pursue a class action even if their individual claims were deemed moot because of a defendant’s offer of full relief. Jeffrey Stein, at *14-20.
  3. The court followed opinions by several other circuits, and declined to follow the Seventh Circuit’s decision in Damasco v. Clearwire Corp., 662 F.3d 891 (7th Cir. 2011), under which a named plaintiff cannot pursue a class action if an offer of full relief is made before the plaintiff has moved to certify a class (but not after that point). The Eleventh Circuit wrote that “the Damasco approach would produce unnecessary and premature certification motions in some cases and unnecessary gamesmanship in others.” Id. at 23.

The Eleventh Circuit recognized that there was significant tension between its holding and part of the rationale given by the Supreme Court majority for its decision in Symczyk. But the Eleventh Circuit characterized the Supreme Court’s opinion on that point as “dictum,” and declined to depart from Zeidman based on that.

So where do things go from here? The Supreme Court might take this issue up and resolve it. But I think that is more likely to happen, if it does, in a case where the defendant has not made a Rule 68 offer (as in this case), but rather makes an unrestricted offer of full relief, including the entry of judgment, untethered to Rule 68. If the district court then enters a final judgment for full relief to the named plaintiff and finds the putative class claims moot, that would seem to be a more likely posture for Supreme Court review. The issue would be cleanly presented, and this would sidestep Justice Kagan’s points about the text and purpose of Rule 68, which were a focus of the Eleventh Circuit here. In the meantime, defendants in the Eleventh Circuit might try to distinguish this case — the Eleventh Circuit appeared to suggest that a different outcome might apply in a case where the named plaintiff did not act diligently to pursue the case as a putative class action. Jeffrey Stein, at *21. And a very different issue would appear to be presented if, for example, the named plaintiff’s individual claim were resolved by arbitration, rather than by an offer of full relief.

State Enforcement Actions Following Class Settlements Addressed By Ninth Circuit

Posted in Class Action Fairness Act, Class Action Settlements

A recent Ninth Circuit decision caught my eye. It addressed whether a state enforcement action can be barred by a class action settlement on the same issue, finding that it was barred in part, to the extent the suit sought restitution that was the same relief at issue in the class action.

In People v. Intelligender, LLC, 2014 U.S. App. LEXIS 21313 (9th Cir. Nov. 7, 2014), the defendant had settled a nationwide class action alleging that it made misrepresentations about its urine test designed to predict a fetus’s gender. The State of California was given notice of the proposed settlement and did not object. An enforcement action was later brought by the People of the State of California, through the San Diego City Attorney. The Ninth Circuit concluded that the State could litigate claims for statutory penalties and injunctive relief, because those claims implicated the State’s public interests. But the State could not pursue claims for restitution, because those same claims had been pursued by the class, and were barred by res judicata. The court explained:

That compensation was limited to those who obtained an incorrect result is a reflection of the bargaining and compromise inherent in settling disputes. Individual Gram class members who bought a Test and used it but did not obtain an incorrect result remain bound by the settlement, even though they will not receive any compensation. If the State wished to secure compensation for those class members, it had an opportunity to do so by intervening after receiving notice of the proposed settlement pursuant to 18 U.S.C. § 1715(a). This is the method CAFA established for states to seek equitable compensation for class members. The State chose not to use its authority, and the settlement was approved. Compensation is res judicata. (Id. at *26-27.)

This case is a good reminder for defendants that a well-crafted class action settlement will not necessarily buy them complete peace. Government enforcement actions may still be able to be brought on essentially the same claims. The type of relief sought may be limited, but here the civil penalties ($2,500 per violation) might be substantial, depending on how they would be calculated. In the insurance context, it is worth taking into consideration whether the state attorney general(s) or insurance regulator(s) have or might be likely to become involved in the issue that is before the court in the class action. 

Class Action Settlement: Judge Posner Strikes Again At Excessive Plaintiffs’ Attorneys’ Fees

Posted in Class Action Settlements

Judge Posner of the Seventh Circuit continues to be prolific in authoring class action-related opinions. I enjoy blogging about these decisions because they are entertaining to read and usually relatively short and to the point, making them easy to get through and summarize here. This opinion, once again, concluded that an award of attorneys’ fees to plaintiffs’ counsel was too high. The message these decisions seem to send is that plaintiffs’ lawyers will simply have to accept less in settling class actions in federal courts, at least in the Seventh Circuit, and probably elsewhere too. The fees will need to be commensurate with the actual benefit to the class and the actual time reasonably spent on the case. The days of plaintiffs’ class action lawyers flying around in their private jets may soon end (at least unless they are really good, and bring cases that are truly meritorious and result in a large benefit to a class).

Pearson v. NBTY, Inc., 2014 U.S. App. LEXIS 21874 (7th Cir. Nov. 19, 2014) involved a settlement of a class action alleging that the defendants made false claims about the efficacy of glucosamine pills. The district court approved an award of $1.93 million in attorneys’ fees (reduced from the $4.5 million that was requested), where the actual benefits paid to class members was $865,284 (in checks refunding $3 per bottle purchased, with maximum limits of $12 per person without receipts or $50 with receipts). Here are some key points made in the opinion:

  • Although the settlement had a maximum potential value of $20.2 million, Judge Posner wrote that this was “based on the contrary-to-fact assumption that every one of the 4.72 million class members who had received postcard rather than publication notice of the class action would file a $3 claim . . . .” Id. at *7.
  • A fee award that amounted to $538 per hour for all lawyer and paralegal work on the case would be excessive. Id. at *10.
  • “[T]he presumption should we suggest be that attorneys’ fees awarded to class counsel should not exceed a third or at most a half of the total amount of money going to class members and their counsel.” Id. at *12.
  • A cy pres award to an orthopedic foundation was found inappropriate because it was “hopelessly speculative” that it would actually benefit the class, and such an award “is supposed to be limited to money that can’t feasibly be awarded to the intended beneficiaries . . . .” Id. at 17. Here, the parties easily could have paid more money to the class members rather than to a foundation.
  • An injunction requiring certain changes to statements made on packaging for the product for what amounted to a 24-month period had no real value to the class for purposes of evaluating the fee award. Id. at *20-23.

Should defendants be concerned that these decisions will make it harder to settle cases? Perhaps, but I don’t think so. Most class action plaintiffs’ lawyers do not want to spend a lot of time litigating a case that they might well lose on class certification, or on the merits. They will probably be willing to accept smaller fees that a court will perceive as more reasonable. That is especially true when you have more than one group of plaintiffs’ lawyers pursuing the same issue against a defendant.

Total Loss Valuations: Class Certified By Louisiana Federal Court

Posted in Auto Insurance

Insurers or their vendors generally use software to perform valuations of vehicles for total losses on auto insurance claims. This software will typically use databases of recent sales or prices offered for comparable vehicles in the area to estimate a vehicle’s value, and enable adjustments to be made for equipment, mileage, condition and other factors. A Louisiana federal judge recently certified a class in a case against Progressive involving the use of this software. The judge concluded that if the software used by Progressive undervalued vehicles across-the-board, the putative class claims could be resolved by the computer system. The decision did not discuss some of the issues that would appear to be central to deciding class certification on this kind of issue. This ruling might not upheld on appeal (if there is one) or be followed by other courts. But if it is, that has the potential to increase insurers’ exposure in this area. It could also potentially impact other lines of business (including property) where insurers use software as an aid in claim adjustment.

Slade v. Progressive Ins. Co., 2014 U.S. Dist. LEXIS 154713 (W.D. La. Oct. 31, 2014) involved Progressive’s use of Work Center Total Loss software that Progressive licensed from Mitchell International, Inc. and used to determine the actual cash value of total loss vehicles. According to the opinion, the software used the vehicle identification number to identify the year, make, model, and configuration of the vehicle. The adjuster would enter the mileage and evaluate the condition of the vehicle on a 1 to 5 scale for thirteen characteristics. The software then generates an overall condition score between 1 and 5. It identifies comparable vehicles offered for sale in the local area, but does not have any information about the condition of those vehicles. The value generated by the software is then adjusted based on the condition score, with the majority of adjustments being downward. According to the opinion, the adjuster would not have discretion to depart from the value generated by the software.

The insurance policy provided for the vehicle’s value to be determined based on “market value, age, and condition of the vehicle at the time the loss occurs,” and specifically provided for the use of computer software and databases.

A computer expert for the plaintiffs testified that he could use Progressive’s data to calculate the difference between prices generated by the Work Center Total Loss software and the NADA or blue book value. A Progressive representative testified that claimants can negotiate the value, but less than 1% of putative class members did.

The court concluded that common issues predominated over individual issues because it concluded that all that would be necessary to resolve the case, if plaintiffs prevailed, would be a computerized calculation:

If it is shown that NADA is a generally recognized used motor vehicle industry source, and WCTL is not, then the determination of each individual class member’s entitlement will be a matter of comparing the NADA value (either already contained in Progressive’s data or derived from Progressive’s data) to the WCTL valuation and finding the difference. If it is shown that Progressive misused its condition evaluations, then adjustments can be made to the valuations in accordance with those findings. The dispute is how a computerized system applied objective claims data–not the data that was entered into the system. Resolution can be achieved by revising the computerized system to apply the data properly.

. . .

As it is conceded that the plaintiff and proposed putative plaintiffs have no quarrel with the conditioning determinations of Progressive’s adjusters, the Court will not be required to review the individual subjective condition evaluations of Progressive’s adjusters. Rather, the dispute is with the manner in which the automated WCTL system used those condition determinations in reaching its valuations.

Id. at *22-23. The court distinguished property insurance cases in which courts in the Fifth Circuit have repeatedly denied class certification because “unlike the storm damage cases, the claim is that Progressive used an unacceptable computer system” and “[d]etermination of undervaluation is a matter of re-running existing data through a different computer system.” Id. at *23.

From my perspective as a lawyer who defends these types of cases, the court seems to be missing a few key points. First, even if NADA or some other data source were found to be a more appropriate general guideline, how could the court determine that the true value of a particular damaged car would be that value? Adjustments would seem to have to be made on a case-by-case basis by the factfinder based on condition, etc., to determine the correct value under the policy. Second, if condition evaluations were found to be misused by the software, wouldn’t that require readjusting each individual claim to determine the true value? Wouldn’t the insurer be able to take the position that on some claims the condition was incorrectly evaluated to its detriment? Third, Plaintiffs or their lawyers might be willing to concede that they would not challenge the condition determinations by the adjusters, but what right would they have to make that concession on behalf of all of the putative class members, many of whom would want to challenge that if they were litigating their individual case? Some putative class members would probably lose more from this concession than they would stand to gain otherwise. There are lots of questions that seem unanswered here.

Supreme Court Oral Argument in Dart Cherokee Basin v. Owens

Posted in Class Action Fairness Act

The U.S. Supreme Court heard oral argument this week in Dart Cherokee Basin Operating Co. v. Owens, No. 13-719 (SCOTUSblog page) (transcript). This case involves whether a defendant must provide evidence with its notice of removal under the Class Action Fairness Act to support the amount in controversy. I wrote about this case after certiorari was granted (see my April 10 blog post). In my view, the applicable statute (28 U.S.C. § 1446(a)) seems quite clear that evidence is not required with the notice of removal. So I thought the case might be an easy one for the Court.  

Attempting to read the tea leaves from the oral argument, it appeared from the Justices’ questions that a number of them appeared to agree with me. But that is only if they reach the merits.

Surprisingly, a main focus of the oral argument was on whether the Court has jurisdiction to hear the case. CAFA provides courts of appeals with discretion to grant or deny permission to appeal, analogous to the discretion that the Supreme Court has in deciding whether to grant certiorari. Some of the Justices’ questions suggested that they were concerned that the Court might not have jurisdiction where a court of appeals denies review, or that the Court’s role in that circumstance might be limited to deciding whether a court of appeals abused its discretion in denying review. Justices pointed out that an abuse of discretion standard could be difficult to apply because in Dart, and in most cases where review is denied, no reason is given. There was some discussion about the fact that an error of law could be an abuse of discretion. But it was also noted that the Tenth Circuit majority might have denied review simply because the judges were too busy.

It’s puzzling to me why the Court was concerned about this, given that its first CAFA case, Standard Fire Ins. Co. v. Knowles, one that I worked on, was a case that came to the Court with the exact same procedural posture. The Eighth Circuit had denied permission to appeal without giving reasons. The Court granted certiorari, and then decided the merits. The Court’s opinion did not suggest that it was deciding whether the Eighth Circuit abused its discretion in denying review, and reached the merits. Jurisdiction was briefed as it always is, but no party or amicus directly challenged the Court’s jurisdiction.

It does not seem to make sense that Congress, in granting the courts of appeals discretion to hear a CAFA appeal (similar to the discretion provided under 28 U.S.C. § 1292(b)), would intend to prevent or limit the Supreme Court’s discretion, under its broad certiorari jurisdiction, to hear the same appeal. Just because the court of appeals declines to exercise its discretion does not mean the Supreme Court should not have an opportunity to exercise its own discretion and review the district court decision. Congress likely did not include the Supreme Court in the provision allowing discretionary appellate jurisdiction under CAFA (or 1292(b) or Rule 23(f)) because the Court has broad certiorari jurisdiction after the court of appeals has acted.

Limiting the Court’s review power to instances where the court of appeals has granted review would be problematic because, once a court of appeals has squarely decided a question, it is very unlikely to grant review again to decide the same issue. So if the losing party in the first case that is decided on an issue does not seek certiorari, or the Court for whatever reason denies certiorari, there might be no opportunity to get an important issue to the Court, unless the Court can grant review after a court of appeals denies review. In Knowles, for example, the question presented had been decided by the Eighth Circuit in another case, but there was no petition for certiorari filed in that case. So it was very unlikely that there would be another case in which the Eighth Circuit would grant review. Most likely, the only way the Supreme Court could hear a case on that issue arising out of that circuit would if the Court took a case in which the circuit denied review.

Both logic and practicalities appear to support the Court having jurisdiction to take cases under CAFA (or Rule 23(f) or 28 U.S.C. 1292(b)) after a court of appeals denies review. The Court, on relatively rare occasions, reviews even state trial court decisions where discretionary review has been denied by the state appellate and/or supreme courts.  See, e.g., Norfolk & Western Ry. v. Ayers, 538 U.S. 135, 144 (2003). It seems odd that the Court would find that Congress intended this procedure to operate differently in cases in the federal system where intermediate appellate review is discretionary. We’ll see what the Court does.

Attorneys’ Fees In Class Action Settlements Addressed By Judge Posner

Posted in Class Action Settlements

Judge Posner of the Seventh Circuit is a frequent author of class action-related opinions. His most recent one reversed an order approving a class action settlement because the attorneys’ fee award was too high.  The case involved claims that RadioShack violated the Fair and Accurate Credit Transactions Act by putting expiration dates for credit card numbers on receipts. The settlement provided $10 coupons to class members who received notice and requested these coupons. The value of the $10 coupons requested by the less-than-1% of class members who sought them totaled $830,000. The district court awarded an attorneys’ fee of slightly under $1 million.

The opinion in Redman v. RadioShack Corp., No. 14-1470 (7th Cir. Sept. 19, 2014) is lengthy, but here are some key points:

  • The court found that the full amount of administrative costs should not have been included in calculating the value of the settlement to the class for purposes of evaluating the reasonableness of the fee award. “By doing so the court eliminated the incentive of class counsel to economize on that expense – and indeed may have created a perverse incentive; for higher administrative expenses make class counsel’s proposed fee appear smaller . . . .” (Slip op. at 10-11.) 
  • The court concluded that because of RadioShack’s apparent financial condition, a modest overall settlement was warranted, but more of it should go to the class members and less to class counsel. (Id. at 15-16.)  
  • A lodestar analysis was not proper without taking into account that “the efforts of class counsel yielded an extremely modest harvest . . . .” (Id. at 16.) 
  • The Class Action Fairness Act provision regarding coupon settlements does not rigidly require waiting to see how many coupons are redeemed before making the fee award; rather, the district court has flexibility to consider expert testimony about how many coupons likely will be redeemed, or to provide for payment of some fees upfront and more after redemption, if warranted. (Id. at 19.) 
  • “Clear-sailing clauses,” in which a defendant agrees not to contest class counsel’s request for an attorneys’ fee award, warranted “intense critical scrutiny” in this case, where it involved a non-cash settlement award. (Id. at 26.) 
  • According to the court, under Rule 23(h), the motion for the attorneys’ fee award should be filed prior to the deadline for objections to the settlement, so that objectors have adequate opportunity to object. (Id.) This is an important point for class action practitioners, as it has been more typical for the fee application to be filed later.

Although the court, of course, could not itself rewrite the settlement, it suggested that “[a] renegotiated settlement will simply shift some fraction of the exorbitant attorneys’ fee awarded class counsel in the existing settlement that we are disapproving to the class members.” (Id. at 27.)

This case continues the trend we’ve seen in recent years of increased scrutiny being given to attorneys’ fee awards in class action settlements. It seems likely that plaintiffs’ attorneys are going to simply have to agree to substantially lower fees in lower-value class actions, unless they want to spend a long time battling appeals. Or perhaps defendants in some cases will be willing to roll the dice, by agreeing to a settlement with the class but leaving the fee award to the court. That would create a more vigorous adversarial process on these fee awards, but obviously has its risks.