May 19, 2017

This update provides an overview and summary of key class action developments during the first quarter of 2017 (January through March).  Part I explores significant class-certification decisions from the Seventh, Eighth, and Ninth Circuits.  Part II addresses decisions from the Third, Seventh, and Ninth Circuits adopting conflicting approaches to determining whether putative class representatives have standing to sue for statutory violations under the Supreme Court's decision in Spokeo, Inc. v. RobinsPart III analyzes decisions from the Second, Sixth, and Seventh Circuits addressing mootness of putative class actions under the Supreme Court's decision in Campbell-Ewald Co. v. Gomez.  Finally, Part IV discusses noteworthy decisions reversing approvals of class settlements from the Eighth and Ninth Circuits. 

I.    Notable Decisions Addressing the Propriety of Class Certification

The federal courts of appeals continued in the first quarter of 2017 to decide a steady stream of class-certification appeals.  Four such decisions are worth highlighting because they provide important guidance to district courts and class-action litigants. 

The Seventh Circuit in McCaster v. Darden Restaurants, Inc., 845 F.3d 794 (7th Cir. 2017), adopted a strict view of the requirement that a certified class "identif[ies] a common question, the answer to which 'will resolve an issue that is central to the validity of each one of the claims in one stroke.'"  Id. at 801 (quoting Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350 (2011)).  The plaintiffs alleged that former employees of a restaurant chain were improperly denied pay-outs for unused vacation time, purportedly in violation of state law.  Id. at 796–97.  The Seventh Circuit affirmed the denial of class certification after concluding that the plaintiffs failed to satisfy the "bedrock requirement" of a "common contention that is 'capable of classwide resolution,'" id. at 800 (quoting Dukes, 564 U.S. at 350), and consequently Rule 23(a)'s typicality requirement and Rule 23(b)(3)'s "more strenuous predominance requirement" were also not met.  Id. at 801.  The court emphasized that there was no allegation of any policy that facially violated the law, or of a "statewide practice" of withholding earned pay.  Id. at 801.  The class thus presented "only an amalgam of individual" claims, the resolution of which "depend[ed] entirely on each employee's individual work history … and the specific payroll practices of the managers of the restaurants where they worked."  Id. at 801. 

McCaster also reaffirmed the prohibition on "fail-safe" classes—that is, classes defined to include only those persons who have a valid claim.  Id. at 799.  The Seventh Circuit explained that such classes are "impermissible because a class member either wins or, by virtue of losing, is defined out of the class and is therefore not bound by the judgment."  Id. at 799 (quotation marks and citation omitted). 

Next, the Seventh Circuit held in Eike v. Allergan, Inc., 850 F.3d 315 (7th Cir. 2017), that a class was improperly certified because the plaintiffs lacked standing to sue.  There, the plaintiffs alleged that glaucoma eye drops manufactured by several pharmaceutical companies were "unnecessarily large," purportedly in violation of state consumer protection statutes.  Id. at 316.  The court noted that the plaintiffs were seeking only what they "contend[] to be an unnecessarily high price for the defendants' eye drops because of the size of those drops," and emphasized that there were no allegations that class members had suffered side effects from the drops, were harmed "because they ran out of them early," had paid inflated prices due to collusion or misrepresentation, or that the drops were "unsafe or ineffective."  Id. at 317–18.  Rather, the claims on behalf of the class boiled down to "[t]he fact that a seller does not sell the product that you want, or at the price you'd like to pay," which the court held was "not an actionable injury; it is just a regret or disappointment."  Id. at 318.  The Seventh Circuit thus concluded that the "suit fails at the threshold, because there is no standing to sue," and for that reason both vacated the grant of class certification and ordered the district court to dismiss the suit with prejudice.  Id.

In contrast to these Seventh Circuit decisions, the Ninth Circuit in Just Film, Inc. v. Buono, 847 F.3d 1108 (9th Cir. 2017), rebuffed multiple challenges to class certification of two nationwide classes.  In Just Film, small businesses (and their owners) who leased credit and debit card processing equipment alleged, among other things, that entities involved in the leasing and financing of that equipment had violated RICO in calculating and collecting taxes that were not actually due or paid to any taxing authority.  Id. at 1113.  The district court certified two nationwide classes, one under RICO and the other under a breach of contract theory, and the Ninth Circuit affirmed.  Id. at 1114–15. 

The Ninth Circuit held that the potential for "some individualized issues" in calculating damages did not render class certification inappropriate; it was sufficient that damages could be "determined without excessive difficulty" and would be "attributed to" the plaintiffs' "theory of liability."  Id. at 1121.  Further, notwithstanding the "highly individualized" element of reliance under RICO, the district court did not abuse its discretion in concluding that other common questions predominated over any individualized issues.  Id. at 1121–22.  The Ninth Circuit also explained that the "requirement of typicality is not primarily concerned with whether each person in a proposed class suffers the same type of damages," but instead whether "the plaintiff endured a course of conduct directed against the class."  Id.  at 1118.  The court thus concluded that the fact that one of the named plaintiffs "was able to fend off the attempted fraud before it reached into and diminished her bank account" did not make her claims atypical.  Id. 

The Eighth Circuit took a similarly skeptical view of individualized defenses and damages issues in affirming class certification in Barfield v. Show-Me Power Electric Cooperative, 852 F.3d 795 (8th Cir. 2017).  The district court certified a class of landowners who alleged the improper use of easements over their properties.  Id. at 798–99.  On appeal following a summary judgment ruling and damages award in the class's favor, the defendants challenged the propriety of class certification, arguing that the affirmative defense of landowner consent had to be "individually investigated and adjudicated" and there was a need for "individualized damages calculations."  Id. at 806.  The Eighth Circuit rejected both of those challenges.  As for the defense of consent, the defendants provided "no evidence that even one class member consented to" the disputed use, so this defense was merely an "unsupported allegation" that did not "undercut" the finding of predominance.  Id.  On the issue of individualized damages, the court confusingly reasoned that because it had separately vacated the award of damages, it would not reverse certification on the basis of "the nature of a hypothetical future damages award."  Id.  The Eighth Circuit appears to have overlooked, however, that district courts at the class-certification stage will always be assessing how a case will be tried in the future.  To reject challenges to class certification as "hypothetical" merely because they concern future events would greatly circumscribe the class certification inquiry.

II.    The Federal Courts of Appeals Adopt Divergent Interpretations of Spokeo

As discussed in our May 2016 and February 2017 updates, the Supreme Court held in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), that Article III requires plaintiffs to establish "a concrete injury even in the context of a statutory violation."  Id. at 1549.  With this holding, Spokeo disapproved many lower-court decisions that had deemed any alleged statutory violation sufficient on its own to satisfy the standing requirements of Article III, thus opening the door to the certification of "no-injury" class actions in which plaintiffs seek to recover statutory damages on a classwide basis without any proof that individual class members suffered any actual, concrete injury.  Spokeo's ultimate impact, however, will depend on how lower courts implement its requirement that plaintiffs establish they suffered a "concrete" injury.  Diverging opinions issued during the first quarter of 2017 by the Third, Seventh, and Ninth Circuits shed some light on Spokeo's potential impact in the lower courts.

Although it has not yet issued its follow-up decision in Spokeo, the Ninth Circuit held in two separate cases that, notwithstanding the Supreme Court's decision, plaintiffs had standing under Article III to pursue claims under the Telephone Consumer Protection Act ("TCPA") and the Fair Credit Reporting Act ("FCRA") based on alleged statutory violations alone.

In Van Patten v. Vertical Fitness Group, LLC, 847 F.3d 1037 (9th Cir. 2017), the Ninth Circuit affirmed summary judgment in favor of defendant Vertical Fitness in a putative class action alleging the defendant sent unsolicited text messages regarding gym memberships in violation of the TCPA.  On appeal, the Ninth Circuit considered whether the plaintiff had alleged a "concrete injury-in-fact" that was sufficient to establish Article III standing.  Id. at 1042–43.  Noting that Spokeo "observed that intangible harms a plaintiff alleges can … 'nevertheless be concrete,'" the Ninth Circuit concluded that the plaintiff had alleged such an injury because Congress found "unsolicited contact" under the TCPA to be a "concrete harm," and an alleged violation is necessarily a "concrete, de facto injury."  Id. at 1042–43 (citations omitted).  The Ninth Circuit nonetheless affirmed summary judgment in favor of the defendant because the plaintiff did not revoke his prior consent to receive the text messages.  Id. at 1043–48.

Similarly, in Syed v. M-I, LLC, 853 F.3d 492 (9th Cir. 2017), the Ninth Circuit reversed an order dismissing a putative class action filed against a prospective employer that allegedly violated the FCRA's disclosure requirements by including a liability waiver in its disclosure notice.  The FCRA requires that "the disclosure document consist 'solely' of the disclosure."  Id. at 498, 500–01.  Applying Spokeo, the Ninth Circuit found a concrete alleged injury because the court "can fairly infer that Syed was confused by the inclusion of the liability waiver with the disclosure and would not have signed it had it contained a sufficiently clear disclosure, as required in the statute," which is more than a "bare procedural violation."  Id. at 499–500.  The court reached this conclusion even though the plaintiff never alleged that he was actually confused by the disclosure; indeed, the plaintiff alleged that the employer's disclosure "contained too much [information]" rather than "too little."  Id. at 498 (emphasis added). 

Consistent with these Ninth Circuit decisions, the Third Circuit held that plaintiffs had standing to bring claims under the FCRA following an alleged data breach related to the theft of laptops from a health insurer.  In re: Horizon Healthcare Servs. Inc. Data Breach Litig., 846 F.3d 625 (3d Cir. 2017).  Although the court acknowledged that Spokeo could be read "as creating a requirement that a plaintiff show a statutory violation has caused a 'material risk of harm' before he can bring suit," the Third Circuit interpreted Spokeo more narrowly, as merely "reiterat[ing] traditional notions of standing, rather than erect[ing] any new barriers that might prevent Congress from identifying new causes of action though they may be based on intangible harms."  Id. at 637–38.  Applying this rationale, the court held that "the 'intangible harm' that FCRA seeks to remedy 'has a close relationship to a harm [i.e. invasion of privacy] that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.'"  Id. at 639–40.  Thus, the plaintiffs did not "allege a mere technical or procedural violation of FCRA.  They allege instead the unauthorized dissemination of their own private information—the very injury that FCRA is intended to prevent."  Id. at 640.

By contrast, the Seventh Circuit applied Spokeo in Gubala v. Time Warner Cable, Inc., 846 F.3d 909 (7th Cir. 2017), to affirm the dismissal of a putative class action alleging that Time Warner Cable violated the Cable Communications Policy Act ("CCPA") by failing to destroy customers' personal information after they cancelled their subscriptions.  The Seventh Circuit held that the plaintiff lacked Article III standing under Spokeo because, "while he might well be able to prove a violation of [the CCPA], he has not alleged any plausible (even if attenuated) risk of harm to himself from such a violation—any risk substantial enough to be deemed 'concrete.'"  Id. at 911 (citation omitted).  Indeed, the plaintiff never alleged a credible threat that his "personal information might have been stolen from Time Warner or sold or given away" to third parties who could harm him; Time Warner's technical "violation of [the CCPA simply] … made him feel aggrieved."  Id. at 910–11.

These decisions confirm that, now a year after its issuance, the full impact of Spokeo remains up for debate, with the courts of appeals reaching seemingly conflicting conclusions.  Given the importance of Spokeo to the viability of "no-injury" class actions, we will continue to monitor how the lower courts are interpreting Spokeo in future updates.

III.    The Lower Courts Continue to Reject Attempts to Moot Putative Class Actions After Campbell-Ewald

In prior updates, we noted that while the Supreme Court in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016), held that an unaccepted offer of judgment does not render a putative class action moot, the Court at the same time appeared to provide a lifeline to class-action defendants by expressly declining to resolve "whether the result would be different if a defendant deposits the full amount of the plaintiff's individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount."  Id. at 672.  In the ensuing year, class-action defendants put that unresolved question to the test, and engaged in various attempts to moot putative class actions in ways not addressed in Campbell-Ewald, such as by making an offer of judgment to the named plaintiff, depositing the offered amount in the court's registry, and moving for entry of judgment in the named plaintiff's favor. 

Unfortunately, the federal courts of appeals thus far have largely expressed skepticism about the Supreme Court's suggested distinction between an unaccepted offer of judgment and an unaccepted offer combined with the delivery of money to the plaintiff and obtaining a judgment in plaintiff's favor.  This trend continued in the first quarter of 2017.

It is clear after Campbell-Ewald that an accepted offer of judgment can result in mootness.  An example of this is Wright v. Calumet City, Illinois, 848 F.3d 814 (7th Cir. 2017), in which the Seventh Circuit dismissed  an action as moot where the plaintiff accepted the defendant's offer of judgment in full satisfaction of the plaintiff's individual claims.  Id. at 821.  The plaintiff in that case brought a class action against the defendant for allegedly violating the Fourth and Fourteenth Amendment rights of arrestees.  Id. at 815.  After the Seventh Circuit denied his petition for permission to appeal the denial of class certification, the plaintiff accepted an offer of judgment "for all claims brought under this lawsuit," including attorneys' fees and costs incurred in pursuing plaintiff's individual (but not class) claims.  Id. at 816.  The plaintiff then appealed the class certification decision, asserting a continuing interest in obtaining attorneys' fees for the class claims to shift the costs of litigation to the class, which the Supreme Court suggested in Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 336–37 (1980), might be sufficient to satisfy standing even if a judgment is issued in the plaintiff's favor.  Wright, 848 F.3d at 820–21.  The Seventh Circuit, however, held that the plaintiff had actually accepted the defendant's Rule 68 offer as complete relief for the plaintiff's claims, citing Campbell-Ewald for the rule that a case becomes moot when a plaintiff accepts an offer of judgment that fully redresses the plaintiff's injuries.  Id.   

But the lower courts have often reached the opposite conclusion when confronting the scenarios falling short of actual acceptance of an offer of judgment that the Supreme Court left open in Campbell-Ewald.  For example, the Second Circuit held in Geismann v. ZocDoc, Inc., 850 F.3d 507 (2d Cir. 2017), that a district court's entry of judgment in the plaintiff's favor on an unaccepted offer of judgment does not moot a putative class action.  Id. at 513.  After receiving unauthorized faxes, the plaintiff sued the defendant under the TCPA.  Id. at 509.  While the plaintiff's class-certification motion was pending, the defendant made an offer of judgment, which the plaintiff rejected.  Id. at 510.  But finding that the defendant's offer would have afforded complete relief on the plaintiff's individual claims and rendered the action moot, the district court entered a judgment in the plaintiff's favor and later, while the appeal was pending, granted the defendant leave to deposit a check with the clerk of court in satisfaction of that judgment.  Id. at 511.  The Second Circuit reversed, citing Campbell-Ewald for the proposition that an unaccepted offer of judgment is considered "withdrawn" and is a legal nullity.  Id. at 512.  The court further rejected the argument that the district court's entry of judgment made the case meaningfully different from Campbell-Ewald because, in its view, "the judgment should not have been entered in the first place."  Id. at 513. 

A divided panel of the Sixth Circuit adopted an even broader rule in Unan v. Lyon, 853 F.3d 279, 287–88 (6th Cir. 2017), holding that a defendant's conduct in affording the named plaintiffs complete relief does not moot a putative class action, even if judgment has been entered in the named plaintiffs' favor, where the defendant has not provided that same relief to all members of the putative class.  Two days after the named plaintiffs filed their putative class action complaint alleging that the defendant had denied them comprehensive Medicaid coverage, the defendant restored those individuals' coverage and later began approving individual applicants who were members of the putative class.  Id. at 284.  The district court deemed the case moot and entered summary judgment in the defendant's favor.  Id.  But the Sixth Circuit reversed, holding that case was not moot under both the "picking off" exception to mootness, which prevents defendants from strategically avoiding class litigation by settling the claims of individual named plaintiffs in a way that "would be contrary to sound judicial administration," id. at 285 (quotation marks and citation), and the "inherently transitory" exception, which applies when the alleged injury is "so transitory that it would likely evade review by becoming moot before the district court can rule on class certification" and it is clear that "other class members are suffering the injury," id. at 287 (quotation marks and citation omitted).  In dissent, Judge Sutton disagreed with the majority's conclusion that the record supported a finding of an inherently transitory injury, id. at 296, and he noted that the Supreme Court has applied the picking off exception only "after the district court has ruled on class certification, not before" and only where review of the class-certification order would otherwise be prevented.  Id. at 295.

IV.    Close Appellate Scrutiny of Class Settlements Continues

We have noted in several of our prior year-end and quarterly updates (including our October 2016 update) that federal courts of appeals have been closely scrutinizing the fairness of class action settlements in recent years.  This trend continued in the first quarter of 2017. 

For example, the Eighth Circuit vacated a class settlement in a class action covering up to 110 million Target customers affected by the company's data security breach in 2013.  In re Target Corp. Consumer Data Security Breach Litig., 847 F.3d 608 (8th Cir. 2017).  The court concluded that the district court failed to conduct the requisite "adequacy" analysis under Rule 23(a)(4).  Id. at 612–13.  The settlement provided a $10 million fund to be distributed to class members with losses from the breach; by contrast, class members who suffered no loss would get no pecuniary relief, even though they would "release Target from liability for any claims [they] may someday have should the breach injure [them] in the future."  Id. at 611.  The objectors argued there was an inter-class conflict between those with extant losses who could recover money from the settlement fund, and those without extant losses, who could not.  The district court did not offer any reasoned explanation for overruling this objection, which "suggests that class certification was the product of summary conclusion rather than rigor."  Id. at 613.  The Eighth Circuit thus remanded to allow the district court to conduct a "meaningful analysis of class certification."  Id. at 614.

The Ninth Circuit also weighed in on a novel settlement-related jurisdictional issue in Koby v. ARS Nat'l Servs., Inc., 846 F.3d 1071 (9th Cir. 2017).  There, the parties settled a Fair Debt Collection Practices Act lawsuit on a classwide basis, with a magistrate judge approving the settlement and entering a final judgment.  On appeal, the Ninth Circuit joined three other circuits in concluding that only the named plaintiffs' "consent" was needed under 28 U.S.C. § 636 to waive the right to an Article III judge, and that the absent class members did not also need to "consent" to the magistrate's jurisdiction.  846 F.3d at 1075–79.  The court focused on the representative nature of class actions and the ability of named plaintiffs to bind class members to a variety of litigation strategy decisions (e.g., which claims to assert, what discovery to seek, and what motions to file).  Id. at 1075–77.  Whether to consent to a magistrate judge's jurisdiction "is probably less consequential to the outcome than the other decisions the named plaintiffs are ordinarily called upon to make."  Id. at 1077.

The Ninth Circuit then reversed the magistrate's approval of the settlement itself.  Id. at 1079.  The settlement provided injunctive relief requiring the defendant to use a new voicemail message in future debt collection calls.  Id.  But there was no evidence that class members "continued to receive calls from [defendant] as part of ongoing efforts to collect debts that were by then two to five years old, a proposition doubtful enough that empirical data of some sort would be necessary to sustain it."  Id. at 1079–80.  In exchange, the class members waived the right to pursue damages claims as part of a class action (although they could still do so individually).  Id. at 1080–81.  The Ninth Circuit concluded the right to participate in class actions was necessarily worth something, even if not much.  And requiring class members "to give up anything at all in exchange for worthless injunctive relief precludes approval of the settlement as fair, reasonable, and adequate."  Id. at 1081.


 

The following Gibson Dunn lawyers prepared this client update: Kahn A. Scolnick, Bradley J. Hamburger, Christopher Chorba, Theane Evangelis, Andrew LeGrand, Brandon J. Stoker, and David A. Schnitzer.

Gibson Dunn are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm's Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. - Co-Chair, Litigation Practice - Los Angeles (213-229-7000, tboutrous@gibsondunn.com
Christopher Chorba
- Co-Chair, Class Actions Practice - Los Angeles (213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis - Co-Chair, Class Actions
Practice - Los Angeles (213-229-7726, tevengelis@gibsondunn.com)
Kahn A. Scolnick - Los Angeles (213-229-7656, kscolnick@gibsondunn.com)
Bradley J. Hamburger - Los Angeles (213-229-7658, bhamburger@gibsondunn.com)    


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