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

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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Yesterday, the Supreme Court issued its opinion in Standard Fire Insurance v. Knowles.  The question the Court faced in this case was whether a plaintiff may avoid removal of a class action under CAFA by stipulating that the case is worth less than $5 million, the statutory amount-in-controversy requirement.

The Knowles opinion--which was unanimous--provides a straightforward answer. As Justice Breyer put it:

As applied here, the statute tells the District Court to determine whether it has jurisdiction by adding up the value of the claim of each person who falls within the definition of Knowles’ proposed class and determine whether the resulting sum exceeds $5 million. If so, there is jurisdiction and the court may proceed with the case. The District Court in this case found that resulting sum would have exceeded $5 million but for the stipulation. And we must decide whether the stipulation makes a critical difference.

In our view, it does not. Our reason is a simple one: Stipulations must be binding. … The stipulation Knowles proffered to the District Court, however, does not speak for those he purports to represent.

That is because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified.

(Emphasis added) In other words, until a class is certified, a named plaintiff is just an individual plaintiff, not the head of some mystical entity known as a class.

Knowles, combined with a few other cases, like Bayer and Shady Grove, shows that the Supreme Court is slowly coming to a coherent vision of what a class action is. That vision is helpful for defendants, less so for current plaintiffs. The Supreme Court is envisioning the class action as a procedural aggregation device, rather than a corporate deterrent or a trust-like entity. This is good news for defendants, who have traditionally argued that the class action is a rule-based joinder device that should not confer any special treatment onto the named plaintiff.

Disclosure: I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief in this case. 

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 ... from November's cases so far:

• CAFA has not changed the rule that a counterclaim cannot confer federal jurisdiction.  Resurgent Capital Servs., LP v. Thomason, 2012 U.S. Dist. LEXIS (W.D. Mo. Nov. 5, 2012) (remanding case).
• Courts get suspicious when parties widen the scope of a class action during settlement negotiations.  Smith v. Levine Leichtman Capital Partners, Inc., 2012 U.S. Dist. LEXIS 163672 (N.D. Cal. Nov. 15, 2012) (denying approval of settlement).
• If you're going to settle a class action, you still need a workable class definition.  Supler v. FKAACS, 2012 U.S. Dist. LEXIS 159210 (E.D.N.C. Nov. 6, 2012) (denying preliminary approval of settlement).

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 Daniel Villalpando sued three companies--Exel Direct, Inc., Deutsche Post DHL, and DHL Express (USA), Inc.---in California state court for underpaying him and drivers like him by misclassifying them as independent contractors. The defendants removed the case to the Northern District of California under the auspices of the Class Action Fairness Act. Mr. Villalpando moved to remand the case, citing the home state exception (which keeps cases where two thirds of the class members and the primary defendants are from the same state in state court) and the local controversy exception (which allows remand where the nature of the controversy is confined to a single state). The defendants opposed, pointing out that Deutsche Post DHL was based in Germany, not California. Mr. Villalpando countered that Deutsche Post DHL was not a "primary defendant." Similarly, he argued that the local controversy applied because of California's "unique set of laws" governing employment relationships.

In its opinion in Villalpando v. Exel Direct, Inc., 2012 U.S. Dist. LEXIS 160631 (N.D. Cal. Nov. 8, 2012), the court found in favor of the Defendants on both arguments. Mr. Villalpando had asserted the same claims against all three defendants, so if one of them was "primary," all of them were. And, since the defendants were vulnerable to the same kind of claims in other states, the controversy was not "truly local."

So what can defense lawyers learn from this, aside from the intricacies of the home state and local controversy exceptions? The complaint still matters. The defendants' arguments, and the court's analysis, were all based on what Mr. Villalpando had actually pled. He was the one who identified all three companies in each claim. And he was the one who invoked the specific, not-that-unique California laws. When the plaintiffs' arguments diverge from their pleadings, it is still worthwhile to point out what they pled when they had the time and the inclination.

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I haven't commented much about the Supreme Court's class action docket so far, largely because this year I was more focused on--in my own small way--trying to influence what it would be.  But now that my particular efforts are done, I thought I would focus on each of the cases before the Court this Term.  I don't feel comfortable talking much about Standard Fire Ins. Co. v. Knowles, which addresses plaintiffs' use of stipulations that limit class recovery to less than CAFA's $5 million amount-in-controversy threshold, since I was on a team that assisted Ted Frank of the CCAF in filing its amicus brief.  

However, several law students alerted me to a pair of student notes touch on the issues in the case, and there's no reason I can't share those with you.  

First up, Front-End Fiduciaries: Pre-Certification Duties and Class Conflict by Nick Landsman-Roos of Stanford Law School.  Landsman-Roos provides a good overall discussion of fiduciary duty, with a focus on binding stipulations.  His primary argument: 

When an action potentially prejudices or does prejudice a substantive legal right of ab- sent class members, an attorney should have an opportunity to offer a good faith defense—that the course of conduct was undertaken in a good faith belief that it would maximize the class’s recovery. That defense, in turn, can be evaluated in terms of whether it is legitimate, genuine, or pre-textual.

(Emphasis added.)

Next, An Illusion of Sacrifice: The Incompatibility of Binding Stipulations in CAFA Cases by Ryan S. Killian of Pepperdine Law School.  Killian takes a hard-line stance against binding stipulations:

For reasons theoretical, legal, and practical, the right answer is the most extreme. Judges should impose a per se rule against giving effect to any purported binding stipulations. The theoretical reasons for such a rule have their basis primarily in agency theory. The legal reasons flow naturally from considerations of due process and the obligatory rigorous inquiry into Rule 23(a)(4)’s adequacy requirement. The practical reasons stem from considerations of complex litigation and efficiency.

(Emphasis added.  Internal footnote omitted.)

As good student notes should, these both provide all the background one needs to follow along on the Knowles argument.

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A busy travel and work schedule this week means that today, I'm just going to point you to three cases with lessons class-action lawyers should be aware of.  So, when defending your class actions, don't forget:

• When removing under CAFA, pay attention to continuing damages.  In Leslie v. Conesco Life Ins. Co., 2012 U.S. Dist. LEXIS 130508 (S.D. Fla. Sep. 13, 2012), the Southern District of Florida was willing to count continuing damages up through the projected trial date in determining whether the plaintiff met the $5 million amount-in-controversy requirement. 

• Plaintiffs must prove arbitration would be too expensive.  In Lowry v. JP Morgan Chase Bank, N.A., 2012 U.S. Dist. LEXIS 128907 (N.D. Ohio Sep. 11, 2012), the plaintiffs offered an estimate from an economist to argue that they could only vindicate their rights through a class action, but the court found the proffer "insufficient," and compelled arbitration.  

• Sometimes, you can sway a court to stay litigation by describing the costs involved in proceeding.  In Blixseth v. Cushman & Wakefield of Colorado, Inc., 2012 U.S. Dist. LEXIS 128977 (D. Colo. Sep. 11, 2012), the defendants faced the usual problem: they had moved to dismiss the case, but the plaintiff wanted to push ahead with expensive discovery.  When the defendants moved to stay discovery, the court noted that the plaintiff offered no good reason other than "public interest" to proceed, but also observed that "Plaintiff's 85-page complaint alleges nine causes of action and, based on the allegations, the case will likely involve discovery of thousands of documents."  So it granted the motion to stay.  

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 Back in 1990, Kenneth Carter was in an automobile accident with an underinsured motorist, one serious enough to exhaust the other party's limited bodily injury coverage. Carter's policy allowed him to stack coverage, meaning he probably had $150,000 coming to him. But his insurer didn't tell him that, instead allowing him to believe that he only had $50,000 in coverage. So Carter sued his Allstate, his insurer, and made a settlement demand for $250,000. (His counsel represented a few other claimants with similar allegations, and made individual settlement demands of up to $6 million for them.) Allstate tried to remove the case to federal court, but because Carter had joined a local defendant, the case was remanded. After remand, Carter amended his complaint to add class action allegations.

At that point, Allstate removed the lawsuit again under the auspices of the Class Action Fairness Act. And then it moved to strike the class allegations, because it had already faced--and defeated at certification--a class action his lawyers had previously filed alleging similar facts. Allstate did not argue preclusion or comity; instead it made the common-sense argument that the same flaws that had doomed the previous class action were present in Carter's complaint.

At this point, Carter's counsel tried something that probably seemed inspired in the moment: they conceded the motion to strike. They then moved to remand the case again, arguing that the court lacked jurisdiction over Carter's claim for one of four reasons: (1) the amount in controversy was not sufficient; (2) with amendment, his proposed class action was a local controversy because of the claims against the local defendant, (3) the striking of his class allegations should be considered an exception to the "time of removal" rule for jurisdiction, and--requiring particular chutzpah--(4) the striking of his class allegations demonstrated they were frivolous, and therefore his lawsuit was not a real class action for CAFA purposes.

The court, in Carter v. Allstate Ins. Co., 2012 U.S. Dist. LEXIS 117288 (N.D. W. Va. Aug. 21, 2012), rejected each of these arguments. It found that (1) the proposed class action was more expansive than the previous class action that the lawyers had brought in federal court, and therefore would likely meet the $5 million amount in controversy; (2) the defendant claims adjuster had likely not administered every class member's claims, and therefore the claims against her were not a "significant basis" for the class action; and (3) (and (4)) that there was no reason to depart from the normal rule that jurisdiction is determined from the time of removal.

The lesson here is a subtler one than usual. GIven the gantlet they often must run, plaintiffs are often intensely tactical rather than strategic in their thinking. It doesn't matter as much if they have a coherent long-term goal if they can't get past the next motion. (This could be one reason why otherwise-helpful plaintiff's lawyer Max Kennerly always insists that writing kitchen-sink briefs is a good idea.) That can put plaintiffs at a disadvantage against defendants, because unless tactics are part of a larger coherent strategy, it doesn't matter how brilliant they are. At some point, the court's need for a consistent story will catch up with the plaintiffs. And once a party is exposed as acting purely tactically, it lacks the ethos to convince the court in more difficult arguments that may arise. Good strategy is coherent, and that coherency alone will sometimes help one to win.

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For the tech savvy, virtual money is all the rage. It's been the subject of a few science fiction/crime mashups by bestselling authors like Neal Stephenson and Charlie Stross. It even provides a thriving trade in various online games, one that has proved to be worth a fair amount of of real-world money. And now, it's entered the world of class action practice.

The case, Abreu v Slide Inc (ND Cal 2012), involved an internet game (which Google eventually bought) called SuperPoke! Pets. The game allowed users to adopt and care for a virtual pet. By playing with the pets, users earned virtual currency that could be used to buy virtual goods for the pets. But, if the users were willing to spend actual money, they could also buy "gold," which could be used to buy premium goods; they could also buy and sell certain goods on a "robust secondary market."  And boy did players spend; in fact, the named plaintiff alleged that she spent more than $1,000 on her virtual pets during the time she played.

So, how does virtual gold translate into a real lawsuit? In June 2011, SuperPoke! Pets announced it was discontinuing its gold, and then in September 2011, it announced it would take the game offline in 2012.  So the plaintiff sued in California State Court, alleging that SuperPoke! Pets had violated California's consumer fraud act, and seeking

to recover the full value of users’ in-game purchases of both money and virtual goods, as well as “other investments” allegedly lost as a result of the game’s termination.

SuperPoke! Pets removed the case to the Northern District of California, where it landed on the docket of blog-favorite Judge William Alsup. As part of its notice of removal, it appended an affidavit showing that users had spent more than $6,116,000 buying gold between October 2010 and June 2011.

The plaintiff moved to remand, arguing that SuperPoke! Pets had not met its burden of showing the amount in controversy because they had not provided business records, and had not covered the entire class period. (The plaintiff also, contrary to the allegations in her complaint, argued that SuperPoke! Pets had not considered any refunds they might have offered.) Judge Alsup was having none of it.

Defendants’ submissions, coupled with the allegations in the complaint, plainly show the amount in controversy exceeds five million dollars. Plaintiff’s complaint seeks to recover the actual value of SPP users’ “investments and property” in “gold” and virtual goods as well as money spent on VIP status subscriptions. The complaint alleges users spent “hundreds or even thousands of dollars on the game." Thus plaintiff has put at issue the full amount of user spending on SPP. The Michalek declaration shows user spending exceeded the jurisdictional amount on just one portion of the game (“gold” purchases), and in just the nine months preceding the game’s termination. According to the complaint, user purchases of “gold” and premium virtual goods began well before October 2010.

Plaintiff faults defendants for failing to produce actual business records to show the amount of damages. Defendants are not required, however, to prove plaintiff’s damages allegations. They need only show that the amount put at issue by plaintiff exceeds the jurisdictional amount.

(Emphasis added, internal citations omitted.)

Virtual gold, but real jurisdiction.

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Today's case, Thatcher v. Hanover Insurance Group (8th Cir. 2011) is another short one that nonetheless raises important issues for class action defendants. Allen Thatcher (or, rather, his attorneys) filed a class-action complaint in Arkansas state court against his insurance company. He alleged that the defendants did not pay insureds properly under the terms of their insurance policies. (The specifics had to do with insurance for general contractors.) And he alleged the standard wide spectrum of claims: unjust enrichment, fraud, constructive fraud, and breach of contract.

It's what happened next that makes the case really interesting.  The defendants removed the case to federal court under CAFA.  And then:

Thatcher sought permission to voluntarily dismiss his case without prejudice [under Rule 41(a)(2)] so that he could refile an amended complaint in state court that would avoid federal jurisdiction. The district court granted Thatcher's voluntary motion to dismiss without prejudice.

Now, it's not surprising that a class-action plaintiff would want to stay in Arkansas state court. Arkansas class action law differs from federal law; most importantly, it does not require a "rigorous analysis" of whether a class action should be certified. What is surprising is that a plaintiff would be so brazen about forum-shopping.  And, since the Eighth Circuit has held that forum-shopping is not a valid reason to dismiss a complaint, it was also surprising that the trial court granted the motion.

Not surprisingly, the defendants appealed. And the Eighth Circuit pretty quickly reversed the voluntary dismissal in reviewing the remand.

In addressing whether a district court should allow voluntary dismissal, we have repeatedly stated that it is inappropriate for a plaintiff to use voluntary dismissal as an avenue for seeking a more favorable forum.

The Eighth Circuit also briefly took the trial court to task for not looking harder at what Thatcher's motives were, in part because his tactic, while good for his attorneys, was not nearly as good for the class he sought to represent:

Thatcher was dismissing so he could return to the more favorable state forum. Thatcher's expressed intent was to amend his complaint in order to avoid federal jurisdiction. ... This reading of Thatcher's purpose is supported by his failure to consider the effects of his actions on the putative class that he purportedly represents. In the original complaint, Thatcher included claims for unjust enrichment, fraud, constructive fraud, and breach of contract. In his motion to dismiss without prejudice, Thatcher set forth his intention to refile this matter in state court as a breach of contract claim only. Thatcher set forth no adequate reason why it would benefit the class to abandon these additional claims.

(Emphasis added.)  In other words, the Eighth Circuit was unimpressed with the fact that Thatcher (or more likely, his attorneys) were willing to jettison a number of causes of action specifically to keep the case out of federal court.

If I were a betting man, I'd say it's unlikely that a plaintiff will specifically ask to refine his claim to avoid federal jurisdiction. (And frankly, it's a little surprising that a plaintiff did this time.)

But more importantly, this opinion offers two important reminders for class action defense counsel. First, it is often worth raising whether the purpose for a plaintiff's tactic is a proper one. It actually does matter in the long run. Second, and as important, no matter how many times it draws comments about foxes and henhouses, it is always worth asking whether the plaintiffs' tactic is good for the proposed class. Too often, they're not. And far too often, the defendant is the only one sticking up for the absent class members.

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Today's opinion is a short one from the Seventh Circuit, but a very useful one for defendants nonetheless. Keeling v. Esurance Insurance Company was a class action filed against automobile insurer Esurance (created of the popular advertising icon Erin Esurance) that alleged that it sold a series worthless insurance policies in Illinois. Esurance removed to federal court, and a trial court in the Southern District of Illinois remanded, because the dispute did not meet the $5 million amount in controversy requirement. Since policies at issue had only collected 613,894 in premiums, the trial court reasoned it was "legally impossible" to meet the amount in controversy requirement.

Not so fast, said Judge Easterbrook. Once one took into account all of the relief the plaintiffs were asking for, $5 million was indeed a conceivable number. How did he get there?

First, Judge Easterbrook held that defendant may count the financial loss from complying with injunction as part of the amount in controversy.

The district court wrote that the cost to Esurance would be trivial: just reprint the forms. But this suit is about money, not ink. If the class is right and Esurance must either stop charging a premium or change the terms so that policyholders receive indemnity more frequently, it will suffer a financial loss.

(Emphasis added.)  Judge Easterbrook counted the financial loss from complying as roughly $1.4 million; meaning restitution plus injunction put $2 million at issue.

That's still $3 million short of the amount-in-controversy requirement, however. But the plaintiffs had also requested punitive damages. And Judge Easterbrook noted that Illinois courts had held punitive multipliers of up to 7x to be legitimate (although the Supreme Court preferred a multiplier closer to 4x). So, counting just a 5x multiplier would add in the additional $3 million.

We therefore do not think it "legally impossible" for the class to recover more than $3 million in punitive damages. Improbable, perhaps, but not impossible.

The takeaway of this opinion should be pretty clear: as a removing defendant, think through all of the costs you may incur.

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 Sometimes, the most interesting cases, from both a strategic and an equities standpoint, are hidden in the weeds of a statute. For example, take the lengthily named case Graphic Communications Local 1B Health & Welfare Fund "A" v. CVS Caremark Corp., 636 F.3d 971 (2011).

In Graphic Communications, the plaintiffs originally sued the defendants in Minnesota state court, alleging a number of claims related to the pricing of generic drugs. (Exciting already, no?) The defendants removed the case under CAFA, and moved to dismiss. The court granted the motion without prejudice. So the plaintiffs filed an amended complaint that eliminated some of the grounds the defendants had used to invoke CAFA jurisdiction, and later moved to remand under CAFA's "local controversy" exception. (The local controversy exception applies to cases where more than two-thirds of the plaintiff class comes from the same state as one defendant, the principal conduct occurred in the state, and no related class actions have been filed in the previous three years.) At that point, reasoning that it did not have jurisdiction over the case anymore, the district court granted the remand, and the defendants appealed to the Eighth Circuit.

The defendants made several arguments on appeal, among them that the plaintiffs had not moved to remand in a timely fashion. (For reasons even the Eighth Circuit did not know, the plaintiffs waited more than 100 days before moving to remand, instead of the 30 required under the statute.)

The Eighth Circuit began by heading straight to the meat of the question. Looking at the text of CAFA, it noted that

The local controversy provision, which is set apart from the above jurisdictional requirements in the statute, inherently recognizes the district court has subject matter jurisdiction by directing the court to "decline to exercise" such jurisdiction when certain requirements are met. Thus, the local controversy provision operates as an abstention doctrine, which does not divest the district court of subject matter jurisdiction.

(Emphasis added, internal citation omitted.)

At that point, the court had to determine whether a "local controversy" was somehow a jurisdictional defect that did not involve subject matter jurisdiction. (If so, then the plaintiffs might not be bound by the 30-day time limit for filing remand motions.) After a lengthy discussion of the meaning of the term "defect" (which was not defined in the statute, and was susceptible to several meanings from context), the court determined that a "local controversy" is not a jurisdictional defect under CAFA.

But the court ruled that that did not necessarily mean that the plaintiffs' motion was timely. Noting that a remand motion is not necessarily authorized at any time, the court pointed out that it was entirely possible the appropriate time for moving to remand may even be shorter than the 30-day "defect" limit. (This conclusion makes sense; ruling the other way means that a plaintiff could amend a complaint to invoke a local controversy, but only move to remand after some adverse ruling from the federal trial court. It's unlikely the drafters of CAFA meant to give plaintiffs a "get out of federal court free" card like that.) So instead, the court held that

We recognize there may be similar considerations to take into account in this case, but, along with the central question of whether the more than 100 days it took for Plaintiffs to move to remand constitutes a "reasonable" time frame, we remand to the district court to make these determinations in the first instance.

So what can defendants learn from this case? Don't be afraid to argue the equities of a motion, even if (perhaps especially if) it appears to be highly technical. Like most humans, judges are sensitive to when people are trying to game a rule to reach an unintended result, and, like most humans, judges don't like it when that happens.

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Today's opinion, Doe v. Match.com, 2011 U.S. Dist. LEXIS 56567 (C.D. Cal. May 25, 2011), involves a plaintiff and a defendant who made the same mistake: prizing an immediate tactical move over the internal consistency of their positions. For the plaintiff, the inconsistency came from an attempt to turn an unquestionably horrific individual incident into a class action. For the defendant, it came from the desire to win each individual motion without considering the effect on its larger strategy.

The facts that the Jane Doe plaintiff alleged in her complaint are, without a doubt, horrific. Ms. Doe had subscribed to Match.com, a popular dating service. She met a man through the service who turned out to be a serial sexual predator (he had six prior convictions for sexual battery), who raped her. Doe pressed charges against her attacker and cancelled her subscription.

After canceling her account, Doe filed a lawsuit against Match.com. Instead of seeking damages for the horrible thing that happened to her, her lawyer made the case a class action that alleged Match.com's failure to screen for sexual predators put its other subscribers at risk. To support this story of customers in imminent danger, Doe's lawyer moved to enjoin Match.com from signing up any new subscribers until it implemented some kind of predator screening.

Match.com removed the case to federal court, where it defeated the plaintiff's motion for a temporary restraining order. During the hearing, Doe informed the court that she had cancelled her subscription. Based on that information, the court expressed doubts that Doe had actually suffered a cognizable injury that could be cured by future screening. (If she was no longer using the service, she was not in danger of meeting future predators through it.)

So, to protect the class-action part of her complaint, Ms. Doe subscribed for another six months. When Match.com moved to dismiss the case for lack of Article III standing, she argued that, since she was again a subscriber, she was in danger of meeting future predators.

The court, however, was not convinced by the tactic:

Here, Plaintiff has presented no evidence that she plans to use Defendant's services to meet other users. In fact, Plaintiff has stated that she only re-subscribed because "it came to my attention that I needed to be a member of Match to file a class action suit in Federal Court. . . ." Plaintiff's counsel also represents that Plaintiff has not answered any e-mails inquiring of her availability for dates since the alleged assault. Thus, the undisputed facts of the case at bar show a more tenuous likelihood of future injury than those in Lyons or Lujan.

...

Plaintiff's statements suggest that she does not intend to use Defendant's services for future dates, diminishing the possibility that she could suffer any injury caused by Defendant's failure to screen for sexual offenders.

(Emphasis added, internal citations omitted.)  The opinion sounds like a win for Match.com, except for one thing: because the case had not originally been filed in federal court, moving to dismiss on jurisdictional grounds (and Article III standing is a jurisdictional doctrine) did not eliminate the case. Instead of dismissing the case with prejudice, the district court simply remanded it to the Los Angeles Superior Court.

What can defense counsel learn from this case? Consistency is important for every party in litigation. Just as a court is unlikely to believe that someone who tactically re-subscribes to a service with no intention of using it is in danger of further harm, it's not likely to be sympathetic to a defendant who removes a case to federal court only to attack its right to be there once it arrives.

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As I've written before, it's rare for something to qualify as breaking news in the world of class action practice. This, however, qualifies. This afternoon, the three-judge panel that had ruled that the Class Action Fairness Act requires at least one class member to have suffered $75,000 in damages--thus turning itself into an outlying circuit on the question of class-action jurisdiction--reversed itself in a per curiam opinion:

On July 19, 2010, we issued an opinion in this case. Cappuccitti v. DirecTV, Inc., No. 09-14107, slip op. (11th Cir. July 19, 2010). We based our decision on our interpretation of the jurisdictional requirements of the Class Action Fairness Act of 2005 (“CAFA”), Pub. L. No. 109-2, 119 Stat. 4 (codified in scattered sections of 28 U.S.C.), which we have elsewhere called a “statutory labyrinth.” Lowery v. Ala. Power Co., 483 F.3d 1184, 1199 (11th Cir. 2007). Subsequent reflection has led us to conclude that our interpretation was incorrect. Specifically, CAFA’s text does not require at least one plaintiff in a class action to meet the amount in controversy requirement of 28 U.S.C. § 1332(a). Accordingly, we construe both parties’ petitions for rehearing en banc to include petitions for panel rehearing,1 vacate our earlier opinion, and replace it with this one.

(Emphasis added.)  The court then proceeded to address the arbitration provision that had actually been before it in the original case, finding that DirecTV's arbitration provision was not unconscionable.

The court erred. As Cappuccitti readily conceded in opposing DirecTV’s motion to compel arbitration, attorney’s fees and litigation expenses would be available to him if he prevailed on the theory that the early cancellation fee is invalid as “[u]nfair or deceptive” under O.C.G.A. § 10-1-393(a). The JAMS Rules provide for the award of attorney’s fees and litigation expenses if allowed by state law, and O.C.G.A. § 10-1-399(d) authorizes them.

In light of this, it is apparent that the district court’s order denying arbitration must be vacated and the case remanded for further proceedings consistent with this opinion.

With this ruling, the Eleventh Circuit has brought itself back into line with other federal courts on the question of which class actions qualify for federal jurisdiction under CAFA. 

We now return you to your (hopefully) class-action-free weekend.

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 On Monday, I reported on the passing of Vanderbilt Professor Richard Nagareda. Given the widespread recognition of his contributions to studying aggregated litigation, it seemed appropriate to revisit one of his better articles: Aggregation and Its Discontents: Class Settlement Pressure, Class-Wide Arbitration, and CAFA, which originally appeared in the Columbia Law Review in 2006. 

In this article, Professor Nagareda took three debates over class-action practice -- (1) do class actions create undue settlement pressure? (2) can arbitration clauses override the use of the class-action device?; and (3) did the passage of CAFA threaten to abrogate the Supreme Court's holding in Klaxon v. Stentor Electric Manufacturing Co. (1941) that federal courts must apply state choice-of-law principles -- and used them to ask a broader question posed by class-action practice:

When should the law become concerned, as a normative matter, that the affording or withholding of aggregation is not a matter of mere procedural format but amounts instead to an unauthorized, back-door method of reform for substantive rights?

After a careful examination of the (then-) state of the law for each of these issues, Professor Nagareda came to the following conclusion:

The debates over class settlement pressure, waivers of class-wide arbitration, and CAFA each pose questions about the relationship between aggregate procedure and substantive law. In these high-stakes disputes, one side or the other seeks to characterize the availability of aggregation as merely a cosmetic matter, whereas the opposing side seeks to probe its practical effects. Interestingly enough, plaintiffs and defendants make different arguments along these lines in different settings.

The law should cut through the advocacy on both sides by situating all three debates along a common metric of institutional authority. Each is ultimately a debate over when the affording or the withholding of aggregation is not merely a matter of procedural format, but also a way to alter substantive law.

Each of Professor Nagareda's questions has gradually been answered by the evolution of class-acton doctrine and civil procedure doctrine. While undue settlement pressure is always a concern, defendants have been handed better tools (like the much-used Iqbal ruling) with which to minimize the in terrorem effect of large but meritless cases. The Supreme Court has granted certiorari to hear the Concepcion case, which should provide an answer to whether arbitration clauses can preclude classwide consumer litigation in certain circumstances. And, while the Shady Grove decision did not directly address the clash between CAFA and Klaxon, it does provide guidance for how federal class-action rules should interact with state substantive law.

That said, there's still a great deal that class-action lawyers can take from this article. First, Professor Nagareda did an outstanding job of picking apart the tactics that underlay each side's approach to these three issues. There is a reason that this article is generally considered seminal.

Second, Professor Nagareda identifies an important rhetorical technique, which is the sliding scale each side employs in characterizing the effect of class-action rulings. In essence, the bigger the change a side wants, the more likely they are to gloss it as "cosmetic." Class-action defense lawyers have long known that one of the best ways to show a court the problems with a class proposal is to focus on how the case would actually be tried.  Professor Nagareda brought both scholarly rigor and intellectual honesty to bear on how that argument plays out under various circumstances.  

And finally, Professor Nagareda's article provides an excellent reminder that there is much to be said for standing back from the nitty-gritty of the rules at times and asking the larger question of what each of your arguments actually means. As he illustrates here, sometimes the answer really will be surprising.

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Followers of this blog have probably noted (and probably with some chagrin) that I rarely discuss just-released cases, because I'm more interested in what we can learn about the strategies in a case than breaking the latest legal news. This case, though, is different, because last week the Eleventh Circuit released an opinion on jurisdiction under the Class Acton Fairness Act (CAFA) that is baffling in large part because it ignores the ways in which parties actually litigate a class action.

In the recently-decided Cappuccitti v. DirecTV (11th Cir. Jul. 19, 2010), the Eleventh Circuit dismissed a class action for lack of subject-matter jurisdiction under CAFA.

As part of its reasoning, it held that at least one plaintiff must allege more than $75,000 in damages:

While § 1332(d) may have altered § 1332(a) to require only minimal diversity in CAFA actions, there is no evidence of congressional intent in § 1332(d) to obviate § 1332(a)’s $75,000 requirement as to at least one plaintiff.

(Citation omitted.) 

How did the court reach that conclusion?  Plaintiffs Renato Cappuccitti and David Ward sued DirecTV, Inc., claiming that DirecTV wrongfully charged its subscribers fees for cancelling their subscriptions prior to the subscriptions’ expiration. They brought suit in federal court under CAFA (both plaintiffs were Georgia residents, DirecTV is a California corporation, and the amount in controversy exceeds $5 million). DirecTV moved to dimiss and to compel arbitration. The district court refused to compel arbitration, and partially dismissed the plaintiffs' claims. DirecTV appealed the denial of arbitration.

The Eleventh Circuit never reached the arbitration question. Instead, it held that it lacked subject-matter jurisdiction over the case because neither of the plaintiffs had alleged a claim worth more than $75,000. As the opinion puts it:

in a CAFA action originally filed in federal court, at least one of the plaintiffs must allege an amount in controversy that satisfies the current congressional requirement for diversity jurisdiction provided in 28 U.S.C. § 1332(a). Such a conclusion is compelled by the language of § 1332 as well as the general principle that federal courts are tribunals of limited jurisdiction whose power to hear cases must be authorized by the Constitution and by Congress.

The Eleventh Circuit based its holding on a reading of several cases interpreting the "mass action" provisions of CAFA.  But it also worked from the assumption that its job is to reduce the number of class actions filed in federal court:

If we held that § 1332(a)’s $75,000 requirement for an individual defendant did not apply to § 1332(d)(2) cases, we would be expanding federal court jurisdiction beyond Congress’s authorization. We would essentially transform federal courts hearing originally-filed CAFA cases into small claims courts, where plaintiffs could bring five-dollar claims by alleging gargantuan class sizes to meet the $5,000,000 aggregate amount requirement. While Congress intended to expand federal jurisdiction over class actions when it enacted CAFA, surely this could not have been the result it intended.

This reasoning is puzzling, because the vast majority of federal class actions aggregate smaller claims. In fact, much of the federal court's Rule 23 jurisprudence is based on the benefits that derive from allowing plaintiffs to aggregate small-dollar claims. (It also ignores footnote 12 of the Supreme Court's Allapattah opinion, and its own opinion in Evans v. Walter Industries, Inc., each of which accept that the $5 million aggregate requirement replaced the $75,000 individual requirement.)

With the issuance of the Cappuccitti opinion, the Eleventh Circuit has made itself an outlier on CAFA jurisdiction.  (Placing it in opposition to the Second, Third, Fifth, Sixth, Seventh, Eighth, and Tenth, Circuits)  Given the odd result of the Cappuccitti opinion, it is likely that plaintiffs who wish to keep cases out of federal court will file them in Georgia, Florida, and Alabama.  Defendants should prepare themselves accordingly.  

UPDATE, 15 OCTOBER 2010 - The three-judge panel that decided this case subsequently reversed itself in a per curiam opinion.  

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 For the most part, this blog has focused on tactics that defendants may use to oppose class certification. But another important part of class action defense is being alert to new trends in class-action practice. And, in the last few years, a new type of class action has arisen that is worth looking at more closely: the data-breach class action, which seeks to hold companies liable for revealing customer data once they've been hacked.

For example, take In re Hannaford Bros. Co. Customer Data Security Breach Litigation. The specific opinion affirmed a remand of a class action under CAFA's home-state exception (a class of Florida citizens had sued a Florida corporation in Florida state court), but the underlying facts describe the archetypical data-breach class action. As the court described them:

Defendant Kash N' Karry Food Stores, Inc. operates a chain of grocery stores in Florida. A computer hacker stole the credit card information of customers who had shopped at Kash N' Karry's stores between December 2007 and March 2008. Plaintiff Thomas Grimsdale, III regularly shopped at Kash N' Karry's stores in Tampa, Florida during this period and paid for his purchases using his bank debit card.

On April 4, 2008, Grimsdale sued Kash N' Karry in Florida state court, alleging that Kash N' Karry had failed to adopt adequate security measures to protect its customers' credit card information. He sought to represent a class of approximately 1.6 million persons who had “used credit/debit cards at [Kash N' Karry's] stores between December 7, 2007 and March 10, 2008 and/or had their personal and sensitive Confidential Information stolen and/or compromised as a result of the [security] Breach.”

Information security is a growing concern among American businesses.  And a number of plaintiffs' firms have begun filing data-breach class actions.  Data-breach class actions have qualities that are--at least superificially--appealing to the plaintiffs' bar. Data breaches are often events that present small (or ambiguous) harms to a large number of potential class members. And if the security breach can be tied back to a single incident, then there may be common issues applicable to a class.

Does this mean that data-breach class actions unbeateable? Hardly. It is often difficult to prove any actual injury in a data-breach class action. And, if some class members' data was actually used illegally (while the rest remained untouched), it will be difficult to certify a class without getting into the merits of all class members' claims.

But, given the vulnerability of personal data, and the growth in filings of data-breach class actions, it is certainly worth defense counsel's time to think through the issues presented by these kinds of cases.

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What is grand strategy? It's a term that's usually thrown around in military, security, and foreign policy circles. As the military historian Liddell Hart defined it in his classic book Strategy:

[T]he role of grand strategy – higher strategy – is to co-ordinate and direct all the resources of a nation, or band of nations, towards the attainment of the political object of the war – the goal defined by fundamental policy.

...

while the horizons of strategy is bounded by the war, grand strategy looks beyond the war to the subsequent peace. It should not only combine the various instruments, but so regulate their use as to avoid damage to the future state of peace – for its security and prosperity.

What does this mean for class actions? It means that often, the best defenses against a class action don't involve a specific lawsuit. Instead, they involve larger policies and strategic decisions. For one thing, it is possible to have a firm-specific (or client-specific) "grand strategy" for fighting class actions. The most obvious grand-strategic move is one that law firms sell to clients all the time, a compliance policy. If a corporation has a robust compliance policy, it is less likely to get sued for breaking the law.

But some corporations are just located in industries where they're more likely to be sued in class actions. A corporation like that might decide that part of its grand strategy will be to oppose every class action on Rule 23 grounds and settle class actions where the plaintiff has a valid claim on a named-plaintiff basis. Its goal over time could be twofold: (1) build a reputation as a vigorous litigator, which should deter those plaintiffs looking for a quick settlement; and (2) make incremental changes in class-action law to eliminate the worst plaintiff-side abuses. Specific law firms may have grand strategies as well. For example, throughout the 2000s, O'Melveny & Myers, under the leadership of John Beisner, made part of its goal to create a legislative environment that curbed the worst of plaintiff-side abuses. Part of that effort involved providing scholarship that analyzed the reasons why some plaintiff practices made for bad policy. One outcome that grand strategy helped produce was passage of the Class Action Fairness Act. These are hardly trade secrets, Beisner's scholarship is published, and he mentions his CAFA testimony in his firm biography. [Disclaimer - I worked at OMM during the period I'm discussing.]

The most important part of developing grand strategy is recognizing that defending a lawsuit, even a "bet the company" lawsuit, still must fit into a company's (or law firm's) larger goals. Defense lawyers tend to treat this statement as a truism: of course you align your strategy with your client's goals. But treating this advice as strategy instead of marketing can help lawyers develop far more robust defenses to class actions.

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Figueroa v. Sharper Image (S.D. Fla. 2007) provides a case study in how a rushed class settlement can go wrong. The settlement drew objections almost immediately, invited interference from lawyers pursuing competing class actions, witnessed intervention from various state Attorneys General, and even earned a judicial rebuke. What happened?

First, some background. The plaintiffs had all bought ionizing air purifiers from Sharper Image. After Consumer Reports announced there was no evidence that the purifiers did any purifying, several plaintiffs' firms filed class actions. The Figueroa plaintiffs were later filers, so Sharper Image filed a Motion to Stay and Abate, arguing the suit was a copycat that could wait until the other cases were finished. The court denied the motion after the plaintiffs added new causes of action and another defendant, so the parties conducted class-related discovery and briefed class certification.

Right before the certification hearing, the parties informed the court they had agreed to a settlement. Part of what was driving the settlement, they said, was that Sharper Image was close to bankruptcy, and could not afford a protracted trial or massive damages. The proposed settlement provided:

1. a $19 coupon,
2. a chance to buy a new purifying attachment for $7
3. some modifications to Sharper Image's advertising

It also contained an extremely broad release and a non-disparagement provision.

The court expressed misgivings, but set a date for a preliminary fairness hearing, which, remarkably, drew several objectors. (Objectors usually appear at the final fairness hearing.) The court rejected this first agreement, but preliminarily approved one that limited the release and dropped the non-disparagement provision.

Once notice went out, objectors appeared in droves. Most notably, 36 state Attorneys General – all notified pursuant to the Class Action Fairness Act – protested that the coupons did not provide real relief to the class. In response, on the last day for objections, the parties filed an amended settlement that addressed some concerns, but kept the coupons. (This eleventh-hour amendment drew further objections.)

The parties then submitted a third agreement that made the coupons transferable, and added a provision for cy pres relief. But objectors still complained that the settlement was a "reverse auction" -- where defense attorneys pick the most compliant plaintiffs' lawyers from competing class actions, and settle on unduly favorable terms, precluding the other class actions. The court rejected the settlement. While it found no evidence of collusion, it agreed that Sharper Image had conducted a reverse auction:

Sharper Image selected counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain a global peace, and then proceeded to . . . convince Class Counsel to accept highly undesirable terms to settle the case.

As a result, the settlement was “not the product of informed, arms-length negotiations between effective Class Counsel and the Defendant." The court was sending a clear message: settlements resulting from reverse auctions would not be tolerated. From a strategic standpoint, the lesson is broader: in class actions, trying too hard to settle on the cheap can get very expensive.

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