Ninth Circuit Holds That State Is Precluded from Seeking Remedies Released Through Previous Class Action Settlement

November 13, 2014

An important new Ninth Circuit case holds that class action settlements may limit the remedies available in subsequently filed state enforcement actions.  In California v. IntelliGender, Case No. 13-56806 (9th Cir. Nov. 7, 2014), the State of California filed an action in California Superior Court against IntelliGender, the manufacturer of a fetal prediction test, alleging violations of California’s Unfair Competition Law ("UCL") and False Advertising Law ("FAL").  IntelliGender had previously settled similar claims in a nationwide class action in federal court.  IntelliGender removed the State’s action to federal court and sought to enjoin the State from litigating claims that had previously been settled.  The issue before the district court, and eventually the Ninth Circuit, was the impact a class action settlement has on a State’s action relating to the same alleged conduct.

In the underlying class action, plaintiffs sued IntelliGender in district court invoking jurisdiction under the Class Action Fairness Act ("CAFA") and alleging violations of California’s UCL, FAL, and Consumer Legal Remedies Act.  The parties subsequently settled the action on behalf of "all individuals who personally purchased a Test between November 1, 2006 and January 31, 2011. . . ."  IntelliGender agreed to pay $10.00 for each approved claim submitted by a class member who purchased the test and received an inaccurate result.  The parties notified the appropriate State officials pursuant to 28 U.S.C. § 1715, none of whom intervened, and the settlement was ultimately approved by the district court. 

The State of California subsequently filed an enforcement action alleging essentially the same claims asserted and settled in the class action and seeking civil penalties, injunctive relief and restitution on behalf of all purchasers of the IntelliGender test.  IntelliGender sought to enjoin the State’s entire action, and when that failed, it sought to enjoin only the State’s restitution claims, arguing that the class had released its restitution claims through the settlement.  The district court rejected both motions, and IntelliGender appealed. 

The Court of Appeals reversed as to the State’s restitution claim on res judicata grounds.  Noting that the first two res judicata requirements–i.e., a final judgment and the same cause of action or claim–were easily satisfied, the Court held that sufficient privity also existed between the State and the class members, because the government was suing for "the same relief that plaintiff[s] [had] already pursued."  (emphasis, quotations and citation omitted).  The Court found it irrelevant that the amount of restitution sought by the State (the full amount paid for the test or $30.00 per claimant) was different from the settlement amount or that under the settlement only certain class members were compensated:  "If the State wished to secure compensation for those class members, it had an opportunity to do so by intervening after receiving notice of the proposed settlement. . . .  The State chose not to use its authority, and the settlement was approved.  Compensation is res judicata."  The Court held that the district court should have issued an injunction to protect its continuing jurisdiction to enforce and administer the settlement.

In comparison, the Court affirmed the district court’s denial of IntelliGender’s motion to enjoin the State’s enforcement action in its entirety, citing to the "well-established general principle that the government is not bound by private litigation when the government’s action seeks to enforce a federal statute that implicates both public and private interests."  Accordingly, the State may still seek penalties and injunctive relief.

The Ninth Circuit’s holding is significant because it precludes the State from seeking restitution from a defendant for alleged UCL/FAL violations where the aggrieved consumers have already settled their UCL/FAL claims against the defendant.

Gibson, Dunn & Crutcher LLP     

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers:

Gail E. Lees – Los Angeles (213-229-7163, [email protected])
Christopher Chorba
– Los Angeles (213-229-7396, [email protected])
Andrew S. Tulumello
– Washington, D.C. (202-955-8657, [email protected])
Austin V. Schwing – San Francisco (415-393-8210, [email protected])

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