motion to strike class allegations

One of the reasons that companies hate class actions is that, win or lose, the defense costs are often enormous. Usually, it’s discovery that leads to eye-popping numbers on the bills—whether from law firms themselves, contract attorneys, or e-discovery vendors. But defendants have an often overlooked tool for attempting to avoid costs related to discovery—the pre-discovery motion to strike class allegations.

My recent article, Control Class Action Costs by Filing an Early Motion to Strike the Class Allegations (pdf), explains the authority for such motions and the types of arguments that tend to work best for attacking the class allegations on the pleadings.  Thanks to Bloomberg BNA Class Action Litigation Report for publishing the article.

Here’s the situation: You’re facing a class action in federal court in which the plaintiffs define the putative class so broadly as to encompass many people who weren’t injured by the alleged wrongdoing. For example, consider a false-advertising class action on behalf of “all purchasers” of a product that the vast majority of purchasers would have used without any problem whatsoever, meaning that the alleged rarely occurring (or entirely hypothetical) defect that the defendant failed to disclose makes no difference to them. What’s the best way to attack this weakness in the complaint?

One option would be to characterize the problem as a lack of Article III standing. Article III allows courts to hear a case only if the plaintiff has suffered an injury in fact that is fairly traceable to the defendant’s conduct and that could be redressed by a favorable decision from the court. In our hypo, the defendant could move to strike the class allegations on the ground that virtually all of the alleged class members lack standing.

This approach, however, has potential pitfalls. For example, some courts have held that Article III requires merely that the named plaintiffs have standing, a rule that (as plaintiffs argue with some success) allows a class action to go forward even though the putative class includes people who themselves lack standing and thus could not bring their own individual actions. See, e.g., Stearns v. Ticketmaster Corp., 655 F.3d 1013, 1021 (9th Cir. 2011). But see, e.g., Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023, 1034 (8th Cir. 2010); Denney v. Deutsche Bank AG, 443 F.3d 253, 263-64 (2d Cir. 2006). In the wrong jurisdiction, the court will simply deny the motion to strike as foreclosed by circuit precedent.

To avoid this difficulty, the defendant can move to strike the class allegations, using the fact that most class members are uninjured to challenge commonality, typicality, adequacy, and predominance. Of course, because courts are divided over the standing issue, that issue is ripe for eventual Supreme Court review. Defendants therefore should consider raising the standing defect in the alternative in order to preserve the issue (though insofar as standing is jurisdictional, it should be possible to raise it at any time even if it has not been raised before).

But what if the named plaintiffs themselves appear to be uninjured because they didn’t experience the alleged product defect either? The defendant could challenge their standing in a motion to dismiss for lack of subject matter jurisdiction. But there is a risk to doing so. Some federal courts believe that the proper course when the named plaintiffs lack standing is to remand the case to state court, where laxer concepts of standing, more lenient class-certification standards, and antipathy toward out-of-state businesses may hamstring the defendant’s ability to defend itself. To make matters worse, the Tenth Circuit recently held that a district court decision remanding a class action to state court for lack of “standing” is non-reviewable under 28 U.S.C. § 1447(d). See Hill v. Vanderbilt Capital Advisors LLC (pdf), No. 11-2213 (10th Cir. Dec. 27, 2012). Accordingly, unless there is clear Circuit precedent indicating that the district court should not remand in this situation or the state court to which the case would be remanded is not hostile to business defendants, companies confronted with such a dilemma may be better served challenging the merits of the plaintiffs’ claims rather than their standing to assert them.

We’re big fans of filing an early motion to strike class allegations when it’s apparent from the pleadings that the class definition is fatally flawed. Why should a defendant be forced to submit to the wringer of class discovery before taking a swing at defeating class certification? A recent case involving Office Depot illustrates the successful use of that strategy.

In Lindsay Transmission LLC v. Office Depot Inc. (pdf) (E.D. Mo.), the plaintiff alleged that an Office Depot store had faxed him an advertisement in violation of the Telephone Consumer Protection Act (“TCPA”). The complaint demanded statutory damages on behalf of a putative nationwide class of fax recipients. Once the case entered the discovery phase, the plaintiff (predictably) sought broad discovery. Among other things, the plaintiff requested information regarding every advertising fax any Office Depot employee had sent since 2006, including the contents of each fax, the sending and receiving telephone numbers, and the make and serial number of the sending device. Office Depot calculated that interviewing store managers to compile the information would take at least 2,000 hours. And that was just one of the plaintiffs’ discovery requests.

As the parties fought over the discovery, Office Depot moved to strike the class allegations, arguing that the class defined in the complaint was an improper “fail-safe” class. A “fail-safe” class is one in which a person’s membership in the putative class turns on the merits of that person’s underlying claim. (These classes are called “fail-safe” because if a person’s claim fails on the merits, he or she no longer satisfies the class definition and thus is excluded from the class and not bound by the adverse judgment—a no-lose proposition. For more on fail-safe classes, please see our article (pdf) on how to remove such class actions to federal court.) The putative class excluded fax recipients who had consented to receiving the fax or who had an established business relationship with Office Depot—circumstances that would be defenses to a TCPA claim.

In response, the plaintiff argued that the motion was premature and that the propriety of class certification should await the conclusion of class discovery and the plaintiff’s motion to certify the class. And the plaintiff also noted that some courts had certified similarly defined classes in other TCPA cases.

The court rejected both arguments. It first noted that Rule 23 authorizes pre-discovery motions to strike class allegations by specifying that courts should “determine by order whether to certify the class as a class action” “at an early practicable time.” And the court agreed that the class defined in the complaint was a fail-safe class. The court recognized the existence of earlier cases certifying seemingly similar classes, but explained that they involved situations in which the challenged faxes or telephone calls had been sent by a third party who didn’t get consent from or have relationships with any of the recipients. In those cases, it would be possible to identify class members without evaluating the merits of the claims by simply looking at the caller’s or sender’s records of calls or faxes. By contrast, in this case, the challenged faxes allegedly were sent by Office Depot—which would have received consent from at least some putative class members or have an existing relationship with them—and thus individualized inquiries into each fax would be needed to determine class membership. The court therefore struck the class allegations—thus mooting the class discovery propounded by the plaintiff.

Lindsay is a reminder that an early motion to strike class allegations can be highly effective. Much of the pain that defendants face in class actions—and thus much of the corresponding settlement leverage that plaintiffs often have—comes from expensive class and pre-trial discovery. Even if the motion to strike ultimately is denied, the defendant might be able to narrow the class or at least send an early message that the class is flawed and should be closely scrutinized at the class-certification stage.

In litigation—as in war—it is natural to focus on winning today’s skirmish and to defer planning for battles that might not happen for weeks or months.  But that shortsightedness can lead to strategic blunders—as one class action plaintiff suing Capital One Bank and credit counseling agency InCharge Debt Solutions recently learned the hard way.

In King v. Capital One Bank (USA), N.A. (pdf) (W.D. Va.), the plaintiff, who had asked InCharge to help her with a debt-management plan for some debts she owed to Capital One, alleged that (among other things) the two companies had a hidden relationship that violated the Credit Repair Organizations Act.  After she filed a class action, the defendants moved to compel arbitration on an individual basis under the arbitration clause in her written contract with InCharge.

In response, the plaintiff argued that she never agreed to arbitrate because—despite InCharge’s evidence that it had a standard practice of providing its customers with contracts containing an arbitration clause—she somehow had not been given a copy.  This type of contract-formation challenge appears to be increasingly common after the Supreme Court’s decision in Concepcion confirmed that federal law generally requires enforcing agreements to arbitrate on an individual basis.  And in a narrow sense, the argument was successful: the court held that the plaintiff was entitled to a bench trial on whether she had agreed to arbitrate.

But in making this argument, the plaintiff failed to appreciate that it would sink her ability to maintain a class action.  For if the plaintiff hadn’t agreed to the standard contract, she wouldn’t be typical of the putative class of customers—the vast majority of whom would have received written contracts and thus be subject to enforceable arbitration agreements.  Nor could she represent a class of other customers who hadn’t been given copies of their contracts.  Even assuming that there were enough such customers to satisfy Rule 23(a)(1)’s numerosity requirement, identifying those customers and evaluating the varying scenarios in which a customer might not have signed a contract would require a host of individualized inquiries, thus preventing common issues from predominating over individualized ones.  For these reasons (and other defects in the putative class action), the court granted the defendants’ motion to strike the class allegations.

The takeaways from this case are that class action defendants should be alert for opportunities to turn plaintiffs’ arguments at one stage of the case against them in other stages and, when appropriate, should move to strike class allegations rather than play on the plaintiffs’ turf by waiting to resist a motion for class certification.  There frequently are openings for legal jujitsu when a plaintiff’s opposition to a motion to dismiss or to compel arbitration highlights individualized issues that can defeat class certification.  And defendants often can minimize their defense costs by immediately moving to strike the class allegations on those grounds, rather than waiting until the plaintiff has moved for class certification after potentially expensive and burdensome discovery.