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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.

Class Action Against State Auto Concerning Homeowners’ Policy Limits Is One Worth Watching

Posted in Property Insurance

Insurers typically adjust (or propose to adjust) the policy limits on a homeowners’ policy every year to take into account changes in the cost of construction. This is intended to help insureds make sure that sufficient coverage is available if there is a total loss. At the same time, this can result in an increase in the policy limit, and an increase in premium, when construction costs go up with inflation. But some insureds sometimes believe that their insurer has gone too far, and has proposed or required a policy limit that significantly exceeds the actual cost of rebuilding their house from the ground up.  This issue is the subject of a class action in Ohio against State Auto, in which an Ohio federal court recently denied (in large part) a motion to dismiss. This is an issue and a case that I think the insurance industry at large will want to watch closely as it moves forward.

In Schumacher v. State Auto. Mut. Ins. Co., No. 1:13-cv-00232, 2014 U.S. Dist. LEXIS 130952 (S.D. Ohio Sept. 18, 2014), the plaintiffs allege that they bought their home for $234,000 in 2001. They have not made improvements to it and its market value, they allege, has remained about the same. They have been insured with State Auto for years, and they allege that State Auto has increased the policy limit substantially, to over $500,000 on the dwelling as of 2013, which they claim far exceeds what it would cost to rebuild or replace their home. Id. at *5-7. (One interesting aside here is that there are two different costs that a policyholder might want to take into account – the cost of rebuilding from the ground up on the same lot, and the cost of simply buying a similar, older replacement home nearby. Those costs may be quite different in some markets, and some people will want enough insurance to rebuild on the same lot, while others might prefer to buy enough insurance to buy a similar home elsewhere, although the land is not insured and not included in any loss payment.)

The court largely denied State Auto’s motion to dismiss.  It dismissed the breach of contract claim because all of the allegedly-improper conduct by State Auto occurred before each new policy was issued, and “[a]n act or omission that occurs before a contract is formed cannot later be evidence of a[n] alleged breach.” Id. at *15.  The tort and statutory claims, however, were not dismissed. The court found Ohio law applicable to those claims, regardless of where the plaintiffs resided, because the alleged misconduct occurred at State Auto’s headquarters in Ohio. Id. at *17. (This is contrary to some other decisions and has significant potential implications for class certification, if the choice of law determination remains in place.) The court found that the plaintiffs had plausibly stated a claim for breach of the implied covenant of good faith and fair dealing by alleging that State Auto had “conconcted a plot . . . to sizably increase their premium revenue by selling an overpriced and superfluous product to their insureds . . . .” Id. at *18. Based on similar allegations of a purported plan by State Auto to raise rates by raising policy limits, the court also denied the motion to dismiss with respect to the claims for fraud, negligent misrepresentation and violation of the Ohio Deceptive Trade Practices Act.

This case is definitely one worth watching.  Stay tuned.

Summer Reading on Insurance Class Actions

Posted in Articles

If you read this blog, you have an interest in the very exciting subject of class actions against insurance companies. Either that or, more likely, it’s useful to your job to read the blog. If you have some downtime as the Summer winds down, and actually feel like reading even more about class actions, I’ve got two articles that might interest you. Or perhaps you want to put them on your shelf for when you have some downtime in the Fall.

First, I recently published in the FDCC Quarterly, a scholarly publication of the Federation of Defense and Corporate Counsel, an article entitled “Turning New Guns on Old Targets: Class Actions Against Insurance Companies.”  (Incidentally, for any of you who have not heard of the FDCC, it’s a great organization of defense lawyers and in-house lawyers – check out their website and contact me if you’d like more information.)  The article gives an overview of recent developments in insurance class actions, separated by line of business: property, auto, life and subrogation. So if you’re only interested in one of those lines of business you can just flip to that section of the article. At the end there is a section on the U.S. Supreme Court’s most recent class action decisions and my thoughts on their potential impact on insurance cases.

Second, I recently published an article in the Summer 2014 issue of TortSource, a publication of the ABA Tort Trial & Insurance Practice Section.  The article is entitled “Reaffirming Class Action Waivers in Arbitration Clauses,” and focuses on the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant.  If you’re an ABA TIPS member, you received this publication recently in the mail.  Unfortunately, the web-based version of the publication is not up to date so I don’t have a link for you.  If you’d like a copy of the article, e-mail me.

Affirmative Defenses Must Be Addressed In Class Certification Order, According To Texas Court of Appeals

Posted in Defense Strategy

A recent decision of the Texas Court of Appeals in Austin (Third District) caught my eye. Not because it involved insurance; rather, it was a securities class action challenging a board of directors’ approval of a corporate transaction. See Brigham Exploration Co. v. Boytim, No. 03-13-00191-CV, 2014 Tex. App. LEXIS 9068 (Tex. Ct. App. – Austin Aug. 15, 2014).  What caught my attention was that the court of appeals held that it was an abuse of discretion for the trial court to issue an order certifying a class without addressing the defendant’s affirmative defenses. 

The court explained that the Texas class action rule explicitly requires a trial plan in every order certifying a class. (While numerous other courts have required this, it is not typically inserted in the class action rule itself.)  The court ruled that “by failing to include analysis of the pleaded defenses, the trial court failed to conduct the required ‘rigorous analysis’ before ruling on the class certification.”  Id. at *10.  On that basis alone, the court of appeals found that the trial court abused its discretion.

This is a nice arrow for defendants to have in their quiver in Texas.  And the rationale should help elsewhere too.  I’ve said this here before, and I’m sure I’ll say it again: in opposing class certification, affirmative defenses can potentially make a real difference.

Insights from DRI Class Action Seminar 2014 – Part 2

Posted in Seminars/Programs

Here is part two of my insights from DRI’s 2014 class action seminar held last week:

Halliburton v. Erica P. John Fund DecisionAaron Streett, who  argued the Halliburton v. Erica P. John Fund, Inc. case in the Supreme Court, spoke about the decision.  The Court declined to overrule the efficient market presumption it had previously adopted in securities fraud litigation, but held that defendants are entitled, at the class certification stage, to introduce evidence to rebut that presumption by demonstrating that the alleged misrepresentation did not affect the market price.  This is largely, and perhaps entirely, an issue unique to securities litigation.  Aaron did not expect the decision to have significant impact outside of that narrow context, but noted that it might be a useful decision in other class actions where there is a rebuttable presumption that is part of the cause of action at issue.  The decision also reaffirms that merits issues, where they overlap with class certification issues, must be addressed at the class certification stage.

Constitutional Limits on Class ActionsProfessor Martin Redish of Northwestern University Law School and Tristan Duncan of Shook Hardy & Bacon presented on constitutional limits to class actions.  Prof. Redish stressed that Rule 23 is “not a roving device for doing justice” and cannot alter substantive law.  He strongly rejects the theory that plaintiffs in class actions are acting as private attorneys general or bounty hunters because they do not have that right by virtue of Rule 23.  He noted that there may be viable arguments that class actions violate due process when the manner in which they are conducted alters the substantive law.  There is also an argument that mandatory class actions under Rule 23(b)(1) and (b)(2), where there is no right to opt out, may violate due process rights of absent class members – an issue that has not been aggressively pursued by defendants at the appellate level in many years.   This is a key point to remember, particularly if (b)(2) class actions become more prevalent.  Tristan Duncan also noted that, when a class action is litigated in state court, there may be a viable argument that the state court’s interpretation of state law violates due process (e.g., because a very vague “unfairness” standard is being applied)  or constitutes a judicial taking.  Defendants may want to look for a suitable test case to bring these issues to the Supreme Court and ask it to impose constitutional limits on class actions.  Such a case might involve a “no injury” class action, or one in which the conduct was lawful or permitted or authorized by regulation (later overturned retroactively).

Emerging IssuesJohn Beisner of Skadden presented on emerging issues in class actions.  A hot issue is ascertainability of the class, particularly after the Third Circuit’s decision in Carrera v. Bayer Corp., which is strongly favorable to defendants.  Overbreadth of classes and standing of absent class members is another hot issue.  Beisner also suggested that defendants should argue a lack of typicality where the named plaintiffs have suffered harm but the vast majority of absent class members have not.  Another key point he made was that motions to strike the class allegations are becoming more successful – particularly with respect to unascertainable classes, nationwide classes, personal injury classes and fatally-flawed named plaintiffs.  Defendants may want to be more cautious, however, about when to raise predominance at the motion to strike stage.

Cy Pres:  Professors Hines and Redish and John Beisner also spoke about the use of cy pres in class action settlements.  Significant attention has been given to Chief Justice Roberts’ unusual statement regarding his vote to deny certiorari in Marek v. Lane, a case involving a cy pres settlement by Facebook.  Chief Justice Roberts’ statement noted that the Marek case was not a good vehicle for resolving the fundamental issues involving cy pres settlements because the issue presented was narrow, but that there are important issues the Court may need to address in the future.  Prof. Redish noted that we may see a constitutional Article III attack on some cy pres settlements where money is not reaching consumers or achieving the goals of the substantive law, and courts are essentially playing a role that they are not designed to play, and potentially altering substantive law.  If the courts were to preclude this type of settlement entirely, however, it could make settlements very difficult in class actions in which it is difficult to identify the class or it is not practical to issue individual payments.


Insights from DRI Class Action Seminar 2014 – Part 1

Posted in Seminars/Programs

Last week I attended the Defense Research Institute’s third class action seminar, an event that I had the privilege of helping put together.  As I’ve done in past years, I will summarize my “takeaways” from the seminar here.

State Attorney General SuitsChristopher Curran, who argued Mississippi v. AU Optronics Corp. (blog post) in the Supreme Court, spoke about the decision.  Although the Supreme Court refused to allow a state attorney general parens patriae suit to be removed as a “mass action” under the Class Action Fairness Act, Curran stressed that the door may still be open for removal of such suits as “class actions.”  What constitutes an action under a state rule or statute “similar” Rule 23 remains undecided.  He noted that there is language in the AU Optronics decision to the effect that if Congress had wanted representative suits to be removable under CAFA it would have done so under the “class action” provision.  And the decision in Standard Fire Ins. Co. v. Knowles (blog post) explains that courts should not exalt form over substance in applying CAFA.  Defense lawyers may want to argue against the “parens patriae” label and focus on these principles articulated in AU Optronics and Knowles in seeking removal of state attorney general actions as “class actions” under CAFA.  Insurers faced these kinds of suits following Hurricane Katrina, and were able to successfully remove some of them.

How Harm to the Class Affects PredominanceBrian Murray of Jones Day spoke about how courts are applying the Supreme Court’s decision in Comcast Corp. v. Behrend, which held that, in order to certify a class, damages must be provable on a classwide basis.  In the front-loading washing machine litigation, however, the Sixth and Seventh Circuits have allowed certification, at least for liability purposes only, even where the evidence indicates that the vast majority of putative class members suffered no harm because they’ve never had a problem with their machine.  Murray noted that one issue defendants can focus on in this type of case is typicality – the named plaintiff, who typically is one of the 3% who were harmed and not the 97% who were not harmed, is not typical of the class.  If the plaintiff limits the class to people who were harmed, the class might be considered an improper failsafe class (although from an exposure perspective, the defendant would probably prefer this limitation).  Standing is another issue that can be raised – some circuits require the absent member of the putative class to have standing; an issue the Supreme Court has yet to address squarely.  Murray recommended that defendants try to force the plaintiffs to provide a damages model, test whether it aligns with their liability theory, and whether it actually yields a positive damages figure.  Defendants also may want to try to force the plaintiff to present a trial plan.

Issue Class Actions under Fed. R. Civ. P. 23(c)(4)Professor Laura Hines of the University of Kansas School of Law, who has published extensively about “issue” class actions under Rule 23(c)(4), noted that the rule itself is vague, stating that “when appropriate, an action may be brought or maintained as a class action with respect to particular issues,” without explaining when  an issue class action is or is not “appropriate.”  She noted that the framers of the 1966 amendments to Rule 23, which included this provision, viewed this as a mere “detail” and did not give much attention to it.  Prof. Hines rejects the view that an issue class action can be certified under (c)(4) without meeting the predominance requirement of (b)(3) where otherwise required.  In her view, any (c)(4) class action must satisfy the applicable portion of Rule 23(b).

Class Action Settlements:   A panel of in-house counsel, moderated by Michelle Thurber Czapski of Bodman PLC discussed practical considerations regarding class action settlements.  Key points I gleaned from this panel included:  (1) don’t forget to plan for the possibility that the settlement will receive significant publicity and might even “go viral” on social media; have a plan for media relations and investor relations; (2) defendants may want to consider using settlement counsel separate from the trial team in some cases so as not to divert the trial team from its focus; (3) consider proposing a settlement special master either to oversee negotiations or to oversee the settlement process; and (4) get a settlement administrator, and, if needed, a notice expert, involved early, probably before settlement terms are finalized.

Whether and How Individualized Damages MatterJoel Feldman of Sidley Austin presented on strategies for taking advantage of Comcast v. Behrend and its progeny.  One of Comcast’s strongest progeny, from a defense perspective, is the Halvorson v. Auto Owners Ins. Co., an Eighth Circuit decision holding that whether medical charges were reasonable required individualized analyses that would predominate over common issues, and that every putative class member was required to have standing (see my blog post on Halvorson).  Joel made a recommendation that I’ve made a number of times here – developing a detailed factual predicate demonstrating how individual trials are needed, showing the judge how a class trial would be unwieldy.  Joel also suggested that defendants consider placing the legal standard (Wal-Mart and Comcast) at the very beginning of their class certification opposition to emphasize it for the judge.  Not sure I agree on that but it’s an interesting strategy.

Arbitration and Class Action WaiversArchis Parasharami of Mayer Brown, one of the lawyers who litigated AT&T v. Concepcion (and who I served on the faculty with at a class action seminar last year), presented on  the latest developments in the use of arbitration provisions with class action waivers.  While these provisions are almost always enforceable now after Concepcion and American Express v. Italian Colors Restaurant, Archis noted that arbitration is not without its downsides:  defendants pay the costs; arbitrators are not necessarily bound by substantive law; and there is essentially no right of appeal (absent unusual circumstances).  For those kinds of reasons some companies (and I think this includes insurance companies) have not expanded their use of arbitration clauses as a means of class action avoidance.  Other companies do not have a practical means of creating a written contract governing their interactions with consumers that can include an arbitration clause.  Two areas where plaintiffs have continued to attack these provisions include: (1) if the arbitration clause forbids the assertion of federal statutory rights; and (2) if filing fees make access to arbitration impracticable. Both of those can typically be avoided when drafting the clause.  It is also not clearly settled whether an arbitration clause can waive public injunction claims. And plaintiffs’ lawyers are attacking the fairness of individual arbitrations on unconscionability grounds, and whether there truly was assent to the arbitration clause.  A key development to plan for is that the American Arbitration Association has issued new consumer arbitration rules effective September 1, 2014, which requires preapproval of the arbitration clause by AAA and public registration of it, and the clause must allow for a small claims court option.  The Consumer Fraud Protection Bureau study on arbitration clauses could be issued by the end of the year, and might lead to regulation of those clauses.

Retained Asset Account ERISA Class Action: First Circuit Overturns Judgment in Favor of Plaintiffs

Posted in Life Insurance

One of the hot areas of class action litigation against life insurers over the last few years has been the use of retained asset accounts, whereby the insurer pays life insurance proceeds not by a lump sum but instead by providing beneficiaries with access to an interest-bearing account from which the funds can be drawn.  One of the cases in which the plaintiffs’ bar had success was in the District of Maine, where the district court found a breach of fiduciary duty under ERISA (see my February 22, 2012 blog post).  This case ultimately resulted in a $12 million judgment in favor of the plaintiff class, but that judgment was recently overturned by the First Circuit.  The First Circuit found no ERISA violation where the use of the retained asset account was expressly authorized by the ERISA plan, and the insurer complied with the plan.  The First Circuit’s decision closely followed decisions by the Second and Third Circuits reaching similar conclusions.

In Merrimon v. UNUM Life Insurance Company of America, Nos. 13-2128, 13-2168, 2014 U.S. App. LEXIS 12540 (1st Cir. July 2, 2014), the plaintiffs asserted that the use of the retained asset accounts to pay benefits: (1) constituted self-dealing in plan assets, in violation of section 406(b) of ERISA; and (2) violated a duty of loyalty under section 404(a) of ERISA.  The court of appeals initially addressed standing, concluding that the plaintiffs had standing because the claimed wrongful retention and misuse of assets “[i]f proven, would constitute a tangible harm, even if no economic loss results.”  Id. at *10.  The court also found that the Department of Labor’s conclusion that the use of a retained asset account does not violate ERISA where it is consistent with the plan terms, as expressed in an amicus brief, was entitled to deference because it was well-reasoned (not because the court agreed with it, but because the analysis itself was thorough).  Id. at *13-17. 

On the first issue, the First Circuit agreed with the district court that there was no violation of section 406(b), which prohibits self-dealing in plan assets, because the assets in retained asset accounts were not plan assets.  The court explained that “[i]t is the beneficiary, not he plan itself, who has acquired an ownership interest in the assets backing the RAA,” and “a beneficiary’s assets are not plan assets.”  Id. at *20.  The First Circuit distinguished its prior decision in Mogel v. Unum Life Ins. Co., 547 F.3d 23 (1st Cir. 2008), often relied upon by the plaintiffs’ bar, on the grounds that Mogel involved a plan that specifically mandated that benefits be paid in a lump sum, and the insurer in that case failed to comply with the plan documents.  Merrimon, at *20.

On the second issue, the First Circuit found no violation of section 404(a), which requires a fiduciary to discharge its duties solely in the interests of participants and beneficiaries.  The court relied on the Department of Labor’s amicus brief, and explained that once the insurer paid the benefits into the retained asset accounts, its fiduciary duties ceased and the subsequent relationship was a debtor-creditor relationship governed only by state law.  Id. at *26-27.  The setting of interest rates on the accounts was thus governed only by state law.  Id. at *31.

Based on these rulings, the First Circuit overturned a $12 million judgment in favor of the certified class, and instructed the district court to enter judgment in favor of the insurer.  Will this be the nail in the coffin of retained asset account class action litigation?  Perhaps, but stay tuned.

Comcast Construed In Recent Seventh Circuit Opinion

Posted in Class Certification Standards

After the Supreme Court decided Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013) (blog post), requiring damages to be provable on a classwide basis in order for a class to be certified under Rule 23(b)(3), class action practitioners and commentators wondered how much impact Comcast would have.  The Seventh Circuit recently addressed the scope of Comcast in a products liability case.  The decision potentially could impact other types of consumer class actions, and warrants a careful read.

If you’ve been anywhere near a supermarket in recent years, I’m sure you’ve seen a lot of foods advertised as organic.  But you may not have heard about organic shingles for your roof.  I had not, until I read In re IKO Roofing Shingle Products Liability Litigation, No. 14-1532, 2014 U.S. App. LEXIS 12684 (7th Cir. July 2, 2014).  The issue in the case, though, appears to have nothing to do with what “organic” means when it is used in describing a roofing shingle.  The plaintiffs allege that the defendant manufacturer falsely told consumers that certain organic roofing shingles met an ASTM D225 standard, and were tested using an ASTM D228 protocol.  Id. at *1-2.  The district court denied class certification on the grounds that individual consumers’ experiences with the roofing shingles would vary substantially based on the weather the shingles experienced, whether they were installed properly, etc.  Id. at *7-8. 

The Seventh Circuit vacated the denial of certification, rejecting the district court’s view that Comcast requires “commonality of damages,” explaining that “[i]f this is right, then class actions about consumer products are impossible,” and that recent Seventh Circuit precedent finding class certification appropriate in two products cases would have to be overruled.  Id. at *8 (citing Butler v. Sears, Roebuck & Co., 727 F.3d 796 (7th Cir. 2013) and Pella Corp. v. Saltzman, 606 F.3d 391 (7th Cir. 2010)).  The Seventh Circuit described Comcast’s primary focus as being on whether the theory of loss matched the theory of liability.  It noted that there were two potential approaches to damages identified by the plaintiffs that matched the theory of liability:  (1) damages potentially could be calculated based on the difference in market price between a shingle that satisfies the applicable standard and one that does not; or (2) if the putative class members’ shingles failed, and the shingles’ failure to meet the applicable standard caused the failure, they would be entitled to damages (although this would require individual hearings, which the court appeared to recognize might not be manageable).  Id. at *11.  The Seventh Circuit repeatedly made clear, however, that it was not ruling that class certification was required or would even be prudent.  That was left to the district court to determine on remand.   The Seventh Circuit noted that a thorough examination of the expert testimony and other evidence appeared warranted, but was not before the court of appeals.  Id. at *12-15.

Plaintiffs’ lawyers undoubtedly will cite this decision when faced with defendants’ arguments in consumer class actions that damages are not provable on a classwide basis, as required by Comcast.  From the defendants’ perspective, however, it is important that the Seventh Circuit clearly was not saying that there was no need for a deeper dive by the district court into whether in fact damages could be proven on a class wide basis, and whether the plaintiffs’ damages theories were viable as a matter of law.  Comcast would support further examination of those issues as well.  The Seventh Circuit’s opinion seems clear that such further analysis would be appropriate, and certainly not foreclosed by its opinion.

Class Action Settlement in Pella Windows Case Overturned By Seventh Circuit

Posted in Class Action Settlements

One of the prominent cases in which a products liability class action has been certified in recent years is Pella Corp. v. Saltzman, 606 F.3d 391 (7th Cir. 2010), involving windows that allegedly contained a design defect that allowed water infiltration.  After the class was certified, a settlement was reached and approved by the federal district court, over objections by some of the named plaintiffs.  The Seventh Circuit recently reversed approval of the settlement, in an at times vituperative opinion by Judge Posner in which he refers to the settlement as “scandalous.”  Eubank v. Pella Corp., Nos. 13-2091 et al., slip op. (7th Cir. June 2, 2014).  This opinion has gotten a fair amount of attention in the legal media.

One of the reasons for disapproval of the settlement is hardly surprising, and unremarkable.  The lead named plaintiff was the father-in-law of the lead class counsel, whose wife (the daughter of the lead named plaintiff) was also a lawyer in the same law firm.  There were four other class representatives.  Until all of them objected to the settlement.  This kind of thing has long been disapproved in class actions.  As the court explained, a named plaintiff is supposed to be a fiduciary for the class, and to direct and supervise class counsel, and cannot have this type of conflict of interest.

The Seventh Circuit also found the settlement terms unfair because, among other reasons: the claim forms were unduly long (12 and 13 pages) and required data that would be difficult to locate (it appears that the class member would have to tear out their window and look for ID numbers on it); some claimants would get only coupons; in order to recover more than $750 and up to $6,000, claimants would have to participate in arbitration likely without counsel or expert witnesses; and the aggregate value of the settlement to the class, for those who had made claims, would be less than the attorneys’ fees.  The court concluded that “[c]lass counsel sold out the class.”  (Slip op. at 17.) The settlement notice was also found to be misleading because it implied that the $750 and $6,000 figures were guarantees rather than ceilings on potential payments.

The opinion has a lot of dicta.  There are a couple of areas where even the best intentioned parties seeking approval of a class action settlement, and district judges inclined to approve them, could run into problems, depending on how much other courts follow some of what Judge Posner has to say.  First, at one point, the opinion states:

Not only did the settlement agreement not quantify the benefits to the class members, but the judge approved it before the deadline for filing claims.  He made no attempt to estimate how many claims were likely to be filed, though without such an estimate no responsible prediction of the value of the settlement to the members of the class could be made.  (Slip op. at 10-11.)

Claims-made settlements, where only those class members who submit claim forms receive relief, are very common.  Does this mean that claims-made settlements should not be approved without expert testimony as to what the potential “take rate” (percentage of class members responding with valid claims)  might be?  Where is that information going to come from given that it is not infrequently treated as confidential?  Or does this mean that the parties should go through the entire, often quite expensive, process of giving notice and receiving claim forms back before the settlement approval hearing is held?  There is some potential benefit here — most defendants would probably be happy to have attorneys’ fees awards to class counsel be based only on what class members actually receive in benefits.  But perhaps not if this makes it too difficult to reach a resolution because class counsel does not have a sufficient financial incentive to settle.

Second, Judge Posner writes that the district court judge “didn’t estimate the likely outcome of a trial, as he should have done in order to evaluate the adequacy of the settlement.”  (Slip op. at 19.)  How deep does such an evaluation need to go?  Class action trials are extremely rare, so verdict data is almost always not available and essentially useless.  Unless perhaps there are very similar individual cases that have been tried, but again that would be rare.  In most class action settlements the case has not been fully developed in discovery.  What evidence would be presented at trial and which side would be likely to prevail and by how much may be very difficult to predict.  It seems to me that the best that a district court could be expected to do in most class action settlements would be to estimate a reasonable range of possible outcomes at trial.