Class Actions Update: Key Trends and Key Cases in the Year Ahead

February 20, 2013

In the 35-year period from 1974 through 2009, the United States Supreme Court decided fewer than a dozen cases involving core class action issues.[1]  All that has changed in the last few years, with the Supreme Court increasingly taking cases presenting major class action questions.  This trend has intensified recently, with the Court granting review this Term in cases involving fundamental issues such as jurisdiction under the Class Action Fairness Act and the evidentiary requirements for obtaining class treatment under Federal Rule of Civil Procedure 23.

The Court’s increased attentiveness to core class action issues has affected the lower courts as well.  In large measure, the lower courts in the past 18 months have grappled with the application of the rigorous class certification principles that the Supreme Court announced in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).  They also have confronted efforts by the plaintiffs’ bar to wrestle with the enforceability of arbitration agreements following the Court’s decisions in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and Stolt-Nielsen S.A v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010).  We have also experienced a season of increased scrutiny of class action settlements, with lower courts exercising a policing function as they evaluate whether proposed settlements provide sufficient benefits to the members of the affected class.

This update provides an overview and summary of the specific cases in which these trends have developed.  Part I of this update provides a review of the class action issues the Supreme Court is confronting this Term (and a brief review of some of the key decisions from last Term), and Part II provides a summary of the trends in class action practice in the state and lower federal courts.

I.  The Supreme Court Continues to Confront Significant Class Action Issues

This year, the U.S. Supreme Court will once again weigh in on important class action issues, including the implications of its landmark decision in Wal-Mart Stores, Inc. v. Dukes.  In Comcast Corp. v. Behrend, the Court will address a split of authority among the circuit courts on whether class certification requests must be supported with admissible expert evidence, an issue addressed (but not fully resolved) in Wal-Mart.  Next, in Standard Fire Insurance Co. v. Knowles, the Court will address for the first time the nearly decade-old Class Action Fairness Act and plaintiffs’ practice of using claims-limiting stipulations to circumvent the Act’s $5 million amount-in-controversy threshold for federal jurisdiction.  And in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Court will decide whether plaintiffs in securities cases must establish “materiality” as a prerequisite to class certification.  The Court will also revisit class action arbitration issues, as the lower courts continue to grapple with its decisions in Stolt-Nielsen S.A and Concepcion.

A.        Comcast Corp. v. Behrend:  Defining the Standard for Evidence at Class Certification

In 2011, the Court reaffirmed in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), that “Rule 23 does not set forth a mere pleading standard,” and instead district courts must engage in a “rigorous analysis” to ensure that the “party seeking class certification [has] affirmatively demonstrate[d] his compliance” with Rule 23 by “prov[ing] that there are in fact sufficiently numerous parties, common questions of law or fact, etc.”  Id. at 2551 (quotation marks and citation omitted).  Wal-Mart emphasized that district courts are required to resolve any “merits question[s]” bearing on class certification, even if the plaintiffs “will surely have to prove [those issues] again at trial in order to make out their case on the  merits.”  Id. at 2552 n.6.  The Court also suggested that uncritical acceptance of evidence and testimony at the class certification stage may not satisfy the rigors of Rule 23.  The Ninth Circuit had held that a Daubert hearing on the admissibility of expert testimony would be inappropriate at the class certification stage; the five-justice majority “doubt[ed] that [was] so,” but the Court did not expressly resolve this issue.  Id. at 2554.

Before and after Wal-Mart, the federal courts of appeals have split as to the precise standard to apply to expert testimony at class certification.  The Seventh Circuit has held that a district court “must perform a full Daubert analysis before certifying the class” when “an expert’s report or testimony is critical to class certification.”  Am. Honda Motor Co. v. Allen, 600 F.3d 813, 815–16 (7th Cir. 2010) (per curiam); see also Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 813–14 (7th Cir. 2012) (applying American Honda post-Wal-Mart); Ellis v. Costco Wholesale Corp., 657 F.3d 970, 982 (9th Cir. 2011) (citing Wal-Mart and stating that a district court “correctly” applied Daubert at class certification).  Under the Seventh Circuit’s rule, a court must consider at class certification whether critical expert testimony is sufficiently reliable to be admissible at trial.  The Eighth Circuit, in contrast, has rejected the Seventh Circuit’s rule, noting that it was “not convinced that the approach of American Honda would be the most workable in complex litigation or that it would serve case management better” than a relaxed approach to expert testimony.  In re Zurn PEX Plumbing Prods. Liab. Litig., 644 F.3d 604, 612 (8th Cir. 2011).  Instead, the Eighth Circuit held that a district court should conduct a “focused Daubert analysis” that could involve a more limited inquiry into the reliability of the expert testimony.  Id. at 614.

The Supreme Court could resolve this circuit split in Comcast Corp. v. Behrend.  (Gibson Dunn represents Comcast in the Supreme Court and its opening and reply brief can be found here and here.)  As occurred in Wal-Mart, Comcast presents a case in which plaintiffs obtained class certification based on expert testimony that had not been subjected to a rigorous analysis.  Plaintiffs allege that Comcast monopolized the cable television market and raised prices in the Philadelphia area by acquiring competitors, or by swapping cable systems and subscribers outside of the Philadelphia market for cable systems and subscribers within the Philadelphia market–a process that plaintiffs described as “clustering.”  See Behrend v. Comcast Corp., 655 F.3d 182 (3d Cir. 2011), cert. granted, 133 S. Ct. 24 (2012) (No. 11-864).  The district court granted certification under Rule 23(b)(3), concluding that antitrust impact could be established through common evidence applicable to all class members and that damages could be quantified using an expert model on a class-wide basis.  Id. at 188.  Plaintiffs’ damages expert constructed his model while plaintiffs were asserting four anticompetitive impact theories, but the district court later rejected three of those theories; the court nonetheless accepted the model over Comcast’s objections that it could not measure damages attributable to the sole remaining theory of antitrust impact.  Id. at 192, 195.  A divided panel of the Third Circuit affirmed.

The Supreme Court granted review on the question “[w]hether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”  Comcast, 133 S. Ct. at 24.  The Court held oral argument on November 5, 2012, which explored what standard–if any–district courts should apply when considering evidence at the class certification stage.  Comcast urged application of the Daubert standard for expert testimony or some equivalent inquiry that considers the “fit” and “reliability” of proffered evidence.  Plaintiffs agreed, in theory, that Daubert applies to the certification inquiry, but argued that the expert testimony at issue here would satisfy that standard.

The Court’s decision could have a significant impact on class certification proceedings by clarifying whether plaintiffs must submit reliable, admissible evidence to support class certification.  Although Wal-Mart made clear that determining whether the prerequisites for class certification have been met will frequently require courts to delve into questions that overlap with the merits, it did not squarely resolve what standard district courts should use to evaluate evidence when conducting the requisite rigorous analysis.  A relaxed standard would encourage the certification of unmeritorious claims premised on spurious or inadmissible evidence, including expert testimony that cannot satisfy the basic requirements of Daubert–claims that defendants may be forced to settle regardless of the underlying merits.  See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 130 S. Ct. 1431, 1465 n.3 (2010) (Ginsburg, J., dissenting) (“A court’s decision to certify a class accordingly places pressure on the defendant to settle even unmeritorious claims.”).

B.        Standard Fire Insurance Co. v. Knowles:  Whether Plaintiffs May Avoid CAFA Jurisdiction by Stipulating to Seek Less Than $5 Million

In Standard Fire Insurance Co. v. Knowles, the Court will decide for the first time the standard for establishing whether the Class Action Fairness Act’s (“CAFA”) $5 million amount-in-controversy requirement is satisfied.  After CAFA took effect in 2005, the use of claims-limiting stipulations became a popular tactic among the plaintiffs’ bar to avoid the clear congressional intent to expand the scope of federal jurisdiction over class actions with multi-jurisdictional consequences.  The practice has become particularly popular in cases initially filed in a handful of plaintiff-friendly state courts.  Plaintiffs in Standard Fire initially sought to bring suit in Miller County, Arkansas, a jurisdiction that was viewed as plaintiff-friendly in which it is difficult to secure rulings on dispositive motions until years into litigation, and which approves large attorney’s fee awards in settlements that award little or no recovery to the class.[2]

Circuits have split on the propriety of stipulations promising not to “seek” more than $5 million to avoid federal jurisdiction under CAFA even in cases where plaintiffs’ claims are admittedly worth more than $5 million.  The Seventh Circuit in Back Doctors Ltd. v. Metropolitan Property & Casualty Insurance Co., 637 F.3d 827 (7th Cir. 2011), rejected the use of such stipulations, explaining that the named plaintiffs lack the authority to limit the potential recovery of absent class members prior to class certification.  Id. at 831 (“What [the named plaintiff] is willing to accept thus does not bind the class and therefore does not ensure that the stakes fall under $5 million.”).  But the Eighth Circuit in Rolwing v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), affirmed a remand order based on a similar stipulation purporting to limit class damages to less than $5 million, even though the aggregated total of the individual class members’ claims exceeded $12 million, more than twice CAFA’s jurisdictional threshold.  Id. at 1070–72.

Standard Fire will decide whether stipulations purporting to seek less than $5 million on claims that would otherwise exceed that amount can actually bind absent class members and destroy federal jurisdiction.  In conjunction with his complaint, the named plaintiff filed a signed stipulation stating that he would not “seek” damages for the class “in excess of $5,000,000 in the aggregate.”  Standard Fire removed the action under CAFA to federal court, arguing that the claims of putative class members could exceed $5 million and that the named plaintiff’s stipulation was ineffective because he lacked authority to act on behalf of unnamed members of a putative class before class certification.

Although the plaintiff never disputed that the value of the proposed class claims exceeds $5 million, the district court concluded that the stipulation satisfied the plaintiff’s burden of proving to a legal certainty that the class members’ claims were worth less than CAFA’s $5 million threshold.  Knowles v. Standard Fire Ins. Co., No. 4:11-CV-04044, 2011 WL 6013024, at *3, *6 (W.D. Ark. Dec. 2, 2011), petition to appeal denied, No. 11-8030, 2012 WL 3828891 (8th Cir. 2012), cert. granted, 133 S. Ct. 90 (2012) (No. 11-1450).  The court also rejected the argument that plaintiff’s attempt to artificially limit the class recovery violates the due process rights of absent class members.  Id. at *6.  The Eighth Circuit summarily denied Standard Fire’s petition to appeal this ruling.  The Supreme Court granted review on August 31, 2012, and heard argument on January 7, 2013.  (Gibson Dunn represents Standard Fire in the Supreme Court.  Its opening and reply briefs can be found here and here.)

The outcome of Standard Fire will be significant for defendants who find themselves defending class actions in plaintiff-friendly state-court jurisdictions.  Congress’s effort to expand federal jurisdiction over interstate class actions will be frustrated if plaintiffs can simply stipulate their way around CAFA’s jurisdiction threshold even for claims whose undisputed value far exceeds $5 million.  Critics note that CAFA eliminated that one-year limitation on removal if subsequent events reveal that plaintiffs can or will recover more than $5 million or that a recovery-limiting stipulation destroys the adequacy of the proposed class representative under Rule 23.  See 28 U.S.C. § 1453(b).  But this safeguard provides cold comfort in jurisdictions (like Miller County) that delay ruling on class certification and other substantive motions until years into litigation.  The settlement pressure imposed by burdensome discovery and litigation practice in the interim has the potential to deprive defendants of any opportunity to remove cases that belong in federal court.

C.        Amgen and Other Supreme Court Cases to Watch

This Term, the Supreme Court is also hearing a securities class action, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, that raises important questions about the inquiry into the merits at class certification.  The Court had earlier noted in Wal-Mart that “[p]erhaps the most common example of considering a merits question at the Rule 23 stage arises in class-action suits for securities fraud,” where plaintiffs generally must “establish the applicability of the so-called ‘fraud on the market’ presumption” in order to obtain certification, and again in order to prevail at trial.  Wal-Mart, 131 S. Ct. at 2552 n.6.

In Amgen, the Court will decide whether a district court must require proof of materiality or allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a securities fraud class action.  The Ninth Circuit held in Amgen that a securities plaintiff “need not prove materiality to avail [itself and the class] of the fraud-on-the-market presumption of reliance at the class certification stage.”  Conn. Ret. Plans & Trust Funds, 660 F.3d 1170, 1177 (9th Cir. 2011), cert. granted, 132 S. Ct. 2742 (2012) (No. 11-1085).  The Second and Fifth Circuits, by contrast, have held that a plaintiff must prove materiality to obtain class certification, and that a defendant may present evidence at the certification stage to rebut materiality.[3]  The Court’s decision in Amgen should provide further guidance in the wake of Wal-Mart, as courts continue to struggle to define the line between “class certification” issues and “merits” issues.

Another noteworthy case on the horizon is Genesis HealthCare Corp. v. Symczyk, 656 F.3d 189 (3d Cir. 2011), cert. granted, 133 S. Ct. 26 (2012) (No. 11-1059), which will review whether a Fair Labor Standards Act (“FLSA”) collective action becomes moot if the defendant offers a named-plaintiff-only settlement.  In Symczyk, the district court had held that a defendant’s Rule 68 offer of judgment in the amount of $7,500 to the named plaintiff rendered a collective action moot.  The Third Circuit reversed, reasoning that the district court should have applied the “relation back” doctrine to consider the plaintiffs’ motion for conditional certification as of the time of the filing the complaint–not after the offer of judgment–because otherwise, a defendant could use Rule 68 to “pick off” named plaintiffs and “frustrate the objectives” of the FLSA.  656 F.3d at 201.  At oral argument, the Justices appeared to be divided on the permissibility of this practice, with some justices focusing on the interests of the named plaintiff’s co-workers, and others addressing the concepts of standing and mootness.

Finally, in 2012 the Court side-stepped an important case involving Article III standing in statutory damages cases.  After the case was fully briefed and argued, the Court dismissed the writ of certiorari as improvidently granted in First American Financial Corp. v. Edwards, 132 S. Ct. 2536 (2012) (per curiam).  That case presented the issue of whether a statutory violation alone would have been sufficient to create Article III standing where the plaintiff fails to allege any actual harm.  Although the case involved the Real Estate Settlement Procedures Act, it was closely watched in the growing field of consumer privacy and similar “no injury” class actions.

D.        Plaintiffs Fight to Avoid Concepcion‘s Approval of Class Action Waivers in Arbitration Clauses

In the past year, the lower courts have continued to apply and interpret the Supreme Court’s class arbitration decisions in Stolt-Nielsen S.A v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), and AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

In Stolt-Nielsen, the Court held that “a party may not be compelled under the [Federal Arbitration Act (‘FAA’)] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”  130 S. Ct. at 1775.  Plaintiffs have attempted to circumvent Stolt-Nielsen by limiting that decision to its facts, and arguing that the parties in that case expressly stipulated that there was no agreement to conduct class arbitration.  Federal appellate courts have split on this issue.[4]  For example, the Third Circuit held that an arbitrator did not abuse his discretion in allowing arbitration to proceed on a class basis where the arbitration agreement at issue made no reference as to whether the parties agreed to class arbitration.  Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 224–25 (3d Cir. 2012), cert. granted, 81 U.S.L.W. 3070 (U.S. Dec. 7, 2012) (No. 12-135).  The Supreme Court granted certiorari in Oxford Health to determine whether arbitrators exceed their power under Stolt-Nielsen by determining that parties have agreed to class arbitration based on their use of broad contractual language that does not include an express class waiver.

Concepcion held that the FAA preempts state laws, such as California’s Discover Bank rule, that stand as an impediment to enforcing commercial class arbitration waivers.  131 S. Ct. at 1750–51.  Following Concepcion, many plaintiffs argued that an arbitration agreement must yield where it would impede a plaintiff’s ability to vindicate his or her statutory rights.  Several circuits have rejected these arguments,[5] but the Second Circuit adopted them in In re American Express Merchants Litigation, 667 F.3d 204 (2d Cir. 2012), cert. granted sub nom., 131 S. Ct. 594 (2012), a putative class action brought by merchants who alleged that American Express’s contractual “Honor All Cards” provision, which requires merchants to accept both “charge” and “credit” cards, constitutes an illegal tying arrangement in violation of the Sherman Act.

The Amex Merchants litigation has become a frequent visitor to 1 First Street:  following its decision in Stolt-Nielsen, the Supreme Court instructed the Second Circuit to reconsider its initial decision.  Id. at 206.  On remand, the Second Circuit yet again affirmed the invalidation of the waiver and also held that its decision was unaltered by ConcepcionId.  To get around the class waiver, plaintiffs argued (and the Second Circuit agreed) that the costs of individual arbitration in an antitrust case were sufficiently high so as to preclude the plaintiffs in this case from “vindicating their statutory rights,” and that Concepcion did not address this issue.  Id. at 213, 216–19.  Despite Concepcion‘s specific holding that the putatively prohibitive costs of arbitration involving “small-dollar claims” were insufficient to avoid the arbitration agreement, 131 S. Ct. at 1753, the Second Circuit’s opinion in American Express in effect creates a loophole in the FAA, permitting case-by-case evaluations of whether a class action “is the only economically feasible means” for a plaintiff to pursue federal statutory claims.  Am. Express, 667 F.3d at 218.[6]  In January 2013, the Federal Trade Commission and U.S. Department of Justice filed an amicus brief (available here) supporting the plaintiffs, and arguing that “[t]he United States . . . has a substantial interest in ensuring that arbitration agreements are not used to prevent private parties from obtaining redress for violations of their federal statutory rights.”

Plaintiffs also have attempted an end-run around Concepcion by arguing traditional contract doctrines such as formation, waiver, and/or unconscionability.  See, e.g., Schnabel v. Trilegiant Corp., 697 F.3d 110, 128 (2d Cir. 2012) (holding that plaintiffs had not passively agreed to an arbitration provision received in an unsolicited email upon continuing to pay a monthly membership fee rather than cancel their service).  These arguments typically focus on the more fundamental question of whether an agreement to arbitrate exists in the first place as a matter of state contract law.  Compare Brewer v. Mo. Title Loans, 364 S.W.3d 486, 488–89 (Mo. 2012) (limiting Concepcion to cases in which arbitration agreements are held unconscionable “for the sole reason that they bar class relief”), with Davis v. Sprint Nextel Corp., No. 12-01023-CV-W-DW, 2012 WL 5904327, at *2 (W.D. Mo. Nov. 26, 2012) (distinguishing Brewer and applying Concepcion to find arbitration agreement not unconscionable).

In addition, the California Supreme Court–which issued the Discover Bank decision that was invalidated in Concepcion–is considering the scope of Concepcion‘s preemptive effect on state contract law in a trio of cases relevant to class action practitioners, particularly in the employment context.  See Sanchez v. Valenica Holding Co., 201 Cal. App. 4th 74 (2012), review granted, 139 Cal. Rptr. 3d 2 (Cal. 2012) (granting review to determine whether the FAA, as interpreted in Concepcion, preempts state-law rules that invalidate arbitration provisions in consumer contracts on unconscionability grounds); Iskanian v. CLS Transp. L.A., LLC, 206 Cal. App. 4th 949 (2012), review granted, 147 Cal. Rptr. 3d 324 (Cal. 2012) (granting review to determine whether Concepcion abrogates Gentry v. Superior Court, 42 Cal. 4th 443 (2007), which invalidated class waivers in employment contracts); Sonic-Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011) (holding provisions of arbitration provision in employment contract unenforceable despite FAA, holding that an employee cannot be compelled to forgo a Berman hearing as a condition of employment), cert. granted, vacated and remanded, 132 S. Ct. 496 (2011) (instructing court to apply Concepcion).

II.  Class Action Trends in State and Lower Federal Courts

A.        Application of Wal-Mart and Open Issues

            1.         Incidental Relief Under Rule 23(b)(2)

Wal-Mart unanimously concluded that certification under Rule 23(b)(2) was improper because class members’ claims for backpay were “not incidental to the injunctive or declaratory relief.”  131 S. Ct. at 2557.  In the wake of this holding, plaintiffs have continued to try to wedge monetary relief as “incidental” under Rule 23(b)(2), but the federal courts generally have rejected these attempts.

For example, in another case involving Wal-Mart, the Ninth Circuit affirmed the denial of certification of a wage and hour class under Rule 23(b)(2).  Sepulveda v. Wal-Mart Stores, Inc., 464 F. App’x 636, 637 (9th Cir. 2011).  Before the Supreme Court’s guidance in Wal-Mart, the Ninth Circuit held that the district court erred when it denied class certification on the grounds that the claims for monetary relief were not “incidental” to the injunctive relief sought.  See id.  On reconsideration after Wal-Mart Stores, Inc. v. Dukes, the Ninth Circuit agreed with the district court that resolving plaintiffs’ request for monetary awards would require “highly individualized” inquiries, and thus precluded certification under Rule 23(b)(2).  Id.; see also Nationwide Life Ins. Co. v. Haddock, 460 F. App’x 26, 29 (2d Cir. 2012) (similar); Bauer v. Kraft Foods Global, Inc., 277 F.R.D. 558 (W.D. Wis. 2012) (reiterating Wal-Mart‘s holding that even incidental monetary relief may not be appropriate for Rule 23(b)(2) classes).

Not all of the lower courts read Wal-Mart in the same way, however.  In McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482 (7th Cir. 2012), the Seventh Circuit affirmed certification of a Rule 23(b)(2) class while recognizing that “there may be no common issues” with respect to the claims of the 700 class members for damages.  Id. at 492.  Rather than considering whether the claims for monetary relief were “incidental” to the equitable relief sought, the Seventh Circuit reasoned that Wal-Mart helped the plaintiffs’ case because Merrill Lynch employed company-wide policies whose “incremental causal effect . . . –which is the alleged disparate impact–could be most efficiently determined on a class-wide basis.”  Id. at 490.

The Seventh Circuit made a similarly fine distinction between incidental non-incidental monetary relief in Johnson v. Meriter Health Services Employee Retirement Plan, 702 F.3d. 364 (7th Cir. 2012).  In that ERISA action, the defendant contended that those participants who were no longer contributing to the retirement plan–such as retired and former employees–lacked any entitlement to forward-looking relief, making a monetary remedy their only recourse.  Id. at 369.  The court held that this was no barrier to certifying a Rule 23(b)(2) class because if plaintiffs succeeded on the merits, the proposed reformations to the retirement plan could be applied to beneficiaries’ entitlements by a computer program.  Id. at 370–71.  Consequently, the court held that “the concerns expressed in the Wal-Mart opinion are thus not engaged.”  Id. at 372.

Cases such as McReynolds and Johnson thus focus on whether the equitable relief sought is separable from the monetary component and whether it resolves common issues.  While that set of inquiries appears to run counter to Wal-Mart‘s clear instructions that Rule 23(b)(2) classes not contemplate monetary relief that is “not incidental to the injunctive or declaratory relief,” 131 S. Ct. at 2557, this approach has also taken hold beyond the Seventh Circuit.  See, e.g., Gooch v. Life Investors Ins. Co. of Am., 672 F.3d 402, 428 (6th Cir. 2012) (“The point is not simply . . . that monetary relief is incidental to declaratory relief.  It is that, in this case, declaratory relief is a separable and distinct type of relief that will resolve an issue common to all class members.”); Seekamp v. It’s Huge, Inc., No. 1:09-CV-00018, 2012 WL 860364, at *7 (N.D.N.Y. Mar. 13, 2012).

            2.         “Issue” Certification Under Rule 23(c)(4) in the Wake of Wal-Mart

Some plaintiffs have looked to “issue” certification under Rule 23(c)(4) as a means to resolve issues on a class-wide basis, while respecting Wal-Mart‘s heightened requirements for class certification.  See Fed. R. Civ. P. 23(c)(4) (“When appropriate, an action may be brought or maintained as a class action with respect to particular issues.”).  For example, the Seventh Circuit held in McReynolds that “issue” certification was appropriate in employment discrimination cases alleging a central company-wide policy of discrimination, because the existence of such a policy could be litigated on a class-wide basis.  672 F.3d at 490.  Notably, McReynolds allowed issue certification even where the predominance requirement of Rule 23(b)(3) would not be satisfied for the class as a whole.  In so holding, the Seventh Circuit adopted an approach similar to the Second Circuit, which has in the past been open to “issue” certification as an alternative to traditional certification under Rule 23(b).  See, e.g., In re Nassau Cnty. Strip Search Cases, 461 F.3d 219 (2d Cir. 2006); Robinson v. Metro-North Commuter R.R., 267 F.3d 147 (2d Cir. 2001).

McReynolds appears to be in direct conflict with Fifth Circuit precedent, which holds that issue certification under Rule 23(c)(4) is not appropriate where the predominance requirement of Rule 23(b)(3) is not satisfied.  See Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998); Castano v. Am. Tobacco Co., 84 F.3d 734 (5th Cir. 1996).

The Supreme Court has not directly addressed issue certification under Rule 23(c)(4), nor has it considered the various approaches that the circuit courts have taken towards issue certification.  Some commentators have opined that issue certification is properly limited to bifurcating liability from remedies, and thus does not allow the certification (or exclusion) of discrete claim elements and defenses permitted by some courts.  If the current trend of seeking issue certification continues, it may well be the next core class action issue to garner the Court’s attention.

            3.         Wal-Mart in State Court

Wal-Mart also continues to have a significant impact on state class certification decisions.  For example, the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), adopted Wal-Mart‘s holding that the class certification analysis “‘[f]requently . . . will entail some overlap with the merits of the plaintiff’s underlying claim.'”  Id. at 1023 (quoting Wal-Mart, 131 S. Ct. at 2551).  This is significant in light of previous California Supreme Court decisions rejecting any merits inquiries at the class certification stage.  See, e.g., Linder v. Thrifty Oil Co., 23 Cal. 4th 429 (2000).  Several other state courts also cited Wal-Mart for the same proposition–that the certification analysis may require consideration of the merits of plaintiffs’ underlying claims.  See, e.g., Chipman v. Nw. Healthcare Corp., 2012 MT 242, ¶ 44 (Mont. 2012); Marler v. E.M. Johansing, LLC, 199 Cal. App. 4th 1450, 1458 (2011); Jackson v. Unocal Corp., 262 P.3d 874, 885 (Colo. 2011) (en banc); Price v. Martin, 79 So. 3d 960, 966–67 (La. 2011); State Farm Mut. Auto. Ins. Co. v. Reyher, 266 P.3d 383, 388–89 (Colo. 2011).

State courts also have looked to Wal-Mart for guidance in applying the commonality and predominance requirements.  For example, in San Diego v. Haas, 207 Cal. App. 4th 472 (2012), the California Court of Appeal cited Wal-Mart and concluded that commonality and predominance were satisfied because resolution of certain questions would “determine the status of defendants’ retirement benefits ‘in one stroke.'”  Id. at 501 (quoting Wal-Mart, 131 S. Ct. at 2551).  Many other state courts have taken a similar approach.  See, e.g., Critchfield Physical Therapy v. Taranto Grp., Inc., 263 P.3d 767, 776–78 (Kan. 2011) (applying Wal-Mart in support of holding that commonality was satisfied); Henry v. Dow Chem. Co., No. 03-47775, 2011 WL 3269118 (Mich. Cir. Ct. July 18, 2011) (“In sum, because of the need for such highly individualized factual inquiries, plaintiffs cannot show that there is a common contention that is capable of classwide resolution.”); Tire Kingdom, Inc. v. Dishkin, 81 So.3d 437, 449 (Fla. Dist. Ct. App. 2011) (applying Wal-Mart and denying certification, because the court would need to conduct an individualized inquiry into “the precise language of each advertisement, the class member’s awareness of [the] shop-fee signage, and the class member’s conversations with [the] employees”).

Additionally, Wal-Mart‘s unanimous rejection of the use of statistical sampling to minimize individualized issues is at the heart of two significant state court actions that may be decided in 2013:  Duran v. U.S. Bank National Assoc. before the California Supreme Court (Case No. S200923), and Hummel v. Wal-Mart Stores, Inc. before the Pennsylvania Supreme Court (Case Nos. 32 E.A.P. 2012 & 33 E.A.P. 2012).  Both are wage-and-hour class actions in which plaintiffs were allowed to “prove” their claims at trial by using statistical sampling and extrapolations that were similar to the proposed methods of proof rejected in Wal-Mart.

B.        Federal Courts Continue to Crack Down on Class Settlements

In recent years, the federal courts of appeals have applied heightened scrutiny to class action settlements.  For example, the Ninth Circuit rejected one proposed class settlement because the disproportionately high attorneys’ 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 Prods. Liab. Litig., 654 F.3d 935, 938 (9th Cir. 2011).

Bluetooth involved plaintiffs in 26 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 proposed settlement awarded plaintiffs $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 ruled that the attorneys’ 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 attorneys’ fees.  Id. at 945.  Bluetooth counsels district courts to ”assure [themselves] that the amount awarded [to plaintiffs’ counsel is] not unreasonably excessive in light of the results achieved,” id. at 943, and directs that “pre-certification settlements “must withstand an even higher level of scrutiny for evidence of collusion or other conflicts of interest,” id. at 946.

In addition, in Nachshin v. AOL LLC, 663 F.3d 1034 (9th Cir. 2011), the Ninth Circuit drew tighter limits around the types of charities parties may designate for distribution of cy pres settlement funds, which place unclaimed class settlement funds to their “next best compensation use” where “the proof of individual claims would be burdensome or distribution of damages costly.”  Id. at 1038 (quotation marks and citation omitted).  There, the court rejected the parties’ designation of three local charities in Los Angeles and the Federal Judicial Center for cy pres donations and explained that cy pres distributions must (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 1039–40.

In 2012, the Ninth Circuit extended these restrictions on cy pres relief in Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012).  In that opinion, the court ruled that the proposed cy pres beneficiaries (food shelters) were not sufficiently tethered to the aims of underlying litigation (alleged false advertising of “Frosted Mini-Wheats” cereal).  Although the court noted that the proposed $5.5 million product distribution to “charities that feed the indigent” was a “noble goal,” the cy pres award was “divorced from the concerns embodied in consumer protection laws such as [California’s Unfair Competition Law and Consumers Legal Remedies Act].”  Id. at 866.  The “appropriate cy pres recipients are not charities that feed the needy,” the court explained, “but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.”  Id. at 867.  Cf. In re Lupron Mktg. & Sales Practices Litig., 677 F.3d 21, 33, 38 (1st Cir. 2012) (affirming cy pres distribution in which the charitable recipient’s interests “reasonably approximat[ed]” those being pursued by the class, while expressing “concern[]” that the judge (rather than the parties) was given discretion to make the initial selection of proposed recipients).

Dennis obviously makes it more difficult to identify mutually acceptable charities, as defendants will not want to fund organizations that may bring new false advertising lawsuits against them.  One potentially recurring question that Dennis did not resolve is whether courts must resolve challenges to proposed cy pres beneficiaries before it is clear that a cy pres distribution will even be necessary.  The Ninth Circuit has previously suggested that such objections are premature at the class settlement approval stage, because the “issue[s] becomes ripe only if the entire settlement fund is not distributed to class members.”  Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 966 (9th Cir. 2009).  Although Dennis explained that future selection of cy pres beneficiaries did not “placate” its underlying concerns regarding the connection between the purposes of the lawsuit and the proposed cy pres distributions, it did not announce a blanket rule that all class settlements must identify specific cy pres recipients up front.  Reserving selection of recipients could avoid unnecessary collateral disputes during mediations (or through litigation with objectors) unless and until cy pres issues actually become ripe for adjudication.

III.  Conclusion

The dust is now settling in the wake of Wal-Mart.  As the business world and class action litigators survey the new landscape, many open issues remain, and there is every indication that class actions will continue to present significant challenges for companies in the years to come.  Tellingly, the Supreme Court’s heightened interest in class actions has continued during the October 2012 term, with the Court set to weigh in on important issues such as:

  • Whether class certification must be supported with admissible expert evidence that meets the Daubert standard (Comcast Corp. v. Behrend);
  • Whether plaintiffs may use claims-limiting stipulations to avoid CAFA’s $5 million amount-in-controversy requirement (Standard Fire Insurance Co. v. Knowles);
  • Whether plaintiffs in securities class actions must establish “materiality” at the certification phase (Amgen Inc. v. Connecticut Retirement Plans and Trust Funds);
  • Whether defendants can moot an FLSA collective action by issuing a Rule 68 offer of judgment to the named plaintiff (Genesis HealthCare Corp. v. Symczyk); and
  • Whether, notwithstanding AT&T Mobility LLC v. Concepcion, courts may invalidate class arbitration waivers where the costs of individual arbitration would impede plaintiffs’ ability to “vindicate statutory rights” (In re American Express Merchants Litigation).

The lower courts remain heavily engaged in addressing class action issues as well.  Federal and state judges across the country are now interpreting and applying the Wal-Mart decision–among other things, courts are imposing more rigorous class certification standards, deciding whether monetary relief is merely “incidental” under Rule 23(b)(2), and rejecting the use of statistical sampling and extrapolations to prove class claims at trial.  In addition, the lower courts are continuing to confront new attacks by plaintiffs’ lawyers on class arbitration waivers following Concepcion.  Courts also continued their increased scrutiny of class action settlements, reflecting a growing consciousness that in many cases, class actions may not provide real benefits to the class itself.

[1]  See, e.g., Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) (notice to class members); Gulf Oil Co. v. Bernard, 452 U.S. 89 (1981) (limits on communication with unnamed members of class); Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147 (1982) (typicality); Cooper v. Fed. Reserve Bank of Richmond, 467 U.S. 867 (1984) (res judicata); Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) (choice of law); Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997) (settlement class actions); Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) (”limited fund” class actions).

[2]  Although many of the court filings in these cases remain under seal, available information and news reports indicate that these settlements resulted in attorneys’ fee awards that totaled more than $150 million in Miller County alone.  See Michelle Massey, “Failure to Communicate” Could Lead to $45M in Discovery Costs, Southeast Tex. Rec., Aug. 8, 2007 (explaining that a Miller County court “ordered defendant Foremost Insurance Company to produce all of its claim files” within 90 days, “even though the defendants estimated the cost for production at $45 million”); Editorial, The Colossal Colossus Travesty, Southeast Tex. Rec., Mar. 28, 2009; see also Big Money for Lawyers, Arkansas Times, Dec. 14, 2011 (describing another Miller County class action in which a settlement resulted in “the lawyers g[etting] $185 million in legal fees”); Judge OKs $90M “Click Fraud” Settlement, Associated Press, July 29, 2006 (“No one will receive cash except the lawyers, who will split $30 million.”).

[3]  See In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 484 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 265 (5th Cir. 2007), overruled on other grounds by Erica P. John Fund, Inc. v. Halliburton Co, 131 S. Ct. 2179 (2011); see also In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011) (holding that plaintiffs need not prove materiality at the certification stage, but that defendants may nevertheless rebut the presumption of reliance by proving lack of materiality).

[4]  Compare Reed v. Fla. Metro. Univ., Inc., 681 F.3d 630, 645 (5th Cir. 2012) (holding that “Stolt-Nielsen . . . require[es] courts to ensure that an arbitrator has a legal basis for his class arbitration determination . . . .  [This] necessarily requires some consideration of the arbitrator’s award and rationale.”), with Jock v. Sterling Jewelers Inc., 646 F.3d 114 (2d Cir. 2011) (citing deferential standard of review applicable to arbitrators’ decisions, and upholding arbitrator’s determination that class arbitration was permitted because the agreement did not expressly prohibit it).

[5]  See, e.g., Coneff v. AT & T Corp., 673 F.3d 1155, 1158 (9th Cir. 2012) (holding that Concepcion is so “broadly written” that it forecloses the vindication of statutory rights argument).  In Kilgore v. KeyBank, National Association, an en banc panel of the Ninth Circuit will decide whether Concepcion abrogated a California rule prohibiting the arbitration of claims for public injunctive relief under California’s Unfair Competition Law and Consumers Legal Remedies Act (“CLRA”).  See 673 F.3d 947 (9th Cir. 2012), reh’g en banc granted, 697 F.3d 1191.  The original panel reasoned that although such a rule was potentially desirable for public policy reasons, Concepcion made clear that the FAA preempts any state-law rule that “‘prohibits outright the arbitration of a particular type of claim'”  Id. at 957 (quoting Concepcion, 131 S. Ct at 1747).  California state courts have split on this issue.  Compare Flores v. W. Covina Auto Grp., — Cal. App. 4th —-, No. B238265, 2013 WL 139200, at *9 (Jan. 11, 2013) (holding that the FAA, as construed by Concepcion, preempts the CLRA’s prohibition on class waivers in arbitration agreements), with Caron v. Mercedes-Benz Fin. Servs. USA LLC, 208 Cal. App. 4th 7 (Ct. App. 2012) (enforcing CLRA restriction on class waivers notwithstanding Concepcion), review granted, 149 Cal. Rptr. 3d 247 (Cal. 2012).

[6]  In 2012, the Supreme Court issued several per curiam reversals that sought to eliminate residual judicial hostility to arbitration.  See Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1203 (2012) (per curiam) (reversing West Virginia Supreme Court ruling that enforced state law invalidating attempts to arbitrate claims for personal injury or wrongful death violations under Concepcion on the grounds that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward:  The conflicting rule is displaced by the FAA.”); Nitro-Lift Techs., L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam) (reversing decision that refused to submit noncompetition clause in employment agreement to arbitration:  “[T]he Oklahoma Supreme Court must abide by the FAA, which is ‘the supreme Law of the Land.'”); KPMG LLP v. Cocchi, 132 S. Ct. 23, 24 (2011) (per curiam) (reversing Florida District Court of Appeal decision that two of the four claims in a putative class action were nonarbitrable; under Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 217 (1985), courts must allow the arbitrable claims to be arbitrated).

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 co-chairs of the Class Actions Group:

Gail E. Lees – Los Angeles (213-229-7163, [email protected])
Andrew S. Tulumello – Washington, D.C. (202-955-8657, [email protected])
Christopher Chorba – Los Angeles (213-229-7396, [email protected])

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