Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Professor Jay Tidmarsh of the University of Notre Dame has a new article on superiority: Superiority as Unity, 107 Nw. U. L. Rev. 565 (2013). The piece is heavily influenced by Martin Redish's book Wholesale Justice.  In particular, Professor Tidmarsh takes Professor Redish's critiques of the class action' flaws seriously, and proposes a new set of inquiries (which he calls "superiority," even though it is not really the Rule 23(b)(3) superiority we know) as a test for when a class action is appropriate.

From the abstract:

This Essay begins from the opposite premise: that class actions should be grounded in the notion of social utility rather than autonomy so that class actions should be used whenever they achieve net social gains. This idea of “superiority” presents some difficulties, not the least of which is the capacity of a court to determine whether a class action is indeed superior to other forms of dispute resolution. The Essay proposes a series of presumptions that give effect to superiority and make an inquiry into superiority easier for courts to conduct. When the results obtained by these presumptions are examined, they do not result in the near-absolute position against class actions that Professor Redish favors, but surprising convergences in the autonomy and utility approaches emerge.

There are two aspects of Tidmarsh's article of immediate practical use. First, his take on superiority has some application to current litigation:

“Superiority” is inherently a comparative inquiry: the class action must be compared to other options that a government has established to resolve disputes over legal rights. A range of alternatives can exist. One option for the government is to do nothing and let harm lie where it falls. Another is direct government intervention, either through regulating behavior ex ante or pursuing civil or criminal actions ex post. A third is to allow parties to resolve disputes privately—through arbitration, settlement, or the like. A fourth is private litigation, with the government, through its court system, hosting and resolving claims presented to it.

Under the private-litigation option, various suboptions for resolving wide-scale disputes exist. One is individual litigation, with a separate case brought by each affected person. Another is group litigation, in which victims voluntarily join together or courts consolidate their individually filed cases. Yet another is a bellwether process, in which the claims of some victims receive a full hearing and the claims of other victims are determined or settled on the basis of these decisions. Any of these processes may be married to a preclusion process in which (by consent or judicial fiat) the findings or results attained in early cases bind other victims. A government may make available some of these suboptions and not others, and the available suboptions may overlap with each other. The American litigation system, for example, sets individual litigation as its default position, but it also offers all of the litigation alternatives—although it severely constrains the use of the preclusion option.

(Emphasis added, internal footnotes omitted.) He also points out that--much as some courts have--the superiority analysis is a global one.

Benefits and costs must be calculated on a global basis, not just on the benefits or costs to the parties. Not every class action generates the same benefits or creates the same costs.

(Emphasis added)

The second use is to point out that even this explicitly policy-focused version of the class action (which is most similar to the deterrence story plaintiffs like to tell) does not justify many of the class actions that plaintiffs file.

Professor Tidmarsh's take on superiority is that it requires unity along at least one of three axes (facts, legal theory, and remedies), and substantial overlap on the other two. In essence, this is a simplified version of the various overlapping inquiries about commonality, predominance (or cohesion), and typicality.

Even though treating superiority seriously, as the superiority as unity concept does, reworks the law of class actions significantly, it is not likely to expand the scope of present class action law. The reason is the requirement of unity with respect to the liability-related facts, legal theory, or remedy. Unity—in other words, an identity of facts, law, or remedy for each and every class member—is difficult to demonstrate. But it is also almost always necessary if class treatment is to be deemed superior. Without unity along at least one dimension of a case, the aggregation of individuals is too ragged and too lacking in cohesion to justify legal recognition as a group capable of uniting together and being bound by the result achieved in a single courtroom. Unity also keeps alive the prospect that an entire aspect of the case (and perhaps the entire case itself) can be resolved in one fell swoop.

(Emphasis added.) It's an interesting theory, although one that's unlikely to get too much traction in its current form. (Indeed, one could argue that Judge Posner adopted something similar to this when he attempted to "clarify" predominance in Butler v. Sears, Roebuck & Co.) But it does highlight one important aspect of class action law: the class action is not an all-purpose lever; it is a specific tool that is applicable only in specific circumstances.

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Today's case, In re Universal Serv. Fund Telephone Billing Practices Litig., 2013 U.S. Dist. LEXIS 80204 (D. Kan. Jun. 7, 2013), provides an unusual situation for a class action. First of all, it involves a verdict in a class action trial. Second, it is one of the first trial court opinions to pay attention to the ALI Principles of Aggregated Litigation. 

In this case, the plaintiffs challenged certain billing practices by AT&T, which are not important to this discussion. All you need to know is that the plaintiffs got a class certified, won at trial, and conceded that each class member was entitled to approximately $5 per landline they owned. After the verdict was reduced (because some charges had been billed but never collected) and the damages had been distributed to the class, there was still more than $1 million left over.

So the question arose: what to do with remainder?

The plaintiffs' original trial plan called for a cy pres distribution (that is, a distribution to a closely related charity). Consistent with that plan, one class member filed a motion asking for a distribution to a single organization. The plaintiffs' attorneys argued for an additional $142 distribution to each class member. But the court worried that the additional money would constitute too much of a windfall to justify giving it to the class members:

Implicit in class plaintiffs' proposal that unclaimed funds be distributed through a cy pres award, then, is the recognition that if unclaimed funds remained, then each claimant necessarily received a $1000 award--an amount that significantly exceeded class members' individual damages, which were estimated to be less than $5.00 per landline. It appears to the court, then, that class plaintiffs, at the time they proposed their distribution plan, realized that any distribution beyond the $1000 per landline (an amount that overcompensated class members for their injuries) would constitute a windfall such that a cy pres distribution was appropriate.

So the court decided that a cy pres distribution was appropriate. The final cy pres distribution went to three different organizations, the one suggested by the class member, and two others suggested by the attorneys. (The court declined to suggest anywhere, since it believed doing so was not consistent with its Article III powers.)

This particular case is notable for a reason aside from the rarity of determining what to do with a class action jury verdict: in making their arguments, the plaintiffs relied on the ALI's Principles for Aggregated Litigation. While the court found that they had misread the appropriate Principles, it too referred to the Principles in deciding what to do with the leftover funds. So the biggest takeaway from this particular case is: pay attention to the ALI Principles. Courts are starting to.

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Earlier this week, the Supreme Court quietly granted certiorari in Sears, Roebuck & Co. v. Butler:

Petition GRANTED. Judgment VACATED and case REMANDED for further consideration in light of Comcast Corp. v. Behrend, 569 U. S. ___ (2013).

The case below, Butler v. Sears, Roebuck & Co., had been notable because it was a Judge Posner-written opinion that affirmed a certification (and reversed a denial) of a pair of class actions alleging that certain models of washing machines were defective. The Seventh Circuit had "accepted the appeals in order to clarify the concept of "predominance" in class action litigation." It held that in these cases, the class action would be an efficient means of resolving the controversy. (This is an analysis that sounds like it tips over into superiority.) And Judge Posner was not troubled by variations in damages, or the possibility that some of the class members had been unaffected by the alleged defect.

"Predominance is a question of efficiency. Is it more efficient, in terms both of economy of judicial resources and of the expense of litigation to the parties, to decide some issues on a class basis or all issues in separate trials? A class action is the more efficient procedure for determining liability and damages in a case such as this, involving a defect that may have imposed costs on tens of thousands of consumers yet not a cost to any one of them large enough to justify the expense of an individual suit. If necessary a determination of liability could be followed by individual hearings to determine the damages sustained by each class member (probably capped at the cost of replacing a defective washing machine — there doesn't seem to be a claim that the odors caused an illness that might support a claim for products liability as distinct from one for breach of warranty). But probably the parties would agree on a schedule of damages based on the cost of fixing or replacing class members' mold-contaminated washing machines. The class action procedure would be efficient not only in cost, but also in efficacy, if we are right that the stakes in an individual case would be too small to justify the expense of suing, in which event denial of class certification would preclude any relief.

Sears argues that most members of the plaintiff class did not experience a mold problem. But if so that is an argument not for refusing to certify the class but for certifying it and then entering a judgment that will largely exonerate Sears — a course it should welcome, as all class members who did not opt out of the class action would be bound by the judgment.

This is the third case the Supreme Court has remanded in the wake of Comcast Corp. v. Behrend. At this point, it is safe to say that the Behrend standard is having real effect already.

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 Longtime readers may remember that last February I had the pleasure of participating in the DePaul Law Review's symposium on Class Action Rollback.  The article from that symposium will be appearing shortly in the DePaul Law Review, and a very late draft of it is now available at SSRN. Without further comment, here is the SSRN abstract for the article:

Most discussions of legal doctrine assume that litigants will react to a change in doctrine, but not that they will try to influence that doctrine further by adopting new arguments or finding loopholes in the doctrine itself. As a result, legal scholars tend to overstate the reactions to changes in doctrine, and understate the role of legal strategy in changing doctrine. One recent example is the legal academy's pronouncement of the "death of the class action" in response to the Supreme Court's opinion in Wal-Mart Stores, Inc. v. Dukes. In fact, when one examines the lower court responses to Dukes, it becomes clear that Dukes did not present a significant change in class-action doctrine, let alone sound a death knell for the device. Instead, it was a periodic correction in an area where litigants have fought for advantage over a period of more than forty years.

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 Class action practice provides plaintiffs with some odd pleading incentives. Two that cause continual problems are the need to keep things vague (in order to emphasize commonalities over any variations that may arise from more specific details) and the need to frame one's complaint as broadly as possible to maximize the potential recovery in settlement negotiations.

As it turns out, it is in fact possible to plead a complaint that is too broad and too vague. In fact, the Eastern District of Louisiana entertained a case like this a few months ago, in Duvio v. Viking Range Corp., 2013 U.S. Dist. LEXIS 38592 (E.D. La. Mar. 20, 2013).

The Plaintiffs allege that "each and every" Viking appliance is "unreasonably defective," and that the Defendants are engaged in an ongoing tortious scheme to defraud their consumers. Specifically, the Plaintiffs claim that Viking manufactures and sells defective products designed to malfunction so that Hadco can profit by selling replacement parts for the faulty Viking products.

(Emphasis added, internal citation omitted.) Faced with a complaint that attacked its entire product line, Viking moved to strike the class allegations under Rule 23(d)(1)(D). The court agreed that this was the proper mechanism.

Courts have routinely applied Rule 23(d)(1)(D), formerly Rule 23(d)(4), to actions where a party seeks to strike class allegations because plaintiffs have not met the requirements of Rule 23.

And, in this case, the court found that the complaint had clearly not met those requirements. Specifically, given the stunning breadth of the class, the court held that the plaintiffs had not met the commonality requirement.

Like the female employees in the Wal-Mart litigation, the putative class in this case--all purchasers of Viking appliances across the United States--present similar problems with commonality. From wine cellars to rangetops and everything in between, there are currently 27 different types of Viking appliances in 187 models in varying designs, features, and options. The Plaintiffs do not specify a time period for the manufacture or purchase of these products, which further complicates the matter because some Viking appliances that were manufactured and sold have been discontinued. Given the vast array of products at issue, proving the defectiveness of each and every Viking product ever sold in the United States would entail numerous engineering experts and individual trials to determine causation, which not only present efficiency problems that are contradictory to the purpose of class actions, but also defeats the requirement of commonality because there is not a common question among the members of the purported class.

(Emphasis added.) But, it wasn't just the breadth of the proposed class that posed problems. It was also the fact that the plaintiffs had not pled any specific facts to support their products liability theory. As a result, the court also held that the plaintiffs had not met their burden of persuasion, even at the pleading stage.

Similarly, the present case also lacks a common question because the Plaintiffs do not allege any facts in support of their conclusory allegations. In fact, Plaintiffs complaint is completely devoid of one fact detailing how the Defendants' products are defective, much the less whether there is a commonality among the vast array of appliances and their alleged defective qualities.

Duvio shows that there are limits to just how broad and just how vague a class action complaint may be. At some point in the pleadings, plaintiffs have to show some of their cards. If not, they are particularly vulnerable to a motion to dismiss or motion to strike.

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The merits based (or "fail-safe") class (e.g., "everyone who was a victim of defendant's fraud") has long been considered one of the best examples of a poorly-defined class: because the class is defined in terms of the merits, the class size fluctuates based on the verdict. A verdict for the plaintiff creates a sizable class; a verdict for the defendant means there was never a class at all (if there was no fraud, no one could have been a victim). As a result, many courts have refused to certify fail-safe classes.

Last year, in a remarkable move, the Fifth Circuit declared that it saw no problem with fail-safe classes. The holding, in In re Rodriguez, relies more on an unusual reading of Fifth Circuit precedent than on any logical reason why fail-safe classes are not a problem:

Because our precedent rejects the fail-safe class prohibition, we conclude that the bankruptcy court did not abuse its discretion when it defined the class in the present case.

(Emphasis added.)  Faced with a new split in appellate circuit authority, Fordham law student Erin L. Geller did exactly what any good law student should: she drafted a student note on the issue. The Note, The Fail-Safe Class as an Independent Bar to Class Certification, 81 FORDHAM L. REV. 2769 (2013), provides a useful taxonomy of various ascertainability problems (dividing classes into fail-safe, administratively difficult, and overbroad).

But the most useful portion of the Note is Geller's big insight: fail-safe classes look like one of the evils that the modern Rule 23 was supposed to prevent: one-way intervention.

The res judicata argument can be taken one step further. Fail-safe classes must be barred from class certification because allowing fail-safe classes to be certified reinstates the one-way intervention that the 1966 amendment to Rule 23 was designed to abrogate. Under the 1966 amendment, the court's judgment - whether or not favorable to the class - must include all individuals that the court finds to be class members. Fail-safe classes thus violate the amendment by allowing class members to benefit from a favorable judgment but to be defined out of the class in the case of an adverse judgment. Fail-safe classes can be analogized to the spurious class actions the amendment eliminated by removing the tripartite characterizations of class actions. Much like the spurious class action in which class members could intervene to receive the benefit of a favorable judgment but were not bound by an adverse judgment, fail-safe class members are only bound by a favorable judgment.

(Emphases added; internal footnotes omitted.) Ms. Geller's Note provides a powerful argument--even in the Fifth Circuit--for finding fail-safe classes invalid. It's well worth a read.

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Just about anyone who owns a printer has strong opinions on toner cartridges. An enterprising group of plaintiffs' lawyers sought to capitalize on consumer annoyance with printer cartridges by filing three class actions in the Northern District of California against toner manufacturer Hewlett Packard.

Their cases didn't go so well. Some of the complaints were dismissed on the pleadings. They lost a bid at class certification. And trial court called their evidence of causation and injury "weak." These setbacks must have been particularly difficult because these plaintiffs' counsel had spent a great deal of time and money imposing discovery costs on HP, making the case particularly hard fought. When it came time to talk settlement, both sides were ready to be done with the case. They just faced the classic dilemma: HP didn't want to pay much, but class counsel wanted their fees.

So the parties turned to a classic solution: injunctive relief and coupons. Coupons tend not to cost a defendant much (and may bring it new business), but can be used to justify larger fee awards for class counsel. It sounds like a win-win, until one remembers that many absent class members don't like coupons very much, which has led to coupon settlements falling into disapproval in the last decade.

So when it looked like the plaintiffs lawyers were going to walk away with more than $2 million in fees and costs, while the plaintiffs would receive "e-credits" (electronic coupons) for toner that could only be redeemed on the company website (where prices were higher than other retailers'), the settlement drew objections, most notably from the Center for Class Action Fairness. [Disclosure: I have, pro bono, written several amicus briefs for the Center.]

The Ninth Circuit agreed with the CCAF's objection, and, in Feder v. Frank, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013), it reversed the approval of the class settlement with orders to recalculate the attorneys' fees based on the actual redemption rate of the coupons.

In the course of doing so, the court provided a concise explanation of the costs and benefits of coupon settlements:

Typically, courts try to ensure faithful representation by tying together the interests of class members and class counsel. That is, courts aim to tether the value of an attorneys' fees award to the value of the class recovery. Where both the class and its attorneys are paid in cash, this task is fairly effortless. The district court can assess the relative value of the attorneys' fees and the class relief simply by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class. The more valuable the class recovery, the greater the fees award. And vice versa.

But where class counsel is paid in cash, and the class is paid in some other way, for example, with coupons, comparing the value of the fees with the value of the recovery is substantially more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions. For instance, a coupon settlement is likely to provide less value to class members if, like here, the coupons are non-transferable, expire soon after their issuance, and cannot be aggregated. Of course, consideration of these variables necessarily increases the complexity of the district court's task--comparing the ultimate "value" of the coupon relief with the value of a proposed fees award. And perhaps more importantly, the additional complexity also provides class counsel with the opportunity to puff the perceived value of the settlement so as to enhance their own compensation."

(Emphasis added, internal citations omitted.) And it engaged in a thorough analysis of the provisions of the Class Action Fairness Act (CAFA) that govern coupon settlements:

Indeed, if the legislative history of CAFA clarifies one thing, it is this: the attorneys' fees provisions of § 1712 are intended to put an end to the "inequities" that arise when class counsel receive attorneys' fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class. This point cannot be overemphasized ...

(Emphasis added.) So the 9th Circuit found that the trial court had erred in using a lodestar calculation (which relies on the effort the attorneys expended instead of the benefit the class received) to determine the attorneys' fees in this coupon settlement. It quickly stressed,

however, that the responsibility for this error lies principally with the parties. Because the settlement agreement specifies that no coupons may issue until after entry of a final judgment, it would have been impossible for the district court to calculate the redemption value of the coupons as required by § 1712(a). By structuring the settlement in this way, the parties essentially invited the error here.

So what's the takeaway here? An oldie but goodie: trying to settle on the cheap can get expensive very quickly. If the settling parties don't provide real benefits to absent class members, they run a high risk of drawing objections that could scuttle approval of any classwide settlement.

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The Economist is reporting that the French president Francois Hollande's government just presented a class action bill to the Council of Ministers on May 2. While the bill still must be debated and passed, it has already generated a fair amount of buzz in Europe about whether this means that the French Socialist government will be importing American-style class actions.

European businesses need not worry that much. The bill really is far more similar to England's "group action" law (although it appears to operate on an opt-out principle rather than an opt-in one). As Commercial Risk Europe reports, the bill only allows registered consumer associations to bring the group action, and only for "material losses." It's aimed primarily at consumers, and is likely to cover primarily products liability and competition cases. (It was apparently driven by several issues with medical products in the last few years.)

As a result, it's unlikely to result in the flood of litigation that companies face in America. Consumer associations tend to be non-profit, which means they will likely focus more on cases where real harm was done than on cases that can leverage the largest settlements (and therefore fees for their lawyers).
That said, it will be interesting to see how American plaintiffs' firms react. Firms like Hausfeld LLP have been trying to build a global presence for some time. If they wind up taking "advisory" roles on French group action cases, that may signal they sense the potential for profit. Someone might want to start monitoring the comings and goings in the 8th arrondissement.

(Thanks to Betting the Company co-author Andrew DeGuire for the tip about the article.)

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 Brenda Kennedy was hospitalized in 2009 for four days. She had an insurance policy from United American that paid benefits for each day that she spent in the hospital, and she assigned those benefits to the hospital. When she received her hospital bill, she discovered that it had only covered three days, not four. So she bought a class action on behalf of everyone who received benefits from the policy.

United American moved to dismiss the case because Ms. Kennedy had not received benefits herself; she had assigned them to the hospital. The court agreed with the argument, but stayed dismissal to give Ms. Kennedy a chance to either find a new class representative or to get the hospital to ratify her lawsuit. (She did the latter.)

Then she moved to certify a nationwide class. United American opposed certification on a number of grounds, all of which revolved around the fact that Ms. Kennedy had not been the real party in interest in the case. According to United American, that meant that the class she had defined was overbroad (it contained individual with standing and without), individualized issues would predominate over any common issues (particularly the question of who was a real party in interest, and who had assigned their interest elsewhere).

In Kennedy v. United Am. Ins. Co., 2013 U.S. Dist. LEXIS 48197 (E.D. Ark. Apr. 3, 2013), the court denied certification. Its primary reason was that:

Kennedy cannot bypass or ignore the important task of identifying putative class members that qualify as real parties in interest.

In particular, it held that determining who was a real party in interest (and therefore who would belong in the class) would require individualized inquiries, affecting both ascertainability and predominance. As it reasoned:

Under the circumstances, it is difficult to envision a method for identifying proper class members without conducting extensive, individualized inquiries. In determining whether Kennedy qualified as the real party in interest in this case it was necessary to resolve multiple questions--including which state's law governed the issue, whether the language of the assignment contract between Kennedy and NEA evidenced an intention to effect a transfer, and whether the contract language and circumstances evidenced only a partial transfer and an intent that Kennedy retain the right to sue. As demonstrated by the protracted proceedings regarding Kennedy's status, assignments of GSP2 benefits present a myriad of issues that require consideration of individual proof.

(Emphasis added.) But the court went further, pointing out that Ms. Kennedy's situation rendered her an inadequate class representative as well.

"Even if Kennedy were a benefit payee, the Court finds that she does not qualify as an adequate representative, which is perhaps the most important of all prerequisites to certification of a class action. See Bishop v. Committee on Professional Ethics and Conduct, 686 F.2d 1278, 1288 (8th Cir. 1982). Kennedy's entire claim rests on the supposition that the GPS2 Policy requires that United count the day of discharge as a day of confinement during a hospital stay. United notes that Kennedy's proposed interpretation conflicts with the standardized billing practices of hospital class members that she seeks to represent. United also points out that the putative class includes current GSP2 policyholders who have a financial incentive to consider how this litigation will affect the cost of a GSP2 Policy. Kennedy, who is not a policyholder and remains indebted for the hospital charges that underlie her claim for benefits, has no similar interest."

(Emphasis added.)  In other words, Ms. Kennedy's class action not only conflicted with how most policyholders would understand their benefits, it also threatened to make current policyholders' policies more expensive, undermining their interests.

Kennedy the case began with a motion to dismiss that was arguably unsuccessful. (The court agreed with the defendant's arguments, but gave the plaintiff an opportunity to fix the complaint.) The defeat of class certification built directly off of the motion to dismiss. There are two lessons that defendants can draw from this case. First, stay consistent; consistent arguments across several motions can be very persuasive to a judge. Second, don't be afraid to educate the court. Sometimes it takes a loss in an early skirmish to set up the victory where it is needed.

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