At its conference on January 10, the Supreme Court can get serious about fixing consumer class actions. The Justices should take up that challenge, because it will consider two certiorari petitions that seek review of class certifications—involving alleged “moldy odors” in high-tech front loading washing machines—that are prime examples of what has gone wrong with the lower federal courts’ application of Rule 23. We’re somewhat biased: along with our partner Steve Shapiro and our co-counsel at Wheeler Trigg, we represent the petitioners in Whirlpool Corporation v. Glazer, No. 13-431, and Sears, Roebuck & Co. v. Butler, No. 13-430; copies of our cert petitions are available here, and our reply is available here (pdf).

But we and our clients are by no means alone in thinking that these cases present excellent vehicles for the Justices to bring more rigor and fairness to the application of Rule 23(a) and (b)(3). A bevy of amici has filed briefs in support of certiorari, explaining to the Court why the technology industry, appliance and other manufacturers, retailers, and U.S. businesses in general need the Court to intervene. Commentators too have seen in these cases the chance for the Supreme Court to clean up the class action mess. See, for example:

  • this op-ed in the Wall Street Journal by Governor John Engler, President of the Business Roundtable (subscription required);
  • this editorial in the Washington Examiner;
  • this article in the New York Law Journal by Michael Hoenig (subscription required); and 
  • this piece by Desmond Hogan and Erica Songer in InsideCounsel

In Whirlpool, plaintiffs allege that Whirlpool front-loading washing machines have a design defect that makes it possible for the machines to produce moldy odors. In Sears, the plaintiffs allege that Kenmore-brand washers made by Whirlpool have the same design defect and that some also have a manufacturing defect that on occasion may produce a false error code. In both cases, the alleged odor and error-code issues have manifested for only a tiny portion of purchasers—less than five percent according to Whirlpool and Sears service records and independent surveys by Consumer Reports. Yet the Sixth Circuit in Whirlpool approved certification of a class of all Ohio residents who bought 21 differently designed washing machine models. And the Seventh Circuit did the same in Sears for a class of buyers of 27 different models in six different States, the relevant laws of which vary. Over the course of the class period not only did the design of the machines change, but so did the instructions given to consumers to protect against any moldy odors. Individual owners used their machines differently, cared for them differently, and operated them in varied conditions.

As we explain in our briefs, both courts of appeals ignored a raft of individualized issues that make it impossible for plaintiffs to satisfy the class-certification requirement that common issues predominate over individual ones. Only class-member-specific inquiries could determine the crucial questions of whether any particular buyer experienced the alleged issues with moldy odors or error codes at all, whether the alleged defect or other factors caused any such issues, whether the buyer followed care and use instructions, whether problems manifested during the warranty period, whether the buyer requested and received adequate warranty service, and whether any damages resulted from any alleged defect (among other questions). And the fact that the certified classes are filled with uninjured buyers fatally undermines constitutional standing to litigate the class claims and threatens to unfairly dilute the rights of the few class members who may actually have injuries.

The harms caused by the decisions of the Sixth and Seventh Circuits are not limited to the violence those decisions have done to Rule 23’s requirements. Indeed, the adverse social and economic consequences of certification of these sorts of cases cannot be overstated. The introduction of front-loading washers reflected years of innovation to improve water- and electrical-efficiency in response to regulatory mandates. Independent testing shows that front-loading washers perform very well both on those measures and on cleaning capability. Yet every manufacturer of front-loading washers is now the subject of class actions across the Nation.

Massive class action litigation of this sort is immensely costly. Those costs end up being absorbed by consumers. Class suits over products that for the vast majority of owners perform as advertised undermine the generous warranty programs that manufacturers and retailers offer to quickly address problems actually experienced by individual customers. And they deter innovation. Any manufacturer must think twice before creating an innovative product when the reward is an onslaught of class litigation. What technologically advanced new product does not have glitches or sporadic issues? That is what warranty programs are designed for—to keep customers happy and coming back despite the likelihood of teething troubles in advanced, innovative products that make all our lives better.

Of course, the Supreme Court has tried before to bring more rigor to Rule 23 analysis—but many lower federal courts have ignored the message. Take the Sears case, in which the Seventh Circuit thumbed its nose at a litany of Supreme Court precedents. After the Supreme Court GVR’d the Seventh Circuit’s initial certification decision in light of Comcast Corp. v. Behrend, Judge Posner seemed perplexed about why his ruling had been vacated. Despite the GVR, he concluded that there was “no possibility” that the holding in Comcast could apply. And although the Supreme Court in Wal-Mart Stores, Inc. v. Dukes ruled that “common answers,” not “common questions,” are the key to satisfying the Rule 23(a) commonalty requirement, Judge Posner wrote that asking for “common answers” would place too “heavy” a burden on plaintiffs to justify certification. And why the stretch to certify? Because, in his view, individual claims would be too “meager” to make “suing worthwhile.” But that “ends-justifies-the-means” rationale for class actions runs counter to the Supreme Court’s repeated teachings that substantive law cannot be modified to pave the way for employing the class device.

What explains this flouting of precedent? The Seventh Circuit’s realpolitik approach recognizes that once cases are certified they tend to “quickly settl[e]” without any adjudication of the merits and using some mechanical “schedule of damages”—a result the Seventh Circuit deemed “efficient” (never mind that the Supreme Court repeatedly has identified blackmail settlements as a problem, not a solution). Indeed, the Court has again and again admonished that “[t]he class action is ‘an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only’”—as the Court said in both Dukes and Comcast. For that reason, Court said just last Term in American Express Co. v. Italian Colors Restaurant that Rule 23’s stringent requirements should “in practice exclude most claims” from class treatment; but federal trial and appeals courts still treat those requirements as authorizing class certification of “most claims.” So long as that departure from precedent continues, class actions will effectively impose a tax on every American, with the only beneficiaries being the plaintiffs’ bar, as a recent empirical study our colleagues conducted documents. Granting certiorari and reversing certification in the washer cases would go a long way indeed to putting the class action device back on track.

The Seventh Circuit’s recent decision in Espenscheid v. DirectSat USA, LLCauthored by Judge Posner—is full of good news for employers and other class-action defendants.

The case is a hybrid collective action under the Fair Labor Standards Act (pdf) and opt-out Rule 23(b)(3) class action asserting state-law wage-and-hour claims. The plaintiffs—a group of home satellite-dish installers who were paid by the job rather than by the hour—sued their employer for allegedly failing to ensure that they were paid the federal minimum wage and time-and-a-half for overtime work. The district court initially certified the collective and class actions, but decertified them after seeing the plaintiffs’ trial plan. The Seventh Circuit affirmed.

There’s a lot to like about the  decision:

  • The court holds that the standard for certifying an opt-in collective actions is the same as the standard for certifying an opt-out class action under Rule 23. That’s great news for employers. Other courts have held that the standard for certifying collective actions is more lenient—in our view, more loosey-goosey—than the requirements of Rules 23(a) and (b)(3). See, e.g., O’Brien v. Ed Donnelly Enters., Inc., 575 F.3d 567, 584-85 (6th Cir. 2009). 
  • The Seventh Circuit approved of the district court’s decision requiring the plaintiffs to submit a “specific plan for litigating the case” as it had been initially certified. Such a request is “reasonable,” the court explained, “given the difficulty of trying a class action.”  The court’s approval of this growing trend of requiring plaintiffs to submit detailed trial plans benefits defendants in all types of class actions; such plans often smoke out individualized issues and make clear that the proposed class would be hopelessly unmanageable at trial.
  • Because the trial plan submitted by class counsel confirmed that calculating damages would require individualized inquiries, the Seventh Circuit held that the class was properly decertified. That’s great news: Many courts have disregarded individualized issues as to damages by invoking the mantra that they pose no obstacle to class certification. These courts, of course, virtually never have to try these cases, which almost invariably settle after certification. But the Seventh Circuit recognized that “2341 separate evidentiary hearings” on damages—one for every technician—“might swamp the Western District of Wisconsin with its two district judges.” And although it’s “realistic” to assume that the defendant “would settle” rather than try the class action, “class counsel cannot be permitted to force settlement by refusing to agree to a reasonable method of trial should settlement negotiations fail.”
  • The Seventh Circuit rejected the plaintiffs’ proposal to prove damages by presenting testimony from 42 “representative” class members—a practice permitted by a few other courts (such as the Sixth Circuit in O’Brien). The Seventh Circuit explained that the sample was not randomly selected in a statistically sound way.  And the court added that even if the sample had been random, “this [approach] would not enable the damages of any members of the class other than the 42 to be calculated.” Extrapolating from these class members’ experiences would result in undercompensating some workers and overcompensating others. At bottom, the Seventh Circuit explained, the plaintiffs were “ask[ing] the district judge to embark on a shapeless, free-wheeling trial that would combine liability and damages and would be virtually evidence-free so far as damages were concerned.” 
  • Finally, the Seventh Circuit reminded plaintiffs that they must explain why their proposed collective or class action is superior to an enforcement action by the Department of Labor. Defendants in other types of class actions can cite this language when faulting plaintiffs for failing to seek other types of regulatory or administrative relief.

I do have one quibble with the decision. The Seventh Circuit noted in dicta that the class might have been certified had the plaintiffs been seeking declaratory or injunctive relief instead of damages. That doesn’t make sense to me. In explaining the thorny individualized questions that must be answered to determine damages, the Seventh Circuit makes clear that a number of them in fact go to injury. For example, converting an employee’s per-job rate into an hourly wage might demonstrate that he or she is being paid above the federal minimum wage. Some efficient workers might not have worked overtime. And some workers may have underreported their hours not because of any pressure from their employer, but because they wanted to appear especially efficient and thus worthy of promotion. These workers not only have suffered no damages, they are not injured—which negates liability. Individualized issues as to liability should preclude certification regardless of the type of relief the plaintiffs seek.

Nonetheless, Espenscheid is a great win for employers and class-action defendants in general.

Federal Rule of Civil Procedure 23(f) gives federal courts of appeals authority to permit interlocutory appeals from orders granting or denying motions to certify a class. The rule leaves it murky, however, whether an order partially decertifying a class is appealable under Rule 23(f). In a brief opinion by Judge Posner, the Seventh Circuit has now held that it is.

In Matz v. Household International Tax Reduction Investment Plan (pdf), the court ruled that “an order materially altering a previous order granting or denying class certification is within the scope of Rule 23(f) even if it doesn’t alter the previous order to the extent of changing a grant into a denial or a denial into a grant.” The court reasoned that “[t]his is best seen by imagining that rather than altering a class that the court had already certified the district judge had at the outset certified a narrower class than proposed by the plaintiff. That order would have been appealable by either party . . . . We don’t see why it should make a difference that the order modifying the class requested by the plaintiff came later. The difference is between one order and two orders that accomplish the same thing.”