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Cutting-Edge Issues in Class Action Law and Policy

Primary Jurisdiction is Gaining Some Weight in the Food Court

Posted in Class Action Trends, Motions Practice

The plaintiffs’ bar continues to file consumer class actions challenging food and beverage labels en masse, especially in the Northern District of California—also known as the “Food Court.” One particular line of cases—at least 52 class actions, at last count—targets companies selling products containing evaporated cane juice. The battle over evaporated cane juice has become the latest front in the war over whether federal courts should apply the primary-jurisdiction doctrine and dismiss or stay food class actions while awaiting guidance from the federal Food and Drug Administration.

In these cases, plaintiffs allege that the term “evaporated cane juice” is misleading because (in their view) it disguises the fact that the ingredient is a type of “sugar”; they contend that the ingredient  should be identified as “sugar.” Their theory rests almost entirely on a draft guidance that the FDA issued in 2009, in which the agency proposed the ingredient be called “dried cane syrup” (notably, not “sugar”), and invited public comment on the issue. That guidance suggested that the name “evaporated cane juice” not be used because it suggests the ingredient is a juice.

In response to these lawsuit, many defendants have emphasized that the FDA’s 2009 guidance not only is non-binding, but that the existence of the guidance establishes that the FDA is examining the precise issue underlying plaintiffs’ theory of liability. Accordingly, defendants argue, courts should let the agency finish its work. Or, put another way, because the federal Food, Drug, and Cosmetic Act squarely authorizes the FDA to regulate the names of ingredients as part of its power to prescribe uniform national standards for food labels, the issue is within the FDA’s “primary jurisdiction.” Thus, as we have contended in advancing the primary-jurisdiction argument, the issue should be decided by an expert agency, not via litigation brought by profit-motivated consumer class action lawyers.

How have these arguments fared? Because the FDA did not take action for over four years after issuing the 2009 draft guidance, plaintiffs had a great deal of success in convincing courts that the FDA was not actively addressing the evaporated-cane-juice issue further and therefore that applying the primary-jurisdiction doctrine was inappropriate.

All that changed in March 2014, when the FDA published a notice in the Federal Register reopening the comment period on the 2009 draft guidance and emphasizing that it has “not reached a final decision on the common or usual name for” evaporated cane juice and that it “intend[s] to revise the draft guidance, if appropriate, and issue it in final form.” [Our firm recently filed a comment with the FDA on this issue.]

As if a light had been switched on, virtually every court to consider the issue since the March notice—at least 10 class actions so far—has ruled in favor of deferring to the FDA’s primary jurisdiction in evaporated-cane-juice cases. This overwhelming trend is welcome news.

But from our perspective, the fact that the FDA recently reiterated its interest in this area should not have been necessary to trigger the primary-jurisdiction doctrine. Indeed, even before the March 2014 notice, the question of the proper labeling of evaporated cane juice was one within the primary jurisdiction of the FDA, as at least one court recognized.

To be sure, as one judge has put it, whether the FDA (or another regulatory agency) “has shown any interest in the issues presented by the litigants” appears to be an “unofficial fifth factor” that influences courts grappling with whether primary jurisdiction should be applied in a given case. Greenfield v. Yucatan Foods, L.P., — F. Supp. 2d –, 2014 WL 1891140, at *4-5 (S.D. Fla. May 7, 2014). But this “unofficial fifth factor” is neither necessary nor part of the four, well-recognized factors for applying primary jurisdiction: “(1) [a] need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration.” Clark v. Time Warner Cable, 523 F.3d 1110, 1115 (9th Cir. 2008).

The same factors were satisfied in the evaporated-cane-juice context even before the March 2014 notice.  And—speaking more generally—uncertainty over when the FDA will act should not be treated as an invitation for different courts to apply different state laws and develop differing labeling regimes.

Here’s hoping for a few more helpings of primary jurisdiction at the Food Court—and a few more scoops of uniformity and certainty for the food and beverage industry.

More Thoughts On Ascertainability And Why It Matters In Deciding Whether To Certify A Class Action

Posted in Ascertainability, Class Certification

Can you have a class action if you can’t figure out who’s in the proposed class? According to many in the plaintiffs’ bar, the answer is “yes.” But as we have discussed in prior blog posts, there is an emerging consensus to the contrary. Most courts agree that plaintiffs in consumer class actions have the burden of proving that members of the putative class can be identified (i.e., that the class is ascertainable). And most of those courts have held that it is not sufficient for plaintiffs to rely upon affidavits by would-be class members who attest that they fall within the class definition.

The Third Circuit adopted both of those principles last fall in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013). As we have reported, that court recently denied en banc review over objections by plaintiffs’ lawyers that taking ascertainability seriously would render many class actions unsustainable.

As it turns out, a growing number of other courts are following Carrera’s lead in holding that classes whose membership cannot be determined flunk the ascertainability requirement and therefore cannot be certified.

For example, in Karhu v. Vital Pharmaceuticals, Inc. (pdf) (S.D. Fla. Mar. 3, 2014), the court refused to certify a putative class of purchasers of weight-loss supplements. The court explained that the plaintiffs had failed to show any objective, administratively feasible method of ascertaining the identities of class members. Class members could not be identified from the defendants’ records because the products were sold to retailers, and defendants therefore had no database of end-user consumers. The plaintiffs could not show that the purchasers could be identified from the records of third-party retailers. And, of course, few if any purchasers would have retained receipts from such purchases years after the fact.

The plaintiffs argued that class members could simply submit affidavits confirming that they bought the supplements at issue during the relevant time period. But the court recognized that this process would be extremely unwieldy, and would inevitably devolve into “a series of mini-trials” over the circumstances of particular purchases that would “defeat the purpose of class action treatment.” And the court added—citing Carrera—that simply exempting the affidavits from individualized challenges would lead to fraudulent claims, which “could dilute the recovery of genuine class members.”

Similarly, a federal court recently decertified a California class action—in part on ascertainability grounds— in In re Pom Wonderful LLC Marketing and Sales Practices Litigation (pdf) (C.D. Cal. Mar. 25, 2014). The plaintiffs alleged that Pom Wonderful had misled a class of California customers with purportedly false or misleading statements in advertising about the “various health benefits” of “certain Pom juice products.” But the court held that class members could not be identified, and therefore that no “ascertainable class exists.” In reaching that conclusion, the court provided some useful guidance on how ascertainability works:

  • “Class actions, and consumer class actions in particular, each fall on a continuum of ascertainability dependent upon the facts of the particular case or product.”
  • “While no single factor is dispositive, relevant considerations include the price of the product, the range of potential or intended uses of a product, and the availability of purchase records.”
  • “In situations where purported class members purchase an inexpensive product for a variety of reasons, and are unlikely to retain receipts or other transaction records, class actions may present such daunting administrative challenges that class treatment is not feasible.”

Applying these principles, the court readily concluded that the proposed class in Pom Wonderful “falls well towards the unascertainable end of the spectrum.” That was so for multiple reasons, including that (i) “millions of consumers paid only a few dollars per bottle”; (ii) “[f]ew, if any consumers, are likely to have retained receipts”; (iii) “[n]o bottle, label, or package included any of the alleged misrepresentations” (as they were all contained in advertising); and (iv) “consumer motivations” for purchasing Pom juice “likely vary greatly, and could include a wide array of sentiments such as ‘I was thirsty,’ ‘I wanted to try something new,’ ‘I like the color,’ ‘It mixes well with other beverages,’ or even, ‘I like the taste,’ or, as Plaintiffs contend, ‘It prevents prostate cancer.’” As a result, “there is no way to reliably determine who purchased [the challenged] products or when they did so.”

(The decision also contains an extensive discussion of why the plaintiffs’ proposed damages models failed to satisfy the predominance requirement under Comcast Corp. v. Behrend.)

Carrera, Karhu, and Pom Wonderful should be helpful for defendants who oppose class certification when the proposed class consists of purchasers of consumer products for which there are no customer lists. In these cases, plaintiffs often have no real plan for satisfying the ascertainability requirement other than by inviting a show of hands—via barebones affidavits—from the (relatively few) individuals who might want a small payout from a potential class fund.

In response, defendants routinely (and appropriately) argue that affidavits are not good enough, because due process entitles them to challenge an individual’s claim that he or she purchased a given product, such as by cross examination at a trial. Recognizing that the right to individualized cross-examination would render a trial unmanageable—making class certification inappropriate—plaintiffs sometimes argue that fraudulent claims can be winnowed out through the use of a claims administrator.

That approach strikes us as improper. To be sure, in class action settlements, the parties often agree that a claims administrator may make judgments to determine whether a claimant truly is a class member who qualifies for benefits and to assess whether any submitted claims are fraudulent. But that agreement reflects one of the compromises of settling a case, in which defendants trade away the right to cross-examine each putative class member in exchange for certainty, finality, and—most significantly—a substantial discount on the potential liability claimed by the plaintiff and his or her counsel.

By contrast, in a litigated case, defendants’ due process rights cannot be so easily jettisoned. In the absence of party agreement, how can it be that the administrative determinations of an outside third party serve as an adequate substitute for a defendant’s right to cross-examine its accusers and for judicial resolution of factual disputes? (We leave to one side whether assessments by claims administrators would be accurate, but commend to our readers an article by Alison Frankel discussing an interesting amicus brief on the subject that was filed in Carrera.)

* * *

In short, when it comes to ascertainability, the list of questions goes on and on. Defendants targeted by consumer class actions where customer lists are not readily available may wish to insist upon answers.

Third Circuit Rejects Effort At End Run Around The Ascertainability Requirement

Posted in Ascertainability, Class Certification

We previously wrote about the Third Circuit’s decision in Carrera v. Bayer Corp., which reversed a district court’s class-certification order because there was no reliable way to ascertain class membership—indeed, no way to identify who was a member of the class aside from a class member’s own say-so. Last week, the full Third Circuit denied (pdf) the plaintiff’s request to rehear the case en banc over the dissent of four judges. The clear message of Carrera is that when plaintiffs file class actions that have no hope of compensating class members for alleged wrongs because the class members can’t be found, courts should refuse to let these actions proceed.

As we discuss below, the denial of rehearing is significant in itself, given the concerted efforts by Carrera and his amici to draw attention to the case. But what might be most significant about this latest set of opinions is what even the dissenting judges did not say.

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Are You Objecting to Personal Jurisdiction In Magnet Jurisdictions Yet?

Posted in Motions Practice, U.S. Supreme Court

Until recently, many large companies have resigned themselves to the assertion of personal jurisdiction by courts in any state in which they do business—so long as the plaintiff has named the right corporate entity as defendant. That’s because the conventional wisdom has been that large companies are subject to personal jurisdiction nationwide because they do a lot of business in every state.

The Supreme Court recently has provided reason to revisit that assumption, however. Two recent decisions by the Court place significantly tighter limitations on the assertion of personal jurisdiction, equipping businesses with new defenses against forum-shopping by plaintiffs’ class-action lawyers.

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Class Action Can’t Be Remanded To State Court Just Because The Plaintiff Says It’s Uncertifiable

Posted in Motions Practice

When was the last time you saw a plaintiffs’ lawyer seeking to represent a class argue that the class couldn’t be certified? Readers might wonder whether this is a trick question. In a sense, it is. In Hoffman v. Nutraceutical Corp. (pdf), the Third Circuit upheld the denial of a motion to remand a class action to state court, rejecting the argument—made by the named plaintiff himself!—that a class could not be certified under controlling circuit precedent. The Third Circuit acknowledged that the plaintiff was right about the governing law, but pointed out that the relevant jurisdictional inquiry was whether the stakes placed in issue by the proposed complaint satisfy the Class Action Fairness Act’s $5 million amount-in-controversy requirement—not whether the requirements of Rule 23 are satisfied.

So what gives? It turns out that—according to the Third Circuit—named plaintiff Harold Hoffman “is an attorney who has made a habit of filing class actions in which he serves as both the sole class representative and sole class counsel.” And that’s what Mr. Hoffman had done here by filing a putative class action in New Jersey state court against a nutritional supplement company—offering to serve as both class representative and class counsel. The company removed the case to federal court, and Mr. Hoffman moved to remand the case to state court. The district court rejected that motion, and—after the case was dismissed on the merits—Hoffman contended on appeal that the case should have been returned to state court because it was a “legal certainty” that the $5 million amount in controversy could not be met in his case. As summarized by the Third Circuit, Mr. Hoffman argued that “because [he] is both the sole class representative and the sole attorney for the class, the purported class cannot possibly be certified under established Third Circuit law. … Thus, he reasons, the amount in controversy of the action—as least while the case remains in federal court—is tantamount to the value of Hoffman’s individual claim, roughly $200, rather than the aggregate value of the class members’ claims, which would easily exceed $5 million.”

Mr. Hoffman was correct that, under the Third Circuit’s precedent—like the prevailing rule in many other federal circuits—a named plaintiff cannot serve as class counsel. That is so because, as a number of federal courts have explained, a class representative cannot adequately monitor the class counsel—and guard against counsel’s incentives to maximize attorneys’ fees rather than the class’s recovery—when the class rep is class counsel.

The plaintiff in Hoffman suggested that state courts might tolerate class actions in which the named plaintiff is the class counsel even though federal courts will not. That argument, however, runs afoul of the very reason CAFA was enacted: to avoid the application of lax certification standards to class actions involving claims worth $5 million or more. For that reason, the Third Circuit rightly rejected Mr. Hoffman’s attempt at an end-run around CAFA.

Another California Court Does Backflips to Thwart Arbitration and Elevate The Class-Action Device

Posted in Arbitration

The hostility of some California courts to arbitration—and their resistance to preemption under the Federal Arbitration Act (FAA)—has produced nearly three decades of U.S. Supreme Court reversals. The most recent is AT&T Mobility LLC v. Concepcion, which held that the FAA preempted the Discover Bank rule, under which the California Supreme Court had blocked enforcement of consumer arbitration agreements that required individual rather than class arbitration. Last week’s decision in Imburgia v. DirecTV, Inc. (pdf) demonstrates that resistance to Concepcion lives on in the California courts, even at the cost of creating a split with the Ninth Circuit on the same issue in the same contract used by the same company.

Specifically, DirecTV’s arbitration agreement—like many others—provides that the arbitration agreement shall not be enforced if a court invalidates the ban on class arbitration. Taking advantage of the specific wording of the agreement, a panel of the California Court of Appeal in Los Angeles held that the preemptive effect of Concepcion did not apply and the agreement could be invalidated on the basis of the very Discover Bank rule that Concepcion held was preempted.

The arbitration clause at issue in Imburgia appeared in Section 9 of DirecTV’s customer agreement; the arbitration clause expressly precluded class actions and class arbitration. Section 10 provided that “Section 9 shall be governed by the Federal Arbitration Act.” Section 9 also stated, after the sentence that waived class procedures: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”

The Imburgia court held that the reference to “the law of your state” should be read to invalidate the arbitration agreement if the class waiver would be unenforceable under state law without regard to the preemptive effect of the FAA. That is, the court held, the agreement was subject to state-law rules that are invalid under the FAA even though the arbitration agreement explicitly provided that the FAA would govern. That holding takes an idiosyncratic view of the Supremacy Clause, which mandates that federal law—including the FAA—trumps contrary state law. Under the Supremacy Clause, once state law has been displaced by federal law, the state law cannot survive in some shadow universe. Rather, state law is not “law” when it has been declared unconstitutional, whether because it violates the First Amendment or the Supremacy Clause because it is preempted by a federal statute.

Imburgia also expressly conflicts with the Ninth Circuit’s decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which enforced the same clause and rejected the same argument. The Ninth Circuit explained that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state.” DirecTV may well seek further review in light of this conflict.

In the meantime, Imburgia offers businesses a pair of cautionary lessons. First, businesses that use arbitration clauses should not underestimate the pockets of resistance to Concepcion and other recent Supreme Court precedents—especially in some California state courts.

Second, the decision underscores the importance of careful drafting of arbitration clauses that waive class actions. Even though the Supreme Court has made clear that any doubts concerning the scope of arbitral agreements should be resolved in favor of arbitration, the court here—like other courts hostile to arbitration—chose to construe the language of the arbitration clause against the drafter. And viewed in that (improper) light, it is easy to see why the wording of DirecTV’s clause, and in particular the use of the phrase—“[i]f … the law of your state would find …”—unnecessarily appeared to give state law special stature. Choice-of-law issues have bedeviled companies in the past—as detailed in an article (pdf) one of us has published, it is important for companies to address the governing law carefully in their agreements and thus minimize the risk that hostile courts will apply the wrong law to defeat arbitration.

Federal Court Upholds FTC’s Authority To Bring Enforcement Actions Over Data-Security Standards; Will Class Actions Follow?

Posted in Class Action Trends

Already, 2014 has been an eventful year in the world of data breaches and cybersecurity. In addition to a flurry of litigation over high-profile breaches at the start of the year, the National Institute for Standards and Technology released its long-anticipated Cybersecurity Framework. The latest development is the recent decision in the closely-watched Wyndham case, in which a federal district court has just held that the Federal Trade Commission may use its “unfairness” authority under Section 5(a) of the FTC Act to enforce data-security standards. As a result, companies can expect the FTC to continue—and perhaps even expand—its efforts to regulate data-security standards through enforcement actions. And (as we have seen time and time again) where the FTC leads, the plaintiff’s bar often follows by filing class actions piggybacking on the agency’s allegations.

What happened in Wyndham?

The Wyndham action arose when a group of hackers allegedly penetrated the hospitality chain’s networks from 2008 to 2010, and compromised over a half-million payment card numbers. Already facing the substantial financial and reputational harm caused by the hackers’ crime, Wyndham next found itself facing a civil action filed by the FTC. In its initial and amended complaints, the FTC alleged that Wyndham had not maintained reasonable and appropriate data security measures. The agency claimed that Wyndham had engaged in (1) deception through alleged misrepresentations of the company’s data-security practices; and (2) “unfair” conduct based upon the harms allegedly suffered as a result of the purportedly unreasonable data-security practices.

Wyndham moved to dismiss the amended complaint, arguing, among other things, that the FTC’s “unfairness” authority does not extend to data security, that the FTC had failed to provide fair notice of what Section 5 of the FTC Act requires, and that Section 5 does not govern the security of payment card data. Wyndham—joined by a number of amici—pointed to the FTC’s lack of clear statutory authority, the continued legislative debates about data-security standards, and the FTC’s failure to establish standards through rulemaking as powerful reasons why the FTC lacked the authority to regulate data-security practices through Section 5 enforcement actions.

The district court was not persuaded. It concluded that more narrow data-security requirements enacted by Congress complemented, rather than precluded, the FTC’s assertion of authority under Section 5. The court also disagreed with defendants about the import of the ongoing legislative debates and prior statements by the FTC about the limits of its authority to regulate data security. The court thus declined “to carve out” what it understood to be “a data-security exception to the FTC’s authority.” The court likewise held that the FTC did not need to promulgate rules before exercising that authority, and that the FTC had adequately pled its unfairness claim. Finally, the court rejected the defendants’ challenge to the FTC’s deception claim.

Implications of the Wyndham decision

Many observers believe that the district court’s decision—and the resulting headlines—may serve to boost the FTC’s efforts to regulate data security. From our perspective, the decision (unless it is overturned on appeal) may have a significant effect on data-breach class actions as well for at least three reasons.

First, past FTC actions have spawned follow-on class litigation. Continued or possibly expanded FTC activity in the field of data security thus does not bode well for companies that must defend themselves first from hackers and then from regulators and plaintiffs’ attorneys who seek to turn a company’s victimization into a basis for claimed liability.

Second, the district court’s highlighting of what it called “data-security insufficiencies” may foreshadow a focus on simplistic checklists rather than on risk-based data security practices. These supposed “insufficiencies” include allegations that the company stored unencrypted data, used outdated operating systems, and failed to require the use of complex passwords. These purported “insufficiencies” were described in a manner bereft of any context—and in particular, without any reference to the specific risks facing the company or the company’s overall security response. But data security is not one-size-fits-all. Context does matter. For that reason, the creation of a data security checklist through litigation, whether by the FTC or by a putative class representative, will benefit no one.

Third, the district court’s willingness to authorize case-by-case development of security standards—including through the use of consent orders that provide little or no guidance to non-parties—promises legal and regulatory uncertainty for companies in an area that cries out for stable and predictable guidelines. This uncertainty will only increase if class actions are allowed to further complicate the existing patchwork of data-security standards.

At bottom, the Wyndham decision is troubling for companies that seek to manage data-security risks and stave off unnecessary and inappropriate litigation. Indeed, the district court appeared resigned to the prospect of more litigation in this area, noting that “we live in a digital age that is rapidly evolving” and that will raise “a variety of thorny legal issues that Congress and the courts will continue to grapple with for the foreseeable future.” Companies certainly should hope that the district court was wrong to forecast more litigation, but should be prepared for continued legal uncertainty and the opportunistic litigation it will generate.

We’ll be discussing the Wyndham decision—along with many other new trends and strategies in data breach and privacy class actions—in a webinar next week. We hope that clients and friends of the firm will consider joining us for that discussion.

Supreme Court to Decide Whether All Evidence Supporting Removal Under the Class Action Fairness Act Must Be Submitted With The Notice of Removal

Posted in Motions Practice, U.S. Supreme Court

To remove a civil action from state court to federal court, the defendant must “file … a notice of removal … containing a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a). Today, the Supreme Court granted certiorari in Dart Cherokee Basin Operating Co. v. Owens, No. 13-719, to decide whether a notice of removal must also include evidence supporting jurisdiction if the facts establishing jurisdiction do not appear on the face of the state-court complaint. The Court’s resolution of this issue will be important to all businesses seeking to remove state-court class actions to the federal courts.

Owens, the plaintiff in Dart Cherokee, filed a class action in Kansas state court seeking to recover oil and gas royalties, but did not specify the amount sought. The defendants responded by filing a notice of removal that invoked the Class Action Fairness Act of 2005. The notice alleged that the royalties at issue exceeded $8.2 million, and thus satisfied the CAFA’s $5 million jurisdictional minimum. See 28 U.S.C. § 1332(d)(2). When Owens moved to remand the suit to state court, the defendants filed a declaration supporting the jurisdictional facts alleged in their notice of removal. Relying on Tenth Circuit precedent, the district court remanded the case on the ground that the defendants had not “establish[ed] by a preponderance of the evidence that the amount in controversy exceeds $5 million” because they had “fail[ed] to incorporate any evidence supporting [their] calculation in the notice of removal, such as an economic analysis of the amount in controversy or settlement estimates.” The district court refused to consider the evidence filed with the opposition to the motion to remand, holding that the defendants “were obligated to allege all necessary jurisdictional facts in the notice of removal.” A divided panel of the Tenth Circuit denied leave to appeal; and rehearing en banc was denied by an equally divided court, over a published dissent.

According to the petition for certiorari, the Fourth, Seventh, Eighth, Ninth, and Eleventh Circuits apply a notice-pleading standard, requiring that notices of removal include allegations but not evidence. Furthermore, the petition contends, the First, Fourth, Fifth, Seventh, Ninth, and Eleventh Circuits have either allowed or required district courts to consider post-notice removal evidence when deciding whether to remand.

The correct articulation of the procedures and evidentiary burdens for seeking removal, especially under the CAFA, will be of substantial interest to any business that may prefer a federal forum to state court. In many consumer class actions, it is a challenge to assemble sufficient evidence of the size of the putative class and the potential value of their claims by the 30-day deadline for a notice of removal. The Dark Cherokee case will determine whether defendants will continue to have the option, now available in most circuits, of pleading jurisdictional facts in the notice and establishing them with evidence some weeks later in the opposition to any motion to remand.

Class-Action Plaintiffs Must Offer Evidence Showing That They Meet Class-Certification Requirements

Posted in Adequacy, Class Certification, Predominance, Securities

A recent decision denying certification of a securities-fraud class action underscores that plaintiffs must prove with evidence that they satisfy the requirements of Federal Rule of Civil Procedure 23, not merely allege that they do so or promise that they can.

The decision in In re Kosmos Energy Limited Securities Litigation arose from a class action filed in the Northern District of Texas by plaintiffs challenging certain statements made in connection with the defendant’s initial public offering (“IPO”). The court denied the plaintiff’s motion to certify a putative class of stock purchasers.

In its opinion, the court provided a useful overview of class-certification law, explaining that courts have moved “away from the presumptively pro-plaintiff view” of class actions that had prevailed decades ago. The court explained that “[g]oing forward, the clear directive to plaintiffs seeking class certification—in any type of case—is that they will face a rigorous analysis by the federal courts, will not be afforded favorable presumptions from the pleadings or otherwise and must be prepared to prove with facts—and by a preponderance of the evidence—their compliance with the requirements of Rule 23” (emphases added)

The court concluded that the plaintiff had failed to provide evidence establishing that it would be an adequate class representative or that common issues of law or fact would predominate over individualized ones. The plaintiff had attempted to rest in large part on allegations in the complaint and broad statements in dicta in past decisions. The court didn’t buy it.

The court first explained that “adequacy is the plaintiff’s burden to prove—not the defendant’s burden to disprove.” The court also criticized the plaintiff’s declaration attesting in impossibly vague terms that she had “reviewed” the pleadings and “supervised” her lawyers. As the court put it, “this type of generic detail is really no detail at all, for it provides naught by which to assess [the plaintiff’s] credibility, her knowledge about the underlying facts of the case, or how much of what she has stated may have been prompted by counsel. Indeed, any potential class representative in any securities case could make almost identical assertions.”

With respect to predominance, the court concluded that the plaintiffs were effectively asking for an assumption that securities class actions are certifiable. That “assumption,” the court explained, was “ill-founded.” The court also emphasized that “[w]hile Defendants offered a 107-page Expert Report demonstrating the need for individual inquiries into investor knowledge, Lead Plaintiff offered no proof from which to draw an inference that individual inquiries may not be required if the Court were to certify this putative class . . . .”

This decision is good news for businesses—and not just in the context of securities-fraud class actions. True, those suits are subject to heightened pleading requirements set forth in the Private Securities Litigation Reform Act (“PSLRA”). But the court’s denial of class certification rested on fundamental principles arising from Rule 23 itself, which applies to all class actions in federal court.

Plaintiffs Can’t Evade Removal Under Class Action Fairness Act By Suing For Only Declaratory Relief

Posted in Motions Practice

Over the years, the plaintiffs’ bar has used a wide variety of stratagems to try to prevent defendants from removing class actions to federal court. We’ve previously blogged about several of them. A recent Eleventh Circuit decision addresses yet another page from the plaintiffs’ playbook.

Defendants often can remove significant class actions under the Class Action Fairness Act (CAFA) when there is at least minimal diversity of parties and the amount in controversy exceeds $5 million. In South Florida Wellness, Inc. v. Allstate Insurance Co. (pdf), the plaintiffs tried to prevent the defendant from satisfying CAFA’s $5 million amount-in-controversy requirement by suing for only a classwide declaratory judgment. The plaintiffs’ theory of liability apparently would have put roughly $68 million at stake—the difference between the formula for reimbursement that the defendant insurance company had used and the formula the plaintiffs alleged should have been used. But the plaintiffs argued that because they weren’t directly seeking money damages, it would be “too speculative” to value the declaratory relief at issue as exceeding CAFA’s $5 million threshold; not every class member necessarily would capitalize on the declaratory judgment, the plaintiffs contended.

The district court agreed with the plaintiffs’ argument and remanded the case. But the Eleventh Circuit reversed, holding that the value of the declaratory judgment sought could be calculated concretely enough. The appropriate touchstone for that value is “how much will be put at issue,” not the expected value of the plaintiff’s claims “discounted by the chance[s] that the plaintiffs will lose on the merits,” that “the putative class will not be certified, or that some of the unnamed class members will opt out.” “[F]or amount in controversy purposes,” the Eleventh Circuit reaffirmed, “the value of injunctive or declaratory relief is the value of the object of the litigation measured from the plaintiff’s perspective.”

The defendant insurance company had offered unrebutted evidence that the difference between the amount in claims that it in fact had paid to class members and the amount that class members could receive if the theory outlined in plaintiffs’ complaint was entirely successful was $68 million. That calculation, the Eleventh Circuit held, satisfied CAFA’s $5 million amount-in-controversy requirement. In so holding, the Eleventh Circuit rejected the plaintiffs’ contention that the additional steps needed to convert the declaratory judgment into dollars in each class member’s pockets—i.e., mailing a demand letter and potentially filing a lawsuit supported by proof on some elements—made the value of the declaratory judgment too speculative for removal purposes.

The Eleventh Circuit’s decision in South Florida Wellness should be helpful to businesses trying to remove class actions that seek only declaratory relief. In fact, the court’s reminder that CAFA’s amount-in-controversy requirement looks to the maximum potential value of the claims rather than the discounted expected value following litigation should be helpful in explaining why removal is proper under CAFA in cases seeking all kinds of relief.