Another Ninth Circuit panel has roiled the class certification waters, this time rejecting a class action settlement because the district court did not conduct a meaningful analysis of predominance.
Donald Falk has an extensive appellate practice in which he presents oral arguments, briefs, and motions in the US Supreme Court, and many other federal and state appellate and trial courts. His work involves a wide range of constitutional, statutory, patent, securities, administrative, criminal and common law issues. Don has successfully argued before the United States Supreme Court and the highest courts of California, New York, Maryland and Texas, and has briefed winning appeals in the Delaware and Nevada Supreme Courts. Don frequently briefs and argues cases in the federal and California state appellate courts. He has substantial experience with California's broad unfair competition law (Business & Professions Code Â§ 17200), and many of his recent matters have involved class certification issues and preemption under the Federal Arbitration Act.
What’s the difference between claiming that a food product is improperly certified as organic and claiming that the producer was properly certified but the product isn’t really organic? A unanimous California Supreme Court held in Quesada v. Herb Thyme Farms, Inc. (pdf) that state courts and juries should figure out the answer. That ruling opens the door to state-law actions that challenge food producers’ compliance with the federal organic food product certification and labeling scheme, so long as the claims don’t take issue with the original certification decision. The decision revived a consumer class action alleging that a food producer—though properly certified to use the “organic” label—intentionally misapplied that label to products containing conventionally produced herbs from one of its noncertified facilities.
Drawing an exquisitely fine line, the California Supreme Court held that preemption extends only to “matters related to certifying production as organic” and left “untouched enforcement against abuse of the label ‘organic.’” The court concluded that state lawsuits alleging intentional misuse of an organic label were not preempted because (in the California court’s view) lawsuits of that kind would help rather than hinder Congress’s objective.
The federal Organic Foods Production Act of 1990 (OFPA) creates a uniform, federal definition of the term “organic” and gives the U.S. Department of Agriculture exclusive authority to elucidate the labeling standard and to certify producers as qualifying to label food as “organic.” The USDA may approve a state agency to carry out the certification function and impose more stringent state substantive standards. The California Department of Food and Agriculture has been approved for both of these roles. The OFPA and its California counterpart both provide for administrative enforcement of the regulations, including processes for consumer complaints to the relevant agency.
In Quesada, the plaintiff sued Herb Thyme Farms under California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA), alleging that Herb Thyme applied a “Fresh Organic” label to conventionally produced herbs and to a mixture of organic and conventional herbs. Herb Thyme has an organic farm that has been certified to use the “organic” label, but also operates conventional, nonorganic farms.
The California Supreme Court held that the federal OFPA did not preempt Quesada’s state-law claims. First, the court held that, because the pertinent provisions of OFPA do not reference enforcement, the statute expressly preempts state law only as to the definition of “organic” and the process for certifying that a grower’s methods of production entitle it to use the “organic” label. The California court relied on the fact that the mislabeling claims did not address the certification or compliance of Herb Thyme’s organic facility, but only challenged the use of the “organic” label for Herb Thyme products that contained (or consisted solely of) herbs that were not produced at the certified farm. The federal certification standards also address the procedures to be followed where a producer has both organic and conventional facilities, but the California Supreme Court found that regulation insufficient to bring the case within the OFPA’s preemptive scope.
Second, the California court concluded that Quesada’s claims were not impliedly preempted because they did not pose an obstacle to the uniform federal regulatory scheme, but rather furthered the purpose of that scheme. In the court’s view, once the regulators decide whether a producer or product meets the standards in the first instance, private plaintiffs may enlist state-law theories to enforce the producer’s later compliance with the labeling requirements. According to the court, allowing plaintiffs to use state statutory and common law to enforce the OFPA would “affirmatively further the purposes of the Act”—the more enforcement, the merrier.
By allowing a private plaintiff to pursue a state-law misrepresentation theory to police compliance with OFPA labeling standards, Quesada conflicts with the Eighth Circuit’s decision in In re Aurora Dairy Corp. Organic Milk Marketing & Sales Practices Litigation. The Eighth Circuit held in Aurora Dairy that claims alleging that “milk [was sold] as organic when in fact it was not organic are preempted because they conflict with the OFPA.” As the court of appeals put it, “compliance and certification cannot be separate requirements.” While the plaintiffs in Aurora Dairy could not sue over the use of the “organic” label, they could challenge related assertions and omissions about the way the cows were raised and fed, including affirmative claims that the cows were antibiotic- and hormone-free.
The California Supreme Court tried to avoid the conflict by asserting that the plaintiffs in Aurora Dairy were challenging the certification process itself. But that is not what the Aurora court said; moreover, the claims it allowed were based on representations that did not use the word “organic.”
Although the Quesada decision is limited on its face to claims involving fraudulent or intentional substitution of uncertified products for certified ones, that restriction may provide only modest comfort to defendants. Plaintiffs’ counsel can manipulate the allegations in their complaints with relative ease, particularly under the elastic standards of the UCL and CLRA. And the California Supreme Court opinion reflects hostility to federal preemption, suggesting that state lawsuits serve the purposes of an otherwise uniform federal regulatory scheme merely by increasing the volume of litigation, and that the so-called presumption against preemption may be dispositive even in an area like food safety, where the federal government has been heavily involved for more than 100 years. .
The California Supreme Court has a reputation for hostility to arbitration, especially in the consumers and employment context. Much of the arbitration docket of the United States Supreme Court over the past 30 years has involved reversals of California Supreme Court decisions refusing to enforce arbitration agreements, most recently (and perhaps most notably) in AT&T Mobility v. Concepcion (in which the authors were counsel). Even when seemingly compelled to enforce an arbitration provision in the face of recent U.S. Supreme Court authority, the California court has often found a way to carve out some exception to arbitration in the particular case or to offer suggestions to plaintiffs seeking to avoid arbitration in a future case. A prime example is the 2014 decision in Iskanian v. CLS Transportation, which exempted from arbitration all wage-and-hour civil-penalty claims under the Private Attorney General Act.
The decision in Sanchez v. Valencia Holding Co. (pdf) represents a welcome break from this pattern, upholding an arbitration agreement against an array of unconscionability challenges without finding it necessary to sever even a single clause to render the agreement enforceable. Although every point decided in Sanchez is consistent with recent U.S. Supreme Court authority applying the Federal Arbitration Act, however, the opinion’s emphasis on the specific factual setting may seed further efforts to evade arbitration agreements . As so often is the case, the devil is often in the details.
Article III of the Constitution limits the jurisdiction of the federal courts to “cases” and “controversies.” The Supreme Court has held that “‘an actual controversy … be extant at all stages of review, not merely at the time the complaint is filed.’” Arizonans for Official English v. Arizona, 520 U.S. 43, 67 (1997). Accordingly, “[i]f an intervening circumstance deprives the plaintiff of a ‘personal stake in the outcome of the lawsuit,’ at any point during litigation, the action can no longer proceed and must be dismissed as moot.” Genesis HealthCare Corp. v. Symczyk, 133 S. Ct. 1523, 1528 (2013). In Genesis, the Court recognized that one “intervening circumstance” may arise under Rule 68 of the Federal Rules of Civil Procedure, which permits a party to offer to allow judgment in favor of its adversary on specified terms. A party who rejects a Rule 68 offer, but obtains a judgment “not more favorable than the unaccepted offer,” must pay the costs accrued by the offering party between the offer and judgment. (We’ve previously blogged about Genesis.)
Today, the Court granted certiorari in Campbell-Ewald Company v. Gomez, No. 14-857, to determine whether a defendant’s unaccepted offer of judgment, made before a class is certified, that would fully satisfy the claim of a would-be class representative renders the plaintiff’s individual and class claims moot. The Court also granted certiorari to decide whether the derivative sovereign immunity doctrine recognized in Yearsley v. W.A. Ross Construction Co., 309 U.S. 18 (1940), applies only to claims for property damage caused by public works projects.
A decade ago, California’s unfair competition law (UCL) and its closely related false advertising law (FAL) were the ideal plaintiff’s tools. Any person—even one with no connection to a particular asserted violation or harm—was able to bring a claim on behalf of the “general public” and recover restitution for thousands of people (and, of course, attorney’s fees) without going through the hassle of class certification. But in 2004, the California voters changed that; private plaintiffs who want to sue on behalf of others must certify a class. The statutes still work the old way for public prosecutors, who can invoke the public’s rights without meeting the requirements for class certification.
Sometimes a plaintiff’s attorney and a prosecutor fasten on the same target. Then what? What if the private plaintiffs get there first, settling for the class before a prosecutor brings an action on behalf of the general public?
The Ninth Circuit recently addressed this scenario in People v. Intelligender, LLC. Intelligender makes a test designed to predict a baby’s gender. The test’s accuracy allegedly disappointed some of its purchasers, who brought a class action under the UCL and FAL. Intelligender removed the case to federal court under the Class Action Fairness Act of 2005 (CAFA), and eventually settled the class action. As part of the settlement approval process, the parties notified the California Attorney General, as CAFA requires (see 28 U.S.C. § 1715). The AG did not seek to challenge the settlement—which involved both monetary and injunctive relief—and the district court approved it.
Enter the San Diego City Attorney, who decided that Intelligender had not paid enough. The City Attorney brought a new action in state court on behalf of the general public and in the name of the State, seeking not only a broader injunction and civil penalties but also restitution for same class of buyers that had settled the federal case.
But Intelligender did feel that enough was enough. After removing the case to federal court under CAFA, Intelligender asked the district court to enjoin the entire lawsuit. The district court declined and remanded the case to state court. Intelligender then asked the district court to enjoin only the State’s pursuit of restitution, but the district court declined again.
The Ninth Circuit affirmed in part and reversed in part. The court of appeals agreed that California could pursue its own injunction and could seek civil penalties because the private settlement did not have res judicata effect over a public entity. The court reasoned that law enforcement cannot be shut down by a private settlement, and the private plaintiffs could not and did not pursue civil penalties.
But the Ninth Circuit drew the line at the pursuit of duplicative restitution, which failed under “longstanding principles of res judicata.” Citing the Supreme Court’s admonition in EEOC v. Waffle House, Inc. that “it goes without saying that the courts can and should preclude double recovery by an individual” even when a public agency litigates on the individual’s behalf, the Ninth Circuit turned back the State’s effort to increase the private payout. Because the certified class of all purchasers had settled all their claims for restitution, the State could not step in and seek greater compensation for the same injury. This was so even though the settlement only compensated those whose test results were inaccurate, while the State also sought “restitution” of the entire purchase price for buyers who got everything they paid for—persons who were in the settlement class, but received no payment under the settlement. The time for the State to challenge the lack of payment to uninjured buyers was in the private case after receiving the CAFA-required notice of the settlement.
The Ninth Circuit—joining a long list of district court decisions, including one we blogged about last year—was right to prevent the State from reopening the issue of compensation for class members. Whatever a State may do in pursuing public law enforcement remedies, it cannot try to extract greater payments to individuals whose own claims have been decided or settled. So while defendants cannot altogether stop follow-on UCL actions by public prosecutors, any additional pecuniary liability must run to the State, not to the plaintiffs who sued—and settled—first.
A plaintiff hopes to represent a class to pursue two sets of wage-and-hour claims but runs into headwinds in the district court. First, one set of claims disappears because his legal theory doesn’t withstand a motion to dismiss. Then class certification is denied on what was left. After that, the defendant— invoking Rule 68 of the Federal Rules of Civil Procedure—offers to settle “any liability claimed in this action.” Under Rule 68, if the case goes to judgment and the plaintiff wins less than the offer, he would be liable for the defendant’s costs for any proceedings after the offer was made.
What is to be done? The plaintiff in Sultan v. Medtronic, Inc. thought that he could simply accept the offer of judgment and associated payment and then proceed as if he hadn’t done so. Forging ahead with an appeal of the partial dismissal and the denial of class certification, the plaintiff principally relied on a Ninth Circuit decision that permitted a settling plaintiff to appeal because the accepted offer lacked broad language addressing all claims—and in fact, during negotiations in that case, the parties had deleted an explicit reference to class claims.
Sometimes a settlement really is a settlement, however, and the Ninth Circuit held that this was one of those times. Rejecting the plaintiff’s arguments that the Rule 68 judgment did not moot the class claims because they were not specifically identified in its terms, the court held (in an unpublished opinion) that a settlement of “any liability claimed in this action” was enough to end the entire case. Along with my colleagues John Zaimes and Ruth Zadikany, I was counsel for Medtronic on this appeal.
There seem to be two prevailing conceptions of class actions. In one view, a class action is a way of determining many similar claims at once by evaluating common evidence that reliably establishes liability (and lays a ground work for efficiently calculating damages) for each class member. That is, the class device produces the same results as individual actions would, but more efficiently. In the other view—one we consider misguided—a “class” of plaintiffs complaining about similar conduct can have their claims determined through statistical sampling even if no common evidence will provide a common answer to common factual or legal questions. Instead, this theory holds, the results of mini-trials can simply be extrapolated to the entire class, even if individual results would vary widely.
Last week, the Ninth Circuit took a step deeper into the second camp in Jimenez v. Allstate Insurance Co. (pdf), delivering a ringing endorsement of statistical sampling as a way to establish liability as well as damages.
Sometimes it’s hard to know who’s in a class without substantial individualized inquiries. Can a court certify a class of persons with allegedly similar injuries by pigeonholing the question of class membership as a question of damages to be determined later? Not so fast, the Fourth Circuit held in EQT Production Co. v. Adair (pdf). A class that is not ascertainable ex ante is not a class at all.
And the Fourth Circuit also decided another question that has led to different answers from different courts. When the rule of law proposed by plaintiffs would permit a controlling question to be answered in common for the class, but the competing rule proposed by defendants would require individualized inquiries, can the trial court treat the dispute of law as itself a common question supporting class certification? On this point, the Fourth Circuit held that the court must first determine the correct rule and then decide whether it is susceptible to a common answer. In a recent post, we described a California Court of Appeal decision taking the contrary view; the California Supreme Court has since denied review. (We submitted an amicus letter (pdf) on behalf of the U.S. Chamber of Commerce supporting the petition.)
Finally, the Fourth Circuit outlined a qualitative rather than a quantitative, issue-counting approach to predominance. Under this approach, it is not how many circumstances are common among class members, but whether the common circumstances or other, individualized ones will be more significant in determining class members’ entitlement to relief.
EQT arises from a series of disputes about who was entitled to royalties for coal-based methane, a coal byproduct that is an energy source in its own right; wells are drilled to extract methane gas. The owners of surface rights to real property often sever coal mining rights (the “coal estate”) from subsurface gas rights (the “gas estate”). The disputes in EQT focus on who owns the rights to coal-based methane when the owner of the gas estate and the owner of the coal estate for a particular tract differ. The plaintiffs are gas estate owners who assert that they are entitled to royalties for coal-based methane.
The district court certified five classes. Four consist of current and former gas estate owners who were never paid coal-based methane royalties; the members of the fifth class assert that they were underpaid. The Fourth Circuit reversed all five certifications.
First, the court of appeals held that you can’t certify a class if you can’t tell who is in it. The Fourth Circuit held that the district court had not properly considered whether identifying class members “would render class proceedings too onerous” in light of a variety of “heirship, intestacy, and title-defect issues” affecting many potential class members’ claims. The Fourth Circuit understood ascertainability to require a way to “readily identify the class members in reference to objective criteria”—which means something less individualized than tract-by-tract ownership analyses.
Plaintiffs often like to recharacterize the deficiencies in a class definition as pertaining only to damages calculations—and that’s what the EQT plaintiffs did to get around their inability to determine who was in the class and who was out. Plaintiffs contended that it would not be necessary to resolve the individualized ownership issues until the damages phase, but the court of appeals disagreed: “The fact that verifying ownership will be necessary for the class members to receive royalties does not mean it is not also a prerequisite to identifying the class.”
Second, the court held that a dispute over the dispositive rule of law is not automatically a common issue if one competing rule could be resolved only upon individualized inquiries. In certifying the four classes who had never been paid royalties, the district court found that the overriding common issue was a dispute over whether Virginia law entitled the owners of the gas estate to coal-bed methane royalties. One legal rule would entitle all gas-estate owners to those royalties; the other would make the answer hinge on particular deed language. The Fourth Circuit held that the district court should have resolved the question, and went ahead to hold that deed language was paramount. The court of appeals left open the possibility of subclasses organized around deeds for which the relevant language was materially similar.
Finally, the Fourth Circuit rejected the finding of predominance for the class of owners claiming underpayment. On that issue, the district court had pointed to a large number of uniform practices by the defendants that were relevant to the royalty calculation. The Fourth Circuit rejected this quantitative approach because the dispositive questions again hinged on the specific contract language, again recognizing that subclasses perhaps could be constructed around materially similar terms.
EQT provides some welcome structure and discipline to class certification analysis. Let’s hope that other courts of appeals will provide similar guidance.
Suppose that you’re a trial court considering a motion for class certification. And suppose that the parties present you with two competing statutory interpretations. One legal standard permits the case to be adjudicated with common evidence. And the other standard would require individualized inquiries. What should you do? Should you decide what the law is and then see whether the putative class claims can be tried in a single trial?
The surprising answer of the California Court of Appeal is in Hall v. Rite Aid Corp. (pdf) is “No.” Hall appears to conclude that commonality and predominance need not be established under the correct substantive legal standards. Rather, if the plaintiffs propose a legal standard dispensing with individualized inquiries, the very question whether that standard applies is a common issue supporting class certification.
Hall is another decision in a growing series of “suitable seating” cases addressing a California Industrial Welfare Commission Wage Order that requires employers to provide employees with “suitable seats when the nature of the work reasonably permits the use of seats.” The plaintiffs in Hall—cashier-clerks who divided their time between check-out counters, stockrooms, and sales floors—construed the Order to require seats to be provided to every employee for every task where providing seats would be reasonable. In particular, the plaintiffs contended that Rite Aid had a duty to provide a seat to any employee who worked at a check-out counter for any period of time, even if for much of that time the employee would not be able to perform the job while sitting. Rite Aid, in contrast, contended that the duty to provide a seat depended on the employee’s duties as a whole, so that the Order would not require providing a seat to an employee working at a check-out counter if the employee worked mostly at tasks where seating was inappropriate, or if check-out duties would not allow the employee to sit most of the time. Thus, under plaintiffs’ legal theory, any failure to have a seat at a check-out counter was a violation requiring no further inquiry, while under Rite Aid’s theory such a failure would violate an employee’s rights only under certain, largely individualized circumstances.
Agreeing with Rite Aid’s view of the substantive law, the trial court decertified a class. The San Diego-based Court of Appeal reversed. In its view, the disputed legal elements of the plaintiffs’ claim were themselves common legal issues supporting class certification. According to that court, deciding exactly what the law required the plaintiff had to prove in common was an impermissible predetermination of the action’s merits, and thus fell afoul of the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court.
True, Brinker had disapproved a “free-floating inquiry into the validity of the complaint’s allegations” at the class certification stage. Yet the California Supreme Court also recognized that when “legal issues germane to the certification inquiry bear as well on aspects of the merits, a court may properly evaluate them”; indeed, [t]o the extent the propriety of certification depends on disputed threshold factual or legal questions, a court may, and indeed must, resolve them.”
It seems to me that, when one interpretation of a Wage Order would require resolution of myriad individualized issues, and the other interpretation would permit the same issues to be resolved in common, the “propriety of certification” under Brinker would depend on the correct legal standard. Not so, according to the Hall court, which viewed the very dispute over the legal standard as a common issue supporting class certification.
The Hall opinion would seem to allow a plaintiff to obtain class certification simply by advancing a theory of liability that omits inherently individualized elements such as causation and injury, on the ground that the validity of the plainly erroneous legal theory could be determined on a class-wide basis. And the Hall approach raises significant unanswered questions. The opinion suggests that defendants—especially employers whose policies are challenged—should want threshold legal questions to be decided after class certification so that the entire class is bound by the result. But if class counsel is wrong about the legal theory, and in fact the legality of the employer’s policy depends on individual circumstances, does the entire class lose because the class plaintiff’s overbroad theory fails, even though some or even many class members would have valid claims under the proper, more individualized standard? That might create adequacy and due process problems, elevating the interests of the class-action lawyers over those of their clients. But if determination of the legal issue on a class basis instead simply results in decertification of the class, allowing new actions under the correct theory, then it makes no sense to defer the decision as to what, exactly, plaintiffs must prove through common evidence.
The issue surfaced indirectly in the California Supreme Court’s recent unanimous decision in Duran v. US Bank NA (pdf), which we recently discussed. Duran rejected the use of questionable statistical sampling that swept away individualized issues and defenses in a wage-and-hour class action. The Court’s evaluation of the class-certification and trial-management issues hinged on a view of the governing law under which an employee’s exempt status under the overtime laws hinged on whether the employee actually spent more than half-time carrying out duties that were exempt (there, sales outside the employer’s facility). Justice Liu’s concurring opinion suggested a possible legal test—different from the Court’s view—that would turn on the employer’s reasonable expectations about the balance of exempt or nonexempt activity within a particular job classification, not on the employees’ actual work practices. If that test correctly stated the obligation, Justice Liu suggested, the application of the exemption could be determined as a common issue without the need for statistical sampling. Hall raises the troubling possibility that a litigant could seek to avoid individualized issues by restating the governing legal test along the lines of Justice Liu’s concurrence in Duran, and then claim that the choice between Justice Liu’s formulation and the formulation adopted in the Court’s opinion itself was a common issue of law. In my view, such an approach would be inconsistent with Duran and Brinker.
In Duran v. U.S. Bank N.A. (pdf), the California Supreme Court recently addressed an important question in the context of state-court class actions: Can plaintiffs invoke statistical sampling in an attempt to prove class-wide liability and overcome the presence of individual questions that ordinarily would defeat class certification?
The court’s answer to that question is a mixed bag for business. The court firmly rejected the haphazard approach to sampling used by the trial court in the lawsuit against U.S. Bank. But the court left open the troubling possibility that sampling might be used in support of class certification in the future. Continue Reading California Supreme Court Rejects Exceptionally Poor Sampling Method, But Leaves Open Many Questions About Sampling And Class Certification