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.
We have repeatedly discussed in this space the ongoing debate among the federal courts about ascertainability—a red-hot topic in class action litigation these days. (For a more detailed look at our views on the ascertainability doctrine, see the amicus brief (pdf) that we filed on behalf of the National Association of Manufacturers in support of a pending cert petition.) That topic—and the debate among the lower courts—shows no sign of slowing down, as evidenced by new decisions issued by the Second, Sixth, and Third Circuits over the past two months. The central takeaway from these decisions is that while ascertainability is not a panacea for defendants facing consumer class actions, the doctrine (or variations on the ascertainability theme) should help defeat class actions in many circuits when class members cannot be identified without individualized inquiries.
The U.S. District Court for the Central District of California recently issued an interesting decision (pdf) denying class certification in 15 consolidated consumer class actions against the maker of 5-hour ENERGY drinks.
The recent decision in Cholly v. Uptain Group, No. 15 C 5030, 2017 WL 449176 (N.D. Ill. Feb. 1, 2017), drives home the point—as we’ve discussed on the blog before—that sometimes the pleadings alone reveal that the requirements for class certification cannot possibly be met. In Cholly, the plaintiff alleged the defendant debt collector violated the Telephone Consumer Protection Act (“TCPA”) by calling her mobile phone using an automatic telephone dialing system (“ATDS”) after she had told the defendant to stop calling. The plaintiff sought to represent (i) a class of persons who received calls from the defendant where it did not have consent, and (ii) a subclass of persons who received calls after they revoked consent. But the district court struck all of the plaintiff’s class allegations under Federal Rule of Civil Procedure 12(f)—at the pleading stage and before discovery—and ordered that the case proceed on an individual basis.
At the outset, the court recognized that Rule 23(c)(1)(a) requires that it “determine whether to certify an action as a class action ‘[a]t an early practicable time’” and that a motion to strike class allegations under Rule 12(f) is an appropriate device to determine if the case will proceed as a class action. The court concluded that the plaintiff couldn’t satisfy the “typicality” requirement under Rule 23(a)(3) because she originally consented to the defendant’s calls and, thus, “cannot represent a class of persons who received calls from [the defendant] where [it] did not have express consent.”
The court held the plaintiff couldn’t represent the subclass either because she couldn’t meet the predominance requirement under Rule 23(b)(3). In particular, the court found that individual inquiries as to whether the putative class members revoked consent would predominate over any common questions of fact:
In order to determine whether each potential class member did in fact revoke his or her prior consent at the pertinent time, the [c]ourt would have to conduct class-members specific inquiries for each individual. The class members would not be able to present the same evidence that will suffice for each member to make a prima facie showing at the recipients of defendants’ telemarketing calls had validly revoked his or her prior consents.
The plaintiff has filed a petition for leave to appeal under Rule 23(f), and the Seventh Circuit directed the defendant to respond. We’ll report on any major developments.
The class action plaintiffs’ bar celebrated yesterday’s Supreme Court’s decision in Tyson Foods, Inc. v. Bouaphakeo (pdf), rejecting Tyson’s challenge to class certification. One lawyer called it “a huge David v. Goliath victory.”
But when plaintiffs’ lawyers wake up this morning and focus on the details of the Court’s opinion, they are in for a serious post-celebration hangover.
The Court’s reasoning for the first time maps a clear route for defendants to use in challenging plaintiffs’ use of statistical evidence in class actions. It also provides important guidance for defendants about preserving the ability to challenge plaintiffs’ reliance on statistics.
Under Federal Rule of Civil Procedure 23(b)(3), a court may certify a suit for damages as a class action when “there are questions of law or fact common to the class” that “predominate over any questions affecting only individual members.” Similar certification standards apply when a plaintiff seeks to certify a collective action under the Fair Labor Standards Act (FLSA). Yesterday, in its highly anticipated decision in Tyson Foods, Inc. v. Bouaphakeo (pdf), the Supreme Court affirmed the certification of an FLSA collective action where the evidence tying class members together was a study of a representative sample of similarly situated workers.
Today, the Supreme Court granted review in what may be a major decision on the standards for class certification, Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146.
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.
The securities class action industry was launched a quarter-century ago when the Supreme Court recognized the so-called “fraud-on-the-market” presumption of reliance in most putative securities class actions. The result has been that—despite Congressional efforts at securities litigation reform—most securities class actions that survive the pleadings stage are likely to achieve class certification, forcing defendants to settle. In the meantime, as explained in prior blog posts, the best economic thinking has shifted, calling the empirical assumptions underlying the fraud-on-the-market presumption into question.
In Halliburton Co. v. Erica P. John Fund, Inc. (pdf), decided today, the Supreme Court declined to abandon that presumption, instead largely maintaining the status quo. The Court did clarify one key aspect of how class certification works in the securities context, holding that defendants are now entitled to attempt to rebut the presumption by introducing evidence at the class certification stage that there was no “price impact”—i.e., that misrepresentation alleged in a particular lawsuit did not affect the stock’s price. This adjustment will make it possible for defendants to challenge class certification in a number of securities class actions, but is unlikely to alter the landscape of securities litigation significantly—a result that is troubling from a policy perspective because (for reasons we have previously stated) securities class actions generally benefit the lawyers who bring and defend them rather than the investors.
We provide more details about the decision below. Continue Reading Supreme Court Refuses To Overturn Fraud-On-The-Market Presumption, But Adjusts Presumption To Allow Evidence of Absence Of “Price Impact” At Class Certification Stage
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.