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.

When state attorneys general file suits to seek monetary recoveries based on claimed injuries to private citizens, those lawsuits look like, walk like, and quack like class actions. In fact, in most of these so-called “parens patriae” cases, the same private plaintiffs’ lawyers that bring private class actions are retained to represent states in exchange for the potential to garner substantial attorneys’ fees. While most class actions and mass actions of significance can be removed to federal court under the Class Action Fairness Act of 2005 (“CAFA”), the Supreme Court held today in Mississippi ex rel. Hood v. AU Optronics Corp. (pdf), that lawsuits in which the state is the sole named plaintiff do not as a technical matter fall within CAFA’s coverage of “mass actions,” and therefore that such lawsuits may proceed in state courts. The likely impact of the decision is that businesses will face more class-action-style cases in state-court forums.

CAFA allows defendants to remove, among other things, “mass actions” from state to federal court. Under the statute, a mass action is “any civil action … in which monetary relief claims of 100 or more persons are proposed to be tried jointly.” 28 U.S.C. § 1332(d)(11)(B)(i). The question facing the Court in Hood was whether a parens patriae suit filed by a State as the sole plaintiff constitutes a mass action when the suit includes claims for restitution based on injuries suffered by the State’s citizens.

The case arose out of a lawsuit filed in state court by the State of Mississippi alleging that manufacturers of liquid crystal displays (“LCDs”) had formed a cartel to restrict competition and raise prices. The State sought, among other forms of relief, restitution for its own purchases of LCD products and for the purchases of its citizens. The manufacturers removed the case to federal court, arguing that it qualified as a mass action. The district court found that the case was a mass action, but remanded under CAFA’s “general public exception.” On appeal, the Fifth Circuit reversed, agreeing with the district court that the case qualified as a mass action but finding that no exception to federal jurisdiction under CAFA existed. The Fifth Circuit’s decision conflicted with rulings in the Fourth, Seventh and Ninth Circuits, which had all held that similar lawsuits were not “mass actions” under CAFA.

The Supreme Court granted review to resolve the circuit split. Today, in a unanimous opinion by Justice Sotomayor, the Court reversed the Fifth Circuit’s decision, holding that such parens patriae actions do not qualify as mass actions under CAFA. The Court held that the “100 or more persons” language in CAFA’s mass action provision refers to named plaintiffs only, and does not encompass unnamed persons who are real parties in interest. Slip op. 5-10. Citing CAFA’s numerosity requirement (28 U.S.C. § 1332(d)(5)(B)), the Court noted that Congress knew how to include unnamed persons in a definition, but chose not to do so with respect to mass actions. Id. at 6. Further, the Court determined that the “100 or more persons” were later specified as the “plaintiffs” in the same provision and that the term “plaintiffs” could not include unnamed parties. Id. at 6-8. The Court concluded that construing “plaintiffs” to include unnamed real parties in interest would stretch the meaning of “plaintiff” beyond its common understanding as a party who brings a civil suit. Id. at 8-9.

In addition, the Court noted CAFA’s requirement that a removed case shall not be transferred to another court “unless a majority of the plaintiffs in the action request transfer.” Id. at 10. If “plaintiffs” included unnamed parties, the Court found, it would be difficult for a court to poll all of the real parties in interest to decide whether the case could be transferred. Id. In addition, the Court found that the mass action provision functions largely as a “backstop” to ensure that plaintiffs cannot evade federal jurisdiction under CAFA by naming a host of plaintiffs rather than using the class device. Id. at 11. According to the Court, if Congress wanted CAFA to authorize removal of representative actions brought by a state, it would have provided for the removal under the class action mechanism, not the mass action provision. Id.

Finally, the Court found that it was not proper in the mass action context to apply a background principle requiring courts to look behind the pleadings to ensure that parties are not improperly creating or destroying diversity jurisdiction. Id. at 11-13. According to the Court, this background principle had not previously been applied to count up unnamed parties but was typically applied to determine which parties’ citizenship should be considered in determining diversity. Id. at 12. In addition, by prohibiting defendants from joining unnamed individuals to turn a case into a mass action, see 28 U.S.C. 1332(d)(11)(B)(ii)(II), Congress indicated that it did not want courts to look behind the pleadings to attempt to find the real parties in interest. Id. at 13.

Today’s decision is highly significant for businesses. State attorneys general already have been filing enforcement actions in increasing numbers. And, as we have discussed before, some members of the plaintiffs’ bar have been lobbying states to deputize them as acting attorneys general so that they may file lawsuits as parens patriae actions in order to avoid federal jurisdiction and instead proceed in state court, which they perceive as a more hospitable forum. The Court’s decision today will likely encourage the private plaintiffs’ bar to redouble those efforts.

The American Tort Reform Association has released its annual report on “Judicial Hellholes”—a term it popularized for jurisdictions in which defendants often contend that they can’t get a fair shake. This year’s report identifies California, Louisiana, New York City, West Virginia, Madison & St. Clair Counties (Illinois), and South Florida as the most unfavorable jurisdictions. According to the report, these jurisdictions suffer from (among other things) overly-aggressive plaintiffs’ bars, expansive liability rules, court procedures that advantage plaintiffs, and welcoming attitudes toward forum-shopping out-of-town plaintiffs.

While the report is worth reading in full, here are some of the highlights that jumped out at us:

  • California won the slot as the top Judicial Hellhole, serving as “a breeding ground for consumer class actions, disability-access lawsuits and asbestos claims”—and an “unemployment rate [that] is one of the nation’s highest,” which the report indicates shouldn’t be surprising given the productivity-stifling effects of the skyrocketing costs of litigation. The Report highlighted the Northern District of California’s receptiveness to food-labeling and food-marketing class actions, noting that “[b]y one count, . . . more than 100 consumer class actions were filed against food makers in 2012 alone, five times the number filed four years earlier.” The report suggests that the “unpredictable” outcomes of litigation in “Food Court” have the perverse effect of harming consumers, “as litigation costs are invariably passed on to them in the form of higher food prices.” (According to a Law360 article, some advocates of class-action litigation have pushed back against California’s #1 ranking, contending the report focused on a “small number of clearly abusive lawsuits” rather than (in their view) providing a fuller context.)
  • According to the report, a decision from the West Virginia Supreme Court of Appeals is likely to increase the pressure for defendants to settle even meritless suits by allowing a plaintiff’s attorney’s fees to factor into the calculation of punitive damages. An individual sued her mortgage lender, alleging it had made an unconscionable loan. After a bench trial, the trial court agreed, and awarded the plaintiff “about $17,000 in restitution,” in addition to “void[ing] the remainder of the $144,800 loan obligation,” and “awarded the plaintiff nearly $600,000 in attorney fees and costs.” The trial court included that attorney-fee award as part of the compensatory damages used in calculating a punitive-damages award with a 3x multiplier—equal to a $2.2 million punitive damages award. The West Virginia high court agreed in Quicken Loans v. Brown, 737 S.E.2d 640 (2012), concluding that the state Consumer Credit and Protection Act’s fee-shifting provision is “compensatory in nature.” When the court remanded for the trial court to make written findings in support of the punitive-damages award, the case was reassigned to another judge who “increased the multiplier” and ultimately awarded approximately $3.5 million in punitive damages.
  • The report touched on a phenomenon we have described in the past: State attorneys general around the country hire contingency-fee plaintiffs’ lawyers to sue companies in the name of the state. According to the report, after the Attorney General of Louisiana hired plaintiffs’ firms that had donated to his campaign, he defended himself against accusations of cronyism by noting that state law authorized no-bid contracts for professional services. Meanwhile, the West Virginia Supreme Court of Appeals rejected a challenge to that state’s AG’s practice of hiring outside contingency-fee lawyers to pursue claims for damages that, by statute, could only be recovered by the state. The report went on to note that the Nevada attorney general hired a plaintiffs’ firm to pursue claims against mortgage lenders under a “deal that gives the private firm ‘virtual veto power’ over any settlement offer” in a nationwide settlement. The report asks—as we have—whether state AG actions should be permitted at all when the AG hires private class-action lawyers to bring the case, and the government is involved in name only.

One of the more alarming recent developments in the class-action arena is the increase in actions by state attorneys general that mirror private class actions. These state AG actions aren’t like the typical enforcement action, in which the government pursues claims for civil penalties that are distinct from the relief sought in the private class action. Instead, these are copycat actions in every sense of the word. The state AG seeks restitution or disgorgement that is equivalent to the remedies requested in the private class action. And increasingly, the state AG is handing over the reins entirely to class-action plaintiffs’ lawyers, who sometimes get to call themselves “special assistant state attorneys general”—and usually get a big chunk of the ultimate recovery.

We’ve written before about this new breed of parens patriae action. But we wanted to focus on a different problem, which several Justices of the Supreme Court asked about during oral argument in Mississippi ex rel. Hood v. AU Optronics Corp. Specifically, the defendants targeted by these suits are being asked to pay damages twice for a single injury:

JUSTICE GINSBURG: But now we have the consumers who were affected, they’ve already been paid [in the settlement of the private class action]. So how does it work for the Attorney General’s suit? What is the impact of the class action that has already gone forward and been completed on the Attorney General’s claim?

* * *

CHIEF JUSTICE ROBERTS: What prevents * * * attorneys general from around the country sitting back and waiting * * * as private class actions proceed, and as soon as one settles or the plaintiffs’ class prevails, taking the same complaint, maybe even hiring the same lawyers, to go and say, well, now we are going to bring our parens patriae action. We know how the trial is going to work out or we know what the settlement is going to look like, and we are going to get the same amount of money for the State?

When asked about the fairness of this one-two punch, the lawyer for the Mississippi AG punted, suggesting that it is a matter of state law whether the judgment in the consumer class action could preclude a double recovery in the parens patriae action.

But that cannot be the whole picture. There are strong arguments that principles of federal due process forbid states from authorizing that kind of double dipping by removing well-established claim preclusion (res judicata) protections.

Those principles may also inform how state law approaches the question. Indeed, such arguments recently were successful in New Mexico ex rel. King v. Capital One Bank (USA) N.A. (pdf).

In that case, the New Mexico AG sought (among other things) restitution for New Mexico consumers who had subscribed to the defendant’s payment-protection plans. Yet the defendant had already reached a nationwide class settlement that resolved privately brought consumer-protection claims seeking restitution for the amounts New Mexico consumers had paid for these plans.

The district court agreed that the New Mexico AG’s claims for restitution were barred by res judicata under state law. The court first pointed out that the prior class settlement expressly discharged the claims of “all those who claim through [the class members] or who assert claims on their behalf (including the government in its capacity as parens patriae).”

The court next concluded that the claims in the current suit undoubtedly arose out of the same transaction or occurrence as the previously settled claims, and that the New Mexico AG was in privity with the class in the earlier private class action because both sought to remedy the same injury to the same group of people. Finally, the court added that “as a policy matter, the class members * * * should not be allowed to receive ‘double recovery.’”

Naturally, we think that the district court got it right. It remains to be seen whether the Tenth Circuit and district courts elsewhere will agree. Given the significance of this issue, we will keep our eyes open for future cases raising it and report on them.

Today at the Supreme Court, all eyes, including mine, were on the oral arguments in the Town of Greece prayer case. But the second case—although it will certainly garner less attention—also is of great importance, especially to class-action practitioners. The issue in that case, Mississippi ex rel. Hood v. AU Optronics Corp., is whether so-called parens patriae lawsuits filed by state attorneys’ general to recover money on behalf of state citizens can be removed to federal court under the Class Action Fairness Act (CAFA).

Why does Hood matter? Significantly, the fight is not over whether these cases can be brought at all, but instead whether they proceed in federal court rather than state court. As business defendants know well, many state courts have a long and distressing history of tolerating abuses of the class-action device (or analogous procedures like mass actions and representative proceedings). Indeed, it was in response to that phenomenon that Congress enacted CAFA in 2005. And many parens patriae lawsuits bear some of the same hallmarks as class-action lawsuits. After all, state attorneys general routinely retain private class action lawyers to bring the litigation—Hood is a great example—and frequently the apparent goals of the case are (1) to recover money on behalf of individual consumers (whether paid to those consumers or into the state’s coffers) and (2) to secure attorneys’ fees for the private lawyers driving the litigation.

In short, when these state AG lawsuits are in effect prosecuted in state court by the private plaintiffs’ class action bar, the same kinds of abuses that led Congress to pass CAFA are implicated. Thus, as a policy matter, the real question should be: What do state attorneys general—or more to the point, their retained outside counsel—have to fear from a level playing field in federal court?

As I watched the oral arguments, it seemed clear that policy concerns about the misuse of parens patriae actions were on the minds of at least some of the Justices. That said, most of the questioning at oral argument focused on whether the state AG lawsuit at issue—in which the state seeks restitution of excess money paid due to allegedly fixed prices in violation of state antitrust law—qualified as a “mass action” under CAFA. On that legal question, which is one that has divided the circuits, my take is that the Justices’ questions at argument did not clearly signal which way the Court will go.

That said, I have a number of takeaways from the argument (transcript available here)).

First, many Justices were concerned with how any money recovered by the state AG would be allocated and distributed. Counsel for Jim Hood, the Mississippi attorney general, asserted that “the restitution claim seeks recovery to the State of the money, not to consumers in Mississippi,” and that it was likely that any such money would end up in the state treasury. But as Justice Breyer asked in one of his questions, the language of the relevant Mississippi statute refers to ordering defendants “to restitute any and all moneys for the purchases of its citizens”—and so even if the money was “given to the State, the restitution is for individual purchases of individual citizens,” meaning that “you better have a list of the individual people who bought something.” If so, Justice Breyer continued, that fact might support the companies’ argument that the state is really “pursuing” the claims of “individual people.” (Or, put another way, the individual consumers might be seen as the real parties in interest because the subject matter of the litigation comprises alleged antitrust violations as to those consumers’ particular purchases.) Thus, that approach sounds a lot like seeking to try many individual consumers’ antitrust claims jointly in the same action, which—roughly speaking—is a substantial part of test for whether a set of claims qualifies as a “mass action” that is removable under CAFA.

Second, there was a great deal of debate over whether a state AG’s lawsuit actually does propose to try claims jointly “on the ground that the plaintiffs’ claims involve common questions of law or fact,” as CAFA puts it. Justice Kagan pushed the companies’ counsel on this issue, contending that, as a procedural matter, the state did not have to demonstrate affirmatively that such “common questions of law and fact” truly existed. Justice Kagan seemed to be of the view that, if the state AG did not have to meet that hurdle, the text of CAFA’s mass-action provision would not be triggered.

Third, Chief Justice Roberts focused on the fact that parallel private class-action lawsuits had been filed involving similar allegations, and that settlements had been reached in those lawsuits that called for companies to pay money damages. (It is fairly common for parens patriae lawsuits to be filed by state AGs after or alongside private class actions.) This fact led the Chief Justice to point out “that there is nothing to prevent 50 attorneys general . . . from saying, every time there is a successful class action as to which somebody in my state purchased one of the items, we are going to file a parens patriae action” in which “the complaint is going to look an awful lot like the class action complaint.” If so, he noted, “it would make no sense for a defendant in a class action brought by consumers to ever settle the case,” because the business is “going to have to pay twice”— to settle the private class action and to resolve the state’s lawsuit. That problem would raise practical concerns about judicial administration that could be solved if state AG actions were removable to federal court, where presumably they would be joined or consolidated through the MDL process with private class actions filed in or removed to federal court.

Of course, the ultimate resolution of these troubling policy concerns depends upon how the Supreme Court interprets CAFA. A number of the Justices seemed sympathetic to the companies’ argument that “the driving force behind [CAFA] was to put interstate claims of national importance into Federal court.” And surely at least some Justices agree that these state AG lawsuits look like and quack like the types of class and mass actions that were susceptible to state court abuses. But that does not necessarily mean that the Court will find these state AG lawsuits subject to removal. As Justice Scalia archly observed: “Sometimes Congress doesn’t do it right. … Sometimes, they try to catch everything, but the language they use doesn’t do it.”

Did Congress get it right here? We’ll be waiting for the Supreme Court’s answer.

We’ve blogged before about whether parens patriae lawsuits filed by state attorneys’ general to recover money on behalf of state citizens can be removed under the Class Action Fairness Act (CAFA). (CAFA authorizes defendants to remove certain “mass actions” involving “monetary relief claims of 100 or more persons” from state court to federal court. 28 U.S.C. § 1332(d)(11)(B)(i). Today, the Supreme Court granted certiorari in Mississippi ex rel. Hood v. AU Optronics Corp., No. 12-1036, to resolve a circuit split on this issue.

The case arises from a lawsuit that the Mississippi attorney general filed in state court against manufacturers of liquid crystal display panels, alleging a price-fixing conspiracy. Among other relief, the complaint sought restitution on behalf of Mississippi consumers who had purchased LCD panels during the period when prices were allegedly fixed. After the defendant manufacturers removed the case to federal court as a “mass action” under CAFA, Mississippi moved to remand, contending that it did not fall within the scope of CAFA jurisdiction.

The district court granted Mississippi’s motion to remand, but the Fifth Circuit reversed.  Mississippi ex rel. Hood v. AU Optronics Corp., 701 F.3d 796 (5th Cir. 2012). The Fifth Circuit concluded that Mississippi’s suit constituted a mass action because the individual consumers are “[t]he real parties in interest.” Id. at 800. The court reasoned that, insofar as Mississippi brought claims to enforce the rights of consumers, the state was “not asserting its sovereign interest[s]” but was instead acting “as a class representative” and “pursu[ing] the interests of … private part[ies].” Id. at 801. The case therefore remained in federal court.

Many other state attorneys general have filed similar lawsuits against the LCD manufacturers. In a number of those lawsuits, however, the Fourth, Seventh, and Ninth Circuits have held that removal is not permitted under CAFA. The Supreme Court granted review to resolve the circuit split.

The Supreme Court’s decision in this case will be significant for businesses, as state attorneys general have been filing enforcement actions in increasing numbers. Indeed, we have blogged about how some members of the plaintiffs’ bar have been lobbying states to deputize them as acting attorneys general so that they may file lawsuits as parens patriae actions in order to avoid federal jurisdiction. Moreover, as we have discussed in the past, the Court’s decision may be relevant to litigation over the scope of the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb(f), which prohibits “private part[ies]”—but not states—from filing certain securities-fraud class actions in state court.

A number of courts recently have weighed in on a question we’ve blogged before—whether lawsuits by state attorneys general seeking restitution on behalf of private citizens are subject to removal under the Class Action Fairness Act of 2005 (pdf) (“CAFA”). These rulings have broad implications for the litigation of these quasi-class actions.  They also are of substantial importance to determining whether securities fraud actions filed by state attorneys general are precluded by the federal Securities Litigation Uniform Standards Act of 1998 (pdf) (“SLUSA”). Continue Reading Are Quasi-Class Action Suits By State AGs Removable Under CAFA (Or, For Securities Fraud Cases, Barred By SLUSA)?

Some academics and commentators have been reading the tea leaves in Wal-Mart Stores, Inc. v. Dukes (pdf) and AT&T Mobility LLC v. Concepcion (pdf) as spelling doom for consumer and employment class actions. That’s overwrought; Dukes rejected an extremely adventuresome application of the class action rules by the Ninth Circuit, and Concepcion merely reminded courts that they can’t get around the Federal Arbitration Act by insisting that arbitration agreements permit expensive aspects of judicial litigation that are completely alien to arbitration in its traditional form. The continuing flood of class action filings is proof that the spigot hasn’t been shut off. But companies should pay attention to where the plaintiffs’ bar thinks they should move next if filing class actions stops being a viable business model.

In a recent article—After Class: Aggregate Litigation in the Wake of AT&T Mobility v. Concepcion (pdf), 79 U. Chi. L. Rev. 623 (2012)—law professor Myriam Gilles and plaintiffs’ lawyer Gary Friedman shine the spotlight on state attorneys general:

In our view, the “private attorney general” role assumed by class action lawyers over the past several decades should give way to a world in which state attorneys general make broad use of their parens patriae authority—far greater use than they have in the past—to represent the interests of their citizens in the very consumer, antitrust, wage-and-hour, and other cases that have long provided the staple of class action practice.

And to tackle complex cases, we would hope to see underfunded AG offices making use of the lawyers who have acquired expertise in originating, investigating, and prosecuting class actions, as well as financing them.

The linchpin of this strategy is, of course, the money. If a state AG can’t give the deputized class action lawyers a big chunk of the money recovered for citizens, the model falls apart. Of course, money was one of the main problems with the biggest experiment with deputizing private lawyers as state AGs—the states’ lawsuits against the tobacco industry. Then-Texas AG Dan Morales was sentenced to four years in prison for attempting to steer millions of dollars from the proceeds of the tobacco settlement to a Houston lawyer.

So what should businesses do if they face one of these parens patriae lawsuits from a faux “acting AG”? Here are a few thoughts: Continue Reading What’s Next for the Class Action Plaintiffs’ Bar? Getting Deputized by State Attorneys General