Judge Posner is often considered to be a pro-defense jurist, particularly in the area of class actions. Lately, he’s been proving himself to be more independent-minded than that. First, he allowed certification of a washing machine class, justifying certification despite some outcome-determinative individualized issues because predominance is a matter of "efficiency," and should not be reduced to "bean-counting."

And last week, he authored an opinion that reversed decertification of an Electronic Funds Transfer Act (EFTA) class action.

In Hughes v. Kore of Indiana Ent., Inc., No. 13-8018, 2013 U.S. App. LEXIS 18873 (7th Cir. Sep. 10, 2013)  (previously), the plaintiffs sued the defendant for operating ATMs in two bars without the required notice of fees. The trial court had originally certified a class, but, after the plaintiff failed to notify the class, the court reexamined its decision and decertified the class.

The plaintiffs appealed under Rule 23(f). The defendant did not file a response. And the Seventh Circuit granted the petition and reversed certification. Judge Posner’s opinion relied on two arguments.

First, he ruled that a class action was in fact superior to individual EFTA lawsuits, despite the presence of attorneys’ fees and statutory damages. Since the individual damages would be capped at no more than a few dollars each, which admittedly would deter many class members from filing claims, Judge Posner recommended that the trial court consider some form of "cy pres" damages:

Since distribution of damages to the class members would provide no meaningful relief, the best solution may be what is called (with some imprecision) a "cy pres" decree. Such a decree awards to a charity the money that would otherwise go to the members of the class as damages, if distribution to the class members is infeasible. Payment of $10,000 to a charity whose mission coincided with, or at least overlapped, the interest of the class (such as a foundation concerned with consumer protection) would amplify the effect of the modest damages in protecting consumers. A foundation that receives $10,000 can use the money to do something to minimize violations of the Electronic Funds Transfer Act; as a practical matter, class members each given $3.57 cannot.

(Internal citations omitted, emphasis added.) He justified the cy pres damage award (which is an unusual, if not radical proposal given the current case law) by pointing to the deterrence provided by class actions.

A class action, like litigation in general, has a deterrent as well as a compensatory objective.

This argument is not unheard of, but it has rarely been applied to contested class actions.

Second, Judge Posner held that notice was in fact feasible to the class. In this case, the "best notice practicable" would be a notice on the machines themselves, coupled with a website and local newspaper advertisement. (He discounted the district court’s concern about out-of-state travelers and businessmen by noting that "it is unlikely that ATMs in bars are commonly used for business transactions.")

While Judge Posner’s opinion carefully couches the reversal, noting that there may be other grounds for decertification, and that EFTA’s stated policy of deterrence justified the "cy pres" award, the language–as well as his dismissal of some of the typical arguments against fluid recovery in a contested certification–make this a troubling opinion for defendants.

So what can defense counsel take from this opinion? Several lessons:

First: Always reply to a Rule 23(f) petition, lest the court just proceed to the merits as the Seventh Circuit did here.

Second: Be prepared for plaintiffs to argue for cy pres damage awards (also known as "fluid recovery") in contested cases again. This argument has been disfavored for some time,  either because fluid recovery is not specifically authorized by Rule 23 (or by underlying substantive statutes), because authorizing third party damages may violate the Rules Enabling Act, and because fluid recovery is not considered an acceptable substitute for an ascertainable class. Nonetheless, Judge Posner’s imprimatur will be enough to resurrect the argument in some circles.

Third: Keep an eye on the Supreme Court. There’s already one certiorari petition regarding cy pres in settlements before the Court. Since Judge Posner’s opinions creates an arguable circuit split with the Second Circuit (and maybe the Fourth), it would make sense for the defendant here to appeal it. And, if not here, it is likely that some Seventh Circuit opinion soon will revisit the question; if it does, it is likely to make an excellent candidate for Supreme Court review.