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How is a district court supposed to apply the Supreme Court’s opinion in Wal-Mart v. Dukes?  Dive deeply into the specifics of the plaintiff’s causes of action, the defendant’s defenses and the relevant facts.  A more general, broad brush analysis will not do.  That was the message delivered by the Fifth Circuit fairly strongly in an opinion released last Friday. 

M.D. v. Perry, No. 11-40789, 2012 U.S. App. LEXIS 6061 (5th Cir. Mar. 23, 2012), is a class action brought by children in Texas’ foster care system, seeking declaratory and injunctive relief regarding alleged systemic deficiencies in that system.  It is similar to cases arising out of other states in which classes had been certified, and certification affirmed, by other circuits before Wal-Mart.  The Southern District of Texas certified a Rule 23(b)(2) class in this case, but the Fifth Circuit vacated and remanded largely because the district court’s analysis was not sufficiently rigorous and tailored closely enough to the requirements of Wal-Mart with respect to commonality.  The Fifth Circuit explained that: 

1. The district court failed to focus intently on Wal-Mart’s key holding on commonality.  The Fifth Circuit explained that “the district court failed to consider or explain how the determination of [common] questions would ‘resolve an issue that is central to the validity of each one of the [individual class member’s] claims in one stroke.’  Rather, the district court merely found that the Named Plaintiffs’ various allegations of ‘systemic deficiencies’ . . . raised common questions of fact.”  Id. at *20 (quoting Wal-Mart).
2. The district court’s analysis of common questions of law was too general and broad brush.  The Fifth Circuit explained that “the district court conducted no analysis of the elements and defenses for establishing any of the proposed class claims, nor did it adequately explain how those claims depend on a common legal contention whose resolution ‘would resolve an issue that is central to the validity of each of the [individual’s] claims in one stroke.”  Id. at *24-25 (quoting Wal-Mart).  This is required to provide a proper record for appellate review.
3. Delving into the details is essential.  The Fifth Circuit instructed that “the district court must explain its reasoning with specific reference to the ‘claims, defenses, relevant facts, and applicable substantive law’ raised by the class claims, in order to ensure that ‘dissimilarities within the proposed class’ do not ‘have the potential to impede the generation of common answers.’”  Id. at *26 (citations omitted).

How can defendants take advantage of this?  Make the legal standards section of your opposition to class certification interesting to read.  Spice it up, and use this case (and others) to illustrate what the district court needs to do under Wal-Mart in evaluating class certification.  This case should be quite useful outside of the Fifth Circuit in reminding district courts of the importance of a thorough, rigorous analysis before certifying a class (although there are cases where no hard work is necessary to determine that the case is facially improper for certification).  Call plaintiffs’ counsel on the carpet when they proffer a superficial analysis that does not delve into the details of the causes of action, defenses and facts.

The Federal Circuit recently held that individual notice to absent class members is required to bind them to a judgment in a class action certified under Rule 23(b)(2), at least where the claims are monetary in nature.  This case is particularly significant for a defendant faced with a class action that has been certified under Rule 23(b)(2).  To ensure that class members will be bound by the result, the defendant will need to insist on formal notice to the class.

Beer v. United States, No. 2010-5012, 2012 U.S. App. LEXIS 3279 (Fed. Cir. Feb. 17, 2012) is a lawsuit brought by federal judges asserting that certain legislation regarding judicial salaries was unconstitutional under a provision of Article III of the Constitution that provides that salaries for Article III judges cannot be reduced while judges are in office.  In certain years, Congress has blocked cost of living adjustments for judicial salaries (but not other federal employees), and in other years Congress failed to provide such adjustments for judges (while providing them to other federal  employees),   (Incidentally, this case poses interesting issues of judicial recusal given that the outcome of this case would inure to the personal benefit or detriment of every federal judge.  But if the entire federal judiciary were recused there is no procedure for appointment of a special court to resolve the case.) 

This case has a complex procedural history.  In a previous class action on the same issue, a class of judges was certified under Rule 23(b)(2) by the Federal Court of Claims and the trial judge ruled in favor of the plaintiffs.  The Federal Circuit reversed on a 2-1 vote, holding that Congress’s action was constitutional.  En banc review was denied, with several dissents, and the Supreme Court denied certiorari, but with three justices dissenting (four votes are required to grant cert).  See Williams v. United States, 264 F.3d 1089 (Fed. Cir. 2001), cert. denied, 535 U.S. 911 (2002).  A group of judges who were members of the certified class in Williams, but not named plaintiffs in that case, then filed the Beer case.  Without reaching the issue of preclusion, the Court of Claims dismissed the case as barred by the Williams precedent.  The Federal Circuit affirmed, and en banc review was denied, but with four judges dissenting.  The Supreme Court then granted certiorari, vacated the judgment and remanded the case to the Federal Circuit for resolution of the preclusion issue.

The Federal Circuit held, in addressing an issue left open by the Supreme Court’s decision in Wal-Mart v. Dukes, that notice is required before a certified class can be bound by the judgment in a (b)(2) class action, and thus the prior decision in Williams is not binding in the Beer case:

The Supreme Court established in Wal-Mart that due process requires notice be given to absent class members when monetary claims are more than just "incidental" to the claims for injunctive or declaratory relief. See Wal-mart, 131 S. Ct. at 2557, 2559-60. Wal-Mart explicitly declined, however, to decide whether notice was required as a matter of due process when monetary claims were "incidental" to injunctive or declaratory claims in a class action. Id. at 2560.  . . .

We agree with the plaintiffs that the incidental exception, if there is one, cannot apply where the requested injunctive or declaratory relief is directed to the payment of money. The requested relief in Williams was framed as declaratory relief, asking the court, for example, to "declare" that the blocking legislation was "unconstitutional and void," and to "declare" that the plaintiffs were "entitled to damages in an amount to be determined by the Court."  Thus the government conceded that the declaratory relief requested in Williams was itself directed to the payment of money, and the case was "essentially one for money damages."

It may be, as the government argues, that the "other than money damages" provision of the Administrative Procedure Act ("APA"), 5 U.S.C. § 702, turns on whether a request is for past damages or an order for payment of money in the future. But, as far as the due process right to notice is concerned, we are unable to distinguish between actions in which the suit is for past due money and those situations in which the action is for both past due money and the payment of future money.  . . .

Because we conclude that both the prospective and retrospective aspects of the claims in Williams were essentially monetary in nature, we hold that due process does not allow the plaintiffs' claims in the present suit to be precluded by Williams in the absence of notice of the Williams class. In other words, Williams was a case in which money claims predominated and in which, accordingly, notice to absent class members was required as a matter of due process. We need not address whether opt-out rights are also required as a matter of due process.

Id. at *17-22.

The court went on to also hold that it was insufficient that informal notice may have been given through an article published in a newsletter distributed to the federal judiciary.  Rather, “when absent class members are entitled to notice as a matter of due process, formal notice must be provided advising absent class members of the pendency of the action and their right to participate before being precluded from bringing their own action.”  Id. at *26. 

So the Supreme Court, if it is so inclined, and assuming it agrees with this ruling, will have the opportunity to take up the constitutional issue regarding judicial salaries.  Given the federal judiciary’s repeated pleas for raises, and the significant number of judges who have complained about salary levels when leaving the bench, it will be interesting to see if the Court takes this up.

What does this mean for other class actions under Rule 23(b)(2)?  Given that a defendant will be bound by a judgment against it in a Rule 23(b)(2) class action, in order to avoid having to re-litigate the issues presented in most circumstances a defendant would be well-advised to insist that formal notice be given to the class, so that the class members will be bound if the defendant prevails.  What could be worse for the government here than winning a certified class action and then having to defend another lawsuit on the very same issue?

The Sixth Circuit recently ruled in a health insurance case that a claim for a declaratory judgment regarding insurance contract interpretation could be certified under Rule 23(b)(2) under Wal-Mart v. Dukes, even if the declaratory relief would be a predicate to monetary relief, under which certification was sought under Rule 23(b)(3) but not yet ruled upon.  This decision is significant for insurers faced with opposing class certification under Rule 23(b)(2).

Gooch v. Life Investors Insurance Company of America, Nos. 10-5003/5723, 2012 U.S. App. LEXIS 2643 (6th Cir. Feb. 10, 2012) is a class action brought under a cancer insurance policy.  The plaintiff contends that the policy requires payment of the full “list prices” on medical bills, rather than the lower prices that are accepted as full payment by the medical providers (the idea seems to be that the insureds would get to pocket the difference).  The Sixth Circuit’s opinion is lengthy and involves a number of issues.  The court rules that a nationwide class action settlement by the defendant in Arkansas was binding and prevented the plaintiff from seeking certification of a class that overlapped with the class in the Arkansas case, but did not prevent the plaintiff from seeking certification of a class that did not overlap with the class in the Arkansas case (e.g., a different time period or a potential class of opt-outs). 

What I found most significant was the court’s ruling that class certification was appropriate on a declaratory relief claim under Rule 23(b)(2) on an issue of insurance contract interpretation.  The court wrote as follows:

[Plaintiff] requested that the district court certify a "Declaratory Relief Class . . . pursuant to Rule 23(b)(2) . . . and, at such time as the Court deems proper, then certify the Restitution/Monetary Relief Sub-Class as a class action pursuant to Rule 23(b)(3)." R. 1 (Compl., Prayer for Relief A) (emphasis added). He explicitly asked the court to enter a declaratory judgment separate from the request for restitution and monetary damages, which would be the subject of a distinct sub-class certified under a different subsection of Rule 23.[15] Id. at Prayer for Relief B, C; see also id. ¶¶ 71, 88. He did not "combine any claim for individualized relief with [his] classwide injunction." Wal-Mart, 131 S. Ct. at 2558. The point is not simply that declaratory relief predominates over monetary relief or that monetary relief is incidental to declaratory relief. It is that, in this case, declaratory relief is a separable and distinct type of relief that will resolve an issue common to all class members.

Not every class member will have a claim for damages because some presumably did not make a claim for payment after the May 2006 policy clarification. Still, the declaratory judgment will apply to a uniform interpretation of a contract that governs or governed each class member, making Rule 23(b)(2) certification appropriate. "All of the class members need not be aggrieved by . . . [the] defendant's conduct in order for some of them to seek relief under Rule 23(b)(2). What is necessary is that the challenged conduct or lack of conduct be premised on a ground that is applicable to the entire class." 7AA Wright & Miller, supra, § 1775. "It is sufficient if class members complain of a pattern or practice that is generally applicable to the class as a whole. Even if some class members have not been injured by the challenged practice, a class may nevertheless be appropriate." Walters v. Reno, 145 F.3d 1032, 1047 (9th Cir. 1998). "The key to the (b)(2) class is `the indivisible nature of the injunctive or declaratory remedy warranted—the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or to none of them.'" Wal-Mart, 131 S. Ct. at 2557 (quoting Nagareda, 84 N.Y.U. L. Rev. at 132). Because Life Investors interprets the phrase "actual charges" the same way for each policyholder, uniform declaratory relief is appropriate.

This point also disposes of Life Investors's contention that the district court's "piecemeal certification" of a single count of Gooch's complaint "does not materially advance the litigation." Appellant 10-5723 Br. at 53.[16] We find nothing objectionable about the district court certifying one count of Gooch's complaint, an approach that we have affirmed in the past. See Beattie, 511 F.3d at 568. In sum, certifying declaratory relief under Rule 23(b)(2) is permissible even when the declaratory relief serves as a predicate for later monetary relief, which would be certified under Rule 23(b)(3).

Id. at *56-59.  The court also noted in a footnote that it did not view claim splitting as a problem for piecemeal certification in this case.  Id. at *59 n.16.  The court does not really address whether certification under Rule 23(b)(2) would remain proper if the district court concludes that a (b)(3) class for damages is improper, an issue not yet addressed by the district court.  The district court ruling was vacated and remanded for further proceedings.

This decision seems somewhat inconsistent, for example, with the Seventh Circuit’s opinion last year in Kartman v. State Farm Mut. Auto. Ins. Co., 634 F.3d 883 (7th Cir. 2011) (blog post), in which the Seventh Circuit explained that “Rule 23(b)(2) governs class claims for final injunctive or declaratory relief and is not appropriately invoked for adjudicating common issues in an action for damages,” which seems to be how declaratory relief is sought to be used in Gooch.  Id. at 895.

I expect this decision could lead to more attempts by policyholders to seek certification of Rule 23(b)(2) classes for declaratory relief against insurance companies on issues of contract interpretation.  Stay tuned.

Earlier this week I attended the ABA’s national webinar entitled “The Future of Class Actions,” part of its Premier Speaker Series.  The panelists were Paul Bland of Public Justice, Mark Perry of Gibson Dunn and Judge Lee Rosenthal of the Southern District of Texas.  Here is what I found most interesting: 

• Paul Bland, the plaintiffs-side member of the panel, argued that Wal-Mart, as an employment case, is distinguishable in many consumer class action contexts.  His example was where cases are based on identical contract documents and a common practice by the defendant.  That almost describes to a tee what plaintiffs typically argue in seeking to certify insurance class actions, which suggests we may see more focus on insurance.  But when you dig into the details, frequently the policy language for the proposed class is not identical and the “common practice” is really nothing more than a guideline with plenty of case-by-case exceptions to it, making the case much more analogous to Wal-Mart. 
• There seemed to be a general consensus among the panelists that, post-Wal-Mart, more evidentiary hearings (essentially mini-trials) are being held on class certification in federal courts, and we are likely to see more of that.  I think that’s a good thing regardless of which side of the case you’re on, such a hearing tends to focus a busy judge more intently on the evidence on class certification.  It also gives class action lawyers more opportunities to conduct evidentiary proceedings, given the very few class actions that go to trial. 
• Mark Perry made an interesting point about a sometimes overlooked part of the class action rule requiring that courts certifying a class “must define the class and the class claims, issues, or defenses . . . .”  Fed. R. Civ. P. 23(c)(1)(B) (emphasis added).  He made the point that under this rule and in light of Wal-Mart, district courts should be carefully examining each element of the plaintiffs’ causes of action and each defense, and determining whether they can be tried on a classwide basis.  I thought that was a great point.  Some decisions fall into the trap of looking at the issues in the case too broadly without digging into the details of each cause of action and each defense.  The need for individual proof of defenses can be critical in defending against class certification. 
• Judge Rosenthal pointed out that there is a significant open question after Wal-Mart as to whether a Rule 23(b)(2) class can recover an award of relatively small penalties on each class member’s claim, which, when aggregated, amount to a very large penalty that can potentially cripple a defendant, particularly a smaller company.  This is an issue the insurance industry needs to be paying very close attention to because insurance claim-handling statutes sometimes provide for these types of penalties.  The Louisiana Supreme Court’s recent decision in Oubre v. Louisiana Citizens Fair Plan, No. 2011-C-0097, 2011 La. LEXIS 3014 (La. Dec. 16, 2011) is a good example of how this type of aggregation of small penalties can result in a huge potential exposure for an insurer (see my recent blog post on Oubre for more).  The latest word on Oubre is that the Louisiana Supreme Court denied rehearing and that Louisiana Citizens intends to petition for certiorari in the U.S. Supreme Court, as recently reported on Property Casualty 360.  I wouldn’t hold your breath for that petition to be granted, but you never know.   
• On AT&T v. Concepcion, Paul Bland took the position that if Concepcion results in enforcement of arbitration provisions barring class action arbitrations even in circumstances where it is not financially viable for an individual to pursue an arbitration (as the Eleventh Circuit has held), then consumer class actions will disappear except in circumstances where there is no contract between the putative class members and the defendant.  Mark Perry pointed out that the Consumer Financial Protection Bureau will have the power to bar the use of arbitration clauses by lenders within its jurisdiction, and that the NLRB has recently ruled that it is an unfair labor practice for employers to ban class arbitrations (this is on appeal).  They didn’t mention insurance, but, as I’ve noted here before, that is another area where state regulators and state legislatures have power to regulate the use of arbitration provisions (see my August 22, 2011 and December 14, 2011 blog posts for more on this).  One risk I see here is that if the insurance industry does not pursue greater use of arbitration post-Concepcion and most other industries do, that could make the insurance industry a more prominent target of the plaintiffs’ class action bar. 
• There was an interesting discussion about the Fifth Circuit’s opinion in In re Monumental Life Ins. Co., 365 F.3d 408 (5th Cir. 2004), a case involving allegations of racial discrimination in the sale and administration of low-value industrial life insurance policies.  In a 2-1 decision, the majority reversed a denial of class certification, holding that damages potentially could be obtained under Rule 23(b)(2).  The majority accepted the plaintiffs’ argument that damages, although individualized, could be calculated in an across-the-board way through the use of the insurer’s rating practices and data, and thus were proper under Rule 23(b)(2).  The court also suggested that, although notice and opt out procedures are not required under Rule 23(b)(2), they can be used in (b)(2) cases, and might be appropriate in that case.  Judge Rosenthal suggested that there are open questions as to whether these holdings survive Wal-Mart. 

The Seventh Circuit has started 2012 off with a significant class certification opinion.  Messner v. Northshore Univ. Healthsystem, No. 10-2514, 2012 U.S. App. LEXIS 731 (7th Cir. Jan. 13, 2012) was an antitrust case alleging that a merger of two hospitals violated federal antitrust laws, but the opinion speaks to several broader issues regarding class certification that are important for many putative class actions, including insurance cases: 

• A Full Daubert Analysis Is Required On Both Sides If The Expert Testimony Is Important For A Class Certification Issue:  The Seventh Circuit reaffirmed its prior holding that “[w]hen an expert’s report or testimony is ‘critical to class certification’ . . . a district court must make a conclusive ruling on any challenge to that expert’s qualifications or submissions before it may rule on a motion for class certification.”  Id. at *15.  This is contrary to the Eighth Circuit’s view that only a focused, limited Daubert analysis is required.  (For more on that, see my prior post about In re Zurn Pex Plumbing Prods. Liab. Litig., 644 F.3d 604 (2011).)  The Seventh Circuit further elaborated that the word “critical” should be interpreted “broadly to describe expert testimony important to an issue decisive for the motion for class certification.  If a district court has doubts about whether an expert’s opinions may be critical for a class certification decision, the court should make an explicit Daubert ruling.”  Messner, at *16.  The Seventh Circuit held that where the testimony of the defendant’s expert “laid the foundation” for the opposition to certification, a full Daubert analysis was required.  The court rejected arguments that Daubert standards should only apply to plaintiffs because they bear the burden of proof on class certification, reasoning that a class certification ruling is important to both sides and Rule 702 applies to both sides regardless of who bears the burden of proof.  This is not an unanticipated outcome but it stresses the importance for defendants and their counsel of fully vetting their expert testimony used at class certification, just as they would in preparing experts for use at trial.  Defendants should not focus on attacking the plaintiffs’ expert without taking care to ensure that their own expert’s analysis will withstand a rigorous Daubert inquiry. 
• Lack of Injury to Some Class Members:  The court drew what it described as a “critical” distinction between cases where it is shown that a large part of the class has suffered no injury as a factual matter, and cases where a large number of class members could not possibly have been harmed.  It said only the latter are inappropriate for certification: 

[I]f a proposed class consists largely (or entirely, for that matter) of members who are ultimately shown to have suffered no harm, that may not mean that the class was improperly certified but only that the class failed to meet its burden of proof on the merits.  If, however, a class is defined so broadly as to include a great number of members who for some reason could not have been harmed by the defendant’s allegedly unlawful conduct, the class is defined too broadly to permit certification.  . . . There is no precise measure for “a great many.”  Such determinations are a matter of degree, and will turn on the facts as they appear from case to case. 

Id. at *53-55.  This seems to be a new and notable holding.  It could potentially apply to insurance class actions given that it is common for some part of the proposed class in an insurance class action to have sustained no injury.  The court here creates a standard that likely will be difficult for district courts to apply and there likely will be inconsistency in application of this new standard.  I’m not aware of any other circuit articulating this standard.  But class certification decisions in this area tend to focus more on whether individualized inquiries (and how many of them) are required to determine whether individuals fall within a class definition or were harmed.  Class actions that might meet this new Seventh Circuit standard still may fail to satisfy the predominance requirement.  The Supreme Court also will say something this Term about what kind of injury to a named plaintiff (and perhaps class members, at least by extension) is necessary to establish Article III standing, in a case under the Real Estate Settlement Practices Act, see First American Fin. Corp. v. Edwards, No. 10-708 (check out SCOTUS blog’s recap of the oral argument for more on that case and speculation on possible outcomes).  This Supreme Court opinion might impact the kind of issue the Seventh Circuit dealt with in Messner, but that will depend largely on how broadly or narrowly the opinion is written. 

• Fail-Safe Classes and Class Definitions:  The Seventh Circuit further discussed “the problem of the fail-safe class: one that is defined so that whether a person qualifies as a member depends on whether the person has a valid claim.  Such a class definition is improper because a class member either wins or, by virtue of losing, is defined out of the class and is therefore not bound by the judgment.”  Messner, at *55-56.  This is also an issue that frequently comes up in insurance class actions because some plaintiffs’ lawyers define their proposed classes in this fashion.  The court further explained that “[d]efining a class so as to avoid, on one hand, being overinclusive and, on the other hand, the fail-safe problem is more of an art than a science.  Either problem can and often should be solved by refining the class definition rather than by flatly denying class certification on that basis.”  Id. at *56-57.  This comment poses a practical problem for case management by district courts that seems to be ignored here.  The scope of a class definition is often essential for framing the discovery that is taken on class certification issues and also for developing expert testimony on class certification.  While a plaintiff is not completely locked into a class definition drafted prior to any discovery, there needs to be a point at which the proposed class definition is established and class certification is decided on that definition, up or down, otherwise the defendant and the judge are trying to constantly deal with a moving target.  I don’t think the court is saying here that the trial judge should do the plaintiffs’ work for them and come up with his or her own definition that satisfies class certification standards; that would eviscerate the plaintiffs’ burden of proof and almost convert the judge into an advocate for the plaintiffs making their best arguments for them.  District courts, at least in the Seventh Circuit, will have to sort out how to address this new commentary, which appears to be dicta.

This is a guest post by Seth Schmeeckle, a partner at Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans and Baton Rouge, Louisiana.  Seth and I have worked together on Hurricane Katrina and Rita litigation for the last six years.  Seth and his partner, Ralph Hubbard, ran the defense group in the Eastern District of Louisiana for the flood exclusion-related class actions and the Louisiana Attorney General’s Road Home litigation.  He is also a great resource if you need to know where to find the best gumbo (or other fantastic food of various varieties) in New Orleans.

In Price v. Martin, --- So. 3d ---, 2011 WL 6034519 (La. 12/6/11), a decision that could dramatically alter the landscape of class action litigation in Louisiana, the Louisiana Supreme Court recently adopted the “heightened commonality” requirement announced by the U.S. Supreme Court in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), requiring that plaintiffs present “significant proof” that common questions of law or fact exist before a district court may certify a putative class.  While Price’s ultimate effect remains to be seen, at a minimum it provides lower courts with a new and powerful mechanism for denying certification to those purported classes where the plaintiffs advance only superficial or unsupported theories of common liability or causation.

In Price, a group of landowners living in the vicinity of a wood-treating facility brought a putative class action against past and present owners of that facility, alleging that those owners had engaged in environmentally-unsound practices that caused hazardous chemicals to be released into the surrounding environment.  Id. at *1.  Plaintiffs sought to define the class as essentially all persons or entities that had been present in the vicinity of the facility since 1940.  Id. at *2.  Although the district court initially certified the class and the appellate court later affirmed, the Louisiana Supreme Court reversed, relying on the U.S. Supreme Court’s recent decision in Wal-Mart to hold that the plaintiffs had not satisfied the requirements for class certification. 

The Price court, citing Wal-Mart for the proposition that the rules for class action certification do not set forth a “mere pleading standard,” reversed on the grounds that the plaintiffs had not offered “significant proof” that the “commonality” requirement was satisfied.  The plaintiffs had argued the requirement was satisfied by the existence of a common factual issue, namely, whether defendants’ chemical emissions had caused damage to the residences surrounding the facility.  Id. at *6.  Testing the validity of this assertion, the court analyzed the specific proof plaintiffs offered in support, finding that none of it was sufficient to establish the existence of a common question whose truth or falsity would resolve an issue that was central to the validity of each of plaintiffs’ claims.  Id. at *9.  Rather, the court found that plaintiffs’ proffered evidence belied the existence of a “myriad of property-specific facts” that would need to be resolved in order to determine defendants’ liability to individual plaintiffs.  Id. at *9-10.  Because the court’s “rigorous analysis” revealed an absence of “significant proof” of a common question, the court held the commonality requirement found in La. C.C.P. art. 591 was not satisfied and that the lower court had committed manifest error in granting certification.  Id. at *12.  On this same basis, the court also held that the predominance and superiority requirements found in La. C.C.P art. 591(b)(3) were necessarily not satisfied.  Id.

By denying certification while at the same time embracing Wal-Mart’s “heightened commonality” requirement, the Louisiana Supreme Court appears to be sending a strong message to lower courts that the practice of certifying class actions on the basis of a subcutaneous common question of law or fact is over.  Not only is the court providing a new tool for district courts to use to deny certification; it also appears to be encouraging the lower courts to employ this tool to minimize the number of class actions that are certified.   Assuming the lower courts follow suit – which remains to be seen – class action litigation in Louisiana state courts could be resolved at an earlier stage in the proceedings, much in the same way the U.S. Supreme Court’s decisions in Twombly and Iqbal led to courts becoming more willing to resolve dispositive issues by way of motions  under Fed. R. Civ. P. 12.

On its surface, it appears difficult to reconcile the Louisiana Supreme Court’s analysis on class certification in its Price decision with another recent of its class action decisions in Oubre v. Louisiana Citizens Fair Plan, No. 2011-C-0097, 2011 La. LEXIS 3014 (La. Dec. 16, 2011) (see Wystan’s recent blog post about Oubre).  In Oubre, the Louisiana Supreme Court reinstated a $92 million summary judgment in favor of the class of policyholders against their insurer for its failure to timely initiate the adjustment of Hurricane Katrina losses in compliance with Louisiana law.  But it must be remembered that the issue before the court in Oubre was not whether the class should have been certified.  Rather, the issue concerned the application of Louisiana’s bad faith statutes concerning timely initiation of loss adjustment.  Several years prior, the Louisiana Supreme Court decided to deny Louisiana Citizens’ writ application concerning the appropriateness of the lower courts’ decision to certify the class.  See Oubre v. Louisiana Citizens Fair Plan, 964 So. 2d 363 (La. 2007).  One has to wonder if the Louisiana Supreme Court would have granted the writ application at that time if it had the Wal-Mart decision available to it.

The Colorado Supreme Court recently issued several new decisions on class certification, one of which was in an insurance class action – State Farm Mutual Automobile Insurance Company v. Reyher, Case No. 10SC77, 2011 Colo. LEXIS 844 (Colo. Oct. 31, 2011).  This was one of many putative class actions that have been filed involving the use of databases by insurers to evaluate the reasonableness of medical bills.  These cases have led to mixed results recently – the Illinois Appellate Court recently found certification improper, but in Oregon there was a class certified and a large verdict against an insurer that was upheld (and is now the subject of a petition for certiorari to the U.S. Supreme Court), and Farmers entered into a nationwide settlement.  (For some background on these recent developments in this area, see my prior posts on August 10, 2011, June 12, 2011 and April 22, 2011.)  What I found significant about this decision was that the Colorado Supreme Court explained how the trial judge correctly resolved a factual dispute presented by the evidence at the class certification hearing.  The court gave some guidance on how to draw the line between what issues are appropriate for the trial judge to decide at class certification and what issues should be left for a jury at trial.

Here, the relevant provision of the Colorado No-Fault Act required payment of “all reasonable and necessary” medical expenses.  State Farm, in evaluating claims, contracted with a third-party vendor to compare bills received with a database of charges for services in the same geographic area. The dispute here involved a classic type of issue that is often at the center of an insurance class action.  The plaintiffs claimed that they could prove the case on a classwide basis because State Farm purportedly relied solely on the vendor’s database and the pricing used in the database was allegedly flawed.  State Farm claimed that its adjusters would review the information from the vendor’s database and then make their own independent judgment on each claim, reviewing all relevant information in the file and not blindly adhering to the third-party recommendation.  The trial court was persuaded by State Farm’s evidence and found that individual issues predominated.  The court of appeals disagreed, finding that the plaintiff had adequately shown that they could “conceivably prove” liability on a class-wide basis, if their version of the facts were correct, and that the trial court improperly decided the “merits.”  The Colorado Supreme Court held that the trial court was correct (or at least it did not abuse its discretion), and reversed the court of appeals.

The Colorado Supreme Court explained that:

The court of appeals thus accepted at face value Plaintiffs' allegations that State Farm had a practice of relying solely on the database to assess the reasonableness of claims and reprice them accordingly. As a result, the court of appeals concluded that Plaintiffs could "conceivably prove" State Farm's liability on a class-wide basis. This constituted error.

In Jackson, we explained that a trial court may consider disputes "that overlap with the merits only to the extent necessary to satisfy itself that the requirements of C.R.C.P. 23 have been met." Slip op. at 27. The U.S. Supreme Court has similarly permitted district courts to analyze issues that overlap with the merits for the purpose of determining whether the plaintiff has established the class certification requirements. See Wal-Mart Stores, Inc. v. Dukes, __ U.S. __, 131 S.Ct. 2541, 2552 n.6 (2011). A trial court may not, however, go a step further and prejudge the merits of the case or otherwise screen cases at the class certification stage. Jackson, slip op. at 26-27.

In the instant case, whether State Farm relied solely on the database was an issue relevant to Plaintiffs' class-wide theories of proof and the merits of the case. The trial court only considered this issue to the extent necessary to satisfy itself that Plaintiffs had failed to establish State Farm's sole reliance on the database with common proof. Moreover, because the trial court undertook this analysis for the purpose of determining whether common issues predominate over individual issues, it did not violate Jackson or otherwise impermissibly prejudge the merits of the case.

. . .

[A]fter rigorously analyzing Plaintiffs' class-wide proof, namely the nature of State Farm's claim review process, the trial court was satisfied that State Farm did not have a class-wide practice of relying solely on the database. The trial court then determined that proof at trial would be predominantly individual — a determination within the trial court's discretion. We defer to this case management decision and recognize that Plaintiffs' interpretation of the No-Fault Act and theories of proving liability can be tested in individual trials on the merits.

Id. at *18-19.

The court essentially said that the trial judge can decide factual disputes relevant to class certification issues, even where they overlap with the merits, but cannot prejudge which party ultimately would win on the merits (i.e., who would win regardless of whether the case is tried individually or on a classwide basis).  This is an important win for the insurance industry (and class action defendants generally), and I see it as an indication that most state supreme courts, even ones that are not particularly conservative, are likely to follow the U.S. Supreme Court decision in Wal-Mart on issues such as the consideration of the merits at class certification.  That portion of Wal-Mart, although it appears in the 5-4 portion of Justice Scalia’s opinion, is probably something the entire Court or nearly all of it would agree on.  But putting that aside, I think it’s the correct result as a matter of procedural law because it keeps the decision on class certification in the hands of the judge, where it is supposed to be.  If the Colorado Court of Appeals were correct, it would mean that where the plaintiff had some evidence that the case might, on their theory, be subject to resolution in a class-wide manner, the trial judge would have to throw up his or her hands and leave it to the jury to resolve.  The jury would essentially be deciding the issue of class certification – the plaintiffs would try to show that State Farm had a practice of blindly adhering to a purportedly inaccurate database, and State Farm would present its evidence that its claims were handled on a case-by-case manner.  Putting that issue to the jury takes away the trial judge’s role under the procedural rule to decide whether the case properly can be tried on a classwide basis or must be tried on an individual basis. 

One issue that seems to be missing from the Colorado Supreme Court’s analysis is that a full analysis on a motion for class certification should take into account not only how the plaintiffs intend to prove their case at trial but also how the defendant intends to defend the case at trial.  The mere fact that a plaintiff has a viable theory on which the plaintiff’s prima facie case could be presented on a class-wide basis at trial does not mean that common issues predominate if the defendant has the legal right to defend against the class claims by presenting evidence on an individual, claim-by-claim basis, and such individual evidence that the defendant has the right to present at trial will overwhelm the common issues.  That point was made by the U.S. Supreme Court unanimously in Wal-Mart when it found “Trial by Formula” improper (see my June 21, 2011 post), but the Colorado Supreme Court did not address this issue.

Notwithstanding the wide variation in skill levels within the plaintiffs’ class action bar, denials of class certification based on inadequacy of proposed class counsel are relatively rare.  The Seventh Circuit’s recent decision in Gomez v. St. Vincent Health, Inc., 649 F.3d 583 (7th Cir. 2011) caught my eye because there the only ground for denial of certification was inadequacy of class counsel.  The district judge had found counsel inadequate because, in a prior putative class action on the same issue brought by the same attorney, he was not diligent, the court had issued an order compelling discovery against his client and imposed costs, and counsel had not developed a full record on a summary judgment motion.  In Gomez, plaintiffs’ counsel pursued the same arguments as in the prior case and again was subject to an award of costs on a motion to compel.  The Seventh Circuit affirmed, finding that plaintiffs’ counsel had made no persuasive argument for why the district court abused its discretion in denying certification on this ground.

In my view, adequacy of proposed class counsel is something courts should take quite seriously because, if a class is certified, the rights of thousands of absent class members will be in the hands of class counsel, whom the absent class members had no role in choosing.  Although absent class members can opt out if the class is a (b)(3) class (but not if it is a (b)(1) or (b)(2) class), few of them would want to spend the time trying to determine if class counsel is competent.  The standard should not be that any lawyer who files a putative class action will be suitable to represent the class if he or she does a minimally adequate job prior to certification and does not have a disciplinary record.  Substantial trust is being placed in the hands of proposed class counsel, much more than in the typical small individual suit, and the standard for adequacy should be higher.  Except where there are battles over appointment of lead counsel, which typically occurs only in securities class actions or other high-profile class actions, it is rare that courts dig very deeply into the adequacy of counsel.  Defense lawyers also in many instances do not pursue this issue with much fervor, perhaps because it would seem unseemly to “attack” opposing counsel, particularly if defense counsel has other cases against them or is likely to litigate against them in the future, or if the local bar is a collegial one.  While there are certainly some cases where the adequacy of proposed class counsel cannot be questioned, in other situations defense counsel should dig into the history of prior class actions brought by plaintiffs’ counsel, and take some discovery on the adequacy of counsel.  You never know what you might stumble upon.                  

I recently came across an interesting article entitled “Canada: Class Actions and the Insurance Industry” that I thought would be of particular interest to readers of this blog.  Many U.S. insurers write homeowners and auto policies in Canada and may need to start paying closer attention to developments in Canadian class action law, which Canadian legal commentators indicate is more permissive for plaintiffs than U.S. federal law (here is an article discussing differences between Canadian and U.S. class action law).  Reportedly there has been a significant increase in class action filings in Canada in recent years.  I have not studied Canadian class action law in any detail but a few things jumped out at me:

• It appears that Canada primarily has what we call “issues classes” in the U.S. (where common issues are decided in a consolidated proceeding and then individual issues are resolved separately).  The standard for certification though may be more generous to plaintiffs.  On this, the recent American Law Institute Principles of the Law of Aggregate Litigation lay out some suggested guidelines for deciding whether and when to certify an issues class.  Although obviously not binding on Canadian (or even U.S.) courts, they may have some persuasive value.
• The cases seem to proceed in a manner similar to in the U.S. – class certification is hotly contested, and most classes that are certified result in settlements, with trials of class actions rarely occurring.  It appears that nationwide classes, however, are often pursued separately and simultaneously in multiple provinces because Canadian federal courts do not have jurisdiction over such cases.
• The issues that have been the focus of insurance class actions include some of the same issues that have been a focus in the U.S. – “vanishing premium” life insurance policies, the use of non-original equipment manufacturer parts in repairing damaged automobiles, and the use of “checkbook” accounts to pay policy proceeds under life policies.  While so far it seems that issues identified as potential bases for class actions in the U.S. are migrating north of the border, given that Canada seems to have more plaintiff-friendly standards, we may see the reverse start to occur, with class action issues that are successful in Canada being brought into U.S. courts.  Stay tuned. 

In response to my recent post about the Seventh Circuit’s decision in the Aqua Dots litigation, law professor Eric Voigt of Faulkner University alerted me to a draft article he’s written entitled “A Company’s Voluntary Refund Program for Consumers Can Be a Fair and Efficient Alternative to a Class Action to Warrant the Denial of Class Certification.”  He argues that the Seventh Circuit got it wrong in Aqua Dots when it concluded that the superiority prong of Rule 23(b)(3), which requires that a court find that “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy,” only allows a court to compare class action litigation to other methods of litigation, not other methods of resolving the dispute (such as a voluntary refund program).  Prof. Voigt has studied the history of the proceedings of the Advisory Committee that drafted this portion of the rule in 1966, and the writings at that time by Professor Charles Alan Wright, who was a member of that Advisory Committee, and other scholars.  He finds that the original intent was to allow a comparison between class action litigation and other non-judicial methods of resolution.  Prof. Voigt also notes that early court decisions after the 1966 adoption of the superiority requirement understood the rule as allowing a comparison between class litigation and non-judicial resolution, including administrative proceedings.  He also argues that a voluntary refund program can be the sole basis for denying class certification in appropriate cases, and provides some thoughts on desirable features of such a program.

So if you are a defendant that has provided voluntary relief to a putative class, you may want to argue both a lack of superiority and a lack of adequacy of representation.  On superiority you may want to push back against Judge Easterbrook’s opinion, particularly if you are outside of his Circuit, and perhaps cite Prof. Voigt’s article once it is published.  I don’t know the whole history of the Aqua Dots case and have not read the briefs, but it strikes me as potentially an instance where a court decided an issue (the meaning of “adjudicating” in Rule 23(b)(3)) without the benefit of thorough briefing and historical research on it.  Perhaps the Seventh Circuit might have reached a different result if they had the benefit of Prof. Voigt’s research and analysis.

Following Wal-Mart, I expect we will see more attempts by plaintiffs to try to certify issues classes under Rule 23(c)(4), which provides that “[w]hen appropriate, an action may be brought or maintained as a class action with respect to particular issues.”  Courts have disagreed about when issues classes may be certified under this provision.  The Third Circuit recently addressed this in Gates v. Rohm & Haas Co., 2011 U.S. App. LEXIS 17756 (3d Cir. Aug. 25, 2011), and adopted the ALI’s recently-promulgated Principles of Aggregate Litigation on this point.  I expect this decision will be quite helpful to insurers and other defendants in defending against attempts to certify issues classes under Rule 23(c)(4).

Gates was a mass tort case in which the plaintiffs alleged that chemical companies dumped wastewater containing a carcinogen into the ground near their homes.  They sought certification of a class seeking medical monitoring and also an issues class seeking a determination of liability only, with damages to be determined separately in individual suits.  Id. at *2-3.

With respect to the proposed issues class, the Third Circuit noted that there is a circuit split on the question of whether an issues class can be certified if there is a lack of predominance for the class as a whole (where certification is sought under Rule 23(b)(3)).  Id. at *45-46.  The court chose not to follow either side of the circuit split, but rather concluded that the ALI’s recently-adopted Principles of Aggregate Litigation provided the best guideline for district courts in deciding whether to certify an issues class:

In light of the adoption of the Final Draft of the Principles of Aggregate Litigation, when deciding whether or not to certify an issues class, the trial court should consider: the type of claim(s) and issue(s) in question; the overall complexity of the case; the efficiencies to be gained by granting partial certification in light of realistic procedural alternatives; the substantive law underlying the claim(s), including any choice-of-law questions it may present and whether the substantive law separates the issue(s) from other issues concerning liability or remedy; the impact partial certification will have on the constitutional and statutory rights of both the class members and the defendant(s); the potential preclusive effect or lack thereof that resolution of the proposed issue class will have; the repercussions certification of an issue(s) class will have on the effectiveness and fairness of resolution of remaining issues; the impact individual proceedings may have upon one another, including whether remedies are indivisible such that granting or not granting relief to any claimant as a practical matter determines the claims of others; and the kind of evidence presented on the issue(s) certified and potentially presented on the remaining issues, including the risk subsequent triers of fact will need to reexamine evidence and findings from resolution of the common issue(s).

Id. at *47-48 (citing Principles of the Law of Aggregate Litigation §§ 2.02-2.05 (2010)).  The Third Circuit affirmed the denial of certification, focusing on the lack of severability between the common issue and the individual issues.  Id. at *49.

The court also rejected certification of the proposed class seeking medical monitoring under Rule 23(b)(2), relying on the Supreme Court’s recent decision in Wal-Mart.  The court rejected plaintiffs’ expert testimony concerning putative class members’ exposure to the chemical because it was based on “[a]verages or community-wide estimations [that] would not be probative of any individual’s claim because any one class member may have an exposure level well above or below the average.”  Id. at *26.

With respect to issues classes, I expect the approach adopted by the Third Circuit here will be favorable for defendants in many circumstances, particularly in comparison to those circuits that have, in some circumstances, allowed certification of issues classes without a showing of predominance as to the case as a whole.  As in Gates, a key issue in these cases is likely to be whether the individual issues are intertwined with or separable from the common issues sought to be litigated in the class action.  In many insurance class actions where predominance is not satisfied, common issues are intertwined with individual issues.

I also recommend studying the ALI Principles of Aggregate Litigation.  They are gaining traction with judges and we are likely to see them cropping up more and more in class certification opinions and other decisions on management of class actions.

A recent certification of a class against CIGNA in the Eastern District of Pennsylvania is a good example of the type of issue on which insurers may continue to have significant class action exposure following the Supreme Court’s decision in Wal-Mart (see my blog post on Wal-Mart).  This decision has received fairly extensive coverage in the media and blogs, including on Insurance Networking News and Insurance Dispatch. 

In Churchill v. CIGNA Corp., 2011 U.S. Dist. LEXIS 90716 (E.D. Pa. Aug. 12, 2011), the plaintiff alleged that CIGNA improperly denied claims seeking certain types of treatment for autism known as Applied Behavior Analysis and Early Intensive Behavioral Treatment (collectively “ABA”).  The claims were denied under an exclusion for “experimental or investigative” treatment, and CIGNA apparently had a policy of universally denying all such claims on this basis.  Id. at *2.

The court found that the new commonality requirement articulated in Wal-Mart was satisfied because, in contrast to the discretion that Wal-Mart gave store managers over employment decisions, “Cigna indisputably has a national policy of denying coverage for ABA to treat ASD” and “the central question here is whether Cigna’s denial of medical coverage for ABA as a treatment for ASD on the basis that such treatment is investigative or experimental was proper, and the answer to this question will resolve each class member’s individual claim.”  Id. at *12-13.  The court also found that predominance was satisfied because there was no evidence that the policy of denying these claims was any different for any of the ERISA plans managed by CIGNA.  Rather, “Cigna made a class-wide determination that ABA was experimental in all cases.  The propriety of this determination – specifically, whether it violates ERISA – can easily be litigated in a single forum.”  Id. at *22.  The court did not really address some of the individual issues I could see arising in this kind of case, such as whether, assuming the treatment was not “experimental or investigative,” it would be appropriate for particular children based on their condition.

Notably, the court distinguished a Tennessee federal court decision, Graddy v. Blue Cross blue Shield of Tenn., 2010 WL 670081 (E.D. Tenn. Feb. 19, 2010), in which the court found that individualized assessments as to the appropriateness of treatment would be required, and the insurer apparently did not have any across-the-board, universal policy.

The key takeaway I see here is that when an insurer adopts a bright-line rule requiring denial of all claims of a particular type, without any exceptions and without any individualized assessment, while that might in some instances make business sense, that type of policy or practice can in some cases increase the insurer’s class action exposure.  Where some discretion is given to front-line personnel and individual, fact-based determinations are made, there is less chance a class action being certified.

In seeking to certify multistate and nationwide class actions against insurance companies, plaintiffs’ attorneys often argue that the law of breach of contract is essentially the same nationwide, and therefore class certification is proper.  This argument has some appeal to some judges, at least at first blush.  As I think back to my contracts class in the first year of law school (with E. Allan Farnsworth), I don’t recall a lot of discussion about differences in state law.  At the 30,000 foot level, when you are learning the fundamentals, the basics of the law of contract formation and breach are fairly uniform.  But what courts don’t always recognize in class actions is that, when it comes to important nuances, such as what constitutes an ambiguity or what rules the court follows if it finds an ambiguity, there is substantial variation in state law.  It’s also not uncommon that even under what are nominally the very same rules on ambiguity, two judges in two different states applying their own state precedents will reach the opposite result. 

In Krueger v. Northwestern Mutual Life Insurance Company, 2011 U.S. Dist. LEXIS 79440 (N.D. Fla. July 21, 2011), the court held that differences in state law on breach of contract precluded certification (along with other grounds).  The plaintiff alleged that Northwestern Mutual entered into annuity contracts that promised to pay dividends from its surplus, and then later changed its practice and paid interest on a short-term bond instead, allegedly in breach of the contracts.  Id. at *1-2.  In a single-state class action that was certified in Wisconsin, the case went to trial and the court found a breach of contract and breach of fiduciary duty.  Id. at *4.  The plaintiff in the Florida case sought to certify a class of purchasers of these annuities who resided in Florida either at the time of purchase or currently.  Id.  The parties agreed that Wisconsin’s choice of law rules governed, but under those rules, the law of the state where the contract was entered into generally would apply, and that would vary because the class included people who purchased the annuities in various states and then moved to Florida (given Florida’s popularity as a retirement destination, not an uncommon occurrence).  Id. at *10-11.

The court denied certification on typicality, predominance and manageability grounds.  It found that the plaintiff had failed to meet her burden of showing uniformity or near-uniformity of state law.  The court explained that states have different standards for ambiguity, and different standards for admissibility of extrinsic evidence.  Id. at *11-13.   

Another key deciding factor in this decision was that the defendant intended to assert defenses of waiver, notice and estoppel, where available under state law, and these defenses would require a factual inquiry into the facts surrounding the purchase of the annuities.  Id. at *15-16.  As I’ve noted before on this blog, defenses are often key to defeating class certification in insurance class actions.  The Supreme Court made clear in Wal-Mart v. Dukes (see my prior blog post) that the class action device cannot be used in a manner that strips a defendant of its defenses that require introduction of individual facts.  That part of Wal-Mart was unanimous, and was something Justice Sotomayor was stressing during oral argument.  In opposing class certification, these defenses should be demonstrated with evidence of concrete examples from the putative class.  Sometimes it can be hard work to find the evidence to demonstrate those examples, but they are powerful.

I haven’t posted about the Supreme Court’s decision in Erica P. John Fund, Inc. v. Halliburton Co. because I viewed it as limited to a narrow issue of securities law that would not affect insurers except to the extent that they are public companies occasionally subject to defending securities class actions like any other public companies. 

Erica P. John Fund is a short unanimous opinion, authored by Chief Justice Roberts, holding that loss causation need not be proven by a plaintiff in order to obtain class certification.  The opinion is narrow in its focus and does not include any general commentary on class certification law.  It discusses Basic, Inc. v. Levinson, 485 U.S. 224 (1988), where the Court held that, for purposes of a Rule 10b-5 securities fraud claim, a plaintiff can use a “fraud on the market” theory to establish a rebuttable presumption of reliance.  The idea there is that the market price of a company’s shares reflect the publicly available information, and thus an investor can be presumed to rely on public statements about the company in buying stock at the market price.  The separate requirement of loss causation requires a showing that misrepresentations, not other intervening causes, caused the drop in the stock price.  The Court held in Erica P. John Fund that this loss causation requirement need not be proven to obtain class certification.  Most courts of appeal had taken that view, but the Fifth Circuit had required proof of loss causation. 

I don’t see this case as having a significant impact on insurance class actions outside the securities context because attempts to extend the “fraud on the market theory” beyond the securities context have been largely rejected, for example, in cases involving insurance sales practices.  Proof of loss causation is really proof of damages and not proof of one of the elements of Rule 23, as the Supreme Court concluded in a rather summary manner. 

I was surprised though by a citation to Erica P. John Fund in the Florida Supreme Court’s opinion in Sosa v. Safeway Premium Finance Company (see my blog post on the Sosa case).  In the course of discussing commonality, the Florida Supreme Court cited loss causation as an example of the type of “fact question” that did not need to be proven at class certification.  (Slip op. at 33.)  Oddly, the Florida court did not mention Wal-Mart, which focused extensively on commonality.  But that may be because the Florida opinion, issued on July 7, 2011, was largely finalized before Wal-Mart was decided in late June.  The Sosa opinion notwithstanding, I still think it is rare we will see Erica P. John Fund cited outside of the securities context, and its impact on non-securities class actions should be minimal.

A recent Florida Supreme Court decision addressed class certification in a case involving insurance premium finance agreements, and highlighted several important issues. 

In Sosa v. Safeway Premium Finance Co., No. SC09-1849 (Fla. July 7, 2011), the plaintiff claimed that the defendant violated a Florida statute by applying a $20 service charge for a premium finance agreement twice in one year.  Under a premium finance agreement, a finance company pays the entire premium for an insurance policy upfront, and the insured then repays the finance company in monthly installments, with interest and typically a service charge.  Here, a Florida statute required that an “additional service charge” (beyond interest) must not exceed $20 and can be imposed no more than once in a 12-month period, except if there was a cancellation for nonpayment.  The plaintiff claimed that the defendant improperly charged this fee twice per year for policies issued for six-month terms, in violation of the statute.  The Florida Department of Financial Services had discovered this during an audit of the defendant, and had required that the problem be fixed going forward, but had not required refunds of past overcharges. 

The trial court had granted class certification, and the Third District Court of Appeal had reversed.  The Florida Supreme Court reversed the court of appeal, finding the case appropriate for class certification.  (This was a 4-3 decision, with the dissenters opining that there was insufficient conflict between the courts of appeal for the state supreme court to exercise jurisdiction.)  I saw a few points of broader applicability to insurance class actions here: 

1. Predominance should be evaluated based on whether trial of one named plaintiff’s case can prove the class members’ cases.  The court explained that “a class representative establishes predominance if he or she demonstrates a reasonable methodology for generalized proof of class-wide impact,” and “[a] class representative accomplishes this if he or she, by proving his or her own individual case, necessarily proves the cases of the other class members.”  (Slip opinion, at 35 (emphasis in original).)  This is not new, a number of other courts in Florida and other jurisdictions have said this, but parties and trial courts do not always give it sufficient attention.  The focus needs to be on how the plaintiff and defendant will prove their cases at trial.
2. Appellate courts owe appropriate deference to trial court factual findings.  The Florida Supreme Court stressed that, where the trial court had conducted an evidentiary hearing, the Third District Court of Appeal “gave no deference to the trial court’s factual findings and made its own independent determination” of whether the class certification requirements were met.  (Id. at 15.)
3. Defenses matter to class certification when they are individualized, not common defenses.  The court concluded that, in this dispute over a billing practice of the defendant, “any minor variance in factual circumstances would be with regard to the issue of damages and not liability,” and “any defense by Safeway would involve a defense common to all class members, i.e., that it was not aware, nor did not understand, that its conduct would result in an overcharge to all class members.”  (Id. at 38.)  One thing insurers need to focus on in defending class actions is identifying defenses that are dependent on the individual circumstances of putative class members, and proving that up with concrete examples at a class certification hearing.  Safeway may not have had the ability to do this effectively here where the case focused on an across-the-board billing practice.

Class action law has changed.  Nearly every brief and decision on class certification will now cite the Supreme Court's opinion in Wal-Mart Stores, Inc. v. Dukes, the Court’s most important decision on class actions in decades.  It substantially raises the bar for plaintiffs to obtain class certification in all types of class actions, and it solidifies the law in several areas where lower courts were not consistent.  Plaintiffs' class action lawyers won't hang up their cleats, but only the major leaguers will be able to play ball effectively in federal courts.  And the scope of Class Action Fairness Act jurisdiction becomes even more important because the gap between federal law on class certification and state law in states that eschew the federal standards is now even wider.

I won't discuss the background of the case in much detail here because most readers know it by now and good summaries are abundant elsewhere, including the Employment Class Action Blog.  Suffice it to say that plaintiffs sought certification of a class of every current and former female employee of Wal-Mart (over 1.5 million people), claiming gender discrimination in pay and promotion.  The claim was that the broad discretion that Wal-Mart gave to store managers in making pay and promotion decisions had an unlawful disparate impact on women.  Plaintiffs tried to prove this through statistical evidence about disparities between men and women in pay and promotion; anecdotal reports of discrimination against women; and testimony of a sociologist that Wal-Mart's culture makes it "vulnerable" to gender discrimination.

The Supreme Court ruled that class certification was improper because: (1) plaintiffs did not satisfy the commonality requirement of Rule 23(a) (this was 5-4, along conservative/liberal lines); and (2) plaintiffs' claims for individualized monetary relief (back pay) could not be certified under Rule 23(b)(2) (this was unanimous).

The Court hit all the points I hoped it would in my prior post after the oral argument.  Here is where I see the Court's opinion having the most impact outside of the employment context:

(1) There are now two big hurdles to class certification in most cases:  both commonality and predominance.  Gone are the days when federal district courts would brush over commonality on the theory that merely identifying one common question that appeared relevant was enough.  Commonality now has real teeth to it:

Commonality requires the plaintiff to demonstrate that the class members "have suffered the same injury."  This does not mean merely that they have all suffered a violation of the same provision of law.  . . . [Putative class members'] claims must depend upon a common contention -- for example, the assertion of discriminatory bias on the part of the same supervisor.  That common contention, moreoever, must be of such a nature that it is capable of classwide resolution -- which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.  (Slip op. at 9 (citation omitted).)

Plaintiffs will now have to demonstrate at least one common question that meets this standard and, where 23(b)(3) applies, also that the common question(s) that meet this standard predominate over individual questions.  That is a tall order. 

(2) A rigorous analysis of the merits is now clearly required where merits issues overlap with class issues.  Some circuits had been saying this, especially the Second and Third Circuits, but the Supreme Court has now made it clear.   The plaintiffs must "establish that [their] theory can be proved on a classwide basis."  (Slip op. at 16.)  The Court holds that "[b]ecause respondents provide no convincing proof of a companywide discriminatory pay and promotion policy, we have concluded that they have not established the existence of any common question."  (Id. at 19.)  That certainly seems to decide a merits issue.  The Court analogizes to jurisdictional decisions where the judge has the power to decide factual issues on a preliminary motion.  (Id. at 11.)  The Court says that where class certification overlaps with the merits, the issue must be decided twice -- once by the judge at class certification and a second time by the fact-finder at trial (as footnote 6 explains).   In the Wal-Mart case, the issue that overlapped with the merits was whether Wal-Mart had a discriminatory practice -- a central issue in the case, which the trial judge had the power to decide on class certification.  (Id.) Not only the quality but also the quantity of proof is now fair game at class certification -- the Court analyzes the number of affidavits describing anecdotal instances of discrimination, finding them insufficient in quantity given the huge size of the proposed class.  (Id. at 18.)  The Court also eliminates any suggestion that its decision in Eisen bars a ruling on the merits in deciding class certification (see footnote 6).  The merits of the case are now clearly in play on class certification, and in a big way.

This means defendants should almost always demand a jury trial because if they lose on class certification and the judge is the factfinder at trial, they will have the difficult task of changing the judge's mind on merits issues that overlap with class certificaiton issues.  Plaintiffs might be better off not demanding a jury because if they win on class certification they will have proven at least major portions of their case to the same trial judge who will be the factfinder at trial.

(3) Expert testimony must be scrutinized at class certification.  In addressing the district court's conclusion that Daubert does not apply at the class certification stage, the Supreme Court says "We doubt that is so," but it does not have to reach that question because the sociologist's testimony was not sufficient to demonstrate commonality -- "[i]t is worlds away from 'significant proof' that Wal-Mart 'operated under a general policy of discrimination.'"  (Slip op. at 14.)  Again, this was an area where the merits overlapped with class certification and the Court decided a “merits” issue of whether there was adequate proof of a policy of discrimination.

(4) Where the class is seeking monetary relief, Rule 23(b)(2) does not apply, at least where "the monetary relief is not incidental to the injunctive or declaratory relief."  (Slip op. at 20.)  "Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class," and "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages."  (Id. at 20-21.)  This is not a major change, most circuits had reached this result already.  Russell Jackson’s blog post discusses this aspect of Wal-Mart in much greater detail than I have – you should read it if you are looking for further detail on this.

(5) Trial of a sample set of individual cases cannot be used to establish class damages.   Plaintiffs proposed that in Wal-Mart as a means of proving class wide backpay.  The Court unanimously "disapprove[d] that novel project," making clear that "a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims."  (Slip op. at 27.)

(6) Has the standard of review been raised?  Justice Scalia's majority opinion says nothing about an abuse of discretion standard of review.  Justice Ginsburg's opinion suggests that the majority is going beyond the proper role of an appellate court on abuse-of-discretion review.  Is the majority saying indirectly that there is a higher standard?  At a minimum it performs a very rigorous abuse-of-discertion review.

Wal-Mart is certainly not a panacea for all problems defendants face with class actions.  The problem of re-litigation of class certification in state court (particularly in states that don’t follow federal standards) remains a major problem -- it was alluded to but not decided in Smith v. Bayer Corp., see my post on that.  There are also critical issues under CAFA that will have to be decided in defendants’ favor to keep plaintiffs from framing their cases to stay in state court, see my post about that.

So what are the downsides?  Class actions might become more costly if they survive a challenge on the pleadings.  I'd expect plaintiffs' attorneys to argue they need more discovery because of their heightened burden, and they will continue to try to challenge bifurcation of discovery between class certification issues and other merits discovery.  Motions to strike class allegations will become more important, as will district courts’ willingness to grant those motions without hearing evidence.   If a class is certified in federal court (and certification affirmed on appeal or Rule 23(f) review denied), the stakes become significantly higher.  If the plaintiffs can demonstrate on their motion for class certification that they truly can prove their case in a classwide way, that likely will increase their chances of winning at trial.  The class certification decision becomes even more important.  Weak cases should not pass muster but cases that are certified likely will be stronger.  This may not really change much since as things currently stand few class actions that are certified in federal court are tried because the high exposure often leads to settlement.  Another potential downside is that plaintiffs' lawyers will have a stronger incentive to try to find end runs around CAFA jurisdiction in states that don’t (or might not) follow Wal-Mart.  That will become an even bigger battleground.

What does this mean for insurance cases in particular?  Wal-Mart should be quite helpful to insurers (subject to the possible downsides outlined above).  Many insurance class actions involve individualized discretionary determinations by adjusters or underwriters, often guided by broad guidelines from senior management, not strict rules.  These discretionary decisions are quite similar to the discretion Wal-Mart managers have on pay and promotion.  As long as insurers continue to give front-line personnel substantial discretion, many class actions should not meet this new standard.  The battleground will continue in cases where there is less individual discretion and more bright-line rules, or where plaintiffs claim that computers rather than human beings are making decisions.  Insurers also now should be able to effectively defeat attempts to bring cases that are really seeking monetary relief under 23(b)(2), such as class actions seeking declaratory relief with respect to insurance policy interpretation or the appropriateness of a particular company practice (see my post on the 7^th Circuit’s Kartman decision as an example of this).

What is the media saying?  The New York Times has an editorial railing against the decision, suggesting that the standard for class certification has been “low” for 45 years and is now higher.  I’m not sure that’s accurate, the standard in most circuits was fairly high and the Supreme Court largely reaffirmed that.  The Times also says that the average amount of backpay potentially recoverable ($1,100 per year) was too low to merit individual litigation.  I’m not that familiar with the full scope of relief that might be available to individuals under employment law but on insurance claims the vast majority of individual plaintiffs have more than adequate remedies available to warrant the thousands of individual suits that are filed after any catastrophe.

An article by Steven Greenhouse in the Times predicts that:

The ruling will push plaintiffs’ lawyers into filing fewer huge class actions and more cases on behalf of individuals or smaller groups, lawyers said. That will raise costs and give lawyers less incentive to take on class actions and other complex litigation.

That may well be true – plaintiffs’ lawyers will have to be more selective about bringing class actions and they will need to work up their cases better for class certification.  But is that a bad thing for our legal system?  Many individuals who have a real gripe about employment discrimination (or their insurance claim) want a court (or at least a mediator) to hear their own story and decide their own case based on its own facts, not lump their situation together with thousands of others that are really different.  See my recent post about the problems with mass litigation of insurance claims.