Use of Expert Testimony at Class Certification Stage Addressed By Third Circuit

The Third Circuit recently joined the Seventh, Eighth, and Ninth Circuits in holding that, where a Daubert challenge is made to the use of expert testimony in support of class certification, the Daubert challenge must be resolved at that stage. The Third Circuit explained that “[e]xpert testimony that is insufficiently reliable to satisfy the Daubert standard cannot ‘prove’ that the Rule 23(a) prerequisites have been met ‘in fact,’ nor can it establish ‘through evidentiary proof’ that Rule 23(b) is satisfied.” In re Blood Reagents Antitrust Litigation, No. 12-4067, 2015 U.S. App. LEXIS 5630, *9 (3d Cir. Apr. 8, 2015).

That result is hardly surprising. What I found most useful in this opinion was a footnote stressing that “[l]ike any evidence, admissible expert opinion may persuade its audience, or it may not,” and “[w]eighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.” Id. at *12 n.10. If the plaintiff’s expert testimony at class certification is weak enough that whether it is admissible under Daubert is a close call, the district court might not even need to reach that issue. That is because the testimony is not persuasive enough to warrant class certification regardless of whether it meets the Daubert threshold. Courts may find that to be a less cumbersome way of resolving the issue, particularly given that class certification is decided by the court, not a jury, and Daubert is more important in the jury context.

Expansion of Class Allows Second Removal Under Class Action Fairness Act, According to Ninth Circuit

It is important to remember that when a putative class action is remanded to state court under the Class Action Fairness Act (“CAFA”), that may not be the end of the jurisdictional battle. Developments in the case, or in the applicable CAFA jurisprudence, may warrant another removal of the case to federal court, if those developments change the removal analysis.

The Ninth Circuit recently decided a case in which the district court had previously remanded the case to state court on the grounds that the amount in controversy under the CAFA was not satisfied. Without any amendment to the complaint, the state court later certified a broader class, resulting in an amount in controversy exceeding $5 million. The district court held that the removal was untimely because it was based on the same complaint. But the Ninth Circuit reversed, finding that a second removal was proper. It explained that “Of course, defendants are not entitled to more than one bite at the apple, but the superior court’s certification order substituted a new apple. . . . When the superior court later certified a broader class, it increased the amount in controversy, effectively amending the complaint.” Reyes v. Dollar Tree Stores, Inc., No. 15-55176, 2015 U.S. App. LEXIS 5222, *9 (9th Cir. Apr. 1, 2015). Because the second removal was accomplished within 30 days of the certification order, it was timely.

Third Circuit Clarifies Its Ascertainability Standard

Ascertainability is an implied requirement for class certification, not expressly addressed in Fed. R. Civ. P. 23. While there are different formulations of the requirement, in essence it requires that there be an adequate method for ascertaining who the class members (as defined by the class definition) are, without conducting trials for that purpose. Ascertainability of the class is essential for the court to give notice to the class, determine who is bound by a final judgment, etc.

The Third Circuit has been a hotbed of litigation over this requirement following its decisions in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013) and Marcus v. BMW of North America, LLC, 687 F.3d 583 (3d Cir. 2012). Some commentators have suggested that the Third Circuit’s standard is so stringent that it completely precludes certification of any class involving a small consumer product for which consumers rarely retain a receipt or other proof of purchase. The Third Circuit recently clarified its standard.

In Byrd v. Aaron’s Inc., No. 14-3050, 2015 U.S. App. LEXIS 6190 (3d Cir. Apr. 16, 2015), the plaintiffs rented computers from the defendants, which allegedly used spyware to secretly record screenshots, keystrokes and webcam images, without the renters having any idea that their activities were being recorded. All kinds of personal information was allegedly recorded, in a scenario reminiscent of George Orwell’s book 1984, as the court noted. The plaintiffs alleged that this violated the Electronic Communications Privacy Act of 1986.

The district court denied class certification on ascertainability grounds. It found the proposed class underinclusive, overly broad, and vague to the extent it included “household members” of those who rented computers.

The Third Circuit reversed, finding that ascertainability was satisfied, and remanded for further consideration of the other class certification requirements. Here are some key points from the opinion:

  • Ascertainability requires that “(1) the class is ‘defined with reference to objective criteria’; and (2) there is ‘a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.” Id. at *15. “If class members are impossible to identify without extensive and individualized fact-finding or ‘mini-trials,’ then a class action is appropriate.” Id. at *16.


  • The class members need not be actually identified at the class certification stage, but there must be a sufficient evidentiary showing demonstrating that class members can be identified. Id. at *18.


  • Although ascertainability is related to the class definition, it is a separate requirement from the requirement that the class be adequately defined for purposes of a class certification order, and the two requirements should not be conflated. Id. at *22-23.


  • There is no requirement that a class include everyone who was harmed because that might require a fail-safe class, and “[i]ndividuals who are injured by a defendant but are excluded from a class are simply not bound by the outcome of that particular litigation.” Id. at *25-26.


  • Potential overbreadth of the class is an issue that should be addressed separately from ascertainability. A class that is defined broadly but can be readily identified through objective records is ascertainable. Whether members of the putative class lack standing is a separate issue that the court declined to address before the district court had done so. Id. at *29-31.


  • The inclusion of “household members” of persons who rented computers in the definition of the class did not render the class not ascertainable. Public records could be used to identify persons who resided in the same house or apartment as the renter. Id. at *31-32.

Judge Rendell issued a concurring opinion, explaining that she would eliminate the second prong of the Third Circuit’s ascertainability test. She would not require that there be an “administratively feasible” mechanism for determining who the class members are because, in her view, this requirement eliminates too many “small-value” consumer class actions. Id. at *51-54 (Rendell, J., dissenting).

While this decision likely will be viewed as an effort by the court to narrow, to some degree, the Third Circuit’s defendant-friendly ascertainability standard, ascertainability remains a key basis on which defendants will be able to defeat class certification in many cases. One way to develop an evidentiary record for this is to find examples of potential putative class members with respect to whom a mini-trial would be required to determine whether or not they fall within the class. To the extent you can show that these mini-trials would be required in a substantial number of cases, that makes the defendant’s argument even stronger.

In insurance claim-related class actions, the proposed class is frequently defined in a manner in which an individual claim file review would be required to identify class members, and even that review would not squarely answer the question of class membership in many instances because the file does not clearly answer the relevant questions, and may contain incorrect information. Ascertainability can be a key ground on which to defend against class certification in insurance cases.

Labor Depreciation Class Actions Heating Up Across The Country

Class action litigation is spreading across the country involving the application of depreciation in calculating the actual cash value of property damage under homeowners and commercial property insurance policies. This blog post will be longer than typical, but I think you will find it worth reading.

The Issue: For decades, insurers have been using replacement-cost-less-depreciation as a method (where appropriate) for calculating actual cash value. That method typically takes the entire estimated replacement cost of an item of property (which includes the materials, labor and sometimes other components) and depreciates that item based on factors such as age, condition and obsolescence. Software programs such as Xactimate are often used in performing these calculations. Recently, putative class action cases in various jurisdictions have asserted that depreciation should be applied only to the materials component of the replacement cost, and not to the labor component. For example, if the cost of replacing a roof is $10,000 and $7,000 of that is labor and $3,000 is materials, then only the $3,000 should be depreciated, according to these plaintiffs.

Here is the status of the litigation in the jurisdictions where I’m aware of the issue being litigated, followed by some thoughts on options insurers have in addressing this issue. (If you are aware of any jurisdiction I’ve missed, please let me know.) There are also some jurisdictions where insurance department regulations have addressed the issue, such as California and Montana.

Arkansas: In 2013, the Arkansas Supreme Court ruled that “the cost of labor may not be depreciated when determining the actual cash value of a covered loss under an indemnity insurance policy that does not define the term ‘actual cash value.’” Adams v. Cameron Mutual Insurance Company, 430 S.W.3d 675, 679 (Ark. 2013). The court concluded that the term “actual cash value” was ambiguous, and that labor was not “logically depreciable” because it does not wear out over time. The court relied on a dissenting opinion in Redcorn v. State Farm Fire & Cas. Co., 55 P.3d 1017 (Okla. 2002). In that case, the majority of the Oklahoma Supreme Court had ruled in favor of the insurer’s position, explaining that under the “broad evidence rule” applied in Oklahoma and many other jurisdictions in determining actual cash value, it was appropriate to consider all relevant evidence in determining actual cash value. And the actual cash value of a roof, for example, would take into account the entire value of the roof as a completed product, not just the materials component thereof. For more on the Arkansas decision, see my November 21, 2013 blog post. This ruling led to numerous class actions being filed in Arkansas on this issue, some of which have resulted in class action settlements. There has been no ruling on class certification in Arkansas to my knowledge.

Kentucky: Last week, in Bailey v. State Farm Fire & Casualty Company, Civ. A. No. 14-53-HRW, 2015 U.S. Dist. LEXIS 37568 (E.D. Ky. Mar. 25, 2015), another putative class action on this issue, a Kentucky federal district court denied State Farm’s motion to dismiss. The court noted that a Kentucky regulation provides for actual cash value to be calculated as replacement cost less depreciation, but does not address how depreciation should be calculated. Id. at *11-12 (citing 806 KAR 12:095(9)). The court cited Kentucky law applying the principle of indemnity under which an insured receiving actual cash value payment should be “put back in the position he or she enjoyed before the loss,” without a benefit or detriment. Id. at *13. While the Oklahoma Supreme Court majority found that this principle supported the insurer’s position because depreciating only a portion of the value of an item would not yield its true actual cash value, the Kentucky federal district court disagreed. It wrote that “labor is not subject to wear and tear” because, for example, “the cost of labor to install a new garage would be the same as installing a garage with 10 year old materials.” Id. at *14-15. But is that the right question to ask? If the garage was for sale the day before the loss occurred, would a reasonable buyer pay the depreciated value of the garage in its entirety, or the depreciated value of the materials together with full labor costs? It would obviously be the former. The Kentucky court, however, agreed with the Arkansas Supreme Court decision, and the dissent in the Oklahoma Supreme Court.

Minnesota: In Wilcox v. State Farm Fire & Casualty Company, Civ. No. 14-2798 (RHK/FLN) (D. Minn. Mar. 4, 2015), a Minnesota federal district court recently decided to certify to the Minnesota Supreme Court the following question: “May an insurer, in determining the ‘actual cash value’ of a covered loss under an indemnity insurance policy, depreciate the costs of labor when the term ‘actual cash value’ is not defined in the policy?” The court directed the parties to submit proposed statements of facts to accompany the certified question.

Alabama: In Baldwin Mutual Insurance Company v. McCain, 2015 Ala. LEXIS 22 (Ala. Feb. 20, 2015), the Alabama Supreme Court recently reversed the certification of a class, on procedural grounds, in a case involving a labor depreciation issue. The insured alleged that it was improper to depreciate labor costs associated with the removal of damaged materials (some insurers do not apply depreciation to these costs), but apparently the insured did not challenge the depreciation of the labor costs associated with installing materials. The insurer’s summary judgment motion was denied by the trial court, and a class was certified. The Alabama Supreme Court reversed the certification of the class on procedural grounds. This was because the plaintiff, in a brief filed after the class certification hearing, sought to expand the scope of the class to include policyholders who had replacement cost policies, in addition to those who had actual cash value policies. The trial court had adopted this new class definition. The supreme court held that it was improper for the trial court to certify the class without giving the insurer the opportunity to oppose certification of this newly-framed class at a new evidentiary hearing. The Alabama Supreme Court did not address the merits of the issue presented or the merits of certification. So this decision is not likely to have impact elsewhere.

Missouri: There are several putative class actions where the labor depreciation issue has been raised in Missouri, but no ruling on the merits or class certification has been reached yet: Riggins v. Am. Fam. Mut. Ins. Co., Case No.: 2:14-cv-04171-NKL (W.D. Mo.); McLaughlin v. Fire Ins. Exch., No. 1316-CV11140 (Mo. Cir. Ct., Jackson Cty.); Bellamy v. Nationwide Affinity Ins. Co., No. 1516-CV06346 (Mo. Circ. Ct., Jackson Cty.).

So what options might insurers consider on this issue, given that it seems to be gaining traction in the plaintiffs’ bar and spreading across the country? Here are the options that I can think of:

Litigating Vigorously: Although a couple of decisions have gone against the industry, there should be still plenty of hope that the tide can be turned. In jurisdictions that have adopted the “broad evidence rule” or “fair market value” as the method of calculating actual cash value, there is a strong argument that a market value calculation intrinsically takes into account depreciation of the overall market value of a building, including both labor and materials. Insurers can also rely on the manner in which depreciation is calculated in other relevant contexts, such as appraisal of real property for tax purposes. These appraisals typically apply depreciation to the entire value of the structure, and this method is frequently upheld by courts. Leading appraisal textbooks also provide for that type of calculation. Arguments focused on a broader, more comprehensive analysis of the jurisdiction’s law on actual cash value and depreciation may persuade courts that the insurance industry’s longstanding approach of depreciating the entire replacement cost value of an item is the correct approach, and a more accurate method of determining actual cash value. Insurers also have a host of arguments in opposing class certification, including that age, condition and obsolescence of items must be litigated on a case-by-case basis, and determining how depreciation was applied on a claim and how the claim was handled (whether on a replacement cost or actual cash value basis or some combination thereof) requires a file-by-file review. Both liability and damages may require individualized adjudication.

Modifying Policy Language: At least one insurer has adopted policy language specifically permitting the application of depreciation to labor costs. If approved by the insurance department (where required), this is likely to be effective in resolving the issue on a going-forward basis. But changing policy language will not resolve the issue when raised under older policy forms that do not have the new language. And plaintiffs sometimes argue that a change in policy language means that the old version was ambiguous (although courts have repeatedly rejected that argument). An insurer that changes its policy language would still face the risk of a putative class action alleging that, under the prior policy provisions, depreciation of labor costs was improper. The only way to try to preclude that risk would be to issue retroactive payments on closed claims that are not time-barred, which would be expensive.

Seeking Regulatory Guidance: Insurers might consider asking insurance departments to opine on this issue, but they risk the possibility of an adverse result. And the department may not have the authority to regulate where the issue involves construing policy language and applying existing court precedent. Seeking regulatory guidance is probably not likely to happen unless the insurer has reason to believe the department’s answer will support its position. Insurers will need to be prepared, however, for the possibility of increased regulatory activity in this area in light of the class action litigation.

Changing Practices: Insurers could avoid this issue prospectively by changing their practices nationwide, or in certain jurisdictions, so as not to depreciate the labor component of replacement cost value in calculating actual cash value. But that would be expensive. And unless the change were implemented retroactively by reopening closed claims and issuing supplemental payments, such a change would not prevent the possibility of a successful class action seeking to recover labor depreciation amounts on claims within the applicable suit limitation period (or contractual limitations period). And defending those suits might be more difficult where the practice has been changed. No matter how well documented, the fact that a change is made might create the wrong impression about the correctness of the prior practice.

Injunction in Aid of Class Action Settlement Addressed by Seventh Circuit

Defendants who are defending multiple class actions involving the same issue in different jurisdictions can sometimes be faced with a quandary when they want to settle. They might reach a settlement agreement with plaintiffs’ counsel in one of the cases, but until that settlement is final, which typically takes months, they may have to continue litigating the other cases. And, in the meantime, cross their fingers that the other cases do not undermine the settlement. One option some federal courts have used to prevent other litigation from derailing a settlement is to issue an injunction, after preliminary approval, that bars the class members from prosecuting other litigation in state court on the same issue. The Seventh Circuit, however, held last week that such an injunction violated the Anti-Injunction Act, in Adkins v. Nestle Purina Petcare Co., No. 14-3436, 2015 U.S. App. LEXIS 3270 (7th Cir. Mar. 2, 2015).

The Anti-Injunction Act bars a federal court from enjoining state court proceedings “except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.” 28 U.S.C. § 2283. Where a class action settlement reaches a final judgment, an injunction may well be appropriate, as the Seventh Circuit explained. But here, where the settlement process would take months to complete, and the state court class action was heading towards trial, the parties relied on the “necessary in aid of its jurisdiction” exception to the Anti-Injunction Act. In finding this exception inapplicable, Judge Easterbrook wrote that the word “jurisdiction” meant “adjudicatory competence,” or, in other words, that a court “has been designated by statute as an appropriate forum for a dispute of a given sort . . . . .” Id. at *6. The opinion further explained that “[p]arallel state and federal litigation is common” and “[t]he first to reach final decision can affect the other,” but “the potential effect of one suit on the other does not justify an injunction.” Id. at *7. The Seventh Circuit also cited the word “necessary” in the statute and dictum in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011) to the effect that when in doubt injunctions should not be issued. Id. at *10-11. It noted that other courts had reached contrary results but did not discuss those opinions.

Adkins may be taking an unduly narrow view of the terms “jurisdiction” and “necessary.” The word “jurisdiction” has different meanings in different contexts. If “jurisdiction” means only that the federal court has statutory authority to hear a case, which Adkins seems to suggest, it is difficult to conceive of circumstances in which state courts could interfere with that. Either the federal court has jurisdiction or it does not, and that is a federal question that the state court has nothing to do with. But the “necessary in aid of jurisdiction” exception cannot be a dead letter. Congress likely intended to allow federal courts to enjoin state courts to prevent them from interfering with federal courts’ authority (not merely statutory jurisdiction) in some respects. Adkins seems to acknowledge that, at least if there were inconsistent orders by the federal and state systems, the “necessary in aid of its jurisdiction” exception might apply (and it has been found applicable in “in rem” cases).

Other than arguing that Adkins was wrongly decided (if you are in another circuit, or in the Supreme Court), what can a defendant do in this scenario? Asking the state court for a stay would be an option (and perhaps trying to appeal the ruling on that issue, if possible). But where there is a “race to res judicata” that might fail. Another option would be to try to speed up the federal settlement – speed up the issuance of the notice, shorten the opt-out period, and hold the fairness hearing as soon as possible. Not easy, but it might work. There is no real reason why class members need a long period after getting a class action notice in the mail (or by e-mail) to send back a form. Perhaps a federal court could even issue a judgment that would be effective as a final judgment (and thereby permit an injunction against other proceedings), but be subject to reopening if the settlement process failed? It may take some creativity to work around this decision and achieve the objective of a final resolution sooner with lower litigation costs.

Comcast, Superiority, Predominance and Injunctive Relief Addressed in Recent Second Circuit Class Certification Opinions

The Second Circuit recently addressed a panoply of class certification issues in two opinions. Both decisions ruled in favor of the plaintiffs, but will help defendants tailor their arguments in future cases.

Roach v. T.L. Cannon Group, No. 13-3070-cv, 2015 U.S. App. LEXIS 2054 (2d Cir. Feb. 10, 2015) addressed whether the Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) overruled Second Circuit law regarding the impact of individualized damages issues on a class certification analysis under Rule 23(b)(3). This was an employment case in which the district court had denied certification on the sole ground that the plaintiffs did not offer a model for proving damages on a classwide basis. The Second Circuit vacated this decision and remanded. It explained that “Comcast held that a model for determining classwide damages relied upon to certify a class under Rule 23(b)(3) must actually measure damages that result from the class’s asserted theory of injury; but the Court did not hold that proponents of class certification must rely upon a classwide damages model to demonstrate predominance.” Id. at *14. The Second Circuit further explained that, “[t]o be sure, Comcast reiterated that damages questions should be considered at the certification stage, when weighing predominance issues,” but “[t]he Supreme Court did not foreclose the possibility of class certification under Rule 23(b)(3) in cases involving individualized damages calculations.” Id. at *15-16. The court concluded that this interpretation of Comcast was consistent with that of other circuits. Id. at *16-17.

What does this mean for defendants? There is no question that individualized damages remain a relevant factor and in some cases will be a very important factor in the class certification analysis. When damages are individualized, that often means that causation or other issues relevant to liability are similarly individualized. A more “totality of the circumstances” approach melding various individualized issues may be most effective.

Sykes v. Mel S. Harris and Assocs. LLC, No. 13-2742-cv, 2015 U.S. App. LEXIS 2057 (2d Cir. Feb. 10, 2015) is a lengthy opinion involving an alleged debt collection scheme whereby the defendants would obtain default judgments in New York City Civil Court by executing false affidavits of service and affidavits of merit. Issues of potentially broader significance were:

Predominance: The defendants argued that individualized issues existed with respect to damages, the statute of limitations, and whether service of process was made properly. The Second Circuit majority held that individualized issues of damages would not defeat predominance because the amount of money obtained by defendants would be information in defendants’ possession and the damages sought were tied to the theory of liability. The majority further concluded that the applicability of the statute of limitations would not present a problem because the plaintiffs disclaimed reliance on equitable tolling (although this would defeat some of the named plaintiffs’ individual claims). The majority found the causation issue would not defeat some of plaintiffs’ claims (including a FDCPA claim), and was not sufficient to defeat predominance. The dissent concluded that individualized issues regarding service of process would predominate, and that the statute of limitations issue would either require individualized inquiries or render the named plaintiffs inadequate and atypical because they relied on equitable tolling.

Superiority: There was an interesting debate between the majority and dissent with respect to whether a state court procedure would be superior to a class action. The defendants argued that a New York state court procedure that would allow for fraudulently obtained default judgments to be vacated en masse would be superior to a class action. The Second Circuit majority disagreed because the New York City Civil Court would not have jurisdiction to hear a class action, the superiority analysis does not properly compare federal to state court fora, and the New York state court procedure would have to be initiated by an administrative judge, and would not allow the plaintiffs to pursue a right of action or control the litigation. Judge Jacobs’ dissent concluded that the state court procedure would be “broad, wholesale, effective, and easy,” and “[t]he only remaining salient advantage of this federal class action is attorneys’ fees, which do not much help the members of the class.” Id. at *76 (Jacobs, J., dissenting).

Rule 23(b)(2): The majority concluded that the proposed injunctive relief (requiring defendants to correct their practices in the future) would benefit the entire class. While the named plaintiffs’ default judgments had been vacated, the majority concluded (without explanation) that they might still be subject to further action by the defendants. The dissent concluded that certification under Rule 23(b)(2) was improper because the named plaintiffs would not benefit, and any suggestion of potential future suits and default judgments by the defendant was mere speculation.

This is a case that defendants will argue should be limited to its facts, which involved serious allegations of fraud to which the district court appeared to give significant credit. The nature of the FDCPA claim was critical to the court’s analysis and would not extend to other contexts where causation would have to be determined individually. The superiority ruling may not be particularly problematic because it is rare that defendants would prefer a state court forum. The Rule 23(b)(2) analysis lacks thoroughness and may not withstand scrutiny in future opinions.

Can A Certified Class Include Uninjured Parties? First Circuit Majority Says “Yes,” In Some Instances

One of the “hot” issues in class actions today is whether, or to what extent, a class can be defined to include members who were not injured, and do not have standing to sue. The First Circuit recently addressed this in a 2-1 decision, concluding that “class certification is permissible even if the class includes a de minimis number of uninjured parties.” In re Nexium Antitrust Litigation, 2015 U.S. App. LEXIS 968, *6-7 (1st Cir. Jan. 21, 2015). But how do you determine what is “de minimis”? And how do you properly identify those people and ensure that they do not obtain relief? The answers to those questions remain unclear even in the First Circuit. This is the type of issue that may be bound for the Supreme Court, either in this case or another similar case. This decision also addresses important issues concerning standing in class actions, but without fully analyzing them (at least in my view). These issues will continue to be a major battleground in class certification law in the coming years.

The Nexium case involved antitrust claims asserting that settlement agreements entered into between companies selling generic drugs and the original manufacturer of the drug (Nexium) violated state antitrust laws. Under the settlement agreements entered into during the course of patent litigation between the drug manufacturers, the original manufacturer agreed to make payments to the generic drug companies, one of which was over $1 billion. In return, the generic companies agreed to delay the launch of the generic drugs. Id. at *9-10. The plaintiffs asserted that these settlements were unlawful agreements not to compete, and caused insurance plans and individual consumers to pay more for the name brand drug during the period when the generic version was not available. Id. at *4.

The district court certified a class under Rule 23(b)(3). The central issue on appeal was whether it was proper to include in the class persons who were not injured because, for example, they would have chosen to continue to buy the name brand drug even after the generic versions were on the market. The First Circuit majority concluded that such persons could be included in the class definition, but “[a]t the class certification stage, the court must be satisfied that, prior to judgment, it will be possible to establish a mechanism for distinguishing the injured from the uninjured class members.” Id. at *19. The majority further recognized that no evidence was presented below as to whether or how this could be done. The court suggested, however, two methods: (1) a rebuttable “presumption that consumers would purchase the generic if it were available,” similar to the rebuttable presumption of reliance in certain securities class actions; or (2) testimony from each class member, perhaps by affidavit or declaration. Id. at *21-22. The court found this permissible because the number of potentially uninjured parties was “de minimus.”

So what is “de minimus”? According to the majority, “de minimus” should be defined “in functional terms,” and in this case the evidence suggested that the number of uninjured class members was somewhere between 2% and 5.8% of the class. Id. at *50-51. But where would they draw the line? What if it were 10% or 20% of the class?

Significantly, the majority further found that standing was satisfied because “[t]o the extent that it is necessary that each and every member of the class who secures a recovery also has standing, the requirement will be satisfied – only injured class members will recover.” Id. at *55. But, as the Supreme Court has explained, standing must be satisfied “at the outset of the litigation,” or the “commencement of the litigation . . . .” Friends of the Earth, Inc. v. Laidlaw Environ. Servs. (TOC), Inc., 528 U.S. 167, 180, 189 (2000). When does litigation commence for purposes of the absent class members? This likely occurs when a class is certified and the opt-out process has taken place—that is when class members become parties to the litigation. Smith v. Bayer Corp., 131 S. Ct. 2368, 2379 (2011). This was not addressed by the First Circuit, but potentially could support an argument that, when a class is certified, or at least after the opt-out period has expired, the class members must have standing. That issue, however, is for another day.

Judge Kayatta wrote a strong dissent. He disagreed with the result reached by the majority because: (1) the purportedly “de minimus” number of uninjured class members was estimated at over 24,000; (2) “the district court has not identified—much less rigorously analyzed—any method for identifying and excluding these thousands of consumers prior to entry of judgment”; and (3) it was improper, in his view, for an appellate court to create its own proposed method for culling out uninjured class members that was never proposed by the plaintiffs or considered by the district court. Judge Kayatta also noted that, during the pendency of this interlocutory appeal, the district court had taken the case to trial without conducting any culling method. The most colorful sentence of the dissent wrote that “the majority affirms a certification order based entirely on a fiction that we know to be false.” Id. at *67.

The issues presented in this opinion are an important arrow in defendants’ quiver. Many proposed class actions, including insurance cases, involve significant numbers of uninjured or potentially uninjured putative class members. In the context of insurance claims, for example, many consumers who were affected by an allegedly unlawful practice were not necessarily injured when you review how the claim was handled in its entirety. The problems in identifying those who were not injured, and whether they are even properly part of a class at all, including whether they have standing, potentially can be strong grounds for defeating class certification.

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

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

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

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.