2011 Year-End Update on Class Actions

January 30, 2012

The business world and class action litigators on both sides of the courtroom will remember 2011 for its blockbuster Supreme Court decisions and the sea changes they wrought.  But the waters were roiled in disparate venues across the country as well, so that companies facing class action litigation in 2012 will indeed be doing so in a new world.  In this new world, they will have powerful weapons available to them that should help level the playing field–among them:  (1) the possibility of obtaining dismissal of a class action because of the applicability of an arbitration clause that waives class action rights; (2) the elimination of the use of federal Rule 23(b)(2) to circumvent obstacles to certification of a damages class; (3) an all-important clarification that not only must common questions be present to support Rule 23 certifications, but common answers to those questions as well; and (4) much-needed confirmation of the requirement of injuries (both real and common) before a class action can proceed.  In the eight months since the Wal-Mart Stores, Inc. v. Dukes decision, alone, lower courts have cited the decision hundreds of times and relied on it to deny certification or decertify in many of those cases. 

These developments bring welcome changes–including the enforcement of important contract rights and a refined approach to Rule 23’s class certification prerequisites.  Yet we do not see these changes as tolling the death knell on class actions by any means.  Finding historical precedent for this prediction only requires looking back as far at 2004-05, when the dual developments of Proposition 64 in California (bringing the state in line with others in requiring that class action procedures and an "injury" requirement apply before a suit could proceed on behalf of others) and the passage of the Class Action Fairness Act on the federal level were heralded as a one-two punch on class action filings.  Instead, what we saw was a massive increase in federal filings based on diversity (approximately a 400% increase in filings in the Third, Ninth, and Eleventh Circuits) paralleled by a surge in state court filings in California (a 55% increase in Los Angeles alone).  Now as then, one thing is certain:  despite some significant setbacks for the plaintiffs’ bar, class action lawsuits aren’t going away.  To the contrary, there is every indication that class actions will present significant challenges for companies in the years to come.  Federal and state courts are just beginning to interpret this year’s landmark cases, and states are applying their own procedural and substantive rules with a variety of consequences in the class setting.  In short, 2012 should be a busy year in the world of class actions as plaintiffs’ lawyers continue to explore new theories and develop novel arguments.


Class actions took center stage during the October 2010 Supreme Court Term.  The Court handed down a number of major decisions addressing issues ranging from class certification to class action waivers to loss causation at the certification stage: 

  • In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the hallmark case of the Term, the Court reversed class certification in the largest employment class action ever filed in the United States.  Dukes reinvigorated Rule 23(a)’s "commonality" requirement and unanimously rejected the notion that claims for individualized monetary relief may be certified under Rule 23(b)(2).  Courts nationwide have taken heed of Dukes, citing it widely both as a general guide for evaluating class certifications and, most significantly, as the basis for denying certification or decertifying in more than a hundred cases in the past six months alone.
  • In another momentous decision, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Court examined state rules that purport to classify class action waivers as unconscionable in consumer arbitration agreements.  Concepcion held that the Federal Arbitration Act preempts such rules.  Concepcion undoubtedly strengthens the enforceability of parties’ agreements to arbitrate claims, including those raised in state courts, but many issues remain to be resolved in the lower courts–the plaintiffs’ bar has been making a push to limit the applicability of Concepcion.
  • The Court provided a small counterpoint to Dukes and Concepcion in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), a case involving the relitigation exception to the federal Anti-Injunction Act.  In Smith, the Court held that a federal district court had overstepped its authority by enjoining a state court from considering a class certification request similar to one a federal court had previously denied in another case.  The Court reiterated that absent putative class members are not "parties" to a litigation unless there is a certified class.  Time will tell whether Smith has opened the door to repetitive class certification fights over the same basic claims by allowing plaintiffs’ counsel simply to switch the named parties on the caption and avoid preclusion issues. 
  • The Supreme Court also issued a pair of securities decisions that will have an impact on class litigation.  In Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011), the Court ruled that class proponents need not "show loss causation as a condition of obtaining class certification."  And in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Court clarified that the speaker of a statement who can be subject to liability under the securities laws must be one who has "ultimate authority" over the statement.

2011 also saw the lower federal courts grappling with significant class action issues.  For instance, class settlements received increased scrutiny:  Courts examined the standards governing cy pres distributions of settlement funds; the propriety of mooting class actions pre-certification by settling with the named plaintiff; Article III standing requirements for objectors; and the fairness of fee awards in light of possible collusion between the parties.  In addition, Internet privacy class actions were a heavy focus of activity this past year–suits involving "Flash cookies" and other Internet "tracking" devices were particularly noteworthy.  Finally, the federal courts of appeals also continued to develop the appropriate standards for assessing "adequacy of representation" under Rule 23(a)(4).

There also were a number of important rulings and developing trends in the state courts in 2011–particularly in California, a traditional hotbed of class action lawsuits.  The California Supreme Court decided Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), which relaxed Proposition 64’s statutory heightened standing requirement of "lost money or property" applicable to private plaintiffs in an unfair competition lawsuit.  In addition, the California Supreme Court held in Pineda v. Williams-Sonoma Stores, Inc., 51 Cal. 4th 524 (2011), that recording zip codes as part of a credit card transaction violates the Song-Beverly Credit Card Act–creating a tremendous surge of consumer lawsuits based on this theory.  But it was not all bad news:  The D.C. Court of Appeals issued a noteworthy decision in 2011 that bolstered the pleading requirements for claims under D.C.’s consumer protection law; and peeking through the keyhole into January, 2012, the Ninth Circuit Court of Appeals importantly clarified in Mazza v. American Honda, No. 09-55376, 2012 WL 89176 (9th Cir. Jan 12, 2012), that courts at the certification stage may not presume reliance by individual class members who may not have been exposed to the challenged practice.  California also joined several other states in addressing the extraterritorial reach of their respective unfair competition laws. 

This year-end update highlights 2011’s key decisions in greater detail and considers the far-reaching implications of these cases in federal and state courts, including an examination of how the cases currently are being applied.  It also provides a report on trends in class action practice over the last year and identifies important class action issues likely to be litigated in 2012 and in the years ahead.  Part I of this update highlights the United States Supreme Court decisions addressing class actions during the October 2010 Term.  Part II identifies significant trends in class action practice in the federal courts.  Part III discusses trends in class action practice in the state courts.

I.  The Supreme Court Issues Long-Awaited Decisions on Several Core Class Action Issues

A.  Wal-Mart v. Dukes–Commonality and Rule 23(b)(2) Certification

On June 20, 2011, the U.S. Supreme Court in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), unanimously reversed a Ninth Circuit opinion that had upheld certification of the largest employment class action ever.  The district court had certified a nationwide class of as many as 1.5 million current and former female employees of Wal-Mart Stores, Inc. stores across the country.  The plaintiffs alleged, among other things, that Wal-Mart had violated Title VII by adopting policies that "foster[] or facilitate[] gender stereotyping and discrimination, . . . and that this discrimination is common to all women who work or have worked in Wal-Mart stores."

In 2010, a sharply divided Ninth Circuit, sitting en banc, found class treatment appropriate based not on a showing of any commonly applied policy or practice, but, rather, on a "common question" whether female employees at Wal-Mart had experienced discrimination.  The Ninth Circuit also found that plaintiffs’ claims for billions of dollars in backpay could be certified pursuant to Rule 23(b)(2). 

In this first case ever to reach the Supreme Court on Rule 23(f) interlocutory appeal, the Court unanimously reversed the Ninth Circuit.  Writing for the Court, Justice Scalia explained that "the crux of this case . . . is commonality–the rule requiring a plaintiff to show that ‘there are questions of law or fact common to the class.’"  Dukes, 131 S. Ct. at 2550-51 (quoting Rule 23(a)(2)).  "That common contention, moreover, must be of such a nature that it is capable of classwide resolution–which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke."  Id. at 2551.  Indeed, "[w]hat matters to class certification . . . is not the raising of common ‘questions’–even in droves–but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation."  Id. (citation omitted). 

The plaintiffs had asserted that a common question existed because all Wal-Mart managers were afforded some discretion in making pay and promotion decisions.  "On its face," the Court explained, "that is just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices."  Id. at 2554.  This, the Court found, undermined commonality.  "Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored."  Id. at 2552.

Without any claim that Wal-Mart had applied a uniform employment standard, the Court explained, Rule 23 required that Title VII plaintiffs show "significant proof" that Wal-Mart had operated under a general policy of discrimination.  Id. at 2553 (quoting Gen. Tel. Co. of the Sw. v. Falcon, 457 U.S. 147, 159 n.15 (1982)).  But the Court found that "significant proof" that Wal-Mart "operated under a general policy of discrimination . . . is entirely absent here."  Id.  To the contrary, "Wal-Mart’s announced policy forbids sex discrimination, and . . . the company imposes penalties for denials of equal employment opportunity."  Id.

The plaintiffs had attempted to show commonality through a combination of isolated anecdotes, statistical evidence, and the expert testimony of a sociologist.  The Court held that such evidence should be "disregarded" and thus that plaintiffs’ case was "worlds away from ‘significant proof’ that Wal-Mart operated under a general policy of discrimination."  Id. at 2554.  Explained the Court:  "In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction.  Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short."  Id. at 2555.  Quoting Chief Judge Kozinski’s dissent in the Ninth Circuit, the Court reiterated that the members of the class "have little in common but their sex and this lawsuit."  Id. at 2557.

The Court further reached the unanimous conclusion that the class could not properly be certified under Rule 23(b)(2), given plaintiffs’ claims for individualized backpay.  Claims for monetary relief may not be certified under (b)(2), "at least where (as here) the monetary relief is not incidental to the injunctive or declaratory relief."  Id.  The Court contrasted the mandatory class authorized under Rule 23(b)(2) with those authorized under subsection (b)(3).  Citing the structure and history of Rule 23, the Court explained that "[t]he key to the (b)(2) class is ‘the indivisible nature of the injunctive or declaratory remedy warranted–the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.’ . . . [Rule 23(b)(2)] does not authorize class certification when each individual class member would be entitled to a  different injunction or declaratory judgment against the defendant."  Id.

Similarly, Rule 23(b)(2) "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages."  Id. at 2557 (citation omitted).  In contrast, Rule 23(b)(3) may apply when class action treatment is not as clearly called for, as it provides the added procedural protections of notice to class members and the opportunity for class members to opt out.  The Court explained that allowing classes for monetary damages to proceed under Rule 23(b)(2), even where an injunction or declaratory remedy predominates, would nullify the procedural protections that the Rule provides under subsection (b)(3). 

Reserving the question whether monetary claims can ever be certified in a (b)(2) class, the Court unanimously concluded that the plaintiffs could not meet this standard in any event.  The plaintiffs’ backpay claims required individualized determinations that could not be considered "incidental" to a classwide injunction.  The Court also emphasized the "need for plaintiffs with individual monetary claims to decide for themselves whether to tie their fates to the class representatives’ or go it alone–a choice Rule 23(b)(2) does not ensure that they have."  Id. at 2559.

The Court also unanimously rejected the "Trial by Formula" plan approved by the Ninth Circuit, which would have allowed the district court to try a sample set of selected cases and then apply the percentage of claims found to be valid and the average backpay award to determine recovery for the entire class.  Id. at 2561.  Rejecting this "novel project," the Court explained that Title VII affords Wal-Mart the right to raise individual defenses regarding each class member’s eligibility for backpay.  Id

Dukes clarifies fundamental rules of class action law and establishes principles that will protect the rights of all participants in the civil justice system.  Dukes also demonstrates the importance of interlocutory challenges to class certification to curb Rule 23 abuses.  Indeed, the decision appears to confirm that class certification proceedings have increasingly become the "main event" where courts must resolve factual disputes, consider competing expert testimony, and make a preliminary judgment as to the merits of the plaintiffs’ claims before allowing them to proceed with their claims as a class under Rule 23.  And while Dukes was widely celebrated by the defense bar, companies would be wise not to assume that plaintiffs’ class-action lawyers will simply find a new practice area.  To put things in perspective, following the enactment of the Class Action Fairness Act of 2005–which was supposed to curb class action abuses–consumer class action filings increased by 577% in the district courts in the Ninth Circuit!

          1.  Applying Dukes in Federal Courts

As expected, Dukes has had an immediate and widespread impact.

In one of the first circuit court opinions to rely on Dukes, the Ninth Circuit had a swift opportunity to make a course correction in Ellis v. Costco Wholesale Corp., 657 F.3d 970 (9th Cir. 2011).  Like Dukes, this appeal challenged the certification of a nationwide class of female employees alleging gender discrimination.  The Ninth Circuit emphasized that "district courts are not only at liberty to, but must perform ‘a rigorous analysis [to ensure] that the prerequisites of Rule 23(a) have been satisfied,’" which "will entail some overlap with the merits of the plaintiff’s underlying claim."  Id. at 980 (quoting Dukes, 131 S. Ct. at 2551).  In this case, the plaintiffs’ experts identified only regional pockets of possible discrimination, which undermined the theory of a nationwide policy applicable to all plaintiffs.  Because "the district court failed to engage in a ‘rigorous analysis’" by declining to "resolve the critical factual disputes centering around the national versus regional nature of the alleged discrimination," the Ninth Circuit reversed and remanded for further proceedings.  Id. at 984; see also Sepulveda v. Wal-Mart Stores, Inc., No. 06-56090 (9th Cir. Dec. 30, 2011) (granting rehearing based on Dukes; affirming the denial of class certification in an employment class action seeking individualized monetary relief  brought under Rules 23(b)(2) and (b)(3)). 

Similarly, the Third Circuit relied on Dukes to affirm the denial of class certification in an environmental class action because plaintiffs failed to demonstrate sufficient commonality.  In Gates v. Rohm & Haas Co., 655 F.3d 255 (3d Cir. 2011), plaintiffs claimed that chemical companies dumped an alleged carcinogen at an industrial complex near their residences.  The district court denied certification of both Rule 23(b)(2) and (b)(3) classes, because "[i]t found the medical monitoring class lacked the cohesiveness needed to maintain a class under Rule 23(b)(2) and that common issues of law and fact did not predominate as required under Rule 23(b)(3).  Both failed for the same reason–the ‘common’ evidence proposed for trial did not adequately typify the specific individuals that composed the two classes."  Id. at 261.  The Third Circuit affirmed, explaining:  "The evidence here is not ‘common’ because it is not shared by all (possibly even most) individuals in the class.  Averages or community-wide [exposure] estimations would not be probative of any individual’s claim because any one class member may have an exposure level well above or below the average."  Id. at 266. 

A few days into the new year, the Ninth Circuit issued its long-awaited decision in Mazza v. American Honda Co., Inc., No. 09-55376, 2012 WL 89176 (9th Cir. Jan 12, 2012), holding that individualized choice-of-law issues precluded certification of a nationwide class action brought under California’s consumer-protection laws, and that individualized reliance issues precluded certification of a California-only class of consumers.  The court reiterated the rigorous Rule 23 analysis that the Supreme Court articulated in Dukes and made clear that those standards apply in the consumer-protection context.  The court’s choice of law analysis casts serious doubt on the propriety of certifying nationwide classes under California’s consumer protection laws, even in cases in which the defendant has extensive contacts with California.  Significantly, the court also questioned presumptions of reliance by a class as a whole.  Distinguishing In re Tobacco II Cases, 46 Cal. 4th 298 (2009)–in which the California Supreme Court found that plaintiffs were not required to demonstrate reliance for individual class members where there was a long-term, consistent advertising campaign–the court refused to presume class-wide reliance where "it [wa]s likely that many class members were never exposed to the allegedly misleading advertisements insofar as advertising of the challenged system was very limited."  Mazza, 2012 WL 89176 at *11.

Dukes exerts its influence no less at the trial level, where courts have applied it to a wide variety of cases outside the employment context.  See, e.g., In re Wells Fargo Residential Mortg. Lending Discrim. Litig., No. 08-MD-01930, 2011 U.S. Dist. LEXIS 99830 (N.D. Cal. Sept. 6, 2011) (applying Dukes to putative class of approximately one million minority mortgage borrowers); Walter v. Hughes Commc’ns, Inc., No. 09-2136, 2011 U.S. Dist. LEXIS 72290 (N.D. Cal. July 6, 2011) (applying Dukes to deny preliminary approval and conditional class certification of putative nationwide class composed of satellite broadband users); Aho v. Americredit Fin. Servs., Inc., No. 10cv1373, 2011 U.S. Dist. LEXIS 80426 (S.D. Cal. July 25, 2011) (applying Dukes analysis while certifying Rule 23(b)(2) class composed of persons from whom defendant alleged repossessed automobiles by means that violated California debt-collection statutes).

          2.  Dukes‘ Impact on State Courts

Because Federal Rule of Civil Procedure 23(a) often serves as a guide for analogous state class certification rules, Dukes should have a significant impact on state class certification decisions.  In California, for instance, certification requires proof "of a well-defined community of interest" embodying three factors analogous to Rule 23’s commonality, typicality, and adequacy requirements.  See In re Tobacco II Cases, 46 Cal. 4th at 318 (explaining that Rule 23(a) contains "requirements [that] are analogous to the requirements for class certification under Code of Civil Procedure section 382").  The Supreme Court of California has "urged trial courts . . . to incorporate procedures from outside sources in determining whether to allow the maintenance of a particular class suit" and specifically "directed them to [Rule 23]."  City of San Jose v. Superior Court, 12 Cal. 3d 447, 453 (1974).

Not surprisingly, several state courts already have applied Dukes in assessing state-law class certification issues.  A Michigan Circuit Court, for example, relied explicitly on Dukes when it reversed certification of a class of more than 2,000 property owners alleging that dioxin contamination from a Dow facility had damaged the value of their properties.  See Henry v. Dow Chem. Co., No. 03-47775 (Saginaw County, Mich. Cir. Ct. July 18, 2011).  The court had previously ruled that the plaintiffs satisfied Michigan’s statutory certification requirements, including Michigan’s equivalent of Rule 23(b)(3).  Slip op. at 2.  On remand of a different issue, however, the court reconsidered its commonality ruling and held that denial of class certification was "mandated by" DukesId. at 5.  "Even assuming that defendant negligently released dioxin and that it contaminated the soil in plaintiffs’ properties, whether and how the individual plaintiffs were injured involves highly individualized factual inquiries regarding issues such as the level and type of dioxin contamination in the specific properties, the different remediation needs and different stages of remediation for different properties, and the fact that some of the properties have been sold."  Id. at 5–6 (emphasis added).  Henry illustrates the broad impact of Dukes on class actions outside the employment context as well as the openness of some state courts to adopting the robust commonality standards elucidated by the Supreme Court.  See also Price v. Martin, — So.3d —-, 2011 WL 6034519, at *3-12 (La. Dec. 6, 2011) (adopting and applying Dukes‘ commonality standard).

California state courts also have relied favorably on Dukes.  In Marler v. Johansing, LLC, 199 Cal. App. 4th 1450 (2011), the Court of Appeal explicitly adopted Dukes‘ explanation that class certification requires a "rigorous analysis [that frequently] will entail some overlap with the merits of the plaintiff’s underlying claim."  Id. at 1458 (quoting Dukes, 131 S. Ct. at 2551).  Likewise, in American Honda Motor Co. v. Superior Court, 199 Cal. App. 4th 1367 (2011), the court seemed implicitly to rely on Dukes when it denied class certification in a suit alleging that Honda violated California’s Unfair Competition Law (UCL) by withholding information about alleged transmission defects about Acura vehicles.  The court concluded that the "UCL cause of action is not subject to common proof."  Id. at 1379 (emphasis added).  Although a connection to Dukes was not made explicit, the court went beyond the predominance question and noted the absolute lack of commonality itself. 

Other states have reacted differently to Dukes.  Perhaps in response to the impression that federal courts have adopted "a policy of limiting class actions," the Colorado Supreme Court eased the standard by which trial courts assess class certification under Colorado’s own version of Rule 23.  Jackson v. Unocal Corp., 262 P.3d 874, 883 (Colo. 2011).  Although a Colorado trial court must "conduct a rigorous analysis of the evidence" at the class certification stage, it need only "find to its satisfaction that each [Colorado Rule of Civil Procedure] 23 requirement is established."  Id. at 882.  The court explained, "[l]eaving class certification to the discretion of the trial court without requiring a specific burden of proof squares with the pragmatic and flexible nature of the class certification decision, recognizes the trial court’s ongoing obligation to assess the certification decision in light of new evidence, and preserves the trial court’s case management discretion."  Id. (emphasis added).  In a vigorous dissent, Justice Allison Eid lamented that no court has required anything less than proof by a preponderance of the evidence that a proposed class satisfies Rule 23, and that "the majority’s standardless approach makes class certification in Colorado essentially unreviewable by appellate courts and raises serious procedural due process concerns."  Id. at 894 (Eid, J., dissenting). 

Time will tell how other states respond to Dukes and whether state court interpretations of Dukes will have the effect of shifting more class action activity from federal to state courts. 

B.  AT&T Mobility LLC v. Concepcion–Supreme Court Upholds Class Action Waivers in Arbitration Agreements

In recent years, state courts have resisted defendants’ efforts to avoid class actions by compelling individual arbitration.  In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the Federal Arbitration Act ("FAA") preempts state rules that purport to invalidate class action waivers in consumer arbitration agreements as unconscionable.  In so ruling, the Court expressly preempted California’s "Discover Bank rule" (Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005)).  The Court reasoned that although the FAA preserves generally applicable contract defenses (through its "savings clause," which provides that arbitration agreements "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 "cannot be held to destroy itself."  Concepcion, 131 S. Ct. at 1748.  In other words, nothing in the FAA’s savings clause suggests an intent to preserve state laws or rules that are an obstacle to the FAA’s principal purpose of "[e]nsur[ing] that private arbitration agreements are enforced according to their terms."  Id.  

In reaching its decision, the Court also relied in part on its prior decision in Stolt-Niselen S.A. v. Animal Feeds International Corp., 130 S. Ct. 1758 (2010), where the Court held that arbitrators exceeded their powers by ordering class arbitration when the parties had not expressly agreed to it, and where the arbitration agreement was otherwise silent.  Likewise, the Court in Concepcion reiterated:  "The conclusion follows that class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA."  Concepcion, 131 S. Ct. at 1750-51.  The shift from individual to class arbitration sacrifices the principal advantages of arbitration–its informality–and makes the process slower, more costly, and more likely to generate a procedural morass.  Id. at 1751.  Moreover, class arbitration lacks the procedural protections captured in Rule 23 and necessary to protect the rights of absent class members.  Id.  To put it succinctly, "[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations."  Id.  The Court specifically rejected the Concepcions’ argument that class proceedings are necessary to prosecute small dollar claims that might otherwise offer an insufficient return to justify their pursuit.  "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons."  Id.

          1.  Plaintiffs’ Attempts to Limit Concepcion

In the wake of Concepcion, defendants filed a host of motions to compel arbitration with considerable success in federal district courts and state trial courts across the country, including in cases where arbitration previously had been denied.  Yet, it remains to be seen exactly how courts will interpret common law principles and rules that invalidate arbitration agreements and, more specifically, whether they will find that such laws and rules run afoul of the FAA because they discriminate against arbitration.  The plaintiffs’ bar has been pushing to shift the focus away from Concepcion and turn attention to contract formation issues (by arguing that there can be no agreement to arbitrate where there is no agreement in the first place), and it has been making global unconscionability attacks.  These efforts are aimed at advocating for the savings clause provision of the FAA to permit states to invalidate arbitration agreements.  The plaintiffs’ bar also has made arguments–accepted by at least some courts–that Concepcion is inapplicable to certain claims or causes of action.  Public Justice has taken the lead in advocating for ways to limit Concepcion, with a section of their website devoted to this issue.  See http://www.publicjustice.net.  Efforts to influence public opinion against the use of arbitration clauses have taken strong hold as well. 

Plaintiffs’ attempts to escape Concepcion’s broad holding have been met with at least some success in the courts.  Some courts have found that arbitration provisions are unenforceable because the contract that contains the arbitration provision is unenforceable for failure to follow laws concerning the formation of contracts generally.  For example, in NAACP of Camden County East v. Foulke Management Corp., 421 N.J. Super. 404 (2011), the court invalidated an arbitration provision on the basis that the "disparate arbitration provisions in this case were too confusing, too vague, and too inconsistent to be enforced."  Id.  The court first discussed Concepcion, found that "state courts remain free to decline to enforce an arbitration provision by invoking traditional legal doctrines governing the formation of a contract and its interpretation," and then concluded that the "fundamental requirements of clarity and consistency in form contracts" dictate that the arbitration provision is "unenforceable for lack of mutual assent."  Id.    

Even after Concepcion, courts continue to apply–and sometimes invalidate arbitration provisions under–what they consider to be generally applicable laws specifically premised on the doctrine of unconscionability.  In Sanchez v. Valencia Holding Co., 2011 WL 5865694 (Cal. Ct. App. Nov. 23, 2011), the court noted that "Concepcion is inapplicable where . . . we are not addressing the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the arbitration provision and the purposes of the Federal Arbitration Act."  The court continued, "[t]he unconscionability provisions on which we rely govern all contracts, are not unique to arbitration agreements, and do not disfavor arbitration."  Based on what the court found to be generic principles of the doctrine of unconscionability, the court found an arbitration provision unenforceable on the basis that its terms were both procedurally and substantively unconscionable.  Id.; see also Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803, 816 (N.M. 2011) (invalidating an arbitration provision in an auto dealership sales contract, because the named arbitration service was no longer available and, despite Concepcion, the arbitration arrangement was "unfairly one-sided and substantively unconscionable"). 

In addition, in the wake of Concepcion, a group of Democratic senators introduced bills intended to supersede the Court’s decision–the "Arbitration Fairness Act," which would amend the FAA to invalidate arbitration clauses in consumer or employment contracts, and the "Consumer Mobile Fairness Act," which would apply solely to wireless devices.  Neither bill has gained much traction, but proponents are hoping to lay the groundwork for passage down the road.  Accordingly, the battle continues on multiple fronts.

          2.  Broader Application of Concepcion

Courts also are interpreting the contexts in which Concepcion applies–and are coming to differing conclusions in some of these contexts.  For example, courts have not been able to agree whether claims under the federal Magnuson-Moss Warranty Act ("MMWA") are arbitrable.  In Kolev v. Euromotors West/The Auto Gallery, 658 F.3d 1024 (9th Cir. 2011), the Ninth Circuit created a circuit split when it held that the MMWA precludes enforcement of a pre-dispute agreement that requires mandatory binding arbitration of consumer warranty claims.  In contrast to the Ninth Circuit, the Fifth and Eleventh Circuits, pre-Concepcion, held that the MMWA does not overcome the FAA’s presumption in favor of arbitration.  See Walton v. Rose Mobile Homes LLC, 298 F.3d 470 (5th Cir. 2002); Davis v. S. Energy Homes, Inc., 305 F.3d 1268 (11th Cir. 2002).  The Ninth Circuit based its decision on the Federal Trade Commission’s interpretation of the MMWA; the court did not present any substantial analysis of Concepcion.  It remains to be seen how courts will interpret Kolev in light of the Supreme Court’s recent decision in CompuCredit Corp. v. Greenwood, 565 U.S. —- (Jan. 10, 2012), in which the Court upheld arbitration agreements relating to claims under the Credit Repair Organizations Act ("CROA") because the CROA was silent on arbitrability.

As with the MMWA context, courts have come to inconsistent conclusions when interpreting whether claims under California’s Private Attorney General Act ("PAGA") may be arbitrated.  In Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011), the court held that Concepcion does not apply to enforce waivers of representative actions for California employees under the PAGA.  The court reasoned that Concepcion "does not address a statute such as the PAGA, which is a mechanism by which the state itself can enforce state labor laws, for the employee suing under the PAGA ‘does so as the proxy or agent of the state’s labor law enforcement agencies.’"  Id. at 503.  The court therefore found unenforceable an employee’s waiver of the right to file a representative action under the PAGA.  See also Plows v. Rockwell Collins, Inc., No. SACV 10-01936 DOC (MANx), 2011 WL 3501872, at *5 (C.D. Cal. Aug. 9, 2011) ("[C]lass waivers contained in arbitration agreements may not be used to divest plaintiffs of their right to bring representative actions under PAGA.").  In contrast, in Grabowski v. Robins, — F. Supp. 2d —-, 2011 WL 4353998 (S.D. Cal. Sept. 19, 2011), the court expressly disagreed with Brown and instead relied on the reasoning in Quevedo v. Macy’s Inc., 798 F. Supp. 2d 1122 (C.D. Cal. 2011), to find that PAGA claims were arbitrable and that an agreement barring an employee from bringing a representative PAGA claim is enforceable.  The court explained, based on Concepcion, that a state cannot prohibit outright the arbitration of a particular type of claim.  See id. at 1142. 

Although Concepcion is a landmark decision in favor of enforcing parties’ agreements to arbitrate claims, many issues remain to be resolved–even in the consumer context.  For instance, in the absence of a direct-purchase requirement, plaintiffs in California have attempted to avoid the impact of Concepcion by suing retailers, with whom consumers generally have no arbitration agreements.  Other jurisdictions may see similar types of claims in the wake of Concepcion.

Outside the consumer context–e.g., claims against employers–Concepcion‘s application is less clear.  On January 3, 2012, the National Labor Relations Board ruled that an employer engages in an unfair labor practice when it requires employees to sign an agreement precluding them from filing employment-related class action claims (that decision is being appealed).  See D.R. Horton, Inc., 357 N.L.R.B. No. 184.  On October 31, 2011, the United States Supreme Court granted certiorari in Sonic-Calabasas v. Moreno, 132 S. Ct. 496 (2011), and vacated and remanded the California Supreme Court’s decision in that case.  See Sonic-Calabasas v. Moreno, 51 Cal. 4th 659 (2011).  There, the California Supreme Court had held, pre-Concepcion, that a provision in an employment contract waiving the right to a particular type of hearing (a Berman hearing) in favor of arbitration was unconscionable and unenforceable.  On remand, this will be the first California Supreme Court case to be heard regarding arbitration since Concepcion struck down the California Supreme Court’s Discover Bank rule, which had held that an arbitration agreement that precludes class actions in standard consumer contracts was unconscionable and unenforceable. 

C.  Smith v. Bayer Corp.–The Court Puts a Damper on Relitigation Injunctions

In a Supreme Court term that generally drew tighter limits on class actions, Smith v. Bayer Corp., 131 S. Ct. 2368 (2011), provided a small counterpoint.  On June 16, 2011, the Supreme Court held in Bayer that a federal district court overstepped its authority under the relitigation exception to the Anti-Injunction Act when it enjoined a West Virginia court from considering a request for class certification similar to one a federal court had previously denied in another case.  Id. at 2382.

In a prior lawsuit, plaintiff George McCollins had brought claims against Bayer in West Virginia state court arising from Bayer’s sale of an allegedly hazardous prescription drug called Baycol.  Bayer removed the case to the federal district court, which ultimately denied McCollins’s request to certify a proposed class of plaintiffs under federal Rule 23.  In a subsequent case, plaintiffs Keith Smith and Shirley Sperlazza brought suit against Bayer, also in West Virginia state court, alleging claims nearly identical to those in the McCollins suit.  When Smith and Sperlazza sought class certification, Bayer requested an injunction from the same federal district court that had denied certification in the McCollins suit, arguing that the injunction was necessary to protect the earlier certification ruling.  The federal court agreed and granted the injunction.  The Eighth Circuit affirmed on appeal.  In re Baycol Prods. Litig., 593 F.3d 716 (8th Cir. 2010).

The Supreme Court unanimously reversed and held that "any doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed."  Bayer, 131 S. Ct. at 2375.  Because the relitigation exception is narrow and should not be enlarged by loose statutory construction, "an injunction can only issue if preclusion is clear beyond peradventure."  Id. at 2376.  An injunction may issue under the relitigation exception only if (1) "the issue the federal court decided [is] the same as the one presented in the state tribunal," and (2) the state court plaintiff was "a party to the federal suit or [fell] within one of a few discrete exceptions to the general rule against binding nonparties."  Id.  The Court found that neither of these requirements had been satisfied. 

First, the cases did not raise the "same" issue because, although Smith’s substantive claims broadly overlapped with McCollins’s, the federal court adjudicated McCollins’s certification motion under federal Rule 23, while the state court was poised to consider Smith’s proposed class under West Virginia Rule 23.  Id. at 2377-78.  Absent "clear evidence" that a state court has adopted an approach tracking federal Rule 23, the Court explained, any uncertainty as to whether certification issues are identical should preclude an injunction.  Id. at 2378. 

Second, the Court ruled Smith was not a formal "party" to the prior federal suit.  Although "an unnamed member of a certified class may be considered a ‘party’ for the particular purpose of appealing an adverse judgment," it would be "surely erroneous" to argue that an unnamed class member "is a party to the class-action litigation before the class is certified."  Id. at 2380 (internal quotation marks, citations, and alterations omitted).  "Still less does that argument make sense once certification is denied.  The definition of the term ‘party’ can on no account be stretched so far as to cover a person like Smith, whom the plaintiff in a lawsuit was denied leave to represent."  Id.  Likewise, Smith could not be bound as a "nonparty" class member because "the McCollins suit . . . was not a class action."  Id. at 2380.  Indeed, because the very ruling that Bayer argued ought to be given preclusive effect denied class certification, the Court explained, "we cannot say that a properly conducted class action existed at any time in the litigation."  Id. (emphasis added).  In sum, "[n]either a proposed class action nor a rejected class action may bind nonparties."  Id. 

Bayer does elucidate some helpful principles for defendants, such as the notion that courts may not afford relief to (or, in some cases, preclude a defendant’s communication with) plaintiffs who are not before the court–including absent class members prior to class certification or after decertification.  In addition, the opinion in Bayer underscores Rule 23’s "representativeness" requirement at the certification stage:  courts may bind absent class members only if the named plaintiffs’ claims truly are "the same" as those of the class.  Id. at 2376.  The representativeness requirement is grounded in notions of due process.  See Taylor v. Sturgell, 553 U.S. 880, 891, 894, 898 (2008) ("Due process limitations" require "[r]epresentative suits" to rest on actual and direct representation of one party by another, not merely representation that is "close enough").)  Bayer also clarifies that when a class is decertified, it means the class was never properly certified–not merely that the class no longer enjoys such status.

On the whole, however, Bayer will likely make it more difficult for defendants to rely on the preclusive effect of federal denials of class certification in ancillary or subsequent state court proceedings raising substantially the same claims.  Indeed, Bayer argued that the Court’s approach would permit class counsel to try repeatedly to certify the same class "by the simple expedient of changing the named plaintiff in the caption of the complaint."  Bayer, 131 S. Ct. at 2381.  The Court attempted to reassure Bayer that (1) "principles of stare decisis and comity among courts generally suffice to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs," (2) defendants may remove any sizable class action involving minimal diversity to federal court under the Class Action Fairness Act, and (3) Congress may enact legislation to "modify established principles of preclusion" and/or the Federal Rules of Civil Procedure may be changed to address this issue.  Id. at 2381-82 & n.12.  Nonetheless, experience suggests these safeguards offer little solace to the litigation-weary defendant. 

D.  Halliburton and Janus–The Court’s Treatment of Securities Class Actions

Finally, in 2011 the Supreme Court also issued an important pair of decisions involving class treatment of private securities actions.  In Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Court ruled that plaintiffs pursuing claims under Rule 10b-5 need not "show loss causation as a condition of obtaining class certification."  Id. at 2186.  Yet, following up in Dukes, the Court also explained that, consistent with a plaintiff’s obligation at class certification actually to establish that the requirements of federal Rule 23 are satisfied, a 10b-5 plaintiff seeking to use the "fraud on the market" presumption to obtain class certification "must prove that their shares were traded on an efficient market, an issue they will surely have to prove again at trial in order to make out their case on the merits."  Dukes, 131 S. Ct. at 2552 n.6. 

Separately, in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), the Court addressed what type of speaker of an alleged misstatement can be subject to liability in a private securities action.  The court ruled that "[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."  131 S. Ct. at 2302.  By essentially limiting the universe to issuers and certain others specified by Congress, the Court has made clear that the vast array of service providers to public companies–including bankers, lawyers, accountants, investment and financial advisers, and others–will not generally be subject to suit in private Rule 10b-5 class action suits.

II.  Class Action Trends in the Federal Courts

A.  Class Settlements Subject to More Rigorous Scrutiny

In 2011, the lower federal courts weighed in on a number of important issues relating to class settlement procedures and settlement fund disbursement methods:  cy pres distribution of settlement funds; the strategy of mooting a class action pre-certification by settling with the named plaintiff; objectors to a class settlement attempting to circumvent Article III’s standing requirement; and possible collusion among the parties in structuring a settlement, to the detriment of the class.

          1.  Courts Frown on Cy Pres Distributions

The Fifth and Ninth Circuits took a critical look at cy pres distribution of class settlement funds in 2011.  Such distributions are frequently used "in the settlement of class actions where the proof of individual claims would be burdensome or distribution of damages costly."  Nachshin v. AOL, LLC, No. 10-55129, 2011 WL 5839610, at *3 (9th Cir. Nov. 21, 2011).  The cy pres doctrine permits a court to put unclaimed class settlement funds "to [their] next best compensation use, e.g., for the aggregate, indirect, prospective benefit of the class."  Id.  The doctrine has come under attack, however, because cy pres distributions conspicuously untethered to the interest of the absent class members and "the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety."  Id. at *4. 

In Nachshin, a class of 66 million AOL subscribers brought claims against AOL for inserting footers containing promotional messages into subscribers’ e-mails without permission.  Although the millions of plaintiffs lived throughout the United States, the parties designated three local charities in Los Angeles and the Federal Judicial Center for cy pres donations in lieu of a cost-prohibitive settlement disbursement.  The Ninth Circuit reversed the district court’s approval of this settlement because the donations failed to (1) "address the objectives of the underlying statutes" upon which plaintiffs based their claims, (2) "target the plaintiff class" by accounting for the class members’ geographic diversity, and (3) "provide reasonable certainty that any member of the class would be benefited."  Id. at *4.  The court remanded for reconsideration and directed the district court to consider escheating the funds to the United States Treasury if a suitable cy pres beneficiary could not be located.  Id. at *5. 

Addressing another cy pres donation, the Fifth Circuit, in All Plaintiffs v. All Defendants, 645 F.3d 329, 335, 337 (5th Cir. 2011), reversed the award of unclaimed settlement funds in an antitrust class action, because the district court had failed to follow state law governing fund distribution.  After settlement of the case, many checks returned as undeliverable or never cashed were aggregated in a cy pres donation to the Center for Energy and Environmental Resources at the University of Texas.  The Fifth Circuit determined, however, that the settlement administrator was subject to the Texas Unclaimed Property Act, which required the unclaimed funds to escheat to the State of Texas.

Naschin and All Plaintiffs demonstrate that courts and parties must carefully account for the interests of silent class members and abide by applicable state law in crafting cy pres distributions of settlement funds.

          2.  Mooting Class Actions Pre-Certification by Settling with the Named Plaintiff

A class settlement issue that continued to divide federal courts this past year is the practice of settling with named plaintiffs as a means of mooting a class action before a class can be certified. 

In 2011, the Seventh Circuit renewed a split with the Third, Fifth, Ninth, and Tenth Circuits, when it held that a defendant moots a class action by making a complete offer of judgment to a named plaintiff before a class certification motion.  In Damasco v. Clearwire Corp., 662 F.3d 891 (7th Cir. 2011), the named plaintiff filed a putative class action in Illinois state court alleging that Clearwire violated the Telephone Consumer Protection Act by sending unsolicited text messages to cellphone users.  Before the plaintiff moved for class certification, Clearwire offered him his full request for relief, removed to federal court, and moved to dismiss, arguing that the offer mooted the plaintiff’s claim.  The district court agreed, and the Seventh Circuit affirmed.  The Seventh Circuit acknowledged that four other circuits have fashioned a rule allowing a plaintiff to move to certify a class and avoid mootness even after an offer for complete relief, but the court explained that "the exception created by these circuits is unnecessary.  To allow a case not certified as a class action and with no motion for class certification even pending, to continue in federal court when the sole plaintiff no longer maintains a personal stake defies the limits on federal jurisdiction expressed in Article III."  Id. at 896.  To placate the concern that defendants might try to "buy off" plaintiffs prior to class certification, the court suggested that class plaintiffs "move to certify the class at the same time that they file their complaint.  The pendency of that motion protects a putative class from attempts to buy off the named plaintiffs."  Id.  The key takeaway from Damasco is that plaintiffs in the Seventh Circuit are still decidedly susceptible to pre-certification offers of settlement unless they file a motion for class certification concurrently with their complaint.

          3.  Article III Standing of Objectors

In Glasser v. Volkswagen of Am., Inc., 645 F.3d 1084 (9th Cir. 2011), the Ninth Circuit closed the door on an attempted end-run around Article III standing requirements for parties objecting to class settlements.  Glasser involved a settlement of class claims against Volkswagen relating to replacement vehicle keys.  The Ninth Circuit affirmed the district court’s ruling that an objector to the attorney’s fees award lacked standing because the objector had no interest in that independent award–that is, the fee was not paid from a common settlement fund.  Id. at 1087-88.  Although objectors may still have standing outside a common fund settlement scenario where objectors allege class counsel has leveraged "an excessive attorney fee award as part of a deal to accept an inadequate settlement for the class," id. at 1088, the objector in Glasser made no such allegation.  Instead, the objector argued that an excessive fee award would cause Volkswagen to pass settlement costs along to shareholders and customers, and that preventing such an award would somehow benefit him as a customer in avoiding these costs.  The Ninth Circuit rejected this novel theory, explaining that the objector failed to establish an injury in fact that is "concrete and particularized and . . . actual or imminent, not conjectural or hypothetical."  Id. at 1089 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)).  For now, objectors must continue to identify a concrete interest in the class settlement before raising formal objections in court.

          4.  Indicia of Collusion Among Settling Parties

In another recent class settlement decision, the Ninth Circuit reversed the approval of a proposed class settlement because the disproportionately high attorney fee award raised "at least an inference of unfairness" and the record failed to "adequately dispel the possibility that class counsel bargained away a benefit to the class in exchange for their own interests."  In re Bluetooth Headset Prod. Liab. Litig., 654 F.3d 935, 938 (9th Cir. 2011).  Bluetooth involved plaintiffs in twenty-six putative classes against manufacturers of wireless headsets who alleged that the manufacturers knowingly failed to disclose potential risk of noise-induced hearing loss, in violation of state consumer fraud protection and unfair business practice laws.  The parties agreed to settle early in the case; the district court approved an agreement providing plaintiffs with $100,000 in cy pres awards and $0 for economic injury, while setting aside up to $800,000 for class counsel and $12,000 for the class representatives.  Id. at 939–40.  The Ninth Circuit reversed, agreeing with objectors that the attorney fee award, amounting to nearly 84% of the total settlement, was disproportionate to the class members’ award and far exceeded the 25% benchmark for fair and reasonable attorney fees.  Id. at 945.  Bluetooth indicates that district courts must do more to "assure [themselves] that the amount awarded [to plaintiffs’ counsel is] not unreasonably excessive in light of the results achieved," and that plaintiffs’ counsel may need to accept fee awards more proportionate to the settlements they negotiate for silent class members.  Id. at 943, 945. 

B.  Wave of Internet Privacy Class Actions

Undaunted by the advances in class action defense principles in courts at all levels, the plaintiffs’ bar was increasingly active in 2011 and the first month of 2012 in bringing putative class actions involving alleged privacy invasions directed to new and developing technologies.  We expect this area to continue to be one of focus for the plaintiffs’ bar as more and more people spend a significant amount of their time interacting with new technologies–whether on the Internet or on mobile devices such as smartphones and tablets–that may involve the collection of a user’s data.  In several suits in 2011, plaintiffs challenged the use of "Flash cookies" and other Internet "tracking" technologies employed by online advertising networks, analytics companies, and website publishers to track the computers of Internet users for the purpose of serving relevant advertisements to those users or gathering anonymous data about their Internet usage.  Plaintiffs also filed suits related to their use of mobile devices and the mobile application ("app") marketplace, targeting Apple, Google, Microsoft, and several other companies that provide advertising or analytics services on mobile platforms.  Finally, 2011 also saw a number of putative class actions filed in the wake of alleged data breaches.  Lawsuits in each of these categories frequently were spurred by the publication of academic articles, blog postings, or sensational media reports.

Plaintiffs’ theories of harm in these cases vary, but typically they involve some assertion that the unexpected collection and use of plaintiffs’ "personal information" harmed the plaintiffs in some way–either by diminishing the value of that information or by depriving plaintiffs of the opportunity to use and control that information as they see fit.  Plaintiffs also frequently assert that their "personal information" is being misappropriated or misused by the entities that collect it, although plaintiffs frequently fail to cite any examples of actual misappropriation or misuse.  In cases involving data breaches, plaintiffs typically assert the increased risk of identity theft and the costs flowing from it (for example, the purchase of credit monitoring) as the alleged harm. 

          1.  Flash Cookies Suits and Article III Standing

The year began with the settlement of several putative class actions filed in mid-2010 alleging that online advertising networks and several website publishers had used Flash cookies to track Internet users without their knowledge or consent for the purpose of serving behaviorally-targeted advertisements.  See In Re Clearspring Flash Cookie Litig., Case No. 10-CV-5948-GW (C.D. Cal.); In Re Quantcast Advertising Cookie Litig., Case No. 10-CV-5716-GW (C.D. Cal.); Davis, et al. v. VideoEgg, Inc., Case No. 10-CV-7112-GW (C.D. Cal.).  Defendants in these cases denied any wrongdoing, but they did not mount a challenge to the pleadings, and the parties settled after private mediation (the defendants collectively agreed to pay $3.2 million). 

Despite these settlements,  online advertising network Specific Media, Inc.–which also was named in a consolidated class action complaint alleging the improper use of Flash cookies–moved to dismiss the complaint for lack of Article III standing on the ground that plaintiffs had not suffered any injury in fact.  On April 28, 2011, in the first decision of its kind, the court agreed and dismissed the complaint.  See In re Specific Media Flash Cookies Litig., Case No. 10-CV-1256-GW, 2011 WL 1661532 (C.D. Cal. Apr. 28, 2011).  In this groundbreaking decision, the court stated that while it "would recognize the viability in the abstract" of the amorphous theories of harm advanced by plaintiffs–including "such concepts as ‘opportunity costs,’ ‘value-for-value exchanges,’ ‘consumer choice,’ and other concepts,"–the plaintiffs had failed to "give some particularized example of their application in this case."  Id. at *4.  The court also observed that "the Complaint does not identify a single individual who was foreclosed from entering into a ‘value-for-value exchange’ as the result of [defendant’s] alleged conduct," and stated that "even assuming an opportunity to engage in a ‘value-for-value exchange,’ Plaintiffs do not explain how they were ‘deprived’ of the economic value of their personal information simply because their unspecified personal information was purportedly collected by a third party."  Id. at *5.

After the holding in Specific Media, federal courts dismissed several other putative class actions challenging the use of Flash cookies and other Internet tracking technologies.  See, e.g., Del Vecchio v. Amazon.com, Inc., 2011 WL 6325910 at *7 (W.D. Wash. Dec. 1, 2011) (dismissing a Flash cookies case against Amazon.com, holding that plaintiffs had "simply not pled adequate facts to establish any plausible harm"); Bose v. Interclick, Inc., 2011 U.S. Dist. LEXIS 93663 (S.D.N.Y. Aug. 17, 2011) (dismissing all claims with prejudice against several companies–including Microsoft, Mazda, McDonald’s, and CBS–that had contracted with Interclick to serve targeted advertisements).

Flash cookies lawsuits filed in state court also lost momentum.  For example, defendants obtained dismissal of  putative privacy class action complaint filed in Arkansas against a host of traditional corporate internet sites–initially on the grounds that the plaintiffs had failed to plead injury as required to state a claim under the Arkansas statutes at issue, and later (after the filing of an amended complaint) on the basis that plaintiffs’ claims were subject to mandatory arbitration pursuant to the terms of service governing the relevant website.

Despite these setbacks, the plaintiffs’ bar continues to mount legal challenges to the use of any online "tracking" technologies other than standard browser cookies.  See, e.g., Kim v. Space Pencil, Inc., et al., Case No. 11-CV-3796-LB (N.D. Cal.) (challenging analytics company’s alleged use of Flash cookies, Etags, and HTML5 storage to identify computers of users who have blocked or deleted browser cookies); Garvey v. KISSmetrics, et al., Case No. 11-CV-3764-LB (N.D. Cal.) (same); Couch v. Space Pencil, Inc., et al., Case No. 4:11-CV-5606-LB (N.D. Cal.) (same).  This trend should continue in 2012 and beyond, particularly as technology continues to evolve and plaintiffs become more creative in their theories of harm.

          2.  Privacy Challenges to Mobile Devices and Article III Standing

In 2011, the plaintiffs’ bar also mounted privacy challenges to the alleged "tracking" of smartphone users by mobile device manufacturers (or the creators of those devices’ operating systems) and third-party advertising and analytics companies that support the "apps" that can be downloaded onto such devices.  As with the Flash cookies litigation, however, plaintiffs encountered significant challenges in this area. 

On September 20, 2011, the United States District Court for the Northern District of California relied in large part on the decision in Specific Media and issued an order dismissing a putative nationwide class action against Apple Inc. and eight mobile advertising and analytics companies .  See In re iPhone Application Litig., Case No. 11-MD-02250-LHK, 2011 U.S. Dist. LEXIS 106865 (N.D. Cal. Sept. 20, 2011).  The case involved several consolidated class actions filed throughout the country on behalf of all users of apps on Apple iPhones, iPads, and other iOS devices, against Apple and eight different "Mobile Industry Defendants" that provide advertising and analytics services to app developers.  Plaintiffs alleged that the Mobile Industry Defendants violated federal and state laws by collecting and disclosing users’ personal information located on mobile Apple devices without users’ knowledge or permission.  The court dismissed the complaint for lack of Article III standing because plaintiffs had "not identified a concrete harm from the alleged collection and tracking of their personal information sufficient to create injury in fact."  Id. at *15-17.  While plaintiffs had "stated general allegations about the Mobile Industry Defendants, the market for apps, and similar abstract concepts (e.g., lost opportunity costs, value-for-value exchanges)" to those advanced by plaintiffs in Specific Media, the court held that plaintiffs had "not identified an actual injury to themselves sufficient for Article III standing."  Id. at *18.  (Apple and the Mobile Industry Defendants have filed similar motions to dismiss the plaintiffs’ amended complaint, which are scheduled to be heard in May 2012.)

Following the holdings in In re iPhone Application Litig. and Specific Media, a federal court also dismissed a putative privacy class action against the business networking website, LinkedIn, for lack of Article III standing.  See Low v. LinkedIn Corp., 2011 WL 5509848, at *5 (N.D. Cal. Nov. 11, 2011).  Similar complaints are also pending against Google and Microsoft, and motions to dismiss those complaints are likely to be decided in the first part of 2012.  See In re Google Android Consumer Privacy Litig., 11-MD-02264-JSW (N.D. Cal.); Cousineau v. Microsoft Corp., Case No. 11-CV-01438-JCC (W.D. Wash.). 

In response to the various decisions in 2011 dismissing privacy complaints for failure to allege a cognizable injury in fact, the plaintiffs’ bar has begun to shift, with some success, to pleading statutory claims that may not have an express damages component–such as the federal Wiretap Act (18 U.S.C. § 2510) or California’s Right of Publicity statute (Cal. Civ. Code § 3344).  Plaintiffs’ theory in such cases is generally that they have satisfied Article III’s injury-in-fact requirement by pleading "statutes creating legal rights, the [mere] invasion of which creates standing."  Warth v. Seldin, 422 U.S. 490, 500 (1975).  This premise, however, is being tested this Term in First American Corp. v. Edwards, 131 S. Ct. 3022 (2011), in which the U.S. Supreme Court will decide whether a statutory violation alone is sufficient to create Article III standing where the plaintiff fails to allege any actual harm.  It therefore remains to be seen how successful plaintiffs will be with such tactics in the absence of any concrete injury to a named plaintiff (and often in the absence of the ability actually to plead a statutory claim that passes muster under federal Rule 12(b)(6)). 

          3.  Data Breach Suits

Finally, 2011 also saw the filing (or continued prosecution) of several lawsuits filed in the wake of alleged data breaches.  In this arena, too, the injury-in-fact requirement was at the forefront.  In Claridge v. RockYou, Inc., 785 F. Supp. 2d 855 (N.D. Cal. 2011), for example, the court declined to dismiss the complaint for lack of Article III standing where plaintiffs alleged that a hacker had exploited a security vulnerability and accessed the database of RockYou (a publisher and developer of online services and applications for use with social networking sites) and copied the e-mail and social-networking login credentials of approximately 32 million registered RockYou users.  Although plaintiffs could point to no specific harm that had occurred, the court declined to dismiss for want of standing given the "paucity of controlling authority regarding the legal sufficiency of plaintiff’s damages theory," as well as the fact that the "context in which plaintiff’s theory [arose]–i.e., the unauthorized disclosure of personal information via the Internet–is itself relatively new, and therefore more likely to raise issues of law not yet settled in the courts."  Id. at 861.

In sharp contrast, the plaintiffs in Hines v. OpenFeint, Inc., Case No. 11-CV-03084-EMC (N.D. Cal.) voluntarily dismissed their complaint after defendant OpenFeint, the largest mobile social gaming network for Apple and Android devices in the world, moved to dismiss for lack of Article III standing.  In its motion to dismiss, OpenFeint noted that plaintiffs had not even identified an actual data breach, but at most had identified an entirely hypothetical security vulnerability.  Thus, at the very least, it appears that even the plaintiffs’ bar recognizes that an actual data breach is a prerequisite to such lawsuits (even if the issue of injury in fact after a breach has occurred remains somewhat unsettled).

The year 2012 should see more important decisions in the emerging data breach arena, as several such cases, which are now routinely filed within days of publicized data breaches, wind their way through the courts.

C.  Raising the Bar on Adequacy of Representation  

In 2011, the courts of appeals continued to develop the appropriate standards for assessing adequacy of representation under federal Rule 23(a)(4).  In In re Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242 (2d Cir. 2011), for example, the Second Circuit affirmed the denial of class certification where subtle conflicts arose among various groups within the proposed class.  The plaintiffs, freelance authors, alleged that defendant publishers reproduced plaintiffs’ articles in their own online databases without the plaintiffs’ permission, thus infringing on the plaintiffs’ copyrights.  Id. at 245.  The claims were divided into three categories.  Id. at 251.  Most class members fell into the third category of authors who had not registered their copyrights and, therefore, had weaker claims.  Id.  Although the class representatives belonged to all three categories, the court determined that the interests of class members belonging only to the third category might be jeopardized because no representative exclusively represented their interests.  The only way to ensure that the interests of every class member were adequately represented, according to the court, was to create subclasses with independent representatives.  Id. at 257.  This decision suggests that even in classes where plaintiffs do not share an overt conflict, courts should carefully consider the need for subclassing with independent counsel representing the interests of each subset of plaintiffs.  

Similarly, in Randall v. Rolls-Royce Corp., 637 F.3d 818 (7th Cir. 2011), the Seventh Circuit reversed the grant of class certification in a sex discrimination suit, because the female class representatives earned pay exceeding the base pay of most male employees and were therefore subject to a defense that would not defeat the claims of most unnamed class members.  This holding should impact future decisions on class certification because it stresses that the issue of class certification cannot always be separated from the merits of the case.  Based on the court’s statement that "[i]ntervention shouldn’t be allowed just to give class action lawyers multiple bites at the certification apple, when they have chosen, as should have been obvious from the start, patently inappropriate candidates to be the class representatives," this decision should also influence future rulings on intervention where class action lawyers have chosen "patently inappropriate candidates to be the class representatives."  Id. at 827.  

Finally, in In re Aqua Dots Prod. Liab. Litig., 654 F.3d 748 (7th Cir. 2011), the Seventh Circuit affirmed denial of certification where the class representative could not "adequately protect the interests of the class" because "[t]he principal effect of class certification . . . would be to induce the defendants to pay the class’s lawyers enough to make them go away" and relief for consumers was unlikely.  Id. at 752–53.  The plaintiffs, purchasers of a children’s toy, brought products liability actions against the manufacturer, distributor, and retailers of that toy, challenging the adequacy of a recall program after children who swallowed large quantities of the toy allegedly became sick.  Id. at 749.  Yet the plaintiffs "[only] want[ed] relief that duplicate[d] a remedy that most buyers already [had] received, and that remain[ed] available to all members of the putative class."  Id. at 752 (alterations and emphasis added).  Relying on Rule 23(a)(4), "which says that a court may certify a class action only if ‘the representative parties will fairly and adequately protect the interests of the class,’" the court held that "[a] representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests."  Id.   

In re Aqua Dots should be of particular interest to defendants in consumer class actions who have provided voluntary remedies to consumers.  The decision suggests that such remedy programs are relevant to the adequacy of representation, as well as to the superiority of a class action.  Id. at 748.  In other words, effective and voluntarily undertaken consumer remedies, such as recall programs, have the potential to reduce the class action exposure of manufacturer, distributor, or retailer defendants. 

III.  State Court Trends and Developments

A.  California Relaxes UCL Injury-In-Fact Pleading Requirement

As the result of Proposition 64’s amendments to California’s UCL and False Advertising Law (Cal. Bus. & Prof. Code §§ 17200 et seq. & 17500 et seq.), private plaintiffs must now show an "injury in fact" and have "lost money or property as a result" of the allegedly unlawful conduct in order to have standing under these statutes.  In a series of recent decisions, the California Supreme Court has addressed the meaning of these amendments–most notably in its decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), in which the Court ruled that a private plaintiff in a class action must establish actual reliance on the allegedly misleading statements in accordance with traditional tort principles.

One issue that remained unresolved was the meaning of "lost money or property," a subject addressed by the Supreme Court this past year in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011).  In Kwikset, the primary issue was whether plaintiffs could show that they "lost money or property" due to Kwikset’s alleged misrepresentation that its locksets were "Made in the U.S.A."  Plaintiffs claimed that this statement violated the UCL because the locksets contained some foreign-made pins and screws.  The Court of Appeal had rejected this position and concluded that plaintiffs could not show "lost money or property."  According to that court, despite plaintiffs’ frustrated "patriotic desire to buy fully American-made products," they received a fully functioning lockset (the "benefit of their bargain"), they did not claim that they paid a premium based on the "Made in the U.S.A." label, and they did not assert that the lockset was defective or inferior to a product containing all-American components.

On review, the Supreme Court reversed and held that plaintiffs satisfied the "lost money or property" requirement because they "bargained for locksets that were made in the United States" and "got ones that were not."  Id. at 332.  The five-justice majority ruled that the "plain language" of Proposition 64 requires that private parties "(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair practice or false advertising that is the gravamen of the claim."  Id. at 322.  According to the Court, "lost money or property–economic injury–is itself a classic form of injury in fact" and "[i]f a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact."  Id. at 325. 

It was irrelevant, in the majority’s view, whether or not a plaintiff received a properly functioning product or paid a premium because of a purported error in a product label.  Instead, a plaintiff who relied on a label when making a purchase has suffered economic harm by having "paid more for [a product] than he or she otherwise might have been willing to pay if the product had been labeled accurately."  Id. at 329.  Any other result "would bring an end to private consumer enforcement of bans on many label misrepresentations, contrary to the apparent intent of Proposition 64."  Id. at 330.  "Simply stated," Justice Kathryn M. Werdegar wrote, "labels matter," and consumers who purchase a mislabeled product satisfy Proposition 64’s standing requirements.  Id. at 328.

Justice Ming W. Chin wrote a dissenting opinion (joined by Justice Carol A. Corrigan) that sharply criticized the majority’s holding as standing "[i]n direct contravention of the electorate’s intent," because it "effectively mak[es] it easier for a plaintiff to establish standing" after Proposition 64.  Id. at 338 (emphasis added).  Justice Chin explained that the majority effectively collapsed the "injury in fact" and "loss of money or property" requirements into a combined "economic injury" element that requires only a showing that private plaintiffs "lost" the "price the consumer paid for the product," and an allegation that plaintiffs "would not have bought the mislabeled product."  Id. at 345.

Looking ahead, companies facing UCL claims still have strong defenses to liability notwithstanding Kwikset.  For instance, Kwikset may be limited to specific types of misrepresentations–the "Made in the U.S.A." claim violated specific regulations and many consumers have a strong preference for American-made products.  Moreover, Kwikset may not apply in cases predicated on an alleged omission (rather than an affirmative misrepresentation).  In addition, because the Court’s reasoning in Kwikset rests largely on the subjective valuations of the plaintiff, there likely will be many opportunities to challenge class certification on the grounds that named plaintiffs are not typical of the class, the class itself is not ascertainable, or individual issues predominate (under Tobacco II, even if the named plaintiffs establish standing, the court must still determine if the proposed class meets these other requirements for certification).

B.  California Supreme Court Expands Reach of Consumer Protection Laws to Non-California-Based Employees

In 2011, the California Supreme Court joined several other state courts in addressing the extra-territorial reach of the state’s unfair competition laws.  See, e.g., Schnall v. AT&T Wireless Servs., Inc., 225 P.2d 929, 938 (Wash. 2010) ("[N]othing in our law indicates that [Washington Consumer Protection Act] claims by nonresidents for acts occurring outside of Washington can be entertained under the statute."); Morrissey v. Nextel Partners, Inc., No. 3194-06, 2009 WL 400030, at *12 (N.Y. Sup. Feb. 19, 2009) (the court "would be precluded from applying New York consumer protection laws to claims arising out-of-state" in the class action context); Landau v. CNA Fin. Corp., 886 N.E.2d 405, 407 (Ill. App. 2008) ("The Consumer Fraud Act is a statute without extraterritorial effect; the Illinois General Assembly did not intend the Act to apply to fraudulent transactions that take place outside Illinois.").

In a ruling that broke with the trend of these other courts, and one that could spur a new wave of wage and hour class action litigation, the Supreme Court of California unanimously held in Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011), that non-California employees who work for a California-based employer were entitled to overtime pay under California law (which requires daily overtime pay after eight hours worked in a day) for full days and full weeks worked in California under the facts presented in that case. 

Sullivan involved a suit originally brought in federal court by plaintiffs from Colorado and Arizona who worked as "Instructors" for Oracle Corporation, which is headquartered in California.  Plaintiffs worked mainly in their home states, but traveled periodically to California to perform training.  After years of federal litigation, the case found its way to the California Supreme Court on three questions certified by the Ninth Circuit.

The Court first ruled that California’s overtime rules apply to "work performed in California for a California-based employer by out-of-state plaintiffs."  Id.  According to the Court, California’s overtime statutes applied to all work performed in the state, regardless of the residence of the worker.  Moreover, even though the overtime laws of Arizona and Colorado did not require the same overtime payments as were required in California, neither of those states’ laws expressed a public policy contrary to California’s, such that application of California law would impair any policy goals of those states.

Next, the Court ruled that, because the out-of-state plaintiffs were due overtime wages under California law, California precedent also permitted the plaintiffs to seek relief under the UCL.  Id. at 1206 (applying Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 177 (2000)).

Finally, the Court ruled that the UCL "does not apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case based solely on the employer’s failure to comply with the overtime provisions of the FLSA."  Sullivan, 51 Cal. 4th at 1209.  Oracle’s decision to classify its Instructors as exempt, which was the only nexus to California, was not in itself an unlawful act.  The Court left open the question of whether there would be a sufficient nexus to California if the wages for the out-of-state employees were paid in California.  Id. at 1208.  This final point may offer a silver lining to defendants:  The rule that the UCL cannot be applied to out-of-state class members, combined with Mazza‘s holding that class claims based on the laws of many different states cannot be certified (see supra at Section I.A.1), should make it more difficult to certify nationwide classes in California.

C.  Recording Customers’ ZIP Codes Can Violate California Consumer Law

In Pineda v. Williams-Sonoma Stores, Inc., 51 Cal. 4th 524 (2011), the California Supreme Court held that a ZIP code constitutes "personal identification information" under the Song-Beverly Credit Card Act and that requesting and recording ZIP codes as part of a credit card transaction violates the Act.  In Pineda, the plaintiff alleged that she made a purchase at a Williams-Sonoma store with her credit card and that the clerk asked her for and recorded her ZIP code.  Williams-Sonoma subsequently used her name and ZIP code to locate her home address.  Id. at 528.  

The Court found that the only reasonable interpretation of the Song-Beverly Act, which prohibits retailers from requesting or requiring the customer to provide personal identification information as a condition to accepting the credit card payment, is that personal identification information includes a cardholder’s ZIP code.  Id. at 535.  The Court reasoned that "the Legislature, by providing that personal identification information includes the cardholder’s address," intended to include components of the address.  Id. at 531.  Further, the Court noted that several considerations weighed in favor of a broad reading of the Act, including its expansive language and the liberal construction generally owed to consumer protection statutes.  Failing to protect ZIP codes would, in the Court’s view, undermine the statute’s clear intent, because with the ZIP code, a merchant could readily obtain the information that was supposed to be protected–such as home addresses and telephone numbers–through marketing software.  Id. 

The immediate impact of Pineda has been swiftly felt; dozens of class actions were filed following this decision.  See, e.g., Folgelstrom v. Lamps Plus, Inc., 195 Cal. App. 4th 986 (2011); Dardarian v. Nordstrom, Inc., 2011 U.S. Dist. LEXIS 48567, at *9 (N.D. Cal. 2011).  Nonetheless, although Pineda may be a concern for retailers, it does not wholly foreclose them from collecting personal identification information.  The Song-Beverly Act does not apply to cash transactions, for instance; nor does it prevent retailers from collecting personal identification information for delivery or other special purposes incidental, but related to credit card transactions.  In addition, the Song-Beverly Act does not prohibit retailers from collecting personal identification information in connection with online transactions.

D.  Heightened Pleading Requirements for Claims Under D.C.’s Consumer Protection Procedures Act

In Grayson v. AT&T Corp., 15 A.3d 219 (D.C. 2011), the D.C. Court of Appeals found that plaintiffs asserting claims under D.C.’s Consumer Protection Procedures Act ("CPPA") must satisfy the standing requirements of Article III of the U.S. Constitution, including the element of injury-in-fact.   

In the first action of this consolidated case, plaintiff Grayson alleged that several telecommunications companies defrauded the federal government by failing to report as unclaimed property the unused value of prepaid calling cards purchased by Grayson and others.  Although the court acknowledged that Grayson had alleged an injury-in-fact, the court ultimately concluded that Grayson failed to allege a violation of his statutory rights under the CPPA.  Id. at 247–50.  In the second action, where the court was once again confronted with the threshold issue of standing, a different plaintiff (Breakman) alleged that the Internet service provider AOL failed to disclose to its existing members that it was offering new members a cheaper option for monthly dial-up Internet service.  Id. at 246.  The court concluded that because Breakman was not an AOL customer, his claim was brought solely in "a representative capacity on behalf of the interests of the general public" under the CPPA.  Id.  

Grayson and Breakman both argued that amendments to the CPPA enacted in 2000 authorized plaintiffs to bring suits "on behalf of the general public," regardless of whether the plaintiff had any contact with the defendant, purchased the defendant’s products, or suffered injury of any kind.  Id. at 242-44.  Based on the structure and legislative history of CPPA amendments, the court concluded that the D.C. Council did not intend to override the D.C. courts’ longstanding practice of adhering to federal Article III standing requirements, even though those principles do not directly bind the D.C. judiciary (an Article I creation).  Instead, the court held that a plaintiff must suffer "actual or threatened injury" from the alleged unlawful practice to have standing to assert a CPPA claim.  Id. at 243.

The holding in Grayson has affected such cases as OneWest Bank, FSB v. Marshall, 18 A.3d 715 (D.C. 2011), which noted that "[s]tanding is a threshold jurisdictional question which must be addressed prior to and independent of a party’s claims."  Id. at 720.  Further, Grayson restored stability to litigation under the CPPA.  The District of Columbia was at risk of becoming a magnet for "no-injury" lawsuits filed by professional plaintiff’s law firms and litigation advocacy groups.  By adhering to traditional standing requirements, the D.C. Court of Appeals has ensured that only plaintiffs with a true stake in the outcome will be able to file suit.    

Gibson, Dunn & Crutcher LLP  

Gibson, Dunn & Crutcher’s Class Actions Practice Group is available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you work or any of the following members of the Class Actions Group:

Gail E. Lees – Chair, Los Angeles (213-229-7163, [email protected])
Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, [email protected])
G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, [email protected])
Christopher Chorba – Member, Los Angeles (213-229-7396, [email protected] 

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