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

 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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 Plaintiffs filed a class action complaint against defendant Tournament One Corp. in Nevada state court. Tournament One removed the case to federal court, and immediately filed a Motion to Compel Arbitration and a Motion to Dismiss, or, in the alternative, to stay the case pending the arbitration motion.

In the resulting opinion, Kidneigh v. Tournament One Corp., 2013 U.S. Dist. LEXIS 62217 (D. Nev. May 1, 2013), The trial court stressed that the Rules of Civil Procedure do not allow for automatic stays of discovery just because a dispositive motion is pending. But, observing that "discovery is expensive," it granted the motion to stay. As it reasoned:

With Rule 1 as its prime directive, this court must decide whether it is more just to speed the parties along in discovery while a dispositive motion is pending or to delay discovery to accomplish the inexpensive determination of the case.
The Court finds that the Defendant has made the strong showing necessary to support the requested stay. The issues before the Court in the pending dispositive motion do not require further discovery and are potentially dispositive of the entire case.

Rule 1, of course, requires courts to interpret the Rules of Civil Procedure "to secure the just, speedy, and inexpensive determination of every action and proceeding."

There are two takeaways from this case: first, when moving to stay, make sure the underlying dispositive motion is as close to a slam dunk as possible. Second, in class actions, which involve huge expenditures of time and effort in discovery, never underestimate the power of invoking Rule 1.

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Yesterday, I received my author's copy of Betting the Company: Complex Negotiation Strategies for Law & Business, which I wrote with old friend Andrew DeGuire of Johnson Controls, Inc. We've been informed that Amazon is now shipping orders (a month earlier than expected).

So today's post is a brief excerpt, to let you all know what we've been working on for the last eighteen months.

Throughout this book, we use “complex negotiations” to mean negotiations with (or among) organizations. Why? Because nego- tiations between organizations have a number of characteristics that may place them on the complex end of any spectrum. There are six characteristics of complex negotiations, each of which presents itself most visibly in negotiations between organizations.

 

* Complex negotiations amplify the effect of nonrational judgments. Individual negotiations involve nonrational components and strong personalities. For various reasons we will explain in greater depth, these nonrational judgments are more frequent (and more severe) in organizations than among individuals.
* Complex negotiations also involve multiple parties. Even if the negotiation is only one organization negotiating with another, the negotiation will likely be handled by teams, and those teams will represent constituents that must be mollified.
* Complex negotiations involve multiple issues. Negotiations over a single issue depend on the amount of bargaining power each party has. By contrast, negotiations over multiple issues provide greater opportunities for agreement (where concessions on one issue can be traded against gains on other issues) or deadlock (by providing additional areas for distrust or disagreement).
* Complex negotiations take place over an extended period of time. When negotiations take place over a course of months or years, the parties develop relationships that affect the nature of the exchange.
* Complex negotiations are heavily regulated. They occur against a background of complex rules and laws. They may also occur against a background of organizational rules.
* Complex negotiations are intercultural. Each organization has its own culture. And negotiations that cross international boundaries may involve different national cultures as well.

Of course, many of these characteristics occur even in “simple” negotiations. It is possible for negotiations between individuals to involve nonrational components, third parties, multiple issues, or culture clashes. However, as explained in greater detail later in this book, because of the ways in which members of groups interact with each other, these issues are more likely to arise in the context of negotiations between organizations.

One central irony we will discuss throughout this book is that organizations are extremely helpful with complex issues: they allow us to throw more resources at a problem; they check individual personality quirks that might lead us astray; and they allow us to add expertise on new issues when necessary. But at the same time as they solve some challenges, organizations intensify others: organizations multiply the number of people who must be satisfied with the outcome; they lengthen the time required to consummate a deal, allowing new events to intervene; they can even amplify undesirable personality traits and entrench them as corporate culture.
In short, complex negotiations mean lots of moving parts, which in turn means lots of distractions and lots of chances to knock a negotiating team off its original plan. So one of the things this book is about is how to maintain strategic focus when events are exploding around you.

While I hope the connection with class-action practice will be self-evident, this book represented a departure from the doctrinal analysis so many of us lawyers spend so much time on. I'm proud of the result, and hope some of you will find it useful.

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 Going through bankruptcy is traumatic enough; doing so and still having your credit report still list your discharged debts as "delinquent" is enough to drive some people to litigation. And that's how several credit agencies found themselves on the receiving end of a series of Fair Credit Reporting Act class actions.

In this case, the defendants settled, offering the plaintiffs injunctive relief and some pro-rated monetary relief, as well as paying attorneys fees and some incentive awards for the named plaintiffs.

The settlement drew objections, however. The trial court approved the settlement nonetheless, but on appeal, in Radcliffe v. Experian Info Solutions Inc., the Ninth Circuit Court of Appeals vacated the settlement. The problem, it held, was the incentive award agreement:

On or before October 19, 2009, Proposed 23(b)(3) Settlement Class Counsel shall file an application or applications to the Court for an incentive award, to each of the Named Plaintiffs serving as class representatives in support of the Settlement, and each such award not to exceed $5,000.00.

(Emphasis added.) Based on both the agreement and testimony at the fairness hearing, it was clear that the incentive provision was supposed to encourage the named plaintiffs to support the settlement. That, the court held, was a conflict of interest that rendered the named plaintiffs inadequate as class representatives.

But the court also expressed concern about the disparity in the size of the incentive awards, stating that this alone might be reason enough to disqualify the plaintiffs as inadequate:

There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards. Under the agreement, if the class representatives had concerns about the settlement's fairness, they could either remain silent and accept the $5,000 awards or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. The conditional incentive awards at issue here, like the disproportionately large awards in Staton, fatally alter the calculus for the class representatives, pushing them to be "more concerned with maximizing [their own gain] than with judging the adequacy of the settlement as it applies to class members at large."

(Emphasis added.)

Finally, the court also held that the provision meant that class counsel was not adequate to represent the class, because there were representing conflicting parties: the named plaintiffs who would receive the incentive award and the absent class members who would not.

Radcliffe appears to be part of a growing trend of courts of appeal watching out for the interests of absent class members. And that makes for an important takeaway: if the settling parties don't protect the absent class members, the courts will step in to do so.

NOTE - An earlier version of this post identified the Public Citizen Litigation Group as involved with the case.  While they are listed in the opinion as counsel, I have been informed that the brief they filed was on a collateral issue, not one objecting to the settlement.

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Despite the warnings, Wal-Mart Stores, Inc. v. Dukes did not herald the end of the class action, or even class action scholarship. Indeed, new debates have risen in its wake. One of the most interesting is what to do about classes where large numbers of class members might not have suffered any injury. Courts do certify these cases, for settlement purposes if nothing else. But should they?

One plaintiff attorney-scholar group (Joshua Davis, Eric Cramer, and Caitlin May) says "yes." In their paper The Puzzle of Class Actions with Uninjured Members, they argue that based on their analysis,

courts are free to continue to certify classes--even to award damages to classes--that contain members who suffered no legally cognizable harm.

How do they justify this?  The authors make three arguments:

First, there is no valid standing objection to compensating uninjured class members. As the authors argue, several courts, including the Seventh Circuit in Kohen v. Pacific Investment Management LLC and the Second Circuit in Denney v. Deutsche Bank AG, have held that the Article III case or controversy requirement does not require each class member to independently prove her standing.

Second, there is no valid due process objection. According to the authors, the due process concerns (the class member's right to "autonomy" or "full compensation," the defendant's right to ) are "abstract," as opposed to the presumably concrete (or, as they put it, "practical") needs of the class member to some recovery.

Third, Shady Grove undermines any objections that class actions confer substantive rights in violation of the Rules Enabling Act. According to the authors, certifying a class that includes uninjured members and then awarding damages does not confer a new substantive right on the uninjured class members, it just changes the way in which the claims are processed.

Even if a class is certified with potentially uninjured members, a court will address the same claims and defenses. It will simply litigate common issues in a common--and therefore more expeditious--manner.

Unfortunately, none of these arguments really holds up to scrutiny.

Part of the problem here is that the plaintiffs cherry pick their cases, and ignore inconvenient details. For example, while the authors discuss Kohen, an opinion by Judge Posner that held that the defendants had not provided enough evidence to show that a proposed class definition was overbroad (thus pulling in uninjured class members), they completely ignore Judge Easterbrook's opinion in In re Bridgestone/Firestone, which specifically detailed the problem with certifying a class that included "millions of uninjured buyers." (Emphasis in original.) Similarly, the authors discuss Denny v. Deutsche Bank AG, an opinion by the Second Circuit that upheld a settlement with class members who received bad tax advice, without ever mentioning that the opinion reviewed a "conditional certification 'for settlement purposes only.'" (The court considered that posture very significant: it allowed it to consider solely "suffered injuries-in-fact, irrespective of whether their injuries are sufficient to sustain any cause of action.")

The biggest problem with the authors' analysis is that it does not mention Comcast Corp. v. Behrend (which was decided five days before they posted their paper). And it appears Behrend blows a big hole in their argument. The Supreme Court there expressed grave concerns about certifying a class in which some percentage of members might have been injured, just not by the wrong the plaintiffs challenged. As it put it:

In light of the [plaintiff's] model's inability to bridge the differences between supra-competitive prices in general and supra-competitive prices attributable to the deterrence of overbuilding, Rule 23(b)(3) cannot authorize treating subscribers within the Philadelphia cluster as members of a single class.

Granted, the Court did not discuss standing, due process, or Shady Grove. It relied on the a far more

unremarkable premise. If respondents prevail on their claims, they would be entitled only to damages resulting from reduced overbuilder competition, since that is the only theory of antitrust impact accepted for class-action treatment by the District Court.

(Emphasis added.) In other words, the damages the plaintiffs seek have to be related to their theory of the case. A class containing large numbers of uninjured members may or may not violate standing or due process. But it is definitely overbroad. And courts--long hesitant to compensate the uninjured--have long refused to certify overbroad classes simply on ascertainability grounds.

So what can defense lawyers pull from this paper? Two things. First, the paper provides a look into what some plaintiffs' attorneys see as one of their larger vulnerabilities: to make money they need large classes, but large classes are usually overbroad. How will they justify those classes? Second, and more prosaically, it always pays to read the underlying cases, and to be up on the state of the law.

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Rule 68 offers of judgment have been controversial in class action practice for quite some time. Proponents of the tactic believe that it offers a valuable means of limiting frivolous lawsuits: where there are really only a few affected claimants, an offer of judgment can force them to face up to the costs of meritless class allegations. Opponents believe that corporate defendants would rather buy off potential claimants one by one than face a class-action lawsuit. Circuit courts of appeal had split on whether the tactic could actually moot a class action.

Genesis Healthcare Corp. v. Symczyk, in which a nurse appealed the dismissal of her FLSA collective action after the defendant made an offer of judgment and then moved to dismiss her case as moot, seemed to offer a solution to the longstanding question of whether the offer of judgment is a valid defense tactic in class actions. In the opinion that came out last week, Justice Thomas, writing for a 5-Justice majority, allowed the tactic in the case before the Court, but seemingly limited it for the time being. Specifically, he held that

In the absence of any claimant's opting in [to the proposed collective action], respondent's suit became moot when her individual claim became moot, because she lacked any personal interest in representing others in this action.

If you believe that reasoning sounds like the Court did not intend its opinion to reach Rule 23 class actions, you are correct. The Court immediately rejected any attempt to use Rule 23 cases to support a wider ruling in Symczyk:

But these cases are inapposite, both because Rule 23 actions are fundamentally different from collective actions under the FLSA, see Hoffmann-La Roche Inc., 493 U. S., at 177-178, 110 S. Ct. 482, 107 L. Ed. 2d 480 (SCALIA, J., dissenting), and because these cases are, by their own terms, inapplicable to these facts.

(Emphasis added.) The Court did, however, include some language that suggests it might find Rule 68 offers of judgment appropriate when made to Rule 23 named plaintiffs. First, it pointed out that settling a collective action early does not deprive additional claimants of any rights to bring lawsuits:

While settlement may have the collateral effect of foreclosing unjoined claimants from having their rights vindicated in respondent's suit, such putative plaintiffs remain free to vindicate their rights in their own suits.

Second, Justice Thomas responded to Symczyk's argument that "picking off" a named plaintiff in a collective action would frustrate the efficiency justifications for a collective action, as they had been articulated for class actions in Depsoit Guaranty National Bank v. Roper. In general, he rejected the argument on its logic, but he also include a footnote that implied Roper may no longer be good law:

Because Roper is distinguishable on the facts, we need not consider its continuing validity in light of our subsequent decision in Lewis v. Continental Bank Corp., 494 U. S. 472, 110 S. Ct. 1249, 108 L. Ed. 2d 400 (1990).

That footnote sounds like an invitation to revisit the issue. Based on Justice Kagan's spirited dissent, it will likely be another contentious debate.

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Paul Karlsgodt (of the longstanding and outstanding Class Action Blawg) has published an article with the University of Denver Law Review's Online Edition: Statutory Penalties and Class Actions: Social Justice or Legalized Extortion? Statutory Penalties is an excellent introduction to the problem of defending class actions based on statutory violations, and Karlsgodt's focus on privacy litigation is a welcome one.

Among the most useful parts of his article, Karlsgodt provides a handy summary of the "annihilation argument" and how it's currently received by the courts.

One argument raised in early class actions involving potentially annihilating statutory damages liability was that the potential of putting a defendant out of business defeated the superiority element required for class certification. Courts found that class actions were not the superior means of resolving claims because the potential liability in a class action would put the defendant out of business and because statutory penalties themselves facilitated individual lawsuits. More recently, as illustrated by the Ninth Circuit Court of Appeals’ decision in Bateman v. American Multi-Cinema, Inc., courts have rejected the idea that the potential for annihilating liability is a basis for finding a lack of superiority.

(Emphasis added.)  Since he's writing for a university law review, Karlsgodt jumps quickly from diagnosing the problem to legislative solutions. And that's understandable: after all, the legislature caused the problem in the first place. But, despite what the leap to legislative recommendations implies, there are some tactics class action defense lawyers can use (short of the due process challenges he discusses) to fight statutory damage cases:

• Focus on fairness. Judges are human: they often look at what's really at stake in a case, and many of them don't really like "gotcha" class actions. As a result, they are often willing to read causation or other requirements into statutory class actions that might otherwise result in billions of dollars of nominal damages.
• Focus on the class definition. Overeager plaintiffs may botch the class definition, reaching for more than the statute will grant them. (This has proven particularly true in TCPA cases.) But, in addition, some statutory class actions (like those under EFTA) may not lend themselves to widespread class definitions.
• Make an offer of judgment. Depending on How the Supreme Court decides Symczyk, it may be that Depending on the jurisdiction, a Rule 68 offer of judgment can stave off some of these cases by offering relief to the few plaintiffs who might actually care about the "gotcha" violation.

Go. Read. It's an interesting article about an important current issue.

[Disclosure: Paul and I correspond occasionally, and he has been very kind to the Class Action Playbook over the years. Also, I quite liked his book World Class Actions.]

[Correction: in the 72 hours between writing this post and its going live, the Supreme Court decided Symczyk.  More on that on Tuesday. Thanks to Ted Frank for pointing out the error.]

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 Two plaintiffs' firms filed nearly identical class actions against a dietary supplement company, alleging that one of its weight loss supplement didn't work. The cases were filed within two weeks of each other, one in federal court (Branca v. Iovate Health Sciences USA, Inc.), and one in California state court (Garcia v. Iovate Health Sciences USA, Inc.). Shortly thereafter, the defendant filed a motion to stay in the federal case, because it had settled the case in state court.

So far, this was all just run-of-the-mill procedural maneuvering. So why make it the subject of a blog post? As the court explained:

Why not stay this case, if one that's virtually identical to it, and would resolve all of the claims, has reached a preliminary settlement that is now awaiting court approval? The real reason, according to Branca, is that the Garcia settlement is collusive, or at least looks really bad.

(Italics in original; bold emphasis added.)  The part that "look[ed] really bad" was that the firm representing the defendant had been about to engage in mediation with opposing counsel when the Garcia case was filed. The opinion implies (but does not state outright) that the quick settlement in the Garcia case might be the result of a reverse auction.

The Court has read the parties' briefs and given considerable thought to them. Here's the basic problem: No matter how hard Iovate tries to argue that a stay is warranted under Landis v. North American Co., 299 U.S. 248, 254, 57 S. Ct. 163, 81 L. Ed. 153 (1936), and no matter how hard Branca tries to argue back that a stay isn't warranted under Colorado River Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976), the real fight here is for control of a class action between two warring plaintiffs' firms. That fight, moreover, is inseparable from the ostensibly disinterested legal arguments they make for the Court staying or not staying this case.

But, having identified the real stakes of the motion to stay, the court decided to grant it anyway.

The Court's view is that if there's something procedurally or substantively unsavory about the Garcia settlement, even though it appears to be the result of vigorous bargaining before an experienced mediator, Judge de Bellefeuille should be the judge to say so. Garcia is her case. But until Judge de Bellefeuille makes that call, and meaningfully stalls the progress of the Garcia settlement, the Court is inclined to exercise its discretionary power under Landis to stay this case in the interest of judicial economy.

The case is notable because it's not often that a court will pull back the curtain to expose the real interests behind a mundane procedural motion. That kind of realism is always worth a second look. And the takeaway for defense lawyers is one that always bears repeating: don't be afraid of telling the court what's really going on. Courts are often more willing to wave aside legal fictions than we might think.

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This week's article is a student comment: George Mason 3L Jennifer Johnston has published an interesting discussion of the problems that arise from cy pres distributions, Cy Pres Comme Possible to Anything is Possible: How Cy Pres Creates Improper Incentives in Class ActionSettlements, 9 J.L. Econ. & Pol'y 277 (2013). Her primary argument is that, since cy pres relief changes the incentives for key personnel in a class action settlement, it should only be used when there are assurances it will actually benefit absent class members.

Charitable cy pres distributions effectively add third parties to adversarial proceedings, in the form of charities and nonprofit organizations. Compared to the traditional incentives in the adjudicatory process, introducing another party into a traditionally bilateral proceeding generates significant changes in incentives structures. Judges are often given great discretion in approving a settlement. Typically, the judge is also given wide latitude to decide where to direct the cy pres award, thus giving the judge incentives to consider his own interests and those of a third party organization he views as worthy to receive the funds. Incentives that stem from the judge's discretion can create conflicts of interest, which in turn can create an appearance of impropriety on the part of the judge.

Other times, the plaintiffs' attorney or the defendant is left to decide where to direct the funds, pending approval from the opposing side and the judge. Since the plaintiffs' attorney's fee is often based on a percentage of the entire award, including the cy pres award, counsel for the class has a financial incentive to seek such an award. Cy pres has also created a "cy pres industry" where charities, nonprofits, and even law schools lobby the judiciary to direct funds to their organizations. In evaluating how cy pres has changed the incentives of parties involved, it is necessary to look at models of incentive structures for each party in a traditional adjudicatory class action proceeding and how these parties should ideally behave.

(Footnotes omitted, emphasis added.)

Johnston's solution is twofold: (1) keep more class actions in state court, where it may be easier to identify class members, and where unused funds may revert to the state, or (2) for federal class actions, require a second round of notice if there are significant unused funds. I'd question whether a second round of notice will accomplish much when many absent class members don't read the first notice in a class action, but that is an empirical debate worth having.

Johnston's comment is a cogent, well-researched, and clearly-organized discussion of the problems that arise from cy pres relief. It's well worth a read.

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