Supreme Court imageArticle 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.

Continue Reading Supreme Court to decide whether an offer of judgment for full relief moots a named plaintiff’s class-action claims

Plaintiffs’ lawyers love to challenge products labeled as “natural,” with hundreds of false advertising class actions filed in just the last few years. Recently, in Astiana v. Hain Celestial (pdf), the Ninth Circuit reversed the dismissal of one such class action, and in doing so, addressed some key recurring arguments made at the pleading stage in litigation over “natural” labeling.

The Hain Celestial Group makes moisturizing lotion, deodorant, shampoo, conditioner, and other cosmetics products. Hain labels these products “All Natural,” “Pure Natural,” or “Pure, Natural & Organic.” A number of named plaintiffs, including Skye Astiana, filed a putative nationwide class action, alleging that they had been duped into purchasing Hain’s cosmetics. According to plaintiffs, those cosmetics were not natural at all, but allegedly contained “synthetic and artificial ingredients ranging from benzyl alcohol to airplane anti-freeze.” Astiana claimed that she likely would not have purchased Hain’s cosmetics at market prices had she been aware of their synthetic and artificial contents. As is typical in such cases, she sought damages and injunctive relief under a variety of theories: for alleged violations of the federal Magnuson-Moss Warranty Act, California’s unfair competition and false advertising laws, and common law theories of fraud and quasi-contract.

The district court dismissed the entire case in deference to the “primary jurisdiction” of the U.S. Food and Drug Administration over natural labeling of cosmetics. On appeal, the Ninth Circuit made two important rulings to which defendants in “natural” litigation should pay special attention:

Primary Jurisdiction

Federal regulators have (with a few limited exceptions not relevant here) declined either to adopt a formal definition of the term “natural” or to regulate that term’s use on cosmetics or food labels. But both plaintiffs and defendants have pointed to informal FDA statements and letters on the subject to advance particular litigation positions. For example, in this case, Hain invoked the prudential doctrine of primary jurisdiction to argue that a case challenging labeling statements cannot go forward because the FDA, not the courts, must determine in the first instance what the challenged labeling statement means and how it should be used. (Indeed, as we have previously discussed, the primary jurisdiction doctrine has led more than a dozen courts to stay false advertising cases in which plaintiffs allege that the ingredient name “evaporated cane juice” is misleading.)

Critically for other defendants intending to invoke primary jurisdiction in the future, the Ninth Circuit concluded that the district court had not erred in concluding that the doctrine applied. Rather, the district court’s error was only in dismissing the case rather than staying it. As the Ninth Circuit explained, “[w]ithout doubt, defining what is ‘natural’ for cosmetics labeling is both an area within the FDA’s expertise and a question not yet addressed by the agency,” and “[o]btaining expert advice from that agency would help ensure uniformity in administration of the comprehensive regulatory regime established by the [Food Drug and Cosmetics Act.]” Significantly, as the Ninth Circuit noted, the FDA had shown “reticence to define ‘natural’” at the time Hain invoked the doctrine with respect to food labels, in light of competing demands on the agency, and there is no reason to believe the FDA is on the verge of rulemaking on ‘natural’ labeling. But that was not a reason to bar the doctrine’s application.

That said, when, as in Astiana, additional judicial proceedings are contemplated once the FDA completes its work, the Ninth Circuit held that the case should be stayed rather than dismissed. And on that basis, the Ninth Circuit reversed the district court’s dismissal. Whether the Astiana decision supports primary jurisdiction arguments outside the context of “natural” labeling on cosmetics—such as ‘natural’ statements on food labels—remains to be seen. But as we read it, the court’s core holding would seem to have broader application.

Express Preemption

Hain separately argued that the FDCA expressly preempted the plaintiffs’ claims challenging the use of the term “natural.” But because there are no regulations defining ‘natural’ or its use on cosmetics labels, the Ninth Circuit disagreed, concluding that neither plaintiffs’ claims nor their requested remedy would impose requirements different from the (non-existent) federal rules on “natural” labeling. The Court did not find persuasive Hain’s argument that the FDA’s conscious decision not to define or regulate the term “natural” supports express preemption. That said, in other settings, including in “natural” cases, defendants may still find it appropriate to point out that the FDA (or another agency) has made a conscious decision not to regulate, and that such a decision should be entitled to deference and respect, or should be taken into account in assessing whether plaintiff has stated a claim.

As readers of this blog are well aware, manufacturers and retailers have faced a tidal wave of consumer class actions alleging false advertising in recent years. In these cases, the plaintiffs bemoan how they were deceived by the labels or advertising of all kinds of products – from yogurt to waffles to dog food to shampoo. But no matter how implausible these claims may be, judges often allow them to survive motions to dismiss (often multiple times), which inevitably ratchets up the pressure to settle. For companies that stick it out and take discovery of the named plaintiff, however, there can be a payoff. Sometimes, the plaintiff’s own testimony can halt an expensive class action in its tracks. That is exactly what happened in Major v. Ocean Spray Cranberries, Inc.

Major was a putative class action filed in the Northern District of California. A California purchaser alleged that Ocean Spray’s 100% Juice products violated California’s consumer protection statutes. Specifically, she alleged that the statement “No Sugar Added” deceived her because (1) the juice labels did not include a disclaimer (one required by federal regulations) explaining that the products were not a low-calorie food, and (2) the products contained “juices from concentrate,” which the plaintiff characterized as a form of added sugar.

The truth of the matter, however, came out at the plaintiff’s deposition. Armed with admissions demonstrating that plaintiff wasn’t even remotely deceived by the term “No Sugar Added,” Ocean Spray moved for partial summary judgment on precisely the same claims that were the subject of the plaintiff’s pending motion for class certification. Judge Davila agreed with Ocean Spray and granted the motion for summary judgment, which in turn rendered the plaintiff’s motion for class certification moot.

First, the plaintiff’s testimony demonstrated that the absence of a disclaimer that the juices were not low calorie had zero effect on her decision to purchase Ocean Spray’s juices. When asked whether she purchased the 100% Juice products because she thought they were “a reduced calorie product,” the plaintiff said no. And when she was asked whether she thought the juices were low calorie products at the time she purchased them, she also said no. In other words, she had not been even remotely deceived by the absence of the disclaimer because (1) she knew the juices were not low in calories and (2) calorie content was not a motivating factor for her purchase. In response, the plaintiff argued that she had understood “No Sugar Added’ to mean “better and healthier.” Judge Davila agreed with Ocean Spray, however, that this argument was just an improper attempt to “amend her Complaint ‘on the fly’” and in any event, the plaintiff hadn’t identified the particular statements on the juice labels that proclaimed the products to be “better.”

The plaintiff’s deposition testimony also disproved her second theory of deception alleged in the complaint (i.e., that including “concentrated fruit juice” as an ingredient belied the “No Sugar Added” labeling statement). She testified that she understood the term “No Sugar Added” to mean that “there’s literally nothing containing sugar that’s added to this other than the natural sugar from the fruit.” Ocean Spray was able to show that its juice (1) was accurately portrayed under the relevant regulations as having “no sugar added” and (2) satisfied the plaintiff’s own understanding of what “no sugar added” means. As a factual matter, the plaintiff’s allegation in the complaint that Ocean Spray’s products contained “concentrated fruit juice” was untrue; Ocean Spray produced undisputed evidence that its juices were “fruit juice from concentrate.” The difference between the two seemingly similar terms is critical: Ocean Spray’s evidence showed that “juices from concentrate, such as Defendant’s products, contain the same ratio of water to sugar solids and other compounds that exist naturally,” which is “is in contrast to products containing fruit juice concentrate, which do contain a higher level of sugar than would exist naturally.” Because “products[] made with juice from concentrate[] contain the same amount of sugar that would have existed naturally,” the court held that “the products cannot be said to contain ‘added sugars.’” And this factual showing also “conform[ed] to plaintiffs’ understanding” that “no sugar added” means no sugar beyond “the natural sugar from the fruit.” As a result, the plaintiff could not meet her burden of showing a factual dispute over whether she was deceived about the sugar content in Ocean Spray juice.

To be sure, not every plaintiff will provide deposition testimony that will so neatly end a case. But the Major decision demonstrates that settlement is far from the only option when a judge denies a motion to dismiss, even in a false advertising case.

The Ninth Circuit recently clarified the circumstances in which a plaintiff who settles his or her individual claims can appeal the denial of class certification of related claims. In Campion v. Old Republic Protection Company (pdf), the Ninth Circuit dismissed a class certification appeal as moot because the plaintiff had settled his individual claims. The court explained that a settling plaintiff must retain a personal, “financial” stake in litigation in order to appeal the denial of class certification—“the theoretical interest akin to a private attorney general” will not suffice.

The leading Ninth Circuit case on post-settlement class-certification appeals is Narouz v. Charter Communications, LLC (pdf). The plaintiff in Narouz settled his individual claims and attempted to settle on behalf of a class as well. If the settlement class had been certified and the class settlement received final approval, Narouz would have obtained an additional $20,000 incentive payment on top of the amount he had been given to settle his individual claims. The district court, however, refused to certify the class for settlement purposes, and Narouz appealed. The Ninth Circuit found that the individual settlement did not moot the appeal because Narouz retained a “personal stake” in the class litigation—i.e., the $20,000 enhancement award.

As we recently reported, in November 2014, the Ninth Circuit rejected as moot a plaintiff’s attempts to appeal class claims after accepting a Rule 68 offer of judgment covering “any liability” asserted in the action. In an unpublished decision, Sultan v. Medtronic, Inc., the court held that Narouz foreclosed the appeal because the plaintiff did not retain a personal stake in the class claims. Campion, a published decision, follows on the heels of Sultan and clarifies the standard established in Narouz and applied in Sultan. (Our colleague Don Falk represented Medtronic in Sultan.)

In Campion, a customer sued a home warranty provider, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and violations of the California Consumers Legal Remedies Act (“CLRA”) and California Unfair Competition Law. Campion complained that Old Republic arbitrarily denied class members’ claims and cheated them out of benefits owed under their policies. After extensive motions practice, the district court denied Campion’s motion for class certification, granted Old Republic partial summary judgment on the CLRA claims, and denied Campion leave to amend the complaint. After these rulings, the parties reached a settlement agreement. Campion dismissed his individual claims with prejudice in exchanged for the “full amount of those claims,” but “expressly reserve[d] the right to appeal the … order denying class certification” and “any other order in the case.” Campion then purported to appeal (on behalf of the putative class) the orders denying class certification and granting the defendant partial summary judgment.

A divided panel of the Ninth Circuit dismissed the appeal as moot. Campion argued that he retained an interest in the matter as a private attorney general sufficient to satisfy Narouz. But the panel majority disagreed, explaining that “a more concrete interest” is necessary. Specifically, the panel majority explained that courts of appeals have jurisdiction over appeals of class certification denials brought by settling named plaintiffs “only where the putative class representative maintain[s] a financial interest in class certification.” Because Campion had settled his individual claims for their full value, he lacked the personal financial stake necessary to pursue the class appeal.

Judge Owens dissented. He explained that he would have reached the merits of Campion’s appeal and affirmed the denial of class certification and grant of partial summary judgment. Judge Owens predicted that “the Supreme Court someday will hold that a plaintiff who voluntarily settles his claim must retain a financial stake in the litigation to serve as a class representative.” But he stated that, in his view, current law allowed settling plaintiffs to appeal on a private attorney general theory; he did not read the Narouz decision as imposing a “financial-in-nature” limitation on the type of personal stake needed to have standing to appeal the denial of class certification.

The majority noted, however, that Narouz had retained a $20,000 interest in his class appeal (the potential incentive payment). Although the Narouz court had not used the term “financial” in its formulation of the personal-stake standard, the court had permitted Narouz to proceed with his appeal only because of his $20,000 financial interest in the class claims. Similarly, in another case discussed by the Campion majority (Evon v. Law Offices of Sidney Mickell (pdf)), the settling plaintiff continued to have a personal stake in the class appeal because he had retained the right to seek up to $100,000 in attorneys’ fees if that appeal were successful. Campion, by contrast, stood to gain no compensation if the putative class recovered, thereby mooting his appeal.

Campion thus confirms that, at least in the Ninth Circuit, a plaintiff voluntarily settling individual claims must retain a personal, financial stake in continuing litigation in order to purport to file appeals on behalf of a putative class. Individual cases will “turn[] on the language of [the] settlement agreement,” but merely retaining the right to appeal as a private attorney general will not suffice. The court left open the possibility that a private attorney general interest might suffice when the plaintiff’s individual claims expire “involuntarily,” rather than by voluntary settlement. But where the plaintiff voluntarily extinguishes his entire financial interest, he or she cannot later appeal on behalf of the class.

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.

One of the hottest areas in class actions is litigation under the Telephone Consumer Protection Act (TCPA).  And one of the most significant issues in TCPA litigation is the existence and scope of vicarious liability.  The key question is to what extent are businesses liable for the actions of third-party marketers who, without the consent of the recipient, send text messages or place calls using autodialers or prerecorded voices or transmit faxes?

Some plaintiffs had argued that businesses are strictly liable for TCPA violations committed in their name by third-party marketers.  Last year, the FCC rejected that approach in a declaratory ruling.  As we explained in our report, the FCC instead concluded that plaintiffs instead must prove liability under “federal common law principles of agency.”

But that declaratory ruling was decided in the context of telemarketing.  Should the same rule apply to alleged TCPA violations involving unsolicited marketing faxes?  Can plaintiffs revive their old arguments that businesses are strictly liable for faxes advertising their services sent by others?  Or are businesses not liable for TCPA violations that they themselves don’t commit?

The Eleventh Circuit recently considered this issue in Palm Beach Golf Center-Boca, Inc. v. John G. Sarris, D.D.S., P.A.  In that case, a marketer had allegedly sent several thousand unsolicited faxes advertising the services of a dental practice.  When a recipient of a fax sued the dental practice under the TCPA, the district court granted summary judgment in part because the plaintiff had failed to show that the dental practice was vicariously liable for the marketers actions.

The Eleventh Circuit reversed.  The court explained that the FCC’s prior declaratory ruling that the limited scope of vicarious liability for TCPA violations applied only to telemarketing calls.  But rather than decide what the vicarious-liability standard should be for faxes, the court held—based on a letter brief (pdf) submitted by the FCC—that the recipient of the fax didn’t need to prove vicarious liability at all.  Instead, the court held that  the dental practice could be viewed as the sender itself and therefore the recipient could attempt to show that the dental practice had directly violated the TCPA itself.

That result is hard to swallow.  The dental practice, after all, hadn’t actually sent any faxes itself.  And although it had hired the marketer, the evidence presented to the district court apparently showed that the dental practice had no direct role in the fax campaign—it didn’t decide to whom to send faxes or even approve the final language of the fax itself.  And it certainly didn’t press the button to send the faxes.

Nonetheless, the court held—based on the FCC’s letter brief—that the recipient of the fax could proceed to trial on the theory that the dental practice had committed a direct violation of the TCPA.  The TCPA makes it unlawful “to use any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement.”  Under a natural reading of this language, one would think that the dental practice itself neither “use[d]” a fax machine nor “sen[t]” a fax.  But in the FCC’s view, a business is the “send[er]” of a fax transmitted by a third party so long as the fax was either sent on the business’s “behalf” or if the fax “advertise[s] or promote[s]” the business’s “goods or service.”

The FCC’s position conflates direct and vicarious liability for alleged TCPA violations involving faxes.  There are accordingly strong reasons to think that other courts should refuse to defer to the FCC’s interpretation.  That said, businesses whose marketing activities may include third-party fax campaigns should be aware of the potential that courts will, like the Eleventh Circuit in Palm Beach Golf Center, adopt the FCC’s position and authorize claims for direct liability under the TCPA.

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.

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.

Continue Reading Are You Objecting to Personal Jurisdiction In Magnet Jurisdictions Yet?

In what circumstances should you be permitted to invest your retirement savings in your own employer’s stock? We have blogged before about an ERISA class action pending at the Supreme Court regarding when plan fiduciaries must prevent participants from investing in employer stock. After the Solicitor General filed an amicus brief (pdf) asking the Court to broaden its inquiry, the case was poised to challenge a bedrock of ERISA stock-drop actions—a presumption that fiduciaries act prudently when investing in employer stock.

On Friday, the Supreme Court granted certiorari in the case, Fifth Third Bancorp v. Dudenhoeffer, No. 12-751, but did not accept the Solicitor General’s request to have the parties brief the appropriateness of the presumption of prudence. Rather, the Court left intact the question presented by the petition, which concerns only the applicability of the presumption at the motion-to-dismiss stage.

A bit of background: As a general rule, the fiduciaries who administer ERISA-governed retirement plans owe a duty of prudence to plan participants. But although many investment advisors would warn investors not to invest substantial portions of their retirement savings in a single stock, Congress wanted to encourage employees to invest in their companies. So it waived the duty of prudence “to the extent that it requires diversification” for purchases of company stock. 29 U.S.C. § 1104(a)(2).

Of course, the risk of a non-diversified portfolio is that an individual stock will lose value. When that happens, securities-fraud class actions are commonplace, as are ERISA class actions that argue that retirement plan fiduciaries should have forced plan participants to sell their employer stock. Nearly 20 years ago, the Third Circuit recognized the tension between such claims and Congress’s goal of encouraging employee ownership. Under Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), which has been adopted in varying forms by seven federal courts of appeals, when a plan sponsor requires or encourages plan fiduciaries to invest in employer stock, plan fiduciaries are not generally liable for permitting such investments—unless the employer was in such dire financial straits that the company’s viability as a going concern was in doubt.

Despite the general agreement among the courts of appeals, the Labor Department has long disagreed with the Moench presumption. But as the presumption has gained acceptance in the lower courts, the Supreme Court has exhibited no particular interest in adopting a different course. The Court’s order in Fifth Third signals, if anything, that the Justices are not particularly eager to enter the fray now. That’s a sensible outcome. The Supreme Court rarely will address an issue that the parties did not contest below. And there are good reasons—grounded in Congress’s special dispensation for employer stock—why the courts of appeals have been reluctant to saddle employers with liability for stock-market volatility.

At a minimum, this case will determine what a plaintiff must allege to survive a motion-to-dismiss and to obtain discovery. And the Court is not precluded from resolving the broader issue when the case is decided this spring. That would be a substantial undertaking, however, because the Moench presumption implicates big questions for ERISA class actions:

  • When plan fiduciaries are instructed by the plan sponsor to invest in employer stock, they face a potential conflict between the terms of the plan and the duty of prudence. When must a fiduciary disregard the terms of the plan? See 29 U.S.C. § 1104(a)(2)(D).
  • If the purpose of diversifying investments is to “minimize the risk of large losses,” how (if ever) does a plan fiduciary violate the duty of prudence by permitting plan participants to sustain large losses through an investment in employer stock? See id. § 1104(a)(1)(C), (a)(2).
  • Do fiduciaries face the same prudence obligations when they affirmatively invests plan participants’ retirement assets (as in a defined-benefit pension plan) as when they merely offer investment options among which plan participants will construct a portfolio (as in a 401(k) plan)?

To see whether the Court answers those questions, we will have to await the argument and decision.

In practice, the most significant change in modern litigation has been the dramatic increase in electronic discovery costs. As the amount of electronically stored information has skyrocketed over the past two decades, the burden on parties (chiefly businesses) to retain, review, and produce that information in litigation has exponentially increased as well.

Recognizing that reality, the federal Judicial Conference’s Advisory Committee on Civil Rules has recently issued a preliminary draft of proposed amendments to the Federal Rules (pdf) that, if adopted, would take some modest steps towards ensuring greater balance in the discovery process.

A number of interested parties will make their views known through the public comment process that must take place before proposed amendments to the Civil Rules are finally approved for transmission to Congress.

Earlier today, a subcommittee of the Senate Judiciary Committee joined the debate by holding a hearing on the proposed amendments. The title of the hearing reflects a certain point of view: “Changing the Rules: Will limiting the scope of civil discovery diminish accountability and leave Americans without access to justice?”

Our colleague Andy Pincus (who often posts on the blog) was asked to testify about the proposed amendments from the perspective of a lawyer who represents businesses that are concerned with e-discovery. As Andy explains in his testimony (pdf),

  • The cost of the U.S. legal system – which is growing significantly as a result of electronic discovery – is increasingly producing outcomes unrelated to the merits of cases, but rather tied to the defendants’ litigation costs. A key barrier to foreign investment in the United States is the concern, expressed repeatedly by leaders of non-U.S. businesses, about excessive litigation costs in our country. These costs also make it more difficult for U.S. companies to compete with businesses headquartered in other countries.
  • The tremendous growth in electronically stored information – combined with discovery rules formulated for the typewriter-and-paper era – have produced an exponential growth in discovery-related litigation costs. A recent independent study found a median cost of $1.8 million per case for producing electronically stored information, and companies must incur additional costs, in the millions of dollars, to preserve electronic information that might be demanded in discovery.
  • The principal proposed amendment relating to the scope of permissible discovery simply moves a standard already in the Rule – requiring that discovery be proportional to the needs of the case – in order to give it increased emphasis. As the Advisory Committee observed, “[t]he problem is not with the rule text but with its implementation – it is not invoked often enough to dampen excessive discovery demands.” The proposal is designed to remedy that deficiency, and hopefully it will have that effect.
  • The amendments also would modify the provisions of the current rules establishing presumptive limits on some forms of discovery, modestly reducing existing limits on depositions and interrogatories and establishing a new presumptive limit for requests for admissions. The proposed limits are based on information regarding the norms in most federal court litigation, and the Advisory Committee’s eminently reasonable conclusion that “it is advantageous to provide for court supervision when the parties cannot reach agreement in the cases that may justify a greater number.” Nothing prevents a court from allowing a greater number of discovery requests upon a proper showing.
  • Finally, the current vague and uncertain standard for determining when sanctions should be imposed for failure to preserve electronic information is forcing companies to incur very substantial costs to “over-preserve” electronic information. The proposed amendments address this problem by replacing the existing rule with a new, somewhat clearer standard. Two modifications to the proposal would significantly increase the chances that it will have a significant effect in reducing the over-preservation costs that now plague businesses and other organizations.

We’ll continue to watch the progress of the proposed amendments to the Civil Rules, which (if adopted) hopefully will have a salutary impact on the e-discovery costs that businesses face when defending against class actions.