Comcast Corp. v. Behrend: Even More Than Meets the Eye?

On Wednesday, the United States Supreme Court handed down its opinion in another of this term’s major class action cases. Following on the heels of Standard Fire Insurance Co. v. Knowles, where the Court closed a loophole which had allowed plaintiffs to attempt to stipulate around the threat of removal to Federal court pursuant to the Class Action Fairness Act, the Court overturned class certification in Comcast Corp. v. Behrend, holding that plaintiffs had failed to establish that damages could be proven on a class-wide basis. There’s no doubt that Behrend was a big win for the defense bar, but the question which has divided attorneys in the days since it came down is – how big? Our initial post on Behrend, discussing the facts and lower court rulings in depth, is here.

Behrend involved a certified class of more than two million former and current subscribers to Comcast’s cable services in the Philadelphia metropolitan area. The plaintiffs alleged that Comcast had violated Sections 1 and 2 of the Sherman Act by deliberately buying up cable systems in areas where Comcast had a significant market presence, often in return for giving up systems in areas where Comcast was less concentrated. The plaintiffs argued four different theories of antitrust injury, but ultimately only one was certified – the proposition that Comcast’s alleged behavior deterred entry by “overbuilders” – companies who deliberately entered a market where another cable provider was already established.

Comcast’s cert petition presented the case as a slam-dunk violation of Wal-Mart Stores, Inc. v. Dukes, going so far as to seek summary reversal. Comcast argued that the Third Circuit had simply ignored the Supreme Court’s Dukes instruction to conduct a “rigorous analysis” in certification proceedings, whether or not the issues overlapped the merits. After a number of relists, the Supreme Court ultimately granted cert on a somewhat different question: whether a district court could certify a class without deciding whether the plaintiffs had introduced admissible evidence, including expert testimony, to show that damages could be awarded on a class-wide basis. In other words: are Daubert challenges appropriate at the certification stage?

When the opinion came down last week, at first glance it seemed that prospects for a major Daubert/class certification decision had struck an iceberg: the defendants had never raised a Daubert challenge to the plaintiff’s expert. Noting the arguable waiver, the majority reformulated the question presented slightly, announcing that the issue was whether “certification was improper because respondents had failed to establish that damages could be measured on a classwide basis.” But reading the majority opinion as a whole, it appears that the majority arguably answered the question they planned to answer all along.

The district court in Behrend had held that to be entitled to certification under Federal Rule 23(b)(3), the plaintiffs were required to show that “the damages resulting from [the injury] were measurable ‘on a class-wide basis’ through use of a ‘common methodology.’” The sole basis for the court to make that finding was the multiple regression model of cable pricing built by the plaintiffs’ experts. But there was a problem with the model: the expert’s regression didn’t separate out damages flowing from overbuilder deterrence from damages flowing from other issues, including the other three possible theories of antitrust injury proposed by plaintiffs and rejected by the district court (at least for classwide treatment). Instead, the model merely predicted what prices would have purportedly prevailed in a “but-for” world absent the defendant’s alleged anticompetitive activities. The defendants had pointed this out before the Third Circuit, but the court had refused to even consider the issue, labeling it a merits question.

In fact, Justice Scalia’s opinion for a five-Justice majority found, the Court’s recent precedents on Rule 23 not only permitted, but flatly required such an analysis. “The first step in a damages study is the translation of the legal theory of the harmful event into an analysis of the economic impact of that event,” the Court noted, quoting the Federal Judicial Center’s Reference Manual on Scientific Evidence. Since the plaintiffs had presented no classwide theory of damages flowing from their one certified theory of injury, Rule 23 was not satisfied and certification was improper. Justices Ginsburg and Breyer filed an unusual joint dissent, joined by Justices Sotomayor and Kagan. The dissenters argued that once the Court discovered the procedural problems with the Daubert issue, the Court should have dismissed certiorari as improvidently granted (what the Court calls a “DIG”).

As I noted above, the bar has been somewhat split in the days since Behrend about just how important a win it is. For example, some attorneys interviewed by Law 360 argued that the decision was a powerful new tool for defense counsel, while others suggested that given the expectations for a full-blown analysis applying Daubert to certification, Behrend had turned out to be much ado about relatively little. Global Regulatory Enforcement Law Blog comments that Behrend is “sure to give class action defendants ammunition to attack expert evidence of classwide damages.” Class Action Countermeasures calls the opinion “limited,” but agreed that it “provides some help” to defendants.

Several conclusions seem clear from the opinion. First, as the employment bar has already noted, cases such as wage and hour class actions, where damages tend to be inherently individualized, may prove significantly harder for plaintiffs to get certified. Second, as Insurance Class Actions Insiderhas correctly pointed out, Behrend will make it far more difficult for the plaintiffs’ bar to persuade lower courts that individual issues in damages calculations are irrelevant to the certification issue, since all of the statements found in Behrend trying to limit the breadth of the majority opinion on this issue are found in the dissent.

But there’s more here than that. The Supreme Court originally granted certiorari on the question of whether a Daubert challenge – the proposition that the plaintiffs had no admissible model of class-wide damages – could block class certification. Although the majority seems to gently turn aside that issue, the majority then holds that the regression model built by plaintiffs’ expert is insufficient because it fails to distinguish between various sources of possible higher-than-competitive pricing. But this is simply another way of saying that had the defendants brought a Daubert challenge, the expert’s model would have been excluded; it answers the wrong question and is therefore irrelevant testimony. Specifying the appropriate number of variables to separately quantify every plausible influence on price is hardly an unusual issue in properly constructing a multiple regression model – it can fairly be said that that is what such models are for. The statistical biases created by using too few variables are well understood in the literature. At the very least, defense counsel should raise every appropriate Daubert challenge at the certification stage post-Behrend in order to give the Court to opportunity to formally and expressly decide the issue they wanted to address here. But closely examining the opinion with an understanding of multiple regression theory suggests that in fact, a majority of the Court has already made up its mind about the Daubert issue.

Second Circuit Vindicates Concepcion in Gender Discrimination Case

In April 2011, the U.S. Supreme Court handed down its landmark opinion in AT&T Mobility v. Concepcion, holding that the Federal Arbitration Act preempted California's Discover Bank rule, which had previously voided waivers of class arbitration in most consumer cases. In the nearly two years since Concepcion, the courts and the defense bar have been wrestling with a lengthy succession of theories by which the plaintiffs' bar has hoped to pull the teeth of Concepcion's unequivocal endorsement of arbitration over costly class litigation. I wrote about one of these cases pending before the California Supreme Court, Iskanian v. CLS Transportation Los Angeles, last month for the Washington Legal Foundation. On Thursday, the Second Circuit handed down another, rejecting plaintiffs' attempt to evade their arbitration agreement in Parisi v. Goldman, Sachs & Co.

Parisi arises from the termination by the defendant of a former managing director. Upon being promoted to managing director, the plaintiff signed an agreement promising to arbitrate "any dispute, controversy or claim arising out of or based upon or relating to Employment Related matters." The arbitration agreement said nothing one way or the other about class arbitration.

Plaintiff sued, filing a putative class complaint alleging gender discrimination in violation of Title VII of the Civil Rights Act.  The defendant moved to compel arbitration, arguing that under Stolt-Nielsen S.A. v. Animal Feeds International Corp., a party could not be forced to arbitrate a class claim unless it had agreed to do so, and accordingly, plaintiff had to arbitrate her claims as an individual claim if at all. Plaintiff responded that the arbitration clause was unenforceable, at least as the defendant interpreted it, because it would effectively wipe out her right to challenge allegedly systemic discrimination at defendant's workplace.

The magistrate invalidated the arbitration agreement on the grounds that it would make it impossible for the plaintiff to pursue a pattern-and-practice claim under Title VII, and therefore effectively operated as an unlawful waiver of substantive rights. The district court adopted the magistrate judge's ruling.

The Second Circuit was a potentially high-risk forum for defendants in their attempt to overturn the district court's holding. In 2012, the Second Circuit filed Am. Express Travel Related Servs. Co. v. Italian Colors Rest., in which the Court invalidated a waiver of class arbitration on the grounds that it would effectively immunize the defendant from liability for antitrust violations, since it was economically infeasible for any particular plaintiff to pursue the antitrust claims, either in court or before an arbitrator, on an individual basis. [Italian Colors is currently pending before the Supreme Court, and was argued in February.]

Nevertheless, the Second Circuit unanimously reversed in Parisi, vindicating the parties' arbitration agreement. The problem with plaintiffs' theory, the Court wrote, was that a class-wide "pattern or practice" claim was not a substantive cause of action belonging to the plaintiff; it was merely a method of proof. Therefore, the Supreme Court's statement in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. that arbitration agreements could be invalidated where a plaintiff could not vindicate a statutory cause of action in an arbitral forum didn't save plaintiff's argument. Ultimately, since plaintiff lost no statutory right by being forced to arbitrate, the parties' arbitration agreement was fully enforceable.

Parisi is a significant win for defense counsel in the employment bar litigating claims in the Second Circuit, and another step forward in vindicating the Supreme Court's landmark decision in Concepcion.

Supreme Court Unanimously Holds Plaintiffs Can't Stipulate Around CAFA

On Tuesday morning, a unanimous U.S. Supreme Court decisively closed a loophole in the Class Action Fairness Act, holding in Standard Fire Insurance Co. v. Knowles that a purported stipulation by the named plaintiff to seek less than the $5 million jurisdictional threshold was irrelevant for purposes of determining whether Federal jurisdiction over the class complaint existed.

Knowles began when the plaintiff’s home was allegedly damaged in a hail storm. In the spring of 2011, Knowles filed a putative class complaint for breach of contract against the defendant, alleging that the defendant had concealed its purported obligation to pay a 20% general contractors’ overhead and profit fee routinely added to invoices for the repair or replacement of damaged property. Knowles proposed a class of “hundreds, and possibly thousands” of Arkansas residents who had failed to receive such payments during 2009 and 2010, but appended a sworn stipulation to his complaint stating that he “will not at any time during this case . . . seek damages for the class as alleged in the complaint to which this stipulation is attached in excess of $5,000,000 in the aggregate (inclusive of costs and attorneys’ fees).”

The defendant removed the action to federal court, pointing to three flaws in plaintiff’s attempt to avoid removal: (1) plaintiff had deliberately understated possible damages by limiting the class to two years, although the Arkansas statute of limitations on breach of contract was five years; (2) plaintiff’s counsel has not signed a similar stipulation stating that he would not seek or accept an attorneys’ fees award which would push the total amount in controversy past $5 million; and (3) Knowles lacked the authority to bind absent class members anyway.

The defendant’s desire to keep the action out of Arkansas state courts is hardly surprising, given the discussion by defendant and amici before the Supreme Court of Arkansas’ class action law. Although the plaintiff disputed the characterizations of the defense side, amicus the State Chamber of Commerce argued that Arkansas rejects the Federal “rigorous analysis” standard for class certification, requiring only “enough of an analysis to enable us to conduct a meaningful review”; presumes class counsel “will vigorously and competently pursue the litigation”; bars trial courts at the certification stage from considering “whether the plaintiffs will ultimately prevail, or even whether they have a cause of action”; will not examine the standing of the class representative at the certification stage; and will not perform a choice-of-law analysis before certifying multi-state classes.

The district court granted plaintiff’s motion to remand the action to state court, noting that Eighth Circuit law recognized class representatives’ stipulations limiting damages, and that a number of district courts had sent putative class actions back to the state courts based on that precedent, relying on similar stipulations. Worries over absent class members’ due process rights were of no moment, the court held, commenting that if the plaintiffs attempted to evade the stipulation, the case could simply be removed again, and any class members dissatisfied with the stipulation could simply opt out and pursue their own actions.

The Eighth Circuit declined to hear the defendant’s appeal. While the defendant’s petition for rehearing was pending, the Circuit decided Rowling v. Nestle Holdings, which affirmed a remand order based on a similar anti-CAFA stipulation. This brought the Eighth Circuit into conflict with the Tenth, which had rejected a stipulation on damages in Frederick v. Hartford Underwriters Ins. Co., and the Supreme Court’s order granting certiorari followed.

The Supreme Court unanimously reversed, dispatching the issue in a mere seven pages.  The plaintiff had a fundamental problem, the Court pointed out; under Smith v. Bayer Corp., prior to certification, a class member had no authority to diminish the rights of the still-absent class members. Therefore, although the stipulation presumably restrained plaintiff’s damages, it had no impact at all on the class members. The Court acknowledged a long-standing line of authority, heavily relied on by plaintiff in his briefs to the district court and the Supreme Court, that a plaintiff is “master” of his or her complaint, and may deliberately state a cause of action in such a way as to keep it out of federal court if he or she chooses, but the Court distinguished those cases as involved stipulations which actually were binding on all plaintiffs. The Court agreed that reversal was necessary in order to vindicate Congress’ purposes in enacting CAFA. If anti-CAFA stipulations purporting to limit damages were recognized, there were a variety of ways for large class actions of national import to remain locked up in state courts: a state court could certify the class on condition that the stipulation be excised from the complaint; or the court could find that plaintiff was by definition an inadequate class representative, given his attempt to limit the class members’ claims, and replace the representative with another plaintiff with an amended complaint. In fact, if stipulations like the plaintiff’s were effective, the Court suggested that there would be no barrier to another plaintiff dividing a $100 million dispute into twenty-one sub-$5 million classes in the state courts.

Although some observers have wondered (subscription req.) in the forty-eight hours since Knowles came down whether the decision will ultimately result in larger damages claims in future class complaints given that we now know that limiting stipulations are ineffective to manipulate jurisdiction, but the concern seems misplaced. After all, much of the discussion in Knowles turned on the significant number of ways in which such a stipulation could be evaded once jurisdiction was settled, so believing that such a stipulation was the last word on possible exposure seems unjustified. I agree with others (subscription req.) who regard Knowles as a significant and unqualified win for the defense bar. If the Court had agreed that a mere stipulation was sufficient to evade Federal jurisdiction, such stipulations would have become even more commonplace, likely resulting in more class actions surviving certification motions. With that door now slammed shut, major cases will go to Federal court as Congress intended, where they will be governed by the far more rigorous Federal standards of Rule 23, as interpreted in Wal-Mart v. Dukes and its successors.

Glazer Should Be Added to SCOTUS' Class Action Docket

As I’ve noted in several previous posts, (see here, and here, and here), the new term at the U.S. Supreme Court is shaping up as a major one for class action litigation. Today I preview Whirlpool Corp. v. Glazer, a case still in the petition stage which the Court will likely consider in a December conference. Review is urgently needed in Glazer. The Court should grant the petition for certiorari.

The named plaintiffs in Glazer seek to represent all persons who have purchased Whirlpool front-loading automatic washing machines in Ohio since 2001. The plaintiffs allege that all such machines accumulate excessive mold and mildew, or biofilm, as to emit offensive odors.

But here’s the thing: this so-called “defect” isn’t just uncommon; it’s vanishingly rare. Consumer Union’s annual reliability surveys report that less than 1% of all owners report the biofilm problem. Data from customer call centers puts the incidence of the “defect” at two tenths of one percent during the one-year warranty periodAccording to Whirlpool’s cert petition, at least ninety-seven percent of all buyers, including buyers who have used their washers for more than a decade, have never experienced the “defect.”

So it’s an easy case, right? Federal Rule 23 isn’t supposed to be a magic wand that conjures up vast class actions out of nothing. The rationale of having the rule is that there are significant numbers of people with real, live claims – claims that would pass Article III muster – that can’t be brought individually either because too little money is at stake, or individual suits would overwhelm the courts, or both. One would think that if a bare minimum of ninety-seven percent of all class members have no claim in the Article III sense, class certification should necessarily have been denied, at least under the plaintiffs' vastly overbroad class definition.

But wait, it gets far worse. Twenty-one different washer models are involved in Glazer. They’re built on two different platforms which share only a few common components. The model designs changed markedly over what is now an eleven-year class period. The defendant’s knowledge and disclosure regarding any potential for odors changed materially over the period (despite the extreme rarity of the issue, a team was deployed to analyze it and recommend design, manufacturing and product literature changes to reduce the rate even further). Buyers’ compliance with use and care instructions was all over the board, creating a wealth of causation and product misuse defenses, each and every one of which required individualized fact finding.

Nevertheless, the district court certified a class on plaintiffs’ claims for tortious breach of warranty, negligent design, and negligent failure to warn under Rule 23(a) and 23(b)(3). The Sixth Circuit affirmed. The court brushed aside the problem of individual wash habits (upon which each claim depends) and the fact that the vast majority of the class members had never actually experienced any problem at all, commenting that the class members who had never experienced the alleged odor problem might have been injured by paying too much for the washing machine – a theory never argued by the plaintiffs or briefed on appeal, and apparently not recognized in Ohio where this case is pending.

The questions raised by the Sixth Circuit’s decision in Glazer are of enormous importance. Although the plaintiff seeks to represent “only” 200,000 Ohio consumers, it’s estimated that multiple class actions already filed against several manufacturers of front-loading washing machines across the country potentially involve millions of class members. Already, the Glazer opinion is influencing other courts, with the Seventh Circuit endorsing the Sixth Circuit’s view in a similar case against Sears only a few days ago [pdf].

The lead question proposed by Whirlpool’s cert petition is whether a class may be certified under Federal Rule 23(b)(3) when most class members could not sue on their own behalf. Whirlpool points out two principal reasons why the answer is an emphatic “no”: (1) allowing such classes violates the Wal-Mart v. Dukes requirement that named plaintiffs and absent class members share a common injury; and (2) certifying a class including a significant number of uninjured parties violates Article III, the Rules Enabling Act and Rule 23 itself. The petition points out that the Circuits are split on this issue: the Second and Eighth bar classes with any uninjured members, the Third, Sixth and Ninth Circuits view the issue as irrelevant to class certification, and the Seventh Circuit takes an intermediate view. It is worth noting that the recent Seventh Circuit opinion does not make reference to Wal-Mart v. Dukes, a startling omission that underscores the danger of Glazer becoming a de facto "alternative" to Dukes.

The petition also criticizes the Court of Appeals’ decision for failing to take seriously the searching inquiry under Rule 23 required by the Dukes Court. The Court of Appeals virtually disregarded Whirlpool’s substantial factual showing regarding individualized and disputed factual issues, making no effort to resolve conflicts bearing directly on the requirements of Rule 23. The petition also points out that the Sixth Circuit limited its discussion of predominance to a single sentence – far short of the convincing proof of compliance with Rule 23 required to justify certification.

Not surprisingly given the serious threat to the business community posed by “no injury” class actions, Whirlpool’s cert petition has attracted heavyweight amicus support. The Pacific Legal Foundation writes that permitting class members to proceed without Article III standing “will flood the federal courts with ‘lawyers’ lawsuits.’”   Given that the vast majority of class actions settle once they’re certified, the PLF writes that such “no injury” suits are ripe for abuse. According to the Product Liability Advisory Council’s brief, allowing such class actions “presage[s] a toxic litigation environment for manufacturers doing business in the United States,” since even a defect experienced by only a single consumer of a mass-produced product might, in theory, become the basis for an enormous class action. PLAC adds a compelling economic argument, pointing out that while traditional class actions in effect spread the cost of compensating a few injured consumers to all users of a product, a “no injury” class settlement would amount to little more than a tax on the product. In a joint amicus brief, the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers argue that allowing the Sixth Circuit’s decision to stand would amount to a significant step away from the rigorous analysis and enforcement of Rule 23 required by the Court in Dukes. The Wall Street Journal’s editorial board has urged the Court to grant cert as well.

On October 9, the Court requested a response to the cert petition – a hopeful sign that the Court is taking a hard look at the case. The Seventh Circuit’s endorsement of Glazer may raise the odds of a grant even further. The plaintiff’s reply is currently due November 30.

Can Lawyers Use Drivers' DMV Information To Recruit Potential Class Representatives?

As I’ve noted in earlier posts (see here and here), this is shaping up as an important term for the class action defense bar at the United States Supreme Court. Late last month, the Court added another important question to its docket, granting certiorari in Maracich v. Spears. In Maracich, the Court will decide whether plaintiffs’ counsel may obtain drivers’ personal identifying information from state Departments of Motor Vehicles in order to send those drivers letters attempting to recruit them as class representatives.

The Drivers’ Privacy Protection Act of 1994 provides that drivers’ “personal information” held by state Departments of Motor Vehicles must be held confidential, and may be disclosed only pursuant to one of several enumerated exceptions. Two are at issue in Maracich. First, the “litigation exception” permits use “in connection with any civil, criminal, administrative, or arbitral proceeding in any Federal, State, or local court or agency . . . including the service of process, investigation in anticipation of litigation, and the execution or enforcement of judgments and orders, or pursuant to an order of a Federal, State or local court.” Second, the “solicitation exception” permits use: “for bulk distribution for surveys, marketing or solicitations if the State has obtained the express consent of the person to whom such personal information pertains.” 18 USC 2721(b). The DPAA includes a private right of action, 18 USC 2724(a), provides for statutory liquidated damages, 18 USC 2724(b), and states that intention or knowing violations may be a criminal offense. 18 USC 2722, 2723.

The defendants in Maracich – several South Carolina plaintiffs’ lawyers and their law firms – were contacted in mid-2006 by several people who complained of unfair practices by car dealerships. The defendants sent their initial FOIA request to the South Carolina DMV, explaining that they were “attempting to determine if this is a common practice,” and invoking the litigation exception to the DPPA. About a month later, they sent a second request, seeking drivers’ information for additional counties and invoking the litigation exception again. A few days after the second request, they filed their first class complaint pursuant to the South Carolina Regulation of Manufacturers, Distributors, and Dealers Act, naming 51 dealerships as defendants and listing four class representatives.

Most of the dealerships moved to dismiss, noting that they had sold nothing to any of the class representatives. So the lawyers sent a third FOIA request, asking for drivers’ personal information and types of vehicles bought for 328 enumerated dealerships, including all those with pending motions to dismiss. Not long after, the defendant lawyers amended their class complaint, naming four more class representatives and 273 additional defendants. Again, the dealerships who had not sold a vehicle to any named class representative moved to dismiss – 183 in all.

In January 2007, the lawyers sent the first of their letters to drivers whose contact information had been received in the FOIA requests. Headed “advertising material,” the letter stated that “we would like the opportunity [to] discuss your rights and options with you in a free consultation.” As required by the South Carolina Rules of Professional Conduct, a copy of the letter and the names and addresses of recipients was filed with the state Office of Disciplinary Counsel, effectively making the information obtained from the DMV a matter of public record. Over the following weeks, the lawyers sent three additional FOIA requests, each time invoking the litigation exception. Following the last FOIA request, they sent two additional waves of letters to drivers, more than 21,000 in all. In June 2007, the lawyers moved for leave to amend their complaint to add 250 additional named plaintiffs.

Two years later, three drivers who had received the letters filed a class action complaint against the lawyers, alleging that their conduct violated the DPPA. The plaintiffs sought $2,500 for each unlawful use of personal information, as well as punitive damages, attorneys’ fees and costs. The lawyers moved to dismiss, citing the litigation exception. After initially denying the motion, the district court reversed itself. The court held that the lawyers’ conduct was not “solicitation” because, having filed a putative class action, the attorneys had a fiduciary duty to unnamed possible class members. In the alternative, the court held that the lawyers’ conduct satisfied the litigation exception, and therefore did not have to satisfy the solicitation exception as well.

The Fourth Circuit affirmed on somewhat different grounds. The Court found that although the lawyers’ conduct was solicitation under an objective standard, solicitation of potential class representatives was “an accepted and expected element of, and . . . inextricably intertwined with” the lawyers’ “investigation in anticipation of litigation” – a permitted use under the litigation exception.

As the plaintiffs’ cert petition points out, the Fourth Circuit’s decision essentially creates a new, free-standing exception to the DPPA: “for use by lawyers.” If a lawyer may send out mass mailings using drivers’ confidential contact information whenever he or she receives a few complaints about a vehicle or other product, it is difficult to imagine when the strict limits on solicitation could ever apply. The plaintiffs note that the Third Circuit flatly rejected the notion that the DPPA allows the use of DMV data in hunting for potential litigants in Pichler v. UNITE. The District of Columbia Circuit reached the same result in Wemhoff v. District of Columbia, as did the Eleventh Circuit in Thomas v. George, Hartz, Lundeen, Fulmer, Johnstone, King & Stevens, P.A.

The Fourth Circuit considerably worsened a Circuit split regarding the relationship between the DPPA exceptions as well, the plaintiffs argue. The Fourth Circuit’s view that unlawful solicitation is permitted because it is “inextricably intertwined” with permissible litigation use squarely conflicts with the Third Circuit’s view that nothing in the Act excuses an impermissible use just because it is executed in conjunction with a permissible one. Although the Fourth Circuit insisted that its position matched the Eleventh Circuit’s view in Rine v. Imagitas, Inc., the plaintiffs argued that this was not so. The Eleventh Circuit held that any lawful purpose for a single use of personal information was enough to bar liability, not that lawful uses justified separate, unlawful uses.

Given that there seems to have been no serious Circuit split in DPPA law worth the Court’s time until Maracich, the Court’s immediate grant of certiorari here seems to indicate a better-than-even chance that the Court will reverse the Fourth Circuit. The Fourth Circuit’s extraordinarily broad construction of the litigation exception – previously thought to be limited to locating witnesses and facilitating service of process – writes the clear limits to the solicitation exception out of the statute, in violation of long-settled rules of construction. Reversal in Maracich will restore the balance Congress intended when the statute was enacted, vindicating important privacy rights. We expect a decision in the first quarter of 2013.

Defusing a Class Action in a Hurry

By any definition, it's a crisis: your client receives a summons and complaint for a putative class action in Federal court.

Can you close down the case in the starting gate by just giving the named plaintiff what he or she wants -- filing a Rule 68 Offer of Judgment for all requested relief, plus attorneys fees and costs?

For several decades, the answer has been "probably not." But in the next Supreme Court term, that may change.

The case to watch is Genesis HealthCare Corporation v. Symczyk, and to appreciate its importance, we have to go back to the dawn of the class action era.

In the spring of 1980, the United States Supreme Court decided two important class action cases in a single day. The first was Deposit Guar. Nat'l Bank of Jackson v. Roper. Roper involved a putative class action of a group of credit card holders against their issuing bank. Following denial of plaintiffs' motion for class certification, the defendant bank tendered a Rule 68 offer which did not include attorneys' fees. Could the plaintiff still appeal the denial of class certification?

Yes, the Supreme Court found. The named plaintiff had a surviving concrete interest in Article III terms -- the interest in spreading the costs of the litigation among the class through the common fund doctrine. The defendants had left that interest undisturbed by failing to include attorneys fees in their Rule 68 offer. Although a good pick-off move is essential in baseball, it isn't permitted in Federal class action litigation: "[r]equiring multiple plaintiffs to bring separate actions, which effectively could be 'picked off' by a defendant's tender of judgment before an affirmative ruling on class certification could be obtained, obviously would frustrate the objectives of class actions; moreover it would invite waste of judicial resources by stimulating successive suits brought by others claiming aggrievement."

United States Parole Comm'n v. Geraghty, decided the same day as Roper, was a prisoner class action. The plaintiff's motion for class certification was denied, and while his appeal was pending, he was released. Did that moot the appeal? A narrowly divided Supreme Court held "no," finding that the named plaintiff had a "right" to obtain class certification which survived traditional mootness and was enough for Article III purposes. Justice Lewis Powell led a four-Justice dissent which included Chief Justice Burger -- who wrote Roper -- and future Chief Justice Rehnquist, who concurred in the Roper result.

In the years since Roper and Geraghty, the Federal and state courts have struggled to figure out what it all means, and how far the precedents should be extended. Only last year, the Illinois Supreme Court decided a precursor of Symczyk's issue presented, Barber v. American Airlines, Inc. Barber was a putative class action challenging the defendant's initial refusal to refund a baggage carriage fee when the plaintiff cancelled the flight. A few days after the complaint was filed, the defendant relented, and refunded the money. The Illinois Supreme Court held that defendant's action mooted the putative class action, holding that there was no such thing in Illinois law as the "pick off" exception to mootness for class actions.

Which brings us at last to Symczyk. Symczyk arises under the Fair Labor Standards Act. FLSA litigation has been a major growth area for the plaintiff's bar in the last ten years -- annual filings were up 300% from 2001 to 2011, and increased 15% in just the last year of that period. Filings are increasing for two reasons: an award of attorneys' fees is mandatory, and the FLSA is a strict liability statute whose scope is mostly unresolved. Section 216(b) of the FLSA (29 USC 216(b)) permits representative actions, but there is a crucial difference between FLSA litigation and traditional Rule 23 class actions -- employees must opt-in, rather than opting-out. Congress banned Rule 23 class actions under the FLSA in 1947.

Symczyk was a registered nurse. She sued under the FLSA, challenging her employer's alleged practice of deducting meal break times from her paycheck whether or not she had an uninterrupted break. Before plaintiff filed a class certification motion -- and before anyone had opted in -- defendants offered her everything she wanted pursuant to Rule 68 -- recovery, fees and costs. Then they moved to dismiss. The district court dismissed, but the Third Circuit reversed, extending Roper and Geraghty to FLSA actions and holding that the eventual certification of a class -- even if it happens after the case has been effectively mooted -- relates back to the date of filing.

Symczyk's cert petition presents two important questions: (1) do Roper and Geraghty apply to representative actions under the FLSA, in addition to traditional Rule 23 class actions; and (2) do Roper and Geraghty, even in the Rule 23 world, apply to class complaints where a class certification motion has not yet been filed? With respect to the first question, the petition argued that the 9th and 11th Circuits -- which have distinguished the FLSA from Rule 23 -- are squared off with the 3rd and 5th Circuits. As to the second, broader question, the petition argued that the 3rd, 5th, 9th and 10th Circuits, which hold that a late-filed class certification motion relates back to the filing of a complaint, are in conflict with the 4th, 7th and 8th Circuits, which allow a "pick-off" move. In the opposition to certiorari, plaintiffs distinguished between cases involving Rule 68 offers of judgment and voluntary settlements, but in the reply, defendants pointed out that plaintiffs had never explained why the distinction made a difference. Both the United States Chamber of Commerce and the Defense Research Institute have joined the litigation, supporting the defendants.

So where is all this likely to wind up? Although it's always a perilous enterprise to predict where SCOTUS is going, I have some difficulty picturing the Supreme Court that decided Wal-Mart Stores, Inc. v. Dukes affirming the Third Circuit. If there is a reversal, I see three possibilities, each a progressively bigger earthquake for class action practice:

  • The Supreme Court holds that Roper and Geraghty do not apply to FLSA representative suits;
  • The Supreme Court holds that Roper and Geraghty do not apply even to traditional Rule 23 class actions where a settlement or offer of judgment is served before the class certification motion is filed, effectively legalizing the "pick-off"'; and
  • The Supreme Court overrules Geraghty.

Appellate Strategist will be following Symczyk closely as the litigation proceeds. 

Will Daubert Become Part of Class Certification Hearings?

In the closing days of its term, the Supreme Court announced that it had granted certiorari in Comcast Corporation v. Behrend, setting up what is certain to be a major battle over expert testimony and class certification hearings.

Behrend arises from what appears to be the largest certified class in history – more than two million former and current subscribers to Comcast’s cable services in the Philadelphia metropolitan area. According to the complaint, Comcast violated Sections 1 and 2 of the Sherman Act by pursuing a strategy of anticompetitive clustering – deliberately buying up cable systems in geographic areas where Comcast already has a significant foothold while selling or trading away cable systems where the carrier’s holdings were less concentrated. According to the plaintiffs, Comcast’s clustering deterred entry by “overbuilders” – companies who deliberately enter a market where another cable provider is already established.

Comcast’s cert petition in Behrend set the case up as a straightforward application of the Court’s landmark 2011 decision in Wal-Mart Stores, Inc. v. Dukes, where the Court announced that class certification is proper only if the trial court is satisfied, “after a rigorous analysis,” that the requirements for class certification have been proven – even if plaintiffs will be required to prove the same propositions again in order to prevail on the merits at trial. Dukes was handed down against a background of earlier lower court holdings applying a lesser standard, often certifying classes based only on a determination that class representatives would likely be able to establish the prerequisites for class certification later, at trial. These cases took their cue from the Supreme Court’s apparent bar in Eisen v. Carlisle & Jacquelin against inquiring into the merits at the class certification stage. But the Dukes court dispatched Eisen in a footnote, dismissing the relevant language as “purest dictum.” Comcast asked for summary reversal in Behrend, arguing that the Third Circuit had ignored Dukes and resurrected Eisen, disregarding Comcast's various merits arguments on a variety of Rule 23 issues.

The Court seems to have been deadlocked about what to do with Behrend for several weeks, relisting the case from conference to conference no less than seven times. Ultimately, the justices reached a compromise, granting cert on a single question: whether a district court could certify a class without deciding whether the plaintiffs had introduced admissible evidence, including expert testimony, to show that awarding damages on a class-wide basis is practical. In other words, when an expert’s testimony is crucial to the plaintiffs’ Rule 23 arguments – which it will generally be in antitrust, if not in most class actions – must the parties and the court have a full-blown Daubert proceeding before a class can be certified?

"We are really expecting this to be the big one," Ankur Kapoor of Constantine Cannon told the Philadelphia Inquirer after cert was granted. "The legal journals will be writing about it for years." Lawyers at Mayer Brown LLP agreed, writing that the issue is of "extraordinary importance to businesses defending themselves against class actions of all stripes." Seyfarth Shaw's Workplace Class Action blog agreed, writing that the opinion in Behrend "could have wide-ranging impact on class actions, including those in the workplace arena." Cozen O'Connor's Class Action Defense Review, on the other hand, predicted that Behrend would not have the profound impact of Dukes and the Court's other class action landmark of 2011, AT&T Mobility v. Concepcion.

There's no question a Circuit split has developed in the years immediately before and after Dukes on the question of how to handle expert testimony. As the petitioners in Behrend pointed out, the Seventh Circuit has held at least twice that district courts must make a definitive ruling on the Daubert inquiry at the class certification stage if the plaintiff's compliance with Rule 23 depends on the admissibility of the expert's testimony -- most recently in Messner v. Northshore University Healthsystem, and earlier in American Honda Motor Co. v. AllenThe Ninth Circuit endorsed a full-blown Daubert analysis in Ellis v. Costco Wholesale Corp. The Eleventh Circuit agreed in Sher v. Raytheon Co., following Allen in an unpublished opinion.

But on the other hand, there is the Eighth Circuit's opinion in In re Zurn Pex Plumbing Products Liability Litigation, filed only two weeks after Dukes. The Eighth Circuit failed to take up the Supreme Court's heavy hint in Dukes that Daubert was fully applicable to class certification hearings, affirming a district court's "tailored" determination that expert testimony was sufficiently reliable "in light of the existing state of the evidence" to justify certifying a class. After all, the Eighth Circuit pointed out, class certification was "inherently tentative," and a full Daubert inquiry could not be justified at such an early stage.

Given the Supreme Court's dicta in Dukes and the apparent compromise at the cert stage, it seems likely that the Court will reject the Eighth Circuit's approach in Zurn Pex, as it should. Class certification is a crucial stage in class action litigation, particularly in antitrust cases. Designing an econometric model which reliably predicts damages on a classwide basis is an enormous challenge and, as the cert petition in Behrend observes, "most cases will be on the fast track to settlement shortly after class certification." Although plaintiffs may press for more discovery pre-certification if courts are required to conduct full-blown Daubert inquiries before certification, this seems like a reasonable price to pay in order to defeat meritless class actions early. Although some have worried that courts which approve expert testimony at the certification hearing will decline to reconsider at the close of discovery, this seems unlikely, given the discovery and factual development likely to occur in the interim. All in all, Behrend is likely to be an important battle at the Supreme Court, and a worthy sequel to the Court's opinion in Dukes.

The Upshot: What Wal-Mart v. Dukes Means for Future Aggregate Litigation

The Supreme Court’s decision overturning the certification of the massive gender discrimination class in Wal-Mart v. Dukes [pdf] has been well-publicized. We go behind the headlines, therefore, to offer a few educated guesses as to what the case will mean for the future of class actions and other forms of aggregate litigation:

  • Statewide classes barred on state law will become more common as claimants will seek friendlier state jurisprudence on the commonality question;
  • Some counsel will seek to litigate claims through “mass actions” of large numbers of individual claimants rather than face rigorous class action requirements;
  • Greater care will be taken in framing class definitions to meet Wal-Mart’s more rigorous commonality standards;
  • The practice of “smuggling” monetary claims into purported injunctive class actions will stop;
  • Attempts to bring medical monitoring claims as injunctive class actions will face increased scrutiny;
  • Merits-related evidence will usually be essential at certification hearings;
  • Expert testimony at the certification stage will be subject to Daubert scrutiny;
  • The unanimous rejection of “trial by formula” will stifle “creative” attempts to dispose of aggregated claims by denying the defendants’ right to present individual defenses. “Bellweather” trials will not be binding.

Against "Rough Justice" Part One: The Fidelity Imperative

In his recent article in the online magazine, Slate, Richard Thompson Ford discusses the key class action case, Wal-Mart v. Dukes, currently pending before the Supreme Court. Ford notes some of the problems of handling such an enormous number of claims as class actions. Under the Dukes trial plan, each class member’s entitlement to back pay will be determined by a mathematical model, without permitting Wal-Mart to challenge the merits of a particular class member’s claim.

Ford is okay with this because, in his view, “rough justice is better than no justice at all.” His rationale is revealing. He notes that proving individual discrimination is difficult and that “even if the statistics prove that Wal-Mart discriminated against a lot of women, very few would be able to prove they were one of them.”

Ford’s concern for “rough justice” is typical of advocates for procedures that aggregate many claims together for a single adjudication. Generally, these advocates worry about “false negatives” in civil litigation—the risk that a wrong will go unpunished rather than false positives—the risk that an innocent party will be forced to pay. While advocates of “rough justice” are right to worry that procedures should not be so cumbersome as to preclude legitimate claims, their proposed remedy is worse than the disease for several reasons. This post explores one of those reasons. Other reasons will addressed in future posts.

Ford’s concern that many women would be unable to prove a claim gives away the game. He advocates the class action approach not simply because it deals with numerous claims more efficiently, but because it allows persons to recover as part of an aggregated claim who would not have been able to recover as an individual claimant. It allows losers to become winners, not because the merits of the individual cases require that result but because weaknesses in individual claims are obscured when the dispute is litigated on a mass basis.

Ford’s argument is not really about class actions at all. His “rough justice” position ultimately boils down to a preference that a member of a group that has experienced discrimination should be permitted to recover, even if the particular individual cannot show that she has been affected by that discrimination.

Whatever the merits of this view, it is simply not the law. To obtain money damages, a plaintiff must show that she has been personally injured. Converting a case to a class action should not be permitted to change this result. The Rules Enabling Act prescribes that the rules of procedure are not to be used to alter a party’s substantive rights.

Procedural devices such as class actions are meant to implement the law more efficiently, not to change what a claimant must establish to win the case. Hence, the American Law Institute’s Principles of Aggregate Litigation speaks of the essential requirement of “fidelity” in all forms of aggregate litigation. Aggregation of claims must be used to implement the law faithfully, not to alter it. Indeed, to use class procedures to change the law is undemocratic. It alters the policy choice enacted by Congress when it restricted the back pay remedy to those who had personally been victims of discrimination.

It’s tempting to use techniques such as class actions as a kind of a short cut to justice. But too often such short cuts never reach the intended destination. Sometimes they take you places you never wanted to go.

Supreme Court Says Arbitration Agreements Can Derail Class Actions

In a 5-4 decision, the U.S. Supreme Court has reaffirmed the right of businesses to compel arbitration of consumer complaints, and to block class action litigation through the enforcement of individual arbitration agreements. In so holding, the Court invalidated the prior California Supreme Court rule in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005) that classifies most collective-arbitration waivers in consumer contracts as unconscionable.  The Court held that the Discover Bank rule was preempted by the Federal Arbitration Act. The High Court’s decision may pave the way for businesses to insist on including arbitration agreements in individual consumer service contracts as a means of derailing class action lawsuits.

The case, AT&T Mobility LLC v. Concepcion, 09-893, arose out of the plaintiffs’ purchase of AT&T cellular phone service, which was advertised as including free phones with the signing of a service contract. While the plaintiffs were not charged for the phones, they were charged sales tax based on the phones’ retail value. The plaintiffs brought a complaint against AT&T in the U.S. District Court for the Southern District of California, alleging false advertising and fraud, and the case was consolidated with a putative class action. AT&T moved to compel arbitration under the terms of its contract with the plaintiffs, which provided for arbitration of all disputes between the parties, and required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”

The terms of the AT&T arbitration agreement actually appeared quite favorable to the consumer as described by the Court. (See Slip Op., p.2.) The terms required that AT&T pay all costs for non-frivolous claims; that arbitration take place in the county where the customer is billed; that arbitration of smaller claims may be conducted at the election of the consumer in person, by phone, or by submission; that either party may bring a small claims action in lieu of arbitration; that AT&T could not seek attorney’s fees; and that should the consumer receive an arbitration award greater than AT&T’s last written settlement offer, AT&T would be required to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.

Though the District Court noted the favorability to the plaintiffs of the arbitration agreement, it nevertheless followed the rule of Discover Bank. The Ninth Circuit affirmed, finding the FAA did not preempt the Discover Bank rule. In reversing the decision of the Ninth Circuit, Justice Scalia, writing for the majority, held that the FAA preempts California’s Discover Bank rule because that rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  

In relevant part, the FAA, enacted in 1925, provides that “[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The FAA puts arbitration agreements “on an equal footing with other contracts.” (Slip Op. p.5.) Like other contracts, agreements to arbitrate may be invalidated by generally applicable contract defenses such as fraud, duress, or unconscionability, but may not be invalidated “by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” (Slip Op. p.5.) 

The Court held that the Discover Bank rule was a defense of the latter kind. The rule of Discover Bank was that class-action waivers in consumer contracts affecting disputes of small amounts constitute an attempt by the party with superior bargaining power to exempt itself from its own fraud, and to cheat large numbers of consumers out of individually small sums of money.  They are therefore unconscionable contract terms and unenforceable. The Supreme Court held: “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” (Slip Op. p.6-7.) “[A] court may not rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what the state legislature cannot.” (Slip Op. p.7.)

“The overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes or arbitration and thus creates a scheme inconsistent with the FAA.” (Slip Op. p.9.) The Court opined that class arbitration, as opposed to bilateral arbitration, “makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” (Slip Op. p.14.) The Court noted that, by their nature, class actions requires elements such as notice to class members and a determination of adequate class representation by the class plaintiff - procedures not suitable for disposition by an arbitrator. (Slip Op. p.15.) Additionally, the Court theorized the absence of an adequate review process makes it more likely errors will go uncorrected. (Slip Op. p.15-16.) Lastly, the Court noted that the favorable terms of the plaintiffs’ arbitration agreement with AT&T make it unlikely that the plaintiffs would be left without adequate redress absent the use of class action litigation.

The Court’s ruling is likely to breathe renewed life into existing arbitration agreements, especially in California, and prompt businesses that regularly enter into service contracts with consumers to include arbitration agreements requiring that claims be brought in the complainant’s individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.

California Supreme Court Establishes Economic Injury Threshold for Unfair Competition and False Advertising Claims

The California Supreme Court has declared that “labels matter,” and that under California’s Unfair Competition Law, a consumer’s subjective sense of feeling duped translates to a cognizable economic injury.

The Court’s majority opinion in Kwikset Corporation v. Superior Court (.pdf), issued today, January 27th, held that plaintiffs “who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property,’” and therefore have standing to sue under California’s Unfair Competition Law and False Advertising Law.  The Court reversed a decision of the Fourth District Court of Appeal, and potentially opened the door to class action litigation brought by plaintiffs who have experienced no dissatisfaction with the actual function or performance of a manufacturer’s product. 

The plaintiffs brought a class action lawsuit alleging that they purchased locksets manufactured by Kwikset in reliance upon representations that the locks were “Made in U.S.A.” or similarly designated.  The locks contained components made in Taiwan or involved latch sub-assembly performed in Mexico.  The plaintiffs alleged violations of California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200) for unlawful, unfair, and fraudulent business practices.  Their complaint further alleged violation of California’s False Advertising Law (Cal. Bus. & Prof. Code § 17500.)

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Illinois Supreme Court Allows Petitions for Leave to Appeal In Eight New Civil Cases

Last week, the Illinois Supreme Court allowed petitions for leave to appeal in eight new civil cases.  They are:

  • Uldrych v. VHS of Illinois, Inc., Williams v. Board of Review, 2010 WL 743894 (1st Dist., 2010), which involves the question of whether implied indemnity actions are subject to the four-year statute of repose governing actions which “aris[e] out of patient care”;
  • Barber v. American Airlines, Inc., 2010 WL 546359 (1st Dist., 2010), which involves the question of whether and when a defendant’s tender of the relief sought by a class representative prior to class certification moots the action;
  • Lemmenes v. Orland Fire Protection District and Gaffney v. Board of Trustees of the Orland Fire Protection District, 2010 WL 1133028 (Lemmenes) and 397 Ill.App.3d 679 (Gaffney), 2010 (Lemmenes) and 2009 (Gaffney) decisions from the First District, consolidated by the Supreme Court, which involve the question of under what circumstances a firefighter injured while participating in a training exercise “reasonably believes” that he or she is responding to an emergency for purposes of being entitled to continued payment of health insurance premiums for the firefighter and his or her family;
  • Howell v. Dunaway, 924 N.E.2d 1190 (5th Dist. 2010), which involves the issue of whether various hospitals’ statutory liens for services under the Health Care Services Lien Act were properly reduced by a share of attorneys’ fees incurred by the injured parties pursuant to the common fund rule;
  • LaSalle Bank National Association v. Cypress Creek, 398 Ill.App.3d 592 (3rd Dist. 2010), which involves several questions relating to allocation of foreclosure proceeds where both a mortgagee and mechanics’ lien claimants are present;
  • Thompson v. Gordon, 398 Ill.App.3d 538 (2nd Dist. 2009), which involves the question of whether expert witness testimony created genuine issues regarding duty, breach and causation in a negligence action arising from a contract to design a replacement for a bridge deck; and
  • Jablonski v. Ford Motor Company, 398 Ill.App.3d 222 (5th Dist. 2010), which involves several issues respecting whether plaintiffs’ multiple theories of negligence and claim for punitive damages were properly submitted to the jury.

For further details about all eight cases, check Appellate Strategist's database of civil issues pending at the Illinois Supreme Court.