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Injunction in Aid of Class Action Settlement Addressed by Seventh Circuit

Posted in Class Action Settlements

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

Posted in Class Certification Standards

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

Posted in Class Certification Standards, Defense Strategy

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

Posted in Property Insurance

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

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

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

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

Cy Pres Distributions in Class Action Settlements Addressed By Eighth Circuit

Posted in Class Action Settlements

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

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

 Key points made in the opinion include:

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

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

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


Thoughts on Trends in Insurance Class Actions in 2014

Posted in Defense Strategy

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

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

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

Supreme Court Opinion in Dart Cherokee Basin v. Owens

Posted in Class Action Fairness Act

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

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

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

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

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

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

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

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

Posted in Defense Strategy

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

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

Here is a short summary:

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

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

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

State Enforcement Actions Following Class Settlements Addressed By Ninth Circuit

Posted in Class Action Fairness Act, Class Action Settlements

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

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

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

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

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

Posted in Class Action Settlements

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

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

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

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