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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.

Total Loss Valuations: Class Certified By Louisiana Federal Court

Posted in Auto Insurance

Insurers or their vendors generally use software to perform valuations of vehicles for total losses on auto insurance claims. This software will typically use databases of recent sales or prices offered for comparable vehicles in the area to estimate a vehicle’s value, and enable adjustments to be made for equipment, mileage, condition and other factors. A Louisiana federal judge recently certified a class in a case against Progressive involving the use of this software. The judge concluded that if the software used by Progressive undervalued vehicles across-the-board, the putative class claims could be resolved by the computer system. The decision did not discuss some of the issues that would appear to be central to deciding class certification on this kind of issue. This ruling might not upheld on appeal (if there is one) or be followed by other courts. But if it is, that has the potential to increase insurers’ exposure in this area. It could also potentially impact other lines of business (including property) where insurers use software as an aid in claim adjustment.

Slade v. Progressive Ins. Co., 2014 U.S. Dist. LEXIS 154713 (W.D. La. Oct. 31, 2014) involved Progressive’s use of Work Center Total Loss software that Progressive licensed from Mitchell International, Inc. and used to determine the actual cash value of total loss vehicles. According to the opinion, the software used the vehicle identification number to identify the year, make, model, and configuration of the vehicle. The adjuster would enter the mileage and evaluate the condition of the vehicle on a 1 to 5 scale for thirteen characteristics. The software then generates an overall condition score between 1 and 5. It identifies comparable vehicles offered for sale in the local area, but does not have any information about the condition of those vehicles. The value generated by the software is then adjusted based on the condition score, with the majority of adjustments being downward. According to the opinion, the adjuster would not have discretion to depart from the value generated by the software.

The insurance policy provided for the vehicle’s value to be determined based on “market value, age, and condition of the vehicle at the time the loss occurs,” and specifically provided for the use of computer software and databases.

A computer expert for the plaintiffs testified that he could use Progressive’s data to calculate the difference between prices generated by the Work Center Total Loss software and the NADA or blue book value. A Progressive representative testified that claimants can negotiate the value, but less than 1% of putative class members did.

The court concluded that common issues predominated over individual issues because it concluded that all that would be necessary to resolve the case, if plaintiffs prevailed, would be a computerized calculation:

If it is shown that NADA is a generally recognized used motor vehicle industry source, and WCTL is not, then the determination of each individual class member’s entitlement will be a matter of comparing the NADA value (either already contained in Progressive’s data or derived from Progressive’s data) to the WCTL valuation and finding the difference. If it is shown that Progressive misused its condition evaluations, then adjustments can be made to the valuations in accordance with those findings. The dispute is how a computerized system applied objective claims data–not the data that was entered into the system. Resolution can be achieved by revising the computerized system to apply the data properly.

. . .

As it is conceded that the plaintiff and proposed putative plaintiffs have no quarrel with the conditioning determinations of Progressive’s adjusters, the Court will not be required to review the individual subjective condition evaluations of Progressive’s adjusters. Rather, the dispute is with the manner in which the automated WCTL system used those condition determinations in reaching its valuations.

Id. at *22-23. The court distinguished property insurance cases in which courts in the Fifth Circuit have repeatedly denied class certification because “unlike the storm damage cases, the claim is that Progressive used an unacceptable computer system” and “[d]etermination of undervaluation is a matter of re-running existing data through a different computer system.” Id. at *23.

From my perspective as a lawyer who defends these types of cases, the court seems to be missing a few key points. First, even if NADA or some other data source were found to be a more appropriate general guideline, how could the court determine that the true value of a particular damaged car would be that value? Adjustments would seem to have to be made on a case-by-case basis by the factfinder based on condition, etc., to determine the correct value under the policy. Second, if condition evaluations were found to be misused by the software, wouldn’t that require readjusting each individual claim to determine the true value? Wouldn’t the insurer be able to take the position that on some claims the condition was incorrectly evaluated to its detriment? Third, Plaintiffs or their lawyers might be willing to concede that they would not challenge the condition determinations by the adjusters, but what right would they have to make that concession on behalf of all of the putative class members, many of whom would want to challenge that if they were litigating their individual case? Some putative class members would probably lose more from this concession than they would stand to gain otherwise. There are lots of questions that seem unanswered here.

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.