Offers of Judgment in Class Actions: First Circuit Suggests Sending a Bank Check

There has been a lot of activity in the federal courts of appeals recently regarding the use of offers of judgment to named plaintiffs in class actions. The Fifth and Seventh Circuits recently held that an unaccepted Rule 68 offer to the named plaintiff for full relief will not render a putative class action moot (see my August 20 post for more on those decisions). The First Circuit has agreed on that point, but suggested an alternative strategy that defendants might be able to use, depending on how the Supreme Court decides Campbell-Ewald Co. v. Gomez (see my June 16 post for more on that). The First Circuit’s suggestion was to simply send the named plaintiff a bank check for an amount that constitutes full relief, where damages will fully satisfy the plaintiff’s claim. While defendants will need to evaluate carefully whether that’s the right approach, it is certainly worth considering.

In Bais Yaakov of Spring Valley v. ACT, Inc., 2015 U.S. App. LEXIS 14718 (1st Cir. Aug. 21, 2015), a private school filed a putative class action under the Telephone Consumer Protection Act (“TCPA”), alleging that ACT, Inc., the company that makes the ACT college-entrance examination, sent the school three unsolicited faxes in violation of the TCPA. In an attempt to end the case quickly, ACT made an offer of judgment under Rule 68 for the full amount of statutory damages available. ACT also offered to be enjoined from sending further unsolicited faxes to the plaintiff, and offered to pay attorneys’ fees and costs awarded by the court. The plaintiff ignored the offer. ACT moved to dismiss the suit as moot. The district court denied the motion to dismiss, but certified its ruling to the First Circuit under 28 U.S.C. § 1292(b).

The First Circuit’s opinion, by Judge Kayatta, reviewed the existing Supreme Court precedent, which lacks clarity on the issue (hence the recent grant of certiorari). The First Circuit agreed with recent decisions from other circuits that “an unaccepted Rule 68 offer cannot, by itself, moot a plaintiff’s claim.” Id. at *16. “To the contrary, Rule 68 expressly specifies what happens to a rejected offer: it is deemed to be ‘withdrawn,’ and it is ‘not admissible except in a proceeding to determine costs.’” Id. at *17.

Judge Kayatta suggested, however, another approach that defendants might take: “In many cases involving damages in a certain amount as the only remedy, delivery of a bank check might get around the infirmities in using a Rule 68 offer.” Id. at *21-22. He noted that “if substance is to prevail over form, and consumer class actions are not to be largely eviscerated, the Supreme Court will need to decide that a plaintiff’s request to proceed as a class representative pressing the real claims of those to be represented is a claim for relief that precludes a finding of mootness.” Id. Based on Justice Kagan’s dissent in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), there are probably four justices who would agree with that proposition. But we don’t know yet if there will be a fifth.

In the meantime, some defendants might want to take Judge Kayatta’s suggested strategy to the bank. They will need to think about the fact that the amount of the check and its delivery will not be protected from admissibility the way a settlement offer could be. So if the gambit fails (based on how the Supreme Court ultimately decides the issue), and the case continues, the defendant’s maneuver might come out at trial (if there ever is a trial). But that may not be a big deal, and a letter accompanying the check might help with the explanation for it at trial. Sending a check to the plaintiff may not be enough where the complaint also seeks injunctive and declaratory relief. As to those forms of relief, the defendant may need to not only provide the check but make an offer, or file something with the court formally offering to accept the relief as to the named plaintiff. There are risks to consider there, however, depending on the nature of the relief sought.

Offers of Judgment in Class Actions: Fifth and Seventh Circuits Weigh In

As highlighted in my June 16 blog post, the Supreme Court has granted certiorari, in Campbell-Ewald Co. v. Gomez, No. 14-857 (SCOTUSblog page), to decide whether an offer of complete relief to a named plaintiff renders a putative class action moot. Notwithstanding that the Supreme Court is about to decide this question (with oral argument scheduled on October 14), the Fifth and Seventh Circuits both recently weighed in on it, and both ruled in favor of the plaintiffs. Some commentators have suggested that these decisions make it likely that the Supreme Court will rule for the plaintiff in Campbell-Ewald. I tend to disagree because the Fifth and Seventh Circuits were construing Rule 68, and Campbell-Ewald presents the issue not merely under Rule 68. but also in the context of a tender of full relief by the defendant independent of Rule 68. I suspect that the focus in Campbell-Ewald will be on the fact that a court logically must be able to bring an end to litigation where the defendant is willing to throw in the towel, and whether a class action can still proceed where the defendant has tendered full relief to a named plaintiff (independent of Rule 68). The Seventh Circuit, while ruling in favor of the plaintiff, highlights some of these remaining questions, which the Supreme Court might address, or might leave for another day.

In Hooks v. Landmark Industries, Inc., No. 14-20496, 2015 U.S. App. LEXIS 14116 (5th Cir. Aug. 12, 2015), a putative class action under the Electronic Funds Transfer Act, the defendant made an offer of judgment to the named plaintiff under Rule 68, which was not accepted and expired. There was a dispute over whether the offer was for complete relief, but the Fifth Circuit found it unnecessary to decide that because, even if complete relief was offered, the case was not moot. The Fifth Circuit relied on the fact that Rule 68 expressly states that “[a]n unaccepted offer is considered withdrawn,” and on Justice Kagan’s dissenting opinion in Genesis Healthcare Corp. v. Symczyk. The  Fifth Circuit further explained that “[t]he court is not deprived of the ability to enter relief—and thus the claim is not mooted—when a named plaintiff in a putative class action rejects a settlement offer from the defendant.” Id. at *13. The Fifth Circuit did not address, however, the broader question (which was not before the court) of what happens when a defendant simply tenders complete relief to the named plaintiff, and whether a named plaintiff can still properly represent a class in that circumstance.

Chapman v. First Index, Inc., Nos.  14-2773 & 14-2775, 2015 U.S. App. LEXIS 13767 (7th Cir. Aug. 6, 2015) was another case involving a Rule 68 offer of judgment to the named plaintiff. The Seventh Circuit overruled its own prior precedent and agreed with Justice Kagan’s dissent in Genesis Healthcare that “an expired (and unaccepted) offer of a judgment does not satisfy the Court’s definition of mootness, because relief remains possible.” Id. at *7. But what I found most interesting from a defense perspective was Judge Easterbrook’s comments about how defendants might well have a good argument, but mootness is the wrong way to frame the argument. Judge Easterbrook suggested that “[f]ailure to accept a fully compensatory offer also may suggest that the plaintiff is a bad representative of the class, for he has nothing to gain (implying poor incentives to monitor counsel) and may have given up something the class values (here, an injunction that would have stopped any further improper faxing).” Id. at *8.  Judge Easterbrook also suggested that there is a question about “whether a spurned offer of complete compensation should be deemed an affirmative defense, perhaps in the nature of an estoppel or a waiver.” Id. at *9. And “Why should a judge do legal research and write an opinion on what may be a complex issue when the plaintiff can have relief for the asking? Opinions are supposed to be the by-products of real disputes.” Id. at *11. These are all arguments that defendants should consider making. Some of this may be addressed in Campbell-Ewald – they are not all squarely before the Court, but the Court often addresses the broader context of the issue before it. Or these questions may be left for another day.

Filed Rate Doctrine Addressed in Recent Second Circuit Decision

The filed rate doctrine can often provide a strong defense to an insurer in a class action claiming that insurance premiums were too high for some reason. A recent Second Circuit decision applied the doctrine broadly. This decision is likely to be helpful to insurers in future cases.

Rothstein v. Balboa Insurance Co., No. 14-2250-cv, 2015 U.S. App. LEXIS 12623 (2d Cir. July 22, 2015), was one of numerous putative class actions that have been filed involving “forced-placed” homeowners insurance. Where a mortgage borrower does not maintain homeowners’ (or, where required, flood) insurance on his or her home, the lender has the right to purchase a policy to protect its interests, and charge the premium to the borrower. The policy purchased by the lender is typically called a “forced-placed” or “lender-placed” policy. In Rothstein, the plaintiffs alleged “that they were fraudulently overbilled because the rates they were charged did not reflect secret ‘rebates’ and ‘kickbacks’ that GMAC [the lender] received from Balboa through Balboa’s affiliate, Newport Management Corporation.” Id. at *2. The central allegation was that Newport provided certain “loan tracking services” to GMAC at no charge, which reduced GMAC’s expenses, in exchange for GMAC agreeing to buy lender-placed insurance exclusively from Balboa. While GMAC charged the plaintiffs the filed rates for the insurance, the plaintiffs alleged that the rates should have been discounted because of the benefit of the services being provided by Newport. Id. at *6.

The Second Circuit, reversing the denial of a motion to dismiss, held that “a claim challenging a regulator-approved rate is subject to the filed rate doctrine whether or not the rate is passed through an intermediary,” and “[t]he claim is therefore barred if it would undermine the regulator’s rate-setting authority or operate to give the suing ratepayer a preferential rate.” Id. at *3. The Second Circuit further explained that plaintiffs’ theory could succeed only if the services provided by Newport were required to be reflected in the rates, and “it is squarely for the regulators to say what should or should not be included in a filed rate.” Id. at *10-11.

As this decision demonstrates, the filed rate doctrine is a defense worth considering in cases that involve insurance premiums.

Update on Labor Depreciation Class Action Litigation: Kansas Federal Court Rules for Insurer

As an update to my March 29, 2015 blog post on the status of class actions on the labor depreciation issue, a Kansas federal court recently granted summary judgment in favor of an insurer.

In Graves v. American Family Mutual Insurance Company, 2015 WL 4478468 (D. Kan. July 22, 2015), the homeowners’ policy at issue (as is typical) provided coverage on a replacement cost basis if the insured actually made the repairs, but only an actual cash value basis if repairs were not made, and documentation thereof provided to the insurer, within one year of the loss. The policy defined “actual cash value” as “[t]he amount which it would cost to repair or replace damaged property with property of like kind and quality, less allowance for physical deterioration and depreciation, including obsolescence.” Id. at *1. The plaintiff sustained damage to the roof of her home and the kitchen ceiling. The roof damage was repaired but not the ceiling, for which she recovered only the actual cash value. She brought a putative class action seeking to recover the amount of depreciation attributable to the labor component of the cost of repairing the ceiling. Id. at *1-2.

The court concluded that the insurer properly applied depreciation because it is the damaged property, not merely the labor component thereof, that loses value over time. Here are some key portions of the court’s reasoning:

The key word, which neither party emphasizes, however, is “property.” Though comprised of tangible (materials) and intangible (labor) inputs, property is ordinarily understood as an indivisible output. And it is that indivisible output, not its original tangible and intangible components, that is the object of this policy. True, that indivisible output is itself tangible and can lose its useful form over time. But it is a concern for the value of that useful, ultimate tangible form that the policy contemplates.  . . . The value of the finished product diminishes. And that loss is measured by determining the expense of recreating the property (including the costs of its tangible and intangible inputs) and offsetting through depreciation those expenses to approximate the value of the property’s pre-loss, useful condition. Through this process, the insured is placed in a position as good, but no better, than s/he occupied prior to the damage. A reasonable insured would understand that the policy allows depreciation of all costs associated with (re)creating the insured property in order to compensate the insured at—and not above—the property’s pre-loss value.

Id. at *3.

The reasoning here seems strong and will be welcomed by insurers, given the recent adverse decision by a Kentucky federal district court.

The issue is also in the process of being briefed in the Minnesota Supreme Court. Blog readers who are following this issue may be interested in The American Insurance Association’s Amicus Curiae Brief  I recently filed in that case. It highlights the history and purpose of actual cash value insurance, and how insurers’ position on this issue is consistent with how depreciation is applied in other relevant contexts (including property tax assessments, eminent domain valuations and real estate appraisals).

Self-Driving Vehicles – Potential Class Action Exposure for Insurers?

Self-driving or autonomous vehicles is a hot topic in insurance industry media and mainstream media as well. I attended a great program on this at the Federation of Defense and Corporate Counsel (FDCC) annual meeting last week. Auto manufacturers are working on a broad spectrum of designs, from vehicles with automatic safety features such as automatic braking and warning sensors (some of which are already on the market) to semi-autonomous vehicles that will drive themselves say on a highway, but allow or even direct the human driver to take control at certain points, to fully-autonomous vehicles that may not even allow a human driver to take control. Given the focus of my blog, this got me thinking about what kinds of class action lawsuits these new automobile designs might lead to. Here are some thoughts:

  1. Automobile manufacturers’ programming decisions: Automobile manufacturers likely will need to make programming decisions on these vehicles to tell them which risk to take where a collision is inevitable, and even under what circumstances the vehicle will choose a path that is likely to injure or even kill its occupants. These decisions strike me as perhaps leading to class actions against the manufacturers, in which insurers may participate both as subrogees and as liability insurers for manufacturers. Manufacturers will need to consider whether to allow the vehicle owner to re-program their vehicle to make different decisions, which might provide a better defense to some class actions but spawn others.
  2. Underwriting: Given what is expected to be a fairly wide variety of different technologies offered by auto manufacturers, getting the pricing correct could become challenging. And if customers are not offered the right premium for their vehicle consistent with regulatory filings, that could potentially lead to class action exposure.
  3. Costs of Repair and Method of Repair: These new vehicles will have new and no doubt costly components, and there will be issues about costs and method of repair. Aftermarket parts class action litigation has largely died down, but was active for years. What will become of “aftermarket” computers that control a semi-autonomous vehicle’s safety system?
  4. Regulatory and Statutory Compliance: This is always a challenge for insurers to keep up with, and a hot area for class actions. It will not get any easier when “old” requirements that were based on “older” vehicles become applicable to semi-autonomous or autonomous vehicles. The FDCC panelists mentioned how California Proposition 103’s requirements for automobile insurance rating may be particularly difficult to apply to the new vehicles.

Insights from DRI Class Action Seminar 2015 – Part 2

Here is part two of my insights from last week’s DRI class action seminar:

No Injury Classes and Article III Standing: Andrew Pincus, lead counsel in Spokeo, Inc. v. Robins (to be decided by the Supreme Court next Term, see my May 1, 2015 blog post), spoke on this subject. The question presented is whether a federal statute can confer standing on a named plaintiff simply based on a statutory violation where the plaintiff does not suffer any concrete harm. Pincus expects the case will be argued in the first or second week of November. His client is making two alternative arguments — a constitutional argument, and a statutory interpretation argument. The constitutional argument is, of course, that Article III requires a concrete harm, in part because the injury needs to be of the type that was recognized in 1787. Also, a showing of actual harm to the plaintiff is necessary, as a matter of separation of powers, to separate private party suits from government enforcement proceedings. Otherwise, there would be an improper delegation of executive branch power. The alternative argument is that the statute at issue (the Fair Credit Reporting Act) should be interpreted as requiring a concrete harm, to avoid a constitutional problem. This is based on the principle of constitutional avoidance, and the principle that if Congress is going to take a step that interferes with the ordinary constitutional framework, it must do so clearly. If Congress were to allow a statutory violation without a concrete harm, it likely would impose a monetary cap with respect to class actions. Most of this seems likely to have less direct impact on insurance class actions, which generally involve state law and rarely present federal statutory claims. But this decision, to the extent it is on constitutional grounds, would govern standing in federal court in diversity cases, and could also influence state courts that look to federal law in evaluating their own standing.

International Class Actions: This panel explained how most of the world now has class actions, and in many countries they are conducted much differently from U.S. class actions. Some of the procedures sound pretty scary from a defense perspective. In Brazil and most of Latin America, the defendant does not know how the class will be defined, and thus cannot properly evaluate the size of the class or exposure, until after liability is determined! And Brazil’s high court has ruled that all class actions are nationwide! Mexico allows class members to opt into the class up to 18 months after the trial court’s decision on the merits. In Argentina, the defendant has only five days to answer the complaint, produce its evidence and identify witnesses for what amounts to an immediate trial on the merits. And we thought the Eastern District of Virginia was the “rocket docket.” France just started to allow class actions last Fall. They will decide both suitability for class treatment and liability in the “first judgment,” although they have no punitive damages. One of the first class actions filed was against an insurance company (no surprise there). In Canada, generally there is a low threshold for class certification, issue certification is common, and defendants typically have few options at the class certification stage. But defendants win some class actions at trial, and they benefit from a “loser pays” rule with respect to attorneys’ fees (although third-party funding is allowed, allowing plaintiffs’ lawyers to shift the risk), and there are no juries. The class action environment internationally is certainly a factor that should be considered when insurers and other large corporations are considering international mergers.

Media Relations in Class Cases: Jim Moorhead presented on this topic. He noted how plaintiffs’ firms have tended to dominate Google searches regarding particular class actions or “hot” issues in class actions generally. Defendants can pay for ads that counteract that. (And it strikes me that defense lawyer blogging helps somewhat since those blog posts often make the first or second page of Google.) Jim also talked about the importance of a social media presence, another area where plaintiffs’ lawyers tend to dominate. Jim emphasized the importance of establishing the company as a source of timely and accurate information on the issue with a strong initial response that is not legalistic, and not a response that may have to be retracted later. He stressed that a company, when faced with a difficult issue, should take specific actions and steps that demonstrate that it is addressing the issue (e.g., stating publicly that it is assigning certain people to investigate or otherwise handle a matter), and make statements about how the company is committed to doing what is lawful and ethical (and making improvements if appropriate). He said there are ways to do this effectively without creating problems in the litigation. When dealing with investigative reporters, he suggested first trying to understand what the story being worked on is, and providing a short written response tailored to that.

Psychology of Legal Ethics: Kevin Underhill of Shook, Hardy & Bacon LLP presented on this topic. Using Watergate and other examples, one of his main points was that ethics transgressions can arise because of “group think,” i.e., the tendency of individuals working on a team not to want to challenge the leader or the general sentiment or initial thinking of a group. This problem can be avoided with a culture that makes sure everyone is comfortable and encouraged to make their own independent evaluation and raise concerns. Other problems arise as a result of moving too quickly, without taking the time to stop and think things through.


Insights from DRI Class Action Seminar 2015 – Part 1

As I’ve done in past years, this post and the next one will summarize some takeaways I gleaned from this year’s DRI Class Action Seminar.

Impact of Dart Cherokee: Nowell Berreth, who argued this case in the Supreme Court, spoke about this case, which held that a notice of removal is not required to attach evidence. Rather, it’s merely a pleading like a complaint that needs to include a “short and plain statement” of the grounds for removal. The greatest impact of Dart Cherokee has been the Court’s statement about there being no presumption of removal under CAFA. This has been cited by courts of appeals in summarily reversing or vacating decisions granting motions to remand. Even the Ninth Circuit, which was not previously particularly friendly to removals under CAFA, has done this. So this decision seems to have enhanced defendants’ chances of getting remand decisions reviewed on appeal at the court of appeals level, although the Supreme Court’s ruling about its own CAFA jurisdiction may make it more difficult to get a certioriari petition granted if the court of appeals denies review.

Cutting Edge Developments in Class Action Law: Scott Burnett Smith presented on this topic. He highlighted a couple of circuit splits that might be ripe for Supreme Court review. The Third and Fourth Circuits are split on ascertainability, regarding whether the class members have to be actually identifiable at class certification, or whether it’s sufficient to have merely a method for identifying the class. There is also a split between the Seventh, Ninth and Eleventh Circuits on the viability of injunctions of state court proceedings to protect class settlements — the Seventh Circuit has rejected that (with a certiorari petition remaining pending in the Supreme Court), while the Ninth and Eleventh have allowed it. Although it has not receive a lot of attention, the Supreme Court’s decision on personal jurisdiction in Walden v. Fiore, which narrowed the test for specific jurisdiction, is helping some defendants in class actions. The new test focuses on the defendant’s contacts with the forum state, rather than with the plaintiffs.

Judge Posner on Attorneys’ Fees: Judge Richard Posner of the Seventh Circuit spoke about his concerns with plaintiffs’ attorneys’ fees in class actions. His main concern is that class representatives are not typically acting as clients and making any effort to rein in their lawyers’ fee applications. Defendants also may not worry much about how much of what they are paying goes to the class as opposed to the plaintiffs’ attorneys (although I’m not sure that’s correct where the class members are long-term customers of the defendant whom the defendant has a continuing relationship with). Judge Posner sees objectors as part of the solution to this problem. He said that judges should be evaluating how much time was spent by plaintiffs’ counsel and how the work was allocated between them. And where they have agreed to a modest settlement because of a lower likelihood of success on the merits or on class certification, that should result in a lower fee. He also suggested that in some cases it may make sense to defer the award of fees, or part of it, until it is known how many class members have made claims in a claims-made settlement, and how much relief they have obtained. This allows the fee application to be evaluated in connection with the actual relief to the class. Judge Posner also suggested that the only real justification for cy pres relief is punitive, if the class action device is seen as having a deterrent role. He suggested that judges should give little weight to a “clear sailing” provision in a settlement agreement (an agreement by the defendant not to oppose an attorneys’ fee up to a particular amount), and that if there is a good reason for a reversion provision (allowing money not awarded to be returned to the defendant), it should be permitted. Another panelist made an important point about how Rule 23 does not allow an award of attorneys’ fees if there is no statute or contract provision providing for them. In those circumstances, defendants can take a class action to trial without risking an attorneys’ fee award.

Mediation of Class Cases: Former U.S. Magistrate Judge Diane Welsh of JAMS explained how a procedure of doing individual mediations in select cases, with the individual plaintiffs present, was successful in achieving a mass settlement in a mass tort context. In her view, that was more effective than bellweather trials, which have a tendency to lead to more extreme verdicts on either side, which can make settlement more difficult. Individual mediations of the named plaintiffs’ claims and perhaps some putative class members’ claims might be useful in attempting to settle a class action, depending on the circumstances.

Rule 23 Amendments: Members of the subcommittee of the advisory committee considering potential amendments to Rule 23 discussed the status of their work and took comments from the audience. They are working on a proposal (not reflected in the current draft amendments) to encourage “front-loading” of class actions more, with a list of information that should be provided to the judge early in the case, and information that should be presented with a motion for preliminary approval of a class settlement. They are also considering whether to wade into the debate about ascertainability (given the circuit split discussed above). Some consideration is being given to whether objectors should have to qualify in some respect before they are heard. John Parker Sweeney, president of DRI, argued that the committee should address “no injury” class actions, by adding to the rule a provision that a class cannot be certified if the class members’ injuries are different in scope from the named plaintiffs’ injuries. Committee members expressed some skepticism about whether they should wade into that area given that it is currently before the Supreme Court. Michael Pennington spoke against the proposal to allow settlement classes to be certified without predominance, suggesting that might lead to more “strike suits” by plaintiffs’ attorneys. I suggested that the proposed rule provision that would reinstitute a requirement for court approval of settlements with named plaintiffs should not be adopted because it could make settlement of nonmeritorious class actions more difficult, and goes against Smith v. Bayer Corp.‘s holding that putative class members are not parties until a class is certified. With respect to the proposal that “issues classes” not require predominance, I suggested that if the committee were to adopt that, they should at a minimum allow district courts to evaluate whether predominance is required, in part by evaluating whether the case or issue belongs under Rule 23(b)(2) or Rule 23(b)(3). In some cases the parties reasonably dispute which part of the rule applies, or whether the issue is truly a common issue or not. The judge should be able to decide that predominance is required because the issue belongs under (b)(3), or is one on which individual application is necessary. With respect to ascertainability, I suggested that the committee consider including the requirement in the rule (to reflect the nearly universal case law) but not wade into the debate about how precisely to apply the requirement.

Practical Approaches to Defending Class Actions: John Parker Sweeney pointed out how Wal-Mart v. Dukes provides a good roadmap to defending a class action by taking rigorous discovery of the named plaintiffs and perhaps some putative class members as well. Jennifer Quinn-Barabanov made a good point about how, in filing a Daubert motion and setting up your expert to defend one, you want to make sure you are leaving some issues for the merits, not trying to litigate the merits entirely at the class certification stage. She also made a great point about how defendants can search for public records, public information and third-party sources of information about the named plaintiffs and putative class members to develop additional information in defending against class certification.

Is a Class of Opt Outs Viable? Florida Court of Appeal Says No

A recent Florida appellate court decision caught my eye because it addressed a potentially-important issue that is not expressly addressed by Fed. R. Civ. P. 23, and has rarely been litigated: whether persons who have opted out of a class action settlement may pursue another class action on the same claims. The court held that they could not.

In Bay Area Injury Rehab Specialists Holdings, Inc. v. United Services Automobile Association, No. 2D14-786, 2015 Fla. App. LEXIS 8772 (Fla. 2d Dist. Ct. App. June 10, 2015), approximately 293 class members had opted out of a prior class action settlement. One of the opt outs had also filed a putative class action on largely the same issues that were the subject of the settlement. That case was stayed, by agreement of the parties, pending resolution of the class action that was settled. The plaintiff then sought to represent a class of medical providers who had opted out of the prior class settlement. The trial court granted a motion to strike the class allegations, and the court of appeal affirmed.

The court of appeal explained that “a party who opts out of a class action retains the right to proceed individually, but not to launch a competing class action of opt-outs seeking the same relief resolved on a class basis in a prior lawsuit.” Id. at *7-8. The court of appeal also endorsed the trial court’s reasoning that:

serial class actions would promote a marketplace for competing class actions and erode the benefits of proceeding in a single class action. The underlying lawsuits could proceed ad infinitum. Indeed, these competing class actions would weigh down the mechanism of providing litigants with an economically viable means of addressing their common claims in court through a single representative action.

Id. at *9. The court further noted that “[a]lthough we do not hold in this case that a class action of opt-outs is legally impossible, the need for such a class action would seemingly require exceptional circumstance.” Id. at *10.

This well-reasoned decision likely will be helpful to insurers and other defendants faced with this issue in other jurisdictions, given the paucity of precedent addressing the question. This also may be an area in which an amendment to class action rules to expressly address this issue might be appropriate.

Can an Insurer Intervene in a Class Action to Protect Against a Collusive Settlement?

Liability insurers are sometimes faced with a difficult scenario: Their insured has been sued in a class action with potentially large stakes. The insurer believes they have no duty to defend and a denial of coverage is appropriate. But the result of declining to defend the insured is likely to be a “collusive” class action settlement in which the named plaintiffs, on behalf of the class, agree to a large judgment, with only a relatively small portion of it (if any) collectible against the insured, and the remainder collectible only against the insurer that has denied coverage. A likely scenario where this type of scenario may occur is where the insured has little assets in comparison to the potential liability. The insurer may be confident that its denial of coverage will be upheld. But it cannot be certain of that. And if a court rules that coverage exists, the insurer could be stuck with a very large class action settlement, unless it can challenge the appropriateness of that settlement.

One approach an insurer can take in this scenario is move to intervene in the underlying class action. That motion, however, may need to be filed early in the case, according to a recent Seventh Circuit decision. In CE Design Ltd. v. King Supply Co., No. 12-2930, 2015 U.S. App. LEXIS 11117 (7th Cir. June 29, 2015), the plaintiff filed a class action under the Telephone Consumer Protection Act (“TCPA”) against King Supply, which was insured under CGL and commercial umbrella policies. The insurers denied coverage based primarily on exclusions for TCPA claims. After class certification, King Supply agreed to a $20 million settlement (the policy limits), with only $200,000 (1% of the judgment) executable against King Supply. After the proposed settlement agreement was filed, but before it was approved, the insurers moved to intervene in the case. They also sought a declaratory judgment on coverage separately in a state trial court, and eventually prevailed.

The district court held that the insurers’ motion to intervene was untimely, and the Seventh Circuit affirmed. Judge Posner’s opinion for the Seventh Circuit concluded that the insurers “should have begun worrying when the suit was filed rather than almost three years later” because “[a]lmost all class actions are settled, and . . . a class action settlement may be the product of tacit collusion between class counsel and a defendant.” Id. at *7. Judge Posner wrote that “[a] prospective intervenor must move to intervene as soon as it ‘knows or has reason to know that [its] interests might be adversely affected by the outcome of the litigation.’” Id. at *9-10 (citation omitted).

Judge Posner’s opinion further noted that “even if the insurers had filed a timely motion to intervene, their interest might well have been deemed too contingent on uncertain events to justify granting their motion.” Id. at *11. Judge Posner suggested that insurers might be better off either defending the insured under a reservation of rights, or simply relying on their declaratory judgment action to vindicate their rights. Judge Hamilton wrote a concurring opinion concluding that the insurers lacked the type of interest that would justify intervention because their rights were contingent on whether their coverage decision was correct.

So what is an insurer faced with this quandary to do? Defend under a reservation of rights and incur substantial class action defense costs until the coverage issue is resolved in a declaratory judgment action (if the court will decide that before the underlying case is resolved)? Move to intervene early in the underlying action to protect against a collusive settlement? Or play the odds that the coverage decision will ultimately be upheld? Not an easy call to make. But intervening later in the case is unlikely to succeed, at least in the Seventh Circuit.

DRI Class Action Seminar 2015

The Defense Research Institute (DRI) will be holding its annual class action seminar on July 23 and 24, in Washington, D.C. I’ve attended this program every year since its inception, and have served on the planning committee for several years. The program has continually improved year after year.

This year’s program will feature, among other sessions:

  • a discussion with Judge Posner of the Seventh Circuit regarding attorneys’ fees in class actions
  • a program on class action mediations with retired Judge Diane Welsh
  • a discussion with Judge Robert M. Dow, Jr., a member of the Rule 23 Subcommittee to the Advisory Committee on Civil Rules, regarding the proposed rule changes (see my May 4 blog post for a summary of those)
  • a session by Supreme Court litigator Andrew Pincus on “no injury” classes and Article III standing, which will be the subject of Spokeo v. Robins, to be decided by the Supreme Court next Term (see my May 1 blog post for more on that)
  • a session on managing media relations in class actions by Richard Levick (I heard him speak on this subject several years ago and he was excellent).

I hope to see you there.