2015 Amendments to Federal Rules – Impact on Class Actions

Various amendments to the Federal Rules of Civil Procedure are taking effect on December 1. Here are my thoughts on how these amendments may impact the defense of class actions:

  • Greater Emphasis on Proportionality: The new Rule 26(b)(1) will expressly limit discovery to that which is “proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” While class actions are generally large and important cases, they can vary widely in the amount in controversy, for example. Defendants can use this change as an important new tool in seeking to limit the scope of the discovery they are burdened with in class actions.
  • Cost-Sharing: The new Rule 26(c)(1)(B) has an express provision for a protective order directing cost sharing for discovery. It will be interesting to see how courts apply this in class actions when defendants seek to shift costs to the named plaintiffs or their counsel (who almost always are funding the litigation).
  • Preservation of Evidence and Clawback Agreements: The new Rule 16 suggests that the initial scheduling order include a provision with respect to preservation of electronically stored information (ESI) and a provision with respect to a clawback agreement under Fed. R. Evid. 502 for inadvertent disclosure of privileged material. These are sometimes but not always included in initial scheduling orders, and generally desirable to have, so that the defendant can be assured that the scope of its litigation hold in a class action is court-approved early in the case.
  • Document Productions: The new Rule 34 allows a party objecting and responding to a document request to specify “another reasonable time” for producing the responsive documents. This should give large corporate defendants some leeway where document productions take longer. Another new provision requires the responding party’s objection to “state whether any responsive materials are being withheld on the basis of that objection.” One thing the new rule seems to overlook on that point, however, is that often a responding party will not know whether there are additional responsive materials because the objection is to the burden of searching beyond a particular scope. I would expect responding parties will state in their objections what they are not searching for, and thus do not know what exists. Hopefully judges will view that as adequate compliance with the new rule.
  • Sanctions for Failure to Preserve ESI: The new Rule 37 narrows the scope of sanctions for failure to take reasonable steps to preserve ESI. An adverse inference instruction or other severe sanction is permitted “only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation . . . .” This should reduce the stress level when oversights or mistakes are made in the preservation of ESI.

On a related note, if you are interested in a program on strategies for the use of absent class member discovery in defending class actions, my fellow class action blogger Andrew Trask and I are doing a webinar for Stafford on that subject on December 2. I have a small number of free registrations available for clients and friends – if you are interested just e-mail me.

Thoughts on Tyson Foods Oral Argument

Tyson Foods, Inc. v. Bouaphakeo, the third and last of the three class action cases that the U.S. Supreme Court is hearing this Fall was argued yesterday. Articles in the New York Times and USA Today have suggested that the plaintiffs are likely to win this case because Justice Kennedy’s comments suggested he would side with them, and his vote could prove crucial, as it often is. My reading of the transcript is that how the case will be decided seemed very much up in the air. How the majority opinion is written, more than the result itself, will have the most impact (or lack thereof) on class action law more broadly, including insurance cases.

Tyson Foods is an employment class action alleging that Tyson failed to  pay overtime wages for time spent by employees putting on and taking of their protective equipment. The case involves both a class action and a collective action under the Fair Labor Standards Act (“FLSA”). It was tried to a jury verdict in which the plaintiffs introduced evidence based on statistical sampling, but the amount of the verdict reflected that the jury rejected that evidence in substantial part. The questions presented involve the propriety of class certification based on the statistical sampling technique, and whether the class could be properly certified where it includes many members who were not injured.

Towards the end of the argument, Justice Sotomayor summarized a key question that her colleagues had asked about repeatedly, involving how the Court could know what the jury decided where it did not accept the plaintiffs’ evidence:

Sotomayor photo

Clearly, the expert here, Dr. Joy, said – I’m using a hypothetical – there’s 10 minutes of overtime. And the figure that comes out with 10 minutes of overtime is a million dollars. Now the jury comes back with half a million dollars.  . . . How do we know what – how the jury calculated that half million? (Transcript, at 55.)

The Government’s counsel (supporting the plaintiffs) conceded that the answer to that question is not known, and Justice Sotomayor then asked, then why is it fair to distribute the award pro rata? The Government’s counsel responded that this issue should be left to the district court on remand, and that Tyson may have waived the issue by asking for a lump sum verdict.  Justice Ginsburg suggested that Tyson should not care about that because they have to pay the same amount of money regardless. On rebuttal, Carter Phillips (arguing for Tyson) said Tyson would be happy for a remand for allocation, but noted that the district court had already entered a final judgment, with no provision for allocation. Justices Scalia and Alito had suggested earlier in the argument that there was no way at this point to identify who was injured, and whom to pay. Justice Kagan appeared to blame that on Tyson’s litigation strategy in the district court. Chief Justice Roberts suggested that the Court may need to address how this case was presented to the jury, and then whether there was a waiver by Tyson.

There was also extensive discussion about the interplay here between class action law and the substantive law under the FLSA. Back in 1946, the Supreme Court adopted a burden shifting framework under the FLSA – the employee must prove liability, but then “[u]nless the employer can provide accurate estimates, it is the duty of the trier of facts to draw whatever reasonable inferences can be drawn from the employees’ evidence as to the amount of time spent in these [compensable] activities in excess of the productive working time.” Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 693 (1946). Justices Kagan and Kennedy both suggested that the answer here may lie more in that rule than in class action law. But the case appears to involve a class action under state law as well.

Kennedy photo

Justice Kennedy asked whether the plaintiffs’ counsel would concede that the class might not be certifiable under Rule 23 absent the Mt. Clemens decision. Plaintiffs’ counsel did not concede that point, but the Government’s counsel agreed that the case would be much closer if it did not involve the FLSA. Justice Kennedy seemed to struggle with how an opinion might be written if the result were in plaintiffs’ favor. He asked about what the standard would be and expressed dissatisfaction with the suggested answers. Given that he is the senior justice if the majority consists of Justice Kennedy and the four liberal justices, he will either write the opinion or decide who writes it. And that will determine to what extent this case impacts class action law more broadly. The Supreme Court is usually not in the business of deciding cases narrowly based on their facts. That is not its role. But it has to decide the case, not just expound on the law, and sometimes the result is a narrow decision. That seemed to be where Justice Kennedy might be headed, if he is the lynchpin in forming a majority. But I also see the possibility here of a majority being formed that might, as the Chief Justice suggested, explain how the case was not properly presented to the jury and the verdict now cannot properly be distributed, and then send it back to the lower courts.

Depreciation of Labor Class Action — Minnesota Supreme Court Oral Argument

I’ve been following closely a series of class actions around the country alleging that, in calculating the “actual cash value” of property damage under a homeowners or commercial property insurance policy, insurance companies should not be applying depreciation to the labor component of the replacement cost of a damaged structure. When insurers estimate “actual cash value,” they typically estimate the replacement cost of the damage based on the materials, labor and other costs necessary to make the repairs, and then apply depreciation to that amount, to arrive at the actual cash value.

Plaintiffs’ lawyers have filed numerous class actions arguing that labor costs are not depreciable, and that the actual cash value thus should be calculated based on the full cost of labor and depreciated value of materials. If you haven’t been following this issue and would like more background, I suggest you read my August 10, 2015 and March 29, 2015 blog posts. This is, in my view, the hottest area in insurance class actions right now.

One of the benefits of modern technology for those who like to follow important cases closely nationwide is that many state supreme courts are now recording oral arguments and posting them online, or in some instances streaming the argument live (as the Massachusetts Supreme Judicial Court did in a case I recently argued).

The Minnesota Supreme Court recently heard oral argument on the issue of depreciation of labor costs (on a certified question from the Minnesota federal district court) in Wilcox v. State Farm Fire & Casualty Company. (In the interests of full disclosure, I wrote an amicus brief for the American Insurance Association in this case.) The oral argument video was recently posted online. The court dug deeply into both sides of the issue. Here are a few observations I had:

Minnesota Supreme Court photo

  • The court focused some of its initial questioning on how an appraiser of real estate, using the “cost approach” to valuation, will depreciate the full value of the building, including the labor component, as economically appropriate. Plaintiffs’ counsel appeared to concede that this approach is correct for a total loss, but argued that it is not appropriate for a partial loss. Those justices who commented on that issue did not seem persuaded by his argument that partial losses should be treated differently in this respect.
  • There was some discussion about a hypothetical where a roof was nearing the end of its useful life, with some justices appearing to take the view that it would not be an accurate method of calculating the actual cash value of the roof to apply depreciation only to the materials and not to the labor component.
  • Some of the court’s questions focused on how the State Farm policy at issue (like most homeowners’ policies) provides replacement cost coverage if the insured makes the repairs. One justice appeared to suggest that this demonstrates that State Farm is correct about what is intended by actual cash value.
  • There was a fair amount of discussion about how Minnesota’s adoption of the “broad evidence rule” for determining actual cash value impacts the question presented. One justice pointed out that the “broad evidence rule” allows for methods of calculation other than replacement cost less depreciation, which is the method that State Farm used here. He suggested that there may be circumstances where there are issues of fact.
  • One justice asked about a hypothetical scenario in which the repairs involved $200 of materials, but $10,000 of labor, and how that loss would be treated.
  • The chief justice asked whether State Farm would lose if the court found an ambiguity, and why State Farm had not revised its policy language to specifically address the issue.
  • One justice suggested that the plaintiffs’ argument is equating actual cash value with replacement cost.

This was the first time I’ve watched an argument in the Minnesota Supreme Court, so any prognostication I make is not based on experience with that court but my experience with the issue presented. My guess (and I could be wrong) is that the court will rule that depreciation may be applied to labor costs in appropriate circumstances.

Thoughts on Supreme Court Oral Argument in Spokeo, Inc. v. Robins

Yesterday, the Supreme Court heard oral argument in Spokeo, Inc. v. Robins, No. 13-1339 (SCOTUSBlog page). The question presented is “Whether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute.” The case has been highlighted as one that potentially could have a significant impact on class action practice because many class actions involve claims in which the named plaintiff at least arguably did not suffer a concrete harm, and thus may not have standing to sue. The impact on insurance class actions is likely to be in circumstances where: (1) insurers are subject to regulation under federal statutes, such as the Fair Debt Collection Practices Act or Telephone Consumer Protection Act; (2) insurers are subject to state regulation, but the suit is brought in or removed to federal court; or (3) insurers are sued in state court, but the state jurisprudence on standing aligns itself with the Supreme Court’s Article III case law.

Based on my review of the oral argument transcript, the Justices were most concerned about where to draw the line. The case involves allegations that the defendant violated the Fair Credit Reporting Act by publishing personal information about the plaintiff that was grossly inaccurate, but the plaintiff could not identify particularized harm that he suffered beyond the publication of inaccurate information (which may or may not have been seen by anyone). The Ninth Circuit concluded that Congress could, in this context, essentially create standing by statute.

The Court seemed to be largely in agreement that there has to be some concrete harm beyond a mere statutory violation, and thus that the Ninth Circuit’s opinion was incorrect or not well-written in at least some respects. The Justices appeared to disagree about whether, on the allegations in this case (which was decided on a motion to dismiss), there is a harm sufficient to confer standing. Andrew Pincus, arguing for the defendant, asserted that the plaintiff would need to show that something happened to his credit or with an employment opportunity. Justice Kagan responded “that’s a really hard thing to do,” and suggested that it should be sufficient merely that someone was inaccurately represented in a credit report. Justice Breyer appeared to agree with that. Pincus later pointed out how an amicus brief detailed how actual harm can be shown. Justice Kennedy suggested that in the Internet age there “has to be some real injury” in this type of circumstance, and that perhaps Congress was holding credit agencies to a higher standard.  Chief Justice Roberts suggested that “you have to look at whether the plaintiffs have been injured in fact, and that some plaintiffs will be able to proceed if they can make that showing and others may not.” He noted that “the requirement of a case or controversy . . . has always been recognized as at the core of Article III jurisdiction. And we have a legion of cases that say you have to have actual injury.” Justice Breyer seemed to indicate that he read the Fair Credit Reporting Act as requiring a showing that false information was published, not merely that there was a bad practice by the defendant. He later suggested that the statute would need to be construed in that manner to save its constitutionality. Justice Alito asked about whether there was any indication that anyone actually searched the defendant’s database for information about the plaintiff (there was not). He suggested that, in the absence of such a showing, any harm would be speculative. Justice Sotomayor, however, took the view that “I think the breach of any legal right you’re given . . . gives Article III jurisdiction” and “[t]here is a difference between that and whether you’re within the zone of interest of a statute.” That view, however, did not appear likely to command a majority.

My prediction is that this case will be a close call, possibly a 5-4 decision. The decision might turn on the language of the statute at issue and the specific allegations here more than on the broader constitutional principles of standing. If that is the case, it won’t be a blockbuster decision. But you never know.

Campbell-Ewald Co. v. Gomez: Thoughts on Supreme Court Oral Argument

Campbell-Ewald Co. v. Gomez was argued yesterday in the U.S. Supreme Court. It is one of several major class action cases that will be decided by the Court this Term. It presents the question of whether a putative class action case becomes moot when the defendant offers complete relief to the named plaintiff (for more detail on the case, see my June 16 blog post). If the Court rules that an offer of complete relief renders a case moot (or otherwise dead), and that a named plaintiff cannot pursue a class action in that circumstance, that could potentially put an end to many small dollar value consumer class actions as we know them. Unless the plaintiffs’ lawyers could assemble a very large number of plaintiffs, the defendant could easily resolve the case for far less then it will pay to defend it, simply by paying the small claims of the named plaintiffs.  Plaintiffs might try for declaratory or injunctive relief, but those remedies also may not be viable where damages are an adequate remedy, the named plaintiffs have been fully paid, and the plaintiffs cannot show that they are likely to have another similar claim against the defendant in the future for which declaratory or injunctive relief would be an appropriate remedy.

Based on the transcript of yesterday’s oral argument, this is shaping up as a very interesting case.  There were a few questions about whether the offer in the case was really for complete relief, but the Court seemed to move past that issue fairly quickly. Most of the justices seemed to agree that when a defendant offers complete relief (the precise mechanism for which was debated), the case must end. Justice Ginsburg suggested that, even in that circumstance, the plaintiff should be entitled to pursue a judicial finding of liability, but based on other justices’ comments that position seemed unlikely to be adopted by a majority. There was a lot of debate about, when the defendant offers complete relief, precisely how the case should end – whether it should be a finding of mootness, or a judgment based on the offer, or whether such a ruling should be made at the summary judgment stage of a case (as Justice Sotomayor suggested). Chief Justice Roberts appeared to be strongly of the view that if the plaintiff is getting everything he or she wants, there can be no case or controversy, and the court system has an interest in not issuing a ruling in that circumstance. Justices Alito and Kennedy appeared to suggest that if the defendant simply delivers cash or a certified check, that should put an end to the case. Plaintiff’s counsel suggested that should be a merits issue or an affirmative defense, but not render a case moot. Justice Breyer suggested that the defendant could simply pay the money into court, “[a]nd, of course, if that person [i.e., the named plaintiff] now has all he wants, he can’t certify this is a class because he isn’t harmed.” Justice Breyer suggested that whether a judgment was entered for the named plaintiff would not make any difference. (Transcript, at 48.) Other than these comments from Justice Breyer, and some from Chief Justice Roberts, there was not a lot of discussion about the issue of whether a class action can continue when the named plaintiff’s claim has been fully paid.

Attempting to read the tea leaves from the justices’ comments and questions (and that is always an effort at guesswork at which I could be wrong), I’m seeing a distinct possibility that a majority of the Court might recognize an avenue through which a defendant can defeat a class action, at least by tendering a certified check to the named plaintiff or paying that money into court. If Justices Kennedy and Breyer are thinking along those lines, there might be five votes on the Court for that position, although it’s not squarely presented by the facts of the Campbell-Ewald case. And that proposition would certainly change class actions as we know them.

Ascertainability in Class Actions: Second Circuit Weighs In

Ascertainability has been a hot topic in class action appeals recently. The Third Circuit recently clarified its ascertainability standard (see my April 20 blog post). The committee considering potential Rule 23 amendments is exploring adding an explicit ascertainability requirement to the rule. (My fellow class action blogger Paul Karlsgodt just posted a great summary of the latest on those deliberations.) For now, ascertainability remains an implicit requirement that the proposed class members must be identifiable – for purposes of notice, for example, and determining who is bound by any judgment.

Courts have debated the precise contours of this standard. The Second Circuit recently weighed in, holding that for a class to be ascertainable it must: (1) be defined by objective criteria; (2) be administratively feasible; and (3) not require mini-hearings to determine class membership. This is similar to how most circuits have defined ascertainability, although some courts have suggested that objective criteria alone might be sufficient.

In Brecher v. Republic of Argentina, No. 14-4385 (2d Cir. Sept. 16, 2015), the district court certified a class of bondholders in a case involving Argentina’s defaulting on sovereign debt. As initially certified, the class was limited to persons who continuously held a beneficial interest in a particular bond series for a certain time period. In a prior decision, the Second Circuit held that the district court’s method of calculating damages for that class was inflated, and remanded the case. The district court then modified the class definition to expand the class to include all holders of beneficial interests in the bond series, without any time limitation. This was intended to make the damages calculation easier. But the Second Circuit allowed an appeal under Rule 23(f) on the new class definition.

The Second Circuit held that the new class definition failed the ascertainability test. The court explained that “[a] class is ascertainable when defined by objective criteria that are administratively feasible and when identifying its members would not require a mini-hearing on the merits of each case.” Slip op. at 5. Objective criteria alone are not sufficient if they “do not establish the definite boundaries of a readily identifiable class.” Id. at 6. The court explained that, due to the manner in which the Argentinian bonds are identified and traded on the secondary market, it is “practically impossible to trace purchases and sales of a particular beneficial interest,” making the proposed class not ascertainable. Id. at 7-8. “Even if there were a method by which the beneficial interests could be traced, determining class membership would require the kind of individualized mini-hearings that run contrary to the principle of ascertainability.” Id. at 8-9.

In insurance cases, ascertainability is often a strong argument against class certification. Often plaintiffs propose to define a class in a manner that requires an individual file-by-file review of claim or underwriting files to determine whether the potential claimant fits the class definition. And even those files may be unclear regarding the relevant criteria, thus requiring mini-hearings. If plaintiffs broaden the class in an attempt to avoid those issues, that can often mean that the class includes many people who have no potential entitlement to any relief and no standing to sue, leading to another series of defenses to class certification.

Predominance Is Lacking Where Some Class Members Have No Injury, Says the Ohio Supreme Court

The U.S. Supreme Court is poised to decide next Term, in Tyson Foods, Inc. v. Bouaphakeo, whether a class can be certified when many class members lack injury (see my June 16 post for more on that). The Ohio Supreme Court recently weighed in on a similar question, but treated it as a predominance issue. One of the interesting aspects of class action practice is that often the same or a similar line of argument can be cast in different ways – what some courts treat as an issue of standing might also be treated as an issue of commonality or predominance. A good defense strategy can be to make what amounts to the same or a similar argument under different aspects of the class action rule.

In Felix v. Ganley Chevrolet, Inc., No. 2013-1746, 2015 Ohio LEXIS 2113 (Ohio Aug. 27, 2015), the plaintiffs purchased and arranged financing for a vehicle through the defendant. They alleged that an arbitration clause in the purchase contract was unconscionable and that the defendant’s conduct violated the Ohio Consumer Sales Practices Act (“OCSPA”). Id. at *2-5. The trial court granted class certification, ruled that the arbitration provision violated the OCSPA, and awarded $200 per transaction to the class members. The Ohio Supreme Court reversed.

The Ohio Supreme Court, noting that it looks to federal law on class certification as persuasive authority, held that under the Ohio class action rule, “Plaintiffs in class-action suits must demonstrate that they can prove, through common evidence, that all class members were in fact injured by the defendant’s actions.” Id. at *16-17 (emphasis added). The court explained that the fact of damage is different from the amount of damage. “If the class plaintiff fails to establish that all of the class members were damaged (notwithstanding questions regarding the individual damages calculations for each class members), there is no showing of predominance under Civ. R. 23(b)(3).” Id. at *18. The court explained that “there is absolutely no showing that all of the consumers who purchased vehicles through a contract with the offensive arbitration provision were injured by it or suffered any damages.” Id. at *19. One justice dissented, asserting that the majority had improperly addressed a merits question at class certification. Id. at *23 (O’Neill, J., dissenting).

While some courts address this type of question as an issue of class member standing (and perhaps the Supreme Court will do that in Tyson Foods), this decision is a helpful reminder to defendants that, even if you do not prevail on standing grounds, you might prevail on essentially the same question as a predominance issue. Another way to cast the same type of argument is that liability to individual class members is individualized, because liability cannot be established through common evidence.  That is another way to get around the plaintiffs’ argument that individualized calculations of damages should not be enough to defeat class certification.

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.